FEDERAL COURT OF AUSTRALIA

Rambaldi (Trustee) v Meletsis, in the matter of the Bankrupt Estate of Karas [2022] FCA 73

ORDERS

THE COURT ORDERS THAT:

1.    The parties are to provide a minute of orders giving effect to these reasons within seven days.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DAVIES J:

INTRODUCTION

1    The plaintiffs (the trustees) are the trustees of the bankrupt estate of Tom Karas (Mr Karas or the bankrupt), the fifth defendant to these proceedings. The trustees are also the assignees of the “right, title and interest” of 70 Nicholson Street Pty Ltd (in liq) (70 Nicholson Street or the company) in all causes of action against the defendants pursuant to a deed of assignment entered into between the liquidators of 70 Nicholson Street and the trustees in September 2017 (the assignment deed) arising out of, or relating to, dealings in a property at 70-74 Nicholson Street, Fitzroy (the property or the Nicholson St property) that 70 Nicholson Street owned and which it sold to Establishment 5 Developments Pty Ltd (Establishment 5), the fourth defendant. At the time of the sale, Nick Meletsis (Mr Meletsis), the first defendant and the brother in-law of the bankrupt, was the company’s sole director and shareholder, having replaced the bankrupt as the company’s sole director and shareholder in May 2011. The dealings at the time of the sale of the property included the discharge of a mortgage (Karas mortgage) that the bankrupt held over the property to secure a loan that he had made to the company in 2009. The second defendant is Hallmark Group (Aust) Pty Ltd (Hallmark) (a company controlled by Mr Meletsis which, it is alleged, received the proceeds of settlement) and the third defendant is Howard Speer (Mr Speer), a director of Establishment 5.

2    In brief overview, the trustees have alleged as against Mr Karas that the Karas mortgage was discharged for nil consideration and that the discharge is void as against the trustees pursuant to ss 120 and 121(1) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), alternatively that the discharge for nil consideration was an alienation of property with intent to defraud creditors of the bankrupt and void as against the trustees under s 172 of the Property Law Act 1958 (Vic) (Property Law Act). Those causes of action are separate to the assigned causes of action. On the assigned claims, the trustees have alleged that the defendants carried out a concerted plan to transfer the Nicholson St property to Establishment 5 in order to avoid potential claims of creditors to the benefit of themselves. It is further alleged:

(a)    as against Mr Meletsis, that he breached his duties as a director of 70 Nicholson Street in regard to the sale of the Nicholson St property and, in breaching those duties, he had a dishonest and fraudulent design;

(b)    as against Hallmark, that it knowingly received property in consequence of Mr Meletsis’ breach of director’s duties;

(c)    as against Mr Speer, that he participated in the concerted plan with knowledge of its dishonest and fraudulent design; and

(d)    as against Establishment 5, that it knowingly received property in consequence of Mr Meletsis’ breach of director’s duties.

3    Only Mr Meletsis and Hallmark (collectively referred to as the Meletsis parties in these reasons) appeared to defend the claims against them and they relied on the same defences and had the same legal representation. Mr Speer is a bankrupt and the proceeding is stayed as against him; Establishment 5 is in liquidation – leave to proceed against it was granted by order made on 10 July 2020, but the liquidator elected not to participate in the hearing; and whilst Mr Karas did participate in the hearing, he did so as a witness for the Meletsis parties and not in his own right to defend the claims brought against him.

BASIC FACTS AND CHRONOLOGY OF EVENTS

4    The basic facts and chronology of events were largely either admitted by the defendants or not disputed by them.

Purchase of the Nicholson St property

5    The Nicholson St property was acquired by 70 Nicholson Street in August 2003. The property, at the time, comprised three buildings known as “Staffa House” and was subject to a lease to Tithang Pty Ltd (Tithang), which operated a low cost boarding house and backpackers’ accommodation with approximately 80 rooms under the name “The Hub”. The company acquired the property in its capacity as trustee of the 70 Nicholson Street Unit Trust, which had been established for the purpose of the property acquisition in May 2003 and which had as its unitholders, entities associated with Mr Karas, his brother-in-law, Mr Meletsis, Martha Tsamis (Ms Tsamis) and a long term friend Frank Georgakopoulos (Mr Georgakopoulos).

6    Mr Karas was the sole director of the company from its incorporation until 27 May 2011. On 27 May 2011, Mr Meletsis replaced Mr Karas as the sole director of the company.

7    The original unitholders in the 70 Nicholson Street Unit Trust were:

(a)    Genesis Holdings (Aust) Pty Ltd (Genesis) in its capacity as trustee of the GH Family Trust (a discretionary trust, the beneficiaries of which included Mr Meletsis, his sister, Irene Meletsis, who is married to Mr Karas, and Mr Karas) with 560 units (50 percent);

(b)    Frank Georgakopoulos as trustee for the Georgakopoulos Property Trust with 280 units (25 percent); and

(c)    Nafpaktos Pty Ltd (ACN 088127084) (Nafpaktos) (a company controlled by Ms Tsamis) with 280 units (25 percent).

8    The purchase price of the property was $2,680,000, which was funded in part by a loan of $1,605,000 from the ANZ Banking Group Ltd (ANZ Bank) to 70 Nicholson Street that the ANZ Bank secured by a first registered mortgage over the property (ANZ mortgage).

New lease

9    On 26 March 2008, 70 Nicholson Street and Tithang entered into a new lease of the property for a term of 10 years and 4 months with provision for further terms.

Assignment of the ANZ mortgage to Rover Nominees Pty Ltd

10    On 7 July 2008, the ANZ Bank and Rover Nominees Pty Ltd (Rover Nominees), a company owned and controlled by Mario Costanzo (Mr Costanzo), a friend of Mr Karas, entered into a deed of assignment pursuant to which the bank assigned its first registered mortgage to Rover Nominees in consideration for payment of the amount then outstanding to the bank on the loan to 70 Nicholson Street in the sum of $1,295,621.27. This amount was paid to the ANZ Bank by Bourke Property Group Pty Ltd (Bourke Property Group), a company then controlled by Irene Meletsis, and the transfer of mortgage to Rover Nominees was registered on 11 July 2008 (Rover mortgage).

11    In their joint defence, Mr Meletsis and Hallmark pleaded that Bourke Property Group lent those funds to Rover Nominees for that purpose, that Rover Nominees took an assignment of the ANZ mortgage from the ANZ Bank in consideration of Rover Nominees paying the assignment sum and, therefore, that the assignment sum was a debt due and owing by 70 Nicholson Street to Rover Nominees; however they abandoned those claims at trial and conceded that 70 Nicholson Street never owed any funds to Rover Nominees. Instead, the case put by Mr Meletsis at trial was that as far as he knew, the ANZ mortgage had been paid out by Rover Nominees, which took the mortgage security and he did not become aware of Bourke Property Group’s involvement until 2017 (after the sale of the Nicholson St property).

Voluntary administration of 70 Nicholson Street and the Karas mortgage

12    In the meantime, in or around early 2008, a dispute arose between Nafpaktos and 70 Nicholson Street and litigation ensued in the County Court of Victoria. On 2 April 2008, Mr Karas caused 70 Nicholson Street to go into voluntary administration and appointed Paul Vartelas as administrator of the company. Anthony Cant (Mr Cant) later replaced Mr Vartelas as administrator on 26 May 2008.

13    On 28 August 2008, 70 Nicholson Street, Mr Karas (as Proposer) and Mr Cant (as deed administrator) entered into a deed of company arrangement. Pursuant to the terms of the deed of company arrangement, Mr Karas was to pay the deed administrator an amount calculated by the deed administrator to be due to unsecured creditors of the company, any outstanding superannuation guarantee obligations of the company, and the administrator’s fees and expenses. The amount paid was to be loaned by Mr Karas to 70 Nicholson Street with the loan to be secured by a second ranking mortgage over the Nicholson St property.

14    On 25 February 2009, Mr Cant advised Mr Karas in writing of the amount he was required to pay under the deed of company arrangement. The amount totalled $755,105 and comprised the following items:

(note: figures have been revised from submissions)

15    On 27 February 2009, Mr Karas tendered bank cheques for the amounts payable to Ms Tsamis, Comlaw, Mr Cant, Kliger Partners and Lewenberg & Lewenberg and personal cheques for the amounts payable to Mr Vartelas, Mr Georgakopoulos, Genesis, State Accounting Group, Tithang and another amount owing to Lewenberg & Lewenberg. Mr Cant acknowledged receipt of the cheques the same day. The same day, Mr Karas, in his capacity as director of 70 Nicholson Street, authorised the second ranking mortgage to Mr Karas and the disbursement of the funds as directed by Mr Cant.

16    Genesis and Mr Georgakopoulos received their cheques under cover of letters dated 2 March 2009 but never banked them.

The Karas mortgage

17    The Karas mortgage was registered on 2 March 2009. There were terms of the Karas mortgage that:

(a)    Mr Karas, as mortgagee, would be granted a mortgage over the Nicholson St property by 70 Nicholson Street as mortgagor;

(b)    the principal sum to be advanced was the sum of $755,105.24;

(c)    the principal sum was to be repaid on or before 27 February 2010; and

(d)    interest was payable at the lower rate of 15% per annum and at the default rate of 21% per annum.

18    Albeit that the terms recorded that the advance was in the sum of $755,105.24, it was not in dispute that Genesis and Mr Georgakopoulos never presented their cheques for payment and, by the end of the trial, the trustees also did not dispute that the actual amount owed by 70 Nicholson Street to Mr Karas, and secured by the Karas mortgage was the sum of the total worth of the cheques less the unrepresented cheques, not the $755,105.24 recorded. It was agreed at trial that this figure amounted to $217,229.44, however this figure appears to be a miscalculation and the amount owing pursuant to the correct figures is $218,842.24.

Redemption of the Nafpaktos units

19    On 17 June 2009, Nafpaktos and 70 Nicholson Street resolved the County Court action and entered into terms of settlement, pursuant to which the Nafpaktos units in the 70 Nicholson Street Unit Trust were redeemed.

20    By 18 June 2009, Genesis and Mr Georgakopoulos were the only unitholders in the trust.

Planning permit

21    In December 2009, Urban Works Group Pty Ltd, on behalf of 70 Nicholson Street, applied to the City of Yarra for a planning permit to redevelop the property into a ground plus two-level development comprising 50 residential apartments. Following a VCAT mediation, the Yarra City Council issued a permit for the development of 50 dwellings on the property on 24 November 2010. An amended permit subsequently issued on 29 February 2012.

Assignment of the Tithang lease to Pamplin

22    In early 2011, Dennis G. Pamplin Pty Ltd (Pamplin) purchased “The Hub” business from Tithang and the Tithang lease of the property was transferred to Pamplin (effective as of 11 February 2011).

The development of the Nicholson St property

23    In about March or April 2011, 70 Nicholson Street fitted out a display suite at the Nicholson St property and a hoarding fence for the purpose of advertising the development. Mr Speer’s company, Leading Edge Constructions Pty Ltd (Leading Edge Constructions), constructed the display suite for the sale of the “off the plan” apartments to be constructed as part of the development.

24    On 11 April 2011, the company entered into an exclusive sale authority with real estate agents, Carroll McKeddie, and from about 19 April 2011, the apartments to be built as part of the development were advertised for sale under the project name of “Fontaine Apartments”. From May to December 2011, there were eight contingent “off the plan” sales totalling $3,376,500. A ninth lot was sold in February 2013. Three of the sales were later cancelled.

25    Also in April 2011, the company asked First Valuation Group to provide an opinion of the current market value of the Nicholson St property upon completion of the development and the construction of 49 residential apartments. The valuation was provided on about 10 May 2011, with First Valuation Group providing its opinion that the current market value upon completion of the development and the construction of the apartments was $17.595 million.

26    The ANZ Bank (which Mr Meletsis had approached to obtain funding for the development) also had CB Richard Ellis (V) Pty Ltd (CBRE) value the property both on an “as is” land only value basis and on a gross realisation basis “as if the development was complete”. The valuation was provided on 12 May 2011, with CBRE valuing the land on an “as is” land only value basis at $3.9 million and on a gross realisation basis “as if the development was complete” at $17,974,000. Mr Meletsis was aware of the valuation at or around the time it was obtained.

Enforcement action against Mr Karas

27    On 15 June 2011, Mr Karas and certain of his associated entities had their assets made subject to freezing orders upon the application of the Deputy Commissioner of Taxation on the basis of personal tax liabilities of Mr Karas totalling $44,229,669. A key factual issue for determination is whether Mr Meletsis was aware at or around that time of the making of the freezing orders and/or that the Commissioner of Taxation was pursuing Mr Karas for unpaid tax liabilities.

State Revenue Office commences its investigation into whether there had been a change in use of the Nicholson St property

28    Another factual issue concerns Mr Meletsis’ knowledge as to when the Nicholson St property ceased to be used as a boarding house. This factual issue is relevant because on 16 August 2011, the State Revenue Office wrote to 70 Nicholson Street advising that the Commissioner of State Revenue had commenced an investigation into whether the Nicholson St property, which had qualified for an exemption from land tax as low-cost accommodation, had ceased to qualify for exemption because of a change in use. The State Revenue Office ultimately raised an assessment against 70 Nicholson Street in December 2011 for land tax of $138,000 on the basis that there had been a cessation of use by the end of April 2011.

Establishment 5

29    Establishment 5 was incorporated on 23 November 2011. Its directors were Mr Speer, a Mr Nicholas Potiriadis (Mr Potiriadis) and a Mr Harry Zorbas (Mr Zorbas) (the Leading Edge parties). The shareholders were Leading Edge Nominees Pty Ltd (as to 35%), Leading Edge Property Developments Pty Ltd (Leading Edge Property) (as to 15%) and Neaniki Property Developments Pty Ltd (Neaniki Property Developments) (as to 50%).

30    Establishment 5, at all relevant times, acted as trustee of the Establishment 5 Developments Unit Trust which was also established on 23 November 2011. The unitholders were the companies in their capacity as trustees, and the units were held in the same proportions as the shareholding in the company. The trust of which Neaniki Property Developments held its units as trustee was the Neaniki Property Developments Trust, in which the Karas and Meletsis families held an interest: the primary beneficiaries being Mr Meletsis’ wife, Melissa Meletsis, Mr Karas’ daughters, Katherine Karas and Helen Karas and Mr Speer’s step-daughter, Anastasia Abela; and the general beneficiaries including a broad range of relatives and entities related to the primary beneficiaries. Mr Meletsis and his sister, were also the appointors of that trust.

The sale of the Nicholson St property to Establishment 5

31    Also on 23 November 2011, 70 Nicholson Street executed a contract to sell the Nicholson St property to Establishment 5 for $3 million (the contract of sale). The contract of sale, including the s 32 vendor’s statement, was prepared by Best Hooper Solicitors, who were engaged by Mr Speer in about mid-November 2011 and included terms to the following effect:

(a)    the price of $3 million would be paid by way of a deposit of $300,000 upon signing, with the balance of $2.7 million payable at settlement subject to special conditions 4 and 5 and constituted by:

(i)    a cash payment of not less than $700,000; and

(ii)    an amount payable to third parties not exceeding $2,000,000 as provided in special conditions 4 and 5;

(b)    special condition 4 provided that Establishment 5 assumed liability for the Rover mortgage, and 70 Nicholson Street gave a warranty that the monies due and payable under the Rover mortgage, including accrued interest and legal costs, would not exceed $1.35 million;

(c)    special condition 5 provided that Establishment 5 would pay all unpaid debts of 70 Nicholson Street as specified in a creditors schedule annexed to the contract of sale. 70 Nicholson Street gave a warranty that the debts would not exceed $650,000;

(d)    settlement was to occur on or before 19 December 2011;

(e)    the “Particulars of Sale” section of the contract of sale (page 3) recorded that the Nicholson St Property was sold:

(i)    “subject to existing mortgage” and reference is then made to the Rover mortgage, but not to the Karas mortgage; and

(ii)    “subject to lease” and reference is then made to the Tithang lease, but not to any assignment of that lease; and

(f)    special condition 10 was entitled “Subdivision and Assignment” and subparagraphs (b) and (c) thereof provided for assignment by 70 Nicholson Street to Establishment 5 of all contracts entered into by the company of “any subdivided part of the Property under a prescribed contract”, which included the right to the deposits held. Further, 70 Nicholson Street was required to “execute a formal Deed of Assignment in respect of each and every sale referred to in the preceding sub-condition”.

32    The deposit of $300,000 was paid on 24 November 2011 and settlement took place the following day, only two days after the execution of the contract of sale. It appears that the settlement was effected directly between Mr Meletsis and Mr Speer. The transfer of land for the Nicholson St property was lodged for registration with the Land Titles Office on 8 December 2011 and on 9 December 2011, Mr Speer lodged the discharge of the Rover mortgage for registration with the Land Titles Office.

33    It was not in dispute that Establishment 5 did not pay any funds to 70 Nicholson Street at settlement. There was a payment of another $500,000 about a month later, on 22 December 2011, which left $200,000 remaining to be paid. It is an admitted fact that the remaining $200,000 was never paid to 70 Nicholson Street.

34    As to the third party liabilities which Establishment 5 assumed as part of the consideration for the acquisition of the Nicholson St property:

(a)    it is now not in dispute that there was no amount owed by 70 Nicholson Street to Rover Nominees secured by the Rover mortgage; and

(b)    the legitimacy of some of the debts and expenses listed in the creditors schedule attached to the contract was challenged by the trustees. The trustees accepted that “up to about $300,000 of the debts referred to in the creditors schedule might have been legitimate debts of [70 Nicholson Street]” but in respect of the other debts and expenses they argued (primarily) that 70 Nicholson Street was not liable for those debts and expenses at the time of the contract because they were prospective costs which would only become due if the development proceeded.

Disbursement of the cash proceeds

35    The company paid out $300,000 of the $800,000 which it received to Advance Capital Plus Pty Ltd (Advance Capital Plus), a company associated with Mr Costanzo. The evidence given by Mr Meletsis as to the circumstances of that payment is considered later in these reasons.

36    The remaining $500,000 was used as part payment of the surrender fee payable to Pamplin for the surrender of its lease over the Nicholson St property and the transfer of the business known as “the Hub” to 70 Nicholson Street. The property was sold subject to the Tithang lease which still had a number of years to go. It was not controversial that an agreement was reached between Pamplin and 70 Nicholson Street prior to the contract of sale being entered into that Pamplin would surrender the Tithang lease in consideration of 70 Nicholson Street paying Pamplin the sum of $750,000. A deed dated 14 October 2011 was executed, although it appeared that Pamplin did not provide its executed version of the deed to 70 Nicholson Street until 6 December 2011 and that Mr Meletsis did not sign the deed on behalf of 70 Nicholson Street until around 16 January 2012. Whilst the evidence left unexplained why the deed was dated 14 October 2011 when it was not executed until much later, no significance attaches to timing of execution (which occurred after 70 Nicholson Street contracted to sell the Nicholson St property) as the trustees accepted the Meletsis parties’ case that the lease was the subject of an agreement to surrender at the time that the contract of sale for the Nicholson St property was entered into. Under the deed, the consideration of $750,000 was payable to Pamplin within 28 days of the execution of the deed upon which the lease would be surrendered. In fact, the surrender fee of $750,000 was paid in three tranches: $500,000 on 22 December 2011; $120,000 on 23 February 2012 and $130,000 on 27 February 2012; with the lease being surrendered on 27 February 2012 upon final payment.

Discharge of the Karas mortgage at settlement

37    At settlement on 25 November 2011, Mr Meletsis also provided Mr Speer with a discharge of the Karas mortgage (signed by Mr Karas) and the discharge of the Karas mortgage was lodged for registration at the Land Titles Office with the transfer of land on 8 December 2011. It was admitted by the Meletsis parties that 70 Nicholson Street did not repay any amount to Mr Karas, either by 27 February 2010 (pursuant to the terms of the Karas mortgage) or at all.

Completion of the development

38    Following settlement of the contract of sale, Establishment 5 proceeded to construct 48 residential apartments on the Nicholson St property, completing the development by about August 2014.

70 Nicholson Street wound up

39    In September 2013, 70 Nicholson Street was wound up on the application of the State Revenue Office for non-payment of the land tax assessment that had issued in December 2011.

Establishment 5’s payment of $2.2 million to Hallmark in 2014

40    In about November 2014, Establishment 5 (through Mr Speer) gave Mr Meletsis a bank cheque for the credit of Hallmark for $2.2 million (settlement cheque). At all material times, Mr Meletsis was the sole director of Hallmark which, relevantly, was wholly owned by Genesis in its capacity as trustee of the GH Family Trust, of which both Mr Karas and Mr Meletsis were beneficiaries. On 10 November 2014, Mr Meletsis deposited that cheque in an ANZ Bank account held by Hallmark, being a Business Classic Account BSB 013-381 account number 348947991 (the Hallmark account). On 12 November 2014, Hallmark received $2,231,484.66 (which included the settlement cheque) into the Hallmark account, against which the narration “Settlement 70 Nicholson St” was entered in its MYOB bank register.

41    The trustees’ pleaded case is that by an oral arrangement between the parties that was not documented and was “off the books”, Establishment 5 did not have to pay for the acquisition of the Nicholson St property until the end of the Nicholson St development and that payment would be made at the direction of Mr Meletsis to one of either Mr Meletsis’ or Mr Karas’ companies, rather than to 70 Nicholson Street directly.

Bankruptcy of Mr Karas

42    On 16 October 2015 Mr Karas filed a debtor’s petition for bankruptcy. His liabilities at the time included the tax debt, which remained unpaid.

Deed of Assignment

43    By a deed of assignment dated 11 September 2017, 70 Nicholson Street and the liquidators of the company each assigned to the trustees all of their right, title and interest in causes of action which they had against the defendants arising out of the sale of the property to Establishment 5.

OUTLINE OF THE PARTIES’ CASES

44    By way of outline, the trustees’ case is that Mr Meletsis, the sole director of 70 Nicholson Street as at November 2011: (1) caused 70 Nicholson Street to sell the Nicholson St property to Establishment 5 for $3 million at an undervalue of $905,000 without taking any steps to have the property valued, advertised or otherwise marketed; (2) caused 70 Nicholson Street to collect only $800,000 of the $3 million sale price (plus the value of at most about $300,000 of 70 Nicholson Street’s debts that were discharged by Establishment 5 after completion); and (3) caused the remainder of the consideration to be paid to Mr Meletsis’ company Hallmark in 2014, after the Nicholson Street development was complete and after 70 Nicholson Street had been wound up at the suit of the Commissioner of State Revenue. Further, as part of the sale of the Nicholson St property Mr Karas agreed to release the Karas mortgage without receiving the amount then secured by it (i.e. the sum of $218,842.24 (revised figure) plus interest) which, if paid, would have been caught by the Commissioner of Taxation’s freezing orders and potentially available to be applied in reduction of his tax debt.

45    The trustees claim that these facts give rise to:

(a)    a right in 70 Nicholson Street to equitable compensation from Mr Meletsis for breaches of his fiduciary duties;

(b)    a right in 70 Nicholson Street to equitable compensation/an account of profits from Hallmark for knowing receipt of property obtained in breach of Mr Meletsis’ fiduciary duties and for knowing assistance in Mr Meletsis’ breaches;

(c)    a right in 70 Nicholson Street to equitable compensation/an account of profits from Establishment 5 for knowing receipt of property obtained in breach of Mr Meletsis’ fiduciary duties and for knowing assistance in Mr Meletsis’ breaches;

(d)    a right in 70 Nicholson Street to trace the proceeds of Mr Meletsis’ breaches and to a constructive trust over any property which represents the traceable proceeds in the hands of Hallmark (the cash received and its traceable proceeds) and Establishment 5 (units in the Nicholson St property development and their traceable proceeds); and

(e)    rights in the trustees (independent of the assignment deed) under ss 120 and/or 121 of the Bankruptcy Act and/or s 172 of the Property Law Act arising out of the discharge of the Karas mortgage for no or inadequate consideration. It is contended that those rights mean that the discharge of the Karas mortgage is void as against the trustees and entitle the trustees to trace the proceeds of the funds which ought to have been paid in discharge of the Karas mortgage into the hands of Hallmark (the cash received and its traceable proceeds) and Establishment 5 (units in the development and their traceable proceeds).

46    The Meletsis parties strenuously denied the allegations against them. By way of outline, they contended that the trustees’ claim of a concerted plan by the defendants to transfer the Nicholson St property to avoid creditors was not supported by the facts and matters on which the trustees rely. They also contended that the allegation that the $2.2 million that Establishment 5 paid to Hallmark in 2014 in fact represented payment of the unpaid portion of the purchase price, which was, thereby, diverted to Hallmark, was severely undermined by the trustees’ concession that some of the creditors in the creditors schedule were likely genuine.

47    They also advanced three factual matters by way of defence which were not pleaded and the subject of an unsuccessful application at the commencement of the trial for amendment of their defence to raise those matters. Notwithstanding, the Meletsis parties led evidence in support of their case that:

(a)    there is a “much simpler and more plausible explanation” for the transfer of the property to Establishment 5 in November 2011 – namely that Mr Meletsis was unable to proceed with a development without an injection of money and expertise and the Leading Edge parties provided both. The transfer of the property to a new company, as trustee of a new unit trust, was not part of the plot to defeat creditors, but rather was the means by which Mr Meletsis was able to secure the finance and the experience that the project was lacking. As a result of the Leading Edge parties’ involvement, the development was able to proceed;

(b)    the $2.2 million which Establishment 5 paid to Hallmark in 2014 was in fact advanced by way of loan to enable Hallmark to pay out an overdraft facility with the ANZ Bank; and

(c)    there was no amount owed by 70 Nicholson Street to Mr Karas when the Karas mortgage was discharged in December 2011.

48    They further contended that 70 Nicholson Street’s “right, title and interest” in the causes of action assigned was limited to the right of indemnity that 70 Nicholson Street, as trustee, had to be indemnified out of the proceeds of those causes of action in respect of liabilities properly or reasonably incurred by it in acting as trustee, which in this case were a debt of $152,000 to the Commissioner of State Revenue and a debt of $550 to the Commissioner of Taxation. Alternatively they contended that 70 Nicholson Street, as trustee, held those causes of action on trust for the unit trust and was subject to the equities created by the unit trust in favour of the unitholders. Thus, the argument went, had 70 Nicholson Street as trustee brought those actions itself, subject to its rights of indemnity it would have been bound to account to the unitholders for the proceeds of any recovery pursuant to those causes of action if successful.

EVIDENCE

49    The trustees relied on the following evidence at trial:

(a)    the admissions on the pleadings;

(b)    the documents tended in evidence;

(c)    evidence obtained at public examinations of Mr Georgakopoulos, Mr Costanzo, Mr Speer, Mr Francke, the solicitor from Best Hooper involved in the contract of sale for the Nicholson St property and Mr Karas; and

(d)    an expert report as to valuation provided by Mr Allan Bertacco (Mr Bertacco).

50    Mr Bertacco was asked to provide a valuation of the Nicholson St property on three separate bases, two of which are relevant based on the evidence: his evidence was that at 23 November 2011, the property was worth $3,865,000 if sold on a vacant possession basis and $3,905,000 if sold with a lease subject to a deed of surrender which required vacant possession on 27 February 2012. Mr Bertacco was not cross-examined and the defendants did not put any opposing evidence as to valuation. I accept Mr Bertacco’s valuation on both bases which is also consistent with the opinion expressed by CBRE in the valuation report which it prepared for ANZ on 12 May 2011 which valued the Nicholson St property on a land value basis at $3.9 million (excluding GST).

51    Mr Meletsis and Hallmark called two witnesses to give evidence – Mr Meletsis and Mr Karas – and tendered various documents. The trustees submitted that the Court should make adverse credit findings against Mr Meletsis and Mr Karas and should largely reject their evidence on contentious factual issues.

52    Given the nature of the allegations, the principles in Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336 (Briginshaw) apply and a very high level of satisfaction should be reached in determining whether the trustees’ claims against the defendants have been established on the evidence.

53    The basic facts and chronology (which, as stated, were generally not controversial) are not repeated in examining the evidence, other than making reference where appropriate to give context to disputed matters.

MR MELETSIS

54    Mr Meletsis is the brother-in-law of Mr Karas. He also has had a working relationship with Mr Karas since 1998 and between 2009 through to 2011 worked out of the same office with Mr Karas at 171 La Trobe Street, Melbourne.

55    Mr Meletsis was:

(a)    the sole director and secretary of 70 Nicholson Street in the period from 27 May 2011 until 30 June 2012;

(b)    at all material times the sole director and secretary of Genesis, the trustee of the GH Family Trust, a unitholder in the 70 Nicholson Street Unit Trust, a “specified beneficiary” of the GH Family Trust and from 30 March 2015 he has been the appointor and guardian of the GH Family Trust; and

(c)    a director of Hallmark from 19 October 1995 and its sole director from 15 January 2014. The shares in Hallmark at all material times have been wholly owned by Genesis in its capacity as trustee of the GH Family Trust.

56    Controversial parts of Mr Meletsis’ evidence included the following key topics:

(a)    when Mr Meletsis first learnt about the freezing orders made against Mr Karas and/or Mr Karas’ tax debt (topic 1);

(b)    his awareness of 70 Nicholson Street’s prospective liability for land tax prior to the sale of the Nicholson St property (topic 2);

(c)    his knowledge about whether any amount was secured by the Rover mortgage prior to the sale of the Nicholson St property (topic 3);

(d)    the creditors schedule (topic 4);

(e)    the circumstances of the sale of the Nicholson St property to Establishment 5 (topic 5);

(f)    how the purchase price of $3 million was established (topic 6); and

(g)    the payment of $2,231,484.66 to Hallmark in November 2014 (topic 7).

Topic 1

57    Mr Meletsis’ evidence was that he first learnt that Mr Karas had tax liability of around $44 million and that freezing orders had been made against Mr Karas’ assets when he was served with a garnishee notice by the Australian Taxation Office (ATO) in March or April 2012 in respect of the tax owed by Mr Karas and as a result he had a discussion with Mr Karas. Mr Meletsis denied knowledge of two newspaper articles, one on the front page of the Saturday Age on 2 July 2011 and another article published in the Saturday Age on 30 July 2011, at or around the time they were published. His evidence (at least with respect to the first article) was that he did not become aware of that article until around the time he received the garnishee notice. The import of both articles is that they reported that the ATO had obtained orders freezing up to $44 million of assets of Mr Karas and associated companies in respect of tax liabilities owed by Mr Karas. Mr Meletsis also denied having any discussion with anyone at or around that time about the articles.

58    I find Mr Meletsis’ denial that he neither knew of Mr Karas’ tax debt of around $44 million nor of the freezing orders obtained by the ATO until March 2012 implausible and not credible. First, Mr Meletsis had a close personal and business relationship with Mr Karas: they worked from the same office, they ran the finance broker, State Securities, together on a day-to-day basis and Mr Karas was married to Mr Meletsis’ sister. Secondly, the ATO had issued a garnishee notice to 70 Nicholson Street in respect of Mr Karas’ tax debt of $44 million in July 2011. The garnishee notice was sent to the registered office of 70 Nicholson Street, which was at the same offices at level 9, 171 La Trobe Street, Melbourne out of which Mr Meletsis worked. Mr Meletsis agreed that he was in the office all of July 2011 but denied receiving the letter. That answer is also implausible given the nature of the document and that Mr Meletsis was the sole director of 70 Nicholson Street at the time. Thirdly, the denial that he knew about the freezing orders before March 2012 was contrary to a loan agreement signed by Mr Meletsis and Mr Karas pursuant to which Mr Meletsis agreed to lend Mr Karas $250,000 to cover legal fees with a commencement date of 19 August 2011 and on terms that the loan would be secured if the ATO or the Supreme Court of Victoria allowed security to be granted. Mr Meletsis denied having seen that document before but did not deny that it had his signature on it, though he maintained that he was “quite sure that [he] did not sign” that document. On his evidence, the loan was made in 2012 and that the document he signed specifically identified the real property that was being given as security for the loan and referred to the court order. He speculated in evidence that the document that was shown to him was a draft, but nonetheless accepted that it was possible that he and Mr Karas had signed this loan agreement. Tellingly, even if there was a subsequent loan agreement, the terms of the “draft” loan document are inconsistent with Mr Meletsis’ claim that he did not know about the freezing orders until March 2012 and it is inexplicable that Mr Meletsis would have agreed to make a loan to Mr Karas on such terms had he not been aware of the freezing orders against Mr Karas at the time. Fourthly, Mr Meletsis’ evidence that he did not know about the freezing orders and Mr Karas’ tax problems in mid-2011 was contradicted by the evidence of Mr Karas, who agreed in cross-examination that had had spoken to Mr Meletsis about the freezing orders in mid-July 2011 and that Mr Meletsis was aware that Mr Karas had to borrow funds from Mr Meletsis in order to pay his legal fees because the freezing orders prevented him from using his own money. Mr Karas also confirmed that Mr Meletsis lent the funds to him in August 2011. Mr Karas gave the following evidence:

And the existence of the freezing order has been splashed over the front page of the Saturday paper. It wouldn’t really have been fair of Mr Meletsis for you not to have sat down and talked to him about the freezing order by this stage, would it?---You’re right.

And you did, didn’t you?---I sat down. I explained to him that I had a meeting with the lawyers and that they put 44 million – $45 million, which is unbelievable.

….

During that first six or seven-month period, Mr Meletsis was fairly supportive of you, I assume?---Well, that’s all I was doing. Yes, well, when you say he was supportive, yes, I mean, you know, he asked me what it was and I said, “Look, it’s a mistake.” And, you know, for quite a while for six months, we thought – because at 44 million, personally, as an ATO debt, you know, it’s hard to fathom that – very hard.

….

Mr Meletsis start loaning you money to pay legal fees for the freezing order from 19 August 2011?---He lent me money to pay the legal fees, yes. And those were legal fees that were only payable because of the freezing order?---The tax assessment, yes.

59    I accordingly find that Mr Meletsis knew about the freezing orders and Mr Karas’ tax liability by 19 August 2011 at the latest.

Topic 2

60    The trustees’ case is that Mr Meletsis knew at the time that the Nicholson St property was transferred to Establishment 5 that the State Revenue Office was likely to assess 70 Nicholson Street on a special land tax liability for the 2011 financial year of around $138,000.

61    As mentioned, on 16 August 2011, the State Revenue Office wrote to 70 Nicholson Street advising that an investigation had been commenced into whether the Nicholson St property had ceased being used for low cost accommodation. Mr Meletsis responded to that letter in early September 2011 advising that preliminary works on the development had commenced at the property and a caretaker resident was in place but that the company had not made a decision to cease using the property for low cost accommodation. When put to him that he knew at the time that the Nicholson St property was transferred to Establishment 5 on 23 November 2011 that there was a prospect that the State Revenue Office might levy a special land tax, his answer was “no because the place was still used as a boarding house”. That answer was contradicted by the contents of a facsimile that Mr Meletsis sent on 8 February 2012 and cannot be accepted as truthful. In that facsimile which Mr Meletsis sent to Origin disputing a final electricity account to the Nicholson St property, Mr Meletsis wrote that the tenant (Tithang) had moved out on or about 30 April 2011 and after numerous attempts by the tenant to get a final meter reading he took over and called Origin in August 2011 and made an appointment “for a final meter read as the property [was] vacant”. In cross-examination, Mr Meletsis maintained that three or four boarders had not left. He also maintained that he wanted to keep the option open to continue to use the property for low cost accommodation if the development did not proceed. Be that as it may, the business was no longer operating as from the end of April 2011; no rent was being collected by 70 Nicholson Street from the use of the property as low cost accommodation; and those boarders who remained in occupation were short term until such time as they could be moved out. What is to the point is that the boarding house business did not recommence after the tenant moved out at the end of April 2011 and the fact is that the property had ceased to be used for the purposes of low cost accommodation following the commencement of the preliminary works. Pertinently also, whether or not Mr Meletsis wished to keep the option open to use the property for low cost accommodation, he knew when the property was sold to Establishment 5 in late November 2011 that the property had not been used as a rooming house since the end of April 2011, contrary to the position he represented to the State Revenue Office by letters dated 31 January 2012 and 19 April 2012 in which he wrote that the property was still a “rooming house” and that its use had not changed. Those letters go to the credit of Mr Meletsis as he knew by the time that the Nicholson St property was sold to Establishment 5 that the Tithang lease was to be surrendered, which in fact happened on 27 February 2012. When asked about this in cross-examination, Mr Meletsis’ answer in self-justification was that he was not responding to what was happening then but what had been the position in 2011. That is not what he wrote however and I reject his answer as truthful.

62    It was contended for Mr Meletsis that it was not reasonably open on the evidence for the Court to find that an assessment of 70 Nicholson Street for special land tax was a fait accompli following the letter from the State Revenue Office of 16 August 2011. That contention misses the point that Mr Meletsis, on any view, was on notice that the State Revenue Office was investigating whether there had been a change in use of the Nicholson St property and whether 70 Nicholson Street was liable for special land tax as a result of the change in use. Mr Meletsis gave evidence that he took the existence of a land tax clearance certificate which 70 Nicholson Street’s solicitors, Best Hooper, obtained from the State Revenue Office for the purposes of inclusion in the s 32 statement to the contract of sale to mean that there was no land tax levy owing when he signed that contract. That certificate does not assist Mr Meletsis as it stated specifically that the amount of land tax shown on the certificate related to the amount of land tax due and payable as at the date of the application for the certificate “and not to any future liability” of the land. Mr Meletsis’ evidence was not supported by the plain terms of that certificate and I do not accept his evidence that he relied upon that certificate to form the view that no liability would arise.

Topic 3

63    It was uncontroversial that nothing was owed by 70 Nicholson Street to Rover Nominees, secured by the Rover mortgage, at the time that the contract of sale was entered into and the Rover mortgage discharged. At trial the Meletsis parties abandoned their defence that the amount of $1.295 million was owed by 70 Nicholson Street to Rover Nominees and instead put the case that Mr Meletsis believed at the time that the contract of sale was entered into that the Rover mortgage did secure a liability of 70 Nicholson Street to Rover Nominees. Mr Meletsis did not give evidence-in-chief on this topic but instead the Meletsis parties sought to rely on the evidence he gave in his s 81 public examination that he held this belief because of:

(a)    his knowledge that the Rover mortgage remained registered on the title of the Nicholson St property;

(b)    his knowledge that Rover Nominees had taken an assignment of the ANZ mortgage on the Nicholson St property in about 2008;

(c)    his knowledge that, at the time Rover Nominees took the assignment of the ANZ mortgage, 70 Nicholson Street had owed the ANZ Bank approximately $1.35 million; and

(d)    a conversation he had with Mr Costanzo prior to the sale of which Mr Costanzo told him that 70 Nicholson Street owed Rover Nominees $1.35 million under the Rover mortgage.

64    That evidence was said to be consistent with Mr Meletsis’ conduct, on 2 December 2011, in paying $300,000, at Mr Costanzo’s, direction to Advance Capital Plus on account of unpaid interest which had accrued under the Rover mortgage prior to the sale. It was submitted that Mr Meletsis was unshaken in cross-examination on this matter. I disagree. There are a number of matters that tell against the plausibility of Mr Meletsis genuinely believing that the Rover mortgage secured moneys owed by 70 Nicholson Street to Rover Nominees at the time of the contract of sale. First of all, it requires me to accept that Mr Meletsis was unaware at the time that Bourke Property Group used the proceeds from the sale of its principal asset, a nightclub property in Bourke Street, Melbourne, to pay out the ANZ Bank. I am asked to believe that he did not know in circumstances where Mr Meletsis was the sole director and shareholder of British Securities Pty Ltd, which owned all the shares in Bourke Property Group and all of the units in the Bourke Property Unit Trust; although Mr Meletsis was not a director of Bourke Property Group, he was a signatory to the Bourke Property Group cheque account in December 2008 and he agreed in cross-examination that he did not have reason to believe that he was not in July and August 2008 (when Bourke paid out ANZ); moreover, both Mr Meletsis and Mr Karas gave witness statements to the Administrative Appeals Tribunal in 2014 and 2015 respectively stating that Mr Meletsis had the “day-to-day” control of Bourke Property Group and the affairs of the Bourke Property Trust at the time of the sale of the nightclub; on Mr Meletsis’ own evidence, he knew of that sale at the time it occurred and knew that the nightclub was sold for around $2.4 million. When asked in cross-examination what Bourke Property Group did with the sale proceeds, Mr Meletsis replied that Bourke Property Group paid its unitholders. When confronted with an extract from the accounts of Bourke Property Group which showed the payment of $1.295 million to ANZ on 3 July 2008 out of the proceeds of sale, Mr Meletsis maintained he was not aware at the time of the sale that Bourke Property Group used the proceeds of the sale of the night club to pay out the ANZ mortgage. I found that response implausible in light of his involvement in the affairs of Bourke Property Group. Moreover, it is also implausible that Mr Meletsis did not know in 2011 that no amount was owed by 70 Nicholson Street to Rover Nominees. After all, Mr Meletsis was the sole director of 70 Nicholson Street at the time of the contract of sale and it is reasonable to infer that as the sole director of the company he was aware of the assets and liabilities of the company. Indeed, in the same witness statements that Mr Meletsis and Mr Karas made to the Administrative Appeals Tribunal in 2014 and 2015, both of them stated that Mr Meletsis managed the 70 Nicholson Street Unit Trust on a day-to-day basis in the 2006 to 2011 period. Tellingly, there was nothing in the evidence to indicate that the company’s books and records showed an indebtedness to Rover Nominees as at November/December 2011.

65    Mr Meletsis’ denial that he knew that no amount was owing was also inconsistent with the evidence that Mr Costanzo gave in his s 81 public examination. Mr Costanzo’s evidence was that the payment of $300,000 which was received in December 2011 was not in respect of the Rover mortgage or the Nicholson St property but related to a separate loan made by one of Mr Costanzo’s companies. Mr Costanzo was not called as a witness by the Meletsis parties and no explanation was given for not calling him. I infer that his evidence on this factual issue would have assisted the Meletsis parties.

66    I find that Mr Meletsis did know that no amount was owed on the Rover mortgage at the time of the sale.

Topic 4

67    The consideration payable by Establishment 5 to 70 Nicholson Street for the purchase of the Nicholson St property was to be discharged in part by Establishment 5 assuming $650,000 worth of liabilities of 70 Nicholson Street to third parties outlined in a creditors schedule annexed to the contract of sale. Mr Meletsis prepared that schedule which is divided into sales expenses, development expenses, statutory fees and holding costs. The statutory fees included the item “City of Yarra – Open Space Contribution $125,000”. It was not in contention that the open space contribution was not a debt of the company at the time the property was sold, as such contributions are only payable at the time of subdivision (see ss 18, 19 and 21 of the Subdivision Act 1988 (Vic)) and the application for subdivision of the Nicholson St property was only made in May 2014 and only approved in September 2014, but Mr Meletsis’ evidence was that it was his belief when he included that liability in the creditors schedule that it was a debt of the company. He gave as the source of his belief an email he had received from CBRE on 26 May 2011 which detailed, amongst other things, various items of expected costs to complete the development, including the open space contribution, which CBRE had adopted for the purposes of preparing a financial feasibility model for the ANZ Bank. The evidence however does not support a finding that he genuinely believed that 70 Nicholson Street was liable for open space contribution space contribution of $125,000 as at the date of sale of the Nicholson St property:

(a)    70 Nicholson Street had not received an invoice from the City of Yarra for the open space contribution;

(b)    70 Nicholson Street had not received a notice of valuation from the City of Yarra for the purposes of calculating the open space contribution;

(c)    there had been no call on 70 Nicholson Street to make any payment for the open space contribution; and

(d)    the financial feasibility model, which was prepared in May 2011, made it clear that the open space contribution was not due to be paid until about month 16 of the project. Mr Meletsis was aware of the financial feasibility model because he forwarded it to Mr Costanzo by email of 29 August 2011.

68    Three other expenses listed in the creditors schedule also fall into this category: City West Water $77,430, Drainage Levy $9,851 and Telstra $10,000. Each of those expenses were also projected costs of the development and Mr Meletsis acknowledged in cross-examination that he included those expenses based on the CBRE email.

69    The trustees argued for, but I do not include, the item Building Permit Fee $17,500 in this category, as there was an invoice in evidence from PWJ Building Surveying Services to 70 Nicholson Street dated 11 March 2011 for payment of that fee. It was submitted for the trustees that the “quote” was “clearly staggered based on stages of the development” but the document is not expressed as a “quote” but as a tax invoice.

Topic 5

70    The Meletsis parties, in their written opening submissions, advanced factual claims about why and how the sale of the Nicholson St property from 70 Nicholson Street to Establishment 5 came about by way of answer to the trustees’ case against them that the defendants engaged in a concerted plan to transfer the Nicholson St property to avoid the potential claims of creditors. Those factual claims were unpleaded and, in response to the trustees’ objection to the Meletsis parties running a case outside the scope of the pleading, the Meletsis parties made an oral application at the commencement of the trial to amend their defence to plead those factual claims. Although that application was refused, the Meletsis parties’ evidentiary case traversed some of those factual claims and, in their final written submissions, the finding which the Meletsis parties urged on the Court is that the transfer of the Nicholson St property to Establishment 5 was not part of a plot to defeat creditors but, rather, was the means by which Mr Meletsis was able to secure the finance and the experience needed for the development to be able to proceed. The Meletsis parties, however, had pleaded a bare denial to the allegation of the concerted plan to avoid the potential claims of creditors and the trustees once more objected to the Meletsis parties putting a case which departed from their pleaded case. There is substance in that objection, but consideration of the evidence, in any event, leads to the conclusion that Mr Meletsis cannot be believed on his explanation as to why the Nicholson St property was sold to Establishment 5 in November 2011.

71    Mr Meletsis’ evidence-in-chief was that he replaced Mr Karas as director of 70 Nicholson Street in May 2011 because, at the time, the company was looking for funding for the development and Mr Meletsis had a relationship with the ANZ Bank. However he was unable to secure funding from the ANZ Bank and in or around August 2011 he “looked for alternatives” to get funding for the development. In around late September 2011, he was contacted by Mr Potiriadis who told him that he had heard that he was looking for someone to invest in the development. Mr Meletsis told Mr Potiriadis that he had been unable to raise finance and was looking for alternative arrangements for people to invest in the development. Mr Potiriadis then introduced Mr Speer and Mr Zorbas to Mr Meletsis. The Leading Edge parties together ran a building company, Leading Edge Constructions. A meeting was arranged at the display suite in around October 2011 attended by the Leading Edge parties, Mr Meletsis and “possibly” Mr Karas. At that meeting it was agreed they would enter into a joint venture and for that purpose sell the property to a new company to act as trustee of a unit trust, with a purchase price of $3 million agreed upon. When asked in examination-in-chief as to why the Leading Edge parties did not simply just put money into 70 Nicholson Street rather than setting up a new company, Mr Meletsis’ explanation was that Mr Speer raised that a new entity should be established because the voluntary administration of 70 Nicholson Street in 2008 “was adverse for the lending”.

72    The evidence that 70 Nicholson Street could not be the entity because of the previous voluntary administration was unsupported by contemporaneous documentation from the ANZ Bank in June 2011. It appeared from that evidence that the reason that the ANZ Bank did not provide funding for the development was because it required a minimum of 32 off the plan sales before it would agree to lend. Mr Meletsis, on his own evidence, admitted that “the presales were the killer point in this deal not going through” and agreed in cross-examination that there was no reluctance by the ANZ Bank to lend to 70 Nicholson Street because of the previous voluntary administration. Despite that, Mr Meletsis denied that the previous voluntary administration had nothing to do with the decision to transfer the property from 70 Nicholson Street to Establishment 5. I do not accept that denial. Mr Meletsis agreed that aside from the ANZ Bank, he did not approach any other lender for finance so there was nothing otherwise in the evidence to indicate that the previous voluntary administration of 70 Nicholson Street may have posed an issue for it in obtaining funding. Moreover, Mr Speer was not called to give evidence to support Mr Meletsis’ version of events and, as no explanation was given for not calling him, I infer that his evidence on this factual issue would not have assisted the Meletsis parties.

73    Accordingly I reject the explanation put forward by Mr Meletsis as to why the Nicholson St property was transferred to Establishment 5 which, in the circumstances, lacks credibility. I note that no other evidence was presented by the Meletsis parties otherwise to explain why the Nicholson St property was transferred to Establishment 5.

Topic 6

74    It is alleged by the trustees that Mr Meletsis did not make a genuine, or any, attempt to sell the Nicholson St property for the best possible price. That allegation is denied by the Meletsis parties and, further, it is pleaded by the Meletsis parties by way of defence that Mr Meletsis, in determining his view that the sale price of the property was fair and reasonable:

(a)    considered the likely costs and expenses associated with developing the property;

(b)    considered the requirements placed on the property by the City of Yarra planning permit and the likely additional risks and expense that those requirements placed on the development;

(c)    considered the likely sale price for units and the difficulties the company had in selling units off the plan (at that stage only eight out of 48 units);

(d)    considered the difficulty he was having in obtaining finance to commence the project;

(e)    spoke to Mr Costanzo who told him that in his view the property was worth about $3 million;

(f)    considered the fact that Pamplin had an ongoing right to possession of the property;

(g)    considered the valuation report prepared by CBRE dated 12 May 2011;

(h)    considered the most recent City of Yarra rates notice for the Nicholson St property; and

(i)    considered the fact that he believed (as turned out to be true) that the ultimate beneficiaries of the 70 Nicholson Street Unit Trust would maintain an interest in the development by reason of them also being within the class of beneficiaries of the Neaniki Property Developments Trust.

75    The evidence fell way short of establishing those pleaded facts. If the account which Mr Meletsis gave in evidence is to be believed, he came up with the $3 million purchase price based on a rates notice and a discussion he had with Mr Costanzo, albeit that he admitted that he was aware at the time that an expert valuer had valued the property in May 2011 at $3.9 million. The more probable version of events, based on other evidence given by Mr Meletsis, is that the parties worked backwards to come up with the figure of $3 million. In his evidence-in-chief Mr Meletsis gave what I accept as a more reliable account as to how the $3 million purchase price was arrived at:

So the amount required to be paid, Mr Meletsis, under the contract of sale was $3 million?---Yes.

Do you recall how that figure came to be agreed?---The – the figure of $3 million?

Yes?---The figure of $3 million comprised of – [the Leading Edge parties] put $1 million into the deal – the 1350 outstanding mortgage to Mario’s company, [Rover Nominees], and the $650,000 in creditors.

That’s how it was calculated, was it?---Yes.

What about – and who made that calculation?---I had that calculation before I went to the [d]isplay [s]uite meeting in my head regarding the information I had on hand.

76    Consistently, Mr Meletsis also gave evidence-in-chief that he went to the October 2011 meeting “with the details of what the mortgage was, what the creditors were” and that he “had a number in [his] head about what [he] wanted for this deal”.

77    The evidence showed that the parties arrived at a purchase price based upon what the Leading Edge parties could pay in cash and how the balance of the purchase price could be accounted for. Whether or not Mr Meletsis believed that a $3 million price tag was reasonable having regard to what the property was valued at for rates purposes is not to the point. What is to the point is that on any view, Mr Meletsis did not make a genuine, or any, attempt to sell the Nicholson St property for the best possible price.

Topic 7

78    There was no dispute that 70 Nicholson Street only received $800,000 of the purchase price. The trustees’ case is that it was part of the concerted plan to defraud creditors that an arrangement was reached between the defendants that payment of the remaining $2.2 million would be made by Establishment 5 after completion of the development to one of either Mr Meletsis’ or Mr Karas’ companies as directed by Mr Meletsis, rather than to 70 Nicholson Street directly. It was also alleged by the trustees and admitted by the Meletsis parties that Establishment 5 paid $2.2 million to Hallmark in November 2014 which, in Hallmark’s MYOB bank register, was described as “Settlement 70 Nicholson St”.

79    There was a bare denial by the Meletsis parties to the allegation of the concerted plan. At the commencement of the hearing, one of the proposed amendments to their defence was to add the claim that the reason for Establishment 5 paying $2.2 million to Hallmark in November 2014 was because Hallmark had to repay a loan to the ANZ Bank of $2,238,755.76 and that Mr Speer agreed to provide Hallmark $2.2 million for the purpose of Hallmark paying the amount due to the ANZ Bank. Although the proposed pleading was not permitted, the Meletsis parties’ evidentiary case included establishing that the ANZ Bank had indeed called on payment of the debt owed to it in October 2014 and the repayment of that debt by Hallmark in November 2014. So much was not disputed by the trustees. However, in written final closing submissions, the Meletsis parties urged the Court to find that the $2.2 million was, in fact, a loan from Establishment 5 to Hallmark. That is an entirely new claim – not only is such a claim outside the scope of their defence, it is outside the scope of the proposed new pleading which the Court did not allow. It was not part of that proposed pleading that the $2.2 million was advanced by way of loan. There was merely the allegation that Mr Speer and Mr Meletsis agreed that the characterisation to be given to the $2.2 million would be further discussed and agreed upon at a later date. That agreement was particularised as “verbal and to the effect stated”.

80    As a matter of general principle, a party should be confined to its pleadings, the function of which is to state with sufficient clarity the case that must be met and which served to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against them: Banque Commerciale SA (in liq) v Akhil Holdings Ltd [1990] HCA 11; 169 CLR 279 at 286-287 (Mason CJ and Gaudron J). However, as Dawson J observed in that case at 296-7, pleadings do not impose so rigid a framework that if evidence which raises fresh issues is admitted without objection at trial, the case is to be decided upon a basis which does not embrace the real controversy between the parties – “special procedures apart, cases are determined on the evidence, not the pleadings”. In the present case, it seems to me that the Court should deal with the Meletsis parties’ claim that the $2.2 million was lent by Establishment 5 to Hallmark. First, that claim was the subject both of evidence-in-chief and cross-examination; secondly, the trustees’ tender bundle included a document upon which the Meletsis parties now rely in support of the finding which they urged the Court to make, namely a trial balance for Hallmark as at 30 June 2015; and thirdly, both parties in their oral and closing submissions addressed this point in some detail.

81    That said, the evidence fell far short of substantiating that the $2.2 million was in fact a loan from Establishment 5 to Hallmark. First, that was not Mr Meletsis’ evidence-in-chief. In answer to the question:

[W]as there any understanding as to the basis upon which [the $2.2 million] was going to be paid, any discussion with [Mr Speer] about whether that would be repayable or how it would be dealt with?

Mr Meletsis responded:

At that time my main concern was to get the [$2.2 million] to pay out the bank and then there were discussions about whatever the – the distribution for – regarding Nicholson Street development would be. It would be worked out after. I just needed the $2.2 million to send to the bank.

82    Later in cross-examination, Mr Meletsis gave the following answers about the $2.2 million:

MR MAIDEN: Now, your case about the payments that were made by Hallmark – I beg your pardon, to Hallmark in November 2014, is it fair for me to summarise those in this way. [ANZ Bank] made demands on Hallmark to repay an overdraft of about $2.2 million and Hallmark couldn’t afford to pay that itself. You reached out to Mr Speer and asked him to provide the money. He agreed to provide the money and he paid it to Hall – and he caused Establishment 5 to pay it to Hallmark and Hallmark used it to retire its [ANZ Bank] debt. Is that a fair summary?---Yes.

All right. And I think your case is that at the time that that happened you and Mr Speer didn’t agree on a particular characterisation that that payment would make and it was left to determine at some later date?---No, it was a loan. A loan at that point in time. It was determined later on how to categorise it after. I just needed $2.2 million.

Well, what does that mean? How can you have a loan and then recategorise it later down – later on?---Because there was money due on the development regarding the profit share.

Sorry, can you say that again, I didn’t hear it?---Because I believed there was money due from the profit share of the development.

The profit share on the development? Forgive me, I think this is the first I’ve heard of a profit share on the development. Can you tell me what that’s about?---The development at [the Nicholson St property].

Yes, and what was the profit share on the development?---Whatever the amount’s going to be, whether it was higher or lower, I just needed $2.2 million. It was going to be worked out once the numbers from the development were finalised.

And who was this profit share payable to?---To [Neaniki Property Developments].

To [Neaniki Property Developments]?---Which is our 50 per cent.

I see. And so you directed him to pay that $2.2 million to Hallmark – sorry, you directed [Establishment 5] to pay that – withdraw that. You directed him to make payment to Hallmark, and you now say that was a loan, and you would work out between yourselves how it would be characterised once the profit share was calculated.

MR GALVIN: I’m not sure that Mr Meletsis’ answer was clear then.

THE WITNESS: Yes.

MR MAIDEN: There never was an accounting, was there, Mr Meletsis?---No.

No. So is it your evidence sitting here today that that – those funds that were paid to Hallmark still exist as an outstanding loan to Establishment 5, is it?---On the books and records of Hallmark, it is a loan, yes.

83    In evidence was a trial balance as at 30 June 2015 for Hallmark (being the document included by the trustees in their court book) which records a loan between Establishment 5 and Hallmark of $2,231,811.70 as a non-current liability. I place little weight on that document. First, it was not Mr Meletsis’ evidence that he ever did reach agreement with Mr Speer that the $2.2 million would be recorded as a loan from Establishment 5 to Hallmark. Secondly, the evidence did not explain who prepared that trial balance and it did not appear from Mr Meletsis’ evidence that he prepared it. Thirdly, Hallmark’s own bank register contained the narration against the receipt of the cheque of $2.2 million: “Settlement 70 Nicholson St”. It was submitted by the Meletsis parties that the trustees elected not to cross-examine Mr Meletsis in relation to that narration and the failure of the trustees to put the narration to Mr Meletsis was in breach of the rule in Browne v Dunn (1893) 6 R 67 (Browne v Dunn). That submission is misconceived. The narration was an admitted fact and the Meletsis parties were on notice that the narration would be relied upon by the trustees in support of their case. It was for the Meletsis parties to put evidence before the Court in contradiction of that narration, if it not be accurate. They did not and there is no reason to doubt the accuracy of the narration. Fourthly, tellingly, there was no evidence to indicate that Establishment 5 has ever called on the loan or that Hallmark has been subject to any claim by Establishment 5 for repayment or that any repayment has been made by Hallmark.

84    Accordingly I do not accept that the evidence established that the $2.2 million was advanced by way of loan. Whilst the fact that Hallmark required funds at the time may have provided the occasion for Mr Meletsis calling on payment, neither that fact nor the use of the funds by Hallmark dictate the character of the payment as a loan. Rather, I find that the payment of $2.2 million by Establishment 5 to Hallmark was the balance of the purchase price due and owing to 70 Nicholson Street, but which was diverted to Hallmark. There are a number of matters which lend support to that conclusion.

85    First, the fact is that no amount was paid by Establishment 5 at settlement to obtain a discharge of the Rover mortgage because, as Mr Meletsis knew at the time, no amount was owed.

86    Secondly, the characterisation of the $2.2 million is corroborated by Mr Speer’s account in his public examination. Mr Speer gave evidence at his public examination to the effect that there was an oral arrangement between the parties, which was not recorded in writing and was “off the books”, which supplemented the contract of sale. Under that arrangement, Establishment 5 did not have to pay for the acquisition of the Nicholson St property until the end of the development, and that payment would be made as directed by Mr Meletsis. In his public examination, the following exchange occurred:

MR SEGAL: Was the arrangement that you would pay the $1.35 million plus interest at a later date to one of either Mr Meletsis’ or Mr Karas’ companies or entities?---Yes.

Yes?---Well, I didn’t know who I was paying.

But that you would pay at their direction?---That’s right.

So that the $1.35 million would be not paid to 70 Nicholson Street, but would be paid to, at a later date to an entity or entities at either Mr Karas’ or Mr Meletsis’ direction?---Well, at that time, I believe the Rover Nominees mortgage to be real, so I believe that someone had paid that out and that’s why I got delivered a discharge. And my understanding was that my responsibility was then to pay that mortgage amount, that debt, whatever it may have been, at the end of the development plus interest.

87    In relation to the payment of the sum of $2.2 million in 2014, Mr Speer’s evidence was as follows:

At some point down the track were you told – did somebody come up and say, “Remember that debt? I paid it out. Now, you pay me”?---Well, I mean, the arrangement was at the end of the development and when that occurred, I was directed to pay the money.

And who directed you to pay the money?---It was either [Mr Costanzo] or [Mr Meletsis]. I can’t remember but. Mario Costanzo or Nick Meletsis?---Yes, that’s right. Yes.

And do you know who the money was paid to?---I was told to pay it to the ANZ Bank.

And do you remember how much was paid?---I do.

And how much was paid?---$2.2 million.

88    Thirdly, Mr Speer confirmed that the reason that only $800,000 of the initial $1 million cash payment was paid to 70 Nicholson Street was because Establishment 5 did not have sufficient funds to pay the stamp duty associated with the transfer of the property. Mr Speer’s evidence was that $200,000 was added to the amount to be paid at the end of the development.

89    Fourthly, Mr Speer’s account finds corroboration in a spreadsheet he prepared entitled “Establishment 5 Developments Payments 70 – 74 Nicholson Street Purchase Loan” recording the interest payable on a loan amount of $1.55 million, which Mr Speer described as “for the Rover Nominees debt”. Whilst Mr Speer’s evidence in his public examination was vague and unspecific, tellingly, a “purchase loan” of $1.55 million tallies with the $1.35 million referrable to the Rover mortgage discharge amount, which formed part of the consideration payable by Establishment 5 and the $200,000 which Establishment 5 kept back from the cash payment made at settlement in order to pay the stamp duty on the transfer. The spreadsheet is also telling in its description, as is the commencement of the interest period (January 2012) correlatively with settlement of the transfer in November 2011 and the final accounting (October 2014), correlatively with the payment made to Hallmark in November 2014 at Mr Meletsis’ direction. Finally, the total interest payable as at October 2014 came to $307,006.38 which, according to Mr Speer, he was directed by Mr Meletsis to pay to entities identified as “Degani” and “BLF Developments”. Whilst Mr Meletsis disagreed with Mr Speer’s evidence that he had told him to make those payments, the spreadsheet provides cogent contemporaneous evidence that there was an arrangement between Mr Meletsis and Mr Speer to defer payment of the balance of the purchase price until completion of the development. Moreover, the inference to be drawn from the fact that the interest was paid to two third parties, rather than to 70 Nicholson Street, is that Mr Speer was directed either by Mr Meletsis or Mr Karas to pay the interest to those entities and that Mr Speer acted in accordance with the instructions given.

90    Fifthly, Mr Speer’s account also finds corroboration in Hallmark’s MYOB bank register in which the payment was described as “Settlement 70 Nicholson St”.

Mr Meletsis’ lack of credibility

91    Overall I found Mr Meletsis to be an unimpressive witness who was, at times, deliberately untruthful. The answers which he gave to the questions were often unresponsive, argumentative and generally self-serving. Moreover, the occasions on which he has been found not to be a truthful witness go to the core of the allegations against the defendants.

92    Another instance of a factual issue on which I do not accept Mr Meletsis’ evidence relates to whether Mr Georgakopoulos knew about the sale of the property to Establishment 5. Mr Meletsis’ evidence that he did know also lacked credulity. First, it is striking that whilst Mr Georgakopoulos held 25% of the units in the 70 Nicholson Street Unit Trust, Mr Georgakopoulos had no direct or indirect interest in the Establishment 5 Unit Trust, unlike Mr Karas and Mr Meletsis, who fell within the class of additional members of the Neaniki Property Developments Trust. Secondly, Mr Georgakopoulos gave evidence at his public examination which was significantly different to the evidence given by Mr Meletsis and Mr Karas during the trial. In particular, Mr Georgakopoulos’ evidence was that he did not know that the Nicholson St property had been sold. Mr Georgakopoulos’ evidence was as follows:

All right. Do you know what happened to the [Nicholson St property] in about 2011?---No.

Were you aware that the property was sold out of the trust?---No.

So were you aware that the property was sold to a company owned by Howard Speer?---No.

So, as far as you understand, what happened to the [Nicholson St property]?---As

far as I’m concerned, what happened to my share there, it got swallowed up in breakdowns, apparently.

…

So you had no idea that the [Nicholson St property], was sold out of the trust to Establishment 5 at the end of 2011?---No, no.

So when you became the director of 70 Nicholson Street did you still think that the property was - - -?---I thought I was waiting to get something out of it. That’s why I  - - -

And you thought the property was still in the trust?---I had no idea what was going on, you know. They’re just saying, “Become a director. We’re waiting for things to finalise, get some money in and do this”, running on hope, you know, and that’s - - -

Did they tell you that they had an arrangement with Howard Speer to develop the property?---No, no. Nothing like that.

No. Did they tell you that Howard Speer was developing the property?---No.

So what did they tell you about the property?---Nothing. They told me that the property – nothing, nothing.

Did you discover it any point before that the company was no longer the owner of the property when you became a director?---I didn’t know about it.

So you had no knowledge about the sale of [the Nicholson St property] at all?---No.

You weren’t consulted about it?---No, no.

You don’t know how much the property sold for?---Wouldn’t have a clue.

You don’t know who bought the property?---No.

And so Nick Meletsis, he was the director at the time of 70 Nicholson Street. He didn’t consult with you as a unit holder about the sale?---No.

And Tom Karas didn’t consult with you about the sale?---Nothing at all.

93    The Meletsis Parties did not seek to call Mr Georgakopoulos to give evidence at the trial and in cross-examination, each of Mr Meletsis and Mr Karas agreed that Mr Georgakopoulos could have attended to give evidence. I infer that his evidence would not have assisted the Meletsis parties.

94    Also lacking credence was Mr Meletsis’ denial that there was an arrangement that Establishment 5 did not have to pay the balance of the purchase price until after completion of the development. Mr Meletsis’ testimony was contradicted by the fact that no amount was paid to obtain the discharge of the Rover mortgage. It was also contradicted by the two pieces of documentary evidence, namely, the spreadsheet entitled “Establishment 5 Developments Payments 70 – 74 Nicholson Street Purchase Loan” which is addressed above and the description of the payment of the $2.2 million in Hallmark’s MYOB ledger.

95    In the end, I found Mr Meletsis’ evidence largely an attempt at self-justification, which lacked a reliable evidentiary foundation on which to accept it.

MR KARAS

96    Mr Karas was also an unimpressive witness, who gave inconsistent evidence and at times was shown to be deliberately untruthful. Instances were as follows:

(a)    Mr Karas initially maintained that Mr Meletsis did not know about the freezing order “until later [2011] or the following year” but when presented with the articles published in July 2011 and the signed loan agreement, both consistent with the probability that he and Mr Meletsis had discussed the freezing order soon after it was imposed, Mr Karas changed his evidence;

(b)    Mr Karas gave a witness statement to the Administrative Appeals Tribunal in 2014 stating that Mr Meletsis had the “day-to-day” control of Bourke Property Group and the affairs of the Bourke Property Trust at the time of the sale of the nightclub; in his examination-in-chief in this proceeding, however, Mr Karas changed that evidence to say that there was really no day-to-day running of the Bourke Property Group. When pressed, Mr Karas admitted that he had changed his evidence;

(c)    on several occasions in his public examination, when asked about the funding of the assignment of the ANZ mortgage to Rover Nominees, Mr Karas answered the question by directing the examiner to direct the question to Mr Meletsis. At no point did Mr Karas volunteer an answer from his personal knowledge as to how the arrangement between Bourke Property Group, Rover Nominees and the ANZ Bank came about. Each answer was to direct attention to Mr Meletsis. The clear inference from Mr Karas’ answer was that the payment had been organised by Mr Meletsis or that Mr Meletsis was the person who knew about the circumstances of that payment. In this proceeding, however, Mr Karas gave an entirely different version in cross-examination, namely that he arranged the assignment of the ANZ mortgage to Rover Nominees and paid out the ANZ mortgage through Bourke Property Group using “family money” by taking a redraw on his house and “through other trusts”. On his own evidence in this proceeding, it follows that he also knew that the Rover mortgage did not secure any amount owed by 70 Nicholson Street to Rover Nominees;

(d)    Mr Karas accepted that he organised for the Karas mortgage to be registered for the full amount of $755,000, notwithstanding that he had an arrangement with Mr Georgakopoulos and Genesis that they would not bank their cheques, when the amount actually loaned and secured by the Karas mortgage was only $218,842.24 (revised figure). He agreed in cross-examination that he orchestrated the appearance of a mortgage securing $755,000 in order to convince Ms Tsamis that her units in the 70 Nicholson Street Unit Trust were worth less than they actually were;

(e)    Mr Karas also agreed that he had orchestrated a notice to quit and a notice to pay from Rover Nominees to 70 Nicholson Street in order to put pressure on Ms Tsamis to resolve the County Court proceeding.

97    These are all matters that go to Mr Karas’ credit and I was left with the clear impression that the testimony he gave on matters against his interest should be considered with considerable caution. That testimony importantly included the circumstances of the discharge of the Karas mortgage.

98    On the trustees’ pleaded case, the Karas mortgage was discharged for nil consideration either at settlement on 25 November 2011 or when the discharge was lodged at the Land Titles Office on 8 December 2011: see para 58(c)-(d) and the particulars to para 101 of the second amended statement of claim. On the Meletsis parties’ pleaded case, the Karas mortgage only ever secured the debt of $218,842.24 (revised figure) owing by 70 Nicholson Street to Mr Karas because of an agreement that Mr Georgakopoulos and Genesis reached with Mr Karas in February 2009 that they would return their cheques to Mr Karas without presentation and forgive the debts owed to them by 70 Nicholson Street. It was further alleged that the debt of $218,842.24 (revised figure), which was secured by the Karas mortgage, was “discharged” by a “collateral agreement” between 70 Nicholson Street and Mr Karas made on or about 17 June 2009 in consideration for 70 Nicholson Street transferring the redeemed Nafpaktos units in the 70 Nicholson Street Unit Trust to Genesis. The transfer of the Nafpaktos units to Genesis on or about 17 June 2009 pursuant to that “collateral agreement” was also pleaded: see para 31B of the defence. In the premises, it was alleged, all amounts owing under the Karas mortgage were repaid by on or about 17 June 2009 by operation of the “collateral agreement” (see para 31C of the defence).

99    In their closing written submissions, the Meletsis parties appeared to depart from their pleaded case by submitting that the discharge was agreed to on 22 June 2009 and given in consideration of the return of the cheques payable to Genesis and Mr Georgakopoulos. Unsatisfactorily, the evidentiary basis for that submission was not identified, nor addressed by senior counsel for the Meletsis parties in final submissions. Furthermore, the Meletsis parties had unsuccessfully applied at the commencement of the trial to amend their defence to plead that at a meeting of unitholders of the 70 Nicholson Street Unit Trust on 22 June 2009 attended by Mr Karas (as director for 70 Nicholson Street), Mr Georgakopoulos (for his family trust) and Mr Meletsis (for Genesis), resolutions were passed to the effect that Genesis and Mr Georgakopoulos would return their unpresented cheques to 70 Nicholson Street and 70 Nicholson Street would return both unpresented cheques in exchange for Mr Karas providing a discharge of the Karas mortgage. Presumably though, the Meletsis parties relied for that submission on minutes of a meeting on 22 June 2009 tendered in evidence through Mr Karas in his re-examination (without objection). That document records that a meeting of unitholders of the 70 Nicholson Street Unit Trust on 22 June 2009 was attended by Mr Karas (as director for 70 Nicholson Street), Mr Georgakopoulos (for his family trust) and Mr Meletsis (for Genesis) and that the following resolutions were passed on 22 June 2009, namely that:

(a)    Mr Georgakopoulos (for his family trust) return his unpresented cheque to 70 Nicholson Street to cancel the Karas mortgage in favour of Mr Karas;

(b)    Mr Meletsis return the unpresented cheque to Genesis to 70 Nicholson Street to cancel the Karas mortgage in favour of Mr Karas; and

(c)    70 Nicholson Street forward both unpresented cheques to Mr Karas in exchange for Mr Karas providing a discharge of the Karas mortgage.

100    Aside from not identifying the relevant evidence said to support their submission, the closing written submissions also unsatisfactorily did not address whether the Meletsis parties sought to resurrect the new case which they were not permitted to plead, given that the minutes had gone into evidence, or whether they relied on those minutes as providing evidentiary support for their pleaded case. However, there are a number of reasons for not accepting those minutes as reliable evidence that the Karas mortgage was discharged for consideration in 2009, whether those minutes are relied on as evidentiary support for the pleaded defence or for the new case.

101    First, if Mr Karas’ account is to be believed, the 280 units that Nafpaktos had held in the 70 Nicholson Street Unit Trust were taken up by Genesis, following which the unitholders met on 22 June 2009 to pass the resolutions as recorded in the 22 June 2009 minutes. The difficulty with that evidence is that the terms of settlement with Nafpaktos provided for the Nafpaktos units to be redeemed and cancelled; the terms of settlement did not provide for Nafpaktos to transfer its units to Genesis. Consistently, there was no documentary evidence to show that there was an issue of extra units to Genesis or which substantiated that the Nafpaktos units were transferred, rather than cancelled.

102    Secondly, the terms of the resolution are inconsistent with the agreement that Mr Karas made with Rover Nominees a day later to give an executed discharge of the Karas mortgage to Rover Nominees for Rover Nominees to hold as part of a suite of measures which 70 Nicholson Street, Mr Karas, Mr Georgakopoulos and Genesis agreed to with Rover Nominees to protect Rover Nominees’ rights as mortgagee of 70 Nicholson Street. That agreement made no sense if Mr Karas had already agreed to discharge the mortgage in consideration for the return of the unpresented cheques.

103    Thirdly, and consistently with the fact that no discharge was given in June 2009, Mr Karas on his own evidence gave an executed discharge to Mr Costanzo to hold as per the agreement entered into on 23 June 2009. Also consistently with the fact that no discharge was given in June 2009, the mortgage remained on title at the time of the sale of the Nicholson St property to Establishment 5.

104    Fourthly, the evidence left wholly unexplained as to why the discharge of the mortgage was not registered until 2011 when, even on the Meletsis parties’ case, it had been agreed by Mr Karas, Mr Georgakopoulos and Genesis by June 2009 (at the latest) that Mr Karas would discharge his mortgage in consideration for Mr Georgakopoulos and Genesis not presenting their cheques (which they gave back in 2009). Absent such evidence, the fact that the discharge was not lodged for registration until settlement of the sale of the Nicholson St property to Establishment 5 and not in 2009 is more likely to be explained by the fact Mr Karas was still owed $218,842.24 (revised figure) by 70 Nicholson Street. I do not accept Mr Karas’ self-serving assertion in cross-examination that there was no debt owing as a correct statement of the facts.

105    Fifthly, the first time that the trustees came to know about those minutes of meeting and of their content was at trial, despite such a document falling within the terms of the documents required to be produced to the trustees and without explanation as to why it had not been produced at any earlier time. Moreover, the asserted agreement made on 22 June 2009 as recorded in that document is not corroborated by other contemporaneous documentation. In the circumstances, I do not attach any weight to it.

106    I accordingly find that the Karas mortgage was discharged in December 2011 and that it was discharged without the debt of $218,842.24 (revised figure), which it secured, being paid.

THE CREDITORS SCHEDULE

107    These reasons have already addressed some of the items in the creditors schedule in the context of addressing specific factual issues that arose for determination on Mr Meletsis’ evidence (see [67]–[69] of these reasons). The trustees’ case also challenged the legitimacy of the inclusion of two items under the heading “sales expenses” listed in the schedule: an amount of $11,700 payable to Lewenberg & Lewenberg Solicitors (Lewenberg Solicitors) and sales commissions of $101,295. Lewenberg Solicitors were the conveyancers for the off the plan sales and Carroll McKeddie were the real estate agents appointed to market and the sell the apartments.

108    I accept that the sales commissions and conveyancing fees were not liabilities that had arisen for payment as at November 2011. First, pursuant to the exclusive sales authority dated 11 April 2011 between 70 Nicholson Street and Carroll McKeddie, one third of the commission to a maximum of $100,000 was payable within 60 days after the exchange of an unconditional contract of sale and the other two thirds of the commission was payable within 10 days after the settlement of the contract of sale. At the time of the contract of sale of the Nicholson St property there were no completed contracts, as the executed off the plan contracts of sale were all conditional contracts of sale dependent upon planning approval and the development proceeding. Secondly, in any event, those expenses were payable out of the trust funds held by Lewenberg Solicitors from the deposit moneys from the sales of the off the plan apartments, which Mr Meletsis accepted in cross-examination. Thirdly, the right to the deposit funds was transferred by 70 Nicholson Street to Establishment 5 under the contract for the sale of the Nicholson St property, a fact that Mr Meletsis and Mr Speer both would, or should, have known at the time.

109    On the face of the evidence, the inference open to be drawn, and which I make, is that Mr Meletsis orchestrated the creditors schedule to give the appearance that there was at least $650,000 in liabilities of 70 Nicholson Street assumed by Establishment 5 as consideration for the acquisition of the Nicholson St property when, in fact, at least $222,281 of those debts were projected expenses, which would arise later in the development if it progressed and were not amounts that 70 Nicholson Street was then, or would become, liable to pay and another $112,000 were to be paid out of funds held on trust under the off the plan sale contracts.

110    In so concluding, I reject the submission for the Meletsis parties that the trustees’ concession that some of the creditors in the creditors schedule were likely genuine undermines the allegation that the $2.2 million that Establishment 5 paid Hallmark in November 2014 represented the unpaid portion of the purchase price which was, thereby, diverted. First, for the reasons given already, that characterisation is supported by two pieces of contemporaneous documentation. Secondly, even if some expenses were legitimate and paid by Establishment 5, the fact of payment is not inconsistent with the trustees’ case, given that the expenses in question were ones that attached to the property and the payment of such liabilities is equally open to explanation on the basis that Establishment 5, as the owner of the Nicholson St property, bore those expenses as part of the costs of the development. I accordingly attach no significance to the fact that some expenses may have been actual liabilities of 70 Nicholson Street.

THE CONCERTED PLAN

111    On the facts as found and the facts either admitted or not in controversy, the transfer of the Nicholson St property from 70 Nicholson Street to Establishment 5 occurred against the backdrop that:

(a)    70 Nicholson Street, in its capacity as trustee of the 70 Nicholson Street Unit Trust, owned a valuable piece of land valued at $3.9 million, which it intended to develop with the potential for a sizeable profit following completion;

(b)    from 18 June 2009 onwards, the Karas and Meletsis families, through Genesis, had (at least) a 50% interest in the unit trust;

(c)    Mr Karas held a second ranked mortgage over the property, securing payment of the sum of $218,842.24 (revised figure) (as now accepted by the trustees), which Mr Karas had loaned to 70 Nicholson Street. Although a second ranked mortgage, to the knowledge of Mr Meletsis and Mr Karas no amount was secured by the first ranked mortgage held by Rover Nominees, as the debt which that mortgage had secured had been discharged;

(d)    the ATO was pursuing Mr Karas for tax liabilities of $44 million and his assets were subject to a freezing order, of which Mr Meletsis had knowledge; and

(e)    the State Revenue Office was investigating whether 70 Nicholson Street remained entitled to claim an exemption from land tax and Mr Meletsis knew that the company no longer qualified for that exemption because the property had ceased to be used for low cost accommodation in April 2011.

112    Also on the facts as found and the facts either admitted or not in controversy, Mr Meletsis had 70 Nicholson Street sell the Nicholson property in November 2011:

(a)    to a newly formed company set up for the purpose of acquiring and holding the property on trust for the Establishment 5 Unit Trust, also newly formed, the unitholders of which included the Neaniki Property Developments Trust with a 50% unitholding, through which the Meletsis and Karas families, as beneficiaries, would have an entitlement to a share of the profits of the development;

(b)    at an undervalue and for a price that was worked out by reference to the amount of cash that the Leading Edge parties were able to pay ($1 million), the notional value of the Rover mortgage at $1.35 million (which was a façade because Mr Meletsis knew that no amount was owed by 70 Nicholson Street to Rover Nominees) and the notional value of various liabilities purported to be owed by 70 Nicholson Street to third parties at $650,000 (which was also a façade because Mr Meletsis knew that a substantial portion of those expenses were not amounts that 70 Nicholson Street was then, or would become, liable to pay);

(c)    where ostensibly the purchase price of $3 million would be paid by way of Establishment 5 making a cash payment of $1 million at settlement with the balance comprising the purported assumption by Establishment 5 of the obligation to pay out the Rover mortgage and the unpaid debts of 70 Nicholson Street as specified in the creditor’s schedule; and

(d)    where, by a side arrangement that Mr Meletsis had with Mr Speer, not documented, of the $3 million purchase price, only $1 million was payable at settlement with the balance payable only after the development was completed, which is what actually happened.

113    Of the $1 million cash portion which was due at settlement of the sale, only $800,000 ultimately was received by 70 Nicholson Street, as $200,000 was kept back by Establishment 5 to pay the stamp duty on the transfer, leaving $2.2 million payable. Then in November 2014, following completion of the development, Mr Meletsis directed Mr Speer to cause Establishment 5 to pay $2.2 million to Hallmark which, in Hallmark’s MYOB bank register, was described as “Settlement 70 Nicholson St”. Also at or around the same time, Mr Meletsis directed Mr Speer to cause Establishment 5 to pay the interest on the “70-74 Nicholson Street Purchase Loan” to two third parties. Hallmark, it should be remembered, was a company controlled by Mr Meletsis which has, as its sole shareholder, Genesis as trustee for the GH Family Trust through which, materially, the Meletsis and Karas families would have an entitlement to receive those proceeds.

114    It is reasonably open to infer from those facts and circumstances, and I draw the inference, that it was the intention of Mr Meletsis to remove the property and the sale proceeds from the potential reach of creditors, by transferring the property to a new company for a consideration disguised as to part as the assumption of liabilities by the purchaser company, when the real arrangement was that Establishment 5 would not have the responsibility to pay the balance of the purchase price paid until after completion of the development and, when it became payable, would do so to such entity as directed by Mr Meletsis, which is what actually occurred. By that mechanism, aside from the $800,000 which 70 Nicholson Street did receive in late 2011, the balance of the sale proceeds were diverted and concealed with the Meletsis and Karas family interests both obtaining the benefit of the balance of the purchase price (through Hallmark) and an entitlement to a share of the profits of the development (through the Neaniki Property Developments Trust).

115    The following evidence of Mr Meletsis, from his cross-examination, was telling:

You didn’t take any steps to test the market to find out what alternative purchasers might have paid for this property, did you?---I always wanted – no, I didn’t.

No. What were you going to say, you always wanted what?---To be involved in this development.

That’s right. And that’s why you didn’t take any steps to test the market to find out whether or not another buyer might have paid more, because that wouldn’t have allowed you to maintain an involvement in the development, would it?---I was a 75 per cent unitholder – the company was – and [Mr Georgakopoulos] was 25. And [Mr Georgakopoulos] left it up to me, so whatever decisions I made there was more for myself. I tried to work out the best possible return for myself.

116    And again when Mr Meletsis referred to the interest in the Neaniki Property Developments Trust as “I was 75 per cent” and again when discussing the contract of sale, he said:

At the time you did the deal, at 23 November, you expected to get $1 million in cash shortly thereafter for the company?---23 November – I was 75 per cent unitholder. I had a 50 per cent interest after that going forward. I wasn’t concerned. No.

.…

And the reason that you didn’t put the property in the hands of an agent or test the market yourself was because you wanted to find somebody who would engage in this joint venture deal with you, wasn’t it?---The deal was to develop the property.

Yes. And that’s why you didn’t go to market with it?---I wanted to keep interest in it. I said that from the start.

117    In re-examination, Mr Meletsis maintained he thought he was owed “about $2.8, 2.9 million owing for [his] 50 per cent”.

118    I accept the trustees’ submission that Mr Meletsis’ evidence is a stark acknowledgment that he orchestrated the sale of the Nicholson St property by 70 Nicholson Street in a way that had as part of the design that he keep an interest in it for himself. It is also evident that the sale was orchestrated in a way that had as part of its design for Mr Karas to keep an interest in it for himself.

119    I am also satisfied on the evidence to the Briginshaw standard of proof and find that Mr Meletsis acted with a dishonest and fraudulent design. That intent can be inferred from his involvement in the concerted plan and in each of the steps involved in its execution, but also from the following matters:

(a)    the Nicholson St property was sold at a time when Mr Meletsis knew that Mr Karas had a very significant tax liability of $44 million to the ATO and the State Revenue Office had commenced an investigation into whether 70 Nicholson Street still qualified for a land tax concession as a rooming house (and was, on the information available to Mr Meletsis, most likely to levy such a tax);

(b)    the unusual haste with which settlement under the contract of sale occurred, namely within two days of the contract being signed, the minimal involvement of solicitors on behalf of 70 Nicholson Street in selling the property, including the fact that it was Mr Speer who instructed solicitors to draft the contract of sale and the vendor’s statement and the fact that settlement was effected as between Mr Meletsis and Mr Speer in the absence of solicitors and when only $300,000 of the $3 million purchase price had been paid;

(c)    the utilisation of the façade of the assumption of liabilities by Establishment 5 to the value of $2 million to reduce the amount actually payable by Establishment 5 at settlement, when Mr Meletsis knew that no amount was owed by 70 Nicholson Street to Rover Nominees, which the Rover mortgage secured and knew that at least some of the liabilities that he included in the creditors schedule were not debts of 70 Nicholson Street for which it was or would become liable;

(d)    the discharge of the Karas mortgage over the Nicholson St property at the time it was sold for nil consideration.

120    The involvement of Mr Speer, Establishment 5 and Hallmark in the concerted plan is equally evident. Mr Meletsis was also a director of Hallmark and his knowledge and actions can be imputed to Hallmark’s participation in the concerted plan and the receipt of the $2.2 million from Establishment 5. Mr Speer was the director of Establishment 5 and his knowledge and actions can be imputed to Establishment 5’s participation in the concerted plan and the transfer to it of the Nicholson St property. Mr Speer’s knowledge of the dishonest nature of the concerted plan can readily be inferred from his involvement in:

(a)    the decision to set up Establishment 5 and the Establishment 5 Unit Trust to acquire the Nicholson St property;

(b)    the “negotiation” of the purchase price;

(c)    the preparation of the contract of sale;

(d)    the settlement of the purchase without tendering the full purchase price or even the full cash payment of $1 million;

(e)    obtaining and lodging the discharge of the Rover mortgage for registration without Establishment 5 paying any amount to Rover Nominees;

(f)    entering into arrangements, which were not documented, for the subsequent payment of the non-cash portion of the purchase price by Establishment 5 as directed by Mr Meletsis after completion of the development; and

(g)    Establishment 5 paying $2.2 million to Hallmark as directed by Mr Meletsis after completion of the development.

121    It can also readily be inferred from the same facts and circumstances detailed above from which Mr Meletsis’ dishonest and fraudulent design can be inferred that Mr Karas was also a party to the concerted plan with knowledge of its dishonest and fraudulent design. Mr Karas was not a director of 70 Nicholson Street at the time, but it is improbable that the sale occurred without his concurrence of its fraudulent design and purpose, as borne out by the sequence of events. Those events included that as part of the sale of the Nicholson St property, Mr Karas agreed to the discharge of the Karas mortgage without payment made by 70 Nicholson Street of the outstanding debt owed to him, which was then secured by the Karas mortgage. It is reasonable to infer that the reason that the Karas mortgage was discharged without payment was because otherwise the moneys may have been available to be applied in reduction of his tax debt.

122    The Meletsis parties were highly critical of the trustees’ “concerted plan” allegation. Aside from urging the Court to accept their version of events – namely that the transfer of the Nicholson St property to Establishment 5 was the means by which Mr Meletsis was able to secure the finance and the experience that the project was lacking – which, they contended, was the “more plausible explanation” for the transfer than what they described as the trustees’ “case theory”, they argued that it was not clear from the pleading which creditors were intended to be defeated by the “concerted plan” or the alleged dishonest and fraudulent design. Further, they argued, no creditor of Mr Karas was defeated by the transfer of the Nicholson St property to Establishment 5, because his “interest” in the property was merely that of discretionary beneficiary of the GH Family Trust, which held units in the 70 Nicholson Street Unit Trust and, moreover, it had not been alleged that the transfer was in breach of the freezing orders. It was argued that if the trustees’ case was that creditors of the company were defeated by the transfer, the only substantive potential creditor was the Commissioner of State Revenue for land tax of $138,000. Thus, the argument went, the trustees’ case came down to the claim that Mr Meletsis conspired with Mr Karas and Mr Speer to avoid this land tax liability by transferring the property to another company which, they contended, would be equally liable for the land tax as it would happen. Moreover, the tax would remain as a first charge on the land notwithstanding the transfer. However, that is not to deny that the steps were taken and the transfer occurred at a time when Mr Karas faced a substantial liability to the ATO, which the ATO was seeking to enforce and freezing orders had been made against him and there was anticipation that the State Revenue Office would assess the company to a special land tax levy, nor does it gainsay the existence of a dishonest and fraudulent design in the actions of the respondents in effecting the transfer with the intent to put the property beyond the reach of creditors.

123    It was further submitted that contrary to the rule in Browne v Dunn, it was never squarely put to Mr Meletsis in cross-examination or in his public examination that his decision to sell the property to Establishment 5 was part of a plan hatched by him with Mr Karas and Mr Speer to avoid a debt to the Commissioner of State Revenue or a debt owed by Mr Karas to the Commissioner of Taxation or anyone else; nor was it put to Mr Karas, in cross-examination or in his public examination, that he participated in a plan with Mr Meletsis and Mr Speer to avoid payment of a debt owed by him to the Commissioner or a debt owed by the company to the Commissioner of Taxation; nor was it put to Mr Speer in his public examination that, by causing Establishment 5 to enter into a transaction to acquire the property from the company, he implemented a plan which he had formulated in concert with Mr Meletsis and Mr Karas to defeat a $138,000 claim by the Commissioner of State Revenue against the company or a claim by the Commissioner of Taxation against Mr Karas.

124    The rule in Browne v Dunn generally requires cross-examining counsel to put implications to a witness, which counsel proposes to submit can be drawn from the evidence so that the witness has the opportunity to respond. In Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; 44 ALR 607, Hunt J described the rule in Browne v Dunn as follows (at 16):

It has in my experience always been a rule of professional practice that, unless notice has already clearly been given of the cross-examiner’s intention to rely upon such matters, it is necessary to put to an opponent’s witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. Such a rule of practice is necessary both to give the witness the opportunity to deal with that other evidence, or the inferences to be drawn from it, and to allow the other party the opportunity to call evidence either to corroborate that explanation or to contradict the inference sought to be drawn.

The rule is an aspect of the principle that a trial must be conducted fairly, and where notice has been given that a witness’s account may be subject to challenge, the rule does not apply. Notice that the witness’s version of events may be subject to challenge may come from the pleadings or otherwise from the manner in which the case is conducted.

125    Such notice was given by the trustees in this case by the express pleading against the defendants (see para 72 of the second amended statement of claim). There was no obligation formally to put the matters identified to each of the witnesses in this proceeding.

BREACH OF DUTIES

126    Mr Meletsis owed the following duties to 70 Nicholson Street as its director:

(a)    the duty to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if he or she:

(i)    were a director or officer of a corporation in the company’s circumstances; and

(ii)    occupied the office held by, and had the same responsibilities within the company as Mr Meletsis;

(b)    the duty to exercise his powers and discharge his duties;

(i)    in good faith in the best interests of the company; and

(ii)    for a proper purpose;

(c)    the duty not to use his position improperly to:

(i)    gain an advantage for himself or someone else; or

(ii)    cause detriment to the company.

127    Mr Meletsis admitted that prior to entering into the contract of sale, he did not:

(a)    make any genuine or any attempt to sell the Nicholson St property for the best possible price;

(b)    take any steps to ascertain the current market value of the Nicholson St property;

(c)    market the Nicholson St property for sale or engage a real estate agent to market and sell the property; or

(d)    engage solicitors or conveyancers to prepare the contract of sale or vendor’s statement under s 32 of the Sale of Land Act 1962 (Vic) (which he arranged for Mr Speer do).

128    Based on the findings made and the admissions of Mr Meletsis, I find that Mr Meletsis breached the duties that he owed to 70 Nicholson Street:

(a)    by selling the Nicholson St property for a purchase price which he knew was less than it was worth;

(b)    by not making a genuine attempt to sell the Nicholson St property for the best possible price;

(c)    by entering into the contract of sale with Establishment 5 as detailed above;

(d)    by delivering up a transfer of the Nicholson St property without receiving the purchase price;

(e)    in effecting the sale of the Nicholson St property without discharging the debt owed by 70 Nicholson Street to Mr Karas, which the Karas mortgage secured; and

(f)    by entering into arrangements at the time of the contract of sale for the subsequent payment of monies by Establishment 5 to an entity other than 70 Nicholson Street in lieu of payment of the remaining purchase price to 70 Nicholson Street.

129    Further, it is well established law that a director of a company must exercise his or her powers “honestly in furtherance of the purposes for which they are given” and not for his or her personal benefit or gain or for that of a third party: Howard v Federal Commissioner of Taxation [2014] HCA 21; 253 CLR 83, [31]; Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; 207 CLR 165, [74] (McHugh, Gummow, Hayne and Callinan JJ). In my view, the evidence also overwhelmingly supports the finding, which I make, that Mr Meletsis acted with a dishonest and fraudulent intent in taking the steps which he did to transfer ownership of the Nicholson St property to Establishment 5 to put the property beyond the reach of creditors.

KNOWING RECEIPT AND KNOWING ASSISTANCE

130    In view of the findings made, it also follows that:

(a)    as Mr Meletsis’ knowledge can be imputed to Hallmark, Hallmark had knowledge of the breach of duties by Mr Meletsis and of his fraudulent and dishonest design; and

(b)    as Mr Speer’s knowledge can be imputed to Establishment 5, Establishment 5 had knowledge of Mr Meletsis’ breach of directors duties and of his fraudulent and dishonest design.

131    On those findings, Hallmark, Mr Speer and Establishment 5 are each liable as knowing participants in Mr Meletsis’ breach of duties under the principles referred to as the second limb of Barnes v Addy (1874) LR 9 Ch App 244 (Barnes v Addy): i.e. knowing assistance; and in the case of Hallmark and Establishment 5 for knowing receipt of the benefits of Mr Meletsis’ breach of duties under the principles referred to as the first limb of Barnes v Addy – in the case of Establishment 5, the receipt of the Nicholson St property and in the case of Hallmark the receipt of the $2.2 million.

DEED OF ASSIGNMENT

132    The findings above give rise to a right in 70 Nicholson Street to the declaratory and equitable relief claimed against Mr Meletsis, Establishment 5 and Hallmark. However, the trustees’ claim to that relief depends on the deed of assignment. The Meletsis parties contended that what was assigned to the trustees by the deed of assignment was no more than a right to prosecute the causes of action to recover an amount limited by 70 Nicholson Street’s trust liabilities. The Meletsis parties contended further and in the alternative that the assignment was beyond the power of the company to effect. Both contentions were refuted by the trustees.

133    The assignment deed was executed on 11 September 2017 by 70 Nicholson Street and its liquidator, Hamish MacKinnon (Mr MacKinnon). Pursuant to the terms of the deed, 70 Nicholson Street assigned to the trustees “absolutely all of its right, title and interest in the causes of action detailed in Part 1 of the Schedule [to the deed], together with all interest which [had] accrued or which may accrue in the future in relation to those causes of action”: cl 1.1. The liquidator, Mr MacKinnon, similarly assigned to the trustees “absolutely all of his right, title and interest in the causes of action detailed in Part 2 of the Schedule [to the deed], together with all the interest which [had] accrued or which may accrue in the future in relation to those causes of action”: cl 1.2. On or about 20 November 2017, the trustees gave written notification of the assignment deed to Mr Meletsis and Hallmark.

134    Part 1 of the Schedule to the deed provided:

1.    All causes of action against [Mr] Meletsis and any other party arising out of, or connected with, the sale and transfer by the [c]ompany of the key Property on or about 23 November 2011 to Establishment 5 and in particular, a cause or causes of action under first, Part 2D.1 of the Corporations Act 2001 (Cth) and secondly, breach of duties of a director at common law.

2.    All causes of action against [Mr] Meletsis arising out of or connected with, the payment or transfer of [c]ompany monies to third parties arising out of or relating to the sale or transfer of the Property in the period from on or about 24 November 2011 to 31 July 2013.

3.    All causes of action against Establishment 5 arising out of or connected with the sale and transfer of the Property on or about 23 November 2011 and in particular, a cause of action under section 172 of the Property Law Act 1958 (Vic).

The “Property” was defined to mean the Nicholson St property.

135    Part 2 of the Schedule to the deed provided:

1.    All causes of action against [Mr] Meletsis and any other party arising out of, or connected with, the sale and transfer by the [c]ompany of the Property on or about 23 November 2011 to Establishment 5 and in particular, a cause or causes of action under first, Part 5.7B or Part 5.8 of the Corporations Act 2001 (Cth) and secondly for breach of duties of a director at common law.

136    It was argued for the Meletsis parties that as 70 Nicholson Street acted in no other capacity than as trustee of the 70 Nicholson Street Unit Trust, the causes of action which the company assigned were trust property and the company’s rights in respect of those causes of action were accordingly limited to its right of indemnity against the proceeds of those causes of action for liabilities properly or reasonably incurred by it in acting as trustee of the unit trust, and to an equitable lien or charge over the proceeds of the causes of action to secure that right of indemnity. It was further submitted that the trustees’ rights under the assignment could not be greater than the rights of the company before assignment. It was thus submitted that by assigning “its right, title and interest in the causes of action” to the trustees, the company assigned no more than a right to recover an amount sufficient to pay its liabilities. As at the date of the assignment the debts of the company incurred by it in the performance of the trust comprised a debt of approximately $152,000 to the Commissioner of State Revenue (Victoria) and a debt of approximately $550 to the Commission of Taxation, therefore, the argument went, what was assigned to the trustees was no more than a right to prosecute the causes of action to recover an amount which could be no more than the total trust liabilities of the company. It was submitted that the trustees’ contention that they are entitled to recover more than the value of the company’s right of indemnity was inconsistent with the plain terms of the deed of assignment and “manifestly unjust and contrary to principle”. It was further submitted that “were it to be accepted it would produce a perverse outcome, a windfall, which would entirely disregard the equities which bound the company in favour of the unitholders”.

137    These contentions disregard the fact that the assigned causes of action upon which the defendants are sued are causes of action of 70 Nicholson Street, upon which it could sue in its own right and, but for the assignment, any loss or damage recovered as consequence of those causes of action would be that of 70 Nicholson Street, even though 70 Nicholson Street would be accountable to the beneficiaries for such loss or damage. It is an established principle that where a company acts as trustee of a trust, the duties of its directors include a duty to ensure that the company acts in accordance with its obligations as trustee. If a director breaches their fiduciary duty, it is a breach of duty to the trustee to whom the duty is owed, and a cause of action against a director for breach of duty relating to trust property is the chose in action of the trustee company: see Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2015] VSCA 9; 318 ALR 302, 315-8 [52]–[65] (Warren CJ, dissenting but not on this point); Ying Mui Pty Ltd v Hoh (No 3) [2017] VSC 29; 349 ALR 296, [382], [387]–[388], citing the observations of Edelman J in Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; 48 WAR 1 (Agricultural Land Management), [277], [302]–[303]. As Edelman J explained:

I explain below why it is nonsense to speak of fiduciary duties owed to a company in a particular capacity as trustee or as beneficial owner. Fiduciary duties are owed to the company.

…

Duties are generally owed to legal persons. A “trust” is not a legal person which has rights and is owed duties. The rights are held by the trustee. The duties are owed to the trustee.

Viewed from the perspective of the trustee, the rights are held, and any loss is suffered, by the trustee. So, when a defendant damages a tangible thing the defendant will be liable to the owner for damages for conversion or trespass to the chattel. It does not matter if the ownership of the chattel is held on trust. The owner still holds the rights (subject to the trust). The claim for damages against the third party defendant (ie external to the trust relationship) is almost always brought by the trustee as part of the trustee’s duty to protect the trust estate even though the ultimate loss might be borne by the beneficiaries.

Thus, it is not correct that 70 Nicholson Street, by assigning “its right, title and interest in the causes of action” to the trustees, could assign no more than a right to recover an amount sufficient to pay its liabilities. 70 Nicholson Street, as the entity to whom the alleged wrongs were done, had the right to seek recovery of the loss and damage and the fact that the proceeds would be held by 70 Nicholson Street on trust would not have affected its right to recover those proceeds: Agricultural Land Management, [309]–[311].

138    Nor is it correct, as the Meletsis parties contended, that what was assigned pursuant to the deed of assignment were the causes of action subject to the equities created by the 70 Nicholson Street Unit Trust Deed (Trust Deed) in favour of the unitholders. That contention was premised in part on the proposition that the company “could not transfer trust property free from such equities, not without the unitholders’ consent”. That proposition does not withstand scrutiny. First, for the reasons already given, the company’s “right, title and interest in the causes of action” were not limited as a matter of law to its right of indemnity and equitable lien over the causes of action; and secondly, the terms of the Trust Deed expressly empowered the company to sell or dispose of property of the trust fund at its absolute discretion (cl 6.1(c)(i)). The exercise of that power did not require unitholders’ consent.

139    That contention was also advanced as a matter of the proper construction of the deed of assignment. It was asserted that an assignment of the causes of action in their entirety, as distinct from the company’s right, title and interest in them (being defined and measured by its rights of indemnity) would be contrary to the terms of the Trust Deed, in breach of the company’s fiduciary duties to the unitholders, contrary to the interests of the unitholders and in breach of the warranty negotiated by the parties as to the infringement of third parties’ rights and contrary to the law with respect to the assignment of choses in action subject to equities. It was submitted that in this context and in those circumstances a reasonable business person would not construe the assignment of the company’s right, title and interest in the causes of action as including not only the company’s interest in those causes of action, but also the unitholders’ interests in the causes of action. There are two primary responses. First, once again, the contention relied in part on the wrongful premise that the company’s “right, title and interest in the causes of action” was limited as a matter of law to its right of indemnity. Secondly, the reference to the “warranty negotiated by the parties as to the infringement of third parties’ rights” was a reference to cl 6.2(a) of the deed of assignment. By that clause, the company and the liquidator represented and warranted to the trustees that to the best of their knowledge “the grant of any rights the subject of this [d]eed will not infringe the rights of any person or constitute a breach of any agreement with any other person”. It was argued that a reasonable business person reading and interpreting the deed would understand that the rights of third parties, including in particular unitholders, were not intended to be adversely affected, transferred or destroyed by the assignment of the causes of action. That submission also partly depends for its efficacy on the wrongful premise that the company’s “right, title and interest in the causes of action” was limited as a matter of law to its right of indemnity. Otherwise, it was a matter of assertion that the assignment of the causes of action in their entirety would be a breach of that clause, without elucidation as to why that must necessarily follow and I do not accept that a breach would necessarily follow, if the deed was construed as the trustees urged.

140    Finally, it was claimed that the company did not have the power to assign the causes of action, because upon its liquidation on 4 September 2013 the company became obliged to retire as trustee of the 70 Nicholson Street Unit Trust and in breach of its obligation it had failed to do so and it was no longer authorised to act as trustee.

141    That contention also has no merit. The Trust Deed did not contain an automatic removal clause for a corporate trustee in the event of insolvency. Rather, cl 6.4(a)(ii) of the Trust Deed provided that the trustee covenanted with the unitholders:

… [to] retire or as the case may be procure the retirement of any other [t]rustee from the trust if being a company such [t]rustee shall go into liquidation (except for the purpose of amalgamation or reconstruction or some similar purpose) or if a receiver shall be appointed of the undertaking of the [t]rustee or any part thereof or if it ceases to carry on business or fails or neglects after reasonable notice from the unitholders to carry out or satisfy any duty imposed upon a [t]rustee by this deed or if the unitholders so direct in writing or if any [t]rustee being an individual becomes bankrupt or makes any arrangement or composition with his creditors generally or becomes of unsound mind or person whose person or estate is liable to be dealt with in any way under the law relating to mental health.

142    The clause obliged a trustee in liquidation to retire, but did not automatically effect its retirement. Furthermore, cl 6.4(d) of the Trust Deed referred to the ability of unitholders to remove the trustee, but that never occurred. A similar situation arose in Re Metrobore Australia Pty Ltd [2014] VSC 247, which involved a similar “will retire” clause. Ferguson J (as Her Honour then was) held that the retirement clause did not effect an immediate removal of the trustee, or result in the trustee company holding the trust assets merely as bare trustee; and until the trustee retired or was replaced, it should continue to perform the role of trustee and may exercise all its rights and powers as trustee, including the power to sell trust assets to satisfy its indemnity (see [10]). Further, as Allsop CJ held in Jones v Matrix Partner Pty Ltd; re Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; 260 FCR 310 at [90]: while a trustee company is in liquidation and remains the trustee of a trust, “the affairs of the company” to which the liquidator is obliged to attend include the administration of the trust. It follows that at the time of the assignment, the company (in the hands of its liquidator) remained the trustee of the 70 Nicholson Street Unit Trust and had the power to sell the assigned claims.

143    Accordingly, I have concluded that the trustees are entitled to claim the relief they seek under the general law on the assigned claims.

THE KARAS MORTGAGE

144    The trustees claimed that the discharge of the Karas mortgage without payment of consideration at settlement of the contract of sale was:

(a)    a transfer of property by Mr Karas at an undervalue for the purposes of s 120 of the Bankruptcy Act;

(b)    a transfer of that property for the main purpose of preventing it from becoming divisible among Mr Karas’ creditors for the purposes of s 121 of the Bankruptcy Act; and

(c)    an alienation of that property for the main purpose of defrauding Mr Karas’ creditors within the meaning of s 172 of the Property Law Act.

145    Section 120 of the Bankruptcy Act relevantly provides:

Transfers that are void against trustee

(1)    A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a)     the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and

(b)     the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.

…

146    Section 121 of the Bankruptcy Act relevantly provides:

Transfers that are void

(1)    A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a)    the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(b)    the transferor’s main purpose in making the transfer was:

(i)    to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii)    to hinder or delay the process of making property available for division among the transferor’s creditors.

…

Showing the transferor's main purpose in making a transfer

(2)    The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.

…

147    Section 172 of the Property Law Act relevantly provides that:

Voluntary conveyances to defraud creditors

(1)    Save as provided in this section, every alienation of property made, whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.

…

148    The Meletsis parties argued that none of these provisions applied because the transfer of the Nicholson St property was neither a transfer by Mr Karas (i.e. the person who became bankrupt) nor property that would have been divisible amongst his creditors because he was a beneficiary of a discretionary trust which held the units in the 70 Nicholson Street Unit Trust and he had no interest in the property to vest in the trustees upon sequestration of his estate and be divisible amongst his creditors. That submission disregards that at the time of the discharge of the Karas mortgage, Mr Karas was mortgagee of the Karas mortgage with a proprietary interest in the Nicholson St property as a secured creditor.

149    It is only necessary to consider the application of s 172 of the Property Law Act. The express terms of s 172 of the Property Law Act do not require Mr Karas to have transferred the property. Rather, the criterion to come within the terms of that section is the alienation of property with intent to defraud creditors. The phrase “intent to defraud creditors” has been held to encompass an intention to “delay, hinder or [otherwise] defraud” (Marcolongo v Chen [2011] HCA 3; 242 CLR 546, [19]) and that intention can readily be inferred in the present case by the fact that Mr Karas gave a discharge of the Karas mortgage for no consideration as part of the suite of steps taken to transfer the Nicholson St property to Establishment 5.

RELIEF CLAIMED

150    The trustees seek the following relief:

(a)    equitable compensation from Mr Meletsis of:

(i)    $905,000, being the difference between the $3 million sale price and the value of the Nicholson St Property at the time of sale; plus

(ii)    an amount equal to that part of the purchase price that 70 Nicholson Street never collected, being $2.2 million (less any creditor amounts that the Meletsis parties can establish were actually discharged from Establishment 5’s own resources); plus

(iii)    $307,000 being the interest payments that Mr Meletsis caused to be directed to Degani and BLF Developments;

(b)    a declaration that Hallmark holds its interest in any part of the $2.2 million that it received in November 2014 and the traceable proceeds of that sum on trust for the trustees;

(c)    equitable compensation from Hallmark of $2.2 million, being the amount of the purchase price that was paid to it by Establishment 5, alternatively an order that Hallmark account to the trustees for, and pay them, any profits that it earned on the development of the Nicholson St property;

(d)    a declaration that Establishment 5 holds its interest in any remaining units in the 70 Nicholson Street development, and any part of the sale price of any such units that remains in its hands, on trust for the trustees;

(e)    equitable compensation from Establishment 5 of:

(i)    $2.2 million, being the amount of the purchase price that it wrongfully paid to Hallmark; plus

(ii)    $307,000 being the interest payments made to Degani and BLF Developments instead of 70 Nicholson Street;

(f)    a declaration that Hallmark holds its interest in that part of the $2.2 million that it received in November 2014 which would have been payable under the Karas mortgage at settlement of the contract of sale, and the traceable proceeds of that sum, on trust for the trustees;

(g)    equitable compensation from Hallmark in the amount that the Court finds was secured by the Karas mortgage at the time of settlement of the contract of sale, on the basis that if the Karas mortgage were set aside, that amount ought to have been paid under the Karas mortgage;

(h)    equitable compensation for the interest payments to Mr Meletsis caused to be directed to Degani and BLF Developments totalling $307,000;

(i)    interest on the amounts awarded; and

(j)    costs.

151    The only aspect of the relief referrable to the claims of 70 Nicholson Street which was challenged by the Meletsis parties (assuming that claims were established and the deed of assignment be effective, as contended by the trustees) concerned the claim by the trustees for equitable compensation from Mr Meletsis of $307,000 being for the interest on the “70-74 Nicholson Street Purchase Loan” which Mr Meletsis caused Establishment 5 to be directed to Degani and BLF Developments Pty Ltd. It was contended that such a claim was not raised in the statement of claim and leave would be required to make that claim. It was also contended that leave ought not to be granted because of the lateness of raising that claim without explanation for the delay and which would result in substantial unfairness and prejudice to Mr Meletsis if allowed. In particular, it was submitted that the claim is premised upon evidence which had been available to the trustees since at least 9 November 2017 with no explanation offered as to why the claim was not previously made in either of the two amendments in the statement of claim on 22 August 2018 or 24 May 2021 and was instead made through closing submissions after evidence had been concluded. Those payments were, however, cross-examined on without objection and both parties furnished written submissions on whether the Court should find that the two payments made by Mr Speer had the character urged by the trustees and paid at the direction of Mr Meletsis. Nonetheless, it was not foreshadowed by the trustees that they would seek additional relief by way of equitable compensation from Mr Meletsis in respect of the payment of $307,000 until the trustees’ written closing submissions were filed. In the circumstances, given the lateness with which the Meletsis parties were put on notice that such relief would be sought, I consider there would be unfairness and substantial prejudice to Mr Meletsis if such relief was ordered.

152    The Meletsis parties also challenged the entitlement of the trustees to a tracing order in respect of the Karas mortgage, arguing that the claim did not make sense because the transaction challenged was not the Karas mortgage but the discharge of that mortgage. However, that submission fails to take account that the discharge of the Karas mortgage for nil consideration had the effect of transferring value from Mr Karas to Establishment 5, namely the value of the debt that 70 Nicholson Street owed to him, which Establishment 5 later passed through to Hallmark, which, like Establishment 5, was a party to the dishonest design to divert property to avoid creditors.

ORDERS

153    The parties are directed to provide a minute of orders giving effect to these reasons within seven days.

Associate:

Dated:    7 February 2022

SCHEDULE OF PARTIES