Written by Holly Eastway

The recent case of Pugwall v Arthur McKenzie Investments Pty Ltd [2022] VSCA 272, in the Victorian Court of Appeal, serves as a reminder of the risks of personal guarantees for directors, revealing the dangers of personally guaranteeing the obligations of a company, especially where one may consider themselves safe under the corporate veil.

The Facts

A joint venture agreement (“JVA”) between two constructions companies, concerning the development of residential units in Seaford, Victoria turned sour following issues with funding.

Mr Clark, the sole director and secretary of one of the parties, and Mr McKenzie the sole director and secretary of the other, gave personal guarantees on behalf of their own respective companies.

The problem was that, despite being personally named as guarantors within the JVA, neither Mr Clark nor Mr McKenzie signed the JVA in their personal capacities.

First Instance Decision

The trial judge held, among other things, that McKenzie could not be held liable in his personal capacity pursuant to the guarantee.

On Appeal

The Court confirmed that the court will assess a party’s intention to be bound to the terms of a contract on the basis of an objective construction of the document as a whole, rather than the subjective, uncommunicated intentions of that party.  Upon assessing the JVA in its entirety, it was found that the JVA evidenced the intention for the guarantors to be personally liable and that the formal way in which a party signs a contractual document, will not be determinative of a party’s intention.

Mr McKenzie submitted that his signature to the JVA was only in his capacity as sole director/secretary, and that no signing clause was provided for him in his personal capacity as guarantor.  However, the Court found on appeal that the entirety of the JVA evidenced otherwise.

Key Takeaways

Pugwall v Arthur McKenzie Investments Pty Ltd is a potent reminder of the dangers of personal guarantees. It demonstrates the importance for lawyers to understand the wide ramifications of commercial relationships gone bad and the significance of good legal drafting skills. All in all, the Victorian Court of Appeal has set a precedent for ignoring the subjective intentions of parties to a contract in favour of an objective analysis of the contract itself.

Contact Us

If you’re thinking of entering into a contractual arrangement as a guarantor, seek legal advice in advance.  Uther Webster & Evans can provide you with advice and guidance, so contact our office here.

Disclaimer: the contents of this article are for informational purposes only and do not constitute legal advice, nor are the contents of this article intended to be a substitute for legal advice or to be relied upon as such.

Background

This case involved a dispute between four adult siblings, Giovanni (the Plaintiff), Nicola, Salvatore and Carmine Mantovani, as to the terms of and entitlement to assets within a family trust and, consequently, the distribution of their mother, Teresa’s, estate.

In 1976,  the Mantovani Family Trust (the Trust) was established and a corporation known as Vanta Pty Ltd (Vanta) was appointed as the trustee. Teresa transferred her interest in a number of properties to Vanta, with the transfers treated as loans in the trust records. In 2015, Teresa died. Under her Will, she purported to gift the properties which had been transferred to Venta to each of her children in equal shares. Over the years, Vanta had been controlled by members of the Mantovani family. At the time of the proceedings, Nicola and Salvatore were Vanta’s directors and shareholders.

Despite extensive searches, the original Deed for the Trust was unable to be located and the parties agreed that it had been lost. However, a Trust Schedule existed, which included the date, name, settled sum, settlor, trustee, appointer and beneficiaries of the Trust. There were also financial statements and tax returns for the Trust from 2012 to 2020.

The Plaintiff sought a declaration that all assets held by Vanta were subject to a resulting trust in favour of Teresa’s estate and an order for the taking of accounts and payment of the amounts found to be due to Teresa’s estate. The key issue for determination by the Court was what, if any, legal consequences flowed from the loss of the Deed. In order to reach a conclusion on this issue, the Court was required to answer the following questions:

1. Was the Deed Lost?

The Court held that the Deed was lost, in circumstances where reasonable searches and inquiries had been made by all parties.

2. Could Secondary Evidence Prove the Deed’s Existence and Contents?

The Court referred to the standard of “clear and convincing proof” required to prove a Deed’s existence and contents by way of secondary evidence. Whilst the schedule and financial documents proved the existence of the Deed, they did not prove its contents. For example, the documents did not explain the basis on which distributions were to be made or how or when vesting was to occur.

3. Did the Presumption of Regularity Apply?

The presumption of regularity says that, where a formal act is done which can only legally be done after the performance of some prior act, proof of the prior act is presumed. The Court held that the issues arising from the loss of the Deed extended beyond mere adherence to formal requirements, to substantive concerns as to the Deed’s contents. As such, the presumption could not be relied on to overcome the lack of evidence as to the Deed’s subject matter.

4. Did the Trust fail for uncertainty?

The obligation to act in strict conformance with the terms of a trust is perhaps the most important duty of a trustee.  Where the contents of a trust deed cannot be ascertained, the trustee cannot discharge this obligation and the trust must fail. Accordingly, the Court held that Vanta had acted in breach of trust and the Trust failed for uncertainty.

5. Should a Declaration of Resulting Trust be made?

The Court noted that, where an express trust fails, an automatic resulting trust arises by operation of law, such that the trustee holds the trust property on trust for the settlor. Under an automatic resulting trust, the settlor has transferred the legal interest in property, but not the beneficial interest.

In this case, Teresa’s (albeit invalid) devising of properties under her Will indicated that she did not wish for Vanta to retain the beneficial interest in those properties. Although Teresa’s father was the trust’s settlor, Teresa established the trust and transferred the property, so she was the provider of the trust property. As such, all assets held by Vanta were subject to a resulting trust in favour of Teresa’s estate.

6. Should the Plaintiff’s Proposed Orders be made?

A claim for accounts in common form enforces a trustee’s obligation to account to the beneficiaries of the trust. As trustee, Vanta had an ongoing duty to account and pay amounts owed. The Court found that the Deed must have been lost since at least 2011, and that the $120,000 in distributions which Vanta made since that time to Nicola and Salvatore were a breach of trust. Accordingly, the orders sought by the Plaintiff were justified.

Costs

Given that these proceedings involved hostile litigation and allegations of breach of trust, the Court held that costs should be treated in the same way as ordinary litigation and follow the event. Although a trustee generally has an implied right of indemnity for expenses properly incurred in the administration of the trust, Vanta had not properly incurred the costs involved in these proceedings. The fact that Vanta breached its duties as trustee and adopted an adversarial approach to the proceedings warranted an order that the Plaintiff was entitled to costs on an indemnity basis.

Key Takeaways

These proceedings highlight the importance of trustees being familiar with the location of the trust deed and ensuring its safekeeping. If a trust deed cannot be found, it is crucial to seek directions from the Court as to how the trust should be administered going forward. Otherwise, trustees expose themselves to the risk of not only protracted litigation, but also an adverse costs order.

The contents of this post are for informational purposes only. They do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such.

To discuss your trust matter, please contact our office for advice from our experienced lawyers.

Written by Holly Eastway

The recent case of Pugwall v Arthur McKenzie Investments Pty Ltd [2022] VSCA 272, in the Victorian Court of Appeal, serves as a reminder of the risks of personal guarantees for directors, revealing the dangers of personally guaranteeing the obligations of a company, especially where one may consider themselves safe under the corporate veil.

The Facts

A joint venture agreement (“JVA”) between two constructions companies, concerning the development of residential units in Seaford, Victoria turned sour following issues with funding.

Mr Clark, the sole director and secretary of one of the parties, and Mr McKenzie the sole director and secretary of the other, gave personal guarantees on behalf of their own respective companies.

The problem was that, despite being personally named as guarantors within the JVA, neither Mr Clark nor Mr McKenzie signed the JVA in their personal capacities.

First Instance Decision

The trial judge held, among other things, that McKenzie could not be held liable in his personal capacity pursuant to the guarantee.

On Appeal

The Court confirmed that the court will assess a party’s intention to be bound to the terms of a contract on the basis of an objective construction of the document as a whole, rather than the subjective, uncommunicated intentions of that party.  Upon assessing the JVA in its entirety, it was found that the JVA evidenced the intention for the guarantors to be personally liable and that the formal way in which a party signs a contractual document, will not be determinative of a party’s intention.

Mr McKenzie submitted that his signature to the JVA was only in his capacity as sole director/secretary, and that no signing clause was provided for him in his personal capacity as guarantor.  However, the Court found on appeal that the entirety of the JVA evidenced otherwise.

Key Takeaways

Pugwall v Arthur McKenzie Investments Pty Ltd is a potent reminder of the dangers of personal guarantees. It demonstrates the importance for lawyers to understand the wide ramifications of commercial relationships gone bad and the significance of good legal drafting skills. All in all, the Victorian Court of Appeal has set a precedent for ignoring the subjective intentions of parties to a contract in favour of an objective analysis of the contract itself.

Contact Us

If you’re thinking of entering into a contractual arrangement as a guarantor, seek legal advice in advance.  Uther Webster & Evans can provide you with advice and guidance, so contact our office here.

Disclaimer: the contents of this article are for informational purposes only and do not constitute legal advice, nor are the contents of this article intended to be a substitute for legal advice or to be relied upon as such.

Background

This case involved a dispute between four adult siblings, Giovanni (the Plaintiff), Nicola, Salvatore and Carmine Mantovani, as to the terms of and entitlement to assets within a family trust and, consequently, the distribution of their mother, Teresa’s, estate.

In 1976,  the Mantovani Family Trust (the Trust) was established and a corporation known as Vanta Pty Ltd (Vanta) was appointed as the trustee. Teresa transferred her interest in a number of properties to Vanta, with the transfers treated as loans in the trust records. In 2015, Teresa died. Under her Will, she purported to gift the properties which had been transferred to Venta to each of her children in equal shares. Over the years, Vanta had been controlled by members of the Mantovani family. At the time of the proceedings, Nicola and Salvatore were Vanta’s directors and shareholders.

Despite extensive searches, the original Deed for the Trust was unable to be located and the parties agreed that it had been lost. However, a Trust Schedule existed, which included the date, name, settled sum, settlor, trustee, appointer and beneficiaries of the Trust. There were also financial statements and tax returns for the Trust from 2012 to 2020.

The Plaintiff sought a declaration that all assets held by Vanta were subject to a resulting trust in favour of Teresa’s estate and an order for the taking of accounts and payment of the amounts found to be due to Teresa’s estate. The key issue for determination by the Court was what, if any, legal consequences flowed from the loss of the Deed. In order to reach a conclusion on this issue, the Court was required to answer the following questions:

1. Was the Deed Lost?

The Court held that the Deed was lost, in circumstances where reasonable searches and inquiries had been made by all parties.

2. Could Secondary Evidence Prove the Deed’s Existence and Contents?

The Court referred to the standard of “clear and convincing proof” required to prove a Deed’s existence and contents by way of secondary evidence. Whilst the schedule and financial documents proved the existence of the Deed, they did not prove its contents. For example, the documents did not explain the basis on which distributions were to be made or how or when vesting was to occur.

3. Did the Presumption of Regularity Apply?

The presumption of regularity says that, where a formal act is done which can only legally be done after the performance of some prior act, proof of the prior act is presumed. The Court held that the issues arising from the loss of the Deed extended beyond mere adherence to formal requirements, to substantive concerns as to the Deed’s contents. As such, the presumption could not be relied on to overcome the lack of evidence as to the Deed’s subject matter.

4. Did the Trust fail for uncertainty?

The obligation to act in strict conformance with the terms of a trust is perhaps the most important duty of a trustee.  Where the contents of a trust deed cannot be ascertained, the trustee cannot discharge this obligation and the trust must fail. Accordingly, the Court held that Vanta had acted in breach of trust and the Trust failed for uncertainty.

5. Should a Declaration of Resulting Trust be made?

The Court noted that, where an express trust fails, an automatic resulting trust arises by operation of law, such that the trustee holds the trust property on trust for the settlor. Under an automatic resulting trust, the settlor has transferred the legal interest in property, but not the beneficial interest.

In this case, Teresa’s (albeit invalid) devising of properties under her Will indicated that she did not wish for Vanta to retain the beneficial interest in those properties. Although Teresa’s father was the trust’s settlor, Teresa established the trust and transferred the property, so she was the provider of the trust property. As such, all assets held by Vanta were subject to a resulting trust in favour of Teresa’s estate.

6. Should the Plaintiff’s Proposed Orders be made?

A claim for accounts in common form enforces a trustee’s obligation to account to the beneficiaries of the trust. As trustee, Vanta had an ongoing duty to account and pay amounts owed. The Court found that the Deed must have been lost since at least 2011, and that the $120,000 in distributions which Vanta made since that time to Nicola and Salvatore were a breach of trust. Accordingly, the orders sought by the Plaintiff were justified.

Costs

Given that these proceedings involved hostile litigation and allegations of breach of trust, the Court held that costs should be treated in the same way as ordinary litigation and follow the event. Although a trustee generally has an implied right of indemnity for expenses properly incurred in the administration of the trust, Vanta had not properly incurred the costs involved in these proceedings. The fact that Vanta breached its duties as trustee and adopted an adversarial approach to the proceedings warranted an order that the Plaintiff was entitled to costs on an indemnity basis.

Key Takeaways

These proceedings highlight the importance of trustees being familiar with the location of the trust deed and ensuring its safekeeping. If a trust deed cannot be found, it is crucial to seek directions from the Court as to how the trust should be administered going forward. Otherwise, trustees expose themselves to the risk of not only protracted litigation, but also an adverse costs order.

The contents of this post are for informational purposes only. They do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such.

To discuss your trust matter, please contact our office for advice from our experienced lawyers.