Background and facts

Australian Karting Association Ltd (Karting Australia), is the Australian body responsible for promoting the sport of karting in Australia and a company limited by guarantee. A previous federated association known as AKA Inc had carried out these responsibilities, but in 2013 the operations of AKA Inc were transferred to Karting Australia. At the same time a memorandum of understanding was executed between Karting Australia and the state karting associations.

Karting (NSW) Incorporated (Karting NSW) is a non-profit association and is responsible for promoting the sport and conducting karting races in New South Wales and the Australian Capital Territory.

Disputes arose between Karting Australia and Karting NSW regarding the administration of a trust fund for track development to which the state bodies contributed funds. In 2018 Karting NSW proposed to its members that there be a vote of no confidence in Karting Australia’s board and a members’ resolution that Karting NSW cease to be a member of Karting Australia.

Karting NSW later demanded its funds from the trust fund, sought to convene a meeting of Karting Australia to consider removing its directors, and took unilateral steps to establish its own rules for the conduct of karting races.

In 2019 Karting Australia purported to expel Karting NSW as an ordinary member after receiving grievances about Karting NSW from other members. Karting Australia then wrote to Karting NSW informing it that it had cancelled each of 3 loan agreements and demanded immediate repayment of the outstanding amount of principal, together with interest on the principal advanced, from the date of commencement of each loan. Karting Australia then made a claim for the loan monies.

Karting NSW defended Karting Australia’s claim on the basis that:

  • it was not in default of the loan agreements as Karting Australia had not validly expelled it as an ordinary member;
  • the terms for accelerated payment and interest in the loan agreements amounted to penalties and were therefore unenforceable; and
  • Karting Australia’s conduct was unconscionable and the provisions of the loan agreements ought not be enforced.

Karting NSW also claimed the return of monies which comprised driver levies which it had been obliged to collect on behalf of Karting Australia. Karting Australia had allocated these amounts in its financial statements to a loan account in favour of Karting NSW. The monies amounted to unpaid distributions under a trust created in 2005. Karting Australia contended that no monies had ever been distributed under the trust and that, accordingly, the monies claimed remained part of the trust property.

The Court’s decision

The Court first considered the legal position regarding the monies in Karting NSW’s loan account with Karting Australia.

A discretionary trust for track development was created in 2005 by AKA Inc as trustee (later changed to Karting Australia) with the state associations as the Corpus and Specified Beneficiaries. Every year, the trustee deducted from its receipts and income (which comprised the driver levies from state members and interest on deposits) the expenses which it incurred and credited these amounts to the state karting associations.  The monies were not actually paid to the state karting associations.  Instead, the trustee credited their loan accounts, based on their respective contributions.

Every year, the trustee notionally distributed the net amount (being the beneficiary’s proportion of the total income less expenses) to each beneficiary and recorded the amount in its balance sheet as a net liability. Karting NSW, as a beneficiary, was entitled to have that money paid to it.

The Court found that the trustee, Karting Australia, had the power under the trust deed to pay out capital and make distributions of trust property. The Court found that it had exercised this power to make distributions to Karting NSW and the other ordinary members of Karting Australia who were beneficiaries of the trust.

The Court explained (at [110]):

The effect of crediting these amounts to the beneficiaries’ loan accounts was to distribute the amounts to the beneficiaries.  That is, the funds were no longer held by the trustee on trust pursuant to the terms of the discretionary trust; they were held by the trustee on a bare or absolute trust in favour of the beneficiary in the amounts set out in the loan accounts and were repayable on demand by each beneficiary.

Thus, the crediting of the loan account of Karting NSW with the initial capital sum, the levies and interest each year constituted an admission by Karting Australia of a debt in favour of Karting NSW in the total sum recorded in the financial statements as the balance of Karting NSW’s loan account.

The Court then considered Karting Australia’s claim under the loan agreements.

It was submitted that when Karting Australia expelled Karting NSW as an ordinary member, there was an event of default since Karting NSW was no longer an affiliate of Karting Australia, as lender. The Court rejected this argument as Karting Australia did not become the lender for the purposes of the loan agreements, but rather, by reason of the assignment, Karting Australia acquired from the lender (AKA Inc) the chose in action to sue on the debt.

The Court considered the interest provisions in the third loan agreement to amount to penalties and the conduct of Karting Australia to be unconscionable. This meant that it ought not be permitted to recover against Karting NSW in circumstances where Karting NSW continued to pay the third loan off in accordance with the terms applicable to the interest-free loan.

The Court found that the provisions of the third loan agreement were being used (and were available to be used, as contemplated prospectively by the terms of the agreement) to punish Karting NSW for conduct which Karting Australia regarded, whether rightly or wrongly, as warranting its expulsion as an ordinary member.

This amounted to a penalty as the amount to be paid on breach was wholly disproportionate to the maximum amount of damage (including legitimate commercial interests) that might be expected to flow from the breach.

Section 21 of the Australian Consumer Law relevantly provides that a person must not, in trade and commerce, in connection with the supply of goods or services, engage in conduct that is, in all the circumstances, unconscionable.

The Court stated (at [145]-[146]):

[W]hile Karting NSW had indicated that it was considering disaffiliation, its concerns principally arose from the handling of the trust funds and the failure by Karting Australia to pay to it money to which it was, at law and in equity, entitled.  I have found, for the reasons given above, that Karting NSW was entitled to make the claim and entitled to be paid the money.  Karting NSW’s construction of the Trust Deed and of the financial statements of Karting Australia, as trustee, was correct.  Karting Australia’s legal stance was incorrect and amounted to a breach of the fiduciary duties which it owed to Karting NSW as beneficiary of a fixed trust of the sum standing to its credit under the loan account (in the sense explained by Gageler J in Fischer [Fischer v Nemeski (2016) 257 CLR 615]).  By expelling Karting NSW as an Ordinary Member (whether the expulsion was valid or not), Karting Australia was using its powers to get rid of the one voice which was challenging its legal errors.  Karting NSW was both a beneficiary under a discretionary trust (the trust property of which was $1) as well as being a beneficiary under a bare or absolute trust (the trust property of which was the amount standing to its credit in its loan account).  As a trustee, Karting Australia was obliged to inform itself of the terms of the trust and of the effect of its own conduct on its beneficiaries.  By persistently misrepresenting the legal position to Karting NSW, Karting Australia behaved in a manner which I am satisfied was unconscionable. This is not to say that any individual involved behaved unconscionably.  Unlike common law principles, which may, in many instances, accord with an instinct for right and wrong, the law of trusts is not particularly accessible to non-lawyers.  But the circumstance that the individuals through whom Karting Australia acted were not malevolent or consciously engaging in trickery or deception or active thwarting of Karting NSW’s legal entitlement is not determinative of whether Karting Australia itself engaged in unconscionable conduct.  Thus, Karting Australia may be found to have acted unconscionably, even though the humans through whom it acted, may have honestly believed in the correctness of their stated legal position.

Therefore, Karting NSW was successful.

Commentary

This was a complex legal case involving a peak sporting association attempting to transition its governance and relationships with its state members. The Court found a bare trust in favour of Karting NSW. A bare trust is a trust under which the trustee (in this case Karting Australia) holds property (in this case money) without any interest in it other than that existing by reason of the office and legal title of trustee. The trustee of a bare trust has no duty to perform other than to convey the property upon demand to the beneficiary (in this case Karting NSW). Thus, the monies in question had to be transferred to Karting NSW.

With the benefit of hindsight, the situation may have been mitigated if there had been some procedure which all parties entered into in good faith to resolve issues and build trust and confidence.

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