There were also claims for mental distress, anxiety and for exemplary damages. Those claims, which were dismissed, are not relevant to the issues in this case.
45 The appellants submitted that, on the principles stated in Prudential Assurance v Newman Industries and Johnson v Gore Wood and given the finding of the trial judge that the conspiracy was effected through illegal means, namely by the appellants breaching their duties as directors to KSA, while KSA may have a cause of action against them, the respondent's claim was not maintainable because all of the individual components of the damages awarded were amounts owed to Karandonis by KSA or reflective of his investments in KSA. It was integral to the appellants' submission that the company's cause of action did not have to be the same as that available to Karandonis. Rather, they submitted the question was "can a plaintiff, being a shareholder, claim in respect of a loss which is reflective of a diminution in value of the shareholder's investment in the company". They submitted that on the principles in Prudential Assurance v Newman and Johnson v Gore Wood the answer to that question was "no". See also McWilliam v Penthouse Publications Ltd [2001] NSWCA 237; Milfull v Terranora Lakes Country Club (1999) 17 ACLC 1515.
46 The appellants' defence based on the principles in Prudential Assurance and Johnson v Gore Creek was not specifically pleaded contrary to the requirements of Pt 15 r 13(2) of the District Court Rules 1973 (NSW). However, the issue was raised at the commencement of proceedings when the appellants moved to strike out para 15.6C of the Statement of Claim (and probably all of para 15 to the extent that those paragraphs pleaded a conspiracy). The issue was thus clearly raised before his Honour. The appellants complain, however, that his Honour completely failed to deal with it. Assuming it to be correct for the moment that his Honour did fail to deal with the issue, that would involve appellable error. In the normal course, an error of that type would involve the matter, at least on the omitted issue, being remitted to the District Court for determination. Neither party was anxious for the Court to adopt that approach and urged it to determine the matter for itself. That raises a particular difficulty, to which I shall return, if the Court comes to the view that Karandonis did suffer a loss which is recoverable within the principles stated in Prudential Assurance v Newman Industries.
47 As is apparent from Prudential Assurance v Newman Industries and Johnson v Gore Wood, it is necessary to identify the precise nature of each claimed loss to determine whether it is merely a "reflective loss" to use the language of Lord Millett or whether it is a separate loss arising from the wrongdoing of the tortfeasor, which is not recoverable by or from the company.
48 His Honour identified the losses suffered by Karandonis as being: (i) the loss of salary in China; (ii) the loss of salary as managing director in Australia; (iii) the loss of the benefit of a promised 20% interest in Total Win, who had a 60% interest in SKS; and (iv) the loss of his 20% interest in KSA and the $73,500 lent to KSA to fund the acquisition of the Karandonis Shoes business. His Honour also observed that "by reason of the [appellants'] actions [Karandonis] has [lost] the right to trademark his goods under his own name", although, correctly, he does not appear to have included that matter in the catalogue of claimed losses.
49 His Honour then turned to the assessment of damages, which, he observed was "not … easy". It is apparent that he considered that the damage flowing from each of the losses identified in (i) to (iv) above was recoverable from the appellants. The appellants challenge that this is so. For the reasons which follow, I consider that it is only the first and third of the claimed losses which are recoverable.
50 His Honour allowed the claim in the sum of $53,333 for Karandonis' loss of salary in China. Counsel for the appellants effectively conceded this amount was recoverable by the respondent. That is clearly so. His Honour had earlier held that Karandonis had reached an agreement with Daniel Chen for the payment of that salary by Far Dragon. His salary was never paid by or agreed to be paid by KSA. Nor did KSA have any legal obligation to pay him for his work in China.
51 However, the loss of Karandonis' managing director's salary falls into a different category. Karandonis was employed by KSA as managing director. There was no suggestion that the parties ever entered any other arrangement for the payment of his managing director's salary. This loss, therefore, is a loss claimable only from KSA and is not recoverable: see Johnson v Gore Wood per Lord Millett at 67.
52 That leaves the third and fourth claims. His Honour found that Karandonis was led by the appellants to believe that as part of his package in the Chinese joint venture he would hold a 20% interest in Total Win. The effect of his Honour's finding was that there was an agreement to this effect with the appellants. This is not challenged on appeal. Sometime after 9 January 1996, a decision was made not to allocate any such interest to Karandonis. This loss, therefore, falls into the same category as the loss of the salary whilst in China and is recoverable from the appellants.
53 The loss of the 20% interest in KSA, however, is not. It was a loss of Karandonis' investment in the company. The loss was caused by the depletion of the assets of that company due to the appellants' breach of their fiduciary duty to the company. The recovery of such a loss is directly denied by the principles stated in Prudential Assurance v Newman. The loan of $73,500, being the second amount referred to in (iv), is also not recoverable. They were monies lent to KSA and are only recoverable from it. On the principles in Prudential Assurance v Newman it is irrelevant that KSA's inability to repay was caused by the appellants' conduct. Accordingly, the principles in Gould v Vaggelas, to the extent they might otherwise have applied, are of no assistance: see Actionable Misrepresentation, Bower, Turner and Handley at para 223.
54 Having come to these conclusions, it is necessary to return to the quantification of damages relating to the loss of the interest in the joint venture. His Honour observed in that regard that:
"There is a total absence of acceptable evidence from the [appellants] as to what the real value of the China interests are."
55 His Honour then referred to the financial position of KSA. His Honour accepted that by the end of 1995, Karandonis' interest in KSA, if liquidated at that point of time, would have been a negative one. He considered, however, that had KSA been allowed to trade normally it might have been able to trade out of its difficulties. His Honour also held that Karandonis' interest in both KSA and the joint venture "still exist[ed]", although he was unable to be precise as to their value. He noted that it was the appellants' case that they were without value. He said, however:
"I think that any court can fairly infer from the absence of evidence of that nature that neither of those foregone interests are without value, and the conduct of Mr Kingsley Chou and the Danchen interests in pursuing them and continuing them would militate against one forming such a view."
56 Nor did he accept that KSA's indebtedness as presented to the liquidator was a true statement of its financial position, as it "was being loaded up with charges that represented advances by [Total Win] to [SKS]".
57 His Honour's approach, given his inability to value Karandonis' interest in SKS and KSA, was simply to award him the loss of his investment in KSA by way of damages for the loss of his interest in both. However, as I have already said, Karandonis' loss of his investment in KSA was not, as a matter of law, recoverable. Senior counsel for the appellants resisted any such approach to valuing the loss of the interest in the joint venture as amounting to no more than speculation.
58 He further argued that in any event, the basis of the assumption was wrong because as at the date of the conspiracy, that is in January 1996, there was no value in KSA. In particular, the appellants drew specific attention to its indebtedness to BOC in the sum of approximately $AUD 800,000 by mid 1995 and to the fact that by 30 June 1996, KSA had a deficiency of assets over liabilities of approximately $AUD 761,000. This submission, however, runs counter to his Honour's view that KSA may have traded out of its difficulties and to his finding that there was still some value in that interest. It is also not the subject of a specific ground of appeal. However, it is unnecessary to enter into that area of discourse, at least for the moment, as the loss relating to Karandonis' investment in KSA is not recoverable.
59 That leads directly to the difficulty to which I have averted. How is Karandonis' loss of his interest in the Chinese joint venture to be valued? The appellants submit that there is no acceptable evidence of the value of Karandonis' shareholding in Total Win and therefore, no basis upon which to award any amount for damages. In other words, the appellants submitted that Karandonis had failed to prove his loss. Karandonis responded to this by asserting that "the absence of evidence of value is the responsibility of the appellants as wrongdoers": see Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46, where Handley JA said at 59:
"The defendants, having improved common property without lawful authority, and attempted to effect a fraud on the minority, are wrongdoers, and their failure to keep and produce proper accounts of their actual expenditure on the common property has made it difficult to assess the compensation due to the plaintiff: compare Armory v Delamirie (1722) 1 Stra 505; 93 ER 664. In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party 'whose actions have made an accurate determination so problematic': see LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508."
60 In Armory v Delamirie, when the plaintiff was unable to prove the value of a jewel wrongly detained by the defendant, it was held that the court would "presume the strongest against him, and make the value of the best jewels the measure of [the] damages".
61 In Houghton the difficulty in assessing damages was due to the defendants' failure to keep proper accounts of the cost of construction of the unlawful improvements they undertook. However, there was evidence of the estimated costs of those improvements which provided a foundation upon which the Court could enter upon the task of assessing damages. There was also some evidence available to the Court in LJP Investments v Howard Chia, the case to which Handley JA referred in Houghton.
62 In this case, there is no evidence of the value of Karandonis' interest in the Chinese joint venture. Nor is it likely that the value of that interest could ever be satisfactorily assessed, given the manner in which the appellants conducted the affairs of the various corporate entities involved in the Karandonis shoe business. The question is whether the Court can, in such circumstances, embark upon any process whereby damages for the loss of the interest might be awarded. Some guidance to the dilemma the Court faces is provided by Docker v Somes 2 MY & K 656; ER 1095, where Brougham LC said:
"When did a Court of Justice, whether administered according to the rules of equity or law, ever listen to a wrongdoer's argument to stay the arm of justice, grounded on the steps he himself had successfully taken to prevent his iniquity from being traced? Rather let me ask, when did any wrongdoer ever yet possess the hardihood to plead, in aid of his escape from justice, the extreme difficulties he had contrived to throw in the way of pursuit and detection, saying, you had better not make the attempt, for you will find I have made the search very troublesome? The answer is, 'the Court will try.'"
63 So emboldened, and given the "robust" approach taken in the authorities referred to above, which authorise an approach of using such evidence as is known or may be determined and which is relevant to an assessment of the loss claimed, I consider that the following matters are known, either from his Honour's findings or from the evidence, and may provide some basis upon which the Court may assess the loss and thereby the damages to which I have found Karandonis is entitled.
64 A liquidator was appointed to KSA in August 1999 at the instance of Chou. His Honour found that thereafter Chou:
"negotiated with the liquidator for the right to establish another corporation of identical name, with a different corporate number, and also to purchase from the liquidator the very valuable (in the circumstances) trademarks initially acquired by [Karandonis]."
65 His Honour held that he did "not doubt for one moment that in so proceeding, [Chou] was acting as factotum for Daniel Chen's interests". He observed that that entity continues to operate a retail outlet "in a prime position in Sydney displaying the [Karandonis] name".
66 At J 70-71, his Honour referred to Chou's evidence as to how the shoe business continued after the liquidation:
"Mr Chou explains that the liquidator of [KSA] put in as a bundle with the trademarks the opportunity to continue the name Karandonis Shoes Australia Pty Limited with a different ACN number, a prudent step taken at the suggestion of, 'the solicitors'.