Cogent Nominees v Anthony

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4735/02 COGENT NOMINEES PTY LTD & ORS V UPIL ANTHONY & ORS JUDGMENT 1 HIS HONOUR: In this proceeding the plaintiffs seek to recover a large sum of money, which they claim to have been improperly taken from them by the first and eighth defendants (Mr Anthony and La Bourse), with involvement by the second, third and fifth defendants. The third defendant, Mr Boyd, owns all of the shares in the second defendant, Futures Telecom, and 61% of the shares in the fifth defendant, Advantage Telecommunications (Australia). 2 As a result of interlocutory applications made to other judges of this Court in October and November 2002, and to me on 11 July 2003, various Mareva and other orders are in place. Prior to my orders of 11 July 2003, the orders (so far as relevant) were as follows: (1) Mr Anthony, Mr Boyd and Futures Telecom were restrained until further order from removing money from a specified account with the National Australia Bank ("the First Bank Account"); (2) Mr Boyd and Advantage Telecommunications (Australia) were restrained until further order from removing money from another specified account with the National Australia Bank ("the Second Bank Account"); (3) Mr Anthony and La Bourse, and Mr Boyd, Futures Telecom and Advantage Telecommunications (Australia), were restrained until further order from dealing with any of their assets, including bank accounts, real property, shares and interests in superannuation funds, subject to the following provisos: (a) there was to be no restraint provided that assets to the value of $11 million owned by them remained available in New South Wales; (b) Mr Anthony was permitted to expend $2,502.54 per week for ordinary living expenses, including $650 per week for mortgage expenses in relation to Unit 21 Bridgewater Apartments, Cashel Street, Christchurch, New Zealand ("the Cashel Street Property"); (c) Mr Boyd was permitted to expend $2,896 per week for ordinary living expenses, including $560 per week for mortgage expenses in relation to Unit 1, The Ranui, The Woods Luxury Villas, 12 Dublin Street, Queenstown ("the Queenstown Property"), and the permitted amount was to be released from the joint bank account held by him with his wife; (d) Mr Anthony and La Bourse were permitted to pay costs reasonably incurred in the present proceeding and related criminal proceedings up to $160,000, out of the proceeds of the sale of some shares in a company called Cube Capital Limited, authorised by the orders; (e) Mr Boyd, Futures Telecom and Advantage Telecommunications (Australia) were permitted to pay costs reasonably incurred in this proceeding up to $160,000, and $60,000 was authorised to be released from Mr Boyd's joint bank account with his wife. 3 On 11 July 2003, after an application was made to me as Duty Judge, I varied the order referred to in paragraph (3)(d) above by increasing the maximum amount for the legal expenses of Mr Anthony and La Bourse from $160,000 to $300,000, to be provided by the sale of the Cashel Street Property for a price not less than NZD440,000 and by requiring the balance of proceeds of the sale that property, after certain deductions, to be paid into a trust account in the name of the solicitor for Mr Anthony. The application was initially contested, but after some observations made by me during the course of argument, the plaintiffs by their solicitor eventually consented to those orders being made. 4 As far as I can recollect, no cases were cited dealing with the allowance of expenses to a defendant where the plaintiff's Mareva order is based on a proprietary claim. Specifically, I was not taken to United Mizrahi Bank v Doherty [1998] 2 All ER 230, a case referred to by all parties to the present application. In that case the court (at 235) contemplated that if a defendant is permitted, by way of exception to a Mareva order over assets to which the plaintiff makes a proprietary claim, to apply any such assets to meet legal expenses, the defendant might be required by the court to give an undertaking supported by security. The undertaking would be to make good, out of funds to which the plaintiff has no proprietary claim, any sums spent on costs which are found at the end of the day to have come out of property in which the plaintiff has a good proprietary claim. That undertaking would be supported by a charge in favour of the plaintiff, securing payment of the "replacement moneys", over an asset that is clear of any claim by the plaintiff to a proprietary interest. The court contemplated that in addition to this undertaking and security, the plaintiff should be entitled to be represented at the taxation of the defendant's costs. No such requirements were applied for or made as conditions of the variations ordered on 11 July 2003. 5 The orders I made on that occasion did no more than to clarify and expand the exception to the Mareva order against Mr Anthony and La Bourse. They did not operate to protect those defendants or their legal advisers from any proprietary claim by the plaintiffs, having regard to the United Mizrahi Bank case. 6 In the United Mizrahi Bank case the plaintiff alleged that the first defendant, Mr Doherty, had wrongfully siphoned off its money to offshore entities, and sought to trace the funds into the hands of other defendants including the fifth defendant, Mrs Doherty. The court made a Mareva order against Mr and Mrs Doherty, subject to the usual provisos including a proviso allowing reasonable expenditure for legal costs. Subsequently the court made a declaratory order that Mr and Mrs Doherty would not be in breach of the Mareva order by utilising certain assets held by them to fund their reasonable legal expenses of defending the action, subject to the further proviso that nothing in the declaratory order should deprive the plaintiff of any proprietary claim it might have to those assets. Being concerned about that proviso (since their solicitors had said they would no longer act if they were at risk that they might be required to return their fees), Mr and Mrs Doherty made an application seeking, in effect, a determination that the plaintiff would not be entitled to assert any proprietary claim against funds taken out of those assets and applied for legal expenses. 7 Michael Burton QC, sitting as a Deputy Judge in the Chancery Division, held that the court's earlier order did not prevent the plaintiff from asserting a proprietary claim (if it were to succeed at the final hearing) against funds applied for legal expenses. He held (at 239) that the question whether recipients of those funds, such as Mr and Mrs Doherty's solicitors, could resist the plaintiff's proprietary claim would depend upon the application of principles relating to constructive trusts for knowing receipt of trust property and for assistance with knowledge of dishonest breach of duty: see, for example, Carl-Zeiss-Stiftung v Herbert Smith & Co (a firm) (No 2) [1969] 2 Ch 276 and Finers (a firm) v Miro [1991] 1 All ER 182 (although the principles applied in those cases may need to be re-assessed as a result of Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378). Those principles are applicable whether or not, at an interlocutory stage in the plaintiff's recovery action, it has obtained a Mareva order (at 238, 239). It would be open to the solicitors or other recipients of the fund to seek to protect themselves by making an appropriate application (at 240), but they were not protected simply by the circumstance that the expenditure fell within an exception to a Mareva order. 8 I respectfully agree with this reasoning, and I regard it as applicable to the orders I made on 11 July 2003. Indeed, this is a slightly easier case than the United Mizrahi Bank case, because here the Court's order did no more than to raise the permitted maximum expenditure and authorise the making of that expenditure out of a specific asset, whereas in the United Mizrahi Bank case there was a declaratory order to the effect that expenditure out of the designated assets constituted reasonable expenditure for the purposes of the Mareva order. It was therefore crystal clear, in the present case, that the Court's order was nothing more than a modification of the prohibition established by the Mareva order. 9 On 21 August 2003 I made orders, by consent of the plaintiffs, Mr Anthony and La Bourse, that there be judgment for the plaintiffs against Mr Anthony in the sum of $16,469,355.43 plus interest, deferring to a later time the making of declaratory orders against him. I made declaratory orders against La Bourse, to the effect that La Bourse assisted Mr Anthony in misappropriating funds from the plaintiffs and knowingly receiving those funds; and is therefore liable as a constructive trustee; and is liable to account to the plaintiffs for assets that can be traced into its possession from the misappropriated funds, including a list of specified assets. I also ordered that there be judgment for the plaintiffs against La Bourse in the sum of $701,773.02 plus interest. 10 By an amended notice of motion filed on 1 August 2003, Mr Boyd, Futures Telecom and Advantage Telecommunications (Australia) ("the applicants") now seek orders varying the Mareva Order in (3)(e) to the effect that (i) the maximum permitted amount of their legal expenses be increased from $160,000 to $260,000; (ii) half of the balance of the proceeds of sale of the Cashel Street Property, which I previously ordered to be paid into the trust account of Mr Anthony's solicitor, be ordered to be paid into the trust account of the applicants' solicitor; (iii) Mr Boyd's permitted living expenses (including mortgage expenses and periodic outgoings with respect to the Queenstown Property), and the applicants' permitted legal expenses up to the new maximum amount, be authorised to be paid from the money paid into the trust account of the applicants' solicitor. 11 As to the increase in permitted expenditure for legal expenses, the solicitor for the applicants has given affidavit evidence that the applicants have exhausted the funds in the joint account of Mr Boyd and his wife, and it has therefore become necessary for alternative arrangements to be made. Substantial legal services have been performed for the applicants and those services are continuing. The solicitor says it is his considered opinion that the applicants require a further $100,000 to be a made available to meet the cost of continuing legal services in these proceedings. He says he is prepared to detail the work if required. At the hearing of the application, this evidence was not challenged and no demand was made for further details of the legal work that has been done and will need to be done on behalf of the applicants. I therefore accept that the applicants need this amount for the further conduct of their case, and I shall make an order varying the Mareva Order by raising the maximum permitted expenditure for legal expenses from $160,000 to $260,000. 12 The only issue before me is whether to vary the order so as to permit the applicants to have access to the proceeds of sale of the Cashel Street Property for their additional expenditure on legal expenses. In my opinion, the applicants bear the burden of proving facts sufficient to persuade the Court to vary the existing Mareva order in the manner sought. That proposition is supported, by analogy, by Commissioner of Taxation v Manners and Terrule Pty Ltd (1983) 81 FLR 131. There, the plaintiff obtained Mareva orders preventing the defendants from dealing with certain assets, and the defendants sought to have the orders varied to allow them to pay legal fees. Phillips J dismissed the application by the first defendant on the ground that he had failed to discharge the burden of proof to show that he had no other assets from which to pay legal fees. Here the position is different because the Mareva order is expressed in general terms, rather than being directed to specific assets. Nevertheless, the reasoning of Phillips J (especially at 134) supports the general proposition that the applicants bear the onus of showing that the amendment they seek is appropriate, and that it is needed (either because they have no other source of funds for legal expenses or because it would be unfair to require them to rely on any such other source). 13 The Cashel Street Property was held in the name of a New Zealand company called La Bourse Ltd (as opposed to the eighth defendant, La Bourse Pty Ltd), in which Mr Boyd is an equal shareholder and director, the other shareholder and director apparently being Mr Anthony or some interest associated with him. According to an affidavit by the plaintiffs' solicitor, two sums, namely AUD3,000,000 and AUD550,000, were transferred out of accounts of the plaintiffs in November 2001 and May 2002, into a bank account in the name of Futures Telecom. Then there was a series of transactions, which included an acquisition of shares in a public listed company called Advantage Telecommunications Ltd, not necessary to be detailed here. The result of examining those transactions, according to the plaintiffs' evidence, is that NZD336,739.76, traceable from the money transferred out of the plaintiffs' accounts, was applied to provide 95% of the purchase money for the Cashel Street property, acquired by La Bourse Ltd. 14 The Cashel Street Property has now been sold and the Court has authorised the payment of proceeds of sale into a trust account of the solicitor for Mr Anthony and La Bourse. The plaintiffs say they had a "strong proprietary interest" in the Cashel Street Property, and therefore in the proceeds of sale. Although I have made orders permitting use of some of the sale proceeds for the legal expenses of Mr Anthony and La Bourse, the plaintiffs wish to protect their proprietary claim with respect to the balance of the sale proceeds, an amount of approximately NZD200,000, and therefore they resist any order that would give the applicants access to this fund. 15 The applicants do not assert any proprietary claim to the Cashel Street Property. On 1 August 2003 the plaintiffs' solicitors wrote to the applicants' solicitor saying: "Your clients admit having no interest in, and indeed claim no proprietary interest whatsoever in, the Cashel Street property and any funds derived from the sale of that property (this position was advised to the Court, ourselves and counsel for the first & eighth defendants by your clients' counsel, Mr George Thomas, during the hearing of the first & eighth defendants' notice of motion before his Honour Mr Justice Austin on 11 July 2003)." 16 Those assertions were not denied during the hearing of the application, and, indeed, they are supported by the applicants' solicitor's letter dated 20 August 2003, considered below. 17 I turn to the question whether the applicants have any other sources of funds for legal expenses. According to the sketchy evidence before me on the application, there are two other New Zealand properties in which either or both of Mr Anthony and Mr Boyd appeared to have some interest. 18 The Queenstown Property is in the joint names of Mr Anthony and Mr Boyd. A caveat has recently been lodged by Allthis Limited, to protect an interest it alleges to have pursuant to an agreement for mortgage made between it and Mr Anthony and Mr Boyd. 19 In their letter dated 1 August 2003 to the applicants' solicitor, the plaintiffs' solicitors claimed: "Your clients (through the third defendant, Mr Andrew Boyd) have access to at least one asset over which the plaintiffs do not have as strong a proprietary claim as they do over the Cashel Street property, that could be sold by Mr Boyd (with the consent of Mr Anthony) to fund their defence of these proceedings; namely 4/12 Dublin Street, Queenstown [I assume this is an incorrect reference to Unit 1, and Accessory Unit 1A, together the Queenstown Property], which we understand from the affidavit of Mr Anthony Boyd sworn 2 October 2002, is worth between NZ$1.5 million - NZ$2 million (see paragraph 1(iii))." 20 The applicants did not adduce any evidence to deny these claims, at the hearing of the application. 21 The other property is at 63 Dyers Pass Road, Cashmore ("the Dyers Pass Road Property"), which is also in the joint names of Mr Anthony and Mr Boyd. Cogent Nominees, one of the plaintiffs, has lodged a caveat claiming a beneficial interest as a beneficiary. 22 According to the evidence before me, the Dyers Pass Road Property has been sold, by an agreement dated 29 July 2003. The agreement for sale appears to have been signed by Mr Anthony but not by Mr Boyd. On 31 July 2003 Mr Boyd's solicitor wrote to the New Zealand solicitors acting for the vendors, saying that the sale could not proceed because there is a Mareva order in place preventing any sale, although a sale may become possible if the plaintiff consents. It is not clear whether the plaintiffs have consented to the sale, but in any event no application has yet been heard for any variation of the Mareva orders to permit Mr Anthony and Mr Boyd to deal with the Dyers Pass Road Property. The evidence suggests, prima facie, that Mr Anthony may have already acted in breach of the Court's orders by authorising the sale. Completion of the sale would appear, on the evidence before me, to amount to another contravention of the Court's orders, unless the Court is first persuaded to vary the orders notwithstanding the existing contravention. I understand that such an application will be made, and that the present applicants do not resist it. 23 I note that on 21 August 2003 the purchasers of the Dyers Pass Road Property obtained a Mareva order in the High Court of New Zealand, restraining the vendors from uplifting or procuring the release of the deposit prior to completion of settlement of the sale. 24 On 20 August 2003 the applicants' solicitor wrote to the plaintiffs' solicitors, saying: "My Client [evidently, Mr Boyd] has at all times made it clear that it is his position that Mr Anthony had no beneficial interest in the Queenstown property. He [that is, Mr Boyd rather than Mr Anthony] has not asserted to date in these proceedings a beneficial interest, in his own right, in either the Cashel Street property or the Dyers Pass Road property. However that is not to say that those properties should be dealt with in a manner for the peculiar advantage of Mr Anthony, his company or his solicitors. This is the more so, given that Mr Anthony had effectively conceded the Plaintiff's claim in these proceedings and is pleading guilty to criminal charges arising out of the subject matter of these proceedings. The payment of what can only be viewed as an exceptionally large amount of money for legal costs in these circumstances out of assets to which the Plaintiff claims to trace it funds [sic] has as a consequence possible prejudice to the position of Mr Boyd, insofar as the Plaintiff is looking to Mr Boyd to effect recovery and he has an interest in seeing that relevant assets are preserved." 25 Importantly for present purposes, the letter does not assert any proprietary claim for the applicants over either the Dyers Pass Road Property or the Cashel Street Property, but it contends for the beneficial ownership of the Queenstown Property. The basis for the present application, as can be seen from the letter, is the contention that, unless the applicants are given access to the balance of proceeds of the Cashel Street Property, they will be forced to sell the Queenstown Property (said from the bar table, without evidence, to be Mr Boyd's family dwelling). They will consequently be treated more harshly than Mr Anthony and La Bourse, notwithstanding that Mr Anthony and La Bourse have now consented to orders against them (and Mr Anthony has, according to the applicants' submission, pleaded guilty to criminal charges). This is said to be highly unfair. 26 There is a fatal flaw in the applicants' case. Their position is fundamentally different from the position of Mr Anthony and La Bourse. Mr Anthony and La Bourse claim to have a proprietary interest in the net proceeds of sale of the Cashel Street Property, of a kind sufficient to entitle them to use that fund for permitted expenditure under the provisos to the Mareva order made against them. When the plaintiffs asserted that their strong proprietary claim to trace into the proceeds of sale of the Cashel Street Property entitled them to prevent its use for legal expenses, Mr Anthony and La Bourse brought that dispute before the Court, which was then invited to carry out what has been described as a "balancing act" (United Mizrahi Bank case at 234; see also PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 and the other English cases, mostly unreported, summarised in the United Mizrahi Bank case). At stake was the balancing of inconsistent proprietary claims to a single fund, in interlocutory circumstances. (As I have said, eventually the application on 11 July 2003 was disposed of without the Court making a determination.) 27 The applicants do not make any proprietary claim at all to the proceeds of sale of the Cashel Street Property. That is evident from the correspondence to which I have referred, and it was confirmed by the applicants' submissions at the hearing of the application. No attempt was made to contend, for example, that the applicants have a right of subrogation to the rights of Mr Anthony or La Bourse, or a right of contribution against them, with (in either case) proprietary consequences. It is therefore unnecessary for me to consider whether, if it is established that the applicants or some of them are liable to the plaintiffs as constructive trustees, they may have that kind of recourse against Mr Anthony or La Bourse as co-trustees. 28 The Mareva order against the applicants does not prevent them from using the Cashel Street proceeds, for the simple reason that the Mareva order applies only to the use of assets in which they have an interest. Therefore the exceptions to the Mareva order for legal expenditure and living expenses are irrelevant. The application does not present for the Court a problem of balancing inconsistent proprietary claims to a single fund, because the applicants make no such claim to the fund. In those circumstances, there is simply no basis, under the guise of varying the exception to a Mareva order or otherwise, for granting the applicants access to property which is in no sense theirs for any purpose, including the purpose of funding their legal and living expenses. If Mr Boyd is left with no option but to sell the Queenstown Property to fund the litigation and routine expenses (upon this obtaining a variation of the Court's existing orders to permit him to do so), that is a consequence of his limited assets rather than a matter to be visited upon other defendants. 29 The applicants offered to submit to conditions of the kind described in the United Mizrahi Bank case (at 235), in substance offering to undertake that, to the extent that they succeed in their tracing claim with respect to the Cashel Street Property, the plaintiffs will be entitled to recover from the applicants the amount withdrawn by the applicants from the proceeds of sale, and offered to secure this undertaking by a caveat over the Queenstown Property. There is nothing to stop the plaintiffs and the applicants making an agreement to this effect, but there is no basis for the Court to impose such an arrangement on the plaintiffs when the applicants claim no proprietary interest in the fund. 30 The plaintiffs submitted that if I were to make orders allowing the applicants to have access to part of the proceeds of sale of the Cashel Street Property, they would ask the Court to recognise that the order did not limit any right the plaintiffs might otherwise have to trace withdrawals from the fund into the hands of the applicants' solicitors and other recipients. The applicants submitted that there was no basis for any such reservation, and if it were made, the unfairness of the outcome as between them and Mr Anthony and La Bourse would be underlined. The question does not arise, because I have decided that the applicants' primary claim must fail. If, however, I had been persuaded to grant the applicants access to part of the Cashel Street proceeds, my order would not have limited the plaintiffs' right to trace, for the reasons I have explained. Since my order of 11 July 2003 did not limit any right the plaintiffs' might have to trace withdrawals from the fund to cover legal expenses of Mr Anthony and La Bourse, there would be no discrepancy of treatment as between the defendants. 31 My conclusions are as follows. I shall make an order further varying order 6(e)(iii) made by Bergin J on 2 October 2002, as varied by the order of Hamilton J on 20 November 2002, by replacing "the sum of $160,000" with "the sum of $260,000" as the provision for legal costs and expenses of the Second, Third and Fifth Defendants. However, I shall make none of the other amendments to the orders sought by the applicants. I shall hear the submissions of the parties with respect to the costs of the application. **********

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