Cole & Anor v Manning

Cole & Anor v Manning - [2002] NSWCA 150 - NSWCA 2002 case summary — Zoe

[8]

The trial judge's findings 4 The trial judge found that Miles and Cole had been friends for 30 years. They conducted an outdoor sign business in partnership until about 1989, and thereafter did so through various trust structures. Manning, an accountant, had been a friend of Cole for 15 years and advised Cole and Miles to adopt the trust structures employed. 5 Little Caesars Casino Pty Ltd ("Little Caesars") was trustee of the White Bay Unit Trust, which was created on 15 June 1992. Miles, Cole and Manning were the directors, and they each held one third of the shares in Little Caesars. Each man controlled a company owning one third of the units in the unit trust. Each of those three companies was trustee of a unit trust. Each of those three unit trusts represented the interests respectively of Miles, Cole and Manning. 6 The trial judge found: "The Trust was formed for the purpose of acquiring the White Bay Hotel on Victoria Road, White Bay (the Hotel). The Hotel and the associated liquor licence was purchased by Little Caesars in June 1992. After Little Caesars purchased the Hotel it was never operated as an hotel, however Little Caesars continued to own the liquor licence. One of the main attractions to the Hotel was the prominence of the outdoor signs with the ability to erect further signs with their capacity to bring income from entities which hired the signs for advertisements. Ian Gregory Fripp (Fripp), a friend of Manning, was a director and shareholder of a company known as Video Training Academy Pty Ltd (VTA). In 1994 Fripp had been known to Manning for about four years as an operator of a furniture business at Granville, known as the Barn, and a business producing and selling training videos for use in commerce and industry. Little Caesars granted a five year lease to VTA on 1 October 1994. In early 1995 the person, who was not identified in the evidence, who held Little Caesars' liquor licence did not wish to hold it any longer and it became necessary to find some other person to hold the licence. Manning could not do so because he was already the licensee of an hotel, known as the Family Inn Hotel at Rydalmere, in which he had an interest. As Miles and Cole had no interest in completing the relevant training course, Manning, with their consent, arranged for Fripp to do the training course and become the licensee of the Hotel on behalf of Little Caesars from 28 April 1995. On 5 October 1995 the lessee VTA changed its name to the The Barn Office Consulting Ltd (Barn) of which Manning became a director in May 1998. As at July 1998 Manning and Cole had interests in other hotels, the Family Inn at Rydalmere (the Family Inn) and the Taverners Hill Hotel at Leichhardt (the THH). The Family Inn property was owned by Devoge Pty Ltd and the business was owned by Keenhost Pty Ltd. These two companies acted as trustees of unit trusts for the benefit of interests associated with Manning, Cole and others. The property and business of the THH were owned by Elswick Pty Ltd which purchased the THH on 2 July 1998 as trustee for a unit trust for the benefit of interests associated with Manning, Cole and others. In July 1998 the New South Wales Government circulated an Information Memorandum entitled 'Sale of Poker Machine Permits' to hotel licensees (the Memorandum). A copy of the Memorandum was sent to Fripp under cover of a letter dated 13 July 1998 from the Treasurer of New South Wales, Mr M Egan. The terms of that letter included the following: Please find enclosed an Information Memorandum and Bidding Form for the sale of 2,300 poker machine permits.

[13]

Manning: If Little Caesars put in successful bids it could help out the Family Inn, as it may not be successful in all of its bids. Miles: All right, Steve. Why don't you have a look at it and get back to Bill and me about it. Manning: Okay, I'll come back to you. Miles also gave evidence that he said to Cole and Manning that he would ask his accountant, Terry Purcell, about the matter. At the end of the meeting Miles understood that Cole was of the view that Little Caesars could not afford to bid, but was awaiting a further response from Manning about whether bids might be made by Little Caesars to assist the Family Inn. The evidence does not go any further by way of explanation as to what that might mean. However, one view is that Little Caesars could obtain permits which could be, either paid for by the Family Inn or alternatively on-sold to the Family Inn. Manning gave evidence that he had a further conversation with Miles on 27 July 1998 on the telephone. His evidence in this regard depended upon the existence of a diary note. The integrity of that diary has been effectively demolished in cross examination. I could not have any confidence in finding that the content of the entries is accurate. I accept Miles' evidence in preference to Manning's evidence in this regard and I am satisfied that Miles did not have any further discussions with Manning about the permits until early [1999] when Miles found out from the LAB that Fripp had bid successfully for the permits. Manning gave evidence of further conversations that he alleged occurred between himself and Miles. The first was alleged to have occurred [in early] August 1999. This could not have happened because Miles was in the air flying home from South Africa. The second conversation was alleged to have occurred at the Drummoyne Rugby Club in which, quite late in the trial, it was alleged that Miles' brother was present. I accept Miles and his brother's evidence that no such conversation occurred." 8 The trial judge then made findings about how the permits which were the subject of this litigation were allocated. "On 28 August 1998 Fripp lodged a poker machine permit application for 15 permits. The deposit of $30,000 was paid by Manning's company Keenhost Pty Ltd. On 2 September 1998 Fripp was notified as the licensee of the White Bay Hotel at an address C/- Family Inn at Rydalmere, of successful bids of eight poker machine permits to him at a final selling price of $50,000, a total of $400,000. Fripp was also informed that the balance of $370,000 was to be paid by instalments of $10,000 by 23 September 1998 and $360,000 by 19 October 1998. Although it is not certain on the evidence, the $10,000 to be paid by 23 September 1998 was probably also paid by Keenhost Pty Ltd. This left a balance of $360,000 owing to the LAB. Cole's superannuation fund paid $200,000 and Manning's superannuation fund paid the balance of $160,000.

[15]

It would appear to me to be one or both of a breach of duty by the other directors of Little Caesars Pty Ltd and a breach of trust by that company if persons other than Little Caesars Pty Ltd claim to be owners of the said poker machine licences. Accordingly, I require an understanding [scil undertaking] that the said licences were acquired by Little Caesars Pty Ltd as trustee for the benefit of the trust owning the White Bay Hotel. I also require an explanation how Little Caesars Pty Ltd acquired the necessary funds to permit the acquisition of the said licences and the terms of such funding. Manning, as Secretary of Little Caesars, responded to Miles' letter on Little Caesars' letterhead in the following terms: I am receipt of your letter of 7th April 1999 concerning the White Bay Hotel. I am giving all shareholders and directors of Little Caesars Casino Pty Ltd in its capacity as trustee of the White Bay Unit Trust notice of a General Meeting to table and discuss your letter. The meeting is to take place at the 1st Floor, 378 Victoria Road Rydalmere (being the principal place of business) on Monday 3rd May 1999 at 4.30 pm. The agenda for the meeting will be: Table letter from Mr W Miles of 7 April 1999 Discuss issued raised in the letter Resolution of matters outlined in letter. Please confirm if you will be attending. Miles gave his proxy to Mr JD McAuley, accountant, to attend on his behalf at the meeting. Manning stated Little Caesars did not acquire any permits and that it was Cole's and Manning's respective superannuation funds which acquired the permits and claimed that such acquisition had been consented to by Miles. That claim has now been abandoned." 10 In May 1999, the trial judge found, the permits were sold in the following way. "On 6 May 1999 in an Agreement for Sale of Poker Machine Permits, which identified Fripp as 'vendor's current licensee', permits PN1982, 1983 and 1984 were sold to Elswick Pty Ltd, as the proprietor of the THH for $225,000. These, together with two other unrelated permits, were subsequently sold to Duggan Family Hotels, as proprietor of the Avondale Hotel at Burwood, on 27 September 1999 for a total of $700,000, or $140,000 each. Also on 6 May 1999 permits PN 1985 and 1986 were sold to John William Buckley of the Royal Exhibition Hotel for $150,000. Once again the LAB agreement noted that the vendor's current licensee was Fripp. On 14 May 1999 permits numbered PN 1979, 1980 and 1981 were sold to the Duggan Family Hotels for $225,000. It is apparent that the profit of $25,000 ($12,500 each) on each of the eight permits, a total of $200,000 ($100,000 each), was paid into the Cole and Manning superannuation funds." 11 In these proceedings Miles alleged that the acquisition of the eight permits in 1998 was a breach of the fiduciary duties owed by Manning and Cole as directors of Little Caesars. On the second last day of the twelve day trial Manning and Cole withdrew their defence to that allegation. In particular they withdrew their specific contention that the plaintiff had consented to what had happened on three occasions - at the meeting of mid July 1998, and in two conversations thereafter. 12 However, Manning and Cole argued that the breach of fiduciary duty was restricted to a single act - causing Fripp on 28 August 1998 to apply for the permits. The trial judge rejected this argument. She held that the breach consisted not only of applying for the permits in 1998, but also of selling them in May 1999. She said that if it was relevant to inquire what would have happened had the breach of duty consisting of the selling of the permits in May 1999 not occurred, the answer was that the permits would have remained those of Little Caesars, held on trust for it by Manning, Cole and Fripp. 13 The trial judge then held that even if the only relevant inquiry was whether Little Caesars would have made the bids for the permits had Manning and Cole not breached their fiduciary duty by failing to disclose their plans, the answer was that it would have. 14 On the basis of these alternative approaches, the trial judge concluded that Manning and Cole had caused a loss by their breaches of fiduciary duty, and were obliged to compensate Little Caesars for it. 15 The trial judge held that Little Caesars would probably have sold the permits in 1999. She valued the permits in 1999 at $140,000 each, ie $1,120,000. From that she deducted the cost of the permits ($400,000) and acquisition costs ($27,137) to arrive at $692,863.

[16]

The conduct of Manning and Cole 16 The behaviour of Manning was disgraceful at all stages. That of Cole, who relied on Manning, was evidently less blameworthy, but was far from satisfactory. 17 Manning and Cole procured Fripp to obtain the permits. That could not have been done without utilising trust property, namely the White Bay Hotel, of which Fripp was licensee, since the government would not issue permits to anyone but hotel licensees. The opportunity to acquire the permits for the superannuation funds of Manning and Cole beneficially by using the instrumentality of Fripp only came to Manning and Cole because of their directorships of Little Caesars. Their conduct could only be justified if they had obtained the fully informed consent of their co-director Miles. This they never did. Indeed, they kept what had happened a secret until Miles found out what had happened in April 1999. They did this despite the fact that Cole worked daily and in the same room with Miles in the latter half of 1998 and despite the fact that Cole and Manning had many conversations about the permits. 18 When Miles discovered that Fripp had acquired the permits he became angry. At the meeting with Cole and Manning early in April 1999 he called Manning a "liar" and a "cheat". These were accurate observations. Miles is also said to have used stronger words not recorded in the affidavits. Miles made his position equally plain in his letter of 7 April 1999 alleging a breach of duty and demanding an acknowledgement that the permits were held by Little Caesars as trustee. Yet the other directors, particularly Manning, paltered with him. They did not deal frankly and speedily with the letter, but summoned a meeting for 3 May 1999. At that meeting Manning took the very technical point that Little Caesars had not acquired permits because the superannuation funds had. Manning deceitfully told McAuley that Miles had consented to the acquisition, though he never said this to Miles' face. Miles' reaction to what had happened appeared to stimulate sales of the permits in rather indecent haste on 6 and 14 May 1999. The lie which Manning told at the 3 May 1999 meeting was a silly one, since it was open to ready contradiction by Miles. But silly or not, it was maintained between 3 May 1999 and 7 November 2000 by Manning in numerous totally discreditable ways. Manning maintained it by positive evidence in court as to the meeting of mid July 1998 and as to two conversations allegedly occurring thereafter which never took place. He maintained it by destroying parts of his diary. He maintained it by fabricating other parts of his diary. He maintained it by apparently causing Cole to believe the lie. Indeed, according to Cole, Manning had retailed the lie to him as early as July-August 1998. In consequence of this conduct, the following reprehensible events took place. False Defences were filed, together with false affidavits verifying those pleadings (which in turn involved a deception of the innocent solicitors involved by the giving of false instructions to them). Those false affidavits were read in court. False instructions were given to counsel on the basis of which counsel in good faith cross-examined Miles by leading questions framed with a view to eliciting, but not in fact eliciting, incorrect answers conforming to the deceit. The trial was unnecessarily lengthened on a wholly false basis. The truth was only revealed, after Manning had been destroyed in cross-examination, by concessions on the second last day of the trial. 19 In all the circumstances the trial judge's language, and her language about Manning in particular, was remarkably mild. In his submissions to this Court Miles was more direct: he said that the appellants had been dishonest to him in not disclosing either the acquisition of the permits or their onsale, dishonest to the government of New South Wales in acquiring permits in breach of a condition on which they were issued that they be acquired only by hotel licensees, and dishonest to the court by Manning's destruction and falsification of documentary evidence and false testamentary evidence. These are reasonable propositions. 20 If the functions of equitable compensation included a punitive function, this would be a case calling for that function to be exercised. But that is not one of the functions of equitable compensation. However, the conduct of Manning, and as a result of Manning's conduct, that of Cole, must be borne in mind in assessing some of the submissions advanced on their behalf which tended to downplay the squalid nature of their swindling to the point of invisibility.

[21]

Would Little Caesars have applied for the permits in August 1998 if full disclosure had been made? 25 The trial judge was of opinion that if there had been full disclosure Little Caesars would probably have bid for the permits. She said: "This is so in circumstances where two of its directors and interested members of the trust were very keen to make bids, so keen that they obtained funding very soon after the first meeting in July 1998. Such an approach demonstrates a confidence in the capacity to trade or transfer the permits at a profit. Such confidence in two of the three directors and beneficiaries of the trust, if properly disclosed, in my view would have persuaded Little Caesars to make the bids for the permits. I am of the view that this is what would have happened had Cole and Manning performed their duty." 26 Manning and Cole attacked that statement, and also attacked the trial judge's observation that at the end of the mid July 1998 meeting Miles understood that Cole was awaiting a response from Manning about whether bids might be made by Little Caesars to assist the Family Inn, meaning that Little Caesars could obtain permits which could either be paid for by the Family Inn or onsold to the Family Inn. 27 Manning and Cole submitted that if the meaning of the conversation was the first meaning - that Little Caesars would obtain permits which would be paid for by the Family Inn - that did not suggest a conclusion that Little Caesars would have applied for the permits, and obtain them for itself. All it meant was that the Family Inn was interested in acquiring permits, and that Little Caesars would apply, not for its own benefit, but for the benefit of the Family Inn. It was implicit in the submissions of Manning and Cole that if this were the correct reading of the conversation, there would have been no breach of duty by them because the opportunity was not one open to Little Caesars but only to the Family Inn. Yet at the end of the trial they conceded a breach of duty, and maintained this inevitable concession during the appeal. 28 Manning and Cole submitted that if the meaning of the conversation was the second meaning - that Little Caesars would obtain permits for itself and onsell them to the Family Inn - it depended on Little Caesars having the financial capacity itself to apply for and acquire the permits. This, it was submitted, it did not have. Manning and Cole submitted that, as the trial judge found, the permits were of no use to Little Caesars save as an investment to sell at a profit. That was because the permits could only be used in conjunction with an operating hotel, and though Little Caesars owned the White Bay Hotel, it did not operate it as a hotel. It only operated it as a building on which advertising signs could be displayed profitably. There were risks associated with acquiring permits as investments to sell at a profit. Though it was possible for a bidder to bid for up to fifteen permits, the price per permit would not be announced until the bids were in, and it would not be clear until then how many permits an applicant would obtain. This was only a commercial opportunity of exploiting the possibility of acquiring on borrowed money an indeterminate number of permits at an indeterminate price to be sold shortly afterwards with the hope of profit. 29 Manning and Cole pointed out that the trial judge appeared to find that Little Caesars could have acquired the permits by borrowing 100 percent of the purchase price. They complained that that finding was extraordinary in that at trial there was no documentary evidence, no evidence in chief and no cross-examination on the issue of whether Little Caesars would or could have borrowed. They said it could not have borrowed the money for the following reasons.

[24]

(b) The trial judge found that in the meeting held in mid July 1998, "Miles expressed the view that he did not think that Little Caesars had enough money to make bids for the permits …", and that Cole said "I agree". 30 Manning and Cole then submitted that if the trial judge's view that the purchase by Little Caesars could have been "fully financed" was a finding that Cole, Manning and Miles personally would have borrowed the money, or made guarantees or mortgages over their homes available to Little Caesars to enable Little Caesars to borrow it, it was wrong. "Firstly, there is no basis in the evidence for such a finding. Secondly, in assessing the financial capacity of a company (whether acting as trustee or not) to take advantage of a business opportunity, it is wrong to take into account the financial position of individual directors where there is no evidence that the company can reasonably expect the directors to make their own financial resources available to the company." 31 Manning and Cole attacked the trial judge's reliance on their keenness to make bids as demonstrating a confidence in the possibility of dealing in the permits at a profit. They said that while it might be assumed that before 28 August 1998, the day when the permits were applied for and their initial deposit was paid, Manning and Cole had arranged finance to enable the payment of the balance should the bids be successful, there was no evidence as to how soon after the mid July 1998 meeting they had made those arrangements. 32 Manning and Cole also submitted that at the mid July 1998 meeting they made it clear that they were keen to participate in the bid process, but only via the Family Inn (in which they and others had interests). They submitted that even if they had gone further and disclosed that they were desirous of acquiring or causing the trustees of their superannuation funds to acquire permits in addition to permits that might be acquired by or on behalf of the Family Inn, it did not follow that Miles would have agreed to Little Caesars acquiring permits. 33 Miles answered these arguments by submitting, first, that this causation inquiry was immaterial, and, secondly, that if it were undertaken, the trial judge's finding that Little Caesars probably would have acquired the permits if full disclosure had been made was correct. 34 So far as the latter submission is concerned, Miles argued that reliance on statements by Manning in the mid July 1998 conversation and in his affidavit offered no support to the appellants because of the trial judge's adverse view of Manning's credibility. Miles pointed to admissions by Manning, accounts prepared by Manning, and the unchallenged evidence of an accountant to support the following arguments as to the capacity of Little Caesars to take up the permits. Miles said that the permits were acquired by means of accommodation totalling $400,000 ($200,000 from each of Manning and Cole), requiring a payment of about $32,000 per annum in interest. Little Caesars as trustee of the White Bay Unit Trust had a net profit in 1998 of $114,714, which well exceeded the cost of servicing an interest only loan of $400,000. Its income increased in 1999 and 2000. 35 It had available as security a freehold hotel with outdoor signs on it valued (as to the hotel) at $1.05 million and (as to the sign) at $0.85 million in 1999, and hence likely to be worth the same in 1998. Since it was mortgaged to secure an existing debt of $1 million, the equity available to secure a loan of $400,000 to purchase the permits was $900,000. Further, Manning and Cole would have been likely to provide guarantees or additional security for Little Caesars to acquire the permits because they in fact borrowed $400,000 to acquire the permits and, as the trial judge said, in a finding admitted by Manning and Cole to be correct, they were "very keen to make bids". 36 It was also submitted that leaving aside the fact that with hindsight it can be seen that the permits increased greatly in value, given the willingness of Manning and Cole to invest, their combined desire would have caused Little Caesars to bid, since they could have outvoted Miles on the board of Little Caesars. 37 Manning and Cole responded by submitting that even if the hotel was worth $1.9 million in 1999, it did not follow that it was worth $1.9 million in 1998; and that Manning's statement about Little Caesars' financial capacity extended to its capacity to borrow. In oral argument they submitted that the finding that Little Caesars would have bid was suspect because there was no evidence or finding about how many bids it could make and at what prices, and because what Manning and Cole did with their assets in pursuit of their own self-interest was no guide to what Little Caesars would have done with its distinct assets and in its distinct predicament. 38 The attacks of Manning and Cole on the trial judge's finding that Little Caesars would have bid for the permits fail. 39 First, it is clear that Manning and Cole were very keen to make bids with a view to making personal gains.

[26]

(b) It is demonstrated also by the fact that at the mid July 1998 meeting Manning proposed as a possible course that Little Caesars should put in bids to help out the Family Inn (in which Manning and Cole had interests). 40 Secondly, Manning and Cole were prepared secretly and dishonestly to breach their fiduciary duties, and in the case of Manning at least engaged in a series of actions which he must have appreciated were grossly wicked if not criminal, in order that each would obtain half of whatever profit could be obtained from bidding for fifteen permits and paying for them from their own assets. It is highly probable that, had they made disclosure to Miles, they would have been prepared each to obtain one third of that profit employing Little Caesars' assets without having to resort to the secrecy, suffer the inconvenience, and bear the other burdens associated with dishonesty or other misconduct. It is also highly probable that whatever opinion Miles may have expressed or experienced at the mid July 1998 meeting about Little Caesars' lack of sufficient money to make bids, he would have altered that view had he been told that his two colleagues, who to his knowledge were men highly experienced in the liquor trade and hence in what profits might be made by trading in poker machine permits useful in that trade, were eager to participate personally in that kind of venture. The mid July 1998 meeting did not end with Miles flatly refusing to consider any investment by Little Caesars in that kind of venture. Rather it ended with Manning proposing Little Caesars as a bidder who might help the Family Inn, and with a promise by Manning to Miles to have a look at the project and get back to Cole and Miles. That promise was broken. Manning got back to Cole, but not to Miles. Had Manning got back to Miles, Miles' reaction was likely to have been positive if he had been told, in the period up to 28 August 1998, that Manning and Cole were not going to seek Little Caesars' aid to put in bids so as to help out the Family Inn, but were going to make bids entirely on their own behalf. Judging by his reaction on learning part of the truth the following April, he would in July-August 1998 have sought to ensure Little Caesar's participation in the acquisition. In any event, even if Miles had decided not to proceed, it was the duty of Manning and Cole as directors of Little Caesars to acquire the opportunity, if it were to be acquired at all, for that company, and not for themselves. That being the only honest way in which profits could be made, if Manning and Cole wanted a share of those profits they had to obtain them via their interests in Little Caesars, and it is probable that they would have, persuading Miles to this course if possible and outvoting Miles if necessary, if Little Caesars had the financial capacity. Even if it did not, it is probable that they would have procured arrangements to be made which could enable Little Caesars to borrow sufficient funds, and made for themselves honest profits, even though the putatively reluctant Miles would also gain profits. 41 Thirdly, whether or not there was evidence in chief or in cross-examination about Little Caesars' capacity to borrow, it was a question at the trial. Miles submitted to the trial judge that Little Caesars could have borrowed funds. Manning and Cole submitted that there was no evidence it could have. That submission appears to have been implicitly rejected by the trial judge, and there was indeed evidence that Little Caesars could have borrowed. The asset position contended for by Miles - gross assets of $1.9 million and debts of $1 million - is compatible with borrowing $400,000 for the eight permits granted. No doubt before 28 August 1998 the directors of Little Caesars might have feared that the number granted or the price stipulated might turn out to make the acquisition cost too high, but if that fear was experienced, it did not deter Manning and Cole from proceeding in their own right. Manning and Cole pointed to no convincing evidence, expert or other, contradicting the propositions that the net worth of Little Caesars at all material times was $0.9 million, and that it had an ample capacity to service a suitable loan of income. Manning's statement in paragraph 16 of his affidavit of 14 April 2000 that Little Caesars did not have the financial resources to bid for permits does not in terms say that Little Caesars could not borrow sufficient financial resources; though he was not challenged, in view of the trial judge's view of his credibility and his conduct, there is no reason either to construe the words he used favourably or place any reliance on them given the interests he was seeking to serve at the time the affidavit was filed and the fact that he was at that time dishonestly and furtively maintaining an eventually abandoned position. Nor is there any reason to place any weight on his non-denials at the mid July 1998 meeting of statements by Miles and Cole that Little Caesars did not have enough money to bid. He and Cole did not have enough money to bid in their own bank accounts evidently, but raised it from related entities. What they said and did not say at that meeting is not an objective guide to reality in view of their use of it as a means of cheating Miles and Little Caesars. 42 Finally, in view of the fact that Manning and Cole in procuring the acquisition of the permits for their superannuation funds were using an opportunity available only to Little Caesars through an agent of Little Caesars at a time when there had been inconclusive discussions not finally ruling out an acquisition by Little Caesars, a tactical onus rested on them to show positively that Little Caesars would have behaved differently from the way that Manning and Cole in fact did. This onus was not discharged. 43 The findings of the trial judge that Little Caesars would have bid for the permits are factual findings. Since they involved an assessment of the three personalities involved, each of whom spent much time in the witness box under energetic attack, they were findings in part based on judgments of the men as men. They are thus findings of a type which have traditionally proved difficult to attack on appeal. They are findings for which there is a relevant basis, briefly but clearly explained. The attack on them by Manning and Cole wholly fails. 44 Accordingly, it is not necessary to consider the arguments of Manning and Cole to the effect that their own capacity to offer real or personal security was irrelevant. However, they did use their own assets to fund their purchases of the permits, and they did not endeavour by cross-examination to demonstrate that Miles, had matters been fully disclosed to him, would not have. In view of their breach of fiduciary duty, that was an issue on which they bore a tactical onus. 45 In view of the above reasoning, it is not necessary to decide the merits of an argument advanced by Manning and Cole that they only committed one breach of duty, namely causing Fripp to apply for the permits on 28 August 1998, and did not commit a second one in causing them to be sold in May 1999; that it was wrong for the trial judge to treat the permits as subject to a constructive trust from the outset; and that it was wrong to treat the inquiry into loss as turning on what Little Caesars lost by that sale of the permits in May 1998. The trial judge adopted the converse reasoning, which afforded support for her conclusions independently of her finding that Little Caesars would have applied for and paid for the permits in 1998. Since she rightly held that they would have, it is not necessary to consider the merits of her alternative approach. 46 Miles advanced an argument that equity does not permit or require any inquiry into whether Little Caesars would probably have acquired the permits had it been fully informed. The authorities relied on by Miles for that approach were cases where the remedy of account of profits was an issue, but Miles could point to no cases supporting it where equitable compensation was in issue. In view of the conclusions favourable to Miles' position arrived at as a result of the factual inquiry, it is not necessary to consider the argument that the inquiry was uncalled for. 47 Further, it is not necessary to consider the argument of Miles and Cole that where their breach of fiduciary duty caused their superannuation funds, as distinct from themselves personally, to acquire a benefit, they were not liable to account for the profits made by the funds and not liable to pay equitable compensation because Little Caesars could not and would not have paid for the permits: the trial judge's reasoning invalidates the last proposition.

[31]

Accordingly, the loss incurred by Little Caesars by Cole's and Manning's breaches of fiduciary duty is: Eight permits x $140,000 $1,120.00 Less cost of the permits $ 400,000 Less acquisition legal costs and interest $ 27,000 Total $ 692,863 I order that Cole and Manning are to pay equitable compensation of $692,863 to Little Caesars." 49 Manning and Cole argued that it was wrong to find that the eight permits would have been sold by Little Caesars "in 1999". They argued that the trial judge should have found that if Little Caesars had acquired the permits, they would have been sold in May 1999. In that month they were in fact sold by the trustees of the superannuation funds which owned them for $75,000 each, totalling $600,000, generating a profit of $172,863 (after deducting expenses of $27,137). An alternative submission is that the trial judge should have found that Little Caesars would have sold the eight permits in September 1999 for $128,000 each, producing a profit of $596,863. An intermediate position depended on the view that Little Caesars would have sold five permits in May 1999 for $75,000 and three in September 1999 for $128,000. 50 It is convenient to deal with a related but contrary submission by Miles at this point. As will be seen, Miles advanced various arguments favouring much higher figures based on the view that the trial judge was wrong to assess the value of the permits as in 1999 at all. But on the assumption that she was right to assess the value in 1999, Miles submitted that the appropriate value was $151,000 per permit. Miles submitted that many sales of permits in November 1999 took place at $151,000, and that Mr Orr estimated the market value in October 1999 at $150,000-$160,000. 51 The flaw in the criticisms of the trial judge made by Manning and Cole is that she was not bound to assume that Little Caesars, if fully informed at all relevant times, would necessarily have sold at precisely the same times as those selected by the actual vendors of the permits. In May 1999 Cole and Manning caused the holders of the permits to sell five of the permits to third parties and three to Elswick Pty Ltd. This latter purchase was described thus in the appellants' written submissions: "The purchase by Elswick Pty Limited was on behalf of the Elswick Super Joint Venture which was a joint venture between six persons or companies, including the two trustees of the superannuation funds which had a combined 50% interest in the joint venture, with the other 50% being held by interests not associated with Cole and Manning (Manning's affidavit 14.4.00 para 17). Elswick Pty Limited also acted as trustee of the Elswick Unit Trust which owned the Taverners Hill Hotel, sometimes called the Elswick Hotel. (Affidavit of Manning 1.2.00 para 94)."

[32]

Elswick Pty Ltd onsold those three permits, together with two other unrelated permits, for $128,000 each in September 1999 to the Duggan Family Hotels (the trial judge mistakenly said in her reasons for judgment that the total price was $700,000, an average of $140,000 each, but Manning and Cole appear to be correct in saying the true figure was $128,000 each). 52 The first point to be made about these sales is that, though at times the submissions of Manning and Cole did not face up to this, the fact is that the sale to Elswick Pty Ltd on 6 May 1999 was not a sale to a wholly unrelated purchaser. 53 The second point relates to the dates of the sales. The Elswick Pty Ltd sales were made on 6 May; another two permits were sold on 6 May; and three more were sold to the Duggan Family Hotels on 14 May 1999. These dates are very soon after Miles became aware of the purchase of the permits in early April 1999; protested in a heated oral discussion at that time; wrote a formal letter of complaint on 7 April 1999; and was summoned to a meeting of the directors and shareholders of Little Caesars on 3 May 1999. Mr McCauley attended and was deceitfully told that Miles had consented to the acquisitions of permits in 1998. The May sales give the impression of having taken place under extreme pressure, for fear that Miles might prevent them. 54 On the other hand, even if Little Caesars had been fully informed and had acquired the permits, there is force in the trial judge's conclusion that it would have sold them at some time in 1999. As has been seen, Little Caesars had no premises operating as a licensed hotel; the permits had no long term utility for it; Manning and Cole only acquired them as an investment to sell at a profit, and Little Caesars would have been in the same position; Little Caesars did not have $400,000 in the bank with which to buy the permits, and it would have been necessary for it to have borrowed that sum; once the opportunity to take profits and terminate the flow of interest payments presented itself during 1999, it is likely that it would have been taken. But it was not possible for the trial judge to isolate a day, a week or a month when the sales would have occurred. The sales would probably have taken place later than May: the actual sales in May appear to have been under pressure because of the fears of Manning and Cole about the anger Miles was displaying. The trial judge selected a figure of $140,000 per permit, which was less than Mr Orr's estimate of $180,000-$190,000 as at June-July 2000, a little less than the respondent's suggested figure of $150,000, and a little more than the $128,000 figure for the arms length sale to the Duggan Family Hotels in late September 1999. It is true that the trial judge erred in stating that the figure was not $128,000 but $140,000. But the task of assessing equitable compensation in these circumstances is necessarily one which turns on imponderable and indeterminate factors. 55 The permits market was volatile. The supply of information about actual sales to would be sellers and would be buyers was public, but not perfect or instantaneous. Prices thus varied even in relation to almost instantaneous sales. Little Caesars would have been both attracted and in some degree compelled towards a speedy sale. The whole activity in which Manning and Cole had become engaged was one geared to a speedy sale. On the other hand, the market was evidently rising. Manning and Cole have not demonstrated that compensation calculated on a price per permit of $140,000 worked any injustice, proceeded on a wrong principle, or rested on any significant error of fact. Similarly, Miles has not successfully demonstrated that the figure should have been $151,000. Miles said that that figure should be selected on the basis that if the trial judge was right in saying that the permits would have been sold in 1999, the highest price paid in 1999 should have been selected. Underlying this was a contention that the permits were trust property, and the duty of Manning and Cole was either to restore the trust property to Little Caesars or pay its highest value. That is a contention which is rejected below as inapplicable to the particular circumstances of this case.

[33]

The cross-appeal: equitable compensation 56 The first three grounds of the Amended Notice of Cross Appeal are: "The trial judge erred in holding and in calculating equitable compensation on the basis that Little Caesars would have sold the poker machine permits during 1999 (judgment 8 February 2001, paragraphs 85-86) and, consequently, in assessing their value at $140,000 each and assessing equitable compensation at $692,863. The trial judge should have assessed the value of the poker machine permits at their market value as at the date of the trial (ie $190,000 each) for the purpose of calculating the equitable compensation payable by the First Cross Respondent and the Second Cross Respondent to Little Caesars (judgment 8 February 2001, paragraph 87). The trial judge should have ordered the First Cross Respondent and the Second Cross Respondent to pay equitable compensation of $1,092,862.93 to Little Caesars." 57 Miles advanced a number of complex arguments, which were supported by a detailed citation of authority. They can, however, be set out briefly. 58 The first argument advanced in support of the relevant grounds of cross- appeal was that equitable compensation should be seen as being in lieu of restitution of constructive trust property in specie. It was submitted that the date at which the quantum of compensation so viewed was to be determined was the date of determination of the proceedings according to the circumstances then existing and with the full benefit of hindsight. At that date the value of a permit was $180,000-$190,000. As at that date Cole and Manning were unable to fulfil their obligation to make restitution of the permits in specie because they had sold them in 1999. Hence Little Caesars was entitled to equitable compensation on the basis that from the time of their acquisition they had been held on constructive trust for Little Caesars. 59 The second argument of Miles was that where a fiduciary fails to disclose material facts, it is not relevant to speculate on what course the principal would have taken if there had been full disclosure. It was said to follow that the trial judge erred by considering what Little Caesars would have done in relation to selling the permits in 1999. 60 The third argument of Miles was that the loss to Little Caesars should be evaluated by presuming against the appellants that Little Caesars would have made the most profitable use of the permits by selling them at the most profitable time - that is, when their market price was highest, not when they were sold in May 1999. 61 Fourthly, Miles submitted that it was not open to the trial judge to make a finding that Manning and Cole would probably have caused Little Caesars to sell the permits in 1999. It was said that this was not an issue at the trial, had not been put to Miles in cross-examination, and had not occasioned any evidence to be led from him. Further, because it was not an issue at the trial, Cole and Manning were not cross-examined on the point. Miles also submitted that there was no evidence or insufficient evidence to support the finding. 62 These arguments are unsound. 63 Equitable remedies, including the remedy of equitable compensation, have a flexible character. The proposition that the compensation payable was in lieu of alienated trust property depends on the view that there is a close analogy between trust property subject to an express trust and property which might have been subjected to a constructive trust had proceedings been instituted in time, or might perhaps have been subjected to a constructive trust from a particular point of time by reason of an order made later. The analogy is not close in the present circumstances because of the opportunistic nature of the investment in the permits. If Little Caesars had invested in the permits, according to the trial judge it would not have held them beyond the end of 1999. That conclusion has not been shown to be wrong. To compensate Little Caesars on the basis that the permits would have been held beyond the end of 1999, or should have been, is to ignore the nature of the permits and the financial position of Little Caesars. Further, the analogy is not close because Manning and Cole were not express trustees; they were directors of a trust company. And the analogy is not close because when a court recognises a constructive trust it is normally doing so pursuant to the fashioning, in part, of an appropriate remedial response. That remedial response can vary very considerably depending on the circumstances; it turns on what the wrongdoer did at the time of the wrongdoing, rather than on what the settlor of the trust stipulated well before the time of the wrongdoing. And the remedial response is also controlled by the need to avoid injustice even to the wrongdoer. Here the wrongdoers had put their superannuation funds into a position in which gains could be made from the permits acquired; but those potential gains depended on the laying out of $400,000 at a time when gains were not certain. If the respondent had sought the imposition of a constructive trust in April 1999, it would only have been imposed if Little Caesars had paid Manning and Cole the $400,000, which could probably only have been funded by short term finance contemplating repayment via a relatively early sale of the permits, just as an acquisition by Little Caesars of the permits in 1998 would have imposed on Little Caesars the burden of acquiring and servicing financial accommodation. Permits subject to these burdens are not closely analogous to permits held under an express trust with which the trustee dealt in breach of an express term of the trust deed. 64 Though Miles cited cases dealing with the obtaining of property by fiduciaries who had either to disgorge it or to account for the profits made from it, he did not point to any case in which, like this, equitable compensation was claimed against a defendant who was not an express trustee dealing with trust property but another kind of fiduciary acquiring property which ought to have been acquired, if at all, by the principal, and where the claim was for the highest value of the property at any time, even after it had been disposed of in fact and even after it would probably have been disposed of. 65 The contention that there should not have been speculation by the trial judge on what course Little Caesars would have taken with the permits if there had been full disclosure was not supported by citation of any case directly in point. Authorities dealing with the effect of non-disclosure in breach of fiduciary duty at a time when principals are entering a transaction in which they expect performance by the fiduciary of the appropriate duty are dealing with a different problem. They do not necessarily prevent an examination of the precise circumstances relating to the causation of loss and compensation for it when the impugned transaction has turned out advantageously to the principals. 66 Does a presumption operate against Manning and Cole that Little Caesars would have sold when the price was highest? This question need not be answered. Even if there is a presumption to that effect, it was rebutted on the particular facts of the case because of the nature of the permits, the character of Little Caesars, and the peculiar features of its financial position. 67 It is true, as Miles submits, that no inference should be drawn directly from what Manning and Cole did to what Little Caesars would have done if it had been fully informed. But the trial judge did not do that. She did no more than infer from the fact that Manning and Cole sold at one time in 1999 that Little Caesars would have sold at some time that year, not that Little Caesars would have sold precisely when Manning and Cole sold. 68 Miles' contention that the question whether Little Caesars would have sold the permits in 1999 was not in issue at the trial overlooks the fact that Miles bore the burden of proving his loss and of proving what the correct compensation was. For the reasons given in relation to the appeal of Manning and Cole in relation to equitable compensation, there was evidence of a general character to support the trial judge's conclusions.

[34]

The cross-appeal: costs of 23 February 2001 69 The remaining grounds of appeal in the Amended Notice of Cross Appeal are: "The trial judge erred in ordering that each party pay their own costs of the hearing on 23 February 2001 (judgment 23 February 2001, page 3). The trial judge should have held that Order 14 made by her Honour on 9 November 2000, which, inter alia, stated 'Mr Cole and Mr Manning pay the plaintiff's costs of these proceedings on an indemnity basis', applied to the plaintiff's costs of the hearing on 23 February 2001 (judgment 23 February 2001, page 3). The trial judge should have ordered that the First and Second Cross Respondents pay the Cross Appellant's costs of the proceedings on 23 February 2001 and that they do so on an indemnity basis." 70 The trial judge dealt with the substantive issues in the trial in her reasons for judgment dated 8 February 2001. On 23 February 2001 she delivered a further set of reasons for judgment dealing with the following matters. 71 First, she ordered Manning and Cole to pay the costs of the proceedings on an indemnity basis, and withdrew paragraphs 90-96 of her reasons for judgment delivered on 8 February 2001. In those paragraphs she had decided that while Manning should pay the costs on an indemnity basis, Cole should only pay them on an ordinary basis. She made the change because on 9 November 2000 she had made an order by consent (order 14) that each of them pay the costs on an indemnity basis, and she had overlooked that order in preparing the reasons for judgment of 8 February 2001. 72 Next, she recorded that counsel for Manning and Cole drew her attention to the fact that the average price for the five permits sold to the Duggan Family Hotels on 27 September 1999 was in fact $128,000, not $140,000, as recorded in the first judgment. She declined to vary her judgment, however, for reasons which she gave. 73 The trial judge then dealt with an application by Miles for interest on the judgment sum of $692,863 from 1 December 1999. That application was not opposed. 74 Finally, she dealt with an application by Miles that the costs of 23 February 2001 be paid by Manning and Cole on an indemnity basis. She said: "The proceedings today were proceedings that in part had to occur in any event because of the requirement to deal with matters arising from the judgment which included an application for interest pursuant to s 94 of the Supreme Court Act. However, the judgment included a judgment as to costs of the proceedings and those paragraphs in my judgment have been deleted because an order consenting to costs was made in November 2000. That was necessary because of an error made by me, not by the parties, in particular not by the defendants. The other matter that Mr Carnovale has raised was a matter which I ultimately did not accede to but in all the circumstances was a matter properly raised for argument. Although the interest was not opposed and the date chosen from which interest was to run from was not opposed, the parties had to be present to argue the matters to which I have referred. I am not satisfied that paragraph 14 of the short minutes of order filed on 10 November 2000 can be called upon to comfort the plaintiff for his costs today. I am satisfied that the appropriate order in the circumstances that I have just outlined is that each party pay their own costs of today's hearing." 75 Miles submitted to this Court: "In our submission, her Honour's consent order of 9 November 2000 that Cole and Manning pay the plaintiff's costs of ' these proceedings' on an indemnity basis applied to the plaintiff's costs of the hearing on 23 February 2001. 'Proceeding' is defined in s 4 of the Federal Court of Australia Act 1976 to mean: ' A proceeding in a court whether between parties or not, and includes an incidental proceeding in the course of, or in connection with, a proceeding, including an appeal.' We submit that this definition accords with the ordinary meaning of the word proceeding in the context of litigation. The applications made by the plaintiff on 23 February 2001 were in respect of issues raised at the trial which remained unresolved (in one sense or another) after her Honour delivered judgment on 8 February 2001. The application in relation to interest was foreshadowed in her Honour's judgment and the application pertaining to costs arose out of an error made by her Honour: see RB 149. The application made by Cole and Manning sought to re-agitate a matter raised at trial and dealt with in her Honour's judgment of 8 February 2001. Whilst the application was unsuccessful, her Honour considered that it was properly made: RB 149. In our submission, all of the applications made on 23 February 2001 formed part of, were connected with and were incidental to the proceedings. None of the applications could have been made independently of the proceedings prior to that date: they would have been meaningless. It follows, we submit, that the costs of 23 February 2001 were costs of these proceedings and, accordingly, her Honour's order of 9 November 2000 applies to them. Even if we are incorrect, we submit that Cole and Manning should have been ordered to pay the plaintiff's costs of 23 February 2001. The plaintiff succeeded in both of his applications. One of the applications was brought to rectify an error made by the trial judge. Without that rectification, the plaintiff would have been denied costs to which he was entitled on an indemnity basis by consent. Cole and Manning failed in their application. In the premises, we submit that in making the order as to costs on 23 February 2001 her Honour acted on a wrong principle: House v The King (1936) 55 CLR 499 at 505. Her Honour should have applied the principle that costs follow the event. This injustice should be remedied and the Court should order that Cole and Manning pay the plaintiff's costs of 23 February 2001 on an ordinary basis." 76 These submissions should be rejected. Order 14 made on 9 November 2000 did not bind the court in relation to any costs thereafter incurred. The order might well indicate a prima facie approach to those costs, but the court retained its ultimate discretion over the costs. The trial judge took into account the fact that two of the matters dealt with on 23 February 2001 arose from errors by her for which Manning and Cole were not responsible. One of these errors was corrected in favour of Miles; the other was not corrected in favour of Manning and Cole, but it was not unreasonable for them to have raised the problem. The interest issues were resolved by consent. In all the circumstances it cannot be said that any relevant error has been demonstrated in the decision not to make an order for the costs of 23 February 2001. Indeed, in oral argument to this Court Miles said he was not challenging the exercise of the discretion beyond contending that the costs of 23 February 2001 were automatically caught by consent order 14. In my opinion it was not.

[36]

The appellants are ordered to pay the respondent's costs of the appeal and the cross-appeal. 79 HODGSON JA: I agree with Heydon JA. 80 This was a case of entry by a fiduciary into an advantageous transaction which should have been obtained for the beneficiary. In such circumstances, the beneficiary has the alternatives of seeking (1) an account of profits, or recovery of the property obtained subject to payment of the fiduciary's expenses in obtaining it, this being available to the beneficiary whether or not the beneficiary would have entered into the transaction; or (2) equitable compensation, this requiring a finding that the beneficiary would have entered into the transaction but for the breach of fiduciary duty. Insofar as the breach of duty consists in failing to get the informed consent of the beneficiary to the fiduciary's having the benefit of the transaction, it is proper to proceed on the assumption that such consent would not have been forthcoming had there been proper disclosure: see Brickenden v. London Loan & Savings Co. [1934] 3 DLR 465. However, in order to obtain compensation, the beneficiary still has the onus of proving that, but for the breach of duty, the beneficiary would have entered into the transaction, although this should not be considered a heavy onus, because it is the fiduciary's breach that has prevented the matter being put to the test. 81 Because the beneficiary has a right to recover the property obtained, subject to payment of the expenses incurred by the fiduciary, the beneficiary may be considered to have an equitable interest in that property. If the fiduciary deprives the beneficiary of that interest by disposing of property, that may be considered a further breach of the fiduciary's duty. However, such a disposition is not the disposition of a property in which the beneficiary has an absolute interest. The interest of the beneficiary in such property is only commensurate with the equitable right to recover the property subject to payment of the fiduciary's expenses. 82 In this case, the beneficiary (or rather, Mr. Miles on behalf of the beneficiary) elected not to seek an account of profits or recovery of the proceeds of the property in question, but rather to seek equitable compensation. Accordingly, it was necessary for the respondent to prove that, but for the breach of fiduciary duty, Little Caesars would have acquired the permits. In deciding that question, it was proper to proceed on the basis that the informed consent of the respondent would not have been obtained, and accordingly that the only way that the appellants could have benefited from Little Caesars' entitlement to acquire the permits would have been to ensure that Little Caesars did in fact acquire them. The inference that this would have happened was readily available. 83 The question of the measure of compensation also required a judgment as to what would have happened subsequently but for the breach of fiduciary duty, and the conclusion that the permits would have been sold in 1999 was readily open. In my opinion, a figure of $140,000.00 per permit was a reasonable estimate on the evidence: it was appropriate not to presume in favour of the wrongdoer that the permits would have been sold as early as May 1999, or even September 1999. 84 Since the beneficiary elected to take equitable compensation rather than an account of profits or recovery of property, I am doubtful if it was open to the beneficiary to rely on an alleged additional breach of fiduciary duty by the sale of the permits in 1999. However, even if the beneficiary was entitled to rely on those sales as being further breaches of fiduciary duty, they were not breaches in respect of trust property to which the beneficiary was absolutely entitled. The breaches were only in respect of an interest in the permits co-extensive with the beneficiary's equitable right to recover the permits subject to the beneficiary's paying the expenses incurred by the fiduciary. I do not think there would be any difference in the proper measure of damages in respect of that right than in respect of the original breach of fiduciary duty.

At a glance

Court

Decision date

Before

Source

Judgment (37 paragraphs)

Parties

Cases Cited (1)