Commissioner of Taxation v Macquarie Health Corp Ltd

REASONS FOR JUDGMENT 1 On 29 October 1998 I delivered my reasons for reaching conclusions which I then expressed in relation to the various issues which had been argued before me up to that time. At that stage, I indicated that I would give the parties the opportunity of further argument in relation to the question of the relief, if any, to which the Trustees were entitled, in the light of the conclusions which I had reached. 2 Because of difficulties arising from commitments of counsel, further argument did not take place until 8 March 1999. On that day I heard further argument on several questions and also made incidental rulings in relation to the principal proceeding. However, I reserved my decision on the question of the relief, if any, which should be ordered on the second cross claim. 3 The effect of the decision of the Full Court in earlier proceedings between the Taxpayer and Commissioner (reported at 96 ATC 4550), as I have held, was that the moneys in question, which were paid to the Taxpayer by Morlea, were not received by way of loan or advance. Rather, the moneys were received by the Taxpayer as a constructive trustee. Nevertheless, the beneficiaries of the two trusts have received benefits in respect of the sale of the Pathology Business. It has not been suggested by the Trustees that the 1984 Transactions constituted a breach of fiduciary duty or breach of trust by Morlea as agent of the Morlea Partnership, or by Morlea or Aborda as trustees of the Aurelius Unit Trust and the Aborda Trust. The 1984 Transactions could not have been entered into in the form in which they were entered into if there was not some indebtedness of the Taxpayer which was the subject of the sale. 4 I concluded that neither member of the Morlea Partnership suffered any loss because, on the completion of the sale of the Pathology Business by Morlea as agent of the partners, the partners received consideration in the form of a promise to pay by Nika together with assumption of responsibility for the liabilities of the Pathology Business. That consideration was equal to the value of the property sold and was in fact received by the members of the Morlea Partnership. In their respective capacities as trustees of the Aurelius Unit Trust and the Aborda Trust, the members of the Morlea Partnership distributed to their respective beneficiaries that part of the consideration consisting of the indebtedness of Nika. That benefit, albeit a promise to pay, was received by the beneficiaries of the Aurelius Unit Trust and the Aborda Trust only because of the purported assignment to Nika of moneys said to be owing by the Taxpayer. 5 The Trustees contended, however, that it is not to the point to consider whether any loss has been suffered by the Trustees. Rather the enquiry should be as to whether the withholding of a proprietary remedy of the declaration of a constructive trust would allow the Taxpayer "to profit from its breach of trust". The Trustees contended that the Taxpayer would be unjustly enriched if no declaration of trust is made. 6 A claim against the perpetrator of a breach of fiduciary duty must be distinguished from an action to recover damages for a pecuniary loss caused, for example, by fraudulent misrepresentation. Equity intervenes where there is a breach of a fiduciary duty, not so much to recoup a loss suffered by the victim as to hold the fiduciary to, and vindicate, the high duty owed to the victim - Maguire v Makaronis (1996) 188 CLR 449 at 465. Issues of "causation", by analogy with those found with the recovery of damages in tort or contract, do not emerge in a case where a breach of fiduciary duty is involved. A transaction entered into in breach of such a duty will be liable to set aside at the suit of the victim, whether or not any loss is caused - Maguire v Makaronis at 467. Causation does, however, arise in relation to a breach of fiduciary duty, but in a different context. Where, for example, what is sought is a proprietary remedy in the nature of a constructive trust, a need will arise to specify criteria for a sufficient connection, or "causation", between breach of duty and the asset held - Maguire v Makaronis at 468. 7 In the present case, there is no transaction which the Trustees seek to have set aside. The effect of the decision of the Full Court is simply that the payments in question were given a different characterisation from that which they had been given in the books of Morlea and the Taxpayer. There was no breach of fiduciary duty or breach of trust by the Taxpayer because the Taxpayer was not in any fiduciary relationship with the members of the Morlea Partnership or the beneficiaries of their respective trusts. As the Full Court held in the earlier proceedings, the Taxpayer was the recipient of trust moneys, albeit with knowledge that the payment of the moneys constituted a breach of trust. The position of the Taxpayer, therefore, is not the same as that of a perpetrator of a breach of fiduciary duty, as was under consideration in Maguire v Makaronis. 8 The principles by which liability to account for profits is assessed against errant fiduciaries are also designed to hold fiduciaries to their duty. Thus, it is no defence that the victim was unwilling, unlikely or unable to make the profits for which an account is taken or that a fiduciary acted honestly and reasonably - Maguire v Makaronis at 468. In the present case, of course, there has been no claim for an account of any profits alleged to have been derived by the Taxpayer from use of the moneys paid to it by Morlea. The payments in question were treated in the books of the Taxpayer as loans by Morlea. It was not suggested that the making of such loans to the Taxpayer by Morlea would have been a breach of duty or breach of trust. Further, there was no evidence that the Taxpayer profited from receipt of the moneys to any greater extent than it would have, if the payments in question had truly been loans. 9 A trustee in breach of trust must either restore to the trust estate the assets which have been lost to the estate by reason of the breach or pay compensation to the trust for such loss. If specific restitution of the trust property is not possible, then the liability of the trustee is to pay sufficient compensation to the trust estate to put it back to what it would have been had the breach not been committed. The common law rules of remoteness of damage and causation do not apply. However, there must be some causal connection between the breach of trust and the loss to the trust estate for which compensation is recoverable, namely the fact that the loss would not have occurred but for the breach - Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434 per Lord Browne-Wilkinson. 10 In Target Holdings v Redferns, Lord Browne-Wilkinson, whose judgment was cited with approval by the High Court in Maguire v Makaronis at 469-470, also made the following observations at 432: "At common law there are two principles fundamental to the award of damages. First, that the defendant's wrongful act must cause the damage complained of. Second, that the plaintiff is to be put 'in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.'… Although… in many ways equity approaches liability for making good a breach of trust from a different starting point, in my judgment those two principles are applicable as much in equity as in common law. Under both systems liability is fault-based: the defendant is only liable for the consequences of the legal wrong he has done to the plaintiff and to make good the damage caused by such wrong. He is not responsible for damage not caused by his wrong or to pay by way of compensation more than the loss suffered from such wrong. The detailed rules of equity as to causation and the quantification of loss differ, at least ostensibly, from those applicable at common law. But the principles underlying both systems are the same." 11 His Lordship also observed (at page 436) that to impose an obligation on a trustee which enabled a beneficiary to recover more than he has in fact lost flies in the face of common sense and is in direct conflict with the basic principles of equitable compensation. 12 Prior to the 1984 Transactions, the members of the Morlea Partnership would have been entitled to recover the amounts in question from the Taxpayer either as debts, or as moneys received pursuant to the breach of trust or breach of fiduciary duty by Morlea. There was no dispute about the indebtedness at that stage. Nevertheless, if the Court had determined that the payments in question constituted a breach of trust or breach of duty, it may have been appropriate for the Court to declare a constructive trust at that time. 13 However, the state of affairs was completely changed by the 1984 Transactions. Further, on 15 June 1989, as I have said, the Taxpayer and Nika entered into a deed whereby the Taxpayer acknowledged that it was indebted to Nika for the amount of $16,317,088.90. That was the starting point of the 1989 Reconstruction, which was founded upon the existence of indebtedness of the Taxpayer to Nika. The accounts of the Taxpayer have consistently treated the payments in question as giving rise to a liability to Morlea. Further, as I said in my earlier reasons, there is no evidence that there is any dispute as to the remaining indebtedness to April Street, which is shown in a report of the Liquidator as a creditor of the Taxpayer. 14 There has been no offer by the Trustees, in their present capacities as trustees of the Aurelius Unit Trust and the Aborda Trust, to disgorge the benefit received as a consequence of the 1984 Transactions. Indeed, disgorgement by the beneficiaries to whom the benefit derived from the 1984 Transactions has been distributed may not be possible. There has been no claim for equitable compensation against the original trustees in respect of the payments in question. In the light of the benefits that accrued to the beneficiaries in consequence of the 1984 Transactions, it may be that there could be none. It has not been suggested that there could be such a claim against the original trustees. It would be anomalous, therefore, if the Trustees were nevertheless entitled to maintain a claim against the property of the Taxpayer that could entail the beneficiaries of the Aurelius Unit Trust and the Aborda Trust deriving a windfall gain. 15 The Trustees countered the contention of a windfall gain by suggesting that it would be open to the Court to mould appropriate orders for relief to ensure that there was no windfall to the beneficiaries of the Aurelius Unit Trust and the Aborda Trust. For example, the Court could require, as a term of any declaration that the Taxpayer held property on constructive trust for the Trustees, that the Trustees hold the indebtedness owed to them by Nika in trust for the Taxpayer or require undertakings that the Trustees would assign those rights to the Taxpayer. One difficulty with such terms, of course, is that the Trustees may not be in a position do so. The benefit of the indebtedness owed by Nika has been distributed and transmogrified in the manner which I described in my earlier reasons. 16 The Trustees contended, in any event, that the correct analysis of the circumstances which arose following the 1984 Transactions is as follows: (a) on the sale of the Pathology Business, Morlea received no more than a promise to pay; (b) a proportion of that promise to pay related to the sale of a non-existent asset, namely, the so-called loans; (c) there was a failure of consideration because the loans were non-existent; (d) Nika cannot continue to be under an obligation to pay for the non-existent asset; (e) therefore, that part of the promise to pay referable to the non-existent asset is unenforceable and of no value; (f) accordingly, Morlea has suffered a loss commensurate with its constructive trust claim. 17 That contention, in essence, raises the question which I reserved for further argument. The Trustees, in the original hearing contended that there is still a potential claim for restitution of some sort. In my earlier reasons, I accepted that, to the extent that such a potential claim could be made, that could be said to be loss suffered by reason of Morlea's breach of fiduciary duty and that any constructive trust over the property of the Taxpayer would be limited to the amount of such a claim. I therefore suggested that the appropriate relief might have been a declaration that the property of the Taxpayer is charged with such liability, if any, as the Trustees have to give restitution to Nika or Nika's successor, April Street. The question which I intended to reserve for further argument was whether I should make such a declaration. I pointed out that such an order could result in uncertainty. 18 At the original hearing, there was no evidence at all of any claim having been made on behalf of either Nika or April Street. However, in the course of the further hearing on 8 March 1999, senior counsel for the Trustees tendered a document purporting to be a facsimile communication from April Street to Morlea dated 1 March 1999. 19 Omitting formal parts, the facsimile was in the following terms: "April Street Investments BV pursuant to a Deed of Assignment dated 16th June, 1989 acquired from Nika Professional Services Pty Ltd (formerly Macquarie Professional Services Pty Ltd) ["Nika"] certain receivables which Nika had acquired from your company being monies owed pursuant to loans ["the Loans"] purportedly made by your company to Richard Walter Pty Ltd (In Liquidation). In addition, April Street Investments BV pursuant to a Deed of Assignment dated 16th June 1989 acquired from Aurelius Commodus Investment BV ["ACI"] a receivable ["the Receivable"] being the monies owing by Nika to ACI. The Receivable consisted of a distribution in specie by you as trustee of the Aurelius Trust of part of the purchase price owed by Nika for the purchase of the assets of the Morlea Partnership. These assets included the Loans. The Receivable therefore in part consisted of monies payable by Nika for the purchase of the Loans. April Street Investments BV acquired the Loans and the Receivable in good faith and for valuable consideration. It has come to our attention that as a result of proceedings in the Federal Court in Australia, the Loans were not loans carrying an obligation to repay but transfers of beneficial ownership of those monies by your company to Richard Walter Pty Ltd (In Liquidation). Therefore Richard Walter Pty Ltd (In Liquidation) would appear to be entitled to refuse to repay the Loans to April Street Investments BV. As a result April Street Investment BV will not be able to recover the Loans which it acquired in good faith and for valuable consideration and will therefore have suffered damage equal to the current outstanding amount of the Loans. In addition the amount of the Receivable in part may have no value because Nika would appear to be entitled to refuse to pay ACI that part of the Receivable consisting of the consideration for the purchase of the Loans. These circumstances have arisen as a result of your acts and omissions in conveying and representing that you had good title to the Loans. Accordingly notice is hereby given that if Richard Walter Pty Ltd (In Liquidation) does not repay the Loans to April Street Investment BV at 100 cents in the dollar including accrued interest thereon, then April Street Investment BV will be taking legal action for damages against your company." 20 For reasons that I gave on 8 March 1999, I rejected the tender on formal grounds. However, the Taxpayer and the Commissioner objected to the tender on a more fundamental ground. If evidence of the communication were admitted, a lengthy adjournment may be required to enable investigation of the circumstances in which the facsimile came to be sent and the genuineness of the claim foreshadowed in the facsimile. I reserved the question of whether I would give to the Trustees leave to reopen to prove, in proper form, any such communication received by Morlea from April Street. 21 If evidence of such a communication were to be admitted, it would show that April Street has now threatened to take action against Morlea in respect of the 1984 Transactions and the 1989 Reconstruction. No evidence was foreshadowed as to the circumstances in which such a letter might have been written. It is inherently unlikely that such a letter would have been written five days before the further hearing as a matter of pure chance. However, no explanation was foreshadowed as to why April Street had not previously made any claim. 22 It is the very kind of claim that the Trustees contended could potentially be made. It would have been open to the Trustees to make appropriate enquiries prior to the original hearing of the proceedings and to adduce evidence as to those matters. There has been no suggestion that any enquiries were made before the original hearing or that any have been made since then. 23 The Court has a discretion to permit a party to reopen its case to supply a deficiency in its case if the interests of justice so require, and the evidence could not with reasonable diligence have been discovered before. Evidence may be led late in some circumstances where justice requires, even if the evidence could have been available earlier with the application of diligence. I accept that the communication of 1 March 1999 was not evidence that was available at the time of the original hearing. However, there has been no evidence as to the enquiries, if any, which have been made of April Street on behalf of the Trustees concerning the communication in question and the reasons why no claim was made until five days before the further hearing, if that be the fact. 24 I have not found that the effect of the 1984 Transactions was to assign any equitable claim, which the members of the Morlea Partnership or the beneficiaries of the Aurelius Unit Trust and the Aborda Trust may have been able to maintain against the Taxpayer. No contemporaneous document refers to any such assignment for the simple reason that, at that time, those responsible for the management of the affairs of the relevant entities were treating the payments in question as advances by way of loan. Nevertheless, if any genuine dispute does exist as between April Street and Morlea, a question could arise as to whether, as between those parties, there was an assignment of such claims in equity as the members of the Morlea Partnership might have had against the Taxpayer. As I have said, Morlea purported to give something as consideration for the assumption of liability and promise to pay on the part of Nika. 25 There has been no suggestion of a claim by Nika. Even if April Street is able to maintain some claim against Morlea, questions may arise as to whether Morlea would be in a position to meet any such claim and as to whether Morlea would be entitled to an indemnity from the members of the Morlea Partnership or from the trust estates in respect of which those members were trustees. Those questions have not arisen in these proceedings. It is difficult to see how some of them could be raised without joinder of the beneficiaries as parties to the proceeding. It is too late for that. Accordingly, even if the Trustees were able to adduce evidence authenticating a communication in the form set out above, I would refuse leave to reopen at this stage of the proceeding. 26 I consider, in the circumstances, that the Trustees have failed to establish that they are entitled to any relief against the Taxpayer in the nature of a declaration of a constructive trust. It follows that the second cross claim should be dismissed with costs. I shall adjourn the proceedings to a date convenient to the parties to enable them to bring in short minutes to reflect all of the conclusions that I have now reached.