The methodology for interest - simple or compounding?
25 Directed seeks an order that Mr Meneses and the Hanhwa parties pay compound interest on the secret commission amounts for which each is liable from the date when each payment was made and at the rate equal to the RBA cash rate at the date of payment plus 4% as envisaged in this Court's practice note on the subject. Further, the compounding is sought with monthly rests.
26 I should say here that the context for considering compound interest concerns equitable compensation rather than a plain vanilla common law claim of the type dealt with in Hungerfords v Walker (1989) 171 CLR 125. I am only dealing with the prophylactic jurisdiction of equity and her protection of innocent parties affected by the wrongful conduct of fiduciaries and knowing assisters. And no one should doubt the malleability of her remedies.
27 Now an award of compound interest may be made in equity against a trustee or other fiduciary for breach of an equitable obligation. But it is not limited to the situation where funds have been withheld or misappropriated by a trustee or other fiduciary or where a trustee is under a duty or direction to accumulate income. The over-arching consideration is what justice demands in the particular circumstances. In other words, what is equitable?
28 Now it must be borne in mind that such an award is compensatory in nature. It is not designed to be punitive in purpose or effect. Such an award is designed to make good what the innocent party may have lost by reason of the breach of the equitable obligation.
29 It is not necessary to demonstrate fraud, dishonesty or other serious misconduct to justify an award of compound interest, although such a finding is not unhelpful as it may justify a more robust approach to drawing inferences in favour of the innocent party and against the miscreant fiduciary concerning use by the latter or loss by the former.
30 Further, for such an award, it is not strictly necessary to demonstrate that the recalcitrant or defaulting fiduciary has made a gain whether by the use of the innocent party's money or in some other way, but of course if that is the case or it can reasonably be inferred, then any claim for compound interest would be fortified.
31 Further, in a modern mercantile setting, an award of compound interest is more likely to be consistent with commercial reality. Simple interest usually under-compensates, and the longer the period of the calculation, the greater the magnitude and magnification of such under-compensation. Is there any such thing as a lender or borrower who does not expect to receive or be charged respectively interest utilising periodic rests and thereby permitting or envisaging some level of compounding? I doubt it. Of course, setting a higher rate with simple interest may give you nearly arithmetic equivalence with otherwise setting a lower rate with compound interest. But assuming that the setting of the rate has not been massaged to achieve that end or to implicitly so reflect such an allowance, one would expect that some level of compounding should be the norm.
32 Now Directed says that the present case falls within the class of cases where the application of compound interest is appropriate to approximate the profit made from the use of the proceeds; see Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 at [547] to [552] per Finn, Stone and Perram JJ.
33 And of course one of the circumstances in which compound interest is awarded with periodic rests, for example, weekly, monthly, quarterly or yearly, is where trust money is misused by a trustee or fiduciary in his or her own trade or business. And the informing principles may reflect those employed in accounting for profits, including presuming that the party against whom relief is sought has made that amount of profit which persons ordinarily would in analogous circumstances make in trade.
34 In such a class of case, the object of a compound interest award and the use of periodic rests is to reflect in the award a crude approximation of the profit likely to have been made by the fiduciary or trustee from the money misused where that profit could reasonably be supposed to exceed in value a simple interest award.
35 Now Directed submits that in order to arrive at a crude approximation of the profits considered likely to have been earned from the money misused, monthly rests are appropriate.
36 I note that on the question of periodic rests, in Grimaldi the Full Court ordered monthly rests. They overturned the decision of the trial judge who had ordered yearly rests, although it was unclear whether the trial judge may have intended to refer to monthly rests. The Full Court determined that monthly rests were appropriate on the basis that (at [753]):
The issue of incidence of rests is not one of comity. The question is what by the use of compound interest and rests is likely to prove a crude approximation of the profits considered likely to have been earned from the money misused. His Honour's own appreciation, having had the advantage both of hearing the matter and of long reflection on it, was that monthly rests were appropriate. We consider this likely to be far closer to the mark than annual rests.
37 Now the Hanhwa parties at trial challenged any impropriety in making the secret commission payments, but I found that the secrecy was manifest and that the conduct was a corrupting influence on what otherwise should have been a mutually beneficial relationship of supplier and customer. I found that Mr Meneses' conduct was fraudulent and dishonest and well known to be so by Mr YS Lee and the Hanhwa parties. The Hanhwa parties also failed to disclose the commission payments to Mr Tselepis and Mr Siolis.
38 And on the question of quantum, as was observed by me, the principle seems to be that it will be assumed that the true price of any goods bought by the principal was increased by at least the amount of the bribe paid to the agent.
39 Now in relation to the Hanhwa parties, the object of the secret commissions arrangements was to incentivise Mr Meneses to increase the Hanhwa parties' business from which they would, and did, make profits. From Mr Meneses' perspective, the arrangements provided him with payments to which he was never entitled and for which he is liable to account. The secret commissions arrangements between Mr Meneses and the relevant Hanhwa parties including their predecessors were on foot for some time. Mr Meneses commenced receiving secret commissions in 2009. The Hanhwa parties, subject to various differences between entities, paid secret commissions dating back some years.
40 Accordingly, the benefits obtained by the parties by reason of the bribes/secret commissions are difficult to calculate. And in circumstances where the relevant respondents' profits by reason of the bribes can only be approximated, Directed submits that applying the relevant principles, this is an appropriate occasion for interest to be awarded on a compounding rather than simple basis, with the compounding to be based on monthly rests.
41 Let me then deal with the position of Mr Meneses first and the Hanhwa parties second.
42 Mr Meneses submits that the appropriate basis on which interest should be ordered is on a simple basis. Alternatively, he says that if I am minded to award compound interest, I should do so on yearly rests rather than monthly rests.
43 First, Mr Meneses says that there is no safe basis to presume that some "trading-type" profit was made by Mr Meneses which warrants an award of compound interest. There is no evidence that Mr Meneses invested the money in any business of his own or into that of any of the Hanhwa parties.
44 He referred to Burdick v Garrick (1870) LR 5 Ch App 233 at 242 where Lord Hatherley LC said:
… There is nothing like compound interest obtained upon the money employed by a solicitor ... no case arises here in which you could say that a profit has been made, or necessarily is to be inferred, and consequently that there was an error committed in directing compound interest.
45 As a result, Mr Meneses says that an award of compound interest risks the possibility of straying into punishment of Mr Meneses by way of interest. That risk is exacerbated by the fact that the relevant interest rate is 4% above the RBA cash rate. If compound interest were to be awarded, Mr Meneses says that it carries the implicit presumption that Mr Meneses achieved a nominal "profit" of significantly above the prevailing cash rate, and did so on a continual and compounding fashion. But that implicit presumption is not justified.
46 Second, if compound interest were to be awarded, Mr Meneses says that monthly rests are inappropriate. Now although monthly rests were adopted in Grimaldi, there is no universal rule requiring such a rest to be employed. I note that yearly rests were awarded in Hagan v Waterhouse (1991) 34 NSWLR 308 at 393 per Kearney J, Bullhead Pty Ltd v Brickmakers Place Pty Ltd (in liq) [No 2] (2019) 58 VR 129 at [53(5)] per Kyrou, McLeish and Hargrave JJA, Thomas v SMP (International) Pty Ltd (No 6) [2010] NSWSC 1311 at [24] per Pembroke J and Fang v Sun (No 2) [2014] NSWSC 1194 at [14] per Slattery J.
47 Accordingly, if compound interest were awarded, Mr Meneses says that the use of yearly rests is a more appropriate measure on which the calculation should be made.
48 But ultimately, Mr Meneses submits that an award of simple interest appropriately balances the need to ensure that a defaulting fiduciary does not receive a profit against the need to ensure that an award of interest does not act as a punishment.
49 Now I will make an order for compound interest against Mr Meneses. His breach of fiduciary duty was fraudulent and dishonest. But in my view, a better approximation in the present circumstances is to use yearly rests rather than monthly rests. I am not here dealing with a clear case of wrongfully retained property or direct loss of profits. And I do not have direct evidence of any loss of use claim justifying monthly rests. So, the parties will need to calculate the correct figures using yearly rests.
50 Let me now say something about the position concerning the Hanhwa parties.
51 The Hanhwa parties say that interest ought to be payable as simple interest and not compounding interest.
52 They say that any suggestion that my findings as to the making out of the claim for secret commissions were findings as to further aggravating factors is not correct. They say that the relevant passages referred to by Directed were findings setting out the foundation for the establishment of the more basal fact of liability.
53 Further, they say that Directed's reference to the relevant arrangements being in place for a very long period of time with respect to the Hanhwa parties' predecessors is also misguided given that I accepted that liability could not be sheeted home to any of the Hanhwa parties in respect of payments made by Nan-Skin Min and/or Hanhwa Enterprise. I agree, and have put this to one side as any justification for an award of compound interest.
54 Further, they say that Grimaldi can be distinguished as against the Hanhwa parties, since none of them were themselves fiduciaries of Directed or the alter ego/nominee of a fiduciary. The relevant passages cited by Directed only concerned the applicable interest to be applied when making an award against a fiduciary. Now that may be correct, but in my view it is not a sufficient answer to justify not awarding compound interest.
55 It is also pointed out that the Full Court in Grimaldi (at [550]) quoted Lord Hatherley LC's observations in Burdick at 241 and 242 regarding the appropriateness or otherwise of compound interest for money paid into the common account of a firm of solicitors, but in the case before me I distinguished between the presumptive rule applicable to fiduciaries on the one hand, and knowing assistants on the other hand. Now that is true, but again it is not a complete answer.
56 Further, it is pointed out that ultimately, citing Grimaldi, I was not persuaded that Directed had established the necessary causal connection against the Hanhwa parties as knowing participants/assistants to satisfy the relevant evidentiary threshold burden (at [1513] to [1516]). But all of that was dealing with a slightly different point. I am not here dealing directly with the ascertained disgorging of profits as a relevant basis.
57 And related to this last point, it is said that Directed's basing of its submission as to compound interest by reference to and reliance upon the Hanhwa parties' profits, including as to periodic rests, appears to be an attempt to revisit its rejected trial submissions to the effect that Hanhwa Korea ought to be liable to disgorge all of its profits of supply to Directed between 2012 and 2018. I agree and have put this to one side as a relevant basis.
58 Moreover, Directed's reference to [1454] to [1456] of my principal reasons is also misconceived. I went on to reject the argument as to the disgorgement of all of Hanhwa Korea's profits between 2012 and 2018.
59 Now accepting that there is merit in some of the Hanhwa parties' points, they are not sufficient to convince me that I should not make an award of compound interest. Given their knowledge and participation in Mr Meneses' breaches of fiduciary duty, it is appropriate that they also pay compound interest with yearly rests. They facilitated indeed made the secret commission payments. They incentivised Mr Meneses to engage in the relevant wrongful conduct. I will so order the compounding of interest payable by the Hanhwa parties.