Glazier v Australian Men's Health - [2000] NSWSC 253 - NSWSC 1999 case summary — Zoe

NSWNSWSC

Glazier v Australian Men's Health

[2000] NSWSC 253

Supreme Court of NSW|1999-03-10|Before: Austin J, Mr J

View original source

At a glance

Source facts

Court

Supreme Court of NSW

Decision date

1999-03-10

Before

Austin J, Mr J

Catchwords

application by second and third defendants in 4237/98 for removal as parties denied
on plaintiff's application for costs in 4237/98, no order for costs

Source

Original judgment source is linked above.

Catchwords

application by second and third defendants in 4237/98 for removal as parties deniedon plaintiff's application for costs in 4237/98, no order for costs

Judgment (44 paragraphs)

[1]

Introduction - parties 1 This judgment relates to two proceedings. In Proceeding No 4905 of 1997 the matter for decision is an application by a trustee and receiver of trust assets for judicial advice. In Proceeding No 4237 of 1998 the matters for decision are the plaintiff's application that the second and third defendants be ordered to pay its costs and the application by the second and third defendants to be removed as parties to the proceeding. 2 The proceedings seek different relief and the parties to the applications that are before me for decision are not identical. Nevertheless the two proceedings are closely connected because they relate to aspects of the same overall facts. I have therefore decided to deliver a single judgment covering the applications in both proceedings, although I shall try to ensure that the combination does not obscure my decision, reasoning and findings of fact in each case. 3 In both proceedings the plaintiff is Glazier Holdings Pty Ltd ('Glazier'). The first defendant is Australian Men's Health Pty Ltd ('AMH'), formerly the trustee of the Australian Men's Health Unit Trust ('the Trust'). AMH is now in a creditors' voluntary winding up, and was at an earlier time under voluntary administration and subject to a deed of company arrangement. The administrator was Mr John Star, who is now the liquidator. 4 Glazier is a company controlled by Dr Keramianakis and Dr Smagarinsky ('the Doctors'). It is a unitholder of the Trust. The other unitholder is Treykell Pty Ltd, a company associated with Mr Graham Meehan. Treykell is the fifth defendant in the 1997 proceeding, and Mr Meehan, who effectively controlled AMH, is a defendant in both proceedings. The financial controller of AMH, Mr Anthony Murphy, is a defendant in both proceedings, and the remaining defendant in the 1997 proceeding is Mr Arthur Brain, who was a director of AMH for a time. 5 In March 1998 the Court appointed Mr Martin Madden (an insolvency practitioner) to be trustee of the Trust in substitution for AMH. Shortly afterwards the Court appointed Mr Madden to be the receiver of the assets of the Trust. Although he is not a party to either proceeding, Mr Madden is the applicant for judicial advice in the 1997 proceeding.

[2]

Formation of the Trust 6 From April 1997 until March 1998 the Trust conducted the business of providing medical services and pharmaceutical products for the treatment of sexual dysfunction in men, in about 40 clinics throughout Australia. It operated under the business name 'Australian Men's Health'. 7 The Trust was established by a trust instrument dated 14 April 1997, between Henton Pty Ltd as settlor and AMH as trustee. It resulted from a merger of a similar business conducted by On Clinic (Australia) Pty Ltd and another similar business conducted under the business name 'Immediate Sexual Potency' or 'ISP'. On Clinic was owned by interests associated with Mr Meehan. ISP was controlled by the Doctors. Mr Meehan alleges that the purchase price for the business assets of On Clinic was $1,015,918.30, and that ISP was paid $84,673.16 for medication and some assets. The Doctors dispute this, claiming that the consideration for transfer of assets to the merged enterprise was the issue of units in the Trust, Mr Meehan's interests receiving a greater unitholding because they brought more valuable assets to the business. 8 Upon the merger Glazier was issued 108 'A' Class trust units entitling it to 18 percent of the income and capital of the Trust. Treykell was issued 492 'B' Class units entitling it to the remaining 82 percent of the income and capital of the Trust. By a unitholders' deed also dated 14 April 1997, Glazier, Treykell and others agreed to arrangements for calculation and distribution of the net income of the Trust. As the holder of 'A' Class units, Glazier was entitled under the unitholders' deed to additional units, the number being calculated in accordance with a formula that measured increases in the 'average patient conversion rate', defined by reference to the number of new patients who purchased 'bottles' of medication. It appears that no additional units have been issued. 9 Neither the trust instrument nor the unitholders' deed sheds any direct light on the dispute between Mr Meehan and the Doctors regarding the consideration for the assets acquired by AMH upon the merger. According to the trust instrument, the initial units were allotted at $1 each, rather than at a consideration reflecting the value of the assets brought to the business. But if the parties intended that the unit holdings should reflect the value of the assets contributed, this might perhaps have been achieved by revaluation of unit holdings after the assets had been transferred to the Trust. Mr Madden's evidence was that he did not know the proper way of reflecting the Doctors' version of the transaction in accounting records, but that the trust instrument was consistent both with their view and with Mr Meehan's view. I agree.

[3]

The operation of the business 10 Mr Brain and Mr Roger Hyde were appointed as directors of AMH to represent the interests of Treykell and Glazier respectively. AMH's day-to-day operations were controlled by Mr Meehan as the chief operating officer of the impotency business. Mr Leonard Vaysman was the general manager of the impotency business and reported to Mr Meehan, as did the financial controller, Mr Murphy . Mr Brain ceased to be a director on 4 December 1997, and Mr Hyde ceased to be a director on 20 March 1998. They were replaced by Mr Meehan and Mr Murphy, who have been the directors of AMH at all subsequent relevant times. 11 Medical services were provided by qualified medical practitioners, who either bulk-billed through the Medicare system or were paid by the patient at the time of consultation. Medical products were dispensed and paid for by the patient at the time of consultation. Daily sales of medical services and medical supplies for each of the clinics were recorded in a document known as a 'tail sheet'. The tail sheet also recorded the number of patients seen at the clinic each day. 12 The consulting medical practitioners performed their services for the Trust through consultancy arrangements, which were reduced to written agreements in most but not all cases. It appears that the agreements were initially entered into between the medical practitioners and On Clinic, but it is probable that the same arrangements continued between the medical practitioners and the Trust after the Trust took over On Clinic's business. The consultancy agreements provided for the contracting medical practitioner to pay On Clinic a facility fee ranging from 75 percent to 81 percent of all receipts which resulted from treating impotency patients. 13 Daily sales receipts and Medicare collections relating to the Trust's business were banked into an account, evidently a trust account, which was called 'the Harvey's Account'. It appears that the Harvey's Account was put in place, with the assistance of a firm of chartered accountants called Harveys, because non-doctors are prohibited from dealing with the proceeds of doctor services under the Health Insurance Act. Mr Meehan and Mr Murphy were authorised signatories and they (or AMH, through them) effectively controlled the operation of the Harveys Account. 14 Each week the consulting medical practitioners were paid their commissions (ranging from 19 percent to 25 percent) in respect of medical consultations and supplies which had been deposited into the Harveys Account. After accounting for bank fees and dishonoured cheques, the balance of funds in the Harveys account was paid to the Trust. The Trust did not have a bank account. Payments to the Trust were made into the account of On Clinic until 22 August 1997. AMH opened a bank account at that time, and thereafter payments to the Trust were made into AMH's account. 15 The Trust business made use of services provided by three companies associated with Messrs Meehan and Murphy. Medical Admin Services Pty Ltd provided head office administration, Asire Pty Ltd provided patient booking services, and Medical Integrated Services Pty Ltd provided clinic services. Messrs Meehan and Murphy controlled the day-to-day management and operations of the service companies. 16 Although the service companies were not parties to it, the unitholders' deed purported to bind each of them to provide their respective services (particularised in Annexures C, D and E to the deed) for two years. The trustee was obliged by the deed to pay for the services. In the case of head office administration and patient booking services, the deed limited the consideration payable to the costs and expenses of the relevant service company in procuring the services. However Annexure C, dealing with administrative services, stated 'Cost: $ 7 per patient', and Annexure D dealing with booking services stated 'Cost: $11 per patient'. In the case of clinic services, the consideration was limited to 110 percent of the amount set out in Annexure E, which stated 'Cost: $30 per patient'. 17 In his Report to which I shall refer, Mr Madden expressed the view that the unitholders' deed was internally inconsistent, though he noted that in each case the service company charged the Trust by reference to the cost of procuring the services rather than at a flat rate per patient. In my opinion the correct construction of the deed is that in the case of administration and booking services, the service company was permitted to charge no more than its costs and expenses in procuring the services; but in the case of clinic services, the service company was permitted to charge no more than 110 percent of an amount of $30 per patient. 18 The business was initially very profitable. The net income for the period from 14 April 1997 to 25 March 1998 was $ 1,072,084. Receipts were approximately $11 million. However, in the course of 1997 some problems arose. There was an investigation into the business practices of the Trust by the Health Care Complaints Commission of New South Wales, with associated bad publicity. And almost from the outset, the business was beset by a dispute between Messrs Meehan and Murphy and their interests, on the one hand, and the Doctors and their interests, on the other hand. The dispute led to the two proceedings which are before me now. For one or both of these reasons, new patient bookings decreased from 1170 during the week ended 20 July 1997 to 665 during the week ended 7 September 1997.

[4]

Proceeding No 4905 of 1997 for removal of trustee 19 Glazier sued by statement of claim in that proceeding, seeking relief as a beneficiary of the Trust. The statement of claim alleged breaches of the terms of the trust instrument and the unitholders' deed, more fully particularised in affidavit evidence. The breaches were said to include failure to apply and distribute the net income of the Trust to the beneficiaries in proportion to their unit holdings, failure to keep proper accounts, and failure to ensure that income to which the plaintiff had become entitled was held in a separate fund. It was alleged that the breaches were committed by AMH 'by its servants and agents' including Messrs Meehan, Murphy and Brain. It was alleged that Treykell refused to consent to the removal of AMH as trustee and the appointment of a fit and proper person as the new trustee. 20 Glazier relied on a report by Mr Adrian Abbott, a chartered accountant, who on its instructions had inspected the books and records of the AMH. Mr Abbott reported inter alia that AMH's records had not been kept in a proper manner and that distributions from the Trust had disproportionately favoured Treykill. 21 Glazier relied on a report by Mr Adrian Abbott, an accountant, who, after inspecting the books and records of the AMH, concluded that AMH's records had not been kept in a proper manner and that 'inappropriate' conduct had occurred. 22 Glazier sought orders against all five defendants for: (a) the removal of AMH as trustee of the Trust; (b) the appointment of Mr Madden to replace AMH as trustee; (c) the vesting of the assets of the Trust in the new trustee; (d) an account to be taken of the dealings and transactions of AMH as trustee and that the defendants be ordered to pay to the new trustee the amount found to be due on the taking of accounts, plus interest; (e) costs on an indemnity basis; and (f) the appointment of Mr Madden as receiver and manager of AMH pending the final hearing of the action. 23 Except to the extent that I have indicated, the statement of claim did not formulate a basis for obtaining the order in paragraph (d) against Treykell or Messrs Meehan, Murphy and Brain. As far as I can see, the only obvious basis for an order against them to pay to the plaintiff the amount found to be due on the taking of accounts would be that they were third parties implicated in the breaches of trust under Barnes v Addy (1874) LR 9 Ch App 244. The assertions against them in the statement of claim should probably be taken to plead liability on that ground.

[6]

Application to Cohen J 26 Mr Madden became the trustee of the Trust on 18 March 1998. As trustee he was responsible for the conduct of the Trust's business, and for the taking of accounts in accordance with Young J's orders. Conducting the business of the Trust meant that Mr Madden had to deal with the service companies, and very soon he encountered difficulty in doing so. 27 Some of the problems were outlined in a letter to him from the defendants' solicitor dated 20 March 1998. The solicitor claimed that the Trust had substantial debts, including debts to the service companies, and demanded a written acknowledgment by Mr Madden that AMH as the former trustee had a right of indemnity secured by an equitable lien over the assets of the Trust, which would be satisfied in priority to any debts which Mr Madden may incur as the new trustee. Additionally, the service companies refused to continue to provide services to the Trust on the cost basis set out in the unitholders' deed, unless Mr Madden provided a personal indemnity. Mr Madden offered to provide an indemnity to the service companies, limited to the assets of the Trust, but that offer was rejected. 28 It would have been open to Mr Madden to approach the Court immediately for relief which would hold the service companies to their obligations, so that he could continue to conduct the Trust business. He may have been able to protect himself from the risk of liability for continuing to conduct the business by making an application for general administration of the Trust. But neither of these steps was taken. Instead, having promptly formed the view that the Trust was insolvent, Mr Madden approached Cohen J for judicial advice that as trustee he would be justified in ceasing to operate the business of the Trust. On 25 March 1998 his Honour gave advice in those terms, and made an order appointing Mr Madden as receiver of the Trust without security, with powers to investigate the existence of and get in and convert into money the assets of the Trust and pay that money into Court. Orders were made giving Mr Madden's costs as receiver priority over any lien or right of indemnity that AMH might have as the former trustee. 29 Cohen J found that it would be impossible for the trustee to continue to carry on the business of the Trust, both because it was an insolvent business, and because (in view of the attitude taken by the service companies) the trustee no longer had the means of conducting the business. His Honour noted Mr Madden's desire to investigate whether there were any claims which he might make on behalf of the Trust against any persons, and said: 'It would be the duty not only of a trustee but even more so of a receiver to have a proper investigation, within reasonable limits as to expense, of course, as to any claims against persons if the evidence suggests that he should make those investigations. This matter is somewhat shadowy since nobody has proffered any evidence which would at this stage indicate that an investigation is justified, but that would be a matter for the discretion of the receiver.'

[8]

Steps taken by Mr Madden after April 1998 34 By an agreement dated 14 May 1998 the receiver sold the stock-in-trade of the Trust business to Health Services For Men Pty Ltd ('HSFM'), and sold the assets of the business (including goodwill) to Medical Integrated Services Pty Ltd. The purchase price for the stock-in-trade was $375,000, and the purchase price for the assets was $25,000. Most of the purchase price for the assets was apportioned to plant and equipment, with only $1 being apportioned to goodwill. The agreement, to which AMH was a party, stated that the receiver had priority for recovery of his costs and expenses over any lien of AMH arising under its indemnity as former trustee. 35 Mr Madden completed the sale and received the purchase price, and received payments by debtors. He also attended to various payments, including his own remuneration (amounting to $307,552.70 plus expenses, up to 11 February 1999) and legal fees ($127,171.12 up to the same date). By 11 February 1999 the net balance in his hands was $341,145.73. 36 Mr Madden prepared a substantial report to the Court ('the Report') of investigations which he had undertaken for the purpose (he said) of complying with Young J's order of 18 March 1998 that an account be taken of the dealings and transactions of AMH as trustee of the Trust. A copy of the Report was exhibited to his affidavit of 20 November 1998. He found that the Trust's financial records were in a very unsatisfactory state, and he was unable to account for various discrepancies, which I shall describe in more detail later. For these reasons he found it impossible to prepare an account. 37 The order made by Young J on 18 March 1998 was that an account be taken of the dealings and transactions of AMH as trustee, and that the defendants pay to the new trustee the amount found to be due on the taking of such accounts together with interest. Apparently as a consequence of Mr Madden's inability to prepare an account, no amount payable by the defendants to the new trustee has been calculated. 38 To deal with Mr Madden's application for judicial advice in Proceeding No 4905 of 1997, I must examine the Report carefully. However, before doing so I shall set out the facts relating to the voluntary administration and liquidation of AMH, subsequent applications in Proceeding No 4905 of 1997, and the commencement and continuation of Proceeding No 4237 of 1998.

[9]

Voluntary administration of AMH 39 AMH was placed in voluntary administration by a resolution of its directors (Messrs Meehan and Murphy) made on 15 June 1998, and Mr Star was appointed administrator. The directors prepared a Report as to Affairs which disclosed assets with a book value of $1,607,950 and an estimated realisable value of $400,000, unsecured creditors' claims of $1,254,311, and consequently a deficit before administration costs of $854,311. The directors attributed the failure of the company to the decision of the new trustee not to continue trading, the termination of AMH's role as trustee, and costs associated with the receivership. 40 On 2 September 1998 Mr Star submitted his report as administrator to AMH's creditors. He noted that the company had incurred debts in excess of $1 million on behalf of the Trust and had claimed an indemnity in respect of those costs against the assets of the Trust. He noted that the assets had been substantially depleted by the cost of the receivership. 41 Mr Star said he was unable to form an opinion as to whether the company had complied with the requirements of the Corporations Law with regard to maintenance of proper books and records, because of 'teething problems' associated with the company's computer system and because some of the records were in the possession of the receiver. He reported that he was unable to form an opinion as to whether the company had traded insolvently prior to his appointment, and he said that he was unable to form any view as to unfair preferences until he had examined all books and records of the company. 42 Mr Star identified a number of related entities of Mr Meehan (other than the service companies) which were parties to transactions with the Trust, principally loan account transactions. The related entities included On Clinic (one of the original merger parties), Edgecliff Medical Centre Pty Ltd (lessor to the Trust), Urodynamics Centre of Australia Pty Ltd (which treated incontinency in men, and shared some facilities with the Trust), and Pershore Investments Ltd (a British Virgin Islands company which was the ultimate holding company of On Clinic and Asire, one of the service companies). Mr Star's report listed another seven related entities which had dealings with the Trust. While identifying a substantial volume of related party transactions, he did not express the opinion that any of the transactions were open to challenge. 43 After adjusting the deficiency reported by the directors, Mr Star calculated the total deficiency of the company as $854,911. He recommended that the company enter into a deed of company arrangement ('DCA'), under the terms of which the 'Meehan' related parties would not anticipate any distribution. The total amount owing to the 'Meehan' related parties was stated to be $400,856. He noted that the company's only asset was its right of indemnity against the assets of the Trust. He gave an estimate that on liquidation, creditors would receive a return of 20-24 cents in the dollar (assuming no recoveries were made as a result of the liquidator's investigations), whereas under the proposed DCA the estimated return would be 30-35 cents depending on realisations from the receiver and the enforcement of the right of indemnity. 44 The terms of the DCA provided for the establishment of a fund. The company was required to pay into the fund any money which it received as a result of its claim to be indemnified out of the assets of the Trust (which claim was assigned to the administrator), together with any sums realised from other assets of the company (in fact, there were no other assets). The DCA expressly provided that these assets excluded 'any right of action of the Company against any director of the Company being a right of action which subsisted at the date of the appointment of the administrator'. If the administrator did not receive payment in respect of the company's right of indemnity within six months from the commencement date of the DCA (30 September 1998), the administrator was required by the DCA to convene a meeting of creditors to consider a variation of the DCA or its termination and consequently liquidation of the company. As proposed by Mr Star, the 'Meehan' related entities were excluded from participating as creditors. The proposal approved by creditors also required the administrator to obtain legal advice before the commencement date to the effect that the 'Meehan' related entities had claims against the company exceeding $250,000. 45 The company's creditors approved Mr Star's proposal at their meeting held on 10 September 1998. Glazier, which was a creditor for unpaid costs, voted against the proposal. The DCA was entered into on 30 September 1998.

[10]

The deed of company arrangement and the winding up of AMH 46 On 13 October 1998 Glazier commenced Proceeding No 4237 of 1998 by summons seeking orders to set the DCA aside, on grounds which included allegations of deficient administration, and also seeking orders for costs against AMH and its directors Messrs Meehan and Murphy. As I have said, Mr Madden completed his report in November 1998. 47 On 8 December 1998 AMH, then subject to the DCA, made an application by notice of motion for orders which would give the administrator access to some of the assets of the Trust, and therefore provide Mr Star with funds to defend Proceeding No 4237 of 1998. In support of this application, Mr Star alleged that AMH had a right of indemnity out of the assets of the Trust for recoupment of expenditure made and liability incurred by it while it was trustee of the Trust. 48 In a judgment handed down on 17 December 1998 I dismissed this application. I said that AMH had failed to overcome three obstacles to its asserted entitlement. First, the evidence before me did not identify any particular expenditure made or liability incurred by AMH as trustee of the Trust. Secondly, Mr Madden's Report raised some concerns about the proper administration of the Trust and in view of these concerns, AMH had not proved that its right of indemnity could be asserted against the remaining assets of the Trust. Thirdly, I decided it would be inappropriate to grant AMH access to the assets held by Mr Madden as receiver without first dealing with Mr Madden's motion for judicial advice, even if AMH had otherwise made out its entitlement. 49 I expressed my concerns about the proper administration of the Trust as follows: 'An objective reader of the Receiver's Report would be very concerned, as I am, that there may have been serious irregularities in the administration of the Trust by the first defendant, some of which may amount to breaches of trust. It would be inappropriate for me to express anything like a concluded view of the matters discussed in the Receiver's Report in the context of the present application. But I shall mention one matter as an example, to give an indication of the nature and possible financial scale of the concerns which the Receiver's Report raises. All the income generated by the Trust's clinics was deposited into a bank account known as 'The Harveys Account'. Mr Madden performed a reconciliation of transfers from The Harveys Account to other bank accounts, in order to ensure that all transfers were received by the Trust in full. His analysis indicates that transfers from The Harveys Account totalling $442,309 cannot be traced into the Trust's bank account. One of the directors of the first defendant, Mr Murphy (the third defendant), provided an explanation which indicated that related entities, including entities associated with Mr Meehan, received most of this amount, though a sum of $62,000 remains unaccounted for: see Receiver's Report, paragraphs 1.7, 4.12, 4.13.' 50 By notice of motion filed on 14 January 1999 in Proceeding No 4905 of 1997, Glazier applied for orders either that Mr Star personally pay the plaintiff's costs as respondent to the notice of motion filed on 8 December 1998, or that the costs payable in relation to the motion be deferred expenses for the purpose of s 556(1)(de) of the Corporations Law. I denied that application, in my reasons for judgment delivered on 22 March 1999. 51 On 24 February 1999 Mr Star made a further report to creditors of AMH, and there was a further meeting of creditors on 2 March 1999. At that meeting the creditors resolved that the DCA be terminated. The consequence was, by virtue of Corporations Regulation 3A.07(1)(b), that Mr Star became liquidator of AMH, the winding up being treated as a creditors' voluntary winding up. 52 Once the DCA had been terminated, the primary relief sought in Proceeding No 4237 of 1998 became otiose, and the only remaining issue in that proceeding was the question of costs. Glazier has contended that it is entitled to an order that Messrs Meehan and Murphy pay its costs of the 1998 proceeding, but Messrs Meehan and Murphy seek an order removing them as parties to the proceeding. This is the second matter which will be determined in the present judgment.

[11]

Sources, approach and conclusions 53 According to his Report (para 1.1), Mr Madden investigated the financial records of the Trust and AMH, and the audited financial statements of AMH, in order to prepare an account of the dealings and transactions of AMH as trustee of the Trust, in accordance with the orders made by the Young J on 18 March 1998. He was given access to some financial statements of AMH and the service companies, and the general ledgers of AMH, On Clinic and the service companies, together with some supporting documentation. He conducted interviews with Mr Murphy, Mr Meehan and their legal advisers, and also with the two Doctors and their legal advisers, and the financial adviser of the Doctors, Mr Adrian Abbott. 54 His investigation covered the period from 14 April 1997, when AMH became trustee of the Trust, to 25 March 1998 when he took up his position as receiver. He summarised the tasks which he performed in section 3 of the Report. Briefly, the focus of his investigation was to review receipts and payments, reconciling documentary records relating to the movement of money. Thus, he tested the tail sheets, which recorded the daily sales of medical services and medication, to determine whether all of the sales were recorded as income of the Trust. Then he reconciled the total sales recorded in the tail sheets to the amounts banked into the Harveys account, to ensure that all the Trust income was banked. He compared the daily sales records with the Trust's general ledger, to determine if the income was correctly recorded in the ledger. He reconciled transfers from the Harveys account to the trustee' s bank account (originally the On Clinic account, until AMH opened an account) to ensure that the Trust received the income to which it was entitled. 55 He also endeavoured to vouch items in various expense accounts which together made up about 78 percent of total expenses of the Trust (that is, the expense accounts for advertising, medical supplies, legal expenses, travel, salaries and wages, and consulting fees), and to reconcile them with the Trust's general ledger. He examined payments to known related entities, and endeavoured to reconcile a sample of expense journals in the Trust's general ledger for each of the service companies to the relevant source documents. He reviewed the general ledgers of the service companies and endeavoured to reconcile them to source documents. He examined legal agreements between the Trust and related entities. 56 His review of these materials led Mr Madden to conclude that AMH had failed to maintain adequate books and records of the Trust which would enable true and fair accounts of the Trust to be produced. He set out his reasons for this conclusion in 14 bullet points at paragraph 1.23 of the Report. The reasons included the following: the Trust used On Clinic's bank account from 14 April 1997 to 22 August 1997; there was insufficient documentation to support payments made to entities associated with Mr Meehan; there was also insufficient documentation to evidence numerous Trust expenses, such as advertising, rent and travel; the contractual arrangements with consulting medical practitioners, unitholders and managers of the Trust were not adequately documented; there was inadequate monthly management reporting; and there were inadequate reconciliations of transfers between the Harveys Account and the bank accounts used by the Trust. Significantly for present purposes, Mr Madden found that there were inadequate controls surrounding related party transactions; and that Trust funds, third party funds and other funds were intermingled without adequate control. 57 In section 15 of the Report Mr Madden found that the requirement of the unitholders' deed that monthly management accounts be prepared, had not been observed. Moreover, he concluded that AMH would not have been able to prepare monthly accounts giving a true and fair view of the Trust's financial position from the inadequate books and records which were maintained. He noted that although the Trust had only two employees, salary and wage expenses relating to more than two employees were shown in the profit and loss accounts of AMH. AMH's stock records did not reconcile with amounts appearing in its financial statements. Approximately 35 percent of the total dollar value of travel expenses could not be substantiated. The majority of transactions between the Trust and entities associated with Mr Meehan did not have any supporting documentation. 58 There were no financial statements for the Trust. AMH prepared financial statements, which were audited, for the period ending 30 June 1997 and 31 December 1997. However, Mr Madden concluded from the minutes of the directors' meetings that the auditor was not appointed until 22 December 1997 or later. In cross-examination, he was asked why he did not pay greater regard to the audited financial statements. He explained that the auditor had conducted a limited audit of the Trust and had produced two reports, one being an audit report expressing a view on the balance sheet and profit and loss account of the Trust, and the other being an examination of revenue and expenses which the auditor called a 'compilation report'. The latter was a listing of revenue and expenditure of the Trust. The auditor stated that he had not audited this information. Mr Madden noted that under the relevant accounting standard for such a compilation report, what is required is accounting expertise rather than audit expertise. I accept Mr Madden's explanation of the limitations of the audit and I regard it as reasonable for him to proceed in the manner in which he did. 59 Mr Madden reported, as a general conclusion, that he was unable to complete the following tasks: · to obtain confirmation that all of the Trust's income was recorded in the general ledgers of either AMH or On Clinic (and consequently he was unable to confirm that the Trust received all of the income to which it was entitled); · to obtain confirmation that all expenses in the general ledger of On Clinic and AMH were actual expenses of the Trust, since he was unable to find supporting documentation for various payments; · to obtain confirmation that the charges of the service companies related solely to the trading of the Trust; · to reconcile the cash in AMH's bank account to its receipts and payments (Report, paras 3.4 and 1.6).

[14]

Receipt of income from consultations and the sale of medication 65 Section 4 and Annexure G of the Report presents Mr Madden's findings with respect to the Trust's income. They are summarised at paragraphs 1.6 and 1.7. The system for dealing with the receipt of income was that daily sales receipts from medical consultations and the sale of medication, together with Medicare debtors, were banked into the Harveys Account regularly. Payments were made from the Harveys Account to consulting medical practitioners for their commissions, and the balance of funds in the Harveys Account (after deducting bank fees and dishonoured cheques) were paid to the Trust. 66 Mr Madden endeavoured to reconcile the sales shown in the tail sheets with funds banked into the Harveys Account. He found that the amounts paid into the Harveys Account exceeded the sales recorded by the Trust by $234,000. Mr Murphy explained to him that the over-banking related to receipts belonging to the Urodynamics business. As I have mentioned, Urodynamics is a company associated with Mr Meehan. It provides services for incontinence in men. Mr Madden was unable to verify whether this explanation was correct, although he noted that a portion of the over-banking may have related to Medicare collections for On Clinic prior to the commencement of trading of the Trust. This analysis demonstrates, to my mind, that the Trust's position was obscured by the intermingling of money belonging to Urodynamics and On Clinic with money belonging to the Trust. 67 Mr Madden performed a reconciliation of transfers from the Harveys Account to the On Clinic bank account of 14 April 1997 until the end of August 1997, and to AMH's bank account since its establishment on 22 August 1997. This analysis indicated that transfers were made from the Harveys account totalling $442,309 which could not be traced into the Trust's bank accounts. Mr Murphy explained that Urodynamics received $215,000 from the Harveys Account, On Clinic received $60,000, Medical Integrated Services (one of the service companies) received $40,000 and HMP Finance (another entity associated with Mr Meehan) received $10,000. That left $62,000 unaccounted for but Mr Murphy purported to account for that amount in a facsimile dated 15 January 1999. Once again, this material shows the confusion which arises from intermingling from the money of the Trust with money belonging to various entities associated with Mr Meehan. 68 Mr Madden's conclusions (at paragraphs 1.6 and 1.7 of the Report) were that he had been unable to confirm that all income derived from consultations with patients and medication sold to patients was accurately recorded in the records of the Trust; nor was he able to confirm that all transfers out of the Harveys Account were banked into the Trust's bank accounts or paid to the Trust's consulting medical practitioners; therefore he was unable to confirm that the Trust received all of the income to which it was entitled. 69 I note that his inability to confirm these matters was a consequence of the intermingling of trust money with other money. It has not been suggested that the unit trust deed or the unit holders' deed authorised the intermingling which has occurred. Clause 9 and Schedule 4 of the unit trust deed envisage the establishment and preservation of a trust fund, and although paragraph (l) of Schedule 4 authorises the establishment of a bank account 'in the name of the Trustee, or jointly, or in the name of any person as nominee of the Trustee', that provision does not confer authority to mix trust money in a bank account which belongs beneficially to someone else. None of the evidence before me suggests that Glazier acquiesced in the intermingling which occurred. It would not be appropriate for me to make any firm finding of breach of trust in an application for judicial advice such as is before me. However, there are at least reasonable grounds for apprehension that the intermingling of trust money with other money as recorded by Mr Madden was in breach of trust.

[18]

(c) The total amount charged by Asire to the Trust was $513,000. The total payments made by the Trust to Asire amounted to $279,000. Asire informed Mr Madden that it was owed $38,604. Turtons claimed that the Asire debt was $30,305, less a part payment. Again Mr Madden was not able to determine the correct amount. 72 Moreover, he was not able to determine from the profit and loss accounts of the service companies whether the expenses that were included were actually expenses relating to the provision of services to the Trust. He noted that the monthly charges to the Trust did not match the monthly profit and loss accounts of the service companies, although indicators of MAS and Asire, but not MIS, the Trust was actually charged less than the amounts appearing in the accounts. He was unable to vouch the monthly profit and loss accounts of the service companies to source documents, and consequently he could not conclude that the charges to the Trust related solely to the provision of services to the Trust. Nor could he determine the correct costs incurred by the service companies which should be charged to the Trust. 73 In the letter of 19 January 1999, Mr Star asserted that the balances outstanding to the service companies for work charged to the Trust were 'paid' via journal entry number 2487. The journal entry reconciles the figures which I have set out, but it does not address the underlying concerns which I have set out in the previous paragraph. 74 A director or manager of a trustee company who prefers to place the trust's business with an entity in which he has an interest, thereby breaches his fiduciary duty to the company by putting himself in a position of conflict between duty and personal interest. In some cases that activity may also involve a breach of duty by the company as trustee. In the present case the unitholders' deed, to which all of the beneficiaries were parties, expressly contemplated contractual relationships between the Trust and each of the service companies. Therefore transactions with the service companies would not have involved breaches of trust so long as they were strictly in accordance with the deed. As Mr Madden's Report notes, there is an element of inconsistency between the clauses of the deed which required two service companies to supply their services at cost, and allowed only a 10 percent profit margin for the third company, and the schedules which purported to attribute a 'per patient' unit cost. Be that as it may, charges referable neither to the clauses nor the schedules would not be unauthorised by the deed. Further, in my view the deed would not authorise a service company to make a charge at cost if the cost were incurred by paying another Meehan-related entity a fee not representing external costs. 75 Mr Madden's Report does not establish that transactions between the Trust and any of the service companies involved a breach of trust, having regard to the unitholders' deed. But the Report points to a highly unsatisfactory system of record-keeping and accounting in connection with the service companies. And yet the 'related party' character of the transactions demanded that the Trust's financial records be maintained, and its accounts prepared, with meticulous care. Further, Mr Madden's conclusions raise a significant doubt as to whether breaches of trust may have occurred with respect to the service companies. It would be reasonable to expect the parties who are in a position to remove that doubt (that is, Messrs Meehan and Murphy) to undertake the burden of doing so.

[19]

Transactions with On Clinic 76 As I have mentioned, the Trust used a bank account of On Clinic from 14 April 1997 until the end of August 1997. Mr Madden assumed, reasonably in my opinion, that all transactions through the On Clinic bank account during that period were actually transactions of the Trust. 77 During the period from 14 April 1997 to 25 March 1998, On Clinic received net cash payments from the Trust of $440,000. In addition, according to Mr Madden's calculations the Trust paid $543,000 to the trade creditors of On Clinic whose debts were outstanding at 14 April 1997. Further, cheques totalling $231,000 were processed through the On Clinic bank account after 14 April 1997, although they related to the expenses of On Clinic before the merger occurred on that date. In summary, On Clinic received the benefit of cash payments totalling $1.214 million from the Trust. 78 As noted earlier in this judgment, there is a dispute between Treykell and Glazier about the merger arrangements. Treykell claims that it was agreed between the unitholders that funds would be made available after three months to pay the pre-merger trade creditors of both ISP and On Clinic. Glazier disagrees and claims that the arrangement was that neither On Clinic nor ISP would receive any consideration for the transfer of their assets, other than their respective unit holdings in the Trust. I have previously commented upon this dispute. 79 In effect, the Trust's financial records reflect Treykell's view of the merger arrangements. Upon the commencement of trading, an entry was processed through the Trust's general ledger, purporting to show credit entries for 'Annual Leave Accrual $42,455' and 'On Clinic Loan Account $ 1,015,918'. The ledger entry also showed debits to various items. 80 The first debit item was 'Rental bonds $25,204'. These were bonds previously paid by On Clinic in respect of clinics that it brought to the trust business. The next item was 'Stock $402,040', representing the value of stock provided by On Clinic. Then there was an item 'Motor Vehicles $28,047' which referred to a motor car transferred to the Trust from On Clinic at its cost price. 81 The other debit items in the ledger entry were two items relating to fixtures, fitting and equipment, for $482,463 and $120,618 respectively. The first of these represented the value of fixed assets of On Clinic as at 21 June 1996, the date upon which they had been valued. The amount shown in the ledger entry was based on the valuation price plus a premium of approximately 15 percent. Mr Madden commented that he was unable to determine whether all of the assets that had been valued in 1996 had been transferred to the Trust. He also expressed the view that the Trust should not have been charged a premium for these assets as they would have depreciated in value, and some may have been sold between the date of the valuation and the subsequent transfer of assets to the Trust. 82 The other item for fixtures, fittings and equipment represented the cost price of assets acquired by On Clinic after 21 June 1996, and are therefore not included in the valuation. Mr Madden said he was unable to verify whether those assets were transferred to the Trust and whether the amount appearing in the ledger entry accurately reflected the value of the assets. 83 Additionally, the entry for fixtures fittings and equipment of $120,618 includes assets totalling $37,510 which were acquired after the Trust began trading. Although these assets were paid for through the On Clinic bank account, they were paid for by the Trust, and On Clinic was not entitled to reimbursement for them. 84 Mr Madden calculated that even if the debit items in the ledger entry were all accepted (other than the debit for fixtures fittings and equipment of $120,618, which he reduced by subtracting the $37,510 to which I have referred), On Clinic had nevertheless received an additional $194,000 in cash from the Trust. That is, even if Treykell's version of the merger arrangements were to be accepted, On Clinic had received an overpayment of $194,000. 85 The transactions between On Clinic and the trust are a cause for serious concern. There is a contested question of fact as to the merger arrangements. If Treykell's version of the arrangements is correct, then something like the ledger entry would be justified, although there is room to debate the specific amounts. It is far from clear, however, that AMH was entitled to reflect Treykell's version in the financial records of the Trust, and to act on it to the purpose of determining entitlements to distributions, when it was aware that Treykell's version was disputed by Glazier and the dispute was unresolved. Given that Mr Meehan controlled both AMH and On Clinic, there is room for contending that he should bear the onus of justifying the accounting treatment which has been adopted. 86 Apart from dispute about the merger arrangements, Mr Madden's Report identifies some other discrepancies and anomalies. No allowance was made in the ledger entry for any depreciation of the fixed assets which On Clinic brought to the business. The justification for a 15 percent premium on the 1996 assets is not obvious. Mr Madden's inability to verify that all of the fixed assets charged in the ledger entry have been transferred is another cause for concern, given the relationship between On Clinic and Mr Meehan. And there is the cash analysis, which shows an overpayment to On Clinic even if it's figures are otherwise accepted. These facts raise questions about possible breaches of duty by Mr Meehan to AMH and by AMH to its beneficiaries.

[20]

Transactions with Edgecliff Medical Centre Pty Ltd ('EMC') 87 The director of EMC is Mr Murphy and according to the Report, the company is controlled by Mr Meehan. The company had a head lease with the owner of the premises called the Edgecliff Medical Centre. The head lease provided for an initial rent-free period which expired on 31 March 1998, and also provided that outgoings were not required to be paid for most of that initial period. 88 AMH as trustee entered into two sub-licence agreements with EMC for the use of parts of the premises for the Trust's business. The agreements were dated 14 April 1997 and 1 July 1997 but according to Mr Madden, they were not executed until at least 22 December 1997, and the rental bond payable by the Trust was not paid until January 1998. 89 According to Mr Madden, although the agreements related to approximately 48 percent of the space at the Edgecliff premises, they did not pass on to the Trust any of the benefit of the rent-free period which EMC enjoyed under the head lease. They required the payment of a disproportionately high rental bond. Additionally, EMC charged the Trust a significant premium for car spaces, including some car spaces used by employees of Asire and not the Trust. 90 The general ledger of AMH shows a loan account between the Trust and EMC, but the payments recorded as made to EMC bear no resemblance to the amounts due pursuant to the licence agreements. Finally, even if the amounts payable under the licence agreements were accepted as reasonable, Mr Madden calculated that the Trust overpaid rent to EMC by $221,000. 91 There is a factual dispute between Glazier and Treykell as to whether Glazier was aware of the rental arrangements at the time of formation of the Trust. Unless it can be shown that Glazier was aware of the arrangements and consented to them, there is at least a reasonable basis for the view that since EMC and the Trust were not dealing with each other at arms' length, it was a breach of trust for AMH (controlled by Mr Meehan) to have entered into the licence agreements without sharing in the rent-free period, and a breach by Mr Meehan of his duty, as a director, to AMH to cause it to do so. 92 Additionally, there are at least reasonable grounds for concern that AMH may have committed breaches of trust in overpaying EMC and entering into disadvantageous transactions with that company.

[29]

The defendants' criticism of Mr Madden's Report 112 Messrs Meehan and Murphy say two things in response to the Report. First, they emphasise that the Report makes no finding of defalcation or skimming of Trust money by them. This is correct. However, their point does not sufficiently take account of Mr Madden's numerous findings of inadequacies in the books and records of the Trust, and the many occasions upon which Mr Madden identified unexplained discrepancies. Indeed, it was his inability to account for discrepancies on the information available to him, which led him to conclude that it was impossible to prepare the account which (he believed) was required by Young J's orders - and therefore, one assumes, impossible to reach any conclusion as to whether skimming or other defalcation had occurred. It would be wrong to see the Report as exonerating Messrs Meehan and Murphy just because there was no positive finding against them. 113 Secondly, they criticise Mr Madden and the Report on numerous grounds, and invite the Court to discount or disregard it. First, they complain that Mr Madden incurred unreasonably large fees and disbursements of over $400,000. But there is no evidence that the fees, though very large, were excessive. Mr Madden's evidence is that two partners (including him) and 20 employees of Arthur Andersen devoted a total of 1630 hours to their task during the period from 26 March 1998 to 31 October 1998. There is no basis for me to conclude that the amount of the fees exposes Mr Madden to any criticism. Further, the fact that the Report was not solely a report by Mr Madden but was a combination of his and his staff's work is no basis for criticism. The use of the word 'I' in the Report merely signifies that Mr Madden accepts responsibility for the work and the conclusions. 114 Messrs Meehan and Murphy complain that Mr Madden ignored documents which were available to him, failed to take into account detailed vouching which they had undertaken, and ignored the opinion of AMH's auditor. I have already rejected the submission that Mr Madden was at fault for failing to take sufficient account of the auditor's opinion. I disagree with the submission that Mr Madden and his team did not adequately consider the information which Messrs Meehan and Murphy provided to them. 115 Counsel for Messrs Meehan and Murphy placed particular reliance on evidence about an entry in AMH's general journal on 31 December 1997. The entry shows a 'netting off' of amounts owing by the Trust to the service companies against an amount owing to the Trust by On Clinic. Counsel asked Mr Madden in cross-examination whether he had disregarded the journal entry in his Report. 116 It is true, as noted earlier in this judgment, that the Report records the discrepancy between the total amount charged by each service company to the Trust and the total payments made by the Trust to each service company. The Report notes that the explanations received for the discrepancy asserted that the net debt owing by the Trust to each service company was in an amount different from the amount implied by the cash records. Mr Madden observes in the Report that he is unable to determine the correct amount. 117 Counsel's suggestion to Mr Madden was that the journal entry explained why Mr Murphy and Turtons gave lower figures for the debts owing by the Trust to the service companies than appeared from the analysis of cash movements. Mr Madden's reply was that the journal entry did not explain anything. It remained the case, as he had said in the Report, that he was unable to determine the correct amount owing. 118 Mr Madden's evidence was as follows (Transcript, 23.55 to 24.13): 'Q. And you had not sought in any way shape or form to explain what if any inaccuracy there is in this ledger that you don't accept as being properly recorded in it, do you? A. My approach was to go back to basics and go back to the cashbook because there were significant transactions which had been changed, amended, where the accounts had in fact been subsequently adjusted, where the only sensible approach in an investigation of this type was to go back to the source documents namely the cash receipts and cash payments. Q. And did that entitle you to ignore the journal entries? A. We did not ignore the journal entries, the journal entries, as I say, also in my report were in the main unsubstantiated with a complete lack of documentation explaining what they were and very difficult for anyone to understand.' 119 Counsel submitted that Mr Madden's failure to mention the existence of the journal entry in his Report, 'let alone its obvious significance in accounting and practical terms as to unexplained discrepancies', was 'an omission that was calculated to mislead readers of the Report in respect of the motives and performance of the defendants'. I disagree. I accept Mr Madden's explanation for not referring to the journal entries. It was unsatisfactory for the defendants to produce a journal entry (especially when entry was evidently made well after the unitholders were in dispute) without explaining why it was appropriate to net off the various debts, and without purporting to refer the journal entry to any documented transaction. In my opinion the journal entry confirms the unsatisfactory approach which the defendants appear to have taken to related party transactions generally. 120 Counsel for Messrs Meehan and Murphy was also critical of Mr Madden's treatment of a memorandum by Mr Steven Rice, an employee of Arthur Andersen. Mr Rice was asked to examine some patient files, selected at random, to determine if the patient attended the clinic during the period 14 April 1997 to 25 March 1998. If he did, then Mr Rice would compare the patient records with the tail sheets to determine whether tail sheet information accorded with information in the patient files. He then examined banking records to determine if all patient entries which had been selected for audit were included in the records. His conclusion was of the 125 entries selected for audit, only two were not included in the banking records. This was an error representing approximately 2% in value terms. Mr Rice expressed the conclusion, in his memorandum of 23 July 1998, that in his opinion the records which he examined were materially complete. 121 In his Report (paragraph 4.18) Mr Madden noted that two patient records out of the 125 tested were not properly recorded. Without mentioning Mr Rice's conclusion, he then said: 'Thus I am unable to conclude that the tail sheets correctly record all the sales made by the Trust.' This, says counsel, is a misreporting of Mr Rice's work. Counsel says that when confronted with the discrepancy between his Report and Mr Rice's memorandum in cross-examination, Mr Madden 'adhered stubbornly and without qualification to his error', and that this reflected his overall approach to his evidence and his Report. 122 Once again, I disagree with the submission. In my opinion Mr Madden was a witness of truth who displayed considerable professionalism about his task and his evidence. He pointed out in his oral evidence that Mr Rice was a first-year member of his staff, and that he disagreed with Mr Rice's conclusion. His evidence was that he discussed the matter with Mr Rice and pointed out to him how he could not reach the conclusion which he had reached. The point Mr Madden made in the Report was that, regardless of whether the discrepancy is 2% or some other percentage, the real problem was that documentary records of the Trust could not be found (Transcript 36.45). In my opinion paragraph 4.18 of the Report gave an accurate though succinct account of the most pertinent fact discovered by Mr Rice, and gave Mr Madden's expert observation about that fact. 123 Counsel also criticised Mr Madden for drawing attention to discrepancies of very small amounts. He suggested that in preparing the Report, Mr Madden should have applied the principle of materiality emerging from accounting standard AASB 1031. According to that standard, an amount which is equal to or greater than 10% of the appropriate base amount may be presumed to be material, while an amount which is equal to or less than 5% of the appropriate base amount may be presumed not to be material. 124 Mr Madden's answer was, to my mind, convincing. Counsel showed him a copy of the standard, and then the following exchange occurred (Transcript, page 31): ' Q. That applies as the accounting standard for financial statements in this country, doesn't it? A. It applies to general purpose financial statements only. It does not apply to special purpose financial statements and therefore does not apply to the Trust. Q. Can I direct your attention to paragraph 4.1.6 [the paragraph of the accounting standard which defines materiality by reference to the 5 and 10 percent figures]? A. Yes. Q. That reflects the principle of materiality which I was seeking to put to you yesterday, would you agree? A. No, I don't. This section and this standard applies to the preparation of financial statements and relates to guidance that may be used by someone, by an accountant to define an account balance materiality. It is completely different for a number of reasons. The first reason is that this is a trust situation. The paragraph you refer to points out materiality is a matter of professional judgment. Even more so paragraph 4.1.3 points out that materiality as set out in this standard may not apply where there are transactions between an entity and parties which have a fiduciary relationship, which is clearly the case in the Trust. However, more fundamental, what we were talking about yesterday was a matter of internal accounting control, namely, the transfer of a balance from the journal into a ledger. That is not a question of materiality if the journal entry is meant to reflect what is in the detail. It is simply a matter of recording and there should be no difference. It is a completely different matter for which this standard is supposed to address to say because financial statements may somehow or other have a percentage error, it may not be material in the context of the presentation of the profit. It is a completely different matter to say that one can transfer amounts from one entity to another and leave room for a margin of error. It is a completely different matter and this standard does not apply.' 125 I accept the evidence. I would add that even where it applies, the accounting standard acknowledges the qualitative as well as the quantitative component of materiality, and accepts that items which would not be material in isolation may be material when seen as part of a pattern of events. Here, the pattern of events is the combination of inadequate records and vouching and the preponderance of related party transactions. 126 Counsel complained that Mr Madden minimised the value of the internal systems which were in place in the accounting structure of a relatively complex business. In fact, Mr Madden's concern, in my opinion a proper one, was to ensure that the centralised accounting operation in Edgecliff was soundly conducted. 127 Another complaint against Mr Madden related to an alleged failure of consultation. First, it was said that Mr Madden had failed to answer proper and reasonable requests for material and explanations from Mr Star, who (as I have said) wrote to him requesting information on 19 January 1999. What strikes me about Mr Star's letter is the volume of information which it requests. The letter seems to have been written on the assumption that Mr Madden had a duty to explain himself to Mr Star. In my opinion, Mr Madden's duty was to prepare as accurate a report as he could in response to Cohen J's encouragement to him to conduct an investigation. He behaved properly by carefully considering the matters raised in Mr Star's letter and filing an affidavit amending his report in minor ways as a result of that consideration. 128 Another complaint is that when Mr Madden encountered difficulties in reconciling the financial records with explanations provided by Messrs Meehan and Murphy, he did not seek to identify to them any inadequacies in their explanations. In my opinion Mr Madden's duty was to prepare an accurate report within an acceptable timeframe. While it was appropriate for him to invite explanations, it was not necessary for him to engage in further dialogues when inadequate explanations were provided. The Report acknowledges that Messrs Meehan and Murphy provided information, but appropriate enough, Mr Madden assessed the adequacy of their responses. 129 Counsel submits that the vice of the Report is that it is calculated to convey an aura of suspicious conduct and improper administration, whereas in truth no misappropriation has been identified. It is true that the Report provides a basis for concern that breaches of trust and duty may have occurred, as I have found. But the Report does not rely on insinuation and innuendo. It focuses on facts about the movements of cash, and identifies inadequacies in the explanation of discrepancies. It does so in the context of a dispute between unitholders with respect to a trust controlled by the controller of the majority unitholder, who caused it to engage in complex and persistent transactions with other entities in which he was interested. The suspicion which naturally arises from these circumstances was created by Mr Meehan's activities, and it does not lie with him to complain if natural inferences are drawn from his conduct.

[30]

The orders sought by Mr Madden 130 By his notice of motion filed on 20 November 1998 and subsequently amended, Mr Madden seeks the opinion, advice and direction of the Court in respect of the question whether he would be entitled to take no further steps as trustee and receiver of the Trust, other than in relation to any liabilities of the Trust, until further order of the Court. If the answer to the question is in the affirmative, he seeks an order directing him to take no further steps as trustee or receiver, other than in respect of any liabilities of the Trust, until further order. 131 Having realised the business of the Trust, Mr Madden appears to have carried out the main task envisaged by Cohen J in his reasons for judgment, when he appointed Mr Madden receiver of the Trust on 25 March 1998. Cohen J noted that Mr Madden intended to 'investigate whether there are any claims which he might make on behalf of the Trust against any persons'. It is probable that the investigation that Mr Madden had in mind in March 1998 was the preparation of the Report. If so, he has completed that task as well. Cohen J did not empower him to commence any proceedings as receiver, although that power was sought in the notice of motion, but he reserved the right to apply for further powers. 132 Mr Madden has not yet obtained legal advice to identify any causes of action which may be available to him as trustee, and his prospects of successfully pursuing them. However, Mr Madden's solicitor has informed him, after reviewing the Report, that the legal costs which would be incurred in identifying causes of action, advising him on his prospects of successfully pursuing them, and prosecuting proceedings to finality, would be likely to amount to several hundred thousand dollars. Mr Madden has formed the view, given the expense of pursuing possible causes of action, the general uncertainty of litigation, and the limited funds available for that purpose (namely the $341,145.73), that it may not be in the interests of the unitholders or creditors of the Trust for him to take any further steps.

[32]

See also Bowen LJ at 562; Re England's Settlement Trusts [1918] 1 Ch 24, 31; Adsett v Berlouis (1992) 37 FCR 201, 211. Rules of Court may allow the Court to make orders allowing the trustee to recover the costs of proposed litigation out of the property of the trust: Re Dallaway (1982) 1 WLR 756. 136 The risk of liability to pay costs presents the trustee with a dilemma. Maughan AJ described the dilemma, and one of the ways out of it, in Alcock v Public Trustee (1936) 53 WN (NSW) 192, 193: 'Counsel stressed the dilemma in which an executor or trustee would find himself if the ordinary rule as to the costs of adverse litigation were to prevail as against him. He said that if such an executor or trustee failed to dispute an adverse claim he might find himself charged with breach of trust and bound to reimburse his cestuis-que-trustent to the extent to which they have suffered by his not opposing the claim, and if he contested the claim unsuccessfully he would find himself ordered to pay the costs of the claimant personally. I do not think that counsel has covered the whole field of possibilities in the dilemma which he has stated. ... If all the persons interested be not sui juris and accessible, or if, being sui juris and accessible, they are not unanimous as to the course which the trustee or executor is to undertake, the latter should ask the Court for judicial advice as to his conduct.' 137 In the present case it is very likely that if litigation were commenced in light of Mr Madden's Report, it would be hotly contested. Messrs Meehan and Murphy appeared at the hearing of Mr Madden's application, and were (as I have indicated) extremely critical of the Report. Any proceedings flowing from the Report would in all probability be proceedings against them, or against entities associated with Mr Meehan. However, the fact that any proceedings would be controversial would not imply that I should exonerate Mr Madden from taking the first step of obtaining advice as to whether there are good grounds for taking proceedings, if I were otherwise inclined to require that advice be sought. 138 Glazier begins with proposition that it is the duty of a trustee to take action to recover trust property by legal proceedings, if it has not been properly accounted for within a reasonable time; and the only excuse for not doing so is a well-founded belief on the part of the trustee that proceedings would be fruitless: Re Brogden (1888) 38 ChD 546. The duty of a corporate trustee to make good the trust property extends, in an appropriate case, to the institution of proceedings against its directors, where the directors are alleged to have participated in breaches of trust by the trustee. If a defaulting trustee is replaced, the new trustee has standing to sue the directors of the former trustee, according to Young v Murphy [1996] 1 VR 279. 139 I do not disagree with these legal principles, but they assume that the trustee has at least a reasonable prospect of proving his case. The problem confronting Mr Madden, as his Report makes abundantly clear, is that in the state of the facts known to him, he has been unable to reach firm conclusions as to the explanations for the numerous discrepancies he has discovered. In this case it would be too simplistic to purport to solve the problem by recourse to textbook statements about the trustee's duty. 140 Glazier submits that Mr Madden's Report discloses strong grounds for believing that valid causes of action are available to the trustee, both in equity and under statute for breach of directors' duties. Glazier says that the Report discloses failure to keep proper accounting records as required by the Corporations Law, and it raises equitable issues concerning accessory liability for breach of AMH's obligations as trustee, especially with respect to payment of trust moneys for non-trust purposes and to related entities. 141 In my opinion this submission overstates Mr Madden's conclusions. The facts which he presents provide reasonable grounds for concern that there have been breaches of trust and duty, as I have said. But there may be explanations which overcome those concerns - indeed, Mr Madden records various explanations given by Messrs Meehan and Murphy, the truth or falsity of which he is unable to judge. 142 It may be that in proceedings taken by Mr Madden against AMH for breach of trust, AMH would bear the onus of demonstrating that money which should have been retained in the Trust's bank account has been properly dealt with. The same may be true in proceedings taken against Messrs Meehan and Murphy on behalf of Trust. But in my opinion it cannot be said that the defendants to such proceedings would inevitably bear the onus of disproving wrongdoing as soon as Mr Madden proves the contents of the Report. For example, the mere fact that there was an overall discrepancy between receipts and payments calculated through an examination of certain documents (patient records, tail sheets, bank statements for the Harveys account and bank statements for the On Clinic/AMH account) during the former trusteeship would not prove a breach of trust in the absence of explanation. As Mr Madden himself acknowledged in his affidavit of 11 February 1999, additional factors need to be examined, including the credit or debit balance in the Trust's account at the beginning of the trusteeship. In my opinion, therefore, the immediate commencement of proceedings against AMH or Messrs Meehan and Murphy is not warranted.

[33]

What should the trustee do? 143 Glazier contends that if Mr Madden is not to commence proceedings immediately, he should pursue one of several options. One possibility would be to obtain advice on pursuing causes of action on equitable or statutory grounds. Another would be to apply to the Australian Securities and Investments Commission to become an 'eligible applicant' so that he could conduct an examination of Messrs Meehan and Murphy under Part 5.9 of the Corporations Law: see Burns Philp & Co Ltd v Murphy (1992) 29 NSWLR 723; Kelly v Murphy , NSW CA, unreported, 25 November 1993. Yet another would be to seek an order for the general administration of the trust, as in McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623. 144 Another alternative would be for the Court to replace Mr Star with Mr Madden as liquidator of AMH, while he remains trustee of the trust. The plaintiff says that as liquidator, Mr Madden could exercise statutory powers of recovery, and pursue AMH's right of indemnity out of trust assets. It says that funds recovered could be appropriated, up to the amount of trust liabilities, to the general estate of AMH for the benefit of non-trust creditors: Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158. 145 This proposal raises the question of conflict of duties, but the plaintiff refers to some observations by McLelland J in the Grime Carter case (at 162), in which his Honour said that whether a person appointed to the office of liquidator and trustee should retain both offices 'must depend on whether there is any real prospect of a conflict of duties, or a conflict of duty and interest, arising from their holding both offices'. The plaintiff says that here, as in that case, there would be no real prospect of any such conflict, and there would be a strong practical reason for appointing Mr Madden as liquidator, in view of his familiarity with the company. 146 I have already expressed my view that the Report provides a reasonable basis for concern that breaches of trust and duty may have occurred, and to that extent I have sympathy with the plaintiff's submissions. However, the matter before me for decision is Mr Madden's application for judicial advice. There is no application for an order for general administration of the trust, nor for the replacement of the liquidator of AMH. The plaintiff could make such applications but it has not done so. Neither course of action would be an appealing prospect, in view of the probable costs involved. The real issue before me is whether there are any practical steps which Mr Madden could take within the limits of the available funds, which would be reasonably likely to produce either some recovery for the Trust, or at least some real clarification of the trustee's prospects of recovery. 147 I am not attracted by the proposal that Mr Madden should seek to examine Messrs Meehan and Murphy under Part 5.9 of the Corporations Law. I would not regard it as inappropriate for Mr Madden to choose to do so. But taking the conservative approach to judicial advice recommended by the case law, I do not believe that the Court should advise him to do so. I am not persuaded that the cost of conducting examinations would be warranted by the likely outcome. While Mr Madden's Report records that some of the information which he requested has not been supplied, the principal problem seems to have been that relevant information is not available at all, rather than that it is being withheld. I am inclined to think no one would be much better informed after the process than they are now. 148 In my opinion it is highly desirable that something more be done by or on behalf of Glazier to explore the possibilities of redress in light of the information contained in the Report. I was at first attracted by the idea that Mr Madden should obtain senior counsel's advice on the availability and strength of his causes of action as trustee in light of the Report. However, an obvious problem for counsel would be that Mr Madden has been unable to discover whether there have or have not been defalcations, because of the absence of sufficient records and explanations. Given the inadequacy of the financial information, I find it difficult to see how counsel could give the kind of firm advice which would warrant the commencement of proceedings. 149 What is needed, before new proceedings are contemplated, is a process which casts the onus on Messrs Meehan and Murphy to justify their financial management of the Trust and compels them to accept responsibility for deficiencies. It seems to me that there is a practical way forward which could achieve justice for the plaintiff it if it is properly undertaken. I refer to the procedure for taking accounts, which does not appear to have been properly followed present case.

[34]

The taking of accounts 150 Young J's orders of 18 March 1998 included an order for the taking of accounts in the following terms: 'order that an account be taken of the dealings and transactions of the first defendant as trustee and that the defendants be ordered to pay to the new trustee the amount found to be due on the taking of such accounts together with interest.' 151 That was an order under Parts 48 and 49 of the Supreme Court Rules, which are not mutually exclusive: Hagan v Waterhouse [1983] 2 NSWLR 395, 398. Part 49 Rule 2 allows any party to move the Court to proceed under the order once it has been entered. On the hearing of a motion to proceed under orders, the Court is empowered by Part 49 Rule 4 to give directions as to the conduct of the proceedings. Therefore it was open to the plaintiff or any other party to initiate the accounting process once Young J's orders were entered. It remains open to any party to do so now. 152 In paragraph 1.1 of his Report, Mr Madden said that his report was a summary of the results of the investigations which he undertook in order to prepare an account of the dealings and transactions of AMH as trustee of the Trust, in accordance with Young J's orders. He said that for the reasons set out in the Report, it had not been possible to prepare an account. Useful though his report has been, this paragraph misconceives the nature of the accounting process. 153 An order for the taking of accounts upon a change of trustee imposes an obligation on the retiring trustee, as the accounting party, to bring in an account. This is so whether the order was made after a hearing or by consent: see Re Wrightson [1908] 1 Ch 789. It was not inappropriate for Mr Madden to undertake, as receiver, an investigation of the books and records and financial statements of the Trust's business. Cohen J seems to have thought that an investigation was an appropriate step for the receiver to take. But there was no occasion for Mr Madden to replace AMH's role as the accounting party under Young J's orders, especially when by doing so he may have delayed the exercise of remedies available to the trustee and beneficiaries during the accounting process. 154 If an application is made to proceed under a judgment or orders for the taking of an account upon a change of trustee, the retiring trustee will be required to file his account and a verifying affidavit, and to serve it on each other party: Part 48 Rule 5. It is then open to the other parties to surcharge or falsify the account. According to Parker's Practice in Equity (New South Wales) (2nd ed by GP Stuckey and CD Irwin, 1949), p 269, a surcharge is the showing of an omission for which credit ought to have been given; while a falsification is the showing of a charge which has been wrongly inserted, the falsifying party alleging that moneys shown in the account as paid were either not paid or improperly paid. These procedures for challenging the account have been preserved in Part 48 Rule 6, although the rule has abandoned the arcane though precise terminology of the Chancery practice. 155 If AMH had been required, prior to its voluntary administration and winding up, to bring in an account, it would have been open to Mr Madden or the plaintiff to challenge the account as the falsifying party. The challenge could have raised all of the concerns which Mr Madden has described in his Report. Points of principle could have been resolved on an application for directions. From the point of view of the Trust and the plaintiff, an advantage of proceeding as falsifying party, rather than in the manner which has in fact been chosen, is that on a falsification, the onus is on the accounting party to justify the account, unless the account is a settled account (which would not be true in this case): Parker , p 269, and note the forms of falsification and surcharge in Miller and Horsell's Equity Forms and Precedents (1934), p 195-196; as to the different onus of proof on a stated account, see Pit v Cholmondeley (1754) 2 Ves 565, 28 ER 360; and generally, see Daniell's Practice of the High Court of Chancery (5th ed, 1871), p 1120ff, and as to settled accounts, p 575ff; Seton's Forms of Judgments and Orders (6th ed, 1901), Vol II, p 1356ff and as to settled accounts, p 1382ff. 156 Another advantage of the accounting procedure is that the Court is available to give directions and hear applications on matters arising during the taking of accounts. One of the issues which may have to be clarified in the present case is whether the order is for the taking of a common account or an account upon the footing of wilful neglect and default. The distinction was explained, in the context of an administration summons, by Sir Richard Kindersley V-C in Partington v Reynolds (1858) 4 Drew 253, 255-6, 62 ER 98. 98-99: 'There are two different modes of accounting, to which an executor or administrator may be subjected by the Court, and accordingly there are two different forms of decree in use to compel him to account. The one is a decree compelling him to account only for what he has received of the testator's or the intestate's personal estate; the other is a decree compelling him to account, not only for what he has received, but also for what he might, without his wilful neglect or default have received, although he has not received it. These are two perfectly different decrees. It is not merely that the latter is a modification of the former; they are totally distinct from each other in principle. They proceed on totally distinct grounds. The one supposes no misconduct; the other is entirely grounded on misconduct. ... To obtain the accounts of what the executor or administrator has received, the plaintiff ... needs not to allege or prove anything special with respect to the personal estate of the deceased, or the dealings or intromissions therewith; it is sufficient that the defendant holds the office of executor or administrator; to obtain the other decree the plaintiff must allege and prove that there is some part of the deceased's personal estate which ought to have been and might have been received by the defendant, and which he has omitted to receive by his own wilful neglect or default.' 157 In this case the order was made by consent, but that does not necessarily mean that the account was to be taken on a common or usual basis: Re Wrightson , supra, at 797. It is significant that the statement of claim alleges breach of trust by AMH, by its servants and agents Messrs Meehan and Murphy, by failing or refusing to do what should have been done. These appear to be charges of wilful default. It is arguable that, by consenting to the orders sought in the statement of claim, the defendants have consented to the taking of an account on the footing of wilful neglect and default. The issue needs to be clarified by appropriate directions, if an application is made to proceed under the order. 158 Young J's order required the defendants to pay the amount found to be due. That is, the payment obligation extended to Treykell and Messrs Meehan, Murphy and Brain as well as to AMH. Since AMH is now in liquidation and the liquidator has no funds unless and until he can establish a right of indemnity against the remaining trust assets, it would be futile to proceed to an accounting in which the accounting party is AMH. However, the obligation to bring in an account, which was implied rather than expressed because the order speaks in the passive voice, appears to extend to all of the defendants, since all of them have the obligation to pay the amount found to be due. Given the practical inability of AMH to bring in an account, it would seem reasonable to require that the account be brought in by the two defendants who are in the best position to do so, namely Messrs Meehan and Murphy. 159 Since there is no application before the Court for a party to proceed under the order, this is not the occasion for me to resolve the issues which will arise if an application is made. However, I have said enough to indicate that in my view, the taking of an account would be a satisfactory procedure for determining whether the concerns which arise out of Mr Madden's Report are valid. Appropriately, the procedure would require Messrs Meehan and Murphy to fill in the gaps in AMH's accounting for the dealings and transactions of the Trust. And even more appropriately, the procedure would carry to their conclusion the orders which the plaintiff sought, the defendants consented to, and the judge made for the purpose of resolving the proceeding. It is not without irony that a venerable Chancery procedure may achieve justice where modern accounting and financial analysis have failed.

[35]

Conclusion as to Mr Madden's application for judicial advice 160 For the reasons I have given, I am not persuaded that Mr Madden should institute any proceedings or even seek further legal advice about doing so at this stage. Nor am I persuaded that he should seek to examine any of the defendants under the Corporations Law. No application has been made for general administration of the Trust or for replacement of the liquidator of AMH, but I am doubtful that it would be helpful to proceed in either of those ways. 161 Nevertheless, Mr Madden's Report gives cause for concern that breaches of trust and duty may have occurred, and the Court ought not to bring the proceeding to a close without seeking out an effective procedure for testing and resolving the issues which the Report has raised. I believe this can be adequately achieved by my facilitating, as best I can by directions and otherwise, any application which may be made to proceed under Young J's order for the taking of an account. 162 I have considered whether I should decline to give Mr Madden the advice that he seeks, on the basis that he is the person who should make the application. I have decided that he should not be expected to do so. Strictly, he is not a party to the proceeding. More importantly, the order for the taking of an account was made in the form sought by the plaintiff. It is not unreasonable to expect the plaintiff to follow through the execution of the order by making an application to proceed under it. It would be better to have the process of surcharge and falsification conducted as between the real contestants, rather than to expect the trustee to take up the role of challenging the account. The plaintiff already has the benefit of an indemnity costs order and if that does not extend to the application to proceed under the order (a matter about which I express no opinion), there is the prospect of seeking an order that costs be paid out of the trust fund (see McDonald v Horn [1994] NLJ Law Rep 1515). 163 Therefore I have decided to advise Mr Madden that on the facts presented to the Court, he would be justified in taking no further steps as trustee and receiver of the Trust other than in relation to any liabilities of the Trust, until further order of the Court. My intention in doing so is to relieve Mr Madden of any obligation he might otherwise have, as trustee or receiver, to take any of the following steps: to seek legal advice as to causes of action which may be pursued, or to seek to examine Messrs Meehan and Murphy under the Corporations Law, or to seek an order for the general administration of the Trust, or to seek appointment as liquidator of AMH. As I shall explain, there may be some minor steps remaining for him to take, and I do not mean to say that he would be justified in not taking them. Further, it is possible that an occasion for him to consider whether to commence proceedings may arise out of the taking of the account. 164 Mr Madden also seeks an order preventing him from taking any further steps as trustee or receiver of the Trust other than in respect of liabilities of the Trust, until further order of the Court. I do not believe that I should make that order at this stage. It would be appropriate for Mr Madden, acting as trustee, to give some limited assistance to the plaintiff if it applies to proceed under the order, and to give limited assistance to the defendants in the preparation of the account. I have in mind the provision of information, or guidance as to where information might be found. Care must be taken not to consume any substantial portion of the remaining fund on fees. 165 I shall grant the parties and Mr Madden liberty to apply to me on 48 hours' notice. If the plaintiff chooses to proceed in the manner which I have outlined, its initial application to proceed under the order, and for appropriate directions, should come before me.

[36]

Proceeding No 4237 of 1998 to set aside the DCA 166 As I have said, Glazier commenced this proceeding on 13 October 1998, shortly after the DCA was executed. The original summons sought an order under s 445D of the Corporations Law that the DCA be terminated, or an order under s 445G(2) that the deed be declared void, or an order under s 447A that the deed be set aside. The summons also sought an order that AMH be wound up and that a liquidator be appointed, and costs. The defendants were AMH, Mr Meehan and Mr Murphy, each of whom filed a notice of appearance. 167 On 26 February 1999, shortly after Mr Star made his further report to creditors which led to the decision of 2 March 1999 to terminate the DCA, Glazier filed an amended summons, seeking an additional order pursuant to s 447A of the Corporations Law that the liquidator of AMH be a person other than Mr Star. 168 Section 445D(1) empowers the Court to make an order terminating a deed of company arrangement if it is satisfied that one of seven grounds exist. Some of the grounds (paragraphs (a), (b) and (c)) relate to the quality of information provided to the creditors who decide to enter into the deed - specifically, whether it is materially false or misleading or there are material omissions. Other grounds include whether the deed has been materially contravened (paragraph (d)) and whether effect can be given to the deed without injustice or undue delay (paragraph (e)). Paragraph (f) relates to whether the deed or acts done under it are oppressive, unfairly prejudicial, unfairly discriminatory or contrary to the interests of the creditors. Paragraph (g) allows the Court to terminate the deed for "some other reason". It is evident that s 445D authorises the Court to undertake a broad factual inquiry as to the conduct of the administration: generally, see Deputy Commissioner of Taxation v Comcorp Australia (1996) 21 ACSR 590; Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 129; Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (1996) 19 ACSR 160, 22 ACSR 169, 24 ACSR 47; Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427: Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707. 169 Section 445G empowers the Court to make an order declaring a deed of company arrangement to be void, or not to be void, where there is doubt on a specific ground as to whether the deed was entered into in accordance with Part 5.3A or complies with Part 5.3A. The Court may declare the deed to be valid despite a contravention, if it is satisfied of substantial compliance, and that no injustice will result. The section also empowers the Court to make an order varying the deed with the consent of the administrator. Once again, it is evident from such cases as the Comcorp case that in applying this section the Court must undertake a factual inquiry as to the degree of compliance. 170 Section 447A gives the Court a general power to make orders about how Part 5.3A is to operate in relation to a particular company. Subsection (2) says that, for example, if the Court is satisfied that the administration of a company should end because the company is solvent, or because provisions of Part 5.3A are being abused, or for some other reason, the Court may order that the administration is to end. The cases which I have cited show that s 447A gives the Court a very broad discretionary power. 171 Thus, by commencing the 1998 proceeding Glazier set out to show that there were good grounds for bringing the DCA to an end by reference to such matters as the provision of materially misleading information to AMH's creditors, unfairness in the terms and operation of the DCA, contraventions of the law and "other good reasons". It is clear from the outline of contentions which Glazier supplied before the hearing, and the oral submissions made on its behalf, that Glazier had a number of specific factual complaints about Mr Star's administration. 172 Without seeking to give a complete summary of Glazier's contentions, I shall mention some assertions that would undoubtedly be contested as factual matters. Central to Glazier's case is the allegation that Mr Star as administrator failed sufficiently to investigate documents relating to Proceeding No 4905 of 1997, including the consent orders of 18 March 1998 and circumstances surrounding the making of those orders. Further, Glazier says that Mr Star failed to take into account the facts which revealed the course of Mr Madden's detailed investigation and analysis, and failed to take up the invitation extended on behalf of Mr Madden for Mr Star to inspect relevant documents. Glazier says that Mr Star uncritically accepted self-serving statements made by Messrs Meehan and Murphy; that he failed to appreciate that valuable choses in action were available to AMH against Messrs Meehan and Murphy; and that he failed to seek recovery of the payment of legal fees paid to Turtons, as an unfair preference. Glazier alleges that partly because of Mr Star's failings and partly because of misconduct by Messrs Meehan and Murphy, the creditors who resolved to approve the DCA did so on the basis of misleading and incomplete information. Glazier also makes detailed criticisms of Mr Star's report to creditors of 2 September 1998. 173 Contentions of these kinds are appropriate contentions to be made in support of an application for orders under ss 445D, or 445G and 447A. It does not follow that they are contentions which must be examined and resolved when the only application is for costs.

[37]

Effect of termination of DCA on the 1998 proceeding 174 When the creditors resolved on 2 March 1999 to terminate the DCA, Mr Star became the liquidator (Corporations Regulation 3A.07(1)(b)), and AMH went into a creditors' voluntary winding up. Once this had occurred, it was no longer appropriate for Glazier to seek any of the relief sought in the original summons, other than costs. Nor was it appropriate to seek the order in the amended summons that a liquidator be appointed other than Mr Star. Glazier could have made a further amendment to seek the replacement of Mr Star under s 503 of the Corporations Law, but it did not do so. 175 Instead, Glazier abandoned all substantive relief and sought only an order for costs. At the hearing of the proceeding Glazier's counsel informed the Court that the order for costs was sought only against Messrs Meehan and Murphy. At the commencement of the hearing their counsel sought and were granted leave to file a notice of motion in court, returnable instanter, seeking an order that Messrs Meehan and Murphy be removed as parties to the proceeding. 176 The approach which the Court should take to the question of costs where there has been no hearing on the merits, and neither party wishes to proceed to one, was laid down by McHugh J in Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622. He said (at 624-5): "In an appropriate case, a court will make an order for costs even where there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical question between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. ... Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. ... But such cases are likely to be rare. ... If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion would usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases." 177 His Honour identified two grounds upon which a party in the position of Glazier might obtain an order for costs: where that party's conduct has been reasonable but its opponent has acted so unreasonably as to justify an order for costs; and where that party was almost certain to have succeeded if the matter had been fully tried. I shall deal with the second matter first.

[39]

The reasonableness of Glazier's conduct 181 In order to apply the principles stated by McHugh J, I must examine whether the parties have acted reasonably. I shall first consider the actions of the plaintiff. Counsel for Messrs Meehan and Murphy criticised Glazier's conduct on several grounds. 182 Counsel contended that the central proposition of Glazier's case was that the directors of AMH had misled Mr Star, who had mistakenly relied on them. But, counsel submitted, that proposition had not been proved and indeed, it was disproved by the evidence. Counsel claimed that Glazier's assertion was put in terms of generalities, and no attempt had been made to identify misleading information or documents which Messrs Meehan and Murphy had supplied to Mr Star. 183 It is true that in cross-examination, Mr Lloyd insisted that he had made his own inquiries on behalf of Mr Star, and had not simply relied upon what Messrs Meehan and Murphy had told him. Nevertheless, an objective reader who compared Mr Star's report of 2 September 1998 with Mr Madden's Report would be likely to infer, in my opinion, that Mr Star's report was heavily reliant upon information supplied by the directors of AMH, whereas Mr Madden's Report was sceptical of information provided by the directors and made an independent assessment of cash movements. 184 Glazier did not have Mr Madden's Report when it commenced the 1998 proceeding, but there had been communications between Ms Jones and Mr Lloyd which would have conveyed to the latter the flavour of Mr Madden's likely conclusions, and Glazier had much earlier obtained a critical assessment of AMH's financial records from its own accountant, Mr Abbott. Glazier had available to it the evidence in the 1997 proceeding, including the transcript of the hearing before Young J which ended on 18 March 1998, as well as the consent orders made by Young J on that day and his Honour's judgment on Mr Madden's application for judicial advice on the sale of the assets of the Trust, delivered on 30 April 1998. In all these circumstances, it was not unreasonable for Glazier to suspect in October 1998 that Mr Star had used misleading information supplied by Messrs Meehan and Murphy. 185 Counsel for Messrs Meehan and Murphy criticised Glazier for failing to convene a meeting of creditors to terminate the DCA, and for failing to ask Mr Star what information he had relied upon in preparing his report. I reject those criticisms. The evidence shows that Glazier was represented at the meeting of creditors of 10 September 1998 and argued against the DCA. Having been unsuccessful on that occasion, it would have been futile for Glazier to convene another meeting of creditors. Nor was it necessary for Glazier to interrogate Mr Star on his report before commencing the proceedings. It was not unreasonable for Glazier to draw the inference from the report and the surrounding circumstances that creditors had been misled. It may well be true, as counsel submitted, that the initiation of the 1998 proceeding was another step in the feud between the Doctors and Messrs Meehan and Murphy. But it cannot be said that commencing the proceedings was an irrational step dictated by hatred rather than reason. 186 I have reached this conclusion without relying upon three matters upon which counsel for Glazier placed emphasis. In my view none of these matters advances Glazier's case that it acted reasonably in commencing the 1998 proceeding, although they do not demonstrate that it was unreasonable for Glazier to do so. The first of these matters is the payment of legal fees to Turtons. Glazier says that the payment was clearly an unfair preference, which the administrator should have fully investigated and sought to recover. There is evidence that Mr Lloyd undertook an investigation, though evidently a limited one. But the nature of the administrator's position imposes constraints upon investigations into such matters (see Hagenvale at 145, at Comcorp at 590), and in my opinion the administrator's action in this case was probably sufficient. 187 Glazier also refers to a payment of $215, 255 to Edgecliff Medical Centre Pty Ltd and says that that payment was also capable of constituting an unfair preference. I make the same comment about that allegation. 188 Secondly, as I have mentioned, the DCA expressly provided that the assets which were to be realised and paid into the deed fund did not include "any right of action of the Company against any director of the Company being a right of action which subsisted at the date of the appointment of the administrator". Glazier says that in this way the DCA purported to deprive AMH of a valuable chose in action, thereby purporting to exonerate Messrs Meehan and Murphy from legal liabilities arising from their misconduct. In my opinion this contention misconstrues the DCA. The DCA merely excluded rights of action against the directors from the assets which were to be collected and distributed to creditors. It did not purport to release the directors from their liability. Any cause of action which AMH had against its directors could still be asserted by the company in the event of a change of directors, or by a minority shareholder in a derivative action, or (more likely) by the liquidator in the event of liquidation. 189 Thirdly, Glazier says that HSFM, the purchaser of the Trust's business, claimed to be owed $320,465 by reason of payments allegedly made to creditors of AMH on its behalf. Glazier asserts that in fact HSFM voluntarily paid certain of AMH's creditors to induce them to trade with HSFM as continuing operator of the business. Glazier says that those voluntary payments do not entitle HSFM to reimbursement. There is insufficient evidence of these transactions to enable the Court to take any view of them. If the payments were made as part of the arrangements which constituted the sale of the business, it may well be wrong to describe them as "voluntary" payments. 190 In my opinion there is no basis for criticising Glazier's conduct during the period from the execution of the DCA on 30 September 1998 until determination of the DCA on 2 March 1999. Glazier, having opposed the DCA at the meeting of creditors held on 10 September 1998 which resolved to approve it, commenced proceedings with reasonable expedition after the deed had been executed. It cannot be plausibly contended that Glazier failed to prosecute the proceedings with due diligence. 191 Glazier's allegations against Mr Star, though they have not been proved, were not unreasonably held or unreasonably acted upon. The next question is whether the defendants responded to the proceedings in a reasonable manner. Since Glazier's counsel has expressly disclaimed any claim to costs against AMH, the question for consideration is whether Messrs Meehan and Murphy have acted so unreasonably that (assuming they are properly parties to the proceeding) I should order them to pay Glazier's costs.

[40]

The reasonableness of the conduct of Messrs Meehan and Murphy 192 Glazier's central contention is that Messrs Meehan and Murphy misled Mr Star concerning the assets and liabilities of AMH, and instigated the amendment to the draft DCA which led it to exclude rights of action against the directors from the assets to be paid into the deed fund. Glazier also alleges that Messrs Meehan and Murphy misled Mr Star by stating that AMH had become insolvent because the new trustee (Mr Madden) decided not to trade. Glazier says that this is a misleading statement in light of the history of the matter set out in this judgment and in the judgment of Young J of 30 April 1998. 193 The question for me to consider is whether Messrs Meehan and Murphy have acted so unreasonably that costs should be ordered against them (assuming that they are properly parties to the proceeding). I cannot reach that conclusion unless I make findings of fact in favour of Glazier with respect to at least some of its assertions. And yet I cannot embark on, in effect, the hearing of the substance of the proceeding. 194 In my opinion the correct conclusion is against Glazier, for two reasons. First, if it were proper for me to make findings of fact as to the conduct of Messrs Meehan and Murphy, I would decline to hold, on the balance of probabilities, that Messrs Meehan and Murphy have deliberately misled Mr Star in relation to any specific aspect of the assets and liabilities of AMH. As I have said, a comparison of Mr Star's report with Mr Madden's Report will lead the objective reader to infer that Mr Star has been influenced by the directors of AMH to reach conclusions generally favourable to them. But a person in the position of Mr Star might reach such conclusions without any direct misrepresentation. For me to be satisfied that Messrs Meehan and Murphy have behaved so unreasonably that costs should be awarded against them, I would need to have some evidence of specific misleading conduct by them. As far as I can see there is no such evidence, except in one respect. 195 I would agree with Glazier that it was misleading for Messrs Meehan and Murphy to say that AMH became insolvent because Mr Madden decided not to trade. The truth was much more complicated, as I have endeavoured to show. But it was not implausible for them to believe, and to assert, that Mr Madden's decision was the final step leading to insolvency, in the sense that if he had been prepared to undertake personal liability for the debts of the Trust, subject to his right of indemnity against trust assets, the business might have been saved. I therefore would not regard this misleading conduct as evidence of unreasonableness of a kind sufficient to warrant an order for costs. 196 Secondly and more importantly, in my opinion it would be wrong for me to make findings of fact with respect to Glazier's allegations about the conduct of Messrs Meehan and Murphy. Glazier's allegations go to fundamental aspects of its case for setting aside or terminating the DCA. It would be undesirable to allow a party to a case which will not proceed to a hearing on the merits, to have a component of the final hearing determined solely for the purpose of deciding who should bear the costs of the proceeding: JT Statford & Ltd v Lindley (No 2) [1969] 3 All ER 1122, 1124. This is especially so where the facts are contested and issues of credit are involved. 197 Glazier contends that is appropriate to deal with these matters within the fourth category of principles enunciated by Hill J. in the Aust-Home Investments case (at 201). His Honour described the fourth category in this way: "In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation". 198 As far as I can see, there was nothing in the conduct of Messrs Meehan and Murphy, or for that matter Mr Star, which precipitated the 1998 proceeding, other than the conduct which is the subject of the principal relief sought in this case. If Hill J.'s fourth category were to be construed as permitting the Court to assess the reasonableness of the conduct of the defendants which is the very subject of the proceeding, then the fourth category would cancel out the proposition that the Court must not embark on a hearing on the merits solely to determine the question of costs. To my mind the latter is the predominant principle, and therefore I would be acting contrary to the cases if I were to make the findings with respect to the conduct of Messrs Meehan and Murphy which Glazier has invited me to make.

[41]

The application to remove Messrs Meehan and Murphy as parties to the proceeding 199 Messrs Meehan and Murphy contend that as directors of AMH, they should not have been joined as parties to the 1998 proceeding. They seek an order removing them as parties. 200 Glazier says that where an application is made to set aside or terminate a deed of company arrangement, the directors are proper defendants, and refers to Re Carey Builders Pty Ltd (1997) 23 ACSR 754. In that case the judge who heard the original application made orders to set aside the deed, but because the application had not been served on the directors, he stayed the orders until the directors were given the opportunity to be heard. The directors subsequently applied to set aside the first judge's orders, and their application was heard by a different judge, who granted the directors' application. In my opinion this case establishes that the directors have a sufficient interest to be joined as defendants to the proceeding where the deed binds them as parties. In the present case Messrs Meehan and Murphy are not parties to the deed. 201 Glazier says that it was appropriate for Messrs Meehan and Murphy to be joined as defendants upon the commencement of the proceeding, because in the proceeding Glazier alleged that the DCA should be set aside or terminated because they had misled the administrator and consequently the creditors. Further, Glazier points out that the DCA excludes rights of action against the directors from the assets which are to be collected and paid into the deed fund. Glazier says is appropriate for the directors to remain as parties now because they should be made liable to pay the costs of the proceeding. 202 On this latter point, I note that while the power of the Court to make an order for costs against a non-party appears to have been expanded by decisions of the House of Lords and High Court of Australia in relatively recent times ( Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965; Knight v FP Special Assets Ltd (1992) 174 CLR 178), the Court ought nevertheless to be cautious about doing so outside established categories (see D. Jackson (1993) 67 ALJ 706; as to liquidators, see Bent v Gough (1992) 36 SCR 204; Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274; Emanuele v Hedley , ACT Supreme Court, 19 December 1997, unreported; and as to solicitors Leicester v Walton , Court of Appeal of New South Wales, 22 November 1995, unreported). 203 Further, notwithstanding the breadth of s 76 of the Supreme Court Act 1970 (NSW), this Court is constrained by Part 52A Rule 4, subrule (3) of which states, subject to exceptions, that a person shall not be made a party for the purpose of making an application for costs against the person. Unless, therefore, there is a legitimate basis for Messrs Meehan and Murphy to be parties other than for the purpose of costs, they should not have been joined. 204 In my opinion it is unnecessary to reach any categorical conclusion on the issues of principle as to joinder of parties. Regardless of whether Messrs Meehan and Murphy were properly joined as defendants initially, the facts are that they lodged notices of appearance and appeared at a directions hearing, without raising the question whether they were properly parties to the proceeding. The issue was raised only in written replies to Glazier's outline of contentions, received by Glazier and my associate on the morning of the hearing. At the hearing counsel for Messrs Meehan and Murphy participated fully on the issue of costs, although at the outset counsel filed a notice of motion for removal of his clients as parties and addressed that matter in submissions. 205 In these circumstances there are overwhelming reasons of convenience for dealing with Glazier's application that Messrs Meehan and Murphy pay its costs. I have done so in these reasons for judgment, reaching the conclusion that Glazier's application should fail. I see no reason to make an order which would have the effect that Messrs Meehan and Murphy were not parties to the proceeding throughout the hearing of the application. Although Glazier argued that Messrs Meehan and Murphy were estopped from applying for their removal as parties, or that they had made an irrevocable election to appear, is unnecessary for me to rely on those doctrines in order to reach the conclusion which I have stated.

Glazier v Australian Men's Health

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (44 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (7)