JAB Nominees (Aust) Pty Ltd v Auswild

CORPORATIONS - Oppressive conduct - Whether equity's inherent jurisdiction to award compound interest enlivened by an order for reimbursement pursuant to s 233 of the Corporations Act 2001 (Cth).

INTEREST - Whether interest payable on reimbursement of corporation's legal costs ordered pursuant to s 233 of the Corporations Act 2001 (Cth) under s 58 or s 60 of the Supreme Court Act 1986 (Vic) - Whether amount ordered was payable by virtue of some written instrument being the solicitors' invoices paid by corporation - Whether amount ordered had been demanded by letter threatening to apply for costs order against directors.

INTEREST - Whether Court should order interest at the maximum rate prescribed under the Penalty Interest Rates Act 1983 (Vic).

COSTS - Whether an order for reimbursement of corporation's legal costs of a proceeding should include costs incurred prior to the filing of the proceeding.

1 On 20 November 2020, I made orders in this proceeding including, relevantly, the following order pursuant to s 233 of the Corporations Act 2001 (Cth) ('the Corporations Act'):

1. The third parties reimburse the plaintiffs in the Company Proceeding for the costs and disbursements incurred by the plaintiffs in the Company Proceeding up to and including the entry of judgment on 30 October 2019, in a sum to be determined by the Court.

The sum ordered to be paid by the third parties in this proceeding, being James Bergmuller and Peter Parker ('the Third Parties') is hereafter referred to as 'the Reimbursement Sum'.

2 On the same day, the defendants foreshadowed an application to claim interest on the Reimbursement Sum. Accordingly, I gave directions for the filing and service of an application to amend the third party notice to claim interest on the Reimbursement Sum and for the filing of material by the parties.

3 By summons filed 22 December 2020, the defendants applied for leave to amend the third party notice by adding the following prayers for relief:

(e) Interest on the sum payable under Order 4 of the Orders made by Riordan J on 20 November 2020 (Order 4) calculated from the day following the day on which each invoice was paid by PMG pursuant to s 58 of the Supreme Court Act 1986 (Vic) (the Act), or as is otherwise payable pursuant to an order of the Court at a rate prescribed under s 2 of the Penalty Interest Rate Act 1983 (Vic).

(f) In the alternative to order (e), interest on the sum payable under Order 4 pursuant to s 60 of the Act from 20 February 2018.

(g) Further in the alternative to (e) and (f) interest on the sum payable under Order 4 at the rate of 6% pa from the day following the day on which each invoice was paid by PMG.

4 The background to this dispute and the procedural history of this proceeding and the related proceeding S ECI 2014 00071 ('the Company Proceeding')[1] are extensive and complicated. It is not necessary to have regard to all of the issues in this proceeding and the Company Proceeding for the purpose of determining the residual issues relating to interest.[2]

5 For present purposes, it is sufficient to state that the Reimbursement Sum relates to the costs and disbursements incurred by the plaintiffs in the Company Proceeding ('the Plaintiff Companies'), which were invoiced by Macpherson Kelley, the Plaintiff Companies' solicitors, and paid as set out in the schedules to these reasons.

6 On 26 February 2021, on return of the summons, the Third Parties did not oppose the defendants' application for leave to amend the third party notice or dispute an entitlement to interest.

7 Arising from the submissions filed by the parties, the relevant issues for determination are as follows:

(a) Should the Reimbursement Sum include costs incurred prior to the filing of the Company Proceeding?

(b) Should the Reimbursement Sum include GST, which was refundable as an input credit to the Plaintiff Companies?

(c) Is interest payable under s 58 or s 60 of the Supreme Court Act 1986 (Vic) ('Supreme Court Act')?

(d) Should the Court award interest at the maximum rate prescribed under the Penalty Interest Rates Act 1983 (Vic) ('Penalty Interest Rates Act') or at a lower rate?

(e) Should the Third Parties be ordered to pay interest as part of equitable compensation pursuant to the Court's inherent jurisdiction?

Should the Reimbursement Sum include costs incurred prior to the filing of the Company Proceeding?

8 On 20 November 2020, I directed that the Plaintiff Companies file and serve details of the costs and disbursements they incurred in the Company Proceeding, including the dates of payments, up to and including the entry of judgment on 30 October 2019.

9 By letter dated 11 December 2020, Macpherson Kelley stated that the costs and disbursements incurred by the Plaintiff Companies totalled $12,784,168.51 inclusive of GST or $11,771,079.65 exclusive of GST (see Schedule 1 to these reasons). The amount was calculated with reference to costs incurred in the period from the date the Company Proceeding was filed (29 August 2014) up to and including the date judgment was entered (30 October 2019) and included the sum of $51,700, being counsels' disbursements for preparation of the statement of claim which was incurred before 29 August 2014.

10 By letter dated 24 February 2021 to Pikes & Verekers (the defendants' solicitors), Macpherson Kelley enclosed a spreadsheet itemising all payments from 15 January 2013 (being the date they commenced work on the litigation file that became the Company Proceeding) up to the date the proceeding was filed, which totalled $1,340,980.30 inclusive of GST or $1,219,147.70 exclusive of GST (see Schedule 2 to these reasons).

11 By submissions filed 5 March 2021, the Third Parties accepted that an amount of $11,632,550.56 exclusive of GST paid after the commencement of the Company Proceeding was within the reimbursement order set out in paragraph 1 above.[3] However, the Third Parties submitted that amounts incurred prior to the commencement of the Company Proceeding should not be allowed because:

(a) the defendants requested the preparation of a statement of claim prior to the mediation before Mr McHugh QC in July 2014; and

(b) the work completed by Macpherson Kelley prior to the filing of the Company Proceeding was done following a meeting of shareholder representatives with the consent of the parties.

12 By submissions filed 11 March 2021, the defendants contended that the Reimbursement Sum should be an amount of $14,125,148.81 inclusive of GST and excluding interest, being the amount referred to in the letter from Macpherson Kelley dated 11 December 2020, plus the costs and disbursements incurred prior to the date the Company Proceeding was filed, as set out in the letter Macpherson Kelley dated 24 February 2021, for the following reasons:

(a) The Reimbursement Sum should include the pre-filing costs because there was no reason to doubt the veracity of the information provided by Macpherson Kelley.

(b) There is nothing to support the submission that the schedule of payments and dates is insufficient to prove the precise nature of the work to which those costs relate.

13 In my opinion, to relieve the defendants from the oppressive conduct of the Third Parties,[4] it is not necessary for the Third Parties to reimburse the costs and disbursements incurred prior to the filing of the Company Proceeding, for the following reasons:

(a) In the Principal Reasons, I only found that the Third Parties were aware of the intention to file this proceeding at the time the Company Proceeding was filed.[5] There was no finding that the Third Parties had a relevant conflict of interest at any time prior to the filing of the Company Proceeding.

(b) In August 2013, it was agreed by the directors representing all shareholders in the Plaintiff Companies that 'a sensible way forward would be for [Macpherson Kelley] to prepare a draft Statement of Claim',[6] for the purpose of identifying the disputes between the shareholders prior to to the proposed mediation before Mr McHugh QC, which took place on 23 and 24 July 2014.

14 Accordingly, the Reimbursement Sum is the amount of costs paid to Macpherson Kelley from the date of the filing of the Company Proceeding up to and including the entry of judgment on 30 October 2019.

Should the Reimbursement Sum include GST, which was refundable as an input credit to the Plaintiff Companies?

15 The defendants accepted that the Plaintiff Companies had been entitled to claim the GST component of Macpherson Kelley's invoices as an input tax credit. However, they contended that the Third Parties should be ordered to pay the GST component because the payment of the Reimbursement Sum would give rise to an obligation for the Plaintiff Companies to repay the input tax credit arising by reason of a GST adjustment pursuant to s 19-10 of A New Tax System (Goods and Services Tax) Act 1999 (Cth) ('the GST Act').

16 Alternatively, the defendants submitted that, if there was an issue about whether payment of the Reimbursement Sum would constitute an adjustment event, it would be preferable for the Court to make orders including a declaration indemnifying the Plaintiff Companies for the amount of any increasing adjustment arising in consequence of the payment of the Reimbursement Sum as an adjustment event in relation to input tax credits previously claimed.

(a) The payment of the Reimbursement Sum would not give rise to an adjustment event, for the following reasons:

(i) Payment by the Third Parties of the Reimbursement Sum to the Plaintiff Companies does not have the effect of reversing or nullifying the transaction between the Plaintiff Companies and Macpherson Kelley for legal services rendered and paid for. It is not a situation whereby Macpherson Kelley was refunding the Plaintiff Companies; and the reimbursement by the Third Parties would not change the consideration for the supply.

(ii) It was not a situation whereby a party was being ordered to pay for services which had already been rendered to it. The Third Parties were not the recipients of the legal services.

(b) Accordingly, the payment of the Reimbursement Sum in order to relieve against oppression does not change the consideration for the supply of the legal services so as to constitute an adjustment within the meaning of the GST Act.

(c) The payment of the Reimbursement Sum is not a 'taxable supply' for the purposes of the GST Act and there will be no requirement for the Plaintiff Companies to remit a GST component.

18 Section 19-10 of the GST Act defines an adjustment event as follows:

(1) An adjustment event is any event which has the effect of:

(a) cancelling a supply or acquisition; or

(b) changing the *consideration for a supply or acquisition; or

(c) causing a supply or acquisition to become, or stop being, a *taxable supply or *creditable acquisition.

Example: If goods that are supplied for export are not exported within the time provided in section 38‑185, the supply is likely to become a taxable supply after originally being a supply that was GST‑free.

(2) Without limiting subsection (1), these are *adjustment events:

(a) the return to a supplier of a thing, or part of a thing, supplied (whether or not the return involves a change of ownership of the thing);

(b) a change to the previously agreed *consideration for a supply or acquisition, whether due to the offer of a discount or otherwise;

(c) a change in the extent to which an entity that makes an acquisition provides, or is liable to provide, consideration for the acquisition (unless the entity *accounts on a cash basis).

(3) An *adjustment event:

(a) can arise in relation to a supply even if it is not a *taxable supply; and

(b) can arise in relation to an acquisition even if it is not a *creditable acquisition.

(4) However, the return of a thing supplied, or part of a thing supplied, to its supplier is not an *adjustment event if the return is for the purpose of repair or maintenance.

19 Section 19-40 makes provision for an adjustment which gives rise to a liability to pay GST.

20 I accept the submissions of the Third Parties. A reimbursement payment does not have the effect of cancelling a supply or acquisition, changing the consideration for a supply or acquisition, or causing a supply or acquisition to become or stop being a taxable supply or creditable acquisition. It was accepted by the parties that generally, a plaintiff that has incurred losses in respect of which it has received a GST input credit, is only entitled to recover damages equivalent to the losses suffered excluding the reimbursed GST.[7]

21 This conclusion is based on the proposition that an award of damages does not constitute a taxable supply.[8]

22 With respect to damages, the Australian Taxation Office's Goods and Services Tax Ruling explains as follows:

1. With a dispute over a damages claim, the subject of the dispute does not constitute a supply made by the aggrieved party. If a payment made under a court order is wholly in respect of such a claim, the payment will not be consideration for a supply.
2. If a payment is made under an out-of-court settlement to resolve a damages claim and there is no earlier or current supply, the payment will be treated as payment of the damages claim and will not be consideration for a supply at all, regardless of whether there is an identifiable discontinuance supply under the settlement.

1. Bluey's Waste Removal contracts for a three month period with the local Council to collect waste from specified sites in a particular area and remove it to the Council's rubbish tip. Subsequently, one of Bluey's trucks has its suspension badly damaged on the tip site while delivering a load of rubbish in accordance with the contract. An obstacle, which should have been removed by Council staff, was the cause of this damage.
2. Bluey takes legal action to recover $50,000, being the cost to repair the truck and the loss of productive time caused by the truck being off the road. Subsequently, Bluey and the Council settle the dispute, with the Council paying Bluey $37,000 and Bluey agreeing to proceed no further with the action.
3. No part of the $37,000 paid by the Council to Bluey is consideration for a supply.[9]

23 The defendants accepted as much, but they contended that payment of the Reimbursement Sum may constitute an adjustment under the GST Act, which would give rise to an obligation for the Plaintiff Companies to repay the input tax credit. No submission was advanced as to how the payment of the Reimbursement Sum by the Third Parties could have the effect of cancelling a supply or acquisition, changing the consideration for a supply or acquisition, or causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition.

24 Macpherson Kelley's provision of legal services was a taxable supply and subject to GST. If, for example, Macpherson Kelley reimbursed part of the consideration for the taxable supply, an adjustment event would then arise. Payment of the Reimbursement Sum is not a taxable supply and does not affect the consideration paid by the Plaintiff Companies for the taxable supply provided by Macpherson Kelley.

25 An unsuccessful litigant ordered to pay costs to another party, which has claimed an input credit on its costs paid to its solicitor, is not required to pay the refunded GST.

26 With respect to the recovery of costs in litigation, the Australian Taxation Office's Goods and Services Tax Ruling explains as follows:

1. In any legal action the parties concerned are required to pay their legal advisers the solicitor client costs incurred and the supply of these legal services will attract GST and be GST inclusive sums to the extent that they are not GST-free. Both parties to a dispute, as recipients of a supply of legal representation respectively, may be entitled to an input tax credit for a creditable or partly creditable acquisition of these services.
2. For the purposes of this Ruling, we are concerned with the subsequent stage when the successful party is able to recover costs wholly or partly through a court order for costs or by negotiation of an amount in a settlement.
3. As we have seen for a supply to be a taxable supply the conditions under section 9-5 of the GST Act must be met. In the instance of the payment of costs under the court order or settlement there is no supply for consideration from the successful party to the unsuccessful party. This is essentially paying compensation for costs or losses incurred in the dispute and will be treated in the same manner as damages under paragraphs 110 and 111.
4. Accordingly, the payment of court ordered costs or costs negotiated in a settlement in the circumstances described will not be consideration for an earlier or current supply. It does not matter that the payment of the costs order or settled amount is made by an entity other than the unsuccessful party.[10]

27 The example provided with respect to an entity registered for GST being reimbursed for its costs of litigation is also instructive:

1. ABC Co, a registered transport company, sues for compensation for damages arising out of breach of a contract it has with a major retailer. Prior to any court proceedings being issued, a settlement is reached whereby the retailer agrees to pay the estimate of damages and a percentage of the costs incurred by ABC Co in bringing the action, for example, for the recovery of dishonoured cheque fees, costs of issuing a letter of demand, or court filing fees etc.
2. _ABC Co is able to claim an input tax credit for the GST included in the fees charged by its legal representatives. The actual cost to ABC Co is a GST exclusive amount._73A
3. As with a court ordered award of costs, the payment of costs to ABC Co under the settlement arrangements is not a payment for a supply made by ABC Co. It is a payment akin to damages and there is no GST liability for ABC Co arising from the receipt of the payment.[11]

28 For current purposes, the Third Parties are in the same position as an unsuccessful litigant which is subject to a costs order.

29 Accordingly, the Reimbursement Sum is the amount of costs paid to Macpherson Kelley from the date of the filing of the Company Proceeding up to and including the entry of judgment on 30 October 2019 exclusive of GST.

Is interest payable under s 58 or s 60 of the Supreme Court Act?

30 Section 58 of the Supreme Court Act relevantly provides:

(1) If in a proceeding a debt or sum certain is recovered, the Court must on application, unless good cause is shown to the contrary, allow interest to the creditor on the debt or sum at a rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 or, in respect of any bill of exchange or promissory note, at 2% per annum more than that rate from the time when the debt or sum was payable (if payable by virtue of some written instrument and at a date or time certain) or, if payable otherwise, then from the time when demand of payment was made.

...

(3) A debt or sum payable or a date or time is to be taken to be certain if it has become certain.

31 Section 60(1) of the Supreme Court Act provides:

The Court, on application in any proceeding for the recovery of debt or damages, must, unless good cause is shown to the contrary, give damages in the nature of interest at such rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 as it thinks fit from the commencement of the proceeding to the date of the judgment over and above the debt or damages awarded.

32 It is common ground that if s 58 is not applicable, interest would be payable under s 60.

33 The defendants submitted that interest is payable under s 58 because the Reimbursement Sum:

(a) is a sum certain;

(b) is payable by virtue of some written instrument; and

(c) was demanded by letter dated 13 March 2014.

34 The fact that the Reimbursement Sum was a sum certain was not disputed and, in support of the contention that the Reimbursement Sum was payable by virtue of some written instrument, the defendants submitted as follows:

(a) Had it not been for the invoices from Macpherson Kelley which, as directors, the Third Parties paid, they would not be liable. Accordingly, their liability to reimburse the Plaintiff Companies for the amount of the invoices arose at the moment they breached their fiduciary duties and caused the Plaintiff Companies to pay the invoices.

(b) The terms of s 58 do not refer to the person liable to pay interest being a party to the written instrument and, if Parliament intended to confine the section to a written instrument between the parties, it would have done so.

35 Alternatively, it was submitted that the letter of 13 March 2014 was a demand in terms of s 58 because the letter included the assertion that the Third Parties were acting in conflict of interests for which they would be held personally accountable, which was a clear intimation that payment was required.

36 The Third Parties submitted that the Reimbursement Sum:

(a) was not payable by virtue of some written instrument; and

(b) was not demanded by the letter from the defendants' solicitors of 13 March 2014.

37 In support of these contentions, the Third Parties submitted as follows:

(a) The judgment against the Third Parties is not for monies payable by them pursuant to the invoices rendered by Macpherson Kelley to the Plaintiff Companies in the Company Proceeding, but is a reimbursement by an order under s 233 of the Corporations Act of an amount referable to the amounts owing by the Plaintiff Companies to Macpherson Kelley under a legal services contract.

(b) A demand requires 'a clear intimation that payment is required' or 'a distinct demand of payment'. The letter of 13 March 2014 does not demand any payment but rather demands the provision of information and puts the Third Parties on notice that the defendants might seek a personal costs order against the directors (as they ultimately did and which application failed). Nothing in the letter demanded any reimbursement of the Plaintiff Companies' legal expenses.

38 In my opinion, the Reimbursement Sum was not payable by virtue of the invoices issued by Macpherson Kelley to the Plaintiff Companies.

39 In my opinion, it cannot be said that the Third Parties' obligation to pay the Reimbursement Sum crystallised prior to the initiation of the third party proceeding filed by the defendants. The construction proposed by the defendants would not be consistent with the distinction between s 58 and s 60 drawn in Chong & Neale v CC Containers Pty Ltd, where the Court of Appeal explained:

However, as is evidenced by the language of s 60(2)(e), ss 58 and 60 are not intended to overlap. The legislature clearly intended to distinguish between cases where a debt has become payable prior to the initiation of a proceeding for its recovery (in which case, s 58 will be enlivened if its requirements are met), and one in which the obligation to pay has not so crystallised at an earlier time (in which case, s 60 will be enlivened if its requirements are met).[12]

40 The Macquarie Dictionary defines the expression 'by virtue of' to mean 'by reason of'.[13] Accordingly, for the Reimbursement Sum to be 'payable by virtue of some written instrument', the liability to pay must arise by reason of the written instrument. The Third Parties' liability to pay the Reimbursement Sum did not arise by reason of Macpherson Kelley's invoices and the fact that the Plaintiff Companies' liability to Macpherson Kelley arose from the invoices does not create a necessary nexus.

41 To take the example referred to in paragraph 22 above, the fact that Bluey's Waste Removal paid the motor vehicle repairer's invoice of $50,000 would not mean that the liability of the negligent Council to reimburse Bluey for the cost of repairs arose by virtue of some written instrument, being the repairer's invoice.

42 In support of their contention that there had been a relevant demand under s 58, the defendants relied on a letter dated 13 March 2014 to Macpherson Kelley in which Pikes & Verekers noted that there had been no response to their letter dated 30 January 2014, and that they had still not received a draft statement of claim. The letter asserted that the directors who engaged Mr Smith to complete the ShineWing reports had failed to 'exercise proper control over the cost and scope of the investigation' and to limit it to the retainer authorised by the board of directors of companies within the Preston Motors Group. With respect to conflict of interests and oppression, the letter asserted as follows:

Section 232 of the Corporations Act and related sections broadly provide that a company must act in the interests of members as a whole and not for the preference of one group of shareholders over another in a fashion that is oppressive or unfairly prejudicial. This would include actions by the company with the collateral purpose or affect [sic] of unfairly discriminating between shareholders. The issue of whether your clients' conduct in this matter has been oppressive has previously been raised in correspondence from this firm. In the circumstances it would appear that the directors of PMG instigating this claim have or will have a conflict of interest and collateral purpose arising from:

(a) Their actions in instructing Mr Smith to prepare the ShineWing Report;

(b) Threatening and or instigating proceedings in the name of PMG against my clients; which

(c) Will directly benefit those directors at the expense of PMG;

And those actions are oppressive and unfairly prejudicial to my clients in that:

(d) None of those directors are bearing the costs of the proceedings.

(e) The costs of the proceedings are born [sic] by PMG, approximately half, if not in fact half, of which is owned by my clients.

(f) Effectively half of such costs are being born [sic] by the Auswild interests for an action against them where PMG appears intent on benefitting the Bergmuller/Parker interests and in those circumstances the cost of the action should lie with the Bergmuller/Parker interests, who stand to benefit from the action or the settlement proceedings as they are being presently conducted.

(g) In the event my clients successfully defend any action in whole or in part thereby entitling costs, my clients are through their 50% (approx.) shareholding effectively only recovering 25% of their costs.

(h) The claim to date has been directed solely at my clients in circumstances where and [sic] integral part of the complaint is unsatisfactory accounts which were audited and [JRA] and Mrs Waugh are the only parties from the indicative pool of 9 director/officer defendants and 14 third party defendants from whom PMG is seeking settlement. It is not in the company's interests to limit its source of recompense.

Of particular relevance, the letter concluded as follows:

Should your clients continue to reject legitimate requests for information as set out above, I am instructed to put you on notice that in the event of this matter being wholly or partly resolved in favour of my clients either informally or in court, my clients will seek costs personally from the directors of your client who instigated proceedings.

43 To constitute a demand under s 58, the demand need not be framed with formality or in any specified language. However, a demand requires 'a clear intimation that payment is required',[14] or 'a distinct demand of payment'.[15] As the Court of Appeal explained in Carbone v Melton City Council:

Where s 58(1) of the SC Act applies to a claim pursuant to a contract but the contract does not provide for payment of the amount claimed 'at a date or time certain', interest is payable 'from the time when demand of payment was made'. A demand need not be in any particular form, or specify the exact sum due, so long as it contains a distinct demand of payment. The issue of a writ does not constitute a demand for payment for the purposes of s 58(1).[16]

44 In my opinion, the letter dated 13 March 2014 did not constitute a demand under s 58 because, although the letter referred to the Third Parties having a conflict of interests, in its terms, it was no more than a threat to apply for a non-party costs order if the Third Parties 'continue[d] to reject legitimate requests for information as set out above' in the letter. In the Principal Reasons, I ultimately rejected the defendants' claim for a non-party costs order against the Third Parties.[17]

45 Accordingly, interest is payable under s 60 from the date of the filing of proceedings against the Third Parties (19 February 2018) and, with respect to invoices paid after that date, from the date of such payments.

Should the Court award interest at the maximum rate prescribed under the Penalty Interest Rates Act or at a lower rate?

46 The Third Parties submitted that the interest should not be applied at the maximum rate for the following reasons:

(a) Sections 58(1) and 60(1) of the Supreme Court Act both prescribe that interest should be charged at a rate 'not exceeding the rate' set out in s 2 of the Penalty Interest Rates Act. The purpose of awarding interest pursuant to s 60 is to compensate a plaintiff for being kept out of its money, not because it has lost the opportunity to invest it.

(b) The reason for awarding the penalty rate is to ensure that recalcitrant defendants do not withhold payments so that they can invest moneys in the meantime.

(c) The circumstances of the relief ordered and the commercial position of the Plaintiff Companies requires the Court to exercise its discretion by imposing a lower rate of 3%. The Reserve Bank of Australia's cash rate in September 2014 was 2.5% and it has steadily declined to its current level of 0.1%. The Plaintiff Companies' major debt facility with Toyota Finance incurred interest at the rate of 3.5%.

(d) Equitable compensation has to have regard to the particular facts which, in this case, were that the Third Parties were found not to have breached their duty to act in the best interests of the Plaintiff Companies and that the litigation was not unreasonably pursued.

(e) The Third Parties should not be penalised in circumstances where the defendants, through their shareholder representatives, approved the allocation and expenses of the legal costs incurred in the Company Proceeding.

47 The defendants submitted that interest should be awarded at the rate prescribed in s 2 of the Penalty Interest Rates Act on the basis of the following facts:

(a) The Third Parties pursued their personal interests in filing and maintaining the Company Proceeding in circumstances where they knew the Plaintiff Companies would not receive the benefit of any award of compensation for the claims which they had substantially funded.

(b) By 2020, the Plaintiff Companies' financial circumstances were sufficiently dire for the Preston Motors Group to have entered into an informal voluntary winding up.

48 In Carbone v Melton City Council, the purposes of an award of statutory interest were explained as follows:

The statutory power to award interest has a twofold beneficial purpose. First, to compensate a party who has been obliged to take proceedings to recover a money sum and who in the meantime has been kept out of moneys which could otherwise have been used or upon which interest could have been earned. Secondly, to encourage the early resolution of litigation.[18]

49 With respect to the appropriate rate of interest to be awarded under the statute, in Hodgson v Amcor Ltd (No 9), Vickery J explained the practice in Victoria as follows:

[T]he settled practice in Victoria is that, unless good cause to the contrary is shown, the statutory maximum rate is used. In Hartley Poynton Ltd v Ali Ormiston JA reasoned: 'The pattern in Victoria has been that, unless good cause be shown, successful plaintiffs are ordinarily awarded interest at the rate prescribed under the Penalty Act without too fine a regard for these distinctions'. In Johnson Tiles Gillard J likewise observed_:_ 'The practice has evolved in this State to apply as a general rule the rate fixed pursuant to the Penalty Interest Rates Act ...'. The statutory rate was described as a 'benchmark' by Fullagar, Marks and J.D Phillips JJ in Clarke v Foodland Stores Pty Ltd and in Kalenik v Apostolidis (No 2) Hargrave J said to like effect: 'As a general rule, the starting point is the penalty rate ... the penalty rate is routinely awarded by the Court'.[19]

50 The observations of Vickery J have been endorsed by a number of judges of this Court.[20]

51 In my opinion, the Third Parties have not demonstrated any good cause why it is inappropriate for the settled practice in Victoria to be applied to the interest payable on the Reimbursement Sum under s 60 of the Supreme Court Act. Accordingly, I will order that interest is payable at the maximum rate prescribed under the Penalty Interest Rates Act.

Should the Third Parties be ordered to pay interest as part of equitable compensation pursuant to the Court's inherent jurisdiction?

52 The defendants submitted that the Third Parties should be ordered to pay interest pursuant to equity's inherent jurisdiction, for the following reasons:

(a) It is uncontroversial that equitable principles permit an award of interest on equitable compensation.

(b) It is proper to infer from the finding in the Principal Reasons that, in pursuing their personal interests, the Third Parties saved themselves and the plaintiffs in this proceeding, the cost of expending moneys in prosecuting the proceeding.

(c) It is necessary that interest be awarded on the principal amount of equitable compensation in order for the fiduciaries to account for and disgorge the full advantage obtained.

(d) The Court's equitable jurisdiction is not subject to s 60 of the Supreme Court Act, which limits the time from which interest may accrue.

53 The Third Parties contended that no award for interest 'as part of equitable compensation' should be awarded.

54 The first third party, James Bergmuller, submitted as follows:

(a) There was no pleading of a claim in equity, much less for equitable compensation, and such a claim could only be brought in the names of the Plaintiff Companies. A claim is brought under the Corporations Act, and the asserted jurisdiction is not enlivened.

(b) The relief from the present conduct was not granted on the basis that the Third Parties account for and disgorge the full advantage obtained. There is no proper basis to draw or deploy a vague inference that the Third Parties saved themselves the 'cost of expending moneys'.

55 The second third party, Peter Parker, submitted as follows:

(a) The defendants have failed to establish that a causal connection exists between loss sustained and the relevant conduct, which is a requirement for an order for interest pursuant to equitable principles to be appropriately made.

(b) As equitable relief is not intended to enable the claimant to derive a profit, the interest rate and amount claimed by the defendants is inappropriate because it would cause the Plaintiff Companies and its shareholders to obtain a windfall profit.

56 I accept the Third Parties' submission that the defendants have not established that the equitable jurisdiction to award interest has been enlivened. No claim was made against the Third Parties in equity generally, or for equitable compensation in particular. The award of compound interest in equity is part of the equitable jurisdiction of the Court and is exercised in accordance with the 'object' of equitable compensation, being to 'restore persons who have suffered loss to the position in which they would have been if there had been no breach of equitable obligation'.[21]

57 The defendants did not refer to any authorities or construct any argument that the Court may exercise its equitable jurisdiction to award interest on orders made for the payment of money under s 233 of the Corporations Act.

58 Further, in Bullhead Pty Ltd v Brickmakers Place Pty Ltd (in liq) (No 2), the Court of Appeal extracted the following principles relevant to the equitable jurisdiction to award interest on equitable compensation:

(1) There is an equitable jurisdiction to award interest where money has been withheld or misappropriated by a fiduciary, and that right is independent of statute.

(2) Traditionally, at a time when interest rates were stable, a fiduciary whose liability was based on misconduct (as here) was ordered to pay interest at an annual 'mercantile rate' of 5%.

(3) During times of interest rate volatility, however, awards of interest at higher rates were made in a number of cases, so that 'the mercantile rate should reflect the reality of the market place' at the relevant times.

(4) The purpose of awarding interest in equity is not to punish the defaulting fiduciary but, rather, 'to restore to the innocent party the benefit derived by the defaulting fiduciary from his or her use of the property'.

(5) In some circumstances, compound interest with yearly rests may be awarded. For example, where the defaulting fiduciary has used the money for commercial purposes, or where the defaulting fiduciary 'has been guilty of fraud or serious misconduct'.

(6) It may be that the right to award compound interest is limited to 'cases where the defaulting fiduciary is being compelled to disgorge a gain' - as here.

(7) In order to justify an award of compound interest, there must be 'some evidentiary foundation' for an assumption that the defaulting fiduciary has made a gain from use of the profit which must be disgorged.

(8) In the case of defaulting fiduciaries, there is a discretion to award the statutory rate in times of interest rate volatility.[22]

59 In this case, if the equitable jurisdiction to award interest was enlivened, I would have considered that compound interest would not have been appropriate and that the appropriate rate of interest to restore the Plaintiff Companies would have been approximately 3%, for the following reasons:

(a) A rate of 3% is substantially higher than the current Reserve Bank of Australia's cash rate of 0.01%.[23]

(b) In the Principal Reasons, I did not find that the Third Parties breached their statutory duties under s 181 of the Corporations Act or their fiduciary duties to act in the best interests of the Plaintiff Companies.[24]

(c) In the circumstances, I do not consider that the Third Parties could be said to have defrauded or misappropriated the funds applied by the Plaintiff Companies to payment of the legal costs invoiced by Macpherson Kelley.

(d) The Third Parties did not use the money for commercial purposes; and I do not consider that, in these circumstances, it could be said that they were guilty of fraud or serious misconduct.

(e) In circumstances in which the Plaintiffs Companies' claims were wholly unsuccessful, it is doubtful whether it could be said that, by an order to pay the Reimbursement Sum, the Third Parties would be being compelled to 'disgorge a gain'.

60 Accordingly, I do not propose to make any order for the payment of interest in the Court's equitable jurisdiction.

1. The Reimbursement Sum, provided in paragraph 4 of my order made 20 November 2020, be calculated by reference to the amount of costs paid by the Plaintiff Companies to Macpherson Kelley, exclusive of GST, from the date of the filing of the Company Proceeding up to and including the entry of judgment on 30 October 2019.
2. The Third Parties pay interest on the Reimbursement Sum at the maximum rate prescribed under the Penalty Interest Rates Act 1983 (Vic) from the date of the filing of proceedings against the Third Parties and, with respect to invoices paid after that date, from the date of such payments.

62 I will direct the parties to consult about the calculation of the amounts of the Reimbursement Sum and interest payable, and I otherwise adjourn the further hearing of this proceeding to 28 May 2021.

[1] Finance & Guarantee Company Pty Ltd v Auswild [2019] VSC 664 (Riordan J).

[2] For a summary, see JAB Nominees (Aust) Pty Ltd v Auswild [2020] VSC 731, [5]-[16] (Riordan J) ('the Principal Reasons').

[3] There was no reconciliation between that figure and the sum of $11,771,079.65 exclusive of GST referred to in the letter from Macpherson Kelley dated 11 December 2020.

[7] Gagner Pty Ltd v Canturi Corporation Pty Ltd [2009] NSWCA 413; (2009) 262 ALR 691, 721-2 [147] (Campbell JA, with whom Macfarlan JA and Sackville AJA agreed); Millington v Wastewise Environmental Pty Ltd [2015] VSC 167; (2015) 295 FLR 301, 311 [27]-[29].

[8] Interchase Corporation Ltd v ACN 010 087 573 Pty Ltd (2000) 45 ATR 445, 457 [53]-[54].

[9] Australian Taxation Office, Goods and Services Tax Ruling (GSTR 2001/4, 15 July 2020) 21-2.

[12] [2015] VSCA 137; (2015) 49 VR 402, 476-7 [256] (Redlich, Santamaria and Kyrou JJA) (citations omitted).

[13] Macquarie Dictionary (online at 20 May 2021) 'virtue'.

[14] Re Colonial Finance Mortgage Investment and Guarantee Corporation Limited [1905] NSWStRp 118; (1905) 6 SR (NSW) 6, 9 (Walker J), quoted with approval in AJ Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2009] VSCA 310, [172]-[177] (Redlich and Dodds-Streeton JJA and Beach AJA).

[15] Carbone v Melton City Council (2020) 60 VR 539, 552 [55] (Tate and Kyrou JJA) (citations omitted).

[18] (2020) 60 VR 539, 549 [44] (Tate and Kyrou JJA) (citations omitted).

[19] [2012] VSC 205, [36] (citations omitted).

[20] See, eg, Minister for Energy, Environment and Climate Change v Morton (2017) 228 LGERA 71, 104 [106] (Garde J); Weatherbeeta Ltd v Hammersmith Nominees Pty Ltd (No 2) [2019] VSC 713, [24] (Connock J); Amcor Ltd v Barnes [2019] VSC 849, [82] (Sloss J).

[21] Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd [2015] VSCA 9; (2015) 318 ALR 302, 374 [320] (Garde AJA).

[22] Bullhead Pty Ltd v Brickmakers Place Pty Ltd (in liq) (No 2) (2019) 58 VR 129, 142-3 [53] (Kyrou, McLeish and Hargrave JJA), discussing Talacko v Talacko [2009] VSC 579 (Kyrou J) (citations omitted).

[23] See, eg, Benjamin Corp Pty Ltd v Smith Martis Cork & Rajan Pty Ltd [2003] FCA 1471, [358].

[24] Principal Reasons [176]-[179].