Kation Pty Ltd v Lamru Pty Ltd

Factual background 5Before dealing with the cross-claim itself, it is necessary to say something more about the history of the dispute between Kation and Lamru. 6Following the appointment of a liquidator to Nortex, Lamru lodged a proof of debt for $2,301,985.79. Broadly speaking, that proof of debt had three components. 7One component was for Lamru's loan account balance which, at the date of liquidation, was said to be $786,279.37. A second component consisted of various claims in respect of benefits which were said to have been received improperly by Mr Lewis or Mr Mark Lewis, who was Mr Peter Lewis's son and who also worked in the business carried on by Nortex. A third component arose from what were said to be unequal profit distributions made to Kation and Lamru. 8The liquidator admitted Lamru's proof of debt for $494,921.37. In doing so, he accepted Lamru's claim in respect of the loan account subject to an adjustment. However, the liquidator rejected claims based on allegations that Mr Peter Lewis and Mr Mark Lewis had improperly received benefits from Nortex and claims based on the allegation of unequal profit distributions. 9Lamru lodged an appeal against the liquidator's partial rejection of its proof of debt and at the same time commenced separate proceedings against Kation, Mr Peter Lewis and Mr Mark Lewis in respect of the matters that had been raised in the proof of debt. 10Both proceedings came before Hamilton J. His Honour ordered that Lamru prepared a consolidated points of claim. The issues raised by an amended version of that claim were heard by his Honour over a lengthy period of time. His Honour delivered his principal judgment on 29 November 2004. 11One of the matters that it was necessary for Hamilton J to determine in the proceedings was the correct calculation of distributable income for the Trust in each financial year. One issue relevant to that question was whether Kation and Lamru had adopted two "accounting conventions" relating to the way in which certain items were to be dealt with in the accounts of Nortex (or the Trust) and, if so, whether those conventions were inconsistent with the trust deed governing the Trust. One of those conventions - referred to by the parties in the hearing before Hamilton J as the "differential interest convention" - turned on whether Kation and Lamru had reached an agreement in terms of the one in contention in these proceedings. On that issue, Hamilton J said (see Lewis v Nortex Pty Ltd (In Liq) [2004] NSWSC 1143 at [61]): The "differential interest convention" flowed from an agreement that any money lent by the unit holders to the trust should be lent at interest. This convention was to deal with the situation where the amounts lent by the unit holders were unequal, which was virtually always the case. Rather than the unit holders charging and the trust paying this interest, the agreement constituting the convention was that the interest differential, ie, the difference between the amounts payable to the unit holders respectively, should be regarded as a debt payable between the unit holders directly. This was usually discharged by an adjustment of the amounts respectively credited to them as their shares of the free net income when determined. Later, at [73], Hamilton J said: Lastly, I should record a finding as to who were the parties to the agreements. First of all, the Lewis interests submitted that any agreements that there were (and they seemed to concede, as they had to, that they existed) were between only Kation and Lamru. Bearing in mind that the directors of Nortex were Lewis and Lamb and the unit holders Kation and Lamru, it should be taken that the agreement was a tripartite one, the consideration for the agreements among all three parties being the entry of the others into the agreements. In my view, Lewis and Lamb should be taken to have acted as directors of Nortex, as well as directors of their respective companies, in entering into the conventions. I find that Nortex was also a party to the agreements. But that matters little. Even if the conventions were agreements between Lamru and Kation only, those companies as unit holders agreed to direct, and did direct, the trustee to act in the way that it did. The result of that direction (Lamru and Kation being all the unit holders of the trust) was that there was no breach of trust, or certainly no breach of trust which could be relied on, in the trustee acting in the way it did. Agreements to which Lamru and Kation were parties, which there undoubtedly were, would be sufficient to ensure that result. Finally, his Honour dealt with the question when the two conventions in issue came to an end. On that issue, his Honour concluded that there was no basis for finding that the conventions had terminated: see [2004] NSWSC 1143 at [74]-[75]. 12In a later judgment (Lewis v Nortex Pty Ltd (In Liq) [2006] NSWSC 480), Hamilton J went on to make findings in relation to the precise amount of each of Kation's and Lamru's loan account balances as at the date of liquidation. Having made those findings, his Honour made the following declaration: (7) Declare that as a result of the foregoing declarations and orders the balances of the loan accounts with Nortex of Lamru and Kation respectively as at the date of the commencement of the winding up of Nortex (2 September 1997) should stand at: Lamru - $1,149,745.62 Kation - $679,579.55 13There was an appeal from Hamilton J's judgment: Kation Pty Ltd v Lamru Pty Ltd (2009) 257 ALR 336; [2009] NSWCA 145. Although the Court of Appeal varied the orders made by Hamilton J in some respects, it left untouched the findings his Honour had made in relation to the differential interest convention: see [2009] NSWCA 145 at [141]-[142]. In a supplementary judgment (Kation Pty Ltd v Lamru Pty Ltd (No 2) [2009] NSWCA 428), the Court of Appeal varied the declaration made by Hamilton J in respect of the loan account balances: see [2009] NSWCA 428 at [30]ff. 14Following the decisions of the Court of Appeal, the court on 23 July 2010 made consolidated orders in terms of those made by Hamilton J as varied by the Court of Appeal. Relevantly, those orders provided: (2) In relation to the issues concerning the agreements referred to in the proceedings as the add-backs convention and the differential interest convention ("the conventions"): (a) DECLARE that the implementation of the conventions did not constitute a breach or breaches of trust; (b) DECLARE that the conventions continue in operation and have not ceased to have effect; ... (7)DECLARE that as a result of the foregoing declarations and orders the balances of the loan accounts with Nortex of Lamru and Kation respectively as at the date of the commencement of the winding up of Nortex (2 September 1997) should stand at: Lamru - $1,197,673 Kation - $631,651. 15In these proceedings, Lamru relies on the findings made by Hamilton J and the declarations made by the court as creating issue estoppels in relation to the existence and terms of the agreement on which it sues. In addition, Mr Lamb swore an affidavit setting out in detail the conversation he said he had with Mr Lewis in 1990, when he was negotiating to acquire a 40 percent interest in the Trust, concerning the agreement in relation to the loan accounts. That evidence was in these terms: Lewis said: We treat everything in the same way. Profits are split in proportion to ownership. Cash sales are split in the same proportion. Any private type items like salaries and motor expenses are treated as advances against our profit shares. It is only fair that we maintain loan accounts with Nortex in the same in proportion [sic] as our ownership. Any over or under lending is effectively a loan between the unit-holders so we agree an interest adjustment for the difference. According to Mr Lamb, after Mr Lewis produced a document, the conversation continued: Lewis said: In order to adjust for the over or under lending by the unit holders to Nortex, we calculate the average balance of the loan accounts for the year. Once these are agreed between us, we calculate the difference to see who has effectively been lending money to the other unit holder. By agreement, we make an interest adjustment between us. In this case Dufty and I agreed to round off to $10,000. I said: OK, that seems fair. 16Later, at some time around 1991, Mr Lamb said that he and Mr Lewis had a discussion in words to the following effect: Lewis said: As Nortex banks with the Commonwealth Bank, we use the Commonwealth Home loan rate to adjust between the unit holders for the over or under lending to Nortex. I said: That seems reasonable. I agree. 17Mr Lewis did not give evidence. Mr Lamb was cross examined. However, it was not put to him that his account of the conversations he had with Mr Lewis concerning the agreement was incorrect. It was suggested to Mr Lamb that the adjustments made in accordance with the agreement were dealt with by adjustments to the loan account. Mr Lamb agreed that that was so in 1991 to 1994, but he said nothing about later years and he was not pressed on the issue. 18Having regard to the fact that Mr Lewis did not give evidence and that Mr Lamb was not cross-examined on his evidence of the conversations, I accept the evidence given by Mr Lamb concerning the agreement in relation to the loan accounts. In any event, an issue estoppel exists in relation to that issue arising from the findings of Hamilton J.

Lamru's claim 19In his affidavit, Mr Lamb calculates Lamru's claim starting at 30 June 1996. At that time, taking account of adjustments made by Hamilton J and the Court of Appeal, Mr Lamb calculates that Lamru had under lent to Nortex by an amount of $325,307.27. The following year as at 30 June 1997, Mr Lamb calculates, again making adjustments made by Hamilton J and the Court of Appeal, that Lamru had over lent by $465,943.40. He also gave evidence that no change to the loan accounts occurred in the period from 1 July 1997 to 2 September 1997 so that the figures for the loan accounts specified in paragraph (7) of the orders made on 23 July 2010 were also the figures for 30 June 1997. Consequently, in accordance with the agreement, Lamru claims that, as at 30 June 1997, Kation owed it $465,943.40 together with interest on the difference between the balances as at 30 June 1996 and 30 June 1997 (that is, $70,318.07) at CBA rates. For each subsequent year, since the loan balances did not change, Lamru claims interest on the whole of the $465,943.40 at CBA rates. It also claims in accordance with s 100 of the Civil Procedure Act 2005 (NSW) interest on the unpaid interest from the date that that interest ought to have been paid until the date of judgment.

The issues 20Mr Johnson, who appeared for Kation, did not cross-examine Mr Lamb on his calculation of the loan balances as at 30 June 1996 or 30 June 1997. Nor did he submit that the figures arrived at by Mr Lamb were incorrect for some reason. In those circumstances, I can see no reason why those figures should not be accepted. 21Mr Johnson did, however, raise four issues in relation to Lamru's claim. First, he submitted that it was part of the agreement that the amount payable in accordance with it would be settled through the respective loan accounts. In his submission, the court determined the amount of those loan accounts as at 2 September 1997 (and therefore as at 30 June 1997) and that determination operates as an issue estoppel between the parties. In written submissions, Mr Johnson also asserted that the declaration of the court in respect of the respective loan accounts operated as a res judicata or alternatively that the principles of law established in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 applied to preclude Lamru from maintaining its cross-claim. However, res judicata and Anshun estoppel are not raised by Kation's defence to the cross-claim and, having regard to the way in which the defence is put, it is difficult to see what they add. Kation's case is that the amount of the loan accounts has already been determined by the court. It is not suggested that the court has already determined Lamru's claim that it is entitled to recover from Kation the amount it over-lent together with interest on that amount so as to give rise to a res judicata. Nor is it suggested that that claim ought to have been brought in the proceedings heard by Hamilton J so as to give arise to an Anshun estoppel. 22Second, Mr Johnson submitted that, if the court made an order in terms of those sought, then the loan accounts would require adjustment. However, the amount of those loan accounts have already been fixed by the orders made by the court. 23Third, Mr Johnson submitted that Lamru's calculation of the amount due to it was flawed because, even if the amount owing under the agreement could not be processed through the Nortex loan accounts after Nortex went into liquidation, it could have been processed through those loan accounts before that date. As a result, Lamru was only entitled to claim interest from Kation from 2 September 1997. 24Fourth, Mr Johnson submitted that the court should not in the exercise of its discretion award interest under s 100 of the Civil Procedure Act.

25The first three issues raised by Mr Johnson turn on the same point, which is whether it was a term of the agreement that the adjustments required to be made by the differential interest convention would be made through the loan accounts. If that was a term of the agreement then the only way Lamru could pursue its claim was through an adjustment to the loan accounts. However, the amount of those loan accounts has been fixed by the orders of the court made on 23 July 2010. 26I do not accept this submission. I do not accept that it was a term of the agreement that amounts due under the differential interest convention would only be paid through adjustments to the loan accounts. Hamilton J made no such finding. The finding his Honour made was that that was the way that the adjustment was usually made, and the evidence that Mr Lamb gave was that that is what happened in the earlier years. But neither of those matters establishes that it was a term of the agreement that the adjustment would be made in that way. It is one thing for the adjustment in respect of interest to be made in that way while Nortex was a going concern. It is another thing for the adjustment to be made in that way once Nortex became insolvent or went into liquidation. 27The agreement on which Lamru sues has two aspects. The first is that any over or under lending was to be treated as a debt between the unitholders. That aspect of the agreement arises from the statement by Mr Lewis to the effect that "Any over or under lending is effectively a loan between the unit-holders ...". The commercial rationale for such an agreement is obvious. What was intended was that neither unit holder would be exposed to Nortex for an amount which was disproportionate to their interest in it. To the extent a unit holder's exposure was greater, it was agreed in effect that the other unit holder would give an indemnity to the over exposed unit holder to the extent of the over exposure. It was not necessary for Hamilton J to make any finding on this aspect of the agreement since it is not relevant to the calculation of the amounts due from one party or the other. It is only relevant to who is liable for the over exposure once determined - that is, whether it is a liability of Nortex only or whether it is also a liability of the other unit holder. The second aspect of the agreement was that the unit holder which was under exposed would pay interest on the amount of the over exposure of the other unit holder. 28While Nortex was a going concern, there was no issue in relation to the first aspect of the agreement. However, once it went into liquidation, the indemnity became of practical significance and, as things transpired, it was Lamru that had over lent and consequently it was Lamru that was entitled to be indemnified by Kation. Similarly, while Nortex remained a going concern, there was no reason not to make the interest adjustments through the respective loan accounts. However, once Nortex went into liquidation, payment in that way would not be effective payment. In those circumstances, in accordance with the agreement, Lamru is entitled to recover the interest directly from Kation. It was necessary to fix the loan accounts as at 30 June 1997 in order to determine the precise extent of the over lending. But the fixing of those amounts did not alter the fact that it was an obligation placed on Kation to indemnify Lamru in respect of its over exposure and to pay interest on that amount. 29In my opinion, the position is not altered by the fact that Hamilton J held that the agreement on which Lamru sues was a tripartite one involving Nortex as well. As Hamilton J pointed out, it matters little whether Nortex was a party to the agreement. What is important in the present context is that Lamru and Kation were parties to the agreement and under the terms of the agreement Kation itself agreed to pay Lamru the amount of any overpayment by Lamru together with interest on that amount. 30In my opinion, Lamru is entitled to recover interest under s 100 of the Civil Procedure Act. The interest it claims is interest on the interest payable under the agreement. The interest payable under the agreement was payable at the end of each financial year. Lamru has been out of pocket in respect of that interest since it was due. There is no reason why Lamru should not be entitled to interest under s 100 to compensate it for that fact. 31Mr Johnson submitted that Lamru should not be entitled to interest because it has been guilty of inordinate delay in bringing its claim. I do not accept that submission. It was not possible to quantify the amount of Lamru's claim until the balances of the loan accounts were finally resolved. That did not occur until 2010. Consequently, Lamru has not delayed excessively in pursuing its claims.

32There should be judgment for the first cross-claimant for the sum of $1,317,990.64 together with interest from 6 September 2012 to the date of judgment. The parties should bring in short minutes to give effect to that order. If the parties cannot agree on the terms of the short minutes of order, the matter should be re-listed for further argument. 33The cross-defendant should pay the cross-claimants costs.

Amendments 18 October 2012 - the words "cross defendant" in first sentence changed to "cross claimant" Amended paragraphs: 1 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 October 2012