(c) in 1997 - $138,733.30 to Mr Mark Lewis.
86 His Honour concluded that each of the payments was made in breach of the trust deed and ordered that the Nortex accounts be adjusted with respect to the 1995 financial year and that Mr Peter Lewis reconstitute the trust by payments of the amounts paid to Mr Mark Lewis in breach of trust in 1996 and 1997: order 3(d), (e) and (f).
87 Mr Mark Lewis, the son of Mr Peter Lewis, worked for Nortex for several years on a base salary of $36,000 per annum. However, in the 1995 financial year Mr Peter Lewis sought to debit against the net profits of the company, before ascertaining the free net income for the purpose of distribution between the unitholders, an amount of $58,070 which was originally attributed in the account to Kation, but was later transferred to the loan account of Mr Mark Lewis. The figure was calculated as a bonus of 15% of the 1995 net profits, payable in respect of the second half of the financial year only and calculated as 7.5% of the annual net profits. In the 1996 financial year Mr Mark Lewis was credited with a bonus of 15% of the annual profit, being an amount of $101,626. Mr Lamb did not agree with the arrangement and Mr Lewis credited the 1996 bonus to Mr Mark Lewis after Mr Lamb had ceased to work in the business. In the 1997 financial year Mr Peter Lewis approved a bonus payable to his son at the rate of 50% of the net profits, being an amount of $138,733.30.
88 The total amount paid by way of bonuses from the profits to Mr Mark Lewis over the three years was $298,429.30. Lamru's 40% share of that amount was $119,371.72.
89 The trial judge dealt with the claims with respect to these payments by considering, first, whether the payments were made pursuant to a binding contract between Nortex and Mr Mark Lewis or constituted payments by Nortex in breach of trust: [94] and [96]. His Honour held that there was no evidence of a contract between Nortex and Mr Mark Lewis with respect to these amounts, nor was there evidence that Mr Lamb, as a director of Nortex, consented to the payments: at [97]. Rather, his Honour concluded that "Lamb did not agree to Mark Lewis having a share of profits out of Lamru's entitlement, but rejected the suggestion whenever [Peter] Lewis put it to him": at [103]; see also [105] and [107].
90 Mr Peter Lewis and Kation, in their appeal, complain of his Honour's findings in relation to breach of trust; Lamru, in its cross-appeal, complains of the orders (to which further reference will be made below) which did not require payment by Mr Peter Lewis and Kation to Lamru of its share of the payments, but rather the reconstitution of the Nortex trust. It is convenient to deal first with the challenge on the appeal to the findings of breach of trust.
(2) Breach of trust - a severed question?
91 The primary complaint in relation to these findings is that on day two of the trial, Hamilton J ordered that the claims against Mr Mark Lewis be dealt with separately and after the other matters which had been set down for hearing. Kation contended that even if his Honour had been correct in holding that Nortex had no contractual obligation to make the payments, Mr Mark Lewis would nevertheless have had alternative bases for claiming additional remuneration which may have allowed the liquidator to admit his proof of debt in part, on the basis of compromising either a threatened claim in quantum meruit or an application to the Industrial Relations Commission, seeking a variation of his employment contract pursuant to s 106 of the Industrial Relations Act 1996 (NSW). In the course of the trial, after considerable debate, evidence from the liquidator was taken on the voir dire in relation to the stance he took with respect to the claim by Mr Mark Lewis, namely that he disallowed the payments of the bonuses on a contractual basis but agreed to allow a lesser amount on the basis that it would be a reasonable compromise of a quantum meruit claim for the work in fact undertaken by Mr Mark Lewis for the years in question. However, expert evidence upon which the liquidator had relied was not admitted in evidence at the trial. The claim by Kation and Mr Peter Lewis was that, if the bonuses had been credited in breach of trust, the amount which they were required to make good to the trust was limited to the loss suffered by the trust. If the trust were legally liable for some amount payable to Mr Mark Lewis in excess of his salary, that amount should be assessed before relief was granted to Lamru against Mr Peter Lewis and Kation.
92 In order to assess this complaint, it is necessary to note the terms of the order made on the second day of the trial. The purpose of the order was to excuse Mr Mark Lewis from attending and incurring costs with respect to matters in which he had no interest. Following discussion, counsel for Mr Mark Lewis made the following application (Tcpt, 11/04/02, p 92):
"Your Honour, I am instructed in proceedings 1750/02 to make an application which I understand is made by consent for an order that pursuant to Part 31 rule 2 the claims against the third defendant [Mark Lewis] be heard separately and after the trial of the balance of the proceedings."
93 After confirming with counsel for the other parties that there was indeed consent, his Honour made the order, in the following terms:
"By consent I order in 1750/02 that all questions arising from the claims against the third defendant be determined separately from and after the other questions in the proceedings."
94 At that stage no point appears to have been taken that the order which his Honour made varied from that for which counsel had applied and to which others had consented, by adding before the words "the claims against the third defendant" the words "all questions arising from": no one commented on this addition at the time.
95 There was a further aspect to the order, namely that it was restricted to the proceedings commenced by Lamru against Kation in which Mr Mark Lewis was the third defendant: it did not in terms relate to the statutory appeal with respect to the liquidation, although the 2002 proceedings had been commenced only the previous month and were said to have been "consolidated" with the statutory appeal.
96 The present issue highlights an underlying tension in the two sets of proceedings: one was concerned with the proper administration of a company in liquidation; the other with claims for breach of trust by the company in its own role as trustee. Pursuant to the trust deed (clause 30) the office of a trustee "shall be ipso facto determined and vacated" if the trustee enters into either compulsory or voluntary liquidation. That may have had consequences for steps taken by the liquidator on behalf of the company, but no point appears to have been taken in that regard in the proceedings.
97 The claims against Mr Mark Lewis included being knowingly concerned in the breaches of trust alleged with respect to the bonus payments in 1996 and 1997. Whether or not there were such breaches of trust was undoubtedly a question which arose in the proceedings with respect to Mr Mark Lewis, but was also critical in relation to proceedings against Kation and Mr Peter Lewis. In answer to the claims against them with respect to the payment of bonuses, Kation and Mr Peter Lewis maintained that the payments were made "pursuant to valid and binding agreements between Nortex and [Mr Mark Lewis], were permitted by Clause 18B(6) of the Trust Deed, were for valuable consideration and were for amounts commensurate with the duties performed and responsibilities undertaken by the third defendant, and further in respect of the financial years ended 30 June 1995 and 30 June 1996 were made with the knowledge and consent of the plaintiff [Lamru] by its agent, Lamb".
98 It would appear that the consent order was either intended to exclude from the proceedings all questions in respect of the bonus payments, or permitted the determination of those questions but only in relation to the liability of the first and second defendants, Kation and Mr Peter Lewis. If the latter were correct, it could be anticipated that inconsistent findings could arise from the further separated proceedings. If the former course had been intended, it might have been expected that the consent order would identify the limitation being imposed on the proceedings with respect to the first and second defendants with some greater particularity.
99 It seems tolerably clear from the course of the proceedings that the more limited separation was intended. Somewhat ironically, a dispute with respect to the admission of evidence arose because counsel for Kation and Mr Peter Lewis was seeking to elicit from the liquidator the view that he had taken with respect to the bonuses. That evidence was objected to by counsel for Lamru. However, it does not appear that either party proceeded on the basis that the bonuses issue should not be determined with respect to the claims against Kation and Mr Peter Lewis. Those parties in particular actively agitated those issues.
100 There was no dispute as to the existence of a contract between Nortex and Mr Mark Lewis, nor as to the payments properly made in pursuance of that contract. This was not a case of services rendered under an ineffective or void agreement: cf Craven-Ellis v Canons Ltd [1936] 2 KB 403. It was a case in which, at its highest, Mr Mark Lewis may have had an argument that the level of his remuneration was unfair, given the work he performed. That was an argument, as recognised by Kation, which might have supported proceedings in the Industrial Relations Commission. Not only had no such proceedings been commenced (more than a decade after the termination of his employment) but, more importantly, the payment was not made on that basis.
101 If there had been a purported contractual relationship between Nortex and Mr Mark Lewis, other than the acknowledged contract of employment, that was a matter as to which either Mr Peter Lewis or Mr Mark Lewis could have given evidence. That evidence would have been relevant to the defence pleaded by Mr Peter Lewis and Kation. No such evidence was adduced or tendered. There is no factual basis for concluding that, in the course of the proceedings, counsel for the appellants was dissuaded from adducing such evidence because the defence filed on behalf of Kation and Mr Peter Lewis, was not relevant, as it responded to paragraphs of the amended consolidated points of claim which were not before the Court on the hearing. If the appellants had held such an expectation, it seems inevitable that it would have been recorded and, if there were some doubt about the matter, an application made to clarify the position. The holding of any such view is inconsistent with the attitude taken by counsel in relation to, amongst other issues, the cross-examination of the liquidator. This challenge to the entitlement of his Honour to make findings with respect to the bonuses, so far as they raised issues pleaded against Kation and Mr Peter Lewis, should be rejected.
(3) Efficacy of 1997 bonus payment
102 The "Mark Lewis loan account", in the books of Nortex, indicated that on 3 July 1995 the company loaned Mr Mark Lewis an amount of approximately $224,000, which accrued interest at the rate of 10.5% compounding annually. When account was taken of some minor additional loans, the balance outstanding as at 30 June 1997 was a little over $282,000. Had the bonuses been properly credited to the account, there would have been a small balance payable in favour of Mr Mark Lewis.
103 A provisional liquidator was appointed to Nortex on 8 July 1997, the official liquidator being appointed on 3 September 1997, by which stage the business of Nortex had been sold. The 1997 financial year bonus was not credited to Mr Mark Lewis' loan account until a journal entry of 8 September 1997, the entry being made by Mr Peter Lewis. Kation and Mr Peter Lewis argued that the entry was simply ineffective, by virtue of the operation of s 471A of the Corporations Law, as then in force. In practical terms, this apparent change of heart on the part of Mr Peter Lewis left Nortex with a potential claim against Mr Mark Lewis for payment of the balance of his loan account, which, since September 2003, would be statute barred. As appears from his Honour's supplementary judgment of 19 May 2005, there had been no allegation that the crediting of the 1997 bonus payment to Mr Mark Lewis' loan account with Nortex was otherwise than a valid action, subject to the question of whether the amount was properly owing to him from Nortex: [2005] NSWSC 482 at [29].
104 As discussed in the course of argument, if the company were no longer the trustee of the Nortex unit trust after the appointment of a liquidator, the liquidator may be seen to act as a de facto trustee or receiver of the trust. Assuming, however, in accordance with the way in which the case was run, that the real question was whether the payment of the 1997 bonus, by a journal entry reducing Mr Mark Lewis' loan account balance, was effective, the answer was said to depend upon whether it was undertaken "with the liquidator's written approval" for the purposes of s 471A(1)(c). In truth, the question was whether a credit had been given against a debt which was otherwise recoverable, but absent any legal liability on the part of the company to provide such a credit, arising from conduct prior to the liquidation. If Mr Mark Lewis had a contractual entitlement which had arisen from work done in the year ending 30 June 1997, that entitlement had both to be recognised by the liquidator and taken into account in respect of the net profit of the trust. If there were no such entitlement, the net profit of the trust was increased by that amount and Lamru's claim for 40% of that amount was made good.
105 In adopting the accounts prepared by Mr Peter Lewis, it was contended that the liquidator gave written approval to the transaction. However, the payment was not made by a journal entry, after the appointment of the liquidator: on the case which was run at trial the journal entry must be taken as relating to an actual payment made during the financial year ended 30 June 1997 and before the appointment of the provisional liquidator. As his Honour noted, he had proceeded in his principal judgment on the basis that "the payments to Mark Lewis in respect of those years [1995, 1996 and 1997] had in fact been made": [2005] NSWSC 482 at [28]. He noted that that was the basis on which the case was conducted by all parties prior to his principal judgment. His Honour then noted, at [29], that submissions on the form of orders on the part of the Lewis interests were based on the proposition that in the 1996 and 1997 years no payments were made. He discussed the effect of the journal entry and the liquidator's conduct in approving it, reaching the finding that it was effective. It was that finding which was the subject of challenge on the appeal. However, his Honour continued in the same paragraph concluding:
"I do not propose to allow any departure from the basis on which the trial was conducted, namely, that the payments had been made, or to go behind what was said in my judgment concerning the breaches of trust in any way."
106 It followed that the challenge to the efficacy of the 1997 bonus payment was a false issue. Accordingly, knowing that the payment was not a true liability of Nortex, that payment was fraudulently induced by Mr Peter Lewis.
(4) Interest on bonuses
107 A subsidiary issue on the appeal related to an order by his Honour that interest should be paid on the amounts of the so-called bonuses payable to Mr Mark Lewis, calculated at Supreme Court rates. The appellants argued that the bonuses were effected by journal entries against Mr Mark Lewis' loan account, which carried interest at 10.5% up to 1996 and at 7.55% thereafter, the consequential loss to Nortex would be satisfied by the notional reinstatement of the loan account and payment of the lost interest.
108 In response the liquidator accepted that the rate fixed in 1997 was 7.55% per annum, but contended that if it had been an asset of the company, the obligation of the liquidator was to call in the loan, with the result that the interest rate charged prior to the liquidation no longer reflected the loss to the company thereafter. The liquidator also submitted that a proper assessment of the loss justified interest compounded on annual rests. (There was no challenge to the part of the order involving compounding, but merely to the rate at which interest was to be calculated.)
109 The evidential basis for the appellants' assertion about the rate of interest was unclear. The loan account summary, prepared by the liquidator and annexed to his letter to Mr Mark Lewis of 11 January 2000, stated "Interest Rate Per Nortex General Ledger 10.5%" with a note that the interest compounded annually.
110 In his judgment of 23 May 2006, Hamilton J concluded that the trust had made a loss from the reduction of the loan account as it was deprived of the interest which would otherwise have accrued on the outstanding balances: [2006] NSWSC 480 at [11]. His Honour concluded, in accordance with principles stated in Ford and Lee, Principles of the Law of Trusts at [17,140], that compound interest might be awarded in cases of breach of trust, "(1) where the breach is of a particularly wilful or heinous kind; (2) where the trust has been engaged in a business income earning activity, so that, had the misappropriation not occurred, the amount misappropriated would have earned income for the trust."
111 His Honour concluded that both factors were satisfied and that accordingly interest should be awarded on a compound basis with annual rests. His Honour stated that that approach was supported by the judgment of Giles JA in Harrison v Schipp [2001] NSWCA 13 at [128]-[130]. It is common ground that awarding interest, compounded on an annual basis, was within the general discretion available to the Court, as described by Heydon and Leeming in Jacobs' Law of Trusts in Australia (7th ed, 2006) at [2209]. No basis has been demonstrated for interfering with his Honour's exercise of that discretionary power.
112 In respect of the 1996 and 1997 bonus payments, the orders of 23 May 2006 require that Mr Peter Lewis reconstitute the trust by paying the full amount of each bonus together with interest calculated under the Uniform Civil Procedure Rules 2005 (NSW) from 30 June of the respective years. It is common ground that, whatever order was appropriate against Mr Peter Lewis, it should have concerned 40% of the bonus payment and not the full amount. To the extent that interest was fixed at the court rates, they were, for the last six months of 2006, 9% and thereafter 10%: UCPR, Sch 5.
113 If this issue stood alone, it would not be a matter with respect to which leave to appeal should be granted. However, because the orders with respect to the bonus payments will need to be varied in any event, it is appropriate that leave be granted but that the ground of challenge with respect to the award of interest be dismissed.
(5) Finding of dishonesty of trustee
114 A final challenge with respect to the bonus payments was that, in order to grant relief in respect of breach of trust, it was necessary for his Honour to find that the conduct of the trustee constituted a dishonest and fraudulent design on the part of the trustee. Kation and Mr Peter Lewis said that allegation was not pleaded, or otherwise available in the circumstances.
115 In considering the liability of Kation and Mr Peter Lewis in respect of the bonus payments, his Honour referred to the discussion of "accessorial liability", setting out the passage from Lord Selborne LC's judgment in Barnes v Addy (1874) LR 9 Ch App 244 at 251-252 in the principal judgment at [179]. His Honour also noted a passage in Meagher and Gummow's Jacobs' Law of Trusts in Australia (6th ed, 1997) at [1334] in which the authors note that Lord Selborne "also treated as clearly liable as trustees third persons 'actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust'". In Jacobs' Law of Trusts in Australia (7th ed, 2006), the authors note at [1334]:
"That is, whatever the required mental state for a third party who participates in a fiduciary's breach, it is not necessary to establish that the fiduciary was behaving dishonestly. This has now been affirmed by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [[1995] 2 AC 378 at 384-385]. Among the pre- Barnes v Addy authorities to which their Lordships refer is Eaves v Hickson [(1861) 30 Beav 136; 54 ER 840], in which the trustees had been guilty of breach of trust by paying over trust funds to the illegitimate children of one Knibb upon the faith of a marriage certificate which Knibb had produced to them knowing it was forged; Knibb was made responsible, with the trustees, for the moneys lost. The fraudulent design was that of Knibb, not the trustees he duped, and on neither limb of Barnes v Addy would he have been liable."
116 The submissions for the appellants elide the distinction between participation as a principal and accessorial liability. They seek support in that position from statements in the unanimous judgment of the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 at [159]-[183], a passage which appears under the heading "Second limb of Barnes v Addy". Reliance on this authority does not assist the appellants. The High Court stated:
"[160] As conventionally understood in Australia, the second limb makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary.
[161] Several points of a general nature should be made here. The first concerns the scope of the second limb. This was not expressed by Lord Selborne LC as an exhaustive statement of the circumstances in which a third party who has not received trust property and who has not acted as a trustee de son tort nevertheless may be accountable as a constructive trustee. Before Barnes v Addy , there was a line of cases in which it was accepted that a third party might be treated as a participant in a breach of trust where the third party had knowingly induced or immediately procured breaches of duty by a trustee where the trustee had acted with no improper purpose; these were not cases of a third party assisting the trustee in any dishonest and fraudulent design on the part of the trustee.
[162] Secondly, the distinction has been recognised in the Australian case law but, on one reading of Royal Brunei Airlines Sdn Bhd v Tan , may have been displaced by the Privy Council in favour of a general principle of 'accessory liability' expressed as follows:
'A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. "Knowingly" is better avoided as a defining ingredient of the principle'.
[163] Thirdly, whilst the different formulations of principle may lead to the same result in particular circumstances, there is a distinction between rendering liable a defendant participating with knowledge in a dishonest and fraudulent design, and rendering liable a defendant who dishonestly procures or assists in a breach of trust or fiduciary obligation where the trustee or fiduciary need not have engaged in a dishonest or fraudulent design."
117 In the present case, so far as Nortex was concerned, Mr Peter Lewis was its human emanation. His acts were its acts and his intention and state of mind were the intention and state of mind of the company. It was he who procured the company to act in the way that it did. Similarly, in so far as Kation was the recipient of the first bonus payment, in breach of trust, its state of mind was that of Mr Peter Lewis.
118 There was no error in the way in which the trial judge approached this question: nor does Farah Constructions, decided after his Honour's judgment, require any different approach. Indeed, Farah Constructions is supportive of the approach of the trial judge. This ground of challenge must be rejected.
(6) Equitable compensation
119 In its cross-appeal, Lamru challenged the limited relief provided by the primary judge, which involved the adjustment of the accounts for 1995 and the reconstitution of the trust fund for the 1996 and 1997 years. The effect of such reconstitutions, Lamru complained, was merely to provide further funds to be eaten up by the claims of the liquidator for his costs and expenses.
120 In relation to the 1996 and 1997 bonuses, Lewis and Kation supported Lamru's contention, no doubt because that did not require them to disgorge the whole of each payment with interest, but only Lamru's share, with interest: Appeal Tcpt, 30/10/08, p 236 (20). They resisted any payment with respect to the 1995 bonus. The liquidator, by contrast, supported his Honour's orders with respect to the adjustments to the Nortex accounts and the reconstruction of the trust.
121 In respect of the 1995 financial year, the appellants sought to raise an additional argument: because Mr Lamb remained actively involved in the Nortex business until late in the following financial year, it is not clear that any amount standing to the credit of Lamru in the trust accounts as at 30 June 1995 would have been paid to Lamru. Counsel referred to other factual matters, including bank covenants, which required Nortex to maintain certain amounts in its loan accounts. This, it was contended, was a matter which should have been taken into account, with the benefit of hindsight.
122 This approach was not entirely consistent with that adopted by the trial judge. His Honour noted that, pursuant to cl 4(2) of the trust deed (set out at [57] above), Nortex was required to hold "as a separate trust fund the Free Net Income … in trust absolutely for the Unit Holders … in the Specified Proportion". In 1995, the bare trust created by cl 4(2) was, with respect to Lamru's share, 3% less than it should have been, but that trust was dissipated by distribution to the respective loan accounts of Kation and Lamru: [2005] NSWSC 482 at [36]. The payment to Mr Mark Lewis in that year did not come from Nortex, but from Kation's loan account. His Honour then concluded at [37]:
"There should be a declaration that there was a breach of trust and that Lewis assisted with knowledge in a dishonest design on the part of the trustee and a declaration that Kation received and became chargeable with the relevant part of the trust property."
123 His Honour then concluded that Lamru's loan account should be credited with the additional 3%, of which it had been deprived: at [38]. His Honour further stated that there was no point in reconstituting "the long disbursed bare trust fund": at [39]. He held:
"Lamru is therefore entitled to an order for compensation in its favour, provided there can now be regarded as being a loss which Lamru has suffered by reason of this breach of trust."
124 Lamru also claimed an entitlement to equitable compensation from Lewis and Kation, quantified in such a way as to place it in the position it would have been in immediately prior to the winding up of the trust, if the breaches had not occurred. This, Lamru contended, was not a case in which restoration of the trust fund, for continued administration by a trustee, would provide a remedy. In accordance with the reasoning of the High Court in Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; 212 CLR 484 at [43], "the misapplication of the moneys held on trust on terms that, in the events that happened, obliged [Lewis and Kation] to hold the moneys absolutely for [Lamru] and at its direction". Thus Lewis and Kation were liable to pay the money to Lamru personally by reason of their breach of trust. This obligation was not diminished by the subsequent winding up, nor was it necessary to find that the winding up itself was contributed to by the breach of trust, although Lamru contended that it was. This was not a case in which the funds removed from the fund in breach of trust were subsequently used for the intended purpose, with the result that no loss followed from the breach: cf Target Holdings Ltd v Redferns [1996] AC 421.
125 This conclusion was not accepted by the trial judge because he held that, even if the trust fund had been reconstituted, the value had diminished in the meantime, "but that diminution has not in any sense been caused by the breach of trust": [2005] NSWSC 482 at [40]. This reasoning appears to have been based upon statements in cases such as Target Holdings that in a case of breach of trust, the loss must be assessed at the time of judgment, with, as his Honour said, "the full benefit of hindsight".
126 If it were necessary to conclude that the diminution of the trust was at least contributed to (in the language of causation in tort) by the breach of trust, such a finding should be made. Mr Lamb's evidence was that the attempt by Mr Lewis to obtain his consent to payment of a bonus to Mr Mark Lewis had been critical in the breakdown in the relationship. However, in accordance with the principles articulated in Youyang, that inquiry is not necessary or appropriate. The funds did not in fact, at any stage, find their way into any fund or security, in accordance with the trust purposes. Lamru was deprived of money which it should have received by way of a distribution of the trust at or shortly after the time of breach.
127 The liquidator argued that the breach committed by Mr Peter Lewis was a wrong against the trust and that the correct order was to make good the trust. In support of that proposition he sought to rely upon a number of decisions including Ogilvie-Grant v East (1983) 7 ACLR 669 at 672 (McPherson J, Campbell CJ and Sheahan J agreeing) in the Queensland Supreme Court; Aliprandi v Griffith Vintners Pty Ltd (In liq) (1991) 6 ACSR 250 at 252(35) (McLelland J) and Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (1988) 17 FCR 344 at 350-352 (Gummow J). However, those cases have nothing to say about the position of a party in the position of Lamru seeking equitable compensation from the manager of the trustee company, for breach of trust. Each is concerned with the powers of control vested in a liquidator in respect of litigation defending or seeking to recover the assets of the company.
128 With respect to the payments in the 1996 and 1997 years, his Honour noted that it was possible to reconstitute the Nortex trust fund, because, unlike the bare trusts of the free net income, it was a subsisting trust: at [41]. He found that the accounts could not be adjusted because that would involve a consequential reconstruction of the liabilities of Mr Mark Lewis, which could not happen in his absence from the proceedings: at [42]. He therefore concluded that "appropriate orders need to be made against Lewis, who has been found to have accessorial liability for these breaches of trust, in order to remedy the situation". That, his Honour said, was to be done by reconstitution of the trust fund.
129 Lamru contended that it was entitled to equitable compensation from Kation and Mr Peter Lewis for the reasons considered above. The trial judge did not expressly address that argument in his judgment with respect to orders, but implicitly appears to have favoured the proposition that Lamru's only entitlement was as a beneficiary of the trust fund: that is, to have the fund duly administered and to receive its share of any surplus once other debts have been met. If there were competing interests, that argument might have required consideration. In fact, even in the circumstances that existed at the date of his Honour's judgment, the only competing interests were between the liquidator's entitlement to recover his outstanding costs from the fund (about which more will be said below) and Lamru's entitlement to equitable compensation. Lamru's entitlement should prevail and it should receive equitable compensation calculated by reference to its 40% share in the misapplied payments disbursed to Mr Mark Lewis.
130 In the circumstances of the case, Lamru has made good its entitlement to equitable compensation against those responsible for the breach of trust in each of the 1995, 1996 and 1997 financial years and is entitled to recover equitable compensation from them, together with interest.
131 The remaining question concerns the appropriate variation of his Honour's orders. Because the appellants have not made good their challenge to the orders generally, the appropriate course is to allow the relevant orders to stand subject to variation with respect to the payment to Lamru of its share by way of equitable compensation. In effect, Kation and Mr Peter Lewis will be required to reconstitute the trust fund for the 1996 and 1997 years, but in an amount limited to 60% of the misapplied moneys, together with interest.
5. Use of Accounting Conventions
132 The appellants complain that in calculating the net income, for the purposes of distribution between the unitholders, his Honour required the adoption of two particular accounting conventions which had operated whilst the unitholders were co-operating. The first and most important of these conventions required that, in calculating annual profit, payments made to the individual unitholders during the course of the year be added back into the profit calculation, so as to cancel out the reduction of profit caused by treating them as expenses.
133 The second convention, which had less financial significance overall, was known as the "differential interest convention" and operated with respect to the loan accounts of the directors of Nortex. Thus, instead of the directors receiving or paying interest to Nortex on the balance of the loan accounts from time to time, interest was calculated, but interest entitlements or liabilities were balanced by a payment between the directors at the end of the financial year. Again, it was not in dispute that such a convention had operated: the question was whether, once the relationship between the unitholders had broken down, a proper accounting under the trust deed required the application of the conventions. His Honour could see no basis upon which those arrangements could be said to have terminated when Mr Lamb departed from the Nortex premises on 28 June 1996: at [74]-[77].
134 The appellants' written submissions set out the basis of the challenge to his Honour's conclusion that the accounting conventions continued to operate in the following terms (at [61]):
"In short, Kation challenges that reasoning on the following bases:
(a) the conventions are inconsistent with sub-clauses 4(1) and 4(2) of the Trust Deed, which operate as exhaustive provisions in relation to the distribution of income;
(b) there was no valid variation of those provisions;
(c) while the result is that, strictly speaking, there were breaches of trust in following the conventions, those breaches were of no consequence for so long as the accounting treatment was consensual as between the two unitholders and the trustee;
(d) upon Lamb's departure from Nortex, that treatment ceased to be consensual, and from that time on, the strict terms of clause 4 governed the distribution of income."
135 This argument is based upon the primary proposition that the application of the conventions was inconsistent with clause 4 of the trust deed. However, neither the written nor oral submissions provided much assistance in understanding the substance of the argument. As already discussed, clause 4(1) conferred on the trustees a power to apply any part or parts of the "net income" of the trust fund to those eligible to receive it. Clause 4(2) provided that any amount not so distributed should be held by the trustees for the unitholders in proportion to their holdings.
136 This clause did not in terms identify how the "net income" was to be calculated. The phrase "net income" was not defined.
137 The liquidator, which supported the appellants in this contention, relied upon clause 23 of the trust deed which, so far as relevant, provided:
"The Trustees shall keep complete and accurate books of account and records of all receipt and expenditures on account of the Trust Fund and promptly after the close of each Accounting Period the Trustees shall prepare a written accounting report (prepared in accordance with normally accepted accounting procedures) for such period consisting of a balance sheet, a statement of income and expenditure and a list of assets held at the close of the period …."
138 During the course of oral argument, the appellants conceded that the term "net income" enjoyed a degree of flexibility. No doubt it envisaged income less expenses (which could have been assessed either on a cash or accruals basis). Money could be paid to the unitholders on such terms as they saw fit. There might be contractual arrangements by which they obtained wages or salaries for the directors who worked in the business, or it might be agreed that the only form of remuneration was to be by way of distribution of profits at the end of an accounting period. The latter approach might also allow for draw-down during the year in anticipation of a final payout. On one view, the argument descended to a question of what the agreement was which had been identified by the primary judge. That, the appellants submitted, appeared in [60] in the following terms:
"The 'add backs convention' was to the effect that, whatever drawings or payments there had been in favour of each of the unit holders during the course of the year (whether to the unit holder companies themselves or to their principals or associates of their principals), they were to be added back into the accounts before the free net income was determined. In the ultimate wash up, there were to be no drawings or remuneration for work done; the sole remuneration of each 'partner' was to be the profit share in the agreed proportion of his company in the profits earned, without additional allowance for the labour or efforts of the company's principal."
139 Once it is accepted, as the unchallenged findings suggest, that there were to be no financial entitlements other than a share of profits payable to unitholders, it was simply a matter of applying normal accounting procedures to that arrangement. That being the arrangement, Nortex had no obligation to pay wages or salaries to the principals of the unitholders. Equally, they had no entitlement to such payments. It followed that the net income of the trust allowed for no element of expenditure on account of wages or salaries to the directors. The add-backs convention was therefore appropriate and was not inconsistent with the trust deed.
140 There appears to have been some suggestion in the submissions that such an arrangement operated unfairly to Mr Lewis after Mr Lamb ceased to work in the business. Whether that was so or not, for as long as Mr Lamb remained a unitholder, he was entitled to a distribution in accordance with the trust deed. His Honour found that there was no basis to assume that the contractual arrangements between the various parties changed when Mr Lamb left the office and there is no direct challenge to that conclusion.
141 The analysis with respect to interest payments operated in the same way. There was in effect an agreement that moneys loaned to the company and no doubt used by it as working capital were not to attract interest. There was an arrangement to achieve fairness between the principals of the unitholders which permitted a payment directly between them with respect to any interest differential. As a practical matter, an adjustment was made by way of payments by the company to the unitholders to allow for the interest differential. However, there was no reason to interpret that practice as evidencing some unsourced agreement that Nortex would pay interest on loans made by the principals of the unitholders. Accordingly the differential interest convention was entirely consistent with the contractual arrangements entered into by the various parties, including Nortex, and operated, so far as relevant, to allow for the identification of net income absent any interest expense incurred by Nortex.
142 The grounds of appeal with respect to the application of the accounting conventions should be rejected. There was, otherwise, no challenge to order 2 made on 23 May 2006 and it should accordingly stand.
6. The Stock Fraud: "Unclean Hands"
143 The final issue in relation to the appeal concerned a finding by the trial judge that Mr Peter Lewis (and Kation) were responsible for understating the amount of stock held by Nortex as at 30 June 1996 and keeping for themselves the profits of the sale of that stock during the following financial year. His Honour accepted that the amount of the undervaluation was $210,000 and the amount of profit which should have been recorded in the 1997 accounts was $150,000. In his judgment of 23 May 2006, his Honour ordered that the accounts of Nortex be adjusted to take in those figures: order 4. The separate allowance for different amounts in each of the accounts reflected the book value of the stock (to be included in the earlier accounts) and the loss of profit on sale (to be included in the accounts for the subsequent year. The total variation was thus $360,000: [2005] NSWSC 482 at [19].
144 The evidence upon which that finding was based was primarily that of Mr Lamb who described the practice in which both he and Mr Lewis had jointly engaged in preceding years, with the result that the taxable income of the trust was materially understated in respect of each year, as were the distributions to the unitholders. His Honour held that Lamru, in seeking to rely upon that evidence, came to the Court with "unclean hands" and, on that basis, should be denied equitable relief in its favour. However, his Honour noted that the liquidator had not relied upon such a defence and, accordingly, Nortex was entitled to have its accounts adjusted in the manner provided in the order. The appellants contended that the defence of "unclean hands" should have extended so as to deny relief in favour of Nortex. On the other hand, by its cross-appeal, Lamru contended that the defence was not available either to Nortex or to Kation and Mr Lewis and that his Honour erred in failing to make orders in favour of Lamru with respect to its 40% share of the proceeds of the stock sales which had been misappropriated by Mr Lewis and Kation.
145 The grant of relief in favour of Nortex resulted from a claim made by Lamru, not the liquidator. However, after judgment had been given by Hamilton J, the liquidator sought to bring a cross-claim against Mr Peter Lewis requiring him to account to Nortex for the value of the stock not accounted for in the 1996 accounts and for the proceeds of its sale during the 1996/97 financial year. This was said to constitute a sum of $360,000 together with interest from 30 June 1997. The late filing of the claim was explained by the liquidator on the basis that, until Mr Lamb gave evidence of the practice, he had no material sufficient to support a claim of fraud. Indeed, on satisfying himself that stock was missing, he had spoken to Mr Peter Lewis and received vehement denials that he, Lewis, had been responsible for misappropriating the stock. On 27 July 2006, Palmer J granted the liquidator further time within which to make the cross-claim, pursuant to Uniform Civil Procedure Rules, r 9.1(1): see Lewis v Nortex Pty Ltd (in liq) [2006] NSWSC 768.
146 Mr Lewis seeks leave to appeal against that order.
147 The effect of the relief sought by the liquidator appears to be twofold: first, it would allow the liquidator, on behalf of Nortex, to maintain the claim against Mr Peter Lewis, even if the appeal succeeds and the declarations made by the trial judge in favour of Nortex are set aside because the claim was brought by Lamru and should have failed because Lamru had "unclean hands". Secondly, in a mechanical sense, the order sought requires payment of the amount by Mr Peter Lewis, being a judgment which the liquidator could enforce directly against Mr Lewis, if successful on the cross-claim. It is convenient, first, to consider Lamru's claim to payment by Kation and Mr Peter Lewis directly, as Mr Lewis cannot be held liable to both Nortex and Lamru in the same amount.
148 At trial his Honour held that the relief sought by Lamru was equitable in nature and hence subject to equitable defences: that point is no longer in contention. The defence said to preclude relief on the part of Lamru with respect to the stock misappropriations was that it came with "unclean hands". To describe this phrase as a maxim or aphorism is overly generous: without a detailed understanding of the circumstances in which it operates, it is a colourful but imprecise label: cf Corin v Patton [1990] HCA 12; 169 CLR 540 at 557 (Mason CJ and McHugh J). Historically, many of the cases have arisen in circumstances which no longer have social resonance or which are now covered by the expanding blanket of statutory regulation. As the trial judge noted, the circumstances of its application were helpfully summarised by Campbell J in Black Uhlans Inc v NSW Crime Commission [2002] NSWSC 1060; 12 BPR 22,421 at [157]-[185].
149 In a case which revealed, in its pleading, a misconception of administrative law, the Victorian Racing Club sought to resist proceedings to overturn its disqualification of a horse owner on the basis of ultra vires resulting from a denial of natural justice because it said the horse owner had only come to attention by reason of his own misconduct. As the High Court noted, the merits of the conduct were not in issue before the Court: see Meyers v Casey [1913] HCA 50; 17 CLR 90 at 101 (Barton ACJ) and 123 (Isaacs J). Although it was the allegation of misconduct which brought the appellant before the Racing Tribunal, "the wrong he complains of, namely, his condemnation by an incompetent and unauthorized tribunal in the one case, and a disregard of natural justice in the other, are equally independent of any misconduct by him": at 123. Isaacs J continued (at 123-124):
"It is therefore impossible to say, [in the words of Eyre LCB in Dering v Earl of Winchelsea (1787) 1 Cox 318 at 319-320, 29 ER 1184 at 1185, that his alleged misconduct has 'an immediate and necessary relation to the equity sued for,' or that it was 'a depravity in a legal as well as in a moral sense.'
It is altogether different from the cases where the right relied on, and which the Court of equity is asked to protect or assist, is itself to some extent brought into existence or induced by some illegal or unconscionable conduct of the plaintiff, so that protection for what he claims involves protection for his own wrong. No Court of equity will aid a man to derive advantage from his own wrong, and this is really the meaning of the maxim."
150 The numerous authorities discussed by the trial judge (and by Campbell J in Black Uhlans) provide little additional guidance in relation to the circumstances of the present case. It is to those circumstances that attention must be directed, in order to assess the availability of the defence.
151 At the legal level, the right which Lamru relies upon is that arising from the Nortex trust deed. In clear contrast to many cases in which the defence has been relied upon, there was no sense in which the establishment of the trust was tainted: cf Nelson v Nelson [1995] HCA 25; 184 CLR 538; Gascoigne v Gascoigne [1918] 1 KB 223; In Re Emery's Investments Trusts; Emery v Emery [1959] Ch 410; Griffiths v Griffiths [1973] 1 WLR 1454. Nor was the conduct complained of, which was found to be a fraudulent misappropriation of trust property, conduct in which either Lamru or Mr Lamb was implicated. That was because Mr Lamb had ceased to have a role in the administration of the business prior to the misappropriations by Mr Peter Lewis. True it was that in previous years there had been similar conduct in which Mr Lamb had been involved. Lamru made no complaint about that conduct, no doubt because it had not suffered, but, to the extent that the Commonwealth had been deprived of revenue as a result of fraudulent accounting records and tax returns, Nortex had benefited and Lamru had obtained its proportionate part of that benefit. In any event, it raised no issue with respect to the conduct of Mr Peter Lewis or Kation in relation to the earlier years.
152 The impropriety relied upon by Mr Peter Lewis and Kation is of a different character. The inference that Mr Peter Lewis misappropriated items of stock in 1996-97 flowed, in part, from the evidence Mr Lamb gave as to the practice in respect of stock accounting which had been adopted in earlier years, with which he was familiar and, indeed, in which he was implicated. That practice was improper because it was designed to deprive the Commissioner of Taxation of correct records upon which to assess income tax. Because Mr Lamb's evidence in this respect implicated him in criminal conduct, he sought and obtained, prior to giving the evidence, a certificate under s 128 of the Evidence Act, the consequence of which was that such evidence could not be used against Mr Lamb in other proceedings. The issue of that certificate was not challenged and the evidence given by Mr Lamb was undoubtedly relevant and admissible for the purpose upon which Lamru relied.
153 No part of Lamru's cause of action depended on its or Mr Lamb's improper or discreditable conduct. This fact was recognised by the trial judge when he stated at [153]:
"It is true that Lamru did not, and did not have to, plead or aver Lamb's or its own misconduct as part of the facts to be made out to establish this cause of action. However, Lamru did choose to lead evidence of Lamb's and its own misconduct in conjunction with Lewis to render more probable the proposition that Lewis behaved in the way alleged in the 1997 year …. I have found that the conduct complained of did occur during the 1997 year, relying on the body of evidence brought forward by Lamru, including the evidence of the earlier conduct. The latter was an integral part of Lamru's case on this cause of action."
154 As this passage demonstrated, his Honour moved from the conclusion that the discreditable conduct formed no element in the cause of action to the evidential point that it was an integral part of "Lamru's case on this cause of action". Factually the latter statement was correct and the closeness of the relationship between the earlier conduct and that complained of was relied upon as having evidential force. His Honour continued the reasoning as follows:
"There was in effect a continuum between the conduct complained of and the conduct relied on to prove it. The same course of fraud on the revenue started with two parties and finished with one. It is evidence of this fraud that Lamru relies on to establish fraud during 1997. No steps have been taken to restore the benefits wrongly gained. Lamb and Lamru still enjoy their profit from the fraudulent enterprise. … For these reasons, it is my view that the Court would in reality be aiding a litigant 'to derive advantage from [its] own wrong', in the words of Isaacs J in the Meyers case, if it granted equitable relief in these circumstances."
155 This passage contained two further elisions in the process of reasoning. The first was to elide the evidence of events in 1996 and the events in 1997 from which the cause of action arose, disregarding the absence of Mr Lamb from the events in 1997. The second was to treat the failure to account to the Taxation Office in respect of the earlier course of conduct as evidence of failure to restore benefits wrongly gained, thus precluding reliance on evidence of that conduct in support of the separate cause of action. Those steps took the operation of the defence beyond any of the authorities to which this Court was referred.
156 The matter may be tested, as it was by the trial judge in part, by inquiring whether Lamru still enjoyed the profits from its "fraudulent enterprise" or whether steps had been taken to restore "the benefits wrongly gained": at [153]. The answer given by his Honour was that they had not been restored and that it was not possible on the evidence to calculate the quantum of the benefit, "so as to consider moulding conditional relief". However, it is clear that any profit enjoyed by Nortex and hence by Lamru resulted from the non-disclosure of income in earlier years. The fact that there was no evidence of precise amounts in relation to earlier years highlighted the fact that there were in fact a number of separate acts of misconduct, rather than a single fraudulent exercise. His Honour was not required to, and did not, make specific findings in relation to earlier years.
157 A defence based on "unclean hands" is effective to deny equitable relief in circumstances where it has been held or assumed that a breach of trust has occurred. Because the beneficiary of the breach of trust will retain his or its ill-gotten gains, the Court should be reluctant to allow the defence to succeed, except in cases where its application is clearly appropriate. This constrained approach is reflected in the case-law generally. For example in Moody v Cox [1917] 2 Ch 71 Warrington LJ stated that relief should only be denied where it has been shown "that the taint has a necessary and essential relation to the contract which is sued upon …": at 85-86. To similar effect Scrutton LJ stated (at 87-88):
"equity will not apply the principle about clean hands unless the depravity, the dirt in question on the hand, has an immediate and necessary relation to the equity sued for."
158 After referring to these and other authorities to similar effect, Campbell J in Black Uhlans at [179] stated:
"If a plaintiff needs to prove his own bad conduct to be able to prove the circumstances which he says entitles him to an equitable remedy, that bad conduct has an immediate and necessary relation to the equity sued for."
159 There may be an element of ambiguity in asking whether the plaintiff "needs to" prove his own bad conduct. In a constrained sense, the need may be identified by reference to the legal elements of the cause of action; in the broader sense, the need may be a practical one referring to that which is necessary in an evidential sense. The authorities which led his Honour to adopt that language do not, however, support the latter construction. Further, his Honour's failure to identify the possible ambiguity in a careful analysis of the case-law, suggests that he was indeed focusing upon the more constrained approach requiring a legal necessity of reliance upon bad conduct. So understood, the defence has no application in the present case and, in my view, his Honour was in error in upholding it.
160 In Carantinos v Magafas [2008] NSWCA 304, a judgment handed down shortly after the hearing of the present appeal, Hodgson JA (Campbell JA and Handley AJA agreeing) adopted rather more flexible language, asking whether the disentitling conduct "had a sufficiently close relationship to the equity sued for" to give rise to a discretion to refuse relief: at [58]. However, the issue was materially different from that which arises in the present case in that the dishonesty involving both parties tainted the funds used to acquire the trust property in dispute. The authorities to which his Honour referred do not suggest that he was seeking to depart from the language discussed above.
161 According to Lamru, one consequence of this conclusion is that Lamru was entitled to recoup its loss directly from Kation and Mr Peter Lewis, given his Honour's findings as to their conduct. That relief should be provided. One consequence of such relief, so far as Lamru is concerned, is to render otiose the cross-claim by the liquidator seeking orders in favour of Nortex with respect to the same amounts. On the other hand, subject to what is said at [170] below, the liquidator would be entitled to maintain his cross-claim in favour of Nortex in respect of Kation's share. (Whilst, in principle, that might be available for the benefit of third party creditors, in fact it appears that such moneys would be entirely consumed by the liquidator's costs.)
162 On the basis that relief was available, it did not follow that Lamru was entitled to the full amount of the relief which it claimed. Although it made good, on a factual basis, its assertion that Mr Peter Lewis had misappropriated stock from the business, it did not necessarily follow that its loss was its proportionate share of the profit on that stock. What it had been deprived of by Mr Lewis' misappropriation was its share of the profit after Nortex had paid whatever tax was appropriate on the income. Nevertheless, as Nortex was a trust, it might be expected that liability for income tax would fall on the beneficiary: Income Tax Assessment Act 1936 (Cth), Part III, Div 6 - Trust income. There was no submission to the contrary. No adjustment is necessary.
163 Before turning to the issue concerning the liquidator's cross-claim, it may be noted that the trial judge upheld the entitlement of Lamru, in respect of its challenge to the liquidator's rejection of part of its proof of debt, to an order that the liquidator adjust the accounts of Nortex so as to include the value of the stock abstracted by Mr Lewis and the profit on disposal of those goods. The defence of "unclean hands" did not apply with respect to this challenge because Lamru was exercising a statutory right under the Corporations Law and was not seeking equitable relief: Lewis v Nortex Pty Ltd (in liq) [2005] NSWSC 482 at [8]. As noted above, the appellants challenged this conclusion. They did so on the basis that the position of the liquidator was no different to that of the company so that, if Nortex could resist Lamru's claim by reliance on the defence on "unclean hands" so could the liquidator and there was, accordingly, no legal error on the part of the liquidator in refusing to acknowledge a debt owing to Lamru: see Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; 169 CLR 332 at 341 (Brennan and Dawson JJ). Even accepting that the liquidator was entitled to reject claims on the company which he considered unenforceable, it does not follow that he would have been precluded by a defence of "unclean hands" in seeking to recover misappropriated stock from a director. If the company were not affected by the misconduct of one director, it cannot have been affected by the fraudulent conduct of both. Accordingly, the liquidator would have been entitled to rely upon the evidence of Mr Lamb in seeking to recover stock from Mr Lewis.
164 Were it otherwise, fraudulent directors could successfully conspire to strip a company of its assets, leaving the creditors with no recourse through the appointment of a liquidator. Indeed, when the matter was put to counsel for the appellants in the course of argument, no contrary contention was proffered: Tcpt, NSWCA, 27/10/08, p 53(35). Rather, the challenge to the order of Palmer J allowing the cross-claim by the liquidator to proceed was agitated on the basis that it would constitute an abuse of process and the re-litigation of issues already decided, contrary to the principles articulated in Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; 147 CLR 589. How precisely the principles were said to apply requires some elucidation. Anshun involved a claim by a worker in respect of an injury suffered by him arising out of the use of a crane. The worker sued both the hirer and the owner of the crane. Damages were recovered by the worker, the owner being ordered to pay 90% of the damages. The owner did not, however, raise in those proceedings an agreement between it and the hirer pursuant to which the hirer was required to indemnify the owner against such claims. Judgment having been given in the first proceedings, the owner then sought to commence separate proceedings against the hirer, based on the indemnity. The High Court upheld an order staying the second proceedings. The second proceedings failed because the owner could have pleaded the indemnity in the original proceedings and it would have been reasonable for it to do so. The principles stated in the joint judgment of Gibbs CJ, Mason and Aickin JJ were identified in the following terms (at 602-603), after noting that "the abuse of process test is not one of great utility":
"In this situation we would prefer to say that there will be no estoppel unless it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it. Generally speaking, it would be unreasonable not to plead a defence if, having regard to the nature of the plaintiff's claim, and its subject matter it would be expected that the defendant would raise the defence and thereby enable the relevant issues to be determined in the one proceeding. In this respect, we need to recall that there are a variety of circumstances, some referred to in the earlier cases, why a party may justifiably refrain from litigating an issue in one proceeding yet wish to litigate the issue in other proceedings e.g. expense, importance of the particular issue, motives extraneous to the actual litigation, to mention but a few.
…
The likelihood that the omission to plead a defence will contribute to the existence of conflicting judgments is obviously an important factor to be taken into account in deciding whether the omission to plead can found an estoppel against the assertion of the same matter as a foundation for a cause of action in a second proceeding. By 'conflicting' judgments we include judgments which are contradictory, though they may not be pronounced on the same cause of action. It is enough that they appear to declare rights which are inconsistent in respect of the same transaction."
165 Although it was said that abuse of process may not be a helpful test, it may also be said that "estoppel" in the commonly adopted phrase 'Anshun estoppel', when taken out of its particular context, may be a misleading epithet.
166 The appellants faced two particular difficulties in applying these principles to the present circumstances. The first was that the present proceedings had not reached the stage of a final judgment. Thus, although it was contended that there had been a "final hearing" of the issues relied on by the liquidator as the foundation of his claim, it was not contended that Palmer J did not have power to extend time on the basis that the proceedings had been completed: clearly they had not. Secondly, the appellants had some difficulty in establishing that the liquidator's conduct in failing to file a cross-claim at an earlier time was unreasonable. In support of his application, the liquidator set out the circumstances with respect to Mr Lamb's accusations of stock misappropriation against Mr Peter Lewis in an affidavit sworn on 26 July 2006, which included the following statement at [8]:
"As at April 2002 I did not consider that I had any evidence which I could present to the court tending to prove that Peter Lewis had misappropriated stock belonging to Nortex or had taken stock belonging to Nortex and failed to account for the proceeds of sale thereof other than a general assertion to that effect made to me by Russell Lamb. I had been unable to identify any corroborating witness and unable to identify any documentary records which substantiated Mr Lamb's accusations. I was not prepared to verify any pleading which made any allegation against Peter Lewis to the effect that he had been guilty of misappropriation or failure to account for money."
167 The liquidator was not cross-examined on this paragraph, but the appellants argued that the liquidator did not need to file a verified pleading or indeed enter upon the factual dispute: all that was required of him was that he formulate a claim identifying the appropriate relief, if Lamru were successful in establishing, through Mr Lamb's evidence, the factual premise of its claim. In support of that submission, the appellants noted that the liquidator had in fact filed written submissions in February 2004 in which he identified Lamru's claim and stated:
"Should the Court declare that Mr Lewis stole $423,851 from the Nortex Unit Trust during the year ended 30 June 1996 then, as Mr Lewis is a party to these proceedings, (i.e. 1750 of 2002) it is submitted that the Court should order Mr Lewis, personally, to pay that money to Mr Silvia together with interest."
168 That submission, which was reiterated in oral argument in the same month, is reflected in the declaration in fact made by the trial judge (challenged by the appellants) requiring that the accounts of Nortex be adjusted to include allowance for the misappropriated stock.
169 As a matter of practical effect, the appellants rely upon two arguments to resist the order of Palmer J. The first is that raised in the appeal, namely that their defence of "unclean hands" should have precluded the order in fact made at the suit of Lamru. Secondly, to the extent that such an order might be available, but only on the application of the liquidator, they resisted his late application in part to avoid a further order requiring Mr Lewis to reconstitute the trust in the amount found to have been misappropriated. The unfairness is said to arise from the fact that, at trial, Mr Peter Lewis made the forensic decision not to give evidence in respect of the misappropriation of stock, but to rely solely upon relevant defences, and in particular that of "unclean hands". He continued on appeal to assert that such a defence was good against the liquidator. However, there was no evidence given by Mr Lewis, or anyone else on behalf of him or Kation, to support the inference that he might have taken a different position with respect to giving evidence had the liquidator raised before trial the same claim for relief in relation to the misappropriated stock as was now sought to be pursued. In the absence of such evidence (the nature of which is by no means clear), there is no basis for this Court to infer that Mr Peter Lewis would have made a different decision had the liquidator's cross-claim been raised prior to the trial. Any allegation of unfairness would also need to be assessed by reference to the evidence which might be led at any further hearing. Thus an issue was raised before Palmer J (but not determined by his Honour) as to whether, given the structure of the proceedings, Mr Peter Lewis would be estopped from giving evidence in relation to any agitation of the cross-claim seeking to contradict the finding made by Hamilton J, or whether he would be estopped from taking that course by the finding made in the consolidated proceedings: cf Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; 53 NSWLR 198 (although in that case it was the plaintiff who had failed on a particular factual basis in earlier proceedings and was attempting to re-litigate the issue in later proceedings, albeit against different parties).
170 Because the appellants did not, in their appeal, challenge the factual findings made by his Honour, and because they have failed in respect of the defence of "unclean hands", the appellants have failed to make good their challenge to the interlocutory judgment of Palmer J. However, both in this Court and in the Court below, Lamru argued that the Nortex trust fund should have been reconstituted by the amount lost through the stock fraud. For the reasons given by Hodgson JA, in the circumstances of the case such relief should be available at the suit of Lamru. That would require an order that Kation and Mr Peter Lewis pay to the liquidator an amount equal to 60% of the $360,000 misappropriated. Having received its share by way of equitable compensation, Lamru would have no interest in that sum in the Nortex trust fund. Such an order would fulfil the purpose of the cross-claim sought to be brought by the liquidator. Those proceedings would thus become otiose, but that in itself does not provide a reason to grant leave to appeal against the order of Palmer J, in respect of which no error has been demonstrated.
171 Accordingly, I would dismiss the application for leave to appeal and order that Kation and Mr Peter Lewis pay the costs of the application for leave to appeal against the judgment of Palmer J.
7. Nortex' Costs
172 Between October 1996 and June 1997 various legal and accounting fees were paid by Nortex, then under the control of Mr Peter Lewis. Mr Lamb brought proceedings to challenge the retainer of Mallesons Stephen Jaques ("Mallesons"), who were then solicitors acting for Nortex. In response to those proceedings, Mr Lewis convened a general meeting of Nortex on 13 February 1997 at which resolutions were passed ratifying various steps taken and proposed to be taken by Nortex, including the retainer of solicitors and accountants.
173 Two issues arose in relation to these matters before the trial judge and on appeal. They concerned, first, the validity of the ratification resolutions and, secondly, an amount said in any event to be outside the scope of the resolutions because not properly referable to the concerns of the company. The amount of the expenditure was a little over $176,000. Of that amount Lamru claimed that only $53,422.17 had been expended on the business of the company.
174 With respect to the validity of the resolution, Lamru's argument was originally rejected in proceedings brought by it against Mallesons in August 1997. The trial judge referred to the judgment of Master McLaughlin in that matter in which it had been held that the original retainer given by Mr Lewis to Mallesons, to the extent that it related to the business of Nortex, was given without authority. His Honour also noted the Master's further conclusion that the purported ratification at the general meeting of the company on 13 February 1997 was valid and effective.
175 The trial judge accepted Lamru's argument that, neither Lewis nor Kation being party to those proceedings, they were not bound by the Master's findings. He therefore accepted that it was open to Lamru to reagitate those issues in the proceedings before him, but agreed with Master McLaughlin that the challenge brought by Lamru failed.
176 In its notice of cross-appeal, Lamru identified an error on the part of the trial judge in this respect "in construing his earlier judgment in 2004 as dealing with all the submissions that had been addressed to the Court" including the submission that the ratification was not valid. That ground (ground 21) appears to have been mistaken. In the course of both written submissions and oral argument, counsel for Lamru consistently referred to the resolution "if valid". However, no substantive argument as to invalidity was presented to this Court: see, eg, CA Tcpt, 29/10/08 at 204-205. After some prevarication, counsel for Lamru abandoned the challenge to the validity of the ratification: CA Tcpt, 30/10/08, pp 255-256. The remaining issue is the second question, namely whether his Honour erred in failing to consider whether particular matters were outside the scope of the ratification.
177 At [166] his Honour referred to an issue which he suggested had "occurred" to him during the course of the trial, in the following terms:
"That was the question of whether or not, even if the authority of Lewis to engage solicitors on behalf of Nortex was established, particular items of expenditure could be characterised as breaches of trust because they were for the sole benefit of Kation or Lewis and so foreign to the trust. Ratification can, after all, operate only to justify actions by an agent taken on behalf of the principal to the extent that the acts would be valid acts of the principal …."
178 His Honour then stated that no "adjustment" had been made to the points of claim or the Scott Schedule to raise the question identified above: at [167].
179 This conclusion is curious, because his Honour had earlier set out the relevant allegations in the points of claim which included the assertion that, in breach of trust, Nortex paid the amounts in question "as incurred in the interests of Nortex when in substance the expense was incurred in the interests of Lewis Senior": at [156].
180 The basis of rejection is unsound. Lamru took this Court to discussion of the specific issues concerning the dissection of the accounts in the transcript of the trial for 9 March 2004 at pp 6789-6802. The issue was clearly raised and debated: neither the liquidator nor Kation took the Court to any passages which contradicted the inference to be drawn from this discussion. Accordingly, this Court must consider the validity of Lamru's challenge in this respect.
181 Lamru put submissions that of the total amount of $176,050.87, $53,422.17 related to the business of Nortex while the balance, $122,628.70 did not. Accordingly the latter amount should be added back into the 1997 Nortex accounts. Lamru's share of that amount would be $49,051.48.
182 The correctness of Lamru's submissions in this respect require some detailed knowledge of the steps taken in the various proceedings at various times; in particular, they require an understanding of the issues which were the subject of a mediation in 1997. Different explanations were given in argument as to the focus of the mediation. No doubt it was correct, on one view, to identify its primary focus as the resolution of disputes between Lewis and Kation on the one hand and Lamb and Lamru on the other. Nevertheless, in a formal sense it involved Nortex and the state of the loan accounts. It seems likely that the role of Nortex was (or should properly have been) a limited one, comparable to the proper role of the liquidator in the proceedings now before the Court.
183 Lamru contended that if the Court were satisfied that the trial judge erred in failing to deal with these matters, it would be necessary to refer its claim to a referee. As counsel for Mr Lewis and Kation noted, it became difficult to respond to the detailed question raised by the claim, in those circumstances. They submitted, however, that no basis had been made out for disputing the liquidator's assessment, made in response to the claim in Lamru's proof of debt, that only the amount of $6,594.10 was not properly referable to expenses of Nortex.
184 In truth, there is no attraction in referring the matter to a referee unless the principles to be applied can be identified in advance. Those principles must have regard to two factors, namely that the underlying substratum of the dispute was between the two unitholders and their respective controllers and, secondly, that the dispute related to the assets of the trust. The trust was a commercial enterprise and had trade creditors whose interests the trustee was required to consider. It follows that, with respect to the majority of the costs, both accounting and legal, it could not be said that the trustee had no interest in the resolution of the various disputes. Its interest may have been substantially less than that of Kation and Mr Peter Lewis, but unless it were established that there was a breach of trust in Mr Lewis, Kation and Nortex obtaining advice and representation from solicitors and accountants jointly, the proper course is to apportion the expenses between Nortex on the one hand and the Kation and Lewis interests on the other. This is not an exercise which can be undertaken with any precision. The exercise can, however, be undertaken by this Court as well as by a referee, on the basis that the relative interests of the parties at the earliest stages of the dispute were probably little different from their respective interests in the litigation as it progressed, including in this Court, putting to one side the very significant financial interest that has accrued to the liquidator in terms of recovery of his own costs and disbursements.
185 Approaching the matter on this basis, significant weight should be given to the fact that the substratum of the disputes involved Mr Lewis and Kation on the one hand and Lamru and Mr Lamb on the other. As between the former and Nortex, it is appropriate to apportion their jointly incurred costs, as to 75% in favour of Lewis and Kation and as to 25% in favour of Nortex, after reducing the account by the amount identified by the liquidator as an amount in which Nortex had no interest. So apportioned, Mr Lewis and Kation should bear responsibility for $127,092.57. Assuming that the 1997 accounts have been reconstituted to take account of the amount the liquidator found was solely referable to the interests of Kation, further allowance should be made for that additional sum, of which 40%, namely $50,837, should be attributed to Lamru's loan account.
186 As no party proposed to the Court that this issue might be resolved in this way, each should have an opportunity to comment on the proposed orders set out in the last paragraph.
8. Liquidator's Costs
187 Mr Silvia was appointed provisional liquidator on 8 July 1997. Having sold the business and collected moneys outstanding, at the termination of the provisional liquidation on 2 September 1997 (and on his appointment on that day as official liquidator) Mr Silvia held approximately $900,000 on account. Shortly thereafter he called for creditors to submit proofs of debt, which were received and considered in September and October 1997. The bulk of the claims came from interests associated respectively with Mr Lewis and Mr Lamb.
188 During the hearing of the appeal, counsel for the liquidator indicated that there were no outstanding trade creditors. Counsel for Lamru disputed that position and, at the request of the Court, Mr Silvia submitted a further affidavit indicating the amounts claimed by creditors other than Messrs Lewis and Lamb and their respective companies and family members. Those claims totalled some $48,000, although the liquidator noted that the Commissioner of Taxation might lodge a revised proof of debt as a result of the evidence of stock misappropriations.
189 Somewhat startlingly, a summary of the approximate cash position, the liquidator's fees and legal costs incurred between the date of appointment and January 2003 indicated that virtually the whole of the $1 million recovered had been appropriated to liquidator's fees and legal costs. Approximately one-half of that expenditure (namely $474,000) was disbursed between the date of judgment of Young CJ in Eq (22 June 2001) and January 2003. In particular, $269,000 was spent during that period on legal fees.
190 The issue with respect to these amounts is the challenge by Lamru to the costs incurred by the liquidator in actively resisting its claims following the judgment of Young CJ in Eq in June 2001. As submitted by Lamru, the proper course for the liquidator to take with respect to a dispute between the unitholders was simply to explain the position taken in formulating the accounts and then adopt a neutral stance in respect of the proceedings.
191 The orders made by Hamilton J on 23 May 2006, with respect to the costs of the consolidated proceedings were, in substance, as follows: