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[2009] NSWCA 145
Court of Appeal (NSW)
2008-10-30
Allsop P, Hodgson JA, Basten JA, Palmer J
Original judgment source is linked above.
CITATION: KATION PTY LTD v LAMRU PTY LTD; LEWIS v NORTEX PTY LTD (In liq) [2009] NSWCA 145
JUDGMENT OF: Allsop P at 1; Hodgson JA at 12; Basten JA at 36
(1) Grant leave to the appellants and cross-appellants to appeal with respect to the matters raised in their notices of appeal and cross-appeal filed in this Court so that all steps purportedly taken shall be treated as properly taken in the appeal and cross-appeal respectively.
(3) The cross-appeal be allowed in part and the orders made by the trial judge in matter nos 3081 of 1997 and 1750 of 2002 be varied so that:
(i) in order 1, the reference to order "3(iii)(d)" be amended to order "3(d)"; (ii) in order 3 delete paragraphs (d)-(f) and in lieu thereof insert the following:"
(d) order that Lewis and Kation pay to Lamru: (i) in respect of the 1995 financial year, $23,228, together with interest calculated from 30 June 1995; (ii) in respect of the 1996 financial year, $40,650, together with interest calculated from 30 June 1996; (iii) in respect of the 1997 financial year, $55,493, together with interest calculated from 30 June 1997;
(e) order that Lewis and Kation reconstitute the Nortex unit trust by paying into the trust fund: (i) in respect of the 1996 financial year, an amount of $60,976, together with interest calculated from 30 June 1996; (ii) in respect of the 1997 financial year, an amount of $83,240, together with interest calculated from 30 June 1997;
(f) in respect of the calculations of interest, the amount is calculated on the sum to which it relates at the rate specified in Schedule 5 to the Uniform Civil Procedure Rules 2005 and compounded on annual rests until payment."
(4) In relation to order 4, set aside paragraph (b) and (c), and in lieu thereof insert: "(b) declare that the amounts of the trust were erroneous by reason of the taking and selling of stock: (i) by understating the value of stock at the end of the 1996 financial year by $210,000; (ii) by understating the profits for the 1997 financial year by a further $150,000;
(c) order Lewis reconstitute the Nortex Trust Fund by paying into the Trust Fund sixty per cent of the amounts referred to in par (b), together with interest at the rates payable under Schedule of the Uniform Civil Procedure Rules 2005, calculated on 30 June in respect of each financial year, compounded at annual rests;
(d) order that Lewis pay to the liquidator to be placed in an interest-bearing account (if the liquidator and Lamru give written consent to the Court and to Lewis within seven days) or into Court (if they do not) forty per cent of the amount referred to in par (b), together with interest at the rates payable under Schedule 5 of the Uniform Civil Procedure Rules 2005, calculated from 30 June in respect of each financial year, compounded at annual rests;
DECISION: (e) liberty to Lamru to apply to the Court for payment of the amounts referred to in par (d) to it on the basis of evidence that it has made full disclosure to the Australian Tax Office of tax evasion by Mr Lamb and Lamru in connection with Nortex stock and has made appropriate arrangements to pay any additional tax and penalties;
(f) liberty to the liquidator to apply to the Court after twelve months for release to him of the amounts in par (d), in the event that no application has been made by Mr Lamb and Lamru in the meantime or in the event that such an application has been refused."
(6) Set aside order 12 and in lieu thereof order that the Liquidator pay 30% of Lamru's costs of the claims: (i) with respect to the Mark Lewis bonuses, and (ii) its entitlement to costs at trial.
(7) Add a new order: "14. To the extent that the Liquidator's costs diminish Lamru's interest in the assets of the company, order that Kation and Mr Peter Lewis indemnify Lamru."
(8) Order that Mr Peter Lewis and Kation pay Lamru's costs: (a) of the appeal; (b) of the stock fraud, "unclean hands" issue of the cross-appeal, and (c) the application for leave to appeal against the interlocutory judgment of Palmer J.
(9) Order that Mr Peter Lewis and Kation pay the liquidator's costs of the application for leave to appeal against the judgment of Palmer J.
(10) Dismiss the application for leave to appeal against the judgment of Palmer J.
(11) Order that the Liquidator pay 50% of Lamru's costs of its cross-appeal with respect to the issues identified in (6) above.
(12) Direct that these orders not be entered for 28 days and thereafter only with leave of a judge of the Court and that, within 28 days, the parties shall: (a) apply by notice of motion for variation of these orders on the basis of - (i) any suggested failure to deal with an issue addressed on the appeal or cross-appeal, or (ii) any suggested failure of the orders to accord with the reasons for judgment; (b) provide to the Court agreed figures, or submissions in support of their separate calculations, with respect to the terms of a declaration as to the respective loan account balances of Kation and Lamru as at 2 September 1997, and (c) provide submissions (if any) as to the orders proposed in [185] with respect to Nortex' costs.
CATCHWORDS: APPEAL - leave to appeal - Anshun estoppel - abuse of process - unfairness - challenge to granting liquidator extension of time to file cross-claim - whether party would have taken different course to giving evidence - CORPORATIONS - winding up - trustee - appointment of liquidator - challenge to accounts in statutory appeal from liquidator's rejection of proof of debt - whether challenge barred by unclean hands - COSTS - liquidator's costs - neutrality - active resistance - whether liquidator entitled to costs where active contradictor defending liquidator's action -liquidator's active defence in relation to accounting conventions - substantial costs accrued by liquidator - COSTS - trustee's costs - ratified by resolution - whether properly referable to concerns of company - apportionment between trustee and beneficiary - whether to be referred to referee - EQUITY - equitable defences - "unclean hands" - abandonment - acquiescence - long delay in seeking remedy - whether trust accounts should be reopened - where party had engaged in malpractice in preceding years - connection with Limitation Act 1969 (NSW), s 9 - EVIDENCE - evidence of unlawful conduct - protection of certificate under Evidence Act 1995 (NSW), s 128 - relationship to equitable defence of "unclean hands" - TRUSTS - accounting conventions - addbacks convention - differential interest convention - whether liquidator should have applied accounting conventions between unitholders following breakdown of relationship - consistency with trust deed - TRUSTS - breach of trust - dishonesty of trustee - distinction between principal and accessorial liability - whether payments by way of "bonuses" were in breach of trust - whether payments made pursuant to binding contract - liquidator's approval fraudulently induced - TRUSTS - breach of trust - remedies - stock fraud - unclean hands - scope of defence - whether party could claim relief directly through party rather than through trustee - reliance on evidence that taxable income understated in previous years - whether cause of action depended on improper conduct - TRUSTS - breach of trust - remedies - whether reconstitution of trust appropriate remedy - court's discretion to award interest compounded annually - TRUSTS - distribution of profits - whether accounts should be reopened - availability of equitable defences -effectiveness of resolution distributing profits - compliance of resolution with trust deed requirements - WORDS AND PHRASES - "net income" - "unclean hands"
Corporations Act 2001 (Cth), s 473 Corporations Law, s 471A Evidence Act 1995 (NSW), s 128 Evidence Act 1995 (Cth), s 128 LEGISLATION CITED: Income Tax Assessment Act 1936 (Cth), Part III, Div 6 Industrial Relations Act 1996 (NSW), s 106 New South Wales Consolidated Equity Rules 1902, r 82 Supreme Court Act 1970 (NSW), s 101 Uniform Civil Procedure Rules 2005 (NSW), r 9.1
Aliprandi v Griffith Vintners Pty Ltd (In liq) (1991) 6 ACSR 250 Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 Barnes v Addy (1874) LR 9 Ch App 244 Black Uhlans Inc v NSW Crime Commission [2002] NSWSC 1060; 12 BPR 22,421 Carantinos v Magafas [2008] NSWSC 304 Commissioner of Taxation v Bruton Holdings Pty Limited (in liq) [2008] FCAFC 184; 70 ATR 903 Corin v Patton [1990] HCA 12; 169 CLR 540 Craven-Ellis v Canons Ltd [1936] 2 KB 403 Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184 Deweese v Reinhard 165 US 386 (1897) Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 Gascoigne v Gascoigne [1918] 1 KB 223 Griffiths v Griffiths [1973] 1 WLR 1454 Harrison v Schipp [2001] NSWCA 13 In re Diplock; Diplock v Wintle [1948] Ch 465 In re Emery's Investments Trusts; Emery v Emery [1959] Ch 410 CASES CITED: In re Robinson; McLaren v Public Trustee [1911] 1 Ch 502 Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 143 Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 189 Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 1063 Lewis v Nortex Pty Ltd (In liq) [2006] NSWSC 768 Meyers v Casey [1913] HCA 50; 17 CLR 90 Ministry of Health v Simpson [1951] AC 251 Moody v Cox [1917] 2 Ch 71 National Trustees and Executors and Agency Co of Australasia Ltd v Barnes [1941] HCA 3; 64 CLR 268 Nelson v Nelson [1995] HCA 25; 184 CLR 538 Ogilvie-Grant v East (1983) 7 ACLR 669 Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; 147 CLR 589 Rippon v Chilcotin Pty Ltd [2001] NSWCA 142; 53 NSWLR 198 Scarel Pty Ltd v City Loan & Credit Corporation Pty Ltd (1988) 17 FCR 344 Tanning Research Laboratories Inc v O'Brien [1990] HCA 8; 169 CLR 332 Target Holdings Ltd v Redferns [1996] AC 421 Williams v Wilcox (1838) 8 Ad & E 314; 112 ER 857 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; 212 CLR 484
Ford and Lee, Principles of the Law of Trusts at [17,140] Meagher and Gummow's Jacobs' Law of Trusts in Australia (6th ed, 1997) at [1334] Jacobs' Law of Trusts in Australia (7th ed, 2006) at [1334], [2209] TEXTS CITED: R Meagher, J D Heydon and M Leeming Meagher, Gummow and Lehane's Equity Doctrines and Remedies, 4th Ed (2002) Butterworths at 98-102 [3-110] - [3-135], [36-090] W A Parker The Practice in Equity (1930) (Law Book Co at 178-179 Pomeroy's Equity Jurisprudence, 5th Ed (1941) Vol 2 at 90 - 143 [397]-[404] Spence's Equitable Jurisdiction (1846), London, Vol 1 at 339 J Story Commentaries on Equity Pleadings (1865, Little Brown) at 15-16
Matter No. 40366/06: Kation Pty Ltd (Appellant and First Cross-respondent) Peter Lawrence Lewis (Second Appellant and Second Cross-respondent) Lamru Pty Ltd (First Respondent and First Cross-appellant) PARTIES: Russell William Lamb (Second Respondent and Second Cross-appellant) Nortex Pty Ltd (In liq) (Third Respondent and Third Cross-Respondent) Brian Raymond Silvia (Fourth Cross-respondent) Matter No. 40523/06: Peter Lawrence Lewis (Applicant) Nortex Pty Ltd (In liq) (Respondent)
IM Jackman SC/J Baird (Kation, Peter Lawrence Lewis) COUNSEL: SJ Motbey (Lamru, Russell William Lamb) VR Gray (Nortex, Brian Raymond Silvia)
Kemp Strang Lawyers (Kation, Peter Lawrence Lewis) SOLICITORS: Lyons & Lyons Solicitors (Lamru, Russell William Lamb) Somerset Ryckmans (Nortex, Brian Raymond Silvia)
LOWER COURT JURISDICTION: Supreme Court
LOWER COURT FILE NUMBER(S): SC 3081/1977; SC 1750/2002; SC 3354/2002
LOWER COURT JUDICIAL OFFICER: Young CJ in Eq; Hamilton J; Palmer J
LOWER COURT DATE OF DECISION: 22 June 2001; 19 July 2001; 19 April 2002; 9 December 2002; 20 December 2002; 29 April 2003; 20 June 2003 (Tcpt 2689); 20 June 2003 (Tcpt 2692); 26 June 2003; 2 March 2004; 29 November 2004; 19 May 2005; 13 October 2005; 23 May 2006; 27 July 2006
LOWER COURT MEDIUM NEUTRAL CITATION: [2001] NSWSC 511; [2001] NSWSC 610; [2002] NSWSC 337; [2002] NSWSC 1192; [2002] NSWSC 1245; [2003] NSWSC 354; [2003] NSWSC 581; [2004] NSWSC 121; [2004] NSWSC 1143; [2005] NSWSC 482; [2005] NSWSC 1062; [2006] NSWSC 480; [2006] NSWSC 768
IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40366/06 CA 40523/06 SC 3081/97 SC 1750/02 SC 3354/02
ALLSOP P HODGSON JA BASTEN JA
12 JUNE 2009 KATION PTY LTD v LAMRU PTY LTD; LEWIS v NORTEX PTY LTD (In liquidation) Headnote Mr Peter Lewis and Mr Graeme Dufty ran a business through a trading trust, constituted as a unit trust. The trustee was Nortex Pty Ltd ("Nortex"). Companies controlled by Mr Lewis and Mr Dufty each held units in the trust. By a document bearing the date 12 April 1991 and signed by Mr Lewis and Mr Dufty, a resolution was passed by them as Nortex's directors stating the estimated net income of the trust fund for the period ending 12 April 1991 and directing how this net income would be distributed.
In April 1991, Mr Russell Lamb, through a company controlled by him, Lamru Pty Ltd ("Lamru"), acquired units in the trust from Mr Dufty's company. Following the change in ownership, Mr Lewis' company, Kation Pty Ltd ("Kation"), held 60% of the units and Lamru held 40% of the units. Mr Dufty resigned as a director of Nortex and Mr Lamb was appointed director.
In 1996, a dispute arose between Mr Lewis and Mr Lamb in relation to the conduct of each with respect to the business. On 28 June 1996, Mr Lamb ceased to attend at Nortex's premises. On 30 September 1996, Lamru issued a statutory notice of demand to Nortex claiming $611,000, said to be owing to it on its loan account with Nortex.
On 3 July 1997, Mr Lewis sought the appointment of a provisional liquidator in the Supreme Court. Five days later, a provisional liquidator was appointed and in August the Nortex business was sold. The liquidator was appointed as official liquidator on 3 September 1997.
On 10 December 1998, Lamru lodged with the liquidator a proof of debt which was admitted and rejected in part. Lamru's proof of debt included a claim that the figures for stock held on account at the end of the 1996 and 1997 financial years were falsified. There were other claims of fraudulent conduct on the part of Kation, Mr Peter Lewis and his son, Mr Mark Lewis, who also worked in the business and received a share of profits in certain years. On 4 February 2000, Lamru appealed against the liquidator's decision with respect to rejected debts by notice of motion filed in the winding up proceedings. On 31 July 2000, Lamru filed an amended notice of motion seeking to be admitted as a creditor of Nortex for just over $1 million.
On 22 June 2001, Young CJ in Eq held that a document, appointing Mr Lewis as the sole appointer of the trust, had been executed by Messrs Lewis and Dufty on or shortly after 16 April 1991, but had no effect until it was served in 1997.
The claims of fraud in Lamru's proof of debt led to an order in March 2002 that Lamru commence separate proceedings against Kation and the Lewises, identifying its claims and the relief sought. Kation and Mr Peter Lewis filed cross-claims. Both sets of proceedings were heard before Hamilton J intermittently between 10 April 2002 and 8 November 2004. On 29 November 2004, Hamilton J delivered the principal judgment. In 2005 and 2006, he delivered three supplementary judgments. Mr Lewis and Kation appealed against these judgments and Lamru cross-appealed. The orders made by Hamilton J were interlocutory; therefore, leave was required with respect to the appeal and cross-appeal. Leave was granted.
Following Hamilton J's second supplementary judgment on 12 October 2005, the liquidator took steps to file and serve a cross-claim, which sought payment from Mr Peter Lewis of $360,000 on account of the falsified stock, for the proceeds of which it was said Mr Lewis and Kation were liable to account to Nortex. Palmer J granted leave to file the claim on 27 July 2006. Mr Lewis sought leave to appeal against Palmer J's decision.
The issues for determination on appeal were: (i) whether the parties could reopen the Nortex accounts because there was a failure to divide profits in the 1991 and 1992 financial years in accordance with the Nortex trust deed; (ii) whether the trial judge's findings that payments made to Mr Mark Lewis as "bonuses" out of Nortex's profits in 1995, 1996 and 1997 were in breach of trust were correct; (iii) whether the liquidator should have applied the addbacks and differential interest accounting conventions between the unitholders; (iv) whether the defence of unclean hands was available to Nortex or Kation and Mr Lewis with respect to Lamru's claim to a 40% share of the proceeds of the stock sales which had been misappropriated by Mr Lewis and Kation, and, if not, whether Lamru was entitled to recoup its loss directly from Kation and Mr Peter Lewis; (v) whether Mr Lewis should be granted leave to appeal from Palmer J's decision; (vi) whether legal expenses incurred by Nortex pursuant to ratification resolutions were properly referable to the concerns of the company; and (vii) whether the liquidator could recover its costs of defending its position in relation to the non-application of the accounting conventions.
The Court held, dismissing the appeal, and allowing the cross-appeal in part:
In relation to (i) (per Basten JA, Allsop P and Hodgson JA agreeing)
The parties prepared accounts and tax returns and conducted their business generally on the basis of the distribution of profits as proposed by Mr Lewis in late 1991. The 1992 accounts operated in a similar fashion to the 1991 accounts. The trial judge's conclusion that the accounts for those financial years should not be reopened was correct: [72].
The difficulty of producing, on the basis of the evidence, a consistent and coherent understanding of the financial arrangements made in 1991 militated against any reopening of the 1991 and 1992 accounts: [67], [81].
No element of fraud having been established and no deliberate breach of trust having been proved, questions of equitable defences were not directly invoked. Assuming that a prima facie case of underpayment were established by Lamru, the fact that Mr Lamb was content, for at least six years, to acquiesce in the arrangements was sufficient to justify the Court refusing leave to reopen accounts for those years: [83]-[84]. Spellson v George [1992] NSWCA 254; 26 NSWLR 666, applied.
In relation to (ii) (per Basten JA, Allsop P and Hodgson JA agreeing)
At its highest, Kation's argument was that Mr Mark Lewis' remuneration was unfair, given the work he performed, and that this might have supported proceedings in the Industrial Relations Commission. However, no such proceedings had been commenced (more than a decade after the termination of his employment) and the payments were not made on that basis: [100].
The bonus payments were not made pursuant to a binding contract between Nortex and Mr Mark Lewis because no evidence was given by Mr Peter Lewis or Mr Mark Lewis about this. The bonuses constituted payments by Nortex in breach of trust: [101].
As Mr Mark Lewis did not have a contractual entitlement to the bonuses, the trust's net profits were increased by that amount and Lamru's claim for 40% of that amount was made good. In adopting the accounts prepared by Mr Peter Lewis, the liquidator gave written approval to the transaction. Knowing that the payment was not a true liability of Nortex, that approval was fraudulently induced by Mr Peter Lewis: [104] - [106].
The order that interest should be paid on the bonus amounts, compounded annually, was within the Court's general discretion. No basis was demonstrated for interfering with the trial judge's exercise of that discretionary power: [110] - [111]. Harrison v Schipp [2001] NSWCA 13, referred to.
Mr Peter Lewis' acts were Nortex's acts and his intention and state of mind were Nortex's intention and state of mind. 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. There was no error in the way the trial judge approached the question of the trustee's dishonesty: [116] - [118]. Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89; Barnes v Addy (1874) LR 9 Ch App 244, considered.
In relation to (iii) (per Basten JA, Allsop P and Hodgson JA agreeing)
Once the relationship had broken down between the unitholders, a proper accounting under the trust deed required application of the addbacks and differential interest conventions. There was no basis upon which those arrangements could be said to have terminated when Mr Lamb departed from Nortex's premises on 28 June 1996. The conventions were appropriate and not inconsistent with the trust deed: [133], [139], [141].
The evidence alleged to give rise to a defence of unclean hands was probative of a wrong having been committed, not by the giver of the evidence, but by a third party. Such evidence was given under the protection of a certificate under the Evidence Act, and thus the protection of Mr Lamb and Lamru derives from the operation of an Act of Parliament. However the exercise of discretion to refuse relief or the imposition of conditions upon relief does not undermine the policy of the Evidence Act: [10].
The bad conduct engaged in by Mr Lamb had a close temporal connection to the wrong committed by Mr Lewis, a close forensic connection, and a close practical human connection in terms of inducement or formation of habit. It thus had an immediate and sufficiently close relation to the equity sued on to invoke the defence: [8] - [9]. Meyers v Casey [1913] HCA 50; 17 CLR 90; Dering v Earl of Winchelsea (1787) 1 Cox 318, referred to.
The requirement that the bad conduct, alleged to give rise to the defence, have "an immediate and necessary relation to the equity sued for" is not one that the relation be of the nature of contributing to or constituting the equity sued for. Since this is merely a principle guiding the exercise of discretion, it should not be given a narrow or technical construction: [28].
The bad conduct established practices conducive to the misappropriation of stock, and provided an essential part of the evidentiary material supporting the finding on which the claim for equitable relief was based. That relationship justified the application of the defence: [29].
The discretion should not be exercised, without conditions attaching, in circumstances where it would both give Lamru the forensic benefit of dishonest conduct of its principal and the principal's evidence of that conduct, but also leave its principal immune from any consequences arising from his voluntary decision to proffer that evidence for the benefit of Lamru: [31].
The considerations that a person who dishonestly takes trust property should not be allowed to keep it, and that previous tax evasion should be declared and remedied, support the giving of conditional relief. That condition ought to be that Mr Lamb undertake to provide to the Australian Tax Office a statement disclosing all matters disclosed in his evidence: [31] - [32]. Carantinos v Magafas [2008] NSWSC 304, applied.
Nortex was entitled to an order reimbursing it for Kation's share of the misappropriated stock, at the suit of Lamru. The defence of unclean hands failed because Lamru was exercising a statutory right under the Corporations Law, not seeking equitable relief; therefore, it did not preclude the order made at the suit of Lamru: [1], [17]-[21], [163], [170]
The right which Lamru relies upon arises from the trust deed. There was no sense in which the establishment of the trust was tainted. Nor was the fraudulent misappropriation conduct in which either Lamru or Mr Lamb was implicated because Mr Lamb had ceased to have a role in the administration of the business prior to Mr Peter Lewis' misappropriations: [151]. 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, distinguished.
The defence of "unclean hands" has no application in the present case because Mr Lamb's conduct did not have an immediate and necessary relation to the equity sued for: [159] - [160]. Moody v Cox [1917] 2 Ch 71, applied. Carantinos v Magafas [2008] NSWCA 304, distinguished. Meyers v Casey [1913] HCA 50; 17 CLR 90; Black Uhlans Inc v NSW Crime Commission [2002] NSWSC 1060; 12 BPR 22,421, considered. Corin v Patton [1990] HCA 12; 169 CLR 540, referred to.
Lamru was entitled to recoup its loss directly from Kation and Mr Peter Lewis, given the trial judge's findings as to their conduct; that is, that they had misappropriated stock from the business: [161].
In relation to (v) (per Basten JA, Allsop P and Hodgson JA agreeing)
There was no evidence given by Mr Lewis, or anyone else on his or Kation's behalf, to support the inference that Mr Lewis might have taken a different position with respect to giving evidence had the liquidator raised before the 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, there is no basis for the Court to infer that Mr Lewis would have made a different decision had the liquidator's cross-claim been raised prior to the trial: [169]. No error was shown in the judgment of Palmer J. Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; 147 CLR 589, applied.
In relation to (vi) (per Basten JA, Allsop P and Hodgson JA agreeing)
The trial judge had erred in failing to consider whether particular matters were outside the scope of the retainer: [180].
The circumstances of the dispute were such that the trustee must have possessed an interest, albeit substantially less than that of Kation and Mr Peter Lewis, in its resolution. In the absence of a breach of trust, the proper course is to apportion the expenses accordingly: [184]
The apportionment of expenses can be undertaken by this Court rather than by a referee, on the basis that the relative interests of the parties have remained reasonably constant throughout the litigation: [185].
In relation to (vii) (per Basten JA, Allsop P and Hodgson JA agreeing)
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: [190].
The liquidator was not entitled to obtain his own legal costs from the company assets in respect of his active defence of his own accounting practice, in circumstances where his approach was actively and aggressively supported by Kation as contradictor and which tended to diminish the resources available for unsecured creditors: [210], [214] - [215]. National Trustees and Executors and Agency Co of Australasia Ltd v Barnes [1941] HCA 3; 64 CLR 268; Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220, considered. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40366/06 CA 40523/06 SC 3081/97 SC 1750/02 SC 3354/02
ALLSOP P HODGSON JA BASTEN JA
12 JUNE 2009 KATION PTY LTD v LAMRU PTY LTD; LEWIS v NORTEX PTY LTD (In liquidation) Judgment 1 ALLSOP P: I have had the considerable advantage of reading the reasons of both Hodgson JA and Basten JA. I agree with the reasons of Hodgson JA, with the minor exception of his Honour's disposition of the application for leave to appeal against the order of Palmer J granting the liquidator of Nortex leave to bring the cross-claim. The removal of the cause for the making of that application, by the correction of Hamilton J's refusal to grant Lamru relief as to the reconstitution of the trust fund does not lead to the conclusion of error in the making of the order by Palmer J. It may be that the proceedings will be otiose and should now be discontinued. A question of costs may arise in relation to that. That can be dealt with when, or if, it arises, no doubt in the context of how it arose and Mr Lewis' responsibility for the underlying wrong. I agree with the reasons of Basten JA, with the exception of his Honour's reasons on unclean hands. I agree with the orders proposed by Basten JA, but subject to the orders proposed by Hodgson JA dealing with the conditional relief by reason of the operation of the doctrine of unclean hands. I would add some comments of my own.
2 I have not found the resolution of the issue of unclean hands easy. The principles were applied and discussed in Carantinos v Magafas [2008] NSWCA 304 by Hodgson JA (with whom Campbell JA and Handley AJA agreed). The principles are largely uncontroversial: R Meagher, J D Heydon and M Leeming Meagher, Gummow and Lehane's Equity Doctrines and Remedies, 4th Ed (2002) Butterworths at 98-102 [3-110] - [3-135]; and Pomeroy's Equity Jurisprudence, 5th Ed (1941) Vol 2 at 90 - 143 [397]-[404]. The expression of the matter by Hodgson JA in Carantinos at [58]-[59] was whether the disentitling conduct had a sufficiently close relationship to the equity sued for to justify the exercise of a discretion to refuse or otherwise qualify relief. That flexible way of expressing the matter recognises the underlying requirements of the principles on which a court of equity will act: honesty, equity and conscience: Spence's Equitable Jurisdiction (1846), London, Vol 1 at 339. The expression of the matter in terms of "discretion" reflects the underlying conception of equity to enforce conscience and good faith, these matters being, to a significant degree, necessarily evaluative: Pomeroy at 92-93 [398]; and see Deweese v Reinhard 165 US 386 at 390 (1897). The limitation of the operation of the principle to circumstances where there is the necessary connection with the equity invoked was introduced to avoid the barring of justice, through equity's orders, to persons who may not be morally or legally blameless, but whose behaviour that could be so described had no relevant connection with the equity they sought to invoke. Just as the underlying concepts are evaluative and, to a degree, reflective of contemporary social morality, the degree of proximity of the iniquity to the equity is equally necessarily evaluative. Pomeroy's expression of the matter at 94-95 [399] is helpful: "… The maxim, considered as a general rule controlling the administration of equitable relief in particular controversies, is confined to misconduct in regard to, or at all events connected with, the matter in litigation, so that it has in some measure affected the equitable relations subsisting between the two parties, and arising out of the transaction; it does not extend to any misconduct, however gross, which is unconnected with the matter in litigation, and with which the opposite party has no concern. When a court of equity is appealed to for relief it will not go outside of the subject-matter of the controversy, and make its interference to depend upon the character and conduct of the moving party in no way affecting the equitable right which he asserts against the defendant, or the relief which he demands." [footnote omitted] 3 The necessary measure of the conduct's removal from, or proximity to, the equity will be affected, as here, by the consequences of withholding relief. Here Peter Lewis was involved in a fraud on the trust and on the Revenue. To withhold any remedy to repair the damage caused by that fraud would be to see him retain the fruits of his conduct. The orders and conditions suggested by Hodgson JA, however, do not permit that wrong to go unremedied; rather they see the equity vindicated, but the relative advantage of the remedy to Mr Lamb and Lamru being dictated by their choice whether to have their prior conduct set right with the Revenue. 4 I do not think that the flexible expression of the principle by Hodgson JA in Carantinos is easily reconcilable with a distinction between an equitable "cause of action" and evidence being the operating discriminant. That is not to criticise the use of the expression "equitable cause of action". It is a legitimate way of expressing a suit in equity, including the relief or equity claimed and the facts on which that relief or equity will be based. It is helpful, however, to recognise the personal nature of equity's operation and the manner of expressing, and seeking to vindicate, a prayer for relief. A bill in equity would claim or pray for some relief. In order to enable the court and the other party to understand the case and for the court to be in a position to administer justice the bill would contain a clear and exact statement of all material facts: J Story Commentaries on Equity Pleadings (1865), Little Brown at 15-16. Story referred to a modern (in 1865) bill as having a number of parts. The first was the nature of relief sought. The third was the "premises" or the "stating part" of the bill which contained a narrative of the facts and circumstances of the plaintiff's case and of the wrong or grievance of which he or she complained. Story op cit at 20 [28] said that: "every material fact, to which the plaintiff means to offer evidence, ought to be distinctly stated in the premises; for otherwise he will not be permitted to offer or require any evidence of such fact."
It is clear, however, that a general statement of the charge would, in many circumstances, be sufficient, without the minutiae of all evidence. At the same page Story said: "… A general charge or statement, however, of the matter of fact is sufficient; and it is not necessary to charge minutely all the circumstances, which may conduce to prove the general charge; for these circumstances are properly matters of evidence, which need not be charged in order to let them in as proofs. Thus, under a bill to set aside an award for fraud and partiality, a general charge of the fraud and partiality will authorize the plaintiff to give evidence of circumstances tending to establish it, although those circumstances are not charged in the bill." (footnotes omitted) 5 Rule 82 of the New South Wales Consolidated Equity Rules of 1902 drew a distinction, for statements of claim in equity, between "material facts and circumstances" and evidence: W A Parker The Practice in Equity (1930 Law Book Co) at 178-179 and see Williams v Wilcox (1838) 8 Ad & E 314 at 331; 112 ER 857 at 863. 6 Methods of pleading of years past do not, of course, dictate an answer to a modern problem. The potential breadth of the bill in equity (which at times led to problems of prolixity) does, however, militate against a bright line distinction between the equity (or equitable cause of action) and the evidence to justify its vindication. 7 Here, Mr Lamb (with the protection of a certificate under the Evidence Act 1995 (NSW), s 128) gave evidence that he and Mr Lewis had a practice of abstracting stock from Nortex and selling it for private gain in fraud of the trust and the Revenue. This evidence assisted in proof of the fact of Mr Lewis' continuation of the practice, of which Mr Lamb, through Lamru, now complained in respect of later years after Mr Lamb's departure from the business. Whilst Rule 82 might have required only a statement or allegation of the fraud in later years, a bill in equity passing muster in 1865 following the guidance of Story may have legitimately seen (and perhaps required) an allegation of the past practice about which evidence was to be given. 8 The "immediate and necessary relation to the equity sued for" (to use the words of Eyre LCB in Dering v Earl of Winchelsea (1787) 1 Cox 318 at 319; 29 ER 1184 at 1185) was in contradistinction to "general depravity". In Meyers v Casey [1913] HCA 50; 17 CLR 90 at 124, Isaacs J spoke of the right or equity being "to some extent brought into existence or induced by some illegal or unconscionable conduct of the plaintiff". 9 Here, the fraudulent practice engaged in by the pair of Mr Lewis and Mr Lamb was continued in later years by Mr Lewis. It had a close temporal connection with the wrong of Mr Lewis; it had a close (indeed decisive) forensic connection with proving the wrong of Mr Lewis; and it had a close practical human connection with Mr Lewis' wrong as a kind of inducement or habit. It had, in my view, an immediate and sufficiently close relation to the equity sued on. Would there be any difference if the claim was in relation to one year in which Mr Lamb took a leave of absence from the business and complained that Mr Lewis had, for his sole benefit, engaged in the practice which (on this hypothesis) both had done in previous years and both did and intended to do in later years? The answer is, no. Both are sufficiently close to invoke the maxim. 10 One issue of some concern to me in considering the application of the unclean hands maxim was the question of the effect of the Evidence Act, s 128. It is to be recalled that a law of the New South Wales Parliament was held by the primary judge to permit the evidence to be given under the protection of a certificate. No challenge was made to the operation of the Evidence Act in that facultative or advantageous way for the witness. In those circumstances, relevant evidence of persuasive probative value was given which raised a clear inference of a wrong, not of the giver of the evidence, but of a third party, but by reference to a practice which in the past involved the giver of the evidence. The protection of Mr Lamb was derived from the operation of an Act of Parliament. I considered whether this militated against exercising the discretion to refuse relief or to require conditions of unqualified disclosure to be attached to relief. However, on reflection, there is no undermining of the policy of the Evidence Act. Mr Lamb has a choice between two ways of vindicating his equity. To obtain the more advantageous outcome, in practical terms, he must confront his past conduct by disclosure to the Australian Tax Office.
11 For the above reasons I agree with the orders proposed by Basten JA with the exception of his order (4). In lieu of that order (4) I agree with the order (4) proposed by Hodgson JA. 12 HODGSON JA: I agree with the reasons of Basten JA, except concerning the issue he has identified as The Stock Fraud: "Unclean Hands"; and this has some consequences in relation to costs and the orders to be made. 13 There are two important sub-issues concerning the stock fraud on which I need to give reasons: (1) Whether relief should be granted against Lewis to the effect that he indemnify Nortex in respect of the stolen stock. (2) The defence of unclean hands. Indemnification of Nortex 14 The primary judge's identification of relevant issues and his resolution of them are in par [5]-[18] of his judgment of 19 May 2005 ([2005] NSWSC 482): [5] The issues raised under this heading were claims by Lamru to the following effect: (a) That the 1996 closing stock figure should be adjusted in accordance with the finding of the abstraction of stock, so that the free net income ("FNI") of that year is adjusted accordingly in the books of the trust. This is, in effect, relief in the statutory appeal against the liquidator's act or decision in maintaining the original stock figure. As that proceeding is statutory, not equitable, the unclean hands defence does not apply. (b) That, similarly in the 1997 year, the accounts should be prepared on the basis that they include in the income of the year the profit from the sale of the abstracted stock, with Lewis shown as a debtor to the company in the corresponding amount. (c) That there should be an order that Lewis and Kation pay to the trust the value of the abstracted stock and the profit derived from its sale. This is said to be on the basis that Lamru as beneficiary brought and agitated at the trial a claim on behalf of the trustee, in effect for conversion of the stock, or alternatively a claim in fraud arising from its abstraction and sale. These claims were not determined in my judgment. The unclean hands defence did not apply to this claim: (i) in so far as the conversion claim was a purely common law claim; (ii) because the defence of unclean hands is not available in respect of the trust's claim for indemnity against Lewis/Kation in respect of the breach of trust constituted by failure to account for the stock money; Lamru brings the claim on behalf of the trust (as a derivative action) and the act of tendering evidence of historical tax evasion by Lewis and Lamb is not conduct disentitling. (d) That, both in respect of the claim to be admitted as a creditor of Nortex in respect of the missing stock and of the derivative claim on behalf of the trust, it is necessary for the Court to quantify the monetary impacts of the missing stock in 1996 and 1997 and the Court is pressed for $219,215 in 1996 (closing stock) and $164,038 in 1997 (profit on sale of items). [6] As to (a) & (b), these are claims that Lamru is entitled to orders in these terms based upon [129] of my judgment to the effect that Lewis (with the knowledge and acquiescence of Kation), during the 1997 year took and sold stock of Nortex and did not pay or account to the company for the proceeds. To conceal this, the stock figure at the end of the 1996 year was falsely adjusted down. Equitable relief was held not to be available to Lamru in respect of this subject matter by virtue of the unclean hands defence: see my judgment [153]. However, Lamru contends that it is still entitled to have a determination that the liquidator was wrong in rejecting so much of Lamru's proof of debt as depended upon the acceptance of these claims and to have the accounts of Nortex adjusted accordingly. These orders would be made in the determination of the statutory appeal proceedings. As the relief in those proceedings is not equitable, but statutory, the unclean hands defence does not apply.
[7] Mr Cotman, of Senior Counsel for the Lewis interests, protests that by doing this the Court would give indirectly what it could not give directly and that this a court of equity could not or would not do. However, it seems to me that that proposition is not sound. The Supreme Court is, of course, a court of equity, a court of law and a court which exercises statutory jurisdiction. There will be many circumstances where the withholding or granting of relief by reference to the clean hands doctrine will turn on what some would perceive as the technical distinction between whether the cause of action relied on is legal or equitable. It is clear that, if the relief sought is purely legal, the clean hands doctrine has no operation and the unclean hands defence is unavailable. Despite Mr Cotman's submission that the Court will not do indirectly what it could not do directly, there are many instances where there are different avenues to, in effect, the same relief. Often, upon the same set of facts, there will be available potentially a judgment at common law and relief in equity. Even if the equitable relief will be precluded by unclean hands, the purely legal relief, if otherwise available (eg, not depending upon the establishment of an illegal transaction) may be obtained: see Meagher, Gummow & Lehane's Equity Doctrines and Remedies (4th ed, 2002) [3-135]; Nelson v Nelson (1995) 184 CLR 538 at 550 per Deane & Gummow JJ. There is no room in this area for the operation of the doctrine enunciated by Mr Cotman. The situation is the same in respect of the Court's exercise of its statutory jurisdiction to review decisions of liquidators under s 1321 of the Corporations Law ("the CL"), which was the relevant legislation when Nortex was wound up in 1997 and which continues to apply to the winding up. This relief is not equitable in nature, unclean hands do not preclude the relief and operation should not be given to the doctrine enunciated by Mr Cotman: Lodge v National Union Investment Co Ltd [1907] 1 Ch 300; and see generally Meagher, Gummow and Lehane ibid.
[8] As the clean hands doctrine does not preclude relief in the statutory appeal, the findings in [129] of my judgment entitle Lamru to have a determination that the liquidator was wrong in rejecting so much of Lamru's proof of debt as depended upon the acceptance of these claims and to have the accounts of Nortex adjusted accordingly.
[9] As to (c), the claim that there should be an order that Lewis and Kation pay to the trust the value of the abstracted stock and the profit derived from its sale, this is based on the proposition that Lamru as beneficiary made at the trial a claim on behalf of the trustee. Whether the claim seeks to navigate around the unclean hands defence by being a common law claim or by being a claim made on behalf of the trustee, the viability of the argument depends on the proposition that the case was conducted as a claim brought by the beneficiary on behalf of the trustee.
[10] This argument progresses by reminding the Court of the terms of ss 553 and 553E of the CL It then progresses to paras 42, 43 and 44 of the points of claim, which are as follows: 42 In breach of trust Nortex wrongfully failed to include in its closing stock for the accounting period ending on the 96 income vesting day some 120,464 units of stock having a value (for the purposes of valuing closing stock) of $219,215.00 with the consequence that the total free nett income to the 96 income vesting day should be increased by that amount and Lamru's 40% share thereof ($87,686.00) accounted to it. PARTICULARS
a) Scott Schedule claim 17 and evidence there referred to b) Request for particulars and answer thereto 28/7/00 and 3/8/00 c) Affidavit Lamb 15/2/02 d) Annexure C to affidavit of Lamb 14/11/02 e) Pages 78A-D of Exhibit AV …
43 Lewis Senior and Kation were knowingly concerned in the beach of trust pleaded in 42 …
44 As such accessories to Nortex's breach of trust Lewis Senior and Kation are liable to Nortex to indemnify it in respect of the breach and liable to compensate 'Lamru'.
[11] The allegations relating to the profit from the abstracted stock in the 1997 year in paras 56 - 59 essentially followed the pattern of paras 42 - 44. Paragraph 57 was as follows: 57 Those units of stock had a sale value of $383,253.00 translating to a gross profit of $164,038.00 which sums should be, included in the free nett income as at the 97 vesting day (ie the $1,425,079.84 referred to in 55) with the result that Lamru is entitled to 40% of that concealed profit ($65,615.20).
[12] It is said that these provisions are to be read as enunciating not only Lamru's claim under Barnes v Addy (1874) LR 9 Ch App 244, but a claim made by Lamru on the trust's behalf for recovery from Lewis of the value of the goods wrongly taken. This, it is said, would be a purely legal claim on behalf of the trust against a third party to recover trust property. An analogy would be the claim of a trustee who was the registered proprietor of a piece of real property occupied by squatters. The trustee's remedy would be to bring an action for judgment for possession, which would undoubtedly be a legal claim. To a legal claim, the defence of unclean hands is no defence and it would offer no bar. Equally, if it is regarded as an equitable claim in fraud made on behalf of the trustee, the fact that it is in substance the trustee's claim would avoid the effect of the unclean hands defence.
[13] Claims such as those outlined may have been propounded, had Lamru chosen to do so. But there are a number of objections to this being regarded as a correct characterisation of what has occurred in the present proceedings.
[14] First, the pleading allegations set out above are not an adequate allegation of such a claim. The "pleading" does not make such a claim in terms and is not recognisable as making such a claim. There is no allegation that the trustee has declined to bring such a claim. However, there is some doubt as to whether that is a necessary ingredient of a cause of action by a beneficiary for such relief. It is said that this is a matter that goes to standing, not to the existence of the cause of action: see IV Scott on trusts para 294.1. In my view, under modern pleading practice, that matter should be pleaded to eliminate surprise. Additionally, it is said that any problem is solved by Pt 15 r 11 of the Supreme Court Rules 1970, which dispenses with the pleading of conditions precedent. But that is not a solution. The plaintiff must in its pleading show its entitlement to bring the action. And Pt 15 r 11 does not operate to dispense with the pleading of a necessary ingredient of a cause of action: May v Chidley [1894] 1 QB 451; Roberts v Plant [1895] 1 QB 597; and see generally Ritchie's Supreme Court Procedure NSW [15.11.1].
[15] Whether or not it needs to be specifically alleged in the pleading that the trustee has failed to bring the action or that the beneficiary sues on behalf of the trustee, stating the facts that entitle it to do so, this "pleading" is inadequate to bring to attention the causes of action now sought to be relied on, rather than only Lamru's Barnes v Addy claim. On the authority of McDougall J's decision in White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220, this would be sufficient to preclude relief in respect of these causes of action. In that case, the wider case was opened. But, as the defendants could not have been taken to have consented to the case being conducted on that basis, the plaintiff was confined to its case as pleaded and particularised.
[16] Whatever the adequacy or inadequacy of the "pleading" to draw attention to claims of this nature, the conduct of the case did not lend any support to the proposition that these causes of action ought be allowed to be relied on. Mr Motbey, of counsel for Lamru, concedes that these claims were not propounded in this way in final address at the trial before I delivered my judgment. They have not been put forward as such, that is, as claims made through the trustee, in these proceedings at any time up to the present. What is more, Mr Motbey, during the course of the trial, eschewed that Lamru was making a claim on this subject matter otherwise than on the basis of its Barnes v Addy claim. Thus, at transcript p 6570 the following exchange occurred: His Honour : I think I understand; equally bearing in mind the White ACT point, you agree that there is no direct case of fraud against Lewis. You have not pleaded that. It is not now made. Your claim against Lewis is for accessorial liability only through the breaches of trust that we have just discussed.
[17] In my view, these derivative claims were not made and the proceedings were not conducted on the basis that they were made. No direct claim of fraud was made against Lewis, much less any common law claim for conversion in respect of the goods. It is now too late and Lamru cannot succeed upon claims propounded in this way at this stage.
[18] For these reasons, there will be no order that Lewis and Kation pay to the trust the value of the abstracted stock or the profit derived from its sale on the basis that Lamru as beneficiary made at the trial a claim on behalf of the trustee. 15 The primary judge's resolution of this matter has been challenged in the cross-appeal: 2 Red 384L and 389I-Q (grounds 30-32), 1 Orange 114-116 (par 90-104), appeal transcript 202-204. 16 In my opinion, this challenge to the primary judge's decision should succeed. 17 I agree with the primary judge that the pleaded claim was limited to a claim of accessory liability of Mr Lewis and Kation to a breach of trust by Nortex; but that has to be understood in the light of the circumstance that at the time of the alleged breach of trust, Nortex was wholly under the control of Mr Lewis. In my opinion, it would have been no answer by Mr Lewis to the claim made on this basis to say that it was he and not Nortex that was the principal perpetrator. There is in my opinion no inconsistency or incongruity in Lamru seeking, as part of its remedy for this accessory liability, that Nortex (now under the control of the liquidator) be reimbursed by those with accessory liability. 18 Thus the primary judge's determination that there was no pleading of a legal claim by the trust for recovery direct from Mr Lewis and no claim of fraud made directly against Mr Lewis is not to the point. The claim on the basis of accessory liability was made, and the claim for relief by way of Mr Lewis indemnifying Nortex was squarely made. 19 This leaves the question of whether the pleading was deficient in that there was no allegation that the trustee had declined to bring the claim. The primary judge expressed the view that this should have been pleaded to avoid surprise, and also that a plaintiff must in its pleadings show its entitlement to bring the action. 20 Clearly, there was no deficiency in the pleading of a cause of action available to the trust, of which Lamru was a beneficiary. In circumstances where the trustee was a defendant to the proceedings, and did not itself in the proceedings seek the relief sought by the beneficiary, it is in my opinion overly technical to say that the beneficiary should have pleaded the unwillingness of the trustee, in order to show its standing to pursue this cause of action on behalf of the trustee. Failure to plead this is hardly, in my opinion, a matter that could lead to a defendant being taken by surprise: the trustee was in the proceedings as a defendant, it was not pursuing this cause of action, and the beneficiary was plainly seeking to do so. In those circumstances, if anyone was to be surprised, it would be the plaintiff in circumstances where the defendant does not suggest a lack of standing to pursue the proceedings. 21 For those reasons, in my opinion, subject to the questions of Lamru's claim on its own behalf, and Lamru's lack of clean hands, an order should be made that Mr Lewis indemnify the trust by paying to it the value of the stolen stock and the profits made from it. 22 This order would make the liquidator's cross-claim superfluous; and for that reason, I would grant leave to appeal from the decision of Palmer J, allow that appeal, set aside the order giving leave to the liquidator to bring the cross-claim, and make an order dismissing that cross-claim. In the circumstances, I would propose that each party pay its own costs of that cross-claim and of the application before Palmer J, and also of the application for leave and appeal. Unclean hands 23 In this case, in order to advance Lamru's case that Mr Peter Lewis had been guilty, during the 1997 financial year, of fraudulently taking and selling stock of Nortex and not paying or accounting to Nortex for the proceeds thereof, Mr Lamb gave evidence that he had participated together with Mr Lewis in the same practice in fraud on the revenue up to the time of his departure from Nortex on 28 June 1996. 24 When called to give this evidence, Mr Lamb asked for and was given a certificate under s 128 of the Evidence Act 1995 (NSW). That section is in the following terms: 128 Privilege in respect of self-incrimination in other proceedings
(1) This section applies if a witness objects to giving particular evidence, or evidence on a particular matter, on the ground that the evidence may tend to prove that the witness: (a) has committed an offence against or arising under an Australian law or a law of a foreign country, or (b) is liable to a civil penalty. (2) The court must determine whether or not there are reasonable grounds for the objection. (3) If the court determines that there are reasonable grounds for the objection, the court is to inform the witness: (a) that the witness need not give the evidence unless required by the court to do so under subsection (4), and (b) that the court will give a certificate under this section if: (i) the witness willingly gives the evidence without being required to do so under subsection (4), or (ii) the witness gives the evidence after being required to do so under subsection (4), and (c) of the effect of such a certificate. (4) The court may require the witness to give the evidence if the court is satisfied that: (a) the evidence does not tend to prove that the witness has committed an offence against or arising under, or is liable to a civil penalty under, a law of a foreign country, and (b) the interests of justice require that the witness give the evidence. (5) If the witness either willingly gives the evidence without being required to do so under subsection (4), or gives it after being required to do so under that subsection, the court must cause the witness to be given a certificate under this section in respect of the evidence. (6) The court is also to cause a witness to be given a certificate under this section if: (a) the objection has been overruled, and (b) after the evidence has been given, the court finds that there were reasonable grounds for the objection. (7) In any proceeding in a NSW court or before any person or body authorised by a law of this State, or by consent of parties, to hear, receive and examine evidence: (a) evidence given by a person in respect of which a certificate under this section has been given, and (b) evidence of any information, document or thing obtained as a direct or indirect consequence of the person having given evidence, cannot be used against the person. However, this does not apply to a criminal proceeding in respect of the falsity of the evidence. (8) Subsection (7) has effect despite any challenge, review, quashing or calling into question on any ground of the decision to give, or the validity of, the certificate concerned. (9) If a defendant in a criminal proceeding for an offence is given a certificate under this section, subsection (7) does not apply in a proceeding that is a retrial of the defendant for the same offence or a trial of the defendant for an offence arising out of the same facts that gave rise to that offence. (10) In a criminal proceeding, this section does not apply in relation to the giving of evidence by a defendant, being evidence that the defendant: (a) did an act the doing of which is a fact in issue, or (b) had a state of mind the existence of which is a fact in issue. (11) A reference in this section to doing an act includes a reference to failing to act.
The effect of s 128 subs (12) to (14) of the Evidence Act 1995 (Cth) is that the prohibition in s 128(7) of the New South Wales Act also applies in proceedings in Federal and ACT courts. 25 There may be a question as to whether this was a correct application of s 128. Although Mr Lamb was not a party to the proceedings, he was the principal and directing mind of the plaintiff Lamru, and he was called to give evidence by Lamru's counsel on what effectively must have been his own instructions. Thus there may be a question whether it can truly be said that he "objected" to giving the evidence, when his own purpose in instructing Lamru's counsel to call him must have been that he give that very evidence. However, that question does not arise in this appeal, and I will say no more about it. 26 The primary judge, at par [153] of his judgment of 29 November 2004, noted that the particular acts of fraud complained of were committed in the 1997 year, while the course of fraud in which Lamru participated was in earlier years; but he held that the earlier conduct had a close relationship with the conduct the subject of the claim, that there was in effect a continuum between the conduct complained of and the conduct relied on to prove it, that Lamru still enjoyed the profit from the fraudulent enterprise, and that the earlier conduct was an integral part of Lamru's case on this cause of action. On that basis, the primary judge held that the unclean hands defence applied; and he also held that it was not appropriate to grant conditional relief, and so he refused Lamru any relief on this cause of action. 27 On appeal, it was put for Lamru that, since the relation between Lamru's own fraudulent conduct and the cause of action was evidentiary only, it was not a sufficiently close relation for the unclean hands defence to arise at all. 28 The relief sought was equitable relief. The Court has the discretion whether or not to grant such relief, but there are principles guiding the exercise of that discretion. Some of those principles relate to the circumstances in which equitable relief may be refused because of unclean hands; and these principles require that the bad conduct in question have "an immediate and necessary relation to the equity sued for". However, this is not a requirement that the relation be of the nature of contributing to or constituting the equity sued for; and since this requirement is not a rule of law but merely an aspect of principles guiding the exercise of discretion, it should not in my opinion be given a narrow or technical construction. 29 In the present case, the relation between the bad conduct and the equity sued for was that the bad conduct established practices conducive to the understatement of stock as at 30 June 1996, and to the disposal of abstracted stock in the year ended 30 June 1997; and that it provided an essential part of the evidentiary material supporting the finding that the equity sued for existed. In my opinion, that relation was sufficiently close to justify application of the unclean hands doctrine. 30 A further reason for regarding the relation as being sufficiently close to enliven a direct discretion to refuse relief, or at least to make it conditional, is the effect of the s 128 Certificate. The transcript of Mr Lamb's evidence could be sent to the Australian Taxation Office. However, the effect of s 128(7) of the NSW Act and s 128(12)-(14) of the Commonwealth Act is that, not only could Mr Lamb's evidence not be used in any proceedings in New South Wales or Commonwealth courts against him, but also that evidence obtained as a consequence of Mr Lamb's having given that evidence could not be so used. The evidence could be used against Lamru, but if Lamru is or becomes impecunious, this may be worthless. 31 Accordingly, I am not prepared to exercise a discretion in favour of Lamru in relation to this cause of action, at least without the imposition of conditions, in circumstances where so to exercise the discretion would not merely give Lamru the forensic benefit of dishonest conduct of its principal and the principal's evidence of that conduct, but also leave its principal immune from any consequences arising from his voluntary decision to proffer that evidence for the benefit of Lamru. As in Carantinos v Magafas [2008] NSWSC 304, however, the considerations that a person who dishonestly takes trust property should not be allowed to keep it, and that previous tax evasion should be declared and remedied, support the giving of conditional relief in this case. 32 In my opinion, the appropriate course would be to order Lewis to pay the amounts of $210,000 and $150,000 plus interest, as to sixty per cent to the liquidator, and as to the remaining forty per cent either to the liquidator to be placed in an interest-bearing account (if the liquidator and Lamru consent to this) or into Court (if they do not), such sum to remain there until the further order of the Court. Lamru would be given liberty to apply to the Court for payment of the money to it on the basis of evidence that it has made full disclosure to the Australian Taxation Office of tax evasion by Mr Lamb and Lamru in connection with Nortex stock and has made appropriate arrangements to pay any additional tax and penalty; and the liquidator would have liberty to apply after twelve months for release of the money to him in the event that no application is made by Mr Lamb and Lamru in the meantime. ORDERS 33 I note that Basten JA has proposed an order for costs in relation to the cross-appeal by Lamru. Although I would give effect to the defence of unclean hands, I would grant Lamru conditional relief and also grant it relief for the benefit of the trust; and in my opinion the order proposed by Basten JA in that paragraph is appropriate. 34 Accordingly, I would propose the following variations to the orders proposed by Basten JA, which otherwise I agree with: (1) In lieu of order (4): (4) In relation to order 4, set aside paragraph (b) and (c), and in lieu thereof insert: "(b) declare that the amounts of the trust were erroneous by reason of the taking and selling of stock: (i) by understating the value of stock at the end of the 1996 financial year by $210,000; (ii) by understating the profits for the 1997 financial year by a further $150,000; (c) order Lewis reconstitute the Nortex Trust Fund by paying into the Trust Fund sixty per cent of the amounts referred to in par (b), together with interest at the rates payable under Schedule of the Uniform Civil Procedure Rules 2005, calculated on 30 June in respect of each financial year, compounded at annual rests; (d) order that Lewis pay to the liquidator to be placed in an interest-bearing account (if the liquidator and Lamru give written consent to the Court and to Lewis within seven days) or into Court (if they do not) forty per cent of the amount referred to in par (b), together with interest at the rates payable under Schedule 5 of the Uniform Civil Procedure Rules 2005, calculated from 30 June in respect of each financial year, compounded at annual rests; (e) liberty to Lamru to apply to the Court for payment of the amounts referred to in par (d) to it on the basis of evidence that it has made full disclosure to the Australian Tax Office of tax evasion by Mr Lamb and Lamru in connection with Nortex stock and has made appropriate arrangements to pay any additional tax and penalties; (f) liberty to the liquidator to apply to the Court after twelve months for release to him of the amounts in par (d), in the event that no application has been made by Mr Lamb and Lamru in the meantime or in the event that such an application has been refused." (2) A further order (11): (11) In respect of the application for leave to appeal from Palmer J: (a) leave to appeal granted, appeal allowed; (b) orders of Palmer J set aside, and in lieu thereof dismiss the liquidator's cross-claim; (c) each party to bear its own costs of the cross-claim, the application before Palmer J, the application for leave and the appeal. (3) A further order (12): (12) Direct that these orders not be entered for twenty-eight days, and liberty to any party to apply by notice of motion brought within fourteen days for variation of these orders on the basis that some issue has not been dealt with or that the orders do not appropriately give effect to the Court's reasons. 35 The last proposed order is not an invitation for reargument but is a failsafe provision in a matter of extreme complexity to be availed of only in circumstances where it is thought that the orders omit a matter of substance or do not accord with the reasons in a substantial way. 36 BASTEN JA: INDEX Paragraph 1. Nature of Proceedings 37 2. Issues for Determination (1) Issues on appeal 49 (2) Issues on cross-appeal 51 3. Distribution of Profits (1) 1991 financial year 57 (2) 1992 financial year 73 4. Bonuses paid to Mark Lewis (1) Background 85 (2) Breach of trust - a severed question? 91 (3) Efficacy of 1997 bonus payment 102 (4) Interest on bonuses 107 (5) Finding of dishonesty of trustee 114 (6) Equitable compensation 119 5. Use of Accounting Conventions 132 6. The Stock Fraud: "Unclean Hands" 143 7. Nortex' Costs 172 8. Liquidator's Costs 187 9. Grant of Leave to Appeal 220 10. Costs in this Court 238 11. Conclusions 242
(1) payments made to Mr Mark Lewis by way of "bonuses" out of the profits of Nortex in 1995, 1996 and 1997 were made in breach of trust;
(2) certain accounting conventions were to be applied as between the unit trust holders, and
(3) despite a finding that Lamru was not entitled to assert a breach of trust in respect of the falsified stock sales, because it was party to the improper arrangements, Lamru was nevertheless permitted to challenge the accounts in the statutory appeal from the liquidator's rejection of its proof of debt. 50 As will be seen shortly, one complaint made by the appellants in respect of the first issue to be discussed is that the trial judge made findings with respect to the bonuses paid to Mr Mark Lewis in circumstances where he had previously ordered that questions arising from the claims against Mr Mark Lewis be determined separately from and after other questions in the proceedings. That fact alone, which was not in dispute, was sufficient to render the orders made by Hamilton J interlocutory, at least in relation to the 'fraud proceedings'. Accordingly, leave was required both with respect to the appeal and the cross-appeal. Although no application for leave was made, the first order in the amended notice of appeal sought leave, "to the extent necessary". The appeal being interlocutory, leave is necessary: Supreme Court Act 1970 (NSW), s 101(2)(e). In the course of the hearing, the parties were asked to consider whether, if leave were granted, it should be subject to any conditions. For reasons which will appear below, it is appropriate that leave be granted in relation to the issues raised on the appeal, but subject to conditions. (2) Issues on cross-appeal 51 The cross-appeal was, in a sense, more comprehensive in the scope of its complaints than was the appeal. However, it too may be characterised as involving three primary issues, being challenges to the failure of the trial judge to accept Lamru's submissions in relation to:
(1) various complaints with respect to the Nortex accounts;
(2) the claim for relief against Mr Peter Lewis and Kation directly (rather than through Nortex), and
(3) a reduction in the amount of the costs which the liquidator was entitled to recover from Nortex. 52 A key element to the cross-appeal was that the whole of the funds of Nortex had been expended by the liquidator, not in the payment of outside creditors, but in payment of the liquidator's costs and disbursements. Thus, even if Lamru were successful in recovering funds for Nortex, a large part of those funds would disappear, primarily into the hands of the liquidator on account of his own costs and legal fees, leaving little if anything for Lamru. 53 Issue (1) concerned various complaints in relation to the accounts: these were in turn sub-divided into three categories, namely:
(a) failure to divide the profits as accounted for in accordance with the trust deed;
(b) false claims for expenses, post-June 1996 (when Mr Lamb ceased to work for the business), and
(c) income not accounted for in 1997, resulting from the falsified stock sales. 54 Each matter complained of on the appeal constituted an item which fell within the broad category of accounting complaints raised on the cross-appeal. Accordingly, it is convenient to deal with issue (1) of the cross-appeal before the other appeal and cross-appeal issues. 55 The third issue raised on the appeal involved an assertion that Lamru could not obtain recovery with respect to the falsified records of stock, so as to bring into account sales which were not found in the accounts for the year ending June 1997, because Mr Lamb had himself been party to such arrangements in previous years. Kation and Mr Lewis complain that he should not have been allowed to seek relief on behalf of Nortex in that respect; Lamru has a broader claim, namely that it should have been accorded relief against Kation and Mr Lewis directly. Accordingly, it is convenient to deal with the third issue on the appeal in the context of the second issue on the cross-appeal. 56 Further, because all of the complaints relating to the division of profits may ultimately be traced back to the requirements of the trust deed, it is necessary to commence by examining the operation of the trust deed and to note the effect of the document of appointment which was the subject of the proceeding before Young CJ in Eq in 2001. 3. Distribution of Profits (1) 1991 financial year 57 Chronologically, the first issue raised on the cross-appeal concerned a distribution of profits for the year ended 30 June 1991. Clause 4(2) of the Nortex trust deed stated: "The Trustees shall hold as a separate trust fund the Free Net Income of each Accounting Period at the expiry of that Accounting Period in trust absolutely for the Unit Holders of the Ordinary Units as at the expiry of that Accounting Period in the Specified Proportion." 58 Various terms used in this sub-clause were defined in clause 1. The "Accounting Period" was a financial year; the "Specified Proportion" was the proportion of units held by a particular unitholder in relation to the total number of units; the "Trustees" was a reference to Nortex. In addition, the term "Free Net Income" was defined as follows: "(32) 'Free Net Income' in relation to a particular Accounting Period means so much of the net income of the Trust Fund for such Accounting Period as shall not at the expiry of such Accounting Period be the subject of a valid and effective determination by the Trustees during that Accounting Period under sub-clause (1) of Clause 4 of this Deed." 59 The potential operation of clause 4(1) was a significant issue at various stages during the proceedings. Pursuant to that provision of the deed, the trustee could at any time during an accounting period set aside any part or parts of the net income for the accounting period for any one or more of the unitholders. By a document bearing the date 12 April 1991 and signed by Mr Peter Lewis and Mr Dufty, a resolution was passed by them as directors of Nortex which stated that "preliminary accounts indicated that the Net Income of the Trust Fund for the period ending 12th April 1991 would be approximately $200,000" ("the resolution of 12 April 1991"). The document continued: " IT WAS RESOLVED THAT THE Net Income of the Trust Fund should be distributed as follows: (1) The sum of $150,000 of the Net Income of the Trust Fund to Hirmanu No. 1 Trust. (2) The balance of the Net Income of the Trust Fund to Lewis No. 1 Trust." 60 Pursuant to clause 4(1) of the trust deed, such a resolution required the "prior written consent of the Appointor". As at 12 April 1991, the joint appointors were Messrs Dufty and Peter Lewis. There was no evidence of "prior" written consent on their part in that capacity. In his judgment in June 2001, Young CJ in Eq held that the document purporting to nominate Mr Peter Lewis as the sole appointor under the trust deed was executed on 16 April 1991, but was ineffective, for procedural reasons. Related to that conclusion, question 5 answered by his Honour was in the following terms: "5. On the true construction of the relevant trust deed and in the events which have happened, were the income splits from 1991 to 1995 validated by valid and effective determinations in accordance with clause 4(1) of that deed?" 61 Young CJ in Eq held that they were not, but there was doubt as to whether the answer which his Honour gave was intended to encompass the resolution of 12 April 1991: see [2004] NSWSC 1143 at [19]. Hamilton J held that it should not: at [44]. As a result, Hamilton J needed to consider a number of further issues including:
(a) whether the resolution was effective, absent evidence of a prior written consent by the appointors;
(b) whether the resolution should be set aside because of a fraudulent misstatement by Mr Lewis as to the effect of preliminary accounts, and,
(c) if such an argument were available, whether it could be relied on by Lamru. 62 His Honour held that, despite the absence of evidence of any prior written consent by the appointors, the presumption of regularity was applicable and would require a finding that, if not set aside for fraud, the resolution was valid: at [46]. Further, his Honour held that Lamru and Lamb had no standing to challenge the resolution, because they were not deceived by it. 63 Each of these findings in turn was challenged by Lamru on the cross-appeal, which, additionally, raised issues as to the proper construction of the resolution. 64 Whatever the status of the resolution of 12 April 1991, it appears to have played no part in the division of profits for the 1991 year. Mr Lewis prepared affidavits prior to the hearing before Hamilton J, but did not give evidence. However, Lamru, through Mr Lamb, sought to tender two paragraphs of an affidavit of Mr Lewis sworn on 9 April 2002 to the following effect: "5. I tender against Mr Lewis paragraphs 24 and 25 of his affidavit of 9 April 2002 where he says: ' 24. In respect of the 1991 financial year, I recall that Lamb prepared a spreadsheet shortly prior to 30 June 1991 which contained a projection of Nortex's profits for that year. That projection was quite accurate when compared with Nortex's final accounts later produced. At the time Lamb produced that spreadsheet we discussed its contents, and I said to him words to the following effect: "Even though you've only been a unitholder for a short while I'll make sure you get a distribution out of this year's profits." 25. Shortly after 30 June 1991 a trial balance for Nortex's financial accounts for the year ended 30 June 1991 was produced. At about that time I had a discussion with Lamb in words to the following effect: I: "Here are the figures for 91. The trial balance shows profits of about $1.2 million, which includes the reserves brought forward from last year. This is how the profits will be distributed." I then proceeded to write out by hand on a piece of paper in front of Lamb how I proposed that the Trust's profits for the 1991 year be distributed. (I no longer have this record.) The conversation then continued in words to the following effect: I: "You can see that I have distributed $96,000.00 to Lamru. I think that's quite generous in the circumstances. I have also carried forward $291,000.00 to 1992 by way of stock and other reserves This is effectively the balance of the reserves brought forward from 1990. I do not want all of this apportioned to me this year, so I have decided to carry forward $291,000.00 from my distribution to next year." Lamb: "That's fine by me." I deny his suggestion that I agreed to accept that I was not entitled to any of the reserves. I deny agreeing to what he was proposing. I say I did not agree and that the conversation was as I have previously stated. …" 65 Mr Lamb, while denying that he had agreed with the proposal put by Mr Lewis as to Lamru's entitlements, nevertheless did accept the figures for profits for the 1991 financial year, as outlined by Mr Lewis, which were in line with the figures he himself had set out in his own affidavit of 27 March 2000 at pars 10-11. In a further affidavit of 16 November 2000, he stated: "6. Mr Lewis and I had our first discussions about the splitting of the profits to 30 June 1991 in about September 1991. I deny any agreement with Lewis made or even discussed prior to 30 June 1991. … I was supposed to get 40% of the nett profits to 30 June 1991 at the time that financial year came to an end … nobody ever suggested anything to the contrary to that point in time. 7. It was not until about September 1991 that Mr Lewis and I discussed the profit split for the profits to 30 June 1991. When this topic came up at that time as best I can now recall Mr Lewis produced some draft accounts which indicated that the profit before add-backs was about $950K. He said 'You're not entitled to a full 40% because there were some provisions in the previous year'. I said words to the effect 'No way. Whatever the nett profit is I get 40%.' I said 'If BHP had bought a property in 1900 and it was in the books at less than its current value, the current shareholders would share that profit, not the shareholders back in 1900'. He said 'You weren't here at the time and you're not entitled to it and that's that'. We agreed to disagree. Mr Lewis prepared a calculation (which he showed me and which I do not think I have ever had a copy of) saying words to the effect 'Here is the figures which adjusts for the reserves in the accounts that you are not entitled to'. After the profits to 30 June 1991 were divided Lamru received $278,133.69 as indicated in the relevant records of the business." 66 The trial judge referred to this material and to evidence given by Mr Lamb in cross-examination, where he agreed that he had not been coerced, forced or overborne: at [51]. Mr Lamb also agreed that he was aware of minutes of Nortex which reflected the distribution as proposed by Mr Lewis and that he had prepared Lamru accounts and tax returns on that basis. 67 In substance, the difficulty in assessing the nature of this dispute arises from the absence of evidence as to the terms of the agreement on which Lamru acquired an interest in the business. Nor is there any clear evidence as to the terms upon which Hirmanu surrendered or transferred its units in the trust. 68 Although the matter was dealt with somewhat generally, the trial judge concluded hypothetically, that even if he had found a breach of trust established, he would have withheld relief on the basis of "laches, acquiescence and delay": at [54]. In substance, he accepted Mr Lamb's own description of the events of late 1991 when he said that he and Mr Lewis "agreed to disagree". His Honour found it unnecessary to consider an additional defence based on "waiver": at [55]. 69 The argument presented for Lamru was in substance not one involving fraud or falsification on the part of Mr Lewis, nor reliance by Nortex on any distribution under clause 4(2) of the deed. Rather, it was merely a dispute between the parties as to whether Lamru, having purchased units in the final quarter of the financial year should receive 40% of the net profits for that year. This amounted to a retrospective attempt to enforce the terms of the trust deed, by way of proceedings commenced after the business relationship had failed (in 1996) and indeed after Nortex had gone into liquidation in July 1997. 70 Lamru complained that Mr Lewis and Kation had in effect taken three inconsistent stances in relation to the complaint about the 1991 accounts, namely that:
(a) the distribution was justified by a resolution under clause 4(2) of the trust deed;
(b) that the distribution had been agreed to by Mr Lamb on behalf of Lamru, and
(c) Mr Lamb had not agreed but Lamru had allowed the distribution to go unchallenged for several years. 71 The inconsistency was said to be fatal to a defence of acquiescence or waiver for two reasons. First, the key element of the defence was directed to the state of mind of the defendant (in this case Mr Lewis) and, secondly, he bore the onus of proof in that regard. In addition, Lamru sought to argue on appeal that no defence of acquiescence, delay or laches could preclude the bringing of proceedings within time under the Limitation Act 1969 (NSW). (It was assumed for this purpose that the limitation period was one of 12 years, as the cause of action was for wrongful distribution of trust property, to the extent that the claim was brought against Kation, or any other person to whom the property had been distributed: s 47(1)(d) and (e). There was no discussion of the possibility that the action might be one for breach of trust, pursuant to s 48 which, if it were the only provision to apply, would impose a limitation period of six years.) However, that position was substantially abandoned in the face of s 9 of the Act which provided: " 9 Acquiescence etc Nothing in this Act affects the rules of equity concerning the refusal of relief on the ground of laches, acquiescence or otherwise." 72 Although Lamru asserted that its failure to take Mr Lamb's protest any further "really amounts to" a claim of supposed waiver, that approach sought to adopt a term of acknowledged vagueness in place of a recognised defence of laches or acquiescence: cf Meagher, Heydon and Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [36-090]. In essence the long delay in seeking to assert a remedy was treated as abandonment, so as to preclude relief in circumstances where the putative wrongdoer would be prejudiced by a late claim for equitable relief. It is clear that the parties prepared accounts and tax returns and conducted their business generally on the basis of the distribution as proposed by Mr Lewis in late 1991. His Honour's conclusion that the accounts for that financial year should not be reopened was correct in all the circumstances. (2) 1992 financial year 73 Clearly the factual material in relation to the following financial year was different, but little weight was placed upon any significant difference. The evidence of Mr Lamb, given in his affidavit of 16 November 2000 was to the following effect: "Towards the end of 1992 Mr Lewis and I had a discussion about the splitting of the profits that had been made to 30 June 1992 wherein Mr Lewis said words to the effect "There are still some reserves from last year that need to be allowed for and so you are not entitled to the 40%". I said more or less what I had said the year before. Lamru only got $256,244.79 by way of profit split for the period to 30 June 1992 as revealed in the relevant records." 74 No different issues were raised in the written submissions with respect to the 1992 year, nor was the Court taken in oral argument to any different circumstances. Thus, although the same reason was given by Mr Lewis for limiting the share provided to Lamru to something less than 40% of the recorded profit, nothing turns on that for present purposes. 75 His Honour treated the failure of the challenge to the accounts for the 1991 financial year as operating in similar fashion with respect to the 1992 year. This Court should not adopt a different approach. 76 In the course of his cross-examination, Mr Lamb was questioned in some detail about his arrangements with Mr Dufty for the purchase of his interest in the business. He said that the aggregate price was $580,000: Tcpt, 11/12/02, p 1231 (28). Of that amount, $150,000 was paid by way of distribution from Nortex's profits. Mr Lamb contended that that amount, which had been approved by the resolution of 12 April 1991, was to be understood as coming from the share of profits to which Lamru would be entitled as at 30 June 1991: Tcpt, 11/02/02, pp 1227(52)-1228(18). He also gave evidence that $270,000 was paid by Nortex in settlement of Mr Dufty's loan account: Tcpt, 11/02/02, p 1228(26)-(34). Mr Lamb remained liable for the balance of $160,000. 77 Mr Lamb gave evidence that he was not privy to discussions between Mr Lewis and Mr Dufty and it is not clear from the available records how the payment by Nortex to Hirmanu of $270,000 was accounted for. Further, Mr Lamb, understandably, had a limited recollection of the events of April-June 1991. It is apparent that Mr Lamb had some concern as to whether answers given to questions in respect of those financial arrangements might leave him open to prosecution. He sought reassurance that his answers were covered by a certificate given by the trial judge under s 128 of the Evidence Act 1995 (NSW) with respect to answers which might have the tendency to incriminate him. 78 There was a further question as to whether the resolution of 12 April 1991 was voidable because it stated an amount by way of anticipated profit for the period ending 12 April 1991 which was manifestly less than the true figure for that period. Lamru's claim that this was fraudulent conduct on the part of Mr Lewis in relation to Mr Dufty and Hirmanu was not accepted by the trial judge. Although Mr Dufty gave evidence, he did not say that he had been seriously misled. Although Mr Lamb was not privy to the resolution at the time it was passed (as neither he nor Lamru held units in Nortex at that time) he agreed that he would not himself have treated the figure as accurate because the company had made many times that profit in 1990 and that he and, he believed, Mr Dufty were aware that in 1991 the business was doing "at least as well as 1990, if not better": Tcpt, p 1236 (45)-(49). 79 The real complaint about the resolution of 12 April is that, if it purported to allocate the rest of the profits for that period to Kation, and if Mr Lamb understood that he was purchasing a 40% interest in the profit for the 1991 financial year, he would have been seriously misled. 80 That, however, does not appear to have been his claim. Had that been Mr Lewis' understanding of the resolution, he would presumably have drawn up separate accounts for the periods up to and following 12 April 1991 and allocated profits accordingly. Lamru would then have been offered 40% of the free net income for the period from 13 April to 30 June 1991. That did not happen. In fact, it is Lamru's complaint that it received exactly half the amount which it should have received. Because, to Mr Lamb's knowledge, the business was not seasonal and profits therefore accrued at a steady rate throughout the financial year, Lamru might have expected to receive one-third of its annual entitlement, rather than exactly 50%, if the resolution had the effect suggested. The evidence of both Mr Lamb and Mr Lewis as to the distribution of profits in September 1991 was inconsistent with reliance upon the 12 April minute in the way now suggested on behalf of Lamru. 81 The difficulty of producing, on the basis of the evidence, a consistent and coherent understanding of the financial arrangements made in 1991 militates against any reopening of the accounts for that year (and the subsequent year) for the purposes of the liquidation. 82 On behalf of Lamru, it was submitted that his Honour was in error in suggesting that it alone wished to reopen the accounts for those years: at [54]. As counsel demonstrated, Kation also sought to reopen the accounts. 83 No element of fraud having been established and no deliberate breach of trust having been proved, questions of equitable defences, which might arise in those circumstances, are not directly invoked. Assuming, however, that a prima facie case of underpayment were established by Lamru on all of the evidence, the fact that Mr Lamb was content, for a period of at least six years, to acquiesce in the arrangements which had then been made would be sufficient to justify the Court refusing leave to reopen the accounts for those years. As explained by Hope AJA in Spellson v George (1992) 26 NSWLR 666, in relation to the defence of "consent" at 673F: "It is clear that consent (or concurrence) by a beneficiary to a breach of trust can be an important element in the defence of the trustee to proceedings brought against him by the beneficiary on the basis of that breach. However, as it seems to me, it is only part of the defence. Consent having been established, the beneficiary does not automatically fail. The court must consider all the circumstances of the case and decide whether it is fair and equitable that the beneficiary should sue the trustee." 84 In the present case, even if Kation also wished to reopen the accounts, neither should be permitted to do so. It follows that so much of the first order made by the trial judge on 23 May 2006 as relates to the 1991 and 1992 financial years was appropriate and, to the extent that the cross-appeal sought to vary that order, it should be dismissed. 4. Bonuses paid to Mark Lewis (1) Background 85 It is convenient to deal next with the first matter raised by Kation on the appeal, with respect to the payment of the following bonuses in three financial years:
(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:
(2) the liquidator to have his costs of the proceedings out of the assets of the company, and
(3) there to be no order as to the liquidator's costs as between Lamru and the liquidator. 192 In his affidavit filed after the hearing of the appeal, the liquidator stated (par 11): "Having run out of funds in June 2003 both my legal advisers and I have continued to conduct the winding up and to incur costs in the proceedings so that substantial moneys are presently owed to me and my advisers." 193 The phrase "substantial moneys" tells the Court nothing as to the amounts claimed by the liquidator and his legal advisers. However, since much of the trial took place after January 2003, together with all steps in the proceedings in this Court, it seems likely that the costs incurred in the last six years will not be less than those incurred in the previous three years. To the extent that the legal costs are recoverable from the assets of the company, and assuming that the liquidator had been able to recover the payments required to reimburse the trust under the orders of Hamilton J (which, with interest, totalled some $1 million) it is likely that a significant proportion would go to the liquidator's legal bills. (A review of the liquidator's remuneration may be undertaken by the Court on application by a significant creditor in accordance with s 473 of the Corporations Act 2001 (Cth): no such application is before this Court.) 194 The orders sought in the notice of cross-appeal filed for Lamru required that Mr Peter Lewis, Kation and the liquidator each pay Lamru's costs of the proceedings below, but that Mr Lewis and Kation indemnify the liquidator in respect of his liability. In relation to the costs of the appeal, Lamru sought an order that Kation and Lewis pay its costs and the costs of the liquidator. 195 An assumption underlying these proposed orders was that Lamru had been entirely successful in the proceedings below. In that sense, the cross-appeal appeared to challenge the finding of the trial judge which was reflected in the order that Kation and Lewis pay 70% of Lamru's costs of the trial. 196 It is clear that there were issues litigated before Hamilton J which neither side won and at least one set of issues which Lamru lost. Although Lamru has enjoyed some further success on its cross-appeal in relation to the "clean hands" defence, the trial judge treated Lamru as successful on the stock fraud issue and entitled to its costs, despite not obtaining all the relief it sought: see [2006] NSWSC 480 at [29]. No reason has been demonstrated for interfering with the apportionment of costs as between Lamru on the one hand and Mr Peter Lewis and Kation on the other. Assuming that the recoverable costs of each side were the same, 85% of those costs were to be borne by Mr Lewis and Kation. So far as the cross-appeal seeks to interfere with that finding, it should be rejected. Indeed, in so far as leave was required to interfere with that finding, that is to the extent to which the challenge was not consequential upon other substantive challenges, leave should be refused because no real argument was mounted in its favour. 197 The primary complaint of Lamru is that, by allowing Mr Silvia to take his costs out of the company assets, on the assumption that there are available assets, Lamru will end up paying those costs to the extent of its 40% share of the net assets. Accordingly, Lamru sought:
(a) to recover from Kation and Mr Lewis directly, rather than through Nortex;
(b) an order that Kation and Mr Lewis indemnify the liquidator against his obligation to pay costs in relation to claims on which Lamru succeeded, and
(c) to limit the liquidator's right to meet his costs out of Nortex' funds. 198 The question of the liquidator's entitlement to costs was addressed by his Honour in the fourth judgment: [2006] NSWSC 480 at [33] ff. His Honour treated separately the issues of the liquidator's costs vis-à-vis Lamru and whether he should obtain his costs from the assets of the company. His Honour noted that the liquidator "played only a limited role in the trial, appearing on only about 30 days, sometimes by counsel and sometimes by his solicitor": at [36]. The issues to which the liquidator actively responded were twofold, namely the suggestion that he had improperly aligned himself with Mr Lewis and Kation and, secondly, the application of the accounting conventions. On the first issue he was successful; on the second he was unsuccessful. As a result, his Honour thought it appropriate that no costs be awarded as between Lamru and the liquidator: at [44]. 199 In dealing with the right of the liquidator to recover his costs from the company's assets, his Honour concluded that having acted both reasonably and successfully in resisting the allegation of impropriety, he was entitled to recover those costs from the company assets: at [49]. Despite the breadth of the cross-appeal, no real challenge was mounted in argument to that conclusion. 200 The second question concerned the right of the liquidator to recover the costs of defending his position in relation to the non-application of the accounting conventions. Lamru argued that this was a dispute fully contested by Kation on the one hand and Lamru on the other: without taking sides, the liquidator could not maintain a neutral stance (as was appropriate) and, to the extent that he took the Kation side, his active participation was both otiose and inappropriate. The rejection of these submissions was challenged by Lamru on the appeal. 201 There are a number of curious aspects of the liquidator's role in the proceedings. First, there was his own evidence as to his motives for active intervention, referred to by the trial judge at [35]: "It should be said at once that the Liquidator personally did not have a correct perception of the principle that it was open to him not to take any active part in the proceedings. He said several times in evidence that he was bound to defend his adjudication and, indeed, said on at least one occasion that, if he did not do so, he feared that the appeal would automatically succeed. This is certainly not so where there is, in the proceedings, an obvious and aggressive contradictor other than the Liquidator, as was the case here." 202 His Honour added that the liquidator's apparent misapprehension in this respect was not shared by his legal advisers. Nevertheless, in his Honour's view the misperception had no great relevance to the question of costs "in the circumstances of these proceedings". When his Honour came to consider its relevance in relation to the question of indemnity from company assets, he noted again that the liquidator's view was "wrong" but that "he also gave other reasons for some active participation in these proceedings": at [51]. These further reasons were, on Lamru's submissions, also misconceived, but were accepted by the trial judge. 203 The first reason noted by his Honour was "vigilance on behalf of unrepresented interests, such as the unsecured creditors, particularly in relation to the actual and potential debt to the Commissioner of Taxation": at [51]. 204 The operation of this factor in the circumstances of the case is obscure. The major unsecured creditors were the two disputing unitholders. To the extent that the Commissioner might have an interest in the proceedings, it was an interest which was likely to flow from success on the part of Lamru, which Kation was resisting. 205 Secondly and apparently consequentially, his Honour noted that the liquidator mentioned "his duty as the representative of the company to ensure that correct information was furnished to the Commissioner of Taxation". Why that purpose was best fulfilled by active participation in legal proceedings was not explained. 206 Thirdly, the liquidator referred to the need to be "careful of the self-interest of conflicting parties". Presumably that was a note of caution against unnecessary intervention in litigation. The trial judge continued: "But here he was dealing with men who were both found in the course of the proceedings, by Young CJ in Eq, by me or by both to have been guilty of significant dishonesty." 207 As Lamru submitted, Mr Peter Lewis had been found guilty of significant dishonesty by Young CJ in Eq, but not Mr Lamb. How a finding by the trial judge in his judgment was supposed to justify the earlier involvement of the liquidator (prior to the judgment) is somewhat obscure. Nor is it entirely clear why a distrust of the participants in the litigation justified active intervention on the issue under consideration, namely the application of the accounting conventions. 208 Finally, his Honour referred to a fourth factor: "That the need for caution was not illusory was demonstrated, admittedly late in the day, by both sides settling the New Zealand proceedings without referring to him, although both had promised to do so, when he refrained from active participation in those proceedings." 209 As Lamru pointed out, there was a temporal problem with this consideration: the New Zealand proceedings were settled in August 2003, after the bulk of the proceedings before Hamilton J and presumably well after the liquidator had determined his role in those proceedings. Secondly, counsel for Lamru asserted (a matter not denied by the liquidator) that Mr Lamb had given no such promise. Thirdly, the significance to the liquidator of the settlement of the New Zealand proceedings was not explained. Fourthly, it is unclear how that consideration would explain the liquidator's active involvement in one aspect of the proceedings in the Equity Division, namely the accounting conventions. 210 With respect, none of these considerations provides support for the view that the liquidator was entitled to obtain his own legal costs from the company assets in respect of his active defence of his own accounting practice, in circumstances where his approach tended to diminish the resources available for unsecured creditors and which was, in any event, actively and aggressively supported by Kation as contradictor. 211 The correct approach to the right of the liquidator to recover from the company assets was treated by the trial judge (without demur from the parties to the appeal) as governed by principles relevantly identical to those with respect to trustees. Whether or not that equation is correct in any particular case may well depend upon the terms of the trust deed. In the present case the question was blurred by the conventional approach of the parties in treating the trust as still on foot and the liquidator, on behalf of Nortex, as the trustee. As already noted, pursuant to clause 30 of the trust deed, Nortex had ceased to be trustee as a result of entering liquidation. Further, the question whether the trustee would have been entitled to recover legal expenses in respect of the litigation between the unitholders was not addressed by reference to the trust deed. 212 Applying principles derived from trust law, Lamru referred to the judgment of Lightman J in Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220. His Lordship noted certain principles of law at 1223-1224 in the following terms: "Trustees may be involved in three kinds of dispute. (1) The first (which I shall call 'a trust dispute') is a dispute as to the trusts on which they hold the subject matter of the settlement. This may be 'friendly' litigation involving, for example, the true construction of the trust instrument or some other question arising in the course of the administration of the trust; or 'hostile' litigation, for example, a challenge in whole or in part to the validity of the settlement …. (2) The second (which I shall call 'a beneficiaries dispute') is a dispute with one or more of the beneficiaries as to the propriety of any action which the trustees have taken or omitted to take or may or may not take in the future. This may take the form of proceedings by a beneficiary alleging breach of trust by the trustees and seeking removal of the trustees and/or damages for breach of trust. (3) The third (which I shall call 'a third party dispute') is a dispute with persons, otherwise than in the capacity of beneficiaries, in respect of rights and liabilities, for example in contract or tort, assumed by the trustees as such in the course of administration of the trust. Trustees (express and constructive) are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust and have a lien on the trust assets to secure such indemnity. Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and accordingly to represent the trust in a third party dispute. Accordingly their right to an indemnity and lien extends in the case of a third party dispute to the costs of proceedings properly brought or defended for the benefit of the trust estate. Views may vary whether proceedings are properly brought or defended, and to avoid the risk of a challenge to their entitlement to the indemnity (a beneficiaries dispute), trustees are well advised to seek court authorisation before they sue or defend. The right to an indemnity and lien will ordinarily extend to the costs of such an application. … A beneficiaries dispute is regarded as ordinary hostile litigation in which costs follow the event and do not come out of the trust estate (see Hoffmann LJ in McDonald v Horn [[1995] 1 All ER 961])." 213 Where a trustee successfully defends a beneficiaries dispute against a particular class of beneficiaries, an appropriate costs order, in circumstances where the plaintiff beneficiaries were unable to pay the costs may be one in which the trustees obtain indemnification from the estate, with the shares of the unsuccessful beneficiaries to be used first in satisfying the right to indemnity: see National Trustees and Executors and Agency Co of Australasia Ltd v Barnes [1941] HCA 3; 64 CLR 268. As explained by Williams J (Rich ACJ agreeing) at 279: "If a trustee is sued by beneficiaries who complain of some act or omission by the trustee, he is entitled to defend his conduct as an incident of such administration …. Even if he fails in the suit, he may be allowed his costs out of the estate, but, if he succeeds, as in this case, he is clearly entitled thereto. At the same time the indemnity must be given effect to in such a way as to make the burden fall upon the beneficiaries equitably having regard to the circumstances under which the costs, charges and expenses were incurred. Here they were incurred as a result of the action of nine out of the thirty-seven beneficiaries, so that the shares of these beneficiaries should be exhausted before any part of the burden is placed on the shares of the twenty-eight." 214 There was no suggestion in the present case that different principles applied in relation to a liquidator. In circumstances where the liquidator's refusal to apply the accounting conventions was known to be supported by the Kation interests, the liquidator of the trustee had no sensible interest in being involved in the proceedings, otherwise than to submit to the order of the Court. Having exercised his independent discretion as liquidator, he was in a similar position to other quasi-judicial officers whose decisions are sought to be reviewed in the original jurisdiction of a court, whether pursuant to a general law or statutory power. As representative of the trustee, his conduct did not constitute protection of the trust assets, nor protection of the interests of unsecured creditors. All that his intervention achieved was a likely increase in the costs of the litigation and particularly the expenses which might be levied on the fund. 215 Because the liquidator acted in Kation's interests, Kation could not complain if the liquidator's costs were to be paid first out of Kation's interests in any reconstituted fund. If that order were made, the next question is whether, if those interests are insufficient to meet the costs of the liquidator with respect to the issue in question, he should be entitled to recover the balance from the interest payable to Lamru. Because his conduct, vis-à-vis Lamru, was indeed an abandonment of a position of neutrality, such recovery would not be equitable. 216 To a significant extent, Lamru's complaint about the costs incurred by the liquidator and recouped from the trust funds, are met by its success in obtaining orders for payment of various amounts directly to it from Mr Peter Lewis and Kation. As noted above, there was no application on foot with respect to the quantum of the liquidator's remuneration. Accordingly, the only relief which would have been available to Lamru would be to limit the rights of recovery by the liquidator to such share of the reconstituted trust as was part of Kation's entitlement. Lamru also sought an order that Kation and Mr Peter Lewis indemnify Lamru in respect of any part of the liquidator's costs which were to be payable out of Lamru's share. 217 Despite the challenge by Lamru to the order of the primary judge that the liquidator be entitled to recover his costs from the company assets, no alternative order was sought by the liquidator. Nor has the liquidator sought to justify the very significant expenditure incurred by him in the course of the litigation at a time when he was largely, if not entirely, supporting the claims of Mr Peter Lewis and Kation. 218 As noted above, the liquidator claims that he exhausted the funds of the company in payment of his own costs and his legal costs by June 2003. He further claims that very significant costs have been incurred since that time, but does not provide any breakdown of those costs, or in whose interests they were incurred. Nor have Mr Peter Lewis or Kation made submissions in opposition to the view that the liquidator has, at least until recently, acted in or consistently with their interests. 219 In the circumstances, it is appropriate that Lamru have an order that, to the extent that costs incurred by the liquidator have been paid out of its share of the trust fund, it should be indemnified by Mr Peter Lewis and Kation in respect of that amount. 9. Grant of Leave to Appeal 220 Two matters of concern to the Court were raised during the course of oral submissions. The first was that the purported appeal by Kation and Mr Peter Lewis was incompetent because there were outstanding issues in the proceedings which had not been dealt with by Hamilton J in the judgments and orders from which the purported appeal was brought. Although no objection to competency was raised on behalf of Lamru or the liquidator, counsel for the appellants eventually conceded that leave was required. The same conclusion followed with respect to Lamru's cross-appeal. 221 The second matter of concern was the time and resources which had been devoted to the litigation so far, to reach a stage at which no final orders were yet in sight. In large part, the resources expended were those of the previous directors and unitholders in Nortex, namely the Lamb and Lewis interests. The fact that individuals (and their corporate entities) may appear to indulge in a frenzy of litigation with mutual financial ruin likely on each side, is not immediately a matter of concern to the Court. Indirectly, however, it is: such litigation inevitably absorbs public resources within the administration of justice which could otherwise be deployed to the more efficient and expeditious resolution of other disputes. Further, in this case, the Court has a concern with the expeditious liquidation of a company having creditors with no interest in the present proceedings, except to maintain a hope that their acknowledged debts will be paid. Disturbingly, when first questioned by the Court as to the existence of third party creditors, counsel for the liquidator (who had been involved in the proceedings for many years) indicated that there were none. Their existence was identified only when the Court insisted on the liquidator filing an affidavit setting out the amount owed to such uninvolved creditors. The public interest in meeting those relatively small amounts apparently led the liquidator at an early stage of the liquidation to propose that the present litigants subordinate their claims to those of the trade creditors, so that the liquidator could pay them out. There appears to have been some dispute as to the amount properly owing to trade creditors and the attempt to reach agreement was abandoned. Whether there has been any attempt to revive such a possibility since its abandonment almost a decade ago is not known. 222 It is apparent that there are significant public interests which militate in favour of any steps which can appropriately and reasonably be taken to bring the litigation to finality. A possibility raised in the course of argument was that, as a condition of the grant of leave to appeal, necessary on both sides of the record, the parties might consent to withdrawal of outstanding proceedings which were not covered by the matters being agitated in this Court. 223 There have been, in form, six separate sets of proceedings between some or all of the current parties before this Court. Only one has been completed. That was a proceeding brought in New Zealand by Mr Peter Lewis against Mr Lamb and another person involved in the Nortex business in New Zealand, in 1997. The proceedings were settled on 15 August 2003, with Mr Lamb and his associate in effect conceding that there should be a judgment in favour of Mr Lewis in an amount of $NZ400,000: Common Law Division, matter No. 1091 of 2004. That judgment remains a relevant issue because its execution was stayed by Hamilton J, pending the outcome of the proceedings now before this Court. (The precise terms of the orders do not appear from the materials before this Court.) 224 The remaining proceedings were in the Equity Division. Chronologically, the first proceedings were commenced by Nortex on 21 October 1996 (No 3731 of 1996), their purpose being to set aside a statutory notice of demand issued by Lamru on 30 September 1996 claiming an amount said to be owing to it on its loan account with Nortex. The formal fate of these proceedings is unclear, but in substance they were overtaken by the winding up proceedings. 225 It was the withdrawal by Mr Lamb of his guarantee of a banking facility held by Nortex which led, on 3 July 1997, to the filing by Mr Lewis of a summons (No 3081 of 1997) seeking to wind Nortex up and appoint a provisional liquidator. They involved several elements:
(1) statutory appeal of Mark Lewis/Chikwawa Pty Ltd;
(4) statutory appeal of Nortex Co (a company controlled by Mr Lewis). 226 Various steps were taken in those proceedings including the filing by Lamru of a notice of motion seeking to challenge a decision of the liquidator with respect to its proof debt. Those proceedings remain on foot, subject to later orders made by Hamilton J with respect to the part of the proceedings not before this Court. 227 A pleading in those proceedings by Lamru, making allegations of fraud against Kation and Mr Lewis, led to directions that Lamru commence separate proceedings in which to agitate those matters. Those proceedings (No 1750 of 2002) were commenced by Lamru on 4 March 2002. They, with the winding up proceedings (No 3081 of 1997) were referred to as the principal proceedings. They also involve several elements:
(1) deferred cross-claim by Peter Lewis/Kation against Lamb/Lamru;
(2) claim by Lamru against Mark Lewis/Chikwawa Pty Ltd.
(3) claim by Nortex against Peter Lewis/Kation for moneys had and received. 228 By orders made on 1 March 2002, when directing Lamru to commence separate proceedings in relation to the matters which had been the subject of the proposed cross-claim, Hamilton J directed "these proceedings be heard together with the proceedings to be commenced by summons at the fixture commencing on 10 April 2002 before me": see Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 143 at 10. 229 Although the proceedings were said from time to time to have been "consolidated", that was not entirely accurate. On 8 March 2002 his Honour directed that "consolidated points of claim" be filed "in each of the two sets of proceedings": see Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 189 at 3. He then ordered that "when the two sets of proceedings are heard together the evidence in the one shall be evidence in the other so far as relevant": at 3. That appears to have been the basis on which the proceedings went to trial, subject to a qualification which must now be noted. 230 The qualification is concerned with orders made by the trial judge after the commencement of the trial, separating out various issues. These may be summarised as follows:
(1) on 11 April 2002, pursuant to an order already discussed, his Honour directed that claims against Mr Mark Lewis be heard separately and after the trial of the balance of the proceedings;
(2) on 27 March 2002, having allowed Kation and Mr Peter Lewis to amend their defence and add matters by way of cross-claim against Lamru and Mr Lamb, his Honour nevertheless directed that those additional matters should not be set down for hearing at the trial then shortly to commence. That direction was affirmed on 7 November 2002: Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 1063. 231 The fifth proceedings (No 3354 of 2002) appear to have incorporated the additional matters raised by way of cross-claim by Mr Lewis and Kation. They involved a claim by Lewis against Lamb for moneys lent. Those matters were not dealt with by Hamilton J. 232 The sixth proceedings (No 2850 of 2003) commenced on 19 May 2003, were brought by Mr Peter Lewis against Mr Lamb personally, based on a "private account" between them as to which evidence had been given in the course of the trial. The status of those proceedings is unclear. 233 Finally, it is necessary to refer to the cross-claim brought by the liquidator against Mr Lewis and Kation, seeking for the company reimbursement of the misappropriated stock. As noted above, that proceeding was only commenced with leave of Palmer J, after the principal judgment the subject of the present proceedings and it may have limited significance in the light of the proposed orders for disposal of the appeal. 234 Consent by each party to the termination of outstanding proceedings would involve at least:
(a) discontinuance by Lamru of proceedings 3731 of 1996 (if still on foot);
(b) discontinuance by Lamb of his cross-claim in proceedings 3354 of 2002;
(c) discontinuance by Mr Peter Lewis and Kation of proceedings 3354 of 2002 and 2850 of 2003;
(d) discontinuance by Lamru of so much of the primary proceedings as sought relief against Mr Mark Lewis;
(e) discontinuance by Mr Peter Lewis and Kation of so much of their cross-claim in the primary proceedings as was stayed and stood over for separate determination;
(f) discontinuance by the liquidator of his cross-claim.
(g) to the extent necessary, that the stay granted by Hamilton J in relation to the consent judgment in the New Zealand proceedings be lifted. 235 In the course of the hearing, each party sought instructions to give consent to the effect set out above, but their positions, as conveyed to the Court orally, were qualified and in various respects imprecise. Earlier this year, the Court wrote to the parties seeking clarification of the position of each with respect to the abandonment of outstanding proceedings. The responses received remained qualified, and in certain respects, ambiguous. 236 In these circumstances, and the Court having formed a view as to the matters raised on the appeal and cross-appeal, the proper course is to grant unconditional leave to the appellant and cross-appellant in relation to the matters raised in the notices of appeal and cross-appeal respectively. 237 The Court also gave consideration to the possibility that to the extent that the Nortex trust fund is reconstituted, it might direct that moneys necessary to meet outstanding debts of third party creditors be set aside for that purpose. However, it is not clear that such orders can be made, nor did any party seek an order to that effect. None of the third party creditors has played any part in any of the proceedings now before this Court. 10. Costs in this Court 238 With respect to the purported appeal, being the proceedings brought by Mr Peter Lewis and Kation, those parties have been substantially unsuccessful. They should bear the costs of Lamru in respect of those proceedings. 239 In relation to the purported cross-appeal, brought by Lamru, it has enjoyed a significant level of success, specifically in relation to the defence of "clean hands" being the primary issue agitated as against Kation and Mr Peter Lewis. It should have its costs of that part of the proceedings against them. 240 The other major issues sought to be agitated on the cross-appeal were the right of Lamru to relief in respect of the bonuses credited to Mr Mark Lewis and the attempt to limit the right of recovery of the liquidator in respect of his costs of the proceedings below, which he was permitted to recover from the assets of the company. Lamru has had a measure of success in those regards. The appropriate course is to award it 50% of its costs with respect to those issues as against the liquidator. 241 A separate question arises as to whether the liquidator should have his costs of the appeal out of the assets of the company. In resisting Lamru's claim, he was not so much acting in the interests of the trust or in preserving the assets of the company, but in his own interests. He made no application with respect to his costs of the proceedings in this Court and any issue in that respect should be reserved. 11. Conclusions 242 It follows from these reasons that variations are required to the orders made by the primary judge. 243 First, the adjustment and reconstruction of the Nortex accounts to allow for the bonuses improperly paid to or on behalf of Mr Mark Lewis, require variation to order 3. In order 1, it was declared that there be no reopening or amendment of the accounts of Nortex for the years up to and including 30 June 1995, "subject to order 3(iii)(d)". The exception is affected by the change to order 3. Further, the reference to (iii), which identified the payment with respect to the 1997 financial year was inapt: the following numbered paragraphs were not related to that sub-paragraph alone. Accordingly that reference should be deleted. 244 Order 4 concerned the stock fraud. The conclusion that Lamru was entitled to relief in respect of stock fraudulently taken and sold by Mr Peter Lewis, without accounting to Nortex, requires variation of pars (b) and (c) of order 4. 245 There remains a question as to the constitution of the loan accounts of Lamru and Kation with Nortex, at the date of the commencement of the winding up (2 September 1997). The primary judge found that they should stand at: (i) as to Lamru - $1,149,745.62 (ii) as to Kation - $679,579.55. 246 Those figures will need to be varied to the extent that orders made by his Honour reconstituting and adjusting the accounts have been set aside. It is not possible for the Court to undertake a recalculation of declaration 7 on the material before it. If it is necessary for there to be a declaration in that form, the parties will have to present the figures to be included in such an order or, if they are unable to agree on the figures, submissions in favour of their proposed figures. 247 As there are further steps to be taken in the proceedings, in order for the making of final orders, it is appropriate for directions to be made with respect to those steps and delaying entry of orders. 248 I would propose the following orders:
(1) Grant leave to the appellants and cross-appellants to appeal with respect to the matters raised in their notices of appeal and cross-appeal filed in this Court so that all steps purportedly taken shall be treated as properly taken in the appeal and cross-appeal respectively.
(3) The cross-appeal be allowed in part and the orders made by the trial judge in matter nos 3081 of 1997 and 1750 of 2002 be varied so that: (i) in order 1, the reference to order "3(iii)(d)" be amended to order "3(d)"; (ii) in order 3 delete paragraphs (d)-(f) and in lieu thereof insert the following: "(d) order that Lewis and Kation pay to Lamru: (i) in respect of the 1995 financial year, $23,228, together with interest calculated from 30 June 1995; (ii) in respect of the 1996 financial year, $40,650, together with interest calculated from 30 June 1996; (iii) in respect of the 1997 financial year, $55,493, together with interest calculated from 30 June 1997; (e) order that Lewis and Kation reconstitute the Nortex unit trust by paying into the trust fund: (i) in respect of the 1996 financial year, an amount of $60,976, together with interest calculated from 30 June 1996; (ii) in respect of the 1997 financial year, an amount of $83,240, together with interest calculated from 30 June 1997; (f) in respect of the calculations of interest, the amount is calculated on the sum to which it relates at the rate specified in Schedule 5 to the Uniform Civil Procedure Rules 2005 and compounded on annual rests until payment."
(4) In relation to order 4, set aside paragraphs (b) and (c) and in lieu thereof insert: "(b) declare that the understatement of the value of stock at the end of the 1996 and 1997 financial years was: (i) in the 1996 financial year, $210,000, and (ii) in the 1997 financial year, $150,000; (c) order that Lewis pay to Lamru 40% of the amounts referred to in (b), namely $84,000 in respect of the 1996 financial year and $60,000 in respect of the 1997 financial year together with interest at the rates payable under Schedule 5 to the Uniform Civil Procedure Rules 2005, calculated from 30 June in respect of each financial year, compounded at annual rests, until payment; (d) order that Lewis pay to the liquidator as the trustee of the Nortex trust fund, 60% of the amounts referred to in (b), namely $126,000 in respect of the 1996 financial year and $90,000 in respect of the 1997 financial year, together with interest at the rates payable under Schedule 5 to the Uniform Civil Procedures Rules 2005, calculated from 30 June in respect of each financial year, compounded at annual rests, until payment,"
(6) Set aside order 12 and in lieu thereof order that the Liquidator pay 30% of Lamru's costs of the claims: (i) with respect to the Mark Lewis bonuses, and (ii) its entitlement to costs at trial.
(7) Add a new order: "14. To the extent that the Liquidator's costs diminish Lamru's interest in the assets of the company, order that Kation and Mr Peter Lewis indemnify Lamru."
(8) Order that Mr Peter Lewis and Kation pay Lamru's costs: (a) of the appeal; (b) of the stock fraud, "unclean hands" issue of the cross-appeal, and (c) the application for leave to appeal against the interlocutory judgment of Palmer J.
(9) Order that Mr Peter Lewis and Kation pay the liquidator's costs of the application for leave to appeal against the judgment of Palmer J.
(10) Dismiss the application for leave to appeal against the judgment of Palmer J.
(11) Order that the Liquidator pay 50% of Lamru's costs of its cross-appeal with respect to the issues identified in (6) above.
(12) Direct that these orders not be entered for 28 days and thereafter only with leave of a judge of the Court and that, within 28 days, the parties shall: (a) apply by notice of motion for variation of these orders on the basis of - (i) any suggested failure to deal with an issue addressed on the appeal or cross-appeal, or (ii) any suggested failure of the orders to accord with the reasons for judgment; (b) provide to the Court agreed figures, or submissions in support of their separate calculations, with respect to the terms of a declaration as to the respective loan account balances of Kation and Lamru as at 2 September 1997, and (c) provide submissions (if any) as to the orders proposed in [185] above with respect to Nortex' costs. 249 Other than order 4, these orders have the support of a majority of the Court. Order 4 will be as proposed by Hodgson JA, with the support of Allsop P. It is appropriate to emphasise that, as explained by Hodgson JA the purpose of direction (12)(a) is to allow for correction of error of the kinds noted therein: no wider canvassing of the orders or judgments will be acceptable. If any party avails itself of the opportunity conferred by (12)(a), the Court will, on considering the notice of motion, give further directions in relation to submissions as it deems appropriate. **********
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(1988) 17 FCR 344
(1995) 184 CLR 538
(1992) 26 NSWLR 666