Lewis Securities Ltd (in liq) v Carter

Court of Appeal (NSW)|2018-07-24|Before: Leeming JA

HCA 15 Category: Consequential orders (other than Costs) Parties: Lewis Securities Ltd (in liq) (First Appellant) LSL Holdings Pty Ltd (in liq) (Second Appellant) Marilyn Carter (First Respondent) Robert Miller (Second Respondent) Representation: Counsel: J Stoljar SC with M Cleary (Appellants) A G Bell SC with L Livingston (First Respondent) N A Cotman SC with E Finnane (Second Respondent)

Solicitors: Easton Belle Lawyers (Appellants) Swaab Attorneys (First Respondent) Uther Webster & Evans Pty Ltd (Second Respondent) File Number(s): 2017/130893 Publication restriction: Nil Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Citation: [2017] NSWSC 412 Date of Decision: 7 April 2017 Before: Rein J File Number(s): 2014/317448; 2014/317554

Judgment

THE COURT: By this Court's judgment delivered on 7 June 2018, the appellants enjoyed a measure of success. Their appeal had been brought from orders made in two separate proceedings, heard and determined concurrently, in which each of their claims had been dismissed. In relation to one of those proceedings (the Bass proceeding - 2015/317554), this Court set aside the judgment entered against them and ordered that there be judgment in their favour against the first respondent (Ms Carter) and the second respondent (Mr Miller): Lewis Securities Ltd (in liq) v Carter [2018] NSWCA 118. This Court made a further order in the following terms: "3. Direct the parties to file and serve within 21 days (a) agreed short minutes of order, or, in default of agreement, (b) the orders for which they contend and short submissions in support as to (i) the amount of the judgment debt, (ii) the appropriate order as to costs in this Court, and (iii) any further orders which should be made."
Each of the parties has supplied written submissions in support of the orders for which they contend. Although order 3 invited "short submissions", those supplied by the respondents are extensive (8 and 10 pages excluding annexures).
The extent to which liberty was given to the parties to make further submissions turns upon the Court's orders read with its reasons. The first area in respect of which liberty was granted, namely, as to the amount of the judgment debt, reflected two of Ms Carter's submissions as to set-off which had not been fully addressed in the parties' submissions. It is as well to address how this came about immediately.
Leeming JA, with whom in this respect Sackville AJA agreed (at [98]), addressed questions of relief at [86]-[93]. At [87], Leeming JA referred to the order sought against Ms Carter and Mr Miller that they "pay damages or equitable compensation to the appellants in the amount of $1 million together with interest" and said that while damages were inappropriate, both respondents were accountable to the appellants and may be ordered to pay equitable compensation. His Honour then dealt with three submissions made by Ms Carter against the relief sought by the appellants. 1. The first was a submission that the appellants' claim be limited to $850,000 by reference to the pleading. This submission was rejected at [88] and referred in part to the allegation in paragraph 35 of the statement of claim that $1 million had been transferred from LSL to Holdings. That was said to be "sufficient to give rise to a claim for knowing assistance in relation to the entire $1,000,000". 2. Ms Carter's second submission, addressed at [89]-[90], was concerned with her claim to a set-off for "admitted proofs of debt" of $43,750.68 and $43,812.34. His Honour said at [90]: "In principle, Ms Carter is entitled to a set off of proofs of debt which have been admitted. However, it is far from clear that any orders need, or should, be made by this Court in this appeal to reflect it. If that be wrong, the orders I propose will permit the parties to be heard." 1. The third submission was that Ms Carter claimed to be entitled to a further set-off because of repayments of some $836,346 and his Honour expressed a view that that was not an issue that arose in or should be determined by the judgment in this appeal.
In relation to the substantive orders, Leeming JA concluded: "For those reasons, I propose orders which will leave in place the dismissal of the Malone proceedings but give judgment against the respondents in the Bass Transaction proceedings. Prima facie, the appellants are entitled to pre-judgment interest, and the parties should be able to determine the amount."
Emmett AJA left open for further submissions substantially the same points: at [219].
Nowhere in this Court's reasons is there any suggestion that pecuniary relief should only be ordered in favour of one of the appellants, or that no pecuniary relief should be awarded at all, or that there should be an inquiry. The matters left open as to "the amount of the judgment debt" concerned Ms Carter's second submission as to set-off, whether the appellants' "prima facie" entitlement to pre-judgment interest should be displaced, and the calculation of interest.

Appellants' submissions

The appellants seek a judgment in their favour against Ms Carter and Mr Miller in the amount of $1 million plus interest in the amount of $1,287,068.57. The latter amount reflects interest counted at pre-judgment rates from 21 June 2002, being the date a cheque for $1 million was drawn from LSL's bank account and made payable to "Bass Holdings and Investments P/L".
In relation to costs, the appellants submit that they were entirely successful in relation to Mr Miller, but acknowledge that they failed against Ms Carter in relation to the Malone proceedings. They seek an order that Ms Carter pay 60% of the appellants' costs of the appeal, on the basis that (a) they had been required in any event to approach the Court of Appeal to vindicate their claim in relation to the Bass proceeding, (b) significantly more time was spent on the Bass Holdings transactions than on the Malone Loan (they assert that arguments dealing with the Malone Loan aspect of the appeal took up approximately one third of the hearing time) and (c) the amount of money at stake in relation to the Bass Holdings transaction was significantly more than in relation to the Malone Loan.
The appellants also seek to rely upon Calderbank offers dated 5 March 2018 to Ms Carter and Mr Miller, which offered to settle the appeal in each case on the basis of a payment of $1 million, and two other orders: Ms Carter was to release the appellants from costs orders in her favour (including the costs of the Malone proceedings) and Mr Miller was to pay an additional amount of $150,000 on account of costs. The offer was expressed to be open for acceptance until 5pm on Friday 9 March 2018. The appeal was listed to be heard on Monday 12 March 2018.
The appellants also submitted that they were entitled to a favourable order as to costs, on the usual basis, of the Bass proceeding at first instance, and noted that this Court's orders left in place the costs order in favour of Ms Carter in relation to the Malone proceeding.
The appellants also sought to have repaid amounts of $60,000 provided to each of Ms Carter and Mr Miller by way of security for the costs of the appeal, and some $170,000 provided by way of security for the costs of the trial. The evidence shows that as at 21 May 2018, Ms Carter's solicitors held $93,125.56 in respect of the security provided for costs at first instance, while Mr Miller's solicitors held, as at 30 June 2016, an amount of $80,994.02.

Ms Carter's submissions

Ms Carter submitted that the correct judgment creditor was the second appellant, LSL Holdings Pty Ltd (in liq), because "the credit of $850,000 was purportedly made in favour of Mr Lewis in his ledger account with Holdings" and "similarly, the credit of $145,000 was purportedly made in favour of Vimow Pty Ltd in its ledger account with Holdings". She submitted that the sum of $5,000 which left the LSL bank account and was not returned was inconsequential.
Ms Carter then propounded three alternative sets of submissions, with various further internal alternatives.
First, as her primary submission, Ms Carter maintained that Holdings was entitled only to declaratory relief because it suffered no net loss. The submission was put as follows: "The loss suffered by Holdings as a consequence of the Bass transaction was wholly offset by the creation of a new chose in action against Mr Lewis for fraud, which was at equal value as at July 2002 to the chose in action in debt which had been lost. There should be declarations to that effect, but no award of equitable compensation …".
This submission was said to be supported by what had been said in the reasons for judgment at [15], [96] and [176], to the effect that the extinguishment of the debt owing by Mr Lewis to Holdings was replaced by a "more complicated" claim at law or in equity to recover the same amount from Mr Lewis. It was then said that that latter claim became worthless when Mr Lewis became bankrupt in 2009, given that the creditors of his bankrupt estate received no distribution; alternatively, any such claim became worthless when it became statute barred by s 47 of the Limitation Act 1969 (NSW) in July 2014. The submission continued: "10 Thus, applying this Court's reasoning to the events which have occurred, it follows that the economic loss suffered by Holdings was incurred not by reason of any of the transactions in 2002 but by reason of either Mr Lewis's bankruptcy in 2009 or, at the latest, by the operation of the Limitation Act in 2014. At one or other of those times, the value of the alternative remedies available to Holdings as described by Leeming JA at [15] was lost. 11 That conclusion accords with the reasoning of the primary judge (which, in this particular respect, was not relevantly challenged by any party in this Court) at [130] Red 88K-L. His Honour there said that he recognised that the continued existence of a claim by Holdings was 'of no comfort to the plaintiffs because Lewis was declared bankrupt in 2009 (and Vimow is in liquidation).' Adjusting that reasoning as necessary to accommodate this Court's conclusion that the claim which Holdings retained was not the claim in debt but, rather the 'more complicated' claim identified by this Court, it nonetheless follows that the value of that 'more complicated' claim was not lost until Mr Lewis's bankruptcy in 2009. Alternatively, at the latest, that value was lost in 2014. 12 On either hypothesis, the true crystallised loss was caused not by the transactions in 2002, but rather by events many years later for which Ms Carter was not responsible. If there had been no breach of fiduciary duty by Mr Lewis in 2002, the value of the debt otherwise enforceable by Holdings (like the value of the alternative remedies) nonetheless would have been lost when Mr Lewis became bankrupt in 2009."
Secondly, Ms Carter's alternative submission was that "it is plain that the true loss was less than $1 million" because the alternative choses in action, including against third parties, had real value. Ms Carter submitted that it was necessary to remit the proceedings for an inquiry to determine the amount of the net loss.
Thirdly, Ms Carter submitted that the judgment in favour of Holdings in the amount of $995,000 should be adjusted to give effect to a set-off in her favour of $43,812.34. She submitted that the $43,812.34 was "the subject of Ms Carter's proof of debt in the winding up of Holdings". More precisely, it was said that Ms Carter's ledger account with Holdings as at 29 October 2008 was $51,543.93, and that she had received distributions in August 2010 and May 2013 of some $7,600, leaving the amount of $43,812.34. On that basis, she submitted that the judgment against her should be $951,187.66, being the difference between $995,000 and $43,812.34. Ms Carter submitted that the set-off had been pleaded, was the subject of undisputed evidence at trial and was addressed in her submissions at first instance and on appeal. She further submitted that she should have the benefit of the set-off in full rather than to the extent of her proportion and share as an unsecured creditor. She said that because her proof of debt had been admitted to proof and partly paid, any entitlement to set-off under s 553C of the Corporations Act 2001 (Cth) had been spent.
In terms of interest, Ms Carter submitted that interest should only be payable (a) from the date of the commencement of the Bass Proceedings (28 October 2014), (in light of the "unexplained and unreasonable" delay in commencement); or alternatively (b) only from the date of Mr Lewis's bankruptcy, (that being the "true date of loss and thus the date from which Holdings has been kept out of its funds"), or in the further alternative (c) only from the date on which any cause of action in respect of fraud available to Holdings became statute-barred against Mr Lewis, being 2 July 2014 (12 years after the accrual of the cause of action on 2 July 2002).
Ms Carter's primary submission as to costs was that the appellants pay her costs of the appeal, because if monetary relief were refused, the result was "analogous to the entry of judgment in the purely nominal sum, which was not relevantly a 'success' for the purpose of the exercise of the Court's discretion as to costs".
Alternatively, she submitted that having regard to the mixed success of the parties on the appeal the appropriate order was that there be no order as to costs. She noted that substantial time in the oral and written argument related to the limitation defences, laches and questions of relief which related to both the Malone and the Bass proceeding. In the further alternative, she proposed that Ms Carter and Mr Miller should each pay 50% of the appellants' costs. She rejected that appellants' submission that the Calderbank letter dated 5 March 2018 warranted a special order for costs. She gave three reasons: (a) it required acceptance in its entirety as to both the Bass proceeding and the Malone proceeding, (b) it would have resulted in Ms Carter giving up the benefit of the costs order in her favour in the Malone proceeding, which was a "very substantial (and as yet unquantified) benefit, because that order was for indemnity costs … which covered the period of some 10 weeks leading up to the trial" and (c) the offer came very late, seven days before the hearing of the appeal.
In relation to costs at first instance, Ms Carter's primary submission was that merely declaratory relief would not warrant any disturbance of the costs ordered in her favour. Her secondary submission was that in the event of an inquiry, the question of costs should await the outcome of the inquiry. Her fallback position was that the costs made in her favour in the Bass proceeding on 12 April 2017 should be set aside and each of the defendants should pay 50% of Holdings' costs at first instance. She submitted that this was a case where it was just to so order, by reference to the principles stated by Ball J in The Owners - Strata Plan 68372 v Allianz Australia Insurance Ltd (No 2) [2015] NSWSC 729 at [22], given that the factual issues arising against Mr Miller were different from those arising against her, and substantial time at trial was devoted to the factual issues against him, and it would be unfair to impose on her responsibility for the whole of Holdings' costs. There was no opposition to the making of appropriate orders relating to the funds held by way of security consistently with the exercise of the discretion as to costs.

Mr Miller's submissions

The second respondent, Mr Miller, adopted the primary submission made by Ms Carter, to the effect that the loss suffered by "the plaintiff" should be quantified at nil. Alternatively, he submitted that "the judgment for the appellants [sic] should either be nil, or $150,000". The proposed order reflecting this referred to a judgment for the second plaintiff, and so it appears that at least in part Mr Miller was adopting Ms Carter's submission that only the second appellant was entitled to judgment. Mr Miller justified the judgment in the amount of $150,000 on the basis that it was "the difference between the $1 million paid out in the Bass Transaction and the $850,000 debt of Lewis that was repaid (and would otherwise have been lost when Mr Lewis became bankrupt)."
Mr Miller also adopted Ms Carter's submissions on interest but did not adopt her "alternative submission". His written submissions did not identify whether that was a reference to Ms Carter's first alternative submission (paragraph 14 of her written submissions) or her second alternative submission (paragraphs 15-18). However, Mr Miller submitted that if there was a set-off "in accordance with the first respondent's alternative submission", then that set-off ought to reduce the liability of both respondents, "because otherwise the appellants would obtain double recovery in respect of the one loss". Accordingly, it is to be inferred that the reference is to Ms Carter's second alternative submission.
Against the possibility that his primary submission was rejected, Mr Miller sought a declaration that Ms Carter and Mr Miller were liable as accessories to the breach of duty by Mr Lewis, and a direction that there be an inquiry to determine the amounts of loss, any credits, and interest. In support of this, Mr Miller raised a series of submissions addressed to what was said to be the "necessity" for such an inquiry. It was submitted that having regard to the way in which the appellants case was pleaded, as distinct from the way in which it has now been decided, he would be denied procedural fairness if not given an opportunity to go into evidence on the issue of whether, and what, loss was suffered. Secondly, it was said that this Court's reasons envisaged some quantification of loss. Thirdly, he sought to address the principles relevant to equitable compensation and their relevance to the present case. Fourthly, he said that there were amounts identified by Ms Carter as germane to quantifying the amount which had not been dealt with in the appeal. Each of those four matters was then elaborated.
The first related to what was said to be the difference between the way the case had been pleaded and the way in which Ms Carter and Mr Miller had been found liable as follows: "9. This Court determined: a. that there was a transfer of ownership of the funds used in the Bass Transaction; b. that Mr Lewis' indebtedness was extinguished and a credit given to Vimow; and c. that a loss was suffered. That is, by making the payments from the joint bank account to the account of LSL, Mr Lewis did not 'purportedly' repay his loan. He did so with legal effect, albeit subject to an equity to rescind. 10. In contrast, the appellants' pleaded case (as discussed in second respondents' submissions in this appeal) was that the monies paid into the joint account were the plaintiffs' monies. The relief claimed included a declaration that those funds were held on constructive trust. The appellants did not assert that the purported loan repayment by Mr Lewis was effective or employed his own money. Rather, they described recordings as having been made in ledgers, and asserted that the plaintiffs' funds had been used to 'purportedly repay the $774,923.20 loan ...'. Thus, what the plaintiffs appeared to be asserting by their pleading was that the Bass Transaction was a deception, ending in a purported (i.e. not real) repayment. The appellants did not go on to plead or quantify any loss caused by the deception. 11. Even the appellants' written opening stated, in paragraph 4:8 'The two proceedings are linked in that the "loan" which was purportedly paid out pursuant to the bogus round robin of payments the subject of the Bass Holdings proceedings was part of the money which (according to Marilyn Carter) Tony Lewis "gave" to her...'. 12. The respondents' primary case at trial and in the Court of Appeal embraced the proposition that the Bass Transaction involved a purported repayment only. It was not necessary for the respondents to put forward a case on whether and what loss was sustained, or investigate the quantification of any such loss; given that the plaintiffs' case was that the round robin was bogus and the loan was not actually repaid."
It was said that those submissions were "not made for the purpose of cavilling with or contradicting the decision of this Court", but rather that the second respondent "should not be disadvantaged by being shut out from seeking to show that the loss that the plaintiffs have suffered is something less than the amount that was paid out, or the subject of the various journal entries."
Secondly, by reference to what had been said at [15] and [175]-[176], it was contended that this Court's reasons were "to the effect that there has been loss, with the amount to be determined", and that "quantification is not a straightforward matter". It was said that those passages showed that the Court did not accept the appellants' submission that "LSL suffered through a loss of $1 million of its funds, which were used to buy (worthless) redeemable preference shares in Bass Holdings, as well as the loss of $145,000, which was credited to the Vimow loan account …".
Thirdly, Mr Miller submitted that loss was to be determined in equity as at the time of trial using the full benefit of hindsight, and that the measure was to restore the plaintiff to the position he or she would have been in had the breach not occurred. It was submitted that when there has been a breach of trust, a trustee's liability is quantified having regard not only to the losses but also to the benefits to the trust estate, and that the same principle must apply where third parties were liable, because otherwise there would be a windfall accruing to the principals. It was said that there were broadly three matters relevant to quantum to be considered in an inquiry: the true value of Holdings' chose in action against Mr Lewis, the value of the rights, at law and in equity, created by the payment of moneys in the Bass transaction, and which entity, as between Lewis Securities and Holdings, suffered the losses or if both, in what amount or proportion. Each of those three matters was then sought to be articulated in paragraphs 27-36 in Mr Miller's submissions in ways which need not be summarised. Finally, Mr Miller added that "the matters referred to in paragraphs 90-91 of Leeming JA may be appropriate matters to include in an inquiry".
Mr Miller submitted that costs should await the outcome of the inquiry and that there should be no order as to the costs of the appeal in light of the mixed success of the parties. Alternatively, Mr Miller submitted that if any costs order were to be made against him, he should not be ordered to pay the whole costs of the appeal, given that one proceeding did not concern him. He said that if costs were to be ordered against him, they should be limited to one quarter of the costs of the appeal.
Although Mr Miller accepted that the appellants were entitled to have the money paid as security for costs of the appeal returned, he submitted that the order for the return should be stayed against the possibility of an application to the High Court. It was said that otherwise the respondents would be left without any security for their costs notwithstanding that any such leave application and appeal may be successful and disturb the costs orders in this Court and at first instance.

Consideration

Although the details of the transactions giving rise to the claims against Ms Carter and Mr Miller are set out in detail in the reasons of the primary judge and of this Court, it is convenient to summarise them as follows, so that these reasons may be self-contained.
The Bass Holdings letter dated 1 June 2002 was purportedly written by Mr Bass (who knew nothing about it) advising of an investment position which required $1 million to be invested in preference shares. On 21 June 2002, a cheque for the sum of $1 million was drawn on LSL's bank account payable to "Bass Holdings and Investments P/L", and that cheque was deposited to the credit of an account with Bass Holdings on that day. Thereafter, a series of cheques were drawn and presented, leading to a credit into the joint account of Mr Lewis and Ms Carter in the amount of $996,800. Cheques on that account were drawn by Mr Lewis totalling $850,000 and provided under cover of a letter dated 29 June 2001, stating: "Please find attached my cheques totalling $850,000 for repayment of my personal loan from LSL Holdings Pty Ltd". There was also a credit for a fifth cheque in the sum of $145,000 to Vimow.
Emmett AJA recorded the relevant findings as to the states of mind of Mr Lewis, Ms Carter and Mr Miller as follows at [150]-[155]: "The primary judge concluded that the transactions involving Bass Holdings, Byrne Investments and the Joint Account (the Bass Transactions) were dishonest and fraudulent and were undertaken by Mr Lewis to advance his own interests. His Honour found that Mr Lewis deliberately set out to remove from the books of LSL and Holdings assets consisting of the loan owed by him to Holdings and the loan owing by Holdings to LSL and that he did that fraudulently. His Honour found that the Bass Letter was fraudulent, having been created by Mr Miller or Mr Lewis with the knowledge or acquiescence of the other. The fact that it was addressed to Holdings rather than LSL was regarded by his Honour as anomalous. His Honour considered that it was clear that the scheme emanated from Mr Lewis and it was not surprising that he would tell Mr Miller how he wanted the letter framed. His Honour also concluded the Lewis Letter was deliberately dishonest and designed to implement the fraudulent pretence that Mr Lewis was repaying $850,000 out of his own money. The primary judge held that Mr Miller knowingly assisted Mr Lewis by setting up the two companies and having them record Mr Bass and Mr Byrne respectively as a director when he knew that neither had been appointed and neither had consented to being appointed. Further, Mr Miller arranged for bank accounts to be established to receive and pay funds 'in a round robin loop' that would see $1 million removed from the LSL's ANZ Account for no legitimate purpose of LSL and replaced by an investment in worthless preference shares in Bass Holdings. His Honour found that Mr Miller assisted in creating the appearance that either LSL or Holdings had made an investment in Bass Holdings when, to his knowledge, the investment was non-existent and of no value whatsoever. His Honour found that Mr Miller falsely stated in documents provided to ASIC that preference shares had been created and issued to LSL. The primary judge found that Mr Miller arranged for the LSL cheque for $1 million to be deposited into the Bass Holdings' St George Account that he had established. His Honour also found that Mr Miller arranged for the cheque for $998,000 to be drawn on the Bass Holdings' St George Account payable to Byrne Investments. Finally, his Honour found that Mr Miller arranged for the cheque drawn on the account of Byrne Investments payable to Mr Lewis and Ms Carter to be credited to the Joint Account. The primary judge found that Ms Carter knew that $995,000 had been paid into the Joint Account. His Honour found that Ms Carter recorded the payment (or was aware that another part-time employee had recorded the payment) from LSL's ANZ Account of $1 million to Bass Holdings as consideration of the acquisition by Holdings of the preference shares in Bass Holdings. His Honour also found that Ms Carter recorded the repayment of the debt owed by Mr Lewis to Holdings and the debt owed by Holdings to LSL. His Honour further found that Ms Carter made the entry crediting Vimow with the sum of $145,000. The primary judge was satisfied that Mr Miller assisted Mr Lewis in the dishonest and fraudulent design of Mr Lewis. His Honour did not consider that it assisted Mr Miller that the scheme in which Mr Lewis had him participate was beneficial to Mr Lewis personally. His Honour found that the money taken from LSL's ANZ Account, of which both Mr Lewis and Mr Miller were directors, was being used to extinguish the debt owed by Mr Lewis to Holdings. The primary judge concluded that Mr Miller had knowingly assisted Mr Lewis in the fraudulent breach by Mr Lewis of the duty that he owed to LSL and Holdings and that Mr Miller, himself, thereby breached a fiduciary duty owed by him to LSL. His Honour also found that Ms Carter assisted Mr Lewis with knowledge of the breach because it was only the ledgers that recorded the amount owing by Mr Lewis to Holdings and by Vimow to LSL. His Honour considered that, although Ms Carter may not have known of the details of the scheme, she knew that the Bass Transactions had taken $1 million out of LSL's ANZ Account and put $995,000 in the Joint Account for which she could provide no justification. His Honour found that Ms Carter deliberately closed her eyes to the reality of the situation or deliberately abstained from making the inquiries as to the use of LSL's funds that an honest and reasonable person in her position would have made."
Central to the determination of the appeal was this Court's rejection of the submissions made by Ms Carter and Mr Miller to the effect that there was no loss because the fraudulent transactions had no substantive effect and that Mr Lewis remained indebted to one or other of the appellants.

The appropriate judgment creditor

The first matter to resolve is Ms Carter's submission (adopted in some of the orders formulated by Mr Miller) that the only judgment creditor should be the second appellant LSL Holdings Pty Ltd (in liq).
This was not a submission which was made when the appeal was heard. Indeed, Ms Carter's submissions proceeded on the basis that if the appellants were entitled to monetary relief, she was entitled to a set-off for separate amounts owed by each of LSL (in the amount of $43,750.68) and Holdings (in the amount of $43,812.34). She submitted that she was entitled to a set off "against the sum claimed by the appellants the debts that are owed by them to Ms Carter", which totalled $87,563.02 (paragraph 80, written submissions dated 25 October 2017). That submission was recorded in [89] of this Court's judgment. Other submissions made by her likewise referred to the relief sought by the "appellants" (plural), including paragraphs 79 and 81.
Ms Carter's submissions responded to a notice of appeal which sought in order 4: "An order that the First and Second Respondents pay damages or equitable compensation to the Appellants [sic] in the amount of $1,000,000 together with interest ..."
In short, it was common ground as between the appellants and Ms Carter that, subject to the failure of her grounds of appeal as to liability, both appellants were entitled to pecuniary relief.
Mr Miller's submissions on the appeal take the matter no further. They too drew no clear distinction between the appellants. For example, he submitted that "Mr Lewis increased the monies in the joint account by approximately $1 million, and became liable to LSL / Holdings for that amount as monies had and received" (written submissions, 23 October 2017, para 53).
Further, Ms Carter's submission goes outside the leave granted by this Court's orders. This Court, conformably with what was sought by the appellants, to which no contrary submission in this respect was made, ordered judgment in favour of both appellants (order 2 made on 7 June 2016). Order 3, which permitted the parties to apply for further orders on three specified matters left open by the principal judgment, did not extend to setting aside the judgment ordered against the first appellant.
Still further, if Ms Carter's submissions on this point are to be entertained, it is necessary to identify power to vary this Court's final order. Order 2 was made and entered on 7 June 2016. No application was made by Ms Carter within the 14 days specified by UCPR Pt 36 r 36.16. That period cannot be extended. Nor does the "slip rule" recognised by r 36.17 apply. It is difficult to see that there was a slip in entering judgment in favour of both appellants when the respondents did not oppose a judgment to that effect should their other grounds of appeal be rejected.
But notwithstanding the force of all of the above, it is as well to say something of the merits of this point.
First, Prayers 2 and 4 of the statement of claim consistently sought orders for equitable compensation "to one of more of the plaintiffs". The same language was used in prayers for relief seeking the imposition of a constructive trust (prayer 1) or an account of profits (prayer 3). The paragraphs which were pleaded to give rise to accessory liability on the part of Ms Carter were paragraphs 35 and 42. The former alleged that "on or about 21 June 2002 Mr Lewis caused LSL to advance $1 million to LSL Holdings; the transfer was effected by Ms Carter making an entry in [the loan account]". The latter dealt with the funds used to reduce Mr Lewis' loan account. That paragraph alleged that Ms Carter had, at Mr Lewis' direction, recorded the payment of $850,000 "as a credit in the Loan Account (A/C No 761) being a ledger account recording loans made by LSL to LSL Holdings, in the amount of $850,000" and "as a credit in the Loan Account (A/C No 750), being a ledger account recording loans made by LSL [sic] to Mr Lewis, in the amount of $850,000". In fact, according to the loan accounts, Mr Lewis was indebted to Holdings, not LSL, and so it appears that the reference to "loans made by LSL to Mr Lewis" should be a reference to "loans made by LSL Holdings to Mr Lewis".
The ambiguity was maintained even in parts of the judgment of the primary judge, who referred at [110] to Mr Lewis "effectively purporting to repay his debt to Holdings/LSL with LSL's own money". The same conflation occurs at [52] in connection with the Malone transaction. The primary judge regarded the fact that the Bass letter was addressed to Holdings, rather than LSL, as anomalous": at [116]. The ASIC records of Bass Holdings and Investments record LSL as the owner of the preference shares, although (i) the ledgers maintained by Ms Carter appear to treat LSL as having lent $1,000,000 to Holdings for this purchase, and (ii) the balance sheet of Holdings records them as an asset.
Secondly, both the $1,000,000 paid out on 21 June 2002 and the $850,000 received on 29 June 2002, insofar as they involved ledger entries, were driven by the fact that the only company with a bank account was LSL. Following LSL drawing a cheque on its ANZ bank account, the internal ledgers were adjusted recording a debit to Holdings in the sum of $1,000,000. That is to say, the ledgers reflect Holdings borrowing money from LSL, which wrote a cheque payable to Bass Holdings and Investments Pty Ltd which was presented and credited to an account in the name of that company.
Thirdly, the payment away of $1,000,000 was in dishonest and fraudulent breach of duty by Mr Lewis to both companies. Mr Lewis has been found to be a fraudster and there is, to say the least, some inconsistency in the way in which the internal financial positions of LSL and Holdings have been maintained. In those circumstances, there is no reason why both LSL and Holdings may not hold Ms Lewis to account for those breaches, noting of course that he is only liable to account for the one amount of $1,000,000. There is also no reason why both LSL and Holdings may not hold third parties who knowingly participated in those breaches to account. Ms Carter and Mr Miller were sufficiently involved to be liable pursuant to the second limb of Barnes v Addy (1874) LR 9 Ch App 244.
Thus, even if Ms Carter's belated submission as to Holdings being the sole judgment creditor were addressed on its merits, it would be rejected. Indeed, there is benefit to Ms Carter, on which she sought in terms to rely, when the appeal was heard, insofar as she is permitted to set off amounts owed to her by each of LSL and Holdings.

The amount of the judgment

First, contrary to the submissions of Ms Carter and Mr Miller, it is not open now to contend that there should be merely declaratory relief because there was no loss. That, in substance, is the submission which this Court rejected in the appeal. It is also contrary to the orders for judgment already entered against Ms Carter and Mr Miller. Those orders presuppose some loss. What has been said above about timing and the absence of power to vary final orders is equally applicable here. The submissions misconceive the liberty which was granted.
Secondly, and for similar reasons, it is not open to the respondents to contend that there should be an inquiry. This is not something that was sought by Ms Carter or Mr Miller in the appeal. Despite both having relied upon elaborate notices of contention, there was no contingent cross-appeal (seeking declaratory relief or an inquiry) in the event that their submissions as to the three ways in which the judgment should be reduced (see [88]-[91] of this Court's reasons) were rejected.
The appellants had consistently maintained they were entitled to an order for equitable compensation in the amount of $1,000,000 plus interest. The issues on appeal going to quantum were confined to those identified by Ms Carter at paragraphs 79-82 of her written submissions dated 25 October 2017, developed orally at pages 58.39-59.11 of the transcript of 12 March 2018. Those issues were summarised in this Court's principal judgment at [88]-[91], and one was left unresolved. Mr Miller's written and oral submissions took the matter no further in this respect.
Thirdly, Mr Miller's submission that in some way would be a denial of procedural fairness if he were "shut out from seeking to show that the loss that the plaintiffs have suffered is something less than the amount that was paid out, or the subject of the first, or last journal entries" must be rejected. Mr Miller has not been "shut out", as he was free at trial to advance such a case. Depending on the stance taken at trial, he may have been free to raise such a case in this Court, by way of cross-appeal. He had the example of Ms Carter's submissions filed more than 5 months before the appeal was heard. However, he cannot be permitted now, after hearings at first instance and on appeal, to maintain that there should be a further hearing with new evidence on a point not hitherto taken by him.
Against this, Mr Miller seeks to take comfort from the fact that the appellants styled the transactions as "purported" repayments, such that "it was not necessary for the respondents to put forward a case on whether and what loss was sustained, or investigate the quantification of any such loss". That is not so. The time for Mr Miller to put forward any and all defences to the appellant's claim for judgment in the amount of $1,000,000 was at trial. It is not open to him, after litigating on chosen issues at trial and on appeal, to seek to have a further hearing on different evidence.
That is sufficient to reject this aspect of the respondents' submissions. However, there is also a substantive answer, although - given the way this issue has emerged - it has not been the subject of an exchange of submissions. Mr Lewis was accountable to LSL and Holdings when he caused a cheque to be written for $1,000,000 in favour of Bass Holdings and Investments Pty Ltd. Ms Carter and Ms Miller are likewise accountable to LSL and Holdings for the same amount, because they assisted the dishonest and fraudulent breaches of duty by Mr Lewis (including by her involvement in the ledger transactions necessary to effect the transaction, in the case of Ms Carter, and in his involvement in the Bass letter and establishing the companies and their bank accounts, in the case of Mr Miller). The position recalls that of the law firm in Youyang v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15, which was liable when trust monies were paid out in breach of trust: see at [32], [43] and [69]. True it is that equity does not ignore subsequent events in formulating relief of this nature. However, it is not to the point to say that the "economic loss" was incurred years afterwards, or when the "value of the alternative remedies ... was lost" (as Ms Carter submitted). Nor is it to the point to say that "the choses in action created in the Bass Transaction apparently created something of value" and "What that value is, relative to the amount paid away, is the extent LSL or LSL Holdings has suffered actual loss".
We now turn to a matter which was left open for further submissions following this Court's principal judgment, the various set-offs which Ms Carter claimed. It will be noted that her position has altered from that recorded at [89] of the principal judgment. She now seeks a set-off in respect only of an amount of $43,812.34 (it may be that this stance is informed by what Ms Carter now contends should be appropriate judgment creditor, which has already been addressed). The appellants accept that she is entitled to a set-off, but say that it is unnecessary for this Court to make any order for it.
In circumstances where: 1. Ms Carter has made different submissions about the set-off she seeks when the appeal was heard and now in support of final orders; 2. Ms Carter seemingly has lodged proofs of debt in different amounts in the winding up of each of the appellants; 3. both Ms Carter and Mr Miller are accountable to the appellants, but (so far as appears from the materials in this Court), only Ms Carter has lodged proofs of debt which have been admitted by the liquidators; 4. close attention to the identity of the judgment creditor has not been given until the formulation of orders; and 5. the winding up proceedings are not before this Court, it is appropriate to accede to the appellants' request and not set-off the judgment. That said, nothing in this Court's reasons or orders should be construed so as to preclude Ms Carter from relying upon a set-off of her proof of debt in the event that the whole of the judgment is sought to be executed against her.
Ms Carter seeks to reduce the incidence of pre-judgment interest. She invokes the principles in this Court's decision in Kalls Enterprises Pty Ltd (in liq) v Baloglow (No 3) [2007] NSWCA 298. This Court said at [10]-[12] (citations omitted): "Delay is ordinarily not a reason for refusing or reducing the inclusion of interest. The defendant has had the use of the money, and the plaintiff has been out of its use and should be compensated accordingly. The purpose is to compensate the plaintiff for being kept out of its money, not to punish it for delay. Interest should be included unless good cause be shown, in order to fulfil the purpose. Delay can nonetheless be relevant to the exercise of the discretion. For example, unreasonable delay and a high interest rate may mean that the defendant is unjustly left as the source of the plaintiff's investment income. The question is one of injustice to the defendant. If the interest rates used by the plaintiff exceed commercial interest rates (although commercial interest rates are an imprecise criterion, see below), the plaintiff's self-inflicted loss of use of money may be unfairly made a burden on the defendant. In the present case there was passage of time, but we do not accept that there was unreasonable delay of itself warranting reduction in interest. It is plain from the evidence at the trial that the liquidator had a difficult task in piecing together what had occurred, determining what action to take, and presenting the evidence necessary for prosecution of his claims. Although the passage of time was greater than desirable, it was not so great that unreasonable failure to bring and prosecute the claim against Mr Baloglow in a timely manner should be inferred, and for the period after 29 February 1999 Mr Baloglow had some opportunity to prevent delay. Unreasonable failure needed to be positively demonstrated, and it was not."
Those principles were applied in Lovick & Son Developments Pty Ltd v Doppstadt Australia Pty Ltd (No 3) [2013] NSWSC 135, on which Ms Carter also relies. Ms Carter also directed attention to two first instance decisions of the Supreme Court of the Australian Capital Territory which pre-date Kalls Enterprises. They take the matter no further.
It is true that there was considerable delay in the commencement of proceedings by the companies. Liquidators were appointed in February 2009, while the proceedings were not commenced until October 2014, almost 6 years later.
However, has it been positively demonstrated that the delay unreasonable? The essential nature of the Bass transaction was a fraud which appears on its face to have been designed to avoid detection. It involved bringing into existence a fraudulent letter purporting to promote an investment opportunity, and bank accounts in the names of companies whose directors had no idea that their names had been used. Even so late as the trial, Mr Miller denied that he had prepared the Bass Holdings letter, although the primary judge it was "a fraudulent letter created by Miller or Lewis with the knowledge or acquiescence of the other": at [116]. Likewise, the primary judge recorded at [55] that Ms Carter "was adamant that she did not know that the $850,000, said to have been paid in June 2002, had come from the Lewis/Carter account, but had to admit, when confronted with Exhibit F (which she herself had prepared), that she had known that the funds had come from the Lewis/Carter account".
True it is that the appellants had not alleged concealed fraud. The onus of establishing concealed fraud as an answer to a limitation defence rests on the appellants. However, the position is different here, when it is said by the respondents that the appellants should be deprived of some pre-judgment interest. The onus rests with the respondents to demonstrate a proper basis to do so.
In circumstances such as these, not lightly is it to be concluded that the delay has been unreasonable so as to depart from the ordinary entitlement to pre-judgment interest.
The amount of interest is large. There seems to be no dispute as to the relevant rates and time period, or that as of 7 June 2018 it amounted to $1,287,068.57. However, according to the ledgers maintained by the appellants, Mr Lewis was in fact being charged interest, at rates ranging between 7% and 8.75% per annum over much of the period, which was being capitalised annually. Hence the effect of treating the loan to Mr Lewis of $850,000 as being repaid was to deny the company interest over the period, at effective rates which approximate those calculated in accordance with the rules. That confirms the prima facie position that the appellants are entitled to interest at ordinary rates over the entirety of the period.

Costs and other orders

Contrary to the appellants' submissions, the Calderbank offers dated 5 March 2018 do not impact on the discretion as to costs. The Calderbank letters amounted to an offer to settle the proceedings for payments of $1,000,000, plus the giving up of a favourable costs order (in the case of Ms Carter) or a further payment of $150,000 (in the case of Mr Miller). The ultimate amount of the judgment is some $2.287 million (exclusive of costs), for which each of Ms Carter and Mr Miller is liable. Thus the offers were offers which amounted to, or came close to amounting to, capitulation, made a week prior to the hearing of the appeal. It is not shown to have been unreasonable for Ms Carter and Mr Miller not to accept them.
Bearing in mind that the appeal occupied a single day, and the defences based upon the Limitation Act, delay and laches were common to both claims, it is inappropriate to apportion the costs of the appeal between the Malone and Bass proceedings. In cases such as this, it is well settled that a broad-brush approach is appropriate. Both the appellants and Ms Carter enjoyed mixed success while Mr Miller was wholly unsuccessful, although some grounds of appeal did not concern him. A fair outcome in relation to the costs of the appeal will be achieved if Mr Miller pays one quarter of the appellants' costs of the appeal, with no other order on the basis that otherwise the parties bear their own costs of the appeal. (To be clear, that limited order is made notwithstanding what the appellants have submitted as to (a) the relatively lesser amount of time taken by the Malone proceeding and (b) the lesser value of the Malone proceeding.)
There is no reason why the security for costs which the appellants have provided should not be returned. As much is accepted by Ms Carter. Contrary to Mr Miller's submission, there is no sound basis for security to be retained against the possibility of an application for special leave to appeal by either or both of Ms Carter or Mr Miller. The form of orders 5-8 below is proposed by the appellants and substantially agreed to by Ms Carter (the only difference in the orders formulated by her is the omission of the words "plus accrued interest").
There is force in Ms Carter's submission that this is an appropriate case where there should be a several order as to the costs at first instance. Otherwise those costs should follow the event. In the Bass proceedings, Ms Carter should be ordered to pay one half of the plaintiffs' costs, and Mr Miller should likewise be ordered to pay one half of the plaintiffs' costs. (The orders made by the primary judge as to the costs of the Malone proceeding have not been disturbed.)

Orders

The orders reflecting those reasons are as follows:
Enter judgment in favour of the first appellant Lewis Securities Ltd (in liq) and the second appellant LSL Holdings Pty Ltd (in liq) against the first respondent Ms Carter and the second respondent Mr Miller in the amount of $2,287,068.57, such judgment to have effect on 7 June 2018.
Pursuant to s 101(3) of the Civil Procedure Act 2005 (NSW), extend the 28 day period within which post-judgment interest is not payable if the amount is paid in full to 28 days from the date these orders are made.
Order that the second respondent Mr Miller pay one quarter of the appellants' costs of the appeal.
Order that Ms Carter pay one half, and Mr Miller pay one half, of the plaintiffs' costs of the proceeding at first instance in 2014/00317554.
Order that the amount of $60,000 plus accrued interest paid by the appellants into an interest bearing controlled money account held by the first respondent's solicitors in the name of the first respondent and the appellants as security for costs of the appeal be paid to the appellants by the first respondent.
Order that the amount of $60,000 plus accrued interest paid by the appellants into an interest bearing controlled money account, held by the second respondent's solicitors in the name of the second respondent and the appellants as security for costs of the appeal be paid to the appellants by the second respondent.
Order that the amount of $90,000 plus accrued interest paid by the plaintiffs in proceeding 2014/317554 into an interest bearing controlled money account held by the first defendant's solicitors in the name of the first defendant and the plaintiffs as security for costs of the trial be paid to the plaintiffs by the first defendant.
Order that the amount of $80,000 plus accrued interest paid by the plaintiffs in proceeding 2014/317554 into an interest bearing controlled money account held by the second defendant's solicitors in the name of the second defendant and the plaintiffs as security for costs of the trial be paid to the plaintiffs by the second defendant.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 July 2018

At a glance

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Judgment (13 paragraphs)

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Legislation Cited (4)

Cases Cited (7)

Cited By (2)