3 ACLR 529
Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [(NSWCA)]
45 ACSR 244
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6
200 FCR 296
Plunkett v Bull (1915) 19 CLR 544
Yeshiva Properties No 1 Pty Ltd v Marshall [2005] NSWCA 23
Source
Original judgment source is linked above.
Catchwords
10 ACLR 3
Walker v Wimbourne (1976) 137 CLR 13 ACLR 529
Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [(NSWCA)]45 ACSR 244
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6200 FCR 296
Plunkett v Bull (1915) 19 CLR 544
Yeshiva Properties No 1 Pty Ltd v Marshall [2005] NSWCA 23Sycotex Pty Ltd v Baseler (1994) 51 FCR 425
122 ALR 531
(2012) 44 WAR 1
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239
Leeming, M
Judgment (4 paragraphs)
[1]
219 ALR
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266
Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110
Panama and South Pacific Telegraph Co. v India Rubber, Gutta Percha, and Telegraph Works Co (1875) 10 Ch App 515
R v Burdett (1820) 4 B & Ald 95; 106 ER 873
Re Hallett's Estate [1879] 13 Ch D 696
Maguire v Makaronis (1997) 188 CLR 449
Lewis v Condon [2013] NSWCA 204
Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425; 122 ALR 531; 13 ACSR 766
Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302
Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653
Miller v Miller (1995) 16 ACSR 73
Forge v ASIC [2004] NSWCA 448
National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251
SCEGS Redlands Ltd v Alison Barbour & Anor [2008] NSWSC 928
Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181
Port Ballidu Pty Ltd v Frews Lawyers & Ors [2017] QSC 19
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1
KM v HM (1993) 96 DLR (4th) 289
Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497
LGM v CAM [2011] FAMCAFC 195
Schwaller-Schroeder v Schwaller-Schroeder [2012] FAMCA 1121
Texts Cited: Ritchie's Uniform Civil Procedure NSW (LexisNexis, Sydney, 2005)
Chitty on Contracts (27th Edition, Sweet & Maxwell)
Heydon, J; Leeming, M; Turner, P, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th edition, LexisNexis Butterworths, 2014)
Leeming, M 'How Long is Too Long for an Equitable Claim?' (2014) 88 ALJ 621
Category: Principal judgment
Parties: Lewis Securities Ltd (in Liq.) (First Plaintiff)
LSL Holdings Pty Ltd (in Liq.) (Second Plaintiff)
Marilyn Carter (First Defendant)
Robert Miller (Second Defendant in 2014/317554)
Representation: Counsel:
J. Stoljar SC & M.P Cleary (First and Second Plaintiff)
A.G Bell SC & L. Livingston (First Defendant)
E.T Finnane (Second Defendant)
[2]
Solicitors:
Easton Belle Lawyers (First and Second Plaintiff)
Swaab Attorneys (First Defendant)
Uther Webster & Evans (Second Defendant)
File Number(s): 2014/317554 & 2014/317448
Publication restriction: Nil
[3]
Judgment
The plaintiffs went into liquidation on 6 February 2009. I shall refer to the first plaintiff as "LSL" and the second plaintiff as "Holdings". LSL and Holdings bring two sets of proceedings, one (2014/317448), in which the only defendant is Ms Marilyn Carter ("Carter"), which concerns a property at 87 Kings Road Vaucluse and which proceedings I shall refer to as "the Property proceedings". The other proceedings, (2015/317554) have as defendants Carter and Mr Robert Miller ("Miller"), and which I shall refer to as "the Bass proceedings". Mr J. Stoljar SC with Mr M. Cleary appear for the plaintiffs. Mr A.G Bell SC appears with Mr L. Livingston for Carter and Mr E. Finnane of counsel appears for Miller.
Mr Anthony Richard Lewis ("Lewis") owned the majority of the shares in LSL. Lewis with Vimow Pty Ltd ("Vimow") owned the shares in Holdings. Lewis owned two of the three shares in Vimow, the other share being held by Carter, his wife: see Exhibit A1 p 258. Carter was also recorded as the company secretary of Vimow, although she said she had no recollection of that fact: see paragraph 56 of her first affidavit.
What follows in [4] to [40] is taken from the Agreed Statement of Facts of 6 March 2017.
LSL commenced operations in 1985 to deal and advise in Australian fixed interest securities.
At all material times LSL held an Australian Financial Services Licence.
LSL was a company in a group associated with Lewis, which included:
(i) LSL;
(ii) Holdings;
(iii) Fixed Interest Pty Limited ("FIPL");
(iv) Interest Investments Pty Limited ("IIPL"); and
(v) Vimow;
(together, "the Lewis Companies").
At the time of the transactions pleaded in the Property Proceedings, and in the Bass Proceedings, Lewis was:
one of three directors of LSL;
the sole director of Holdings;
together with his father (Allan Stanley Lewis) a director of Vimow; and
a director of many other companies (CB1/304).
Miller, the second defendant to the Bass proceeding, was the second director of LSL.
The third director of LSL was Ian Roberts ("Roberts"), a partner at Hunt and Hunt.
On 13 August 1990 Carter was appointed company secretary of LSL. She remained in this role until 29 October 2008.
[4]
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: 13 April 2017
On 29 October 2008 the Lewis Companies went into administration.
On 6 February 2009 the Lewis Companies went into liquidation owing some $23 million to creditors.
On or about 3 April 2009 Lewis was declared bankrupt.
On 2 December 2010 Lewis and Carter were examined by the trustee of Lewis' bankrupt estate (which I shall refer to as "the bankruptcy examination").
On 7 and 8 September 2011 and 23 and 24 April 2012 the liquidators of LSL held public examinations of, among others, Lewis and Carter. (I shall refer to these as "the public examinations").
On 4 April 2012 Lewis was discharged by law from bankruptcy.
On or about 29 September 1992 Carter became the registered proprietor of the land and improvements at 3 Hopetoun Avenue, Vaucluse, NSW, being the land comprised in folio identified B/30543111 (Hopetoun Avenue property), for a purchase price of $750,000.
On or about 28 March 2000 Carter entered into a contract of sale to acquire the land and improvements at 87 Kings Road, Vaucluse, NSW, being the land comprised in folio identifier 110/10293 ("the Property"), for a purchase price of $2.25 million.
The deposit on the said contract of sale was paid by cheque 119601 dated 29 March 2000 drawn on the LSL account in the sum of $225,000, an amount which reflects 10% of the purchase price of the Property: see Exhibit A2 p 976.
On 15 June 2000 stamp duty on the contract of sale for the Property was paid in the amount of $109,240, including by cheque 119821, in the sum of $24,507.60 drawn on the LSL account.
Settlement of Carter's purchase of the Property took place on 23 June 2000, on which day: (1) Graham Nicolls as solicitor for Carter executed on her behalf as transferee a transfer of the Property, which transfer in due course was registered and allocated number 6963027; and (2) a cheque was drawn on the LSL account in an amount of $1,024,923.20 in favour of Westpac Banking Corporation, for the purposes of acquiring a Westpac bank cheque.
The amount referred to in (2) in the preceding paragraph of $1,024,923.20 comprised the sum of:
$250,000; and
$774,923.20, which was withdrawn from the bank account of LSL, paid to Westpac, debited to Holdings' deposit account with LSL (LSL/Holdings Ledger) by way of reduction of the balance owing by LSL to Holdings and a debit in the ledger between Lewis and Holdings (Lewis/Holdings' Ledger) in favour of Holdings.
ANZ Bank registered the following mortgages on the title of the Property, namely:
registered mortgage 6963029 dated 15 June 2000, which was stamped for a secured amount of $1 million and appears to be "on account" of LSL; and
registered mortgage 6963028, which was undated and was stamped for a secured amount of $47,000.
On or about 28 June 2000 Carter executed a transfer of the Hopetoun Avenue property for a consideration of $1,060,000.
On or by 23 June 2000 the transfer of the Property to Carter was registered.
In approximately May 2009 Carter sold the Property for $4 million.
The proceeds of sale were deployed as follows:
$1,975,000 was used by Carter to acquire a new matrimonial home at 7 Poate Road, Centennial Park, being the land comprised in folio identifier 3/1040790 (Centennial Park property). Carter and Lewis moved to this new matrimonial home in about December 2009;
$887,062.90 was used to repay loans to the ANZ;
$94,174.87 was used to repay loans to IMB;
a further sum was used to pay legal fees and other expenses; and
the balance was deposited into a cash management account in Carter's name.
Carter and Lewis continue to reside in the Centennial Park property.
Bass Proceedings:
On 14 May 2002 Bass Holdings and Investments Pty Ltd ("Bass Holdings") and Graham Byrne Investments Pty Ltd ("GB Investments") were registered.
On 16 May 2002, according to ASIC records, Robert Bass ("Mr Bass") was appointed as the sole director and shareholder of Bass Holdings and, according to ASIC records, Graham Byrne ("Mr Byrne") was appointed as the sole director and shareholder of GB Investments.
The records of the Lewis Companies include a letter dated 1 June 2002, purportedly from Mr Bass ("Bob Bass") on behalf of Bass Holdings (and with a Bass Holding letterhead) to Lewis in his capacity as director of Holdings stating:
We have secured an investment position with Graham Byrnes Investments Pty Ltd, which has huge upside. We require $1,000,000 to be invested in preference shares with Bass Holdings & Investments Pty Ltd. These funds will be invested in Grahame Byrnes Investments Pty Ltd. In four years time we will repay Lewis Securities Holdings Pty Ltd their full principal of $1,000,000 plus 20% of the profits that we shall earn from the venture. Your share is estimated at 20% per annum however, as with all speculative investments, future returns cannot be guaranteed.
You have indicated that you are interested in making this investment for $1,000,000 and we shall advise you of our banking details shortly.
(I shall refer to this as the "Bass Holdings letter").
The LSL/Holdings Ledger includes an entry dated 21 June 2002 of a payment by LSL to Holdings in the sum of $1 million: see Exhibit A2 p 482.
There was, in fact, no cash payment as between LSL and Holdings. This could only be affected by journal, as Holdings did not have its own bank account.
Also, on 21 June 2002, the sum of $1 million was paid from the LSL's Bank Account to the Bass Holdings Bank Account: see Exhibit A2 p 1652.
On 26 June 2002 $998,000 was paid from the Bass Holdings Bank Account to the GB Investments Bank Account: see Exhibit A2 p 1635.
The next day, on 27 June 2002, the sum of $996,800 was paid from the GB Investments Bank Account to the joint ANZ Bank Account held by Lewis and Carter. This payment was dishonoured on 1 July 2002 and represented on 2 July 2002: see Exhibit A2 p 1635 and Exhibit A1 p 832.
Then, on 28 June 2002, the sum of $995,000 was paid from the ANZ joint Bank Account held by Lewis and Carter to the LSL Bank Account. This payment was dishonoured on 1 July 2002 and represented successfully on 2 July 2002: see Exhibit A1 pp 833 - 834.
The records of the Lewis Companies include loan account ledgers in which the payment of the said sum was treated, as to $850,000 thereof, as:
(i) a credit in favour of Holdings/Lewis in the LSL Ledger; and
(ii) a credit in favour of Lewis in the Holdings Ledger,
by the same amount: see Exhibit A1 p 482.
The records of the Lewis Companies include loan account ledgers in which the balance of the said $995,000, being the sum of $145,000, was treated as:
(iii) a credit in favour of Holdings/Vimow in the LSL Ledger; and
(iv) a credit in favour of Vimow in the loan account of Vimow with Holdings,
by the same amount: see Exhibit A1 p 482.
Miller, it has been agreed, was not responsible for bookkeeping in any of the Lewis Companies.
The Plaintiffs' Claims:
The plaintiffs' claim in the Property Proceedings, as pleaded, is as follows:
1. Lewis arranged for the payment of $1,359,163 out of the ANZ bank account of LSL which was used to assist Carter to buy the Property i.e.:
1. $225,000 deposit
2. $1,024,923 on settlement
3. $109,240 stamp duty.
1. The $250,000 was debited from an account held with LSL by Mrs Beryl Malone ("Mrs Malone"), "which was beneficially owned by Ms Beryl Malone." By this date LSL was receiving deposits from customers and much of its business was centred on the purchase of fixed interest investments using the deposits of its customers, who would receive interest on the monies deposited in return.
2. The borrowings from LSL or, alternatively, Holdings was without any written agreement between Lewis and LSL (or Holdings) or was on unfair terms there being no security provided by Lewis, and no loan agreement between Lewis and Carter, or any obligation on Carter to repay the money or interest, and constitutes a breach of fiduciary duty on the part of Lewis.
3. The actions in (1), (2), and (3) constituted a breach of fiduciary duties of Lewis and amounted to a fraudulent and dishonest design by Lewis as his purpose was to use the funds to make a gift to Carter from which both Lewis and Carter would obtain a significant benefit.
4. That Carter received the $1,359,163 that was obtained by Lewis in breach of his fiduciary duties and that she was aware of the source of funds and, based on her role as in house accountant for the Lewis Companies, she knew that the monies received by her were obtained in breach of Lewis's fiduciary duties.
5. That Carter knowingly assisted Lewis because:
1. she was in house accountant and bookkeeper of the Lewis Companies;
2. she was aware that she had received $1,359,163 from Lewis for the purchase of the house;
3. she was aware that the $1,359,103 had come from LSL's bank account;
4. She was aware that the Property was received in breach of Lewis's fiduciary duties; and
5. She assisted Lewis by making the entries in the accounting ledgers of LSL and Holdings.
The plaintiffs' pleaded case in the Bass proceedings is as follows:
1. Lewis accepted an offer, purportedly made from Bass Holdings, when he knew that Bass Holdings did not engage in any business activities or trading activities and did not hold any income producing assets
2. Lewis caused $1 million to be paid by LSL to Holdings, caused $1 million to be paid by Holdings to Bass Holdings, received $996,800 from GB Investments in the Lewis/Carter account, paid $850,000 to LSL's bank account, and retained $146,800 in the Lewis/Carter bank account.
3. Lewis directed Carter to apply $850,000 to reduce the Holdings loan to LSL and his loan to LSL by $850,000.
4. That the steps (1) to (3) involved Lewis in a breach of fiduciary duty to LSL and Holdings, which amounted to a dishonest and fraudulent design.
5. That Miller breached his fiduciary duties to LSL because he caused Bass Holdings and GB Investments to be incorporated, nominating as directors persons who had no knowledge that they were described as directors and had no involvement in the transactions which Miller set up with Lewis.
6. That Miller's breach of duty amounted to a dishonest and fraudulent design to enable LSL's funds to be used to reduce the amount outstanding as a loan from LSL to Lewis, and conceal the loss to LSL by means of a non-existent investment.
7. That Carter knowingly received the $995,000 paid into the Lewis/Carter account that had come from LSL's bank account, albeit indirectly.
8. That Carter knowingly assisted because she was responsible for maintaining the accounting ledgers for the LSL Group, including all loans made by LSL and Holdings to Lewis and any repayments on those loans, and she gave effect to the transfers by making entries and knowingly assisted Lewis in the breach of his fiduciary duties, which amounted to a fraudulent and dishonest design.
9. That Miller provided knowing assistance in respect of what I shall refer to as "the Bass transaction" by:
1. Causing Bass Holdings and GB Holdings to be incorporated for the sole or primary purpose of undertaking the laundering transaction;
2. Opening a bank account for Bass Holdings for the sole or primary purpose of undertaking the laundering transaction;
3. Causing the Bass Holdings letter to be sent to Lewis;
4. Causing Bass Holdings to purportedly issue 1 million preference shares to Holdings;
5. Causing $998,000 to be transferred from the Bass Holdings bank account to GB Investment's bank account;
6. Causing GB Investments to purportedly issue 1 million preference shares to Bass Holdings; and
7. Drawing a cheque which caused $996,800 to be transferred from GB Investments' bank account to the Lewis/Carter bank account.
I should note, in relation to [42(6)], that paragraphs 52 and 53 of the statement of claim in the Bass proceedings (see: Exhibit A1 pp 29 - 30) speak of Holdings when I think LSL was intended. The loan to Lewis was recorded as a loan from Holdings not LSL: see Exhibit A2 pp 1334 - 1337, and Miller says that Lewis told him he wanted to remove a debt on the books of LSL owed to Holdings: see T274.20. The records show that Holdings did not, as at June 2002, owe any money to LSL: see Exhibit A1 p 482.
Barnes v Addy:
The claim against Carter, that she knowingly received monies obtained by Lewis in breach of fiduciary duties owed by him as a director to LSL and/or Holdings and knowingly assisted him in that process, and the claim that Carter 'received' funds from the Bass transaction - and that she and Miller knowingly assisted Lewis in the breach of Lewis' duties to LSL and/or Holdings, are based on what are often referred to as Barnes v Addy claims (Barnes v Addy (1874) LR 9 Ch App 244). The principles relating to third party liability consequential upon breach of fiduciary duty were relatively recently restated by the NSW Court of Appeal in Simmons v New South Wales Trustee and Guardian (2014) 17 BPR 33, 717; [2014] NSWCA 405, per Gleeson J, with whom Beazley P and Barrett J agreed at [86] - [91]:
The elements of the first limb of Barnes v Addy
[86] In Farah at [112] the High Court defined the first limb of Barnes v Addy in this way:
Persons who receive trust property become chargeable if it is established that they have received it with notice of the trust.
[87] The High Court also accepted, in the absence of any argument to the contrary, that a claim under the first limb of Barnes v Addy may be made against not only a trustee who misapplies trust property, but also a fiduciary who deals with property, in respect of which he or she owes fiduciary obligations, in breach of such obligations: Farah at [113].
[88] The elements of a claim under the first limb of Barnes v Addy may be taken to be:
(1) the existence of a trust, or a fiduciary duty, with respect to property (trust property);
(2) the misapplication of trust property by the trustee or fiduciary;
(3) the receipt of trust property by the third party;
(4) knowledge by the third party, at the time he or she received the relevant property, that it was trust property and that it was being misapplied or, in the case of breach by a fiduciary, that the trust property was transferred pursuant to a breach of fiduciary duty.
[89] The authorities which may be taken to establish element (4) above, include: Hancock Family Memorial Foundation Ltd v Porteous (1999) 32 ACSR 124 ; [1999] WASC 55; BC9903035 at [79] per Anderson J; Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ACSR 285 ; [2003] FCA 1025; BC200305634 at [55] per Finkelstein J; Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 ; [2012] FCAFC 6; BC201200621 at [20], [249]-[254] ; Imobilari Pty Ltd v Opes Prime Stockbroking Ltd [2008] FCA 1920; BC200811188 at [15] ; and Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (Bell Group (No 9)) (2008) 70 ACSR 1 ; [2008] WASC 239; BC200809492 at [4748] per Owen J.
[90] Although Farah did not consider the categories of knowledge sufficient to attract liability under element (4) of the first limb of Barnes v Addy , it may be accepted that the knowledge required is:
(1) actual knowledge of the trust, or the existence of the fiduciary duty, and of the misapplication of trust property or transfer pursuant of to a breach of fiduciary duty; or
(2) willfully shutting one's eyes to those things; or
(3) abstaining in a calculated way from making such inquiries, as an honest and reasonable person would make, about the trust and the application of the trust property; or
(4) knowledge of facts which to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication.
[91] The authorities which have accepted that the above categories of knowledge are sufficient include: Kalls Enterprises Pty Ltd (in liq) v Balaglow (2007) 63 ACSR 557 ; [2007] NSWCA 191; BC200706350 at [176] per Giles JA; Ipp and Basten JJA agreeing; Hancock Family Memorial Foundation Ltd v Porteousat 142 ; Grimaldi v Chameleon Mining NL (No 2)at [268]-[270] . See also Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1 ; [2012] WASCA 157; BC201206001 at [2130] , when approving the view to which Owen J came at first instance in Bell Group Ltd (No 9) at [4748] .
And the elements of the Second limb of Barnes v Addy at [111] - [115]:
The elements of the second limb of Barnes v Addy
[111] In New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd [2004] NSWSC 781; BC200405527 at [15] , Young CJ in Eq stated in the context of a pleading dispute:
It is essential to plead the elements of the second limb in Barnes v Addy which Jacobs, Law of Trusts (6th ed, 1997, Butterworths) at [1339] sets out as:
(1) The existence of a fiduciary duty;
(2) A dishonest and fraudulent design by the fiduciary;
(3) The assistance by the third party in that design;
(4) With knowledge.
[112] As Farah makes clear ( at [174]-[177] ), Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 ; [1975] HCA 8; BC7500014 supports the proposition that knowledge within categories (i) to (iv) of Baden v Sociéte Générale pour Favoriser le Développement du Commerce et de l'lndustrie en France SA (Baden) [1993] 1 WLR 509 at 575-6 is sufficient for the purposes of the second limb of Barnes v Addy , but constructive knowledge within category (v) of Baden is insufficient, that is, knowledge of circumstances which would put an honest and reasonable man on inquiry.
[113] Thus, for the purposes of pleading a second limb claim, the categories of knowledge are: (i) actual knowledge; (ii) willfully shutting one's eyes to the obvious; (iii) willfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man.
[114] Farah also established that liability under the second limb of Barnes v Addy is confined to cases where the breach of fiduciary duty amounts to a "dishonest and fraudulent design": see the analysis by Leeming JA (with whom I agreed) in Hasler v Singtel Optus Pty Ltd (Hasler v Singtel Optus) [2014] NSWCA 266; BC201406650 at [121]-[125] . Farah requires that such an allegation ought to be pleaded and sufficiently particularised: at [170].
[115] For present purposes, what is meant by the phrase "dishonest and fraudulent design" is succinctly explained in the following paragraphs of the judgment of Leeming JA in Hasler v Singtel Optus ( at [123]-[124] ):
[123] The short point is that Lord Selborne's formulation avoids the potential for dispute as to the meaning of "fraud" in equity, by requiring that there must also be dishonesty on the part of the fiduciary.
[124] Dishonesty amounts to a transgression of ordinary standards of honest behaviour. It is not necessary to say anything else by way of elaboration, save to confirm that it is not necessary to demonstrate that the person thought about what those standards were. (I have paraphrased Lord Hoffmann's account in Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2006] 1 All ER 333 at [16].)
It will be noted that for the first limb of Barnes v Addy it is not necessary to establish that the breach of fiduciary duty amounted to a dishonest and fraudulent design, whereas for the second limb it is necessary to establish dishonest and fraudulent design, and assistance in, or knowledge of, that design.
There was, in this case, no dispute as to the principles applicable but rather the dispute was over the factual findings which should be made, i.e:
1. Did Lewis breach his fiduciary duty to LSL in relation to:
1. the Property; and/or
2. the Bass transaction?
1. If so was either breach fraudulent and dishonest?
2. Did Miller breach his duty to LSL in relation to the Bass transaction?
3. If so, was that breach fraudulent and dishonest?
4. Did Carter receive funds as a result of an established breach of fiduciary duty by Lewis - in respect of the Property or the Bass transaction?
5. Did Carter assist Lewis in an established breach of fiduciary duty in relation to the Property or the Bass transaction?
6. If the answer to any of (3) - (6) is yes, for what amount are Miller and/or Carter liable?
The other issues which were raised by the defendants were these:
1. Can the plaintiffs bring any proceedings against Carter based on Barnes v Addy relating to the Property given that they have affirmed the loan for $850,000 by claiming in respect of it?
2. Did LSL or Holdings suffer any loss by reason of the Bass transaction?
3. The "sham" issue, in relation to the Bass transaction.
4. The shareholder approval point, in relation to the Property and the Bass transaction.
5. Are the plaintiffs' claims barred by analogy with a statutory limitation in respect of the Property and the Bass transaction?
6. Should the plaintiffs' claims, in respect of the Property and the Bass transaction, be defeated as a result of laches?
The House Proceedings:
There are some aspects of [41] and [42] which can be dealt with simply. In relation to [42(2)] the $146,800 did not remain in the Lewis/Carter bank account. It was paid in to LSL's bank account. In relation to [41(1)(c)] there is evidence that an amount of $24,507.60 was paid out of the LSL bank account for stamp duty but no evidence that the remaining $84,732.40 was paid out by LSL. I do not think it is open to infer that LSL provided the funds for the payment of the $84,732.40, since the source of all other amounts used for the purchase of the Property can be identified.
There is no dispute between the plaintiffs and Carter that the balance of the $1,359,163 came out of the LSL ANZ bank account, i.e. $1,274,163. The significance of that fact is, however, the subject of divergent positions. Part of the reason for that divergence is that the Lewis Companies had only one bank account and that was held in the name of LSL. Carter's position is that the mere fact that money came out of the LSL bank account does not mean that the payment can be treated as a payment by LSL, the ledgers, which were maintained by LSL, Holdings and Vimow must be taken into account, as must ledgers relating to Lewis, Malone and others. Thus, for example, if Lewis' loan account with LSL was in credit and money was paid out from the LSL bank account, that amount would not be a payment in breach of any duty owed by Lewis to LSL, even if it were paid for a purely personal purpose of Lewis. There are many examples of such expenditure. The next step in Carter's argument is that if the Lewis account was in debit, but payments were made out of LSL bank account with a recording of the payments as a debit to Lewis's account with LSL or with Holdings, then there is no breach of fiduciary duty and no fraudulent design. This contention is strengthened it is said by reference to the fact that Lewis and Carter were effectively the only shareholders of LSL, Holdings, and Vimow, with Lewis holding the majority of shares.
Mr Bell pointed to what he claimed was an anomaly in the plaintiff's position, namely that they had pleaded that Carter had received the funds for the Property as a gift and yet seemed to attack Carter's assertion that she had received the money as a gift. The supposed anomaly may be explained by reason of the fact that it is the plaintiffs' case that Lewis did not really have $1.3 million to give Carter, but that he obtained that money from LSL. There is no suggestion that Carter was, herself, borrowing the $1.3 million from LSL, so there is no question of any terms of borrowing as between Carter and LSL as is suggested by [41(3)]. It is also appropriate to note here that it was, in the course of the hearing, effectively accepted by the plaintiffs that the balance of the purchase price of the Property had been funded by Carter.
Carter says that Lewis told her that he was giving her 'the house', or giving her the money for the house, which Lewis confirmed in his bankruptcy examination: see Exhibit A4 p 2622. The real dispute seemed to be over whether Carter knew that the $1.2 million - $1.3 million that she received to assist her purchase of the house was coming out of LSL. In her affidavit her evidence was that she understood Lewis to have been successful in various trades and well able to afford gifting her the shortfall between the proceeds of sale of the Hopetoun Road property and the Property. In my view the plaintiffs have established, on the balance of probabilities, that Lewis could not, in fact, fund the shortfall without recourse to money obtained from LSL and Mrs Malone. He told Carter that he needed to borrow money from Mrs Malone to fund part of the purchase price. He told the Australian Taxation Office in June 2002 that his liquidity had been stretched over "the last two years" (see Exhibit A2 pp 1641 - 1642) and we know that the $1.3 million did in fact come out of the LSL bank account. That, however, does not of itself establish that Carter was aware of that fact.
Carter gave evidence to support her contention that she had reason to think that Lewis would be able to provide her with the balance of the purchase price by virtue of dividends being paid to him out of profits: see paragraphs 107-125 of her first affidavit. Carter said that she prepared the schedules: see Exhibit A2 p 976, p 533 and p 845 (and the documents from which those schedules were prepared were put into evidence: see Exhibit 1D6). It is clear, however, that the profit earned by LSL and distributed to Lewis by way of dividends did not produce enough to enable Lewis to pay the full balance of the Property and this, notwithstanding that Lewis, she says, told her that he was confident he had enough money to cover the balance of the purchase price (see: paragraph 129 of Carter's first affidavit) since he had to borrow $775,000 from Holdings/LSL and $250,000 from Mrs Malone. If Carter knew that he did have to borrow more than $1 million to fund the balance, what Lewis told her, and the trades which she went to the trouble of recording (on her evidence), becomes of little significance.
In order to reach a conclusion on some of the issues in this case it is necessary to express a view as to the credit of witnesses. Mr Stoljar mounted a significant attack on the credit of both Carter and Miller. No attack was made as to the credit of Mr Civil, one of the joint liquidators who gave evidence for the plaintiffs, and I have no reason to doubt his veracity.
Credit of Carter:
Carter is clearly an intelligent, articulate person. She holds a Bachelor of Arts, a Graduate Diploma in Financial Markets, a Graduate Diploma in Corporate Governance, as well as a Masters of Commerce in Professional Accounting. She has had wide experience in the finance industry. She was the corporate accountant for the Lewis Companies for 19 years, commencing in 1990 after she married Lewis.
Mr Stoljar made the following points in relation to his attack on Carter's credit:
1. She often did not answer questions asked of her, but rather made submissions to support her case and gave answers anticipating where she thought Mr Stoljar was heading.
2. She was, in her affidavit and in cross-examination, anxious to minimise her role in the company, saying, for example, she was a bookkeeper engaged in fairly low grade work (see T139.32) and see paragraph 46 of her first affidavit and when she said her role was that of bookkeeper when in fact she was the corporate accountant for LSL and indeed called herself the accountant for all the Lewis companies: see T154.15.
3. She was, in her affidavit and in cross-examination, anxious to distance herself from any knowledge of Holdings, asserting that she did not make entries in the Holdings' ledgers and that her understanding of Holdings' purpose or function was vague: see paragraph 53 of her affidavit of 25 February 2016. She was able to say what the role of Holdings was, i.e. to engage in the purchase of listed and unlisted shares, rather than fixed interest positions, and she was, in fact, an investor in Holdings: see T168 - 169. She agreed at T169 that what she had said in paragraph 53 of her first affidavit was deliberately phrased to give the impression that she knew nothing about the functions of Holdings.
4. She gave unsatisfactory evidence regarding her receipt of the LSL bank statements in respect of the Lewis/Carter account. Mr Stoljar submits that her evidence that she did not read the Lewis/Carter statements and put unopened envelopes in a box was 'fanciful' and simply unbelievable. He also maintained that what she said was inconsistent with what she had told the liquidator in an email: see Exhibit B.
5. She 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: see T313 - T314.
6. He attacked the quality of her evidence in respect of conversations with Lewis which she relied on for various matters. He submitted that her evidence lacked the necessary degree of precision to enable the Court to be reasonably satisfied that the words she refers to in her affidavits were spoken. He referred, in that connection, to Watson v Foxman (2000) 49 NSWLR 315 at 319 per McLelland (CJ in Eq), submitting that her evidence did not have the necessary "degree of precision."
7. He attacked her evidence that she had no knowledge that Lewis had a loan from Holdings of $775,000 as at 23 June 2000 when checking the Holdings account ledger in June 2002: see T205, asserting that her evidence had changed after she had overheard the evidence being replayed whilst outside the Courtroom (which Carter denied she had listened to).
I think that Mr Stoljar points in (1) - (5) in relation to Carter's credit are well made and they were effectively not challenged by Mr Bell, although Mr Bell did contend that Carter's admission in respect of Exhibit F was immediate and is supportive of her veracity: see T438. I do not think Carter had any choice but to make the concession she did, and I do not view that concession as an antidote to the other matters. I will add some observations of my own and then deal with (6) and (7) of [55].
An example of Carter's style of evidence is her evidence concerning the Lewis/Carter joint account. In her affidavit she described how she regarded the joint account as Lewis' account: see paragraph 24 of her affidavit of 25 February 2016. She referred a number of times to the account as "Tony's account": see for example T324.22 where she said:
They are drawn on Tony's account, yep. I know my name is on it as well, but I didn't consider [it] as my account.
Carter volunteered that she had not signed the $850,000 worth of cheques at T324.28 - 36. When confronted with the fact that she had drawn other cheques on the Lewis/Carter account (see Exhibit A2 p 1496 for example) she then said she occasionally drew some cheques on that account: see T325.15 but then said "I never put money in that account" and then asserted "I did reimburse Tony usually for these cheques." She asserted that the reimbursement of Lewis was mentioned in her affidavit: see T325, but what she said in her first affidavit at paragraph 26 and paragraph 6(d) of her affidavit of May 2016 was that she always told Lewis about payments made out of the account. She admitted that her evidence that she knew nothing about the Lewis/Carter account was not correct: see T327.7 - 11.
As mentioned, another example of her evidence related to the receipt of the Lewis/Carter bank account statements. Her evidence in her affidavit of 25 February 2016 was:
1. That she never opened the bank statements which were sent to her weekly (another copy being sent to Lewis) because she regarded the joint account as being Lewis' account "and the bank statements were of no interest to me." In cross-examination she said what she did was to place the unopened envelope in a box or boxes: see T.129.39, she referred to the boxes but at T130.22 she said "or aside somewhere in a pile". At T132.35 she said she believed she occasionally opened them.
2. In 2009 in preparation for moving house she took the statements out of the envelopes and put them in a folder.
3. When the liquidator asked for the bank statements she said she would look for the folder.
4. She looked for the folder containing the bank statements but could not find it since moving to Centennial Park in December 2009.
There are numerous difficulties with this evidence:
1. It is highly implausible that an accountant who was the joint owner of a bank account and who was a guarantor of her husband's debt would not open bank statements, but rather, put them unopened in a box.
2. It is unlikely that, having put unopened envelopes in a box, she would, many years later (and before there was any crisis making those bank statements important), open those statements and put them in a folder.
3. There was no suggestion in the public examinations that she had not opened the account statements when she received them, or was not aware of their contents.
4. The letter that she sent to the liquidator suggests that she had the statements in a folder (as one would expect) and that she thought she still might have the folder: see Exhibit B.
5. When confronted with the fact that at her examination she had said she did not always open the statements, but in these proceedings she says she did not open them because she regarded the account as her husband's "and the bank statements were of no interest to me", she said she thought the two statements were "somewhat consistent" and there followed during Mr Stoljar's cross-examination at T135.4 - 136.8:
Q. Is that another way of saying inconsistent?
A. It probably reflects the fact that I'm embarrassed by having a lot of envelopes in boxes.
Q. That's not a truthful position, is it, Ms Carter?
A. That's very truthful.
Q. This morning in your evidence this morning, you said you occasionally opened the envelopes?
A. I probably occasionally opened the envelopes. My recollection is quite vague.
Q. Where did you put the statements when you occasionally opened the envelopes?
A. They weren't put into a folder at that time.
Q. Where did you put them?
A. I suspect they went back into the same boxes.
Q. Isn't this the position, it's quite clear that your story has altered over time in a way that is favourable to you; do you agree with that proposition?
A. I don't think so.
Q. 2011, you make no suggestions that these envelopes were all being stored sealed; 2012 you sometimes open them; 2016, five years later, that's five years after the 2011 email, you say, "I did not open the envelopes at the time."
BELL: I object to that. It's not a fair summary of the evidence in the affidavit.
STOLJAR: I was reading from it, "I did not open those envelopes at the time" para 30.
BELL: Look at 31.
STOLJAR: "I did not open those envelopes at the time"
HIS HONOUR: No, but 31 I don't know that they are inconsistent, what you're saying is wrong, but in 31 she says what she did in mid 2009.
STOLJAR: Quite. Yes, what I'm saying is that setting aside what she says happened in 09, the 2011, it just says, "We each received a weekly bank statement. The account was used for daily expenses, not interesting at all", 2012, the version is, "I didn't always open the statements", 2016, in para 30 in effect, "I never opened the envelope".
HIS HONOUR: Yes, I allow the question.
STOLJAR
Q. I want to make it clear so that you have an opportunity to respond, Ms Carter, that what I'm suggesting to you is that over time your story has changed in a way that is self serving and favourable to you; what do you say to that?
A. At the moment I can't see how it's self serving to me. It was Tony's account, not mine.
1. The bank statements, she said, "seem to have got lost with the move". Mr Lewis said he was not aware of any such folder containing the bank statements and that when they moved house the bank statements were destroyed: see Exhibit A4 p 2771 line 25. Carter had not said in her affidavit that the folder was lost in the move, but rather that she could not find the folder (as at February 2016) and she agreed that, as at September 2011 when she sent the email to the liquidators, she did not think that anything was missing: see T137.5.
2. Carter knew, by the time of her move, that Lewis Companies had gone into liquidation.
3. She seemed, at T327.50 - T328.4 (her attention having been drawn to the fact that that particular statement was addressed to Lewis), to wish to assert that she had not always received bank statements and that might be the reason why she had not ever received the bank statement found at Exhibit A2 p 834. It is true that she had in her affidavit said that she started receiving bank statements addressed to her sometime after she had become a joint signatory to the account and probably because she had become a guarantor of her husband's obligations (see paragraph 30 of her affidavit), but it is clear that she had a joint account from the early 1990s and had become a guarantor by 2000, if not well before: see T330 - T331.
In relation to her role in the Lewis Companies, I agree with Mr Stoljar that she attempted, in her affidavit and in her oral evidence, to minimise her role and paint herself as, effectively, a mere bookkeeper who simply recorded what she was told to record, when the reality drawn out in cross-examination, and by reference to documents, established that:
1. She was the corporate accountant for LSL - she was so described in a directory of the Company: see Exhibit D, as being "responsible for the company accounts". She prepared the financial reports that were sent to the auditors: see T161.15 - 34 and T160.26, and checked all of the data see: T162.49, and was responsible for checking all related party transactions: see T163.6 - 25, and see also Exhibit A4 p 2808.40 - 41.
2. She raised matters of significance with the auditors: see Exhibit C and see Exhibit A2 at p 1840, although she tried at first to resist the natural reading of the document: see T141.22 - 35, and see T142- T143, and she was involved in some business decisions: see T156.41.
3. She requested the meeting to have the auditors removed: see Exhibit A2 p 1643. This was in a context where the auditors, Donnelly Rush, were concerned about LSL's approach to dividends: see T144 - 145 and see Exhibit A2 p 1592.
4. She created accounts known as Futcash accounts and designed Excel spreadsheets.
5. She supervised the work of Ms Kurrle: see T166, and Ms Humiston: see T217.39 - T218.43 and her evidence at the public examination: see Exhibit A4 p 2699 - 2702.
6. She reconciled spreadsheets to ledgers: see T138.45.
7. She was the main point of contact with the auditors for "verifying the transactions": see T165.36, managed the internal entry of accounting information onto the computer system: see T165.50 - 166.1 and prepared monthly, quarterly and annual account ledgers: see T166.5.
8. She prepared spreadsheets of profits on trades and summaries (see: paragraphs 110 - 111 of her first affidavit and T201.49 - T202.9).
9. She attended with Lewis as a representative of LSL at a meeting with ASIC in October 2002: see Exhibit A2 p 1726 and see T246.
Some further examples of her attempt to minimise her role are:
1. Her evidence in relation to the representation letter sent to the auditors (see: Exhibit A2 p 1734) at T149.21 - T151.24:
Q. Could you go, please, to volume 3, page 1734. You should be looking at a letter from LSL to the auditor?
A. Yes.
Q. If you go over to the next page, 1735, you'll see that you've signed that letter as the company accountant?
A. Yes.
Q. You read through the letter before you signed it?
A. I can't recollect whether I did or not.
Q. It is likely that you read through the letter before you signed it?
A. That's possible.
Q. It is likely, is it not, that you read through the letter before you signed it?
A. May I take a moment to read the letter more closely?
Q. Of course?
A. It's likely that I, at least read through it quickly.
Q. You understood that it's an important letter?
A. Not necessarily.
Q. It's a representation letter in connection with the audit of LSL. You can see that from the opening lines?
A. It does, yes.
Q. You understood LSL was licensed by ASIC to provide financial services?
A. Yes.
Q. This was an audit that needs to be carried out as part of the licence conditions?
A. Yes.
Q. It was to give the auditors comfort about their opinion as to whether the financial report of LSL was, in all material respects, presented fairly and properly?
A. Yes, it appears to be that.
Q. You understood that at the time?
A. I don't recall.
Q. You read through the letter, you've told us, at least quickly before you signed it?
A. Yes.
Q. You understood from that quick read that it was an important letter?
A. I understand, yes, as I read it now, that it is an important letter.
Q. You understood that at the time?
A. Well, you're suggesting to me. I may not have understood it at the time.
Q. You have a Masters in accounting Ms Carter?
A. Yes.
Q. You're the company accountant. You accept that?
A. Yes.
Q. You signed off on this letter, a representation letter to the auditor of LSL; correct?
A. Yes, that's who it's to.
Q. You accept that you read through it you say quickly but you read through it and you're resisting the proposition that you regarded it at the time and you understood that was an important letter?
A. I've conceded that I probably read through it quickly. I can't confirm that. I just don't recall.
HIS HONOUR
Q. Why would you read through it quickly?
A. I was often pressed for time and, I mean, frankly, I trusted my husband, if he asked me to sign something.
Q. If your husband asked you to sign something, you'd sign it, do you mean even without reading it?
A. Well, I had I would at least have
Q. No, you hope you would, but do you say you were willing to sign things your husband gave you without reading them on occasions?
A. I can't it's possible. I can't recall whether I did or not.
Q. Is this a letter you can't recall whether he just asked you to sign it?
A. I can't recall reading. That doesn't mean I can't recall not reading I can recall not reading. I just don't recall, I'm sorry.
Q. You may not have read it?
A. I would have I'm fairly sure I would have at least cast my eye over it quickly, but
Q. But why quickly?
A. I've had to now look at it again to determine that it's an important letter, because you're suggesting that it's important. It's a letter to the auditors discussing some valuations.
Q. Are you doubting now having read that letter today in the witness box that this is an important letter?
A. I don't understand how important it is you seem to be saying
Q. No, I'm not asking how important, but do you tell me. You've read it. You know what it was for. Do you say this is not an important letter as far as you're concerned?
A. Reading it now, it appears an important letter.
1. There was this evidence in relation to Ms Humiston at T171.34 - T172.8:
Q. You say that Ms Humiston was the main bookkeeper responsible for the ledger of Holdings during the time of her employment "I did not record transactions in the ledger of Holdings during this period from about 5 June 2000 to about January 2003", is that a true statement, Ms Carter?
A. To the best of my recollection, yes.
Q. Did you do it sometimes?
A. I did it after she left. I took over after she left.
Q. During the period June 2000 to 24 January 2003, did you do it sometimes?
A. I don't believe I did, no.
Q. You don't believe you did?
A. No. I can't recall, but I don't recall that I did. I respected her autonomy and it just wouldn't work. I had enough to do.
Q. Are you quite sure about that evidence, Ms Carter?
A. No, I'm not sure. I've apologised many times. I don't remember very well what I was doing in 2001 or 2000, whenever we're talking about.
Q. You accept, do you, the proposition that you don't remember very well what you were doing between June 2000 to about 24 January 2003; you accept that?
A. Yes, I do.
See also T154.36 - T154.19:
Q. It's perfectly fine and reasonable, the point is that you are very anxious in this Court to say that you did nothing but mundane bookkeeping work, and you didn't really act as the company accountant at all, that's the problem, do you understand?
A. Yes. I still don't believe this is high level
HIS HONOUR
Q. But do you agree that this is the sort of email you would expect the company accountant to send?
A. I suppose so, yes. It seems to me I'm explaining something as a bookkeeper, but
Q. Pardon?
A. It seems to me that I'm explaining why I made some particular bookkeeping entries. I'm not quite sure where we can
Q. But this is what you'd expect from the accountant, isn't it?
A. Well, okay. Yes. Yes. I'll say that if that's what you consider an accounting function.
Q. No. It's not what I consider. It's what you consider?
A. Sorry, I don't know where the line is.
Q. No. But you know that this is the sort of thing that an accountant for the group would be likely to write, don't you?
A. Yes.
Q. You called yourself an accountant for the group, didn't you?
A. I did, yes. Yes.
Q. You signed a document, we saw it a short while ago, where you signed as the accountant, do you remember that?
A. I don't remember. I remember looking at one as company secretary.
Carter sought to create the impression that she had no involvement with writing up the Holdings ledgers in the period 2000 - 2002, seeking to ascribe that role to Ms Humiston: see paragraph 89 - 90 of her first affidavit, and the subject of many comments by her in answering other questions (see: T155.30 - T156.6):
Q. Do you agree with me that your version of events is changing over time, so that now we roll through to 2016, and in your affidavit you attempt to say that you're just the bookkeeper?
A. I believe the 90% of my time probably was bookkeeping. 10% was accounting.
Q. You didn't say that back in 2011, did you? You accepted easily that your role was that of accountant?
A. Yes.
Q. In fact, I think it was put to you this is 2670, line 12 or thereabouts:
"Q. Your role is one of more an accountant?
A. Yes. That's right.
Q. And a bookkeeper?
A. Yes."
A. Sorry, where is this?
Q. 2670, line 12 or 13.
"Q. Your role is one of more an accountant?
A. Yes. That's right.
Q. And a bookkeeper?
A. Yes."
A. Yes.
In her public examination she clearly states she was responsible for entering and reconciling entries for Holdings and Vimow, as well as LSL: see Exhibit A4 pp 2699 - 2701, and I found her attempts to explain the difference between her evidence before me and the evidence she gave at the examination (see: T175 - T177) as unconvincing.
Carter agreed that her statement in her affidavit of 25 February 2016 paragraph 46 that she had not been involved in any business decisions was wrong: see T156.41.
In cross-examination, at T219.212 - 47, Carter, having agreed at T217 that she would have checked the entries in the LSL ledger and that $775,000 was a significant figure, there was the following exchange at T219.44 - 47:
A. It would have caught my eye to the extents that I would have realised what it was about. I'm sorry, but I'm still not willing to concede because it's absolutely not true that I was aware that Tony was borrowing the funds from the companies.
Another example of a self-serving recollection, which was not stated in her affidavit, was her evidence concerning the Malone loan at T228.16 - T229.24:
Q. I just want to ask you about Beryl Malone. On your account, did you say anything back to Tony?
A. I don't recall.
Q. You don't recall?
A. I don't recall the words, no.
Q. Not that you don't recall the words. Did you say anything back to him?
A. No. I don't think so.
Q. He just said that I only borrowed the money from her for a short time and you said nothing at all?
A. I don't remember saying anything at all. No.
Q. Because you didn't say, "Gee, she's on old lady who has entrusted LSL with money. Maybe she should get some independent legal advice", did you say that?
A. I didn't, no.
Q. Did you ask him how long the loan was for?
A. I believe he told me it was for a short time. I didn't ask him how long a "short time" was.
Q. You believe he said that to you, but you didn't ask how long?
A. No.
Q. It's pretty important for Ms Malone, isn't it?
A. Yes. But I believed that Tony and she had spoken and had agreed to terms.
Q. Did you ask about whether he was giving any security for this loan?
A. I didn't, no.
Q. She's just giving an unsecured loan of indefinite duration. Is that what
you're saying?
A. I believed it was a short term loan, and I was aware that she
Q. How long?
A. He had known her for a while. I sorry. My vague recollection is a period of three months was mentioned.
Q. Three months?
A. Yes.
HIS HONOUR: She said two to three months.
STOLJAR: I'm sorry.
Q. Two to three months was mentioned?
A. No. It ended up being longer than that, I realised, from reviewing the numbers.
Q. He said two to three months, did he?
A. That was my vague recollection. I don't remember the words.
Q. Where do I find that in your affidavit?
A. It hasn't been recorded. I don't have any strong recollection.
And at T230 the vague recollection of a letter turned into a vague recollection of seeing a "written loan agreement signed by Ms Malone."
In relation to the conversations with her husband [55(6)], it needs to be recognised that the conversations she was giving evidence about occurred long ago and I do not think she can be criticised for a lack of detail, however, it was clear that her recollection was selective, in the sense that the conversations which she said she could recall were helpful to her case and whenever questions sought to probe further, they were answered with either a lack of recall or very vague responses: see, for example, T149.1 - 12, T146.22, T147, T177 - 180, T181 - T184, T228, and T352 - T353. In relation to the question of whether Lewis did 'gift' the house to her, I do not think it matters much because he clearly intended the Property (like the Hopetoun property) to be bought in her name. The real question is not whether he made a gift to her of the money, but rather, whether in the circumstances of the 'loan' out of which he paid the $1.3 million for the Property, the funds were his to give to Carter or not.
In relation to [55(7)] I do not accept that Carter was, by her evidence between T201 - T211, admitting that she knew in 2000 that there was a loan of $775,000 to Lewis, rather she was agreeing that she accepts now, and has done since the commencement of proceedings against her, that there was such a loan.
For the reasons I have outlined in [54] - [68], I am not able to accept Carter as a truthful witness and I am disinclined to accept her evidence unless independently corroborated.
Credit of Miller:
Miller admits his involvement in the Bass transaction. He says that Lewis said to him:
"Do you have anyone who would front for a company so that I can put 1 million into the company for redeemable preference shares? I would then need a second one to put the money into for redeemable preference shares, and then the money would then come back into Lewis Securities as a repayment of the Lewis Securities Holdings loan."
(at T274.42 - T74.46)
and that he agreed to assist Lewis to achieve that end i.e. he says clearing a debt of $1 million owed to LSL by Holdings. He admits that he caused Bass Holdings to be established with that name and with Mr Bass as its sole director, and GB Investments to be established with Mr Byrne as its sole director. He admitted that he lodged with ASIC documents relating to Bass Holdings and GB Investments. He also created a bank account in the name of Bass Holdings with St George (see Exhibit A2 p 1650 and 1652), signing on behalf of Bass Holdings when he had no authority to do so. He also created a bank account in the name of GB Investments, without Mr Byrne appreciating that that was what he was doing: see Exhibit A4 pp 2925.45 - 50, and without Mr Byrne having any idea of the purpose of that account.
What Miller denies is that:
1. He knew Lewis was trying to remove from the books of LSL or Holdings a loan to Lewis of any amount;
2. He drew or arranged for Byrne to draw a cheque for $996,800 to Lewis and Carter, as opposed to a cheque for that amount to LSL or Holdings;
3. He prepared the Bass Holdings letter.
Miller said that Lewis told him that LSL (not Holdings) was owed money and then said that he made no enquiry about the veracity of what Lewis told him: see T292 - T293, even though he was himself a director of LSL.
I shall return to the significance of the matters that Miller has admitted, but I need to address the question of his credit:
1. Mr Miller denied that he had been Mr Lewis' accountant (see T25.25 - 26), but he was shown evidence that he had so described himself (see Exhibit A2 p 1588 and p 1591 and T251.27 - 50, T252.15 - 21) and was Lewis' accountant as at March 2002 (see T252.37). He had first met Lewis in 1985 (see T253.1 - 5) and remained a business associate (see T253.11, T254.18 -20).
2. He said at T257.1 that he could not recall whether he took any steps to procure the consent of Mr Bass to Mr Bass' appointment as director, or to inform Mr Bass that he had opened a bank account for Bass Holdings (see T257.17 - 21), and that he could not recall taking any steps to obtain the consent of Mr Byrne (see T257.15). His email to the liquidator in February 2014 (at Exhibit A2 p 2841) is inconsistent with that failure to recall, and the professed lack of recollection was exposed as untruthful later at T313.23 - 29 and by Mr Bass and Mr Byrne's evidence at their public examination.
3. At T259 he was asked about a resolution purportedly passed by Bass Holdings:
That within the period of one month prior to the lodgement of this return, the directors of the company have resolved that they are of the opinion there are reasonable grounds to believe the company will be able to pay its debts as and when they become due and payable.
The following ensued at T259.22 - T260.10:
A. Correct.
Q. No such resolution had been given within the period of one month prior to the lodgement of that return, had it?
A. Not that I can recall.
Q. That statement, or the declaration, is false?
A. On that basis, yes.
Q. On any basis, isn't it?
A. Well, the company didn't have any debts, so it could pay its debts.
Q. There had been no resolution of the directors of the company within a month prior to the lodgement of the annual return; correct?
A. There was a resolution to issue the shares.
Q.
"There had been no resolution of the directors of the company to the effect that they're of the opinion that there are reasonable grounds to believe the company would be able to pay its debts as and when they become due within a period of one month prior to the lodgement of this return."
Correct?
A. Sorry, where are you?
Q. I'm looking at the declaration at subs (b) on 1727.
A. The company had no debts.
Q. You know that that is not the question I'm asking you, don't you?
A. You'd asked was there
Q. A resolution by the directors of Bass Holdings within the period of one month prior to the lodgement of the return that the directors were of the
A. I can't recall.
Q. You know there had been no such resolution because the Bass
A. Well, I can't recall.
The attempt by Miller to avoid questions, and then to assert that Mr Bass and Mr Byrne were involved in some way in the incorporation of Bass Holdings and GB Investments, notwithstanding his email to the liquidator, continued over many pages but at T264.35 - T265.9 there was the following exchange between myself and Miller:
Q. No, you're [not semble] being asked about whether the company could pay its debts. You're asked about whether there was resolution of the company and you know there was no resolution of the company, don't you?
A. Well, I can't recall. I can't recall.
Q. But you know that if Mr Bass wasn't aware he was a director and he was the only director recorded, he couldn't have resolved; you know that, don't you?
A. Well, if Mr Bass wasn't there, he couldn't be I agree.
Q. Therefore, it's a false declaration, isn't it?
A. Okay. I agree. On that basis, yes.
Q. You put it into ASIC, didn't you?
A. Yes, I did
STOLJAR
Q. You knew when you put it into ASIC that it was a false declaration, didn't you?
A. I guess so, yes.
Q. The form reads that the declaration must be signed by a current director or secretary of the company; do you see that?
A. Yes.
And he admitted that he had submitted the form on behalf of Bass Holdings, which form contained the declaration that the form had been signed by a current director or secretary of Bass Holdings, when he knew it has not been: see T268.22 - 32. He made similar admissions in respect of GB Investments: see T268 - T269. At T314 Miller agreed that if he had caused Bass Holdings and GB Investments to be incorporated, without Mr Bass' and Mr Byrne's knowledge, and caused them to be named as directors without their knowledge, that would be a dishonest act on Miller's part. When asked if that is what happened in respect of Bass Holdings he said he could not recall: see T315.1 - 3, and see T315.25 - 30 in relation to GB Investments.
1. Miller agreed that if Lewis knew that Mr Bass was recorded as the director of Bass Holdings the person who must have supplied Lewis with that information was Miller. The same applied to the information that Mr Byrne was the director of GB Investments: see T271.40 - 50 and Miller did so for the purposes of the creation and implementation of the round robin: see T272.33 - 45, but he consistently asserted that the round robin, which he believed he was assisting Lewis to implement, was not designed to see a loan to Lewis from LSL wiped, but rather a loan (which he believed was around $1 million) from LSL to Holdings wiped: see T273.10 - 14.
2. Notwithstanding his admission that the scheme, which he was helping put into effect, involved Miller setting up companies with no assets, and in respect of which false declarations were made and the names of persons who had not consented to their names being used, he sought to maintain that the "preference shares", which were purportedly issued, were not "utterly worthless" (see T275.20 - 49). At T275.40 he asserted that the shares in Bass Holdings were still worth $1 million. This approach was based on the proposition that, as matters had transpired, GB Investments had lent Holdings $1 million, and would be entitled to recover it from Holdings. He also denied, at T279.11 - 12, that there had been any "shifting of funds" because "the funds were going out of Lewis Securities and went back to Lewis Securities". The reality is that, even on Miller's version of the scheme, his assertions are contradictory - his claim that the $1 million was to "go round the circle" is not consistent with the contention that the preference shares had any worth, or that GB Investments was 'lending' $1 million to Holdings (or LSL). That the preference shares had worth was grudgingly conceded as "somewhat artificial" at T281.12 and see T306 - T308.28 during which Miller agreed that no documentation of the supposed loan had ever been made, no terms for the preference shares were ever agreed, and that the notion that Holdings (or LSL) could redeem the $1 million paid could be described as 'fanciful'.
3. Miller once again returned to his assertion that he could not recall that he had caused Mr Bass to be named a director of Bass Holdings without the knowledge and consent of Mr Bass. Mr Bass' evidence at the examination by the liquidator is that he had no knowledge whatsoever that Bass Holdings had been set up or that he had been named as a director: see Exhibit A4 pp 2890 - 2902. Mr Bass knew nothing of a bank account with St George: see Exhibit A4 p 2898. Mr Byrne's evidence at his examination was that GB Investments was established by Miller and possibly with his approval, but he had nothing to do with it and no involvement in the redeemable preference share transaction: see Exhibit A4 pp 2923- 2924. Miller's email to the liquidator, which stated that:
"Neither Mr Bass and Mr Byrne were involved in the transaction. They have no records, not had any involvement in the management of the companies"
confirms this, as does Mr Bass' evidence and Mr Byrne's evidence that Miller told them, after they had received a notice from the liquidator, "it's nothing for you to worry about" in answer to the question what it "was all about" (see: Exhibit A4 p 2920 of Mr Byrne) and "it's nothing to do with you, don't worry about it" (see: Exhibit A2 p 2891 of Mr Bass) and that the liquidator would be "wasting time" examining Mr Bass and Mr Byrne which "will not reveal anything, simply because they were never involved": see Exhibit A2 p 2841.
1. Miller was frequently evasive in his answers, as some of what I have set out above itself demonstrates.
For the foregoing reasons, whilst I accept that Miller did make some important and damaging admissions, insofar as Miller gives evidence of his belief as to the effect of the transaction and any limitations on his role in it, I am unable to accept his evidence as truthful.
Credit of Lewis, Mr Bass and Mr Byrne:
Lewis, Mr Bass, and Mr Byrne did not give evidence in the proceedings, but the transcript of their public examinations, as well as the bankruptcy examination in the case of Lewis, were put into evidence. The receipt of the respective transcripts (in addition to those of Carter and Miller) appeared to be the result of a compromise between the plaintiffs and the defendants, which included the agreement that the transcript of Lewis and Carter's public examination could not be used against Miller: see T95, and Miller's transcript could not be used against Carter: see T71. I must take into account that the plaintiffs' tender of transcript included that of Lewis (as well as those of Mr Bass and Mr Byrne) and the defendants could have objected to the admission of the Bass and Byrne transcripts, so in that sense it cannot be said that they were denied the opportunity to cross-examine these witnesses. I have no reason to doubt the veracity of Mr Bass and Mr Byrne and their ignorance of what transpired with companies of which they were purportedly directors was largely corroborated by Miller. Lewis' evidence at the public examination concerning the Bass transaction was that:
1. He had no recollection of a discussion with Miller about reclassifying loans and/or a related party loan as between LSL and Holdings in 2001 or 2002: see Exhibit A4 pp 2988.46 - 2999.12;
2. That he relied on a recommendation from Miller as to why Bass Holdings and GB Investments were used: see Exhibit A4 pp 2980 and 2981;
3. That he did not recall the Lewis letter: see Exhibit A4 p 2982; and
4. That he had no recollection of where the $1 million had come from: see Exhibit A4 pp 2984- 2987.
And there is the following evidence at line 46 of Exhibit A4 p 2988 - 2999 line 12:
Q. Mr Lewis, you can't recall can you, or can you recall discussions with Mr Miller in mid-2002, around May or June, about this type of transaction, that is the million dollar investment in Bass Holdings and Investments Pty Limited?
A. Privilege. I have vague recollections of talking to him about it and - privilege - I somewhat recall that Graham Byrnes was going to give me a million dollars to invest or roughly, and you know I banked it in between, then I sort of forgot all about it. I can't recall any transaction between Graham Byrnes and myself, I can't remember what it was about, but when I declared bankruptcy I did quote both their names, Graham Byrnes Pty Limited and Bass Holdings, and Aravanis wrote it then on a circular and I believe they never heard anything from them. So I just can't recall what it was about, they didn't put up their hand, nobody knows what it was about.
Q. As far as your recollection is concerned, there was never any discussion or plan to reclassify - to use this transaction, to utilise this transaction to reclassify loans internally between Lewis Securities and LSL Holdings?
A. Privilege. I can't recall anything like that.
Lewis' lack of recollection, in the circumstances, coupled with the objective evidence and Miller's evidence, which was not the subject of any cross-examination by Mr Bell, leads me to reject Lewis' proffered ignorance of the scheme that was clearly put into effect. The passage from the Lewis public examination to which I have just referred was not one to which attention was drawn by any counsel and Mr Stoljar and Mr Bell certainly adopted the position that the Bass transaction was fraudulent and dishonest. Obviously, since Lewis is not a party to the proceedings, he has not been heard on any of the allegations against him, and Carter did not call him in support of her case, but I am required to make findings based on the evidence before me about Lewis' conduct in the context of proceedings between other parties.
The Property Transaction:
In relation to the Property transaction, Carter does not deny that she received the $1.3 million of funds that came out of the LSL bank account, and that that money assisted her to buy the Property. She advances a number of points in her defence (leaving aside the shareholder approval point and the limitations and laches arguments for the moment):
1. That Lewis did not breach his fiduciary duty to LSL by arranging for the $1.3 million to be paid for her benefit.
2. That if Lewis was in breach of his fiduciary duty, she was not aware that he was in breach of his duty at the time that she received the funds. She thought that Lewis was able to gift the $1.3 million to her because of successful trades that he had entered into, and because of his receipt of dividends from LSL. That the time of awareness for a Barnes v Addy claim is the time of receipt of the money is made clear in Lurgi (Australia) Pty Ltd v Ritzer Gallagher Morgan Pty Ltd [2000] VSC 277 at [45] per Byrne J, and some support can be gained for that proposition in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [160], Linton v Telnet (1999) 30 ACSR 465 pp 478 - 480 per Giles JA with whom Beazley JA (as her Honour then was) and Sheppard AJA agreed.
3. That if there was a breach by Lewis of his fiduciary duty, it was not a fraudulent or dishonest breach.
4. That of the amount of $1.3 million, $250,000 was actually a loan by Mrs Malone to Lewis.
5. That the plaintiffs are precluded from making a claim for $850,000 because of their claims in the Bass proceedings.
The closing submissions on behalf of Carter ("the CCS") made a number of general points, which I summarise:
1. The plaintiffs' case of knowing assistance involves an allegation that Lewis engaged in a dishonest and fraudulent design and the Court will not give relief on an issue of fraud unless the allegation has been clearly raised on the pleadings: see Ritchie [14.14.25] and cases there cited.
2. A pleading of fraud must specifically allege the acts involved and that they are done in a manner which involves fraud.
3. Fraud must be pleaded distinctly and with particularity and clearly proved: see Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563, at 573.
4. In relation to the allegation of knowing participation in a dishonest and fraudulent design, the Briginshaw (Briginshaw v Briginshaw (1938) 60 CLR 336) standard must be applied: see s 140 (2) of the Evidence Act 1995 (Cth), which reflects this.
I accept that each of the points in (1) - (4) is applicable here.
Did Lewis breach his fiduciary duty:
Lewis arranged for the removal of $1.3 million of funds from LSL's bank account. There is no evidence that he did so with the approval of either of his fellow directors. There is no documentation in respect of the $1.3 million, so far as the company is concerned, other than the ledgers. The ledgers do record the movement of balances between Lewis, LSL, Holdings, and Vimow. The LSL ledger records an interest rate of 7% per annum for what is recorded as a loan of $775,000.
Of the Lewis Companies, only LSL had a bank account. There is no doubt that, for the Lewis Companies, the ledgers provide the only guide to the state of the financial indebtedness of Holdings to LSL, Lewis and Vimow to Holdings, LSL to Holdings and so forth. Mr Civil agreed that a payment going into or out of LSL's bank account was the first step in identifying the nature of the transaction, and that regard had to be paid to the ledgers: see T98.17 - T99.47.
It follows that payment out of the LSL account does not mean that that money must be treated as LSL money and it makes the ledger accounts very important documents. It also follows that if there was a breach of fiduciary duty by Lewis, it must relate to the decision that he made to direct that Holdings' account be debited with the $775,000, thus reducing the amount owed by LSL to Holdings, enabling Holdings to lend him $775,000 (see p 469, p 1337, p 1334, p 1362) and payments to be made out of the LSL bank account on behalf of Vimow, with payments of the deposit of $225,000, and the stamp duty of $24,507.60, effectively for Lewis' (and hence Carter's) benefit. The Malone amount of $250,000 is in a different category and I shall deal with it and the $225,000 and $24,507.60 separately. So far as the balance of the stamp duty is concerned - an amount of approximately $85,000, there is no evidence that that amount was paid out of the LSL account. I find that $1,274,430.60 ($1,024,923 + $225,000 + $24,507.60) was paid to purchase the Property for her benefit and thereby received by Carter.
The allegation that the Property transaction was a breach of fiduciary duty is on the pleadings based upon:
1. The absence of security;
2. The absence of a loan agreement between Carter and LSL/Holdings;
3. The absence of any obligation upon Carter to repay the money; and
4. The absence of and provision for interest.
As I have noted, there was no loan documentation, but there was a provision for interest at 7% per annum in the ledger for the $775,000 loan. Where no term for repayment is specified, the money lent is repayable from the time that the money is lent or at least on demand with reasonable notice: see Young v Queensland Trustees Ltd (1956) 99 CLR 560 and Ogilvie v Adams [1981] VR 1041 and see Joachimson v Swiss Bank Corporation [1921] 3 KB 110 and Chitty on Contracts (27th Edition, Sweet & Maxwell) [36] - [210]. There was no requirement for any loan obligation to be imposed on Carter to repay because she was not the borrower.
There was no security provided for the loan of $775,000. There was no security provided for the $225,000, the $24,700 or the amount treated as the Malone loan, nor was there any interest for the Malone loan.
The question of whether a director of a company can loan money to himself or his family, and the process by which that can be achieved, is not without its complications. Legislation has been introduced to prevent directors of a public company from making loans to themselves without shareholder approval: see former s 234 of the Corporations Act 1989 (Cth) and presently ss 208 - 209 of the Corporations Act 2001 (Cth), dealing with the need for member's approval in respect of a related party benefit. In relation to private companies there is a requirement that any transaction which materially benefits a director or his family must be the subject of notice to all other directors (see s 191 of the Corporations Act 2001 (Cth)).
The case cited by Mr Stoljar, Paul A Davies (Aust) Pty Ltd (in liq) v Davies (No 2) [1983] 1 NSWLR 440, was one in which the trial judge had found that the directors of a company had used moneys of the company for their own purposes at a time when the company was in financial difficulties and not all of the shareholders had given consent because the shareholder, who held shares as trustee for the directors' children, had not given consent to that use. The appeal was concerned with the nature of the relief granted as the liquidator claimed that the relief granted at first instance was too limited.
In Linton v Telnet (1999) 30 ACSR 465, the NSW Court of Appeal Giles JA (with whom Beazley JA and Sheppard AJA concurred) considered an interest free loan to the director of $1.06 million, which had been used by the director to buy a house for the appellant - his wife. The trial judge had held that the loan was a breach of the directors' fiduciary duty because the director was bankrupt at the time. The Court of Appeal overturned the decision because the director had been discharged from bankruptcy three years before the loan, so the foundation of the trial judge's decision was erroneous. Giles JA rejected the liquidator's cross-appeal, which was based on the director's failure to consider the interests of creditors, because the liquidator had not advanced the case at the hearing but, in doing so, his Honour made reference to cases dealing with when directors are required to have regard to the interests of creditors: see Nicholson v Permakraft (NZ) Ltd (1985) 3 ACLC 453 at 459; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722; 10 ACLR 395, and see Walker v Wimbourne (1976) 137 CLR 1; 3 ACLR 529. The plaintiffs in the present case have not pleaded that the loans were not in the interests of creditors, nor have they pleaded that the dividends, which were paid to Lewis and which improved the ledger of his account with Vimow, and Vimow with Holdings, were not properly made at the time they were paid. It appears that Holdings was not in financial difficulties at the time that it borrowed money, indeed it had been a creditor of LSL until the time of the transaction and had made a profit in excess of $400,000 in the previous financial year.
I accept that a director could be in breach of his fiduciary duty by entering into a loan for himself without the approval of other directors, but that was not pleaded as a particular and I do not think that it was necessarily a breach of fiduciary duty to enter into a loan with a 7% rate of interest without security where the director and his wife own all of the shares in the company, and where it has not been pleaded that the transaction was inimical to the interests of creditors. There is no evidence that a loan by Holdings to Lewis at 7% per annum was not advantageous, or was commercially imprudent, and see Lewis' tax return at Exhibit A2 p 1366 - 1367, which points to substantial taxable income. The only particulars of the pleaded case, in respect of the Property, that are made out are the fact that no security was provided and there was no formal documentation.
Whilst the evidence supports the conclusion, on the balance of probabilities, that Carter was aware as at June 2000 that Lewis was borrowing $775,000 to put towards the purchase of the Property on behalf of Carter, because she was responsible for at least the LSL and Vimow ledgers and more likely the Holdings ledgers as well (see Exhibit A1 p 469 and the evidence referred to at [61] ) and the purchase was a very important acquisition for her, I do not think it is necessary to reach a conclusion as to whether the loan of $775,000 was a breach of Lewis' fiduciary duty because there is a more fundamental problem for the plaintiffs, which is that by June 2002 the Lewis loan to Holdings was $850,000 (see: p 482 and p 394) and it is that amount which is the subject of the Bass transaction claim. In the course of submissions, Mr Bell pointed out that by their pleadings the plaintiffs had affirmed the existence of the $850,000 loan. Mr Stoljar conceded (at T485 - T486 particularly T486.3 - 8) that the plaintiffs had affirmed the loan and that they could not recover against Carter for that amount since, on the present state of the law, a voidable transaction said to have been entered into in breach of fiduciary duty must be voided if the company seeks to recover it: see Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [(NSWCA)]; 45 ACSR 244 at [73]-[74], [82] and Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 at [271]-[281]. Mr Stoljar asserted, however, that the remainder of the amounts making up the $1.3 million were not affected by that concession. If the $850,000, the $84,000 are removed, the balance claimable is $385,000. If $250,000 for the Malone loan is removed, the balance claimable is $135,000.
The Malone Loan:
Mrs Malone was a depositor of funds with LSL. As at June 2000 she had $250,000 invested with LSL. Mrs Malone was elderly and knew Lewis. Lewis claims that she was a family friend. He claims that he asked her whether she would be willing to lend him $250,000, and that she agreed to that, insisting, notwithstanding Lewis' offer to pay interest, that she would not charge him interest: see Exhibit A4 pp 2809.16 and p 2813.41 - 49.
According to Carter, Lewis told Carter that Mrs Malone had agreed to the loan and Carter made an entry in Mrs Malone's ledger with LSL that she had withdrawn $250,000 from Mrs Malone's account and into Lewis' account. No document has been found in relation to this arrangement whereby Mrs Malone went from earning 6% from LSL to earning no interest whatsoever, with no evidence of the loan or documentation given to her. Carter in her affidavit of 25 February 2016 at paragraph 159 said that she thought that she had a recollection of having seen a letter with Mrs Malone's signature consenting to the loan. Carter did not say that she had seen such a letter at her examination (see: Exhibit A4 pp 2736.30 - 44), and nor did Lewis say that such a letter had been created (see Exhibit A4 pp 2822.25 - 28). Mr Ross Barker (Mrs Malone's son and also a member of the plaintiffs' committee of inspection) found no such letter in his mother's papers and no such letter was included in the books and records of the plaintiffs. I do not accept Carter's account as truthful.
Mrs Malone passed away before November 2003, at which time the 'loan' had not been repaid by Lewis. Her son, Mr Barker, gave evidence in this case by affidavit of 18 April 2016 (p 198 - 199 of Exhibit A1) but he was not required for cross-examination.
Mr Bell submits that the plaintiffs cannot pursue a case based on a breach of duty owed by Lewis to Mrs Malone since that was not the case that was pleaded.
Although $250,000 was recorded as being the amount of the loan by Mrs Malone on 23 June 2000 (see: Exhibit A1 p 352), Mrs Malone did not have $250,000 owing to her at that time - the transfer of $250,000 to Lewis' account put her account into debit of $79,703.67. This problem was 'resolved' a week later because the ledger records the payment of $80,000 into Mrs Malone's account.
There are reasons to seriously doubt the veracity of Lewis' claim that Mrs Malone agreed to loan him $250,000 and, therefore, that he had Mrs Malone's approval to transfer her credit balance in the LSL ledgers and make that credit available to himself. If he did not have her agreement to that course his actions would be grossly dishonest both viz a viz Mrs Malone and LSL. If Mrs Malone in fact approved the transfer of the debt to Lewis, then there was no misappropriation or improper removal of funds.
As between Mrs Malone, or her estate, LSL would be required to prove that she had given her approval. As between the plaintiffs and Carter, however, the plaintiffs must establish that Lewis breached his fiduciary duty to LSL by debiting the amount of $250,000 from her account balance and thereby transferring, in effect, Mrs Malone's chose of action against LSL without her approval. Lewis' evidence does not assist the plaintiffs. Mr Barker testified that his mother had been a bookkeeper and was extremely fussy about documentation. Mr Barker's evidence that there was no record of the loan to Lewis in his mother's papers, nor of any letter in the LSL/Holdings records supports the plaintiffs' case, and, as was recognised in Plunkett v Bull (1915) 19 CLR 544, per Isaacs J at p 549, it is necessary to scrutinize very carefully claims made by a person about conversations with a deceased person.
There is, however, a pleading issue in relation to the Malone loan. At paragraph 17(c), the plaintiffs plead that Lewis caused $250,000 to be debited "from an account held with LSL, which was beneficially owned by [Malone], being a client of LSL." In paragraph 24 the plaintiffs assert, inter alia, that:
"In the premises [Lewis]
(a) borrowed the amount of $225,000, $109,240, $250,000 and $774,923.20 from LSL:
(i) without a written agreement between [Lewis] and LSL and
(ii) on unfair terms including without provided any security in respect of the borrowed money..."
On the face of the ledger accounts Lewis did not borrow the $250,000 from LSL or Holdings, but from Mrs Malone. If it was to be asserted that the debiting of Mrs Malone's account was improper and itself a breach of Lewis' duty to LSL (because it involved a breach of LSL's duty to Mrs Malone) then that should have been pleaded. If it was to be asserted that the entry in Mrs Malone's ledger, and the corresponding entries, were false, leading to the result that the $250,000 was improperly removed from LSL, that would not appear to constitute a 'borrowing' from LSL at all, but "borrowing" is what is pleaded. I, therefore, accept Carter's contention that the plaintiffs cannot recover the $250,000 because it has not been adequately pleaded.
Further, the ledger for Lewis with LSL records him as having repaid to Mrs Malone, or her estate, $245,000 of the $250,000, including by payments to third parties, one of whom was Mr Barker, her executor: see Exhibit A2 p 1339. The accuracy of the ledger was not challenged, nor was Carter's claim that, in any event, the Malone loan was repaid. I conclude that the plaintiffs cannot succeed, in relation to the case asserted, in respect of the $250,000 since even if Lewis was in breach of fiduciary duty it is a defence to a claim for breach of fiduciary duty that the fiduciary has partially or wholly satisfied the loss: see Heydon, J; Leeming, M; Turner, P, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th edition, LexisNexis Butterworths, 2014) at paragraphs 23 - 190, and it must be open to the third party recipient to be able to rely on the same defence: see Yeshiva Properties No 1 Pty Ltd v Marshall [2005] NSWCA 23; (2005) 219 ALR 112 at [80] per Bryson JA (with whom Mason P and Beazley JA concurred) dealing with a similar point of principle.
The Amounts of $225,000 and $24,507
In relation to the $225,000 paid for the deposit and debited to Vimow's account ledger, and the amount of $24,507, these amounts were recorded in the ledger of Vimow (see: Exhibit A1 p 590) and of LSL (see: Exhibit A1 p 417). They were not loans from LSL or Holdings to Lewis, but in any event, they show that within a week almost all of the amount of $225,000, debited to Vimow's account, was repaid. At the time that the $24,507 stamp duty was paid, Vimow was in credit with LSL (see: Exhibit A1 p 417) in an amount of $27,805. It would thus appear that even if Lewis, in breach of his fiduciary duty, removed $225,000 to pay the deposit, Lewis, through Vimow, had repaid the amount of $225,000. In saying that I recognise that the reason why the Vimow debt, brought about by the payment of the $225,000, was in credit was because $217,000 worth of dividends were credited to Vimow's account. The allocation of dividends is itself highly questionable because LSL did not in the 1999/2000 financial year generate profits, and Carter herself accepted that dividends could only be paid if the Company had profits (see: T185.36 - 49). but wrongful allocation of dividends was not the subject of any pleaded case, and indeed Mr Stoljar eschewed any case of wrongful payment of dividends to Lewis: see T197.15 - 24.
Mr Bell contended that the loan accounts of Lewis, Holdings and Vimow should be treated as running accounts and he relied on a passage from Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, at p 286, in which Barwick CJ cautioned against an analysis of a running account, for the purpose of determining whether a payment was a preference or not, to "pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed" citing Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 at p 133. Menzies J took a different approach at p 316 and Kitto J did not decide the point. Mr Stoljar submitted that Queensland Bacon had no application to this case since what is under scrutiny here are loan accounts, not a running account for goods and services, and whether loans were made in breach of a fiduciary duty or not. I accept Mr Stoljar's contention that the approach taken by Barwick CJ in Queensland Bacon is not pertinent to the present question. What is relevant, however, in respect of each impugned transaction, is "was the debt or loan repaid?" If it has been repaid then neither Holdings, nor LSL, have suffered a loss that is compensable by the defendants.
The plaintiffs' case against Carter in respect of the Property is, therefore, not made out. I do not, therefore, need to address the question of the precise extent of the remedy available to the plaintiffs, which was raised as an issue between the parties, and which included the question of whether the profit made by Carter on the sale of the Property was recoverable by the plaintiffs.
The Bass Transaction:
There are various aspects of the Bass transaction which I need to reiterate and detail:
1. The $1 million came out of LSL's bank account on 21 June 2002: see Exhibit A1 p 1652.
2. The $996,800 came back into the LSL bank account on or about 2 July 2002: see Exhibit A1 p 834.
3. There are in evidence copies of four cheques totalling $850,000 drawn on the Lewis/Carter account and payable to Holdings (at p 1498 and another page of the same cheques at p 1499). Those cheques have a date of 29 June 2001. The cheques contain Lewis' handwriting: see T324.
4. There is a letter (see p 1500) dated 29 June 2001 from Lewis to Holdings stating:
Please find attached my cheques totalling $850,000 for repayment of my personal loan for LSL Holdings Pty Ltd.
I shall refer to this as "the Lewis letter."
1. There is a loan ledger in the name of Lewis with Holdings, which records $850,000 as having been paid by Lewis to Holdings: see Exhibit A1 p 482, and a loan ledger in the name of Holdings with LSL, which records $850,000 as having been repaid by Holdings to LSL on 28 June 2002: see Exhibit A1 p 482 (and see p 395).
2. There is an account transactions document (Exhibit F) which records five cheques for $995,000 having been dishonoured on 1 July 2002 and having been honoured on 2 July 2002.
3. All five cheques, totalling $995,000, were drawn on the Lewis/Carter account. All were shown to be treated as for the credit of Lewis. There is no copy of the cheque for $145,000, which was shown to be for the credit of Vimow, but there is no dispute that a total of $995,000 was paid out of the Lewis/Carter account to LSL's bank account and that $145,000 was credited to Vimow.
4. The ASIC historical extract for LSL refers to LSL as having had preference shares issued to it, but LSL's audited accounts do not reveal any such holding (see paragraph 116 of Mr Civil's affidavit of 15 September 2016). The unaudited balance sheet for Holdings (see Exhibit A2 p 1636) does refer to the Bass Holdings shares.
5. No preference shares were in fact issued by Bass Holdings or GB Investments and nor could they have been since no person was appointed as a director of either company.
6. Vimow was Lewis' company that he used as his own account for payments in and out: see T170.39-40.
7. The Bass letter was a complete fiction. There were no preference shares in Bass Holdings, there was no "investment position", there was no prospect of payment of 20% of profits because there was no possible source of profits. Miller says he did not write it and described it as a forgery. I find it was either written by Lewis or Miller. If it was written by Miller, Lewis clearly knew of the contents of the letter because it was addressed to him and held by LSL, and he well knew, I infer, that there was no real investment because the companies were, according to his plan, just a 'front'.
The parties are agreed that the $995,000 came out of the LSL account in late June 2002 (not June 2001) and was paid into the LSL bank account in July 2002. The reason that the cheques were dated 2001 and why the letter bears that date has not been explained by Lewis or Miller - but it appears likely that it was done this way to give the appearance that there was no connection between the money going out of LSL's bank account in late June 2002 and then appearing back in the account (less $5,000) within two weeks. Carter was unable to explain this discrepancy, or the fact that one of the ledgers records a relevant transaction as "29/06/01": see Exhibit A2 p 1334. She did admit, however, after originally denying such knowledge, that she was aware within, she says, between one week and six weeks, that the $995,000 had been paid into the Lewis/Carter account and paid out of that account to the LSL bank account.
In relation to the connection between the $995,000 and the $1 million for the Bass transaction, Carter said that Ms Humiston asked her in paragraph 241 of Carter's first affidavit:
"Do you have any information about the Bass Holdings investment?" to which she replied "I don't know anything about this. You'll have to ask Tony, Tony should have some information about it."
As to the question of the precise time at which Carter became aware that the $995,000 had come out of the Lewis/Carter account, I think it is far more likely that Carter was aware at the time that the cheques had been received by LSL and, therefore, that they were drawn on an account of which she was a joint owner because:
1. She knew there was an issue with the dishonoured cheques because she says either Lewis or Ms Kurrle told her about them: see paragraphs 230 - 231 of Carter's first affidavit.
2. The first set of cheques were dishonoured on presentation, and they bore a date almost one year before they were presented.
3. She says that she did not ask her husband from what source the funds for the cheques were derived: see T338.50 - T340.11.
4. I do not accept her evidence that she did not keep the ledgers of both Holdings and LSL and, in any event, she was responsible for Exhibit F (on her own evidence) and in it she recorded that the payments were all to be treated as for the benefit of Lewis or his company Vimow.
5. I think it is highly unlikely that Lewis did not bring to her attention at the time the cheques were drawn that he was using those funds to pay back the loan he had obtained two years earlier from LSL, but even more so when there was a problem with $1 million worth of cheques with dates that were most unlikely to be correct being dishonoured and Ms Humiston, a part-time employee of the company, was raising a query of Carter. Carter's evidence that she did not speak to her husband about the reason for the payments out of their account is, in the context, highly implausible.
To the extent that it was argued on behalf of Carter in relation to the Bass transaction (and the Property transaction) that the writing up of ledgers was not of itself causative of any loss by LSL or Holdings, the context in this case is one in which the ledgers have considerable significance, indeed it was put by Carter in relation to the Property transaction that the money being paid out of the LSL bank account should be treated as money of Holdings or Vimow, for example, because of the ledgers. This is not a case in which entries in ledgers merely recorded the payment, receipt, or transfer of monies, details of which could be established by other means.
The essence of what occurred is that Lewis, with Miller's assistance, drew $1 million from LSL and used that money (through the circular route of the bank transfers) to repay his debt of $850,000 to Holdings', and hence Holdings' debt to LSL. Also, in relation to the balance, he used it to pay $145,000 to Vimow. The Bass transaction was a subterfuge (or a charade as Mr Bell described it) designed by Lewis to cover up his dishonest and fraudulent removal of a debt which he owed to Holdings (and Holdings owed to LSL). I find that Carter knew that the $995,000, paid by Lewis to wipe the loan of $850,000 and to pay the $145,000 into Vimow, came from the Lewis/Carter account. I find that Carter knew that it was coming from there on or around 2 July 2002. I find also that Carter was aware that $1 million of LSL's funds were paid to Bass Holdings at around the same time.
The fact that Carter was aware that Lewis was using funds in their joint account to pay $850,000 to repay the loan and to pay $145,000 to Vimow does not of itself establish any involvement or knowledge of the fraudulent design. Nor, of itself, does Carter's entry in the books and records of LSL and Holdings of the repayment by Lewis of the $850,000 loan (or the payment to Vimow). If Lewis had $1 million in the Lewis/Carter account from a legitimate source there would be no misfeasance or impropriety in recording the $850,000 loan as repaid, or in recording the payment of $145,000 to Vimow.
The real problem with what occurred is that Lewis had $995,000 in the Lewis/Carter account because he had obtained that money improperly from LSL. He was effectively purporting to repay his debt to Holdings/LSL with LSL's own money, not his own.
I turn now to the question of whether Carter knew (in any of the senses described in the Barnes v Addy context) that the funds which were used to "pay off" Lewis' loan, and of which $145,000 were paid to Vimow, had come from the Bass transaction, and hence from LSL itself.
There is no evidence that Miller and Carter spoke about the Bass transaction. There is no evidence that Lewis spoke to Carter about the transaction. Lewis said he could not recall having done so: see Exhibit A4 p 2987 line 21, and Carter said she did not do so, except that Lewis may have told her that cheques to a value of $1 million had been dishonoured.
On Carter's evidence she knew:
1. That in 2000 Lewis had borrowed at least $750,000 from LSL to make a gift to her for the purchase of the Vaucluse house, and probably $1.3 million.
2. That he had borrowed $250,000 (interest free) from Mrs Malone using funds of LSL and making an account ledger adjustment showing a debit to Mrs Malone's account.
3. That by June 2002, the $750,000 loan was $850,000 and the Malone loan was $170,000.
4. That an amount of $995,000 had been received into the Lewis/Carter bank account on 28 June 2002.
5. That the $995,000 was paid into LSL's bank account on 2 July 2002.
6. That LSL had, on 21 June, paid $1 million to Bass Holdings.
7. That the cheques totalling $995,000 drawn on the Lewis/Carter account were dishonoured and represented.
8. That Ms Humiston asked Carter about the transaction at the time of the transaction.
In addition to the matters set out at [113], there are the following items of evidence:
1. Carter knew that the loan to Lewis in 2000 (that produced the funds for the purchase of the Property) was made possible, in part, by the crediting to his account of dividends of more than $300,000. She claims that she did not appreciate it at the time, but she agreed she would have known by the time the accounts were prepared after June 2002 that there were no profits for LSL that could justify the payment of those dividends: see T191 - T194 and T200.34 - T202.40 (LSL actually suffered a loss of $126,000 see: Exhibit A2 p 1349A).
2. Carter knew that there was a problem with the dividends paid to Lewis and the loans because she sought the removal of the auditors. She claims that there was no connection between the auditor's removal and the manner in which the accounts of the company were being handled, as far as she was aware (saying that Lewis told her that it was a good idea to change auditors every couple of years: see T147.40), but she agreed that it would appear that way (see: T149.16) and I do not accept her denial that she was not aware that the reason that Lewis wanted to remove the auditors was out of concern the auditors were creating difficulties for Lewis and LSL, in relation to, at least, dividend allocations.
3. As I have noted, Carter says she did not herself ask Lewis about the transactions involving the cheques received out of their joint account, or the Bass transaction. I find her failure to ask her husband where the $995,000 that repaid the loan that he owed and put $145,000 into Vimow's account with LSL, had come from, particularly in a context of cheques that were not accepted by the bank, (and where she says that Lewis did not provide her with information relating to the Bass transaction and she was aware at the time (see: T243.24) that she had not been provided with adequate documentation) extraordinary and implausible but if it is true that she did not ask, then I find it was because she, being astute, had worked out the connection, or thought it better not to ask. Carter was not simply Lewis' wife, she was also LSL's corporate accountant (and its company secretary), and she had also very much benefited by funds which had come out of the LSL bank account in 2000.
4. It is not Carter's evidence that at some stage after 2002, and before 2008 (when the Lewis Companies went into administration), she became aware that the Bass transaction was bogus. Indeed she was initially unwilling to accept that description, even after having heard Miller's evidence, saying only that she preferred to describe it as suspicious: see T207.7 - 20. She said in cross-examination, in describing the ledger entry, that the purchase ("of the Bass Holdings shares") had been "correctly recorded as preference shares in the end": see T238.31 - 34. Later at T242.49 - 50, she agreed that the Bass transaction was bogus. Carter had endeavoured to explain in her affidavit that she had followed up on the Bass transaction and that she had spoken to Lewis in late 2002 about the fact that no dividends had been received from the Bass shares. She said, however, that said she could not recall what explanation Lewis had given her and she said that she had later asked for the documentation relating to the transaction, but does not recall having been shown any: see T351 - T352, and could not recall what Lewis said to her when she asked him for more details about the shares: see T353. None of this was convincing as evidence in support of the proposition that she had in June/July 2002 had a belief that the Bass transaction was genuine, particularly since she had endeavoured to assert that she did not ever appreciate, prior to the commencement of these proceedings, that the funds for the repayment of Lewis' loan had come out of their joint account.
Taking into account all of these matters, including my assessment of Carter's credibility and my inability to accept her as a truthful witness, I conclude, on the balance of probabilities, but having regard to the seriousness of the finding, that Carter either had actual knowledge of the Bass transaction in June/July 2002 and its purpose, or deliberately refrained from obtaining details of the source of the funds which went into an account she owned jointly and which funds went back to LSL and were recorded as paying off Lewis' debt of $850,000 and to put $145,000 into Vimow's ledger.
I summarise my findings in relation to the Bass transaction proceedings as follows:
1. The Bass transaction was a dishonest and fraudulent transaction undertaken by Lewis to advance his own interests.
2. Lewis deliberately set out to fraudulently remove an asset from each of the books of LSL and Holdings, namely a loan owed by him to Holdings, and Holdings' to LSL.
3. The Bass letter was a fraudulent letter created by Miller or Lewis with the knowledge or acquiescence of the other. The fact that it is addressed to Holdings, rather than LSL, might be anomalous because Miller had prepared the information for ASIC on the basis that the shares were issued to LSL, although on a date well before any money had been moved out of LSL's account to Bass Holdings, but it is clear that the scheme emanated from Lewis it is not surprising that he would tell Miller how he wanted the letter framed. I think it more probable that it was created by Miller, because it had a Bass Holdings letterhead and Miller established the company under that name and knew Mr Bass' name, but that finding is not critical since the letter was not used to obtain the funds from LSL or Holdings, but rather was intended, I infer, to be shown to anyone who might later enquire as to why LSL was recorded as paying $1 million to Holdings, and Holdings paying $1 million to Bass Holdings: see Exhibit A1 p 482. Miller says his belief was that the Bass transaction was designed to remove a debt owed to LSL. The placement of the Bass Holdings shares as an asset on the balance sheet of Holdings, rather than LSL (whose accounts were audited) was very likely not accidental: see Exhibit A2 p 1636.
4. The Lewis letter was a deliberately dishonest letter designed to implement the fraudulent pretence that Lewis was repaying the $850,000 out of his own money.
5. Miller knowingly assisted Lewis in that transaction by:
1. Setting up two companies and having them recorded as companies with Mr Bass and Mr Byrne respectively as their directors, when he knew that they had not been appointed, and pretending that resolutions had been passed and recorded when they had not been;
2. Arranging for bank accounts to be set up to receive and pay out the $1 million in a round robin loop that would see $1 million removed from the LSL bank account for no legitimate purpose of LSL;
3. Assisting 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 to LSL or Holdings;
4. Falsely stating in documents provided to ASIC that preference shares had been created and issued to LSL; and
5. Either writing the Bass letter, or providing the names of and Mr Bass, and Bass Holdings, to Lewis so that he could write the Bass letter.
1. I find that Miller also arranged for the LSL cheque for $1 million to be deposited into the St George bank account that he, Miller, had established and for a cheque for $998,000 to be drawn on the Bass Holdings account payable to GB Investments, and for a cheque from GB Investments account payable to Lewis/Carter by Lewis. A copy of the GB Investments cheque itself is not in evidence and I accept that it is possible that the cheque was made out to LSL and endorsed over to Lewis/Carter by Lewis, but I think it is more likely that it was made out as Lewis wanted it made out, i.e. to the account into which it was paid. On Miller's evidence he left it to Lewis to organise so I do not think it assists Miller to say that he thought it would be paid to LSL direct, and he certainly made no enquiries to ascertain that what occurred was what he says he thought would occur. He also says that he thought that he was assisting Lewis to replace a Holdings debt to LSL, but that he did not know that Lewis owed money to Holdings. Since the 'replacement' was a parcel of bogus shares, which could never be genuinely issued, and its purpose was to wipe a debt owed to LSL, Miller's position is akin to a person who unlawfully unlocks the door of a stranger's house to permit a thief to break in and steal silverware, but contends that he had no knowledge that they intended to steal jewellery.
2. I find that Carter knew that $995,000 had been paid into the joint account and that it had been paid to LSL.
3. I find that Carter recorded (or was aware at around that time that Ms Humiston had recorded) the payment out from LSL's bank account of $1 million to Bass Holdings as a purchase by Lewis Holdings of preference shares in Bass Holdings, and recorded a repayment by Lewis of his debt to Holdings, and Holdings' debt to LSL, and made an entry to Lewis' favour of $145,000 to Vimow.
Mr Finnane, in his written submissions (Miller's closing submissions "MCS"), seemed to contend that, as the round robin, as effected, involved no profit to Lewis and no detriment or expense to Holdings, that meant that there was no breach of fiduciary duty, and no knowing assistance by Miller. I shall deal with the question of loss below. There was, however, a clear detriment to LSL having its funds used to pay off a debt by Lewis to Holdings, and Holdings to LSL, and Holdings' debt from Lewis replaced by an investment in non-existent preference shares.
Mr Finnane also seemed to contend that because, on the view he was propounding as to how the Court should deal with the transaction, almost all of the $1 million came back to LSL, the transaction was not one affecting Holdings' assets, and that there was no dishonest and fraudulent design by Miller. He speaks in MCS paragraph 108 of the "reclassification of a loan" owing to LSL, not to Holdings, and that the only change to the balance sheet would be in the change of the identity of the creditor, namely LSL to GB Investments. This view seems to embrace the evidence of Miller that there was a loan from GB Investments to Holdings, which, as I have pointed out, is not supported by any evidence other than Miller's assertion that this was the idea, and which is entirely inconsistent with the round robin and the pretence of preference shares. The purpose of the round robin could not have been to make GB Investments a creditor of Holdings, but rather, it was, as I have found, to create the impression that Holdings was a creditor of Bass Holdings through the holding of preference shares.
I note that Mr Finnane contended that the Court would need to be satisfied to the Briginshaw standard that:
1. Miller drew, or organised, for a cheque payable to Lewis/Carter;
2. Miller wrote the Bass letter;
3. Miller's understanding of the round robin was not as he asserts, and that reasonable satisfaction is not to be produced by "inexact proofs, indefinite testimony, or indirect inference" per Dixon J (as his Honour then was) in Briginshaw at 362.
I have earlier set out my conclusions in respect of [119(a)] and [119(b)]. I am satisfied, and comfortably so, whilst having regard to the serious nature of the allegation, that Miller assisted Lewis in Lewis' dishonest and fraudulent design. If Miller thought that it was LSL to whom the debt was owed, as he asserts, and that the debt was owed by Holdings, then the scheme in which he thought he was participating was one which replaced a debt by Holdings to LSL with a bogus investment. I do not think it assists Miller that the scheme in which Lewis had him participate was (if Miller's evidence were accepted) beneficial to Lewis personally, rather than to Lewis' company, Holdings. In either case what was being used to remove the debt was the money taken from the account of LSL, of which both Lewis and Miller were directors. The concept embraced by the words of Mellish CJ in Panama and South Pacific Telegraph Co. v India Rubber, Gutta Percha, and Telegraph Works Co (1875) 10 Ch App 515 at p 530, cited by Dixon J in Briginshaw at p 362 have some relevance here:
No doubt the court is bound to see that a case of fraud is clearly proved, but on the question at what time the persons who have been guilty of that fraud commenced it, the court is to draw reasonable inferences from their conduct.
and similarly, see Best J's remarks in R v Burdett (1820) 4 B & Ald 95 at p 123; 106 ER 873 at p 884, also cited by Dixon J.
It follows that, in my view, Miller has knowingly assisted Lewis in Lewis' fraudulent breach of the duty he owed to LSL and Holdings, and Miller has, himself, thereby breached a fiduciary duty owed to LSL. I also find that Carter assisted Lewis with knowledge, within the meaning of Barnes v Addy, because it was only the ledgers which recorded what was owing by Lewis to Holdings, and Vimow and Holdings, and Vimow to LSL. Carter may not have known of the details of the scheme, but I find that she knew that the Bass transaction had taken $1 million out of LSL's bank account and put $995,000 in the account of which she was a joint holder, and for which she had, on her evidence, been provided with no justification, and that she deliberately closed her eyes to the reality of the situation and 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.
Sham/No Loss:
Given my conclusion that the Bass transaction was a complete fiction with only the pretence that preference shares would be issued and a profit made, the next question is what was the effect of what occurred? The $1 million certainly left LSL's account and made its way to Bass Holdings' account, then to GB Investment's account, then to the Lewis/Carter account, and back to LSL's account (less $5,000 which may have been some sort of fee, or may have been a reduction to reduce the dividends of the connection between the payment out and the payment in, but that was not explored and none of the parties asserted that the $5,000 discrepancy was of significance.)
Mr Bell contended that the Court should:
1. Treat the Bass transaction as a sham;
2. Treat the Lewis loan as not repaid by the payment from the Lewis/Carter account;
3. Treat Lewis as doing what he ought to have done, namely repaying to LSL the money which he wrongly extracted from the LSL account; and
4. That for the Court to do otherwise would be to give its imprimatur to Lewis's wrongful and dishonest conduct.
Mr Finnane submits that the plaintiffs are propounding a case based on a fiction. The true round robin as transacted, he says, put the money back into the LSL bank account with the consequence, he submits, that there is not really a question of sham at all, but if the ledgers and journals should be treated as having some force in themselves, he submits they should be found to be a sham.
Mr Finnane also submitted that, in accordance with the equitable principle, I should treat Lewis as having repaid the money that had wrongfully been taken: see Re Hallett's Estate [1879] 13 Ch D 696 at 727, because equity assumes that people act honestly. This 'rule' in Re Hallett is wherever an act "can be done rightfully, [the fiduciary] is not allowed to say, against the person entitled to the property or the right, that he has done it wrongfully": see Maguire v Makaronis (1997) 188 CLR 449 at 469.
Mr Stoljar contended that the Court should not treat the transactions as a sham, because the transactions, however dishonest, were intended to have the effect recorded in the ledgers.
The principles relating to shams were reiterated in Lewis v Condon [2013] NSWCA 204 per Leeming JA (McColl JA and Sackville JA agreeing) at [58]-[63]:
[58] The essence of a sham for present purposes is as stated by the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55 ; (2004) 218 CLR 471 at [46]:
[Sham] refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.
[59] That is to say, it is essential that there be an intention that the true transaction is different from that which would ordinarily be attributed to the transaction on the face of the documents. As Lord Wilberforce put it, "to say that a document or transaction is a "sham" means that while professing to be one thing, it is in fact something different": WT Ramsay v Inland Revenue Commissioners [1982] AC 300 at 323.
[60] Basic to the legal notion of sham is that it is a confined and exceptional aspect of the process of giving legal meaning to a document, as Professor Conaglen has pointed out ("Sham Trusts" (2008) 67 CLJ 176 at 206):
The relevance of the sham doctrine, and the difference between it and normal processes of construction, lies in the fact that it justifies the court in ignoring (as opposed to construing) the usual primary material regarding that transaction, and focusing its attention instead on all other material factors which indicate the arrangement that the parties in fact intended.
[61] That echoes the words of Windeyer J in Scott v Cmr of Taxation (Cth) (No 2) (1966) 40 ALJR 265 at 279:
The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front … concealing their real transaction.
[62] The sham doctrine is thus one of those relatively rare doctrines in the law where legal meaning is given to a document by reference to a subjective intention. Other examples are a plea of non est factum at law and a claim for rectification in equity. All these doctrines "must necessarily be kept within narrow limits", for all subtract from the objective theory of contractual obligation, and if unchecked would cause "serious mischief": see Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 ; (2004) 219 CLR 165 at [46]-[47]. This has long been the law: see for example Jordan CJ's reasons in Perpetual Trustee Co (Ltd) v Bligh (1940) 38 SR NSW 33 at 39-40. In all these areas, strong evidence is required in order to displace the orthodox approach to construction. Hence the "heavy onus" that must be discharged by the plaintiff in a non est factum case (Petelin v Cullen (1975) 132 CLR 355 at 360) and the need for "clear and convincing proof" in a rectification suit (Franklins Pty Ltd v Metcash Pty Ltd [2009] NSWCA 407 ; (2009) 76 NSWLR 603 at [451]-[460]).
[63] Because a finding of sham requires a finding of an intent to deceive, considerations associated with Briginshaw v Briginshaw (1938) 60 CLR 336 require a cautious approach: Raftland Pty Ltd v Commission of Taxation at [36]. Thus there is a "strong and natural presumption against holding a provision or a document a sham": National Westminster Bank plc v Jones [2001] 1 BCLC 98 at [59] (Neuberger J). "A court will only look behind a transaction's ostensible validity if there is a good reason to do so, and 'good reason' is a high threshold, since a premium is placed on commercial certainty": Official Assignee v Wilson [2007] NZCA 122 ; [2008] 3 NZLR 45 at [52] (Robertson and O'Regan JJ). Lockhart J referred to "a strong finding, and one which cannot be made if another inference is at least equally open" in Sharrment Pty Ltd v Official Trustee in Bankruptcy at 461.
It can be seen that there is, in this case, a close interconnection between the issue of sham and loss. The defendants, focusing on the fact that the $1 million found its way back into LSL's bank account, assert that neither LSL nor Holdings has lost anything by what occurred. Mr Stoljar contends that what LSL/Holdings lost was a chose in action i.e. Lewis' debt to LSL/Holdings because his debt was expunged by the entry of credit of $850,000. Neither Carter nor Miller contended at the hearing, or sought to establish, that the loan to Lewis was not worth $850,000.
Given that the whole purpose of the round robin was, on my findings, dishonest, I do not think there is any scope for an assumption that Lewis was acting honestly, but it is possible to describe the Bass letter, and any reference to redeemable preference shares in the ledgers and accounts of LSL/Holdings, as a "sham", since there was no intention to create any such shares, or for there to be any genuine investment by LSL or Holdings in Bass Holdings (or by Bass Holdings in GB Investments), but the Lewis letter was intended to have effect and the entry in the LSL and Holdings ledgers showing Lewis as having repaid $850,000 (and having put $145,000 into Vimow) was also intended to have effect as well, albeit one based on a fraudulent scheme.
The real question, I think, is whether the crediting of Lewis' account with $850,000 on the basis of the monies paid to LSL out of the Lewis/Carter account, with money that formed part of the $1 million removed from LSL, should be treated as having any force or not. In my view it should not because it was a completely fraudulent transaction - if Lewis was sued by the plaintiffs he could not deny that he owed one or other of Holdings or LSL the $850,000. He could not legitimately assert that he had in fact paid the loan monies back given that he had used LSL's own funds to put $1 million into, and then pay $1 million out of his account. The use of LSL funds in this way would be no different to Lewis having taken $1 million from the LSL safe, given it to an employee and said "here is my repayment of my loan. Please credit my loan account." The change made to the ledger, by which the loan was purportedly repaid, was part of, indeed, the central purpose of the fraud. I conclude that the fraudulent transaction perpetrated by Lewis cannot be treated as having any substantive effect, with the consequence that Lewis remains indebted to either LSL or Holdings for the $850,000 loan that he received in 2000 (and that Vimow remained indebted to LSL for $145,000). I recognise of course that that is of no comfort to the plaintiffs because Lewis was declared bankrupt in 2009 (and Vimow is in liquidation). It follows that the plaintiffs have not lost the chose in action by reason of what Lewis did, and it follows that neither Miller nor Carter are liable for the $850,000 for which they have been sued in the Bass proceedings.
The Informed Consent Point:
Another argument relating to both the Property proceedings and the Bass transaction is what is described as the informed consent point. The defendants contend that, even if Lewis would otherwise have been in breach of his duties, any breach can be rectified by the retrospective ratification of his actions (and Miller's actions). I do not think this can be maintained because ratification with fully informed consent can only be achieved by shareholders when the company is solvent: see Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 and Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 444 ; 122 ALR 531 at 550 ; 13 ACSR 766 at 785 approved in Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302 at [78] per Neave JA and [253] - [260] per Garde AJA. It is a requirement of effective ratification that it must occur within a reasonable time of the unauthorised act (see Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653 at 665) and there was, in any event, no evidence of ratification, or even that the third director of LSL had been informed of the Bass transaction and the use of LSL funds to wipe Lewis' debt to Holdings and Holdings' debt to LSL. Nor is ratification available where it would constitute a misappropriation of company resources: see Miller v Miller (1995) 16 ACSR 73 at p 89 per Santow J (as his Honour then was), approved in Forge v ASIC [2004] NSWCA 448 at [372].
Non-Receipt:
In relation to the Bass transaction, Mr Bell contended that Carter did not 'receive' the $995,000 because she was the joint holder of that account. He relied on National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251. and SCEGS Redlands Ltd v Alison Barbour & Anor [2008] NSWSC 928 for the proposition that a person who is a joint account holder is not to be taken to receive money merely because the account is used to receive money and then paid out to third parties with no benefit to one of the joint account holders. The question of whether, on the facts of this case, Carter received the funds because they went into the account is linked to the issue of whether she assisted Lewis by making the entries she did make. If she had no knowledge of the Bass transaction I think there would be strong grounds to conclude that the passage of the money through the joint account would not amount to receipt, but this case is very different to Batty or SCEGS Redlands. The problem for the plaintiffs, however, once again, is that the $995,000, which went into the Lewis/Carter account, was paid out and back into LSL's account within a few days, which, subject to the other issues with which I have already dealt, provided her with a defence.
Limitation Defences:
Whilst strictly unnecessary given my conclusion on liability, I shall consider both the limitations defences in relation to both sets of proceedings. Carter and Miller both assert that the plaintiffs' cases are the subject of a time bar. They accept that neither the Limitation Act 1969 (NSW) nor s 1317K of the Corporations Act specifically deals with equitable claims based on Barnes v Addy against third parties, but they contend that equity does apply time bars by analogy with statute law. Reference was made to s 23 of the Limitation Act and I will set out s 14 and 23 of that Act and ss 179 - 183 and s 1317K of the Corporations Act as well:
Limitation Act 1969 (NSW)
14 General
(1) An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims:
(a) a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed,
(b) a cause of action founded on tort, including a cause of action for damages for breach of statutory duty,
(c) a cause of action to enforce a recognizance,
(d) a cause of action to recover money recoverable by virtue of an enactment, other than a penalty or forfeiture or sum by way of penalty or forfeiture.
(2) This section does not apply to:
(a) a cause of action to which section 19 applies, or
(b) a cause of action for contribution to which section 26 applies.
(3) For the purposes of paragraph (d) of subsection (1), enactment includes not only an enactment of New South Wales but also an enactment of the Imperial Parliament, an enactment of another State of the Commonwealth, an enactment of the Commonwealth, an enactment of a Territory of the Commonwealth and an enactment of any other country.
23 Equitable relief
Sections 14, 16, 17, 18, 20 and 21 do not apply, except so far as they may be applied by analogy, to a cause of action for specific performance of a contract or for an injunction or for other equitable relief.
Corporations Act 2001 (Cth)
179 Background to duties of directors, other officers and employees
(1) This Part sets out some of the most significant duties of directors, secretaries, other officers and employees of corporations. Other duties are imposed by other provisions of this Act and other laws (including the general law).
(2) Section 9 defines both director and officer. Officer includes, as well as directors and secretaries, some other people who manage the corporation or its property (such as receivers and liquidators).
180 Care and diligence - civil obligation only
(1) Care and diligence - directors and other officers A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see section 1317E).
(2) Business judgment rule A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
Note: This subsection only operates in relation to duties under this section and their equivalent duties at common law or in equity (including the duty of care that arises under the common law principles governing liability for negligence) - it does not operate in relation to duties under any other provision of this Act or under any other laws.
(3) In this section:
business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
181 Good faith - civil obligations
(1) Good faith - directors and other officers A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
Note 1: This subsection is a civil penalty provision (see section 1317E).
Note 2: Section 187 deals with the situation of directors of wholly-owned subsidiaries.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved.
Note 2: This subsection is a civil penalty provision (see section 1317E).
182 Use of position - civil obligations
(1) Use of position - directors, other officers and employees A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note: This subsection is a civil penalty provision (see section 1317E).
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved.
Note 2: This subsection is a civil penalty provision (see section 1317E).
183 Use of information - civil obligations
(1) Use of information - directors, other officers and employees A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
Note 1: This duty continues after the person stops being an officer or employee of the corporation.
Note 2: This subsection is a civil penalty provision (see section 1317E).
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Note 1: Section 79 defines involved.
Note 2: This subsection is a civil penalty provision (see section 1317E).
1317K Time limit for application for a declaration or order
Proceedings for a declaration of contravention, a pecuniary penalty order, or a compensation order, may be started no later than 6 years after the contravention.
The question of the application of limitations by analogy is not without its difficulties, but as Justice Leeming in his article "How Long is Too Long for an Equitable Claim?" (2014) 88 ALJ 621 at 622 notes, much of the confusion in this area of law was resolved by the judgment of Meagher JA in Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181, with whom Beazley P and Emmett JA concurred.
Gerace, like the present case, was concerned with an exclusively equitable claim. Three directors and members of Auzhair Supplies were found to have breached their fiduciary duty to Auzhair Supplies, by establishing another company and transferring all of Auzhair Supplies' assets to a new company for little or no consideration. The directors contended that, as the claim was brought more than six years after the acts in question, it was statute barred by analogy with s 1317K of the Corporations Act. Brereton J held that the equitable claim for breach of statutory duties was an analogy "as close as one can conceive" to the compensation available for contraventions by the directors of their statutory duties found in ss 180-183. His Honour declined, however, to treat the claim as statute barred because he held it would be inequitable to apply the limitation bar because the directors had voluntarily deregistered the company and it had remained deregistered until a little more than a year before the six year period expired, and proceedings were not brought within time. "The company did not by its board of directors (either formally or formally) consider the circumstances of the breaches and whether it should take proceedings in respect of them" (at [4] of Gerace).
Meagher JA considered the many authorities in the area and concluded at [70] - [72]:
[70] The authorities referred to above, and in particular R v McNeil, show that in purely equitable proceedings, where there is a corresponding remedy at law in respect of the same matter and that remedy is the subject of a statutory bar, equity will apply the bar by analogy unless there exists a ground which justifies its not doing so because reliance by the defendant on the statute would in the circumstances be unconscionable. They do not support the proposition that equity retains any broader discretion whether to apply the bar. The description of such a ground, or the conduct giving rise to or constituting it, as unconscionable or unconscientious leaves to be identified the principles according to which equity justifies that conclusion: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63 ; 208 CLR 199 at [45] (Gleeson CJ) and Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18 ; 214 CLR 51 at [41]-[42] (Gummow and Hayne JJ).
[71] In applying the statute by analogy, equity gives effect to the maxim that it follows the law and acts on the basis that "laches is presumable in cases where it is positively declared at law": Story's Commentaries on Equity Jurisprudence, First English Edition (1884) at [64a]. In doing so, it must be taken also to be giving effect to the legislature's judgment in fixing the relevant limitation period and in allowing for any exceptions to its application. The considerations likely to inform that judgment are referred to by McHugh J in Brisbane South Regional Health Authority v Taylor [1996] HCA 25 ; 186 CLR 541 at 552-554.
[72] The distinction, referred to by Isaacs J in R v McNeil, between equity applying its own doctrine of laches and adopting, in analogous cases, the measure of time fixed by statute unless there is a "greater equity", is one of substance. The circumstances in which such an equity arises include where fraudulent conduct of the defendant has denied the plaintiff the opportunity to sue within the statutory period. That equity is satisfied by preventing the defendant from taking advantage of the plaintiff's omission to do so.
In Gerace it was noted that the Court may decline to permit a defendant to rely upon a statutory bar by analogy at [75]:
…where there has been fraudulent concealment, which requires either fraudulent conduct as an element of the right of action or conduct consisting of active concealment of a right of action that does not include fraud as an element: Meagher Gummow & Lehane's Equity Doctrines and Remedies at [34-085]…
The equitable doctrine is not confined to common law fraud or deceit and requires a consciousness on the part of the defendant that what is being done is wrong or that to take advantage of a particular situation involves wrongdoing: see Beaman v ARTS Ltd [1949] 1 KB 550 at 559-560 (per Lord Greene MR); Kitchen v Royal Air Force Assn [1958] 1 WLR 563 at 572-573 (per Lord Evershed MR); Applegate v Moss [1971] 1 QB 406 at 413 (per Lord Denning MR); King v Victor Parsons & Co [1973] 1 WLR 29 at 33-34 (per Lord Denning MR).
In Port Ballidu Pty Ltd v Frews Lawyers & Ors [2017] QSC 19, Applegarth J considered Gerace and applied its reasoning to a case where third parties were alleged to have been knowingly concerned in the misconduct of a director of the plaintiff company, which director had used an old power of attorney to borrow money on the security of the mortgage for his own benefit. The company argued that there was a residual discretion not to apply the limitation provision if otherwise engaged. His Honour decided that he should follow Gerace, and see at [34] - [40]:
[34] In my view, the facts underlying the claim for breach of fiduciary duty by O'Rourke and the first and second defendants' knowing involvement in it closely resemble the time-barred statutory cause of action for compensation in respect of the breach of director's duty by O'Rourke, and the first and second defendants being "knowingly concerned" in it. The content of O'Rourke's fiduciary duty as a company director and his statutory duty as a company director are pleaded by the plaintiff to be the same. If the plaintiff had pursued relief under the Corporations Act for a breach of O'Rourke's duties as a director and for the first and second defendants being knowingly concerned in those breaches of duty, then the same conduct relied upon by the plaintiff as constituting a breach of his fiduciary duty would have been conduct which breached his statutory duties as a director. O'Rourke would have been liable under the provisions of the Corporations Act for breaches of duty imposed by s 181 and s 182. The same conduct of the first and second defendants which is alleged to have amounted to being knowingly involved in O'Rourke's breach of fiduciary duty would have amounted to their being knowingly concerned in his contravention of the Corporations Act. The conduct would have caused the same loss for which compensation is available under statute as the loss for which equitable compensation is sought.
[35] A cause of action under the Corporations Act would have been met by a limitation defence. Civil claims for compensation in respect of a contravention, and being knowingly involved in such a contravention, are subject to the statutory limitation period of six years contained in s 1317K of the Corporations Act. That six year statutory limitation period would run from the date of the contravention. That six year time-bar should be applied by analogy unless there exists a ground which makes it unconscionable to permit the first and second defendants to rely on the time limitation.
[36] There is a similar, close correspondence between the equitable claim for compensation against the first and second defendants and the pleaded claim for compensation for their being knowingly concerned in O'Rourke's contravention of the TPA. The same conduct is pleaded and the same compensation is sought.
[37] The plaintiff points to an authority to the effect that different approaches to causation may apply in the case of equitable claims against fiduciaries and claims for compensation based upon contravention of statute, such as a breach of a director's statutory duties or conduct in contravention of a statute such as the TPA.27 However, the plaintiff does not explain in its submissions why this might make any difference in this case, being a case in which the causal nexus between O'Rourke's conduct, the conduct of the first and second defendants, and the loss which the plaintiff suffered appear to be the same, based on the same facts.
[38] More generally, the fact that a claim for equitable compensation for breach of fiduciary duty and a corresponding claim for compensation under statute have different elements in law does not lead to the conclusion that the claims do not closely resemble each other. Were it otherwise, it would never be possible to establish that a claim for compensation pursuant to statute closely resembles a claim for equitable compensation.
[39] In summary, I conclude that it is clear that the plaintiff's claim for equitable compensation against the first and second defendants is closely analogous to both a cause of action arising from breach of O'Rourke's statutory duties as a director (which has not been pleaded) and the cause of action for compensation based on the first and second defendants being knowingly concerned in O'Rourke's misleading conduct.
[40] Subject to the issue of whether it would be unconscionable or unconscientious for the defendants to rely upon such a limitation period in respect of the claim for equitable compensation, I consider that the statutory six year period should be applied by analogy.
Faced with these two decisions unhelpful to his position, Mr Stoljar asserted that Gerace was not dealing with a claim against a third party. Port Ballidu he accepted was such a case but it was a first instance decision. Mr Stoljar submitted that this Court ought to follow the Full Court of the Federal Court, which in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1 had approved the decision of Owen J in The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1 on the question of limitations in respect of equitable claims against third parties, rather than Port Ballidu. Bell is, Mr Stoljar points out, a decision of an intermediate Court of Appeal, and he submitted that I ought to follow it.
The problem with Mr Stoljar's argument, it seems to me, is twofold. The first, and the more important, is that the Bell decision is based on a line of cases which Gerace considered and did not follow. The most obvious of these was KM v HM (1993) 96 DLR (4th) 289 (and which was approved by Kirby P in Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497, at [510] and which the Court in Gerace declined to follow. The second problem is that Bell was not considering whether a Barnes v Addy claim is analogous to claims in respect of s 179 - s 183 of the Corporations Act but rather whether it was analogous to a claim in tort.
I find Applegarth J's reasoning set out above persuasive and it seems to me that a Barnes v Addy claim against a third party is very similar to a claim based against a person alleging knowing involvement in the breaches of duty of a director.
It seemed to be contended by Mr Stoljar that a claim of knowing involvement of a third party is different to a claim against a director. Whilst that is true, if Gerace is correctly decided, as I am bound to accept, I am not persuaded that there is any reason in logic why a claim against a director should be statute barred, but a claim against the third party with knowing receipt or knowing assistance should not be statute barred as well. The third party is not more culpable than the director.
As Gerace makes clear, there does remain the question of whether there has been fraudulent concealment.
I think that the consequence of Gerace and Port Ballidu is that a claim for breach of fiduciary duty (and consequential accessorial liability) that is not found to be a fraudulent and dishonest breach will be barred by analogy with statute, (viz s 1317K of the Corporations Act) but a claim based on a fraudulent breach (or actual concealment of a right of action) will not be barred.
I should also note that, as Meagher J pointed out in Gerace, the directors' minds are not always to be attributed to a company: see [78] and the discussion in Grimaldi v Chameleon Mining NL (No 2) at [282]-[284].
Mr Bell made reference to s 47(1) of the Limitation Act as perhaps being applicable given the definition of 'trust' in s 11(1) of the Act. Given that Carter's defence did not raise s 47(1) as a ground of limitation and the plaintiffs did not put their claim as a claim based on a breach of trust, I do not need to consider this point further.
Laches:
To the extent that s 1317K applies by analogy, it is not necessary to consider the question of laches. In relation to the exceptions identified in Gerace it would be necessary to have regard to "all the circumstances of the case": see Bell pp 9306 - 9308 and I can see no utility in my expressing any view on that given my conclusions on liability.
The Certificate under s 128 of the Evidence Act:
During the cross-examination of Miller, Mr Stoljar raised the question of whether Miller should be given a warning as to the potential effect of his evidence: see T.265.11 Mr Finnane then sought an opportunity to confer with his client (which I granted), following which Mr Finnane asked that a certificate be issued under s 128(c) of the Evidence Act so that Miller could answer questions without risk that his answers could be used against him in criminal proceedings or proceedings for a civil penalty: see T267.6. The transcript records the point at which the certificate was said to be granted. I directed Mr Finnane to prepare the appendix for the certificate once he had the transcript. There were questions on the following day which were similarly to be the subject of a certificate.
Mr Finnane subsequently provided me with the two sets of transcript. In relation to the first set of transcript, he seeks to have included in the certificate the portion of the transcript before the application for a certificate was made commencing at T258.5. The second set commences at T267.6. Mr Finnane has drawn my attention to the case of LGM v CAM [2011] FAMCAFC 195 (and Schwaller-Schroeder v Schwaller-Schroeder [2012] FAMCA 1121, which applied LGM), in which the Full Court of the Family Court took the view that s 128 was protective in its operation and that it was open to the trial judge to extend the operation of the certificate retrospectively. Mr Stoljar pointed out that LGM was concerned with a situation where an objection had been taken but overruled and later the Court found there were reasonable grounds for the objection and he also expressed doubts as to the reasoning of the Full Court as regards s 128(6), although he did point out, fairly, that LGM is an authority of an intermediate appellate Court.
I have decided to issue the certificate to include the questions and answer commencing at T258.5, and not simply from T265, for these reasons:
1. The questions, the answers for which, protection is sought are questions that relate to the same subject matter as those for which the certificate was initially sought and are very close temporally.
2. Some of those questions (at T264.35 - 49) were questions which were asked by me and arguably, having regard to s 132 of the Evidence Act, should have been the subject of a warning at that stage.
3. Whilst I share Mr Stoljar's concerns, having regard to the view of the Full Family Court, that s 128 is protective in its operation, and can be given a retrospective operation.
Referral:
Miller is a chartered accountant. I regard his involvement in the Bass transaction as conduct of a seriously inappropriate kind. I intend to refer this judgment to CPA Australia and to ASIC for further consideration by them of his conduct. I was informed that the liquidator has already provided a report to ASIC in connection with Lewis and it may be that Lewis' role as director of LSL and Holdings, and Carter's role as secretary of both companies and corporate accountant, warrants further consideration at the same time.
Conclusion:
It follows that the plaintiffs have failed in their case against Carter in both proceedings, and against Miller in the Bass proceedings, and that there should be judgment in favour of the defendants. I will hear the parties on the issue of the costs orders that should be made.