Lewis v Nortex Pty Ltd

Supreme Court of NSW|2003-04-24|Before: Hamilton J, Kation P, Lamru P, Nortex P

CITATION : Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2003] NSWSC 354 revised - 25/06/2003 HEARING DATE(S) : 22 - 24 April 2003 JUDGMENT DATE : 29 April 2003 JURISDICTION: Equity JUDGMENT OF : Hamilton J DECISION : Some amendments of defence allowed and others refused.

CATCHWORDS : EQUITY [1] - General principles - Rules and maxims of equity - "Clean hands" - Misconduct disentitling party to relief - Must have immediate and necessary relation to equity sued for - "He who seeks equity must do equity" - Rights not related to obligations between parties to action. LEGISLATION CITED : Evidence Act 1995 s 128 Limitation Act 1963 s 63 Abdurahman v Field (1987) 8 NSWLR 158 Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060 Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184 Gascoigne v Gascoigne [1918] 1 KB 223 George v Greater Adelaide Development Land Co Ltd (1929) 43 CLR 91 CASES CITED : Griffiths v Griffiths [1973] 1 WLR 1454 Nelson v Nelson (1995) 184 CLR 538 Weston v Beaufils [No 2] (1994) 50 FCR 476 Ashburner's Principles of Equity (2nd ed, 1933) at 463 Meagher, Gummow and Lehane, Equity Doctrines and Remedies (4th ed, 2002) at [3-055] Spry, Principles of Equitable Remedies (6th ed, 2001) 246 3081/97 Peter Lawrence Lewis (P) Lamru Pty Ltd (Applicant) Kation Pty Ltd (Respondent) Brian Raymond Silvia (Liquidator) PARTIES : 1750/02 Lamru Pty Limited (P) Kation Pty Limited (D1) Peter Lawrence Lewis (D2) Mark Lewis (D3) Nortex Pty Ltd (In Liq) (D4) FILE NUMBER(S) : SC 3081/97; 1750/02 N A Cotman SC & J T Johnson (P L Lewis & Kation P/L) COUNSEL : S J Motbey (Lamru P/L) V R Gray (Liquidator & Nortex P/L) No appearance (M Lewis) Kemp Strang (P L Lewis & Kation P/L) SOLICITORS : Lyons & Lyons (Lamru P/L) Abbott Tout (Liquidator & Nortex P/L) Corrs Chambers Westgarth (M Lewis)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3081/97 PETER LAWRENCE LEWIS v NORTEX PTY LTD (In Liq) 1750/02 LAMRU PTY LIMITED v KATION PTY LIMITED & ORS JUDGMENT 1 HIS HONOUR: This judgment relates to an application by the Lewis interests further to amend their points of defence in these two sets of proceedings, which are being heard together. In these proceedings Lamru Pty Limited ("Lamru") is seeking against what I have collectively called "the Lewis interests" relief arising out of their mutual association in a company now in liquidation ("Nortex"). Mr Lamb was and is the controller of Lamru. The amendments propounded are set out in Ex A36 tendered on the application. That exhibit contains pars 37D to 37N proposed to be inserted in the points of defence as they stand. These amendments are propounded late in the proceedings, as there have already been more than 30 days of trial before me. However, at least as regards the unclean hands defences contained in Ex A36, there is a reason for the lateness. The reason is that those defences flow from the giving of certain evidence by Mr Lamb in the proceedings on behalf of Lamru under cover of a certificate under s 128 of the Evidence Act 1995 ("the EA") ("the certificate evidence"). It was quite reasonably soon after the certificate evidence was given that this amendment was sought. 2 The pattern of the proposed amendments is as follows. The defences are pleaded in answer to Lamru's claims made in pars 42 - 44 and 56 - 59 of its amended consolidated points of claim. Those claims in essence arise from the alleged abstraction from Nortex by Mr Lewis during the financial year ended 30 June 1997 of certain of its stock, its sale by him and his failure to account to Nortex for the proceeds of stock so taken and sold. The way in general in which this claim has been sought to be established is by comparison of a stock list of Nortex as at 28 June 1996, which Mr Lamb took when he left Nortex, with its stock figures as returned at the end of the 1997 financial year, in conjunction with an analysis of the goods bought and sold by Nortex during that year. The inference is invited that stock was missing and that Mr Lewis, who remained in sole control of Nortex, must have taken and sold it as alleged. 3 The difference that was made by the giving of the certificate evidence was this. That evidence, which had not previously been brought forward in the long preparatory stages of this case, was to the effect that in years previous to the 1997 year, that is, up to the time that Mr Lamb left the company at the end of the 1996 year, Mr Lewis and Mr Lamb, by agreement between themselves and with the assent of the relevant corporate entities, took certain of the stock of Nortex, sold it and did not account for the proceeds to Nortex, but instead divided the proceeds between themselves in the proportion to which they were ultimately entitled to the profits of Nortex, namely, 60:40. The way in which Lamru seeks to rely on this evidence is to suggest that, if it is accepted, it will render more likely the drawing of the inference that Mr Lewis took the stock in the 1997 year, that is, that he continued by himself the practice in which he and Mr Lamb had participated together before that time. 4 Turning to the new paragraphs propounded in Ex A36, the various heads of defence that emerge from those paragraphs are as follows. In pars 37D to 37G the Lewis interests say that they are entitled to an unclean hands defence because Lamru comes to court with unclean hands in that "by the certificate evidence given in support of and proof of its case against the Defendants" it "relies on evidence on [sic] participation by Lamb and Lamru in an unlawful scheme to defraud the Commissioner of Taxation". 5 In pars 37H and 37I the Lewis interests plead an unclean hands defence to the effect that Lamru has propounded "false or misleading affidavits and particulars and schedules in support of [its] case", and has thereby abused the process of the Court. The alleged false or misleading material is material which suggests that the financial records of years earlier than the 1997 year were correct, although it is now suggested that they were not correct, to the extent of the practice of which Mr Lamb has now given evidence. 6 In pars 37J and 37K the Lewis interests make prefatory averments in which they allege that Lamb had made admissions of personal indebtedness to Lewis in the sum of either $126,000 odd or $121,000 odd as at the end of the 1996 year, such indebtedness being alleged to include indebtedness from Lamb to Lewis arising from their dishonest dealings with the stock of Nortex while Lamb was still with the company. 7 Paragraph 37L proceeds to an additional unclean hands defence said to arise because the propounding of the claim in respect of the 1997 abstraction of goods, in circumstances where Lamb's alleged indebtedness of $126,000 or $121,000 is not brought into account, is an abuse of process which amounts to coming to court with unclean hands. 8 By par 37M it is alleged that by making that claim in those circumstances Lamru is seeking to have equity without doing equity and ought be compelled to do equity by bringing into account the alleged indebtedness of Lamb which I have mentioned. 9 Paragraph 37N alleges that the foregoing matters lead to an estoppel against Lamru's claim "because it is unconscionable in equity for Lamb and/or Lamru to claim amounts arising from dealings with stock in the 1997 year without bringing the indebtedness into account". 10 Various objections to the amendments are taken on behalf of Lamru. The principal objection taken, particularly in relation to the unclean hands defences, is that the defences are defective and must fail, so that to permit them to be brought into play would be futile. There is no real argument that a proposed amendment should be rejected if it would be futile and I propose to proceed on that basis. 11 So far as the unclean hands defences are concerned, there has recently been a useful compendious consideration of the law in this field by Campbell J in Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060. Among the matters relating to the unclean hands defence that his Honour there points out is that one of the considerations central to the maintenance of a successful unclean hands defence is the question of whether the conduct relied on as constituting unclean hands has "an immediate and necessary relation to the equity sued for". Those words are the words of Lord Chief Baron Eyre in Dering v Earl of Winchelsea (1787) 1 Cox 318; 29 ER 1184. Campbell J then traces the exegesis of that formula through subsequent authority, both English and Australian. It is unnecessary for me to go into this in detail and, indeed, undesirable that I do so in view of the conclusion that I have come to with respect to this aspect of the case. Suffice it to say that Mr Motbey, of counsel for Lamru, has emphasised the cases where unclean hands defences have failed because of lack of sufficient connection between the matter of defence relied on and the equity the subject of the proceedings or the equitable relief sought. Mr Cotman, of Senior Counsel for the Lewis interests, has on the other hand pointed to the contrast drawn by Campbell J between the decisions in Gascoigne v Gascoigne [1918] 1 KB 223 and Griffiths v Griffiths [1973] 1 WLR 1454. Campbell J's conclusion at [179] from the decision in Gascoigne was that, if: "… a plaintiff needs to prove his own bad conduct to be able to prove the circumstances which he says entitle him to an equitable remedy, that bad conduct has an immediate and necessary relation to the equity sued for".

In that case the plaintiff husband had proved his own bad conduct of seeking to defeat and delay creditors as part of the evidence central to rebutting a resulting trust said to arise in his wife's favour on a transfer of property. In Griffiths the bad conduct, that of misrepresenting ownership of a property to the Law Society for the purpose of obtaining a legal aid certificate and to a bailiff for the purpose of avoiding distraint, did not need to be and was not brought forward by the plaintiff husband, but only by the defendant wife in support of the unclean hands defence. It seems to me that one possible view of this case is that it falls somewhere between these two cases. In a sense Lamru was not forced to bring forward the certificate evidence as a necessary part of proving its claim, but it has chosen to do so for the purpose of making its claim more cogent. In other words, it is the claimant who has brought forward the evidence of discreditable conduct for the purpose of furthering its case. I need not go into the matter in further detail. My conclusion is that I cannot on a summary basis come firmly to the conclusion that there is no sufficient connexion between the subject matter of the claim and the misconduct relied on to support the averment of unclean hands. 12 Mr Motbey did put an additional argument that the relevant claim made by Lamru is in essence a claim for debt. As he put it, "The core of the suit is a claim in debt". In other words, this is a purely legal claim, to which there is no defence of unclean hands. That, however, is not in my view correct. This is not an action for debt. The plaintiff is Lamru. If there is a claim for debt, the necessary plaintiff would be Nortex. This is in reality a claim for a form of equitable accounting and/or a claim arising in equity's jurisdiction over fraud or in respect of breach of fiduciary duty, since Mr Lewis stood in the fiduciary position of director towards Nortex at the time the goods were abstracted. It is not a purely legal claim so as to exempt it from the ambit of the unclean hands defence. 13 Mr Motbey also put to me that, by reason of the fact that the claim was in effect a claim in fraud or for breach of a fiduciary duty, it was taken out of the ambit of the unclean hands defence. In making this submission he relied upon the statement of principle by Deane and Gummow JJ in Nelson v Nelson (1995) 184 CLR 538 at 562, where their Honours said that one exception from the defence of illegality: "...concerns recovery of money or other property which, whilst tainted by illegality, was induced by fraud of one of the parties or was the product of a breach of fiduciary duty owed by one party to the other."

The majority in Nelson appear to treat the defence in that case under the rubric of illegality rather than under the rubric of unclean hands. Mr Cotman specifically eschews a defence formulated in terms of illegality. However, Mr Motbey contends that the principle stated above applies equally to a defence of unclean hands. If the principle does exist as stated and does apply to unclean hands defences, the defence may not be available in this case. There may even be some doubt on the basis of the discussions in Nelson and the recent English authorities there considered whether illegality and clean hands are part of the same defence in equity, or should be regarded as representing two separate sets of principles (see per McHugh J in Nelson supra at 608 - 609). 14 The above seems to me to show the law in this area as in a state of flux. I do not regard the proposition quoted from Deane and Gummow JJ as absolutely certainly reflecting the law. Despite the eminence of those Judges, that dictum was obiter in the context of Nelson. Furthermore, the three cases cited by their Honours in support of the proposition, namely, George v Greater Adelaide Development Land Co Ltd (1929) 43 CLR 91 at 99 - 100; Abdurahman v Field (1987) 8 NSWLR 158 at 162 - 163; and Weston v Beaufils [No 2] (1994) 50 FCR 476 at 499 - 500, are also somewhat uncertain and equivocal as to the existence and extent of the principles. In those circumstances I do not regard it as absolutely unarguable that the principle does not apply in the present case. 15 The result of my conclusions in [11] and [14] is that that defence ought be allowed in, so that the matter may be debated and decided on all the evidence at the conclusion of the proceedings, rather than summarily excluded at this stage. 16 The second defence of unclean hands is that propounded in pars 37H and 37I based upon an abuse of process through reliance on false or misleading material amounting to an abuse of process. Spry, in his Principles of Equitable Remedies (6th ed, 2001) 246, accepts that abuse of process may provide a basis for a clean hands defence. The learned author says: "In the first category specific performance may be refused if the plaintiff is shown to have materially misled the court or to have abused its process or to have attempted to do so. Whether on any particular occasion the behaviour of the plaintiff has been sufficiently improper to lead to a refusal of relief is a matter that is within the discretion of the Court."

There may be grave doubts on the material as it at present stands whether there has been such a degree of misleading as to justify the upholding of a clean hands defence. Again, however, that is a matter that should be decided upon the final hearing rather than in a summary way upon the present application. I shall therefore allow a defence in terms of pars 37H and 37I of Ex A36. 17 So far as concerns the last defence of unclean hands, that charged in par 37L, I find that defence of unclean hands somewhat difficult to follow. I find it difficult or indeed impossible to see how it can be said that the making of a claim in such a fashion as to exclude the alleged debts of Lamb being brought into account can amount to an abuse of process or can otherwise fall within the concept of unclean hands. So far as I can understand the propositions set out in par 37L, the view that I have formed is that they cannot be maintained. In those circumstances I shall not allow par 37L to be included in the amended defence. 18 Another of the three defences arising from the existence of debts by Lamb to Lewis allegedly admitted and which it is said ought be brought into account is the defence in par 37N that those debts must be brought into account if the relevant claims succeed, since otherwise Lamru will have sought or obtained equity without having done equity. It should be said that Mr Cotman has limited the defence to so much of the indebtedness as arose from Lewis and Lamb's dealings with stock. The general principle as to the content of the maxim, "He that comes into equity must do equity", is stated as follows in Ashburner's Principles of Equity (2nd ed, 1933) at 463 as follows: "The defendant, while admitting that the plaintiff has a valid claim, may say that he has a claim against the plaintiff which would entitle him to take an independent proceeding, and which for the sake of convenience, should be adjudicated upon in the proceedings in which he is defendant; or he may say that, although he has no independent equity against the plaintiff, he has what may be called a passive equity - a right, that is, in equity to have certain matters taken into account in mitigation of the plaintiff's claim. The defendant's right in both these cases is expressed by the maxim that 'he that comes into equity must do equity'."

A similar point is shortly made in Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [3-055] as follows: "This is one of the most important of the maxims of equity. It prescribes that any plaintiff who wishes to avail himself of an equitable remedy can only do so on terms that he fulfils his own legal and equitable obligations arising out of the subject matter of the dispute." 19 In Nelson v Nelson supra, whilst the plaintiff was spared the consequences which would have flowed from the upholding of a defence of illegality, she was, by the majority of the High Court, compelled to do equity as a condition of the relief granted. She was granted relief declaring her entitlement to certain property, but upon the basis that she would do equity by paying to the Commonwealth moneys that represented the difference between a commercial interest rate and a concessional interest rate that she had obtained by dishonest representations in relation to a borrowing to acquire the relevant property. At least one of the two dissenting Justices of the High Court, Dawson J, said in terms (at 581) that there was not sufficient connection between the plaintiff's dishonesty in making the representation which she had and the subject matter of the suit to require her to do equity in the way the majority (Deane, Gummow and McHugh JJ) thought appropriate. The majority Justices appear to have taken the view that there was a sufficient connection with the subject matter of the suit by reason of the fact that it was in the very acquisition of the property, her entitlement to which she sought to have declared, that her dishonest conduct had occurred. 20 Mr Motbey has emphasised, in opposing the admission of a defence based on this maxim, the fact that the countervailing obligations are not between the same parties, as contemplated in the statement of the rule by the learned text writers quoted above. The wrapped up indebtedness, to whatever extent it related to accounting between Lewis and Lamb for proceeds of stock taken in earlier years, was an accounting between them, whereas these proceedings are brought by Lamru for an accounting through Nortex in relation to stock during the 1997 year. The situation thus is that the parties to the obligations are different. Mr Motbey also points out that the alleged admissions of debt should be taken to be qualified or conditional. He also points out that, as already indicated, they are the end result of a rolled up accounting between the two individual men encompassing various matters. Furthermore, they relate to a period that terminated at the end of the 1996 financial year, when Lamb left the company. Mr Motbey also points to the likelihood that the claim, which he says can be maintained only by Lewis, in relation to the alleged indebtedness, has not before now been brought forward in litigation and is barred by s 63 of the Limitation Act 1969. For all these reasons he says that there is no sufficient relationship between the claim and the matter in respect of which it is alleged that equity must be done for the defence to have any possibility of success. 21 In relation to this matter I accept Mr Motbey's submission. In my view there is not sufficient connexion between the obligation sued for and the obligation sought to be brought into account. It seems to me that there is no realistic possibility of success of this pro tanto defence. On that ground the defence charged in par 37M of Ex A36 should not be allowed to be propounded. 22 Paragraph 37N, as I have indicated, propounds a defence of estoppel on the basis of unconscionability in relation to the making of the claim in respect of stock allegedly abstracted in the 1997 year. I find the claim made in this paragraph difficult to follow and lacking in content and specificity. I am unable to see on the material before me how such a defence could be made out. Paragraph 37N should, equally with par 37M, not be allowed to be brought forward, on the basis that it has no reasonable prospect of success. 23 I should add in relation to these last two defences, those in pars 37M and 37N, there is a discretionary consideration which also conduces to refusal of the application to amend. Unlike the defences which relate to the giving of the certificate evidence only recently brought forward, these are matters that could have been propounded long ago. This must be particularly borne in mind in view of the wide range and Byzantine complexity of the various pieces of litigation that exist between these parties. They include not only matters in play before me, but matters in the cross claim, the agitation of which has been postponed because of their late introduction into the case; matters propounded in a separate suit pending in this Division (No 3354/02), which again is not for trial at this stage because of its late commencement; and, what is more, proceedings relating to transactions among the parties in the High Court of New Zealand, the trial of which has been postponed until after these proceedings are finalised. The matters on which pars 37M and 37N depend have been in existence and within knowledge for a long time. They are not brought to the fore by reason of a recent change of direction by the plaintiff, which justice demands the defendant should be allowed adequate opportunity to answer. They are brought forward late, without any real explanation of their lateness. The factual investigation they would necessitate of the account between Mr Lamb and Mr Lewis, not previously raised, would further complicate the conduct of these proceedings. It may be that those discretionary considerations would of themselves justify rejection of the amendment to bring those paragraphs forward, but it is not really necessary to come to a conclusion on that matter, bearing in mind the conclusion I have come to as to the practical hopelessness of the defences. 24 The result of the foregoing will be that the defendant will be permitted to amend its defence to propound defences generally in the form brought forward in pars 37D to 37I of Ex A36, but will be refused leave to propound the defences brought forward in pars 37J to 37N of that Exhibit.

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