Lewis v Nortex Pty Ltd [2004] NSWSC 1143 | Case summary

Lewis v Nortex Pty Ltd [2004] NSWSC 1143 | Case summary | Zoe

[2]

CATCHWORDS : CONTRACTS [218] - Particular parties - Principal and agent - Relations between principal and third persons - Other cases - Agent participating with principal in transactions involving breach of trust - Knowing receipt of proceeds of breach of trust - CORPORATIONS [19] - Constitution and legal capacity - Contracts - Other matters - Engagement of solicitors and accountants by one of two directors in proceedings brought at the instance of the other - Ratification by general meeting - Whether effective - CORPORATIONS [291] - Winding up - Liquidator - Appeal from liquidator's decision - Rejection of proof of debt - Nature of proceedings - EQUITY [1] - General principles - Rules and maxims of equity - "Unclean hands" - Corresponding common law maxims relating to illegal conduct - Respective operation of defences of illegality and of unclean hands - Principles relating to application of clean hands doctrine - EQUITY [185] - Trusts and trustees - Powers, duties, rights and liabilities of trustees - Liability for breach of trust - What constitutes a breach of trust and who may be liable - Breach of fiduciary duties - Conflict between duty and interest - Duty not to profit from position - Remedies - EVIDENCE [144] - Burden of proof, presumptions, and weight and sufficiency of evidence - Generally - Sufficiency - Standard in civil proceedings - When fraud alleged - Whether "clear and cogent" proof required - Whether "actual persuasion of its occurrence or existence" necessary before Court can find fact proved - EVIDENCE [216] - Witnesses - Cross examination - When permitted and in general - By whom - Evidence of witness proposed to be contradicted by adversary. The Corporations Law ss 232(2), (4) & (6) LEGISLATION CITED : Corporations Act 2001 (Cth) s 251A(6) Evidence Act 1995 ss 128, 140 Abdurahman v Field (1987) 8 NSWLR 158 Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 Barnes v Addy (1874) LR 9 Ch App 244 Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060 Blundell v Curvers [1999] NSWCA 421 Bray v Ford [1896] AC 44 Briginshaw v Briginshaw (1938) 60 CLR 336 Browne v Dunn (1893) 6 R 67 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 Catt v Marac Australia Ltd (1986) 9 NSWLR 639 Chalker v Barwon Coast Committee of Management Inc [2003] VSC 286 Chan v Zacharia (1984) 154 CLR 178 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Danish Mercantile Co Ltd v Beaumont [1951] Ch 680 Day v Mead [1987] 2 NZLR 443 Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 Gascoigne v Gascoigne [1918] 1 KB 223 George v Greater Adelaide Land Development Co Ltd (1929) 43 CLR 91 Government Employees Superannuation Board v Martin (1997) 19 WAR 224 Griffiths v Griffiths [1973] 1 WLR 1454 Helton v Allen (1940) 63 CLR 691 Hill v Rose [1990] VR 129 Idameneo (No 123) P/L v Ticco P/L [2003] NSWSC 538 Idameneo P/L v Ticco P/L [2004] NSWCA 329 In Re Emery's Investment Trusts. Emery v Emery [1959] Ch 410 In re Hulkes. Powell v Hulkes (1886) 33 ChD 552 Jones v Dunkel (1959) 101 CLR 298 Jones v Lenthal (1669) 1 Chan Cas 154; 22 ER 739 Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612 Lewis v Nortex Pty Ltd [2001] NSWSC 511; (2001) 10 BPR 19,035 Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 124 Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 143 CASES CITED : Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 189 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 337 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 1192 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2003] NSWSC 354 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 121 Loughran v Loughran 292 US 216 (1934) McKenzie v McDonald [1927] VLR 134 Meyers v Casey (1913) 17 CLR 90 Miller v Miller (1995) 16 ACSR 73 Mills v Mills (1938) 60 CLR 150 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 Nelson v Nelson (1995) 184 CLR 538 Nocton v Lord Ashburton [1914] AC 932 Nortex Pty Ltd v Lamru Pty Ltd NSWSC 12 August 1997 Master McLaughlin unreported Pascoe Ltd (in liq) v Lucas (1999) 75 SASR 246 R v Birks (1990) 19 NSWLR 677 Re Jay-O-Bees; Rosseau v Jay-O-Bees [2004] NSWSC 818 Re Nortex Pty Ltd (In Liq) [2003] NSWSC 1036 Rejfek v McElroy (1965) 112 CLR 517 Rochefoucauld v Boustead [1897] 1 Ch 196 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262 Southern Area Health Service v Brown [2003] NSWCA 369 Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 Tinker v Tinker [1970] P 136 Weston v Beaufils (No 2) (1994) 50 FCR 476 I E Davidson "The Equitable Remedy of Compensation" (1982) 13 MULR 349 W M C Gummow "Compensation for Breach of Fiduciary Duty" in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989) 57 Sir Frederick Jordan "Chapters on Equity in New South Wales" (6th ed, 1947) (reprinted in "Select Legal Papers" (1983)) at 115 Meagher & Gummow, Jacobs' Law of Trusts in Australia (6th ed, 1997) at [1334], [1711], [1735] Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [3-110], [5-260] Stephen Odgers, Uniform Evidence Law (6th ed, 2004) at [1.4.100] F M B Reynolds, Bowstead and Reynolds on Agency (17th ed, 2001) Article 13 [2-047] 4 Scott on Trusts (4th ed, 1989) par 326.3 Lord Walker "Dishonesty and Unconscionable Conduct in Commercial Life - Some Reflections on Accessory Liability and Knowing Receipt" John Lehane Memorial Lecture 2004 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 S D Rares SC then N A Cotman SC and J T Johnson (P L Lewis & Kation P/L) COUNSEL : S J Motbey (Lamru P/L) V R W Gray (Liquidator & Nortex P/L) P R Whitford & M P Cleary (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)

[4]

3081/97 PETER LAWRENCE LEWIS v NORTEX PTY LIMITED (In Liq) 1750/02 LAMRU PTY LIMITED v KATION PTY LIMITED & ORS JUDGMENT 1 HIS HONOUR: TABLE OF CONTENTS Item Paragraphs Introductory 1 - 3 The Issues 4 - 7 Background Facts 8 - 16 The Course of the Litigation 17 - 25 The Credit of Witnesses 26 - 33 Issues 1 & 4 1 Whether the $150,000 paid to Hirmanu in 1991 was paid as a distribution of profit to Hirmanu or was borrowed by Lamru and paid by it to Hirmanu? 34 - 56 4 Was Lamru short paid $161, 398 or any sum in 1991? Issues 2 & 3 2 Whether the differential interest convention is effective? 57 - 77 3 Whether the add backs convention is effective? Issue 5 78 - 82 Was Lamru short paid $164,121 or any sum in 1992? Issues 6 & 7 6 Was Lamru short paid $27,026 or any sum in 1993? 83 7 Was Lamru short paid $3,758.13 or any sum in 1994? Issue 8 84 8 Was Lamru short paid $38,248.01 or any sum in 1995? Issue 9 85 What was the free net income in 1996? Issue 10 86 - 87 What was the free net income at 30 June 1997? Payments to Mark Lewis 88 - 107 Fraudulent taking of stock 108 - 132 Unclean hands defences 133 - 155 Legal and accounting expenses 156 - 169 China creditors 170 - 173 Issue 11 174 Issue 12: Accessorial liability Whether Kation or Lewis is personally liable to Lamru in respect of any of the breaches of trust 175 - 183 proved Issue 13 Whether the cross claims against Lamru and Lamb 184 for contribution or indemnity succeed Issue 14 Whether the cross claims against Lamru and Lamb based on breach of contract or for breach of his duties 185 - 201 as a director succeed Appeals from liquidator's decisions on proofs of debt 202 - 203 Conclusions 204 - 205

[42]

19 His Honour conducted a trial after which, by a judgment delivered on 19 July 2001, he answered those questions: Lewis v Nortex Pty Ltd [2001] NSWSC 511, partly reported in (2001) 10 BPR 19,035 ("the 2001 judgment"). The effect in substance of his Honour's answers to the first four questions was that a document appointing Lewis as the sole appointor under the trust deed was in fact signed by Lewis and Dufty on or shortly after 16 April 1991. Because it was then put in a drawer by Lewis and left there until 1997, it had no effect until that time and only limited effect thereafter. The answer to question 5 was, No. So far as concerns the years 1992 to 1995, the effect of this answer is clear: there was no determination relating to any part of the net income validly made under clause 4(1) of the trust deed in respect of any of those years. As to the 1991 year, the situation is somewhat more complex. There is no doubt that it flows from the answer that the determination pertinently made by a minute dated 28 June 1991 ("the 28 June 1991 minute") is not to be regarded as a valid determination within clause 4(1). However, there has been conflict as to whether the answer also encompasses an earlier determination ("the 12 April 1991 resolution") contained in a minute of 12 April 1991 ("the 12 April 1991 minute") of a meeting at which Lewis and Dufty are shown as being present. I shall have more to say about this. There is also a controversy as to whether the effect of these answers was to preclude the continuing use of "accounting conventions", which had been treated as being in effect between Lamru and Kation up to the time of his Honour's decision. In the belief that the accounting conventions could not be used, the liquidator subsequently revised his determination of the proofs of debt. The liquidator's determinations as they stand are, therefore, not in all instances as they were at the time the appeal was taken from them. The parties are agreed that this should not disrupt the course of these proceedings and that the Court should proceed to determine the questions in issue between the parties as they are defined in the "pleadings".

[50]

27 Lamb spent more time in the witness box than any other witness. He was cross examined extensively. There was a development in his evidence in chief which was significant, both in the assessment of his credit and also in the course which the trial followed thereafter. Lamb was not himself a party to the proceedings (except as a defendant to the cross claim). The party on his side was Lamru, a company of which he was, and is, the controller. As counsel for Lamru, Mr Motbey asked Lamb in chief questions to elicit answers to the effect that, during the years 1991 to 1996, while he and Lewis had in general been working together amicably, they had together engaged in a fraud on the revenue. Lamb refused to answer the questions on the ground that the answers might tend to incriminate him. The procedure under s 128 of the Evidence Act 1995 ("the EA") was invoked. It was protested on behalf of the Lewis interests that the process could not be used where the witness who was asked the question was asked it by counsel instructed by a company, which he, the witness, controlled, in support of a claim by the company. I rejected that submission and granted to Lamb a certificate under s 128 in respect of the evidence: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 1192. Lamb then gave evidence concerning the fraud. His account was that the arrangement by which the fraud was effected was that goods of Nortex were sold and the proceeds were not directed into the company but directed in cash into the pockets of Lewis and Lamb in the proportions in which they were ultimately entitled to the profits of the trust (60:40). The effect of this evidence will need to be examined more closely when I turn to the issues arising as to the accounts of the 1996 and 1997 years. However, in general terms, Lamb's account, if accepted, makes it more credible or likely to be accepted that Lewis continued on his own behalf alone the same practice after Lamb had left the company at the end of the 1996 year, than it would be were such evidence not given and accepted.

[73]

42 The first matter which needs to be determined is question (1), whether the argument that the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed is precluded by the 2001 judgment. On the face of that judgment there is some apparent basis for the argument. Question 5, which was answered, No, asked, "Were the income splits from 1991 to 1995 validated by valid and effective determinations in accordance with clause 4(1)?" The principal discussion concerning that was in [64] of the 2001 judgment, as follows: "64 Mr Motbey says that the evidence shows quite clearly that although there was a minute of 28 June 1991 and a similar minute in 1992, the minute was actually signed some time after 30 June in each year. There is thus no proper evidence that the board of the trustee ever met prior to 30 June in 1991 or 1992 to make a determination under clause 4(1). Furthermore, as Lewis and Dufty were the appointors until at least 1997, there was no prior written consent of the appointor to anything that Nortex may have done" (my italics). 43 His Honour proceeded in [65] to say that he could see no answer to that submission. Lamru, in support of its submission, relies on the italicized words in [64] of the judgment. Whilst literally those words encompass a finding that the board did not meet on 12 April 1991 or make a determination under clause 4(1) on that day, it is argued that there are other indications in the judgment and elsewhere that His Honour did not intend the answer to question 5 to extend to the board meeting of 12 April 1991 and the 12 April 1991 resolution. This matter was taken back to Young CJ in Eq on an application under the slip rule in 2003. His Honour refused that application: Re Nortex Pty Ltd (In Liq) [2003] NSWSC 1036. The application was refused on the basis that there was controversy concerning it and that the slip rule should not be used where there is controversy as to the appropriateness of its use. His Honour said that what he was really being asked to do was to construe the answer to question 5 given in the 2001 judgment and that that should be done in separate proceedings. It falls to me to do it on this trial.

[74]

44 Whilst I have said that there is some justification for Lamru's argument on the face of the 2001 judgment, in my view, considering the whole of that judgment, it should not be taken to embody a ruling concerning the validity of the directors' meeting said to have been held on 12 April 1991 or the 12 April 1991 resolution. Paragraph [64] itself refers in terms only to the directors' meeting purportedly held on 28 June, not to the directors' meeting of 12 April 1991. His Honour was well aware of the earlier meeting. In the 2001 judgment it is referred to in [20]. In [22] his Honour referred to Lewis' evidence that there was a further directors' meeting on 16 April 1991 and that, at it or shortly after it, the instrument appointing a new appointor was executed. Despite his reservations about Lewis' evidence, his Honour in the end accepted that the notice of appointment was in fact executed as Lewis deposed. He did not make a specific finding that the directors' meetings of 12 and 16 April 1991 occurred, but he did not find that they did not, which one imagines he would have done, in the course of deciding the matters that he did decide, had he rejected the evidence that those meetings were held. As his Honour elsewhere referred to the evidence of the holding of the meeting of 12 April 1991 and did not reject it, it seems to me that he should not be taken by his answer to question 5 as finding that that meeting did not occur; that the 12 April 1991 resolution was not passed; or that it was not an effective determination within clause 4(1). The argument, that the issue as to the validity of the 12 April 1991 resolution as a determination under clause 4(1) is foreclosed by the 2001 judgment, is therefore rejected. 45 I have stated as question (2) whether the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed. It was argued before me but faintly, if at all, that the meeting did not take place or that the resolution was not passed. It was implicit (if not explicit) in Young CJ in Eq's 2001 judgment that the meeting was held and the resolution was passed: see [20] and [22] of that judgment and [44] above. His Honour, in effect, found that a directors' meeting between Lewis and Dufty was held on 16 April 1991 following on a directors' meeting held between them on 12 April 1991. There is no reason to doubt that the 12 April 1991 minute does accurately record what occurred at the meeting on 12 April 1991. Even if his Honour's finding is not binding, I make the same finding on the material before me. Dufty gave evidence and did not suggest that the meeting did not occur or that the minute, signed by him, was bogus. On the evidence, I find that the meeting took place and the resolution was passed. 46 There was some suggestion that there was an onus on the Lewis interests to establish positively the prior consent of the appointor before they could rely on the 1991 resolution. I do not think this is so. The appointor at the relevant time was Dufty. It is not impossible on the evidence that he gave the appropriate consent and there is nothing in the evidence that establishes that he did not. Those propounding the resolution are in the circumstances entitled to the benefit of the presumption of regularity. The 12 April 1991 resolution was valid and, if not set aside, continues to be operative.

[89]

53 In relation to question (5), whether there is any breach of trust established in relation to the distribution of profits of the 1991 year, this must be dealt with in the light of my decisions on the first four sub issues. These leave a situation where the existence and validity of the 12 April 1991 resolution are established and the Lewis interests are not estopped from alleging that the profits to 12 April 1991 exceeded $200,000. Lamru's allegation remains that it has established a breach of trust. The Lewis interests do not concede a breach of trust. By particular (d) in its particulars of reply in the Scott Schedule, Lamru complained that the Lewis interests had not established the quantum of profit between 12 April and 30 June 1991. But, if Lamru complains of a breach of trust in respect of the distribution of the 1991 profits, it bears the onus of establishing its existence and, if that involves establishing the quantum of the profit during a particular period, it is for Lamru to prove it. Lamru undoubtedly received some $96,000 as its share of profit of the 1991 year. That sum is 40 per cent of about $240,000. $240,000 is about a quarter of the 1991 profit of about $1 million. The period between 12 April and 30 June 1991 is less than one quarter of the 1991 year. In saying this, I am not adopting as valid (as the liquidator did) a pro rata test for the amount of profit earned during that period. But it is not as if the profit during that period was estimated or assessed by Lewis at nil; Lamru received a profit share consonant with a substantial profit during the relevant period. The amount assessed by Lewis and paid or allowed by Nortex to Lamru as its 40 per cent share of the 1991 profit is not on the face of it impossible or improbable as a proper estimate of the profit during the post 12 April period, which is the relevant period since the 12 April 1991 resolution stands as a valid clause 4(1) determination. In my view, on the evidence, Lamru has simply not established a breach of trust in relation to the 1991 distribution of profits. 54 In relation to issue 4, I do not really need to deal with the substantive defences raised under questions (6) and (7). However, I think it desirable that I should make a finding at least in relation to the defence of laches, acquiescence and delay. I find that, if a breach of trust were established, relief would be precluded by that defence. I do not think I need to analyse the distinctions between the three elements embedded in its tripartite formulation. On the evidence, Lamb did not return to his complaint about this subject matter until after the terminal row between Lewis and himself and his departure from Nortex. It was in the course of the bitter disputation that then arose that the complaint was renewed, when Lewis and Lamb were throwing all possible allegations at each other. In the meantime, it seems to me that Lamb and Lamru proceeded on the basis, which Lamb says he enunciated at the time the 1991 profits were discussed, "We agreed to disagree". What happened thereafter is elucidated in the answers to cross examination set out in [51]. It must be borne in mind that the division of the 1991 profits arose in the context of an ongoing business in which the accounts had to be, and were, finalised each year and the participants each year had to, and did, submit their own income tax returns based upon the results of the business, as Lamb conceded. In each case, the next year's accounts depended for their starting point on the preceding year's accounts, which were used accordingly. It seems to me that where this process was continued for a period of five years with both sides participating in it, it is not equitable that one party be allowed to reopen the situation after this lapse of time. 55 In view of this finding, I do not need to consider additionally the submission based on waiver.

[91]

57 These issues may also be considered together. 58 The issues relating to these conventions are best defined in the following provisions of the Scott Schedule dealing with the add backs convention. As matter of defence, the Lewis interests stated: "In paragraph 63 of his Judgment Justice Young found as follows: 'Clause 4 of the trust deed provides that at any time and from time to time during any accounting period with the prior consent of the Appointor with respect to any part of the net income of the trust fund for such accounting period the trustee may determine to pay same to any one or more of the unitholders as the trustee in its absolute discretion determines. An accounting period is 12 months ending on 30 June of each year. The definition clause defines "Free Net Income" as so much of the net income of the trust fund for an accounting period as is not the subject of a valid and effective determination by the trustees during that accounting period under clause 4. Under clause 4(2) the trustees are to hold as a separate trust fund the free net income of each accounting period in trust absolutely for the unitholders of the ordinary units in the specified proportion. "Specified Proportion" is defined in 1(14) of the deed as meaning the proportions that the number of ordinary units held by a unitholder bears to the total ordinary units. Thus, unless there has been a proper determination under clause 4(1) of the deed, the income for the financial year is held in proportion to the number of units that a unitholder has to the total number of units.' In relation to the net income of the trust fund for the relevant accounting period, net income is a recognised accountancy term with a specified meaning. It does not include 'add backs'. The clear consequence of Justice Young's Judgment is to eliminate any procedure for 'add backs' as propounded by Lamru. This is supported by clause 18B(6) of the Trust Deed, which provides that any remuneration for services rendered paid to any beneficiary is not to be taken into account as part of his share of the Trust Fund or the income thereof. Further at paragraph 67 of his Judgment, Justice Young specifically rejected contentions by Kation that the parties were estopped from departing from their conduct in relation to the accounts of Nortex from 1991 onwards. It follows that, in accordance with His Honour's ruling, Lamru cannot now raise the conduct of the parties in relation to the 'add back' procedure, but is bound by the strict approach to be found in the four corners of the Trust Deed in calculating the net income of the Trust ('Free Net Income')."

[99]

44 (1) Subject to the prior consent in writing of the holders of all of the ordinary units and the Appointor the Trustees for the time being may at any time and from time to time by oral declaration, or by resolution, or by deeds, revocable or irrevocable revoke add to or vary all or any of the Trusts terms and conditions herein contained or the trusts terms and conditions contained in any variation or alteration or addition made thereto from time to time and may in like manner declare any new or other trusts terms and conditions concerning the Trust Fund or any part or parts thereof the trusts whereof shall have been so revoked added to or varied provided that a perpetuity is not thereby created and subject to the later provisions of this Clause." 65 The argument was most clearly put by Mr Ventry Gray, of counsel for the liquidator, who indeed said that it was "crystal clear". It proceeded as follows. From 22 June 2001, when the 2001 judgment was delivered, it was clear that, in respect of the 1991 to 1995 years, there was no valid determination of the division of profits under clause 4(1) of the trust deed. The profits therefore fell to be divided under the provisions of clause 4(2). They had to be divided in accordance with the terms of the trust deed. These included the provisions of clause 23 which required the keeping of accounts in accordance with "proper accounting procedures". Acting in accordance with the add backs convention and the differential interest convention was not in accordance with proper accounting procedures. Those conventions could have valid effect only through a clause 4(1) determination. Nortex as trustee (and therefore the liquidator) as of 22 June 2001 came under an obligation to rewrite all the accounts that had formerly been written in accordance with the conventions. Not to do this would involve breaches of trust. Any agreement between Kation and Lamru giving effect to the conventions may have been operative until Lamb's departure from Nortex, but ceased to have effect at that time. Therefore, Lamru could not unilaterally require the liquidator to maintain the accounts as they had been written over the preceding years. (Apparently Kation was able unilaterally to require the opposite course to be taken.) The liquidator was obliged to rewrite them. 66 There are a number of reasons why this argument is not sound. Each of these reasons would alone destroy its validity. 67 First, it is not correct that the conventions could have effect only through a valid clause 4(1) determination (of which there was none in any relevant year, save that I have determined that the 12 April 1991 resolution was effective). Clause 4 is set out in [10] above. Clause 4(2) provides that in general terms the trustee shall hold the Free Net Income of each accounting period for the unit holders in the proportions of their interests in the trust. The Free Net Income is so much of the net income as shall not be the subject of a clause 4(1) determination. A clause 4(1) determination is a determination to apply the whole or any part of the net income to any one or more of the unit holders in such amounts or proportions as the trustee determines. Properly construed, this does not preclude the trustee from determining, or the unit holders from agreeing, that the accounts should be kept in one or another particular way which is proper. Nor is there anything in the 2001 judgment which would compel the conclusion contended for or necessitate or authorise the rewriting of the accounts in the fashion in which it was done. 68 Secondly, it is not established that to prepare the accounts on the basis of the conventions was, on the evidence, to prepare them otherwise than in accordance with "proper accounting procedures". The term is a very general one contained in a very general clause in the trust deed concerning the preparation of accounts, not the substantive rights of the parties. I do not think that it could be applied to forbid the preparation of accounts on a proper basis agreed between the trustee and the unit holders.

[100]

69 On top of that, the evidence that what occurred was not in accordance with proper accounting procedures was exiguous. This was a matter for expert evidence. Craig Edwards, a chartered accountant, made a report which was in evidence and dealt with this, among other subject matters. The relevant evidence was as follows: "I have noted in the distribution of net income for the years ended 30 June 1992 to 1995 that certain expenses (eg wages, superannuation, motor vehicle expenses) were 'added back' prior to the apportionment of net income between the unitholders (ie the expenses were excluded from Net Income when determining distributions). I have seen nothing in the material provided to me to show that such expenses were not bona fide business expenses, and accordingly, such expenses should be deducted when calculating Net Income (consistent with the normal definition of net income or profit, which is equal to revenue less expenses). The accounting treatment in the profit distribution is not usual. Although it may reflect an arrangement between the unit holders, it does not, in my opinion, accord with the distribution of Free Net Income in accordance with ordinary accounting concepts." 70 That evidence is in its terms far from certain or clear. It deals only with the add backs convention as not according with normally accepted accounting principles. It does not express that opinion in relation to the differential interest convention. Mr Edwards expresses the view that it would make no difference to the result as between the parties whether or not the differential interest convention was applied. As to the latter, there appears to be no expert evidence supporting the proposition that to prepare the accounts in accordance with that convention was to prepare them otherwise in accordance with "normally accepted accounting procedures". But even in relation to the add backs convention, any value that Mr Edwards' evidence may have is vitiated by the fact that his report was written in a context in which he was not given proper instructions as to the factual situation in which the accounting procedures were used. In cross examination he agreed that he had not been told that the add backs convention had at any time existed, so that he was dealing with an entirely hypothetical situation, where the person preparing the accounts had apparently acted in the way he had without the support of any instructions as to the subject matter. The reason that Mr Edwards suggested the procedure was unsound was that, if these items were not to be treated as expenses, then they should not have been expensed in the first place. However, he agreed that that there was a perfectly sound way of putting the parties' intentions into effect, namely, by recording the items as advances against drawings. None of this appears to me to compel as a matter of accounting principle the recording of the transactions in a way that was manifestly in conflict with an agreement binding the unit holders in force at the time. 71 For these reasons it was not established that there was in the original adherence to the add backs convention or the differential interest convention any breach of clause 23, or otherwise of the trust deed. Furthermore, there is nothing in the 2001 judgment that compels any other conclusion. 72 I should add that it was argued on behalf of Lamru that what the trustee did was in effect validated by the provisions of clause 18B(24) of the trust deed as being a determination in relation to a matter as to which a doubt, difficulty or question arose in relation to the execution of the trusts. I have some doubt as to whether this matter falls into the relevant category but, in view of what I have said, I do not need to determine that matter.

[102]

74 I find the suggestion that the agreements came to an end when Lamb departed from the premises of Nortex somewhat strange in the circumstances. It is less than entirely clear from the submissions how this result is said to arise. It is not clear whether it is suggested that the terminations arose from terms of the agreements or arose in some other way. If there were relevant terms, they must have been to the effect that the departure of Lamb (or of either of the principals) personally would bring the agreements to an end. Whether it was contended that these terms were express or implied is again not entirely clear. Insofar as it is suggested that the terminations occurred in some other way, it is not clear what that way was alleged to be. 75 In my view, there is no basis for finding that the conventions were terminated. There is no evidence that would support a finding that there were express terms of the agreements to the requisite effect. There was no clear argument in favour of the existence of implied terms, or the basis on which, or circumstances in which, they arose. If the conventions were alleged to have been terminated in some other way, I am far from clear what it was. There was some inchoate argument that the agreements were terminated upon Lamb's personal departure. But the rationale of the agreements still existed. Lamru was still holder of 40 per cent of the units in the unit trust and the division of profits still had to take place at the end of each year, so long as that situation prevailed. Agreements are presumed to continue unless the mechanism of their termination is established: see per Bryson J (as his Honour then was) in Idameneo (No 123) P/L v Ticco P/L [2003] NSWSC 538 at [84], cited with apparent approval in the Court of Appeal on appeal in Idameneo P/L v Ticco P/L [2004] NSWCA 329 at [85]. The way in which the add backs convention applied may have changed, to the extent that Lamb was not still personally working in the business, but I do not see how this effected an automatic termination of the convention or justified a unilateral revocation of the agreement. In the case of the differential interest convention, there was not even a change of relevant circumstances. Both unit holders still had moneys on loan at interest to the trust.

[106]

Lamru's replies include the following: "(a) There was no stock reserve as such. Lewis required, and Lamb accepted, that they would adopt a conservative closing stock valuation method. This was done year in and year out. The profit entitlements of Lamru and Kation were calculated on the basis of the tax accounts. There was no instance of 2 sets of accounts: one for the tax and one for the beneficiaries. The conservative closing stock figure was always the same as the next year's opening stock figure. (b) The suggestion that the profits to June 90 and to June 91 were incorrectly stated in the Lewis-prepared tax accounts was first raised by the Liquidator, (after representations to him from Lewis) after Kation lost the main issue decided by Young CJ in ED [sic]. Lewis has made out to the liquidator, who has adopted this belated contention, that the 90 profits were higher (Lamb had no interest in the business as at June 1990) and that $291K of the 1992 profits should be written into 1991 so that he can attempt enhance his financial interests with his argument that Lamru is only entitled to 40% of the profits made between 12 April 1991 and 30 June 1991. (c) The liquidator, who takes subject to the equities, is as much estopped as the company itself would be estopped from going back upon agreements and legitimate conventions solemnly made and applied by the trustee and the beneficiaries. (d) In any event, the contention that there was a valid and effective clause 4 determination in April 1991 which effectively disposed of all the profits from 1 July 1990 to 12 April 1991 is, for the reasons elaborated Below (Section 3 reply to Kation's defence to claim 3), wrong (e) The agreement of April 1991 (which saw Hirmanu depart as a beneficiary and Lamru come in) was made well after the 1990 accounts were settled and signed off and it is not appropriate to seek to re-open those accounts in these proceedings without notice to Hirmanu". 80 The $291,840 was an example of a figure which has at various times in the proceedings been referred to as a "stock reserve". This was a device for taxation purposes, whereby an amount of stock was moved from year to year (ie, the amount of stock at the end of a year, and therefore the profit, was, by agreement between the parties, deliberately understated) in order to "defer" payment of taxation by a year. The device did not ultimately avoid taxation on the relevant amount but, on each occasion that it was employed, moved the liability back a year. It was, of course, dishonest. It should be said, however, that, on the evidence, Lamb did not participate in the dishonesty in respect of this sum of $291,840, because it arose in the 1991 year, in virtually none of which was he a principal in the business. It was at Lewis' instance that it was moved into the 1992 year, but then entirely attributed to Kation. After the 2001 judgment Lewis advocated, and the liquidator adopted, a course whereby the $291,840 was brought into account as profit in the 1991 year, so there could be no question of Lamru participating to any extent in the profit. 81 I shall determine the second question first. For much the same reasons as I have given in respect of the division of profits in the 1991 year, I am of the view that, even if this sum be left in the profits in the 1992 accounts, the original division of profits for that year ought be allowed to stand. I accept that Lamb made some protest about the treatment of this sum at much the same time (relatively) as in respect of the 1991 year, ie, in late 1992, but thereafter proceeded as he did in relation to the controversy about the division of the 1991 income. In effect, he accepted the division of the 1992 income until after warfare broke out between Lewis and him in 1996. The accounts continued to be prepared and acted on by all concerned until that time, on the basis that the original treatment was correct. Acting on that basis included the lodgement of income tax returns prepared accordingly on behalf of the trust and by the unit holders. Lamb, and therefore Lamru, are to be taken as agreeing to the course that was followed. It is not established that it was a breach of trust or a breach of trust available to be complained of by Lamru. If it was a breach of trust, it was in the end consented to or the right to object to it was waived: see [24] above. In addition, if it were necessary, I should uphold the defence of laches, acquiescence and delay in respect of this claim also. 82 In view of my decision in [81], it is not necessary for me to decide the first question between these parties. The result as between Lamru and the Lewis interests will be the same in whichever year the $291,840 is included in the profit. There is an argument that, in any event, the liquidator having rewritten the accounts in this regard, the Court should do nothing to alter that situation, but let the $291,840 lie in the 1991 accounts, although the reasons for letting it lie are not as stated in the liquidator's defences in the Scott Schedule. This argument in favour of the present situation arises from the fact that it has become plain during the trial that the original removal of the $291,840 from the 1991 year to the 1992 year was dishonest vis a vis the revenue. Its subsequent return to the 1991 accounts restored honesty. It is argued that, once the dishonesty was revealed, an accountant's duty to the revenue compelled the liquidator to take this step, whatever the interests of the parties, and the Court as a matter of public duty should ensure that it is maintained. Although it is not necessary for me to decide this question, I am not inclined to think the argument correct. The liquidator's undoubted duty to the revenue could be discharged by drawing the facts to the attention of the Commissioner of Taxation by amending the relevant tax returns or otherwise. I am far from certain that a rewriting of the accounts was necessary or appropriate, particularly when Lamru was not in reality a participant in the relevant dishonesty. I should add that tax returns were lodged and tax paid on the basis that the $291,840 was brought into the profits in the 1992 year and attributed entirely to Kation.

[129]

97 The case is not quite so clear in the case of the 1996 and 1997 payments. The complaint that is made is of the payment of six figure sums to Mark Lewis as bonuses, depriving Lamru of 40 per cent of those sums by reason of the consequential diminution of the net profit. The case here is that, as there was no valid resolution of the board of directors of the trustee company to pay these large bonuses, to do so was a breach of trust. The principal submission put by the Lewis interests was that these payments were in satisfaction of binding contracts with Mark Lewis. Secondly, they were to be regarded as justified and proper, insofar as the liquidator found them to be fair and proper remuneration for what Mark Lewis in fact did. But, to have the effect contended for, the contracts would have to bind the trustee company. There is not established on the evidence before me a contract binding on the company. There is no evidence which I accept of the directors (including Lamb) resolving to enter into or otherwise assenting to any such contract (as to the evidence, see [98] - [102] below), nor is there evidence of any such contract being made by anyone with Mark Lewis. Furthermore, insofar as it matters, the liquidator found that the amounts paid were in excess of the value of the services rendered by Mark Lewis. But, as there was no relevant contract established, the payments cannot be found to be validated pro rata, simply by a finding of the liquidator as to their value. In the circumstances, I hold that the payments to Mark Lewis in the 1996 and 1997 years were breaches of trust. 98 Question (3) concerns whether the 1995 and 1996 payments were consented to by Lamb on behalf of Lamru. A breach of trust cannot be relied on by a beneficiary who, with full knowledge of the relevant facts, assents to the breach of trust. This question was hotly contested. It is necessary to set out the evidence concerning it at some length. Lamb deposed in an affidavit of 27 March 2000: "13 In about January 1995 Mr Lewis said to me words to the effect that his son Mark (who was an employee doing office and warehouse work) should receive a profit share of 15%, out of his and my shares, for no consideration. I did not agree. This issue grew into a considerable conflict between myself and Mr Lewis over the next 12 months. In February 1996 Mr Lewis said to me 'I am paying Mark 15% backdated to January 1995'. I said 'Pay him out of your share, not mine'. Things got worse and worse. I went away for a holiday and thought about it and in May 1996 I decided that the relationship was totally unworkable." And in an affidavit of 12 May 2000: "3(a)(iii) …… Lewis Senior did say to me in early 1995 that he wanted to give his son a 15% share of the business's [sic] profits. I made it very clear to him that I did not agree. He continued to try to persuade me to give in. I would not. In about February 1996 he informed me (at about the time that the accounts to 30 June 1995 were being finalised) that he was going to give his son 15% backdated to January 1995. I protested most strongly and it was really this conduct of Lewis Senior that precipitated my decision to give up trying to be partners with him. At no stage did he tell me that he'd made any agreement with Mark Lewis of the sort that Mark now alleges. In the early part of 1996 Lewis Senior presented me with his profit split calculation for the year ended June 1995." And in an affidavit of 11 April 2002: "3 At no stage in the period from January 1995 to February 1996 did Mr Lewis or Mark Lewis make any statement to me to the effect that any agreement had been made giving Mark Lewis 15% of the profits.

[138]

104 I find that no directors' meeting was held on 8 December 1995. I take into account the provisions of the corporations legislation (see the Corporations Act 2001 (Cth) ("the CA") s 251A(6)) that a minute should be taken to be evidence of the transactions stated until the contrary is proved. There is no express evidence that such a meeting was not held on that day. However, Lewis' only written assertion is of a meeting on 6 February 1995 and, not unnaturally, Lamb's affidavit evidence dealt specifically only with that. The evidence suggests that what passed between them on this subject matter (including discussion by reference to the handwritten proposal Exhibit A page 178) occurred only shortly before the income tax return was signed on 27 February 1996. On all the evidence, I conclude that the meeting purportedly recorded by the minute of 8 December 1995 did not take place. I should add that, in any event, it would be my view that the rule in Browne v Dunn (1893) 6 R 67 would preclude the Lewis interests from relying on that minute. Although it was in evidence in the bundle of documents, it was not referred to in the course of evidence by either side. If the Lewis interests intended to rely on it in final submissions as having the effect contended for, they should have put its existence to Lamb in cross examination to permit him to respond to it. Without that, Lamb was not given a fair opportunity of dealing with the proposition that there was a directors' meeting on that day at which the distribution of a reduced share of profits to Lamru or accounts embodying such a distribution were approved: see Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 22 - 23 per Hunt J; R v Birks (1990) 19 NSWLR 677 at 689 - 690 per Gleeson CJ; Blundell v Curvers [1999] NSWCA 421 at [28] - [34] per curiam; Southern Area Health Service v Brown [2003] NSWCA 369 at [102], [103] per Sheller JA. Without reliance on that minute, there is no evidence of a directors' meeting on that day.

[171]

129 As to question (5), whether it ought be inferred that the difference in the stock figures resulted from Lewis selling stock for cash and taking the proceeds himself, the evidence is circumstantial. I have accepted the matters set out in [128] above. The discrepancy is established. It is a greater leap, or at least step, to infer that the difference was caused by Lewis continuing to abstract and sell stock and pocket the cash from the sales. However, I am assisted in drawing the requisite inference from the failure of Lewis to give or call evidence either denying the continuation of the pre existing practice, or suggesting some other explanation for the stock discrepancy. I find that Lewis (with the knowledge and acquiescence of Kation), during the 1997 year, took and sold stock of Nortex and did not pay or account to the company for the proceeds. Although the case is circumstantial, I have come to this conclusion bearing in mind what Dixon J said in Briginshaw at 368 - 369 as set out in [120] above. I have also borne in mind Dixon J's statement in Jones v Dunkel at 305: "…… But the law … does not authorise a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied." I should add that I do not rely in reaching this conclusion on what was supposedly said by Potter, although a great deal of time was taken up at the trial wrangling about that. I do not find it possible to come to a conclusion as to what Potter said on that occasion. I do accept that at one stage Lewis said to Lamb concerning this matter words to the effect, "You prove it", but this has not played a significant part in my conclusion. 130 As to question (6), what was the value of the goods taken and sold in this fashion, in view of my answer to question (8), it is not necessary for me to decide question (6). 131 As to question (7), relating to the defence of laches, acquiescence and delay, it is equally not necessary for me to decide this question. However, I should say that, for reasons similar to those expressed in [107] in relation to the claim arising from payments to Mark Lewis, I should be unlikely to uphold this defence. I say this bearing in mind the recency of these claims and the fact that negotiations to settle the parties' affairs commenced shortly after, followed by this litigation. I do not think there was any undue delay in relation to this subject matter.

[173]

37I In the presents the Plaintiff does not come to the Court with clean hands in that by propounding false or misleading affidavits and particulars and schedules in support of its case, it has abused the process of the Court." 134 It is important to note that the defences relied on are propounded in terms of unclean hands rather than of illegality and that, although offences against the revenue laws are alluded to, I have not been referred to any specific provisions of those laws, or of the Crimes Act 1995 (Cth) or its predecessor, and it is not been stipulated that any particular statutory prohibition or penal provision operates in the circumstances. The allegations that are made are that evidence was given in support of this claim of Lamru's participation through Lamb in dishonest and unworthy conduct, in seeking to defraud the revenue, and that, earlier in these proceedings, false documents were propounded seeking to conceal that behaviour. 135 The defences of illegality and unclean hands have come increasingly to be regarded as separate defences. The defence of illegality is equally operative in respect of claims at law and in equity. If the transaction sued on is itself unlawful, then in general terms it will not be enforced at law or in equity. In those circumstances, there is no need for recourse to the clean hands doctrine: see, for instance, per Deane and Gummow JJ in Nelson v Nelson (1995) 184 CLR 538 at 550 - 551. The defence of unclean hands operates only in respect of claims for equitable relief. If, on a claim, the claimant is entitled to both legal and equitable relief, the establishment of the defence of unclean hands will preclude the equitable relief, but will not preclude the availability of purely legal relief: see the decision of the Court of Appeal in Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612 at [54]. In this case, Mr Motbey attempted to characterise the claim agitated as essentially one in debt and therefore purely legal. Lamru, he said, is in effect suing on its loan account. But the "pleadings" belie this assertion. The claim is propounded as one of breach of trust and is extended from Nortex to Kation and Lewis on the basis of their participation as accessories in those breaches of trust. Success in the defences will therefore preclude relief, which is essentially equitable in nature.

[179]

It is also instructive to refer to cases in which the plaintiff did fail. 143 Meyers v Casey (1913) 17 CLR 90 was a case arising from a decision of the Supreme Court of Victoria as to the validity of rulings of stewards and then a committee of the Victorian Racing Club, disqualifying a horse owner for malpractice. The claim was based on the lack of authority of the committee and a denial of natural justice. The relief sought included an injunction. Objection was taken that the plaintiff could not have equitable relief because he did not come to Court with clean hands by reason of his malpractice. The High Court ruled that the clean hands doctrine had no role to play in connection with the challenge to the validity of the ruling of the committee. Barton ACJ said at 101 - 102: "His Honour who tried the case dismissed the action on the ground that the plaintiff, in seeking the assistance of equity, did not come into Court with clean hands. I do not think that his case can be met by the application of the maxim. The merits of the plaintiff's conduct were not in issue before his Honour. The case raised by the claim and met by the defence was based purely on the asserted illegality of the decision against him. It was not its correctness, but its validity, that was contested in the Supreme Court. Its correctness was assumed for the purpose of the argument, but was not admitted as a fact. The plaintiff could not have been heard to declare his innocence in that proceeding. Evidence as to the turpitude or integrity of his conduct was not admissible on the case made." Isaacs J said at 123 - 124: "…… the rights asserted by the appellant, namely, membership of the club and public right under the by-laws to enter the racecourse, of course exist, if at all, by reason of circumstances wholly independent of the alleged misconduct; the wrong he complains of, namely, his condemnation by an incompetent and unauthorised tribunal in the one case, and a disregard of natural justice in the other, are equally independent of any misconduct by him. It is therefore impossible to say, in the Lord Chief Baron's words, that his alleged misconduct has 'an immediate and necessary relation to the equity sued for,' or that it was 'a depravity in a legal as well as in a moral sense.'

[180]

It is altogether different from the cases where the right relied on, and which the Court of equity is asked to protect or assist, is itself to some extent brought into existence or induced by some illegal or unconscionable conduct of the plaintiff, so that protection for what he claims involves protection for his own wrong. No Court of equity will aid a man to derive advantage from his own wrong, and this is really the meaning of the maxim." 144 There are other cases dealing with the use of evidence as constituting unclean hands that are instructive in the present circumstances. Gascoigne v Gascoigne [1918] 1 KB 223 was a case in which a man had put real property in his wife's name for the purpose of defeating his creditors. After husband and wife had separated, the husband claimed a declaration that the wife held the property on a resulting trust for him. On appeal from the County Court to a Divisional Court of the King's Bench Division, Lawrence and Lush JJ said at 226: "…… what the learned judge has done is this: He has permitted the plaintiff to rebut the presumption [of advancement] which the law raises by setting up his own illegality and fraud, and to obtain relief in equity because he has succeeded in proving it. The plaintiff cannot do this; and, whether the point was taken or not in the county court this Court cannot allow a judgment to stand which has given relief under such circumstances as that." 145 Similarly, in In Re Emery's Investment Trusts. Emery v Emery [1959] Ch 410, a husband sought a declaration that he was entitled to a half share in the proceeds of securities sold by his wife on the ground that they had been put in the wife's name only to enable the husband to avoid American withholding tax. This intention of the husband was averred in the pleadings and relied on by him. Wynn Parry J said at 420: "… It is enough to say that the wife, who was clearly a witness of the truth, was not able to help me very much. The husband, on the other hand, satisfied me by his evidence that his intention was that the beneficial interest should be shared, and there are various indications to support that, such as the retention of control and the payment of the dividends into the joint account. But matters such as the retention of control and the payment into the joint account cannot be decisive when once the equitable presumption of advancement has arisen, and it is necessary for the husband, in his endeavour to rebut that presumption to assert that the property in question was put into his wife's name in order to avoid the payment on his beneficial interest of tax which would otherwise have been payable, so that, upon the basis that the tax had been United Kingdom tax, it appears to me that Gascoigne v Gascoigne [1918] 1 KB 223 completely covers the present case." Gascoigne and Emery were approved in the English Court of Appeal in Tinker v Tinker [1970] P 136 by Lord Denning MR at 141 and Salmon LJ at 143. 146 A contrast is offered in Griffiths v Griffiths [1973] 1 WLR 1454. There, where a husband claimed an increased beneficial interest in the matrimonial home by reason of improvements effected by him, the wife objected that he came to court with unclean hands because he had represented to the Law Society, for the purpose of obtaining a legal aid certificate and to a bailiff in order to avoid a distraint, that the house belonged exclusively to his wife. Arnold J said at 1456 - 1457: "In my judgment, the point is a bad one because he is not, in preferring his claim to the improvements, relying upon his own disreputable act, as, for example, does a man who seeks to enforce a resulting or express trust of property transferred by him to his wife by saying 'Oh, the transfer was only to defraud my creditors.' Nor is he doing the other thing which is forbidden, by the doctrine of promissory estoppel, of reversing a previous contention where, but only where, the party against whom the contention is made has in the meantime altered his or her position in reliance on the previous contention. He falls between the two stools; for it is no ingredient in the claim that he behaved wrongly, and therefore he escapes from the principle of Gascoigne v Gascoigne [1918] 1 KB 223, and it is not suggested that the wife relied on his disclaimer or either of his disclaimers in such a way as to make it unfair to her that the position should now be reversed."

[182]

185 It is not necessary for the Club to prove anything about the circumstances in which Citibank was misled to be able to prove the facts which make good that claim to a beneficial interest. The equity which the Club asserts is one which originally arose against Mr Reardon by reason of the Club's money providing part of the purchase price, and operated to impose equitable obligations on him, concerning his legal ownership of the property - the circumstances in which Mr Reardon came to have money to make his own contribution to the purchase price of the property have no immediate and necessary relation to that. Another way of putting this is that even accepting (as I do) that the Peakhurst property would probably not have been purchased at all if Citibank had not been misled, that misleading of Citibank did not make any contribution to the proportionate beneficial interest which recognition of the resulting trust would give to the Club. The entirety of the fruits of the deception of Citibank have been treated, on my findings, as a contribution to the purchase price by Mr Reardon. Even if the defendants were right in submitting that all of the wrongful conduct of Mr Hill and Mr Reardon, in their dealings with Citibank, could be attributed to the Club (a matter which I do not find it necessary to decide), recognising the particular resulting trust which I would be prepared to uphold does not involve the plaintiff in receiving a benefit from its own wrongful conduct. Recognition of that trust is nothing more than recognising a proprietary interest into which the Club's own money, not shown to be derived from any wrongful conduct, can be traced. No attempt was made to show that the Club is better off by having had its asset in the form of a partial beneficial interest in the Peakhurst property, rather than remaining as cash. In my view the principle of unclean hands provides no reason for refusing to recognise that particular resulting trust. If the Club were to claim an entitlement to part of the beneficial interest in the property derived from Mr Reardon's contributions the position might be different - but I do not need to decide that question." 148 Returning to early authority, in Jones v Lenthal supra the misconduct relied on was the earlier false swearing that a debt had been satisfied, when it had not. But it was no part of the plaintiff's case to prove his earlier false oath to recover the debt. The defendant sought to rely on the false oath, but was not allowed to. 149 As to proposition (e), that there is no general rule in equity that where there has been any impropriety equity will allow the loss to lie where it falls, this must now be taken to be established by Nelson: see per Deane and Gummow JJ at 559 - 561; per Toohey J at 596 - 597; McHugh J at 603 - 605. 150 As to proposition (f), Nelson is again clear authority for the proposition that a finding of illegality does not lead automatically to an absolute refusal of equitable relief: per Deane and Gummow JJ at 571 - 572; McHugh J at 616 - 618. Because of the ability of equity to give conditional relief, relief may be moulded to ensure that the perpetrator of the illegality does not obtain an advantage from the illegal action, but is not penalised in a way disproportionate to the quality of the illegal act or the quantum of the advantage obtained. Thus, the majority in Nelson were prepared to grant relief, but to grant relief conditional upon reparation being made for the small monetary advantage gained by the low interest loan being dishonestly obtained. See also Karl Suleman at [57]. 151 One further submission was put to me, which it was said would deflect the application of the clean hands doctrine if it were otherwise applicable. It was said that the doctrine did "not apply in cases of breaches of fiduciary duty and fraud". This proposition may be thought analogous to the principle in Rochefoucauld v Boustead [1897] 1 Ch 196, that the Statute of Frauds should not be allowed to become an engine of fraud. In relation to the unclean hands defence, Mr Motbey made reference to Nelson at 562 and cases there cited. He submitted that cases of breaches of fiduciary duty and fraud constituted an "established exception" to the operation of the defence. He had put similar submission to me on behalf of Lamru when the Lewis interests sought to amend the defence to plead the unclean hands defences. I delivered a judgment on that application: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2003] NSWSC 354. In that judgment I dealt with this submission at [13] and [14] as follows: "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).

[183]

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." 152 This argument was put again, but was not further developed, in final submissions. It is to be noted that Nelson itself, as well as the cases cited at 562, namely, George v Greater Adelaide Land Development Co Ltd (1929) 43 CLR 91; Abdurahman v Field (1987) 8 NSWLR 158 at 162 - 163; and Weston v Beaufils (No 2) (1994) 50 FCR 476 at 499 - 500, are cases where the defence was illegality rather than lack of clean hands. As I have said, it appears from Karl Suleman and, indeed, from Nelson, that if a defence is a defence of illegality in the strict sense, whether it is pleaded to a common law or an equitable claim, it should be dealt with under the rubric of illegality rather than the rubric of clean hands. Nelson itself and the cases cited at 562 all concern the question of whether, when money has been paid or property has passed under a contract tainted with illegality, the money or property may in appropriate circumstances be recovered. They cannot be taken to establish a general principle that the unclean hands defence does not apply where the claim responded to is of a breach of trust or of fiduciary duty. It is certainly not established in the Karl Suleman case, nor to my knowledge is there any authority, that establishes this as a general principle. Indeed, as I opined in my earlier judgment, I do not think that the cases clearly establish a general principle to that effect, even in relation to claims of illegality in the strict sense. I do not accept that the submission put in this regard should necessarily deflect me from any conclusion which I should otherwise reach. 153 In the present case, I have come to the conclusion that the clean hands doctrine should preclude Lamru from obtaining relief in respect of the fraudulently taken stock, by reason of Lamru's reliance on the certificate evidence, as pleaded in par 37G of the defence. The equity relied on was an equity to obtain relief in respect of a breach or breaches of trust, alleged to have been committed by Nortex and participated in by Kation and Lewis. The breaches of trust alleged were the taking by Lewis or Kation of stock of Nortex, selling it and keeping the proceeds. The particular acts complained of were committed in the 1997 year when Lamb was no longer a participant in the affairs of the company. He did not in that year participate in abstraction of stock or diversion of proceeds; in that year what occurred was a fraud on Lamru as well as on the revenue. It is true that Lamru did not, and did not have to, plead or aver Lamb's or its own misconduct as part of the facts to be made out to establish this cause of action. However, Lamru did choose to lead evidence of Lamb's and its own misconduct in conjunction with Lewis to render more probable the proposition that Lewis behaved in the way alleged in the 1997 year: the fact that Lamb and Lewis behaved together in the same discreditable way in relation to the stock of the company during earlier years rendered it more probable that Lewis continued with the same conduct alone in the later year. I have found that the conduct complained of did occur during the 1997 year, relying on the body of evidence brought forward by Lamru, including the evidence of the earlier conduct. The latter was an integral part of Lamru's case on this cause of action. It was specifically and strongly relied on by Lamru in support of it. It materially assisted the establishment of the conduct complained of by increasing the probability that it had in fact occurred. Lamb and Lamru's participation in the same course of conduct (which is the subject of the certificate evidence) persisted up to Lamb's departure from the company. That conduct had a close relationship with the conduct the subject of this claim. There was in effect a continuum between the conduct complained of and the conduct relied on to prove it. The same course of fraud on the revenue started with two parties and finished with one. It is evidence of this fraud that Lamru relies on to establish fraud during 1997. No steps have been taken to restore the benefits wrongly gained. Lamb and Lamru still enjoy their profit from the fraudulent enterprise. It is not possible, on the evidence, to calculate the quantum of that benefit, so as to consider moulding conditional relief, if that course were otherwise appropriate. For these reasons, it is my view that the Court would in reality be aiding a litigant "to derive advantage from [its] own wrong", in the words of Isaacs J in the Meyers case, if it granted equitable relief in these circumstances. The fact that the continuation of the conduct by Lewis and Nortex was a fraud on Lamru as well as on the revenue does not, in my view, on the facts of this case, prevent the operation of the clean hands doctrine. The only appropriate course in the circumstances is to refuse any relief. Therefore, the defence in paragraph 37G succeeds and Lamru's claim for equitable relief in relation to the fraudulent taking of stock fails. 154 As I have said at [150], Nelson emphasises that a finding of illegality does not lead automatically to an absolute refusal of equitable relief. It may lead to the grant of conditional relief, moulded to ensure that the perpetrator of the illegality does not obtain an advantage from the illegal action, but is not penalised in a way disproportionate to the conduct proved or the quantum of the advantage obtained. But it does not seem to me that the granting of conditional relief, rather than the refusal of relief, is appropriate in this case. Indeed, no submission to that effect was put to me. It is true that Lamb and Lamru had ceased to participate in the conduct which was dishonest vis a vis the revenue upon Lamb's departure from Nortex on 28 June 1996. However, although the conduct was belatedly confessed by Lamb in court during the course of the trial, there was no suggestion that he had taken any step to inform the revenue authorities of what had occurred, or to disgorge the taxation benefits derived during the years that the practice was in operation. Again, in those circumstances, I do not think that I should be deflected from the conclusion in [153] that the clean hands doctrine in this case precludes the relief sought.

[186]

156 The "pleading" allegations in the points of claim in relation to this claim are as follows: "68(a) In further breach of trust Nortex accounted for an amount of $168,550.87 (allegedly paid to lawyers and other professionals - Horwaths) in connection with litigation and other legal problems arising out of disputes between Lewis Senior and Nortex's other director Mr Lamb) as incurred in the interests of Nortex when in substance the expense was incurred in the interests of Lewis Senior; 40% of the $168,550.87 is $67,420.35. (b) Alternatively, without the authority of Nortex, Lewis Senior purported to engage lawyers (and other professionals - Horwaths) and then caused $168,550.87 to be paid from Nortex's funds to those lawyers/professionals as if owed to those lawyers/professionals under valid and binding contracts when in truth and in fact there were no valid and binding contracts because of the want of authority referred to. PARTICULARS a Scott Schedule claim 24(i) and evidence there referred to b Aff Lamb 15/2/02 c $38360.70 - Horwath; Mallesons - $130,190.17; total $168,550.87" In the Scott Schedule, the relevant portion from claim 24 is to the effect that the profits as recorded by Lewis in the accounts and tax returns were less than they ought have been by the following item (among others): "(i) $168,550.87 caused by Lewis to be paid to lawyers in connection with his various disputes and court cases with Lamb during that financial [sic] ……;" The Lewis interests responded: " (b) All payments of legal fees by Nortex were duly authorised - see the minutes of the general meeting of members of Nortex Pty Ltd held 13 February 1997 in which resolutions were duly passed ratifying and confirming the retainer of Messrs Mallesons Stephen Jaques, and the authority of Mr Lewis to retain Mallesons Stephen Jaques, as solicitors for Nortex Pty Ltd in relation to proceedings commenced against it by Mr Lamb." And Lamru replied: "re (b) the question of whether or not to employ Mallesons was a matter for the Board. The company could not determine that question without either altering the articles or sacking the Board neither of which were done."

[208]

The accessorial allegations in respect of 1997, contained in paragraphs 63 and 64, are in substance identical. 178 The bases of accessorial liability for breaches of trust or fiduciary duty have become one of the most debated and vexed issues in current equity jurisprudence, both in England and Australia. One of the points of controversy has been a divergence of view between the High Court and the House of Lords concerning the quality or degree of the notice or knowledge required for liability under the second limb in Barnes v Addy (1874) LR 9 Ch App 244: contrast Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 395 with Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at 388. The starting point for debate has been the famous passage from the judgment of Lord Selborne LC in Barnes v Addy at 251 - 252. There has been a tendency to treat these words almost as if engraved on a Mosaic tablet. The complications of the law as to questions of the knowledge and notice relevant under the so called "two limbs" have become almost Byzantine. For an up to date account by Lord Walker, writing extra curially, see the John Lehane Memorial Lecture 2004, "Dishonesty and Unconscionable Conduct in Commercial Life - Some Reflections on Accessory Liability and Knowing Receipt". Fortunately, the application of the relevant principle in the present case is quite simple. 179 The famous passage from Lord Selborne's judgment in Barnes v Addy is as follows: "Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust . But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees." [My italics] 180 An important feature of this pronouncement is noted in Meagher & Gummow, Jacobs' Law of Trusts in Australia (6th ed, 1997) at [1334] as follows: "Later cases have spoken of the first and second limb in Lord Selborne's propositions, the first being concerned with agents who receive and become chargeable with some part of the trust property, and the second with agents assisting with knowledge in a dishonest and fraudulent design on the part of trustees. …… The resultant tendency has been to treat the two limbs of Barnes v Addy as an exhaustive statement of the circumstances in which a third party may become accountable as a trustee. Plainly this is not so. First , Lord Selborne was directing his remarks to the accountability of agents who act in particular transactions; that he was not speaking of those who act as principals (eg, as trustees de son tort) or of third parties who purport to take property as purchasers or donees, not as agents, is readily apparent if his remarks are read as a whole. Secondly , his Lordship also treated as clearly liable as trustees third persons 'actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust' and, while the second limb may be seen as a species of this genus, there was well established authority at the time Lord Selborne spoke whereunder third parties who had not received trust property as agents and who had not as agents participated in a fraudulent design within the second limb and who had not acted as trustees de son tort, were held accountable as trustees." 181 Similarly, it is stated in 4 Scott on Trusts (4th ed, 1989) par 326.3: "Furthermore, the directors and officers [of a trustee corporation] are under a duty to the beneficiaries of trusts administered by the corporation not to cause the corporation to misappropriate the property. Any director or officer who knowingly causes the misappropriation of trust property by the corporation is personally liable for participation in the breach of trust committed by the corporation. The breach of trust need not, however, be a misappropriation of the trust property. Any officer who knowingly causes the corporation to commit a breach of trust causing loss to a trust administered by the corporation is personally liable for the loss to the beneficiaries of the trust." 182 Those observations are relevant in the present case. The relevant breaches of trust are breaches of trust by Nortex as trustee of the trust. Lewis was at all times a director of Nortex. It was he who caused the accounts to be made up in the ways complained of. In the 1995 year, they distributed the disputed 3 per cent of profit to Kation. In the 1996 and 1997 years the payments were recorded as made to Mark Lewis. The other director of Nortex was Lamb. As I have found, Lewis, in causing Nortex to carry out these transactions, did not act, as he asserted, with the consent of Lamb, but in the face of and with knowledge of Lamb's refusal of consent or agreement to these transactions. In respect of the transactions relating to the 1996 and 1997 years, Lamb had left the company and was not consulted. However, it was plain that Lamb did not consent to the giving of a profit share directly or indirectly, by paying remuneration over and above the value of his work, to Mark Lewis. As I have found that the use of funds in this way by Nortex was a breach of trust and that Lewis was a participant in that breach of trust, he is therefore liable to Lamru in respect of the sums of money dealt with in that way. 183 I turn to the position of Kation. In respect of the disputed 3 per cent in the 1995 year, after the conversations between Lewis and Lamb it was attributed to Kation in the 1995 accounts. This is the complaint made in the particulars appended to paragraph 34. On the evidence, Kation should be taken to have received it. As Lewis was the controlling mind of Kation, Kation undoubtedly did so with his knowledge of the dishonesty of the transaction. It is therefore liable to Lamru for that sum. However, in respect of the 1996 and 1997 years, it did not receive the relevant moneys. The actions within Nortex were carried out by Lewis as director and de facto controller of that company. Despite his role in Kation, I do not think the relevant actions were acts of Kation. I do not think that Kation can be said, in the words of the "pleading", to have been "knowingly concerned in the breach of trust". No doubt it could be said, as one of the parties otherwise entitled to the monies, to have acquiesced in the payments. But I do not think that, of itself, sufficient. On that basis Kation is not liable in respect of the 1996 and 1997 payments. ISSUE 13 Whether the cross claims against Lamru and Lamb for contribution or indemnity succeed 184 The cross claims for contribution or indemnity can only arise insofar as claims against Kation or Lewis have succeeded. The only such claims that have succeeded are those in respect of the payments to Mark Lewis. The basis of the claims for contribution or indemnity is that Lamru and Lamb also participated in the breaches of trust that form the basis of liability. It is clear from my findings on that subject matter that Lamru and Lamb did not participate in the relevant breaches of trust. ISSUE 14 Whether the cross claims against Lamru and Lamb based on breach of contract or for breach of his duties as a director succeed 185 The three claims ultimately made in respect of these breaches were succinctly summarised on behalf of Lamru and Lamb as follows: "1 Claim 1. This is a claim for damages for breach of the contract pleaded in para 60. 60 pleaded an agreement by Lamb and Lamru not to call up the loan account with Nortex and not to withdraw a personal guarantee of Nortex in favour of the CBA. 61 pleaded that the loan account was called and guarantee was withdrawn. It was alleged that in consequence Nortex ceased to be able to trade (63). It was further alleged that the conduct caused damage to Nortex Kation and Lewis (68) and claimed damages (70).

[221]

(d) on 19 June 1997, without prior notification to or consent from Lewis, Lamb again notified CBA of discontinuance of liability under his personal guarantee to CBA for advances made to Nortex." 187 There is no need to say more about the claim in contract than that there is no evidence that establishes an express contract to the relevant effect. Nor is there any evidence of the circumstances surrounding the creation of the relevant facilities in 1993 from which an implied contract to this effect might be inferred. This head of cross claim fails for those reasons. 188 The duties claimed to have been breached fall into two categories. In the first are the duties imposed by s 232(2), (4) and (6) of the Corporations Law (which was in force at the relevant time) and the common law duty of care corresponding to the duty imposed by s 232(4). The other category of duties is the fiduciary duties imposed on directors. 189 In both cases, it is important to examine what Lamb was doing and in respect of what rights, when he performed the actions complained of. In each case the rights he was pursuing or exercising were rights entirely personal to him or Lamru. In giving the notice of demand, he was acting as a director of, and seeking to enforce a right of, Lamru, which was a creditor of Nortex under its loan account. Lamru was not, of course, a director of Nortex. It was as a director of Lamru, not Nortex, that Lamb acted in causing the notice of demand to be given. It was equally in that role that he acted with regard to the objection as to the retainer of the solicitors in the proceedings consequential on the giving of the notice of demand. It was a personal right to withdraw a guarantee given by him personally that he was exercising when he withdrew the guarantee supporting Nortex 's finance facilities. 190 Section 232(2), (4) and (6) of the Corporations Law provided as follows: "232(2) [Act honestly] An officer of a corporation shall at all times act honestly in the exercise of his or her powers and the discharge, of the duties of his or her office.

[223]

232(6) [Improper use of position] An officer or employee of a corporation must not, in relevant circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation." 191 Each of these subsections imposes duties on a director in the course of his or her exercising powers or carrying out duties as a director. This is made plain by the words "in the exercise of … and the discharge of" in subs (2) and (4) and the words "make improper use of his or her position" in subs (6). It cannot be said in any realistic way that Lamb was exercising any powers, or discharging any duties, or making any use of his position as a director of Nortex, in doing what he did. The same applies to any allegation of breach of a common law duty of care imposed on him as a director. 192 For those reasons alone the cross claims based on allegations of breach of those duties must fail. 193 The content of the relevant fiduciary duty or duties is not so easily determined. That Lamb as a director of Nortex was in a fiduciary relationship with the company is undoubted. But the relevant ambit of the duties arising from that relationship and whether the actions complained of conflicted with those duties is far from clear. The fiduciary duties, breaches of which were complained of, were pleaded as duties "to act in good faith and in the interests of Nortex"(paragraph 40(b)(i)); "to have regard to and act in the best interests of the unitholders" in the trust (paragraph 41(b)); and "not to prefer his own interests or those of [Lamru] above those of Kation" (paragraph 41(c)). 194 Again, as has been made plain, Lamb was not acting in the role of a director of Nortex in carrying out the actions the subject of the claims. However, the ambit of the fiduciary duties imposed on a director is not necessarily limited to actions taken solely within the role of director. That there are two different themes as to what falls within the ambit of fiduciary duties was made plain by Deane J in Chan v Zacharia (1984) 154 CLR 178 at 199: "Notwithstanding authoritative statements to the effect that the 'use of fiduciary position' doctrine is but an illustration or part of a wider 'conflict of interest and duty' doctrine (see, eg, Phipps v Boardman [1967] 2 AC at p 123; NZ Netherlands Society 'Oranje' Inc v Kuys [1973] 1 WLR at p 129; [1973] 2 All ER at p 1225), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it." 195 Under the first limb, it is the receipt of a benefit or gain that constitutes the breach of duty. It is clear that a breach of fiduciary duty may arise where a benefit is received in circumstances where there is a conflict between fiduciary duty and personal interest, even though the director could not be said to be acting in that role. The pursuit of a benefit or gain may be sufficient if it causes the company damage: see [200] below. In its most extreme formulation, the duty was said by Lord Herschell in Bray v Ford [1896] AC 44 at 51 to be that a person "… is not allowed to put himself in a position where his interest and duty conflict." But it is plain that that most extreme form does not represent the law. 196 It was said by Sir Frederick Jordan in "Chapters on Equity in New South Wales" (6th ed, 1947) (reprinted in "Select Legal Papers" (1983)) at 115: "It has often been said that a person who occupies a fiduciary position ought to avoid placing himself in a position in which his duty and his interest, or two different fiduciary duties conflict.

[225]

It seems to flow from this that the rule stated in the first paragraph of the quote is not absolute and that the prohibition is not against the entry into a position of potential conflict as such, but, in Sir Frederick Jordan's words, taking advantage of a conflict which arises. 197 In Mills v Mills (1938) 60 CLR 150, the High Court recognised that it was not a breach of the rule for a director to hold shares in the company, and therefore to have a personal interest, which may come into conflict with his or her fiduciary duties as a director. Latham CJ said at 163 - 164: "It must, however, be recognized that as a general rule, though not invariably (as, for example, in the case of Birtchnell in this case), directors have an interest as shareholders in the company of which they are directors. Most sets of articles of association actually require the directors to have such an interest, and it is generally desired by shareholders that directors should have a substantial interest in the company so that their interests may be identified with those of the shareholders of the company. Ordinarily, therefore, in promoting the interests of the company, a director will also promote his own interests. I do not read the general phrases which are to be found in the authorities with reference to the obligations of directors to act solely in the interests of the company as meaning that they are prohibited from acting in any matter where their own interests are affected by what they do in their capacity as directors. Very many actions of directors who are shareholders, perhaps all of them, have a direct or indirect relation to their own interests. It would be ignoring realities and creating impossibilities in the administration of companies to require that directors should not advert to or consider in any way the effect of a particular decision upon their own interests as shareholders. A rule which laid down such a principle would paralyse the management of companies in many directions. Accordingly, the judicial observations which suggest that directors should consider only the interests of the company and never their own interests should not be pressed to a limit which would create a quite impossible position."

[226]

Equally, it is made plain in that case that a director is not obliged to ignore totally, or necessarily act contrary to, personal interests in the discharge of duties. If the rule were otherwise, it would be extremely inconvenient and might completely stultify the operation of small companies, where the engagement of directors independent of the shareholders would be a practical impossibility. 198 Similarly, it would be extremely inconvenient if directors could not make loans (represented by loan accounts), especially to small companies, which find in such loans one of their most common sources of finance. Likewise, the provision of guarantees by directors, often supported by the giving of security over personal assets, is often a necessity for such companies to obtain finance facilities from banks and other outside sources. In my view, it is clear that such transactions are not prohibited by the rule. 199 The question then becomes whether a director who has entered into such a transaction is precluded from exercising the personal rights conferred, if that exercise would be in any way detrimental to the company. Such a ban would tend to have the same effect as an absolute prohibition of such transactions, since directors would be strongly discouraged from entering into such transactions, advantageous or even necessary to the company, if they could not enforce their personal rights. In my view, the law does not impose such an absolute ban on the exercise of purely personal rights by directors. Such enforcement cannot be regarded as an act of the director in the role of director, as opposed to an action in a purely personal capacity. It may be that the vindication of a personal right of the director, whether by the recovery of money or otherwise, cannot be regarded as obtaining a gain or benefit within the formulation of Deane J in the passage set out in [195] above. Equally, although it is clear that there is a situation of conflict, it cannot be regarded, in Sir Frederick Jordan's words, as taking advantage of the conflict. It was suggested that in the case of the notice of demand, there was liability because the notice encompassed some items of debt which were not established or as to which there was a bona fide dispute. But I do not think that that changed the situation in this case. I should add that I was not referred to, and was unable to find, any case in which a director was found in breach of duty in circumstances such as those alleged in the relevant parts of the cross claim. I am of opinion that there was no breach of fiduciary duty which the Lewis interests can rely on. 200 In the case of a breach of fiduciary duty, there is no doubt that in appropriate circumstances equitable compensation will be available as a remedy for that breach of duty: see Nocton v Lord Ashburton [1914] AC 932 at 952, 956 - 957; McKenzie v McDonald [1927] VLR 134 at 146; Catt v Marac Australia Ltd (1986) 9 NSWLR 639 at 659 - 660; Day v Mead [1987] 2 NZLR 443 at 460 - 461; Hill v Rose [1990] VR 129 at 143 - 144; Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 548, 570 - 571, 589 - 590; and see generally I E Davidson "The Equitable Remedy of Compensation" (1982) 13 MULR 349; W M C Gummow "Compensation for Breach of Fiduciary Duty" in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989) 57; Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [5-260]. One of the appropriate circumstances, is, of course, that it is demonstrated that the company has suffered a loss and that there is a causal connexion between that loss and the breach of duty. On the evidence before me, it was not established that there was any identified loss actually suffered by Nortex, nor that there was any causal connection between any loss suffered and the actions alleged to constitute breaches of duty. In the case of the notice of demand, the company was not wound up as a result of its service. There is no evidence that there were any costs incurred that were not dealt with in the proceedings ensuing from the notice of demand. In relation to the withdrawal of the guarantee, certainly there is evidence that, on the day following the withdrawal, the Bank withdrew Nortex's finance facility, attributing as its reason the withdrawal of the guarantee. Some time afterwards the company was wound up. However, there is no evidence as to the financial state of the company at the time of the withdrawal of the guarantee or the availability or unavailability to the company of alternative sources of finance. In those circumstances, it is impossible to find that the winding up was caused in the requisite way by the withdrawal of the guarantee. Equally, there is no evidence as to what, if any, losses the company suffered by reason of being wound up. For those reasons alone, these claims for equitable compensation would fail, even if a breach of duty were established. 201 In those circumstances, the claims made in the cross claim which have been agitated upon the trial before me must fail and there will be judgment for Lamru and Lamb in respect of them. Appeals from liquidator's decisions on proofs of debt 202 The principles applicable on appeals from liquidators' rejections of proofs of debt were discussed in the High Court in Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 per Brennan and Dawson JJ at 340 - 341 as follows: "If the liquidator, in performing his function of considering the admissibility of proofs of debt, decides to reject a proof of debt, the ordinary remedy of the person claiming to be admitted as a creditor is to apply to the court to reverse or modify the decision …… The proceedings thus instituted, though often referred to as an 'appeal' from the liquidator's decision to reject, are originating proceedings which the court hears de novo: In re Bird's Stores Pty Ltd (1931) 37 Arg LR 94; In re Kentwood Constructions Ltd [1960] 1 WLR 646; [1960] 2 All ER 655; In re Trepca Mines Ltd [1960] 1 WLR 1273; [1960] 3 All ER 304. In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. If the liquidator relies on those special defences which allow him to go behind a judgment, an account stated, a covenant or an estoppel in order to ascertain the true liability of the company, he is none the less in the role of an adversary. The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation."

Lewis v Nortex Pty Ltd

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Judgment (238 paragraphs)

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Legislation Cited (2)

Cases Cited (37)

Cited By (15)