Lewis v Nortex Pty Ltd

Supreme Court of NSW|2004-12-17|Before: Hamilton J, Kation P, Lamru P, Nortex P

CITATION : Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2005] NSWSC 482

HEARING DATE(S) : 13 - 15 & 17 December 2004, 21 - 24 February and 7 & 8 March 2005

DECISION : Various decisions re form of orders.

Corporations Law ss 471A, 553, 553E, 1321 LEGISLATION CITED : Supreme Court Rules Part 15 r 11

Barnes v Addy (1874) LR 9 Ch App 244 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 249 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 271 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 1143 Lodge v National Union Investment Company Limited [1907] 1 Ch 300 May v Chidley [1894] 1 QB 451 Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (In Liquidation) (1999) 96 FCR 217 Nelson v Nelson (1995) 184 CLR 538 Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 84 WN (Pt 1) (NSW) 399 Roberts v Plant [1895] 1 QB 597 Selangor United Rubber Estates Ltd v Cradock (No 3) (1968) 1 WLR 1555 CASES CITED : Target Holdings Ltd v Redferns [1996] 1 AC 421 Twinsectra Ltd v Yardley [1999] Lloyd's Rep Bank 438 White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220 Youyang Pty Limited v Minter Ellison Morris Fletcher (2003) 212 CLR 484 15 The Laws of Australia tit Equity [195] 27 Halsbury's Laws of Australia (1995) tit Trusts [430-5330] Hayton & Marshall, Commentary and Cases on the Law of Trusts and Equitable Remedies (11th ed, 2001) par 10-02 IV Scott on Trusts par 294.1 Jacobs' Law of Trusts in Australia (6th ed, 1997) [2205] Lewin on Trusts (17th ed, 2000) 40-09 Meagher, Gummow & Lehane's Equity Doctrines and Remedies (4th ed, 2002) [3-135] Ritchie's Supreme Court Procedure NSW [15.11.1]

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)

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)

Kemp Strang (P L Lewis & Kation P/L) Lyons & Lyons (Lamru P/L) SOLICITORS : Abbott Tout (Liquidator & Nortex P/L)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3081/97 PETER LAWRENCE LEWIS v NORTEX PTY LTD (In Liq) 1750/02 LAMRU PTY LIMITED v KATION PTY LIMITED & ORS JUDGMENT 1 HIS HONOUR: In this matter I delivered my substantive judgment on 29 November 2004: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 1143 ("my judgment"). The matter has been back before me for debate as to the form of orders which should be made consequent on my decisions. Bearing in mind the unruly nature of this matter, I invited the parties to inform me at the same time if they submitted that there were any matters that I should have decided in my judgment, but that I omitted to decide. There are thus matters of two types dealt with in this judgment, as follows:

1 Whether there are matters that were not dealt with in my judgment which should now be dealt with.

2 What relief should be granted as a result of my decisions. The form of relief was explicitly not dealt with at the trial or in my judgment. 2 Matters were raised and debated under five heads as follows:

(1) Whether there should be a finding or an order as to the amount in which Lamru should be admitted as a creditor of Nortex.

(2) The consequences of the findings of stock fraud.

(3) Breaches of the accounting conventions that occurred in the 1996 and 1997 years.

(4) The consequences of the payments to Mark Lewis.

(5) The legal and accounting costs. 3 I shall consider these in turn. (1) Whether there should be a finding or an order as to the amount in which Lamru should be admitted as a creditor of Nortex. 4 At one stage I had some doubt as to whether this was an appropriate part of the judicial process in this case or whether it should remain an accounting exercise to be conducted out of court. However, a declaration as to this amount was sought from the inception of these proceedings and all parties join in asking that there be declaratory relief to this effect. In these circumstances, the Court is prepared to grant this relief. It was suggested that it might be necessary before it could be granted to order an inquiry before the Master to establish the relevant amount. However, I believe that, after various matters still in contention before me are decided, the relevant amount should be able to be determined as a matter of calculation by agreement between the parties. At worst, some procedure could then be adopted to resolve any dispute as to the calculation in some fashion simpler and cheaper than a formal inquiry before the Master. Further consideration of this matter may be deferred until draft minutes are brought in consequent upon this judgment. (2) The consequences of the findings of stock fraud. 5 The issues raised under this heading were claims by Lamru to the following effect:

(a) That the 1996 closing stock figure should be adjusted in accordance with the finding of the abstraction of stock, so that the free net income ("FNI") of that year is adjusted accordingly in the books of the trust. This is, in effect, relief in the statutory appeal against the liquidator's act or decision in maintaining the original stock figure. As that proceeding is statutory, not equitable, the unclean hands defence does not apply.

(b) That, similarly in the 1997 year, the accounts should be prepared on the basis that they include in the income of the year the profit from the sale of the abstracted stock, with Lewis shown as a debtor to the company in the corresponding amount.

(c) That there should be an order that Lewis and Kation pay to the trust the value of the abstracted stock and the profit derived from its sale. This is said to be on the basis that Lamru as beneficiary brought and agitated at the trial a claim on behalf of the trustee, in effect for conversion of the stock, or alternatively a claim in fraud arising from its abstraction and sale. These claims were not determined in my judgment. The unclean hands defence did not apply to this claim: (i) in so far as the conversion claim was a purely common law claim;

(ii) because the defence of unclean hands is not available in respect of the trust's claim for indemnity against Lewis/Kation in respect of the breach of trust constituted by failure to account for the stock money; Lamru brings the claim on behalf of the trust (as a derivative action) and the act of tendering evidence of historical tax evasion by Lewis and Lamb is not conduct disentitling.

(d) That, both in respect of the claim to be admitted as a creditor of Nortex in respect of the missing stock and of the derivative claim on behalf of the trust, it is necessary for the Court to quantify the monetary impacts of the missing stock in 1996 and 1997 and the Court is pressed for $219,215 in 1996 (closing stock) and $164,038 in 1997 (profit on sale of items). 6 As to (a) & (b), these are claims that Lamru is entitled to orders in these terms based upon [129] of my judgment to the effect that Lewis (with the knowledge and acquiescence of Kation), during the 1997 year took and sold stock of Nortex and did not pay or account to the company for the proceeds. To conceal this, the stock figure at the end of the 1996 year was falsely adjusted down. Equitable relief was held not to be available to Lamru in respect of this subject matter by virtue of the unclean hands defence: see my judgment [153]. However, Lamru contends that it is still entitled to have a determination that the liquidator was wrong in rejecting so much of Lamru's proof of debt as depended upon the acceptance of these claims and to have the accounts of Nortex adjusted accordingly. These orders would be made in the determination of the statutory appeal proceedings. As the relief in those proceedings is not equitable, but statutory, the unclean hands defence does not apply. 7 Mr Cotman, of Senior Counsel for the Lewis interests, protests that by doing this the Court would give indirectly what it could not give directly and that this a court of equity could not or would not do. However, it seems to me that that proposition is not sound. The Supreme Court is, of course, a court of equity, a court of law and a court which exercises statutory jurisdiction. There will be many circumstances where the withholding or granting of relief by reference to the clean hands doctrine will turn on what some would perceive as the technical distinction between whether the cause of action relied on is legal or equitable. It is clear that, if the relief sought is purely legal, the clean hands doctrine has no operation and the unclean hands defence is unavailable. Despite Mr Cotman's submission that the Court will not do indirectly what it could not do directly, there are many instances where there are different avenues to, in effect, the same relief. Often, upon the same set of facts, there will be available potentially a judgment at common law and relief in equity. Even if the equitable relief will be precluded by unclean hands, the purely legal relief, if otherwise available (eg, not depending upon the establishment of an illegal transaction) may be obtained: see Meagher, Gummow & Lehane's Equity Doctrines and Remedies (4th ed, 2002) [3-135]; Nelson v Nelson (1995) 184 CLR 538 at 550 per Deane & Gummow JJ. There is no room in this area for the operation of the doctrine enunciated by Mr Cotman. The situation is the same in respect of the Court's exercise of its statutory jurisdiction to review decisions of liquidators under s 1321 of the Corporations Law ("the CL"), which was the relevant legislation when Nortex was wound up in 1997 and which continues to apply to the winding up. This relief is not equitable in nature, unclean hands do not preclude the relief and operation should not be given to the doctrine enunciated by Mr Cotman: Lodge v National Union Investment Company Limited [1907] 1 Ch 300; and see generally Meagher, Gummow and Lehane ibid. 8 As the clean hands doctrine does not preclude relief in the statutory appeal, the findings in [129] of my judgment entitle Lamru to have a determination that the liquidator was wrong in rejecting so much of Lamru's proof of debt as depended upon the acceptance of these claims and to have the accounts of Nortex adjusted accordingly. 9 As to (c), the claim that there should be an order that Lewis and Kation pay to the trust the value of the abstracted stock and the profit derived from its sale, this is based on the proposition that Lamru as beneficiary made at the trial a claim on behalf of the trustee. Whether the claim seeks to navigate around the unclean hands defence by being a common law claim or by being a claim made on behalf of the trustee, the viability of the argument depends on the proposition that the case was conducted as a claim brought by the beneficiary on behalf of the trustee. 10 This argument progresses by reminding the Court of the terms of ss 553 and 553E of the CL. It then progresses to pars 42, 43 and 44 of the points of claim, which are as follows: "42 In breach of trust Nortex wrongfully failed to include in its closing stock for the accounting period ending on the 96 income vesting day some 120,464 units of stock having a value (for the purposes of valuing closing stock) of $219,215.00 with the consequence that the total free nett income to the 96 income vesting day should be increased by that amount and Lamru's 40% share thereof ($87,686.00) accounted to it. PARTICULARS a Scott Schedule claim 17 and evidence there referred to b Request for particulars and answer thereto 28/7/00 and 3/8/00 c Affidavit Lamb 15/2/02 d Annexure C to affidavit of Lamb 14/11/02 e Pages 78A-D of Exhibit AV

43 Lewis Senior and Kation were knowingly concerned in the beach of trust pleaded in 42

44 As such accessories to Nortex's breach of trust Lewis Senior and Kation are liable to Nortex to indemnify it in respect of the breach and liable to compensate 'Lamru'". 11 The allegations relating to the profit from the abstracted stock in the 1997 year in pars 56 - 59 essentially followed the pattern of pars 42 - 44. Paragraph 57 was as follows: "57 Those units of stock had a sale value of $383,253.00 translating to a gross profit of $164,038.00 which sums should be, included in the free nett income as at the 97 vesting day (i.e. the $1,425,079.84 referred to in 55) with the result that Lamru is entitled to 40% of that concealed profit ($65,615.20) . 12 It is said that these provisions are to be read as enunciating not only Lamru's claim under Barnes v Addy (1874) LR 9 Ch App 244, but a claim made by Lamru on the trust's behalf for recovery from Lewis of the value of the goods wrongly taken. This, it is said, would be a purely legal claim on behalf of the trust against a third party to recover trust property. An analogy would be the claim of a trustee who was the registered proprietor of a piece of real property occupied by squatters. The trustee's remedy would be to bring an action for judgment for possession, which would undoubtedly be a legal claim. To a legal claim, the defence of unclean hands is no defence and it would offer no bar. Equally, if it is regarded as an equitable claim in fraud made on behalf of the trustee, the fact that it is in substance the trustee's claim would avoid the effect of the unclean hands defence. 13 Claims such as those outlined may have been propounded, had Lamru chosen to do so. But there are a number of objections to this being regarded as a correct characterisation of what has occurred in the present proceedings. 14 First, the pleading allegations set out above are not an adequate allegation of such a claim. The "pleading" does not make such a claim in terms and is not recognisable as making such a claim. There is no allegation that the trustee has declined to bring such a claim. However, there is some doubt as to whether that is a necessary ingredient of a cause of action by a beneficiary for such relief. It is said that this is a matter that goes to standing, not to the existence of the cause of action: see IV Scott on Trusts par 294.1. In my view, under modern pleading practice, that matter should be pleaded to eliminate surprise. Additionally, it is said that any problem is solved by Part 15 r 11 of the Supreme Court Rules 1970, which dispenses with the pleading of conditions precedent. But that is not a solution. The plaintiff must in its pleading show its entitlement to bring the action. And Part 15 r 11 does not operate to dispense with the pleading of a necessary ingredient of a cause of action: May v Chidley [1894] 1 QB 451; Roberts v Plant [1895] 1 QB 597; and see generally Ritchie's Supreme Court Procedure NSW [15.11.1]. 15 Whether or not it needs to be specifically alleged in the pleading that the trustee has failed to bring the action or that the beneficiary sues on behalf of the trustee, stating the facts that entitle it to do so, this "pleading" is inadequate to bring to attention the causes of action now sought to be relied on, rather than only Lamru's Barnes v Addy claim. On the authority of McDougall J's decision in White Constructions (ACT) Pty Ltd (in liq) v White (2004) 49 ACSR 220, this would be sufficient to preclude relief in respect of these causes of action. In that case, the wider case was opened. But, as the defendants could not have been taken to have consented to the case being conducted on that basis, the plaintiff was confined to its case as pleaded and particularised. 16 Whatever the adequacy or inadequacy of the "pleading" to draw attention to claims of this nature, the conduct of the case did not lend any support to the proposition that these causes of action ought be allowed to be relied on. Mr Motbey, of counsel for Lamru, concedes that these claims were not propounded in this way in final address at the trial before I delivered my judgment. They have not been put forward as such, that is, as claims made through the trustee, in these proceedings at any time up to the present. What is more, Mr Motbey, during the course of the trial, eschewed that Lamru was making a claim on this subject matter otherwise than on the basis of its Barnes v Addy claim. Thus, at transcript p 6570 the following exchange occurred: "HIS HONOUR: I think I understand; equally bearing in mind the White ACT point, you agree that there is no direct case of fraud against Lewis. You have not pleaded that. It is not now made. Your claim against Lewis is for accessorial liability only through the breaches of trust that we have just discussed.

MR MOTBEY: Yes, that's right, your Honour." 17 In my view, these derivative claims were not made and the proceedings were not conducted on the basis that they were made. No direct claim of fraud was made against Lewis, much less any common law claim for conversion in respect of the goods. It is now too late and Lamru cannot succeed upon claims propounded in this way at this stage. 18 For these reasons, there will be no order that Lewis and Kation pay to the trust the value of the abstracted stock or the profit derived from its sale on the basis that Lamru as beneficiary made at the trial a claim on behalf of the trustee. 19 As to (d), by reason of my decision in [18], there will be no need for assessment of these monetary amounts for the purposes of a claim under item (c). However, my decision in [8] above that Lamru is entitled to a determination that the liquidator was wrong in rejecting so much of Lamru's proof of debt as depended upon the acceptance of these claims and to have the accounts of Nortex adjusted accordingly necessitates the quantification of the value of the items omitted from the stock count at the end of the 1996 year and of the profit made in the 1997 year from their sale. In relation to the items of stock Lamru claims $219,215 and in respect of the profit on sale, $164,038. It submits that these figures were established on the evidence. That submission was supported by the liquidator. Lamb gave evidence relating to the calculation of each of these figures. The work was detailed and appeared to have been done with care. Where it appeared over the course of the proceedings that amendment was necessary, concessions were made and amendments to the calculations carried out by Lamb. The bases for calculating the value of stock and the quantum of profit appeared to me sound. The greatest attack made in cross examination and address was on the 1997 profit figure. This was to the effect that the profit figure put forward showed a 43 per cent mark up, whereas the accounts showed that historical mark ups were 27 or 28 per cent. But it was not clear that the comparison sought to be made was a true comparison. And other explanations were put forward for the difference. Lamb did not in cross examination make any clear concession that this rendered his calculation of profit wrong. I am not satisfied that this attack provided a sufficient basis for rejecting Lamb's calculation. It was also put by Mr Cotman, in this regard, as in a number of others, that Lamb's evidence should be treated as utterly worthless and that nothing should be regarded as being established on his evidence alone. However, despite my reservations concerning him as a witness, I have already rejected that proposition in a number of other places and I do not accede to it now. In fact, Lamb's evidence on these subject matters appeared to me to have considerable cogency. Bearing in mind all aspects of the evidence on this subject matter, including the quality of the calculation, the manner in which Lamb gave oral evidence concerning this, the lack of effective cross examination and the lack of any evidence given or called by Lewis (who was seised of the relevant facts), I find that it is established that the value of the goods abstracted and the quantum of the loss of profit on their sale were substantially as calculated by Lamb. On the evidence, it may be that some anomalies or inaccuracies remain, but in my view they are not considerable. To allow for them, I propose to make some small allowance from Lamb's figures. Doing the best I can on the evidence, I assess the value of the stock abstracted at $210,000 and the profit on the disposal of the goods at $150,000. The accounts of the trust should be adjusted accordingly. (3) Breaches of the accounting conventions that occurred in the 1996 and 1997 years. 20 I have not in my judgment decided certain claims arising from departure from the accounting conventions in relation to the 1996 and 1997 years. This was an inadvertent omission, as I have already acknowledged: see transcript p 6950, 13 December 2004. I did, of course, find that the conventions did apply in relation to those years. Lamb did not physically depart until two days before the end of the 1996 year and the termination of his engagement in the business was at a time after then that it has not been necessary to determine. But his departure did not in any event terminate the conventions, so that they should be applied in the preparation of the accounts of the 1996 and 1997 years: see my judgment [75] - [77]. 21 The claims that I omitted to determine were claims of accessorial liability in Lewis and Kation arising from participation in breaches of trust in preparing the 1996 and 1997 accounts without reference to the conventions. These claims depended on the assistance by Lewis and Kation in a dishonest and fraudulent design on the part of Nortex as trustee. 22 In the case of the Mark Lewis payments, I found that there was liability because Lewis procured Kation to make these payments on the basis that Lamru had through Lamb agreed to them, whereas the opposite was true, as Lewis in causing Nortex to act plainly knew. This constituted the participation in dishonesty and fraud which attracted the accessorial liability: see my judgment [182], [183]. 23 However, I do not in relation to the steps taken to reverse the application of the conventions in relation to the 1996 and 1997 accounts find established the relevant element of dishonesty or fraud. There is considerable evidence that Lewis in a number of instances acted dishonestly. However, dishonesty cannot be presumed, but must be established in each particular instance. Here, there were two views available as to whether the conventions should be persisted with. They were the subject of considerable argument at the trial, the outcome of which was not self evident. I am not prepared to find (particularly bearing in mind the gravity of the issue) that these departures from the conventions involved dishonesty or fraud. 24 Also, in relation to the 1997 accounts, the evidence seems to show that they have not been finalised and remain to be finalised by the liquidator. Any steps taken by Lewis in this regard have not taken effect and cannot be the basis of liability. (4) The consequences of the payments to Mark Lewis. 25 This is the most difficult question remaining for my decision. First, it requires something to be said concerning one matter stated in my judgment. Paragraph [204] is a purely summary paragraph. Although under the heading "Conclusions", it is stated to be a summary of "the decisions I have made". Items (4) and (9) of those "conclusions" are stated as follows: " (4) That the payments by Nortex to Kation of an additional 3 er cent of the profits in the 1995 year in the sum of $58,070 and to Mark Lewis of bonuses in the 1996 and 1997 years in the sums of $101,626 and $138,733.30 respectively were made in breach of trust.

(9) That Lewis should be ordered to pay to Lamru 40 per cent of the Mark Lewis payments in the 1995, 1996 and 1997 years and that Kation should be ordered to pay to Lamru 40 per cent of the Mark Lewis payment in the 1995 year. " 26 Item (4) correctly reflects my findings at [96], [97] and [105] - [107] as to the establishment of breaches of trust. At [182] and [183] there are conclusions as to the accessorial liability of Lewis and Kation respectively. But, as I have already said at [1] above, there was no argument as to the relief to be granted. And there is no basis in the material summarised for the conclusion expressed in item (9) as to the appropriate form of remedy, which was expressed by inadvertence, arising in part from the constant references in documentation and submissions to Lamru's 40 per cent share and the litany that this should result in orders for the payment to Lamru of compensation calculated by reference to that proportion. Understandably, in light of the foregoing, there was lack of argument for any other form of remedy. In light of my actual findings, item (9) should read as follows, which is a correct summary of those findings:

(9) That Lewis is liable in relation to breaches of trust with respect to the Mark Lewis payments in the 1995, 1996 and 1997 years and that Kation is liable in relation to the breach of trust with regard to the Mark Lewis payment in the 1995 year. 27 No argument has been put that I am bound to this inadvertent mis summarisation. I propose to withdraw this portion of my reasons for judgment and replace it in revised reasons with an item (9) in the terms set out immediately above. 28 It should be apparent from a reading of my judgment that I proceeded on the basis that the payments to Mark Lewis in respect of those years had in fact been made. That, indeed, is the basis on which the case was conducted by all parties during the trial before my judgment was delivered. The Lewis interests in particular conducted the case on the basis that the payments had been made, but had been consented to by Lamru (which I found not to be so): see Scott Schedule item 18. It should also be noted that no submission was made, pursuant to my invitation made in [1] above, that there was an issue which I had not determined as to whether the payments had been made or not. 29 However, in submissions made to me, on the form of orders that should flow from my judgment, it is now put on behalf of the Lewis interests that, in effect, there was no loss in respect of the Mark Lewis remuneration in the 1996 and 1997 years because no payment was made. In the words of the written submissions, "there has been no disposition of trust property in respect of the 1996 and 1997 years to any person" and so no loss to the trust which can sound in any order being made. It is said that this is because, in respect of the 1996 year, there was a journal entry made by Lewis on 8 March 1997, but the accounts were never adopted by the directors. In respect of the 1997 year, the journal entry made by Lewis was made after the appointment of the provisional liquidator. The liquidator did, on the evidence, write to Lewis and Mark Lewis in 2000 suggesting that he did not recognise the journal entries, but his conduct concerning this matter has been inconsistent and equivocal and in the end he too must be taken to have conducted himself on the basis that the payments were made. He originally determined Lamru's complaint in this regard on the basis of reducing the payments to what he considered the real value of Mark Lewis' work, which acknowledged the payments as made. He referred to them as made in his written submissions at the trial. Even if s 471A of the CL meant that the director's journal entry relating to 1997 had no force of itself, it was adopted on behalf of the company by the liquidator's conduct, particularly his conduct of these proceedings. I do not propose to allow any departure from the basis on which the trial was conducted, namely, that the payments had been made, or to go behind what was said in my judgment concerning the breaches of trust in any way. 30 There has not been a great deal of exposition of the appropriateness of the different types of remedy available in Barnes v Addy claims. Whilst it is clear that a Barnes v Addy claim responds to a direct right of a beneficiary rather than a derivative right claimed through the trustee, it is clear that in some circumstances the remedy to be granted will be an order for the restitution of the trust fund in respect of an amount abstracted, whereas in other circumstances it will be an award of equitable compensation to the beneficiary in respect of the beneficiary's personal loss. It is concerning the differing circumstances in which these alternative remedies will be appropriate in Barnes v Addy claims that there has been a dearth of authority. 31 There was recently a comprehensive exposition of the law as to a beneficiary's remedies against a trustee for breach of trust in the speech of Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] 1 AC 421 (in which Lord Keith of Kinkel, Lord Ackner, Lord Jauncey of Tullichettle and Lord Lloyd of Berwick concurred). The whole of that speech deserves close attention, but from it can be derived the following propositions:

1 The defendant's wrongful act must cause the damage complained of. 2 The plaintiff must be put in the same position as he would have been in if he had not sustained the wrong for which he is now getting reparation. (These are common law principles which are applicable in equity.) 3 The basic right of a beneficiary is to have the trust duly administered in accordance with the provisions of the trust instrument and the general law. 4 In relation to a traditional trust, the right of each beneficiary is to have the whole fund vested in the trustees so as to be available to satisfy his equitable interest when and if it falls into possession. 5 Under traditional trusts where the trust are still subsisting, the right of each beneficiary and his only right is to have the trust fund reconstituted as it should be. 6 But in respect of trusts which have come to an end the Court will generally order payment of compensation directly to the beneficiary (although a possibility of an order to reconstitute the fund is not entirely ruled out). 7 One purpose of this rule is to preserve the value of the trust, particularly the bare trust, as a device in commercial and financial dealings. 8 The restitution or compensation payable is assessed at the date of trial and not the date of breach. Although there is an accrued cause of action as soon as the breach is committed, the quantum is fixed at the date of judgment at the figure then necessary to put the trust estate or the beneficiary back into the position it would have been in had there been no breach. 9 The losses are to be assessed at the time of trial using the full benefit of hindsight. 10 If, on the facts known at the time of judgment, the plaintiff has eventually suffered no loss by reason of the breach of trust, then no order for restitution or compensation can be made.

In relation to propositions 8 and 9, His Lordship relied particularly on the judgment of Street J in Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 84 WN (Pt 1) (NSW) 399 and the judgment of McLachlin J in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534. In relation to proposition 6, see Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (In Liquidation) (1999) 96 FCR 217. In relation to propositions 3, 4 and 5 and generally, see also 15 The Laws of Australia tit Equity [195]; 27 Halsbury's Laws of Australia (1995) tit Trusts [430-5330]; Jacobs' Law of Trusts in Australia (6th ed, 1997) [2205]; Hayton & Marshall, Commentary and Cases on the Law of Trusts and Equitable Remedies (11th ed, 2001) par 10-02. 32 A number of Lord Browne-Wilkinson's propositions were specifically approved by the High Court in Youyang Pty Limited v Minter Ellison Morris Fletcher (2003) 212 CLR 484 and none was disapproved. The difference in result in Target and Youyang is accounted for as follows. In Target, the beneficiary obtained by the payment away exactly what it bargained for, its loss being caused by the antecedent fraud of others. 33 Whilst Target and Youyang deal with the liability of a trustee rather than that of an accessory, the principle is that the court of equity deals with an accessory liable under Barnes v Addy principles on the basis that he is liable as though he were a trustee: see Lewin on Trusts (17th ed, 2000) 40-09; Selangor United Rubber Estates Ltd v Cradock (No 3) (1968) 1 WLR 1555 at 1582 per Ungoed Thomas J, approved by Potter LJ in the Court of Appeal in Twinsectra Ltd v Yardley [1999] Lloyd's Rep Bank 438 at [116]. It flows from this that the same principles should be applied in granting relief against an accessory as against a trustee for a similar breach. 34 In relation to this matter, as to so many others, the form of the "pleading" is of particular importance. The allegation concerning the 1995 year was made in par 34 of the points of claim, set out in [88] of my judgment. The allegations concerning the 1996 and 1997 years were made in pars 45 and 60 of the points of claim, respectively set out in [89] and [90] of my judgment. They are significantly different in respect of the 1995 year on the one hand and the 1996 and 1997 years on the other. 35 The allegation in respect of the 1995 year was that in "breach of trust Nortex failed to pay the full 40 per cent of the free nett [sic] income". As appears in [96] of my judgment, what was paid to Lamru's benefit that year was 37 per cent only, as appears from the 1995 accounts. It is necessary to remember, as was pressed on me by Mr Motbey, that clause 4(2) of the trust deed (set out in [10] of my judgment) declared that the trustees should hold as a separate trust fund the FNI of each accounting period in trust absolutely for the unit holders as at the expiry of the accounting period in their respective proportions. 36 In my view, that provision created a separate bare trust of the FNI as determined in the 1995 accounts. It is from that separate bare trust of the FNI that the defalcation was alleged and it was from that separate bare trust that the defalcation occurred. Clause 4(2) required the holding of 40 per cent of the FNI or $339,413 for Lamru, whereas in fact only $316,185 was treated as held for Lamru, the difference being $22,318. This bare trust was dissipated as soon as it was created by being distributed to the respective loan accounts of Kation and Lamru. It was from the bare trust that these amounts were disbursed, not from the unit trust itself. Upon the making of these disbursements, the bare trust came to an end. But it was the lesser incorrect amount that was distributed to Lamru and the greater incorrect amount that was distributed to Kation. It was Kation's account that was then debited with the amount of $58,070 credited to Mark Lewis. 37 What orders should result from the findings which I have made? There should be a declaration that there was a breach of trust and that Lewis assisted with knowledge in a dishonest design on the part of the trustee and a declaration that Kation received and became chargeable with the relevant part of the trust property. 38 One consequence of these declarations is that the accounts of the trust must be adjusted so as to credit Lamru with the additional 3 per cent with which it should have been credited and to debit the same amount to Kation. That must be done, if, for no other reason than that the correct state of the Lamru loan account is open and to be determined in these proceedings. There will be no change to the Mark Lewis loan account in this regard, because the movement in that loan account was a matter transacted only between Lewis and Mark Lewis. 39 In the circumstances, there is no point in reconstituting the long disbursed bare trust fund. Lamru is therefore entitled to an order for compensation in its favour, provided there can now be regarded as being a loss which Lamru has suffered by reason of this breach of trust. 40 The difficulty for Lamru's case as to relief is that, once the adjustment referred to in [38] is made and in the light of it, it cannot be said that Lamru is now suffering any loss as a result of the breach of trust which would found an order for compensation. Had the breach of trust not been committed, there can be no doubt on the evidence that what would have occurred in 1996 is that the correct amount would have been disbursed and credited to Lamru in the accounts of Nortex. This will now have occurred. The value of the trust fund has diminished in the meantime, but that diminution has not in any sense been caused by the breach of trust. The loss must be assessed at the time of judgment with the full benefit of hindsight. Viewing the matter in the light of present circumstances, Lamru cannot be said to have suffered any loss as a result of this breach of trust. There will therefore be no order in its favour in respect of this item, beyond any order necessary to effect the adjustment referred to above. 41 The situation is different in relation to the payments to Mark Lewis of $101,626 in relation to the 1996 year and $138,733 in relation to the 1997 year. The first thing that needs to be said is that I repeat that I shall continue to proceed on the basis that these payments were made to Mark Lewis for the reasons set out in [29] above. Secondly, it is both alleged in terms in the points of claim and appears on the evidence that these payments were made out of the unit trust before there was any determination of the FNI for the respective years. The evidence shows that these payments were made through the mechanism of journal entries, not by a distribution of the FNI in the accounts. This means that there is substance in the argument that has been put that, because the unit trust is still a subsisting trust, the order that should and must be made, even though these claims are made as Barnes v Addy claims, is that the unit trust fund be reconstituted by an order that 100 per cent of the moneys paid away be repaid into that trust fund. This argument is espoused by the Lewis interests and the liquidator (contrary to Lamru's submission that it should have an order in its favour for compensation in respect of 40 per cent of those moneys. The argument espoused by the Lewis interests and the liquidator proceeds that entitlement of the beneficiary Lamru in relation to that still subsisting unit trust fund is to have it duly administered and for Lamru to be paid its share at the end after the trust has been fully administered and other claims such as those of other creditors have been met. It is clear that that fund has some problems of liquidity, but it cannot be told at the present time what the ultimate result of its administration may be. Whether the administration of that fund should continue to be by the liquidator in his role as liquidator of the former trustee company, or whether a new trustee will need to be appointed, does not fall for decision at the moment, nor will that decision be governed by my refusal to appoint a new trustee or representative of the trust during the course of these proceedings by reason of my conclusion that it was unnecessary for the purposes of the proceedings, because of the representation in the proceedings of all interested parties: see Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 249; Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 271. 42 The situation in respect of the 1996 and 1997 payments to Mark Lewis cannot be regulated by an adjustment to the accounts. That is because Mark Lewis is not a party to the proceedings as conducted before me. These amounts have been credited to him in the accounts of the company. Those credits cannot be reversed in a situation where the orders will not be binding on him. The relevant sums will therefore continue to stand as credits to him in the accounts of the company. In those circumstances, appropriate orders need to be made against Lewis, who has been found to have accessorial liability for these breaches of trust, in order to remedy the situation. But, as the trust is subsisting, the order should not be in favour of Lamru for payment to it of its 40 per cent share, but should be, at its suit, an order for the reconstitution of the unit trust fund by the payment of the above sums by Lewis to that fund. There will be orders accordingly. Any question of interest relating to that order can be dealt with when draft minutes are brought in. (5) The legal and accounting costs. 43 The legal and accounting costs are dealt with in my judgment at [156] - [169]. Mr Motbey has complained that I failed to adjudicate upon certain issues raised relating to this subject matter. These costs consisted of a number of separate items, which fell into three categories. One item the liquidator held to be a purely private expense of Lewis or Kation, which could not be converted by ratification into an expense of Nortex. There is no complaint about this. A second category of items Mr Motbey concedes is dealt with by my ruling on ratification: see my judgment [165]. But he claims that, in respect of a third category, totalling some $104,628.70, I failed to deal with an argument that these items fell into the first category, namely, as purely private expenses of Lewis or Kation, which could not be ratified as expenses of Nortex. That proposition is not correct. I dealt with this argument at [166] and [167] of my judgment. Essentially, I ruled that this argument had simply not been raised for decision in these proceedings; the only issues that had been raised in relation to these costs were authorisation and ratification: see issue 10(e) at [86]; and see also [167]. In any event, an examination of the detailed accounts relating to these items of costs does not, in my view, lead to the conclusion that there was any error in the decision come to by the liquidator. There will be no departure from my judgment. 44 Draft minutes of order should now be brought in to give effect to my decisions embodied in my judgment and in these reasons for judgment. As I have already said, any questions of interest can be raised at that time. Arrangements can then also be made for the argument of costs.

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Judgment (31 paragraphs)

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Cases Cited (6)