Linton v Creighton-Brown & Co Pty Ltd No. 1 [2005] VCAT 813

Linton v Creighton-Brown & Co Pty Ltd No. 1 [2005] VCAT 813 | Case summary | Zoe

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1. The Respondent Creighton-Brown & Co Pty Ltd ("Creighton-Brown") is a company which carries on a chartered accountancy business. Kevin Moran is a director of Creighton-Brown. It is the conduct of Mr Moran about which the Applicant makes claims in this proceeding.

2. Corporate Interior Constructions Pty Ltd ("CIC") was incorporated in 1995. Its founders were the Applicant Ani Linton and her ex-husband Thomas van Oosterom. They were its directors and shareholders initially. In forming the company they had the assistance of Mr Moran, who was then a partner in a firm called Moran Webb. On his advice they created a discretionary trust. Under a deed of trust, of which Mr Moran was the settlor, CIC became the trustee of the van Oosterom Family Trust ("the Family Trust").

3. CIC carried on a business of fitting out commercial premises. Mr van Oosterom had skills in that field. Ms Linton was involved in the business as a bookkeeper. The business prospered and distributions were made to the beneficiaries of the Family Trust: Mr van Oosterom, Ms Linton, and their children Jacob and Sarah.

4. By 1999 CIC had become the trustee not only of the Family Trust, which was the trading trust, but also of three other trusts. One of those trusts was the van Oosterom Property Trust ("the Property Trust"). In its capacity as the trustee of the Property Trust, CIC became the owner and registered proprietor of two properties: an apartment in Flinders Lane, Melbourne, and the office premises in Queensbridge Street, Southbank where CIC carried on its business.

5. CIC recorded its financial transactions by using a computer software package called "Quickbooks." Transactions were recorded in a general ledger. Whenever Mr and Mrs van Oosterom (as they then were) drew money from the business for living expenses and other personal expenses, the drawings were recorded in the general ledger. Ms Linton made, or supervised the making of, many of those records of drawings.

6. At intervals Mr Moran provided accountancy services to the business. He prepared the income tax return for CIC, as a trading trust, and prepared the personal income tax returns for Mr van Oosterom and for Ms Linton. As ground work, so to speak, for the preparation of the tax returns, Mr Moran prepared financial reports at the end of each financial year: a trading and profit and loss statement, a balance sheet, and a distribution statement showing that distributions had been made to the beneficiaries of the Family Trust. In those financial reports Mr Moran categorized the total of the drawings as loans, to "T.J. and A.M. van Oosterom". The extent to which Ms Linton knew about, or was consulted about, or agreed to the characterization of, those drawings as "loans" is a matter of controversy in this case. The balance of the "loans" was recorded in the balance sheet each year as an asset of the company or of the Family Trust.

7. In these financial reports the distributions to the beneficiaries were set out not only in the distribution statements but also in the balance sheet as "beneficiary current accounts". They were recorded as a liability of the company or of the Family Trust. These distributions were nominal; no money changed hands; no money was physically paid out by CIC to any beneficiary other than the drawings which had already been made. For that reason there was no record of them in the general ledger. They were book-entries found only in Mr Moran's financial reports, reflecting what were the profits earned in each financial year that it was said that CIC had decided should be regarded as having been distributed to the beneficiaries.

8. In 1996 Ms Linton resigned as a director of CIC. Until a Mr di Carlo became a director in August 2001, Mr van Oosterom was the sole director of CIC after Ms Linton's resignation.

9. On 1 February 2001 Ms Linton and Mr van Oosterom separated. At first the separation was amicable. Ms Linton continued to do bookkeeping tasks for CIC for a while and helped to train another bookkeeper. She and Mr van Oosterom endeavoured to achieve a property settlement between themselves whereby he took over any interest she had in the business of CIC, she became the owner of the two properties owed by CIC as trustee of the Property Trust, and he made an additional payment for equality. They consulted Mr Moran about the values to be ascribed to the various assets involved in the proposed property settlement. By this time Mr Moran had become a director of Creighton-Brown and it had been Creighton-Brown, through Mr Moran, which had done the financial reports since at least 1999.

10. Ms Linton maintains that she, Mr van Oosterom and CIC had reached a legally binding agreement for a property settlement which, among other things, involved not only her giving up any interest in CIC but also the expunging of any liability she had to CIC. Whether or not she is right in her contention, what is clear is that at the instance of Mr van Oosterom he and she submitted the proposed property settlement to the Family Court for approval, but it was never approved. The question of the status of the property settlement plays a part in the present dispute between Ms Linton and Creighton-Brown, as will appear below.

11. After the separation Mr van Oosterom ran the CIC business alone. Drawings continued to be made from the business funds for personal expenditure. Whether the drawings were for Mr van Oosterom's benefit alone, or were for the benefit of both him and Ms Linton, is a matter of contention.

12. In or about June 2001 several documents, some designed to formalize the departure of Ms Linton from CIC and her relinquishment of any interest in the business, and others designed to give her control of the two properties which were assets of the Property Trust, were signed. First, Ms Linton signed a transfer of her one share in CIC to Mr van Oosterom, and they forwarded the signed transfer dated 1 July 2001 to Mr Moran at Creighton-Brown. Secondly, Ms Linton signed a transfer to Mr van Oosterom of her units in the van Oosterom Superannuation Fund (another trust of which CIC was a trustee), and by a minute of a meeting of the directors of CIC (that is to say, Mr van Oosterom) on 29 June 2001 the transfer of the units was approved. Thirdly, by a deed of amendment to the original trust deed and dated 1 July 2001 the name of the Property Trust was changed to the Linton Property Trust and by another deed dated 1 July 2001 Ms Linton was appointed as the trustee of the Property Trust instead of CIC. Moreover - although when this happened did not ever emerge - CIC executed transfers to Ms Linton of the two properties in Flinders Lane and Queensbridge Street respectively; a conveyancer Ms Schneider had posted the transfer to CIC, for signing, by a letter dated 30 October 2001.

13. Mr van Oosterom alone having run its business since the date of separation, CIC got into financial difficulty. On 11 April 2002 it appointed Colin Tuckwell, a chartered accountant, as its administrator. On 8 May 2002 Mr Tuckwell was appointed liquidator and CIC went into liquidation. By that time the transfer of the two properties which were assets of the Property Trust had not been registered at the Office of Titles; the reasons why they had not been have not emerged. Upon the commencement of the liquidation Mr Tuckwell took possession of and examined CIC's books of account and became aware of the financial reports prepared by Mr Moran.

14. Ms Linton then discovered, to her horror, that the liquidator Mr Tuckwell was claiming that she and Mr van Oosterom jointly owed CIC a sum in excess of $1,800,000.00. Mr Tuckwell was claiming that as at 30 June 2001 they had owed $1,370,189.00 being the balance of the "T.J. and A.M. van Oosterom" loan account, as it was described in Mr Moran's financial reports, and that those financial reports correctly reflected the entries in CIC's general ledger for drawings. Mr Tuckwell was also claiming that between 30 June 2001 and the date of the commencement of his administration there were further drawings of $308,208.71, and other transactions recorded in the general ledger, which increased the joint indebtedness to CIC to a total of $1,826.46.

15. The liquidator and CIC (in liquidation) commenced a Supreme Court proceeding no. 8355 of 2002 against Mr van Oosterom and Ms Linton, claiming sums which, after amendment to the Statement of Claim, became $1,826,284.46. Mr van Oosterom did not defend it. He allowed a default judgment to be entered against him, and went bankrupt. Ms Linton, however, has defended the Supreme Court proceeding vigorously, albeit in person without a lawyer. It is still on foot and does not appear to be anywhere close to trial.

This Proceeding

16. On 15 September 2003 Ms Linton commenced this proceeding in the Tribunal against Creighton-Brown, claiming compensation of $1,800,000.00. In her written application she was saying, in effect, that Mr Moran's financial reports were wrong, and negligently wrong; that she owed CIC nothing; but if as a consequence of Mr Moran's financial reports she is found to owe CIC anything then what she owes is a loss for which Creighton-Brown is responsible. Of course the logical way to have made claims of that sort was to have joined Creighton-Brown as a third party to the Supreme Court proceeding, but Ms Linton has steadfastly declined to do that, and has pursued her claims in this Tribunal instead.

17. Soon after this proceeding was commenced Creighton-Brown applied for an order striking it out for want of jurisdiction. Under Part 9 of the Fair Trading Act 1999 the Tribunal has jurisdiction to hear and determine a "consumer and trader dispute": a dispute between a purchaser of goods or services and a supplier of goods or services in relation to the supply or possible supply of goods or services. In addition, section 159 of the Act confers upon a person who suffers loss or damage because of a contravention of a provision of the Act a right to recover the amount of the loss or damage against any person involved in the contravention, and provides that a proceeding in pursuance of that right may be brought in the Tribunal. One provision of the Act that is commonly alleged to have been contravened is section 9, which provides that a person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.

18. On 26 April 2004 I completed the hearing of and determined Creighton-Brown's application for a striking-out order. I ruled that, insofar as the proceeding purported to have been brought under Part 9, there was no jurisdiction because Creighton-Brown was not a supplier to Ms Linton of the services (the making of the financial reports) of which she complained; it supplied those services to CIC, not to her; CIC, not she, was the purchaser of those services; so the dispute between her and Creighton-Brown was not a "consumer and trader dispute". On the other hand, I ruled that some of the allegations made by Ms Linton in the written material that she had filed in opposition to the strike-out application were capable of giving rise to allegations that Creighton-Brown's conduct had been misleading or deceptive, in contravention of section 9, and that those allegations could enliven the Tribunal's jurisdiction under section 159. So I ordered as follows:

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32. However, on 19 July 2004 I limited the scope of the hearing to the issue of liability and said that there would be no determination at this stage of the question of what loss or damage has been suffered (element (c)). So I limit myself to considering whether Ms Linton has made out elements (a) and (b): that there was conduct by Creighton-Brown that was misleading or deceptive or likely to mislead or deceive, and that there was actual reliance upon misleading or deceptive conduct in such a way that was capable of causing loss or damage.

The Origins of the Loan Account

33. The financial reports characterized the drawings made for personal expenditure by Ms Linton and her ex-husband as loans, allocated those drawings to a joint loan account under the names "T.J. and A.M. van Oosterom", and specified the balance of the loan account. Mr Tuckwell gave evidence that the drawings, claimed by him to have been loans, were all identified in CIC's books of account of which he took possession and which he examined in the course of carrying out his duties as liquidator, but he also gave evidence that at his request Mr Moran gave him access to Creighton-Brown's file which contained copies of his financial reports, and I am sure that those financial reports would have assisted Mr Tuckwell considerably in examining and understanding the books of account. Accordingly I consider that it is right to say, as Ms Linton does, that the financial reports prepared by Creighton-Brown played an important part in founding the liquidator's allegation that she owed a very large amount of money to CIC at the date of the commencement of the liquidation.

34. In his witness statement Mr Moran gave an explanation of how the drawings came to be characterized as loans. He said that when the business started to make a profit (in 1995 or thereabouts) he gave advice to Ms Linton and Mr van Oosterom as to how the profits might be drawn against and dealt with in the books of account and income tax returns. He advised them, he said, that there were two different options. The first was to pay themselves salaries, and make drawings for personal expenses in that fashion; the payment of salary, however, would necessitate further expenditure for payroll tax, work cover payments, withholding tax and superannuation contributions. The second option was to utilize the trust structure: to make drawings throughout the year and then to determine at the end of the financial year how much of the profit earned should be "distributed" (nominally) to the beneficiaries; in the meantime the drawings were to be treated as loans and were to be delisted to a loan account. The taxation advantage to be gained from that second option, he said, was "to possibly minimise income tax as they [the profit distributions] can be decided once the taxable income of the profit of the Trust is determined and the distribution can be made to optimise the various tax brackets of the beneficiaries."

35. In his witness statement Mr Moran went on to say that Ms Linton and Mr van Oosterom had directed him to use the second of the two options. So the financial reports he prepared for each year described the drawings as loans, allocated them to a loan account, and allocated to beneficiary accounts whatever profits they had decided to distribute. Ms Linton had told him, he said, that she preferred the drawings and the distributions to beneficiaries to be kept separate, so that she could see clearly how much had been drawn for personal expenditure. Both CIC and the individuals had lodged income tax returns, prepared by Mr Moran on the basis of the second of the two options, that is to say, the individuals paid income tax not on what they actually drew from the business each year but only on what CIC as trustee had decided should be distributed to them, as beneficiaries, from the profits.

36. Mr van Oosterom in his witness statement confirmed that he and Ms Linton had given Mr Moran the direction to employ the second of the two options. In cross-examination he said that the first option (receipt of a salary) was one that he had initially preferred, but once Mr Moran had explained that the second option, which involved the trust and the loan account, would lead to tax minimisation, he and Ms Linton agreed upon it, although he (Mr van Oosterom) did not really understand it.

37. Although both Mr van Oosterom and Mr Moran were cross-examined about their explanations for the origin of the loan accounts, Ms Linton did not give any evidence herself on the matter. Strictly speaking I would be entitled to regard the evidence of Mr Moran on the point as uncontradicted and to accept it for that reason alone. I consider, however, that I should make allowances for the fact that Ms Linton was not represented by a professional advocate. From the cross-examinations and from the presentation of the case as a whole it was clear enough that Ms Linton wanted to dispute Mr Moran's version. I am prepared to assume that if she had given evidence on the point she would have denied that she had approved of the employment of the second option mentioned by Mr Moran, denied that she had been consulted about it, and asserted that it had all been Mr Moran's idea.

38. Mr Vink sought to make something of the fact that in an affidavit sworn on 12 May 2003 in Family Court proceedings between Ms Linton and Mr van Oosterom, Mr Tuckwell had said that Mr Moran had informed him that he (Mr Moran) had advised them that there were "three ways available to take profits from the business": "salary and wages", "profit distributions" and "via a loan account". Mr Vink submitted that that information to Mr Tuckwell was inconsistent with Mr Moran's evidence in this proceeding that his advice involved two options, not three, and that I should therefore decide that Mr Moran's evidence on this point was unreliable. I do not accept that submission. The important distinction is between an option which involved the "salary and wages" concept and an option which utilized the trust structure; "profit distributions" at the end of a financial year, and drawings "via a loan account" during the financial year, were features of the second option, even though they were transactions of different kinds. While Mr Moran may have described the process to Mr Tuckwell slightly differently to the way in which he described it to me, that does not cause me to doubt Mr Moran's evidence that CIC, through Ms Linton and Mr van Oosterom, decided against the "salary" option and for the trust structure (drawings as loans, and discretionary distributions of profits) option.

39. Mr Moran's explanation for the origin of the loan account was, to my mind, persuasive. It was supported by Mr van Oosterom's evidence, to some degree. Mr van Oosterom's capacity to understand and choose between the two options was limited, I consider; but he did confirm that they had been discussed and that CIC had chosen the second option. I have borne in mind that there is by now obvious hostility between Ms Linton and Mr van Oosterom and that he may have reasons for not wanting to assist her case in this proceeding. Nevertheless, I regarded him as a truthful, if occasionally volatile, witness.

40. In her evidence Ms Linton showed herself to be astute in financial matters. Below I shall refer to one example of that astuteness. Another striking example is in the documents tendered: an e-mail from her to Mr van Oosterom dated 22 June 2001, headed "Summary of Meeting with Kevin" (an obvious reference to Mr Moran), in which she sets out in detail some suggested adjustments to their respective financial affairs and invites him to contact her to discuss them. In my view she is, and always showed herself to be, more astute in financial matters than her ex-husband. It is highly unlikely, in my opinion, that discussions between Mr Moran and Mr van Oosterom about how the business should be set up in 1995 or thereabouts would have excluded her, or that she would have allowed herself to be excluded. There is also the fact that for years her personal income tax returns were submitted, and she paid income tax, on the advantageous basis that her income was the declared distribution of profit to her as beneficiary of the Family Trust: a consequence of a choice of the second option referred to above.

41. For those reasons I accept the part of Mr Moran's evidence which gave an explanation of how the drawings from CIC, by Ms Linton jointly with her ex-husband, came to be characterized as loans. I find that Ms Linton knew and approved of the setting-up of the trust structure which involved the drawings being characterized as loans and which involved the nominal distribution of profits at the each of each financial year and the payment of personal income tax only upon those profits which the trustee (CIC) had, in the exercise of its discretion, decided to distribute. I reject the allegation numbered (i) in paragraph 21 of these reasons.

42. Although I have accepted Mr Moran's explanation, there was one extraordinary omission from that explanation. The advice that he said that he gave to Ms Linton and Mr van Oosterom about the comparative advantages and disadvantages of the two options did not include anything about what might happen if the trading trust became insolvent or if other less serious financial exigencies required the "loans" to be repaid. I would have thought that that was, even in 1995, the most obvious potential disadvantage of the second option, and that that potential disadvantage ought to have been canvassed fully between the three of them before a decision to choose the second option was made. Yet there was no evidence that a word was said about it at the time. The business structure was set up, and the business proceeded, as if the day of reckoning for the repayment of the loans would never come. In 2002 the day of reckoning came with a vengeance. The failure of Mr Moran to warn Ms Linton of the potential personal liability, in the event of future insolvency or financial difficulty, is something for which Mr Moran deserves criticism, in my opinion.

43. That criticism, however, does not have any significance in the outcome of this case. The limits of the Tribunal's jurisdiction have confined Ms Linton to allegations of conduct which occurred on and after 1 September 1999. Any actionable failure to advise her about disadvantages of the second option occurred long before then. Moreover it had nothing to do with the present Respondent Creighton-Brown, for in 1995 Mr Moran was acting in his capacity as a partner of the firm Moran Webb.

Financial Reports Before 1999

44. Mr Moran's first financial reports were for the year ending 30 June 1995. There were two sets of reports for that year. One was headed "Corporate Interior Constructions Pty Ltd". It showed (in a note to the accounts), as "receivables", a "right of indemnity from trust assets" in a sum of $50,247.00. The other was headed "The van Oosterom Family Trust" and contained a trading account and a revenue account, showing an income of $969.00 and a distribution of the whole of that income to one beneficiary, "Anne van Oosterom".

45. For the financial years ending 30 June 1996 and 1997 respectively the copies of the financial reports in the tendered documents were not complete, but they appear to have been prepared in the same way as for the 1995 year, with a trading and profit and loss statement under the hearing "The van Oosterom Family Trust" and with a balance sheet under the same heading. Presumably there was another set of reports under the heading "Corporate Interior Constructions Pty Ltd"; whether they contained the same reference to a "right of indemnity from trust assets" I cannot say. It was in the first set of reports (for the Family Trust), however, that the loan accounts appeared as "receivables" (debtors) and the "beneficiary current accounts" appeared under the heading of creditors. As well as the financial reports, the tendered documents contained examples of minutes of meetings of "directors" of "The van Oosterom Family Trust", recording resolutions for the distribution of income to beneficiaries in figures which corresponded to the totals in the beneficiary current accounts shown in the financial reports.

46. For the financial year ending 30 June 1998, however, the nature of the financial reports changed. There was no longer anything prepared with a heading "The van Oosterom Family Trust". There was one set of financial reports only, prepared with a heading "Corporate Interior Constructions Pty Ltd". The balance sheet recorded, as a current asset, "Loans - Unsecured: T.J. and A.M. van Oosterom, $273,690.00" and recorded, as a liability, four sums under a heading "Beneficiaries' Current Account" for the four beneficiaries, totalling $169,420.00.

47. This change in method has produced two consequences. The first method, with the two different sets of financial reports, has created a wrong impression in the mind of Ms Linton that the Family Trust was a different entity from CIC. It was not. The Family Trust did not have a distinct legal entity. It was just a way of describing the relationship, between the trustee and the potential beneficiaries, created by the trust deed. There was a single legal entity: CIC, the trustee. The two sets of financial reports were of CIC, in its capacity as trustee of the Family Trust. This wrong impression led Ms Linton to say at one point during cross-examination that if she did owe any money under a loan account it was not owed to CIC, because the loan account existed not in CIC but in "the trust entity", meaning the Family Trust. As I have said, there is no such thing as "the trust entity" distinct from CIC itself.

48. The other consequence is that the change in method, with only set of reports with a CIC heading and with that set of reports incorporating the loan account and the beneficiary current accounts, lies behind the allegation that the financial reports from 1999 onwards ought to have been prepared under the hearing of the Family Trust and that the failure to prepare them in that way misled the liquidator to think that he could have resort to assets of a different trust, the Property Trust.

49. Exactly why Mr Moran changed the method when preparing financial reports for the year ending 30 June 1998 was not made clear to me. Mr Fettes gave evidence that in 1995 it was permissible for a company which was a trustee "to report the liabilities with a right of indemnity", and that after 1995 the company was required to report in a more informative fashion if it was trading but was not required to report at all if it was not trading. Mr Moran gave similar evidence. That evidence explains why reference to the right of indemnity had dropped out of Mr Moran's financial reports by 1998, but I am afraid that I did not ever grasp why it was thought appropriate to have one set of reports instead of two, or why it was ever thought appropriate to have two sets of reports instead of one.

50. The example of Ms Linton's financial astuteness, which I said above that I was going to mention, is this. During cross-examination she made a complaint that Mr Moran's financial reports were wrong because they should have shown no asset other than a right of indemnity, and so should not have shown the joint loan account as an asset. The right of indemnity was not something which had been raised at all in the case to that point, and was not something which her expert witness Mr Fettes had mentioned at all in the expert report which became his witness statement. Ms Linton could have got the idea only from a thoughtful consideration of the financial reports for 1995. The evidence I have just been discussing showed that her point was wrong, but the fact that she raised it in that way showed to my mind not only a preparedness to throw every possible allegation at Mr Moran in the hope that one would hit home but also a keen interest in and understanding of accounting details.

Financial Reports For 30 June 1999

51. The financial reports for the year ending 30 June 1999 included a balance sheet which records total current assets of $758,123.00, total assets of $779,067.00, and total liabilities of $779.057.00. In notes to the financial statements, current assets included $494,481.00 for "T.J. and A.M. van Oosterom" (the loan account), and, as liabilities, under the heading of creditors and borrowings, $278,331.00 as "Beneficiary Current Accounts". A distribution statement, part of the financial reports, showed the following distributions, and minutes of a meeting of directors of CIC (signed by Mr van Oosterom as chairman) recorded a resolution that the net income of "the trust" for the year ending 30 June 1999 be distributed in that fashion:

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I have taken this to be an opinion that, leaving aside the distributions to the two children that were shown in the beneficiary current accounts, "normal accounting practice" would have been to set off the accounts but to show only the figure arrived at after the set-off.

58. The conclusions I draw from that evidence is that, while opinions amongst accountants may differ as to which is the preferable course to adopt, it is permissible in accounting practice to record loan accounts and beneficiary current accounts separately, as Creighton-Brown did, but it is also permissible in accounting practice to do the opposite and to set off one lot of accounts against the other, at any rate to the extent that the debtors (under the loan account) and the beneficiaries are the same persons.

59. From those conclusions it follows that there was nothing misleading or deceptive about Creighton-Brown having recorded the loan accounts and beneficiary current accounts separately and without any set-off. Whether as a matter of law the two different kinds of accounts can be set off has nothing to do with whether in the financial reports the company has set them off or has purported to set them off. At best from Ms Linton's point of view one might say that if the financial reports had been prepared in the other way there was a chance that the liquidator might have accepted them at face value and claimed the lower figure after the undisclosed set-off. So I reject the allegation numbered (iii).

60. Far from concluding that the Creighton-Brown method of recording the two accounts was misleading or deceptive, I venture the opinion that it would be more arguably misleading or deceptive for an accountant merely to show, as a balance of a loan account, a figure arrived at after deducting amounts shown in beneficiary current accounts, without disclosing that there had been a set-off and without making any reference to what two figures had been set off against each other. I hasten to add that I am not suggesting that Mr Fettes ever said that the set-off should not be disclosed in the financial reports at all.

61. During the evidence it emerged that on 17 December 1999 Creighton-Brown sent by fax to "Esanda" a balance sheet for CIC as at 30 June 1999 which showed, as current asset, "T.J. and A.M. van Oosterom" and a figure of $216,150.00 (not $494,481.00 as appeared in the version in the hands of the liquidator): that is to say, the total of the loan account after setting off the balance of the beneficiary accounts. Mr Moran did not give any clear explanation of why he prepared the second balance sheet, for "Esanda", in that way. That document appears to demonstrate that Mr Moran thought it to be acceptable accounting practice to prepare a balance sheet in that way. I would have thought that if anybody could argue that it had been misled by accounting documents prepared by Mr Moran it would be "Esanda" (Esanda Finance Corporation Limited). That, of course, is not what Ms Linton is alleging in this case.

62. Whether the set-off is permissible as a matter of law is not something I need to decide or should decide. That is a matter for the Supreme Court to decide, after hearing argument from the liquidator as well as argument from Ms Linton. There may be good legal reasons, revealed in the liquidator's argument in the Supreme Court proceeding, why the set-off is not permissible. Without the benefit of hearing any such argument, I make the comment that I do not at the moment see any reason why the total of the beneficiary accounts of Ms Linton and Mr van Oosterom could not have been set off, at the date of the commencement of the liquidation, against the total of the loan account. Section 553 C of the Corporations Act 2001 (Commonwealth) appears to permit such a set off, even though, as I acknowledge to be the case, the amount owing under a loan account is a simple debt whereas the total shown in a beneficiary's current account represents the value of an equitable right to receive trust income. I repeat, however, that I cannot need not and do not decide whether the set-off is permissible as a matter of law.

Financial Reports For 30 June 2000

63. The financial reports for the year ending 30 June 2000 showed, in the trading and profit and loss statement, a net profit of $635,923.00, compared with $110,248.00 for the previous year. The balance sheet showed current assets as including receivables of $1,974,204.00, and notes to the financial statements showed those receivables as including "Loans - Unsecured, T.J. and A.M. van Oosterom" in a sum of $807,954.00, compared with $494,481.00 for the previous year. That is to say, there had been additional drawings of $314,473.00 during the financial year. I see no reason to doubt that those figures in the financial reports prepared by Creighton-Brown accurately reflected what appeared in CIC's general ledger.

64. Again there was a distribution statement which showed distributions to the beneficiaries in respect of the financial year ending 30 June 2000. According to the distribution statement they were:

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Those sums totalled $111,286.00. Yet the net profit for the year had been $635,923.00. The distribution statement, if accurate, reflected a decision by the trustee CIC to distribute to the beneficiaries only sums that were broadly the same as the amounts which had been distributed in respect of the previous financial year ending 30 June 1999, even though profits had increased more than fivefold, and to leave undistributed $524,637.00 of the $635,923.00 net profit.

65. The bundle of tendered documents did not include any minutes of a meeting of directors of CIC recording a resolution for the distribution of only $111,286.00 of the profits earned in the proportions set out in the distribution statement. The evidence about a decision to distribute only that sum was sparse, and the evidence about the reason for making the decision was almost non-existent. Mr van Oosterom made the bare statement, in his witness statement, that CIC had decided to retain income. Mr Moran in his witness statement deposed that CIC had decided to retain income "after taking into account the tax positions of the beneficiaries." Nothing more enlightening emerged from cross-examination.

66. A decision to distribute to the beneficiaries only a small part of the net profit earned in the financial year ending 30 June 2000, and to retain $524,637.00 being the rest of the net profit, was, as Mr Woods aptly put it during his final address, "a fateful decision." For if CIC had decided to distribute the whole of the net profit, so that the beneficiary current accounts were increased by $524,637.00, and if the total of those accounts could have been set off against the total of the loan accounts, an extra $523,000.00 approximately of the indebtedness under the loan accounts would have disappeared at one stroke.

"Retained" and "Distributed" Income

67. As I understood Mr Vink's argument, it is Ms Linton's case that the "decision" to distribute only $111,286.00 of the net profit and to retain the remaining $524,637.00 of the profit was a fiction on Mr Moran's part, designed to disguise an error he had made in preparing the financial reports for the year ending 30 June 2000. The true position, the argument went, was that the whole of the net profit was meant to be distributed, just as it had been in respect of the previous financial year, and so the whole of the net profit should be regarded now as having been distributed to the beneficiaries and set off against any balance in the loan accounts.

68. The argument is tenable only because of the absence of minutes of a directors' meeting resolving to distribute only a small part of the net profit and to retain the rest, and the sparseness of the evidence about the circumstances in which a decision to distribute and retain was made and the reasons for such a decision. To accept the argument one would have to conclude that Mr Moran had given deliberately false evidence in this proceeding for no other reason than to save face. I see no justification whatever for reaching such a conclusion.

69. Although no copy of any personal income tax return for Ms Linton was produced during the hearing, Mr Moran gave evidence, and Ms Linton did not dispute, that she paid income tax for the year ending 30 June 2000 on what the financial reports showed as having been her income, namely, $55,000.00. Had the whole of the profits been distributed, or had she and her ex-husband intended to distribute the whole of the profits and thought that they had been distributed, income tax would have been payable by her upon a much larger sum. Although Mr Moran did not specifically say so, I should imagine that that is what he meant by saying that "the tax positions of the beneficiaries" influenced the decision about how much to distribute. There was no evidence of Ms Linton having queried at the time why she was paying income tax only upon $55,000.00.

70. Accordingly, despite the surprising lack of documentary evidence about the decision to distribute only part of the net profit and to retain the rest, and the lack of any evidence of discussion between the parties about that decision, I have concluded that it is highly probable that the decision was indeed made and that the financial reports prepared by Creighton-Brown correctly reflected it.

71. On the evidence there seems to have been no reason, apart from personal income tax considerations, why the whole of the net profit could not have been distributed. But it was not. It does not assist Ms Linton to say that it could have been distributed and, once distributed, could have been set off against the loan account. That simply did not happen. If a set off could have been effected (as for present purposes I am assuming), the discrepancy between the size of the loan accounts and the size of the beneficiary accounts for Ms Linton and Mr van Oosterom ($191,649.00 and $192,018.00 respectively) was more than $420,000.00 as at 30 June 2000. So I reject the allegation numbered (iv).

72. I cannot say why there is no minute of the relevant directors' meeting. But I do say that it is astonishing that there was no evidence of any discussion between Mr Moran on the one hand, and Ms Linton and Mr van Oosterom on the other, of the ramifications of the decision not to distribute all of the profits: I mean the ramifications for the liability under the loan account. This is a second instance where I think that some criticism of Mr Moran is warranted. The liability had grown to $807,954.00. It seems to me that any thought of a taxation advantage for the individuals from a retention of profits should have been balanced by an appreciation that profits if not distributed could not be regarded as available to reduce the liability under the loan account. Even if the facts were that the individuals merely passed on to Mr Moran their decision not to distribute all the profits without taking his advice about it - and the evidence is so sparse that I do not know whether or not that happened - I think that it behoved Mr Moran to point out the ramifications and to invite them to reconsider their decision. Again, however, this note of criticism is not relevant to any allegation of misleading or deceptive conduct made in this case. What matters is that the financial reports for the year ending 30 June 2000 were not misleading or deceptive, as Ms Linton alleged they were.

Financial Reports For 30 June 2001

73. The financial reports for the year ending 30 June 2001 showed, in the trading and profit and loss statement, a net profit of $253,787.00. The balance sheet showed current assets as including "Loans - Unsecured, T.J. and A.M. van Oosterom" in a sum of $1,370,189.00, compared with $807,954.00 for the previous year. So they purported to show drawings of $562,245.00 during the financial year.

74. Those figures perpetuated one significant error. During the financial year CIC had drawn a cheque to pay income tax of $254,448.95, a figure that related, apparently, to the retained profit for the year ending 30 June 2000. By mistake this figure appeared in CIC's general ledger as drawings. Of course it was not; CIC was simply discharging a liability. Because of the mistake Creighton-Brown, through Mr Moran, added it to the total of the joint loan account. In his evidence Mr Moran acknowledged that that was an error, and stated that when he became aware of the error he informed the liquidator Mr Tuckwell of it. Mr Tuckwell also in his evidence acknowledged that there had been that error and said that Ms Linton should never have been regarded as owing that sum of $254,448.95. He also said that in the Supreme Court proceeding that error had been corrected, but I could find nothing in the Second Further Amended Statement of Claim (part of the bundle of tendered documents) in the Supreme Court proceeding that reversed the error; that pleading still alleged that $1,370,189.00 was owing under the loan account as at 30 June 2001.

75. So the balance of the loan account turned out to have been overstated by at least $254,448.95, and cannot have been any more than $1,115,740.00. No doubt it can be said that the financial reports were misleading to that extent, and that the liquidator was for a time misled by the error, but because of his acknowledgement of the error the misleading figure is not one that is capable of causing any loss or damage to Ms Linton, for any judgment in favour of the liquidator in the Supreme Court proceeding will not include that $254,448.95.

76. Because of the separation on 1 February 2001 and Ms Linton's allegation that a property settlement reached between her and Mr van Oosterom had the effect of transferring the liability under the loan account to him alone, there is controversy over whether the joint loan account, as it continued to be shown in the financial reports, represented a joint debt or a debt of Mr van Oosterom only.

77. Again I see no reason to doubt that the figures to which I have referred so far, in the financial reports for the year ending 30 June 2001 prepared by Creighton-Brown, accurately reflected what appeared in CIC's general ledger. Taking the loan account in isolation, making an allowance for the error over the income tax payment, and acknowledging the controversy to which I have referred, I conclude that as at 30 June 2001 CIC was owed $1,115,740.00.

78. There was a distribution to beneficiaries too in respect of this financial year. A distribution statement, part of the financial reports, set out the following distributions:

[48]

The total of the first two figures is $646,168.00.

79. For reasons I have already given, I think that Ms Linton's argument that that total of $646,168.00 should be set off against the balance of the loan account has every chance of being successful (and, if it is, the balance after the set-off should be $469,572.00), but it was not misleading or deceptive conduct not to show the set-off in the financial reports.

80. I observe at this point that there was evidence that on an unidentified date which must have been after 1 January 2002 Mr Moran prepared, and sent to the Commonwealth Bank, a document of three pages, the face page of which bore a title "Corporate Interior Constructions Pty Ltd ATF the van Oosterom Family Trust Financial Statements for the Years Ended 30th June 1999, 2000, 2001 + 6 Months to 31/12/02." The second page was a profit and loss statement for each of those three complete financial years and the final half-year. The third page was a balance sheet for each of those periods. The balance sheet showed figures for "Loans - Unsecured, T.J. and A.M. van Oosterom" which appeared to represent the balance of the loan account after setting off the balance of the beneficiary current accounts (to which there was no reference in the document). Again Mr Moran did not give me any clear explanation of why he prepared the balance sheets in that way. The document is further evidence that Mr Moran thought it to be acceptable accounting practice to prepare balance sheets in that way, and strengthens the argument that there should be a set-off. It has no other significance, in my opinion. I have already given reasons for concluding that it was not misleading or deceptive for Creighton-Brown to have prepared other financial reports that did not express the set-off.

The Separation, the Property Settlement and the Name of the Loan Account

81. Once Ms Linton and Mr van Oosterom separated, on 1 February 2001, they discussed how property might be divided between them, and Mr Moran was involved in some of those discussions. For the most part Ms Linton's evidence on this topic was not contested. It was clear from her evidence, from Mr van Oosterom's evidence and from the documents to which reference was made in evidence on this topic, that she and he had reached an agreement in principle as to which property each of them should own, the values which should be attributed to each item of property, and the amount which Mr van Oosterom should pay to Ms Linton to equalize the division of property.

82. One of the elements of the proposed property settlement was that Ms Linton would transfer to Mr van Oosterom any interest she had in CIC. In the process of their agreeing upon a value to be ascribed to the interest which she was transferring, they agreed that he would assume responsibility for any money owing to CIC as a consequence of them having made drawings from the business for personal expenditure.

83. I have already described, in paragraph 12 of these reasons, documents which they signed, some of which were dated 1 July 2001, and which were designed to give effect to the property settlement. Before that date, Ms Linton, who was still assisting with bookkeeping for CIC, had taken some steps to document the element of the agreement that Mr van Oosterom should take over responsibility for the joint loan account. On a print-out from the general ledger of CIC she ruled a line after the last entry for 31 January 2001 and before the first entry for 1 February 2001. She also changed the name of the loan account in the general ledger so that it was entitled the T.J. van Oosterom loan account instead of the T.J. and A.M. van Oosterom loan account.

84. Although the parties had reached agreement in principle upon the terms of a property settlement, each of them engaged a lawyer. The lawyers submitted a proposed property settlement to the Family Court for approval. For present purposes I do not think that it matters why the Family Court never gave its approval. What matters is that it did not give approval. To what extent the non-approval stemmed from a change of heart by Mr van Oosterom is not clear to me and, as I have said, I do not think that it matters. There ensued lengthy, and no doubt expensive, litigation in the Family Court.

85. Despite the absence of approval from the Family Court, some parts of the property settlement were put into effect, including the substitution of Ms Linton for CIC as the trustee of the Property Trust and the (eventual) transfer into her name of the two properties which were assets of the Property Trust. There was also Ms Linton's action in changing the name of the loan account so that her own name disappeared from it.

86. Ms Linton contends that the agreement for the property settlement was more than an agreement in principle: it was a legally binding agreement, the effect of which was that she was no longer a debtor to CIC. This contention is of great significance in the Supreme Court proceeding. She and the liquidator will have to argue it in that proceeding. I have not had occasion to hear any argument from the liquidator. It is not necessary for me to attempt to determine the issue, and it would not be proper for me to attempt to do so. Nevertheless, I shall take the liberty of making some comments about it below.

87. It is important to consider at what date the agreement, be it an agreement in principle or a legally binding agreement, was intended to take effect and did take effect. I shall refer to that date as "the critical date". There are two possibilities. The first is that the critical date was 1 February 2001, the date of the separation. Ms Linton's ruling of the line in the general ledger is consistent with that. The second is that the critical date was 1 July 2001, the date which was inserted as the date of several documents designed to put elements of the property settlement into effect, as I have described in paragraph 12 of these reasons. I express no view about which of the two possibilities should be selected.

88. By the time when Mr Moran approached the task of preparing financial reports for the year ending 30 June 2001, he was aware that Ms Linton had changed the name of the loan account in CIC's records. There is a conflict in the evidence of how he became aware of it. Ms Linton's evidence was that he had advised it, and that she handed to him a copy of the general ledger, with the change of name, and asked him to prepare financial reports accordingly. Mr Moran's evidence was he had never advised it, and that Mr van Oosterom had told him of the change of name and had said that he had not authorized it. I need not, and shall not, decide which version is correct. I accept, however, Mr Moran's evidence that Mr van Oosterom on behalf of CIC instructed him that the loan account should remain in joint names in the financial reports. The upshot was that the financial reports prepared by Creighton-Brown for the year ending 30 June 2001 showed the loan account as being a joint loan account, as had financial reports for all the previous years.

89. I now offer some comments about the effect of the agreement, on the assumption that it did have legal effect. I repeat that I am not deciding anything about it. It seems to me that it would have three effects.

90. First, at the very least, it would have amounted to an indemnity by Mr van Oosterom against any liability of Ms Linton to CIC; that is to say, he was promising her that if the loans ever had to be repaid then he would pay them, and if she was ever called upon to repay them then he would reimburse her. That indemnity is now worthless, because he is bankrupt.

91. Secondly, I do not see how the agreement could have altered the legal position that had existed before the critical date, which was that there had been a joint debt. As at the critical date, CIC would be entitled to say, and the liquidator is now entitled to say, that there was a joint debt for the amount as it was on the critical date. Apart from the creation of the indemnity, the agreement did not change the past, it operated only for the future.

92. Thirdly, it seems to me that there simply could not be a joint loan account operating after the critical date, irrespective of whether the agreement had any legally binding effect. The parties had separated. Ms Linton's interest in the business was disappearing, and Mr van Oosterom was running it on his own. Whatever drawings were made after that date could not have been intended to be joint drawings, and I do not think that they should be characterized as joint drawings. The joint loan account crystallized on the critical date. Thereafter there should have been individual loan accounts for whichever person made individual drawings. If the critical date was 1 July 2001, Mr Moran was correct in recording in the financial reports for the year ending 30 June 2001 a joint loan account; but if the critical date was 1 February 2001, the financial reports ought to have recorded a joint loan account, the balance of which crystallized on that date, and either one or two individual loan accounts for drawings on and after 1 February 2001.

93. This is another instance in which I feel I have to express a criticism of Mr Moran. Although the separation of Ms Linton and Mr van Oosterom had been amicable at first, and although their discussions about the property settlement (in some of which Mr Moran participated) showed that they were largely of one mind in that regard, once they expressed to Mr Moran different views about the name by which the loan account should be described I think that it should have become apparent to Mr Moran that the interests of the two of them were beginning to conflict. In implementing Mr van Oosterom's instructions and identifying in the financial reports the loan account as a joint account, and in effect reversing what Ms Linton had done, Mr Moran furthered the interests of Mr van Oosterom to the detriment of the interests of Ms Linton. In saying, as he did in his evidence, that because Mr van Oosterom was a director of CIC and Ms Linton was not he could not accept instructions from her purporting to be given on behalf of CIC and was legally obliged to accept instructions from CIC only through Mr van Oosterom, he was legally correct. But I think that those instructions should not have been accepted uncritically. The idea of terminating the joint loan account and commencing new individual loan accounts ought to have been canvassed. If it had been and Mr van Oosterom had refused to agree to it, the conflict of interests would have been even more apparent than I think it should have been already.

94. The failure, as I consider it was, on Mr Moran's part to recognize a growing conflict of interests has been, I am sure, a factor contributing to this litigation. It is not significant in the outcome of it, however. It does not make any of Mr Moran's conduct, or any of the financial reports of Creighton-Brown, misleading or deceptive. There was a loan account, and Creighton-Brown had described it in the way that its client CIC had instructed that it should be described, namely, as a joint loan account. Whether or not the true amount owed under the joint loan account was correctly stated, the fact was that Ms Linton owed a substantial amount to CIC as at 30 June 2001 by reason of a loan account. So I reject the allegation numbered (v).

Allegedly Untrue Statements to the Liquidator about the Property Settlement

95. Ms Linton has made the allegation that Mr Moran told the liquidator that the property settlement was not final and binding, and that that information led the liquidator into pursuing her for money said to be owing under the loan account; had he not been given that information, the liquidator should and would have concluded from the CIC documents, from notes recording discussions about the property settlement, and from Mr van Oosterom's briefing of him, that there had been a final and binding property settlement under which Ms Linton's liability had been expunged.

96. Mr Moran gave evidence that he did indeed, when asked by the liquidator about any agreements that Ms Linton and Mr van Oosterom had made, say to the liquidator that to the best of his knowledge they had not made any binding agreement. For the rest of the allegation, however, there was simply no foundation in the evidence. There was no evidence that Mr Moran's answer to the liquidator's question shaped the liquidator's attitude. One the contrary, Mr Tuckwell stated during cross-examination that he made enquiries not only of Mr Moran but also of Mr van Oosterom and of the lawyers for the respective parties; Mr van Oosterom had told him that in the Family Court he was disputing that there had been an agreement (a different stance to the one that Mr van Oosterom took in his evidence during the hearing before me) and that the lawyers confirmed what Mr van Oosterom had said.

97. Mr Tuckwell is an experienced accountant. As liquidator of CIC he has engaged lawyers to give advice. He told me, and I accept, that on the question of whether there had been a property settlement and on many other matters he had had regard to information supplied by Mr Moran but had made his own enquiries, had made his own examination of CIC records and had drawn his own conclusions from all that information, with the assistance of his own lawyers.

98. Ms Linton has also made the allegation, which Mr Vink repeated at the commencement of his final address, that Mr Moran had told the liquidator that Ms Linton was party to an agreement that was detrimental to the creditors of CIC. I am afraid that I simply do not understand the basis for this allegation. Both Mr Moran and Mr Tuckwell denied that Mr Moran had said any such thing and there was no evidence that he did say, or imply, any such thing. Moreover the allegation seems inconsistent with the other allegation that Mr Moran had told the liquidator that there was no binding agreement at all.

99. For those reasons I reject the allegation numbered (vi).

Drawings After the Separation

100. It seems that after the separation a large amount of money was drawn out of the CIC business: more than CIC could sustain. Mr Moran in his evidence put the figure at $600,000.00. The drawings continued to be debited to the joint loan account, and the liquidator is claiming in the Supreme Court proceeding that Ms Linton was jointly liable to repay the balance of the loan account as it was at the date of the commencement of the liquidation.

101. The allegation numbered (vii) is that Mr Moran told the liquidator that the drawings made after the separation were joint drawings and that that is why the liquidator has made that particular claim. I can dispose of this aspect of the case by saying that there was no evidence that Mr Moran told the liquidator any such thing, directly or indirectly. The only document by way of a financial report for a period after 30 June 2001 that Mr Moran prepared, so far as the evidence went, was the document that was prepared for the Commonwealth Bank. That document included a profit and loss statement for CIC for a period ending 31 December 2001 but not any balance sheet for that period. So there was nothing in that document that made any reference to a loan account, joint or otherwise, for any period beyond 30 June 2001. Mr Tuckwell gave evidence that he had asked Mr van Oosterom to go through the general ledger records after 31 January 2001 (just before the date of separation) and highlight which drawings were for his own purposes and which were for Ms Linton's purposes. That this was an unreliable source of information seems to have been demonstrated by the fact that at first the liquidator included amongst the joint drawings a sum of $36,000.00 paid for the benefit of Kim Lewis, Mr van Oosterom's girlfriend, then conceded later that it was not a drawing made for Ms Linton's benefit. The point, however, is that this evidence, which I accept, establishes that the source of the liquidator's claim that drawings after the separation were joint drawings was not any document that Creighton-Brown prepared or anything that Mr Moran said or did. So I reject the allegation numbered (viii).

102. I have already expressed my doubt that there could be any increase in the joint account at all after the critical date, and my view that the parties probably intended that there should be individual loan accounts that corresponded to their individual drawings after the critical date. This is another issue, however, that is properly to be decided by the Supreme Court, after having heard evidence and argument from both the liquidator and Ms Linton, not for me to decide.

103. I do make one further observation, however. Amongst the sums claimed by the liquidator to have been joint drawings is the total of regular payments made to Ms Linton on account of the bookkeeping assistance she was continuing to give CIC after the date of separation. Ms Linton is maintaining that those payments were by way of salary to her, not loans to her. In all the circumstances, including the matrimonial separation, her relinquishment of any interest in the business and the negotiations for a property settlement, I think that a disinterested outsider knowing of these circumstances would have been very surprised at the proposition that Ms Linton was not being paid for her services to CIC after the separation but was simply being lent money by CIC. I acknowledge that the usual paraphernalia of an employer-employee relationship (such as deduction of income tax) seem to have been missing, but I must say that Ms Linton's contention that the payments were not loan moneys seems to me to have considerable merit.

Whether Profits Extinguished the Loans

104. An allegation in the "Clarification of Statement of Claim" filed by Ms Linton, which I have numbered (viii) in paragraph 21 of these reasons, was that at the time of her separation from her husband Mr Moran informed her that CIC's profits had offset and extinguished all the drawings and she owed nothing. There was no evidence at all in support of the allegation, and I suspect that the allegation was made in error, because it was inconsistent with Ms Linton's case that she and Mr van Oosterom had reached an agreement whereby he agreed to assume responsibility for repayment of all drawings described as loans.

105. A good deal of time was spent during the hearing on a related proposition, which was that by 30 June 2001 the business of CIC had generated enough profit, and there had been enough equity for Ms Linton and Mr van Oosterom in the business, for whatever debt was shown in the loan account to have been paid off, and so it should be regarded as having been paid off.

106. Mr Fettes' evidence bore upon this point. His expert report, which he adopted as his witness statement and verified, included the following passage (underlining added):

[50]

The balance sheet to which he referred was one that he had reconstructed himself. The reference to "the T.J. van Oosterom loan account" was contentious because it assumed an acceptance of Ms Linton's argument that as a result of the property settlement the liability under the loan account became his alone. The reference to an offset of the Beneficiary Current Accounts was also contentious but was a contention that I think has a good chance of turning out to be justified. But the most significant reference for present purposes is to "current year profits" offsetting the loan account.

107. I cannot accept the proposition that loans owing to a company by its present or past members can be regarded as having been repaid merely because the company had earned enough profits, and there had been enough money in the company, for the company to have been able to repay those loans. That is a proposition that Mr Vink on behalf of Ms Linton asked me to accept. The passage which I have quoted from Mr Fettes' report appears to be an expert opinion in support of it. Even so, I cannot and do not accept it. I could understand a statement that the financial position of CIC as at 1 February 2001 was such that Ms Linton and Mr van Oosterom could have distributed enough profits, or could otherwise have arranged CIC's finances, to pay off the loan account; in other words, that there had been a potential for paying off the loan account. I cannot tell whether such a statement, if made, would have been correct, although Mr Moran's evidence in cross-examination suggested to me that he might have agreed with such a statement. If that is what Mr Fettes meant to say, I would accept it. That is a long way from establishing, however, that something was done with the profits or with the equity to pay off the loan account entirely. I find that that simply did not happen.

108. So I reject the related proposition as well as the allegation numbered (viii) itself.

109. The report of Mr Fettes mentioned a report by a Mr Selak of Ernst & Young Corporate Finance Pty Ltd and stated that he (Mr Fettes) agreed with it. Mr Moran in his witness statement mentioned what is presumably the same report from Ernst & Young and said that it was incorrect. I simply note that although a report from Mr Selak of Ernst & Young was amongst the bundle of documents I was not referred to it during the hearing and have not attempted to appraise it.

Non-Identification of the Family Trust

110. In paragraphs 44 to 48 (inclusive) of these reasons I described how Mr Moran began his financial reporting by preparing two sets of reports, one headed "Corporate Interior Constructions Pty Ltd" and the other headed "The van Oosterom Family Trust", and how by 1998 there was one set of financial reports only, headed "Corporate Interior Constructions Pty Ltd", containing a balance sheet in a form which in earlier years had appeared as a balance sheet in the set of reports relating to the Family Trust. I stated that one consequence of the change of the method of preparation of the financial reports was that it lay behind the allegation that Creighton-Brown's failure to prepare financial reports from 1999 onwards under the heading of the Family Trust misled the liquidator into thinking that he could have resort to all trust property because CIC owned all trust property, whereas the fact was that after 1 July 2001 Ms Linton had become the trustee of the Property Trust instead of CIC and the liquidator had no right to resort to the assets of the Property Trust.

111. Ms Linton has alleged that because the liquidator was misled in that way, and attempted to claim and sell on behalf of CIC the two properties at Flinders Lane, Melbourne and Queensbridge Street, Southbank which were assets of the Family Trust, she suffered financial loss, in the form of expenses incurred in defending herself against the liquidator's attempts. This allegation has been very much at the forefront of Ms Linton's claims in this proceeding. It is reflected in the first paragraph of the "Clarification of Statement of Claim", although I have numbered it as (ix). It occupied a substantial part of the cross-examination of Mr Tuckwell and of Mr Moran. It was a matter that Mr Fettes dealt with in his expert report; Mr Fettes expressed the view that the financial statements for the years 1998 to 2001 were incorrectly titled because the accounts were those of the Family Trust, not of CIC. Putting the view in that way perpetuated the misconception that the Family Trust has a different legal entity from CIC, but the point is that in Mr Fettes' opinion the financial statements ought to have been headed in the name of the Family Trust, as they were before 1998.

112. The balance sheets, under the heading "Fixed Assets", identified two pieces of land: one at The Patch, and the other at Spunner Court, Sorrento. Those two pieces of land were always assets of the Family Trust, never of the Property Trust. Neither of the two properties which were assets of the Property Trust, and which before 1 July 2001 had been owned by CIC as trustee of the Property Trust, had ever been mentioned in any financial statements prepared by Creighton-Brown. So anybody reading on from the heading on the documents to the body of them would have had no reason to think that they had anything to do with the Property Trust or with properties which were assets of the Property Trust. Mr Fettes in his report had no difficulty in that regard, for he said that the financial statements were "clearly" for the Family Trust. Moreover the balance sheets in those financial statements stopped at the year ending 30 June 2001, and Ms Linton did not become the new trustee of the Property Trust until 1 July 2001, so the financial statements were not capable of misleading anyone into thinking that Ms Linton was not the owner of the assets of the Property Trust; as at 30 June 2001, CIC was still the legal owner.

113. Nevertheless, the allegation that the mere heading on the financial statements was capable of misleading or deceiving the liquidator is not without some tenable basis. There was some evidence of confusion in the mind of the liquidator. In paragraph 11 of his affidavit sworn on 12 May 2003 in the Family Court proceeding, Mr Tuckwell said (underlining added):

[54]

That paragraph is some evidence that the financial reports misled him into thinking that they related to the Property Trust as well as the Family Trust.

114. The affidavit was amongst the bundle of tendered documents and Mr Vink referred to it in his final address. Unfortunately, he did not cross-examine Mr Tuckwell about the paragraph. In a court proceeding with both sides represented by lawyers, that might have led to a successful submission that the evidence in paragraph 11 of Mr Tuckwell's affidavit ought to be disregarded. That submission was not made, and if it had been I think that it would have been unfair to accept it. So I have had regard to the paragraph, even though Mr Tuckwell was not confronted with it and given an opportunity to explain, if he could, why he said that the financial reports were of the Property Trust. Mr Tuckwell did say during cross-examination that he knew all along that the financial reports of Creighton-Brown related to a trust. He did not say that he knew all along that they related to the Family Trust and not the Property Trust. Even though Mr Fettes was not misled in that regard, and even though I doubt that most readers with accountancy skills would have been misled, I think it likely that Mr Tuckwell was.

115. So I consider that Ms Linton has established that the financial reports prepared by Creighton-Brown after 1 September 1999 were misleading in that they did not specifically state that the trust to which they related was the Family Trust only and not to any other trust of which CIC was trustee. That, however, is only one of the elements of the claim that has been permitted to proceed in this case. The second element is proof that the liquidator relied upon the financial reports, rather than on anything else, in such a way that was capable of causing loss or damage to her.

116. To prove that second element it is not enough to say that the liquidator thought that the financial reports related to the Property Trust as well as to the Family Trust. It is necessary to show that the reason why the liquidator thought that the two properties to which he was attempting to have resort were still owned by CIC in 2002 was probably that the financial reports confused him into thinking that that was so. In my opinion it is quite improbable that that was the reason.

117. The two properties at Flinders Land and Queensbridge Street were mortgaged to the Commonwealth Bank. As I stated in paragraph 12 of these reasons, transfers of the two properties from CIC to Ms Linton were not forwarded to the parties for signature until 30 October 2001. It would have been necessary for the Commonwealth Bank to consent to the registration of the transfers. That must have happened, because the transfers to Ms Linton were eventually registered in the Office of Titles, although not until after the date of the commencement of the liquidation.

118. Against that background I refer to the following passage from the cross-examination of Mr Tuckwell:

At a glance

Court

Decision date

Before

Source

Judgment (85 paragraphs)

Linton v Creighton-Brown & Co Pty Ltd No. 1 [2005] VCAT 813 (28 April 2005)

Parties

Legislation Cited (1)

Cases Cited (2)