Lowe v Pascoe

Supreme Court of NSW|2021-12-08

Proceedings 2005/262284 M Pesman SC with N Allan (Plaintiffs) J Stoljar SC with Z Hillman (First Defendant) D L Williams SC with J D Little (Fifth, Sixth and Seventh Defendants)

Proceedings 2017/325815 D L Williams SC with J D Little (Plaintiffs) J Stoljar SC with Z Hillman (First Defendant) M Pesman SC with N Allan (Second and Third Defendants)

Proceedings 2005/262284 Beazley Lawyers (Marque Lawyers from 10.3.22) (Plaintiffs) Hall & Wilcox (First Defendant) Holman Webb Lawyers (Second Defendant) CLS Legal (Fifth, Sixth and Seventh Defendants)

Proceedings 2017/325815 CLS Legal (Plaintiffs) Hall & Wilcox (First Defendant) Beazley Lawyers (Marque Lawyers from 10.3.22) (Second and Third Defendants) File Number(s): 2005/262284; 2017/325815

Judgment

On 8 December 2021, I directed the Administrator to bring in short minutes for the further conduct and finalisation of both the Partnership Proceedings and the FC Chow Proceedings. On 3 November 2021, the Administrator's solicitors provided proposed orders to the other parties. The solicitors for FC Chow estate responded on 5 November 2021 and 18 November 2021, taking issue with some respects of the proposed orders. On 26 November 2021, the Administrator's solicitors provided a calculation sheet to explain the calculations contained in the proposed orders. On 20 December 2021, the Administrator's solicitors provided further draft orders in both proceedings, which included some amendments to the version circulated earlier.
Under cover of a letter bearing the date 22 November 2021, which was clearly intended to be 22 December 2021, the solicitors for FC Chow estate provided to the Administrator's solicitors alternative versions of the proposed orders. On 23 December 2021, the Administrator's solicitors responded to the letter dated "22 November 2021", indicating the position of the Administrator in relation to questions raised by the solicitors for FC Chow estate. The parties have now asked the Court to resolve, on the papers, the questions raised by the differences between the two versions. As I understand the position, there are three questions remaining, namely, the extent to which the estate of KST should receive a distribution from the funds held by the Administrator, the calculation of the notional distributions received by Sunly and Gordon, and costs of the proceedings.

Entitlement of KST's Estate

CLS Legal, who are acting for the estate of FC Chow, complain that the Administrator has changed his position with respect to the entitlement of then estate of KST to a distribution from the funds held by the Administrator. Accordingly, they say, because the Court has not made a ruling as to how the deficiency caused by the defalcations of KST should be taken into account, they assumed that the orders proposed on behalf of the Administrator would seek a timetable to dispose of that issue, which has now been raised on behalf of the Administrator belatedly.
CLS Legal contend that the orders proposed on behalf of the Administrator exhibit an error in so far as the Administrator now claims, on behalf of the late KST, a distribution from the Partnership without bringing to account the notional distributions that had previously been made to him, being the amounts of his defalcations. They assert that, to the extent that there is a deficiency in funds after notional distributions to other members of the Partnership are added back, that deficiency is due to the misappropriation on the part of KST. They assert that the calculation made in the orders proposed on behalf of the Administrator results in KST benefiting from his defalcations at the expense of the other members of the Partnership, a result that they characterise as "nonsensical".
CLS Legal complain that the Administrator had never previously raised that possibility in pleadings or argument or taken any of the opportunities given to the parties by the Court to raise that matter as a question that requires resolution. Rather, they say, the position of the Administrator was to disavow expressly any entitlement to a distribution to the estate of the late KST in circumstances where there was a shortfall to the other members of the Partnership. The consequence, they say, is that the Court has not made findings that would permit such a result.
The orders proposed by the Administrator contain a note to the effect that the Administrator does not have and has never had sufficient funds to distribute the notional amounts of the Net Proceeds Trust and the Profits Trust. CLS Legal assert that that shortfall in the funds of the Partnership resulted because the funds were used by KST or were distributed prior to the appointment of the Administrator. Therefore, they say, the estate of KST must account notionally for that shortfall in the funds of the Partnership that he caused to be lost to the Partnership in the same way as all other members of the Partnership are required to account notionally for the previous distributions made to them from funds of the Partnership. They assert that a member of the Partnership who received the benefit of such funds, including KST, must notionally account to the Partnership for the value of any funds that represent funds of the Partnership. They assert that it would be perverse if KST's estate were not required to account notionally for the funds that were lost to the Partnership by his defalcation.
Messrs Hall and Wilcox, who are acting for the Administrator, respond that the Administrator has always claimed a share of the Net Proceeds Trust since it was necessary to do so in order to meet the costs order made in favour of Mary and Geoffrey. They assert that, given the orders of the Court of Appeal, that approach has not been the subject of any complaint or controversy up to this time. They support the Administrator's claims on the Profits Trust on several bases.
First, they say, the process of the Inquiry has resulted in the estate of KST accounting in full for all benefits obtained by KST. They say that it is incorrect to assert that the estate of KST has not done equity in relation to his share in the Partnership since the estate of KST has contributed to the "pool" of funds available for distribution to the members of the Partnership. Thus, they say, KST's interest in the three properties that were not purchased using monies of the Partnership, all funds held in his accounts (save for those removed from those accounts after his death), the proceeds of the sale of shares held by KST on his death and the entirety of his 10% interest in the net proceeds of sale of the three Partnership Properties have been brought to account. In addition, they say, the entirety of the rental income from the Partnership Properties has been brought to account as well as an occupation fee. Accordingly, Hall and Wilcox assert, the entirety of the fruits of KST's working life have now been contributed to the Partnership.
Secondly, Hall and Wilcox assert, those acting for FC Chow estate objected to the Administrator's failing to claim the share of KST and the Court accepted that approach by confirming that, if the FC Chow estate is entitled to a distribution, all members of the Partnership are also entitled to participate on the basis that they bring to account any benefits that they have received from KST in the same fashion as is proposed for Sunly and Gordon [1] . Thirdly, they say, it is in the interests of all beneficiaries of KST's estate, including those members of the Partnership who have confirmed they will not claim as partners, that the estate of KST claim its entitlement.
As I understand the competing contentions, the Administrator accepts that the estate of KST must bring to account the benefits that KST received from the funds of the Partnership but asserts that the estate of KST has in fact done so by reason of the Inquiry as directed by the Court of Appeal. It is true that the estate of KST is bringing into account certain benefits received by KST during his lifetime. However, the fact that there is a shortfall indicates that the Administrator has not received reimbursement for the full extent of KST's misappropriations. Had there been full reimbursement, there would be no shortfall.
As I have indicated previously, the shortfall results partly from the operation of the Real Property Act 1900 (NSW) in relation to the interests acquired in the partnership properties as a result of misappropriations. Nevertheless, the amounts of those distributions should be notionally brought to account by the estate of KST in the same way as the benefits received by Sunly and Gordon are brought to account as notional distributions. That is to say, the estate of KST should be treated as having received distributions in the amounts of the funds misappropriated by KST to the extent that they have not been made good. There should be no double counting of amounts already notionally brought to account by the estate of FC Chow in respect of the benefits resulting from the operation of the Real Property Act.

Sunly and Gordon's Benefit

In their letter of 18 November 2021, CLS Legal indicated disagreement with the Administrator's calculation that Sunly and Gordon had received 81.5% of their entitlement to the Net Proceeds Trust, asserting that the correct proportion was 73.3%. They said that the percentage of 81.5% was based on 100% of the notional proceeds of sale of the proprietary interests of Sunly and Gordon whereas it is only 90% of those interests that were required with funds of the Partnership. CLS Legal also disagreed with the calculation that Sunly and Gordon had received 79.8% of their entitlement to the Profits Trust, saying that the correct proportion is 56%. They say that the percentage of 79.8% was based on 100% of the prior distributions received by Sunly and Gordon but it is only 70% that the Court has held were funds of the Partnership, namely, rent from the Partnership Properties.
Hall and Wilcox respond by saying that that disagreement with the Administrator's calculations is inconsistent with the position adopted on behalf of FC Chow estate at the hearing on 13 July 2021, when a document entitled "Alternate Calculations of the pro rata entitlements of each partner (sic; scilicet party) prepared on behalf of the FC Chow Plaintiffs" was circulated on behalf of FC Chow estate. In referring to that document during the hearing on 13 July 2021, senior counsel for FC Chow estate asked the Court, for practical purposes, to ignore the differences between the calculations made on behalf of FC Chow estate and the Administrator's calculations because they are de minimis and ultimately have little or no impact. Senior counsel for FC Chow estate asserted that they were prepared to accept the Administrator's calculations "and that gets rid of a whole lot of the differences between us", save for one or two discrete matters that need to be taken into account. Hall and Wilcox assert that, in those circumstances, it is now too late to reopen those issues.
In their letter of 22 December 2021 (dated 22 November 2021), CLS Legal reiterated the asserted miscalculations. In the letter of 23 December 2021, Hall and Wilcox rejected the suggested reconfiguration of the relevant percentages for the reasons set out in their letter of 20 December 2021, namely, that the position that was put to the Court was that the Administrator's percentages were in substance agreed. In the circumstances, I do not consider that it is open to the estate of FC Chow to re-agitate the question of the percentages.

Costs

I have concluded that the Administrator's costs of both proceedings should be paid out of the funds held by the Administrator. The final question that requires consideration is party/party costs of both proceedings. The parties have proposed that the question of costs of the proceedings be determined on the papers. I propose to give the following directions: 1. Direct that the Administrator, within 7 days, bring in short minutes of orders giving effect to all conclusions reached in the proceedings. 2. Direct that, within 14 days thereafter, the plaintiffs in both proceedings file and serve submissions as to costs. 3. Direct that, within a further period of 14 days, the defendants file submissions in response. 4. Direct that, within a further period of 7 days, the plaintiffs file submissions in reply if they wish.

Endnote

See Lowe v Pascoe (No 10) [2021] NSWSC 1232 at [29]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 March 2022

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