Lym International Pty Ltd v Chen; Marcolongo v Lym International Pty Ltd

Supreme Court of NSW|2009-03-16|Before: Hamilton J

CITATION : Lym International Pty Ltd v Chen; Marcolongo v Lym International Pty Ltd [2009] NSWSC 167

CATCHWORDS : EQUITY [35] - General principles - Fiduciary obligations - Conflict of interest and duty - Purchase by agent from principal of property - Liability to retransfer property - Whether allowance to delinquent agent for money expended on property should include allowance for agent's work and skill in improving property.

A & R Constructions Pty Ltd v Lees (1982) 7 ACLR 900 Alati v Kruger (1955) 94 CLR 216 Green and Clara Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 Huon Shipping & Logging Co Ltd v The South British Insurance Co Ltd [1923] VLR 216 Kiri Te Kanawa v Leading Edge Events Australia Pty Limited [2007] NSWCA 187 Lym International Pty Ltd v Chen [2009] NSWSC 98 CASES CITED : Maguire v Makaronis (1997) 188 CLR 449 O'Sullivan v Management Agency and Music Ltd [1985] QB 428 Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 Phipps v Boardman [1965] Ch 992 The Bernisse and The Elve [1920] P 1 United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 Vadasz v Pioneer Concrete (SA) Pty Limited (1995) 184 CLR 102 Warman International Ltd v Dwyer (1995) 182 CLR 544

TEXTS CITED : Dal Pont's Law of Costs (2nd ed, 2009) [28.65] Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) [5-255], [24-050]

5533/06 Lym International Pty Limited (P1) Limin Yang (P2) Yang Liu (P3) PARTIES : Yu Po Chen (D1) Westpac Banking Corporation (D2) 5049/07 Leonilda Marcolongo (P) Lym International Pty Limited (D1) Yu Po Chen (D2)

T S Hale SC & S A Wells (Lym International, Yang & Liu) COUNSEL : D R Pritchard SC & J S Emmett (Chen) T A Alexis SC & D H Mitchell (Marcolongo) M W Sneddon (WBC)

Unsworth Legal Pty Ltd (Lym International, Yang & Liu) SOLICITORS : Middletons (Chen) Dunstan Legal (Marcolongo) Henry Davis York (WBC)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5533/06 LYM INTERNATIONAL PTY LIMITED & ORS v YU PO CHEN & ANOR 5049/07 LEONILDA MARCOLONGO v LYM INTERNATIONAL PTY LIMITED & ANOR JUDGMENT 1 HIS HONOUR: There has been considerable argument before me and by way of written submissions over the space of a few days as to the appropriate form of the very complex orders that require to be made in these proceedings, particularly proceedings 5533/06. Those submissions have dealt both with a number of matters of principle and also in detail with various proposed forms of order that have passed to and fro between the Court and counsel and among counsel for the various parties. These reasons for judgment will deal principally with the matters of substance that have been argued and, save as to those matters, there will be room for further argument, if desired, as to the form of particular orders after this judgment has been delivered. 2 The first thing that is to be said is that, despite room in the law for there to be principal relief other than by way of order for retransfer both in the Lym International proceedings and in the Marcolongo proceedings, eg, equitable compensation, no party has argued for any principal relief in either case other than the retransfer of the Property and that is the form that the principal relief will take. 3 So far as the retransfer is concerned, Mr Chen has argued that there should be no retransfer until the calculation and payment of what is owed to him, for instance, for moneys of his own expended either in the discharge of the Kingsway mortgage or in the improvement of the Property by completion of the townhouse project. On the other hand, both Lym International and Mrs Marcolongo argue for an immediate retransfer of the remaining Units that now represent the Property by Mr Chen to Lym International, leaving the questions of what is owed to him to be settled subsequently. 4 In submitting that he ought be repaid his expenditure before the Units are transferred to Lym International, Mr Chen relies on the general principle that he who seeks equity must do equity, as it is applied in relation to the setting aside or rescission of transactions. That principle is discussed in Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [24-050]; and see Maguire v Makaronis (1997) 188 CLR 449 at 473 per Brennan CJ, Gaudron, McHugh and Gummow JJ. In Vadasz v Pioneer Concrete (SA) Pty Limited (1995) 184 CLR 102 at 111 - 112 the Court quoted with approval what had been said by Dixon CJ, Webb, Kitto and Taylor JJ in Alati v Kruger (1955) 94 CLR 216 at 223 - 224: "If the case had to be decided according to the principles of the common law, it might have been argued that at the date when the respondent issued his writ he was not entitled to rescind the purchase, because he was not then in a position to return to the appellant in specie that which he had received under the contract, in the same plight as that in which he had received it: Clarke v Dickson (1858) EI BI & EI 148 [120 ER 463]. But it is necessary here to apply the doctrines of equity, and equity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitution in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take account of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo." 5 The principle is that equity must be done and the position of the party retransferring the Property must be secured in relation to moneys expended by him on the Property. It is in the discretion of the Court as to how this ought be done: there is no absolute rule that payment must be made before retransfer. What the Court must do is achieve what is practically just between the parties. 6 Mr Chen contends that, if there is to be an immediate transfer of the units to Lym International, Lym International ought borrow the money to discharge the Westpac mortgage. He says that there is no evidence that it cannot do so. Equally it seems to me far from clear that it can readily do so in the present economic climate. It is also clear that considerable trouble and expense would be involved in this course. Worse still, bearing in mind the enquiry to be ordered and the possibility of an appeal, it would leave Lym International out of pocket millions of dollars for a considerable time. 7 Here, it is clear that Mr Chen will have to pay to the plaintiffs sums larger than Lym International will have to reimburse to him. In these circumstances, Mr Chen's position will be adequately secured if a charge is imposed on the Property in respect of the sums he should receive to protect his position until the process of set off between the parties is completed after the result of the enquiry to be ordered is known. In the meantime, Lym International should have the title to and control of the remainder of the Property which should always have been vested in it. 8 I shall order immediate transfer of the Units from Mr Chen to Lym International, but with the imposition of a charge that properly secures Mr Chen's position. In addition, as is already apparent, an enquiry will be ordered to ascertain the amount of the charge and other relevant matters. The only controversy of substance as to the content of this enquiry is whether or not an allowance ought be made for Mr Chen's work and skill in the completion of the townhouse project. 9 As to whether an allowance ought be made for the work and skill of a fiduciary ordered to account for his profit or on whom a constructive trust is imposed, there is a discussion of the law in Meagher, Gummow and Lehane at [5-255]. It is suggested in that paragraph that different rules may apply, depending on whether the fiduciary acted honestly; whether the fiduciary was guilty of an element of dishonesty; or whether the fiduciary has been particularly fraudulent. It should be commented that the writing of that paragraph lacks the degree of incisiveness and clarity that is generally a feature of this work. When one turns to the authorities, one discovers why: they are lacking in incisiveness, clarity and consistency. The result appears to be that each case must be decided on its own facts and that the Court has a wide discretion as to the stance it takes in a particular case. It must attempt to do what it regards as just in the circumstances. 10 The most recent statement of principle in the High Court is contained in Warman International Ltd v Dwyer (1995) 182 CLR 544 where the Court said at 562: "Whether it is appropriate to allow an errant fiduciary a proportion of profits or to make an allowance in respect of skill, expertise and other expenses is a matter of judgment which will depend on the facts of the given case: See McCamus, 'Remedies for Breach of Fiduciary Duty' (1991) Special Lectures of the Law Society of Upper Canada, 1990, Fiduciary Duties 57, at pp 62 - 63; see also O'Sullivan v Management Agency & Music Ltd , [1985] QB 428. However, as a general rule, in conformity with the principle that a fiduciary must not profit from a breach of fiduciary duty, a court will not apportion profits in the absence of an antecedent arrangement for profit-sharing but will make allowance for skill, expertise and other expenses."

The principle thus stated did not play any particular part in that decision and was not further expounded by the Court. 11 In the decision of the Court of Appeal in United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 (which was overturned by the High Court but not in this regard) at 241 the Court said: "In the second place, as is clear enough, we do not consider this case to be one where a fiduciary has made an honest mistake and has to account accordingly; it is a case where the fiduciary set out to steal, and stole, the interests of the beneficiary he was required to protect. Cases including fraud and dishonesty seems [sic] always to have been treated as exceptions in the relevant statements of principle as being cases where the courts will not interfere to preserve for the fraudulent and dishonest party the contribution which he made and used to carry out his fraudulent and dishonest purpose. Thus in Scott v Scott [1964] VR 300, at 313, Hudson J said in referring to Lord Provost of Edinburgh v The Lord Advocate (1879) 4 App Cas 823: 'In that case the apportionment of the accretion in value which had taken place was, of course, between the funds of two charitable trusts, but it appears to me that in a case where, as here, there is no suggestion of fraud nor of an intention on the part of the trustee by his conduct to enrich himself, the rule is not only in accordance with authority but an obviously just one and should be applied.'

Presumably Hudson J considered that the remedy against a fraudulent trustee would be a stricter one than that applied in the case of an honest trustee. Statements are to be found in many other cases that the trustee's misconduct did not involve fraud." 12 In O'Sullivan v Management Agency and Music Ltd [1985] QB 428 Fox LJ referred to dicta in the Court of Appeal in Phipps v Boardman [1965] Ch 992 and said at 467 - 468: "The latter observations (and those of Lord Denning MR and the judgment of Wilberforce J at first instance) accept the existence of a power in the court to make an allowance to the fiduciary. And I think it is clearly necessary that such a power should exist. Substantial injustice may result without it. A hard and fast rule that the beneficiary can demand the whole profit without an allowance for the work without which it could not have been created is unduly severe. Nor do I think that the principle is only applicable in cases where the personal conduct of the fiduciary cannot be criticised. I think that the justice of the individual case must be considered on the facts of that case. Accordingly, where there has been dishonesty or surreptitious dealing or other improper conduct then, as indicated by Lord Denning MR, it might be appropriate to refuse relief; but that will depend upon the circumstances." 13 In Green and Clara Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32 Brinsden J said at 38: "The recitation of the facts and the findings of the courts in the earlier decisions in this case are sufficient, I think, to indicate that Green and his alter ego, Clara, were not in the same position as Boardman and his co-trustee, in that Green had been guilty of surreptitious dealing and he certainly had not acted openly and above board. The learned trial judge has expressly ordered that there should be a just allowance allowed to Clara but in my view, the remarks quoted above support the view that the conduct of the defendant is to be taken into account in deciding what is a just allowance, bearing in mind, as Kennedy J pointed out, that this branch of the law is prophylactic, not restitutionary. There is a penal element in it calculated to deter others from behaving in the same way." 14 In this case I have found substantial dishonesty on the part of Mr Chen. He set out and obtained powers of attorney under which he might sell the Property without revealing that he regarded himself as a potential purchaser. He made various misrepresentations in the course of the subsequent dealings between him and Ms Yang that led to the contract for sale. He misappropriated some $1.3 million from bank accounts, swearing to the Court in the conduct of the proceedings that he was authorised to do so, a claim that I have found was not established. He used those moneys in procuring the transfer of the Property from Lym International to himself. He assumed conduct of the settlement of the contract for sale on behalf of Lym International as well as on his own behalf and used that position to effect the transfer to himself. He gave no settlement statement in relation to the settlement of the transaction and gave no accounting as to how moneys and the debts that he alleged he was entitled to satisfy as part of the payment of the purchase price to Lym International, Ms Yang or, indeed, the creditors whose debts he claims were satisfied. In the face of this course of conduct I have come to the conclusion that no allowance should be made to Mr Chen for his time and trouble in procuring the completion of the townhouses that he avowedly carried out to increase his own profit. This is not a case where the Court will interfere to preserve "for the fraudulent and dishonest party the contribution which he made and used to carry out his fraudulent and dishonest purpose". Part of the justification for this course is to deter others from behaving in the same way. 15 There was a debate, small in extent, as to whether, when declaratory relief as the basis for the judgments is given in favour of Ms Yang and Jasmine, it should be declared that the abstracted moneys had been misappropriated. In [181] of my substantive judgment (Lym International Pty Ltd v Chen [2009] NSWSC 98) I indicated that I should make declarations in those terms and I do not intend to resile from that now. A reference to misappropriation will be included in the appropriate declaratory relief. 16 A stay of proceedings is asked for in respect of the substantive orders in this case. There is no argument that injunctive relief to maintain the status quo pending the carrying out of the orders should be stayed. It obviously requires to be in force immediately and to remain in force. The subject matter of the controversy that there has been in this area is the order for the payment out of Court of the $750,000 paid in by Lym International as security for Mr Chen's costs. 17 I propose to follow the usual policy adopted by trial Judges in this Division, where an appeal is contemplated, of ordering a stay of proceedings of the substantive orders until it can be seen whether an appeal is in fact instituted and giving the parties time to apply to a Judge of Appeal to establish a holding regime during the pendency of the appeal, if one be instituted. In my view, the appropriate time is 42 days. The only controversy in this case has been whether that stay ought apply to the order for the payment out of security for costs or whether that order should be left among the orders having immediate effect. 18 In submitting that that order, too, should be stayed, Mr Chen has relied on the judgment of Beazley JA in Kiri Te Kanawa v Leading Edge Events Australia Pty Limited [2007] NSWCA 187. Mr Hale, of Senior Counsel for Lym International, has argued strongly that the order for payment out ought have immediate effect. He referred to the fact that the amount involved was the very considerable sum of $750,000, pointed out that the purpose of the order was exhausted when judgment was obtained in Lym International's favour in the substantive proceedings and relied on a line of authority including the decision of Lord Sterndale P in The Bernisse and The Elve [1920] P 1, the decision of Irvine CJ in Huon Shipping & Logging Co Ltd v The South British Insurance Co Ltd [1923] VLR 216 and the decision of Blackburn CJ in A & R Constructions Pty Ltd v Lees (1982) 7 ACLR 900. The principle enunciated in those decisions is regarded as still current in Dal Pont's Law of Costs (2nd ed, 2009) at [28.65]. That is to the effect that, once the purpose of the security has been exhausted, the moneys should be paid out at once, even where an appeal is contemplated, leaving the questions of security for costs of the appeal and any possible re trial for later consideration. 19 The following observations should be made about the judgment of Beazley JA. Her Honour was sitting as a single Judge of Appeal and the decision, even if it laid down any general principle, is not to be taken as a decision of the Court of Appeal. Secondly, it appears that her Honour was not referred to the Huon Shipping line of cases. Thirdly, the discretion to stay an order for the payment out of security must in every case be exercised upon the particular facts and circumstances of the case in question. Her Honour was in the Kiri Te Kanawa case concerned with a set of considerations quite distinct from the present case. 20 Whilst acknowledging the width of the discretion, I have come to the conclusion that nothing in this case justifies a departure from the course followed in the Huon Shipping line of cases. The sum involved is, as I have already observed, considerable. Lym International has won at trial, which radically changes the context in which the order was originally made. It is for the Court of Appeal to determine whether there should be any order for security for costs of the appeal (if application is made). Respectfully, it would seem to me that, if such an order were made, it would be in a sum far less than $750,000. The possibility of a second trial is remote and speculative. The fact that Lym International paid into Court $750,000 to satisfy the original order would suggest that it would be able again to meet an order for security for costs if one were made. In these circumstances I do not intend to stay the order for payment out of the security for costs, to the intent that those moneys should be paid out forthwith. 21 I have already referred to the injunctive relief put in place to maintain the status quo in both 5533/06 and 5049/07. It seems to me that in each case there is an element of Mareva relief in the orders made. In so far as those orders contain a Mareva element, that is justified. I refer to Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319. I rely on the well known general statement of the criteria for Mareva relief by Gleeson CJ at 321 - 322. The first element referred to by Gleeson CJ is obviously satisfied by the plaintiff's success in both 5533/06 and 5049/07. As to the element of apprehension of dispersal of assets, Meagher JA said at 326: "However, in exceptional cases (of which the present is unfortunately one) one can infer the existence of the latter ingredient partly or wholly from proof of the former. This may well be the situation in all cases where the plaintiff's prima facie case against the defendant involves proof of gross dishonesty."

As already appears more than once in respect of Mr Chen's conduct, there is not an allegation, but a judicial finding, of substantial dishonesty. I find that the element of an apprehension of dispersal of the funds is established in the present case sufficiently to found Mareva relief. 22 So far as the costs of Mrs Marcolongo in her proceedings and of Westpac in the Lym International proceedings is concerned, it is clear that both those parties ought have an order for costs in their favour. There has been a deal of argument as to whether that order should be against both Mr Chen and Lym International or solely against Mr Chen, who has been found to be the party whose dishonesty is the principal trigger of the litigation in each case. 23 The conclusion that I have come to is that both Mrs Marcolongo and Westpac should have an order against Lym International as well as against Mr Chen so that they will not be left without remedy for their costs if Mr Chen proves unable to pay them. The plaintiffs brought 5533/06, necessarily joining Westpac, but Westpac was joined for their own purposes in bringing that litigation. 24 In 5049/07 it was Mr Chen who was the primary mover in persuading Ms Yang to participate in removing the Property from Lym International in an expeditious fashion. In my view, in each case, although Lym International ought be ordered as well as Mr Chen to pay the costs concerned, it ought in each case have a Bullock order against Mr Chen for the recovery of any costs paid by it. 25 Finally, I received a late submission from Mr Pritchard, of Senior Counsel for Mr Chen, to the effect that the necessity of the matter being before the Court today was solely by repetition by Mr Hale of submissions that he had earlier put concerning the immediate payment out of the security for costs. I do not accept that that is the sole reason for today. There were various other matters in the orders that required further debate, as well as today being necessary for my delivery of my judgment concerning the whole of these complex orders. In those circumstances there will be no special order concerning the costs of today.

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