Supreme Court of WA|2001-02-21

McLauchlan & Anor v Prince & Anor [2001] WASC 43 (21 February 2001)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : McLAUCHLAN & ANOR -v- PRINCE & ANOR [2001] WASC 43

Equitable remedies - Summary application to have trustee account on basis of wilful default - Whether summary procedure available - Principle to be applied - Meaning of "wilful default" - Whether compound interest to be awarded - Basis of award of interest

Rules of the Supreme Court WA 1971, O 14 r 2(1), O 14 r 3(1),O 45 r 1

Account order on basis of wilful default with compound interest with rate and rests to be subject of further submissions

Brockway v Pando [2000] WASCA 405

Goldman v Thai Airways Ltd (1983) 1 WLR 1186

Re City Equitable Fire Insurance Co [1925] Ch 407

Re Munton [1927] 1 Ch 262

Re Wrightson (1908) 1 Ch 789

Wilkinson v Feldworth Financial Services Pty Ltd (1998) 29 ACSR 642

1 MASTER SANDERSON: This is the plaintiffs' application seeking orders that the first defendant account to the plaintiffs on the basis of wilful default for all of the assets of the estate of Kathleen Maude McLauchlan (deceased). The application is brought under O 45 r 1 which is in the following terms:

"(1) Where the statement of claim claims an account or involves the taking of an account the plaintiff may, at any time after the defendant has entered an appearance, or after the time limited for appearing, apply for an order under this Rule.

(2) An application under this Rule must be made by summons and must, unless the Court otherwise directs, be supported by affidavit or other evidence.

(3) On the hearing of the application, the Court may, unless satisfied by the defendant by affidavit or otherwise that there is some preliminary question to be tried, order that an account be taken and may also order that any amount certified on taking the account to be due to either party be paid to him within a time specified in the order."

2 The facts of the case can be shortly stated. The deceased died on 4 May 1983 and on 8 July 1983 probate of her will was granted to W G and F A Egerton ("the executors"). By deed dated 27 September 1984 the executors resigned from their appointment as trustees of the trust created by the will of the deceased and the first and second defendants were appointed trustees of the trust. The deed provided, inter alia, that the trustees agreed to administer the trust according to the terms of the will and according to law. The first-named plaintiff is the life tenant of the trust and the second-named plaintiff is the only member of the class of remainder beneficiaries pursuant to the trust. These matters are dealt with in the first three paragraphs of the plaintiffs' statement of claim filed 1 November 2000. These matters are uncontroversial and were admitted by the first defendant in his defence filed 27 November 2000.

3 The plaintiff alleges that since September 1984 the estate has been depleted by a number of investments not authorised by law. Two such investments are mentioned in par 4 of the statement of claim. For present purposes it will be enough if I deal with one such investment which is detailed in par 4.2. This subparagraph reads as follows:

"$36,406.64 was paid to or for the benefit of defaulting borrowers under loans brokered by Jamieson in his capacity as a licensed finance broker, such payment, alternatively investments, not being authorised investments under the Will or the (Trustees) Act; much of the $36,406.64 has been lost."

4 The claim against the first defendant which is the subject of this application is to be found in par 5 of the statement of claim. It is in the following terms:

"The depletions of the Estate pleaded in paragraph 4 have occurred in consequence of the wilful default of Prince in;

5.1 ...

5.2 ... recklessly permitting Jamieson to have possession and control of the assets of the Estate without any supervision or participation by Prince."

5 The statement of claim goes on to deal with other matters and by par C of the prayer for relief seeks an account from the first defendant on the basis of wilful default. By par 2 of his defence the first defendant does not admit the investment of the $36,406.64 by Jamieson as alleged in par 4.2 of the statement of claim. There is not a direct denial that such an investment was made, rather it is not admitted. By par 3 of the defence it is admitted that the first defendant permitted the second defendant to invest the assets of the estate but it is denied that this was done recklessly, as is alleged by par 5.2 of the statement of claim. Although it is not expressly stated in the defence it is clear that the first defendant denies that the plaintiff is entitled to an account on the basis of wilful default.

6 The first question to be determined is whether it is open to the court to grant the relief sought by the plaintiff on a summary basis. In Clarke v Australian Guarantee Corp Ltd, unreported; SCt of WA; Library No 980484; 27 August 1998, I expressed the tentative view that an application under O 45 was akin to an application for summary judgment under O 14. Having had the benefit of full argument on this question, I am confirmed in that view. Order 14 r 2(1) anticipates an application for summary judgment supported by an affidavit in which the deponent verifies the facts in the statement of claim and states that in his or her belief there is no defence to the action. Once the plaintiff complies with O 14 r 2(1) it is for the defendant to satisfy the court that "there is an issue or question in dispute which ought to be tried or that there ought, for some other reason, be a trial of that claim": See r 3(1). What is required of the defendant is that they show a triable issue and to do so they must condescend upon particulars: See Moscow Narodny Bank Ltd v Mosbert Finance (Aust) Pty Ltd [1976] WAR 109. In other words, once the conditions for summary judgment have been met by a plaintiff, the evidentiary onus, but not the legal onus, shifts to a defendant. A failure on the part of the defendant to discharge that onus will generally result in summary judgment being entered for the plaintiff.

7 The scheme of O 45 r 1 is exactly the same as the scheme in O 14 r 2. A party seeking an account by way of relief may seek such an order at any time after an appearance has been entered. The application is to be supported by affidavit or other evidence. Then, unless the court is satisfied by the defendant by affidavit or otherwise that there is some preliminary question to be tried, it may order the account to be taken. In other words, it is for the defendant to satisfy the court that the summary order ought not be made. It may be the case that this can be done without the need for the defendant to file an affidavit in opposition to the application. Rule 3 envisages such a possibility. But it is clear that the rule also envisages an evidentiary onus shifting to the defendant to establish that the order for account ought not be made. Of course, the court retains a discretion just as under O 14 there is a discretion if the court is satisfied that an order ought not be made. But in this and in all other respects the scheme of O 14 and O 45 are identical.

8 The second question then is whether the summary relief is available in a case where a plaintiff seeks to have accounts taken on the basis of wilful default. Counsel for the first defendant submitted that the question of whether or not there had been wilful default was a preliminary question to be tried and the order therefore ought not be made on a summary application. Counsel was unable to quote any authority in support of that proposition. In my view, were it the case that there was a conflict of evidence on the question of wilful default which could not be resolved on affidavit, then undoubtedly no order should be made. That is consistent with the practice under O 14. When there is a conflict of evidence on the affidavits summary judgment will not be available and the issues must be resolved at trial: See Webster v Lampard [1993] HCA 57; (1993) 177 CLR 598.

9 But in this case there is no conflict of evidence on the affidavits. Indeed the first defendant has not filed any affidavit material. Furthermore, the affidavit filed by the plaintiffs in support of the application makes it plain that the first defendant does not contest either the unauthorised investment by the second defendant of the $36,406.64 or his failure to supervise or participate in the investment by the second defendant. Appearing as annexure "JSM 6" to the affidavit of the first-named plaintiff, sworn 1 December 2000, is a letter from the first defendant to the plaintiffs dated 24 July 2000. That letter reads in part:

"These trusts were quite clear and the estate moneys were properly invested, in my view, at the time I finished in legal practice in 1993.

I have not been contacted by Mr Jamieson about anything to do with the estate for in excess of five years, and so it came as a considerable surprise to me to find in recent days that it seems that the trust estate has not been properly administered.

... In more recent times Mr Jamieson tells me that he has lent out some of the estate funds totalling $36,406.64, unsecured to various persons."

10 It is clear from this letter that the first defendant acknowledges that the investment by the second defendant of the $36,406.64 was made in breach of the trust. Furthermore, it is clear that the first defendant took no steps to participate in the administration of the trust subsequent to his retiring from practice in 1993. Neither of these two propositions was challenged by counsel for the first defendant at the hearing. At the commencement of the hearing counsel for the first defendant acknowledged that as a trustee the first defendant was an accounting party. An open offer was made of a common account, but counsel submitted that the question of whether there should be an account on the basis of wilful default should be left to trial.

11 Before dealing further with this question it is convenient to state just what is meant by the taking of accounts on the basis of wilful default. Meagher, Gummow and Lehane: "Equity Doctrines and Remedies" define the phrase as follows:

"(Wilful default) means that the defendant must account not only for all receipts and payments actually made by him but also for all moneys which he would have received if he had managed the property prudently".

12 This may be contrasted with what is referred to as a common account. Generally speaking a common account is a procedure to ascertain the monetary dealings of the parties in respect of the subject property and to determine with precision the balance due between them. After the balance is ascertained orders are made as to the rights of the parties to that balance. Thus a common account generally involves a two-step process. But an account on the basis of wilful default involves ascertaining the status of the corpus, determining the extent to which it has been depleted, ascertaining what would have been earned had the estate been properly administered and ordering payment to the plaintiff of that amount. This whole process is wrapped up in the one procedure. In effect then, the making of an order that the accounts be taken on the basis of wilful default effectively disposes of that part of the plaintiffs' claim.

13 The circumstances when an account on the basis of wilful default will be ordered were considered by Kennedy J in Gava v Grljusich [1999] WASC 13. His Honour in the course of his judgment undertook a thorough review of the authorities. It is unnecessary for me to repeat what his Honour had to say. The position can be summarised by quoting from what was said by Brightman LJ in Bartlett v Barclays Trust Co Ltd (Nos 1 & 2) [1980] Ch 515 at 546:

"Wilful default by a trustee in this context means a passive breach of trust, an omission by a trustee to do something which, as a prudent trustee, he ought to have done - as distinct from an act of breach of trust, that is to say, doing something which the trustee ought not to have done."

14 The plaintiffs' claim in this case that the wilful default on the part of the first defendant arises as a consequence of his failure to supervise his fellow trustee and to participate in investment decisions. There can be no doubt that such passive indifference amounts to wilful default. I think this emerges clearly from such cases as Dalrymple v Melville (1932) 32 SR (NSW) 596; Lewis v Nobbs [1878] 8 Ch D 591; Dawson v Dawson [1945] VicLawRp 14; [1945] VLR 99; Re Vickery [1931] 1 Ch 572. Although counsel for the first defendant did not concede this point, there was no substantial argument to the contrary.

15 In the circumstances then I can see no basis upon which the first defendant can resist the plaintiffs' claim to have accounts taken on the basis of wilful default. I am unable to see that there is any preliminary question to be tried. Furthermore, I can see no reason why given the general terms of O 45 r 1(3) that accounts on the basis of wilful default cannot be ordered on a summary basis. In the circumstances then I am prepared to order that the first defendant account to the plaintiffs on the basis of wilful default.

16 Before leaving this issue I should point out that there is no question of dishonesty on the part of the first defendant. That was not alleged on this application and in fact counsel for the plaintiffs made it plain that a claim for active breach of trust which is to be found in the statement of claim was not pursued. An order for accounts to be taken on the basis of wilful default is an equitable remedy which imputes a failure on the part of a trustee to meet the highest standards set by equity in the administration of trusts. The use of the word "wilful" means no more than the trustee, understanding his obligations, has failed to comply with those obligations. The evidence establishes that the first defendant knew nothing of the investment decisions taken by the second defendant. That is where the wilful default lies. There is no question of active participation by the first defendant in the second defendant's breach of trust.

17 Having determined that the first defendant should account on the basis of wilful default, it remains to be determined what moneys he would have received if he had managed the property prudently. No direct evidence was led on this question. Rather, the plaintiffs submitted that the determination should be made on the basis of compound interest at 7 per cent with monthly rests. To this submission the first defendant had two responses. First, it was said in a case such as this, compound interest was not the appropriate form of compensation and could not as a matter of law be awarded. As I understood the first defendant's position, if an account was to be ordered on the basis of wilful default, then further evidence would need to be led as to what income might have been earned by the trust had it been properly administered and that was a matter for another day. Secondly, it was submitted that if I concluded that compound interest was payable then the first defendant should be given the opportunity to make submissions about the rate and the frequency of the rests.

18 There is no direct authority on the question of whether it is appropriate to order the payment of compound interest as a measure of compensation to a plaintiff when accounts are ordered on the basis of wilful default. As a matter of general principle, courts of equity will, in appropriate circumstances, award compound interest. In President of India v La Pintada Compania Navigacion SA [1985] AC 104, Lord Brandon of Oakbrook put the position as follows (at 116):

"The Chancery courts, again differing from the common law courts, had regularly awarded simple interest as ancillary relief in respect of equitable remedies, such as specific performance, rescission and the taking of an account. Chancery courts had further regularly awarded interest, including not only simple but also compound interest, when they thought that justice so demanded, that is to say in cases where money had been obtained and retained by fraud, or where it had been withheld or misapplied by a trustee or anyone else in a fiduciary position."

19 It is important to acknowledge that the awarding of interest was never done on the basis of imposing a penalty on the defaulting party or as compensation for the parties suffering the loss. Rather, interest was imposed as a way of assessing the benefit passing to the trustee by use of the misappropriated trust funds. In Docker v Somes [1834] EngR 663; (1834) 2 My & K 655; 39 ER 1095 Lord Brougham put the position as follows (at 664 - 666):

"Wherever a trustee, or one standing in the relation of a trustee, violates his duty, and deals with a trust estate for his own behoof, the rule is that he shall account to cestui que trust for all the gain which he has made. Thus, if trust money is laid out in buying and selling land, and a profit is made by the transaction, that shall go not to the trustee who has so applied the money, but to the cestui que trust whose money has been thus applied ... But where, having engaged in some trade himself, [the trustee] had invested the trust money in that trade along with his own, there was so such difficulty in severing the profits which might be supposed to come from the money misapplied from those which came from the rest of the capital embarked, that it was deemed more convenient to take another course, and instead of endeavouring to ascertain what profit had been really made, to fix upon certain rates of interest as the supposed measure or representative of the profits, and assign that to the trust estate."

20 In Wallersteiner v Moir (No 2) [1975] QB 373, Lord Denning MR appeared to adopt a different approach. His Lordship said that an additional purpose for charging the fiduciary with interest is that the beneficiary "should be compensated for the loss ... occasioned to it": See 388. His Lordship's views were not supported by the other two members of the Court of Appeal. Buckley LJ said (at 398):

"In cases of this kind interest is not, as I understand the law, given to compensate for loss of profit but in order to ensure as far as possible that the defendant retains no profit for which he ought to account."

21 There are two cases, both decisions of this Court, which are of some relevance on this question. The first is the case of Ninety Five Pty Ltd v Banque Nationale de Paris [1988] WAR 132. This case concerned an action by liquidators of a company which had financed the purchase of its own shares. The court found that cheques were paid to the defendant by the directors of the plaintiff in breach of their fiduciary duty as directors in repayment of a loan by the defendant to the plaintiff to enable the plaintiff to acquire its own shares. It was not disputed that the funds paid to the defendant were trust property and remained so in its hands. The defendant argued that it was a bona fide purchaser for value without notice. The court rejected that argument. On that basis the defendant was liable to account to the plaintiff as a constructive trustee. The question then was whether interest ought be awarded on the sum retained by the defendant in its capacity as trustee and if so, on what basis. Smith J, in dealing with this question, said (at 185):

"While it is well established in equity that a trustee who in breach of trust misapplies trust funds will be liable not only to replace the misapplied principal fund but to do so with interest from the date of misapplication, the rate of interest and the choice between simple and compound interest is in the discretion of the court."

22 His Honour referred to the decision in Wallersteiner v Moir (No 2) in support of the approach he adopted.

23 The decision in the Ninety Five case is important in two respects. First, his Honour clearly viewed the awarding of compound interest as compensation for loss suffered by the plaintiff. Secondly, the decision whether to award compound interest or simple interest is discretionary and depends upon the facts of each case. That point also emerges clearly from the Wallersteiner decision.

24 The second relevant authority is the decision of Nicholson J in Ledger v Petagna Nominees Pty Ltd (1989) 1 WAR 300. This case concerned the recovery by a liquidator of a company of certain money paid to a defendant and found to be a preference. The second defendant was a director of the first defendant and was in a fiduciary relationship with the company in liquidation. Nicholson J summarised the position as follows (at 301):

"It is not here contended that a fiduciary relationship exists as between the first defendant and the Company but only that such a relationship exists between the second defendant and the Company, as it undoubtedly did ... While there exists therefore the prima facie basis for making of an order for payment of interest on a compound basis against the second defendant the same basis is not contended for by the plaintiff in relation to the first defendant. The existence of the fiduciary relationship is the foundation necessary on which to make an award on a compound basis."

25 His Honour then went on to conclude that the first defendant received payment in the knowledge of the breach of trust on the part of the second defendant and the first defendant was therefore in a fiduciary relationship with the company. Having reached that conclusion his Honour went on (at 302):

"Further, I am satisfied that it is here appropriate to exercise the discretion in favour of the grant of interest on a compound basis. It is not possible here, as it was in Ninety Five at 185, to distinguish the situation of a trustee who, having trust money, uses the money for his own commercial benefit. The association of the second defendant in the management of the first defendant and the Company makes that distinction otiose. Further I am satisfied that an award of interest would not result in a benefit to any other party save the creditors of the Company. I therefore accept the submissions made on behalf of the Company that interest should be awarded on a compound basis."

26 These two decisions, based as they are on the idea of compound interest as compensation, have been subject to criticism: See Davis "Interest as Compensation" in Finn (Editor) "Essays on Damages" (1992) at 133 - 134.

27 All of the cases to which I have referred involve a situation where a fiduciary has converted trust money to his or her own use and as a consequence derived a benefit. That is not the case here. The first defendant is being called to account on the basis of wilful default. It is not a question of what personal benefit has been obtained by the trustee in using the trust moneys. As I have been at pains to point out, there is no suggestion of dishonesty on the part of the first defendant and the evidence clearly shows he has not used the trust moneys. The question is what income could the plaintiffs have earned had there been no wilful default on the part of the first defendant. In these circumstances it seems to me that compound interest is an appropriate measure to be employed. Such an award is not made as a measure of compensation to the plaintiffs. Rather, it is to ensure that a profit which equity presumes would have been made, had there been no wilful default on the part of the first defendant, is paid to the plaintiffs.

28 Having reached that conclusion I think it is proper to allow the first defendant the opportunity to make submissions both with respect to the rate of interest and the timing of rests. It is also appropriate that I hear the parties as to the precise form of orders in relation to the taking of accounts.

McLauchlan & Anor v Prince & Anor [2001] WASC 43

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McLauchlan & Anor v Prince & Anor [2001] WASC 43 (21 February 2001)

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