Plaintiffs v Defendants

1 Rule 21.02(1) of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) ('Supreme Court Rules') provides that where a defendant does not serve a defence within the time limited to do so, the plaintiff may apply for judgment against that defendant.

2 June Patricia Kirk, the first plaintiff, now in her 89th year, gave powers of attorney to the second defendant, Michael George Wortman, in 2004 and 2009. Mrs Kirk, the trustee of her family trust, Talpa Pty Ltd ('Talpa'), and two other persons who owned a property the subject of the claim (collectively, the plaintiffs) brought this proceeding against Mr Wortman and PBP Accounting Solutions Pty Ltd (the first defendant, or 'PBP'), a company of which Mr Wortman was director and secretary. The plaintiffs allege that, using the powers granted, but in breach of his fiduciary obligations, Mr Wortman transferred very substantial sums of money belonging to the plaintiffs to PBP. The plaintiffs seek recovery of that money.

3 As this is a claim subject to directions in a managed list, the time limited for serving a defence has been the subject of directions. In circumstances described more fully below, when the defendants failed to file defences within the time ordered by the court, the plaintiffs applied for judgment in default of defence. After the court allowed Mr Wortman and, in effect,[1] PBP a further period of time in which to file the defences, still neither did so. The plaintiffs have again applied for judgment in default of defence.

4 The first issue is whether the defendants have failed to serve a defence within the time so limited. If not, the second issue is whether the plaintiffs have established an entitlement to relief on their statement of claim. If so, the third issue is what relief should be granted.

Did the defendants default in serving their defences?

5 There must be proof by affidavit of the default: r 21.02(1). That condition has been satisfied in this case.[2] The time for the service of a defence may be fixed by the rules or by court direction: r 14.04. In this case is was fixed by court direction as I will now describe.

6 On 18 December 2003, in a different proceeding to this one, Campaspe Investments Pty Ltd and others brought a claim against Mr Wortman and PBP ('Campaspe proceeding'). Mr Wortman had been the trusted financial adviser of the Moorhead family between 2005 and 2013. In that proceeding it was alleged that, having been granted a power of attorney from Mrs Moorhead, Mr Wortman diverted family and trust funds to PBP in breach of various duties. The court made a freezing order freezing $5.5 million of the defendant's Australian assets.

7 Soon after the Campaspe proceeding was commenced, on 26 February 2014, Mrs Kirk, Rosalind Mackay and Mark Mackay commenced this proceeding against PBP and Mr Wortman in which strikingly similar allegations were made. On that day, the plaintiffs having also applied for a freezing order, Cavanough J accepted an undertaking from the defendants, given in this proceeding, that they would abide by a freezing order made in the Campaspe proceeding as if the frozen sum was $22,000,000. That undertaking was extended on several occasions upon further adjournments of the plaintiffs' application until, on 4 June 2014, the court made a freezing order in this proceeding in respect of amounts up to $22,000,000.

8 Meanwhile the court made orders requiring the defendants to provide records of transactions and to disclose the location of certain monies. Deadlines for these disclosures were extended on various occasions when not met. In June, the plaintiffs issued subpoenas to several banks. Lawyers previously acting for the defendants ceased acting.

9 In July 2014 the court ordered Mr Wortman to file a further affidavit accounting for sale proceeds of a particular property and the court set down a pleading timetable for the parties to file their statement of claim and defences respectively. That pleading timetable has been varied on several occasions. It has been varied because on the first few occasions the plaintiffs did not file a statement of claim by the time they were required to do so. Ultimately they did so on 4 February 2015, five days later than last required by the order of 19 December 2014.

10 By consent order of the same date, the defendants were required to serve their defences by 20 February 2015. They did not do so. Nor did they do so even allowing a further five days to equate to the plaintiffs' delay in meeting the order to serve a statement of claim. Neither had they done so by 27 March 2015 when this matter next came before me for directions.

11 At the directions hearing on that date, the plaintiffs sought judgment in default of a defence. Mr Wortman sought a further extension of time in which to serve one. On that occasion he appeared only for himself, there being no qualified person appearing on behalf of the first defendant. Mr Wortman sought an extension arguing that the plaintiffs had taken over five months to serve their claim after being first ordered to do so.

12 Previously, at the directions hearing on 26 September 2014, the plaintiffs said the reason for their delay in filing a statement of claim was the difficulty in obtaining information about the transactions made by Mr Wortman and ascertaining the destination of monies they sought to recover.

13 There were several factors mitigating against granting Mr Wortman the further extension he asked for. First, on 19 December 2014 he consented to filing a defence within 21 days of receiving a statement of claim; secondly, unlike the plaintiffs, he was the one who, prima facie, had the records of and knowledge about the impugned transactions (if they were not simply to be denied); and, thirdly, the plaintiffs' delay in serving a statement of claim also worked in Mr Wortman's favour giving him time to gather what was necessary to defend the claims which had been substantially identified in the materials prepared for the freezing order application.

14 Nevertheless, on the basis that it was his last chance, I extended time for Mr Wortman's defence until 15 April 2015, nearly ten weeks since he had received the statement of claim. Although no similar order was made in favour of the first defendant, by declining to proceed with the default judgment application at that time PBP was effectively given the same benefit.

15 In addition to extending time for the defence I also ordered that Mr Wortman file and serve an affidavit stating whether he had retained a solicitor to act on behalf of PBP and for himself. If not, but he still intended doing so, he had to state when such solicitor would be engaged and provide evidence that established the likelihood of such appointment in the near future. That affidavit was also to be filed by 4.00 pm 15 April 2015. The reason for ordering it was that Mr Wortman claimed that he was on the cusp of obtaining funds to retain a new solicitor who would be able to file a defence on behalf of PBP. He had been saying that for some time.

16 No defences were filed on 15 April. Nor did Mr Wortman file the affidavit he was ordered to file. Instead, on the evening before the directions hearing on 17 April, a solicitor was retained to appear on behalf of Mr Wortman and the company to request yet another extension of time to file the defences. She said explicitly she had no instructions beyond those to seek an extension of time although she anticipated that, if funding was provided, she would be retained to file defences for both parties. She had no instructions, still less evidence, regarding the likelihood that Mr Wortman would obtain funding to enable him to retain the solicitor to prepare defences.

17 In short, the time for filing a defence was fixed by the court on 19 December 2014, for both defendants, namely, by 20 February 2015. On 27 March 2015 the court extended the time only for the second defendant to 15 April 2015. No defence has been served by either defendant by the times directed by the court order. In the wider circumstances I have described, I declined any further extension and indicated that I would determine the plaintiffs' application for judgment in default of a defence.

18 I should add, that on 13 February 2015, Campaspe Investments and others obtained summary judgment against Mr Wortman and PBP, and some other entities associated with Mr Wortman, including orders that they pay the plaintiffs equitable compensation of over $5,000,000.

Have the plaintiffs established an entitlement to relief?

19 In claims for the recovery of debt, damages or any property, a plaintiff may enter judgment against the defendant under r 21.03. In any other case - as here - the court may give judgment for the plaintiff upon the allegations made in the statement of claim: r 21.04.

20 Because every allegation in a pleading that is not denied is taken to be admitted[3] - except as to the fact of an amount of any damage suffered[4] - the facts alleged in the statement of claim are taken to be established without the need for verification. Judgment may be obtained if the alleged facts establish the entitlement to the relief claimed and, generally, only for the relief claimed.[5]

What facts were established by the admissions made to the statement of claim?

21 By their statement of claim, the plaintiffs allege that Mrs Kirk was the director, secretary and shareholder of Talpa, the owner of several bank accounts and the registered proprietor of five parcels of land. Talpa was alleged to be the trustee of the Kirk Family Trust and also the owner of a bank account. Mr Wortman was said to be the director and company secretary to PBP which was itself the owner of several bank accounts.

22 The statement of claim further alleges that Mr Wortman was appointed the attorney of Mrs Kirk first by general power of attorney on 7 December 2004 and secondly by an enduring power of attorney on 4 March 2009. Each of those powers of attorney remained in place until they were revoked in February 2014. The statement of claim alleges that Mr Wortman owed fiduciary duties to Mrs Kirk in exercising his power.

23 Between paragraphs 11 and 67 of the statement of claim, the plaintiffs allege a series of transactions carried out by Mr Wortman, purportedly on behalf of Mrs Kirk, involving the sale of the five parcels of land and the transfer of certain amounts of the sale proceeds to bank accounts held by PBP. Other direct transfers of monies from Mrs Kirk's bank accounts to those of PBP are also alleged.

24 The disposition of certain of the sale proceeds and the transfers of monies from Mrs Kirk's bank accounts to PBP's accounts are said to have occurred without the authority of Mrs Kirk and without having been disclosed to her. The total amount in question was alleged to be $3,845,091.41.

25 After alleging the foundational facts for each transaction, the plaintiffs then make a series of common allegations in each case as follows:

By reason of the matters set out in [the preceding paragraphs], Mr Wortman:

(a) did not carry out and perform his functions honestly and in good faith;

(b) did not exercise the power and authority reposed in him by Mrs Kirk solely for her benefit;

(c) improperly used his position to gain an advantage for:

(i) himself; and

(ii) PBP;

(d) made a profit from his position;

(e) placed himself in a position where his duties to Mrs Kirk conflicted with his:

(i) personal interest; and

(ii) obligations to PBP.

In the circumstances, Mr Wortman breached the Fiduciary Duties.

By reason of the matters set out in [the preceding paragraph], Mr Wortman's breach of the fiduciary duties has caused Mrs Kirk to suffer, and to continue to suffer, loss and damage.

Particulars

...

26 Because these paragraphs - and the fundamental allegations of fact preceding them - are all taken to have been admitted, it is therefore established that Mrs Kirk has suffered a loss, and Mr Wortman and PBP have respectively acquired a personal gain, in the amounts alleged. It is further established that those losses and gains were suffered and acquired by means of Mr Wortman's breach of a fiduciary duty owed to Mrs Kirk.

27 In further paragraphs of the statement of claim, the plaintiffs then allege accessorial liability of PBP with respect to the money Mr Wortman had transferred to it in breach of his fiduciary duties. In particular, the plaintiffs alleged that PBP knowingly received trust property (paragraphs 68-73), and/or alternatively, knowingly assisted Mr Wortman in the breach of his fiduciary duties and thereby profited (paragraphs 74-78). In those circumstances it is alleged that from the time that PBP received the proceeds of sale from the various parcels of land, and the transfers of money from Mrs Kirk's bank accounts, it held those monies upon a constructive trust in favour of Mrs Kirk. In those circumstances it is alleged that from the time that PBP received the proceeds of sale from the various parcels of land, and the transfers of money from Mrs Kirk's bank accounts, it held those monies upon a constructive trust in favour of Mrs Kirk.

28 The plaintiffs further allege (paragraphs 82-94) that, between 9 March 2011 and 19 November 2013, Mr Wortman transferred $415,550.28, in numerous instalments, from Talpa's bank account to PBP's bank account when he was neither authorised by Talpa to do so nor having disclosed to Talpa that he did so. It is alleged that at all material times PBP had knowledge that the money was held by Talpa on trust for the Kirk Family Trust and that the transfers were made without authority or disclosure. So it is alleged that PBP is liable in equity for its knowing receipt of that trust property and, for that reason, it held those monies upon a constructive trust in favour of Talpa.

29 The final, alternative claim is that the amounts paid to PBP belonging to Mrs Kirk and the amounts paid to PBP belonging to Talpa as trustee for the Kirk Family Trust were monies had and received by PBP to the use of each of those persons.[6]

30 Upon the basis that each of the facts alleged are taken to be admitted, I am satisfied that Mr Wortman caused loss to Mrs Kirk by means of breaching fiduciary duties owed to her; that PBP has knowingly received Mrs Kirk's money and knowingly assisted in Mr Wortman's breaches; and that PBP has knowingly received trust property belonging to Talpa.

32 In addition to some necessary machinery orders to join Talpa as a party, the plaintiffs have sought default judgment on the following terms:[7]

1.1. against the second defendant, Michael George Wortman, (Mr Wortman):

(a) a declaration that Mr Wortman breached the fiduciary duties which he owed to Mrs Kirk;

(b) equitable compensation of $3,845,091.41;

(c) interest of $1,143,655.89 (being interest at the rate of 6% per annum compounded yearly); and

(d) costs.

1.2. against the first defendant, PBP Accounting Solutions Pty Ltd (PBP):

(a) a declaration that PBP knowingly received a total of $3,845,091.41 which was held on trust for Mrs Kirk and subject to the fiduciary duties owed by Mr Wortman to Mrs Kirk;

(b) a declaration that PBP knowingly assisted, and participated in, Mr Wortman's dishonest conduct which was in breach of the fiduciary duties which he owed to Mrs Kirk;

(c) a declaration that PBP held the amount of $3,845,091.41 on trust for Mrs Kirk;

(d) a declaration that PBP holds the benefit of any property purchased using the $3,845,091.41, or any part of it, on trust for Mrs Kirk;

(e) equitable compensation of $3,845,091.41;

(f) interest of $1,143,655.89 (being interest at the rate of 6% per annum compounded yearly); and

(g) costs.

2. In favour of Talpa:

2.1 a declaration that PBP knowingly received $415,550.28 from money held by Talpa as trustee for the Kirk Family Trust;

2.2. a declaration that PBP held the amount of $415,550.28 on trust for Talpa;

2.3. a declaration that PBP holds the benefit of any property purchased using the $415,550.28, or any part of it, on trust for Talpa;

2.4. equitable compensation of $415,550.28;

2.5. interest of $86,025.21 (being interest at the rate of 6% per annum compounded annually); and

2.6. costs.

33 In my view, on the basis of the facts established by admissions, it is appropriate that I make -

(a) declarations that Mr Wortman breached the fiduciary duties owed to Mrs Kirk (1.1(a));

(b) declarations as to knowing receipt and knowing assistance (1.2(a) and (b), and 2.1));

(c) declarations that PBP held the amounts of money on trust for Mrs Kirk and Talpa respectively (1.2(c) and 2.2);

(d) awards of equitable compensation in favour of Mrs Kirk against Wortman and PBP (1.1(b) and 1.2(e)), and against PBP in favour of Talpa (2.4).; and

(e) an order that the defendants are to pay the plaintiffs' costs of the proceeding which, absent agreement, are to be taxed on a standard basis.

34 However, I am not prepared to make declarations (as in italics above) that PBP holds the benefit of any property purchased using the amounts of money referred to in 1.2(d) or in 2.3. There are no facts to support the proposition that any property has been purchased with those monies and the making of such declarations at this stage is purely hypothetical. That is a matter which the plaintiffs may need to advance in subsequent enforcement proceedings.

35 That then brings me to the question of interest. The questions here are whether any award of interest should be simple or compound and at what rate interest should be awarded.

36 The plaintiffs seek compound interest on the amounts in question at the rate of 6% per annum since the date of receipt by PBP. This being a claim for equitable compensation, a form of 'damages', the alternative is that the court order simple interest pursuant to s 60(1) of the Supreme Court Act 1986 (Vic). That section provides that on application in any proceeding for the recovery of debt or damages, the Court must, unless good cause is shown to the contrary, 'give damages in the nature of interest at such rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 as it thinks fit from the commencement of the proceeding to the date of the judgment over and above the debt or damages awarded'.

37 In their submissions, the plaintiffs referred to various cases supporting their view that equity courts have regularly awarded interest (including compound interest) when justice so demanded, including Hungerfords v Walker[8], The Commonwealth v SCI Operations Pty Ltd[9], Harris v Digital Plus Pty Ltd[10] and Harrison v Shipp[11].

38 In Talacko v Talacko [2009] VSC 579 ('Talacko'), Kyrou J decided that the plaintiffs were entitled to simple interest at the rates prescribed from time to time under the Penalty Interest Rates Act 1983 (Vic) in respect of certain amounts awarded for equitable compensation. In doing so, his Honour collected and summarised the principles that are relevant to determining whether or not the statutory rule should be applied or some other conception of interest. I gratefully adopt his Honour's summary of the relevant principles, with which I agree.

39 Identifying the principles from Talacko relevant to the current matter:

(a) 'The court has inherent equitable jurisdiction to award interest when the interests of justice so demand, including in circumstances where money has been withheld or misappropriated by a fiduciary. The right to interest in equity exists independently of statute.' [12] So, the court's equitable jurisdiction is not limited by s 60 of the Supreme Court Act 1986 (Vic);[13]

(b) 'Traditionally, in fixing the rate of interest, equity broadly distinguished between two classes of case. In cases involving a breach of trust or misconduct, the fiduciary was charged interest at the mercantile rate of five per cent per annum. In all other cases, the defaulting fiduciary was charged interest at a rate of four per cent per annum. More recently, however, the courts have departed from the fixed interest rates of four and five per cent';[14]

(c) 'In some circumstances, it will be appropriate for the court to award compound interest',[15] to ensure that no profit remains in the defaulting fiduciary's hands. Citing Boehm AM in Southern Cross Commodities Pty Ltd (in liq) v Ewing[16], this may, and normally will, occur where the defaulting fiduciary has used the money for his own commercial purposes, and also is guilty of fraud or serious misconduct.

(d) 'an award of compound interest should ordinarily be considered only in cases where the defaulting fiduciary is being compelled to disgorge a gain';[17] and

(e) Although the decision to award simple or compound interest is discretionary, to be determined on the facts of each case,[18] the court's power to award compound interest is not at large, and there must be features in each case justifying a departure from the normal rule for simple interest.[19] There must be evidence of an actual gain by the defaulting fiduciary or an evidentiary foundation upon which any gain may be assumed. [20]

40 In February 2015, the Victorian Supreme Court of Appeal published its decision in Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd,[21] which concerned, amongst other things, an award of equitable compensation. Relevantly, Garde AJA held that although the case necessitated an award of simple and not compound interest, an interest rate of 6% was appropriate from the dates of the respective payments (in the financial years 2007 and 2008) to 12 February 2015.[22] This, his Honour said, was arrived at doing the best he could to be fair to both parties, taking into account the fall of interest rates since the global financial crisis.

41 Applying the principles to the present matter, I am minded to award the plaintiffs an interest rate of 5% per annum compounded annually. This form and rate appropriately takes into account Mr Wortman's admitted wilful and dishonest conduct in relation to Mrs Kirk and Talpa, and Mr Wortman and PBP's breaches of their fiduciary duties.

42 Further, unlike in in Talacko,[23] whilst there is no evidence before me as to the actual gain made by the defendants, there is an evidentiary basis from which a gain may be inferred, in that the moneys were paid into PBP's bank accounts.[24] I infer that as the money was paid into the bank accounts of PBP, that Mr Wortman and PBP were making the most beneficial use of the funds by earning compound interest, and conversely that had Mr Wortman and PBP not deprived Mrs Kirk and Talpa from their money, that they would have made the most beneficial use of it open to them.[25]

43 I have adopted a rate of 5% interest to take into account the lower rates of interest banks have offered after the global financial crisis. I note that whilst Mr Wortman's unauthorized transfer of $1,700,666 from Mrs Kirk's bank accounts to PBP's bank account occurred between July 2005 and November 2013, PBP retained the other deposit and settlement funds between 2011 and 2013. In the circumstances, 5% interest compounded annually is appropriate.

44 Accordingly, I will make the orders substantially in the form proposed by the plaintiffs, subject to my comments at paragraph 34 above. The plaintiffs will need to provide further calculations in respect of the appropriate award of interest applying compound interest at a rate of 5% per annum.

[2] Affidavit of Anna Elizabeth Smith sworn 17 April 2015.

[5] See generally LexisNexis, Williams' Civil Procedure Victoria, vol 1 (at Service 286), [21.04.15].

[6] See paragraphs 95 and 96 of the statement of claim.

[7] See plaintiffs' outline of submissions dated 17 April 2015.

[8] [1989] HCA 8; (1989) 171 CLR 125, 148 (Mason CJ and Wilson J).

[9] [1998] HCA 20; (1998) 192 CLR 285, 316 (McHugh and Gummow JJ).

[10] [2003] NSWCA 10; (2003) 56 NSWLR 298, 367-9 (Heydon JA).

[11] [2001] NSWCA 13 (20 February 2001).

[12] Talacko [2009] VSC 579 (11 December 2009) [10], citing Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125, 148 and Wallersteiner v Moir (No 2) [1975] QB 373, 388, 397, 406.

[14] Ibid [12], citing, for example, Hagan v Waterhouse (1991) 34 NSWLR 308 and Murdocca v Murdocca (No 2) [2002] NSWSC 505.

[15] Ibid [15], citing Hagan v Waterhouse ( 1991) 34 NSWLR 308, 393; see also Harris v Digital Plus Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298, 367-9 (Heydon JA).

[16] (1988) 14 ACLR 39.

[17] Ibid [16], citing Fico v O'Leary [2004] WASC 215 (11 October 2004) [280].

[18] Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd [2015] VSCA 9 (12 February 2015) [320] (Garde AJA).

[19] Talacko [2009] VSC 579 (11 December 2009) [25].

[21] [2015] VSCA 9 (12 February 2015).

[23] Talacko [2009] VSC 579 (11 December 2009) [26].

[24] See also Wallersteiner v Moir (No. 2) [1975] QB 373, 398, 406, where the Court of Appeal thought it appropriate to charge compound interest on the basis that the defendant was a financier.

[25] See Wallersteiner v Moir (No 2) [1975] QB 373, 388.