CONSIDERATION
47 The starting point for the position of Mr Ma and Sino Global is unexceptionable. It is based upon the following observation in Warman International Limited v Dwyer (1995) 182 CLR 544 (Warman)at 559:
It is necessary to keep steadily in mind the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts.
See also Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 (Hospital Products) per Mason J at 108 and per Deane J at 124-125.
48 However, in this matter, I do not agree that it follows that the particular circumstances do not mean that a constructive trust should not be imposed over Mr Ma's shareholding in Plaza Carpark or the units in the Plaza UT held by Sino Global. The contrary is the case.
49 In Hospital Products, Gibbs CJ said at 67:
A person who occupies a fiduciary position may not use that position to gain a profit or advantage for himself, nor may he obtain a benefit by entering into a transaction in conflict with his fiduciary duty, without the informed consent of the person to whom he owes the duty.
50 It is also uncontroversial now that that rule applies whether or not the person in the position of a fiduciary acted fraudulently or with good intent, or acted knowingly in breach of that rule or in ignorance of it: Phipps v Boardman [1967] 2 AC 46; Chan v Zacharia (1984) 154 CLR 178. Thus in Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, Lord Russell of Killowen said at 386:
The rule of equity which insists on those, who by fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff … or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.
51 In the case of the $350,000 applied to the subscription for units in the Plaza UT, I find that Mr Ma would not have been able to finance the undisclosed borrowing including for the subscription for those units but for using the asset, namely the car park, as security for it. The resolution passed on 11 October 1996 by Plaza Carpark was procured at the instigation of Mr Ma as its sole director. That resolution, and what it might enable, was not brought to the attention of the investors. It did not expressly anticipate the borrowing by Plaza Carpark from the bank, as distinct from borrowing by a subscriber for units in the Plaza UT from another lender supported by the security of the car park. However, it reveals an awareness of the potential to borrow at least part of the undisclosed borrowing on the security of the car park. Mr Ma acknowledged that he could not have procured those funds otherwise. He also accepted that he did not have the resources to meet certain other personal liabilities except supported by that security.
52 In the case of the $350,000 applied to the payment of Mr Ma's personal liabilities, the application of the principles referred to clearly leads to the view that he should repay that sum to Plaza Carpark. It will then hold that sum as part of its assets in trust for the unit holders in the Plaza UT. Mr Ma acquired that benefit by breach of his duty as a fiduciary and must account for it. He does not now dispute that obligation.
53 Mr Ma and Sino Global placed considerable reliance on Warman in resisting any declaration that the share in Plaza Carpark and the units in the Plaza UT are held on a constructive trust for the investors (as unit holders and shareholders respectively).
54 In that case, an Australian company (the employer) was (inter alia) the agent for the distribution in Australia of gearboxes manufactured in Italy. It declined the manufacturer's proposal to manufacture the gear boxes in Australia under a joint venture. Its manager, whilst still employed, then dealt with the manufacturer regarding that proposal. He agreed with the manufacturer to set up a new company jointly owned equally by him and his wife of the one part and the manufacturer of the other. He then resigned from his employment. The manufacturer terminated the agency. The new company was established and it took over the agency, and entered into the proposed joint venture agreement.
55 The manager was found to have acted in breach of the fiduciary relationship between himself and his employer. The nature of the remedy was contentious. Ultimately, the High Court ordered that the employer was entitled to an account of profits made by the new company in its first two years of operation, being net profits before tax less an allowance for the expenses, skill, expertise, resources and effort contributed by its former manager. There was no issue before the High Court as to whether any part of the goodwill of the new business was held on constructive trust for the employer: see at 555. The issues were whether it was entitled to an account of profits, and if so upon what basis.
56 The Court (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ) considered at 557 ff the nature of the liability of a fiduciary to account. That liability, their Honours said at 557, does not depend upon detriment to the person to whom the duty was owed but exists if (relevantly) the benefit was obtained by reason of the fiduciary position or by taking advantage of an opportunity or knowledge derived from the fiduciary position. They reinforced the stringent rule that the fiduciary cannot profit from the trust in breach of duty. At 558, their Honours said:
What is necessary however is to determine as accurately as possible the true measure of the profit or benefit obtained by the fiduciary in breach of his duty.
57 Mr Ma and Sino Global sought to contend, on the basis of that decision, firstly that no constructive trust should be found in their share and units and secondly that, in accounting for their profits, "just allowances" should be made for the effort and skill or Mr Ma in procuring the opportunity to invest in the car park and then for sustaining it. They point to the fact that the investment opportunity only arose through Mr Ma, including him arranging for the borrowing, and that he could have obtained other investors if they did not agree to the arrangement including them financing him into the investment and also lending him a further $350,000 (had it been explained to them). They note that Plaza Carpark has operated profitably, providing good returns and that no opportunity was diverted or lost by Mr Ma's conduct, nor any loss in fact suffered by the investors. Through Sino Global he managed the car park investment well. They point to the absence of evidence (except from Ms Chan) that any investor would have declined to participate had Mr Ma disclosed what he planned, and to the apparent lack of interest of the investors in the detailed financial position of Plaza Carpark. Other matters are noted at [46] above. Hence, they contend, a "fair and balanced" result would not include the imposition of a constructive trust on Sino Global's units in the Plaza UT because it would be disproportionate to do so.
58 They maintain that the open offer which they put by letter of 8 October 2009, on the third day of the hearing, reflects a fair and balanced outcome in all the circumstances. That offer was that the car park be sold and the profits be distributed to all the unit holders (including Sino Global) pro rata, or alternatively that the investors purchase Sino Global's units in the Plaza UT and Mr Ma's share in Plaza Carpark for $800,000. That figure is reached by the following calculation:
Value of carpark (based on August 2008 bank valuation) $8,500,000
Less cost $4,450,000
Less 2.5% (marketing commission) $ 212,500
$4,827,500
One-ninth share of profit $ 470,833
Plus purchase price of Sino Global's units $ 356,000
$ 826,833
(say) $ 800,000
59 Mr Ma would also repay the balance of the undisclosed borrowing of $350,000 to the bank to reduce the bank indebtedness, leaving the investors in the same position they would have been in had Mr Ma not engaged in the undisclosed borrowing. In the short term, by repaying the $350,000 used for meeting his personal debts, Mr Ma would be in the same position as the other investors but for the increased indebtedness of Plaza Carpark to the bank by reason of it having funded Mr Ma's acquiring the units in the Plaza UT in the name of Sino Global.
60 The detail of how those figures are justified is not entirely clear. Allowing for some marketing cost, they assume a net realisable value of the car park at present of about $8,300,000 so a one-ninth share would be about $920,000. They appear to assume the present full borrowing from the bank (other than $350,000 of the undisclosed borrowing used by Mr Ma for personal purposes) would be repaid by Plaza Carpark. Hence, the proposal appears to assume that Mr Ma will retain, or retain the benefit of, that part of the undisclosed borrowing which was used to subscribe for units in Plaza UT. The reason for the difference between one-ninth of designated cost and the designated purchase price of the units is not clear; it is about $140,000. In the view I have reached on the principal issue, it is not necessary to take those queries further.
61 If either of Mr Ma's proposals is accepted, he is prepared to set off the income to which he claims to be entitled as a unit holder in Plaza UT since November 2008 to satisfy the costs of the investors, and to meet his own costs.
62 In this matter, the claim of the investors is not seeking from Mr Ma and Sino Global an account of profits made by acquiring a business in breach of the fiduciary duty. It is for a declaration of trust in respect of the asset (the units in Plaza UT) acquired by funds obtained in breach of that duty. In circumstances such as those in Warman, where there was no claim before the High Court that the asset - the new business or its goodwill - be held in trust, it is clear that the accounting for profits gained in breach of a fiduciary duty should have regard to the role of the fiduciary in generating the profits of the business, whether by effort and skill or by the introduction of capital. The Court in that case at 561:
[I]t may well be inappropriate and inequitable to compel the errant fiduciary to account for the whole of the profit of his conduct of the business or his exploitation of the principal's goodwill over an indefinite period of time. …
The stringent rule requiring a fiduciary to account for profits should not be applied in a manner which makes it a vehicle for the unjust enrichment of the plaintiff. In such a case it may be appropriate to allow the fiduciary a portion of the profits depending on the circumstances.
63 In this matter, in any event, I do not consider that imposing a constructive trust on the units in the Plaza UT held by Sino Global would involve any unjust enrichment on the part of the investors or be unfair to Mr Ma and Sino Global. In managing Plaza Carpark as trustee for the Plaza UT, Mr Ma through Sino Global caused Plaza Carpark to enter into a management contract with Sino Global. It charged a fee for doing so. There is no suggestion its fee was not a commercial one. Nor is there any suggestion that it should be required to account for the fees so received. In procuring the opportunity for the investors to participate in the Plaza UT, Mr Ma certainly undertook some work. Such "spotter's fee" as might have been payable has - in circumstances which the evidence does not satisfactorily reveal (as discussed below) - been paid at settlement to "consultants" (as Mr Ma so described them in correspondence with the solicitor's arranging the settlement) as the undisclosed commissions. There is little evidence about the extent of Mr Ma's professional work in procuring the investment beyond that; nor is there evidence that excludes from consideration the benefit to him as a professional accountant the provision of such services to his clients so as to maintain their work and to procure new clients so as to get their work.
64 It is plain that he acquired the units in the Plaza UT in breach of his fiduciary duty. Had that breach been detected at that time, I do not think there could have been any real doubt that the Court would have determined that he held those units on a constructive trust for the investors. Since then, the management of the Plaza UT was undertaken by Sino Global apparently for a professional fee. The fact that those units have become more valuable over time does not, in my view, provide any reason now in all the circumstances not to grant similar relief. The units in Plaza UT were a benefit obtained by Mr Ma by reason of him taking advantage of an opportunity which he got in his position as a fiduciary and in breach of his duty as a fiduciary: see per Mason J in Hospital Products at 107. That benefit, in my view, should be held by him as a constructive trustee for the investors. It is the gain from the breach, and in the circumstances that gain should be held on a constructive trust; cf Paul A Davies (Australia) Pty Ltd (in liquidation) v Davies (1983) 1 NSWLR 441 per Moffit P at 444. See also per Heydon JA (as he then was) in Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 at 414. There is a clear and direct connection between the breach of duty and the asset held: see per Brennan CJ, Gaudron, McHugh and Gummow JJ in Maguire v Makaronis (1996) 188 CLR 449 at 468 (Maguire).
65 Mr Ma and Sino Global submitted that the Court should take account of the fact that the investors would not have had the opportunity to invest in the car park but for Mr Ma identifying and securing that opportunity, and have since then had a satisfactory income stream and will in due course have a substantial capital profit. It was said in Warman at 558, in a passage cited with approval in Maguire at 468-469, that the fact that the fiduciary acted in good faith and in the interests of the trust and that the opportunity to invest would not have been available but for the fiduciary's skill and knowledge, does not provide an answer to the claim for relief. And, for the reasons already given, I do not consider the circumstances are such that the claim for a constructive trust should be rejected or tempered in the same way by Mr Ma's work at the time of, or subsequent to, the investment opportunity.
66 As Mr Ma has apparently given to the bank a personal guarantee for the full extent of Plaza Carpark's indebtedness, in the circumstances it is appropriate that he be relieved of that guarantee upon him repaying that part of the undisclosed borrowing used for his personal purposes, either by the investors negotiating with the bank for the release of that guarantee or by them underwriting any call on that guarantee in an appropriate way. It is also appropriate that it be made clear that he not also be liable for that part of the undisclosed borrowing used to subscribe for those units. The investors did not, in their submissions, seek to maintain his liability for that part of the undisclosed borrowing as well as a constructive trust for their benefit over the units issued to Sino Global. That was an appropriate position to take. Had Mr Ma acquired those units with funds from his own resources (whether or not he borrowed the funds to do so), the constructive trust would have been declared subject to the investors repaying those funds. They have elected to seek the remedy of a constructive trust in the circumstances, obviously because the units have significantly appreciated in value. They would be unfairly enriched if they got that order without repaying any contribution by Mr Ma for their acquisition; on the other hand, in such a case, he would be unfairly punished: see Chan v Zacharia (1984) 154 CLR 178 at 204-205. Leaving that part of the undisclosed borrowing as a liability of Plaza Car Park is a short cut to ordering reimbursement to Mr Ma of what he paid for the units on the condition that he then repay it to the bank to reduce the indebtedness. He is being brought to account for the benefit he received by his breach of fiduciary duty.
67 As noted earlier in these reasons, Mr Ma and Sino Global acknowledged that any liability of Mr Ma for breach of his fiduciary duty would extend to Sino Global: Barnes v Addy (1874) LR 9 Ch App 244 at 251.
68 I also consider that it is appropriate in principle to order that the dividends declared in favour of, and paid to, Sino Global since 1996 also be accounted for and paid to Plaza Carpark, subject to some adjustment in favour of Sino Global or Mr Ma for the interest paid by them on the $350,000 used to acquire those units. Again, that adjustment should be made because, albeit in breach of his fiduciary duty, Mr Ma acquired the units in Plaza Carpark with borrowed funds, but had the funds been borrowed independently (and subject to ensuring he did not profit from his breach of duty), the constructive trust over the units issued to Sino Global would be on the condition that the (borrowed) funds applied to their issue would attract an appropriate allowance for their use whilst the units appreciated in value. An appropriate allowance in this instance is, in my view, the interest paid on that borrowing.
69 Mr Ma produced material from which, it was submitted, it was shown that he had overpaid the proportion which he should have paid of the interest and bank fees on the undisclosed borrowing. The picture is not particularly persuasive. One calculation suggests that in the period to September 2008 the total interest and fees on the borrowing of $1,600,000 (made up of the undisclosed borrowing of $700,000 and the $900,000 borrowed and on-lent to the shareholders and Mr Ma to finance the extra $100,000 cost of each block of units in the Plaza UT) totalled $1,642,925 of which Mr Ma's proportion is $718,780 (7/16). That document claims that Mr Ma had in fact paid $746,735, made up of Sino Global's distributions from the Plaza UT and personal funds deposited by Mr Ma, that is an excess of $27,955. Another document shows Mr Ma had paid $766,337 including the distributions to Sino Global to 30 June 2008 and made further payments in the subsequent period totalling $38,067. The settlement proposal by letter of 8 October 2009 does not claim any overpayment of that nature.
70 The evidence is not particularly persuasive. The calculations were made only during the hearing from bank statements and other financial statements and documents. There was no evidence of a ledger kept by Mr Ma which routinely recorded the receipts and payments in relation to the undisclosed borrowing, or in relation to the units in the Plaza UT. It was his responsibility to maintain such a record, as Sino Global was the manager of Plaza Carpark and Mr Ma actually prepared what financial records were made and retained. As I have found above, whether or not he was aware at the time that he was in breach of his fiduciary duties, he anticipated his subscription for units in the Plaza UT being funded by borrowing (whether personal or corporate) and being secured by the car park. His monthly reports to the investors clearly did not reveal that transaction. Any shortcoming in the records, and so any lack of confidence in the reliability of the claims he now puts forward, must rest with him.
71 I have reached the view that there should be no credit allowed to Mr Ma or Sino Global on the basis of the claimed overpayment. I am satisfied that Mr Ma, by applying the dividends received from the Plaza UT and by the addition of such supplementary funds as he considered were necessary, tried regularly to pay the interest and bank fees on the unsecured borrowing. He did not say that he tried to build any surplus, whether to reduce the undisclosed borrowing or otherwise, beyond making the payments for interest and bank fees. I do not consider that he did build up any such surplus. There is no such surplus shown either as a standing to his credit in the annual financial statements from time to time or shown as reducing the extent of his indebtedness.
72 However, the fact is that Mr Ma has paid the interest and other bank charges on the undisclosed borrowing, including that part of it applied to acquire units in the Plaza UT. The dividends received have apparently been sufficient to cover the interest and bank fees on that part of the borrowing. No attempt was made to allocate his appropriation of the dividends received and other payments made by him to the two different uses to which the undisclosed borrowing was applied. But there would be no element of unjust enrichment by him if he were to be given credit for those payments as part of the "just allowances". Sino Global will hold its units in the Plaza UT on trust for the investors. And, on the other hand, I do not think the investors will be disadvantaged by having been deprived of the additional dividend flow. I infer that, had Mr Ma not procured units in the Plaza UT, some other investor would have participated and received the dividends which were received by Sino Global.
73 Accordingly, I do not propose to order that Mr Ma or Sino Global should account to Plaza Carpark for the dividends declared in favour of, and paid to, Sino Global since 1996. Nor do I propose to make any order in favour of Mr Ma or Sino Global on the claimed basis that they have in fact paid more than the interest and bank fees payable on the undisclosed borrowing since 1996.
74 Finally, I note that apart from the undisclosed borrowing, Mr Ma or Sino Global in fact borrowed $100,000 (along with each of the other investors) to partly fund the issue of units in the Plaza UT. The interest on the total of $900,000 was routinely declared and brought to account in the monthly statements; issued when the monthly dividends were paid, and in the financial statements. It is still a debt due by Mr Ma to Plaza Carpark. As that borrowing was applied towards purchase of the units in the Plaza UT, and as those units of Sino Global are to be held in trust for the investors, any final orders should relieve Mr Ma of that indebtedness to Plaza Carpark.
75 It is clear that, by reason of having the benefit of the other part of the undisclosed borrowing, Mr Ma was able to secure funds to meet other liabilities which he could not otherwise have met and that he did so at a rate of interest less than he would otherwise have been able to secure an unsecured borrowing (on the assumption that he would otherwise have been able to make that borrowing elsewhere, or have had to pay interest to his other creditors on the basis of an unsecured loan) or on a borrowing secured by a charge over the units in the name of Sino Global.
76 In my judgment, Mr Ma should therefore also be required to pay interest to Plaza Carpark at a rate of interest (which I determine conservatively at 3%) above the rate of interest paid by Plaza Carpark on that part of the unsecured borrowing. There is no science in that figure. There was no direct evidence, for instance, as to the bank rate applicable to unsecured personal loans during the period. Indeed, it must be doubtful if an unsecured loan of that amount would have been made by the banks to Mr Ma, or to anyone else. It may have advanced that amount on some sort of charge over the units themselves. It is not desirable that there be further evidence to determine, for example, the bank overdraft rate from time to time assuming that was somehow secured by a charge over the units. Mr Ma breached his fiduciary duty by arranging that part of the unsecured borrowing, and then by taking and using it for his own purposes. Although he has to date paid Plaza Carpark for the interest and bank fees it has paid to the bank on that part of the unsecured borrowing, he should be required to pay interest to Plaza Carpark at the higher rate as a way of requiring him to account for the profit he made by being relieved of the indebtedness he met with that borrowing (as discussed in Finn, Fiduciary Objections at 112-114). See also Southern Cross Commodities Pty Ltd (In Liq) v Ewing (1998) 6 ACLC 647 at 660 (Ewing). That interest should be calculated on a compounding basis with half yearly rests: see Ewing at 667 per Legoe J and at 670 per von Doussa J.
77 I turn to consider the undisclosed commissions.
78 The issue, as counsel for Plaza Carpark put it, is whether the undisclosed commissions were payments made in the best interests of the Plaza UT or procured by Mr Ma in breach of his fiduciary duties to the Plaza UT. The answer to that question turns upon whether Mr Ma, through Plaza Carpark, exercised appropriate diligence and prudence in agreeing to make and procure those payments: Austin v Austin (1906) 3 CLR 516, having regard to what an ordinary prudent business person would do: Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 at 516-517 and 522 per Finn J.
79 At first blush, the payment of a "spotter's fee" or a fee paid to an agent to negotiate a purchase price, or both, would not seem imprudent. Nor is there any evidence that the amount of the spotter's fee and the fee paid to negotiate the purchase price in this instance is itself excessive.
80 However, Mr Ma's evidence as to how and why the particular undisclosed commissions were paid is not entirely satisfactory. Initially, he said there was one consultant involved in the negotiations of the purchase of the car park. He was able to identify the opportunity for the investment through Mr Paul Ho of APH Consultants, and he asked Mr Ho to undertake the negotiations to secure the best price achievable. He agreed to pay Mr Ho a "success fee" of $100,000. Mr Ho's efforts led to the purchase price being reduced by some $400,000. In his cross-examination, he said that he did not deal with more than one consultant, and that the undisclosed commissions were paid in accordance with Mr Ho's direction to his company and the company Unilink based in Hong Kong. In fact, the evidence shows that by 8 October 1996, the payment to Unilink was directed to be paid, well before the settlement of the car park. How the timing of that direction came about was not satisfactorily explained. No evidence was adduced from Mr Ho. No receipt from him was produced. No written direction from him was produced. No record of any communications with Unilink was disclosed. Mr Ma had no knowledge of that company.
81 However, despite the forceful submission of counsel for Plaza Carpark, I do not think that Mr Ma went so far as to acknowledge in his evidence that the payment to Unilink was no part of the payment due to Mr Ho or was not paid at his direction. Despite the features of the evidence to which my attention was drawn, I am not satisfied that Mr Ho was not engaged as a consultant to Mr Ma and Plaza Carpark to negotiate the purchase of the car park, or that he was not entitled to a fee by agreement of $100,000, or that the fee in all the circumstances was improvident either at all or as to its amount. Nor am I satisfied that the manner in which the fee was paid was not in accordance with Mr Ho's direction.
82 Consequently, I do not conclude that the undisclosed commissions were paid by Plaza Carpark at Mr Ma's direction in breach of the fiduciary duty owed by Mr Ma.
83 The cross-claim was not, ultimately, pursued. It should be dismissed.
84 Mr Ma and Sino Global should pay to Plaza Carpark its costs of the proceeding, and its costs of the cross-claim.
85 As my reasons indicate that the orders to be made will be somewhat complex, I direct that Plaza Carpark prepare a draft order to give effect to my reasons for judgment, and submit it to the solicitors for Mr Ma and Sino Global within 14 days. In the event that the parties, through their solicitors, accept that the draft order gives effect to these reasons, they may so indicate and I will make the order in those terms. If they do not so agree, any party is given liberty to apply on short notice to relist the matter for submissions as to the terms of the appropriate orders.
I certify that the preceding eighty-five (85) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.