Proceedings before the Master
27 It is accepted that the references in Orders 5 (c) and (d) to Orders 6 and 7 are misprints. "Order 6" refers to Order 5(b) and "Order 7" refers to Order 5(c). The Master was required by the orders, then, to take accounts pursuant to orders 5 (a), (d), (e) and (f) and to make the enquiries referred to in Orders 5 (b) and (c).
28 It was accepted by Windeyer J, in the judgment appealed from, that an observation made by the Master in the course of his judgment, that the matter was far more complex than had been originally thought, was correct. It was not possible to take the accounts in the discrete manner required by the orders. The allocation of items between the separate headings became too difficult. Accordingly, the parties accepted that the accounts ordered by 5 (a), (e) and (f) should be taken in composite form. The necessity so to do was acknowledged by Windeyer J, in the judgment under appeal.
29 In receiving evidence in relation to the taking of these accounts, as is clear from his judgments, the Master formed an adverse view of the credibility of Sam, which was, to an extent, in contrast to the view formed by Windeyer J in the initial proceedings. This affected findings of the Master in relation to the accounts. Also, he was satisfied that not inconsiderable "just allowances" should be made to Frank and Teresa in relation to work done in the organising of the construction of the properties and in their management. Moreover, he found that they had been far from niggardly in the moneys that had been provided to Sam over the years, albeit that his share of the rentals of the Teralba Street properties formed part of the fund from which these amounts had been provided. The moneys provided significantly exceeded Sam's share of the rents. In the upshot, and taking into account the amount of $169,695.90 paid to him under the interim order in respect of the loan account, the Master found that Sam was indebted to the respondents in the amount of $109,048.54. It is clear that this was an unexpected result It was, obviously, of some significance to his Honour when he entered upon the further consideration of the matter in 1997.
30 The account required by order 5 (d) was not undertaken by the Master. Windeyer J in his judgment of 1997 accepts that the Master was not required to do so, before the question of what further orders should be made upon further consideration of the matter had been determined.
31 It should be noted, also, that in arriving at the figure of Sam's indebtedness, the Master allowed interest in respect both of amounts awarded to Sam and to the defendants. Accordingly, in the computation, Sam was credited with all amounts that he should have received by way of rent from the Teralba Street properties together with interest on those amounts.
32 The enquiries enjoined by orders 5 (b) and (c) obviously occasioned difficulty. Sam relied upon the evidence of an expert, Mr Ludowici who prepared two sets of accounts which became known, in the litigation, as Pollcash and Pollprop. It is convenient to set-out what the Master said of these two exercises, in his judgment of 21 March 1996.
"The first exercise, Pollcash, was one in which he for the years from 1978 to 1988 sought to determine whether there was income available to the Trust from its other income producing activities, i.e. the building business, and receipt of rents from flats other than 146 and 148 Teralba Road. In the event that there was no such income or that there was a loss, then the conclusion inherent in the exercise is that the rents received from 146 and 148 Teralba Road have gone towards the purchase and acquisition of the four properties with which we are concerned.
The second exercise Pollprop is one which looks at the properties held by the Trust and properties purchased by the Trust from third parties. Relevantly the properties held by the Trust are, of course, 146 Teralba Road, 148 Teralba Road and College Street, Lismore. The schedule uses what Mr Ludowici had determined was the purchase price and construction costs in respect of these properties (which will be quite different from what I have determined in this judgment) and then applies a proportion for Sam being his share in respect of the two Teralba Road properties and no interest in respect of College Street, Lismore. This results in Sam having an interest of 30.36 percent which Mr Ludowici says was increased by the withdrawal of some monies from the Trust by Frank and Teresa of $77,069 making the proportion of Sam's entitlement to the assets of the Trust at 38.45 percent. The logic of the schedule then is that this is the foundation for all the subsequent purchases and that Sam should be entitled to share in the subsequent purchases to the extent of 38.45 percent. There is an assumption that mortgages on 146 and 148 Teralba Road allowed the later purchases and also an assumption that the whole of the rents from those properties were used for the subsequent purchases and construction."
33 The Master was critical of these exercises saying that there were a number of fundamental problems with them. He went on to point out that a number of matters were left out of account. These are set-out in detail in his judgment. There is no need to repeat them here. He indicated that a large number of other matters would have to be taken into consideration before any determination could be reached as to what was Sam's proportionate interest in the Trust assets before the purchase of the later properties. The judgment was necessarily inconclusive and no findings were made in relation to orders 5 (b) and (c).
34 On 15 May 1996 the matter was before the Master for further directions. Directions were given in relation to accounting records and further references made to the Pollprop and Pollcash exercises, but nothing conclusive occurred.
35 On 12 August 1996 after receiving further evidence and submissions the Master made a number of findings in respect of outstanding matters including appropriate rates of interest. He also dealt with the Pollcash and Pollprop exercises, having regard to further work that had been done following on the previous discussions. He recorded the fact that there was a dispute as to whether the exercises, even in a more refined form, were the appropriate way to approach the enquiries required by order 5 (b) and (c). There was very clearly an issue between the parties as to whether the percentage of interest approach was the correct way of dealing with the problem, rather than a detailed specific consideration of the history of the use of the two properties in the purchase of the later properties. The Master indicated that the problem was "far more complex than anticipated by the parties and by his Honour Mr Justice Windeyer at the time the directions were formulated." He also noted that order 5 (c), unlike order 5 (b) did not conclude with the words "and if part which part?" He noted that Windeyer J had not, in his judgment "given detailed consideration as to how the results of the Master's enquiry would be applied by him in formulating any final orders." In these circumstances, he determined that it would be appropriate for him to "make findings in respect of these two areas of enquiry (which are not an account) which would give his Honour flexibility in the final result."
36 He then had regard to the new versions of Pollprop and Pollcash which had been placed before him. He noted that a reworking had produced the result that the plaintiff's share in the Trust assets before the acquisition of the later properties was 24.88 percent. He noted that the exercise did not take into account certain matters and that, if they were taken into account, the proportion would be reduced to 23.12 percent.
37 However, he noted that the exercise had been the subject of considerable criticism through an expert called on behalf of the respondents, who had concluded that the exercise "did not have any integrity in relation to accounting practice."
38 Similarly, the exercise Pollcash was subject to fundamental objections. The Master considered these matters in some detail. He stated his opinion that the exercise contained some underlying assumptions which he thought were fallacious. It turned out that the exercise had some inherent reliability problems and did not assist in answering the question imposed by order 5 (c).
39 The Master then referred to the fact that there had been strenuous objection by the defendants to the use of the Pollprop and Pollcash exercises, firstly on the basis that they were unreal, in failing to have regard to the fact that Sam owed the defendants money in respect of funds advanced by them for his benefit and that this indebtedness extended over many years and was particularly in evidence at the time of the acquisition of the later properties. The second objection noted was that the exercises failed to take any account of "the nature and the quantitative assessment of the use to which the properties were put to borrow or acquire later properties." It is clear that this posture to Pollprop and Pollcash had been maintained on behalf of the defendants throughout the hearing before the Master.
40 In order to accommodate this latter objection the Master made detailed findings in respect of each of the later properties indicating the source of funding, security given and period of borrowings. These are in considerable detail and were accepted in full by Windeyer J in the judgment under appeal. He set them out in his reasons. It is necessary to set them out here. They are as follows:-
" 127 Victoria Street
This property was purchased for $38,000 on or about 3 August 1979 and $30,000 of these funds came from a bill facility from the National Australia Bank secured on 146 Teralba Road. The bill facility was reduced by $5,000 on 11 February 1980 and was repaid in full on 5 August 1980. Although the evidence does not indicate the cost of construction it does indicate that these costs were met from the proceeds of the sale of Lismore and this is supported by the evidence of Mr Frank Pollicino in cross-examination.
137 Teralba Road
This was purchased on 24 July 1981 for $52,000. These funds came from the funds of Vaiela and at that stage the only overdraft was $10,000 as I have noted in my earlier judgment. The evidence does not show whether this was utilised for the purchase.
169 Brunker Road
This was purchased on 17 February 1982 for $72,000. Finance came from a bill facility from the National Australia Bank in the sum of $50,000 and an overdraft of $20,000. The bill facility was reduced and it was cleared on 11 December 1985. An additional bill facility of $25,000 was approved in April 1983 and was rolled over on a reducing basis until it was cleared on 27 June 1984. From 1983 it was also secured by personal guarantees of Frank and Teresa.
115 Teralba Road
This was purchased in about April 1982 for $180,000. $150,000 of this came from a commercial loan from the C.B.F.C. as collateral security. In due course finance for the construction was provided by the Commonwealth Bank of Australia and also by Mr Santi Pollicino. The Commonwealth Bank security included 148 Teralba Road and an unregistered mortgage over Frank and Teresa's home together with their personal guarantees. In 1985 the Commonwealth Bank facility appears to have been $200,000 for the construction of the flats rising in June 1986 to $470,000. By March 1988 this had reduced to $440,000. The facility remained in place and by December 1989 increased to $540,000. In late 1991 it was reduced to $380,000. In June 1992 it increased again to $480,000."
41 The Master then returned to question 5 (b). He noted that he had already found that all the properties were purchased in part with monies secured by way of mortgage over 146 and 148 Teralba Road. He said it was not possible "because of the nature of the question which has been asked" to determine what was the part purchased. He said that it was not clear in what precise way his Honour would use the information from the enquiries for the purpose of his final determinations, as the complications which had occurred were not then known to him. He indicated that, accordingly, he would not make any further findings and that the findings made should assist his Honour "in the final resolution of the matter." As to question 5 (c) he noted that it did not require any quantification of the extent to which the rent had been used to purchase the later properties. The question could be answered by stating that the properties had been purchased in part from money received from the rents of 146 and 148 Teralba Road.
42 On 18 October 1996 the Master provided his Certificate in which he recorded the finding that the plaintiff was indebted to the defendants in the sum of $109,048.54. He appended 37 pages of accounts indicating how this figure was arrived at. In relation to question 5 (b) he certified that each of the later properties had been purchased in part with money secured by way of mortgage over 146 and 148 Teralba Road. He stated that he had not, due to the nature of the question, been able to determine what part of each of the properties was so purchased but he referred to the findings in his judgment in this regard. He noted that he had not taken the account required by order 5 (d), for the reasons set-out in his judgment. In respect of paragraph 5 (c) he certified that each of the later properties had been purchased in part by monies received from the rents of 146 and 148 Teralba Road and he referred to his findings in his judgment.
43 The proceedings then came back before Windeyer J, the following year.