Spangaro v Corporate Investment Australia Funds Management Ltd

RULING 1 In reasons for judgment published on 26 September 2003 I found that Mr Spangaro was entitled to recover $13,600 from each of Cardinal Financial Securities Ltd (in liq) (Cardinal) and Corporate Investment Australia Funds Management Ltd (CIAFM), in the one case for breach of trust and in the other by way of restitution, provided payment of the judgment debt by any one defendant pro tantodischarged the obligation of the other. I left outstanding a number of issues including that of interest. The parties have now had the opportunity of making submissions on the question of interest and I am in a position to deliver my ruling. 2 Speaking generally the function of an award of interest is to compensate a plaintiff for the loss or detriment which he suffers by being kept out of his money: MBP (SA) Proprietary Limited v Gogic (1991) 171 CLR 657, 663. Interest is not allowed simply to penalise a defendant, even though it may have that effect: Clarke v Foodland Stores Pty Ltd [1993] 2 VR 382, 396-397. Although the court may have a discretion to award interest under s 51A of the Federal Court of Australia Act 1976 (Cth), this discretion is not wholly at large. The rule is that the court should allow interest "unless good cause is shown to the contrary": s 51A(1); HK Frost Holdings Pty Ltd (in liq) v Darvall McCutcheon (a firm) [1999] FCA 795. It is not possible to state with precision in what circumstances the general rule will be departed from, but it is generally agreed that interest will not be charged if it would work an injustice to the defendant - "alleviating the defendant in a proper case" as Gowans J put it in Marsh v Ruby [1975] VR 191, 193: see generally Clarke v Foodland Stores Pty Ltd above at 393, 398-400. 3 As to the rate of interest to be awarded the usual practice is to adopt the rate applied by the Supreme Court of the State or Territory in which the Federal Court is sitting: Nagy v Masters Dairy Ltd (1997) 150 ALR 301, 317. This supposedly ensures that interest is awarded at the same rate regardless of whether the proceeding is brought in a federal court or in the relevant State or Territory Supreme Court. In Victoria the rate is fixed by the Penalty Interest Rates Act 1983 which, as was noted by the Full Court in Clarke v Foodland Stores Pty Ltd [1993] 2 VR 382, 396-397, imposes a maximum rate that is properly described as penal. 4 Although the parties did not advert to the point, the liability of trustees for interest is governed by principles which are not in all respects the same as those which apply to other parties. According to Street J in Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211, 218 "[t]he general principle is that where a trustee has, through his breach of trust, occasioned loss to the trust estate then he is liable to make good that loss, together with interest." Here, the court's power to award interest does not depend upon statute. The power is to be found in its equitable jurisdiction. 5 The rate at which interest is charged against a defaulting trustee varies. At one time the rate was 4 per cent per annum (known as the "trustee's rate") and was applied in cases where no breach of duty was involved: In Re Tennant; Mortlock v Hawker (1942) 65 CLR 473 at 486, 507-508 (in fact a case involving the entitlement of beneficiaries under hotchpot clauses in a will). Where there was a breach of trust or misconduct (as distinguished from mere negligence) a higher rate of interest was imposed, often at a mercantile rate: Lewin on Trusts 17th ed (2000) at [39-33]; Jacobs' Law of Trusts in Australia 5th ed (1986) at [2208]. There is a detailed discussion about the appropriate rate of interest to be charged in Kearney J's judgment in Hagan v Waterhouse (1992) 34 NSWLR 308, 391-393, a decision which was approved by the Court of Appeal in Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45. Kearney J identified cases where a defaulting trustee had been charged with interest obtainable from investment in government stock, at varying fixed rates, at a mercantile rate, at the official bank rate, at the minimum bank lending rate and at the bank overdraft rate. 6 Section 2 of the Penalty Interest Rates Act requires the Attorney General to determine the penalty interest rate by: (a) obtaining a recommendation from the Treasurer as to "an appropriate institutional rate of interest" that is the rate charged for loans or paid for borrowings by public or commercial institutions and which, in the opinion of the Treasurer, reflects prevailing commercial rates of interest; and (b) at the Attorney General's discretion, adding a penalty element. Thus, if one were to ignore the penalty component, the rate should approximate to a mercantile rate. This is the rate (namely, a rate without a penalty component) which it is appropriate to charge the defaulting trustee, Cardinal. I note on this aspect that Mr Spangaro does not seek compound interest as, perhaps, he might have done for the reasons explained in O'Sullivan v Management Agency & Music Ltd [1985] QB 428, 461-462: See also Southern Cross Commodities Pty Ltd (in liq) v Ewing (1987) 11 ACLR 818, 843-844. 7 As regards the claim against CIAFM, the prima facie approach, if it were followed, would be to allow interest against it at the full penalty rate. But in this case there is no reason why the rate should be different from that charged against the trustee. 8 Finally, on this aspect I reject the submission by Cardinal that the period for which interest be allowed should be reduced on account of Mr Spangaro's alleged delay in prosecuting his claim. As previously stated, an order for interest is compensatory and is not imposed to penalise a defaulting trustee. By the same token, an award of interest can also be seen as a device which ensures that no profit remains in the hands of the defaulting trustee. Where the defaulting trustee has had the use of the plaintiff's money, it would be unusual to deprive the plaintiff of interest for the full period even if he be guilty of some delay. In any event it is not clear how interest charged for the full period will work an injustice on Cardinal. So, "good cause" has not been shown why there should be a departure from the usual rule. 9 I will leave it to the parties to calculate the quantum of the interest that will be incorporated into the orders to be made. I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.