18 ER 464
Flavelle, Re [1969] 1 NSWR 361
Ford v Princehorn
Estate of Ford [2012] NSWSC 1165
Grace v Grace [2012] NSWSC 976
Hancock v Rinehart [2015] NSWSC 646
(2007) 33 WAR 321
Urquhart v M'Pherson (1880) 6 VLR (E) 17
White v Lady Lincoln (1803) 8 Ves Jr 363
Source
Original judgment source is linked above.
Catchwords
26 ER 1
Doss v Doss (1843) 3 Moo Ind App 17518 ER 464
Flavelle, Re [1969] 1 NSWR 361
Ford v PrincehornEstate of Ford [2012] NSWSC 1165
Grace v Grace [2012] NSWSC 976
Hancock v Rinehart [2015] NSWSC 646(2007) 33 WAR 321
Urquhart v M'Pherson (1880) 6 VLR (E) 17
White v Lady Lincoln (1803) 8 Ves Jr 363
Judgment (10 paragraphs)
[1]
Solicitors:
Noel F Bracks & Company (plaintiff)
Sarvaas Ciappara Lawyers (defendant)
File Number(s): 2015/89674
Decision under appeal Jurisdiction: Equity Division - General
Citation: [2016] NSWSC
Date of Decision: Tuesday, 16 August 2016
Before: Brereton J
File Number(s): 2015/89674
[2]
Judgment
Under arrangements entered into in 1978 and 1996, the plaintiff Philippa Louise Torlonia has a right to receive mining royalties from a coal mine in the Hunter Valley operated by Wambo Mining Corporation Pty Ltd ("the Wambo Royalties"). From 1995 until early 2014, the defendant Andrew David Lincoln Wright acted as her financial and commercial adviser, in respect of the Wambo Royalties and other issues, including structuring her affairs in such a manner that she would not be an Australian resident for income tax purposes. Mr Wright also performed work in connection with endeavouring to achieve a sale of her rights to the Wambo Royalties, but this did not come to fruition.
Upon Mr Wright's advice, by a trust deed dated 30 April 2003, a discretionary trust called the Phoenix Trust was constituted, with Ms Torlonia as the "specified beneficiary"; the other discretionary beneficiaries were mainly relatives of Ms Torlonia. Contemporaneously, Mr Wright caused Leccino Pty Ltd to be incorporated, and it became the trustee of the Phoenix Trust. From 30 April 2003 until his resignation on 19 February 2014, Mr Wright was its sole director, secretary, and public officer, and a company controlled by him was the sole shareholder. Ms Torlonia was the Appointor, with power to remove and replace the trustee.
Upon Mr Wright's advice, the Wambo Royalties to which Ms Torlonia was entitled were paid by her direction to Leccino, and upon receipt they were credited to her loan account in the Phoenix Trust: thus, they were accounted for not as income of the Trust, but as advances by her to the Trust. It is common ground that royalty income of $10,618,149 (net of withholding tax) was received in this way during the period 2004 to 2013. Other assets which Ms Torlonia had held in Australia were apparently transferred, for value, to the Phoenix Trust; presumably the price was credited to her loan account, but this is not of great significance for present purposes.
The Trust never made a profit, so there was never any distribution of income or capital; however, Leccino as trustee, under the practical control of Mr Wright, made payments from the trust bank accounts into which the Wambo Royalties were deposited, to or at the direction of not only Ms Torlonia, but also other discretionary beneficiaries. All such payments - whether or not authorised by Ms Torlonia - were debited to her loan account.
Mr Wright resigned as a director of Leccino on or about 19 February 2014, whereupon Ms Torlonia's solicitor Mr Noel Bracks became the sole director and shareholder of Leccino; he holds his share upon trust for Ms Torlonia. In connection with the handover, Mr Wright prepared a statement of the Trust's assets and liabilities as at 31 December 2013, which records a net deficiency of $696,252.40, with Ms Torlonia's loan account at $2,903,805.90.
[3]
Issues
In these proceedings, Ms Torlonia claims an order that Mr Wright account to her for the Wambo Royalties received during the period 2004 to 2013, and that the account be taken on the wilful default basis. Mr Wright resists such an order, contending that:
1. he was not a trustee for Ms Torlonia in respect of the Wambo Royalties, and so he is not an accounting party;
2. to the extent that he has any liability to account, he has sufficiently discharged it by providing Leccino's bank statements, identifying the persons to whom the payments recorded in them were made, and describing the payments in his affidavit sworn 3 August 2016, the net effect of which is to show that he does not owe but is owed money;
3. to the extent that Ms Torlonia seeks an account for the period prior to 25 March 2009 (being six years from the date these proceedings were commenced), such action is statute-barred; and
4. insofar as a claim is made for accounts to be taken on the footing of wilful default, no basis has been established.
A late application for leave to amend to plead a defence that, to the extent that Mr Wright was acting as trustee for Ms Torlonia and had committed any default, he ought to be excused on the basis that he acted honestly and reasonably at all times, under (NSW) Trustee Act 1925, s 85, was refused at the commencement of the hearing, as it would have raised diverse new issues which the plaintiff had not up to that point had to address by evidence. Given the evidence that emerged during the hearing, it can now be added that had the amendment been permitted, the defence would not have succeeded.
[4]
Liability to account
In an application for an account, the first and fundamental issue is whether the parties are in an accounting relationship pursuant to which there is a liability on the part of the defendant to pay to the plaintiff any amount found to be due on the taking of accounts. [1] The principal authority is Doss v Doss, [2] in which Dr Lushington said:
A decree for an account is not, as appears to have been assumed, a mere direction to inquire and report. It proceeds, and must always proceed, upon the assumption that the party calling for it is entitled to the sum found due. It is a decree affirming his rights, only leaving it to be enquired into, how much is due to him from the party accounting.
In this state, in Lang v Simon, [3] McLelland J after referring to that passage added:
Dr Lushington, I think, makes it clear what he has in mind by the sentence which immediately precedes the sentence to which I have referred. He said, "We cannot make a decree, ordering them to account, without first determining that they are liable to pay if anything be found due".
For Mr Wright, it was submitted that there was no accounting relationship between him and Ms Torlonia personally; that he was not personally trustee for her; and, in effect, that if he had any liability to account it was to Leccino and not to Ms Torlonia, and if she was entitled to an account it was against Leccino and not against him.
The amended statement of claim is not a model pleading. However, the following allegations sufficiently appear from it:
1. Between 2003 and 2013, Ms Torlonia was entitled to royalties from Wambo of in excess of $10 million (paras 4, 5);
2. The relationship between Ms Torlonia and Mr Wright was one in which he was her professional business and financial adviser, accountant and tax agent, in whom she reposed trust and confidence and upon whose advice she relied (paras 6-14);
3. Mr Wright had de facto control, on behalf of Ms Torlonia, of the receipt and application of the Wambo Royalties to which she was entitled (para 11);
4. Mr Wright was obliged to act in the interests of Ms Torlonia (para 13);
5. Mr Wright opened accounts in the name of Leccino (paras 15 - 21), into which he caused the royalties to which Ms Torlonia was entitled to be deposited (para 22), and from which he caused them to be disbursed, sometimes without her knowledge or authority (para 22);
6. Mr Wright was a trustee for Ms Torlonia of the royalties to which she was entitled that came into his control (claim 1);
7. Mr Wright is liable to account for the Wambo royalties, loan moneys and other sums received by him on behalf of Ms Torlonia (para 25).
The pleading thus alleges that by reason of the particular relationship that existed between Mr Wright and Ms Torlonia, and his control over her royalties, he is personally liable to account to her. Although the pleading does not expressly allege that the relationship was a fiduciary one, it contains allegations of the material elements of a fiduciary relationship - vulnerability, trust and confidence, a duty to act in the principal's interest, and control of the principal's property - between Mr Wright personally and Ms Torlonia, coupled with the assertion of an obligation to account. A case that Mr Wright was personally liable to account to Ms Torlonia by reason of a fiduciary relationship between them was open on that pleading; indeed, it is the only sensible reading of a pleading which sought relief against Mr Wright only.
Mr Wright is qualified as a chartered accountant and was practising as such as a partner in a large firm when he was first introduced to Ms Torlonia in 1992. The professional relationship that commenced then continued when he left that firm in about 1994 and established his own consultancy. Although he did not thereafter hold himself out as an accountant, he provided commercial and financial advice to Ms Torlonia. They often spoke two to three times a week - as Ms Torlonia put it, "I thought we were great friends", and "I hope I was his confidant, and he definitely was mine". Later it was put to her "Mr Wright was a confidant over an extended period", to which she responded "Absolutely". There was no serious dispute, and there is no doubt, that Ms Torlonia reposed trust and confidence in, and heavily relied upon, Mr Wright and his advice.
In 2003, when it appeared that the rights to the Wambo Royalties would commence to generate income, Mr Wright advised Ms Torlonia on steps to be taken to ensure so far as possible that she would not, for taxation purposes, be an Australian resident. It was in this context that Leccino was incorporated and the Trust established. In response to the suggestion that she decided to place her Australian assets in a discretionary trust in order to protect her non-resident status, Ms Torlonia said, and I accept: "He was my adviser, I trusted him, I did as he said". The rationale was explained by Mr Wright in a memorandum to Ms Torlonia dated 20 January 2009:
This memorandum has been prepared to assist Philippa Torlonia manage the assets of Leccino Pty Limited in the event of Andrew Wright's resignation or demise.
Leccino Pty Limited is a company, whose sole activity is to act as trustee for The Phoenix Trust.
Whilst Philippa is the Appointor of the trust, and therefore the ultimate 'controller' of the trust, Andrew Wright, as Sole Director and controller of the sole Shareholder of the trustee Company has de-facto control.
…
By way of further background the Trust was set up to consolidate assets and to act as a holding entity or conduit for the distribution of funds from the Wambo royalty. The company, as legal agent, received the royalties, which were paid net of withholding tax, on behalf of Philippa. The royalties are not income of the Trust, as the funds are received as agent for Philippa, who is a non-resident of Australia for tax purposes
And also in an email from him to her of 19 February 2009:
The Leccino-Phoenix structure was set up to achieve the following:
� To ensure that the royalty receipts could not be 'seen' by anyone other than you and I. This was accomplished via direct transfer from Wambo to the second Leccino account. This secrecy was particularly designed to protect you from Georgio and in some respects Charlie.
� To ensure that your name appeared nowhere on any documentation in Australia. So that the chances of you being labelled a resident for tax purposes was minimised.
� To collect the royalties as agent for you after a final withholding tax of 10% had been deducted. This was so you are an Italian Tax resident for Wambo's purposes and Leccino is an Australian agent.
� The structure also held the vast majority of the equity in Winwell, the company that owns Hardwicke, to prevent any further issues with Tori's ex etc.
� Additionally, the trust holds all the equity in the olive grove's, including that at Hardwicke, although I have never been able to complete the paper work for the latter as it was interwoven with the subdivision issues. This has enabled the trust to accumulate losses.
� It also holds the shares from your mother's estate and the majority of the equity in Muyen Pty Limited. With respect to the latter the shares or land should have been transferred to the other venturers at each of the groves - although this has never happened as far as I am aware.
� Additionally there is a loan, for which I have given a personal guarantee, from Elders which was used to fund the original purchase of the land at Billimari.
� Ie it is a tax effective holding company with all your assets, legally separated from Georgio and the others, to retain complete privacy.
� To achieve this, the records show I am the shareholder (through one of my company's) and sole director. Although you have complete control as you have a legal right to remove the trustee (who legally holds all assets and makes all 'decisions'), I have also given you a resignation and pre-signed share transfer - so that in the event you want to remove me or I die etc, it can be easily implemented.
Control by Mr Wright - her trusted adviser - was thus a fundamental feature of the structure. It was Mr Wright, not Leccino, upon whom Ms Torlonia relied to manage her affairs. Once income began to flow from the Wambo Royalties in about 2003, he had a significant degree of control over that income, which was at his suggestion deposited into bank accounts of Leccino and accounted for as a loan to Leccino, of which he was the sole director, secretary and shareholder. Indeed, the royalties were received by Leccino pursuant to invoices prepared by Mr Wright, in the name of Ms Torlonia, but which directed payment to Leccino's account. In respect of directing payment of the royalties to Leccino, Ms Torlonia said, and I accept: "Andrew instructed me in all these things. I told the man from Wambo to put the money wherever Andrew said". As she said, she was never very sure of the way it actually worked.
While funds were from time to time paid to various beneficiaries, those payments were treated as repayments of Ms Torlonia's loan, and were debited to her loan account - not to the account of the beneficiary for whose benefit it was paid. This reinforces the impression that Leccino and the Trust were mere vehicles for the management of Ms Torlonia's affairs.
In addition, on his own case, the funds advanced to Leccino were ultimately used, in part, to acquire shares in Etres Resources Limited - a Philippines mining venture in which he had a significant personal stake - for the benefit of Ms Torlonia (not Leccino), which shares were (he says) held for her, in the name of entities controlled by him.
There are several well-established accounting relationships - for example, trustees are liable to account to their beneficiaries, agents to their principals, employees to their employers, mortgagees to their mortgagors, partners to their partners, and joint venturers to their joint venturers. The existence of a fiduciary relationship is a common though not universal feature of these relationships. Although the relationship of accountant and client is not one of the classic fiduciary relationships, it can in particular circumstances be or become a fiduciary relationship. [4] In Pavan v Ratnam, [5] the Court of Appeal held that in the circumstances of that case a tax accountant did not owe fiduciary obligations to his client in respect of advice to a client to invest in a property which the accountant proposed to develop, so as to reduce the client's tax liability. However, Beazley JA (as her Honour then was) (with whose judgment Meagher JA agreed) said:
The cases establish that a number of factors may characterise a relationship as being of a fiduciary nature. They include: vulnerability, reliance and the presence of loyalty, trust and confidence. The notion of vulnerability, as used in this context, is not to be understood in the sense of any "weaker party" concept. Rather, it refers to the circumstance where another party agrees (not necessarily contractually) "to act on behalf of or in the interests of another and, as such, is in a position to affect the interests of that other person in a legal or practical sense. As such, fiduciary relationships are marked by vulnerability in that the fiduciary can abuse the power or discretion given him or her to the detriment of the beneficiary": see Hodgkinson per La Forest at 168. Reference is also usefully made to Professor Finn's (now Justice Finn of the Federal Court of Australia) description in "The Fiduciary Principle" at 50-1:
...fiduciary responsibilities will be exacted where the function the advisor represents himself as performing, and for which he is consulted, is that of counselling an advised party as to how his interests will or might best be served in a matter considered to be of importance to his personal or financial well-being, and in which the adviser would be expected both to be disinterested, save for his remuneration, and to be free of adverse responsibilities unless the contrary is disclosed at the outset.
The formal relationships - created by and on the advice of Mr Wright - were undoubtedly that Leccino was established as the trustee of the Phoenix Trust, of which Ms Torlonia was but one discretionary beneficiary (albeit the "specified beneficiary", to whom income and capital would default in the absence of the trustee not exercising its discretion to direct it to another beneficiary). However, focussing on these formal arrangements distracts from the overarching relationship between Mr Wright and Ms Torlonia, which long preceded the establishment of Leccino and the Trust in 2003, and within which their establishment and management arose and was nested. So far as Ms Torlonia was concerned, she was dealing with and relying on Mr Wright; Leccino and the Trust were merely vehicles in a structure created by and on his advice for the more effective management of her affairs - including to ensure that she was not for taxation purposes a resident of Australia. While those entities were interposed, it was Mr Wright who, in a real practical sense, controlled the receipt and disbursement of the Wambo Royalties on behalf of Ms Torlonia. The net royalties were paid to Leccino, which received them not as trust income, but on behalf of Ms Torlonia, and - at the instigation of Mr Wright - treated them as an advance by her to the Trust.
In my judgment, Ms Torlonia's reposing of trust and confidence in Mr Wright, her vulnerability arising from her overseas residence and limited understanding of commerce and finance, and her entrusting of her Australian affairs to him in such a manner as gave him practical control over them - in particular, the Wambo Royalties - amply supports the conclusion that the relationship between them was a fiduciary one, and that - regardless of the corporate vehicles that might be interposed - he was obliged to deal with the Wambo Royalties in her interest and for her benefit. Though the royalties were banked into Leccino's bank accounts and treated as loans by Ms Torlonia to Leccino, in the context of the overarching fiduciary relationship this was but a device for the management by Mr Wright of her affairs, and the interposition of a corporate trustee controlled by him to receive her royalties does not relieve him of the obligation to account to her for the moneys the receipt and application of which he effectively controlled.
Mr Wright maintained that, as trustee, Leccino was entitled to deal with the funds it held at its own discretion, without reference to or the concurrence of Ms Torlonia. However, while it may be that the royalty moneys once received by Leccino could be dealt with by it as trustee in the same way as moneys borrowed from any other source could be, it is not apparent on what basis the trustee was entitled to debit to Ms Torlonia's loan account - which was the predominant if not only source for advances - payments which were not made to her or by her authority and direction. That is not to say that there were not significant payments made by her authority and direction which were properly debited to her loan account; it is clear that Ms Torlonia accepts that significant sums were applied, in accordance with her wishes, to her children Charles and Vittoria, her uncle Frank McDonald, and otherwise. To the extent that Mr Wright can show that moneys received have been applied, albeit through Leccino, in accordance with the authority or direction of Ms Torlonia, that may well discharge his obligation to account. Nonetheless, in my judgment, because of his fiduciary obligation to Ms Torlonia, Mr Wright is liable to her as an accounting party for any deficiency in his account for the amounts received from the Wambo Royalties.
[5]
Accounts rendered
It is a defence to an application for accounts if the accounting party shows that it has already rendered proper accounts and paid any amount due. [6] Proper accounts must show, individually, each receipt and payment, supported by vouchers (although oral evidence of disbursements may be allowed in the absence of vouchers). [7]
Mr Wright produced a number of schedules, which purport to explain the application of the admitted receipts. He relies on these to contend that he has already rendered proper accounts, or at least that in light of them an order for accounts should be declined as a matter of discretion as it would serve no useful purpose. Mr Wright's schedules cover the entire period from 2004 - which precedes the commencing date for Mr Wright's liability to account from 25 March 2009, as I have found it to be in the light of the limitation issue. However, if Mr Wright can show that he has rendered satisfactory accounts for the longer period since 2004, then the defence will necessarily be established for the shorter period since 2009.
On the receipts side, Mr Wright admits receipt of royalties (net of withholding tax) of $10,618,149; interest of $321,140; the proceeds of a loan from Elders of $600,000; the proceeds of shares transferred from an estate of $144,049; and dividends of $22,760 - an admitted total of $11,706,099. Mr Wright's expenditure schedules comprise:
(1) Schedule 10 - repayments
(a) Charles de Nanteuil $899,891.42
(b) Vittoria Torlonia $310,175.97
(c) Plaintiff $2,550,984.55
(d) Winwell/horses $1,340,410.39
(e) Frank McDonald $504,156.40
(2) Schedule 11 - Unallocated (net) payments $1,071,919.21
(3) Schedule 12 - Transactions $4,608,411.86
(4) Schedule 13 - Payments to defendant on account of fees, expenses and disbursements $871,992.23
[6]
The amounts referred to in Mr Wright's expenditure schedules thus total $12,157,942.03, which exceeds by $451,843.03 his admitted receipts (for the corresponding period 2004-2013) of $11,706,099.
Ms Torlonia contends that in fact $700,000 was received from Elders, and that there is additional income, which Mr Wright has not brought to account, of $1,392,064. It may well be that this can be explained, at least in part, as Mr Wright suggested - that additional income is in fact reflected in the "netting off" process he has adopted in his expenditure schedules. However, because the schedules are not in the form of proper accounts, it is not self-evident that this is so. Moreover, that the expenditure does not balance with but exceeds the receipts is demonstrative that not all receipts can have been brought to account - there must have been additional income, to fund that expenditure. This is exacerbated by the circumstance that, in the course of cross-examination, it emerged that at least two payments totalling $390,000 made at Mr Wright's direction from a term deposit in the name of Leccino, to an account in Orange - which it transpired were payments for or in connection with the renovation of Mr Wright's home - were not reflected in his schedules. While an omission from the expenditure side generally operates to the disadvantage of the accounting party, in this case it has the consequence that, at least prima facie, there must have been additional income to fund those payments. It follows that it is not possible to be satisfied that Mr Wright has brought to account all relevant receipts, and the form of his accounts does not enable that to be clarified and tested.
In respect of Schedule 10, Ms Torlonia conceded the payments to her son Charles de Nanteuil ($899,891.42), her daughter Vittoria Torlonia ($310,175.97), herself ($2,550,984.55) and Winwell/horses ($1,340,410.39). She conceded $275,000 paid to her uncle Frank McDonald, but disputed that the balance paid to him, being $229,156.40, was authorised. There were no vouchers, or other evidence, to establish the existence of such authority. Some of the payments to Frank were made in or after 2009, and thus this will remain an issue even within the limitation period.
As to Schedule 11 (unallocated payments), Ms Torlonia disputed these in full; but the unexplained amount mainly represented payments by cheque for which Mr Wright no longer held the cheque butt and was unable to categorise. While it cannot be said that he has provided an adequate account for the longer period in this respect, he will not encounter this problem, at least to the same extent, in rendering accounts from 2009, because almost all of these payments were made before 2009. For that reason, were this the only defect in the schedules as an account, I might well have concluded that there was no utility in ordering an account.
In respect of Schedule 12 (transactions $4,608,411.86), Ms Torlonia in effect submitted that a number of transactions included should be "added back". Some of these - payments to Niranga ($23,000), Etruscan ($166,000) and Atlas Equities ($20,118) - appear to have been included in Schedule 13 (payments to defendant) and brought to account in that way. However, authority to make the payments to Etres Resources Limited (shown on Schedule 12 as totalling $1,009,600, of which $115,070 was in late 2008, and the balance since 2009) was in dispute. Ms Torlonia was aware that some shares were to be issued in the name of her grandchildren - but it is not apparent that any shares were so issued. However, she denied that she ever agreed to invest in Etres - she says that while she had at one stage offered to do so, Mr Wright always said that the time was not yet ripe, and that never changed. Ms Torlonia said that she never made a written application for shares in Etres, was never told that she had been allocated shares in Etres, and never received a share certificate for shares in Etres. Mr Wright said that in about August 2008 he informed her that it was now time to invest. However, he agreed that there was no form of application for shares in her name or on her behalf. He said that he - or entities controlled by him - had been allotted shares in Etres as nominee for Ms Torlonia, and that in 2014 he consolidated those holdings into one share certificate issued in the name of Ms Torlonia. This explanation strains credulity. Records lodged by Mr Wright with ASIC in January 2012 showed that the shares held by the entities associated with Mr Wright, with one possible exception, could not have been held for Ms Torlonia. The exception was the shares held in the name of Nirlanga, which were recorded as "not beneficially held". Nirlanga was a company which Mr Wright had described as holding his family home; at the last moment, he suggested that Ms Torlonia's shares may have been held by it. In essence, there was no documentary evidence that Ms Torlonia had any interest in Etres before January 2014, when administration was imminent. The explanation that this was so that Mr Wright had a "block" of shares does not appear plausible, as the shares he controlled were in a range of names; there is no reason why Torlonia could not have been one of them. Satisfactory evidence of authority to make the payments to Etres has not been produced, and in this respect Schedule 12 is inadequate as an account.
As to Schedule 13 (remuneration $871,992.23), reference has already been made to the omission of the payments to ANZ Orange totalling $390,000 which should have but did not appear in this schedule, and the implications for the overall accuracy of the "account" said to be provided by Mr Wright's schedules. However, Schedule 13 suffers from additional problems. In short, it was not adequately supported by vouchers establishing Mr Wright's entitlement even to the amount that he admittedly received, let alone the additional amount he propounded by way of set-off.
The defence pleaded that, in addition to the part payment of his remuneration and disbursements of $871,992.23, Mr Wright was entitled to further remuneration and reimbursements of $3,418,966, "and that he abandons any amount owing to him in excess of the sum necessary to fully account for the monies received" (para 3). At the hearing, he unsuccessfully sought leave to amend by deleting the abandonment of the excess, and to file a cross claim for the additional $3,418,966; leave was refused because the decision to "abandon the excess" appeared to have been a calculated forensic judgment when made, and no explanation for a change of position was provided. However, it remains pleaded as a set-off against any amount to which Ms Torlonia might be found entitled. In this context, Mr Wright claimed to be entitled to remuneration and reimbursement from Ms Torlonia and Leccino for the following sums, less the $871,992.23 already paid:
1. $563,333.50 for acting as a director of Leccino (calculated at $400 per hour for 2.5 hours per week for the period 2004 to 2013);
2. $563,333.50 for advising Ms Torlonia (calculated at $400 per hour for 2.5 hours per week for the period 2004 to 2013);
3. $480,000 remuneration for additional advisory services (a further three weeks each year);
4. $275,000 for disbursements (calculated on the basis of $15,000 travel, $4,000 communication charges, $3,000 printing postage and stationery, and $3,000 miscellaneous payments and costs, each year for eleven years);
5. Unpaid disbursements of $39,600;
6. Guarantee fee of $25,000;
7. Beneficiary entitlement in the Phoenix Trust of $1,179,794.36 (calculated as 10% of $11,679,964, being the gross Wambo Royalties before withholding tax);
8. $1,089,897 in respect of the Wambo Royalties (comprising $589,897 being a 5% share in respect of past royalties, and $500,000 in respect of estimated future royalties); and
9. $75,000 for work performed after 19 February 2014 in preparing the schedules.
In one sense, merely stating that claim suffices to demonstrate that it is preposterous. The total claim (for about $4.3 million over the 12 year period), represents about 40% of the royalties received. The claim was quantified by round estimates of time spent and expenses incurred, in the absence of any contemporaneous records. Barely an invoice was produced to support it, although Mr Wright claimed to have rendered invoices and to have retained copies in his office. The only two invoices produced (other than a couple raised in 2015 and 2016) were by his company Atlas Equities, one dated 24 November 2008 to Ms Torlonia for services rendered during the FY09 year (including for Leccino and the Phoenix Trust) for $100,000, and one dated 30 June 2008 to Ms Torlonia for $86,341.35 - being 5% of the royalties received in July 2008 - said to be for consultancy services pursuant to the "Wambo Memorandum". However, no payment to Mr Wright corresponded with either of them. Mr Wright said that the payments made to him were "advances" against his remuneration, but if he was rendering invoices as he claimed, there would have been no occasion for "advances".
As to remuneration and reimbursements (items 1, 2, 3, 4 and 5), Mr Wright said that he always intended to charge for his work and time. He said that there was no written agreement, but believed that there was an oral agreement that he would charge for his time and expenses. He thought that the rate was probably not mentioned. Ms Torlonia said that she never received a letter of engagement, and never had a discussion with Mr Wright about the fees he would charge, but was so close to him and had such total confidence in him - "I thought my financial shoulders were covered" - that she would say to him "'I hope you're getting enough money for this, I hope you're taking enough", to which he would reply: "Don't worry about me". I accept that Mr Wright was authorised to draw reasonable remuneration and expenses.
The defendant's Schedule 13 reveals that he drew $20,000 on 2 August 2005, $11,500 on 22 September 2005, $1,000 on 23 December 2005, $23,000 on 3 August 2007, $10,000 on 16 October 2007, $30,000 on 27 February 2008, $37,000 on 18 March 2008, $60,000 on 22 April 2008, $22,000 on 24 July 2009, $9,000 on 6 October 2009 and $9,000 on 15 December 2009. There were some additional occasional smaller drawings. In all, for remuneration and reimbursements, between 2005 and 2008 he drew a total of $329,017, or on average about $82,250 per annum over the four-year period.
In his email to Ms Torlonia of 19 February 2009, Mr Wright wrote:
Fees
The need for me as an adviser has greatly reduced and I have been unable to achieve a positive outcome, in my opinion, at the Olgiata (although I do think I was close when we had a written agreement with Georgio and an agreement with Cora and Golly). Accordingly I suggest I charge you for the preparation of any returns and any costs that I incur. These will be invoiced to you and sent to you for payment. If there is an intended transaction that requires time, say a property acquisition, then I will charge you on an hourly rate, currently $330 per hour. I don't intend charging you for the time spent during each week for doing simplistic tasks, nor for the act of being the trustee, unless the activities change in nature.
Although he endeavoured to explain this as a proposal that arose in circumstances where Ms Torlonia was proposing to engage an accountant/bookkeeper, there is nothing to indicate that any other quote was ever provided, let alone accepted. While he claims to have told Ms Torlonia later that he changed his mind, he cannot recall anything about the alleged conversation.
Consistently with his 19 February email, the financial statements for Leccino for 2009, prepared by Mr Wright, contained statements to the effect that no director's remuneration was payable.
In an email to Ms Torlonia of 22 October 2009, Mr Wright wrote:
The $9,000 was paid to me for fees to 31/12 and I'll address this under separate cover.
That plainly conveyed that he had drawn, in advance, his fees up to 31 December 2009. In addition, any claim for fees accrued before 2009 would apparently be statute-barred.
Thereafter, on 6 April 2010, he drew $250,000; $200,000 in July 2010 (via the ANZ Orange account), $190,000 in August 2010 (also via the ANZ Orange account); on 11 October 2010, $40,000; on 2 May 2011 (from term deposit 3264) $66,000; on 26 April 2012, $11,000; on 18 May, $15,000; on 4 June, $6,000; on 11 July, $70,000. Again, there were many smaller payments, many of them recorded as "fees" or "reimburse expenses". Between 2010 and 2012, he drew a total of $932,475, an average of $310,000 per annum over a three-year period.
I do not accept that, at least after 2009, Mr Wright had any entitlement to remuneration for acting as director of Leccino; his 19 February 2009 email to Ms Torlonia, and the 2009 financial statements, tell to the contrary. I accept that he was entitled to remuneration for advisory work, at the rate of $330 per hour, in accordance with the 19 February email. However, I do not accept that in that respect he incurred fees and expenses for which he did not promptly charge and pay himself. Whether he was entitled to all that he drew can be examined on the taking of accounts, it being not at all apparent that he was entitled to as much as he drew by way of "advances". As he conceded, such income would be taxable on an accrual basis and if earned would have been disclosed in his (or his private company's) income tax returns for the years in question. Thus, production of such returns could have corroborated his claim, yet none were produced.
Further, in respect of the claim for "expense reimbursements" of $275,000 (item 4), said to be largely in respect of trips to Europe in the course of which he visited Ms Torlonia in Italy, I do not accept that seeing Ms Torlonia in a professional role was the sole, or even dominant, purpose of his trips. It is remarkable that he did not draw these expenses as and when they were incurred, if that were the case.
As to the claim for "guarantee fees" of $25,000 (item 6), this was in respect of Mr Wright as director of Leccino providing his own guarantee to support a mortgage on security of property held by a subsidiary of Leccino, Torlonia Properties, for the purpose of funding the purchase of a unit for Ms Torlonia's daughter in Rome, in about September 2012. The fee was the subject of an invoice not raised until 14 January 2016. However, the reason why finance was required was that Ms Torlonia's moneys in Leccino had been expended on other matters. There is no evidence of any agreement that Mr Wright would be entitled to charge a fee for giving the guarantee. Given that the loan was secured on an asset of Torlonia Properties, it is unlikely that Mr Wright incurred any significant risk in doing so.
The claim for "beneficiary entitlement from the Phoenix Trust", in the sum of $1,179,794 (item 7) is perhaps the most extraordinary. Mr Wright was never a beneficiary of the Trust. He said that at one stage Ms Torlonia had said that she wanted him to be a beneficiary, and although that was never implemented, he advanced a claim to 10% of the total Wambo Royalties receipts - even though they were not trust income and did not generate trust assets. Perhaps unsurprisingly, this claim was not ultimately seriously pressed, but that it was ever made is illustrative of Mr Wright's grasping behaviour. And it was also in addition to the 5% claim next referred to below.
Next is the claim for $589,897 (being 5% of the past (gross) royalty receipts), and a further $500,000 for the future. Mr Wright says that in or about 2003 or 2004, in recognition of the work performed by him in connection with the potential sale of the Wambo Royalties income stream, Ms Torlonia executed an assignment to him of 5% of her entitlement to the Wambo Royalties; he called this document the "Wambo Memorandum", and said that there were two copies, of which he had retained one - but which he could no longer find, and did not produce. The first part of this claim was based on it. Ms Torlonia denied that there was any such assignment, although she acknowledged that she had agreed that in the event that a sale of the royalty rights was achieved, he would receive 5% of the price. Mr Wright produced an invoice dated 30 June 2008 for 5% of the royalty which accrued on 1 July 2008, but in the absence of evidence that it was paid, I am unconvinced of its contemporaneity: why it would have been issued at the time, but not paid, was not the subject of any intelligible explanation. In the absence of production of the Wambo Memorandum by Mr Wright, I prefer Ms Torlonia's denial of any such agreement to Mr Wright's assertion. The second part of the claim is in the nature of compensation for loss of the right to 5% of the sale proceeds if there is a sale in the future. While Ms Torlonia accepted that he would have been entitled to 5% of the price had he achieved a sale, the basis on which he is entitled to compensation where no sale has been achieved is not apparent.
The final claim for $75,000 (item 9) was for the preparation of the schedules, which was undertaken after his resignation, in the context of preparing for these proceedings. It is not something for which Mr Wright is entitled to charge in the absence of a costs order.
Accordingly, I do not accept that Mr Wright is entitled to any amount over and above what he has already drawn. Further, that he is entitled to the amounts he actually drew has not been adequately established by any time records, invoices, proof of disbursements or otherwise. To establish it by oral evidence would require much more than the broad estimates he currently advances.
It follows that in my view, the schedules leave unresolved at least the following matters:
1. As to receipts, not all the income can have been brought to account;
2. As to expenditure, authority for the payments to Etres Resources is not established; authority for the payments to Frank McDonald to the extent they exceed $275,000 is not established; and the payment of $871,992.23 to Mr Wright or his related entities, claimed as advances against remuneration and reimbursements, is insufficiently supported by vouchers such as invoices, time records, receipts for disbursements, or any other evidence.
That is not to say that these matters will necessarily be resolved in favour of Ms Torlonia. I am not at this stage taking accounts, but determining only whether there has already been an adequate account rendered. But these matters represent such deficiencies in the schedules, so far as they represent an attempt to account, that it cannot be accepted that there has already been an adequate account. Mr Wright has not rendered accounts such as would entitle him to resist an order for accounts, nor has he adequately explained what he has received and how it has been applied such that it could be said that an account would serve no utility.
Ms Torlonia is therefore entitled to an order for accounts.
[7]
Limitation
Mr Wright was permitted to amend his defence, at the commencement of the hearing, to plead that if he were liable to account, that liability was limited to the period of six years preceding the institution of proceedings. Leave to amend in this respect was granted because the amendment appeared to raise a question of law which would not require further evidence.
In the context of trustee and beneficiary, the duty to account is founded in the mere relationship of trustee and beneficiary, and all the ingredients of the cause of action for an account exist from the moment of the creation of the trust, with the consequence that at any time the beneficiaries have a cause of action for accounts, but only in respect of the preceding six years. [8]
For these purposes, the fiduciary relationship is indistinguishable from that of trustee and beneficiary. Ms Torlonia's cause of action for an account arose from the moment that Mr Wright first managed on her behalf the receipt and application of the Wambo Royalties. It follows that Ms Torlonia is entitled to accounts only in respect of the period from 25 March 2009, being six years before the proceedings were instituted.
Financial statements prepared by Mr Wright for the Phoenix Trust as at 30 June 2009 provide a convenient and uncontroversial opening balance; they establish that as at that date, Ms Torlonia's loan account (which represented the royalties received to that point, less repayments) stood at $4,232,225 (being the total of the amount shown as the subordinated loan, and the amount shown as non-current liabilities). From 1 July 2009 until 1 January 2013, there appear to have been undisputed receipts from the Wambo Royalties, net of withholding tax, of $4,060,513.05. Thus the receipts for which Mr Wright is liable to account total at least $8,292,738.05. [9]
[8]
Wilful default
The plaintiff claims an account on the basis of wilful default.
On the taking of accounts in common form, the accounting party accounts only for what has actually been received and disposed of; the other parties can challenge the accounting party's account by asserting that more was received (surcharges) or that less was disposed of (falsifications). [10] Where accounts are taking on the footing of wilful default, the accounting party must account not only for what has actually been received, but also for what should have been received, or what would have been received if the relevant duties of the accounting party had been properly discharged. [11] To justify an order for taking accounts on the basis of wilful default, at least one instance of wilful default must be established, and there must be some evidence founding a reasonable suspicion that there may have been other such defaults. [12] Wilful default is not coextensive with breach of trust: there may be a breach of trust without wilful default. [13] Parties seeking an order for the taking of accounts on a wilful default basis must establish at least one allegation of wilful default - namely, failure by the trustees to get in an asset which but-for their wilful neglect or default might have been received; [14] and such allegations must be pleaded and particularised. [15] The significance and distinction of an account on a wilful default basis is on the receipts, rather than on the expenditure, side of the ledger: it potentially increases the receipts, by bringing to account not only what was actually received, but also what should have been received. [16]
No wilful default of this kind was particularised, and none was suggested by Ms Torlonia in cross-examination of Mr Wright, or in submissions. There does not appear to be any suggestion that he failed to get in any royalty income which ought to have been received. There was, in cross-examination, an imputation that Ms Torlonia's loan to Leccino was not interest-bearing; however, moneys held by Leccino were invested at interest in term deposits, and the account will include interest and other income earned in the name of Leccino in that way. In my judgment, the ground for accounts to be taken on the footing of wilful default has not been established.
[9]
Conclusion
My conclusions may be summarised as follows:
By reason of the overarching relationship of confidential professional adviser and client between Mr Wright and Ms Torlonia, her manifest reposing of trust and confidence in him, and his practical control of the Wambo Royalties receipts, and notwithstanding the interposition of Leccino as a corporate trustee, Mr Wright owed fiduciary obligations to Ms Torlonia, to deal with the Wambo Royalties moneys for her benefit and in accordance with her directions, and to account to her for them. Accordingly, there was a relevant accounting relationship.
Mr Wright has not properly or satisfactorily accounted for the Wambo Royalties, at least in the following respects:
1. As to receipts, as the accounts do not balance, and the expenditure side must be further increased by $390,000 drawn by Mr Wright which was omitted, not all the income can have been brought to account;
2. As to expenditure, authority for the payments to Etres Resources is not established; authority for the payments to Frank McDonald to the extent they exceed $275,000 is not established; and the payment of $871,992.23 to Mr Wright or his related entities, claimed as advances against remuneration and reimbursements - let alone any additional amount - is insufficiently supported by vouchers such as invoices, time records, receipts for disbursements, or any other evidence.
Ms Torlonia is therefore entitled to an order for accounts. However, for limitation reasons, she is entitled to accounts only for the period commencing six years before the proceedings were instituted, that is to say from 25 March 2009.
The financial statements as at 30 June 2009 provide a convenient and uncontroversial opening balance, as they establish that as at that date, Ms Torlonia's loan account stood at $4,232,225. From 1 July 2009 until 1 January 2013, there appear to have been undisputed receipts from the Wambo Royalties, net of withholding tax, of $4,060,513.05. Thus the receipts for which Mr Wright is liable to account total at least $8,292,738.05.
There is no evidence that Mr Wright failed to get in any royalty or other receipt which acting properly he ought to have got in. Although he did not invest Ms Torlonia's moneys at interest, interest was earned by Leccino, and as such interest and other income is to be included in the receipts, there is no basis for accounts to be taken on the basis of wilful default.
The Court therefore orders that:
1. An account be taken of all moneys received and disbursed by the defendant (including through Leccino Pty Limited) in respect of the plaintiff's Wambo Royalties, including interest and other income received in respect of their investment, for the period from 25 March 2009 to date.
2. For the purposes of the account referred to in Order 1:
1. Until further order, the account proceed before Brereton J;
2. The defendant within 28 days of the date of these orders, serve on the plaintiff his detailed account, verified by affidavit, of all of the receipts and disbursements in respect of the Wambo Royalties from 25 March 2009 up to and including the day 28 days from the date of these orders, with the opening balance being the sum standing to the credit of the plaintiff's loan account in Leccino as at that date;
3. Such verifying affidavit is to annex or exhibit all documents relevant to the detailed account as are in the possession, custody or power of the defendant;
4. Such account shall specify in respect of each payment or receipt the date and amount thereof, to whom or from whom the amount was paid or received, and the purpose or account for which the amount was paid or received as the case may be;
5. The items of the account shall be numbered consecutively;
6. The plaintiff be at liberty within 28 days after service upon her of the said accounts and statements, to apply to examine the defendant viva voce or upon interrogatories in respect of the said account;
7. The plaintiff, within 28 days after service upon her of the said account, or within 28 days of the conclusion of the examination of the defendants, have liberty to file and serve upon the defendant her surcharges, falsifications and objections (if any) thereto;
8. All vouching be done out of Court prior to the matter being relisted;
9. There be liberty to apply on three days' notice by arrangement with the Associate to Brereton J.
1. The defendant pay the plaintiff's costs.
2. The proceedings be adjourned to 11 October 2016 at 9.45am for mention.
[10]
Endnotes
Mulherin v Quinn Villages Pty Ltd [2007] QSC 231 at [17]-[22]; see also Rapid Metal Developments (Australia) Pty Ltd v Rosado [1971] Qd R 82 at 88-90; Rockhampton Permanent Building Society v Petersen [1986[ 1 Qd R 128 at 130; Re Sharpe (FCA, Drummond J, 11 December 1992, unreported, at [5]); Woodward v Woodward [2015] NSWSC 1793 at [9] (White J).
(1843) 3 Moo Ind App 175 at 196-7; 18 ER 464.
(1952) 53 SR(NSW) 508 at 514.
Townsend v Roussety Co (WA) Pty Ltd [2007] WASCA 40; (2007) 33 WAR 321; Pavan v Ratnam (1996) 23 ACSR 214 at 224-225 (Beazley JA; Meagher JA concurring); Sliteris v Ljubic [2014] NSWSC 1632 at [43] (Black J). While no fiduciary relationship was found to be established in those cases, each acknowledged the potential. A fiduciary relationship was found in Thomas v SMP International (No 4) [2010] NSWSC 984 (Pembroke J) at [68]-[69].
(1996) 23 ACSR 214 at 224-225.
Dawson v Dawson (1737) 1 Atk 1; 26 ER 1; Young PW, Croft C & Smith ML, On Equity, [16.1340].
White v Lady Lincoln (1803) 8 Ves Jr 363; 32 ER 395; Christensen v Christensen [1954] QWN 37; Ford v Princehorn; Estate of Ford [2012] NSWSC 1165, [31] (White J); R Geddes, C Rowland & P Studdert, Wills, Probate and Administration Law in New South Wales (LBC 1996), [85.02]; Ford & Lee, [9.4010]; Hancock v Rinehart [2015] NSWSC 646; (2015) 106 ACSR 207 at [353].
How v Earl of Winterton [1896] 2 Ch 626; Re Flavelle [1969] 1 NSWR 361, 365 (Helsham J); Hancock v Rinehart [2015] NSWSC 646; (2015) 106 ACSR 207 at [355]. Although the decision in Hancock v Rinehart was in the context of (WA) Limitations Act 2005, s 26, which provided that an action for an account could not be commenced if the limitation period for the cause of action that was the basis of the duty to account had expired, and the corresponding provision in this state ((NSW) Limitation Act 1969, s 15) speaks only of a liability at law to account, so that it may not in terms catch equitable claims, the legal limitation period is applied by analogy: Urquhart v M'Pherson (1880) 6 VLR(E) 17 (Molesworth J).
There may have been additional receipts, such as interest and dividend income.
Grace v Grace [2012] NSWSC 976 at [217].
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 22 August 2016