Ash v Ash (No 2)
[2017] VSC 569
•26 September 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY & PROBATE LIST
S CI 2016 01190
| GRAHAM BARRY ASH (by his administrator, Suzanne Lyttleton) | Plaintiff |
| v | |
| VANESSA MARIA ASH | First Defendant |
| -and- | |
| BRADLEY GRIMM | Second Defendant |
| -and- | |
| G.B. ASH & CO PTY LTD (ACN 005 479 792) (as trustee of the Eighth Gombak Nominees Pty Ltd Superannuation Fund and G.B. ASH Family Trust) | Third Defendant |
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JUDGE: | McMillan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 3, 4 April 2017 |
DATE OF JUDGMENT: | 26 September 2017 |
CASE MAY BE CITED AS: | Ash v Ash (No 2) |
MEDIUM NEUTRAL CITATION: | [2017] VSC 569 |
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FIDUCIARY DUTIES — Where first defendant owed duties as plaintiff’s attorney — Where third defendant owed duties as trustee — Where plaintiff alleges breach of fiduciary duties against defendants — Where all defendants knowingly assisted and benefited from breaches of duty — Dishonest and fraudulent design — Barnes v Addy (1874) LR 9 Ch App 244.
INTEREST — Awards of interest — Where plaintiff entitled to interest on funds used by defendants in breach of duties — Whether plaintiff entitled to compound interest — Rate of interest to be awarded — Date from which interest accrued — Supreme Court Act 1986, s 60 — Talacko v Talacko [2009] VSC 579.
COSTS — Indemnity costs — Whether ‘special or unusual features’ warrant special costs order — Where defendants’ conduct during proceeding justifies award of indemnity costs to the plaintiff — Supreme Court (General Civil Procedure) Rules 2015, r 63.28.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J L Smith | Bardoel & Associates |
| For the Defendants | Mr P W Lithgow | Neill Ogge Lawyers |
HER HONOUR:
The plaintiff, by his administrator, seeks relief arising from alleged breaches of fiduciary duty by the first defendant in her capacity as his attorney. The first defendant was appointed the plaintiff’s attorney under an enduring power of attorney (financial) dated on or about 1 December 2012 (‘the power of attorney’).
Liability of the second defendant, who is the first defendant’s husband, and the third defendant, the trustee company of a family trust and superannuation fund established by the plaintiff, is also said to arise based upon the principles espoused in Barnes v Addy.[1] The plaintiff claims further that the third defendant acted in breach of its equitable duties.
[1](1874) LR 9 Ch App 244 (‘Barnes v Addy’).
On 27 September 2016, the Court delivered judgment on the plaintiff’s application for summary judgment of certain claims against the defendants. The Court found that the defendants had no real prospect of success in defending the allegations in the plaintiff’s amended statement of claim concerning the purported lease, the appointor removal deed and the share issue, all terms defined in the judgment.[2]
[2]Ash v Ash [2016] VSC 577 (27 September 2016) (‘the summary judgment’).
Plaintiff’s remaining claims
The determination of the balance of the plaintiff’s claims is contained in this judgment. On 3 April 2017, leave was granted to the plaintiff to file a further amended statement of claim. The remaining claims relate to the plaintiff’s superannuation fund. The plaintiff has pleaded that:
(a) in transferring superannuation funds from a term deposit to the control of companies from which the first defendant and second defendant profited, the plaintiff acted in breach of the ‘no conflict’ and ‘no profit’ fiduciary duties. The second defendant is said to be liable as he benefited from the transfers and knowingly assisted the first defendant. Further, relief is sought against the third defendant which knowingly assisted the breaches; and
(b) in allowing the transfers from the superannuation fund, and further transfers to companies controlled by the first defendant and second defendant, the third defendant breached its fiduciary duties and duty of due care and skill. As knowing assistants, the first and second defendants are also asserted to be liable for the breaches of the third defendant.
At trial, the plaintiff relied on the affidavit of Suzanne Lyttleton sworn 22 February 2017. Ms Lyttleton’s affidavit was tendered without objection from the defendants and the contents of it were not challenged.
The first and second defendants relied on the oral evidence of the second defendant. The first defendant did not give evidence. No explanation was given for her absence. Counsel for the defendants accept that in the circumstances it may be accepted at law that her evidence would not have assisted the defendants.[3]
[3]See generally Jones v Dunkel (1959) 101 CLR 298; O'Donnell v Reichard [1975] VR 916.
For the reasons that follow, the Court has determined that the plaintiff should succeed in all of his claims. Conflict, disloyalty and lack of due care pervaded the conduct of all three defendants in relation to the superannuation fund, causing significant loss to the plaintiff.
Applicable principles—fiduciary duties
In the summary judgment, the parties agreed on the substantive principles concerning the duties of fiduciaries and third party liability for breaches of trust.[4]
[4]Ash v Ash [2016] VSC 577 (27 September 2016) [102]–[104].
A conflict of interest between a fiduciary and principal can be overcome with the principal’s informed consent. A summary of what informed consent requires is contained at [104] of the summary judgment. The critical aspects are revealed in the extract from Groeneveld Australia Pty Ltd v Nolten (No 3).[5] Informed consent requires full disclosure of all relevant facts and consent to the proscribed conduct.
[5](2010) 80 ACSR 562; [2010] VSC 533 (22 November 2010). See also Shears v Chisholm [1994] 2 VR 535, 627 (J D Phillips J).
Evidence
The first and second defendants were officeholders and shareholders of a group of companies that provided financial services for self-managed superannuation funds (‘the Ostrava companies’). The second defendant said he was qualified with a diploma in financial services, and was the founder and effective controller of the Ostrava companies. The Ostrava companies are now in administration.
The first defendant worked for the Ostrava companies. She is a lawyer who was previously employed at the Australian Securities and Investments Commission (‘ASIC’). Together with a company that she controls, the first defendant is the majority shareholder in at least three of the Ostrava companies.
In 2012, the plaintiff was aged 72 and suffering from Parkinson's disease. He had stopped driving that year as a consequence of the disease. His wife had died approximately four years earlier. On 1 December 2012, the plaintiff appointed the first defendant as his financial attorney. As attorney, the first defendant owed fiduciary and other duties to the plaintiff. It is axiomatic that both the plaintiff and first defendant understood that the plaintiff was in need of a person to execute documents on his behalf in his absence and make decisions concerning his affairs as his condition deteriorated, and the plaintiff had full trust in the first defendant in this regard.
In January 2013, the plaintiff appointed the first defendant as a signatory to his Westpac bank account. Around Easter of that year, the plaintiff became unable to write and the first defendant wrote cheques on his behalf. On 30 June 2013, the plaintiff’s self-managed superannuation fund had a value of approximately $1 156 273, consisting chiefly of a Westpac term deposit ($974 893) and an amount of $181 380 comprising shares in listed companies ($165 031) and cash ($16 349).[6]
The July 2013 meeting
[6]The cash component includes an income tax return owing.
In July 2013, the first and second defendants went on holiday for two weeks. Upon returning home, they attended the plaintiff’s house (‘the July 2013 meeting’). By this stage, the plaintiff’s condition had deteriorated such that he could no longer sign his name, and in the view of the second defendant, he was not ‘100 per cent’ mentally. He was, however, said to understand the substance of the discussions at the meeting. At the time, the plaintiff was purportedly ‘quite distraught’. He had struggled over the previous two weeks and said that he wanted the first and second defendants to manage his affairs—to ‘take over’.
The second defendant asserts that the plaintiff was concerned about protecting his assets and indicated that he wanted the money in his superannuation fund to be transferred to the family trust.The plaintiff was also said to be concerned that due to declining interest rates he was losing money on his investments. Purportedly, he wanted the Ostrava companies to manage his affairs.
In his oral evidence, the second defendant initially stated that the plaintiff also wanted to obtain units in the Ostrava Unit Trust:
I went to [the plaintiff’s] house, [the plaintiff] asked me to transfer an amount of money from the superannuation fund to the family trust, and invest that money in the Ostrava Unit Trust.
The Ostrava Unit Trust was one of two relevant aggregate investment vehicles used by the Ostrava companies. The trustee of the Ostrava Unit Trust was a company of which the first defendant was director and shareholder. When cross-examined specifically about the assertion that the plaintiff wanted to obtain units in the Ostrava Unit Trust, the second defendant conceded that he would not ‘describe it in that way’. Rather, the plaintiff wanted the first and second defendants to manage his affairs and the second defendant’s ‘suggestion was to transfer money to the family trust … and to invest that money in the Ostrava Unit Trust’. The second defendant later accepted his earlier affidavit evidence that the investment in the Ostrava Unit Trust was on the basis of advice from the superannuation fund’s accountant.
Three documents were said to be given to the plaintiff at the July 2013 meeting: a financial services guide; an investment management agreement; and an administration agreement. The plaintiff did not sign the documents and did not read them in the second defendant’s presence. The documents have not been discovered by the second defendant, who asserts they are either with the liquidators of the Ostrava companies or with Ms Lyttleton as the plaintiff’s administrator.
At the July 2013 meeting, the second defendant did not discuss with the plaintiff any of the fees associated with the services of the Ostrava companies that were said to be referred to in the three documents. When questioned regarding this omission, the second defendant stated: ‘[q]uite frankly, I don’t think it was an issue for [the plaintiff]; I think he just wanted someone in the family to look after his affairs’. He also made reference to the possibility that the fees of the Ostrava companies had been discussed with the plaintiff on other occasions.
On the issue of whether the first or second defendants suggested to the plaintiff that he should get advice on the matter, the second defendant responded: ‘[the plaintiff] got advice from me’.
The plaintiff’s purported acceptance of the second defendant’s advice at the July 2013 meeting was said to have come after multiple discussions between the plaintiff and second defendant over the preceding six to twelve months. During those discussions, as recounted by the second defendant, his advice ‘in a nutshell’ was:
to transfer funds into his family trust for asset protection. And if [the plaintiff] was of mind to, the Ostrava entities were happy to manage those and his other funds for him.
No advice was given regarding the plaintiff’s individual risk profile in relation to management of his funds. Rather, general advice was provided. The investment strategy of the Ostrava companies was to:
generate a reasonable return on funds invested in the context of a risk as best we could quantify and understand it … to buy shares that hopefully will increase in value and pay dividends. And … If they got to a level of price that was beyond what we thought the value was, we would often sell and realise a capital gain.
It was not the philosophy of the Ostrava companies to maintain a cash component to moderate risk. Nor did the second defendant necessarily subscribe to the theory that aging investors should perhaps be more risk averse with their investments compared with younger investors. Certainly, the second defendant went so far as to say that ‘there were people who were 25 who came to [the Ostrava companies] and said “I don’t like what you guys do, it’s too risky”’. Moreover, the second defendant admitted to being unfamiliar with the standard of prudence expected of trustees.
The first defendant was appointed a director of the third defendant and member of the superannuation fund by the plaintiff on 29 July 2013. On the second defendant’s evidence, it appears that this occurred at the July 2013 meeting in response to searches revealing that the third defendant was non-compliant with the company’s memorandum of articles of association. The appointment was said to be minuted, although the second defendant was unsure of the whereabouts of the minute.
Control of the plaintiff’s financial affairs
By her appointment as a signatory to the Westpac bank account, the plaintiff’s attorney and a director of the third defendant, the first defendant had the capacity to control all aspects of the plaintiff’s financial affairs: his personal assets and income, his superannuation fund and the family trust established by him.
From July 2013, the second defendant began managing the plaintiff’s financial affairs, including the superannuation fund, the family trust and assets that remained in the plaintiff’s personal name. Three bank accounts and share trading accounts were said to be opened for each of these groups of assets.
On 31 July 2013, the first defendant executed a deed of indemnity whereby the third defendant indemnified her for any loss or damage arising from her involvement in its activities as corporate trustee. The first defendant executed the document both personally and on behalf of the third defendant.
On 1 August 2013, Bankwest account 910078-5 was opened in the name of the plaintiff.
The term deposit matured on 1 October 2013. On 7 October 2013, the proceeds of $1 006 031 were paid into Westpac account 47-5128 held by the third defendant as trustee of the superannuation fund.
On or about 30 September 2013, the third defendant caused the trust deed for the superannuation fund to be replaced by a substitute deed.
On 3 October 2013, the plaintiff lost capacity after falling at his home. It is not in issue that after that date, the plaintiff was incapable of giving his consent.[7]
[7]Ash v Ash [2016] VSC 577 (27 September 2016) [42].
On 12 December 2013, as the plaintiff’s attorney, the first defendant caused the second defendant to be appointed as a director of the third defendant and as a member of the superannuation fund.
The four transfers
After the accrual of interest on the funds in Westpac account 47-5128, approximately $1 011 499 was held by December 2013. Through four transactions in the period from 13 December 2013 to 18 March 2014 (‘the four transfers’), the first defendant transferred the entire sum into two Bankwest accounts operated by the Ostrava companies. The transfers were made at the request of the second defendant, and it is not denied that the first defendant facilitated the four transfers. Rather, the first defendant pleads that when she transferred the funds, she was not acting as the plaintiff's attorney.
The second defendant deposed in his affidavit that the first defendant made the transactions as a result of ‘arrangements previously put in place by [the plaintiff] and her’. While he acknowledged that one of those arrangements was the first defendant’s appointment as attorney, he denied that he was referring to the first defendant’s status as attorney. Instead, he asserted that the reference in his affidavit to ‘arrangements’ refers to the first defendant being the ‘signatory to bank accounts and being the director of the company’.
By one transfer, the sum of $125 000 was paid into Bankwest account 902182-4. In her evidence before the VCAT, the first defendant stated that this account was held in the name of the Ostrava Unit Trust. In the three other transfers, the remaining $886 498 was deposited into Bankwest account 145132-8. That account was held in the name of the third defendant for the superannuation fund, although the associated statements were mailed directly to the Ostrava companies.
Despite the first and second defendants listing over 5000 documents in their affidavit of documents, records accounting for how the funds were then applied are limited in number. On a number of occasions in giving his evidence, the second defendant was ‘unable to recall’ whether certain documents were among the documents listed in the affidavit of documents.
Financial records of the superannuation fund indicate that approximately $832 000 was paid from the superannuation fund to the family trust. In the member’s statement for the period ending June 2014 this deduction is described as a benefit/pension paid. The family trust financial statement for the same period identifies $709 980 that the second defendant suggested came from the superannuation fund, in a row described as ‘Unsecured loans from beneficiaries: Beneficiaries’.
Of the funds transferred to the family trust, at least $585 000, possibly $635 000, was then used to purchase units in the Ostrava Unit Trust. The second defendant estimated that in June 2014 there were 20 unit holders in the Ostrava Unit Trust altogether, with a paid up value of between $1.2 million and $1.4 million. As such, the plaintiff’s funds bought about half the units in the Ostrava Unit Trust.
The funds remaining of approximately $250 000 in the family trust were then said to be paid toward the plaintiff’s living expenses or directly to the aged care facility where the plaintiff resided. Statements from Bankwest account 145132-8 appear to show that a total of $184 000 was paid toward the plaintiff’s accommodation bond at the aged care facility. Certain investments of the family trust were also said to have decreased in value.
After the payment of benefits to the family trust, approximately $179 499 of the initial term deposit funds remained attributable to the superannuation fund.
Assets of the superannuation fund other than those from the term deposit were transacted upon in the 2013/14 financial year. The second defendant decided to sell a number of shares held by the third defendant in listed companies that could be described as ‘blue chip’ investments. Additionally, dividends from certain investments of the superannuation fund appear to have been paid into Bankwest account 145132-8.
Charging of fees
Statements for Bankwest account 145132-8 for the period 12 December 2013 to 30 June 2014 indicate that the Ostrava companies were charging the trustee company numerous fees for their services. The second defendant claimed that these were in accordance with the documents handed to the plaintiff in the meeting of July 2013 and included investment management fees, brokerage fees on a sliding scale, administration fees and fees for service, based upon the second defendant’s hourly rate of $600. Additionally, brokerage fees were payable to a third party broking firm. The statements indicate, for example, that during this period three separate administration fees of $5900 were deducted, as were brokerage fees totalling over $10 000. Further, the second defendant could not account for withdrawals of $5500 or $7500.
The financial statements for the year ending 30 June 2014 for both the family trust and superannuation fund that were before the Court were signed by the first and second defendants, but not the external accountant said to have prepared the documents. According to the second defendant, the accounts of the Ostrava companies’ clients were audited by an external auditor.
The documents before the Court do not disclose the share transactions that resulted in the brokerage fees being deducted from the bank accounts. The second defendant asserted that the transactions would be recorded in general ledgers, which would be with the liquidators of the Ostrava companies. When pressed, he conceded that he had been given access to documents held by the liquidator.
During the second defendant’s cross-examination the following exchange took place in relation to the charging of fees:
Q:… well we know at this point when you're charging these fees that Mr Ash is incapacitated with a brain injury and [your wife] is his attorney … he trusts the two of you, and there is absolutely no one looking over your shoulder as you withdraw all of these funds. Do you agree?
A: I’d agree with that.
Q:And so the only people [the plaintiff] can rely upon at this point to protect his interests are you and [the first defendant]. Do you agree?
A: I’d agree with that.
Q: So you’re in a position of absolute trust?
A: I’d agree with that.
The statement of Bankwest account 910078-5, which was held in the plaintiff’s name, also indicates that a number of fees were withdrawn from that account, for example, on 14 August 2013 the sum of $1000 was transferred into the account, but within a month the balance was $25.96 on account of the withdrawal of five separate fees.Notably, $20 000 was deposited into that account on 11 October 2013. After stating that he did not know where these funds came from, the second defendant conceded that it was possible that they had been paid into the account by the first defendant, almost certainly from the plaintiff’s personal funds.
The second defendant conceded that both he and the first defendant were in positions of conflict, wearing the hats of both the trustee company and the Ostrava companies. The conflict was said to be managed by disclosure to the plaintiff. The second defendant also acknowledged that he benefited from the fees generated from the plaintiff.
Investment in Equity Capital
In late 2014 or early 2015, assets of the superannuation fund were used to invest $225 000 in Equity Capital Partners Hedge Fund Pty Ltd (‘Equity Capital’), the second relevant aggregate investment vehicle of the Ostrava companies. The second defendant gave evidence that it was around this time that he began divesting other shareholdings in order to make the investment. At the time of the investment, Equity Capital had no assets as it had previously been a dormant shelf company. A number of other shareholders, including the second defendant, had not paid for their shares in the company. The second defendant gave evidence that the thought had not occurred to him that this was the case. The shares issued to the third defendant represented 41 per cent of those issued in total.
The plaintiff was the first or second biggest client of the Ostrava companies in terms of capital invested. Of the Ostrava companies’ six aggregate investment entities, relatively speaking, only the two aggregate investment entities that the plaintiff’s funds were invested in, the Ostrava Unit Trust and Equity Capital, ‘got off the ground’. The second defendant appeared to accept that, in accordance with the previously agreed plan, the plaintiff’s funds were used to ‘kick-start’ the two aggregate investment vehicles.
As part of this proceeding, the first and second defendants were ordered to produce administration accounts for both the superannuation fund and the family trust. The account provided by the second defendant indicates that the only remaining asset of the family trust is the investment in the Ostrava Unit Trust, while the superannuation fund now only holds shares in Equity Capital. Both investments are estimated to be of no value. Other than noting these assets, the accounts fail to disclose any receipts or disbursements for the period 29 July 2013 to 1 September 2016. This is said by the second defendant to be due to a lack of access to documents.
Other significant events
As recounted in the summary judgment, a number of significant events took place in 2014 and 2015. On 16 March 2014, the first defendant’s sister applied to VCAT for revocation of the power of attorney and appointment of an independent administrator for the plaintiff. The first defendant subsequently resigned from her position, albeit not before executing a number of purported transactions in her favour on 24 December 2014.
Ms Lyttleton was appointed as the plaintiff’s administrator on 23 January 2015. From that date, Ms Lyttleton sought details of and all relevant documents about the financial position of the plaintiff, the superannuation fund and the family trust from the first and second defendants. In subsequent correspondence over a period of months, the first defendant did not mention the transfer of funds from the superannuation fund and the documents provided to Ms Lyttleton in relation to the fund and family trust were limited.
By three transactions in February and March 2015, the first defendant transferred $60 000 to the statutory trust account of Ms Lyttleton.
In 2015, the second defendant and the trustee of the Ostrava Unit Trust were in litigation with ASIC. Based upon an alleged indemnity, some of the funds of the Ostrava Unit Trust were used to pay legal expenses associated with that litigation.
Summary judgment orders were made on 13 October 2016. Pursuant to those orders, the defendants were required to, inter alia, transfer trust assets and prepare administration accounts. Further orders were subsequently sought and made to ensure compliance with those, and later, orders.
As noted, an affidavit of documents of the first and second defendants sworn 17 November 2016 lists 5000 documents. Aside from what appear to be typographical errors, none of the documents listed are dated after 1 October 2013, some extend back as far as 1982, and the majority seem to be of no relevance to the proceeding.
Submissions
Plaintiff’s submissions
The plaintiff submits that the evidence of the second defendant reveals the second defendant to be self-serving, untrustworthy and concerned only to protect his own interests. Additionally, the failure of the first defendant to give evidence is said to ‘beggar belief’ given allegations of breach of fiduciary duties, dishonesty and fraud, and that the first defendant is an officer of the Court.
Insofar as the first defendant is primarily liable, the plaintiff submits that the defendants did not plead the issue and should be taken to admit it.[8] The plaintiff further notes the first defendant relies upon two defences: informed consent, and that the first defendant was not acting as attorney at the time of the transactions.
[8]That paragraph pleads that, in transferring the plaintiff’s pension to the Bankwest accounts operated by the Ostrava companies, the first defendant: (a) promoted the interest of the Ostrava companies in furtherance of her duties to them where there was a conflict, or a real and substantial possibility thereof, between her position of trust in relation to the plaintiff and her own interest or the interests of the Ostrava companies; (b) gained a benefit as a director and shareholder of the Ostrava companies. The defence denies that the first defendant was acting as the plaintiff’s attorney and pleads that the paragraph also contains matters of opinion.
In relation to informed consent, the plaintiff submits that consideration must turn to what matters ought to have been disclosed and that the list of relevant matters for fully informed disclosure must include that:
(a) various fees would be charged by the Ostrava companies, including the nature, extent, regularity and method of calculation of those fees;
(b) the defendants would benefit personally from the proposed arrangement;
(c) the first and second defendants were in a state of irredeemable conflict by virtue of being directors and shareholders of the Ostrava companies as well as active promoters of their various investment vehicles, whilst the first defendant acted as the plaintiff’s attorney and both acted as directors of the third defendant;
(d) the plaintiff was the largest investor in the two aggregated investment vehicles, the Equity Capital and the Ostrava Unit Trust, and in effect, his funds were pledged to kick-start these vehicles;
(e) other investors in Equity Capital did not pay for their shares, including the second defendant, meaning that others stood to reap the benefit of the plaintiff’s capital contribution;
(f) the funds invested might ultimately be used to fund the second defendant’s litigation costs in the event that he was sued by ASIC;
(g) the Ostrava companies did not accept that there was any need to mitigate risk by, for example, maintaining a cash component in an investment portfolio;
(h) the second defendant did not assess the plaintiff’s personal risk profile or the advisability of certain investments for a person at his stage of life;
(i) the second defendant’s qualifications were limited to a diploma in financial services obtained in around 2000 or 2001; and
(j) the plaintiff should take independent advice on the proposed investments and fees.
In the submissions of the plaintiff, the second defendant’s explanation as to how consent was obtained does not deal with any of these matters, and he conceded as much during cross-examination. Further, when given the financial services guide and other documents in July 2013, the plaintiff did not read them, and even if he had, there must be grave doubts about his capacity to understand them. In July 2013, the plaintiff’s health was so compromised that he would not have been able to give truly informed consent. It is asserted that the onus is on the defendants to demonstrate that the plaintiff had capacity and there has been no medical evidence on this question.
The plaintiff submits that the Court should reject the defendants’ claim that the first defendant was not acting in her capacity as attorney when she facilitated the four transfers. In 2012, the plaintiff was aged 72, suffering from Parkinson’s disease and had recently lost his wife. It can be inferred that both the plaintiff and the first defendant understood that the plaintiff was in need of a person not just to execute documents on his behalf in his absence but to make decisions concerning his affairs as his condition deteriorated. It is difficult to accept that a superannuation fund, knowing that the member had an attorney, would make significant changes to the superannuation agreement without input from the attorney. It is fanciful that this would occur in the context of a self-managed superannuation fund where an incapacitated individual is effectively the only member. It would require a fiction to attempt to unravel acts done by the first defendant as attorney from those done as director of the trustee company when both appointments concerned the one subject matter of the plaintiff’s financial well-being.
According to the plaintiff, the real issue is the scope of the first defendant’s fiduciary duty as attorney. In this regard, reference is made to Chan v Zacharia[9] and the significance of the circumstances of the appointment of the fiduciary, and the ‘common sense’ approach referred to in Canberra Residential Developments Pty Ltd v Brendas.[10] In that case, the Full Court of the Federal Court stated:
… the mere existence of a fiduciary relationship does not define the nature of the duties that arise for three reasons. First, it is wrong to assume that the duty owed by a fiduciary attaches to every aspect of the fiduciary’s conduct, however irrelevant that conduct is to the relationship that is the source of the duty… Second, the scope of the duty is very much dependent upon the facts of the particular case… In most cases the duty will be determined in large part by reference to the nature of the activities of the principal… Third, defining the scope of the duty must be approached with common sense and with an appreciation of the sort of circumstances in which it has been applied in the past. It should only be applied to a state of affairs which discloses a real conflict of duty and interest and not just some theoretical or rhetorical conflict…[11]
[9](1984) 154 CLR 178, 196, 204 (Deane J).
[10](2010) 188 FCR 140.
[11]Ibid 147 (Finkelstein, Siopis and Katzmann JJ) (citations omitted).
It is submitted that in the present circumstances the fiduciary duty must have extended to all acts and things done by the first defendant that touched upon the financial affairs of the plaintiff. To recognise otherwise would be to permit a fiction undermining the very purpose of fiduciary duties—to protect those in relationships of dependence and vulnerability.
The first defendant must be liable for all of the losses flowing from the transfer of the superannuation funds into the Ostrava companies. Further, the plaintiff submits that the second defendant knowingly involved himself and knowingly benefited from the first defendant’s breaches of duty.
As to the third defendant, although the plaintiff asserts that it is liable as well, in accordance with Barnes v Addy, it should also be found primarily liable as owing fiduciary and equitable duties to the plaintiff. In allowing the transfer of funds to the Ostrava companies, the third defendant favoured the interests of the Ostrava companies and the first and second defendants ahead of the plaintiff. It adopted the second defendant’s investment strategy without considering the obligations that it owed to the plaintiff, and the investment strategy breached the due care and skill obligation. As controllers of the third defendant, the first and second defendants are said to have knowingly assisted and knowingly benefited from the third defendant’s breaches of duties.[12]
[12]H A J Ford and I J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in P D Finn (ed), Equity and Commercial Relationships (Lawbook Co, 1987) 63.
In regard to the element of dishonest and fraudulent design necessary for a knowing assistance Barnes v Addy claim, the plaintiff asserts that the conduct of the first defendant was to the benefit of the first and second defendants and to the detriment of the plaintiff. It was also in contravention of the undertakings of the first defendant when executing her appointment as attorney. Additionally, the transfers of funds to the Ostrava companies were executed so as to generate fees and commissions. Insofar as the first and second defendants were aware of the consequences of their actions, the first defendant is a solicitor and officer of the Court with over 20 years’ experience, having also worked at ASIC, and the second defendant is a sophisticated businessman and financial adviser.
The plaintiff seeks:
(a) equitable compensation of $912 273.[13] This is based upon an initial figure of $1 156 273 being the amount held in the super fund as at 30 June 2013, with due allowance for a payment of $60 000 made to Ms Lyttleton and payments totalling $184 000 towards the plaintiff’s accommodation bond;
(b) compound interest, as the defendants have engaged in fraudulent and dishonest conduct, from the time of the impugned withdrawals;[14] and
(c) in the event that the plaintiff succeeds, indemnity costs as this is a case with ‘special or unusual features’,[15] including: the exploitation of a father by his own daughter and son-in-law; the position of trust; the long-running nature of the conduct; the refusal to discover documents and to account; the failure to make discovery; the failure of the first defendant to give evidence; the total financial destruction visited upon the plaintiff and the refusal of the defendants to acknowledge any wrong-doing.
[13]Nocton v Lord Ashburton [1914] AC 932, 952 (Viscount Haldane LC); Warman International Ltd v Dwyer (1995) 182 CLR 544, 559 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ).
[14]Supreme Court Act 1986, s 60; Haustorfer v Haustorfer (Unreported, Supreme Court of Victoria, Mukhtar AsJ, 21 June 2012) [8]–[12].
[15]Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, 230, 232 (Sheppard J).
It is submitted that due allowance should not be made for monthly payments totalling $71 698.73 made to the plaintiff’s aged care facility as disclosed in bank statements, as the defendants did not reference these in their administration accounts, nor produce any source documents by way of discovery. The plaintiff emphasises that a particularly disturbing aspect of the circumstances is the failure of the defendants to account for the plaintiff’s assets outside the trustee company, even though the existence of some of those resources were identified in evidence and were substantial.[16]
Defendants’ submissions
[16]Reference was made, for example, to a Commonwealth Bank account and shares held in the plaintiff’s name.
The first and second defendants deny that the first defendant breached her duties, that the second defendant was liable and that any loss was suffered. As to the liability of those defendants, the defence pleads that the first defendant was not acting in her capacity as attorney. Additionally, it is asserted that the transfer of superannuation funds during the financial year 1 July 2013 to 30 June 2014 was based upon a previously agreed strategy of the plaintiff and second defendant.[17]
[17]Although not pleaded in the defence of the first and second defendants, consent was raised as a defence in the summary judgment pleadings.
While the third defendant denies that it breached its fiduciary duties, no specific defence is pleaded.
The issue of the capacity in which the first defendant was acting when she made the four transfers was all but conceded by the defendants in their final submissions; that is, the first defendant was acting as the plaintiff’s attorney. Certainly, the defendants asserted that the first defendant was giving effect to the previously agreed strategy, which was based upon previous arrangements put in place by the plaintiff, including the first defendant’s appointment as attorney, as a signatory to bank accounts, and as a director of the third defendant.
It is asserted that the previously agreed strategy was made after prior disclosure of all facts including fees and charges and the involvement of the Ostrava companies and the first and second defendants. The withdrawal of superannuation funds was said to be based on:
(a) the plaintiff seeking the second defendant’s advice as to asset protection, capital protection, income generation and taxation matters;
(b) the second defendant advising the plaintiff that the superannuation fund could make a tax free withdrawal to the family trust in the form of a pension payment and such a transfer would protect the assets from claims of third parties, including any claim from the de facto partner of the plaintiff’s other daughter;
(c) the plaintiff agreeing to the second defendant’s advice at the July 2013 meeting that, when the term deposit matured, it should be transferred into the family trust;
(d) requests by the second defendant to the first defendant to transfer the funds, which could be done as a result of the previous arrangements; and
(e) advice of the superannuation fund’s accountant forming the basis for units in the Ostrava Unit Trust being issued to the family trust.
The plaintiff’s undisputed instructions prior to 3 October 2013 are said to be his ‘informed consent’. Although evidence of his capacity prior to that date has been speculated about, a finding that the plaintiff lacked the requisite capacity is not open.
The defendants submit further that the funds invested have been accounted for by them. To the extent that they have diminished, that is the consequence of the Ostrava companies being placed under external administration. Moreover, where the liquidation of the Ostrava companies is not finalised, and there is no evidence of the likely position of creditors, it is not possible to quantify any loss related to the investments.
In summary, it is asserted that the transfer of funds the subject of the plaintiff’s remaining claims was necessary to give effect to the previously agreed strategy, was designed to benefit the plaintiff and was agreed by him prior to 3 October 2013. Any benefit to the Ostrava companies was on a ‘normal’ fee for service basis as disclosed to the plaintiff and was only of incidental, if any, benefit to the defendants personally or generally.
Consideration
Findings regarding the evidence
The second defendant’s evidence was inconsistent and on more than one occasion he sought to avoid directly answering the question at hand, or to place a particular slant on his answers. This was evident, for example, regarding references to the ‘compliance department’ of the Ostrava companies,[18] the $20 000 deposit into Bankwest account 910078-5,[19] whether the first defendant was to give evidence, the standard of care required of a trustee, and whether the defendants had attempted to locate documents. Additionally, it is untenable that after years of experience in the financial services industry, the second defendant failed to consider the detriment caused to the plaintiff in investing in Equity Capital at a time when the company had no assets and several shareholders who had not bought into the company.
[18]Later conceded by the second defendant to be an external provider.
[19]See paragraph [46] above.
The second defendant’s evidence specifically in relation to the disclosure of fees was inconsistent and consequently unreliable. While a meeting between the plaintiff and first and second defendants took place in July 2013, in my view, the fees of the Ostrava companies were not specifically discussed at that time. Further, given the lack of both documentary evidence and reference in the second defendant’s affidavit, it is doubtful that the financial services guide, investment management agreement and administration agreement were in fact handed to the plaintiff. Similarly, while the plaintiff may broadly have agreed to the transfer of his superannuation funds and for the first and second defendants to ‘take over’, the evidence does not support a finding that the discussion extended to the investment of those funds in the Ostrava Unit Trust.
Did the first defendant breach her fiduciary duties?
In determining whether the first defendant breached the duties that she owed to the plaintiff as his attorney, consideration must first turn to the scope of those duties which, in turn, depends upon the circumstances of this case.[20]
[20]Chan v Zacharia (1984) 154 CLR 178, 204 (Deane J); Canberra Residential Developments Pty Ltd v Brendas (2010) 188 FCR 140.
The plaintiff was 72 years old at the time that he executed the power of attorney in the first defendant’s favour. He had been diagnosed with Parkinson’s disease five years earlier and the disease had progressed to an extent that he had ceased driving. He placed full trust and confidence in the first defendant, who is his daughter as well as a commercial lawyer. In such circumstances, the fiduciary duty stemming from the power of attorney extended to all acts and things done by the first defendant that touched upon the plaintiff’s financial affairs.
The first defendant was acting in her capacity as attorney when making the relevant transactions. To recognise otherwise—that a director of a trustee company or signatory of a bank account could transfer significant funds of a self-managed superannuation fund, while parallel duties owed as an attorney to the fund’s sole member are seemingly suspended—would only serve to undermine the protective role inherent in the appointment of an attorney.
When the first defendant made the four transfers she was in a position of clear conflict. The transfers exposed the funds to the significant fees and investment strategies of the Ostrava companies. The first defendant was not only personally interested in the Ostrava companies as director and shareholder, but she owed duties to the Ostrava companies that were at odds with those that she owed to the plaintiff. Her loyalty was far from undivided.
To avoid a finding of breach of duty, the first defendant must demonstrate the plaintiff’s fully informed consent, including disclosure of all relevant facts. Indeed, given the trust and confidence reposed in fiduciaries such as the first defendant, and the principal’s position of vulnerability, the Court considers any defence of consent with ‘infinite and the most guarded jealousy’.[21]
[21]Ex parte Lacey (1802) 6 Ves 625; (1802) 31 ER 1228.
In this regard, save for the specificity of subparagraphs 59(d), (e) and (f) above, I accept the plaintiff’s submissions that, in the circumstances, fully informed consent required evidence of at least the factors set out in that paragraph being disclosed. Each of those factors may have had a bearing upon the plaintiff’s consent to the four transfers. As to subparagraphs 59(d), (e) and (f), the requisite disclosure perhaps should only extend to informing the plaintiff that his funds may become the most substantial capital invested in the Ostrava Unit Trust and/or Equity Capital, and may also provide an indemnity to the directors.
The defendants failed to demonstrate that at the July 2013 meeting, or indeed at any time prior to the plaintiff losing capacity, any of the relevant matters were disclosed to him. Rather, the evidence is that at a time when the plaintiff was said to be vulnerable, quite distraught and ‘not 100 per cent mentally’, he indicated to the first and second defendants that he wanted them to ‘take over’ and for the Ostrava companies to manage his funds. The emphasis of the second defendant’s evidence was on prior discussions with the plaintiff and the plaintiff’s general awareness that the Ostrava companies formed the second defendant’s business, and that factors such as fees and conflict were not really ‘an issue’ for the plaintiff. Such general awareness falls well short of being fully informed and any ‘previously agreed strategy’ does not amount to the plaintiff’s consent.
The first defendant exploited the position of vulnerability of her father and breached her fiduciary duty of no conflict. Insofar as she is said to have benefited from the four transfers, while the plaintiff’s submissions as to the pleadings have some force, I am satisfied that the first defendant benefited in any event as fees were charged by the Ostrava companies from the plaintiff’s funds: the first defendant, alongside a company that she was sole shareholder and director of, were majority shareholders in at least three of the Ostrava companies, including the corporate trustee for the Ostrava Unit Trust; and the first defendant worked for the Ostrava companies.
In view of these conclusions, it is unnecessary to make any findings regarding the capacity of the plaintiff at the time of the July 2013 meeting.
Dishonest and fraudulent design
The issue of dishonest and fraudulent design arises as an element of the Barnes v Addy knowing assistance claims brought against the second and third defendants associated with the first defendant’s primary breach, and the first and second defendants regarding alleged breaches by the third defendant. To avoid repetition, it is convenient to set out the dishonest and fraudulent design surrounding use of the plaintiff’s superannuation funds.
A knowing assistance claim in accordance with the second limb of Barnes v Addy requires a ‘dishonest and fraudulent design’ on the part of the fiduciary;[22] the relevant dishonesty amounting ‘to a transgression of ordinary standards of honest behaviour’.[23] Although in determining that a breach of fiduciary duty was one of dishonest and fraudulent design, the civil standard of the balance of probabilities applies, with the seriousness of such a finding to be kept in mind.[24] That said, in the current circumstances, the breach of fiduciary duties by the first defendant readily fall within the scope of those described as ‘dishonest and fraudulent’.
[22]Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 159 [160], 164–5 [179]–[184] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ) (‘Farah Constructions’), as recently summarised in Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101 (15 March 2017) [331] (Hargrave J).
[23]Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609, 636 (Leeming JA); Rogers v MHM Metals Ltd [2015] FCAFC 67 (25 May 2015) [72] (Middleton, Gilmour and Gleeson JJ).
[24]Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449, 451 (Mason CJ, Brennan, Deane and Gaudron JJ).
The first defendant is a lawyer with experience in corporate regulation and should have been well aware of issues of conflict. She was reposed with the total trust and confidence of her elderly father, whose health was deteriorating. In circumstances where he was ‘quite distraught’ and under the impression that his assets were at risk, at best he generally agreed to the transfer of his superannuation funds to the family trust under the management of the Ostrava companies. The deficiencies surrounding this general agreement have already been identified.
There is no evidence that the first defendant attempted to dispel the plaintiff’s concerns as to any risk posed to his assets by other family members, or discuss prudent investment strategies in light of the plaintiff’s needs over coming years. Rather, it was at this time that the plaintiff appointed the first defendant a director of the trustee company. This appointment was encouraged, if not prompted by the second defendant, who was later also appointed a director by the first defendant.
Stemming from the July 2013 meeting, the first and second defendants gained control of the plaintiff’s significant superannuation funds. They effectively exercised that control, particularly after 3 October 2013, without accountability. Significant fees were withdrawn from the funds to the benefit of the first and second defendants, and the funds that were accumulated over the plaintiff’s lifetime and intended to support him as he aged, were used to kick-start the aggregate investment vehicles of the Ostrava companies.The investment in Equity Capital was clearly adverse to the plaintiff’s interests.
At no time does it appear that the interests of the plaintiff were seriously considered. Rather, the unquestionable conclusion to be drawn from the evidence as a whole, including the oral evidence of the second defendant, is that the first and second defendants sought to apply the plaintiff’s funds as they saw fit and apply those funds in a manner that was chiefly to their benefit. This is evident in the summary judgment findings, the continued failure of the first and second defendants to account, in any detailed fashion, for both the superannuation funds and certain personal assets of the plaintiff also under their control, the disregard of the plaintiff’s interests and the failure of the first defendant to give evidence.
While such conduct is of the requisite ‘dishonest and fraudulent’ character for the purposes of a claim under the second limb of Barnes v Addy, it also readily falls within the definition of elder abuse as the term has been employed recently by the Australian Law Reform Commission.[25]
Are the second and third defendants liable in accordance with Barnes v Addy?
[25]Australian Law Reform Commission, Elder Abuse—A National Legal Response, Report No 131 (2017).
In respect of the breach of fiduciary duties by the first defendant, I accept that the second and third defendants are liable in accordance with Barnes v Addy. At trial and as pleaded, the second defendant only relied upon the defences of the first defendant, which have been rejected. Further, it is clear that the second defendant orchestrated the four transfers and he has conceded that he ultimately benefited from them.[26]
[26]See [47] above.
The third defendant provided assistance in allowing the transfer of funds from Westpac account 47-5128 to the Bankwest accounts controlled by the Ostrava companies. Whilst cognisant of the comments of Dodds-Streeton J (as her Honour then was) in Re-Engine Pty Ltd (in liq) v Fergusson[27] that mere passive acquiescence does not amount to assistance, in my view, the circumstances in which the third defendant as trustee released superannuation trust funds to bank accounts controlled by others, extends beyond mere acquiescence. Insofar as the third defendant had the requisite knowledge, it is appropriate for the knowledge of the first and second defendants to be imputed onto the third defendant.[28] At the time of the transactions the plaintiff had lost capacity and the first and second defendants were directing the mind and will of the third defendant.
Is the third defendant liable for a breach of its duties as trustee?
[27](2007) 209 FLR 1; [2007] VSC 57 (9 March 2007). See also Quince v Varga [2009] 1 Qd R 359.
[28]Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd [2015] VSCA 9 (12 February 2015); (2015) 318 ALR 302, 327 [106] (Warren CJ) (‘Australasian Annuities’); Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, 357 [244] and 366 [282] (Finn, Stone and Perram JJ); Ying Mui Pty Ltd v Frank Kiang Ngan Hoh (No 3) [2017] VSC 29 (8 February 2017); (2017) 119 ACSR 577, 644–5 [421]–[424] (Vickery J).
The third defendant, as a trustee company, owed the plaintiff fiduciary duties not to be in a position of conflict and not to profit, in addition to equitable duties more broadly, including that of due care and skill. Such duties existed regarding the four transfers and the later investment of superannuation funds in Equity Capital and the Ostrava Unit Trust.
While strictly the third defendant itself did not have an interest in the four transfers or later investments that conflicted with those duties, in the circumstances the preference of the interests of the first and second defendants over those of the plaintiff involved such disloyalty so as to fall within the ‘no conflict’ rule. The facts in this proceeding bear a degree of similarity with the facts in Australian Securities Commission v AS Nominees Ltd.[29] There, loans were made by a trustee company to a company considered to be managing the trust, which was a party to the trust deed and could be taken to be in the same position as the trustee, and was also remunerating a director of the trustee company.[30] Multiple breaches of fiduciary duty were said to ‘infect’ the loan, which Finn J determined may also constitute a violation of the ‘no conflict’ rule.[31] Here, the conflict is evinced in the third defendant allowing the relevant funds to be invested in schemes that benefited its directors. This conflict was never fully disclosed to the plaintiff, such disclosure again requiring discussion of the factors listed in paragraph [59] above.
[29](1995) 133 ALR 1.
[30]Ibid 39 (Finn J).
[31]Ibid.
In addition to breaching a fiduciary duty, the conduct of the third defendant fell short of the duty of due care and skill required of a trustee. Allowing the superannuation funds to be transferred to the control of the Ostrava companies lacked the necessary prudence. The Ostrava companies adopted only broad investment strategies, with no regard for the plaintiff’s personal risk profile nor use of maintained cash components. Certainly, the second defendant admitted that the approach of the Ostrava companies to risk had previously deterred potential clients. Further, the third defendant permitted the significant investments in the Ostrava Unit Trust and Equity Capital, the latter in particular being adverse to the plaintiff’s interests. Such approaches are inconsistent with the prudence required of a trustee, particularly a trustee of superannuation funds,[32] a standard of which the second defendant said that he was unaware.
Are the first and second defendants liable in accordance with Barnes v Addy?
[32]Ibid 29.
The breaches by the third defendant are capable of giving rise to liability on the parts of the first and second defendants in accordance with Barnes v Addy. As discussed by Young CJ in Eq in New Cap Reinsurance Corporation Ltd v General Cologne Re Australia Ltd,[33] one of the many situations in which directors will be liable under the second limb of Barnes v Addy is where ‘the directors of a trustee type of company carried on its activities for their own or the company’s best interests and not for the benefit of the beneficiary’.[34] In this regard, there is commentary suggesting that while the duty of due care and skill is not typically viewed as fiduciary, for the purposes of Barnes v Addy liability, it can be so viewed.[35]
[33][2004] NSWSC 781 (26 August 2004).
[34]Ibid [30], citing Biala Pty Ltd v Mollina Holdings Ltd (1993) 11 ACSR 785, 833 (Ipp J), affirmed by the Full Court of the Supreme Court of Western Australia in Dempster v Mollina Holdings Ltd (1994) 15 ACSR 1, and Turner v TR Nominees Pty Ltd (1995) 31 ATR 578.
[35]Westlaw Australia, Ford and Lee: The Law of Trusts (1 March 2017) [22.10140].
On the issue of ‘dishonest and fraudulent design’, I accept the plaintiff’s submission that the first and second defendants were the ‘brains and hands’ of the company. As stated by Ford and Hardingham:
if a trustee company has a dishonest and fraudulent design, directors of that company, acting in the administration of the trust, as the ‘brains and hands’ of the company, must have known about that design and must, of necessity, have assisted in its development and implementation.[36]
[36]Ford and Hardingham, above n 13, 65.
The breaches of fiduciary duties by the third defendant were of a dishonest and fraudulent design as they facilitated the accrual of benefits to the first and second defendants at the expense of the plaintiff in the circumstances discussed in paragraphs [87]–[93] above. In their capacity as directors, the first and second defendants knowingly assisted in the development and implementation of that design.
What is the appropriate relief?
Equitable compensation seeks to place the principal in the position which he or she would have been aside from the breach of equitable duty.[37] It is a flexible remedy, capable of being fashioned to meet the needs of the case,[38] and as previously identified by Warren J (as her Honour then was), ‘the court will approach the matter of endeavouring to ensure that equity prevails’.[39]
[37]Nocton v Lord Ashburton [1914] AC 932, 952 (Viscount Haldane LC). See also Hill v Rose [1990] VR 129, 144 (Tadgell J).
[38]Warman International Ltd v Dwyer (1995) 182 CLR 544, 559 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ); Cole v Miles [2002] NSWCA 150 (22 May 2002) [63] (Heydon JA); GM & AM Pearce & Co Pty Ltd v Australian Tallow Producers [2005] VSCA 113 (11 May 2005) [65] (Warren CJ).
[39]Disctronics Ltd v Edmonds (No 2) [2002] VSC 534 (3 December 2002) [5].
The plaintiff submitted the starting point for analysis in the current circumstances is the $1 156 273 that was held on behalf of the superannuation fund as at 30 June 2013.[40] As the accounts of administration now show that the assets of the superannuation fund are worthless shares in Equity Capital, it is contended that the plaintiff is entitled to the entire sum of $1 156 273, with allowances then being made for the accommodation bond of $184 000 and the payment of $60 000 to Ms Lyttleton. However, the defendants submit that as the liquidation of Equity Capital and the Ostrava Unit Trust has not been finalised, it is not possible to quantify the plaintiff’s loss.
[40]See [13] above.
In my view, the issue of compensation requires a somewhat different approach to that proposed by the plaintiff. Equitable compensation seeks to place the plaintiff in the position that he or she occupied prior to breach of the relevant equitable duties. Here, the plaintiff has successfully pleaded breaches by the first defendant in relation to the four transfers, and breaches by the third defendant regarding both the four transfers and the further transactions leading to the investment in Equity Capital.[41] As to the former, if the four transfers had not occurred when they did, the plaintiff would have retained the term deposit funds of $1 011 499. The latter breaches require consideration of the transfer of superannuation funds to Equity Capital. Exactly where those funds were drawn from is unclear, as the defendants have failed to account for assets of the superannuation fund in any detail, particularly the shares in listed companies and cash held on 30 June 2013 of approximately $181 380, and the portion of $179 499 of the term deposit that was not paid to the family trust. The inference to be drawn from the evidence is that these assets were invested and traded by the second defendant before finally being invested in Equity Capital.[42]
[41]See [13] and [40] above.
[42]See [40]–[41] and [48] above.
Where a party has failed to keep proper accounts, leading to difficulties in the assessment of compensation, the Court should resolve doubtful questions against that party. As summarised by Lindsay J in Smith v Smith:[43]
Where an accounting party fails to keep proper accounts, and thereby renders problematic any exercise of accounting by the Court, the Court generally proceeds on a presumption against that party, resolving doubtful questions against the party whose actions have made an accurate determination problematic… This principle may require moderation in its application to the facts of the particular case in order to serve the interests of justice; but, in a case in which an accounting party has deliberately put it out of the power of an adversary to obtain an accounting to which there is an entitlement, the accounting party cannot complain if the Court presumes the worst against him, her or it.
[43][2017] NSWSC 408 (13 April 2017) [448] (citations omitted). See also JD Heydon et al, Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (LexisNexis, 5th ed, 2015) [23-260].
In the circumstances, the defendants have failed to account for the $181 380 in cash and shares, and the $179 499 remaining of the term deposit, attributable to the superannuation fund. The justice of the case affords the presumption that those funds formed the asset base that was eventually drawn upon to invest in Equity Capital. While the loss of $179 499 falls within the compensation for the four transfers, as it came from the term deposit, the $181 380 does not. Consequently, prima facie the plaintiff should be compensated for the loss of $181 380 in addition to that of $1 011 499, equating to $1 192 879 in total.
The defendants’ submission that the Court cannot accurately calculate the loss due to uncertainty surrounding the value of the shares and units held in Equity Capital and the Ostrava Unit Trust respectively must be rejected. Of the little information provided in the administration accounts, the value of each of those assets was listed as zero.
The two allowances of $184 000 and $60 000 made by the plaintiff are appropriate in the circumstances. The Court should not accept the intermittent payments amounting to $71 698.73 listed in the relevant bank statements as being made to the aged care facility. The defendants failed to make any reference to those payments in the administration accounts and failed to produce any source documents by way of discovery.
Accordingly, the plaintiff is entitled to equitable compensation of $948 879.[44]
Should interest and compound interest be awarded?
[44]Calculated by subtracting the two allowances of $184 000 and $60 000 from the total amount of $1 192 879 (with the total amount of $1 192 879 made up of $181 380 plus $1 011 499).
In Talacko v Talacko,[45] Kyrou J noted the Court’s inherent equitable jurisdiction to award interest.[46] The principles that his Honour discussed were conveniently summarised by Macaulay J in Kirk v PBP Accounting Solutions Pty Ltd[47] as follows:
[45][2009] VSC 579 (11 December 2009).
[46]Ibid [10], citing Hungerfords v Walker (1989) 171 CLR 125, 148 (Mason CJ and Wilson J). See also Giller v Procopets (2008) 24 VR 1.
[47][2015] VSC 173 (30 April 2015).
(a) The Court has inherent equitable jurisdiction to award interest when the interests of justice so demand, including in circumstances where money has been withheld or misappropriated by a fiduciary. The right to interest in equity exists independently of statute. So, the Court’s equitable jurisdiction is not limited by s 60 of the Supreme Court Act 1986.
(b) Traditionally, in fixing the rate of interest, equity broadly distinguished between two classes of case. In cases involving a breach of trust or misconduct, the fiduciary was charged interest at the mercantile rate of five per cent per annum. In all other cases, the defaulting fiduciary was charged interest at a rate of four per cent per annum. More recently, however, the courts have departed from the fixed interest rates of four and five per cent.
(c) In some circumstances, it will be appropriate for the court to award compound interest to ensure that no profit remains in the defaulting fiduciary’s hands. This may, and normally will, occur where the defaulting fiduciary has used the money for his own commercial purposes, and also is guilty of fraud or serious misconduct.
(d) An award of compound interest should ordinarily be considered only in cases where the defaulting fiduciary is being compelled to disgorge a gain.
(e) Although the decision to award simple or compound interest is discretionary, to be determined on the facts of each case, the court’s power to award compound interest is not at large, and there must be features in each case justifying a departure from the normal rule for simple interest. There must be evidence of an actual gain by the defaulting fiduciary or an evidentiary foundation upon which any gain may be assumed.[48]
[48]Ibid [39] (citations omitted). As to circumstances where funds are used in trade, see Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132, 179 (Smith J).
In Kirk v PBP Accounting Solutions Pty Ltd, the second defendant, in his capacity as the first plaintiff’s attorney, transferred funds belonging to the plaintiffs to the first defendant, a company of which the second defendant was director and secretary. The plaintiffs obtained judgment in default of defence, and in light of the breach of fiduciary duties and wilful and dishonest conduct of the second defendant, Macaulay J awarded compound interest at a rate of five per cent. In doing so his Honour stated:
whilst there is no evidence before me as to the actual gain made by the defendants, there is an evidentiary basis from which a gain may be inferred, in that the moneys were paid into [the first defendant’s] bank accounts. I infer that as the money was paid into the bank accounts of [the first defendant], that [the first and second defendants] were making the most beneficial use of the funds by earning compound interest, and conversely that had [the first and second defendants] not deprived [the plaintiffs] from their money, that they would have made the most beneficial use of it open to them.[49]
[49]Ibid [42] (citations omitted).
In Australasian Annuities, the respondent breached his fiduciary duties when he transferred funds from a trustee company of a family trust, of which he was director, to a superannuation fund. In doing so he believed that his actions were lawful, and not in conflict with his duties to the trustee company. On the issue of compound interest Garde AJA stated:
The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of equitable obligation. The interest awarded in equity is not punitive. The decision whether to award simple or compound interest is discretionary, and is determined on the facts of the case. Neither party descended to evidence as to what has become of the superannuation contributions to the super fund … There is nothing to show whether the funds have been invested profitably … and if so to what extent profits have been made since they were received. The financial statements of [the trustee company of the superannuation fund] since 2007–08 are not before the court. It is not shown that the award of compound interest is necessary to ensure that [the trustee company of the superannuation fund] does not retain any profit that it has made, or that it should be stripped of a financial gain. [The respondent] gave evidence that he believed he was acting lawfully when he made the payments challenged in these proceedings….[50]
[50]Australasian Annuities (2015) 318 ALR 302, 374 [320] (citations omitted).
In the circumstances of this proceeding, the plaintiff should be awarded compound interest at a rate of five per cent. In breach of their fiduciary duties, the defendants fraudulently and dishonestly applied the plaintiff’s funds for their own commercial gain. The funds were used to kick-start the two aggregate investment vehicles of the Ostrava companies, which although ultimately failed, went through periods of trading. Further, the evidence suggests that funds were applied toward various share transactions before they were pooled into the two aggregate investment vehicles, and a number of withdrawals from Bankwest account 145132-8 were made for which there has been no accounting. While specific evidence is lacking regarding discrete profits that the first and second defendants may have made, the evidentiary foundation supports an inference that with the funds under their control, the first and second defendants were attempting to maximise investment gains. It would go against the interests of justice if the plaintiff were not awarded compound interest, which presumably he could have been earning if his funds were reinvested in a term deposit, on account of the failure of the first and second defendants to disclose detailed accounts and client ledgers identifying specific gains that may have been made during the period that they controlled the plaintiff’s assets.
The plaintiff is entitled to interest from the time of the impugned withdrawals pursuant to s 60 of the Supreme Court Act 1986 and as equitable compensation pursuant to equitable principles.[51]
[51]Hungerfords v Walker (1989) 171 CLR 125, 148 (Mason CJ and Wilson J); Talacko v Talacko [2009] VSC 579 (11 December 2009) [10] (Kyrou J).
As noted, the amount of $181 380 (comprising shares in listed companies and cash) was held in the plaintiff’s superannuation fund as at 30 July 2013. As best as can be determined, after a period of trading in 2013/2014,[52] these assets were ultimately drawn upon to invest in Equity Capital. It can be inferred that the loss of these funds occurred on 30 July 2013.[53]
[52]See [41] above.
[53]See [104]–[106] above.
As to the remaining amount, and as already noted, on 7 October 2013 an amount of $1 006 031 was paid into Westpac account 47-5128 in the name of the third defendant as trustee of the superannuation fund. Thereafter, by 13 December 2013 with the accrual of interest, approximately $1 011 499 was in that account. In the period from 13 December 2013 to 18 March 2014, by executing the four transfers, the first defendant transferred the entire amount into accounts operated by the Ostrava companies.[54] Accordingly, the impugned withdrawals occurred as from 13 December 2013 to 18 March 2014 with all of those funds paid to the third defendant.
[54]See [29] and [33] above.
As such, the award of compound interest at the rate of five per cent should commence from 30 July 2013 for the amount of $181 380 and from 13 December 2013 for the amount of $1 011 499, with deductions being made for the amounts of $184 000 in 2014, for the plaintiff’s accommodation bond, and $60 000 in February/March 2015, for Ms Lyttleton’s fees.
Should indemnity costs be awarded?
Prima facie, costs are awarded on a standard basis. In accordance with r 63.28 of the Supreme Court (General Civil Procedure) Rules 2015, however, the Court is afforded discretion to award costs other than on the standard basis. The principles relating to departure from the usual order as to costs on the standard basis and making a special costs order are conveniently set out in cases such as Ugly Tribe Co Pty Ltd v Sikola,[55] Colgate-Palmolive Co v Cussons PtyLtd[56] and Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3).[57] Circumstances that may warrant a special costs order include ‘unmeritorious or deliberate improper conduct’.[58] The categories of circumstances are not closed, however, and each case must turn on its own facts.
[55][2001] VSC 189 (14 June 2001).
[56](1993) 46 FCR 225.
[57][2012] VSC 399 (14 September 2012).
[58]Yara Australia Pty Ltd v Oswal (2013) 41 VR 302, 317 [57] (Redlich and Priest JJA and Macaulay AJA).
In the present context, the plaintiff raises a number of ‘special or unusual features’ that are said to warrant a special costs order, traversing the conduct of the first and second defendants both as to the substantive issues and their participation in the proceeding. In my view, it is the later conduct to which a special costs order is primarily directed.[59] Specifically, the following conduct of the first and second defendants justifies an award of indemnity costs:
[59]PCRZ Investments Pty Ltd v National Golf Holdings Ltd [2002] VSCA 24 (14 March 2002) [35]–[36] (Chernov JA); NMFM Property Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77, 92 [56] (Lindgren J).
(a) failing to make discovery;
(b) failing to comply with the orders of 13 October 2016 and 11 November 2016, necessitating further orders being made;
(c) providing an affidavit of documents listing 5000 documents of little or no relevance;
(d) relying on that affidavit as a basis of being unable to recall whether specific documents had been produced;
(e) suggesting that attempts were made to obtain documents, but those attempts were in fact directed towards obtaining documents from the plaintiff; and
(f) providing administration accounts with very little information.
Such conduct not only frustrated the plaintiff’s case but it also hampered the progress of the proceeding.
Conclusions
On the evidence, I am satisfied that:
(a) the first defendant breached the fiduciary duties owed to the plaintiff in her capacity as his attorney. She benefited from this breach, as did the second defendant who knowingly assisted in the breaches. The third defendant, in allowing the four transfers to occur and superannuation funds to come under the control of the Ostrava companies, also knowingly assisted in the first defendant’s breaches; and
(b) the third defendant breached the equitable duties that it owed to the plaintiff as trustee of the superannuation fund and family trust, both in allowing the four transfers and further transfers to the Ostrava companies. The first and second defendants, as the effective controllers of the third defendant at the relevant time, knowingly assisted and benefited from those breaches.
In addition to the matters resolved in the summary judgment, the evidence demonstrates the conduct of the first and second defendants to be reprehensible. They exploited the assets of the first defendant’s aging father, who is of ill-health, on the general assertion that that is what he intended. Such a claim is untenable. It is clear that the defendants had limited regard, if not total disregard, to the plaintiff’s interests. Specifically in relation to the four transfers, the plaintiff’s superannuation funds were subject to numerous undisclosed fees and imprudent investment strategies, from which the first and second defendants benefited.
A disturbing aspect of the actions of the defendants is that they have failed to account for the plaintiff’s assets held in his own name, when the existence of some of those resources was identified in evidence and they were said to be of a similar quantum as those assets held in the plaintiff’s superannuation fund.[60] The defendants did not make disclosures in relation to those assets despite interlocutory orders being made, despite the general obligation concerning discovery, despite access to all documents held by the liquidator by an electronic programme and despite the second defendant’s evidence that all questions concerning the plaintiff’s affairs would be answered by reference to general ledgers maintained by the Ostrava companies. The reality is that the plaintiff will never know the extent of his resources outside the trustee company or what has become of them.
[60]Reference was made, for example, to a Commonwealth Bank account and shares held in the plaintiff’s name.
Moreover, the manner in which the first and second defendants have conducted their defence has not only contributed to delay and cost, but is suggestive of an intent to frustrate the proceeding. In this regard, the affidavit of documents filed by the defendants warrants special mention as it listed over 5000 documents of very little relevance and failed to comply with the Court’s orders.
The award of $948 879 plus compound interest at the rate of five per cent and indemnity costs will, as near as possible, return the plaintiff to the position he would have been in had the defendants not breached their fiduciary duties and exploited the trust that the plaintiff placed in them.
The parties are to forward a minute of proposed orders that reflect these reasons.
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