GJB Building Pty Ltd v AI & PB Property Pty Ltd (Ruling No 3)
[2022] VSC 62
•17 February 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2019 01225
| GJB BUILDING PTY LTD (ACN 607 342 343) (and others according to the Schedule attached) | Plaintiffs |
| v | |
| AI & PB PROPERTY PTY LTD (and others according to the Schedule attached) | Defendants |
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JUDGE: | Nichols J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 4 February 2022 |
DATE OF RULING: | 17 February 2022 |
CASE MAY BE CITED AS: | GJB Building Pty Ltd & Ors v AI & PB Property Pty Ltd & Ors (Ruling No 3) |
MEDIUM NEUTRAL CITATION: | [2022] VSC 62 |
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PRACTICE AND PROCEDURE – Supreme Court General Civil Procedure Rules 2015 (Vic), Order 50 – Whether to adopt a special referee’s report in whole or part – Interests of justice – Wenco Industrial Pty Ltd v WW Industries Pty Ltd (2009) 25 VR 119, [2009] VSCA 191.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | R Garratt QC with A Germano | Corrs Chambers Westgarth |
| For the Plaintiff in S ECI 2017 00190 | C Dawes | Simon Nixon |
| For the First Defendant | No appearance | |
| For the Second Defendant | G Lubofksy | Sinisgalli Foster |
| For the Third Defendant | A Strahan QC with P Tiernan | Dentons |
| For the Fourth to Sixth Defendants | C Juebner with K Hickie | Russell Kennedy |
HER HONOUR:
Introduction and Background
The question for decision is whether certain paragraphs of a report of a special referee should be adopted by the Court.
By Orders dated 16 June 2021, I appointed Mr Owain Stone as a Special Referee in this proceeding pursuant to Order 50.01 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the Rules). Mr Stone delivered his final report on 17 December 2021 (the Report). The parties are agreed that the majority of the Report should be adopted. They are in dispute about only one section of the Report.
Although the dispute is of narrow compass, it is helpful to set out the wider context of the reference. Broadly, the subject matter to which the referral questions were directed concerned the plaintiffs’ claim in respect of 80 separate payments out of the second plaintiff CornoNero’s bank account made to third parties, said to have been made for purposes other than company purposes and without authority (the Impugned Transactions).
The plaintiffs allege that the director defendants (Ascenzo, Breckenridge and Hartwig) caused or authorised the payments to be made, in breach of their directors duties. The plaintiffs seek compensation in the amount of the payments plus interest.[1] Among other things, the defendants deny that they breached their duties and that any breach gave rise to any loss. The third defendant (Breckenridge) alleges by way of defence that if in fact he caused or authorised the payments, they were made for justifiable reasons and on each occasion the payment was recorded in a ledger described as the ‘Trimont Loan Account’, the balance of which fluctuated from time to time, at times in favour of CornoNero and at times in favour of Trimont. On the question of loss, Breckenridge alleges that for 99% of the Impugned Transactions by value, as at the date of each payment CornoNero received a ‘corresponding benefit to reflect the payment, namely an adjustment in the loan account to increase the amount owed by Trimont to CornoNero’. Consequently, he says, ‘if there was any loss it was not caused by the impugned payment’.
[1]Being $2,508,667.97 plus interest.
The Special Referee was asked to identify whether each or any of the Impugned Transactions was recorded in CornoNero’s accounts, whether they were recorded as meeting a debt or liability of CornoNero and whether there was evidence that the Impugned Transactions were made. Next, he was asked whether the materials before him evidence any Trimont Loan Account(s) and if so, whether any of the Impugned Transactions was reflected in those Trimont Loan Account(s).[2] He was then asked:
(f)Having regard to the analysis in 1(a) to 1(e) and on the assumption that any obligations owed by Trimont to CornoNero were unsecured, undocumented and non-interest bearing, did the Impugned Transactions diminish the assets of CornoNero?
(g)If yes to the question in subparagraph (f) above, to what extent and by reason of what matters were the assets of CornoNero diminished?
[2]The ‘Trimont Loan Account’ is defined in the reference as ‘any loan account between CornoNero and any of Trimont Pty Ltd; Trimont Builders Pty Ltd; Trimont Construction Pty Ltd; Trimont Concrete Construction Pty Ltd; the Ascenzo Family Trust; AI Project Developments Pty Ltd; or Silvio Ascenzo’.
The plaintiffs say that the Disputed Paragraphs (at [156]-[181] of the Report) are responsive to questions 1(f) and (g) set out above, deal with matters before the Special Referee, and are relevant to the question of loss. The defendants say that they are outside the scope of the reference and address matters outside of the plaintiffs’ pleaded case which, if adopted, will not serve the interests of justice in relation to the proceeding.
For context, and omitting detail not presently relevant, the Special Referee has in summary found in that part of the Report not in contention, that:
(a)79 of the Impugned Transactions were recorded in CornoNero’s accounts, totalling $2,497,778.
(b)That amount was paid by CornoNero in respect of the 79 Impugned Transactions. Twenty-one transactions meet debts or liabilities (totalling $523,304), and of those, a related building project could be identified for nine transactions.
(c)In the Special Referee’s opinion, each of the 79 Impugned Transactions was made. The payees of four of those transactions were creditors of CornoNero (totalling $4,000).
(d)A MYOB account described as the ‘MYOB Trimont Loan Account’ in CornoNero’s general ledger constitutes a Trimont Loan Account. Of 282 entries in this account, 68 (totalling $2,483,981) could be identified as including Impugned Transactions.[3]
(e)There are two other loan accounts in CornoNero’s general ledger against which Impugned Transactions were recorded, being the East Brunswick Operations and Dutton Café loans.[4] Those Other Loan Accounts do not meet the definition of ‘Trimont Loan Account’, but are relevant to the questions as to whether the Impugned Transactions met debts or liabilities of CornoNero, and whether the Impugned Transactions diminished CornoNero’s assets. Only five Impugned Transactions, totalling $5,046 were recorded against the Other Loan Accounts.
(f)As to questions 1(e) and (f), all 79 Transactions recorded in the accounts are credited against the ‘trading account’, being the bank account, a balance sheet account. An Impugned Transaction with a corresponding debit to a balance sheet account will not result in a diminution in the recorded dollar amount of the net assets because it represents a reallocation between balance sheet accounts. However, debits to a profit and loss account will result in a diminution of assets because it will have the effect of reducing the profit of CornoNero. One of the Impugned Transactions diminished the assets of CornoNero by $163.[5]
(g)The remaining 78 Transactions did not diminish the recorded dollar amount of the assets of CornoNero because the entries in the accounts are reallocations between balance sheet accounts, which does not change the net asset position of CornoNero.[6] The Special Referee goes on to say that even if the dollar amount of the assets remains constant, the reallocation of amounts between balance sheet accounts may, however, diminish the quality of the assets to the extent that it converts cash to other accounts which are less liquid (reducing the amount of cash readily available to CornoNero) and/or are unsecured, diminishing the potential recoverability of the converted asset.[7] The Impugned Transactions debited against the Loan Accounts did not themselves result in a net diminution of assets of CornoNero. They did, however, appear to result in a reduction in the quality of the net assets of CornoNero, as cash was replaced with unsecured loans.[8]
[3]Noting that 99% of the value of the transactions was debited to the MYOB Trimont loan account
[4]The Other Loan Accounts are largely immaterial for present purposes. The amounts of Impugned Transactions recorded against those accounts was small, and as discussed later in these reasons, the parties pleadings only refer to the Trimont Loan Account. It therefore suffices in these reasons to refer to the Trimont Loan Account. The expression ‘Trimont Loan Account’ used here, refers to the MYOB Trimont account described in paragraph (d) above. Where the terms ‘Loan Accounts’ is used, this refers to both the Trimont Loan Account and the Other Loan Accounts.
[5]This transaction was referrable to an expense which reduced CornoNero’s profit.
[6]Report, [148]-[150]. This includes the 68 Impugned Transactions debited against the Trimont Loan Account.
[7]Report, [150]-[151].
[8]Report, [155].
There was no dispute that the part of the Report pertaining to the above-mentioned findings should be adopted. In Breckenridge’s written submissions on this application it was put that the questions asked of the Special Referee were not concerned with the quality of CornoNero’s assets, which issue is addressed at paragraphs 151-155. However, Breckenridge did not in fact object to the adoption of those parts of the Report, and the point was not pressed in oral submissions. I consider that those paragraphs are within the scope of the reference. In addition, paragraphs 182-201 answer Referral Question 1(h) (regarding Ascenzo’s building licence fee or salary) were not in dispute. Leaving aside the Disputed Paragraphs, I agree that the Report is responsive to the questions and is clearly and soundly reasoned, and should be adopted. The disputed parts of the Report are described and considered, below.
Governing Principles
Rule 50.01 of the Rules provides that a court may refer any question to a referee for the referee to decide the question or give the referee’s opinion with respect to it. Rule 50.04 provides:
The Court may as the interests of justice require adopt the report of a special referee or decline to adopt the report in whole or in part, and make such order or give such judgment as it thinks fit.
The principles governing the adoption of a special referee’s report are well established. In Wenco Industrial Pty Ltd v WW Industries Pty Ltd the Court of Appeal set out a comprehensive guide to the principles the Court is to apply in considering whether to adopt an opinion or report of a referee (in whole or part), in the following terms:[9]
[9](2009) 25 VR 119, 126-7 [17] (Redlich and Bongiorno JJA, Beach AJA). More recently adopted in Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd (2018) 56 VR 557 (Riordan J).
(a)First, in exercising the power conferred by r 50.04 to adopt the report of a Referee, the Court has a wide power which is to be exercised ‘as the interests of justice require’. This broad mandate should not be the subject of restrictions laid down in advance of judges exercising it. Subject to what follows, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.
(b)Secondly, the purpose of rules 50.01 and 50.04 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation. Further, that purpose would be frustrated if the reference were to be treated as ‘some kind of warm-up for the real contest’.
(c)Thirdly, insofar as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.
(d)Fourthly, where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for inquiry and report.
(e)Fifthly, if the referee’s report reveals some error of principle, absence or excess of jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than ‘unsafe and unsatisfactory’.
(f)Sixthly, generally, the referee’s findings of fact should not be re- agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.
(g)Seventhly, the purpose of r 50.01 and r 50.04 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.
(h)Eighthly, the Court is entitled to consider the futility and cost of re- litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.
(i)Ninthly, even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not ordinarily be (in the absence of any of the matters.
Submissions
The parties made the following submissions, in substance.
Breckenridge (whose submissions the other defendants adopted) said that by the disputed parts of the Report the Special Referee purported to answer questions that did not form part of the reference, and so the paragraphs where in excess of jurisdiction. The Special Referee was asked whether the Impugned Transactions diminished the assets of CornoNero, and not about the effect of any subsequent transactions, in particular transactions[10] transferring loan balances to the work in progress (WIP) account. Having drawn the conclusions at paragraphs 150-151 and 155 (the Impugned Transactions did not diminish the recorded dollar amount of the assets of CornoNero by reallocation between balance sheet accounts, but such a reallocation may diminish the quality of the assets by converting to cash to other less liquid accounts), there was no need for the Special Referee to go further. The Disputed Paragraphs raised new issues not part of the pleaded case. Nothing in the plaintiffs’ claim, or the defences, raises any issue connected with the WIP account. Paragraph 14(c) of the Reply is impermissible because it does not answer the relevant part of Breckenridge’s defence. It is nowhere alleged that Breckenridge (or any other defendant) was responsible for or played any part in any ‘unjustified’ WIP transaction (the making of any accounting entries); and no allegation of loss arising from such entries is alleged.[11] Finally, as is apparent from the Report, the Special Referee had insufficient information and was not properly briefed to deal with the issues related to the WIP account. The Court could not be assisted by the Special Referee’s exploration of questions not put to him, examined without sufficient factual materials, and which went to issues not raised in the proceeding
[10]The plaintiffs objected, during oral argument, to the use of the expression ‘transactions’ in the context of discussion of accounting entries. It is clear that the use of that term in the context of the loan accounts, the defendants intended to refer to relevant accounting entries.
[11]The issues raised on the pleaded cases are considered further below.
The plaintiffs submitted that:
(a)The Special Referee was entitled to consider any payments or entries in the accounts connected with the Impugned Transactions. The reference does not limit the scope of the factual investigations that the Special Referee was entitled to make, on the materials before him.
(b)The Special Referee has properly considered other entries in the Loan Accounts in order to answer what impact the Impugned Transactions had on the assets of CornoNero.
(c)The Disputed Paragraphs, in the context of the whole Report, will assist the Court in determining the loss suffered by CornoNero. The ultimate point that the plaintiffs wished to put on this question, relating to the Disputed Paragraphs, was that there was nothing to indicate that the Trimont Loan (or any indebtedness intended to be reflected in the Trimont Loan Account) had been repaid. The reductions in the Trimont Loan Account balance by the making of accounting entries ‘reallocating’ amounts to the WIP account, did not evidence such repayment.
(d)The pleading raises a factual question as to the dealings that had taken place with respect to the WIP account. Any question in respect of the pleading reserved by Breckenridge or Hartwig can be preserved by permitting the point to be raised in final address.
(e)In any case, entries in the WIP account were specifically raised by Breckenridge on the question of loss, in his submission before the Special Referee. Breckenridge made those submissions with the benefit of expert reports which dealt with transfers between the loan accounts and the WIP account. The matter has been canvassed on the available material, with the parties having access to all relevant books and records of CornoNero and no prejudice to the defendants that would flow from admitting the Disputed Paragraphs has been demonstrated.
Hartwig made an additional submission which is addressed below.
The pleaded cases
It is convenient to briefly consider the relevant parts of the parties’ pleaded cases. Plainly enough, the question before me is not whether parts of any pleading are objectionable, but whether relevant parts of the Report should be adopted. However, references to parties’ cases serves to illuminate and give context to the matters raised on this application.
The plaintiffs’ case is put somewhat differently against each of the director defendants (reflecting among other things, their different roles in and in relation to CornoNero), but those differences are presently immaterial. Each of the defendants denies liability. Their defences differ in certain respects. Breckenridge makes a positive plea in relation to loss and a more fulsome positive case on liability in relation to the Impugned Transactions. The defence gives context to the reference to the Trimont Loan Account, but it is unnecessary to describe it here. Ascenzo and Hartwig plead bare denials in respect of this aspect of loss, but adopted Breckenridge’s submissions on this application.
Breckenridge relevantly says in relation to the plaintiffs’ loss claim, at paragraph 51 of his defence, that:
(a)in respect of 99% of the Impugned Payments (by value) as at the date the payment was made CornoNero received a corresponding benefit to reflect the payment, namely an adjustment to the Trimont Loan Account to increase the amount owed by Trimont to CornoNero where at the relevant time, the Trimont Loan Account was at zero or showed Trimont owing an amount to CornoNero, or a decrease in the amount owed by CornoNero where, at the relevant time, the Trimont Loan Account showed CornoNero owing an amount to Trimont; and
(b)consequently, if any loss was suffered by CornoNero (which is denied) that loss was not caused by the Impugned Payments.
The plaintiffs say in Reply to Breckenridge, at paragraph 14, that:
(a)CornoNero received no corresponding benefit in a payment away of its money to an entity (being Trimont) which was not entitled thereto and which had a net asset deficiency and was in fact insolvent.
(b)The payments referred to in Appendix 2.2 of the Deloitte Report were payments made without the provision of security or documentation of any obligation to repay or to pay interest.
(c)Where at month end entries in the Trimont Loan Account reduced the balance owing by Trimont to $0 those entries did not reflect payment of the pre-existing indebtedness, but balancing reductions in CornoNero’s WIP account made without justification.
The debate before me concentrated on the reference in sub-paragraph 14(c) of the plaintiffs’ Reply, which was the first occasion on which reference was made in any pleading, to CornoNero’s WIP account or ‘balancing reductions’ made in that account. That plea was made by the plaintiffs amending their Reply on 8 September 2021.
The defendants’ concerns with the disputed parts of the Report were among other things, addressed to the prospect that in reliance on the Disputed Paragraphs the plaintiffs would in final submissions, seek to expand their existing case. That issue was clarified during oral submissions on this application.
Breckenridge pointed out in this context that he had, by his opening submissions, maintained that that part of the pleading was objectionable, ‘raising a new case that is unparticularised and would require significant new evidence’. The plaintiffs had said in opening, that:
It is apparently unchallenged that the Trimont Loan account balance was reduced to zero at month end without payment to CornoNero at the same time as CornoNero’s WIP account balance – reflecting what should be accruing payments to CornoNero – was reduced by an equivalent amount to keep the books balanced. No accounting justification for his course was advanced, and none could be.[12]
[12]Plaintiffs’ outline of opening submissions, [49].
It is apparent then, that Breckenridge puts in issue that for the Impugned Transactions (99% of them by value) CornoNero received a ‘corresponding benefit’ because there were entries in the Trimont Loan Account which were to CornoNero’s credit. The ‘corresponding benefit’ is not further defined, but it is apparent that Breckenridge seeks to answer the claim that moneys were paid out of CornoNero’s bank account, by pointing to entries made in a loan account in CornoNero’s favour. Breckenridge’s defence refers to the Trimont Loan Account, and not to a loan or loan agreement between Trimont and CornoNero.[13] The plaintiffs’ Reply sets out their answer as to why the Trimont Loan Account entries did not amount to a corresponding benefit including because the payment of moneys to Trimont were made without the provision of security, documentation, or any obligation to repay. That a loan or loan agreement is not directly alleged by Breckenridge is reflected in the indirect language of the plaintiffs’ Reply.
[13]It was not sought to be established before the Special Referee (or in evidence in the proceeding more generally, for that matter) that any loan account between Trimont and CornoNero was the subject of a written loan agreement or subject to any particular terms (however agreed) in relation to repayment and the like. Breckenridge’s pleading refers to a loan account, rather than to a loan agreement, and refers to other dealings between the parties in relation to obligations of CornoNero said to have been assumed by Trimont. It is unnecessary to consider those matters for present purposes.
Paragraph 14(c) of the Reply is elliptical. It assumes, rather than alleges as a fact, entries made in the Trimont Loan Account to reduce its balance to zero at month end. It does not identify any such entries. The case, put by this pleading, is that where such entries were made in the Trimont Loan Account they did not reflect repayment of any pre-existing indebtedness. On its face, the plea is anticipatory or defensive. That it was intended to be read that way was accepted in the course of argument on this application, by the plaintiffs. As the plaintiffs accepted in the course of submissions, it was intended to say that insofar as the defendants were asserting repayment of the Trimont Loan Account or set-off as evidenced by reductions of the Trimont Loan Account balance to zero, there was no evidence in fact, of any actual repayment of moneys to CornoNero.
The plea is that month end entries that reduced the balance of the Trimont Loan Account were ‘balancing reductions in CornoNero’s WIP account made without justification’.
On this application Breckenridge (and through him the other defendants) articulated their concerns that in view of that plea, and the disputed parts of the Special Referee’s Report, the plaintiffs were evidently seeking to advance a case that the defendants were responsible for such accounting entries and somehow liable for losses flowing from the making of entries in the Trimont Loan Account that reduced that loan account’s balance. No such case had been made by any pleading by any party, or for that matter, run at trial. Whether or not accounting entries transferring amounts between the Trimont Loan Account and the WIP account were made in breach of any duty or themselves gave rise to any loss, was not in issue and could not be put in issue at this point, by the reference to the WIP account in the plaintiffs’ Reply, but more relevantly for present purposes, by the adoption of those parts of the Report.
The plaintiffs accepted in submissions, and made clear in answer to questions I put to the plaintiffs’ Senior Counsel, that they were not and are not seeking to advance any case that the defendants had breached any duty by causing or authorising any accounting transfers between the Trimont Loan Accounts and the WIP account, or that they were liable in any other respect for losses arising from the transfers to the WIP account themselves. So much was appropriate. It would not have been open to press such a case by reference to passing mention of ‘balancing reductions in CornoNero’s WIP account’.
The reference in paragraph 14 of the plaintiffs’ Reply invites the inquisitive reader to ask why one would make accounting adjustments by reducing the balance of the Loan Account and increasing the balance of the WIP account, which raises a question about the relationship if any, between the Loan Account and the WIP account. This issue as it concerns the proceeding more substantively, is taken up below.
The final part of sub-paragraph 14(c) of the Reply, in which it is said that the WIP account adjustments were ‘made without justification’, employs imprecise language. The balancing entries themselves are not described in the pleading, and the matters by reference to which, or the criteria against which they might be characterised as having been made as ‘without justification’ are not alleged. The plaintiffs clarified their case in the course of oral argument, and said that they did not by that expression intend to allege improper conduct or accounting errors in relation to the adjustments between the accounts. They meant only to say that any transfers from the Trimont Loan Account to the WIP account that reduced the loan account balance did not themselves evidence repayments of any prior indebtedness of Trimont to CornoNero, or set-off. In in that way, it was submitted that the plea was responsive to the allegation that the Trimont Loan Account entries constituted a ‘corresponding benefit’, although without much elaboration of the conceptual linkage between each proposition. The clarification made in submissions properly acknowledged that it would not have been open to press a case of wrongful or somehow ‘unjustified’ conduct by the defendants, or accounting errors in respect of transfers from the Trimont Loan Account to the WIP account.
It is apparent then, that what is relevantly in issue in the case is whether by reason of the entries made in the Trimont Loan Account to CornoNero’s credit, CornoNero received a benefit capable of extinguishing or otherwise providing a legal answer to the loss suffered by reason of the Impugned Transactions. When the imprecise language of the plaintiffs’ Reply is read as it was submitted it should be read, the plaintiffs say that no such benefit was received because the payment of moneys out of CornoNero’s account were made without the provision of security, documentation, or any obligation to repay. Leaving to one side whether there is a technical or other defect in the pleading, the additional point sought to be advanced by the Reply is a defensive one; that if it be asserted that the Trimont Loan was repaid, entries in the WIP Account do not evidence such repayment. What is not in issue, is whether the entries in the WIP account were in any other sense correct or ‘justified’. What is not in issue is whether by reason of the transfers between the Trimont Loan Account and the WIP account, any defendant breached any legal obligation, as a result of which the plaintiffs suffered loss.
Hartwig correctly submitted that the accounting entries transferring amounts between the WIP account and the Trimont Loan are nowhere raised in any pleading concerning Hartwig. Whilst that is so, Hartwig, like the other defendants, puts in issue the loss said to flow from the Impugned Transactions and accordingly on one view, the matters presently in dispute affect Hartwig in the same way as they affect the other defendants. The question as to how the findings in those parts of the Report adopted by the Court ought bear on the legal questions of liability and loss in respect of each defendant, remain to be considered. Hartwig may revisit his submission in that context, in final address. Acknowledging that the differences between the scope of the cases and defences in respect of each defendant will require consideration in determining the issues in the proceeding, it suffices for present purposes to concentrate on the issues as expressed in Breckenridge’s defence and the plaintiffs’ Reply to it.
Analysis
Before drawing together the considerations relevant to the exercise of the power conferred by rule 50.04 it is convenient to consider the scope of the reference, the submissions before the Special Referee and the substance of the Disputed Paragraphs.
The Reference
As set out above, the Special Referee was asked to determine whether the Impugned Transactions were in fact made and whether they were recorded as meeting a debt or liability of CornoNero. He found that most of them had been made and did not meet a debt or liability of CornoNero. As to the Trimont Loan Account he was asked whether, if there were such accounts (there were), any of the Impugned Transactions were reflected in them (they were). Relevantly, he was then asked whether the Impugned Transactions diminished the assets of CornoNero. He was asked to do so on the assumption that any obligations owed by Trimont to CornoNero were unsecured, undocumented and non-interest bearing, and if so, to what extent and by reason of what matters the assets were diminished.
The Special Referee was not asked whether any transfers between the Loan Accounts and the WIP account were correct according to accounting standards, appropriate or justified or supported by evidence, or whether any other transactions or accounting entries by themselves diminished the assets of assets of CornoNero.
Submissions before the Special Referee
The plaintiffs submitted before me that the disputed parts of the Report reflected matters that the parties (Breckenridge in particular) had put in issue before the Special Referee. Breckenridge said that he had not put those matters in issue, and had only submitted to the Special Referee that matters raised by the plaintiffs did not in fact properly arise and should not be considered. The consideration that follows is directed to that issue, and not to revisiting matters before the Special Referee.
Relevantly and in substance, the plaintiffs made the following submissions to the Special Referee on the question as to whether the Impugned Transactions diminished the assets of CornoNero (and if so how and by reason of what matters):
(a)The recording of the Impugned Transactions in the Trimont Loan Account had the effect of increasing the receivable, or where the balance was a liability, reducing the amount owed in the books of CornoNero. During the relevant period a total of $2.032m was reallocated from the Trimont Loan Account to the WIP account (and a total of $557,773 was transferred from the Trade Creditors Account[14] to the Trimont Loan Account).
(b)There is no information available to explain the rationale as to why work in progress, which would ordinarily be assumed to reflect contract assets for CornoNero projects, was used to reallocate the balance of the Trimont Loan Account. The net impact of the journals recorded at the end of September, October and November 2015 was to reduce the Trimont Loan Account balance to zero. There is no information available to explain the purpose of the journals recorded on or immediately prior to the end of each month and resulting in a zero balance. There is no association in the WIP ledger account or in the reallocated Trimont Loan entries in the WIP account against any specific building contract.
(c)Based on the absence of information on the relevance of the amounts transferred to WIP, there is no apparent rational explanation for the journal entries and therefore no basis to conclude that the WIP asset was recoverable.
(d)Having regard to the above, the assets of CornoNero were diminished by the total amount of the 67 Impugned Transactions recorded against the Trimont Loan Account.
[14]A debit account, to which relevant payments or amounts were debited (as recorded in CornoNero’s general ledger).
Breckenridge submitted,[15] relevantly and in substance:
(a)A Trimont Loan Account existed in the records of CornoNero and the Impugned Transactions were accounted for in the Trimont Loan Account. The Impugned Transactions gave rise to assets of CornoNero in the form of loans owed by Trimont to CornoNero.
(b)There is no evidence before the Special Referee from which it can be concluded that CornoNero ‘did get value for those assets or that they became unrecoverable’. Accordingly, there is no basis for a conclusion that CornoNero suffered loss.
(c)During the relevant period the balance of the Trimont Loan Account (representing an amount owed by Trimont to CornoNero) was transferred to a WIP account at the end of each month. The plaintiff’s expert criticises the use of the WIP account but does not show that any loss occurred as a result.
(d)In order to conclude that the Impugned Transactions resulted in a diminution of the assets of CornoNero, it would be necessary to show a write down (reduction) in the WIP account subsequent to the transfer from the loan account to the WIP account. It would then be necessary to trace that reduction in the WIP account. It would then be necessary to trace that reduction in the WIP account balance back to the non-recoverability of a loan asset created at the time of an Impugned Transaction; thereby excluding the possibility that the reduction in WIP was referrable to some other cause. Other possible causes could be work done by CornoNero allocated to WIP but later deemed unrecoverable or work performed by Trimont for the benefit of CornoNero that was offset against Trimont’s debe recorded in the WIP account. The materials before the Special Referee (and the experts) do not allow that analysis to be performed.
[15]Breckenridge’s submissions were adopted by the other defendants.
The Disputed Paragraphs
In substance, in the Disputed Paragraphs the following matters and findings are set out:
(a)73 Impugned Transactions totalling $2,489,026 are debited against one of three Loan Accounts.[16]
[16]Of which, $2,483,981 is debited against the Trimont Loan Account. The balances in the other two accounts are transferred to WIP and reduced to zero in September 2015 with no further entries recorded in either account.
(b)Of the 73 Impugned Transactions recorded in the loan accounts, 34 totalling $1,032,206 have insufficient supporting documentation, including any documentation that identifies any project to which those entries might relate.[17]
[17]Report, [164].
(c)Each Loan Account subsequently contains entries which transfer balances to the WIP account.[18]
[18]Report, [157]-[158].
(d)There are other amounts in the Trimont Loan Account (totalling a $1,613,955 net credit) which do not represent an Impugned Transaction or allocation to or from the WIP account.[19] The net effect of those transfers between the Loan Accounts and the WIP account is to contribute to reducing the balance of the loan accounts to nil at the end of each month between September 2015 and June 2016.[20]
[19]Report, [159].
[20]Report, [159].
(e)Transfers to and from the WIP account appear to be lump sum adjustments. There is no information in the entries which details a specific project or other identifying feature and there is insufficient detail in the accounts to determine the extent that the transfers included amounts referrable to the Impugned Transactions. The Special Referee has not been provided with work papers to support those journal entries to and from the WIP account, that he would have expected to have detailed the WIP accounts by project, which would allow him to assess the specific transactions which make up the amounts transferred.[21]
[21]Report, [160].
(f)By reference to the available documentation, the Special Referee considers (at paragraphs 163-177) whether the Impugned Transactions recorded in the Loan Accounts were for goods and services in respect of a CornoNero project, and relate to the period after 1 August 2015 (the date of settlement for the business sale agreement).[22] He concludes (at paragraphs 178-179) that in respect of the Impugned Transactions recorded in the Trimont Loan Account, $30,953 of the Impugned Transactions amounts s relate to a CornoNero projects in the period after 1 August 2015, and $1,425,867 of the Impugned Transactions amounts were incurred before 1 August 2015, or were incurred after that date but did not relate to a CornoNero Project.[23]
[22]Report, [163]-[177].
[23]Report, [178]-[179]. Note that the Special Referee also found that $5,046 of the Impugned Transactions amounts recorded in the Other Loan Accounts were not in respect of CornoNero projects.
(g)The analysis at paragraphs 163-177 is framed in this way:
Subsequent transactions related to [the identified loan accounts] may have diminished the assets of CornoNero the extent they transferred loan balances to the account ‘Work in Progress’ (WIP) in circumstances where this was not appropriate to allocate to WIP.[24]
Whether or not transfers from the Loan Accounts to the WIP account were ‘appropriate’ is sought to be tested by reference to whether particular transfers between accounts can be tied to any Impugned Transaction for the which the amounts recorded appeared to relate to a CornoNero Project in respect of the post 1 August 2015 period.[25] (The ‘appropriateness’ designation is discussed below).
(h)However, while the Special Referee has ascertained whether or not entries related to the Impugned Transactions met those criteria,[26] he can say no more about the transfers between the Loan Accounts and the WIP account because the transfers were by lump sum adjustments and there was insufficient materials to determine which of the transfers included amounts referable to the Impugned Transactions.[27]
[24]Report, [156].
[25]Report, [161]-[162].
[26]Report, [178]-[179].
[27]Report, [160], [165], [180]-[181].
Should the Disputed Paragraphs be adopted?
Having regard to the matters set out above, I consider that it is appropriate and in the interests of justice to exercise the power in Rule 50.04 to include the Disputed Paragraphs within the adoption of the Report, such that the entire Report is adopted.
I accept (and it was not in dispute) that the reference is directed to the Impugned Transactions and whether or not they diminished the assets of CornoNero. It was not directed to whether separate transactions or accounting entries themselves caused the diminution of CornoNero’s assets, entailed accounting errors or reflected any breach of legal obligation by any party.
The defendants’ submission that the disputed part of the Report was directed to determining whether subsequent transactions (as opposed to the Impugned Transactions) had caused a diminution of CornoNero’s assets, held some attraction but it ultimately rested on a superficial reading of the Report.
The defendants’ submissions fastened upon the first paragraph of the section in dispute, in which the Special Referee says that subsequent transactions related to these Loan Accounts may have diminished the assets of CornoNero to the extent that they transferred loan balances to the WIP account, in circumstances where this was not appropriate to allocate to WIP. [28] They also concentrated upon the statements by the Special Referee that there was insufficient information about the Impugned Transactions and their relationship with the accounts and transfers between accounts,[29] in support of the submission that the Special Referee was embarking on a task with which he was not charged. They pointed to the conclusion that entries in the WIP account could not be related specifically to the Impugned Transactions,[30] as indicating that the disputed part of the Report went nowhere, and adopting it could not assist the Court. Otherwise, the submissions of both parties were directed to the Disputed Paragraphs essentially in globo, and were put in general terms.
[28]Report, [156].
[29]Report, [160], [164], [180], [181].
[30]Report, [160], [180], [181].
The language in parts of the Disputed Paragraphs is less clear than it could be, and the organisation of the paragraphs does not assist ready comprehension of the Special Referee’s analysis. However, on a closer reading of the Disputed Paragraphs, understood in the context of the matters raised before the Special Referee, it is apparent that the Special Referee has considered the subsequent transactions (the transfers between the Loan Accounts and the WIP account) for the purpose of determining whether the Impugned Transactions have resulted in a diminution of the assets of the CornoNero. Ultimately the Special Referee concludes that the materials before him do not permit the drawing of any conclusion from transfers to the WIP accounts, because both the Loan Accounts and the WIP account included unrelated entries, and the transfers were lump sum adjustments. However, the fact that he has reached that view does not itself support the conclusion that the exercise undertaken to get to that point was outside the reference or in excess of jurisdiction.
Turning to the context within which the Special Referee considered questions 1(f) and (g), it should be recalled that Breckenridge’s submissions before the Special Referee commenced with the proposition that the Impugned Transactions gave rise to assets of CornoNero in the form of loans owed to it by Trimont, and that there was no evidence before the Special Referee from which it could be concluded that CornoNero ‘did not get value for those loans’ and accordingly no basis on which to conclude that CornoNero has suffered loss.[31]
[31]It is noted that the submissions were addressed at least in part, to loss, whereas the questions were framed in terms of the diminution of assets. It is unnecessary to pursue the difference if any between those two designations, for present purposes.
In that context both parties submitted to the Special Referee that it was accepted that the Loan Account balances had in fact been reduced to zero (monthly over the relevant period in the case of the Trimont Loan Account), by transfers to the WIP account. Breckenridge went on to say that the plaintiffs’ expert had criticised the use of the WIP account but had not shown that a loss had resulted. Breckenridge then posited that in order to conclude that the Impugned Transactions resulted in a diminution of the assets of CornoNero, it would be necessary to show a reduction in the WIP account subsequent to the transfer from the loan account and to trace that reduction in the WIP account, and then back to the non-recoverability of a loan asset created at the time of an Impugned Transaction.
Before me, Breckenridge sought to characterise those submissions as putting only that matters raised by the plaintiffs could not be properly pursued, although the submission was sparsely elaborated. I acknowledge that Breckenridge’s submissions before the Special Referee may have been at least in part responsive to the plaintiffs’ materials and intended to criticise the plaintiffs’ position. However, Breckenridge nevertheless squarely put before the Referee that there was no evidence before the Special Referee from which it could be concluded that CornoNero ‘did not get value’ for those loans, and in circumstances where the loan account balances had been transferred to the WIP account, it could not be concluded that the Impugned Transactions had resulted in a diminution of CornoNero’s assets unless certain tracing exercises were done. Breckenridge submitted that the materials before the Special Referee did not permit that exercise to be done.
Those submissions having been made and directed to the question whether the Special Referee could conclude that the Impugned Transactions diminished CornoNero’s assets, it was not outside the Special Referee’s remit to test those propositions for himself. It was not outside his remit to consider what the materials before him established concerning a relationship between the Impugned Transactions, the Loan Accounts and the transfers to the WIP account, for the purposes of answering whether the Impugned Transactions diminished the assets of CornoNero.
The Report reveals that the Special Referee made those inquiries, in response to the reference, which did not confine the scope of his factual inquiries and which widely defined the materials to which the Special Referee may have regard.
Turning more particularly to the Report by reference to the summary set out at paragraph 37 above:
(a)the parts of the Report referenced in sub-paragraphs 38(a), (c) and (d) traverse matters put in issue by the parties, as discussed above;
(b)the parts of the report referenced in sub-paragraph 38(b) discuss the limits of the information before the Special Referee related to the Impugned Transactions;
(c)the parts of the Report referenced in sub-paragraphs 38(e) and (h) identify the limits of the inquiry which flow from the nature of the material.
The parts of the Report referenced in sub-paragraphs 38(f) and (g) consider whether it appears that the Impugned Transactions themselves were in respect of goods and services concerning CornoNero projects, in the relevant period. The context for the examination of that issue is a consideration by the Special Referee of the transfer of loan balances to the WIP account.
Conceptually, in circumstances where it is said that the Impugned Transactions did not diminish CornoNero’s assets because when payments were made out of CornoNero’s bank account a ‘corresponding’ loan asset was created, it may be accepted that subsequent entries in the loan accounts which are themselves connected or related to the Impugned Transactions, may be capable of informing the question whether, to what extent and by what matters, the Impugned Transactions reduced the assets of CornoNero.
It is apparent that in those parts of the Report the Special Referee is ascertaining what, if anything, might be established from the materials before him, in relation to the entries in the WIP account that then might be connected back to reductions in the loan balances, and what the materials before him reveal about the relationship if any, between the Impugned Transactions and the transfers of the loan balances to the WIP account. Although he does not say so explicitly, when read contextually, it is apparent that the Special Referee considers the transfers to the WIP account for that purpose.
While the label ‘appropriate’ (as in ‘appropriate transfers to WIP’) is distracting, what the Special Referee is evidently intending to convey by it is that where an amount (an accounting entry) reflects work done or expenditure incurred on behalf of CornoNero its ‘allocation’ to CornoNero’s WIP account may be considered appropriate in the sense work done or money expended in that way may properly be recorded as increasing the balance of the WIP asset. That is of course only one part of the relevant inquiry. Were amounts referable to the Impugned Transactions in fact individually identifiable in the transfers to the WIP account, a connection between an entry in the WIP account (representing an increase in the WIP asset because of work done or moneys expended for CornoNero) and a reduction in the Loan Account balance might then be identified. The inquiry about whether there was such a relationship would be possible. However, as the Report makes plain, the lump sum transfers from the Loan Accounts (which contain other amounts not referrable to the Impugned Transaction) and the lack of detail in the accounts, meant that no relevant conclusion could be drawn about the transfers to the WIP account.
In circumstances where the defendants’ submissions before the Special Referee went to what could not be established on the evidence before him, they have not shown it to be outside the reference or inimical to the interests of justice to permit the adoption of those parts of the Report setting out the analysis that the Special Referee has undertaken and describing the limits of what may be shown on the materials before him.
I accept that the language of this part of the Report is in parts, infelicitous. However, I do not consider the Disputed Paragraphs to reveal perverse reasoning, or an inquiry outside of jurisdiction.
Having regard to the scope of the plaintiffs’ case and the matters discussed earlier, the adoption of the disputed parts of the Report will not result in the Court entertaining claims in respect of the liability of the defendants for un-pleaded transactions or accounting entries, or for any losses that are not caused by the Impugned Transactions but by other transactions.
The defendants did not submit before me that the Special Referee had had regard to any materials that he ought not have considered, or to which the defendants had not themselves had access. They did not submit that the Special Referee had, in the Disputed Paragraphs, made any factual finding that was unsupportable on the evidence or contrary to the evidence. Having regard to the submissions made on this application, the adoption of the Disputed Paragraphs will not result in the Court acting on erroneous factual findings.
The defendants have not established that adopting those parts of the Report will cause prejudice to them.
Waiver
It is unnecessary in the circumstances to deal with the plaintiffs’ wavier point, by which they said that the defendants had waived their right to object to the Disputed Paragraphs by not making their objection earlier. I will say only that it was a misconceived application of the doctrine of waiver. The point at which the issue ‘came to notice’ (to employ the language used in Commonwealth v Verwayen),[32] and the defendants were faced with a choice, was not upon provision of a draft report to the parties, but upon provision of the final report and the making of submissions before the Court in relation to the exercise of the power conferred by rule 50.04.
[32](1990) 170 CLR 394 at 482 (Gaudron J).
Disposition:
It follows that the whole of the Report will be adopted.
SCHEDULE OF PARTIES
GJB BUILDING PTY LTD (ACN 607 342 343) as trustee for the GJB BUILDING TRUST
First Plaintiff
and
CORNONERO PTY LTD (ACN 606 176 069)
Second Plaintiff / Defendant by Counterclaim
and
AI & PB PROPERTY PTY LTD (ACN 167 992 323)
First Defendant
and
SILVIO ASCENZO
Second Defendant
and
PETER BRECKENRIDGE
Third Defendant
and
BERKELEY CAPITAL PARTNERS PTY LTD (ACN 078 247 319)
Fourth Defendant
and
BERKELEY CAPITAL DEVELOPMENTS PTY LTD (ACN 116 121 665)
Fifth Defendant / Plaintiff by Counterclaim
and
BRETT HARTWIG
Sixth Defendant
0
3
0