Herfords Double Bay Pty Ltd v Herford (Jnr)
[2013] NSWSC 1610
•06 November 2013
Supreme Court
New South Wales
Medium Neutral Citation: Herfords Double Bay Pty Ltd v Herford (Jnr) [2013] NSWSC 1610 Hearing dates: 1 November 2013 Decision date: 06 November 2013 Jurisdiction: Equity Division Before: Robb J Decision: (1) Direct the parties to bring in short minutes.
(2) The parties will be heard as to costs.
Catchwords: TRIAL PROCEDURE - whether determination of any account should be heard concurrently with the claim and cross-claim - circumstances in which beneficiaries are entitled to pursue an account and inquiry against executors and trustees - whether an account was likely to be ordered in the proceedings - process of taking accounts. Legislation Cited: Civil Liability Act 2002
Corporations Act 2001 (Cth)
Trustee Act 1925
Uniform Civil Procedure Rules 2005Cases Cited: Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (No. 2) [2001] NSWSC 6
Juul v Northey [2010] NSWCA 211
Meehan and Ors v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146
White & Libut v Thompson & Ors [2011] NSWCA 161Texts Cited: Ritchie's Uniform Civil Procedure NSW Category: Interlocutory applications Parties: Herfords Double Bay Pty Limited (First Plaintiff)
Margret Meagher (Second Plaintiff)
James Meagher (Third Plaintiff)
Maxwell Francis Herford (Jnr) (First Defendant)
David Mark Henderson (Second Defendant)
Mark Reed Henderson (Third Defendant)
Carolyn Susan Chudleigh (Fourth Defendant)
Caroline Elizabeth McConnachie (Fifth Defendant)Representation: Counsel:
J Ireland QC (Plaintiffs)
J Thomson (First Defendant)
J Tobin (Second and Third Defendants)
N Kabilafkas (Fourth Defendant)
K Stanton (Fifth Defendant)
Solicitors:
McGirr Lawyers (Plaintiffs)
Michael C Smith (First Defendant)
Gadens Lawyers (Second and Third Defendants)
King Wood & Mallesons (Fourth Defendant)
Barraket Stanton Lawyers (Fifth Defendant)
File Number(s): 2011/156606; 2011/123495
Judgment
The fourth defendant, Ms Chudleigh, moves on an amended notice of motion filed on 1 November 2013. The plaintiffs oppose the relief sought by Ms Chudleigh. The other defendants are either neutral or support Ms Chudleigh's application.
Ms Chudleigh seeks an order that the determination of any account or enquiry to which the plaintiffs, or any one of them, is entitled be heard concurrently with the plaintiffs' claim against the defendants and the defendants' cross claims.
The current statement of claim is a further amended statement of claim filed on 22 April 2013. In essence the plaintiffs plead:
(1) The first plaintiff is a company.
(2) Up to 2 February 2011 the first to third defendants were the directors of the company.
(3) The shares in the company are an asset of the estate of the late Mr Maxwell Herford (the "deceased").
(4) From 24 March 2003 to 9 March 2011 the first and third to fifth defendants were the executors and trustees of the deceased's will.
(5) Since 9 March 2011 the second and third plaintiffs have been the executors and trustees of the will.
(6) Between 1 July 2004 and 31 January 2011 the first defendant caused the payments in Schedule A to be made from the company's funds (defined as "the Payments").
(7) Schedule A lists approximately 239 separate payments of specified amounts totalling $2,915,720.85.
(8) Nothing in the further amended statement of claim suggests that there may have been additional payments made that are presently unknown by the second and third plaintiffs, or that the former executors and trustees may have engaged in any other conduct which could constitute a breach of their duty to the estate.
(9) The first claim pleaded is a claim in debt by the first plaintiff against the first defendant.
(10) The second claim is a claim by the first plaintiff against the second and third defendants for breach of directors' duties and related claims.
(11) The third claim is by the first plaintiff against the second and third defendants for breaches of sections 180(1), 181(1) and 182(1) of the Corporations Act 2001 (Cth).
(12) Fourthly, and relevantly to Ms Chudleigh's notice of motion, the plaintiffs make a claim for breach by the third, fourth and fifth defendants of their duties as executors and trustees of the estate. The relevant paragraphs of the further amended statement of claim plead:
"20. The third, fourth and fifth defendants each as trustees of the Estate of the Deceased owed the second and third plaintiffs, as beneficiaries, the following duties:
(a) a duty to secure and maintain the assets of the Estate of the Deceased; and
(b) a duty to give proper and adequate consideration to matters for decision relating to the Estate.
21. The third, fourth and fifth defendants, in breach of their duties to the second plaintiff (sic) as pleaded in paragraph 20 above:
(a) failed to make any or any proper or adequate inquiries into HDB's financial position;
(b) failed to examine HDB's accounts and financial books;
(c) failed to consult as to HDB's financial position;
(d) failed to consult with the second plaintiff, the third plaintiff or other beneficiaries of the Estate concerning the affairs of the Estate;
(e) failed to take any steps to ensure that the first defendant did not engage in self dealing transactions which would benefit himself and/or Haddonstone at the expense of, or risk to the assets of the Estate;
(f) failed to take control of the bank accounts and assets of HDB.
22. By reason of the matters pleaded in paragraphs 20 to 21 above the assets of the Estate have been lost and paid away."
The plaintiffs have amended their pleading to abandon claims against the first defendant in his capacity as a director and an executor and trustee (consequently I have deleted from par 8 set out below the reference to the first defendant which erroneously was not deleted from the paragraph when the pleading was amended).
The second and third plaintiffs make the following claims for relief against the third, fourth and fifth defendants:
"8. A declaration that the third, fourth and fifth defendants acted in breach of their duties as executors and trustees of the Estate of the late Maxwell Francis Herford:
(a) by allowing the first defendant to make the Payments to the payees thereof; and
(b) by failing to take necessary steps to prevent the said Payments being made.
9. An order for all necessary accounts and enquiries in relation to the funds constituting the Payments."
The plaintiffs therefore seek a declaration that the third to fifth defendants have breached their duties by allowing the first defendant to make some 239 specific and identified payments. The plaintiffs do not, however, seek an order that the third to fifth defendants pay to the plaintiffs any amount that the court finds by which the estate was depleted by reason of the alleged breaches. Instead they seek an order for all necessary accounts and enquiries, but that prayer is limited to the funds constituting the Payments.
The dispute between Ms Chudleigh and the plaintiffs turns upon whether, if the plaintiffs insist upon proceeding by way of an account or enquiry, the plaintiffs should be required to do that in the proceedings which will determine the defendants' liability, and their rights in respect of any cross claims. Alternatively, as the plaintiffs seem to require, should all of those matters be dealt with in the proceedings, except the obligation of the third to fifth defendants actually to pay money to the plaintiffs? I will return to this issue after I consider a number of other relevant matters.
In order for the court to make the declaration sought by the plaintiffs against the third to fifth defendants, it will have to determine specifically and finally in respect of each of the Payments whether a breach occurred. Those defendants were not themselves in control of the business of the first plaintiff. The first to third defendants controlled the business, as they were the directors of the company for the relevant period. At least in respect of that part of the estate constituted by ownership of the shares in the first plaintiff, Ms Chudleigh and the fifth defendant, who unlike the third defendant were only executors and trustees, would not in the ordinary course have been aware of the day to day transactions of the first plaintiff, or been in a position to prepare accounts of its financial transactions. Ms Chudleigh and the fifth defendant were only in a position to exercise the rights of shareholders in the first plaintiff to supervise its affairs.
In submissions the plaintiffs suggested that the material before the court did not form a sound foundation for the court to speculate as to the issues that are likely to arise at the trial concerning the bases upon which the third and fourth defendants may be liable to the plaintiffs. I accept that submission in principle. However, as the starting point is that Ms Chudleigh and the fifth defendant could only exercise control of the affairs of the first plaintiff by means of their being shareholders, it is probable that if the plaintiffs succeed it will be by demonstrating that by reason of certain circumstances the third and fourth defendants ought to have taken steps from a particular point of time to prevent the directors permitting the first defendant continuing to cause the Payments to be made. Again, if the plaintiffs succeed, they are likely to establish that the fourth and fifth defendants, and the third defendant qua executor and trustee, are liable to replenish the estate for the aggregate amount of the Payments that occurred after the particular point of time.
Ms Chudleigh filed an amended defence to the further amended statement of claim on 27 August 2013. In essence Ms Chudleigh admits her status as executor and trustee and that she owed a duty to the estate, but she denies any liability to the plaintiffs. Ms Chudleigh pleads that any liability that she may have is reduced in quantum by the value of the plaintiffs' claims against the first to third defendants. She pleads that the plaintiffs have failed to mitigate their loss. In paragraph 12 Ms Chudleigh pleads a proportionate liability defence under the Civil Liability Act 2002 (NSW). Finally, Ms Chudleigh claims a right to be excused under section 85 of the Trustee Act 1925, because she acted honestly and reasonably.
Ms Chudleigh also filed a cross-claim on 7 June 2013 by means of a further amended statement of cross-claim. The cross defendants are the other defendants in the proceedings. In essence Ms Chudleigh claims contribution in equity.
The evidence before the court on the notice of motion was the correspondence between the solicitors for Ms Chudleigh and the plaintiffs concerning the plaintiffs' claim for an order for an account or enquiry. It is not necessary to examine the correspondence in detail. Ms Chudleigh's solicitor started from the point that the plaintiffs have claimed a declaration that Ms Chudleigh is in breach of her duty to the estate in relation to all of the Payments, but the plaintiffs have not sought any order that Ms Chudleigh pay any money, in particular by way of equitable compensation. Ms Chudleigh invited the plaintiffs to amend their pleading by claiming relief to oblige Ms Chudleigh to restore the estate. The plaintiffs' solicitor responded by asserting that as Ms Chudleigh is alleged to be a defaulting executor and trustee, the proper remedy is the taking of an account, particularly as Ms Chudleigh is accused of wilful default. The plaintiffs' solicitor provided a detailed defence in legal principle of their clients' position in a letter dated 22 July 2013.
If the court is to approach the resolution of this dispute practically, it must be noted that the plaintiffs have refused to amend their pleading to claim any order that Ms Chudleigh pay equitable compensation or otherwise replenish the estate. That is plainly an unusual course for plaintiffs to take. Plaintiffs who believe that they have a valid claim that some defendant is obliged to pay them money, who are moved to institute proceedings and allege a basis for an entitlement to payment of money by the defendant, usually include a claim that the defendant be ordered to pay the money. Plaintiffs would usually be expected to take that course, even if they thought that some alternative legal mechanism for securing payment, such as the taking of accounts, was more orthodox. Put shortly, it is inexplicable why the plaintiffs have refused to accept Ms Chudleigh's invitation that they actually seek an order against her that she pay the money.
The crux of Ms Chudleigh's position at the hearing of the notice of motion was that, by whatever legitimate procedural means are available, Ms Chudleigh wishes to ensure that the plaintiffs' claims against Ms Chudleigh are litigated fully against her at the trial of the proceedings involving the other defendants, so that all issues between the plaintiffs and the defendants, including such matters as proportionate liability and liability to contribute, can be dealt with efficaciously at the trial. They look to the plaintiffs' insistence on not seeking any order for payment from Ms Chudleigh at the trial, and their request for an order for account or enquiry - which will necessarily involve a second stage of the proceedings against Ms Chudleigh - and are concerned that the result will be that at the trial the plaintiffs do not put forward all of the evidence and litigate all of the issues concerning their claim against Ms Chudleigh which may be necessary for Ms Chudleigh to be able effectively to litigate her claims concerning proportionate liability and contribution.
Ms Chudleigh suggested in argument that the plaintiffs may not properly particularise their claims against Ms Chudleigh, or provide all of their evidence, but rather they may hold back on the basis that if they succeed in obtaining the declaration they seek, they can pursue additional aspects of their claims against Ms Chudleigh in the second stage of the proceedings against her, being the account and enquiry that they seek. Ms Chudleigh is concerned that this gives rise to the possibility that, in a way which is not now entirely predictable, the trial could miscarry if the plaintiffs hold back part of their case for the second stage of their claim against Ms Chudleigh, but the part held back is necessary for the final resolution of all other issues, such as proportionate liability and the liability to contribute.
Ms Chudleigh also put the specific submission that a consequence of the plaintiffs' seeking a declaration that Ms Chudleigh had breached her duty in relation to each and every one of the Payments would be that the judgment of the court on those issues would give rise to issue estoppels which will determine all issues between the plaintiffs and Ms Chudleigh that could possibly arise at the second stage of the proceedings. If that is so, she submits, there can be no reason why the account and enquiry should not happen in conjunction with the initial trial.
Ms Chudleigh says in effect that, if her submission about estoppels is correct, the plaintiffs' insistence on having a two-stage process can only mean that they harbour some prospect that as part of the second stage they will be able to make additional claims against Ms Chudleigh which do not emerge from their existing pleading.
I have considerable sympathy for the state of suspicion that Ms Chudleigh has developed in response to the plaintiffs' unusual insistence that they will not amend to seek an order that she pays money to them.
On the other hand, there was no application for further particulars before the court. The court was not asked to review the evidence which has been filed by the plaintiffs in order to form a view as to whether or not Ms Chudleigh's fears that the plaintiffs are holding something back are real. The plaintiffs' position appeared to be that they have not declined to provide particulars, because none have been sought. They have put their evidence on, for good or ill, and if the evidence is not enough for them to succeed, then so be it. The plaintiffs also submitted that Ms Chudleigh's fears were exaggerated and that her concern that it would not be possible for all issues of proportionate liability and contribution to be litigated at the trial was unreal.
I have mentioned the fact that the refusal of the plaintiffs to add a claim that Ms Chudleigh be ordered to pay them money is at the least unusual. Another factor material to the resolution of the present dispute is that, notwithstanding that Ms Chudleigh initially took the position that the plaintiffs should amend to seek an order for equitable compensation against her, she has not pursued that position in her notice of motion. Ms Chudleigh has specifically accepted that the plaintiffs have a justiciable claim for an order for an account and enquiry. Ms Chudleigh only wishes to insist that the account and enquiry be pursued at the trial.
Even though Ms Chudleigh has adopted that position, it is still appropriate for me to make a number of observations about the plaintiffs' right to an account and enquiry in this case. Given Ms Chudleigh's position, it is not necessary or desirable for me to express any final view on this issue. However, the underlying principles that govern the circumstances in which beneficiaries are entitled to pursue an account and enquiry against executors and trustees remain relevant to the resolution of the present dispute, even if only at the level of case management.
My provisional view is that, on the basis of the matters alleged by the plaintiffs in their further amended statement of claim, the court would be unlikely to make an order for an account or enquiry, if that course were opposed by Ms Chudleigh.
The essential reason for that view is that the Payments were made out of the funds of the first plaintiff while under the control of its directors, the first to third defendants. Ms Chudleigh and the fifth defendant at least, in their capacity as executors and trustees, had the rights of shareholders. That observation says nothing about how they ought to have exercised those rights in the circumstances. However, they did not have immediate or direct control of the financial affairs of the first plaintiff. It is not meaningful to think of their being responsible for keeping accounts of the financial affairs of that company. The accounts that they may have been required to keep in relation to the estate are a different matter altogether. In essence what is alleged against Ms Chudleigh and the fifth defendant is that they failed to exercise proper control, as shareholders, over the making of the Payments by the first defendant. Let me assume that they breached their duties to the estate, and any defences they raise will fail. On that basis they will be liable to pay a lump sum to the plaintiffs, whether by way of equitable compensation or some replenishment of the estate. There is no suggestion that there may be other breaches of duty by the executors and trustees. Nothing has been suggested as to how the process of having an account or enquiry will advance the plaintiffs' interest in this case.
The process of taking an account would be governed by UCPR rr 46.5 to 46.7. The items on each side of an account must be numbered consecutively. Ordinarily an accounting party must verify his or her account by affidavit, and the account must be made an exhibit to the affidavit. Ordinarily an accounting party must file his or her account and verifying affidavit. If a party seeks to charge an accounting party with an amount beyond that in respect of which the accounting party by his or her account admitted receipt, he or she must give to the accounting party notice of the charge. If a party alleges that an item in the account of an accounting party is erroneous in amount or otherwise, he or she must give to the accounting party notice of the allegation. Charges concerning omitted amounts in the account are usually called surcharges. Charges concerning the making of errors are usually called falsifications. There is a time-honoured process whereby the parties resolve these disputes before the court: see Ritchie's Uniform Civil Procedure, NSW, [46.7.5].
It is only necessary to read the plaintiffs' allegations against Ms Chudleigh in their further amended statement of claim, and then to consider how the determination of those allegations might sit within the process described in the preceding paragraph, to appreciate that the suggestion that an account is either required or appropriate in the present case is difficult to sustain.
The court should be wary about being too absolute in relation to forecasting the precise future of any complex litigation, but it seems to be legitimate to conclude that, on the matters pleaded, Ms Chudleigh's account would contain only one item - being the liability which the Court has declared she owes to the estate to replenish its funds - and that would be the end of the matter.
The process of taking an account and undertaking an enquiry in relation to the affairs of a trust is a sometimes necessary but an entirely unattractive process. It is a suitable procedure when an accounting party has controlled the financial affairs of some entity, such as a trust, and the party entitled to an account has a basis for establishing that the accounting party has not properly accounted for the funds, or has committed one or more defaults which cast into doubt the propriety of the accounting party's overall conduct. Once adequate doubt is cast on that propriety, whether or not the default can be shown to be wilful, a case is made which requires the accounting party to prepare a full account, and an enquiry is then undertaken to explore the extent to which the accounting party's control of the funds has been legitimate. It is the existence of circumstances which cast doubt on the extent of any improper dealing with the fund which justifies and requires the enquiry: see Glazier Holdings Pty Ltd v Australian Men's Health (No 2) [2001] NSWSC 6 at [59] and [60] per Austin J (overturned on other grounds in Meehan and Ors v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146). Generally speaking it is not appropriate for an order for an account to be made where the plaintiff is alleging that the defendant has made specific breaches, even a significant number of them, which do not add up together to a challenge to the whole course of administration of the trust.
Ms Chudleigh in argument relied upon Handley JA, with whom Basten and Young JJA agreed, where his Honour referred in White & Libut v Thompson & Ors [2011] NSWCA 161 at [38] to "...the long established principle that the rights of the parties in proceedings for a judicial account must be established at the trial. Any accounts and inquiries ordered at the trial "follow merely consequentially"... Accounts and inquiries are ordered for the purpose of working out the rights established at the trial and determining issues of quantum". Ms Chudleigh also relied upon Juul v Northey [2010] NSWCA 211 at [194], [195].
As I have said, my own view is that Ms Chudleigh's initial position on this issue was probably right in principle, but she has not insisted upon it. She accepts that the plaintiffs have a right to an account and enquiry, but only wishes to control when that process happens.
I have come to the view that one clear objective must be that the plaintiffs should be required to litigate as much of their claim that can be dealt with properly at the initial trial as is possible. The plaintiffs must put forward all of the evidence upon which they seek to make Ms Chudleigh liable to pay them money or replenish the estate. Everything that can be done must be done to ensure that Ms Chudleigh and the other defendants can achieve finality in respect of all of their defences, including that which raises proportionate liability, and all of their cross claims. I have no means of knowing whether any present doubts about this happening are real or not, whether Ms Chudleigh has sought all particulars to which she may be entitled or not, or whether there is any reality in Ms Chudleigh's suspicion that the plaintiffs may have held back on some evidentiary issues.
If there is to be no escape from the holding of an account and an enquiry, I presently cannot see why that process should not occur at the trial. Ms Chudleigh has sought an order that the account occur at the trial, but I could not actually make that order without addressing the need for an order that there be an account, that the order define the issues which arise on the account, and for appropriate directions to be made under UCPR r 46.4.
In my view it is proper for the court to respond to the plaintiffs' disinclination to seek positive orders against Ms Chudleigh for the payment of money by making appropriate orders and directions to ensure that, so far as is reasonably possible, all issues which arise in these proceedings are fully determined at the initial trial.
The plaintiffs made the point in submissions that the court should not now pre-empt any right of the trial judge to make orders that may seem to be appropriate for deferring the actual quantification of amounts which the defendant should be ordered to pay. It goes without saying that I should not interfere with the trial judge's powers in this respect. However, if it emerges that it may be desirable for issues of quantification to be deferred, that is as likely to happen in relation to the claims against the directors, as it is concerning the claims against the executors and administrators. The orders and directions that I may now be persuaded to make will not in any way bind the discretion of the trial judge.
It emerged in argument that the kernel of the present dispute may be that the parties have not had the benefit of case management procedures. I agreed that in relation to the issues raised by Ms Chudleigh's notice of motion I would case manage the proceedings pro tem. At an appropriate stage the conduct of the proceedings should revert to the orthodox procedure in the General List.
I also agreed with the parties that I would publish my reasons for judgment and then invite the parties to bring in short minutes. I invite them to do so in relation to the specific claim for relief in Ms Chudleigh's notice of motion, and also in relation to appropriate directions for the future conduct of these proceedings. The parties may contact my associate in relation to the making of appropriate orders and directions, and the re-listing of the matter, if that is necessary.
I will hear the parties on costs.
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Decision last updated: 06 November 2013
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