Kalls Enterprises Pty Ltd (in liq) v Baloglow (No 3) - [2007] NSWCA 298

NEW SOUTH WALES COURT OF APPEAL

CITATION: Kalls Enterprises Pty Ltd (In liquidation) & Ors v Baloglow & Anor (No 3) [2007] NSWCA 298

FILE NUMBER(S):
40441/06

HEARING DATE(S): On written submissions

JUDGMENT DATE: 24 October 2007

PARTIES:
Kalls Enterprises Pty Ltd (In liquidation) - First Appellant
AA Australian Commercial Laundries Pty Ltd - Second Appellant
Christopher Damien Darin (in his capacities as Liquidator of Kalls Enterprises (In liquidation) and AA Australian Commercial Laundries Pty Ltd (In liquidation) - Third Appellant
Theo Baloglow - First Respondent and Cross-Appellant
Peter Kaliaropoulos - Second Respondent and Cross-Respondent

JUDGMENT OF: Giles JA Ipp JA Basten JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 1841/99

LOWER COURT JUDICIAL OFFICER: Hamilton J

COUNSEL:
(On question of interest)
R G Forster SC - Second Appellant
C P Locke - First Respondent

SOLICITORS:
(On question of interest)
Koffels - Second Appellant
Oliveri Attorneys - First Respondent

CATCHWORDS:
Interest - pre-judgment interest - whether calculated at Schedule 5 rates for whole of pre-judgment period - whether delay in bringing and prosecuting proceedings - whether other commercial rates of interest established - relevance of failure to claim recovery from other persons - compensatory purpose of award of interst - broad discretion - Schedule 5 rates ordinarily used - overcompensation not established.

LEGISLATION CITED:

CASES CITED:
Ambulance Service of New South Wales v Worley (No 2) [2006] NSWCA 236;
Bennett v Jones (1977) 2 NSWLR 355;
Clarke v Foodland Stores Pty Ltd (1993) 2 VR 382;
Falkner v Bourke (1990) 19 NSWLR 574;
Geoffrey W Hill & Associates (Insurance Brokers) Pty Ltd v Squash Centre (Allawah North) Pty Ltd (1990) 6 ANZ Ins Cas 61-012;
Grincelis v House (2000) 201 CLR 321;
Hexiva Pty Ltd v Lederer (No 2) [2007] NSWSC 49;
Heydon v NRMA Ltd (No 2) (2001) 53 NSWLR 600;
Kalls Enterprises Pty Ltd (In liquidation) v Baloglow [2007] NSWCA 191;
MBP (SA) Pty Ltd v Gogic (1991) 171 CLR 657;
Ruby v Marsh (1975) 132 CLR 642.

DECISION:
Order 2.1 made on 9 August 2007 discharged and in lieu thereof ordered: "2.1 That there be judgment for the second plaintiff against the first defendant for $1,190,596.64 taking effect on 9 August 2007."

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40441/06
SC 1841/99
GILES JA
IPP JA
BASTEN JA
Wednesday 24 October 2007

KALLS ENTERPRISES PTY LTD (in liquidation) & ORS
v
BALOGLOW & ANOR (No 3)

Judgment

THE COURT: The Court published its reasons in the appeal and cross-appeal on 9 August 2007: Kalls Enterprises Pty Ltd (In liquidation) v Baloglow [2007] NSWCA 191. Using the same nomenclature as in the reasons, order 2.1 was that there be judgment for AA against Mr Baloglow for $555,000 -
“ … plus interest as calculated by [AA] and [Mr Baloglow] and notified to the Registrar, or in the event of disagreement upon calculation as determined by the Court upon written submissions filed in accordance with order 3 below”.
The parties did not agree. In circumstances which need not be recounted order 3 was not complied with, but directions were subsequently given for the filing of written submissions. They were filed in late September – early October 2007.
AA calculated interest from 19 December 1995, when the $555,000 was paid to Mr Baloglow, at the rates for post-judgment interest in Schedule 5 of the UCP Rules. The calculation was of simple interest, implicitly relying on the discretionary power to include interest in the amount for which judgment is given in s 100(1) of the Civil Procedure Act 2005, and there is no occasion to consider whether on equitable principles AA would have been entitled to compound interest.
Section 100(1) says of the interest that it is -
“ … to be calculated at such rate as the court thinks fit:
(a)on the whole or any part of the money; and
(b)for the whole or any part of the period from the time the cause of action arose until the time the judgment takes effect,”
The interest as calculated by AA was $635,596.64. Interest is an important matter in finalising the appeal.
AA accepted that the use of the Schedule 5 rates had no statutory backing, but cited Hexiva Pty Ltd v Lederer (No 2) [2007] NSWSC 49 at [16] for a conventional practice of adopting the rates prescribed for post judgment interest. In that case it was recognised, however, that there might be reason to do otherwise.
Mr Baloglow said that there was reason to do otherwise. He submitted that the interest should be calculated either at a rate reflecting the Reserve Bank of Australia cash rate target over the period from 19 December 1995, an average rate of approximately 5.45 per cent as distinct from the average rate of 9.79 per cent derived from the Schedule 5 rates, or by limiting the period for which it was awarded: he suggested commencement dates of 15 October 2003 or alternatively 29 February 1999. The earlier of these dates was the date on which the liquidator commenced the proceedings. The later of the dates was when the liquidator’s substantive affidavit was filed.
Mr Baloglow submitted that interest should be calculated at a lesser rate or for a lesser period -

because of the liquidator’s delay in demanding payment, bringing the proceedings and prosecuting the proceedings;
because of the liquidator’s failure to seek recovery from Mr Kalls, Mrs Kalls or Mr Kaliaropoulos; and
because interest as calculated by AA would substantially exceed that which could have been obtained by prudent investment and prevailing commercial rates of interest, and so would over-compensate AA.

The chronology is as follows. The liquidator was appointed liquidator of AA on 3 April 1996 and of KE on the following day. He demanded payment of the $555,000 from Mr Baloglow on 23 December 1997. He commenced the proceedings on 29 February 1999. He filed the substantive affidavit on 25 October 2003. The proceedings were heard in the latter part of 2005 and the early part of 2006. The trial judge gave judgment on 21 June 2006, and judgment as to costs on 23 June 2006. The appeal to this Court was then brought.
Delay is ordinarily not a reason for refusing or reducing the inclusion of interest. The defendant has had the use of the money, and the plaintiff has been out of its use and should be compensated accordingly. The purpose is to compensate the plaintiff for being kept out of its money (Bennett v Jones (1977) 2 NSWLR 355 at 367, 380; MBP (SA) Pty Ltd v Gogic (1991) 171 CLR 657 at 663; Grincelis v House (2000) 201 CLR 321 at [16]), not to punish it for delay (Bennett v Jones at 367; Geoffrey W Hill & Associates(Insurance Brokers) Pty Ltd v Squash Centre (Allawah North) Pty Ltd (1990) 6 ANZ Ins Cas 61-012 at 76,768; Clarke v Foodland Stores Pty Ltd (1993) 2 VR 382 at 397). Interest should be included unless good cause be shown, in order to fulfil the purpose (Ruby v Marsh (1975) 132 CLR 642 at 644; Falkner v Bourke (1990) 19 NSWLR 574 at 576); Clarke v Foodland Stores Pty Ltd at 389).
Delay can nonetheless be relevant to the exercise of the discretion. For example, unreasonable delay and a high interest rate may mean that the defendant is unjustly left as the source of the plaintiff’s investment income. The question is one of injustice to the defendant. If the interest rates used by the plaintiff exceed commercial interest rates (although commercial interest rates are an imprecise criterion, see below), the plaintiff’s self-inflicted loss of use of money may be unfairly made a burden on the defendant.
In the present case there was passage of time, but we do not accept that there was unreasonable delay of itself warranting reduction in interest. It is plain from the evidence at the trial that the liquidator had a difficult task in piecing together what had occurred, determining what action to take, and presenting the evidence necessary for prosecution of his claims. Although the passage of time was greater than desirable, it was not so great that unreasonable failure to bring and prosecute the claim against Mr Baloglow in a timely manner should be inferred, and for the period after 29 February 1999 Mr Baloglow had some opportunity to prevent delay (cf Geoffrey W Hill & Associates (Insurance Brokers Pty Ltd v Squash Centre (Allawah North) Pty Ltd at 76,767). Unreasonable failure needed to be positively demonstrated, and it was not.
Mr Baloglow placed some emphasis on the fact that, although the liquidator believed that he was entitled to recover the $555,000 from Mr Kalls, Mrs Kalls or Mr Kaliaropoulos, he did not take steps to recover it from them. We do not regard that as a matter of significance. It was suggested that, had the liquidator sought recovery from them, he would have obtained it (at least from Mr Kaliaropoulos) at an earlier time than his success against Mr Baloglow. That is speculative. From the evidence at the trial, Mr Kalls had gone bankrupt and Mrs Kalls and Mr Kaliaropoulos were likely to have defended proceedings brought against them. But it seems to us that the fact that the plaintiff could have, but did not, prosecute a claim against a third party has little to do with the proper inclusion of interest in the judgment against the defendant. The inclusion of interest must be considered on the position as between the plaintiff and the defendant.
There remains, however, the question whether the interest rates should be those in Schedule 5.
In Heydon v NRMA Ltd (No 2) (2001) 53 NSWLR 600 the questions included the rate of interest on money to be repaid after a successful appeal. Mason P, with whom Beazley JA and Ipp AJA agreed, said at [22] that it is -
“ … artificial to seek to calculate the interest actually lost (by the appellant) or the interest actually gained (by the respondent). For one thing, an exact correspondence would only occur by chance unless the parties had come to some agreement about the proper investment of the judgment moneys pending the appeal. This is one of several reasons why a common yardstick for determining the rate of interest is appropriate (see further below).”
His Honour later continued, referring to the Schedule J (now Schedule 5) rates -
“[31] Similar principles may be gleaned from the case law discussing the circumstances when a court should exercise the discretion to depart from Sch J rates in an award of pre-judgment interest pursuant to s 94 of the Supreme Court Act. In Cullen v Trappell (1980) 146 CLR 1 at 22, Gibbs J said that “the award of interest should always be approached in a broad and practical way”. Commercial reality and non-rigid uniformity have been cited as appropriate factors to be borne in mind (R W Miller & Co Pty Ltd v The Ship Patris [1975] 1 NSWLR 704 at 718; Smith v In Shoppe Pty Ltd [1976] 2 NSWLR 175 at 177). There is no reason to assume that Sch J rates are fixed in disregard of commercial reality or that they embody a deterrent or punitive intent. The situation is quite different in Victoria where pre-judgment interest rates are set pursuant to the aptly named Penalty Interest Rates Act 1983 (Vic) (see generally Meerkin (at 33)).
[32] In this Court the practice is to award restitutionary interest at the rates payable on judgments unless special circumstances exist (see National Australia Bank Ltd v Budget Stationery; Woolworths Ltd v Kelly (No 2) (Court of Appeal, 29 August 1991, unreported); Production Spray Painting & Panel Beating Pty Ltd v Newnham (No 2) (1992) 27 NSWLR 659 at 663; Akron Securities Ltd v Iliffe (No 2) (Court of Appeal, 26 June 1997, unreported); Baulkham Hills Shire Council v Pascoe [2000] NSWCA 322 and Seiko Australia Pty Ltd v Da Rin [2001] NSWCA 84).
[33] There have been cases departing from the general practice, but the reasoning in them tends to reinforce the general rule as well as explicating its rationale. In Haig v Minister Administering the National Parks and Wildlife Act 1974 (No 3) (1996) 90 LGERA 408, the court applied the statutory rates payable under the Public Works Act 1912 for the payment of interest on compensation as the rates applicable to interest on overpaid compensation ordered to be refunded. The Court was emphatic that restitution was a right, not the consequence of a favourable exercise of discretion. However, considerations of ‘justice and consistency’ were seen to require the court to apply the special statutory rates applicable to the payment of interest on compensation when awarding interest on overpaid compensation ordered to be refunded (see at 412).”
His Honour concluded (at [36]) that the respondent had “a persuasive and evidentiary burden … to take itself outside the general rule”. The same approach, with reference to and citation from Heydon v NRMA Ltd (No 2) was taken by Basten JA, with whom Tobias and McColl JJA agreed, in Ambulance Service of New South Wales v Worley (No 2) [2006] NSWCA 236. It was also concerned with money to be repaid after a successful appeal, but Mason P’s observations extend to pre-judgment interest and these cases support using the Schedule 5 rates as a guide to inclusion of pre-judgment interest.
As we have noted, Mr Baloglow submitted that AA would be compensated beyond the interest which could have been obtained by prudent investment and prevailing commercial rates of interest. There are ambiguities in the submission. Is prudent investment restricted to trustee securities, or can compensation assume seeking higher returns while not risk-taking? Are the commercial rates of interest the rates of return on investment or the rates payable on overdraft or other finance facilities? Compensation for being out of the use of money may mean compensation for interest paid which would not have been paid had the plaintiff been in funds – it is not confined to compensation for lost investment income. There is a range of commercial rates of interest.
As Brereton J observed in Hexiva Pty Ltd v Lederer (No 2) at [21], the conventional use of prescribed interest rates now found in Schedule 5 is founded upon acceptance that the rates are “a fair proxy for the average commercial rate”. His Honour’s reference to the average commercial rate brings in the range of commercial rates of interest. The Schedule 5 rates provide a “common yardstick” (Heydon v NRMA Ltd (No 2) at [22]) available in the broad and practical exercise of the discretion.
Mr Baloglow proffered a table of the Reserve Bank of Australia cash rate target rates. The cash rate target represents the overnight money market interest rate. AA submitted that it had no direct application to interest rates payable between non-bank entities, and that higher interest rates would have been obtainable for a sum as large as $555,000 deposited for a fixed term. It also submitted that the Schedule 5 rates were justifiably higher because they reflected that money would ordinarily be invested on a compounding basis.
There was no evidence beyond the availability of the cash rate target rates. They represent but part of the range of commercial rates of interest, and their use requires the assumption that the compensation to AA for its loss of use of money should be as investor on the overnight money market. No basis for the assumption has been put forward. It is likely that higher rates were available; it could not be taken that they were not, and simply proffering the cash rate target rates did not show that the Schedule 5 rates were distant from commercial reality. That was not otherwise shown. We are not satisfied that use of the Schedule 5 rates would over-compensate AA, or that compensation would more correctly be arrived at by use of the cash rate target rates.
As noted in Heydon v NRMA Ltd (No 2) at [30], the Schedule 5 rates and their predecessor the Schedule J rates provided to the parties a “broad standard approach” which Mr Baloglow must be taken, though his legal representatives, to have known. He defended the liquidator’s claims in that knowledge, and there is no reason to decline to apply those rates: cf Grincelis v House at [21]).
In our opinion, AA’s calculation of interest should be adopted. Order 2.1 made on 9 August 2007 having been overtaken by events, it should be discharged and in lieu thereof it should be ordered -
“2.1That there be judgment for the second plaintiff against the first defendant for $1,190,596.64 taking effect on 9 August 2007.”
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LAST UPDATED: 24 October 2007