McMahon v Livingstone
[2001] NSWSC 55
•16 February 2001
CITATION: McMahon v Livingstone & Ors [2001] NSWSC 55 CURRENT JURISDICTION: Equity Division FILE NUMBER(S): SC 2000 of 1998 HEARING DATE(S): 30 and 31 January, 1 and 2 February 2001 JUDGMENT DATE:
16 February 2001PARTIES :
Brian McMahon (Plaintiff)
Kenneth Livingstone (First Defendant)
John Joseph Scott (Second Defendant)
Ophix Finance Corporation Pty Limited (Third Defendant)JUDGMENT OF: Windeyer J at 1
COUNSEL : Mr S Rushton SC (Plaintiff)
In person (First Defendant)
Mr B Coles QC with him Mr D Ronzani (Second and Third Defendant)
Mr B J Skinner (Trustee of the bankrupt estate of the First Defendant)SOLICITORS: Horowitz & Bilinsky (Plaintiff)
In person (First Defendant)
Church & Grace (Second and Third Defendant)
CATCHWORDS: EQUITY - fiduciary obligations - funds given by clients to accountant A for investment lodged in account operated by other accountants B and used by a company controlled by accountants B to lend or for its own developments - funds collected by accountant A not separately identified in books of accountants B - as between clients and accountant A moneys held on trust - as between accountant A and accountant B and company relationship debtor and creditor - losses or payments made by company on matters in which accountant A interested charged against the general account to detriment of clients of accountant A - whether breach of trust - whether participation in breach by accountant B and company - whether claim for return of moneys available or order for taking of accounts - question of parties necessary on the account EQUITY - remedy for knowing assistance or participation in breach of trust - where trust had many beneficiaries and trustee bankrupt - third party liable to account to trustee in bankruptcy for trust funds lost in breach - individual beneficiaries not entitled to equitable compensation from third party as their interest in debut due not ascertained LEGISLATION CITED: Bankruptcy Act 1966 CASES CITED: Barnes v Addy (1874) LR 9 ChApp 244
Hayim v Citibank NA [1987] AC 730
Sharpe v San Paulo Railway Co (1873) LR 8 ChApp 597DECISION: See paragraphs 51 to 54
THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
WINDEYER J
FRIDAY 16 FEBRUARY 2001
2000/98 BRIAN MCMAHON v KENNETH LIVINGSTONE & ORS
JUDGMENT
Introduction
1 Mr Livingstone (the first defendant) was the accountant of Dr McMahon (the plaintiff) a retired dentist.
2 Mr Livingstone accepted from Dr McMahon a series of deposits for the purpose of investing them over a period of around fourteen years commencing in April 1982, with the last recorded deposit made on 21 March 1996. The total amount of these deposits with interest as agreed was approximately $1,900,000.00.
3 Mr Livingstone paid this money or most of it into an account operated by Mr Scott (the second defendant) and Mr Slattery, both also accountants and Mr Livingstone’s former employers. This account was known as the Scott and Slattery Clearing Account (the clearing account).
4 Moneys from this account were lent to borrowers in the name of Ophix Pty Ltd (“Ophix”) (the third defendant) or used by Ophix to finance its own investment or development ventures. Mr Scott and Mr Slattery were the only directors and shareholders of Ophix.
5 Depositors to the clearing account were paid a rate of interest which was varied quarterly and which exceeded that offered by the Commonwealth Bank.
6 McMahon was one of a number of Livingstone’s clients whose money found its way to the clearing account but in the books of Ophix only one account was recorded. This account, the “K” or “Ken” account, recorded the total deposits from Livingstone clients on a single ledger.
7 According to Scott and Ophix the balance of that account on 1 July 1994 was $9,568,623.00 and the balance of that account on 11 May 2000 was $413,643.26.
8 Livingstone is an undischarged bankrupt. He is currently in gaol serving a sentence for crimes unrelated to these proceedings. He was present in court as a defendant at the commencement of the proceedings but after some discussion counsel for the plaintiff accepted that as there had been no order authorising the continuance of the proceedings against Livingstone, they were stayed pursuant to s58 of the Bankruptcy Act 1966.
9 These proceedings are, therefore, an attempt by McMahon to recover his moneys from Scott and Ophix. For some unexplained reason Mr Slattery was not joined as a defendant.
The Facts
10 In the early 1970’s, while he conducted his dental practice, McMahon was a client of Scott, who conducted an accounting practice in North Sydney. Livingstone was an employed accountant of that practice. It was in this capacity that he began to attend to McMahon’s affairs in around 1976.
11 McMahon contends that prior to this Scott personally dealt with his accounting work from about 1973 till 1975. Scott denies this. Not a great deal hinges on this. What is important, however, is that McMahon claims that while he was a client of Scott he invested some $10,000 in the Scott Family Trust. This was an investment trust set up by Scott that was closed in 1979 when the moneys held under that name were deposited in the account called the Scott and Slattery Clearing Account. McMahon was not cross-examined on this claim. Although Scott denied it I accept the evidence of the plaintiff on this as in general I accept nearly all his evidence. As I will later explain little faith can be placed in the uncorroborated evidence of Scott.
12 In 1978 Livingstone left the partnership and set up his own practice in Frenchs Forest. McMahon became his client there. Two years later, in around 1980, McMahon retired from dental practice and established an auto-accessories business that traded under the name Tappets Auto Accessories (“Tappets”). On Livingstone’s advice he conducted the business through a company called Valbri Pty Ltd.
13 In April 1982 McMahon began to deposit moneys, often in cash, although occasionally by cheque, with Livingstone for investment. The details of this arrangement need to be examined in some depth.
14 Scott and Slattery took money from clients for investment which was paid into the clearing account with moneys of their own. Those moneys were lent out, usually to other clients, in the name of Ophix. The funds were usually lent out for investment and real estate development, sometimes with security and often without security. It is not clear whether investors knew that loans were made in the name of Ophix as that company had no separate bank account so that interest payments and principal repayments would have come from the clearing account in the name of Scott and Slattery. While investors were paid a rate of interest reviewed quarterly, the borrowers rate did not necessarily change quarterly, although Scott said it often did. Ophix had to bear the losses on investments but of course also kept the difference between the interest received from borrowers and the interest paid to investors. To that extent evidence of Scott about what Ophix received was inaccurate, but not I think deliberately so.
15 McMahon, apart from the $10,000 in the Scott Family Trust which is not the subject of these proceedings, never invested money directly with Scott and Slattery. All his moneys were paid to Livingstone who in turn deposited the money to the clearing account often with money from other clients. On occasions moneys were paid into a trust account of Livingstone and then paid out of that to the clearing account but generally Livingstone deposited them direct. Livingstone kept accounts for all the clients who deposited money through him to the clearing account, but Scott and Ophix recorded all Livingstone deposits in one account - the “K” or “Ken” account - which merely recorded a running balance of the deposits of all Livingstone clients. From time to time Livingstone would himself adjust his clients' accounts so that one client withdrawing funds would be paid direct with funds of a client investing at the same time. He would do this direct making the appropriate journal and ledger entries in his own records, leaving the balance in the "K" account in the clearing account unchanged but of course with different ownership.
16 So far as the present proceedings are concerned, what occurred was that between 1982 and 1996 Livingstone collected McMahon’s money and deposited it in the clearing account. Scott and Slattery, operating through Ophix, then used this money to invest, just as they used money of their own clients. For the most past the moneys were lent on projects in which clients were interested but on occasions they were advanced on projects in which Scott and Slattery were interested or Ophix used the moneys for its own projects. A variable rate of interest was paid or credited on the amount in the Ken account and Livingstone apportioned this interest among his clients. What Livingstone made out of the arrangement was not the subject of any evidence in the trial, but clearly both Scott and Slattery and McMahon stood to benefit from the arrangement.
17 Interest was not paid quarterly. In fact on the evidence it seems it was not paid at all unless a client withdrew all funds. The effect of this was that compounded interest was credited. Accordingly to Scott the account was operated on the basis that all partial withdrawals were treated as withdrawals of principal. It is not necessary to determine the legal effectiveness of this. Certainly the tax returns of the plaintiff were prepared with no regard to interest earned, but unpaid, so that it was thought tax was somehow postponed.
18 McMahon did not know or care where Livingstone was investing his money, although I am satisfied he knew it was going to the clearing account and that interest rates were set by Scott. Livingstone was a friend, he trusted Livingstone and was happy to leave investing to him. He did not care if his funds were secured or not.
19 The evidence that was adduced about the account of McMahon with Livingstone was his evidence as to quarterly meetings, a personal note book kept by McMahon setting out his deposits, and some incomplete copies of Livingstone’s ledgers. From this evidence the following facts appear:
a) McMahon made a series deposits between 1984 and 1996. He met with Livingstone each quarter and confirmed these deposits and his own calculations of interest. Thus a running balance of the amount owed to McMahon was maintained. The black book figures were not challenged.
c) On 1 July 1994 the balance credited to the Ken account was over $9.5m.b) Livingstone transferred these funds or most of them to the clearing account. Mr Coles QC, acting for Scott and Ophix, endeavoured to suggest that Livingstone’s records showed him using some of McMahon’s money for his own purposes and not transferring it. I consider that Livingstone’s records merely show him “contra-ing” balances as between his clients and that he made the appropriate account credits and debits whenever he used cash deposited by McMahon to pay another client. Thus I accept the amount of approximately $1.9m which both Livingstone and McMahon agree was owed to McMahon was part of the Ken account.
20 Scott and Slattery knew that these moneys included a significant amount of clients funds, although I accept that a small proportion of the deposits may have been Livingstone’s own money. I find that neither Scott nor Slattery knew the exact portion of that amount which belonged to individual clients of Livingstone, but Scott certainly knew that it included substantial funds of McMahon.
21 On 5 May 2000, Hodgson CJ in Eq ordered Scott and Ophix to file a verified Statement of Account of all moneys held on 1 July 1994 and subsequently received from Livingstone and of moneys disbursed from 1 July 1994 with their explanation for such disbursement. The account was sworn on 27 July 2000. It is from this account that the balance of $9.5m referred to above is drawn, although it was accepted before that date. To it is added $1.2m in interest, another $1.2m in deposits from Livingstone’s clients, the net proceeds of the sale of a property known as Plumpton and a $10.00 filing fee. From it is deducted some $12.3m and the final balance - which ought now to be under the control of Livingstone’s trustee in bankruptcy, if it were available in cash, - is $413,643.26.
22 These deductions were made, according to Scott, under the authority of an agreement between Livingstone and Slattery that
- all amounts (including specifically principal amounts and legal costs and expenses) paid or incurred in respect of any client of Livingstone or any claim made by such a person would be for Livingstone’s account and would be charged against amounts owing to Livingstone by Scott and/or Ophix. The terms of this agreement were the subject of a conversation in or about 1994 between Livingstone and John Joseph Slattery ( “Slattery”)
23 On 23 June 1999, while at Lithgow gaol, Livingstone signed a deed in the following terms:
- THIS DEED is made the 23rd day of June 1999
BETWEEN: KENNETH ROBERT LIVINGSTONE ( "Livingstone") of the first part
AND: JOHN JOSEPH SCOTT ("Scott") of the second part
AND: JOHN JOSEPH SLATTERY ("Slattery") of the third part
AND: OPHIX FINANCE CORPORATION PTY LIMITED, ACN 002 085 430 ("Ophix") of the fourth part
WHEREBY
Livingstone acknowledges and confirms to Scott, Slattery and Ophix (and each of them) the following:
1. Livingstone from time to time deposited moneys into and withdrew moneys from and was paid moneys out of the Scott and Slattery Clearing Accounts ( "the Clearing Accounts" ).
2. All moneys deposited by Livingstone in the Clearing Accounts were for the credit of Livingstone's account with Ophix. Subject to the authority of Scott as nominee of Livingstone to hold security for some of those moneys and for Scott to take such action as Scott considers reasonable to enforce such security and recover such moneys in his capacity as nominee.
3. The following amounts were (or are to) debited to Livingstone’s account with Ophix:
- a. all monies:-
i. paid to or at the direction of Livingstone from the Clearing Accounts; and
ii. withdrawn from the Clearing Accounts by Livingstone (by his completing and distributing cheques drawn on that account).
· moneys paid to or at the direction of Mr Bagshaw (“Bagshaw”);
· moneys paid by or at the direction of Mr Lowe;
· moneys paid in relation of the Wilpena settlement;
· moneys paid to Livingstone from the proceeds of the mortgagee’s sale by Scott of Bagshaw’s sale of Plumpton;
· the net proceeds of moneys received from litigation with Bagshaw or the exercise of any rights against Bagshaw.
- b. all losses incurred by Winrobe Pty Limited and Simpost Pty Limited in relation of the acquisition, development and sale of their property at Leighton Place, Hornsby; and
c. legal fees and disbursements paid or payable by or on behalf of Scott, Slattery and Ophix (or any one or more of them) relating to claims by or against them concerning in any way to Livingstone or moneys deposited by Livingstone in the Clearing Accounts or securities taken on behalf of Livingstone by Scott, Slattery or Ophix (or any one or more of them) including (but without limiting generality of the foregoing) Bagshaw, Mr Lowe, Mr Constantine and Mr McMahon;
d. all moneys paid or payable by Scott, Slattery and Ophix (or any one or more of them) as a result of any court order or judgement in proceedings concerning in any way moneys deposited by Livingstone in the Clearing Accounts and any moneys paid or payable by Scott, Slattery and Ophix (or any one or more of them ) in the settlement of any such proceedings.
IN WITNESS WHEREOF the parties have hereunto set their hands and seals on the day and year firsthereinbefore written.
24 It seems that no one other than Livingstone signed the document. According to Scott the deed was confirmation of the agreement said to have been made with Slattery in or prior to 1994. I would have had grave doubts about whether that agreement was made because Scott's evidence on it, like much of his evidence, was quite unsatisfactory, but no questions were put to Livingstone as to whether the oral agreement was every made and the main case as pleaded really proceeded on the basis it was made.
25 So that this part of the case can be understood, it is necessary to set out that part of the Statement of Account which shows the figures. It is as follows:
Balance May 11, 2000 $ 413,643.26$
Balance July 1, 1994 9,568,623.00
Add : Interest (1.7.94-31.12.99) 1,273,454.12
Net proceeds sale of Plumpton
(as mortgage from Bagshaw)(1.2.95) 730,280.61
Filing fees (13.2.98) 10.00
Livingstone deposits ( schedule one) 1,183,211.28 3,186,956.01
12,755,579.01
Less : Bagshaw proceedings (legal costs
and expenses) (27.12.94-17.4.00) 202,116.77
Balance of commission on sale of
Plumpton (Bagshaw) 30,410.00
McMahon proceedings (legal costs and expenses)
(9.12.98 - 17.4.00) 30,857.30
Legal costs and expenses with respect to claims
by Carr, Dwyer , Scheurer, Keel, Girgis, Dohery,
Chapman, Hawkins, Perkins, Rogers& Graham
(7.3.00) 1,200.00
ASIC filing fees (Winrobe Pty Ltd &Simposts Pty
Ltd) (28.1.98, 18.1.99, & 31.12.99) 800.00
Australian Taxation Office (penalty tax -
Winrobe Pty Ltd & Simposts Pty Ltd) (17.4.00) 4,400.30
Lowe proceedings (legal costs and expenses)
(9.7.96, 02.09.96, 29.11.96 & 31.1.97) 22,885.90
Lowe (pay out) (5.12.96 & 31.1.97) 1,250,000.00
Transfer to Winrobe Pty Ltd and Simposts
Pty Ltd loan account (payout balance) (30.6.97) 5,356,006.55
Office of State Revenue (5.12.96) 2,948.00
Allen (Hornsby Units) (1.4.96) 1,061,300.00
M. Koeninger (21.12.94 & 12.4.96) 170,000.00
J Couriel (30.6.96) 1,542.00
P. Gwozdecky (30.6.96) 28,057.00
D. Scott (30.6.96) 74,784.00
T & Y Tate (7.2.96) 160,000.00
MLC (transfer from Omega) (Sept 95) 1,213.00
R Gardner (21.12.94 & 6.1.95) 575,246.00
J Elmas (5.12.94) 65,000.00
M Walsh (21.12.94) 250,000.00
N. Bland (21.12.94) 135,208.00
G. Pattern (21.12.94) 140,000.00
World Golf Tours (McMahon) (21.12.94) 5,225.00
Milton Corporation Limited (Lord & Allen)
(22.11.94)) 154,948.72
Legal costs (Lord) (17.3.00) 2,726.00
Davwren Pty Limited (17.3.00) 198,000.00
K. Livingstone (11.9.97 & 2.2.95 & 21.2.95) 1,676,864.59
Livingstone payments ( schedule two ) 738,997.62 12,341,935.75
Deductions on Account
26 In general the deductions are claimed to have been made on the basis of the agreement which is set out in paragraph 22 of this judgment. It is not necessary to go into all of them at this stage, but some of them should be dealt with. The amount claimed in respect of Bagshaw proceedings is a claim for legal costs incurred in proceedings in the Federal Court apparently for recovery of moneys lent to Bagshaw. Scott swore an affidavit in the Federal Court proceedings stating that he had lent the funds to Bagshaw, that certain title deeds were deposited with Livingstone as security for the loan, and a particular title deed was held by him. On the statement of account pursuant to the order of the Chief Judge sworn to by Scott it is said that Livingstone had lent funds to Bagshaw. In cross-examination in the hearing before me Scott said that practically everything he had sworn to in his first affidavit in the Federal Court of Australia of 16 November 1995 was untrue. If that is the position then he was guilty of perjury before that Court. If it were not the position then he was guilty of perjury in these proceedings. An affidavit he swore in the Federal Court proceedings on 9 April 1997 - he said to clear up the problem with the first affidavit - did no such thing. It is not, however, possible to come to any firm conclusion on the matter as Livingstone was not asked anything about the Bagshaw loan.
27 The payments set out on the account from Koeninger down to Milton Corporation Limited (Lord & Allen) are said to be payments from the clearing account on account of Ophix to Livingstone investors made at the direction of Livingstone. Of the persons named as payees Livingstone denied that D. Scott, J Couriel and D Gwozdecky were clients of his. I would be inclined to accept that denial, but because it is not essential to make a final determination on this I refrain from doing so.
Lowe - $1,272,885
28 With respect to Mr Lowe, he was either a client of Scott and not of Livingstone or letters which purport to come from Scott to Lowe bear a signature of Scott which is forged. He said that it was. Scott knew of the existence of the letters and the signatures look like his. He and Slattery were made parties to Family Court proceedings and Livingstone was also a party to those proceedings between Mr and Mrs Lowe. Scott and Slattery agreed to pay money in settlement of those proceedings. Scott did not impress at all as a witness. His credit was severely shaken by his evidence about the Federal Court proceedings and generally on important matters of fact where there is an issue I would not accept his evidence unless it were in some way corroborated. I should add, however, that the Lowe payments in the account do not appear to be as significant as counsel for the plaintiff seemed to think, because the evidence does go to establish that the moneys invested by Lowe were included in the Ken account balance and if in fact the investment was direct with Scott rather than with Livingstone, they should not have been included in that balance and the deduction would not be of any significance.
Winrobe Pty Ltd & Simposts Pty Ltd - $5,345,006
29 According to Scott, Livingstone lent some money on an investment at Hornsby being carried out by these companies. He said the borrower got into default and that Livingstone, rather than sell the properties, took a transfer of all the shares in the borrowing companies apparently as some sort of private foreclosure. He said that thereafter Ophix funded the development for Livingstone, that a loss was incurred, and that this was charged up to the K account as a Livingstone liability to Ophix. There were four issued shares in each company two held by Livingstone and two by Scott. Scott said that this was because two shareholders were needed and Livingstone asked him to take two.
30 Livingstone's evidence was unclear. He said that he did not consider he was beneficially entitled to the shares and considered they were held by Ophix as lender after what he called "repossession". It is unlikely to matter which story is true. If the deed is merely written confirmation of the 1994 oral agreement, then payments for the benefit of Livingstone are not covered by it. If the 1999 Deed in some way widens the oral agreement it must have been made by Livingstone in breach of trust to investors in the K account. As I will explain Scott and Ophix knowingly participated in that breach.
Allen (Hornsby units) - $1,061,300
31 According to the explanation given in the statement of account, Allen was a Livingstone investor. This was acknowledged by Livingstone. Ophix held a mortgage over the Hornsby units and at the request of Livingstone agreed to discharge its mortgage over some of these units so that they could be transferred to Allen in satisfaction of his credit in the Livingstone account, or at least part of that. There is no reason to doubt that explanation.
Davwren Pty Ltd - $198,000
32 According to the evidence of Scott, money was lent by a company Davwren Pty Ltd, controlled by Slattery, to the children of Livingstone to enable them to purchase Livingstone's family home at Frenchs Forest. One can only guess at the purpose for this. That loan was repaid with funds from Ophix directed to the Livingstone children and debited against the balance in the K loan account.
Pleadings
33 The final claim was made by further amended statement of claim filed early in the hearing when the plaintiff's counsel accepted that the action against Livingstone was stayed. The plaintiff claimed (a) for return of moneys invested, (b) for compensation for breach of trust or fiduciary duty and (c) for accounts.
34 So far as the claim for return of moneys is concerned, the plaintiff alleged that moneys of the plaintiff were paid to Livingstone for investment; that Livingstone became trustee of those moneys which he invested with Scott and/or Ophix; alternatively that Livingstone acted as agent for Scott and Ophix in collecting such moneys: and that in either case the moneys were repayable on demand to the plaintiff and that repayment had not been made.
35 The trust or fiduciary duty claim is mounted on two fronts. First, it is alleged that if the 1994 agreement were entered into then it was a breach of trust for Livingstone to do so and that Scott and Ophix knowingly participated in that breach. Secondly, it is claimed that Scott and Ophix failed to keep proper records of the various moneys; that they mixed McMahon's funds and other depositors' funds and invested those funds or part of them in investments in which Scott or Ophix had an interest.
36 The claim based on failure to account is predicated on liability to account for separate moneys invested with Scott or Ophix by the plaintiff.
37 The relief sought by the plaintiff under the final claim is for return of the moneys invested or equitable compensation or taking of accounts.
38 The defendants in answer to the claim for return of moneys do not admit that any moneys of the plaintiff were invested by Livingstone with them; deny that they were aware that this was the fact, if it is true, and deny that Livingstone was their agent. In relation to the trust or fiduciary claim the defendants do not admit any breach by Livingstone and deny knowing assistance or participation. As to mixing of funds, the defendants say that the funds of the plaintiff were not invested by them. By this, as I understand it, they mean that the funds were not identified.
Discussion
Return of funds
39 Unless the plaintiff's funds were isolated or deposited and separately identified in the clearing account, or unless there was an obligation on Scott or Ophix so to identify them, it is difficult to see how this claim could succeed. At a meeting which McMahon had with Livingstone and Scott in September 1996 it was stated by Livingstone that the balance in the Livingstone account with Ophix was an amount of about $9 million. Scott did not deny it and in fact his account verifies this. There is however no evidence that Scott accepted that McMahon had the figure which he claims as part of that account. The evidence of McMahon is that he gave the funds to Livingstone to invest and was happy with what he did. I accept and find that Livingstone became trustee of the funds for that purpose. When he balanced his accounts with Scott each quarter and when he agreed with McMahon each quarter the amount owing to him, he was under a duty to allocate the balance amount in accordance with such reconciliation. There can be no basis to suggest however that Scott or Ophix was agent for McMahon or trustee for him unless Livingstone was acting for them in obtaining the moneys paid into their account for investment. There is no doubt that Scott provided Livingstone with the ability to deposit moneys into the clearing account and gave him a deposit book for that purpose. He also gave him the ability to withdraw moneys from that account by handing him signed cheques, some of which Livingstone handed to McMahon. I find that Scott was aware of this, although it did not seem to concern him. His evidence that, although he saw the cheques, he took no notice of the payee is something which I do not accept and in any event he was well aware that McMahon was a depositor. Thus I have no difficulty in finding that Scott was aware that McMahon had moneys invested by Livingstone which had been placed on loan to Ophix. In cross-examination, Livingstone said that so far as McMahon was concerned, he did not solicit funds for Scott, but just did as McMahon asked.
40 Whether Livingstone, on entering into separate practice just sought to continue arrangements then existing for clients whom he took over, or whether he sought Scott's agreement to his putting his clients' funds out for investment through Ophix does not really matter. It is not established that Livingstone was acting as agent for Scott or Ophix to collect the funds. This allegation that he was, I should say, was only made by amendment after I allowed the defendants to amend a defence which was clearly entered by mistake, which admitted receipt of the sum of $1,908,923 from McMahon.
41 The funds deposited by Livingstone in the clearing account were controlled by Ophix. The relationship between Ophix and Scott with their depositors was, I consider, one of debtor and creditor. The funds were lent to Ophix and either re-lent to borrowers or used by Ophix on its own account. In other words, Ophix and Scott were not trustees of those funds for investment as authorised by the depositors but were borrowers. I consider this finding inevitable because Ophix at times used the funds for its own developments; the interest rate paid to depositors was not the same as that paid by borrowers from Ophix or by Ophix when it used the funds for its own purposes; and the clearing account controlled by Ophix was overdrawn, with Ophix , Scott or some other third party giving the bank security for this. The significance of this finding is that Scott and Ophix owed to Livingstone the balance in the K account in the Ophix ledger including the interest credited from time to time. Livingstone held this asset as trustee for those persons who had entrusted funds to him in accordance with their interests in the total.
42 It is clear that Scott was aware that Livingstone was not the owner of all the funds in the K account. In fact it is clear he was aware of substantial depositors. He was well aware, for instance, that McMahon had substantial funds invested with Livingstone, as did Lowe. In fact, although he denied it, I find he was aware that the withdrawals were made by McMahon by cheques drawn on the clearing account as those cheques were returned to him by the bank. That would not necessarily give McMahon a right to repayment of the claimed figure direct. However, as Scott was aware, and Ophix was aware, that Livingstone was not owner of the funds and it could not be suggested he was a borrower of the funds from clients Scott and Ophix were aware that Livingstone took those funds as trustee for his client investors. Any agreement by Livingstone with Scott or Ophix that would have an adverse effect on persons placing funds with Livingstone would be an obvious breach of trust by Livingstone and any action by Scott and Ophix to give effect to such agreement would be knowing participation in such breach. Apart from anything else those investors were paid an agreed rate of interest by Ophix. There was no possible basis on which it could be thought that Livingstone had some right by agreement with Ophix to reduce the fund in which they were entitled to share. However, none of this supports the claim for repayment of the particular sum McMahon had placed with Livingstone.
Breach of trust or fiduciary duty
43 In light of what I have said under the previous heading this can perhaps be dealt with more easily. Scott and Ophix were in knowing receipt of trust funds even if they did not know the amounts held for particular beneficiaries. Ophix was a borrower of those funds, albeit they may have been mixed with some funds of Livingstone, although there is, I think, no evidence of this. There was no reason why Ophix could not invest those funds as it thought fit, even in its own development projects. That is because it was a borrower. But on no basis could it be thought that it was proper for the amount borrowed to be dependent upon the success or failure of particular investments, particularly when it seems from the evidence that success was not acknowledged while losses were taken into account. If Livingstone's own moneys were lent to Ophix and moneys of Ophix were lost on some development promoted by Livingstone, there would be no reason why an agreement could not have been made for the loss to be set off against the debt to Livingstone. That is because the parties whose funds were involved would be those affected by the agreement. The position is, however, otherwise if the agreement to which a trustee is part is obviously a breach of trust and results in loss to the trust beneficiaries.
44 It is therefore necessary to look again at the position as shown by the statement of account, which of course is based on the assumption that there was an agreement. The agreement is not admitted by the plaintiff in the statement of claim, but nevertheless to a large extent, the action was run on the basis that the agreement did exist and that Livingstone's entry into it was a breach of trust. I would have had the greatest difficulty in accepting that any such agreement was made in 1994 or earlier, were it not for the fact that Livingstone was asked no questions whatsoever about it. In fact, even on the evidence as it stands, I am not satisfied that the agreement was made because it is contrary to the acknowledgement made by Scott to McMahon about the balance in the K account or at least his failure to deny the figure of $9 million stated by Livingstone to be the position at the meeting in 1996. Scott attempted to get over this by an unimpressive insistence that he was speaking about the balance shown in the books. This only supports my view about the unreliability of what he said. However I proceed now on the basis the agreement was made.
45 Insofar as the payments shown on schedule 1 of the statement of account show repayment of depositors through Livingstone it is unlikely there could be any complaint. Where there is conflict for persons such as Couriel, Gwozdecky and Scott, the evidence is so inconclusive it is not possible to determine whether the payments were proper. So far as Lowe is concerned, the evidence at the least establishes a requirement for an accounting as to this with a proper opportunity to object to the payment. The statement of account and its explanation of the Lowe deductions does not claim the moneys were invested with Livingstone and seems to skirt this; and the letters which Scott claims do not bear his signature certainly appear to do so and it is difficult to see why anyone else would sign them. However, as I have said, this may not be very significant because it is likely that the amount, however invested in the clearing account, is in fact included in the K account balance.
46 More important perhaps is the $5,356,006.55 which Scott says was the loss incurred by Ophix on the Hornsby development of the two companies, Winrobe Pty Ltd and Simposts Pty Ltd. Probably the loss was incurred by Ophix, which according to Scott advanced all the moneys required for the development after the foreclosure when the original loan went into default. However, if this were a personal project of Livingstone, the claimed 1994 agreement did not apply to it as it was in respect of Livingstone clients, not Livingstone himself. The 1999 agreement was said to be confirmation of the 1994 agreement but if it extended its scope it would not assist a loss made in 1997. As Scott was aware the project was funded through Ophix moneys of which some comprised funds deposited by Livingstone which he knew came from Livingstone clients, it was a clear participation in a breach to enter into the agreement with Livingstone and to claim the deduction: Barnes v Addy (1874) LR 9 ChApp 244 at 251. Without any valid authorisation the investors were entitled to repayment of their invested amounts and an agreed rate of interest.
47 It could not, I think, be even pretended that the Davwren payment was covered by the agreement albeit that it might have been made on the authority of Livingstone. Its effect would clearly diminish the interests of the beneficiaries in the K account. The claimed effect would produce the result that Livingstone investors would in some way fund the purchase of Livingstone's house by his children. Clearly Livingstone was in breach of trust if he authorised it and there could be no possible right in Ophix to debit that payment against the credit in the K account. How any two accountants would consider Livingstone was able to authorise the payment I cannot comprehend. But in any event the 1999 agreement could have been of no benefit to Livingstone. Insofar as Scott and Ophix had anything to do with it, as they clearly did, it just connected them to a breach of trust.
What is the result
48 The result of all of this is that McMahon, while entitled to claim for the full amount in the bankrupt estate of Livingstone, is not entitled to claim that same figure as against Scott and Ophix, although I consider the liability of Scott and Ophix to be the same as all payments were made it seems from the clearing account or dealt with through the Ophix books so that Scott's assistance or acquiescence was needed for this. The account was clearly prepared on the basis of common liability. The evidence does not show to what proportionate interest McMahon is entitled in the amount which should be held to the credit of Livingstone by Scott and Ophix. It is not possible to discern from the present state of the evidence the identity of all those persons interested in the amount due from to Livingstone as trustee for them. In those circumstances it is not possible to say that McMahon had a certain interest in the amount due. Neither is it possible to determine upon the evidence before me which deductions made from the K account were authorised although I am of the clear opinion that at least those to which I have specifically referred, namely Winrobe, Simposts and Davwren, were not. It follows from this that prima facie there should be an account.
49 One of the difficulties about this is that one would have expected that Slattery would have been required to be an accounting party, but it seems to me that Scott could seek to have him joined in the accounting if he wished. It does not seem to me that would necessarily require a separate action for accounts to be commenced although it some ways that might make the position clearer. Mr Coles also argued that the funds McMahon claimed he invested with Livingstone were not his, but belonged to Valbri Pty Ltd. That was a sort of shadowy claim not established to be the position. They might have come from Valbri and have been lent to McMahon. McMahon might have invested them as agent for Valbri as an undisclosed principal. On any basis they were invested in his name with Livingstone and he was entitled to claim them back. The final matter relevant to an accounting is that Mr Coles argued that the proper party to demand an account was Livingstone's trustee in bankruptcy because it would seem that all beneficiaries in respect of moneys paid to Livingstone on trust for investment would be beneficiaries entitled to a share in whatever could be obtained in respect of moneys due by Scott, Slattery or Ophix to Livingstone. Most of these people would presumably have been listed on the Statement of Affairs filed by Livingstone. Thus counsel argued in accordance with general principle that one of a number of trust beneficiaries should not be entitled to bring a claim against a debtor to the trust unless the trustee refused to do so. He argued that the trustee of Livingstone's bankrupt estate ought to be plaintiff in any proceedings for an account: Sharpe v San Paulo Railway Co (1873) LR 8 ChApp 597 at 609. But while that may be the usual position there are circumstances when it is not appropriate. This is one such circumstance because, were it not for his bankruptcy, it is clear McMahon would have had an action against Livingstone for moneys had and received. It is in part the actions of Livingstone in entering into that agreement and signing the deed which are challenged. Such circumstances make it proper for McMahon to claim: Hayim v Citibank NA [1987] AC 730 at 747-8. In such circumstances, however, it is ordinarily necessary to join the trustee as a defendant. In the particular circumstances of this case the order should provide for the trustee in bankruptcy to be joined as a defendant on the taking of accounts unless he elects to be joined as a plaintiff so as to take over the proceedings on the account himself.
50 The account as filed is, I consider, appropriate for vouching, objections and the like. In the circumstances and in view of questions which might arise, proceedings on that account should take place in this instance before a Master rather than a Registrar.
Proposed orders
51 There should be an order for proceedings on the account before a Master to determine the balance due by Scott and Ophix to the estate of Livingstone. The Master in his reasons or certificate should recommend how the costs of the accounting should be borne.
52 There should be an order that Livingstone's Trustee in Bankruptcy, who is aware of the proceedings, should be notified of these reasons and asked to elect whether he wishes to join as a plaintiff or be joined as a defendant on the accounting. I would envisage that entitlements to the amount so determined should be decided by the Trustee in Bankruptcy in accordance with proofs lodged with him but further consideration should be reserved in case there is a problem with this.
53 An order should probably be made covering the costs of the action to date unless there is some good reason for this to wait until the result of the accounting is known.
54 I will stand the matter over for a week or so to enable the parties to consider these reasons and endeavour to agree on appropriate orders. Failing agreement the plaintiff should bring in draft orders for consideration. Livingstone's trustee in bankruptcy appeared through counsel at the commencement of the proceedings and stated he was prepared to come back to assist the court if necessary. It would be desirable if he could be present when consideration is being given to the final orders.
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