Plain v Howard

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

No. 6805 of 1999

CAROL ELIZABETH PLAIN	Plaintiff
v
ROBERT ALAN HOWARD	First Defendant
THE BLADE CLOTHING COMPANY PTY LTD	Second Defendant
KEVIN WILLIAM HOWARD	Third Defendant
JUNE LAUREL HOWARD	Fourth Defendant
COMMONWEALTH BANK OF AUSTRALIA	Fifth Defendant

AND

No. 7287 of 1999

KEVIN WILLIAM HOWARD and JUNE LAUREL HOWARD	Plaintiffs
v
CAROL ELIZABETH PLAIN	First Defendant
ROBERT ALAN HOWARD	Second Defendant

And Between

CAROL ELIZABETH PLAIN	Plaintiff by Counterclaim
v
KEVIN WILLIAM HOWARD	First Defendant by Counterclaim
JUNE LAUREL HOWARD	Second Defendant by Counterclaim
ROBERT ALAN HOWARD	Third Defendant by Counterclaim

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JUDGMENT

JUDGE:	Cummins J
WHERE HELD:	Melbourne
DATES OF HEARING:	28 April - 2 May 2003, 5-8 May 2003, 12-16 May 2003, 19-23 May 2003, 12-13 June 2003, 16 June 2003
DATE OF JUDGMENT:	2 July 2004
CASE MAY BE CITED AS:	Plain v Howard and ors
MEDIUM NEUTRAL CITATION:	[2004] VSC 240

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Partnership – dissolution – post-dissolution trading – alleged fraudulent concealment of profits – breach of duty of care to keep books of account – failure to account – breach of fiduciary duty – constructive trust – conversion – deceptive and misleading conduct – equitable compensation – declarations and injunctions – loss and damage – banking.

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APPEARANCES:	Counsel	Solicitors
(as in No. 6805 of 1999)
For the Plaintiff	Mr R.E. Cook	S.V. Winter and Co.
For the 1^st – 4^th Defendants:	Mr L.M.F. Watts	Madisons
For the 5^th Defendant:	Mr J.W. Kewley	Ryrie Bridges

____________________________________

TABLE [L1]OF CONTENTS

The Proceedings........................................................................................................................... 1
The evidence................................................................................................................................. 6

(a) The general evidence.............................................................................................................. 6
(b) The financial evidence.......................................................................................................... 38
(c) The dissolution evidence..................................................................................................... 47

Assessment and Conclusions.................................................................................................. 49
Claim against the Commonwealth Bank of Australia........................................................ 51
Proceeding No. 7287 of 1999..................................................................................................... 56

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HIS HONOUR:

1. The Proceedings

This case had modest beginnings. On 23 December 1997 in the County Court the plaintiff Mrs Carol Elizabeth Plain filed proceeding 1997 no. 9710250 against her brother Mr Robert Alan Howard alleging that in July 1986 she and her brother had commenced carrying on in partnership the business of clothing manufacturer under the name Piccolino Children’s Wear; that on 2 June 1997 she had given her brother notice of her intention to dissolve the partnership; that the partnership was dissolved on 2 June 1997; and that her brother has refused to accept the dissolution of the partnership and has continued to carry on the business without accounting to her for her share of the partnership. The plaintiff sought a declaration that the partnership had been dissolved on 2 June 1997; alternatively, an order that the partnership be dissolved; an order that the affairs of the partnership be wound up; that for those purposes, all necessary accounts and enquiries be taken and made; that all necessary and consequential accounts, enquiries, directions and orders be effected; that a receiver be appointed; that pursuant to s.28 Partnership Act 1958 the plaintiff have access to and inspect and copy the books of account of the business; that the defendant deliver up for inspection all the financial records and books of account of the business; and for interest and costs. The statement of claim comprised 4 paragraphs, the prayer 11 parts, and the whole document 3 pages.

On 13 February 1998 the defendant filed a four line defence, admitting the establishment and dissolution of the partnership and denying the allegations that he refused to accept the dissolution of the partnership and that he had continued to carry on the business without accounting to the plaintiff for her share of the partnership.

By a long and tortuous metamorphosis the claim and its satellites came to constitute the substantial matters now before this Court.

That process of development was as follows.

On 30 January 1998 in the County Court his Honour Judge F.B. Lewis declared that the partnership was dissolved on 2 June 1997 by notice given to the plaintiff, and appointed Mr Graham John Clark as receiver and manager of the partnership.

On 20 August 1998, pursuant to an Order of Judge F.B. Lewis made on 19 August 1998 the plaintiff filed an amended writ, the statement of claim of which comprehended 25 pages and 56 paragraphs and the prayer for relief 18 paragraphs. Three further defendants were added: the second defendant, The Blade Clothing Company (hereafter “Blade”) said to be a successor to Piccolino Children’s Wear (hereafter “Piccolino”), the third defendant, Mr Kevin William Howard, the father of the plaintiff, and the fourth defendant, Mrs June Laurel Howard, the mother of the plaintiff. This statement of claim made a raft of new allegations. The primary new allegations were that Blade, the directors of which were Mr K.W. and Mrs J.L. Howard and the controller of which was Mr K.W. Howard and the book-keeper of which was Mrs J.L. Howard, carried on the business of Piccolino under the name of Blade without properly accounting to the plaintiff and received moneys therefor properly payable to the plaintiff. The plaintiff claimed that the first defendant (her brother, Robert) had in a multitude of ways breached his fiduciary duties to her. The plaintiff in addition to the relief originally sought, now claimed that she had suffered and continued to suffer loss and damage and sought equitable compensation from the first defendant, declarations, a share of the profits of the ongoing business and proceeds and moneys of the ongoing business. The plaintiff sought like relief from the other defendants. The plaintiff further alleged that the second defendant Blade falsely represented itself to be the owner of the ongoing business and that each of the other defendants aided and abetted and was knowingly concerned in that falsity, such representations being also misleading and deceptive under sections 52 and 53 Trade Practices Act 1974 (Commonwealth) and sections 11 and 12 Fair Trading Act 1985 (Victoria), and continued to do so. The plaintiff thus sought injunctions restraining the defendants from dealing with the assets of Blade, equitable compensation, damages, declarations and consequential orders.

A detailed defence was filed by the defendants on 25 September 1998, denying the fresh allegations in the amended statement of claim.

On 2 July 1999 the plaintiff’s parents, Mr K.L. Howard and Mrs J.L. Howard, filed proceedings in the County Court, 1999 no. 9903381 against their two children Mrs Carol Plain and Mr Robert Howard. These proceedings were in consequence of the National Australia Bank Ltd requiring repayment of an overdraft facility utilised by Carol Plain and Robert Howard in the operation of Piccolino and as to which the two parents were guarantors. On 6 July 1998 the Bank had served demands upon the children which were unproductive and on 22 February 1999 the parents paid to the Bank the sum of $56,545.86 under the guarantees. By proceeding no. 9903381 the parents sought recovery of that amount, with interest, from the children, and consequential orders. On 26 July 1999 Mrs Carol Plain filed a defence to her parents’ proceeding, denying the substantial allegations, and counterclaiming the matters she had claimed in her own action. Mr Robert Howard did not file a defence to his parents’ action and has never done so. Hereafter where convenient I shall refer to Mrs Plain’s proceeding 1997 no. 9710250 as “the main action” or “Mrs Plain’s action” and the parents’ proceeding 1999 no. 9903381 as “the subsidiary action” or “the parents’ action”.

The substantial escalation in the nature and ambit of the plaintiff’s claim derived in part from the investigation and reports of the receiver Mr G.J. Clark. His first report was filed on 20 May 1998, the second report 3 July 1998 and the third 7 December 1998. The receiver had got in assets of the partnership in May 1998. The plaintiff claimed that on 4 June 1998 the receiver sold to the plaintiff the partnership assets as at the date of dissolution for $15,000. The first defendant claimed that the receiver had sold the assets to him.

The receiver published his third Report on 7 December 1998. In it he concluded (as he had foreshadowed in his second Report of 3 July 1998) that there was an unexplained shortfall in the net profit of Piccolino for the years 1988 to 1997 of $993,447.

On 9 September 1999 upon application of the plaintiff Mrs Plain and pursuant to s.21(1) Courts (Case Transfer) Act 1991 the Deputy Registrar of the County Court ordered that the main action, the plaintiff’s proceeding 1997 no. 9710250, be transferred to the Supreme Court. That proceeding became no. 6805 of 1999 in the Commercial and Equity Division of the Supreme Court.

On 22 November 2000 Master Kings granted the plaintiff Mrs Plain leave to join the Commonwealth Bank of Australia as the fifth defendant to that proceeding. The Commonwealth Bank through its Brighton North branch was the banker for Blade.

On 28 November 2000 the plaintiff filed a further amended statement of claim in the Supreme Court. This statement of claim essentially replicated the 20 August 1998 amended statement of claim in the County Court as regards the first four defendants but added 13 further paragraphs alleging fraudulent concealment by the first and fourth defendants of the shortfall in recording the gross profits of the business from 1988 to 1997 in the sum of $993,447, breach of duty of care by those defendants properly to keep the books of account and to inform the plaintiff of the partnership finances, with like claims as to interest in the plaintiff’s favour in the loan account in the sum of $95,000 and claiming against those defendants the sums of $993,447 and $95,000. The plaintiff also claimed damages for the loss of use of the $993,447 including losses incurred by her in the forced sale of her property at 52 Chatsworth Road, Prahran. As regards the Commonwealth Bank, the further amended statement of claim alleged in relation to cheques between 3 April and 13 May 1998 to the value of $28,175 payable to Piccolino but deposited to the account of Blade that the Commonwealth Bank had acted in breach of duty to the Piccolino partnership or in breach of agreement with it, the plaintiff having purchased the choses in action of the business from the receiver in June 1998. The plaintiff claimed that sum of $28,175 against the Bank and damages for the loss of its use.

Then pursuant to an Order of Master Evans made on 10 May 2001, on 30 May 2001 the Plaintiff filed a second further amended statement of claim. Thereby the plaintiff as against the first and fourth defendants alleged reckless disregard as to the $993,447 and the interest on the loan account, and against the fifth defendant alleged that the sum due upon cheques from 3 April 1998 to the present was $51,196 or possibly more, not $28,175 as previously claimed. Further, the plaintiff claimed against the first four defendants the sum of $42,796 for cheques payable to Piccolino and which were deposited by them at places unknown.

Defences on behalf of the first to fourth defendants essentially denying the allegations were filed on 13 August 2001. A defence on behalf of the fifth defendant was filed on 2 July 2001, denying contractual or tortious breach and alleging that the cheques were properly endorsed and paid into the Blade account and done so with authority.

Then pursuant to a further Order of Master Evans made on 22 November 2001, a third further amended statement of claim was filed on behalf of the plaintiff, repleading the causes of action as to reckless disregard by the first and fourth defendants in its predecessor and as to fraudulent concealment by the first and fourth defendant. Further particulars as to the claim for the consequential loss from the loss of use of the $993,447 were provided namely the present loss of some $650,000 upon the forced sale in 1994 of the plaintiff’s home in Prahran and the loss of 12% per annum upon investment in securities.

By the Order of Master Evans of 22 November 2001 the proceeding was transferred to the Common Law Division of this Court.

Defences by the first four defendants to the plaintiff’s third further amended statement of claim were filed on 5 and 6 February 2002. The defences also alleged that Blade had an equitable interest in the partnership assets and the winter 1998 range of clothing.

The parents’ claim, County Court proceeding 1999 no. 9903381, likewise was transferred to the Supreme Court by Order of the Deputy Registrar of the County Court made on 27 July 1999. It became Supreme Court proceeding no. 7287 of 1999.

On 3 December 2002 Master Kings made directions for the hearing of both proceedings. She directed that subject to any contrary Order of the trial Judge, each witness statement stand as evidence in chief of that witness.

When the matters came before me on 28 April 2003 I directed that they (that of Mrs Plain 1999 no. 6805 and that of the parents 1999 no. 7287) be heard together.

Despite the lengthy history of amendment, before me during trial further amendments to the pleadings were sought and granted. In the end the pleadings were in a state whereby the true issues between the parties were exposed. It is profitless to trace those further amendments. The main amendments, by the fourth further amended statement of claim, were that, as against the first four defendants the claimed amount of $993,447 for fraudulent concealment and related heads was reduced to $610,933 and as against the fifth defendant the claim for damages for loss of use of $51,196 was withdrawn.

The evidence

(a) The general evidence

At the outset a brief chronology is appropriate.

In July 1986 the plaintiff and the first defendant commenced partnership as a clothing manufacturer under the name “Piccolino Children’s Wear”. Just on eleven years later, in June 1997 the plaintiff served on the first defendant a notice of intention to dissolve the partnership (later declared by Judge F.B. Lewis to be dissolved on 2 June 1997). There was no written partnership agreement.

Mrs Carol Plain, previously married to Mr John Plain, was divorced from him and entered a divorce settlement in April 1986 in which she received an amount equivalent to approximately $1,000,000. That amount included a cash component of approximately $800,000. From that amount she purchased in 1986 a property at 52 Chatsworth Road, Prahran for approximately $400,000. This was a large Victorian house with a basement. She and Robert Howard, who was then 26 years of age, entered the partnership in July 1986. Mrs Plain and her two young children resided in the house and the business was run from the house. The business aimed at the upper end of the children’s wear market, with summer and winter ranges. Mrs Plain’s parents, Mr Kevin and Mrs June Howard, lived at Brighton. Mr Kevin Howard was recently retired and Mrs June Howard kept the books of the business. It operated for a number of years. In February 1994 Mrs Plain sold the house at Chatsworth Road, Prahran for $650,000. Factory premises at 417 Warrigal Road, Moorabbin were found and Mrs Plain and Robert Howard on 1 January 1994 commenced a yearly lease of those premises in the name of Piccolino. Mrs Plain had made advances to the partnership which by July 1996 stood at $153,000. Differences occurred between Mr Plain on the one hand and Robert Howard and their parents on the other as to the loan account and the financial state of the business. In August 1996 a meeting occurred between Mrs Plain, Mr K.W. Howard and Mr B.K. Taylor the accountant to the business and then on 4 October 1996 a further meeting occurred at which also attended Robert Howard and Mr John Plain. Mr J. Plain handed Robert Howard a demand for repayment of Mrs Plain’s loan account of $153,000 plus interest, which Robert Howard refused to receive. Mrs Plain ceased working in the business in October 1996. On 2 June 1997 Mrs Plain signed a notice of her intention to dissolve the partnership, which was served on Robert Howard on 24 June 1997. Later Judge F.B. Lewis declared that the partnership was dissolved on 2 June 1997.

On 23 December 1997 Mrs Plain filed proceedings in the County Court seeking a declaration that the partnership had been dissolved on 2 June 1997 or that it be dissolved, that its affairs be wound up, that a receiver be appointed and that a proper accounting be taken.

On 30 January 1998 Judge F.B. Lewis appointed Mr G.J. Clark as receiver and manager of the partnership.

On 6 February 1998 the receiver visited the premises at 417 Warrigal Road, Moorabbin, the lease of which had been renewed by Mr Robert Howard and Mrs June Howard on 1 January 1998, and provided Robert Howard with a copy of the Order appointing Mr Clark receiver. On 9 February 1998 the Blade Clothing Company was incorporated, the directors of which were Mr K.W. and Mrs J.L. Howard. The business operated from the Moorabbin premises. The receiver Mr G.J. Clark made three reports, on 20 May 1998, 3 July 1998 and 7 December 1998.

I turn to the evidence called on behalf of the plaintiff. First, her own evidence, taken from her witness statement, oral evidence before me and documentary material emanating from her.

Mrs Plain gave evidence that the genesis of Piccolino was as follows. In April 1986 she had entered a divorce settlement with her former husband, Mr John Plain by which she received an amount equivalent to $1,000,000 of which there was a cash component of $800,000. From that component she purchased for $400,000 a property at 52 Chatsworth Road, Prahran and she and her two young children, then aged 7 and 5 years, moved in there. Her father, Mr Kevin Howard suggested that post-divorce she should commence an occupation and use the balance of the moneys from the divorce settlement to produce income. Her parents resided in Brighton and were in a modest financial position, her father having recently been retrenched and her mother being a qualified book-keeper. Her younger brother, Robert, then 25 years of age, had been working as a sale representative of Marquise Knitwear Pty Ltd and wished to start his own business in the knitwear industry. Her father introduced her and her brother to her father’s accountant, Mr M. Trytell, to obtain advice as to how to set up the business. Mr Trytell advised the setting up of a partnership, that as they were brother and sister no formal partnership agreement was needed, and to register a business name. Mr Trytell did not give any further advice, Mrs Plain did not obtain any and brother and sister went into partnership. Thus Piccolino Children’s Wear.

There never was any written or formal partnership agreement. The two partners were to be equal partners. As Robert Howard had only $5,000 capital to introduce to the business, he and Mrs Plain each put $5,000 capital into the business. The business was conducted from the Chatsworth Road house, the basement being used for stock and the loungeroom as an office. The business paid no rate or rents and used the house telephone. It was agreed from the outset that Robert would draw $300 per week from the business as wages, which later rose to $400 per week, and was provided by the business with a motor vehicle for business purposes and personal use. He was repaid his $5,000 investment after a year; Mrs Plain was not. Mrs Plain took no wages or drawings from the business until late 1995 when, after complaining that she was receiving nothing from the business, she commenced to receive a weekly payment of $150. Originally there had seemed little point in her taking money out of the business as the aim was to establish the business as an ongoing concern. Mrs June Howard did all the book-keeping for the business, for no wages, for like reason. Mrs Plain worked in the business for 20-25 hours per week, Robert Howard full-time and Mrs June Howard four days a week (Monday being her day for bridge). Mrs Plain’s working arrangements gave her some personal flexibility particularly in the care of her two young children who in the early years were attending Glamorgan, the junior school in Toorak of Geelong Grammar School. She took her children away during school holidays.

Piccolino aimed at supplying clothing to the upper end of the children’s market. At a later time the business also used the name Kaos Kids. Robert Howard and Mrs Plain designed the samples which were then made up by jobbers. Robert Howard would then take the orders around to retailers in order to obtain wholesale orders. The mark-up was usually 100% and sometimes more, up to 120%. Discounts were not given when invoicing goods to retailers. There were two ranges of clothing produced annually, a summer and a winter range. Twice annually a sale would be held directly to the public of garments which remained unsold at the end of the respective season. These public sales accounted for about 10% of the business sales and were at or slightly above wholesale price.

Robert Howard acted effectively as manager of the business. He accepted orders for stock, visited retailers to obtain orders, arranged for the manufacture of stock, ordered fabric, did deliveries, orders and invoicing, and sometimes banked moneys. He knew the costings and the selling prices of garments. He worked full time on the business. Mrs Plain assisted with the design of ranges and arranged for the making up of orders and the dispatch of finished goods. She did not work on the financial aspects of the business. She worked about six hours a day at the business particularly in busy periods when sending out new ranges or conducting end of season sales. Mrs June Howard, a qualified book-keeper, kept all the books of account of the business from the outset. She attended Chatsworth Road daily except Mondays to do the financial work of the business and was in effect its financial controller. She did the banking. All bank statements were sent to her Brighton home. Mr Kevin Howard, who was a printer by occupation, arranged for the printing of order books, invoices and business documentation. The parents provided security for the business by providing a mortgage to the National Australia Bank over their home, and whereby an overdraft facility originally of $20,000 and later of $50,000 was provided. The business bank account was with the National Bank, Brighton branch, which was also the father’s bank. Initially, the signatories to the Piccolino bank account at the NAB Brighton were Mrs Plain and Robert Howard; later for convenience Mrs June Howard also became a signatory, the account requiring two signatures.

The business commenced operation in August 1986. Initially, fabrics were inspected, a range was made up, and Robert Howard in October 1986 took the range to customers. That was the winter 1987 range.

From time to time Mrs Plain was asked to loan moneys to the business. By 30 June 1993 she had advanced the business at least $67,000 by way of loans and had introduced $17,565 by way of other capital advances. Further, at her mother’s request, she had taken out a fully drawn advance of $25,000 from her investment account with the A.N.Z. Bank. Repayment of that latter amount was made to her over a number of years but not of the other amounts. By then Mrs Plain had become worried about her continuing exposure to the business and the constant need for her to provide capital. As a result, in October 1993 she informed her brother and parents that she could not afford to continue in the business as it was costing her too much money and she was not receiving any reward. She told them that in any event she had to sell the Chatsworth Road property and the business would have to move its operations from there. She said to them that the reason she had to sell Chatsworth Road was because of her financial position due principally to her continually funding the business, and that she would have liked to have kept the house if she were able to get her money back from the partnership and indeed make money from it. Her investment account was now exhausted. Robert Howard and both parents urged her not to leave the business. They said that the four persons had worked on it for seven years and that if the business were relocated to commercial premises it would take off. She told them that she was not prepared to introduce further capital into the business and was told that none would be required. Thus the move to Warrigal Road, Moorabbin.

In late 1993 Mr Kevin Howard and Robert Howard found factory premises at 417 Warrigal Road, Moorabbin. She and her brother took an annual lease of those premises from 1 January 1994. The business operated from those premises thereafter.

Mrs Plain put the Chatsworth Road house on the market for auction in October 1993. It was passed in. In January 1994 it was sold, with settlement in February 1994. The sale price was $650,000.

Although she had been told in October 1993 that no further funding of the business would be required of her, on 14 February 1994 she was requested to advance (and did) the sum of $25,000 to cover a business problem, and which was credited to her loan account, which stood at $104,000 at the end of June 1994. (The business problem was STD Textile Distributors Pty Ltd refusing further supply until an outstanding account was paid, the provision by Mrs Plain of $25,000 and its application. Much was made of this matter to no avail and I shall not refer to it further). Throughout 1994 and 1995 the business usually operated at or just above its then overdraft limit of $50,000. From time to time during that period, the overdraft was substantially exceeded. When this occurred the NAB branch manager would require temporary transfer of funds from her personal account with the NAB to the partnership account to bring it back within its limit. These transfers were for a few days’ duration. In September 1995 Mrs Plain saw the accounts of the business for the year to June 1995 showing her loan account standing at $150,000. At her parents’ home she said that she would no longer continue to finance the business which had apparently never shown a profit, that she was continuing to finance the business contrary to earlier assurances and that the overdraft was continuing to increase. It was then standing at about $70,000. Her father said he would take over the overdraft facility which he did. On that assurance she said the partnership could continue for the time being. Then in July 1996 she received copies of the partnership returns for the year ended June 1996 which revealed that sales were some $270,000 but the business had made a loss of $3,500. Her loan account was standing at $153,500. Mrs Plain told her brother and father that she wanted to get out.

Her father arranged a meeting at the office of the business accountant Mr Barry Taylor. At the meeting her father said that she could not close the business down because it was “your brother’s livelihood”. Her father and Mr Taylor agreed that the business should continue until 30 June 1997 but that Mr Taylor would oversee its finances and reassess its position at the end of December 1996. Mrs Plain then informed her former husband, Mr John Plain, of the outcome of the meeting and said to him that she felt she had been pressured into continuing the business against her wishes. Mr Plain said he would intervene to assist her.

At this point Mr Plain enters the narrative, to which matter and its significance I shall return.

On 4 October 1996 a further meeting was held at Mr Taylor’s office. This time Mrs Plain was accompanied by Mr John Plain. Present were also Robert Howard, Mr Kevin Howard and Mr Taylor. At the meeting the financial accounts for the year ended 30 June 1996 were tabled. Mr John Plain handed Robert Howard a letter from Mrs Plain requesting immediate payment of her loan account which then stood at $153,000. Robert Howard refused to accept the letter. Mr Plain stated that he considered that the accounts on their face indicated the business was insolvent and should be wound up. He said to Robert Howard that he was not to make any further payments from the business in reduction of the overdraft account before he repaid Mrs Plain’s loan account with interest. The overdraft at that time stood at $78,000. Mr Kevin Howard replied that that would not be done and that the overdraft, which he had guaranteed, would be paid out first. The meeting concluded unharmoniously. Mrs Plain ceased working in the business in October 1996. She has not spoken to her mother or her brother since November 1996. Since October 1996 her loan account has not been repaid nor interest on it nor has Robert Howard accounted to her for her share in the partnership.

On 2 June 1997 Mrs Plain formally gave notice of intention to dissolve the partnership. This document was served on Robert Howard on 24 June 1997.

When the financial records of the partnership for the year to June 30, 1997 were available Mr Kevin Howard arranged another meeting at Mr Taylor’s office, this time they and Mrs Plain attending. This meeting resolved nothing. Mrs Plain has not spoken to her father since.

After Mrs Plain ceased working in the business in October 1996 she went back to College and did a ten week business administration and computing course and then commenced in February 1997 working as a medical receptionist. She was still receiving $150 per week by cheque from the business. She is now a consultant with a leading retail company in the area of cosmetics.

It is appropriate at this point to introduce into the exposition two witnesses called on behalf of the first four defendants. First, Mrs Plain’s twin brother, Peter Kevin Howard.

Mr Peter Howard, teacher, holds the degrees of Bachelor of Economics, Diploma of Education, Graduate Certificate in Careers Counselling and Graduate Diploma of Finance and Investment. He is a Fellow of the Securities Institute of Australia. Between 1976 and 1981 he was the assistant to the investment manager for the Vice-Principal’s Division, University of Melbourne, which administered trust and superannuation funds associated with the University. He then worked for a year as an investment analyst at National Mutual, for four years with the Australian Shipping Commission in accounting, and then commenced teaching.

Mr Peter Howard gave evidence that some time after his sister Mrs Plain bought the house at Chatsworth Road, she asked him for advice on how she should invest the balance of her divorce settlement. She said that she had been to see a financial adviser at Wardley’s Australia on her father’s recommendation, that that adviser had said she could not live on the income she would generate from her investments and that she did not accept that advice. Mrs Plain said to Peter Howard that she had about $450,000 left over after buying the house. Peter Howard referred her to Mr Alan Baulding of Prudential Bache Securities for advice. Mr Baulding was not known personally to Peter Howard but was regarded as one of Victoria’s leading financial planners. Mrs Plain consulted with Mr Baulding who provided a report to her. She in turn gave the report to Peter Howard and asked him to explain it to her as she could not understand the recommendation or what it was based on. The Baulding report had attached to it a series of spreadsheets which demonstrated that with the rate of return Mrs Plain was then receiving for her capital and her spending patterns, she would be insolvent within ten years. In particular the report identified that in order to meet her requiring living standard she would have to continuously draw down capital which after ten years would eliminate that capital. Peter Howard explained the report to Mrs Plain. She then said to him that she could not live on the money that she was earning and that she would just have to keep extra cash in the bank and draw down the cash to live on. Peter Howard told her that the report identified that she would actually run out of money. She dismissed that prediction outright. Peter Howard suggested that she should go back to see Mr Baulding. She replied that she would not be going back to see him.

In cross-examination Mrs Plain said that she did not recall consulting after her divorce and on her father’s recommendation a Mr Lloyd Friend of Wardley’s Australia, as to investment of her divorce moneys. Her divorce was 18 years ago, in 1986. She did not have $450,000 to invest after the purchase of Chatsworth Road. She had $400,000. She repeatedly said she did not recall the meeting with Mr Baulding or the advice of her brother Peter, outlined above. Ultimately, when the witness statement of Peter Howard as to the Baulding meeting, the Baulding report and spreadsheets and the consequent explanation and advice to her by her brother Peter, was read out in full, Mrs Plain replied as to that explanation and advice (T.239-240):

“I have absolutely no recollection whatsoever of any conversation along those lines and if I had had a conversation along those lines at the time of my divorce, I certainly would not have gone into business with my brother on the recommendation of my father with a person at the time who had no contribution whatsoever over the 10 year period to this partnership and unfortunately I wish I had, in hindsight, been given that advice at the time. But when I was divorced at the time my father came to me within three months of me receiving my divorce settlement and he took advantage of the fact that he knew I wasn’t a financial person and that I wish I had had better advice because, on hindsight, I would never ever have entered into a partnership with my brother on the recommendation of my father knowing full well – knowing what I know now, that I was going to be continually asked to finance this partnership, continually not being paid a wage and my parents were fully aware of the fact that I didn’t have a large earning capacity and they were fully aware of the fact that especially further down the track, that I needed an income to sustain myself and my children. So I really do wish that I had had that advice at the time because I would never ever have made the decision that I made to go into partnership with Robert Howard.”

After further cross-examination as to whether the events did or did not happen or whether Mrs Plain simply could not remember, she was asked (T.246):
“Did you ever consult Mr Baulding of Prudential Bache Securities or receive a report from him? … No.
Did you ever consult Lloyd Friend of Wardleys Australia and receive verbal advice from him? … No.”

In cross-examination Mrs Plain stated that of the $800,000 cash upon the divorce settlement provided to her, she invested $400,000 in the purchase of the Chatsworth Road property and of the other $400,000, $150,000 was invested on a first mortgage, another $100,000 with the IOOF Building Society, money was invested in an ANZ long term investment fund and money was in her bank account. By 1993 there “could have been” $100,000 left (T.173). By 2000 there was nothing left (T.255).

Mr Peter Howard had nothing to do with the financial aspects of the partnership business. He had nothing further to do with Mrs Plain’s finances until after she sold Chatsworth Road, when she asked him for advice about what she should do with the money from the sale. Peter Howard advised her to buy a cheaper house, invest the balance and build up that investment and obtain a part-time job to meet future expenses. She rejected his advice and leased a properly in Mercer Road, Armadale. About 1998 Mrs Plain telephoned Peter Howard after she had terminated her business relationship with Robert Howard. She asked Peter Howard how much money was Dad worth. Peter Howard replied that he didn’t know. She then said that she would get John Plain to take on their father. Peter Howard replied that you don’t do that to your parents. Mrs Plain replied “they can all go to hell”. The only contact between the twin siblings since then was in late 2002 when Mrs Plain arrived at Peter Howard’s home early one Saturday morning. She said that she had no money, that John Plain had just lost a case with A.G.C. and that she and John Plain had to live together.

The other witness called by the first four defendants whom it is appropriate to introduce into the exposition at this point is Mr Barry Taylor.

Mr Barry Keith Taylor, certified practising accountant and the principal of B.K. Taylor & Co is an official liquidator of this Court, a registered liquidator for 30 years, a certified practising accountant and a fellow of the Australian Society of Certified Accountants. He knew both Mr Kevin Howard and Mr John Plain through the Dendy Park Tennis Club. He met Mrs Plain socially when he attended the home in Shakespeare Grove, Hawthorn of the Plains when they were married. In July 1989 Mrs Plain came to see him in his professional capacity. She told him that she and her brother Robert ran in partnership, a children’s clothing manufacturer known as Piccolino, that she was in charge of accounting and finances while her brother Robert was in charge of sales and production, and that her mother June acted as book-keeper to the business at no charge. Mr Taylor’s firm was then appointed as accountant to the partnership. Some three or four years later Mr Taylor was approached by Mr Kevin Howard to do the tax returns for the partnership. His firm continued to be the accountant to the business until the date of dissolution of the partnership on 2 June 1997. Mr Taylor is familiar with the business, its books of account, its trading position, its tax returns and its financial position.

Commencing with the 1989 tax year, Mrs Plain would bring in annually the partnership’s books for the purpose of preparing the partnership tax returns. Each year after the partnership tax returns had been prepared by his firm, Mr Taylor and Mrs Plain had a discussion concerning the financial performance of the business. Each year the discussions centred on the lack of profitability of the business. Each year Mr Taylor said to Mrs Plain that the profit margin needed to be increased by either reducing costs or increasing selling prices. Mrs Plain was fully aware of the losses incurred as the matter was discussed at length at the end of each financial year. Mr Taylor wrote (D.C.B. 106) on 21 February 1991 to Robert Howard and Carol Plain trading as Piccolino because of his concerns about the lack of profits in the partnership. This was a detailed 3 page letter of analyses and recommendations, with a 3 page schedule. This letter was sent not because Mr Taylor was asked to send it, but because of his concerns about the lack of profit in the partnership. At no time had Mr Taylor spoken to Robert Howard about any partnership matters.

In the early days of the partnership, Mr Taylor advised Mrs Plain that it was not in her best interests to have interest charged to her loan account in circumstances where interest had not been paid, as she was only entitled to 50% of the loss associated with interest being charged. Mrs Plain agreed that no interest would be charged and signed tax returns each year aware of that fact. In the annual discussions Mrs Plain stated to Mr Taylor that the costings were done on the basis of a 60% mark-up. At the start Mrs Plain said the mark-up was 60%. She and Mr Taylor discussed the mark-up at regular stages through the course of the years. The mark-up varied from 60% to 65% to 68% over time. After the preparation of the 1996 tax return Mrs Plain stated that the mark-up was to increase to 100% for the 1997 year.

In cross-examination Mrs Plain stated that Mr Taylor did not give her any detailed analysis or explanation of why the losses were occurring. Mr Taylor very early on “made, on one occasion, a suggestion” (T.195) as to increasing sales and reducing overheads. Mr Taylor had “mentioned” (T.199) the issues of sales and overheads to her. She denied ever receiving Mr Taylor’s letter of 21 February 1991. She denied that the reason it was she who annually conferred with Mr Taylor was that she was responsible for the accounting and finance functions of the business. She said she saw Mr Taylor only because she was the sole person who had invested money in the business. She had never said to Mr Taylor that the margin on goods sold was 60%. She did not say to Mr Taylor in 1996 that in 1997 the mark-up would go to 100%. Mr Taylor never informed her that she was entitled to interest on her loan account. They never had a discussion about how she could be paid interest on the loan account. Prior to Mrs Plain selling Chatsworth Road in 1993, her former husband Mr John Plain who had been providing maintenance and education for their two children at Geelong Grammar had lost his business and could not afford the provision he previously made. Mr Plain was made a bankrupt which “was another major concern why I sold the house” (T.263). By 1996 Mrs Plain was unwell. That year their daughter was in Year 12 at Geelong Grammar and their son in Year 10 at Geelong Grammar. In 2002 Mr Plain “lost his case with AGC” (T.264). Mr Plain is providing the legal costs for this action, which Mrs Plain hopes to repay upon its completion, is active in its marshalling and is supportive of her.

Called on behalf of the plaintiff was her former husband, Mr Sidney John Plain. Mr Plain from 1968 to 1991 was the proprietor and managing director of William Lawrence (Globe Dye Works) Pty Ltd, a very substantial Australian producer of knitted textiles. Due to high commercial interest rates around 1989 to 1991 several major customers of the company defaulted, leading ultimately to its going into receivership on 8 June 1991. From 1992 to 1993 Mr Plain was managing director of Gartex Pty Ltd, a small garment dyer. The witness statement of Mr Plain, under the heading “employment history” states in part:

“1995-2002Invested in second mortgages. Prepared to litigate case against Australian Guarantee Corporation Ltd.”

Mr Plain’s litigation against A.G.C. Ltd, concluded in July 2002. Mr Plain was unsuccessful in that litigation. Mr Plain holds the qualifications of City and Guilds Certificates of Dyeing and Chemistry (R.M.I.T.), Diploma of Chemistry (R.M.I.T.) and almost completed a Diploma of Accountancy (A.S.A.).

Mr Plain and Mrs Plain were divorced in 1986 as previously stated. Due to their then personal situation he did not take part in arrangements for the setting up of Piccolino. However Mrs Plain, with whom over the years he had remained on general good terms, approached him in mid 1996 about problems she was experiencing in the business of Piccolino and with her brother Robert. He assisted Mrs Plain in her endeavours thereafter. As a consequence himself of falling on hard times due to his unsuccessful litigation with A.G.C., Mr Plain moved into Mrs Plain’s premises in Flintoff Avenue, Toorak in late 2002 and has remained there thereafter. They reside separately at those premises.

Mr Plain confirmed the evidence of Mrs Plain as to the 4 October 1996 meeting at Mr Taylor’s office set out in paragraph 41 above. In his witness statement after stating that at that meeting Mr Plain informed the persons present that it was apparent from the accounts that the business was insolvent and should be wound up, the following appears (paragraph 5):

“(As I have had extensive business experience in the rag trade I know very well what goes on in this industry).”

Following that meeting “Carol and I then instructed Carol’s solicitor, Mr Winter” (Mr Plain’s witness statement para. 7) to write to Robert Howard to agree on a winding up procedure for the business and for the immediate repayment of Mrs Plain’s loan account, standing at $153,000 together with interest.

Mr Plain gave evidence that for some time prior to the October 1996 meeting Mrs Plain had been informing him of her concerns about the unprofitability of the Piccolino business. Mr Plain stated (to and in 1994) (T.327-328):

“I knew what was happening because Carol would tell me from time to time and she said she was worried it didn’t make any profits and she was having to put more money in and, of course, she became a lot more concerned when my financial situation was obviously severely diminished. Up until that stage, a little bit of extra money really didn’t bother me but then we had to be very, very careful. She wanted the children to keep going to private school, which I did, but I was not able to certainly fund any more maintenance so she had to take that on. I, for a long time, said ‘There’s something not right about this business’ … she said ‘I feel its going to make money, it will make money when we go to a factory outlet’. I said it was hard, it was her family so I didn’t become very much involved in it until she became – I said ‘Something is not right’, that’s all I could tell. I have been in this trade for 34 years, I’m very, very familiar with what happens in this trade, who wins, who loses … she had absolutely no control and really, to me, she would not have understood financially what was going on, I knew that. She was dependant on her father’s advice. I had been married to her for eight years or seven years or whatever it was and I knew her strengths and weaknesses, and her strengths were more her creative side rather than her ability with finance, so clearly when there is a divorce a girl goes to her father, that’s what she should do, and the father should really – he should protect her and frankly, I was appalled that that wasn’t happening. Clearly, I wasn’t going to be doing it; I was married again.”

(Mr Plain had remarried in 1988, had separated in 1994, had a property settlement in 1995 and was divorced shortly thereafter).

In cross-examination Mr Plain stated that William Lawrence (Globe Dye Works) Pty Ltd went into receivership on 8 June 1991. He had been declared bankrupt on 4 August 1994 which bankruptcy was annulled on 28 February 1995. Proceedings by William Lawrence (Globe Dye Works) Pty Ltd against A.G.C. Ltd were commenced in this Court in 1997 (being no. 5936 of 1997). During the course of those proceedings a matter arose in 2000 before Beach J as to contempt of court by Mr Plain in relation to the sale of property, and also as to security for costs. Ultimately the proceeding concluded in July 2002 with the William Lawrence claim for $80 million being abandoned and with each party to pay its own costs. Mr Plain suffered legal costs of the order of $900,000.

I shall return to the evidence of Mr Plain in relation to the receiver, Mr G.J. Clark, in the section headed “the financial evidence”.

I turn to the further evidence called on behalf of the first four defendants.

Robert Alan Howard gave evidence that he and Mrs Plain went into partnership in July 1986. He was then 26 years of age. They agreed that the business Piccolino Children’s Wear would start with a capital of $10,000 contributed equally by them, that all business decisions would be jointly made including designs and fabric selection, that she would be responsible for business administration and that he would be responsible for manufacturing and sales. The business was run that way. Mrs Plain was actively involved in the day to day business operations. Mrs June Howard did the book-keeping.

Initial sales were mediocre. In the first year of trading there were approximately 35 customers, primarily from his former employer Marquise Knitwear, a manufacturer of children’s clothing where he had been a salesman. He was surprised and disappointed at the lack of sales to his prior customers at Marquise, but felt that this would improve as he learnt more about the business. Cash flow did not start until about April 1987. In the year ending 30 June 1987 there had been about $40,000 in gross sales. An overdraft facility was obtained. Sales moved slowly. Puff n’Gilly was a customer from the first year and was and remained the partnership’s largest customer. It ordered about $12,000 per year. The other main customer was Country Kids. It ordered about $6,000 per year. Both those customers also purchased discounted stock, at 40% to 60% discount. In the initial years, most other customers were small individual suburban boutiques. Later, larger customers came on but they did not become repeat customers. By 1996 there were 89 customers throughout Australia. The largest order ever received was from Tamijac, New Zealand, in May 1996 for $60,000 of merchandise being a winter range. There were delays in payment. It was not a repeat order. The costs of some aspects of the partnership were low (eg the house premises and book-keeping) but the high cost of the merchandise, due to the high quality product and low production runs, always caused problems. Neither he nor Mrs Plain were experienced in the market. In 1993 he and Mrs Plain decided that sales were being hampered by their inability to recognise fashion trends. They decided to go to Paris to view and purchase samples intending to use the knowledge gained to assist in design production. This they did. It was usual in the clothing business for persons to go overseas to improve designs. He returned via Bali and Mrs Plain returned via Italy. In later years he travelled to Japan and the United States for the same purpose. Mrs Plain supported those trips as they both recognised that their designs and the marketability of the product improved after each trip. A problem was that because of the low volume the name of the product did not reach the stage itself of generating sales. Sales had to be generated by one on one selling of the product by him. Further, importers were generally able to release new season’s samples two or three months before Piccolino, taking much of the market. He and Mrs Plain regularly discussed this problem but could not think of a solution. Mark-up margins were initially 60% but in later years increased to meet increased costs aiming at 100% mark-up, particularly after the business moved to the factory premises at Moorabbin. Sales to boutiques were low volume business. The cost to volume ratio for these sales was very high, including because of the small volumes carried over a number of styles. The boutiques were slow in paying. Discounts of around 5% were offered for prompt payment. Sales to the public did not occur in the first three years, in part because of limited stock. Unused fabric was sold off at the end of each season at substantially reduced prices.

The business operated for some years out of Chatsworth Road which arrangement was unsuitable for the business and for Mrs Plain and her children. At the end of 1993 the business moved to Warrigal Road, Moorabbin, involving leasing and other costs of those premises. In 1996 Mrs Plain said that she wanted to get out of the partnership. She said that she suspected that the cost of producing the goods was greater than they had estimated. Mrs Plain complained to their father, Mr Kevin Howard, who suggested that she do a check of Robert Howard’s estimated costings for the summer 1996 range. Mrs Plain confronted Robert Howard one day in the factory in about October 1996 and said that she had found a number of errors in the estimates. Robert Howard replied that they were only estimates. Shortly afterwards in a further discussion he offered to buy out her interest for $50,000 and assumption of the overdraft. She rejected the offer. Then they had the meeting in Mr Taylor’s office set out in paragraph 41 above. At the end of the meeting Mr Plain said to Robert Howard “You will be paying your sister off for the rest of your life”. Mr Plain denies this. After the dissolution of the partnership in June 1997 Robert Howard continued to run the business on his own account. Since that date Mrs Plain has not been liable for the operations of the business. (I deal with the dealings between the receiver and Robert Howard below, in the section headed “the financial evidence”). No receipts of the partnership business have been concealed from Mrs Plain. After a decade in the business Robert Howard came out of the partnership with nothing. He considers in retrospect that the business was unsuccessful because it was always undercapitalised and because he and Mrs Plain both were inexperienced in running a business of that sort.

In cross-examination Robert Howard said that he left home at the age of 22 years. He has rented premises ever since. He has never married or had children. He was paying $190 per week in rent at the time of giving evidence (May 2003). He left school at the end of 1^st term of Year Twelve. The vehicle the business purchased for him was a second-hand Commodore station wagon, which had done 50,000 kilometres, for the price of $11,000. The maximum weekly salary he ever drew from the business was $450. Most of his life since age 22 he has shared flats with other people. The units he lived in alone were small. When he and Mrs Plain were in Paris they shared a room to keep expenses down. He went to Paris once (as above), the United States twice, and Japan three or four times on business trips. The gross annual sales reached $200,000 before the move to Moorabbin and $270,000 thereafter. The business usually posted an annual net loss. The mark-up was 60% for a number of years and gradually was pushed up, seeking to reach 100%, with increased costs particularly after the move to the factory premises at Moorabbin. He did not say to the receiver the mark-up was 100% before the move to the factory premises. He said to the receiver that was the mark-up on the range at the time of the receiver’s question, namely 1998. Robert Howard was cross-examined about the balance sheets of the partnership, its annual gross sales and net losses, and its method of invoicing, which matters I shall refer to in the section headed “the financial evidence”. As to October 1993, Robert Howard had no recollection of Mrs Plain saying she was concerned about her exposure to the costs of the business and the business not making money. They had just come back from Paris. He did not know why she sold Chatsworth Road and considered that was her private business. It was more professional for the business to operate from factory premises than a private house, and hopefully would result in better profitability. The following was asked in cross-examination (T.877-878):

“Why did you keep this business going for so long? - - - When we moved into the factory, we increased the sales. As I said, I have never done any accountancy, marketing, things like that; I was trying to generate more sales. But as has been discussed, Carol went to the accountant at the end of each year and she would come back and say ‘We made a small loss’ or ‘We made a little bit’ or ‘We nearly broke even’, things like that. It was really the vision in the business that it would get better and, as it turned out, there was a downturn in client base due to a lot of shops closing. That vision did not come to fruition and I’m not blaming Carol; it’s joint blame. I mean, we’ve got to take joint responsibility for what happened. We both worked the business. It didn’t work out how we wanted it to, obviously, and when we increased the sales – but at the end of the year the profits weren’t there.
In 1996 you didn’t want to stop the business, did you? - - - As I said, we had had discussions that if someone did come in – and I had future orders for a six month period – I was quite open to sell the whole – get as much money back and finish.
Who is going to buy a business that’s made a loss for eight or nine years? - - - Maybe someone – look, it’s the same in a retail shop – someone might have bought a business and they might have had greater expertise than Carol and myself and they might have wanted to take advantage of any exposure that we had had in the marketplace previously. A lot of shops are sold with very little goodwill and profits but they are still sold.”

As to Mrs Plain wishing to leave the partnership, the following was said in cross-examination by Robert Howard (T.880-881):
“… As I said previously, I was quite open to Carol getting out of the partnership. My concern was how I was going to repay half the loan account. As I said, we continued trading which, under partnership law, is – there was no direction from Carol to say ‘I am going to stop you trading’ or anything of that nature and, of course, she wasn’t receiving any bills or accounts from the partnership; I took it upon myself to pay those bills.
You knew that from then on she was steadfast and adamant in wanting her involvement in the business to cease and to be repaid her share of the loan account? - - - I’m not sure of the actual date of the demand of the actual loan account but, as I said previously, the demand of $153,000 plus interest, I always took it that in a partnership if you took the tax benefits of the losses, the profits which of course we made in 1997, that was probably where I saw a little bit of light at the end of the tunnel and thought okay, it might be profitable, hopefully, from hereon in, it gave me a means of paying back the half of the loan account which I recognised to Carol and it is shown in the offer that is made, that sum that was offered in a liquidation of a business, and I’ve seen a lot of liquidations through businesses, unsecured creditors get absolutely zero and I wasn’t taking – I mean, Carol is my sister. The offer of the $20,000, plus $15,000 a year for two years plus relinquishment from the overdraft, which is then standing at $50,000 so we are 50/50 in that, was $25,000, plus the $50,000 in tax benefits and anything else, I thought, was probably the best and achievable offer that could be made.”

After extensive and detailed cross-examination of Robert Howard by counsel for the plaintiff, ultimately I intervened as follows (T.887-888):

“HIS HONOUR: [Counsel], at some stage I take it you are going to put to this witness where the $993,000 went, which has now been reduced to $610,000, and I take it at some stage you are going to put to him enrichment?
[Counsel]: I was going to do that towards the end of my cross-examination, yes.”

That cross-examination proceeded over a further 89 pages on two days. No enrichment was ever put to Robert Howard, nor to either of his parents. However the following evidence was given by Robert Howard (T.965-969):
“Did you ever sell stock that wasn’t recorded through either the sales at the factory or through the books in the normal way? - - - No. The only situation would have been if it was a $20 cash sale, that we kept a tiny float of change in the drawer.
You know it’s possible, don’t you, in the trade in which you were then occupied, to take merchandise and sell it through, for example, a market; do you know that that’s possible? - - - Anything is possible, Mr Cook, but that – I refute any proposition by yourself or claims that I sold stock outside of that factory.

What about hotels; can you sell stock through hotels? - - - As I said, you could run out on the street and wave a car down and say “Do you want to buy a T-shirt, you have got a child in the back?’ Anything is possible. There are plenty of ways of selling stock but as I said, I did not, through the whole period of this – why would I sell anything on the side when I have got Carol and an overdraft sitting there? The other point is, as I have explained before, what I would want to do if I had sales there, which you are imputing that there are missing sales, why would I hide those? I would be proud. I am proud of what I sell. If I had half my sales not recorded, that is not my character. I have always been proud of making a good sale and I always try and sell as much as I can. I would never ever hide sales. I would have been proud of what I sold and I would show it.
You could just make cash sales to people with boutiques, can’t you, and not record it? - - - If you look at the pay-in books, which I have looked at numerous times in the last month, you will see that the tiniest amounts – even if we had too much change there in the float, the small float in the drawer, for $10 or $20 worth of change that we didn’t need, that would be banked. All the tiny amounts are shown in pay-in books consistently through the whole period of the partnership. If you are saying all these little amounts add up and that was taken, it’s quite incorrect. …
There is a note on the receiver’s file that says: ‘Maggie Day. Carol has told me that Maggie will give evidence that he boasted that he took cash from the business and sold stock down the pub’. Did you ever tell Maggie Day that - - - ? - - - I would never boast on things like that. I know the exact situation she is talking about. My cousin owned a pub down in Brighton, the Devonshire Hotel. He had a couple of small children and it might have been half a dozen garments. That would probably go back in the cash drawer or whether I needed to buy a tank of petrol, that was one occasion and I will admit it, that I sold about six garments to my cousin. …
I thought a moment ago you just told His Honour categorically that you had never ever sold any garments anywhere in a pub? - - - That was one time. I’m not going to lie in the witness box. That was one time that I did for my cousin for his two little children. As I said, whether it went into – I mean, we are only talking $60 or something like that or $50. I probably bought a tank of petrol.
The note says: ‘He boasted that he took cash from the business as well as sold stock at the pub.’? - - - That’s not correct. If I needed – as I said, you can see there I was operating on no money. If I needed to grab a loaf of bread and a litre of milk and – as I said, I – yes, for $5 or something and I had absolutely no money in my wallet, I would buy a loaf of bread and a litre of milk. …
Your income of $350 per week net does not allow you much by way of a budget for going out for dinner, does it? - - - You could probably go out down the pub. I mean, you are only looking at $10 for a meal, but no, I never had any spare money, to this day.”

Then, at the conclusion of cross-examination (T.982-989):
“You knew that the books of account as they were published each year didn’t accurately reflect the true financial state of the partnership, didn’t you? - - - I totally refute that remark, Mr Cook; that is totally incorrect.
You knew that the sales that were recorded weren’t accurately recorded, didn’t you? - - - I repeat my answer from before.
You see, I put to you that you concealed from Carol over the period of nine years this partnership operated that there was a shortfall in recording the gross profits of the business in the books of account? - - - That’s totally 100 per cent correct.
You knew that stock had been sold without it being properly accounted for, didn’t you? - - - Totally 100 per cent incorrect.
Even including the six items that were sold at the pub?
HIS HONOUR:      We have covered that? - - - Mr Cook, this business was run out of Carol’s private house. Carol signed for goods being delivered to the property. The goods were all there. All the styles were there or we would have seen when we were invoicing that things were missing; they were all there. These goods are under lock and key at Carol’s own premises. I mean, that’s a seven year period. What am I, the cat burglar?
[COUNSEL]            You knew that it was impossible for sales figures that were recorded to be the proper sales figures of the partnership, didn’t you? - - - Those sales figures were true and correct. There was no – I won’t get drawn into it because I refute that claim by yourself 100 per cent.
You knew that your sister didn’t know that the partnership accounts weren’t being properly kept, didn’t you? - - - My sister knew; we worked together in this business and everything was up front and open and all the accounts are true and correct for the whole trading period.
You knew that you ought to tell your sister everything you knew about the true financial state of the business, didn’t you? - - - My sister was fully aware of the true financial state of the business; she handled the financial state of the business.
You knew that there were a large number of entries that should have been recorded in the books of account that weren’t, didn’t you? - - - That’s totally incorrect.
You didn’t tell your sister about that? - - - That is totally incorrect. She was my sister, Mr Cook.
I have no further questions, Your Honour.
HIS HONOUR:      Mr Cook, I didn’t uphold Mr Watts’ objection because I didn’t want to cut across the fabric of your cross-examination on this important topic and I wanted to leave it in your good hands as to what was specifically revealed at what stage of your questioning, but now that you have finished it, I will come back to Mr Watts’ objection. You didn’t put to Mrs Howard the matters you have latterly put to Mr Robert Howard and bearing that in mind, and bearing in mind Mr Watts’ objection, are you putting to Mr Robert Howard that he did not give his mother this information or are you putting it that she is in on it too?
[COUNSEL]            I understand the difference, Your Honour, and I’m putting it both ways: that he ought to have passed on all information to her, that he didn’t, and that they both knew - - -
HIS HONOUR:      You say he was cheating his sister and he was keeping his mother in the dark; is that what you are putting?
[COUNSEL]            They both knew that the books didn’t properly reflect the true state of the accounts.
HIS HONOUR:      So the mother was in on it, too; is that what you are putting?
[COUNSEL]:           Yes, but he obviously was in a position where he was required to disclose all the details of the sales that he was responsible for and he didn’t.
HIS HONOUR:      As long as I know that you are putting.
[COUNSEL]:           They both must have known that this company was - - -
HIS HONOUR:      Do you want to put to Mr Howard that his mother was part of this, because you only put that he was?
[COUNSEL]:           Yes, all right. [To witness]: You knew, didn’t you, that your mother knew that the books of account didn’t properly reflect the true financial state of the business? - - - That is 100 per cent incorrect; the books were kept beautifully and 100 per cent accurate.
In order for the books to be kept accurately and beautifully, you have to have all the relevant entries, don’t you? - - - All the relevant entries were there.
You knew that all the relevant entries weren’t there, all the sales weren’t recorded, didn’t you? - - - The sales were all recorded.
You knew that your mother knew that all the sales weren’t recorded? - - - That’s totally incorrect.
And that a false picture of the finances of the partnership had been built up? - - - That’s outrageous, Mr Cook.”

That concluded cross-examination of Robert Howard by counsel for the plaintiff.

Robert Howard was in fact the second witness called on behalf of the first four defendants, although he was the first defendant. Mrs June Howard was called first, in order to meet her health situation. I proceed to her evidence.

Mrs June Laurel Howard of Brighton, whose occupation is home duties, gave evidence that she is the wife of Kevin William Howard, the third defendant and the mother of Carol Elizabeth Plain, the plaintiff, Robert Alan Howard, the first defendant and Peter Kevin Howard. Carol and Peter were born in 1954 and Robert in 1959. Carol was educated at Mentone Girls Grammar School to Year 11 and did a secretarial course at Holmes Business College. She was 22 when she married Mr Plain. He had been previously married and divorced. They lived in Shakespeare Grove, Hawthorn and had two children, a daughter born in 1978 and a boy in 1981. They were divorced in April 1986.

Mrs June Howard was not a qualified book-keeper. Prior to her and Mr Kevin Howard starting their family, Mrs Howard was assistant secretary of the Institute of Mining and Metallurgy for some 9 years. She helped her cousin keep books of a horse riding ranch at Bonnie Doon from 1983 and followed the methods of her predecessor there. She had no other training or experience in book-keeping as at the commencement of Piccolino.

Mr Kevin and Mrs June Howard supported the idea of Carol and Robert starting Piccolino, given the children’s respective situations in 1986. During the partnership Mrs June Howard did the books but Mrs Plain did the banking at the NAB Toorak, usually on the way to pick up her children who were then at Glamorgan, or Robert Howard did the banking at Middle Brighton, he then living in Brighton. At a later stage Mrs June Howard became a signatory (two signatures were required) to the partnership bank account. After the business moved to the factory at Moorabbin she attended to the banking. She at no time had control of the finances of the partnership business. The parents assisted the children by providing mortgage security for overdraft accommodation and guarantees but had no financial interest in the partnership. She did not deal with taxation returns or balance sheets or the like of the business. She could not read a balance sheet. She did not deal with costings. She wrote up the books, including monthly reconciliations. Mrs Plain looked after the financial side of the business and Robert Howard was the salesman. The bank statements were sent to Chatsworth Road, not to the parents home in Brighton, at least to 1992. Mrs Plain never complained to Mrs June Howard about being short of money until mid-1996. Mrs June Howard considered that her daughter’s financial affairs including her divorce settlement and the purchase and sale of Chatsworth Road were matters private to her daughter and Mrs Howard did not intrude upon them. In mid-1996 at the factory her daughter first spoke to Mrs Howard about money problems. The detail was given in cross-examination on behalf of the plaintiff. First at T.685:

“You knew that Carol was continually advancing loan funds to the business, didn’t you? - - - At the rate Carol was spending money, you would have thought that she never had a money problem at all. The first indication I had from her that she had money problems was in 1996 when she said to me she had made two mistakes: one was that she thought she would be married again and the other one was that she never thought that John would lose his money, and that is the first time, in 1996, that I ever had any indication that she had any money problems.
That wasn’t the question I asked. The question I asked was that you knew she was lending money to the partnership? - - - Yes, I did, because I kept the books, but she was not – she never ever – there was never money physically paid in – I think on a few occasions that money was transferred and I never ever had any knowledge or anything to do with her transferring money. I mean, Carol transferred the money, nobody transferred it for her. I couldn’t transfer her money, no-one could tell her what to do anyway so she transferred the money.
Why would she need to transfer the money? - - - I have no idea. Because the business needed it, I presume.
That would indicate the business was make a loss, wouldn’t it? - - - I would presume so, yes.
Carol complained about the money that she had to advance on many occasions over the period of the partnership? - - - No, not to me, never to me. She may have to the accountant but never to me.
Perhaps we will come back to that in due course.”

Then, forty-eight pages later (T.733):
“When was the first time that you knew that Carol wanted to terminate her interest in the partnership? - - - Mid-1996.
How do you know that? - - - By her complaints.
They were to you, were they? - - - They were to me and to Robert in the factory.
What were they about; what did she say? - - - Oh dear, I can’t remember the exact words.
Just the substance? - - -- I said to you before she said to me she had felt she had made two mistakes: one was that she thought she would be married again and the other one was that she never thought John would lose his money.
That had nothing to do with - - - ? - - - It has everything to do - - -
That’s nothing to do with complaining about the level of her loan account? - - - It’s to do with her money, I should think. I don’t know.”

The final paragraph of the witness statement of Mrs June Howard states:

“I have never directed Robert or Carol in relation to the affairs of the partnership. In my dealings with Robert and Carol concerning the partnership I have always acted as a concerned parent who loves their children. This case has caused me great personal distress. False and baseless allegations have been made against me, and Carol and John Plain have left a permanent and ugly scar over our family.”

At the conclusion of Mrs Howard’s cross-examination I raised with counsel for the plaintiff (at T.756-761) whether issue had been joined in relation to the plaintiff’s allegations in paragraphs 59 and 59A of the fourth further amended statement of claim of fraudulent concealment by Mrs Howard and of recklessness. Counsel considered the matter overnight and the next morning with leave Mrs June Howard was recalled for further cross-examination on behalf of the plaintiff. The following was said (T.764-768):
“[COUNSEL]           Mrs Howard, you know that it’s been suggested in the pleadings that you were fraudulent in the way you kept the books of account of the business. Do you understand that?
HIS HONOUR:      The allegation is that she ‘fraudulently concealed from the plaintiff the circumstances that there was a shortfall in the’ - - -
[COUNSEL]            I’m just asking whether she understood? - - - I understand, yes, what that means.
In the first instance it’s said that you were in effective day-to-day control of the business and that during that period, during the time, the nine years prior to June 1997, that you concealed from Carol the fact that there was a shortfall in reporting the gross profits of the business. Do you understand that? - - - I understand what you are saying, yes.
In other words, the sales weren’t all recorded. Do you understand that? - - - Well, I deny that but I understand what you are saying.
You understand that – this is a hypothetical question – if the sales weren’t properly recorded, you should have told Carol about that, don’t you? - - - Do I have to answer a hypothetical question?
HIS HONOUR:      Mr Cook, this is put as an allegation, I take it, in which case it’s not hypothetical.
[COUNSEL]            I suppose that’s right.
HIS HONOUR:      That’s what’s said in paragraph 59. Put it to her if you are going to put it to her. If you are not going to put it to her, don’t put it to her, but now is the time.
[COUNSEL]            It’s said that you knew of the existence of the shortfall and that you ought to have told Carol about it? - - - I don’t agree with that at all, no. I’ve already stated that I was not in control of the financial affairs of the business, that Carol visited the accountants. I had nothing to do with the accountants and I had nothing to do with the bank.
If you knew that all the sales weren’t being recorded in the books of account, you knew that you should have told Carol about that? - - - I did record all the sales in the books of account so there was nothing to tell anybody.
There may have been sales that you weren’t concerned about that weren’t recorded? - - - There were no sales that were not recorded, therefore I had no concern at all.
How can you categorically say that there were no sales that weren’t recorded in the books of account? - - - Because I was not aware of them. I was not aware of it. Maybe Carol was aware of sales and is concealing it herself.
If one thinks about the analysis that the various experts have gone on with during the course of this case, and if it can be shown, for example, that there were missing garments that are unaccountable for and His Honour draws the conclusion that there had been sales that hadn’t been recorded, if you knew about those sales, you should have told Carol about them, shouldn’t you? - - - But, Mr Cook, it has not been proven that there are any missing garments at all.
But if His Honour finds as a matter of fact, having heard all the evidence, that there were missing garments and there were sales that were unaccounted for, if you knew about that, you should have told Carol, shouldn’t you? - - - I did not know of any missing garments, therefore I did not have anything to tell anybody.
That wasn’t the question I asked. The question I asked was if you knew about them, you should have told Carol, shouldn’t you? - - - But I did not know about them. I had nothing to tell her. I can’t tell her something that I do not know.
I won’t ask the question again. The next question I would ask is this: did you really worry about whether - - -
HIS HONOUR:      Before you move on to paragraph 59A, are you going to put to the witness any reason or motive for the alleged fraud and are you going to put to the witness any time at which the alleged fraud came into existence; that is to say, what course of conduct was involved as fraud?
[COUNSEL]            You understand that our experts have said that over the entire period of the partnership there have been unexplained shortfalls. Do you understand that? - - - I head what they said, yes.
If His Honour finds that over the entire period of the partnership there were unexplained shortfalls in sales, are you able to, firstly, offer any explanation as to why that might have happened? - - - But there have not been unexplained shortfalls in sales; it has not been proven and there is a lot of evidence yet to be heard to prove that there were not shortfalls in sales.
We say this: we say that over nine yeas, in each year sales took place which weren’t properly recorded. Do you understand that; that’s what we say? - - - I understand what you are saying to me, yes.
We say that the reason for that isn’t known but it could be, for example, that there were sales to other boutiques or markets or other retailers that took place without them being recorded. Do you understand that? - - - I understand what you are saying, yes.
Do you have any knowledge of any sales that took place to other boutiques? - - - I do not.
Did you care whether those sorts of things might have gone on? - - - I have no knowledge of it. I was not placed in a position to care or not care; it did not happen, to my knowledge.
If you had have known about those, would you have cared to tell Carol about it? - - - That’s hypothetical, Mr Cook. I did not know, therefore there was nothing to tell her. Did she tell me everything that happened in the business? Certainly not.
I have no further questions to ask this witness, Your Honour.
HIS HONOUR:      Thank you. Mr Watts? Further.
Further re-examined by Mr Watts:

I have spent many hours examining the partnership documents in order to see whether losses to the plaintiff, whether of the order of $610,993 or otherwise, can be made out. I did so also out of deference to the very substantial work counsel for the plaintiff performed in preparing and presenting the case for the plaintiff. I have been unable to find any documentary support for her claim of loss that is reliable, cogent or persuasive. Constructs, extrapolations and projections based upon unproved premisses and made in isolation where the true context is multi-factorial, will not do.

Mr Ross Clarke was called on behalf of the plaintiff. Mr Clarke is a certified practising accountant. He has practised as an accountant for 27 years and as a principal in private practice since 1983. He is a registered company auditor. Throughout his practice he has been involved in both auditing and advisory services to small business across a broad spectrum of clients including both private and public companies involved in a broad range of industries including the clothing trade. From 1997 onwards Mr Clarke has prepared the plaintiff’s personal annual income tax returns.

Mr Clarke prepared two reports which were received in evidence, the first of 17 April 2003 and the second of 29 April 2003. The first, of nine pages, in part addressed the matter of the alleged shortfall and the second provided comment upon the report of Mr P.B. Wilkinson dated 16 April 2003 and a revised estimate of the shortfall. Mr Clarke gave evidence before me, confirmatory of and in furtherance of his reports.

In his report of 17 April 2003 Mr Clarke commented (paragraph 12) “In my experience it is very unusual for a business to continue on an unprofitable basis over an eleven year period”. This became a sub-theme of the plaintiff’s case, the proposition being that because the business continued, there had to be a profit; the profit had not been disclosed; and therefore there was a shortfall. This sub-theme was relied upon analytically in support of the main theme, which was Mr G.J. Clark’s extrapolation, based upon a 100% mark up over eleven years, of a $993,447 shortfall (reduced to $610,933). The sub-theme, like the main theme, was simplistic.

In his first report Mr Clarke considered a range of documentary material, including financial statements and income tax returns of the partnership from 1988 to 1997, sales invoices and price lists of Piccolino for that period, costings sheets of Piccolino for summer 1996 and miscellaneous invoices to Piccolino being charges for the purchase of fabric and the marking up of garments. Mr Clarke noted, as had the receiver, that Piccolino did not use a system of pre-numbered invoices. Mr Clarke’s analysis showed there were missing invoices for summer 1997. There was not sequential control of invoice numbers. The accounting system used by Piccolino was manual and not computerised. Mr Clarke stated that the costings, price lists and invoices prove beyond any doubt that a 100% mark up was applied to the total cost of manufacture and passed through to the customer invoices. Mr Clarke concluded that it was probable that sales have been understated and that the invoices for that income have been removed from the company’s records. Based upon an estimated mark up of 93.6% (being $100% less an average of 3.2% being the discount provided by Piccolino as calculated from Appendix Four of the report) a shortfall in estimated net profit for both Piccolino and Blade of $952,570 resulted. The shortfall based upon a mark up of 78.76% (the industry average) was $719,364.

In Mr Clarke's report of 29 April 2003, for reasons there set out, Mr Clarke concluded at paragraph 16 that the net profit shortfall of Blade and Piccolino "is expected to be 71.86%". Based upon that new figure, he concluded that the shortfall was $610,933. Accordingly the plaintiff sought leave to file a fourth further amended statement of claim, reducing the amount claimed as being fraudulently concealed by the quantum of $382,514 – that is, by more than one third. This was after the trial had commenced.

I am unpersuaded by Mr Ross Clarke’s evidence as to the existence or quantum of the alleged shortfall. Mr Clarke’s premisses and conclusions of mark ups over 11 years of 93.6% and 71.86% are directly inconsistent with the evidence of Robert Howard (who said that the mark ups started at 60% and only reached 100% near the end) and of Mr B.K. Taylor (who said that Mrs Plain repeatedly said to him that the mark ups were in the 60-68% range and only in 1996 were to reach 100%). Mr Clarke relied upon incomplete and derivative material. He never saw a cash payments book or a cash receipts book (T.625) and in part he relied upon material provided by Mr J. Plain via Mr G.J. Clark (T. 368, 613, 626, 656). The unqualified conclusion expressed in paragraph 16 of his 17 April 2003 report (“The costings, price lists and invoices of the partnership prove beyond any doubt that a 100% mark up was applied …”) was revised by him in cross-examination to be an attempt rather than a fulfilled exercise (T.615) and excused by him as “just a poor turn of phrase”. It is unacceptable that such a grave conclusion as in that report (paragraph 24: “It is … probable that sales have been understated and the invoices for this income have been removed from the partnership records”) be asserted on such limited, incomplete, and theoretical material. I consider that the analysis of Mr P.B. Wilkinson is far more rigorous than those of either Mr G.J. Clark or Mr Ross Clarke.

Mr Peter Bruce Wilkinson gave evidence before me, and three reports of his were tendered, being dated 16 April 2003, 30 April 2003 and 20 May 2003.

Mr Wilkinson is a chartered accountant and a partner in the firm Munday Wilkinson of Collins Street, Melbourne. Mr Wilkinson holds the degree of Bachelor of Business (Accounting) R.M.I.T., was made an Associate of the Institute of Chartered Accountants Australia in 1980 and became a Fellow in 1994. He is a registered company auditor and a registered tax agent, both registrations being obtained in 1981. He has over 25 years’ experience in commercial and professional accounting services and during the last 15 years has specialised in forensic accounting. I have quoted above (at paragraph 90) the analysis summary contained in the 16 April 2003 report of Mr Wilkinson. Unlike Mr G.J. Clark and Mr Ross Clarke, Mr Wilkinson undertook an analysis of all available empirical evidence. His address to the relevant considerations (first report, paragraph six) is careful, detailed and balanced. He demonstrated that an initial review of the costs sheets tends to confirm Mr G.J. Clark’s conclusion that the average mark up was 100% but when an analysis is performed which includes actual costs incurred in the design and manufacture of the garments a significantly different result, of the order of 68.9% is obtained. It is unnecessary to go to all the detail in Mr Wilkinson’s reports. The bottom line is that they demolish the foundations and structure of the financial evidence relied upon by the plaintiff. Mr Wilkinson’s evidence before me was clear and cogent. I accept it.

(c) The dissolution evidence

It is not a function of the judgment to provide a review or critique of the receivership of Mr G.J. Clark. I refer to the receivership and its incidents only so far as are relevant to the matters in issue between the parties to this proceeding.

The receiver did not seek to take possession of or control over the trading activities being conducted at Warrigal Road, Moorabbin (T.411 and 492-493). At the 6 February 1998 attendance at Moorabbin the receiver acknowledged that the winter 1998 stock was not part of his administration (T.448-449). I have already stated (paragraph 91 above) that I accept Robert Howard’s evidence as to what he said to the receiver about the mark ups. At T.771 Robert Howard said that the receiver asked him at the premises about the mark up on the stock there present. The receiver complained about delay and incompleteness by Robert Howard in providing documentation. This is likely to be a matter of impression, a significant factor in which was the pressure being put on the receiver by Mr Plain and to which I shall come. Robert Howard and Mrs June Howard both said they cooperated with the receiver.

By letter dated 27 February 1998 sent by Mr B.K. Taylor to the receiver, Blade made an offer to purchase certain assets of the partnership for $12,500. It is evident from the evidence of Mr Plain (T.354) that he learnt of the existence and quantum of that offer before Easter 1998. On 3 April 1998 by letter of Mr B.K. Taylor, Blade stated that its offer would be withdrawn unless it was accepted by Friday, 10 April 1993 (Easter). Mr Plain also knew of that communication (T.354). Robert Howard gave evidence as follows (T.770-771):

“Mr Clark rang me later on 9 April, which was the Thursday before Easter. I answered the phone – my mother was sitting at the desk opposite me – and Mr Clark said that ‘I have accepted the offer of Blade Clothing Company to purchase the assets of the partnership’ and nothing more was said. I said ‘Thank you, Mr Clark’ and that was the end of the conversation.”

Although Mrs June Howard was not examined as to contemporaneous corroboration of that evidence, she said (T.747) “we were sure that we had bought the business on 9 April”. Mr G.J. Clark’s evidence as to that telephone conversation (T.405) was different from that of Robert Howard, Mr Clark stating that he said that “it was my intention to take up that offer by sending an acceptance to Barry Taylor”. Mr Clark prepared a fax to send to Mr Taylor to that effect but did not do so because he received a telephone call from John Plain in which he made a higher offer for the business. Blade wrote to Mr Clark on 15 April, hand delivered on 16 April, confirming “your acceptance of its offer” and enclosing a $12,500 cheque. Mr Clark did not inform Blade that there was a competing offer or that he had not sent an acceptance to Mr Taylor or why he had not. On 23 April 1998 Mr Clark wrote to Blade acknowledging “receipt of your offer to purchase the assets”, saying that Mrs Plain had questioned the identification of assets to be sold and that he would “hold your cheque in the interim”. Mr Clark did not state whether the “offer” was the 27 February 1998 offer or the 15 April 1998 letter of confirmation of acceptance. On 29 April 1998 Mr Clark attended the Moorabbin premises and did not inform Robert Howard of a competing offer. Various communications ensued between them. Robert Howard first learned of the existence of a competing offer in Mr Clark’s first receiver’s report. On 3 June 1998 Blade’s solicitors sent the receiver’s solicitors a without prejudice letter in which Blade’s offer was increased to $14,000. On 4 June Mr Clark wrote to Mrs Plain stating “I am pleased to advise that your offer 16 April 1998 of $15,000 has been accepted”. While all this finessing by the receiver was going on, it is unsurprising that Blade thought it had had an acceptance. Mrs June Howard stated (T.740):
“Blade did not trade until after they had paid the receiver $12,500 for the business and the offer was accepted on 9 April. A consideration was paid by my husband. The cheque was delivered to Mr Clark on 15 or 16 April and after that date we waited for a week and then commenced to pay the creditors …”

Likewise, Mrs Howard at T.745:
“ … we did not bank the cheques until we had bought the business. We waited until we were sure that we owned the business, therefore we banked the cheques.”

On 23 June 1998 Mr Clark attended the Moorabbin premises, collected numerous chattels and delivered them to Mrs Plain’s then home in Armadale. Amongst those items was a filing cabinet of partnership financial documents, as is evident by the tick next to that item on the contemporaneous collection document by the receiver. This is the attendance by Mr Clark which is described by Mrs June Howard and quoted in paragraph 91 above. Mrs Howard confirmed the taking of the filing cabinet (T.673).

I find that there were no profits derived by Blade or any of the defendants from any use of the partnership assets post dissolution. The winter 1998 stock was not Piccolino’s. The Piccolino name was utilised as were office furniture and other incidentals. However the name was used only temporarily and for convenience and was not worth anything of substance commercially. The office furniture and other incidentals were of negligible contribution. The defendants have operated consonantly with s.46 Partnership Act 1958 and with Fry & Ors v Oddy (1999) 1 VR 557.

3. Assessment and Conclusions

I have had the opportunity to observe the many witnesses in this case and to assess their evidence in relation to the documentary evidence and human probability. I found Mr Kevin Howard an impressive and honest witness. I found Mrs June Howard likewise an impressive and honest witness. Of their children, Peter was a clear and accurate witness with a good recall of events. Mrs Carol Plain has made grave allegations against her parents and her brother Robert. Every one of those allegations is untrue. Most unfortunately, over time she has come to believe that her family have wronged her, which they have not. Mrs Carol Plain gave evidence in accordance with what she now believes are the facts. I do not consider her evidence is accurate and reliable. I was impressed by Robert Howard as a decent, honest witness who was doing his best to recall events accurately over time. I accept his evidence as both truthful and accurate.

Of the expert witnesses, I was much impressed by Mr B.K. Taylor. He is a man of very considerable intellect and capacity and of complete honesty, all applied to his professional work and to the evidence he gave before me. Mr Wilkinson was impressive, rigorous and clear. Mr Ross Clarke was a good witness also, but hampered in his evidence by inadequate recourse to data. Mr G.J. Clark I consider was an honest witness and who acted honestly in the receivership. Unfortunately his receivership and evidence lacked rigour and, also unfortunately, he was the subject of unremitting pressure by Mr John Plain which interfered with Mr Clark’s objective discharge of his receivership although Mr Clark did his best.

I found Mr John Plain also to be a truthful witness. He is a person of capacity. However, he has a domineering personality. This affected Mrs Plain’s judgment of events and also the objectivity of Mr G.J. Clark’s receivership.

Piccolino was a partnership between two persons lacking commercial experience, undercapitalised, operating in a limited and expensive market, and built on hope. Many such businesses fail. This one did also. It operated for so long because of the help provided by the Howard family and by the persistence of Robert. Mrs Plain contributed significantly but for the initial years she did not regard it as of immediate financial importance to her. When the financial circumstances of Mr John Plain dramatically worsened, Mrs Plain was forced to face the financial reality she had previously ignored, despite professional advice. She realised the immediate financial importance of Piccolino and that it was wanting. Her parents were concerned to see that Robert was not prejudiced, not because of preference for one child over another, but for the practical reason that Robert was the more dependent on the business. Mrs Plain turned to her former husband. He projected onto the running of this amateur business his own methodology and found the business wanting. He concluded that there had to have been profits made, when there were none. In turn he placed pressure on the receiver, who acted honestly but failed to repudiate the pressure exerted upon him. Sadly, Mrs Plain has come to believe that she has been wronged by her family, when they have not wronged her.

I turn to the allegations against the 1^st to 4^th defendants.

I find there was no fraudulent concealment of profit in Piccolino or recklessness by any defendant, no fraud or dishonesty committed by any defendant, no breach of fiduciary duty or of duty or of contract, no conversion, and no deceptive or misleading conduct. The defendants did not carry on the business of Piccolino without failing to account. The plaintiff has suffered no loss which is compensable by any of the first four defendants, and no damage. The loss of the capital and interest of her loan account money was a loss in a failed business. In the circumstances I have outlined above including the major investigations which have now occurred into the partnership accounts it is inappropriate to order the taking of accounts.

The plaintiff’s claims against each of the first four defendants wholly fail. I dismiss the claims and shall enter judgment for the defendants.

4. Claim against the Commonwealth Bank of Australia

I turn to the plaintiff’s claim against the Commonwealth Bank of Australia.

In view of the foregoing, the claim can be dealt with briefly.

The plaintiff’s claim against the Bank relates to payments made by Blade into its account with the Commonwealth Bank, North Brighton branch being cheques payable to Piccolino. They were as follows:

(a)between 3 April 1998 and 11 May 1998 eight deposits into an account in the name of Blade maintained by CBA (the Blade account) comprising cheques payable to Piccolino Childrens Wear (Piccolino) to a total value of $31,675.31 (the earlier deposits) [para 32(a)(A)]; and
(b)between 11 May 1998 and 5 June 1998 nine deposits into the Blade account comprising cheques payable to Piccolino to a total value of $19,521.25 (the later deposits) [para 32(a)(B)].

The plaintiff claims that at all material times CBA was under a duty of care to the plaintiff and the Piccolino partnership not to bank cheques made out in favour of the partnership in an account other than a partnership account without proper authority from the partnership or unless the same had been duly endorsed payable to that other account by or on behalf of the partnership [para 72]. Alternatively, the plaintiff claims it was a term of the agreement CBA acted as banker for the partnership and that CBA would so act as banker with all necessary due skill, care and responsibility [para 74]. The plaintiff says that in breach of the duty and/or in breach of the agreement CBA accepted the earlier deposits and the later deposits into the Blade account, by reason whereof the plaintiff suffered loss and damage, namely $51,196.56 [paras 73, 75 & 76].

By its Second Amended Defence dated 22 May 2003 the Bank pleaded that:

(a)it admitted the earlier deposits and the later deposits, and that in accepting the same it acted in good faith and without negligence [para 7];
(b)the plaintiff was not the true owner of the cheques comprising the earlier deposits and the later deposits, nor was she entitled to immediate possession of the same, by reason whereof the Bank did not owe the plaintiff the duty [paras 7A and 7B];
(c)further or alternatively, the duty could not have been owed by the Bank to the partnership at the time because the partnership was dissolved on 2 June 1997 and did not exist thereafter [para 7C]; and
(d)further or alternatively, there could have been no agreement between the Bank and the partnership at the relevant time because the partnership was dissolved on 2 June 1997 and did not exist thereafter [para 9A].

On 15 December 2000 the Bank filed and served on Blade a Notice of Contribution where in it claimed to be entitled to contribution from Blade in respect of any sum which the plaintiff recovered from the Bank to the extent such amounts may be found by the Court to be just and equitable having regard to the extent of Blade’s responsibility for such damages [PCB 66A].

The evidence reviewed above and that of Ms K. Monger, bank officer and then commercial lending specialist at the Elsternwick Commercial Lending Cell of the Bank and who had control over lending at the North Brighton branch of the Bank, establishes the following. (I follow the format and review helpfully provided by counsel for the Bank in the following).

(a) The partnership was dissolved pursuant to the Notice of Dissolution of the plaintiff dated 2 June 1997 and served personally on the first defendant (Robert Howard) on 24 June 1997 (see s.36 Partnership Act 1958), which dissolution was confirmed by Court order on 30 January 1998 (s.39 of the Act) as a result of an application to that effect by the plaintiff [(PCB 4405 – 10)];

(b)the receiver’s appointment and the authority provided to him by the Order was limited to partnership trading prior to the date of dissolution;
(c)the winter 1998 range, having been produced subsequent to the dissolution of the partnership [Carol Plain T 282-3, 284-5, 292, Robert Howard W/S para 87 T 905-6, 913], was not included in the receivership and early on Mr Clark asked Robert Howard to separate the partnership stock from the post-partnership stock [Clark T 448-9, 503-4, 552 K Howard T1026 DCB 201 R Howard W/s para 72, T 900, 913];
(d)the proceeds of the sale of the winter 1998 range were not included in the receivership [Clark T 504, 552, R Howard T 913];

(e)       the cheques comprising the proceeds of the sale of the winter 1998 range:
(i)       did not fall within the receivership
(ii)      did not belong to the receiver; and thus
(iii)could not be part of the choses in action the receiver subsequently sold to the plaintiff; and

(f)the cheques comprising the earlier deposits and the later deposits constituted payment for the winter 1998 range [PCB 329, DCB 1426-9, R Howard T 780, 986].

The evidence establishes:

(a)by reason of the history of Blade’s offer to purchase the business, between 9 April 1998 and about 22 May 1998 the Howards believed Blade had purchased the business [J Howard T 681, R Howard T 770, 772, 774-5, 778, K Howard T1029 -–30, 1034 – 5, 1036];
(b)the $2,220.00 deposit on 3 April 1998 comprised a cheque payable to Robert Howard for wages [Howard T 778, DCB 119];
(c)the $3,500.00 deposit on 16 April 1998 comprised a cheque payable to Blade [R Howard T 1029 – 30, PCB 4436, 4436A];

(d) to the best of Ms Aspin’s recollection, on 20 April 1998:
(i)Mr Kevin Howard rang her and told her Blade had purchased Piccolino and accordingly Piccolino cheques would be paid into the Blade account. In the course of that conversation Ms Aspin told Mr Kevin Howard the cheques would need to be endorsed on the back by Robert Howard [Howard T 1031-2]. Ms Aspin told Mr Kevin Howard to write a letter to Julie Richardson at North Brighton confirming Piccolino cheques would be endorsed payable into the Blade account; and that she would telephone Ms Richardson and adviser her that Piccolino cheques would be endorsed and paid into Blade account.
(ii)Ms Aspin telephoned Ms Richardson and told her of her conversation with Mr Kevin Howard and indicated she would confirm the instructions regarding endorsing the cheques in a memo to Ms Richardson.
(iii)Ms Aspin sent Ms Richardson a Memo in the internal mail confirming endorsement instructions [PCB 4611].

(e)Mr Kevin Howard prepared the Blade letter of 20 April 1998 to Ms Richardson [DCB 126, Kevin Howard T 1030]. He then attended the CBA North Brighton branch with that letter. He had with him the various cheques totalling $11,695.13 and $5,972.66 payable to Piccolino which had been endorsed by Robert Howard. He met with Ms Richardson and at that meeting he and Ms Richardson “established the method by which time [ie the endorsing of cheques] was going to take place” [T 1032]. The cheques were deposited into the Blade account [PCB 4424, 4427-4435].
(f)between 20 April 1998 and 1 May 1998 the Bank accepted into the Blade account cheques payable to Piccolino and endorsed by Robert Howard to Blade (save for the first two deposits), which cheques comprised the earlier deposits [PCB 4427 – 4433].
(g)the cheques comprising the later deposits were payable to Blade [Robert Howard T 987, PCB 4446A, 4446B, 4447];
(h)when accepting the earlier deposits and the later deposits the Bank was acting on the instructions of Blade to do so [Robert Howard T 782, Mr Kevin Howard T 1042, PCB 4414, 4415];
(i)Blade received the benefit of the earlier deposits and the later deposits [Robert Howard T 782, Mr Kevin Howard T 1042, PCB 4421-6].

The consequence of the above evidence is the following.

The Bank acted honestly, reasonably and in good faith. So too did Mr Kevin Howard, Mrs June Howard and Robert Howard. The Howards acted consonantly with s.46 Partnership Act 1958 and Fry & Ors v Oddy (1999) 1 VR 557. The plaintiff’s interest in the cheques deposited to the Commonwealth Bank account of Blade did not give rise to any duty owed to her by the Bank. She was an unsecured debtor (Sobell v Boston & Ors (1975) 1 WLR 1587).

The plaintiff’s claim against the Bank fails wholly. There is no need to consider the matter of contribution.

Finally I turn to the parents’ action.

5. Proceeding No. 7287 of 1999

In the parents’ claim, no. 7287 of 1999, the claim has been proved. Mr Kevin Howard and Mrs June Howard as guarantors paid the sum of $56,454.86 to the National Australia Bank on 19 February 1999 which sum paid out the partnership overdraft. The guarantees were dated 20 and 27 February 1996 (D.C.B. vol. 5 p. 1783 and p. 1803). The NAB made demand on Mr Kevin Howard and Mrs June Howard on 6 July 1998 for payment. Payment by Mr Kevin Howard and Mrs June Howard was made by a cheque in the sum of $21,545.86 dated 19 February 1999 drawn on their account with the NAB (account no. 51-789-3710) and by a loan taken out by them with the NAB in the sum of $35,000 which was dawn down on 24 February 1999. For the reasons stated in the judgment in relation to proceeding no. 6805 of 1999, Mrs Plain has no valid counterclaim against her parents’ claim. In proceeding no. 7287 of 1999, each of the defendants Carol Plain and Robert Howard are liable to their parents in the amount claimed and I shall make appropriate Orders to that end. For the reasons I have stated above, I dismiss Mrs Plain’s counterclaim against her parents and brother.

I express my appreciation to the barristers and solicitors who put a great amount of work into the presentation of their clients’ causes and acted with loyalty and fortitude for them throughout.

I shall temporarily adjourn proceedings in order that this published judgment may be read. I shall then list the matters for the making of appropriate Orders.

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[2004] VSC 240

2 July 2004