Scott & v McMahon

[2004] NSWCA 327

NEW SOUTH WALES COURT OF APPEAL

CITATION:      SCOTT & ANOR v McMAHON & ORS [2004]  NSWCA 327

FILE NUMBER(S):
41235/03

HEARING DATE(S):               29 June 2004, 30 June 2004

JUDGMENT DATE: 23/09/2004

PARTIES:
John Joseph Scott - First Appellant
Ophix Finance Corporation Pty Ltd - Second Appellant
Brian McMahon - First Respondent
Kenneth Livingstone - Second Respondent
John Sheahan - Third Respondent

JUDGMENT OF:       Handley JA Sheller JA Santow JA   

LOWER COURT JURISDICTION: Compensation Court

LOWER COURT FILE NUMBER(S):          2000/98

LOWER COURT JUDICIAL OFFICER:     Windeyer J

COUNSEL:
B A Coles QC/P B Walsh - Appellants
D M Jay - First Respondent
J  E Marshall SC/J E Thornton - Third Respondent

SOLICITORS:
Church & Grace - Appellants
Horowitz & Bilinsky - First Respondent
Aitken McLachlan & Thorpe - Third Respondent

CATCHWORDS:
INVESTMENT OF TRUST FUNDS - whether appellants liable to account to TRUSTEE IN BANKRUPTCY - whether relationship between appellant and first respondent that of debtor and creditor - whether joinder of trustee in bankruptcy necessary and proper - whether first respondent sought account between appellants and trustee in bankruptcy - whether wrongful rejection of evidence - calculation of accounts

LEGISLATION CITED:
Bankruptcy Act 1966
Supreme Court Act 1970

DECISION:
Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 41235/03
ED 2000/98

HANDLEY JA
SHELLER JA
SANTOW JA

SCOTT & ANOR v McMAHON & ORS

On 28 December 1997, Dr Brian McMahon began Common Law proceedings against three defendants, Kenneth Livingstone, John Joseph Scott and Ophix Finance Corporation Pty Ltd (Ophix).  Mr Livingstone was the accountant of Dr McMahon and over a period of fourteen years had accepted from Dr McMahon a series of deposits for the purpose of investing them.  The amount of these deposits plus interest was agreed to total $1,900,000.  It was alleged that Mr Livingstone paid this money into an account operated by Mr Scott, known as the Scott and Slattery Clearing Account.  Moneys from this account were used by, or lent on behalf of, Ophix.  Mr Scott and Mr Slattery were the only directors and shareholders of Ophix.

In the proceedings, Dr McMahon sought, amongst other things, a declaration that the money he had paid over to Mr Livingstone for investment was impressed with a trust.  The statement of claim was later amended to seek also an order that Mr Scott and Ophix repay to Dr McMahon all moneys Mr Livingstone had invested with them on behalf of Dr McMahon, together with interest.

On 20 April 2000, Hodgson CJ in Eq dismissed a notice of motion filed by Mr Scott and Ophix seeking further particulars and in the alternative that the proceedings be dismissed.  On 5 May 2000, his Honour ordered that Mr Scott and Ophix prepare and serve a verified statement of account and this was filed with the Court on 27 July 2000.

On 3 October 2000, Mr Livingstone was made bankrupt. Consequently, the proceedings against Mr Livingstone were not competent to the extent that they sought to enforce any remedy against Mr Livingstone or his property in respect of a provable debt; s58(3) of the Bankruptcy Act 1966. Subject to that limitation, Windeyer J heard the proceedings in the Equity Division and delivered judgment on 16 February 2001.

Windeyer J found that the relationship between Mr Scott and Ophix and Livingstone was that of debitor and creditor not agency and therefore Mr Scott and Ophix were not trustees of the funds for investment.  However, his Honour held that Mr Scott and Ophix were in knowing receipt of trust funds even if they did not know the amounts for particular beneficiaries and were therefore participants in a breach of trust by Livingstone.

His Honour concluded that it was not possible to say on the evidence what Dr McMahon’s interest in the amount from Livingstone’s bankrupt estate was, or which deductions from the Ken account as described in the Ophix ledger were authorised.  Therefore no relevant relationship was established between Dr McMahon and Mr Scott and Ophix giving Dr McMahon any entitlement to demand repayment of moneys from Mr Scott and Ophix.

Following this judgment, Windeyer J made orders joining Livingstone’s trustee in bankruptcy, the third respondent, and for an account to determine the balance due by Mr Scott and Ophix to the Livingstone estate.  In further proceedings, Windeyer J dealt with this account, allowing and disallowing numerous items with the end result being a balance on the account in favour of the trustee in bankruptcy in the sum of $8,026.307.

Mr Scott and Ophix appealed from the decisions of Windeyer J and from the decisions of Hodgson CJ in Eq.  It was submitted that Hodgson CJ in Eq erred in ordering that the appellants file a verified account. It was further contended that Windeyer J should have dismissed the proceedings with costs, as all Dr McMahon’s claims against Mr Scott and Ophix failed and Dr McMahon did not seek an account as between the trustee in bankruptcy and Mr Scott and Ophix. Further, the trustee in bankruptcy was not a party to the proceedings when judgment was given.  It was also submitted that the evidence did not establish a breach of fiduciary duty nor was it the case that the monies invested by Livingstone were impressed with a constructive trust.

Held: per Sheller JA, Handley and Santow JJA agreeing:

1. It mattered not that Mr Sheehan, as trustee in bankruptcy, was not a party from the outset of the proceedings.  In so far as Mr Sheehan recovered in his capacity as trustee of the Livingstone trust, Mr Livingstone was always the proper party up until the order made on 13 October 2001 pursuant to which Mr Sheehan replaced Mr Livingstone as the trustee of the Livingstone trust.  Accordingly, the relevant entity, namely the trustee of the Livingstone trust, was always a party to the proceedings.

2. The joinder of the trustee in bankruptcy was necessary and proper. It was a straightforward application of Pt8 r10 of the Supreme Court Rules 1970. No objection was taken to the joinder when it was sought in March 2001 and, in any event, the joinder was consistent with principle. The appellants’ attempts to assist upon separate proceedings rather than a cross-claim flew in the face of s63 of the Supreme Court Act 1970.

   Mulcahy v Curramore Pty Ltd [1974] 2 NSWLR 464 applied.

1. Despite the appellants’ submission to the contrary, Dr McMahon did seek an order that Mr Scott and Ophix account to the trustee in bankruptcy.   This order was sought and obtained from Hodgson CJ in Eq on 5 May 2000 and the account produced pursuant to that order was before Windeyer J.  This account was the subject of evidence, cross-examination and submissions before Windeyer J.

1. The deposits to the Scott and Slattery clearing account gave rise to a debtor/creditor relationship; notwithstanding that the relationship between Mr Livingstone and the investor clients was one whereby he was a trustee.  The consequence was that Mr Livingstone held the credit balance of the Ken Account as trustee for the investor clients, who had trusted funds to him in accordance with their interests in the total.

1. The purpose of the order for an account was to establish what, if anything, Mr Scott and Ophix were entitled to deduct from that admitted debt owing to Mr Livingstone on behalf of his investor clients. The onus was on Mr Scott and Ophix to justify the debits and apart from some debits, which were agreed, they were largely unsuccessful.

1. Mr Scott and Ophix never disputed that if Mr Scott and/or Ophix owed money on the Ken Account it was owed on a debtor/creditor relationship to Mr Livingstone.  As the Ken Account was neither reconciled nor updated after 1994, an account for the dealings between the appellants and Mr Livingstone was called for.

1. Mr Scott could and indeed did raise defences to his personal liability which were dealt with in closing addresses on 2 October 2003.  There was no lack of opportunity for Mr Scott to present his defence.

1. In the written outline of submissions of 2 February 2001, on behalf of Mr Scott and Ophix, it was conceded that when Mr Livingstone received the funds, which he deposited with the appellants, he did so as trustee and that these deposits had to some extent been sourced from Dr McMahon.  The appellants’ contention, therefore, that there was no evidence or no sufficient evidence to demonstrate the basis upon which Mr Livingstone held the funds of the investor clients was incorrect.

Legislation cited:

Bankruptcy Act 1966
Supreme Court Act 1970

Cases cited: 

Hayim v Citibank NA [1987] AC 730
Leotta v Public Transport Commission of New South Wales (1976) 50 ALJR 666
Mulcahy V Curramore Pty Ltd [1974] 2 NSWLR 464
Ramage v Waclaw (1988) 12 NSWLR 84

ORDERS

Appeal dismissed with costs.

********

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 41235/03
ED 2000/98

HANDLEY JA
SHELLER JA
SANTOW JA

Thursday, 23 September 2004

SCOTT & ANOR v McMAHON & ORS

Judgment

1. HANDLEY JA:   I agree with Sheller JA.

2. SHELLER JA: 

   Introduction

   On 28 December 1997 the plaintiff, Dr Brian McMahon, began proceedings in the Common Law Division against three defendants, Kenneth Livingstone, John Joseph Scott and Ophix Finance Corporation Pty Ltd (Ophix).  In those proceedings, Dr McMahon sought a declaration that certain moneys he had paid over to Mr Livingstone for investment were impressed with a trust.  He alleged that from October 1983 Mr Livingstone had invested the moneys by lending them to either or both of Mr Scott and Ophix.  Dr McMahon sought an order that Mr Livingstone take all such steps and do all such things as were necessary to make demand on, and recover, all the moneys Mr Livingstone had paid over to Mr Scott and Ophix on his behalf.  He further sought an order for accounts.

3. Subsequently the statement of claim was amended in various ways.  Amongst other things, Dr McMahon sought an order that Mr Scott and Ophix repay to him all moneys Mr Livingstone had invested with them on behalf of Dr McMahon and unrepaid to Dr McMahon, together with interest.

4. On 20 April 2000, Hodgson CJ in Eq (as his Honour then was) dismissed a notice of motion filed by Mr Scott and Ophix seeking further particulars and in the alternative that the proceedings be dismissed.  In the course of his reasons for judgment his Honour said:

   “5.It appears that between about July 1994 and June 1996 there was a sum of around $9 million acknowledged as owing from [Mr Scott and or Ophix] to Mr Livingstone.

   6.It seems to me that in those circumstances, the plaintiff cannot reasonably be required to provide additional particulars.

   7.It seems to me that, on the material before the Court, there is prima facie evidence that something like $2 million of the $9 million owing at that time was, in substance Mr McMahon’s money, paid to [Mr Scott and Ophix] on his behalf by Mr Livingstone. 

   8.The plaintiff is unable to identify what part of that $9 million is his money, and it may well be that [Mr Scott and Ophix] are unable to do so.  However, in circumstances where there is prima facie evidence that the plaintiff is entitled or was entitled to $2 million of $9 million acknowledged as owing on 30 June 1996, it does seem to me prima facie that the plaintiff is entitled to an account from [Mr Scott and Ophix] as to how the balance between them and [Mr Livingstone] has changed since 30 June 1996.

   9.I interpolate that apparently [Mr Scott and Ophix] now allege that only about $500,000 is owing to Mr Livingstone.”

5. On 5 May 2000, Hodgson CJ in Eq made the following order:

   “1.Pursuant to Part 48 of the Supreme Court Rules, [Mr Scott and Ophix] serve on or before 5.00 pm on 12 May 2000 a verified statement of account of all:

   (a)monies held on 1 July 1994 and thereafter received from [Mr Livingstone];  and

   (b)monies disbursed on and from 1 July 1994 together with their explanation for such disbursement from those funds.”

6. On 28 July 2000, a statement of account pursuant to that order was filed in court verified by Mr Scott on 27 July 2000.  It purported to set out, inter alia:

   “(a)The amount owing by the Second Defendant (Scott) and/or Third Defendant (Ophix) to the First Defendant (Livingstone) on 1 July 1994 [namely $9,568,623, together with subsequent accretions thereto totalling $3,186,956.01];

   “(e)amounts paid by the (sic) Scott and/or Ophix at the request of or on behalf of Livingstone where the payees and circumstances are known to Scott and Ophix;  and

   (f)amounts paid out by cheques drawn on the account of Scott and/or Ophix by Livingstone or at his direction, where the payees and circumstances are not known to Scott and Ophix …”

   The balance as at 11 May 2000 was $413,643.26.

   Hearing in the Equity Division

7. On 3 October 2000, Mr Livingstone was made bankrupt. In consequence the proceedings against Mr Livingstone were not competent to the extent that they sought to enforce any remedy against Mr Livingstone or his property in respect of a provable debt; s58(3) of the Bankruptcy Act 1966. Subject to that limitation, between 30 January and 2 February 2001 Windeyer J heard the proceedings in the Equity Division. On 16 February 2001 his Honour delivered judgment and on 21 March 2001 made orders.

8. Windeyer J introduced his reasons for judgment of 16 February 2001 as follows, so far as presently relevant:

   “1Mr Livingstone (the first defendant) was the accountant of Dr McMahon (the plaintiff) a retired dentist.

   2Mr Livingstone accepted from Dr McMahon a series of deposits for the purpose of investing them over a period of around fourteen years commencing in April 1982, with the last recorded deposit made on 21 March 1996.  The total amount of these deposits with interest as agreed was approximately $1,900,000.00.

   3Mr Livingstone paid this money or most of it into an account operated by Mr Scott (the second defendant) and Mr Slattery, both also accountants and Mr Livingstone’s former employers.  This account was known as the Scott and Slattery Clearing Account (the clearing account).

   4Moneys from this account were lent to borrowers in the name of Ophix Pty Ltd (‘Ophix’) (the third defendant) or used by Ophix to finance its own investment or development ventures.  Mr Scott and Mr Slattery were the only directors and shareholders of Ophix.

   …

   6McMahon was one of a number of Livingstone’s clients whose money found its way to the clearing account but in the books of Ophix only one account was recorded.  This account, the ‘K’ or ‘Ken’ account, recorded the total deposits from Livingstone clients on a single ledger.

   7According to Scott and Ophix the balance of that account on 1 July 1994 was $9,568,623.00 and the balance of that account on 11 May 2000 was $413,643.26.

   8Livingstone is an undischarged bankrupt. He is currently in gaol serving a sentence for crimes unrelated to these proceedings. He was present in court as a defendant at the commencement of the proceedings but after some discussion counsel for the plaintiff accepted that as there had been no order authorising the continuance of the proceedings against Livingstone, they were stayed pursuant to s58 of the Bankruptcy Act 1966.

   9These proceedings are, therefore, an attempt by McMahon to recover his moneys from Scott and Ophix.  For some unexplained reason Mr Slattery was not joined as a defendant.”

9. After reciting background facts, Windeyer J said:

   “18McMahon did not know or care where Livingstone was investing his money, although I am satisfied he knew it was going to the clearing account and that interest rates were set by Scott.  Livingstone was a friend, he trusted Livingstone and was happy to leave investing to him.  He did not care if his funds were secured or not.

   19The evidence that was adduced about the account of McMahon with Livingstone was his evidence as to quarterly meetings, a personal note book kept by McMahon setting out his deposits, and some incomplete copies of Livingstone’s ledgers.  From this evidence the following facts appear:

   a)McMahon made a series [of] deposits between 1984 and 1996.  He met with Livingstone each quarter and confirmed these deposits and his own calculations of interest.  Thus a running balance of the amount owed to McMahon was maintained.  The black book figures were not challenged.

   b)Livingstone transferred these funds or most of them to the clearing account.  Mr Coles QC, acting for Scott and Ophix, endeavoured to suggest that Livingstone’s records showed him using some of McMahon’s money for his own purposes and not transferring it.  I consider that Livingstone’s records merely show him ‘contra-ing’ balances as between his clients and that he made the appropriate account credits and debits whenever he used cash deposited by McMahon to pay another client.  Thus I accept the amount of approximately $1.9m which both Livingstone and McMahon agree was owed to McMahon was part of the Ken account.

   c)On 1 July 1994 the balance credited to the Ken account was over $9.5m.

   20Scott and Slattery knew that these moneys included a significant amount of clients funds, although I accept that a small proportion of the deposits may have been Livingstone’s own money.  I find that neither Scott nor Slattery knew the exact portion of that amount which belonged to individual clients of Livingstone, but Scott certainly knew that it included substantial funds of McMahon.

   21On 5 May 2000, Hodgson CJ in Eq ordered Scott and Ophix to file a verified Statement of Account of all moneys held on 1 July 1994 and subsequently received from Livingstone and of moneys disbursed from 1 July 1994 with their explanation for such disbursement.  The account was sworn on 27 July 2000.  It is from this account that the balance of $9.5m referred to above is drawn, although it was accepted before that date.  To it is added $1.2m in interest, another $1.2m in deposits from Livingstone’s clients, the net proceeds of the sale of a property known as Plumpton and a $10.00 filing fee.  From it is deducted some $12.3m and the final balance – which ought now to be under the control of Livingstone’s trustee in bankruptcy, if it were available in cash, - is $413,643.26.

   22These deductions were made, according to Scott, under the authority of an agreement between Livingstone and Slattery that

   all amounts (including specifically principal amounts and legal costs and expenses) paid or incurred in respect of any client of Livingstone or any claim made by such a person would be for Livingstone’s account and would be charged against amounts owing to Livingstone by Scott and/or Ophix.  The terms of this agreement were the subject of a conversation in or about 1994 between Livingstone and John Joseph Slattery (‘Slattery’).”

10. Windeyer J set out the terms of a deed which Mr Livingstone signed on 23 June 1999 while at Lithgow Gaol.  The deed was also signed by Mr Scott and Mr Slattery and the seal of Ophix was affixed.  In particular, in cl 4 Mr Livingstone acknowledged that Mr Scott and Mr Slattery had no personal liability or obligation to him in respect of moneys deposited by him in the clearing accounts and released Mr Scott and Mr Slattery from any claim or action in regard to any conduct concerning or involving the operation of the clearing accounts.  According to Mr Scott, the deed was confirmation of the agreement said to have been made with Mr Slattery in or before 1994.  Windeyer J observed:

    “I would have had grave doubts about whether that agreement was made because Scott’s evidence on it, like much of his evidence, was quite unsatisfactory, but no questions were put to Livingstone as to whether the oral agreement was ever made and the main case as pleaded really proceeded on the basis it was made.”

11. Windeyer J set out the summarised statement of account filed pursuant to Hodgson CJ in Eq’s order and dealt with some of the deductions, notably amounts transferred to Winrobe Pty Ltd and Simposts Pty Ltd ($5,356,006.55) and to Davwren Pty Ltd ($198,000).  Other debits outlined were for amounts claimed to have been outlaid by Mr Scott and credited to him.  An example was recovery costs against a borrower and mortgagor, Bagshaw.  Under the heading “Pleadings” Windeyer J continued as follows:

    “33The final claim was made by further amended statement of claim filed early in the hearing when the plaintiff’s counsel accepted that the action against Livingstone was stayed.  The plaintiff claimed (a) for return of moneys invested,  (b) for compensation for breach of trust or fiduciary duty and (c) for accounts.

    34So far as the claim for return of moneys is concerned, the plaintiff alleged that moneys of the plaintiff were paid to Livingstone for investment;  that Livingstone became trustee of those moneys which he invested with Scott and/or Ophix;  alternatively that Livingstone acted as agent for Scott and Ophix in collecting such moneys;  and that in either case the moneys were repayable on demand to the plaintiff and that repayment had not been made.

    35The trust or fiduciary duty claim is mounted on two fronts.  First, it is alleged that if the 1994 agreement were entered into then it was a breach of trust for Livingstone to do so and that Scott and Ophix knowingly participated in that breach.  Secondly, it is claimed that Scott and Ophix failed to keep proper records of the various moneys;  that they mixed McMahon’s funds and other depositors’ funds and invested those funds or part of them in investments in which Scott or Ophix had an interest.

    36The claim based on failure to account is predicated on liability to account for separate moneys invested with Scott or Ophix by the plaintiff.

    37The relief sought by the plaintiff under the final claim is for return of the moneys invested or equitable compensation or taking of accounts.”

1. Windeyer J dealt with these pleadings under various headings the first of which was “Return of funds”.  In para 39 his Honour said that unless the plaintiff’s funds were isolated or deposited and separately identified in the clearing account, or unless there was an obligation on Mr Scott or Ophix so to identify them, it was difficult to see how this claim could succeed.  At a meeting which Dr McMahon had with Mr Livingstone and Mr Scott in September 1996, it was stated by Mr Livingstone that the balance in the Livingstone account with Ophix was an amount of about $9 million.  Mr Scott did not deny it and in fact his account verified this figure.  There was no evidence that Mr Scott accepted that Dr McMahon had the figure he claimed as part of that account.  Dr McMahon’s evidence was that he gave the funds to Mr Livingstone to invest and was happy with what he (Livingstone) did.  Windeyer J accepted and found that Mr Livingstone became trustee of the funds for that purpose.  But in his Honour’s opinion, there could be no basis to suggest that Mr Scott or Ophix was an agent for Dr McMahon or trustee for him unless Mr Livingstone was acting for them in obtaining the moneys paid into their account for investment.  Further, Windeyer J had no difficulty in finding that Mr Scott was aware that Dr McMahon had moneys invested by Mr Livingstone which had been placed on loan to Ophix.

2. The funds deposited by Mr Livingstone in the clearing account were controlled by Ophix.  Windeyer J considered the relationship between Ophix and Mr Scott and their depositors was one of debtor and creditor.  Ophix and Mr Scott were not trustees of those funds for investment as authorised by the depositors but were borrowers.  Thus, on his Honour’s findings, Mr Scott and Ophix owed to Mr Livingstone the balance in the K account in the Ophix ledger including the interest credited from time to time.  Mr Livingstone held this asset as trustee for those persons who had entrusted funds to him in accordance with their interests in the total.  It had clearly emerged from the evidence that the Livingstone trust was not one of which Dr McMahon was the sole beneficiary.

3. Windeyer J found that Mr Scott was aware that Mr Livingstone was not the owner of all the funds in the K account.  He was aware of substantial depositors and aware that Dr McMahon had substantial funds invested with Mr Livingstone.  Although he denied it, Windeyer J found that Mr Scott was also aware that the withdrawals were made by Dr McMahon by cheques drawn on the clearing account as those cheques were returned to him by the bank.  But, his Honour observed, that would not necessarily give Dr McMahon a right to repayment of the claimed figure direct. 

   “However, as Scott was aware, and Ophix was aware, that Livingstone was not owner of the funds and it could not be suggested he was a borrower of the funds from clients Scott and Ophix were aware that Livingstone took those funds as trustee for his client investors.  Any agreement by Livingstone with Scott or Ophix that would have an adverse effect on persons placing funds with Livingstone would be an obvious breach of trust by Livingstone and any action by Scott and Ophix to give effect to such agreement would be knowing participation in such breach.  Apart from anything else those investors were paid an agreed rate of interest by Ophix.  There was no possible basis on which it could be thought that Livingstone had some right by agreement with Ophix to reduce the fund in which they were entitled to share.  However, none of this supports the claim for repayment of the particular sum McMahon had placed with Livingstone.”

4. Thus, his Honour held that it was rightly submitted that Dr McMahon’s claim so based failed.

5. Windeyer J dealt next with “Breach of trust or fiduciary duty”.  Mr Scott and Ophix were in knowing receipt of trust funds even if they did not know the amounts held for particular beneficiaries.  Ophix was a borrower of those funds.  Accordingly, there was no reason why Ophix, as a borrower, could not invest those funds as it thought fit, even in its own development projects.  But, Windeyer J said:

   “… on no basis could it be thought that it was proper for the amount borrowed to be dependent upon the success or failure of particular investments, particularly when it seems from the evidence that success was not acknowledged while losses were taken into account.”

6. On the other hand, his Honour found if Mr Livingstone’s own moneys were lent to Ophix and moneys of Ophix were lost on some development promoted by Mr Livingstone, there would be no reason why an agreement could not have been made for the loss to be set off against the debt to Mr Livingstone.  The parties whose funds were involved would be those affected by the agreement.  But, Windeyer J said:

   “The position is, however, otherwise if the agreement to which a trustee is party is obviously a breach of trust and results in loss to the trust beneficiaries.”

7. This led his Honour to look at the statement of account which he said was based on the assumption that there was an agreement.  His Honour observed that to a large extent the action was run on the basis that the agreement did exist and that Mr Livingstone’s entry into it was a breach of trust.  On the evidence as it stood, his Honour was not satisfied that the agreement was made because, as he said, it was contrary to the acknowledgement made by Mr Scott to Dr McMahon about the balance in the K account or at least contrary to his failure to deny the figure of $9 million stated by Mr Livingstone to be the position at the meeting in 1996.  Nevertheless, the trial Judge proceeded on the basis that the agreement was made.  Most important was the deduction in the statement of account of $5,356,006.55 which Mr Scott said was the loss incurred by Ophix on a development at Hornsby by Winrobe Pty Ltd and Simpost Pty Ltd.  His Honour said:

   “… if this were a personal project of Livingstone, the claimed 1994 agreement did not apply to it as it was in respect of Livingstone clients, not Livingstone himself.  The 1999 agreement was said to be confirmation of the 1994 agreement but if it extended its scope it would not assist a loss made in 1997.  As Scott was aware the project was funded through Ophix moneys of which some comprised funds deposited by Livingstone which he knew came from Livingstone clients, it was a clear participation in a breach to enter into the agreement with Livingstone and to claim the deduction:  Barnes v Addy (1874) LR 9 Ch App 244 at 251. Without any valid authorisation the investors were entitled to repayment of their invested amounts and an agreed rate of interest.”

8. His Honour went on to say that it could not even be pretended that the deduction of $198,000 to Davwren Pty Ltd was covered by the agreement.  This was money lent by Davwren, which was controlled by Mr Slattery, to the children of Mr Livingstone to enable them to purchase Mr Livingstone’s family home at Frenchs Forest.  That loan was repaid with funds from Ophix directed to Mr Livingstone’s children and debited against the balance in the K loan account.

9. As the next heading, Windeyer J posed the question “What is the result”.  Windeyer J was of opinion that Dr McMahon, while entitled to claim for the full amount in the bankrupt estate of Livingstone, was not entitled to claim that same figure as against Mr Scott and Ophix.  Although his Honour considered the liability of Mr Scott and Ophix to be the same as all payments were made it seemed from the clearing account or dealt with through the Ophix books so that Mr Scott’s assistance or acquiescence was needed for these payments.  His Honour said that the account filed in July was clearly prepared on the basis of common liability.  However, the evidence did not show what proportion of interest Dr McMahon was entitled to and the amount which should be held to the credit of Mr Livingstone by Mr Scott and Ophix.  He said:

   “It is not possible to discern from the present state of the evidence the identity of all those persons interested in the amount due from to [sic] Livingstone as trustee for them.  In those circumstances it is not possible to say that McMahon had a certain interest in the amount due.  Neither is it possible to determine upon the evidence before me which deductions made from the K account were authorised although I am of the clear opinion that at least those to which I have specifically referred, namely Winrobe, Simposts and Davwren were not.  It follows from this that prima facie there should be an account.”

10. His Honour recognised but saw no difficulty in the fact that Mr Slattery was not a party because Mr Scott could seek to have him joined in the accounting if he wished.  His Honour said:

    “It does not seem to me that would necessarily require a separate action for accounts to be commenced although [in] some ways that might make the position clearer.  Mr Coles also argued that the funds McMahon claimed he invested with Livingstone were not his, but belonged to Valbri Pty Ltd.  That was a sort of shadowy claim not established to be the position.  They might have come from Valbri and have been lent to McMahon.  McMahon might have invested them as agent for Valbri as an undisclosed principal.  On any basis they were invested in his name with Livingstone and he was entitled to claim them back.  The final matter relevant to an accounting is that Mr Coles argued that the proper party to demand an account was Livingstone’s trustee in bankruptcy because it would seem that all beneficiaries in respect of moneys paid to Livingstone on trust for investment would be beneficiaries entitled to a share in whatever could be obtained in respect of moneys due by Scott, Slattery or Ophix to Livingstone.  Most of these people would presumably have been listed on the Statement of Affairs filed by Livingstone.  Thus, counsel argued in accordance with general principle that one of a number of trust beneficiaries should not be entitled to bring a claim against a debtor to the trust unless the trustee refused to do so.  [Mr Coles] argued that the trustee of Livingstone’s bankrupt estate ought to be plaintiff in any proceedings for an account:  Sharpe v San Paulo Railways Co (1873) LR 8 Ch App 597 at 609. But while that may be the usual position there are circumstances when it is not appropriate. This is one such circumstance because, were it not for his bankruptcy, it is clear McMahon would have had an action against Livingstone for moneys had and received. It is in part the actions of Livingstone in entering into that agreement and signing the deed which are challenged. Such circumstances make it proper for McMahon to claim: Hayim v Citibank NA [1987] AC 730 at 747-8. In such circumstances, however, it is ordinarily necessary to join the trustee as a defendant. In the particular circumstances of this case the order should provide for the trustee in bankruptcy to be joined as a defendant on the taking of accounts unless he elects to be joined as a plaintiff so as to take over the proceedings on the account himself.”

11. Windeyer J proposed that there be an order for proceedings on the account before a Master to determine the balance due by Mr Scott and Ophix to the estate of Livingstone as well as an order that Mr Livingstone’s trustee in bankruptcy should be notified and asked to elect whether he wished to join as a plaintiff or be joined as a defendant on the accounting.

12. The orders Windeyer J made included the following:

    “1.Orders that the Trustee in Bankruptcy of the First Defendant be joined as a Defendant in these proceedings.

    2.Orders that the proceedings be referred to the Master, Equity Division, on the Statement of Account verified by the Second Defendant on 27 July 2000 to determine the balance due by the Second and Third Defendants to the estate of the First Defendant.

    6.Orders that the Second and Third Defendants pay to the Trustee in Bankruptcy of the First Defendant the amount certified by the Master on the taking of accounts within fourteen (14) days of such certification.

    7.Orders that the Second and Third Defendants pay the Plaintiff’s costs of these proceedings up to the date of entry of these orders.

    11.Orders that the Trustee in Bankruptcy of the First Defendant have leave to file a cross-claim in the form initialled and placed with the file.”

13. At that time Max Christopher Donnelly was the trustee in bankruptcy for Mr Livingstone.  On 21 March 2001 the Trustee filed a cross-claim claiming:

    “1.That upon completion of proceedings for account before a Master, … an order be made for the entry of judgment in favour of the Cross-Claimant against [Mr Scott and Ophix] in such amount as the Master may find is due and owing upon the taking of accounts.”

14. Thereafter, John Sheahan replaced Mr Donnelly as trustee.  On 7 December 2001, an amended cross-claim was filed which came before Windeyer J for hearing.  On 13 December 2001, his Honour gave judgment.  His Honour observed in his reasons that the trustee in bankruptcy had been joined as a defendant because he had decided that he did not wish to be joined as a plaintiff.  Windeyer J said:

    “3.By an Amended Cross Claim filed by leave on 7 December in substitution for a Notice of Motion filed on 2 November, Mr Sheahan as cross claimant, seeks a declaration that the moneys certified by the Master, as due to the bankrupt estate, are moneys which are properly divisible among the creditors of the fourth cross-defendant, namely, the creditors of Mr Livingstone.

    4.In the alternative, an order is sought that Mr Sheahan be appointed as Trustee of the Trust, which comprises those moneys given to him by investors for investment and placed by him, in what was described in evidence, as the Scott and Slattery Clearing Account and the asset being the chose in action against the second and third defendants to recover trust moneys.

    …

    10.The alternative order sought by the cross-claimant is that Mr Sheahan, the Trustee in Bankruptcy, be appointed as trustee of what might be described as the chose in action held by Livingstone on trust for trust beneficiaries.  While in some cases there could be some conflict if this were done, it does not seem to me that there is any conflict in the present case, and I should add, that if the arguments put forward by counsel for the cross-claimant on seeking the declaration were successful, then the same person would have been collecting the total mixed fund in any event.

    11.In those circumstances it seems that there is no reason not to appoint Mr Sheahan, and I propose to do so, his consent having been filed.  There is a need to make an order for remuneration, because a trustee of this kind cannot be expected to act without remuneration.

    …

    15.Order that John Sheahan be joined as a party in his capacity as Trustee of the Livingstone Trust.”

15. The formal orders, so far as relevant, were:

    “1.An Order pursuant to section 70 of the Trustee Act that the Cross Claimant be appointed as trustee in lieu of the Fourth Cross-Defendant of the trust identified in paragraph 39 of the judgment of Windeyer J delivered herein on 16 February 2001 arising by virtue of the deposit by certain persons of money with the Fourth Cross Defendant for the purpose of investment with the Second and Third Defendants (the ‘Livingstone Trust’).

    2.An Order pursuant to section 78 of the Trustee Act that all property of the Livingstone Trust, including but not limited to any chose in action, vest in the Cross Claimant as trustee.

    3.For the purposes of orders 1 and 2 above, an Order pursuant to Part 8 Rules 13 and/or 14 of the Supreme Court Rules that the Third Cross Defendant, Brian McMahon, be appointed to represent all persons claiming to be beneficiaries under the Livingstone Trust.

    …

    5.An Order that John Sheahan be joined as a party in his capacity as the trustee of the Livingstone Trust.”

16. Following on reasons for judgment given by Master Macready on 23 May 2002 further orders were made and directions given by Windeyer J on 15 July 2002 by consent.  These included the following:

    “2.The proceedings be referred to the Master, Equity Division, on the consolidated Statement of Account directed pursuant to Direction 4 below to determine the balance due by the Second and Third Defendants to the Fourth Defendant/Cross-Claimant:

    (a)as trustee of the bankrupt estate of the First Defendant;  and/or

    (b)as trustee of the Livingstone Trust (as identified in order 1 made 13 December 2001).”

    The consolidated statement of account directed was an updated account.

17. On 23 May 2003, the Court ordered that all further proceedings on the accounts be determined by Windeyer J.  For reasons given on 25 November 2003, Windeyer J decided the accounts and on 8 December 2003 certified that upon the taking of accounts, the balance on the account in favour of Mr Sheahan was $8,026,307 at 8 December 2003 and ordered that Mr Scott and Ophix pay Mr Sheahan that amount. 

    Appeal

18. Mr Scott and Ophix appealed from all the decisions of Windeyer J and from the decisions of Hodgson CJ in Eq of 5 May 2000 and 19 May 2000.  In the amended notice of appeal the grounds of appeal, now pressed, were as follows:

    “1.Justice Windeyer erred in the judgment of 16 February 2001 in holding, in substance, that there should be an accounting as between the Appellants and [Mr Sheahan (as trustee for Mr Livingstone)].

    2.Justice Windeyer should have dismissed the proceedings with costs in circumstances where:

    a.[Dr McMahon] did not seek and was not entitled to an accounting as between either Appellants and [Mr Sheahan as trustee for Mr Livingstone];

    b.All of [Dr McMahon’s] pleaded claims against the Appellants failed;

    c.[Mr Sheahan as trustee for Mr Livingstone] was not a party to the proceedings at the time judgment was given and had previously expressly disavowed any intention to participate in the proceedings;

    d.No submissions were made by the parties on the question of whether or not an account should be ordered against either Appellant in favour of [Mr Sheahan as trustee for Mr Livingstone].

    2A.Justice Hodgson erred in ordering on 5 May 2000 and on 19 May 2000 that a verified account of all moneys held by them be filed by the Appellants in circumstances where that relief was not sought by the parties and could not have been claimed as final relief in the proceedings as they were then constituted.

    5.Justice Windeyer should have held:

    a.The deposits by [Mr Livingstone] with the Second Appellant created the relationship of creditor and debtor between those parties;

    b.There was no contractual or other relationship of legal consequence between [Mr Livingstone] and the First Appellant;

    c.The Second Appellant was entitled to and did deal with the funds deposited by [Mr Livingstone] in accordance with the directions of [Mr Livingstone].

    6.In the alternative, Justice Windeyer should have held that any liability of the First Appellant and/or Second Appellant to [Mr Livingstone] was released by [Mr Livingstone] pursuant to the Deed dated 23 June 1999 and in consequence there was no balance due to [Mr Sheahan as trustee for Mr Livingstone] on the accounting.

    7.The proceedings before Justice Windeyer miscarried as a consequence of his Honour’s observations in the judgment of 25 November 2003 that lead [sic] to a reasonable apprehension that his Honour was influenced by views he had formed on earlier occasions, rather than by an assessment of the evidence before his Honour on the accounting.”

    Nothing was said in support of ground 7.  It was without merit and should be rejected.

19. The complaints made about the decisions in these proceedings are based upon procedural technicalities.  The essential point made by the appellants was that Dr McMahon’s case as pleaded should, on Windeyer J’s findings in his judgment of 16 February 2001, have been dismissed.  In particular, Windeyer J should not have made orders joining Mr Livingstone’s trustee in bankruptcy as a party and for an account between the appellants and that trustee in bankruptcy.  The appellants claimed that Windeyer J made the orders notwithstanding:

    (a)Dr McMahon did not seek an order that either Mr Scott or Ophix account to the trustee in bankruptcy;

    (b)The trustee in bankruptcy was not a party to the proceedings at or prior to the judgment date and became a party only on 21 March 2001 as a consequence of what Windeyer J had said in the course of his judgment;

    (c)The trustee in bankruptcy appeared, by counsel, on the first day of the hearing but disavowed any wish to participate in the proceedings and was only joined as a defendant to provide a party in whose favour an accounting could be given.   The relief sought by the trustee in bankruptcy by cross-claim was entirely the consequence of the order for the taking of accounts.

    (d)No submissions were made to Windeyer J on the question of whether or not an account should be ordered against either Mr Scott or Ophix in favour of the trustee in bankruptcy.

    The appellants submitted that the trial Judge should have dismissed Dr McMahon’s claim because:

    (a)He had failed in all of his pleaded claims and so was not entitled to any relief;

    (b)He had no standing to seek those orders;

    (c)If (b) was wrong, the trial Judge made no finding of fact that justified the making of the orders;

    (d)The proceedings between Dr McMahon and the appellants had not agitated those orders as part of their subject matter and no submissions were made as to the appropriateness of such relief;

    (e)The proceeding had not been constituted so as to explore the nature of the relationship between Mr Livingstone and the appellants;  and

    (f)Due to the way in which the proceedings were constituted, Mr Scott was not given the opportunity to raise defences including that he was an agent for a disclosed principal, Ophix.

1. In short, it was submitted that Dr McMahon had failed to establish any entitlement to relief on the bases pleaded and had failed to establish any relationship or entitlement to demand payment to him of moneys from Mr Scott or Ophix.

2. Whatever the vagaries of the pleading, Windeyer J had read to him, subject to various objections, affidavits of Dr McMahon (14 February 2000), (1 April 1999) and Mr Scott (12 December 2000) and heard oral evidence from each of them. 

3. The appellants submitted that, on the findings Windeyer J had made, his Honour should have dismissed the proceedings and not taken the further step of proposing an account to determine the balance due by Mr Scott and Ophix to Mr Livingstone or joined Mr Livingstone’s trustee in bankruptcy in the proceedings.  On the same basis, it was argued that Hodgson CJ in Eq should not have made an interlocutory order requiring Mr Scott and Ophix to serve a verified statement of account of all moneys held on 1 July 1994 and thereafter received from Mr Livingstone and moneys disbursed on and from 1 July 1994 together with the explanation for such disbursement.  Hodgson CJ in Eq had said that on the material before him there was prima facie evidence that something like $2 million of the $9 million owing at that time was in substance Dr McMahon’s money paid to Mr Scott and Ophix on his behalf by Mr Livingstone.  Since Dr McMahon was unable to identify what part of the $9 million was his money and there was prima facie evidence that Dr McMahon was entitled to $2 million of the $9 million acknowledged, Dr McMahon was entitled to an account from Mr Scott and Ophix as to how the balance between them and Mr Livingstone had changed since 18 June 1996.

4. I find it hard to discern what criticism could be made of Windeyer J’s reasoning or conclusions.  It was not disputed that Mr Livingstone had passed $9 million, which he held as trustee for clients, to the clearing account.  It was not suggested that it was not open to Windeyer J to conclude that Mr Scott was aware that this money was trust money.  The problem not covered by the original pleading was that not all of that money was held by Mr Livingstone as trustee for Dr McMahon.   Part appeared to be held for other clients of Mr Livingstone or other depositors with Mr Livingstone.  The entitlement of Dr McMahon could not be determined until it was known what part of the trust fund represented by a chose in action, namely the borrower’s debt to the trustee Mr Livingstone, was Dr McMahon’s share.  For this purpose a wider account was required than that sought in the pleading.  Moreover, inevitably repayment of those borrowed moneys would be to the trustee Mr Livingstone, who was a party to the proceedings.  However, after the proceedings had begun Mr Livingstone had been made bankrupt.  There were accordingly good grounds for replacing him as trustee of the fund represented by the chose in action and also good grounds for his trustee in bankruptcy to be a party.  All that was needed was a mechanical process for ensuring that the appropriate parties were before the Court.  In substance, the extent of the liability of Mr Scott or Ophix did not change according to whether they were liable to repay the appropriate portion directly to Dr McMahon or to the trustee of the funds which had been lent to Mr Scott or Ophix, whether that trustee were Mr Livingstone himself or a substitute appointed on his bankruptcy.

5. It is a well-recognised and fundamental principle of the Supreme Court Act 1970, recognised in s63, that multiplicity of proceedings be avoided. Section 63 provides that the Court shall grant, either absolutely or on terms, all such remedies as any party may appear to be entitled to in respect of any legal or equitable claim brought forward in the proceedings so that, as far as possible, all matters in controversy between the parties may be completely and finally determined, and all multiplicity of legal proceedings concerning any of these matters avoided.

6. In Leotta v Public Transport Commission of New South Wales (1976) 50 ALJR 666, the case which the appellant at the trial sought to have submitted to the jury was factually different from that alleged in the statement of claim and the particulars of negligence included therein. At 668 Stephen, Mason and Jacobs JJ said:

   “… the duty of the trial judge was clear. If in the cause of action upon which the plaintiff sued there had emerged at the conclusion of the evidence facts which, if accepted, established that cause of action, then it was the duty of the trial judge to leave the issue of negligence to the jury. The pleadings should have been amended in order to make the facts alleged and the particulars of negligence precisely conform to the evidence which had emerged. [Pt 20 r 1(2) of the Supreme Court Rules] … Now, and for many years past, a plaintiff does not fail by being refused leave to amend or through failure formally to apply for amendment, where the evidence has disclosed a case in the cause of action fit to be determined by the tribunal of fact. …

   In a case where the question arose whether an amendment ought to have been requested and allowed in order to raise breach of a different duty of care the Court in Mummery v Irvings Pty Ltd (1956) 96 CLR 99 at 112 said:

   ‘There is, of course, no doubt that the question of extending the issues at the trial was peculiarly within the discretion of the trial judge.  But, on the assumption that there was some evidence upon which the jury could have reached a conclusion on this additional issue, there was every reason why it should have been submitted to the jury.’ “

7. In powerful submissions counsel on behalf of Mr Sheahan the third respondent and trustee in bankruptcy of Mr Livingstone’s estate, who in that capacity was the replacement trustee for Mr Livingstone of the trust between Mr Livingstone and the investor clients, submitted that it was of no consequence that it was Dr McMahon who sought the account and not Mr Livingstone.  Dr McMahon was one of the investor clients and a beneficiary of the Livingstone trust.  When the proceedings were begun, Mr Livingstone was not a bankrupt but was reluctant to pursue the claim to recover the credit balance of the Ken Account and had failed to do so for many years.  By the time of the hearing before Windeyer J in 2001, Mr Livingstone had been made bankrupt and was in gaol.  The fact that he was bankrupt meant that the proceedings were stayed against him pursuant to the Bankruptcy Act. This was a point the appellants expressly advanced.  Mr Livingstone had signed the 1999 deed which purported to reduce the trust asset, that is to say the amount owing on the Ken Account, to the detriment of Dr McMahon and other investor clients.  In the circumstances, Dr McMahon could bring himself within the exception referred to in Hayim v Citibank NA (to which Windeyer J referred), where Lord Templeman, speaking for the Judicial Committee of the Privy Council, said at 748:

   “These authorities demonstrate that a beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in performance of the duty owned (sic) by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.”

8. In Ramage v Waclaw (1988) 12 NSWLR 84 at 91, Powell J cited with approval a passage from Jacobs’ Law of Trusts in Australia, 4th ed (1977), (see now 6th ed [2002] at 690-1 where both Hayim, which apparently was not cited to Powell J and Ramage v Waclaw are referred to),  where it was said that:

   “where a trustee refuses to institute proceedings against a debtor or to recover trust property, the beneficiary may wish to institute proceedings himself, either in his own name or in the name of the trustee.  The rule here is that a beneficiary may sue in his own name only where the relief sought is in the equitable jurisdiction of the court and even then only where the circumstances are exceptional.”

9. Powell J went on to remark that although in the early stages the only circumstances which might be regarded as “exceptional” or “special” were collusion between the trustee and debtor, or insolvency of the trustee, a consideration of the authorities demonstrated that “exceptional” or “special” circumstances are not now to be regarded as limited to such categories of case.  His Honour then gave authoritative examples.  Clearly enough, by the time the proceedings came on for hearing with Mr Livingstone being bankrupt and in gaol the circumstances were such as to justify Dr McMahon bringing proceedings to recover trust property from Mr Scott and Ophix on his own behalf and on behalf of other beneficiaries of the Livingstone trust.

10. It matters not that Mr Sheahan, as trustee in bankruptcy, was not a party from the outset.  Mr Livingstone was always a party.  In so far as Mr Sheahan recovered in his capacity as trustee of the Livingstone trust, Mr Livingstone was always the proper party up until the order made on 13 December 2001 pursuant to which Mr Sheahan replaced Mr Livingstone as the trustee of the Livingstone trust.  Accordingly, the relevant entity, namely the trustee of the Livingstone trust, was always a party to the proceedings.

11. In so far as Mr Sheahan may have recovered in his capacity as trustee in bankruptcy the following points should be made. The joinder was necessary and proper and met the appellants’ initial complaint that the suit had become improperly constituted by reason of the intervening bankruptcy of Mr Livingstone. It was a straightforward application of Pt8 r10 of the Supreme Court Rules which provides (1) that where a party becomes bankrupt but a cause of action in the proceedings survives the proceedings shall not abate by reason of the bankruptcy, (2) that where the interest of a party passes to another person, the Court may make consequential orders for the addition of parties and may make orders for the further conduct of the proceedings, and (3) that the Court may act under sub-rule (2) on application by a person to whom the interest passes or of its own motion.

12. When the joinder of the trustee in bankruptcy was mooted on 30 January 2001 by counsel then appearing for Dr McMahon, there was no record of any objection.  When the joinder was sought on 21 March 2001, no objection was apparently taken.  In any event, the joinder was consistent with principle.  In Mulcahy v Curramore Pty Ltd [1974] 2 NSWLR 464 this Court, on an appeal, raised a question concerning the non-joinder of the legal owner of the possessory title to certain land the subject of a declaration and injunction. An application was made in this Court to join the legal owner as a party and leave was granted. In the course of his judgment, with which the other members of the Court agreed, Moffitt P said at 468:

    “In my view we have the power to permit the joinder of Hurley as a defendant and should do so, if no injustice is caused to the appellant by his being joined at this stage of the proceedings.  Authority for this course is to be found in Harmer v Armstrong [1934] 1 Ch 65 at 92-93 aided by the Supreme Court Act 1970 s44, Fourth Schedule, Pt 8, rr7-8.”

13. In the present case no prejudice was asserted in opposition to the late joinder of the trustee in bankruptcy.  Given that the trustee in bankruptcy was added as a defendant rather than as a plaintiff, it was appropriate that the trustee in bankruptcy bring a cross-claim.  There was no recorded opposition to the cross-claim.

14. It is convenient at this point to refer to the written submissions put to Windeyer J on behalf of Mr Scott and Ophix.  In substance, they were:

    1.Mr Livingstone received large sums from his investor clients.

    2.For the period that Mr Livingstone himself held the funds, he was trustee of those funds.

    3.The deposit by Mr Livingstone of those funds in the Scott and Slattery Clearing Account gave rise to a debtor/creditor relationship.

    4.Once deposited in the Scott and Slattery Clearing Account Mr Livingstone ceased to hold the funds themselves on trust.

    5.In lieu of the funds themselves being held trust, the debt owed pursuant to the debtor/creditor relationship was held by Mr Livingstone on trust for the investors;  that is the credit balance of the Ken Account was held by Mr Livingstone on trust for the investor clients.

    6.Because of the bankruptcy of Mr Livingstone the proper party to recover the credit balance of the Ken Account was the trustee in bankruptcy.

    7.There is a deficiency in the constitution of the proceedings because the trustee in bankruptcy was not a party.  It was asserted “the trustee must be a party to the proceedings (or if he is bankrupt, his own trustee in bankruptcy must be such a party)”.

15. The third respondent submitted that in light of those submissions the only point  that remained open was the procedural point based upon the constitution of the proceedings in the absence of the trustee in bankruptcy.  In fact, the third respondent recovered as trustee of the Livingstone trust.  In any event, the joinder of the trustee in bankruptcy was appropriate.

16. In his written submissions, the third respondent dealt with many individual submissions put on behalf of the appellants.  First, it was said that Dr McMahon did not seek an order that either Mr Scott or Ophix account to the trustee in bankruptcy.  Dr McMahon did seek an account.  Order 12 sought in the further amended statement of claim filed on 2 February 2001 was for accounts to be taken of all moneys paid to and received by Mr Livingstone and paid or disbursed by him for Dr McMahon, all transactions upon the trust account held by Mr Livingstone in relation to Dr McMahon and all moneys received by Mr Scott and Ophix from Mr Livingstone on behalf or for the account of Dr McMahon together with all transactions pursuant to which any moneys received by Mr Scott or Ophix from Mr Livingstone on behalf of or on account of Dr McMahon were disbursed by either of them.  Dr McMahon sought and obtained an order from Hodgson CJ in Eq on 5 May 2000 and the account produced pursuant to that order was before Windeyer J.  This account was the subject of evidence before Windeyer J, the subject of cross-examination before Windeyer J and the subject of submissions before Windeyer J.  It was clear that Dr McMahon sought to have that account brought up to date and that he also sought to dispute items in the account. 

17. The appellants submitted that no submissions were made to Windeyer J on the question of whether or not an account should be ordered against either Mr Scott or Ophix in favour of the trustee in bankruptcy.  It was said that submissions were made on the form of the orders after Windeyer J delivered his reasons for judgment.  It was clear enough from para 49 of Windeyer J’s judgment of 16 February 2001 that submissions were made with respect to an account, namely that if there was to be an account it had to be in favour of the trustee in bankruptcy.  Further, the account filed pursuant to the orders of Hodgson CJ in Eq was the subject matter of the first hearing before Windeyer J. 

18. The third respondent disputed the claim that Dr McMahon had failed in all of his pleaded claims and so was not entitled to any relief.  The third respondent submitted that it must have been plain that Dr McMahon was seeking to have a further account following from the account ordered by Hodgson CJ in Eq and this, at least, was part of the relief he claimed.  As to the standing of Dr McMahon it was justified by Windeyer J, who referred to Hayim v Citibank.  The appellants submitted that the proceedings had not been constituted so as to explore the nature of the relationship between Mr Livingstone and the appellants.  The appellants asserted that due to the way in which the proceedings were constituted Mr Scott was not given the opportunity to raise defences including that he was an agent for a disclosed principal, Ophix. The third respondent denied this.  The relationship between Mr Livingstone and the appellants with respect to the Scott and Slattery Clearing Account was in issue before Windeyer J.  The relationship was the subject of evidence and submissions which the appellants dealt with.

19. In the late 70s or early 80s, Mr Scott and Mr Slattery set up the Scott and Slattery Clearing Account.  That was an account of which they were the only two proprietors.  It was with the Commonwealth Bank of Australia, North Sydney Branch, account number 2217 0028 1287.  It was clear that the proprietors were Mr Scott and Mr Slattery personally as was evidenced by the Commonwealth Bank’s records.  In consequence, between Mr Scott and Mr Slattery on the one hand and the Commonwealth Bank on the other, it was Mr Scott and Mr Slattery who owned the credit balance and Mr Scott and Mr Slattery who were liable for any debit balance.   There were other later versions of the Scott and Slattery Clearing Account with Westpac and St George Bank.  They operated on precisely the same basis.  Mr Scott and Mr Slattery were the proprietors of the accounts.

20. After Mr Livingstone left Mr Scott’s employment in 1978, he set up his own practice.  Mr Livingstone received funds from investors who were clients of his accounting practice.  When he did this he informed his clients by way of a standard form letter which indicated that the money was banked into a trust account.  He received those funds as trustee.  Mr Livingstone deposited the funds into the “Scott and Slattery Clearing Account” operated by Mr Scott and his partner, Mr Slattery.  He had deposit books which allowed him to do this.  Although he maintained his own trust account, he rarely, if ever, used it for client funds.  Within the Scott and Slattery Clearing Account, Mr Scott operated a hand-written ledger referred to as the Ken Account.  It represented movements in the balance owing to Mr Livingstone.  The reason for such a Ken Account was that Mr Livingstone received money from his clients for investment and he would pay money into the Scott and Slattery Clearing Account on behalf of his clients. 

21. This account was reconciled between Mr Scott and Mr Livingstone on a quarterly basis.  Hand-written reconciliations were maintained by Mr Scott.  The practice of reconciling the Ken Account ended as at 30 June 1994.  At that date the credit balance was $9,568,623.  That figure was the opening balance in all the various versions of the account filed pursuant to orders for the taking of an account.  The last version was the consolidated statement of account which carried it forward to 24 July 2002.  The deposits to the clearing account gave rise to a debtor/creditor relationship;  notwithstanding that the relationship between Mr Livingstone and the investor clients was one whereby he was a trustee.  The consequence was that Mr Livingstone held the credit balance of the Ken Account as trustee for the investor clients, who had entrusted funds to him in accordance with their interests in the total.   

22. When asked whether he and Dr McMahon regularly struck a balance of the account as between the two of them, Mr Livingstone said:  “I had a ledger of all clients’ accounts that matched the net balance of Scotties’ money”.  Dr McMahon was in no different position from that of other investor clients.  Mr Scott was aware that the funds that Mr Livingstone was depositing to the Scott and Slattery Clearing Account were the funds of his investor clients.  In evidence, when referring to the $9 million odd reconciled credit balance of the Ken Account, Mr Scott agreed that that was an amount owing for Mr Livingstone’s investment clients as at 31 December 1994.

23. Mr Scott and Ophix treated the opening balance of the Ken Account as being the balance as at 30 June 1994, $9,568,623, based upon Mr Scott’s hand-written reconciliation.  That figure was adopted in all of the accounts filed by Mr Scott and Ophix in these proceedings.  For the period from 30 June 1994 to 31 December 1994 the hand-written version of the Scott and Slattery Clearing Account was maintained by Mr Scott.  The Ken Account had a credit balance of $9,677,668 as at 31 December 1994 according to Mr Scott’s records.  That meant that Mr Livingstone had an asset of that value for his “investment clients”.  The purpose of the order for an account was to establish what, if anything, Mr Scott and Ophix were entitled to deduct from that admitted debt owing to Mr Livingstone on behalf of his investor clients.  If Mr Livingstone himself had brought proceedings to recover the debt, he would have proved the amount owing as at 31 December 1994 and it would have been for Mr Scott and Ophix to show why it was some lesser figure.  The onus was on Mr Scott and Ophix to justify the debits.  They accepted this position before Windeyer J.  Apart from some debits, which were agreed, they were largely unsuccessful.

1. Following Hodgson CJ in Eq’s order for an account, Mr Scott and Ophix prepared five versions which culminated in that filed on 25 July 2002.  This was the revised form of account before Windeyer J during the 2003 hearing.  Mr Sheahan’s response was in the objections filed on 14 October 2002. 

1. Mr Scott could and indeed did raise defences to his personal liability which were dealt with in closing addresses on 2 October 2003.  The majority of the points raised in the closing address for Mr Scott and Ophix related to Mr Scott’s personal liability and were the subject of paragraph 7 in Windeyer J’s judgment of 25 November 2003.  Mr Scott’s personal liability was an issue raised by paragraph 6 of the further amended statement of claim, which asserted that Mr Livingstone had lent the money to either or both Mr Scott and Ophix.  Similarly, the amended cross-claim, paragraph 3A, sought an order against each of Mr Scott and Ophix, not just Ophix.  on personal liability, namely that the account was in truth Ophix’s account.

2. On the question of whether there was a disclosed principal there was no cross-examination to that effect of Mr Livingstone and in any event the re-examination of Mr Livingstone presented a problem.  In re-examination by counsel for Dr McMahon this appeared:

   “Q.I think you have already indicated to his Honour that you and Mr Scott were in the habit of using the Scott Family Trust interchangeably with Ophix;  is that right?  A.  I always called it the Scott and Slattery.  I don’t know what names laid in behind the scenes.”

3. It was submitted by the third respondent that there was no lack of opportunity for Mr Scott to present his defence.  He simply failed to avail himself of that opportunity. 

4. The appellants challenged Windeyer J’s findings in the judgment of 16 February 2001 and asserted that there was no sufficient evidence to demonstrate the basis upon which Mr Livingstone held the fund.  It was said, correctly, that none of the investors except Dr McMahon gave evidence at all.  The response from the respondents was that there was evidence and it was accepted.  Mr Scott admitted that the deposits were the money of Mr Livingstone’s investor clients.  The written outline of submissions of 2 February 2001 on behalf of Mr Scott and Ophix contended that when Mr Livingstone received the funds he did so as trustee. 

5. The appellants asserted that there was no evidence that moneys of Dr McMahon found their way to Mr Scott and Ophix.  Again Mr Scott and Ophix’s written outline contained this concession:

   “Mr Scott appears to have accepted at that stage that moneys deposited with Ophix by Livingstone had to some extent been sourced from McMahon.”

6. The appellants asserted that there was no sufficient evidence or no evidence that the appellants were aware of the basis upon which Mr Livingstone held the funds of the investor clients.  It was said there was no evidence of the awareness of the trust.  For reasons already given, this was simply not so. 

7. As to the question of Dr McMahon’s standing, the third respondent submitted that this was now of no relevance. The suggestion that even if Mr Livingstone had been found to act in breach of trust he was not the trustee at the time of hearing was wrong. Mr Livingstone was the trustee of the Livingstone trust up until the time he was removed by order of the Court on 13 December 2001. The attempt by the appellants to insist upon separate proceedings rather than a cross-claim flew in the face of s63 of the Supreme Court Act which has already been referred to.

8. In dealing with ground 2A of the appeal and the orders made by Hodgson CJ in Eq, the third respondent pointed out that the appellants did not suggest that they had opposed the making of the order for an account.  In any event, the order was appropriate and necessary to ascertain the amount owed to Mr Livingstone on the Ken Account.  It was submitted that while, when interlocutory relief is sought, it is necessary to identify the legal or equitable rights to be determined at the trial and in respect of which final relief is sought, in the present case the final relief ultimately obtained related to the interlocutory order and that was sufficient.  Further, the consolidated statement of account claimed to credit outlays which Mr Scott alone had borne.  An example was claimed reimbursement for costs paid by Mr Scott for proceedings against Mr Bagshaw.  That demonstrated that Mr Scott (not merely Ophix) owed money on the Ken Account.  Thus, the substance of the account showed it was prepared on the basis of common liability.

9. Mr Livingstone kept records with respect to the investor clients who had deposited money through him to the Scott and Slattery Clearing Account.  Although Mr Livingstone kept these records for his individual investor clients, the records that Mr Scott maintained of the Scott and Slattery Clearing Account recorded all of Mr Livingstone’s transactions in the one ledger being the Ken Account.  Mr Scott and Mr Slattery knew that the funds deposited by Mr Livingstone in the Scott and Slattery Clearing Account were funds of Mr Livingstone’s investor clients. 

10. Mr Scott and Ophix purported to reduce the credit balance of the Ken Account to a negative sum by a series of debits.  The primary justifications for the debits were alleged agreements with Mr Livingstone.  These were:

    1.The oral agreement said to have been made in about 1994 between Mr Livingstone and Mr Slattery (not Mr Scott);  and

    2.The written agreement in the form of a deed (the 1999 deed).

11. The existence, efficacy and construction of those agreements were disputed before Windeyer J.  Also disputed were specific individual debits and some series of related debits made to the Ken Account.  The most significant was the debit of $5,356,006.55 as at 30 June 1997 purportedly made to the Ken Account and relating to Winrobe and Simposts. Mr Sheahan disputed the entitlement to debit the account altogether and disputed the amount of the debit.  Mr Scott and Ophix had no admissible evidence to justify the amount of the debit. 

12. Mr Scott and Ophix never disputed that if Mr Scott and/or Ophix owed money on the Ken Account it was owed on a debtor/creditor relationship to Mr Livingstone.  As the Ken Account was neither reconciled nor updated after 1994, an account of the dealings between the appellants and Mr Livingstone was called for.

    Orders

13. In my opinion, the appeal should be dismissed with costs.  It is unnecessary in the circumstances to deal with the third respondent’s notice of contention.

14. SANTOW JA:  I agree with Sheller JA.

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LAST UPDATED:               23/09/2004