Victoria Street Apartments Limited (in liquidation) v Sharma
[2012] NZHC 2
•10 January 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2009-404-008377 [2012] NZHC 2
BETWEEN VICTORIA STREET APARTMENTS LIMITED (IN LIQUIDATION)
First Plaintiff
ANDTREASURY TECHNOLOGY DISTRIBUTION LIMITED Second Plaintiff
ANDSUREN SHARMA First Defendant
ANDSUREN SHARMA AS TRUSTEE OF THE SHARMA FAMILY TRUST NO. 2
Second Defendant
ANDSUREN SHARMA AS TRUSTEE OF THE SHARMA FAMILY TRUST
Third Defendant
ANDQUAY STREET APARTMENTS LIMITED
Fourth Defendant
ANDMUTUAL TRUST PROPERTIES LIMITED
Fifth Defendant
ANDMISSION TRUSTEE ONE LIMITED AND MISSION TRUSTEE TWO LIMITED
Sixth Defendants and Ninth Third Parties
ANDREGINALD JAMES WATT Third Party
Hearing: 5 and 6 September 2011
Counsel: D W Grove for the Plaintiffs
D E Smyth for the Defendants
Judgment: 10 January 2012
VICTORIA STREET APARTMENTS LTD (IN LIQUIDATION) and ANOR v SHARMA and ORS HC AK CIV-
2009-404-008377 [10 January 2012]
JUDGMENT OF DUFFY J [Re Third Party Claim]
This judgment was delivered by Justice Duffy on 10 January 2012 at 4.45 pm, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Counsel: D W Grove P O Box 130 Shortland Street Auckland 1140 for the Plaintiffs
D E Smyth P O Box 105270 Auckland City Auckland 1143 for the Defendants
[1] This judgment is associated with and therefore, should be read together with earlier judgments I delivered on this proceeding: see Victoria Street Apartments Ltd (in liq) v Sharma HC Auckland CIV-2009-404-8377, 21 September 2011 (the liability judgment); and Victoria Street Apartments Ltd (in liq) v Sharma HC Auckland CIV-2009-404-8377, 15 December 2011 (the quantum judgment). Factual findings made in the earlier judgments affect what is an available finding in this judgment. The present judgment determines the first, second and third defendants’ third party claim against Reginald Watt.
[2] The plaintiff, Victoria Street Apartments Limited (in liquidation) (VSAL), was successful in its claims against the first defendant, Suren Sharma, who was sued in his personal capacity as a director of VSAL: see the liability judgment. Initially, the defendants were Suren Sharma and P Richardson, who were sued in their capacity as trustees of the Sharma Family Trust No. 2. VSAL abandoned its claim against Mr Richardson, as it accepted that he was a professional trustee whose liability was limited. But the claim was continued against Mr Sharma in his role as trustee of the Sharma Family Trust No. 2. The third defendants were Suren Sharma and P Richardson as trustees of the Sharma Family Trust. Again VSAL abandoned the claim against Mr Richardson but continued with the claim against Mr Sharma. VSAL was successful in proving its claims against Mr Sharma in his role as a trustee of the Sharma Family Trust No. 2 and the Sharma Family Trust.
[3] In the liability judgment, I found that various payments (the suspect payments) made by Mr Sharma from VSAL’s funds were made in breach of the fiduciary duties of loyalty and good faith that he owed to VSAL. I also found that the Sharma Family Trust No. 2 and the Sharma Family Trust had either received or enjoyed the benefit of the improper payments in circumstances where VSAL was entitled to recover those funds from those trusts. Following the findings on liability, I delivered a judgment quantifying the amounts to be recovered from Mr Sharma and the two trusts (the suspect advances). I found that they were obliged to repay VSAL as follows:
Mr Sharma (First cause of action) Mr Sharma (Sixth cause of action) Sharma Family Trust No. 2 (Second cause of action)
Sharma Family Trust (Third cause of action )
$ 429,135.50
$ 60,569.00
$ 649,105.00
$ 138,039.20
[4] These persons now seek to have their liability to pay the judgment sums entered against them diminished by a claim for contribution against Mr Watt. For ease of reference in this judgment, I propose, when referring to them jointly, to describe them as the third party claimants. When referring to them severally, I will use either the names of the trusts or Mr Sharma, depending on whether I am referring to his conduct as a trustee or in his personal capacity.
[5] In their statement of claim against Mr Watt, the third party claimants allege that the suspect advances were made at the direction of Mr Watt. They allege that Mr Watt led Mr Sharma to believe that funds held by VSAL were in fact Mr Watt’s funds so that the payments made from VSAL’s accounts were, in reality, payments of funds owned by Mr Watt and which were made at his behest. These sums total
$618,846.94. In addition, they allege that further payments were made by VSAL to Mr Watt’s account to meet mortgage payments due on properties owned by Mr Watt. These payments came to $63,745.46. Whilst the payments were made to a bank account in the name of Quay Street Apartments Limited, the fourth defendant in these proceedings, the third party claimants contend that the account was actually that of Mr Watt.
[6] In total, the suspect payments came to $682,592.40. Each individual payment was drawn from VSAL’s bank accounts. Funds had arrived in VSAL’s bank accounts in one of three ways. First, as a payment of $400,000, the origin of which was in dispute in the main proceeding; secondly, as sales proceeds from the sale of units in the Victoria Street apartment complex that was developed by VSAL; and thirdly, in the form of a Goods and Services tax (GST) refund of $800,299.75.
[7] The third party claimants’ contention is that the $400,000 was actually funds
owned by a company by the name of Point of Difference Limited. The shares in this
company were owned by a family trust of Mr Watt. Thus, the third party claimants contend that the use of these funds was subject to the direction of Mr Watt.
[8] Regarding the other monies that Mr Sharma disbursed, the third party claimants have adopted more than one position when it comes to control and ownership of those funds, none of which is clearly described or explicitly pleaded. First, they contend that Mr Watt was acting in a joint venture with either VSAL or Mr Sharma (they are not precise about which or who it was) and, therefore, Mr Watt had authority to direct Mr Sharma to disburse funds from VSAL. Secondly, they contend that the disbursement of the funds by Mr Sharma at the direction of Mr Watt was done by mistake. Thirdly, they contend that Mr Watt, as a co-obligor of VSAL, is liable to contribute to the repayment of funds that they have been required to make.
[9] In the third party statement of claim, they claim that they are entitled to recover the total amount of $682,592.40 from Mr Watt. However, at the hearing, their counsel presented a table itemising the payments alleged to be recoverable from Mr Watt. They came to a total of no more than $199,449.77. Despite this, there was no formal abandoning of the amount sought in the third party statement of claim. I propose, therefore, to address their claim on the basis of the total amount sought in their pleading.
[10] Procedurally, the third party claim leaves much to be desired. It does not explicitly plead all the contentions that the third party claimants raised before me to support contribution from Mr Watt. In particular, the pleading does not allege the existence of a common liability or any other relationship between the third party claimants and Mr Watt; all it does is to assert a right of contribution from him. The need for there to be a common liability is something that is addressed in the discussion on the material legal principles.
[11] Whilst Mr Watt filed and served a statement of defence to the third party claim, by the time of the hearing he was unrepresented and he chose not to appear. The claim against him proceeded by way of formal proof. His absence may reflect a
decision by him not to bother with defending the third party claim, given the unsatisfactory way in which it was presented.
[12] I consider that even by way of formal proof, I must be satisfied that the third party claimants have established a claim in law against Mr Watt.
[13] Despite the deficiencies of their statement of claim, the third party claimants argue that they satisfy all the necessary elements of equitable contribution. They contend that VSAL could have proceeded against Mr Watt, as well as against them. But they do not identify the basis on which VSAL could have done so. This causes some difficulties when it comes to assessing if their respective liabilities are common.
[14] The third party claimants argue that as matters stand, they have to meet the whole of the liability claimed by VSAL, whereas Mr Watt will retain all the benefits he and his interests have received from VSAL. They say (relying on statements in Ross & Grantham and Charles E F Rickett Enrichment & Restitution in New Zealand (Hart publishing, Oxford, 2000) and Charles Mitchell and Stephen Watterson Subrogation: Law and Practice (Oxford Diversity Press, Oxford, 2007)) that in such circumstances, the right to contribution is a restitutionary claim arising out of unjust enrichment. In their submissions, they argue that Mr Watt was in “a joint venture with Mr Sharma in VSAL as held by the arbitrator”. Thus, they say that Mr Watt has a joint liability with Mr Sharma to VSAL. They acknowledge that the payments that were demonstrably made by VSAL to Mr Watt, as opposed to other entities for his benefit, are payments that were made to the Quay Street Apartments No. 2 BNZ bank account and that Mr Watt has acknowledged receiving payments he describes as fees from VSAL. Regarding the latter payments, the third party claimants contend that Mr Watt performed no work for VSAL and he must, therefore, have known he had no entitlement to receive the fees.
[15] I have considered confining the judgment on the third party claim to the allegations made in the third party statement of claim. However, given the widespread arguments which extend beyond those allegations, I consider it better to deal with the merits of all the arguments that the third party claimants have raised to
support recovery against Mr Watt. This is because I have concluded that none of them can succeed.
[16] I consider the third party claim to be misconceived. None of the third party claimants has the requisite elements for a claim in contribution.
Analysis
[17] Here, the third party claimants must rely on equitable contribution as the potential material liabilities are not within the statutory rights of contribution provided in s 17 of the Law reform Act 1936. By this, I mean that they cannot be viewed as being joint tortfeasors. Nor can they rely on common law contribution as they have not paid the judgment entered against them and rights of contribution do not arise at law until the party seeking contribution has paid a larger proportion of the liability than their equal proportion: see Wolmershausen v Gullick [1893] 2 Ch
514. In equity, contribution can be sought either when the party seeking contribution has paid more than an equal share, or where the creditor of the claimant has acquired an immediate right to payment from the claimant: see Mahoney v McManus (1981)
180 CLR 370. Given the quantum judgment against the third party claimants, they fall within the second category.
[18] The third party claimants were found to be liable to VSAL in the following ways: Mr Sharma was liable in equity for breach of fiduciary duties; the Sharma Family Trust No. 2 was liable in debt to VSAL, having been found to have received advances from that company which it was obliged to repay (see [173] to [193] of the liability judgment). The Sharma Family Trust was liable in debt to VSAL (see [195] to [199] of the liability judgment) having also been found to have received advances from that company that it was obliged to repay.
[19] The third party statement of claim alleges that, following his bankruptcy on
25 July 2001, Mr Watt as owner of the shares in Point of Difference Limited (either personally or as a trustee) ordered Mr Sharma to transfer the sum of $400,000 from Point of Difference Limited to the trustees of the Otis Family trust (Otis) and then Mr Watt requested Otis to transfer the $400,000 to VSAL. After this, Mr Watt is
alleged to have directed Mr Sharma to use those funds to meet certain pre- bankruptcy debts of Mr Watt and to pay the remainder into a bank account known as the Quay Street Apartments Limited No. 2 bank account from which Mr Watt was to draw funds to purchase “homes and to meet his living and other expenses”.
[20] In the liability judgment, I found that Mr Sharma did not dispute that he had made the suspect payments for purposes that were not for the benefit of VSAL: see [101] to [105] of the liability judgment. At [105] I stated:
The general impression I have gained of Mr Sharma’s evidence, given on behalf of all the defendants, is that he does not dispute that the suspect payments were not in VSAL’s interests. He has not sought to argue that such payments were made either because VSAL was under an obligation to make them, or that it was going to obtain a benefit from doing so. Instead, Mr Sharma argues that the payments were either for Mr Watt’s benefit, or, insofar as they were for Mr Sharma’s benefit or any entity associated with him, the payments’ subsequent transfer into directors’ fees by directors’ resolutions of 2004, 2005 and 2006 validate their disposition, by providing a reciprocal fair value.
[21] When it came to the payment of $400,000 to VSAL, I found that at the time VSAL received those funds, Mr Sharma knew they were being received as a loan from Otis to VSAL and I found his explanation for how the $400,000 came to VSAL to be untruthful: see [60] to [67] of the liability judgment. Thus, I rejected Mr Sharma’s explanation that he acted with the honest belief that the funds were actually the property of Point of Difference Limited: see [68] of the liability judgment.
[22] At [228] to [231] of the liability judgment, I rejected the defence of money paid under mistake and change of position raised by those who now appear as third party claimants.
[23] The findings I have already made regarding the suspect payments and Mr Sharma’s knowledge and conduct in relation to them mandate how they are viewed for the purpose of the third party claim, which means that the arguments that Mr Sharma disbursed the advance of $400,000 from Otis believing that the funds were actually those of Mr Watt to control cannot succeed. Put simply, the earlier findings mean that the $400,000 must be now viewed as funds that had no legal or
beneficial connection with Mr Watt. Nor can the argument that Mr Sharma acted on Mr Watt’s direction owing to a mistake of fact or law as to the legal character of those funds prevail. Mr Sharma’s evidence on this topic has been rejected. There is no proper basis for revisiting that rejection.
[24] It follows that when it comes to the $400,000, the factual basis alleged in the third party statement of claim for ordering contribution against Mr Watt cannot be sustained. This is sufficient reason to deny the claim for contribution insofar as it relates to those funds.
[25] Aside from the $400,000 alleged to be under the control of Mr Watt, there is the balance of $282,592.40. The third party statement of claim does not allege how Mr Watt came to have control over the balance of the suspect payments, or why Mr Sharma complied with the alleged directions given by Mr Watt regarding those payments. All that the pleading does is to list a series of payments and allege that they were made at Mr Watt’s direction. There is only the allegation that Mr Watt directed Mr Sharma to disburse VSAL’s funds to certain named parties of which a total of $28,623.35 is alleged to have been paid directly to Mr Watt. However, before rights to contribution can be established, more than this is required.
Legal principles
[26] In equity, there is a general principle that co-obligors can claim contribution against each other where one has satisfied more than his or her share of a common debt: see Goff & Jones The Law of Restitution (7th ed, Sweet & Maxwell, London,
2007) at 385:
[I]t has long been held that at law and in equity, sureties, joint-contractors, trustees, directors, partners, insurers, mortgagors and co-owners can as a general rule claim contribution from their co-obligors if they satisfy more than their proper share of the common debt … Any obligor who owes with another a duty to a third party and is liable with that other to a common demand should be able to claim contribution.
Similarly, see Halsbury’s Laws of England (4th ed reissue, Butterworths, London
1998) vol 9(1) at [1116]:
The essence of the right to a contribution lies in the liability to a common demand; and, where there is such a liability, the court will, subject to any contractual provision modifying or limiting any claim to a contribution, make an assessment of contribution.
[27] Equitable contribution derives from the equitable maxim that equality is equity; it is also said to be founded on concepts of fairness and justice, which in this context mean the recognition that if “‘one of several persons has paid more than his proper share towards discharging a common obligation’ he is entitled to be recompensed by those who have not”: Burke v LOFT Pty Ltd [2002] HCA 17, (2002)
209 CLR 282 at [22].
[28] However, when it comes to identifying the essential elements of this principle, the law is in a state of uncertainty. As has already been recognised, it is easier to identify what is not a common liability or common demand than it is to identify what fits those descriptions: see Burke per McHugh J at [43]:
In order to establish a right of contribution, it is often said that the claimant must prove that its own liability is “co-ordinate” with that of the party against whom it claims contribution. But as Fitzgerald JA observed in Stratti v Stratti (2000) 50 NSWLR 324 at [18], the difficulty in defining which liabilities meet that description is noted almost as often as the term is used. Previous cases provide some guidance, however, as to liabilities that do not meet that description.
[29] McHugh J then outlined examples that had been found not to amount to co- ordinate liabilities (see [43] to [50]). These were:
(a) Where the claimant and the person from whom contribution was sought were not on the same level of liability: see Scholefield Goodman and Sons Ltd v Zyngier [1986] AC 562 (PC);
(b)The fact that the respective liabilities arise out of similar relationships or related transaction will not be enough: see Smith v Cock [1911] AC
317 (PC);
(c) Contribution is not to be available simply because each party owes obligations to the same party or are otherwise connected in time or
circumstance: see Re La Rosa; Ex parte Norgard v Rodpat Nominees
Pty Ltd (1991) 31 FCR 83 at 91; and
(d)Contribution is not available simply because the claimant’s payment has benefited the party from whom contribution has been sought: see Ruabon Steamship Co Ltd v London Assurance [1900] AC 6; and Cockburn v GIO Finance Ltd (No 2) (2001) 51 NSWLR 624 at [30].
[30] New Zealand authorities also recognise that the task of identifying common or co-ordinate liabilities is difficult. The differences that emerge from the case law are concisely summarised by Associate Judge Lang (as he then was) in Centre For Advanced Medicine Ltd v Sprott & Ors HC Auckland CIV 2004-404-1245,
20 August 2004, and by Wild J in Altimarloch Joint Venture Ltd v Moorhouse HC Blenheim CIV 2005-406-91, 23 March 2009.
[31] In Altimarloch, Wild J referred to the discussion on this topic in Centre For Advanced Medicine Ltd and to the discussion in Burke. When Altimarloch went on appeal, the Court of Appeal expressed its gratitude to counsel for accepting that the apportionment of liability should be equal: Vining Realty Group Ltd v Moorhouse [2010] NZCA 104, (2011) 11 NZCPR 879 at [123]:
It is common ground amongst the parties that if the Law Reform Act does not apply (as we have held that it does not) the common liability of $125,000 falls to be apportioned. We adopt this common position with some gratitude as it avoids the necessity for us to navigate our way through some reasonably complex case law.
[32] The difference that emerges from the case law can be summarised in this way. One view equates what is a “common liability” with each party being liable in the same cause of action: see McLaren Maycroft & Co v Fletcher Development Co Ltd [1973] 2 NZLR 100 (CA) where the Court of Appeal equated a common liability with the same cause of action. At 116-117 Richmond J said:
I am also of opinion that the circumstances of the present case give rise to no right of contribution against McLaren Maycroft ... The nature of a right to contribution is discussed in 8 Halsburys Laws of England (3rd ed) pp 233-
235 and at p 235 it is stressed that a common liability is of the essence of a right of contribution. In the present case there was no such common liability
to the plaintiff in contract as would give rise to a right of contribution at
common law or in equity. The provisions of the Law Reform Act 1936 as to contribution between joint tortfeasors are obviously inapplicable as the liability of Fletchers to the Hudsons was in contract only.
And see Smaill v Buller District Council [1994] 3 NZLR 294 (HC) at 297 where
Holland J referred to earlier case law and said:
It is implicit from this Privy Council decision [Smith v Cock [1911] AC 317 (PC)], and the later decision of Speight J [Karori Properties Ltd v Jelicich Austin Smith & Davies [1969] NZLR 698 (SC)], that the terms “common obligations” and “liability on a common demand” were applied by the Courts in those cases as meaning obligations or demands arising from the same cause of action or a similar cause of action which demonstrated a common obligation.
[33] The other view does not require the parties to face demands arising from the same cause of action and instead sees it as enough to establish a right to contribution if the liability is to a common plaintiff for the same loss suffered by that plaintiff: see Equiticorp Industries Group Ltd (in stat man) v Hawkins (No 4) (1992) 5 PRNZ 484 (HC) per Wylie J in a decision given on 18 February 1992:
The requirement of common liability should not be so strictly applied as to preclude an equitable apportionment of liability between those who may be liable to a common plaintiff for the same loss suffered by that plaintiff notwithstanding insubstantial differences of detail in the circumstances giving rise to their respective liabilities. In the words of Lord Chelmsford in Caledonian Railway Co v Colt (1860) 3 Macq 833 cited by Lord Ross in BP Petroleum Development Ltd v Esso Petroleum Co Ltd [1987] SLT 345] the alleged liability of the Crown and Elders is, in my opinion, “of the same nature and to the same extent.” Thus I conclude that the application to strike out the claim for contribution cannot succeed.
[34] However, two days later in Boon v Australian Guarantee Corp (NZ) Ltd (1992) 5 PRNZ 598 (HC) on 20 February 1992, Wylie J struck out a claim for contribution that relied on the approach taken in BP Petroleum Development Ltd v Esso Petroleum Co Ltd on the ground that the obligations each party owed to the plaintiff were fundamentally different.
[35] When the facts of Equiticorp and Boon are compared, the following is apparent. In Equiticorp, Wylie J concluded that, although the circumstances giving rise to the liabilities differed, each party, in essence, faced an alleged common liability; namely, each was alleged to be:
… a constructive trustee and liable accordingly because of alleged knowing assistance and, in the case of the Crown and subject to the further amended statement of claim being filed, knowing receipt. But what each is charged with is, in effect, complicity in the one breach by A14. The nature of the participation of each varies in detail, but those differences are merely matters of evidence as to the exact participation of each. They do not go to the root of the real cause of action or to the nature of the liability of each.
[36] On the other hand, in Boon, Wylie J analysed the alleged liability of the persons from whom contribution was sought and that of the claimant and concluded that the causes of action and potential awards of damages were so different that they could not be characterised as common. The claimant was alleged to be liable to the plaintiff as his accountant in professional negligence (either contractual or tortious) and breach of fiduciary duties. The persons from whom contribution was sought were alleged to be liable as partners of the plaintiff, or as the result of a contract with him to share any liability he was found to owe to the defendant in the proceeding. Assessment of damages for each respective party involved a different exercise and these were likely to lead to quite different results. The different causes of action and their potential consequences led Wylie J to conclude that each group faced fundamentally different liabilities and, therefore, contribution was not available.
[37] Whether the existence of a common liability hinges on the cause of action that the plaintiff brings against a defendant/third party claimant being the same as the basis of the latter’s claim against the third party, or whether it will be enough if the allegations that the plaintiff might make against a defendant/third party claimant and a third party substantively assert that each is liable to the plaintiff for the same loss, is a question that continues to trouble courts. The High Court of Australia’s decision in Burke provides a more recent example of the factors at play here. Whilst the approach in Australia (at least since Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342) has been to focus on whether the parties share a co-ordinate liability making them responsible for the same loss, irrespective of the source of their obligations to the plaintiff. Australian courts remain troubled by how to determine whether in a given case the necessary degree of co-ordinate responsibility is present. A comparison of the majority judgments of the High Court of Australia in Burke with the dissenting judgment of Kirby J illustrates this.
[38] I propose to look at the issue of common liability from the perspective of how the question has been approached in the past in New Zealand courts, either broadly or narrowly. In this regard, I consider that the broad approach reflected in Wylie J’s decision in Equiticorp is similar to the approach taken by McHugh and Callinan JJ in Burke. I have concluded that the outcome is the same whether I take a broad or a narrow approach to the meaning of common liability. On either of these views, the third party claimants cannot establish that they and Mr Watt share a common liability for a common demand.
Application of legal principles
[39] Centre for Advanced Medicine Ltd outlines how a court should approach a third party claim for contribution. The first defendant, Adrian Sprott, sought leave to issue a third party claim for contribution. Lang AJ recognised (at [22]) that to determine if contribution would be available to Adrian Sprott, the Court would need to analyse the plaintiff ’s claims against Mr Sprott, and to compare them with the basis upon which it was said that the proposed third parties were liable to the plaintiff. In the present case, the third party claimants have not explicitly pleaded, nor have they otherwise identified, the basis upon which they say that Mr Watt is liable to VSAL. All they have done is to assert that Mr Watt is liable (in an unspecified way) to VSAL, but that the liquidator of VSAL has chosen not to pursue him. This makes it difficult when it comes to determining if the third party claimants and Mr Watt share a common liability, as the Court is left with having to glean from the totality of their case what the common liability might be.
[40] In their submissions, the third party claimants have raised the notion, somewhat obscurely, that Mr Watt was in a joint venture; either with Mr Sharma or VSAL. Perhaps in this way they seek to establish that both persons owed fiduciary duties to VSAL. But the third party claimants have not outlined the nature of any fiduciary duties that any such relationship might impose on Mr Watt, let alone how Mr Watt may have breached those duties. Furthermore, before this could lead to a liability for contribution, Mr Watt would have to owe duties in common with Mr Sharma to VSAL.
[41] Even if Mr Watt had been in a joint venture with Mr Sharma, that arrangement could not give rise to Mr Watt owing fiduciary duties to VSAL, given its separate legal personality. If the third party claimants wanted to allege that Mr Watt had been in a joint venture with VSAL and by that arrangement owed fiduciary duties to VSAL, the nature of the duties and the factual context in which they arose would need to have been pleaded. Unless the third party claimants could show that any such duties were equivalent to those that Mr Sharma, as a director, owed to VSAL, there would be no basis for thinking that each might owe duties in common to VSAL. It is plain from Amaltal Corp Ltd v Maruha Corp [2007] NZSC
40, [2007] 3 NZLR 192 at [20] that the characterisation of a commercial arrangement as a joint venture is not, of itself, sufficient as a guide to whether the parties owe each other fiduciary obligations. Thus, a finding that Mr Watt and VSAL were in a joint venture would not be enough for me to conclude that I should treat him and Mr Sharma as co-obligors who were entitled to seek contribution from each other to meet VSAL’s claims. For this reason, I see no point in determining whether or not Mr Watt and VSAL were in a joint venture together.
[42] Once the suggestion that Mr Watt owed a fiduciary duty to VSAL is put to the side, the next possible basis of liability he might owe to VSAL is as an accessory for Mr Sharma’s breaches of fiduciary duty, either by dishonest assistance or as a knowing receiver. The third party claimants allege that Mr Watt directed Mr Sharma to pay VSAL’s funds to Mr Watt or to entities in which he held an interest. But that bare allegation does not contain all the elements of dishonest assistance or knowing receipt. Since Mr Watt has not been put on notice through a proper pleading alleging accessory liability in equity against him, I am not prepared to treat him as having that liability to VSAL, let alone consider whether that liability is sufficiently similar to Mr Sharma’s liability so as to enable Mr Sharma to claim contribution from Mr Watt.
[43] The remaining potential claim that VSAL might have against Mr Watt is one based on restitutionary principles of tracing funds that Mr Sharma has misapplied to Mr Watt’s possession. But once again, since the third party claimants have not pleaded such a claim against Mr Watt, he has not been put on notice of the
allegations and, therefore, given a proper opportunity to defend himself against them.
[44] The procedural defects of the third parties’ claims would be sufficient reason
to refuse to order contribution. Here, the claims fail on the merits as well.
[45] The liability of recipients in a restitutionary claim to trace funds paid in breach of the fiduciary duties of good faith and loyalty is fundamentally different from the liability of the person responsible for that breach, especially when, as is the case here, the breach is done knowingly. The former entails no more than the return of the funds that were received without entitlement. The latter, which involves worse conduct, can give rise to awards of equitable compensation and accounts of profit, as well as the restitution of the misapplied funds. Thus, even if I were to take a broad approach to the meaning of “common liabilities”, and not to equate them with a common cause of action, the liabilities of Mr Sharma and Mr Watt in relation to VSAL are so different that no right to contribution can arise. In this regard, I would be characterising the circumstances of this case as being more analogous to those in Boon than to those in Equiticorp.
[46] Furthermore, the circumstances that McHugh J identified in Burke as excluding contribution seem to me to apply here. There is nothing that places Mr Watt on the same level of liability as the third party claimants. The relationships and transactions involving them are dissimilar. Mr Sharma’s disbursement of VSAL’s funds may, in some respects, have benefited or relieved Mr Watt financially, but, as was recognised in Burke, that is not enough to give a right of contribution. Nothing has been alleged against Mr Watt, even on the most liberal approach to what is a common liability, that would establish that as between the third party claimants and Mr Watt, they owed common liabilities, that made them subject to common demands from VSAL.
[47] The third party claimants face further difficulties. First, the only funds that are alleged to have actually gone to Mr Watt, rather than to some other person from whom he then obtained the funds, amount to no more than approximately $28,000. Thus, this would limit the amount that could be traced to him in any restitutionary
claim that VSAL might bring against him. Claims based on payments made at Mr Watt’s direction to other entities would either have to be brought as restitutionary claims against those entities, or as claims against Mr Watt for equitable compensation on the strength of allegations of his dishonest assistance of Mr Sharma. But, as I have already stated, nothing like this has been attempted, either by VSAL or by the third party claimants.
[48] Secondly, when it comes to the Sharma Family Trust No. 2 and the Sharma Family Trust, their liability to VSAL is distinct from any liability of Mr Watt to that company. The judgment sums entered against them ($649,105.00 and $138,039.20 respectively) are for debts that I found they owed to VSAL. The findings in the main proceeding, which resulted in those parties being found liable to VSAL, rested on facts that did not involve Mr Watt directing Mr Sharma. Their debts are separate and different from any restitutionary liability Mr Watt might owe to VSAL to return the improper payments that Mr Sharma made to him. The subject matter of his liability to VSAL is different from the subject matter of the liabilities the Sharma Family Trust No. 2 and the Sharma Family Trust were found to owe to VSAL. Thus, none of them face a common demand: see R Meagher, D Heydon and M Leeming Meagher Gummow & Lehane’s Equity Doctrines & Remedies (4th ed, LexisNexis, NSW, 2002) at [10-060] to [10-065].
[49] There is another disentitling reason that applies specifically to Mr Sharma. There are occasions when a claimant’s conduct will be seen by equity to disqualify his or her rights of contribution. It is not surprising that unconscionable conduct can displace an entitlement to contribution: see Dering v Earl of Winchelsea (1787) 1
Cox 319, 29 ER 1184; and the discussion in Meagher Gummow & Lehane’s Equity Doctrines & Remedies at [3-115] citing Staples v Baker [1999] 1 Qd R 317 (CA) where a guarantor was refused contribution from his co-guarantor because of his dishonest manoeuvring to minimise his own liability. In Staples v Baker at 327-328, the Queensland Court of Appeal based their decision on a line of cases in which the maxim that a party seeking the assistance of a court of equity “must do equity” has been applied. In New Zealand, Panckhurst J recognised that a fiduciary who obtains a benefit in breach of his duty (see Re Mulligan (deceased) [1998] 1 NZLR 481 (HC) at 502 and 511) may have to indemnify his co-fiduciaries and thus bear the
entire burden of making restitution. A trustee who has intentionally defrauded a trust or wilfully misconducted himself or herself will bear all or a greater portion of the loss than co-trustees whose fault lay in failing to detect the improper conduct: see discussion and authorities cited in Alastair Hudson Equity and Trusts (6th ed, Routledge-Cavendish, Oxon, 2010) at [18.2.4]. Similarly, a person whose conduct has been found to be fraudulent, wilful misconduct or grossly negligent has no right of contribution from others (Burke, above, at 306 to 307 per McHugh J and at 336 to
337 per Callinan J).
[50] For Mr Sharma to succeed in his claim for contribution, therefore, he would need to establish that his conduct towards VSAL did not disqualify him from contribution from Mr Watt.
[51] The findings I have already made against Mr Sharma in the main proceeding, when coupled with the allegations he makes against Mr Watt in the third party claim, mean that in the context of the claim for contribution Mr Sharma must be viewed as: (a) knowingly paying out VSAL’s funds; (b) knowing that the payment was not for the benefit of VSAL and was, therefore, for an improper purpose that was in breach of his fiduciary duties to VSAL; and (c) acting under the direction of someone who Mr Sharma knew had no claim to control those funds. But on this view, there could be no basis for allowing Mr Sharma’s claim against Mr Watt. To do so would be to go against the sound principles identified in Staples v Baker, and applied by the majority in Burke.
[52] There is a further reason why I consider that Mr Sharma should not be able to seek contribution from Mr Watt. This is founded on public policy and is based on the principles of allegans suam turpitudinem non est audiendus (a person alleging his own wrongdoing is not to be heard) and ex turpi causa non oritur actio (an action does not arise from a wrongful cause). These principles are the reason why equitable contribution was unavailable as against joint tortfeasors: see the discussion in Belan v Casey (2003) 57 NSWLR 670 at 698.
[53] The thrust of Mr Sharma’s evidence in the main proceeding and in the third
party claim was that he acted under Mr Watt’s direction because, at the material time,
Mr Watt was an undischarged bankrupt. Mr Sharma has said in evidence (in both hearings) that he took over as director and trustee shareholder of companies formerly held by Mr Watt to enable Mr Watt to continue to operate in business enterprises. He was perceived by Mr Sharma to be good at spotting potential high value real estate developments and so Mr Sharma, and companies in which Mr Sharma was a director (including VSAL), worked with Mr Watt to take advantage of his business acumen. Mr Sharma also said that by allowing Mr Watt to remain active in this way, certain other persons and entities, including those in which Mr Sharma held interests (including the Sharma Family Trust No. 2) had a better chance of recovering the pre- bankruptcy debts that Mr Watt owed to them.
[54] To assist Mr Watt to continue to act in business while under the constraints of bankruptcy, Mr Sharma, who was also a director of Quay Street Apartments Limited, said that he opened a No. 2 bank account for that company with the Bank of New Zealand (BNZ) and gave Mr Watt authority to use the account. Thus, funds paid into the company’s No. 2 bank account are said by Mr Sharma to be funds that went from VSAL to Mr Watt.
[55] I am not prepared to accept that I should treat payment of VSAL’s funds to the BNZ No. 2 bank account of Quay Street Apartments Limited as a payment that was directly made to Mr Watt. I only have Mr Sharma’s word for Mr Watt having authority to use that account. I have already found Mr Sharma to be an untruthful witness on other aspects of his evidence that would assist him (see liability judgment). I am suspicious of his evidence regarding the payments to the BNZ No. 2 bank account, and am reluctant to accept it. The legal holder of the account was Quay Street Apartments Limited. Mr Sharma, at the material times, was the director of that company. He is now inviting me to go behind the form of the account’s ownership and to treat it as belonging to Mr Watt. On the face of it, the relevant payments were made from VSAL to Quay Street Apartments Limited. What that company then did in terms of allowing another (Mr Watt) to access its bank account seems to me to be a separate event giving rise to separate issues. But even if I were to accept the suggestion that the payments VSAL made to this account were actually made to Mr Watt, there remains the fact that Mr Sharma admits that this was done to allow Mr Watt to operate outside the constraints of his bankruptcy.
[56] For Mr Sharma to allow VSAL and other companies over which he had control to be used as a front for Mr Watt to continue business activities on his own behalf, at a time when he was legally constrained from doing so by bankruptcy, undermines the purpose of the law of insolvency (given the period of time involved, the relevant law is to be found in the Insolvency Act 1967 and the Insolvency Act
2006). Furthermore, when, in the course of improperly assisting Mr Watt in this way, Mr Sharma incurred a liability to VSAL for breach of fiduciary duty, it would be contrary to public policy for Mr Sharma to be able to reduce this liability by seeking contribution from Mr Watt. There should be no escaping liability for this type of intentional wrongful conduct (which was in breach of fiduciary duty to VSAL and potentially illegal under insolvency legislation), through being able to share the burden of the liability with the bankrupt and instigator of the breach of duty.
[57] Attorney-General v Wilson (1840) Cr & Ph 1 at 28; 41 ER 389 is cited in equity textbooks as an example where a court refused to allow that contribution might be claimed as between persons who had knowingly acted wrongly. In Wilson, certain members of the governing body of the then Leeds Corporation, which had been created by letters patent of Charles II, transferred funds belonging to the Corporation elsewhere. They did this because they disagreed with the purpose of new legislation which was intended to regulate them, and other like entities, as a municipal corporation. They attempted to remove property from the Corporation so that it would not fall into the hands of the persons who would gain control of the Corporation under the legislation. The Attorney-General took action to recover the funds. Those who were sued and were responsible for the removal of the Corporation’s property were found to owe duties to the Corporation as its agents, which made them liable for loss resulting from the removal of the Corporation’s property. On the question of whether all those responsible should have been joined as co-defendants, Cottenham LC said (at 398):
In cases of this kind, where the liability arises from the wrongful act of the parties, each is liable for all the consequences, and there is no contribution between them, and each case is distinct, depending upon the evidence against each party. It is, therefore, not necessary to make all parties who may more or less have joined in the act complained of; nor would anyone derive any advantage from their being all made Defendants, because, as the
decree would be general all found to be guilty of the charge, it might be executed against any of them.
Conclusion
[58] Mr Sharma’s explanation for the payments he made to Mr Watt, or entities associated with Mr Watt, is akin to the circumstances where equity has refused to allow contribution. The circumstances which Mr Sharma relies upon to found his entitlement to contribution from Mr Watt amount to unconscionable conduct. First, there are the findings in the liability judgment that Mr Sharma knowingly breached the fiduciary duties of loyalty and good faith that he owed to VSAL, which led me to conclude that his conduct amounted to equitable fraud and, therefore, his reliance on the Limitation Act 1950 as a defence against some of VSAL’s claims could not succeed (see liability judgment at [221]-[225]). Those findings mandate how I must view his conduct for the purpose of the third party claim. Secondly, Mr Sharma has admitted that his conduct included a design to enable Mr Watt to avoid the constraints of bankruptcy; to retain for his own use funds received from Mr Sharma, thus placing them beyond the reach of the Official Assignee; as well as preferring certain pre-bankruptcy creditors (including Mr Sharma and his family trust) at the expense of other creditors. The conduct was designed to thwart the purpose of the law of bankruptcy. Looked at overall, his conduct is the very kind of conduct that disqualifies someone from exercising a right of contribution.
[59] For the reasons stated herein, I am satisfied that the third party claimants have no right of contribution from Mr Watt.
Result
[60] The claims of the third party claimants are dismissed.
Duffy J
0
7
0