Denis Cassegrain & Ors v Gerard Cassegrain & Co Pty Ltd (in liquidation) & Ors

1. [1]

   These proceedings have returned to Court, this time as a result of the parties being in disagreement in relation to whether the report of the Referee, Mr RH Macready (the Referee), should be adopted. The background to the present application is described in previous judgments: Denis Cassegrain & Ors v Gerard & Co Pty Limited & Ors [2012] NSWSC 403; (2012) 88 ACSR 358 (the Judgment); Denis Cassegrain & Ors v Gerard Cassegrain & Co Pty Ltd & Ors (Final Orders) [2012] NSWSC 834; (2012) 264 FLR 392 (the Final Orders Judgment); Gerard Cassegrain & Co Pty Limited (in liquidation) v Cassegrain [2013] NSWCA 455; (2013) 305 ALR 687 (the CA Judgment); Denis Cassegrain & Ors v Gerard Cassegrain & Co Pty Limited (in liquidation) & Ors [2014] NSWSC 411 (the Further Judgment) and should be read with these reasons.

2. [2]

   The matter that was referred to the Referee on 8 July 2014 by consent pursuant to Part 20 rule 14 of the Uniform Civil Procedure Rules (UCPR) was the enquiry as to the existence and quantum of any loss to Gerard Cassegrain & Co Pty Limited (in liquidation) (GC&Co) by reason of the transfer of its shares in CaTTO and OAL to Felicity Cassegrain at an undervalue for the purpose of making orders for equitable compensation to be paid to GC&Co by Claude Cassegrain (Claude) and Anthony Sarks (Mr Sarks). There was also referred to the Referee the enquiry as to the extent of Felicity Cassegrain’s (Felicity) liability to pay equitable compensation to GC&Co as a result of her knowing receipt of the shares.

3. [3]

   The Referee provided his report dated 30 January 2015 (the Report) to the Court pursuant to UCPR 20.23. The Referee was satisfied that the value of the one share in CaTTO at the time it was transferred to Felicity on 19 January 2005 was $845,356 (R [65]). The Referee was also satisfied that the value of the OAL shares at the time they were transferred to Felicity on 20 January 2005 was $1,882,566 (R [91]). The Referee determined that the amount of equitable compensation payable by the three defendants jointly and severally is $2,596,039, plus interest (R [100]).

4. [4]

   On 13 February 2015 the liquidator of GC&Co filed a Notice of Motion seeking an order that the Report be adopted pursuant to UCPR 20.24 and that orders be made that Claude, Mr Sarks and Felicity jointly and severally pay equitable compensation in the amount of $2,596,039 to GC&Co comprising: compensation payable in respect of the one CaTTO share in the amount of $784,923; and compensation payable in respect of the OAL shares in the sum of $1,811,116. The liquidator also seeks an order that Claude, Mr Sarks and Felicity jointly and severally pay GC&Co interest on the sum in respect of the CaTTO share in the amount of $676,117.13 as at 6 February 2015 and accruing at the rate of $139.78 per day until judgment. A further order is sought that Claude, Mr Sarks and Felicity jointly and severally pay GC&Co interest on the compensation sum payable in respect of the OAL shares in the amount of $1,559,612.87 as at 6 February 2015 and accruing at the rate of $322.53 per day until judgment. The liquidator also seeks an order for costs associated with the reference including the costs of the adoption hearing.

5. [5]

   The application was heard on 23 April 2015 when Mr MA Ashhurst SC, leading Mr GB Colyer, of counsel, appeared for the plaintiffs/applicants; Mr DE Grieve QC, leading Mr PG Bolster, of counsel, appeared for Claude and Mr Sarks; and Mr RE Raffell, of counsel, appeared for Felicity.

6. [6]

   UCPR 20.24 provides relevantly:

7. [7]

   Although various statements have been made over the years, particularly since the introduction of the UCPR, the guidance provided by Gleeson CJ in Super Pty Ltd (formerly known as Leda Constructions Pty Ltd) v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 is relevant to the present application. In dealing with the predecessor to UCPR 20.24, the Chief Justice said at 563-564:

8. [8]

   There is also the exercise of the discretion as to the extent to which matters of detail before the Referee are to be explored. On this matter Mahoney JA said in the same case at 567A-B:

9. [9]

   Although reversed on appeal for other reasons, McDougall J’s “succinct distillation” of these principles with additions in Chocolate Factory Apartments v Westpoint Finance & Ors [2005] NSWSC 784 at [7] has been applied in many cases since the introduction of the Civil Procedure Act 2005 and the UCPR: Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 310 ALR 113 at 119 [24]: Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd (2013) 84 NSWLR 410 at 412 [15]. In this case with the litigious history of this family, Gleeson CJ’s caution against treating the process as “some kind of warm-up for the real contest” (repeated by McDougall J at [7](3)) is relevant. The parties were well aware of the constraints of the process and chose to proceed by way of reference. They must therefore be held to their choice.

10. [10]

    The Judgment dealt with the plaintiffs’ claims against Claude, Mr Sarks and Felicity in respect of the transfer GC&Co’s shares in CaTTO and OAL to Felicity in January 2005. It was held that Claude and Mr Sarks had transferred the shares in breach of their fiduciary duty and that Felicity was in knowing receipt of the shares. The Final Orders Judgment dealt with the competing claims by the plaintiffs for an order winding up GC&Co and the defendants for the re-transfer of the Shares to GC&Co. An order was made for the winding up of GC&Co rather than the re-transfer of the shares to GC&Co (at [6]). The Final Orders Judgment included the following:

11. [11]

    In the CA Judgment Emmett JA, with whom Meagher and Ward JJA agreed, said:

12. [12]

    Emmett JA concluded that the appeals by Claude and Anthony should be dismissed and said:

13. [13]

    The remitter was heard on 25 February 2014 and the Further Judgment was given on 10 April 2014 granting leave to the plaintiffs to amend the pleading and including Felicity in the equitable compensation enquiry.

14. [14]

    The Referee recounted the facts pertinent to the equitable compensation enquiry (the enquiry) (R [4]). In short form the facts as recounted referred to the establishment of the various companies; the establishment of the tea tree projects (the Projects) and the tea tree plantation on the “Wynne Property” at The Hatch on the North Coast of New South Wales; the arrangement between the Project Trustee, Australian Rural Group (ARG), OAL and the manager of the Projects, Agricultural & Rural Finance Pty Ltd (ARF) and the investors in the Projects; the decline in the price of tea tree oil; the appointment of administrators; the litigation in respect of CTK Engineering Pty Ltd; and the subsequent litigation (the Gardiner proceedings) against the investors in respect of loans that had been provided through ARF of monies owed to OAL (R [4]).

15. [15]

    The Referee also referred to the pertinent findings in the Judgment relating to the impugned share transfers that occurred in January 2005. Those findings included that the CaTTO share was transferred to Felicity on 19 January 2005 for $60,423; the shares in OAL were transferred to Felicity on 20 January 2005 for $71,450; the share transfers were at a significant undervalue and were for an improper purpose; the share transfers were in breach of both the fiduciary duties and statutory duties owed by Claude and Mr Sarks; Felicity received the shares with knowledge of the breaches; and the transfers could not have occurred without Felicity’s assistance and consent (R [6]).

16. [16]

    The Referee then dealt with the respective parties’ contentions as follows:

17. [17]

    The Referee referred to the claim by Claude and Mr Sarks that if the appropriate date for calculation of compensation is 2005 then they should be allowed a deduction for just allowances in respect of the CaTTO share (R [11]). The Referee also noted that Claude and Mr Sarks claimed that if the CaTTO share had not been transferred, the companies would have been wound up and, as determined by Mr Hood (a witness called by them in the Reference), the value of the CaTTO share was less than the transfer price. It was also contended that the liquidator had not discharged the onus of proof in respect of the OAL shares (R [11]).

18. [18]

    The Referee referred to Felicity’s defence that her actions were not causative of the loss suffered and thus she should not be held liable to pay any equitable compensation (R [12]). The Referee also noted Felicity’s alternative claim that her culpability was substantially less and as a matter of discretion she should not be held liable for any amount or alternatively the whole amount that the Court might find payable by Claude and Mr Sarks (R [12]).

19. [19]

    Having regard to the importance of the issue as to the date at which compensation should be calculated, it is appropriate to set out the passages of the Report on this topic in full:

20. [20]

    The Referee referred to Felicity’s claim that she was not liable to pay any equitable compensation and the grounds she advanced in respect of this claim that: she was not a director or officer of GC&Co and was the “mere recipient” of the shares and did not do anything personally or relevantly to cause any loss to GC&Co; to order equitable compensation against Felicity would be inequitable and unconscionable and contrary to the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts; and that the Referee should report to the Court that no such equitable compensation should be awarded (R [33]).

21. [21]

    The Referee decided that Felicity’s participation in the transfers of the CaTTO share and OAL shares was such that she should be held liable to pay equitable compensation on the basis identified by Gibbs J in Consul Development Pty Limited v DPC Estates Pty Limited (1975) 132 CLR 373 in particular at 395-6 (R [39]). The Referee said that the “only question” was whether Felicity should be liable for the whole amount or some reduced amount to reflect the extent of her involvement (R [41]). The Referee concluded that Felicity should be held liable for the full amount of the compensation to be awarded with the result that the three defendants are jointly and severally liable to pay that sum (R [47]).

22. [22]

    The Referee then dealt with the value of the CaTTO share noting that the liquidator had relied upon the report of Jennifer Exner dated 13 June 2014 to establish the value of the share as at January 2005 at $845,356. The Referee noted that the “revised” value of the Wynne Property took into account the legal costs attributable to the “inconvenience” of having the registered lease removed from the title (R [48]; [52]). The Referee identified the issues between the parties as being the value of the Wynne Property and Ms Exner’s use of the discounted cash flow method to determine the present value of future cash flows (R [53]). It was noted that the defendants called Mr Hood as a valuer, rather than relying upon its previous expert, Mr Rogers. Mr Hood valued the Wynne Property at $650,000 or $550,000 if sold in a forced sale (R [54]). The plaintiffs relied on their original valuer, Mr Reid. Ms Exner had relied upon the previously agreed value of the Wynne Property at $2,430,000 that had been reached between Mr Reid and Mr Rogers (R [54]).

23. [23]

    The Referee referred to the criticisms of Mr Hood’s approach to the valuation of the Wynne Property including that: his value was one quarter of the agreed value with no explanation as to why Mr Rogers’ agreement had been abandoned; it was significantly less than all of the Valuer General’s valuations since 1994 and was only 30% of the Valuer General’s 2004 value at $1,830,000; it assumed that the highest and best use of the property was not as a tea tree plantation; he failed to take into account as a positive factor the $10 million spent on the Wynne Property; the valuation was based on only four comparable sales, three of which were eighteen months old; and it failed to take into account a comparable sale the explanation for which did not “withstand scrutiny” (R [55]). The Referee also said (R [55]):

24. [24]

    The Referee also said (R [56]):

25. [25]

    The Referee then dealt with Mr Reid’s valuation. Mr Reid’s opinion was based on his view that the highest and best use of the Wynne Property was as a tea tree farm (R [57]). The Referee then set out the criticisms that were made of Mr Reid’s approach. Those criticisms included that although he acknowledged that the highest and best use of a particular parcel of land is generally determined by its economic productivity, if the Wynne Property had been operated as a tea tree plantation between 2005 and 2007 it would inevitably have incurred significant losses. Mr Reid also conceded that he did not inspect the property “thoroughly” at the time he first valued it in 2007. The criticisms of Mr Reid also suggested that he was guilty of “partiality” demonstrated by a particular answer that conveyed that without any information as to the productivity of the Wynne Property he nonetheless considered that he was justified in forming the view that its highest and best use was as a commercial tea tree farm. It was also apparent that none of the “so-called comparables” upon which Mr Reid relied had any commercial tea tree farming operations. There was also criticism of Mr Reid’s cavilling with the meaning of the expression “hobby farm”. Finally there was criticism of Mr Reid endeavouring to retreat from his evidence relating to the probable cost of converting the subject property to a grazing property at $700 per hectare (R [57]).

26. [26]

    After referring to these criticisms the Referee said:

27. [27]

    The Referee also referred to the opinion provided by Ms Exner who used Mr Reid’s valuation and deducted the legal costs and liabilities to provide a net asset position. The Referee described this process and referred to the relevant paragraphs of Ms Exner’s reports. The Referee concluded that there was no doubt that the procedure adopted by Ms Exner would not “in normal circumstances” produce an accurate valuation of future earnings and accepted that the outcome was “an approximation” (R [64]). The Referee concluded that there was “sufficient conservatism” in Ms Exner’s approach to ensure that the value was less than what it might have been if certain information had been made available to her (R [64]).

28. [28]

    The Referee concluded that the value of the CaTTO share when it was transferred to Felicity on 19 January 2005 was $845,356.

29. [29]

    The Referee then valued the OAL shares. The CA Judgment dealt with the expert evidence that had been given at trial that was reliant upon the assessments of the prospects of OAL recovering $10 million owing to it by ARF. It was noted in the CA Judgment that this in turn depended upon the prospects of ARF and OAL being successful in the Gardiner proceedings (at [141]). After referring to the findings at first instance that it was appropriate to put a value on the contingent asset, the Court of Appeal noted that a 50 per cent chance of success in the litigation did not translate into a value of the debt of 50 per cent of its face value (at [145]). The CA Judgment included the following (at [145]):

30. [30]

    The Court of Appeal concluded that the finding at first instance that the OAL shares were transferred at an undervalue was correct. However it observed that there was a “real question” as to the extent of the undervalue (at [146]).

31. [31]

    The Referee referred to the fact that as a result of these comments by the Court of Appeal the plaintiffs had obtained evidence from Mr Purcell, a solicitor expert in litigation funding, for the purpose of demonstrating the value of the choses in action (R [73]). The Referee observed that Ms Exner’s opinion was based on Mr Purcell’s findings and her evidence would stand or fall depending upon whether Mr Purcell’s evidence was accepted (R [73]).

32. [32]

    The Referee referred to Mr Purcell’s explanation that a cause of action is rarely valued as an asset that can be sold or purchased at a particular price. Rather it was most likely that the cause of action would be attributed a “recoverable value” in an arrangement under which the litigation funder underwrites the cost of the legal proceedings to pursue the claim to settlement or adjudication. Mr Purcell said that the value of the cause of action in the claimant’s hands was the quantum likely to be received by the claimant from the defendant, less the amount payable to the litigation funder (R [75]).

33. [33]

    Mr Purcell’s valuation started with the total debt as at 20 January 2005 of $13,412,302. He then reduced that figure: by 27% on the assumption that only 73% would be non-complying defendants; a further 25% as a risk discount to reflect the vicissitudes of litigation; a further 10% to take account of reduced recoveries due to those borrowers who could raise good defences; and a further 20% on the assumption that this percentage of non-complying defendants would not have financial capacity to satisfy a successful judgment. That reached a figure of $5,287,129.45. Mr Purcell then reduced that figure by $575,000 for legal costs for various steps described in his report to reach a figure of $4,712,129.45. Mr Purcell then concluded that if the funder was entitled to receive 25% of the recovered amount the value would be $3,390,347.08; and if the funder was entitled to receive 40% of the judgment amount that would be reduced to $2,597,277.67 (R [78]).

34. [34]

    The Referee then referred to the defendants’ criticisms of Mr Purcell that he: made no allowance for appeals in his assessment; he misinterpreted Senior Counsel’s advice in relation to the claim; his assumption that 73% of the borrowers had failed to pay promptly was erroneous; and his report contained guesswork and speculation in respect of the capacity of the borrowers to pay the judgment, the costs of litigation and the outcome of possible defences (R [79]).

35. [35]

    The Referee observed that such criticisms of Mr Purcell had to be seen in the context that the defendants had called no evidence of their own in respect of the value of the causes of action (R [80]). Mr Purcell conceded that any cost of the appeals would reduce the amount of recovery but expressed the opinion that he would be surprised if they would have eaten significantly into the amount of $4.7 million because much would depend upon the costs orders that would be made on appeal (R [81]).

36. [36]

    The Referee said at [81]:

37. [37]

    The Referee dealt with the criticism in relation to the so-called misinterpretation of Senior Counsel’s advice inferentially concluding that this had not occurred (R [83]). Mr Purcell’s assumption that 73% of the borrowers had failed to pay promptly was based on a judgment of this Court in 2009 for 66 of the 206 defendants on the basis that they had made punctual payments. Mr Purcell conceded in cross-examination that in the ordinary course he would have called for documentary evidence such as debtors’ ledgers to determine whether or not the defendants or some of them were non-compliant and did not do so in this case (R [84]). As to the question of the appropriateness for Mr Purcell to make the assessment of 73% the Referee said (R [84]):

38. [38]

    As to the complaint in respect of Mr Purcell’s failure to expose his reasoning, the Referee said (R [85]):

39. [39]

    The Referee then went on to consider the matters raised in respect of Mr Purcell’s evidence as follows:

40. [40]

    The Referee analysed the claim for just allowances (at [92]-[99]) and said:

41. [41]

    The Referee referred to Claude’s evidence of the work that he performed between 2005 and the trial noting that no evidence was given of how one would value such work (R [97]).

42. [42]

    The Referee then concluded his Report as follows:

43. [43]

    Claude and Mr Sarks contend that the Referee’s conclusion (R [18]) that the date on which the equitable compensation is to be assessed was to be determined “in the reference” cannot stand with the dismissal of GC&Co’s appeal.

44. [44]

    They also contend that the Report should be rejected because it is predicated on an assumption or an implicit finding of “very doubtful validity” that had GC&Co chosen in January 2005 to sell its shares in CaTTO and OAL on the open market it would have had no difficulty in accomplishing sales of those shares for $784,023 and $1,811,116 respectively. It was submitted that it is scarcely probable that any party would willingly invest such a substantial sum of money on the footing that the only way in which the investment could be realised would be pursuant to proceedings for the compulsory winding up of the investee company.

45. [45]

    They also contend that the Referee erred in preferring the evidence of Mr Reid to that of Mr Hood and that the Referee’s acceptance of Mr Purcell’s evidence is “open to legitimate criticism on a number of bases”.

46. [46]

    Claude and Mr Sarks contend that the Referee found that a hypothetical purchaser would readily and willingly pay $1,811,116 for OAL’s shares notwithstanding that the hypothetical purchaser would have had no control over the conduct of the litigation by the company’s major debtor (ARF) against that company’s alleged debtors and notwithstanding that the outcome of the litigation would not become clear for some years. It was submitted that such a finding “offends common sense”.

47. [47]

    It was also contended that the Referee conflated the purpose of the enquiry of what the hypothetical purchaser of OAL’s share capital would pay, with the price that a willing, but not anxious buyer would pay to acquire the causes of action in January 2005.

48. [48]

    In addition to the submissions made by Claude and Mr Sarks which she adopted Felicity contends that there are significant errors of principle, being errors of law and errors of fact in the Report and that it should be rejected.

49. [49]

    Felicity made the additional submission that even if there was no requirement imposed on the Referee by the Court as to the date on which equitable compensation was to be assessed, the Referee was in error in assessing equitable compensation by reference to the value of the shares as at January 2005.

50. [50]

    Felicity also submitted that the Referee wrongly concluded that because she was found to have participated in the breach of fiduciary duty by Claude and Mr Sarks with knowledge of their improper purpose in transferring the shares in CaTTO and OAL to her, she was, without more, liable in equity to pay compensation for the full value of the shares (R [40]-[41]).

51. [51]

    Felicity also submitted that the Referee wrongly concluded that she should pay compensation for the full value of the Shares without allowance or deduction (R [41]-[44]).

52. [52]

    Finally Felicity submitted that the Referee omitted to take into account the nature and extent of her knowledge of improper purpose which did not relate to the value of the shares either at the date of the orders made at the trial or at the time of enquiry; and wrongly failed to exercise his discretion that she should not pay compensation or pay a substantially reduced amount of compensation (R [41]-[47]).

53. [53]

    Before turning to consider the contentions of the parties I should record that Claude and Mr Sarks tendered a folder of materials (Ex 2) in respect of which there was controversy in relation to the documents in tabs 10, 11 and 12 (tr 9-11). Having regard to my findings the materials contained in tabs 10, 11 and 12 are not relevant and I reject it.

54. [54]

    As there is some overlap between the submissions made by Claude and Mr Sarks and those made by Felicity I will deal first with the submissions that are common to all defendants and then address Felicity’s additional submissions separately.

55. [55]

    The first issue for determination relates to the date on which equitable compensation should be assessed. The defendants contend that there was a requirement imposed on the Referee by the Final Orders Judgment and/or the CA Judgment to assess equitable compensation as at the date of the hearing and not as at January 2005 when the breaches and the transfers occurred.

56. [56]

    This is a factual inquiry as to whether such a requirement was imposed in the Final Orders Judgment and/or the CA Judgment. If no such requirement was imposed, Claude and Mr Sarks have not made a separate submission that the Referee’s choice of January 2005 was wrong as a matter of law requiring the rejection of the Report. However submissions were made on Felicity’s behalf that even if the Court did not impose a requirement on the Referee in respect of the date for assessment of equitable compensation, the Referee fell into error in deciding that the date for the assessment of the value of the shares was January 2005.

57. [57]

    There was nothing in the Final Orders Judgment that expressly imposed a requirement on the Referee to assess equitable compensation as at the date of the hearing. In paragraph [7] of that judgment, the plaintiffs’ claim to have the equitable compensation quantified “immediately” on what was submitted to be the “straightforward” basis of the difference between the amounts Felicity paid for the shares and the value of the shares recorded in the Judgment was rejected. It was rejected in favour of holding an enquiry as to the amount of equitable compensation payable by the defendants. There was nothing said about the date at which the equitable compensation should be assessed.

58. [58]

    The parties appealed from the Judgment and the Final Orders Judgment. The liquidator’s grounds of appeal included the following:

59. [59]

    The defendants submitted that having regard to these grounds of appeal, it is clear that the plaintiffs construed the Final Orders Judgment to mean that it was not appropriate to assess equitable compensation as at the date of the transfers (the date of the breaches). The defendants submitted that the dismissal of this appeal carried with it the irresistible implication that the Court of Appeal intended the equitable compensation to be assessed at the date of the hearing and not at the date of the breaches in January 2005.

60. [60]

    The Court of Appeal concluded that at first instance there was no finding of a value of the shares for the purpose of determining equitable or statutory compensation (at [161]). There was nothing in the CA Judgment that expressly stated that equitable compensation was to be assessed as at the date of the hearing or at the date of the breaches in January 2005.

61. [61]

    The dismissal of the liquidator’s appeal is not equivalent to a finding that equitable compensation had to be assessed as at the date of the hearing and not at the date of the breaches. Indeed the Court of Appeal’s findings make no mention of that date. However the Court of Appeal said (at [161]) “No binding determination of the true value of the Shares as at the dates of the Transfers has been made”. Although the reference to the value “as at the dates of the Transfers” may suggest that the Court of Appeal may have had in mind the dates of the transfers in January 2005 as the appropriate dates for the assessment of equitable compensation, neither the plaintiffs nor the defendants, nor indeed the Referee, relied upon this passage for that purpose. Rather the Referee emphasised the Court of Appeal’s statement that it was undesirable to constrain the conduct of the enquiry by any practical rulings (at [177]) in concluding that the Court of Appeal “had left this question to be determined in the reference” (R [17]-[18]).

62. [62]

    I am not satisfied that there was any requirement imposed on the Referee by the Court at first instance or on appeal in respect of the date for the assessment of equitable compensation.

63. [63]

    It is appropriate to now deal with Felicity’s submission that in any event the Referee erred in concluding that the date for assessment of the value of the shares was the date of the breaches in January 2005.

64. [64]

    A “general rule” that the assessment of equitable compensation for breach of fiduciary duty should occur as at the time of trial, with the benefit of hindsight was developed following the analysis by McLachlin J (as the Chief Justice then was) in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 at 154; see Target Holdings Ltd v Redferns [1996] AC 421 at 437. In McNally v Harris (No 3) [2008] NSWSC 861 White J summarised the relevant cases on this topic and considered that the appropriate date for assessing compensation in that case was the date of making the orders rather than any other date such as the date the suit was commenced (at [17]).

65. [65]

    In Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd & Anor (1996) 39 NSWLR 143 McLelland A-JA, with whom Priestley and Meagher JJA agreed said at 154:

66. [66]

    It is appropriate to refer to McLachlin J’s statement in Canson Enterprises Ltd v Boughton & Co upon which reliance was placed by McLelland A-JA (and indeed in the cases referred to above and many others). It was as follows (at 162):

67. [67]

    In Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484, Gleeson CJ, McHugh, Gummow, Kirby and Hayne JJ said at 499 (footnotes omitted):

68. [68]

    In contrast to the “general rule” referred to in the abovementioned cases, Michael Tilbury and Gary Davis in paragraph [2217] of their chapter 22 “Equitable Compensation” in The Principles of Equity, edited by Patrick Parkinson (2nd ed 2003, Lawbook Co) (referred to by the Referee (R [13])), expressed the opinion that there could not be a “general nor even a prima facie rule” for fixing the appropriate date of assessment of equitable compensation. The learned authors argued that the assessment ought to be made on a date which “the justice of the case requires in all the circumstances”. The three factors relevant to the requirements of justice in that context were identified as: (1) the nature of the obligation binding the defendant and the nature of the defendant’s breach; (2) the choice of a date of assessment that favours the beneficiary rather than the wrongful trustee; and (3) any question of mitigation. Relevantly the authors expressed the opinion that the consideration of the first factor may result in “value being taken as at the date of the breach of the duty in question, or at any other date appropriate in all the circumstances”. They referred to WMC Gummow’s chapter “Compensation for Breach of Fiduciary Duty” in TG Youdan (ed), Equity, Fiduciaries and Trusts (1989, Carswell) 57 at pp 69-73 in support of the statement that there could be neither a general nor even a prima facie rule in respect of the appropriate date of assessment of equitable compensation. In fact WMC Gummow did not express such an opinion. Rather he said at 69: “Elaborate rules have been evolved in cases of breach of trust as to the time at which the loss is to be measured. I merely give several illustrations” with a footnote referring to DWM Waters, The Law of Trusts in Canada (2nd ed 1984, Carswell) at 993-1005. In that publication DWM Waters refers to various cases, concluding that in the “final assessment the principle is reparation for loss, and the calculation of that loss turns upon the individual factors in each particular case” (at 998). Messrs Tilbury and Davis also referred to Target Holdings Ltd v Redferns noting that in that case there was no distinction drawn between different types of duty.

69. [69]

    More recently the criticisms of Lord Browne-Wilkinson’s approach in Target Holdings Ltd v Redferns have been recognised: AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 583; 3 WLR 1367 at [20] per Lord Toulson with whom Lord Reed (writing separately) and Lord Neuberger, Baroness Hale and Lord Wilson agreed. In that case both Lord Toulson and Lord Reed analysed the decisions in Canson Enterprises Ltd v Boughton & Co and Target Holdings Ltd v Redferns. In particular Lord Browne-Wilkinson’s analysis in Target Holdings Ltd v Redferns was considered for the purpose of deciding whether his Lordship’s statement of the “fundamental principles” which guided him in that case should be affirmed, qualified or re-interpreted (at [49]). Lord Toulson considered that it would be a “backward step” for the United Kingdom Supreme Court to depart from Lord Browne-Wilkinson’s fundamental analysis in Target Holdings Ltd v Redferns or to “re-interpret” the decision (at [63]). The Supreme Court affirmed the approach adopted by McLachlin J in Canson Enterprises Ltd v Boughton & Co referred to above.

70. [70]

    In Target Holdings Ltd v Redferns Lord Browne-Wilkinson dealt with two arguments. The first (referred to as argument “A”) related to the position where the trustee was under a continuing duty to reconstitute the trust fund. The second (referred to as argument “B”) related to the position where there was an immediate right to have the trust fund reconstituted at the moment of the breach of trust (at [27]).

71. [71]

    In respect of those two arguments Lord Reed said:

72. [72]

    Lord Reed conducted an analysis of the cases since Target Holdings Ltd v Redferns, which included reference to Youyang Pty Ltd v Minter Ellison Morris Fletcher (at [123]-[124]). After referring to the recent cases in the Hong Kong Court of Final Appeal, Akai Holdings Ltd (in liq) v Kasikornbank PCL [2011] 1 HKC 357 and Libertarian Investments Ltd v Hall [2014] 1 HKC 368, his Lordship reached the following general conclusions:

73. [73]

    However there will be circumstances where the Court may be justified in departing from the “general rule” or the date that the assessment is “normally” made at the date of trial. One such case was Southern Real Estate Pty Ltd v Dellow & Arnold [2003] SASC 318; (2003) 87 SASR 1. In that case the Full Court of the Supreme Court of South Australia (Debelle J, Nyland and Lander JJ agreeing) was dealing with breaches by a director of a company who prepared a list of customers while still a director of the company with the intention of using it once she had resigned as a director in breach of her duty to act bona fide and in the best interests of the company. The company was a real estate agency and the Court concluded that the most appropriate method of assessing the loss to the company was to assess the diminution in the value of the rent roll (the list of customers whose rental properties were managed by the company). After observing that the values of rent rolls had increased since the time of the breach to the point that if the rent roll were being valued at the date of the trial the multiple would be two, Debelle J said (at [52]):

74. [74]

    Debelle J then identified the reasons for departing from the “general rule” including that if the director had acted conscionably with due regard for her duties as a director and negotiated to purchase part of the rent roll, the price would have been paid at the time of the breach, in January or February 2001. His Honour also observed that there was no evidence that the real estate agency intended to sell the rent roll and accordingly the price in 2001 was “the appropriate measure of the loss” (at [52]).

75. [75]

    The Referee referred in detail to Edelman J’s judgment in Agricultural Land Management Limited v Jackson (No 2) (2014) 98 ACSR 615. The Referee also referred to AIB Group (UK) plc v Mark Redler & Co Solicitors in which Edelman J’s judgment was described as “erudite” (at [53]). In that case Lord Reed said at [93]:

76. [76]

    As the High Court warned in Youyang Pty Ltd v Minter Ellison Morris Fletcher, generalisations may mislead. The particular circumstances of each case must guide the Court in crafting the appropriate remedy. For instance in Akai Holdings Ltd (in liq) v Kasikornbank PCL Lord Neuberger of Abbotsbury NPJ, with whom Chief Justice Ma, Bokhary, Chan and Ribeiro PJJ agreed, concluded that equitable compensation should be assessed by reference to the value of the subject shares at the date of their sale, some 18 months after the claim for knowing receipt arose (at [153]).

77. [77]

    The Referee formed the view that in the circumstances of this particular case equitable compensation should be assessed by reference to the value of the shares in January 2005 having regard to factors including: (1) the nature of the breaches: (2) the fact that there had been substantial change to the assets since the breaches; and (3) the need to determine what the position would have been if the breaches of fiduciary duty had not occurred; concluding that if there had been no breaches of fiduciary duty the shares would have sold at a proper value (R [22]-[30]). The Referee described the valuation issues as “somewhat complex” but did not take this factor into account in determining that the appropriate date for valuation of the shares was January 2005 (R [30]). The Referee concluded that any valuation of the shares as at the date of the hearing would have “little relationship” to the value of the shares had they remained with GC&Co (R [29]). In this regard the Referee was using the benefit of hindsight.

78. [78]

    The Referee was clearly cognisant of the authorities establishing the “general rule” that equitable compensation is to be assessed at the date of the trial. The Referee was satisfied that the “appropriate date” (the date consistent with the “requirements of justice”) for valuation of the shares was January 2005. Felicity has not established that in the circumstances of this particular case the Referee erred in adopting that date.

79. [79]

    The challenge made by Claude and Mr Sarks fails. The additional challenge made by Felicity also fails.

80. [80]

    The defendants contended that the Report should be rejected because of the Referee’s implicit finding that had GC&Co chosen in January 2005 to sell the shares on the open market it would have had no difficulty in doing so for the values as found. It was submitted that there was no market for the CaTTO share or the OAL shares and any hypothetical sale would have had nil proceeds.

81. [81]

    In response to this submission the plaintiffs relied upon Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari [2000] 2 Qd R 359. That was a case in which the directors, Mr and Mrs Ferrari, conceded that they were in breach of their fiduciary duties as directors by transferring or gifting the “rent roll” of the original real estate company to the new company, Ferrari Management Services Pty Ltd (at [18]). The new company was the “knowing beneficiary” of those breaches (at [18]). The issue on appeal was the manner in which the trial judge had assessed equitable compensation. Thomas JA, with whom Shepherdson J agreed (Pincus JA dissenting), concluded that the question of equitable compensation in the situation presented should have been assessed on the basis of the value to the misappropriating fiduciary rather than the value according to “an artificial hypothetical exercise” as if there had been a sale on the open market (at [45]). Thomas JA referred to Hope JA’s judgment in Mordecai v Mordecai (1988) 12 NSWLR 58 at 70 where his Honour said:

82. [82]

    The defendants submitted that Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari is distinguishable for the “simple reason” that the asset was a rent roll and the issue was whether or not its value should have been discounted on the basis of the presence or otherwise of some restraint of trade provision (tr 14). The defendants submitted that one can readily understand the difference in value in those two circumstances. Whereas it was submitted that in the present case the Court is concerned with shares in two small proprietary companies, an entirely different circumstance from that which pertained in Ferrari Investment (Townsville) Pty Ltd (in liq) v Ferrari. That distinguishing feature must be accepted. However the plaintiffs’ reliance on the passage from Mordecai v Mordecai is still apt.

83. [83]

    The Referee’s finding (R [22]) that there was no evidence to support the claim that there was no market for the sale of the shares, was not challenged by the defendants. However the following submission was made (at par 10 of the written submission for Claude and Mr Sarks):

84. [84]

    Ms Exner’s valuation of the CaTTO share was predicated upon Felicity being the purchaser. It is not in issue that during the reference, none of the defendants took any issue with Ms Exner’s assumptions about Felicity being the purchaser of the CaTTO share for valuation purposes. Nor did any of the defendants take any issue with Ms Exner’s use of the Net Tangible Asset method in relation to the market valuation of the OAL shares.

85. [85]

    It is also not in issue that the defendants did not put any competing valuation evidence about the market value of any of the shares before the Referee. In the circumstances the Referee was entitled to deal with Ms Exner’s evidence in the manner described earlier.

86. [86]

    The defendants’ complaints in this regard are not made out.

87. [87]

    The defendants contended that the Report should be rejected because the Referee erred in preferring the evidence given by Mr Reid as to the value of CaTTO’s property (the Wynne Property) in 2005 to the evidence of Mr Hood on that topic.

88. [88]

    The contest between the parties before the Referee was that the plaintiffs’ expert, Mr Reid, valued the property on the basis that the highest and best use of the land was for a tea tree plantation. Whereas the defendants’ expert, Mr Hood, valued the property on the basis that the highest and best use of the land was for cattle grazing.

89. [89]

    The Referee’s analysis of Mr Reid’s and Mr Hood’s evidence is referred to earlier (at [23-[26]). The defendants submitted that the Referee should have accepted the criticisms that had been levelled at Mr Reid’s opinion as referred to by the Referee and extracted earlier (R [57]) (at [25] above). It is clear that the Referee took into account the very matters that the defendants now seek to agitate again in this Court. However the defendants also submitted that the Referee disregarded Claude’s unchallenged evidence that in order to pursue the tea tree farming operation, CaTTO had to borrow very substantial sums over the years and to undertake remediation and other activities on a very large scale. It was submitted that this evidence demonstrated that the tea tree farming activity was “fraught with risk and only proved justifiable in very recent years”. It was submitted that the hypothetical purchaser of a half interest in CaTTO in January 2005 “would have had little enthusiasm for the undertaking of that risk”.

90. [90]

    It was also submitted that if the Referee had accepted Mr Hood’s appraisal he would have been bound to conclude that the price paid by Felicity for the share in CaTTO actually exceeded the value of those shares as at January 2005.

91. [91]

    It is not correct to say that the Referee disregarded Claude’s evidence in relation to the borrowings and/or injection of capital into the tea tree business. Certainly there was reference to the $10 million that was spent on the property and the competitive attributes that resulted (R [27]; [55]). It is also clear that the Referee analysed both Mr Hood’s evidence and Mr Reid’s evidence in light of the deficiencies in that evidence alleged by the respective parties (R [55]; [57]).

92. [92]

    The plaintiffs submitted that the Referee’s approach was both scientific and systematic in the reasons he gave for preferring Mr Reid’s evidence to Mr Hood’s evidence (tr 4). The plaintiffs submitted that even if it were shown that this Court might have reached a different conclusion, the defendants need to demonstrate that no reasonable tribunal of fact could have reached the same conclusion as the Referee. It was submitted that there was nothing manifestly unreasonable in relation to the Referee’s fact finding: Super Pty Ltd v SJP at 564.

93. [93]

    In any event the plaintiffs submitted that the evidence negates any alternative conclusion being reached. They point to the evidence about the millions of dollars spent in establishing the Wynne Property as a tea tree plantation; the significant competitive cost advantages enjoyed by the Property; the fact that Mr Hood was not made aware of the expenditure or the advantages before he gave his evidence; and the entirely unexplained departure from the defendants’ position at trial that the highest and best use of the Property in 2005 was as a tea tree plantation.

94. [94]

    The analysis conducted by the Referee took into account the evidence of each witness including its deficiencies. The Referee concluded that having seen the witnesses and analysed their reports and evidence he clearly preferred the evidence of Mr Reid.

95. [95]

    I am not satisfied that the Referee fell into error as alleged by the defendants.

Valuation of the choses in action

1. [96]

   The defendants contended that the report should be rejected because the Referee erred in accepting Mr Purcell’s evidence. It was submitted that such acceptance was open to “legitimate criticism on a number of bases”.

2. [97]

   The Referee analysed the evidence given by Mr Purcell (R [73]-[88]), referred to above (at [31]-[39]).

3. [98]

   The written submissions for Claude and Mr Sarks included the following (par 14):

4. [99]

   The defendants also submitted that there was error in the Referee’s approach to the valuation in paragraph 81 where it was said:

5. [100]

   The defendants submitted that this is not correct because the enquiry was concerned with what the hypothetical purchaser of OAL’s share capital would pay for it. The defendants have taken the Referee’s statement in respect of the price to acquire the causes of action out of context. The relevant parts of paragraph 81 are extracted earlier (at [36]). Read in context it can be seen that the Referee was considering the total value of the OAL shares and dealing with the specific aspects of the “contingent asset”. The Referee said earlier in his Report that what he was dealing with was the transfer of shares in companies, the value of which depended upon the underlying assets as well as other matters (R [26]).

6. [101]

   The Referee was careful to adjust his figures on his own conclusions taking into account Mr Purcell’s evidence. It was not a carte blanche acceptance in those circumstances but rather a careful and conservative analysis of aspects of the evidence given by Mr Purcell.

7. [102]

   The plaintiffs submitted that the defendants have not sought to identify any error of principle in this aspect of the Referee’s Report. Nor it is said have they identified any basis upon which the Court could find a perversity or manifest unreasonableness in the Referee’s fact finding. It was submitted that the defendants’ criticism rises no higher than a complaint that the Referee did not accept the defendants’ competing submission that the OAL shares were worth nothing in 2005. This submission has force.

8. [103]

   Another criticism made by Claude and Mr Sarks was that the Referee disregarded the prospect of appeals in the Gardiner proceedings. It is correct that there had been no appellate history in the Gardiner proceedings as at 2005. They had only just been commenced. It is not in issue that none of the parties put any evidence before the Referee in respect of any costs of appeals. Mr Purcell’s approach was to accept that appeals may diminish the amount available but that this would depend upon any costs awards that would be made in the appellate Court. The Referee was entitled to review the evidence given by Mr Purcell in this way and to reach his own conclusions in respect of the figures that Mr Purcell had used. Notwithstanding those figures the Referee introduced even further reductions in the valuation.

9. [104]

   Claude and Mr Sarks also contended that it was inappropriate for the Referee to accept Mr Purcell’s evidence and analysis on the basis that he had assumed that 73% of the borrowers had failed to pay promptly. It was submitted that there was inconsistency in Mr Purcell’s approach in not taking into account events post-dating the transfers of the shares but then making an assessment of non-compliant borrowers at 73% based on a post-transfer event, a judgment of this Court in 2009. The plaintiffs submitted that Mr Purcell’s report was also based on a letter that had been written on 5 January 2004 by OAL’s then solicitors where they had advised the insurer that virtually all of the borrowers were unable to rely upon the OAL indemnity because of their loan payment defaults.

10. [105]

    This complaint is without substance. In any event the Referee did not accept the figure of 73% and built in a more conservative figure of 60% (R [90]).

11. [106]

    I am not satisfied that the defendants’ complaints regarding the Referee’s analysis and conclusions in respect of Mr Purcell’s evidence are made out.

12. [107]

    As I have said earlier Felicity adopted the submissions and contentions made by Claude and Mr Sarks, all of which are without foundation. The primary argument raised by Felicity is that she should not be held liable for the loss because her conduct did not cause GC&Co’s loss. The Referee dealt with this contention (R [35]-[47]).

13. [108]

    The following passage from the Judgment is pertinent to this issue (at [268]):

14. [109]

    In respect of this complaint the plaintiffs referred to Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 in which the High Court said at [199]:

15. [110]

    The Referee referred to this passage in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (R [40]) and said (R [41]):

16. [111]

    The Referee went on to refer to the High Court’s judgment in Warman International Ltd v Dwyer (1995) 182 CLR 544 (R [41]-[42]) and said:

17. [112]

    Felicity submitted that the Referee’s reference to the passage of Gibbs J’s judgment in Consul Development Pty Limited v DPC Estates Pty Limited and to the High Court’s decisions in Farah Constructions Pty Ltd v Say-Dee Pty Ltd and Warman International Ltd v Dwyer were all based on the erroneous assumption that they were relevant to the assessment of equitable compensation. The Referee was clearly cognisant of the different approaches to the remedy sought by the parties in those cases and identified the differences between an account of profits and equitable compensation.

18. [113]

    It was submitted that the Referee failed to consider that it is necessary for there to have been a causal link between Felicity’s conduct and the plaintiffs’ loss. Although the Referee referred to the passage in Farah Constructions Pty Ltd v Say-Dee Pty Ltd in respect of the cause of action being complete without having to examine questions of causation, it is clear that the Referee did consider such questions. The Referee found that the transfers by which the losses were occasioned could not have gone ahead without Felicity’s complicity. The Referee was clearly satisfied on a common sense view of causation that Felicity’s conduct caused loss to GC&Co.

19. [114]

    Felicity was in knowing receipt of the shares. Felicity’s attempt to suggest that the transactions occurred in December 2004 was rejected at trial and was demonstrative of her understanding of the improper purpose for which the transactions occurred in January 2005. Without her participation there would have been no loss caused to GC&Co. The Referee was satisfied that the loss was caused by her conduct.

20. [115]

    I am not satisfied that the Referee’s approach to the loss caused to GC&Co is a basis for rejecting the Report.

21. [116]

    Felicity claimed the Referee erred in failing to allow her any just allowance in respect of the award of equitable compensation. It is true that Felicity made such a claim albeit that it was based on Claude’s conduct after the breach. It was acknowledged during the hearing of this application that no submissions were made separately on Felicity’s behalf before the Referee (tr 26).

22. [117]

    In any event as the Referee noted (R [97]) there was no evidence called by any of the defendants about how one would value any of the work which Claude did after 2005. Nor did Felicity lead any evidence to prove that any work done by Claude was done on her behalf.

23. [118]

    The defendants acknowledged that if there is no error in the Referee’s determination of the date for the assessment of equitable compensation, the claims for just allowances are irrelevant (tr 26).

24. [119]

    Felicity claimed that the Referee’s discretion miscarried because he failed to take into account the extent of her knowledge and wrongly failed to reduce the amount of compensation payable by her. Felicity has always claimed that she was far less culpable than her husband and her father in the transactions the subject of the proceedings. That claim has been rejected both at trial and on the reference. Felicity was a pivotal part of the process and her knowledge of the improper purpose was taken into account by the Referee and previously by the Court.

25. [120]

    I am not satisfied that the Referee erred in exercising his discretion in relation to the amount of equitable compensation to be awarded against Felicity.

26. [121]

    I make the following orders:

    1. (1)

       The report of the Referee, Mr RH Macready, dated 30 January 2015, is adopted.

    2. (2)

       The second, third and fourth defendants, jointly and severally, are to pay equitable compensation in the amount of $2,596,039 to the first defendant, comprising:

    3. (3)

       The interest as ordered by the Referee is to be agreed by the parties and included in a Short Minute of Order to be filed with my Associate by no later than 23 July 2015. Orders in respect of interest will be made in Chambers.

    4. (4)

       The parties are to endeavour to reach agreement on costs orders associated with the reference and with the hearing of the application for the adoption of the Report. The agreed costs orders are to be included in a Short Minute of Order to be filed with my Associate by no later than 23 July 2015. Orders in respect of costs will be made in Chambers.

    5. (5)

       If the parties are unable to agree on orders in respect of interest and/or costs I will hear argument on a date to be fixed, such date to be arranged with my Associate by no later than 23 July 2015.

    6. (6)

       These orders are to be taken out forthwith.