Lewis Securities Ltd (in Liq.) v Marilyn Carter & Anor

The plaintiffs went into liquidation on 6 February 2009. I shall refer to the first plaintiff as “LSL” and the second plaintiff as “Holdings”. LSL and Holdings bring two sets of proceedings, one (2014/317448), in which the only defendant is Ms Marilyn Carter (“Carter”), which concerns a property at 87 Kings Road Vaucluse and which proceedings I shall refer to as “the Property proceedings”. The other proceedings, (2015/317554) have as defendants Carter and Mr Robert Miller (“Miller”), and which I shall refer to as “the Bass proceedings”. Mr J. Stoljar SC with Mr M. Cleary appear for the plaintiffs. Mr A.G Bell SC appears with Mr L. Livingston for Carter and Mr E. Finnane of counsel appears for Miller.

Mr Anthony Richard Lewis (“Lewis”) owned the majority of the shares in LSL. Lewis with Vimow Pty Ltd (“Vimow”) owned the shares in Holdings. Lewis owned two of the three shares in Vimow, the other share being held by Carter, his wife: see Exhibit A1 p 258. Carter was also recorded as the company secretary of Vimow, although she said she had no recollection of that fact: see paragraph 56 of her first affidavit.

What follows in [4] to [40] is taken from the Agreed Statement of Facts of 6 March 2017.

LSL commenced operations in 1985 to deal and advise in Australian fixed interest securities.

At all material times LSL held an Australian Financial Services Licence.

LSL was a company in a group associated with Lewis, which included:

At the time of the transactions pleaded in the Property Proceedings, and in the Bass Proceedings, Lewis was:

Miller, the second defendant to the Bass proceeding, was the second director of LSL.

The third director of LSL was Ian Roberts (“Roberts”), a partner at Hunt and Hunt.

On 13 August 1990 Carter was appointed company secretary of LSL. She remained in this role until 29 October 2008.

On 29 October 2008 the Lewis Companies went into administration.

On 6 February 2009 the Lewis Companies went into liquidation owing some $23 million to creditors.

On or about 3 April 2009 Lewis was declared bankrupt.

On 2 December 2010 Lewis and Carter were examined by the trustee of Lewis’ bankrupt estate (which I shall refer to as “the bankruptcy examination”).

On 7 and 8 September 2011 and 23 and 24 April 2012 the liquidators of LSL held public examinations of, among others, Lewis and Carter. (I shall refer to these as “the public examinations”).

On 4 April 2012 Lewis was discharged by law from bankruptcy.

On or about 29 September 1992 Carter became the registered proprietor of the land and improvements at 3 Hopetoun Avenue, Vaucluse, NSW, being the land comprised in folio identified B/30543111 (Hopetoun Avenue property), for a purchase price of $750,000.

On or about 28 March 2000 Carter entered into a contract of sale to acquire the land and improvements at 87 Kings Road, Vaucluse, NSW, being the land comprised in folio identifier 110/10293 (“the Property”), for a purchase price of $2.25 million.

The deposit on the said contract of sale was paid by cheque 119601 dated 29 March 2000 drawn on the LSL account in the sum of $225,000, an amount which reflects 10% of the purchase price of the Property: see Exhibit A2 p 976.

On 15 June 2000 stamp duty on the contract of sale for the Property was paid in the amount of $109,240, including by cheque 119821, in the sum of $24,507.60 drawn on the LSL account.

Settlement of Carter’s purchase of the Property took place on 23 June 2000, on which day: (1) Graham Nicolls as solicitor for Carter executed on her behalf as transferee a transfer of the Property, which transfer in due course was registered and allocated number 6963027; and (2) a cheque was drawn on the LSL account in an amount of $1,024,923.20 in favour of Westpac Banking Corporation, for the purposes of acquiring a Westpac bank cheque.

The amount referred to in (2) in the preceding paragraph of $1,024,923.20 comprised the sum of:

ANZ Bank registered the following mortgages on the title of the Property, namely:

On or about 28 June 2000 Carter executed a transfer of the Hopetoun Avenue property for a consideration of $1,060,000.

On or by 23 June 2000 the transfer of the Property to Carter was registered.

In approximately May 2009 Carter sold the Property for $4 million.

The proceeds of sale were deployed as follows:

Carter and Lewis continue to reside in the Centennial Park property.

On 14 May 2002 Bass Holdings and Investments Pty Ltd (“Bass Holdings”) and Graham Byrne Investments Pty Ltd (“GB Investments”) were registered.

On 16 May 2002, according to ASIC records, Robert Bass (“Mr Bass”) was appointed as the sole director and shareholder of Bass Holdings and, according to ASIC records, Graham Byrne (“Mr Byrne”) was appointed as the sole director and shareholder of GB Investments.

The records of the Lewis Companies include a letter dated 1 June 2002, purportedly from Mr Bass (“Bob Bass”) on behalf of Bass Holdings (and with a Bass Holding letterhead) to Lewis in his capacity as director of Holdings stating:

The LSL/Holdings Ledger includes an entry dated 21 June 2002 of a payment by LSL to Holdings in the sum of $1 million: see Exhibit A2 p 482.

There was, in fact, no cash payment as between LSL and Holdings. This could only be affected by journal, as Holdings did not have its own bank account.

Also, on 21 June 2002, the sum of $1 million was paid from the LSL’s Bank Account to the Bass Holdings Bank Account: see Exhibit A2 p 1652.

On 26 June 2002 $998,000 was paid from the Bass Holdings Bank Account to the GB Investments Bank Account: see Exhibit A2 p 1635.

The next day, on 27 June 2002, the sum of $996,800 was paid from the GB Investments Bank Account to the joint ANZ Bank Account held by Lewis and Carter. This payment was dishonoured on 1 July 2002 and represented on 2 July 2002: see Exhibit A2 p 1635 and Exhibit A1 p 832.

Then, on 28 June 2002, the sum of $995,000 was paid from the ANZ joint Bank Account held by Lewis and Carter to the LSL Bank Account. This payment was dishonoured on 1 July 2002 and represented successfully on 2 July 2002: see Exhibit A1 pp 833 – 834.

The records of the Lewis Companies include loan account ledgers in which the payment of the said sum was treated, as to $850,000 thereof, as:

The records of the Lewis Companies include loan account ledgers in which the balance of the said $995,000, being the sum of $145,000, was treated as:

Miller, it has been agreed, was not responsible for bookkeeping in any of the Lewis Companies.

The plaintiffs’ claim in the Property Proceedings, as pleaded, is as follows:

The plaintiffs’ pleaded case in the Bass proceedings is as follows:

I should note, in relation to [42(6)], that paragraphs 52 and 53 of the statement of claim in the Bass proceedings (see: Exhibit A1 pp 29 – 30) speak of Holdings when I think LSL was intended. The loan to Lewis was recorded as a loan from Holdings not LSL: see Exhibit A2 pp 1334 – 1337, and Miller says that Lewis told him he wanted to remove a debt on the books of LSL owed to Holdings: see T274.20. The records show that Holdings did not, as at June 2002, owe any money to LSL: see Exhibit A1 p 482.

The claim against Carter, that she knowingly received monies obtained by Lewis in breach of fiduciary duties owed by him as a director to LSL and/or Holdings and knowingly assisted him in that process, and the claim that Carter ‘received’ funds from the Bass transaction – and that she and Miller knowingly assisted Lewis in the breach of Lewis’ duties to LSL and/or Holdings, are based on what are often referred to as Barnes v Addy claims (Barnes v Addy (1874) LR 9 Ch App 244). The principles relating to third party liability consequential upon breach of fiduciary duty were relatively recently restated by the NSW Court of Appeal in Simmons v New South Wales Trustee and Guardian (2014) 17 BPR 33, 717; [2014] NSWCA 405, per Gleeson J, with whom Beazley P and Barrett J agreed at [86] – [91]:

It will be noted that for the first limb of Barnes v Addy it is not necessary to establish that the breach of fiduciary duty amounted to a dishonest and fraudulent design, whereas for the second limb it is necessary to establish dishonest and fraudulent design, and assistance in, or knowledge of, that design.

There was, in this case, no dispute as to the principles applicable but rather the dispute was over the factual findings which should be made, i.e:

The other issues which were raised by the defendants were these:

There are some aspects of [41] and [42] which can be dealt with simply. In relation to [42(2)] the $146,800 did not remain in the Lewis/Carter bank account. It was paid in to LSL’s bank account. In relation to [41(1)(c)] there is evidence that an amount of $24,507.60 was paid out of the LSL bank account for stamp duty but no evidence that the remaining $84,732.40 was paid out by LSL. I do not think it is open to infer that LSL provided the funds for the payment of the $84,732.40, since the source of all other amounts used for the purchase of the Property can be identified.

There is no dispute between the plaintiffs and Carter that the balance of the $1,359,163 came out of the LSL ANZ bank account, i.e. $1,274,163. The significance of that fact is, however, the subject of divergent positions. Part of the reason for that divergence is that the Lewis Companies had only one bank account and that was held in the name of LSL. Carter’s position is that the mere fact that money came out of the LSL bank account does not mean that the payment can be treated as a payment by LSL, the ledgers, which were maintained by LSL, Holdings and Vimow must be taken into account, as must ledgers relating to Lewis, Malone and others. Thus, for example, if Lewis’ loan account with LSL was in credit and money was paid out from the LSL bank account, that amount would not be a payment in breach of any duty owed by Lewis to LSL, even if it were paid for a purely personal purpose of Lewis. There are many examples of such expenditure. The next step in Carter’s argument is that if the Lewis account was in debit, but payments were made out of LSL bank account with a recording of the payments as a debit to Lewis’s account with LSL or with Holdings, then there is no breach of fiduciary duty and no fraudulent design. This contention is strengthened it is said by reference to the fact that Lewis and Carter were effectively the only shareholders of LSL, Holdings, and Vimow, with Lewis holding the majority of shares.

Mr Bell pointed to what he claimed was an anomaly in the plaintiff’s position, namely that they had pleaded that Carter had received the funds for the Property as a gift and yet seemed to attack Carter’s assertion that she had received the money as a gift. The supposed anomaly may be explained by reason of the fact that it is the plaintiffs’ case that Lewis did not really have $1.3 million to give Carter, but that he obtained that money from LSL. There is no suggestion that Carter was, herself, borrowing the $1.3 million from LSL, so there is no question of any terms of borrowing as between Carter and LSL as is suggested by [41(3)]. It is also appropriate to note here that it was, in the course of the hearing, effectively accepted by the plaintiffs that the balance of the purchase price of the Property had been funded by Carter.

Carter says that Lewis told her that he was giving her ‘the house’, or giving her the money for the house, which Lewis confirmed in his bankruptcy examination: see Exhibit A4 p 2622. The real dispute seemed to be over whether Carter knew that the $1.2 million - $1.3 million that she received to assist her purchase of the house was coming out of LSL. In her affidavit her evidence was that she understood Lewis to have been successful in various trades and well able to afford gifting her the shortfall between the proceeds of sale of the Hopetoun Road property and the Property. In my view the plaintiffs have established, on the balance of probabilities, that Lewis could not, in fact, fund the shortfall without recourse to money obtained from LSL and Mrs Malone. He told Carter that he needed to borrow money from Mrs Malone to fund part of the purchase price. He told the Australian Taxation Office in June 2002 that his liquidity had been stretched over “the last two years” (see Exhibit A2 pp 1641 - 1642) and we know that the $1.3 million did in fact come out of the LSL bank account. That, however, does not of itself establish that Carter was aware of that fact.

Carter gave evidence to support her contention that she had reason to think that Lewis would be able to provide her with the balance of the purchase price by virtue of dividends being paid to him out of profits: see paragraphs 107-125 of her first affidavit. Carter said that she prepared the schedules: see Exhibit A2 p 976, p 533 and p 845 (and the documents from which those schedules were prepared were put into evidence: see Exhibit 1D6). It is clear, however, that the profit earned by LSL and distributed to Lewis by way of dividends did not produce enough to enable Lewis to pay the full balance of the Property and this, notwithstanding that Lewis, she says, told her that he was confident he had enough money to cover the balance of the purchase price (see: paragraph 129 of Carter’s first affidavit) since he had to borrow $775,000 from Holdings/LSL and $250,000 from Mrs Malone. If Carter knew that he did have to borrow more than $1 million to fund the balance, what Lewis told her, and the trades which she went to the trouble of recording (on her evidence), becomes of little significance.

In order to reach a conclusion on some of the issues in this case it is necessary to express a view as to the credit of witnesses. Mr Stoljar mounted a significant attack on the credit of both Carter and Miller. No attack was made as to the credit of Mr Civil, one of the joint liquidators who gave evidence for the plaintiffs, and I have no reason to doubt his veracity.

Carter is clearly an intelligent, articulate person. She holds a Bachelor of Arts, a Graduate Diploma in Financial Markets, a Graduate Diploma in Corporate Governance, as well as a Masters of Commerce in Professional Accounting. She has had wide experience in the finance industry. She was the corporate accountant for the Lewis Companies for 19 years, commencing in 1990 after she married Lewis.

Mr Stoljar made the following points in relation to his attack on Carter’s credit:

I think that Mr Stoljar points in (1) – (5) in relation to Carter’s credit are well made and they were effectively not challenged by Mr Bell, although Mr Bell did contend that Carter’s admission in respect of Exhibit F was immediate and is supportive of her veracity: see T438. I do not think Carter had any choice but to make the concession she did, and I do not view that concession as an antidote to the other matters. I will add some observations of my own and then deal with (6) and (7) of [55].

An example of Carter’s style of evidence is her evidence concerning the Lewis/Carter joint account. In her affidavit she described how she regarded the joint account as Lewis’ account: see paragraph 24 of her affidavit of 25 February 2016. She referred a number of times to the account as “Tony’s account”: see for example T324.22 where she said:

Carter volunteered that she had not signed the $850,000 worth of cheques at T324.28 – 36. When confronted with the fact that she had drawn other cheques on the Lewis/Carter account (see Exhibit A2 p 1496 for example) she then said she occasionally drew some cheques on that account: see T325.15 but then said “I never put money in that account” and then asserted “I did reimburse Tony usually for these cheques.” She asserted that the reimbursement of Lewis was mentioned in her affidavit: see T325, but what she said in her first affidavit at paragraph 26 and paragraph 6(d) of her affidavit of May 2016 was that she always told Lewis about payments made out of the account. She admitted that her evidence that she knew nothing about the Lewis/Carter account was not correct: see T327.7 – 11.

As mentioned, another example of her evidence related to the receipt of the Lewis/Carter bank account statements. Her evidence in her affidavit of 25 February 2016 was:

There are numerous difficulties with this evidence:

In relation to her role in the Lewis Companies, I agree with Mr Stoljar that she attempted, in her affidavit and in her oral evidence, to minimise her role and paint herself as, effectively, a mere bookkeeper who simply recorded what she was told to record, when the reality drawn out in cross-examination, and by reference to documents, established that:

Some further examples of her attempt to minimise her role are:

Carter sought to create the impression that she had no involvement with writing up the Holdings ledgers in the period 2000 – 2002, seeking to ascribe that role to Ms Humiston: see paragraph 89 – 90 of her first affidavit, and the subject of many comments by her in answering other questions (see: T155.30 – T156.6):

In her public examination she clearly states she was responsible for entering and reconciling entries for Holdings and Vimow, as well as LSL: see Exhibit A4 pp 2699 – 2701, and I found her attempts to explain the difference between her evidence before me and the evidence she gave at the examination (see: T175 – T177) as unconvincing.

Carter agreed that her statement in her affidavit of 25 February 2016 paragraph 46 that she had not been involved in any business decisions was wrong: see T156.41.

In cross-examination, at T219.212 – 47, Carter, having agreed at T217 that she would have checked the entries in the LSL ledger and that $775,000 was a significant figure, there was the following exchange at T219.44 – 47:

Another example of a self-serving recollection, which was not stated in her affidavit, was her evidence concerning the Malone loan at T228.16 – T229.24:

In relation to the conversations with her husband [55(6)], it needs to be recognised that the conversations she was giving evidence about occurred long ago and I do not think she can be criticised for a lack of detail, however, it was clear that her recollection was selective, in the sense that the conversations which she said she could recall were helpful to her case and whenever questions sought to probe further, they were answered with either a lack of recall or very vague responses: see, for example, T149.1 – 12, T146.22, T147, T177 – 180, T181 - T184, T228, and T352 – T353. In relation to the question of whether Lewis did ‘gift’ the house to her, I do not think it matters much because he clearly intended the Property (like the Hopetoun property) to be bought in her name. The real question is not whether he made a gift to her of the money, but rather, whether in the circumstances of the ‘loan’ out of which he paid the $1.3 million for the Property, the funds were his to give to Carter or not.

In relation to [55(7)] I do not accept that Carter was, by her evidence between T201 – T211, admitting that she knew in 2000 that there was a loan of $775,000 to Lewis, rather she was agreeing that she accepts now, and has done since the commencement of proceedings against her, that there was such a loan.

For the reasons I have outlined in [54] – [68], I am not able to accept Carter as a truthful witness and I am disinclined to accept her evidence unless independently corroborated.

Miller admits his involvement in the Bass transaction. He says that Lewis said to him:

Miller said that Lewis told him that LSL (not Holdings) was owed money and then said that he made no enquiry about the veracity of what Lewis told him: see T292 – T293, even though he was himself a director of LSL.

I shall return to the significance of the matters that Miller has admitted, but I need to address the question of his credit:

For the foregoing reasons, whilst I accept that Miller did make some important and damaging admissions, insofar as Miller gives evidence of his belief as to the effect of the transaction and any limitations on his role in it, I am unable to accept his evidence as truthful.

Lewis, Mr Bass, and Mr Byrne did not give evidence in the proceedings, but the transcript of their public examinations, as well as the bankruptcy examination in the case of Lewis, were put into evidence. The receipt of the respective transcripts (in addition to those of Carter and Miller) appeared to be the result of a compromise between the plaintiffs and the defendants, which included the agreement that the transcript of Lewis and Carter’s public examination could not be used against Miller: see T95, and Miller’s transcript could not be used against Carter: see T71. I must take into account that the plaintiffs’ tender of transcript included that of Lewis (as well as those of Mr Bass and Mr Byrne) and the defendants could have objected to the admission of the Bass and Byrne transcripts, so in that sense it cannot be said that they were denied the opportunity to cross-examine these witnesses. I have no reason to doubt the veracity of Mr Bass and Mr Byrne and their ignorance of what transpired with companies of which they were purportedly directors was largely corroborated by Miller. Lewis’ evidence at the public examination concerning the Bass transaction was that:

In relation to the Property transaction, Carter does not deny that she received the $1.3 million of funds that came out of the LSL bank account, and that that money assisted her to buy the Property. She advances a number of points in her defence (leaving aside the shareholder approval point and the limitations and laches arguments for the moment):

The closing submissions on behalf of Carter (“the CCS”) made a number of general points, which I summarise:

I accept that each of the points in (1) – (4) is applicable here.

Lewis arranged for the removal of $1.3 million of funds from LSL’s bank account. There is no evidence that he did so with the approval of either of his fellow directors. There is no documentation in respect of the $1.3 million, so far as the company is concerned, other than the ledgers. The ledgers do record the movement of balances between Lewis, LSL, Holdings, and Vimow. The LSL ledger records an interest rate of 7% per annum for what is recorded as a loan of $775,000.

Of the Lewis Companies, only LSL had a bank account. There is no doubt that, for the Lewis Companies, the ledgers provide the only guide to the state of the financial indebtedness of Holdings to LSL, Lewis and Vimow to Holdings, LSL to Holdings and so forth. Mr Civil agreed that a payment going into or out of LSL’s bank account was the first step in identifying the nature of the transaction, and that regard had to be paid to the ledgers: see T98.17 – T99.47.

It follows that payment out of the LSL account does not mean that that money must be treated as LSL money and it makes the ledger accounts very important documents. It also follows that if there was a breach of fiduciary duty by Lewis, it must relate to the decision that he made to direct that Holdings’ account be debited with the $775,000, thus reducing the amount owed by LSL to Holdings, enabling Holdings to lend him $775,000 (see p 469, p 1337, p 1334, p 1362) and payments to be made out of the LSL bank account on behalf of Vimow, with payments of the deposit of $225,000, and the stamp duty of $24,507.60, effectively for Lewis’ (and hence Carter’s) benefit. The Malone amount of $250,000 is in a different category and I shall deal with it and the $225,000 and $24,507.60 separately. So far as the balance of the stamp duty is concerned – an amount of approximately $85,000, there is no evidence that that amount was paid out of the LSL account. I find that $1,274,430.60 ($1,024,923 + $225,000 + $24,507.60) was paid to purchase the Property for her benefit and thereby received by Carter.

The allegation that the Property transaction was a breach of fiduciary duty is on the pleadings based upon:

As I have noted, there was no loan documentation, but there was a provision for interest at 7% per annum in the ledger for the $775,000 loan. Where no term for repayment is specified, the money lent is repayable from the time that the money is lent or at least on demand with reasonable notice: see Young v Queensland Trustees Ltd (1956) 99 CLR 560 and Ogilvie v Adams [1981] VR 1041 and see Joachimson v Swiss Bank Corporation [1921] 3 KB 110 and Chitty on Contracts (27th Edition, Sweet & Maxwell) [36] – [210]. There was no requirement for any loan obligation to be imposed on Carter to repay because she was not the borrower.

There was no security provided for the loan of $775,000. There was no security provided for the $225,000, the $24,700 or the amount treated as the Malone loan, nor was there any interest for the Malone loan.

The question of whether a director of a company can loan money to himself or his family, and the process by which that can be achieved, is not without its complications. Legislation has been introduced to prevent directors of a public company from making loans to themselves without shareholder approval: see former s 234 of the Corporations Act 1989 (Cth) and presently ss 208 – 209 of the Corporations Act 2001 (Cth), dealing with the need for member’s approval in respect of a related party benefit. In relation to private companies there is a requirement that any transaction which materially benefits a director or his family must be the subject of notice to all other directors (see s 191 of the Corporations Act 2001 (Cth)).

The case cited by Mr Stoljar, Paul A Davies (Aust) Pty Ltd (in liq) v Davies (No 2) [1983] 1 NSWLR 440, was one in which the trial judge had found that the directors of a company had used moneys of the company for their own purposes at a time when the company was in financial difficulties and not all of the shareholders had given consent because the shareholder, who held shares as trustee for the directors’ children, had not given consent to that use. The appeal was concerned with the nature of the relief granted as the liquidator claimed that the relief granted at first instance was too limited.

In Linton v Telnet (1999) 30 ACSR 465, the NSW Court of Appeal Giles JA (with whom Beazley JA and Sheppard AJA concurred) considered an interest free loan to the director of $1.06 million, which had been used by the director to buy a house for the appellant – his wife. The trial judge had held that the loan was a breach of the directors’ fiduciary duty because the director was bankrupt at the time. The Court of Appeal overturned the decision because the director had been discharged from bankruptcy three years before the loan, so the foundation of the trial judge’s decision was erroneous. Giles JA rejected the liquidator’s cross-appeal, which was based on the director’s failure to consider the interests of creditors, because the liquidator had not advanced the case at the hearing but, in doing so, his Honour made reference to cases dealing with when directors are required to have regard to the interests of creditors: see Nicholson v Permakraft (NZ) Ltd (1985) 3 ACLC 453 at 459; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722; 10 ACLR 395, and see Walker v Wimbourne (1976) 137 CLR 1; 3 ACLR 529. The plaintiffs in the present case have not pleaded that the loans were not in the interests of creditors, nor have they pleaded that the dividends, which were paid to Lewis and which improved the ledger of his account with Vimow, and Vimow with Holdings, were not properly made at the time they were paid. It appears that Holdings was not in financial difficulties at the time that it borrowed money, indeed it had been a creditor of LSL until the time of the transaction and had made a profit in excess of $400,000 in the previous financial year.

I accept that a director could be in breach of his fiduciary duty by entering into a loan for himself without the approval of other directors, but that was not pleaded as a particular and I do not think that it was necessarily a breach of fiduciary duty to enter into a loan with a 7% rate of interest without security where the director and his wife own all of the shares in the company, and where it has not been pleaded that the transaction was inimical to the interests of creditors. There is no evidence that a loan by Holdings to Lewis at 7% per annum was not advantageous, or was commercially imprudent, and see Lewis’ tax return at Exhibit A2 p 1366 – 1367, which points to substantial taxable income. The only particulars of the pleaded case, in respect of the Property, that are made out are the fact that no security was provided and there was no formal documentation.

Whilst the evidence supports the conclusion, on the balance of probabilities, that Carter was aware as at June 2000 that Lewis was borrowing $775,000 to put towards the purchase of the Property on behalf of Carter, because she was responsible for at least the LSL and Vimow ledgers and more likely the Holdings ledgers as well (see Exhibit A1 p 469 and the evidence referred to at [61] ) and the purchase was a very important acquisition for her, I do not think it is necessary to reach a conclusion as to whether the loan of $775,000 was a breach of Lewis’ fiduciary duty because there is a more fundamental problem for the plaintiffs, which is that by June 2002 the Lewis loan to Holdings was $850,000 (see: p 482 and p 394) and it is that amount which is the subject of the Bass transaction claim. In the course of submissions, Mr Bell pointed out that by their pleadings the plaintiffs had affirmed the existence of the $850,000 loan. Mr Stoljar conceded (at T485 – T486 particularly T486.3 – 8) that the plaintiffs had affirmed the loan and that they could not recover against Carter for that amount since, on the present state of the law, a voidable transaction said to have been entered into in breach of fiduciary duty must be voided if the company seeks to recover it: see Robins v Incentive Dynamics Pty Ltd (in liq) (2003) 175 FLR 286 [(NSWCA)]; 45 ACSR 244 at [73]-[74], [82] and Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 at [271]-[281]. Mr Stoljar asserted, however, that the remainder of the amounts making up the $1.3 million were not affected by that concession. If the $850,000, the $84,000 are removed, the balance claimable is $385,000. If $250,000 for the Malone loan is removed, the balance claimable is $135,000.

Mrs Malone was a depositor of funds with LSL. As at June 2000 she had $250,000 invested with LSL. Mrs Malone was elderly and knew Lewis. Lewis claims that she was a family friend. He claims that he asked her whether she would be willing to lend him $250,000, and that she agreed to that, insisting, notwithstanding Lewis’ offer to pay interest, that she would not charge him interest: see Exhibit A4 pp 2809.16 and p 2813.41 – 49.

According to Carter, Lewis told Carter that Mrs Malone had agreed to the loan and Carter made an entry in Mrs Malone’s ledger with LSL that she had withdrawn $250,000 from Mrs Malone’s account and into Lewis’ account. No document has been found in relation to this arrangement whereby Mrs Malone went from earning 6% from LSL to earning no interest whatsoever, with no evidence of the loan or documentation given to her. Carter in her affidavit of 25 February 2016 at paragraph 159 said that she thought that she had a recollection of having seen a letter with Mrs Malone’s signature consenting to the loan. Carter did not say that she had seen such a letter at her examination (see: Exhibit A4 pp 2736.30 – 44), and nor did Lewis say that such a letter had been created (see Exhibit A4 pp 2822.25 – 28). Mr Ross Barker (Mrs Malone’s son and also a member of the plaintiffs’ committee of inspection) found no such letter in his mother’s papers and no such letter was included in the books and records of the plaintiffs. I do not accept Carter’s account as truthful.

Mrs Malone passed away before November 2003, at which time the ‘loan’ had not been repaid by Lewis. Her son, Mr Barker, gave evidence in this case by affidavit of 18 April 2016 (p 198 – 199 of Exhibit A1) but he was not required for cross-examination.

Mr Bell submits that the plaintiffs cannot pursue a case based on a breach of duty owed by Lewis to Mrs Malone since that was not the case that was pleaded.

Although $250,000 was recorded as being the amount of the loan by Mrs Malone on 23 June 2000 (see: Exhibit A1 p 352), Mrs Malone did not have $250,000 owing to her at that time – the transfer of $250,000 to Lewis’ account put her account into debit of $79,703.67. This problem was ‘resolved’ a week later because the ledger records the payment of $80,000 into Mrs Malone’s account.

There are reasons to seriously doubt the veracity of Lewis’ claim that Mrs Malone agreed to loan him $250,000 and, therefore, that he had Mrs Malone’s approval to transfer her credit balance in the LSL ledgers and make that credit available to himself. If he did not have her agreement to that course his actions would be grossly dishonest both viz a viz Mrs Malone and LSL. If Mrs Malone in fact approved the transfer of the debt to Lewis, then there was no misappropriation or improper removal of funds.

As between Mrs Malone, or her estate, LSL would be required to prove that she had given her approval. As between the plaintiffs and Carter, however, the plaintiffs must establish that Lewis breached his fiduciary duty to LSL by debiting the amount of $250,000 from her account balance and thereby transferring, in effect, Mrs Malone’s chose of action against LSL without her approval. Lewis’ evidence does not assist the plaintiffs. Mr Barker testified that his mother had been a bookkeeper and was extremely fussy about documentation. Mr Barker’s evidence that there was no record of the loan to Lewis in his mother’s papers, nor of any letter in the LSL/Holdings records supports the plaintiffs’ case, and, as was recognised in Plunkett v Bull (1915) 19 CLR 544, per Isaacs J at p 549, it is necessary to scrutinize very carefully claims made by a person about conversations with a deceased person.

There is, however, a pleading issue in relation to the Malone loan. At paragraph 17(c), the plaintiffs plead that Lewis caused $250,000 to be debited “from an account held with LSL, which was beneficially owned by [Malone], being a client of LSL.” In paragraph 24 the plaintiffs assert, inter alia, that:

On the face of the ledger accounts Lewis did not borrow the $250,000 from LSL or Holdings, but from Mrs Malone. If it was to be asserted that the debiting of Mrs Malone’s account was improper and itself a breach of Lewis’ duty to LSL (because it involved a breach of LSL’s duty to Mrs Malone) then that should have been pleaded. If it was to be asserted that the entry in Mrs Malone’s ledger, and the corresponding entries, were false, leading to the result that the $250,000 was improperly removed from LSL, that would not appear to constitute a ‘borrowing’ from LSL at all, but “borrowing” is what is pleaded. I, therefore, accept Carter’s contention that the plaintiffs cannot recover the $250,000 because it has not been adequately pleaded.

Further, the ledger for Lewis with LSL records him as having repaid to Mrs Malone, or her estate, $245,000 of the $250,000, including by payments to third parties, one of whom was Mr Barker, her executor: see Exhibit A2 p 1339. The accuracy of the ledger was not challenged, nor was Carter’s claim that, in any event, the Malone loan was repaid. I conclude that the plaintiffs cannot succeed, in relation to the case asserted, in respect of the $250,000 since even if Lewis was in breach of fiduciary duty it is a defence to a claim for breach of fiduciary duty that the fiduciary has partially or wholly satisfied the loss: see Heydon, J; Leeming, M; Turner, P, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (5th edition, LexisNexis Butterworths, 2014) at paragraphs 23 – 190, and it must be open to the third party recipient to be able to rely on the same defence: see Yeshiva Properties No 1 Pty Ltd v Marshall [2005] NSWCA 23; (2005) 219 ALR 112 at [80] per Bryson JA (with whom Mason P and Beazley JA concurred) dealing with a similar point of principle.

In relation to the $225,000 paid for the deposit and debited to Vimow’s account ledger, and the amount of $24,507, these amounts were recorded in the ledger of Vimow (see: Exhibit A1 p 590) and of LSL (see: Exhibit A1 p 417). They were not loans from LSL or Holdings to Lewis, but in any event, they show that within a week almost all of the amount of $225,000, debited to Vimow’s account, was repaid. At the time that the $24,507 stamp duty was paid, Vimow was in credit with LSL (see: Exhibit A1 p 417) in an amount of $27,805. It would thus appear that even if Lewis, in breach of his fiduciary duty, removed $225,000 to pay the deposit, Lewis, through Vimow, had repaid the amount of $225,000. In saying that I recognise that the reason why the Vimow debt, brought about by the payment of the $225,000, was in credit was because $217,000 worth of dividends were credited to Vimow’s account. The allocation of dividends is itself highly questionable because LSL did not in the 1999/2000 financial year generate profits, and Carter herself accepted that dividends could only be paid if the Company had profits (see: T185.36 – 49). but wrongful allocation of dividends was not the subject of any pleaded case, and indeed Mr Stoljar eschewed any case of wrongful payment of dividends to Lewis: see T197.15 – 24.

Mr Bell contended that the loan accounts of Lewis, Holdings and Vimow should be treated as running accounts and he relied on a passage from Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, at p 286, in which Barwick CJ cautioned against an analysis of a running account, for the purpose of determining whether a payment was a preference or not, to “pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed” citing Richardson v Commercial Banking Co of Sydney Ltd (1952) 85 CLR 110 at p 133. Menzies J took a different approach at p 316 and Kitto J did not decide the point. Mr Stoljar submitted that Queensland Bacon had no application to this case since what is under scrutiny here are loan accounts, not a running account for goods and services, and whether loans were made in breach of a fiduciary duty or not. I accept Mr Stoljar’s contention that the approach taken by Barwick CJ in Queensland Bacon is not pertinent to the present question. What is relevant, however, in respect of each impugned transaction, is “was the debt or loan repaid?” If it has been repaid then neither Holdings, nor LSL, have suffered a loss that is compensable by the defendants.

The plaintiffs’ case against Carter in respect of the Property is, therefore, not made out. I do not, therefore, need to address the question of the precise extent of the remedy available to the plaintiffs, which was raised as an issue between the parties, and which included the question of whether the profit made by Carter on the sale of the Property was recoverable by the plaintiffs.

There are various aspects of the Bass transaction which I need to reiterate and detail:

The parties are agreed that the $995,000 came out of the LSL account in late June 2002 (not June 2001) and was paid into the LSL bank account in July 2002. The reason that the cheques were dated 2001 and why the letter bears that date has not been explained by Lewis or Miller – but it appears likely that it was done this way to give the appearance that there was no connection between the money going out of LSL’s bank account in late June 2002 and then appearing back in the account (less $5,000) within two weeks. Carter was unable to explain this discrepancy, or the fact that one of the ledgers records a relevant transaction as “29/06/01”: see Exhibit A2 p 1334. She did admit, however, after originally denying such knowledge, that she was aware within, she says, between one week and six weeks, that the $995,000 had been paid into the Lewis/Carter account and paid out of that account to the LSL bank account.

In relation to the connection between the $995,000 and the $1 million for the Bass transaction, Carter said that Ms Humiston asked her in paragraph 241 of Carter’s first affidavit:

As to the question of the precise time at which Carter became aware that the $995,000 had come out of the Lewis/Carter account, I think it is far more likely that Carter was aware at the time that the cheques had been received by LSL and, therefore, that they were drawn on an account of which she was a joint owner because:

To the extent that it was argued on behalf of Carter in relation to the Bass transaction (and the Property transaction) that the writing up of ledgers was not of itself causative of any loss by LSL or Holdings, the context in this case is one in which the ledgers have considerable significance, indeed it was put by Carter in relation to the Property transaction that the money being paid out of the LSL bank account should be treated as money of Holdings or Vimow, for example, because of the ledgers. This is not a case in which entries in ledgers merely recorded the payment, receipt, or transfer of monies, details of which could be established by other means.

The essence of what occurred is that Lewis, with Miller’s assistance, drew $1 million from LSL and used that money (through the circular route of the bank transfers) to repay his debt of $850,000 to Holdings’, and hence Holdings’ debt to LSL. Also, in relation to the balance, he used it to pay $145,000 to Vimow. The Bass transaction was a subterfuge (or a charade as Mr Bell described it) designed by Lewis to cover up his dishonest and fraudulent removal of a debt which he owed to Holdings (and Holdings owed to LSL). I find that Carter knew that the $995,000, paid by Lewis to wipe the loan of $850,000 and to pay the $145,000 into Vimow, came from the Lewis/Carter account. I find that Carter knew that it was coming from there on or around 2 July 2002. I find also that Carter was aware that $1 million of LSL’s funds were paid to Bass Holdings at around the same time.

The fact that Carter was aware that Lewis was using funds in their joint account to pay $850,000 to repay the loan and to pay $145,000 to Vimow does not of itself establish any involvement or knowledge of the fraudulent design. Nor, of itself, does Carter’s entry in the books and records of LSL and Holdings of the repayment by Lewis of the $850,000 loan (or the payment to Vimow). If Lewis had $1 million in the Lewis/Carter account from a legitimate source there would be no misfeasance or impropriety in recording the $850,000 loan as repaid, or in recording the payment of $145,000 to Vimow.

The real problem with what occurred is that Lewis had $995,000 in the Lewis/Carter account because he had obtained that money improperly from LSL. He was effectively purporting to repay his debt to Holdings/LSL with LSL’s own money, not his own.

I turn now to the question of whether Carter knew (in any of the senses described in the Barnes v Addy context) that the funds which were used to “pay off” Lewis’ loan, and of which $145,000 were paid to Vimow, had come from the Bass transaction, and hence from LSL itself.

There is no evidence that Miller and Carter spoke about the Bass transaction. There is no evidence that Lewis spoke to Carter about the transaction. Lewis said he could not recall having done so: see Exhibit A4 p 2987 line 21, and Carter said she did not do so, except that Lewis may have told her that cheques to a value of $1 million had been dishonoured.

On Carter’s evidence she knew:

In addition to the matters set out at [113], there are the following items of evidence:

Taking into account all of these matters, including my assessment of Carter’s credibility and my inability to accept her as a truthful witness, I conclude, on the balance of probabilities, but having regard to the seriousness of the finding, that Carter either had actual knowledge of the Bass transaction in June/July 2002 and its purpose, or deliberately refrained from obtaining details of the source of the funds which went into an account she owned jointly and which funds went back to LSL and were recorded as paying off Lewis’ debt of $850,000 and to put $145,000 into Vimow’s ledger.

I summarise my findings in relation to the Bass transaction proceedings as follows:

Mr Finnane, in his written submissions (Miller’s closing submissions “MCS”), seemed to contend that, as the round robin, as effected, involved no profit to Lewis and no detriment or expense to Holdings, that meant that there was no breach of fiduciary duty, and no knowing assistance by Miller. I shall deal with the question of loss below. There was, however, a clear detriment to LSL having its funds used to pay off a debt by Lewis to Holdings, and Holdings to LSL, and Holdings’ debt from Lewis replaced by an investment in non-existent preference shares.

Mr Finnane also seemed to contend that because, on the view he was propounding as to how the Court should deal with the transaction, almost all of the $1 million came back to LSL, the transaction was not one affecting Holdings’ assets, and that there was no dishonest and fraudulent design by Miller. He speaks in MCS paragraph 108 of the “reclassification of a loan” owing to LSL, not to Holdings, and that the only change to the balance sheet would be in the change of the identity of the creditor, namely LSL to GB Investments. This view seems to embrace the evidence of Miller that there was a loan from GB Investments to Holdings, which, as I have pointed out, is not supported by any evidence other than Miller’s assertion that this was the idea, and which is entirely inconsistent with the round robin and the pretence of preference shares. The purpose of the round robin could not have been to make GB Investments a creditor of Holdings, but rather, it was, as I have found, to create the impression that Holdings was a creditor of Bass Holdings through the holding of preference shares.

I note that Mr Finnane contended that the Court would need to be satisfied to the Briginshaw standard that:

I have earlier set out my conclusions in respect of [119(a)] and [119(b)]. I am satisfied, and comfortably so, whilst having regard to the serious nature of the allegation, that Miller assisted Lewis in Lewis’ dishonest and fraudulent design. If Miller thought that it was LSL to whom the debt was owed, as he asserts, and that the debt was owed by Holdings, then the scheme in which he thought he was participating was one which replaced a debt by Holdings to LSL with a bogus investment. I do not think it assists Miller that the scheme in which Lewis had him participate was (if Miller’s evidence were accepted) beneficial to Lewis personally, rather than to Lewis’ company, Holdings. In either case what was being used to remove the debt was the money taken from the account of LSL, of which both Lewis and Miller were directors. The concept embraced by the words of Mellish CJ in Panama and South Pacific Telegraph Co. v India Rubber, Gutta Percha, and Telegraph Works Co (1875) 10 Ch App 515 at p 530, cited by Dixon J in Briginshaw at p 362 have some relevance here:

It follows that, in my view, Miller has knowingly assisted Lewis in Lewis’ fraudulent breach of the duty he owed to LSL and Holdings, and Miller has, himself, thereby breached a fiduciary duty owed to LSL. I also find that Carter assisted Lewis with knowledge, within the meaning of Barnes v Addy, because it was only the ledgers which recorded what was owing by Lewis to Holdings, and Vimow and Holdings, and Vimow to LSL. Carter may not have known of the details of the scheme, but I find that she knew that the Bass transaction had taken $1 million out of LSL’s bank account and put $995,000 in the account of which she was a joint holder, and for which she had, on her evidence, been provided with no justification, and that she deliberately closed her eyes to the reality of the situation and or deliberately abstained from making the inquiries as to the use of LSL’s funds that an honest and reasonable person in her position would have made.

Given my conclusion that the Bass transaction was a complete fiction with only the pretence that preference shares would be issued and a profit made, the next question is what was the effect of what occurred? The $1 million certainly left LSL’s account and made its way to Bass Holdings’ account, then to GB Investment’s account, then to the Lewis/Carter account, and back to LSL’s account (less $5,000 which may have been some sort of fee, or may have been a reduction to reduce the dividends of the connection between the payment out and the payment in, but that was not explored and none of the parties asserted that the $5,000 discrepancy was of significance.)

Mr Bell contended that the Court should:

Mr Finnane submits that the plaintiffs are propounding a case based on a fiction. The true round robin as transacted, he says, put the money back into the LSL bank account with the consequence, he submits, that there is not really a question of sham at all, but if the ledgers and journals should be treated as having some force in themselves, he submits they should be found to be a sham.

Mr Finnane also submitted that, in accordance with the equitable principle, I should treat Lewis as having repaid the money that had wrongfully been taken: see Re Hallett’s Estate [1879] 13 Ch D 696 at 727, because equity assumes that people act honestly. This ‘rule’ in Re Hallett is wherever an act “can be done rightfully, [the fiduciary] is not allowed to say, against the person entitled to the property or the right, that he has done it wrongfully”: see Maguire v Makaronis (1997) 188 CLR 449 at 469.

Mr Stoljar contended that the Court should not treat the transactions as a sham, because the transactions, however dishonest, were intended to have the effect recorded in the ledgers.

The principles relating to shams were reiterated in Lewis v Condon [2013] NSWCA 204 per Leeming JA (McColl JA and Sackville JA agreeing) at [58]-[63]:

It can be seen that there is, in this case, a close interconnection between the issue of sham and loss. The defendants, focusing on the fact that the $1 million found its way back into LSL’s bank account, assert that neither LSL nor Holdings has lost anything by what occurred. Mr Stoljar contends that what LSL/Holdings lost was a chose in action i.e. Lewis’ debt to LSL/Holdings because his debt was expunged by the entry of credit of $850,000. Neither Carter nor Miller contended at the hearing, or sought to establish, that the loan to Lewis was not worth $850,000.

Given that the whole purpose of the round robin was, on my findings, dishonest, I do not think there is any scope for an assumption that Lewis was acting honestly, but it is possible to describe the Bass letter, and any reference to redeemable preference shares in the ledgers and accounts of LSL/Holdings, as a “sham”, since there was no intention to create any such shares, or for there to be any genuine investment by LSL or Holdings in Bass Holdings (or by Bass Holdings in GB Investments), but the Lewis letter was intended to have effect and the entry in the LSL and Holdings ledgers showing Lewis as having repaid $850,000 (and having put $145,000 into Vimow) was also intended to have effect as well, albeit one based on a fraudulent scheme.

The real question, I think, is whether the crediting of Lewis’ account with $850,000 on the basis of the monies paid to LSL out of the Lewis/Carter account, with money that formed part of the $1 million removed from LSL, should be treated as having any force or not. In my view it should not because it was a completely fraudulent transaction – if Lewis was sued by the plaintiffs he could not deny that he owed one or other of Holdings or LSL the $850,000. He could not legitimately assert that he had in fact paid the loan monies back given that he had used LSL’s own funds to put $1 million into, and then pay $1 million out of his account. The use of LSL funds in this way would be no different to Lewis having taken $1 million from the LSL safe, given it to an employee and said “here is my repayment of my loan. Please credit my loan account.” The change made to the ledger, by which the loan was purportedly repaid, was part of, indeed, the central purpose of the fraud. I conclude that the fraudulent transaction perpetrated by Lewis cannot be treated as having any substantive effect, with the consequence that Lewis remains indebted to either LSL or Holdings for the $850,000 loan that he received in 2000 (and that Vimow remained indebted to LSL for $145,000). I recognise of course that that is of no comfort to the plaintiffs because Lewis was declared bankrupt in 2009 (and Vimow is in liquidation). It follows that the plaintiffs have not lost the chose in action by reason of what Lewis did, and it follows that neither Miller nor Carter are liable for the $850,000 for which they have been sued in the Bass proceedings.

Another argument relating to both the Property proceedings and the Bass transaction is what is described as the informed consent point. The defendants contend that, even if Lewis would otherwise have been in breach of his duties, any breach can be rectified by the retrospective ratification of his actions (and Miller’s actions). I do not think this can be maintained because ratification with fully informed consent can only be achieved by shareholders when the company is solvent: see Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 and Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 444 ; 122 ALR 531 at 550 ; 13 ACSR 766 at 785 approved in Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302 at [78] per Neave JA and [253] – [260] per Garde AJA. It is a requirement of effective ratification that it must occur within a reasonable time of the unauthorised act (see Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653 at 665) and there was, in any event, no evidence of ratification, or even that the third director of LSL had been informed of the Bass transaction and the use of LSL funds to wipe Lewis’ debt to Holdings and Holdings’ debt to LSL. Nor is ratification available where it would constitute a misappropriation of company resources: see Miller v Miller (1995) 16 ACSR 73 at p 89 per Santow J (as his Honour then was), approved in Forge v ASIC [2004] NSWCA 448 at [372].

In relation to the Bass transaction, Mr Bell contended that Carter did not ‘receive’ the $995,000 because she was the joint holder of that account. He relied on National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251. and SCEGS Redlands Ltd v Alison Barbour & Anor [2008] NSWSC 928 for the proposition that a person who is a joint account holder is not to be taken to receive money merely because the account is used to receive money and then paid out to third parties with no benefit to one of the joint account holders. The question of whether, on the facts of this case, Carter received the funds because they went into the account is linked to the issue of whether she assisted Lewis by making the entries she did make. If she had no knowledge of the Bass transaction I think there would be strong grounds to conclude that the passage of the money through the joint account would not amount to receipt, but this case is very different to Batty or SCEGS Redlands. The problem for the plaintiffs, however, once again, is that the $995,000, which went into the Lewis/Carter account, was paid out and back into LSL’s account within a few days, which, subject to the other issues with which I have already dealt, provided her with a defence.

Whilst strictly unnecessary given my conclusion on liability, I shall consider both the limitations defences in relation to both sets of proceedings. Carter and Miller both assert that the plaintiffs’ cases are the subject of a time bar. They accept that neither the Limitation Act 1969 (NSW) nor s 1317K of the Corporations Act specifically deals with equitable claims based on Barnes v Addy against third parties, but they contend that equity does apply time bars by analogy with statute law. Reference was made to s 23 of the Limitation Act and I will set out s 14 and 23 of that Act and ss 179 – 183 and s 1317K of the Corporations Act as well:

The question of the application of limitations by analogy is not without its difficulties, but as Justice Leeming in his article "How Long is Too Long for an Equitable Claim?" (2014) 88 ALJ 621 at 622 notes, much of the confusion in this area of law was resolved by the judgment of Meagher JA in Gerace v Auzhair Supplies Pty Ltd [2014] NSWCA 181, with whom Beazley P and Emmett JA concurred.

Gerace, like the present case, was concerned with an exclusively equitable claim. Three directors and members of Auzhair Supplies were found to have breached their fiduciary duty to Auzhair Supplies, by establishing another company and transferring all of Auzhair Supplies’ assets to a new company for little or no consideration. The directors contended that, as the claim was brought more than six years after the acts in question, it was statute barred by analogy with s 1317K of the Corporations Act. Brereton J held that the equitable claim for breach of statutory duties was an analogy “as close as one can conceive” to the compensation available for contraventions by the directors of their statutory duties found in ss 180-183. His Honour declined, however, to treat the claim as statute barred because he held it would be inequitable to apply the limitation bar because the directors had voluntarily deregistered the company and it had remained deregistered until a little more than a year before the six year period expired, and proceedings were not brought within time. “The company did not by its board of directors (either formally or formally) consider the circumstances of the breaches and whether it should take proceedings in respect of them” (at [4] of Gerace).

Meagher JA considered the many authorities in the area and concluded at [70] – [72]:

In Gerace it was noted that the Court may decline to permit a defendant to rely upon a statutory bar by analogy at [75]:

In Port Ballidu Pty Ltd v Frews Lawyers & Ors [2017] QSC 19, Applegarth J considered Gerace and applied its reasoning to a case where third parties were alleged to have been knowingly concerned in the misconduct of a director of the plaintiff company, which director had used an old power of attorney to borrow money on the security of the mortgage for his own benefit. The company argued that there was a residual discretion not to apply the limitation provision if otherwise engaged. His Honour decided that he should follow Gerace, and see at [34] – [40]:

Faced with these two decisions unhelpful to his position, Mr Stoljar asserted that Gerace was not dealing with a claim against a third party. Port Ballidu he accepted was such a case but it was a first instance decision. Mr Stoljar submitted that this Court ought to follow the Full Court of the Federal Court, which in Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1 had approved the decision of Owen J in The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 39 WAR 1 on the question of limitations in respect of equitable claims against third parties, rather than Port Ballidu. Bell is, Mr Stoljar points out, a decision of an intermediate Court of Appeal, and he submitted that I ought to follow it.

The problem with Mr Stoljar’s argument, it seems to me, is twofold. The first, and the more important, is that the Bell decision is based on a line of cases which Gerace considered and did not follow. The most obvious of these was KM v HM (1993) 96 DLR (4th) 289 (and which was approved by Kirby P in Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497, at [510] and which the Court in Gerace declined to follow. The second problem is that Bell was not considering whether a Barnes v Addy claim is analogous to claims in respect of s 179 - s 183 of the Corporations Act but rather whether it was analogous to a claim in tort.

I find Applegarth J’s reasoning set out above persuasive and it seems to me that a Barnes v Addy claim against a third party is very similar to a claim based against a person alleging knowing involvement in the breaches of duty of a director.

It seemed to be contended by Mr Stoljar that a claim of knowing involvement of a third party is different to a claim against a director. Whilst that is true, if Gerace is correctly decided, as I am bound to accept, I am not persuaded that there is any reason in logic why a claim against a director should be statute barred, but a claim against the third party with knowing receipt or knowing assistance should not be statute barred as well. The third party is not more culpable than the director.

As Gerace makes clear, there does remain the question of whether there has been fraudulent concealment.

I think that the consequence of Gerace and Port Ballidu is that a claim for breach of fiduciary duty (and consequential accessorial liability) that is not found to be a fraudulent and dishonest breach will be barred by analogy with statute, (viz s 1317K of the Corporations Act) but a claim based on a fraudulent breach (or actual concealment of a right of action) will not be barred.

I should also note that, as Meagher J pointed out in Gerace, the directors’ minds are not always to be attributed to a company: see [78] and the discussion in Grimaldi v Chameleon Mining NL (No 2) at [282]-[284].

Mr Bell made reference to s 47(1) of the Limitation Act as perhaps being applicable given the definition of ‘trust’ in s 11(1) of the Act. Given that Carter’s defence did not raise s 47(1) as a ground of limitation and the plaintiffs did not put their claim as a claim based on a breach of trust, I do not need to consider this point further.

To the extent that s 1317K applies by analogy, it is not necessary to consider the question of laches. In relation to the exceptions identified in Gerace it would be necessary to have regard to “all the circumstances of the case”: see Bell pp 9306 – 9308 and I can see no utility in my expressing any view on that given my conclusions on liability.

During the cross-examination of Miller, Mr Stoljar raised the question of whether Miller should be given a warning as to the potential effect of his evidence: see T.265.11 Mr Finnane then sought an opportunity to confer with his client (which I granted), following which Mr Finnane asked that a certificate be issued under s 128(c) of the Evidence Act so that Miller could answer questions without risk that his answers could be used against him in criminal proceedings or proceedings for a civil penalty: see T267.6. The transcript records the point at which the certificate was said to be granted. I directed Mr Finnane to prepare the appendix for the certificate once he had the transcript. There were questions on the following day which were similarly to be the subject of a certificate.

Mr Finnane subsequently provided me with the two sets of transcript. In relation to the first set of transcript, he seeks to have included in the certificate the portion of the transcript before the application for a certificate was made commencing at T258.5. The second set commences at T267.6. Mr Finnane has drawn my attention to the case of LGM v CAM [2011] FAMCAFC 195 (and Schwaller-Schroeder v Schwaller-Schroeder [2012] FAMCA 1121, which applied LGM), in which the Full Court of the Family Court took the view that s 128 was protective in its operation and that it was open to the trial judge to extend the operation of the certificate retrospectively. Mr Stoljar pointed out that LGM was concerned with a situation where an objection had been taken but overruled and later the Court found there were reasonable grounds for the objection and he also expressed doubts as to the reasoning of the Full Court as regards s 128(6), although he did point out, fairly, that LGM is an authority of an intermediate appellate Court.

I have decided to issue the certificate to include the questions and answer commencing at T258.5, and not simply from T265, for these reasons:

Miller is a chartered accountant. I regard his involvement in the Bass transaction as conduct of a seriously inappropriate kind. I intend to refer this judgment to CPA Australia and to ASIC for further consideration by them of his conduct. I was informed that the liquidator has already provided a report to ASIC in connection with Lewis and it may be that Lewis’ role as director of LSL and Holdings, and Carter’s role as secretary of both companies and corporate accountant, warrants further consideration at the same time.

It follows that the plaintiffs have failed in their case against Carter in both proceedings, and against Miller in the Bass proceedings, and that there should be judgment in favour of the defendants. I will hear the parties on the issue of the costs orders that should be made.