New South Wales Supreme Court CITATION : Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 1143 revised - 09/12/2005 HEARING DATE(S) : 10 - 19 April, 7 - 14 November, 2 - 20 December 2002, 14 - 16, 22 April - 2 May, 16, 17, 19 - 27 June, 10 - 14 & 20 November 2003, 9 - 20 February, 1 - 9 March, 21 April, 11 May and 8 November 2004 JUDGMENT DATE : 29 November 2004 JURISDICTION: Equity JUDGMENT OF : Hamilton J DECISION : See paragraph [202] CATCHWORDS : CONTRACTS [218] - Particular parties - Principal and agent - Relations between principal and third persons - Other cases - Agent participating with principal in transactions involving breach of trust - Knowing receipt of proceeds of breach of trust - CORPORATIONS [19] - Constitution and legal capacity - Contracts - Other matters - Engagement of solicitors and accountants by one of two directors in proceedings brought at the instance of the other - Ratification by general meeting - Whether effective - CORPORATIONS [291] - Winding up - Liquidator - Appeal from liquidator's decision - Rejection of proof of debt - Nature of proceedings - EQUITY [1] - General principles - Rules and maxims of equity - "Unclean hands" - Corresponding common law maxims relating to illegal conduct - Respective operation of defences of illegality and of unclean hands - Principles relating to application of clean hands doctrine - EQUITY [185] - Trusts and trustees - Powers, duties, rights and liabilities of trustees - Liability for breach of trust - What constitutes a breach of trust and who may be liable - Breach of fiduciary duties - Conflict between duty and interest - Duty not to profit from position - Remedies - EVIDENCE [144] - Burden of proof, presumptions, and weight and sufficiency of evidence - Generally - Sufficiency - Standard in civil proceedings - When fraud alleged - Whether "clear and cogent" proof required - Whether "actual persuasion of its occurrence or existence" necessary before Court can find fact proved - EVIDENCE [216] - Witnesses - Cross examination - When permitted and in general - By whom - Evidence of witness proposed to be contradicted by adversary. The Corporations Law ss 232(2), (4) & (6) LEGISLATION CITED : Corporations Act 2001 (Cth) s 251A(6) Evidence Act 1995 ss 128, 140 Abdurahman v Field (1987) 8 NSWLR 158 Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 Barnes v Addy (1874) LR 9 Ch App 244 Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060 Blundell v Curvers [1999] NSWCA 421 Bray v Ford [1896] AC 44 Briginshaw v Briginshaw (1938) 60 CLR 336 Browne v Dunn (1893) 6 R 67 Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 Catt v Marac Australia Ltd (1986) 9 NSWLR 639 Chalker v Barwon Coast Committee of Management Inc [2003] VSC 286 Chan v Zacharia (1984) 154 CLR 178 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Danish Mercantile Co Ltd v Beaumont [1951] Ch 680 Day v Mead [1987] 2 NZLR 443 Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 Gascoigne v Gascoigne [1918] 1 KB 223 George v Greater Adelaide Land Development Co Ltd (1929) 43 CLR 91 Government Employees Superannuation Board v Martin (1997) 19 WAR 224 Griffiths v Griffiths [1973] 1 WLR 1454 Helton v Allen (1940) 63 CLR 691 Hill v Rose [1990] VR 129 Idameneo (No 123) P/L v Ticco P/L [2003] NSWSC 538 Idameneo P/L v Ticco P/L [2004] NSWCA 329 In Re Emery's Investment Trusts. Emery v Emery [1959] Ch 410 In re Hulkes. Powell v Hulkes (1886) 33 ChD 552 Jones v Dunkel (1959) 101 CLR 298 Jones v Lenthal (1669) 1 Chan Cas 154; 22 ER 739 Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612 Lewis v Nortex Pty Ltd [2001] NSWSC 511; (2001) 10 BPR 19,035 Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 124 Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 143 CASES CITED : Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 189 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 337 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 1192 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2003] NSWSC 354 Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 121 Loughran v Loughran 292 US 216 (1934) McKenzie v McDonald [1927] VLR 134 Meyers v Casey (1913) 17 CLR 90 Miller v Miller (1995) 16 ACSR 73 Mills v Mills (1938) 60 CLR 150 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 Nelson v Nelson (1995) 184 CLR 538 Nocton v Lord Ashburton [1914] AC 932 Nortex Pty Ltd v Lamru Pty Ltd NSWSC 12 August 1997 Master McLaughlin unreported Pascoe Ltd (in liq) v Lucas (1999) 75 SASR 246 R v Birks (1990) 19 NSWLR 677 Re Jay-O-Bees; Rosseau v Jay-O-Bees [2004] NSWSC 818 Re Nortex Pty Ltd (In Liq) [2003] NSWSC 1036 Rejfek v McElroy (1965) 112 CLR 517 Rochefoucauld v Boustead [1897] 1 Ch 196 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262 Southern Area Health Service v Brown [2003] NSWCA 369 Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 Tinker v Tinker [1970] P 136 Weston v Beaufils (No 2) (1994) 50 FCR 476 I E Davidson "The Equitable Remedy of Compensation" (1982) 13 MULR 349 W M C Gummow "Compensation for Breach of Fiduciary Duty" in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989) 57 Sir Frederick Jordan "Chapters on Equity in New South Wales" (6th ed, 1947) (reprinted in "Select Legal Papers" (1983)) at 115 Meagher & Gummow, Jacobs' Law of Trusts in Australia (6th ed, 1997) at [1334], [1711], [1735] Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [3-110], [5-260] Stephen Odgers, Uniform Evidence Law (6th ed, 2004) at [1.4.100] F M B Reynolds, Bowstead and Reynolds on Agency (17th ed, 2001) Article 13 [2-047] 4 Scott on Trusts (4th ed, 1989) par 326.3 Lord Walker "Dishonesty and Unconscionable Conduct in Commercial Life - Some Reflections on Accessory Liability and Knowing Receipt" John Lehane Memorial Lecture 2004 3081/97 Peter Lawrence Lewis (P) Lamru Pty Ltd (Applicant) Kation Pty Ltd (Respondent) Brian Raymond Silvia (Liquidator) PARTIES : 1750/02 Lamru Pty Limited (P) Kation Pty Limited (D1) Peter Lawrence Lewis (D2) Mark Lewis (D3) Nortex Pty Ltd (In Liq) (D4) FILE NUMBER(S) : SC 3081/97; 1750/02 S D Rares SC then N A Cotman SC and J T Johnson (P L Lewis & Kation P/L) COUNSEL : S J Motbey (Lamru P/L) V R W Gray (Liquidator & Nortex P/L) P R Whitford & M P Cleary (M Lewis) Kemp Strang (P L Lewis & Kation P/L) SOLICITORS : Lyons & Lyons (Lamru P/L) Abbott Tout (Liquidator & Nortex P/L) Corrs Chambers Westgarth (M Lewis) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J MONDAY, 29 NOVEMBER 2004 3081/97 PETER LAWRENCE LEWIS v NORTEX PTY LIMITED (In Liq) 1750/02 LAMRU PTY LIMITED v KATION PTY LIMITED & ORS JUDGMENT 1 HIS HONOUR: TABLE OF CONTENTS Item Paragraphs Introductory 1 – 3 The Issues 4 – 7 Background Facts 8 – 16 The Course of the Litigation 17 – 25 The Credit of Witnesses 26 – 33 Issues 1 & 4 1 Whether the $150,000 paid to Hirmanu in 1991 was paid as a distribution of profit to Hirmanu or was borrowed by Lamru and paid by it to Hirmanu? 34 – 56 4 Was Lamru short paid $161, 398 or any sum in 1991? Issues 2 & 3 2 Whether the differential interest convention is effective? 57 – 77 3 Whether the add backs convention is effective? Issue 5 78 – 82 Was Lamru short paid $164,121 or any sum in 1992? Issues 6 & 7 6 Was Lamru short paid $27,026 or any sum in 1993? 83 7 Was Lamru short paid $3,758.13 or any sum in 1994? Issue 8 84 8 Was Lamru short paid $38,248.01 or any sum in 1995? Issue 9 85 What was the free net income in 1996? Issue 10 86 – 87 What was the free net income at 30 June 1997? Payments to Mark Lewis 88 – 107 Fraudulent taking of stock 108 – 132 Unclean hands defences 133 – 155 Legal and accounting expenses 156 – 169 China creditors 170 – 173 Issue 11 174 Issue 12: Accessorial liability Whether Kation or Lewis is personally liable to Lamru in respect of any of the breaches of trust 175 – 183 proved Issue 13 Whether the cross claims against Lamru and Lamb 184 for contribution or indemnity succeed Issue 14 Whether the cross claims against Lamru and Lamb based on breach of contract or for breach of his duties 185 – 201 as a director succeed Appeals from liquidator's decisions on proofs of debt 202 – 203 Conclusions 204 – 205 2 This is a commercial "divorce" case. By that I mean that it arises from the entry of two men into conducting a business together. The business flourished but the relationship turned sour. Upon the separation of the parties they fell into disputation of the utmost acrimony. 3 The men in conflict are Peter Lawrence Lewis ("Lewis") and Russell William Lamb ("Lamb"). The business was a business of wholesaling manchester. It was conducted through a trading trust, which was a unit trust, known as the Nortex Unit Trust ("the trust"). This was governed by a deed ("the trust deed"). The trustee of the trust was Nortex Pty Ltd ("Nortex"). Prior to 1991 the "partners" in the business were Lewis and one Graeme Dufty ("Dufty"). Their respectively controlled companies, Kation Pty Ltd ("Kation") and Hirmanu Pty Ltd ("Hirmanu") owned 53 per cent and 47 per cent respectively of the issued units in the trust. Lewis and Dufty were also the only directors and shareholders of Nortex. Kation and Lewis appeared by the same representatives at the trial and are together referred to as "the Lewis interests". During 1991, there were negotiations between Lewis, Dufty and Lamb with a view to Lamb acquiring a share in the business. In the end, Lamru Pty Ltd ("Lamru"), a company controlled by Lamb, acquired 40 per cent of the units in the trust from Hirmanu and Lamb became a director and shareholder of Nortex in Dufty's stead. Lewis, however, retained the majority of voting shares in that company. Lamb physically departed from the business on 28 June 1996, but remained a director of Nortex and holder of units in the trust. Lewis' son, Mark ("Mark Lewis"), also worked in the business. His position was a subject of conflict between Lewis and Lamb. In September 1996, Lamru gave to Nortex a statutory notice of demand under the Corporations Law, but this did not lead to the winding up of the company. In June 1997 Lamb withdrew a guarantee of obligations of Nortex that he had given to the Bank jointly and severally with Lewis. Not long afterwards, Nortex was wound up and Brian Raymond Silvia was appointed its liquidator. THE ISSUES 4 At the end of the evidence, the issues arising at the suit of Lamru were formulated by agreement between the parties as follows. These have formed the principal basis of the debate before me in final submissions. I set them out verbatim with only minor corrections. 1 Whether $150,000 was paid to Hirmanu in 1991 as distribution of profit or was borrowed by Lamru and paid by it to Hirmanu as part of the purchase price of units? 2 Whether the differential interest convention applies? 3 Whether the add backs convention applies? 4 Was Lamru short paid $161,398 or any sum in 1991? 5 Was Lamru short paid $164,121 or any sum in 1992? 6 Was Lamru short paid $27,026 or any sum in 1993? 7 Was Lamru short paid $3,758.13 or any sum in 1994? 8 Was Lamru short paid $38,248.01 or any sum in 1995? 9 What was the free net income in 1996? The Sub Issues: (a) Was it correct for the interest payable to the unit holders to be expensed or should it have been subject to the differential interest agreement? (b) Ought the add backs of $307,060 be added back? (c) Was a management fee of $101,626 payable to Mark Lewis an expense of the business in 1996? (d) What was the correct value of the closing stock? 10 What was the free net income in 1997? The Sub Issues: (a) Add backs: Ought $380,000 in add backs not have been added back (salaries, superannuation payments paid to Lewis and Mrs Lewis etc – they are treated as expenses – thus reducing Lamru's share)? (b) Were legal and accounting expenses of $168,550.87 authorised by the company or ratified by it? (c) Was a profit share of $138,733 payable to Mark Lewis an expense of the business in 1997? (d) Was it correct for interest payable to unit holders to be expensed or should it have been subject to the differential interest agreement ($150,166)? (e) Flow on effect of the stock $164,038 – profit element. (The profit from 120,000 odd units was $164,038.) (f) Should China creditors $284,837 be taken into account when determining the free net income? 5 There was an 11th issue over the terms of which the parties failed to agree. They submitted conflicting versions. The purport of it I found difficult to understand. I shall deal with it below: see [174]. 6 There is an additional issue which clearly arises. In view of the fact that Nortex's funds are now exhausted, it may be of considerable practical importance. It is whether, in respect of any breaches of trust found to be established, Lamru is entitled to relief against Lewis or Kation. I shall deal with this as the 12th issue. 7 In relation to the cross claim, on 7 December 2002 I made the following orders: "2 Peter Lawrence Lewis be granted leave nunc pro tunc, pursuant to Section 237 of the Corporations Act 2001, to bring in the name and on behalf of Nortex Pty Limited (In Liquidation), the claims made in the following paragraphs of the Cross-Claim: (a) The claim (in paragraphs 40, 41, 41A - 41D, 41H - 41K, 42A and 60 to 70) for damages for breach of the contract pleaded in paragraph 60; (b) The claims (in the paragraphs referred to in (a) above) for damages for breach of the duties pleaded in paragraphs 40 and 41 (director's statutory and general law duties) by: (i) demanding payment of Lamru's loan account; and (ii) discontinuing liability under personal guarantees to CBA; (c) The claim (in paragraphs 67(c), 68 and 70) for damages for breach of the duties pleaded in paragraphs 40 and 41 by causing Lamru to make a vexatious application to the Court challenging the retainer of Mallesons Stephen Jaques. …… 6 In respect of the Cross-Claim, the following claims be heard in the present hearing: (a) the claims (in paragraphs 38 and 39) for contribution and/or indemnity; (b) the claims made by the Cross-Claimants specified in sub-paragraphs (a), (b) and (c) of Order 2 above. 7 All other claims in the Cross-Claim be decided separately from and after the decision of all other questions in these proceedings." Whether the claims for contribution and indemnity should succeed I shall deal with as the 13th issue. The claim referred to in order 2(a) (as the case was conducted) is for breach of an alleged contractual promise by Lamru and Lamb, that Lamb would provide a continuing guarantee of Nortex's liabilities to the Commonwealth Bank and would not withdraw that guarantee without the prior consent of Lewis. The subject matters of the cross claims referred to in orders 2(b) and (c) are of alleged breaches of duty by Lamb as a director of Nortex. I shall deal with the claims in those three sub paragraphs as the 14th issue. BACKGROUND FACTS 8 The following background facts are uncontroversial or easily found. 9 As I have said, the negotiations for Lamb's entry into the business were conducted in the first half of the calendar year 1991. The transaction was certainly consummated before 30 June 1991 and Lamru had become a unit holder in the trust by that date. The oldest disputes in play in these proceedings relate to the terms of the negotiations among Lewis, Dufty and Lamb and the division of the profits of the trust for the 1991 financial year, that is, the year ended 30 June 1991. References to years in this judgment (as in most of the material before the Court) are, in general terms, references to financial years. 10 As to the basis of the division of income in 1991 and the following years, it should be said that the trust deed contained the following provisions. The definitions in clause 1(32) and (35) are as follows: "(32) 'Free Net Income' in relation to a particular Accounting Period means so much of the net income of the Trust Fund for such Accounting Period as shall not at the expiry of such Accounting Period be the subject of a valid and effective determination by the Trustees during that Accounting Period under sub-clause (1) of Clause 4 of this Deed. (35) 'the Appointor' shall mean subject to the provisions of Clauses 31 and 32 hereof successively the person or persons successively named described or defined as such in the First Schedule (if any) or determined according to the provisions hereof and where two or more persons are specified in the First Schedule as acting jointly shall mean those persons acting jointly." The first two sub clauses of clause 4 are as follows: "4(1) The Trustees may prior to the Vesting day without creating a perpetuity at any time and from time to time during any Accounting Period and with prior written consent of the Appointor with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period determine to pay apply or set aside the same to or for any one or more of the Unit Holders and/or the Trustees of any eligible trust (acting in such capacity) and/or any eligible corporation and/or any other person or persons who from time to time shall be living prior to the Vesting day and come within the definition of Beneficiary in sub-clause (42) of clause 1 of this Deed in such amounts and/or proportions as the Trustees in their absolute discretion determine. (2) The Trustees shall hold as a separate Trust Fund the Free Net Income of each Accounting Period at the expiry of that Accounting Period in trust absolutely for the Unit Holders of the Ordinary Units as at the expiry of that Accounting Period in the Specified Proportion." Clause 32(1) provides for the appointor by instrument in writing to appoint a new appointor or appointors. 11 In each of the 1991 to 1995 years, there was a minute of a meeting of the directors of Nortex before 30 June dividing the profits and apparently operating as a direction under clause 4(1) of the trust deed. In 1991 there were two such minutes. 12 After the end of each of the 1991 to 1997 years, accounts were prepared of Nortex or, more accurately, the trust. Loan accounts were kept between, on the one hand, the trust, and, on the other hand, Lamru and Kation respectively. They were recorded in the accounts. Advances during the year to Lamru and Kation were debited to their loan accounts and, each year, after their shares of profits were determined, those shares were credited to their loan accounts. Under the differential interest convention, as to which see [61] below, the amount owing as between Lamru and Kation was taken into account in determining the amount of profit to be credited to their respective loan accounts. The points of claim (as to the meaning of which see [20] and [22] below), the primary written submissions and the argument at the end of the case have progressed through the end of year accounts in chronological order. 13 After Lamru entered into it, the business proceeded successfully. Operations were commenced in New Zealand in association with the Ower family. Those operations were carried on through the companies Nortex Limited ("Nortex New Zealand") and Nortex International Limited ("Nortex International"). Lamb gave evidence that he had a personal trust in Lewis, which declined gradually over the years. Problems came to a head in about May 1996 as a result of continuing insistence by Lewis on giving to Mark Lewis a 15 per cent interest in the business, taken proportionately out of Kation's interest and Lamru's interest, to which Lamb says he persistently objected. Lewis places the quarrel at about the same time, but insists that it came out of the blue as a result of his discovering dealings of Lamb in New Zealand which Lewis claimed were dishonest. There was controversy about the circumstances in which Lamb left the premises of Nortex, but it is clear that his last day there was 28 June 1996. 14 There were, shortly after his departure, negotiations between Lewis and Lamb as to the terms on which they might part, but they failed. On 30 September 1996, Lamru gave to Nortex a statutory notice of demand under the Corporations Law in respect of some $600,000 said to be owing on its loan account. On 21 October 1996, on Lewis' instructions, Nortex took out summons 3731/96 in this Division to set aside the notice of demand. In the proceedings there was conflict as to whether Lewis was authorised to instruct solicitors on behalf of Nortex. By motion taken out on 30 December 1996, Lamru sought that the solicitors, Mallesons, pay its costs of the proceedings, because they were not authorised by Nortex to commence them. On 13 February 1997, a general meeting of Nortex purported to ratify the solicitors' retainer. When the motion for costs came before Master McLaughlin on 12 August 1997, the learned Master held that the instructions had been effectively ratified. 15 After Lamb's departure, Lewis assumed full control of Nortex and continued to operate the business. The accounts for the 1997 year appear to show it operating successfully up to 30 June 1997. On 19 June 1997, Lamb withdrew a guarantee which he had given jointly and severally with Lewis of Nortex's obligations to the Commonwealth Bank. On 20 June 1997, the Bank withdrew Nortex's finance facility, stating as its reason the withdrawal of the guarantee. On 8 July 1997, Brian Raymond Silvia ("the liquidator") was appointed provisional liquidator of Nortex. Nortex was, on 2 September 1997, on the application of Lewis wound up by order of this Court and the liquidator was appointed permanently. The winding up order was made in proceedings 3081/97. Proofs of debt were lodged with the liquidator by Lamru, Nortex and Mark Lewis (among others). Those proofs of debt were originally determined by the liquidator on 11 January 2000. From that determination Lamru, by notice of motion dated 23 February 2002, appealed to this Court in relation to various items. That appeal is the first of the two proceedings which I have heard together and am at present determining. Mark Lewis also appealed against various of the liquidator's determinations relating to his proof of debt. 16 Nortex New Zealand and Nortex International continued to operate for some time after Lamb left the Australian company. Their operations are said to have come to an end when Lamb entered and "trashed" their premises. Subsequently, Lewis brought proceedings in the High Court of New Zealand at Auckland against Lamb relating to transactions of the New Zealand companies ("the New Zealand proceedings"). In 1998 there was a mediation involving the Lewis interests and the Lamb interests before Sir Laurence Street in respect of the disputes between them. But nothing was settled, until in 2003 there was a settlement of the New Zealand proceedings, then about to come on for trial in Auckland. The proceedings which I have been trying have continued relentlessly. THE COURSE OF THE LITIGATION 17 As I have said, the first of the two sets of proceedings before me is the statutory appeal from the liquidator's determination of Lamru's proof of debt. 18 On 4 September and 4 October 2000, Young CJ in Eq, in his words, "reluctantly ordered" the separate determination of five questions in the proceedings. Those questions were: "In these questions the words impugned document means any version of annexure F to the affidavit of P L Lewis sworn 23 August 2000. The questions are: 1 Was the impugned document signed on (a) 16 April 1991 or; (b) some other, and if so, which date? 2 Does the impugned document have the effect of making Peter Lawrence Lewis the sole appointor of the Nortex Unit Trust? 3 (a) If yes to 2, did the appointor notify the trustee of such appointment or of any consent to distribution by the trustee; (b) If the answer to (a) is yes, was any such notification given, and if so, when? 4 What, if anything, is the effect of the notice bearing date 31 March 1997? 5 On the true construction of the relevant trust deed and in the events which have happened, were the income splits from 1991 to 1995 validated by valid and effective determinations in accordance with clause 4(1) of that deed? (This question does not comprehend any issue of fraud on a power)." 19 His Honour conducted a trial after which, by a judgment delivered on 19 July 2001, he answered those questions: Lewis v Nortex Pty Ltd [2001] NSWSC 511, partly reported in (2001) 10 BPR 19,035 ("the 2001 judgment"). The effect in substance of his Honour's answers to the first four questions was that a document appointing Lewis as the sole appointor under the trust deed was in fact signed by Lewis and Dufty on or shortly after 16 April 1991. Because it was then put in a drawer by Lewis and left there until 1997, it had no effect until that time and only limited effect thereafter. The answer to question 5 was, No. So far as concerns the years 1992 to 1995, the effect of this answer is clear: there was no determination relating to any part of the net income validly made under clause 4(1) of the trust deed in respect of any of those years. As to the 1991 year, the situation is somewhat more complex. There is no doubt that it flows from the answer that the determination pertinently made by a minute dated 28 June 1991 ("the 28 June 1991 minute") is not to be regarded as a valid determination within clause 4(1). However, there has been conflict as to whether the answer also encompasses an earlier determination ("the 12 April 1991 resolution") contained in a minute of 12 April 1991 ("the 12 April 1991 minute") of a meeting at which Lewis and Dufty are shown as being present. I shall have more to say about this. There is also a controversy as to whether the effect of these answers was to preclude the continuing use of "accounting conventions", which had been treated as being in effect between Lamru and Kation up to the time of his Honour's decision. In the belief that the accounting conventions could not be used, the liquidator subsequently revised his determination of the proofs of debt. The liquidator's determinations as they stand are, therefore, not in all instances as they were at the time the appeal was taken from them. The parties are agreed that this should not disrupt the course of these proceedings and that the Court should proceed to determine the questions in issue between the parties as they are defined in the "pleadings". 20 After the 2001 judgment of Young CJ in Eq, the proceedings came before me for case management and, ultimately, a further trial. The proceedings first came before me on 1 November 2001. At that time, the only proceedings were the statutory appeal and the only documents defining the issues were the notice of motion instituting the appeal and a Scott Schedule relating to the various items in the proof of debt which were the subject of the appeal. An amended notice of motion was filed on 1 March 2002. It was plain that some of the allegations being made in the Scott Schedule amounted to allegations of fraud against Lewis and Mark Lewis, who, although they were party in some way to the proceedings, were not effectively being treated as defendants to those allegations of fraud. I directed that those parties against whom allegations of fraud were made should be squarely joined and made party in the appropriate way to those allegations: Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 124. Subsequently, on 4 March 2002, separate proceedings (1750/02) were commenced in which the frauds were alleged. I ordered both sets of proceedings to be heard together. I then directed the filing of consolidated points of claim encompassing all matters in both sets of proceedings, the existing Scott Schedule to stand as particulars in the proceedings: Lewis v Nortex Pty Ltd (In Liq) [2002] NSWSC 143; Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 189. The trial has proceeded on the "pleadings" consequent upon these consolidated points of claim. They followed the plan of alleging the matters complained of chronologically, which has proved reasonably successful in giving some order to the various matters sought to be agitated in both sets of proceedings. 21 Before and at the trial, there were various applications to amend these "pleadings", some of which I granted and some of which I refused. It was not possible to encompass in these proceedings all of the matters in conflict between the parties, if for no other reason, because of the existence of the New Zealand proceedings. Furthermore, I allowed certain cross claims to be made in these proceedings (so that no question could be raised afterwards of any res judicata or Anshun estoppel), but ordered their separate and later determination. Separate proceedings have been commenced relating to issues in play directly between Lewis and Lamb. These also I have declined to include in the present trial. Furthermore, on the application of Mark Lewis, I have somewhat reluctantly ordered that all claims against him be tried separately and subsequently. The arguments against this are obvious, but were outweighed by the unfairness of compelling his participation in a monster trial, which mostly did not concern him. That aside, I have attempted to keep grouped together issues directly related to each other. The outcome reached is not neat, but in my view there is no neat solution. 22 The current form of the points of claim is a document entitled "amended consolidated points of claim" ("the points of claim"). The current form of the defence of the Lewis interests is entitled "further amended points of amended defence to amended consolidated points of claim and points of amended cross-claim" (referred to respectively as the "defence" and "the cross claim"; the liquidator's points of defence will be referred to as "the liquidator's defence"). The current form of the Scott Schedule is a document entitled amended Scott Schedule ("the Scott Schedule"). 23 The points of claim plead the basis on which it is said that various decisions of the liquidator which are appealed from should have been decided otherwise. They also allege those matters as breaches of trust, for which it is said that Kation and Lewis should bear accessorial liability and should at the suit of Lamru be ordered to compensate it. Those allegations are generally made in the following terms: "Lewis Senior and Kation were knowingly concerned in the breach of trust pleaded in [paragraph number]. As such accessories to Nortex's breach of trust Lewis Senior and Kation are liable to Nortex to indemnify it in respect of the breach and liable to compensate Lamru." These are referred to as "the accessorial allegations". Where their specific terms are material, they will be recorded in the appropriate place. 24 I should also note here that the Lewis interests pleaded generally to Lamru's claims the defence of laches, acquiescence and delay (defence paragraph 37B; see also paragraph 32). In relation to claims for breach of trust they pleaded consent (paragraph 32) and also waiver and estoppel (paragraph 31). 25 The estimates of the time necessary for the trial given by the parties have constantly changed, always lengthening. Much time has been taken up by constant and combative disputation between the parties over the applications for amendments and every other conceivable point. These matters have added length and contributed disorder to the trial, which has taken some 77 days. THE CREDIT OF WITNESSES 26 Lamb, Dufty and Michael Potter were called on behalf of Lamru. Craig Edwards was called on behalf of Kation. The liquidator gave evidence in his own case. The Lewis interests had filed a number of affidavits by Lewis and it was originally indicated that they would be read in their case. But, in the event, they were not read and Lewis did not give evidence at the trial. Lamb 27 Lamb spent more time in the witness box than any other witness. He was cross examined extensively. There was a development in his evidence in chief which was significant, both in the assessment of his credit and also in the course which the trial followed thereafter. Lamb was not himself a party to the proceedings (except as a defendant to the cross claim). The party on his side was Lamru, a company of which he was, and is, the controller. As counsel for Lamru, Mr Motbey asked Lamb in chief questions to elicit answers to the effect that, during the years 1991 to 1996, while he and Lewis had in general been working together amicably, they had together engaged in a fraud on the revenue. Lamb refused to answer the questions on the ground that the answers might tend to incriminate him. The procedure under s 128 of the Evidence Act 1995 ("the EA") was invoked. It was protested on behalf of the Lewis interests that the process could not be used where the witness who was asked the question was asked it by counsel instructed by a company, which he, the witness, controlled, in support of a claim by the company. I rejected that submission and granted to Lamb a certificate under s 128 in respect of the evidence: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 1192. Lamb then gave evidence concerning the fraud. His account was that the arrangement by which the fraud was effected was that goods of Nortex were sold and the proceeds were not directed into the company but directed in cash into the pockets of Lewis and Lamb in the proportions in which they were ultimately entitled to the profits of the trust (60:40). The effect of this evidence will need to be examined more closely when I turn to the issues arising as to the accounts of the 1996 and 1997 years. However, in general terms, Lamb's account, if accepted, makes it more credible or likely to be accepted that Lewis continued on his own behalf alone the same practice after Lamb had left the company at the end of the 1996 year, than it would be were such evidence not given and accepted. 28 The admission of this evidence led the Lewis interests to seek and obtain leave to add to the defence a defence based on the maxim, "He who comes into equity must come with clean hands". It was only after this evidence had been admitted that it was announced that Lewis would not be called as a witness. 29 Lamb gave this evidence with apparent frankness. It was not denied by Lewis, the only other party to the arrangement alleged. Furthermore, there was confirmation of the truth of the allegations in documentary evidence before the Court (indeed, tendered by the Lewis interests) that recorded the sale of items, the collection of cash and the way in which it was accounted for between Lamb and Lewis. Whilst there is a case for accepting the evidence, the giving of the evidence inevitably reflects adversely on Lamb's credit. If it is found to be untrue, then he has given untrue evidence on oath. If it is found to be true, then he has participated in a calculated and protracted fraud on the revenue. Either of these reflects poorly on his credit. It is clear from other evidence that he engaged in other practices to defraud the revenue. For instance, the consideration for the purchase by Lamru of the units in the trust was understated to avoid stamp duty. All this is poor conduct by a man qualified as an accountant in New Zealand, although not practising as an accountant in Australia. It evinces dishonesty, which casts doubt on whether his word can be taken on his oath. 30 Other detailed material was put by Mr Cotman, of Senior Counsel for the Lewis interests, in support of a submission that Lamb's credit was so wounded that his word could not be taken for anything, at least unless it were supported by credible evidence. Mr Cotman's points were not without some substance. However, I do not accept them at face value. In my view, it was in only a few instances, not central to these proceedings, that Lamb was shown actually to have given false answers. As I earlier had occasion to remark, one deficiency in his evidence was a certain diffuseness: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 337 at [9]. This tendency continued throughout his evidence. It arose from a reluctance to engage with particular questions that were asked of him. There was also a tendency, arising I think from his deep absorption in, even obsession with, his disputes with Lewis and the course of the litigation, to put things at their best from his point of view. Nonetheless, in a number of instances, when faced with contrary evidence, he readily admitted that his earlier evidence had been incorrect. I perceived in Lamb a tendency to rush and give a version favourable to the proposition he was advancing without sufficient thought (as in the case of a much debated affidavit sworn on 16 January 1998 and filed in the New Zealand proceedings), but also a preparedness to correct his evidence on greater reflection. 31 I have had a very extensive opportunity to watch Lamb in the witness box. He was a far from exemplary witness. During the trial he gave evidence on a lengthy voir dire hearing on the admissibility of a computer record. In a judgment given on that issue (Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 337), I expressed the view (at [9]) that "in the comparatively short cross examination he has undergone before me on the voir dire, there has been some diffuseness in the answering of questions, but nothing which would lead me at this stage, as I make this judgment, to regard Lamb overall as a witness lacking veracity or accuracy." The situation grew worse for Lamb during the course of his lengthy cross examination in the trial. The diffuseness continued. The false answers were given. The cheating of the revenue was revealed. Despite all the matters that have been set out above, I do not, however, accede to Mr Cotman's submission that Lamb's evidence is utterly unreliable or worthless. In my view, what Lamb says must always be approached with great caution and assessed in the light of the circumstances in which the particular piece of evidence is given. Despite the fact that his credit is damaged, I am prepared to regard his evidence, in general terms, as a possible view of the facts, to be assessed together with and in the light of the other material going to the particular issue in relation to which it is being assessed. Potter 32 Michael Potter is an employee of the liquidator. Much was made on behalf of Lamru of an account which Potter is said to have given orally, years ago, which, if taken literally, would indicate that Lewis admitted abstracting stock of Nortex in the 1997 year (which propositions are controverted by the Lewis interests). Potter was examined and cross examined about this. I formed the impression that he was in his evidence attempting to give the best of the recollection that he had when in the witness box concerning what had originally happened and his subsequent recounting of it. I do not accede to suggestions that were made to the effect that it was surprising or sinister that Potter had no notes taken on the relevant occasion or that he should not better remember small (to him) events occurring a long time ago. Dufty 33 Dufty appeared to me to give his evidence in an open and relaxed manner. My impression was that he was trying to give the Court the best account he could of the events with which he was dealing. I also formed the view that his recollection of those events was reasonably good. ISSUES 1 AND 4 1 Whether the $150,000 paid to Hirmanu in 1991 was paid as a distribution of profit to Hirmanu or was borrowed by Lamru and paid by it to Hirmanu? 4 Was Lamru short paid $161,398 or any sum in 1991? 34 These issues are interrelated and should be dealt with together. Issue 1 needs to be dealt with only if Lamru succeeds on issue 4. That is because under issue 1 Lamru does not make a claim, but makes a concession of $150,000, which it says it is appropriate for it to do if it succeeds on issue 4. It is probably correct that the concession is appropriate if Lamru succeeds on issue 4. 35 It is always important, but particularly important amidst the complexities of this case, to determine the issues in light of the way they are pleaded. The points of claim make the claim relevant to issue 4 as follows: "10 As at 91 income vesting day the free nett income (calculated in accordance with accounting methods and conventions agreed to between Nortex, Lamru and Kation), was $1,098,828.04 of which Nortex was bound in law to hold as to 40% for Lamru. PARTICULARS a Scott Schedule claims 1 and 2 and evidence there referred to. …… 12 In breach of trust Nortex dealt with the free nett income as at 91 income vesting day by accounting only $278,133.69 to the benefit of Lamru, with the deficiency on Lamru's side (an amount of $161,397.53 as disclosed in the last (ie the summary) page of the Scott Schedule filed in Court on 8 March 2002) wrongfully accounted to the benefit of Kation. PARTICULARS a Scott Schedule claims 1 and 2 and evidence there referred to …… 15 In breach of trust Nortex, having misdealt with the free nett [sic] income as at the 91 income vesting day as pleaded above, made corresponding incorrect entries in the loan accounts between itself and Kation and itself and Lamru. PARTICULARS a Scott Schedule claims 1 and 2 and evidence there referred to" The primary defence by the Lewis interests to this claim is contained in paragraph 29 of the defence, as follows: "29 In further answer to paragraph 10 of the Amended Consolidated Points of Claim, the first and second defendants say that on 12 April 1991 Nortex distributed all of the free net income of the Nortex Unit Trust for the period from 1 July 1990 up to and including 12 April 1991, with $150,000.00 being distributed to Hirmanu Pty Limited and the balance to the first defendant." To that, Lamru pleaded in its amended points of reply ("the reply") as follows: "4 As to the allegation (para 29) that there was a valid and effective 4(1) determination on 12 April 1991, the plaintiff denies that allegation and repeats the contentions in reply contained in the Scott Schedule (little white book 46 – 47) and previously advanced in its synopsis (20/7/01 – little white book 66 – 67)." 36 The relevant material in the Scott Schedule is as follows: "(a) The contention cannot survive Justice Young's finding answering question 5 in the negative. That answer says in terms that there are no clause 4(1) determinations which support the 1991 profit splits that in fact occurred. (b) The evidence of Mr Dufty (transcript page 13) that he had been duped by Mr Lewis into falsely believing that the profits to 12 April 1991 were of the order of $200,000 only and would not have signed if he had known the truth was accepted by Justice Young (judgment para 30) where His Honour found that Dufty had been cheated by Lewis. Consequently the document of 12 April 1991, although signed by Dufty, is voidable for the fraud of Lewis. (c) Even if the document is not voidable, Lewis's dishonest conduct, would estop [sic] him from asserting that the profits to 12 April 1991, if it were otherwise proven, exceeded $200,000 with the result that the profits to 30 June 1991 would be the total year profits less the $200,000. (d) Next, Kation/Lewis failed to adduce any evidence either to the Liquidator in the adjudication process or to the Court establishing the actual profits to 12 April 1991 as opposed to the total year profits to 30 June 1991. (e) Finally, and Lamru says conclusively, when Kation and Lamru came to the task of splitting the 1991 profits (in the latter part of 1991) it was common ground between them that they were splitting the full profits for the entire 12 months and not merely dealing with some isolated sum gained after 12 April 1991." 37 The questions that arise under this issue are as follows: (1) Whether the argument that the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed is precluded by the 2001 judgment. (2) Whether the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed. (3) Whether, if it was a valid determination, Lamru is entitled to have it set aside as procured by a fraud on Dufty and Hirmanu. (4) Whether the Lewis interests are estopped from alleging that the profits of the 1991 year up to 12 April 1991 exceeded $200,000. (5) Whether there is any breach of trust established arising out of the distribution of the profits of the 1991 year. (6) Whether Lamru consented to or waived its rights in respect of any breach of trust committed. (7) Whether the defence of laches, acquiescence and delay is available to disentitle Lamru from any relief which would otherwise be available to it: see [24] above. 38 These matters must be determined against the background of the negotiations which were being conducted during 1991 among Lewis, Lamb and Dufty, which I have referred to earlier. Lamb's evidence was that in 1988 he was already in the manchester business and in the course of it met Lewis and Dufty. In 1990, Lewis invited Lamb to join the Nortex business full time. Initially it was anticipated that Lewis, Dufty and Lamb would all be involved in the business together. Lamb commenced to work for Nortex in the last couple of months of the calendar year 1990. Within a few weeks after he started, there was a falling out between Lewis and Dufty. There were negotiations among the three of them and, in the end, "for an agreed consideration, Dufty transferred to my entity Lamru (on 19 June 1991) 40% of the units. The balance of his units he transferred to Kation, so that from 19 June 1991 Kation owned 60% and Lamru owned 40%." On 16 April 1991, Dufty resigned as director and Lamb became a director of Nortex. Lewis held two shares and Lamb one share in the company. 39 In the course of the negotiations, Lewis represented to Dufty that the profits of the 1991 year to 12 April 1991 were approximately $200,000. That that representation was made is corroborated by the 12 April 1991 minute which is set out in [40] below. It is apparent from other evidence in the case that this representation was not true. It seems likely that the profits for the year were approaching $1 million even by that time. In the 2001 judgment (at [30]) Young CJ in Eq found that Lewis had cheated Dufty. But I do not need to rely on his Honour's finding. I propose to make a similar finding for reasons stated at [47] below. 40 Although his Honour found that a subsequent meeting of directors recorded in the 28 June 1991 minute did not take place, his Honour accepted that a meeting of directors attended by Lewis and Dufty did take place on 12 April 1991. I also accept that that occurred and was accurately recorded in the 12 April 1991 minute. This proposition was not seriously controverted at the trial before me. That minute was signed by Lewis and Dufty. The substantive business of the meeting was recorded as follows: "Confirmed that preliminary accounts indicated that the Net Income of the Trust Fund for the period ending 12th April 1991 would be approximately $200,000. IT WAS RESOLVED THAT THE Net Income of the Trust Fund should be distributed as follows: (1) The sum of $150,000 of the Net Income of the Trust Fund to Hirmanu No 1 Trust. (2) The balance of the Net Income of the Trust Fund to Lewis No 1 Trust." 41 On the face of it, there is no reason why the 12 April 1991 resolution should not be taken as a valid determination of profits within clause 4(1) of the trust deed. If it does operate to have that effect, then clause 4(2) would operate to apportion the 1991 profit 60:40 only in respect of the profit accruing after 12 April 1991. 42 The first matter which needs to be determined is question (1), whether the argument that the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed is precluded by the 2001 judgment. On the face of that judgment there is some apparent basis for the argument. Question 5, which was answered, No, asked, "Were the income splits from 1991 to 1995 validated by valid and effective determinations in accordance with clause 4(1)?" The principal discussion concerning that was in [64] of the 2001 judgment, as follows: "64 Mr Motbey says that the evidence shows quite clearly that although there was a minute of 28 June 1991 and a similar minute in 1992, the minute was actually signed some time after 30 June in each year. There is thus no proper evidence that the board of the trustee ever met prior to 30 June in 1991 or 1992 to make a determination under clause 4(1). Furthermore, as Lewis and Dufty were the appointors until at least 1997, there was no prior written consent of the appointor to anything that Nortex may have done" (my italics). 43 His Honour proceeded in [65] to say that he could see no answer to that submission. Lamru, in support of its submission, relies on the italicized words in [64] of the judgment. Whilst literally those words encompass a finding that the board did not meet on 12 April 1991 or make a determination under clause 4(1) on that day, it is argued that there are other indications in the judgment and elsewhere that His Honour did not intend the answer to question 5 to extend to the board meeting of 12 April 1991 and the 12 April 1991 resolution. This matter was taken back to Young CJ in Eq on an application under the slip rule in 2003. His Honour refused that application: Re Nortex Pty Ltd (In Liq) [2003] NSWSC 1036. The application was refused on the basis that there was controversy concerning it and that the slip rule should not be used where there is controversy as to the appropriateness of its use. His Honour said that what he was really being asked to do was to construe the answer to question 5 given in the 2001 judgment and that that should be done in separate proceedings. It falls to me to do it on this trial. 44 Whilst I have said that there is some justification for Lamru's argument on the face of the 2001 judgment, in my view, considering the whole of that judgment, it should not be taken to embody a ruling concerning the validity of the directors' meeting said to have been held on 12 April 1991 or the 12 April 1991 resolution. Paragraph [64] itself refers in terms only to the directors' meeting purportedly held on 28 June, not to the directors' meeting of 12 April 1991. His Honour was well aware of the earlier meeting. In the 2001 judgment it is referred to in [20]. In [22] his Honour referred to Lewis' evidence that there was a further directors' meeting on 16 April 1991 and that, at it or shortly after it, the instrument appointing a new appointor was executed. Despite his reservations about Lewis' evidence, his Honour in the end accepted that the notice of appointment was in fact executed as Lewis deposed. He did not make a specific finding that the directors' meetings of 12 and 16 April 1991 occurred, but he did not find that they did not, which one imagines he would have done, in the course of deciding the matters that he did decide, had he rejected the evidence that those meetings were held. As his Honour elsewhere referred to the evidence of the holding of the meeting of 12 April 1991 and did not reject it, it seems to me that he should not be taken by his answer to question 5 as finding that that meeting did not occur; that the 12 April 1991 resolution was not passed; or that it was not an effective determination within clause 4(1). The argument, that the issue as to the validity of the 12 April 1991 resolution as a determination under clause 4(1) is foreclosed by the 2001 judgment, is therefore rejected. 45 I have stated as question (2) whether the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed. It was argued before me but faintly, if at all, that the meeting did not take place or that the resolution was not passed. It was implicit (if not explicit) in Young CJ in Eq's 2001 judgment that the meeting was held and the resolution was passed: see [20] and [22] of that judgment and [44] above. His Honour, in effect, found that a directors' meeting between Lewis and Dufty was held on 16 April 1991 following on a directors' meeting held between them on 12 April 1991. There is no reason to doubt that the 12 April 1991 minute does accurately record what occurred at the meeting on 12 April 1991. Even if his Honour's finding is not binding, I make the same finding on the material before me. Dufty gave evidence and did not suggest that the meeting did not occur or that the minute, signed by him, was bogus. On the evidence, I find that the meeting took place and the resolution was passed. 46 There was some suggestion that there was an onus on the Lewis interests to establish positively the prior consent of the appointor before they could rely on the 1991 resolution. I do not think this is so. The appointor at the relevant time was Dufty. It is not impossible on the evidence that he gave the appropriate consent and there is nothing in the evidence that establishes that he did not. Those propounding the resolution are in the circumstances entitled to the benefit of the presumption of regularity. The 12 April 1991 resolution was valid and, if not set aside, continues to be operative. 47 I turn to the argument (question (3)), that the resolution may and should be set aside at the suit of Lamru because "the document of 12 April 1991, although signed by Dufty, is voidable for the fraud of Lewis". It is alleged that Lewis deceived Dufty by representing to him that, as at 12 April 1991, the profits for the 1991 year were about $200,000, whereas in truth they were something more closely approaching $1 million. It was so found by Young CJ in Eq in the 2001 judgment. As all of Lamru, Kation and Lewis were parties to the proceedings at the time of the trial before Young CJ in Eq, it appears to me that that finding is binding upon them all. In any event, I make the same finding on the evidence before me. Dufty has given evidence that he was cheated. The minute of 12 April 1991 is corroborative of the representation. It is clear on the evidence in this trial that the profit for the year was far beyond $200,000 as at 12 April 1991. Lewis has not given evidence that he did not deceive Dufty or that that there was some reason for him saying that the profits as at April 1991 were about $200,000 only. Dufty not only gave evidence that he was cheated, but also gave evidence that he subsequently taxed Lewis with this. As a result of this approach to Lewis, there was a settlement between Lewis and Dufty (encompassing their companies Kation and Hirmanu respectively) in relation to that deception and as to other outstanding issues between them. In satisfaction of those claims Lewis paid to Dufty $100,000. The claims of Dufty (and Hirmanu) in respect of the deception were thereby satisfied. I accept that Lewis deceived Dufty and thereby procured his agreement to the 12 April 1991 resolution. The clarity of the evidence satisfies me of this, even taking into account the provisions of s 140(2) of the EA (as to which see [117] below). 48 However, even if Dufty and Hirmanu's claims had not been extinguished by satisfaction, in my view, the deception of Dufty by Lewis is not something that could be relied on by Lamru or Lamb as a ground for setting aside or otherwise negativing the effect of the 12 April 1991 resolution. The representation was not addressed to Lamru, Lamru was not deceived by it and Lamru does not have standing to seek relief arising from it. The 12 April 1991 resolution will not be set aside. 49 Question (4) is whether the Lewis interests are estopped from alleging that the profits to 12 April 1991 exceeded $200,000: see particulars (c) and (e) in the particulars of reply in the Scott Schedule set out in [36] above. It appears that these seek to propound an estoppel by representation and a conventional estoppel respectively. The allegations by way of reply, insofar as they are spelt out in items (c) and (e), in my view are not sound in fact or in law. They do not, as a matter of law, fully or properly state the basis of an estoppel. But, in any event, the matters which they seek to adumbrate are not established as matters of fact. I have already observed in [48] above, that the representation relied on was made to Dufty and was not, on the evidence, made to, or relied on, by Lamru. 50 Insofar as either form of estoppel is alleged to arise from conduct subsequent to the making of that representation, the evidence as to what passed between Lamb and Lewis late in calendar year 1991 in relation to the 1991 profits is exiguous. The account in Lamb's affidavit of 27 March 2000 is as follows: "In about September 1991 I had a meeting with Mr Lewis where he advised that he had completed the accounts for the year ended 30 June 1991. He indicated that the nett [sic] trading profit was of the order of $950,000 before add-backs. He said that I was not entitled to 40% of that figure because some of the reserves in the accounts were put in place before I joined the business. I did not agree with his argument and said that I had come into my 40% aware of these reserves, and he'd even commented about the books being very conservative as a selling point. I said they were assets that I should be free to participate in. However he then did a calculation in which he said made the adjustments allegedly to compensate him for the reserves in the accounts. He prepared a sheet of paper with the revised figures and did the add backs to produce our respective shares. I do not have a copy of that sheet of paper but as best I can recall it was similar to the sheets Mr Lewis prepared in later years." 51 The same subject matter is repeated in Lamb's affidavit of 16 November 2000 with little substantial difference, although that account contained the words, "We agreed to disagree." Furthermore, he was cross examined on this subject matter as follows: "MR COTMAN: Q It was in about September in each of the relevant years that you came to address the question of what the distribution should be? A It was usually about that time of year, yes. HIS HONOUR: Q You say that the same thing happened in September 1992 in relation to the '92 return; is that what you say? A Each year through to 1995, yes. MR COTMAN: Q You say the difference between the '91 and '92 years, and '93, '94 and '95 respectively, is that in the last three years, you agreed with the distributions, in the first two years you disagreed with the distributions; is that right? A No, that's not quite right. In the first two years I agreed and in the '93 and '94 years I agreed and the '95 year was actually the argument over Mark Lewis receiving a percentage of the profits, so I never agreed to the distribution with the '95 one. Q Well, in the '91 and '92 years, you don't say that you were in some way forced or overborne by Mr Lewis in relation to the conduct of the affairs of the trust, do you? A No, I wouldn't call it forced. I'm not sure what you mean by 'overborne'. Q You didn't consider yourself to be under some improper pressure to agree with Mr Lewis, do you? A Well, it came across quite plausibly as a misunderstanding or an - it wasn't a stand-up argument, it was a - he put his view that, 'Oh, you misunderstood when you bought into the business, you were not entitlement [sic] to this', and I put my bit back, but it was - you know, we both put our views strongly, but it wasn't what I'd call a stand-up fight or anything. Q But the question I asked you was you didn't consider yourself to have been coerced or forced or overborne by Mr Lewis at this time, did you? A No, quite the opposite, it was very plausible. Q You know that minutes were prepared of the company of which you were a director reflecting a meeting between you and Mr Lewis describing the distribution for 1991 and 1992? A Yes, I'm aware those minutes were prepared. Q And you were aware that the tax returns were prepared in accordance with each of those sets of resolutions? A Yes, I am. Q You prepared your own accounts in accordance with those same resolutions, I take it, for the company Lamru? A Yes. Q And the tax returns? A Yes. Q And as you understood it, Mr Lewis was doing the same thing - for Kation, I'm sorry? A I don't know but I would assume so." Lamru suggested that Lamb had made repeated complaints about the 1991 division of profits, but in view of the affidavit evidence and the cross examination set out above, I find that the only discussions on this subject were the annual discussions recounted in his answers to cross examination. 52 In my view, the accounts set out above do not establish as a matter of fact representations or conduct as relied on in items (c) and (e) in the Scott Schedule set out in [36] above, and they are not otherwise established. Those matters of reply therefore fail. There is no operative estoppel as alleged. 53 In relation to question (5), whether there is any breach of trust established in relation to the distribution of profits of the 1991 year, this must be dealt with in the light of my decisions on the first four sub issues. These leave a situation where the existence and validity of the 12 April 1991 resolution are established and the Lewis interests are not estopped from alleging that the profits to 12 April 1991 exceeded $200,000. Lamru's allegation remains that it has established a breach of trust. The Lewis interests do not concede a breach of trust. By particular (d) in its particulars of reply in the Scott Schedule, Lamru complained that the Lewis interests had not established the quantum of profit between 12 April and 30 June 1991. But, if Lamru complains of a breach of trust in respect of the distribution of the 1991 profits, it bears the onus of establishing its existence and, if that involves establishing the quantum of the profit during a particular period, it is for Lamru to prove it. Lamru undoubtedly received some $96,000 as its share of profit of the 1991 year. That sum is 40 per cent of about $240,000. $240,000 is about a quarter of the 1991 profit of about $1 million. The period between 12 April and 30 June 1991 is less than one quarter of the 1991 year. In saying this, I am not adopting as valid (as the liquidator did) a pro rata test for the amount of profit earned during that period. But it is not as if the profit during that period was estimated or assessed by Lewis at nil; Lamru received a profit share consonant with a substantial profit during the relevant period. The amount assessed by Lewis and paid or allowed by Nortex to Lamru as its 40 per cent share of the 1991 profit is not on the face of it impossible or improbable as a proper estimate of the profit during the post 12 April period, which is the relevant period since the 12 April 1991 resolution stands as a valid clause 4(1) determination. In my view, on the evidence, Lamru has simply not established a breach of trust in relation to the 1991 distribution of profits. 54 In relation to issue 4, I do not really need to deal with the substantive defences raised under questions (6) and (7). However, I think it desirable that I should make a finding at least in relation to the defence of laches, acquiescence and delay. I find that, if a breach of trust were established, relief would be precluded by that defence. I do not think I need to analyse the distinctions between the three elements embedded in its tripartite formulation. On the evidence, Lamb did not return to his complaint about this subject matter until after the terminal row between Lewis and himself and his departure from Nortex. It was in the course of the bitter disputation that then arose that the complaint was renewed, when Lewis and Lamb were throwing all possible allegations at each other. In the meantime, it seems to me that Lamb and Lamru proceeded on the basis, which Lamb says he enunciated at the time the 1991 profits were discussed, "We agreed to disagree". What happened thereafter is elucidated in the answers to cross examination set out in [51]. It must be borne in mind that the division of the 1991 profits arose in the context of an ongoing business in which the accounts had to be, and were, finalised each year and the participants each year had to, and did, submit their own income tax returns based upon the results of the business, as Lamb conceded. In each case, the next year's accounts depended for their starting point on the preceding year's accounts, which were used accordingly. It seems to me that where this process was continued for a period of five years with both sides participating in it, it is not equitable that one party be allowed to reopen the situation after this lapse of time. 55 In view of this finding, I do not need to consider additionally the submission based on waiver. 56 So far as issue 1 is concerned, in light of my finding on issue 4, this issue does not arise. As I have already pointed out (in [34] above), it is not a claim made by Lamru, but a concession proffered by it as appropriate to be made if issue 4 is found in its favour. As the latter has not occurred, the need for the concession does not arise. I should add that, if it were necessary to deal with the subject matter, I do not think it possible on what evidence there is of the negotiations to find one way or the other whether, on the tripartite agreement among those concerned, the $150,000 was paid in either of the ways contended for. ISSUES 2 AND 3 2 Whether the differential interest convention is effective? 3 Whether the add backs convention is effective? 57 These issues may also be considered together. 58 The issues relating to these conventions are best defined in the following provisions of the Scott Schedule dealing with the add backs convention. As matter of defence, the Lewis interests stated: "In paragraph 63 of his Judgment Justice Young found as follows: 'Clause 4 of the trust deed provides that at any time and from time to time during any accounting period with the prior consent of the Appointor with respect to any part of the net income of the trust fund for such accounting period the trustee may determine to pay same to any one or more of the unitholders as the trustee in its absolute discretion determines. An accounting period is 12 months ending on 30 June of each year. The definition clause defines "Free Net Income" as so much of the net income of the trust fund for an accounting period as is not the subject of a valid and effective determination by the trustees during that accounting period under clause 4. Under clause 4(2) the trustees are to hold as a separate trust fund the free net income of each accounting period in trust absolutely for the unitholders of the ordinary units in the specified proportion. "Specified Proportion" is defined in 1(14) of the deed as meaning the proportions that the number of ordinary units held by a unitholder bears to the total ordinary units. Thus, unless there has been a proper determination under clause 4(1) of the deed, the income for the financial year is held in proportion to the number of units that a unitholder has to the total number of units.' In relation to the net income of the trust fund for the relevant accounting period, net income is a recognised accountancy term with a specified meaning. It does not include 'add backs'. The clear consequence of Justice Young's Judgment is to eliminate any procedure for 'add backs' as propounded by Lamru. This is supported by clause 18B(6) of the Trust Deed, which provides that any remuneration for services rendered paid to any beneficiary is not to be taken into account as part of his share of the Trust Fund or the income thereof. Further at paragraph 67 of his Judgment, Justice Young specifically rejected contentions by Kation that the parties were estopped from departing from their conduct in relation to the accounts of Nortex from 1991 onwards. It follows that, in accordance with His Honour's ruling, Lamru cannot now raise the conduct of the parties in relation to the 'add back' procedure, but is bound by the strict approach to be found in the four corners of the Trust Deed in calculating the net income of the Trust ('Free Net Income')." Lamru replied: "Justice Young's answers to the questions posed for preliminary determination in no way foreclose the issue as to whether or not the add-back methodology employed by the trustee is in accordance with the trust deed. That issue was not raised or decided. The source of the add-back methodology was a solemn agreement negotiated between Lamb, Lewis and Dufty when Lamb's entry into the business was originally agreed. That agreement was perfectly valid and was put into effect and applied from the time of Lamb's arrival until Lewis, (after excluding Lamb from the business) quite improperly, unilaterally, without any agreement or corporate resolution, purported to abandon it in his own interests. There is nothing at all in the trust deed which forbids or affects the rights of the parties concerned to make the agreement that they made and consistently applied for many years. clause [sic] 18B(6) relates to moneys paid to unit holders. The unit holders are Kation and Lamru. The moneys which were added back were moneys paid to or for the benefit of Mr Lamb or Mr Lewis. See footnote 11 to synopsis being annexure A to aff [sic] of Lyons of 20/7/01 [sic] Young J's comments at para 67 have nothing to do with the question as to whether or not the add-back agreement provides an estoppel. If, which is denied, there is some invalidating provisions of the trust deed that affects [sic] the add back agreement then both Kation and the trustee are estopped from relying upon that invalidating provision." 59 The "conventions" referred to were agreements as to the way in which certain items were to be dealt with in the accounts. They were called "accounting conventions". They affected the way in which the free net income was to be calculated in each year. 60 The "add backs convention" was to the effect that, whatever drawings or payments there had been in favour of each of the unit holders during the course of the year (whether to the unit holder companies themselves or to their principals or associates of their principals), they were to be added back into the accounts before the free net income was determined. In the ultimate wash up, there were to be no drawings or remuneration for work done; the sole remuneration of each "partner" was to be the profit share in the agreed proportion of his company in the profits earned, without additional allowance for the labour or efforts of the company's principal. 61 The "differential interest convention" flowed from an agreement that any money lent by the unit holders to the trust should be lent at interest. This convention was to deal with the situation where the amounts lent by the unit holders were unequal, which was virtually always the case. Rather than the unit holders charging and the trust paying this interest, the agreement constituting the convention was that the interest differential, ie, the difference between the amounts payable to the unit holders respectively, should be regarded as a debt payable between the unit holders directly. This was usually discharged by an adjustment of the amounts respectively credited to them as their shares of the free net income when determined. 62 There was debate as to whether the agreements were between the unit holders only, or whether the trustee was also a party to them. This is further discussed at [73] below. 63 Apart from this debate as to the parties, there is no doubt that these agreements existed and were acted on. They date back to the time when the unit holders were Kation and Hirmanu. They were applied consistently throughout the time that Lewis and Lamb worked together in the business. They were applied by the liquidator, who had no doubt of their existence, when he originally dealt with the respective proofs of debt of Kation and Lamru. It was not suggested by any party to these proceedings that they had not existed and been acted on. The way in which the issue arose was that, after the 2001 judgment of Young CJ in Eq, the legal advisers of the Lewis interests took a strong view that the judgment had the effect of negating the conventions, in the sense that it ruled that they were inconsistent with the trust deed and that their implementation involved a breach or breaches of trust. The liquidator came (with what degree of persuasion it matters not for present purposes) to take the same view and revised the accounting between the parties accordingly. 64 The question for determination is whether this view is correct. The question turns on the true interpretation of the trust deed and the correct view of the effect of the 2001 judgment. Clauses 4(1) and (2) and the relevant definitions are set out in [10]. Clause 18B(6) and (24) and clause 23 of the trust deed were also cited as relevant to the argument. I refer to clause 44 also as having a possible relevance to the subject matter. Clauses 18B(6) and (24), 23 and 44(1) are as follows: "18 …… B The Trustees shall have in addition to and not in derogation from any other powers they have by law or conferred on them by other provisions of this Deed the following additional powers and such powers may be exercised together or separately and from time to time and at any time or times: …… (6) the power to remunerate any beneficiary who is at any time in the employ of the Trustees to the same extent and in the same manner as if the beneficiary so employed were not a beneficiary hereunder and all bona fide payments made by the Trustees to any such beneficiary in the form of remuneration for services rendered or to be rendered or on account of expenses in connection with such employment shall not be or be deemed to be payment to the beneficiary of or on account of his or her share in the Trust Fund or the income thereof, …… …… (24) the power to determine whether any moveable or immoveable property or any increase or decrease in amount number or value of any property or holdings of property or any receipt or payments from or in connection with any moveable or immoveable property shall be treated as and credited or debited to capital or to income and generally to determine all matters as to which any doubt difficulty or question may arise under or in relation to the execution of the trusts and powers contained in this Deed and every determination of the Trustees in relation to any of the matters aforesaid whether made upon a question formally or actually raised or implied in any of the acts or proceedings of the Trustees in relation to the Trust Fund shall bind all parties interested therein and shall not be objected to or questioned on any ground whatsoever; …… 23 The Trustees shall keep complete and accurate books of account and records of all receipt and expenditures on account of the Trust Fund and promptly after the close of each Accounting Period the Trustees shall prepare a written accounting report (prepared in accordance with normally accepted account procedures) for such period consisting of a balance sheet a statement of income and expenditure and a list of assets held at the close of the period and a copy thereof shall be furnished upon request to each of the Ordinary Unit Holders and the accounting report shall include the names and addresses of all persons or firms having custody of all or any portion of the assets of the Trust Fund and the Trustees shall be entitled but not obliged to have such accounts audited by an Auditor appointed by the Trustees at the expense of the Trust Fund but the report of any such Auditor must be endorsed on or attached to the balance sheet relating to the period in respect of which the Auditor's report relates. …… 44 (1) Subject to the prior consent in writing of the holders of all of the ordinary units and the Appointor the Trustees for the time being may at any time and from time to time by oral declaration, or by resolution, or by deeds, revocable or irrevocable revoke add to or vary all or any of the Trusts terms and conditions herein contained or the trusts terms and conditions contained in any variation or alteration or addition made thereto from time to time and may in like manner declare any new or other trusts terms and conditions concerning the Trust Fund or any part or parts thereof the trusts whereof shall have been so revoked added to or varied provided that a perpetuity is not thereby created and subject to the later provisions of this Clause." 65 The argument was most clearly put by Mr Ventry Gray, of counsel for the liquidator, who indeed said that it was "crystal clear". It proceeded as follows. From 22 June 2001, when the 2001 judgment was delivered, it was clear that, in respect of the 1991 to 1995 years, there was no valid determination of the division of profits under clause 4(1) of the trust deed. The profits therefore fell to be divided under the provisions of clause 4(2). They had to be divided in accordance with the terms of the trust deed. These included the provisions of clause 23 which required the keeping of accounts in accordance with "proper accounting procedures". Acting in accordance with the add backs convention and the differential interest convention was not in accordance with proper accounting procedures. Those conventions could have valid effect only through a clause 4(1) determination. Nortex as trustee (and therefore the liquidator) as of 22 June 2001 came under an obligation to rewrite all the accounts that had formerly been written in accordance with the conventions. Not to do this would involve breaches of trust. Any agreement between Kation and Lamru giving effect to the conventions may have been operative until Lamb's departure from Nortex, but ceased to have effect at that time. Therefore, Lamru could not unilaterally require the liquidator to maintain the accounts as they had been written over the preceding years. (Apparently Kation was able unilaterally to require the opposite course to be taken.) The liquidator was obliged to rewrite them. 66 There are a number of reasons why this argument is not sound. Each of these reasons would alone destroy its validity. 67 First, it is not correct that the conventions could have effect only through a valid clause 4(1) determination (of which there was none in any relevant year, save that I have determined that the 12 April 1991 resolution was effective). Clause 4 is set out in [10] above. Clause 4(2) provides that in general terms the trustee shall hold the Free Net Income of each accounting period for the unit holders in the proportions of their interests in the trust. The Free Net Income is so much of the net income as shall not be the subject of a clause 4(1) determination. A clause 4(1) determination is a determination to apply the whole or any part of the net income to any one or more of the unit holders in such amounts or proportions as the trustee determines. Properly construed, this does not preclude the trustee from determining, or the unit holders from agreeing, that the accounts should be kept in one or another particular way which is proper. Nor is there anything in the 2001 judgment which would compel the conclusion contended for or necessitate or authorise the rewriting of the accounts in the fashion in which it was done. 68 Secondly, it is not established that to prepare the accounts on the basis of the conventions was, on the evidence, to prepare them otherwise than in accordance with "proper accounting procedures". The term is a very general one contained in a very general clause in the trust deed concerning the preparation of accounts, not the substantive rights of the parties. I do not think that it could be applied to forbid the preparation of accounts on a proper basis agreed between the trustee and the unit holders. 69 On top of that, the evidence that what occurred was not in accordance with proper accounting procedures was exiguous. This was a matter for expert evidence. Craig Edwards, a chartered accountant, made a report which was in evidence and dealt with this, among other subject matters. The relevant evidence was as follows: "I have noted in the distribution of net income for the years ended 30 June 1992 to 1995 that certain expenses (eg wages, superannuation, motor vehicle expenses) were 'added back' prior to the apportionment of net income between the unitholders (ie the expenses were excluded from Net Income when determining distributions). I have seen nothing in the material provided to me to show that such expenses were not bona fide business expenses, and accordingly, such expenses should be deducted when calculating Net Income (consistent with the normal definition of net income or profit, which is equal to revenue less expenses). The accounting treatment in the profit distribution is not usual. Although it may reflect an arrangement between the unit holders, it does not, in my opinion, accord with the distribution of Free Net Income in accordance with ordinary accounting concepts." 70 That evidence is in its terms far from certain or clear. It deals only with the add backs convention as not according with normally accepted accounting principles. It does not express that opinion in relation to the differential interest convention. Mr Edwards expresses the view that it would make no difference to the result as between the parties whether or not the differential interest convention was applied. As to the latter, there appears to be no expert evidence supporting the proposition that to prepare the accounts in accordance with that convention was to prepare them otherwise in accordance with "normally accepted accounting procedures". But even in relation to the add backs convention, any value that Mr Edwards' evidence may have is vitiated by the fact that his report was written in a context in which he was not given proper instructions as to the factual situation in which the accounting procedures were used. In cross examination he agreed that he had not been told that the add backs convention had at any time existed, so that he was dealing with an entirely hypothetical situation, where the person preparing the accounts had apparently acted in the way he had without the support of any instructions as to the subject matter. The reason that Mr Edwards suggested the procedure was unsound was that, if these items were not to be treated as expenses, then they should not have been expensed in the first place. However, he agreed that that there was a perfectly sound way of putting the parties' intentions into effect, namely, by recording the items as advances against drawings. None of this appears to me to compel as a matter of accounting principle the recording of the transactions in a way that was manifestly in conflict with an agreement binding the unit holders in force at the time. 71 For these reasons it was not established that there was in the original adherence to the add backs convention or the differential interest convention any breach of clause 23, or otherwise of the trust deed. Furthermore, there is nothing in the 2001 judgment that compels any other conclusion. 72 I should add that it was argued on behalf of Lamru that what the trustee did was in effect validated by the provisions of clause 18B(24) of the trust deed as being a determination in relation to a matter as to which a doubt, difficulty or question arose in relation to the execution of the trusts. I have some doubt as to whether this matter falls into the relevant category but, in view of what I have said, I do not need to determine that matter. 73 Lastly, I should record a finding as to who were the parties to the agreements. First of all, the Lewis interests submitted that any agreements that there were (and they seemed to concede, as they had to, that they existed) were between only Kation and Lamru. Bearing in mind that the directors of Nortex were Lewis and Lamb and the unit holders Kation and Lamru, it should be taken that the agreement was a tripartite one, the consideration for the agreements among all three parties being the entry of the others into the agreements. In my view, Lewis and Lamb should be taken to have acted as directors of Nortex, as well as directors of their respective companies, in entering into the conventions. I find that Nortex was also a party to the agreements. But that matters little. Even if the conventions were agreements between Lamru and Kation only, those companies as unit holders agreed to direct, and did direct, the trustee to act in the way that it did. The result of that direction (Lamru and Kation being all the unit holders of the trust) was that there was no breach of trust, or certainly no breach of trust which could be relied on, in the trustee acting in the way it did. Agreements to which Lamru and Kation were parties, which there undoubtedly were, would be sufficient to ensure that result. 74 I find the suggestion that the agreements came to an end when Lamb departed from the premises of Nortex somewhat strange in the circumstances. It is less than entirely clear from the submissions how this result is said to arise. It is not clear whether it is suggested that the terminations arose from terms of the agreements or arose in some other way. If there were relevant terms, they must have been to the effect that the departure of Lamb (or of either of the principals) personally would bring the agreements to an end. Whether it was contended that these terms were express or implied is again not entirely clear. Insofar as it is suggested that the terminations occurred in some other way, it is not clear what that way was alleged to be. 75 In my view, there is no basis for finding that the conventions were terminated. There is no evidence that would support a finding that there were express terms of the agreements to the requisite effect. There was no clear argument in favour of the existence of implied terms, or the basis on which, or circumstances in which, they arose. If the conventions were alleged to have been terminated in some other way, I am far from clear what it was. There was some inchoate argument that the agreements were terminated upon Lamb's personal departure. But the rationale of the agreements still existed. Lamru was still holder of 40 per cent of the units in the unit trust and the division of profits still had to take place at the end of each year, so long as that situation prevailed. Agreements are presumed to continue unless the mechanism of their termination is established: see per Bryson J (as his Honour then was) in Idameneo (No 123) P/L v Ticco P/L [2003] NSWSC 538 at [84], cited with apparent approval in the Court of Appeal on appeal in Idameneo P/L v Ticco P/L [2004] NSWCA 329 at [85]. The way in which the add backs convention applied may have changed, to the extent that Lamb was not still personally working in the business, but I do not see how this effected an automatic termination of the convention or justified a unilateral revocation of the agreement. In the case of the differential interest convention, there was not even a change of relevant circumstances. Both unit holders still had moneys on loan at interest to the trust. 76 In any event, even if the conventions terminated upon Lamb's departure, unless observance of them constituted a breach of trust, which I have declined to find (see [71]), they were in existence and operated to govern the preparation of the accounts for the periods during which he was working in the business, that is, up to the end of the 1996 year. Their termination at that point of time would not require or justify the alteration or rewriting of the accounts for those periods so as to remove or efface the operation of the conventions while they were in effect. There is nothing that would suggest that the termination of the conventions in any of the ways contended for would lead to their obliteration ab initio rather than a cessation of effect de futuro. 77 For those reasons, I am of opinion that the arguments that the implementation of the add backs convention and the differential interest convention constituted breaches of trust and that the conventions ought not have been acted on, or ceased to have effect, should be rejected. I hold that the liquidator was in error in revising the accounts on that basis. ISSUE 5: Was Lamru short paid $164,121 or any sum in 1992? 78 This issue encompasses two matters. The first is whether the add backs and differential interest conventions apply. That matter is determined by my determination of issues 2 and 3: see [77]. The other matter concerns the sum of $291,840. As to this, there are two questions. The first is whether this sum should be brought into account as income in this year (1992) (as it was originally) or in the 1991 year (as the liquidator has subsequently amended the accounts to do). The second question is whether, if this item of profit remains in the 1992 year, it should be divided 60:40 between Kation and Lamru. It was in the 1992 year in fact that Lewis subtracted it from the profits before division and accounted for it entirely in Kation's favour, apparently on the basis that it was in truth part of the 1991 profits, to which Kation alone was entitled, and not in truth part of the 1992 profits, in which case it should have been divided. 79 The first of these questions as to the $291,840 was best formulated in the Scott Schedule in the sections relating to the defences of the liquidator and Lamru's replies. With respect to Lamru's claim No 1 (as to the quantum of the profits of the 1991 year), the liquidator alleged: "BRS affidavit 4/9/2001. Total profits for year end 30/6/91 increased by $291,840 being stock 'reserve' at 30/6/91 previously taken into account as profits for year ended 30/6/92 - 'written back' into year end 30/6/91 profits. Income/overstated expenses for year end 30/6/90 of $521,644 assumed to have been fully 'accrued' in year end 30/6/91 re-allocated as to profits to 30/6/90". Lamru's replies include the following: "(a) There was no stock reserve as such. Lewis required, and Lamb accepted, that they would adopt a conservative closing stock valuation method. This was done year in and year out. The profit entitlements of Lamru and Kation were calculated on the basis of the tax accounts. There was no instance of 2 sets of accounts: one for the tax and one for the beneficiaries. The conservative closing stock figure was always the same as the next year's opening stock figure. (b) The suggestion that the profits to June 90 and to June 91 were incorrectly stated in the Lewis-prepared tax accounts was first raised by the Liquidator, (after representations to him from Lewis) after Kation lost the main issue decided by Young CJ in ED [sic]. Lewis has made out to the liquidator, who has adopted this belated contention, that the 90 profits were higher (Lamb had no interest in the business as at June 1990) and that $291K of the 1992 profits should be written into 1991 so that he can attempt enhance his financial interests with his argument that Lamru is only entitled to 40% of the profits made between 12 April 1991 and 30 June 1991. (c) The liquidator, who takes subject to the equities, is as much estopped as the company itself would be estopped from going back upon agreements and legitimate conventions solemnly made and applied by the trustee and the beneficiaries. (d) In any event, the contention that there was a valid and effective clause 4 determination in April 1991 which effectively disposed of all the profits from 1 July 1990 to 12 April 1991 is, for the reasons elaborated Below (Section 3 reply to Kation's defence to claim 3), wrong (e) The agreement of April 1991 (which saw Hirmanu depart as a beneficiary and Lamru come in) was made well after the 1990 accounts were settled and signed off and it is not appropriate to seek to re-open those accounts in these proceedings without notice to Hirmanu". 80 The $291,840 was an example of a figure which has at various times in the proceedings been referred to as a "stock reserve". This was a device for taxation purposes, whereby an amount of stock was moved from year to year (ie, the amount of stock at the end of a year, and therefore the profit, was, by agreement between the parties, deliberately understated) in order to "defer" payment of taxation by a year. The device did not ultimately avoid taxation on the relevant amount but, on each occasion that it was employed, moved the liability back a year. It was, of course, dishonest. It should be said, however, that, on the evidence, Lamb did not participate in the dishonesty in respect of this sum of $291,840, because it arose in the 1991 year, in virtually none of which was he a principal in the business. It was at Lewis' instance that it was moved into the 1992 year, but then entirely attributed to Kation. After the 2001 judgment Lewis advocated, and the liquidator adopted, a course whereby the $291,840 was brought into account as profit in the 1991 year, so there could be no question of Lamru participating to any extent in the profit. 81 I shall determine the second question first. For much the same reasons as I have given in respect of the division of profits in the 1991 year, I am of the view that, even if this sum be left in the profits in the 1992 accounts, the original division of profits for that year ought be allowed to stand. I accept that Lamb made some protest about the treatment of this sum at much the same time (relatively) as in respect of the 1991 year, ie, in late 1992, but thereafter proceeded as he did in relation to the controversy about the division of the 1991 income. In effect, he accepted the division of the 1992 income until after warfare broke out between Lewis and him in 1996. The accounts continued to be prepared and acted on by all concerned until that time, on the basis that the original treatment was correct. Acting on that basis included the lodgement of income tax returns prepared accordingly on behalf of the trust and by the unit holders. Lamb, and therefore Lamru, are to be taken as agreeing to the course that was followed. It is not established that it was a breach of trust or a breach of trust available to be complained of by Lamru. If it was a breach of trust, it was in the end consented to or the right to object to it was waived: see [24] above. In addition, if it were necessary, I should uphold the defence of laches, acquiescence and delay in respect of this claim also. 82 In view of my decision in [81], it is not necessary for me to decide the first question between these parties. The result as between Lamru and the Lewis interests will be the same in whichever year the $291,840 is included in the profit. There is an argument that, in any event, the liquidator having rewritten the accounts in this regard, the Court should do nothing to alter that situation, but let the $291,840 lie in the 1991 accounts, although the reasons for letting it lie are not as stated in the liquidator's defences in the Scott Schedule. This argument in favour of the present situation arises from the fact that it has become plain during the trial that the original removal of the $291,840 from the 1991 year to the 1992 year was dishonest vis a vis the revenue. Its subsequent return to the 1991 accounts restored honesty. It is argued that, once the dishonesty was revealed, an accountant's duty to the revenue compelled the liquidator to take this step, whatever the interests of the parties, and the Court as a matter of public duty should ensure that it is maintained. Although it is not necessary for me to decide this question, I am not inclined to think the argument correct. The liquidator's undoubted duty to the revenue could be discharged by drawing the facts to the attention of the Commissioner of Taxation by amending the relevant tax returns or otherwise. I am far from certain that a rewriting of the accounts was necessary or appropriate, particularly when Lamru was not in reality a participant in the relevant dishonesty. I should add that tax returns were lodged and tax paid on the basis that the $291,840 was brought into the profits in the 1992 year and attributed entirely to Kation. ISSUES 6 AND 7 6 Was Lamru short paid $27,026 or any sum in 1993? 7 Was Lamru short paid $3,758.13 or any sum in 1994? 83 The only question open in relation to these years is whether the add backs and differential interest conventions apply. This matter is determined by my determination of issues 2 and 3: see [71]. ISSUE 8: Was Lamru short paid $38,248.01 or any sum in 1995? 84 In this issue there are the following sub issues: (a) Was it correct for the interest payable to the unit holders to be expensed or should it have been subject to the differential interest convention? (b) Was a profit share of $58,070 (7.5 per cent) payable to Mark Lewis to be deducted as to 3 per cent out of Lamru's 40 per cent share of the profit? ISSUE 9: What was the free net income in 1996? 85 In this issue there are the following sub issues: (a) Was it correct for the interest payable to the unit holders to be expensed or should it have been subject to the differential interest convention? (b) Ought the add backs of $307,060 be added back? (c) Was a management fee of $101,626 payable to Mark Lewis an expense of the business in 1996? (d) What was the correct value of the closing stock? ISSUE 10: What was the free net income at 30 June 1997? 86 In this issue there are the following sub issues: (a) Was it correct for the interest payable to the unit holders to be expensed or should it have been subject to the differential interest convention? (b) Ought the add-backs of $307,060 be added back? (c) Was a profit share of $138,733 payable to Mark Lewis an expense of the business in 1997? (d) Flow on effect of the stock $164,038 – profit element. (The profit from 120,000 odd units was $164,038.) (e) Were legal and accounting expenses of $168,550.87 authorised by the board or ratified by the company? (f) Should the item of $284,837 for "China creditors" be taken into account when determining the free net income? 87 Of these sub issues of issues 8, 9 and 10, issue 8(a), issue 9(a) and (b) and issue 10(a) and (b) are determined by my determination of issues 2 and 3: see [77] above. Issues 8(b), 9(c) and 10(c) will be dealt with together under the heading Payments to Mark Lewis. Issues 9(d) and 10(d) will be dealt with together under the heading Fraudulent taking of stock. Issue 10(e) will be dealt with under the heading Legal and accounting expenses. Issue 10(f) will be dealt with under the heading China creditors. Payments to Mark Lewis 88 It is important with regard to these claims to recall the allegations concerning them in the "pleadings". The following allegations are made in the points of claim concerning the 1995 year: "34 In breach of trust Nortex failed to pay the full 40% of the free nett [sic] income to 95 income vesting day PARTICULARS a Nortex, as indicated in annexure C to Lamb's aff sworn 27/3/00 reduced Lamru's share down to 37%, allowing 7.5% ($58,070) to Mark Lewis. The $58,070 was treated in the accounts as a profit distribution to Kation. b In its Proof of Debt Lamru claimed $119,37 1 .72 for so-called 'Mark Lewis Bonuses'. That $119,371.72 included 40% of the $58,070" 89 The following allegations are made in the points of claim concerning the 1996 year: "45 In further breach of trust Nortex accounted to the benefit of Lewis junior an amount of $101,626 allegedly as a bonus for services rendered thereby depriving Lamru of 40% of that amount ($40,650.40). PARTICULARS a Scott Schedule claim 18 and evidence there referred to b Aff Lamb 15/2/02 [sic] …… 46 Nortex's conduct as pleaded in 45 was not authorised by its board as Lewis junior knew or ought to have known." 90 In relation to the 1997 year, paragraphs 60 and 61 allege as follows: "60 In further breach of trust Nortex accounted to the benefit of Lewis junior an amount of $138,733.30 allegedly as a bonus for services rendered; 40% of which is $55,493.32 PARTICULARS a Scott Schedule claim 24(ii) and evidence there referred to b Aff Lamb 15/2/02 …… 61 Nortex's conduct as pleaded in 60 was not authorised by its board as Lewis junior knew or ought to have known." 91 Each of the sets of allegations in paragraphs 34, 45 and 46, and 60 and 61 is followed by the accessorial allegations (see [23] above) in respect of that set, being paragraphs 35 and 36, paragraphs 48 and 49 and paragraphs 63 and 64 respectively. 92 In the defence, the paragraphs of the points of claim referred to in [88] to [91] are traversed (paragraph 6). In addition, the Lewis interests plead that the payments were made to Mark Lewis pursuant to an agreement between Nortex and him and, in respect of the 1995 and 1996 years, with the knowledge and consent of Lamru by its agent, Lamb (paragraph 35). The particulars appended to paragraph 35 refer to an affidavit of Mark Lewis, which at this trial was neither read nor put into evidence in any form, and so provide no further elucidation. 93 As further substantive defences, the Lewis interests have in relation to the 1995 year pleaded laches, acquiescence and delay (paragraph 37B) and accounts stated and accord and satisfaction (paragraph 37C). The accounts stated are said to be constituted by "the accounts of Nortex … in respect of" the 1995 year (paragraph 37C(a)). The accord and satisfaction is said to arise from "the adoption of the accounts of Nortex by its directors and the acceptance of such accounts by Lamru and Kation … in respect of" the 1995 year (paragraph 37C(b)) The general pleading of consent, waiver and estoppel also apply: see [24] above. 94 Questions which arise in the determination of these matters are as follows: (1) whether the matter alleged in any of paragraphs 34, 45 or 60 of the points of claim constituted a breach of trust; (2) whether any of these payments was made pursuant to a binding contract with Mark Lewis; (3) whether the payments in 1995 and 1996 were agreed to by Lamb on behalf of Lamru; (4) whether the 1995 accounts constituted an account stated or an accord and satisfaction in respect of the 1995 payment; (5) whether equitable relief is precluded by the doctrine of laches, acquiescence and delay; the determination of the defences of consent, waiver and estoppel may or may not be necessary. 95 The evidence concerning these matters is very disorderly. It is necessary to set out parts of it in full, particularly in relation to question (3). 96 I shall deal first with questions (1) and (2) together. In relation to the $58,070 in the 1995 year, the Lewis interests' primary contention was that there could be no breach of trust, since there was no loss to the trust itself. It was said that dealing with the $58,070 in the way that occurred was merely a "book entry". There are a number of valid responses to this. The first is that the complaint made in paragraph 34 of the points of claim is not that the $58,070 was paid to Mark Lewis, but that Lamru's 40 per cent share of profit was reduced to 37 per cent. That it was so reduced is made clear by the 1995 accounts. It will be necessary to refer further to these accounts. Secondly, a payment can, of course, be effected in law by a book entry. Thirdly, a breach of trust can be committed not only by abstracting from the trust a sum that should not be abstracted at all, but by paying to the wrong person a sum which should undoubtedly be paid out: Meagher & Gummow, Jacobs' Law of Trusts in Australia (6th ed, 1997) at [1711], [1735]; In re Hulkes. Powell v Hulkes (1886) 33 ChD 552 at 556 – 557 per Chitty J. Here, the income should have been distributed to Kation and Lamru 60:40 (subject to adjustments), but was distributed, one would infer quite deliberately (though that matters not), in different proportions. In my view, that constituted a breach of trust. 97 The case is not quite so clear in the case of the 1996 and 1997 payments. The complaint that is made is of the payment of six figure sums to Mark Lewis as bonuses, depriving Lamru of 40 per cent of those sums by reason of the consequential diminution of the net profit. The case here is that, as there was no valid resolution of the board of directors of the trustee company to pay these large bonuses, to do so was a breach of trust. The principal submission put by the Lewis interests was that these payments were in satisfaction of binding contracts with Mark Lewis. Secondly, they were to be regarded as justified and proper, insofar as the liquidator found them to be fair and proper remuneration for what Mark Lewis in fact did. But, to have the effect contended for, the contracts would have to bind the trustee company. There is not established on the evidence before me a contract binding on the company. There is no evidence which I accept of the directors (including Lamb) resolving to enter into or otherwise assenting to any such contract (as to the evidence, see [98] – [102] below), nor is there evidence of any such contract being made by anyone with Mark Lewis. Furthermore, insofar as it matters, the liquidator found that the amounts paid were in excess of the value of the services rendered by Mark Lewis. But, as there was no relevant contract established, the payments cannot be found to be validated pro rata, simply by a finding of the liquidator as to their value. In the circumstances, I hold that the payments to Mark Lewis in the 1996 and 1997 years were breaches of trust. 98 Question (3) concerns whether the 1995 and 1996 payments were consented to by Lamb on behalf of Lamru. A breach of trust cannot be relied on by a beneficiary who, with full knowledge of the relevant facts, assents to the breach of trust. This question was hotly contested. It is necessary to set out the evidence concerning it at some length. Lamb deposed in an affidavit of 27 March 2000: "13 In about January 1995 Mr Lewis said to me words to the effect that his son Mark (who was an employee doing office and warehouse work) should receive a profit share of 15%, out of his and my shares, for no consideration. I did not agree. This issue grew into a considerable conflict between myself and Mr Lewis over the next 12 months. In February 1996 Mr Lewis said to me 'I am paying Mark 15% backdated to January 1995'. I said 'Pay him out of your share, not mine'. Things got worse and worse. I went away for a holiday and thought about it and in May 1996 I decided that the relationship was totally unworkable." And in an affidavit of 12 May 2000: "3(a)(iii) …… Lewis Senior did say to me in early 1995 that he wanted to give his son a 15% share of the business's [sic] profits. I made it very clear to him that I did not agree. He continued to try to persuade me to give in. I would not. In about February 1996 he informed me (at about the time that the accounts to 30 June 1995 were being finalised) that he was going to give his son 15% backdated to January 1995. I protested most strongly and it was really this conduct of Lewis Senior that precipitated my decision to give up trying to be partners with him. At no stage did he tell me that he'd made any agreement with Mark Lewis of the sort that Mark now alleges. In the early part of 1996 Lewis Senior presented me with his profit split calculation for the year ended June 1995." And in an affidavit of 11 April 2002: "3 At no stage in the period from January 1995 to February 1996 did Mr Lewis or Mark Lewis make any statement to me to the effect that any agreement had been made giving Mark Lewis 15% of the profits. 4 Although I am not able to be precise about the time, my best recollection is that Mr Lewis showed me the document in Ex A 178 in about late 1995 early 1996. We had already argued for nearly a year about Mark Lewis being given a profit share with me to contribute to it and again when he showed me his document (at 178) we quarrelled and I told him again I was not going to agree to this. 5 Not long after seeing the 178 document Mr Lewis and I had the conversation that I referred to in para 13 of my affidavit of 27 March 2000 (where I said he should pay Mark out of his share and not mine). 6 The document at Ex A 174 shows how the profit before add-backs as at 30 June 1995 was split between Lamru and Kation. If you add the $58070 [sic] to the $410398 [sic] (at the foot of 178) you get the 468468 [sic] shown as going to Kation at 174. Mr Lewis signed off on the tax return for 1995 on 27/2/96 (see 171). As best I can recall, our conversation (as referred to in para 5 above) occurred shortly before 27/2/96. By 27/2/96 Mr Lewis must have caused the $58,070 (that he said he was to go to Mark [sic]) to be credited to Kation. I say this because of the distribution statement in the tax return (ie174 [sic]). As stated in para 3(a)(iii) of my affidavit of 12 May 2000, at no stage did Mr Lewis tell me that he'd made any agreement with Mark of the sort he alleges in para 35 of his affidavit of 9 April 2002." 99 I should say that page 178 of Exhibit A which is referred to in Lamb's evidence is a handwritten note which shows a proposed distribution of the 1995 profits as to 55.5 per cent to Lewis, 37 per cent to Lamb and 7.5 per cent ($58,070) to Mark Lewis. In the accounts appended to the 1995 income tax return, which as stated above was dated 27 February 1996, the distribution was shown as to 63 per cent to Kation and 37 per cent to Lamb. 100 Again, Lewis did not give evidence at the trial. Lewis' version, so far as it can be gleaned, appears indirectly. As can be seen above, at the end of paragraph 6 of Lamb's affidavit of 11 April 2002, there is a denial of some account in an affidavit of Lewis (which is not itself in evidence) that he had told Lamb that he had an agreement with Mark Lewis concerning a 15 per cent profit share. In a document prepared for the mediation, Lewis' (unsworn) version is stated as follows: " Performance Bonus – The payment of this was approved at a directors meeting held on 6.2.95 having regard to the low level of salary compared to Mark Lewis' responsibilities and contributions within the company. Mr Mark Lewis was then informed that the performance bonus would become part of his overall remuneration package. R Lamb has recently acknowledged the critical role which he now plays in the overall operation of business, and has expressed the opinion that it should be shown as an outgoing rather than a distribution of profit. The treatment he suggests has been adopted." 101 In relation to these assertions, Lamb deposed in an affidavit of 28 November 2002: "20 …… I queried the performance bonus in my letter (annexure B to my affidavit of 17 April 2002) and on 20 May 1997 I got the document that is annexure A to my affidavit of 11 April 2002 and found out that Mr Lewis was alleging that the so-called performance bonus was paid to Mark Lewis under a director's [sic] meeting of 6 February 1995. There was no such director's [sic] meeting. ……" 102 Although cross examined, Lamb did not resile from his denial of a directors' meeting on 6 February 1995, nor from his general denial of any consent to the payment of a bonus to Mark Lewis funded in part from Lamru's share of profits. There is no minute of a directors' meeting of 6 February 1995, nor is the holding of such a meeting sworn to by Lewis. On the evidence, I find that there was no directors' meeting on 6 February 1995. A curious feature of this aspect of the case is that the only directors' meeting canvassed as relevant during the bulk of the trial was the alleged meeting of 6 February 1995. There was no debate about a directors' meeting on 8 December 1995 until final submissions. Then there was raised a minute of a directors' meeting of that date, buried in the voluminous folders of documents in evidence usual in modern commercial cases. This recorded the presence of Lewis and Lamb, was signed by Lewis and recorded a resolution adopting the 1995 accounts said to have been tabled at the meeting. There is no proof of the document tabled at that meeting, if indeed the meeting took place. As I have said, the version of the 1995 accounts in evidence is that attached to the income tax return, which was not signed until 27 February 1996. Those accounts do not bear Lamb's signature. As Mr Motbey conceded in argument, nowhere did Lamb expressly deny the holding of a meeting on 8 December 1995. On the other hand, it was never put to him in cross examination that that meeting had in fact been held, that he had attended it and that at the meeting the accounts showing a 37 per cent only distribution of income to Lamru had been approved. 103 Somewhat hampered by the lack of a version of the facts sworn by Lewis, Mr Cotman submitted that, as Lamb's word was absolutely worthless, it could not be taken to prove anything in relation to these claims. I have already rejected that submission in [31] above. I bear in mind that there is no sworn evidence to support the version put forward on behalf of the Lewis interests. I am of the view that the inherent probabilities of the matter favour Lamb's version. It is improbable that he would agree to Mark Lewis being given free a profit share out of Lamru's entitlement, which had been purchased in 1991. Even if Lamb had recently been treated generously by Lewis in relation to the advance to him of New Zealand profits, what he was being asked to do was to reduce permanently, and for no consideration, Lamru's ongoing income share in a profitable business. I accept that relations between Lewis and Lamb did gradually deteriorate over a period from 1995 until the denouement on 28 June 1996. I find that Lamb did not agree to Mark Lewis having a share of profits out of Lamru's entitlement, but rejected the suggestion whenever Lewis put it to him. 104 I find that no directors' meeting was held on 8 December 1995. I take into account the provisions of the corporations legislation (see the Corporations Act 2001 (Cth) ("the CA") s 251A(6)) that a minute should be taken to be evidence of the transactions stated until the contrary is proved. There is no express evidence that such a meeting was not held on that day. However, Lewis' only written assertion is of a meeting on 6 February 1995 and, not unnaturally, Lamb's affidavit evidence dealt specifically only with that. The evidence suggests that what passed between them on this subject matter (including discussion by reference to the handwritten proposal Exhibit A page 178) occurred only shortly before the income tax return was signed on 27 February 1996. On all the evidence, I conclude that the meeting purportedly recorded by the minute of 8 December 1995 did not take place. I should add that, in any event, it would be my view that the rule in Browne v Dunn (1893) 6 R 67 would preclude the Lewis interests from relying on that minute. Although it was in evidence in the bundle of documents, it was not referred to in the course of evidence by either side. If the Lewis interests intended to rely on it in final submissions as having the effect contended for, they should have put its existence to Lamb in cross examination to permit him to respond to it. Without that, Lamb was not given a fair opportunity of dealing with the proposition that there was a directors' meeting on that day at which the distribution of a reduced share of profits to Lamru or accounts embodying such a distribution were approved: see Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 22 – 23 per Hunt J; R v Birks (1990) 19 NSWLR 677 at 689 - 690 per Gleeson CJ; Blundell v Curvers [1999] NSWCA 421 at [28] – [34] per curiam; Southern Area Health Service v Brown [2003] NSWCA 369 at [102], [103] per Sheller JA. Without reliance on that minute, there is no evidence of a directors' meeting on that day. 105 I conclude that Lamb did not consent on behalf of Lamru to the payments to Mark Lewis in the 1995, 1996 or 1997 years or to the reduction by 3 per cent of the 1995 profit distribution to Lamru. 106 As to question (4), I need not go into the interstices of the law of accounts stated or of accord and satisfaction. In view of my finding, that it is not established that a directors' meeting took place on 8 December 1995 as recorded in the minute, the fact that the 1995 accounts are not signed by Lamb and that there is no other evidence of the accounts being adopted by Lamru or Lamb or of any agreement being entered into by Lamru or Lamb in relation to the distribution of the 1995 income, neither of these defences can succeed. 107 As to question (5), I do not find the defence of laches, acquiescence or delay established in relation to this claim. My findings above are to the effect that Lamb at all times protested at the suggestion that Mark Lewis should have a profit share partly out of Lamru's entitlement and did not assent to his having the contested bonuses. The quarrel concerning the profit share proposal culminated in February 1996. On 28 June 1996 Lamb left the business. Negotiations to settle the parties' affairs commenced by the end of June and inexorably descended into this litigation. I do not think any case of laches, acquiescence or delay is made out. The determination of the defences of consent, waiver and estoppel is not necessary. Fraudulent taking of stock 108 In relation to these claims also it is necessary to refer to the "pleading" allegations. The points of claim allege in respect of the 1996 year: "42 In breach of trust Nortex wrongfully failed to include in its closing stock for the accounting period ending on the 96 income vesting day some 120,464 units of stock having a value (for the purposes of valuing closing stock) of $219,215.00 with the consequence that the total free nett income to the 96 income vesting day should be increased by that amount and Lamru's 40% share thereof ( $87,686.00 ) accounted to it. PARTICULARS a Scott Schedule claim 17 …." The accessorial allegations in relation to paragraph 42 are made in paragraphs 43 and 44. 109 This matter is dealt with by Lamru as follows in item 17 of the Scott Schedule: "That the profits, before add-backs, were, in truth, $957,150.52 and not the $533,299.12 shown in the tax returns and the accounts (prepared by Lewis after Lamb left) because the true value of the closing stock was $423,851.40 more than the closing stock figure shown by Lewis in those accounts". And under the heading "Evidence": "Lamb affidavit 19/6/00 and floppy disc RL1 (being copy of Nortex's stock control record as at late June 1996); annexure A to aff of Lyons 20/7/01" 110 In paragraph 6 of the defence, the Lewis interests traversed the above paragraphs of the points of claim. In the Scott Schedule, the Lewis interests asserted that Lamb kept the stock records and that any inaccuracy was due to his conduct. 111 The liquidator in the Scott Schedule stated that he had disallowed this claim. Lamru replied that this was a hearing de novo, that the rejection was wrong and that the liquidator "had Potter's information from Lewis that he alleged that Lamb had stolen the property." 112 Concerning the 1997 year, the following allegations are made by Lamru in the points of claim: "56 In breach of trust Nortex failed to account for the proceeds of sale of the 120,464 units of stock that were in its possession at the commencement of the accounting period expiring on the 97 income vesting day. PARTICULARS a Scott Schedule claims 21, 22 and 23 and the evidence there referred to b Aff Lamb 15/2/02 c Aff Lamb 14/11/02 Annexure C and exhibit AV pages 78A-D 57 Those units of stock had a sale value of $383,253.00 translating to a gross profit on sale of $164,038.00 which sum should be, and is, included in the free nett [sic] as at the 97 vesting day (ie the $1,425,079.84 referred to in 55) with the result that Lamru is entitled to 40% of that concealed profit ( $65,615.20 )." The accessorial allegations in relation to paragraphs 56 and 57 are made in paragraphs 58 and 59. The matter is elucidated as follows in item 23 of the Scott Schedule: "That the fair market value of the $423,851.40 worth of stock disposed of by Lewis during the relevant accounting year and not brought to account in the Lewis-prepared accounts is the $522,223.86 arrived at by Lamb in his audit/analysis as explained in his affidavit." 113 In the defence, the Lewis interests in paragraph 6 traversed the above paragraphs of the points of claim. In addition, they pleaded as a substantive defence to these claims laches, acquiescence and delay (paragraph 37A). They also pleaded unclean hands defences (paragraphs 37D - 37I). The gravamen of these defences is that, in support of these claims, Lamru relied on evidence which Lamb gave (under the protection of a certificate under s 128 of the EA) that, during his time with Nortex, Lewis and he had together engaged in a scheme to defraud the revenue as set out in [114] and that Lamru propounded in this case documents which were false by reference to their concealment of that fraudulent scheme. 114 Lamru alleges that Lewis or Kation during the 1997 year sold for cash stock of Nortex and that they, rather than Nortex, received the cash. During the trial its claim was moderated from that made in the points of claim. In the end, the claim alleged the taking of 120,464 items, of a value of $219,215 and involving a loss of profits of $164,038. The case is sought to be proved by the tender of what is said to be the stock list of Nortex as at 28 June 1996 (Exhibit K); its adjustment by reference to purchase and sale records to determine the stock as at 30 June 1996; and the comparison of that figure with the stock figure inserted by Lewis in early 1997 in the 1996 accounts. In support of the inference that the missing stock was sold for cash and that Lewis took the proceeds, Lamb deposed that, while he was working in the company, Lewis and he had together engaged in defrauding the revenue by the very practice of selling goods of Nortex for cash, omitting the proceeds from the Nortex accounts and pocketing the cash themselves, rendering it likely that Lewis, left alone in control of the company, continued the same practice for his own sole benefit. This claim is put in issue by the Lewis interests. 115 Questions which arise in the determination of this matter are as follows: (1) whether Exhibit K should be accepted as, in substance, a copy of the Nortex stock list as at 28 June 1996; (2) whether Lamb's adjustment of the stock list between 28 and 30 June 1996 ought be accepted; (3) whether Lamb's workings as to the unexplained difference between his 30 June 1996 stock figure and the 30 June 1996 stock figure in the accounts should be accepted as accurate; (4) whether Lamb's account of the practice of selling stock engaged in by Lewis and himself between 1991 and 1996 ought be accepted; (5) whether it ought be inferred that the difference in the stock figures resulted from Lewis selling stock for cash and taking the proceeds instead of accounting for them to Nortex; (6) what was the value of the goods taken and sold in this fashion and what was the profit lost; (7) whether equitable relief is precluded by the doctrine of laches, acquiescence and delay; (8) whether equitable relief is precluded by the unclean hands defences. 116 This issue of the fraudulent taking of stock must be viewed by reference to two rules. 117 The first is the rule as to the onus of proof in civil cases of allegations that amount to allegations of crime or fraud. Although this is a commonplace, it was argued at length in this case. The subject matter is now governed by s 140 of the EA. That section provides as follows: "Civil proceedings: standard of proof (1) In a civil proceeding, the court must find the case of a party proved if it is satisfied that the case has been proved on the balance of probabilities. (2) Without limiting the matters that the court may take into account in deciding whether it is so satisfied, it is to take into account: (a) the nature of the cause of action or defence, and (b) the nature of the subject-matter of the proceeding, and (c) the gravity of the matters alleged." 118 Section 140 itself did not figure largely in the argument. Familiar cases were referred to, such as Briginshaw v Briginshaw (1938) 60 CLR 336, Helton v Allen (1940) 63 CLR 691, Rejfek v McElroy (1965) 112 CLR 517 and Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170. In the latest edition of his Uniform Evidence Law (6th ed, 2004 at [1.4.100]), Stephen Odgers casts doubt on the continuing applicability of these cases and particularly of the dictum of Dixon J in Briginshaw that "when the law requires the proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found". These words are embedded in Dixon J's classic statement concerning the onus of proof in adultery cases at 361 – 362. The situation was summarised in Rejfek, where the Court said at 521: "…… If this phrase is used to mean no more than that proof of fraud should be clear and cogent such as to induce, on a balance of probabilities, an actual persuasion of the mind as to the existence of the fraud, it is in accordance with the decision of this Court in Helton v Allen (1940) 63 CLR 691. …… The 'clarity' of the proof required, where so serious a matter as fraud is to be found, is an acknowledgement that the degree of satisfaction for which the civil standard of proof calls may vary according to the gravity of the fact to be proved. ……" 119 Odgers concedes that his view is in conflict with a dictum of Spigelman CJ in Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262 at [136] and also with what was said in the Court of Appeal in Amalgamated Television Services Pty Ltd v Marsden [2002] NSWCA 419 at [61]. I do not think there is any inconsistency between the provisions of s 140 and what was said by Dixon J in Briginshaw. But in any event, as a single Judge, I am bound by the decision of the Court of Appeal to regard the Briginshaw test as still representing the law. I should add that I should reach the same result in this case whichever view is correct. 120 The application of the rule in cases of circumstantial evidence was discussed by Dixon J in Briginshaw at 368 – 369 as follows: "Upon an issue of adultery in a matrimonial cause the importance and gravity of the question make it impossible to be reasonably satisfied of the truth of the allegation without the exercise of caution and unless the proofs survive a careful scrutiny and appear precise and not loose and inexact. Further, circumstantial evidence cannot satisfy a sound judgment of a state of facts if it is susceptible of some other not improbable explanation. But if the proofs adduced, when subjected to these tests, satisfy the tribunal of fact that the adultery alleged was committed, it should so find." 121 The other rule which must be borne in mind is the rule as to the significance of the failure of a party to call evidence in answer to allegations made against it. This is generally referred to as the rule in Jones v Dunkel (1959) 101 CLR 298. Although the application of this rule can have complexities, it applies in a simple and straightforward way in regard to this issue. In the most significant activities involved, there were only two participants, Lamb and Lewis, and Lewis did not give evidence. The classic statement of the consequence in Jones v Dunkel is that any inference favourable to a plaintiff, for which there is ground in the evidence, may be more confidently drawn, when a person presumably able to put the true complexion on the facts relied upon as the ground for the inference has not been called as a witness by the defendant. 122 As to question (1), whether Exhibit K should be accepted as a copy of the Nortex stock list as at 28 June 1996, it must be remembered that it was tendered on the basis that it was in substance a hard copy of file 22 contained in Exhibit H. Exhibit H was a computer containing a hard disk in which file 22 was recorded. After a lengthy voir dire, file 22 was sufficiently established as a copy of the Nortex computer stock list as at 28 June 1996 for that computer to be admitted into evidence so far as it contained file 22: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 337 at [10]. At the same time, I made it plain that that ruling did not foreclose the defendants from continuing to contest that file 22 should be accepted as establishing the stock level at 28 June 1996 at the end of the evidence. In particular, the establishment of file 22 as a copy of the stock list depended on acceptance of evidence of Lamb. I accepted that evidence on the basis of my assessment of his credit as it stood at that time, whilst recognising that his credit might be further damaged by cross examination during the course of the trial: see [9] of that judgment. Thereafter, Exhibit I was tendered as a hard copy of file 22 in Exhibit H and, subsequently, Exhibit K was tendered, which was agreed to contain the same figures as Exhibit I and which has been the version generally referred to as establishing the contents of the Nortex computer stock list as at 28 June 1996. 123 Further damage was done during the trial to Lamb's credit, as mentioned in paragraphs [29] and [30] above. However, I continue to accept his evidence as to this matter and adhere to my previous finding on the balance of probabilities (and bearing in mind that this is a fraud issue) as to file 22 in Exhibit H being a copy of the Nortex computer stock list as at 28 June 1996. I therefore find that Exhibit K contained what is in substance a hard copy of that stock list. In making that finding,I bear in mind that, despite attacks on Lamb's credit in other areas, there was no substantial further attack on his evidence concerning file 22. Lewis sat in Court throughout the trial, but did not give evidence which may have cast doubt on the accuracy of that document as a copy of the stock list. Nor did Mark Lewis, who was primarily responsible for keeping the stock lists both before and after 28 June 1996, give evidence. Mark Lewis is a party to these proceedings, although not involved in this trial. There is no suggestion that he was not available to be called as a witness. In fact, no submissions were put in final argument that Exhibit K should not be treated as a copy of the stock list as at 28 June 1996 that were substantially different from, or additional to, those put on the voir dire. 124 As to question (2), whether Lamb's adjustment of the stock list between 28 and 30 June 1996 ought be accepted, again I have come to the conclusion that it ought. The period was short. Lamb appears to have examined the available records thoroughly. Attacks on him in cross examination about these matters did not achieve any great success. 125 Question (3), whether Lamb's workings as to the unexplained difference between his 30 June 1996 stock figure and the 30 June 1996 stock figure in the accounts should be accepted as accurate, is a much larger subject matter than question (2). Furthermore, Lamb changed his evidence on this subject matter on a number of occasions. This led to him being extensively cross examined and criticised. The necessity for him to change his evidence was a valid subject of criticism, and the evidence must be approached with caution. However, it should be said that the effect of the revisions was to reduce very considerably, rather than to increase, Lamru's claim. I have decided that I should accept his evidence establishing the difference between the stock level as recorded in the 1996 accounts and the actual stock level as at 30 June 1996. 126 As to question (4), whether Lamb's account of the practice of selling stock engaged in by Lewis and himself between 1991 and 1996 ought be accepted, again the evidence must be approached with caution. It is self serving. It was brought forward late in the piece. Not only was it not incorporated in the affidavits which were filed before the trial, it was a considerable way into the trial that the question was asked which triggered an application for a certificate under s 128 of the EA. 127 Upon the grant of that certificate, the nub of the evidence given was as follows: "Q Would you tell the court the nature of the transactions in the period in which you were in the business and in which there was the maintenance of this type of file 22 stock record - would you tell the court what were the nature of the transactions that were described under that banner 'samples'? …… A 'Samples' refers to cash sales that Mr Lewis and I split amongst ourselves in proportion to our beneficial ownership of Nortex. The file 22 shows the units relating to those sales under the heading 'Samples'. Q Can you be a little more explicit as to what occurred? A If I can give an example, that is the best way to -- Q Yes. A If we sold some towels for - 10 towels for $100, the $100 cash proceeds from that sale would be split between Mr Lewis and I, $60 for him and $40 for him. The 10 units recorded in the sample docket book would then be recorded in the file 22 under the 'samples' column. Q There was a samples docket book, was there? A Yes; in the period that I was there. Q What would be shown in that docket book in relation to the example you gave of 100 towels? A It may or may not have the person's name at the top of the page, it may just have cash sales and it would have 10 towels at $10 equals $100 and that was about as much information as might be included. There would be enough information to identify the stock code. So it might have, for example, BTD times 10 at $10 for a total of $100. Q When you say the cash was divided, I gather this wasn't shown as sales proceeds in the company's books; is that what you are saying? A That's correct." 128 The considerations set out in [126] militate against the acceptance of this evidence. However, I was impressed by the manner in which this evidence was given. Despite the vigour of the cross examination, it was not directly suggested that this evidence was false. In fact, Mr Cotman in final address did not really controvert this evidence, but suggested that, so far as it went, it showed that Lamb had received most of the cash proceeds and not accounted for them to Lewis. However, the evidence in this regard related to a limited period leading up to the breakdown. No evidence denying Lamb's account was given by the other participant in the conduct. The Jones v Dunkel inference is available. Furthermore, there are important pieces of documentary corroboration. The most important is Exhibit 5. There are also cross references in Exhibit 6. Exhibit 5 is said to be a document produced by Lamb which records the collection of cash payments from various sellers (referred to by first name) of Nortex's goods and the distribution of that cash to Lamb and Lewis (in the period covered by the document mostly to Lamb) by reference to columns headed "RL" and "PL". Lamb also gave detailed evidence as to how the document was compiled from docket books. The document was originally brought forward by Lamb as an exhibit to an affidavit, but it was in fact tendered on behalf of the Lewis interests, first as Exhibit A39 on an interlocutory application and subsequently as Exhibit 6 in the trial. It was tendered avowedly as a document of which Lamb was the author. It was not suggested in cross examination that it was manufactured ex post facto for the purposes of the trial. Taking all these matters into account, and bearing in mind that this is a fraud issue, I feel the requisite degree of satisfaction that this portion of Lamb's evidence ought be accepted and that Lamb and Lewis did engage together in the dishonest practice outlined by Lamb. 129 As to question (5), whether it ought be inferred that the difference in the stock figures resulted from Lewis selling stock for cash and taking the proceeds himself, the evidence is circumstantial. I have accepted the matters set out in [128] above. The discrepancy is established. It is a greater leap, or at least step, to infer that the difference was caused by Lewis continuing to abstract and sell stock and pocket the cash from the sales. However, I am assisted in drawing the requisite inference from the failure of Lewis to give or call evidence either denying the continuation of the pre existing practice, or suggesting some other explanation for the stock discrepancy. I find that Lewis (with the knowledge and acquiescence of Kation), during the 1997 year, took and sold stock of Nortex and did not pay or account to the company for the proceeds. Although the case is circumstantial, I have come to this conclusion bearing in mind what Dixon J said in Briginshaw at 368 - 369 as set out in [120] above. I have also borne in mind Dixon J's statement in Jones v Dunkel at 305: "…… But the law … does not authorise a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied." I should add that I do not rely in reaching this conclusion on what was supposedly said by Potter, although a great deal of time was taken up at the trial wrangling about that. I do not find it possible to come to a conclusion as to what Potter said on that occasion. I do accept that at one stage Lewis said to Lamb concerning this matter words to the effect, "You prove it", but this has not played a significant part in my conclusion. 130 As to question (6), what was the value of the goods taken and sold in this fashion, in view of my answer to question (8), it is not necessary for me to decide question (6). 131 As to question (7), relating to the defence of laches, acquiescence and delay, it is equally not necessary for me to decide this question. However, I should say that, for reasons similar to those expressed in [107] in relation to the claim arising from payments to Mark Lewis, I should be unlikely to uphold this defence. I say this bearing in mind the recency of these claims and the fact that negotiations to settle the parties' affairs commenced shortly after, followed by this litigation. I do not think there was any undue delay in relation to this subject matter. 132 Question (8), as to whether the unclean hands defences succeed, is an extensive subject that I shall deal with under a separate heading. The unclean hands defences 133 These defences are based on the maxim, "He who comes into equity must come with clean hands". As is emphasised by authority on the subject, it is of the utmost importance to characterise precisely the conduct relied on and the way in which it is said to be improper. The charges of law contained in the defence concerning the two heads of conduct complained of are as follows: "37G In the presents, the Plaintiff does not come to the Court with clean hands in that the Plaintiff, by the Certificate evidence given in support of and proof of its case against the Defendants, relies on evidence of participation by Lamb and Lamru in an unlawful scheme to defraud the Commissioner of Taxation. …… 37I In the presents the Plaintiff does not come to the Court with clean hands in that by propounding false or misleading affidavits and particulars and schedules in support of its case, it has abused the process of the Court." 134 It is important to note that the defences relied on are propounded in terms of unclean hands rather than of illegality and that, although offences against the revenue laws are alluded to, I have not been referred to any specific provisions of those laws, or of the Crimes Act 1995 (Cth) or its predecessor, and it is not been stipulated that any particular statutory prohibition or penal provision operates in the circumstances. The allegations that are made are that evidence was given in support of this claim of Lamru's participation through Lamb in dishonest and unworthy conduct, in seeking to defraud the revenue, and that, earlier in these proceedings, false documents were propounded seeking to conceal that behaviour. 135 The defences of illegality and unclean hands have come increasingly to be regarded as separate defences. The defence of illegality is equally operative in respect of claims at law and in equity. If the transaction sued on is itself unlawful, then in general terms it will not be enforced at law or in equity. In those circumstances, there is no need for recourse to the clean hands doctrine: see, for instance, per Deane and Gummow JJ in Nelson v Nelson (1995) 184 CLR 538 at 550 – 551. The defence of unclean hands operates only in respect of claims for equitable relief. If, on a claim, the claimant is entitled to both legal and equitable relief, the establishment of the defence of unclean hands will preclude the equitable relief, but will not preclude the availability of purely legal relief: see the decision of the Court of Appeal in Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612 at [54]. In this case, Mr Motbey attempted to characterise the claim agitated as essentially one in debt and therefore purely legal. Lamru, he said, is in effect suing on its loan account. But the "pleadings" belie this assertion. The claim is propounded as one of breach of trust and is extended from Nortex to Kation and Lewis on the basis of their participation as accessories in those breaches of trust. Success in the defences will therefore preclude relief, which is essentially equitable in nature. 136 Of the clean hands maxim it is said in Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [3-110]: "[3-110] This an equally important maxim. It means that when a plaintiff whose conduct has been improper in a transaction seeks relief in equity that relief will be refused. It is closely linked, both in origin and application, with the previous maxim. [He who seeks equity must do equity.] Like it, it is an historical reflection of the fact that courts of equity began as courts of conscience. Many cases, such as the money-lending cases just discussed, would be considered as aptly under either rubric. Indeed in Fitzroy v Gwillim (1786) 1 TR 153; 99 ER 1025, Lord Mansfield CJ (whose knowledge of equity was not his strong suit) confused the two, saying that in equity a plaintiff must 'come with clean hands according to the principle that those who seek equity must do equity'. By 'improper' is meant legal, not merely moral, impropriety: Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184; [1775-1802] All ER Rep 140. Impropriety, however, is not illegality. The defence of illegality is distinct from the defence of unclean hands; and if the former exists, there is no need to rely on the latter." The reference to "the defence of illegality" I take to be a reference to the defence that the transaction sued upon is itself forbidden by law, either in its inception or in its performance, using the expression in the same way as I have in [135] . 137 There is a most useful recent collation and discussion of the authorities relating to the application of the clean hands maxim in the judgment of Campbell J in Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060, which I have found to be of the greatest utility in formulating the principles applicable in this case. 138 Out of the authorities the following relevant propositions may be distilled: (a) the maxim requires the Court to look at the conduct of the applicant for relief rather than that of the defendant; it is past conduct that is relevant: Black Uhlans at [159]; (b) there is a limitation on the types of conduct which will be material; (c) the conduct must be conduct towards the defendant; (d) the conduct must have an immediate and necessary relation to the equity sued for; (e) there is no general rule in equity that where there has been any impropriety equity will allow the loss to lie where it falls; (f) thus, even where there has been some impropriety, equity may not flatly refuse relief, but may grant relief conditioned to ensure that a wrongdoer does not have the benefit of his wrongdoing. 139 As to proposition (b), that there is a limitation on the types of conduct which will be material, Brandeis J said of this maxim, "Equity does not demand that its suitors shall have led blameless lives": Loughran v Loughran 292 US 216 (1934) at 229. In FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 Young J (as his Honour then was) said at 554: "…… unless there is established one of the equitable defences, then general naughtiness or the desire of the court to censor [sic] the plaintiff's conduct, does not enter into the equation when one is considering whether the plaintiff should get relief." And see Black Uhlans at [163]. 140 As to proposition (c), that the conduct must be conduct towards the defendant, Campbell J said in Black Uhlans at [161] (see also [162]): "…… A maxim which is a verbal variant of the 'clean hands' maxim was recognised by Richard Francis, Maxims of Equity (1727, reprinted Garland Publishing Inc 1978). Francis recognises as his second maxim 'he that hath committed Iniquity shall not have Equity' . A note to that maxim (at page 5) says: 'but it seems, the Iniquity must have been done to the Defendant himself; for where the Plaintiff had, to avoid a Sequestration in the Time of the Great Rebellion, sworn in an Answer that he was satisfied the Debt, and after the Restoration brought a Bill for it; tho' such Answer was objected to him, yet the Court would not suffer it to be read, but decreed the plaintiff his Debt.'" In the case relied on by Francis for his note, namely, the decision of Sir Harbottle Grimstone MR in Jones v Lenthal (1669) 1 Chan Cas 154; 22 ER 739, an editorial note in the report explained: "For though the Rule be, That he who has committed Iniquity (as here, in the false Answer) shall not have Equity ; yet it seems, that is to be understood, when the Iniquity is done to the Defendant himself: As where a Lessee is sued at Law on a Forfeiture of his Lease, for Non-payment of Rent or the like; if such Lease was obtained by Fraud or false Suggestion, Equity will not relieve; contra , if no Fraud, &c, was done to or imposed on the Lessor." 141 As to proposition (d), that the conduct must have an immediate and necessary relation to the equity sued for, the oft quoted statement of Kelly CB in Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 (Cox at 319 - 320; ER at 1185) is as follows: "It is not laying down any principle to say that his ill conduct disables him from having any relief in this court. If this can be founded on any principle, it must be, that a man must come into a Court of Equity with clean hands; but when this is said, it does not mean a general depravity; it must have an immediate and necessary relation to the equity sued for; it must be a depravity in a legal as well as in a moral sense." 142 As to ascertaining what is meant by "an immediate and necessary relation to the equity sued for", I agree with what Campbell J said in Black Uhlans at [165]: "What is meant by the expression 'an immediate and necessary relation to the equity sued for' is best explained by reference, first, to cases where an allegation of unclean hands was made, but did not result in the plaintiff failing to be granted relief." It is also instructive to refer to cases in which the plaintiff did fail. 143 Meyers v Casey (1913) 17 CLR 90 was a case arising from a decision of the Supreme Court of Victoria as to the validity of rulings of stewards and then a committee of the Victorian Racing Club, disqualifying a horse owner for malpractice. The claim was based on the lack of authority of the committee and a denial of natural justice. The relief sought included an injunction. Objection was taken that the plaintiff could not have equitable relief because he did not come to Court with clean hands by reason of his malpractice. The High Court ruled that the clean hands doctrine had no role to play in connection with the challenge to the validity of the ruling of the committee. Barton ACJ said at 101 - 102: "His Honour who tried the case dismissed the action on the ground that the plaintiff, in seeking the assistance of equity, did not come into Court with clean hands. I do not think that his case can be met by the application of the maxim. The merits of the plaintiff's conduct were not in issue before his Honour. The case raised by the claim and met by the defence was based purely on the asserted illegality of the decision against him. It was not its correctness, but its validity, that was contested in the Supreme Court. Its correctness was assumed for the purpose of the argument, but was not admitted as a fact. The plaintiff could not have been heard to declare his innocence in that proceeding. Evidence as to the turpitude or integrity of his conduct was not admissible on the case made." Isaacs J said at 123 - 124: "…… the rights asserted by the appellant, namely, membership of the club and public right under the by-laws to enter the racecourse, of course exist, if at all, by reason of circumstances wholly independent of the alleged misconduct; the wrong he complains of, namely, his condemnation by an incompetent and unauthorised tribunal in the one case, and a disregard of natural justice in the other, are equally independent of any misconduct by him. It is therefore impossible to say, in the Lord Chief Baron's words, that his alleged misconduct has 'an immediate and necessary relation to the equity sued for,' or that it was 'a depravity in a legal as well as in a moral sense.' It is altogether different from the cases where the right relied on, and which the Court of equity is asked to protect or assist, is itself to some extent brought into existence or induced by some illegal or unconscionable conduct of the plaintiff, so that protection for what he claims involves protection for his own wrong. No Court of equity will aid a man to derive advantage from his own wrong, and this is really the meaning of the maxim." 144 There are other cases dealing with the use of evidence as constituting unclean hands that are instructive in the present circumstances. Gascoigne v Gascoigne [1918] 1 KB 223 was a case in which a man had put real property in his wife's name for the purpose of defeating his creditors. After husband and wife had separated, the husband claimed a declaration that the wife held the property on a resulting trust for him. On appeal from the County Court to a Divisional Court of the King's Bench Division, Lawrence and Lush JJ said at 226: "…… what the learned judge has done is this: He has permitted the plaintiff to rebut the presumption [of advancement] which the law raises by setting up his own illegality and fraud, and to obtain relief in equity because he has succeeded in proving it. The plaintiff cannot do this; and, whether the point was taken or not in the county court this Court cannot allow a judgment to stand which has given relief under such circumstances as that." 145 Similarly, in In Re Emery's Investment Trusts. Emery v Emery [1959] Ch 410, a husband sought a declaration that he was entitled to a half share in the proceeds of securities sold by his wife on the ground that they had been put in the wife's name only to enable the husband to avoid American withholding tax. This intention of the husband was averred in the pleadings and relied on by him. Wynn Parry J said at 420: "… It is enough to say that the wife, who was clearly a witness of the truth, was not able to help me very much. The husband, on the other hand, satisfied me by his evidence that his intention was that the beneficial interest should be shared, and there are various indications to support that, such as the retention of control and the payment of the dividends into the joint account. But matters such as the retention of control and the payment into the joint account cannot be decisive when once the equitable presumption of advancement has arisen, and it is necessary for the husband, in his endeavour to rebut that presumption to assert that the property in question was put into his wife's name in order to avoid the payment on his beneficial interest of tax which would otherwise have been payable, so that, upon the basis that the tax had been United Kingdom tax, it appears to me that Gascoigne v Gascoigne [1918] 1 KB 223 completely covers the present case." Gascoigne and Emery were approved in the English Court of Appeal in Tinker v Tinker [1970] P 136 by Lord Denning MR at 141 and Salmon LJ at 143. 146 A contrast is offered in Griffiths v Griffiths [1973] 1 WLR 1454. There, where a husband claimed an increased beneficial interest in the matrimonial home by reason of improvements effected by him, the wife objected that he came to court with unclean hands because he had represented to the Law Society, for the purpose of obtaining a legal aid certificate and to a bailiff in order to avoid a distraint, that the house belonged exclusively to his wife. Arnold J said at 1456 - 1457: "In my judgment, the point is a bad one because he is not, in preferring his claim to the improvements, relying upon his own disreputable act, as, for example, does a man who seeks to enforce a resulting or express trust of property transferred by him to his wife by saying 'Oh, the transfer was only to defraud my creditors.' Nor is he doing the other thing which is forbidden, by the doctrine of promissory estoppel, of reversing a previous contention where, but only where, the party against whom the contention is made has in the meantime altered his or her position in reliance on the previous contention. He falls between the two stools; for it is no ingredient in the claim that he behaved wrongly, and therefore he escapes from the principle of Gascoigne v Gascoigne [1918] 1 KB 223, and it is not suggested that the wife relied on his disclaimer or either of his disclaimers in such a way as to make it unfair to her that the position should now be reversed." On appeal, the Court of Appeal did not have to deal with the clean hands point. 147 Deciding the point in Black Uhlans, Campbell J said at [184], [185]: "184 In applying the unclean hands principle in the present case, it is necessary first to identify what is the equity which (absent unclean hands) I would be prepared to uphold. It is the equity of resulting trust, relating to those contributions which the Club has made to the purchase price of the Peakhurst property from its own money. 185 It is not necessary for the Club to prove anything about the circumstances in which Citibank was misled to be able to prove the facts which make good that claim to a beneficial interest. The equity which the Club asserts is one which originally arose against Mr Reardon by reason of the Club's money providing part of the purchase price, and operated to impose equitable obligations on him, concerning his legal ownership of the property – the circumstances in which Mr Reardon came to have money to make his own contribution to the purchase price of the property have no immediate and necessary relation to that. Another way of putting this is that even accepting (as I do) that the Peakhurst property would probably not have been purchased at all if Citibank had not been misled, that misleading of Citibank did not make any contribution to the proportionate beneficial interest which recognition of the resulting trust would give to the Club. The entirety of the fruits of the deception of Citibank have been treated, on my findings, as a contribution to the purchase price by Mr Reardon. Even if the defendants were right in submitting that all of the wrongful conduct of Mr Hill and Mr Reardon, in their dealings with Citibank, could be attributed to the Club (a matter which I do not find it necessary to decide), recognising the particular resulting trust which I would be prepared to uphold does not involve the plaintiff in receiving a benefit from its own wrongful conduct. Recognition of that trust is nothing more than recognising a proprietary interest into which the Club's own money, not shown to be derived from any wrongful conduct, can be traced. No attempt was made to show that the Club is better off by having had its asset in the form of a partial beneficial interest in the Peakhurst property, rather than remaining as cash. In my view the principle of unclean hands provides no reason for refusing to recognise that particular resulting trust. If the Club were to claim an entitlement to part of the beneficial interest in the property derived from Mr Reardon's contributions the position might be different – but I do not need to decide that question." 148 Returning to early authority, in Jones v Lenthal supra the misconduct relied on was the earlier false swearing that a debt had been satisfied, when it had not. But it was no part of the plaintiff's case to prove his earlier false oath to recover the debt. The defendant sought to rely on the false oath, but was not allowed to. 149 As to proposition (e), that there is no general rule in equity that where there has been any impropriety equity will allow the loss to lie where it falls, this must now be taken to be established by Nelson: see per Deane and Gummow JJ at 559 – 561; per Toohey J at 596 – 597; McHugh J at 603 - 605. 150 As to proposition (f), Nelson is again clear authority for the proposition that a finding of illegality does not lead automatically to an absolute refusal of equitable relief: per Deane and Gummow JJ at 571 – 572; McHugh J at 616 – 618. Because of the ability of equity to give conditional relief, relief may be moulded to ensure that the perpetrator of the illegality does not obtain an advantage from the illegal action, but is not penalised in a way disproportionate to the quality of the illegal act or the quantum of the advantage obtained. Thus, the majority in Nelson were prepared to grant relief, but to grant relief conditional upon reparation being made for the small monetary advantage gained by the low interest loan being dishonestly obtained. See also Karl Suleman at [57]. 151 One further submission was put to me, which it was said would deflect the application of the clean hands doctrine if it were otherwise applicable. It was said that the doctrine did "not apply in cases of breaches of fiduciary duty and fraud". This proposition may be thought analogous to the principle in Rochefoucauld v Boustead [1897] 1 Ch 196, that the Statute of Frauds should not be allowed to become an engine of fraud. In relation to the unclean hands defence, Mr Motbey made reference to Nelson at 562 and cases there cited. He submitted that cases of breaches of fiduciary duty and fraud constituted an "established exception" to the operation of the defence. He had put similar submission to me on behalf of Lamru when the Lewis interests sought to amend the defence to plead the unclean hands defences. I delivered a judgment on that application: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2003] NSWSC 354. In that judgment I dealt with this submission at [13] and [14] as follows: "13 Mr Motbey also put to me that, by reason of the fact that the claim was in effect a claim in fraud or for breach of a fiduciary duty, it was taken out of the ambit of the unclean hands defence. In making this submission he relied upon the statement of principle by Deane and Gummow JJ in Nelson v Nelson (1995) 184 CLR 538 at 562, where their Honours said that one exception from the defence of illegality: "…… concerns recovery of money or other property which, whilst tainted by illegality, was induced by fraud of one of the parties or was the product of a breach of fiduciary duty owed by one party to the other." The majority in Nelson appear to treat the defence in that case under the rubric of illegality rather than under the rubric of unclean hands. Mr Cotman specifically eschews a defence formulated in terms of illegality. However, Mr Motbey contends that the principle stated above applies equally to a defence of unclean hands. If the principle does exist as stated and does apply to unclean hands defences, the defence may not be available in this case. There may even be some doubt on the basis of the discussions in Nelson and the recent English authorities there considered whether illegality and clean hands are part of the same defence in equity, or should be regarded as representing two separate sets of principles (see per McHugh J in Nelson supra at 608 – 609). 14 The above seems to me to show the law in this area as in a state of flux. I do not regard the proposition quoted from Deane and Gummow JJ as absolutely certainly reflecting the law. Despite the eminence of those Judges, that dictum was obiter in the context of Nelson . Furthermore, the three cases cited by their Honours in support of the proposition, namely, George v Greater Adelaide Development Land Co Ltd (1929) 43 CLR 91 at 99 - 100; Abdurahman v Field (1987) 8 NSWLR 158 at 162 - 163; and Weston v Beaufils [No 2] (1994) 50 FCR 476 at 499 – 500, are also somewhat uncertain and equivocal as to the existence and extent of the principles. In those circumstances I do not regard it as absolutely unarguable that the principle does not apply in the present case." 152 This argument was put again, but was not further developed, in final submissions. It is to be noted that Nelson itself, as well as the cases cited at 562, namely, George v Greater Adelaide Land Development Co Ltd (1929) 43 CLR 91; Abdurahman v Field (1987) 8 NSWLR 158 at 162 - 163; and Weston v Beaufils (No 2) (1994) 50 FCR 476 at 499 – 500, are cases where the defence was illegality rather than lack of clean hands. As I have said, it appears from Karl Suleman and, indeed, from Nelson, that if a defence is a defence of illegality in the strict sense, whether it is pleaded to a common law or an equitable claim, it should be dealt with under the rubric of illegality rather than the rubric of clean hands. Nelson itself and the cases cited at 562 all concern the question of whether, when money has been paid or property has passed under a contract tainted with illegality, the money or property may in appropriate circumstances be recovered. They cannot be taken to establish a general principle that the unclean hands defence does not apply where the claim responded to is of a breach of trust or of fiduciary duty. It is certainly not established in the Karl Suleman case, nor to my knowledge is there any authority, that establishes this as a general principle. Indeed, as I opined in my earlier judgment, I do not think that the cases clearly establish a general principle to that effect, even in relation to claims of illegality in the strict sense. I do not accept that the submission put in this regard should necessarily deflect me from any conclusion which I should otherwise reach. 153 In the present case, I have come to the conclusion that the clean hands doctrine should preclude Lamru from obtaining relief in respect of the fraudulently taken stock, by reason of Lamru's reliance on the certificate evidence, as pleaded in par 37G of the defence. The equity relied on was an equity to obtain relief in respect of a breach or breaches of trust, alleged to have been committed by Nortex and participated in by Kation and Lewis. The breaches of trust alleged were the taking by Lewis or Kation of stock of Nortex, selling it and keeping the proceeds. The particular acts complained of were committed in the 1997 year when Lamb was no longer a participant in the affairs of the company. He did not in that year participate in abstraction of stock or diversion of proceeds; in that year what occurred was a fraud on Lamru as well as on the revenue. It is true that Lamru did not, and did not have to, plead or aver Lamb's or its own misconduct as part of the facts to be made out to establish this cause of action. However, Lamru did choose to lead evidence of Lamb's and its own misconduct in conjunction with Lewis to render more probable the proposition that Lewis behaved in the way alleged in the 1997 year: the fact that Lamb and Lewis behaved together in the same discreditable way in relation to the stock of the company during earlier years rendered it more probable that Lewis continued with the same conduct alone in the later year. I have found that the conduct complained of did occur during the 1997 year, relying on the body of evidence brought forward by Lamru, including the evidence of the earlier conduct. The latter was an integral part of Lamru's case on this cause of action. It was specifically and strongly relied on by Lamru in support of it. It materially assisted the establishment of the conduct complained of by increasing the probability that it had in fact occurred. Lamb and Lamru's participation in the same course of conduct (which is the subject of the certificate evidence) persisted up to Lamb's departure from the company. That conduct had a close relationship with the conduct the subject of this claim. There was in effect a continuum between the conduct complained of and the conduct relied on to prove it. The same course of fraud on the revenue started with two parties and finished with one. It is evidence of this fraud that Lamru relies on to establish fraud during 1997. No steps have been taken to restore the benefits wrongly gained. Lamb and Lamru still enjoy their profit from the fraudulent enterprise. It is not possible, on the evidence, to calculate the quantum of that benefit, so as to consider moulding conditional relief, if that course were otherwise appropriate. For these reasons, it is my view that the Court would in reality be aiding a litigant "to derive advantage from [its] own wrong", in the words of Isaacs J in the Meyers case, if it granted equitable relief in these circumstances. The fact that the continuation of the conduct by Lewis and Nortex was a fraud on Lamru as well as on the revenue does not, in my view, on the facts of this case, prevent the operation of the clean hands doctrine. The only appropriate course in the circumstances is to refuse any relief. Therefore, the defence in paragraph 37G succeeds and Lamru's claim for equitable relief in relation to the fraudulent taking of stock fails. 154 As I have said at [150], Nelson emphasises that a finding of illegality does not lead automatically to an absolute refusal of equitable relief. It may lead to the grant of conditional relief, moulded to ensure that the perpetrator of the illegality does not obtain an advantage from the illegal action, but is not penalised in a way disproportionate to the conduct proved or the quantum of the advantage obtained. But it does not seem to me that the granting of conditional relief, rather than the refusal of relief, is appropriate in this case. Indeed, no submission to that effect was put to me. It is true that Lamb and Lamru had ceased to participate in the conduct which was dishonest vis a vis the revenue upon Lamb's departure from Nortex on 28 June 1996. However, although the conduct was belatedly confessed by Lamb in court during the course of the trial, there was no suggestion that he had taken any step to inform the revenue authorities of what had occurred, or to disgorge the taxation benefits derived during the years that the practice was in operation. Again, in those circumstances, I do not think that I should be deflected from the conclusion in [153] that the clean hands doctrine in this case precludes the relief sought. 155 Paragraph 37I of the Lewis interests' defence relies on the fact that there are untrue statements said to have been directly or indirectly made by Lamb in the "pleadings", particulars and evidence originally relied on in this case. Probably the most directly untrue assertion was that there were not two sets of books kept in Nortex. This was made in paragraph (a) of the replies of Lamru contained in the Scott Schedule and set out in [79] above. Although untrue and unworthy, this statement was not made on oath. But in view of my conclusion in [153], it is not necessary to decide this defence. However, I should say that, in my view, by reason of the retraction of the untruths and the disclosure of the true situation during the course of the trial, the view I should come to would be that this defence ought not succeed. Legal and accounting expenses 10(e) Were legal and accounting expenses of $168,550.87 authorised by the board or ratified by the company? 156 The "pleading" allegations in the points of claim in relation to this claim are as follows: "68(a) In further breach of trust Nortex accounted for an amount of $168,550.87 (allegedly paid to lawyers and other professionals – Horwaths) in connection with litigation and other legal problems arising out of disputes between Lewis Senior and Nortex's other director Mr Lamb) as incurred in the interests of Nortex when in substance the expense was incurred in the interests of Lewis Senior; 40% of the $168,550.87 is $67,420.35. (b) Alternatively, without the authority of Nortex, Lewis Senior purported to engage lawyers (and other professionals - Horwaths) and then caused $168,550.87 to be paid from Nortex's funds to those lawyers/professionals as if owed to those lawyers/professionals under valid and binding contracts when in truth and in fact there were no valid and binding contracts because of the want of authority referred to. PARTICULARS a Scott Schedule claim 24(i) and evidence there referred to b Aff Lamb 15/2/02 c $38360.70 - Horwath; Mallesons - $130,190.17; total $168,550.87" In the Scott Schedule, the relevant portion from claim 24 is to the effect that the profits as recorded by Lewis in the accounts and tax returns were less than they ought have been by the following item (among others): "(i) $168,550.87 caused by Lewis to be paid to lawyers in connection with his various disputes and court cases with Lamb during that financial [sic] ……;" The Lewis interests responded: " (b) All payments of legal fees by Nortex were duly authorised – see the minutes of the general meeting of members of Nortex Pty Ltd held 13 February 1997 in which resolutions were duly passed ratifying and confirming the retainer of Messrs Mallesons Stephen Jaques, and the authority of Mr Lewis to retain Mallesons Stephen Jaques, as solicitors for Nortex Pty Ltd in relation to proceedings commenced against it by Mr Lamb." And Lamru replied: "re (b) the question of whether or not to employ Mallesons was a matter for the Board. The company could not determine that question without either altering the articles or sacking the Board neither of which were done." 157 The questions that arise in the determination of this matter are as follows: (1) whether Lewis was authorised by Nortex to employ the professionals on its behalf; (2) whether Lewis' employment of them on behalf of Nortex was ratified by the resolution of a general meeting of the members of Nortex so as to validate that employment. 158 The facts out of which this dispute arose are set out in [14] above. The resolution ratifying the appointment of the solicitors passed at the general meeting of Nortex on 13 February 1997 was generally in the terms alleged by the Lewis interests in the paragraph (b) from the Scott Schedule set out in [156]. 159 In his judgment determining Lamru's motion for costs against the solicitors, Master McLaughlin found that Lewis had not been authorised to give the instructions, but held that they had been effectively ratified by the resolution of the general meeting and the lack of authority cured: Nortex Pty Ltd v Lamru Pty Ltd NSWSC 12 August 1997 unreported. 160 Lamru submits that Master McLaughlin's judgment does not constitute an operative res judicata or issue estoppel by virtue of the fact that the application that the learned Master determined was between Lamru and Mallesons (and no one else) for an order that Mallesons personally pay Lamru's costs, because they had acted without the authority of Nortex. So far as I can tell, that appears to be correct: Nortex was a party to the proceedings, but not to the motion which the Master determined. In that event, Lewis and Kation are not bound by that decision. 161 In the current proceedings, Lamru maintains that Exhibit BP shows that it was Lewis who contracted with Mallesons in his own name and that the accounts within Exhibit L5 demonstrate that services rendered by Mallesons arose out of the conflict between Lewis and Lamb. The Lewis interests submit that, during the period after Lamb served his statutory demand on Nortex, there was a hard fought curial battle, which arose out of Lamb's intent to wind up Nortex. The attacks on Lewis and on the solicitors were incidental. 162 Mr Cotman submitted that, while the costs agreements were made with Lewis, it was Lewis as representative of Nortex and not as an independent entity. Nortex was justified in defending itself and the appointment of Mallesons as defender was ratified by a resolution of the members, to the extent that it required ratification. 163 I should say at once that, while the learned Master's decision was not binding on the Lewis interests, it appears to me to be correct in its findings. Master McLaughlin said (at page 7): "…… the original retainer by Mr Lewis, acting alone without consultation and without communication to his fellow directors of his proposed intention so to do, was an act which Mr Lewis at the date when he purported to retain the solicitors did not have the authority to perform. The next question which arises is whether the meeting of shareholders, that is the general meeting of the company held on 13 February 1997, which purported to ratify the conduct of Mr Lewis in retaining the solicitors for the purpose of instituting the present proceedings, had the effect of validating that retainer at the date when the solicitors purported to commence the proceedings. The general effect of such a subsequent ratification of conduct, which had not at the time that was [sic] effected been authorised, would be that ratification would take effect from the date of the original action which was being sought to be ratified." 164 A decision relied on by the learned Master (at page 10) was that of the English Court of Appeal in Danish Mercantile Co Ltd v Beaumont [1951] Ch 680. At 687 Jenkins LJ held that an action instituted in the name of a company by a solicitor, who, as it turned out, did not have authority to do so, was not properly constituted, but that such an action was not a nullity and that the company was able to ratify the act of the solicitor and cure the defect in the proceedings as originally constituted. Hodson LJ concurred at 688. Gillard J recently stated in Chalker v Barwon Coast Committee of Management Inc [2003] VSC 286 at [36]: "… There is no doubt that where a proceeding is brought without authority in the name of a person or entity which has a cause of action against a defendant, the named party may later ratify the unauthorised issue of the proceeding in accordance with the principles concerning principal-agent." 165 I agree with Master McLaughlin that, insofar as Lewis' actions were without authorisation, the ratification cured the lack of authority. I am also of the view that the payment of legal fees to combat the statutory demand was a justified and reasonable expense of Nortex. As that company had no business but as the trustee of the unit trust and the loan account demanded was a loan account in the accounts of the trust, the expenditure of those costs was a proper expenditure of trust moneys. 166 In addition, I should say that it occurred to me during the trial, and I raised it with the parties, that there was conceivably another issue intertwined with the issue of authority and ratification. That was the question of whether or not, even if the authority of Lewis to engage solicitors on behalf of Nortex was established, particular items of expenditure could be characterised as breaches of trust because they were for the sole benefit of Kation or Lewis and so foreign to the trust. Ratification can, after all, operate only to justify actions by an agent taken on behalf of the principal to the extent that the acts would be valid acts of the principal: see Bowstead and Reynolds on Agency (17th ed, 2001) Article 13 [2-047]; and see also the judgment of Santow J in Miller v Miller (1995) 16 ACSR 73 at 89; the judgment of Ipp J in Government Employees Superannuation Board v Martin (1997) 19 WAR 224 at 275; and the decision of the Full Court of the Supreme Court of South Australia in Pascoe Ltd (in liq) v Lucas (1999) 75 SASR 246 at 274 - 275. The fact that an agent's acts are established to have been authorized by the principal cannot justify acts which, if done personally by the principal, would be breaches of trust. However, I made it plain that if a claim were to be made on any such basis as this, this would have to appear from the "pleadings" and the Scott Schedule, and it did not. 167 At one stage Mr Motbey declared that the only points taken were the original points on authority and ratification (which I take to be the points argued before Master McLaughlin as against Mallesons). Certainly, no adjustment was ever made to the points of claim or the Scott Schedule to raise the question adverted to in [166]. Furthermore, during final submissions it was agreed by the parties that the issue tendered on this subject matter was issue 10(e) as set out above. As was pointed out by Mr Cotman, the liquidator carried out an exercise in which he characterised some of the costs as incurred on behalf of the company and some as incurred on behalf of the private parties only. One example, which might have been controversial, was the costs of the mediation which took place. On the evidence before me, the liquidator took the view that, even if there were some private disputes involved in it, the mediation bore the character of an attempt to resolve the dispute which arose from the claim made in the notice of demand (based on the Lamru loan account) and the consequential proceedings between Nortex and Lamru to set aside the notice, which was the form which the curial proceedings between those parties took at that time. I do not regard a specific challenge to such an item on that basis as arising out of issue 10(e) as formulated, or as having been in any other way specifically or sufficiently made in these proceedings. I should add that decision of this issue as to the challenged costs generally has been made particularly difficult by the imprecise way in which it has been argued. 168 Similarly, there was some suggestion that, if expenditure on some items, which were in reality personal costs of Kation or Lewis, were not a breach of trust because ratified, it could and should be dealt with under the add backs convention. Equally, this argument does not seem to me to fall within the issue as formulated. 169 In those circumstances, Lamru fails in its claim for 40 per cent of the legal and accounting expenses. China creditors 170 This item arises quite differently from any of the others which have been dealt with. It concerns an item of $284,837, in respect of which entities in China lodged proofs of debt referable to the 1997 year by which they claimed to be admitted as creditors of Nortex. The liquidator rejected those proofs of debt. An obvious consequence is that the $284,837 should be written back into the accounts of Nortex as a credit at some point of time. This item was not the subject of any claim in the points of claim or the Scott Schedule. The subject matter of this item was agitated before me about halfway through the trial. At that stage, it was clear from what was said in Court and correspondence that passed immediately afterwards, that Lamru would make no claim because, so far as it was concerned, the item should be brought in as a credit in the 1997 year (the accounts of which are "open" in the proceedings before me). At that time the Lewis interests agreed that that was the correct course to be followed and they did not challenge that course. No demur was made by the liquidator at that stage. I should add that it was expressly said on behalf of Lamru that there was no allegation of any wrongdoing by Kation or Lewis in respect of this item. 171 The next time the matter arose was when, in the course of final submissions before me, Mr Gray submitted that, on proper accounting principles, the credit in respect of the disallowed proofs should not be brought into account in the 1997 year but in the 1998 year (the accounts of which are not under review in the proceedings before me). Furthermore, he submitted that Lamru should not in any way be allowed to agitate this item, because of the lack of claim in the points of claim and the Scott Schedule. Mr Motbey replied that no step had been taken to amend the claim to comprehend this item, because of the agreement among the parties apparent at the time of the earlier discussion before me as to what ought occur in relation to the item, namely, that the credit should be recorded in the 1997 year. 172 When the matter was raised during the course of final submissions, I delivered a judgment: Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2004] NSWSC 121. In that judgment, I ruled that Lamru was entitled to make a submission about the item, despite the absence of any formal claim, because of the agreement of the parties manifested at that earlier time. The submission that it was able to make was that the credit should be recorded in the 1997 year, as that was the basis agreed to by all parties at that time. 173 In that judgment, I expressed the view that, on the evidence available, the correct course was for the credit to be recorded in the 1997 year. There were no further submissions made to me on the subject matter after the delivery of that judgment and no application was made for any party's case to be reopened to lead further evidence on the subject matter, which might detract from the conclusion that I had expressed in that judgment. In those circumstances, the reasons I expressed in that judgment should be regarded as being incorporated in this judgment. On that basis, the credit against the $284,837 deduction in respect of the China creditors item arising from the liquidator's rejection of the proof of debt should be recorded in the 1997 year and this issue should be regarded as concluded among all the parties. Any party who desired to agitate this question further should have sought to make appropriate amendments to the "pleadings" or Scott Schedule and to bring forward any claim or submission about it, along with any relevant evidence, at an appropriate time in the proceedings. This did not occur. ISSUE 11 174 During the trial the parties attempted to formulate an 11th issue. They could not agree on a formulation. When I originally reserved judgment, I said that I should take their respective formulations and make sense of them, but I could not distil out of them an issue for decision beyond issues decided under other headings. I asked the parties for further submissions as to whether it was intended to raise questions beyond the applicability of the accounting conventions and the ambit of clause 23 of the trust deed, both of which I have dealt with above. In the end, the parties agreed that there was no other issue intended to be raised for decision under the proposed issue 11 and I need say no more about it. ISSUE 12: Accessorial liability Whether Kation or Lewis is personally liable to Lamru in respect of any of the breaches of trust proved 175 As a result of my decisions embodied in this judgment, the claim relating to the Mark Lewis payments is the only claim in respect of which this issue remains to be determined. There were issues involving the actions of Kation and Lewis raised in pars 76 to 88 of the points of claim in relation to issues 2 and 3 as to the add backs convention and the differential interest convention. In those paragraphs it is alleged that the final determination of the liquidator in relation to those conventions was erroneous and that the Lewis interests were involved in that erroneous decision by reason of the fact that their solicitor, Mr Baird, applied persuasion to the liquidator to alter, after and by reason of the 2001 judgment, the previous regime that he had adopted as to the conventions. However, these allegations were pleaded only as against the liquidator in relation to the statutory appeal. Lamru did not plead or bring or agitate at the trial, among the many claims that it did, a claim that Kation and Peter Lewis should be made personally liable by reason of any persuasion they exercised through Mr Baird. Furthermore, examination of the transcript shows that, even against the liquidator, these allegations were withdrawn before the end of the trial and are not open for any purpose at the time of this judgment. It is therefore not appropriate that I record any finding relating to those allegations. 176 Turning to the Mark Lewis payments, the form of the "pleadings" is again important. In relation to the 1995 payment, the allegation of breach in paragraph 34 of the points of claim is set out in [88] above. The accessorial allegations, in paragraphs 35 and 36, are as follows: "35 Lewis Senior and Kation were knowingly concerned in the breach of trust pleaded in 34. 36 As such accessories to Nortex's breach of trust Lewis Senior are liable to Nortex to indemnify it in respect of the breach and liable to compensate Lamru." 177 In relation to the 1996 and 1997 payments, the allegations of breach, in paragraphs 45 and 46 and paragraphs 60 and 61 respectively of the points of claim, are set out in [89] and [90] above. The accessorial allegations in respect of 1996, in paragraphs 48 and 49, are as follows: "48 Lewis Senior, Kation and Lewis junior were knowingly concerned in the breach of trust pleaded in 45 and Lewis Junior knowingly received the said benefit. 49 As such accessories to Nortex's breach of trust Lewis Senior, Kation and Lewis Junior are liable to Nortex to indemnify it in respect of the breach and liable to compensate Lamru." The accessorial allegations in respect of 1997, contained in paragraphs 63 and 64, are in substance identical. 178 The bases of accessorial liability for breaches of trust or fiduciary duty have become one of the most debated and vexed issues in current equity jurisprudence, both in England and Australia. One of the points of controversy has been a divergence of view between the High Court and the House of Lords concerning the quality or degree of the notice or knowledge required for liability under the second limb in Barnes v Addy (1874) LR 9 Ch App 244: contrast Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 395 with Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 at 388. The starting point for debate has been the famous passage from the judgment of Lord Selborne LC in Barnes v Addy at 251 - 252. There has been a tendency to treat these words almost as if engraved on a Mosaic tablet. The complications of the law as to questions of the knowledge and notice relevant under the so called "two limbs" have become almost Byzantine. For an up to date account by Lord Walker, writing extra curially, see the John Lehane Memorial Lecture 2004, "Dishonesty and Unconscionable Conduct in Commercial Life – Some Reflections on Accessory Liability and Knowing Receipt". Fortunately, the application of the relevant principle in the present case is quite simple. 179 The famous passage from Lord Selborne's judgment in Barnes v Addy is as follows: "Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust . But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees." [My italics] 180 An important feature of this pronouncement is noted in Meagher & Gummow, Jacobs' Law of Trusts in Australia (6th ed, 1997) at [1334] as follows: "Later cases have spoken of the first and second limb in Lord Selborne's propositions, the first being concerned with agents who receive and become chargeable with some part of the trust property, and the second with agents assisting with knowledge in a dishonest and fraudulent design on the part of trustees. …… The resultant tendency has been to treat the two limbs of Barnes v Addy as an exhaustive statement of the circumstances in which a third party may become accountable as a trustee. Plainly this is not so. First , Lord Selborne was directing his remarks to the accountability of agents who act in particular transactions; that he was not speaking of those who act as principals (eg, as trustees de son tort) or of third parties who purport to take property as purchasers or donees, not as agents, is readily apparent if his remarks are read as a whole. Secondly , his Lordship also treated as clearly liable as trustees third persons 'actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust' and, while the second limb may be seen as a species of this genus, there was well established authority at the time Lord Selborne spoke whereunder third parties who had not received trust property as agents and who had not as agents participated in a fraudulent design within the second limb and who had not acted as trustees de son tort, were held accountable as trustees." 181 Similarly, it is stated in 4 Scott on Trusts (4th ed, 1989) par 326.3: "Furthermore, the directors and officers [of a trustee corporation] are under a duty to the beneficiaries of trusts administered by the corporation not to cause the corporation to misappropriate the property. Any director or officer who knowingly causes the misappropriation of trust property by the corporation is personally liable for participation in the breach of trust committed by the corporation. The breach of trust need not, however, be a misappropriation of the trust property. Any officer who knowingly causes the corporation to commit a breach of trust causing loss to a trust administered by the corporation is personally liable for the loss to the beneficiaries of the trust." 182 Those observations are relevant in the present case. The relevant breaches of trust are breaches of trust by Nortex as trustee of the trust. Lewis was at all times a director of Nortex. It was he who caused the accounts to be made up in the ways complained of. In the 1995 year, they distributed the disputed 3 per cent of profit to Kation. In the 1996 and 1997 years the payments were recorded as made to Mark Lewis. The other director of Nortex was Lamb. As I have found, Lewis, in causing Nortex to carry out these transactions, did not act, as he asserted, with the consent of Lamb, but in the face of and with knowledge of Lamb's refusal of consent or agreement to these transactions. In respect of the transactions relating to the 1996 and 1997 years, Lamb had left the company and was not consulted. However, it was plain that Lamb did not consent to the giving of a profit share directly or indirectly, by paying remuneration over and above the value of his work, to Mark Lewis. As I have found that the use of funds in this way by Nortex was a breach of trust and that Lewis was a participant in that breach of trust, he is therefore liable to Lamru in respect of the sums of money dealt with in that way. 183 I turn to the position of Kation. In respect of the disputed 3 per cent in the 1995 year, after the conversations between Lewis and Lamb it was attributed to Kation in the 1995 accounts. This is the complaint made in the particulars appended to paragraph 34. On the evidence, Kation should be taken to have received it. As Lewis was the controlling mind of Kation, Kation undoubtedly did so with his knowledge of the dishonesty of the transaction. It is therefore liable to Lamru for that sum. However, in respect of the 1996 and 1997 years, it did not receive the relevant moneys. The actions within Nortex were carried out by Lewis as director and de facto controller of that company. Despite his role in Kation, I do not think the relevant actions were acts of Kation. I do not think that Kation can be said, in the words of the "pleading", to have been "knowingly concerned in the breach of trust". No doubt it could be said, as one of the parties otherwise entitled to the monies, to have acquiesced in the payments. But I do not think that, of itself, sufficient. On that basis Kation is not liable in respect of the 1996 and 1997 payments. ISSUE 13 Whether the cross claims against Lamru and Lamb for contribution or indemnity succeed 184 The cross claims for contribution or indemnity can only arise insofar as claims against Kation or Lewis have succeeded. The only such claims that have succeeded are those in respect of the payments to Mark Lewis. The basis of the claims for contribution or indemnity is that Lamru and Lamb also participated in the breaches of trust that form the basis of liability. It is clear from my findings on that subject matter that Lamru and Lamb did not participate in the relevant breaches of trust. ISSUE 14 Whether the cross claims against Lamru and Lamb based on breach of contract or for breach of his duties as a director succeed 185 The three claims ultimately made in respect of these breaches were succinctly summarised on behalf of Lamru and Lamb as follows: "1 Claim 1. This is a claim for damages for breach of the contract pleaded in para 60. 60 pleaded an agreement by Lamb and Lamru not to call up the loan account with Nortex and not to withdraw a personal guarantee of Nortex in favour of the CBA. 61 pleaded that the loan account was called and guarantee was withdrawn. It was alleged that in consequence Nortex ceased to be able to trade (63). It was further alleged that the conduct caused damage to Nortex Kation and Lewis (68) and claimed damages (70). 2 Claim 2 This is a claim arising out of the same facts (calling up loan and withdrawal of guarantee) causing Nortex to cease to be able to trade. However it is put, additionally as a breach of director's duties (67) with a claim for damages (70). 3 Claim 3 This was a claim (67(c)) that Lamb, in breach of his director's duties owed to Nortex, made a vexatious application to the Supreme Court challenging Malleson's retainer to act for Nortex in a suit arising out of Lamru's service of a statutory demand. This breach of director's duties was said to have caused damage to Nortex, Kation and Lewis (including reduced profits, legal costs, loss of goodwill (68)) with a claim for damages (70)." 186 Again, the precise allegations in the "pleadings" are of importance. The following allegations are made in the cross claim: "40 At all material times from 16 April 1991 to 2 September 1997 Lamb: (a) was a director of Nortex, together with the second cross-claimant, Peter Lawrence Lewis ('Lewis'); (b) in that capacity, owed Nortex: (i) a fiduciary duty to act in good faith and in the interests of Nortex; (ii) a duty under section 232(2) of the Corporations Law (as it then was) at all times to act honestly in the exercise of his powers and the discharge of his duties as a director of Nortex; (iii) a duty under section 232(4) of the Corporations Law to exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances; (iv) a duty under section 232(6) of the Corporations Law not to make improper use of his position as a director of Nortex to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to Nortex; and (v) a duty under the general law to exercise reasonable care and diligence in and about the exercise of his powers and the discharge of his duties as a director of Nortex. 41 At all material times from 16 April 1991 to 2 September 1997 Lamb, as a director of Nortex in its capacity as trustee of the Nortex Unit Trust, owed duties under the general law to the first cross-claimant ('Kation') as a unit holder in the Nortex Unit Trust: (a) to exercise reasonable care and diligence in and about the exercise of his powers and the discharge of his duties as a director of Nortex in its aforesaid capacity; (b) to have regard to and act in the best interests of the unitholders in the Nortex Unit Trust; (c) not to prefer his own interests or those of the first cross-defendant ('Lamru') above those of those of Kation; and (d) not to breach his aforesaid duties to Nortex." …… 60 Further, on or about 19 July 1993 Lamru and Lamb agreed with Kation, Lewis, Nortex and Commonwealth Bank of Australia ("CBA"), that in consideration of CBA providing banking facilities to Nortex, Lamru and Kation would not reduce the total amount of their unitholders' loans to Nortex to an amount less than $1,600,000.00 without first obtaining the written consent of CBA, and that Lamb and Lewis would each provide a continuing guarantee of Nortex's financial obligations to CBA and not withdraw that guarantee without the prior consent of the other. PARTICULARS The agreement was both express and implied, and in writing and oral. Insofar as it was in writing it is contained in the Undertaking under the common seals of Lamru and Kation to CBA dated 19 July 1993. Insofar as it was oral it was made in the discussions that took place between Lamb and Lewis on the one hand and representatives of CBA at around that time. The implication arises from the aforesaid express terms and is necessary to give business efficacy to the agreement. 61 In breach of the aforesaid agreement: (a) on 30 September 1996 by Statutory Demand under Section 459E of the Corporations Law (as it then was), verified by an affidavit of Lamb sworn 30 September 1996, Lamb caused Lamru without prior demand or consent from CBA to demand that Nortex pay to Lamru the sum of $610,840.75 upon its loan account within a period of 21 days; and …… (d) on 19 June 1997, without prior notification to or consent from Lewis, Lamb again notified CBA of discontinuance of liability under his personal guarantee to CBA for advances made to Nortex." 187 There is no need to say more about the claim in contract than that there is no evidence that establishes an express contract to the relevant effect. Nor is there any evidence of the circumstances surrounding the creation of the relevant facilities in 1993 from which an implied contract to this effect might be inferred. This head of cross claim fails for those reasons. 188 The duties claimed to have been breached fall into two categories. In the first are the duties imposed by s 232(2), (4) and (6) of the Corporations Law (which was in force at the relevant time) and the common law duty of care corresponding to the duty imposed by s 232(4). The other category of duties is the fiduciary duties imposed on directors. 189 In both cases, it is important to examine what Lamb was doing and in respect of what rights, when he performed the actions complained of. In each case the rights he was pursuing or exercising were rights entirely personal to him or Lamru. In giving the notice of demand, he was acting as a director of, and seeking to enforce a right of, Lamru, which was a creditor of Nortex under its loan account. Lamru was not, of course, a director of Nortex. It was as a director of Lamru, not Nortex, that Lamb acted in causing the notice of demand to be given. It was equally in that role that he acted with regard to the objection as to the retainer of the solicitors in the proceedings consequential on the giving of the notice of demand. It was a personal right to withdraw a guarantee given by him personally that he was exercising when he withdrew the guarantee supporting Nortex 's finance facilities. 190 Section 232(2), (4) and (6) of the Corporations Law provided as follows: "232(2) [Act honestly] An officer of a corporation shall at all times act honestly in the exercise of his or her powers and the discharge, of the duties of his or her office. …… 232(4) [Care and diligence] In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances. …… 232(6) [Improper use of position] An officer or employee of a corporation must not, in relevant circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation." 191 Each of these subsections imposes duties on a director in the course of his or her exercising powers or carrying out duties as a director. This is made plain by the words "in the exercise of … and the discharge of" in subs (2) and (4) and the words "make improper use of his or her position" in subs (6). It cannot be said in any realistic way that Lamb was exercising any powers, or discharging any duties, or making any use of his position as a director of Nortex, in doing what he did. The same applies to any allegation of breach of a common law duty of care imposed on him as a director. 192 For those reasons alone the cross claims based on allegations of breach of those duties must fail. 193 The content of the relevant fiduciary duty or duties is not so easily determined. That Lamb as a director of Nortex was in a fiduciary relationship with the company is undoubted. But the relevant ambit of the duties arising from that relationship and whether the actions complained of conflicted with those duties is far from clear. The fiduciary duties, breaches of which were complained of, were pleaded as duties "to act in good faith and in the interests of Nortex"(paragraph 40(b)(i)); "to have regard to and act in the best interests of the unitholders" in the trust (paragraph 41(b)); and "not to prefer his own interests or those of [Lamru] above those of Kation" (paragraph 41(c)). 194 Again, as has been made plain, Lamb was not acting in the role of a director of Nortex in carrying out the actions the subject of the claims. However, the ambit of the fiduciary duties imposed on a director is not necessarily limited to actions taken solely within the role of director. That there are two different themes as to what falls within the ambit of fiduciary duties was made plain by Deane J in Chan v Zacharia (1984) 154 CLR 178 at 199: "Notwithstanding authoritative statements to the effect that the 'use of fiduciary position' doctrine is but an illustration or part of a wider 'conflict of interest and duty' doctrine (see, eg, Phipps v Boardman [1967] 2 AC at p 123; NZ Netherlands Society 'Oranje' Inc v Kuys [1973] 1 WLR at p 129; [1973] 2 All ER at p 1225), the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it." 195 Under the first limb, it is the receipt of a benefit or gain that constitutes the breach of duty. It is clear that a breach of fiduciary duty may arise where a benefit is received in circumstances where there is a conflict between fiduciary duty and personal interest, even though the director could not be said to be acting in that role. The pursuit of a benefit or gain may be sufficient if it causes the company damage: see [200] below. In its most extreme formulation, the duty was said by Lord Herschell in Bray v Ford [1896] AC 44 at 51 to be that a person "… is not allowed to put himself in a position where his interest and duty conflict." But it is plain that that most extreme form does not represent the law. 196 It was said by Sir Frederick Jordan in "Chapters on Equity in New South Wales" (6th ed, 1947) (reprinted in "Select Legal Papers" (1983)) at 115: "It has often been said that a person who occupies a fiduciary position ought to avoid placing himself in a position in which his duty and his interest, or two different fiduciary duties conflict. This is rather a counsel of prudence than a rule of equity; the rule being that a fiduciary must not take advantage of such a conflict if it arises." It seems to flow from this that the rule stated in the first paragraph of the quote is not absolute and that the prohibition is not against the entry into a position of potential conflict as such, but, in Sir Frederick Jordan's words, taking advantage of a conflict which arises. 197 In Mills v Mills (1938) 60 CLR 150, the High Court recognised that it was not a breach of the rule for a director to hold shares in the company, and therefore to have a personal interest, which may come into conflict with his or her fiduciary duties as a director. Latham CJ said at 163 - 164: "It must, however, be recognized that as a general rule, though not invariably (as, for example, in the case of Birtchnell in this case), directors have an interest as shareholders in the company of which they are directors. Most sets of articles of association actually require the directors to have such an interest, and it is generally desired by shareholders that directors should have a substantial interest in the company so that their interests may be identified with those of the shareholders of the company. Ordinarily, therefore, in promoting the interests of the company, a director will also promote his own interests. I do not read the general phrases which are to be found in the authorities with reference to the obligations of directors to act solely in the interests of the company as meaning that they are prohibited from acting in any matter where their own interests are affected by what they do in their capacity as directors. Very many actions of directors who are shareholders, perhaps all of them, have a direct or indirect relation to their own interests. It would be ignoring realities and creating impossibilities in the administration of companies to require that directors should not advert to or consider in any way the effect of a particular decision upon their own interests as shareholders. A rule which laid down such a principle would paralyse the management of companies in many directions. Accordingly, the judicial observations which suggest that directors should consider only the interests of the company and never their own interests should not be pressed to a limit which would create a quite impossible position." Equally, it is made plain in that case that a director is not obliged to ignore totally, or necessarily act contrary to, personal interests in the discharge of duties. If the rule were otherwise, it would be extremely inconvenient and might completely stultify the operation of small companies, where the engagement of directors independent of the shareholders would be a practical impossibility. 198 Similarly, it would be extremely inconvenient if directors could not make loans (represented by loan accounts), especially to small companies, which find in such loans one of their most common sources of finance. Likewise, the provision of guarantees by directors, often supported by the giving of security over personal assets, is often a necessity for such companies to obtain finance facilities from banks and other outside sources. In my view, it is clear that such transactions are not prohibited by the rule. 199 The question then becomes whether a director who has entered into such a transaction is precluded from exercising the personal rights conferred, if that exercise would be in any way detrimental to the company. Such a ban would tend to have the same effect as an absolute prohibition of such transactions, since directors would be strongly discouraged from entering into such transactions, advantageous or even necessary to the company, if they could not enforce their personal rights. In my view, the law does not impose such an absolute ban on the exercise of purely personal rights by directors. Such enforcement cannot be regarded as an act of the director in the role of director, as opposed to an action in a purely personal capacity. It may be that the vindication of a personal right of the director, whether by the recovery of money or otherwise, cannot be regarded as obtaining a gain or benefit within the formulation of Deane J in the passage set out in [195] above. Equally, although it is clear that there is a situation of conflict, it cannot be regarded, in Sir Frederick Jordan's words, as taking advantage of the conflict. It was suggested that in the case of the notice of demand, there was liability because the notice encompassed some items of debt which were not established or as to which there was a bona fide dispute. But I do not think that that changed the situation in this case. I should add that I was not referred to, and was unable to find, any case in which a director was found in breach of duty in circumstances such as those alleged in the relevant parts of the cross claim. I am of opinion that there was no breach of fiduciary duty which the Lewis interests can rely on. 200 In the case of a breach of fiduciary duty, there is no doubt that in appropriate circumstances equitable compensation will be available as a remedy for that breach of duty: see Nocton v Lord Ashburton [1914] AC 932 at 952, 956 - 957; McKenzie v McDonald [1927] VLR 134 at 146; Catt v Marac Australia Ltd (1986) 9 NSWLR 639 at 659 - 660; Day v Mead [1987] 2 NZLR 443 at 460 – 461; Hill v Rose [1990] VR 129 at 143 – 144; Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 548, 570 – 571, 589 - 590; and see generally I E Davidson "The Equitable Remedy of Compensation" (1982) 13 MULR 349; W M C Gummow "Compensation for Breach of Fiduciary Duty" in T G Youdan (ed) Equity, Fiduciaries and Trusts (1989) 57; Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) at [5-260]. One of the appropriate circumstances, is, of course, that it is demonstrated that the company has suffered a loss and that there is a causal connexion between that loss and the breach of duty. On the evidence before me, it was not established that there was any identified loss actually suffered by Nortex, nor that there was any causal connection between any loss suffered and the actions alleged to constitute breaches of duty. In the case of the notice of demand, the company was not wound up as a result of its service. There is no evidence that there were any costs incurred that were not dealt with in the proceedings ensuing from the notice of demand. In relation to the withdrawal of the guarantee, certainly there is evidence that, on the day following the withdrawal, the Bank withdrew Nortex's finance facility, attributing as its reason the withdrawal of the guarantee. Some time afterwards the company was wound up. However, there is no evidence as to the financial state of the company at the time of the withdrawal of the guarantee or the availability or unavailability to the company of alternative sources of finance. In those circumstances, it is impossible to find that the winding up was caused in the requisite way by the withdrawal of the guarantee. Equally, there is no evidence as to what, if any, losses the company suffered by reason of being wound up. For those reasons alone, these claims for equitable compensation would fail, even if a breach of duty were established. 201 In those circumstances, the claims made in the cross claim which have been agitated upon the trial before me must fail and there will be judgment for Lamru and Lamb in respect of them. Appeals from liquidator's decisions on proofs of debt 202 The principles applicable on appeals from liquidators' rejections of proofs of debt were discussed in the High Court in Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 per Brennan and Dawson JJ at 340 – 341 as follows: "If the liquidator, in performing his function of considering the admissibility of proofs of debt, decides to reject a proof of debt, the ordinary remedy of the person claiming to be admitted as a creditor is to apply to the court to reverse or modify the decision …… The proceedings thus instituted, though often referred to as an 'appeal' from the liquidator's decision to reject, are originating proceedings which the court hears de novo: In re Bird's Stores Pty Ltd (1931) 37 Arg LR 94; In re Kentwood Constructions Ltd [1960] 1 WLR 646; [1960] 2 All ER 655; In re Trepca Mines Ltd [1960] 1 WLR 1273; [1960] 3 All ER 304. In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. If the liquidator relies on those special defences which allow him to go behind a judgment, an account stated, a covenant or an estoppel in order to ascertain the true liability of the company, he is none the less in the role of an adversary. The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation." And see generally the judgment of Campbell J in Re Jay-O-Bees; Rosseau v Jay-O-Bees [2004] NSWSC 818. 203 There are a number of reasons why in my view it may not be appropriate or necessary to determine in terms the various items of appeal from the liquidator's decisions on the proofs of debt. Events have rather flowed over them. In a number of cases, the liquidator's decisions under attack are not encompassed in the statutory appeal, because they were made after the liquidator's original decisions on the proofs of debt and, indeed, after the statutory appeal was instituted. An example is the liquidator's rewriting of the accounts on the basis that the 2001 judgment compelled the add backs convention and the differential interest convention to be put aside in the preparation of the accounts. As I understand it, by reason of my direction for the inclusion in the points of claim of all matters arising under the statutory appeal, as well as all matters raised in the second set of proceedings, all subject matters of complaint are in fact subsumed into those proceedings and may be dealt with by way of declaratory relief made in respect of the issues arising on the points of claim without reference back to the amended notice of motion now constituting the statutory appeal. The passage cited above from the Tanning Research case demonstrates that this is an entirely appropriate way to resolve the issues between the liquidator and the other parties. I refer to what is said in [205] below in respect of the formulation of orders. CONCLUSIONS 204 In summary, the decisions I have made are as follows: (1) That the argument that the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed was not precluded by the 2001 judgment; that the 12 April 1991 resolution was a valid determination under clause 4(1) of the trust deed; that, although the passing of the 12 April 1991 resolution was procured by a fraud by Lewis on Dufty and Hirmanu, Lamru is not entitled to have it set aside; that the Lewis interests are not estopped from alleging that the profit of the 1991 year up to 12 April 1991 exceeded $200,000; that it is not established that there is any breach of trust arising out of the distribution of profits of the 1991 year; and that, if such a breach of trust were established, the defence of laches, acquiescence and delay would be available to disentitle Lamru from any relief which would otherwise be available to it (issue 4). (2) That the implementation of the add backs convention and the differential interest convention did not constitute a breach or breaches of trust and that the conventions continue in operation and have not ceased to have effect (issues 2 and 3). (3) That the attribution of the whole of the sum of $291,840 to Kation in the 1992 year did not constitute a breach of trust or did not constitute a breach of trust of which Lamru was entitled to complain and that the defence of laches, acquiescence and delay would be available to disentitle Lamru from any relief which would otherwise be available to it (issue 5). (4) That the payments by Nortex to Kation of an additional 3 per cent of the profits in the 1995 year in the sum of $58,070 and to Mark Lewis of bonuses in the 1996 and 1997 years in the sums of $101,626 and $138,733.30 respectively were made in breach of trust. (5) That Lewis (with the knowledge and acquiescence of Kation) during the 1997 year fraudulently took and sold stock of Nortex and did not pay or account to the company for the proceeds. (6) That, by reason of Lamru's use of Lamb's evidence as to his and Lamru's dishonest participation together with Lewis and Kation in the same practice in fraud on the revenue up to Lamb's departure from Nortex in support of this claim, Lamru is precluded by the clean hands doctrine from obtaining equitable relief in relation to that fraud. (7) That Lamru failed in its claim relating to legal and accounting expenses. (8) That the credit against the $284,837 deduction in respect of the China creditors item arising from the liquidator's rejection of the proof of debt should be recorded in the 1997 year. (9) That Lewis is liable in relation to breaches of trust with respect to the Mark Lewis payments in the 1995, 1996 and 1997 years and that Kation is liable in relation to the breach of trust with regard to the Mark Lewis payment in the 1995 year. (10) That there should be judgment for the cross defendants on the cross claims agitated on the hearing before me. 205 As I have already indicated to the parties, I do not intend to make or formulate orders at the time that this judgement is delivered. Furthermore, I indicated earlier in the piece that I did not propose to deal with the issue of costs at all, until after my decisions were known. I propose to receive submissions from the parties as to the orders which should be made to give effect to my decisions. Short minutes (including conflicting versions if, as is likely, there is no agreement, concerning them) should be brought in at a time I shall appoint. Arrangements can be made at the same time for the hearing of any argument as to interest and costs. ********** Last Modified: 07/16/2007 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.