New South Wales Supreme Court CITATION : McMahon v Livingstone and Ors (Sheahan - cross-claimant); Sheahan v Scott & Ophix Pty Ltd [2003] NSWSC 1082 HEARING DATE(S) : 29 and 30 September and 1 and 2 October 2003 JUDGMENT DATE : 25 November 2003 JURISDICTION: Equity Division JUDGMENT OF : Windeyer J at 1 DECISION : Accounts decided In 2000 of 1998 Brian McMahon (Plaintiff/Third Cross-Defendant) Kenneth Livingstone (First Defendant/Fourth Cross-Defendant) John Joseph Scott (Second Defendant/First Cross-Defendant) PARTIES : Ophix Finance Corporation Pty Limited (Third Defendant/Second Cross-Defendant) John Sheehan (as trustee for Kenneth Livingstone) (Fourth Defendant/Cross-Claimant) In 5577 of 2002 John Sheahan (Plaintiff) John Joseph Scott (Defendant) FILE NUMBER(S) : SC 2000 of 1998; 5577 of 2002 COUNSEL : Mr J E Marshall SC with him Ms J Thornton (Fourth Defendant/Cross-Claimant in 2000 of 1998; and Plaintiff in 5577 of 2002) Mr P B Walsh (Second and Third Defendants/First and Second Cross-Defendants in 2000 of 1998 and Defendant in 5577 of 2002) Deacons (Fourth Defendant/Cross-Claimant in 2000 of 1998; and Plaintiff in 5577 of 2002) SOLICITORS : Church and Grace (Second and Third Defendants/First and Second Cross-Defendants in 2000 of 1998; and Defendant in 5577 of 2002) - 4 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J TUESDAY 25 NOVEMBER 2003 2000/98 MCMAHON V LIVINGSTONE & ORS, JOHN SHEAHAN (Cross Claimant) 5577/02 SHEAHAN V SCOTT & OPHIX PTY LTD JUDGMENT (on accounts) Procedural Outline 1 This judgment concerns accounts ordered to be taken between the cross-claimant Mr Sheahan ("Sheahan"), and the first and second cross-defendants Mr Scott ("Scott") and Ophix Finance Corporation Pty Limited ("Ophix") as a result of a judgment in the proceedings of 16 February 2001 and a supplementary judgment of 13 December 2001. 2 These reasons must be read with those earlier judgments. By orders made pursuant to those judgments on 21 March 2001 and 15 July 2002, the accounts were to be taken by a Master. However, agreement was reached on many items, at least to amount, if not liability and as the liability questions were the most significant, both parties to the account asked that I determine those issues and then all issues on the accounts. I agreed to do so under orders made by me on 23 May 2003. 3 These reasons will determine the objections still maintained as to the entitlement of Scott and Ophix to charge certain payments against the fund of which the cross-claimant is now trustee, and in a few instances will determine whether the amounts claimed are correct. When this is done the cross-claimant will be able to bring in a draft certificate and the parties will be able to make the necessary interest calculations to enable the amount of the final certificate to be ascertained and judgment entered for that final amount. 4 Proceedings No 5577 of 2002 between Sheahan as plaintiff and Scott as defendant, relate to some of the items on the account which can be referred to as "Bagshaw payments". Those proceedings were heard in part with the proceedings on the account and it will be possible to make orders in those proceedings when the accounts are determined. To that extent this judgment is in both actions. Quantum objections 5 These are limited to: 1. The quantum of interest, which cannot be determined until the other objections are dealt with and which can then be calculated by the parties; and 2. The amounts of items 10, 16 and 47, the first two of which relate to payments under the heading of "Gardner" which was subject to a liability claim as well. Item 47 relates to what I will describe as the "Simpost and Winrobe claims". I will therefore deal with these items first after dealing with a few general matters. Basis for Account 6 The outline of the account is set out in my final judgment. Scott agreed the figures for the Ken Account with Livingstone as at 30 June 1994. He kept the Ken Account up to December 1994 after which he said it was kept by Mr Slattery. There was no evidence of any accounts actually kept after that date. The accounts filed, although verified by Scott, were in fact prepared by Slattery. There is no evidence of any ongoing contemporaneous accounts. Rather the accounts seem to have been constructed as a result of an order made by Hodgson CJ in Eq at an early stage in these proceedings. 7 Mr Scott insisted that the funds in the Scott and Slattery Clearing Account were funds of Ophix. In other words he said Ophix was the proprietor of that account. I do not accept this. It is contrary to the bank documents; it is also contrary to the proceedings Scott brought for judicial advice in this Court; it is contrary to his evidence before the Federal Court; and there are no documents produced to support the claim. It is also contrary to paragraph 13 of Scott's affidavit of 10 July 2001. There is however no doubt that the funds were used by Ophix and available to that company by on-lending if not by ownership. There is another reason for this finding as to ownership. There was no evidence adduced by Slattery. No books or records of Ophix were produced or put into evidence. It was clear that this was a deliberate decision taken by Scott. It was not suggested that the books were not available or that Slattery was not available to give evidence. Gardner: Items 10 and 16 8 Scott said that the amount of $575,246.00 had been invested (according to Livingstone) by Gardner and paid into the clearing account. He said that Gardner was asking for repayment from Livingstone, and by arrangement with Gardner and Livingstone he, Scott, arranged to take over the loan account through Ophix and repay it over a period. He said that $120,000.00 was paid in December 1994 and that the balance of $455,246.00 was debited to the Ken Account on 6 January 1995. If that happened so that Gardner was no longer a trust creditor of Livingstone I consider that the debit was authorized. While it is claimed that an amount said to have been paid to Gardner in January 1995 of $95,246.00 is not proved to have been paid, there is in evidence as Exhibit 12 a copy of a letter from Gardner to Scott acknowledging receipt of all invested moneys less $40,000.00. There is evidence by Mr Scott that this amount was subsequently paid. In light of the support given by the letter I would have considered items 10 and 16 proved. The $95,246.00 is referred to in Exhibit 9 being JJS 1 in a letter from Church and Grace as having been part of the proceeds of the Plumpton sale and paid to Gardner but is brought in as part of the amount received. This item is allowed. Winrobe and Simpost: Item 47 9 This is the most significant item. It is for $5,356,006.55 claimed to be a loss on a development at Hornsby. I referred to it in paragraphs 29, 30 and 46 of my first judgment. As I said there was then and is now conflicting evidence as to the ownership of shares in the two companies. Either Scott held his shares for Livingstone or Livingstone held his shares for Slattery. There is evidence supporting the latter contention, namely a declaration of trust signed by Livingstone on 21 November 1989, which was witnessed by Scott. Scott denied having seen this but I do not accept his evidence. In short Scott says that Hornsby was an investment initially funded by Livingstone which went bad; that the debt was discharged by transfer of shares in the companies holding the relevant land to Livingstone, or on his direction. Livingstone says that this project was not funded by him, but by Ophix, and that he considered that on default it became an Ophix investment. The declaration of trust would go some way to support this. Neither Livingstone nor Scott can be relied upon. Slattery could have given relevant evidence but as I have said did not do so. This was an extremely important issue. An inference must be drawn that evidence of Slattery would not assist Scott. That inference and the declaration of trust weigh the scales in favour of a finding against Scott, although a fax from Livingstone to Scott of 19 April 1989 goes some way to support the claim of an original Livingstone investment, but certainly not an investment funded through the Ken Account. Neither Winrobe nor Simpost was a client of Livingstone to whom the 1994 agreement claimed to have been made was referable. 10 This leads to the 1999 deed, the contents of which are set out in my earlier judgment. Contrary to what I said there further evidence showed that the document was executed by all parties to it. Mr Marshall, senior counsel for the cross-claimant argued strongly that the deed was a sham and put this to Scott who denied it. Scott said that it was intended to record an earlier agreement which he understood had been made between Slattery and Livingstone in 1994. There is no evidence of any earlier agreement. If there had been an agreement, and assuming that neither party would wish to call Livingstone, Slattery could have given evidence of it. Scott said that the written document was not intended to be wider than the prior arrangement, but that is not sufficient to justify a reading down. The cross-defendants rely here on paragraph 3(b) of the deed. 11 When the deed was executed Livingstone was in gaol in Lithgow. He was in great financial difficulties. He had no funds available. He was making arrangements through his solicitors and through the solicitors for Scott and Slattery and Ophix for the transfer of his interest in his home in Pound Avenue, Forestville to his children and his interest in his office premises to his wife. At this time Ophix was also short of funds. It could not have repaid the Ken Account balance. Despite his early denials, Scott was aware of the arrangements to transfer Livingstone's interest in the Pound Avenue property out of his name. He was aware of the arrangements for the deed to be signed in connection with those arrangements. He knew of the introduction Davwren Pty Limited into what was purely a round robin scheme which was almost certainly entered into to defeat creditors. The argument of Mr Marshall was that the document was a sham; that is that it did not set out the actual arrangements between the parties, but was intended to be something to be shown to any trustee in bankruptcy who might be appointed to Livingstone's estate if he became bankrupt, as it seemed he was certain to do. I am unable to conclude by way of inference that the deed is a sham. Livingstone, through the round robin transaction had moved his only assets into the hands of family members; he had been assisted in this by Scott and Slattery; and some of the items authorized to be debited to the account pursuant to the deed were justified. 12 On no basis would the deed establish that item 47 should be allowed as claimed. There is no evidence of the Winrobe and Simpost losses. There is evidence of payments out in respect of the Hornsby venture, some of these being double and at least one triple counted. The claimed outgoings have been shown to have been overstated by at least $1.2 million and probably more. The cross-defendants bear the onus on this. They have not adduced evidence of loss. Scott and Ophix have had the opportunity to prove the losses. They could probably only do so through books of Ophix which they have chosen not to put into evidence. Item 47 should be disallowed. Liability Issues Winrobe and Simpost Item 47 13 The Ken Account investors whose money was held on trust by Livingstone had no interest in the Hornsby development although on some of the evidence it seems that some of their funds may have been used to finance it at some stage. While this was not a matter requiring final determination in my first judgment I adhere to the views I there expressed. For Livingstone to authorize charging against the trust investors' losses of this development must have been a breach of trust. It was never suggested that those investors would have some share of the development. Rather that share, if anyone was to have it, was to be split three ways between the estate agent, Livingstone and Scott and Slattery. The companies did not even pay interest, so far as the evidence shows, to Ophix on the amounts advanced. There is no evidence that the debit was ever entered in any account on the date claimed. On the evidence of Scott the deed was the only authority for the debit unless of course Scott was entitled to rely upon what he said was told to him by Slattery about the arrangements with Livingstone. What Scott and Ophix have purported to do is to appropriate trust moneys to themselves. That is the equivalent of knowing receipt of trust funds. Item 47 is disallowed. Davwren Pty Limited – Item 87 14 Davwren was a company controlled by Slattery. In my first judgment I explained why this item could not be justified. I accept that Dawren advanced $180,000.00 to Jennifer Livingstone and David Livingstone and $15,000.00 to Mrs Pamela Livingstone, secured on mortgages over the properties in which Mr Livingstone had held a one half share, which sums were purported to be repaid with interest by direction of Livingstone from moneys owing to him by Ophix. This purported transaction was nothing else than Livingstone purporting to use trust moneys to discharge family debts. It was a breach of trust; Ophix knew it was a breach of trust; Slattery certainly knew it was a breach of trust. Scott may not have known anything about it but that does not make the debit allowable. Item 87 is disallowed. It is fair to say there was very little argument about this from Mr Walsh, counsel for Scott and Ophix. Item 18 – commission on Plumpton sale 15 This item should be disallowed. There is no proof of payment by correspondence, cheque butts or bank statements. The objection was clearly taken and no evidence has been adduced to support the claim. Item 25 - Tate 16 This item is allowed. A cheque butt is in evidence although the relevant bank statement is not. No cross-examination was addressed to this. Tate was a Livingstone investor. Items 32, 33 and 34 – Omega Superannuation Fund 17 The evidence is confused. The payments were claimed to be made to three persons who were not clients of Livingstone. Nevertheless they were members of the fund; Scott put them into it. There is no doubt the amounts were ultimately paid out by Scott or one of his companies. Provided that the balance in the Ken Account to the credit of Omega included the amounts to the credit of those three persons in the fund, and I accept that it did, the transaction, although a shortcut, was not a breach. It is not established that the Omega fund has suffered. The items are allowed. Items 35, 36, 37, 38, 39, 41 and 42 - Lowe legal fees. 18 These costs were incurred in defending a claim in the Family Court proceedings to which there was no defence. In fact, as Scott admitted, the defence was an abuse of court process for the purpose of delaying the inevitable order for payment. Livingstone had authorized the payment if it were the position that his authority was required. It follows that the only possible authority for the debits is paragraph 3(c) of the 1999 deed. Even assuming that the 1994 agreement was made, the costs could hardly have come within its terms. The money was owed but was not repaid. It was a clear breach of trust by Livingstone to authorize the debit which had the effect of reducing the funds held in trust for other investors. As I have said previously to take that benefit amounts to knowing receipt. The items are disallowed. All items relating to McMahon costs 19 These items are disallowed. They are costs in these proceedings in respect of which orders for costs in favour of McMahon have been made against Scott and Ophix. In fact item 166 which is unquantified is a claim to debit the account with costs ordered to be paid to McMahon. It is, I think, correct to say, as Scott claimed, that the costs paid to Messrs Church and Grace fall within paragraph 3(c) of the agreement. But when the agreement was signed at the time of the round robin to transfer the real estate interests, Scott knew that Livingstone was in serious financial difficulties and could expect to be made bankrupt very shortly; although that in fact did not take place for about twelve months. He knew that most, if not all the Ken Account moneys belonged to investors and not to Livingstone. Livingstone could agree, if he wished, to have his own funds applied towards such costs. It was a breach of trust to agree that investors' rights could be used in this way. It was dishonest and Scott and Ophix must have known it was dishonest. They are wishing to benefit from such dishonesty. They cannot do so. These items are disallowed. Some of the items appear on the supplementary account which is part of Exhibit JJS 14 in Exhibit 10. Legal costs - Livingstone 20 All items in the account and supplementary account under this heading are disallowed for similar reasons. They are a claim to charge up against the Ken Account costs involved in the proceedings on the account, or proceedings 5577 of 2002 to which I will come. Miller – Items 106, 109, 111, 112, 113 21 Item 111 is claimed to have been paid pursuant to terms of settlement of proceedings brought by the executor of the estate of Mr Miller against Livingstone, Scott, Slattery and Ophix to recover moneys invested into the Scott and Avery account through Livingstone. In the statement of claim the sum invested is said to have been $150,000.00 of which $25,000.00 is alleged to have been repaid by Livingstone. Under the terms of settlement and orders filed the proceedings were dismissed against all defendants with no order as to costs. Deeds of release were signed. There is no documentary support for the payment of $25,000.00 which is contrary to the documents in evidence. If $125,000.00 of Miller estate funds were invested and the claims could be settled on the basis that the actions would be dismissed with no orders as to costs that in one way could be seen to be advantageous to other investors. That would be the position even if the $25,000.00 was paid. On that basis it seems to me that items 106, 109, 112, and 113 should be allowed and item 111 disallowed. Item 92 – K Livingstone 22 This is a claimed payment to Livingstone of $10,000.00 and is objected to on the basis that there is no documentary evidence to support it. That is not correct. The evidence is in JJS 40. Livingstone was not bankrupt at the time the payment was made. I do not think that it is necessarily established that this is a breach of trust. I allow the item. Item 134 – payment to Mr Sheahan of $342,517.12 23 This amount was paid by Scott to Mr Sheahan as trustee for the bankrupt estate of Livingstone pursuant to an order of the Federal Court of Australia of 27 September 2001. The amount was accepted by Scott at that date as being due to Livingstone on an account with Scott and Slattery. It may be of some significance that it does not appear to have been claimed to be solely an Ophix liability. The order was made on the undertaking of Mr Sheahan not to distribute the funds without the consent of Mr Scott or leave of the court. According to the evidence before me the order was framed to protect the position of Mr Scott in his appeal to the Court of Appeal in the present proceedings, which appeal was dismissed as incompetent. All that means is that when this matter is finally disposed of it is likely that there could be an appeal which would be competent. It was put by counsel for Mr Sheahan that the item should be allowed and a direction given to Mr Scott to provide consent to distribution to trust creditors. I do not think that I should do this. Unless the balance on the accounts is in favour of the cross-defendants there can be no basis on which Scott could withhold his consent, but that should be determined in the Federal Court proceedings, not here. The item should be allowed. Statutory Demand costs 24 On the supplementary account there are items claimed for costs in proceedings taken by Ophix to set aside a statutory demand served by Mr Sheahan requiring payment of amounts assessed as costs due to Mr Sheahan in respect of the Court of Appeal proceedings. The amounts claimed appear to be Items 181 and 182 in the supplementary account. For the reasons I have previously given in connection with the McMahon costs these debits would not be justified. Further, even if they were otherwise justified, they should not be allowed because they should not have been incurred. Items relating to Bagshaw 25 It is accepted that all items on the account relating to Bagshaw should be allowed. That includes the amounts paid by Mr Scott personally as appear on Exhibit 15 and would include amounts totalling $18,646.11, yet to be paid to Messrs. Church and Grace for legal fees, the total Bagshaw payments therefore being $127,151.00. There is no doubt that Mr Scott is entitled to reimbursement for costs paid by him for the proceedings against Mr and Mrs Bagshaw or their trustees in bankruptcy to recover moneys lent from the Ken Account to Bagshaw. Mr & Mrs Bagshaw are now bankrupt. Settlement has been reached with the trustee in bankruptcy of Mr Bagshaw's estate and it is expected it will be reached with the trustee in bankruptcy of Mrs Bagshaw's estate. Judicial advice was obtained by Mr Scott to the effect that he would be justified in entering into the proposed settlements. As a result of the settlement with the trustee of Mr Bagshaw's estate sums totalling approximately $356,000.00 are held by Messrs Church and Grace and the interests of Mr Bagshaw in properties at Terrigal and Mildura are to be transferred to Mr Scott. Mr Scott has refused direct payment of the $356,000.00 to Mr Sheahan or to transfer the interests in the real estate properties to him unless he is paid the sum of $108,000 which he says is owed, plus as I understand it, the sum of $18,646.11. His attitude would be the same for any settlement achieved with the trustee of Mrs Bagshaw's bankrupt estate, which as I understand it, would be limited to transfer of her interests in the properties at Terrigal and Mildura. 26 If the balance of account were in favour of the cross-defendants as claimed there would be no reason not to allow retention out of the Bagshaw recovery of the costs incurred in making the recovery. The position would be the same for any additional costs involved with recovery from Mrs Bagshaw's bankrupt estate. But as the position will be different following my determination on the accounts, and the balance will be in favour of the cross-claimant, the costs having being claimed and no longer being the subject of objection, they cannot be claimed a second time by way of retention. The election was made, and properly made, to claim these costs as payments on the account. Once the final certificate is prepared and orders made upon it, orders should be made in proceedings No. 5577 of 2002 which were heard without objection at the same time as these proceedings for payment and transfer of the Bagshaw recoveries to Mr Sheahan. If an appeal is filed Mr Scott can seek a stay of distribution. General considerations 27 All items which remain subject to objection have, I consider, been dealt with in the judgment. This is shown by the spreadsheet which dealt with the matters the subject of objection and which can be taken to override the objections to the consolidated account which included more objections. There was no discussion about any of those not dealt with and those items therefore should be allowed. As I have said the cross-claimant can now bring a draft certificate on the accounts pursuant to these reasons and judgment and orders can then be entered. It would seem to me that the cross-defendants should pay the costs of the cross-claimant on the accounts and the orders should provide for that. ********** Last Modified: 12/16/2003 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.