Victoria Street Apartments Limited (in liq) v Sharma HC Auckland CIV-2009-404-008377 [2011] NZHC 1786 (15 December 2011)

Last Updated: 20 December 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2009-404-008377}

BETWEEN VICTORIA STREET APARTMENTS LIMITED (IN LIQUIDATION)

First Plaintiff

AND TREASURY TECHNOLOGY DISTRIBUTION LIMITED Second Plaintiff

AND SUREN SHARMA First Defendant

AND SUREN SHARMA AS TRUSTEE OF THE SHARMA FAMILY TRUST NO. 2

Second Defendant

AND SUREN SHARMA AS TRUSTEE OF THE SHARMA FAMILY TRUST

Third Defendant

AND QUAY STREET APARTMENTS LIMITED

Fourth Defendant

AND MUTUAL TRUST PROPERTIES LIMITED

Fifth Defendant

AND MISSION TRUSTEE ONE LIMITED AND MISSION TRUSTEE TWO LIMITED

Sixth Defendants and Ninth Third Parties

AND REGINALD JAMES WATT Third Party

Hearing: 28 October 2011

Counsel: D W Grove for the Plaintiffs

D E Smyth for the Defendants

_{Judgment: 15 December 2011}

VICTORIA STREET APARTMENTS LTD (IN LIQUIDATION) and ANOR v SHARMA and ORS HC AK CIV-

2009-404-008377 15 December 2011

JUDGMENT OF DUFFY J [Re Quantum]

This judgment was delivered by Justice Duffy on 15 December 2011 at 4.00 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Counsel: D W Grove P O Box 130 Shortland Street Auckland 1140 for the Plaintiffs

D E Smyth P O Box 105270 Auckland City Auckland 1143 for the Defendants

[1] On 21 September 2011, I found that the plaintiffs had proven their claims against the defendants. The reasons for this finding were set out in a judgment delivered on 14 October 2011. The present judgment deals with the quantification of the relief to be awarded to the plaintiffs, as well as their entitlement to costs and interest; and should be read alongside the earlier judgments.

Recovery of misapplied funds

[2] There is no dispute between the parties regarding the amount of the payments

(exclusive of interest) that the plaintiffs are entitled to recover from the defendants. The total amounts able to be recovered are as follows:

First cause of action (Suren Sharma)

Second cause of action (Sharma Family Trust No. 2) Third cause of action (Sharma Family Trust)

Fourth cause of action (Quay Street Apartments Limited) Fifth cause of action (Mutual Trust Properties Limited) Sixth cause of action (Suren Sharma)

_TOTAL

$ 429,135.50

$ 649,105.00

$ 138,039.20

$ 333,262.50

$ 380,000.00

$ 60,569.00

_{$1,990,111.20}

[3] All but $64,157.50 of the amount for which judgment has been given against the fourth and fifth defendants has also been awarded against the second defendant. Each defendant, in its own separate way, is liable to repay the first plaintiff the amounts identified in the above schedule. These amounts represent the funds of the first plaintiff that the first defendant misapplied and which the other defendants have received as a result of that misapplication. However, the first plaintiff is not entitled to recover its lost funds more than once. Accordingly, insofar as there are specific amounts that are recoverable against more than one defendant, full or partial payment by any one of the defendants will correspondingly reduce what can be recovered from the others.

Interest

[4] The plaintiffs seek compound interest calculated from the date each unlawful misapplication of the first plaintiff’s funds occurred until the date on which the defendants’ liability was determined (being 21 September 2011): see Wilson & Horton Ltd v Attorney-General [1997] 2 NZLR 513 (CA) at 530.

[5] The plaintiffs originally contended that an award of compound interest was appropriate because the payments resulted from the first defendant’s breach of fiduciary duties that he owed to the first and second plaintiffs. They argued that the circumstances support a presumption of profit and that this is enough to permit the Court to award compound interest: see Eden Refuge Trust v Hohepa [2011] 3 NZLR

273 at [29]. However, in reply submissions, the plaintiffs accepted that there was no evidence or presumption that the first defendant profited in a way that would allow an award of compound interest. The plaintiffs accepted, therefore, that the first defendant should be liable for no more than an award of simple interest. But the plaintiffs maintain that the other defendants should be liable to pay compound interest.

[6] The defendants argue that in the absence of fraud, equity has never awarded compound interest except as against a trustee or other person in a fiduciary relationship in respect of profits improperly made: see Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12; [1996] AC 669. The defendants submit that there is no evidence of profits being made; nor is there any point in pursuing such a claim, as the first plaintiff’s creditors’ claims are not large enough to warrant further proceedings. This is because once the claims of the first plaintiff’s creditors are met, any surplus would be returned to the first plaintiff’s shareholder, who is also the first defendant.

[7] The defendants also challenge the date from when the award of interest should be calculated. They argue that the commencement date should be 3 June

2009, which is when the arbitrator determined that the first plaintiff owed a debt to the second plaintiff and to the Otis Family Trust. They argue that until that date, the

first defendant as director/shareholder of the first plaintiff was free to apply the company’s funds as he thought fit, as any improper use of those funds was able to be ratified by him as the company’s sole shareholder.

Compound or simple interest?

[8] The first defendant was found to have breached his fiduciary duties of loyalty and good faith to the first plaintiff in a manner amounting to equitable fraud. His conduct in principle would qualify for consideration of an award of compound interest. The first defendant contended that he was free to act in this way because as the first plaintiff’s sole director and shareholder, he had the necessary power as shareholder to ratify his conduct as a director. He considered, therefore, that his breaches of the duty of loyalty that he owed to the first plaintiff as a director could be cured through his power as a shareholder. This is a cynical way to view a director’s fiduciary obligations to his or her company. It also carries a risk, as this conduct can only be carried out without consequences if no other persons are harmed by it. Once such other persons are found to exist, as was the case here in the form of the first plaintiff ’s creditors, this type of conduct brings with it all the attendant consequences of a fiduciary’s breach of his or her fiduciary obligations. I consider that if a fiduciary knowingly conducts himself or herself in a disloyal, self-dealing way on the strength of being able to ratify such conduct through the exercise of other available powers, and later finds that the circumstances have changed such that the power to ratify is unavailable, the fiduciary must bear all the consequences of his or her improper conduct. Such improper conduct can, if other requisite elements are also present, give rise to an award of compound interest.

[9] An award of compound interest is not imposed for the purpose of punishment: see Equitycorp Industries Group Ltd (in stat man) v R (No 51) [1196] 3

NZLR 690 at 696-697. However, as I said in Eden Refuge v Hohepa [2011] 3 NZLR

273 at 28:

... Chancery Courts have awarded compound interest when they thought justice so demanded; that is, where money had been obtained or retained by fraud, or where it had been withheld or misapplied by a trustee or anyone else in a fiduciary position: see President of India v In Pintada Compania Navigacion SA [1985] AC 104 at 116. Both defendants satisfy this

requirement as each of them has knowingly breached his fiduciary duties: the first defendant as trustee of the PWFM trust; and the second defendant as solicitor for the trust. The alternative finding that the second defendant wilfully closed his eyes to the obvious would also satisfy this requirement.

[10] A defaulting fiduciary may be charged compound interest where the monies subject to the fiduciary obligation have been used in trade, the principle being that they are seen to be likely to be used as working capital for earning further profits. Furthermore, compound interest has been awarded in cases where the defendant has either wrongfully profited, or is presumed to have so profited from having the use of another person’s money: see Wallersteiner v Moir (No 2) [1975] QB 373 (CA) at 397 (emphasis added):

Where a trustee has retained trust money in his own hands, he will be accountable for the profit which he has made or which he is assumed to have made from the use of the money.

[11] In the present case, it is clear that the first defendant made use of the first plaintiff’s funds for commercial purposes. However, the plaintiffs accept that the first defendant did not directly profit from his conduct. The benefits that flowed from his improper actions went to the other defendants. Certainly, the first defendant has an association with the other defendants, but that is not sufficient to establish that the first defendant personally profited by his actions.

[12] The claims against the other defendants were for recovery of funds that the first defendant had misapplied. Thus, they were restitutionary in nature, rather than based on accessory liability for equitable fraud (claims for knowing receipt and dishonest assistance). The plaintiff’s ability to recover its misapplied funds from other defendants was based on principles of subrogation: see Foskett v McKeown [2001] 1 AC 102; and Lionel D Smith The Law of Tracing (Oxford, 1997). But the claims that were proved against these defendants did not entail a finding of equitable fraud against them. Accordingly, I consider that the nature of the claims made against them precludes an award of compound interest.

[13] In this case, the defendant with the requisite liability (breach of fiduciary duty) lacks the requisite ingredient of personal profit; whereas the other defendants must have enjoyed some benefit or profit from the improper receipt of the first

plaintiff’s funds, but lack the requisite liability for an award of compound interest. It follows that as no defendant has all the requisite elements for an award of compound interest, an award of simple interest is all that is available.

Commencement of interest

[14] When it comes to the date of the commencement for calculating interest, I do not accept the defendants’ argument that time should run from the date of the arbitral award, being 3 June 2009. I consider the more appropriate date is the time when the funds were wrongfully applied.

[15] As was recognised in Wilson & Horton Ltd at 530, there is no fixed rule as to the commencement date for interest. In that case, the Court of Appeal recognised that it was not uncommon in tort cases to delay the running of interest until the date of issue of the proceedings.

[16] In this case, proceedings were not issued until 2009, although the misapplication of the funds occurred between 2003 and 2006. However, the reason for this delay is that the first plaintiff was only able to act against its director when it went into liquidation in 2009.

[17] In the earlier judgment on liability, I found that by 31 October 2003, the first defendant would have known of the debt owed to the Otis Family Trust, and he would have known of a contingent liability on the part of the first plaintiff to pay GST at the earlier date in March 2003 when he signed the sale and purchase agreement with the second plaintiff: see Victoria Street Apartments Ltd (in liq) and Anor v Sharma and Ors HC Auckland CIV- 2009-404-008377, 21 September 2011 at [92]. Furthermore, for the 2003/2004 financial year, the first plaintiff ’s accounts show a loss of $198,568.55.

[18] It is clear from the judgment on liability that I was satisfied that from 2003, the first defendant was aware of liabilities that the first plaintiff owed to creditors, which meant that the first defendant could not rely on his power as a shareholder to ratify his improper conduct as a director in misusing the first plaintiff’s funds. Nor

did this change during the later financial years of 2005 and 2006. In such circumstances, I consider that it is appropriate that interest run from the time each improper payment was made. It is clear that at all times that the improper payments were made, the first plaintiff had obligations that it owed to its creditors that could not be disregarded.

[19] In the judgment on liability, I found that, due to the first defendant’s relationship with the other defendants, the other defendants would have known at the time they received or benefited from the payments that they were improperly made by the first defendant. Their willingness to accept payments made in such circumstances provides the basis for finding that interest should commence from the time the payments were made. I see no reason why the first plaintiff should not receive the benefit of interest on the funds from the time it lost the use of them. Accordingly, for all defendants, interest will run from the time each of the payments was actually made.

Calculation of interest

[20] The defendants did not dispute the plaintiffs’ arithmetical calculations of the interest due, or the choice of interest rates to be applied. Instead, their dispute focused on rejecting an award of compound interest and on the commencement dates for calculating interest. I have already dealt with these objections. I propose, therefore, to adopt the plaintiffs’ calculations.

[21] The result is that each defendant is liable to pay interest on the judgment amounts awarded against him, or it, as follows:

Names of Defendants and

Causes of action Judgment Amount Interest (simple)

Suren Sharma –

First cause of action $429,135.30 $256,377.97

Suren Sharma –

Sixth cause of action $ 60,569.00 $ 33,463.92

Sharma Family Trust No. 2 –

Second cause of action $649,105.00 $351,308.85

Sharma Family Trust –

Third cause of action $138,039.20 $ 64,253.18

Quay Street Apartments Limited –

Fourth cause of action $333,262.50 $210,037.12

Mutual Trust Properties Limited –

_{Fifth cause of action $380,000.00 $202,567.75}

Costs

[22] For some of the reasons as given in [12] herein, the plaintiffs are only entitled to scale costs against the second to fifth defendants. There was nothing about their conduct, either in terms of what led to their liability or their conduct of the proceeding, that suggested that something above scale costs was in order. The plaintiffs have not provided an itemised account which identifies the appropriate daily recovery rate, or the time allocations as provided in Schedules 2 and 3 of the High Court Rules. This will need to be done before an award of costs can be made.

[23] The conduct of the first defendant, however, was such that, in principle, it could attract an award of indemnity costs. The plaintiffs seek such an award. It would be helpful to know the difference between scale costs and indemnity costs. Indemnity costs are usually determined with reference to actual costs. Here, the plaintiffs’ actual costs were $98,448.75. However, in this case, the plaintiffs need to provide an account of the scale costs they claim against the other defendants. Knowledge of this amount will enable an assessment to be made, if indemnity costs are to be awarded, of the quantum of the uplift.

[24] I propose, therefore, to leave the determination of costs against the first defendant for when I am able to determine the costs entitlement against the other defendants. I consider the plaintiffs’ disbursements claim of $1,790 to be reasonable and accordingly, that is granted.

Set off

[25] The first defendant contends that, as against the money sum he has been ordered to repay, he is entitled to set off an amount that represents his entitlement to a salary as a working director of the first plaintiff.

[26] The first plaintiff argues that the first defendant has failed to plead any such set off and did not adduce any evidence to support or to quantify any such entitlement.

[27] The first defendant referred in his submissions to evidence given by Mr Goodall regarding the level of working director’s salaries and fees. However, such evidence was not adduced in this proceeding.

[28] In principle, a fiduciary who is found to have breached his duties but who has added value to the beneficiaries’ property may be entitled to claim some recompense for his work if the profit is properly attributable to his efforts: see Chirnside v Fay [2006] NZSC 68; [2007] 1 NZLR 433. However, such allowances are made in the context of claims for an account of profits. The idea is that an errant fiduciary should be given some recognition for his or her efforts in generating the profits. In the present case, the plaintiffs have simply sought recovery of funds that were improperly paid by the first defendant to the benefit of the other defendants. No account of profits was sought. Whilst the defendants may have benefited from receipt of the improper advances, the plaintiffs have not sought to recover any such profit.

[29] In the present case, the first defendant simply seeks to have a sum of money determined as part of a salary or fees payment to him, despite no such provision being made for this during the course of his directorship. I am not satisfied that he can retrospectively achieve this outcome. Furthermore, the absence of any pleading or evidence to establish the value of such payments is fatal to his argument. Accordingly, I find that there is no basis for the first defendant to be able to set off a

notional salary or fees entitlement against the sums I have ordered him to repay to the first plaintiff

Result

[30] Judgment is entered against the defendants as is set out in [2] herein.

[31] Simple interest on the judgment amounts, as is set out in [21] herein, is awarded against the defendants.

[32] A decision on costs is deferred. The plaintiffs are to file further particulars regarding costs, and the defendants are entitled to reply.

[33] Leave is reserved to the parties to return to Court on issues regarding the arithmetical calculation of the interest awarded and any issue regarding costs, should the need arise.

Duffy J