Category: Equity

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Accounting for profits

Accounting for profits

  1. More recently in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 92 ALJR 918; [2018] HCA 43 Kiefel CJ, Keane and Edelman JJ said (at [6]-[7]) (citations omitted):

In Consul Development Pty Ltd v DPC Estates Pty Ltd, in a passage accepted as authoritative by both sides in the present case, Gibbs J said that:

a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.

So described, the liability to account and to disgorge benefits encompasses “any benefit” received by the knowing participant in a breach of fiduciary duty “as a result of” that participation. The benefit of a business connection is such a benefit. Foresters’ submission fails to come to grips at all with the fact that the benefit that Foresters stood to gain, and in fact acquired, from its participation in the various acts of disloyalty by Woff and Corby was not sporadic deposits from retail customers; it was the business connections of Lifeplan and FPM.

  1. Their Honours also said (at [13]-[16]) (citations omitted):

Quantification

Once it has been determined that a benefit or advantage has been caused by the acts of knowing assistance, there remains the question of quantification of the benefit to be disgorged. While it is true that equity will not require an errant fiduciary or a participant in a breach of fiduciary duty to account for an advantage which the breach of fiduciary duty has not caused or to which it has not sufficiently contributed, where causation is sufficiently established the onus is upon the errant fiduciary or participant to show that he or she should not account for the full value of the advantage. That onus is not discharged by mere conjecture or supposition giving the benefit of the doubt to a proven wrongdoer. The requirement of proof conforms with the obligation of a party charged with a breach of fiduciary duty to show why the full value of an advantage obtained in a situation of conflict of duty should not be disgorged.

There are two ways in which the wrongdoer might discharge that onus and reduce the extent of the liability to disgorge profits. The first way, which can involve notorious difficulties in attribution of costs, is by proving his or her entitlement to an allowance for costs incurred, and labour and skill employed. No issue of an allowance arises, or was relied upon, in this appeal because it was accepted that the expenses included in the discounted cash flow included an amount for the work and effort of Woff and Corby.

The second way, which was the focus of this appeal, is by demonstrating that the benefit or advantage is beyond the scope of the liability for which the wrongdoer should account for profits. A wrongdoer might prove that some profit or benefit is beyond the scope of liability for which he or she should account if the profit or benefit has no reasonable connection with the wrongdoing. For example, in Frank Music Corporation v Metro-Goldwyn-Mayer Inc, the Ninth Circuit Court of Appeals accepted that a copyright infringement by MGM Grand Hotel Inc in a performance at the MGM Grand Hotel entitled the plaintiffs to the profits directly from the performance. It also entitled the plaintiffs to a proportion of indirect profits, including from the consequential increase in hotel room bookings which were held to have a “sufficient nexus” with the performance. But the direct profit from the performance to be disgorged was limited to 9% because the copyright infringement comprised only the substantial part of Act IV in a 10-act performance. Nor did it entitle the plaintiffs to any profits made by the liable parent company, Metro-Goldwyn-Mayer Inc, as a result of “the advertising value” of the hotel.

No precise test has been prescribed for determining when it will be inequitable to account for a benefit on the basis that it has no reasonable connection with wrongdoing. Nor is there any need for such a test. All of the circumstances must be considered, including the nature of the conduct. It is pertinent here that the profits were from deliberate and dishonest conduct, and were those desired to be achieved.

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Legal principles: Mingling trust funds and onus

Mingling trust funds and onus (from [2018] NSWSC 1987)

  1. The fiduciary obligations arising if a trustee mingles or mixes trust funds with non-trust funds were explained in Cook v Addison(1869) LR 7 Eq 466 (at 470):

It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole.

  1. This was applied by Ungoed-Thomas J in Re Tilley’s Will Trusts; Burgin v Croad [1967] Ch 1179 who said (at 1183) (citations omitted):

The words in that passage “so as that they cannot be separated with perfect accuracy” are an essential part of the Vice-Chancellor’s proposition, and indeed of the principle of Lupton v White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust.

  1. In Foskett v McKeown [2001] 1 AC 102; [2000] UKHL 29 Millett LJ said (at 133) (citations omitted):

The rule in equity is to the same effect, as Sir William Page Wood V-C observed in Frith v Cartland: “if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own”.

  1. Australian courts have accepted these principles: Brady v Stapleton (1952) 88 CLR 322 at 336-9; [1952] HCA 62 (Dixon CJ and Fullagar J) and Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109-10; [1984] HCA 64 (Mason J).
  2. In Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 Campbell JA (with Meagher and Barrett JJA agreeing) said (at [95]):

Because Mr Chincotta paid various sums of money not derived from Heperu into the Westpac accounts, Allsop P held at [112] that the funds in that account were a mixture of trust funds and personal funds of the effective defaulting fiduciary, Mr Chincotta. Trust money that passes through a mixed fund can be traced into an asset that is still in existence when a court considers the matter. This arises through application of the principle that a defaulting trustee who withdraws from a mixed fund and dissipates the withdrawal is presumed to have dissipated his own money. Thus, it was open to Heperu to trace the trust funds from the mixed fund into any asset that had been purchased from the mixed fund: Scott v Scott (1963) 109 CLR 649 at 664. Further, if a withdrawal from the mixed fund was used to discharge a mortgage over real estate, tracing into that real estate could be effected by reason of Heperu being subrogated to the proprietary right of the mortgagee whose mortgage was paid out: Boscawen v Bajwa [1996] 1 WLR 328 at 340-1; Heperu v Belle at [135].

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Alienation of real estate by gift

(Source: Isin v Ozen [2016] NSWSC 1480; [157]-[165] per Hallen J)

Alienation of real estate will be effective, in equity, by gift, if the gift is “complete”: Corin v Patton (1990) 169 CLR 540; [1990] HCA 12, at 558, 563 – 570, 582 – 583; Costin v Costin (1997) 7 BPR 15,167; [1997] NSW ConvR 55-811; Motor Auction Pty Ltd v John Joyce Wholesale Cars Pty Ltd (1997) 8 BPR 15,565.

To effect the gift, the donor must do everything that, according to the nature of the property, is necessary to be done in order to transfer the property and render the gift binding on the donor: Milroy v Lord (1862) 45 ER 1185; (1862) 4 De GF & J 264.

What that means, in the context of Torrens system land, was the subject of debate until, in Corin v Patton, Mason CJ and McHugh J held, at 559, that:

“… the principle is that, if an intending donor of property has done everything which it is necessary for him to have done to effect a transfer of legal title, then equity will recognize the gift. So long as the donee has been equipped to achieve the transfer of legal ownership, the gift is complete in equity. ‘Necessary’ used in this sense means necessary to effect a transfer. From the viewpoint of the intending donor, the question is whether what he has done is sufficient to enable the legal transfer to be effected without further action on his part.”

Deane J, at 582, dealt with the way in which it can be determined that the stage had been reached when a gift of real property under an unregistered Transfer is complete and effective in equity:

“That test is a twofold one. It is whether the donor has done all that is necessary to place the vesting of the legal title within the control of the donee and beyond the recall or intervention of the donor. Once that stage is reached and the gift is complete and effective in equity, the equitable interest in the land vests in the donee and, that being so, the donor is bound in conscience to hold the property as trustee for the donee pending the vesting of the legal title. In that regard, it is not a matter of equity ignoring the provisions of s 41 of the Act and treating the unregistered transfer as effective of itself to assign the beneficial interest in the land. It is simply that equity, acting upon the ‘fact or circumstance’ that the donor has placed the vesting of the legal title within the control of the donee and beyond the donor’s recall or intervention, looks at the substantial effect of what had been done and regards the gift as complete …”

It is, thus, now clear that for land held under the Torrens system, which is said to be the subject of the gift, the donee is unable to secure the registration of her or his title in her, or his, own name, without a transfer executed by the donors. The execution and delivery of the transfer is, therefore, to be regarded as “necessary” to be done by the donor.

In Brunker v Perpetual Trustee Co Ltd (1937) 57 CLR 555; [1937] HCA 29, Dixon J (with whom Rich J agreed), wrote at 602-603:

“That delivery of the transfer to the donee or the donee’s agents is a condition which must be fulfilled before such a right will arise, appears to me to be clear. It is only by the control or possession of the instrument that the transferee could effect registration without any liability to interference or restraint on the part of the transferor. Further, I think that the donee must obtain property in the piece of paper itself and property in the paper could pass only by delivery (Cochrane v Moore (1890) 25 QBD 57). If property in the transfer remained in the transferor, his power of recalling it must also remain. For he would be entitled to possession of the paper, he could refuse to present it for registration, and he could destroy it. But, if by delivery to the donee or someone as bailee for her, the transferor has given her property in the instrument itself, then unless some further condition is expressly or impliedly prescribed by the statute, it would appear that the instrument, assuming it to be registrable, may be registered by the transferee independently altogether of the donor, and in spite of any objection on his part.”

The judgment of McTiernan J, at 609, was to like effect.

However, the delivery of the Transfer, on its own, is not enough. In Corin v Patton, Mason CJ and McHugh J continued, at 560-561:

“Whether or not it is correct to say that the production of a certificate of title is ‘necessary’ to achieve registration of a transfer of Torrens system land, it is apparent that a gift of such land cannot be regarded as complete in equity while the donor retains possession or control of the certificate of title … That is because it can scarcely be said that the donor has done everything necessary to be done by him if he has retained the certificate of title, by virtue of the possession of which the gift might well be thwarted.

In the present case Mrs Patton gave no authority for the mortgagee bank to hand the certificate of title to Mr Corin for the purposes of registration …

Accordingly, the transactions failed to pass the equitable property in the land to Mr Corin, and it is unnecessary to consider under whose control the instrument of transfer was after execution. Further, because the gift was incomplete, Mrs Patton could have recalled the transfer at any time. But it is not strictly relevant to ask whether or not Mrs Patton could have recalled the gift; that is not a criterion but rather a result of the efficacy or otherwise of the gift.”

Deane J, after the passage quoted above, continued, at 583:

“In the present case, the fact that Mrs Patton had taken no step to enable Mr Corin to procure the production of the duplicate certificate of title which was held by the bank meant that she had not done all that was necessary to place the vesting of the common law title within Mr Corin’s control … The plain fact remains however, that registration of the transfer and vesting of the legal title could not be said to be within Mr Corin’s control for so long as he was not entitled to procure production of the document of title. In any event, it is apparent that it remained in Mrs Patton’s power to intervene to prevent the vesting of any legal interest in him.”