Vic Supreme Court on whether to claim simple or compound interest for equitable compensation, and at what rate

By 01/05/2015Damages
equitable compensation

An interesting case involving equitable compensation for the misappropriation of large sums of money from an 89 year old plaintiff by the holder of powers of attorney and his accounting firm: Kirk & Ors v PBP Accounting Solutions Pty Ltd & Anor [2015] VSC 173 (30 April 2015).

Brief background

The first plaintiff, Mrs Kirk, gave powers of attorney in 2004 and 2009 to the first defendant, Mr Wortman. It was alleged that Mr Wortman transferred very substantial sums of money belonging to the plaintiffs, in breach of his fiduciary obligations to Mrs Kirk, to the second defendant PBP Accounting Solutions Pty Ltd, a company of which Mr Wortman was the director and secretary.

As no defences were filed judgment was given in default of defence.

The facts alleged in the statement of claim were therefore taken to be established, including that:

  • Mr Wortman caused loss to Mrs Kirk by means of breaching fiduciary duties owed to her;
  • PBP had knowingly received Mrs Kirk’s money and knowingly assisted in Mr Wortman’s breaches.

Declarations were made as to breach of fiduciary duty against Mr Wortman, knowing receipt and knowing assistance against PBP, and that PBP held Mrs Kirk’s money on trust.  An award of equitable compensation was made in favour of Mrs Kirk against Mr Wortman and PBP.

Interest

The question then arose as to whether any award of interest for equitable compensation should be simple or compound, and what interest rate should be applied.

The plaintiffs sought an award of compound interest at the rate of 6% per annum since the date of receipt of the payments by PBP.  As the claim was for equitable compensation, a form of ‘damages’, the alternative was that the Court order simple interest pursuant to s 60(1) Supreme Court Act 1986 (Vic).

Section 60(1) provides that on application in any proceeding for the recovery of debt or damages, the Court must, unless good cause is shown to the contrary, ‘give damages in the nature of interest at such rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 as it thinks fit from the commencement of the proceeding to the date of the judgment over and above the debt or damages awarded’ (at [36]).  The current penalty interest rate is 10.5% per annum.

His Honour extracted the following summary of relevant principles from Talacko v Talacko [2009] VSC 579 per Kyrou J:

(a)                ‘The court has inherent equitable jurisdiction to award interest when the interests of justice so demand, including in circumstances where money has been withheld or misappropriated by a fiduciary. The right to interest in equity exists independently of statute.’ [fn 1] So, the court’s equitable jurisdiction is not limited by s 60 of the Supreme Court Act 1986 (Vic); [fn 2]

(b)               ‘Traditionally, in fixing the rate of interest, equity broadly distinguished between two classes of case. In cases involving a breach of trust or misconduct, the fiduciary was charged interest at the mercantile rate of five per cent per annum. In all other cases, the defaulting fiduciary was charged interest at a rate of four per cent per annum. More recently, however, the courts have departed from the fixed interest rates of four and five per cent’; [fn 3]

(c)                ‘In some circumstances, it will be appropriate for the court to award compound interest’, [fn 4] to ensure that no profit remains in the defaulting fiduciary’s hands. Citing Boehm AM in Southern Cross Commodities Pty Ltd (in liq) v Ewing [fn 5], this may, and normally will, occur where the defaulting fiduciary has used the money for his own commercial purposes, and also is guilty of fraud or serious misconduct.

(d)               ‘An award of compound interest should ordinarily be considered only in cases where the defaulting fiduciary is being compelled to disgorge a gain’; [fn 6] and

(e)               Although the decision to award simple or compound interest is discretionary, to be determined on the facts of each case, [fn 7] the court’s power to award compound interest is not at large, and there must be features in each case justifying a departure from the normal rule for simple interest. [fn 8] There must be evidence of an actual gain by the defaulting fiduciary or an evidentiary foundation upon which any gain may be assumed. [fn 9]

His Honour then referred (at [40]) to the Victorian Supreme Court of Appeal decision of Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd [fn 10], in which an award of 6% simple interest was made for equitable compensation from the dates of the relevant payments in the 2007 and 2008 financial years to 12 February 2015.  In that case Garde AJA explained that the award was arrived at doing the best he could to be fair to both parties, taking into account the fall in interest rates since the global financial crisis.

In this case the Court awarded interest at 5% compounded annually, taking into account:

1.     Mr Wortman’s admitted wilful and dishonest breaches of fiduciary duty, and PBP’s participation in those breaches.

2.    Evidence from which he could infer that as the money was paid into the bank accounts of PBP, that:

Mr Wortman and PBP were making the most beneficial use of the funds by earning compound interest, and conversely that had Mr Wortman and PBP not deprived [the plaintiffs] from their money, that they would have made the most beneficial use of it open to them”.

3.     The lower rates of interest banks have offered after the global financial crisis.

Comment

Practitioners seeking an award of interest for equitable compensation need to assess the particular facts to determine whether an award of simple or compound interest is justified and, it appears, have regard to the level of prevailing interest rates from the date(s) of breach of fiduciary duty/ trust to the date of judgment.

Footnotes

  1. Talacko [2009] VSC 579 (11 December 2009) [10], citing Hungerfords v Walker (1989) 171 CLR 125, 148 and Wallersteiner v Moir (No 2) [1975] QB 373, 388, 397, 406.
  2. Ibid [11].
  3. Ibid [12], citing, for example, Hagan v Waterhouse (1991) 34 NSWLR 308 and Murdocca v Murdocca (No 2) [2002] NSWSC 505.
  4. Ibid [15], citing Hagan v Waterhouse (1991) 34 NSWLR 308, 393; see also Harris v Digital Plus Pty Ltd (2003) 56 NSWLR 298, 367-9 (Heydon JA).
  5. (1988) 14 ACLR 39.
  6. Ibid [16], citing Fico v O’Leary [2004] WASC 215 (11 October 2004) [280].
  7. Australasian Annuities Pty Ltd (in liq) (recs and mgrs apptd) v Rowley Super Fund Pty Ltd [2015] VSCA 9 (12 February 2015) [320] (Garde AJA).
  8. Talacko [2009] VSC 579 (11 December 2009) [25].
  9. Ibid.
  10. [2015] VSCA 9 (12 February 2015).