Australian Receivables Ltd v Tekitu Pty Ltd

Supreme Court

New South Wales

Medium Neutral Citation: Australian Receivables Ltd v Tekitu Pty Ltd (Subject to Deed of Company Arrangement) (Deed Administrators Appointed) & ors [2011] NSWSC 1306
Hearing dates: 6-10, 14 June 2011
Decision date: 31 October 2011
Jurisdiction: Equity Division
Before: Ward J
Decision:
Plaintiff entitled to trace into controlled moneys account to recover moneys impressed with a trust arising by reference to contractual obligation to hold and remit funds received after sale of business. First cross-claimant entitled to payment of moneys outstanding in respect of sale of business. Set-off as between respective amounts owing.

Catchwords: EQUITY - TRUSTS - whether on proper construction of Sale of Business Agreement, moneys received into first defendant's trading account were impressed with an implied or resulting trust or otherwise held on constructive trust for the plaintiff - whether, if so, plaintiff entitled to trace into account in which moneys now held - whether second and third defendants liable for any shortfall in the retained moneys under the second limb of Barnes v Addy - HELD - implied or resulting trust arose on receipt of the moneys into the trading account and plaintiff able to trace into part of the funds held in the controlled moneys account - knowing assistance in dishonest breach of trust or fiduciary duty established - CONTRACT - whether breach by first defendant of warranties in Sale of Business Agreement - whether breach by plaintiff of obligation to conduct business after completion in ordinary and usual course - HELD - only breach of warranty established was in relation to preparation of company's accounts - no damages recoverable in respect of that breach as no reliance on the relevant warranty - having regard to meaning of "ordinary and usual course" of business no breach of contractual obligation by plaintiff in that regard - plaintiff entitled to set-off as against moneys owing by it to first defendant under Sale of Business Agreement the shortfall on its retained moneys claim after payment out of moneys held on trust for its benefit
Legislation Cited: Commercial Agents and Private Enquiry Agents Act 2004 (NSW)
Corporations Act 2001 (Cth)
Partnership Act 1982 (NSW)
Cases Cited: Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 114 ALR 355
Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588
Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406; (1996) 139 ALR 663
Baden Delvaux & Lecuit v Societe General pour Favoriser le Developpement [1983] BCLC 325
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Barnes v Addy (1874) LR 9 Ch App 244
Bathurst City Council v PWC Properties Pty Limited [1998] HCA 59; (1998) 195 CLR 566
Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137
Bishopsgate Investment Management Ltd (in liq) v Homan [1995] Ch 211
Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207; 1 All ER 155
Cook v Alto Prestige Pty Limited [2010] NSWSC 92
Countrywide Banking Corporation Ltd v Dean (1997) 8 NZCLC 261
Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371
Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318
Devaynes v Noble; Clayton's Case (1816) 1 Mer 572; 35 ER 781
Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463
Duncan Davis Pty Ltd v Hurstbridge Abattoirs [1995] 1 VR 279
Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202
FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102
Forster v Jododex Australia Pty Ltd [1972] HCA 61; (1972) 127 CLR 421
Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129
Gardner v Dairy Industry Authority New South Wales (1977) 18 ALR 55; 52 ALJR 180
Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101
Hanson v Radcliffe Urban District Council [1922] 2 Ch 490
Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204
Ibeneweka v Egbuna [1964] 1 WLR 219
Ingot and Ors v Macquarie and Ors [2004] NSWSC 1136
James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62
Jones v Dunkel (1959) 101 CLR 298
Liquor National Wholesale Pty Limited v Redrock Co Pty Limited [2007] NSWSC 392
Lofts v MacDonald (1974) 3 ALR 404
Meyers v Casey [1913] HCA 50; (1913) 17 CLR 90
Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583
National Commercial Banking Corporation of Australia v Batty [1986] HCA 31; (1986) 160 CLR 251
Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601
Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120
Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440; (1983) 1 ACLC 1091
Perkins v State Bank of South Australia (1993) 61 SASR 246
Power v Ekstein [2009] NSWSC 130
Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 102 ALR 681
Re Bradford Roofing Industries Pty Ltd (in liq) & Companies Act [1966] 1 NSWR 674
Re Cummins (t/a Nam Constructions); Ex parte Harris v ARC Engineering Pty Ltd (1985) 62 ALR 129
Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361
Re Global Finance Group Pty Ltd [2002] WASC 63; (2002) 26 WAR 385
Re Goldcorp Exchange Ltd; Kensington v Liggett [1995] 1 AC 74; [1994] 2 All ER 806
Re Hallett's Estate; Knatchbull v Hallett; Cotterell v Hallett (1879) 13 Ch D 696; [1874-80] All ER Rep 793
Re Jonton Pty Ltd [1992] 2 Qd R 105; (1991) Q ConvR 54 - 392
Re Joscelyne; Allen's Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4
Re Judiciary and Navigation Acts (Advisory Opinions Case) (1921) 29 CLR 257
Re Oatway; Hertslet v Oatway [1903] 2 Ch 356
Re Sharpe; Ex parte Trustee of the Bankrupt's Property v Sharpe [1980] 1 WLR 219
Re Sabri; Ex parte Brien v Australian & New Zealand Banking Group Ltd (1996) 137 FLR 165
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422
Robertson v Grigg (1932) 47 CLR 257
Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378
Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438
Scott v Scott (1963) 109 CLR 649
Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) [1986] 3 All ER 75
Stephenson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536
Taylor v White (1964) 110 CLR 129
Twinsectra Ltd v Yardley [2002] 2 AC 164
University of New South Wales v Moorhouse & Angus & Robertson (Publishers) Pty Ltd (1975) 133 CLR 1
West v Mead [2003] NSWSC 161; (2003) 13 BPR 24,431
Texts Cited: Halsbury's Laws of Australia (online edn)
Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th edn)
Scott and Fratcher, The Law of Trusts (4th edn, Vol 1)
Category: Principal judgment
Parties: Australian Receivables Ltd (Plaintiff/First Cross-Defendant)
NCO Australia Pty Ltd (Second Cross-Defendant)
Tekitu Pty Ltd (First Defendant/First Cross-Claimant)
Ross Edward Smith (Second Defendant/Second Cross-Claimant)
Lynette Mary Smith (Third Defendant/Third Cross-Claimant)
Representation: Counsel
R J Brender with A Ahmad (Plaintiff/Cross-Defendants)
N Cotman SC with Ms M Fisher (Defendants/Cross-Claimants)
Solicitors
Forbes Dowling Lawyers (Plaintiff/Cross-Defendants)
Malcolm Johns and Company (Defendants/Cross-Claimants)

File Number(s): 07/257468

Judgment

HER HONOUR : These proceedings relate to disputes that have their genesis in the sale in 2007 by the first defendant (Tekitu) to the plaintiff (Australian Receivables) of what may broadly be described as a debt collection business (known as Statewide Mercantile Services) then carried on by Tekitu. Although the relevant contracts by which the assets and business were transferred (there being two separate contracts dealing with different aspects of the debt collection business) were entered into in January 2007, the effective date was specified in each as being 30 November 2006. The purchase price under the main contract was payable in successive tranches (the detail of which I will describe in due course).

Disputes arose between the parties not long after completion as to the implementation of the arrangements in relation to the sale. Those disputes related, on the one hand, to the amount outstanding in respect of the second instalment of the purchase price due in April 2007 (including the precise quantum payable by Australian Receivables in respect of that instalment), claims by Tekitu in respect of business expenses said to have been incurred on behalf of Australian Receivables and, later, as to the quantum of the second earn-out payment due by Australian Receivables and, on the other hand, to the claim by Australian Receivables that moneys required to be remitted to it under the terms of the Sale of Business Agreement had been wrongly retained in Tekitu's bank accounts and that there had been breaches of various warranties given by Tekitu in the agreement.

After correspondence during the course of 2007 in relation to various of the matters in dispute, Australian Receivables made demand in October 2007 for the retained moneys. In response to that demand, Tekitu's lawyers acknowledged that certain funds (described as 'set-off funds') were being held in a bank account to the credit of Tekitu (though it seems that some or all of the set-off funds to which the letter referred had already been transferred out of the Tekitu account and into an account of Tekitu's directors). Meanwhile, unbeknownst to Tekitu, Australian Receivables had adopted its own system of set-off by treating in its internal accounts various amounts claimed by Tekitu (that were not apparently disputed by Australian Receivables) as having been paid by way of "loan reconciliation".

In due course the disputes between the parties led to the commencement of these proceedings and an application by Australian Receivables for interlocutory relief. On 1 November 2007, when the summons filed by Australian Receivables was first returnable, an undertaking was given by the defendants (on a without admissions basis and on the giving by Australian Receivables of the usual undertaking as to damages) for the immediate transfer of the sum of around $300,000 to their solicitors' trust account to be held pending further order of the Court. Undertakings were also given, on the same basis, in effect requiring the giving of notice by Tekitu before the expenditure of any money or entry by it into any transactions other than a transaction involving periodic payments not exceeding $5,000 in total and the giving of notice by Tekitu's directors and shareholders (the second and third defendants, Mr Ross Edward Smith and Mrs Lynette Mary Smith), as to any further encumbrance of or dealings with their residential property. An irrevocable direction was agreed to be given to the defendants' banker to the effect that, upon completion of the release of any guarantees provided by the defendants in respect of property leases covered by the parties' agreement, any amounts securing each guarantee were to be paid to the defendants' solicitors' trust account.

The sum of $330,000 was paid into the defendants' solicitors' trust account (and then transferred to a controlled moneys account) on 6 November 2007 following the giving of the above undertakings. A further sum of $1,314 was subsequently paid into that controlled moneys account on 15 November 2007, as representing the balance of that portion of the retained moneys that had been withdrawn by Tekitu's directors from Tekitu's trading account in October 2007.

The orders made in relation to the moneys held in the controlled moneys account were varied on 6 December 2007 to permit the payment (without admission) of $106,707 to Australian Receivables out of that account. Between then and August 2008, three further amounts were paid to Australian Receivables (namely, amounts of $15,774.00, $38,893.00 and $16,500.00), each representing moneys released by lessors in respect of rental guarantees given in relation to property formerly leased by Tekitu. (The first two of those amounts were paid out of the funds held in the controlled moneys account referable to the funds that had been withdrawn from the Tekitu trading account; the third came directly from the lessor in question. There is an issue, which I consider later, as to the characterisation of the first two such payments due to what was described as a timing "hiccup" with the payment of moneys in and out of the controlled moneys account.)

In all, Australian Receivables has received (without admission) payments totalling $177,874.00 in four tranches during the period from 6 December 2007 to 25 August 2008. Australian Receivables claims a declaration that it is entitled to retain the moneys so paid to it.

As at the date of the hearing there remained a sum of $224,607.72 held in the controlled money account. Australian Receivables contends that this sum is impressed with a trust in its favour. Tekitu denies this and contends that it represents no more than security for any adverse judgment in these proceedings (or in the alternative that any trust is limited to the sum presently retained in the account less $54,667 being the sum of the two payments (of $15,774 and $38,893) that were paid out of the account to Australian Receivables prior to receipt of released rent guarantee funds in the same amounts). The significance of the trust claim is that Tekitu is now under external administration.

On 14 December 2007, the defendants filed a notice of motion in effect seeking to be discharged from the undertakings they had given. Australian Receivables filed an opposing notice of motion for the remaining sum held in the controlled moneys account to be released to it. A further notice of motion was filed in March 2008 for the release to Australian Receivables of moneys held by Tekitu in one or more B-pay accounts.

The opposing interlocutory applications were heard by Brereton J in April 2008. In his Honour's reasons, reference was made to the explanation that had been given by the Smiths for the way in which the sum of $330,000 had been paid following the 1 November undertaking (namely, that this amount had been paid by them personally on the basis that the withdrawal from Tekitu's trading account in October 2007 had been a payment to them by Tekitu in reduction of their directors' loan accounts). His Honour considered that the correspondence between the parties and the terms of the undertaking made it plain that what had happened in substance was that the payment to the directors in reduction of their loan accounts (as at 1 November 2007 apparently not hitherto having been disclosed) was reversed and those funds were notionally, if not actually, restored to Tekitu whence they had come. His Honour was of the view that the intent of that payment was that the funds that Tekitu held (or had immediately prior to the payment to the Smiths held) should be paid into the solicitors' trust account.

Brereton J made orders on 4 April 2008 restraining the defendants (until further order) from dealing with the fund held by their solicitor (pursuant to the undertaking that had been given by them on 1 November 2007) and restraining Tekitu, and the Smiths, respectively, from alienating or encumbering assets as identified in the orders (in the case of Tekitu, its assets to the extent that they exceed $200,000, and, in the case of the Smiths, any real property asset) without notice to Australian Receivables' solicitors of their intention to do so (such notice to be given in accordance with the orders then made by his Honour).

The opposing claims now before me are:

(a) a claim by Australian Receivables (to which I will refer as the retained moneys claim) for the payment to it of the moneys said to have been wrongly retained in the Tekitu trading account after completion of the Sale of Business Agreement (which Australian Receivables contends were moneys held by Tekitu on trust for it and for any shortfall in which it says the Smiths are personally liable on a second limb Barnes v Addy ((1874) LR 9 Ch App 244) claim); (As a result of the insolvency of Tekitu, the balance of the retained moneys claim is not pursued against it, except to the extent that it might offset any proven Tekitu cross-claim (though the balance (at least to the extent of $88,100) is pursued personally against the Smiths on the Barnes v Addy claim).)

(b) a cross claim by Tekitu (which it also raises by way of set-off against the retained moneys claim) for moneys owing by Australian Receivables to it in respect of both the outstanding balance of the second instalment of the purchase price for the sale of the business which was due on 9 April 2007 (the quantum of which turns on the validity of the various adjustments contended for by Australian Receivables, which it says operate to reduce that amount to almost nil, and other adjustments claimed by Tekitu) and the second earn-out payment; as well as for damages for alleged breaches by Australian Receivables of the Sale of Business Agreement and of the service agreements entered into at the time of the sale for the provision of services by each of Mr and Mrs Smith to Australian Receivables; and

(c) claims raised by Australian Receivables by way of defence to the Tekitu cross-claim for alleged breach of warranties by Tekitu under the Sale of Business Agreement in relation to the amount for which provision was made in respect of employees' long service leave entitlements in the financial accounts of the business and as to the alleged overdrawing of commission in respect of a particular client (IAG) account.

Insofar as a claim was also made by Australian Receivables in its Further Amended Statement of Claim for relief in relation to moneys held in bank accounts referred to as the B-pay accounts (in respect of which it is said that Tekitu was liable to account but over which no proprietary interest is now claimed), this was ultimately pressed by Australian Receivables as part of its defence to Tekitu's set-off claims. The adjustment to be made in this regard was agreed by the parties as being $1,457.48 in favour of Australian Receivables of (rather than the $17,041 initially claimed), the balance being referable to the reimbursement to Tekitu of bank fees incurred in relation to the B-pay account. Hence, there is no issue remaining for determination in respect of the B-pay dispute.

The principal breach of contract alleged by the Tekitu parties against Australian Receivables is that, in breach of clause 2.2 of the Sale of Business Agreement, Australian Receivables failed after completion to conduct the debt collection business in the usual course and instead conducted it in a way that materially prejudiced the basis for the calculation of the two earn-out payments to Tekitu for which provision was made in the contract as part of the overall purchase price. In submissions this allegation was based principally on the comparative diminution in the financial results of the Statewide Mercantile Services business after Australian Receivables took control of the business, although allegations are also made in the pleadings as to particular aspects of the conduct of the business by Australian Receivables said to be in breach of the clause and as to the alleged failure of Australian Receivables to take opportunities to expand the business (either existing at the time of sale or introduced by Mr Smith after the sale). Tekitu contends that, but for Australian Receivables' breach of clause 2.2, the earn-out amounts owing to Tekitu would have exceeded the earn-out amounts calculated on Australian Receivables' records.

There has been what might be described as an ongoing refinement or reconciliation of the figures in dispute between the parties over the period from 2007 onwards. By the close of the hearing, there was a measure of agreement in relation to various of the claims (not only in relation to the B-pay claim referred to above). There was a concession by the defendants that there had been an overpayment of salaries to Mr and Mrs Smith of $5,656.92 for the period after Australian Receivables took control of the business and I was informed on 10 June 2011 that there had also been agreement reached as to the figure of $29,749.62 (included in the reconciliation schedule handed up on 6 June 2011 by Counsel for Australian Receivables (Mr Brender)) by way of adjustment referable to "SMS November debtors unpaid".

The parties are now agreed as to the following adjustments in relation to the April 2007 purchase price instalment (as reflected in the Schedule to the Defence to the Further Amended Cross-Claim and adopting in general the descriptions used in that schedule):

Instalment due on 9/4/07	$250,000.00
Less First Instalment Payment April 2007	(29,000.00)
Less Second Instalment Payment July 2007	(73,583.11)
Sub-total (balance owing to Tekitu)	$147,416.89
Less agreed Cash Settlement Adjustment owed to Australian Receivables	(33,925.39)
Plus agreed Trade Creditors Payback	4,580.06
Less agreed December 2006 Loss in favour of Australian Receivables*	(160,775.62)
Plus adjustment agreed in respect of incorrect posting re December 2006 loss	26,187.62
Plus reimbursement to Tekitu re Payroll Salaries and Tax	94,609.55
Plus reimbursement to Tekitu for superannuation	43,878.39
Less SMS November Debtors unpaid	(29,749.62)
Revised sub-total (owing to Tekitu)	$92,221.88
Less agreed set-offs for creditor payments	(69,369.08)
Less agreed adjustment for overpaid Smith salaries	(5,656.92)
Less agreed adjustment re Bpay claim	(1,247.73)
Further revised sub-total (owing to Tekitu)	$15,948.15
(*There remains in dispute the adjustment to be made in respect of December debt portfolio commission/revenue from the acquired debt portfolio.)

Where there remained a dispute was as to how much was to be allowed for what was described as the "commission adjustment for acquired debts" and for amounts in respect of software rental, consulting fees and business expenses claimed by Tekitu (as to which Australian Receivables admits a portion only of each of those claims) and whether any amount should be allowed for the Ricoh and Commander claims by Tekitu.

The amount in dispute as to those items is as follows:

[Commission Adjustment for Acquired Debts] :

Tekitu claims that total revenue of $56,321 should have been included, requiring an adjustment in its favour of $33,912 since commission of approximately $22,000 has already been included in the calculations; Australian Receivables accepts only an adjustment of $5,512.56 in Tekitu's favour, thus the amount in dispute is $50,808.44

[Software Rental] : Tekitu claims $31,462.21 of which

Australian Receivables accepts it owes $23,825.56, leaving in dispute $7,626.65

[Consulting Fees] : Tekitu claims $48,507.26 of which

Australian Receivables accepts it owes $39,927.26, leaving $8,580.00 in dispute

[Business Expenses] : $94,832.40 of which

Australian Receivables agrees $89,998.30, leaving in dispute only $4,834.10 in respect of an outstanding legal invoice for advice in relation to property lease issues

[Ricoh legal fees] : Tekitu's claim being $5,845 for legal costs in successfully defending a claim by Ricoh for unpaid rental payments

[Commander] : for which no monetary amount is claimed, simply an indemnity

There is thus a difference between the parties of around $70-75,000 in respect of the adjustments required to be made to the second purchase instalment payable to Tekitu. (As I understand it, the portion now accepted by Australian Receivables as owing in relation to the above disputed adjustments has been included in the schedule attached to the Defence to the Further Amended Statement of Cross-claim and it is only any additional amount that would need to be included if there is a determination in Tekitu's favour on any of those items.)

As to the earn-out payments due under the Sale of Business Agreement, Australian Receivables admits that $122,117.28 is owing to Tekitu for the second earn-out payment. However, it raises a set-off claim by reference to the amounts it claims for alleged breach of warranties in relation to an alleged overdrawing of commission in respect of the IAG account ($119,548.98) and for increased long service leave provisioning (now put at $40,079.33). (Tekitu, which denies any breach of warranty, maintains that there is an adjustment to be made in its favour in respect of the second earn-out payment by reason of the damages it claims for the alleged breach by Australian Receivables of clause 2.2.)

The Further Amended Statement of Cross Claim also sought relief in relation to matters relating to security deposits that had been placed by Tekitu with the National Australia Bank to support bank guarantees provided by the bank as security for property leases that later became the subject of the Sale of Business Agreement (see paras [72]-[80]). It was alleged that, in breach of Australian Receivables' obligations under clauses 8.1 and 8.7 of the Sale of Business Agreement, Australian Receivables had failed to effect the assignment of all the property leases and had failed to replace all of the security deposits (it being particularised that a sum of $23,501 was still on deposit with the bank). Of the $78,078.60 placed with the bank by way of security deposits, a total of $54,577.60 has since been released by the bank and paid without admission to Australian Receivables by Tekitu.

Tekitu claimed to have suffered damage by being deprived of the benefit of the use of the $78,078.60 and the incurring of additional legal expenses and contended that the second cross-defendant (NCO) was liable to indemnify the cross-claimants in relation to the said breach (by reference to the guarantee given by it in clause 10.4 and indemnity in clause 10.5 of the Sale of Business Agreement). That cross-claim is denied. In particular, it is alleged by Australian Receivables that the Tekitu parties have themselves failed to use reasonable endeavours in relation to the assignment of the property leases and that they were in breach of undertakings given in respect of the release of the security deposits (and hence disentitled from bringing the claims in the abovementioned paragraphs of the cross-claim).

During argument before me this aspect of the claim was not pressed and I do not understand it to remain in issue.

Issues remaining for determination at close of hearing

The issues remaining in dispute at the close of the hearing, and now requiring determination, can be summarised as set out below:

(i) Australian Receivables' retained moneys claim (both against Tekitu and against Mr and Mrs Smith personally);

(ii) Tekitu's cross-claim for the balance of the $250,000 purchase payment due on 9 April 2007, requiring a determination as to what adjustment is warranted in respect of the following matters:

(a) what has been referred to as the December acquisition commission;

(b) Tekitu's claims in respect of software rental; and

(c) reimbursement of the claimed business expenses (in relation to Ricoh printers, Commander voice data systems, and legal fees referrable to the property leases).

(iii) Claims as to breach of contract:

(a) the alleged under-provisioning in the accounts by Tekitu for employee long service leave entitlements (said by Australian Receivables to be a breach by Tekitu of various warranties);

(b) the alleged shortfall (or overdrawing by Tekitu of commission) from the IAG account (again, said by Australian Receivables to be in breach of various warranties);

(c) Tekitu's claim in relation to the respective earn-out period payments (beyond the $122,117.28 conceded by Australian Receivables to be outstanding) namely, Tekitu's claim for damages for alleged breach by Australian Receivables of the obligation to carry on business as usual during the earn-out periods; and

(d) Tekitu's claim for consultancy fees under the Smiths' service agreements.

In summary, Australian Receivables contends that it is entitled to the whole of the moneys presently held in the controlled moneys account (without deduction), namely $224,607.72, and to retain the whole of the sums previously paid by the defendants on a without admission of liability basis. It also contends that any amount found to be owing to Tekitu as to the balance of the April 2007 purchase price instalment (once the various adjustments have been taken into account, including the agreed amount to reflect the overpayment of salaries to the Smiths of $5,656.92) is no more than $15,583.52 and that this sum (together with the second earn-out payment it concedes is payable) is to be set off against the amounts claimed by Australian Receivables for the IAG trust account shortfall ($119,548.98) and the increase in long service leave provisioning (of at least $40,079.33) such that no amount is now due to Tekitu.

Summary

For the reasons set out below, I am of the view that:

(i) as to the first issue identified above:

Australian Receivables is able to trace into the moneys presently held in the controlled moneys account to recover the sum of $169,831.72 (that being the total amount held in the account of $224,607.72 less the amount of $54,667 earlier paid to it out of the account) on the basis that these are moneys that were impressed with a trust when held in the Tekitu trading account and for which it (and the directors of Tekitu) are liable to account;
that Australian Receivables is entitled to retain the sums previously paid to it (without admission) out of the controlled moneys account (those being $106,707, $15,774, $38,893 as trust moneys) and to retain by way of set-off the $16,500 paid to it out of funds directly from the lessor in respect of one of the released rent guarantee amounts;
that Australian Receivables may set-off the shortfall in respect of the retained moneys claim (i.e. $219,379.01, that being the agreed quantum of $567,084.73 less the $177,874 already paid and less the sum of $169,831.72 now to be paid out of the controlled moneys account) against the amounts for which it is liable to Tekitu in respect of the second purchase instalment and the second earn-out).
I find that the claim against Mr and Mrs Smith under the second limb of Barnes v Addy , as having knowingly assisted in a dishonest breach of trust by Tekitu, has been established and that they are liable to the extent of any shortfall in respect of the retained moneys after the above set-off (at least up to the amount of $88,100 withdrawn by them between April and October 2007) though the operation of the adjustments made to the amounts outstanding to Tekitu has the effect that there remains no such shortfall.

(ii) in respect of the claimed adjustments to the balance of the $250,000 purchase payment due on 9 April 2007:

(a) the full amount claimed by Tekitu (of $56,321) in respect of the December revenue from the pre-existing debt portfolio should be allowed (meaning that, after taking into account the amount of commission already included in Australian Receivables' calculations, an additional $33,912 should be included in the calculation of the 2007 purchase price instalment);

(b) Australian Receivables is not liable for any of the disputed amounts claimed in respect of software rental and no adjustment should be made;

(c) Australian Receivables is not liable in respect of the disputed business expenses (namely the claim Ricoh printers nor is it liable to indemnify Tekitu in respect of the Commander voice data systems claim, or the claim for reimbursement of the invoice in respect of legal fees of $4,834.10, and there should be no adjustment in this respect.

On my calculation this brings the amount outstanding on the second purchase payment to $49,860.15 (being $15,948.15 plus the adjusted revenue in respect of the December purchased debt collections of $33,912).

(iii) As to the claims for breach of contract:

(a) I am satisfied that there was a breach of warranty in relation to the under-provisioning by Tekitu in its accounts for employee long service leave entitlements; however, I am not satisfied that Australian Receivables has established an entitlement to damages for the said breach of warranty as I find that Australian Receivables was on notice, through its business consultant, Mr Duncan, of the issue and that no reliance was in fact placed on the treatment in the accounts of the long service leave provisioning;

(b) I am not satisfied that there has been a breach of warranty established in relation to the alleged shortfall (or overdrawing of commission) from the IAG account;

(c) I am not satisfied that Tekitu has established its claim for damages for alleged breach of the contractual obligation by Australian Receivables to carry on business as usual during the earn-out periods; and

(d) in respect of the disputed invoices for moneys payable under Mrs Smith's service agreement, I find that Australian Receivables is not liable.

Thus the amount payable for the second earn-out remains at $122,117.28.

When the amounts payable to Tekitu in (ii) and (iii) above (totalling $171,977.43) are offset against the balance of the retained moneys sum in (i), there is a shortfall owing to Australian Receivables of $47,382.52. That amount can be fully met out of the balance remaining in the controlled moneys account after the tracing exercise in (i) (i.e. the $54,667) which, when set off against the shortfall leaves a balance of $7,284.42 payable out of that account to Tekitu.

I will direct the parties to prepare short minutes to take into account the above findings (having regard to the possibility that there may be a dispute as to the mathematical outworking of the above findings).

Background Facts

Prior to January 2007, Tekitu owned and operated a mercantile debt collection business (offering services including process service and the like) known as Statewide Mercantile Services. Mr and Mrs Smith, the directors and shareholders of Tekitu, worked in the Statewide Mercantile Services business, which had its principal office in Frenchs Forest but offices elsewhere, including in Melbourne and Brisbane. Mr Noel Wyett was the general manager of the business. The Smiths' son, Warwick, also worked in the business.

Australian Receivables is a debt collection business established in 2005 by Mr Paul Cooney, its managing director. The majority shareholder is NCO Group Inc, a company based in America. As at 2006, Australian Receivables was largely based in Melbourne. Mr Cooney deposed to a long experience in the integration of debt collection businesses (largely, it would seem, by reference to his involvement in the integration of such businesses as part of another receivables collection business, the RMG group, though he also attested in the witness box to having 40 years' experience in the industry). Prior to the acquisition of the Statewide Mercantile Services business, Mr Cooney had been involved with Mr William Duncan (the business consultant who was later engaged both in relation to aspects of the due diligence in relation to the Tekitu acquisition and in the reconciliation of the accounts after the dispute with Tekitu arose) in the RMG Group. After the RMG Group went into administration (its failure having apparently been ascribed to difficulties with systems integration), Mr Cooney then acquired its debt collection business from its administrators to integrate with the Australian Receivables business established by Mr Cooney in 2005.

The operation of the Statewide Mercantile business, in broad terms, involved the collection of debts (including administrative matters such as attending to the service of process) on behalf of Tekitu's clients. (Mr Duncan (as noted above, the business consultant employed by Australian Receivables since 27 August 2006 to advise in respect to accounting issues and projects), has deposed in his affidavit sworn 29 October 2007 that from his due diligence enquiries and participation in the negotiations for the sale of the Statewide Mercantile Services business, the principal clients of the business were Optus and Insurance Australia Limited (in respect to collection services) and HSBC Bank Australia Ltd and the Australian Taxation Office (in respect to process service) ([5]).)

Tekitu was entitled to receive fees and/or commissions from clients for whom it provided debt collection services. For some of those clients, Tekitu's practice was that when debtors deposited moneys into Tekitu's bank accounts in payment of their debts, Tekitu deducted a commission therefrom and then accounted to the client (on a periodic basis) for the balance of the collected debt. (An example of this kind of arrangement was the IAG account, which was audited on a regular basis by the client as part of the contractual arrangements between IAG and Tekitu.)

At the time of the sale of its debt collection business, Tekitu also had the rights to what were referred to as pre-existing debt purchase portfolios, having taken an assignment of those portfolios from St George Motor Finance Limited and the NSW Police Department Employees Credit Union, respectively, and it had also negotiated with Westpac for the proposed acquisition of an existing debt portfolio held by it.

In relation to debt purchase portfolios held by Tekitu in its own right (where Tekitu had acquired from a client an existing debt portfolio), Tekitu retained the whole of the moneys collected in relation to those debts. (This is a distinction of some relevance when considering the different position taken by the parties as to the revenue which should be taken into account for the purpose of the purchase price adjustment to be made in connection with the second purchase price instalment.)

Tekitu operated several trust and general accounts prior to and after completion of the Sale of Business Agreement. Mrs Smith, in her 8 November 2007 affidavit, identified the various bank accounts and deposed that funds collected from the debtors of creditor customers of Statewide Mercantile Services were not received into Tekitu's trading account (that being the account identified in paragraph 10(a) of her affidavit in respect of which the retained moneys claim is made). Mrs Smith deposed that the only amounts received into that Tekitu trading account were fees and commission paid by creditor customers. (Debt collections were, it seems, paid into one or other of the trust accounts operated by Tekitu.) Thus it was the Tekitu trading account into which the moneys the subject of the retained moneys claim were paid (although it seems to be accepted that other moneys, such as commission for debtors bought back under the Sale of Business Agreement and/or property guarantee funds could also have been received into that account).

On 9/10 January 2007, Australian Receivables entered into a number of agreements with Tekitu, for the purchase by it (and a related company, NCO Financial Management Pty Ltd) of the whole of Tekitu's mercantile debt collection and process service business. This followed a period of discussion and negotiation (from around the middle of 2006 onwards) in relation to the proposed sale between the business consultant acting for Tekitu (Mr Alan Horn) and Mr Cooney (in which discussions Mr Duncan to some extent later became involved as Australian Receivables' business consultant). Mr Cooney confirmed that his principal source of information as to the company in the initial period was Mr Horn (T 122).

At one stage in the discussions the proposal was for the payment of a fixed purchase price without reference to any earn-out period. That changed (according to Mr Cooney as a result of concerns as to the value of the business to be acquired), to include (as a component of the overall purchase price) the payment of sums dependent on the performance of the business during successive earn-out periods (a feature of the sale that Australian Receivables' US shareholder recognised might produce a disincentive in relation to the carriage of the business for some part of that period).)

Although it seemed to be suggested in the course of submissions (by reference to the change in the structure of the deal) that what Australian Receivables had sought to do was to acquire a business worth some $5m for considerably less than that by minimising the earn-out payment component of the purchase price, I do not consider that such an inference can be drawn simply from the fact that during negotiations there was a change in the proposed structure of the purchase price payments from a fixed price arrangement to an arrangement for the purchase price to be referable in part to the performance of the business.

There was a due diligence period leading up to the sale in which (whether diligently or otherwise, as the evidence has revealed) there was an opportunity for Australian Receivables to make enquiries as to the operation of the Tekitu business (including as to matters such as the basis on which provision was made for long service leave entitlements of its employees).

Four separate agreements were entered into in January 2007: a Sale of Business Agreement, pursuant to which Tekitu sold the main assets of and business known as Statewide Mercantile Services; an Asset Sale Agreement, under which Tekitu sold to a company associated with Australian Receivables (NCO Financial Management Pty Ltd) its existing St George/Police Credit Union debt purchase portfolios to Australian Receivables (referred to as the "acquired debts"); and two separate service agreements under which Tekitu agreed to provide to Australian Receivables, for a period after completion, the debt recovery and management consultancy services of Mr Smith and the administrative services of Mrs Smith (the Ross Smith Service Agreement and the Lyn Smith Service Agreement, respectively). At around the same time NCO Financial Management separately acquired from Westpac the debt purchase portfolio that had been the subject of a proposed acquisition by Tekitu.

The effective date for the sale of the Statewide Mercantile business and the debt purchase portfolios was agreed to be 30 November 2006. In effect, therefore, in the period from 1 December 2006 to 9 January 2007 (defined in the Sale of Business Agreement as the Interim Period), Tekitu ran the Statewide Mercantile business on behalf of Australian Receivables.

There is a question as to the financial viability of the Statewide Mercantile business at the time of the sale. Australian Receivables contends (but I do not understand this to be accepted by the Smiths) that it was in dire straits at the time. There is also a dispute as to the motivation for Australian Receivables to acquire the business (on which, as I understand it, Tekitu relies on support for its contention that the business was not carried on in the normal course after its acquisition) - it being suggested to Mr Cooney, consistently with his own emails to the company's US shareholder that the purchase was to acquire leverage for the Australian Receivables' business (and, in particular, to enable it to run the GE client business that it had separately acquired). Mr Cooney denied this and sought to explain away the emails as him "selling a story" to the US shareholder. (In a not dissimilar fashion Mr Cooney seemed to downplay the role of due diligence as being part of obtaining US shareholder approval to negotiate for a purchase of the business, rather than as referable to any investigation or analysis as to the underlying value of the business or the price to be paid therefor.) To the extent that this suggests to me that Mr Cooney was prepared (at least vis a vis the US shareholder) to put a gloss on the facts to suit his business purposes in relation to this transaction, I accept that this warrants a note of caution in relation to the matters asserted by him in the negotiations with Tekitu. However, ultimately nothing turns on this.

After the completion of the sale of the Statewide Mercantile business, some clients continued to pay money to bank accounts controlled by Tekitu (rather than into accounts operated by Australian Receivables). (It seems that no arrangements had been made for clients immediately to pay money to accounts operated by Australian Receivables for that purpose.) Mr Cooney deposed to an arrangement whereby the Tekitu staff transferred moneys received into the Tekitu accounts over the period up to September 2007. The payments received by Tekitu in this period seem to have been both by clients (for commission and/or fees) and from debtors (as part of the debt collection business in payment of their debts), as acknowledged in Mr Cooney's affidavit of 20 December 2010 [168].

Tekitu remitted $1,564,956.95 from the Tekitu trading account to Australian Receivables in the relevant period. However, it is not disputed that there was an amount retained in the Tekitu accounts that was received from clients and was referable to the business acquired by Australian Receivables (but not remitted). This amount is the basis of the retained moneys claim. Mr Brender submitted that the retained sum was built up gradually over the period from April to October 2007, although in Mr Cotman's submission the receipts forming part of the retained moneys claim were from July/August 2007 (on the basis that earlier amounts so received had been part of the $1.5m Australian Receivables accepts were remitted to it).

Mrs Smith, in her affidavit sworn November 2007, deposed to amounts totalling $88,100 as having been drawn from the Tekitu trading account in the period from 17 April 2007 to 15 October 2007, which she said were moneys due to herself and her husband for loan moneys they had advanced to the company (there being an amount of $674,565 recorded as loans to the company in its financial statements for the year ending 30 June 2006). (Relevantly, Mr Brender confirmed (at T 391) that Australian Receivables was not pressing more than a claim for $88,100 against Mr and Mrs Smith personally - that being the amount they have admitted was withdrawn by them from the Tekitu account after 17 April 2007 although submitting that on Mr Duncan's enquiries much more had been withdrawn by the Smiths.)

A letter of demand in relation to the retained moneys was sent on 19 October 2007 (Exhibit T, p 4) and on that same date Mrs Smith transferred the sum of $325,000 from the Tekitu trading account to a personal account operated by herself and her husband. Mrs Smith says that she did this with a view to transferring that money to an investment account. Mrs Smith did the same in relation to a sum of $40,000 on 24 October 2007.

On 23 October 2007, Tekitu's lawyers acknowledged that Tekitu held "certain funds" in a bank account to the credit of Tekitu. (In the witness box Mrs Smith could not recall if the funds referred to in the letter included the $40,000 as well as the $325,000 but at least agreed that it did refer to the latter moneys, which by then had already been transferred to the Smiths' personal account.)

Mrs Smith deposed that, following the orders made by the Court (by consent) on 1 November 2007, she arranged for the bank cheque which had by then been drawn in favour of the investment account to be handed to Tekitu's solicitors for receipt into their trust account. In that fashion, the sum of $330,000 was paid into the trust account on or about 6 November 2007.

Mrs Smith accepted that on 6 December 2007 (when orders for the payment out to Australian Receivables of the sum of $106,707 were made), her legal representatives had explained to her the import of those orders but it seems that on the same day she emailed the bank asking it to close the BPay accounts held by Tekitu and deposit the money to Tekitu (conduct pointed to by Mr Brender as in breach of the orders). (In the witness box Mrs Smith said that she understood the undertaking given on 6 December 2007 to refer to all moneys except charges due to Tekitu.) After closing the BPay accounts on around 12 December 2007, a series of payments to Australian Receivables was made in respect of the moneys that had been held in the BPay account (the defendants withholding the amount disputed in relation to bank fees paid on the BPay accounts).

Tekitu was placed into administration some time after the sale. Its affairs are now governed by a Deed of Company Arrangement, the terms of which were not put in evidence (on the basis that it was accepted by the parties they were not of relevance on the issues before me). As I understand it, Australian Receivables was not informed of the proposed Deed of Company Arrangement nor did it participate in any vote for such a deed. (Australian Receivables submits that it is the beneficial owner of the money in the controlled moneys account and thus not bound by the Deed of Company Arrangement in relation to its claim to that amount referring to s 444D(3) of the Corporations Act 2001 (Cth) which provides that a deed of company arrangement does not affect a right that an owner of property has in relation to that property unless the owner voted in favour of the resolution.)

Leave has been given for Australian Receivables to proceed against Tekitu, while it is subject to external administration, but that leave is limited to the retained moneys claim and the defence to Tekitu's claimed set-off under its cross-claim.

Relevant Provisions of the respective agreements

Sale of Business Agreement

Clause 3 of the Sale of Business Agreement provided as follows:

The Vendor sells to the Purchaser and the Purchaser purchases from the Vendor, the Assets and the Business, as well as the assumption of the Specified Liabilities, free of any Encumbrance

The term "Assets" was defined in clause 1.1(3) as meaning:

...all the property and assets of the Vendor used in the Business at the close of business on the Completion Date but not the Excluded Assets

including the items in (i)-(k) of the definition (relevantly (b) the Trade debtors (defined in turn as the amounts due to the Vendor in respect of the business from third parties as at the Effective Date set out in Schedule 2.2); (g) the "Software Systems, License [sic] and License [sic] Seats" (defined as "the Vendors interest in and to "DebtSmart" software as it exists on an as is where is basis, at the Effective Date and the Vendors interest in a license [sic] to "Mercantile Systems" software and permitted user seats thereto granted by such license [sic] and such other software used in the Business at Completion" [punctuation as per original]); (h) the benefit (subject to the burden) of the Property Leases as defined; and (j) the Clients of the Business subsisting at the close of business on the Effective Date, being the clients set out at Schedule 6.)

The term "Excluded Assets" was defined in 1.1(18), relevantly, as:

...assets of the Vendor that will not be acquired by the Purchaser under this Agreement being -

(a) the licence to the Mercantile Systems and DebtSmart Software Systems

"Business" was defined in clause 1.1(4) as "the business of collection services, debt and claim recovery, process serving, skip tracing, repossessions, credit management and debt purchase services carried on by the Vendor at the Business Premises".

As noted earlier, the Effective Date of the Sale of Business agreement was 30 November 2006; the Completion Date was 9 January 2007. The purchase price was payable in a number of components as specified in clause 5. Provided the Initial Part Payment described in clause 5.1 and completion had occurred under the Collateral Agreement (that being confusingly defined by reference to the clause in which Completion Date was defined but presumably being a reference to the Asset Sale Agreement having regard to the descriptions contained in the latter agreement), title to the Assets and the Business were to pass to Australian Receivables at completion and the Assets were at its risk as from the Completion Date. (Thus to the extent that Tekitu retained any of the Assts in its possession or control after completion, the beneficial interest in those Assets had clearly passed under the agreement to Australian Receivables.)

Under clause 5, the components of the purchase price comprised the sum of $1.95m (payable pursuant to clause 6.4 in two tranches: first, as to $1.7m, on 9 January 2007 and, second, as to $250,000.00 "minus the adjustment referred to in clause 7", within 90 days (i.e. by 9 April 2007), (provided the vendor had performed all of its obligations under the agreement and had provided a discharge of charge form); together with any amounts payable pursuant to the First Earn-out and the Second Earn-out (those being payable by 31 July 2007 and 31 January 2008 respectively).

The First Earn-out was defined in clause 1.1(19) as meaning 50% of the Net Revenues for the First Earn-out Period in excess of $5.6m. The Second Earn-out was defined in clause 1.1(35) as meaning 50% of the Net Revenues for the Second Earn-out Period in excess of $2.8m. The Earn-out periods were from 1 July 2006 to 30 June 2007 and then from 1 July 2007 to 31 December 2007, respectively. The First Earn-out Period therefore encompassed both a period when Tekitu was carrying on the business before the completion date of 9 January 2007 and a period after Australian Receivables had assumed control of the business on that date.

The term "Net Revenues" was defined in clause 1.1(27) as meaning:

The total income invoiced for the Business for the First Earn-out and the Second Earn-out Periods ("Total Income"), less the costs related to that income and being amounts paid or accrued for the same period, in relation to and including all local agent costs, repossession fees, legal fees including court fees, and search fees incurred and directly attributable to the total income, where the total income, means, all amounts invoiced to Clients for commissions, costs and process services, (the business services), and includes commission income on the collection of debts currently owned by the vendor being the Debt Purchase Portfolio set out in Schedule 7) at the rate of 42.5% of the amounts collected, plus commission on the collection of the Westpac debts acquired by NCO Financial Management Pty Ltd on the 7 December 2006 at the rate of 30% for the First Earn-out and the Second Earn-out Periods , plus commission on the collection of all new debt purchase accounts and Prospective Clients at rate to be agreed, where these subsequent transaction are introduced by Ross Smith, during the First Earn Out and the Second Earn out Periods. (my emphasis)

Clause 2, headed "Earn-out Conditions and Purchasers Acknowledgements", provided:

2.1 The Purchaser acknowledges that it has completed its own due diligence of the Business and the accounting records of the Business prior to the Effective Date, to its own satisfaction and is purchasing the Business on an as is where is basis as inspected and based upon its own findings but with the Warranties provided for in clause 9.

2.2 From the Completion Date and until payment of the Second Earn-out, the Purchaser shall conduct the Business in the ordinary and usual course, and in a manner that will not materially prejudice payment to the Vendor of the First Earn out and the Second Earn out and shall:

1. take such action as is reasonably necessary to ensure that the clients of the Business at the Effective date are retained;

2. notify the Vendor prior to making any changes in respect of the General Manager of the Business, Noel Wyett;

...[and take the steps in the following sub-clauses non-sequentially numbered 3, 4, 9 and 10 in which sub-clauses the word "clients" was variously used both as a capitalised and non-capitalised term]

Clause 7 provided for "Adjustments at Completion" in effect for the month of December 2006 (the "Interim Period" between the Effective Date and the Completion Date). Effectively, Australian Receivables was entitled to receive from Tekitu the net cash receipts (and was obliged to reimburse to Tekitu the net cash payments of the Business) for that period as provided under clause 7.1 and Tekitu was entitled to receive the benefit of accrued net profit during the Interim Period and was not to be liable or responsible for any accrued net loss of the Business in that period (clause 7.2).

Clause 7.2(1) provided that Australian Receivables was entitled to the benefit of "the accrued net profit ("ANP") of the Business during the Interim Period" according to the formula in clause 7.2.1:

ANP = AR-AE

and where

AR is the revenue of the Business accrued during the Interim Period (including cash sales)

AE are expenses of the Business accrued during the Interim Period (including cash payments), but not for salaries or wages or other emoluments paid or payable to the Covenantors or directors of the Vendor

Clause 7.3 provided that the adjustments for any net cash receipts or any net cash payments under clause 7.1 and for the reimbursement of any net loss under 7.2(2) were to be made on the completion date to the extent that the adjustments were available but when verified and audited by Australian Receivables were to be made against the payment owing under 6.4(2) (i.e. the $250,000 purchase price instalment) and, if greater than that amount, were to reduce successively the First Earn-out and Second Earn-out.

As to the obligations of the parties on completion, clause 6, relevantly, provided that:

6.2 At Completion, and in addition to the undertakings of the Vendor to be completed on the Completion Date specified elsewhere in this Agreement the Vendor must deliver the Assets and the Business to the Purchaser by giving to the Purchaser possession of the Assets and handing to the Purchaser:

...

(10) the right to the use of only the Mercantile Systems and DebtSmart Software Systems for 90 days following Completion without charge and thereafter at the option of the Purchaser [Australian Receivables] on a month to month basis at monthly charges of $693.44 and $1,527.34 inclusive of GST respectively with termination on 30 days' notice;

Clause 9 provided for the giving of warranties by Tekitu and the Smiths (as Covenantors) in favour of Australian Receivables as set out in schedule 1. Relevantly, those warranties included that:

8. All material records of the Business have been in all material respects fully, properly and accurately kept and completed in accordance with proper accounting and business practices and all legal requirements, and will continue to be so kept and completed until the Completion Date, and there are at the date hereof and will on the Completion Date be no material inaccuracies or discrepancies of any kind contained or reflected in any of them other than as disclosed in writing to the Purchaser (if any) in the course of the Purchaser's due-diligence effected prior to the Completion Date and at the Completion Date they give and will give and reflect a true and fair view in all material respects of the financial, contractual and trading position of the Business. (my emphasis)

Schedule 8 (which set out the components of assets and liabilities required to conduct and continue the Statewide Mercantile business of debt recovery and management) included in the "Specified Liabilities" the sum of $11,952 by way of provision for long service leave.

Under clause 13.3, Australian Receivables assumed all long service leave and holiday pay obligations for employees who transferred to it. That clause affirmatively stated that "employee entitlements of all Employees (whether transferring or not) are as set out in schedule 9". Schedule 9 specified the holiday and long service leave entitlements as at 30 November 2006 (noting long service leave entitlements only for 2 employees in the Frenchs Forest office in the amount of $11,952).

There was also a warranty in relation to the leased premises. Australian Receivables expressly acknowledged the disclosure (by Tekitu) of the expiration of the lease of its premises in Melbourne and that Australian Receivables made no objection or claim in relation thereto, as it was intending to relocate the Melbourne branch of the business to Australian Receivables' own premises in Melbourne. (This becomes relevant insofar as Tekitu later incurred costs (and Mrs Smith rendered invoices for her services) in relation to the steps taken to resolve a dispute with the landlord of the Melbourne premises (Tekitu having exercised an option for a renewed lease before the sale to Australian Receivables).)

Clause 9.3 (of which Mr Cooney in the witness box said he was not aware) contained an acknowledgement by Australian Receivables that it "has conducted complete and satisfactory due-diligence in respect of the Business and the assets prior to entering into this Agreement that relate to the Vendor's operation of the Business" and acknowledged that the warranties and representations applied only in respect of events or matters that related to the operation of the Business up to the Completion Date.

Clause 9.6 obliged Tekitu and the Smiths to take all such steps and provide all such information and documents with regard to the Business and Assets as Australian Receivables might reasonably require to enable it fully to investigate the accuracy of the warranties in that clause. Clause 9.7 also contained an indemnity in favour of Australian Receivables in respect of any loss arising from breach of any of the representations or warranties (but limited the liability of Tekitu and the Smiths in that regard to any breach which in aggregate exceeded the sum of the Purchase Price, the First Earn-out and the Second Earn-out).

Clause 10.3 provided that:

10.3 The Purchaser indemnifies the Vendor against all Liabilities and the cost of all demands, actions and other proceedings against the Vendor by any person after Completion (including legal costs on a solicitor and own client basis) arising directly or indirectly in connection with the Assets and the Business purchased by the Purchaser but not relating to a cause of action against the Vendor arising before the Completion Date.

Clause 12.1 obliged Australian Receivables to accept on completion an assignment of the Trade debtors (the definition of which I have referred to above). Clause 12.2 further required it to assign to Tekitu (and for Tekitu to accept the assignment back of), all Trade debtors not collected by 9 April 2007. In that event, the value of the reassigned Trade debts was to be the original value of trade debtors assigned to Australian Receivables (less any amount part paid) and such sum was to be deducted from the part payment of the purchase price by clause 6.4(2) on the first or second earn-outs.

Relevantly, for the purposes of Australian Receivables' principal (retained moneys) claim, clause 17.5 provided as follows:

At Completion:

(1) The Vendor shall immediately account to the Purchaser at the Purchasers direction, for all client moneys received by the Vendor into the Vendors bank accounts and trust accounts after Completion and without deduction;

(2) pay to the Purchaser all money of Clients held in the Vendor's bank accounts or trust account and thereafter remit daily (or as otherwise required by Purchaser), all payments received into the Vendor's bank accounts and trust accounts and to keep bank accounts and trust accounts open for a period of nine months following Completion and permit Purchaser to verify the bank account and trust account transaction for this 9 month period.

There is no definition of "client moneys" or "money of Clients" (as those terms appear in clause 17.5). The capitalised term "Clients" is defined as "those clients of the Business at the Effective Date set out in Schedule 6". The Client List in Schedule 6 listed a number of clients as either Collection or Process clients (including clients such as Optus and HSCBC as well as Westpac and the Police Credit Union (NSW) Limited (though not St George Motor Finance)).

The temporal sequence within clause 17.5(2) suggests that "all payments received" after the payment of "all money of Clients held in the Vendor's bank accounts" may have been intended to refer to all payments representing "money of Clients" after the initial payment out pursuant to sub-clause (2) but, as a practical matter, no moneys belonging to Clients and for which the business owner would have to account, i.e. remit, to clients were paid into the trading (or general) bank accounts. The term could also refer to all payment of either small 'c' client moneys of the kind referred to in sub-clause (1), assuming there is a distinction. Relevantly, however, it could also have extended to all moneys received from or on behalf of clients and to which the business owner was entitled (such as fees or commissions). I consider the proper construction of this clause in due course.

Asset Sale Agreement

The Asset Sale Agreement (for the sale of the St George/Police Credit Union debt purchase portfolios) was also dated 9 January 2007. The purchaser under this agreement was NCO Financial Management Pty Ltd. Australian Receivables was a party to the agreement as guarantor. This agreement was expressed to be collateral to the Sale of Business Agreement (clause 1.3; clause 23).

The purchase price, payable on 9 January 2007 and duly paid, was $550,000. Under clause 4, title to the portfolio passed at completion and was at the risk, and to the benefit, of NCO from the Effective Date. NCO was entitled to the proceeds of collection of debts from the portfolio as from 30 November 2006.

Service Agreements

The service agreements were by letters dated 10 January 2007, to each of Mr Smith and Mrs Smith respectively. The agreement for Mr Smith's services was for an initial term of 12 months but terminable by Australian Receivables in six months "in the event that RS has not introduced a minimum accumulated value of $500,000 in acquisition cost of Debt Purchase Portfolios". Australian Receivables was to pay a monthly retainer fee of $3,000 per month payable monthly in arrears. (Mr Smith's service agreement was terminated by notice in July 2007 and it is not suggested that it was not open to Australian Receivables to terminate it at that stage.)

The letter agreement in relation to Mrs Smith provided for her services to be retained not for a set period but, rather, "on a part time basis for a period of time to be determined by ARL and agreed by TPL". The letter provided for Mrs Smith to attend the Frenchs Forest offices (part time) and for Tekitu to be paid an hourly fee of $65 per hour with hours worked to be recorded in a daily time sheet, payable monthly in arrears (plus GST). Out of pocket expenses were to be charged "with the prior approval of ARL". It is not disputed that in about February 2007 Mr Cooney asked Mrs Smith to reduce her hours. In August 2007 the Frenchs Forest office was closed. (Mrs Smith accepts that her service agreement is now at an end.)

Issues

(i) Retained Moneys claim

Australian Receivables' principal claim is that, in the period after completion on 9 January 2007 (through to 5 November 2007), Tekitu retained in the Tekitu trading account moneys received from clients of the Statewide Mercantile business (to which it was not entitled), which moneys it says Tekitu was obliged to remit to Australian Receivables in accordance with clause 17.5 of the Sale of Business Agreement.

The payments were identified by Mr Duncan as largely being referrable to payments of commission and fees by Optus, HSBC, The Insolvency and Trustee Service and the ATO. Although Mr Cooney deposed to the transfer up to September 2007 of money both for clients and from debtors (para [168]), Mr Duncan has deposed (and it does not seem to have been disputed by the Smiths) that the "unremitted moneys are entirely payment for collection work and services performed by [Australian Receivables] since acquisition of the SMS Business" ([13] September 2009 affidavit); i.e. the retained moneys represented commission or fees payable in respect of the work carried out for various clients and did not represent collection of debts for which there would have been a liability to account to the relevant clients.

The retained moneys have been variously quantified over the course of the dispute but are now pleaded in the Further Amended Statement of Claim to be $567,084.73 and there is no dispute as to that amount (T 323-324). Further, although Mr Duncan accepted in cross-examination that (presumably in the ordinary course) the general Tekitu trading account would have received moneys in relation to pre-December debts (T 44.32) and for the unwinding of guarantees and the like (T 44.49), it does not now seem to be disputed that the agreed sum ($567,084.73) represents the total of the moneys received into the Tekitu trading account that related to moneys payable to Australian Receivables (not Tekitu) but not remitted to it. (The manner by which that sum is calculated is that the total amount remitted by clients into the Tekitu Trading Account over the relevant period was $2,090,622.63, of which $1,564,956.95 in total was remitted to Australian Receivables, leaving a balance of $525,665.68, to which an additional remittance of $41,419.05 (received from Tru Energy on 2 February 2007 as evidenced by the invoice which is Exhibit U) is added to comprise the agreed sum of $567,084.73.)

After these proceedings had been commenced, as outlined earlier, a total of $331,314.72 was paid into the controlled moneys account in November 2007: first, the sum of $330,000 was paid by way of a bank cheque drawn on funds held in the Smiths' personal account said, in effect to reverse the notional reduction of the Smiths' loan accounts as directors of Tekitu and then the sum of $1,314.72 in compliance with an order made on 15 November 2007). Australian Receivables maintains that the sum paid to the controlled moneys account represents part of the overall retained moneys that were held on trust for it by Tekitu.

Insofar as the 15 November order called for payment into the solicitors' trust account of any remaining balance of the $365,000 transferred from the Tekitu trading account to the personal account, the fact that only $1,314.72 was paid into the account suggests an acceptance by the Smiths that the earlier sum of $330,000 paid into the controlled moneys account represented the funds initially drawn from the Tekitu trading account (since otherwise the amount to be paid in November 2007 would presumably have been much greater).

The sums of $15,774 and then $38,893 (which were also paid into the controlled moneys account pursuant to the agreed interlocutory regime) represented the amount of rental guarantee funds released by the lessors of property occupied by Tekitu. Although those payments were ordered to be made into the solicitors' trust fund and then disbursed to Australian Receivables, it appears that what happened was that prior to receipt into the solicitors' trust account of the actual rental guarantee amounts released by lessors, moneys in the amount of the released rental guarantees were transferred from the controlled moneys account (thus being drawn out of the original $331,314.00 held in that account), there then being a replenishment of the funds held in the solicitors' account. Mr Brender submits that nothing turns on this timing 'hiccup' in relation to the payment of the last two amounts (which he submits was in breach of the court orders), the balance of the account remaining the same at the end of those deposits and transfers as it was before. I consider this in due course.

It does not seem to be suggested that the payments representing the release of rental guarantee funds are of moneys to which Australian Receivables was entitled under the terms of the Sale of Business Agreement. As I understand it, these are amounts previously deposited by Tekitu as a rental bond or guarantee, to which it was to be entitled once the leases were assigned to Australian Receivables. (Hence it would seem that the payment of those funds into the controlled moneys account (or direct to Australian Receivables) account was, in effect, as security for any ultimate order that might be made on the claims made against Tekitu.)

The retained moneys claim has been quantified at $567,084.73 less the sum of $106,707.00 released to Australian Receivables on 6 December 2007, leaving a balance of $460,377.73 of which only $224,607.72 remains in an identified account. It is submitted that the rest ($235,770.01) can be presumed to have been expended by one or more of the defendants (though the Smiths only acknowledge drawing down sums totalling $88,100 for their own benefit).

The principal issue which arises on the retained moneys claim is whether or not the amount now held in the controlled moneys account is held on trust for Australian Receivables. This is of significance in that Australian Receivables contends that it is entitled to that sum in priority to the creditors of Tekitu. (If Australian Receivables has no more than a claim in debt or for damages for breach of a contractual obligation to remit those moneys then it would not have property in respect of that fund and, as an unsecured creditor, it would presumably be subject to the provisions of the Deed of Company Arrangement).

Australian Receivables puts its claim that there is a trust in respect of those moneys on a variety of bases. First, Mr Brender submits that Tekitu retained the sum of $567,084.73 prior to November 2007 in circumstances in which clause 17.5 of the Sale of Business Agreement obliged Tekitu immediately to remit those amounts to Australian Receivables (and that the sum remaining in the controlled moneys account is a subset of those retained moneys).

Australian Receivables contends that clause 17.5 of the Sale of Business Agreement gives rise to the creation of an express trust in respect of the retained moneys in the Tekitu account arising from the entry into the contract and receipt of the initial tranche of the purchase price, after which the beneficial interest in the Assets of the Business passed to Australian Receivables in accordance with the contract ([21] of the Further Amended Statement of Claim) or that those moneys are held on an implied, resulting or constructive trust ([22] of the Further Amended Statement of Claim). The resulting trust is said to have arisen in circumstances where the consideration for the business has been paid and the sums in question are Assets of the Business for which that consideration was paid.

While Tekitu accepts that in principle a trust could arise if the cash received in the relevant Tekitu trading account was itself the subject of the sale, Mr Cotman submits that this cannot be the case where the timing of the receipts the subject of the retained moneys claim was after the completion of the sale (and, he submits, after August 2007). Thus, it is submitted that the cash in the accounts cannot be the subject of the sale itself. (In this regard, Mr Cotman submits that remittances into the account after August 2007 cannot have been referable to debtors "sold" under the contract because by then the option in clause 12.2 was exercised. Remittances before August 2007, it is said, can be presumed to have been paid out of the trading account as part of the $1.5m that Australian Receivables concedes it received, on the application of the so-called "rule" in Clayton's case (Devaynes v Noble; Clayton's Case (1816) 1 Mer 572; 35 ER 781).) Hence, Mr Cotman submits that a proprietary claim can only have arisen if arising out of an obligation to transfer the moneys to Australian Receivables.

I accept that cash received into the Tekitu trading account from July/August 2007 does not fall readily within the definition of "Asset" under the agreement even though what was, in effect, being acquired was the right to continue to conduct the business then owned and conducted by Tekitu; in other words a potential income stream depending on matters such as whether existing clients continued to use the Statewide Mercantile services once those came to be offered by Australian Receivables.

The primary claim of Australian Receivables is based, in essence, on the maxim that equity treats as done that which ought to be done. It is contended that all the money comprising the retained moneys was paid into Tekitu's account by clients in payment of an obligation owed to Australian Receivables (as the owner of the Statewide Mercantile Services business), by way of commissions or fees, and that it was the common intention of the parties that all such money would be remitted by Tekitu into Australian Receivables' bank accounts and trust accounts (and hence there was a common intention that all money received by Tekitu into this account after completion) belonged to Australian Receivables).

Mr Cotman submits that clause 17.5 does not directly deal with the moneys received after August 2007. Further, Mr Cotman submits that the sums of $15,774 and $38,803 paid into the controlled moneys account were moneys acquired by Tekitu as a result of the release of bank guarantees, not representing client receipts, and could not be the subject of a constructive trust.

Clause 17.5(1) in its terms requires that Tekitu immediately account for "all client moneys received by it" at the direction of Australian Receivables and do so "without deduction". Clause 17.5(2) then imposes an obligation on Tekitu to pay to Australian Receivables "all money of Clients" held in Tekitu's bank accounts or trust account and thereafter the daily remittal (unless otherwise required) of "all payments" received into Tekitu's bank accounts and trust accounts.

The question arises as to the construction of those clauses by reference to what is meant by "client money" or "all money of Clients" and, specifically, the ambit of "all payments received" by Tekitu after completion for the purposes of clause 17.5.

As noted above, there is no definition in the Sale of Business Agreement of the expression "client moneys" as found in clause 17.5(1) or of "money of Clients" in the opening words of clause 17.5(2), though the word Client is defined (as being the entities listed in schedule 6). The use of the capitalised term might suggest that "money of Clients" is intended as a reference only to money belonging to those particular clients. However, if so then that does not explain the need for Tekitu to account for "client moneys" (with use of the lower case) in 17.5(1).

Mr Cotman submits that the reference to "client moneys" and "money of Clients" is a reference to money belonging to clients or money in which the client has an interest (not money paid by a client). That would seem to me to be the more natural reading of the latter term ("money of Clients") but not necessarily the former which could as readily refer to moneys paid by clients. Moreover, clause 17.5 refers to moneys in both the bank accounts and trust accounts. (Therefore it is not in its operation confined to the trust accounts in which only moneys held for clients were as a matter of practice retained.

In any event, whether or not the immediate obligation was only to pay to Australian Receivables moneys belonging to clients, clause 17.5(2) goes on to require the daily remittal thereafter of all payments received into Tekitu's bank or trust accounts (i.e. after the initial account has been made of "client moneys" under clause 17.5(1) at completion under clause 17.5(2)) and after the immediate payment without deduction of "all money of Clients" held).

Mr Cotman submits that the expression "all payments received" cannot mean all payments whatever the source or ownership of the money (because, if so, then the clause in its terms would oblige Tekitu to remit to Australian Receivables money that was its own money, with no provision in the agreement as to how there would be recourse by Tekitu or adjustment by Australian Receivables). However, if Mr Cotman's construction is correct, then there would be no contractual obligation on Tekitu under clause 17.5 (or otherwise) to remit to Australian Receivables moneys (mistakenly) paid by way of commission or fees into Tekitu's accounts after completion, even though clause 17.5 itself seemingly contemplates ongoing payments being made into the Tekitu bank accounts for up to nine months after completion.

Had it been intended that the second part of clause 17.5(2) (i.e. the words commencing "and thereafter remit") refer only to money belonging to clients or in which clients retained an interest, then there is no reason for the clause not to have used the same terminology as had been used earlier in the clause (i.e. to have provided for the daily remittal thereafter of "all money of Clients"). Bearing in mind that the clause refers to both bank accounts and trust accounts, and that payments into the bank or trading account are unlikely to have been confined to moneys belonging to clients (even assuming the bank as opposed to the trust account included any money belong to clients, which is contrary to the evidence), and that it would have been open to Tekitu after completion of the sale to direct any payments referable solely to it to be paid into a separate account so as to avoid the difficulty to which Mr Cotman's submission refers, I see no basis not to construe clause 17.5 (2) as meaning precisely what it says. In other words, I consider that the clause should be construed as requiring the daily remittal to Australian Receivables of all payments received into the accounts (after the initial accounting to Australian Receivables of "Client" moneys provided for in the earlier part of the clause) (including any money paid by clients for commission or fees into the trading account, as well as any money paid by debtors into the trust account). To the extent that this might include moneys referable to Tekitu in its own right then it would seem to me that there would be an implied obligation on Australian Receivables to return any such amounts.

Mr Cooney did not agree that the revised budget in early 2007 was quite conservative in its forecast income (T 139) and said that it was not a sophisticated budget. He did not answer directly the question whether, having revised the budget for 2007, if there were significant issues up to March they would have been reflected in the revisited budget, saying at T 140.18 that he was not sure where the cross-examiner was going with that but being adamant that "our" company rules were that once a budget was submitted it did not get changed. At 93.11, he said this might not be the final budget (when taken to the inconsistency of that budget with the existing Tekitu cost structure).

As to the expense line, as noted above Mr Duncan accepted that budgets for debt collection businesses adopted as the cost of sales a consistent percentage of gross revenues for budgeting purposes (T 85). He denied that in March or April 2006 there was a significantly higher ratio of cost of sales to sales than anything budgeted for in late 2006 (T 85.41) and denied that the actual figures showed that the business was incurring a significantly higher proportion of costs - insisting that his budget was a calculation on what he had anticipated (T 86).

Nevertheless, it seems that one factor in the higher cost of sales for which the revised budget provided was the change in the process service cost component. The budget prepared by Mr Duncan allowed a line item of $48,000 per month (T 88.6) in relation to the income then budgeted for the ATO and Mr Duncan accepted ('in part') that the actual results for January to June 2007 were inconsistent with the cost structure in operation at Tekitu before the sale (T 93). That said, as the evidence emerged, the reason for this was the term imposed by the ATO in this respect during the negotiation of the novation deed contemplated as part of the acquisition. Therefore, it seems difficult to maintain that an increased cost of business due to client pressures is one for which Australian Receivables ought be responsible (even if Mr Smith considers that he might have been able to secure a better deal).

Mr Cotman places emphasis on the fact that Mr Wyett, in his affidavit at [11] to [14]), deposes to his experience in budget setting (in particular, that the business when conducted by Tekitu under his management usually achieved within 1% of his budget and that he budgeted to allow for a modest increase in the existing levels of business and any particular new clients or new lines of business in respect of which he had a high level of confidence as to them being achieved). Mr Cotman also points to Mr Duncan's self-expressed experience in the debt collection industry (and the fact that he was involved in assessing the quality of the income stream that was sought to be acquired through the Statewide Mercantile Services acquisition).

Mr Cotman submits that Mr Wyett and Mr Duncan were both very experienced people with no interest in exaggerating the financial future of the business set the 2007 budget for the business having regard to the various changes that they expected to occur and that, having done so, when they revised the budget in early 2007 they made no material change to the income expectations and a 'minor' change to the expense expectations. (The increase in the expense component, however, seems inconsistent with the position as to the correspondence between the proportionality of cost of sales of sales as compared with revenue, as I understand it.)

Mr Cotman pointed out that there was a significant (and, he says, persistent) discrepancy between the actual performance of the business and the budgeted performance of the business as well as a significant discrepancy between its actual performance in 2007 and the equivalent period in 2006. (The discrepancy in income and expense relative to budget is said to be significant on a month-by-month basis in the first half of the year.) What is also seen as significant is that in the second half of the year the income of the business and the discrepancy between actual 2007 income and the equivalent period in 2006 is almost completely reduced (performance against budget only being down by $236,000 for the second half of the 2007 year).

The significance of the first half 2007 result is said to be that the changes to the business (which it is said have generated the bulk of the complaint of adverse change) occurred in the first half of the year from the date of completion as the changing business model (and integration of the businesses) was implemented. It is submitted that the largest observable loss of income (relative to experience and expectation) and the largest expense (relative to income) occurred in the first half of 2007, coinciding with the period of the largest observed dislocation to the conduct of the Statewide Mercantile Services business by reason of the acquisition. I am invited from this to conclude that in the first half of 2007 (during the second earn-out period), the business was not carried on in the ordinary and usual course and/or in a manner materially prejudicial to the earn-out payment.

Mr Cotman submits that simply replicating the 2006 performance would have increased net revenue by $645,000; achieving budget would have produced $840,000 additional net revenue; and simply maintaining costs would have increased net revenue by just under $100,000. It is submitted that the discrepancy between the required income (to maintain the conduct of the business in the usual course) and the target income for the 2006-7 period is in the order of $150,000.

Having said that, there are a number of factors referable to particular clients and/or particular aspects of the business to which reference is made by Tekitu as indicating the breach of contract. One of those is the assertion that revenue was lost due to failure of Australian Receivables to consult with Mr Smith or to give him the opportunity to participate in the business after completion. (It must of course be remembered that Mr Smith was being paid as a consultant for some time after completion and there seems no reason for him not to have made himself available rather than waiting to be called upon to do so. Thereafter, his attitude seems to have been that he was not going to work if he was not paid for that work, although if he is right and his work would have increased revenue then it would have been in Tekitu's interest for him to become involved in order to maximise any earn-out).

Reliance is placed by Tekitu on the forecasts and estimates prepared by Australian Receivables as indicative of a failure to comply with the above obligation. However, Mr Brender also submits that the lay witnesses point to a range of matters that may have contributed to the failure to earn-out what the directors of Tekitu may have expected (including office relocations and other business changes or reorganisation, changing Mr Wyett's role, computer issues, changing of staff and lost business opportunities). Mr Brender submits that none of these, if they happened (and that is not conceded), are shown to have had a material effect on performance and that, even if they did depress earnings, they did not constitute a breach of the Sale of Business Agreement.

Mr Horn's evidence, as noted, was that if the budget was not met then this was the responsibility of management. He did not explain in any detail why it was asserted that losses were said to have been sustained as a result. (Ms Bateman in her report was unable to opine on the reasons why the budget was not met and the earn-out was not achieved.) Mr Brender submits that there is insufficient material on which one could safely conclude that any breaches of the contract by Australian Receivables caused any damage whatsoever. I agree.

Mr Brender submits that the Statewide Mercantile business was in dire straights when it was being sold and suffering huge losses; that its solvency was doubtful and that there could have been no proper basis for safely assuming the earn-outs would deliver more than they did to Tekitu.

Mr Brender notes that Mr Duncan had calculated in the lead up to the sale that trading was break even at best for 2006-2007 and the balance sheet showed insolvency in 2006. (At CB 8/72, Mr Duncan had sent a memorandum to Mr Cooney replying on due diligence matters in relation to revenue, asserting that the company was insolvent.) Mr Duncan acknowledged that he had identified the management of client relationships as a major risk (T 75), though asserting that the risk had not eventuated (T 76). There were losses for the months leading up to and ending October and November 2006 respectively ($270,000 and $285,000) as noted in Mr Duncan's affidavit at [76]-[78]. The December 2006 loss was ultimately agreed at $160,776 ([80]) and there was a six-month trading loss to December 2006 of $656,011 before adjustments ([82]). Hence there was a history leading up to completion of financial problems with the business and Mr Brender submits that there are sound reasons why each of the alleged lost opportunities was not causative of any loss, and that clients were lost as a result of matters that had their genesis before the date of the Sale of Business Agreement.

Mr Brender submits, and I consider this submission to have force, that Mr Horn made his assessments as to the losses to Tekitu during the earn-out period based on what other people told him, including conversations with the Smiths and documents. He accepted that he had no direct knowledge or involvement with the business (T 229.33).

As to the clients, Mr Brender notes that Australian Receivables 'kept' all the major Tekitu clients but that the position was that the revenue from some of them did not meet budget. Mr Brender points to the reasons for this outlined in the affidavit evidence of Messrs Cooney and Wyett, who also explained the position in relation to the potential new clients or new business opportunities that did not eventuate. I do not consider it necessary to go into the detail of each of the clients. However, in summary, the evidence on this issue was as follows.

As to Allianz , Mr Horn's opinion was that the 'loss' was due to the fact that Mr Smith was not given an opportunity to use his contacts (T 231.40). Mr Brender submits, and I agree, that it has not been shown that Mr Smith was prevented from using any such opportunity (Mr Brender referring to Mr Cooney's affidavit at [116] and Mr Wyett's affidavit at [114].)

As to Optus , Mr Horn's view was that Australian Receivables did well but "could have done better" (T 232.36). He did not address the matters raised by Mr Cooney (at [126]) or Mr Wyett as to why the results were not better (T 234.45).

As to the ATO , Mr Horn pointed to the fact that Australian Receivables achieved the target but not the budget (T 237.40). He referred to a failure by Australian Receivables to follow Mr Smith's recommendation to increase the charges (T 238.5) even though Mr Cooney's evidence was that there were restrictions on price increases as a result of a novation deed entered into with the ATO (Mr Horn refused to change his opinion in light of that issue - T 239.5). (Reference is made by Mr Brender to Mr Cooney's evidence at [97] and Mr Wyett at [71]).)

As to the Attorney-General's Department , Mr Horn considered that one of the reasons for the losses was that Australian Receivables did not utilise Mr Smith's services (T 239.40). Mr Horn's opinion was that the matter had not been followed up by senior management (T 244.45). This is inconsistent with the evidence that Mr Warrick Smith was the contact with the Attorney-General's Department and that he worked diligently on that opportunity until he left in August (T 341). (Reference is made by Mr Brender to Mr Cooney's evidence at [110] and Mr Wyett at [66].) Mr Smith agreed at T 327 that there was no impediment to him seeking to introduce new clients and agreed that he had attended a meeting with Warrick Smith in relation to this client and that there was no problem picking up the phone to Mr Wyett (T 328).

As to GE Money , Mr Horn's evidence (at T 249) was that Australian Receivables should be responsible for the shortfall between actual and target or budget because it had responsibility for management and that if there were no new referrals then that is a failure of management. Mr Horn did not give any basis for the conclusion that management failed in that regard (T 40.15-47). Mr Brender points out that, at T 250, Mr Horn conceded that in order to draw his conclusion that management had failed he would need to know about a series of matters (none of which he in fact did know), but still concluded that management was responsible for making budget (T 250.53). (Reliance is placed on Mr Cooney's evidence at [132]).

As to Hertz , Mr Horn's conclusion was that Australian Receivables failed to achieve budget because Mr Smith was not given a chance to help and due to "just general management shortcomings" (T 253.7). (Mr Brender relies on Mr Wyett's evidence at [57].)

As to SIM Plus , there were problems which it is accepted had an impact on the referrals and hence the revenue up to early 2007; however, Mr Horn attributed the whole of the budget shortfall to a failure of management (T 257) without allowance for those problems and even for that part of the year when the result was above target (T 257.44). (Mr Brender pointed to Exhibit W which recorded SIM Plus' happiness at the August 2007 figures and referred to the evidence of Mr Cooney at [119] and Mr Wyett at [59].)

As to Ford Credit , Mr Horn again attributed the shortfall to Mr Smith not having an opportunity to use his contacts but also expressed the view that Mr Cooney should have been bypassed because Ford Credit did not like him. Mr Horn had no knowledge about who was involved in the negotiations (T263). (Reference was made to Mr Cooney's evidence at [113] and Mr Wyett at [48].) Mr Smith's evidence was that he took Mr Wyett to a meeting with Ford Credit in 2006. The problem with that deal (according to his evidence) was Mr Cooney. Mr Brender submits that no opportunity was lost by anything attributable to Australian Receivables.

As to Tru Energy , at T 264 Mr Horn's evidence was that the failure to get work was a management failure although he conceded he did not have 'any idea why' (T 265.10). (Mr Brender refers to Mr Cooney's evidence at [130].)

As to IAG , Mr Horn conceded that the actual results were better than both the target and the 2006 results but he assessed damages because the company did not make the budget and attributed that to staff training and staff morale. (Mr Brender relies on Mr Cooney's evidence at [121]). Australian Receivables submits that there is no basis for linking the two. (In addition it is submitted that it is quite possible, if staff morale was low, (which is not accepted by Australian Receivables) that this may have been because there was a superannuation shortfall attributable to Tekitu (Exhibit P).)

As to Macquarie Bank , Mr Horn was critical of the decision by Australian Receivables not to participate in a tender (T 241.49). However, it seems to me that this was a commercial decision falling within the ordinary course of business. Mr Horn in the witness box conceded that it was a business decision open to Mr Cooney and that different people might have different opinions (T 242.37). The reasons for that decision were cogently explained by Messrs Cooney [108] and Wyett [68].

As noted earlier, I read Mr Horn's evidence only by way of submission. It seemed to me that his conclusions in relation to the causes for the revenue shortfall were superficial and his estimation of the quantum of the loss lacked analytical rigour. I do not accept that his submissions were compelling and his refusal to concede or revisit his opinion when the flimsy basis for some of his conclusions was made apparent, left me to question the objectivity of his evidence.

I am not persuaded that there has been a breach of clause 2.2, whether by reference to the comparatively poor performance in the first half of 2006 (which could have been due to a number of extraneous factors in the market for debt collection services) or the decision to increase the cost of sales line in the budget (apparently due to the requirements for the ATO tender) or the matters raised in relation to particular clients or decisions in relation to the operation of the business. I find that there is no adjustment to be made in this regard.

(d) Smiths' service agreements - consulting fees

Australian Receivables accepts that there were service agreements with each of Mr and Mrs Smith under which Australian Receivables was obliged to pay fees to Tekitu for their services for the period from the completion date. However, Mrs Smith's fees (payable on an hourly basis) rendered in July 2007 and October 2007, totalling $8,580.00, are disputed.

Mrs Smith ceased any regular attendance at the Frenchs Forest office by May 2007. It is said that by that time any role Mrs Smith had was working in her own interest (Mr Duncan's affidavit of 13 October 2010 at [227]-[230] deposes to this). Mr Smith's fees for July 2007 are disputed because his agreement had been terminated by letter dated 23 July 2007 (see Mr Duncan's affidavit of 13 October 2010 at [231]-[234).

The dispute relates to the two final invoices, copies of which are together marked Exhibit R. Mr Brender notes that the work that Mrs Smith did, for which charges are rendered in those invoices, was not recorded in time sheets, was not done at the Frenchs Forest office, and it is alleged that it did not relate to the provision of administrative services for Australian Receivables. Mrs Smith agreed that up to May 2007 she rendered regular invoices with time sheets but that she did not render any time sheets for the July or October invoices (T304).

Mr Brender further submits that much of the October invoice related to time that Mr Smith spent on the Melbourne lease issue. In that regard, Mrs Smith concedes that the October invoice was for time worked by both Mr and Mrs Smith (though the former was not covered by any service agreement at that stage) (T304).

Mrs Smith's evidence was that she spent her time on lease assignments, changing bank direct debits, monitoring bank accounts, reconciling the IAG account and chasing debtors (T 305). (Mr Brender notes that the debtors in question were not Australian Receivables debtors, but the November debtors that had been bought back by Tekitu - T 305-307). Mr Cotman further notes the evidence that, in the period 18 May to 13 July 2007, Australian Receivables had not arranged for all debtors to pay moneys into bank accounts operated by it nor had it assigned the property and plant leases. Thus it is said that, in addition to the matters that were put to Mrs Smith in cross-examination, the inference to be drawn from the evidence is that Mrs Smith was spending time in the period 18 May to 13 July 2007 administering bank accounts crucial to the running of the business; getting in invoices relating to the business; paying such invoices; and rendering invoices to Australian Receivables.

It is submitted by Mr Brender that Mrs Smith spent a lot of her time in this period dealing with the leasing companies for her own benefit because she wanted to remove her name from the leases (something she conceded that she wanted to do - T 308.10). According to Mr Horn, Mrs Smith also spent considerable time trying to reconcile the IAG trust account (something that would not in my view fall within the services agreement).

Neither Mr nor Mrs Smith was able to apportion with any specificity the time spent as between the two of them in the October invoice (T 309.8). Indeed, it seemed that Mrs Smith had simply estimated the time in the invoice as a generalisation rather than by reference to any record of the time spent.

For the period 18 May to 13 July 2007, Mrs Smith charged 45 hours (Exhibit R) (said to equate, at approximately 40 working days between 18 May and 13 July, to an average rate of just over one hour per working day). It is submitted that this is not excessive relative to the services Mrs Smith was rendering. In the period 13 July to 29 October 2007, the Smiths have charged 75 hours across 78 working days, an average of less than one hour per day. It is submitted that again, apart from the matters set out in the invoice, the inference is open that Mrs Smith was spending time in the period 13 July to 29 October 2007 administering bank accounts crucial to the business; getting in invoices relating to the running of the business; paying such invoices; and rendering invoices to Australian Receivables.

The contemporaneous correspondence from Mr Horn (which it might be inferred had been approved by Mrs Smith or at least the substance of it) was that the IAG reconciliation issue had her "undivided attention" at the time (something Mrs Smith in the witness box did not accept - T 305). Mrs Smith did, however, concede that she had spent some time reconciling the IAG accounts and that she had spent time monitoring bank accounts and chasing Tekitu debtors (in relation to this she was defensive, saying that "well I believe that if ARL had chased the debtors as they should have been I wouldn't have been doing it" - T 305.50, even though she accepted that she was chasing buy-back debtors for the benefit of Tekitu not clients of the business acquired by Australian Receivables),

Australian Receivables closed the Frenchs Forest office in August 2007. Mr Cotman submits that, by closing the Frenchs Forest office, Australian Receivables had frustrated the Lyn Smith service agreement. It is submitted that Australian Receivables cannot rely upon its own frustration of the service agreement to argue that Mrs Smith is in breach of the service agreement by not attending the Frenchs Forest office to perform the administrative services. I accept that as a matter of logic the closure of the Frenchs Forest office must have operated to frustrate Mrs Smith's ability to attend at that office in order to perform the administrative services. However, it is not necessary in my view to have regard to the location where the services were said to have been performed in order to form the view that the invoices are not of the kind contemplated by the services agreement.

The difficulty I have with Mrs Smith's claim is that there are no time sheets (as required) or documents to support the assertion that Mrs Smith was performing services for Australian Receivables of the kind that would be required to be reimbursed and the invoice includes time for Mr Smith that is not the subject of any agreement for reimbursement. The time spent by Mrs Smith has only been generally identified and it is difficult not to assume that it includes time that is not referable to Australian Receivables (such as removing the Smiths' name from the property leases and following up Tekitu debts, let alone seeking to reconcile the IAG trust account).

I am not satisfied that entitlement on the part of Tekitu to the amount claimed under the two invoices in question has been established and therefore I make no adjustment for those invoices.

Conclusion

As noted, there is agreement as to the quantum of the retained moneys (those amounting to $567,084.73). On the basis that Australian Receivables is permitted to retain the amounts (totalling $177,874) paid to it without admission of liability (being the $106,107 and the three sums reflecting released rental guarantee payments), the amount outstanding in respect of the retained moneys is $389,210.73. Australian Receivables is entitled to trace into the controlled moneys account for the sum of $169,831.72, thus further reducing the shortfall on the retained moneys claim (to $219,379.01).

On the cross-claim, taking into account the two instalments paid to date of the April 2007 second purchase price instalment ($101,710.89), a sum of $147,416.89 was owing to Tekitu. The agreed adjustments as per the reconciliation attached to the Defence to the Further Amended Cross-Claim (as set out earlier) reduced the balance payable to Tekitu to $46,945.50. To that must be added the adjustment for the December acquired debt collections ($33,912.00) but there is no adjustment to be made for the balance of the amounts claimed by Tekitu nor is there to be any adjustment for the respective breach of contract claims. Therefore the balance owing to Tekitu on its cross-claim is the sum of $49,860.15 plus the amount agreed to be outstanding on the second earn-out ($122,117.28) - a total on my calculations of $171,977.43.

Off-setting the amount owing to Tekitu by way of the balance of the second purchase instalment and second earn-out payment against the amount owing to Australian Receivables by way of shortfall on the retained moneys claim (namely, $219,379.01), on my calculations there is a balance payable to Australian Receivables of $47,401.58. That amount can be met out of the remaining moneys held in the controlled moneys account ($54,667) leaving a small balance ($7,265.42) payable to Tekitu (or more precisely its administrators).

While I consider that Australian Receivables has established that there was knowing assistance under the second limb Barnes v Addy by reference to the withdrawals of moneys from the Tekitu trading account at least from the time that issues were raised as to Australian Receivables' entitlement to those moneys, on the above calculations (and subject to any correction that may need to be made thereto) the claim by Australian Receivables will be satisfied in full by a combination of payment out of the money into which it can trace in the controlled moneys account and an offset in relation to the claims by Tekitu. Therefore no order for compensation personally by the Smiths is necessary.

Orders

As there may be submissions that the parties may wish to make as to the mathematical working out of the above findings, I direct that the parties prepare agreed short minutes of order to reflect this judgment (or competing versions if agreement cannot be reached) within 7 days and I will list this matter at a time convenient to Counsel for the making of final orders and any submissions as to costs.

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Decision last updated: 01 November 2011

[2011] NSWSC 1306

31 October 2011

Key Legal Topics

Areas of Law

Trusts & Equity

Legal Concepts

Implied Trusts

Constructive Trusts

Tracing

Fiduciary Duty

Breach of Contract

Breach of Warranty

Set-off

Medium Neutral Citation:	Australian Receivables Ltd v Tekitu Pty Ltd (Subject to Deed of Company Arrangement) (Deed Administrators Appointed) & ors [2011] NSWSC 1306
Hearing dates:	6-10, 14 June 2011
Decision date:	31 October 2011
Jurisdiction:	Equity Division
Before:	Ward J
Decision:	Plaintiff entitled to trace into controlled moneys account to recover moneys impressed with a trust arising by reference to contractual obligation to hold and remit funds received after sale of business. First cross-claimant entitled to payment of moneys outstanding in respect of sale of business. Set-off as between respective amounts owing.
Catchwords:	EQUITY - TRUSTS - whether on proper construction of Sale of Business Agreement, moneys received into first defendant's trading account were impressed with an implied or resulting trust or otherwise held on constructive trust for the plaintiff - whether, if so, plaintiff entitled to trace into account in which moneys now held - whether second and third defendants liable for any shortfall in the retained moneys under the second limb of Barnes v Addy - HELD - implied or resulting trust arose on receipt of the moneys into the trading account and plaintiff able to trace into part of the funds held in the controlled moneys account - knowing assistance in dishonest breach of trust or fiduciary duty established - CONTRACT - whether breach by first defendant of warranties in Sale of Business Agreement - whether breach by plaintiff of obligation to conduct business after completion in ordinary and usual course - HELD - only breach of warranty established was in relation to preparation of company's accounts - no damages recoverable in respect of that breach as no reliance on the relevant warranty - having regard to meaning of "ordinary and usual course" of business no breach of contractual obligation by plaintiff in that regard - plaintiff entitled to set-off as against moneys owing by it to first defendant under Sale of Business Agreement the shortfall on its retained moneys claim after payment out of moneys held on trust for its benefit
Legislation Cited:	Commercial Agents and Private Enquiry Agents Act 2004 (NSW) Corporations Act 2001 (Cth) Partnership Act 1982 (NSW)
Cases Cited:	Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 114 ALR 355 Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564 Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd [2000] HCA 25; (2000) 202 CLR 588 Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406; (1996) 139 ALR 663 Baden Delvaux & Lecuit v Societe General pour Favoriser le Developpement [1983] BCLC 325 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Barnes v Addy (1874) LR 9 Ch App 244 Bathurst City Council v PWC Properties Pty Limited [1998] HCA 59; (1998) 195 CLR 566 Baumgartner v Baumgartner [1987] HCA 59; (1987) 164 CLR 137 Bishopsgate Investment Management Ltd (in liq) v Homan [1995] Ch 211 Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207; 1 All ER 155 Cook v Alto Prestige Pty Limited [2010] NSWSC 92 Countrywide Banking Corporation Ltd v Dean (1997) 8 NZCLC 261 Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371 Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318 Devaynes v Noble; Clayton's Case (1816) 1 Mer 572; 35 ER 781 Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463 Duncan Davis Pty Ltd v Hurstbridge Abattoirs [1995] 1 VR 279 Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202 FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102 Forster v Jododex Australia Pty Ltd [1972] HCA 61; (1972) 127 CLR 421 Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 Gardner v Dairy Industry Authority New South Wales (1977) 18 ALR 55; 52 ALJR 180 Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 Hanson v Radcliffe Urban District Council [1922] 2 Ch 490 Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 Ibeneweka v Egbuna [1964] 1 WLR 219 Ingot and Ors v Macquarie and Ors [2004] NSWSC 1136 James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 Jones v Dunkel (1959) 101 CLR 298 Liquor National Wholesale Pty Limited v Redrock Co Pty Limited [2007] NSWSC 392 Lofts v MacDonald (1974) 3 ALR 404 Meyers v Casey [1913] HCA 50; (1913) 17 CLR 90 Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583 National Commercial Banking Corporation of Australia v Batty [1986] HCA 31; (1986) 160 CLR 251 Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601 Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120 Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440; (1983) 1 ACLC 1091 Perkins v State Bank of South Australia (1993) 61 SASR 246 Power v Ekstein [2009] NSWSC 130 Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 102 ALR 681 Re Bradford Roofing Industries Pty Ltd (in liq) & Companies Act [1966] 1 NSWR 674 Re Cummins (t/a Nam Constructions); Ex parte Harris v ARC Engineering Pty Ltd (1985) 62 ALR 129 Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361 Re Global Finance Group Pty Ltd [2002] WASC 63; (2002) 26 WAR 385 Re Goldcorp Exchange Ltd; Kensington v Liggett [1995] 1 AC 74; [1994] 2 All ER 806 Re Hallett's Estate; Knatchbull v Hallett; Cotterell v Hallett (1879) 13 Ch D 696; [1874-80] All ER Rep 793 Re Jonton Pty Ltd [1992] 2 Qd R 105; (1991) Q ConvR 54 - 392 Re Joscelyne; Allen's Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4 Re Judiciary and Navigation Acts (Advisory Opinions Case) (1921) 29 CLR 257 Re Oatway; Hertslet v Oatway [1903] 2 Ch 356 Re Sharpe; Ex parte Trustee of the Bankrupt's Property v Sharpe [1980] 1 WLR 219 Re Sabri; Ex parte Brien v Australian & New Zealand Banking Group Ltd (1996) 137 FLR 165 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422 Robertson v Grigg (1932) 47 CLR 257 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378 Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 Scott v Scott (1963) 109 CLR 649 Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) [1986] 3 All ER 75 Stephenson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536 Taylor v White (1964) 110 CLR 129 Twinsectra Ltd v Yardley [2002] 2 AC 164 University of New South Wales v Moorhouse & Angus & Robertson (Publishers) Pty Ltd (1975) 133 CLR 1 West v Mead [2003] NSWSC 161; (2003) 13 BPR 24,431
Texts Cited:	Halsbury's Laws of Australia (online edn) Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th edn) Scott and Fratcher, The Law of Trusts (4th edn, Vol 1)
Category:	Principal judgment
Parties:	Australian Receivables Ltd (Plaintiff/First Cross-Defendant) NCO Australia Pty Ltd (Second Cross-Defendant) Tekitu Pty Ltd (First Defendant/First Cross-Claimant) Ross Edward Smith (Second Defendant/Second Cross-Claimant) Lynette Mary Smith (Third Defendant/Third Cross-Claimant)
Representation:	Counsel R J Brender with A Ahmad (Plaintiff/Cross-Defendants) N Cotman SC with Ms M Fisher (Defendants/Cross-Claimants) Solicitors Forbes Dowling Lawyers (Plaintiff/Cross-Defendants) Malcolm Johns and Company (Defendants/Cross-Claimants)
File Number(s):	07/257468