Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corp
Case
•
[1999] NSWSC 671
•14 May 1999
No judgment structure available for this case.
CITATION: Cashflow Finance v WestpacCOD Factors v Cashflow FinanceStar v Kylon P/LCOD Factors v Walters [1999] NSWSC 671 CURRENT JURISDICTION: Equity Division - Commercial List FILE NUMBER(S): 50111/97; 50177/97; 50047/98; 50114/98 HEARING DATE(S): 15, 16, 17, 18, 19, 22 and 23 March 1999 JUDGMENT DATE:
14 May 1999PARTIES :
50111/97 Cashflow Finance Pty Limited (In Liquidation) - Plaintiff
Westpac Banking Corporation - Defendant)
50177/97 C.O.D. Factors Australia Pty Limited - Plaintiff
Cashflow Finance Pty Limited (In Liquidation) - First Defendant
Peter Wright - Second Defendant
C.O.D. Factors Pty Limited - third Defendant
Edmund Joseph Walters - Fourth Defendant
Lynette Anne Walters - Fifth Defendant
50047/98 John Edward Star - Plaintiff
Kylon Pty Ltd - First Defendant
C.O.D. Factors Australia Pty Limited - Second Defendant
50114/98 C.O.D. Factors Australia Pty Limited - Plaintiff
Edmund Joseph Walters - First Defendant
Lynette Ann Walters - Second Defendant
Trans-pac Australia Pty Limited - Third DefendantJUDGMENT OF: Einstein J
COUNSEL : Mr Campbell QC and Mr Stanton for Cashflow Finance Pty Ltd and for John E. Star
Mr Jacobson QC and Francois Kunc for Westpac Banking Corporation
Mr Walters appearing in person during part of the hearing
Mr Wright appearing in person during part of the hearing
Mr Lindsay SC and Mr Meek for COD Factors Australia Pty Ltd
Mr Meek for Mr and Mrs Burkett
No appearance for COD Factors Pty Ltd
Mrs Walters - in person during part of the hearing
Mr Beasley appearing for Kylon Pty Ltd
No appearance for Trans-pac Australia Pty LtdSOLICITORS: Aitken McLachlan & Thorpe for Cashflow Finance Pty Ltd and John E. Star
Dunhill Madden Butler for Westpac Banking Corporation
John Burrell for COD Factors Australia Pty Ltd and for Royce W. Burkett and Penelope A. Burkett
Cutler Hughes and Harris for Kylon Pty LtdCATCHWORDS: TRUST - Constructive trust - Circumstances in which claimant to assets of insolvent company able to claim priority over general creditors by means of proprietary claim; TRUST - Moneys paid by debt factoring company A to or for benefit of debt factoring company B - Payments made by employee W carrying out accountancy services for both companies - Payments made without knowledge or authority of directors of either company - Partial repayments made by company B prior to discovery by directors of either company of W’s misconduct-Liquidation of company B-Company B claim to avoid partial repayments made as uncommercial transactions and/or as preferential payments-Company A seeks to outflank insolvency provisions by suggested application of equitable doctrines including constructive trust declarations; TRUST - Tracing-Whether identifiable trust property ; TRUST - Constructive trust-General principles - Equity of transaction must shape measure of relief; EQUITY - Restitution - When does obligation to make restitution arise? - Is obligation to make restitution, a post-liquidation obligation? - Prerequisites of an equitable proprietary claim-Relationship between doctrine of constructive trust and tracing - Insolvent defendant not knowing the facts which form the basis of restitutionary claim and is insolvent; EQUITY - Remedies flexibly applied in modern commercial context to be adapted to commercial realities; NOTICE - Imputing of knowledge or notice - Knowledge imputed to company through agency - Knowledge imputed through directing mind and will of company - Knowledge acquired by officer of one company not imputed to another company unless common officer has duty imposed upon him to communicate that knowledge to the other company and a duty imposed on him by the company alleged to be affected by the notice, to receive the notice; COMPANIES - Fiduciary,statutory and common law duties of directors - Attribution of knowledge through common director or employee; BANKRUPTCY - Proprietary claims and their priority in insolvency-Constructive trust cuts across ordinary principles as to pari passu ranking of claims in insolvency administrations - Does property subjected to insolvency administration include property impressed with a constructive trust?; BANKRUPTCY - Insolvent and uncommercial transactions - Priority in respect of post liquidation liabilities-Is obligation to make restitution provable in a winding up - set-offs - Running accounts - Integral part of continuing business relationship,; CORPORATIONS LAW ; Part 5.7B , Part 6 Division 1A; s 9 Definitions, of‘transaction","party"; ss232(2), 232(4), 232(6), 289, 553(1), 555(1), 556(1)(a), 588E(3), 588E(4), 588FA, 588FB, 588FC, 588FE2(2)(a) and (b), 588FE(3), 588FF(1), 588FF(1)(c), 588FG(2), 1307, 1317HD ACTS CITED: Bankruptcy Act 1924, 1966 (Com)
Evidence Act 1995 (NSW)
Fair Trading Act 1987 (NSW) 42
Securities Industry Act 1975 (NSW)CASES CITED: Air Services Australia v Ferrier (1996) 185 CLR 483
A/S Rendal v Arcos Ltd [1937] 3 All ER 577
Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119
Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491
Australian Postal Corporation v Lutak (1991) 21 NSWLR 584
Beach Petroleum NL v Johnson (1993) 43 FCR 1
Beatty v Guggenheim Exploration Co (1919) 225 N.Y. 380
Black v S Freedman & Co (1910) 12 CLR 105
Boscawen v Bajwa [1996] 1 WLR 328
Bringinshaw v Bringinshaw (1938) 60 CLR 336
Cave v Cave [1880] 15 Ch D 639
Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1980] 2 WLR 202
Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426
Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371
Duke Group Ltd (In Liquidation) v Pilmer & Ors (Unreported, Supreme Court of South Australia, 30 January 1998, Mullighan J)
El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685
English v Dedham Vale Properties [1978] 1 All ER 382
Expo International Pty Ltd (In Liquidation) v Torma [1985] 3 ACLC 748
Farrow Finance Company Ltd (In Liquidation) v Farrow Properties Pty Ltd (1997) 26 ACSR 544
Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106
Fowkes v Deputy Director of Public Prosecutions [1997] 2 VR 506
Giumelli v Giumelli [1999] HCA 10, (24 March 1999)
Re Goldcorp Exchange Ltd [1994] 3 WLR 199
Re Hampshire Land Company [1896] 2 Ch 743
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
JC Houghton & Company v Nothard, Lowe & Wills Ltd [1928] AC 1
Re Hunt; Ex parte Sean Investments Pty Ltd (1979) 53 ALJR 552
Re Jaques McAskell Advertising Freeth Division Pty Ltd (In Liquidation) [1984] 1 NSWLR 249
Lennard’s Carrying Company Ltd v Asiatic Petroleum Company Ltd [1915] AC 705
Liggett v Kensington ([993] 1 NZLR 257
Re Macks & Emanuel (No. 14) Pty Ltd (In Liquidation) v Blacklaw & Shadforth Pty Ltd (1997) 15 ACLC 1099
Manchester Trust v Furness [1895] 2 QB 539
Re Montagu’s Settlement Trusts [1987] Ch 264
Muschinski v Dodds (1985) 160 CLR 583
Olifent v Australian Wine Industries Pty Ltd (1996) 14 ACLC 510
Re Pacific Hardware Brokers (Qld) Pty Ltd (1997) 16 ACLC 442
Re Paine; Ex parte Read [1897] 1 QB 122
Pedler v Richardson (unreported, Supreme Court of New South Wales, 16 October 1997, Young J)
Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLR 1293
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254
Queensland Medical Laboratory v Blewett (1988) 84 ALR 615
R v Roffel [1985] VR 511
R v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Space Investments Ktd v Canadian Imperial Bank Commerce Trust Co (Bahamas) [1986] 3 All ER 75
Star v O’Brien (1996) 40 NSWLR 695
State Bank of NSW v Swiss Bank Corporation (1995) 39 NSWLR 350
Stephenson Nominees Pty Ltd v Official Receiver (1987) 76 ALR 485
Sutherland v Liquor Administration Board (1997) 15 ACLC 875
Taylor v White (1964) 110 CLR 129
Taylor v Yorkshire Insurance Co Ltd [1913] 2 Ir R1
Commonwealth of Australia v SCI Operations Pty Ltd (1998) 72 ALRJ 687
Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488
Re Wait [1927] 1 Ch 606
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Woodson (Sales) Pty Ltd v Woodson (Australia) Pty Ltd (1996) 7 BPR 14,685
Yeomans v Lease Industrial Finance Ltd (1986) 5 ACLC 103
Zobory v Federal Commissioner of Taxation (1995) 64 FCR 86DECISION: Short Minutes of Order to be brought in.
THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION - COMMERCIAL LISTEINSTEIN J
50111/97 - CASHFLOW FINANCE PTY LTD v WESTPAC BANKING CORPORATION & ORS
Sydney, 14 May 1999
50177/97 - COD FACTORS AUSTRALIA PTY LTD v CASHFLOW FINANCE PTY LTD (LIQUIDATOR APPOINTED) & ORS
50047/98 - JOHN EDWARD STAR v KYLON PTY LTD & another
50114/98 - COD FACTORS AUSTRALIA PTY LTD v EDMUND JOSEPH WALTERS & ORS
JUDGMENT
1 The final hearing in these four sets of proceedings, commenced on 15 March 1999. During the previous week and during the first days of the hearing, a number of settlements took place with the consequence that a number of issues pleaded fell away and became unnecessary to be considered. In at least one instance, the settlement of one set of proceedings may have an impact on the ultimate entitlements of parties litigating in relation to the proceedings which continued. In the result, it will become necessary in outlining the claims made and issues which require to be determined, to deal from time to time with claims now settled.
2 Before turning to examine the parties and the issues in each of the four sets of proceedings, it is convenient to commence with a general outline to set the factual background explaining how the cases come to be pursued. The following detail includes, as appropriate, findings of fact.
The Principal Companies
3 The cases relate principally to the activities of two companies which, at material times, engaged in debt factoring and money lending from the same set of premises in Beverley Hills. The companies are COD Factors Australia Pty Limited (‘CODFA’) and Cashflow Finance Pty Limited (in liquidation) (‘Cashflow’).
4 Mr Peter Wright was at all material times the managing director of CODFA, the managing director of Cashflow and the managing director of a further company, COD Factors Pty Limited (‘Factors’).
5 Mr William Kull was at all material times a director of CODFA. He has at all material times been a director and shareholder of Kylon Pty Limited (‘Kylon’), effectively controlling Kylon through his shareholding. Kylon is in turn a 50% shareholder of CODFA. The other 50% shareholding in CODFA is held by Factors.
6 To complete the shareholding picture in overview terms, it is convenient to note that Factors at all material times held a 49% shareholding in Cashflow and that Pyrafount No. 3 Pty Limited [‘Pyrafount’] at all material times held a 51% shareholding in Cashflow. Mr Anthony Bonvino effectively controlled Pyrafount through his shareholding. Mr Bonvino was at all material times a director of Cashflow.
7 It is of assistance even before turning to the detailed facts, to set out a flow chart of companies tendered by Cashflow and forming an annexure to the report of Mr AJ Cachia of Bartlett and Cachia, chartered accountants[Exhibit P8].8 The key to the symbols used in Mr Cachia’s Report comprises the following schedule:
Inducement to Invest
9 In early December 1990, Mr Kull responded to an advertisement in the Business Opportunities magazine, reading ‘Investors wanted to invest in factoring business, capital required’. Ultimately, Mr Kull through Kylon, became such an investor in CODFA.
10 Some three and a half years later, in mid-1994, Mr Anthony Bonvino responded to a similar advertisement, this time reading:
‘Investment opportunity11 Thereafter, Mr Bonvino through Pyrafount, came to invest funds in Cashflow.
Real Estate Secured
17 p.c. int. paid monthly
Long established company requires funds for expanding client base. All funds are fully secured. Minimum investment $100,000. Full accounting figures available. For details and appointment, ring the accountant . . .’
12 There are substantial similarities in the initial discussions which Mr Kull had with Mr Wright in December 1990 and which Mr Bonvino had with Mr Wright in mid-1994. The convenient course is to first set out Mr Kull’s evidence and to then set out Mr Bonvino’s evidence. I accept the following accounts of the events as reliable and accurate.
Evidence of Mr Kull
Introduction to Mr Wright
13 In Mr Kull’s initial telephone conversation with Mr Wright, Mr Wright said words to the following effect:
‘I have an established debt factoring business. My company is called COD Factors Pty Limited and I have my office at Beverley Hills. The company has more business than it can handle at present and so I am interested in getting more funds to invest.14 Later in December 1990, Mr Kull had a meeting with Mr Wright at the offices of Factors, situate at Suite 3, 407-409 King Georges Road, Beverley Hills, where Mr Wright said to Mr Kull: “I have been operating COD Factors for the last four or five years and have a credit provider’s licence. At present, I need more funds to factor because of an increasing client demand. Moneys provided by you would be on-lent to clients under our normal factoring agreement. We pay investors such as yourself a monthly interest rate on such moneys that are lent to clients’.
The business of debt factoring involves clients bringing to us their unpaid invoices against which we loan them a fixed percentage amount. We advance up to 80% of invoices less our factoring fee which is usually 5% so the client gets approximately 75% of the invoice value. Our clients either advise their debtors to pay COD Factors directly or they redirect to COD Factors any payment which they receive on invoices that have been factored with us.
Prior to factoring for clients we obtain security on the clients’ assets through either registering a first or second mortgage on the clients’ property or through obtaining a charge on the client company or a charge over its book debts. If payment of an invoice which has been factored is not received by COD Factors within 90 days, the invoice is given back to clients who then have to repurchase the invoice or provide new investors to be factored at the same amount.’
[Paragraph 4, Statement of Mr Kull dated 14 April 1998]
15 Mr Wright then introduced Mr Kull to Mr Edward Walters, who is a party to several of the sets of proceedings now before the Court, saying to Mr Kull words to the effect: ‘This is Ed Walters. Ed is an accountant. He takes care of the accounting and financial side of things. He keeps track of the debts which we have factored, makes sure payments have been received, prepares what we call ‘First Schedules’ when moneys are to be advanced, etc.’
16 At about the same time, Mr Wright introduced Mr Kull to Mr Walters’ wife, Mrs Lynette Walters. Mrs Walters had been a party to the proceedings but in respect of all actions concerning her, they have now been settled.
17 Between December 1990 and August 1991, Mr Wright and Mr Kull had numerous telephone conversations and exchanged correspondence in relation to Mr Kull’s possible investment in the debt factoring business opportunity presented by Mr Wright and about the business structure through which Mr Kull could make such an investment. During one such conversation, Mr Kull said to Mr Wright words to the following effect:’
‘I want a new company formed in which I will have a 50% ownership. My involvement in that company is however to be limited. Board meetings should be held monthly at which I will want to review all new clients prior to the new company undertaking any factoring for them. At each board meeting I also wish to be able to see financial information as to the trading of the previous month. The moneys which I invest in that company are to be secured by a charge on the company that is created. Such moneys are to be treated as a loan to the company for which I will receive interest.’
18 Subsequently, Mr Kull agreed in principle with Mr Wright, that capital invested in the new company by Mr Wright or Mr Kull would receive interest at a rate of 7% above the Westpac Indicator Rate and that this would be paid monthly on all such loan money. Any further earnings from the company were to be paid as a year end dividend, based on previous financial years profit and loss. No directors’ salaries were to be paid. [The Joint Venture Agreement and the amendments to this Agreement are referred to below.]
19 During the conversations which Mr Kull had with Mr Wright, Mr Wright said to Mr Kull words to the following effect:
‘The new company will operate the same way as COD Factors. I will provide the management services for the new company and will have overall control of the operation of the new company. I will also have sole responsibility to market the company and obtain new clients. I will want to be paid a minimum monthly retainer plus a bonus fee for my services. The bonus fee is to be calculated on all fees received from clients over the previous month. I am also to be reimbursed for my mobile phone expenses and motor vehicle expenses.20 Mr Kull’s negotiations with Mr Wright, culminated in an agreement to form a new company and in due course CODFA was, on 26 June 1991, registered with the Australian Securities Commission. Mr Kull was appointed secretary and director of CODFA and Mr Peter Wright was appointed director.
Ed Walters and Lynette Walters will continue to provide accounting, banking, administrative and secretarial services to the new company.’
CODFA is Formed
Banking Arrangements
21 In early July 1991, Mr Wright and Mr Kull attended Barclay’s Bank at its Blacktown Branch where they opened an account for CODFA. On about 20 July 1991, Mr Wright and Mr Kull also signed a banking agreement in respect of the receipt by Barclay’s Bank of cheques made out to payees other than CODFA, which might be deposited into CODFA’s account.
22 Barclay’s Bank also required each client of CODFA to provide Barclay’s Bank with a letter on the client’s letterhead which stated that CODFA had power to bank cheques into CODFA’s account, even though the payee on that cheque was not in the name of CODFA. This was a requirement that was to be adhered to in relation to all of CODFA’s clients. To Mr Kull’s knowledge, this occurred with a number of particular CODFA clients.
23 The signatories to Barclay’s account were Mr Wright, Mr Walters and Mr Kull. Two signatories were required for cheques.
24 Mr Kull’s understanding was that Barclay’s Bank had become St George Bank in 1995.
Joint Venture Agreement
25 On or about 1 August 1991, a Joint Venture Agreement was entered into between Mr Kull, Kylon, Mr Wright, Factors and CODFA. The agreement which is appended as Appendix 1, sets out the roles of Mr Wright, Factors, Kylon and Mr Kull, and sets out the basis upon which CODFA was to operate.
26 Factors contracted with CODFA to provide managerial services which in turn were to be provided by Mr Wright.
27 The agreement as to Walters and Associates, who were to be the accountants for CODFA, is provided for in paragraph 18 of the Joint Venture Agreement.
28 Following execution of the Joint Venture Agreement, CODFA began trading and effect was given to the Joint Venture Agreement. In particular, Factors provided the services of Peter Wright to CODFA to undertake the management of CODFA.
29 For this, Factors rendered accounts to CODFA which were presented for payment at monthly meetings of CODFA. Mr Kull would sign cheques for the payment of Factors’ invoices at the monthly meetings.
30 The Joint Venture Agreement was subsequently amended on 3 June 1992 and 30 June 1993.
31 CODFA gave a charge in favour of Kylon on 21 August 1991. It was registered on 19 September 1991.
32 Kylon commenced from 5 July 1991 to advance funds to CODFA. When CODFA obtained more clients, Kylon advanced more funds to CODFA.
Records of CODFA - Office Set-up - Factoring Procedure
33 CODFA maintained from the outset of business, a computer system which recorded all ledgers, payments received, debtors of clients and other financial records. It also maintained documents as follows:
. First Schedules (a listing of invoices attached to factoring agreements)34 Mr Kull gave evidence as to his detailed observations as to the office layout and personnel at the Beverley Hills office during the period 1991 until about August 1996. Mrs Walters apparently had a position behind the front desk. There was an office boardroom. There was one partitioned space which became the office of Mr Royce Burkett, who also was at one time a party to these proceedings, and who traded as ‘Royce Burkett and Associates’. There was Mr Walters’ office and an office of Mr Wright. The keys to the office were held by Mr Walters and Mr Wright. A coded alarm system was also installed in the office.
. Folders which contained correspondence and copies of legal documentation between CODFA and it’s clients.
. Folders which contained monthly summaries for each client.
. Historical First Schedules and hard copies of historical financial records.
. Cheque books, bank statements and hard copies of ledger accounts.
. The Joint Venture Agreement between Kylon, Mr Wright, Factors, CODFA and Mr Kull.
. Bank deposit slip books.
35 Mr Kull gave a detailed statement as to his observation of the procedure for factoring with clients of CODFA. This involved Peter Wright contacting prospective clients or vice versa in person and by telephone and discussing with them the terms of factoring. Mr Wright requested from clients some security for any money advanced to clients. Such security included a first or second mortgage on property of the client or a charge on book debts.
36 Mr Wright discussed with Mr Kull either at monthly meetings or by telephone, the prospective client and security offered by that client for moneys advanced. Mr Wright and Mr Kull discussed and determined whether to factor or not factor with the particular client before advancing funds.
37 A factoring deed would then be prepared by CODFA’s solicitors and this document, once finalised, would be executed by CODFA and the client. Any documents for the security obtained from the client were also to be executed at that time.
38 The factoring deed set out the obligations of both CODFA and the client and contained a copy of a letter which was required to be completed by the client on the client’s letterhead, advising CODFA’s bank to accept payment into CODFA’s account of cheques made out to the client. The factoring deed also contained blank First Schedules.
39 First Schedules were to be completed by the client and these set out the invoices of the client which the client wanted to have factored. Invoices which were to be factored were to be attached at the back of the First Schedule and forwarded by mail or couriered to CODFA.
40 From the total amount of invoices, Mr Walters would then subtract both a debit retention amount which was usually 20% of the total amount of invoices to be factored, and CODFA’s factoring fee. This adjusted amount was then paid to the client.
41 Most First Schedules to Mr Kull’s recollection, were for monthly periods although some were weekly.
42 CODFA would normally require that all invoices that were factored be paid within sixty days. If all moneys were not received within sixty days, CODFA would require any amount unpaid to be paid by the client or that unpaid invoices be refactored and a credit retention amount created which would have to be paid by the client or alternatively, the client would have to issue CODFA with new invoices for this amount.
The Roles of Mr Wright, Mr and Mrs Walters and Mr Kull
43 Mr Kull gave evidence that from the start of trading of CODFA in August 1991, Mr Wright held the position of managing director of CODFA. Mr Kull gave evidence that from the start of trading of CODFA, he observed Mr Wright perform various tasks including the following tasks:
. Talking on the phone with prospective and existing clients, including negotiating security and factoring arrangements with new clients, and discussing problems with existing client accounts such as outstanding debtors.44 Mr Kull’s evidence was that his role in CODFA involved an attendance at monthly board meetings at which time he was briefed about new clients and reviewed financial information from the previous month which was prepared by Mr Walters. Mr Wright occasionally contacted Mr Kull between board meetings to discuss various matters. Mr Kull also attended the office and assisted in the installation and operation of a new computer system.
. Signing cheques which Mr Walters had prepared.
. Talking on the phone with CODFA solicitors in order to arrange new factoring agreements or obtaining security from clients.
. Attending at monthly board meetings and signing any minutes from such meetings.
45 From the start of trading of CODFA, Mr Kull observed Mr Walters perform the following tasks at CODFA’s offices:
. Entering information into the computer, relating to CODFA’s ledger accounts.46 Mr Kull saw Mrs Walters on most days that he attended the office. From the start of trading at CODFA, he observed Mrs Walters performing various tasks including answering telephone calls, transferring telephone calls or leaving messages; opening mail and attending at the post office to send out mail; recording receipt of cheques by entering the fact that such receipts had been received into the computer for each debtor ledger of the client that the cheque related to, and printing out a journal of receipts for each client and faxing them to the client.
. Preparing reports which Mr Walters provided at monthly board meetings, including a trial balance of all debtors, this being an aged trial balance for clients’ debtors which indicated if debtors were over 90 days, details of receipts and fees from all clients, and profit and loss reports and balance sheets for each previous month.
. Drawing and signing cheques on behalf of CODFA in relation to St George bank account No. 100170533 and later a Burkett account No. 10020185 held at the Commonwealth Bank of Australia and CODFA’s CBA account No. 10026675. The cheques which Mr Walters prepared, were for the following purposes:
(i) payments to clients of CODFA,. Talking to clients on the telephone in relation to the repayment of advances to clients.
(ii) payments of interest on CODFA loan accounts,
(iii) payment of dividends by CODFA on year end Profit and Loss,
(iv) payment to Dubois and Walters Pty Limited and to Walters and Associates for services provided,
(v) employee wages,
(vi) other miscellaneous expenses.
. Checking First Schedules received from clients and making adjustments on the amount on the First Schedule for debit retention and factoring fees charged by CODFA.
. Telephoning CODFA’s banks to determine what cheques had been presented and deposits cleared on the previous day so as to determine a daily balance on CODFA’s account.
. Typing out letters to prospective clients which referred to the terms and conditions of CODFA’s factoring.
. Preparing any minutes of meetings for monthly board meetings.
47 Mr Kull also observed Mrs Walters typing up letters for CODFA and photocopying for CODFA. He also observed Mrs Walters writing up CODFA’s bank deposit books and leaving the office with those books and cheques enclosed.
48 On several occasions, Mr Kull heard Mrs Walters say to Mr Walters and to Mr Wright and himself during monthly meetings, that she was going home at the time and would do the banking on the way home.
49 Mr Kull gave evidence that Mr and Mrs Walters rendered to CODFA invoices for the accounting, administrative, banking and secretarial work undertaken by them. These invoices were initially in the name of Dubois & Walters Pty Limited, but from about October 1993, were in the name of Walters & Associates. [I interpolate that Walters & Associates is a business name, the proprietors of which are Mr Edmund Walters and Mrs Walters. I interpolate also that a company search of Dubois & Walters Pty Limited showed that Mr and Mrs Walters were directors of that company.] The invoices were issued monthly and the amount payable was based on a fixed percentage of factoring fees received by CODFA over the previous month, as well as an extra amount based on an hourly rate for the preparation of reports for clients which CODFA would charge to the clients.
50 The invoices were presented at monthly meetings and Mr Kull signed a cheque for the invoice amount.
51 In about June 1993, the clients of Factors were assigned to CODFA. [See the Deed of Variation dated 30 June 1993]. At about this time, Mr Wright said to Mr Kull: “From 30 June 1993 I’ll transfer COD Factors’ clients over to CODFA”.
52 The pay-out figure of Factors’ clients which is equivalent to the invoice amount on current First Schedules, less debit retention and factoring fees, was treated as a loan from Factors to CODFA.
53 In about December 1992, Mr Wright and Mr Kull had a discussion when Mr Wright said: “We need someone to act as company secretary who is available at any time. You are only in the office to sign documents and cheques once a month at board meetings, so it would be better if we had someone who works in the office. Ed Walters could become the secretary. He is in the office at all times and he can help me sign documents”.
54 Mr Kull then agreed with Mr Wright to have Mr Walters made secretary of CODFA jointly with himself. Mr Walters was appointed secretary of CODFA on 17 December 1992.
55 All cheques of CODFA had to be signed by any two of the office holders of CODFA. Mr Kull observed on several occasions that Mr Walters brought to Mr Wright cheques that Mr Walters had prepared for Mr Wright to sign. Details on the cheques included the payee and the amount.
56 Mr Wright either signed the cheque at that time or signed it later and returned it to Mr Walters. Some of the cheques signed by Mr Wright had First Schedules attached and some did not.
57 Mr Kull would sign CODFA cheques when he attended at monthly board meetings. Cheques which he signed included those relating to payment of loan interest and dividends to Kylon and Factors, payment of monthly management fees to Factors, payment to Dubois & Walters Pty Limited and later Walters & Associates for the service fees of Mr and Mrs Walters, and payments to clients.
The Involvement of Mr and Mrs Burkett
58 In about 1994, CODFA required further loan funds to meet the factoring requirements of its clients. At that time, Mr Wright and Mr Walters approached Mr Burkett for such funds.
59 On 11 July 1994, a Loan Agreement was executed between Mr Royce Burkett and Mrs Penelope Burkett and CODFA which created an overdraft facility for the use of CODFA, secured by a charge over the company. The agreement was varied two years later. The initial Deed of Loan was dated 11 July 1994 and an initial Deed of Equitable Charge was executed, dated 11 July 1994 [PXC B16-35]. Later a Deed of Variation of Loan dated 11 July 1996 was entered into [PXC B36-38].
60 The overdraft facility was with the Commonwealth Bank of Australia in the name of Royce and Penelope Burkett account No. 10020185. For this facility, CODFA paid the Burketts $600 per month and also paid to the CBA, any interest costs on the overdraft facility. In September 1996, the payment to the Burketts for the use of their overdraft facility was decreased from $600 to $500.
61 The signatories to this account were Mr Walters, Mr Burkett and Mrs Burkett. Two signatories were required for cheques.
Creation of Cashflow Finance Pty Limited
62 In about June 1994, Mr Kull became aware that Mr Wright had advertised for new investors to invest in factoring. At about that time, Mr Wright had a conversation with Mr Kull, in which words to the following effect were said:
‘Mr Wright: I have found new investors to put in money for factoring. I will create a new factoring company to generate new business with this money. The new company can operate from these offices. I will manage the new company and Ed Walters will provide accounting and financial services.63 Cashflow was registered on 29 June 1994.
Mr Kull: I want any new investor to place funds into CODFA . . . in order to avoid a conflict of interest between any other company and CODFA in relation to CODFA’s current and future client base.
Mr Wright: I don’t agree to that.
Mr Kull: I want CODFA to have first choice of any new clients.
Mr Wright: I’ll have to discuss that with Tony Bonvino.’
64 On 8 December 1994, Mr Bonvino and Mr Wright signed a minute of meeting that CODFA was to have the first option of any new factoring clients.
The Relationship Between CODFA and Cashflow
65 In or about July 1994, Mr Kull had discussions with Mr Wright in relation to the sharing of office expenses between Cashflow and CODFA. In one such conversation, words to the following effect were said:
‘Mr Kull: We need to work out a method for Cashflow to pay for office expenses such as rent and electricity and other expenses such as advertising, computer costs, staff costs and your car and telephone expenses.66 Mr Kull agreed to this. This method of sharing expenses was maintained up until Mr Star was appointed as provisional liquidator of Cashflow in September 1996. A similar arrangement had previously been in place between CODFA and Factors before Factors transferred its clients to CODFA.
Mr Wright: Office expenses can be apportioned based on fees received by CODFA and Cashflow during the previous month. Whomever receives more fees pays more expenses.’
67 From the time of Cashflow’s creation, Mr Wright as managing director, shared his time between CODFA and Cashflow. On several occasions when Mr Kull attended the offices of CODFA, he overhead Mr Walters say to Mr Wright that there was a phone call for him and he heard Mr Walters name that person; although Mr Kull could not recall the specific name any longer he recognised that the person was not a client nor representative of any client of CODFA. Mr Wright, to Mr Kull’s recollection, would on most occasions, speak to these persons whilst Mr Kull was present. Mr Kull also overhead on several occasions Mr Walters say to Mr Wright words to the effect: “Tony Bonvino is on the phone for you”. Mr Wright would then answer the telephone call.
68 After Cashflow commenced business, Mr Wright’s management fees for work performed on behalf of CODFA, remained at 5% of fees earned by CODFA during the previous month.
69 Mr Walters shared his time between Cashflow and CODFA. It was Mr Kull’s understanding that the work Mr Walters undertook for both companies was similar in terms of the provision of accounting and financial services and the preparing of monthly reports for review by Cashflow directors at monthly board meetings. Mr Kull observed Mr Walters preparing cheques in Cashflow’s Westpac account cheque book which Mr Walters would give to Mr Wright to sign. Mr Walters would also prepare a monthly invoice of fees payable to CODFA from Cashflow for office expenses, based on the fee sharing arrangement to which I have referred.
70 First Schedules relating to Cashflow’s clients, to the best of Mr Kull’s recollection, were held in a cabinet in the office space across from the office of Mr Walters and Mr Wright.
71 Mr Kull did not meet the effective majority shareholder of Cashflow, Mr Bonvino, until about September 1994. Mr Kull had had no role in the running or operations of Cashflow.
72 In about September 1994, CODFA required further loan money in order to factor outstanding invoices of it’s client, Amber Technology Pty Limited [‘Amber Technology’]. At about this time, Mr Wright and Mr Kull had a conversation to the following effect:
‘Mr Wright: I can speak to Tony Bonvino about getting money from Cashflow at an appropriate interest rate.73 CODFA then borrowed $170,000 from Cashflow at an interest rate of 3.5% per month which was the equivalent of fees that would be earned on the factoring of such moneys. An agreement was signed by Mr Wright, Mr Bonvino and Mr Kull which is undated. It reads, inter alia:
Mr Kull: We should pay interest on such moneys at a rate equivalent to what Cashflow would be earning on those moneys if they were using those moneys for factoring with their clients.’
‘Further to our most recent discussions we now confirm our offer to transfer all the rights and title of our factoring client AMBER TECHNOLOGY PTY LTD upon the receipt of the payout owing to C.O.D. FACTORS AUSTRALIA PTY LTD.74 The amount was repaid with interest within two months.
It is further agreed that you will make funds available to C.O.D. FACTORS AUSTRALIA PTY LTD upon receipt of this letter, so that it may factor the gross outstanding invoices of Amber Technology Pty Ltd in the amount of $220,000 (requiring $150,000) prior to transfer.
INTEREST ON LOAN FUNDS
We will pay interest equal to 3.5% per month calculated on daily rest. This interest is payable on changeover settlement.
We make this offer in good faith and without reservation.’
75 At no other time was Mr Kull asked to sign a document authorising any other loan of moneys between CODFA and Cashflow, nor was he told of any other loan between CODFA and Cashflow. Until 12 August 1996, the only inter-company exchange of funds of which he was aware, was the loan of $170,000 referred to above. Nothing regarding any such exchange of funds was raised for discussion in the monthly meetings.
76 In about September 1994, Amber Technology ceased to be a client of CODFA and became a client of Cashflow.
77 In about February 1996, Mr Wright and Mr Kull attended at the Beverley Hills Branch of the CBA and opened account no. 10026675 on behalf of CODFA. Most of the bank deposits and withdrawals of CODFA after this date occurred from this account. The signatories to this CBA account were Mr Wright, Mr Walters and Mr Kull. Any two signatures were required for cheques to be met by the bank.
78 In the months leading up to 12 August 1996, Mr Walters started to be late in providing, and for the month of June failed to provide altogether, monthly client aged ledgers and financial information in respect of CODFA’s performance over the previous month. At a board meeting in about April 1996, Mr Kull had a discussion with Mr Walters to the following effect:
‘Mr Kull: Ed, why are you continually late in providing reports as to client aged debtors and as to the previous month’s financial performance of CODFA?79 The issue of precisely what was said on 12 August 1996 when a meeting took place at the offices of the two companies, attended by Mr Wright, Mr Walters and Mr Bonvino, requires close attention to the two versions of the events respectively given by Mr Kull and by Mr Bonvino.
Mr Walters: I am very busy at the moment.
Mr Kull: When will we have them?
Mr Walters: In a few weeks.’
Discovery of Transfer of Moneys - The 12 August 1996 Meeting
80 In paragraph 51 of Mr Kull’s statement of 14 April 1998, he stated that at the meeting Mr Walters had said:
‘I have transferred moneys between CODFA and Cashflow for the purpose of Cashflow’s factoring with it’s clients. The net result of the transfer of moneys is that $180,000 is owed by Cashflow to CODFA. I have also advanced funds to Trans-pac Australia Pty Limited directly out of CODFA’s account with the CBA.’
81 In his statement, Mr Kull also said that Mr Walters then presented a handwritten list of electronic transactions between May and August 1996 which showed that money had been transferred from CODFA to Trans-pac Australia Pty Limited. Mr Kull referred to the handwritten list of transactions prepared by Mr Walters and annexed to his statement a copy of that document and said in his statement that Trans-pac Australia Pty Limited to his knowledge was not a client of CODFA.
82 The electronic transfers occurred out of the CBA account no. 10026675. The recovery of such transfers is the subject of separate proceedings in the Supreme Court, Equity Division - 2045 of 1997.
83 Mr Bonvino in his affidavit of 27 April 1998, gave evidence as to his recollection of the same meeting. His evidence was that he had met Mr Wright and Mr Walters prior to meeting Mr Kull. His further evidence was that at the meeting at which all four were present, Mr Walters said:
‘[Tony, I worked on this all week-end.] Here is a P&L and trial balance. You have found me out finally. You know that it will never balance because what you want, I can’t give you. I have been lying and deceitful for the past year and a half at least. [I altered the Trans-pac ledger at the end of last year by putting a journal entry of $140,000 as a receipt from Trans-pac when in essence this did not happen]. Since then, I have made advances to Trans-pac without completing First Schedules and without following procedures. [I think you are going to be missing $1.16million and at the same time] COD Australia is missing about $460,000.’ [emphasis added?]
84 Mr Bonvino in the same affidavit also gave evidence that upon hearing Mr Walters’ statements, he became extremely upset as he understood that what Mr Walters was telling him was that the ‘profit’ which had been declared at the end of the 30 June 1995 financial year, should not have been declared, and that Cashflow may well have suffered a loss depending on the collectability of the advances made to Trans-pac No 1.
85 Mr Bonvino’s evidence in his affidavit was that after he calmed down he said to Mr Walters and to Mr Wright “I don’t understand this. I gave you both strict instructions that you should not advance Trans-pac any funds without proper procedures being followed. As far as I am concerned you are both accountable for this. You both have deceived me and I’m taking control of Cashflow to try and sort out this mess.”
86 Mr Bonvino in his affidavit then gave evidence that he said to Mr Walters “Show me every transaction which has occurred between Cashflow and Trans-pac” and that he had selected Trans-pac because Mr Walters had said to him “All the problems are in Trans-pac’s accounts”.
87 Mr Bonvino had in the same affidavit denied that the conversation at which he was present, was to the effect set out in paragraph 51 of Mr Kull’s statement.
88 Mr Bonvino was not cross-examined on this denial.
89 In the course of being cross-examined by Mr Campbell QC, Mr Bonvino’s version of the conversation which took place at the meeting on 12 August 1996 was put to Mr Kull. He accepted a deal of Mr Bonvino’s version of what Mr Walters had said. I have caused to be underlined in paragraph 83 above those sections of Mr Walters’ statements at the meeting which Mr Bonvino had sworn had been said and which Mr Kull agreed had been said. I have also marked in square brackets in paragraph 83 above, those sections of Mr Bonvino’s evidence as to what Mr Walters said which Mr Kull could not recall having been said or could not recall all of the detail suggested. [See transcript 18-3-1999 pages 33-35]
90 Also under cross-examination, Mr Campbell put to Mr Kull that he had been booked to leave Australia on a fairly lengthy overseas holiday and to leave on 17 August 1996 so that during the days immediately before that departure date, he was quite busy with preparing for his overseas trip. Mr Kull accepted that this was correct.
91 At transcript page 34, on 18 March 1999, the following evidence was given by Mr Kull under cross-examination:
‘Q. Now, could I suggest to you that it was only after your return from overseas that you found out about the unauthorised loans that Mr Walters had been making from Cashflow to CODFA and back again?92 In re-examination, Mr Lindsay took Mr Kull back to paragraph 51 of his witness statement of 15 April 1998 and the following evidence was given:
A. That is right yes. . . .’
‘Q. I just want to clear up what may be a discrepancy in that statement. Do you say that on 12 August 1996 Mr Walters made some comment about inter-company money transfers between CODFA and Cashflow, see that?93 In those circumstances, an issue is raised as between the evidence of Mr Kull and that of Mr Bonvino on whether or not information about the Walters’ Unauthorised Payments, in the sense of the inter-company money transfers, was given on 12 August 1996. To my mind, Mr Kull’s recollection has been shown under his cross-examination to be unclear and in the result, in my view, it is Mr Bonvino’s version of the events in question which is to be preferred. This is not to suggest that Mr Kull did anything otherwise than his best to recall the events in question. The fact is, however, that his recollection on this matter has been shown to be somewhat unclear under cross-examination and there being an issue about the matter, to my mind the probabilities favour Mr Bonvino’s recollections.
A. Yes I do.
Q. As I heard your evidence in answer to the questions from Mr Campbell, you suggested that you first heard about those transfers after you returned from overseas or returned from holidays, rather. Can you direct your mind as to the time . . .?
A. Now I am not too sure whether it was mentioned before I went but it certainly wasn’t the amount of money was talked about. It is a bit hard to remember how exactly whether it was before or after I came back.”
94 In about September 1996, Mr Walters gave Mr Kull a document, saying to him words to the effect: ‘Here’s a ledger I created which indicates the transactions between Cashflow and CODFA’.
95 The ledger recorded payments made between CODFA and Cashflow and from CODFA to Cashflow’s clients.
96 Later, on 12 August 1996, Mr Kull spoke with Mr Walters and words to the following effect were said:
‘Mr Kull: Why did you do it Ed, is there a reason?97 Sometime between 12 August and 17 August 1996, there was a meeting between Mr Walters, Mr Wright and Mr Kull. At that meeting, Mr Wright said to Mr Walters words to the effect:
Mr Walters: I don’t know why. I just did it. I know it was stupid.’
“Why did you give the money to Trans-pac, did you have any association with the Panayi?”98 In the days following 12 August 1996, Mr Bonvino and Mr Walters worked at the offices of CODFA in order to reconstruct the transactions that had occurred between CODFA and Cashflow and Cashflow clients. At this time, Mr Bonvino said to Mr Kull that he wanted to get to the bottom of the transactions and wanted to track the paperwork.
Mr Walters replied: “I received no personal benefit at all: I don’t know why I did it.”
99 A few days later, Mr Bonvino told Mr Kull that he had gone through all the transactions, cheque butts, statements, printed ledgers and checked the deposit books to reconstruct who had received what funds.
100 On about 17 August 1996, Mr Kull went overseas for approximately one month and during that period of time he appointed his son-in-law, Mr Poggi as an alternative director and as his representative by Power of Attorney.
101 On 21 August 1996, Mr Walters resigned as secretary of Cashflow and as secretary of CODFA.
102 In late August 1996, CODFA employed Mr Russell Johnson of Adair Management Services, to undertake work that had previously been done by Mr Walters. On 29 August 1996, Mr Johnson was appointed secretary of CODFA.
103 From August 1996 to October 1996, Mr Walters remained at CODFA to assist Mr Johnson to learn the standard procedures and computer systems at CODFA. In approximately October 1996, Mr Walters stopped working at the offices of CODFA.
104 When Mr Kull returned from overseas in about late September 1996, he was informed by Mr Wright and Mr Poggi of the appointment of Mr Star as the provisional liquidator of Cashflow on 12 September 1996, on the application of Pyrafount by summons.
105 Mr Kull had several conversations with Mr Wright at this time, including a conversation in which the following was said:
‘Mr Kull: Why did you sign all the cheques Peter when they were for Cashflow’s clients or for Cashflow?106 On about 25 September 1996, Mr Wright on behalf of CODFA, requested copies of CODFA cheques paid from the St George bank account which related to the payment of moneys to Cashflow and its clients. These cheques are detailed in schedule 1 to the amended statement of claim in proceedings 50177 of 1997.
Mr Wright: I would sign anything in front of me that had a schedule with it but I would not sign blank cheques, cheques made out with no amount or no payees. I don’t think I signed cheques for Cashflow clients.’
107 On about 23 and 30 October 1996, Mr Wright and Mr Kull on behalf of CODFA, signed two surrender of paid cheques agreements with St George Bank.
108 During the period September 1996 to about January 1997, Mr Kull had several conversations with the St George Bank Manager at the Parramatta Branch, Mr David Rollo and an employee at that branch whom he knew. During such conversations, he repeatedly requested copies of cheques paid from CODFA’s accounts cleared at that Bank. In about January 1997, CODFA received copies of cheques requested from St George.
109 On about 25 September, 1996, Mr Johnson on behalf of CODFA, requested from the CBA, copies of CODFA cheques paid from the CBA account which related to the payment of moneys to Cashflow and its clients. These cheques are also detailed in schedule 1 to the amended statement of claim in proceedings 50177 of 1997.
110 On about 7 November 1996, Mr Burkett requested from the CBA, copies of Burkett account no. 10020185 cheques which related to the payment of moneys to Cashflow and it’s clients. These cheques are also detailed in schedule 1.
111 Cheques which were not located by the St George Bank for CODFA’s account and the CBA Burkett account, were cheques numbered 2044, 6924, 6925 and 0029.
112 The signatures of both Mr Walters and Mr Wright appeared on a number of the cheques. These are identified in paragraph 70 of Mr Kull’s statement of 14 April 1998.
113 Mr Kull then had a conversation with Mr Wright in which he referred to these cheques and said:
‘Peter, these cheques show that you signed them.114 In the course of the evidence, paragraph 74 of Mr Kull’s first statement of 14 April 1998 was pressed and read only against parties otherwise than Cashflow. Paragraph 74 was in the following terms:
Mr Wright responded: I can see that I have signed them but I cannot explain why I did so and I did not sign blank cheques.’
‘In or about September 1997, Edmund Walters, Peter Wright and myself had a meeting. At this meeting Mr Walters produced a one page summary which indicated fees received by Cashflow from Trans-pac Container Freight Services Pty Limited between the period September 1994 and September 1996. . . . A conversation ensued with words to the following effect:115 During the period from about October 1996 until January 1997, Mr Kull reviewed copies of cheques drawn on the CODFA’s bank accounts with the St George Bank and the CBA and also the Burkett accounts. At the same time, Mr Kull reviewed the schedule of unauthorised movement of funds between CODFA, Cashflow and clients of Cashflow which had been prepared for CODFA by Mr Graham Green.
Edmund Walters: “I prepared this sheet based on the list of transactions between Cashflow and Trans-pac Container Freight Services Pty Limited that has been supplied by John Star. It reconciles and summarises such amounts between September 1994 and September 1996. This sheet shows that Cashflow received money from Trans-pac Container Freight Services Pty Limited up until the last six months of transactions between the two companies. Cashflow definitely profited up to February 1996.”
Mr Wright: “Why did you make payments from the CODFA accounts to Trans-pac?”
Mr Walters: “There was no good reason to make payments from the CODFA account to Trans-pac.”
116 Mr Kull observed that the signatures of Mr Walters and Mr Wright appeared on a number of cheques which he identifies in paragraph 76 of his statement of 14 April 1998.
117 Mr Kull had no prior knowledge that any of those cheques had been drawn, signed and given to the respective bearers for payment and Mr Kull did not at the time or subsequently, authorise any of the payments.
118 Mr Kull also observed that the signatures of Mr Walters and Mr Burkett appeared on the four cheques identified in paragraph 77 of his said statement. Mr Kull had no prior knowledge that any of these cheques had been drawn, signed and given to Cashflow for payment and did not, at the time or subsequently, authorise any of those payments.
119 As to cheque numbers 6450, 0161 and 0214, Mr Kull gave evidence that they had been signed only by Mr Walters and that Mr Kull had no prior knowledge that any of those cheques had been drawn, signed and given to Cashflow for payment. His evidence was that he did not, at the time nor subsequently, authorise any of those payments.
120 Mr Kull also ascertained that three electronic fund transfers were made out of the CBA account to clients of Cashflow. He details those transfers in paragraph 79 of his said statement. He gave evidence that he had no prior knowledge of any of those payments and did not at the time or subsequently authorise any of those payments.
121 Mr Kull also gave evidence that he had seen copies of two cheques written to clients of CODFA which were in fact paid to Cashflow. His evidence was that he observed that those two cheques had been crossed and marked ‘not negotiable’. Neither the front nor the back of either cheque contained any writing or marking that would indicate that the cheque had been endorsed in favour of another party.
122 The detail of those two cheques is identified in paragraph 80 of Mr Kull’s said statement.
123 Mr Kull reviewed bank statements for CODFA’s St George Bank account and Cashflow’s Westpac account as well. Copies of those bank statements are identified in paragraph 81 of Mr Kull’s said statement. Mr Kull’s evidence was that he observed that on 17 August 1995, CODFA’s account had been debited in the amount of $30,000 through payment of cheque number 6549. He also observed that on 17 August 1995, Cashflow’s account had been credited with $30,000. He observed that on 18 August 1995, CODFA’s account had been debited in the sum of $50,000 through payment of cheque number 6545. He also observed that on 18 August 1995, Cashflow’s account had been credited with $50,000.
124 Mr Kull gave evidence that he had become aware that deposits had been made into CODFA’s accounts which were not from clients of CODFA nor were from moneys received in the ordinary course of CODFA’s business. He referred in that regard to the schedule of unauthorised movement of funds prepared by Mr Graham Green and identified in paragraph 82 of Mr Kull’s statement. A number of those payments are referred to in paragraphs 10(a) and 10(b) in the second cross-claim in proceedings 50111 of 1997. Mr Kull’s evidence was that he did not at the time that those deposits were made, nor subsequently, authorise those deposits to be made.
Evidence of Mr Bonvino
125 Mr Bonvino’s mid-1994 response to the advertisement referred to in paragraph 7 has already been referred to. It is appropriate to now set out in more detail certain of Mr Bonvino’s evidence as to the events thereafter.
Early Meetings
126 A few days after the advertisement, Mr Bonvino met with Mr Wright at the Beverley Hills office to which I have referred. As earlier stated, at this time, this was the office of both Factors and CODFA. At the meeting, Mr Wright told Mr Bonvino about his qualifications and experience and handed to him a brochure relating to Factors. The brochure presented Factors as ‘the business finance specialists’ and was directed to persons or businesses with a cash flow problem entitled ‘Survival in the ‘90s - Cashflow - Run your business on C.O.D.’.
127 At the same time, Mr Wright handed to Mr Bonvino a document entitled ‘Company and Management’s History’, dealing with Factors which presented the business of Factors as ten years of successful profitable trading. Factors was said to provide debt factoring finance for small to medium sized businesses which are profitable and backed by a reasonable level of assets.
128 CODFA was referred to in the following terms:
‘Owing to the significant demand for our services another company known as [CODFA] was formed in 1991. [CODFA] was formed by the founding director, Peter Wright together with a financing equity partner. As the financial statements record this company has enjoyed exceptional growth and profitability under the control and guidance of the founding Managing Director. Once again, owing to the demand for our services [CODFA] has reached its projected budget limits and now seeks investment capital in order for the company to fulfil the demands of its expanding client base . . .’
129 During this meeting, Mr Wright said to Mr Bonvino words to the effect: ‘The business opportunity here is to provide the finance to enable another factoring business to start up. I am running an existing factoring business, and what I intend to do is to duplicate it as a separate entity, and run it here from my office. I have the accounting system all set up and we could just add another business to it. It would be no problem. Also, I have an excellent accountant, Ed Walters, who I have known for ten years, is honest, hard working and diligent. We have no problems in accommodating extra work’.
130 After considering the information made available to him at the meeting, Mr Bonvino a short time later again met Mr Wright at the Beverley Hills office. A conversation took place in which words to the following effect were said:
‘Mr Bonvino: I am in a position to be able to raise capital through my own efforts and also through my client base. I would seriously be interested in pursuing a partnership on the basis that I arrange for the finance and I would at all times have a controlling interest in the company because I would have the most to lose. Due to your experience, I would be happy to give you the day to day running of the operation for which you would be responsible and be paid for.131 All in all, Mr Bonvino held several meetings with Mr Wright following the date of the advertisement and before late June early July 1994. He had a number of conversations with Mr Wright at Mr Wright’s office at Beverley Hills. In each of those meetings, only he and Mr Wright attended although he was introduced on an early occasion to Mr Walters and spoke with Mr Walters on several occasions after that, mainly to obtain information. The conversations which Mr Bonvino was able to recollect were as follows:
Mr Wright: I would be happy to do it that way because I’m already doing it with another partner, but I don’t like giving you control, you could have a charge over the company instead.
Mr Bonvino: I would rather not muck around with a charge because it is a bit messy and I would rather have 51% of the company because it’s a lot neater.
Mr Wright: I will think about that. I understand that you want control because you are putting up all the money, but I will think about which alternative is better.’
(a) Mr Bonvino: “I want to find out how good your operation is, by you giving me your balance sheet and P and L for your existing company.’132 By the end of June or early July 1994, Mr Bonvino was feeling comfortable with the investment following those conversations. He believed that Mr Wright was a competent and experienced operator. He knew from his personal dealings with Mr Wright that Mr Wright was a good salesman and skilled at selling himself and his business. Mr Bonvino thought that Mr Wright would be very good at marketing and managing the business. The office at Beverley Hills appeared to be well run and was well presented. Mr Bonvino was impressed with the software package that was in place and the general day to day running of the operations. The financial records that had been provided to him were sound and he was also impressed with Mr Walters. He believed, as a result of the conversations he had held with Mr Wright, that there was very little risk, if any, in providing the funds for a factoring operation, operated along the lines explained by Mr Wright. He believed that potential customers were scrutinised carefully, debtors to be factored were checked, and that adequate security arrangements would be kept. Accordingly, Mr Bonvino decided to proceed and commence a new business with Mr Wright. He then held another meeting with Mr Wright in late June or early July 1995 in which words to the following effect were said:
Mr Wright: “I don’t have a problem with that as long as you keep it confidential”.
At that meeting, Mr Walters presented Mr Bonvino with a copy of the balance sheet and profit and loss statement of Factors and CODFA.
(b) Mr Bonvino: “I am very concerned about the funds that I would be putting in because they belong to friends and clients and I would to make sure that I have control otherwise I will not be comfortable about putting the money in.”
Mr Wright: “Yes, I understand your concern, we will work out a way to make sure you get control.”
(c) Mr Bonvino: “How is this going to be run?”
Mr Wright: “Don’t be concerned Tony, I have been doing this for ten years. I have a very good accountant in Ed Walters who helps me. His wife Lyn helps him. He works specifically for this operation only and does not do any outside work. You can rest assured that he is honest, hard working and reliable. I will do the marketing and liaise with and manage all new clients and instruct solicitors to get the factoring deeds in place. I will instruct Ed Walters and be responsible for him and Ed Walters will do all the data collection and processing. He will do a daily and report to me directly. We can have a board meeting every month to review performance and at that board meeting, we can arrange payment of my management fee for running the show, process fees for Ed Walters, and the interest payable to investors.”
Mr Bonvino: “The interest to investors has to be the priority.”
Mr Wright: “That’s okay, the investors will get paid first and Walters and I will get paid second.”
Mr Bonvino: “What are you getting at present for your managements?”
Mr Wright: “I am getting 5% of profits, and all overhead expenses are being covered by fees received. Five percent and overheads are paid monthly. At the end of the financial year, I pick up 50% of the profits as an extra bonus. Ed Walters gets about 10% of fees collected for data processing on a monthly basis.”
Mr Bonvino: “Well, I am happy with all of that if that is what you are getting at the moment, because you are running the show but interest to investors should be paid first. I would also be happy enough if I got my return on my investment at the end of the year, as I am not there day to day. I would want at least 50% of the profit.”
Mr Wright: “That’s okay because I have that arrangement with COD Factors Australia at present.”
(d) Mr Bonvino: “Explain to me how you put on a new client.”
Mr Wright: “Tony, I do extensive marketing by sending out brochures, advertising in yellow pages and Sydney Morning Herald. When we receive a response I interview the prospective client. I look at their business and check its profitability. If I decide to proceed with the factoring arrangement, it is always a condition that my company gets a charge over their company. If there is any available equity in property, I get a mortgage over that. Failing that, we start a security account, which builds up to 30% of the factoring pay-out as an extra security.
Mr Bonvino: “Does a security account mean that you put money in a separate bank account, and if you do, on what basis do you do it?”
Mr Wright: “Yes, that is what it is but what we do is that every time we factor, we take 5% and put it in the account. In other words, 5% of the advance gets placed into this account, and in view of the fact that we only advance 80% of the debtors, there is a security buffer of 25% when you put both together, when you first factor. However, we keep adding to the security account and eventually it builds up to 30%, so that overall, you have got a security buffer of 50%. I have been running COD Factors Australia for three years and I have never had a hiccup.”
Mr Bonvino: “When you have the prospective client, what do you do to get him on board?”
Mr Wright: “First of all, I get a $500 deposit to process him. This is not refundable and is paid to the solicitor to draw up the legal documents. I then send out a base proposal and a questionnaire to be completed giving information relating to personal and company assets. When this comes back, we look at them and if everything is okay we proceed to draw up a factoring deed and any security documents that go with it. We present the factoring deed and security documents to the prospective client and after they are reviewed by their solicitor, they are signed and then we are able to proceed. We never factor without entering into a factoring deed and proper security documents. Everything is checked by our solicitor and stamp duty is paid and where appropriate, security documents are registered. We do everything possible to protect your investment.”
Mr Bonvino: “I understand you are purchasing debtors but explain to me what procedures you adopt to safeguard and check that what we are purchasing is correct.”
Mr Wright: “The factoring deed has a schedule which is called the First Schedule. It is filled out by the client every time they factor any debts. The schedule sets out the total invoice value to be factored. The initial fee is deducted from that. We then take away our security which is the retention. What we do then is to forward to the customer the net value after those deductions. We never factor without the customer completing a First Schedule. Before we do that, we spot check the debtors we purchase to check the validity of them, and make sure they are collectible. In other words, they are not in dispute and there is no counter-claim. If we are taking extra security, we deduct 5% from the amount that we send to the customer. This is placed in a separate account. If we have a second mortgage over a property to at least 30% of the amount to be advanced, we do not deduct the extra security.”
Mr Bonvino: “What about collections?”
Mr Wright: “No worries, we have a trial balance with an ageing, and we do a monthly reconciliation with the client. Whenever the debt becomes 90 days or over, we sell it back to them but we still hold it as extra security. In other words, we are still able to collect it.”
Mr Bonvino: “That sounds very safe as long as it is followed, I don’t think I have a problem.”
Mr Wright: “We never operate outside the First Schedule to a factoring deed. We never move without it. If the client receives payment direct from a debtor and deposits that cheque into their account, we come down very hard on them and ask for an immediate reversal. It is part of the deed. Our deed is so powerful we can do whatever we like.”
Mr Bonvino: “I am impressed with everything you have told me and I am prepared to proceed, but only on the basis that I maintain control. In this regard, me or my nominees will require 51% of the company. You will get 49% on the basis of your marketing and management skills. The existing remuneration packages that you and Ed get at the moment are acceptable as well. It will be acceptable to me if the new company pays it’s share of the overhead expenses for the office. You and I will be directors.”133 At the same meeting, Mr Bonvino and Mr Wright decided upon the name ‘Cashflow Finance Pty Limited and selected a logo for their letterhead. The conversation continued:
Mr Wright: “I agree with all of that. Ed Walters can be company secretary because he is already doing it for COD Australia.”
Mr Bonvino: “I want to start off this partnership on the basis that it is fair and reasonable. I think it is fair that I should get 51% because I’m putting all the money in, but I would agree to the shareholdings being made 50% each, if you match my investment dollar for dollar.”
Mr Wright: “Okay, that’s fair. What sort of funds can you get?”
Mr Bonvino: “I shouldn’t have any problems getting $1million and probably I can get more as I have access to funds overseas.”
Mr Wright: “Tony, let’s start off with $1million and see where we go from there. I will go and market and work very hard and together I think we can make a lot of money.”
Mr Bonvino: “I will want interest on my injection of capital, quite apart from any dividends I get back as a shareholder. That’s fair because you are all getting fees.”134 Arrangements were then made for a company called COD Factors (No. 1) Pty Limited which Mr Wright already apparently held shares in, to change its name to Cashflow Finance Pty Limited. Shortly after this Mr Wright, Mr Walters and Mr Bonvino visited the Beverley Hills branch of Westpac Bank and opened an account in the name of Cashflow. There was a conversation at that time in which Mr Bonvino said in the presence of a person he understood to be the manager and in Mr Wright’s presence:
Mr Wright: “Okay we’ll give you an interest rate of 7% above the Westpac Indicator Lending Rate. This is the same rate paid by COD Australia.”
Mr Bonvino: “What would that be?”
Mr Wright: “About 16.75% at the moment. I will prepare something in writing just to confirm this side of it. You will get paid monthly.”
Mr Bonvino: “Okay.”
Cashflow is Acquired
“We will all be signatories on this account but I wish to maintain the ability to take control in the event that I am not comfortable with what’s happening with the company. Otherwise, any two signatures can sign.”135 Mr Wright admits in the pleadings that he was at all material times the managing director of Cashflow. [Defence to amended cross claim in proceedings 50177 of 1997]
Mr Wright said: “That’s acceptable.”
136 A notice of authority to that effect was then signed.
137 At that time, Mr Bonvino drew a cheque on Pyrafount’s account for $2,000 and Mr Wright drew a cheque on Factor’s account for $2,000 and they were deposited into Cashflow’s account to open the account. Mr Wright was reimbursed $740 for the purchase of the company. All funds advanced to Cashflow after those initial deposits were advanced by Mr Bonvino’s company, Pyrafount, apart from a deposit of $102,000 made by Mr Wright out of his profits of Cashflow advanced in late 1995 and early 1996.
138 Under cover of letter dated 19 September 1994, Mr Wright forwarded to Pyrafount, attention Mr Bonvino, a number of documents including a draft minute, reading:
‘These points have been agreed to and will take the form of minutes in place of a partnership agreement . . .139 Mr Bonvino gave evidence that the first client of Cashflow was Trans-pac Container Freight Services Pty Limited, referred to in this Judgment as ‘Trans-pac No. 1’ which is presently called Strathfield Information Processing Bureau Pty Limited. The client was sourced by Mr Wright and Mr Wright and Mr Walters brought the transaction to fruition. The evidence adduced included:
Cashflow Finance Pty Limited
Points of be covered in the minutes:
1. Interest to be paid on loan funds (not working capital accounts) at the rate of 7% above Westpac ILR (presently this would be 16.75%) with a ceiling of 20%.
2. Monthly payment of that loan fund interest.
3. Conditions of loan fund withdrawal (replacement investor/funds prior withdrawal).
4. Equal contribution of initial agreed working capital.
5. Opening of company interest bearing bank cheque account.
6. Signatories to bank account - Peter Wright, Antony Bonvino and Ed Walters (any two signatures).
7. Describe the formula for sharing overhead expenses (suggested that this be according to gross fees in each company) $22,000 was total expenses in COD Factors Australia Pty Limited in 1994.
8. All factoring proposals will be approved by both shareholders before acceptance.
9. Performance bonus payable to COD Factors Pty Limited be 5% of the gross fees.
10. Data processing fees payable to Walters & Associates be 10% of the gross fees.
11. Shareholdings to be 51% (Bonvino or nominee) 49% (Wright or nominee).’
Trans-pac No. 1
(a) Factoring deed dated 1 September 1994 between Trans-pac No 1 and Cashflow.140 Mr Bonvino gave evidence that initially, Cashflow adopted the practice of transferring 5% of cash advances to a security account in Trans-pac No.1’s name, but controlled by Cashflow, as an extra security over and above the factor debts. He gave evidence that sometime prior to 16 February 1995, he had a conversation with Mr Wright in which words to the following effect were said:
(b) Company charge dated 1 September 1994 between Trans-pac No 1 and Cashflow.
(c) Certificate of entry of charge with respect to the charge.
(d) Deed of guarantee and indemnity dated 1 September 1994 between Cashflow, Trans-pac No. 1 and Antony Attallah, Terry Panayi and Patricia Kyriacou.
(e) Deed of indemnity and guarantee dated 16 February 1995 between Cashflow, Trans-pac No. 1 and the persons named in the document as guarantors.
(f) Additional deed dated 16 February 1995 between Cashflow, Trans-pac No. 1 and Patricia Kyriacou.
(g) Mortgage dated 16 February 1995 between Cashflow as mortgagee and Peter and Elly Panayi as mortgagors.
(h) Mortgage dated 16 February 1995 between Cashflow as mortgagee and Terry and Patricia Panayi as mortgagors.
(i) Mortgage dated 16 February 1995 between Cashflow as mortgagee and Terry and Christopher Panayi as mortgagors.
Mr Wright: “Tony, the Trans-pac directors are unhappy that we are holding the 5% security deposit and they can’t use the money. They want to use the money and they have suggested that we take mortgages over their home as a substitute for the security account.”141 Cashflow made it’s first advance to Trans-Pac No. 1 of $147,409 on 1 September 1994 using funds advanced to it by Pyrafount. It was Mr Bonvino’s understanding from the conversations referred to above, that every time an advance was made to Trans-pac No. 1 by Cashflow under the factoring deed, a new First Schedule, completed in accordance with the example annexed to the factoring deed, would be completed.
Mr Bonvino: “How much equity is in the homes after first mortgages?”
Mr Wright: “About $600,000.”
Mr Bonvino: “Have you got a valuation done?”
Mr Wright: “I’ve sent the local agents to have a look and they say there’s no problem.”
Mr Bonvino: “Okay, sounds alright.”
142 After Trans-pac No. 1 became a client, Mr Wright invited Mr Bonvino to meet Mr Terry Barnes of Trans-Pac No. 1, who was one of the founding directors. The meeting was informal, Mr Barnes advised Mr Bonvino about the business of Trans-Pac No. 1 and its proposed sale to new owners. Mr Bonvino also held an informal meeting with the proposed purchasers of the business at the time, Peter and Terry Panayi. Mr Wright attended that meeting.
143 Mr Bonvino was never involved in the process of approving Trans-pac No. 1 as a client or reviewing the Trans-pac No. 1 account, until August 1996, in circumstances in respect of which he gave evidence. He did not see any financial accounts for Trans-pac No. 1 until he took control of the Trans-pac No. 1 file from the office in August 1996. He was not involved in the signing of the factoring deed. Both Mr Wright and Mr Walters signed factoring deeds and any other documents on behalf of Cashflow Finance.
144 Prior to 1 September 1994, Pyrafount advanced to Cashflow sufficient funds to make the advance of $147,409. When Cashflow needed to make an advance to a customer, Mr Bonvino received a phone call or a facsimile from Mr Wright. Mr Wright would say that he needed Mr Bonvino to make another deposit into Cashflow’s account and would give him the amount. Mr Wright would say: ‘this is for factoring for Trans-pac.’
145 If it was required for a different client, Mr Wright would then name that client. Mr Bonvino then arranged for a cheque to be drawn on Pyrafount’s account and for that cheque to be deposited into Cashflow’s account.
146 A copy of the loan agreement between Pyrafount and Cashflow was tendered in evidence. The agreement reads:
‘Whereas Pyrafount No. 3 Pty Limited will make loan advances to Cashflow Finance Pty Limited.147 The balance outstanding on the loan account as at 31 March 1998 was $1,640,175.80 on Mr Bonvino’s evidence.
These loan advances will attract an interest rate of 7% per annum in excess of the Westpac Banking Corporation indicator lending rate with a ceiling of 20% per annum.
Interest on these loan advances are payable monthly within seven days after the close of each business month.’
148 Mr Bonvino gave evidence that when Cashflow commenced to trade, he felt comfortable with the arrangements that he had made and was content for Mr Wright to market and manage the company and Walters & Associates to supply accounting services to Cashflow. He was very busy at this time himself, working as an authorised representative for a firm and did not have any time to spare to get involved in the day to day running of Cashflow. He held monthly meetings with Mr Wright and Mr Walters which would take place at the Beverley Hills office during the day. At these meetings, Mr Wright would report to Mr Bonvino as to the events which had taken place in the previous month and Mr Walters would present to him a monthly profit and loss statement for Cashflow, a monthly trial balance, a summary of debtors purchased and fees received from each client, and a trial balance showing the ageing of all debtors purchased for each client. These reports disclosed a favourable trading performance. At the end of twelve months the books of Cashflow indicated a total profit of approximately $157,000. Cashflow paid tax on this amount and dividends were issued approximately six months after the financial year of 30 June 1995. Later, Mr Bonvino learned that the accounts were in error and a profit should not have been declared.
149 Mr Bonvino gave evidence in relation to the profit and loss statement and balance sheet for the year ended 30 June 1995 in paragraph 17 of his statement of 27 April 1998.
150 During the twelve month period, Cashflow acquired a number of other clients and there was a turnover of clients who came and went as factoring arrangements began and finished. One of the clients obtained by Cashflow in this period was Amber Technology Pty Limited.
Causes for Concern come to Mr Bonvino’s Attention
151 Mr Bonvino gave evidence that after about twelve months, he started to notice certain matters which began to cause him concern. Previously, meetings had been held approximately on the 11th or 12th of each month, but after approximately a year of trading, the meetings were being held later and later in the month. This evidence mirrors precisely that which Mr Kull gave as to his experience. Mr Bonvino’s evidence was that Mr Walters was becoming very difficult to deal with and evaded questions and continually delayed holding the monthly board meetings. When Mr Bonvino would question Mr Walters about the delay in holding the meetings, the conversation generally was in words to the following effect:
Mr Walters: “Tony, you don’t understand what I’m doing. You simply don’t understand. It is very complex and I don’t have time to explain.”152 Mr Bonvino spoke to Mr Wright about these matters, the substance of the conversations being:
Mr Bonvino: “Well explain it to me. I have the time.”
Mr Walters: “I don’t have time Tony, you just wouldn’t understand it.”
Mr Bonvino: “I think Ed Walters’ behaviour towards me is unacceptable and I think he should be replaced by another accountant. He won’t explain things to me and I feel he is holding information close to his chest.”153 Mr Bonvino continued to be unhappy with the performance of Mr Walters and at his instigation, a meeting was arranged between himself, Mr Wright and Mr Kull. That meeting took place on Mr Bonvino’s recollection, on 24 October 1995. On Mr Bonvino’s evidence, Mr Kull said: “I am also unhappy with the performance of Ed” and Mr Bonvino had said:
Mr Wright: “Tony, don’t worry I have got it under control. He has been with me for so long he is just a bit unusual but he is honest and hardworking and I think we should keep him.”
“Okay so we are all agreed, we have identified all the issues where Walters is not performing and I will put these down in point form as a result of this meeting, and we will then hold directors’ meetings at which it will be resolved that Walters can continue with his administration duties provided he observes certain requirements which we have discussed today.”
154 Mr Bonvino did not notice any improvement in Mr Walters’ performance after the 24 October 1995 meeting and he arranged for a young accountant to apply for Mr Walters’ job. Both Mr Wright and Mr Walters rejected the accountant, Mr Walters saying that the accountant was not experienced or street-wise enough.
155 In December 1995, at the monthly meeting in respect of the performance of Cashflow for November, the following was said:
Mr Bonvino: “Our fees have gone down. There is a problem. We have more funds being worked but our fees have dropped. How can this happen. I want you to explain it to me.”156 After that meeting, Mr Bonvino used the existing monthly summaries which he held to reconstruct the fees which should have been received by Cashflow, in order to determine why the fees had dropped when the amount of funds advanced had increased. He noticed that Trans-pac 1 had been incorrectly charged and that an extra fee should have been payable by Trans-pac due to the ageing of debtors that had not been charged. He noticed that Cashflow had been making advances to Trans-pac 1 without receiving First Schedules from Trans-pac 1 as required under the factoring deed. Mr Walters, he noticed, had apparently adopted a practice of making the advance to Trans-pac 1 without a First Schedule and then waiting to the end of the month to determine the fee structure. This meant that Trans-pac 1 received an interest free period of time from the date of the advance to the end of the month. When Mr Bonvino asked Mr Walters for a copy of the First Schedule in respect of a number of advances to Trans-pac 1 Mr Walters replied: “I don’t have them all. I gave them advances and tried to reconcile at the end of the month.”
Mr Walters: “Tony, you have got no idea how these fees work and it is just too hard to explain it to you.”
Mr Bonvino: “Well I’m going to get to the bottom of this even if it kills me.”
157 Subsequently, Mr Bonvino arranged meetings with Mr Wright and Mr Walters at the Beverley Hills office. A meeting was held before Christmas 1995 at which Mr Bonvino demonstrated to Mr Walters how he had failed to charge the fee referred to above and after an initial period of argument, Mr Walters admitted that he had made a mistake and said he would fix it. Mr Bonvino said that he was extremely concerned that the factoring deed had not been observed by Cashflow. He said that he did not agree to the advance of any further funds to Trans-pac without a First Schedule and a summary of all the debtors that Cashflow was purchasing. He said, inter alia:
“That way, the fee structure will be maintained. Peter, it is your responsibility to make sure this happens. It is extremely important and must be observed. We must have First Schedules and the appropriate fees charged to the client. I want your undertaking on that. I want you to bring this account back into good order.”158 Mr Bonvino continued after that meeting to closely check the monthly summaries presented at subsequent monthly meetings and the fees were increasing and he was satisfied. He was not, however, satisfied with the total accountability of the trial balance. The trial balance did not break up the total advances made by Cashflow under factoring arrangements with different clients but simply presented a total figure. He found the trial balance very hard to reconcile because it was not possible to check off against individual client ledgers, the amount which had been advanced by the company overall. He raised that matter at a meeting in January 1996 with Mr Walters who then again said that it was very difficult to produce a total reconciliation of the trial balance as it all related to ageing of the debtors and depended on what point of the month one was in.
Mr Wright said: “Tony, we have got extra security and mortgages over the property. I accept your concern and I will make sure it happens that way. However, you should not be concerned because we hold approximately $600,000 in security over homes of Trans-pac directors and we wouldn’t release this until their account pay-out is received.”
Mr Bonvino said: “I want the same undertaking from you Ed.”
Mr Walters said: “Okay, from now on I will do it as you want.”
159 From time to time over the same period, Mr Bonvino raised with Mr Wright the possibility of retaining a new accountant but Mr Wright did not take up that suggestion. Mr Bonvino remained concerned because at the end of each month from the information he was given, he could not break up the factored amounts into individual client loan accounts. The computer software used by Cashflow was specially developed for factoring and Mr Bonvino did not understand it. Mr Walters avoided giving Mr Bonvino any explanation as to the workings of the software by telling him that it was far too complex and too difficult and that he did not have time. Mr Wright also said to Mr Bonvino to leave it alone as Mr Walters was too busy. Mr Wright said that everything was in order and that Mr Bonvino did not need to worry.
160 Over the next few months, the same issues continued to be raised in the monthly meetings, namely the fact that the trial balance was not supplied with the individual clients’ loan account ledgers, Mr Walters’ performance and whether or not a new accountant should be retained. However, Mr Bonvino’s evidence was that the fees being generated by Trans-pac No. 1 improved. At every monthly meeting, he was presented with monthly summaries by Mr Walters. The monthly summaries showed all factoring clients of Cashflow, the position of their debtors, fees charged, security held and a pay-out figure. Mr Bonvino looked at the monthly summaries and saw nothing out of order except that the amount of retention for the Trans-pac account was outside the factoring deed. He raised this with Mr Walters and Mr Wright at the monthly meetings, Mr Wright saying: “Don’t worry about it. We hold $600,000 extra collateral by way of second mortgage, mortgages over Trans-pac’s directors’ homes. When you take that into account, we have more security than you ever need.
161 Mr Bonvino was shown a profit and loss statement and balance sheet for Cashflow at each monthly meeting. He examined the documents as best he could to understand them and to him, everything appeared to be in order. Cashflow was showing a profit every month. Mr Wright often said at the monthly meetings when discussing financial statements, that they were making good money as Mr Bonvino, he said, should be able to see from the accounts.
162 From the discussions which Mr Bonvino had had with Mr Wright and Mr Walters and the information provided to him at the monthly meetings, he understood that both Mr Wright and Mr Walters were stating that the accounts of Cashflow were correct and that it was making a profit. He further understood that the account in relation to Trans-pac 1 was correct as disclosed by the monthly summaries. He gave evidence which I accept, that had he known the true position in relation to the Trans-pac No 1 account, he would have taken a number of steps to prevent any further deterioration of the Trans-pac No 1 account. Those would have included terminating Mr Walters’ employment immediately, changing the authority with Westpac to include his signature for all cheques written by Cashflow, appointing a new accountant to report directly to him and refraining from investing any further funds in Cashflow from Pyrafount until the internal control procedures of Cashflow were such as to prevent any further loss and the extent of the liability of the Trans-pac account was known.
163 Mr Bonvino gave evidence that with the benefit of hindsight, had he been aware on 30 June 1995, as to the deficit existing in the Trans-pac account to the extent of $140,000 he would not have approved the payment of dividends or fees in respect of that financial year.
164 On 30 June 1996, Mr Bonvino requested Mr Walters to provide him with a year-end profit and loss and balance sheet in a form which would be reconciled. He sought a complete break-up of every client represented by all advances in the balance sheet. Mr Walters ‘fobbed him off’ by saying that he would try but was busy. That conversation was repeated many times but, as at 9 August 1996, the information had still not been provided.
165 After Mr Bonvino demanded a meeting, a meeting took place on 12 August 1996. The events at the meeting have already been set out.
166 Mr Bonvino naturally became extremely upset upon hearing the information given at the meeting. He understood that Mr Walters was informing him that the ‘profit’ which had been declared at the end of the 30 June 1995 financial year, should not have been declared and that Cashflow may well have suffered a loss depending on the collectability of the advances made to Trans-pac No 1. He said to Mr Walters and Mr Wright words to the effect: “I don’t understand this. I gave you both strict instructions that you should not advance Trans-pac any funds without proper procedures being followed. As far as I am concerned, you are both accountable for this. You both have deceived me and I am taking control of Cashflow to try and sort out this mess.”
167 He said to Mr Walters: “Show me every transaction which has occurred between Cashflow and Trans-pac”.
168 He selected Trans-pac No 1 because Mr Walters had said to him: “All the problems are in Trans-pac’s account.
169 Over the next two weeks, Mr Bonvino attended at the Beverley Hills office every day in any attempt to reconstruct the payments and receipt ledger for Trans-pac No. 1. Mr Walters spent a great deal of time with him and showed Mr Bonvino how he had falsified the ledger. Mr Walters had made fictitious journal entries to make the ledger balance. Annexed to Mr Bonvino’s affidavit of 27 April 1998 and marked ‘Z’ is a copy of the general ledger trial balance of Trans-pac from 31 August 1994 to 2 August 1996. That trial balance had been extensively amended by hand. Most of the amendments were made by Mr Walters in Mr Bonvino’s presence and explained to him by Mr Walters during the two week period to which I have referred. Some of Mr Bonvino’s comments were written by him as explanatory notes of what the entry represented.
170 A number of entries have been ruled through with a line by Mr Walters. At that time, Mr Walters said: “The entries I have ruled through with a line are all fictitious. The reason I made them was to make it look as though we were getting substantial receipts to accommodate our payments. In some cases, the cheques that Wright and I wrote out to Trans-pac were deposited back into Cashflow’s account so that it looked as though we were getting deposits”.
171 In relation to the entry of $140,000 designated with the word ‘accrual’ showing a transaction date of 30 June 1995 and a posting date of 3 October 1995, Mr Walters said to Mr Bonvino:
“I did this to reduce Trans-pac’s loan account so that it was in order. If I had not done it, it would have shown a deficiency of $140,000.”172 Mr Bonvino wrote the word ‘dummy’ alongside that entry, following that explanation.
Mr Bonvino responded: “So you mean that the amount that was actually advanced to Trans-pac at 30 June 1995 was $906,125.22 not $766,125.22?”
Mr Walters said: “Yes.
173 As a result of the discussion with Mr Walters, Mr Bonvino was able to reconcile the amounts actually advanced to Trans-pac No 1 and the fees which were generated by each such advance, together with the amounts actually received by Cashflow in respect of the Trans-pac No 1 account, less credit notes raised.
174 With the assistance of the explanation given by Mr Walters, Mr Bonvino reconstructed the Trans-pac No 1 account. Annexed to his affidavit and marked ‘AA’ is a copy of the general ledger reconstructed by him.
175 Mr Bonvino, in paragraphs 30, 31, 32, 33, 34 and 35 of his affidavit of 27 April 1998, gives further detail in relation to his discussions with Mr Walters in the following days. I accept this evidence. The evidence includes Mr Bonvino ascertaining that there were blank cheque butts and there were anomalies and irregularities on many of the cheque butts of Cashflow and that in some cases, the notation on the cheque butt did not accord with the payee or receipt of the relevant cheques. Mr Bonvino also says, and I accept, that he asked Mr Walters how he was able to do this on his own. He said to Mr Walters:
“Didn’t Peter [referring to Mr Wright] sign the cheques? Didn’t he review the First Schedules and didn’t he know that this account was out of whack?”176 Mr Bonvino kept notifying Mr Wright of the matters which he had discovered and told him that the cheque butts were blank and contained anomalies. He said to Mr Wright:
Mr Walters responded: “Tony, Peter just signed the cheques as I presented them to him. He never questioned the cheques and he was usually not around in the afternoon after lunch anyway, to check what I was doing. He never looked at source documents to verify the authenticity of my cheques and he never looked at the First Schedules.”
“Peter, you must have signed cheques where there was no proper paperwork. Why did you do it?”177 Mr Bonvino also attended at the Beverley Hills branch of Westpac and spoke with a female employee there and asked her what were the procedures for honouring a cheque when it was presented to the bank and she said: “We get the cheque, we look at the validity of the cheque, we look at the signatures to make sure they are okay and we make sure that it is going to the person that it is written to.”
Mr Wright said: “I don’t know. I guess we both made a mistake”.
178 Mr Bonvino had been the sole signatory to Cashflow’s cheque account and requested and obtained from the bank employee to whom he spoke, a copy of the account operating authority for Cashflow.
179 At the same time as Mr Bonvino was learning of these circumstances relating to Cashflow, he invited Mr Duffield, a solicitor who represented Cashflow, to attend the premises and advise on the situation. Mr Duffield carried out searches on Trans-pac No 1 and the titles over which Cashflow held securities. Those searches disclosed that both second mortgages over the two Strathfield properties, being the residential homes of the directors of Trans-pac No 1, were discharged.
180 Mr Duffield also ascertained that the National Australia Bank which had taken the place of the previous first mortgagee under a refinancing, had increased the borrowing made under the first mortgage by the sum of $250,000. Cashflow thus no longer had a second mortgage securing it’s debt over those properties.
181 As a result of what Mr Duffield learned, Mr Bonvino realised that the mortgages had been discharged and that Cashflow had received no payment from Trans-pac. The debt from Trans-pac had increased and not reduced. A meeting then took place at which the following was said:
Mr Bonvino: “How did you allow this to happen [referring to Mr Wright and Mr Walters]?182 During Mr Bonvino’s inspection of cheques retrieved from Westpac, he found that a number of cheques drawn on Cashflow’s account and presented for payment and honoured had only the signature of Mr Walters on the cheques.
Mr Wright: “I can’t remember that happening. Maybe I did but I don’t know for sure. It looks like my signature but I can’t be sure.”
Mr Walters: “I can’t answer. I’ve been to see my solicitor and he said I can’t answer.”
183 Mr Bonvino was not ever contacted by Westpac about any cheque drawn by Cashflow that was presented for payment and had only one signature, nor was he contacted by Westpac about any cheque drawn by Cashflow in favour of a party, but banked to the account of another entity. Nor was he contacted by Westpac about any cheque drawn by Cashflow in favour of Trans-pac No 1 which subsequently was banked to the account of Trans-pac Australia Pty Limited or any other account.
184 At some stage during this same period, Mr Bonvino became aware that cheques written by Cashflow to Trans-pac Container Freight Services Pty Limited had in fact been received and banked by Trans-pac No 2.
185 The face value of the cheques drawn by Cashflow in favour of Trans-pac after 1 December 1995 was $1,677,098. The balance of the account at 31 March 1998, including fees and receipts, was $2,560,134.84.
186 Mr Bonvino’s evidence, which I accept, was that Cashflow had no factoring arrangements in place with Trans-pac No 2. He was indeed unaware of the existence of Trans-pac No 2 until August 1996.
187 Mr Bonvino’s affidavit of 27 April 1998 then went into very specific detail on the irregularities which he uncovered during this time and in the course of discovery and inspection of documents. That evidence is accepted. It is unnecessary to go into that detail for present purposes although later in the Judgment a number of specifics are in fact referred to.
188 In about late August 1996 or soon thereafter, Mr Bonvino had a meeting with Mr Peter Panayi from Trans-pac No 1 in Leichhardt. Mr Wright was invited to attend but did not do so. At the meeting, words to the following effect were said:
Mr Bonvino: “Peter [referring to Peter Panayi], I believe you owe us a lot of money. I’d like you to explain how this whole fiasco occurred.”189 Mr Bonvino gave evidence that he was unaware of any advances from CODFA to Cashflow at the time. To his knowledge, Mr Walters and Mr Wright were aware that Pyrafount, the major funder of Cashflow, had additional funds to inject from time to time if necessary. His evidence was that it would have been possible for Pyrafount No 3 to have injected further capital in the order of $500,000 into Cashflow had this been sought.
Mr Panayi: “I know there is a lot of money owed to Cashflow and the exact amount is unclear because of the lack of proper paperwork from Ed Walters and Peter Wright. There are two sides to this story and it is not totally our fault. Walters and Wright are both as much to blame as we are. We can’t make good all the amounts. We may as well just close up shop and give up, but what I can guarantee you is that we will endeavour to pay about half the amount commencing with a certain amount and scaling up. You should ask Wright and Walters for the other half as they knew what was happening. You will find they received a benefit out of this.”
The Proceedings
50177 of 1997 - The Main Proceedings
190 Sufficient of the Court’s findings as to the facts have now been outlined, to indicate the nature of the difficulties exposed by the conduct of Mr Walters and Mr Wright which have led to the institution of these several sets of proceedings. Shortly stated, the proceedings concern the flow of moneys from CODFA to Cashflow and from Cashflow made ostensibly to clients of Cashflow. The flow of moneys can be located in two places. The first is in Schedules 1 and 2 to the amended statement of claim in the central set of proceedings 50177 of 1997. Schedule 1 records payments from CODFA’s accounts to Cashflow or to Cashflow’s clients. CODFA’s pleading describes these payments as ‘the paid funds’. The Judgment adopts the same shorthand description. Schedule 2 records payments from Cashflow to CODFA’s accounts. It is convenient to refer to these payments as ‘the received funds’. The schedules are appended to the Judgment as Appendix 2.
191 The second place where the flow of moneys can be located is a document now annotated by Cashflow, but originally being Schedule A to Exhibit GMG4 to the statement of Mr Graeme Matthew Green of 27 March 1998. In its original form the schedule lists out each entry (in date order) together with a brief typed narration. As annotated by Cashflow in handwriting and with connecting lines, the schedule identifies the running balance of amounts owing by Cashflow to CODFA if all the transactions are binding. The connecting lines point up matching items said to be ‘repayments’. This document is appended to the Judgment as Appendix 3. It is referred to, for convenience, as ‘GMG4’; although it is, of course, an annotated version of that document.
192 The parties to proceedings 50177 of 1997 are CODFA as plaintiff, Cashflow as first defendant, Mr Peter Wright as second defendant, Factors as third defendant, Mr Walters as fourth defendant and Mrs Walters as fifth defendant. the cross-defendants to Cashflow’s cross-claim filed on 18 March 1999 are CODFA as first cross-defendant, Mr Wright as second cross-defendant, Mr Walters as third cross-defendant, Mrs Walters as also a third cross-defendant and Factors as fourth cross-defendant. These proceedings insofar as they involved Mrs Walters either as a defendant or as a cross-defendant have been settled.
50111 of 1997 - The Westpac Proceedings
193 Proceedings 50111 of 1997 were instituted by Cashflow against Westpac Banking Corporation [‘Westpac’] as first defendant and originally against St George Bank Limited [‘St George Bank’] as second defendant. St George Bank filed a cross-claim. St George Bank dropped out of the proceedings at an early stage, on my understanding discontinuing its own cross-claim at a time when Cashflow determined to no longer proceed against it.
194 A second cross-claim was filed by Westpac joining as cross-defendants Mr Walters, Mr Wright, St George Bank Limited, CODFA, Mr Burkett and Mrs Burkett. A third cross-claim had been filed by CODFA joining as cross-defendants Mr Wright, Factors, Mr Walters, Mrs Walters and Westpac. Proceedings 50111 of 1997 have been settled save possibly for some questions as to costs which will be able to be dealt with at the same time as short minutes are finally brought in. Westpac’s payment to Cashflow will be available to the liquidator in the regular administration of the liquidation.
50114 of 1998 - Trans-pac Proceedings
195 Proceedings 50114 of 1998 were brought by CODFA as plaintiff against Mr Walters, Mrs Walters and Trans-pac Australia Pty Limited [‘Transpac No 2] as defendants. Insofar as involving Mrs Walters, these proceedings were settled. The proceedings concern a cheque drawn by Mr Walters on or about 24 May 1996 made payable to Trans-pac or bearer in the sum of $49,626 on CODFA’s account. The proceedings concern also the withdrawal between June 1996 and August 1996 by Mr Walters by operation on CODFA’s account of sums in the total of $396,498 made payable to Trans-pac. Those funds were withdrawn on 12 June 1996 as to $52,316; on 20 June 1996 as to $52,361; on 11 July 1996 as to $75,286; on 16 July 1996 as to $47,671; as to $56,231 on 18 July 1996; as to $66,316 on 31 July 1996 and as to $46,317 on 1 August 1996. Those funds were deposited by electronic transfer directly into the bank account of Trans-pac.
196 The pleading alleges that no proper authorisation by CODFA existed for the drawing and delivery of the cheques or the withdrawal of the funds, as the withdrawals are said not to have been authorised by the directors of CODFA. It is also alleged that there was no commercial purpose for the withdrawal of those sums. The pleading alleges that at all material times, Mr Wright was the managing director of CODFA and was a co-signatory of CODFA’s account, operated with the Commonwealth Bank of Australia at its Beverley Hills Branch. The pleading alleges the partnership at all material times between Mr and Mrs Walters as Walters & Associates. The allegation is that Mr Walters was at all material times the secretary of CODFA and a co-signatory of the CODFA account to which I have referred. The allegation is that at all material times CODFA was the owner of the funds in the CODFA’s account. There is then pleaded an Accountancy and Services Agreement in force as at and after May 1996 between Mr and Mrs Walters jointly trading as Walters & Associates of the one part and CODFA of the other part, whereunder Mr and Mrs Walters are said to have agreed with CODFA for Mr and Mrs Walters to provide to CODFA services in the nature of accounting, banking, administrative and secretarial services in consideration for CODFA paying a fee to them. The same agreement is pleaded in proceedings 50177 of 1997 and findings in relation to the agreement are set out below. The particulars given are not in precisely the same terms but no material difference is made out. The agreement was made on or about 1 August 1991. The particulars of the agreement are given as Clause 18 of the Joint Venture Agreement, later varied, and as conversations between Mr Walters on behalf of himself and Mrs Walters and by Mr Wright on behalf of CODFA of about August 1991. The agreement is also said to be implied in part from the fact that on and after May 1996 until August 1996, Mr Walters worked at the premises for CODFA performing accounting, banking and administrative work; that on and after May 1996 Mrs Walters worked at the premises for CODFA performing secretarial work and otherwise assisting Mr Walters in administrative tasks for the accounting, banking and administrative work performed by Mr Walters; that Mr and Mrs Walters rendered to CODFA invoices in the name of Walters & Associates for the accounting and secretarial work performed for CODFA and that CODFA delivered to Mr Walters cheques in the name of Walters & Associates in payment for the invoices rendered.
197 The Accounting and Services Agreement is said to have contained terms that Mr and Mrs Walters jointly and severally would provide to CODFA services, including processing payments made to CODFA and depositing cheques and other receipts to CODFA’s accounts and preparing cheques for co-signature drawn on CODFA’s accounts properly payable in accordance with CODFA’s authorised business.
198 Further terms pleaded are that Mr Walters would sign and present to Mr Wright for signing only cheques which were payable on behalf of CODFA in accordance with CODFA’s authorised business and that the services provided by Mr and Mrs Walters would be provided honestly and with reasonable care and diligence.
199 There is also pleaded an arrangement existing from May 1996 between Peter Wright and Mr Walters in his capacity as secretary of CODFA and under the Accounting and Services Agreement, whereunder Mr Wright, subject to an overriding supervisory role, delegated to Mr Walters the day to day handling of the management tasks which are referred to in the pleading as the ‘Management Arrangement’. That arrangement is said to have been made in or about August 1991 in conversations between Mr Wright and Mr Walters.
200 CODFA pleads that as secretary of CODFA and/or pursuant to the Accounting and Services Agreement and/or pursuant to the Management Arrangement, Mr Walters at all material times in fact had the day to day handling of management tasks under the supervision of Mr Wright, requiring him to ensure that funds advanced and funds received to and from clients, were made in accordance with factoring agreements and to ensure that loans or other transfers of money to and from companies of which Mr Wright was a director or in which he held some interest or which were not factoring clients of CODFA were scrutinised and paid or received for a proper commercial purpose.
201 CODFA also relies upon Mr Walters as having been an officer of CODFA within the meaning of section 231 of the Corporations Law, who was under the Accounting and Services Agreement and under the Management Arrangement and in tort, a person who owed a duty of care to CODFA for the acts or himself and Mrs Walters; who as secretary of CODFA owed a fiduciary obligation and duty of care to CODFA and who, as an officer of CODFA, had statutory duties to CODFA pursuant to section 232 of the Corporations Law.
202 Again, as the proceedings have been settled in relation to Mrs Walters, it is not necessary to outline the particular allegations which had been made against her before the settlement.
203 The pleading details the cheques and drawings referred to above. The 24 May 1996 cheque is said to have been delivered by Mr Walters to Trans-pac which is said to have presented the cheque for deposit into the bank of Trans-pac. The pleading alleges that the cheque was honoured and the proceeds of the cheque was received by Trans-pac.
204 The pleading alleges that Mr Walters breached the terms of the Accounting and Services Agreement and the duties earlier referred to in making advances of the funds other than in accordance with CODFA’s authorised factoring agreements or other authorised business; in preparing, signing and forging the signature of Mr Wright on the cheque on behalf of CODFA, that was not properly payable to the named payee and otherwise not drawn and presented in accordance with CODFA’s authorised business or alternatively in preparing, signing or presenting to Mr Wright for signing the cheque on behalf of CODFA that was not properly payable to the named payee and otherwise not drawn and presented in accordance with CODFA’s authorised business. Further breaches include the allegation that Mr Walters failed to act in a diligent, honest and careful capacity in accordance with his duties as earlier alleged and set out above.
205 The pleading alleges that the cheque and funds were received by Trans-pac No 2 as a volunteer without any consideration being given for the proceeds and that further or in the alternative, the cheque and funds were received by Trans-pac No 2 with knowledge of the fact that they were the property of CODFA and that the payment of the cheque and funds to Trans-pac No2’s account was without consideration or any other commercial purpose or benefit.
206 The pleading then alleges that in the premises, the proceeds of the cheque and funds are property held by Trans-pac No 2 in trust for CODFA - the proceeds and funds being defined in the pleading as ‘the Trans-pac proceeds’.
207 CODFA asserts that it has demanded payment of the Trans-pac proceeds by Trans-pac No 2 but that Trans-pac No 2 has failed to repay those proceeds.
208 CODFA alleges that it has demanded repayment of the Trans-pac proceeds by Mr Walters and accepts that on 20 November 1997 Mr Walters repaid to CODFA the amount of $99,561 in reduction of the Trans-pac proceeds. The pleading asserts that he has failed to repay any further part of the Trans-pac proceeds.
209 CODFA asserts that as a result of the breaches by Mr Walters of the terms of the Accounting and Services Agreement and the duties earlier referred to, CODFA suffered loss by loss of the Trans-pac proceeds and by the opportunity to earn profit on the Trans-pac proceeds and claims that Mr Walters is liable to pay to CODFA compensation including damages for the loss suffered. That liability is said to arise from the general law and/or from section 1317HD Corporations Law.
210 In the result, the claims to relief by CODFA ultimately pressed in proposed Short Minutes of Order furnished at the end of the hearing are as follows:
(1) Order that Mr Walters pay to CODFA the sum of $346,653 ($446,124 minus $99,561 repaid by Mr Walters) (with interest from 1 August 1996 to 20 November 1997 calculated on the sum of $446,124 and interest thereafter calculated on the sum of $346,653), as compensation and/or damages for losses suffered by CODFA.211 The final set of proceedings 50047 of 1998 were brought by Mr Star, being the liquidator of Cashflow, as plaintiff against Kylon as first defendant and against CODFA as second defendant. CODFA in turn pursues a cross-claim against Cashflow as first cross-defendant and against Mr Star as second cross-defendant.
(2) An order that Trans-pac Australia Pty Limited pay CODFA the sum of $446,124 with interest from 9 August 1996.
(3) Liberty to be reserved to CODFA to claim an equitable interest in such, if any, property as may come into the hands of the liquidator of Trans-pac Australia Limited.
50047 of 1998 - The Avoidance Proceedings
212 Mr Star’s claim is that CODFA received the benefit of various uncommercial and insolvent transactions and that Kylon also benefited from the said transactions within the meaning of section 588FF(1)(c) of the Corporations Law. Hence, these are the proceedings in which the issue is whether the defendants received a benefit from insolvent and uncommercial transactions within the meaning of section 588FF(1)(c) Corporations Law.
213 The plaintiff alleges that Mr Wright was the managing director of Cashflow; that Mr Wright was the managing director of Factors; that Mr and Mrs Walters trading as Walters & Associates provided accounting services to Cashflow and that Mr Walters was an authorised signatory to the account and a secretary of Cashflow and CODFA; that an Office Services Agreement between CODFA and Cashflow referred to below was entered into.
214 Mr Star contends that Kylon owns one-half of the issued capital of CODFA and is the first registered charge holder over the assets and undertakings of CODFA and that Mr Wright and Mr Walters were officers of Cashflow within the meaning of section 232 of the law. Cashflow is said to have been placed in liquidation on 19 December 1996. Mr Star alleges that by virtue of section 9 and Division 1A of Part 5.6 of the Corporations Law, the relation back day of and concerning Cashflow is 12 September 1996.
215 The plaintiff claims that Mr Wright as managing director of Cashflow and Mr Walters as company secretary of Cashflow and also on behalf of Walters & Associates, failed to keep and maintain accounting records of Cashflow in accordance with section 289 of the Corporations Law.
216 The pleading is then that by reason of section 588E(3) and (4) of the Corporations Law, Cashflow was insolvent during the 12 month period ending on the relation back day. That period is defined as ‘the relevant period’. In the alternative, the plaintiff claims that Cashflow was insolvent during the relevant period in fact.
217 The pleading asserts that in the six-month period ending on the relation back day, Cashflow and Factors and CODFA, entered into a number of transactions pursuant to which Cashflow paid to CODFA $498,506. These transactions are said to have been unfair preferences given by Cashflow to CODFA because they were each parties to the transactions which resulted in CODFA receiving from Cashflow in respect of unsecured debts that Cashflow owed to CODFA, more than CODFA would receive from Cashflow in respect of the debts, if the transactions were set aside and CODFA required to prove for the debts in the winding up of Cashflow.
218 The pleading then asserts that the unfair preferences are by reason of section 588FC Corporations Law also insolvent transactions and that by reason of section 588FE 2(2)(a) and (b) of the law, the insolvent transactions are avoidable.
219 The pleading alleges that CODFA benefited from the insolvent transactions and is liable under section 588FF of the law to repay the same.
220 An alternative pleading is that during the relevant period Cashflow entered into a number of transactions pursuant to which:
(a) Cashflow paid $772,172 to CODFA;221 These transactions are said to have been uncommercial transactions of Cashflow, it being asserted that a reasonable person in Cashflow’s circumstances would not have entered into the said transactions having regard to the benefits to Cashflow of doing so, the detriment to Cashflow of doing so and other relevant matters.
(b) Cashflow paid the additional sum of $23,140 or alternatively $15,630 to CODFA being an office services fee paid in the 12-months preceding 12 September 1996 (or alternatively from 1 December 1995 to 12 September 1996).
222 Cashflow is said to have been insolvent at the time those transactions took place.
223 The uncommercial transactions are also said to have been insolvent transactions by reason of section 588FC of the law. The uncommercial transactions are also said to have been voidable by reason of section 588FE(3) of the law.
224 The pleading alleges that CODFA derived a benefit from the uncommercial transactions and is liable to repay the same pursuant to section 588FF of the law.
225 The plaintiff claims damages, interest, an order that the subject transactions be avoided as between Cashflow and CODFA, an order that CODFA pay to Mr Star the amounts of $498,506 and $772,172 pursuant to section 588FF(1) of the Corporations Law. A further claim is made to an order that CODFA pay to Mr Star the amounts of $23,140 (or alternatively $14,630) pursuant to section 588FF(1) of the Corporations Law).
CODFA’s ‘Office Services’ Cross Claim
226 CODFA’s cross-claim against Cashflow and against Mr Star relates to the alleged use by Cashflow of office premises and services paid for by CODFA. CODFA pleads that it carried on business from the Beverley Hills premises as did Cashflow. The pleading is that at all material times CODFA paid all rent, advertising, cleaning, light, electricity, printing, stationery, telephone and motor vehicle expenses associated with the office premises and business conducted by both companies. These are defined as ‘office services’.
227 The pleading alleges that by an agreement existing as at and from 1 July 1996 made between CODFA and Cashflow, in consideration of Cashflow being permitted to operate its business from the premises and have use of the premises and office services, Cashflow was to pay CODFA a contribution fee, being a proportion of the expense for the office services, such proportion being the same percentage as the factoring fees earned by Cashflow from the operation of its business bore to the factoring fees earned by Cashflow and CODFA (‘contribution fee’).
228 The agreement is said to have been express and oral and made between Mr Kull of CODFA and Mr Wright of Cashflow in a conversation in about July 1996 [I take the references to 1994 to be typographic errors]. The agreement is said to have been later varied in late 1996, again in a conversation between Mr Kull of CODFA and this time Mr Bonvino for Cashflow - to include payment of Mr Wright’s motor vehicle expenses associated with his work for CODFA and Cashflow.
229 The pleading alleges that between 1 July 1996 and 11 September 1996, Cashflow continued to operate its business from the premises and to use the premises and office services but in breach of the agreement, had not paid any contribution fee to CODFA. Detailed particulars of the contribution fee by way of calculations are set out in the pleadings. It is then alleged that by an agreement made on or about 16 December 1996 between CODFA and Mr Star, it was agreed that in consideration of Mr Star being permitted to use the premises and office services from the date of his appointment as provisional liquidator, Mr Star would pay $250 per week to CODFA. Particulars of that agreement are set out in letters from CODFA to Mr Star of 16 December 1996 and a response from Mr Star to CODFA of 16 December 1996.
230 The pleading alleges a breach of that agreement and as a result of those breaches, CODFA claims to have suffered loss.
231 In the proposed Short Minutes of Order furnished to the Court at the end of the hearing, CODFA pressed claims to relief on it’s cross claim as follows:
(1) Order that John Edward Star or alternatively Cashflow pay CODFA the sum of $6,050 with interest from 28 February 1997.232 As will already be appreciated, a complication arises in relation to the company referred to during the hearing as Trans-pac No. 1, although it had several names. It is now in liquidation. It was registered on 30 December 1993 as Trans-pac Container Freight Services Pty Limited and in February 1996 changed its name to Strathfield Information Processing Bureau Pty Limited. One of the issues in the proceedings was the date when it did cease to trade. On my findings it ceased to trade in about November 1995. Detailed reasons for this finding are given below.
(2) Order that the liability of Mr Star for the sum of $6,050 and interest thereon be deemed an expense within the meaning of section 556(1)(a) of the Corporations Law for the purposes of the winding up of Cashflow.
(3) Order that Cashflow pay CODFA the sum of $4,344.68 with interest from 12 September 1997.
(4) Order that the liability to account of Cashflow and Mr Star to CODFA should be set off against the liability, if any, of CODFA to pay moneys to Mr Star or Cashflow.
(5) Order that Cashflow and Mr Star hold on trust or subject to orders for equitable security, properties sufficient to meet the liability of Cashflow or Mr Star to CODFA.
The Trans-pac Companies
233 Upon the ceasing to trade of Trans-pac 1, the company referred to during the proceedings as ‘Trans-pac 2’, had been incorporated and it effectively appears to have stepped into the shoes of Trans-pac 1 for all relevant purposes. Trans-pac 2 is also now in liquidation. On 13 October 1995 Trans-pac 2 (formerly a shelf company) adopted the name ‘Trans-pac Australia Pty Ltd’. It commenced to trade in about November 1995. Its principal place of business was the same as that of Trans-pac No. 1. Peter and Terry Panayi were appointed as directors on 9 October 1995.
234 The complication to which I have referred, is that funds were paid from time to time from Cashflow into Trans-pac 2, which had no form of factoring contract or formal arrangement with Cashflow. Trans-pac No 1 on the other hand, did have a formal factoring agreement with Cashflow.
Balance of Account between CODFA and Cashflow
235 The case also concerns a number of other movements of funds. In some cases, CODFA’s funds were paid directly to solvent clients of Cashflow. CODFA’s funds were also paid by cheque made payable to Trans-pac No. 1 but deposited into Trans-pac No. 2’s bank account. And at a material point in time, Cashflow paid a number of cheques back to CODFA. This occurred after Mr Walters apparently became apprehensive that his conduct in paying CODFA moneys into the Cashflow bank account was about to become known and in an attempt, apparently, to repay certain of the moneys.
236 The principal issues which separate CODFA and Cashflow flow from the appointment of a liquidator to Cashflow on 19 December 1996, following an application filed on 12 September 1996. That circumstance has involved Cashflow pressing claims against CODFA to have repaid to Cashflow, moneys paid by Cashflow to CODFA during the six month period leading to 12 September 1996. These payments are attacked as unfair preferences [Section 588FA Corporations Law] [See para 217 above] At the same time, Cashflow pursues CODFA in respect of moneys paid by Cashflow to CODFA during the 12-months leading to 12 September 1996. These payments are attacked as being uncommercial transactions [section 588 FB Corporations Law; See paragraphs 220-224 above]. There is thus a two pronged attack upon payments made during the six month period leading to 12 September 1996.
237 CODFA, understandably, has a violent objection to repayment of any of the moneys which it received from Cashflow during the 12-month period prior to 12 September 1996. It’s stance is that these funds were ‘stolen’ from it and either banked into Cashflow’s bank account or paid to Cashflow’s clients, and that for Cashflow to now claim these funds back using the Corporations Law ‘preference’ provisions or ‘uncommercial transaction’ provisions constitutes unconscionable conduct. CODFA does not accept that the payments fall within the reach of the preference or uncommercial transactions provisions. Alternatively, CODFA seeks to sidestep the operations of the insolvency provisions in a number of ways. If Cashflow be successful in its claim by invoking these provisions to have repaid funds paid by it to CODFA during the 12-month period leading to 12 September 1996, CODFA pursues a claim to a constructive trust over those same funds, submitting that at the very moment that the Court would order these funds to be repaid to Cashflow, a constructive trust should be imposed for CODFA’s benefit over such moneys. CODFA also claims that a constructive trust should be imposed in respect of the net balance alleged to be owing to it following the inter company payments, notwithstanding that it is not possible for CODFA to trace it’s funds into moneys now held by Cashflow’s liquidator.
238 The further dispute between CODFA and Cashflow concerns what is the balance of account between CODFA and Cashflow in terms of the transfers of funds from CODFA to Cashflow and then back again. This dispute is ultimately one of categorising particular payments, most underlying objective facts ultimately being agreed to, for obvious reasons.
239 A number of causes of action are pursued by CODFA against Cashflow and are pursued by Cashflow against CODFA by cross-claim in proceedings 50177 of 1997.
240 Before going to the detailed issues which are pleaded and which separate CODFA and Cashflow, it is convenient to outline the claims made against the other parties, several of whom have already been mentioned.
241 In CODFA’s outline submissions at the commencement of the hearing, it summarised its principal claims for relief in the following terms:
‘(a) A claim against Cashflow for misappropriated or stolen funds in the sum of $180,000 held on a constructive trust or alternatively to be paid on restitutionary principles.242 CODFA, in its second amended statement of claim filed on 22 March 1999 in proceedings 50177 of 1997, claims that Mr Walters and Mrs Walters carried on business in a partnership trading as Walters & Associates and that at all material times Mr Walters was secretary of CODFA, secretary of Cashflow and a co-signatory of CODFA’s accounts, operated with the St George Bank, the Commonwealth Bank of Australia, and in respect of an overdraft facility with the CBA, held in the name of Mr & Mrs Burkett.
(b) A claim against Cashflow and Star for recovery of “office expenses” in the sum of $4,344.68 and $6,050.00 respectively.
(c) A claim against Trans-pac No. 2 for misappropriated or stolen funds in the sum of $396,498 held on a constructive trust or alternatively to be paid on restitutionary principles.
(d) Claims against Wright, Factors, Mr Walters and Mrs Walters for breaches of obligations owed which resulted in the loss of funds claimed above.
(e) Responsive claims against Wright, Factors, Mr and Mrs Walters for any judgment for moneys (if any) which are found to be due by CODFA to Cashflow or Westpac.’
[As earlier indicated, the proceedings against Mrs Walters were settled.]
CODFA’s Claims in Proceedings 50177 of 1997 against Parties other than Cashflow
The CODFA Management Agreement
243 CODFA pleads that an agreement was in force as at and after November 1994 between Factors and CODFA (‘the CODFA Management Agreement’ or ‘the Management Agreement’) whereunder Factors agreed with CODFA that Factors would provide the managerial services of Mr Wright to CODFA in consideration for CODFA paying a management fee to Factors.
244 It is then said to have been a term of the CODFA Management Agreement that the services would be provided honestly and with reasonable care and diligence.
The CODFA Accountancy and Services Agreement
245 CODFA then pleads that by an agreement in force at and after November 1994 between Mr Walters and Mrs Walters jointly trading as Walters & Associates of the one part, and CODFA of the other part, (‘the CODFA Accounting and Services Agreement’ or ‘the Accounting and Services Agreement’), Mr Walters and Mrs Walters agreed with CODFA for Mr Walters and Mrs Walters to provide to CODFA, services in the nature of accounting, banking, administrative and secretarial services in consideration for CODFA paying a fee to Mr and Mrs Walters, trading as Walters & Associates.
246 CODFA then pleads that it was a term of the CODFA Accounting and Services Agreement enforceable against Mr and Mrs Walters jointly and severally, that Mr and Mrs Walters jointly and severally would provide to CODFA services, including processing payments made to CODFA and depositing cheques and other receipts to CODFA’s accounts, and preparing cheques for co-signature drawn on CODFA’s accounts properly payable in accordance with CODFA’s authorised business.
247 CODFA also pleads that further terms of the Accounting and Services Agreement enforceable against Mr and Mrs Walters generally and severally, were that Mr Walters would sign and present to Mr Wright for signing, only cheques which were payable on behalf of CODFA in accordance with CODFA’s authorised business, and that the services provided by Mr Walters and Mrs Walters would be provided honestly and with reasonable care and diligence.
248 CODFA then pleads that Mr Wright in his capacity as managing director of CODFA and/or under the Management Agreement, was responsible for examining and approving factoring proposals that were submitted to CODFA, and for ensuring that funds advanced and funds received to and from clients were made in accordance with factoring agreements.
249 CODFA then pleads that by an arrangement existing as at and from November 1994, between Mr Wright and Mr Walters, in his capacity as secretary of CODFA and under the Accounting and Services Agreement, Mr Wright, subject to an overriding supervisory role, delegated to Mr Walters the day to day handling of the management tasks required under the Management Agreement.
250 CODFA then pleads that as managing director of CODFA and/or pursuant to the Management Agreement, Mr Wright was at all material times responsible for supervising the daily management and affairs of CODFA.
251 CODFA pleads that as secretary of CODFA and/or pursuant to the Accounting and Services Agreement and/or pursuant to the Management Agreement, Mr Walters at all material times in fact had the day to day handling of the management tasks required by that Management Agreement under the supervision of Mr Wright.
252 CODFA then pleads the relevant duties of respectively Mr Wright, Factors, Mr Walters and Mrs Walters.
253 CODFA pleads that at all material times Mr Walters and Mr Wright were officers of CODFA within the meaning of section 231 of the Corporations Law.
254 It is convenient to next detail the specific claims pursued by CODFA.
CODFA’s Claims Against Mr Wright
255 CODFA pleads that in the premises, Mr Wright at all material times:
(a) under the CODFA Management Agreement and/or under the Management Arrangement, owed a duty of care to CODFA;256 CODFA’s claims against Mr Wright are that Mr Wright breached the duties under the CODFA Management Agreement and breached the fiduciary obligations, duty of care and the statutory duties owed pursuant to section 232 of the Corporations Law as earlier set out. Particulars of the breaches are given and these include Mr Wright’s having failed to ensure that CODFA made advances only in accordance with its authorised factoring agreements or other authorised business; Mr Wright signing cheques carelessly without ensuring that the cheques were properly payable to the named payee and otherwise drawn and presented in accordance with CODFA’s authorised business dealings; failure to monitor, supervise and check that Mr Walters was acting in a diligent, honest and careful capacity in accordance with his duties; was acting in accordance with the Accounting and Service Agreement; was acting in accordance with the Management Agreement; was acting in accordance with the authorised factoring business of CODFA; was drawing, signing and/or presenting cheques only in accordance with the authorised operation of CODFA’s account; and was only processing and causing to be deposited in CODFA’s accounts, cheques or other funds properly receivable in accordance with CODFA’s authorised business.
(b) as managing director of CODFA, owed a fiduciary obligation and a duty of care to CODFA; and
(c) as an officer of CODFA, had statutory duties to CODFA pursuant to section 232 of the Corporations Law.
257 Mr Wright is also said to have breached the same duties by failing to ensure that CODFA had a proper system of controls, audit and/or review in its business to avoid any unauthorised conduct by officers or employees such as Walters.
258 CODFA pleads that as a result of the breaches by Mr Wright, alleged in the statement of claim, CODFA has suffered loss by being deprived of the $1,240,641.00 ‘paid funds’, and the opportunity to earn profit on the paid funds. The pleading is that Mr Wright is liable to pay CODFA compensation including damages for the loss suffered, which liability is said to arise from the general law and/or section 1317HD of the Corporations Law.
CODFA’s Claims against Factors
259 CODFA pleads that in the premises, Factors at all material times under the CODFA Management Agreement, owed a duty of care to CODFA to ensure that the provision by Factors of services performed by Mr Wright would be provided with reasonable care and diligence.
260 CODFA pursues its claims against Factors by alleging that Factors breached the term of the CODFA Management Agreement that the services would be provided honestly and with reasonable care and diligence. The pleading is also that Factors is in breach of its duty of care under the CODFA Management Agreement to ensure that the provision by Factors of services performed by Wright would be provided with reasonable care and diligence.
261 CODFA pleads that as a result of such breaches by Factors, CODFA has suffered loss in that it has been deprived of the paid funds and the opportunity to earn profit on the paid funds. The claim against Factors is that it is liable to pay to CODFA damages for the loss suffered.
CODFA’s Claims against Mr Walters
262 CODFA then pleads that in the premises, Mr Walters at all material times:
(a) under the CODFA Accounting and Services Agreement, under the Management Arrangement and in tort, owed a duty of care to CODFA for the acts of himself and Mrs Walters;263 CODFA then turns to the transfer of funds between CODFA and Cashflow and pleads that between November 1994 and August 1996 or thereabouts, Mr Walters caused ‘the paid funds’ to be paid from CODFA’s accounts to Cashflow or to Cashflow’s clients totalling $1,240,641.
(b) as secretary of CODFA, owed a fiduciary obligation and a duty of care to CODFA; and
(c) as an officer of CODFA, had statutory duties to CODFA, pursuant to section 232 of the Corporations Law.
264 CODFA then pleads that between December 1994 and August 1996 or thereabouts, Mr Walters caused funds to be paid from Cashflow or Cashflow’s clients to CODFA’s accounts, totalling $1,060,641 (‘received funds’).
265 CODFA then pleads that as at 9 August 1996 or thereabouts, there was a deficiency of paid funds over the received funds in the sum of $180,000.
266 CODFA’s claim against Mr Walters is that he breached the terms of the CODFA Accounting and Services Agreement earlier set out, and that he breached the duties of care owed to CODFA under the Accounting and Services Agreement and under the Management Agreement and in tort, for the acts of himself and Mrs Walters. Mr Walters is alleged to have breached the duties owed by him as secretary of CODFA by way of fiduciary obligations and duty of care to CODFA. He is also said to have breached his statutory duties owed to CODFA pursuant to section 232 of the Corporations Law. Particulars of the breaches are as follows:
(a) making advances of CODFA’s funds other than in accordance with CODFA’s authorised factoring agreements and/or other authorised business;267 As a result of Walter’s alleged breaches of the terms of the CODFA Accounting and Services Agreement and of the duties earlier referred to, CODFA alleges that it suffered loss, particulars being the paid funds and the opportunity to earn profit on the paid funds. CODFA’s claim against Mr Walters is for compensation, including damages for the loss suffered. That liability is said to arise from the general law and/or a section 1317HD Corporations Law.
(b) preparing, signing and/or presenting to Wright for signing, cheques on behalf of CODFA that were not properly payable to the named payee and otherwise not drawn and presented in accordance with CODFA’s authorised business;
(c) failing to act in a diligent, honest and careful capacity in accordance with the duties earlier referred to.
Dealing with CODFA’s claims against Mr Wright, Factors, Mr Walters and Trans-pac No 2
268 It is convenient to next set out my findings in relation to CODFA’s claims against Mr Wright, Factors, Mr Walters and Trans-pac No. 2.
269 There is no doubt on the evidence, that at all material times Mr Wright was the managing director of CODFA and a co-signatory of CODFA’s St George and Commonwealth Bank of Australia accounts (‘CODFA’s accounts’).
270 Mr Wright in fact admits that he was the managing director of CODFA in paragraph 3 of the Defence to the Amended Statement of Claim. I refer also to paragraphs 11 and 24 of Mr Kull’s statement of 14 September 1998. The particular accounts in respect of which Mr Wright was a co-signatory, were the St George account No. 100170533 at its Blacktown Branch and the CBA account No. 10026675 at its Beverley Hills Branch.
271 There is no doubt that at all material times Mr Walters was the secretary of CODFA and a co-signatory of CODFA’s accounts.
272 The accounts in respect of which Mr Walters was a co-signatory are detailed in Mr Kull’s statement of 14 April 1998, paragraphs 14 and 49.
Findings as to the CODFA Management Agreement between Factors and CODFA
273 On my findings, the CODFA Management Agreement has been proven to be in force as at and after November 1994 between Factors and CODFA by which Factors agreed with CODFA for Factors to provide the managerial services of Mr Wright to CODFA in consideration for CODFA paying to Factors a management fee.
274 That agreement, on my findings, was made on or about 1 August 1991 and varied on 3 June 1992 and 30 June 1993.
275 To the extent that the agreement is express, it is constituted by inter alia the following documents:
(a) Joint Venture Agreement between CODFA, Kylon, Mr Wright, Mr Kull and Factors dated 1 August 1991 - and in particular clause 13 of that document (‘the Joint Venture Agreement’).276 To the extent that the agreement is implied, it is on my findings, to be inferred from the above described documents and is further inferred from the following facts and circumstances:
(b) Deed of Variation of the Joint Venture Agreement between CODFA, Kylon, Mr Wright, Mr Kull and Factors dated 3 June 1992.
(c) Deed of Variation of the Joint Venture Agreement between CODFA, Kylon, Mr Wright, Mr Kull and Factors dated 30 June 1993.
(a) Mr Wright perceived his role as being one in which he would have responsibility for management: “I will . . . have overall control of the operation of the new company” - [statement of Mr Kull dated 14 April 1998, paragraph 9].277 It was, in my judgment, a term of the CODFA Management Agreement that the services would be provided honestly and with reasonable care and diligence. That term is implied and arises from, inter alia, the following facts and circumstances:
(b) As at and after November 1994, Mr Wright worked at the premises for CODFA in a managing capacity.
(c) Factors rendered to CODFA invoices for work performed by Mr Wright on Factors’ behalf for CODFA.
(d) CODFA paid to Factors cheques in the name of Factors for the invoices rendered.
(a) Under clause 12 of the Joint Venture Agreement, Mr Wright and Factors held out to CODFA that Mr Wright had expertise in examining factoring proposals and would bring that expertise to bear in managing CODFA’s business.278 I turn then to the question of the management of CODFA.
(b) The nature of the tasks and duties being performed.
The Management of CODFA
279 Mr Wright, in his capacity as managing director of CODFA and additionally by reason of the terms of the CODFA Management Agreement, was responsible for the following tasks:
(a) Examining and approving factoring proposals that were submitted to CODFA - see clause 12 of the Joint Venture Agreement.280 In my judgment, the CODFA Accounting and Services Agreement has been proven to be in force as at and after November 1994 between Mr Walters and/or Mrs Walters, trading as Walters & Associates of the one part and CODFA on the other part by which Mr Walters agreed with CODFA for Mr Walters to provide to CODFA accounting services and other services in consideration for CODFA, paying to Mr Walters and Mrs Walters, trading as Walters & Associates, a fee.
(b) Ensuring that funds advanced to clients were made in accordance with the factoring agreement. This responsibility arises from the nature of the factoring business - see the statement of Mr Kull dated 14 April 1998, paragraph 25.
(c) Ensuring that loans or other transfers of moneys to companies of which he was a director or in which he held some interest or which were not usual factoring clients of CODFA, were scrutinised and paid for a proper commercial purpose - see statement of Mr Kull dated 14 April 1998 paragraph 25.
(d) Co-signing cheques payable by CODFA in the course of CODFA’s authorised business.
Findings as to the CODFA Accounting and Services Agreement
281 That agreement was made on or about 1 August 1991.
282 To the extent that the agreement is express, it is constituted by clause 18 of the Joint Venture Agreement: Exhibit PXC page A20.
283 To the extent that it is implied, it is constituted by inter alia, the following facts and circumstances:
(a) As at and after November 1994 until about August 1996, Mr Walters worked at the premises for CODFA, performing accounting work and posting into the bank reconciliation ledger details of cheques drawn on CODFA’s account, posting of debtor invoices received by CODFA into the accounts receivable ledgers, processing of receipts received by CODFA, writing cheques, reconciling various aged receivable reports for various clients of CODFA, writing up bank deposit slips for deposits into the account of CODFA.284 On my findings, terms of the CODFA Accounting and Services Agreement were that:
(b) Mr Walters rendered to CODFA, invoices in the name of Walters & Associates for such accounting services performed by Mr Walters for CODFA. The invoices for the period June 1991 to June 1996 are to be found in Exhibit PXC at pages A110-237.
(c) CODFA delivered to Mr Walters, cheques in the name of Walters & Associates for the invoices that were rendered. The copies of cheque butts in payment of such invoices for the period August 1991 to September 1996 are contained in Exhibit PXC pages A270-341. The deposit book entries for EJ & LA Walters account No. 2118250928 which showed deposit of CODFA cheques on payment of such invoices for the period 5 June 1992 to 12 march 1996, are contained in Exhibit PXC pages C249-381.
(a) Mr Walters would provide to CODFA services including processing of authorised cash receipts and drawing for signature of cheques properly payable in accordance with CODFA’s authorised business.285 I accept CODFA’s submission that the terms are implied and arise from the nature of the tasks and duties being performed.
(b) Mr Walters would sign and present to Mr Wright for signing, only cheques which were payable on behalf of CODFA in accordance with CODFA’s authorised business.
(c) The services provided by Mr Walters would be provided honestly and with reasonable care and diligence.
Duties of Mr Wright, Factors and Mr Walters
286 On my findings, Mr Walters and Mr Wright were at all material times, officers of CODFA within the meaning of section 231 of the Corporations Law.
287 Mr Wright at all material times:
(a) under the CODFA Management Agreement owed a duty of care to CODFA;288 Factors at all material times under the CODFA Management Agreement, owed a duty of care to CODFA to ensure that the provision by Factors of services performed by Mr Wright would be provided with reasonable care and diligence.
(b) as managing director of CODFA, owed a fiduciary obligation and a duty of care to CODFA;
(c) as an officer of CODFA, had statutory duties to CODFA pursuant to section 232 of the Corporations Law.
289 Mr Walters at all material times:
(a) under the CODFA Accounting and Services Agreement and in tort, owed a duty of care to CODFA;290 Mr A.J. Cachia of Bartlett and Cachia, Chartered Accountants, prepared a report dated 30 April 1998 dealing, inter alia, with the question of whether the books and records of Cashflow had been kept in accordance with the requirements of the Corporations Law. His investigation was based upon the documents identified on pages 2 and 3 of the Report. The documents included bank statements, factoring agreements, Cashflow monthly reports from September 1994 to August 1996, including profit and loss accounts, balance sheets, trial balances, summaries of transactions with individual clients, debtors’ summary trial balances for Trans-pac and debtors’ reconciliation and ageing. A number of other selected items were made available to Mr Cachia from the provisional liquidator’s investigation file and Mr Cachia also had access to income tax returns for the financial years June 1995 to June 1996 and to financial statements prepared by Mr Burkett for the financial year 30 June 1995.
(b) as secretary of CODFA, owed a fiduciary obligation and a duty of care to CODFA;
(c) as an officer of CODFA, had statutory duties to CODFA pursuant to section 232 of the Corporations Law.
The Books and Records of Cashflow
291 Mr Cachia’s conclusion which was not challenged during the hearing and is supported by the evidence, was expressed as follows:
“We have formed the opinion that the books and records of Cashflow were not kept in accordance with the requirements of the Corporations Law. Specifically, we bring the following matters to your attention.The Cashflow Unauthorised Payments
Section 1307 Falsification of Books:
In our opinion, based upon the results of our investigation, it would appear that the books and records of the company were kept in breach of the provision of Section 1307 of the law.
Section 232 Duty and Liability of Officers
In our opinion from the investigation conducted, it would appear that this section has not been complied with.
Section 232(4) Care and Diligence
In our opinion from the investigation conducted, it would appear that this section has not been complied with.
Section 289
In our opinion from the investigation conducted, it would appear that this section has not been complied with.
In arriving at the opinion that Cashflow did not comply with the above sections of the Corporations Law, we provide the following specific examples:
(a) The financial statements for the year ended 30 June 1995 were incorrect and resulted in an amended income tax return being lodged by the provisional liquidator. In this regard, the debt due from Transpac No 1 was understated by $140,000 as at the aforementioned date. This was a direct result of a post-balance date accrual made on 3 October 1995 accruing 1996 income into the 1995 year. This adjustment forms part of the $224,706 discrepancy in the June 1995 summary . . . . As a consequence until this was subsequently discovered it was not readily apparent that Trans-pac No 1 was then in breach of it’s factoring facilities and the account was in fact delinquent at that stage.
In consequence of the error and entry made as a result, the 1995 financial statements reported a profit. The true position was not disclosed at that time. It required an adjustment in respect of fees paid and written-off in part or as to the whole of the debt due from Trans-pac No 1. Consequently the profit would be recorded as a loss and in turn both the tax paid and the dividend declared would not have been paid. This in turn would require adjustment of the fees payable to COD Factors, Walters & Associates and COD Factors Australia.
(b) The Trans-pac ledger account in the books of Cashflow showed a balance owing by Transpac with agreed with the balance as reported on the monthly statements presented to the Board meetings, however there were numerous computerised ledger entries with substantial adjustments.
In order to assess the actual position, a manual reconstruction of this account was completed by Mr A Bonvino and is included in this report as annexure ‘B’. We chose a representative sample of the transactions identified in annexure ‘B’ and verified those transactions by examining source documents such as cheque butts and bank statements. We are satisfied that annexure ‘B’ has been prepared correctly.
Annexure ‘B’ reveals materials discrepancies in that the balance of the Trans-pac debt presented on the monthly statements was less than the actual debt. For example, extracted below is the reporter debt and the actual debt for the month of July to October 1995:
Month Actual Debt Reported Debt
July 1995 923487 753211
August 1995 977696 737439
September 1995 1026824 766824
October 1995 1147809 780836
The Unauthorised Payments
292 On my findings, between November 1994 and August 1996 or approximately between these dates, Mr Walters caused the ‘paid funds’ of CODFA to be paid from CODFA’s accounts to Cashflow or Cashflow’s clients, totalling $1,240,641 and between December 1994 and August 1996 or thereabouts, Mr Walters caused the ‘received funds’ to be paid from Cashflow or Cashflow’s clients to the St George account totalling $1,060,641. The subject bank statements for CODFA for its CBA, St George and Burkett accounts relating to the unauthorised payments are to be found in Exhibit PXC Volume B at pages 52 to 134. The copies of cheques drawn appear at PXC-B177-215. The summary of payments is set out in Annexure GMG4 to the statement of Mr Graham Green made on 27 March 1998.
293 The payments were unauthorised: see the statement of Mr Kull dated 14 April 1998, paragraphs 47 and 76 - 79.
294 As at 9 August 1996, or approximately on this date, there was a deficiency of paid funds over the received funds in the sum of $180,000.
The Trans-pac No. 2 Unauthorised Payments
295 On 24 May 1996, Mr Walters drew a cheque for $49,626 on CODFA’s account in favour of Trans-pac No. 2.
296 Between June 1996 and August 1996, Mr Walters withdrew by electronic transfer of funds, sums in the total of $396,498 which were paid into the account of Trans-pac No. 2. These payments are admitted by Trans-pac No. 2 - see paragraph 3(a) defence filed 25 September 1997 in proceedings 50114 of 1998. The payments are otherwise established by the evidence - see CODFA’s bank statements, Exhibit PXC pages C45-51; handwritten list prepared by Mr Walters of payments from CODFA to Trans-pac No. 2, Exhibit PXC page C44; bank statements for Trans-pac No. 2 for 11 June 1996 - 12 June 1996 and 19 June 1996 - 20 June 1996, Exhibit PXC page C52.
297 These moneys were paid by Mr Walters without authorisation, to or for the benefit of Trans-pac No. 2 which received the moneys without giving any consideration for it. In those circumstances, Trans-pac No. 2 became liable at law and in Equity to restore CODFA’s moneys to it. On the available evidence, I accept that Trans-pac No. 2 is not shown to have any unsecured property at this time.
Holding as to CODFA’s Claims Against Mr Wright
298 In my judgment, Mr Wright breached the duties alleged by CODFA and each of them. The breaches were:
(a) Failing to ensure that CODFA made advances only in accordance with its authorised factoring agreements or other authorised business. I refer here to the cheques drawn on CODFA’s accounts in favour of Cashflow or parties not clients of Cashflow - see statement of Mr Kull dated 14 April 1998 paragraphs 70-72; see Exhibit PXC pages B177, B178, B181-184, B186, B189-194, B223.299 I accept CODFA’s submission that Factors breached the term of the CODFA Management Agreement that the services would be provided honestly and with reasonable care and diligence. I accept further CODFA’s claim that Factors is in breach of the duty of care owed to CODFA to ensure that the provision by Factors of services performed by Mr Wright would be provided with reasonable care and diligence. The breaches are constituted by the fact that the performance by Mr Wright of management services pursuant to the CODFA Management Agreement, was not carried out with reasonable care and diligence. The breaches are referred to above under the sub-heading ‘Holding as to CODFA’s Claims Against Wright’.
(b) Signing cheques carelessly without ensuring that the cheques were properly payable to the named payee and otherwise drawn and presented in accordance with CODFA’s authorised business dealings. The cheques were drawn on CODFA’s accounts in favour of Cashflow or parties not clients of Cashflow - see the statement of Mr Kull dated 14 April 1998, paragraphs 70-72 and see Exhibit PXC pages B177, B178, B181-184, B186, B189-194 and B223.
(c) Failing to monitor, supervise and check that Mr Walters was:
(i) acting in a diligent, honest and careful capacity in accordance with his duties;[I refer here to the evidence that Mr Wright failed to implement the resolutions (in particular resolution 6 regarding risk management procedures - see T 18 March 1999 pages 29.26-30.13. The breaches appear from the fact that the unauthorised payments were made.]
(ii) acting in accordance with the Accounting and Services Agreement;
(iii) acting in accordance with the Management Arrangement;
(iv) acting in accordance with the authorised factoring business of CODFA;
(v) drawing, signing and/or presenting cheques only in accordance with the authorised operation of CODFA’s accounts.
[In relation to the matters dealt with in sub-paragraph (c) above, I note that concerns about the way in which Mr Walters was performing his duties were raised with Mr Wright by Mr Kull in a meeting on 24 October 1995 - T 18 March 1999 pages 29.26 - 29.33. Mr Wright failed to implement the resolutions and in particular resolution 6 regarding risk management procedures - T 18 March 1999 pages 29.26-30.13. The resolutions are set out in the minutes of the meeting appearing at PX 1954. The breaches appear from the fact that the unauthorised payments were made. The breach by Mr Wright is also confirmed by his own statement tendered as regarding his practice in countersigning cheques - paragraphs 171-178 inclusive of Mr Wright’s statement, Exhibit P17.]
(d) Failing to ensure that CODFA had a proper system of controls, audit and/or review in its business to avoid any defalcation by officers or employees such as Mr Walters.
Holding as to CODFA’s Claim Against Factors
Holding as to CODFA’s Claim Against Mr Walters
300 I accept CODFA’s submission that Mr Walters is shown to have breached the terms of the CODFA Accounting and Service Agreement, earlier referred to in paragraph 284 and the duty alleged in paragraph 287 and each of them.
301 The breaches are:
(a) Making advances of CODFA’s funds other than in accordance with CODFA’s authorised factoring agreements and/or other authorised business - see the statement of Mr Kull, 14 April 1998 paragraphs 74-82.302 Trans-pac No. 2 was plainly not a client of CODFA - see statement of Mr Kull dated 14 April 1998 paragraph 51.
(b) Preparing, signing and presenting to Mr Wright for signing, cheques on behalf of CODFA that were not properly payable to the named payee and otherwise drawn and presented in accordance with CODFA’s authorised business.
(c) Failing to act in a diligent, honest and careful capacity in accordance with his duties - see statement of Mr Kull, 14 April 1998 paragraph 74; evidence of Mr Kull in cross-examination, 18 March 1999 T 33.43 - .53
Holding as to CODFA’s Claim Against Trans-pac No. 2
303 The payments made to Trans-pac No. 2 were not authorised and were not for any CODFA commercial purpose.
304 CODFA has demanded repayment of the funds paid to Trans-pac - see letter from John Burrell solicitors to Trans-pac No. 2 dated 4 September 1996, Exhibit PXC pages C56-57.
305 Trans-pac has failed to repay any funds to CODFA: see paragraph 20 statement of Mr Kull dated 30 October 1998.
306 Leave to proceed against Trans-pac No. 2 has been granted.
Loss
307 I accept CODFA’s submission that as a result of the breaches by Mr Wright, Factors and Mr Walters, CODFA has suffered loss in that it has been deprived of the paid funds and of the opportunity to earn profit on the paid funds.
308 In the result, Mr Wright, Factors and Mr Walters are liable to pay compensation to CODFA including damages, for the loss suffered by CODFA. This liability arises from the general law and also by reason of section 1317HD of the Corporations Law.
309 It is appropriate that judgment be entered for CODFA against Mr Wright, Factors and Mr Walters.
310 It is appropriate that judgment be entered against Trans-pac No. 2 in the sum of $446,124. I stand over for further submissions to be addressed when Short Minutes are brought in, the question of whether, as claimed by CODFA, liberty should be reserved to it to claim an equitable interest in such (if any) property, as may come into the hands of the liquidator of Trans-pac No. 2.
Cashflow’s Case against Factors, Mr Wright and Mr Walters
Operation of the Factoring Deed
311 Cashflow advanced detailed submissions in terms of the precise operation of the Factoring Deed. I accept these submissions.
312 The first step is that the client makes out a First Schedule identifying the debts which the creditor desires to sell to the financier. The format of the First Schedule to the deed provides space for the listing of the debts on the first page and there is a second page of the First Schedule which requires full details of invoices to be provided. Under the factoring deed, it is the payment of the price which is proof of the acceptance of the offer to sell the debt. In relation to Trans-pac’s First Schedules after 7 December 1994, the debts are not identified. They were therefore, I accept, never purchased. Many of the First Schedules that were submitted after 7 December 1994 were not even signed by anyone on behalf of Trans-pac. There is then a gap in the First Schedules from 31 May 1995 to 1 March 1996. The effects of the departures from the procedures laid down in the Factoring Deed is that Cashflow was making loans to Trans-pac No. 1, on no security or inadequate security. Here, I note that the charge that Trans-pac No. 1 gave was to secure moneys owing under the factoring agreement, and that there was also an ‘all moneys’ clause. However, the only property that was charged was the book debts themselves. The guarantees related only to money owing under the factoring deed, and so would not apply to moneys advanced without there being an assignment of debts under the factoring deed.
313 While there was a ‘Trans-pac general ledger control account’ in the books of Cashflow, I accept that the account did not correctly reflect the true legal nature of the arrangements. If there had been a debt purchased from Trans-pac, the purchase price of that debt was money which Cashflow had outlaid on its stock-in-trade. It was not a loan to Trans-pac. If the debtor paid, and Cashflow received the money so paid, it receiver it as it’s own money. If the debtor did not pay, then Cashflow had the right to reassign the debt, and it might come to be owed money by Trans-pac upon any such reassignment occurring. The general ledger control account mixed together indiscriminately moneys that were owing by Trans-pac and moneys that were payable by debtors that had been assigned by Trans-pac to Cashflow. The balance of the account (when corrected for errors) is commercially useful, I accept, as an indicator of the total amount that is due to Cashflow from Trans-pac and assigned Trans-pac debtors in total, and Cashflow used this balance as part of its proof of loss. Its true legal nature, I accept, does require to be recognised.
314 After November 1995, I accept that there was no factoring at all because Trans-pac No. 1 stopped business and Trans-pac No. 2 began. There was no agreement for factoring, I accept, between Trans-pac No. 2 and Cashflow.
The date when Trans-pac No. 1 Stopped and Trans-pac No. 2 Started Carrying on Business
315 This is a factual question. I accept Cashflow’s submission that the correct conclusion from the evidence is that Trans-pac No. 1 stopped business in November 1995 and that Trans-pac No. 2 started at that time.
316 The bases for this conclusion on the evidence are as follows:
(i) In September/October 1995 at the very latest (‘after about 12 months . . .’), Mr Bonvino became concerned about lateness of the monthly meetings of Cashflow directors and lack of information from Mr Walters. In retrospect I accept that it can be seen that the reason for the lateness was that Mr Walters had started to make the unauthorised ‘borrowings’ from CODFA, in circumstances where they could not be ‘repaid’. From 17 August 1995, there were always ‘borrowings’ from CODFA that had not been repaid, and by 19 September 1995, the ‘borrowings’ that were attributable to money paid to Trans-pac, totalled $180,000. This, I accept, is indicative of Trans-pac No. 1 itself being in financial difficulties from at least mid-August 1995. When Trans-pac No. 1 had these difficulties, it’s directors, I accept, had the motivation to abandon Trans-pac No 1 and to recommence using a new shelf company.As against Mr Wright
(ii) Further, the directors of Trans-pac had given mortgages over their homes in February 1995 (and their sons had also mortgaged a property to Cashflow at Kemps Creek). Each mortgage was to secure amounts owing under the guarantee that had been given, which was in turn a guarantee of amounts owing by Trans-pac No. 1 under the factoring deed. The directors of Trans-pac had a motive to stop the build-up of a mortgage debt against their real estate and the real estate of their sons, by incurring no further debt in Trans-pac No. 1.
(iii) On 9 October 1995, Mr Peter Panayi and Mr Terry Panayi were appointed as directors of Trans-pac No. 2.
(iv) On 13 October 1995 Trans-pac No. 2, which was formerly a shelf company, adopted the name of Trans-pac Australia Pty Limited. It’s principal place of business is the same as that of Trans-pac No. 1.
(v) On 31 October 1995, the National Australia Bank issued the first bank statement of Trans-pac No. 2.
(vi) On 27 November 1995, cheques drawn on Cashflow and made out to Trans-pac No. 1 started to be banked to the bank account of Trans-pac No. 2. All cheques which were drawn on Cashflow and made out to Trans-pac No. 1 thereafter were deposited into the bank account of Trans-pac No. 2.
(vii) The dealings in the Trans-pac No. 1 bank account after 27 November 1995, I accept, are sporadic and not the sort of dealings that are to be expected from a company that is actively trading. The dealings in the Trans-pac No. 2 account, I accept, are indicative of trading.
(viii) A report of the Credit Reference Association of Australia Limited shows that there was an enquiry about the credit status of Trans-pac No. 1 on 27 November 1995, but then no further enquiries until CODFA requested a report on 14 August 1996.
(ix) On 9 February 1996, the account of Trans-pac No. 1 with the National Australia Bank at Strathfield was closed.
(x) On 21 February 1996, the name of Trans-pac No. 1 was changed to Strathfield Information Processing Bureau Pty Limited.
(xi) From 9 April 1996, debtor enquiry reports exist in the name of Trans-pac No. 2.
(xii) The provisional liquidator’s report states that Peter Panayi says that Trans-pac No. 1 transferred its business to Trans-pac No. 2 in November 1995. The notes of interview of Mr Star with Mr Panayi of 17 September 1996 appear quite unequivocal that Trans-pac No. 1 ‘ceased to operate in November 1995 and thereafter the business was transferred to CDC Packaging Pty Limited which changed its name to Trans-pac Australia Pty Limited’. [PX 1957]
(xiii) I accept that the broad picture of the assets and liabilities of Trans-pac No. 1 which Mr Panayi disclosed to Mr Star on 17 September 1996 was ‘group tax $700,000, payroll tax $100,000. Workers compensation could be $50-$100,000. Cashflow for whatever it is owed’, and assets of, in substance, nil. This picture, I accept, is consistent with the picture of the assets and liabilities of Trans-pac No. 1 contained in its Report as to Affairs. That supports the view that the Report as to Affairs is based upon trading that the company did up to November 1995.
(xiv) The only mention in the evidence of any other date being attributed to the changeover of the business is Mr Gelder reports, that a defence of Trans-pac No. 2 in Equity Proceedings 2045 of 1997 (verified by Mr Peter Panayi), states that Trans-pac No. 2 took over the management of Trans-pac No. 1 in April 1996. To my mind, that evidence ought not alter the conclusion to which I have reached for the reasons:
(a) That a hearsay reference to such a statement in an affidavit verifying a pleading by a person who is not called in the proceedings is of no weight.
(b) That the inevitable tendency of the defence attributing a late start to Trans-pac No. 2’s business would be to lessen the potential liability of Trans-pac No. 2 in the proceedings in which the defence was sworn. Mr Peter Panayi is someone who, on the evidence before the Court about him, one would not automatically accept. Thus his statement in that particular affidavit is of even less weight than a statement in an affidavit verifying a pleading ordinarily would be.
(c) The proceedings in which that defence was filed are ones that were renumbered as 50114 of 1998, presently before the Court - the defence is one which has had no one appearing in Court to support it.
Personal Common Law and Equitable Claims of Cashflow Against Mr Wright and Mr Walters
317 Cashflow pleads that Mr Wright, as managing director of Cashflow and Mr Walters, as company secretary of Cashflow and also on behalf of Walters & Associates, failed to keep and maintain accounting records of Cashflow in accordance with section 289 of the Corporations Law.
318 Cashflow then pleads that by reason of section 588E(3) and (4) of the Corporations Law, Cashflow was insolvent during the twelve month period ending on the relation back day.
319 Cashflow pleads in the alternative that it was insolvent in fact during the relevant period which is defined as the twelve month period ending on the relation back day.
320 Cashflow pleads that further or in the alternative, there were reasonable grounds for suspecting that Cashflow was insolvent during the relevant period.
321 Cashflow pleads that Mr Wright was or should have been aware that Cashflow was insolvent during the relevant period and was on notice that there were reasonable grounds for suspecting that Cashflow was insolvent. Particulars in support of this allegation are that Mr Wright was managing director of Cashflow during the relevant period and as such, was responsible for the day to day administration and overall supervision of Cashflow. Further particulars are that the accounting records of Cashflow were not kept in accordance with section 289 of the Corporations Law and that Cashflow made advances to Trans-pac No 1 in breach of the relevant factoring deed and/or after Trans-pac No 1 had ceased to trade.
322 Cashflow then pleads that in the premises, Mr Wright is liable to pay to Cashflow, damages or compensation equal to the amount of loss sustained by Cashflow by reason of it’s insolvent trading. Mr Wright’s liability is said to be based upon his breaches of statutory duty brought in respect of the causes of action as stipulated in section 588G and section 1317HD of the Corporations Law.
323 Cashflow also pleads that at all material times Mr Wright acted as managing director and as director, servant and/or agent of Factors in relation to the affairs of Cashflow and that in breach of his duty as a director he so negligently, carelessly and recklessly, managed the affairs of Cashflow and further in breach of his fiduciary duties and/or statutory duties caused Cashflow to suffer damage and loss as a result of the performance of his duties in the manner then pleaded.
324 Particulars of negligence and breaches of fiduciary duties by Mr Wright are detailed in paragraph 32 of the amended cross-claim brought by Cashflow in proceedings 50177 of 1997. The eighteen particulars are as follows:
(i) Failure to ensure that advances were made by Cashflow to Trans-pac No. 1 in accordance with the relevant Factoring Deed.325 Cashflow then pleads that in the premises, Mr Wright was at all material times under a duty to comply with the provisions of section 232(2) and (6) of the Corporations Law and in breach of those duties failed to conform to and/or comply with the law as a result of which Cashflow suffered loss and damage.
(ii) Failing to ensure that Cashflow had a proper system of controls in its business or adhered to such a system.
(iii) Failing to conduct proper enquiry or investigation into the affairs of Trans-pac No. 1 to ensure compliance with the relevant Factoring Deed and Deed of Charge.
(iv) Failing to ensure that Cashflow made advances at all only in accordance with an executed Factoring Deed.
(v) Failing to monitor, supervise and check that Walters was acting in a diligent, honest and efficient capacity.
(vi) Failing to monitor that Walters in his capacity as secretary of Cashflow or a principal of Walters and Associates was acting in accordance with the dictates of the policy of Cashflow and in particular drawing cheques in accordance with the Authority in relation to the Account and not otherwise.
(vii) Failing to ensure that Walters entered into factoring agreements which were proper, suitable and with sufficient security to enable the factoring of the debts and the realisation of them without loss being incurred by Cashflow.
(viii) Failing in the circumstances to conduct and/or supervise audits, reviews, and implement a system of checks and balances to ensure and/or avoid any defalcation by employees, and/or agents in particular such as Walters as occurred;
(ix) Failing in the circumstances to carry out diligently, efficiently and effectively the management of Cashflow’s business to the extent that it required Cashflow to be put into liquidation as a result, inter alia, of the conduct of Walters and Associates in conjunction with Factors Australia.
(x) Failing to ensure that factoring arrangements were only given as against advances with sufficient security and that if security was to be given for limited periods of time alternatively security to supplement and/or replace security offered was available and able to be put into position.
(xi) Allowing himself to be put into a position of conflict to Cashflow, detriment where he was a director of Factors Australia and Factors and in the circumstances deferred his position and breached his fiduciary and statutory duties to Cashflow by advancing the interests of Factors Australia as a result of which Cashflow sustained loss and damage.
(xii) Failing to ask for cash book reconciliations to be compared to amounts noted in financial statements thereby not detecting abnormalities and/or unauthorised advances which would have been so disclosed to him upon perusal.
(xiii) Signing cheques and leaving them with Walters to fill in the amounts and counter sign them thereby offering an opportunity and/or temptation to engage in fraudulent conduct.
(xiv) Failing to attend the premises throughout the day and in particular by only attending for a short period in the day thereby leaving the premises unattended and without proper or adequate supervision to ensure that the business would run properly and not otherwise.
(xv) Declaring dividends when Cashflow as insolvent.
(xvi) Failing to monitor and/or keep himself informed of the status of the loan accounts in respect of advances between Cashflow and Factors Australia.
(xvii) Failing to keep books and records in accordance with Section 289 of the Corporations Law.
(xviii) Allowing payments to be made to Factors Australia by Cashflow without proper arrangements, unsecured, and for no apparent purpose benefiting Cashflow, alternatively failing to prevent such transactions occurring.
326 Cashflow in the alternative, or in addition to its other claims pleads that Mr Wright and/or Mr Walters made a number of representations to Mr Bonvino, a director of Cashflow. These are said to have been that the monthly accounts of Cashflow for the 1995-1996 financial year were correct; that advances were being made to Trans-pac No 1 in accordance with the factoring deed or as agreed and not otherwise; and that the Trans-pac account was in good order.
327 Cashflow pleads that at the time of making these representations, Mr Wright and/or Mr Walters did not have reasonable grounds for making the same.
328 Cashflow pleads that as to Mr Wright, he:
(i) accepted monthly accounts given to him by Mr Walters, when he had not carried out any checks of the accuracy of the accounts, and no systems or alternatively no reasonably adequate system of controls was in place to ensure the accounts were accurate;329 Cashflow also pleads that Mr Walters knew of the lack of reasonable grounds because he was responsible for the failure to take, adhere to and implement the factoring deed and steps required to be taken and not in fact taken by Mr Wright.
(ii) had made no enquiries (or no reasonable enquiries) to ascertain whether or not the advances to Trans-pac were being paid in accordance with the factoring deed or otherwise as agreed;
(iii) had made no enquiries (or alternatively no reasonable enquiries) to ascertain whether or not the Trans-pac account was in good order;
(iv) had taken no steps (or alternatively no adequate steps) to implement systems to assist in achieving accurate monthly accounts in the fund;
(v) had taken no steps (or alternatively no adequate steps) to assist in ensuring that advances would in future be made in accordance with the factoring deed;
(vi) had taken no steps (or alternatively no adequate steps) to assist in ensuring that the Trans-pac account would in future would be in good order.
330 Cashflow pleads that the representations were material and were relied upon by Mr Bonvino as a director of Cashflow in continuing to cause Pyrafount to advance funds to Cashflow to be used as working capital; in inducing other persons to advance funds to Cashflow to be used as working capital; in not investigating himself, the books and records of Cashflow until August 1996; in approving the payment of dividends and fees in respect of the financial year ending 30 June 1995 as a director of Cashflow and in allowing Cashflow to continue to trade.
331 Cashflow pleads that were it not for the representations, it is likely that Mr Bonvino would have investigated the accounts of Cashflow as at 30 June 1995 as a result of which such investigation would have shown the accounts to be incorrect and by reason of the foregoing, no dividends or fees would have been paid and no losses of capital or unauthorised transactions would have occurred after that date.
332 Cashflow pleads that the representations were made in trade or commerce and were misleading or deceptive within the meaning of section 42 of the Fair Trading Act 1987 (NSW) in that the debt due from Trans-pac No 1 as at 30 June 1995 was understated in the financial accounts by $140,000 and the Trans-pac No 1 account was delinquent as at 30 June 1995 and advances had been made other than in accordance with the factoring deed or as agreed.
333 Cashflow pleads that by reason of these matters, it suffered loss and damage.
334 Cashflow in the alternative, pleads that the insolvent transactions occurred by reason of Mr Wright’s negligence or alternatively, were a breach of Mr Wright’s statutory obligation to Cashflow set out in section 232(4) of the law.
335 Cashflow also pleads that during the relevant period it entered into a number of transactions pursuant to which it paid the sum of $772,172 to CODFA; it made payments to Trans-pac No 1; it paid dividends of $105,430 and it paid fees of $113,800.
336 An alternative claim put by Cashflow is that the uncommercial transactions occurred by reason of Mr Wright’s negligence or alternatively were a breach of Mr Wright’s statutory obligation to Cashflow set out in section 232(4) of the law.
As against Mr Walters
337 In relation to Mr Walters, Cashflow pleads that in the course of it’s activities the following agreements were entered into:
(a) a Factoring Deed dated 1 September 1994 between Trans-pac No 1 and Cashflow;338 Cashflow then plead that Mr Walters, by discharges of mortgage dated 7 May 1996 wrongfully facilitated the discharge of the first mortgage and third mortgage by the unauthorised execution of the discharges for which Cashflow pleads that it received no benefit.
(b) a company charge dated 1 September 1994 pursuant to which Trans-pac No 1 gave a fixed and specific charge over it’s book debts in favour of Cashflow;
(c) a Deed of Guarantee and Indemnity dated 1 September 1994, pursuant to which Tony Attallah, Terry Panayi and Patricia Kyriakou guaranteed the obligations of Trans-pac to Cashflow under the Factoring Deed;
(d) a Deed of Guarantee and Indemnity dated 16 February 1995, pursuant to which Tony Attallah, Peter Panayi, Elly Panayi, Terry Panayi, Patricia Kyriakou and Christopher Mark Panayi, inter alia, guaranteed the obligations of Trans-pac No 1 to Cashflow under the Factoring Deed;
(e) a Deed dated 16 February 1995 pursuant to which Patricia Panayi guaranteed the obligations of Trans-pac No 1 to Cashflow under the Factoring Deed;
(f) a Mortgage dated 16 February 1995, given by Terry Panayi and Patricia Kyriakou over property described by folio identifier 20/1/581 in favour of Cashflow to secure the obligations of Terry Panayi and Patricia Kyriakou to Cashflow pursuant to the second guarantee;
(g) a Mortgage dated 16 February 1995 given by Terry Panayi and Christopher Panayi to Cashflow pursuant to the second guarantee;
(h) a Mortgage dated 16 February 1995 given by Peter Panayi and Elly Panayi over a property described as folio identifier 5/18295 in favour of Cashflow, to secure the obligations of Peter and Elly Panayi to Cashflow pursuant to the second guarantee;
(i) acknowledgments dated 16 February 1995 by Terry Panayi and Patricia Panayi, Peter and Elly Panayi, Christopher Mark Panayi and Terry Peter Panayi, Tony Attallah and Patricia Panayi pursuant to which each of them gave certain acknowledgments regarding the second guarantee and/or the third guarantee and/or the first mortgage and/or the second mortgage and/or the third mortgage.
339 Cashflow further pleads that Mr Walters, as an officer of Cashflow and on behalf of Walters & Associates, undertook or caused or allowed the occurrence of the following:
(a) Mr Walters made advances to Trans-pac No 1 knowing that the account was delinquent and/or the advances were not in accordance with the Factoring Deed or as agreed and/or the advances were not in accordance with the charge given by Cashflow;340 Cashflow then pleads that by reason of the above matters, Mr Walters acted in breach of statutory duties he was bound to observe pursuant to section 232, sub-sections (2), (4) and (6) of the law.
(b) Mr Walters prepared monthly management reports which were false to his knowledge;
(c) Mr Walters made advances to Trans-pac No 1 knowing that it was unlikely that such advances would be recoverable;
(d) Mr Walters prepared the accounts of Cashflow and included fees in respect of advances to Trans-pac No 1 knowing that the calculation of the fees was incorrect and such fees were unlikely to be recovered;
(e) Mr Walters prepared the 30 June 1995 accounts of Cashflow knowingly understating the debt of Trans-pac No 1 by $140,000;
(f) Mr Walters made advances to Factors Australia which were not authorised and in respect of which no arrangements were in place;
(g) Mr Walters failed to inform the directors of Cashflow of those matters.
341 Cashflow also pleads that the same conduct was misleading or deceptive within the meaning of section 42 of the Fair Trading Act.
342 Cashflow then pleads that Factors breached the Management Agreement referred to in it’s cross-claim.
343 Cashflow’s pleading seeks relief in terms of an order that the cross-defendants pay to the cross-claimants damages and interest and a declaration of it’s entitlement to contribution or indemnity from CODFA together with interest.
Holdings as to Cashflow’s Claims against Mr Wright, Factors and Mr Walters
Mr Wright’s negligence and breaches of duties and obligations owed to Cashflow
344 I accept that, as managing director, Mr Wright owed a duty of care and fiduciary duties. The duty of care is the common law duty of care which underlies a task.
345 I accept Cashflow’s submission that Mr Wright was responsible for the overall operation of Cashflow, including being responsible for supervising Mr Walters.
346 Mr Wright admits on the pleadings, that he was the managing director of Cashflow.
347 The written explanation of the factoring proposal that Mr Wright gave to Mr Bonvino at their first meeting:
(i) represented that the clients were ‘small to medium sized businesses which are profitable and backed by a reasonable level of assets’. This could only be known if it had been inquired into;348 The oral explanation which Mr Wright gave to Mr Bonvino at their first meeting stated that it was he, Mr Wright, who intended to run the new business.
(ii) gave ‘founding director, Peter Wright’ a central role in the operation, and said he ‘will continue to control all aspects of the company’s growth’. ‘Peter Wright’s long and successful trading history speaks for itself’;
(iii) said that ‘security requirements for factoring clients are very stringent and provide a very secure base for the security of loan funds’.
349 At the second meeting, Mr Wright undertook that he would be responsible for the day to day running of the operation and be paid for it.
350 At one of the earlier negotiating meetings, Mr Wright told Mr Bonvino that the factoring business was his business, he commenced it, and he used Mr Walters to do the accounting work.
351 At one of the June/July 1994 meetings, Mr Wright said that Mr Walters helped him, and that he, Mr Wright, would instruct Mr Walters and be responsible for him. Mr Wright also told Mr Bonvino that Mr Walters would do data collection and processing daily, and report to Mr Wright directly. Mr Wright’s management fee was for ‘running the show’. ‘We do everything possible to protect your investment’. Mr Wright said that a First Schedule was filled out every time any debts were factored. Mr Wright said that before the debts were factored, the debtors that were to be purchased were spot checked, to make sure that they were collectable.
352 Mr Bonvino agreed to pay the fee that Mr Wright asked (5% of profits monthly and an additional 50% of profits yearly) on the basis that it was for both marketing and management. The monthly payment that Mr Wright received was later agreed more specifically as being 5% of gross fees. This high level of remuneration, I accept, is sensible (and likely to be agreed to by Mr Bonvino), only if there is a correspondingly high degree of responsibility.
353 Mr Wright, it will be recalled, told Mr Kull in about June 1994, that he would manage the new company that was to be formed and which became Cashflow.
354 Mr Wright told Mr Bonvino that he intended to duplicate the existing CODFA business and the thrust of the proposal was that everything in Cashflow would operate as it did in CODFA. Under the Joint Venture Agreement relating to CODFA, Mr Wright had promised to ‘use his expertise to examine factoring proposals . . . and to attend to the management of the factoring business to be carried on by the company’ [Joint Venture Agreement clause 12]. The role of Walters & Associates in CODFA was as accountants.
355 On 15 March 1993, Mr Wright sent to Mr Kull a proposal for his ‘new management remuneration package’.
356 Mr Wright, I accept, in fact did tasks appropriate for a manager (rather than a mere salesman). This included being the person who contacted Mr Bonvino to ask for new deposits of funds.
357 Mr Wright’s conduct of the affairs of Cashflow, I accept, was negligent and a breach of the fiduciary and statutory duties owed by him. Each of the allegations particularised in paragraph 32 of the Cashflow amended statement of claim is made out on the evidence and is upheld.
358 Facts relevant to the breaches which I accept, have been proved are as follows:
(i) At an early meeting, Mr Wright told Mr Bonvino that a First Schedule to the factoring deed was filled out every time there was a factoring. The First Schedule requires identification of debts. Mr Wright, I accept, did not adhere to his own standards.
(ii) Mr Wright represented that the business would be carried on in accordance with the provisions of the factoring deed. On the evidence, it was not.359 I accept that Cashflow’s damages proven against Mr Wright, include the following:
(iii) At an early meeting, Mr Wright told Mr Bonvino that they advanced only 80% of the face value of the debtors and in addition have other security. On the evidence, he did not adhere to his own standards in this respect, allowing over 100% of the face value of debtors supposedly assigned to be advanced.
(iv) At an early meeting, Mr Bonvino told Mr Wright and Mr Walters to make sure that the invoices that were provided by clients were spot checked. In fact on the evidence, invoices were not provided at all by Trans-pac, let alone being spot checked. It is, I accept, a usual procedure in factoring to receive and spot check invoices.
(v) At an early meeting, Mr Wright told Mr Bonvino that he never left signed cheques and always checked to see what the cheque is made out to before he signed it. Mr Wright admitted to Mr Star that ‘quite often he’d leave a cheque made out to the company which is crossed without figures in it because they were waiting on the schedules. That’s the First Schedules to be received from the client and he is sure that’s probably one way he [Walters] got around the system’. Mr Walters told Mr Star a similar story. That Mr Wright departed from his own professional standards is strong evidence, I accept, of negligence.
(vi) In December 1994, Trans-pac committed a major breach of its factoring arrangements. [See Mr Wright’s statement paragraphs 80-86] Mr Bonvino was not told (save in bland generalities which conveyed nothing of the true seriousness of the situation). No special care was thereafter taken with Trans-pac by Mr Wright.
(vii) In February 1995, Trans-pac told Mr Wright that it needed advances against invoices to pay its wages. Mr Bonvino was not at a meeting which discussed any such proposal.
(viii) In September - October 1995, both Mr Bonvino and Mr Kull raised with Mr Wright the unsatisfactory way that Mr Walters was performing. Mr Wright defended Mr Walters and said (falsely) that he had it under control and did nothing to investigate the reasons for their dissatisfaction.
(ix) On 24 October 1995, the directors of CODFA and Cashflow resolved that (inter alia) risk management procedures would be updated and reviewed to reduce default, and that a separate person would be employed to do this task. They also resolved that an additional accountant would be employed if Mr Walters was unable to keep up. It appears that Mr Wright did nothing to implement these resolutions.
(x) At the pre-Christmas meeting in December 1995, Mr Wright, I accept, gave a specific undertaking that he would make sure that in future there were proper First Schedules and appropriate fees charged to the clients. That undertaking on the evidence was not adhered to.
(xi) The reconstruction of the account of Trans-pac, which Mr Bonvino carried out (after deleting the various entries which were false), showed understatements, in the monthly statements, of the total amount owing on the Trans-pac account of the following amounts:
Date Dollars
1/6/95 10,310.00
1/7/95 140,000.00
2/8/95 178,253.39
1/9/95 180,000.00
3/10/95 306,393.60
6/11/95 360,000.00
1/12/95 260,000.00
2/1/96 409,539.80
1/2/96 519,499.80
1/3/96 579,999.80
2/4/96 696,379.77
1/5/96 682,313.75
30/6/96 750,713.01
The pattern shown here, I accept, is of steady increase in the amount outstanding over a period of more than a year and is indicative, I accept, of a lack of controls.
(xii) Many of the cheque butts of Cashflow were blank. There were irregularities in the cheques, such as that the notation on the cheque butt did not accord with the payee or recipient of the relevant cheques. This is also indicative of a lack of controls.
(xiii) That Mr Wright permitted money to be paid to Trans-pac when there were no debts identified in First Schedules is, I accept, a departure from the fundamental basis on which the business of Cashflow was to be conducted.
(xiv) Mr Wright never checked the source documents to verify the authenticity of cheques that Mr Walters presented to him, and signed cheques when there was no proper paperwork.
(xv) Mr Wright signed cheques in blank.
(xvi) Mr Wright signed photocopies of cheques, after the original of the cheque had already been delivered to a client. There were numerous cheques (identified in schedule 1 in proceedings 50111 of 1997), issued on the Cashflow bank account that had only one signature. Those cheques were paid by the Bank despite not being in accord with the authority given to the Bank.
(xvii) The whole history of what was referred to in the Cashflow submissions as the “Walters’ unauthorised payments”, went on with Mr Wright being oblivious to it. This, I accept, is res ipsa loquitur of negligence.
(xviii) The proper practice in factoring is described by Mr Maudsley. Mr Wright did not adhere to it.
(xix) Trans-pac was only one of Cashflow’s clients which was not required to deliver invoices for debts which were factored. In this role, Mr Wright departed from his own usual standards.
(xx) Mr Wright admitted to Mr Bonvino that he had ‘made a mistake’ about signing cheques when there was no proper paperwork.
(xxi) Notwithstanding the representations of expertise and responsibility made to Mr Bonvino, Mr Wright in fact, I accept on the evidence, is shown to have left the whole operation of the factoring to Mr Walters and not to have checked up on him at all. Mr Star’s interview with Mr Wright records ‘Peter advised that his initial involvement would be to basically sell the finance and then when he’d done that he would had it over to Ed who would handle the day to day management of the account and the only reason the file would come back to Peter in any way was to make any of the hard decisions on changing the original deal that was set up’.
(xxii) At no time did Mr Wright have anyone from outside come in to check the systems in operation at Cashflow, or do an audit at Cashflow.
(xxiii) Mr Wright had never had an auditor go out to look at the customers of Cashflow - to review their book of debtors, and their financial statements and financial data.
(xxiv) When Trans-pac was taken on as a client, very little financial data was sought by Cashflow. There were no previous financial statements, such as profit and loss accounts and balance sheets obtained.
(xxv) Mr Wright, on the evidence, permitted the usual checks to lapse, in the case of Trans-pac (such as the First Schedules).
(xxvi) Mr Burkett says that Mr Wright was often absent from the office from about November 1994. Mr Walters says ‘It was not uncommon for Peter [Wright] to go to lunch and then not return’.
(xxvii) Mr Walters attributed the problems to ‘weakness in the internal controls in the first instance’.
(i) The payments made to CODFA as part of the Walters’ unauthorised payments. These total $772,172 within one year of the Relation Back Day, and $1,060,641 in total [See Exhibit GMG 4].360 I accept Cashflow’s submission that on the evidence, Mr Wright is shown to have made representations to Mr Bonvino that:
(ii) The payments made to Trans-pac No. 1 (some of which were made after Trans-pac No. 1 had ceased to trade, and therefore were really made to Trans-pac No. 2) and which have not been recovered. These totalled $2,560,134.84 as at 31 March 1998 and $4,045,732.77 as at 28 February 1999.
(iii) The dividends which were wrongly paid totalling $105,430.
(iv) The excess fees paid to Mr Walters and to Factors, and the excess office services fee paid to CODFA. The excess fees (arising from Trans-pac transactions) total $29,693.99 in management fees paid to Factors over the two years of the 1995 and 1996 financial years, plus $56,991.88 fees paid to Walters & Associates. The excess office service fees paid to CODFA are dealt with below.
(v) Fees which would have been chargeable to Trans-pac (or an alternative solvent client) if the money had been advanced correctly. This is included in the total calculation of the amount owing on Trans-pac’s account referred to in (ii) above. It is relevant to the claim for fees that the evidence proves that there was continuing demand for factoring, during the time that Cashflow was operating.
(vi) Interest paid on the loans to Pyrafount and other investors in Cashflow which accrues while there is no income from which to pay it. This item is capable of being calculated from Annexure ‘B’ to Mr Bonvino’s affidavit dated 11 March 1999. Cashflow accepts that if either the amount of the Trans-pac debtors is allowed on the basis that fees that accrued are included, or the damages include an item for the fees which would have been earned if Cashflow’s funds had been invested with a solvent client, no separate damages can be claimed under this item.
(vii) Loss of the value of the goodwill of the business. This is valued by Mr Cachia at $769,018.
(viii) Costs of the liquidation. Up to 31 January 1999 the costs totalled $227,069.70 and the disbursements an additional $35,119.51.
(ix) It is further necessary for a calculation to be made of section 94 interest on the damages. That calculation can only be performed once these reasons for judgment become available.
Fair Trading Act Statutory Claims Against Mr Wright by Cashflow
(a) the monthly accounts of Cashflow for the 1995-1996 year were correct;361 The representation about the monthly accounts of Cashflow for the 1995-1996 year being correct, is implied from the conduct of Mr Wright in putting forward the accounts for acceptance and discussion, and from the regular statements that the accounts showed that ‘we are making good money’. Mr Wright agrees that the records provided to Mr Bonvino each month (which included the accounts) were discussed for ‘an hour to two hours’ each time.
(b) advances were being made to Trans-pac No. 1 in accordance with the factoring deed;
(c) the Trans-pac account was in good order.
362 The representation that the Trans-pac account was in good order, was made:
(a) by conduct following the conversation between Mr Wright and Mr Bonvino (prior to Trans-pac being taken on as a client), when Mr Wright assured Mr Bonvino that everything would be in order and said nothing subsequently about it not being in order;363 The representation about advances being made in accordance with the factoring deed is by conduct, following the early statement by Mr Wright about the essential nature of a First Schedule, and following the undertaking given at the pre-Christmas meeting.
(b) by conduct following the pre-Christmas meeting of 1995 - when Mr Wright had given an undertaking to make sure that the account was brought back in order, and said nothing subsequently about it not being in order;
(c) by Mr Wright by express representation that the account was in order, in the period soon after the pre-Christmas meeting.
364 I accept Cashflow’s submission that these representations were misleading and deceptive. I accept that it is irrelevant whether or not Mr Wright intended to mislead or deceive and that it is irrelevant whether or not Mr Wright was negligent in making the representations.
365 Mr Bonvino, on the evidence, relied on these representations by:
(i) continuing to cause Pyrafount to advance funds to Cashflow. Pyrafount was owed $1,420,000 as at June 1995. It’s loan to Cashflow increased to $1,620,000 in February 1996 and then to $1,752,000 in May 1996;366 The loan account of Pyrafount with Cashflow, I accept, shows that advances continued to be made by Pyrafount up to 3 May 1996. It continues to accrue interest.
(ii) inducing other persons to advance funds to Cashflow;
(iii) not himself investigating the books and records of Cashflow until August 1996;
(iv) approving the payment of dividends and fees in respect of the financial year ended 30 June 1995 as a director of Cashflow;
(v) allowing Cashflow to continue to trade.
367 In the result, Cashflow I accept, has suffered loss and damage. The same heads of damage are relied upon by Cashflow in its Fair Trading Act statutory claim as for the other claims against Mr Wright.
Corporations Law Statutory Claims by Cashflow against Mr Wright
368 Section 232(4) of the Corporations Law requires:
‘. . . an officer to exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporations circumstances.’
369 The payments by Cashflow to CODFA which are part of the Walters’ unauthorised payments, the payments by Cashflow to Trans-pac No. 1, the dividends paid to $105,430, and the fees paid of $113,800, were I accept, all transactions which Cashflow entered into in breach of Mr Wright’s obligations under section 232(4).
370 Cashflow has pleaded a claim against Mr Wright under section 588(G) of the Corporations Law. All the damage that would be recoverable under that cause of action is recoverable by Cashflow under other causes of action against Mr Wright. In the interests of simplifying the trial Cashflow did not make separate submissions concerning that cause of action. Cashflow sought, if Mr Wright would seek to make the cause of action relevant to the proceedings at any later time, to reserve the right to argue that Mr Wright is in fact liable under this cause of action as well as under the other causes of action pleaded against him.
Jones and Dunkel and Mr Wright
371 It is possible to reach a conclusion on the liability of Mr Wright without any resort to Jones v Dunkel. He is liable for the full amount claimed.
Holding as to Cashflow’s Contractual Claim Against Factors
372 There was, I accept, a Management Agreement (‘the Cashflow Management Agreement’) between Factors and Cashflow. It was not in writing. It was a term of each agreement that the services supplied under it would be supplied honestly, and that the services would be competently and professionally given with due care and skill. The actions of Mr Wright are shown on the evidence to constitute a breach of that term. Factors is liable for the same damages that Mr Wright is liable for. The loss, however, that arises from having advanced money to Trans-pac ought be calculated so as to put Cashflow into the position it would have been in if the contract had been performed. That includes the fees that accrue due on the Trans-pac account from time to time. Thus the amount to be allowed in relation to the Trans-pac loan is $4,045,732.77.
Holding as to Cashflow’s Personal Claims Against Mr Walters
373 I accept that Mr Walters owed a duty of care arising from undertaking the task of providing accountancy services to Cashflow, acting as an authorised signatory to the bank account, and acting as a secretary of Cashflow, and that as secretary that he had fiduciary duties and statutory duties.
374 The authority that Mr Walters had was to carry out the paperwork in accordance with the factoring agreement for the ordinary operation of the factoring. He did not have authority to make advances to Trans-pac on any basis other than purchase of identified debts, listed in a First Schedule, for money drawn from the Cashflow account. He did not have authority to make payments to Trans-pac without a ‘sign-off’ from Mr Wright. He did not have authority to ‘borrow’ money of Cashflow and CODFA, one from another.
375 The release of the two mortgages from the Panayis was, I accept, carried out by a forgery of the signature of Mr Wright on each of the discharges and by a use of the Company’s seal without authority. That was a breach. I accept the unchallenged evidence adduced against Mr Walters, of Mr S. Dubedat, as reliable. Mr Dubedat is a handwriting expert with considerable experience in forensic document examination who had worked with the New South Wales Police Service for 15 years. His evidence was that there were significant differences between Mr Wright’s signatures on specimen documents [in fact signed by Mr Wright] and the signatures on the copies of Discharges of Mortgages 2281090W and 2233324U purporting to be those of Mr Wright. I am satisfied on the evidence that Cashflow has discharged the necessary onus required to establish that Mr Walters wrongfully facilitated the discharge of the two mortgages by the unauthorised execution of those discharges for which Cashflow received no benefit.
[As to onus, I note that s 140(1) of the Evidence Act 1995 (NSW) stipulates a single standard of proof for all civil cases, namely the balance of probabilities, and that section 140(2) of the Evidence Act 1995 (NSW) preserves the doctrine in Bringinshaw v Bringinshaw (1938) 60 CLR 336 at 361-362 (see Pedler v Richardson (unreported, Supreme Court of New South Wales, 16 October 1997, Young J) at 10-11.]
376 The making of the Walters’ unauthorised payments was also a breach.
377 Each of the matters set out in paragraph 46 of the amended cross claim was, I accept, a further breach.
378 The value of the security that was obtained from the Panayis was in the range of $650,000 to $700,000.
379 The effect of Mr Walters’ falsification of the books and presentation of false annual and monthly statements of accounts was, I accept, to cause the payment of the dividend, overpayment of fees by Cashflow and continuation of the business at a time when if the true situation had been known, the losses would have been stopped, and further losses not incurred.
380 I accept that it was prior to December 1995 that Mr Walters began to make advances to Trans-pac without a First Schedule, and tried to reconcile the amounts at the end of the month. Mr Walters admitted on 12 August 1996, that he had been ‘lying and deceitful for the past year and a half at least’. He admitted that he had falsified the accounts of Cashflow as at 30 June 1995. He admitted that since the end of the previous financial year, he had been making advances to Trans-pac without First Schedules and without following procedures. He admitted that all the problems were in Trans-pac’s account and that the extent of the shortfall that Cashflow would suffer would be about $1.16million. In fact his admission underestimated the actual loss. He made a similar admission in the weeks after 12 August.
381 At the pre-Christmas meeting in December 1995, Mr Walters gave a specific undertaking that he would require First Schedules before making advances to Trans-pac. He did not adhere to that undertaking.
382 I accept that the dealings with Trans-pac were such a shambles that Mr Peter Panayi told Mr Star that the money that Cashflow paid to Trans-pac ‘weren’t factoring the debtors. Peter didn’t know what they were for’.
383 I accept Cashflow’s submission that the losses caused by the conduct of Mr Walters in respect of which Cashflow is entitled to recover are the same amounts as Mr Wright is liable for, in short:
(i) Payment of $772,172 to CODFA.384 I accept Cashflow’s submission that a very significant admission of liability made by Mr Walters is that he authorised CODFA to appropriate his loan account, in the sum of approximately $150,000, in reduction of the amounts transferred by him from the bank account of the company to Trans-pac Australia Pty Limited.
(ii) All payments made by Cashflow to Trans-pac No. 1 and Trans-pac No. 2 and not recovered.
(iii) Fees which would have been chargeable to Trans-pac (or an alternative solvent client) if the money had been advanced correctly.
(iv) Interest paid on the loans to Pyrafount and other investors in Cashflow which accrues while there is no income from which to pay it.
(v) Dividends paid of $105,430.
(vi) Fees overpaid to Walters and Factors.
(vii) Loss of the benefit of the mortgages over the Panayi properties.
(viii) Loss of the value of the goodwill of the business.
(ix) Costs of the liquidation.
As to the office services fee, this is dealt with below and submissions as to how this matter falls to be treated with will be invited from the parties at the same time as Short Minutes are to be brought in.
Holding as to Cashflow’s Fair Trading Act Claim Against Mr Walters
385 I accept that Mr Walters is shown on the evidence to have represented to Mr Bonvino that:
(i) the monthly accounts of Cashflow for the 1995-1996 year were correct;386 The representations as to the monthly accounts was made by presenting the accounts for approval and discussion.
(ii) advances were being made to Trans-pac No. 1 in accordance with the factoring deed;
(iii) the Trans-pac account was in good order.
387 The representation that the advances were being made in accordance with the factoring deed and that the Trans-pac account was in good order, arose from the whole course of his conduct. In particular, his silence after the pre-Christmas meeting of 1995, makes it all the easier to conclude that he was making that representation.
388 The representations made by Mr Walters were misleading and deceptive. They were made in trade and commerce.
389 The representations were relied upon by Mr Bonvino, I accept, as pleaded in paragraph 36 of the amended cross claim.
390 If those representations had not been made, I accept that it is likely that Mr Bonvino would have discovered the errors and that there would have been no payment of dividend or fees for the year ended 30 June 1995, nor any loss of capital or unauthorised transactions would have occurred after that date.
391 Cashflow makes a separate claim that the conduct of Mr Walters, identified in paragraph 46 of the statement of claim, was misleading and deceptive and caused loss. I accept that these are, by no means, ‘make weight’ claims. While they are not founded on representations, I accept that there is no requirement that breach of section 42 take the form of a misrepresentation. These separate claims recognise what I accept was a reality, namely that it was the secrecy and deception of Mr Walters which is the cause of the downflow of Cashflow.
Holding as to Contractual Claim of Cashflow Against Walters & Associates
392 I accept that an Accounting Agreement (‘the Cashflow Accounting Agreement’) is shown to have been entered into between Mr Walters carrying on business as ‘Walters & Associates’ and Cashflow. The agreement was that in consideration of the accounting services provided by Walters & Associates to Cashflow, Cashflow and/or its clients paid a fee of 10% of factoring fees earned by Cashflow from the operation of its business. I accept that it had a term that the services supplied under it would be supplied honestly and the services would be competently and professionally given with due care and skill. The making of the Walters’ unauthorised payments was, I accept, a breach.
393 Cashflow does not seek to submit that anyone other than Mr Walters personally, carried on practice as Walters & Associates.
394 The measure of damages for breach of contract, I accept, is the difference between the situation that Cashflow is now in and the situation it would have been in if the contract had been performed.
395 The loss that has been suffered, I accept, includes the amount of the Trans-pac debt to Cashflow. None of the debtors of Trans-pac have been recovered. The winding up of Trans-pac No. 1 is complete with a nil return to creditors. No amount has yet, I accept, been recovered under the one remaining mortgage. Thus I accept that the judgment in favour of Cashflow should have the full amount of Trans-pac’s debt as one element included in it.
396 I accept that in addition, the damages suffered by Cashflow include the costs of the liquidation and the value of the goodwill of the business which has been lost.
397 I accept that all the other items recoverable on a tort or Fair Trading Act basis of recovery against Mr Wright are also recoverable on the contractual claim.
Jones v Dunkel and Mr Walters
398 I note Cashflow’s submission that Mr Walters has preferred the well of the Court to the witness box. In addition, I note that after coming to Court and announcing an intention to cross-examine Mr Bonvino and that he had prepared four pages of notes, Mr Walters informed the Court that he had decided that ‘my four pages of notes would only hinder myself if I was to cross-examine, so I prefer not to’. Each of these is, I accept, a significant admission of the weakness or absence of Mr Walters having a case.
An Overview of CODFA’s Case Against Cashflow
399 CODFA’s case is presented at a number of levels. It’s central submission is that in a practical sense Cashflow’s claims to recover moneys from CODFA under Part 5.7B Corporations Law are irrelevant. This is, so CODFA submits, because Cashflow at all material times had a liability, as a fiduciary, to account to CODFA and to restore to CODFA, with interest, money said to have been ‘stolen’ from CODFA and such benefits or profits as Cashflow may have obtained from those moneys. Hence, even if CODFA was by a Part 5.7B order to be required to refund any moneys to Cashflow, Cashflow’s equitable obligation to account to CODFA for those moneys is said to result in a like amount being held on trust by Cashflow for CODFA. CODFA at one of a number of levels seeks to invoke the principles pursuant to which it is suggested that a constructive trust may be imposed by remedial order of the Court. CODFA emphasises that it is not seeking to trace funds through Cashflow. Cashflow’s liability is put as that of a fiduciary to account to CODFA.
CODFA’s Pleading against Cashflow
400 CODFA pleads against Cashflow in the following terms:
‘CLAIMS AGAINST CASHFLOW401 CODFA also addressed detailed submissions as to the claims of Cashflow and of Mr Star under Part 5.7B Corporations Law. CODFA’s final submissions sought to emphasise the following CODFA analysis:
24. Restitution
The paid funds were paid to or on account of Cashflow (as alleged in paragraph 21 hereof) without the authority of CODFA.
ParticularsThe payments were not authorised by the directors of CODFA and there was no commercial purpose for the payment of the funds by CODFA.25. No consideration passed to CODFA or from Cashflow for the paid funds.
26. Cashflow obtained the benefit of the paid funds.
Particulars
a. The funds:Particulars
(i) permitted Cashflow to make payments to Cashflow clients;
(ii) directly discharged debts of Cashflow to Cashflow’s clients.
b. Cashflow received part of the paid funds (namely, the total amount of $568,767.00 listed in the “Cashflow” column of Schedule 1 to this claim) directly into its bank account
c. Cashflow received fees from clients of the company to whom the paid funds were paid.
27. Cashflow either actually or constructively accepted, and has retained, the benefit of the paid funds.
Cashflow:
(a) used the funds to make payments to Cashflow clients;Particulars
(b) adopted or otherwise ratified the use of the funds insofar as they directly discharged debts of Cashflow to Cashflow’s clients.
28. Further, Cashflow in the use of the paid funds in Cashflow’s factoring arrangements, generated, and retains, profits from those funds.
The details are set out in schedule 3
29. Cashflow has not accounted to CODFA for the paid funds or such benefits or profits as it may have obtained from the paid funds.
30. In the premises:
(a) it is unjust for Cashflow to retain the unpaid funds, and the benefit of the funds, and profits thereon, without making restitution to CODFA.31. Further or alternatively to paragraphs 21 to 30 hereof (inclusive) CODFA pleads as set out in paragraphs [sic] to 32J hereof (inclusive.
(b) Cashflow should account to CODFA for the paid funds, the benefit of the paid funds, and the profits Cashflow has made by use of the paid funds.
CONSTRUCTIVE TRUST . . .
32. CODFA repeats the allegations and each of the allegations contained in:
a. Paragraph 21 hereof (to the effect that Walters caused funds, designated “the paid funds,” of CODFA to be paid to Cashflow or clients of Cashflow).32B When the paid funds were paid to Cashflow or clients of Cashflow without the authority of CODFA as alleged in paragraphs 21 and 24 hereof, and at such other times as may be material, Cashflow knew that:
b. Paragraph 24 hereof (to the effect that the paid funds were paid to or on account of Cashflow without the authority of CODFA).
c. Paragraph 25 hereof (to the effect that no consideration passed to CODFA or from Cashflow from the paid funds).
d. Paragraph 26 hereof (to the effect that Cashflow obtained the benefit of the paid funds).
e. Paragraph 27 hereof (to the effect that Cashflow either actually or constructively accepted, and has retained, the benefit of the paid funds).
f. Paragraph 28 hereof (to the effect that Cashflow, in the use of the paid funds in its factoring arrangements, generated, and has retained, profits from those funds).
g. Paragraph 29 hereof (to the effect that Cashflow has not accounted to CODFA for the paid funds or such benefits and profits as it may have obtained from the paid funds).
32A Save to the extent (if at all) payments of “the received funds” pleaded in paragraph 22 are properly attributed to (or adopted by) Cashflow, Cashflow has not accounted to CODFA for (or restored to CODFA) the paid funds or such benefits and profits as it may have obtained from the paid funds.
a. The paid funds were the property of CODFAParticulars
b. The payments were without any consideration passing to CODFA or from Cashflow
c. The payments were in breach of duties owed by Walters to CODFA
ParticularsThe knowledge of Cashflow is imputed from the circumstance that Walters was an officer of Cashflow, Cashflow had delegated to Walters the day to day management of its business affairs and handling of moneys received, and Walters applied the paid funds (for the benefit of Cashflow) by payment to or on account of Cashflow.32C Further or alternatively to paragraph 32B hereof, Cashflow knew the facts and each of the facts alleged in the sub-paragraphs of paragraph 32B no later than 12 August 1996 or thereabouts:On or about 12 August 1996 Walters reported to Mr Anthony Bonvino and Mr Peter Wright (directors of Cashflow) each of the facts alleged.32E Further and alternatively to paragraph 32B and 32C hereof, CODFA says that, with knowledge of the facts and each of the facts alleged in the sub-paragraphs of paragraph 32B hereof;
32D On or about 19 December 1996 Cashflow (by its liquidator, Mr J E Star) undertook to the Court and CODFA in these proceedings that it would set aside, and did set aside, a sum of $200,000.00 as security for the purpose of the relief claimed by CODFA against Cashflow in the proceedings.
a. Cashflow retained (and continues to retain) the paid funds, and such benefits and profits as it may have obtained from the paid funds.a. Cashflow was (and remains) liable, as a fiduciary, to account to CODFA for (and to restore to CODFA) the paid funds and such benefits and profits as it may have obtained or obtain from the paid funds, and
b. Further and alternatively to sub-paragraph (a), Cashflow refused (or, alternatively failed) to account to CODFA for (or to restore to CODFA ) the paid funds when, on or about 5 September 1996, it was called upon by CODFA to do so.
Particularsi. by a letter of demand dated 5 September 1996 addressed to Cashflow, CODFA demanded that Cashflow pay to it the amount of $180,000.00 pleaded in paragraph 23 hereof.i. Formally admitted that it had received a benefit from each of the paid funds other than the payment of $20,000.00 itemised as payment number 19 in Schedule 1 to this claim (“the admitted payments”).
ii. Cashflow has not paid, or agreed to pay, any part of that amount.
iii. Further, by its Cross Claim in these proceedings, Cashflow has claimed an entitlement (allegedly under Part 5.7B of the Corporations Law) to recover some of the received funds, from CODFA with interest.
c. Further and alternatively to sub-paragraphs (a) and (b) on 15 March 1999 Cashflow in these proceedings:32F By reason of the facts and circumstances alleged in paragraphs 21, 24-28 (inclusive) and 32B hereof, from the times when the paid funds were paid to Cashflow or clients of Cashflow without the authority of CODFA as alleged in paragraphs 21 and 24 hereof (and continuing up to and including the present time);
ii. Formally admitted that it has a restitutionary obligation to repay each of the admitted payments to CODFA
III. Formally admitted that that restitutionary obligation came into existence immediately upon the making of each of the admitted payments as alleged in paragraphs 21 and 24 hereof.
ParticularsThe admissions were made by senior counsel for Cashflow at page 30 (lines 31-34, page 30 (line 52) - page 31 (line 46) and page 59 (lines 22-44) of the transcript for 15 March 1999.a. Cashflow was (and remains) liable, as a fiduciary, to account to CODFA for (and to restore to CODFA) the paid funds and such benefits and profits as it may have obtained or obtain from the paid funds; and
b. Further or alternatively, Cashflow was (and remains) liable as a constructive trustee for CODFA of the paid funds and such benefits and profits as it may have obtained or obtain from the paid funds.
32G Further or alternatively to paragraphs 32F hereof by reason of the facts and circumstances alleged in paragraphs 21, 24-28 (inclusive) and 32C hereof, from a time no later than 12 August 1996 or thereabouts (and continuing up to and including the present time):a. Cashflow was (and remains) liable, as a fiduciary, to account to CODFA for (and to restore to CODFA) the paid funds (or alternatively, the admitted payments) and such benefits and profits as it may have obtained or obtain from the paid funds (or, alternatively, the admitted payments) and
b. Further or alternatively, Cashflow was (and remains) liable as a constructive trustee for CODFA of the paid funds and such benefits and profits as it may have obtained or obtain from the paid funds.
32H Further or alternatively to paragraphs 32F and 32G hereof, by reason of the facts and circumstances alleged in paragraph 21, 24-28 (inclusive) and 32 hereof, from a time no later than 15 March 1999 or thereabouts (and continuing up to and including the present time)a. From which it could in whole or part, account to CODFA for (and restore to CODFA) the paid funds and such benefits and profits as it may have obtained from the paid funds; and
b. Further or alternatively Cashflow was (and remains) liable as a constructive trustee for CODFA of the paid funds (or alternatively, the admitted payments) and such benefits and profits as it may have obtained or obtain from the paid funds (or, alternatively, the admitted payments).
32I Cashflow has funds available to it (including, but not limited to, the security set aside as pleaded in paragraph 32D) hereof:
b. To which a constructive trust in favour of CODFA attached (or, alternatively, can and ought to attach by an order of the Court) for payment of the paid funds and such benefits and profits as Cashflow may have obtained from the paid funds.
32J By reason of the facts and circumstances pleased [sic] in paragraphs 32F to 32I (inclusive) Cashflow holds on trust for CODFA (or, alternatively, ought to be ordered to hold on trust for CODFA) an amount equal to the sum of the paid funds and such benefits and profits as Cashflow may have obtained from the paid funds.’[II] On the evidence adduced in the proceedings, reinforced by the manner in which Cashflow has conducted its case, section 588FG(2) provides a complete answer to all of Cashflow’s claims under Part 5.7B (in general) and section 588FF (in particular). This is because:
‘[I] (a) It is common ground between Cashflow and CODFA that, if CODFA’s claimed entitlement to equitable relief is upheld, there is no practical scope for an application of Part 5.7B in Cashflow’s favour.
(b) The purpose of the Corporations Law is in no way to allow, or to assist, a company to retain stolen moneys or, more generally, to circumvent its fiduciary obligations.
(c) The starting and end point of Mr Star’s claim on behalf of Cashflow is section 588FF(1).
(d) That section clearly requires an exercise of discretion: Re Pacific Hardware Brokers (Qld) Pty Ltd (1998) 15 ACLC 442 at 447.
Even if all pre-conditions of section 588FF are satisfied (which CODFA disputes) it would be an improper exercise of discretion to grant relief under the section to Cashflow in light of Cashflow’s fiduciary obligation to account to CODFA.
(e) Even if other pre-conditions of an order under section 588FF(1) have been made out by Cashflow (which is disputed), section 588FG(2) precludes any grant of relief to Cashflow. There is no basis upon which the Court can find otherwise than that CODFA received payments from Cashflow in good faith, with no reasonable grounds for suspecting that Cashflow was insolvent (if it was insolvent), in circumstances in which CODFA had provided valuable consideration for Cashflow's payments.
(f) Insofar as Cashflow seeks to recover its part repayments of stolen moneys by reliance upon an allegation of “unfair preferences”, section 588FA(3) requires that the “unauthorized running account” be taken as a whole. Section 588FA is not confined to formal running accounts; the Court must analyse, and characterize, what in fact occurred between the parties and not merely what (if anything) the respective parties intended or agreed.
(g) Insofar as Cashflow seeks to recover moneys on the basis of “uncommercial transactions”, section 588FB requires it to recognize that it had a positive obligation both to repay the moneys stolen from CODFA and to pay CODFA for a share of their joint office expenses.
There is no reasonable basis upon which either obligation can be characterized as one in which “it may be expected that a reasonable person in a company’s circumstances would not have entered into the transaction”. There was nothing unreasonable about any relevant “transaction”. On the contrary, it would be unreasonable for Cashflow not to have met its obligations.
402 CODFA also addressed detailed submissions in support of:
Mr Walters’ fraud cannot be attributed in any way to CODFA. Cashflow have not suggested that either Mr Kull or Mr Wright knew of the fraud. Nor did it cross examine Mr Kull to impugn his good faith or that of CODFA generally.
(a) Each of the elements in section 588FG(2) must be taken as having been established in favour of CODFA.
(b) The law as to the meaning of “good faith” and “valuable consideration” was considered in P T Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 528 and 530-532;, although the Court’s attention was there directed to sections 120-121 of the Bankruptcy Act 1986 (Cth), the same principles have application to section 588FG(2): Ford’s Principles of Corporations Law, paragraph [27.270].
(c) the Court must find that CODFA became a party to “the unauthorized inter-company payments” and the “office expenses agreements”, and received moneys pursuant to those transactions, “in good faith”. There is no basis upon which it can be said that CODFA was “privy to the fraud of Mr Walters and Cashflow”. See Garuda at 528.
(d) There is no basis upon which it can be said that CODFA or any reasonable person in CODFA’s circumstances, should have suspected that Cashflow was insolvent (if indeed it was insolvent).
CODFA was not privy to false entries in Cashflow’s books. Cashflow’s entire case is predicated upon the contention that Mr Bonvino himself (who was in a position to supervise Cashflow’s books and the conduct of its business) did not suspect insolvency on the part of Cashflow until after Mr Walters confessed to irregularities on 12 August 1996: see ,for example, his affidavit of 5 March 1999 paragraph 18. Even allowing for differences of opinion expressed on either side of the record, the fact remains that there was no suggestion of insolvency by anybody prior to Mr Walters’ confession. On the contrary, Mr Bonvino had undertaken to support the company with loan funds as required. No ex post facto analysis of the company’s solvency can retrospectively attribute reasonable grounds for suspicion of insolvency to CODFA.
(e) CODFA provided valuable consideration for all moneys it received from Cashflow.There is no basis upon which it can be said that CODFA did not provide valuable consideration for Cashflow’s payments of office expenses. Office facilities were shared by Cashflow. The fact that Cashflow has since rewritten its books, to reflect its contention that it did not in fact ultimately receive the quantum of fees it earlier represented to CODFA (through its accounts), provides no occasion for a finding that CODFA did not “provide valuable consideration under the transaction”. There is no basis upon which to vary the “accounts stated” between the parties on their settlement of liability for shared office expenses.’
In relation to Cashflow’s part-repayments of stolen moneys, it is established that an antecedent debt may constitute “valuable consideration” in the statutory context: Garuda at 530-532.
(a) Its claim against Mr Star for recovery of office expenses of $6,050.403 The Court’s findings as to Part 5.7B and it’s application to the facts proven are set out below.
( b) It’s claim against Cashflow for recovery of office expenses of $4,344.68.
(c) It’s defence to Mr Star’s claim for $17,203 said to have been an overpayment of office service fees by Cashflow to CODFA during the financial years ended 30 June 1995 and June 1996.
404 It is convenient to next deal with CODFA’s detailed submissions relating to Cashflow’s equitable obligations. In an important sense, these submissions, which seek to outflank the whole operation of Part 5.7B, form the centrepiece of Cashflow’s case.
CODFA’s Detailed Submissions Relating to Cashflow’s Equitable Obligations
405 CODFA commences it’s submissions with the following preliminary observations:(a) It obtained the benefit of moneys stolen from CODFA.
‘Preliminary Observations
Cashflow cannot escape the consequences of the following facts:
(i) he was an officer of Cashflow.
(b) The moneys were stolen from CODFA for the purpose of benefiting Cashflow.
(c) Mr Walter’s knowledge of the theft must be attributed to Cashflow because:
(d) Even if Mr Walter’s knowledge of the theft is not attributed to Cashflow, the company has refused to account for the stolen moneys (or any profits or benefits derived from such moneys) at any time since Mr Walters freely confessed the misappropriations on 12 August 1996.
(ii) Cashflow had delegated to him (or, at least, acquiesced in his having) the day-to-day management of the company’s business affairs and receipt and disbursement of moneys; and
(iii) he applied CODFA’s moneys (for the benefit of Cashflow) by payment to or on account of Cashflow.Cashflow’s claims against CODFA, in respect of Cashflow’s part repayments of stolen moneys, are a contrived, unconscionable attempt to retain the stolen moneys without any proper accounting for them or for benefits derived from them. Not content with the retention of stolen moneys Cashflow and Mr Star seek to compound the theft by recovery of part repayments of the stolen moneys.
The conduct of Cashflow and Mr Star in these proceedings has, on any view, improperly forced CODFA to incur substantial, unnecessary legal costs.
Not until their opening address on 15 March 1999 did they concede that Cashflow had (at least) a non-proprietary restitutionary obligation to restore stolen moneys to CODFA. Their submission, at that time, that CODFA had a debt which should be admitted to proof in the winding up of the company was a hollow gesture, made belatedly in the proceedings after substantial costs had been incurred, and coupled with a demand for payment of moneys in excess of the current net balance of stolen moneys outstanding.
It should be borne in mind that:On 15 March 1999 Cashflow formally admitted in these proceedings that:
(a) by a letter dated 5 September 1996 CODFA demanded the return of its moneys (more particularly, the balance of $180,000.00), but its demand was not met or acknowledged as correctly based.
(b) on or about 7 February 1997 CODFA lodged a proof of debt with Cashflow, which Mr Star rejected on or about 2 May 1997: Exhibit “D1X” (CODFA Tender Bundle No. 2) documents 14 and 15.
(c) since rejecting CODFA’s proof of debt Cashflow and Mr Star have pursued claims under Part 5.7B of the Corporations Law which are both totally misconceived and unconscionable.
The admissions were made by senior counsel for Cashflow at page 29 (lines 46-55), page 30 (lines 31-34), page 30 (line 52-page 31 line 46) and page 59 (lines 22-44) of the transcript for 15 March 1999.
(a) it had received a benefit from CODFA’s stolen moneys (other than in respect of the disputed $20,000.00).
(b) it has a restitutionary obligation to repay all the stolen moneys (at least insofar as it obtained a benefit from such moneys).
(c) that restitutionary obligation came into existence immediately upon the making of the admitted payments of CODFA’s stolen moneys for the benefit of Cashflow.
CODFA stood to gain, and gained, nothing from the payment of its moneys to or for the benefit of Cashflow (or, for that matter, to or for the benefit of the Transpac companies, with which only Cashflow ever had a commercial relationship).
Cashflow has not suggested, in any way, that CODFA knew or approved of Mr Walters’ misappropriations for the benefit of Cashflow.
In his evidence, Mr Kull (the principal person behind CODFA) denied that he knew anything about the misappropriations: Exhibit “D1A” paragraphs 75-82. He was not cross examined to suggest otherwise.
Nor has Cashflow suggested that knowledge of Mr Walters’ misappropriations could be attributed to CODFA through knowledge of Mr Wright, Mr Kull’s co-director of CODFA. In Cashflow’s opening address senior counsel for the company accepted “that Mr Wright was oblivious to the unauthorized payments which Mr Walters was making [between Cashflow and CODFA] until the very end”: transcript page 28 (lines 8-22).
The fact that Mr Walters’ misappropriations were totally in fraud of CODFA would, of itself, prevent any attribution of his conduct or his knowledge to CODFA: H.A.J. Ford, R.P. Austin and I.M. Ramsay, Ford’s Principles of Corporations Law (9th edition, 1999) paragraphs [16.210] and [16.240]. Even if Mr Walters had been a director of CODFA, and not merely its secretary, his knowledge would not have been attributable to CODFA in the circumstances of this case because he acted totally in fraud (and not at all for the benefit) of CODFA: Beach Petroleum NL v Johnson (1993) 115 ALR 411 at 574 (lines 29-40).
Although it may be accepted that the directors of Cashflow (Mr Bonvino and Mr Wright) did not in fact know of Mr Walters’ misappropriations until 12 August 1996, Mr Walters’ contemporaneous knowledge of the misappropriations must be attributed to Cashflow because:406 CODFA then puts forward it’s ‘constructive trust’ contentions:
(a) he was at all times an officer (company secretary) of Cashflow.
(b) the directors had acquiesced in his having the conduct of the business of Cashflow on a day-to-day basis (in the course of which he not only provided accountancy services but also attended to banking, and the drawing of cheques and dealings with clients, including the Transpac companies).
(c) whether formally authorized by Cashflow or not, Mr Walters’ misappropriations of CODFA’s moneys were, in intendment and in fact for the benefit of Cashflow.
(d) the payments were made in the hope that business would be generated for Cashflow: Mr Campbell QC, final submissions.Mr Bonvino may complain that Messrs Wright and Walters breached their obligations to Cashflow. The fact remains, however, that he and Mr Wright acquiesced in Mr Walters’ active management of the company.
According to the principles developed from Lennards Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 at 713, Mr Walters was in fact the “directing mind and will” of Cashflow in relation to the company’s day-to-day receipts and disbursements. This is because he was the natural person having management and control of the business of the company in relation to the particular conduct in point: Ed Ajou v Dollar Land Holding plc [1994] 2 All ER 685 at 696(a)-(d), 699(h)-(j) and 706(d)-(e). See also Ford op cit paragraphs [16.200]-[16.210], [16.240] and [16.250]. The fact that the misappropriations of CODFA’s moneys were for the benefit of Cashflow overcomes any suggestion that Mr Walters’ dishonesty precludes an attribution of his knowledge to Cashflow.’
‘CODFA’s “Constructive Trust” Contentions
A constructive trust attached to each payment out of CODFA’s bank accounts (as recorded in the Schedule described as “GMG4”), at the time each payment was made out of the accounts.
The moneys, having been stolen from CODFA, remained the moneys of CODFA: Black v S Freedman & Co (1910) 12 CLR 105 at 109, 110; Creak v James Moore & Sons Pty Ltd (1912) 15 CLR 426 at 432; Australian Postal Corporation v Lutak (1991) 12 NSWLR 584 at 589D-E; and Zobory v Commissioner of Taxation (1995) 64 FCR 86 at 90-93. See also H.A.J. Ford and W.A. Lee, Principles of the Law of Trusts (3rd edition, loose leaf service) paragraph [22430]; and the additional cases referred to in K. Mason and J.W. Carter, Restitution Law in Australia (1995) paragraph [1633], in footnote 162.
It is not necessary for CODFA to establish the existence of a fiduciary relationship between itself and any person (such as Mr Walters, Mr Wright or Cashflow) independently of the fiduciary obligations arising from the theft of its moneys. As noted in R.P. Meagher and W.M.C. Gummow, Jacobs’ Law of Trusts in Australia (6th edition, 1997) paragraph [1310], the thefts of CODFA’s moneys were sufficient of themselves both to establish a fiduciary obligation and to constitute a breach of the obligation. Further, as noted by Macpherson ACJ in Puma Australia Pty Ltd v Sportsman’s Australia Ltd (No 2) [1994] Qd R. 159 at 163-164, insofar as Re Diplock [1948] Ch 464 held that a fiduciary relation was needed to sustain a following or tracing in equity, it cannot stand with the decisions of the High Court in Black and Creak which his Honour, independently of their binding authority, endorsed as correct.It should not go unnoticed, however, that, independently of any fiduciary obligation arising from his misappropriations, Mr Walters did owe, and by his misappropriations breach, duties to CODFA as an officer of the company.
Whether or not Mr Bonvino knew or approved of Cashflow’s receipt of, and dealing with, CODFA’s moneys, the objective facts are that Cashflow did receive the moneys and did deal with them to its commercial benefit.
Cashflow no longer suggests that it was in any sense merely a “conduit pipe” through which CODFA’s moneys passed for the benefit on an unrelated party. Accordingly, the observations of Gibbs CJ in National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251 at 268-269 (which concerned common law principles relating to the recovery of moneys had and received rather than to fiduciary obligations) do not, in principle or on the facts of this case, limit CODFA’s entitlements to recovery against Cashflow.
With knowledge which must be imputed to Cashflow, Mr Walters applied all the stolen moneys for the benefit of Cashflow (from which no consideration moved in favour of CODFA) in that:By reason of:
(a) sums totalling $568,767.00 (as summarized in Schedule 1 of CODFA’s Second Amended Statement of Claim filed on 22 March 1999 in the proceedings numbered 50177 of 1997) were paid directly into Cashflow’s bank account; and
(b) sums totalling a further $671,874.00 (being the sum of the total amounts of $538,644.00, $20,000.00, $736,000.00 and $112,494.00 recorded in Schedule 1 of CODFA’s Second Amended Statement of Claim) were paid to customers of Cashflow on account of Cashflow and Cashflow received a benefit from those payments.
(a) the knowledge of Mr Walters which must be imputed to Cashflow;
Cashflow acquired, and retains, the obligations of a fiduciary to account to CODFA for the stolen moneys and its use of the stolen moneys.
(b) further and alternatively to (a), the knowledge acquired by other officers of Cashflow upon or after Mr Walter’s confession of misconduct on 12 August 1996; and
(c) further and alternatively to (a) and (b), Cashflow’s receipt of the stolen moneys (either directly or indirectly), or benefits from those moneys, as a volunteer,
Nothing turns on precisely when Cashflow became “fully aware” of its having received CODFA’s moneys. It had that knowledge, through Messrs Walters and Bonvino, no later than 12 August 1996. Even if the full ramifications of the “unauthorized payments” did not dawn on Mr Bonvino until much later (as to which, see his affidavit of 27 April 1998 paragraph 52(c)) he clearly knew that Cashflow had received some of CODFA’s moneys. Mr Bonvino also received CODFA’s letter of demand on 5 September 1996: Affidavit paragraph 51. In any event, even knowledge acquired now would affect Cashflow’s conscience in equity.
In response to oral submissions of Cashflow (made on 15-17 March 1999) the following should be noted:
(a) CODFA is not seeking “to trace funds through Cashflow”. Cashflow has a liability, as a fiduciary, to account to CODFA and, accordingly, to restore to CODFA (with interest) the moneys stolen from CODFA and such benefits or profits as it may have obtained from those moneys.
(b) irrelevant to CODFA’s claim are the questions:(c) equally, the making of a winding up order against Cashflow is irrelevant to CODFA’s claim (particularly as CODFA was granted leave to proceed against CODFA by an order made on 19 December 1996 in the proceedings numbered 50177 of 1997).
(i) whether or not Cashflow’s bank account was at any time in overdraft.
(ii) whether or not Cashflow was insolvent at or before the “relation back day” (12 September 1996) or at some other time.
(d) in a practical sense, Cashflow’s claims to recover moneys from CODFA under Part 5.7B of the Corporations Law are also irrelevant because, if CODFA is ordered to refund any money to Cashflow, Cashflow’s equitable obligation to account to Cashflow will result in a like amount being held on trust by Cashflow for CODFA.Nothing has occurred since Cashflow received the benefit of CODFA’s misappropriated moneys (and, as it now concedes, it came under a restitutionary obligation towards CODFA) to relieve the company of its fiduciary obligation to account to CODFA.
A fiduciary cannot be permitted to retain a profit or benefit which he has obtained by reason of his breach of fiduciary. A fiduciary is liable to account for a profit or benefit if it was obtained by reason of his fiduciary position or his taking advantage of an opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position. Once it is established that the fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit. It can make no difference that it was not his duty to obtain the profit or benefit for the person to whom the duty was owed. What is important is that the advantage has accrued to him in breach of his fiduciary duty or by his misuse of his fiduciary position. The consequence is that he must account for it and in Equity the appropriate remedy is by means of a constructive trust: Hospital Products Ltd v United States Surgical Corporation (1985) 156 CLR 41 at 107-108 per Mason J.
The nature of the liability to account informs the quantification of the liability.
The obligation of a defaulting fiduciary is essentially a personal obligation of effecting a restitution to the estate of his principal. Having committed a breach of his fiduciary obligations, a fiduciary is liable to place the estate in the same position as it would have been in if no breach had been committed. See Re Dawson (Deceased) [1966] 2 NSWR 211 at 214 (lines 50-54), 215 (lines 9-48) and 216 (lines 5-15).
Further, where a fiduciary has, through his breach of obligations as such, occasioned loss to his principal’s estate then he is liable to make good that loss, together with interest: ibid page 217 (lines 30-32) and page 218 (lines 4-7). An award of compound interest, according to equitable principles, is appropriate both to compensate CODFA and to minimize the possibility that Cashflow will have retained any profit from its breach of duty: Hagan v Waterhouse (1991) 34 NSWLR 308 at 393A-E, approved in Alemite Lubrequip Pty Ltd v Adams (1996) 41 NSWLR 45 at 47E.
The appropriate course in this case is to make orders (including a declaration that Cashflow holds moneys on trust) requiring Cashflow to account for $180,000.00 with interest calculated at a “mercantile rate” from the dates (between 16 November 1994 and 19 July 1996) when Cashflow acquired the benefit of CODFA’s moneys and continuing until such time as all such moneys are restored to CODFA. An award of interest at a compound, mercantile rate would overcome any need to conduct an inquiry as to the quantification of the profits and benefits received by Cashflow from its use of CODFA’s moneys.
Cashflow has funds available to it (including, but not limited, to a sum of $200,000.00 which, on 19 December 1996, it undertook would be set aside as security for the purpose of relief claimed by CODFA against Cashflow in the proceedings):
The undertaking of Cashflow and Mr Star is Exhibit “D1P”. Cashflow is entitled to receive $1.26 million under a deed (Exhibit “D10)” which Mr Campbell QC formally advised the Court (on 22 March 1999) is no longer subject to a condition precedent.
(a) from which it could, in whole or part, satisfy its obligation to account to CODFA; and
(b) to which a constructive trust in favour of CODFA attaches (or, alternatively, can and ought to attach by a remedial order of the Court) in support of that liability to account.
There is no secured creditor of Cashflow who could, or might, be able to dispute CODFA’s equitable claim of priority to Cashflow’s moneys: Exhibit “D1R” page 4.
Unsecured creditors of Cashflow’s have no entitlement which can displace CODFA’s equitable entitlements. Their claims against the company can rise no higher than an entitlement to a rateable share of the assets of the company remaining after discharge of the company’s higher obligations. They can rise no higher than the company itself. They are in effect, through the company, bound to rank behind the company’s fiduciary obligation to account to CODFA.’
407 CODFA then deals with Cashflow’s liability to account for it’s profits and benefits obtained from the use of CODFA’s moneys.
‘CODFA’s Submissions as to Cashflow’s Liability to Account for its profits and benefits obtained from use of CODFA’s Moneys.
On the principles outlined . . . above, Cashflow’s equitable liability to account extends to an accounting for profits and benefits acquired by it from its use of CODFA’s moneys.
Leaving aside the disputed $20,000.00, Cashflow’s concessions of 15 March 1999 include a concession that it obtained benefit from CODFA’s moneys from the times those moneys were paid out of CODFA’s accounts.
Mr Gelder’s report of 4 June 1998 (Exhibit “D1G”), at page 7, also confirms that Cashflow received a benefit from CODFA’s moneys.
Given that Cashflow’s equitable obligation is to “restore the estate” of CODFA, it matters not that Cashflow may have wasted the profits or benefits which accrued to it from CODFA’s moneys. On the principles discussed in Hagen v Waterhouse, and affirmed by the Court of Appeal in Alemite Lubrequip Pty Ltd v Adams, the appropriate course is to order Cashflow to repay $180,000.00 with compound interest calculated at a mercantile rate.
An appropriate rate, established by dealings (not in dispute in these proceedings) between the parties, is 3.5% per month calculated on daily rests: Exhibit “PXC” page B50; Bonvino affidavit sworn 27 April 1998 paragraph 52(b).
408 Further submissions of CODFA go to the disputed $20,000 paid to Trans-pac on 2 April 1996:
In any event, no less interest should be allowed than interest at the rate ordinarily allowed pursuant to the Supreme Court Act 1970, section 94.
The foundation of CODFA’s entitlements in equity renders it unnecessary to consider whether, at common law, there is a restitutionary cause of action for interest alone. See Mason and Carter, op cit, paragraphs [2807]-[2808]. Nevertheless, to the extent it may be necessary for the Court to make a determination on this topic, CODFA submits that it is entitled to a restitutionary award of interest for the reasons stated by Mason and Carter.’
‘Cashflow’s Liability for the Disputed $20,000.00 Paid to Transpac
The only basis upon which Cashflow contends that it should not be liable to account for the amount of $20,000.00 paid out of CODFA’s bank account on 2 April 1996 is that, it says, it obtained no benefit from the payment because the moneys were ultimately paid to Transpac No 2 and, it says, it had no formal factoring agreement with Transpac No 2.The mechanics of the payment are not in dispute. The payment was made by means of a cheque drawn on an account of CODFA (“the Burkett Account”) and made payable to Transpac No 1. The cheque was deposited, in fact, in an account of Transpac No 2.
The critical issue is not whether Cashflow ultimately obtained a benefit from the payment to Transpac (in either of its guises) but whether the payment was made on the account of Cashflow.
The “theft principle” derived from Black v S Freedman & Co. (1910) 12 CLR 105 at 109-110 extends to property other than cash and is capable of applying equally to a theft of money by means of an unauthorized cheque: Australian Postal Corporation v Lutak (1991) 21 NSWLR 584 at 589D-E per Bryson J.
For the reasons stated, . . . the knowledge of Mr Walters (who physically made the payment) must be attributed to Cashflow.
. In assessing whether Cashflow obtained a benefit from the disputed payment the following facts are relevant:
If (contrary to CODFA’s submissions) it is necessary to consider whether Cashflow had a “genuine factoring arrangement” with the Transpac companies, that question must be answered in the affirmative on the undisputed evidence of Alan Maudsley (Exhibit “D1L”), the only expert “Factor” from whom evidence is available.
(a) Although the cheque was banked in Transpac No 2’s account, it was drawn in favour of Transpac No 1.
In this, it differs from the misappropriated moneys which CODFA seeks to recover from Transpac No 2.
(b) At no stage did CODFA ever have a commercial relationship (of any kind) with any Transpac company. It had no commercial relationship with Transpac No 1 or Transpac No 2.
(c) Cashflow had a commercial relationship with both Transpac No 1 and Transpac No 2 or, at least, Transpac No 1.
Further, senior counsel for Cashflow has conceded in these proceedings that Cashflow received moneys from Transpac No 2, and paid moneys to the same company, whether or not those receipts and payments were pursuant to a formal factoring agreement.
Whether or not Cashflow’s commercial relationship with Transpac No 1 was “irregular” insofar as it involved payments and receipts outside the two companies’ formal factoring agreement, the fact is they had a commercial relationship.
(d) In the records of Cashflow the disputed $20,000.00 was brought to account as between itself and Transpac No 1: Exhibit “D1Q” (second entry).
(e) Mr Walters, who physically effected the theft of CODFA’s moneys, regarded the disputed $20,000.00 as having been paid out of CODFA’s moneys on account of Cashflow. It is part of the net sum of $180,000.00 which he confessed was owed by Cashflow to CODFA as a result of the unauthorized inter-company payments. At the time of his confession, and for a period thereafter, Mr Walters was and remained an officer of Cashflow. See Mr Kull’s statement of 14 April 1998 (Exhibit “D1A”) paragraph 51 and the computer “loan accounts” which Mr Walters prepared shortly after his confession (CODFA’s Tender Bundle No. 2, at document No. 2, within Exhibit “D1X”).
(f) Despite Mr Walters’ dishonesty (which he has not disputed, even when present during the hearing, in these proceedings), there is no evidence to suggest that the payment of $20,000.00 out of CODFA’s bank accounts on 2 April 1996 was for his personal benefit or for the benefit of the Transpac companies to the exclusion of Cashflow. Mr Walters certainly made imprudent payments which culminated in benefits to the Transpac companies but, on the evidence, he did so on Cashflow’s account and not otherwise.
409 CODFA’s submissions that the making of a winding up order against Cashflow is irrelevant to CODFA’s claim for restitution generated considerable further attention of the parties. Cashflow and Mr Star commenced by submitting that the combined effect of Sections 553 and 555-556 Corporations Law is to limit CODFA’s entitlements (in respect of inter-company transfers, including amounts received by Mr Star from CODFA pursuant to 5.7B of the Law) to an entitlement to prove a debt in the winding up of Cashflow, such debt to rank with (and to have no priority over) unsecured creditors generally. CODFA then addressed responsive submissions. Cashflow then replied.
As summarized in his conclusions (on page 20 of Exhibit “D1L”) a factoring arrangement did exist between Cashflow and Transpac No 1; payments made by Cashflow to Transpac No 1 are properly to be characterized as within the general terms of payments made in the course of factoring; and Cashflow both stood to benefit, and benefited from, such payments.’
410 The respective submissions were as follows:
CODFA’s Submissions as to the Operation of Corporations Law ss 553 and 555-556[I] In summary, CODFA contends that it is entitled, on any view of the case, to “rank above” the general unsecured creditors of Cashflow. This is because:
‘The submissions of Cashflow and Mr Star must be rejected, as will be shown by an examination of:
(a) sections 553 and 555-556 of the Law.
(b) the nature of the restitutionary obligations of Cashflow and Mr Star, and the circumstances in which those obligations came to attach to them.
(c) the nature of the relief claimed by CODFA.[II] At the risk of oversimplification, and leaving aside the disputed $20,000.00 of 2 April 1996, the dispute between Cashflow/Mr Star and CODFA in this area is essentially one of priorities:
(a) Cashflow and Mr Star have a continuing liability to account to CODFA for the moneys stolen from it and (with or without an entitlement in CODFA to proprietary relief) an obligation to restore CODFA’s estate; and
(b) if it is correct to characterize CODFA’s entitlement to restitution as a “debt” (or an equitable entitlement “in the nature of a debt”, that debt is a “post-liquidation debt” entitled, as such, to priority under section 556(1)(a) of the Law.[III] In considering the operation of sections 553 and 555-556 of the Law the Court should bear in mind that:
(a) On 15 March 1999 Cashflow and Mr Star conceded that Cashflow has restitutionary obligations to CODFA.
(b) It is common ground (as established by Exhibit “D1R” at page 4) that Cashflow has no “secured creditors”.
(c) The contest of priorities is between CODFA (to which “restitutionary obligations” are admittedly owed and which claims, inter alia, equitable relief) and the unsecured creditors of Cashflow generally.[IV] In relation to section 553 of the Corporations Law the following points should be noted:
That is so whether the relief under consideration relates to orders for:
(a) CODFA’s claims for equitable relief are essentially founded on the existence in Cashflow and Mr Star of a liability to account for CODFA’s moneys.
(i) the recognition and/or imposition of a constructive trust; or
(b) the equitable relief sought by CODFA (including non-proprietary relief to effect compensation) is available as a “remedy”, not as “a right” in the same sense as a common law entitlement is said to be a “right”. It is discretionary relief vindicating entitlements dependent, in the absence of agreement, on the making of a court order.
(ii) equitable compensation, with or without security for its payment.
(c) whether the restitutionary obligations of Cashflow and Mr Star are regarded as having equitable or legal foundations, they must be regarded as continuing beyond, or arising after, the commencement of Cashflow’s winding up.
(d) Even if CODFA has an entitlement to restitution at common law, its entitlement to equitable relief is additional to it: Nocton v Lord Ashburton [1914] AC 933 at 956-957.[V] In relation to section 555 of the Law, note that it only applies to “debts and claims proved” in a winding up. It does not apply to other debts or claims. It, thus, does not operate to limit:
(a) section 553(1) is permissive rather than mandatory. It does not exhaust circumstances in which a person’s entitlements against a company may be vindicated.
(b) the sub-section relates (by the words “being debts or claims the circumstances giving rise to which occurred before the relevant date”) to debts or claims which arise before the commencement of a winding up.
(c) the sub-section does not govern “post-liquidation debts or claims”. They may be enforced directly against the company in liquidation or its liquidator and, to the extent that section 556 applies, they have “first ranking priority” over “all other unsecured debts and claims” insofar as they fall within section 556(1)(a).[VI] In relation to section 556 of the Law the following points should be noted:
(a) post-liquidation debts or claims;
(b) curial relief granted against a company; or
(c) relief granted against, or obligations incurred by, a liquidator who then seeks (by reference to section 556(1)(a)) to be indemnified from the property of the company.
[VII] Insofar as CODFA seeks equitable relief, such entitlements as it may have (whether to proprietary relief or otherwise) are not, in the absence of any agreement between Cashflow (and/or Mr Star) and CODFA, limited by sections 553, 555 and 556 of the Law. This is because:
(a) section 556(1) relates to priority of “debts and claims…in the winding up of a company”.
(b) it relates to the priority of certain “debts and claims” over “all other unsecured debts and claims”.
(c) it does not limit curial relief granted against a company and/or its liquidator in the course of a winding up.
(d) in the context in which the section operates, section 556(1)(a) affords priority to the entitlement of a company liquidator to be indemnified from the property of the company of which he or she is liquidator.
(a) even if (which Young J has suggested in Re Trivan Pty Ltd (1996) 14 ACLC 1654 at 1657 and 1658 is doubtful) an “entitlement” to equitable relief can be asserted in a proof of debt, in the circumstances of this case CODFA’s entitlements cannot properly be characterized as having arisen before the commencement of the winding up.
(b) CODFA’s entitlements cannot be said to have arisen before the commencement of the winding up because:
(i) at no time before the commencement of the winding up did Cashflow agree to account to CODFA or to make restitution in favour of CODFA for the moneys stolen from CODFA.
(ii) either CODFA is entitled to a constructive trust (as it has earlier submitted), or its entitlements to non-proprietary relief in equity arise on the making of a Court order (and no Court order was made before the commencement of the winding up).
(iii) on the case for which Cashflow and Mr Star have contended, the “entitlement” of Cashflow to make an election about whether or not it would retain CODFA’s stolen moneys and benefits derived from those moneys, did not arise until after Mr Bonvino became fully aware of the inter-company transfers on or about 28 October 1996 (Bonvino Affidavit sworn 27 April 1998 paragraph 52(c)) and was not exercised (at least expressly) until the opening address of Mr Campbell QC on 15 March 1999 (transcript pages 30-31).
(iv) Cashflow and Mr Star (having retained and used CODFA’s moneys, having obtained and elected to retain benefits derived from those moneys, and having elected to acknowledge restitutionary obligations) cannot limit the legal effect of their conduct by retrospectively characterizing Cashflow’s restitutionary obligations as no more than an obligation to permit CODFA to prove in Cashflow’s winding up as if its entitlements were limited to an unsecured, pre-liquidation debt or claim.CODFA’s Submissions as to the Restitutionary Obligations of Cashflow and Mr Star
[I] A plaintiff who establishes a breach of fiduciary duty has available to him a range of remedies. Not only does he have a range of remedies from which to choose but those remedies are relatively flexible. They include the remedy of constructive trust (including tracing trust property as may be appropriate), the remedy of account and the remedy of compensation in equity: J. J. Doyle QC (as Doyle C.J. then was) at page 211 of P.D. Finn (ed), Equity and Commercial Relationships (1987).
[II] The nature of the case will determine the appropriate remedy available for selection by a plaintiff: Maguire v Makaronis (1997) 188 CLR 449 at 467, citing Spence v Crawford [1939] 3 All ER 271 at 288.
[III] The fundamental liability of a defaulting fiduciary is to account: Justice J B Kearney, “Accounting for a Fiduciary’s Gains in Commercial Contexts” (in Finn, Equity and Commercial Relationships) at 203.
[IV] A constructive trust is merely a means of achieving such an accounting: Kearney, op cit. Once it is established that a fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit: Hospital Products Ltd v United States Surgical Corpn (1985) 156 CLR 41 at 107-108 per Mason J.It is open to an Equity Court to “retrospectively impose a constructive trust” by way of “equitable remedy” in circumstances in which the remedy is based upon an underlying failure to account by a fiduciary and not merely (as may be allowed in USA) upon “idiosyncratic notions of fairness and justice”: Muschinski v Dodds (1985) 160 CLR 583 at 614-616 per Deane J.
The fact that a defendant’s “profit or gain” cannot readily be identified is not an impediment; the Court can, by awarding equitable compensation in lieu of an inquiry, measure the fiduciary’s gain by reference to the loss of the beneficiary: Kearney J, ibid page 207.
[V] Whether by moulding orders for a constructive trust or otherwise it is open to the Court, exercising equitable jurisdiction, to mould relief so as to secure performance of the fiduciary’s obligation to account. Accordingly, it is open to the Court (for example) to grant a lien over an identifiable asset of the fiduciary, whether or not trust property can be “traced” into that property and a constructive trust declared.
That is the context of the quotation from Goff and Jones, The Law of Restitution (4th edition, 1993) page 96 in paragraph 37.2.3.2 on page 33 of Cashflow’s undated “Written Overview Submission”.
In United Surgical Corpn v Hospital Products International Pty Ltd [1982] NSWLR 766 at 816B-F McLelland J accepted that it was open to him, as a matter of jurisdiction, to secure the performance of a liability to account by the imposition of a lien even though it was difficult, if not impossible, to trace profits into any particular asset of the defaulting fiduciary concerned. His decision not to impose a lien was based upon discretionary, not jurisdictional grounds.
[VI] It was by reference to McLelland J’s observations in that passage that Gummow J wrote (in an article entitled “Compensation for Breach of Fiduciary Duty” published in T G Youdan ed, Equity, Fiduciaries and Trusts (1989) at page 64) that, “stated in terms of liability to account for loss, the obligation is to submit to the taking of accounts and to make compensation for loss occasioned by breach of duty.
[VII] This passage emphasises the common origins of equitable “entitlements” to proprietary relief and compensation on enforcement of a defaulting fiduciary’s liability to account. It also emphasises the fact that vindication of equitable “entitlements” may (as in these proceedings) require an order of the Court.
[VIII] The interrelationship between the various remedies available in Equity is also illustrated by the observation of Professor J D Heydon (as he then was) in an article entitled “Recent Developments in Constructive Trusts” (1977) 51 ALJ 635 where (at 644) he wrote: “If in a constructive trustee’s hands there is wrongly acquired property, or property representing it, he can be compelled to disgorge it or a tracing claim may lie. If there is now no property in the constructive trustee’s hands or if there never was, a personal action for account lies against him. In such a case, the dogma that a man cannot be trustee without trust property is infringed, and the ‘constructive trust’ looks much more like a remedy than a substantive institution”.
That passage was approved by Kearney J, ibid at pages 207-208.
[IX] Maguire v Makaronis (1996) 188 CLR 449 confirms not only the range of remedies available in equity (at 467-468) but also the following points:
(a) Equity intervenes not so much to recoup a loss suffered by a plaintiff as to hold a fiduciary to, and vindicate, the high duty owed by a fiduciary to the plaintiff: 465, 468, 470.
(b) the obligation of a defaulting fiduciary is essentially one of effecting restitution to the plaintiff’s estate: 469.
(c) until restitution is made, the Court presumes that a default continues: 470.[X] In Black v S Freedman & Co (1910) 12 CLR 105 the High Court authoritatively determined the “high duty” of a person who receives and retains stolen property. Cashflow and Mr Star are persons upon whom the High Court, as a matter of policy, has imposed a fiduciary obligation to account.
[XI] In Mr Star’s case that obligation is reinforced by his duty as an officer of the Court to act conscionably: Re Condon Ex Parte James (1874) 6 Ch App 609 at 614, considered by Gummow J in Hartogen Energy Ltd (in liquidation) v AGL (1992) 36 FCR 557 at 571-575.
[XII] The observations of Griffith CJ in Black’s case (at 12 CLR 109.9), and in Creak’s case (at 15 CLR 432-433) are consistent with the proposition that a person who innocently receives stolen property may have a limited time within which he or she can decide how to account for the property. The existence of such an opportunity does not assist Cashflow or Mr Star in this case.
[XIII] In these proceedings it is common ground that Cashflow received property, and derived benefits from property, of CODFA in circumstances in which (to put it neutrally) CODFA did not authorize any disposition of the property to or on the account of Cashflow.
Immediately upon the disposition of CODFA’s property for the benefit of Cashflow Cashflow came under a fiduciary obligation to account, which obligation continued and was reinforced by deliberate decisions made by or on behalf of Cashflow (between 28 October 1996 and 15 March 1999, if not earlier) to retain the benefit of CODFA’s property. In those circumstances, having retained and accepted the benefit Cashflow must bear the burden of disgorging the property. Its fiduciary obligation to account cannot properly be said to have been displaced by dissipation of CODFA’s property (particularly as it has received benefits and recovered moneys referrable to the dissipation of property funded by use of CODFA’s property) or by the commencement of its winding up.
[XIV] Cashflow and Mr Star cannot render their obligation to account to CODFA nugatory by their contention that they were entitled to investigate the facts and thereafter to “elect” how they would account to CODFA. Until 15 March 1999 they denied the existence of any restitutionary obligation in favour of CODFA. Any “election” they were entitled to make, and did make, would not displace their continuing fiduciary obligation to account to CODFA. On the contrary, any performance of that obligation by Mr Star or enforcement of it against him as liquidator of Cashflow would result in either:411 Cashflow’s responsive submissions were as follows:
(a) a payment of moneys to CODFA by Cashflow, unaffected by the order of priorities for which section 556 of the Law provides; or
(b) a payment of moneys to CODFA by Mr Star (as liquidator) and indemnification of him, from property of Cashflow, as a first-ranking creditor under section 556(1)(a).’(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realizing or getting in property of the company, or in carrying on the company's business;
‘ When did the obligation to make restitution arise . / Is the obligation to make restitution a post-liquidation obligation
1. CODFA submits that Cashflow’s alleged liability to account is a post-liquidation liability, and so entitled to priority under section 556 (1) (a) Corporations Law. That submission should be rejected.
2. Section 556 (1) (a) says
556 (1) [Ranking] Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:
412 ‘CODFA’s Submissions as to Assessment of Cashflow’s Solvency in light of Mr Bonvino’s Financial Support for the Company
3. Any obligation of Cashflow to make restitution in relation to the WUPs does not fit inside that language.
3.1. It is not an “expense incurred”.
3.2. The only possible “relevant authority” is the liquidator. He has not incurred the restitutionary obligation to repay the WUPs.
3.3. Further, the restitutionary obligation to repay the WUPs has not been incurred “in preserving, realizing or getting in property of the company, or in carrying on the company's business”.
4. The obligation to make restitution of money paid does not arise from the fact that Cashflow admitted it, in the course of the present litigation. Nor was it necessary for Cashflow to have knowledge of the circumstances of the payments before it is under a restitutionary obligation.
4.1. If Cashflow had changed its position on the faith of the payment, the fact that it did not have knowledge of the circumstances which gave rise to the obligation of restitution would be relevant to whether it could make out that defence of change of position. It is, however, irrelevant to the existence of CODFA’s right (subject to any defence) to have restitution.
4.2. (It may be that knowledge of the defendant has a different role to play when restitution is sought in relation to the value of services conferred, for there “acceptance” of the benefit of the services has a role to play in whether a restitutionary obligation arises. Acceptance of the benefit requires knowledge that the benefit has been conferred, not just the fact that the benefit has been conferred. The need for there to be acceptance of the benefit, in the case of a restitutionary action for the value of services conferred, arises from the fact that services conferred cannot be given back in the same way that money paid can be given back.)
5. The right of CODFA to have restitution of those payments which passed through the bank account of Cashflow arose immediately any payment of CODFA’s money was made to Cashflow.
5.1. In David Securities Pty Ltd v Commonwealth Bank of Australia Mason CJ, Deane, Toohey Gaudron and McHugh JJ said
If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt.
Brennan J said
If, under a mistake, money is paid to and unjustly enriches a payee, the payer's right to recover the amount paid accrues at the moment when the payee received the money.
5.2. See also Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51, at 67 per Mason CJ. (Brennan J, with whom Toohey and McHugh JJ agreed, found no need to consider whether there was a restitutionary obligation to repay.)6. In relation to those of the WUPs where there was payment direct from CODFA to a solvent client of Cashflow, the obligation to make restitution arose either when the payment was made by CODFA, or alternatively at the latest when Cashflow received a benefit arising from that payment.
6.1. Each of the payments to a solvent client generated a benefit, in the form of fee income, immediately the payment was made to the solvent client.
6.2. Further, immediately the payment was made to the solvent client, Cashflow would receive the benefit of:
6.2.1. covenants from that solvent client that the debts sold were valid and enforceable
6.2.2. the right to place 20% of the face value of the debts purchased into a retention fund,
6.2.3. covenants to pay any further fees which might accrue in relation to the debts purchased by that payment, and
6.2.4. covenants that the solvent client would refund any balance of the debt which was outstanding after 90 days, together with
6.2.5. all the other rights which arise under the factoring deed in relation to any factored debt.
Thus the obligation to make restitution, in relation to the WUPs made to solvent clients, arose well before liquidation.
7. Benefits of that kind (or any other kind) were not received by Cashflow in relation to the payment of $20,000 made direct from CODFA to Trans-pac on 2 April 1996. The reasons for this are because
7.1. that payment was received by Trans-pac No 2 (and so was not to a client of Cashflow at all),
7.2. no fees were in fact received from Trans-pac No 1 or Trans-pac No 2 in relation to that payment,
7.3. there was no factoring of debts occurring in relation to that payment, and
7.4. no factoring deed existed with Trans-pac No 2 under which any contractual benefits could arise
Is the obligation to make restitution one which arises because Cashflow has a fiduciary obligation to account
8. The obligation to make restitution is a common law obligation, which arises from the fact of receipt of the payment itself, or of benefits attributable to the payment. The authoritative explanation of the restitutionary obligation, which has been given in David Securities, makes no mention of the possibility of there being an equitable basis for the obligation.9. Chase Manhattan does not provide an acceptable basis for saying that there was a fiduciary obligation imposed on Cashflow by reason of the receipt of the WUPs. It should not be regarded as stating the current law in Australia. There have been some scattered references to Chase Manhattan in cases over the years, but nothing which obliges this court to accept that it imposes a fiduciary obligation on Cashflow.
9.1. In Daly v The Sydney Stock Exchange Limited Brennan J made reference to Chase Manhattan Bank v Israel-British Bank, as follows
There is no analogy between the present case and one in which a constructive trust is imposed on money or other property which is acquired by a fiduciary in breach of his duty but not pursuant to a voidable contract. In such a case there is no question of avoiding the contract before the constructive trust is imposed. A fortiori, there is no analogy between the present case and one where a constructive trust is imposed on money or other property which is acquired by a non-fiduciary otherwise than by contract: as, e.g., in Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd.[1981] 1 Ch 105, at pp 118-120..
In other words, Brennan J regards Chase Manhattan as a case of a remedial constructive trust imposed on a person who is not a fiduciary. None of the other judges of the High Court in Daly made reference to Chase Manhattan, notwithstanding that counsel for the appellant had submitted
Alternatively, the money was entrusted to the firm because it was held on a constructive trust for Dr. Daly. The legal title passed by reason of a transaction procured by the transferee in breach of fiduciary duty. Dr. Daly obtained an equitable interest in the money by reason of the equitable fraud of the transferee. [He referred to Black v. S. Freedman & Co. 10 (1910) 12 CLR 105, at p 110.; Spedding v. Spedding 11 (1913) 30 WN (NSW) 81.; Scott on Trusts, 3rd ed. (1967), par. 462.4; Stansbury v. United States 12 (1982) 543 F Supp 154.; and Chase Manhattan Bank N.A. v. Israel-British Bank (London) Ltd. 13 [1981] Ch 105..]
9.2. In Stephenson Nominees Pty Ltd v Official Receiver Gummow J dissented. His Honour was the only judge to mention the Chase Manhattan case. His only remark in any way relevant to its status in Australia was saying
Any principle to be deduced from that case does not appear in the present case.
That remark is consistent with his Honour regarding Chase Manhattan as wrongly decided.
9.3. In Ilich v R [1986] 162 CLR 110, Wilson and Dawson JJ said at 129:
There is, we should add, a civil action to recover money paid under a mistake of fact and equitable rights may arise: see Chase Manhattan Bank NA v Israel-British Bank (London) Ltd.
That observation did no more than recognize that equitable rights “may” arise. The observation was obiter in the judgment of Wilson and Dawson JJ. It was quite unrelated to the matter for decision by the court (which concerned a conviction for a crime involving taking bank notes). The other three judges who delivered judgments in the case (Gibbs CJ, Brennan and Deane JJ) said nothing on this topic.
9.4.1. That case was one which related to a situation where a trustee in bankruptcy had demanded that an execution creditor, who had received some of the property of the bankrupt, should pay to the trustee the amount that he had received. The execution creditor paid the money, then brought an action to have it returned to him. The trustee in bankruptcy resisted that claim on the ground that the execution creditor had paid the money under a mistake of law. James LJ held that the trustee was obliged to give the money back. In the course of his reasons James LJ said that the money that the trustee held belonged in equity to someone else. Gummow J said, at 573
9.4. In Hartogen Energy Ltd v AGL Co Gummow J, in the course of deciding whether a liquidator should be permitted to maintain a claim to legal professional privilege for documents, gave consideration to the rule in Ex parte James.
The crucial passage in the judgment of James LJ (at 614) is as follows:
"With regard to the other point, that the money was voluntarily paid to the trustee under a mistake of law, and not of fact, I think that the principle that money paid under a mistake of law cannot be recovered must not be pressed too far, and there are several cases in which the Court of Chancery has held itself not bound strictly by it. I am of opinion that a trustee in bankruptcy is an officer of the court. He has inquisitorial powers given him by the court and the court regards him as his officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The court, then, finding that he has in his hands, money which in equity belongs to someone else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion, the Court of Bankruptcy ought to be as honest as other people."
Two years later the same judge said, in Rogers v Ingham (1876) 3 Ch D 351 at 355:
"I have no doubt that there are some cases which have been relied on, in which this Court has not adhered strictly to the rule that a mistake of law is not always incapable of being remedied in this Court; but relief has never been given in the case of a simple money demand by one person against another, there being as between those two persons no fiduciary relation whatever, and no equity to supervene by reason of the conduct of either of the parties."
The passage which I have set out from Ex parte James has to be read with this in mind. The passage is concerned with explaining what in the circumstances of that case led the court to find that there was an equity in the party claiming repayment. Further, the proposition that the money in equity belonged to the claimant for repayment is consistent with modern authority, exemplified by Chase Manhattan Bank NA v Israel-British Bank London [1981] Ch 105.
9.4.2. In the circumstances of Ex parte James it was quite clear that the trustee in bankruptcy held the property which had been paid to him by the execution creditor as a fiduciary – it was clearly not his own, simply because the only reason why it had been paid to him was because he was the trustee in bankruptcy. In that situation, the only choice concerned whether it was held on the trusts on which the property of the bankrupt estate was held, or whether it was held for the execution creditor.9.4.3. There is nothing in Ex parte James to suggest that any unauthorised payment which CODFA makes to Cashflow, or to a solvent client of Cashflow, will result in the money being held in any sort of similar fiduciary fashion.
9.4.4. The final sentence of the extract quoted from the judgment of Gummow J is obiter, and hardly an endorsement of the decision in Chase Manhattan.
9.4.5. The derisory remarks about Chase Manhattan that are contained in Meagher Gummow and Lehane Equity Doctrines & Remedies, 3rd edition, paragraphs 505,1402 and in Jacobs’ Law of Trusts in Australia, 6th edition, paragraphs 2703,2705 show that Gummow J does not accept that it is correct if it holds that a fiduciary obligation arises when there is a mistaken payment.
9.4.6. We also mention here that, contrary to the submissions which CODFA makes in §23 of its latest submissions, the decision in Ex parte James, as explained by Gummow J in Hartogen, has no bearing on whether Mr Star ought to recognise any sort of equitable obligation in relation to the assets of Cashflow. A fundamental distinction between the present case and ex parte James is that all the assets in Mr Star's’ hands are ones which the company owned at the time of its liquidation, or (like the right to receive money from Westpac for settlement of the litigation against it) are the fruits of a right of action which the company had at the time it went into liquidation.
9.5. In Commonwealth of Australia v ANZ Banking Group (O’Keefe CJ Comm Div 7 October 1993 unreported, accessible in Butterworths unreported judgments no BC9302376 at 7 ) his Honour said
Monies paid as a result of fraud or mistake are impressed with a trust in favour of the payer, who is entitled to an order for the return of those monies; (Chase Manhattan Bank NA v Israel British Bank (London) Ltd (1981) 1 Ch 105 at 117 to 120, 128.)
Where money has been stolen, that money is held in trust by the thief. Once such money has been impressed with that trust, he, the thief, cannot remove from it its character as trust money. If he pays it over to another person, then it may be followed into that persons hands. (Black v S Freedman and Co (1910) 12 CLR 105 at 117.)
Mr Eliades therefore in my view holds the various monies referred to above as trustee for the ANZ.
Those remarks were made in the context of a tracing claim, brought by the true owner of money against a true thief. They do not assist the present case. In so far as his Honour drew any principle from Chase Manhattan at all, it was relating to moneys paid as a result of “fraud or mistake”.
9.6. In Chippendale v Commissioner of Taxation, Lehane J said that the obligation to repay money paid under mistake was treated as a common law obligation, not an equitable one. His use of a “cf” when referring to Chase Manhattan suggests that he is contrasting his own view with that expressed in Chase Manhattan.
Equally, relief would be available in accordance with common law principles in a case where money was paid as tax under a mistake of fact: for example, if a taxpayer applied the right principles in calculating tax due but made an error in the calculation or, overlooking the fact that the tax due had already been paid, mistakenly paid it again (cf Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] 1 Ch 105).
9.8. It follows that there is no authority which prevents the Court from following the English cases set out in Cashflow’s submissions on constructive trust, in denying that there is any fiduciary obligation here.
9.7. In Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 353 at 455 McHugh JA made mention of Chase Manhattan, but for the conflicts of law principle decided by it, not the point which is relevant to this case.
Is the obligation to make restitution one which is provable in the winding up
10. Section 82 Bankruptcy Act 1966 says
11. A claim for restitution of money paid to or to the use of a person who has become bankrupt is a claim which is provable in a bankruptcy, because it is a liquidated demand. CODFA’s claim to an account is in reality a claim to get back the money it parted with, with interest. That is a liquidated claim.
82. Debts provable in bankruptcy
(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy , or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy , are provable in his or her bankruptcy .
(1A) Without limiting subsection (1), debts referred to in that subsection include a debt consisting of all or part of a sum that became payable by the bankrupt under a maintenance agreement or maintenance order before the date of the bankruptcy .
(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy .
(3) Subject to subsection (3A), penalties or fines imposed by a court in respect of an offense against a law, whether a law of the Commonwealth or not, are not provable in bankruptcy .
(3AA) An amount payable under an order made under paragraph 1317EA (3) (b) of the Corporations Law of a State or Territory is not provable in bankruptcy .
(3A) An amount payable under a pecuniary penalty order or an interstate pecuniary penalty order is provable in bankruptcy .
(3B) A debt is not provable in a bankruptcy in so far as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy , on a debt that is provable in the bankruptcy .
(4) The trustee shall make an estimate of the value of a debt or liability provable in the bankruptcy which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value.
(8) In this section, "liability" includes:
(a) compensation for work or labour done;
(b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt ; and
(c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is:
(i) in respect of amount - fixed or unliquidated;
(ii) in respect of time - present or future, or certain or dependent on a contingency; or
(iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion.
12. The bankruptcy provisions setting out what were provable debts were deliberately cast in wide terms, excluding nothing but claims for personal torts, so as to provide the bankrupt with the fullest opportunity to make a fresh start after the bankruptcy, freed from nearly all claims and demands.
13. While there was not the same policy objective (of allowing a natural person a fresh start) in drafting the winding up provisions relating to provable debts, the provisions of the bankruptcy legislation about provable debts were taken across into legislation governing the winding up of insolvent companies.
14. In the time before the enactment of section 553 and 554A Corporations Law, it was held that where a company has received money which is money out of which A has been cheated, and the company has subsequently gone into liquidation, A has a right of proof in the liquidation for the amount in relation to which A has been cheated, and in relation to which A has a claim in restitution against the company. However, no claim for interest was allowed to be proved in the winding up. Cutten & Harvey v Mount (1988) 50 SASR 81 at 87-88. That authority remains applicable today.
15. When s 553 and 554A Corporations Law were introduced, it was with the intention of allowing even claims for unliquidated damages to be provable in the winding up of insolvent companies. Butterworths Corporations Law – Principles and Practice, para 5.6.0225 says
GenerallyTort
Unliquidated claims are provable in the winding up of a company. However, in the case of insolvent companies, this is subject to s 82(2) of the Bankruptcy Act 1966 (see s 553E). That section provides that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. The limitation on the ability to prove, contained in s 82(2) of the Bankruptcy Act 1966, should be construed narrowly. The expression “by reason of” in that section indicates that it is not necessary to establish more than an appropriate nexus between the damages claimed and the contract or promise.
Until the passing of the CLRA it was settled law that unliquidated damages for tort could not be proved in a winding up of an insolvent company. ….. . However, it is recognized that a strict application of the bankruptcy rule to corporate insolvency may lead to “extraordinary consequences”: see the comments by Gummow and von Doussa JJ in McIntyre v Perkes (1990) 92 ALR 577 at 590; Fielding v Vagrand Pty Ltd (in liq) (1992) 111 ALR 368; 9 ACSR 505 at 511; 11 ACLC 172.
This rule does not apply where there are surplus assets. There is nothing in the law of bankruptcy or in the law of companies which prevents an unsatisfied claimant, in respect of a claim in tort which was still unliquidated by judgment at the commencement of a winding up, from obtaining satisfaction out of the surplus assets which remain after debts and costs of winding up have been paid, before anything is paid to the shareholders. 30. Nor does it prevent the proof of claims which were already liquidated at the time of the making of a winding up order (being the relevant date): Re Autolook Pty Ltd (1984) 2 ACLC 30.
…..16. Thus, under the present Corporations Law, with section 553 and 554A allowing the proof of unliquidated claims, there is no doubt that the obligation of Cashflow to make restitution to CODFA in relation to the WUPs gives rise to a claim which is provable in the winding up of Cashflow.
The Explanatory Memorandum to the CLRA states that the effect of ss 553 and 554A will overcome the effect of s 82(2) of the Bankruptcy Act 1966“and thereby permit claims in tort which are unliquidated at the time of the winding up to be admissible in the winding up”: para 853.
17. The basis on which a court decides whether it will permit an action against a company in liquidation is that it is more convenient to allow the matter to be dealt with by an action than by lodgment of a proof of debt. That the court has decided that it is more convenient to allow the present action to proceed, rather than insisting on CODFA lodging a proof of debt and then dealing with an appeal against the rejection of that proof of debt, ought not result in CODFA being in any better position than it would have been in if the proof of debt route had been followed.
18. We dispute, for reasons given in the course of the hearing, that Cashflow owes, or ever owed, fiduciary obligations in relation to the WUPs. However, if we are wrong about that, all that any fiduciary obligation to account results in, is a personal obligation on the fiduciary to pay money. If the fiduciary becomes insolvent, that personal obligation results in a proof of debt.
Is a personal obligation of a fiduciary to make good a loss, one which is provable in the winding up of the fiduciary
19. There is old and uncontradicted authority that the amount for which a natural person fiduciary can be required to account is provable in the bankruptcy of the fiduciary. (If the claim against the fiduciary was in the nature of a claim for unliquidated damages, it might not have been provable in the bankruptcy.)
20. Section 82 (2) Bankruptcy Act makes clear that a personal liability of a trustee to make restitution for breach of trust is provable in the bankruptcy. If that species of fiduciary obligation is provable in the bankruptcy, it is consistent that an action for other types of breach of fiduciary duty ought also be provable in the bankruptcy.
21. It is the effect of section 553 and 554A Corporations Law that any doubts that there might be about whether all and every claim for breach of fiduciary duty are provable in the winding up of a corporation (including claims which are in the nature of unliquidated claims) has been removed.
22. A dictum of Young J in Re Trivan is to the effect that an entitlement to the equitable relief of subrogation cannot be asserted in a proof of debt, because subrogation is an equitable remedy, not a right. (The ratio of the decision was that subrogation was not available, because the person seeking it had failed to do equity.) Nothing in Re Trivan casts doubt on the ability to lodge a proof of debt for the loss sustained by reason of breach by a company in liquidation of a fiduciary obligation.
Alleged “financial support” by Bonvino of Cashflow
23. That it would have been possible, in December 1994, for Pyrafount to inject a further $500,000 does not bear upon the solvency of Cashflow in the 12 months from 12 September 1995.
24. As to the alleged “inference” that Bonvino and his company had agreed not to withdraw their funds without arranging alternative financing27. The affidavit of 14 March 1999 makes clear that Bonvino had, at the outset, the right to withdraw the funds at any time. His holding 51% of the shares, and therefore having the practical ability to change the board of directors, meant that he had the capacity to ensure that Cashflow agreed to whatever terms for withdrawal of funds he wished to have. Bonvino had this practical ability to get his funds out, and vary any agreement under which they had been provided, whenever he wanted, regardless of the terms that had been originally agreed for their withdrawal.
24.1. that is contrary to the express evidence of Bonvino in his affidavit of 14 March, “I will be able to withdraw the funds in three months even if you cannot find a replacement”
24.2. it was never put to Bonvino in cross-examination that there was any such agreement.
26. There never was any agreement that Bonvino, or Pyrafount (or anyone else) would continue to provide financial support to Cashflow.’
[I] The law relating to assessment of solvency is summarized in H.A.J. Ford, R.P. Austin and I.M. Ramsay, Ford’s Principles of Corporations Law (9th ed, 1999) paragraph [20.140]. The basic authorities are Bank of Australasia v Hall (1907) 4 CLR 14 and Sandell v Porter (1966) 115 CLR 666 at 670-671.
[II] The question whether an assessment of a company’s insolvency requires consideration of the availability of unsecured credit from its officers or promoters is one of fact which depends upon the degree of certainty with which such funds are, and are likely to remain, available for use by the company. See, for example, Taylor v ANZ Banking Group Ltd (1988) 13 ACLR 780 at 784; Re RHD Power Services Pty Ltd (in liq) (1990) 3 ACSR 261 at 264; Re Kerisbeck Pty Ltd (1992) 10 ACLC 619 at 621.
[III] In these proceedings there is evidence of Mr Bonvino’s continuing support of Cashflow. See:
General Principles
(a) paragraph 52(c) of Mr Bonvino’s Affidavit sworn 27 April 1998, in which he said that Cashflow never needed to borrow money from CODFA and that Cashflow had no need of funds from CODFA.
(b) paragraph 64 of the same affidavit, in which he said: “To my knowledge Walters and Wright were aware that Pyrafount No 3 Pty Ltd, the major funder of Cashflow, had additional funds to inject from time to time if necessary. At about that time (December 1994) it would have been possible for Pyrafount No 3 Pty Ltd to have injected further capital in the order of $500,000.00.”
(c) the annexure at page 87 (described in paragraph 11) of the same affidavit, from paragraph 3 of which it may be inferred that Mr Bonvino and his company had agreed not to withdraw their funds in Cashflow without arranging alternative finance.
(d) paragraph 2 of Mr Bonvino’s Affidavit sworn 14 March 1999, in which he refers to a conversation he had with Mr Wright as to the investment of moneys in Cashflow, in the course of which he indicates that there was a requirement of three months’ notice prior to the withdrawal of funds from Cashflow.
(e) document No. 18 within CODFA’s Tender Documents, at page D332-D333, which comprises a letter from the solicitors of Cashflow and Mr Star dated 30 September 1998, in which it is conceded that Pyrafount No 3 Pty Ltd had made no written demand for the repayment of that company’s funds in Cashflow prior to August 1996.’
Dealing with CODFA’s Constructive Trust Case
413 As recently as March 1999, the High Court of Australia has had occasion to caution that care is required in the use of the term ‘constructive’ in this context. In Giumelli v Giumelli [1999] HCA 10, (24 March 1999), Gleeson CJ, McHugh, Gummow and Callinan JJ at paragraph 2, cited the following statement from Scott on Trusts 4th edition (1989) volume 5 paragraph 462.4:
‘It is sometimes said that when there are sufficient grounds for imposing a constructive trust, the Court ‘constructs a trust’. The expression is, of course, absurd. The word ‘constructive’ is derived from the verb ‘construe’, not from the verb ‘construct’. . . . The Court construes the circumstances in the sense that it explains or interprets them; it does not construct them.’
414 In Beatty v Guggenheim Exploration Co (1919) 225 N.Y. 380, Cardozo J explained the principle which informs the raising of a constructive trust as follows:
‘A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.’
415 At page 389 Cardozo J said:
‘A court of equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief.’416 The inquiry is as to whether, according to the principles of equity, it would be a fraud for the defendant to deny the trust. Hence, the inquiry is not as to the actual or presumed intention of the parties. Cf Jacobs’ Law of Trusts in Australia, 6th edition, Butterworths, 1997 edited by R.P. Meagher and W.M.C. Gummow at paragraph 1301.
[Applied by Mason J, as he then was, in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 108].
417 Deane J stated in Muschinski v Dodds (1985) 160 CLR 583 at 614:
‘Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.’
418 Hence, one may proceed upon the basis that CODFA must show that some legal or equitable principle operating in its favour, justifies treating as unconscionable, the retention by Cashflow of the moneys
(a) now held by Cashflow in respect of which CODFA claims a declaration that a constructive trust exists or419 Clearly the list of constructive trusts is not closed. English v Dedham Vale Properties [1978] 1 All ER 382 at 398 per Slade J.
(b) which may be ordered to be repaid by CODFA to Cashflow as a consequence of the application of the insolvency provisions of the Corporations Law.
It is insufficient to appeal to general notions of fairness or reasonableness. [Cf Ford and Lee, Principles of the Law of Trusts, 3rd edition 1996, LBC Information Services, paragraph 22020.]
420 This case throws up the importance of taking into account commercial considerations. In Woodson (Sales) Pty Ltd v Woodson (Australia) Pty Ltd (1996) 7 BPR 14,685 at 14,709 Santow J said:
‘Remedies of equity, flexibly applied in a modern commercial context, must be adapted to commercial realities. Thus, for example, relief which is appropriate to dealing with breaches of traditional family settlements may require adjustment in a commercial context, if it is not to be unduly heavy handed. That does not mean there are automatically lesser standards in a commercial setting, necessarily rendering equitable relief inappropriate. Rather it recognises there may be wholly different circumstances and expectations. Such an adaptation of equitable relief removes much of the objection to equity’s intrusion into commercial dealings, so long too as that intrusion remains principled rather than unpredictable.’421 CODFA’s constructive trust case fails at threshold for at least the following reason:
The Case Fails at Threshold
In order for a constructive trust to be imposed in the circumstances of this case, there would have to be:422 Before turning to this question, it is convenient to examine another threshold consideration. Whilst not in itself determinative of CODFA’s case, it is clearly an important issue. I refer here to the attribution to Cashflow of notice or knowledge of Mr Walters’ misappropriations from CODFA of the paid funds. The two routes to the attribution of knowledge to a corporation are through agency and through the directing mind and will of the corporation. I turn to deal with each.
(a) as to the moneys the subject of Cashflow’s claim described in paragraph 418(a), identifiable trust property now held by Cashflow to which such trust would attach. No such identifiable trust property exists;
(b) as to moneys which become subject to the order referred to in Cashflow’s claim described in paragraph 418(b), a legal or equitable principle which justifies treating as unconscionable, the liquidator’s retention of such moneys for the purpose of their being made available to creditors pursuant to the winding up. No such principle justifies that treatment in the circumstances proven in this case.
The Imputing of Notice or Knowledge
Knowledge through Mr Walters’ acting as agent for Cashflow
423 In Re Hampshire Land Company [1896] 2 Ch 743, approved by the House of Lords in JC Houghton & Company v Nothard, Lowe & Wills Ltd [1928] AC 1, the facts involved the Hampshire Land Company which was closely connected to a building society. Both the company and the society had their offices in the same building, four directors of the company were also directors of the society and both corporations had a certain Mr Wills as secretary. In 1892, the society went into liquidation and in 1893, the company passed an extraordinary resolution in favour of voluntary winding up. The proceedings concerned a claim by the liquidators of the society to prove in the winding up of the company for a debt of over £30,000 for money lent by the society to the company. The facts of the case turned on the borrowing power of the company, which was not to exceed the paid up capital (that being £10,000), unless authorised by general meeting. Vaughan Williams J found as a matter of fact that in 1881 a general meeting was held and a resolution was passed authorising the directors of the company to borrow the moneys from the society. His Lordship also found that that meeting was irregularly convened, not being in accordance with the company articles. It was argued by the company that the resolution was not binding on the company as the society was said to have taken with notice of the irregularity, Mr Wills as common officer of both the society and the company, being aware that the borrowing was ultra vires the company directors.
424 In considering the general proposition that the knowledge of a common officer is always the knowledge of the two companies, Vaughan Williams J rejected that proposition stating at page 748 that:
‘Knowledge which has been acquired by the officer of one company will not be imputed to the other company, unless the common officer had some duty imposed on him to communicate that knowledge to the other company, and had some duty imposed on him by the company which is alleged to be affected by the notice, to receive the notice.’ [Cf Sargent v ASL Developments Ltd (1974) 131 CLR 634 at page 658 per Mason J]
425 Relevantly to the facts there under consideration, Vaughan Williams J, in admitting the proof of debt, continued at page 749 as follows:
‘[I]f Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here at Mr Wills was guilty of irregularity - a breach of duty in respect of these transactions - the same inference is to be drawn as if he had been guilty of fraud.’
426 The principles in accordance with which a corporation may be attributed with the knowledge of a person who is an officer of that corporation are analogous to the principles determining whether a principal may be attributed with the knowledge of his or her agent.
427 A fundamental principle of agency is that in certain circumstances, the principal must be attributed with the agent’s knowledge. In Bowstead and Reynolds on Agency 16th Edition 1996 at 8-206, two lines of reasoning are stated to justify this principle. The first, outlined by Palles CB in Taylor v Yorkshire Insurance Co Ltd [1913] 2 Ir R1 at 21, goes to the identity of the principal and agent:
‘. . . every act of the agent, within the scope of his authority, is the act of the principal. Consequently all knowledge acquired by the agent when acting within the scope of his authority is the knowledge of the principal.’
428 The second line of reasoning is based on the presumption that where an agent has notice or knowledge of a matter relevant to the principal, that notice or knowledge will be passed on to the principal. That presumption is rebuttable - A/S Rendal v Arcos Ltd [1937] 3 All ER 577.
429 In Bowstead and Reynolds on Agency, the authors make clear at 8-207 that the presumption that knowledge will be passed on from the agent to the principal may be ‘nullified by proof that the agent was defrauding the principal in that transaction, whether or not the third party knew this; it can, in such a case, be said that there was a moral certainty that the information would not be communicated, or that communication would require disclosure of the very fraud being practiced upon the principal by the agent [the text contains a typographical error transposing the words ‘agent’ and ‘principal’], or that the agent was not acting for the principal when he received the information’.
430 In short, when the company is the victim of the conduct of particular officers or servants, their knowledge and conduct may not be imputed or attributed to the company [see Duke Group Ltd (In Liquidation) v Pilmer & Ors (Unreported, Supreme Court of South Australia, 30 January 1998, Mullighan J)].
431 In Cave v Cave [1880] 15 Ch D 639, Fry J explained at 644 that this exception may be put in the following two ways:
‘In the one view notice is not imputed, because the circumstances are such as not to raise the conclusion of law, which does ordinarily arise from the mere existence of notice to the agent; in the other view . . . the act done by the agent is such as cannot be said to be done by him in his character of agent, but is done by him in the character of a party to an independent fraud on his principal, and that is not to be imputed to the principal as an act done by his agent.’
432 I note that von Doussa J in Beach Petroleum v Johnson (1993) 115 ALR 411, in acknowledging a difficulty with the above exception, sought to set limits to the exception:
‘I return to the Houghton principle. It is one which may be applied without difficulty where the company is the victim of the fraud or misfeasance of a director and does not gain any benefit from the transaction, as was the situation in Re Hampshire Land Co, Houghton and the Belmont Finance cases. In the Belmont Finance cases the common officers of the plaintiff and the two defendant companies who organised the illegal transaction would have been in breach of fiduciary duty to the defendant companies in that they caused them to enter into an illegal transaction. Yet this fact was not addressed in the judgments. What insulated the plaintiff, but not the defendants, from having the knowledge of those officers imputed to them was the fact that only the plaintiff company was treated as a victim. The defendant companies were parties who benefited by reason of the transaction.433 The limitation, being predicated on the circumstance where the fraudulent officer acted within the scope of his or her actual or apparent authority, was described thus:
Difficulty arises where the director’s fraud or misfeasance, whilst in some aspects inimical to the interests of the company, nevertheless achieves a benefit for the company.’
[at 571-572]
‘If the director is guilty of fraudulent conduct which is not totally in fraud of the corporation, and by design or result the fraud partly benefits the company, the knowledge of the director in the transaction will be attributed to the company.’ [115 ALR at 574]
434 Senior counsel for Cashflow and for CODFA characterised the Walters’ unauthorised payments in different terms. Mr Campbell QC, counsel for Cashflow, submitted that the payments were an ‘unauthorised activity’. Mr Lindsay, senior counsel for CODFA, submitted that the payments represented an ‘unauthorised mode of carrying out an authorised activity’. To my mind, Mr Campbell’s submission is correct. Mr Walters’ actions fell outside the scope of his actual or apparent authority as an employee or officer of Cashflow.
435 Use of the word ‘fraudulent’ requires care when the state of mind of the person of whom fraud is alleged is unclear. In these proceedings, the evidence does not permit a finding as to precisely why Mr Walters acted as he did. All that the evidence establishes is that his conduct was outside the scope of the authority conferred upon him by either Cashflow or CODFA. Using the above description to provide a dictionary for the use which follows of the words ‘fraudulent’ or fraud, to my mind, Mr Walters’ conduct was clearly fraudulent and clearly represented gross breaches of duty owed relevantly to CODFA. He acted totally in fraud of CODFA. He acted totally in fraud of Cashflow. His knowledge was an element of his actions in fraud of both companies. It is not possible to impute knowledge acquired by Mr Walters in his capacity as an officer of CODFA to Cashflow in the circumstances of the evidence in this case. As Mr Campbell submitted at transcript 130, as Mr Walters wore two hats ‘even if he were acting as the legitimate officer of Cashflow in receiving the CODFA funds, he would not tell himself that the payments were in breach of duties which he owed to CODFA’.
436 I note that in Farrow Finance Company Ltd (In Liquidation) v Farrow Properties Pty Ltd (1997) 26 ACSR 544 Hansen J at 587 extended the criterion to cases of breach of fiduciary duty. Referring to Beach Petroleum NL v Johnson (1993) 43 FCR 1, a decision of von Doussa J, Hansen J said:
‘That discussion illustrates that in a case of fraud involving two companies, both of which share a common director who is involved in the fraud, the knowledge of the director will be imputed to the company taking the benefit of the fraud if the director was acting within the scope of his or her actual or apparent authority as a director of the benefiting company. In my opinion, that criterion applies equally to a case not of fraud, but of breach of fiduciary duty.’ [at p 587]437 Viscount Haldane LC in Lennard’s Carrying Company Ltd v Asiatic Petroleum Company Ltd [1915] AC 705 said:
Knowledge through the directing mind and will
‘My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company. My Lords, whatever is not known about Mr. Lennard’s position, this is known for certain, Mr. Lennard took the active part in the management of this ship on behalf of the owners, and Mr. Lennard, as I have said, was registered as the person designated for this purpose in the ship’s register.’ [at p 713]
438 Hoffman LJ in commenting in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 (Court of Appeal), on the above statement says:
‘Viscount Haldane LC therefore regarded the identification of the directing mind as primarily a constitutional question, depending in the first instance upon the powers entrusted to a person by the articles of association. The last sentence about Mr Lennard’s position shows that the position as reflected in the articles may have to be supplemented by looking at the actual exercise of the company’s powers. A person held out by the company as having plenary authority or in whose exercise of such authority the company acquiesces, may be treated as its directing mind.439 The doctrine attributes to the company the mind and will of the natural person or persons who manage and control it’s actions.
It is well known that Viscount Haldane LC derived the concept of the ‘directing mind’ from German law (see Gower Principles of Modern Company Law (5th edn, 1992) p 194, n 36) which distinguishes between the agents and organs of the company. A German company with limited liability (GmbH) is required by law to appoint one or more directors (Geschäftsfuhrer). They are the company’s organs and for legal purposes represent the company. The knowledge of any one director, however obtained, is the knowledge of the company (see Scholz Commentary on the GmbH Law (7th edn, 1986)), s 35). English law has never taken the view that the knowledge of a director [is] ipso facto imputed to the company: see Powles v Page (1846) 3 CB 15, 136 ER 7 and Re Carew’s Estate Act (No 2) (1862) 31 Beav 39, 54 ER 1054. Unlike the German Geschäftsfuhrer, an English director may, as an individual, have no powers whatever. But English law shares the view of German law that whether a person is an organ or not depends upon the extent of the powers which in law he has express or implied authority to exercise on behalf of the company.’ [(1994) 2 All ER at 705]
440 The parties were at issue as to whether as CODFA submitted, Mr Walters was ‘the directing mind and will’ of Cashflow concerning the Walters’ Unauthorised Payments. CODFA sought to rely in this regard on the decision in El Ajou.
441 CODFA’s contention faces an immediate difficulty already dealt with. This is that the knowledge of a person, whether sought to be imputed to a corporation by principles of principal and agent, or by the organic theory, is not so imputed where the person’s knowledge is an element of his fraud against the corporation. R v Roffel [1985] VR 511 at 525 per Brooking J (dissenting on other issues). Hence the findings referred to in paragraph 435 above are determinative on this issue.
442 El Ajou dealt with a particularly complex set of facts. The following description is taken from Ford and Austins ‘Principles of Corporations Law’ Butterworths, 1995, 7th edn at para 16.210:
‘The plaintiff owned funds controlled by a Swiss investment manager who improperly invested them in fraudulent schemes operated by certain Canadians. The operators of the schemes loaned the funds to the defendant (DLH), an English company controlled off-shore by Americans unconnected with the fraud and their agent S. DLH was a holding company with directors who were mere cyphers doing the bidding of the overseas proprietors and S in the signing of whatever documents they were instructed to sign.443 To my mind, the decision is clearly distinguishable from the facts in the present case. The directors of DLH were Mr Ferdman (described in the above extract as ‘F’), Mr Favre and Mr Jaton. The trial judge described the three of them as nominee directors who represented the interests of the beneficial owners and played no part in the conduct of DLH’s business which was carried on by Mr Stern (described in the above extract as ‘S’) in consultation with the Americans.
The plaintiff sued DLH for a declaration that it was liable as a constructive trustee of the funds for the plaintiff on the grounds that it had received the funds knowing that they had been transferred out of the plaintiff’s account by the Swiss investment manager in breach of fiduciary duty. The only basis for showing that DLH knew of the breach of duty was that F, its chairman of directors, knew of it. But F acquired the knowledge when acting for the Canadian operators of the fraudulent scheme and not when acting as an agent of DLH. Millett J held that DLH was not fixed with F’s knowledge. The alternative basis for attributing knowledge was not present because, in the view of Millett J, F was not the directing mind and will of DLH. He exercised no independent judgment. He was chairman of a board of mere nominee-directors.
On appeal, the Court of Appeal reversed on the issue of whether F was the directing mind and will. The Court of Appeal focussed attention on the transactions by which DLH obtained the funds. The activity of F, even though under the direction of others, in signing documents and otherwise committing DLH was enough to make F the directing mind and will.’
444 The decision of the Court of Appeal turned on the fact that Mr Ferdman was a director of DLH, was in a different position from the two other directors and critically, signed an agreement with Yulara Realty Ltd on behalf of DLH, and so signed at the request of Mr Stern whom he knew to be clothed with authority from the Americans. This appears most clearly from the judgment of Hoffman LJ:
‘The authorities show clearly that different persons may for different purposes satisfy the requirements of being the company’s directing mind and will. Therefore the question in my judgment is whether in relation to the Yulara transaction, Mr Ferdman as an individual exercised powers on behalf of the company which so identified him. It seems to me that Mr Ferdman was clearly regarded as being in a different position from the other directors. They were associates of his who came and went. SAFI charged for their services at a substantially lower rate. It was Mr Ferdman who claimed in the published accounts of DLH to be its ultimate beneficial owner. In my view, however, the most significant fact is that Mr Ferdman signed the agreement with Yulara on behalf of DLH. There was no board resolution authorising him to do so. Of course we know that in fact he signed at the request of Mr Stern, whom he knew to be clothed with authority from the Americans. But so far as the constitution of DLH was concerned, he committed the company to the transaction as an autonomous act which the company adopted by performing the agreement. I would therefore hold, respectfully differing from the judge, that this was sufficient to justify Mr Ferdman being treated, in relation to the Yulara transaction, as the company’s directing mind and will.’ [1994 2 All ER at 706]
Nourse LJ said:
‘In disagreeing with the judge on this question, I start from the position that the transactions to be considered are those by which DLH received assets representing the moneys fraudulently misapplied. The responsibility for the management and control of those transactions is not to be determined by identifying those who were responsible for deciding that DLH would participate in the Nine Elms project and the nature and extent of that participation, far less by identifying those who were responsible for business decisions generally. Neither Mr Stern nor the Americans made any of the arrangements for the receipt or disbursement of the moneys by Grangewoods. Nor did they commit DLH to the obligations correlative to their receipt. None of them had the authority to do so. That was the responsibility of Mr Ferdman. The crucial considerations are that Mr Ferdman made all the arrangements for the receipt and disbursement of the £270,000 and the £1,030,000; that it was he who signed the letter of 20 March to Roth; that it was he who, on 25 March, copied that letter to Mr D’Albis; that it was he who signed and dispatched the letter of 7 April to Yulara; that it was he who, on 6 May, signed the agreement with Yulara; and that it was those steps that caused DLH to become involved in the project and enabled it later to acquire the assets representing the moneys fraudulently misapplied.
544 Trans-pac also owed amounts to Cashflow for fees. The sources of income of Cashflow, according to its management accounts, were nearly all fees. A high proportion of the fees that were owed to Cashflow were owed by Trans-pac. While they accrued due and appear in the monthly management accounts, they are not money that can be relied on to actually pay Cashflow’s debts. If they are deducted from the monthly profit that appears in Cashflow’s monthly management accounts, Cashflow is seen to make a loss every month from June 1995 onwards.
(c) The tax was actually paid in December 1995. The whole of the amount that was shown as operating profit in the accounts ($105,430) was distributed as a dividend, in February 1996. From that time onwards, those amounts were not available to fund the debts of the company.
(d) After liquidation, Cashflow submitted an amended tax return for the year ended 30 June 1995 and in November 1996 obtained a refund of the tax it had paid, plus some interest. [Exhibit PX1 page 1571] However, in the period from December 1995 to liquidation, the amount that had been wrongly paid for tax, reduced the liquid assets of Cashflow.
(e) The balance sheet of Cashflow as at 30 June 1995 includes (as by far the most significant asset) receivables of $1,613,998. [Affidavit of Mr Bonvino, 27 April 1998 page 154]. These receivables would include debts owing to Trans-pac No. 1 and Trans-pac No. 2 which had been taken up in the accounts of Cashflow. There is, I accept, no allowance for bad debts. The amount of the receivables as at 30 June 1995 is overstated by $224,706 [Mr Cachia Annexure ‘A’, first column] on the basis on which Mr Cachia did his calculations (namely, accepting that a debt which appears in the books of Cashflow as owing from a Trans-pac customer is really owing and calculating the difference between the amount of debt of Trans-pac to Cashflow that appears in the accounts and the amount that the reconstruction of the Trans-pac account - Annexure ‘B’ to Mr Cachia - shows as owing. That basis is, I accept, too generous to Cashflow’s solvency, in that it does not take account of the fact that many of the debts owing to Trans-pac taken up in the accounts of Cashflow had not really been assigned. Nor I accept does it make any allowance for bad debts.
(f) On the strength of the accounts as at 30 June 1995, Cashflow paid dividends totalling $105,430 [- Affidavit of Mr Bonvino, 27 April 1998 paragraph 17(e) and (f).] The dividend was paid even though accounts had certainly overstated the profit of the company, and possibly overstated the profit (and the available funds) by at least $140,000. This I accept, worsened the insolvency of the company.
(g) Any profit that had been made in the year to 30 June 1995 was not available in cash to meet the debts of the company as they fell due, but rather had been reinvested in the business - Transcript page 49.
(h) The amount of the total of the WUPs that was outstanding at one time, represents the extent to which Cashflow could not pay its debts as they fell due from its own money. I accept Cashflow’s submission that it is difficult to see what could be more indicative of an inability to pay debts as they fall due, than that Mr Walters needed to make unauthorised ‘borrowings’ of money from CODFA. Exhibit GMG4 appended to this Judgment shows that there were substantial unauthorised takings of the money of CODFA to make up for the cash deficiency of Cashflow, continually from August 1995.
(i) I accept that it was because Cashflow was insolvent that Mr Walters needed to engage in the complicated subterfuges that were involved in the WUPs.
(j) On some occasions, cheques that Mr Walters and Mr Wright wrote out to Trans-pac, were deposited back into the bank account of Cashflow, so that it looked as though Cashflow was receiving deposits [- Affidavit of Mr Bonvino, 27 April 1998 para 29(b).] That is, I accept, another litmus test for insolvency.
(k) Not only did Cashflow not make a profit of $157,000 in the year ended 30 June 1995, it is shown to have made a loss. After Cashflow went into liquidation, an amended income tax return, disclosing a loss, was accepted by the Commissioner, and a refund made of the tax that had been paid [- PX 1571-1573.]
(l) Trans-pac No. 1 was a substantial debtor of Cashflow. Over the period from February 1995, the debt which Trans-pac owed to Cashflow fluctuated within the range of 50-60% of the total indebtedness owed to Cashflow - Mr Bonvino’s affidavit of 14 March 1999, Annexure ‘B’. Trans-pac No. 1 was itself a company which I accept was insolvent during the time from February 1995. In this regard I accept the following matters put forward by Cashflow as proven:
(i) Trans-pac No. 1 was incorporated on 30 December 1993 and stopped trading in November 1995. It went into liquidation with a deficiency of $2,644,487. If that loss was incurred evenly over the 23 months it was trading, that was a loss of nearly $115,000 per month.
(ii) Trans-pac No. 1’s annual return for the financial year ended 30 June 1994, showed it at that time as having negative shareholders equity of $12,695 - Exhibit P5. Trans-pac No. 1’s annual return for the year ended 30 June 1995 showed it as having negative shareholders equity at that time of $1,117,870 - Exhibit P5.
(iii) Trans-pac No. 1 had itself had significant losses arising from the paymistress taking company funds. An amount of $30-40,000 was identified as money that the pay mistress had taken, ‘but there was a lot more money going that they haven’t disclosed. It could have been $3-400,000’ - Exhibit PX1 page 1530. As a result of this, Mr Peter Panayi told Mr Star that Trans-pac (at some stage in mid to late 1995) was insolvent - Exhibit PX1 page 1530.
(iv) The Panayis took over the business of Trans-pac No. 1 on an assurance from Barnes that it was viable, ‘and Peter (Panayi] subsequently found out it was quite the opposite’ - Exhibit PX1 page 1531.
(v) It’s statement of affairs shows it as going into liquidation owing $1.2million to Cashflow, secured by a charge over debts, but the debts are shown as worthless. There were $148,000 of preferential creditors (namely the ATO, for superannuation for employees). The unsecured creditors included $318,000 of unpaid payroll tax, $703,000 of unpaid group tax, nearly $96,000 in unpaid PPS tax, various insurers, Mobil and the local council. I accept that these are the sort of debts which cannot be run up in a short time. I accept that they support the conclusion that Trans-pac was itself insolvent many months before November 1995.
(vi) When Trans-pac was such an important debtor of Cashflow, this I accept, makes Cashflow insolvent.
(vii) Further, the trade debts that Trans-pac had, and purported to assign to Cashflow, were themselves I accept, not good debts. A high proportion of the debts purportedly assigned to Cashflow were more than 90 days old - Report of Mr Gelder, 9 September 1998 page 23.
(viii) The bank account of Trans-pac No. 1 was in overdraft, at various times from at least July 1995 until the account was closed - PX1 28 - 33, 556. (When it was closed, the debit balance was brought to zero by a cheque drawn on Trans-pac No. 2.)
545 Trans-pac No. 2 as has already been made plain, is also in liquidation. It changed its name to Kemps Creek Distributors Pty Limited on 27 April 1998. A liquidator had been appointed on 3 August 1998. It has a deficiency of $1.926million. The priority claims by employees are $241,948. The Australian Tax Office is an unsecured creditor for $691,937 out of claims of $1,022,666 by unsecured creditors. Its only assets are the subject of a charge to the Panayi family. I accept Cashflow’s submission that the likely conclusion is that Cashflow could never attribute any value, as money available to pay its debts, to its legal right to restitution of the money Mr Walters had paid to Trans-pac No. 2.
546 The above matters demonstrate, it seems to me, that Cashflow was insolvent, quite apart from any consideration of whether there was or was not a liability on it to repay the Pyrafount loan. However, the Pyrafount loan ought also, I accept, be regarded as a current liability due to be repaid. In this regard, I accept the following matters put forward by Cashflow as made out:
(i) Mr Gelder relied on a minute of a supposed directors’ meeting in April 1994 as setting out the terms of repayment of the Pyrafount loan. That minute is one that Mr Bonvino did not sign. [See Mr Bonvino’s evidence of 22 March 1999]. It attributes the directors’ meeting to a time before Mr Bonvino first saw the advertisement in the Herald which first brought him into contact with Mr Wright. The minute, I find, is a fabrication.547 I accept Cashflow’s submission that Mr Gelder’s report does not establish solvency. I accept that Mr Gelder’s solvency statement was built on the precarious foundation of the accounts that Mr Walters had prepared, which have been shown to be works of creative fiction. One indication of the extent to which they are works of fiction can be obtained from comparing the amount of Trans-pac debt which Mr Walters asserted in the statements, with the amount of the Trans-pac debt which Mr Gelder stated really applied - that is by comparing lines 11 and 12 of Mr Gelder’s solvency statement. The significance of Mr Gelder using the Walters’ accounts to come to a conclusion of solvency is quite different, I accept, to the effect of Mr Cachia using those same accounts as a starting point to come to a conclusion of insolvency. Mr Cachia is able to say ‘I know that Mr Walters was showing a better position than really existed with these accounts, but by making a few sensible adjustments to them, I can show that the company is really insolvent’. I accept Cashflow’s submission that it is a vastly different exercise to use the accounts as Mr Gelder has sought to do to base a conclusion of solvency.
(ii) The uncontradicted evidence about the terms on which funds could be withdrawn is that funds could be withdrawn on three months notice even if a replacement investor could not be found - Mr Bonvino, 14 March 1999, paragraph 2. Further, Mr Wright and Mr Bonvino agreed that if ever there was a problem, Mr Bonvino had the capacity (through his 51% shareholding) to take control of the company, and receive the money even quicker than in three months, being able to withdraw the money when he chose to do so - Mr Bonvino, statement 14 March 1999, paragraph 3.
(iii) The ‘very rough draft of the minute for our agreement’ [- Mr Bonvino statement 27 April 1998 page 86] states: ‘Conditions of loan fund withdrawal (replacement investor/funds prior to withdrawal)’ [- Mr Bonvino statement 27 April 1998 page 87.] That I accept, means no more than that the topic of the conditions of loan fund withdrawal needed to be addressed, concerning both the circumstances in which a replacement investor would be found, and concerning when the funds are withdrawn from being used in the factoring business before being returned to the lender.
(iv) The inclusion of the loan funds as a current liability, in the balance sheet of the company as at 30 June 1995 (which Mr Wright had signed) supports Mr Bonvino’s evidence.
(v) I accept that whilst it is correct that no demand had actually been made for the loan funds to be withdrawn, if Mr Bonvino had known the truth about how the company was being run it is inevitable that he would have withdrawn the funds no later than 30 June 1995. As the funds would have been withdrawn if Mr Bonvino had known the truth, I accept that they should be regarded as funds which need to be provided for, when considering whether the company is able to pay its debts as they fall due.
(vi) There were two small investors (Jay and Milner), who lent money direct to Cashflow. They appear to have been introduced by Mr Bonvino and to have acted on his advice. Their loans are in the same position as the Pyrafount loans.
548 The profit in the first line of Mr Gelder’s solvency statement cannot, I accept, be accepted, as funds available for payment of debts, in the month in which the profit is shown by the management accounts to arise, because:
(a) It is based on accounts prepared on an accrual basis. Fee income which accrues due in a particular month will not necessarily ever be received - it depends on the solvency of the client which is charged the fees - Transcript page 108.549 The exercise of adding on positive amounts in line 4 for the year ended June 1995 and the amounts of July, August, October and November 1995, is, as Mr Gelder admitted, in error - Transcript pages 125-126. I accept Cashflow’s submission that those amounts should be zero (if the calculation in lines 11-14 is correct. If, as a result of the alteration of the calculation in lines 11-14, the figure in line 14 becomes a negative, that negative should be transferred up to line 4).
(b) Even if the fee income is ultimately received, it will not be likely to be available for the payment of debts in the month in which it accrues - Transcript page 107.
(c) the fee income is overstated in the management accounts, because of Mr Walters having entered false invoices into the accounting system - Transcript page 107.
550 The calculation in lines 11-14 is, I accept, incorrect. In this regard I accept the following submissions of Cashflow as made out:
(a) It contains the admitted error which was corrected in the amended solvency statement - Exhibit P15. Correction of that error causes the adjusted profit/loss always to be a lower figure - Transcript page 113.551 I accept Cashflow’s submission that it is incorrect to treat the value of the mortgages given by the Panayis as money available for the purposes of calculating solvency. This is for the following reasons:
(b) It understates the amount of the Trans-pac actual debt by the various figures identified by Mr Bonvino in Exhibit P3. I accept Cashflow’s submission that when Mr Bonvino was not cross-examined concerning Exhibit P3, it must be accepted as correct. The effect is that all the figures in line 12 should increase by (at minimum) $141,000, the effect of making that correction alone being to move the figures in line 14 for the months of August, October and November 1995 into negatives.
(c) The statement of recoverable debtors in line 13 I accept, overstates the amount of debtors that can be relied on for solvency purposes. Mr Gelder treated a debtor as ‘recoverable’ if there is a legal right to recover it, regardless of whether there is a practical likelihood that the debt will be recovered - Transcript pages 104 and 118. I accept that this is inadequate - Transcript page 105. Many of the Trans-pac debtors were more than sixty days, and many more than ninety days - [the actual amounts each month are stated in Mr Gelder’s second report page 23, otherwise numbered as page 3 of the Schedule to that report]. Trans-pac ultimately went into liquidation having debts of $1.2million charged to Cashflow which debts were worthless. If only the 90-plus day debtors are disregarded for solvency purposes, the combined effect of this and the $141,000 adjustment in line 12, is I accept, to have a negative figure in each column of line 5.
(a) The $600,000 figure attributed to them has no firm foundation.552 Cashflow submitted that CODFA faces a dilemma in the proceedings concerning what it should say is the legal effect of the WUPs. The submission was that if CODFA was correct in saying that it had a right to restitution in relation to the WUPs, that provided a clear demonstration that Cashflow was insolvent.
(b) The mortgages secure amounts due under the guarantee. There is, I accept, good reason to believe that the guarantees secure nothing, and hence that the mortgages secure nothing.
(c) I accept that even if the mortgages did secure some substantial sum of money, they could not be enforced fast enough for the proceeds ultimately available from the mortgages to be a sum that should be taken into account in calculating whether or not Cashflow had enough liquid funds to be able to meet its debts as they fell due.
553 Cashflow’s detailed submission in this regard was as follows:
’18.11.16.1. If CODFA is right in saying that it has a right to restitution in relation to the WUPs, that right of restitution is one which came into existence immediately the payment of any sum of CODFA’s money was made. If CODFA’s assertion is accepted, then at any time Cashflow had an obligation to make immediate repayment to CODFA of the net balance of the “account” of the WUPs. [Baker v Courage & Co Ltd [1910] 1 KB 56 at 65 per Hamilton J. Halsbury’s Laws of Australia para 370-6270. There are some decisions dating from before the time when restitution was properly understood, which suggest that a demand is necessary. However, those decisions are wrong in principle - see Oughton, Lowry & Merkin, Limitation of Actions (Lloyds Commercial law Library (1998) page 225-226; Mason & Carter Restitution Law in Australia para 422.2720-2722.] Those net balances are shown in the annotated version of GMG4.
18.11.16.2. The monthly management accounts of Cashflow are unreliable in many respects, but it can safely be inferred that they do not overstate the profitability of Cashflow from time to time. The monthly accounts do not take up, as a liability of Cashflow, any obligation it has to make restitution of the WUPs. If one adjusts them to take up that liability, the following picture emerges:
Thus, if CODFA is right in saying that it is entitled to restitution in relation to the WUPs, Cashflow is insolvent continually from August 1995.’
554 At the end of the day, to my mind the positive evidence in favour of Cashflow’s insolvency resulted in CODFA being unable to rebut the presumption of insolvency.
555 I turn then to examining whether the unfair preferences are insolvent transactions:
Are the Unfair Preferences Insolvent Transactions
556 Paragraph 5(c) of CODFA’s defence raises an issue that CODFA ‘does not admit that transactions were entered into between CODFA and Cashflow within the meaning of Part 5.7B Corporations Law’. I accept Cashflow’s submission that this raises a false issue.
557 There is no requirement that a transaction be ‘entered into’ before it can be set aside as a preference. Section 588FA(1) contemplates that a transaction can be an unfair preference if it is ‘entered into’, or if it is ‘given effect to’, or if it is ‘required to be given effect to’. The context which section 588FA so contemplates, is one which regards these activities relating to a transaction as being only three examples of possible activities that there can be in connection with a transaction. It is, I accept, quite consistent with section 588FA(1) that a transaction simply ‘occur’, whether or not it is ‘entered into’.
558 Section 588FC contemplates that a transaction could be an insolvent transaction if the company is insolvent ‘when the transaction is entered into’. I accept that clearly that route to being an insolvent transaction requires the transaction to be ‘entered into’. However, one alternative way in which section 588FC says the transaction could be an insolvent transaction is if the company is insolvent when ‘an act is done, or an omission is made, for the purpose of giving effect to the transaction’. Another alternative way in which section 588FC says that a transaction could be an insolvent transaction, is if the company becomes insolvent because of, or because of matters including, a person doing an act, or making an omission, for the purpose of giving effect to the transaction. I accept that neither of those routes require the transaction to be ‘entered into’.
Were the Unfair Preference Transactions ‘Entered Into’ within the meaning of Section 588FC?
559 Each of the unfair preference transactions (the WUPs) was ‘entered into’ within the meaning of section 588FC. The expression ‘was entered into’ is, I accept, in the passive voice. It does not say who it is that is required to have done any act, for the transaction to ‘be entered into’. That the payments were in fact made, as a result of Mr Walters acting without authority, is I accept, enough for them to be ‘entered into’. It does not matter, I accept, that Mr Walters was not acting on behalf of Cashflow when he passed the money back and forth.
560 In my view, at the time that each of the transactions was ‘entered into’, Cashflow was insolvent. Hence, each of the WUPs is an insolvent transaction within section 588FC(a)(i).
561 Cashflow became insolvent because of (or because of matters including) the entering into of each of the WUPs. Hence each of the WUPs is an insolvent transaction, within section 588FC(b)(i).)
Whether, even if the Transactions were not ‘Entered Into’, they were still ‘Insolvent Transactions’
562 At the time that Mr Walters caused each of the cheques pursuant to which the WUPs were made to be drawn on Cashflow’s bank account, and paid to CODFA (or Burkett), and banked into the account of CODFA (or Burkett), an act was done (by Mr Walters) for the purpose of giving effect to the transactions. I accept that at each of those times, Cashflow was insolvent. I accept that this establishes each of them as an insolvent transaction within section 588FC(a)(ii).
563 Cashflow became insolvent because of (or because of matters including) a person (Mr Walters) doing an act for the purpose of giving effect to the transaction. I accept that at each time Walters did such an act, Cashflow was insolvent. I accept that this establishes each of the WUPs as an insolvent transaction within section 588FC(b)(ii).
564 Cashflow then submits that the appropriate order is that the transactions be avoided and that CODFA pay to Cashflow an amount equal to the amount that Cashflow paid to CODFA under the transaction.
CODFA’s Defence under Section 588FG(2)
565 I accept as correct Cashflow’s submissions that this defence does not apply to any ‘transaction’ sought to be avoided. I accept that each such transaction is one in which Cashflow’s money was paid to CODFA. I accept Cashflow’s submission that the defence does not apply because:
(i) CODFA did not become a party to the transaction in good faith. The relevant directing mind of CODFA became party to the transaction without knowing it was party to the transaction at all. Hence, I accept that section 588FG(2)(a) is not satisfied.566 CODFA pleaded that CODFA had not been unjustly enriched by the receipt of any of the WUPs and that accordingly, it would be unconscionable for CODFA to be required to pay any money (either under section 588FF, or at all).
(ii) At the time when CODFA became party to the transaction, a reasonable person in CODFA’s circumstances would have had reasonable grounds for suspecting that Cashflow was insolvent at the time or would become insolvent as mentioned in section 588FC(b). A reasonable person in CODFA’s situation would realise that the money was a repayment of an unauthorised borrowing which Walters had engaged in to prop Cashflow up. Hence section 588FG(2)(b)(ii) I accept is not satisfied.
(iii) Section 588FG(2)(c) I accept is not satisfied for the following reasons:
(a) CODFA has not provided valuable consideration under the transaction:
(i). CODFA has not provided valuable consideration at all. The notion of ‘valuable consideration’ is, I accept, the language of contract. Here, there was no contract at all between CODFA and Cashflow relating to the WUPs.
(c) As well as relying on the literal words of section 588FG(2), Cashflow sought to rely on the purpose of the provisions. I accept Cashflow’s submission that the purpose of the provision is to protect ordinary commercial transactions from being avoided. I accept that the transactions that Cashflow attacks as preferences or uncommercial transactions are shown to have been very far indeed from ordinary commercial transactions. Hence I accept that it was not within the scope of the mischief to protect these types of uncommercial transactions.
(ii). I accept that CODFA has not provided valuable consideration ‘under the transaction’. The transaction is the repayment of the unauthorised borrowing. That is not, I accept, the type of transaction ‘under’ which any consideration is provided at all.
(iii). Section 95(2) of the Bankruptcy Act 1924 used to provide that nothing in section 95 (the preference section in that Act) shall affect ‘. . . the rights of a . . . payee . . . in good faith and for valuable consideration and in the ordinary course of business’. In relation to section 95(2), when a loan was repaid, the past consideration consisting of the making of the loan was sufficient to provide the ‘valuable consideration’ - Taylor v White (1964) 110 CLR 129 at 139. However, the previous law does not apply here because here there is no contractual loan, and also the new statutory requirement that the consideration be provided under the transaction, I accept, distinguishes the present section from the old section 92.
(b) Further, I accept that CODFA has not altered its position in reliance on the transaction. I accept that rather CODFA did not know about the transaction at all. Hence, I accept that section 588FG(2)(c) is not satisfied.
Discretion of the Court to make no Order?
567 I accept Cashflow’s submission that the pleading is legally irrelevant. I accept Cashflow’s submission that there is no role for general law notions of unconscionability here. The right to set aside the transaction is plainly a statutory one - see section 588FE. The consequences of a transaction being set aside are well established in the law. Under the law which applied before the commencement of Part 5.7B, there was no express conferral of a right of recovery of a preferential payment - the right to recover it arose as a matter of law.
[Star v O’Brien (1996) 40 NSWLR 695 at 702 - 703 recounting the argument of counsel at 705B-D]
568 The consequences include that any person who has received money under the transaction which is avoided must repay it. I accept Cashflow’s submission that there is no room for the Court to assert that it has a superior sense of justice to that which Parliament has enacted - see Commonwealth of Australia v SCI Operations Pty Ltd (1998) 72 ALRJ 687.
569 Cashflow submitted and I accept that the presence of the word ‘may’ in section 588FF does not mean that there is a discretion in the Court concerning whether to make an order in the circumstances of the present case. In this regard, I accept the following propositions which were put forward by way of Cashflow in its submissions as correct:
(i) Section 588FF more naturally reads as conferring a jurisdiction on the Court, rather than stating that there is a discretion in the Court.570 If there was a discretion in the Court concerning the making of an order under CODFA, I accept Cashflow’s submission that it would need to be exercised in light of the purpose of section 588FF. That purpose is, I accept, to ensure that a creditor did not receive a benefit over and above that received by other creditors - Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLR 1293 at 1301 column 1 per Doyle CJ. Once it is shown that CODFA has received a payment which is indeed an insolvent transaction, I accept that there is no room for operation of any discretion in the court.
(ii) The jurisdiction that is conferred by section 588FF(1) is to make ‘one or more of the following orders’. There is, I accept, clearly a choice to be made by the Court as to which of the orders, in the list set out in paragraphs (a) to (j) of section 588FF(1), is appropriate to be made. That does not mean that, once the Court is satisfied that the circumstances exist which make it appropriate for a preference or uncommercial transaction to be set aside, there is then some separate discretion which the Court can exercise on ‘palm tree justice’ grounds, in deciding whether to actually make the order.
(iii) The power conferred by section 588FF is one where:
‘The word ‘may’ is merely used to confer the authority: and the authority must be exercised, if the circumstances are such as to call for its exercise.’
[Per Windeyer J Finance Facilities Pty Ltd v Federal Commissioner of Taxation (1971) 127 CLR 106 at 134-135 (with whom Barwick CJ agreed at 128). See also at 138-139 per Owen J.]
(iv) The decision in Re Pacific Hardware Brokers (Qld) Pty Ltd (1997) 16 ACLC 442, concerns a different situation to the present. That was a case where company funds were used to purchase an asset (an engagement ring) which was given to an unsuspecting third party. The question was whether the third party should be ordered to pay the value of the asset to the company. It is understandable that there might be a discretion in such a case. In any event, the discretion was there exercised in favour of ordering the payment of the money.
571 CODFA’s argument is, I accept, really the ‘running account’ argument but put in another guise. If one looks at the WUPs on a transaction by transaction basis, I accept that each transfer of the money from Cashflow to CODFA has reduced the indebtedness of Cashflow to CODFA and thereby put CODFA into a better position in the liquidation of Cashflow, than it would have been if that payment had not been made.
572 CODFA submits that Cashflow is seeking to use Part 5.7B in an unconscionable and impermissible way. CODFA submits that Cashflow is seeking to ‘compound the theft’ by ordering repayment of the partial restitution which Walters had made. Cashflow, in opposing this submission, relied upon the following matters:
(i) Cashflow submitted that to characterise the WUPs as ‘theft’ is legally incorrect and an emotional distraction. Cashflow submitted that theft requires an asportation and carrying away of a chattel. Cashflow submits that this did not happen. Cashflow also pointed out that there are other criminal offences connected with employees fraudulently depriving their employers of property. Cashflow submitted that the question of whether theft, or any of those other criminal offences, had been committed, had not been raised for decision in these proceedings.
Cashflow further submitted that another element of theft is that there be an intent permanently to deprive the owner of the property in a thing stolen. The pattern of dealings which Walters engaged in on Cashflow’s submissions, I accept, looks more like (or at the least is equally consistent with) a series of borrowings and payings back (or attempts to pay back) rather than attempts to permanently deprive CODFA of the moneys. Cashflow further submitted that the Court could not make a finding (particularly in Mr Walters’ absence and particularly where he had not been given any notice that the allegation would be made and particularly when the allegation is a serious one) that Mr Walters intended to permanently deprive CODFA of the money.
(ii) Cashflow submitted that it is wrong to say that the amount of CODFA’s money that Mr Walters had ‘stolen’ is $180,000. The submission was that the fact is that Mr Walters had caused to be paid away a total of $1,240,641 of the money of CODFA. The submission was that Mr Walters had caused CODFA to receive back $1,060,641. The submission was that if there was any ‘theft’ by Mr Walters, it was a theft of $1,240,641. Cashflow submitted that CODFA sought to be put into a better situation than other creditors of Cashflow, by not having to bring back into the liquidation the partial repayments that it had received. That, on Cashflow’s submissions was exactly what the voidable transaction provisions was designed to prevent.
(iii) Cashflow submitted that CODFA had assumed that it would be outrageous for the preference provisions to operate to deprive the victim of a thief of restitution that had been made. On Cashflow’s submissions, that assumption is incorrect. Cashflow posits an assumption that A has actually stolen $1million from B and had then been overcome with remorse and sold all his assets and made restitution to B and that within six months of making the restitution, A had gone bankrupt with a deficiency of another $1million. In that situation, Cashflow submitted that the preference provisions would claw back into the bankruptcy, the amount that had been paid to B as restitution, unless B could establish the defence under section 122(2) of the Bankruptcy Act 1966.
(iv) Cashflow submitted that in seeking to portray itself as ‘a victim of theft’, CODFA was ignoring the following facts:
(a) That it was CODFA’s own officer, Mr Walters, who engineered the payment out of CODFA’s money in a way that was unauthorised.
(b) That CODFA’s own managing director, Mr Wright, signed every one of the cheques by which the payment out of CODFA’s money was made.
(c) That it was CODFA’s own managing director, Mr Wright, who ran CODFA in such a slack way that Mr Walters was able to carry out his plans undetected and unhindered.
(d) That it was CODFA’s other director, Mr Kull, who limited his involvement to attendance at a monthly meeting.573 Cashflow points out that any suggestion that was made sub silentio that CODFA was a wronged innocent did not bear scrutiny.
577 Under section 588FC, those transactions are also ‘insolvent transactions’.
Irrelevance of any Set-Off
574 It is well established that if a transaction is a preference, it cannot be the subject of a set-off - Cf McPherson on the Law of Company Liquidation, 3rd Edition, page 385; Keay Avoidance Provisions in Insolvency Law LBC Information Services 1997 page 331. The same rationale must apply to a transaction which is a voidable uncommercial transaction.
Interest Payable on Any Preferential Payment which is Set Aside
575 Cashflow submitted that when an order is made under section 588FF requiring the repayment of a preferential payment, interest should also be paid to the liquidator - Pegulan Floor Coverings Pty Ltd v Carter (1997) 15 ACLC 1293 at 1302; Star v O’Brien (1996) 40 NSWLR 695; 1996 15 ACLC 144; 1996 22 ACSR 434. Cashflow’s submission was that the appropriate date from which interest was to run was the date of demand by the liquidator - Star v O’Brien (1996) 40 NSWLR 695; special leave to appeal refused 1997 8 Leg Rep SL2b. Cashflow’s submission was that that date was the date of the filing of the amended defence and amended cross-claim in proceedings 50177 of 1997 (namely 26 September 1997).
The Claim of the Liquidator of Cashflow to Set Aside Transactions alleged to be ‘Uncommercial Transactions’ Pursuant to Section 588FB Corporations Law
576 I accept Cashflow’s submission that it entered uncommercial transactions during the 12 months before 12 September 1996, these being payment of $722,172 to CODFA.
578 Section 588FB reads as follows:
‘1. A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:579 Section 588FC provides:
(a) the benefits (if any) to the company of entering into the transaction; and
(a) whether or not a creditor of the company is a party to the transaction; and
(b) the detriment to the company of entering into the transaction; and
(c) the respective benefits to other parties to the transaction of entering into it; and
(d) any other relevant matter.
2. A transaction may be an uncommercial transaction of a company because of sub-section 1:
(b) even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian Court or a direction by an agency.’
‘A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and580 The effect of the liquidator of Cashflow pleading that transactions during the 12 months prior to the Relation Back Day are uncommercial transactions is, I accept, that the transactions which occurred during the six months before the Relation Back Day are attacked as preferences, and also attacked in the alternative as uncommercial transactions. Hence, if either attack succeeds the transaction requires to be set aside.
(a) Any of the following happens at a time when the company is insolvent:
(i) the transaction is entered into;
(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or
(i) entering into the transaction; or
(b) the company becomes insolvent because of, or because of matters including:(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.’
581 I note that there is no equivalent to section 588FA(2) so far as uncommercial transactions are concerned. Hence, if the WUPs during the last six months in fact amount to a single transaction because of section 588FA(2), they are still transactions which need to be considered singly (and I accept can be set aside singly) if they are uncommercial transactions.
582 I generally accept Cashflow’s submissions that each of the WUPs is an uncommercial transaction. I accept that the reasons differ, depending on whether they are transactions which relate to Trans-pac, or to solvent clients of Cashflow. They also differ depending on whether or not one adopts a Clayton’s Case approach to the allocation of payments between Cashflow and CODFA.
583 So far as the transactions which relate to Trans-pac is concerned, I accept as correct Cashflow’s submission that a reasonable person in Cashflow’s circumstances would not have repaid money to CODFA which had been advanced by CODFA to Trans-pac. At the start of the 12 month period (that is to say 12 September 1995) (and accepting for the purposes of the analysis all payments made by CODFA which passed through the Cashflow bank account as ones which are chargeable to Cashflow), Cashflow owed CODFA $80,000. That debt, I accept, had arisen from the ‘Warrior’ and ‘Scentinelle’ cheques. [These are cheque 6549 for $30,000 dated 17 August 1995 and cheque 6545 for $50,000 dated 18 August 1995 respectively]. These cheques had been paid into Cashflow’s bank account, and amounts of equal magnitude paid out from Cashflow’s bank account to Trans-pac No. 1. The account balance rose to $180,000 on 19 September, when the cheques 6651 for $100,000 was paid into the Cashflow bank account, and an equal amount was then paid out to Trans-pac No. 1.
584 I further accept Cashflow’s submission that it is preferable not to adopt a Clayton’s Case approach to the allocation of payments made from Cashflow to CODFA. To my mind, this is indeed because Clayton’s Case applies as a matter of presumed intention to an ordinary running account - Creak v James Moore & Sons Pty Ltd (1912) 15 CLR at 433-434 per Griffith CJ. The evidence suggests that Mr Walters had an intention to appropriate payments of particular sums of money to ‘borrowings’ of equal amount from CODFA.
585 I further accept as correct Cashflow’s submissions that, even if one were to adopt the Clayton’s Case method of allocation to the facts here proved, all the payments would be uncommercial. The reasons are as follows:
586 Adopting a Clayton’s Case approach to the allocation of payments from Cashflow to CODFA, the payment of $98,556 by Cashflow on 7 September 1995 paid off the whole of the $30,000 provided by CODFA on 17 August 1995, the whole of the $50,000 that CODFA provided on 18 August 1995 and $18,556 of the $98,556 that CODFA had provided on 1 September 1995. The payment of $100,318 on 6 December 1998 repaid the $80,000 still outstanding from 1 September 1995 and in addition, paid $20,318 of the $100,000 that had been provided by CODFA on 19 September 1995. The $16,699 paid by Cashflow on 7 December 1998 also paid off part of the $100,000 from CODFA on 19 September 1995 (reducing the amount owing from that $100,000 to $62,983). That $62,983 was repaid in total by the payment which Cashflow is proven to have made to CODFA on 5 January1996. Each of the payments made on 6 December 1995, 7 December 1995 and 5 January 1996, is an uncommercial transaction in that a reasonable person in the company’s circumstances would not, I accept, have paid that money to CODFA. The reasons for this are as follows:
(i) The payment was to repay a ‘loan’ from CODFA to Cashflow, which was unauthorised by CODFA, and unauthorised by Cashflow.587 I accept as correct Cashflow’s submission that the test that section 588FB establishes for an uncommercial payment is not one of whether, on analysis, there is a legal obligation on Cashflow to repay the money that has come from CODFA. Rather, it is whether a reasonable person in the company’s circumstances would have entered into the transaction, having regard to the four identified criteria. Legal obligations can, of course, arise from wildly uncommercial transactions. I accept Cashflow’s submission that what section 588FB looks to is whether the transaction is out of the ordinary course of commerce. To the extent that there is a legal obligation on Cashflow to repay the money of CODFA that Walters has passed through Cashflow’s bank account and again to Trans-pac, CODFA is able to prove in the liquidation.
(ii) The proceeds of the ‘loan’ had been applied in a way that was completely outside the scope of Walters’ authority to act on behalf of Cashflow (and indeed contrary to his instructions about how to deal with a client).
(iii) The ‘loan’, and the ‘repayment’ were each kept secret from the Board of Cashflow.
(iv) The transaction with Trans-pac had conferred no benefit on Cashflow (or alternatively a benefit worth considerably less than it’s face value).
588 CODFA did submit that the transactions are not uncommercial because a reasonable person would ‘repay stolen moneys’. That analysis seems to me flawed in its failure to take into account all of the circumstances.
589 Further, section 588FB(1) does not permit the decision as to whether a reasonable person would have entered the transaction to be made on a completely unfettered basis. I accept Cashflow’s submission that rather, the decision is to be made whether a reasonable person in the company’s circumstances would have entered the transaction ‘having regard to’ the matters listed in paragraphs (a) to (d). When a statute says that a decision is to be made ‘having regard to’ certain matters, that, I accept, usually means that the decision-maker must give weight to the specified matters, as a fundamental element in making the decision.
Re Hunt; Ex parte Sean Investments Pty Ltd (1979) 53 ALJR 552 at 554; Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 at 260; R v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327 at 333; Australian Capital Television Pty Ltd v Minister for Transport and Communications (1989) 86 ALR 119 at 145; Queensland Medical Laboratory v Blewett (1988) 84 ALR 615 at 623.590 Cashflow also submitted that on a Clayton’s case analysis, part of two of the three payments was used to repay a debt which arose from sources other than a payment for Trans-pac. Cashflow then submitted that there is no basis in section 588FB to strike down only part of a payment. I accept that submission as one of substance. In the result, the whole of those two payments meet the test for being an uncommercial transaction, even though in part, two of them repaid debt other than the $180,000 that found it’s way to Trans-pac. Hence the whole of the three payments ought be set aside.
The criteria that are here listed are ordinary commercial ones.
591 Part of the three payments were used to pay off amounts which went from CODFA to solvent clients of Cashflow. I accept Cashflow’s submission that whilst this was not as irregular a transaction as the transactions where Walters caused Trans-pac to receive the money, it remained an uncommercial transaction. The payment was to ‘repay’ a ‘loan’ from CODFA to Cashflow, which was unauthorised by CODFA, and unauthorised by Cashflow. The proceeds of the ‘loan’ had been applied in a way that was completely outside the scope of Walters’ authority to act on behalf of Cashflow and was contrary to his instructions about how to deal with a client. Further, the ‘loan’, and the ‘repayment’ were each kept secret from the Board of Cashflow.
592 I accept as correct Cashflow’s submission that analogous reasoning applies to all the payments which appear in GMG4 during the last 12 months before the Relation Back Day. All the amounts paid by Cashflow to CODFA I accept, ought be set aside as uncommercial transactions.
593 Cashflow further submitted that even if one were not to adopt the Clayton’s Case approach to the allocation of payments made to, and from, CODFA and Cashflow, the result would be the same. I accept this submission as one of substance. The inference, I accept, is clear that Mr Walters regarded some of the WUPs as temporary ‘borrowings’ which were ‘repaid’. I accept that the preferable approach is to attribute a ‘repayment’ of $X to a ‘loan’ of $X. The effect of this way of allocating the payments from Cashflow to CODFA will be different to what it is on a Clayton’s Case approach, but I accept Cashflow’s submission that the end result is the same.
594 If one links repayments in this fashion, the ‘borrowings’ which were not for solvent clients of Cashflow are those marked in colour on the annotated version of GMG4. The ‘repayments’ of those ‘borrowings’ occurred (in part) by the payments from the Cashflow account on 10 May 1996, 13 May 1996 and 9 August 1996 (totalling $170,000). Those, I accept, are uncommercial transactions on the basis that a repayment of a ‘borrowing’ made to fund a Trans-pac payment, is uncommercial. All the other repayments, which can be linked to specific ‘borrowings’ for solvent clients of Cashflow are also uncommercial for reasons already given.
595 In the result, for the reasons set out above, each of the uncommercial payments occurred whilst the company was insolvent. Each of the four alternatives in section 588FC(a)(i), 588FC(a)(ii), 588FC(b)(i) and 588FC(b)(ii) is, I accept, applicable. Each is therefore an insolvent transaction.
596 Being transactions which are both uncommercial, and insolvent, and entered into during the period of twelve months ending on the Relation Back Day, each of the transactions is voidable.
597 Cashflow also directed submissions to the approach which it was suggested would apply if contrary to Cashflow’s primary submissions, the repayments of the ‘borrowings’ for solvent clients of Cashflow were not treated as uncommercial, and if a non-Clayton’s Case method of allocating the payments were to be adopted. That submission was that the payments by Cashflow which were not to repay ‘borrowings’ for solvent clients were as follows:
10 May 1996 $20,000598 On that alternative submission, Cashflow contended that it was those transactions totalling $170,000 which should be set aside as uncommercial. It is unnecessary to now deal with that alternative submission as Cashflow’s primary submission has been accepted.
13 May 1996 $50,000
9 August 1996 $100,000
599 Cashflow submitted that when a transaction is set aside as uncommercial, it should be ordered to be repaid to the liquidator together with interest from the date of the liquidator’s demand, namely 26 September 1997.
The disputed $20,000 payment
600 As to the disputed sum of $20,000 paid out of CODFA’s bank account on 2 April 1996, the evidence establishes that the payment was made on the account of Cashflow. The disputed sum was brought to account between Cashflow and Trans-pac No 1 in the records of Cashflow. [Exhibit D1Q (second entry)]
601 CODFA at no time had a commercial relationship with either of Trans-pac No 1 or Trans-pac No 2. I accept CODFA’s submission that ‘whether or not Cashflow’s commercial relationship with Trans-pac No 1 was ‘irregular’, insofar as it involved payments and receipts outside the two companies normal factoring agreement, the fact is that they had a commercial relationship’.
Office Services Fee Issues
602 The amounts of the office services fee paid monthly by Cashflow to Codfa are shown in the right-hand column of Annexure ‘AO’ to Mr Bonvino’s affidavit of 27 April 1998. The amounts are as follows:
Date Amount603 Cashflow puts forward various alternative bases for its claim against CODFA in respect of the office services fee.
30 June 1995 $18,800
31 July 1995 1,680
31 August 1995 2,830
30 September1995 1,510
31 October1995 2,240
30 November1995 1,640
31 December 1995 2,120
31 January 1996 3,800
28 February 1996 2,670
31 March 1996 2,510
30 April 1996 2,500
31 May 1996 2,040
30 June 1996 2,110
Total 27,650
604 I note that the calculation of the amount to be paid was performed by Mr Walters on the basis of the fees that he asserted were earned by Cashflow and by CODFA.
605 It will be recalled that the Relation Back Day was 12 September 1996.
606 The total of the office services fees paid in the period from 12 months before the Relation Back Day amounts to $23,140.
607 The first alternative way Cashflow put its case is that payment of fees in the sum of $23,140 is an uncommercial transaction within section 588FB Corporations Law. This is because it is said that the calculation of the amount of the fees was done on the basis of incorrectly treating fees accrued in Cashflow’s accounts as falling due from Trans-pac as really earned. It is then put that during the whole of the 12 months before the Relation Back Day, the amount of fees that accrued due in the accounts included some fees which were not earned at all, because they were ‘earned’ on fictional invoices. It is said that they also included some fees which were said to be factoring fees, at a time when Trans-pac No 1 was not factoring debts (because Mr Walters was making advances in the hope that invoices would become available for factoring and there were fundamental departures from the Factoring Agreement), and so it is put that no fees fell due. It is also put that they also treated the ‘fees’ as earned from Trans-pac at a time when Trans-pac No 1 was insolvent and the fees would never be actually received. Additionally it is put that they also included (in the period after November 1995) factoring fees which were calculated by reference to invoices which were really the result of Trans-pac No 2 carrying on business, so that no factoring fees could possibly be earned by Cashflow. All these reasons are put forward by Cashflow in support of the proposition that the payment of the office services fee in the amount that it was paid, was an uncommercial transaction.
608 The consequence of accepting Cashflow’s first way of putting its case on office services fee, would be that the amount of $23,140 would be set aside as an uncommercial transaction and that CODFA would be obliged to pay to Cashflow the amount of $23,140 plus interest from 26 September 1997. Cashflow accepts that upon the making of that payment, CODFA would be entitled to prove in the liquidation for ($23,140 minus $17,203) equals $5,937 on account of the office services fee. The $17,203 overpayment is referred to below.
609 The second way in which Cashflow puts its claim in an alternative, is to refer to the total of the fees paid from and including 1 December 1995 as being $15,630. That is said to cover a time when there was no factoring at all (not even purported factoring) being carried out with Trans-pac No 1. Cashflow says that there is no basis whatever on which it was entitled to receive a fee from Trans-pac No 2. Thus Cashflow submits that the payment of the fees of $15,630 is an uncommercial transaction.
610 If the second argument of Cashflow is successful, Cashflow submits that the amount of $15,630 would be set aside as an uncommercial transaction and that CODFA would be obliged to pay to the liquidator $15,630 plus interest from 26 September 1997. The submission is that upon making of that payment CODFA will not be entitled to prove in the liquidation on account of the office services fee and Cashflow will be entitled to set-off the amount of ($17,203 minus $15,630) equals $1,573 against any amount for which CODFA is entitled to prove arising from the WUPs.
611 The third alternative way of putting it’s case by Cashflow is to submit that whether or not there is an uncommercial transaction concerning the office services fee, the fact is that there has been a simple overpayment by Cashflow, relating to the period to the end of June 1996. What is here sought by Cashflow is to enable recovery of the overpayment of office services fees to include all fees which had been overpaid. Cashflow submits that the office services fee properly payable (by reference to the actual fees received of CODFA and Cashflow) in the 1995 and 1996 financial years was less than the amount of fees actually paid by Cashflow and that it is entitled to receive credit for the difference. Cashflow submits that the quantum of that difference is $17,203 and in this regard relies upon Mr Bonvino’s evidence given on his affidavit of 11 March 1999 paragraphs 5 and 6 to be referred to below. Cashflow submits that to the extent to which that excess of $17,203 is an insolvent transaction, it is to be set aside; that to the extent to which it is not an insolvent transaction but was nonetheless paid, it is to be set off against any liability that Cashflow has to CODFA (so reducing CODFA’s right to prove in Cashflow’s liquidation), or added to the amount that CODFA must pay to Cashflow.
612 In short, Cashflow submits that it’s third alternative argument which is put on the basis that it completely fails in setting aside any of the office services fee as uncommercial transactions, will result in Cashflow still being entitled to set-off the amount of $17,203 against any amount for which CODFA is entitled to prove arising from the WUPs.
613 Cashflow’s submission is essentially that the payments of the office services fee should be set aside. It’s submission is that CODFA should repay the amount of the fees received with interest from the date of the liquidator’s demand or alternatively the date of the filing of the amended defence and amended cross-claim in proceedings 50177 of 1997, namely 26 September 1997. Cashflow submits that CODFA will have a right to be admitted as a creditor in the liquidation for the amount that is owing for office services fees, based on a correct calculation of the amount due.
614 In Mr Bonvino’s affidavit of 11 March 1999, he deposed in paragraphs 5 and 6 as follows:
‘Cashflow has claimed from COD Factors Australia Pty Limited (“CODFA”) in the proceedings the sum of $17,203.00, as an overpayment of the office services fee. Cashflow shared the office expenses of CODFA, by making a contribution to those expenses, pro rata to the fees received by it when compared to the fees received by CODFA. The office services fee overpayment has been calculated by me by not taking into account the “fees” received by Cashflow from Trans-Pac, on the basis that such fees are mere accruals, and will not be recovered.615 Mr Bonvino, as Cashflow points out, was not cross-examined on this evidence.
For example, in 1995, I have calculated that the actual fees received by Cashflow, leaving aside accrued fees in the Trans-Pac loan account, was $205,092.00. the actual fees received by CODFA was $825,441.00. Accordingly, total fees received by both Cashflow and CODFA amounted to $1,030,533.00. the actual contribution that Cashflow paid to CODFA in respect of the office expenses for 1995 was $18,800.00.
This contribution was calculated on the basis that Cashflow had received fees from Trans-Pac. However, if Cashflow’s contribution is calculated on the basis of actual fees received of $205,092.00, as a percentage of the total fees of $1,035,533.00, the amount that Cashflow should have paid was $10,577.00. Accordingly, the overpayment amounts to $8,222.00.
I have made a similar calculation of the overpayment of the office services fee for 1996. Annexed and marked “D” is a true copy of a document entitled “Expense Transfer from COD Aust to Cashflow”,prepared by CODFA. The hand written numbers and words on the document have been made by me. The statements I made in the immediately preceding paragraph in relation to 1995 are repeated in summary form on the document. Similarly, in relation to 1996, I calculated the actual fees received by Cashflow after reversal of the Trans-Pac fees. I have written in a separate column in the schedule entitled “Cashflow actual fees received”, and those actual fees amount to $395,514.00. As a percentage of the total actual fees of both Cashflow and CODFA, the amount that should have been paid by Cashflow as a contribution to CODFA’s office expenses was $20,686.00 in respect of the 1996 period. In fact, Cashflow paid $29,667.00, resulting in an overpayment of $8,981.00. The total overpayments for the 1995 year and the 1996 year, being $8,222.00 and $8,981.00 respectively, amount to $17,203.00.’
616 CODFA in turn, disputes the claim for relief made by Mr Star to the alleged overpayment of office services fees by Cashflow to CODFA during the financial years ended June 1995 and June 1996.
617 CODFA claims that the evidence does not support Cashflow’s claim that the agreement between CODFA and Cashflow for sharing of office expenses was based on fees recovered and that this allowed for the reversing of fees at a time following the payment by Cashflow of each month’s contribution fee for office expenses such as a later point in time permitting a claim for any alleged overpayment of contribution fees. CODFA submits that the evidence shows that the contribution fee payable by Cashflow for office expenses was based on the amount for total fees showed in the monthly profit and loss statements of CODFA and Cashflow and thus was based on fees accrued. In this regard, CODFA relies upon the statement of Mr Kull dated 2 September 1998 at paragraph 21.
618 In Mr Kull’s statement of 2 September 1998, he gave evidence which I accept, that in about July 1994 in his discussions with Mr Wright in relation to the sharing of office expenses between Cashflow and CODFA, words to the following effect were said:
‘Mr Kull: We need to work out a method for Cashflow to pay for office expenses such as rent and electricity and other expenses such as advertising, computer costs, staff costs and your car and telephone expenses.619 Mr Kull’s evidence in paragraphs 20 and 21 was that, to the best of his knowledge, from about December 1994 to May 1996, Cashflow paid to CODFA a contribution fee for rent, advertising, cleaning, light/electricity, printing and stationery, telephone and motor vehicle expenses. In this regard he referred to the monthly profit and loss statements of CODFA and Cashflow for the period December 1994 to May 1996. He also gave evidence that his understanding was that the figure for the total fees of both CODFA and Cashflow used in the monthly expense transfer invoices were those shown in the profit and loss statements produced monthly for each company.
Mr Wright: Office expenses can be apportioned based on fees received by CODFA and Cashflow during the previous months. Whomever receives more fees pays more expenses.
Mr Kull: I agree.’
620 In my judgment, the agreement between Cashflow and CODFA was as Cashflow asserts, based on fees recovered so that that agreement did allow for the reversing of fees at a time following the payment by Cashflow of each month’s contribution fee at a later point in time, permitting a claim for any alleged overpayment of contribution fees. A mechanism had to be put in place for monthly payments and this then followed the monthly profit and loss statements. This is not to say that the agreement reached is to be taken to exclude a later verification of the actual fees recovered.
621 This means as CODFA submits, that Cashflow’s entitlement to the sums claimed depends upon a finding being made that it did not recover any fees from either Trans-pac No1 or Trans-pac No 2 and that all fees shown to be earned by Cashflow and Trans-pac No 1 in their monthly profit and loss statements should be reversed for the purpose of determining the correct contribution fee payable by Cashflow to CODFA for office services.
622 To my mind there is substance in Cashflow’s submission that Mr Bonvino, not having been cross-examined on paragraphs 5 and 6 of his affidavit of 11 March 1999, the Court should accept as proved Cashflow’s assertion that the amount in respect of which the office services fee properly payable by reference to the actual fees received of CODFA and Cashflow in the 1995 financial year and in the 1996 financial year, was less than the amount of fees actually paid by Cashflow is $17,203.
623 I remain unclear as to how the parties may seek to put that my acceptance of paragraphs 5 and 6 of Mr Bonvino’s affidavit of 11 March 1999 may affect Cashflow’s arguments put in alternatives 1 and 2 of it’s written submissions. It seems to me that it is appropriate to give the parties an opportunity to address further submissions on this matter before finally dealing with so much of the office services fee issues as involve Cashflow’s claims.
CODFA’s Claim for Relief against Mr Star for Recovery of Office Expenses
624 CODFA makes a claim for relief against Mr Star for recovery of office expenses in the sum of $6,050 said to be owed for the use by Cashflow of CODFA’s office premises during the period 12 September 1996 to 28 February 1997.
625 At transcript page 22, on 18 March 1999 Mr Campbell QC accepted as I understand the position, that CODFA is an unsecured creditor for $6,050 in relation to the office occupancy fee and that this amount is an expense of the liquidation. Earlier, on 16 March 1999 at transcript page 109, Mr Campbell had responded as follows to the following submission by Mr Lindsay:
‘His Honour: The office expenses item, as I recall it, unless it is a different framework, is something like possibly 17 or possibly $23,000, is that correct?626 There is thus a concession as I understand on the issue. I accept that there was an agreement between CODFA and Mr Star that in consideration of Cashflow being permitted to use the premises and office services of CODFA, Mr Star would pay $250 per week to CODFA from the date of his appointment as provisional liquidator until Cashflow ceased to occupy the office premises. [See statement of Mr Kull, 2 September 1998 paragraphs 33 and 34, letter from Mr Star to CODFA dated 16 December 1998 and letter from Star Dean Wilcocks to CODFA dated 11 February 1997.]
Lindsay: That is the claim that is made a claim of that order.
His Honour: Yes.
Lindsay: By Cashflow, based not only but largely upon the Corporations Law uncommercial transaction provisions. Mr Star, when he became liquidator, agreed with CODFA that he would pay, for memory it is something like $250 a week or something like that, towards office expenses. That sum has not been paid. We don’t understand the agreement to be in dispute for the non-payment but as we understand Mr Star’s position, he just says: “Well, I made that agreement but any amount that I have to pay should be set-off against what you should pay me.
His Honour: Yes.
Campbell: I might say this is something I overlooked. So far as that is concerned, we agree with the quantification of the office expense that is contained in my learned friend’s pleading. We accept that that amount is an amount which is provable in liquidation as an expense of liquidation and therefore has a first priority of payment.’
627 I accept that Cashflow occupied the office premises of CODFA during the period from Mr Star’s appointment as provisional liquidator on 12 September 1996 to March 1997 - see statement of Mr Kull dated 2 September 1998 at paragraphs 28, 30, 31 and 39.
628 In the result, Mr Star owed CODFA $6,050 as office rent for the period 12 September 1996 to 28 February 1997.
629 To my mind, the agreement pursuant to which the office services fee was to be paid is not an ‘uncommercial transaction’ within the meaning of section 588FB of the Corporations Law. It was perfectly appropriate for the two companies to reach the agreement which they did at the time when it was entered into for the sharing of office expenses. A reasonable person in the circumstances of Cashflow would have, it seems to me, entered into the transaction being the office services agreement having regard to the benefits to Cashflow of entering into the transaction, the detriment to Cashflow of entering into the transaction, the respective benefits to both Cashflow and CODFA being parties to that transaction on entering into it. I do not see that any other relevant matter proven affects this conclusion.
630 The fact that calculation of the amount of the office services fees took place on the basis of an incorrect treatment of fees accrued in Cashflow’s accounts as falling due from Trans-pac as really earned, is simply a matter which postdated the entry into of the agreement and requires an adjustment in respect of overpayment.
Further Submissions and Short Minutes
631 The four sets of proceedings raised a large number of complex issues. The proceedings will be relisted for further submissions in relation to:
(a) any specific claims which any party contends has not yet been dealt with;(c) any area of overlap or incorrect addition or detail to be found in schedules and the like in relation to calculations which, bearing in mind the matters adjudicated upon as a matter of principle, either party seeks to submit ought be taken into account and/or corrected.
(b) matters in respect of which leave has been expressly reserved in the Judgment for the addressing of further submissions;
Appendices are available from the Supreme Court Registry.**********
Last Modified: 01/04/2002
Cases Citing This Decision
47
Kalls Enterprises Pty Ltd (in liq) v Baloglow
[2007] NSWCA 191
Robins v Incentive Dynamics Pty Ltd (in liq)
[2003] NSWCA 71
Cases Cited
45
Statutory Material Cited
0
Beach Petroleum NL v Kennedy
[1999] NSWCA 408
Beach Petroleum NL v Johnson
[1993] FCA 392
OzEcom v Hudson Investment Group
[2007] NSWSC 719