CC Containers Pty Ltd v Lee (No 6)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

S CI 2010 6056

CC CONTAINERS PTY LTD (ACN 128 976 803) & ORS	Plaintiffs
v
DESMOND MING LEE & ORS	Defendants

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JUDGE:	FERGUSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	15–17, 22–24, 29–31 July, 12–15, 20–22 August 2013
DATE OF JUDGMENT:	10 April 2014
CASE MAY BE CITED AS:	CC Containers Pty Ltd v Lee (No 6)
MEDIUM NEUTRAL CITATION:	[2014] VSC 151	First revision: 11 April 2014 Second revision: 4 July 2014

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TORT – Conspiracy to defraud – Inferences to be drawn where no direct evidence of involvement in fraud in respect of two defendants.

EQUITY – Secret commission – Sale of business to customer – Payment of moneys to director and employee of purchasing company following settlement.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr S R Horgan SC with Mr J Brereton	K & L Gates
For the First, Second and Third Defendants	No appearance
For the Fourth Defendant	Dr N Orow	Jack Bock Lawyers
For the Sixth Defendant	Mr D Williams SC with Mr B Guzzo	Doherty & Colleagues

TABLE OF CONTENTS

Introduction......................................................................................................................................... 1

CCC Old Co and operations at the container yard...................................................................... 3

Repair fraud........................................................................................................................................ 4

Factual matrix................................................................................................................................ 4
Legal principles........................................................................................................................... 13

Conspiracy............................................................................................................................... 13
Standard of proof and inference................................................................................................ 13

The Plaintiffs’ case...................................................................................................................... 15
Mr Lee’s defence......................................................................................................................... 16
Kevin’s defence........................................................................................................................... 16
Kain’s submissions..................................................................................................................... 16
Mr Neale’s submissions............................................................................................................. 18

Did the Chongs, Mr Neale and Mr Lee unlawfully conspire to injure the Plaintiffs?....... 22

Sale of business — Fraudulent misrepresentation, misleading and deceptive conduct.... 29

Sale of business and breach of fiduciary duty........................................................................... 39

Container movement fraud............................................................................................................ 46

Transport fraud................................................................................................................................. 49

Diesel fraud....................................................................................................................................... 52

Container sale fraud........................................................................................................................ 54

Conclusion......................................................................................................................................... 55

HER HONOUR:

Introduction

Mediterranean Shipping Company SA (‘MSC’) operates a shipping business transporting containerised cargo around the world. Mediterranean Shipping Company (Aust) Pty Ltd (‘MSCA’) is its wholly owned agent in Australia and New Zealand. MSC began operating in Australia in about 1989 and used the services of CCC Old Co[1] to repair, maintain and store empty shipping containers in Melbourne. That company was controlled by two of the Defendants, Kevin Chong and his father, Kain Chong.[2]
[1]ACN 082 962 598 Pty Ltd.
[2]As counsel did, I will refer to these defendants by their first names.

In about 2007, as part of its global strategy to control costs, MSC looked at acquiring container depots around the world, including in Australia. As part of that strategy, in February 2008 MSCA acquired an interest in the business conducted by CCC Old Co. A new company was established to purchase and operate the business — CC Containers Pty Ltd (‘CCC’). MSCA held 75 per cent of the shares in CCC with the remaining 25 per cent held by the Chongs. The directors of CCC included the Chongs and Christopher Neale, who was one of the directors nominated by MSCA. Mr Neale was the operations director responsible for all of MSCA’s operations throughout Australia and New Zealand, including shipping container inventory management, maintenance and repairs. He was also a director of MSCA.

MSCA acquired the remaining 25 per cent interest in CCC in November 2009. Kevin continued to work in the business until mid‑2010.

In early November 2010, APL,[3] which was a customer, complained that over an extended period it had been falsely charged for movements of shipping containers which had not occurred. This led to an investigation by MSCA and CCC. It became clear that a number of people originally connected with CCC Old Co had been involved in defrauding customers. Two of the victims of the fraud were MSC and MSCA.
[3]APL Lines (Australia).

MSCA, MSC and CCC seek to recover their loss caused by the fraud from the Chongs, Desmond Lee (‘Mr Lee’), his company, Lee Holdings (Aust) Pty Ltd, and Mr Neale. Mr Lee worked in the business as an employee.

Five different frauds are alleged:

(a)repair fraud — this relates to fraudulent charges made for repair work on shipping containers that was never undertaken;
(b)container movement fraud — this relates to false charges made for the movement of shipping containers in and out of the CCC container yard;
(c)transport fraud — this concerns the operation of a transport business, CC Cartage, by Mr Lee, without the consent of CCC;
(d)diesel fraud — this concerns the unauthorised taking of fuel belonging to CCC; and
(e)container sale fraud — this relates to the unauthorised disposal of shipping containers stored at CCC’s container yard.

In addition, CCC says that as a result of the repair fraud, it paid an increased price for the purchase of the business. It claims its loss in this regard from the Chongs and Mr Neale.

Kain and Mr Neale attended the trial and were represented. Shortly before the trial, Kevin was declared bankrupt. The Plaintiffs were given leave to proceed against him.[4] Neither he nor Mr Lee nor Lee Holdings attended the trial, although they had each filed a defence.
[4]Federal Circuit Court order 8 July 2013 (O’Dwyer J).

For the reasons which follow, the Plaintiffs have made out their claims against each of the Defendants.

CCC Old Co and operations at the container yard

Kain was born in Malaysia. He has no tertiary qualifications. English is not his first language. He worked as a welder, boilermaker and maintenance fitter in Singapore before migrating to Australia in 1976, when he was about 23. He worked in a variety of jobs in Australia and spent some time in Japan working in quality control in a shipyard. From the early 1980s, Kain has been a director of a number of companies and through those entities has operated various businesses, including the shipping container business conducted by CCC Old Co. His son, Kevin, was a co‑director (with others) from the incorporation of CCC Old Co in 1998. At some stage, Kevin took on the role of managing director of CCC Old Co. As I have said, he continued to work in the business until mid‑2010.

Mr Lee began working for CCC Old Co in April 2002. He worked as operations supervisor then later as operations manager. He reported to Kevin.

The shipping container business was operated out of premises at Altona at the time of its purchase by CCC in February 2008. In June 2009, the business moved to its current address in the Port of Melbourne precinct.

In the case of CCC customers, when a ship arrives in Melbourne, the containers are usually collected by the shipper or their agent and taken to their premises to unpack them. Once a container is emptied it is then sent to the CCC container depot. When it comes to the container depot, a container controller records the number of the shipping container and the registration number of the truck that has brought the container to the yard. Each container is surveyed to see if it requires maintenance or repair. If it does, then a quote for the cost of that work is completed and the quote is entered into CCC’s computer system. Containers that require maintenance or repairs are then sent to the repair area of the yard and the repairs are approved by the shipping line which owns the container. There is an automatic approval amount set for most shipping lines so that repairs under that limit are carried out without any other authorisation by the shipping line and without inspection of the container. If the repair cost is above the automatic approval limit, then the shipping line must give specific instructions for the repair work to be undertaken. In addition to maintenance and repairs, work is carried out on some containers to upgrade them from general to food standard so that food may be transported in them.

Once the containers have been repaired or upgraded, the repair quote is marked in the CCC computer system as complete. Invoices are generated periodically in accordance with the arrangements for the particular shipping line. In addition to any repair or maintenance fees, most of the shipping lines are charged an entry fee (when the container comes into the yard), storage fees (for the time that the container is in the yard) and an exit fee (when the container leaves the yard). There are two shipping lines that are not charged in this way. Instead they are billed on a package rate. MSCA is charged a fee when one of their shipping containers leaves the depot. APL is charged a fee when one of their shipping containers enters the depot. In addition, both MSCA and APL are charged for repairs. Once the containers have been repaired or upgraded, they are stored at the depot until they are needed. They may be released to an exporter, or, if there is a shortage of containers in another port, containers may be moved to those other ports.

Repair fraud
Factual matrix

MSC and MSCA were the main targets of the repair fraud.[5] The primary reason for this was that MSCA was the largest customer. In respect of this fraud, MSCA alleges that between at least late October 2002 and February 2008, Mr Lee, the Chongs and Mr Neale unlawfully conspired to injure them.
[5]Other shipping lines were also victims of this fraud. As nothing turns on it and for ease of reference, throughout the remainder of these reasons, in the main I will refer to MSC and MSCA as MSCA.

Three methods were employed for overcharging for repairs. The first method was to falsely duplicate maintenance and repair charges for shipping containers that had already been the subject of maintenance or repair. In other words, MSCA was charged twice for the same work. The second method was to record charges for repair or maintenance works where no repair or maintenance had been undertaken. For example, charges were sometimes levied for work to convert a container from the general category to one that was capable of transporting food but the standard of the container was not altered. Sometimes charges would be made for repair work when there was no damage to the container. The third method of falsifying the invoices was to increase the amount charged for legitimate repairs to more than was an appropriate charge. No matter which method was deployed, the CCC Old Co staff who were involved in the fraud referred to the false repair charges as ‘Repair X′s’, ‘X′s’ or ‘Ghost Repairs’.

On one or two occasions, shipping companies raised questions about the repair charges. When that happened, the overcharging was blamed on the computer system and a refund was arranged.

The fraud was able to be perpetrated on MSCA even though it had a surveyor on site to check repair quotes and physically inspect containers to make sure that the work had been done. This was because MSCA had an automatic approval limit. If the amount quoted for the repair was below the limit, no individual approval was required, nor did MSCA’s surveyor undertake any inspection nor other checks which might have disclosed the false invoicing.

As I have noted previously, neither Mr Lee nor Kevin attended at the trial. However, a number of CCC Old Co maintenance and repair staff gave evidence about the repair fraud, including evidence as to how the false invoices were raised and as to the involvement of Mr Lee and Kevin in the fraud. Two of the witnesses were Jay Ho and Thai Nguyen. Mr Ho’s wife is Kain’s niece. Mr Ho moved from Singapore to Australia in 2002 to work in the CCC business at the invitation of Kevin. A few months after he started, Mr Ho moved to the maintenance and repair section of the business. When he took up that position, another employee taught him how to create the false repair charges and told him that it was part of their practice. Kevin told Mr Ho that this was standard industry practice. As part of the daily routine, Mr Ho created false repair charges. About a year later, Mr Ho was promoted to depot manager. In that role, he oversaw and managed the operations in the yard whilst Mr Lee managed the office operations. He no longer had responsibility for entering the false charges.

Mr Nguyen began working in the maintenance and repair department of CCC Old Co in about 2003. He was responsible for entering into the computer system quotes that were prepared by other CCC Old Co employees for repair works to containers. Mr Nguyen inflated the quotation figures and entered the higher figures into the system. For example, if a quote was for $10, Mr Nguyen might enter $15 into the computer system. He did this on a daily basis. Mr Nguyen did this because he was scared that he would lose his job if he did not do so. He was young and had just started a family. His managers (Mr Lee, Kevin and Mr Ho) told him to enter the false information so that the company could make more profit and stay afloat. They told him not to go overboard with the amount overcharged with a view to avoiding detection. Other steps were also taken to disguise the charges to avoid any suspicion.

Mr Nguyen was also involved in the two other methods for falsely creating repair charges by charging for work that was not done and by duplicating invoices for work that had been done previously. He was given a target of over $10,000 each week to meet for the false charges. Despite being promised cash or pay rises, Mr Nguyen was not paid any additional amount above his normal salary for entering the false charges.

Other employees gave evidence that they too had been involved in this fraud, under threat that they and other employees would lose their jobs if they did not participate. Mr Lee told some employees that the company was not doing well and that staff may need to be laid off. In email correspondence, he mentioned what needed to be done to ‘save everybody’s job’. Some employees were told that they were replaceable and that if they did not want to participate in the X’s, they could leave. Frequently, Mr Lee and Kevin would ask the employees how the repair X’s were going and would encourage them to keep them up.

The documentary evidence also supports MSCA’s case that Mr Lee and Kevin were involved in the fraud. In this regard, from time to time, Mr Lee sent emails to Kevin setting out the amount that was being falsely charged. Sometimes he included information about how those amounts could be increased and what steps should be taken to avoid detection. For example, on 2 December 2007, Mr Lee sent an email to Kevin in which he stated:

Last week's preprint was only $61k, but this week with the X’s I started is at $94k. I managed to get $23k for the week in ghost repairs, so the real figure without my dummies would be $71k (but this figure includes Jay's X). Add to this $8194 from the lifts I manufactured, and your total X's I got is a little over $31k for the week.
Below are the current lift rates for our clients, but pls disregard MSC as I cant manufacture any false moves without Dave Robertson knowing about it. But with regards to other clients, I can do 60 units a day without causing any suspicion, meaning your minimum would be $7090 and your max $9298 per week, depending on which clients I choose.
The remaining $20k or so would come from ghost repairs which I can do for all our clients but of course each procedure is different as they have separate checks in place to catch any discrepancies. There is too much involved to explain in writing the procedure for each client so when you have time, I will explain to you in person.
Between the two procedures above, I can get an average of $30k a week ($1.56million per year), or $25k a week ($1.3mil per year) at the lowest. All this consists many hours work per day which I will do all on my own whenever I have time, whether its on weekends or at home in my time. All I'm asking for in return is my pay in full an e-gear Lambo and M3 paid by the company. Im already getting rid of both my cars and paying out the difference myself, but now I’m so desperate for the Gallardo I’m even willing to take your one off your hands if you’re willing to part with it and want to save money, don’t need to purchase another (unless you want to get me an F430.. haha… just kidn). And I would never drive the Lambo to work, it’s only purely for my personal time.

The reference to ‘preprint’ is to a procedure which involved draft invoices for the week being generated before the final invoices were issued. The reference to ‘lifts’ and ‘lift rates’ is to the charges made for movement of containers in and out of the container yard that did not occur and forms part of the container movement fraud which is dealt with later in these reasons.[6]
[6]See the container movement fraud section of these reasons commencing at [126] below.

It is also clear from the documentary evidence that Mr Lee placed pressure on Mr Nguyen, and two other employees — Chris Miller and John Dular — to process the fraudulent repair charges. For example, on 24 December 2007, Mr Lee sent an email to them complaining that they had not entered information into CCC Old Co’s computer system in time for false charges to be made. Addressing part of the email to Mr Nguyen he stated:

This is why we didn’t reach our target for week ending 23/12. I told you I need over 100k to approach KC on Monday for the 3 pay rises. What do you want me to do now???
It is likely that the ‘KC’ referred to is Kevin.

The repair fraud perpetrated through the duplication of invoices stopped in early 2008, shortly before the sale of the business to MSCA.

There is no direct evidence that Kain or Mr Neale were involved in the repair fraud. However, there is evidence that after MSCA remitted payments, Kain’s company, Ackland Forge Pty Ltd, invoiced CCC Old Co for ‘Discount on invoices of Mediterranean Shipping Co., (A) Pty Ltd remittance’. Kain prepared the invoices. Ackland Forge paid a lesser amount to Mr Neale’s company, Dawn Trading Pty Ltd. Sometimes the payments were made shortly before Ackland Forge had been paid by CCC Old Co, sometimes after it had received payment. Dawn Trading Pty Ltd invoices addressed to Ackland Forge described the charge as being one for ‘work performed’.

Kain gave evidence at the trial in an effort to explain the payments from CCC Old Co to Ackland Forge and from Ackland Forge to Dawn Trading. As I have noted, the CCC Old Co business was established in 1998. Kain was actively involved in it. At that time, the directors of CCC Old Co included Kain and Kevin and a Mr Sam Tarascio. Kain initially gave evidence that when the business started, his wages were low and so he asked Mr Tarascio for 5 per cent of MSCA’s remittances (as it was the largest customer of the business). In cross‑examination he said that the arrangement had been made with his son, Kevin, to pass on to Mr Tarascio. Kain’s version of events is that he asked that the 5 per cent be paid to his company, Ackland Forge Pty Ltd, so that he could use the funds in his other businesses which included a water purification business operated by another company that he controls, CC Technologies Pty Ltd. The money was paid from June 1998. Kain said that he could not remember whether similar payments were made before that, although he did not think so.

Kain’s evidence about all of this differed from his pleaded case. In his defence, he pleaded that the Ackland Forge invoices were issued to give effect to an arrangement with Kevin. In summary, the particulars of that allegation are that he had an oral arrangement with Kevin reached in about July 2001, that he wanted to retire and hand over the business to his son in exchange for CCC Old Co paying Ackland Forge, as a retirement benefit for him, an amount that he would determine up to 5 per cent of the revenue obtained from the largest customer (which was MSCA). In this regard, he gave evidence that his active involvement in the shipping container business ended in 2001 and that at that time he said to his son, Kevin, that he would hand over the business to him and that he would move on to other businesses where there was not so much pressure and he could do what he wanted to do. According to Kain, the terms of handing the business over to his son included that he was to continue to be paid what he had been paid, including up to 5 per cent of the largest client’s remittances for his retirement benefit. He says that payments of up to 5 per cent continued until 2008. He gave evidence that he did not always receive 5 per cent because his monthly allowance was increased by his son so that then he would only receive what additional funds he required, sometimes 3 per cent, sometimes 4 per cent. He also gave evidence that in the event that the business was sold, his son was to give him a gift of money. No written agreement about any of this was entered into.

Turning then to Kain’s evidence about the payments by Ackland Forge to Mr Neale’s company, Dawn Trading. Kain has known Mr Neale since the early 1980s. They were neighbours when they both lived in Mill Park and struck up a friendship, both having migrated to Australia. For some time, they met on a daily basis and Kain described Mr Neale as a good friend.

According to Kain, he had a business in China in the late 1990s which ran into difficulties. He says that in 1999 he spoke to Mr Neale and told him that he may need some help to borrow money to investigate what was going on with his business. According to Kain, Mr Neale told him that he had some family money (something over $100,000) from India that was in Singapore which he could use, but he would have to repay Mr Neale in Australia. There was no discussion as to the amount that could be used, nor was interest to be charged. Kain says that he agreed to the arrangement with Mr Neale and borrowed $20,000 or $30,000 in 2000 to undertake investigations in China. By 2008, he says that he had borrowed about $1.1 million. His evidence was that he agreed to pay Mr Neale’s company, Dawn Trading, when he received payments from CCC Old Co, with no monetary amount set for each repayment. Instead, his version of events is that he would decide how much he would pay. Kain did not keep a record of what he borrowed nor repaid. Instead, he says that from time to time he had contact with a Mr Yip, who he described as the trustee holding the funds for Mr Neale in Singapore. Kain says that he introduced Mr Neale to Mr Yip because Mr Neale needed a trustee to bring money from India to Singapore. According to Kain, Mr Yip passed away in 2010. During Kain’s cross‑examination, the following exchange occurred:

How did you get the money from Mr Neale?---Whatever the expenditure of co in China they will let me know so I will instruct Mr Yip to pay the bill.
What bill?---What occur in China.
Where are the bills?---The bills is owing Mr Yip.
Where are the bills now?---Mr Yip already as them.
How did you get the bills to Mr Yip?---Now, from China tell me the total figure, he sent across to Mr Yip.
Did you get a copy of these bills?---No.
Who were they paying?---Mr Yip.
Who are they paying?---Sorry?
Who were they paying?---To pay someone, will pick up the money. Because they spend the Chinese money in China so - - -
You understand me, Mr Chong. Who are the bills from?---From various place.
Who?---All the food, sometimes - - -
Who? Names?---You spend the money with the police, you spend money for investigation. What you want me to do?
Who are the names of the people in China that were to be paid?
---I don't - - -
Where are their invoices?---In China a lot of things are owed by cash, no invoices.
Are you saying it was all by cash?---Yes.
Who was being paid?---I think according to my report I have appointed - - -
What report? Do you have a document about this?---Yes.
Where is that? This is a report about who is to be paid is it?---No.
Let's just go back to my questions then shall we? Who was to be paid?---I pay all the investigator and I have appointed three representative.
Over what years were you making these payments?---From 2002 - no, from 2000 to 2007.
For seven years you're making payments to people in cash in China using Mr Neale's money?---Yes.[7]

[7]Transcript of proceedings, CC Containers v Lee (No 6) (Supreme Court of Victoria, Ferguson J, 13 August 2013) 952–954.

According to Kain, he prepared each Dawn Trading invoice and it was the method by which he repaid his debt to Mr Neale. His evidence was that he (rather than Mr Neale) prepared the Dawn Trading invoices because he determined the amount that he would pay. He says that he drew a cheque in payment for each invoice, would deposit the cheque into the Dawn Trading bank account, note the cheque number on the invoice and then send a copy of the invoice to Mr Neale. Kain says that he has repaid all money that he owed to Mr Neale. He says that this is based on what Mr Yip told him was owing, with the last repayment being paid from what he described as a gift of $2.65 million that he received from his son, Kevin, when the CCC Old Co business was sold to CCC.

Kain denies that he conspired to falsify shipping container repair invoices that were issued to MSCA and says that he did not discuss falsification of invoices with anyone.

There is no documentary evidence (whether in the form of emails, telephone records or otherwise) that supports Kain’s evidence. Mr Neale did not give evidence.

In my view, the bulk of the evidence given by Kain is not reliable. Indeed, much of his evidence seemed tailored to counteract the documentary evidence. For example, his final pleaded defence was filed during the course of the trial and shortly before he was to give evidence. As I have noted above,[8] the defence pleaded an arrangement entered into in 2001 for payments to be made to Ackland Forge. Yet when Kain did give evidence, he departed from what was alleged to take account of documents that showed that Ackland Forge had received payments from CCC Old Co well before 2001. In cross‑examination, he conceded that prior to being shown documents shortly before he gave evidence, he thought that there was only documentary evidence of the payments to him from July 2001 onwards. Whilst I accept his evidence about his friendship with Mr Neale, his explanation of the payments to Ackland Forge from CCC Old Co and to Dawn Trading is not plausible. I do accept that it is very possible that an agreement between father and son may not be documented and that an agreement between friends would not be formalised. However, it is unlikely that a businessman, such as Kain, would not make (if not retain) any record or note of any type of how much he borrowed from a friend nor how much he repaid, yet at the same time prepare false invoices for what were asserted to be the repayments. I do not accept Kain’s submissions that a distinction can be drawn because corporate entities must keep records (such as invoices) for taxation purposes. He could not identify by name who he had engaged to conduct the investigations in China, nor could he provide cogent evidence of what the payments were for. He did not provide any documentary evidence to support his testimony about Mr Yip and his death in 2010. All in all, his explanation for the payments was improbable.
[8]See above [29].

Legal principles
Conspiracy

The Plaintiffs’ pleaded case in respect of the repair fraud is primarily for the tort of conspiracy. Conspiracy may take one of two forms:

(1)an ‘unlawful means’ conspiracy in which the participants combine together to perform acts which are themselves unlawful; and
(2)a combination to perform acts which, although not themselves unlawful, are done with the sole or predominant purpose of injuring the claimant.[9]

[9]Australian Wool Innovation Limited v Newkirk [2005] FCA 290 [60].

The tort of conspiracy requires that all conspirators intend to injure the claimant. As Kiefel and Jacobson JJ observed in Dresna Pty Ltd v Misu Nominees Pty Ltd,[10] an agreement to do an unlawful act that results in damage to a person is not the same as a conspiracy to injure that party.[11] So it is that intention to injure is sometimes difficult to establish when the conspiracy is aimed at a class of persons. However, in cases such as the present, where the main targets of the fraud are two related entities, it is less difficult to establish the requisite intention to injure those entities.
[10][2004] ATPR 42-013.
[11]Ibid [7].

Standard of proof and inference

If the Plaintiffs are to succeed, then they must establish their case on the balance of probabilities.[12] In determining that, the Court may take into account the gravity of the matters alleged.[13] Here, the allegations are serious allegations of fraud. As the plurality of the High Court stated in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd:[14]

The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary “where so serious a matter as fraud is to be found”. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.[15]

[12]Evidence Act 2008 (Vic) s 140.

[13]Evidence Act 2008 (Vic) s 140(2)(c).

[14](1992) 110 ALR 449.

[15]Ibid 449–50 (Mason CJ, Brennan, Deane and Gaudron JJ) (citations omitted).

In addition, in cases where fraud is alleged, there is often (as in this case) a lack of direct evidence. Where the case is inferential, plaintiffs must satisfy the court that the inference they seek to draw is one, which, on the balance of probabilities, arises from the established facts.[16] The oft cited passage from the High Court’s decision in Bradshaw v McEwans Pty Ltd[17] explains when and what inferences may be drawn from the established facts in the following way:

Of course as far as logical consistency goes many hypotheses may be put which the evidence does not exclude positively. But this is a civil and not a criminal case. We are concerned with probabilities, not with possibilities. The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while [in] the latter you need only circumstances raising a more probable inference in favour of what is alleged. In questions of this sort, where direct proof is not available, it is enough in the circumstances appearing in the evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture; see per Lord Robson, Richard Evans & Co Ltd v Astley.[18] But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought then though the conclusion may fall short of certainty it is not to be regarded as a mere conjecture or surmise.[19]
[16]See for example, Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125, 141, (Tadgell JA) and cases there cited.
[17](1951) 217 ALR 1.
[18][1911] AC 674, 687.
[19](1951) 217 ALR 1, 5.

The Plaintiffs’ case

The Plaintiffs plead both types of conspiracy. In relation to the first, they plead that during the period from at least late October 2002 to about late February 2008, CCC Old Co, Mr Lee, Kevin, Kain and Mr Neale unlawfully conspired to injure MSC and MSCA by unlawful means by:

(a)issuing false shipping repair invoices which inflated the value of the repairs or duplicated invoices for repairs with the intention of causing MSC and MSCA to pay the false invoices;
(b)sharing and distributing the proceeds of the false invoices or a portion of them between CCC Old Co, Kain and Mr Neale.

The unlawful means alleged is obtaining financial advantage by deception, false accounting and the falsification of documents.[20]
[20]Crimes Act 1958 (Vic) ss 82, 83 and 83A.

In addition, the Plaintiffs plead the second form of conspiracy alleging that CCC Old Co, Mr Lee, the Chongs and Mr Neale unlawfully conspired with each other to cause MSC and/or MSCA to pay amounts to CCC Old Co to which it was not entitled, with the sole or predominate purpose of injuring MSC and/or MSCA.

As the Plaintiffs submitted, it would be a rare case for a victim of fraud to have direct evidence of all the necessary elements of the deception. The fraudsters will always seek to conceal their fraudulent conduct. In this case, the Plaintiffs were able to lead a significant amount of the evidence because of a number of damning emails available to them through the transfer of CCC Old Co’s electronic records on purchase of the business and through the evidence given by the maintenance and repair employees.[21] Even so, there are aspects of the case about which no direct evidence was available. For example, there is no direct evidence of an agreement between the Defendants to defraud the Plaintiffs. But that is not a fatal flaw in the Plaintiffs’ case. The Court can infer from other established facts that there was such an agreement.[22]
[21]Subpoenas were served on these witnesses.
[22]The King and The Attorney General of the Commonwealth v Associated Northern Collieries (1911) 14 CLR 387, 400 (Isaacs J).

Mr Lee’s defence

As I have mentioned, Mr Lee did not attend at the trial. He did, however, file a defence. In respect of the repair fraud allegations, his defence predominantly consisted of non‑admissions, or bare denials of the pleading against him. He did, however, plead that MSCA and MSC may have suffered loss and damage as a result of the repair fraud but alleged that that loss was caused by the actions of Kevin, Mr Ho and Mr Nguyen. Mr Lee also alleged that he was following the instructions of Kevin. This defence has not been made out on the evidence. As is clear from the evidence of the CCC Old Co employees (including Mr Ho and Mr Nguyen) and the documentary evidence, Mr Lee was heavily involved in the fraud with no suggestion that he was subject to any pressure or directions from Kevin.

Kevin’s defence

Kevin’s defence in respect of the repair fraud allegations consisted of bare denials, non‑admissions and a claim to privilege on the basis of self‑incrimination. There is no positive defence pleaded.

Kain’s submissions

Kain submitted that although evidence of the repair fraud was led, it was ‘not properly tested’, because neither Kevin nor Mr Lee were represented nor did they give evidence. He contended that the CCC Old Co employees admitted that they were dishonest, because they had been involved in the fraud and they gave evidence under the protection of a certificate under s 128 of the Evidence Act 2008 (Vic). He also suggested that some of the extra repair charges may not have been fraudulent and may have been an honest mistake. Further, he postulated that they may have represented a higher price for services and that CCC Old Co did not maintain proper accounts and records, although he did concede that the duplication of invoices was fraudulent activity. He also asserted that Kevin did not know what was happening on the ground and relied on Mr Lee and Mr Ho. He submitted that the evidence of repair fraud was often bundled up with other allegations of fraud so as to create an impression of tendency to engage in prohibited conduct. Finally he observed that the fraudulent activity continued after MSCA took control.

Among other things, these submissions ignore the fact that the oral testimony about the repair fraud was overwhelming and consistent with and supported by the available documentary evidence, including the many emails referring to ‘ghost repairs’ and the like. I have set out as an example, the email from Mr Lee to Kevin of 2 December 2007.[23] It was open to them to attend the trial and to give evidence and cross‑examine the Plaintiffs’ witnesses, but they did not do so. The evidence discloses that those involved in the fraud took precautionary measures to avoid detection, and the fact that the fraudulent activity continued for a while after MSCA purchased the business is of little moment.
[23]See above [23].

Kain also submitted that there was a sound and credible explanation of the payments made by CCC Old Co to Ackland Forge and by Ackland Forge to Dawn Trading. For the reasons I have given above, I do not agree.

Kain contended that his link to CCC Old Co is very tenuous and is limited to causing Ackland Forge to issue invoices to CCC Old Co based on remittances from MSCA. He submitted that the evidence establishes that he has not had any relevant office or function in that company save and except a formal position as director on the records until 2004 and that he did not participate in the conduct and management of CCC Old Co at any point since 2001. Kain stressed that there is no direct evidence of his participation in the manipulation of invoices. The real question though is whether, despite the lack of direct evidence, it may be inferred that Kain conspired with the other relevant Defendants to cause injury to the Plaintiffs.

In regard to the inferences to be drawn, Kain points out that the fraud was perpetrated against other shipping lines but the Ackland Forge invoices were only in respect of the MSCA invoices. I accept that this is a fact which must be taken into account when considering what inferences should be drawn.

The other submissions that Kain made were also made by Mr Neale.

Mr Neale’s submissions

Mr Neale did not give evidence. His closing submissions placed emphasis on the form of the pleaded claim against him and asserted deficiencies in the pleading. The adequacy of the pleading was considered by the Court of Appeal at an interlocutory stage of the proceeding.[24] The Court stated:

Although the amended pleading could have been better drafted to expressly allege matters that are left to be inferred by necessary intendment, it sufficiently identifies the claims that Mr Neale is required to meet. Similarly, although the pleading is bare in relation to some of the material facts that will need to be established against Mr Neale, it is sufficiently clear that the plaintiffs’ case is that those facts are to be inferred from the other facts that have been pleaded. As all of the elements of the two causes of action for the tort of conspiracy appear sufficiently in the amended pleading, we are not persuaded that it is deficient.[25]

[24]Neale v CC Containers Pty Ltd (unreported, Supreme Court of Victoria, Neave JA and Kyrou AJA, 3 February 2012). Whilst the pleading has since been amended, the only substantive amendments are to reflect that the claim was discontinued against one of the defendants.

[25]Ibid [4].

In oral submissions, Senior Counsel for Mr Neale articulated the argument as one going to show that the Plaintiffs have not made out their case.

Mr Neale submitted that there is no direct evidence of his involvement in or knowledge of the fraud or any conspiracy, nor that he had knowledge that the money Dawn Trading was paid was the proceeds of payment by MSCA. That is true, but it does not mean that the Plaintiffs must fail. In cases such as this, where parties have taken steps to conceal their wrongful conduct, it is unlikely that there will be any direct evidence. It is a question of whether the necessary facts to make out the claim ought permissibly be inferred from other established facts.

Mr Neale submitted that his involvement in a conspiracy requires the Plaintiffs to establish that he had actual knowledge of the conspiracy. Whilst this may be inferred, Mr Neale submitted that such an inference may only be made where it is the only rational inference available on the pleaded facts. Mr Neale contended that this is not such a case, as many possibilities could be envisaged. He observed that during the trial, the Plaintiffs proposed at least two other possibilities, namely a reward for assistance on prices, and a reward for assistance for the sale of business. As I have set out above, Kain gave evidence as to why Ackland Forge paid Dawn Trading money.[26] Mr Neale submitted that even if (as is the case) that evidence is not accepted, it does not leave the alleged conspiracy as the only rational alternative. Mr Neale submitted that another possibility is that an inference might be drawn that the payments were for overall general assistance of some unspecified kind in terms of the relationship between MSCA and CCC Old Co. He submitted that the least likely inference is that there was a conspiracy as alleged in relation to the repair fraud because there is nothing to connect the payments to the repair fraud.
[26]See above [30]–[32].

It seems to me that the proper test to be applied and the question which the Court must answer is whether the more probable inference is that alleged, not whether it is the only rational inference. The cases relied upon by Mr Neale are not relevant. Pereira v DPP[27] concerned proof of knowledge on a criminal charge of importing illicit drugs. In that context, the High Court held that where knowledge is inferred from the circumstances it must be the only rational inference. However, Bradshaw v McEwans Pty Ltd[28] makes clear the distinction between criminal and civil cases so far as the drawing of inferences is concerned.[29] Mr Neale also relied upon Young Investments Group Pty Ltd v Stripe Capital Pty Ltd[30] at first instance and the appeal decision in Young Investments Group Pty Ltd v Mann.[31]The relevant part of that case concerned the pleading of a claim against directors for involvement in a contravention of the misleading or deceptive conduct provision in the Corporations Act.[32]At issue was the pleading as to the directors’ knowledge of the essential facts of the contravention. That is a quite different issue to whether the Defendants in the current case are liable for the tort of conspiracy because they combined to perform acts which injured the Plaintiffs.
[27](1988) 82 ALR 217 [11].
[28](1951) 217 ALR 1.
[29]Ibid 5. See above [39].
[30][2011] FCA 1147 [24]–[31].
[31](2012) 293 ALR 537, 541 [11].
[32]Corporations Act 2001 (Cth) ss 79, 1041H.

Mr Neale submitted that the central proposition on which the Plaintiffs’ case rests had not been made out; that is, that there is a connection between the timing and quantum of the fraudulent invoice payments and the timing and quantum of the payments to Mr Neale. Consequently, counsel contended that the facts necessary for the drawing of inferences against Mr Neale had not been established. As to quantum, Mr Neale says that there is no proportionate relationship between the amounts paid. In this regard, the evidence shows that there was no separate payment of the false repair charges. Rather, there was a single weekly remittance from MSCA to CCC Old Co. The alleged ‘amount generally between 2.00 per cent and 3.00 per cent’ of the remittances was not a percentage of the fraudulent element, but of the whole. Further, Mr Neale observed that the payments to Dawn Trading vary from 1.44 per cent to 4.40 per cent of the amounts received. Mr Neale submitted that there is no pattern in respect of the quantum of the payments, yet Kain (through Ackland Forge) had no qualms nor hesitation in taking a fixed amount from CCC Old Co.

As to timing, Mr Neale submitted that in most cases the payments to Dawn Trading were made before Ackland Forge received a payment from CCC Old Co.

Further, he says that there is a complete lack of correlation between the period over which the Ackland Forge/Dawn Trading payments were made, and the period over which the repair fraud took place. The evidence is that these payments started well before 2002 but one of the central figures, Mr Lee, did not start working at CCC Old Co until April 2002. Mr Nguyen, who is alleged to have played a key role in that fraud, joined even later. In essence, he says that as the payments go back to a time well before Mr Lee was employed by CCC Old Co, there is no correlation between the time the payments started and when the conspiracy is alleged to have begun — so it is not easy to draw an inference that the relevant Defendants were involved in a conspiracy to defraud from at least October 2002.

As to the conclusion of the period, Mr Neale submitted that the payments from Ackland Forge to Dawn Trading (which are allegedly linked to the MSCA weekly remittances) ended in February 2008, and two further payments allegedly linked to the sale of business occurred in March and May 2008. He submitted (and I accept) that although there was evidence that at least one aspect of the repair fraud (specifically the simplest form, being the duplication of repair invoices) was curtailed in about late 2007 or early 2008, there was clear evidence that the other methods employed to perpetrate the repair fraud were still underway after that.

Even if there was any material from which an inference might potentially arise as to Mr Neale’s knowing participation in, or receipt of the proceeds of, the repair fraud, he submitted that there are significant other factors, which would render that inference an unlikely one. He contended that they include at least the following:

(a)Mr Neale was an advocate for the introduction of new software, which had the effect of significantly curtailing the repair fraud. That would be a most surprising thing to have been done by a person supposedly sharing in the proceeds of that very fraud;
(b)there is not the slightest reason to imagine that fraudsters such as Mr Lee and his alleged cronies would let Mr Neale in on their fraud against his company, and share the proceeds with him. Nor is it logical, if Mr Neale was sharing in the proceeds of the repair fraud, that he would not similarly have received a share of the other frauds which (it seems) were being perpetrated by the same people. That is especially so given that the evidence suggests that those other frauds grew and flourished in large part as a replacement for the winding down of the repair fraud, which had been curtailed by the software advocated for by Mr Neale as noted above;
(c)Mr Neale was otherwise a longstanding and trusted director and employee of the second Plaintiff. It is inherently unlikely that a person of Mr Neale’s standing and character would dishonestly abuse his position in the ways in which it is alleged that he has done.

Mr Neale accepted that if the claim against him in respect of the repair fraud conspiracy was made out, the Plaintiffs would also succeed against him on the alternate bases that he breached his fiduciary and statutory duties and received a secret commission so far as the fraud related to the duplication of invoices.

Did the Chongs, Mr Neale and Mr Lee unlawfully conspire to injure the Plaintiffs?

The difficulty with many of the submissions made by Mr Neale and Kain is that they attempt to look at each factual aspect of the case in isolation from other facts. As will be seen from what follows, the task is more complex than that. It is necessary to look at all of the established facts together and then to see what are the probable inferences to be drawn.

When one stands back and looks at the established facts, in my view it is to be inferred from them that both Kain and Mr Neale were involved with Mr Lee and Kevin in the repair fraud.

1.First, there is the fact that MSCA was defrauded through false charges being made for repairs and other work that was never undertaken. It is clear from the documentary and oral evidence that both Kevin and Mr Lee were centrally involved in that fraud. It is not possible to tell exactly how much MSCA overpaid, but suffice to say for present purposes, the amount was in excess of $1 million.
2.While it is not clear exactly when the fraud began, it is clear from Mr Ho’s evidence (which was not contradicted and which I accept) that the repair fraud was underway when he took up his role in CCC Old Co’s maintenance and repair section in 2002. It is also clear from the evidence of Mr Ho that by October 2002 (some six months after Mr Lee began to work for CCC Old Co) the repair fraud was in full swing. Whilst there is no documentary evidence by way of emails from this early period, that is explicable. The electronic records of CCC Old Co (including some historical records) were transferred to MSCA when the business was purchased in February 2008. However, before MSCA took over, CCC Old Co did not have a proper email server on which all emails were stored. Consequently, not all emails from the early period are available.
3.There is the familial relationship between Kain and his son, Kevin. Both were directors of CCC Old Co, at least for part of the time that the fraud was perpetrated.
4.There is the close friendship of many years between Kain and Mr Neale.
5.Mr Neale was a director of MSCA with responsibility for shipping container inventory and management.
6.There is the fact that Kain was told when MSCA remittances were received by CCC Old Co and he raised invoices to CCC Old Co from Ackland Forge for a discount on invoices of MSC.
7.CCC Old Co made payments to Ackland Forge from at least 1998.
8.Ackland Forge made payments to Dawn Trading before 2002.
9.The Dawn Trading invoices addressed to Ackland Forge stated that the charge was for ‘work performed’ when there was no work done.
10.Whilst the amount paid to Ackland Forge was not always exactly the same percentage of the MSCA remittance amount, it was almost always 3.3 per cent until November 2003 and thereafter almost always 4.4 per cent. In this regard, Kain admitted that the payments were made, and that they represented a percentage of the amounts remitted by MSCA.
11.Although the percentage amount paid by Ackland Forge to Dawn Trading was less consistent and there were some limited exceptions, it was usually within a reasonably narrow band of between 2 per cent and 3 per cent of the MSCA remittance. Even on Kain’s version of events, the amount to be paid to Dawn Trading was linked to the MSCA remittances. There is no evidence that the payments were not so linked.
12.Ackland Forge and Dawn Trading were paid within days of the MSCA remittance.
13.Some manifestations of the repair fraud continued after the business was purchased in February 2008 by MSCA.
14.Mr Neale did not share the proceeds of other frauds.
15.Mr Neale was a longstanding director and employee of MSCA. He had not previously been known to have abused his position.
16.Finally, between October 2002 and February 2008, Ackland Forge received over $1 million from CCC Old Co and paid Dawn Trading over $1 million.

Taking all of those facts into account, there being no other plausible explanation provided, and bearing in mind the seriousness of the allegations made, it seems to me probable and proper to infer that Kevin, Kain, Mr Lee and Mr Neale conspired to defraud MSCA. In particular, I would infer that they had an agreement to overcharge MSCA by issuing inflated invoices for repairs (including by the duplication of invoices for work previously performed) and then to share at least part of the proceeds between CCC Old Co, Kain and Mr Neale. In this regard, Kevin and Mr Lee issued (or caused to be issued) false invoices and Kain and Mr Neale received at least part of the proceeds thereby obtaining a financial advantage by deception. The conspirators falsified documents in the course of the fraud (the invoices issued to MSCA (by CCC Old Co), to CCC Old Co (by Ackland Forge) and to Ackland Forge (by Dawn Trading)). I also infer that Kevin, Kain, Mr Lee and Mr Neale conspired with the intention of injuring MSCA. The fraud in respect of the false invoices addressed to MSC and MSCA was aimed at them alone. They were the only entities that would be the subject of harm as a result of the fraud directed to them. In my view, these are the only probable inferences to be drawn. Whilst there are other possibilities, such as that contended for by Kain, they are not probable. In particular, the timing of the payments to Ackland Forge and Dawn Trading after MSCA remittances, the link between Kain and Mr Neale and the fact that Mr Neale was an employee and director of the main target of the fraud, makes it inherently unlikely to my mind that there is no connection between them and the fraud and their co‑conspirators in perpetrating that fraud, or that they did not know about and participate in that fraud. It is not a case where there are unconnected steps taken by individuals in isolation from one another. In the circumstances of this case, that would be an unlikely coincidence of events. Rather, it is probable that the participants acted in concert with a specific plan to effect the fraud and share the proceeds of it. In this regard, it seems likely that Kain acted as the conduit between his son and Mr Lee on the one hand and Mr Neale on the other in arriving at the agreed plan.

Whilst Mr Neale’s perceived good character weighs in the scales against inferring his involvement in the conspiracy, it alone is insufficient to outweigh the other facts from which such an inference is to be drawn.

No plausible explanation has been given for the payments by CCC Old Co to Ackland Forge and Ackland Forge to Dawn Trading before October 2002. In those circumstances, the fact of the earlier payments and that one of the conspirators, Mr Lee, was not working for CCC Old Co until April 2002 does not seem to me to create any difficulty or sufficiently diminish the likelihood of the inferences that I have drawn. There may have been an earlier conspiracy to defraud involving different individuals. That is not important. What matters is that by October 2002, the repair fraud was being perpetrated by the Chongs, Mr Lee and Mr Neale. By that stage, they were combining together to perform unlawful acts which were intended to injure MSCA.

The fact that the payments were not for an identical percentage on each occasion, does not lessen the link between the payments and the MSCA remittances. There could be many reasons for this. Perhaps the most likely is that it is an attempt to make it more difficult for an outsider to detect the fraud. In this regard, Kain would undoubtedly have less concerns about the consistency of payments between CCC Old Co and Ackland Forge. At the time that they were made, there was far less likelihood of investigation of those payments by a third party. In a sense, the payments to Ackland Forge were payments within the Chong family business structure. The payments to Dawn Trading were far more likely to come under scrutiny.

Similarly, although the percentage paid to Ackland Forge and Dawn Trading is linked to the whole amount charged to MSCA that does not suggest to me that the inferences are improbable. No doubt it was much easier to use this method to calculate how the spoils of the fraud were to be shared. As Mr Nguyen gave evidence, in the case of invoices where the charge was merely inflated (as opposed to duplicated) he could not tell which invoice had been increased.

Although sometimes Dawn Trading was paid before Ackland Forge had received payment from CCC Old Co, that is not significant. What is important is that the payments were made after MSCA had paid CCC Old Co. It is the link to MSCA that is most important.

Further, it seems to me that the curtailment of one manifestation of the repair fraud shortly before the sale of the business does not adversely impact upon the Plaintiffs’ claim that the conspiracy in respect of the repair fraud was from at least late October 2002 to about late February 2008. It is simply the case that the Plaintiffs make no conspiracy claim in respect of any later period, just as they make no claim in respect of any conspiracy before October 2002. That Mr Neale was in favour of the introduction of new software that might curtail the fraud is not surprising. The software was being introduced in the broader MSCA business and it would be surprising if Mr Neale had opposed its introduction in Australia, particularly as it was capable of reducing the incidence of fraud. This would only likely have drawn attention to and scrutiny of his motives.

Given his connection was only with MSCA, I do not find it surprising that he did not share in the proceeds of other frauds that were perpetrated to replace the duplicated invoice fraud. Nor does it suggest to me any oddity that he might only be involved in one of many frauds perpetrated against other shipping lines and that he would not benefit from the frauds that were developed to replace the revenue generated by the repair fraud. His connection was with MSCA and, quite likely, his co‑conspirators would only divulge to him that which it was necessary for him to know and share in to enable fraud to be committed. He had no connection with those other shipping lines that were defrauded; let alone a connection such as he had with MSCA.

Having reached the conclusions that I have about the inferences to be drawn, it is not necessary to consider whether those inferences might more readily be drawn because of the failure of Mr Neale to give evidence in circumstances where he had claimed privilege against self‑incrimination in his defence.[33]
[33]Jones v Dunkel (1959) 101 CLR 298.

I would note that MSCA paid the invoices that included the false repair charges that were rendered by first, CCC Old Co and later, CCC. Because of the way that the fraud was conducted and the type of records that were maintained, it has only been possible for MSCA to ascertain the amount that it was overcharged when an invoice was duplicated after March 2005. The first duplicated invoice that MSCA has been able to prove was dated 6 March 2005 with that invoice being paid on 21 April 2005. MSCA is not able to calculate (and does not claim) any amount in respect of the period before March 2005, nor the overcharging where the price for a legitimate repair was wrongly increased, nor where a charge was made but no repair or maintenance was carried out. The total amount of loss that MSC and MSCA have been able to substantiate and claim in respect of duplicated invoices is $1,991,795.50. After 21 April 2005, Ackland Forge was paid $703,178.93 in respect of those duplicated invoices. Dawn Trading received $489,488.49 in respect of the duplicated invoices. This last amount does not include the last two payments made to Dawn Trading (which totalled $288,721.20). Senior Counsel for the Plaintiffs accepted that those payments were not payments which were referable to duplicated invoices. Rather, as will be seen from what follows, those payments were made to Dawn Trading following settlement of the sale of the business.

Orders should be made:

(a)against Mr Lee and Kevin Chong requiring them to pay $1,991,795.50 to MSC and MSCA, together with interest on that amount;
(b)against Kain Chong requiring him to pay $703,178.93 to MSC and MSCA, together with interest on that amount; and
(c)against Mr Neale requiring him to pay $489,488.49 to MSC and MSCA, together with interest on that amount.

The Plaintiffs also claim exemplary damages in the amount of $10,000 against each of Mr Lee, the Chongs and Mr Neale. Exemplary damages are punitive in nature, not compensatory. Thus, punishment and deterrence of reprehensible conduct provide the foundation for such an award.[34] The parties who were represented at the trial agreed that exemplary damages may be awarded if the claim of conspiracy was made out.[35] The Plaintiffs submitted that exemplary damages ought to be awarded because of the targeting of MSCA, the period during which the fraud was perpetrated and the manner in which the fraud was hidden by those involved. In my view, this is an appropriate case in which an award of exemplary damages in the amount sought should be made. The conspiracy operated over many years, and the deception of MSCA was elaborate. The conduct of the conspirators was reprehensible. Had it not been for the transfer of the business records of CCC Old Co when the business was sold, proof of the fraud may not have been possible. The amount sought by the Plaintiffs by way of exemplary damages is not excessive,[36] but rather is modest and appropriate.
[34]XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448, 471; Lamb v Cotogno (1987) 164 CLR 1, 9.
[35]Williams v Hursey (1959) 103 CLR 30.
[36]As to the need for moderation in the awarding of exemplary damages, see XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448, 463 (Gibbs CJ).

Sale of business — Fraudulent misrepresentation, misleading and deceptive conduct

As I have noted above, CCC purchased the shipping container business in February 2008. In this regard, CCC makes a claim against Kevin and Kain for fraudulent misrepresentation and misleading or deceptive conduct. The elements of the tort of deceit (the equivalent of fraudulent misrepresentation in contract) were described by Gummow, Kirby and Crennan JJ in Magill v Magill[37] as follows:

first, that the defendant made a false representation; secondly, that the defendant made the representation with the knowledge that it was false, or that the defendant was reckless or careless as to whether the representation was false or not; thirdly, that the defendant made the representation with the intention that it be relied upon by the plaintiff; fourthly, that the plaintiff acted in reliance on the false representation; and fifthly, that the plaintiff suffered damage which was caused by reliance on the false representation. Generally, the elements of the tort have been found to exist in cases which concern pecuniary loss flowing from a false inducement and the need to satisfy each element has always been strictly enforced, because fraud is such a serious allegation.
Not only do the cases themselves show that an action for deceit has historically been associated with commercial and economic matters, and particularly with inducing contractual relations, but the method by which damages in deceit may be assessed also reflects this link. Where a person makes a fraudulent representation to a purchaser about the value or nature of a product or property, which representation induces the purchaser to buy the product or property, damages can be quantified by reference to the difference between the price paid, and the actual value of the product or property.[38]

[37](2006) 226 CLR 551.

[38]Ibid 587–588 [114]–[115] (footnotes omitted). In respect of a claim for fraudulent misrepresentation in contract, the fifth element need not be established: Tresize v National Australia Bank Limited (2005) 220 ALR 706, 716 [38].

The purchase price paid for the CCC Old Co business was set using a formula that involved multiplying CCC Old Co’s EBITDA[39] for the 2007 financial year by 4.625. The EBITDA figure took into account a number of normalisations. One of those normalisations was to add back in the payments that had been made by CCC Old Co to Ackland Forge in the 2007 financial year. The explanation for this normalisation was that the payments were personal drawings of the Chong family and would not continue after the business was purchased by CCC. In the 2007 financial year, Ackland Forge paid Dawn Trading the amount of $197,610.75. If the multiple was applied to that figure, the effect was to inflate the purchase price by $913,949.72.[40] Further, the EBITDA figure included the amounts charged in the repair fraud false invoices (including the duplicated invoices). The duplicated invoices totalled at least $752,053.50 for the 2007 financial year. The effect of the multiplier on that figure results in a further inflation of the purchase price by $3,478,247.44.[41] CCC therefore paid $4,392,197.16 more for the business than it would have done if the inflated figures had not been included in the calculation.
[39]Earnings before interest, tax, depreciation and amortization.
[40]$197,610.75 by the multiplier of 4.625.
[41]$752,053.50 by the multiplier of 4.625.

The Sale of Business Agreement included warranties that were given by Kain and Kevin. They warranted and represented that:

as an inducement to the Purchaser to enter into this agreement and to purchase the Business … it is a condition of this Agreement that … to the knowledge of the Warrantors each of the [warranties] is true, complete and accurate. ...

The warranties included that:

(a)all information given with respect to the business of CCC Old Co was true and correct;
(b)all information known and material to the purchase of the business had been disclosed;
(c)the books and records of the business were complete, accurate and properly maintained;
(d)the financial performance of the business was not affected by any unusual or non‑recurring items;
(e)all information concerning the financial position of the business had been compiled in accordance with applicable laws and regulations;
(f)there were no actual or contingent liabilities which could adversely affect the value of the business;
(g)all accounting records:
(i) were fully and properly maintained;
(ii) did not contain or reflect any material inaccuracies or discrepancies;
(iii)gave a true and fair view of the trading transactions, financial and contractual positions of the business;
(iv)were prepared in accordance with accepted accounting principles and practices;

(h)the accounts set out in the sale of business agreement were complete and accurate.

The warranties were false as the stated income of the business which formed part of the calculation of EBITDA was inflated as a result of the repair fraud. Both Kain and Kevin were conspirators in the repair fraud and knew that the warranties were false.

Alex Ellis was MSCA’s finance director at the time the CCC Old Co business was purchased. He was heavily involved in the negotiations and decisions concerning the purchase and project managed the purchase. I accept his evidence that if he had been aware of the repair fraud and the dishonesty of those running CCC Old Co, he would not have recommended that the purchase proceed.

Although Kevin did not attend the trial, he had filed a defence. In response to the fraudulent misrepresentation claim against him, he pleaded that CCC did not act in reliance on the warranties because the Sale of Business Agreement was signed simultaneously with the payment of the purchase price and, prior to its execution, CCC carried out due diligence and, among other things, had access to the books and records of CCC Old Co and its auditor. Kain also pleaded that CCC did not act in reliance on the warranties but rather relied on its own internal investigations, on advice of Mr Vincent Pooch (an adviser to CCC) and on KPMG’s financial due diligence report. Vincent Pooch did raise issues concerning whether CCC Old Co was solvent and stated that it was difficult to determine the cash profit of the business ‘due to cash withdrawals in many places by KC’. He also raised concerns about the normalisations.

As might be expected, the Sale of Business Agreement went through a number of iterations before the final form of agreement was executed. Mr Ellis gave evidence (which I accept) that CCC intended to rely on the warranties. During the course of the negotiations, Mr Ellis sent an email to Kevin about various provisions in a draft version of the contract. In relation to the warranties, Mr Ellis observed that they were self‑explanatory, but should be reviewed carefully. The warranties remained in the same form in the concluded contract. In those circumstances, it does not mean that there was no reliance because the agreement was signed and purchase price paid simultaneously. CCC well knew what the terms of the agreement were to be (including the warranties) before it executed the final form of agreement.

Whilst CCC obtained a due diligence report from KPMG and relied on that report and also took advice from Mr Pooch, it did not do so to the exclusion of reliance on the warranties. Mr Ellis did concede that CCC was aware of some inaccuracies in CCC Old Co’s financial records and some deficiencies were identified by KPMG and Mr Pooch in this regard, but the repair fraud was not exposed. As Mr Ellis said, the warranties were there to protect CCC from what he and his co‑directors did not know. It should not be forgotten that the repair fraud was hidden from Mr Ellis, Mr Pooch and KPMG with a false explanation being given as to the true nature of the payments by CCC Old Co to Ackland Forge. The warranties were an important part of CCC’s decision making process in entering into the agreement to purchase the business. So much can be seen from the email that Mr Ellis sent to Kevin cautioning that the warranties should be reviewed carefully.

Kain’s submissions also asserted that CCC is not entitled to rely upon the warranties because he had no intention to enter into a contract, the warranties were the product of unconscionable dealing and he could rely on a defence of non est factum (that is, that he may disown the Sale of Business Agreement even though he signed it).[42] He submitted in the alternative that the doctrine of unilateral mistake applied. The matters pleaded by him were that:

(a)he did not understand the purport and did not assent to the contents of the Sale of Business Agreement;
(b)by reason of his absence from the business for more than six years, he lacked any knowledge concerning the affairs of the business;
(c)he did not know that the warranties were false and untrue and he did not make them recklessly; the Plaintiffs knew or ought to have known that he did not have knowledge of the affairs of CCC Old Co and they did know the state of the affairs of CCC Old Co.

[42]The Latin expression non est factum means ‘it is not my deed’.

Kain’s pleading does not articulate that there was no intention to create legal relations, nor the defence of unconscionability, nor non est factum, nor any claim based on the doctrine of unilateral mistake. In any event, for the reasons which follow, none of those matters are made out on the evidence.

As I have noted above,[43] Kain gave evidence that he retired from the CCC Old Co business in 2001. He remained on the ASIC register as a director of CCC Old Co until 2004 and still described himself as the chairman of the company after that. In addition, there is other documentary evidence which supports the conclusion that Kain was still involved in the business after 2001. By way of example, in December 2004, Mr Ho sent an email to Kain about MSCA’s current rates. Mr Ho followed this up with a further email attaching a copy of ‘amended rates for your review’. Kain gave evidence that he could not understand nor remember why the rates were sent to him. He also gave evidence that he was surprised by this email, never replied to it and that it was the only one that he received about the container business after he left. He denied having received details of MSCA’s rates for review, although he accepted that he had an interest in the amount received on remittance from MSCA. Again, Kain’s evidence appeared to be tailored to address the documentary evidence that could be found. As I have already said, only some of the emails from the period before the business was sold could be retrieved by the Plaintiffs. I do not accept Kain’s evidence. It seems inherently unlikely that he would be consulted about rates if he was not involved in the business.
[43]See above [29].

Kain also denied that he had any involvement in the sale of the business. However, this is not consistent with the contemporaneous documents. On occasion from mid‑January 2006, he sent emails to Kevin asking that he furnish information which could be provided to interested buyers of the business. Further, when it came to the disposal of an interest in the business to MSCA, it was Kain who contacted Mr Neale in late June 2007. His email said:

We wish to thank you for the opportunity to participate in a Joint Venture with MSC on a 50/50 basis, based on the above services and we look forward to discuss this project further in order to formalise an agreement.
C C Container is an independent Family Company and has serviced the shipping industry since 1981 and has been a service contractor to MSC since their establishment in Australia in 1989.
Our Company current provides warehousing, transport, container packing and unpacking, full and empty container storage together with container repair and maintenance facilities.
We are prepared to form an independent company to participate in the JV in order to provide the above quot[e]d services. We believe that the JV company will have the options to purchase (directly or through hire purchase) or lease the facilities and equipment as required, to provide a suitably located bonded, with warehouse of around 4000 Sq/M and bonded storage area for full import containers on land area of around 10–12 acres together with suitable equipment and trucks to service the business. Rail access will be a preference.
We now await your further advice.

Following this email, he corresponded with his son about the possibility of a joint venture with MSCA and requested that Kevin prepare information that could be provided about the business. Subsequently, he sent an email to Kevin informing him that he had spoken to Mr Neale, who he referred to as ‘brother’, about the joint venture. He told Kevin that MSCA would want a five year financial report but that Kevin should wait for an official letter from MSCA requesting this. On a number of occasions in emails, Kain used the terms ‘brother’ and ‘big brother’ when referring to Mr Neale.

On 30 August 2007, Kain sent an email to his son about ‘MSC‑Project’. He stated:

Good morning.
Urgent!
Reference to the above mentioned subject, meeting will take place on 6/9/07 at CC DEPOT, MSC — representative will include finance Director, Operation Director and one Consultant with expert of business analysis as well, this meeting I have to present, you and may be including Kevin Ng as well.
As I told you yesterday that they need 5 years financial report, property lease agreement etc.
MSC will official write to CC.
At this moment if you can give me brief summary of cash flow and last year profit amount will be much appreciated as brother needed.
Also to let you know that you must remember Brother had quoted them to purchase 50% of the business is 6 million not 5.5 million.

Kain denied that he was the one who was organising the meeting. Rather, his evidence was that he was just letting Kevin know about the meeting. He did, however, admit that Mr Neale had told him what MSCA expected to pay for the business of CCC Old Co.

Kain attended the meeting on 6 September 2007. After this meeting, MSCA, the Chongs and some of their companies entered into an exclusivity agreement that would apply whilst MSCA undertook a due diligence exercise in respect of the business. The agreement was signed by Kain and Kevin. Kain subsequently signed other documents including the Sale of Business Agreement, two shareholders agreements and an indemnity agreement. Whilst he may not have had legal advice, he was an experienced businessman.

On 21 October 2007 Kain sent an email to his son stating:

attached please find big brother advise counter offer for your perusal. Please copy all correspondence to me will be much appreciated.
Thanks

The attachment to the email reads:

Subject : MSC buy in CC Containers Pty Ltd.,
Reference to the abovementioned subject I wish to have copy of all correspondence, meeting minutes for the above mentioned subject for my file, your co-operation will be much appreciated.
For the terms discussed on 19/10/2007 meeting between CC and MSC I suggest the Following.
1.CC Container & Laverton Transport as whole at the following.
Counter offer to MSC : MSC purchase 70% shares
CC Container Services (Victoria) Pty Ltd retain 30% Share.

2.Purchase CC Price base on $4,000,000.00 (? Tell me if I am wrong) multiply five (5) times. Counter offer to MSC base on multiply 5 times instead of four times they suggested on 19-10-2007 at meeting. Also ask MSC what is the figure to pay to us. (total amount of 70% shares purchase).
3.Laverton Transport made a lost, tax advantage MSC any incentive to us ?? or may be ask MSC to base on $4,000,000.00 multiply 5.5 times ??
4.CC Containers Property : Counter offer to MSC at following ratio.
MSC purchases 70% price base on market value.
CC Container Services (Victoria) Pty Ltd retain 30%. Of the share holding.
Please ask MSC what is the figure to pay to us.

5.New company to be formed by MSC & CC Container Services (Vic) Pty Ltd to buy CC Containers Pty Ltd.
a)Ask MSC confirm to us that the new company will take over all assets, all debts and other liabilities e.g. leasing equipment and property etc.
b)Board of director : CC ask for 2 seats.

Kindly prepare reply letter to MSC base on the above mentioned points. Thank you.

In addition to the emails that I have set out above, there are other emails that show that Kevin sought his father’s imprimatur in respect of the sale and that he discussed and agreed the terms of counteroffers with his father.

Kain gave evidence that, as a father, he tried to help his son, including by assisting his son with the sale of the business. He denied reading a number of emails that were sent to him by his son about matters concerning the sale. He asserted that he did not know that the Sale of Business Agreement contained warranties and that he thought that it was a document relating to the sale of shares, rather than the sale of the CCC Old Co business. I do not accept his evidence in this regard. His emails show that he was vitally interested in the disposal of the business to MSCA and was one of the decision makers. Indeed, the correspondence between Kain and his son is consistent with Kain instigating the discussions with MSCA and having a guiding role in relation to the sale. Further, Kain was one of the inaugural directors of CCC after it purchased the business. It would seem odd that he would take up that position if he was not involved in the sale of the business. In a sense, Kain’s role as a director of CCC was the continuation of his role in the business.

Kain was an experienced businessman. He well knew what was happening with the sale of the business. Having signed the Sale of Business Agreement, which included the warranties, he is bound by them.[44] The document was clearly contractual in nature and the suggestion that he did not intend to enter into the contract has no foundation. Kain submitted that he was under a special disability because English is not his first language, he was presented with a complex document to sign and he had no legal representation. However, in context, including that he is an experienced businessman, this does not amount to a special disadvantage, such as would be required to establish a claim of unconscionability. Further, given his business experience and, at least in the initial phase, his involvement in discussions about the sale of the business, the Plaintiffs would not have been aware of any special disadvantage nor could they be said to have taken an unfair advantage.[45] On the contrary, Kain knew what he was doing. He is able to read English, and he does not need to rely on others to explain documents to him. Whilst English is not his first language, he is able to communicate in English, both orally and in writing. He simply does not fall into the limited class of defendant who may rely on the defence of non est factum. Further, there was nothing to prevent Kain from taking steps to ascertain the terms of the agreement. If he did not appreciate their import, it was his own carelessness that led to this position. Kain has not made out the defence of non est factum.[46] Further, I am not satisfied that he was mistaken as to the terms of the sale including the warranties. Even if he were mistaken, there is nothing that would suggest that the Plaintiffs knew or ought to have known of any mistake on his part. As I have said, he was involved in the sale process.
[44]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Equuscorp Pty Ltd v Glengallon Invesments Pty Ltd (2004) 218 CLR 471.
[45]Commercial Bank of Australia v Amadio (1983) 151 CLR 447.
[46]Petelin v Cullen (1975) 132 CLR 355, 359–360.

For the reasons which I have given, Kain was one of the conspirators in relation to the repair fraud and must have known that the figures upon which the sale price was based were falsely inflated by reason of that fraud. In the circumstances, CCC has made out its claim of fraudulent misrepresentation. The claim of misleading and deceptive conduct is also made out.

The proper measure of damages for fraudulent misrepresentation is the difference between the price paid and the fair or real value of the business at the time of purchase.[47] CCC accepts that there is some duplication in the amount of damages claimed in respect of the repair fraud and the sale of business. The EBITDA calculation included amounts that were derived by reason of the repair fraud in the 2007 financial year. In that year, CCC Old Co paid Ackland Forge $293,082.71. CCC accepts that the amount of damages for fraudulent misrepresentation should be reduced by that figure because otherwise it would recover twice (once in relation to this claim and once in relation to the repair fraud claim). It claims $4,099,114.45.[48] CCC is entitled to an award of damages in that amount together with interest. That is the difference between the price that CCC paid and the price that it would have paid had the correct EBITDA figure been used as part of the calculation of the purchase price. CCC also seeks an award of $10,000 in exemplary damages. I do not think that such an award should be made in respect of this claim. The claim is, to a large degree, interlinked with the conduct in perpetrating the repair fraud. Having awarded exemplary damages in relation to the conspiracy related to the repair fraud, I do not think that much (if any) additional punitive nor deterrent effect would be achieved by making a second award in relation to that conduct.
[47]Holmes v Jones (1907) 4 CLR 1692 and Toteff v Antonas (1957) 87 CLR 647 cited with approval in Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23, 31 (Gibbs J).
[48]$4,392,197.16 - $293,082.71 = $4,099,114.45.

Sale of business and breach of fiduciary duty

At the time that the sale of the CCC Old Co business was concluded, Mr Neale was a director of both MSCA and CCC. Directors, as fiduciaries, must not place themselves in a position of conflict between their personal interest and their duty to the company unless the company has given its fully informed consent. Similarly, except with the company’s fully informed consent, directors must not misuse their position for their own advantage. The Plaintiffs claim that Mr Neale breached his fiduciary duties to CCC and MSCA by:

(a)failing to inform them that the warranties in the Sale of Business Agreement were false;
(b)failing to inform them that since October 2002 his company, Dawn Trading, had been receiving payments from Ackland Forge;
(c)allowing the sale of business contract to settle; and
(d)allowing the payment of the purchase price to CCC Old Co.

Whilst Mr Neale may not have been the driving force behind the sale, the email correspondence shows that he was sometimes in touch with Kain about the sale of business and he was frequently copied into email correspondence about it. In addition, he attended meetings (both internal and external) during the course of which the sale was discussed. He signed the Sale of Business Agreement on behalf of CCC.

In the absence of any evidence to the contrary, I accept that he was aware that the sale of business agreement contained warranties and that the financial performance of CCC was relevant to the sale. He did not disclose to CCC nor MSCA the existence of the repair fraud and the receipt of payments by Dawn Trading from that fraud. He must have known that the warranties in the Sale of Business Agreement were false and that the price to be paid was inflated by the inclusion of the amounts referable to the repair fraud in the 2007 financial year. In my view, it is clear that he breached his fiduciary duties in this regard.

CCC submitted that if it succeeded in this claim against Mr Neale, he ought be ordered to pay an amount of $4,099,114.45 as equitable and statutory compensation. As can be seen from the preceding section, that figure is the amount by which the purchase price was inflated by reason of the inclusion of the repair fraud figures in the calculation of EBITDA for the 2007 financial year. Mr Neale submitted that the proper approach is to compare what the position CCC is in now with the position that it would have been in but for the wrong. First, he contended that this is a ‘no transaction case’ because Mr Ellis gave evidence that CCC would probably not have proceeded with the purchase at all if it had been aware of the repair fraud. He submitted that CCC would need to establish that what it had paid for the business was worth $4 million less than what it paid for it and, in doing so, would need to take into account any benefits that CCC had obtained from the transaction. Mr Neale contended that CCC had put on no evidence about either of those matters. He also argued that there is no evidence that CCC would have bought the business for $4 million less than it paid, nor that the Chongs would have accepted a lower purchase price. Mr Neale urged the Court to conclude that CCC had not established that it had suffered any damage.

The Plaintiffs submitted that the evidence of Mr Ellis did not lead to the conclusion that this was a ‘no transaction case’ as suggested by Mr Neale. Rather, they submitted that the business having been transferred after the fraudulent misrepresentations were made, CCC is taken to be in the position it now is with something of less value than the business it bought.

It seems to me that when the evidence of Mr Ellis is taken in context, what he was saying was that he would not have recommended that MSCA proceed with the purchase of the business because of the fraud which involved the key management and employees of CCC Old Co. That is something different from saying that if the false representation had not been made (that is, if CCC Old Co had instead represented what the true EBITDA for 1997 was) he would not have recommended that the sale proceed. Indeed, it is more likely that if the proper figures had been provided, CCC would have been content for the sale to proceed at the lower price. In my view, the proper measure of damages for breach of fiduciary duty by Mr Neale is the difference between the price that was paid and the true value of the business at the date of purchase. I do not accept Mr Neale’s submission that there is no evidence of true value. He did not assist the Court by submissions or evidence that would cast light on this issue. Doing the best that I can with the available evidence,[49] it seems to me that the best guide to the true value of the business is the price that would have been paid if the correct EBITDA figure had been used rather than one that was fraudulently inflated. That is the methodology that was agreed by commercial parties at the relevant time. If that value is used, then the difference between the price paid and the true value is $4,099,114.45. Mr Neale should also pay interest on that amount.
[49]Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64.

CCC claims exemplary damages of $50,000 against Mr Neale. Again, in my view, exemplary damages having already been awarded in relation to the conspiracy to defraud claim, no further punitive nor deterrent effect would be achieved by an award of exemplary damages in respect of the breach of fiduciary duties.

In addition to the breach of fiduciary claim, CCC also pleaded that Mr Neale received a secret commission which amounted to 3 per cent of the purchase price paid by CCC to CCC Old Co. The relevant principle was stated by Latham CJ in Peninsular and Oriental Steam Navigation Co v Johnson[50] in the following terms:

If A is dealing with B through A's agent C, that agent cannot, without disclosure to A, take and retain a commission received by him from B in respect of that dealing.[51]

[50](1938) 60 CLR 189.

[51]Ibid 215.

Mr Neale did not disclose two payments that Dawn Trading received from a bank account in the name of CC Technologies (one of Kain’s companies) after the sale.

As I have noted previously, Mr Neale did not give evidence. However, Kain did give evidence about the payments made to Dawn Trading after settlement of the sale. He denied that a commission was paid to Mr Neale. As will be seen from what follows, however, the documentary evidence (including emails authored by Kain) is consistent with the payment of such a commission.

Settlement of the sale took place on 29 February 2008. The net amount received after payment of the debt owed to CCC Old Co’s financier was $9,239,490.65.

On 4 March 2008, Kain sent an email to his son, Kevin, which included his bank account details and then continued:

Also advise me when we wish to pay Chris and what amount ? he will
issues invoice to Ackland Forge Pty Ltd.,.
Any thing you want me to do and can do please let me know.
You have a nice day and God bless you and your family.

Kain’s evidence about this email was that the reference to ‘Chris’ is a reference to his friend, Chris Zhao, who was to be paid a commission of $15,000 by his son, Kevin, for arranging for Mr Zhao’s mother to invest in one of Kevin’s companies. Kain gave evidence that the commission to Mr Zhao has not been paid. I do not accept Kain’s evidence about this email. Correspondence about a commission to be paid to Mr Zhao was sent by Kain to his son almost a year earlier. Any commission to Mr Zhao was not in any way related to the sale of the CCC Old Co business to CCC. There is no evidence of any invoice from Mr Zhao to Ackland Forge. Mr Zhao was not called to give evidence (as might have been expected) and no explanation was given for his absence. On the other hand, as I will describe in more detail below, Dawn Trading did issue an invoice to Ackland Forge for approximately 3 per cent of the amount received by CCC from the sale. It is probable that the ‘Chris’ referred to in this email is Mr Neale.

On 11 March 2008, $1.5 million was paid to Kain’s company, CC Technologies Pty Ltd. His evidence was that this was part of a gift from his son, Kevin, on the sale of the CCC Old Co business. In cross‑examination he said that it was ‘sort of’ for his interest (through a unit trust) in CCC Old Co.

On 14 March 2008, CC Technologies paid $250,000 to Dawn Trading.

On 5 May 2008, Kain sent his son an email asking him to let him know as soon as possible how much Ackland Forge should send an invoice for as people were waiting for payments from him.

On 19 May 2008, Dawn Trading invoiced Ackland Forge for $262,473.82 plus GST of $26,247.38 making a total for the invoice of $288,721.20.

On 21 May 2008, CC Technologies paid $38,721.20 to Dawn Trading.

In an email of 10 June 2008, Kain wrote to his son about his financial position. In part of the email he explained that although he had received $2.5 million from the sale of their 75 per cent interest in the business, he only retained $209,000. He said that he had used the balance of the sale proceeds to pay his wife, debts and business sale commission of $250,000. Kain gave evidence that he used the term ‘sale commission’ because he had a bad relationship with his wife and Kevin and he did not want to tell them that he used a lot of money to investigate issues concerning his business venture in China that had failed. Kain’s evidence was that the payments that were made to Dawn Trading were the last amounts that he had to repay to Mr Neale, based on what Mr Yip told him. For the reasons given above, I do not accept that there was any loan from Mr Neale or Dawn Trading to Kain or Ackland Forge.

On 16 June 2008, Kain sent his son an email seeking his assistance to contact their accountant to advise him how to handle the ‘commission payment and invoice etc’. Kain gave evidence that the commission payment was for Chris Zhao not Mr Neale. Again, I do not accept Kain’s evidence. There was simply no connection between Mr Zhao and the sale of the CCC Old Co business and the payment of a commission to Mr Zhao arose 12 months earlier. It seems to me far more likely that the email was about payment of a commission to Mr Neale, particularly when regard is had to the invoice issued by Dawn Trading to Ackland Forge.

Ackland Forge’s accountant prepared a reconciliation of that company’s taxable income for the year ended 30 June 2008. That reconciliation describes an amount of $262,474 as ‘Commission on Sale re CC Containers’. That is the amount (excluding GST) included in the invoice of 19 May 2008 from Dawn Trading to Ackland Forge.

Mr Neale submitted that the case against him had not been pleaded based on payment of a sales commission to him and that what was pleaded was that by reason of his knowledge of the repair fraud he received a secret commission, being 3 per cent of the purchase price. Mr Neale submitted that the net amount that CCC Old Co received after payment of financiers was far less than the full purchase price. He submitted that it is difficult to infer that the amount paid to Mr Neale is a sales commission of 3 per cent, when the 3 per cent figure is based on only part of the sale price. The amount of $288,721.20 is 3.12 per cent of the net amount of $9,239,490.65 received by CCC Old Co on the sale (after payment of its financier). Mr Neale submitted that a figure of 3.12 per cent is not an obvious figure from which it may be inferred that the payment represented a commission to Mr Neale. Further he noted that both payments were made some time after settlement of the sale and, in the case of the second payment, nearly three months after settlement of the sale transaction. Taking those facts together, Mr Neale contended that the necessary inferences to support a finding of payment of a secret commission to him are not available.

In the absence of other cogent evidence, and based on the documentary evidence that I have set out above, it seems to me probable that the payments to Dawn Trading after the sale of the CCC Old Co business were a secret commission received by Mr Neale. It does not matter that the payments were not made directly to him by CCC Old Co.[52] Indeed, Mr Neale accepts this. It is clear that the payments were derived from that source. There is a sufficient connection between that payment and the payments ultimately received by his company, Dawn Trading.
[52]Fyffes v Templeman [2002] 2 Lloyds Rep 643.

It does not strike me as odd that the payment is not a rounded percentage of either the full purchase price or the net amount received by CCC Old Co. Whilst one might expect a legitimate commission to be charged that way, it is not to be expected where fraud is involved — an odd figure is less likely to raise suspicion. It is true that the payments were made after the settlement of the sale of the business. However, the largest part of the payment was made within two weeks of the settlement. The emails after that time, which I have described above, explain the delay before the second payment.

Mr Neale accepted that if the claim against him for breach of fiduciary duty and secret commission were made out, the Plaintiffs would also succeed against him in their claims for breach of his statutory duties and misleading and deceptive conduct in relation to the sale of the business. Those claims have also been made out.

Container movement fraud

The container movement fraud started some years after the repair fraud. As I noted earlier,[53] shipping customers were charged fees on entry and/or exit of a container from the CCC depot. This fraud involved charging for containers moving in and out of the depot even though the container did not move from the depot. These false charges were sometimes referred to as ‘ghost lifts’, ‘X lifts’, ‘X′s’ or ‘X releases’. Mr Nguyen entered the false charges into the computer system on a daily basis. The weekly target amount for this fraud was between $30,000–$40,000 of false charges.
[53]See above [14].

The container movement fraud was not directed towards MSCA. In all likelihood, any false charges to MSCA would have been discovered because of the systems that it had in place to monitor the movement of containers. Instead, the main target was APL.

Again, steps were taken to make it difficult to discover the fraud, including doctoring the electronic information that was sent to the shipping line customers about their containers.

On one occasion in April 2008, a customer detected that it had been charged for shipping container movements that could not have occurred. In their email of complaint to Mr Lee, the customer gave a number of examples where charges had been made for movement of containers in and out of the depot four or five times over a period of a few weeks. As a result, a credit note was issued to the customer to cover up the fraud.

Mr Nguyen gave evidence (which I accept in the absence of any evidence to the contrary) that Kevin and Mr Lee both knew about and encouraged the practice of entering false container movement charges into the computer system. The documentary evidence is consistent with this. An example is the email which is set out in [23] above. As I noted, the reference to ‘lifts’ and ‘lift rates’ is to the false container movement charges.

In April 2010, APL contacted Mr Lee and Mr Nguyen, because there was a discrepancy between the amount that it had been charged for storage and container movements on the relevant invoice and the supporting documents. Until 5 June 2009, CCC Old Co and later CCC used a computer program, C‑TOL, to record the arrival, storage and departure of shipping containers as well as the nature and amount of any maintenance and repairs performed on the shipping containers whilst the containers were at the CCC premises. From 6 June 2009, C‑TOL was replaced with a computer program called Maximas. When Mr Lee responded to APL’s April 2010 query, he blamed the problem on this new computer program, Maximas. He confirmed that the amount overcharged of approximately $41,000 would be refunded. That refund was paid out of the bank account of his company, Lee Holdings (Australia) Pty Ltd (not the account of CCC).

This ruse did not dissuade APL from investigating what it had been charged on other occasions. On 1 November 2010, APL sent a letter of demand to CCC and MSCA in respect of the false container movement charges that it had been able to identify. APL sought payment of the amount of the overcharges, plus interest and costs. APL noted that in April it had been reimbursed the amount of approximately $41,000 and set out the explanation that had been given by Mr Lee. Consequently, APL sought full reimbursement for the overcharges made and an explanation for how the overcharging had occurred.

CCC has paid over $700,000 to shipping lines in settlement of their claims for overcharging in respect of false container movements. The Plaintiffs concede that they cannot recover the amounts repaid to shipping lines by reason of the container movement fraud. In that regard, they accept that CCC should not have been paid those amounts in the first place and therefore cannot be said to have suffered any loss by being forced to repay them. However, they maintain that they have suffered loss in respect of the amount of interest of $24,126 that they paid to the shipping lines by reason of the container movement fraud. In addition, they claim interest on that amount. They also maintain a claim for an award of exemplary damages in the sum of $10,000.

The claim is brought against Kevin and Mr Lee for the tort of conspiracy. Their co‑conspirators are alleged to be Mr Nguyen and Mr Ho (for part of the period), although no claim is brought against them. As Kevin and Mr Lee were in senior managerial positions at CCC at the time (Managing Director and Operations Manager respectively), the Plaintiffs also allege that they breached their fiduciary duties by reason of the container movement fraud.

Mr Lee’s defence pleaded that he acted under the direction and instruction of Kevin in issuing invoices to customers that included charges for the entry and exit of containers that did not or may not have occurred. He also alleges that through Kevin’s knowledge and the knowledge of Mr George Pantzoglou (another CCC Old Co employee), CCC was aware of the basis on which its customers were being invoiced in respect of container movements and both consented to, and ordered, the continuation of that manner of invoicing. There is no evidence of what (if any) role Mr Pantzoglou played, nor what knowledge he had. Whilst it is true that Kevin knew about the container movement fraud, that is insufficient to defeat CCC’s claim. Otherwise, directors, officers and senior employees would always be able to defeat claims against them for breach of their fiduciary duties and the commission of the tort of conspiracy against the company.

In my view, both claims have been made out against Kevin and Mr Lee. The documentary and oral evidence to which I have made reference above, makes it clear that from about early 2008, Kevin, Mr Lee and Mr Nguyen acted in combination in the performance of the container movement fraud and thus conspired to injure CCC. In this regard, they caused false container movement invoices to be issued to APL and other shipping lines. CCC is entitled to an award of damages of $24,126 plus interest. Again, an award of $10,000 for exemplary damages is warranted. It is clear that Kevin and Mr Lee consciously engaged in this wrongdoing without any regard for the rights of the owners of the containers.

Transport fraud

CCC provides shipping container transport services to its customers by transporting containers from the container yard to the wharf or railway yard. After MSCA purchased the business in February 2008, CCC outsourced this work to a separate transport business which in turn engaged subcontractors to provide the transport. CCC invoiced its customers for the costs of transport and retained a margin.

In January 2009, a new fraud began to take shape. Mr Lee told some of the CCC employees that he was taking over transport with the approval of Kevin. To this end, Mr Lee established a transport business, CC Cartage.[54]
[54]Lee Holdings (Australia) Pty Ltd trading as CC Cartage.

On 16 January 2009, Mr Lee met with John Dular, Jeremy Louey, Matthew Czepil and Chris Miller. Each of the participants at the meeting was to have a role in the CC Cartage business and, as matters transpired, they did. Mr Lee told them that they would all share in the profit made from the business. In this regard, the participants were mostly paid $500 per month cash.

In about May 2009, Mr Ellis discovered that CC Cartage, under the direction and control of Mr Lee, was undertaking transport work for CCC. Mr Ellis raised the issue with Kevin and took steps to have CC Cartage’s involvement in arranging transport terminated.

On 11 June 2009, CCC invited tenders for cartage of empty containers. Mr Lee submitted a tender on 25 June 2009. Mr Ellis sent an email to Kevin enquiring as to whether this was a tender on behalf of CC Cartage or CCC, because if the tendering party was CC Cartage this would give rise to a conflict of interest. Mr Lee unsuccessfully attempted to dissuade Mr Ellis from the view that there was a conflict.

Unbeknown to Mr Ellis, CC Cartage continued to undertake the transport work. In this regard, the deception became more complex and involved the use of the name of a company, African Trans Pty Ltd, which did undertake some legitimate transport work for CCC. Yasin Basha is its director and shareholder.

In mid‑August 2009, CCC received a letter which appeared to be from African Trans Pty Ltd tendering for the cartage business. Mr Basha and his wife, Rosemary Basha, both gave evidence that the letter had not been written by them and was not written on authentic African Trans letterhead. Although it contained the correct address and ABN[55] for African Trans, the telephone numbers were not theirs. They never submitted a written proposal for the cartage business and did not have any meeting with anyone from CCC as was suggested in the letter. The rates set out in the letter were higher than the amounts that African Trans charged CCC for transporting containers.
[55]Australian Business Number.

CCC awarded the cartage contract to ‘African Trans’. This was a front for CC Cartage. Part of the deception included the creation of false African Trans invoices (which the Bashas confirmed had not been prepared by them, nor seen by them before this litigation began). Those invoices contained an address and bank account details that do not belong to African Trans. Mr Nguyen was involved in this deception. At the direction of Mr Lee, he physically altered invoices that had been issued by CC Cartage to make them appear that they were accounts from African Trans.

A further element of the deception included a circular letter that was sent to customers of CCC. At the direction of Mr Lee, Mr Nguyen typed the body of the circular and also added CCC’s letterhead to make it look authentic. The circular informed customers that a new bank account would operate from 28 September 2009 and that all payments due to CCC should be made to that account from then on. The circular stated that transport payments were to be separated from payments for repairs and storage. The account details set out in the circular were not for a CCC account but rather for an account controlled by Mr Lee. Payments were made by customers to the false CCC account.

The real African Trans, in effect, acted as a subcontractor to CC Cartage. In this regard, the Bashas did not render formal invoices but instead submitted daily run sheets and were paid on that basis. From at least October 2009, Lee Holdings started to pay African Trans.

CCC claims Kevin, Mr Lee and Lee Holdings unlawfully conspired to injure CCC by unlawful means by engaging in the transport fraud. CCC also claims that Kevin and Mr Lee breached their fiduciary and, in the case of Kevin, statutory, duties. It claims compensation of $814,351.85.

Whilst the direct evidence against Kevin is less compelling in relation to his involvement in this fraud, there is sufficient evidence from which it may be inferred. Mr Ellis raised the issue of CC Cartage’s involvement in providing transport services with Kevin in about May 2009 and observed that there was a conflict of interest for Mr Lee in operating CC Cartage and that any margin that was being made on the transport operation should remain with CCC. It was Kevin’s responsibility to resolve the issue. Kevin was copied on subsequent emails when Mr Lee openly sought to tender for the transport business. Mr Ellis again raised with Kevin the issue of the inappropriateness of CC Cartage undertaking the transport work. Still later, Mr Ellis contacted Kevin when an invoice was received from CC Cartage noting that it was not acceptable that CC Cartage was involved. When Mr Lee tried to persuade Mr Ellis that his concerns were misplaced, he forwarded a copy of his emails to Kevin. The fraud was perpetrated at a time when Kevin was part of the management team and on‑site at the CCC depot.

The pleaded defence of Mr Lee and Lee Holdings to this claim was that CCC knew (through Kevin) that Lee Holdings (as CC Cartage) was providing subcontracted transport services to CCC. For the reasons already stated above, given Kevin’s role as a participant in the conspiracy, his knowledge of the fraud is insufficient to defeat the claim of CCC. Mr Lee also pleads that the amount charged by CC Cartage was less than charges made by a third party and that it did not disadvantage CCC. There is no evidence to support those allegations.

In my view, CCC has made good its claims and is entitled to an award of $814,351.85 plus interest against Mr Lee, Lee Holdings and Kevin.

CCC also claims exemplary damages of $10,000. In my view, the wrongdoing of these Defendants in regard to the transport fraud is reprehensible and warrants censure by the award of exemplary damages. The fraud was perpetrated using the ruse of African Trans as a legitimate transport provider in circumstances where Mr Lee and Kevin knew that it was not acceptable to CCC that Mr Lee conduct the very transport business that he continued to operate for CCC’s customers to the detriment of CCC.

Diesel fraud

This fraud involved the wrongful taking of diesel which belonged to CCC. The claim is brought against Mr Lee alone. He did not file a defence to this part of the claim against him.

When African Trans began working for CCC, Mr Basha met with Mr Lee, another CCC employee and some other drivers. In effect, Mr Lee told them that they were now working direct for CCC and that CCC would supply them with diesel fuel with the cost of that fuel to be deducted from the amount that they were to be paid for their transport services. So it was that African Trans was paid a net amount after deduction of fuel costs. After a while, Mr Basha asked Mr Lee if he could pay for the fuel by cheque rather than by way of deduction. African Trans’ cheques in payment for the fuel were made out to Mr Lee. Mr Basha thought that Mr Lee owned CCC. In total, African Trans paid $61,600 by cheques drawn in favour of Mr Lee.

There was another part of the fraud which involved DNEPR Enterprises which provides subcontract transport services to CCC. In about July 2009, Mr Lee spoke to one of DNEPR’s drivers, Edward Zolatarev. He told Mr Zolatarev that if he wanted to stay with CCC as a subcontractor, then he would have to do some personal favours for Mr Lee delivering containers to Port Melbourne. Mr Zolatarev acceded to this request and made deliveries twice a week. On each occasion, he would bring his truck loaded with empty 1000‑litre drums to the CCC yard after hours. Under Mr Lee’s instruction, CCC employees unloaded the drums and filled them full of CCC diesel fuel. The drums were then taken away by Mr Zolatarev to meet another truck at Port Melbourne. The containers were unloaded from his vehicle to the other truck. Mr Zolatarev would then wait for about an hour and a half for the other truck to come back with the empty containers which were reloaded onto his truck. This continued until about November 2010.

The financial controller for CCC produced a graph which depicts the diesel used within the CCC yard before, during and after the diesel fraud. It evidences that at least $822,523.33 worth of CCC’s diesel fuel was converted by the twice weekly deliveries of fuel to Port Melbourne.

CCC has made out its claim against Mr Lee in respect of the conversion of the diesel fuel. In this regard, I accept CCC’s submission that the evidence makes out that Mr Lee dealt with CCC’s diesel fuel in a manner which was repugnant to CCC’s immediate right to possession and did so with the intent of depriving CCC of its immediate right to possession of that diesel fuel.[56] CCC is entitled to an order that Mr Lee pay to it the sum of $884,123.33.[57]
[56]Penfolds Wines Pty Ltd v Elliott (1946) 74 CLR 204, 229.
[57]That is the amount of the diesel fuel transported to Port Melbourne in the 1000‑litre drums ($822,523.33) plus the amount of diesel sold to African Trans ($61,600).

CCC also seeks exemplary damages of $10,000. Again, such an award is warranted. Mr Lee’s wrongdoing was carried out in complete and utter disregard of CCC’s ownership rights in respect of the fuel. His conduct is abhorrent and justifies an award of exemplary damages to punish and deter.

Container sale fraud

This fraud involved the theft and improper sale of containers. It began in about 2008. Mr Lee was centrally involved. In part, the fraud was perpetrated by changing the identification plates on containers. When a container is manufactured, a metal decal is placed on each side of the container which identifies the container. It is like a registration number. The decal is made up of letters and numbers. In addition, the same registration details are stamped on the front of the container. Once the identification plates were changed, the containers were then sold for cash by Mr Lee.

In addition to Mr Lee, there were a number of other people involved in this fraud. One of them was Mustafa Songur. For about the last six years, his company, MS Containers Pty Ltd, has repaired shipping containers for CCC. From about May 2010, Mr Songur changed the registration numbers on containers by replacing the decals and grinding down the number stamped on the container. He did this because Mr Lee threatened to cancel CCC’s contract with his company if he did not do so. Mr Lee paid Mr Songur $50 in cash for each container.

Mr Nguyen was also involved in this fraud as was Lawrence Charles, a forklift driver who works for CCC. At least every second weekend between about 2007 and 2009, they were instructed by Mr Lee as to which containers were to have plate details changed. The identified containers would be moved and placed in separate stacks on the Saturday. On the Sunday, they would remove the decals off the containers, replace them with new ones and use a cleaning product to make the new decals look old. Mr Nguyen was also involved in the grinding down of the stamped numbers. Once this work was done, the containers were returned to a stack. Mr Lee paid Mr Charles $100 in cash for the Saturday work and $200 for Sundays.

If a container was wrongfully sold, then when the proper owner called for it, a problem arose, because the container was not available. This was addressed by taking another replacement container and changing the lettering and numbering to match the stolen container’s information. In this way, the theft and wrongful sale of the containers was hidden.

Mr Lee did not file a defence to this part of the claim against him. He is liable for the conversion of the containers which he sold wrongfully. He intentionally dealt with them in a manner which was repugnant to CCC’s immediate right to possession of them.[58]
[58]Penfolds Wines Pty Ltd v Elliot (1946) 74 CLR 204, 229.

CCC suffered loss because it was required to pay the third party owners of some of the converted shipping containers. In this regard, it has paid a total of $1,080,114 to shipping lines in settlement of their claims for missing containers. CCC is entitled to an award of damages for conversion in that amount together with interest. Exemplary damages of $10,000 are also sought against him. I will order that he pay that amount by way of exemplary damages. Again, Mr Lee’s wrongdoing, in the circumstances, was undertaken in complete disregard of the rights of CCC.

Conclusion

For the foregoing reasons, the Plaintiffs will succeed in each of their claims against the Defendants. I will ask the parties to bring in minutes of orders to reflect these reasons and to address me as to the question of costs.

[2014] VSC 151

10 April 2014