Connective Osn v Parkyn
[2018] VSC 697
•2 November 2018
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE COMMERCIAL COURT | Not Restricted |
S ECI 2018 2033
| CONNECTIVE OSN PTY LTD (ACN 106 761 326) and CONNECTIVE SERVICES PTY LTD (ACN 107 366 496) | Plaintiffs |
| v | |
| ERIC NORMAN PARKYN & ORS | Defendants |
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JUDGE: | DIGBY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 2 November 2018 |
DATE OF RULING: | 2 November 2018 |
CASE MAY BE CITED AS: | Connective OSN v Parkyn |
MEDIUM NEUTRAL CITATION: | [2018] VSC 697 |
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EQUITY – Fiduciary relationships – Accessorial liability – Liability for knowing receipt – Liability for knowing assistance – Whether defendant received trust property – Whether defendant knew of dishonest and fraudulent design – Whether funds transferred in breach of fiduciary duty – Barnes v Addy (1874) LR 9 Ch App 244.
PRACTICE AND PROCEDURE – Freezing order – Prima facie case – Risk of dissipation of assets – Ex parte application – Where allegations involve fraud and dishonesty – Where allegations involve pattern of fraudulent and dishonest conduct – Where allegations involve deception of public authorities – Application granted – Supreme Court (General Civil Procedure) Rules 2015 r 37A.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M Clarke QC | Mills Oakley |
HIS HONOUR:
Urgent ex parte application
By Summons dated 1 November 2018, the plaintiffs applied for interim asset preservation orders (freezing orders) against the first, second and third defendants’ assets up to a value of $970,660,59. The application was heard ex parte on 2 November 2018.
Factual background
In 2009, the plaintiffs retained Wellingtons Accountants (Wellingtons) as tax agents for the preparation of tax returns.
Wellingtons employed Mr Eric Norman Parkyn (the first defendant). The first defendant was the tax agent responsible for the affairs of the plaintiffs.
The first defendant is the director and secretary of Thirty5 Group Pty Ltd (the second defendant) and Flight 23 Nominees Pty Ltd (the third defendant). The second defendant is a wholly-owned subsidiary of the third defendant. The second defendant holds a bank account with the Commonwealth Bank of Australia (CBA and the CBA account).
The plaintiffs draw attention to a number of transactions executed at the direction of the first defendant, in his capacity as tax agent for the plaintiffs, between September 2015 and October 2015.[1]
[1]Plaintiffs’ Submissions, 1 November 2018 (Plaintiffs Submissions), [6].
With respect to the second plaintiff, these transactions include the following:
(a) Between September 2015 and November 2015, the first defendant prepared and sent tax returns to a representative of the second plaintiff for FY13–14, assessing the total tax payable to the Australian Taxation Office (ATO) as $396,678.30;[2]
[2]Plaintiffs Submissions, [4(vi)(a) and (b)]; Affidavit of Glenn Lees, 1 November 2018 (Lees Affidavit), [12]–[13].
(b) On 17 November 2015, the ATO received a payment of $396,678.30 from the first plaintiff.[3] This payment was made to satisfy the purported tax liability outlined in subparagraph (a) above. Given the first defendant had not lodged the tax returns at this time, $396,678.30 stood to the credit of the second plaintiff with the ATO; [4]
[3]Affidavit of Andrew Butler, 1 November 2018 (Butler Affidavit), [15(a)]; Lees Affidavit, [14(a)].
[4]Butler Affidavit, [15(a)].
(c) On 30 November 2015, unbeknownst to the plaintiffs, a tax return was lodged by Wellingtons for the second plaintiff for FY13–14 assessing the total tax payable as $nil;[5]
[5]Plaintiffs Submissions, [4(vi)(f)]; Lees Affidavit, [15(c)]; Butler Affidavit, [22(a)].
(d) On 8 December 2015, the ATO refunded $396,678.30 to the second plaintiff. However, the plaintiffs depose that the first defendant caused this amount to be paid into a bank account with the CBA that was operated by the second defendant;[6]
[6]Plaintiffs Submissions, [4(vi)(g)]; Butler Affidavit, [22(b)].
(e) On 23 February 2018, the ATO assessed that the second plaintiff was liable for $305,363 in franking deficit tax, and imposed such a liability on the second plaintiff;[7]
(f) On 17 and 20 September 2018, the ATO received payments, purportedly on behalf of the second plaintiff, in the amounts of $100,000 and $50,000 respectively.[8] The plaintiffs submit these payments were made by the first defendant using stolen funds;[9] and
(g) On 12, 16 and 19 October 2018, the ATO received payments, purportedly on behalf of the second plaintiff, in the amounts of $100,000, $195,305 and $772.36 respectively.[10] The plaintiffs submit these payments were made by the first defendant again using stolen funds.[11]
[7]Plaintiffs Submissions, [4(vi)(h)]; Butler Affidavit, [(15)(f)].
[8]Butler Affidavit, [15(g) & (h)].
[9]Plaintiffs Submissions, [4(vi)(i) & (j)]; Butler Affidavit, [23].
[10]Butler Affidavit, [15(i), (j) & (k)].
[11]Plaintiffs Submissions, [4(vi)(k), (l) & (m)]; Butler Affidavit, [23].
Further, with respect to the first plaintiff, the plaintiffs impugn the following transactions facilitated by the first defendant:
(a) In November 2015, the first defendant prepared and sent tax returns to a representative of the first plaintiff for FY13–14, assessing the total tax payable to the ATO as $1,246,149.60;[12]
[12]Lees Affidavit, [12]–[13].
(b) In November 2015, these tax returns were signed by a representative of the second plaintiff and returned to the first defendant for lodgement with the ATO. The plaintiffs believe that the returns were not thereafter lodged;[13]
[13]Plaintiffs Submissions, [4(vii)(b)].
(c) On 17 November 2015, the ATO received a payment of $1,246,149.60 from the first plaintiff.[14] This payment was made to satisfy the purported tax liability referred to in subparagraphs (a) and (b) above. Given the first defendant had not lodged the tax returns at this time, $1,246,149.60 stood to the credit of the first plaintiff with the ATO;[15]
[14]Butler Affidavit, [16(a)].
[15]Butler Affidavit, [16(b)].
(d) On 24 November 2015, unbeknownst to the plaintiffs, a tax return was lodged by Wellingtons for the first plaintiff for FY13–14 assessing the total tax payable as $181,192;[16]
(e) On 5 May 2016, the ATO issued a cheque refund to the first plaintiff in the amount of $1,093,588.51.[17] The plaintiffs submit that they did not receive this cheque;[18] and
(f) On 11 August 2017, the ATO allowed a credit for a stale refund cheque.[19] Then, on 18 August 2017, the ATO made a refund for FY13–14 in the amount of $402,292.34.[20] The plaintiffs depose to their belief that the first defendant caused this amount to be paid into a bank account with the CBA that was operated by the second defendant[21] and that such a transaction was never authorised.[22]
[16]Plaintiffs Submissions, [4(vii)(e)]; Butler Affidavit, [16(c)].
[17]Butler Affidavit, [16(d)].
[18]Plaintiffs Submissions, [4(vii)(f)].
[19]Plaintiffs Submissions, [4(vii)(g)]; Butler Affidavit, [16(e)].
[20]Butler Affidavit [16(f)].
[21]Butler Affidavit, [23].
[22]Affidavit of Ayse Aslan, 1 November 2018, [6(j)].
Broadly, the plaintiffs allege the first defendant made a number of fraudulent assertions in tax returns in the first defendant’s capacity as tax agent, and that the first defendant received the plaintiffs’ monies paid as purported ‘refunds’ by the ATO, and wrongfully funnelled those monies through the bank account of the second defendant.[23]
[23]Butler Affidavit [22]–[23].
On the basis of the above asserted facts, the plaintiffs’ generally-indorsed Writ dated 1 November 2018 identifies ‘breach of fiduciary duty’ and ‘fraud’ as the plaintiffs’ relevant causes of action against the first to third defendants. The plaintiffs claim, inter alia, ‘equitable compensation,’ ‘damages for fraud,’ and ‘a declaration’ that certain amounts held by the ATO and paid into the bank accounts of the second and third defendants are held on constructive trust.
Relevant legal principles for freezing orders
As earlier explained, this was an ex parte application for freezing orders over the defendants’ assets for up to $970,660,59.
The decision to grant an interlocutory freezing order is discretionary.[24] It is appropriate to briefly set out the general principles attending the Court’s discretion.
[24]Trkulja v Efron (t/as Efron & Associates) [2014] VSCA 76 [28].
In Patterson v BTR Engineering (Aust) Ltd,[25] Gleeson CJ explained:
The remedy is discretionary, but it has been held that, in addition to any other considerations that may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant’s absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.[26]
[25](1989) 18 NSWLR 319.
[26]Ibid 321–22.
Meagher JA explained the principles in a similar manner:
To obtain such an injunction a plaintiff must prove two ingredients: first, that he has a prima facie case against the defendant, and secondly, that there is some risk of a dispersal by the defendant of his assets so as to defeat the value of the plaintiff’s victory if he ultimately wins.[27]
[27]Ibid 326.
The plaintiffs further point out that, as the applicants, they bear the onus of establishing risk by evidence and not mere assertion that there is a sufficient likelihood of risk to justify an order preserving the assets.[28]
[28]Plaintiffs Submissions, [5].
In Frigo v Culhaci,[29] the New South Wales Court of Appeal observed:
A plaintiff must establish, by evidence and not assertion, that there is a real danger that, by reason of the defendant absconding or removing assets out of the jurisdiction or disposing of assets within the jurisdiction, the plaintiff will not be able to have the judgment satisfied if successful in the proceedings. There has been much debate as to the precise degree of risk which must be shown: see generally Patterson. What is clear is that mere assertions that the defendant is likely to put assets beyond the plaintiffs reach will not be enough.[30]
[29][1998] NSWCA 88.
[30]Ibid 8 (citations omitted).
These passages were approved by Warren CJ and Santamaria JA in Trkulja v Efron (t/as Efron & Associates).[31]
[31][2014] VSCA 76 [28]–[30].
In relation to the specific considerations related to the principles referred to above, although an interlocutory freezing order is functionally similar to an interlocutory injunction, the basis for these orders is distinct. The principal purpose of an interlocutory injunction is to preserve the status quo pending trial of the plaintiffs’ legal or equitable right. The foundation of such relief is in equity. In considering whether to grant an interlocutory injunction, the Court considers, inter alia, whether the balance of convenience weighs sufficiently in favour of an intrusion against the rights of the respondent.
However, the principal purpose of an interlocutory freezing order is to prevent a frustration of the Court’s processes by obviating the risk that a respondent who is a prospective judgment debtor may dispose of or dissipate, amongst other things, assets pending determination of the applicant’s claim at trial. Here, pertinent considerations addressed as part of the ‘balance of convenience’ in the setting of an interlocutory injunction application are assimilated into a more global enquiry as to whether the Court should make the interlocutory order sought so as to prevent the possibility of an eventual frustration of the subject judicial processes.
This point was made by Campbell J in Davis v Turning Properties Pty Ltd:[32]
One consequence of a Mareva order not being a species of injunction is that, in deciding whether a Mareva order should be granted, the court does not operate in the conceptual frame, appropriate to decisions about whether to grant an interlocutory injunction, of enquiring whether there is a serious question to be tried, and, if so, where the balance of convenience lies. Rather, the court adopts the conceptual frame used for other interlocutory decisions, of enquiring whether there is prima facie evidence of those facts which are the basis for the grant of the particular interlocutory relief in question and a reasonably arguable basis for any question of law involved.[33]
[32](2005) 222 ALR 676.
[33]Ibid 687 [37] (Campbell J).
Accordingly, there are two principal considerations for the Court in deciding whether to grant this discretionary relief in this matter:
(a) Whether the plaintiffs have established a prima facie case in respect of their identified cause(s) of action against the defendants with a sufficient likelihood of success at trial on the facts as currently presented to found the asserted basis for the relief sought, taking into account the balance of convenience like considerations referred to in (b) below, the risk of disposal or dissipation, and any other related factors which require consideration; and
(b) Whether there is a reasonable possibility, risk or danger, in contrast with an unreal or fanciful one, that the defendants’ assets will be removed from the jurisdiction or otherwise disposed of or dissipated, such that the plaintiffs, if successful in the proceeding, will be, or are, at risk of being unable to have their judgment satisfied.
In addition, the Court will not make a freezing order unless the applicant is prepared to offer an undertaking as to damages similar to the undertaking kind required in an application for an interlocutory injunction.[34] As recorded in the orders I shall make, the plaintiffs offered such an undertaking in this case.
[34]Third Chandris Shipping Corp v Unimarine SA [1979] QB 645, 669 (Lord Denning MR).
Considerations
Prima facie case against the first defendant for breach of fiduciary duty
The plaintiffs’ claims against the first defendant include claims for breach of fiduciary duty. The breach of that alleged duty is said to arise, essentially, from the misappropriation of the plaintiffs’ funds.
While the relationship between an accountant or tax adviser and his or her client may not be an ‘established’ or ‘presumptive’ category of fiduciary relationship,[35] I consider that the plaintiffs, on the present state of the evidence, have satisfied me that there is here a serious issue to be tried, or put another way, a prima facie case, for the existence of an ad hoc fiduciary relationship between the first defendant and the plaintiffs in these circumstances.
[35]Townsend v Roussety & Co (WA) Pty Ltd [2007] WASCA 40 [126]–[128].
The considerations for implication of a fiduciary relationship were explained in the following way by Mason J in Hospital Products v United States Surgical Corporation:[36]
The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.[37]
[36](1984) 156 CLR 41.
[37]Ibid 96–97 (Mason J).
In my view, as best can be evaluated at this interim interlocutory stage of proceedings, the first defendant has in these circumstances undertaken to place the plaintiffs’ interests ahead of his own in the preparation of the plaintiffs’ tax returns. As much is plain from the existence of the retainer between Wellingtons and the plaintiffs, from the first defendant’s professional obligations and from the requirements of the first defendant’s position as a tax agent employed by Wellingtons.
Further, the first defendant had the power to affect the legal and practical interests of the plaintiffs. In particular, the first defendant could make representations as to the plaintiffs’ tax obligations that would prima facie be adopted in the ATO’s assessment, and enjoyed what appears to be a unilateral discretion to direct monies received from the ATO as a tax refund into particular bank accounts. Furthermore, at the same time the plaintiffs reposed confidence in the first defendant (and Wellingtons) and gave them the autonomy and discretion necessary for the efficient finalisation of their tax affairs.
In sum, the plaintiffs were in respect of their tax affairs vulnerable to an abuse of the first defendant’s powers and discretions which arose from his position as their tax agent. Accordingly, in these circumstances, the plaintiffs have a prima facie case for breach of fiduciary duty against the first defendant.
Prima facie case against second and third defendants under Barnes v Addy
The plaintiffs also make claims against the second and third defendants under both limbs of Barnes v Addy.[38] In that case, Lord Selborne LC observed:
…strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.[39]
[38](1874) LR 9 Ch App 244.
[39]Ibid 251–52.
With respect to this passage, the High Court of Australia in Farah Constructions Pty Ltd v Say-Dee Pty Ltd[40] stated:
The form of liability referred to in the first part of the last sentence is often called the ‘first limb’ of Barnes v Addy, and the form of liability referred to in the second part of the last sentence is often called the ‘second limb’.
It has become common to describe the first limb as involving ‘knowing receipt’ and the second limb as involving ‘knowing assistance’.[41]
[40](2007) 230 CLR 89.
[41]Ibid 140–41.
I also consider that the plaintiffs have established a prima facie case on the ‘knowing receipt’ limb of Barnes v Addy against the second defendant for the following reasons:[42]
[42]Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373.
(a) the second defendant has received ‘trust property’, in the sense that the funds are impressed with equitable obligations due to the first defendant’s position as a fiduciary, as explained above;
(b) the funds in question were transferred in breach of fiduciary duty, given they were misappropriated into a personal bank account, or concealed from the plaintiffs or, at the very least re-directed without the plaintiffs’ informed consent, as well as for the reasons explained above; and
(c) given the first defendant was the sole director of the second defendant, the latter had actual knowledge of the existence of the fiduciary relationship between the first defendant and the plaintiffs and that the funds in question were transferred in breach of the first defendant’s fiduciary obligations.
Further the plaintiffs have also, I consider, demonstrated a prima facie case on the ‘knowing assistance’ limb of Barnes v Addy against the third defendant for the following reasons:
(a) there was a ‘dishonest and fraudulent design’, given, inter alia, the first defendant recorded incorrect figures on tax returns, attempted to re-direct the plaintiffs’ monies into a personal bank account, and attempted to conceal entitlements to a tax refund from the ATO;
(b) given the first defendant was the director of the third defendant, and the third defendant was the parent company of the second defendant that prima facie knowingly received trust property into its CBA account, the third defendant had actual knowledge of this dishonest and fraudulent design; and
(c) in addition to the prima facie breaches of fiduciary duty outlined above, the conduct of the third defendant, conditioned by that of the first defendant as its controlling mind, involved a transgression of ordinary standards of honest behaviour.
Risk of disposal, dissipation or dispersal of assets in the hands of defendants
In Deputy Commissioner of Taxation v Gashi,[43] Bell J made the following observation on the wording of r 37A of the Supreme Court (General Civil Procedure) Rules 2015:
I take “might” in r 37 A.05(4) to mean a reasonable possibility, not fanciful or unreal, but not necessarily more than 50%. The order makes clear that, when determining that matter, ‘all the circumstances’ must be taken into account. This would include the likely amount of the judgment, the circumstances in which the cause of action arose, the conduct of the defendants and their capacity to take the avoidance action which gives rise to the danger.[44]
[43](2010) 27 VR 127; [2010] VSC 120.
[44]Ibid [14].
The particular nature of these prima facie arguable allegations, entailing fraud and dishonesty, weigh heavily in the Court’s consideration of the various risk factors and in substance in this context displace possible prejudice to the defendants.[45] In Victoria University of Technology v Wellington,[46] Redlich J observed:
A risk of dissipation cannot be inferred merely from the fact that the plaintiff has a prima facie cause of action. One may in some cases, having regard to the nature of the plaintiff's claim, infer the existence of a risk of dissipation partly or wholly from the fact that the plaintiff has a good, arguable case. Where the plaintiff's prima facie case against a defendant involves proof of allegations of serious dishonesty, such an approach may be appropriate…[47]
[45]Bunnings Pty Ltd v McMillin [2005] VSC 131 [9].
[46]Victoria University of Technology v Wilson [2003] VSC 299.
[47]Ibid [33].
The high-water mark of the plaintiffs’ claim in relation to financial repercussion, as pleaded, is around one million dollars, and as noted above the circumstances in which the pleaded causes of action arose include allegations of fraud and dishonesty.
Furthermore, as earlier emphasised, the acts in question are not isolated incidents, but rather if established at trial, reflect a pattern of calculated dishonest conduct over two years. Broadly, the nature of the allegations imply that the first defendant, and the second and third defendants being under his control, have a propensity to be shrewd, manipulative and dishonest in their dealings with authorities such as the ATO. These allegations, identified and supported sufficiently as they are at this point, provide a basis to accept that the same tactics may well be utilised by the defendants to frustrate the processes of this Court.
Strength of relevant risk related matters
In my view, for reasons outlined above, the plaintiffs have the benefit of being in a position to demonstrate that the balance of convenience like considerations strongly favours them because there is a reasonable possibility, on the basis of the matters outlined above, that there is a real risk or danger here that the defendants’ assets will be removed from this jurisdiction or otherwise disposed of, or dissipated, such that the plaintiffs, if successful in the proceeding, will be, or are at risk of being, unable to have their judgment satisfied.
Conclusion
For the above reasons, I shall grant the plaintiffs’ application for a freezing order pursuant to r 37A of the Supreme Court (General Civil Procedure) Rules 2015. At present making such an order carries the lower risk of injustice in the circumstances.
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