Fortune Holding Group Pty Ltd v Zhang
[2016] VSC 273
•24 MAY 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2013 4855
| FORTUNE HOLDING GROUP PTY LTD (ACN 141 953 773) | First Plaintiff |
| FORTUNE HOLDING DEVELOPMENTS PTY LTD (ACN 142 122 852) | Second Plaintiff |
| FORTUNE HOMES PTY LTD (ACN 143 589 388) | Third Plaintiff |
| YI JUN QUAN | Fourth Plaintiff |
| v | |
| IAN YAN ZHANG | Defendant |
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JUDGE: | RIORDAN J |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 4, 5 MAY & 16 JUNE 2015, 6, 7, 11 APRIL 2016 |
DATE OF JUDGMENT: | 24 MAY 2016 |
CASE MAY BE CITED AS: | FORTUNE HOLDING GROUP v ZHANG |
MEDIUM NEUTRAL CITATION: | [2016] VSC 273 |
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RECOVERY – Money had and received – Misappropriation by employee – Entitlement to reimbursement for entertainment expenses – Availability of plea of non est factum – Whether agreement to pay an amount as a salary was inclusive of tax and/or superannuation entitlements.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr S J Howells | Berrigan Doube Lawyers |
| For the Defendant | In person |
HIS HONOUR:
The plaintiffs in this proceeding claim recovery of amounts allegedly misapplied by an employee, the defendant, together with damages.
Background
The undisputed relevant background facts can be shortly stated as follows:
(a)Mr Quan, the fourth plaintiff, is a Chinese citizen with substantial business interests in China. In 2003, he established a business in New Zealand and engaged a New Zealand citizen of Chinese descent as his manager. In 2008, he decided to investigate the possibility of establishing a real estate development business in Australia. In 2009, he met the defendant and in early 2010, the defendant and Mr Quan had a number of conversations which resulted in an agreement for the defendant to be employed by Mr Quan’s Fortune group of companies, the first, second and third plaintiffs, for the purpose of establishing and managing the plaintiffs’ businesses in Australia (‘the Fortune business’).
(b)As a result, the first plaintiff (‘Fortune Holding’) and the defendant entered into an employment agreement (‘the Employment Agreement’) which provided that the defendant’s employment commenced on 22 February 2010.[1]
(c)In 2012, Mr Quan discovered that the defendant had arranged for himself to be appointed as a director of a number of Mr Quan’s companies including the first to third plaintiff companies, which led to a confrontation. As a result, the the defendant was removed as a director of the plaintiff companies.
(d)In early 2013, Mr Quan carried out an investigation with respect to suspected misappropriations by the defendant, and in late April 2013, the defendant was formally dismissed from his employment.
[1]The tendered copy of this agreement was unsigned and undated but the parties agreed that the original, which could not be found, was signed.
The Claims
The plaintiffs allege that, in breach of his contractual and fiduciary duties, the defendant improperly paid or retained amounts totalling $721,468.49. The plaintiffs also claim repayment of a loan of $100,000 which brings their total claim to $821,468.49. The amounts claimed are calculated by reference to four categories, which the plaintiffs termed as follows:
(a) Misappropriations $65,960.34
(b) Loan account $833,536.89
(c) Unpaid salary ($38,840.76)
(d)Amounts paid credited to his loan
account with the plaintiffs. ($39,187.98).
The plaintiffs also claim damages arising from the defendant appointing himself as a director of Mr Quan’s companies.
The defendant admits of the loan of $100,000 and that he took $250,000 from the plaintiffs that he was not entitled to take.
Misappropriations
The plaintiffs’ claim with respect to misappropriations were as follows:
Description Amount ($) [Received/(Paid)] Pre 16 July 2012 Interest on Term Deposits 1,575.34 Solbrick loan repayment 1 50,000.00 Between 16 July 2012 and 26 April 2013 Solbrick loan repayment 2 6,958.00 Entertainment 5,922.00 After 26 April 2013 ATO GST refund 1,505.00 Total 65,960.34
Interest on Term Deposits
The interest of $1,575.34 consisted of amounts of $308.22 and $1,267.12, being interest paid on term deposits invested on behalf of the plaintiffs as follows:
(a) On 24 June 2010, the defendant invested $25,000 drawn from the plaintiffs’ account. On 24 September 2010, the sum of $25,308.22, being the principal and interest, was paid into the defendant’s account. The defendant transferred $25,000 to the plaintiffs’ account on 11 October 2010 but retained the interest of $308.22.
The defendant conceded that he was liable for this sum.
(b) On 11 August 2010, the defendant invested $200,000 of the plaintiffs’ funds in a NAB term deposit. On 22 October 2010, the principal of $200,000 and the interest of $1,267.12 were withdrawn and deposited into the defendant’s bank account. The principal was debited to the defendant’s loan account with the plaintiffs but he retained the interest.
The defendant concedes that he is liable for the sum of $1,267.12.
Solbrick loan repayment 1
On 21 July 2010, Fortune Holding, through its agent the defendant, entered into a loan agreement with Solbrick Constructions Pty Ltd and its guarantors.
On 20 April 2012, Fortune Holding and Solbrick Constructions Pty Ltd, together with the guarantors, entered into a Deed of Settlement and Release in which Solbrick Constructions Pty Ltd and its guarantors agreed to pay $650,000 by certain instalments.
By email dated 6 July 2012 to Solbrick Constructions Pty Ltd, the defendant requested a transfer of $150,000 to Fortune Holding’s account and $50,000 to his account stating ‘My uncle has been chased (sic) each day regards to Solbrick, if I can show him 150K into FHG account, it will at least shup (sic) him up for a week’. On 12 July 2012, $50,000 was paid into the defendant’s account.
The defendant concedes that this $50,000 was due to be paid to Fortune Holding but contends that it should be set off against a payment of $50,000 made by him to Fortune Holding on 16 March 2012. This sum was credited to the defendant, by Mr Russell Munday of Munday Wilkinson (the expert accountant called by the plaintiffs) in his loan account calculations, and it must therefore either be allowed here or subtracted from those calculations. For convenience, I propose to allow for it in this category, as claimed by the plaintiffs, because it makes no difference to the result.
Solbrick loan repayment 2
A trust ledger of Clamenz Evans Ellis Lawyers for Fortune Holding records deposits of $240,000 on 10 July 2012 and $25,244.52 on 24 July 2012 by ‘The Manager Fortune Holding Group’. The same trust ledger records that, on 1 August 2012, $6,958 was paid into an account, which the defendant acknowledges was his account.
The defendant is unable to identify any basis upon which he could be entitled to that payment from the Fortune Holding Group trust account; and, although he does not agree that it relates to the Solbrick loan, he concedes that the $6,958 was the plaintiffs’ money and he is liable to repay that sum.
Entertainment expenses
The defendant charged entertainment expenses to the credit card of the second plaintiff (‘Fortune Holding Developments’) in the sum of of $5,922 consisting of the following payments:
Date Restaurant Amount 8 June 2012 Toodouri Asian Fusion Restaurant, North Melbourne $150.000 9 June 2012 Music Box Karaoke/BBQ Bar, Melbourne $4,660.00 10 June 2012 Music Box Karaoke/BBQ Bar $832.00 27 June 2012 Squires Loft, Albert Park $120.000 27 June 2012 Squires Loft, Albert Park $160.000
The clause 1.5.3 of the Employment Agreement provided that Fortune Holding would ‘reimburse [the defendant] for all reasonable business-related out-of-pocket expenses which have been properly incurred in the performance of [his] duties, subject to the production of such evidence … including any relevant tax invoice’. However, expenses above $1,100 required specific approval by Fortune Holding.
The defendant contended that these entertainment expenses were authorised because in each case the entertainment was for business purposes and he had provided invoices. He submitted that the entitlement to entertainment expenses incurred for business purposes was supported by the following:
(a)The entertainment expenses were mainly incurred in entertaining the lawyers and accountants for the Fortune business. As the General Manager and sole employee of the Fortune business in Australia, he was heavily dependent on accounting and legal advice.
(b)On Mr Quan’s visits to Australia, Mr Quan would entertain the lawyers and accountants.
(c)He disclosed entertainment expenses in his monthly reports to Mr Quan and no objection was taken.
Mr Quan denied that the entertainment expenses were authorised and said that it was the general policy of the business that management employees were not entitled to incur entertainment expenses. However, he did not refer to any communication with the defendant with respect to this policy. In cross-examination, Mr Quan was shown some monthly reports which identified some ‘Business Dinners’. Mr Quan gave evidence that the defendant had telephoned him with respect to these particular expenses to get his approval. I note that Mr Quan had not suggested, in examination in chief, that he had given specific approval by telephone for specified entertainment expenses in advance. I consider it unlikely that the defendant would have telephoned Mr Quan in China to seek specific approval of such expenses and I do not accept Mr Quan’s evidence in this respect.
The defendant was unable to provide specific evidence about each of these expenses although he said that the Squires Loft restaurant was near his office and therefore it was likely that these expenses related to client entertainment. He said that the $4,660 and the $832 were spent on one night for drinks, after dinner, at the Music Box Karaoke/BBQ Bar. He said that he had taken the entire legal firm and accountants of about 15 people to drinks. Under cross-examination, he said that there was only 7 or 8 people. He conceded that the sum of $5,492 was not a reasonable amount to spend for business purposes.
Counsel for the plaintiffs contended that, although there was no evidence that the entertainment expenses were not for business purposes, I should reject the defendant’s evidence as untruthful. Except for the Music Box Karaoke/BBQ Bar expenses, I accept that the entertainment expenses were probably for business purposes and the defendant is entitled to reimbursement. I do accept the defendant’s evidence in this respect and I consider it is supported by the fact that he disclosed at least some entertainment expenses in his monthly reports to Mr Quan. Mr Quan did not object to the entertainment expenses disclosed in these reports.
However, I reject the defendant’s claim with respect to expenses of $5,492 paid to Music Box Karaoke/BBQ Bar on 9 April 2012 for the following reasons:
(a) The amount exceeds the sum of $1,100, which the Employment Agreement provides as the maximum amount for expenses that can be expended without specific approval.
(b) The amount, in my opinion, and as conceded by the defendant, greatly exceeds an amount which could be properly described as reasonable expenditure for business purposes in the circumstances.
Accordingly, I consider the amount properly recoverable from the defendant with respect to entertainment expenses is $5,492 instead of the amount calculated by Mr Munday of $5,922.
ATO GST refund
On 20 August 2015, the sum of $1,505, being a GST refund, was paid by the Australian Taxation Office into the bank account of the defendant. The GST refund was with respect to the Fortune business.
The defendant said that he had not been aware that the plaintiffs’ GST refunds were to be paid into his account; and he had believed that this payment must have been a refund to which he was entitled. However, he conceded that the GST refund was an entitlement of one of the plaintiffs and accepted that he was liable for this sum.
Summary of misappropriations
On the basis of the above I find that the plaintiffs have established misappropriations of $65,530.34 calculated as follows:
Interest on Term Deposits 1,575.34 Solbrick loan repayment 1 50,000.00 Solbrick loan repayment 2 6,958.00 Entertainment 5,492.00 ATO GST refund 1,505.00
Loan account of the defendant with the plaintiffs
The plaintiffs contended that the loan account between the plaintiffs and the defendant (‘the defendant’s loan account’), properly accounted for, showed that the defendant owed the plaintiffs $833,536.89 calculated as follows:
Description Amount ($) [Received/(Paid)] Pre 16 July 2012 Mr Quan 886,040.82 Paid to Evans Ellis (19,708.33) Fortune Holdings (149,896.20) Fortune Holdings (6,000.00) Fortune Holdings 990.00 Fortune Development (143,977.74) Fortune Homes 264,088.34 Between 16 July 2012 and 26 April 2013 Fortune Holdings 2,000.00 Owed by Mr Zhang 833,536.89
This calculation was as a result of a detailed reconstruction, by Mr Munday, of the plaintiffs’ accounts for the period of the defendant’s management of the Fortune business. In substance, the approach of Mr Munday was:
(a)funds transferred from the plaintiffs’ account to the defendant’s account were debited to the defendant’s loan account; and
(b)funds applied by the defendant for the purposes of the Fortune business were credited to the defendant’s loan account.
Mr Munday prepared a detailed schedule setting out all amounts debited and credited to the defendant’s loan account, together with an explanation and supporting documentation. Prior to the trial, the defendant requested and was given directions for the purposes of inspecting relevant documentation and arranging for the preparation of an expert statement in response.
The defendant conceded that the plaintiffs had advanced $886,040.82 to him for the purposes of establishing the Fortune business. He did not challenge in cross-examination the substance of Mr Munday’s contentions in his report and did not lead expert evidence or give evidence contradicting the substance of the report. In final submissions he did not identify any basis on which I should not accept the approach and analysis of Mr Munday. In particular, he did not point to any expenses, which he had incurred on behalf the Fortune Group, that Mr Munday had omitted.
Further, for the purpose of checking his conclusion that the defendant had misapplied over $800,000 of the plaintiffs’ money for his own purposes, Mr Munday analysed the evidence with respect to the personal expenses of the defendant, for the period of his employment from March 2010 until the date his dismissal in April 2013, on cars, credit cards and a property that the defendant purchased known as unit 2803 and accessory unit 7040 at 180 City Road, Southbank, Victoria.
His conclusions were that for that period the defendant’s personal expenses were $1,193,913.98 calculated as follows:
Description Amount $ BMW 1 140,421.36 BMW 2 40,195.80 VISA card 596,969.63 VISA card 134,454.94 VISA card 71,732.13 VISA card 700.00 Southbank property 209,440.12 Total 1,193,913.98
Mr Munday did a further evaluation of the credit card payments to assess what he described as luxury items. Of the credit card expenses, he assessed $561,793.56 as relating to luxury items. Mr Munday gave evidence that his assessment was based on his knowledge of the named vendor and the amount of the item. While he conceded that such an assessment was necessarily broad and subjective, a review of the transaction details confirms that it would be reasonable to contend that a substantial number did relate to luxury items. By way of example, I note the following items:
Date Transaction detail Amount 19 April 2010 Prada Australia, Melbourne $1,970.00 15 December 2010 Chanel Boutique, Melbourne $3,340.00 14 February 2011 Christian Dior Commercia, Shanghai $3,920.59 16 May 2011 Bvlgari, Melbourne $18,000.00 21 June 2011 Bvlgari, Melbourne $6,040.00 28 December 2011 Christian Dior Commercia, Shanghai $4,030.68 18 April 2012 First Tax and Duty Free, Melbourne Air $15,459.11
The defendant did not contend that these expenses were funded from sources other than the funds supplied by the plaintiffs. In fact, as at 31 December 2009, the defendant’s bank statements show a net debt of $18,061.15.
Unpaid salary
Mr Munday made an allowance of $38,840.76 in favour of the defendant for unpaid salary.
For the purposes of calculating the allowance for the defendant’s entitlement to a salary, Mr Munday assumed, in accordance with his instructions, that the defendant’s entitlement was to a gross salary of $85,000 per year inclusive of taxation and superannuation. He therefore calculated the defendant’s unpaid salary over 37 months as follows:
Salary entitlement $276,249.87[2] Less income tax paid ($102,490.74) Total $173,759.13 Less salary paid in cash ($106,249.95) Total $67,509.18 Less superannuation paid ($28,668.42) Total Salary Unpaid $38,840.76 [2]This appears to be an excessive allowance because the product of 37 months @ $7,083.33 per month is $262,083.21. This may be explained by the fact that the defendant was employed for approximately 38 months.
Clause 1.5.1 of the Employment Agreement provided that the annual remuneration package was as follows:
The Company agrees to pay to the Employee during his employment, in consideration of the services to be provided by the Employee and the Employee at all times being ready, willing and able to perform all the duties provided by this agreement, a remuneration package of $92,650.00 per annum comprising the following components:
(a) Base salary - $85,000.00;
(b) Superannuation - $7,650.00 (ie 9% of $85,000.00); and
(c)an annual bonus equal to 30% of annual gross income of the Company (excluding GST);
together called the ‘Annual Remuneration Package’.
The defendant contended that ‘base salary’ meant that he would be paid $85,000 net of income tax. I reject that proposition for the following reasons:
(a)The gross remuneration package is shown as $92,650 per annum which comprises the base salary of $85,000 and superannuation of $7,650. If the employer agreed to take responsibility for the employee’s taxation liability, the remuneration package would have reflected the entitlement accordingly.
(b)Although employers are obliged to deduct a portion of a salary (as pay-as-you-go withholding) and pay it to the Australian Taxation Office, the liability to pay taxation is on the employee. In the absence of an express agreement for the employer to take responsibility for the employee’s tax, it would not be readily implied. In my opinion, there are no circumstances from which such an obligation could be implied in this case.
(c)The evidence of a negotiation of the salary was that the defendant informed Mr Quan that his current salary was $80,000 and Mr Quan agreed to pay him the salary of $85,000. The defendant conceded that the salary of $80,000 was gross of income tax. In my opinion, in the absence of other circumstances, one would conclude that the $85,000 would similarly be gross of income tax.
The plaintiffs contended (and Mr Munday assumed) that the agreed salary of $85,000 should include the compulsory employer’s superannuation contribution of 9% of the employee’s salary. It was submitted that this should be inferred on the basis that the oral agreement was $85,000 and the written agreement should be rectified because it was not translated to Mr Quan. I reject this submission for the following reasons:
(a)The obligation to make the superannuation contribution is on the employer.[3] In my opinion, in the absence of other circumstances, an offer to pay a salary of $85,000 would not imply that the employer’s compulsory superannuation contributions would be deducted from that sum. Such an inference would normally only be drawn if the employee was offered that sum as a ‘total package’.
(b)Clause 1.5.1 of the Employment Agreement plainly provides for the superannuation contribution to be in addition to the base salary.
[3]Superannuation Guarantee (Administration) Act 1992 s 16.
The plaintiffs contend that the Employment Agreement is not enforceable because Mr Quan signed it without it being translated. I do not accept that the signed Employment Agreement is not enforceable on the basis that it was signed by Mr Quan without it being translated. To sustain a plea of non est factum, it is necessary that the claimant prove that he or she believed that the document he or she signed had a particular character when in fact it had an entirely different character.[4] The fact that a person signed a document put before him or her for signature without making a proper inquiry does not entitle him to make a plea of non est factum.[5] There is a heavy onus on the person seeking to establish the defence that the signing of the document was not due to his or her carelessness.[6]
[4]Hue Dieu Luong v Huong Xuan Du [2013] VSC 723 [107] (Emerton J).
[5]Saunders v Anglia Building Society [1971] AC 1004, 1016 (Lord Reid).
[6] Petelin v Cullen (1975) 132 CLR 355, 359-360 (Barwick CJ, McTiernan, Gibbs, Stephen and Mason J).
There is no evidence that the contents of the document were misrepresented by the defendant or the solicitor; or that Mr Quan requested that the document be translated. In my opinion, there is no reason to believe that the solicitor did other than prepare a standard employment agreement on the basis of an instruction that the agreed salary was $85,000. Mr Quan did not give evidence that he believed that the $85,000 included the superannuation entitlement and, even if he did have such a belief, he gave no evidence of taking any action to request a translation or otherwise ascertain the critical details of the document.
The defendant gave evidence that he translated the term containing the remuneration package to Mr Quan. The defendant was candid enough to concede that he may well have accidently mistranslated the provision about the annual bonus to accord with his understanding of the agreed term. I accept his evidence that he otherwise accurately translated the remuneration package provision to Mr Quan.
The annual remuneration package term provided that ‘an annual bonus equal to 30% of the annual gross income of the Company (excluding GST)’ would be payable to the defendant. The defendant concedes that the bonus was limited to 30% of profits of the Company after expenses and income tax. As noted above, he freely conceded that he may have accidentally misinterpreted this provision to Mr Quan in a manner which reflected his belief. There was no claim by the defendant for an entitlement under the bonus provision.
I accept Mr Munday’s calculation of the unpaid salary component except for his assumption that the superannuation contributions were payable from the salary of $85,000. Accordingly, the unpaid salary allowance should be $67,509.18 being the amount of $38,840.76 as allowed by Mr Munday plus the sum of superannuation contributions for the period of the defendant’s employment being $28,668.42.
Amounts credited to the defendant’s loan account with the plaintiffs
The Fortune business’s books of account record a loan owing the defendant of $39,187.98. Mr Munday set out the items in detail and assumed the entries, which formed the basis of this allowance, to be correct. Accordingly, Mr Munday made an allowance to the benefit of the defendant for this sum in his calculations.
The defendant did not dispute the allowance and I accept that an allowance should be made in favour of the defendant in the sum of $39,187.98.
Transactions requiring further investigation
Mr Munday’s report under the heading ‘Outstanding Items’ states that the writer had identified entries which warrant further investigation, such entries being particularised in appendix 8 to his report. Appendix 8 identifies 35 transactions between 17 February 2010 and 28 October 2013 totalling $585,847.40.
The plaintiffs submit that the defendant should be ordered to pay these sums on the basis of the principle in Houghton v Immer (No 155).[7] In that case, Handley JA said as follows:
The defendants, having improved common property without lawful authority, and attempted to effect a fraud on the minority, are wrongdoers, and their failure to keep and produce proper accounts of their actual expenditure on the common property has made it difficult to assess the compensation due to the plaintiff. … In my judgment the Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party ‘whose actions have made an accurate determination so problematic’.[8]
[7](1997) 44 NSWLR 46 (Mason P, Handley JA and Beazley JA).
[8]Ibid 59 (Handley JA with whom Mason P and Beazley JA agreed) (citations omitted).
I reject the plaintiffs’ submission for the following reasons:
(a)There is no evidence from Mr Munday or otherwise to support the proposition that the appendix 8 transactions were misappropriations.
(b)There was no evidence that would enable me to conclude that it was the defendant’s improper record keeping or even his conduct, such as the deletion of files from his computer, that were the cause of Mr Munday’s inability to complete the investigation of the appendix 8 entries; or otherwise made the accurate determination problematic.
Damages for costs relating to the structure of the plaintiffs’ group of companies
The plaintiffs sought an order for the costs occasioned by the defendant’s conduct in giving wrong instructions to the plaintiffs’ lawyers in relation to the structure of the Mr Quan’s Fortune group of companies and the conduct of some of its projects, to the extent that such losses are not able to be recovered as costs in this proceeding. The plaintiffs’ counsel conceded there was no evidence of these costs and so sought an order in general terms. He was not able to refer to any authority that such an order would be appropriate and with the lack of any evidence as to the costs and how they were caused, I am not prepared to make any such order.
Conclusion
For the reasons set out above, I consider the plaintiffs have proved their claims in the sum of $792,370.07 calculated as follows:
(a) Misappropriations $65,530.34
(b) Loan account $833,536.89
(c) Unpaid salary ($67,509.18)
(d)Amounts paid credited to his loan
account with the plaintiffs ($39,187.98).
I propose to make the following orders:
(a)The defendant pay the plaintiffs[9] the sum of $792,370.07 together with interest of $218,319.37 pursuant to s 60 of the Supreme Court Act 1958.
[9]The plaintiffs and the defendant agreed that it was not appropriate to distinguish between the debts owed by the defendant to the particular plaintiffs and that an order for the defendant to pay the plaintiffs jointly was appropriate.
(b) The defendant pay the plaintiffs’ costs to be taxed.
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