King v Yurisich
[2005] FCA 1277
•13 SEPTEMBER 2005
FEDERAL COURT OF AUSTRALIA
King v Yurisich [2005] FCA 1277
TRADE PRACTICES – allegation of misleading and deceptive conduct – whether in course of trade or commerce – whether damage proved to have been suffered – whether entitlement to damages established.
NEGLIGENCE – allegation of breach of duty of care – whether duty owed and breached – whether damage suffered – whether entitlement to damages established.
PRACTICE AND PROCEDURE – the purpose of expert opinions – the role of experts in legal proceedings.
EVIDENCE – effect of failing to call a respondent to give evidence – inference that can be drawn from such failure.
Travel Agents Act 1986 (Vic)
Trade Practices Act 1974 (Cth)
Fair Trading Act 1985 (Vic)
Fair Trading Act 1999 (Vic)
Aboriginal and Torres Strait Islander Heritage Protection Act 1984 (Cth)
Wrongs Act 1958 (Vic), ss 23B, 24(2)
Corporations Law, ss 45A(2), 293, 294
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 cited
Ramsay v Watson (1961) 108 CLR 642 cited
Paric v John Holland (Constructions) Pty Ltd (1985) 59 ALJR 844 cited
Bugg v Day (1949) 79 CLR 442 cited
Jones v Dunkel (1959) 101 CLR 298 cited
Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594 cited
Chapman v Luminis Pty Ltd (2001) 123 FCR 62 cited
Prestia v Aknar (1996) 40 NSWLR 165 cited
Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 14 FCR 215 cited
Fink v Fink (1946) 74 CLR 127 cited
Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 cited
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257 cited
JOHN MILLER CAMPBELL KING & ORS AS TRUSTEES OF THE TRAVEL COMPENSATION FUND v WAYNE JAMES YURISICH & ORS
VID 764 of 2002
LANDER J
13 SEPTEMBER 2005
ADELAIDE (HEARD IN MELBOURNE)
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 764 OF 2002
BETWEEN:
JOHN MILLER CAMPBELL KING & OTHERS AS TRUSTEES OF THE TRAVEL COMPENSATION FUND
APPLICANTS
AND:
WAYNE JAMES YURISICH
FIRST RESPONDENT
CHERYL ANNE YURISICH
SECOND RESPONDENT
YVONNE GOTTSCHALK
THIRD RESPONDENT
LANE MOLLER PARTNERS PTY LIMITED T/AS LANE MOLLER PARTNERS
FOURTH RESPONDENT
ROBERT YOUNG
FIFTH RESPONDENT
JUDGE:
LANDER J
DATE OF ORDER:
13 SEPTEMBER 2005
WHERE MADE:
ADELAIDE (HEARD IN MELBOURNE)
THE COURT ORDERS THAT:
1. The proceeding be dismissed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 764 OF 2002
BETWEEN:
JOHN MILLER CAMPBELL KING & OTHERS AS TRUSTEES OF THE TRAVEL COMPENSATION FUND
APPLICANTS
AND:
WAYNE JAMES YURISICH
FIRST RESPONDENT
CHERYL ANNE YURISICH
SECOND RESPONDENT
YVONNE GOTTSCHALK
THIRD RESPONDENT
LANE MOLLER PARTNERS PTY LIMITED T/AS LANE MOLLER PARTNERS
FOURTH RESPONDENT
ROBERT YOUNG
FIFTH RESPONDENT
JUDGE:
LANDER J
DATE:
13 SEPTEMBER 2005
PLACE:
ADELAIDE (HEARD IN MELBOURNE)
REASONS FOR JUDGMENT
THE PARTIES
1 The applicants are the trustees of the Travel Compensation Fund (the Fund). For ease of reference, I shall call the applicants ‘the Fund’. The Fund was constituted by a Deed made 12 December 1986 (the Deed) by the then Ministers for Consumer Affairs for the States of New South Wales, Victoria, South Australia and Western Australia. Pursuant to s 46 of the Travel Agents Act 1986 (Vic) (the Act) the Fund has been declared to be an approved compensation scheme for the purposes of the Act.
2 Section 45A of the Act provides that the compensation scheme trustees can sue in the name of the Fund.
3 The object of the Fund is to provide a trust fund for the benefit of:
‘(a) the Crown in the right of a State; and
(b) any person who entrusts money or other valuable consideration to a travel agent in respect of any travel arrangement or travel-related arrangement if —
(i) the travel agent fails to account for that money or consideration; or
(ii) the travel agent passes all or part of that money or consideration to another travel agent who fails to account for that money or consideration in the capacity as a travel agent.’
4 Clause 3 of the Deed identifies the purposes of the trust:
‘3.1 The purposes of the Trust are —
(a) to provide compensation to certain people who deal with travel agents; and
(b) to provide for the operation of the Fund; and
(c) to ensure that only persons who have sufficient financial resources to enable them to carry on business as a travel agent are participants of the Fund.’
5 Jaja Pty Ltd (Jaja) carried on business as a travel agent in the State of Victoria under the name of Harvey World Travel (Croydon) until 23 February 2000.
6 ‘[T]ravel agent’ is defined in the Deed:
‘ “travel agent” means a person who carries on business as a travel agent in a State within the meaning of the Act of that State.’
7 In Victoria a person must not carry on the business of a travel agent except in accordance with the authority conferred on that person by a travel agent’s licence: s 6 of the Act.
8 The first and second respondents were the directors of Jaja. The second respondent ceased to be a director on 1 September 1999. The first respondent was a director of Jaja until 23 February 2000.
9 The third respondent commenced work as an employee of Jaja in May 1997 and became a director of Jaja on 1 September 1999.
10 The fourth respondent, Lane Moller Partners Pty Limited (LMP), is a corporation which carries on an accountancy practice and was, during the relevant time, Jaja’s accountants.
11 The fifth respondent is a registered auditor and was, at all relevant times, the auditor of Jaja’s financial statements.
ISSUES RAISED IN THE APPLICANTS’ STATEMENT OF CLAIM
12 Licensed travel agents, of which Jaja was one during the relevant period, are entitled to become participants in the Fund.
13 A participant in the Fund is obliged to provide to the trustees of the Fund, on an annual basis, information concerning its financial resources in the form of audited financial statements for the preceding year and an Annual Financial Review form (AFR form). The information provided is sometimes call ‘renewal material’.
14 A participant has to provide financial information derived from its audited financial statements and, in the AFR form, provide a calculation in accordance with that form’s requirements.
15 Jaja submitted its financial statements for the financial years ended 30 June 1998 and 30 June 1999 to the Fund. It is not disputed that LMP compiled those financial statements and that Mr Young audited those financial statements.
16 Pursuant to the provisions of the Deed, the trustees are entitled to call upon a participant to supply such financial information as the trustees reasonably consider necessary to enable the trustees to determine whether the participant has sufficient resources to carry on business as a travel agent and/or remain eligible to be a participant in the Fund. The trustees are entitled, again pursuant to the provisions of the Deed, to impose conditions upon a participant’s continued participation in the Fund and, in particular, a condition that the participant maintain a trust account or client account in respect of monies received from clients; increase the capital of its business; reduce the debt of its business; procure a guarantee of its business by a person or class of persons specified by the trustees; maintain and operate books of account and other accounting records of its business in a manner specified by the trustees; and provide specific financial information to the trustees so the trustees may evaluate the participant’s financial viability and assess its eligibility to remain a participant in the Fund.
17 On 26 November 1998 Jaja submitted its renewal application and AFR form and its audited financial statements to the Fund for the year ended 30 June 1998. Those documents were submitted for the purpose of Jaja continuing to be a participant in the Fund in 1999.
18 On 17 February 1999 the Fund resolved to allow Jaja to continue to be a participant in the Fund but on conditions. The conditions were:
‘(a) provision to the Fund of monthly management accounts and client account reconciliations by the 21st day of each month following 28 February 1999; and
(b) lodgement of the Renewal Application and Annual Financial Review for the year ended 30 June 1999 by 31 August 1999.’
19 Jaja complied with the conditions except that it did not provide management accounts for the month of June 1999 but the obligation to comply with that condition was waived by the trustees of the Fund.
20 On 27 August 1999 Jaja submitted its renewal application, an AFR form and accounts for the year ended 30 June 1999 prepared by LMP and audited by Mr Young to the Fund. The whole of that information is sometimes called the ‘2000 renewal material’. The purpose of the submission of that material was in order that Jaja might continue to be a participant in the Fund in the year 2000.
21 Jaja also submitted a guarantee provided by QBE Insurance Limited (QBE) by which QBE guaranteed to pay to the Fund the sum of $60,000 in the event of default by Jaja.
22 On 16 September 1999 the trustees of the Fund resolved:
‘(a) to approve the continued participation by Jaja in the Fund;
(b) to rescind the condition on participation that Jaja submit monthly management accounts to the Fund;
(c) to require Jaja to submit to the Fund on or before 20 January 2000 detailed management accounts for the period ended 31 December 1999, not audited but signed by the directors as being correct.’
23 On 17 September 1999 the Fund wrote to Jaja advising Jaja’s directors of the resolution of the trustees.
24 In compliance with that resolution, on 20 January 2000 Jaja submitted management accounts for the period ended 31 December 1999 to the Fund. Those management accounts were not compiled by LMP. They were not audited. That material was assessed and the trustees resolved to permit Jaja to remain a participant in the Fund without any further conditions. On 23 February 2000 Jaja ceased trading as a travel agent because its directors by then recognised that Jaja was insolvent. On 29 February 2000 the trustees resolved to terminate the participation of Jaja in the Fund effective immediately.
25 Between 1 January 1999 and 23 February 2000 various clients and customers of Jaja (Jaja’s clients) paid money to Jaja in respect of future provision of travel related services which, by reason of Jaja’s insolvency, were never provided. Each of Jaja’s clients became creditors of Jaja and Jaja was obliged to repay to each of them the amount paid by that client or, alternatively, to account to each of Jaja’s clients for the amount received by Jaja. Of course, by reason of its insolvency, Jaja could neither repay nor account for the amounts.
26 Therefore Jaja’s clients, pursuant to the provisions of the Deed, sought compensation from the Fund in respect of the amount or amounts each of Jaja’s clients had paid to Jaja. In total, the trustees of the Fund paid the sum of $266,135 to Jaja’s clients or to third parties for and on behalf of those clients. It recovered $66,000 from QBE pursuant to the guarantee provided by that company. The original guarantee had been increased by $6,000 before Jaja went into liquidation.
27 Section 37(3) of the Act provides:
‘(3) If a payment is made to a claimant under the compensation scheme by reason of an act or omission by a person carrying on business as a travel agent, the compensation scheme trustees are subrogated to the rights of the claimant in relation to the act or omission.’
28 The Fund claim to be entitled to be subrogated to Jaja’s clients in relation to Jaja’s acts or omissions in failing to provide the relevant travel services; in failing to repay each of Jaja’s clients the amount or amounts respectively paid by that client; or alternatively, failing to account to each client for the monies it received. The trustees also claim to be entitled to be subrogated to Jaja’s clients in respect to their claims against each of the first, second and third respondents who were directors at the relevant time.
29 However, the Fund did not proceed against the first and second respondents. In fact, the first respondent is a bankrupt and the trustees did not obtain leave to proceed against him. The second respondent is his wife and impecunious and the trustees did not proceed against her. The Fund did proceed against the third respondent claiming a right of subrogation under s 37(4) of the Act which provides:
‘(4) If the rights conferred by sub-section (3) on the compensation scheme trustees are exercisable against a body corporate, those rights are enforceable jointly against the body corporate and the persons who were its directors at the time of the act or omission and severally against the body corporate and each of those directors.’
30 The claim against the fourth respondent was in respect of the amount paid by the trustees to Jaja’s clients. A defence is given to a director under s 37(5) of the Act but it is not necessary to address that in detail because during the hearing, the Fund and the third respondent settled the Fund’s claim.
31 A deed of settlement was produced to the Court, whereby the third respondent agreed to pay the Fund with a denial of liability the sum of $10,000 ‘being a compromise of costs or a proportion of them of pursuing Gottschalk (including irrecoverable legal fees and disbursements) claimed by the (Fund) in the Proceedings against Gottschalk’.
32 The deed provided for mutual releases. That sum was paid on 13 April 2005. The third respondent abandoned her cross-claims against the fourth and fifth respondents. The fourth respondent also settled its cross-claim with the third respondent. No money changed hands in relation to that settlement.
33 On 20 April 2005 I made the following orders:
‘1. The Applicant’s claims as against the Third Respondent only be dismissed with no order as to costs.
2. The Third Respondent’s Cross-Claim against the Fourth and Fifth Respondents be dismissed with no order as to costs.
3. The Cross-Claims of the Fourth Respondent as against the Third Respondent only be dismissed with no order as to costs.’
34 It follows that I am only concerned with the trustees’ claim against LMP and Mr Young.
35 In their statement of claim the trustees pleaded that, in submitting the 2000 renewal material to the trustees, Jaja made a number of representations to the trustees which were false. It particularises those representations made by Jaja and how it is said the representations to be false. The trustees further claim that, in the provision of the 2000 management accounts on 20 January 2000, Jaja made further representations which were also false. It particularises those representations and the falsity of them. Those pleas are no longer relevant. They were only advanced to put the proposition that the first three respondents had aided and abetted Jaja in making those representations.
36 The trustees plead that LMP made representations to the trustees of the Fund at the time of the submission of the 2000 renewal material. They also pleaded that Mr Young made representations when the 2000 renewal material was presented to the trustees. In respect of both LMP and Mr Young, it is pleaded that those representations were false. I will refer to the representations in more detail. The trustees pleaded that, by LMP making those false representations, it contravened the Trade Practices Act 1974 (Cth) and Mr Young contravened the Fair Trading Act 1985 (Vic) and/or the Fair Trading Act 1999 (Vic).
37 In the alternative, it is pleaded that both LMP and Mr Young owed the trustees, and thereby the Fund, a duty of care which they separately breached. In both cases, the duty of care was said to be ‘to take reasonable care in making any representation to (the trustees) in relation to the 2000 Renewal Material to avoid loss and damage to the Fund’.
38 It is claimed that, either by reason of the contravention of the respective Acts, or the negligence of LMP and Mr Young, the Fund suffered the loss which it was called upon to pay to the claimants as a result of the failure of Jaja.
39 The statement of claim raises the following issues:
1. Whether the financial statements for each of the financial years ended on 30 June 1998 and 30 June 1999 represented a true and fair view of Jaja’s financial position at that time.
2. Whether the provision by Jaja of the 2000 renewal material constituted representations by either or both of LMP and Mr Young to the trustees and thereby the Fund.
3. What those representations were.
4. Whether those representations were false.
5. Whether that leads to a finding that LMP breached the Trade Practices Act 1974 (Cth) or Mr Young breached the Fair Trading Act 1985 (Vic) and/or the Fair Trading Act 1999 (Vic).
6. Whether in the event either or both of LMP and Mr Young were guilty of negligence or a contravention of the respective Acts, the Fund has suffered loss or damage.
7. Whether LMP and Mr Young owed the trustees, and thereby the Fund, a duty of care of the kind pleaded.
8. Whether LMP or Mr Young or both breached that duty of care.
9. The quantification of that loss or damage.
40 The questions raise for consideration and examination Jaja’s 1998 and 1999 financial statements.
ISSUES RAISED IN THE DEFENCES
41 Both the fourth and the fifth respondents denied that in presenting the financial statements for the years ended 30 June 1998 and 30 June 1999 they thereby made any representations. They denied that the representations were false.
42 They both denied that the trustees relied upon the financial statements submitted to the Fund or on the information contained in the AFR form.
43 The fifth respondent argued that, in any event, his conduct was not in trade or commerce and therefore did not contravene either of the Fair Trading Acts which were in force in 1999. The Fair Trading Act 1999 (Vic) (the 1999 Act) repealed the Fair Trading Act 1985 (Vic) (the 1985 Act) and was assented to on 18 May 1999. The applicant has relied on s 11 of the 1985 Act and s 9 of the 1999 Act which are in any event in the same terms. That part of the 1999 Act which contains s 11 came into operation on 1 September 1999. That section seems to me to be relevant to a consideration of the fifth respondent’s liability. The fourth respondent did not argue that its conduct was not in trade or commerce.
44 The fourth respondent argued that the Fund had no obligations to Jaja’s clients and in those circumstances was not entitled to seek to recover any monies paid by the trustees to Jaja’s clients from the fourth respondent. The fifth respondent did not argue that the Fund did not have an obligation to Jaja’s clients.
45 Both the fourth and fifth respondents argued that the Fund’s claim for damages did not have regard to the Fund’s liabilities to Jaja’s clients which would have had to have been met if the Fund had refused to allow Jaja to continue to be a participant in the Fund after 27 August 1999. They both argued that the Fund’s claim did not recognise that, on its own case, Jaja was insolvent as at 27 August 1999. Therefore, the Fund would have been liable to meet the claims of any existing clients of Jaja who had paid for travel which had not been provided.
46 The fourth respondent has also brought a cross-claim against the fifth respondent seeking contribution in respect of any liability it might have to the applicants. The fifth respondent has not sought contribution from the fourth respondent.
47 The fifth respondent claims that the Fund has been guilty of contributory negligence and that any award ought to be reduced by reason of that negligence.
48 It was agreed by all parties that if the Fund was entitled to a verdict either against the fourth or fifth respondents for a contravention of either the Trade Practices Act or the Fair Trading Acts, the verdict could not be reduced by reason of any conduct on the part of the applicants because of the decision of the High Court in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 (‘I & L Securities Pty Ltd’).
49 Of course, if the Fund were only entitled to a verdict for the cause of action in negligence then the verdict could be reduced on account of the applicants’ contributory negligence. No doubt it was for that reason that the fifth respondent argued that its conduct was not in trade or commerce.
THE DEED
50 There is no dispute between the parties about the trustees’ entitlement to require a participant to provide financial information; about the trustees’ entitlement to refuse to allow a travel agent to be a participant in the Fund; about the trustees’ entitlement to require financial information to be provided to the trustees; and about the trustees’ entitlement to impose conditions upon continuing participation in the Fund. However, it is necessary to examine the Deed which provides for the Fund to understand the facts and circumstances which are relied on by the respondents.
51 The Fund is operated by a Board of trustees which consists of 11 trustees appointed by a Ministerial Council.
52 The Board of the Fund has, amongst other duties, the duty to pay out of the Fund any claim admitted under cl 16.7: cl 4A.1(a). I will return to that.
53 The Board is entitled to delegate its powers and duties relating to the administration of the Fund to a Management Committee which is constituted under cl 20 of the Deed.
54 The Management Committee consists of a Chairperson of the Board who is also Chairperson of the Management Committee, the Chief Executive Officer of the Fund and at least two trustees. The Board is entitled to determine the amount, method of calculation and manner of collection of all contributions, fees, levies and penalties payable to the Fund by participants, and any other persons applying to be participants of the Fund.
55 A ‘participant’ is defined in the Deed:
‘ “participant” means a person who is —
(a) accepted as a participant of the fund under clause 10; or
(b) declared to be a participant of the Fund under clause 11.’
56 The Fund is established by cl 5. It consists, inter alia, of any contributions, fees, levies and penalties paid into the Fund. The Board is empowered to determine the amount, method of calculation and manner of collection of all contributions, fees, levies and penalties payable to the Fund by participants or persons applying to become participants: cl 6.1.
57 A person who intends to operate as a travel agent may apply in writing to the Board for a determination that the person is eligible to be a participant of the Fund: cl 8.1.
58 The eligibility of a person to be a participant is provided for in cl 9.1. It provides:
‘9.1 A person is eligible to be a participant if the Board considers that the person has, and is likely to continue to have, sufficient financial resources to enable the person to carry on business as a travel agent and enter into travel arrangements and travel-related arrangements.’
59 The Board is required to publish guidelines as to the criteria it may use to determine whether a person is eligible to be a participant: cl 9.4. The Board has published financial criteria.
60 Clause 9.6 allows the Board, if not satisfied that a person is eligible to be a participant, to require the person to comply with conditions in order for the Board to be satisfied that the person is eligible as a participant.
61 Clause 9.6 provides:
‘9.6 If the Board is not satisfied that a person is eligible to be a participant, it may require the person to comply with any one or more of the following conditions in order to be satisfied that the person is eligible as a participant:
(a) that the person maintain and operate the business as a travel agent in a manner specified by the Board;
(b) that the person —
(i) maintain a trust account or client account in respect of any money received in the course of that business; or
(ii) increase the capital of that business; or
(iii) reduce the debt of that business; or
(iv) provide in favour of the Board any security it requires in any form it determines; or
(v) pay any costs incurred in connection with providing or releasing that security;
(c) that the business be guaranteed or insured in a manner, or by a person or class of person, specified by the Board;
(d) that the person maintain and operate books of account and other accounting records of the business in a manner specified by the Board;
(e) that a report be obtained at the expense of the person from a duly qualified auditor or accountant nominated by the Board —
(i) stating that the accounting records of the business give a true and fair view of the financial position of the business; or
(ii) providing any other information the Board requires to determine whether the person has sufficient financial resources to carry on the business;
(f) that the person provide full disclosure of the identity of any other person involved in the business.’
62 If the Board determines that an applicant is eligible to be a participant on payment of the contribution and relevant fees, the Board must accept that applicant as a participant: cl 10.1(a).
63 Clause 12 of the Deed allows the Board to require a participant to provide the Board with any information the Board reasonably requires about the participant’s financial resources. Clause 12.5 obliges a participant to notify the Board if the participant becomes bankrupt or the participant’s business is wound up or placed in receivership or administration.
64 Clause 12A of the Deed empowers the Board to determine at any time whether a person is entitled to remain eligible as a participant.
65 Clause 15 of the Deed requires the Board to pay compensation out of the Fund to the persons identified in the clause. Clause 15 provides:
‘15 PAYMENT OF COMPENSATION
15.1 The Board must pay compensation out of the Fund to a person who —
(a) enters into travel arrangements or travel-related arrangements directly or indirectly with a participant; and
(b) has suffered or may suffer pecuniary loss arising directly from a failure to account by the participant for money or other valuable consideration paid by the person; and
(c) is not protected against the loss by a policy of insurance.
15.2 The Board may pay compensation to —
(a) a person referred to in clause 15.1 in relation to any consequential pecuniary loss suffered from a failure to account as referred to in that clause; or
(b) a person who has suffered pecuniary loss and consequential pecuniary loss arising directly from a failure to account for money or valuable consideration in relation to any travel arrangement or travel-related arrangement by a person who is not a participant.
15.3 The Board may develop and publish guidelines that apply to the payment of compensation arising under clause 15.2.
15.4 The Board must not pay compensation to a person in respect of loss referred to in this clause that arises before the commencement of the Act in the appropriate State.
15.5 Compensation payable under this clause is payable —
(a) to a person who is a resident of Australia in respect of any travel arrangements or travel-related arrangements; or
(b) to a person who is not a resident of Australia in respect of travel arrangements or travel-related arrangements within Australia.
15.6 A travel agent or an operator who carries on or carried on a business comprising or including the provision of travel arrangements or travel-related arrangements may be paid compensation under this clause only if the travel agent or operator is exercising the right of a person to claim or receive compensation out of the Fund that has been assigned to the travel agent or operator.
15.7 The Board may pay compensation under this clause to a person in consideration of, or subject to, the assignment to the Board of the person’s right and entitlement against another person.
15.8 The Board may pay compensation in instalments in any manner it determines.’
66 Clause 15 is consistent with cl 3 of the Deed which identified the Fund’s purposes which, in particular, is to provide compensation for certain people who deal with travel agents.
67 The Fund is constituted for the purpose of providing monies to make the payments referred to in cl 15.1. Clause 15.1 is mandatory. The Board must pay compensation to the persons identified in paragraphs (a) and (b) of cl 15.1. If a person enters into travel arrangements or travel-related arrangements (which are defined in the Deed) with a participant of the Fund and has suffered, or may suffer, pecuniary loss arising directly from a failure to account by that participant for money or other valuable consideration paid by the person and is not protected against the loss by a policy of insurance, then the Board must pay compensation for those persons.
68 On the other hand, cl 15.2 gives a Board a discretion as to whether it should pay compensation to the persons identified in paragraphs (a) and (b) of cl 15.2.
69 Clause 15.1, as I have already noticed, only applies to persons who have dealt with a participant of the Fund. Those persons are entitled to compensation as of right. On the other hand, persons who have dealt with travel agents who are not participants are not entitled as of right to compensation but may receive compensation in the discretion of the Board. The other persons who also may receive compensation in the discretion of the Board are those who have suffered consequential loss.
70 Clause 15.6 limits the circumstances in which a travel agent, or an operator who is defined in the Deed, may receive compensation under cl 15.
71 The effect of cl 15.6 is, relevantly, for the purpose of these proceedings, that a travel agent may be paid compensation under cl 15 only if the travel agent is exercising the right of a person to claim or receive compensation out of the Fund that has been assigned to the travel agent or operator.
72 In this case, as the facts will later show, the Fund paid compensation to Harvey World Travel Pty Ltd which provided the travel arrangements or travel-related arrangements not provided by Jaja. However, as I have already indicated, the fourth respondent has argued that the trustees and the Fund had no liability to Jaja’s clients. The fourth respondent argued that there had been no assignment to Harvey World Travel Pty Ltd of Jaja’s clients’ rights to claim or receive compensation out of the Fund. In those circumstances, it was argued, the Fund had no obligation to pay and, because it had no obligation to pay, it was not entitled to claim compensation from the fourth respondent for the payments it had made. I will address that argument later.
73 Clause 16 of the Deed requires a person to make a claim within 12 months after the failure to account for money or other valuable consideration to which the claim relates. Clause 16.4 empowers the Board to require the person to provide additional information relating to the claim and copies of any documents in the possession or under the control of the person making the claim. The Board can also require information to be provided by the maker of the claim and a statutory declaration or copies of documents to be verified in a particular manner: cl 16.5.
74 Clause 16.7 provides:
‘16.7 The Board may decide —
(a) to admit a claim in whole or in part; or
(b) to reject a claim.’
75 Clause 17 obliges the Board to determine the amount of compensation payable to a person under either cl 15.1 or cl 15.2, which sum is not to exceed the actual pecuniary or consequential pecuniary loss suffered.
76 The Board can pay emergency compensation out of the Fund where the Board is satisfied that a past participant has failed to meet, or is unlikely to meet, an obligation to a person and it ‘is necessary to meet in whole or in part the emergency requirements of the person arising from the failure’: cl 18.1.
77 However, in doing so, the Board must attempt to ensure that it does not make a payment prohibited by cl 15: cl 18.2.
78 The purpose of the Fund is to encourage travel agents to become participants in the Fund in order to protect travellers from a travel agent’s failure to provide services that have been paid for.
WITNESSES
79 All of the witnesses who were called by the various parties gave their evidence-in-chief in affidavits.
80 The witnesses were then cross-examined by counsel with opposing interests. I did not allow any duplication of the cross-examination of the applicants’ witnesses by the fourth and fifth respondents or any cross-examination where there were no live issues between the parties.
81 The applicants called a number of witnesses in support of their case, including:
● Mr Brattoni, the Chief Executive Officer of the Fund from 31 May 1990 to 18 January 2002;
● Mr King, the Chairman of the Fund;
● Mr Given, a trustee of the Fund;
● Mr Whittaker, the Fund’s Manager of Special Investigations;
● Mr Hammond, the Manager, Operations of the Fund;
● Mr Dellar, the Legal and Policy Adviser of the Fund;
● Mr Newman, a financial assessor employed by the Fund who had responsibility for assessing Jaja’s application; and
● Ms McAlpine, assistant to the financial director at Harvey World Travel.
82 The applicants also called four of Jaja’s clients. An affidavit of Mr Glen Wells, the present Chief Executive Officer, was read but he was not required for cross-examination.
83 I accept some points of Mr Brattoni’s evidence. I do not accept his evidence on the hypothetical scenario that was put to him. I accept the evidence of Mr Whittaker and Mr Hammond. I accept Ms McAlpine’s evidence.
84 I do not accept the evidence of Mr King or Mr Given. I was not impressed by Mr King, who clearly had not read his own affidavit before he gave his evidence and had no idea why it was that he was giving evidence. I do not accept their evidence on the same hypothetical scenario that was put to them.
85 I was not impressed by Mr Newman who, in many respects, was clearly defensive. In some respects he could not explain what he had done or why he had done it. I think he was unable to explain his position because he now recognises that what he did was wrong.
86 I have no doubt that the four Jaja client witnesses did their very best to help me in relation to their evidence and I accept their evidence.
87 The applicants also called Mr Humphreys who is a chartered accountant and registered auditor who provided expert reports in relation to both the 1998 and 1999 financial statements. He also provided commentary on other reports and evidence. He swore three affidavits. Mr Humphreys was a good witness and I accept his evidence.
88 Ms Gottschalk, who was unrepresented, read her affidavit and was cross-examined on it. She was an honest witness and I accept her evidence, although a good part of it became irrelevant after she settled with the other parties.
89 A partner of the fourth respondent, Mr Lane, who had responsibility for the compilation of the financial statements gave evidence. LMP also called Ms Kirby who was a bookkeeper employed by the fourth respondent and who had the direct involvement with Jaja and its directors for the purpose of compiling those financial statements.
90 Neither Mr Lane nor Ms Kirby were satisfactory witnesses. They were both defensive. They both attempted to distance the fourth respondent from its responsibilities in relation to the compilation of the financial statements. In a number of respects I do not accept their evidence.
91 The fifth respondent gave evidence. He was a completely frank and candid witness and I accept his evidence in all respects. Unfortunately, from his point of view, his own evidence makes a finding of negligence against him inevitable.
92 Mr Geoffrey Knott, a chartered accountant and a partner in the firm of BDO Chartered Accountants, was retained by the fifth respondent to offer an opinion:
‘Our report is to provide an assessment in relation to the conduct of Mr Young in light of the allegations made against him.’
93 He was then asked to offer opinions on a number of specific matters relating to the conduct of Mr Young. One of the matters upon which he was asked to offer an opinion was whether Mr Young engaged in misleading and deceptive conduct. That is not the province of an expert. It is unfair to experts to engage them to offer opinions on matters upon which they are not entitled to give. Legal practitioners who have the responsibility of engaging practitioners should be careful to ensure that the opinions which they seek are those which are appropriate and can be given by way of admissible evidence in a Court.
94 Seeking opinions from chartered accountants about legal questions which are solely for the Court only goes to devalue the expert’s opinions and evidence. This is no criticism of Mr Knott who did what he was asked. Unfortunately, Mr Knott was put in a position whereby he was asked as an expert to argue the case on behalf of the auditor.
95 Mr Knott gave three opinions; two were dated March 2004 and one was dated March 2005. In that first opinion, he argued a case for the auditor. Insofar as he gave evidence about the practice of a reasonably competent auditor, the evidence was admissible. Insofar as he purported to give evidence which amounted to findings of fact or inferences on facts, the evidence is inadmissible and I have rejected it. I have also rejected his evidence whereby he purported to give evidence on the ultimate questions in the trial.
96 Mr Knott, like Mr Young, gave his oral evidence in a forthright manner. His oral evidence did not contradict Mr Humphreys’ expert evidence and, indeed, in a number of respects, supported it. His evidence again, unfortunately, confirms that Mr Young’s audit work was not to the appropriate standard for an auditor.
97 Where there is difference between the evidence of Mr Humphreys and Mr Knott, I prefer Mr Humphreys’ evidence. He carried out a number of exercises which were not addressed by Mr Knott which, in the end result, were helpful in determining the issues between the parties. He also addressed the correct questions. He examined the financial statements and underlying financial records in some detail which enabled me to have confidence in the opinions he expressed.
98 The respondents have raised in their defence the question of reliance. That raises for consideration the manner in which the Fund considered applications by travel agents to continue to be participants in the Fund.
99 To that end, it is necessary to consider the way in which the Fund dealt with renewal material.
THE PROCEDURE FOR REVIEWING A PARTICIPANT’S ELIGIBILITY
100 Mr Philip Hammond is the Manager, Operations of the Fund. All assessing staff report to him and he is responsible for the supervision of the assessment process. He said that between 1996 and 2002 the Fund had a standard procedure for reviewing a participant’s eligibility for continuing participation in the Fund.
101 Early in 1987 the trustees of the Fund established financial criteria for continued participation in the Fund. At the same time, it was resolved that specific financial information which must be audited needed to be provided to the Fund.
102 The Fund assesses each participant’s financial criteria on a points basis. The Fund will generally allow a participant to continue in the Fund without the need to provide security or additional financial information if a review of the financial material which has been provided meets the minimum financial criteria measured by a score of at least 10 out of 20 points and, at the same time, meets the necessary level of minimum capital and reserves as defined in the financial criteria.
103 At least one month before the end of each participant’s financial year, the Fund would send a renewal application and in July or August of each year, the Fund would send out a blank AFR form and a copy of the Fund’s financial criteria. If the participant was an International Air Transport Association (IATA) accredited agent, the Fund would require that the form be completed both for IATA and Fund assessment.
104 Within three months after the end of a participant’s financial year, that participant was obliged to provide to the Fund the AFR form together with a set of audited financial statements.
105 If the participant met the Fund’s financial criteria, its renewal application was approved by Mr Hammond, an assessor, or the Chief Executive Officer.
106 If the participant failed to meet the Fund’s financial criteria, the Fund might require the participant to issue shares, provide a bank guarantee or, after 1 January 1999, provide an insurance bond from QBE. The participant may be also required to provide further financial information.
107 Mr Hammond said that the financial criteria addressed three issues: profitability, liquidity and solvency.
108 He said that it was important from the Fund’s point of view that the participant had sufficient current assets to pay its current liabilities and thereby have sufficient working capital to meet at least one month’s overhead expenses of the participant. Moreover, it was a requirement that there would be a sufficient surplus of tangible assets over liabilities (i.e., the company needed to be balance sheet solvent).
109 If a participant had incurred a loss for any particular year in assessing that participant’s continuing viability, the Fund’s financial criteria required that a provision for a loss of the same magnitude be made when assessing the participant’s continuing participation.
110 It was Mr Hammond’s evidence that the participant needed to be profitable; have sufficient working capital to meet one month’s expenses; and be solvent.
111 At all relevant times the Fund had a system of colour coding which applied to all renewal applications. First, the applications were divided between those participants who returned a turnover of less than $3m which were coded ‘green’ and those that had a turnover of more than $3m which were coded ‘yellow’.
112 It was Mr Hammond’s responsibility to ensure that the travel agent had provided all of the information which was required:
‘(a) Annual Financial Review (AFR);
(b) Audited financial statements for the required year end or period end;
(c) Signatures where required on the AFR Materials, for example:-
(i) from the participant on the cover of the AFR;
(ii) from the auditor on personal statement of assets less liabilities;
(iii) from the participant on the company director’s declaration;
(iv) from the auditor on the Audit Report;
(v) from the company directors on the Directors’ Report;
(d) Notes to the accounts within the financial statements; and
(e) Directors Report.’
113 I set out the colour coding procedure:
‘COLOUR TURNOVER Green Less than $3M and meets the minimum financial criteria
Yellow Greater than $3M and meets the minimum financial criteria
Blue Less than $3M trading loss reported for the year and meets the minimum financial criteria
Red Less than $3M, does not meet the minimum financial criteria
Blue/Yellow Greater than $3M, loss reported, meets financial criteria
Red/Blue Less than $3M, loss reported, does not meet the minimum financial criteria
Red/Yellow More than $3M, does not meet the minimum financial criteria
Red/Yellow/Blue More than $3M, loss reported, does not meet the minimum financial criteria’ 114 Those applicants that were coded yellow and green were, on a cursory review, deemed to satisfy the minimum financial criteria as profitable. Those that were coded red or blue were deemed to have failed the minimum financial criteria.
115 If a participant failed to meet the minimum financial criteria the following procedure was adopted:
‘15. If the assessment reflects a financial deficiency (less than 10/20 points score), the Assessor will despatch “Assessment – Deficiency Notice : Non Compliance Penalty Fee” (ADN) letter. Refer Appendix Letter of same title.
16. This allows a period of 21 days to rectify the financial deficiency. A failure to comply, the letter advises the participant that a representative of the entity is provided with an opportunity to attend the next Management Committee Meeting of Trustees (MCM).
17. Where participant is required to lodge renewal documentation within 2 months of the year-end AND is assessed as being financially deficient with no indication of remedial action in process –
Eg. Letter from bank approving guarantee, which has not yet been received by the TCF, or application to QBE for guarantee the Participant is required to attend the nextMCM – the 21-day period is not required. Such Participants would have been advised when the condition of reporting within 2 months was applied; no financial deficiency was to be evident at time of reporting.
18. If Participant is an IATA/DAPA member who does not meet the IATA/DAPA minimum financial criteria, the Assessor
● includes “the IATA Deficiency” paragraphs in the TCF ADN. Refer Appendix Notice of Deficiency Letter.
● Forwards by facsimile to IATA/DAPA
1.a copy of the ADN,
2.IATA Deficiency Worksheet
3.copy of summary balance sheet and
4.IATA calculation worksheet from Annual Financial Review Fax.
Refer Appendix Assessment Calculation Form
Note that this procedure is to be followed also when a Participant meets TCF criteria but not IATA/DAPA’s.
19. If remedial action has not been taken within 21 days a “first call” Agenda 7.4 MCM Briefing Paper (BP) is prepared. Refer Appendix Briefing Paper 7.4. A BP includes a Participant’s relevant information :-
● Legal entity
● Trading name
● Number of additional locations
● Guarantees held by TCF
● Recommendation to the Trustees
● Financial assessment
● Current deficiency
● What action, if any, is being taken or has been taken
● Two month reporter
● Reason why a 2 month reporter
● Attended prior Management Committee Meetings or on MCM agenda
● Previous determinations by Trustees
● Date AFR lodged – late, extension of time to report requested?
● Date approved prior year
● Correspondence and/or telephone contact between assessor, auditor/principal
● Mitigating circumstances
● Background/Overview
● Position for CEO to comment
● Position for Trustees’ determination
20. Following Trustees’ determination, despatch “Notice of Determination” (NOD) letter. Refer Appendix Notice of Determination letter.
21. If Participant fails to comply within the time permitted, a “second call” Agenda 7.5 BP is prepared. This BP is an abridged version of a “first call” BP. Refer Appendix Briefing Paper 7.5
22. Following MCM, Assessor despatches 7.5 “Notice of Determination” letter.
This process is repeated until there is compliance with the conditions imposed for continuing participation or the financial deficiency is rectified. If not, then a further 7.5 BP is prepared with the recommendation for the Trustees to terminate participation in the TCF. The determination of Trustees may be immediate or to be automatically enacted at some future date. If the latter a further NOD is despatched. A participant’s failure to comply by the appointed time requires a “Notice of Termination” to be despatched (NOT). Refer Appendix Letter of same title.
23. If termination of participation in the TCF is to be immediate, following the MCM the Notice of Termination letter is despatched.
24. The terminated participant has a facility to Appeal the termination of participation in the TCF and the means is conveyed in the NOT. If an Appeal is lodged with the respective State Appeals Tribunal and is usually successful, the Order of Termination of the TCF is “Stayed” which allows the Participant to trade until the next hearing. Full participation will be restored, usually after remedial action to correct any financial deficiencies is achieved and the Participant will be reinstated – with or without additional penalty fees, depending upon the circumstances.
25. “Special Case Renewals” with a small “s” “c” “r” – ie. Renewals for Routine ECM approval.
As seen from the Financial Criteria the TCF has tailored the renewal criteria for certain categories of agencies – viz. Inbound, Coach, Airlines, Consolidators and Corporates. Where these hold minimal clients’ funds, they have the option of providing a bank or insurance guarantee for 150% of the maximum client funds held at any time throughout the previous year as certified by their auditor.
Such certification is found within the AFT (Year 2000, page 5). Such renewals are referred to as the “Exposure to Risk” or “$150% Rule.”
Alternatively for Airlines with NTA > A$100M another renewal option is as espoused, without audit qualification, nor subject to insolvency proceedings.
Yet another renewal criteria alternative is available for Airlines and Coach operators and that is where their equity is at least 20% of total tangible assets.
In each of these three cases, the Renewal Front Sheet for ECM approval is prepared with the suitable wording and passed through to the MAS for approval and ECM approval.’
116 If a participant did not meet the minimum requirements, the Fund might require the participant to take remedial action which might include obtaining a bank guarantee, establishing a trust account, or engaging external auditors to monitor the accounts.
117 Where a participant has not met the minimum financial criteria, briefing papers were prepared either by Mr Hammond, his assessors, or Mr Whittaker, who was Manager Special Investigations. They would be forwarded to the CEO who, if he agreed with the recommendation contained in the briefing papers, would sign the papers for tender to the Management Committee of trustees for formal resolution.
118 On the other hand, if the participant is coded ‘green’ or ‘yellow’ then unless the AFR materials, including the financial statements, upon close scrutiny by an assessor and a comparison with the audited financial statements reveal some manifest error, the participant’s full assessment is processed as a desk audit.
119 Mr Hammond said that for Jaja to have obtained a colour coding of ‘green’ (which it did), the renewal material would have had to have shown that Jaja’s turnover was not greater than $3 million; that Jaja was trading at a profit; that Jaja met the minimum equity gateway test; and that Jaja could obtain 10 out of 20 points in respect of the two tests, net tangible assets to turnover and working capital to overheads.
QBE INTERNATIONAL INSURANCE LTD
120 It became evident in 1996 that some participants who had been assessed as deficient often found it onerous and expensive to obtain bank guarantees to make up any deficiency in their capital. In 1997 and 1998 the Fund sought alternative forms of security to bank guarantees that would be acceptable to the Fund. In September 1998 the Fund concluded negotiations with representatives of QBE International Insurance Ltd (QBE) and a scheme was offered by QBE to Fund participants. QBE offered an ‘on demand guarantee’ to the Fund to pay on demand any sum which may be demanded by the Fund up to the amount of the guarantee. In return, the participant would pay QBE 2.2 per cent of the amount guaranteed.
121 Soon after the scheme commenced, QBE agreed with the Fund that it would be obliged to give a guarantee for any sum less than $900,000 if requested by a participant and if the participant paid the fee of 2.2 per cent. In other words, QBE was prepared to give an on demand guarantee without any knowledge of the participant’s financial position. The participants were not required to submit any financial information or accounting in support of a QBE guarantee where the guarantee sought was less than $900,000. The guarantee was for one year and could be renewed from year to year by payment of the premium of 2.2 per cent.
122 The QBE guarantee scheme took effect on 1 January 1999 and was in operation at the relevant time.
123 It was Mr Hammond’s evidence that he was not aware of any case during 1999 or 2000 where a Fund participant was required to provide any financial information to QBE or its agents to secure a guarantee of less than $900,000. In 1999 the Fund received 14 QBE guarantees for amounts between $200,000 and $2 million. Thirteen of those guarantees were given in accordance with QBE’s obligation to automatically give any guarantee under the sum of $900,000. The only guarantee where a participant had to provide information was one where the participants sought a guarantee of $2 million. In 2000 the Fund received 15 guarantees.
124 As will be explained in due course, Jaja obtained a guarantee of $60,000 which was later increased to $66,000. That guarantee was, in due course, met by QBE.
125 The purpose of this evidence was to establish that if the Fund had required Jaja to take a greater guarantee than $60,000 or $66,000 from QBE, it would have been available to Jaja simply on payment of the 2.2 per cent premium.
THE FACTS
126 On 26 November 1998 LMP wrote to the Fund enclosing Jaja’s audited financial statements together with the AFR form. The profit and loss statement showed a loss for the year ended 30 June 1998 of $23,040. The company’s current liabilities were $67,978 and exceeded the current assets of $46,916. The balance sheet showed total shareholders’ equity of only $2,742.
127 The audit report which was addressed to ‘The Members of Jaja Pty Ltd, The Trustees of the Travel Compensation Fund and the International Air Traffic Association’ was qualified:
‘Qualification
During the financial year the company changed from a manual accounting system to a computerised general ledger and client accounting system.
We are unable to satisfy ourselves as to the accuracy of certain computer generated records and in particular commission received which has decreased some $42,518 (or 31%) compared to the previous years, despite a 30% increase in turnover. We are also unable to express an opinion on the accuracy of the Client Bank Account and Client Creditors as shown in the attached Balance Sheet.
We are unable to quantify the extent of the above uncertainties.
Qualified Audit Opinion
In our opinion, except for the effects on the financial statements of the matters referred to in the qualification paragraph, the financial statements of Jaja Pty Ltd for the year ended 30th June 1998 are properly drawn up:
a) to give a true and fair view of:
(I) the company’s state of affairs as at 30th June 1998 and its profit (or loss) for the financial year ended on that date; and
(II) the other matters required by Divisions 4, 4A and 4B of Part 3.6 of the Corporations law as they apply to large corporations to be dealt with in the financial statements; and
b) in accordance with the provisions of the Corporations law; and
c) in accordance with applicable Accounting Standards and mandatory professional reporting requirements.’
128 The audit opinion therefore contained an ‘except for’ qualification.
129 In the letter accompanying the provision of those documents, LMP wrote:
‘Our client, the Directors of the above, wish to advise that the attached audit report has confirmed their grave concerns regarding the financial ratio position of the company’s accounts as at 30 June, 1998.
On presenting our firm with the company’s computer generated general ledger and trial balance for the year ended 30 June, 1998 the Directors of the company advised us that they were very concerned as to the position of the client account and the amount of available commission income to be transferred to the general operating account. Furthermore, due to their lack of knowledge and understanding of the software, they felt very insecure regarding the accuracy of the reports generated by their inhouse computer system.
As of 1 November, 1998 the company commenced using an integrated computer travel software package recommended for use by their franchisor, Harvey World Travel. All records were then “backloaded” to 1 July, 1997 onto the new software. A dual manual/computer system has not been in place for the year ended 30 June, 1998.
On investigation by ourselves and the auditor, Mr Robert Young of Rankin & Young we found that the Directors’ fears were well founded, as the accounts reflected inadequate working capital and other requirements to satisfy the minimum financial ratios required by TCF/IATA and Harvey World Travel.
This firm has prepared the attached financial statements based on source documents as provided. After our review of these financial statements, we believe that the commission income is inaccurate, and therefore produces inaccurate profit, working capital and equity results for the year ended 30 June, 1998. As a result of lengthy discussions with the Directors, it was decided that due to the prohibitive cost, time and resources available, it is not possible, at this time, to further investigate and determine, the exact cause of the problem, but rather, the Directors have immediately taken steps, based on our advice, to rectify the company’s financial and client account position as measured by TCF/IATA.
The following measure have been implemented;
● A $10,000-00 capital injection from shareholders private funds was made into the company, October, 1998. Note this capital injection does not encumber the company’s assets.
● The Directors have taken steps to strengthen internal control by making all cash monies paid by travel clients secure until they are actually deposited at the bank by utilising a wall safe and allowing only one staff person access to the safe.
● To enable the Directors to have confidence in the amount available for transfer of commission income from the client account to the general operating account, and to provide working capital, a manual accounting system for the client account has been implemented, effective October, 1998 (operated in conjunction with the integrated computer software). As a result working capital has been generated and funds are being transferred, with greater accuracy into the general operating account. Furthermore, the accuracy of both the client account and the general operating account are now able to be determined and reconciled.
● The shareholders are in the process of selecting a real estate agent for the purpose of listing their home for sale, with the intent of using funds from the sale to contribute working capital into the company.
● To monitor the performance of the company’s position and the effect of the above strategies the Directors have decided that interim financial statements will be prepared for the six months to 31 December, 1998 by this firm.
● As soon as surplus working capital becomes available the Directors will invest in comprehensive staff training of the existing integrated travel software package to avoid future problems.
It is our belief that given the resolve of the Directors, combined with the positive effect of the above strategies that the TCF/IATA financial measures of, percentage working capital ratios, ratio of net tangible assets to turnover, and minimum equity requirement, and rectification of accurate client account recording will be restored over the current financial year ending 30 June, 1999.
The company has positive current bookings and trading outlook, with significant positive inroads already being made into the 1999/2000 year by confirmed large party bookings being recorded.
We, together with the Directors of the company fully realise that the attached TCF/IATA financial analysis does not meet the requirements as laid down. However, we trust that you will give fair and due consideration to both the Directors’ determination to ensure that the ratios are rectified in order to satisfy the TCF/IATA testing criteria, and to the extenuating circumstances that have arisen resulting in the ratios as per the attached analysis.
Should you have any queries please contact us immediately. On behalf of the Directors of the company, we thank you in anticipation of your support in this matter.’
130 The letter was signed by Mr Lane. In that letter Mr Lane said that the shareholders, who were then the first and second respondents, had injected $10,000 into the company in October 1998. If that had occurred then, of course, that injection would not have been reflected in the balance sheet as at 30 June 1998. If it happened it should have appeared in any balance sheet which was compiled after October 1998.
131 In the penultimate paragraph of that letter Mr Lane referred to Jaja not meeting the requirements as laid down by the Fund.
132 In that regard, he was referring to a calculation termed a ‘financial analysis ratio’ used by the Fund to determine whether a travel agent met the financial criteria necessary to remain a participant in the Fund.
133 As I have said, the financial criteria requires a travel agent to maintain a minimum level of capital and reserves dependant upon the scale of operations measured by the annual turnover (both travel and non-travel). In addition to the minimum capital and reserve criteria, the review of an agent’s financial statements involves the allocation of points for working capital and net tangible asset ratios. Additional points are allocated where a travel agent maintains a client account. The maximum points available are 20 and at least 10 points are required for renewal of membership.
134 In the calculation Jaja presented on 26 November 1998, the total points were minus one (–1).
135 Jaja was colour coded ‘red/blue’. It did not meet the financial criteria. It had operated at a loss. It did not meet the minimum capital and reserves requirements or the minimum equity gateway. It attained –3 points for each of the working capital available to the overhead test and the net tangible assets to turnover ratio test.
136 The audited financial statements and the AFR form were considered by Mr Newman, a financial assessor employed by the Fund. Mr Norman had the responsibility of assessing Jaja’s application for renewal against the criteria imposed by the Fund. That required a consideration of the financial analysis ratio. The Fund also had the separate responsibility, which in this case was also imposed upon Mr Newman, of determining whether the travel agent, in this case Jaja, met the financial criteria for continued membership of IATA.
137 On 1 December 1998 he wrote to the directors of Jaja advising them that the Fund’s assessment of Jaja’s financial statements and AFR form reflected a deficiency in capital of $55,000 and that Jaja had not met the minimum financial criteria determined by the trustees ‘in that it has insufficient Net Capital & Reserves and Working Capital’. He wrote that the equity in the company would need to be increased by the amount of $55,000 either by providing the Fund with a bank guarantee, which was not secured over agency assets, or issuing shares fully paid for cash and retaining the proceeds of the issue.
138 Jaja was further advised that should the appropriate action not be taken by 8 January 1999 the matter would be referred to the trustees’ meeting on 14 January 1999 for determination.
139 On the same day, Mr Newman wrote to IATA and advised that Jaja failed the IATA financial criteria for membership of that organisation.
140 Mr Newman sought an undertaking from Jaja that the proceeds of the $10,000 capital injection which was referred to in LMP’s letter would be retained within the company to strengthen its working capital/equity position.
141 On 3 December 1998 LMP replied to Mr Newman’s letter and enclosed a copy of a letter addressed to the Fund signed by the first and second respondents ‘undertaking that the sum of $10,000 that has been injected into the agency, since the balance date of 30 June, 1998 will remain within the agency to strengthen its working capital/equity position’.
142 LMP also advised that it had a lengthy meeting with the directors and that the directors were confident that the deficiency reflected in the AFR form for the year ended 30 June 1998 was a ‘one off occurrence’.
143 LMP reported that the directors also undertook to provide a further $30,000 capital from the unencumbered proceeds of the sale of their home. Moreover, the directors also undertook to provide the Fund with financial statements for the six months ending 31 December 1998 to be tabled for the February 1999 meeting of the trustees.
144 On 19 January 1999 Ms Kirby telephoned the Fund and advised that the financial statements to 31 December 1998 would be available in mid February. She also advised that she and a director of Jaja wished to attend the February Management Committee meeting of trustees. She further confirmed that the directors were selling their house for the purpose of injecting $30,000 of capital.
145 Mr Newman prepared an Assessing Services Report for submission to the Management Committee meeting on 28 January 1999. In due course, that was signed by both Mr Hammond and Mr Brattoni.
146 In that report it was recommended:
‘2. RECOMMENDATION:
The Trustees resolve as a condition precedent of ongoing participation the participant is allowed 21 days to provide:
● Monthly management accounts commencing with accounts to 31/12/98.
Review MCM February 1999, and
● Is allowed until 8 March 1999 to provide Audit and Directors’ confirmation of cash capital injection of $30,000.
Review MCM March 1999.
The participant wishes the attached letter dated 3/12/98 to be tabled at this MCM, in which they state their intention to attend the February 1999 MCM.
The Shareholder’s house is being auctioned on 20/2/99 to provide the cash capital injection.’
147 On 29 January 1999 Mr Newman wrote to the directors of Jaja stating, inter alia:
‘Dear Participant,
Fund File No: 3 / 4925
NOTICE OF TRUSTEES’ DETERMINATION
This letter is to confirm that, at the Fund’s Management Committee Meeting held on 28 January 1999 at which you were offered the opportunity to attend, but declined to do so, the Management Committee resolved that:
As a condition precedent of ongoing membership, you must provide the Fund, with all the following documents and information by the stated date.
A. By 17 February 1999:
● A set of monthly management accounts for the period ended 31 December 1998
The Management Committee will review your compliance or otherwise with the above at their next Management Committee Meeting to be held on 17 February 1999, and make the appropriate further determination.
B. The participant be requested to attend the next meeting of the Fund’s Management Committee to be held on 17 February 1999, if there is perceived to be a problem with the cash capital injection requirement of $30,000 by 8 March 1999.’
148 On 9 February 1999 LMP provided Jaja’s financial statements for the period ended 31 December 1998 to the trustees. It also provided an AFR form which indicated a financial ratio analysis of seven points. The profit and loss account showed an operating profit for the six months of $3,430. The balance sheet showed an excess of assets over liabilities of $6,482. Current assets were shown as $56,495. They exceeded Jaja’s current liabilities of $48,626.
149 The issued capital as at 31 December 1998 was the same as it had been at 30 June 1998. Thus, the balance sheet did not reflect an injection of $10,000 by way of capital between 30 June 1998 and 31 December 1998.
150 The documents were accompanied by a document headed ‘Compilation Report to Jaja Pty Ltd’ which said:
‘On the basis of information provided by the client, we have compiled in accordance with APS9 “Statement of Compilation of Financial Reports” the special purpose financial report of the Client for the period ended 31 December, 1998 as set out in the accompanying Profit and Loss Statement, Balance Sheet and other attachments (as applicable).’
151 The reference to ‘APS9’ is a reference to an accounting standard. Professional Statement APS9 ‘Statement of Compilation of Financial Reports’ was issued by the National Councils of the Institute of Chartered Accountants in Australia (ICAA) and the Australian Society of Certified Practising Accountants (CPA). The members of both the ICAA and the CPA are obliged by the Code of Professional Conduct to conform with that accounting standard. That Code relevantly provides:
‘A.2 Compliance
“Compliance with the Code is mandatory for all members…”
B.6 Technical & Professional Standards
“Members must carry out their professional work in accordance with the technical and professional standards relevant to that work.”
B.7 Competence and Due Care
“Members must perform professional services with due care, competence and diligence. A member has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques.”’
152 I find that LMP was obliged to comply with APS9 as it represented it had.
153 The relevant clauses of APS9 provide:
‘11 In undertaking a compilation engagement, a member must comply with the requirements of Miscellaneous Professional Statement APS 1 “Conformity with Accounting Standards and UIG Consensus Views” (“APS 1”).
12 When performing any professional service a member must comply with the Code of Professional Conduct. The basic principles governing an engagement by a member to compile a financial report are as follows:
(a)integrity;
(b)objectivity;
(c)confidentiality; and
(d)professional competence and due care.
…
20 A member must obtain a general knowledge of the business and operations of the client in relation to which the compilation is being prepared and must be familiar with the accounting principles and practices of the industry in which the client operates and with the form and content of the financial report that is appropriate in the circumstances.
…
24 A member must consider whether the compiled financial report appears to be appropriate in form and free from material misstatements.
…
26 If a member becomes aware that information supplied by the client contains any material misstatement or is otherwise unsatisfactory, the member must request the client to provide such additional information as may be required. If the client refuses to provide such additional information as is necessary, the member must consider the effect that this may have on the financial report. The outcome of such consideration must be reflected by comment in the report prepared by the member, or in the member withdrawing from the engagement.’
154 Clause 11 refers to Miscellaneous Statement APS1 ‘Conformity with Accounting Standards and UIG Consensus Views’.
155 Paragraph 20 of APS1 provides:
‘Members who are involved in, or are responsible for, the preparation, presentation or audit of a special purpose financial report of an entity are required, except where it is reasonable to expect that the special purpose financial report will be used solely for internal purposes, to take all reasonable steps within their power to ensure that the special purpose financial report, and any audit report or accountant’s statement clearly states:
(a)that it is a special purpose financial report;
(b)the specific purpose for which the special purpose financial report has been prepared; and
(c)the extent to which Accounting Standards and UIG Consensus Views have, or have not, been adopted in its preparation and presentation.’
156 I find that LMP was obliged in compiling Jaja’s financial statements to comply with each of the provisions to which I have referred.
157 LMP also said:
‘Under the terms of our engagement we have not audited the accounting records of the Client or the Accounts. Accordingly, we express no opinion on whether they present a true and fair view of the years trading and no warranty of accuracy or reliability is given.
To the extent permitted by law, we do not accept liability for any loss or damage which any person (or entity), other than the Client, may suffer arising from any errors or omissions therein however caused. No person should rely on the special purpose financial report without having an audit or review conducted.
The special purpose financial report was prepared solely for the benefit of the Client. We do not accept responsibility to any other person (or entity) for the contents of the special purpose financial report.’
158 On the same day, LMP also provided financial statements for the period ended 31 January 1999. That showed an operating profit to that point of time of $4,323. The shareholders’ equity had risen to $7,430. Current assets of $78,411 exceeded current liabilities of $66,743. An AFR form showed a point score of 10.
159 Those documents were enclosed in a letter from LMP dated 9 February 1999. That letter was prepared by Ms Kirby but signed by Mr Lane.
160 In that letter, LMP wrote:
‘On behalf of our client we are pleased to report that the positive action of the Directors for the above combined with the effect of strategies implemented (please refer to our correspondence dated 25 November, 1998) has resulted in a positive change of direction of the company with a turnaround in net profit for the seven month period until 31 January, 1999 of $27,728.’
161 LMP further wrote:
‘The directors of the above are committed to doing all they possibly can to gradually rectify the deficiency as reflected in the 30 June, 1998 financial ratio analysis.
It is a belief of our firm that, our clients, the directors of the above, are genuine people and given support and the opportunity to continue to trade they believe the company should be able to gradually meet all the financial ratio analysis criteria of both TCF and IATA.’
162 An Assessing Services Report was prepared for the meeting of 17 February 1999 by Mr Newman which was again signed by Mr Hammond and Mr Brattoni.
163 In the Assessing Services Report, the following recommendation was made:
‘2. RECOMMENDATION:
The Trustees resolve as a condition precedent of ongoing participation the participant is to provide:
A. On or before 10 March 1999:
● Audit verification and directors’ written undertaking, of additional cash capital injection of $30,000, or
● QBE On Demand Guarantee for $30,000.
B. Or, monthly management accounts commencing with accounts to 28 February 1999, due on 15 March 1999.
Review MCM 11 March 1999.’
164 However, following upon a meeting with the first respondent and Ms Kirby the trustees resolved otherwise. The trustees reported and resolved that:
‘Mr Yurisich, director and the accountant Ms J. Kirby attended the meeting with the Trustees. Following discussion of all matters, IT WAS RESOLVED that as a condition precedent of ongoing membership, the company must provide the Fund, with all the following documents by the stated dates:
A. By 21st of the month following:
● Monthly management accounts and client account reconciliations commencing with the accounts to 28 February 1999, due on 21 March 1999.
B.By 31 August 1999:
● Lodgement of the 1998/1999 Annual Financial Review and accompanying financial statements.
The Management Committee will review compliance or otherwise with “A” above at their Management Committee Meeting to be held in April 1999, and make the appropriate further determination. The matters in “B” above to be reviewed on 9 September 1999.’
165 Mr Newman wrote to the first respondent on 18 February 1999 advising of the resolution of the Management Committee. In that letter he advised that the Management Committee would review Jaja’s compliance or otherwise on 8 April 1999. He suggested that the net capital and reserves position would be improved by capitalising the shareholders’ loans of $11,121.
166 Sometime in early 1999 Ms Gottschalk paid the first respondent $40,000 ‘with the intention that I obtain a half share in the business’. She said in her affidavit:
‘9. Sometime in early 1998 I paid $40,000 by personal cheque to Yurisich with the intention that I obtain a half share in the business. This was to entail a transfer of half the shareholding and eventually my appointment as a director. It was agreed with Yurisich that my appointment as a director would be postponed at his discretion. My concern was primarily to obtain some employment security over the long term. It is very difficult to obtain part time employment close to my residence which I required in order to attend to parental duties. I was not instructed such that I was able to develop my role in the business beyond sales matters. I had no reason to doubt Yurisich’s management of the business which he had been operating since about 1980 to my knowledge.’
167 She did not receive a transfer of the shares nor was she appointed a director at that time.
168 She paid $40,000 because she was told by the first respondent that there was an existing bad debt. She said in her evidence:
‘Did you have any concerns when Mr Yurisich told you about the bad debt?---We did. We knew there was an existing bad debt, namely being Aussie Golf, and we knew that it was approximately $47,000-odd and by injecting that $40,000 we believed that that debt would be, if not – yes, mostly cleared off and we could move ahead from that. That’s the only bad debt that we were informed of.
You now know there were a large number of bad debts in excess of that, don’t you?---We now know, at that stage we did not.
But you never had any detailed discussion with Mr Yurisich about the debit balances in the client ledger trial balance?---No, we were led to believe all the way along that the company was not making a great profit but it was holding its own and by me working there – have another travel agent working in the business so we could grow the business. Never at any stage did we get notification from either Mr Yurisich or Mr Martin Lane that – anything to the contrary.’
439 For the reasons already mentioned, if the Fund is entitled to damages for contravention of the Trade Practices Act by the fourth respondent or contraventions of the Fair Trading Acts by the fifth respondent, there should be no reduction in the damages to be awarded to the Fund on account of any conduct on the part of the Fund: I & L Securities Pty Ltd.
440 However, the fifth respondent, but not the fourth respondent, has argued that insofar as the fifth respondent is liable in negligence there should be a reduction in the damages payable in respect of the tort on account of the Fund’s contributory negligence.
441 The fifth respondent pleaded:
‘66. He denies each and every allegation contained in paragraph 56 thereof. Further, if the Applicants suffered any loss and damage which is denied, Young says that:-
…
(c) any such loss or damage was caused wholly or partly by the acts, omissions and/or contributory negligence of the Applicants.
PARTICULARS
(i) failing to pay any or any proper attention to Young’s audit report in respect of the 1998 accounts;
(ii) failing to pay any or any proper attention to Young’s audit report in respect of the 1999 accounts;
(iii) failing to pay any or any proper attention to the letter from LMP dated 26 November 1998;
(iv) failing to pay any or any proper attention to the auditor’s statement in the 1999 renewal application;
(v) failing to pay any or any proper attention to the auditor’s statement in the 2000 renewal application;
(vi) failing to analyse and assess properly or at all the financial information sent to them by LMP and Young;
(vii) failing to act sooner to terminate Jaja’s participation in the Fund;
(viii) failing to monitor properly or at all Jaja’s financial performance;
(ix) failing to monitor or assess properly or at all the risk posed by Jaja to the Fund;
(x) failing to monitor or assess properly or at all the trust account for client funds operated by Jaja;
(xi) failing to monitor or assess properly or at all the solvency of Jaja;
(xii) failing to examine properly or at all the information and/or assertions given by the directors of Jaja about the company’s operations.’
442 In his written submissions at the conclusion of the trial, the fifth respondent’s counsel did not address the question of contributory negligence. Nor did he address that matter in his oral submissions.
443 The applicant addressed the question of contributory negligence in a sentence by noting that the fifth respondent relied upon the purported qualification regarding doubtful debts as putting the Fund on notice such that it was guilty of contributory negligence.
444 I therefore have not been assisted by either counsel in relation to this issue. I suppose, in a way, this issue is closely related to the question of reliance. However, counsel has advised since I reserved my decision, that reliance is still placed upon this defence. Therefore, I must address the matter.
445 The onus is upon the fifth respondent to establish that the applicant failed to take proper care to avoid suffering loss or damage.
446 It is said that the applicant failed to pay any or any proper attention to Mr Young’s audit report in respect of the 1998 accounts. I am not sure what it meant by that. I am not sure what attention should have been paid and how, in paying that attention to those 1998 accounts, the applicant would have avoided suffering loss or damage.
447 In placita (ii) to placita (vi), the fifth respondent asserts that the Fund failed to pay proper attention to the material contained in the 2000 renewal material and, in addition, the letter of LMP dated 26 November 1998 and all the financial information sent by LMP and Mr Young.
448 I will deal with those in reverse order. The fifth respondent has not identified the financial material which was sent by LMP and Mr Young to the applicant, or how the applicant failed to analyse and properly assess that material. I am not prepared to make a finding of the kind sought in paragraph 66(c)(vi). It has not been established how the Fund could have paid better attention to the letter from LMP dated 26 November 1998 and, if so, how that would have avoided the Fund suffering loss or damage. That particular fails.
449 As to the other matters in placita (ii) to placita (vi), there is no evidence that the Fund failed to pay any or any proper attention to the audit report or the other matters contained in the renewal material. The fact is that the financial statements unknown to the Fund did not reflect a true and fair view of the company’s position or its performance. On the other hand, that was known to Mr Young. Mr Young knew, as his evidence discloses, that a provision should have been made in respect of the bad and doubtful debts identified in the audit opinion. If he had disclosed that information to the Fund, then the Fund might have been guilty of contributory negligence in failing to pay proper attention to that matter. However, he did not disclose that matter in his audit opinion. None of those placita are made out.
450 The other matters are, with respect, too vague to be of any assistance in the fifth respondent’s case on contributory negligence.
451 It has not said how the applicant should have acted to terminate Jaja’s participation in the Fund sooner or why. It has not said how the Fund should have been aware of the risk posed by Jaja to the Fund because of Jaja’s financial position or performance. I reject the contention implicit in paragraph 66(c)(xi) that the Fund failed to monitor or properly assess the insolvency of Jaja. That was the very reason why Mr Young was employed to audit the financial statements. It was for him to assess the solvency of Jaja and it was for him to advise the Fund of Jaja’s financial position. In my opinion, it does not lie in the mouth of the fifth respondent to complain of the conduct of the Fund where the Fund was entitled to rely upon the conduct of Mr Young in its assessment of Jaja’s financial position and performance.
452 In those circumstances, it seems to me, that the issue of contributory negligence does not arise.
CONTRIBUTION
453 The fourth respondent has argued that there ought to be an order that the fifth respondent contribute to whatever damages are payable by the fourth respondent.
454 Section 23B of the Wrongs Act 1958 (Vic) provides:
‘(1) Subject to the following provisions of this section, a person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with the first-mentioned person or otherwise).’
455 That section allows a party to recover contribution from another party liable, whether jointly or otherwise, in respect of the same damage to a third party. Contribution is available whether the two parties who are liable are liable in tort or have a statutory liability. The section operates where there is a joint liability for the same damage.
456 Section 24(2) provides:
‘(2) Subject to sub-sections (2A) and (2B), in any proceedings for contribution under section 23B the amount of the contribution recoverable from any person shall be such as may be found by the jury or by the court if the trial is without a jury to be just and equitable having regard to the extent of that person’s responsibility for the damage; and the jury or the court if the trial is without a jury shall have power to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.’
457 Thus it is that liability for that same damage is apportioned having regard to the extent of the responsibility for the damage.
458 The fourth respondent filed a cross-claim seeking indemnity or contribution under the Wrongs Act ‘or at law’. It does not appear that the fifth respondent has addressed that plea.
459 The fourth respondent said that its claim was non-controversial. It was not addressed by the fifth respondent’s counsel in his written or oral submissions.
460 I am not so sure that the claim is non-controversial. I think if on giving this judgment it still remains a live issue in the proceedings, I should hear the fourth and fifth respondents on that limited issue.
461 If the applicants are not entitled to damages then the cause of action in negligence has not been made out. The Fund claims that it is entitled to compensation for the payments which it had to make to travellers when Jaja ceased trading on 23 February 2000. The Fund claims $206,135, being the net sum after payment of $66,000 by QBE to the Fund pursuant to the guarantee given by QBE in August 1999.
TRUST UNDER NO LIABILITY
462 The fourth respondent argued that the trust was not under any liability to Jaja’s clients to reimburse them for services not provided.
463 Jaja was a franchisee in the Harvey World Travel organisation. Ms McAlpine is the assistant to the financial director of the head office of Harvey World Travel. During her six years with the company, some six franchisees have failed out of a network of about 450. When a franchisee fails, her duties are to coordinate the claims made by clients of the failed franchisee and to pass travel arrangements for those clients to other Harvey World Travel offices. Her primary role is to ensure that the clients or customers of the failed franchisee still receive their travel arrangements. She facilitates another franchisee taking over the files of the failed franchisee who then has the responsibility of determining what has been paid for and what has been supplied in travel services. The payment for the replacement booking is provided by the franchisor. The franchisor contacts the Fund to advise the Fund that the franchisor will be funding the travel arrangements and will be making claims. The franchisor’s purpose is to protect the clients.
464 The franchisee, who is then providing the substitute services, helps the clients to complete the claim forms to the Fund. The client would be told that the Fund would pay the franchise company the amount of the claim.
465 She said that if the Fund refused to pay the franchisor for any substituted services the franchisor had supplied to the client of the failed franchisee, then the franchisor ‘wore the loss’.
466 I accept her evidence in its entirety. She was cross-examined about one aspect of her affidavit. In her affidavit she said:
‘Whilst our aim is to ensure that the claimant does not suffer any loss due to the collapse of the HWT franchise and is able to go on the same or similar trip to that which was originally planned, HWT only arranges such travel because it can be paid for from the TCF. If the TCF was to decline a claim I would have to have the matter of the new travel dealt with by the Board who may then charge the claimant for the new arrangements.’
467 It was put to her in cross-examination that that was inconsistent with her oral evidence. I am not satisfied there is any inconsistency at all. The evidence in the affidavit is addressing a different time point to the oral evidence. Her oral evidence was discussing claims made on provision of substitute travel services. Her affidavit evidence was addressing a point of time before any substituted service was offered by the franchisor.
468 Ms McAlpine was directed to the documentation which was tendered in the trial, I think for the purpose of establishing that the documentation did not reflect the actuality of the arrangements between the franchisor and the client, and the client and the Fund.
469 Each of the clients signed a document entitled ‘Claim for Compensation’. A typical claim form indicated that ‘Harvey World Travel Franchises Pty Ltd has paid again for travel arrangements’. The clients also, in due course, signed a Deed of Release, usually before any payment was made in which the client agreed to accept payment by the Fund of a sum of money and discharge the Fund from any further or other claim against the Fund and at the same time authorise the Fund to pay the compensation to the franchisor.
470 The fourth respondent argued that the arrangements between the franchisor and the Fund were such that no assignment was ever made which allowed the Fund to pay Harvey World Travel Franchises Pty Ltd pursuant to clause 15.6 of the Deed.
471 Clause 15.6 prevents the Fund paying money to any travel agent unless the travel agent is exercising the right of a client to receive compensation out of the Fund that has been assigned to the travel agent. The clause does not contemplate any formal assignment. The purpose of the clause is to prevent travel agents profiting by reason of the default of other travel agents.
472 In my opinion, the arrangements which were in place between Harvey World Travel Franchises Pty Ltd and its clients, and the claims which were made in these cases, were such that the Fund became obliged to pay Harvey World Travel Franchises Pty Ltd the sum which it paid. In my opinion, the fourth respondent’s contentions must be rejected.
DAMAGES
473 I turn to the question of damages.
474 The Fund’s case was that if it had been aware of the true financial position of Jaja it would not have continued Jaja’s participation in the Fund, except upon conditions.
475 The Fund called Mr Whittaker, the manager of special investigations. He gave evidence upon the assumption that Jaja submitted financial statements which incorporated Mr Humphreys’ amended balance sheet (Attachment 4), to which I have already referred and which I have set out above: [271].
476 He performed the financial analysis upon the assumptions contained in Mr Humphreys’ amended balance sheet and concluded that Jaja would have scored –6 points instead of 16 points which were attributed to it.
477 He said, based upon those calculations, the Fund’s assessing section would have required either a bank guarantee in the sum of $222,000 or an injection of capital in the amount of $222,000 and a report from a duly qualified auditor at the expense of Jaja to investigate the reasons for the deficiency in the client trust bank account; to determine whether Jaja is likely to continue to have sufficient financial resources to carry on business as a travel agent; for Jaja to meet the TCF’s financial criteria for participation in the Fund. The Fund would have sought a bank guarantee or a capital injection in the sum of $220,000 because in the terms of its financial analysis or its financial criteria there would have been a shortfall of capital in the order of $220,000.
478 Mr Whittaker prepared a special investigations report with recommendations which he deposed to in his affidavit. The special investigations report is a nonsense. It assumes Mr Humphreys’ opinions expressed in Attachment 4, but Mr Young’s audit opinion. Of course, if one assumes the facts contained in Mr Humphreys’ amended balance sheet and that the financial statements were audited, the audit opinion could never have been in the terms that Mr Young expressed. The audit opinion would have had to refer to a provision for bad and doubtful debts of $127,000 rather than $47,217. As I say, his proposed special investigations report is a nonsense.
479 He said, based upon the assumptions made in Attachment 4 (Mr Humphreys’ amended balance sheet), that the assessor would have written to Jaja imposing those conditions as a condition of Jaja’s eligibility for continued participation in the Fund. Mr Whittaker prepared an amended AFR form to reflect Mr Humphreys’ assumptions.
480 However, in his evidence, he said that if he thought Jaja was hopelessly insolvent he would not have put forward the recommendation to which I have referred but instead would have recommended to the trustees that they terminate its participation in the Fund. That was also the evidence of Mr Hammond.
481 In my opinion, there can be no doubt that that is correct. I set out Mr Whittaker’s evidence:
‘HIS HONOUR: Mr Whittaker, if an accountant was called upon to investigate the reasons for the deficiency, which was, as you show in your workings upon the assumptions made, in the order of $163,000 for services paid for but not delivered, having regard to the assumptions contained in the balance sheet, what explanation could there ever be that would ever satisfy you?---There are a number of reasons, your Honour. People, participants, have a tendency to take money out of their client account and use it for other purposes – very dangerous from the point of view of keeping your business financially healthy, but it does happen. The stock market goes up, the money is in a bank account. Participants think that if they invest it in the stock market they can make money out of it, they can buy a building?---This has happened in a number of instances.
Well, maybe, but that doesn’t seem to me to be a very satisfactory explanation, that they’ve put the money into the stock market to make a profit for themselves. Just assuming that the balance sheet was, as Mr Humphreys has said at page 749, that you’ve got negative shareholders’ funds of $120,000. You’ve got to make a provision for doubtful debts of $127,000. You’ve got accumulated losses of $144,000 and there would appear to be of in the order of $163,000 worth of services paid for but not delivered and insufficient money to deliver them. What explanation could be given in those circumstances that would have satisfied you that the company could have remained a member?---Well, the only way that they could have satisfied me was (a) the business will be conducted in a manner which wouldn’t further undermine the business and that they were in a position to recapitalise the business and give it sufficient financial resources. Even if one has a bank guarantee, if there are $163,000 worth of clients out there who want their tickets the airlines and other principals who provided those tickets have got to be paid in cash and therefore one would need, at the very minimum a corresponding amount of money to that liability and probably for the trade creditors as well, in order to carry on trading.
So the only explanation that would have satisfied you at the time, if such a report had been requested and obtained, was not only the provision of the guarantee but also the recapitalisation of the business to ensure that the clients’ funds were covered?---Yes. You will note that within my briefing paper I said “a bank guarantee of 222,000 as an interim measure.” That was protecting the interests of the fund while we really found out what was going on.
So if you had commissioned the report in paragraph 19(c) which you speak of, you would have, in addition to the guarantee, more than likely – assuming all the assumptions of Mr Humphreys’ balance sheet, more than likely required a recapitalisation in the order of 167,000?---Probably more.
Yes, probably more. Yes, I understand. Yes.’
482 Mr Brattoni was the CEO of the Fund at the relevant time. He was a member of the Management Committee. He said that he would have accepted the recommendations in Mr Whittaker’s briefing paper and imposed the conditions suggested in that paper. Mr Given is a trustee of the Fund. He swore an affidavit in which he referred to Mr Whittaker’s affidavit and the briefing paper exhibited to Mr Whittaker’s affidavit. He said that if he had been provided with that information he would have imposed the conditions suggested by Mr Whittaker. Mr King, who was the chairman of trustees of the Fund, gave evidence to the same effect.
483 I reject the evidence of Messrs King, Given and Brattoni that if they had been provided with the special investigations report, which Mr Whittaker said he would have created if he had assumed the facts contained in Mr Humphreys’ amended balance sheet, they would have imposed the conditions suggested by Mr Whittaker.
484 Mr Humphreys’ amended balance sheet shows Jaja to be hopelessly insolvent. The directors and shareholders could not have injected capital of the kind mentioned to recapitalise Jaja. Jaja could not have continued to trade. Its directors would have committed a number of contraventions of the Corporations Law if they had been aware of the financial position of the company as disclosed in the amended balance sheet and continued to allow Jaja to trade whilst insolvent.
485 The financial statements would have had to be audited. The audit opinion would not have been as that disclosed in Mr Whittaker’s special investigations report. The audit opinion would have had to be adverse. It would have had to refer to the extent of the trust creditors ($182,079) and that their monies had been used for other undisclosed reasons. It would have had to mention the extent of the provision for bad and doubtful debts ($127,569). It would have had to refer to the loss for the year ($116,720). It would have had to note that Jaja’s current liabilities exceeded its current assets by $125,303. Its shareholders’ funds were negative to the extent of $119,462. It would have had to record that Jaja did not have the necessary support to continue trading and that it could not pay its debts as and when they fell due. The audit opinion would have had to conclude that Jaja was insolvent and not a going concern. It would have had to further conclude that Jaja had to be valued on a liquidation basis.
486 If Jaja’s true financial position as disclosed in Mr Humphreys’ amended balance sheet had been known as at August 1999, the company had to have stopped trading immediately. Jaja could not have applied to continue to participate in the Fund. It had to cease trading immediately. Even if it did not, the Fund could not have supported a company which was hopelessly insolvent by imposing a condition that the company obtain a QBE guarantee in the sum of $220,000. That guarantee may have been some protection to the Fund but it would have been no protection to the general body of creditors.
487 I find that if the Fund had become aware on either 27or 30 August 1999 of Jaja’s true financial position it would have immediately ceased Jaja’s participation in the Fund.
488 I reject the Fund’s case to the contrary.
489 If Jaja had ceased to be a participant in the Fund, the Fund would have been liable for any claims of any of the then clients of Jaja who had paid money for travel services not provided. The Fund would have been liable under the Deed for the reasons which I have already explained.
490 No attempt has been made by the Fund or its witnesses to identify Jaja’s client to which and the amounts for which the Fund would have been liable as at, say, 30 August 1999.
491 The clients who had paid for travel services which had not been provided as at, say, 30 August 1999 could easily have been ascertained from the clients’ trust account ledger. That was a task that Mr Humphreys had undertaken as at 30 June 1999. He had ascertained in his inquiry that as at that date the total amount paid for services not provided was $182,079. He could have been asked to undertake the same task as at 30 August 1999. One further matter would need to have been ascertained so as to determine the Fund’s liability to the then clients of Jaja. Each of the clients would need to have been approached to ascertain whether they were protected against a loss caused by Jaja’s inability to repay the amount paid or provide the traveller’s services by a policy of insurance: see clause 15.1(c) of the Deed.
492 It seems to me that the Fund needed to establish those facts so that it could establish its damages. Its damages must be the additional sum which it was called upon to pay by reason of its allowing Jaja to continue to participate in the Fund after 30 August 1999 and up to and including either 23 February 2000 or 29 February 2000.
493 The Fund had an existing liability to Jaja’s clients as at 27 or 30 August 1999. It had to discharge that liability. By relying on the audited financial statements, it allowed Jaja to continue to participate in the Fund up until the time that Jaja advised that it was insolvent in February 2000. The true measure of the Fund’s loss is the amount by which its liability increased to Jaja’s clients between August 1999 and 23 or 29 February 2000.
494 The measure of damages must be the difference between the Fund’s liability as at 27 or 30 August 1999 and its liability as at February 2000.
495 Sometimes a court is called upon to assess damages on incomplete information, when a plaintiff or an applicant cannot establish, with any real certainty, all of the facts which could give rise to a precise assessment of the plaintiff/applicant’s loss. In those circumstances, a court must do the best it can.
496 Where there are difficulties in establishing loss, the law does not permit those difficulties to defeat an appropriate claim for damages. Where those difficulties exist, the court must do the best it can to assess damages: Fink v Fink (1946) 74 CLR 127. In the Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 83, Mason CJ and Dawson J said:
‘The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v Schiffmann (1971) 124 CLR 303 at 308 Menzies J went so far as to say that that “assessment of damages … does sometimes, of necessity involve what is guesswork rather than estimation”. Where precise evidence is not available the Court must do the best it can. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages.’
See also Gaudron J at 153.
497 But there is a difference between an applicant who cannot establish the facts and circumstances upon which the assessment must proceed and an applicant who elects not to do so. As I say in the former case, a court will do the best it can. In the latter case, the applicant must fail for want of proof of damages.
498 In Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257, Hayne J said at [37]-[38]:
‘[37] Placer undoubtedly bore the burden of proving not only that it had suffered damage as a result of Thiess Contractors’ breach of contract, but also the amount of the loss it had sustained. It goes without saying that it had to prove these matters on the balance of probabilities and with as much precision as the subject matter reasonably permitted.
It may be that, in at least some cases, it is necessary or desirable to distinguish between a case where a plaintiff cannot adduce precise evidence of what has been lost and a case where, although apparently able to do so, the plaintiff has not adduced such evidence. In the former kind of case it may be that estimation, if not guesswork, may be necessary in assessing the damages to be allowed. References to mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can may find their most apt application in cases of the former rather than the latter kind. This case did not invite attention to such questions. Placer sought to calculate its damages precisely.’
499 This is a case where the Fund could have proved its starting point for the assessment of the applicants’ loss. It chose not to. In those circumstances, it could not prove its damages. No satisfactory explanation has been advanced by the Fund as to why it chose not to establish the starting point for the assessment of its damages.
500 The only information before the Court relating to the Fund’s potential liability as at 30 August 1999 is contained in the financial statements of 30 June 1999. For reasons already expressed, those financial statements are not accurate. There is Mr Humphreys’ evidence which shows that the amount paid by trust creditors at that time for which services had not been provided was in the order of $182,079.
501 Let it be assumed, wrongly in my opinion, that was the Fund’s liability as at 30 August 1999. It may or it may not have been. I cannot know that but, for the purpose of the exercise, I shall assume it to be.
502 On my findings, Jaja would have ceased to trade some time in August 1999 and immediately upon the auditor giving the auditor’s opinion. It would not have obtained the QBE guarantee. The Fund then would have been liable to Jaja’s clients in the order of $182,000.
503 In due course, the Fund became liable to Jaja’s clients (who were probably different clients at that time but, nevertheless, claimants under the Fund) in the sum of $266,135. The Fund received $66,000 from QBE pursuant to the guarantee which was provided because the Fund allowed Jaja to continue to participate in the Fund. Credit must be given for that amount. The Fund’s loss is therefore in the order of $200,000.
504 The difference between the amount which the Fund would have had to have paid assuming that it had a liability to Jaja’s clients as at August 1999 of $182,000 and the amount it paid, was in the order of $18,000.
505 However, there are two further pieces of evidence which are relevant to a consideration of the loss suffered by the Fund. Mr Humphreys acknowledged that the sum of $182,079 might be understated to the extent of $6,000, being a further payment made by Mount Lilydale College. The trial balance does not disclose the receipt of a cheque for $6,000 which that client undoubtedly paid on or about 25 June 1999. Mr Humphreys agreed that that would increase the trust creditors to $188,000. I find that the trust creditors as at 30 June 1999 were $188,000.
506 Because the Fund’s loss then is the difference between the amount that it paid after recouping the sum of $66,000 from QBE and the amount for which it would have been liable if it had been presented with accurate financial statements for Jaja as at 30 June 1999, the increase in the trust creditors reduces the Fund’s loss by $6,000.
507 However, there is one further sum to which regard might have to be taken. As mentioned earlier, Ms Gottschalk, the fourth respondent, has paid the Fund the sum of $10,000 in satisfaction of the proceedings against her. Whether that sum has been paid in satisfaction of the Fund’s loss or in satisfaction of the Fund’s costs is not clear. If it has been paid in satisfaction of the Fund’s loss then credit might need to be given for it.
508 Therefore, if I am wrong, and there is sufficient evidence upon which the Fund’s damages could be assessed, they would assess in the order of $2,000.
509 However, for the reasons which I have given, in my opinion, the proceeding should be dismissed for the Fund’s failure to prove its damages.
I certify that the preceding five hundred and nine (509) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.
Associate:
Dated: 13 September 2005
Counsel for the Applicants: Mr P G Cawthorn Solicitor for the Applicants: McCabe Terrill Counsel for the First and Second Respondents: The First and Second Respondents did not appear Counsel for the Third Respondent: Ms Y Gottschalk appeared in person Counsel for the Fourth Respondent: Mr M W Thompson Solicitor for the Fourth Respondent: Herbert Geer & Rundle Counsel for the Fifth Respondent: Mr P J Cosgrave Solicitor for the Fifth Respondent: Moray and Agnew Date of Hearing: 4, 5, 6, 7, 8, 11, 12, 13, 20, 21 April 2005 Date of Judgment: 13 September 2005
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