Kodogo Pty Ltd (in liq) v Tabart

[1996] QCA 329

Brisbane

[Kodogo P/L v. Tabart]

BETWEEN:

KODOGO PTY LTD (IN LIQUIDATION)

(Plaintiff) Appellant

AND:

JOHN EDWARD TABART

(Respondent) Respondent

___________________________________________________________________

Fitzgerald P.
Pincus J.A.

Demack J.

___________________________________________________________________________

Judgment delivered 06/09/1996

Separate Reasons for Judgment of each member of the Court, all concurring as to orders to be made. ___________________________________________________________________________

1.          APPEAL ALLOWED.

2.          ORDERS MADE BELOW SET ASIDE.

3.          IN LIEU JUDGMENT FOR THE APPELLANT AGAINST THE RESPONDENT IN THE SUM OF $456,950.00.

4.          RESPONDENT ORDERED TO PAY 40% OF THE APPELLANT’S COSTS HERE AND BELOW.

___________________________________________________________________________

CATCHWORDS: CONTRACT - loan agreement - interest free - money owed to which company - money advanced by different companies - knowledge of change of lender.

BREACH OF FIDUCIARY DUTY - notice of breach - circumstances
such as to put an honest and reasonable man on inquiry - employment
conditions.
Consul Developments Pty Ltd v. D.P.C. Estates Pty Ltd. (1975) 132
C.L.R. 373
Northside Developments Pty Ltd v. Registrar General (1990) 170
C.L.R. 146.

Counsel:	Mr P Keane Q.C. with him Mr A Ryan for the appellant. Mr H Fraser Q.C. with him Mr S Lumb for the respondent.
Solicitors:	Blake Dawson & Waldron for the appellant. Minter Ellison for the respondent.
Hearing date:	19 June 1996.
IN THE COURT OF APPEAL	[1996] QCA 329
SUPREME COURT OF QUEENSLAND	Appeal No. 198 of 1995
Brisbane
Before	Fitzgerald P. Pincus J.A. Demack J.

[Kodogo P/L v. Tabart]

BETWEEN:

KODOGO PTY LTD (IN LIQUIDATION)

(Plaintiff) Appellant

AND:

JOHN EDWARD TABART

(Defendant) Respondent

REASONS FOR JUDGMENT - FITZGERALD P.

Judgment delivered 06/09/1996

The circumstances giving rise to the appeal are set out in the reasons for judgment of Pincus J.A. As

there appears, the trial judge dismissed the appellant’s claim, which related to interest-free loans totalling

$485,000.00 which had been made to the respondent or by payments on his behalf. The respondent’s

employer, Qintex Group Management Services Pty Ltd (“QGMS”), paid $175,000.00 to a former

employer of the respondent on his behalf and advanced $130,000.00 to the respondent. The appellant

advanced a further $180,000.00 to the respondent. Except for the sum of $100,000.00, the total

amount was repayable “no earlier than the expiration of 5 years from the date of termination of [the

respondent’s] employment by Qintex Group Management Services Pty Ltd”. The other $100,000.00,

part of the total paid to or on behalf of the respondent by QGMS was repayable in terms of a similar provision except that the period referred to was “10 years”, not “5 years”. The shorter period had

expired prior to trial, and the longer period has not yet expired; the respondent’s employment by

QGMS terminated in October 1989. The action was commenced by a writ issued on 2 March 1992,

the respondent’s Further Amended Defence was delivered on 25 May 1995, the trial commenced on

5 June 1995 and the judgment appealed from was delivered on 22 August 1995.

The respondent’s only answer to the appellant’s claim for the $180,000.00 which it paid to the

respondent is that the appellant made the payments which aggregate that sum on behalf of QGMS. The

evidence is all to the contrary. Indeed, I agree with Pincus J.A. that the evidence establishes that the

respondent agreed to pay the appellant, in lieu of repaying QGMS, the amounts which QGMS had paid

to him or on his behalf and that the terms of that agreement, upon which the appellant, the respondent

and QGMS all acted, are those set out in Exhibit 7, a letter from the appellant to the respondent dated

31 January 1989, the terms of which are reproduced in the judgment of Pincus J.A.

The respondent sought to uphold the judgment in his favour on the basis that it lacked contractual effect,

and /or there was no “tripartite contract” between the appellant, the respondent and QGMS, and/or

QGMS did not assign its rights against the respondent to the appellant in writing and the respondent did

not receive written notice of such an assignment (Property Law Act 1974, s. 199). Further, the

respondent submitted that the appellant could not rely upon an equitable assignment in the absence of

QGMS as a party to the action, and reference was made to Ashmore Developments Pty Ltd v. Eaton

[1992] 2 Qd.R. 1, 4, 7. However, once the respondent’s contention that the payments made to the

respondent by the appellant were made on behalf of QGMS is rejected, the respondent’s contention that he was not in a contractual relationship with the appellant becomes untenable in the face of his

acceptance of payments aggregating $180,000.00 from the appellant. And part of that contract, to

which he committed himself by accepting those payments from the appellant, required him to pay the

other amounts for which Exhibit 7 provides to the appellant in accordance with the terms of that letter.

The relationships between the parties are such that QGMS would obviously be estopped from pursuing

the respondent for the sums which it had paid to him or on his behalf, at least once he had made

payment to the appellant in accordance with Exhibit 7, and it is instructive to note that there is no

suggestion that QGMS has made demand on the respondent or that he has offered any payment to

QGMS, or that he sought to join QGMS or to interplead once the due date for his repayment of the

first $385,000.00 arrived in October 1994. On the contrary, in the amended pleading which he

delivered on the eve of trial, one of his contentions was that no amount would become payable by him

until 1 June 1996.

Accordingly, I agree with Pincus J.A. that the appeal must be allowed and judgment given against the

respondent. However, the appellant is not content with a judgment for $385,000.00 plus interest (at

10% per annum) from the date (October 1994) when payment of that amount fell due, plus a

declaration that it is entitled to receive the remaining $100,000.00 in 1999 (the appellant says on 18

November) if not paid in the meantime; according to the appellant, it is entitled to immediate payment

of the entire $485,000.00 plus compensation on one or other of two alternative bases, namely:

“1. ... a basis that reflects the cost to the [appellant] based on commercial interest, namely the index rate: ... . The amount of interest on the index rate compounded from 25 October 1989 to June 1995 ... $499,403.33. Using the daily rate from 5 June 1995 specified therein to today renders further interest of $114,688.98 (not compounded).

(iii)        On this basis the appellant seeks judgment (as at [the] date [of the hearing in this Court] for the sum of $1,099,092.31.

2. ... a basis that reflects the advantage or profit derived by the [respondent] by way of his receipt of monies paid to him in breach of fiduciary duties of which he had notice. The [respondent] obtained or utilised the relevant loans for the same purposes as a housing loan. The amount of interest compounded from 25 October 1989 to 31 May 1996 ... $555,528.09.

... On this basis the appellant seeks judgment (as at [the] date [of the hearing in
this Court] for the sum of $1,040,528.09 ...”

These claims by the appellant commence from the fact that it paid to QGMS sums totalling

$305,000.00, the amount which QGMS had paid to or on behalf of the respondent; the appellant paid

$275,000.00 to QGMS on or about 13 February 1989, and a further $30,000.00 on or about 17 April

1989. The foundation of the appellant’s case in relation to the claims now being considered is that these

payments were (i) repayment of the sums paid by QGMS to or on behalf of the respondent, and (ii)

made by the directors of the appellant in breach of their fiduciary duty, and that the respondent knew

or ought to have known of the payments by the appellant and the associated breach of trust. Similarly,

according to the appellant, the payments which it made to the respondent were made by its directors

in breach of their fiduciary duty, and the respondent knew or ought to have known of their breach of

trust. The breach consisted of payments by the appellant which were not for its benefit but contrary to

its interests because of the unfavourable terms on which repayment from the respondent was required,

and, it seems, the excessively favourable terms upon which the respondent was employed by QGMS.

It was accepted and indeed asserted by the appellant that QGMS and the appellant were controlled

by Christopher Skase, and that he was the moving force behind each of the appellant and QGMS in

the transactions in which each was involved. However, it was submitted by the appellant that its rights

had to be considered by reference to its individual interests: Walker v. Wimborne (1976) 137 C.L.R.
1, at pp. 6-7.

The legal principles underpinning the appellant’s claim seem to me well-established; the dispute is largely

factual.

The respondent was the Chief Executive officer of the “Mirage Trusts”, which concerned resort

developments at the Gold Coast and Port Douglas managed by QGMS. However, as the trial judge

found, the respondent had no role in relation to the appellant, and had not heard of it until at or about

the time when Exhibit 7 was produced. He saw nothing unusual in Skase substituting one of his

companies, the appellant, for another, QGMS, as the respondent’s creditor in respect of his existing

indebtedness, or in using the appellant to make subsequent advances. Nor would he have been

surprised, had he turned his mind to it, that the appellant, in turn, obtained its funds for the purpose of

the payments which it made to the respondent and QGMS from within the Qintex group of companies

which Skase controlled. The amounts provided to the appellant were repayable at call, but there is no

firm evidence that it was obliged to pay interest to its lender; further, there is no evidence that the

appellant was in a position to use the funds provided to it from within the Qintex group for any purpose

other than that for which they were used, i.e., the payments to QGMS and the respondent. There is

no evidence that it lost any investment opportunity or repaid what it received from within the Qintex

group, with or without interest.

It follows, in my opinion, that the appellant failed to prove any loss from the material transactions, and

the first basis on which its claim to compensation is founded should be rejected. However, it remains necessary to consider whether it is nonetheless entitled to judgment for the entire $485,000.00 which

it outlaid, together with compensation on the second basis put forward, which is related to “the

advantage or profit derived” by the respondent.

Irrespective of my view, expressed above, that the appellant failed to prove loss, it cannot succeed in

either claim against the respondent related to a breach by the appellant’s directors (Skase) of their

fiduciary duty to the appellant unless it establishes at least that a reasonable person in the position of the

respondent would at least have had cause to question whether the appellant was being caused to act

contrary to its interests.

The appellant introduced into the trial, with “expert” evidence, an issue concerning whether the

respondent’s contract of employment with QGMS was excessively favourable to him. There is nothing

to suggest that that transaction was not negotiated at arms’ length or that the respondent had, or

misused, some superior bargaining position in the negotiations with QGMS. Further, there was no

suggestion that the appellant became the respondent’s employer or subject to any obligations to the

respondent which are not contained in Exhibit 7. The asserted relevance of the terms of the

respondent’s employment contract with QGMS to the dispute between the appellant and respondent

- as best I could understand the appellant’s argument - was that the favourable nature of his bargain with

QGMS was a factor to be regarded when consideration is given to whether the respondent should have

been put on inquiry when Kodogo was substituted for QGMS as lender in respect of the respondent’s

borrowings.
Reference was made earlier to Walker v. Wimborne. While it is correct that the appellant’s rights must

be determined by reference to its individual interests, it is also a potentially material factor to be

considered when deciding whether notice should be attributed to another that a company’s directors

have acted in breach of its interests that the impugned transaction was one between two associated or

related companies.
In the present case, the question whether notice of a breach of fiduciary duty - assuming one to have

occurred - should be attributed to the respondent must be considered from the perspective of an

employee of a company controlled by an individual who controlled a myriad of companies and, it

appears by inference at least, moved funds and entitlements and obligations between them. Without

more than was established by the appellant such as knowledge or suspicion or reason to suspect

impropriety on the part of Skase, in my opinion the respondent should not have notice of a breach

attributed to him.

To take one example, for all the respondent knew, the appellant might have been indebted to QGMS

by reference to some earlier transaction and the funds paid by the appellant to the respondent and

QGMS might have been intended to satisfy all or part of that debt. Or, as might have indeed have been

what occurred, the appellant might, as part of an internal, legitimate arrangement within Skase’s

companies, been chosen as the repository of funds associated with executive loans.

In my opinion, the appellant failed to prove its case except on its claim for money which has fallen due

under Exhibit 7, $385,000.00, plus interest.

I agree with the orders proposed by Pincus J.A.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No.198 of 1995.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No.198 of 1995.

Brisbane

Before Fitzgerald P.

Pincus J.A. Demack J.

[Kodogo P/L v. Tabart]

BETWEEN:

KODOGO PTY LTD (IN LIQUIDATION)

(Plaintiff) Appellant

AND:

JOHN EDWARD TABART

(Respondent) Respondent

REASONS FOR JUDGMENT - PINCUS J.A.

Judgment delivered 06/09/1996

This is an appeal by a company in liquidation against dismissal of a claim made against a former

employee of a company other than the appellant; the employer company and the appellant had in

common that at the head of each was one Christopher Skase, formerly the leading executive of the

Qintex Group and now thought to be resident in some foreign place. The appellant’s claim against the

respondent was to recover a sum said to be due to the appellant under arrangements embodied in a

letter of 31 January 1989 (Exhibit 7) and as well, relief on the basis that the respondent was party to

a breach of fiduciary duty. The case is one in which the issues as litigated were not confined to those

which, from examination of the statement of claim, I would have expected the appellant to have raised.
The appellant’s pleading alleged, in substance, that at material times the respondent was an

employee of a company ("QMS"). The pleading alleged that the appellant was never the employer of

the respondent, nor did he perform any services for it; that was common ground. The pleading said

in effect that, in accordance with Exhibit 7, the letter dated 31 January 1989 mentioned above and

whose terms are set out below, the appellant advanced certain sums on generous terms to the

respondent; that at the time Skase was a director of and stood in a fiduciary position towards the

appellant; that when Exhibit 7 was signed and the loans were made the respondent knew that Skase

was acting in breach of his fiduciary duties towards the appellant; and that the appellant derived no

benefit from making the loans. Various relief was claimed on the basis that the monies advanced under

Exhibit 7, or some of them, had become due, and on the basis of breach of fiduciary duty.

As fought, the case was, as I have said, rather different. It was not attempted to be proved that

the appellant in fact advanced to the respondent the monies claimed by the statement of claim, which

totalled $485,000. The case put forward was in essence that Qintex Group Management Services Pty

Ltd (QMS) paid $175,000 to companies in the Lend Lease Group in discharge of an obligation which

the respondent had to those companies; that it also paid the respondent $130,000 and that the

appellant paid the respondent a total of $180,000; these sums made up the $485,000 claimed in the

statement of claim and all were, under the terms of Exhibit 7, repayable interest-free on dates which

were, at the date of Exhibit 7, well in the future.

Exhibit 7 is as follows:

" KODOGO PTY. LIMITED
29th Level, 12 Creek Street,

Brisbane, Qld. 4000.

31 January, 1989.

Mr. J.E. Tabart,
8/108 Macquarie Street,

ST. LUCIA QLD 4067.

Dear John,

Kodogo Pty. Limited is pleased to confirm the following package of loans as a member of the Qintex Group Executive Team.

As you know, three loan facilities totalling $275,000 presently exist. It is proposed that a further $300,000 loan facility be made available to you.

We confirm that the existing facilities (Loans 1 - 3 below) and the new facility will be subject to the following terms and conditions:

Loan Amount Terms and Conditions

1.	$100,000	Security	- Nil
Term	- Repayable no earlier than the expiration of 10 years from the date of termination of employment by Qintex Group Management Services Pty. Limited.
Interest
Rate	- Interest free
2.	$ 75,000	Security	- Nil
Term	- Repayable no earlier than the expiration of 5 years from the date of termination of your employment by Qintex Group Management Services Pty. Limited.
Interest
Rate	- Interest free
3.	$100,000	Security	- Nil
Term	- Repayable no earlier than the expiration of 5 years from the date of termination of employment by
Qintex Group Management
Services Pty. Limited
Interest
Rate	- Interest free
4.	$300,000 facility	Security	- Nil
Term	- Repayable no earlier than the expiration of 5 years from the date of termination of employment by
Qintex Group Management
Services Pty. Limited
Interest
Rate	- Interest free

Should any matter referred to the above require further explanation please do not hesitate to contact me.

Yours sincerely,

KODOGO PTY. LIMITED

[Signature]

CHRISTOPHER C. SKASE,

Director. "

The evidence showed that the respondent went to work with the Qintex Group in 1986 on

terms which included the payment to or on behalf of the respondent of various lump sums; that in

December 1988 the appellant spoke to Skase about obtaining further such sums, and also to better

define the terms of the arrangements previously made. This part of the case is difficult to reconstruct

from the record, because many of the documents included in it are unindexed, and so not easy to

identify.

On 26 January 1989 the respondent’s accountants, Messrs Arthur Andersen & Co., sent him some draft documents which were intended to be executed by the respondent and by someone on behalf of QMS; they purported to set out the terms of the respondent’s employment, including the

terms on which advances made to him were to be repaid. The respondent gave that document to a man

called Burden, then connected with the Qintex Group, and the result was the production of Exhibit 7

which is in form a letter from the appellant to the respondent. The respondent gave evidence at the trial

to the effect that he played no part in the preparation of Exhibit 7 other than as has just been mentioned,

that is, other than that he gave Burden the Arthur Andersen documents, which did not mention the

appellant; that evidence was accepted. He had previously given evidence to a different effect, but

explained that he was mistaken; the appellant does not challenge the primary judge’s finding about this

point, so that the appeal is to be decided on the basis that the respondent had nothing to do with the

circumstance that, as the appellant contends, under Exhibit 7 the party to which the respondent’s

obligations were due was the appellant, not QMS. The discussion of Exhibit 7 at this stage of my

reasons does not deal with the appellant’s attack on the judge’s finding, which amounted to a view that

there was no contract between the appellant and the respondent; this is pursued below, under the

heading "Contract between Appellant and Respondent".

The respondent gave evidence that he had never heard of the appellant before he saw Exhibit

7. The evidence was that it was decided - it is not clear by whom - that the indebtedness of the

respondent should become an indebtedness to the appellant. This decision was implemented in various

ways. First, as has been mentioned, Exhibit 7 referred to the appellant, not to QMS; secondly, all but

one of the payments which were made to the respondent under the terms of that document after Exhibit

7 was signed were made by the appellant, not by QMS; the exception was a payment which was made

by QMS on 13 April 1989 in the sum of $30,000. Further, the evidence was that the appellant made payments to QMS to reflect the payments which the latter had made to or for the respondent. The

source of the funds which the appellant used to make the necessary payments to QMS was not

precisely identified, but it seems likely that the monies came from Qintex Group companies. It is not

absolutely clear whether loans made to the appellant from companies in the Qintex Group were at

interest or interest-free, but the evidence was that such loans were treated as being "at call".

Although there was no mention of such a case in the statement of claim, before the primary

judge an attempt was made to establish that, considered as terms of a contract of employment, the

conditions set out in Exhibit 7 relating to the "lump sum" monies paid to the respondent under that

document were so extravagant as to show a breach of fiduciary duty on the part of the persons

responsible for authorising Exhibit 7. These allegations were rejected by the primary judge and we were

urged to reach a different conclusion from that arrived at below.

It was not made clear in this Court in what way the improvidence or otherwise of the terms set

out in Exhibit 7 is relevant to the appellant’s case. One possibility would be to argue that the

appellant’s employment agreement constituted a breach of duty to the company which employed him

when it was made; that was QMS. The difficulty about that contention is, as it seems to me, the extent

to which it diverges from the pleading; that contains no suggestion that QMS or its directors were a

party to any breach of fiduciary duty. Also, it would have to be made out that the appellant’s stepping

into the shoes of QMS, insofar as it did so, infected the respondent’s agreement with the appellant with

the vice of the QMS agreement. Another approach is to treat the transaction between the appellant and

respondent in the way in which it is treated in the pleading, i.e. in isolation; but it does not matter, then, whether there was a gross imbalance between the benefits the respondent received, as an employee,

and the value of the services he provided. Those services were not provided to or at the behest of the

appellant; this is no doubt what the pleader meant by saying in para. 14(d) of the statement of claim:

"The plaintiff derived no benefit from making the loans referred to in [Exhibit 7]". That is, in exchange

for the undoubted benefits accorded to the respondent by Exhibit 7, namely the considerable time

allowed for repayment and the absence of any provision for interest in the meantime, the respondent

undertook to do nothing for the appellant; all the appellant obtained as part of the arrangements which

led to Exhibit 7 was money by way of loan, to fund the payments it made, on the evidence, to QMS in

consideration of the agreement of QMS that the appellant should be treated as the creditor of the

respondent, in lieu of QMS. But it was proved that the monies the appellant borrowed were repayable

at call; whether or not interest was charged on them, (and the accounting records suggest that it was)

the arrangement was so disadvantageous to the appellant that no directors having the appellant’s

interests in mind could possibly have assented to it.

Something was sought to be made in this Court of the circumstance that there was no evidence

that demand had been made on the appellant for repayment of the monies which it was lent to make the

necessary payments to QMS and to the respondent; but one must consider Exhibit 7 at the time it came

into existence, with the arrangements associated with it. Under them the appellant became entitled to

repayment from the respondent, interest free and well in the future, of monies which it had obtained by

borrowing at call; such a transaction was, if one takes account only of the interests of the appellant,

grossly improvident.

Counsel for the appellant referred us to authority for the proposition that it is proper, even

where a company such as the appellant is part of a group, to consider its interests in isolation in contexts

of this sort; but that is not a matter which is placed in issue, no doubt because neither QMS nor the

appellant was a member of the Qintex Group. There was no company in the Qintex Group which

owned shares in either of QMS or the appellant; if, as appears to be the case, QMS and the appellant

were administered in some respects as if they were part of the Group, that cannot make any legal

difference. The real difficulty for the appellant is, as it seems to me, the question of notice of a breach

of fiduciary duty. It was not contended, nor can any evidence be found to show, that the respondent

knew what arrangements had been entered into between the appellant and QMS or any company in

the Qintex Group. The contention was that the circumstances were such as to put the respondent on

enquiry.

There was little exploration of that point at the trial, no doubt because the case there advanced,

as to breach of fiduciary duty, had to do with the alleged extravagance on the respondent’s terms of

employment; of those terms, he was of course well aware, but the transaction evidenced by Exhibit 7

and said by the appellant to be one between the appellant and respondent was plainly not part of a

contract of employment. If it had the effect for which the appellant contends, that effect was to

substitute the appellant for QMS as the creditor of the respondent in respect of monies to be advanced

to him. If that was so, then of course the respondent became subject to obligations to the appellant, but

those obligations did not include any of the duties which the respondent had to perform as an employee.

Contract between Appellant and Respondent

The primary judge held that there was no loan agreement between the appellant and the

respondent, nor was there any agreement between them under which the appellant became substituted

for QMS, in respect of rights and obligations subsisting under an agreement between the respondent

and QMS. Those propositions cover all the possibilities; it was not suggested that there was an

agreement between the appellant and the respondent of any other description.

As has been explained above, in setting out the nature of the case advanced at the trial, the

respondent became an employee of QMS. Before Exhibit 7 was written, money was paid to Lend

Lease to discharge the respondent’s obligations to that group, undertaken during his employment there.

QMS also paid to the respondent, in two instalments, a total of $100,000 which was intended to be

consideration for a restrictive covenant to be entered into by the respondent. There was talk of a loan

of $300,000 to be made to the respondent; he said this was promised to him by Skase. On

23 December 1988, Skase prepared a document setting out the respondent’s terms and conditions of

employment and these included mention of a $300,000 interest-free loan. The respondent, as I have

mentioned, had his accountants prepare some documents intended to set out the terms of his

engagement and he gave them to Burden.

Burden gave evidence that he could recall no discussions about Exhibit 7 before it was signed

and said that the respondent had no reason to know what Kodogo was. One Hosking, who was then

in charge of the QMS accounts, explained that the appellant was a company which "took up various

loans transactions as designated by senior executives...". Hosking said that he was told by two other

executives to "ensure that these loans were moved to Kodogo"; he did not have any "full explanation" of the reason. The respondent’s evidence was that when he gave the Arthur Andersen documents to

Burden he was told that Burden would discuss it with Skase and "organise something". Subsequently,

he received Exhibit 7 and noticed the "change to Kodogo". He said he had "never seen or heard of

Kodogo before". I have already referred to the finding that he had nothing to do with the preparation

of Exhibit 7.

It will be noticed that Exhibit 7 does not express what is the connection of the appellant with

the loans which by the document it was "pleased to confirm". One possibility is that the document

should be read as merely providing information about the loans, without any implication that the

appellant was a party to them. That is, in substance, the view which the primary judge took.

But it was not either party’s understanding of the matter. The respondent did not dispute that

the "source of the loans was Kodogo". Some nine months after Exhibit 7 was given to him, he wrote

a memorandum, with a copy to Burden, referring to "several loans which are . . . part of my package"

and added, "the loans are from Kodogo . . . ". In 1991 he prepared a document referring to his "several

loans from Kodogo" and signed that; in the same year he also signed another document using similar

expressions. In a number of other documents he acknowledged, expressly or implicitly, that the loans

were from the appellant. He said in evidence that he proposed to repay the loans to the appellant.

It is true that while the evidence suggests that there was a discussion about Exhibit 7, at least

between Burden and the respondent, there is none but the vaguest explanation as to what that

discussion, which occurred 6 years before, might have been. But it seems improbable that all those concerned, and in particular the respondent, would have, as they did, gained the understanding that the

loans were repayable to the appellant rather than to QMS, had this not in some way been made clear

about the time Exhibit 7 was given to the respondent. Further, all but one of the subsequent payments

by way of loan came from the appellant and there is no suggestion that this was queried by the

respondent. If the point depended on the respondent’s credibility, one would not be justified in differing

from his Honour’s view that there was no contract, which seems equivalent to a view that the appellant’s

role in Exhibit 7 was merely as a provider of information. But the evidence establishes, in my respectful

opinion, that from the time of Exhibit 7 on, the common intention was that Exhibit 7 should be treated

as setting out the terms of the relationship between the appellant and the respondent as creditor and

debtor; in my opinion it should be inferred that whatever was said and done when Exhibit 7 was

produced must have made this clear enough.

Accepting, as I do, the appellant’s argument that the proper inference is that Exhibit 7 contained

terms of a contract between appellant and respondent, I turn again to the question of notice of breach

of fiduciary duty. I have mentioned all the evidence I can find which could bear in any significant way

on that subject. There was no cross-examination of the respondent probing the version he gave, which

was in substance that although he accepted that he became liable to the appellant, he knew nothing of

it. On the appellant’s contention, the respondent had an obligation to ask questions of the appellant

about the appellant’s position in relation to the Qintex Group and more particularly what arrangements

it had made with QMS and with any companies in the Qintex Group, in connection with its assumption

of the role of the respondent’s creditor for sums advanced to him. Of course, the arrangements if

disclosed should have convinced the respondent that Kodogo was proposing to enter into a very disadvantageous transaction: borrowing money at call, (perhaps, also at interest), and lending it long-

term at no interest; that could not possibly have advantaged the appellant, considering its position in

isolation. Further, the respondent could have found out that the transaction could not be defended, even

in a commercial sense, on the basis that the appellant was part of the Qintex Group because, other than

administratively, it was not; its shareholders were natural persons and no companies in the Qintex

Group had an interest in the appellant.

In the reasons of Gibbs J., in Consul Developments Pty Ltd v. D.P.C. Estates Pty Ltd (1975)

132 C.L.R. 373 there is to be found a discussion of the circumstances in which participants in a breach

of fiduciary duty may be made liable. His Honour said at 398:

"It may be that it is going too far to say that a stranger would be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger’s failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognising any impropriety that would have been apparent to an ordinary man."

Then at p. 401 his Honour remarked of the case before him:

"In this case also it has not been established that Clowes knew or should have known that Grey was in breach of his duty, nor has it been established that an honest and reasonable man in the position of Clowes would have felt bound to make inquiries to confirm the assumption that the Walton companies could not afford to buy the Clubb Street property and were not interested in it."

In the present case the only circumstance which I can discern which might have induced a person in the

respondent’s position to make inquiries about the nature of any transactions associated with the

substitution of the appellant as his creditor is what was said to be the excessive generosity of his employment conditions; it might have been, but was not, put to the respondent that the character of his

employment conditions should have made him wary and induced him to require presentation of evidence

that the appellant’s interests were being properly considered. In Northside Developments Pty Ltd v.

Registrar General (1990) 170 C.L.R. 146 at 160, 161, Mason C.J. remarked:

"If the nature of the transaction is such as to excite a reasonable apprehension that the transaction is entered into for purposes apparently unrelated to the company’s business, it will put the person dealing with the company upon inquiry".

Here, it seems to have been accepted that the respondent knew nothing of the appellant’s position; for

all he knew, its assumption of the role of creditor in respect of monies due by the respondent might have

been a regular or ordinary part of its activity, as a member of the Qintex Group. Of course, the

appellant was not in fact a member of that Group.

It is my opinion that this Court should not make a finding, on appeal, that the substitution of the

appellant for QMS as creditor was a step which should have given rise to concern in the respondent

as to the propriety of what was being done, as recorded in Exhibit 7. I reach that conclusion keeping

in mind that, as I have mentioned, the subject was but slightly investigated below.

Conclusion

It follows that the appellant’s case based on breach of fiduciary duty should be rejected, as it

was by the primary judge. But the appeal must succeed insofar as it is based on the proposition that

it is the appellant rather than QMS which is entitled to be repaid the sums advanced as referred to in

Exhibit 7.

The appeal must be allowed and the orders made below set aside; in lieu there will be judgment

for the appellant against the respondent in a sum of $385,000.00 plus interest at 10% from the date

when the various amounts fell due to the appellant, which was 25 October 1994, making a total of

$456,950.00.

There remains the question of costs. Although the appellant has had substantial success, its

principal claim was in truth based on an allegation of involvement in a breach of fiduciary duty and that

claim has failed. Further, the fact that there is room for argument about the identity of the company to

which the respondent is indebted is not the respondent’s fault, but is due to poor drafting by those

responsible for Exhibit 7; as I have pointed out, the respondent accepted, in effect, in evidence, that

he had to pay the appellant. I propose that the respondent be ordered to pay 40% of the appellant’s

costs here and below.

REASONS FOR JUDGMENT - DEMACK J.

Judgment delivered 06/09/1996

I agree with the reasons of Pincus J.A. and with the orders he proposes.