Lurgi (Australia) Pty Ltd v Ritzer Gallagher Morgan Pty Ltd
[2000] VSC 277
•4 August 2000
| SUPREME COURT OF VICTORIA | |
| COMMERCIAL AND EQUITY DIVISION | Not Restricted |
No. 5122 of 1997
| LURGI (AUSTRALIA) PTY LTD (ACN 004 658 708) and LUCON (AUSTRALIA) PTY LTD (ACN 008 228 100) | Plaintiffs |
| v | |
| RITZER GALLAGHER MORGAN PTY LTD (ACN 006 770 109) and PEARSE JOSEPH MORGAN | Defendants |
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JUDGE: | Byrne J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 1, 2, 3, 4, 8, 9, 10, 11, 15, 16, 17, 18, 22, 23, 24 and 25 May 2000 | |
DATE OF JUDGMENT: | 4 August 2000 | |
CASE MAY BE CITED AS: | Lurgi (Aust) Pty Ltd v Ritzer Gallagher Morgan Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2000] VSC 277 | |
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Equity – breach of fiduciary duty – fraud – whether accountant knowingly assisted – Rule in Barnes v Addy.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiffs | Mr M Colbran QC | Blake Dawson Waldron |
| For the Defendants | Mr M Thompson | Herbert Geer & Rundle |
Table of Contents
THE PARTICIPANTS IN THE PROCEEDINGS.................................................................... 2
Culvert Constructions Pty Ltd..................................................................................................................................................... 4
Culvert Excavations Pty Ltd.......................................................................................................................................................... 4
Stable Engineering (Australia) Pty Ltd (“Stable Engineering”).......................................................................................... 4
South Pacific Insulation Pty Ltd (“SPI”)................................................................................................................................... 4
Sandess Pty Ltd (“Sandess”)....................................................................................................................................................... 4
P.R.S. Engineering Pty Ltd (“PRS”).......................................................................................................................................... 5
Ritzer Gallagher Morgan Pty Ltd (“RGM”)............................................................................................................................. 5
THE PROCEEDINGS................................................................................................................. 5
Proceeding No. 6456 of 1995....................................................................................................................................................... 5
Proceeding No. 6802 of 1995....................................................................................................................................................... 5
Proceeding No. 6803 of 1995....................................................................................................................................................... 6
Proceeding No. 6804 of 1995....................................................................................................................................................... 6
Proceeding No. 6884 of 1995....................................................................................................................................................... 6
Proceeding No. 5122 of 1997....................................................................................................................................................... 6
PRS............................................................................................................................................... 8
The Establishment of PRS............................................................................................................................................................ 8
The PRS Frauds........................................................................................................................................................................... 10
THE INVOLVEMENT OF RGM IN THE PRS FRAUDS..................................................... 15
The Initial Payments................................................................................................................................................................... 17
Transactions A1, A2................................................................................................................................................................... 18
Transactions 1 and 2................................................................................................................................................................... 21
Transaction 3................................................................................................................................................................................ 22
The Post-March 1994 Transactions........................................................................................................................................ 25
THE NEGLIGENCE CLAIMS................................................................................................. 29
THE MISLEADING AND DECEPTIVE CONDUCT CLAIMS............................................ 30
CONTRIBUTORY NEGLIGENCE......................................................................................... 30
DAMAGES................................................................................................................................. 32
HIS HONOUR:
On 18 September 1998 Gert Juergen Gratz, having pleaded guilty to one count of theft, four counts of false accounting and one count of making a false statement, was sentenced in this Court to a term of imprisonment for seven years. He consented on that date also to the making of an order against him for compensation under which he was ordered to pay $6.7M to the plaintiffs, Lurgi (Australia) Pty Ltd (“Lurgi”) and Lucon (Australia) Pty Ltd (“Lucon”). These proceedings concern the frauds committed by him and by Herbert Dietrich, upon their employers, Lurgi and Lucon. They represent the efforts of Lurgi and Lucon to recover sums lost from various persons who are said to be civilly liable to them.
At all material times Lurgi, a company incorporated in Victoria, was an engineering design consultant whose business it was to obtain contracts in Australia and in the South East Asian region for the design and construction of major engineering projects. Its subsidiary, Lucon, was typically engaged by Lurgi to perform the construction work for these projects. Lurgi itself is a subsidiary of a German company, Lurgi AG, which is, in turn, a subsidiary of Metallgesellschaft AG, both of which companies are based in Frankfurt.
Mr Dietrich commenced working for the Lurgi organisation in Frankfurt in 1956. He was sent to Australia from 1982 to 1987 and, on a more permanent basis, in June 1989. He was from 1 June 1989 the joint managing director and later the sole managing director of Lucon. He became a member of the board of Lucon on 1 August 1989 and of Lurgi of 1 April 1991. He retained these positions until his retirement and return to Germany in March 1995. Mr Dietrich had the overall responsibility for all of Lucon’s activities and he had the authority to approve invoices and sign cheques on behalf of Lurgi.
Mr Gratz commenced with the Lurgi organisation in Germany in 1970. In October 1980 he was sent to Australia as the commercial and financial coordinator of Lurgi in this country. In June 1988 he, too, became a director of Lucon. In March 1995 he was appointed managing director of Lucon, in succession to Mr Dietrich, and a director of Lurgi. Mr Gratz was also company secretary for Lucon from 1 June 1988 and for Lurgi from 22 December 1989. He relinquished all of these positions when he was summarily dismissed for misconduct on 28 April 1995.
As commercial and financial co-ordinator of Lurgi Mr Gratz was the chief financial officer of the company. He was directly responsible for all of its commercial and financial operations and for the various commercial officers and commercial managers who worked with project managers to implement its projects. He was in charge of commercial operations associated with the tendering and negotiating and formulating of contracts, with the procurement of equipment and in charge of its accounting and banking operations. He had authority to sign invoices, cheques and purchase orders on behalf of Lurgi and Lucon.
In broad terms, what was alleged before me was that Mr Gratz and Mr Dietrich contrived to defraud Lurgi and Lucon in a number of ways:
(a) By having sub-contractors and suppliers perform work or supply materials for them personally and charging the cost to Lurgi and Lucon.
(b) By causing sub-contractors and suppliers to submit claims to Lurgi and Lucon for work on Lurgi projects which work was never done. The payments received by them or part of those payments were paid directly or indirectly to Mr Gratz or Mr Dietrich or to persons or companies on their behalf.
(c) By causing sub-contractors and suppliers to submit spurious claims for cost escalation. The extra payments received by them or part of those payments were paid to Mr Gratz or Mr Dietrich or to persons or companies on their behalf.
The Participants in the Proceedings
There are no less than five proceedings before the court arising out of these frauds. They have been brought by Lurgi and Lucon against twelve defendants. On 1 May 2000, I ordered that all of them be heard together and that the evidence in each be evidence in each other proceeding. The proceedings are no. 6456 of 1995, no. 6802 of 1995, no. 6803 of 1995, no. 6884 of 1995 and no. 5122 of 1997. A sixth proceeding, no. 6804 of 1995, in which Lurgi alone is plaintiff and Stable Engineering (Australia) Pty Ltd is defendant has been settled. I have, nevertheless, determined to deliver separate judgments dealing collectively only with those proceedings where there was a common interest in the defendants; the reason for my adopting this course is that some of the evidence led in one proceeding had a different value in others.
A feature of the trial was the failure of most of the twelve defendants to participate. Three of them are companies controlled by Mr Gratz or Mr Dietrich which have been deregistered and the proceedings against them were struck out. The proceeding against Mr Gratz who is still in gaol has been discontinued, presumably because of the compensation order made against him. Mr Dietrich and Jellwick Court Pty Ltd had been represented by a firm of solicitors until a few days before the trial commenced. On 26 April 2000 I gave leave to the solicitors for those parties to file Notices of Ceasing to Act and no new solicitors have been appointed. Likewise, on 1 May 2000 I gave leave to the solicitor on the record for Culvert Excavations Pty Ltd and Culvert Constructions Pty Ltd to file Notices of Ceasing to Act and no new solicitors have been appointed. I was told at the commencement of the trial that the claims against Ruth Jillian Hedrick and Stable Engineering (Australia) Pty Ltd had been settled in principle. They did not appear at the trial and, on day 16, I was told that the settlements had now been achieved and orders were then made by consent. It followed from this that, of the twelve defendants in all proceedings, only Ritzer Gallagher Morgan Pty Ltd and Pearse Joseph Morgan were represented throughout the trial. Petra Gratz, the former wife of Mr Gratz, with my concurrence, was represented only on those occasions when her interests were directly the subject of evidence or argument.
Finally in this introductory part, I shall now introduce a number of companies which were mentioned in the evidence.
Culvert Constructions Pty Ltd
Culvert Excavations Pty Ltd
These companies were sub-contractors which performed work for Lurgi and Lucon. A principal of these companies was James William Dean, who gave evidence at the trial. They are both defendants in proceeding no. 6884 of 1995 and Culvert Excavations is a defendant in proceeding no. 6802 of 1995.
Stable Engineering (Australia) Pty Ltd (“Stable Engineering”)
Stable Engineering was a company which performed engineering and fabrication work for Lurgi and Lucon during the early 1990’s. Its owner and director was John Buhagiar who gave evidence at the trial. This company is the defendant in proceeding no. 6804 of 1995 but this proceeding has been settled.
South Pacific Insulation Pty Ltd (“SPI”)
SPI was an insulation sub-contractor whose principal, Roy Charles Turner, gave evidence at the trial.
Sandess Pty Ltd (“Sandess”)
Sandess, now deregistered, was a defendant in proceeding no. 6803 of 1995. It was registered on 19 June 1991 and was acquired by Mr Gratz in August 1991. He arranged for two family friends, Mrs Hedrick, a defendant in proceeding no. 6802 of 1995, and her husband, Peter James Hedrick, to become its directors. Mr Hedrick was a witness at the trial. He said that he understood that Sandess was to be trustee of a family trust, but there was no evidence of this trust. In its ASIC return the principal activity of Sandess was said to be that of engineering consultant but there was no evidence that it ever engaged in this activity. In June 1992 Mrs Gratz became director and secretary in place of Mr Hedrick and on 1 December 1992, a few days after his 18th birthday, Mrs Gratz’s son, Gerrik Gratz, replaced Mrs Hedrick as the remaining director. Sandess was said to be controlled by Mr Gratz and a vehicle through which he passed money for his own benefit. Mrs Gratz and her son were also its only shareholders.
P.R.S. Engineering Pty Ltd (“PRS”)
PRS, now deregistered, was a defendant in proceeding no. 6802 of 1995. It was registered on 3 June 1993 giving as its principal activity on its ASIC return that of trustee of the PRS Engineering Trust. There was evidence that, until March 1994, it carried on the business of engineers or fabricators at Morwell performing this work for Lurgi and Lucon. Its directors were Mr and Mrs Hedrick who were its two shareholders. It was said that these directors were appointed because Mr Gratz himself could not properly be seen to control a company carrying out contracts for his employers. The registered office of PRS was the office of Ritzer Gallagher Morgan Pty Ltd in Morwell. PRS was said to be controlled by Mr Gratz and a vehicle through which he passed money for his own benefit.
Ritzer Gallagher Morgan Pty Ltd (“RGM”)
RGM was and is a company incorporated in 1987 to carry on the business of accountants in Morwell, Traralgon and Sale which had previously been conducted as a firm under the same name, Ritzer Gallagher Morgan. RGM is the firstnamed defendant in proceeding no. 5122 of 1997. Its director, Pearse Joseph Morgan, the second defendant in the same proceeding, gave evidence at the trial. He practised as a chartered accountant at its Morwell office. RGM and Mr Morgan were involved in the establishment of PRS in June 1993 and, on instructions from Mr Gratz, carried out various administrative, accounting and banking tasks for that company in the year or so following.
The Proceedings
Proceeding No. 6456 of 1995
In this proceeding Lurgi and Lucon are plaintiffs; the defendants are Mr Dietrich (secondnamed defendant) and Mrs Gratz (thirdnamed defendant). The proceeding against the firstnamed defendant, Mr Gratz, has been discontinued. This proceeding is the subject of a separate judgment.
Proceeding No. 6802 of 1995
In this proceeding Lurgi and Lucon are plaintiffs. There were four defendants. The firstnamed defendant, PRS, and the secondnamed defendant, Consetra Pty Ltd, have been deregistered and the claims against them have been struck out. The claim against the thirdnamed defendant, Mrs Hedrick, was settled and on day 16 of the trial the claim against her was, by consent, dismissed. The fourthnamed defendant, Culvert Excavations, was unrepresented. This proceeding is the subject of a separate judgment.
Proceeding No. 6803 of 1995
In this proceeding Lurgi and Lucon are plaintiffs. There are three defendants. The first defendant, Sandess, and has been deregistered and the claim against it was struck out. The secondnamed defendant is Mrs Gratz and the third defendant is Jellwick Court, which company was unrepresented. This proceeding is the subject of a separate judgment.
Proceeding No. 6804 of 1995
This proceeding brought by Lurgi against Stable Engineering was, by consent, struck out with a right of reinstatement on day 16 of the trial.
Proceeding No. 6884 of 1995
In this proceeding Lurgi and Lucon are plaintiffs. There are two defendants, neither of which was represented at the trial. They are Culvert Excavations and Culvert Constructions. This proceeding is the subject of a separate judgment.
Proceeding No. 5122 of 1997
In this proceeding Lurgi and Lucon are plaintiffs. The defendants are RGM and Mr Morgan. The claim against the thirdnamed defendant, Moreseast Pty Ltd, has been remitted to the County Court.
The plaintiffs’ claims as they appear in their further amended statement of claim filed on 23 May 2000, arise out of twenty-five invoices prepared by RGM or Mr Morgan on behalf of PRS addressed to Lurgi and Lucon and to Culvert Constructions and SPI: invoices 1, 2, 3, 16, 20, 23, 26, 32, 33 and 37, to a total value of $766,343 addressed to Lurgi; invoices 4, 41, 49, 54 and 55, to a total value of $225,124 addressed to Lucon; invoices 31, 34 and 36, to a total value of $192,735 addressed to Culvert Constructions; and invoices 28, 30, 35, 38, 40, 42 and 43, to a total value of $980,167 to SPI.
It is alleged that each of the PRS invoices was for services which had not been provided by it to the invoicee or at all. Culvert Constructions and SPI each paid PRS in response to its invoices directed to them. They, in turn, included these sums in their invoices raised on Lurgi and Lucon. Surprisingly, it often happened that these last-mentioned invoices preceded their claims on PRS. Lurgi and Lucon paid in response to the PRS invoices directed to them and, also, to SPI and Culvert Constructions the sums claimed by them. It is said that RGM and Mr Morgan committed breaches of duty of care owed to Lurgi and Lucon in issuing the fifteen PRS invoices raised on Lurgi and Lucon without enquiring whether the amounts were properly due; that they are liable to account to Lurgi and Lucon as constructive trustees in respect of the moneys paid by them to the invoicees on the basis that they knew that the twenty-five PRS invoices were raised as part of the fraud of Mr Gratz and Mr Dietrich and therefore knowingly assisted in their dishonesty; and, finally, that the issuing of the twenty-five PRS invoices amounted to misleading and deceptive conduct as a consequence of which Lurgi and Lucon suffered loss and damage in the sum of $733,241 and $331,194 respectively. These figures cannot be reconciled with the invoices which are in evidence.
The amended defences of RGM and Mr Morgan were filed on 29 March 1999 and 17 May 2000 respectively. They join issue with many of the plaintiffs’ allegations. They admit, however, that RGM performed certain accounting and administrative services for PRS including the preparation and issue of the PRS invoices. They say that these invoices were prepared and issued on the instructions of Mr Gratz. They deny that they were aware that Mr Gratz or Mr Dietrich were engaged in conduct in breach of fiduciary duty or their duty of care. They deny, too, that they owed to Lurgi and Lucon any duty of care or that they breached any such duty with respect to the payments by PRS. Mr Morgan was authorised to operate the cheque account no. 7500252 established by PRS at the Morwell branch of the Westpac Bank on 9 June 1993 and he acted within that authority. To the misleading and deceptive conduct allegations they say further that the claims are statute barred. To the plaintiffs’ allegation of breach of duty of care, RGM and Mr Morgan also allege contributory negligence in that Lurgi and Lucon did not take sufficient steps to protect themselves from fraud in the conduct of their business.
By an amendment allowed on 1 May 2000 Lurgi and Lucon make a further allegation against RGM. This is that Mr Gratz and Mr Dietrich fraudulently procured a cheque from Lurgi in the sum of $132,439 payable to PRS and a cheque from Lucon in the sum of $169,070 to the same payee. These two payments were referred to in the proceeding as “the initial payments”. The plaintiffs allege that Mr Morgan on behalf of RGM knowingly assisted in this fraud by endorsing one of the cheques drawn from the funds so obtained and are accordingly liable to account to Lurgi and Lucon for their loss.
PRS
The Establishment of PRS
Mr Morgan told me that, prior to 1993 one of his clients in Morwell was SK Engineering Pty Ltd (“SK Engineering”), a steel fabricator which carried on business at Lot 4 Jones Road, Morwell. At that address there was a substantial workshop and an office complex. The business which employed up to 30 people was conducted by a Korean family and in recent years by two brothers from that family, Beom Sho and Rim Sho. SK Engineering did work at Morwell for a number of companies, including Lurgi and Lucon. In April 1993 the company was in financial difficulties and on 3 May a receiver and manager was appointed by the Commonwealth Bank. The receiver’s statement as to affairs as at 5 May 1993 shows that sundry debtors included Lucon in the sum of $64,142. It shows, too, a workshop office valued at $400,000 with a mortgage over it in favour of the Commonwealth Bank for some $430,000.
Mr Morgan said that, after the SK Engineering business was closed, he attended a meeting with Mr Gratz and Mr Dietrich on 10 or 11 May 1993 in which they spoke of resurrecting the business under the continuing management of Mr Rim Sho. This was the first time he met Mr Gratz and Mr Dietrich. He was told that Mr Dietrich was a family friend of the Shos and he believed that the two men were providing friendly assistance to them.
What then happened was that PRS was registered by Mr Gratz’s solicitors, Messrs Pearce Webster Dugdales in Melbourne and took that name on 9 June 1993. As I have mentioned, the office bearers were not Mr Gratz but two of his friends, Mr and Mrs Hedrick. The registered office was that of RGM. Mr Morgan said that he knew nothing of this corporate structure since this was arranged by Mr Gratz, as was the establishment of its bank account. He said it was not until August 1993 that he learnt who were in fact the directors and shareholders of the company. He said, too, that at this time he was not aware of any involvement of Mr Dietrich or Mr Gratz with Lurgi and Lucon, although the two men had spoken in May of PRS seeking work from those companies. I do not accept this. He gave evidence at the Gratz committal proceeding that he knew from Mr Sho that Mr Dietrich was associated with Lurgi and Lucon. I accept this to be fact. I find, too, that he knew at an early stage, certainly by the end of June 1993, that Mr Gratz, also, was associated with Lurgi and Lucon and that he, Gratz, did not want to hold office in PRS because of this association for it would place on public record his conflict of interest. Mr Morgan said that he was asked and that he agreed that RGM would provide administrative services for the new company as well as accounting services. He was authorised to operate the cheque account number 7500252 established by PRS at the Morwell Branch of the Westpac Bank on 9 June 1993.
All of this came to pass, although the detail is not altogether clear. PRS somehow acquired possession of the Jones Road warehouse. Staff were engaged and the first salary cheque drawn by RGM is dated 13 August 1993. Two Lucon contracts were won. The first was for pre-assembly fabrication work for a project at Ulu Pandan in Singapore for an order value of $292,266; the second for a BHP project in Newcastle for an order value of $220,016. It seems that the PRS involvement in these two projects was completed by the end of 1993, for by early December of that year it had been paid the full value of the two Lucon orders. The PRS cheque butts show that final wages cheques were drawn for most of the staff on 21 January 1994. In any event, by March 1994 work had ceased at Morwell and PRS had closed its workshop, paid off its employees there and sold to Lucon its steel, stock plant equipment and consumables.
The PRS Frauds
In this proceeding the plaintiffs assumed the task of demonstrating that PRS had engaged in the systematic fraud upon Lurgi and Lucon. I should say at the outset that, while no concession was made on behalf of the defendants, their counsel did not attempt to justify the conduct of PRS or Mr Gratz. For practical purposes, the proof of these frauds was undefended. Nevertheless, I have anxiously examined the voluminous material tendered in evidence. I have had regard to the serious nature of the allegations and the findings which I set out below are made only after I have been satisfied on admissible evidence that the allegations have been clearly made out.
During its nine month period of operation, PRS, according to its Invoice Listing, issued twenty-five invoices to Lurgi and Lucon to a total value of approximately $1M. Of these, eight invoices were said in this proceeding to be fraudulent or otherwise issued in breach of fiduciary duty. In evidence, these were dealt with in the plaintiffs’ case as separate numbered transactions and I am content to adopt this analysis.
Trs No. Invoice No. Date Invoicee Amount A1 1 18 June 1993 Lurgi 113,041 A1 2 18 June 1993 Lurgi 42,500 A1 3 18 June 1993 Lurgi 10,000 A2 4 18 June 1993 Lucon 75,000 1 16 23 November 1993 Lurgi 72,500 2 20 3 December 1993 Lurgi 95,000 3 26 4 March 1994 Lurgi/Lucon 197,000 4 23 20 January 1994 Lurgi 16,850 $621,891
Transaction 1 refers to invoice 16 issued on 23 November 1993 for $72,500. The invoice describes the work provided as “provision of labour and equipment and transport for Unit 3 Stanwell Queensland”. A Lurgi purchase order dated 26 May 1993 required PRS to perform this work for that sum. Included in the bundle of PRS invoices in Exhibit 661, there is invoice 24, also dated 23 November 1993 and addressed to Lurgi which states that it cancels invoice 16. Invoice 24 also seeks payment of $72,500, but as a progress payment for machinery and equipment purchased on behalf of Lurgi and to be shipped by PRS to the Lucon Stanwell workshop at Rockhampton. Notwithstanding this second invoice, Alan Francis Daws, the company secretary of Lurgi who was in 1993 its accountant, told me that payment was made by Lurgi cheque dated 24 November 1993, drawn by Lurgi against invoice 16. The cheque was signed by Mr Gratz and Mr Dietrich. It was paid into the PRS account on 25 November 1993.
Of the eight invoices listed above, the evidence showed that, except for invoice 23, the work described in them was not provided by PRS. I therefore put invoice 23 to one side on the basis that the claim based on it was not proved. As to the remaining seven invoices, it was clear that they were issued fraudulently at the instigation of Mr Gratz or Mr Dietrich or both, and in breach of fiduciary duty. Furthermore, these same two men somehow procured Lurgi or Lucon to make payments to PRS in response to these invoices, notwithstanding its procedures which were designed to ensure that payment was made only against valid claims. The amount of payments was not the amount of the invoice in every case, for in many cases part of the payment was withheld for tax pursuant to the Australian Tax Office’s Prescribed Payments Scheme. I assume that this tax is recoverable by Lurgi or Lucon so that their loss is the net amount paid to PRS. These amounts are as follows:
Invoice No. Lucon Lurgi Payment Date 1 90,433 8 June 1993 2 34,000 8 June 1993 3 8,000 8 June 1993 4 60,000 0 21 June 1993 16 72,500 25 November 1993 20 95,000 23 December 1993 $60,000 $299,933
The remaining invoice is invoice 26 for $197,000. I shall return in due course to the detail of this transaction. The invoice is addressed to both Lurgi and Lucon and claims full and final payment on the Singapore project and the BHP project at Newcastle as well as the Stanwell Project in Queensland and the Dry Coal project in Yallourn. I am satisfied that PRS provided no work for the latter two projects and that it was not entitled to these payments on the former two projects. The cheque for $197,000 in payment was drawn by Mr Dietrich and Mr Gratz on the Lurgi account and the funds came from this account. Mr Daws, however, said that within the Lurgi organisation the payment was recorded as to one half against the Lurgi project at Stanwell in Queensland and one half as to a Lucon project in Geelong. I think, nevertheless, I should treat this as a loss of Lurgi, as payor of the sum invoiced, leaving the two plaintiffs to sort out its ultimate destination.
In summary, therefore, the losses caused by the seven false invoices issued by PRS in the first period were suffered by Lurgi as to $496,933 and by Lucon as to $60,000.
Notwithstanding that it had no premises and no workforce, PRS continued to issue invoices from March 1994 until April 1995. A further twenty invoices to a total value of $2,346,478 were in evidence. Of these only seven were said in this proceeding to have been issued to Lurgi and Lucon fraudulently and in breach of fiduciary duty. They are the following:
Trs
No.Invoice
No.Date Invoicee Project Amount 5 32 15 June 1994 Lurgi Gladstone 138,110 5 33 16 June 1994 Lurgi Loy Yang 26,342 6 37 4 November 1994 Lurgi Stanwell 55,000 10 41 30 September 1994 Lucon Rockhampton 15,654 10 49 31 October 1994 Lucon Rockhampton 29,321 9 54 30 November 1994 Lucon Rockhampton 32,649 11 54 30 November 1994 Lucon --- 0 8 55 30 November 1994 Lucon Rockhampton 72,500 $369,576 I have attributed a nil value to transaction 11 because the documents show that it was not a transaction separate from transaction 9. As will appear, the sum of $3,328 claimed under this transaction was nothing more than an instalment of the payment due under invoice 54. None of the work referred to in any of these invoices was provided by PRS. In each case the invoice was procured at the direction of Mr Gratz by RGM staff and the cheques for payment were signed by him, or by him and Mr Dietrich.
The documents in evidence show that each of the sums claimed by PRS was paid to it by the invoicee without deduction for PPS Tax. Details of the payments totalling $369,576 appear below:
Lurgi Payments
Trs No. PRS Invoice No. Date Cheque Amount 5 32/33 16/6/94 167017 164,452 6 37 3/11/94 168419 55,000 $219,452 Lucon Payments
Trs No. PRS Invoice No. Date Cheque Amount 10 41/49 30/11/94 25370 44,975 9 54 30/11/94
20/12/9425371
2584029,321
3,3288 55 30/11/94 25372 72,500 $105,149
The picture disclosed by the PRS invoices directed to Culvert Constructions and SPI is a little more complicated. There are three invoices addressed to Culvert Constructions:
Trs No. Invoice No. Date Project Amount 34 31 2 June 1994 Gladstone 78,310 33/34 34 5 August 1994 Geelong 43,025 45 36 19 August 1994 Rockhampton 71,400 $192,735 and there are seven invoices addressed to SPI:
Trs No. Invoice No. Date Project Amount 28 28 8 April 1994 Stanwell 100,000 20 30 15 April 1994 Stanwell 95,000 ? 35 12 August 1994 Queensland Sites 200,000 24 38 4 November 1994 Stanwell 125,167 25 40 18 November 1994 Gladstone 115,000 29 42 20 January 1995 Gladstone 195,000 26 43 15 March 1995 Stanwell 150,000 $980,167
The evidence showed that these invoices were spurious for PRS provided no work or materials or plant as invoiced. Nevertheless, they were paid by the invoicees. I find that the invoices were raised as part of a fraudulent scheme which involved these two sub-contractors. Mr Dean, the owner and manager of Culvert Constructions, and Mr Turner, the principal of SPI, both said that PRS provided no work as invoiced but that they paid to PRS the sums sought because Mr Gratz instructed them to. Each said that his company, which had contracts with Lurgi or Lucon, simply added to claims made under those contracts the amounts so paid to PRS. Each of them said that this was done at the direction of Mr Gratz or Mr Dietrich and that he thought that it had something to do with internal bookkeeping with the Lurgi organisation. Mr Turner said that he suspected nothing was illegal about this. Mr Dean said in response to a suggestion that he believed at the time that there was nothing illegal about it, “At the time that I did it, I didn’t realise, but as I went on through, at some point in time, the penny dropped”. Neither of those witnesses was challenged about this and I forbear from comment in the circumstances.
SPI and Culvert Constructions, in turn, invoiced Lurgi and Lucon for most of the sums referred to in the ten PRS invoices and, with the connivance of Mr Dietrich and Mr Gratz, were duly paid. Details are as follows:
Lurgi Payments
Trs
No.Invoice No. Date Amount Cheque Date Amount 28 SPI 1483 13/4/94 100,000 166401 8/4/94 100,000 20 SPI 1483
SPI 148413/4/94
13/4/9440,000
55,000166497 15/4/94 95,000 24 SPI 1359
SPI 15547/?/93
4/11/9460,167
65,000168417 3/11/94 125,167 25 SPI 1556 18/11/94 115,000 168561 16/11/94 115,000 26 SPI 1589 8/3/95 150,000 169923 9/3/95 150,000 33 CC 713 3/93 27,500 162358 29/3/93 26,125 34 CC 602
CC 60331/5/94
31/5/9420,677
79,589166927 2/6/94 95,254 $706,546
Lucon Payments
Trs
No.Invoice No. Date Amount Cheque Date Amount 29 SPI 1569
SPI 1570
18/1/95
18/1/9598,500
99,50026242 17/1/95 198,027 45 CC 300 27/7/94 84,000 23394 22/8/94 79,800 $277,827
I say most of the sums, because no SPI invoice or payment reflecting PRS invoice 35 for $200,000 raised on SPI appears to match that sum or date.
The consequence of all of this is that I am satisfied that PRS fraudulently obtained directly or indirectly from Lurgi a total of $1,422,931 and from Lucon a total of $442,976 in respect of the twenty-four spurious invoices issued by PRS upon them or upon Culvert Constructions or SPI.
I should add, too, that I am satisfied that these sums were fraudulently obtained by Mr Gratz and that Mr Dietrich was, at the very least, a willing participant in his fraud. I am satisfied, too, that each of these men acted as they did in breach of the fiduciary duties which they owed to Lurgi and to Lucon both as officers and senior employees of those companies.
The Involvement of RGM in the PRS Frauds
The present proceeding is not brought against Mr Gratz or Mr Dietrich; it is against the firm of accountants RGM and its principal, Mr Morgan.
The primary case against them is that they knowingly assisted in the wrongful acts of Mr Gratz and Mr Dietrich and are liable for the losses suffered by Lurgi and Lucon under the second limb of the Rule in Barnes v Addy.[1] The precondition of this liability is a state of mind of the participant which involves dishonesty, in the sense that this word is used by the Privy Council in Royal Brunei Airlines SDN BHD v Tan.[2] In Consul Development Pty Ltd v DPC Estates Pty Ltd,[3] Stephen J,[4] with the concurrence of Barwick CJ, rejected a contention that a participant is to be fixed with this liability by constructive notice. What is required is that the assistance be provided by a person who, at the time, knew of both the trust and of the breach of trust or who wilfully shut their eyes to the obvious.[5] Gibbs J inclined to the same view:
“It may be that it is going too far to say that a stranger will 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 recognizing an impropriety that would have been apparent to an ordinary man.”[6]
[1](1874) LR 9 Ch App 244.
[2][1995] 2 AC 378 at 389.
[3](1975) 132 CLR 373.
[4]132 CLR at 410-12.
[5]132 CLR at 410. See also Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 at 267, per Buckley LJ and Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 49, per von Doussa J.
[6]132 CLR at 398.
I shall approach this case on the same basis. The involvement of Mr Morgan and his employer, RGM, in the conduct of PRS was not disputed. He, or a member of his staff under his direction, prepared and issued the twenty-four PRS invoices in terms dictated by Mr Gratz. In the case of many of the transactions, Mr Morgan received from Lurgi or Lucon payments under the PRS invoices and banked these in the PRS bank account in Morwell or, in one case, endorsed it to Messrs Pearce Webster Dugdales, the solicitors for PRS. There were two cheque books operating concurrently on this account; one by Mr Gratz and the other by Mr Morgan. Mr Morgan, for his part, denied none of this; but he said he did not at any time prior to mid-1995 ever suspect Mr Gratz or Mr Dietrich of being involved in any improper conduct. He said that he became aware of the true situation only when he was interviewed by Peter David Morris, a manager within the Forensic Accounting Division of KPMG. This interview took place in 1995, some time before 1 June. I was invited by counsel on behalf of Lurgi and Lucon to reject this evidence and to find that Mr Morgan knew at all times that Mr Gratz and Mr Dietrich were engaged in frauds upon their employers or, at least that he deliberately shut his eyes to this, and that in this way he ignored the significance of the facts which were indisputably known to him. The contest is essentially one between oath and inference. In assessing the weight of each, I remind myself that this case is to be decided on the balance of probabilities but that the allegations against Mr Morgan are of serious professional impropriety. I should not accept these allegations unless the evidence points clearly in that direction. Furthermore, I must bear in mind that facts or events which may have seemed innocent or perhaps puzzling at the time may take on a more sinister hue when seen from a later time, a time at which the fraudulent purposes of Mr Gratz and Mr Dietrich are evident. This said, I turn to a number of the transactions in question.
The Initial Payments
This is the name given to two payments totalling $301,509 said to have been made to PRS by Lurgi, as to $132,439 and by Lucon, as to $169,070. These payments were added to the claim by the amendment allowed on 1 May. This new claim is complicated by the fact that the money in question became mixed up in transactions A1 and A2 to which I shall refer. The circumstances, which were not in controversy, are as simple as they are mysterious.
§ 11 May 1993. Mr Gratz and Mr Dietrich signed two cheques in the amounts of $132,439 and $169,070 respectively drawn on the bank accounts of Lurgi and Lucon for the two initial payments. The reason for drawing these cheques was not disclosed. The payee of the cheques was Westpac Bank in each case and it may be supposed that they were to purchase bank cheques.
§ 12 May 1993. Westpac Bank issued two bank cheques in favour of the Commonwealth Bank, one for $192,433 and one for $109,067. The first of these cheques is part of transactions A1 and A2 and may be put aside for present purposes.
§ 21 June 1993. The $109,067 bank cheque was returned to the Westpac Bank which replaced it with a cheque in the same amount payable to Messrs Pearce Webster Dugdales, the solicitors for Mr Gratz and PRS. Why this was done and what happened to these funds was not disclosed in evidence.
There is no evidence that Mr Morgan was in any way implicated in this transaction and in this case against him and RGM, I shall say nothing further about it.
Transactions A1, A2
These transactions concern the first four invoices, invoices 1, 2, 3 and 4, issued by PRS totalling $240,541 which, after a deduction of PPS Tax, produced payments totalling $192,433. The facts may be conveniently set out in a chronology.
§ 10 or 11 May 1993. Mr Morgan met Mr Gratz and Mr Dietrich and Mr Sho to discuss the establishment of a new company which was to be PRS.
§ 12 May 1993. The Westpac Bank was requested to draw a cheque in the sum of $192,433 in favour of the Commonwealth Bank. The cheque was drawn on the same day. This cheque was later cancelled.
§ 3 June 1993. PRS was registered.
§ 8 June 1993. A second bank cheque was drawn by the Westpac Bank in the sum of $192,433 payable to PRS. The reverse of this cheque was endorsed by Mr Morgan for payment to the Pearce Webster Dugdales trust account. Mr Morgan agreed that he had signed the endorsement but said he was unable to recall the circumstances of this. The endorsement is not dated.
§ 9 June 1993. PRS opened its bank account no. 7500252.
§ 18 June 1993. Invoices 1, 2, 3 and 4 for sums totalling $240,541 were typed. It is not clear on the evidence who typed these invoices or who caused them to be typed. Lee-Anne Broeren, Mr Morgan’s personal assistant, denied that she raised them. Mr Morgan professed to recall nothing of them and, later, said that Mr Gratz telephoned him and dictated their content and that they were prepared in his office. In each case the work is described as “steel fabrication services for the completion of [one of four named contracts]”. There was no evidence that these invoices were ever sent to Lurgi or Lucon.
§ 19 July 1993. Invoices 1, 2, 3 and 4 were retyped in similar but not identical form to the June invoices. They, too, were prepared in the office of RGM and they bear a fax header showing that they were sent from that office to Lurgi at 9.30 am on 16 July 1993, three days before they are dated. Miss Broeren denied that she raised these invoices. Mr Morgan said he had no idea of the circumstances which led to their preparation.
§ 19 July 1993. The second bank cheque was presented for payment.
§ 5 August 1993. The PRS bank account shows its first transactions. The first cheque was in fact dated 28 July but no deposits or withdrawals are shown until 5 August 1993.
§ 13 August 1993. The first wages cheques were drawn. On this date, too, a first cheque for workshop supplies was drawn in the sum of only $2,000.
What, then, does Mr Morgan say about this? He said that in his practice PRS was not the only client for whom he had sent out invoices and paid wages. When asked how it was that the invoices were sent out so early in the life of PRS, he replied that, in the steel fabrication industry, it is not uncommon for a fabricator to seek and obtain a pre-payment to enable it to purchase steel. He said in his statement to Mr Morris made in June 1995 that, soon after commencing operations, PRS won two contracts from Lurgi or Lucon, one for BHP and the other in Singapore. In evidence before me he said he thought there was a third Lurgi project for which PRS did work and that this was in Queensland. I prefer, however, to act upon his 1995 statement as an admission rather than to rely upon his oral evidence given long after the event. Mr Morgan had, in 1993, no belief that PRS was performing work for any Queensland project from its Morwell workshop. The work in invoices 1, 2, 3 and 4 did not concern the BHP or the Singapore projects. This is confirmed by the fact that Mr Morgan did not include these invoices or the money received from them in his December 1993 reconciliation of payments received from BHP in respect of these two projects. I am satisfied that the work described in the four invoices in question was not work performed by PRS nor was it work for which PRS had an agreement with Lurgi or Lucon to receive payment. The probability is that some arrangement had been made between the Shos and Mr Dietrich and Mr Gratz for PRS to receive payment for work done previously by SK Engineering so as to divert the money from the Commonwealth Bank or the unsecured creditors of that company. I make no finding, however, that this was known to Mr Morgan. He maintained an ignorance of the four invoices and I accept that, at least until they were faxed from his office on 16 July 1993, he did not see them.
Mr Morgan was extensively cross-examined on these and other matters. He admitted that, at the request of Mr Gratz in 1994 he submitted forms to ASIC which, to his knowledge, were false. I was pressed to treat him, therefore, as a man not worthy of credit. I must say, however, that, apart from those acts, he did not strike me, generally, as an untruthful witness. He readily conceded, as was obvious, that he failed to appreciate the significance of many of his acts, that he was naive, that he, like others, was duped by Mr Gratz and, that he acted without due care. His lapses of memory in the witness box, however, were not entirely explicable by the passage of time since the events in question. Nevertheless, his demeanour and his evidence as a whole leads me to the conclusion that he was not deliberately untruthful or systematically evasive. This does not mean that I accept unreservedly all of his evidence. I certainly do not. I have, however, wherever possible, looked at the surrounding circumstances and the contemporaneous facts to test it.
The only evidence which involves him in the transactions presently in question are the facts that he caused the invoices to be prepared on the instructions of Mr Gratz, that he endorsed the second bank cheque sometime before 19 July 1993, and that he or his office faxed the invoices to some person on 16 July 1993. There is no evidence as to what, if anything, Mr Gratz told him about the transactions. I bear in mind, however, that he was by then aware of Mr Gratz’s conflicts of interest. There is no direct evidence of Mr Morgan’s state of mind in performing the acts. I accept his evidence that it did not strike him that the bank cheque was for a sum equal to the net value of the four invoices. In the circumstances, I am not prepared to infer that he knew in mid-July 1993 that the four invoices were brought into existence and sent by him or that the bank cheque was endorsed as a step in or otherwise in furtherance of a fraud by PRS or Mr Gratz upon Lurgi or Lucon. Nor do I conclude that such knowledge as he had would indicate the existence of this fraud to an honest or reasonable man. A more careful man may have made enquiry about what lay behind these matters, but Mr Morgan did not. In his involvement in these transactions he may have been careless but he was not dishonest.
Transactions 1 and 2
These transactions involve the preparation and dispatch to Lurgi of invoices 16 and 20 dated respectively 23 November 1993 and 3 December 1993. These were, I find, written by Wendy Bezzina, an employee of RGM in accordance with the instructions of Mr Gratz given directly or indirectly through Mr Morgan. They were both treated by Lurgi as costs of its Stanwell project in Queensland although only invoice 16 makes reference to this. PRS had no involvement in this project or in any Lurgi or Lucon project in Queensland. The amounts invoiced were paid by Lurgi to PRS by cheques drawn on 24 November 1993 and 22 December 1993 respectively.
In cross-examination of Mr Morgan and in their written submissions, counsel for Lurgi and Lucon suggested and Mr Morgan agreed that invoices were raised when PRS was in need of funds to pay its bills. In the case of these two invoices, however, this does not appear from an examination of the bank statements or the PRS cheque butts. It was put that Mr Morgan knew that PRS had no contracts in Queensland and that he knew that these invoices were not for the BHP contract or the Singapore contract. I have found that Mr Morgan did not at this time have any belief that PRS was doing any work for Lurgi or Lucon in Queensland. He accepted before me that he signed no cheques referable to any Queensland project. He, nevertheless, maintained, and I believe him, that this did not strike him at the time. It seems that he took little personal interest in either the PRS invoices or in the activities of the PRS bank account. He may have received instructions for the preparation of their invoices from Mr Gratz or, more likely, these were given by Mr Gratz directly to his staff. He merely signed cheques when requested and perhaps kept an eye on the bank statements sufficient to be sure that there were funds to meet cheques drawn by him.
Mr Morgan may well have been careless; he was in my judgement not dishonest in his involvement in transactions 1 and 2.
Transaction 3
This transaction concerns invoice 26 dated 4 March 1994 which was also written by Ms Bezzina. The invoice is for $197,000 for work described as follows:
“Full & Final payment for all work done including Eclat settlement dated 4.3.94 for Stanwell, Newcastle, Drycoal & Singapore Project.”
Mr Morgan said that when PRS took over the operation of SK Engineering in June 1993, the Shos continued to manage the business under a contract made between their family company, Eclat Pty Ltd, and PRS. This may not be correct because the PRS cheque butts prior to 5 October 1993 show wages cheques drawn to cash for the wages of the Shos. Then, for two months, until 9 December 1993 the butts show cheques were drawn in favour of Eclat for the wages of the Shos, totalling only $48,000, and in favour of cash for the wages of other staff. Thereafter, payments to the Shos were by cheques drawn to cash. Three further cheques drawn in favour of Eclat on 23 February 1994 appear to be related to other matters.
It seems that the BHP contract and the Singapore contract may not have been profitable. Mr Morgan was requested by Mr Sho to do a profit analysis on them. He did this and it showed that a loss had been incurred. When this was communicated to Mr Sho he was annoyed. Mr Morgan in the witness box said of this:
Witness:“Well, he said he was particularly annoyed that those contracts hadn’t been profitable, and he was further annoyed also that there was subsequent component parts to those jobs that he expected he was going to get, that he regarded as being much more profitable, which he learned were going to be retained by Lurgi/Lucon, that they were going to do in their own workshops. They were not going to subcontract out.
…
Counsel: At that time did Sho tell you anything else?
Witness:That was when I learnt from Sho that he believed that he had an agreement with Gratz and Dietrich that eventually, if the workshop operated profitably, he would then get the opportunity to get control of the workshop back again.”
And so, after some discussions, Mr Gratz and the Shos agreed that their relationship would terminate and that the Shos would be paid “their rightful entitlement to the claim for their additional time that they had spent working on those contracts”. Mr Morgan said also that he worked out the value of this additional time from records kept by Mr Rim Sho. This, he said, was payable to Eclat by PRS and it was then on-charged to Lurgi in invoice 26. The sum invoiced was $197,000. Mr Morgan said that, from the point of view of PRS, it was a legitimate claim on Lurgi/Lucon because of extras on the jobs. No other person involved in all of this gave evidence.
Notwithstanding that Mr Morgan’s evidence on this transaction was uncontradicted I was invited to reject it and I do so. It flies in the face of the undisputed facts, facts which were within his knowledge in March 1994. They are the following:
(a)The two projects of which he spoke were the BHP project and the Singapore project which had an order value in December 1993 of $220,016 and $290,266 respectively. The extra work of which he spoke was for a further $197,000 labour. This is a substantial extra in the circumstances.
(b)The contract sums had been settled by Mr Morgan in December 1993 after a meeting with the Lurgi representative. At that time there was no mention by him of extra work. Indeed, he was persuaded that PRS had been overpaid.
(c)Presumably, when Mr Morgan did the profitability analysis he did not bring these “extras” to account. This must be because the information he then had to hand made no mention of them.
(d)No evidence was presented to explain how it was that Lurgi was liable for these extras. Indeed, Mr Morgan, while maintaining that the extras claim was legitimate, agreed that Lurgi had no obligation to pay for them.
(e)The terms of the invoice make no mention of extras. Moreover, it speaks of two projects, Stanwell and Drycoal which Mr Morgan knew had nothing to do with the Eclat claim on PRS.
(f)Add to this the remarkable response of Lurgi and Lucon to this invoice. Their payment was made on 3 March 1994, the day before the invoice was raised. Mr Morgan said that he was not aware of this. And when the payment was received, PRS paid out Eclat in a surprising way. On 4 March 1994 cheque number 400267 was drawn by Mr Morgan on the PRS account for $185,000 in favour of a bank cheque in favour of Aitco Pty Ltd. Mr Morgan said that this payee was as requested by Mr Rim Sho. In fact, the payee was a subsidiary company of the Adelaide Casino, although Mr Morgan said that he did not learn of this until April 1996 when he was told by a police officer from the Major Fraud Squad. The balance of the amount owed to Eclat for extras was paid by the transfer to the Shos or to Eclat of two cars.
(g)The payment obtained by PRS from Lurgi was used to pay one or more of the Shos to buy their silence. I find that in March 1994 the Shos had threatened Mr Gratz to provide information to Lurgi and Lucon. Mr Morgan before me said that this information concerned an agreement which Mr Gratz had previously made that PRS, or perhaps the Shos, would be given further Lurgi work on the completion of the current contracts. I prefer, however, his sworn evidence given on the Gratz committal on 5 March 1997. There, Mr Morgan said in answer to a question by Mr Gratz who was appearing for himself:
“They [the Shos] threatened to go to Lurgi/Lucon to inform Lurgi/Lucon of your involvement with PRS.”
I find that PRS paid the Shos to assuage their disappointment at having lost money on the two completed contracts and to compensate them for the losses they would suffer upon the pending closure of the PRS workshop in Morwell and also to buy their silence. They threatened to tell to senior Lurgi management that Mr Gratz was operating PRS in circumstances where he knew that this was improper and may cause him to be dismissed.
The significance of this is not only that I accept this as the true explanation for the raising of invoice 26, but also that Mr Morgan knew of this at the time his staff member raised the invoice and when he signed the cheque to buy off the Shos. It shows that he knew that Mr Gratz had a conflict of interest which he wished to conceal from his employer and that he, Gratz, and even Mr Morgan himself was prepared to raise a fictitious invoice in order to obtain money from Lurgi and Lucon. This is not the conduct of an honest man. I am satisfied that Mr Morgan was knowingly implicated in this fraudulent transaction.
The Post-March 1994 Transactions
These include transactions involving seven invoices directed by PRS to Lurgi and Lucon which I have set out above at [36]. I ignore transaction 11 for the reasons set out at [37] above. They include also three transactions involving three PRS invoices raised on Culvert Constructions which I have set out above at [38] and seven transactions involving seven PRS invoices raised on SPI which I have set out in the same paragraph. These seventeen invoices are dated variously between 8 April 1994 and 15 March 1995 and total $1,542,478. With two exceptions, invoices 33 and 34, the invoices claim payment for work done at projects in Queensland. With one exception, the claims were for labour and services of various kinds. Invoice 55 seeks payment for plant, equipment and cranage.
The seventeen invoices are, as I have found, spurious and their payment, directly or indirectly, by Lurgi and Lucon, as I have found in [37] and [40] above, represents a loss to each company as follows:
Lurgi Loss
Invoicer Amount Paid Total PRS (3 invoices) 219,452 Culvert Constructions
(3 invoices)121,379 SPI (7 invoices) 585,167 $925,998
Lucon Loss
Invoicer Amount Paid Total PRS (4 invoices) 105,149 Culvert Constructions
(1 invoice)79,800 SPI (2 invoices) 198,027 $382,976
The involvement of Mr Morgan and RGM lies in the fact that his staff under his supervision and at the direction of Mr Gratz raised these invoices and sent them. Payment into the PRS bank account was by direct deposit. Mr Morgan accepted all of this but maintained that he was innocent of any dishonesty.
What was put against him on this topic was, first, that he was by this time aware that Mr Gratz was defrauding his employer and at least engaging in activities in breach of fiduciary duty. I have made such a finding with respect to the Eclat settlement, invoice 26. It was said that Mr Morgan was familiar with the activity in the PRS bank account since his staff wrote most of the cheques during this period and he signed them. His staff reconciled the bank statements from time to time and maintained a cash book recording transactions from the cheque book operated by him and that operated by Mr Gratz. It would seem, too, that in early July 1994 he or his staff undertook a tax reconciliation for the year just completed. It was put that given his familiarity with these financial transactions and given his knowledge that PRS had closed its Morwell workshop in March 1994 and was drawing no cheques for wages, he knew that the invoices which were being raised in his office after that date were spurious. He maintained that this did not strike him at the time. It was put that, by mid-1993, he was aware that Mr Gratz was an employee of Lurgi or Lucon and that, as such, he had a conflict of interest inasmuch as he controlled PRS. Mr Morgan acknowledged in his evidence that this was evident in August 1993 when Mr Gratz, on behalf of Lurgi, signed agreements of sale to PRS of three motor cars, but he maintained that he did not think very much about it.
It was late 1994, too, that Mr Morgan acted for Mr Gratz in the purchase of Metall Pacific Technology Corporation Pty Ltd, a tax loss company which was part of the Lurgi group. The shares were purchased in October 1994, again in the names of Mr and Mrs Hedrick, who became its directors as nominees of Mr Gratz. In the course of his work for Mr Gratz in connection with this purchase, Mr Morgan lodged with ASIC a return which falsely showed the date of the transaction as 15 June 1994 in order to obtain for his client the benefit of the tax losses of the purchased company. It is clear that he then knew that the date was false. When asked whether he considered the back-dating of documents in these circumstances to be a dishonest and dishonourable thing, Mr Morgan said simply that “it would be creative”. I consider that a remarkable and illuminating answer. It will be recalled that Mr Morgan, a chartered accountant, was steadfastly maintaining an ignorance of the financial, legal and ethical significance of the transactions in which he engaged or in respect of which he supervised the activities of his staff. I need hardly say that the knowing submission to ASIC of a falsely dated document in order to obtain a tax benefit for a client is a serious departure from the standards expected of a member of his profession. For my purposes, it shows that he has a very flexible attitude to standards of honesty. His conduct with respect to this transaction causes me to be very distrustful of the excuses he offers for not appreciating the significance of what Mr Gratz asked him to do in the period presently under consideration.
Next it was put that I should not assess Mr Morgan’s state of mind with respect to these seventeen invoices out of their context. A single transaction which might appear innocent might be looked at differently when seen as part of a series. I was reminded that Mr Morgan was a willing participant in the fraud on Lurgi which provided the funds to buy the silence of the Shos in March 1994.
Against all of this, I must assess his state of mind at the time of each of the transactions in the light of the facts that were known to him. The plaintiffs must establish his dishonesty in the sense that this expression is here to be understood; it is not for him to prove his innocence.
I have found that, at all times in the period now in question, Mr Morgan knew that Mr Gratz was an employee of Lurgi and that he owed fiduciary duties to that company and to Lucon. He knew that Mr Gratz was using PRS to engage in transactions which breached this duty and that he was man who would not hesitate to create a spurious transaction if this could obtain for himself a benefit. As the period progressed this became increasingly apparent. He knew that the Shos were no longer associated with PRS and that no other employees were on its payroll. He knew that Mr Gratz and Mr Dietrich could not themselves be providing engineering consultancy services or supervisory services to the extent described in the Lurgi or Lucon invoices or at all. I find that he knew that the three PRS invoices raised on Lurgi and the four PRS invoices raised on Lucon were spurious. A fortiori, I am satisfied that this would have been apparent to an honest or reasonable man in his position. I am satisfied that Mr Morgan participated in the frauds on those two companies by having his staff raise those seven invoices and that he did so knowing that they were a step in a series of transactions which were dishonest and amounted to breaches of the fiduciary duty owed by Mr Gratz. I reject Mr Morgan’s evidence to the contrary.
I turn now to the ten PRS invoices raised on Culvert Constructions and SPI. In the case of these transactions the fraud on Lurgi and Lucon does not appear on the face of the documents. Nor does it so readily appear on their face that the transactions breached the fiduciary duty owed by Mr Gratz to those companies. The findings which I have made as to the incapacity of PRS to perform the work described in the invoices remain relevant. I find, therefore, that the invoices were spurious. They might in these circumstances be part of a fraud on the invoicees. The difficulty lies in taking the further step that the target of the fraud was in fact Lurgi or Lucon. True it is that the projects were Lurgi or Lucon projects, but there is to my mind no warrant for me to make the further finding which I am asked to make. I am not satisfied that it was known to Mr Morgan, or that it would have been apparent to a person in his position knowing the facts that he knew, that these invoices raised on Culvert Constructions or SPI were part of the fraud upon, or a breach of the fiduciary duty owed to, Lurgi or Lucon. I am not satisfied that the claims have been made out against Mr Morgan with respect to these transactions.
I conclude, therefore, that Mr Morgan was a knowing participant in the following transactions only.
Trs
No.Invoice
No.Date Invoicee Project Amount 3 26 4 March 1994 Lurgi/Lucon Eclat Settlement 197,000 5 32 15 June 1994 Lurgi Gladstone 138,110 5 33 16 June 1994 Lurgi Loy Yang 26,342 6 37 4 November 1994 Lurgi Stanwell 55,000 10 41 30 September 1994 Lucon Rockhampton 15,654 10 49 31 October 1994 Lucon Rockhampton 29,321 9 54 30 November 1994 Lucon Rockhampton 32,649 8 55 30 November 1994 Lucon Rockhampton 72,500 $566,576 The negligence claims
In the alternative, it was put against Mr Morgan and vicariously against RGM, that his conduct in raising the fifteen PRS invoices on Lurgi and Lucon was in breach of a duty of care owed to those companies.
To my mind there is no substance in this claim. It may be correct to say that an accountant who raises invoices in accordance with the instructions of a client would reasonably foresee that loss might be suffered by the invoicee if the invoice were raised inaccurately and without due care. The duty, however, which Lurgi and Lucon would impose upon this accountant is one “to take reasonable care to ensure that any invoice issued by RGM or Mr Morgan on behalf of PRS were for amounts properly due for services provided by PRS”. It was submitted that recent decisions of high authority point to the existence of such a duty. I do not agree. For present purposes I assume that Mr Morgan was not privy to the fraud of Mr Gratz. There is in this case none of the indicia of the special relationship required for the establishment of such a duty.
The Misleading and Deceptive Conduct Claims
What is put here is, first, that PRS is guilty of misleading and deceptive conduct in submitting spurious invoices to Lurgi and Lucon and to Culvert Constructions and SPI and that RGM and Mr Morgan were guilty of aiding and abetting this conduct. The misleading and deceptive conduct of PRS cannot be gainsaid. The accessorial liability of RGM and Mr Morgan, however, requires proof of a guilty mind, a question which I have addressed. I find that RGM is liable under s. 75B of the Trade Practices Act 1974 and that Mr Morgan is liable under s. 31A of the Fair Trading Act 1986 in respect of the seven transactions listed in [36] above. They are liable for the losses suffered by Lurgi and Lucon as a result.
Second, it is said that Mr Morgan himself was guilty of misleading and deceptive conduct in raising and sending the spurious invoices. In the course of final addresses it appeared that the sting of this allegation lay, not so much in the issuing of the invoices, but rather in so doing without disclosing to the invoicees what Mr Morgan knew of the underlying circumstances. This was not pleaded and was not, therefore, pressed. The allegation, therefore, rested on the issue of the spurious invoices and the significance of these lay in their background circumstances.
This claim does not really take the plaintiffs further than their principal allegation. If complicity and fraud is put to one side, I do not see that a person who issues an invoice as directed by another can be personally liable for the conduct of that other.[7]
[7]Gardam v George Wills & Co Ltd 82 ALR 415 at 427, per French J; The Saints Gallery Pty Ltd v Plummer (1988) 80 ALR 525 at 529, per Morling, Pincus, Burchett JJ.
Contributory Negligence
Many of the plaintiffs’ witnesses were cross-examined by counsel for the defendants with a view to showing that, by their laxity in processing the spurious invoices and by failing to detect sooner the frauds of Mr Dietrich and Mr Gratz, Lurgi and Lucon had, to a greater or less extent contributed to their own loss. As a defence to the failed negligence claim it is not necessary that I dwell on these contentions. It was, however, put that in assessing equitable damages for the liability of RGM and Mr Morgan for assisting in the breaches of fiduciary duty, I should abate the damages where Lurgi and Lucon had contributed to their own loss.
In principle, counsel for Lurgi and Lucon accepted that the court might adopt this course in the appropriate case. I will proceed on the basis of this concession without expressing any view upon the principle. Counsel for the plaintiffs however contended that this was not such a case. I agree. Lurgi and Lucon had in place procedures to verify the authenticity of claims made for work done. The evidence showed that they were adequate in terms of then current standards. The inherent difficulty with any procedures of this kind is that their effectiveness is likely to be diminished where corporate officers of the highest rank determine to engage in systematic fraud. The human factor which inclines a subordinate to accept explanations from superiors and to participate in otherwise surprising departures from corporate procedures cannot easily be overcome. The evidence of Anthony George Corkran to this effect I found compelling. Mr Corkran was, in 1993 and 1994, the state manager for Lucon in Queensland, the location of many of the projects referred to in the spurious invoices. He was answerable to Mr Dietrich, the managing director of Lucon and in commercial matters, to Mr Gratz who was also a director of Lucon. It is not easy for a system to be set up or implemented which would enable a person, even in the position of Mr Corkran, to question instructions and explanations given by such persons. As he said, the person to whom he would ordinarily take a query about any irregularity in the processing of invoices would have been Mr Gratz, a man about whom he entertained serious doubts in mid-1994. He said, and I accept, that he thought that, given his doubts about officers at that level, he did not know whom he could trust.
Damages
I found that RGM and Mr Morgan knowingly assisted Mr Gratz and, perhaps, Mr Dietrich, in breaches of fiduciary duty and fraudulent conduct with respect to eight invoices to a total value of $566,576. Of these invoices, three were addressed to Lurgi alone, to a total value of $219,452; and four were addressed to Lucon alone, to a total value of $150,124. The remaining invoice, number 26, in the sum of $197,000, I have allocated to Lurgi so that its loss becomes $416,452. No point was taken at trial that these losses should fall otherwise than on RGM and Mr Morgan jointly and severally. The damages suffered by the plaintiffs for which RGM and Mr Morgan are liable are, therefore, as to Lurgi $416,452 and as to Lucon $150,124.
I will hear counsel further as to the orders to be made to give affect to these conclusions.
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