Meiko Australia Pacific Pty Limited v Adam Samuel Hinchliffe
[2009] NSWSC 354
•7 May 2009
CITATION: Meiko Australia Pacific Pty Limited v Adam Samuel Hinchliffe & Anor [2009] NSWSC 354 HEARING DATE(S): 22/04/09, 23/04/09, 30/04/09
JUDGMENT DATE :
7 May 2009JURISDICTION: Equity Division
Commercial ListJUDGMENT OF: Einstein J DECISION: Judgments to be entered against first and second defendants with a stay of the orders made against the second defendant. Reserve costs for argument. CATCHWORDS: EQUITY - General principles - Wrongful appropriation - Following freezing orders first and second defendant's consent to judgment in the sum of $730,000 against them on a joint and several basis - Further relief sought by plaintiff with respect to additional sums - Onus of proof in cases involving fraud - Evidence Act NSW section 128 certificate - Retroactive application of section 128 not contemplated by section 128 LEGISLATION CITED: Corporations Act 2001 (Cth)
Evidence Act 1995 (NSW)CATEGORY: Principal judgment CASES CITED: ASX Operations Pty Limited v Pont Data Australia Pty Limited (No 1) (1990) 27 FCR 460
Briginshaw v Briginshaw (1938) 60 CLR 336
Cornwell v R [2006] NSWCCA 116
Kelly v Solari (1841) 152 ER 24
Moses v Macferlan [1760] ER 676
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170
Pascoe v Commissioner of Taxation (Cth) (1956) 30 ALJR 402
Pedler v Richardson (Supreme Court of New South Wales, Young J, 16 October 1997, unreported)
Ross v Internet Wines (2004) NSWLR 436
Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516
Royal Bank of Canada v The King [1913] AC 212
Vaughan Constructions Pty Ltd v Luong [2008] NSWSC 1033
Vickery v Jjp Custodians [2002] NSWSC 782
Watson v Foxman (1995) 49 NSWLR 315PARTIES: Meiko Australia Pacific Pty Limited (Plaintiff)
Adam Samuel Hinchliffe (First Defendant)
Swiss Systems Pty Limited (Second Defendant)FILE NUMBER(S): SC 50236/08 COUNSEL: Ms J Richards (Plaintiff)
Mr A Martin (First Defendant)SOLICITORS: Barringtons Lawyers (Plaintiff)
Martin Legal (First Defendant)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST
Einstein J
Thursday 7 May 2009
50236/08 Meiko Australia Pacific Pty Limited v Adam Samuel Hinchliffe & Anor
JUDGMENT
The proceedings
1 The plaintiff is a subsidiary of a German corporation, Meiko Beteiligungs GmbH, which distributes commercial kitchen equipment throughout much of the Western world, through its subsidiaries.
2 From 1 April 2007 until 10 October 2008 the first defendant was employed as the Managing Director of the plaintiff, following the purchase of the business of the second defendant by the plaintiff.
3 The first defendant is and has at all times been the sole director, secretary and shareholder of the second defendant.
4 These proceedings were commenced by Summons in early November 2008 when freezing orders were made against the defendants.
5 On 5 December 2008 the first and second defendants consented to judgment in the amount of $730, 000.00 against them on a joint and several basis. No part of the judgment amount has been paid to the plaintiff.
Further relief sought by the plaintiff
6 The final hearing concerned the following relief sought by the plaintiff:
ii. the following orders against the second defendant:
i. judgment against the first defendant in the sum of $823,649.27 plus interest.
b) a declaration that the amount of $90,782.99 in Bank Account number [ ] in the name of the second defendant (“Bank Account”) is held on trust by the second defendant for the plaintiff.
a) judgment in the sum of $823,649.27 plus interest;
[In understanding the sums sought the plaintiff has made the following matters clear:
The sum of $823,649.27 is said to allow for the offsetting amount of $62,889.93 referred to in Mr Chan’s affidavit sworn 5 February 2009 and identified in Annexure B to that affidavit.The sum of $823,649.27 does not include the admitted $730,000.00 or the amount held in the Bank Account.
- The sum of $62,889.93 is contended to be the total amount the second defendant paid in respect of outgoings in respect of assets which it is said have not been reimbursed by the plaintiffs. The plaintiff's case is that in reality the outgoings were hire purchase, insurance and fuel]
7 The plaintiff claims an entitlement to judgment in the sum of $823,649.27 because the evidence is said to disclose that funds in that net amount were transferred to the second defendant without there having been a proper purpose for the transfer.
8 The contention is that the transfers were effected with the knowledge of the first defendant, the sole director of the second defendant: hence the proposition that his knowledge is imputed to the second defendant.
9 The plaintiff’s claim is that the knowledge that is imputed to the second defendant is that the funds were not funds to which the second defendant was entitled, but were funds of the plaintiff.
10 The plaintiff claims that even absent knowledge the money is recoverable from the second defendant as monies had and received.
The amendment sought
11 The plaintiff belatedly sought to amend its pleadings in final address to add an additional claim:
“that as the first defendant was between April 2007 and October 2008 the managing director of the plaintiff, as such he owed duties to the plaintiff to exercise his powers and discharge his duties in good faith in the best interests of the plaintiff and for a proper purpose [section 181 Corporations Act ] and also not to improperly use his position to gain an advantage for himself or someone else or to cause detriment to the plaintiff [section 182 of Corporations Act ].”
12 The amendment was opposed. The principled exercise of the relevant discretion is to disallow the amendment which came following the cross examination of the first defendant and in circumstances in which fairness would have dictated that any such claim be properly pleaded before or at least at the commencement of the hearing. The gravity of the claims against the first defendant entitled its legal advisers to ready themselves fully on every aspect of the claims made against him and it would not be just to promote these further allegations to be pursued without full particulars having been given.
Parties and sources of evidence
13 The plaintiff’s evidence in chief consisted of the following affidavits: Juergen Sachs (sworn 7 November 2008), Burkhard Joachim Randel (sworn 5 February 2009) and Danny Chan (5 February 2009). Mr Chan was cross-examined.
14 The first defendant’s evidence in chief consisted of parts of earlier affidavits and a further affidavit sworn prior to the hearing: 26 November 2008 (transcript 37: paragraphs 46-49, 54-55 were read; transcript 54: paragraphs 41-45, 51-53, 66); 3 February 2009 (paragraphs 1-35) and 21 April 2009. The first defendant was cross-examined.
Liquidation of the second defendant
15 The second defendant was placed into liquidation by the first defendant in January 2009. On 21 April 2009 the liquidator of the second defendant consented to leave being granted to the plaintiff to proceed against the second defendant in these proceedings.
16 On the same day the plaintiff consented to a relaxation of the Freezing Order made on 7 November 2008 and extended on 13 November 2008 as against the second defendant.
17 The second defendant has not participated in these proceedings.
The first defendant’s complaints qua missing causes of action
18 Bearing in mind the complaints by the first defendant to the effect that the plaintiff had failed to plead various causes of action it is germane to note the following matters:
i. The orders sought in the Summons are:
a) an order that the first defendant pay $1,727,351.62 to the plaintiff
c) by way of interlocutory relief, a freezing order over the assets of the defendants, wheresoever those assets may be situated, together with ancillary relief including the swearing of affidavits of discovery and production of documents.b) an order that the second defendant pay such part of the said sum of $1,727,351.62 as has been paid by the first defendant to it
- ii. The plaintiff’s allegations against the first defendant are contained in the Commercial List Statement dated 7 November 2008. In brief, the allegations made against the first defendant are that:
a) the first defendant ‘wrongly appropriated’ funds from the plaintiff, and
c) the first defendant appropriated funds of the plaintiff wrongly and for his own purposes.b) the first defendant transferred a portion of the wrongly appropriated funds to the second defendant, and again
19 On 1 December 2008 a Commercial List Response was filed jointly by the first and second defendants. In brief, that Response maintained that:
i. the first and second defendants were liable to return to the plaintiff the amount of $730,000.00
ii. the further amount claimed by the plaintiff substantially represented reimbursements to the defendants for moneys disbursed on the plaintiff’s behalf in the ordinary course of business
iv. the second defendant had made various payments to the plaintiff during the course of business, which ought to be taken into account during the reconciliation.iii. a forensic accountant ought to be appointed to reconcile the accounts of the parties, to determine the state of affairs between them, and
20 During address Mr Martin, solicitor, appearing for the first defendant naturally accepted that the plaintiffs pleading clearly disclosed wrongful appropriation for the purposes of the first defendant as a cause of action squarely raised in this litigation: [Transcript 131]
A conspectus of several related and important issues with which the reasons which follow deal
21 It will already be apparent that in the main the proceedings are concerned with questions of fact. Even before travelling through the relevant chronology and the detailed evidence before the court it is useful to indicate a short summary of the relevant enquiries to be undertaken in the balance of the reasons.
22 Without being exhaustive it would seem that the following questions will become germane in the attempts to determine the factual matters in issue:
i. What is the nature of the amount claimed?
ii. Who authorised the transfers?
iv. Could the transfers have been done for proper purposes?iii. What, if any, supporting documentation for the transfers is there?
Chronology
23 A brief chronology made out by the evidence before the Court is as follows.
March 2007
24 The first defendant acquired 100 shares in the plaintiff.
1 April 2007
25 The first defendant commenced employment as plaintiff’s managing director.
5 April 2007
26 The plaintiff commenced trading and employed the first defendant as the plaintiff’s managing director.
15 April 2007
27 The plaintiff acquired 70% of the second defendant’s business for $1,544,253.70 including stock and agreed to assume liabilities.
Late March 2008
28 The first defendant asked to wind down or sell the remaining part of second defendant’s business.
Early June 2008
29 Mr Danny Chan, the accountant employed by WHK Howarth, was asked to prepare a profit and loss statement and balance sheet for the second defendant in respect of the financial year ended 30 June 2008 based on information provided by the first defendant and in the course of which Mr Chan became familiar with the books and records of the first defendant.
August 2008
30 The first defendant offered employment to Mr Chan as the plaintiff’s Financial Officer, which Mr Chan accepted.
25 August 2008
31 The first defendant sought an urgent injection of cash, blaming John Large for “many errors in the journal entries” for which his employment with the plaintiff was terminated.
27 August 2008
32 The German parent sought financial information.
1 September 2008
33 The first defendant acknowledged receipt of Euro 400,000.00 from the German parent and blamed financial incompetence.
5 September 2008
34 Financial information was sent to German parent.
26 September 2008
35 The German parent advised that, having examined the financial information provided, further information was required and a list of suspicious payments was provided, with a request for information about them.
29 September 2008
36 The first defendant blamed others for various discrepancies; as one example, compare first defendant’s characterization of the sum of $430,000.00 as having been authorized by John Large; later says it was possible that John Large had taken the money, but later, through his solicitors, stated that was a “final loan by MAP to Swiss Systems … on 1 August 2008”.
2 October 2008
37 The first defendant continued to blame others and suggested that his trip to Germany may not be worthwhile, offering instead to assist the plaintiff to find a replacement for himself so the plaintiff can “continue on as smoothly as possible from this point”. The first defendant made the following request of the plaintiff: “Please advise ASAP so that suitable arrangements for my departure can be planned.”
6 October 2008
38 The plaintiff required the first defendant to come to Germany.
9 October 2008
39 A meeting was held between the plaintiff and the first defendant. When asked whether there was anything the first defendant wished to tell the plaintiff, the first defendant said that money was needed so stock could be held.
40 The first defendant claimed that John Large may have taken the sum of $430,000.00.
10 October 2008
41 The first defendant admitted having taken money and resigned as Managing Director of the plaintiff when told he could do so or be terminated.
23 October 2008
42 The first defendant denied having misappropriated funds.
24 October 2008
43 Legal representatives of the parties met although no resolution was reached; amount still estimated to be $730,000.00.
After 26 October 2008
44 The plaintiff discovered that the amount missing was $1,727,351.62.
November 2008
45 Mr Chan was asked by the plaintiff’s solicitor to examine the plaintiff’s records and identify transfers of funds from bank accounts from the plaintiff to the second defendant from 13 April 2007; Mr Chan identified numerous transfers and discovered that the net amount owing to the plaintiff by the second defendant was $1,644,432.26.
The evidence given by Mr Sachs
46 Mr Sachs is the financial controller of the Meiko group of companies (hereafter, Meiko) of which the plaintiff is a member. His evidence was broadly as follows.
47 Meiko manufactures and sells dishwashing and other systems for commercial applications. Its head office and manufacturing plant is in Offenburg. It has a number of subsidiaries throughout the world including Meiko Australia Pacific Pty Limited (hereafter “MAP”) in Australia.
48 Prior to establishing a direct presence in Australia Meiko sold its products into Australia through a dealer. The Dealer was the first defendant who conducted his business through Swiss Systems Pty Limited (the second defendant).
49 In or about early 2007 Meiko entered into discussions with the first defendant for Mieko to purchase part of the business of the second defendant. During those negotiations the first defendant said to Mr Sachs’ boss Mr Randel, in his presence, words to the following effect “We will need to settle the sale of the business quickly. There are a number of liabilities of the company and Swiss Systems does not have the funds to continue operating”. Mr Sachs then instructed Meiko’s lawyers in Australia to prepare an agreement and on or about 5 April 2007 a Deed of Agreement for Sale of Business was executed by MAP, Meiko and the first and second defendants.
50 At the time that negotiations were undertaken for the purchase of the Swiss Systems business, several conversations were conducted in relation to the employment by MAP of the first defendant.
51 In or about late March 2007 Mr Sachs had a conversation with the first defendant in words to the following effect:
Mr Sachs : “If you are to be the managing director of Meiko in Australia you cannot also be the managing director of Swiss Systems. We will require you to use all of your efforts to promote the Meiko business”.
Mr Hinchliffe : “I understand this but I will need time to wind down or sell Swiss Systems. I will either find a buyer for the company or appoint someone to wind it up. I will need to spend a little bit of time doing this”.
Mr Hinchliffe: ”Ok I can do that”.Mr Sachs : “We ask you that as Meiko is paying you a fulltime salary to run Meiko Australia we want a commitment that as part of the deal, you will close down the Swiss Systems. We want this done no later than the end of December this year”.
52 Pursuant to the Deed, Meiko purchased that part of the business of Swiss Systems that related to the sale of Meiko or similar products. This amounted to approximately 70% of the second defendant’s business. Meiko agreed to take an assignment of specified property and equipment leases and pay to the first and second defendant a purchase price of $1,403,867.00 (+ GST) for the business plus stock.
53 The transaction was settled on or about 15 April 2007. On settlement an amount of $1,544,253.70 (including GST) was transferred from the account of MAP to the account of the second defendant in full payment of the purchase price and stock.
54 The first defendant failed to dispose of the business by the end of December and Meiko agreed to a final extension to 30 June 2008. The first defendant was employed as the Managing Director of MAP from 1 April 2007.
55 MAP commenced trading in or about 5 April 2007 and set up operations in Victoria, New South Wales and Queensland. In the first year of trading the company operated at a loss. From the period 5 April 2007 to 30 July 2008 amounts totalling Euro 1.1 million (approximately AUD $2.3 million) were forwarded by Meiko to MAP to cover operating losses. Such losses were considered usual for the establishment of a new company in a territory.
56 On 25 August 2008 the first defendant sent an email to Mr Sach’s boss asking that Meiko urgently forward money to fund the operation of the business for the next three months. At that time Mr Sachs was on vacation and could not be disturbed. Mr Randel agreed to provide Euro 400,000.00 subject to receiving more financial information. A copy of Mr Randel’s email to the first defendant and the first defendants reply is at page 48 of Exhibit JS1. On 29 September 2008 Meiko transferred an amount of Euro 400,000.00 to the bank account of MAP.
57 On 5 September 2008 the first defendant forwarded to Meiko a set of the preliminary figures (receivables, liabilities, stocks and liquidity plan) that were requested in the Mr Randel’s email of 27 August 2008. Mr Sachs examined these figures and found that there were some serious discrepancies. There was a substantial amount of unexplained money leaving the MAP and the receivables were too low.
Action taken in relation to discovered obscurities in financial information provided
58 On 9 September 2008 Mr Sachs attended a meeting with Mr Randel and Meiko’s director of finance, Mr Kipca. As a result of that meeting a request was forwarded to the first defendant to clear up any obscurities in the accounts and send copies of the statements. [the ruling as to objections to the second sentence is ‘allow’ the evidence]
59 On 19 September 2008 the further documents were forwarded to Meiko from the first defendant. Mr Sachs noticed that the receivables were elevated and that under the classification “other receivables” were amounts of approximately A$1.2 million. He did not know what these amounts were for. He further investigated the bank statements and found that cheques were made payable from MAP to the second defendant.
60 On 26 September 2008 Mr Sachs forwarded a letter to the first defendant requesting that he provide an explanation for the extraordinary entries within two days. A list of the ‘suspicious payments’ was included in the letter together with a request that the first defendant insert details of the purpose of the payment and the person that authorised the payment.
61 On 29 September 2008 Mr Sachs received an email from the first defendant completing the details of the unsubstantiated payments. A copy of the email is at the end of page 57 and the completed schedule is at page 59 of the schedule. The columns headed “Reasons” and “Authorised by” were completed by the first defendant. The explanation offered for the significant amounts taken from the MAP account is “part reconciliation”. Apart from the staff salaries the first defendant has nominated either John Large or the previous financial controller, Gerald Walz, as the authorising parties for the transactions. Gerald Walz was authorised by MAP to sign cheques or authorise payments from the account but not John Large. Mr Sachs contends that the first defendant was hiding the transactions. [this evidence is allowed as subj/136].
62 On or about 29 September 2008 arrangements were made for the first defendant to travel to Offenburg to explain the payments. The visit was scheduled for 9 October 2008.
63 On 2 October 2008 Mr Sachs sent an email to the first defendant advising him to provide all information to Meiko. A copy of this email is at page 62 (middle) of Exhibit JS1.Mr Hinchliffe's reply is at page 61.
64 Pending the visit from the first defendant Mr Sachs contacted Meiko’s Australian lawyer.
65 On or about 3 October 2008 Mr Sachs received a copy of the Balance Sheet and Profit and Loss statement of Swiss Systems for the period July 2007 to June 2008. The records report showed substantial payments for wages and dividends made by the second defendant to the first defendant.
First defendant attends meetings in Germany
66 On 9 October 2008 Mr Sachs attended a meeting with the first defendant and Mr Randel in Offenburg. During that meeting a conversation took place in words to the following effect:
Mr Randel : “Adam you are here because we don’t understand where all of the money has gone that we sent to Meiko Australia Pacific. We need to have some clarification on this before we start. Is there anything that you want to tell me?”
Mr Randel : “Yes we know about that, we have talked about that before”.Mr Hinchliffe : “We need a lot of money because we need to hold the stock. We can’t wait eight weeks for the stock to come from Germany. The customer has to get it within two weeks or he is not interested”.
67 Mr Sachs then showed the first defendant a copy of the summary of the unsubstantiated payments (page 59 of Exhibit JS1). Mr Sachs said to him in words to the following effect: “We need to know what these entries are for. What is the meaning of the word “Other Debtors”? How did you spend this money, what is it for?” The conversation continued, to the following effect:
Mr Sachs : “These are the bank reconciliations for MAP that you sent to us last week. We see the big amounts going out of MAP into Swiss Systems.”
Mr Hinchliffe : “One is for the GST payment for Qantas and a lot of this money was used to set up the Melbourne showroom. We spent some money on a water treatment unit that we delivered to Qantas”.
Mr Randel : “We asked you to bring the bank statements for Swiss Systems, have you got them here?”
Mr Hinchliffe : “I don’t have them with me, I can see if I can get them for you tomorrow.”
Mr Hinchliffe : “I will give him a call straight away and see if I can get them”.Mr Sachs : “Danny will still be in the office, we would like them now. We want to see the statements for August and July”.
After receipt of the statements twenty minutes later and distribution to Mr Randel and Mr Sachs, Mr Sachs then had another conversation with Mr Hinchliffe in words to the following effect:
Mr Sachs : “Looking again at the $430,000.00 it has gone from MAP to Swiss Systems and there are cheques coming out of Swiss Systems for nearly $430,000.00. You said that these payments were authorised by John Large. Do you think he took the money?”
Mr Randel : “Please provide more details about these cheque from NAB, after that we should meet again”.Mr Hinchliffe : “That is entirely possible, I have never been happy with his work and it could have been him”.
68 The morning of the following day (10 October 2008), Mr Sachs asked the MAP accountant, Danny Chan, to forward additional copies of the bank statements for the second defendant. The bank statements showed that in June and July additional payments were transferred from the MAP bank account to the account of the second defendant. In early June two transactions of $150,000.00 each were transferred from the Map account to the account of the second defendant and on the same day $275,000.00 was taken out. These were large amounts to add to the $430,000.00 Meiko contends that it already knew about. [the ruling as to evidence is to allow the evidence as subj/136]
69 The next morning Mr Hinchliffe came into Mr Sachs’ office and said, “I have to meet you and Mr Randel. I have to tell you something”.
70 Waiting for Mr Randel in Mr Sachs office Mr Sachs had a conversation with Mr Hinchliffe in words to the following effect:
Mr Hinchliffe : “I am very sorry I have made a very stupid mistake. I don’t know what to say. As you know my wife is very ill and I needed to purchase a house for her in Mosman. We need a one level house and it has always been her dream to return to the seaside. I took the money from Meiko to purchase the house. It is the most stupid thing I have ever done in my life and I am truly sorry.” Mr Hinchliffe then started to sob.
Mr Sachs : “Adam I have seen the Swiss Systems bank statements. They show that the money that left MAP went into your company’s account. The money was taken out on the same day. I am very concerned.”
71 Later that morning Mr Sachs attended a meeting with Mr Randel and Mr Hinchliffe. At the meeting a conversation took place in words to the following effect:
Mr Sachs : “Mr Randel I have had a talk with Adam following the receipt of the bank statements for Swiss Systems. The statements show that the money taken from Meiko has gone to Adam’s company. Adam wants to explain this.”
Mr Hinchliffe : “As I told Jurgen this is the stupidest thing that I have ever done in my life. I took the money firstly to pay the deposit on a house that came up for sale in Mosman. My wife is very ill and came from Mosman and has always dreamed of returning to live in Mosman by the seaside. She cannot walk upstairs and I needed to get a house all on one level. I took the money out for the deposit. It was $275,000.00. I then applied to the bank for a loan. I could not get enough money from the bank to settle on the house even though they told me that they would lend it. I took another $430,000.00 out of the MAP account and paid it to Swiss Systems. On the same day I then drew bank cheques from Swiss Systems and gave it to my solicitor to settle on the sale of the property. Those are the five cheques that you can see on the statement. I am very sorry, I regret that I have done this and know that I have let you down.”Mr Randel : “This is a surprise to us.”
72 Mr Randel then said in words to the following effect: “This is a very serious matter. You have taken our company’s money and used it for your own purposes. This is something that cannot be forgiven and the company must take action to terminate your employment and position.” The conversation continued, in words to the following effect:
Mr Hinchliffe : “I can pay the money back and will look at every way to do this.”
Mr Hinchliffe : “I am an honourable business person and I must accept that I must take responsibility for this. I will resign.”Mr Randel : “This is not a situation that Meiko can overlook. You will need to pay the money back but we cannot allow you to continue with the company. We can either terminate you now or you can choose to resign.”
73 Mr Hinchliffe then wrote out a statement of his resignation and handed it to Mr Randel. Mr Randel then said “I ask you not to enter the offices of MAP in Sydney and will need to get from you your keys, your identification and all of the Meiko property. Please hand these things to the Meiko staff in Sydney. Mr Hinchliffe returned to Australia the next day.
74 During and directly after the meeting referred to in the previous paragraph Mr Randel prepared a series of notes to report to the Meiko Board. A copy of the notes sent to the Board of Meiko can be found at page 71 of Exhibit JS1.
Mr Hinchliffe replaced by another employee
75 On 11 October 2008 Meiko sent its international export director, Pierre Demers to Australia to take up the position of interim Managing Director.
Investigation of accounts
76 On 21 October 2008 Mr Sachs travelled to Australia with an assistant accountant and undertook an investigation of the accounts of the company.
77 Mr Sachs’ initial investigation indicated that the accounts had not been kept or had been removed from the office premises. [The ruling as to evidence allows the evidence in the previous sentence]. It was necessary to largely reconstruct the accounts from bank documents and other records that Meiko obtained from sources outside of MAP.
Appointment of lawyers
78 On or about 23 October 2008 Mr Sachs appointed Barringtons Lawyers to enter into negotiations with the lawyers for the first and second defendants. This was because the first and second defendants lawyers alleged that Meiko’s previous lawyer, Mr Rod Commins, had a conflict of interest. Mr Barry met with Mr Martin, the lawyer for the first and second defendants on Friday 24 October 2008. At that meeting no satisfactory offer was put by the first or second defendants to repay the debt to the plaintiff. The debt at the time was estimated to be $730,000.00. The lawyers for the first and second defendants acknowledged that the money had been taken and asserted that it was for the purposes of a loan. [the final sentence is allowed].
79 At no time had Meiko or the plaintiff or any employee or director of Meiko or the plaintiff, given permission for either the first or second defendants to borrow money from the plaintiff. No meeting of the directors of the plaintiff has taken place to approve any loan or other advance to either the first or second defendant.
Discovery of other missing funds
80 Mr Sachs returned to Germany on 26 October 2008. Since his return he had been working with the Australian accountants to reconcile the amounts that have been taken from the plaintiff. [A true copy of the reconciliation of the money that has been withdrawn from the account of the plaintiff and transferred to the benefit of the first or second defendants can be found at page72 of Exhibit JS1]. [This evidence is allowed as subj/136] All of these transactions require approval of this Board of Directors. This approval was never sought or obtained.
81 Mr Sachs’ evidence was that the payments were not referable to any contract or invoice; there was no reason for such large sums to be transferred from MAP; the total amount owing to the plaintiff by the first and second defendants was $1,727,351.62. [this evidence is allowed].
The evidence of Mr Randel
82 Mr Randel is the joint managing director of the plaintiff.
83 As he deposed, the employment contract for the first defendant signed on or about 31 March 2007 stipulated in paragraph 2 of the schedule:
Examples of matters which a deemed to be outside the normal course of the company's business include the following :
"The managing director shall submit all matters which deemed to be outside the normal course of business of the company to a director's meeting of the company for consideration and decision
j entering contracts for a short or long-term credit as well as granting loans and credit.
h initiating extraordinary commercial operations and investments, as far as they exceed the sum of $20,000.00
84 His evidence was that during the period 1 April 2007 until 12 October 2008 or any time before or after that he was able to confirm that there was never any proposition made or put to the directors of the plaintiff to consent to advance any money to the first or second defendants by way of a loan or credit. In particular his evidence was that there was never any proposal, request or approval for any loan granted to the first defendant or to the second defendant for the sum of $730,000.00 to assist in the purchase of a property or for any other reason.
85 His evidence was that he had attended all of the Board meetings of the plaintiff during 2007 and 2008 and he confirmed that no resolution or consent was given by the board to approve any loan from the plaintiff to the first or second defendants. He was unaware of any informal request from either the first or second defendants for approval of a loan or credit from the plaintiff.
The evidence of Mr Chan
86 Mr Chan, a Chartered Accountant with around 27 years of experience undertook an investigation of the plaintiff’s financial records in late November 2008 (paragraph 7).
87 The investigation involved the identification of funds transfers from the plaintiff to the second defendant since 13 April 2007, the date of completion of the sale of the majority of the business of the second defendant to the plaintiff (paragraph 7).
88 Mr Chan identified a category of transfers from the plaintiff to the second defendant unsupported by documentation referable to the plaintiff’s business such as invoices and the like (paragraph 8).
89 These “unsupported” transfers out of the plaintiff’s account, summarised in Annexure C of the affidavit, totalled $1,707,322.19. However, there was also $62,889.93 of unsupported transfers into the plaintiff’s account – resulting in a net figure of $1,644,432.26 (paragraph 9).
90 With regards to the payment of creditors, Mr Chan observed that, from the time of his employment with the plaintiff, the first defendant personally approved each payment and signed each cheque for the creditor companies (paragraph 13).
91 The $1,707,322.19 of unsupported transfers included the entirety of the $730,000.00 judgment debt obtained against the defendants on 5 December 2008 (paragraph 17).
92 Mr Chan’s affidavit also suggests that many of these unsupported transactions in the plaintiff’s financial records are only accompanied by obscure journal entries in the general ledger. These include: “transfer between companies”, “short term loan”, and “other debtors” amongst others.
Cross-examination of Mr Chan
93 Under cross-examination Mr Chan emphasised that he was “100% sure” that all invoices that he used to conduct his investigation were located in the plaintiff’s St Leonards office (transcript 77.15-26).
94 Mr Chan, however, did make some concessions about his evidence under cross-examination.
95 Mr Chan repeatedly stated that it was possible that supporting documentation relating to an unsupported transfer may have come into existence on a bona fide basis but was simply undetected during his investigation. Nevertheless, the question that led to this concession was repeated numerous times during the cross-examination (transcript 77.49-78.3, 78.16-20, 79.30-34, 81.16-20, 81.36-40).
96 Mr Chan was unaware of the backup tapes of a server owned and/or operated by the second defendant that had existed in the plaintiff’s North Melbourne office, the server now being in the possession of law enforcement officers (transcript 92.39-93.14).
97 His evidence was that the quality of the plaintiff’s financial records was compromised by the incompetence of its former accountants Mr Large and Mr Walz (transcript 92.29-37).
The evidence given by Mr Hinchliffe
98 Mr Hinchliffe was not a satisfactory witness. Unless substantiated by contemporaneous documents or by the evidence given by other witnesses of credit, the evidence given by Mr Hinchliffe is rejected. He exhibited an evasiveness in answering questions under cross-examination. There were also material inconsistencies in his assertions regarding crucial issues in the case.
Evasiveness
99 The first defendant was not forthcoming in his answers to questions and attempted to distance himself from critical events where a direct answer would not have favoured his case. Some of the many examples of this are outlined below.
100 When the first defendant was asked about his knowledge about the transfers between the plaintiff and the second defendant, he initially denied awareness of the transfers. However, when he was reminded of one such transfer previously admitted to and recorded in the second defendant’s bank statements, he admitted awareness (transcript 42.30):
Q. There were a number of other payments before the $430,000.00 transfer from Meiko to Swiss Systems that you were aware of at the time that you sent your email in August 2008, weren’t there?
A. I don’t recall that I was aware of all the transactions, no (transcript 42.18-21).Q. And you were in fact aware of money being transferred into Swiss Systems when you looked at Swiss Systems’ bank account at the very least, weren’t you?Q. You were certainly aware of two transactions for $150,000.00 each, weren’t you?
A. I was.
A. I was aware that transfers were made between the two companies, yes (transcript 42.22-30).
101 When asked whether he had made any attempt to locate the invoices referable to various transfers in light of Meiko in Germany raising serious concerns about the transfers with him, the first defendant did not provide a direct answer until pressed. He eventually admitted that he did not go “looking for invoices”:
Q. Did you Mr Hinchliffe, yourself, when Meiko in Germany was raising these very serious concerns with you make any attempt to locate the invoices referable to the various transfers?
A. I requested that the reconciliations be done which would have located the appropriate invoices and I voiced those concerns from at least November 2007 to both Mr Walz and to Mr Large and I would have done that on a weekly basis.Q. Yes?Q. But did you - I just need to get from you Mr Hinchliffe whether you--
A. Did I go looking for invoices; is that your question Ms Richards?
A. No I did not go looking for invoices myself (transcript 45.1-13).
102 When asked whether he was able to provide an explanation for the transfers, the first defendant answered decisively in relation to the existence of invoices, that there were none:
Q. There are no invoices referable to any of these transfers are there?
A. Ms Richards, you’ve asked me about invoices three times and I’ve told you that there are none (transcript 45.34-36).
103 Mr Hinchliffe’s exasperation at being asked about invoices elicited the admission that there were “none”. That on my assessment is a cogent explanation as to why he never looked for any invoices.
104 The evasive and sometimes belligerent attitude of the first defendant betrayed his unwillingness to address the real issue of whether the transferred funds were properly payable to the second defendant. That attitude was expressed in his strong refusal to look at his own records for any supporting materials.
105 However, that refusal occurred in the context of the first defendant’s admission, given only after being pressed, that there were no supporting financial records such as invoices. This admission was not the subject of any re-examination by Mr Martin.
Inconsistencies in the defendant’s position
106 In any case, the first defendant’s position or view of the events under scrutiny in this proceeding contains material inconsistencies.
107 Firstly, the first defendant stated in re-examination that he “had not received the [$730,000.00] in [his] personal capacity” and that he is “not responsible for having received any of that money” (transcript 58.29-40). Yet the evidence was given alongside his admission that the $730,000.00 was used to buy the Mosman property registered in his and his wife’s names (transcript 49.6-9). In fact, the first defendant’s counsel himself stated that:
“… there is no dispute that $730,000.00 flowed from the plaintiff to the second defendant which then flowed from the second defendant to the first defendant, and the first defendant used that to assist he and his wife acquire a property at 252 Raglan Street, Mosman…” (transcript 21.37 - 41).
108 Similarly, the first defendant appears to consider that he is absolved of liability because the plaintiff employed allegedly incompetent accounting staff. That supposed absolution was despite the first defendant’s admitted personal involvement in the Euro transfers to the second defendant (transcript 48.15-17).
109 The first defendant showed himself to be knowledgeable about the affairs of the plaintiff and second defendant. He accepted that the second defendant’s practice was that it would not make a payment without an invoice (transcript 40.36-38).
110 However, the first defendant could not point to a single invoice as justifying the transfers to him the subject of these proceedings. His position was that the transfers were reimbursements for future expenses which he could not identify (transcript 48.9-11).
Onus of proof
111 There is a plethora of authority in support of the proposition that the Court is bound to see that a case of fraud is clearly proved. An allegation of fraudulent intent is one of the most serious allegations capable of being made. Actual dishonesty is said to be “the hallmark of fraud”.
112 The gravity of the allegation has been said to be such that whereas section 140(1) of the Evidence Act 1995 (NSW) stipulates a single standard of proof for all civil cases, namely the balance of probabilities, Section 140(2) preserves the doctrine in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362; Pedler v Richardson (unreported, Supreme Court of NSW, 16 October 1997, Young J) at 10-11. See also McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315, 319.
113 More recently in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 the High Court has put the matter in the following terms:
“The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary “where so serious a matter as fraud is to be found”. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.”
114 The High Court has pointed out that the evidence given by a man of his intention and state of mind, must be tested:
“Most closely and received with the greatest caution.”
[ Pascoe v Commissioner of Taxation(Cth) (1956) 30 ALJR 402]
115 The Courts have emphasized that the best evidence of a man’s purpose is to look at what was actually done: ASX Operations Pty Limited v Pont Data Australia Pty Limited (No 1) (1990) 27 FCR 460 at 482 - 483.
116 Of course the plaintiff required to prove its case consistently with the above dicta which inform the instant standard of proof. In that regard the defendant's stance has broadly been as follows:
i. with the exception of the Prior Judgment Sum, any and all money, which flowed between the second defendant and the plaintiff did so in the ordinary and proper course of the business of those entities, in circumstances where the second defendant and the plaintiff were substantially enmeshed;
ii. to the extent that the plaintiff complains of specific transactions, which it contends constituted a misappropriation by either the second defendant or the first defendant, those transactions are explainable and would be explained, if a proper reconciliation of the accounts of the parties were conducted;
iv. to the extent that any claim may be made for moneys had and received, any such claim must be made against the party, who received the moneys, being the second defendant and not the first defendant.iii. to the extent that the first defendant caused or authorised payments made from the plaintiff to the second defendant, in his capacity as director of the second plaintiff, the first defendant did so on the advice of the financial controller or accountant of the plaintiff and second defendant;
The plaintiff discharged its onus of proof
117 In my view the plaintiff discharged the onus of proof by adducing the evidence which it did in its case. It certainly achieved a situation where it led sufficient evidence to move an evidentiary onus upon the defendant to rebut the inference which the facts, unanswered and unexplained, would readily permit. The evidence called by the first defendant did not rebut that inference.
118 It has to be remembered that over an extensive period orders had been made by the Court requiring that the defendants provide certain particulars. As an example pursuant to orders of the court made on 28 November 2008, the following requests for particulars emanated:
Under paragraph 6 of the defendants’ Responses to Contentions, provide full particulars of the sums said by the defendants to have been paid to the second defendant by way of reimbursement for disbursements incurred on the plaintiff’s behalf, including but not limited to the following:
(a) the date on which any right to reimbursement arose;
(b) the basis of any right to such reimbursement;
(c) the amount of such reimbursement;
(e) the bank account from which any such payment was made by the second defendant;(d) the identity of the entity to which payment was made by the defendants and which gave rise to a claimed reimbursement;
Provide full copies of all documents recording the particulars requested above, including:
(a) if the payment was made pursuant to an invoice, statement or other demand or request for payment provide a copy of that document;
(c) any document authorizing the defendants or one of them to incur the expense the subject of reimbursement;(b) all bank records recording any payment or reimbursement;
Under paragraph 7 of the defendants’ Responses to Contentions, provide full particulars of the following:
(b) identify with specificity the purpose for which each of the “various payments”, identifying same, was made.
(a) which of the “various payments”, identifying same, were made in the ordinary course of business;
119 None of these particulars were provided, generally a pattern which permeated many other requests for particulars which followed.
120 However in due course the defendant's solicitors notified the plaintiff's solicitors that their clients had isolated approximately 30 volumes of material which appeared relevant to order 6 of the orders made on 13 November 2008 which had still not been complied with.
121 The defendants’ solicitors notified the plaintiff's solicitors that since the matter had last been before the court, the defendant had diligently sorted through that material and had reduced the relevant documents to approximately 23 volumes. Those volumes were furnished to the plaintiff. As is apparent production of those documents is in stark contrast to the first defendant's approach taken during the hearing before the Court where no documents were produced.
122 Generally the evidence given by the first defendant included the following:
i. that there was a set of electronic records kept by Swiss Systems by way of an accounting package on the server which was in Melbourne;
ii. that there were five backup tapes of that server;
iii. that he had had access to those backup tapes since at least early November;
iv. that the backup tapes required a specific type of reader as he understood the position;
v. that he was left in a position with virtually no access to Swiss Systems property to allow him to undertake any investigation, he not being an accountant and never having worked in that area but rather having had people employed to do that work;
vi. that he had become aware that the police had taken that server in their search;
vii. that he believed that the computer backup tapes had been given to the liquidator with all the other company records;
viii. that for approximately 6 or 8 weeks prior to him handing the records over to the liquidator he had had them in his own control;
ix. That he had furnished those materials to the liquidator in about early February 2009;
x. that prior to his delivery of those tapes to the liquidator that he had not had the opportunity to examine their contents and this because he did not have a specific reader for such tapes which tapes were an unusual type in terms of consisting of small recovery tapes;
xi. That the subject tapes were backup tapes for the second defendant's server;
xii. That the first defendant was confident that the tapes would contain financial information, company accounts and records;
xiv. when asked whether or not the information on those tapes would assist him in his defence in these proceedings his response was that this would be the case to the extent that they would show that records of the company did not show the outstanding $1,000,000.00 coming to him. His evidence was that they would show that the transactions that were detailed were recorded from one company's accounts to the other company's accounts.xiii. That his confidence on the subject was because he had employed an IT specialist to set up the server in Melbourne and asked him to remove from the shared server of Meiko in Sydney and install all of Swiss Systems’ data on a separate server in Melbourne to help facilitate the separation of the two companies;
123 The evidence was that the material server was seized in execution of a search warrant late in October. That server apparently remains in the custody of the New South Wales police.
124 By reason of the court's finding that the first defendant's evidence cannot be regarded as reliable unless substantiated by evidence given by witnesses of credit and/or by contemporaneous written material, it is simply not possible for the Court to accept the above-described evidence given by the first defendant purporting to set out his beliefs or any reasons he pleaded not have the opportunity to examine the contents of the particular tapes to which he referred.
125 The so-called tapes said to be with the New South Wales police could presumably have been obtained by subpoena issued at the instance of either the plaintiff or the first or second defendants. Neither determined to issue any such subpoena In consequence the whole of the underpinning of the notion that material valuable to the cases of either party must repose on the server which is with the New South Wales police is merely speculation.
126 The evidentiary onus to which I have already referred had passed to the first defendant once the plaintiffs case had closed: however the first defendant failed to rebut the inference which the facts, unanswered and unexplained, permits.
Summary of the issues
127 Notwithstanding the detail already provided in these reasons, it seems appropriate at this point to collapse the crucial issues into an overview first summarised in a table and then dealt with issue by issue. I proceed accordingly.
What is the nature of the amount claimed?
128 The plaintiff’s claim against the first defendant can be summarised in the table below:
Nature Transfers from the plaintiff to the second defendant not supported by documentation referable to the plaintiff’s business Less: transfers from the second defendant to the plaintiff referable to the plaintiff’s business Less: amount subject to consent judgment dated 5 December 2009 Less: sum in bank account in the name of the second defendant Total
129 Importantly, the amount claimed is the amount the subject of the current proceedings and not the $730,000.00 judgment debt obtained against the defendants on 5 December 2008.
130 Each transfer in question is summarised in Annexure C to Mr Chan’s affidavit sworn 5 February 2009. The plaintiff’s bank statements and the second defendant’s bank statements recording each of the transfers are in evidence (Exhibit DC-2 to Mr Chan’s affidavit).
131 The first defendant admitted that the transfers occurred and does not claim that the transfers occurred without his knowledge (transcript 43.40-50).
132 The evidence relating to this bank account is in paragraph 17 of Mr Chan’s affidavit, line 2 and in the documents referred to by him. Mr Chan demonstrates that the money originated from the plaintiff.
133 There would appear to be little dispute that this is the plaintiff’s money. The first defendant admitted that in re-examination (transcript 58.5-20, especially 19-20).
134 The second defendant’s liquidator is aware that the plaintiff will ask for an order in relation to that sum (Annexure C to the affidavit of Hugh Richard Barry sworn 20 April 2009 being a letter dated 20 April 2009 to the liquidator’s solicitors) and see the consent orders made on 21 April 2009, paragraph 2(b).
135 The following questions will focus on the transfers made from the plaintiff to the second defendant not supported by documentation referable to the plaintiff’s business.
Who authorised the transfers?
136 Although the first defendant tried to sheet home the blame for the suggested unruly state of the financial records of the plaintiff to a former employee, Mr Gerald Walz, it is apparent that after Mr Walz’s employment ceased in March 2008 the first defendant can be the only person to have caused the transfers to be made because:
i. From no later than early April 2008 the first defendant was the only signatory to the plaintiff’s bank accounts (transcript 45.39-40, transcript 95.9-17). Crucially, the first defendant has never denied that fact at any time .
ii. The first defendant admitted that he was aware of the transfers between the plaintiff and the first defendant (transcript 42.30).
iii. The first defendant believed he was entitled to use the plaintiff’s funds as he wished (transcript 49.21-24).
iv. The first defendant admitted personal responsibility for three transfers amounting to $730,000.00 in paragraph 15 of his affidavit of 21 April 2009.
v. Although the first defendant refused to take responsibility for the transfers which occurred even after he was the sole signatory of the plaintiff’s bank account, he was willing to concede that under the Corporations Act he was ultimately responsible for the transfers (transcript 44.30-34).
vii. The first defendant admitted that he was personally involved in the transfer of Euros from the plaintiff’s Euro account to the second defendant’s Euro account (transcript 48.15-17). The table at paragraph 17 of Mr Chan’s affidavit outlines those transactions.vi. The first defendant admitted that he was aware of the transfers “from time to time” (transcript 44.35-37).
137 The first defendant claimed that prior to the end of March or early April 2008 he had “virtually no day to day involvement in the bank accounts of either” the plaintiff or the second defendant (transcript 49.26-31).
138 That assertion contradicts his earlier admission of personal involvement in the transfer of Euros, which admission is confirmed by letters signed by the first defendant, referred to in the table at paragraph 17 of Mr Chan’s affidavit. Five transfers occurred before the end of March 2008, totalling approximately the equivalent of $388,000.00.
139 Of course, for all transactions the first defendant had, at the very least, the bank statements for both companies.
140 The ultimate finding is that, there were only two persons (as the plaintiff’s only two bank signatories) who could have authorised the transfers. These were either the first defendant or Mr Walz. As Mr Walz departed in March 2008, the first defendant became the sole person who could authorise the transfers after that time.
What, if any, supporting documentation for the transfers is there?
141 With regards to the presence of any supporting documentation, the first defendant contended (transcript 137):
2. If there was no supporting documentation, their non-existence could be attributed to the incompetence or slackness of Mr Walz or Mr Large or that the documentation could simply have gone missing from a “busy office”.1. If there was supporting documentation, it could be located on the server in police custody or on backup tapes or somewhere in the plaintiff’s North Melbourne office.
142 Upon the assumption that supporting documentation existed in electronic form on the server in police custody, backup tapes or elsewhere in the North Melbourne office, the first defendant vigorously pressed the contention that only the plaintiff could have and should have accessed such records. Hence so, the first defendant submits, the court is entitled to draw a negative inference as a result of the non-investigation and non-production of that evidence.
143 That fundamental assumption underlying the first defendant’s contentions is unsound. The findings that undermine the first defendant’s contentions are that:
i. The first defendant admitted in cross-examination in an exasperated manner, referring to any such invoices supporting the transfers that “there are none” (transcript 47.34-36).
ii. The plaintiff had all the financial records on its side at all times but could not find documents that supported the transfers (as stated in Mr Chan’s affidavit).
iii. The first defendant had unobstructed access to the records of both the plaintiff and the second defendant within his control at all times up until he left for Offenburg, Germany (which would have been on 7 or 8 October 2008 – see the last email communications at pages 68-69 of Exhibit JS-1 to the affidavit of Mr Sachs). Despite having such unobstructed access, the first defendant appears not to have undertaken any attempt to locate invoices that might support the transfers the subject of these proceedings.
iv. After returning from Germany, the first defendant had access to all of the first defendant’s paper records from at least a date in November 2008 until a date in January 2009 when the liquidator took possession of them (transcript 45.50, 46.4). Despite the serious questions raised by the plaintiff’s parent company and the other directors of the plaintiff, the first defendant did not examine the records in his possession to ascertain whether there were any invoices to support the transactions (transcript 46.6-14).
v. Between the time of his return from Germany and the hearing of these proceedings, the first defendant was also able to put forward any personal credit card payments as evidencing some sort of entitlement to reimbursement, but he has failed to do so. Those records would be in his possession presently.
vi. After October 2008 when the first defendant returned from Germany he had at least the paper records that were supplied in relation to the order made on 13 November by the Court – that order seeking all invoices, receipts and other documents in relation to the transactions and transfers . However, none of those particulars were provided.
viii. The first defendant had access to electronic records since at least early November 2008 (transcript 46.24-25). It appears that the first defendant has made no efforts to access the electronic records in his possession by obtaining the “specific type of recorder” required to do so (transcript 46.28-34). Although the first defendant claims that Mr Martin, his solicitor, had made “numerous attempts to gain access to the server” (transcript 46.44-46), no subpoena had been served for its production.vii. Further, with respect to the first defendant having had access to comprehensive paper records following the transfers, he apparently did not consult his solicitors regarding the records he received before they were passed on to the liquidators.
144 Hence, the whole of the underpinning of the notion that material valuable to the cases of either party must repose in electronic form amounts to no more than speculation.
145 Mr Martin, in cross-examination of Mr Chan, attempted to elicit evidence to the effect that Mr Chan might have missed invoices that were located in North Melbourne. Mr Chan explained in re-examination that North Melbourne was a service centre only and that not many accounts were received there (transcript 95.34-41).
146 In closing address, counsel for the first defendant, when asked about access to supporting documentation, stated in a somewhat figurative sense that “presumably Mr Hinchliffe had it under his key if he was the Managing Director of both organisations and had a key to the door and could open it up… (transcript 137)”.
147 Whether the non-existence of the documents be attributed to the incompetence of the former accountants Mr Walz and Mr Large does not address whether there was in fact supporting documentation or not.
148 The most likely conclusion having regard to the evidence adduced is that there is unlikely to have been supporting documentation for the unexplained transfers subject to the proceedings either in hard copy or electronic form.
Could the transfers have been made for proper purposes?
149 The first defendant’s contention that outside of the $730,000.00, the balance of the transfers was for ordinary business purposes is rejected. There is simply no explanation in relation to the balance of the funds. One may examine the inadequate journal entries appearing on Annexure C of Mr Chan’s affidavit to see what little there was said about them.
150 The claim that the transfers were reimbursements is also rejected. The first defendant, when pressed on the issue of the transfers eventually stated that the transfers were for “expected costs by one company on behalf of another…” thus exposing the reality that the transfers were not for reimbursements (transcript 48.8-13).
151 In paragraph 30 of his affidavit sworn 21 April 2009, the first defendant broadly asserted that the second defendant bore various expenses on behalf of the plaintiff. Those expenses were said to be in the nature of reimbursements and not “expected costs” as described under cross-examination (transcript 48.8-13). The following categories of asserted expense have been dealt with in the evidence:
i. Motor vehicle insurance – Mr Chan lists these expenses in his table comprising Annexure B of his affidavit and the first defendant has stated that he thought it probable that the plaintiff had reimbursed the second defendant for expenses in that nature (transcript 39.5-1, 39-50).
ii. Motor vehicle leases – Mr Chan has dealt with those in Annexure B and the first defendant’s belief as to payment also applies to this category.
iii. Telecommunications bills – Mr Chan has dealt with those in Annexure B and insofar as they were not reimbursed, Mr Chan has included that expense in the offsetting amount in his reconciliation.
iv. Travel expenses – the first defendant claimed under cross-examination that travel expenses were paid in the first instance by his and his wife’s personal credit cards. Mr Chan gave evidence that there was nothing on record indicating that any reimbursements were due to either the first defendant or his wife (transcript 89). The first defendant claimed not to have been reimbursed for expenses charged to his personal credit card (transcript 60.43, 61.2). However, despite admitting that his personal credit card records were normally in his own possession (transcript 53.3-4), the first defendant failed to produce any entry that might have demonstrated some sort of entitlement to reimbursement.
vi. The renovation expenses, day to day accounts – nothing was placed in evidence supporting an entitlement to reimbursement, nor any explanation given as to timing of expenses (although it appears to be suggested that it was earlier rather than later as it related to work done on premises to be used by both the plaintiff and the second defendant).v. A similar position exists in relation to his wife, whom the first defendant claimed was entitled to reimbursement. In any event, not a single transaction charged to a personal credit card was put in evidence.
152 If the first defendant’s assertion that the second defendant was entitled to the funds as reimbursement for expenses paid by the second defendant is correct, then the questions put to Mr Chan on behalf of the first defendant suggesting that the payments to the plaintiff somehow related to some of the preceding and following payments in the opposite direction make no sense and were not supported at all by the first defendants own evidence
153 There are also significant differences in the process that had been utilised by the second defendant to obtain (genuine) reimbursements up to October 2007, rendering it highly improbable that the transfers in truth were reimbursements. The first defendant admitted that the reconciled amounts that had been transferred from the plaintiff to the second defendant prior to December 2007 (and which are listed in Annexure A to Mr Chan’s affidavit) had invoices attached to them (transcript 45.35-37). However, none of the transfers were made referable to any invoices. Possibly to make up for the absence of invoices, the first defendant also said that the transfers were for “expected costs” (transcript 48.9-11).
154 Mr Martin’s questions put to Mr Chan in cross-examination were to the effect that some of the transfers represented loans between the parties. Mr Martin did not elicit that notion from the first defendant.
155 In fact, when asked about the $730,000.00 admitted by the defendants to have been taken from the plaintiff, the first defendant admitted that he had not “discussed the loans with anybody in Germany” (transcript 42.5-7). The first defendant did not mention any other loan from the plaintiff.
156 The Court rejects the suggestion that the transfers were the subject of any loan, although even were the transfers individual loans or part of a larger loan, that would not alter the net position as between the companies.
157 Indeed, if the transfers were a part of some loan (evidence of which was not ever given by the first defendant, despite his having sworn a number of affidavits in the proceeding before giving oral evidence at the trial), would significantly detract from the first defendant’s assertion that somehow the first defendant was only taking in advance, what he expected would be borne by the second defendant (transcript 47.29-32).
158 In paragraph 30 of his affidavit sworn 21 April 2009 the first defendant claims that it was necessary for the second defendant to “continue to expend funds to effect the plaintiff’s business and to recoup those funds from the plaintiff”. The first defendant, however, admitted that the plaintiff never ran out of funds.
159 The first defendant had submitted that the “expected costs” were analogous to already incurred “estimated costs” determined by the joint accounting staff of the plaintiff and the second defendant. However, no evidence for the basis of calculation of those estimated costs has been adduced let alone any invoices to assist this contention let alone any invoices.
160 If the transfers were for expected costs, than that was a matter which the first defendant required to make good in discharging the evidentiary onus earlier referred to.
161 In conclusion, the transfers are unlikely to have been for proper purposes. In particular, they are unlikely to be for reimbursements for ordinary business expenses. Whatever the true purpose of the transfers were, expected costs or not, to deprive the plaintiff of funds without an explanation was itself improper.
162 In addition, the numerous prevarications, qualifications and inconsistencies characterising the evidence given by the first defendant and importantly, his concession that there were no invoices referable to any of the transfers mandates the finding which is made [applying terms of the proper approach to the onus of proof earlier referred to] that the purposes of the transfers were improper.
The claim for moneys had and received
163 Whilst it may not strictly be necessary to do so, the plaintiff also put its cases as claims for moneys had and received and/or in the alternative as money paid claims.
164 Gummow J summarized the law relating to a claim for money had and received in Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516.
165 The principle encapsulated by Viscount Haldane LC in Royal Bank of Canada v The King [49] received mentioned from Gummow J. As His Honour observed [in passage later adopted by Lord Wright [50], his Lordship said [51]]:
"It is a well-established principle of the English common law that when money has been received by one person which in justice and equity belongs to another, under circumstances which render the receipt of it a receipt by the defendant to the use of the plaintiff, the latter may recover as for money had and received to his use. The principle extends to cases where the money has been paid for a consideration that has failed."
166 At 89 Gummow J observed as follows:
In this Court, emphasis was placed by Dixon CJ, McTiernan, Williams, Webb and Taylor JJ upon unconscientious retention by the defendant of the sum claimed by the plaintiff as "the reason of the rule under which an action of money had received lies in cases of payment by mistake [126]". Their Honours continued [127]:
- "Under that rule the action is available when the payee cannot justly retain the money paid to him because it would not have come to his hands if it had not been for a false supposition of fact on the part of the payer causing the latter to believe that he was compellable to make the payment or at all events that he ought to make it. It is to be noticed that Parke B in Kelly v Solari [128] defines the requisite mistake as 'the supposition that a specific fact is true, which would entitle the other to the money, but which fact is untrue' [129]." (emphasis added)
167 His Honour summarised the law relating to a claim for money had and received commencing at p 539 and analysed the reasons of Lord Mansfield in Moses v Macferlan [1760] En R 713; (1760) 2 Burr 1005 [97 ER 676] starting at 545.
168 His Honour also observed that the rejection of an earlier implied contract theory should be taken as reflecting the settled position in Australia: foot of [63].
169 As his Honour noted at [90], an action for money had and received is no longer based on implied contract, which was a source of much consideration in Moses v Macferlan, which focused what of the history of the dealings between the parties was necessarily pleaded: [81].
170 At [95] His Honour indicated that recourse should be had to the general considerations referred to in Moses v Macferlan. Those general considerations were whether “upon the merits the plaintiff was entitled to the money” with a safe conscience: [81], [83]. In New South Wales, Austin J in Vickery v Jjp Custodians [2002] NSWSC 782 at [120] generally followed the approach of Gummow J.
171 The cause of action against the first defendant for money had and received is made out. This is because it is apparent that his affairs so far as concerned the transfers were intertwined. He appears to have regarded his minority shareholding in the plaintiff and the fact that he was a director as sufficient to permit him to enter all manner of transactions. Indeed the evidence permits the conclusion that the second defendant was no more than the corporate vehicle of the first defendant. The first defendant used the second defendant as a vehicle for the purpose of receiving funds directed to it by the first defendant.
172 Accordingly, in the words of Lord Mansfield in Moses v Macferlan, the gist of this action, in the circumstance that the first defendant used the second defendant as his personal vehicle and for the receipt of funds for “convenience”, the first defendant is obliged by the ties of natural justice and equity to refund the money: p 681.
173 Likewise the claim against the second defendant for money had and received is also made out. Of course the second defendant was not represented during the hearing of the proceedings and did not defend the proceedings.
174 Generally in terms of the claims to moneys had and received the first defendant in its final address submissions disputed that such a claim had been made out.
Money paid
175 As described by Austin J in Vickery v Jjp Custodians supra at [128] to [130], especially at [130], a claim for money paid may arise where money is paid to a third party at the request of a defendant.
176 Here again it seems unnecessary for the Court to deal with the claim to moneys paid. However, to the extent that this claim is advanced by the plaintiff in the alternative and required to be addressed, the finding would have been that the first defendant requested payment of money by the plaintiff to the second defendant and is therefore liable for the money so paid.
The application for a section 128 certificate pursuant to the Evidence Act 1995 (NSW)
177 On 23 April 2009 the first defendant made an oral application, without notice, for a certificate under s 128 of the Evidence Act 1995(NSW): (transcript 36.10). The Court was informed that the first defendant is facing criminal charges based on substantially the same subject matter of these proceedings. To the extent it was germane to the first defendant’s application, the application (as it was comprehended at that time) was not opposed by the plaintiff.
178 Although no evidence was tendered by the first defendant in support of its oral application for a certificate, there was no need for evidence as the circumstances were obvious and sufficiently discernible from the nature of the case against the first defendant: see Ross v Internet Wines (2004) NSWLR 436 at [90] (Spigelman CJ, Giles and McColl JJA); Vaughan Constructions Pty Ltd v Luong [2008] NSWSC 1033 at [4] (Brereton J).
Ruling on grant of certificate and extent of protection conferred in ruling
179 The Court’s ruling is at transcript 36.36-43, in the following terms:
The court pursuant to s 128 of the Evidence Act, 1995 , certifies that under s 128 of the Evidence Act, 1995, New South Wales, the evidence in these proceedings to be given by Adam Samuel Hinchliffe on 23 April 2009, a record of which cross-examination will be attached to the certificate following the cross-examination is evidence to which s 128(7) of that Act applies and in due course a transcript of the evidence will be attached to the certificate and duly authenticated by myself.”
180 The terms of the ruling on 23 April 2009 refer to evidence “to be given” and to the certificate attaching to a transcript. The wording contained in the ruling defines the scope of the certificate to be given by the Court. The ruling did not extend to any affidavit material.
Extent of protection now sought by first defendant
181 On 30 April 2009 the first defendant’s solicitor presented a certificate which had attached to it transcript and which referred to affidavits which had been read at the trial, none of which were attached to the certificate. All of the affidavits had already been served on the plaintiff and read in the final hearing. All but one (sworn 21 April 2009) had been also read at various hearings prior to the commencement of the final hearing. One of the affidavits was an affidavit of disclosure sworn 26 November 2008, sworn pursuant to an order made on 13 November 2008, when freezing orders made on 7 November 2008 at an inter partes hearing were extended. The orders made on 13 November 2008 provided that if the first defendant wished to object to swearing an affidavit of disclosure, he should file a notice of motion supported by an affidavit. No such application was made.
182 The first defendant now seeks the certificate granted on 23 April 2009 to extend to all of the affidavit evidence of the first defendant filed, served and read in this proceeding. The Court should treat this as a further application for the grant of a certificate, as the affidavits are not referred to in the ruling made on 23 April 2009.
Evidence to be given in future – timing of grant of certificate
183 The purpose of s 128 of the Evidence Act may be gleaned from the tenor of the words used within it. Throughout, references are to the giving of future evidence, to which a certificate shall attach: “to giving particular evidence” in s 128(1); “the court is not to require the witness to give that particular evidence” in s 128(2); “If the witness gives the evidence” in s 128(3); “The court is also to cause a witness to be given a certificate under this section if: (a) the objection has been overruled; and (b) after the evidence has been given, the court finds that there were reasonable grounds for the objection” in s 128(4); “… the court may require the witness to give the evidence” in s 128(5). Section 128 does not contemplate that a certificate might issue in respect of evidence already given save where the evidence is given over an objection by the witness to giving evidence.
184 The terms of s 128 clearly contemplate that a certificate, if granted, is granted prior to the giving of evidence not to evidence which has already been given, particularly where no objection was taken.
185 To the extent that a certificate can be issued after the giving of evidence, this may occur where the court has ruled but not granted a certificate: Cornwell v R [2006] NSWCCA 116 at [87] - [94]. The certificate in that proceeding concerned answers concerning specific matters, in cross-examination.
186 A retroactive application of s 128 is unwieldy and is not contemplated by that section. It also undermines the purpose of the section, which is to prevent witnesses from being coerced into giving evidence which tends to incriminate them. Once the evidence has been given, it cannot be said that the witness has been compelled.
Evidence to which a certificate shall relate – questions to which objection is taken
187 Section 128 applies “if a witness objects to giving particular evidence on the ground that the evidence may tend to prove that the witness: (a) has committed an offence against or arising under an Australian law or a law of a foreign country; or (b) …”: s 128(1).
188 Accordingly, it appears that a certificate should extend only to questions to which objection might be taken, that is, to questions put in cross-examination. Although no objection to any questions was in fact made on behalf of the first defendant, that an objection in reliance of the privilege against self-incrimination would be made to the entirety of the cross-examination is implied from the making of the application.
189 However, in relation to the first defendant’s own affidavit material, there would not have been any such similar objection, not least of all but including because that material was freely sworn and filed and (save in respect of the affidavit read on 23 April 2009) read by the first defendant at earlier hearings.
190 All of the affidavits were read in the course of evidence in chief of the first defendant and so cannot be said to have in any way been the subject of an objection, implied or otherwise.
191 In Ross v Internet Wines Pty Ltd (2004) 60 NSWLR 436 at [104] the purpose of s 128 was identified as being to protect against self-incriminatory disclosures by compulsion. In the present proceedings, the first defendant was not compelled to read the affidavits. For this further reason, no certificate should be granted in respect of the first defendant’s affidavit evidence.
Contents of the affidavits
192 The first defendant’s affidavits do not contain evidence which may tend to prove that the first defendant committed an offence and none have been identified by the first defendant as such.
Decision
193 For those reasons no certificate will be issued with respect to the first defendant’s affidavit evidence.
Orders
194 The courts orders are as follows:
1 Judgment to be entered against the first defendant in the sum of $823, 649.27 plus interest
2 Judgment to be entered against the second defendant in the sum of $823,649.27 plus interest
3 Declaration that the amount of $90,782 in Bank Account number [ ] held in National Australia Bank in the name of the second defendant is held on trust by the second defendant for the plaintiff
4 Stay orders 2 and 3 with liberty to the plaintiff to apply to lift the stay order
6 Grant liberty to the plaintiff to apply in relation to any matter which may affect or prove necessary in relation to the proper working out of these orders5 Reserve costs for argument
17
14
2