Naumoski v NCR Australia Pty Ltd

[2004] NSWCA 310

CITATION:	Naumoski v NCR Australia Pty Ltd [2004] NSWCA 310
HEARING DATE(S):	6 September 2004
JUDGMENT DATE:	10 September 2004
JUDGMENT OF:	Spigelman CJ at 1; Giles JA at 2; Young CJ in Eq at 25
DECISION:	Appeal allowed with costs. The respondent to have a certificate under the Suitors Fund Act if otherwise qualified.
CATCHWORDS:	Liability for assisting in breach of trust - director of defaulting trustee - no knowledge of breach of trust - finding of deliberate shutting of eyes - whether facts entitled finding - held no - no question of principle. ND
CASES CITED:	Barnes v Addy (1874) LR 9 Ch App 244; Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113; Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81; Royal Brunei Airlines Sdn Bhd v Tan (1995) 2 AC 378; Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640.
PARTIES :	Gina Naumoski - Appellant NCR Australia Pty Ltd - Respondent
FILE NUMBER(S):	CA 40218/04
COUNSEL:	B W Rayment QC & G McVay - Appellant D McGovern SC & B Newton - Respondent
SOLICITORS:	McLachlan Chilton - Appellant Heidtman & Co - Respondent

LOWER COURTJURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	SC 2316/00
LOWER COURT JUDICIAL OFFICER :	Austin J

CA 40218/04
SC 2316/00

SPIGELMAN CJ
GILES JA
YOUNG CJ in EQ

Friday 10 September 2004

NAUMOSKI v NCR AUSTRALIA PTY LTD

Judgment

1 SPIGELMAN CJ: I agree with Giles JA.

2 GILES JA: This is an appeal from a judgment for $751,102.43 for assisting with knowledge in a dishonest and fraudulent design on the part of a trustee, within the so-called second limb of a stranger’s liability in Barnes v Addy (1874) LR 9 Ch App 244. The defaulting trustee was The Credit Connection Pty Ltd (“CC”). The appellant, Mrs Gina Naumoski, was a director of CC. She did not know that it was acting in breach of trust towards the respondent, NCR Australia Pty Ltd (“NCR”). Austin J accepted that she would not be liable if, acting without proper attention to the affairs of CC, she negligently but innocently failed to investigate CC’s activities. But he found that Mrs Naumoski had deliberately shut her eyes to CC’s dishonest and fraudulent design, and was to be regarded as having actual knowledge of what would have been known had her eyes been kept open and the dishonesty of the later exposition of the second limb in Royal Brunei Airlines Sdn Bhd v Tan (1995) 2 AC 378. The issue in the appeal is whether the facts entitled his Honour to make that finding.

CC’s breach of trust

3 CC carried on business as a credit collection agency. It was controlled, and its business was managed, by Mr Rade Naumoski, the husband of Mrs Naumoski. It was retained by NCR to collect debts owed to NCR by customers. It was entitled to a commission on the amounts collected, but the money was held on trust for NCR and the commissions or other amounts could not be deducted from the collections without NCR’s authority.

4 Over the period October 1998 - February 1999 CC deducted commissions from the amounts collected before accounting to NCR, and also deducted litigation costs which were not true litigation costs but, at best, an estimate of costs which might be incurred in recovery of debts by litigation. Deeds dated 11 August 1998 and 18 November 1998 purported to authorise this course of action, although on their proper construction they did not fully do so. It was found that the deeds had not been brought into existence until December 1998, that the signatory on behalf of NCR had not had actual or ostensible authority to bind NCR to them, and that they were “nothing more than a device designed by Mr Naumoski to permit CC to appropriate monies recovered on behalf of NCR”.

5 Accordingly, CC was in breach of trust in making the deductions. The deductions totalled $501,133.88, to which was added interest of $249,870.55.

Mrs Naumoski’s position

6 Mr Naumoski was qualified as an accountant. She worked in a practice predominately involving the preparation of tax returns for individuals and small companies, but extending to the preparation of profit and loss statements, balance sheets and annual returns for small companies.

7 CC began its business in about 1988. Mrs Naumoski became a director of CC in 1993, because Mr Naumoski’s co-director was about to resign and at that time two directors were required for a proprietary company. She knew that its business was that of collecting debts. She did no accounting work for CC, and had no involvement in its affairs even by way of directors meetings or seeing, let alone signing, company accounts or income tax returns. She only attended CC’s offices when she happened to be shopping in the area or for the Christmas party. Apart from her accountancy practice, she was occupied with raising three children, in 1998/99 aged about 8, 7 and 3.

8 There were put to Mrs Naumoski copies of CC’s financial statements for the years ended 30 June 1997 and 30 June 1998, each accompanied by a directors report and statement purportedly signed by her. She denied that the signatures were hers. By comparison with Mrs Naumoski’s signatures on the affidavit verifying her defence and her affidavit sworn in the proceedings, the signatures do not appear to have been hers. Mr Naumoski gave evidence, as to one of the financial statements, that it was needed urgently by the bank and he may have had someone in the office sign on behalf of Mrs Naumoski.

9 Mrs Naumoski agreed that she knew at the time that she was entitled to access to CC’s books and records. She said she did not look at them, and gave no thought to doing so because she was fully occupied with her accountancy practice and raising the children and “nothing was ever brought to my attention that I should be, you know, go rushing to the office and having a look at the accounts or figures or anything. I never even thought about it.” She said that, with hindsight, she probably should have resigned as a director. It was put to her -

“McGOVERN: Q. Did you simply turn your eyes away from what was happening in the affairs of the First Defendant?
A. Definitely not.
Q. Well, if you did not turn your eyes away, you had access to the records; didn’t you?
A. Yes I did have access to the records.
Q. And you looked at the records?
A. No I didn’t.
Q. If you did not turn your eyes away then you must have looked at the records?
A. I didn’t look at the records and I didn’t ignore the fact that I was a director. The situation was, as I explained previously, is that at the time in 1998 and 1999 I had other more pressing commitments and responsibilities that I focused on, including my job that as I mentioned worked also on Saturdays and there are only so many hours in the day that one can work and on top of that I had three children who I raised at the time including helping them with homework and to this day I spend a lot of time with my children. It was not that I ignored the fact that I was a director, I was never ever given any reason to think that there was any problem or any need for me to inspect records or – you know – even if there was one whiff of something being wrong or something from the bank, like something wasn’t being paid or something like that, I had absolutely no idea that there was anything going wrong and he is my husband. If this was some other person, then there is no way I would have just become a director and not be involved. This was my husband and is my husband and he basically ran that business. It was his business right from the outset, from right from 1989 when he first started the business, it was his business. He ran it.”

The judge’s reasons

10 Austin J stated his conclusions -

“191 My conclusions are that Mrs Naumoski was aware, during the whole of 1998, that CC collected money from debtors of its clients and was under an obligation to account to the clients for that money. As an accountant, she was aware that CC had an obligation to keep those client moneys separate from its own funds, and not to apply client moneys to meet commissions or expenses without express authority to do so. She was therefore aware of the characteristic of the arrangement which gave rise to a trust of those funds in CC's hands. It has not been established that she was aware in 1998/99 that NCR was a client of CC or that CC collected money specifically on behalf of NCR. However as a director of CC she had an obligation to satisfy herself that the financial statements of CC for the financial years ending 30 June 1997, 30 June 1998 and 30 June 1999 gave a true and fair view of the profit and loss and state of affairs of the company in respect of those financial years, and she had a right of access to the books and records of the company for that purpose.
192 She did not, on her own evidence, take any steps to satisfy herself of the veracity of the financial statements or, more specifically, that the company was discharging its obligation to keep client moneys separate from its own. If she had made inquiries after October 1998, in respect of the company's financial practices concerning money collected on behalf of clients, she would have discovered the October statement which clearly showed that the company purported to deduct commissions from moneys recovered. If she had made inquiry after the December and February statements, respectively, had become available, she would have discovered that the company purported to deduct very large amounts of legal expenses from recoveries, and very large amounts of commissions in respect of recoveries paid directly to NCR. Inquiries about those matters would have led her to conclude either that CC was not authorised to make any of these deductions, or to investigate the validity and efficacy of the two deeds. Inquiries into the company's books and records concerning the deeds would have led her to the letter by Warren McKeon Dickson dated 17 December 1998, where doubt was expressed as the Mr Cannon's authority to bind NCR to the first deed. This chain of inquiry would have led her, quite inexorably, to discover that the company was acting in breach of trust in purporting to make such deductions from its recoveries.
193 I do not regard this as a case of merely negligent failure by a sleeping director to act with proper attention to the affairs of the company. The facts are quite different from the facts of, for example, Deputy Commissioner of Taxation v Clark (2003) 45 ACSR 332 [(2003) 57 NSWLR 113]. Mrs Naumoski was aware, as an accountant, of the responsibilities of directors with respect to financial statements (and, I think, their responsibilities generally, notwithstanding her evidence). She appeared to me, from her evidence, to be determined to turn her back on the discharge of her duties and indeed, on the making of any inquiries whatever as to the company's financial practices and position, for the purpose of avoiding liability. This is a case of deliberate shutting of the eyes, tantamount to actual knowledge of what would have been known had the eyes been kept open. It falls within the concept of dishonesty underlying the second limb of Barnes v Addy , as described by the Privy Council in Royal Brunei Airlines v Tan . My conclusion, therefore, is that Mrs Naumoski, as a director of CC, assisted with knowledge of the company's breach of trust and is liable as a constructive trustee accordingly.”

11 The reasoning in these paragraphs appears to have been as follows. The starting point was the acknowledged awareness that CC collected money from debtors of its clients, from which it followed that it had to account to the clients for the money. Because she was an accountant, Mrs Naumoski was aware that the money had to be kept separate from CC’s own funds and that commission and legal expenses could not be deducted without authority. As a director of CC, Mrs Naumoski was obliged to satisfy herself of the veracity of its financial statements, including that it was discharging its obligation to keep clients’ money separate from its own, and she had a right of access to the books and records of CC for that purpose. If Mrs Naumoski had made the inquiries to which his Honour referred, as part of taking steps to satisfy herself of the veracity of the financial statements and more specifically that it was discharging its obligation to keep clients’ money separate from its own, she would have found out that CC was acting in breach of trust. But there was more than failure of Mrs Naumoski to fulfil her directorial duties and make the enquiries. “From her evidence” she was “determined to turn her back on the discharge of her duties … for the purpose of avoiding liability”. This made out the deliberate shutting of her eyes and dishonesty.

Discussion

12 It must first be asked why, apart from proper discharge of her directorial duties, Mrs Naumoski should have made the enquiries to which his Honour referred. If the answer is nothing more than proper discharge of her directorial duties, then while Mrs Naumoski may have been liable to CC for failing to carry out her directorial duties, or otherwise for failure to participate in the management of CC (as in Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113, to which his Honour referred), there was no basis in the directorial duties for finding that Mrs Naumoski determined to turn her back on the discharge of her duties for the purpose of avoiding liability.

13 The evidence did not support, and his Honour did not refer to, any occasion for Mrs Naumoski to make the enquiries other than the fact that she was a director and should have participated in the management of CC. Something more was required.

14 Austin J considered that there was the something more. It was reflected in his statement that Mrs Naumoski appeared “from her evidence” to be determined to turn her back on making inquiries for the purpose of avoiding liability. What was the evidence?

15 The following can be discerned in earlier paragraphs of his Honour’s reasons.

16 First, his Honour said -

“187 I was unimpressed by Mrs Naumoski as a witness. Her answers were sometimes evasive - for example, in a series of answers she prevaricated before finally admitting that she knew her husband carried on a debt collection business through CC. From time to time she made speeches about the demands of her job and her domestic life as a mother, which went well beyond answering questions put to her. She was aware that one of the issues in the case was the extent to which she had any involvement in the activities of CC, and she seems to me to have been determined to persuade the court by her evidence that she had no involvement and indeed no significant knowledge of CC's activities.”

17 Mrs Naumoski’s answers in relation to CC carrying on a debt collection business do not read evasively, although the judge had the advantage of seeing and hearing her giving evidence. From the transcript, she freely acknowledged knowing that CC collected money from its clients’ debtors. The passage I have set out at para [9] above is an example of what his Honour referred to as speeches going beyond answering questions, and there were other similar paragraphs. There is no doubt that in the course of her evidence Mrs Naumoski forthrightly maintained that she had no involvement and no significant knowledge of CC’s activities. If that was the case, and it was because Mrs Naumoski was fully occupied in her own professional and domestic duties, then pointed and sometimes loquacious evidence would not be extraordinary. Be that as it may, an unfavourable impression as a witness in 2003 was not of itself a reason for finding dishonesty in 1998/1999. Being unimpressed with a person as a witness can, but does not necessarily, mean that the person’s evidence is not accepted. If it does, disbelief generally does not amount to positive evidence of the opposite of what is disbelieved, see Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640 at 684, 694; Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 87.

18 The judge then said -

“188 Although she denied being aware that CC received money in trust for clients, her answers implied that she was aware that CC collected money from its clients' debtors, on the clients' behalf. Her statement that she did not have a full understanding of the responsibilities of company directors was implausible, since she was a practising accountant, and was partially negated by her acknowledgement to the effect that she understood the responsibilities of directors with respect to the company's financial statements and the right of an individual director to access to the company's books and records.”

19 As I have said, Mrs Naumoski acknowledged knowing that CC collected money from its clients’ debtors. She did not agree that she was aware in 1998 and 1999 that it operated by “holding money for third parties from time to time in trust”, saying that she did not know how the business operated. It did not necessarily operate in the manner put to her, and if she did not know how it operated she was entitled to say so. I do not think that she would be alone in not having a full understanding of the responsibilities of company directors, an aspiration few will achieve, and with respect there was nothing implausible in her so stating. Again, however, these observations by his Honour went to acceptance of her evidence. So far as his Honour declined to accept her evidence, there was scarce support for a positive case of deliberate shutting of the eyes.

20 His Honour then said -

“189 While I am not able to find that the signatures on the directors' report and statement of directors of CC for the year ending 30 June 1998 are the signatures of Mrs Naumoski, I found her evidence that the signatures were not hers to be implausible. She conveyed no sense of alarm or concern that on her evidence, the signatures must have been forged, and she could offer no explanation for what had evidently occurred (although Mr Naumoski later speculated, under cross-examination, that he may have instructed someone in his office to sign on behalf of his wife and urgently send the documents to the bank).“

21 This is, with respect, rather odd. In my opinion, the signatures were plainly not those of Mrs Naumoski. Even if the judge were simply not satisfied that they were, to describe Mrs Naumoski’s evidence as implausible was not open because it depended on the signatures being hers. I do not see why, in the manner it was put to her at the trial, Mrs Naumoski should have responded with alarm or concern, and if the signatures were not hers she would not necessarily have been able to explain how they came to be on the documents. Perhaps a better explanation could have been expected through Mr Naumoski, if that is what was meant. It remained, however, that there could be no more than suspicion that Mrs Naumoski had had an undefined involvement in the signatures being placed on the documents which in turn demonstrated an undefined involvement in the affairs of CC. This was not the stuff of a finding of dishonesty.

22 Finally, his Honour said -

“190 Her assertion of lack of involvement in the business and affairs of CC was at odds with her affidavit verifying her defence. In her affidavit she expressed her belief that the allegations of fact which were denied in the defence were untrue. One of the allegations denied in the defence was NCR's allegation of the terms of the agreement between itself and CC. The defence denied that the agreement alleged by NCR was the only operative agreement, and went on to plead that on 11 August and 18 November 1998 NCR and CC entered into further agreements the terms of which were fully set out in the defence.”

23 Reliance on the deeds of 11 August and 18 November 1998 in her pleaded defence in 2003 in my view said nothing of Mrs Naumoski’s involvement in the business of CC in 1998/1999. It was entirely consistent with becoming aware of the deeds after the litigation commenced and, in circumstances not known to the judge, believing in their validity.

24 Putting all these matters together, I respectfully consider that it was not open to his Honour to find that Mrs Naumoski’s failure in her directorial duties was for fear of what she would find out by making the enquiries to which his Honour referred, amounting to a shutting of the eyes or dishonesty for Barnes v Addy purposes. In my opinion, the appeal should be allowed with costs. NCR should have a certificate under the Suitors Fund Act if otherwise qualified.

25 YOUNG CJ in EQ: I agree with Giles JA.

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Last Modified: 09/13/2004