Puddick v Dyamond Developments Pty Ltd

[2019] NSWSC 431

Supreme Court

New South Wales

Medium Neutral Citation:

Puddick v Dyamond Developments Pty Ltd [2019] NSWSC 431

Hearing dates:

1 February 2019

Decision date:

18 April 2019

Jurisdiction:

Equity

Before:

Robb J

Decision:

(1) As per [111], the Court will hear the parties on the terms of any appropriate orders to give effect to these reasons for judgment, and to make provision for the further conduct of these proceedings.

(2) Subject to [112], order that the defendants pay the plaintiffs’ costs of the proceedings.

Catchwords:

EQUITY — Trusts and trustees — Resulting trusts — Quistclose trusts — Obligation to return monies when purpose for which trust was set up has failed

 

EQUITY — Trusts and trustees — Breaches of trust — Misappropriation of trust property — Actual knowledge of breach

  EQUITY — Trusts and trustees — Liability — Circumstances in which Equity will find a person liable as if they were the trustee

Cases Cited:

Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA [1992] 4 All ER 161
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Barnes v Addy (1874) LR 9 Ch App 244
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22
White v Shortall (2006) 68 NSWLR 650

Category:

Principal judgment

Parties:

Justin Frank Puddick (first plaintiff)
John Edward Puddick (second plaintiff)
Dyamond Developments Pty Ltd (first defendant)
George Hatzipapas (second defendant)
Gaks Investment Holdings Pty Ltd (third defendant)

Representation:

Counsel:
Dr E Peden (plaintiffs)
D Allen (defendants)

  Solicitors:
O’Loughlin Westhoff (plaintiffs)
Tomaras Lawyers (defendants)

File Number(s):

2018/185865

judgment

Parties

1. The plaintiffs in these proceedings are Mr Justin Frank Puddick and his father, Mr John Edward Puddick. To avoid confusion, and without meaning any disrespect, I will refer to the plaintiffs as Justin and John respectively.

2. Initially, the defendants were the first defendant, Dyamond Developments Pty Ltd (Dyamond) and the second defendant, Mr George Hatzipapas. For consistency, I will refer to Mr Hatzipapas as George.

3. At all relevant times, George has been the sole director of Dyamond. Of the issued shares in Dyamond, half are held by George and the other half by Ms Argiroula Hatzipapas (George’s wife).

Pleadings

4. The proceedings were commenced by summons filed in court on 15 June 2018. In essence, each of the plaintiffs claimed a declaration that the defendants held the sum of $100,000, transferred by each of them into Dyamond's bank account in January and February 2018, on trust for the plaintiffs absolutely, consequential orders, and an order that the defendants transfer the amount plus interest into the trust account of the plaintiffs' solicitor.

5. On 15 June 2018, Pembroke J made a short-term freezing order against Dyamond in respect of its assets, up to an unencumbered value of $220,000. The freezing order was extended by Slattery J on 20 June 2018.

6. The plaintiffs filed a statement of claim on 15 August 2018, and an amended statement of claim on 17 December 2018.

7. One effect of the amended statement of claim was to join the third defendant, Gaks Investment Holdings Pty Ltd (Gaks) to the proceedings. That was done because the plaintiffs became aware that Dyamond had transferred an asset, part of which had allegedly been acquired with the plaintiffs’ money and which the plaintiffs were seeking to recover by these proceedings, to Gaks for no apparent consideration.

8. George’s wife is the sole director of Gaks, and half of the shares in that company are owned by each of George and George’s wife.

9. On 17 December 2018, Slattery J made a freezing order against Gaks in respect of its assets up to an unencumbered value of $254,000.

10. By their amended statement of claim, each of Justin and John claim that Dyamond holds an amount up to $100,000 on trust for them, or alternatively George and/or Gaks are liable to account to each of them for an amount of $100,000. They claim an order requiring that the defendants or one of them repay each of them $100,000 plus interest.

11. By prayer 6, the plaintiffs claim an order for the tracing of the amounts referred to in the earlier prayers.

12. The Court was advised at the beginning of the hearing that it would only be asked to decide the issues concerning liability raised by the pleadings, and would not be asked to determine whether, and if so in what respect, the plaintiffs are entitled to trace the monies paid by them. That is an issue that will have to be decided, if the plaintiffs are successful in these proceedings on a basis that gives them a tracing remedy.

13. The effect of the allegations in the amended statement of claim is that, on 27 September 2017, George represented to Justin that a company associated with George, Zyber Holdings Ltd (Zyber) was exploring possible investments in the cybersecurity field.

14. On or around 25 January 2018, George called Justin and represented to him that Zyber would be investing in the initial public offering (IPO) of a company called Gravity Consulting Pty Ltd (Gravity Consulting). George said that he was looking to put together a pre-IPO deal for Gravity Consulting, which would involve obtaining private investments in a sum amounting to about $1,000,000, with the minimum private investment being $100,000.

15. By a further communication on 29 January 2018, George represented to Justin that the board of Gravity Consulting was interested in progressing with the pre-IPO, the minimum investment would be $100,000, and "that the investment must be made today so as to show the board of Gravity Consulting that funds are available" (par 9(e) of the amended statement of claim).

16. Importantly, it was alleged in par 9(f) of the amended statement of claim that George represented to Justin "that [he] would need to transfer the funds so that they arrived in [George’s] account today if he wished to participate in the pre-IPO".

17. That is important, as it is an allegation that the arrangement was between Justin and George personally, and that the funds were to be transferred into George's account.

18. It is then alleged, in par 9(g), that George represented to Justin that the $100,000 transferred to George "…would only be used to invest in the pre-IPO…"

19. The plaintiffs then allege in par 10 that, on 29 January 2018, in reliance upon the representations made by George, Justin transferred $100,000 into the bank account nominated by George, which in fact was a bank account in the name of Dyamond.

20. The amended statement of claim then alleges in par 13 that, on 14 February 2018, John called George, who made representations to John substantially in the same terms as are alleged in the amended statement of claim were made to Justin.

21. By par 14 of the amended statement of claim, the plaintiffs allege that, on 14 February 2018, George sent to John details of the bank account into which John's $100,000 was to be transferred. It had earlier been alleged in par 11 that, on 14 February 2018, in reliance upon the representations, John transferred $100,000 into Dyamond's bank account.

22. The plaintiffs allege in par 15 that, on or around 13 March 2018, George told Justin that the pre-IPO was not going to proceed, and the plaintiffs would be repaid the amounts paid into Dyamond's bank account, which were said to have been held in a term deposit.

23. In subsequent paragraphs of the amended statement of claim, the plaintiffs plead the attempts that they have made to recover the $200,000 that they collectively paid. The money has not been repaid to them.

24. The plaintiffs allege in pars 23 and 24 that the monies paid into Dyamond's account were advanced for a specific purpose, being the investment in Gravity Consulting as part of the pre-IPO, and that the monies were therefore held on trust for the plaintiffs. As the purpose for the payments failed, the plaintiffs allege in pars 26 and 27 that the monies are held by Dyamond on trust for the plaintiffs, and that Dyamond is in breach of trust by failing to repay the monies.

25. In par 28 of the amended statement of claim, the plaintiffs plead a claim against George that he has accessorial liability for Dyamond's breach of trust. That is, in part, because he was the director of Dyamond, he procured the payment of the monies from the plaintiffs into Dyamond's account, he controlled Dyamond's account, he knew the purpose for which the monies were advanced, he knew that the purpose had failed, he knew that there was no legitimate or commercial reason why Dyamond did not repay the monies, and he refused to cause Dyamond repay them.

26. The plaintiffs allege in par 29 that George acted dishonestly in assisting Dyamond in relation to its breach of trust by not returning the monies, knowing that they were trust property.

27. The plaintiffs allege in pars 31 to 36 of the amended statement of claim how the money paid by Justin to Dyamond may be traced, and in pars 37 to 41, how the monies paid by John to Dyamond may be traced.

28. As to Justin's monies, it is alleged that on 22 January 2018, before Justin's $100,000 was paid to Dyamond on 29 January 2018, Dyamond entered into a contract with a securities broker for the purchase of 6,350,000 shares in Zyber at a total cost of $222,412.48. As at 24 January 2018, Dyamond only had $302.49 in its account. On 30 January 2018, the $100,000 paid by Justin to Dyamond was transferred by direct credit to the securities broker and applied towards the purchase of the Zyber shares by Dyamond.

29. The amended statement of claim then makes allegations concerning transfers of all of the Zyber shares held by Dyamond into different accounts in its name.

30. As to the payment of $100,000 made by John to Dyamond, the amended statement of claim alleges that, on 15 February 2018, Dyamond transferred the $100,000 into a separate bank account in the name of Dyamond with the Australian and New Zealand Banking Group Ltd (the ANZ). Over the period 15 February 2018 to 6 June 2018, Dyamond allegedly used the $100,000 to trade in shares. The shares traded were shares in Zyber, Fe Ltd, and Pacifico Minerals Ltd (PMY).

31. This culminated, in the period 19 June to 26 June 2018, in Dyamond conducting an off-market transfer of 19,500,000 PMY shares held in the ANZ account to Gaks for nil consideration.

32. The plaintiffs then plead that they have not been repaid any part of the $100,000 that they each paid to Dyamond at the direction of George.

33. The defences filed by each of the defendants on 31 January 2019 to the amended statement of claim admit some matters, partially admit others and deny other allegations that were made. The defences challenge the dates of some of the events alleged in the amended statement of claim. The defendants did not raise any positive defences.

Agreed facts

34. The parties did, however, agree upon a document setting out a number of non-contentious facts, which was admitted into evidence as Exhibit P2. It will be convenient to set out the following admitted facts:

…

6.   The First Plaintiff met the Second Defendant on or about 11 September 2017 through an online equity investment discussion board website ‘ First Plaintiff and the Second Defendant both owned (and own) shares in Zyber Holdings Ltd (ACN 131 090 947, Zyber). They communicated online and subsequently met to discuss the future of Zyber, including via Hatzipapas’ email “[email protected]”.

8.   In January 2018, the Second Defendant told the First Plaintiff orally and by way of emails about a “pre-IPO” of an IT security software company called Gravity Consulting, into which Zyber would be investing. He invited the First Plaintiff to invest up to $150,000.

9.   On 22 January 2018, the First Defendant entered into a contract with a securities broker, Pershing Securities Australia Pty Ltd (ACN 136 184 962, Pershing), for the purchase of 6,350,000 shares in Zyber at a cost of 0.034834 AUD per share (amounting to a total cost of $222,412.48) (the Zyber Shares)

10.   [Not agreed].

11.   [Not agreed].

12.    On 29 January 2018, the First Plaintiff transferred $100,000 into the bank account nominated by the Second Defendant (the Dyamond Bank Account).

13.   On 30 January 2018, the $100,000 paid to the First Plaintiff [error for First Defendant] was applied towards the purchase of the Zyber Shares referred to at paragraph 9 above.

14.   [Not agreed].

15.   On 15 February 2018, the First Defendant transferred $100,000 paid to in [sic] by the Second Plaintiff into a separate bank account also in the name of the First Defendant (ANZ Account).

16.   On 20 February 2018, the First Defendant transferred the Zyber Shares to accounts in the name of the First Defendant or an associated entity of the First Defendant held with Commonwealth Securities Limited (CommSec) and Share Investing Limited (Share Investing).

17.   Sometime in June 2018 (the particular date of which is in dispute), the First Defendant executed the following off-market transfers of shares it held in their CommSec and Share Investing Accounts from:

a.   the ANZ Share Investing Account of 19,500,000 PMY shares to Gaks for a stated nil consideration;

b.   the ANZ Share Investing Account of 6,000,000 PMY shares to Otis Developments Pty Ltd (ACN 162 136 834, Otis) for A$100,000 consideration;

c.   CommSec Trading Account of 5,000,000 PMY shares to Sacco Developments Australia Pty Ltd (ACN 050 415 529, Sacco) for A$75,000 consideration; and

d.   CommSec Trading Account, a second off-transfer, of 5,000,000 PMY shares to Sacco for A$75,000 consideration.

Transfer of PMY shares to Gaks

35. Exhibit P4 establishes that, assuming that the transaction referred to in par 17(a) of Exhibit P2 occurred on Sunday 27 May 2018, as claimed by the defendants, and that it is therefore appropriate to adopt the share price recorded on the ASX on Monday 28 May 2018, the listed price per share was $.013, and the total value of the 19,500,000 shares was $253,000.

36. The share transfer form for this transaction was in evidence. It shows the transfer of 19,500,000 shares in PMY from Dyamond to Gaks for nil consideration on 27 May 2018. George signed on behalf of the seller, and his wife signed on behalf of the buyer.

Primary issue

37. The primary issue in these proceedings concerns the terms upon which Justin and John agreed with George to invest the $100,000 that each of them, at George’s direction, paid into Dyamond’s bank accounts. Justin and John say that there was an express agreement that each of their $100,000 investments was paid solely for the purpose of investing in the pre-IPO for Gravity Consulting, and so was held by Dyamond on trust to be applied only for that purpose, and when the proposal for the pre-IPO failed, Dyamond became liable to repay the money to Justin and John. George, on the other hand, gave a different version of the conversations, to the effect that, while the primary purpose for which the payments were made was that claimed by Justin and John, they both expressly agreed with him that, pending the money being applied to the pre-IPO, George was authorised to cause Dyamond to invest the money in securities chosen by George, for the purpose of building up the investment and making a profit.

Parties’ evidence on primary issue

Justin’s evidence

38. Justin’s evidence, as given in his 14 June 2018 affidavit, was that he came to know and trust George after George contacted him by way of private message on or around 11 September 2017, over the online investment discussion board HotCopper.com.au, in respect of Justin’s equity holdings in Zyber. Justin said that this investment was valued at approximately $250,000 at the time. The message said that George wanted to contact Justin to discuss matters related to Zyber, including the appointment of the new chairman, Mr Geoff Gander. Justin then had discussions with George over the next few months, in which Justin came to believe that George was influential in the management of Zyber.

39. Justin said at par 11 that, on or around 25 January 2018, George called him over WhatsApp to tell him that Zyber proposed to make an investment in a Canberra-based IT company that was a subsidiary of Microsoft. The conversation included George saying: “…I am also looking to put together a pre-IPO deal for the company and looking for private investments in the amount of about $1 million. The minimum investment in the pre-IPO deal is $100,000 and we are looking for about 5 to 8 individuals to invest. The deal is going to be a 10-bagger and there is no way you can lose money on it. Are you interested?” Justin explained that the term “10-bagger” was used to describe an investment that would increase 10-fold.

40. Then, Justin gave evidence, at par 13, of a telephone conversation that he had on 29 January 2018 with George, in which George said:

I am with Bill Ottis [sic] and Geoff Gander and we are wining and dining the board of Gravity Consulting. They love me. I am only getting a small group of guys I can trust to invest in Gravity. The minimum investment is $100,000 and it needs to happen today so that I can show the Gravity Board that I have the funds in my account and are [sic] ready to go. To do this, you need to ‘TT’ the funds so they hit my account today. The money will only be used to invest in this deal so that Gravity can list on the ASX. Zyber is also going to do a further capital raising to invest more money into Gravity and form a close working relationship with it. Gravity Consulting will then help Zyber to finish the MyZyber app that is still in production.

41. Justin said that he trusted George because of claims made by George that he had had success in raising money on small cap deals, and Justin attributed the increase in the value of his Zyber shares from 0.4 cents at the time of their purchase to 4.6 cents on 19 January 2018 to the work done by George.

42. Consequently, on 29 January 2018, Justin transferred $100,000 into the bank account nominated by George, which was in fact Dyamond’s bank account.

43. Justin gave evidence that, on or around 13 March 2018, he called George on WhatsApp and was told that the Gravity Consulting pre-IPO would not go ahead. Justin said that he asked whether he and his father would get their money back, and was told that they would, with George saying: “Yes, you will get your money back. I am travelling overseas and it is in a term deposit. I need to go to the bank in Brisbane to release the funds. They are safe and I will get them back to you very soon.”

44. Justin then gave evidence at pars 22 to 30 of a series of communications with George, starting on or around 10 April 2018, by which Justin pursued George for the recovery of the money invested by Justin and John. These communications included oral discussions in which George advised that the money would be paid back, as well as written demands by WhatsApp. Extracted in Exhibit P1, these demands included:

26/5/18, 11:32 AM – Justin Puddick: George, I need a firm date as to when my dad and I will be paid in full. If I don’t get one from you I’ll have no choice but to consider my options. This is our money not yours. You have no right to decide when we get our money back. My patience has run out.

45. The evidence shows that, on the following day, George caused Dyamond to transfer 19,500,000 PMY shares to Gaks for nil consideration.

46. Justin instructed his and John’s solicitor to send a letter of demand to George, as the director of Dyamond, which the solicitor did on 7 June 2018. The facts recited by the solicitor were consistent with the evidence now given by Justin.

John’s evidence

47. John gave his evidence concerning the circumstances in which he agreed to invest $100,000 in the pre-IPO in his 9 July 2018 affidavit. John said that he decided to make the investment after a discussion with Justin that led him to believe that it was a worthwhile investment.

48. At par 7 of his affidavit, John said that, on 14 February 2018, he had the following conversation with George:

Me:   I’m Justin’s father and Justin told me to phone you regarding a deal.

George:   Yes, we are getting investors together who are investing $100,000 each. If you are interested, this will need to happen within the next 24-48 hours because the company is going to be listed on the ASX.

Me:   How do I transfer the money.

George:   I’ll send you my bank account details.

49. John said that, after receiving Dyamond’s bank account details from George on 14 February 2018, he transferred $100,000 into that account.

50. John said that he learned that the pre-IPO was not going to go ahead, when he received a phone call to that effect from Justin on 13 March 2018.

51. John said that, during the week of 20 April 2018, he called George to request repayment. He said that George told him that he would be away for about one week and then he would go to see his bank and “…you [John] will have your money by the end of that week.”

52. On 5 May 2018, John sent an email to George to give George the correct bank account details in which to deposit his money. The account was that of John’s superannuation fund.

George’s evidence

53. George’s version of the conversation that he had with Justin concerning the basis upon which Justin would invest $100,000 into the pre-IPO is set out in par 31 of his 20 September 2018 affidavit. George said the conversation took place by telephone on or around 29 January 2018, and was in words to the following effect:

I said:   Justin, as you know I am here in Perth speaking to the Gravity guys, it seems that it is Zyber is [sic] interested in investing in the Gravity pre-IPO which will be a good thing for Zyber, after my discussions with Geoff Gander. The minimum amount to put in is $50,000.

He said:   I want to put $200,000 in.

I said:   You can’t invest $200,000, the maximum is $150,000. I will send you my account details to transfer the money. I just want to make sure you understand that this Gravity deal will not happen straight away. It takes time and your money could be held up for months or even several months.

He said:   I just want to pay the money now, so it is there and as soon as the pre-IPO opens, you can be ready to invest for me.

I said:   As long as you put the money in, you will have first preference when the pre-IPO shares are offered.

He said:   I’m happy to go in.

I said:   Once the money hits my account, I can let Geoff Gander know that we are committed and in the meantime before the offering occurs, we can try to increase the pool of funds and try and strengthen our position in the pre-IPO offering by trading on any upcoming potential opportunities.

He said:   This is all good, I will leave it with you. This is exciting stuff.

54. George gave the following evidence, at par 38, of his conversation with John, which he said happened on about 13 February 2018:

He said:   I am Justin’s father, and my son told me about investing in a deal.

I said:   Yes, there is a company called Gravity Consulting, which Zyber is considering investing in through a pre-IPO and are investing about $1,000,000. I am just helping out Geoff Gander with this deal, who is the chairman of Zyber. However, I need to explain to you that this deal is not going to happen straight away and your money could be held up for months or even a up to year [sic]. So you can invest your money with me, and when the Gravity deal comes up, I will invest in the offering for you together with Justin.

He said:   Justin has told me all about it, and I am happy to send the money across, please give me your bank account details.

I said:   Ok, that’s great. I will try to increase the pool of monies which will be used for investments with Zyber and related companies until the Gravity deal comes through.

55. George gave evidence, at par 43, that he had a telephone conversation with Justin, on about 4 March 2018, in which he told Justin that the pre-IPO may take longer than had been thought, and that as part of this discussion the following was said:

…

I said:   Look, there are other opportunities that we can invest in, a really good one at the moment is PMY shares which has great potential. I might invest in those shares for you.

He said:   Ok, I will leave it with you.

56. George gave further evidence, at par 47, that, on about 13 March 2018, he had a further telephone conversation with Justin in the following terms:

I said:   As you know, Geoff is being difficult, and he has not been able to provide all the documents and financials to be put to the ASX which is causing a lot of problems, and I don’t think the deal is going to go through.

He said:   Ok, I understand.

I said:   As discussed with you before, I invested in PMY shares and there will be other opportunities.

57. Finally, George gave evidence, at par 50, of a discussion that took place on 17 March 2018, after it had become clear that the Gravity Consulting pre-IPO would not go ahead. George said that he told Justin that it was lucky that he had not put the money into Gravity Consulting but had “…managed to invest the money in PMY shares as we discussed, and I think that’s a good thing.” George said that the conversation then continued:

Justin said:   (He threw his arms in the air) It doesn’t matter about my father’s money, if we lose it I will cover him. These PMY shares sound good.

I said:   I know the director, he is a good guy, it’s a good company and we have invested in it.

He said:   Ok, thanks, I will have a look into it as well.

58. George then said, at par 51, that he subsequently received a WhatsApp message from Justin on 19 March 2018, which advised him that Justin had just bought 4.5 million PMY shares.

Finding on the terms of the arrangement

59. I found both Justin and John to be credible witnesses, who gave their evidence in a direct, straightforward and candid way. I am prepared to accept their evidence.

60. The manner in which George gave his evidence was less satisfactory. Although the effect does not appear clearly from the transcript, George repeatedly responded to relatively clear questions with answers which, to my mind, created a relatively strong appearance that George was trying to give himself more time with which to formulate his answer.

61. One example of this mode of response was in George’s cross-examination at (T 46.26):

Q. And it's not the case that Justin agreed that you could try and increase the pool of funds by trading on any upcoming potential opportunities, is it?

A. You are losing me again, please repeat that.

62. Although George was a less satisfactory witness than were Justin and John, I principally base my findings on an analysis of the objective evidence, rather than upon my judgment of the relative credibility of the witnesses.

63. For the following reasons, I accept the evidence given by Justin and John concerning the substance of their conversations with George, rather than the inconsistent evidence given by George.

Taking advantage of upcoming opportunities

64. It is significant that George claims, in par 31 of his 20 September 2018 affidavit, that he said to Justin: “…we can try to increase the pool of funds and try and strengthen our position in the pre-IPO offering by trading on any upcoming potential opportunities.”

65. In cross-examination, George explained the reason for making this statement to Justin in the following terms (T 46.38-46.49):

Q. And what did you mean by upcoming potential opportunities?

A. Upcoming potential opportunities.

Q. That's your language?

A. Okay, you read before that I have been in the capital market for 30 years so obviously I have got a lot of connections around the industry and I have been in very successful companies myself, so I always get opportunities. And being a sophisticated investor I get a lot more opportunity than Justin would get or anyone else in this room I guess, if they are not sophisticated investors. So normally, if I have a relationship with my friends, which that's what boiled down the line with Justin, I try to take an opportunity for them to benefit out of that, with their consent all the time.

66. This explanation is not at all consistent with what George actually did. George caused Dyamond to invest the money in the purchase of shares in companies already listed on the ASX, which did not in any way involve him using connections that were not available to Justin and John.

67. In fact, in-so-far as Justin’s and John’s money was used to pay for shares in Zyber and PMY, Justin was already a holder of shares in those companies, and he gave evidence, which I accept, that he had substantial experience in buying shares in companies listed on the ASX, and could easily have bought the shares acquired by Dyamond by himself, in his own name, if that had been what he wanted to do.

68. Upon analysis, the arrangement that George claimed Justin and John had agreed to was commercially unsound. As George agreed, he was not licensed to provide financial or share investment advice, or to trade in shares on behalf of others (T 27.23-.30). Justin and George had nothing to gain from risking their money by leaving its investment within the discretion of George. They would lose the benefit of holding title to any investment acquired with their money. It is true that they took a risk by giving their money to George for the purpose of the proposed pre-IPO with Gravity Consulting, but that, at least, appeared to be a special deal with a limited number of investors, and was promoted to have exceptional potential returns. There is no reason to think that Justin and John would have taken the same risk, if their money was only going to be used in acquiring existing listed shares in companies whose share prices were volatile.

69. Furthermore, given the volatile nature of the share prices concerned, it is improbable that Justin and John would have agreed to the arrangement claimed by George, being that “…we can try to increase the pool of funds and try and strengthen our position in the pre-IPO offering.” Justin and John made investments of $100,000 each, and there was no certainty that any discretionary trading by George with their money would generate any profit. Depending upon the whim of the market, the investments selected by George could just as easily have lost money, so that, if the pre-IPO had gone ahead, Justin and John may not have had enough money to secure the share in the pre-IPO that they intended to acquire.

Shares purchased with Justin’s money

70. The tenor of the arrangement claimed by George in par 31 of his affidavit was that he would, at his discretion, trade “…on any upcoming potential opportunities.” The use of the word “upcoming” clearly refers to future transactions. In par 43, George claimed that, on about 4 March 2018, he said to Justin in relation to the PMY shares: “…I might invest in those shares for you.”

71. This evidence is not consistent with the facts in pars 9 and 13 of the non-contentious facts at Exhibit P2. Dyamond had already contracted to buy 6,350,000 shares in Zyber on 22 January 2018, and, on 30 January 2018, Justin’s $100,000 was applied to the purchase price of those shares.

72. Consequently, George’s evidence of what he told Justin is unlikely to be true, both because the relevant transaction had already happened, and because the shares acquired were shares in Zyber and not in PMY.

Timing of transfer of PMY shares to Gaks

73. As explained above, George and his wife signed a transfer of 19,500,000 shares in PMY from Dyamond to Gaks on Sunday 27 May 2018 for a stated consideration of nil.

74. That was one day after Justin’s WhatsApp message to George, in which Justin had escalated his efforts to get George to repay Justin’s and John’s investments by saying: “…You have no right to decide when we get our money back. My patience has run out.”

75. George did not give any evidence that explained the timing of the transfer of the shares from Dyamond to Gaks, on a proper commercial basis, that might counter the strong appearance that the transfer took place in response to Justin’s veiled threat, and in order to place Dyamond’s assets beyond the reach of Justin and John.

Consideration for transfer of PMY shares to Gaks

76. As has been noted, the transfer form for the transfer of the 19,500,000 PMY shares from Dyamond to Gaks that was signed by George and his wife on 27 May 2018 stated that the consideration was nil.

77. George claimed in par 15 of his 31 January 2019 affidavit that the transfer “…was for consideration payment of intercompany loans between the two entities by way of set off…” George claimed that each of Dyamond and Gaks operate share trading accounts “…to which monies and shares are often transferred…” George said, in par 16, that at the time of swearing his affidavit: “…I have not been able to prepare accounts for the company nor prepare a reconciliation of the payments to and from the said bank accounts…” George annexed to his affidavit a printout of a Gaks bank account statement with Westpac for the period 10 August 2016 to 3 September 2018. This printout was obviously missing many pages. He claimed that the bank statement provides details of the transfers and loan references. George identified references to Dyamond as being “DD”, and said that he had highlighted in yellow the relevant loan payments made to Dyamond.

78. The obvious point to be made about this evidence is that it is plainly inconsistent with the fact that the consideration stated on the share transfer was “nil”. George and his wife could readily have inserted words to the effect of “repayment of debts” if that is what they had understood the effect of the transaction would be. George (and presumably his wife) ought to have been sufficiently commercially sophisticated as to be able to realise that they would potentially create unnecessary problems for themselves by misdescribing the consideration for the transfer on the transfer form.

79. George did not offer an explanation of why he did not attempt to reconcile at least the transactions evidenced in Gaks’ bank statement.

80. Nor did George explain why he had not annexed the equivalent bank statement for Dyamond, which may have improved the reliability of any analysis of the bank statements, as it may have assisted in identifying payments made between the two companies.

81. Unfortunately, whatever highlighting George placed on the annexure was not reproduced in the original of the affidavit that was filed in court.

82. I have carried out an analysis of the bank statement, by attempting to identify all transactions that contain “DD” in the description of the transactions. There is unavoidable scope for error in this exercise. I identified a total of $276,092 in payments made by Gaks to Dyamond in the period 10 August 2016 to 14 May 2018. The fact that the bank statement starts at 10 August 2016 makes the exercise of determining the balance of account between Dyamond and Gaks mathematically unreliable. I identified five payments that appear to have been made by Dyamond to Gaks in the total amount of $251,250 ($250 on 17 January 2017; $100,000 on 29 June 2017: $18,000 on 14 December 2017; $110,000 on 16 March 2018 and $23,000 on 11 May 2018). The balance is an amount of $24,842 owing by Dyamond to Gaks. There is also a deposit of $60,500 on 24 April 2018 that is described as: “DEPOSIT Pacifico DD117” that probably also should be treated as a credit to Dyamond. If so, then Gaks was indebted to Dyamond for a balance of $35,653

83. Even if the analysis that I have been able to carry out is unreliable in its precision, there is nothing in the evidence to sustain George’s claim that 19,500,000 shares in PMY with a market value of $253,000 were transferred by Dyamond to Gaks on 27 May 2018 in order to repay a debt in that amount owed by Dyamond to Gaks.

Transfers of shares to other parties

84. In par 18 of his 31 January 2019 affidavit, George attempted to explain the other transfers to Developments Pty Ltd (Otis) and Developments Australia Pty Ltd (Sacco) that are listed in par 17 of the agreed facts, by saying that the transfers:

…

relate to other parties that invested with me in relation to the Gravity pre-IPO, the subject of these proceedings. Essentially, the plaintiffs, Otis and Sacco, invested with me for the proposed Gravity pre-IPO as part of a syndicate. As the Gravity pre-IPO did not proceed, I transferred shares to Otis and Sacco being the equivalent in value at the time of their investment.

85. If that were so, it would suggest that Otis had invested $100,000 and Sacco had invested $150,000. The transfers may be explicable on the basis that Dyamond regarded itself as being indebted to those companies for the respective amounts of their investments, and the extinguishment of those debts was treated as the consideration provided for the transfer of the shares. If that is so, it is an approach that is inconsistent with the treatment of the transfer of the shares from Dyamond to Gaks where the consideration was stated to be nil.

86. What is notable about these transfers is that Dyamond repaid both of these investors, and may have nothing left or insufficient funds to repay Justin and John, who have not been repaid anything.

87. It is to George’s discredit that, quite apart from the fact that he used Justin’s money to cause Dyamond to pay for shares in Zyber rather than PMY, it is George’s case that Justin authorised him to acquire shares in PMY, but George has caused Dyamond to transfer all of the PMY shares that it held to others (T 49.41), so that George has not even complied with the arrangement that he claims Justin agreed to.

Consideration

88. I am fully satisfied that the evidence establishes that each of Justin and John paid the amounts of $100,000 into a bank account of Dyamond, on 29 January 2018 and 14 February 2018 respectively, in accordance with agreements that they made personally with George.

89. Although George was the sole director of Dyamond, and able to act on its behalf without any formalities being required, Justin and John did not make any arrangement with Dyamond other than the fact that, to fulfil the arrangement that they had with George for the investment of their money in the Gravity Consulting pre-IPO, they paid their money into Dyamond’s account in accordance with the payment instructions given to them by George. As far as Justin and John were concerned, Dyamond was of no particular significance, other than that it was Dyamond’s account that was nominated by George. While, upon receipt of Justin’s and John’s funds, Dyamond may have become subject to a liability to hold that money on trust for Justin and John, it did not follow that George was a party whose responsibility was only ancillary to that of Dyamond. George was the party primarily liable, and he effectively used Dyamond as his agent for the purpose of holding the money.

90. The relative insignificance of the identity of Dyamond is demonstrated by the evidence concerning the steps taken by Justin and John to transfer their money in accordance with the agreement they reached with George. Justin gave evidence in par 15 of his 14 June 2018 affidavit, which I accept, that he learned about Dyamond’s name after he had tried to transfer his $100,000 into the bank account given to him by George, but the bank would not process the transfer until an account name was provided. Justin called George and was given Dyamond’s name, which permitted Justin to complete the transfer. Were it not for the bank’s requirement, Justin would have made the payment without any knowledge of who Dyamond was. The position was a little different with John, as John annexed to his 9 July 2018 affidavit a screenshot of the WhatsApp message sent by George to John on 14 February 2018, which identified Dyamond as the holder of the bank account, but required John to forward the deposit slip to George’s email address. In either case, it would have been immaterial to Justin and John which bank account, effectively controlled by George, was nominated by him.

91. It is clear that Justin and John each paid their $100,000 into Dyamond’s bank account in accordance with express oral agreements that they made with George, that George would use that money to pay for interests to be issued to Justin and John in the proposed Gravity Consulting pre-IPO, whatever precise commercial form that investment may have taken, and not for any other purpose.

Claim against Dyamond

92. As between Justin and John and Dyamond, Dyamond was not entitled to use the money paid into its bank account for any other purpose than to invest the money on Justin’s and John’s behalves in the pre-IPO. The moment that the proposal failed, Dyamond held the money on trust for Justin and John respectively on the principle in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. It may not have been implied in the arrangements made between Justin and John on the one hand, and George on the other, that Dyamond would keep the monies paid by Justin and John separately from all other property under its control. Justin and John simply acted upon instructions to pay their money into Dyamond’s ordinary bank account. However, in my view, it was clearly implied that Dyamond would retain amounts in its bank account equal to or greater than the amounts paid by each of Justin and John, so that those amounts would remain whole in order to enable the agreed investments to be made in the pre-IPO.

93. To the extent that Dyamond has applied Justin’s and John’s money for unauthorised purposes, it is clear that, as a defaulting trustee, Dyamond is obliged to replenish the trust funds and is personally liable to each of Justin and John to pay them $100,000 as equitable compensation, to the extent that Dyamond has dissipated the trust fund: see White v Shortall (2006) 68 NSWLR 650 at [269]-[270] (affirmed on other grounds: Shortall v White [2007] NSWCA 372).

94. In principle, Justin and John are entitled to trace their money into any assets acquired by the use of the trust fund, in accordance with the principles of tracing.

95. I will hear from the parties as to the precise orders that should be made against Dyamond in favour of Justin and John. It seems likely that Dyamond has not acquired assets with Justin’s and John’s money that now have value greater than the amounts paid. As Dyamond used Justin’s and John’s money for its own commercial purposes, in principle Justin and John should be entitled to interest on their money. I will hear from the parties as to the basis upon which interest should be ordered to be paid, if that is the remedy that Justin and John seek.

Claim against George

96. Justin’s and John’s Outline of Submissions puts their case against George primarily on the basis that he may be treated as a third party liable in relation to a breach of trust or fiduciary duty if he assisted “…with knowledge in a dishonest and fraudulent design on the part of the trustees…”: Barnes v Addy (1874) LR 9 Ch App 244 at 251-252 (see par 32 of the Outline of Submissions).

97. I do not accept that it is necessary for the Court to treat George as if he can only be liable if the test for when a third party may be liable in relation to a breach of trust or fiduciary duty is satisfied. As George did not actually receive either payment, he could not, in a technical sense, be treated as a trustee of the money. Dyamond was the trustee. However, it should not be ignored that Justin and John made express oral agreements with George as to what would be done with their money, and in fact they trusted George and not Dyamond. As I have explained above, Dyamond only came to their attention in passing as part of the machinery of actually transferring their funds.

98. The proper analysis of the facts of the present case is that George personally was the individual in whom Justin and John reposed their trust, and it was to him that they looked to perform the arrangements that were made. Dyamond was not the intended trustee of the funds, with George only having the role of the director of that company. In reality, George was the one who accepted the equitable obligations of a trustee, but used Dyamond as a company controlled by him as the receptacle for the funds. I consider that Equity will have no difficulty in these circumstances judging George’s liability as if he were the trustee with the primary liability to honour the terms of the trust actually reposed in him in fact.

99. In my view, that is sufficient to impose upon George directly, as a person primarily liable, an obligation to pay each of Justin and John equitable compensation in the same amount as Dyamond, which is strictly a trustee because of its receipt of the funds.

100. In any event, once Justin and John transferred their funds in accordance with the agreement they had made with George, George was then responsible for what was done with the money and his intent and knowledge in relation to the events that followed was relevant.

101. Justin and John submitted that George was liable for Dyamond’s breach of trust on the basis laid down by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, as follows (footnotes omitted):

…

174 Against this background, it has been customary to analyse the requirement of knowledge in the second limb of Barnes v Addy by reference to the five categories agreed between counsel in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA:

(i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

In Bank of Credit and Commerce International (Overseas) Ltd v Akindele (BCCI), Nourse LJ observed that the first three categories have generally been taken to involve “actual knowledge”, as understood both at common law and in equity, and the last two as instances of “constructive knowledge” as developed in equity, particularly in disputes respecting old system conveyancing. After noting that in Royal Brunei the Privy Council had discounted the utility of the Baden categorisation, Nourse LJ in BCCI went on to express his own view that the categorisation was often helpful in identifying the different states of knowledge for the purposes of a knowing assistance case.

175 Although Baden post-dated the decision in Consul, the five categories found in Baden assist in an analysis of that for which Consul provides authoritative guidance on the question of knowledge for the second limb of Barnes v Addy.

176 Thus, support in Consul can be found for categories (i), (ii) and (iii). Further, Consul also indicates that category (iv) suffices. However, in Consul, Stephen J held that knowledge of circumstances which would put an honest and reasonable man on inquiry, later identified as the fifth category in Baden, would not suffice. Gibbs J left open the possibility that constructive notice of this description would suffice. Barwick CJ agreed with Stephen J.

177 The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.

178 These conclusions in Consul as to what is involved in “knowledge” for the second limb represent the law in Australia. They should be followed by Australian courts, unless and until departed from by decision of this Court.

…

102. It follows from the observations that I have made above that I consider that it would be an unnecessary indulgence to George to treat him only as a third party to the breach of trust in this case. However, if that is the proper way to analyse George’s position, I would hold that George had actual knowledge within category (i) in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l'Industrie en France SA [1992] 4 All ER 161 that Dyamond had engaged in a dishonest breach of trust. The dishonesty flowed from the knowing use of Justin’s and John’s money for Dyamond’s own purposes, contrary to the explicit restriction contained in the agreements under which the money was paid to Dyamond.

103. It is unnecessary for the Court to consider any other basis for George’s personal liability that has been suggested by Justin and John.

Claim against Gaks

104. By the amended statement of claim, both Justin (prayer 2) and John (prayer 4) claim declarations that Gaks is liable to account to them for an amount of $100,000. They also claim, in prayer 5, that Gaks is liable to repay the sum of $100,000 to each of them.

105. In their pleading, Justin and John allege that Dyamond held the funds paid to it on trust, and that George had accessorial liability for Dyamond’s breach of trust.

106. As has been explained above during the analysis of the pleadings, in pars 31 to 36 allegations are made concerning what was done with Justin’s $100,000, and the conclusion alleged is that his money was used by Dyamond to buy shares in Zyber, and that those shares remain owned by Dyamond, although they have been transferred into a different account in its name. George confirmed in cross-examination that Dyamond still held the Zyber shares (T 49.9-.39).

107. The only involvement of Gaks that is alleged in the amended statement of claim is its receipt, in fact on 27 May 2018, of 19,500,000 shares in PMY for nil consideration. As pleaded in pars 37 to 39, some of the money paid to Dyamond by John was used to purchase some of these PMY shares.

108. For the reasons that I have given above, John has succeeded in proving that the whole 19,500,000 shares were transferred without any consideration flowing from Gaks to Dyamond.

109. That finding may be useful for John in any tracing exercise that may be undertaken in relation to the consequences of Dyamond’s breach of trust in the use to which it put his money.

110. I do not understand that Justin’s and John’s amended statement of claim pleads any claim whereby Gaks, which was relevantly a third party to any breach of trust engaged in by Dyamond, could be liable to Justin and John as an accessory to the conduct of Dyamond to pay to them the whole of the $100,000 that they each invested.

Conclusion

111. I will invite the parties to bring in short minutes of order to give effect to these reasons for judgment, and to make provision for the further conduct of these proceedings. That should preferably be done within 14 days of the publication of these reasons. The parties may send any agreed short minutes of order to my Associate, and if agreement cannot be reached, relist the matter by arrangement with her so that it can be given further consideration by the Court.

112. Justin and John are entitled to their costs of the proceedings to date from the defendants. I will hear Justin and John as to the basis upon which the costs should be paid.

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Decision last updated: 18 April 2019