Re-Engine Pty Ltd (in liq) v Fergusson

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 8029 of 2004

RE-ENGINE PTY LTD (in liquidation) (ACN 006 773 986)	First Plaintiff
and
ADRIAN BROWN and GEORGE GEORGES (Joint and Several Liquidators of RE‑ENGINE PTY LTD (in liquidation) (ACN 006 773 986)	Second Plaintiff
v
MICHAEL ALLAN FERGUSSON	First Defendant
and
MARGARET MARIE FERGUSSON	Second Defendant
and
DELLA COURT PTY LTD	Third Defendant

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JUDGE:	DODDS-STREETON J
WHERE HELD:	Melbourne
DATE OF HEARING:	1, 5 and 6 February 2007
DATE OF JUDGMENT:	9 March 2007
CASE MAY BE CITED AS:	Re-Engine Pty Ltd and anor v Fergusson and ors
MEDIUM NEUTRAL CITATION:	[2007] VSC 57

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BANKRUPTCY – Bankruptcy Act 1966 (Cth), ss.58(3), 134, 178 – whether bankrupt defendant has locus standi where trustee in bankruptcy declines to defend but does not object to bankrupt appearing – Court’s discretion to allow audience to promote administration of justice.

Collier v Hicks
Cummings v Claremont Petroleum NL
Flower & Hart (a firm) v White Industries (Qld) Pty Ltd
Hubbard Association of Scientologists International v Anderson and Just (No. 2)
Re Manella; Ex parte Official Trustee in Bankruptcy v Giorgio
O’Toole v Scott

CORPORATIONS – Corporations Act 2001 (Cth), ss.180, 181, 182 – Breach of director’s statutory and equitable duties to plaintiff company – Breach of fiduciary duty – Misleading and deceptive conduct – Fair Trading Act 1999 (Vic), ss.9, 145, 159 – Whether defendant company controlled by director liable under the rule in Barnes v Addy or as accessory to statutory contravention – Whether defendant company received trust property pursuant to first limb of rule in Barnes v Addy – Whether knowledge of director imputed to company – Accessorial liability – Whether dishonest assistance of fiduciary breaches – Whether company advanced or facilitated director’s breaches of duty or was knowingly involved in statutory contravention.

Barnes v Addy

Beach Petroleum NL v Abbott Tout Russell Kennedy

Brinks Ltd v Abu-Saleh (No. 3)
Brown v Bennett
Compaq Computer Australia Pty Ltd v Howard Merry & Ors
Courtney Polymers Pty Ltd v Deang

Dubai Aluminium Co Ltd v Salaam

El Ajou v Dollar Land Holdings plc
Giumelli v Giumelli
Grupo Torras SA v Al-Sabah (No. 5)
Hamilton v Whitehead
Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd
Lennard’s Carrying Company Ltd v Asiatic Petroleum Company Ltd

Linter Group Ltd (in liq) v Goldberg & Ors
Lipkin Gorman v Karpnale Ltd

Lurgi (Aust) Pty Ltd v Ritzer Gallagher Morgan Pty Ltd
National Australia Bank Ltd v Rusu
NIML Ltd v Man Financial Australia Ltd
Royal Brunei Airlines Sdn Bhd v Tan
Say-Dee Pty Ltd v Farah Constructions Pty Ltd
Tableau Holdings Pty Ltd v Joyce

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr A. Segal	Herbert Geer & Rundle
For the First and Second Defendants	Appeared in person
For the Third Defendant	Unrepresented

TABLE OF CONTENTS

Introduction

The Plaintiffs’ Allegations

Amended Defence

Status of the Defendants

Della Court Pty Ltd
The bankrupt defendants

The Plaintiffs’ Evidence

The Evidence of Mr Parker
Evidence of Mr Sadler
Evidence of Mr Fergusson

Application

Conclusion

HER HONOUR:

Introduction

In this proceeding, by an amended statement of claim filed with leave granted on 1 February 2007, the first plaintiff, Re-Engine Pty Ltd (in liquidation) (“Re-Engine”), and the second plaintiffs, Adrian Brown and George Georges (the liquidators of Re-Engine), allege that the first defendant, Mr Michael Fergusson, the second defendant, Mrs Margaret Fergusson (collectively, “the Fergussons”) and the third defendant, Della Court Pty Ltd (“Della Court”), are liable to account for funds advanced by the ANZ Bank to Re-Engine pursuant to a breach of fiduciary duty by Mr Fergusson and subsequently misapplied.

Mr Fergusson was a director and secretary of Re-Engine from 4 June 1987 to 11 August 2004. Mrs Fergusson was a director of Re-Engine from 4 August 1989 to 11 August 2004. Mr Bruce Robert Parker and Mrs Gail Parker were also directors of Re-Engine from September 1992 to 11 August 2004. On 20 August 2004, Re-Engine was placed in voluntary administration. On 16 September 2004, it was wound up and the liquidators were appointed.

The third defendant, Della Court Pty Ltd (“Della Court”), a company of which the Fergussons were directors from 1982 until 12 August 2004, acted as the trustee of the Fergusson Family Trust. Mr Fergusson was reappointed a director of Della Court on 12 October 2006. The plaintiffs allege, and it is not disputed, that Mr Fergusson at all material times controlled and directed Della Court’s activities.

On 8 December 2006, Mr and Mrs Fergusson were made bankrupt on their own petition.

The Plaintiffs’ Allegations

The plaintiffs allege that Mr Fergusson breached his fiduciary and statutory duties owed as a director of Re-Engine pursuant to ss.180, 181 or 182 of the Corporations Act 2001 (Cth) (“the Act”) in that, without the knowledge or consent of any other directors of the plaintiff save for Mrs Fergusson, he caused Re‑Engine to apply for, and receive, advances totalling $1,800,709.85 pursuant to its ANZ International Trade Facility (“the Facility”) on at least 63 occasions during the period from 6 June 2002 to 12 August 2004, of which $388,361.79 was not paid to Re-Engine or applied for its legitimate purposes.

The plaintiffs allege that the Facility was established for the purpose of funding Re‑Engine’s purchase of low kilometre engines outside Australia, for re-sale in the course of business, and that its only permissible purpose was funding international trade. They further allege that although Re-Engine had ceased to purchase low kilometre engines outside Australia by July 2002 at the latest, Mr Fergusson, in breach of duty, caused Re‑Engine to continue to apply for, and draw down, funds on the Facility.

The plaintiffs further allege that Mr Fergusson caused the false purpose of acquisition of used engines overseas to be stated in Re‑Engine’s applications for the advances on the Facility and, after the ANZ introduced a requirement for written evidence of the purpose of an advance, he knowingly caused false invoices to be prepared and supplied to the ANZ, in order to induce it to continue making advances. It is alleged that, but for the false statements of purpose on the applications and the false invoices, the ANZ would not have made the advances to Re-Engine.

The plaintiffs further allege that Mr Fergusson breached s.9 of the Fair Trading Act 1999 (Vic) (“Fair Trading Act”) by his misleading and deceptive conduct in:

(a)representing to the ANZ that the funds advanced on the Facility were to be used for the purpose of purchasing second-hand engines overseas;
(b)failing to disclose that Re-Engine had ceased to purchase such engines from about June 2002; and
(c)failing to disclose that Re-Engine did not acquire stock or assets for use in trade with the advances (save for the amounts derived from the advances which were paid into its account).

The plaintiffs allege that the funds drawn on the Facility were advanced to Re‑Engine outside Australia in the form of Japanese Yen. A proportion of the amount advanced to Re‑Engine was then remitted by persons in Thailand to Australia in Australian dollars. The remittances to Australia were made:

(a)directly to the account of Re-Engine; or
(b)to the joint bank account of Mr and Mrs Fergusson; or
(c)to the bank account of Della Court.

Although a proportion of the funds remitted from Thailand to the bank accounts of the Fergussons or Della Court was then paid to Re‑Engine, a proportion of those funds was not paid to Re‑Engine.

The plaintiffs allege that:

(a)a total of $645,406.00 of the traceable proceeds of the advances to Re-Engine on the Facility was paid into the joint account of Mr and Mrs Fergusson; a total of $519,960.89 was then paid to Re‑Engine and a total of $125,445.11 was not paid to Re-Engine.
(b)A total of $659,269.36 of the traceable proceeds of the advances to Re-Engine on the Facility was paid into Della Court’s account. A total of $588,577.34 was then paid to Re-Engine and a total of $70,712.02 was not paid to Re-Engine;
(c)a proportion of the funds advanced to Re-Engine on the Facility (totalling $192,204.66) was not remitted to Australia at all.

The plaintiffs allege that, by his conduct, Mr Fergusson caused Re-Engine to incur debts to the ANZ through the Facility which were not for the permitted purpose, and also exposed Re-Engine to potential losses on the transactions through international currency fluctuations. The total loss and damage claimed is $388,361.79, which is the total amount drawn on the Facility, but not paid to Re‑Engine (whether directly or indirectly). The amount claimed has been adjusted to reflect movements in the exchange rate.

The plaintiffs allege that Della Court knew of the circumstances of Mr Fergusson’s breaches of director’s and fiduciary duties owed to Re-Engine, and that, by reason of permitting the use of its bank account in the manner alleged, Della Court knowingly and dishonestly assisted the breaches of duties.

It is further alleged that Della Court was knowingly concerned in Mr Fergusson’s contravention of s.9 of the Fair Trading Act.

Section 9 of the Fair Trading Act provides:

(1)A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
(2)Nothing in the succeeding provisions of this Part is to be taken as limiting by implication the generality of sub-section (1).

Section 145 of the Fair Trading Act provides:

“A reference in this Division to a person involved in a contravention of this Act means a reference to a person who-
(a)has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c)has been in any way, directly or indirectly, knowingly concerned in or party to, the contravention;
(d)has conspired with others to effect the contravention.”

Section 159(1) of the Fair Trading Act provides:

“A person who suffers loss, injury or damage because of a contravention of a provision of this Act may recover the amount of the loss or damage or damages in respect of the injury by proceeding against any person who contravened the provision or was involved in the contravention.”

It is alleged that Re-Engine has suffered loss and damage and that, to the extent to which Della Court retained or used funds in the sum of $70,712.02, it holds that sum on constructive trust for Re-Engine. Further, it is alleged that by reason of its dishonest assistance and knowing involvement in Mr Fergusson’s breaches of fiduciary duty and statutory contraventions, Della Court is liable for the entire loss and damage sustained by Re-Engine by reason of those breaches and contraventions.

The plaintiffs also allege that Mr Fergusson breached his duties by failing to cause Re‑Engine to keep, maintain and retain sufficient books, records and accounts. At trial, that claim was not pursued.

The plaintiffs also allege that Mr Fergusson is liable to repay $816,111.09 for insolvent trading pursuant to s.588M of the Act. At trial, that claim was not pursued.

The plaintiffs also allege that Mrs Fergusson is liable to repay $816,111.09 for insolvent trading pursuant to s.588M of the Act. At trial, that claim was not pursued.

Amended Defence

By an amended defence dated 5 June 2006, the defendants admit the existence of the Facility and admit that its initial purpose was to permit the purchase of engines outside Australia.

The amended defence admits that Re-Engine ceased to import engines from Japan, but alleges that the continued use of the Facility was permitted, so that it could be used when such import recommenced.

The defendants admit that Mr Fergusson was a director and secretary of Della Court from 5 February 1982 until 12 August 2004 and that he, at all material times, controlled and directed its activities.

The defendants also admit that “the bulk of the funds advanced in the Period by the ANZ were remitted to Australia from persons in Thailand by payment into the accounts alleged…”

The defendants admit that the bulk of the funds remitted to the bank accounts of the Fergussons or Della Court during the relevant period was paid to Re-Engine, but say that the funds not paid to Re-Engine were used to pay expenses of Re-Engine or were drawings set‑off against Mr Fergusson’s loan account, or in payment of wages or other entitlements due to the Fergussons. The defendants also admit that some funds were not remitted from Thailand to Australia, but say that the amount not remitted was expended on agents’ fees, interest, bank charges and fees caused by exchange rate fluctuations.

Status of the Defendants

On 8 December 2006, Mr and Mrs Fergusson became bankrupt on their own petitions.

Section 58(3) of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act“) provides:

“Vesting of property upon bankruptcy – general rule
…
(3)Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a)to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b)except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”

The plaintiffs are therefore precluded, pursuant to s.58(3) of the Bankruptcy Act, from taking any further step in the proceeding against the Fergussons without the leave of the Court.

At trial, the plaintiffs, however, sought to pursue their claim against Della Court only.

Della Court Pty Ltd

Immediately prior to the bankruptcy on 8 December 2006, Mr Fergusson was the sole director and shareholder of Della Court.

On 8 December 2006, Mr Fergusson was removed as a director of Della Court pursuant to the combined effect of ss.206A(2) and 206B(3) of the Act.

Mr Fergusson’s trustee in bankruptcy was empowered to appoint a director of Della Court in place of Mr Fergusson. By an email to the plaintiffs’ solicitors dated 24 January 2006, the trustee in bankruptcy advised that it declined to exercise its power to appoint a director to Della Court due to a lack of funds and the absence of any perceived benefit to the creditors of the estate.

In such circumstances, it appeared that Della Court was without a “directing mind or will”[1] or any person capable of deciding whether or not it should attend, or obtain representation at, the trial, so that any judgment obtained against it could be subject to an application to set it aside pursuant to Rule 49.02(3) of the Supreme Court (General Civil Procedure) Rules 2005 (“Supreme Court Rules”).
[1]Lennard’s Carrying Company Ltd v Asiatic Petroleum Company Ltd [1915] AC 705 at 713; [1914-15] All ER 280.

A further associated difficulty was that the Court had no information about Della Court’s financial affairs or any claims by its creditors, beneficiaries or other potential claimants. There was no evidence that any step had been taken to notify such claimants of the present proceeding.

Further, a recent company search of Della Court provided to the Court indicated that an application to deregister Della Court pursuant to s.601AA of the Act was lodged on 11 December 2006. The application under s.601AA of the Act required, inter alia, a declaration that the company was not a party to any legal proceeding and had no outstanding liabilities.

The plaintiffs tendered an application made under s.601AA to deregister Della Court, which was lodged with ASIC on 11 December 2006. The application was apparently completed and signed by Mr Fergusson, as a director and applicant. The application declared, incorrectly, that the company was not a party to any legal proceedings.

The plaintiffs sought to proceed with the trial and elected to abide any consequence of Della Court’s lack of a director entailed by Rule 49.02(2) of the Supreme Court Rules.

The bankrupt defendants

At the outset of the trial, Mr and Mrs Fergusson attended. Neither Mr Fergusson nor Mrs Fergusson is legally qualified. Mr Fergusson expressed a desire to participate in the proceeding and to present his version of events. He produced an email from the trustee in bankruptcy stating that the trustee did not object to him appearing, on condition that he informed the Court of his bankruptcy. The matter was stood down to permit consideration of Mr Fergusson’s standing and to enable him to obtain independent legal advice about the risks and potential consequences involved in his giving evidence, making submissions or asking questions of the plaintiffs’ witnesses. Mr Fergusson had been subject to an examination by the liquidator of Re-Engine, to which privilege against self‑incrimination applied.

Following the adjournment, Mr Fergusson stated that he had received independent legal advice on the consequences of participating and giving evidence in the proceeding and wished to do so. The Court reiterated the warning against self‑incrimination.

The plaintiffs contended that Mr Fergusson should not be granted leave to be heard. Mr Segal, counsel for the plaintiffs, in very helpful written and oral submissions, contended that Mr Fergusson had no remaining interest in the proceeding, no standing and no entitlement to be heard, because, as a bankrupt, he was neither liable for the claims made in the proceeding nor had any interest in any property against which the plaintiffs’ claims could be satisfied should they succeed at trial.

In order to succeed against Della Court, the plaintiffs must establish that Mr Fergusson breached his fiduciary and statutory duties by causing Re-Engine to apply for advances on the basis of false statements of purpose and false invoices, in circumstances where a proportion of the advances either remained overseas or were remitted to the Fergussons or Della Court, but were not paid in full to Re-Engine.

Mr Segal submitted that, although Mr and Mrs Fergusson are defendants in the proceeding, due to their bankruptcy on 8 December 2006, no further step may be taken against them without leave and no relief was sought against them in the proceeding. He contended that, in such circumstances, only the Fergussons’ trustee in bankruptcy, who had elected to play no part in the proceeding, had the right to be heard.

Mr Segal relied, in this context, on Cummings v Claremont Petroleum NL[2] (“Cummings”) and cases referred to in that decision. In Cummings, two bankrupts sought to appeal against a judgment obtained against them prior to their bankruptcy. The bankrupts had been defendants in the proceeding and the judgment against them was a debt provable in their bankruptcies. The proceeding in which the judgment was obtained involved allegations of breach of fiduciary duty, fraud and deceit against the bankrupts.
[2](1995) 185 CLR 124.

Brennan CJ and Gaudron and McHugh JJ, in a joint judgment, recognised that, as the judgment was a debt provable in bankruptcy, the judgment creditors were confined to the right to prove against the property of the bankrupts’ estates, which had vested in the trustee in bankruptcy. The bankrupts no longer had any interest in that property, nor any personal liability for the judgment debt. Their Honours did not consider that a contingent interest in any surplus in the bankrupt’s estates would confer such an interest.

They acknowledged that where a bankrupt was a defendant, rather than a plaintiff, the cause of action did not vest in the trustee, but they considered that because the property answerable to the claim did vest in the trustee, the bankrupt had no interest in the proceedings. They concluded that:

“[t]he bankrupt has no financial interest which would confer locus standi to appeal in his own name against the judgment. That is because it is fundamental to the law of bankruptcy that the bankrupt is divested of both his interest in his property and liability for his provable debts.”[3]

[3]At 137-138.

Their Honours also noted that under s.134(1)(j) of the Bankruptcy Act, the trustee in bankruptcy had the right to institute an appeal relating to the administration of the estate. They also acknowledged that because the judgment in question might reflect on the personal or professional character of the bankrupts, there was a potential injustice, in that it was left wholly to the discretion of the trustee in bankruptcy to preserve the bankrupt’s personal or professional character. That potential injustice, in circumstances where a trustee declined to exercise the power to sue or to appeal against a judgment, could be addressed by the Court’s power under s.178 of the Bankruptcy Act to make such orders it thought just and equitable. Their Honours observed, however, that the availability of relief under s.178 would usually depend on the trustee’s costs being met from sources other than the bankrupt’s estate.

Dawson and Toohey JJ, in a joint judgment, also held that the bankrupts could not appeal, on the basis that the right of appeal was property which vested in the trustee in bankruptcy within the definition in the Bankruptcy Act.

Mr Segal also relied on authorities which indicate that a bankrupt defendant has no locus standi or entitlement to be heard.

In Bendigo Bank v Demaria,[4] the defendant mortgagor in an action for possession of mortgaged property was made bankrupt prior to the trial of the proceeding. The defendant, by a counterclaim, alleged that the mortgage was unenforceable. An order was made that the defendant’s trustee in bankruptcy be added as a defendant.
[4][2001] VSC 218.

McDonald J considered that the bankrupt had no interest in the land subject to the mortgage and therefore, no interest in the proceeding for the recovery of the land. The defendant consequently had no standing to be heard, nor to continue to defend.

In Farrow Mortgage Services Pty Ltd v Winfield,[5] Master White held that bankrupt defendants had no standing to be heard in an action to recover possession of land, in circumstances where the trustees in bankruptcy declined to defend the action. Master White acknowledged the apparent dearth of authority on the question of a defendant bankrupt’s status and entitlement to be heard.
[5][1992] 2 Qd R 282.

None of the cases on which the plaintiffs rely involved precisely the same facts as the present case. In the present case, in contrast to Cummings, there is no attempt by a bankrupt to institute an appeal. It is a trial of a proceeding brought against the bankrupts and their family company, which will proceed, and give rise to some costs, whether or not Mr Fergusson is permitted to be heard.

The present case is also distinguishable from Bendigo Bank v Demaria and Farrow Mortgage Services Pty Ltd v Winfield, because the plaintiffs, in order to obtain the relief sought against Della Court, must establish that Mr Fergusson committed serious breaches of fiduciary or statutory duty and was guilty of misleading and deceptive conduct. The allegations have a potential impact on his character and reputation, in which he has a continuing interest.

Although no authority precisely on point was identified, some guidance is offered by cases on fraudulent dispositions under the Bankruptcy Act, in which the trustee in bankruptcy issued proceedings against third parties to recover allegedly fraudulent dispositions by the bankrupt.

In such actions, the bankrupt had no interest in the property subject to the trustee’s claims, nor any standing to bring the action, but it was recognised that the bankrupt should be made a party.

In Re Manella; Ex parte Official Trustee in Bankruptcy v Giorgio[6] (“Re Manella”) Sweeney J referred to Re Barnes; Ex parte Stapleton[7] and endorsed the fact that in that case, the bankrupt had been made a respondent to a fraudulent disposition proceeding instituted by the trustee in bankruptcy.
[6](1989) 21 FCR 50.
[7][1962] Qd R 231.

In Re Manella, the bankrupt was not initially made a party to the proceeding. Sweeney J stated that the problems which had arisen:

“shows the wisdom of making a bankrupt a respondent in a case such as the present.”[8]

[8]At 53.

He noted that, in addition to other advantages,

“In such cases, where the trustee bears the burden of proof that there was actual fraud, that is an actual intention by the bankrupt to defraud creditors, it will be of assistance to the court if the trustee makes him a party so that, if he has an answer to the allegation, he may have an opportunity of presenting it.”[9]

[9]At 53.

The bankrupt was then added as a party, swore affidavits and was cross‑examined.

In Flower & Hart (a firm) v WhiteIndustries (Qld) Pty Ltd[10] (“Flower & Hart”) the Full Court of the Federal Court considered that if a defendant’s alleged improper purpose depended on an anterior finding that another person (who was not a party) also had an improper purpose, procedurally, it would be unsafe to make findings of improper purpose against that non‑party without the matters on which the findings were based being fairly put to him, so as to provide him with an opportunity to explain his position. In Flower & Hart, the non-party was a witness in the proceeding who had sworn an affidavit, but the allegations about his own improper purpose had not been put to him in cross-examination.
[10][1999] FCA 773.

Further, it is well established that the Court has a wide discretion to grant leave to any person to address it. In Hubbard Association of Scientologists International v Anderson and Just (No. 2) (“Hubbard Association of Scientologists“),[11] Gowans J, delivering the judgment of the Full Court, stated:

“The true position would appear to be that the general rule is that any court can, in the exercise of control over its own proceedings, allow itself to be addressed in a proper case by any person it considers a proper person to be allowed audience.”[12]

[11][1972] VR 340.

[12]At 342.

His Honour relied, inter alia, on the observations of the Full Court in McGrath v Dobie[13] and of Lord Tenterden CJ in Collier v Hicks,[14] where his Lordship stated:

“ … but whether any persons, and who shall be allowed to take part in the proceedings, must depend on the discretion of the magistrates, who, like other judges, must have the power to regulate the proceedings of their own courts.”

[13](1890) 16 VLR 646.

[14](1831) 2 B & Ad 663.

Gowans J also relied on the statement of their Lordships of the Privy Council in O’Toole v Scott[15] that:

“ … the discretion is not conferred by statute, but is an element or consequence of the inherent right of a judge or magistrate to regulate the proceedings in his court. There is no reason in principle for limiting the discretion as suggested. It can be exercised either on general grounds common to many cases or on special grounds arising in a particular case. Its exercise should not be confined to cases where there is a strict necessity; it should be regarded as proper for a magistrate to exercise the discretion in order to secure or promote convenience and expedition and efficiency in the administration of justice.”

[15][1965] AC 939 at 959.

In Hubbard Association of Scientologists, the Full Court declined to exercise the discretion in order to permit a legally unqualified agent to appear on behalf of a company.

In the present case, the allegations against Mr Fergusson involve breach of fiduciary duty, the creation of false invoices, contravention of the Fair Trading Act, and dishonesty. Although he has no interest in any property which will be available to satisfy the plaintiffs’ claim, is not now personally liable to satisfy the plaintiffs’ claim, and no further steps may be taken against him in the proceeding without leave by reason of his bankruptcy, Mr Fergusson is already a party and has not ceased to be such by virtue of his bankruptcy. The plaintiffs must establish the allegations of serious misconduct against Mr Fergusson in order to succeed against Della Court. Mr Fergusson has a subsisting interest in the preservation of his reputation and character. His trustee in bankruptcy did not object to his appearance.

Although the authorities indicate that a bankrupt does not have locus standi or an entitlement to be heard, the Court has a discretion to permit Mr Fergusson to give evidence in answer to the allegations.

In the unusual circumstances of this case, it would, in my view, promote the due administration of justice to permit Mr Fergusson to be heard, because the principles of natural justice favour giving him audience to answer the serious allegations of personal misconduct, the trustee in bankruptcy does not object to his participation, the trial will proceed in any event, the Court may be assisted by a contradictor and the bankrupt defendant’s participation will not impose an undue costs burden on other parties.

The Plaintiffs’ Evidence

Mr Adrian Lawrence Brown, a chartered accountant and joint liquidator of Re‑Engine, was appointed joint and several administrator of Re-Engine with Mr George Georges on 20 August 2004. The administrators were appointed joint liquidators of Re-Engine on 16 September 2004.

Mr Brown deposed that, on his examination of the books of Re-Engine, he found that the most basic physical accounting records were missing. At trial, he testified that, on his appointment, he called for Re-Engine’s books and records, but located only some management accounts and a computer which contained some accounting, which he considered unreliable. The essential business records of Re‑Engine were missing. Mr Brown testified that Mr Fergusson, when questioned about the missing records, stated that they had been removed after he “shut the doors” of the business and he did not know their whereabouts.

Mr Brown testified that he never, at any stage, located the books and records of Re‑Engine. He obtained records and bank statements from the ANZ in relation to the bank accounts of Re-Engine, Della Court and the Fergussons and documents from the Customs Department, which he reviewed and analysed. His conclusions about Re‑Engine’s activities, the operation of the Facility and the disposition of the funds advanced, were based on his review and analysis of the documents and records he obtained, and on statements made by Mr Fergusson.

Mr Brown deposed as follows:

“Between April 2002 and mid August 2004, ANZ Bank made an International Trade Facility available to Re-Engine. Between that period, Re-Engine would, from time to time, make an application for an advance in the form of payments in Japanese yen to persons outside Australia. Based on the review which was conducted of the material, Re-Engine made at least 63 applications for advances under the International Trade Facility.
Upon receipt of the application, ANZ Bank would advance the funds which had been requested. The funds were repayable in Australian dollars by Re‑Engine after 180 days by direct deduction from Re-Engine’s ANZ Bank account 013-433 3058-41564, which had an overdraft facility.
The purpose of the International Trade Facility was to enable Re-Engine to purchase, by way of advances of funds, low kilometre engines outside Australia for re-sale in the course of its business. However, Re-Engine had ceased to purchase low kilometre engines from outside Australia by about April 2002 and definitely by 6 June 2002.”

Mr Brown deposed that, based on the relevant records and bank statements, an analysis was conducted by Mr Birnbaum of Ferrier Hodgson, under Mr Brown’s close supervision, tracking the application of the funds. The results were set out in a spreadsheet exhibited to Mr Brown’s affidavit. The forensic accounting analysis was subject to the assumptions set out in his witness statement as follows:

“The spreadsheets also state the assumptions which I instructed David to apply when making the calculations. In particular:
a.Dates have been used to match the advances with deposits into M+M Fergusson, Della Court, Re-Engine Account number 013‑433 3058 41564 (‘Re-Engine 1’) and Re-Engine Account number 013-642 1107 64159 (‘Re-Engine 2’).
b.Cheques that have the same amount and were deposited in one account on or around the time the cheque was drawn from another account are presumed to match.
c.No other accounts were used apart from M+M Fergusson, Della Court, Re-Engine 1 and Re-Engine 2 accounts.
d.Exchanges from JPY to AUD are based no the rates provided by the RBA for the relevant date.
e.Any interest or other charges which have not been included in withdrawals or deposits directly have not been accounted for.”

Mr Brown further deposed:

“From my analysis of the relevant documents, I discovered that Re-Engine was continuing to roll over the International Trade Facility granted by the ANZ Bank to Re-Engine for the purpose of purchasing second-hand engines from Japan in circumstances where no second-hand engines were purchased. The ANZ Bank was making advances under the International Trade Facility in Japanese Yen and that these funds were going to an account in Thailand in name of Subhop Chuenchum. Within one day or a few days after each advance, the funds was [sic] usually then remitted to Australia in Australian dollars by payment into one of the M+M Fergusson, Della Court and Re-Engine 1 accounts. I have checked Re-Engine 2 and found that no monies were remitted directly into that account. However, not all of the funds which were advanced by the ANZ Bank were remitted to Australia from Thailand. Nevertheless, the cost of the facility increased Re-Engine’s indebtedness to the ANZ Bank.
Based on the analysis, ANZ Bank advanced $1,800,709.85 to Re-Engine after 6 June 2002. Of that amount:
a.$659,269.36 was remitted to the Della Court bank account of which $588,557.34 was paid to Re-Engine. This left the amount of $70,712.02 which was not repaid to Re-Engine;
b.$645,406.00 was remitted to the M+M Fergusson bank account of which $519,960.89 was paid to Re-Engine. This left the amount of $125,455.11 which was not repaid to Re-Engine.
c.$268,898.00 was remitted directly to the Re-Engine 1 bank account; and
d.$192,204.66 was not remitted to any of the accounts referred to above and remained in Thailand.

The difference between the sum of $1,800,709.85 advanced to Re-Engine by the ANZ Bank and the sum of $1,333,761.43 repaid to Re-Engine through the bank accounts of M+M Fergusson and/or Della Court or paid direct into the bank account of Re-Engine was $388,361.79, comprising:
a.The amount of $70,712.02 remitted from Thailand to the bank account of Della Court and not paid to Re-Engine;
b.The amount of $125,445.11 remitted from Thailand to the bank account of M+M Fergusson and not paid to Re-Engine; and
c.The amount of $192,204.66 which was not remitted to the bank account of either M+M Fergusson, Della Court, Re-Engine 1 or Re-Engine 2.”

Mr Brown further deposed:

“I obtained records of Re-Engine listing debts due from 172 clients and I sought payment from the debtors or an explanation of as to reasons why payment was not made I sent 143 letters to debtors [sic]. Through responses from debtors and my enquiries, I concluded, in each case, that no payment was due. A spreadsheet was prepared which summarised all of these debtors, the explanations determined from them as to why payment was not due and those debtors from whom no response was received and those debtors whose details were such that I could not contact them.
Based on the information available to me, the creditors of Re-Engine are calculated as totalling $1,431,175.91 as at the date of this statement.”

Mr Brown deposed to the examination of Mr Fergusson before the Federal Court on 30 September 2004, 1 October 2004 and 15 October 2004. The following exchanges occurred in the course of the examination on 1 October 2004:

“MR CRENNAN [counsel for the liquidator]: Mr Fergusson, what did you tell the bank you were doing with these returns?---Privilege. I didn’t tell them anything.
What did the loan application say?---Privilege. Engine purchases.
Is that the only information you conveyed to the bank about these advances?---Privilege. In July the bank had a change of policy that they had to – they required an invoice with every application so I would get the gentleman in Thailand to raise me an invoice and send it out and then I would use the invoices and run them down.
Does these invoices list out engines and prices?---Privilege. Yes. You have a copy of them.
Did you provide those invoices to the bank?---Privilege. Yes.
Were there any engines?---Privilege. No.
…
MR CRENNAN: Do you have any knowledge about these kinds of ANZ trade and finance loan applications?---Privilege. Yes.
What can you tell us about them?---Privilege. They are what they say, they’re trade finance loans.
That application appears to have been completed by Felicity Wickens. Is that correct?---Privilege. Yes.
Was Felicity Wickens at that time, at the date of this application, an employee of Re‑Engine?---Privilege. Yes.
To your knowledge, did Felicity Wickens complete trade finance loan applications in that period she was working with the company?

---Privilege. Yes, she was instructed to.
Who instructed her to?---Privilege. I did.
Did you discuss with her – no, I’ll withdraw that question. So you had knowledge that these applications were being made. Is that correct?---Privilege. I’ve answered that.
Now, what was it that Re-Engine was applying for when it made this application?---Privilege. I applied for the loans.
Yes, and the loans are expressed to be in Japanese yen. Is that correct?---Privilege. Yes.
What was the purpose of the loan?---Privilege. I was making money out of them.
…
Your evidence in relation to that was that you stopped buying stock?

---That’s right.
When did you stop buying stock?---That’s a pretty difficult question to answer. I hadn’t had a container in 12 months, I can tell you that much, but I can’t tell you prior - - -
When you say you hadn’t had a container in 12 months, which 12 months are you referring to?---I’m talking about 2003-2004 financial year.
So from July 2003 to end of June 2004?---That’s what I said.
Had you ordered any stock in that period in terms of low K engines?

---No, I think I indicated to you yesterday that I was buying it locally.”

Mr Brown deposed:

“By his own admission, Mr Fergusson has confirmed that he directed staff of Re-Engine to apply to the ANZ Bank for advances under the International Trade Facility…, even though Re-Engine had ceased to purchase low kilometre engines outside Australia.
Based on the information obtained from the Customs Service and the admissions made by Mr Fergusson during the examination before the Federal Court, the documents purporting to be invoices for second hand engines from CNX Enterprises Ltd dated 18 June 2004…, 1 July 2004…, and 9 July 2004… are all false. These engines did not exist and were not imported into Australia. The CNX invoices were provided to the ANZ Bank for the purpose of inducing the ANZ Bank into continuing to make advances under the International Trade Facility.”

The Evidence of Mr Parker

Mr Bruce Parker and his wife, Mrs Gail Parker, were directors of Re-Engine from September 1992. While a director of Re-Engine, Mr Parker attended both board and management meetings, but testified that he left the day‑to‑day management of Re‑Engine’s business to Mr Fergusson and relied on the management accounts he produced. Mr Parker had direct contact with the ANZ on minor matters only. Mrs Parker did not attend management meetings.

Mr Parker was also a director of Harold Mulhall Pty Ltd (“Harold Mulhall”) and the managing director of HM Gem Engines Pty Ltd (”HM Gem”), a family trust company, which is a large-scale re-manufacturer of motor vehicle engines operating a core business of retrieving old engines. Another business controlled by Mr Parker is Nason Engine Parts, a wholesale distributor of engine parts.

In 1992, Mr Parker was approached by Mr Fergusson and Mr Prosser (then the sole equal shareholders of Re-Engine) who explained that they imported and sold used engines sourced primarily from Japan.

Mr Parker agreed that Harold Mulhall would acquire Mr Prosser’s share in Re‑Engine. Mr Parker deposed:

“In about late 1992 or early 1993, Mr Fergusson told me that part of the business of Re-Engine involved the use of an international trade facility provided by the Bank for the purchase of used Japanese Engines in containers from Japan. I was familiar with trade finance facilities as HM Gem used such a facility provided by its bank. I was aware that the purpose of such a facility was to allow payment for imported goods on terms so that the goods could be delivered in Australia and sold to enable payment. I understood such a facility to involve very little risk.
…
Because of the development of the HM Gem business prior to and since 1992 when we acquired Mr Prosser’s fifty percent share of Re-Engine, I had neither the intent nor the time available to be involved in the Re-Engine business on a daily basis. I have had absolutely no involvement in the day to day running of that business nor did I ever intend to. I dropped in at the offices of Re-Engine from time to time, perhaps once or twice a year. It was my view that Mr Fergusson had expertise in running the business and certainly he knew the used engine business. That was something that I had limited knowledge of. As such, Mr Fergusson was responsible for the day to day business operations of Re-Engine.
In addition to that, Mr Fergusson agreed to have the external accounts produced by the same accountant that produced the external business accounts for the HM Gem, Nasons business. Mr Fergusson also agreed to produce internal accounts of the business and provide those to me in a timely manner. Mr Fergusson and his staff produced all accounting records and management reports for Re-Engine. The external accountants for HM Gem and for Re-Engine prepared the annual statements of the companies for annual returns.
We had monthly management meetings in relation to Re-Engine, which Mr Fergusson attended. At these meetings, Mr Fergusson presented a management report detailing the profit and loss account [sic] of Re-Engine and setting out its trading figures... I relied on the information in these reports for information about Re-Engine’s trading and financial position.
As previously mentioned, one of my major reasons for taking over Mr Prosser’s share of Re-Engine was to sell HM Gem produced re‑manufactured engines through the Re-Engine business. That commenced immediately after acquiring Mr Prosser’s share.
This course of action proceeded until about 2000 where we started to experience some difficulty in collecting the overdue account from Re-Engine. The payments were consistently late and the amount of debt grew gradually. However part payments of the debt continued to be made up until about July 2004.
Sometime after 2000, Mr Fergusson told me that he was phasing down importation of low kilometre engines so as to reduce inventory. He said that Re-Engine would sell engines which it sourced either from inventory or locally in Australia.
I did not know that Re-Engine was continuing to draw on the international trade facility during 2002, 2003 and 2004. In the period from early 2002 until August 2004, Mr Fergusson never mentioned the international trade facility or showed me any document relating to the international trade facility.
Subsequently, I found out that Mr Fergusson was continuing to use the international trade facility, even though it was not sourcing engines from overseas. This made me extremely angry and upset. If I had known that the international trade facility was being used by Re-Engine for a purpose other than purchasing engines in Japan for re-sale, I would have instructed Mr Fergusson to cease using it for that purpose immediately. I also would have informed the ANZ Bank of what had occurred and I would have sought legal advice.
Further, I would not have consented to Mr Fergusson (or Mrs Fergusson) supplementing his income and benefits by the use of the international trade facility. Mr Fergusson drew a salary from Re-Engine and the amount was discussed and agreed with me in advance. Mrs Fergusson may have done some minor cleaning work for Re-Engine. However, Mr and Mrs Fergusson only received one salary from Re-Engine.
Throughout the time I was involved with Re-Engine as a director, I had only minor dealings with the ANZ Bank in relation to Re-Engine. These dealings were confined to initial meetings in the first few months after the purchase of Mr Prosser’s shares in September 1992, as discussed above. The HM Gem business used the Commonwealth Bank. As far as I was concerned, Mr Fergusson was responsible for all dealings with the ANZ Bank on behalf of Re-Engine. I had no contact with the ANZ Bank in relation to the day to day operations of Re-Engine.
In August 2004, I learnt that Re-Engine was in serious financial trouble. In mid August 2004, Mr and Mrs Fergusson resigned as directors of Re-Engine and I discovered that there were substantial discrepancies between the recorded levels of stock engines and the actual levels of stock engines. Mr Fergusson had also sought to close Re-Engine’s business premises.
After a meeting involving some of my staff and Adrian Brown of Ferrier Hodgson, it was decided that the best thing to do would be to place Re-Engine into voluntary administration. On Friday, the 20^th of August 2004, Re‑Engine went into voluntary administration. After the administration commenced, I found out that the ANZ Bank had granted an overdraft to Re‑Engine in late 2003. I did not previously know of the existence of this overdraft.”

Evidence of Mr Sadler

Mr Glynn Sadler, a bank manager with the ANZ, deposed to the operation of the Facility as follows:

“Re-Engine had an International Trade Facility with the ANZ Bank. The International Trade Facility was set up to enable Re-Engine to purchase low kilometre engines from Japan, which would then be re-sold in Australia. The facility was a rolling facility, so that Re-Engine could apply for an advance of Japanese Yen at any time.
Upon receipt of an application from Re-Engine, in the form of an ANZ Trade Finance Loan Application, Re-Engine would apply for Japanese Yen from the ANZ Bank. If the application was successful, the loan would be repayable, on terms, including a term that the loan be repaid in Australian dollars after 180 days. To repay the loan, the ANZ Bank directly debited the Re-Engine 1 account with the equivalent amount of the advance, in Australian dollars, after 180 days.
In the ANZ Trade Finance Loan Application, there is a section which the customer is required to complete which is headed ‘Covering shipment of … From … To.’ In this section, the customer is required to inform the ANZ Bank which overseas shipment is behind the loan application. The International Trade Facility is designed to cover overseas purchases and shipments to Australia. It is not designed for general loan advances or foreign currency trading.
I note that in each ANZ Trade Finance Loan Application, Re-Engine completed this section with the words ‘Covering shipment of used engines From Japan To Melbourne’.
I understand that Re-Engine stopped purchasing low kilometre engines outside Australia by about April 2002. However, the ANZ Trade Finance Loan applications and other instructions which Re-Engine supplied to the ANZ Bank after this date in order to obtain an advance under the International Trade Facility stated that the purpose of the advance was still to purchase low kilometre engines from Japan. At the time these applications were made by Re-Engine, the ANZ Bank did not know that Re-Engine had ceased importing engines from Japan.
From about June 2004, the ANZ Bank required Re-Engine to provide invoices as supporting evidence before funds would be advanced under the International Trade Facility. Thereafter, the Trade Finance Applications received from Re-Engine included documents purporting to be invoices for second hand engines from CNX Enterprises Ltd dated 18 June 2004…, 1 July 2004…, and 9 July 2004… I understand that these invoices are all false and that the engines did not exist and were not imported into Australia. Had these CNX invoices had not been provided with the Trade Finance Applications, the ANZ Bank would not have made advances under the International Trade Facility.
It was the provision of these invoices and the statement in the loan application documents that the advanced funds would be used to purchase used engines from Japan that enabled funds to be advanced under the International Trade Facility. Had the ANZ Bank been aware that the funds being advanced were not being used to purchase engines from Japan, but for some other purpose, the funds would not have been advanced under the International Trade Facility, as it is not a suitable loan product to be used for any other purpose. For example, the ANZ Bank has a specific product for customers who wish to engage in speculative foreign currency dealings. If that had been the case, the customer would have had to apply for that type of product.”

Mr Sadler further deposed:

“Through enforcement of its securities, the amount which Re-Engine owed to the ANZ Bank has been reduced but not fully repaid. The debt has been classified as a non-accrual debt. This means that although the debt remains owing, the debt is taken off the books and interest on the debt is suspended, but could be calculated if necessary.”

Evidence of Mr Fergusson

Mr Fergusson did not, at any stage, present a clear and comprehensible overview of his response to the plaintiffs’ allegations. Even allowing for the difficulties associated with his lack of legal qualifications, Mr Fergusson’s evidence and submissions were evasive, inconsistent and unclear. He appeared to avoid direct explanations and clear propositions.

He handed up a large quantity of documents but provided no, or no adequate, explanation of their status, origin or the facts that they were intended to establish. The documents included spreadsheets purporting to trace the movement of funds, which had been prepared by Mr Fergusson with the assistance of a family member. Mr Fergusson is not qualified in accountancy or finance. The basis or source of the data used, and the assumptions on which the entries in the documents were based, were not stated.

Although Mr Fergusson asserted that he had discovered all of the above documents in the course of the proceeding, that assertion was not accurate. Mr Fergusson’s discovery in the proceeding was deficient and I accept that, few, if any, of the documents had previously been discovered or otherwise produced to the plaintiffs. Despite Mr Fergusson’s submissions, the meaning and relevance of the documents he produced remained unclear. I did not admit the documents into evidence.

Mr Fergusson was not, in my opinion, an impressive or reliable witness. He conceded that he lodged the application to deregister Della Court in his capacity as a director on 11 December 2006, when, to his knowledge, he had been removed as such by his bankruptcy on 8 December 2006. He contended that he had posted the application on 4 December 2006, prior to his bankruptcy. The application for deregistration stated that the company (Della Court) was not a party to any legal proceedings and had no liabilities. Mr Fergusson had attended directions hearings in the proceeding in November 2006. His explanation that he was uncertain of the status of the proceeding was self-serving and unconvincing. Uncertainty would not, in any event, justify the false assertion made on the application to deregister Della Court.

In cross-examination, Mr Fergusson was unresponsive and evasive.

He made certain statements in the course of his examination by the liquidators in the Federal Court in 2004, to which privilege applied. On cross-examination, he declined to confirm or to answer questions about those statements or admissions.

Mr Fergusson did not expressly deny the plaintiffs’ allegation that the other directors of Re-Engine (save for Mrs Fergusson) had no knowledge of Re‑Engine’s continued use of the Facility after it ceased to buy used engines overseas. He appeared, hwoever, to allege that Mr Parker was aware of the use of the Facility, on the basis that Mr Parker’s company instigated the installation of a sophisticated computer system at Re-Engine’s premises and an employee of a company associated with Mr Parker had remained to assist with its operation. Mr Parker reiterated that he had no knowledge of the continued use of the Facility. I accept his testimony.

Mr Fergusson indicated that he and Mrs Fergusson had advanced loans to Re‑Engine and were owed employee entitlements or wages which they had not drawn. He offered no specific details and conceded that there were no documented loans. He did not dispute Mr Brown’s evidence that the only claims made by the Fergussons were the limited employee claims amounting to about $70,000 set out in the schedule to the amended statement of claim, and that they had never submitted a proof of debt or otherwise given any notice of any loans made to, or other claims against, Re-Engine.

He also conceded that Mr Parker did not consent to Mr and Mrs Fergusson drawing any increased or additional wages.

Mr Fergusson initially testified that an ANZ “relationship manager”, Mr John Coombs, had authorised the continued use of the Facility for uses other than the designated overseas purchases.

Mr Fergusson stated that at a meeting in 2001, inter alia, that he asked Mr Coombs “off the record” for advice as to “what we could do to perhaps readjust the loan basis for the business.”

At trial, he testified that:

“Mr Coombs said, ‘Well, interest rates are around about ten per cent, it’s probably going to cost you in the vicinity of about 40,000, $50,000 a year in interest to run an on shore facility’, he said, ‘Plus I would want a mortgage on your property.’ And I said, ‘Well, I’m not going to give you one because I can tell you Mr Parker is not going to give a mortgage on his property and it’s not going to be an equally shared position so I wouldn’t be interested. He said, ‘Well, perhaps you better just stay using your overseas loan.’ And I said, ‘How am I going to do that?’ And he said, ‘Well, you know how you normally roll over loans, you just keep doing, rolling over your loans and then use your money locally to buy engines locally as you need them until you get back to your importing again’, which is exactly what I did. So we continued on, on this basis for, which I believed was going to be about six months and it ended up being two years, we continued on rolling the loans over.”

The amended defence made no reference to any authority from Mr Coombs to use the Facility for purposes other than the purchase of products overseas. Subsequently, in cross‑examination, Mr Fergusson did not maintain the assertion that Mr Coombs had authorised him to continue using the Facility for purposes other than international importation. Rather, he merely asserted that Mr Coombs told him that the interest rate of the Facility was “very beneficial”

Application

No submissions, evidence or documents placed before the Court or questions put by Mr Fergusson vitiated the credibility of the plaintiffs’ witnesses, whose evidence I accept.

I am satisfied, to the requisite standard, that the funds advanced to Re-Engine on the Facility during the period from June 2002 to 12 August 2004 were applied, and that the proceeds may be traced as Mr Brown deposed, in accordance with the spreadsheet exhibited to his witness statement.

I am satisfied that Re-Engine’s importation of used Japanese engines ceased in or by July 2002, at the latest. I am satisfied that thereafter, Mr Fergusson, in breach of his fiduciary and statutory duties, caused Re‑Engine to continue to apply for advances on the Facility, which, to his knowledge, were restricted to use in international trade, without the knowledge or consent of Mr and Mrs Parker. I am satisfied that Mr Fergusson, in breach of duty and in contravention of s.9 of the Fair Trading Act, caused the applications to the ANZ for advances on the Facility and invoices supporting such applications, falsely to state or indicate that the advances were for the purpose of acquiring goods overseas for importation. I am satisfied that Mr Fergusson did not disclose to the ANZ that Re‑Engine had ceased to purchase used engines overseas from July 2002 and that the advances were being used for other purposes. I am satisfied that the ANZ would not have made the advances on the Facility if it had been aware that the advances were not being used for the stated purposes. I am satisfied that Re‑Engine became liable to the ANZ under the Facility for a total of $388,361.79, which was neither paid to it nor applied to its legitimate purposes.

The plaintiffs, being precluded from taking further steps against either Mr or Mrs Fergusson due to their bankruptcy, seek to recover from Della Court not only the $70,712.02 received in Della Court’s bank account but not paid to Re‑Engine, but the entire sum of $388,361.79 for which Mr Fergusson is liable by reason of his breaches of fiduciary duty and statutory duty and contravention of s.9 of the Fair Trading Act.

The plaintiffs submit that Della Court is liable to account for the total loss and damage occasioned by the fiduciary’s breaches of duty and contraventions, on the basis of accessorial liability for dishonest assistance in the breaches and knowing involvement in the statutory contraventions.

It is established that a stranger who is not himself a trustee, company director or other fiduciary, may be liable to account as if he were a trustee or fiduciary where he has irregularly received trust or company property or has assisted or participated in a breach of trust or fiduciary duty. This category of constructive trust is founded on Lord Selbourne LC’s famous enunciation of liability in Barnes v Addy,[16] where he observed:

“But on the other hand, strangers are not to be made constructive trustees merely because they act as agents of trustees in transactions within their legal powers … unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent scheme on the part of the trustee.”[17]

[16](1874) LR 9 Ch App 244.

[17]At [251]-[252].

As amplified by subsequent case law, the rule in Barnes v Addy posits two limbs of a liability imposed on a stranger, the elements of which have shifted over time but which may, for present purposes, currently be stated as follows:

1.liability for the irregular receipt or dealing with trust or company property (“the first limb of Barnes v Addy”);
2.liability for dishonest assistance in a breach of trust or fiduciary duty (“the second limb of Barnes v Addy”).

There has been considerable judicial and academic uncertainty about the relationship and the potential overlap of the receipt and assistance limbs of Barnes v Addy and the necessary elements of liability under each limb.

Although there is no High Court authority on the receipt limb, it appears clear that it is unnecessary to establish dishonesty on the part of the recipient. Further, the recent New South Wales Court of Appeal decision in Say-Dee Pty Ltd v Farah Constructions Pty Ltd (“Say-Dee”)[18] indicates that the conceptual basis of liability for receipt is unjust enrichment, so that it is also unnecessary to establish that the stranger had knowledge, whether actual or constructive, of the breach of trust or fiduciary duty.
[18][2005] NSWCA 309.

In Say-Dee, the New South Wales Court of Appeal acknowledged that while liability for the first limb of Barnes v Addy did not depend on dishonesty, its conceptual basis remained a matter of controversy. Their Honours referred to the three principal possible rationales analysed by Hansen J in Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd;[19] namely, the property approach, the conscience approach and the restitutionary approach.
[19][1998] 3 VR 16.

Their Honours observed:

“What is presently important with respect to the differences between these approaches is that, under the first, the recipient must have notice or knowledge of the beneficiary’s interest and, under the second, must be guilty of unconscientious conduct which itself implies some level of knowledge. It is only under the third that actual or constructive knowledge that the property has been received in breach of the fiduciary’s duty is unnecessary.”[20]

[20]At [218].

The restitutionary approach to recipient liability is based on the law of restitution and unjust enrichment. It implies strict liability, subject to defences such as bona fide purchase, or a change of position which would entail injustice to the innocent recipient. The Court of Appeal in Say-Dee endorsed Hansen J’s preference for the restitutionary approach to recipient liability, which had also been favoured by Harper J in NIML Ltd v Man Financial Australia Ltd,[21] by Bryson J in National Australia Bank Ltd v Rusu[22] and by academic commentators such as Professor Peter Birks.
[21][2004] VSC 449.
[22][2001] NSWSC 32.

In the absence of any High Court authority, the New South Wales Court of Appeal bit “the proverbial bullet” and adopted the restitutionary “Birks/Hansen” approach to liability under the first limb of Barnes v Addy.

Given that Della Court received the sum of $659,269.36, being the traceable proceeds of a breach of fiduciary and statutory duty by Re‑Engine’s director, Mr Fergusson, paid only $588,577.34 to Re‑Engine and retained the sum of $70,712.02, in my opinion, it is liable as a recipient under the first limb of Barnes v Addy for the sum of $70,712.02.

Under the approach adopted in Say-Dee, it is unnecessary to establish that Della Court had actual or constructive knowledge of the breach of trust or fiduciary duty, or was itself guilty of unconscientious conduct. It is prima facie liable, by reason of its receipt, to restore the funds to the injured company to which the fiduciary duties were owed. In the present case, Della Court has not established that it was a bona fide purchaser for value or that it was an innocent recipient which changed its position, so as to render unjust its accountability for the funds.

If, contrary to the approach endorsed in Say-Dee, it be necessary to establish that Della Court had actual or constructive knowledge of Mr Fergusson’s statutory contraventions and breaches of fiduciary duty, in my opinion, the requirement is satisfied. It is not disputed that Mr Fergusson was, at all material times, the directing mind and will of Della Court, who controlled it in relation to the relevant banking transactions. In such circumstances, the principles endorsed in authorities such as Lennard’s Carrying Company Ltd v Asiatic Petroleum Company Ltd,[23] Hamilton v Whitehead,[24] Linter Group Ltd (in liq) v Goldberg & Ors,[25] and El Ajou v Dollar Land Holdings plc[26] indicate that the knowledge of Mr Fergusson would be imputed to Della Court.
[23][1915] AC 705; [1914-15] All ER 280.
[24](1988) 166 CLR 121.
[25](1992) 10 ACLC 739; (1992) 7 ACSR 580.
[26][1994] 2 All ER 685.

In contrast to the first limb of Barnes v Addy, the current consensus is that liability pursuant to the second “accessorial” limb of Barnes v Addy requires dishonesty on the part of the stranger, although the breach of duty by the fiduciary need not be dishonest.

The elements necessary to establish accessorial liability under the second limb of Barnes v Addy have also been the subject of uncertainty and evolution. The equitable accessorial liability developed under case law co‑exists with statutory accessorial liability, including, relevant to the present case, liability pursuant to s.75B of the Trade Practices Act 1974 (Cth) and s.145 of the Fair Trading Act. The equitable and statutory bases of accessorial liability are frequently pleaded together.

In Compaq Computer Australia Pty Ltd v Howard Merry & Ors[27] (“Compaq Computer v Merry”), Finkelstein J succinctly set out the principles relevant to liability under both the second limb of Barnes v Addy and accessorial liability under s.75B of the Trade Practices Act (analogous to s.145 of the Fair Trading Act) as follows:

“ … A contravention of s 52(1) of the Trade Practices Act can occur regardless of whether the corporation is acting honestly or reasonably: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197. But where it is sought to make a person liable as an accessory to a contravention of s 52(1) based on s 75B it is necessary to establish that the person has intentionally participated in the contravention. To establish intentional participation it must be proved that the person has knowledge of the essential matters that make up a contravention of s 52(1): see generally Yorke v Lucas 158 CLR 661; Edwards v R (1992) 173 CLR 653. In this regard knowledge means actual and not constructive knowledge. For example it would not be sufficient merely to show that the person charged with accessorial liability had shut his eyes to the obvious if that is intended to be a substitute for actual knowledge: Giorganni v R (1985) 156 CLR 473. Of course, where there is a combination of suspicious circumstances and a failure to make an enquiry it may be possible to infer knowledge of the relevant essential matters: Pereira v Director of Public Prosecutions (1989) 63 ALJR 1 at 3. In the case of a person who has assisted in a breach of trust or breach of fiduciary duty the criterion for liability is that stated by Lord Selborne LC in Barnes v Addy (1874) 9 Ch App 244 at 255, namely ‘assist(ance) with knowledge in a dishonest and fraudulent design on the part of the trustee.’ For a time it was suggested that there could be no accessorial liability for a breach of trust or breach of fiduciary duty unless the breach itself was dishonest or fraudulent: see e.g. United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157 at 253; compare Belmont Finance, supra; International Sales & Agencies Ltd v Marcus [1982] 3 All ER 551; Carl Ziess Stiftung v Herbert Smith & Co [1969] 2 Ch 276; Belmont Finance Corporation Ltd v Williams Furniture (No. 2) [1980] 1 All ER 393 at 405; Baden Delvaux & Lecuit v Societe General pour Favouriser le Developpement [1983] BCLC 325. But this was not the view expressed in all cases (see e.g. Selangor United Rubber Estates Ltd v Craddock (No. 3) [1968] 1 WLR 1555 at 1580 and 1582) and it was decisively rejected by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378; see also Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 where Stephen J (at 412) referred to knowledge ‘of fraud or breach of trust’. In Royal Brunei Airlines the Privy Council identified dishonesty as ‘the touchstone of liability’. Lord Nicholls said (at 389) that acting dishonestly means:
‘[S]imply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subject characteristics of dishonesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective conduct. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because to see nothing wrong in such behaviour. … Unless there is very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless’.”

[27][1998] 968 FCA.

In Giumelli v Giumelli,[28] the High Court endorsed, albeit in obiter dicta, Lord Nicholls’s statement in Royal Brunei Airlines Sdn Bhd v Tan (“Royal Brunei v Tan”).[29]
[28](1999) 196 CLR 101 at 112 (see footnote 49 in that judgment); 73 ALJR 547; 161 ALR 473.
[29][1995] 2 AC 378.

In addition to dishonesty, the accessorial limb of Barnes v Addy also requires assistance or participation by the stranger. Relevant case law offers little by way of comprehensive definition of “assistance” or “participation” in this context. The absence of an exhaustive definition, is perhaps, attributable to the diversity of forms assistance may assume, as “there are of course as many ways to facilitate the commission of a primary breach as the human imagination can contrive.”[30] It seems, however, that assistance or participation must be facilitative conduct or activity which is more than mere knowledge or notice of the breach of duty. The cases indicate that assistance may overlap with receipt and may involve, for example, the use of bank accounts simply as a conduit for funds, without beneficial receipt. There is now considerable support for the view that mere “ministerial” receipt falls within the ambit of the second limb of Barnes v Addy[31]
[30]Mitchell, C., “Assistance” in Birks, P. and Pretto, A. (eds), Breach of Trust (2002) at 171.
[31]Mitchell, C., “Assistance” in Birks, P. and Pretto, A. (eds), Breach of Trust (2002) at 182-187.

Many dishonest assistance cases have involved alleged payments or dealings with misapplied funds.[32] In other cases, defendants have drafted sham documents[33] or have prepared sham invoices, accounts or records to carry out money laundering.[34]
[32]Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340; [1992] 4 All ER 409.
[33]Dubai Aluminium Co Ltd v Salaam [2001] QB 113.
[34]Lurgi (Aust) Pty Ltd v Ritzer Gallagher Morgan Pty Ltd [2000] VSC 277.

Assistance could also take the form of making representations or causing a company to commit the primary breach. In Compaq Computer v Merry, it was alleged that the directors of a company which owed fiduciary duties under an agency agreement had “knowingly caused, procured, permitted or assisted” the company to breach its fiduciary obligations and had participated in its contravention of s.52 of the Trade Practices Act. The alleged assistance took the form, broadly, of falsely representing that the company would comply with the terms of the agency agreement and causing the company to breach the terms. While Finkelstein J did not consider that accessorial liability was established, he appeared to accept that the alleged activities could amount to assistance in the relevant sense.

It seems self-evident that assistance should “make a difference” and forward or advance the primary breach or misconduct in some way. Mere passive acquiescence in the breach would not, in the ordinary case, suffice to establish liability on the ground of assistance. Further, it appears clear that assistance must take the form of some activity or conduct over and above mere knowledge of the fiduciary’s breaches.

Lord Nicholls in Royal Brunei v Tan,[35] stated that “honesty and its counterpart dishonesty are mostly concerned with advertent conduct.” Similarly, in Nightingale Finance Ltd v Scott,[36] Carnwath J held that “for a third party to become liable as a ‘knowing assistant’ he must be an active participant in the breach of trust.”
[35]At 389.
[36]Ch D, 18 November 1997.

Consistent with that approach, the courts have eschewed the imposition of liability for mere passive acquiescence in the primary breach. In Brinks Ltd v Abu-Saleh (No. 3),[37] Rimer J held that a wife who accompanied her husband on trips to Switzerland where he laundered misappropriated funds was not liable for knowing assistance, indicating that something more than passive acquiescence was required, despite the fact that her presence may have lent an appearance of legitimacy to the trips.
[37]The Times 23 October 1995.

It has been recognised that the Court’s reluctance to impose liability in the absence of a positive act is defensible,[38] given the many difficulties posed by the hypothetical question of what steps an honest person would have been required to take in given circumstances.[39]
[38]Mitchell, C., “Assistance” in Birks, P. and Pretto, A. (eds), Breach of Trust (2002).
[39]See also Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1 at 87-9.

It would seem that the assistance must also have some causal significance, which is more than minimal “for if there is no causative effect and therefore no assistance given … the requirements of conscience [do not] require any remedy at all.”[40]
[40]Brown v Bennett [1999] 1 BCLC 649 at 659 (Morritt LJ).

Therefore, where a delinquent fiduciary has committed a series of breaches, it is necessary “to identify what breach of trust or duty was assisted and what loss may be said to have resulted from that breach of trust or duty.”

In Grupo Torras SA v Al-Sabah (No. 5), Mance LJ stated:

“An allegation of a single and continuing conspiracy to commit and cover up a misappropriation is one thing. But it may involve a series of breaches of trust or fiduciary duty. The actual loss may have resulted at the early stage of the misappropriation, rather than from the cover up. Dishonest assistance confined to the cover up stage may or may not necessarily attract liability for such a previous loss.”[41]

[41]Grupo Torras SA v Al-Sabah (No. 5) QBD (Comm Ct), 24 June 1999 (Mance LJ).

In Courtney Polymers Pty Ltd v Deang[42] (“Courtenay Polymers”) a recent Victorian decision on which the plaintiffs particularly relied, Whelan J held a company liable for dishonest assistance because it had helped to “cover up” the breach of fiduciary duty by a defaulting fiduciary who constituted (with other persons), the “true” mind of the corporate defendant. The fiduciary was also a long‑standing employee and director of the plaintiff who (both before and after his resignation), in breach of fiduciary duty, established a competing business, which was ultimately conducted by the defendant company.
[42][2005] VSC 318.

His Honour held that the defendant company was liable for dishonest assistance pursuant to the second limb of the rule in Barnes v Addy, and as a person knowingly concerned in the contravention of s.52 the Trade Practices Act.

His Honour found that the defaulting fiduciary had established … “a competing business, and he conducted that business in a manner intended to conceal his involvement thereafter. [The defendant company] was an important part of this course of activity, particularly the concealment.”[43] As no proprietary remedy was sought, Whelan J did not determine the defendant company’s liability under the first limb of Barnes v Addy.
[43]At [140].

In Tableau Holdings Pty Ltd v Joyce,[44] the Full Court of the Supreme Court of Western Australia held that a company wholly owned and controlled by a director and his family was not liable for knowing assistance of the director’s breach of fiduciary duty to a third party merely because the company was likely to benefit indirectly from the wrongdoing. Steytler J (with whom Owen and Park JJ agreed) considered it “manifestly untenable”[45] that the fiduciary’s control of the company justified an inference that the company authorised or requested him to engage in the breaches of duty. Something more would be required.
[44][1999] WASCA 49.
[45]At [35].

In the present case, in order to render Della Court liable to account for the loss and damage represented not only by the funds it received in its bank account but did not pay to Re-Engine, but also for the additional funds which were either not remitted from overseas, or were remitted to the Fergussons’ bank account but not paid to Re‑Engine, it would be necessary to establish that Mr Fergusson’s knowledge of the false invoices and applications made to the ANZ and the subsequent disposition of and dealing with all the funds advanced, could properly be imputed to Della Court, and its dishonesty consequently inferred.

It would also be necessary to establish that the acts, conduct or activity of Della Court had some causal significance in advancing or facilitating the fiduciary’s breaches of duty and contraventions.

In the present case, the plaintiffs, by paragraph 55 of the amended statement of claim, allege that, by reason of Mr Fergusson’s knowledge of the matters alleged in paragraphs 16, 17, 19, 21, 22 and 23, Della Court knew of the circumstances comprising his breaches of duty alleged in paragraphs 22 and 24.

The breach of duty alleged in paragraph 22 of the amended statement of claim is the misuse of the Facility under Mr Fergusson’s direction and control (obtaining advances after the purchase of engines from overseas ceased, some of which advances were remitted to Australia and paid, only in part, to Re-Engine).

The breach of duty alleged in paragraph 24 is Mr Fergusson’s preparation of false invoices for presentation to the ANZ to induce the advances.

By paragraph 56 of the amended statement of claim, the plaintiffs allege:

“By reason of its permitting the use of its bank account in the manner alleged in paragraphs 19 and 21 Della Court knowingly and dishonestly assisted Mr Fergusson in the said breaches of duty.”

The acts of Della Court on which the plaintiffs rely are thus, the use of its bank account to receive funds remitted from Thailand and to pay some, but not all, of the remitted funds to Re-Engine.

The breaches of duty said to be assisted by the use of Della Court’s bank account are, in substance, causing Re-Engine to draw advances on 63 occasions within the relevant period for purposes other than the purchase of engines abroad and the associated preparation of misleading applications and false invoices.

The amended statement of claim does not particularise how the use of Della Court’s bank account, as alleged, assisted the breaches or contraventions by Mr Fergusson. Further, it is not expressly alleged that Mr Fergusson breached his fiduciary duty by causing only some of the proceeds of the advances to be remitted to Australia to the various payees, or by causing only a proportion of the funds remitted to the Fergussons’ or Della Court’s account to be paid to Re‑Engine. It is merely alleged that the traceable proceeds of the advances were dealt with in that way, rather than that Mr Fergusson caused or procured that application of the funds.

The specific alleged breaches of duty by Mr Fergusson are the procuring of the advances from the ANZ by presenting false applications and invoices. The fact that there was a shortfall in the proceeds of the advances ultimately paid to Re‑Engine goes to the quantum of loss and damage Re-Engine suffered by reason of the specific breaches.

There are no particulars to clarify any allegation that the use of Della Court’s bank account assisted Mr Fergusson in stating a false purpose on application forms or in preparing or presenting false invoices (thereby misleading the ANZ) in order to procure advances other than for the approved purposes of the Facility.

Further, the evidence does not establish that the use of Della Court’s bank account played any role in misleading the ANZ bank in order to procure the advances.

Rather, the evidence indicates that it was the false statements of purpose in the applications for the advances, and the false invoices, which induced the ANZ to make the advances.

Mr Brown’s evidence was that the invoices were provided to the ANZ Bank for the purpose of inducing the ANZ Bank to continue making advances under the Facility.

Mr Sadler stated that the provision of those invoices, and the statements in the loan application documentation that the advanced funds would be used to purchase used engines from Japan, enabled funds to be advanced under the Facility. Mr Sadler did not state or suggest that the ANZ was aware of, or relied on, the receipt of funds by Della Court and subsequent on‑payment of some of the funds to Re-Engine, as the basis for the ANZ’s assumption that used engines were being purchased overseas, thus inducing the ANZ to make the advances.

The plaintiffs did not allege that the use of Della Court’s accounts disguised or concealed the continued use of the Facility for unauthorised purposes from the Parkers, and Mr Parker gave no evidence that it did.

At the trial, Mr Segal submitted that the use of Della Court’s bank account as alleged contributed to a false appearance of legitimate trading activity by Re-Engine and thus assisted the dishonest scheme of Mr Fergusson. That, however, was neither pleaded, nor established by the evidence.

There is no evidence that the ANZ or any other relevant party assumed that Re‑Engine was conducting normal trade through awareness of, or reliance on, the relevant use of Della Court’s account.

There is no evidence that the use of Della Court’s bank account assisted any breaches by Mr Fergusson other than by its receipt of the funds remitted to and paid (in part) from Della Court’s bank account to Re-Engine. There is no evidence that the use of Della Court’s bank account played any role in the procurement of the advances, the dealing with the funds overseas or the remission of some of the funds from overseas either directly to Re-Engine or to the account of the Fergussons, and the payment of part of those funds to Re-Engine.

If it be assumed (although it is not expressly pleaded) that the remission of some funds to Della Court’s bank account and a payment of part thereof to Re-Engine constituted a breach by Mr Fergusson, the use of Della Court’s account as a conduit may have assisted that breach, but Della Court’s resultant liability would be only for the amount of $70,712.02 not repaid to Re‑Engine, and would coincide completely with its liability for receipt.

While the relationship between receipt and assistance is not fully resolved, where the stranger’s only acts of alleged assistance of the fiduciary breach completely coincide with receipt, and liability for receipt is made out, there is no apparent utility in characterising the resultant liability as accessorial assistance.

In relation to the accessorial liability under the Fair Trading Act, the plaintiffs refer to paragraphs 32 to 36 of the further amended statement of claim. Paragraph 33 alleges that Mr Fergusson represented to the ANZ that the purpose of the advances was to purchase second-hand engines. The particulars of that allegation are:

(a)a failure to declare to the ANZ that Re-Engine had ceased to purchase such engines from about 6 June 2002; and
(b)a failure to declare that Re-Engine did not acquire assets or stock in trade with the advances save to the extent that funds derived from the advances were paid into Re-Engine’s account.

Paragraph 34 pleads that by causing the remittance of the advances to be paid into the bank account of the Fergussons or the bank account of Della Court, before a proportion of such funds was paid to Re-Engine, Mr Fergusson:

(a)disguised the source of the funds being deposited into the bank account of Re‑Engine; and
(b)concealed from the ANZ the fact that the funds advanced by the ANZ to Re-Engine pursuant to the Facility were not being used to purchase second-hand engines from Japan.

There are no particulars of how causing the remittances to be paid into the bank account of Della Court before a proportion of such funds were paid to Re-Engine “disguised the source” of the funds being deposited into Re-Engine’s account.

The allegation is obscure. If “source of the funds” is intended to refer to the payments’ status as the traceable proceeds of advances on the Facility, that is not pleaded. In any event, there is no evidence that the use of Della Court’s bank account played any role in disguising the character or source of any funds paid to Re-Engine from either Della Court’s account or the Fergussons’ account.

Further, there is no evidence that the remittance of funds to Della Court’s account before a proportion of the funds was paid to Re-Engine concealed from the ANZ the fact that the funds advanced by ANZ to Re-Engine pursuant to the Facility were not being used to purchase second-hand engines from Japan.

There is no evidence that the ANZ was aware of, or relied in any way upon, any payments from Della Court’s account to Re-Engine in forming and maintaining any assumption that Re-Engine was purchasing second-hand engines from Japan.

Conclusion

It follows that, in my opinion, it is not established that the use of Della Court’s bank account assisted the specified breaches of duty by Mr Fergusson, or constituted “knowing concern” in Mr Fergusson’s specified contravention of s.9 of the Fair Trading Act, save to the extent to which Della Court received but failed to pay to Re-Engine the traceable proceeds of the advances. Therefore, Della Court is not, in my opinion, jointly and severally liable with Mr Fergusson to account for the total loss and damage to the plaintiffs sustained by reason of his breaches of fiduciary duty and contravention of s.9 of the Fair Trading Act.

Della Court, is, however, in my opinion, liable to account to the plaintiffs for the sum of $70,712.02, which it received but did not pay to Re-Engine, pursuant to the first limb of the rule in Barnes v Addy.

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9 March 2007