Travel Compensation Fund v Fry - [2002] NSWSC 1044

No judgment structure available for this case.

Reported Decision:
(2003) ATPR (Digest) 46-227

New South Wales

Supreme Court

CITATION: Travel Compensation Fund v Fry [2002] NSWSC 1044

CURRENT JURISDICTION: Equity

FILE NUMBER(S): SC 3295/99

HEARING DATE(S): 26, 27, 28 February, 1, 4, 5, 6, 7, 8, 19 & 20 March 2002

JUDGMENT DATE: 8 November 2002

PARTIES :

Travel Compensation Fund (P)
Renee Julie Fry (D1)
Trevor Fry (D2)
Robyn Joan Fry (D3)
Robert Tambree t/as R Tambree & Associates (D4)
Phillip Roseby t/as P J Roseby & Co (D5)

JUDGMENT OF: Austin J

COUNSEL : Mr N F Francey (P)
In person (D1, D2)
Mr P B Walsh (D4)
Mr R E Dubler (D5)

SOLICITORS: McCabe Terrill (P)
Burston Cole & Co (D4)
Phillips Fox (D5)

CATCHWORDS: TRADE PRACTICES - Fair Trading Act - misleading and deceptive conduct in trade and commerce - financial information provided in application for participation in Travel Compensation Fund and in applications for renewal of participation - whether misleading or deceptive - whether Fund's loss through meeting compensation claims recoverable against licensed travel agent, a person involved in the misrepresentations, an accountant and an auditor - causation - NEGLIGENCE - negligent misstatements by accountant and auditor - reliance and causation - TRAVEL AGENTS - Fund's right of subrogation under Travel Agents Act - right of recovery against travel agent through subrogation to claimants' rights

LEGISLATION CITED: Fair Trading Act 1987 (NSW) ss 42, 61, 68
Travel Agents Act 1986 ss 6, 11, 40, 57

CASES CITED: Argy v Blunts Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112
Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83
Cowan v Scargill [1985] 1 Ch 270
Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896
Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241
Gardam v George Wills & Co Ltd (1988) 82 ALR 415
Gisborne v Gisborne (1877) 2 App Cas 300
Howden v Travel Compensation Fund [1997] FCA 1166
Karger v Paul [1984] VR 161
Lock v Westpac Banking Corporation (1991) 25 NSWLR 593
Lutheran Church of Australia v Farmers' Co-operative Executors & Trustees Ltd (1970) 121 CLR 628
March v E & MH Stramare Pty Ltd (1991) 171 CLR 506
Parkes Management Ltd v Perpetual Trustee Co Ltd (1997) 10 ACLR 303
Pauling's Settlement Trust [1964] Ch 303
Re Baden's Deed Trusts [1971] AC 424
Re Londonderry's Settlement [1965] Ch 916
Saints Gallery Pty Ltd v Plummer (1988) 80 ALR 525
Travel Compensation Fund v Travel Guide Pty Ltd (1997) 72 FCR 371
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Yorke v Lucas (1985) 158 CLR 661

DECISION: See under heading "Conclusions"

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

FRIDAY 8 NOVEMBER 2002

3295/99 TRAVEL COMPENSATION FUND V RENEE JULIE FRY & ORS

JUDGMENT

HIS HONOUR:

Introduction

1 These proceedings arise out of the collapse of a business called "The Travel Shop International", which carried on business in Parramatta. When the business collapsed, various customers of the business ("the Claimants") made claims upon the plaintiff (Travel Compensation Fund) in respect of money they had paid to the business for the purchase of travel and accommodation which was never supplied. Those claims were met by the plaintiff, which now seeks recoupment and damages from the first and second defendants (Ms Renee Fry and her father, Mr Trevor Fry) who were the two individuals involved in the conduct of the business, according to the plaintiff's case. The plaintiff also seeks to recover compensation from the fourth defendant (Mr Tambree) who provided accounting services to the business, and from the fifth defendant (Mr Roseby) who was the auditor. No claim to final relief is sought against the third defendant, Mrs Robyn Fry, who accordingly was not represented at the hearing.

2 In addition to "The Travel Shop International", a business name registered by Ms Fry, three corporate entities were connected to the business in ways explored in the evidence. At all material times from 11 October 1996 (when it was incorporated), Ms Fry was the sole director and shareholder of The Travel Shop International Pty Ltd ("TSIPL"). Ms Fry and Mr Fry were directors and shareholders of Fiji Resorts International Pty Ltd ("Fiji Resorts", which was incorporated on 1 August 1994) and of Bali Resorts International Pty Ltd (" Bali Resorts", which was incorporated on 19 September 1996). TSIPL, Fiji Resorts and Bali Resorts are not licensed travel agents and never have been.

The plaintiff's claims

3 The proceedings were commenced by summons filed on 22 July 1999, by which the plaintiff sought an order restraining the first three defendants (Ms Fry and her parents, Mr Fry and Mrs Robyn Fry) from disposing of a property in Strathalbyn Drive, North Parramatta, as well as asset preservation orders against Ms Fry and Mr Fry and orders for them to disclose their assets. On 9 August 1999 Hodgson CJ in Eq made orders substantially as sought by the plaintiff, except that the defendants were permitted to complete a contract for the sale of the North Parramatta property and to apply the proceeds of sale to the purchase of another property, subject to restrictions concerning their dealings with the new property. The orders were supplemented on 17 August 1999 to require that a caveat be lodged against the title to the new property reflecting the plaintiff's asserted interest. The proceedings were subsequently widened and the fourth defendant, Mr Tambree, and the fifth defendant, Mr Roseby, were joined as defendants.

4 The plaintiff's claims are now made by the Third Amended Statement of Claim ("the Statement of Claim"). Strictly there are several plaintiffs, who are compensation scheme trustees authorised to sue in the name of the Travel Compensation Fund by s 52 of the Travel Agents Act 1986 (NSW). I shall refer to the Travel Compensation Fund as the TCF or the Fund. The trustees were appointed as trustees of the Fund by deed made on 12 December 1986 ("the Deed"), which establishes a compensation scheme as contemplated by s 57 of the Act.

5 The Statement of Claim seeks relief against Ms Fry, Mr Fry, Mr Tambree and Mr Roseby. Relief is sought against Ms Fry by way of recoupment under assignments by claimants and under the Travel Agents Act, and against Ms Fry and Mr Fry for damages for misleading conduct under the Fair Trading Act 1987 (NSW). Relief is sought against Mr Tambree and Mr Roseby, respectively, by way of damages for negligent misstatement and misleading conduct under the Fair Trading Act.

Claims against Ms Fry under the Travel Agents Act

6 The plaintiff alleges that Ms Fry carried on business as a travel agent in New South Wales as a participant in the compensation scheme established under the Travel Agents Act, trading as "The Travel Shop International", either on her own account or in partnership with Mr Fry. It alleges that Ms Fry and Mr Fry also arranged for travel services to be supplied by TSIPL, Bali Resorts and Fiji Resorts, which were not participants in the compensation scheme.

7 The plaintiff's contention is that between August 1998 and June 1999 the Claimants paid moneys to the Travel Shop International for the provision of travel and accommodation services, and the business entered into agreements with service providers for the provision of those services, but it failed to pay the service providers. This led the Claimants to make claims on the plaintiff, which the plaintiff has paid. The plaintiff alleges that after 23 February 1999, when it terminated the participation by The Travel Shop International in the compensation scheme, Ms Fry and Mr Fry continued to conduct the business of a travel agent on behalf of TSIPL, Fiji Resorts and Bali Resorts without a licence and contrary to the Act, until May 1999, when they were prevented from doing so by court order.

8 The plaintiff says that by reason of this conduct, Ms Fry became liable to repay the Claimants or to account to them, and by virtue of the right of subrogation contained in s 40 (3) of the Act, she is now liable to account to the plaintiff. The plaintiff also relies on assignments to it by individual Claimants of their rights. A schedule to the Statement of Claim particularises the amounts paid by the plaintiff to meet claims lodged by the Claimants, the total amount being $143,050. That is the amount that the plaintiff seeks to recover, together with interest, from Ms Fry.

Claims against Ms Fry and Mr Fry under the Fair Trading Act

9 The plaintiff claims that Ms Fry and Mr Fry engaged in misleading or deceptive conduct for the purposes of s 42 of the Fair Trading Act (or, in the case of Mr Fry, that he was knowingly concerned in such conduct in contravention of s 42). The plaintiff complains of three kinds of misleading conduct. First, Ms Fry lodged an application for participation in the compensation scheme as a travel agent, by an application, statutory declaration and balance sheet each dated 21 March 1996 ("the Participation Documents"). The plaintiff alleges that the Participation Documents contained representations that were misleading because they did not properly record Ms Fry's financial position and did not disclose the travel-related trading activities that she engaged in with Mr Fry, TSIPL, Fiji Resorts and Bali Resorts. The plaintiff says that it relied on the Participation Documents and the representations in them when it approved Ms Fry's application, and she was subsequently granted a travel agents licence.

10 Secondly, on 3 December 1997 the Travel Shop International renewed its participation in the compensation scheme by providing to the plaintiff a renewal application and an annual financial review, together with financial statements and an independent audit report ("the 1997 Renewal Material"). The plaintiff alleges that the 1997 Renewal Material did not present a true and fair view of the financial position of The Travel Shop International and contained representations that were misleading. The plaintiff says it relied on the 1997 Renewal Material and the representations to approve the continued participation of The Travel Shop International in the compensation scheme for the following year.

11 Thirdly, on 11 November 1998 The Travel Shop International renewed its participation in the compensation scheme by providing to the plaintiff a further renewal application and an annual financial review, as well as financial statements and an independent audit report ("the 1998 Renewal Material"). The plaintiff alleges that the 1998 Renewal Material did not present a true and fair view of the financial position of The Travel Shop International and contained representations that were misleading or deceptive. The plaintiff says that it relied on the 1998 Renewal Material and the representations to approve the continued participation of The Travel Shop International in the compensation scheme for the following year.

12 The plaintiff says that by lodging misleading documents on these three occasions, Ms Fry caused the plaintiff to permit her to become and continue to be a participant in the compensation scheme and carry on business as a licensed travel agent until February 1999, without the imposition of any conditions, and this gave rise to claims by the Claimants and caused the plaintiff to suffer loss when it met those claims.

13 The plaintiff says that Mr Fry participated in or approved or was responsible for the making of the 1997 and 1998 Renewal Materials and the representations contained in them, and that he was aware or ought to have been aware that those materials were misleading and deceptive because they did not accurately reflect the financial position or trading activities of Ms Fry. He was therefore knowingly concerned in Ms Fry's misleading and deceptive conduct, which caused damage to the plaintiff.

Claims against Mr Tambree

14 The complaint against Mr Tambree is that he prepared the accounts that formed part of the Participation Documents, as well as the accounts that were included in the 1997 and 1998 Renewal Materials. The Statement of Claim alleges that Mr Tambree intended and knew or ought to have known that the plaintiff would rely on the accounts. He was therefore under a duty of care to the plaintiff. By providing the accounts he represented their accuracy and compliance with a relevant accounting standard, but his representations were incorrect. The plaintiff alleges that it relied on these representations, which were inaccurate, and that it has suffered loss.

15 The Statement of Claim also alleges that Mr Tambree thereby engaged in misleading or deceptive conduct contrary to s 42 of the Fair Trading Act, or was knowingly concerned in Ms Fry's contravention of s 42.

Claims against Mr Roseby

16 The complaint against Mr Roseby is that he audited the accounts forming part of the 1997 and 1998 Renewal Materials and provided an audit certificate in each year. The Statement of Claim alleges that Mr Roseby intended and knew or ought to have known that the plaintiff would rely on the accounts, and that he was under a duty of care to the plaintiff. By providing his audit certificate he represented that the accounts were correct and that the audit was conducted in accordance with Australian Auditing Standards and with due care and skill, and the plaintiff says it relied on these representations. The representations were inaccurate and the plaintiff has suffered loss.

17 The plaintiff also alleges that Mr Roseby engaged in misleading or deceptive conduct contrary to s 42 of the Fair Trading Act, or was knowingly concerned in Ms Fry's contravention of s 42.

Cross-claims

18 Mr Roseby and Mr Tambree have each filed a cross-claim (the First and Second Cross-claims respectively) seeking indemnity or contribution from the other defendants (including one another), in the event that they respectively are found liable in tort or under the Fair Trading Act. Ms Fry has filed a cross-claim (the Third Cross-claim) against the plaintiff, alleging breach of duty and conspiracy by certain officers of the plaintiff (namely Carlo Brattoni, John Hammond, Anthony Whittaker and Ian Newman), and also alleging defamation by the plaintiff, and claiming damages.

The legislative scheme

19 The Travel Agents Act 1986 (NSW) is part of a national system for the regulation of travel agents by concurrent State legislation. It is the product of a participation agreement amongst Ministers for Consumer Affairs in four States (New South Wales, Victoria, Western Australia and South Australia), subsequently followed by the other States. All States now require licensed travel agents to be members of the TCF, the trust deed for which has been gazetted pursuant to the legislation in each of the States.

20 The structure of the Act is broadly as follows. Section 6 prohibits a person from carrying on business as a travel agent otherwise than in accordance with the authority conferred on that person by a travel agent's licence, or in partnership with a person who is not the holder of a travel agent's licence. There are ancillary prohibitions with respect to such matters as displaying the authorised name of the licensee at the place of business and on stationery (s 35) and empowering the court to make enforcement orders (ss 38 and 39). The Act provides for the issue of a licence by the Director-General of the Department of Fair Trading (called "the Commissioner" in the Act), pursuant to an application complying with the requirements set out in ss 8-10. The Commissioner may impose conditions and restrictions on a licence (s 11 (1)), and under s 11 (2) (a) a licence is subject to a condition that the licensee shall, at all times during the currency of the licence, be a participant in the compensation scheme prescribed under s 57.

21 Section 57 (2) authorises regulations to be made prescribing the compensation scheme. The Travel Agents Regulation 1987 (NSW) prescribed a compensation scheme, the scheme being that contained in a trust deed a copy of which was set out in a schedule to the regulation. The 1987 Regulation was repealed by the Travel Agents Regulation 1995 (NSW). Rather than setting out the text of the trust deed for the prescribed compensation scheme in a schedule to the regulation, the 1995 regulation prescribed that the compensation scheme was the scheme established by a trust deed made on 12 December 1986 by named parties, as amended from time to time, and stated that a copy of the trust deed could be obtained from the Director of the Department of Fair Trading.

22 It will be observed that the 1995 Regulation does not strictly comply with s 57 (2) (b), which contemplates that the compensation scheme will be prescribed by reference to a schedule comprising a copy of the trust deed by which the scheme is established. However, in Travel Compensation Fund v Travel Guide Pty Ltd (1997) 72 FCR 371, Lehane J held that s 57 (2) (b) is directory, and therefore that strict compliance with it is not essential to the validity of a regulation made under s 57 (2). Consequently, Lehane J concluded that the 1995 Regulation, which provided a method of publication which could be regarded as substantial compliance, was valid (at 379). That decision was upheld on appeal: sub nom Howden v Travel Compensation Fund [1997] FCA 1166 (22 September 1997). Although the Court of Appeal found it unnecessary to decide whether s 57 (2) (b) is directory or mandatory, Wilcox and Sackville JJ expressed support for Lehane J’s analysis. Lehane J’s conclusion on this point was not challenged before me.

23 Section 40 (3) states that where a payment is made to a claimant under the compensation scheme by reason of an act or omission by a person carrying on business as a travel agent, the compensation scheme trustees are subrogated to the rights of the claimant in relation to the act or omission. By s 40 (4), where those rights of subrogation are exercisable against a body corporate, they are enforceable jointly against the body corporate and the persons who were its directors at the time of the act or omission, and severally against the body corporate and each of those directors. Directors have a defence under s 40 (5) if they can show that the act or omission occurred without their knowledge or consent. Section 40 (6) contemplates that the act or omission leading to a claim for compensation may be the act or omission of an "unlisted person", being a person who carries on business as a travel agent under a name not included in the Commission's list of licence holders. Therefore a right of subrogation under s 40 may arise in respect of an unlicensed person who carries on business as a travel agent, though not in respect of a person whose business (though travel-related) is not the business of a travel agent as defined in s 4.

24 There are some odd aspects to ss 40 (3), (4) and (5), as Lehane J pointed out in Travel Compensation Fund v Travel Guide Pty Ltd, at 373-4. First, although the Trustees' right to sue the travel agent is stated to depend on subrogation to the rights of the claimant against the travel agent, the subsections appear to assume that the Trustees may sue the travel agent in their own names, to enforce the claimant's rights. Moreover, although the claimant may have no rights against the directors of the travel agent, if it is incorporated, s 40 (4) permits the Trustees to "enforce" the right given to them by subsection (3) against the directors.

25 Lehane J summarised the position in this way (at 374):

"To provide that A is subrogated to B's rights against C, where B has no concurrent claim against D, and that A may "enforce" jointly and severally against C and D the "right" which it thus gets by subrogation, is perhaps a somewhat elliptical way of imposing (for the benefit of A) a co-ordinate liability on D in respect of B's claim against C: a liability to which, but for the statutory "subrogation", D would not be subject (and which D still does not owe to B). That, however, appears clearly enough to be the intention of the provision … .".

The Deed and Annual Financial Reviews

26 A copy of the Deed, as in force at all relevant times, was in evidence before me. Clause 15 is a central provision. The relevant parts are sub-clauses 15.1 and 15.2. They provide:

27 The word "participant" is defined by the deed to mean, approximately, a travel agent licensed under one of the State Acts who meets certain additional eligibility requirements prescribed by the Deed. The word "beneficiary" is defined to mean, approximately, a person who entrusts money or other valuable consideration to a travel agent or an employee of a travel agent or an agent of a travel agent.

28 Clause 18 authorises the Trustees to make a payment out of the Fund which they decide is necessary to meet in whole or in part the emergency requirements of the beneficiary, provided that the payment is within the terms of clause 15.

29 In accordance with the requirements of the Deed, the trustees of the TCF have delegated certain functions to a Management Committee, which meets from time to time. As part of its functions, the TCF (usually through the Management Committee) determines whether applicants should be admitted as participants in the Fund, and administers Annual Financial Reviews ("AFRs") of participants, to determine whether their participation in the Fund should be renewed. An applicant who is successful in a particular financial year is not required to submit an AFR for the immediately following financial year.

30 The TCF sends out a renewal application within a month of the end of the participant's financial year, together with a blank AFR form and a copy of the TCF's financial criteria. The renewal application must be completed and returned, with the accompanying fee, within one month. Within three months of the end of the participant's financial year, the participant must provide to the TCF the AFR form completed by the participant and its auditor and a set of audited financial statements for the preceding financial year.

31 The AFR form provides for the proprietor to apply for renewal of participation in the Fund for the ensuing financial year, and for the proprietor to declare that the financial and other information provided in the application is true and fair and in accordance with the books and records of the business entity. The form includes a summary balance sheet and a worksheet for the calculation of financial ratios, as well as a series of questions about business activity, business income, operating costs and overheads. Provision is made for a statement by an auditor, the content of which I shall refer to below.

32 Financial criteria for the assessment of applications and for the conducting of AFRs have been published. AFRs are conducted by recourse to a points system, which is based on the published criteria. In assessing the financial viability of an applicant, and assessing AFRs, the TCF relies on information submitted by the applicant for participation or renewal, including financial statements which are required to be prepared by an accountant and independently audited. The participant is given a maximum 20 points. The form completed by the participant for an AFR provides for self-assessment. If the self-assessment is in excess of 10 points, participation is automatically renewed for the ensuing year, although the participant is subject to field audit or further review upon receipt of complaints or relevant information. Where a participant scores fewer than 10 points, its financial position is reviewed and generally conditions are imposed on renewal of participation.

33 Mr Antony Whittaker, the Manager Special Investigations of the TCF and a certified practising accountant, gave evidence about the TCF's financial criteria. At the relevant time he was a person who reviewed the financial statements of participants. I accept his account of the TCF financial criteria.

34 Mr Whittaker said that the TCF's financial criteria are directed to three main aspects of the participant's financial status, namely profitability, liquidity and solvency. If a participant had incurred a loss for the most recent financial year and Mr Whittaker was of the opinion that an operating loss of a similar magnitude in the ensuing year would undermine the financial situation of the participant, he would take this into account in determining the level of bank guarantees or other remedial measures that should be required, and whether to require the lodgement of audited financial statements for the ensuing six months rather than waiting another year. Mr Whittaker's practice was to include a provision for future loss in his calculation of the requirements for the participant to meet the financial criteria, unless the auditor said that the participant had not continued to incur losses. As to liquidity, Mr Whittaker's assessment would evaluate whether the participant had sufficient current assets to pay its current liabilities and whether it had a sufficient surplus of working capital to meet at least one month's overhead expenses. Solvency, in this context, involves assessing whether there is a sufficient surplus of tangible assets over liabilities, so that any losses sustained may be written off against shareholders' funds and not against funds belonging to creditors or consumers.

35 The TCF's power to impose conditions upon participation in the scheme is conferred by clause 9 of the Deed. The conditions may include a condition that the participant maintain and operate its business in a specified manner, that it maintain a trust account or client account, that it increase the capital or reduce the debts of the business, or that security or personal guarantees be supplied.

Credibility of witnesses

36 I have found no reason to doubt the credibility of the evidence of the plaintiff’s witnesses, nor (generally) the evidence of Mr Tambree. But I have reached a different conclusion regarding the evidence of Ms Fry and Mr Fry.

37 Having heard Ms Fry in the witness box, I have formed the opinion that Ms Fry's evidence should not be accepted unless corroborated or uncontested. I shall note specific occasions on which I have found her evidence to be implausible or incorrect.

38 I had an even greater opportunity to observe Mr Fry, as he both gave evidence and conducted his case as an unrepresented litigant. I have formed, rather more strongly, a similar view as to the unreliability of his evidence. In his case, both evidence and submissions were affected by his absence of any real sense of relevance, a consequence of which was that much of his defence did not directly meet the TCF's case.

Metro Travel

39 Central to this case is the question whether The Travel Shop International omitted to disclose to the TCF that it had substantial liabilities as at 30 June 1997 and 30 June 1998. That depends on whether trading activity, including the ordering of tickets and the receipt of funds from customers, was conducted by Ms Fry as a participant in the Fund, or by TSIPL or Fiji Resorts or Bali Resorts. Evidence relevant to that question includes evidence taken from the financial records of Metro Travel, the ticket consolidator with whom Ms Fry and her father dealt.

40 A ticket consolidator is a wholesaler of airline tickets, which purchases in bulk tickets from airlines and then sells these tickets to travel agents. Travel agents use a ticket consolidator when, and to the extent that, the consolidator can offer cheaper airline tickets than can generally be obtained by the agents from the airlines directly. The evidence in this case indicated that travel agents can on occasions obtain comparable or better deals by dealing with airlines direct. If a travel agent has an "IT" fare arrangement with an airline, the airline issues tickets at a non-retail rate direct to the travel agent in exchange for payment. Tickets issued under an IT fare arrangement may be used only together with an accommodation package.

41 A travel agent who wishes to use Metro's services must first set up an account. Officers of Metro gave evidence that they would not deal with a travel agent unless the agent had set up an account with Metro, demonstrating that it was a licensed travel agent at that time. There was also evidence that Metro is in competition with other ticket consolidators and engages in marketing to persuade travel agents to open an account with it. Moreover, evidence was given that very few records were kept of travel accounts and Metro was not in the habit of accepting or processing formal credit applications. It relied on telephone checks. In my view it was possible in 1996, notwithstanding the company’s general policy, for an account to be opened in a name other than the name of the licensee.

42 According to the evidence of Meng Ng (who was at the relevant times the National Revenue Accountant for Metro), a travel agent who had an account and who wished to buy tickets from Metro would do so through a reservation system processed through Metro’s computer. The booking would be entered into a queue and Metro would allocate a ticket through the computer. In the alternative, tickets could be booked by facsimile bookings, which were manually processed. Once the booking had been processed, the ticket would be issued, in the case of Sydney agents, through the Metro Sydney office. At that point Metro’s accounting records would be activated and the travel agent’s account would be charged. Accounts were rendered to travel agents bi-monthly, to be settled within seven days.

43 When payments were made, they would be allocated against specific invoices based on information provided by the travel agent, and the payment and the invoice to which it related would be removed from Metro’s computerised accounting system. If the information provided by the travel agent was not sufficient to allow Metro to identify the invoice in respect of which the payment was made, the invoice would remain in the system but a credit would be posted as an unallocated credit. Metro would also post commissions it received from credit card bookings on behalf of the travel agent as unallocated credits. It would retrospectively reconcile unallocated credit invoices in order to reconcile an account.

44 Metro Travel has an annual turnover of many millions of dollars. Surprisingly, in view of the size of its business, its financial records have been shown by this case to be unsatisfactory in some ways. One problem is that the arrangements for use of the Metro account appear to have been quite lax, and another (in view of Mr Shepherd’s evidence) is that accounts may have been established without any clear understanding on the part of Metro Travel, or any significant investigation by it, as to the identity of the corporate entity by which the account would be operated. That may explain the fluctuating evidence given on behalf of Metro Travel at the hearing.

Which entity had the account with Metro?

45 The evidence gives rise to some real doubt as to the identity of the account holder. It appears that the Metro account was opened in about July or August 1996, according to Metro's records. At that time Ms Fry was licensed but the name "The Travel Shop International" had not been registered as a business name, although it appears that the idea of the name had been conceived by Ms Fry. TSIPL had not been incorporated. Fiji Resorts was conducting a substantial travel-related business, perhaps with the assistance of DMV Travel or Century Travel. At about that time Mr Fry arranged for the printing of some receipt books in the name "The Travel Shop", quoting Ms Fry's licence number but giving the Fiji Resorts ACN number.

46 Mr Shepherd, New South Wales manager for Metro, gave affidavit evidence that an account was set up with Metro in 1995/96 in the name of the Travel Shop International Pty Ltd – that is, TSIPL. He referred to a note to him from Mr Fry evidently written in November 1998, listing a number of invoices for payment and attaching a cheque for $10,237.81 dated 27 November 1998 drawn by TSIPL in favour of Metro. In his oral evidence Mr Shepherd said he was in fact unaware whether the account holder was a company. It is clear to me from Mr Shepherd’s evidence that his principal concern was in marketing Metro services to travel agents, and he did not bother to identify the precise account holder. As far as he was concerned, the account was conducted by Mr Fry and Ms Fry for “the Travel Shop”, whatever precise entity may have been the account holder. This conclusion is consistent with the evidence of Mr Ng, who said that there was a single account maintained by Metro in the name “Travel Shop” with the reference “Renee/Trevor”, and the debtor identification was “Fijires”. There is also evidence of cheque butts, showing that both Fiji Resorts and TSIPL made payments to Metro from time to time.

47 While I accept the evidence that officers of Metro would not knowingly deal with a travel agent in the absence of a properly constituted account, it is consistent with the evidence that Metro may not have precisely and systematically confined its dealings to the business entity connected with the licence, dealing instead with Ms Fry and her father on the basis that there was, somewhere, a licensed travel agent connected with them. In my opinion it is likely that the Fijires account was used by The Travel Shop International, the unincorporated business entity for which Ms Fry was licensed, and also (at different times) by Fiji Resorts and TSIPL, incorporated but unlicensed companies. I say this for the following reasons.

48 Ms Fry gave evidence, not challenged by the other parties, that Bali Resorts did not trade. It appears from the financial evidence that Fiji Resorts incurred a liability to Metro Travel for tickets acquired by it in 1996. Counsel suggested, and it may be so, that the tickets were acquired through DMV Travel or Century Travel. Ms Fry's evidence, that Fiji Resorts ceased trading in 1997 and that its bank account was closed in that year is corroborated by bank statements. It appears to me likely that tickets were ordered from Metro on behalf of Fiji Resorts and were charged to the Fijires account with Metro up until about February 1997, whether or not DMV Travel or Century Travel was involved. That is consistent with the very debtor identification name of the account. It is consistent with Metro’s account printout, which shows invoices outstanding as early as 13 February 1997, and account activity before that time, even though it appears that Ms Fry did not commence for licensed business until late February 1997, at the earliest.

49 It appears that by November 1998, when Mr Shepherd and Mr Turner met with Ms Fry and her father and obtained Ms Fry’s guarantee for TSIPL’s debts (in circumstances described below), TSIPL was regarded by both the Frys and Metro as operator of the account in substitution for The Travel Shop International. Mr Fry’s evidence on this point, given against interest, was consistent with this conclusion. Moreover, it appears from the claim forms that between January and April 1999 payments made by clients of the business who became claimants on the Fund were received into the account of TSIPL. The informal "transfer" of the business from Ms Fry to TSIPL is likely to have been intended by her, once she realised that it would be necessary to provide a personal guarantee to Metro.

50 On the other hand, it does appear that, whatever variations there were in the letterheads during the period from November 1998 to the close of the business in 1999, there was a fairly consistent designation of Ms Fry's licence number on the stationery of the business, except towards the end of the business activity when another licence, presumably belonging to DMV Travel, was designated. That leads the TCF to contend that the Metro account and the business were conducted by Ms Fry trading as The Travel Shop International right up to the close of the business, and consequently that all liabilities on the Metro Account were hers and the claimants whose claims have been responded to by the TCF were claimants in respect of her acts and omissions in the conduct of the business of a travel agent, to which the Fund has been subrogated under s 40. Mr Roseby, in contrast, submitted that I should not conclude that Ms Fry trading as The Travel Shop International was ever the account holder.

51 To make a decision on this point, I must weigh up some very unclear and merely indicative evidence. On balance, however, it appears to me probable the account was Ms Fry’s account from about February 1997 to November 1998, and that TSIPL rather than Ms Fry was the account holder from November 1998 onwards. On the same basis, my view is that, from November 1998 onwards, TSIPL conducted the travel agency business that had previously been conducted by Ms Fry trading as "The Travel Shop International". This conclusion implies that TSIPL, which did not hold a licence, carried on business as a travel agent contrary to s 6 of the Travel Agents Act.

52 My findings as to the entities conducting the Metro account and the business are consistent with evidence of statements made by Mr and Mrs Fry and Ms Fry to the bank manager who considered their application for a housing loan in September 1997. I shall refer to the evidence below. Relevantly to the present point, it shows that the Fry family regarded themselves as being involved in a family business, suggesting that the separation of entities may not have been a matter of great importance to them.

53 It follows from these findings that Ms Fry trading as The Travel Shop International used the account and incurred liabilities during a period from about February 1997 to November 1998, and therefore it is probable that amounts outstanding in the Metro account on 30 June 1997 and 30 June 1998 included amounts owing by The Travel Shop International to Metro as at those dates.

54 The evidence relevant to these questions includes the claim forms lodged with TCF by the Claimants after the collapse of the business. Prior to the commencement of the hearing I made orders under s 67 of the Evidence Act 1995 (NSW) to the effect that the statements by Claimants in some 65 claim forms be admitted into evidence notwithstanding the hearsay rule. The claim forms were accordingly tendered at the final hearing. In my opinion they reinforce the conclusions expressed above, as to the identity of the account holder, but they also show considerable confusion in the minds of customers of the business as to the identity of the entity with whom they were dealing.

The amounts owing to Metro on the account

55 In an affidavit sworn on 20 June 2000, Mr Ng said that Travel Shop International owed Metro Travel $65,684.03 as at 30 June 1997, and $152,615.10 as at 13 July 1998 ("being the closest date to 30 June 1998"). He said that on 20 July 2000 the amount owing was $163,237.98.

56 In his later affidavit, made on 28 June 2001, Mr Ng deposed that he had caused a printout to be made of The Travel Shop's account with Metro as at 30 June 1997 and 30 June 1998. Analysing that printout, he said that it showed an amount outstanding up to and including 6 June 1997 of $29,526.53 in respect of invoices outstanding as far back as 13 February 1997. The printout showed, in his opinion, amounts outstanding in the sum of $7055.97 for the period from 10 June to 13 June 1997, $17,389.14 for the period from 16 June to 23 June 1997, and $11,712.57 for the period from 25 June to 30 June 1997. The total amount, after taking into account allowances and unallocated credits, was $65,684.03. Given my findings as to the identity of the account holder, this evidence implies that as at 30 June 1997, $29,526.53 was owed by Fiji Resorts and the remainder was owed by Ms Fry’s business.

57 As to the printout at 30 June 1998, Mr Ng identified amounts outstanding as follows: $125,514.88 for the period from 17 October 1997 to 5 June 1998; $14,737.23 for the period from 9 June to 15 June 1998; $28,556.93 for the period from 16 June to 23 June 1998; and $10,058.97 for the period from 24 June to 30 June 1998 (although there were subsequent adjustments in respect of minor discrepancies). The total outstanding by The Travel Shop to Metro as of 30 June 1998, according to Mr Ng's evidence, was $178,867.11. I infer that the whole of that debt was owed by Ms Fry’s business, although it appears likely that some of it was incurred for the benefit of TSIPL.

58 I accept Mr Ng's evidence with respect to the amounts outstanding in the account on 30 June 1997 and 30 June 1998. Ms Fry and Mr Fry invited me to reject that evidence as implausible, on the ground that it was unlikely that Metro would continue to supply the business with tickets if such large amounts were owing. In my view, their argument confused amounts outstanding at balance dates with overdue debts. They also challenged the specific amounts identified in Mr Ng's evidence. I find that the Metro figures, supported by the printout which is in evidence, should be preferred to the erratic and largely unsubstantiated evidence given on behalf of Ms Fry and Mr Fry as to the Metro account.

59 For the reasons I have given, my view is that the whole of the amount due at 30 June 1998, and most of the amount due at 30 June 1997, were owed by Ms Fry trading as The Travel Shop International. The inference arises because, in my view, The Travel Shop International was the account holder from about February 1997 to about November 1998.

Ms Fry's application and the period prior to June 1997

60 Ms Fry made a decision, some time before 13 April 1996, that she wished to make an application to become a licensed travel agent. Her evidence was that she wished to conduct her own business. Prior to that time, she had worked as an employee of various travel agents (one of which was DMV Travel), and although she was only young at the time of the application (aged about 20), she had accumulated some knowledge of and experience in the travel industry by that time.

61 However, there is also evidence that Ms Fry and her father had worked out that if they conducted a travel business through a licence held by Ms Fry, rather than using the services of DMV Travel or Century Travel, they would obtain additional commission of two or three percent. It appears, therefore, that there was a combination of motives on the part of Ms Fry - economic advancement for herself and her father, together with a wish for a degree of independence not afforded to an employee.

62 Mr Fry had been involved in the travel industry for many years, and it appears that he and his daughter had some involvement together in travel matters. They were co-directors of Fiji Resorts from early 1996. It appears that Fiji Resorts had a number of activities during the period from 1994 to 1997. One was to supply the services of Mr Fry as a travel consultant to a company called Wells Trading Pty Ltd, which was a licensed travel agent trading under several business names including Sports World Tours. Fiji Resorts also had a contract of some kind with DMV Travel. It may also have bought and sold properties in Fiji. There is some evidence that Ms Fry processed travel arrangements made by Fiji Resorts through DMV Travel, when she worked there. Financial statements of Fiji Resorts that are in evidence appear to show that it conducted a substantial travel-related business during the period from 1995 to 1997. It is unnecessary for me to make any finding as to whether it conducted the business of a travel agent without the licence required by the Travel Agents Act.

63 In about 1995 Mr Fry decided to become involved in computer programming for the travel industry, using Fiji Resorts for that purpose. He developed a travel costing program which he adapted for use with Microsoft office software. He left his job at Sports World Tours. It appears that Ms Fry's decision to open her own travel agency was taken shortly afterwards.

64 It is plain that Ms Fry and her father enjoy a close relationship, and that he provides her with advice on business matters. My impression of Ms Fry in the witness box is that she is an independently minded person who has substantial knowledge of the travel industry, acquired partly from her father and partly through experience. However, she is very unsophisticated in business and financial matters, and has little understanding of bookkeeping and accounting. It was in those areas that she seems to have followed her father's advice unquestioningly. While she, rather than her father, was probably in control of the travel business for which she obtained a licence, he had very substantial influence in the conduct of that business, especially on the financial side. He was closely involved in the management of the business in all its aspects, so much so that Mr Shepherd at Metro, and Mr Tambree, dealt with Mr Fry concerning the business rather than with Ms Fry.

65 Ms Fry gave evidence to the effect that she knew nothing about the business of Fiji Resorts. Counsel for the TCF submitted that her evidence was disingenuous on this point. I agree. The evidence as a whole implies that she had substantial knowledge of the business of Fiji Resorts. She was a director of the company. She worked closely with her father who was her adviser on financial matters. It is inconceivable that, given her business knowledge and independence, she would have allowed her father to operate the company of which she was a director without knowing anything at all about the company's affairs.

66 Ms Fry and her father were aware of the requirements to be satisfied by an applicant for a travel agent's licence, and in particular with the need for participation in the TCF. They were aware that it would be necessary to submit audited financial statements.

67 By application forms received on 13 April 1996 but apparently prepared in March 1996, Ms Fry made an application for participation in the TCF. The application was a personal application in the name of Ms Fry as sole owner, and the application form said that the trading name was "to be decided". In the application form Ms Fry nominated Mr Sven Klinge, an employed accountant with R Tambree & Associates, as her accountant and gave her business address as Suite 1, 354 Church Street Parramatta.

68 Mr Tambree gave evidence that he regularly went to Fiji for holidays, staying at a place known as the Treasure Island Resort. In 1996 a friend of his told him that Trevor Fry, who was an acquaintance of the friend, could arrange cheap rates at the Treasure Island Resort. Mr Tambree contacted Mr Fry and arranged cheaper holidays through him. Subsequently Mr Fry asked Mr Tambree to help him prepare some overdue tax returns, and Mr Tambree did so. Then Mr Fry asked Mr Tambree to conduct an audit for his daughter, in connection with her application to become a registered travel agent. Mr Tambree said he explained to Mr Fry that he could not do an audit because his firm were not registered auditors. According to Mr Tambree's evidence, which I accept, Mr Fry told him that he had checked with "the travel people" and Mr Tambree could supply what was required. Evidently Mr Tambree did not personally check with the TCF.

69 Attached to Ms Fry's application form were a Statement of Assets and Liabilities and a Balance Sheet as at 21 March 1996. They showed Ms Fry's personal assets as cash at bank of $15,000, plant and equipment of $5,400 and a Nissan Skyline motor vehicle valued at $5,500, with no liabilities. There was no mention in the application of the business activities of Fiji Resorts. The statement was verified by Mr Klinge, and was accompanied by a balance sheet to the same effect, on the letterhead of R Tambree & Associates, with a certificate by Mr Klinge and that he had examined Ms Fry's books and records and confirmed that the balance sheet showed a true and fair view of her financial viability as at 21 March 1996.

70 On 1 May 1996 the TCF wrote to Ms Fry saying that her travel agency did not appear to meet the financial viability criteria determined by the Trustees. The letter recommended an injection of $3000 to remedy a working capital deficiency, and required a letter from the agency's auditor confirming his or her appointment and the auditor's awareness of the requirement for the agency to lodge audited financial statements within three months of the end of each financial year.

71 Mr Tambree signed a letter also dated 1 May 1996 confirming that his firm acted as auditors for Ms Fry and that they were aware of the need for audited financial statements within three months after the end of each financial year. A little while later, Mr Tambree was contacted by an officer of the TCF, who asked for his registered auditors number. Mr Tambree explained that his firm were not registered auditors, and the officer replied that if that was so, the firm could not do the audit for Ms Fry. Mr Tambree telephoned Mr Fry and recommended that Mr Fry approach Mr Roseby, a registered auditor whose office was nearby. Mr Tambree introduced Mr Fry (apparently not Ms Fry) to Mr Roseby. Thereafter Mr Roseby acted as auditor for Ms Fry's business. Shortly afterwards Mr Tambree acquired to shelf companies for Mr Fry, which became TSIPL and Bali Resorts. Mr Tambree said he subsequently spoke to Ms Fry on limited occasions, and met her in Fiji when he was there on holiday.

72 Ms Fry's application to the TCF was eventually successful, and Ms Fry was admitted as a participant in the Fund. She then successfully made an application to the Department of Fair Trading for the issue of a travel agent's licence. She was issued with Licence No 2TA4438.

73 Ms Fry gave evidence that shortly after she obtained her licence, two officers of the Department of Fair Trading visited her. She said that she wanted to advertise in the Yellow Pages under the letter "B" for Bali and under the letter "F" for Fiji. She said she was told by the Department's officers that she should set up the letterhead to include Fiji Resorts International Pty Ltd and Bali Resorts International Pty Ltd, and then she could advertise under those names. She said she did so. She said that at no stage did she deposit any client money into any bank account of Fiji Resorts or Bali Resorts. Her evidence was not externally corroborated. I do not accept it.

74 On 19 November 1996 Ms Fry wrote to the TCF on a letterhead bearing the name "The Travel Shop International", with the address 366 Church Street Parramatta, and the correct licence number. The letter said that its purpose was to notify TCF of Ms Fry's change of address and to inform TCF of her registered business name, enclosing a copy of the certificate of registration. Enclosed was a Certificate of Registration of Business Name certifying that the business name "The Travel Shop International" was registered in Ms Fry's name and that the principal place of business was 366 Church Street Parramatta.

75 Ms Fry did not commence trading as the Travel Shop International until about February 1997, according to her evidence. She says she finished up working with DMV Travel at the end of 1996, and started her own business in February. Deposits in respect of customer receipts do not appear to have been banked into the account of The Travel Shop until April 1997. It seems that Ms Fry drew cheques on the account in January 1997 but they may have been for start-up expenses. One cheque was drawn in favour of Metro, but Ms Fry said it was a mistake to draw that cheque on her account. It is difficult to be sure, in light of the muddled evidence given by Ms Fry, but on balance I accept her statement that she did not commence her business until February 1997. I have taken the view that prior to late February 1997, transactions on the Metro account were undertaken by Mr Fry or his daughter on behalf of Fiji Resorts, perhaps with the assistance of DMV Travel or Century Travel from time to time.

76 Once established, Ms Fry's business specialised in arranging holidays in Bali and Fiji, approximately 65% of sales being for Bali holidays, and 35% for Fiji holidays. Ms Fry and Mr Fry described the business as a "service provider" business, packaging holidays by acquiring tickets from various sources, and combining those tickets with accommodation, "meet and greet" facilities and transfers which they arranged separately. Ms Fry said she ordered air tickets to Fiji from Metro Travel. For tickets to Bali, the arrangements would depend upon whether the customer travelled by Garuda Airlines or Ansett. If the customer travelled by Ansett, Ms Fry would obtain the tickets directly from Ansett in exchange for payment, because the business had an IT fare with Ansett. If the customer travelled by Garuda, then Ms Fry would acquire the tickets and accommodation from Asian Explorer because she did not have an IT fare with Garuda. There is some corroboration for this in the evidence of cheque butts. I accept her account.

The 1997 Financial Statements and Annual Financial Review

77 The financial statements for the year ended 30 June 1997 were prepared by R Tambree & Associates. Mr Tambree's evidence was that some time in 1997 Mr Fry contacted him, and asked him to prepare some accounts urgently so that he could have his daughter's travel licence renewed. Subsequently Mr Fry attended Mr Tambree's office with a box full of material, including computer-generated cashbook statements, cheque books and invoices. Mr Tambree said that the material was coded into a computer by his staff, and the computer then generated a trial balance. He then saw Mr Fry and prepared a spreadsheet on Mr Fry's instructions. He reconciled the bank account and brought in unpresented cheques. He then carried out journal adjustments. Mr Fry was present while he did this work, and answered questions from time to time. He said that while he verified some items, he was aware that Mr Roseby would audit the accounts. I accept this evidence.

78 Mr Tambree said he asked Mr Fry why there were no amounts owed or owing but he did not recollect the precise terms of the conversation. I find this part of his evidence unconvincing and I reject it.

79 After he completed this process, his staff ran the adjusted figures through the computer, which produced a balance sheet, profit and loss, trading account and income tax return. A little while later, Mr Tambree took all the source material and his file to Mr Roseby. He did not speak to Ms Fry about the financial statements at any time.

80 The 1997 Financial statements were accompanied by the following statement:

81 The 1997 financial statements were accompanied by an "independent audit report" signed by Mr Roseby and dated 2 December 1997. The report declared that Mr Roseby had audited the financial statements, and set out his opinion that they were properly drawn up to give a true and fair view, in accordance with the accounting policies described in note 1 to the financial statements, of the matters required to be dealt with in financial statements by the relevant provisions of the Corporations Law as they apply to large corporations. The report also expressed Mr Roseby's opinion that the financial statements had been drawn up in accordance with provisions of the Corporations Law, and also applicable accounting standards and mandatory professional reporting requirements, applied to the extent described in note 1 to the financial statements.

82 The report noted that the proprietor was responsible for the financial statements and had determined the accounting policies to be used, as described in note 1 to the financial statements. It noted that the financial statements had been prepared for distribution to, inter alia, the Trustee's of the TCF for the purpose of fulfilling their requirements. It disclaimed any assumption of responsibility for any reliance on the report or the financial statements by any person other than (inter alia) the Trustees of the TCF. It asserted that the audit had been conducted in accordance with Australian Auditing Standards.

83 The 1997 renewal application and AFR was dated 2 December 1997. It was signed by Ms Fry as a sole trader. It appears to have been based on financial statements for the year ended 30 June 1997. It contained the declaration, referred to above, by Ms Fry that the financial and other information provided in the report was true and fair and in accordance with the books and records of the business entity. It contained the following statement signed by Mr Roseby as auditor:

Statement of Auditor to the Trustees of the Travel Compensation Fund

Delete if incorrect

Delete if not required

84 It does not appear, from the copy of the document that is in evidence, that any of paragraphs 7, 8 or 9 has been deleted. However, adjacent to the question, "Has a fully funded Client Travel Account /Trust Bank Account been maintained throughout the year in accordance with the criteria set out on page 18?", the "no" box was ticked; and in answer to the question, "Are the Client Travel Account balance at bank and the related Liability for Client Deposits shown on the balance sheet?", the "yes" box was ticked.

85 The financial information in the AFR showed total sales of $288,158, net assets of $50,637, and net profit before income tax of $24,702. Annual expenses were $36,908 and working capital was $46,377. Nothing was shown for current liabilities or client account balances. It is worth noting that in the same financial year, Fiji Resorts had trading revenue of $1,077,535.

86 The calculation of financial ratios in the AFR claimed a maximum 8 points for the ratio of net tangible assets to turnover, as the percentage of net tangible assets to turnover exceeded 3%. It also claimed a maximum 8 points in respect of working capital, as working capital provided more than two months cover to meet overheads. It did not claim any points in respect of a client travel account. It appears that, following normal practice, the 1997 renewal application was treated as a "routine renewal" because self-assessment of the participant's points (16 points) was comfortably above the 10 point threshold. The content of the 1997 AFR was accordingly not brought to the attention of the Management Committee of Trustees, and it was decided that The Travel Shop International continue as a participant in the Fund.

The loan application

87 In September 1997 Mr and Mrs Fry and Ms Fry made a joint application for a loan to purchase a property at 30/4 Strathalbyn Drive Oatlands for $225,000. They had been living in the property as tenants for seven years. The loan was for $180,000 and the loan application, which is in evidence, disclosed savings of $128,201. The borrowing was for more than was needed to pay for the purchase of the property, the surplus being for tax for the year ended June 1997 and provisional tax for the year to June 1998. All three applicants for the loan were described as travel agents, and the business identified was the travel agency that had been in operation for 2 1/2 years.

88 The bank manager made some handwritten notes, which he attached to the application. Concerning the business, he said:

"It is a family run travel agency which comprises two companies:- Fiji Resorts International Pty Ltd and Renee Fry trading as The Travel Shop International."

The 1998 Financial Statements and Annual Financial Review

89 The 1998 financial statements were prepared by Mr Tambree, whose evidence was that they were prepared in the same manner as the 1997 accounts. I accept that evidence.

90 Like the 1997 AFR, the 1998 renewal application and AFR (dated 11 November 1998) contained a declaration by Ms Fry as sole proprietor that the financial and other information provided in the report was true and fair and in accordance with the books and records of the business entity. Mr Roseby again signed the auditor's statement, the form of which had changed slightly since 1997 but was to the same effect in every substantial respect.

91 The AFR's financial statements for the year ended 30 June 1998 showed sales revenue of $1,402,255, net profit of $8337 (down from $24,702 in the previous year), and net assets of $42,174, down from $50,637 in the previous year. Working capital was $37,872. Again, nothing was shown for current liabilities or client account balances. By that time Fiji Resorts had ceased trading.

92 The financial statements were accompanied by a Compilation Report by R Tambree & Associates dated 6 November 1998. That report said that the firm had prepared its special purpose financial report for the period ended 30 June 1998 "on the basis of information provided by Renee J Fry" and "in accordance with APS 9 Statement of Compilation of Financial Reports". A note stated that the financial statements had been prepared in order to satisfy the requirements of the proprietor to prepare accounts, and on the basis that the proprietor had determined that the entity was not a reporting entity. The note said that the financial statements had been prepared in accordance with the requirements of accounting standards AAS 1 (Profit and Loss Accounts), AAS 2 (Measurement and Presentation of Inventories in the Context of the Historical Cost System), AAS 4 (Depreciation of Non-Current Assets) and AAS 8 (Events Occurring After Balance Date), and other mandatory professional reporting requirements, but no other accounting standards had been intentionally applied. The statements were prepared on an accruals basis from the records of the entity, and were based on historic costs and did not take into account current valuations.

93 The Compilation Report asserted that Ms Fry was solely responsible for the information contained in the special purpose financial report. It continued:

94 The financial statements were accompanied by an "independent audit report" by Mr Roseby dated 11 November 1998. It was in terms substantially identical with the 1997 audit report.

95 Ms Fry's 1998 AFR claimed a maximum 8 points for the ratio of net tangible assets to turnover, as the percentage of net tangible assets to turnover exceeded 3%. It claimed a maximum 8 points for working capital, as working capital provided more than two months cover to meet overheads. It claimed a maximum 4 points for maintaining a fully funded client travel account/trust client account. As Ms Fry obtained a maximum 20 points based on the TCF's financial criteria, the 1998 AFR was not brought to the specific attention of the Management Committee and it was decided that The Travel Shop International continue as a participant in the Fund.

The period from July 1998 to 23 February 1999

96 Mr Shepherd, New South Wales Manager of Metro, said that in mid-1998 he was informed by Metro's accounts department that the Travel Shop was disputing accounts from Metro for tickets supplied. He visited the Travel Shop and spoke to Mr Fry. Mr Shepherd's evidence was that when he visited the Travel Shop in mid-1998 he dealt only with Mr Fry, and it appeared to him that Mr Fry was the owner of the business. He did not speak with, and was not introduced to, Ms Fry. Mr Fry told him that because of its "antiquated computer system" Metro had rendered accounts for things that have already been paid for. Mr Shepherd agreed to refer the matter to Metro's accounts department for further investigation.

97 However, problems continued to occur and by November 1998, according to Mr Shepherd, the Travel Shop owed Metro about $140,000. This was a matter of concern to Mr Shepherd because Metro had no security for payment of this amount. He decided to obtain security from "the directors of the Travel Shop, and he ascertained at that stage that it was Ms Fry, not Mr Fry, who was "the sole director of the Travel Shop". On 20 November 1998 Mr Shepherd met with Mr Fry and Ms Fry at the Travel Shop, together with Mr Phil Turner, another officer of Metro. Mr Turner insisted that the current Metro debt be paid by instalments and he said that a guarantee was needed from "the director of the company", Ms Fry. Mr Shepherd presented a guarantee to Ms Fry and she signed it. She said "What's my dad got me into?" Mr Fry told her not to worry and that everything would be sorted out.

98 Mr Fry told Mr Shepherd, in answer to Mr Shepherd's inquiry as to how the Travel Shop got so behind in payment for tickets, that Asia Explorer had put up their prices after the Travel Shop had taken deposits from customers and before it had paid for trips. I accept Mr Shepherd’s evidence of his dealings with Mr Fry.

99 Mr Fry and his daughter have also contended that a person called David Roparti was involved in incorrect accounting that affected The Travel Shop's account with Metro. However, it appears that Mr Roparti left Metro in about June 1998, well before Mr Shepherd and Mr Turner called on The Travel Shop in November 1998. In my opinion, their allegations about Mr Roparti, which were in any case not substantiated by other evidence, are not relevant to any matter I have to decide. Their assertions about Mr Roparti would not, if true, exonerate Ms Fry from disclosing liabilities to Metro in the financial statements of her business, and they would not explain the failure of the business with respect to the Claimants, whose claims relate to events after mid-1998.

100 The guarantee was directed to Metro and Ms Fry's signature was witnessed by Mr Shepherd. In the body of the document Ms Fry declared that on 20 November 1998 she was duly acting as "Director of the travel agency known as the Travel Shop International Pty Ltd". It declared that in consideration of Metro having already issued and any future issuing of travel documents at the request of Ms Fry's agency, the agency would abide by the terms of credit laid down by Metro and settle by the due date. It said that Ms Fry unconditionally and irrevocably guaranteed the payment of her agency to Metro of all moneys now payable or which may become payable.

101 At the time of signing of the guarantee, both Mr Shepherd and Mr Turner clearly believed that the Travel Shop was the incorporated company, TSIPL, and that Ms Fry was its director. The wording of the guarantee implies that Mr Shepherd believed that Metro had issued travel documents to TSIPL in the past, and that it would continue to do so in the future if its credit terms were complied with. Mr Fry subsequently sent Metro a cheque dated 27 November 1998 for $10,237.81, together with a statement specifying the invoices and amounts to which the cheque related. The drawer of the cheque was TSIPL and it was signed by Mr Fry.

102 On 30 November 1998 Mr Ng sent a memorandum to Mr Turner in which he recorded his understanding of the facts relating to the Travel Shop account. Mr Ng said that the first notice that the agent was behind in payments was in May 1998, and when the agent was approached it maintained invoices have been paid and that Metro's accounting records were not up to scratch. He said that the accounts department was reminded to pursue the Travel Shop for proof of payment but his recollection was that the Travel Shop kept stalling when these requests were made.

103 In February 1999 TCF decided to conduct a field audit on The Travel Shop International. According to the evidence of Barbara Eldridge, Executive Assistant to the Chief Executive Officer of the TCF, this was part of TCF's continuing field audit program. However, Mr Brattoni, the Chief Executive Officer, and Mr Ian Newman, a Financial Assessor employed by TCF, gave evidence that Mr Brattoni told Mr Newman to do a field audit because he had received complaints from the "land operators" in Fiji. In my opinion, the latter explanation is more likely.

104 On 8 February 1999 Mr Newman sent a memorandum to Mr Brattoni and Mr John Hammond reporting on various conversations with Mr Fry on that day. He described Mr Fry as the office manager and father of Ms Fry, who had returned his call after he left a telephone message for Ms Fry to contact him.

105 Mr Fry complained that the field audit had come about due to pressure on TCF from Metro, with whom the agency had a dispute about money owing, going back to 1996. Mr Fry said Metro was claiming $150,000, but the agency claimed that $90,000 was owing. Mr Fry also said that 90% of outstanding accounts to Fiji and Bali accommodation suppliers were paid before the clients travelled, and the balances due were small. Mr Fry complained that the agency had suffered a "computer glitch" so that the amount of client funds outstanding would not be known for two days. He also said that he was negotiating to sell the business to a third party and use the proceeds to protect client balances, and after the sale (expected to take about 10 days) the agency would withdraw from the Fund. Mr Fry asked for 10 days to complete the sale negotiations and said that if TCF closed the agency immediately there would be a loss of client funds and claims on TCF. Mr Newman made an appointment for the field audit to take place on 11 February 1999, but he later decided there was no point in carrying it out.

106 Mr Newman gave evidence that his conversation with Mr Fry included the following:

107 Mr Hammond sent an email to Mr Newman on the same day, reporting an anonymous tip-off that one creditor was owed $60,000 to $80,000 and other hotel operators were owed similar amounts. Mr Hammond expressed concern that Ms Fry would declare herself bankrupt and start again as a company.

108 On 18 February 1999 Ms Fry sent a letter to the trustees of the TCF saying that as of that date, she wished to resign her membership of the Fund. She said that she did not anticipate that any clients would make a claim against the fund, and that she would forward her certificate in the mail. The letterhead of Ms Fry's letter said "The Travel Shop International" and on the next line "affiliated with" Fiji Resorts International Pty Ltd and Bali Resorts International Pty Ltd. The letterhead identified the licensee as Ms Fry and correctly stated the licence number.

The period from and after 23 February 1999

109 On 23 February 1999 the Executive Committee of TCF resolved to terminate participation by Ms Fry's agency in the Fund. A letter to that effect was sent on 25 February 1999.

110 On 24 March 1999 the Department of Fair Trading received a letter from DMV Travel, a licensed travel agent also operating in Parramatta, informing the Department that DMV Travel was immediately relocating premises to 366 Church Street Parramatta, the address of the Travel Shop. The Church Street premises remained open until licensing inspectors closed their doors on 20 April 1999. It appears that prior to closure of the premises, travel clients conducted business at the premises and were given receipts from "Dee Cee Pty Ltd trading as DMV Travel formerly The Travel Shop International Pty Ltd". Essentially, Ms Fry and Mr Fry were continuing to operate the business, subject to “back office” changes produced by their purported transfer of the business to DMV Travel.

111 According to a submission prepared by Mr Brattoni for the Management Committee of Trustees on 29 April 1999, the directors of DMV Travel denied knowledge of the letter of 24 March 1999 and alleged that the receipts and other documentation were forgeries. I have insufficient evidence to decide whether that is correct.

112 By his submission, Mr Brattoni sought emergency approval of claims for clients of The Travel Shop who had not received valid travel documents after paying deposits. Mr Brattoni put in place arrangements whereby another travel agent called San Michele Travel took over all bookings that had been made by The Travel Shop International and completed them, on the basis that compensation would be available from the TCF to make up differences between the cost of re-booking and refunds upon cancellation.

113 In April 1999 the Department of Fair Trading changed the locks at 366 Church Street Parramatta and placed chains on the door, precluding Ms Fry and Mr Fry from having access to the premises and effectively bringing to an end the business, which they allege to have been conducted at that time by DMV Travel. Subsequently proceedings were taken by the Department of Fair Trading in this Court, leading to orders banning The Travel Shop International, Ms Fry and Mr Fry from operating as travel agents for a period of five years from the date of the orders, made in May 1999. These events led to a statement in the Legislative Assembly of New South Wales by the Minister for Fair Trading, Mr Watkins, on 26 May 1999, in which he referred to the court orders and the compensation payments made by the TCF, and warned members of the public to take care when planning their holidays.

114 I have found no corroborating evidence to support the claim by Ms Fry and Mr Fry that there was a conspiracy against them by officers of the TCF, in the manner in which the business was closed down, or that they were defamed by the TCF in that process.

Client claims, and payment by the TCF

115 A claimant (referred to in the Trust Deed as a "beneficiary") makes a claim in the form provided by the TCF, attaching supporting documents. The claim form includes a statutory declaration by the claimant and a deed of release. Once received, the claim is registered in the TCF's computer and given a number, and is then allocated to a TCF claims officer for assessment. The assessing officer makes a recommendation to the Trustees, and the Management Committee of Trustees makes a decision on the claim. The claims payment procedure is overseen by the chief executive officer, Mr Brattoni.

116 As at 22 July 1999 the TCF had received claims totalling $155,489 in respect of the activities of The Travel Shop International. Mr Brattoni gave evidence that claims continued to be paid until 28 January 2000, the total payment being $143,050. Only thirteen of the scheduled claims related to payments by the Claimants to the business before 23 February 1999, and they each relate to the period after Ms Fry “transferred” the business to TSIPL.

117 The TCF was faced with a large number of claims by people who expected to Travel to Fiji or Bali in the very near future. Mr Brattoni had previously dealt with a travel agent called San Michele, which he knew to be a Bali specialist. He made arrangements with San Michele for that company to confirm or re-establish the bookings that had been made for the claimants, for air travel, hotel accommodation and transfers. This made it possible for the claimants to take the holidays they had planned, thereby reducing the cost of claims to the TCF. Under the arrangements made with San Michele, the TCF paid the compensation to it as a third party upon the direction of the claimants.

118 Ms Fry and Mr Fry complained about the arrangements with San Michele, essentially on the grounds that Mr Brattoni had shown favouritism to that company and that cheaper arrangements could have been made elsewhere. They contended that travel arrangements would have been honoured by DMV Travel, to whom Ms Fry had sold her business, if the TCF and the Department of Fair Trading had not intervened to close the business. In my opinion there is no substance to these complaints. Mr Brattoni admitted to having dealt with San Michele at a previous time, but there is no evidence to suggest any impropriety in his selection of San Michele on this occasion, or any partiality on his part. Nor did the evidence show that the arrangements with San Michele were unduly generous or otherwise on a basis which was not an arms' length basis. Mr Brattoni gave evidence that San Michele were suppliers of product to a company that was "involved in a scam", but the evidence did not suggest that San Michele was involved in any impropriety.

172 In order to recover damages under s 68 of the Fair Trading Act against Mr Tambree, for his contravention of s 42, the TCF must prove that it suffered loss or damage "by" Mr Tambree's misrepresentations. The requirement of causation under s 68 is the same as the "practical or common sense concept applied by the common law", with the result that acts done by a person in reliance upon the misrepresentation of another constitute a sufficient connection to satisfy the concept of causation: Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525 (in relation to the equivalent provision in s 82 of the Trade Practices Act 1974 (Cth)). It has not been suggested that the element of reliance for the purposes of liability for negligent statement is different from the element of reliance arising under s 68.

173 The “practical or common sense concept” referred to by the High Court in the Wardley Australia case was the concept expounded in March v E & MH Stramare Pty Ltd (1991) 171 CLR 506; see especially at 515 per Mason CJ. The question is not whether, but for the defendant's breach, the plaintiff's loss would have been sustained, but whether the defendant's identified breach was “so connected with the plaintiff's loss or injury that, as a matter of ordinary common sense and experience, it should be regarded as a cause of it”: March v Stramare, at 522 per Deane J. Where, as here, there are several factors (the conduct of each of the four defendants) contributing to the plaintiff’s loss, the correct approach is to identify each “substantial factor”: J G Fleming, The Law of Torts (9th ed, 1998), p 222, citing March v Stramare. I shall consider whether the conduct of each of the four defendants was a “cause” in this sense.

174 It may be, as the TCF contends, that it is strictly not necessary for a plaintiff under s 68 to prove reliance on misrepresentations, if the causal connection between the misrepresentations and the plaintiff's loss can otherwise be established: see the remarks by the Hon Justice French, "The Action for Misleading or Deceptive Conduct: Future Directions", in Lockhart (ed), Misleading or Deceptive Conduct - Issues and Trends (1996), quoted in (1997) 5 Trade Practices Law Journal 176. Since I have concluded, however, that the element of reliance is present, it is unnecessary for me to investigate whether causation may be established in some other way.

175 Mr Tambree contends that the TCF did not rely on the financial statements prepared by him when they assessed the 1997 and 1998 renewal applications. I disagree with this contention. The evidence shows that the assessors who reviewed the renewal applications applied the TCF's financial criteria and the system of self-assessment which I have described. In doing so, they relied on the presence of financial information to support the assessments made by the applicant, and to support the points allocated to the application. That reliance involved reliance on the accuracy of certain aspects of the financial information made relevant by the criteria.

176 It is true that only a little time was given by the assessors to each renewal application, and that the plaintiff has not demonstrated that the assessors for the 1997 and 1998 applications in fact looked at the financial statements as opposed to the information in the application form. Additionally, Mr Brattoni gave evidence that the notes to the financial statements clearly disclosed that they had not complied with the instructions given in the form with respect to accounting standards. Nevertheless the misrepresentations that I have identified go to matters of importance, in respect of which the assessor for each year must have relied on the accuracy of the financial information. In particular, the fact that no liabilities were disclosed when in truth there were substantial liabilities in the business at both balance dates was a matter of fundamental importance. The assessors were entitled to assume that the accountant who prepared the financial statements would have taken steps of the kind prescribed by APS 9, even if the assessors did not read Mr Tambree's representation that he had complied with APS 9. That general assumption would include a particular assumption that the accountant had brought some judgment to bear on the question of liabilities before finalising financial statements which asserted that no liabilities were owing at the respective balance dates.

177 Mr Tambree contends that if the TCF in fact relied on his financial statements (which he denies), it would have been so negligent in protecting its own interest that the court should conclude that the misrepresentation was not any real inducement to the TCF's decision to continue Ms Fry's participation in the Fund (citing Argy v Blunts Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 at 138). I disagree. Having regard to the TCF's method of processing renewal applications, it is appropriate to infer, and I do infer, that Mr Tambree's misrepresentations were a real inducement to the TCF's decisions in respect of the 1997 and 1998 renewals.

178 Mr Tambree also says that the TCF has not shown that its losses occurred because Ms Fry was twice successful in having her participation in the Fund renewed. He points out that all but a small part of the claims made by the TCF related to losses incurred in 1999, while Ms Fry was operating while unlicensed. He relies on evidence by Mr Brattoni that he did not know whether, if Ms Fry had her Licence terminated a year earlier, she and her father would have stopped unlicensed trading at that time. In my opinion, however, the evidence given on behalf of the TCF as a whole, and in particular the evidence given by Mr Whittaker, Mr Pitts and Mr Given, provides a common sense causal connection between Mr Tambree's misrepresentations and the TCF's losses. I accept that evidence.

179 Finally as to causation, Mr Tambree says that the TCF made voluntary payments to those who lost money dealing with Ms Fry while she was unlicensed, in such a fashion that those voluntary payments were not causally related to any conduct of Mr Tambree. Again, I disagree. The evidence does not provide any reason to doubt that the Management Committee of Trustees of the TCF exercised their discretion under the Deed in a proper fashion, to address claims that had arisen through a chain of events causally related to the renewal of Ms Fry's participation as a result of her 1997 and 1998 applications. The renewals permitted her to continue to trade, and then to informally transfer the business to TSIPL, and later to have the business transferred again to DMV Travel, while she and her father continued to deal with clients in much the same way until the business was physically closed down.

180 If the TCF assessor had been aware at the relevant times that, by virtue of the content of the renewal applications, Mr Tambree had not complied with APS 9 and that the accounts had not been properly prepared on an accrual basis, it is reasonable to infer that he would have become concerned about the absence of liabilities in the financial statements, notwithstanding Mr Roseby's audit report. Applying the common sense approach to causation, one can infer that in such circumstances, further inquiries would have been made, leading to such events as Mr Whittaker, Mr Pitts and Mr Given have set out in evidence.

181 To the extent that the claim against Mr Tambree is based upon his involvement in contraventions by Ms Fry, Mr Tambree contends that it has not been established that he had the requisite knowledge that her conduct was misleading. Knowledge of falsehood is necessary, according to Yorke v Lucas (1985) 158 CLR 661 at 666. In my opinion it has not been shown that Mr Tambree knew that the financial statements were incorrect with respect to liabilities. Rather, the problem was that, through failure to comply with APS 9 and to apply his professional judgment appropriately, he did not detect the deficiencies that were present in the financial statements. In my opinion Mr Tambree's liability is primary liability flowing from his own misleading conduct rather than involvement in the misleading conduct of Ms Fry.

182 As to the claim for negligent misstatement causing economic loss, Mr Tambree contends that he did not owe a duty of care to the TCF, because he had no reason to suppose that the accounts he prepared would be communicated to the TCF and that it would rely on them (citing Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 at 252 per Brennan CJ, and at 265-6 per Toohey and Gaudron JJ). According to Mr Tambree, he compiled and supplied the figures to Mr Roseby for audit and no more, and did not expect the TCF to rely on his unaudited financial statements for the purpose of assessing Ms Fry's application. In my opinion these contentions are contrary to the facts. Mr Tambree arranged for Mr Roseby to be engaged as auditor and knew that the accounts were being prepared for submission to the TCF for the purpose of Ms Fry's annual renewal applications. He prepared financial statements which, according to his own evidence, were set out in a professional manner and amounted to meaningful financial statements. He must have been aware that the financial statements prepared by him would, subject to audit, form the basis for the renewal applications.

183 The reliance placed upon the financial statements was reasonable reliance and in particular, it was reasonable for the TCF to rely on Mr Tambree's statement that he had complied with APS 9, and on the implication from the financial statements that they had been prepared on an accruals basis, and therefore that (subject to audit) they were accurate when they showed no liabilities.

184 In my opinion Mr Tambree failed to meet the standard of care required of an accountant whose instructions are to prepare financial statements for the purpose of an audit and in connection with renewal applications to the TCF. The misstatements that I have identified were negligent misstatements by him and for the reasons I have given, they have caused the TCF to suffer losses.

Liability of Mr Roseby

185 The TCF makes claims against Mr Roseby for negligent misstatement and misleading conduct contrary to s 42 of the Fair Trading Act, on the ground that he was knowingly concerned in Ms Fry's contravention of s 42. In my opinion, the ingredients of the first two of these three causes of action have been made out.

186 When he provided his audit reports for the 1997 and 1998 financial statements and applications, Mr Roseby knew that the TCF would rely on those reports. That is evident from the text of the reports themselves. He was under a duty of care to the TCF. By providing his reports he represented that the accounts presented a true and fair view of the matters required to be dealt with in financial statements and that they complied with applicable accounting standards. He also represented that his audit had been conducted in accordance with Australian Auditing Standards and with due care and skill. The TCF relied on Mr Roseby's report, because the application of the TCF's financial criteria to produce a point score depended upon financial information which it required to be audited. Mr Roseby's conduct of the audit failed to comply with the standard of care to which he was subject, and the representations that he made in his report included inaccurate and misleading representations. This is so, notwithstanding that he was deceived by Mr Fry, who concealed from him information about liabilities, because Mr Roseby's duty, which he did not adequately discharge, was to conduct a proper audit regardless of what he was told by Mr Fry. He was therefore liable to the TCF for the loss caused by his negligent conduct.

187 Mr Roseby's conduct of the audits for the 1997 and 1998 financial statements and applications, and his inaccurate and misleading representations in his reports, constituted misleading conduct for the purposes of s 42 of the Fair Trading Act. He was therefore liable under s 68 to compensate the TCF for the loss or damage that it suffered by his contravention. I am not persuaded, however, that Mr Roseby was liable to compensate the TCF under s 68 as a person involved in Ms Fry's contravention of s 42. Her contravention arose when she submitted returns containing false financial information. Having regard to Mr Fry's deception, it has not been established that Mr Roseby actually knew the facts material to Ms Fry's contravention, although he negligently failed to conduct a proper audit which should have uncovered the true facts with respect to liabilities.

188 I base these conclusions on my full acceptance of the evidence of Mr Humphreys and Professor Walker as to the deficiencies of Mr Roseby's audits in 1997 and 1998. Their reports show that Mr Roseby's work was seriously inadequate. None of their reasoning and conclusions has been undermined. Indeed, in final submissions counsel for Mr Roseby did not directly contest the proposition that Mr Roseby was liable to compensate the TCF for losses caused by his client's audits. Rather, counsel submitted that Mr Roseby's audits did not cause the losses which the TCF seeks to recover.

189 As to causation, TCF's case against Mr Roseby is that by reason of Mr Roseby's conduct in auditing Ms Fry's business in 1997 and 1998, the TCF renewed her participation in the Fund and thereby permitted her to continue to trade as a licensed travel agent until February 1999. The TCF alleges that as a consequence, it suffered the loss constituted by meeting the Claimants' claims. Mr Roseby puts forward several answers to the TCF's case.

190 First, Mr Roseby points out that Ms Fry's participation in the Fund was terminated on 23 February 1999, and yet after that time either Ms Fry or Mr Fry or their related entities continued to trade as a travel agent. Indeed, since I have found that from November 1998, TSIPL had taken over Ms Fry's travel agency business, the logic of Mr Roseby's position is that the unlawful activity began in November 1998 rather than in February 1999. According to Mr Roseby, the resulting claims arose either entirely or substantially from this unlawful activity. Mr Roseby contends that the audits of Ms Fry's business in 1997 and 1998 cannot be causally related to the TCF losses. The losses were caused by unlawful trading without a licence or participation in the Fund. By their conduct in continuing to trade unlawfully notwithstanding the actions of the Department of Fair Trading, Mr Fry and Ms Fry have broken the chain of causation back to Mr Roseby's audits, according to his contention.

191 I disagree with this submission. If one takes the evidence of Mr Whitaker, Mr Pitts and Mr Given, which I accept, it can be seen that remedial steps would, in all probability, have been taken by the TCF and the Department of Fair Trading substantially earlier than they were in fact taken. A proper audit would have put the TCF in a position to deal with the misleading financial disclosure late in 1997 or early in 1998. In terms of the common sense meaning of causation, Mr Roseby's conduct of the 1997 audit was a cause of the losses, because it allowed a state of affairs to develop in which Ms Fry and Mr Fry were able to continue to trade and expose the clients of the business to losses.

192 Secondly, Mr Roseby invites the Court to consider the traditional sine qua non test, namely whether "but for" the negligent audit the TCF would have avoided any claims being made upon it. Mr Roseby submits that any such conclusion cannot be drawn in relation to the 1998 audit. This is because Mr Brattoni gave evidence that it would take up to a month to review the financial information in a renewal application, and if remedial action was then required, at least 21 days would be given for the participant to comply, and in the event of non-compliance, the participant would be invited to put its case at the next meeting of the Management Committee. This evidence means, according to Mr Roseby's submission, that a termination following the renewal application made in November 1998 would be unlikely to have occurred before 18 February 1999.

193 I accept this submission, subject to a qualification. Indeed, it seems to me that the same conclusion follows whether one applies the "but for" test or the more general common sense concept of causation. In my view, it could not be said that the deficiencies in the 1998 renewal application and financial statements, if they were considered in isolation, could be said to have been a contributing cause to the TCF losses. The qualification is that Mr Roseby's submission requires that the 1998 renewal application and financial statements be considered in isolation. If one considers the 1998 financial disclosure together with the 1997 financial disclosure, taking into account the evidence of Mr Whittaker, Mr Pitts and Mr Given, a different picture emerges. If there had been full disclosure of liabilities in 1997 either initially or in response to some investigations stimulated by the auditor, and then Ms Fry lodged an application for renewal in 1998 showing much larger turnover figures but no liabilities, it stands to reason that the TCF would have responded rather more quickly than Mr Brattoni's timetable implies.

194 Turning to the 1997 audit, Mr Roseby says that at its highest, the TCF's case is that Ms Fry's licence would have been terminated in about February or March 1998 following lodgement of the financial materials in December 1997. But Mr Brattoni gave evidence that the policing of unlicensed trading was the responsibility of the Department of Fair Trading, whose activities were outside the control of the Fund, and he agreed with the proposition that no one knew whether the Frys would have stopped unlicensed trading if Ms Fry's licence had been terminated a year earlier. Moreover, says Mr Roseby, the Fund became aware of serious grounds for concern about the business on 8 February 1999, and rather than freezing bank accounts or requiring a trust account, it merely gave Ms Fry time to resign and terminated her participation two weeks later.

195 This submission does not take into account the evidence of Mr Whittaker, Mr Pitts and Mr Given. The effect of their evidence is that if proper financial disclosure had been made in 1997, Ms Fry's point score would have been minus 6 and the TCF would have imposed a requirement for a bank guarantee or an injection of capital, leading to termination of the licence if this funding was not forthcoming. Either funding would have been provided and so a capital buffer would have been created for the protection of clients, or participation in the Fund would have been withdrawn and Ms Fry's licence cancelled. If funding had been provided for the purposes of the 1997 renewal, it would then have been increased for the 1998 renewal so that, by February 1999, there would have been a capital buffer in the vicinity of $292,000, an amount adequate to meet the claims in fact made. Mr Roseby's deficient audits in 1997 and 1998 were a cause of this capital buffer not being required and obtained.

196 If the TCF's funding requirements were not met for the 1997 renewal, and consequently Ms Fry's participation in the Fund and her travel agent's licence were withdrawn in 1998, no one can be sure that Ms Fry and her father would not then have engaged in unlawful trading causing losses. But there is no evidence that would lead me to conclude that unlawful trading and losses would be more likely than not. The issue is purely one for speculation. What is tolerably clear is that proper discharge of his auditing duties by Mr Roseby would have led to a chain of regulatory events that would have prevented the loss in fact suffered by the TCF.

197 Thirdly, Mr Roseby draws attention to evidence indicating that Mr Fry, through one or more of the companies Fiji Resorts, Bali Resorts and TSIPL, engaged in unlicensed trading throughout 1997 and 1998. I have found that TSIPL took over the business from November 1998 onwards. TSIPL was never licensed and never audited.

198 It does not seem to me that Mr Fry's activities, assuming them to have been unlawful, made it improbable that proper auditing of Ms Fry's business in 1997 and 1998 would have avoided the TCF's loss. Whether, if regulatory intervention had taken place after a proper audit, Mr Fry would nevertheless have used one or more corporate entities to conduct unlawful trading, is a matter for speculation. Whether, if he did so, he would have caused loss to anyone and whether, if so, the loss would have been borne by the TCF rather than (for example) trade creditors such as Metro, are matters for speculation upon speculation. The evidence shows that on the balance of probabilities, and applying the common sense test of causation, Mr Roseby's deficient audits were a cause of the loss in fact incurred by the TCF.

199 Fourthly, Mr Roseby submits that as from 8 February 1999, all of the alleged financial misrepresentations had been revealed to the TCF. Therefore, says Mr Roseby, any misrepresentation arising from the audit no longer had any operative effect on the TCF. From that date onwards, he says, the TCF was entirely the author of its own losses. It declined to conduct a field audit. It permitted participation to continue until 23 February 1999, and thereafter left it to the Department of Fair Trading to follow up any potential unlicensed trading. Therefore losses incurred after 8 February 1999 can have no causal link to any misrepresentation in the audit.

200 This submission misses the point of the TCF's case on causation. Assuming that the TCF had all relevant knowledge on 8 February 1999, it was then in a position to commence appropriate regulatory steps that would make it likely that losses would eventually be avoided. The losses in fact suffered by the TCF were incurred, principally, during 1999 before closure of the business. The evidence does not show that, if the TCF took its appropriate and usual regulatory measures in a period beginning on 8 February 1999, the actual losses it suffered would have been avoided. However, the evidence does show, on balance, that if Mr Roseby had conducted proper audits and thereby put the TCF in a position to commence its appropriate and usual regulatory procedures in 1998, the losses suffered by the TCF would have been avoided.

201 Fifthly, Mr Roseby draws attention to the fact that the TCF treated the claims it received as discretionary claims under clause 15.2 of the Deed, on the ground that even where payments were made prior to termination, the failure to account was considered to have arisen while the business was unlicensed. Generally speaking, the dates of travel by Claimants, or the dates of the demands made upon the travel agent, or the dates of the claims made upon the TCF, post-dated the termination of Ms Fry's participation in the scheme.

202 In those circumstances, Mr Roseby invokes the general principle that "the free, deliberate and informed act or omission of a human being, intended to produce the consequence which it did in fact produce, negatives causal connection (citing HLA Hart and A Honore, Causation in the Law (1959) at 130). Such intervention is frequently seen as a novus actus interveniens, which is an exception to the "but for" test of causation (citing March v Stramare (1991) 171 CLR 506). To put the matter another way, the law does not recognise a voluntary payment as amounting to a person's loss or damage unless that person was under a legal obligation to meet the payment. The TCF was under no such obligation to meet the claims, because claims were in respect of unlicensed trading and the Trustees had a discretion with respect to them.

203 In my opinion it is correct, in respect of most of the claims, that they were not covered by clause 15.1 of the Deed, because the Claimants' losses did not arise from an act or omission by a participant in the Fund. By the time the losses were incurred, the business had been taken over by TSIPL, which was not a participant, and although Ms Fry remained a participant until 23 February 1999, her business conduct from November 1998 onwards was as agent for TSIPL. Consequently I proceed on the basis that most of the claims were met under clause 15.2, which gives the Trustees an absolute discretion to pay compensation in certain circumstances not governed by clause 15.1.

204 Although the Trustees had a discretion to accept or deny the claims, they were required to exercise that discretion in their capacity as fiduciaries, acting for proper purposes and upon relevant considerations. It is probable that their discretion is in the nature of a trust power (Re Baden’s Deed Trusts [1971] AC 424 at 449 per Lord Wilberforce), and consequently they have an equitable duty to exercise that discretion, when faced with a claim for compensation in proper form. The Court cannot review "on the merits" the exercise by a trustee of an absolute discretion that has been exercised in good faith and without ulterior purpose (Gisborne v Gisborne (1877) 2 App Cas 300), but the exercise of fiduciary powers is open to review on several grounds, however broad may be the terms of the discretion (Karger v Paul [1984] VR 161). The Court may determine whether the discretion has been exercised in bad faith or arbitrarily or capriciously or irresponsibly (Re Pauling's Settlement Trust [1964] Ch 303, at 333; Lutheran Church of Australia v Farmers' Co-operative Executors & Trustees Ltd (1970) 121 CLR 628, at 639; Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83); whether it has been exercised upon a "real and genuine consideration" (Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896, at 905); whether the discretion has been exercised for an ulterior purpose or not in accordance with the purposes for which it was conferred (Cowan v Scargill [1985] 1 Ch 270; Lock v Westpac Banking Corporation (1991) 25 NSWLR 593); and in a case where the trustee has disclosed the reasons for the exercise of the discretion, whether those reasons are sound (Re Londonderry's Settlement [1965] Ch 916; Parkes Management Ltd v Perpetual Trustee Co Ltd (1997) 10 ACLR 303).

205 The evidence does not provide any ground for contending that the Trustees acted otherwise than properly in the discharge of their fiduciary responsibilities. Nevertheless, the Trustees' decisions were constrained by the equitable principles to which I have referred. In particular, the equitable requirement to exercise the discretion for proper purposes, having regard to the objects for which it was conferred, is a substantial limitation which may well mean that, subject to disentitling factors, a claim in proper form should be allowed, where the loss has been caused to a customer of a travel agent who did not know, and had no reason to believe, that the agent was unlicensed. That being so, it is incorrect to classify the Trustees' decisions to allow claims as free acts of intervention, breaking the chain of causation. The misleading financial disclosure in 1997 and 1998 set in train a series of events that included the consideration of compensation claims by the Trustees in the exercise of their fiduciary responsibilities, the product of that process being acceptance of the claims and payment of the Claimants.

206 Sixthly, Mr Roseby submits that, on the evidence, the Metro account holder until June 1997 was Fiji Resorts, and thereafter the account holder was TSIPL. Mr Roseby contends that Ms Fry's business acquired tickets from TSIPL and was only indebted to that company for the tickets actually ordered by her for the business, all of which were paid for. Hence, it said, Ms Fry's evidence that her business had no liabilities at the two balance dates was correct, and consequently the financial statements and renewal applications in 1997 and 1998 did not mistake the liabilities of the business.

207 There are two answers to this submission. First, it is contrary to the findings of fact that I have made with respect to the Metro account, on the basis of my review of the whole of the evidence. I have taken the view that from about February 1997 until November 1998, a period that includes the two balance dates, the account holder with Metro was Ms Fry trading as The Travel Shop International. Secondly, while Mr Roseby's submission, if correct, would have answered the allegation that the financial statements were misleading in their assertion that there were no liabilities, it would not have overcome other deficiencies in the financial statements and their audit, as identified by Mr Humphreys and Professor Walker. Those other deficiencies were causally related to the TCF's loss.

208 Seventhly, Mr Roseby contends that even if Ms Fry's personal business was indebted to Metro Travel at the two balance dates, it does not necessarily follow that this fact would have been revealed in an audit. He draws attention to the fact that the state of the records in the possession of Ms Fry and Mr Fry at the time of the 1997 audit is not known. Metro did not issue regular statements of accounts to The Travel Shop, and the invoices that it issued are not in evidence. While the printout which is in evidence suggests an outstanding debt of approximately $65,000 as at 30 June 1997, Mr Roseby points out that there is no direct evidence that the invoices the subject of the printout had been issued to and received by Ms Fry before 30 June 1997, or that they were due for payment at or before that date.

209 I disagree with Mr Roseby's assessment of the evidence on this point. The printout is to be read in conjunction with Mr Ng's second affidavit and his oral evidence. His evidence clearly was that, although the due date on the statement may not have been accurate, an amount of approximately $65,000 was owing as at 30 June 1997.

210 Mr Roseby also submits that Mr Fry, who admitted to deceiving the auditor in 1998, could have succeeded in deceiving the most diligent auditor in 1997 by not revealing invoices or client files and the like. However, Professor Walker's evidence established that a diligent auditor would have pursued the question of liabilities in the circumstances in this case, where the accounts asserted that there were no liabilities at all. I infer that, although particular invoices or client files could have been concealed from even the most diligent auditor, Mr Fry would not have been able to persuade a diligent auditor that the business had no liabilities whatever at the balance date. Further, I infer that where the business involved very frequent contact with a ticket consolidator, a diligent auditor would have been concerned to know the state of the account between the ticket consolidator and travel agent, and would not have accepted the assertion that there was no debt in the absence of verification.

211 Mr Roseby contends that the alleged debt to Metro Travel as at 30 June 1997 could have been matched by corresponding debtors (for example, DMV Travel or TSIPL), whose debts were not accounted for as current assets. That submission is merely speculation. The only fact established by the evidence is that there was a debt owing to Metro Travel.

212 Mr Roseby says that a payment of $30,000 was proved to have been made to Metro on 2 July 1998, but there is no direct evidence that it was for unpaid invoices issued before 30 June 1998. I am satisfied by other evidence, however, that there was a substantial debt owing to Metro as at 30 June 1998. Moreover, on balance I think it would be appropriate to infer that the amount of $30,000 paid to Metro on 2 July 1998 was in respect of a debt incurred on or before 30 June 1998.

213 Although neither Mr Humphreys nor Professor Walker was prepared to give evidence that proper audits would in fact have revealed the outstanding liabilities to Metro Travel, their evidence is to the effect that the audit should have been directed towards testing, inter alia, whether there was any indebtedness as at the balance dates by the business to the major ticket consolidator with which the business dealt.

214 My conclusion is that there is no substance to Mr Roseby's submissions on these matters. The TCF has made out its case against Mr Roseby for negligent misstatement and for misleading conduct in contravention of s 42, and has established the requisite causal connection between the negligent conduct and contravention and the losses incurred in meeting claims by Claimants.

Conclusions

215 The case against Ms Fry for misleading conduct in contravention of s 42 of the Fair Trading Act has been made out. Mr Fry was involved in Ms Fry's contravention, for the purposes of ss 61 and 68 of the Fair Trading Act, and he was also involved in contraventions by Mr Tambree and Mr Roseby. Mr Tambree and Mr Roseby engaged in conduct in breach of their duties of care to the TCF, which was also misleading conduct under s 42 of the Fair Trading Act.

216 I am satisfied that the wrongful conduct of each of these four defendants caused the TCF to suffer the losses in the sum of $143,050 particularised in the schedule to the Third Amended Statement of Claim. Consequently the TCF is entitled to judgment against each of those four defendants.

217 In my opinion, the TCF has not established any entitlement to recovery under s 40 (3) of the Travel Agents Act or by virtue of assignments by the Claimants of their rights of action.

218 There is no credible evidence to support the cross-claim (the Third Cross-claim) brought by Ms Fry against the TCF, alleging breach of duty and conspiracy by officers of the TCF and defamation against the TCF. That cross-claim should be dismissed.

219 It will be necessary to receive further submissions with respect to the claims for indemnity and contribution made by Mr Roseby and Mr Tambree against the other defendants (including one another). I shall give some directions for that purpose.

220 I shall direct the TCF to bring in short minutes to reflect these reasons for judgment, and I shall arrange a time to hear the submissions of the parties with respect to costs.

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Last Modified: 11/14/2002

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Citations

Travel Compensation Fund v Fry [2002] NSWSC 1044

Most Recent Citation

Travel Compensation Fund v Tambree [2005] HCA 69

Cases Citing This Decision

1

Travel Compensation Fund v Tambree [2005] HCA 69

Cases Cited

14

Statutory Material Cited

2

Howden, Matthew v Travel Compensation Fund [1997] FCA 1166

Travel Compensation Fund v Travel Guide Pty Ltd (in liq) [1997] FCA 54

CITATION:	Travel Compensation Fund v Fry [2002] NSWSC 1044
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 3295/99
HEARING DATE(S):	26, 27, 28 February, 1, 4, 5, 6, 7, 8, 19 & 20 March 2002
JUDGMENT DATE:	8 November 2002
PARTIES :	Travel Compensation Fund (P) Renee Julie Fry (D1) Trevor Fry (D2) Robyn Joan Fry (D3) Robert Tambree t/as R Tambree & Associates (D4) Phillip Roseby t/as P J Roseby & Co (D5)
JUDGMENT OF:	Austin J

COUNSEL :	Mr N F Francey (P) In person (D1, D2) Mr P B Walsh (D4) Mr R E Dubler (D5)
SOLICITORS:	McCabe Terrill (P) Burston Cole & Co (D4) Phillips Fox (D5)
CATCHWORDS:	TRADE PRACTICES - Fair Trading Act - misleading and deceptive conduct in trade and commerce - financial information provided in application for participation in Travel Compensation Fund and in applications for renewal of participation - whether misleading or deceptive - whether Fund's loss through meeting compensation claims recoverable against licensed travel agent, a person involved in the misrepresentations, an accountant and an auditor - causation - NEGLIGENCE - negligent misstatements by accountant and auditor - reliance and causation - TRAVEL AGENTS - Fund's right of subrogation under Travel Agents Act - right of recovery against travel agent through subrogation to claimants' rights
LEGISLATION CITED:	Fair Trading Act 1987 (NSW) ss 42, 61, 68 Travel Agents Act 1986 ss 6, 11, 40, 57
CASES CITED:	Argy v Blunts Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 83 Cowan v Scargill [1985] 1 Ch 270 Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896 Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 Gardam v George Wills & Co Ltd (1988) 82 ALR 415 Gisborne v Gisborne (1877) 2 App Cas 300 Howden v Travel Compensation Fund [1997] FCA 1166 Karger v Paul [1984] VR 161 Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 Lutheran Church of Australia v Farmers' Co-operative Executors & Trustees Ltd (1970) 121 CLR 628 March v E & MH Stramare Pty Ltd (1991) 171 CLR 506 Parkes Management Ltd v Perpetual Trustee Co Ltd (1997) 10 ACLR 303 Pauling's Settlement Trust [1964] Ch 303 Re Baden's Deed Trusts [1971] AC 424 Re Londonderry's Settlement [1965] Ch 916 Saints Gallery Pty Ltd v Plummer (1988) 80 ALR 525 Travel Compensation Fund v Travel Guide Pty Ltd (1997) 72 FCR 371 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 Yorke v Lucas (1985) 158 CLR 661
DECISION:	See under heading "Conclusions"