Yet Son Rosewood Furniture Pty Ltd v Ai Yan Luo
[2012] NSWSC 730
•02 July 2012
Supreme Court
New South Wales
Medium Neutral Citation: Yet Son Rosewood Furniture Pty Ltd v Ai Yan Luo [2012] NSWSC 730 Hearing dates: 11, 12, 13, 14 & 15 April 2011, written submissions closed 28 April 2011 Decision date: 02 July 2012 Before: McCallum J Decision: Verdict for the plaintiff in the sum of $3,775
Catchwords: TORTS - conversion - tax office audit identifying shortfall in the declaration of company's cash sales receipts - company alleging that shortfall represents cash appropriated by defendant whilst employed as bookkeeper for the company - circumstantial case - conversion of small sum established
EVIDENCE - representation by tax office as to shortfall in the declaration of company's cash sales receipts - where representation relevant for a non-hearsay purpose - whether use to be made of the representation should be limited under s 136 of the Evidence Act 1995Legislation Cited: Evidence Act 1995 Cases Cited: Penfolds Wines Pty Ltd v Elliott [1946] HCA 46; (1946) 74 CLR 204
Briginshaw v Briginshaw (1938) 60 CLR 336Category: Principal judgment Parties: Yet Son Rosewood Furniture Pty Ltd (plaintiff)
Ai Yan Luo (defendant)Representation: Counsel:
C Lonergan (plaintiff)
T J Morahan with T J Saunders (defendant)
Herman Chan & Co (plaintiff)
Wang & Associates (defendant)
File Number(s): 2009/291449 Publication restriction: None
Judgment
Yet Son Rosewood Furniture Pty Ltd carries on business as a retailer of imported rosewood furniture. In July 2009, the Australian Taxation Office completed an audit of the company which identified a shortfall in the declaration of cash sales receipts in the order of $480,000 for the two financial years ending 30 June 2006 and 30 June 2007. Yet Son claims that the explanation for the undeclared income is that the cash in question was wrongfully appropriated from its sales revenue by its former bookkeeper, Ms Ai Yan Luo (also known as Kelly Luo). By these proceedings, Yet Son seeks to recover those amounts from Ms Luo.
Background
In order to assess Yet Son's claim, it is necessary to peer through the corporate veil to some extent. The company was established in October 2005. Mr Chiu San Lo has been recorded as its sole director since that date (exhibit E: ASIC searches tendered by consent after the conclusion of the hearing and marked in chambers).
It is common ground on the pleadings that the furniture retail business examined in the tax office audit was carried on by the plaintiff company. Indeed, that is a premise of the company's claim against Ms Luo. However, Chiu San Lo gave evidence that the "actual owners" of the business were his younger brother in China, Mr Zhao Yong Luo, and another Chinese partner, Mrs Pengqun Liao. On the strength of the pleadings and the evidence before me, I am satisfied that it is not strictly accurate to describe the Chinese investors as owners of the business. Their interest is as shareholders in the plaintiff company. ASIC records confirm that, when the company was established, Mr Lo and his brother were two of the three members of the company, each of whom held 100 of the 300 issued shares. I note that Pengqun Liao is not the name recorded as the third member but that is not significant for present purposes.
Chiu San Lo said that he set up the company at the request of his brother and on his brother's behalf. He said that he (Chiu San Lo) was a director in name only (T26) and did not invest any money in the business (T29). He explained that his brother, who was living in China, needed a person in Australia to establish the corporate structure through which the business would be conducted. Mr Lo said (at T25.30):
It was my younger brother who had been begging me, begging me. He asked me to open it on his behalf in here, because at this time he didn't have residential status here and...his daughter was studying in here and the daughter nearly finish it.
The daughter referred to in that conversation is the defendant, Ms Luo. According to Mr Lo, from its inception, the company was controlled and managed by his younger brother and Ms Luo (T26).
Chiu San Lo's contention that he only lent his name to the business and did not invest any money in it is inconsistent with a document headed "Investment Shares Certification" tendered at the hearing (exhibit 1). That document, signed by Mr Lo, records him as one of three shareholders of the company who each invested $1.5 Chinese Yuan to establish the business. It is difficult to know what to make of the document. Chiu San Lo said he thought it was prepared for his protection in light of the substantial borrowings taken out in his name to establish the business (T88). The defendant's mother thought it was prepared for the protection of the Chinese investors, since none of the assets of the business were in their names (T278).
Although considerable attention was paid to it in cross-examination at the hearing, I do not think the document ultimately sheds any great light on the issues I have to determine. However, I accept that it records Mr Lo as having a greater stake in the business than he said in his evidence, since it acknowledges his having made one third of the initial investment. I am unable to determine on the evidence before me whether Mr Lo in fact invested that amount from his own resources. Nonetheless, the fact that the other investors were evidently prepared to acknowledge him as such is a factor I have taken into account in assessing his evidence as to the role he played in the management of the business.
The apparent existence of discrete commercial arrangements behind the corporate structure established by Mr Lo is also relevant to an assessment of his accusations against Ms Luo. She painted his allegations as a transparent and dishonest attempt to escape the company's due tax obligations. Chiu San Lo's response, in effect, is that the business was plundered by Ms Luo for the benefit of her family in China and that he has been left tangled up in the corporate veil.
Causes of action relied upon by the plaintiff
Yet Son brings its claim in conversion and seeks to recover the whole of the undeclared cash sales receipts identified in the audit conducted by the Australian Taxation Office. Specifically, it is alleged that Ms Luo "appropriated to herself the sum of not less than $479,300 that was payable to the plaintiff" (paragraph 7 of the amended statement of claim).
Separately, it is alleged that Ms Luo caused sales of furniture to be made at prices that were "below the stated retail prices thereby causing loss and damage to the plaintiff" (paragraph 12 of the amended statement of claim). No specific authority was relied upon to support the proposition that an employee who is authorised to sell her employer's goods converts the goods if she gives the buyer an unauthorised discount. The plaintiff cited part of a passage from the judgment of Dixon J in Penfolds Wines Pty Ltd v Elliott [1946] HCA 46; (1946) 74 CLR 204. That case was concerned with Mr Elliott's use of Penfolds' empty wine bottles to carry other wine. The passage relied upon (in full) states (at 229.2):
But nothing in the course pursued by the respondent in receiving and filling bottles and returning them could possibly amount to the tort of conversion. The essence of conversion is a dealing with a chattel in a manner repugnant to the immediate right of possession of the person who has the property or special property in the chattel. It may take the form of a disposal of the goods by way of sale, or pledge or other intended transfer of an interest followed by delivery, of the destruction or change of the nature or character of the thing, as for example, pouring water into wine or cutting the seals from a deed, or of an appropriation evidenced by refusal to deliver or other denial of title. But damage to the chattel is not conversion, nor is use, nor is a transfer of possession otherwise than for the purpose of affecting the immediate right to possession, nor is it always conversion to lose the goods beyond hope of recovery. An intent to do that which would deprive "the true owner" of his immediate right to possession or impair it may be said to form the essential ground of the tort.
Whether or not the giving of an unauthorised discount would amount to dealing with a chattel in a manner repugnant to the immediate right of possession of the owner might be debatable, depending on the circumstances. In any event, I am not persuaded that Ms Luo transacted any sale at an unauthorised discount. The little evidence adduced on that issue simply fell short of proving the allegation made. There is, however, a real issue as to whether Ms Luo made a practice of taking undeclared cash out of the business.
The statement of claim pleaded an alternative cause of action in negligence (paragraphs 19 to 21 of the amended statement of claim). However, although that claim was never expressly abandoned, it was given almost no attention in the conduct of the case on behalf of the plaintiff. It was referred to only in passing in opening (at T2.7), where counsel observed that both claims relied upon the same particulars (failure to account to the plaintiff for cash receipts and the allegation that sales were made below the normal retail price). The negligence claim was not addressed at all in the plaintiff's closing submissions except in support of an evidentiary argument (considered below). In the way in which the case was run on behalf of the plaintiff, that aspect of its claim was entirely subsumed in the claim in conversion. I do not consider it necessary to consider it further.
Claim in conversion
As noted on behalf of the defendant, the claim in conversion amounted, in substance, to a claim of fraud and accordingly required clear and cogent proof in accordance with the principles stated in Briginshaw v Briginshaw (1938) 60 CLR 336.
Perhaps unsurprisingly, there was no direct evidence that Ms Luo appropriated any cash from the company to her own use. The claim was based on a combination of the following circumstances and contentions: the shortfall in declared cash sales revenue identified by the Australian Taxation Office in its audit; the contention that Ms Luo was solely responsible for the management of cash sales receipts for the duration of her employment; Ms Luo's admission that she did in fact bank $24,255 of the company's cash receipts into her own bank account during the last several weeks of her employment; a series of anomalies in particular cash sales transactions identified by Chiu San Lo after Ms Luo's resignation and conversations between Chiu San Lo and Ms Luo, some of which appeared to be relied upon as entailing implicit acknowledgement of guilt. It is necessary to consider each of those matters in turn.
Shortfall in declared cash sales revenue
It is a critical premise of the plaintiff's case that large amounts of its cash receipts were diverted from its use during the period of Ms Luo's employment. It is surprising, in that circumstance, that the plaintiff adduced no evidence from an expert witness to analyse the company's financial records for that period and indeed no lay analysis of those records.
The plaintiff called its external accountant, Mr Herman Chang, as a witness but his evidence went no further than to say that the amount identified by the tax office as undeclared cash receipts was in fact treated by the tax office as income, resulting in the issue of amended assessments for the 2006 and 2007 financial years (T99.20). Mr Chang had not checked the work underlying the tax office's decision or attempted to undertake a similar analysis himself. It was clear from his evidence that, to the extent that he endorsed the conclusion that cash was misappropriated by Ms Luo, that was on the basis of instructions from Mr Lo.
The absence of any expert evidence on that issue meant that proof of the alleged diversion of cash from the company's revenue rested almost exclusively on the outcome of the audit undertaken by the Australian Taxation Office.
The Tax Office informed Yet Son of the outcome of the audit by letter dated 2 July 2009. The letter enclosed summaries of the revisions and amendments to Yet Son's tax returns in light of the audit, together with a statement of reasons for those decisions. The letter and its enclosures were admitted into evidence but the parties were in dispute as to what they proved. The difficulty for the plaintiff in relying on that material was acknowledged early in the hearing. In his opening address, Mr Lonergan, who appeared for the plaintiff, said (at T5.31):
We put that forward not as proof of conversion, but, presently, we put it forward as the best particular of the quantification of the damages of $479,300.
It may be acknowledged that there was some ambiguity in that statement. I took it to mean that the plaintiff did not rely upon the letter as to the truth of the representation that the company did in fact receive more cash income than it declared to the tax office.
The whole document was subsequently admitted without objection (T58.42) and there was no application to limit the use to be made of it. It should be noted in that context that the letter could be regarded as in some ways assisting the case for the defendant. The amount of $479,300 referred to by Mr Lonergan as the quantification of the plaintiff's damages was the sum of the amounts identified by the Tax Office as undeclared cash receipts for the financial years ending 2006 and 2007 ($190,564 and $288,736 respectively). Separately, the reasons for decision also identified a shortfall in the declaration of cash receipts for the financial year ending 30 June 2008 in the sum of $133,731. It was common ground that Ms Luo did not participate in the conduct of the business for any part of that financial year. To that extent at least, the hearsay representations in the document supported her defence in that they recorded a shortfall in declared cash receipts for a later period during which she had nothing to do with the company. I nonetheless did not initially understand the parties to rely upon the hearsay representations in the document.
During closing submissions, however, both parties appeared to rely upon parts of the letter as to the truth of their contents. Mr Morahan, who appeared with Mr Saunders for the defendant, submitted that the letter supported the inference that there had been injections of cash into the business (presumably to suggest an innocent explanation for the outcome of the tax office's cash flow analysis). He also sought to rely on a representation that the company's income based on bank statements was $307,787 (T320 to 321). Those submissions created confusion as to the use to be made of the letter in the proceedings.
Following some debate on that question (at T319.45 to 327.4), Mr Morahan resiled from any reliance on the document and sought an order under section 136 of the Evidence Act 1995 limiting the use to be made of it. He submitted that it would be unfairly prejudicial to the defendant, and potentially misleading or confusing, to allow the plaintiff to rely upon the hearsay representations contained in the document as to the truth of those representations. In particular, Mr Morahan submitted that the letter should not be used to prove that the net cash shortfall recorded in the letter in fact existed, but only to prove that the Tax Office had made a finding to that effect (T328.21).
On behalf of the plaintiff, Mr Lonergan then submitted that the letter did prove there was a shortfall (T328.23), by which I took him to mean that the letter proves that the company in fact received $479,300 more in cash receipts than had been declared. Since that issue arose only in closing submissions, the parties accepted that its determination could appropriately be reserved to be dealt with together with the substantive proceedings. The plaintiff did not suggest that it would seek to adduce any additional evidence if unsuccessful in resisting the defendant's application under s 136.
It was implicitly acknowledged in the plaintiff's submissions that the letter was hearsay as to the existence of a cash shortfall. Mr Lonergan submitted, however, that the letter had been properly admitted for a non-hearsay purpose, since it was relevant to Mr Chang's evidence that the Tax Office assessed the shortfall to be income of the company and issued amended assessments accordingly. That evidence was said to be relevant to the issue of damages in the claim in negligence (as already noted, that was the only reference to the negligence claim in closing submissions). Mr Lonergan submitted that, having been admitted for a non-hearsay purpose without limitation, the letter was in for all purposes in accordance with s 60 of the Evidence Act.
In resisting any order limiting the use to be made of the evidence, Mr Lonergan relied on the following statement in the defence filed in the proceedings:
The Australian Taxation Office Audit Report does not show and is not evidence of misappropriation by the defendant. The figures adopted from the report provide no rational basis for alleging misappropriation by the defendant or even any loss by the plaintiff. The figures represent unaccounted cash presumed held by the plaintiff according to a cash flow analysis of the plaintiff's business undertaken by the Taxation Office.
I do not think that pleading amounts to a concession as to the use properly to be made of the letter. That is not the purpose of pleadings. The letter was only referred to in the defence at all because of the unusual course taken by the plaintiff of annexing it to the statement of claim.
Assuming the letter was properly admitted for a non-hearsay purpose as submitted by Mr Lonergan, I have concluded that its use should be limited to that non-hearsay purpose. It should not be able to be used to establish that the company in fact received additional cash income beyond the amounts declared in its tax returns for the years in question.
The prejudice to the defendant of using the hearsay representations in the letter as to the truth of their contents is manifest on the face of the letter. The reasons for the decision, whilst perfectly adequate for the purpose for which they were provided, are presented in summary form with only the barest exposition of the material relied upon, the processes adopted for analysing that material and the identity and qualifications of the people who undertook the analysis. The audit was plainly undertaken in consultation with Mr Lo but the content and extent of his input is not revealed. There is simply no means by which the defendant could have tested the evidence in any meaningful way, or sought to meet it with other evidence.
Accordingly, I am satisfied that the use to be made of the letter and its enclosures must be limited to the non-hearsay purpose for which it was admitted. The letter does not establish that the company's cash receipts exceeded the income declared to the Tax Office.
It follows, in my view, that much of the plaintiff's case falls away. Mr Lonergan submitted that the existence of a shortfall was nonetheless proved by other evidence. He relied upon "the entire case of the plaintiff", including the irregularities identified by Mr Lo in respect of particular transactions and the fact that, during the period of her employment, the defendant deposited over $86,000 in cash into her bank account, as to $28,000 of which she admitted it belonged to the company. Mr Lonergan said (at T324.33):
In my opening, as I did in my submissions today, it was acknowledged that we could not establish, by way of direct evidence, where and when the balance over $86,000 was taken by her. We ask you to say, and find, that, by reason of the evidence of her actions, including the deposits, unexplained as they are in her own bank account, what was calculated by the Tax Office is a particular of the calculation of the shortfall, as known to the plaintiff.
It is necessary to consider those contentions with some care.
Management of the company's sales cash receipts
The way in which the case was put on behalf of Yet Son was that the shortfall identified by the tax office must have been diverted from the use of the company (as opposed to simply being undeclared in its tax returns) and, further, that it must have been Ms Luo who diverted the funds. A step in the reasoning to those conclusions was the contention that, throughout the period of her employment, Ms Luo had sole responsibility for the management of sales cash receipts.
It was demonstrated clearly during the hearing that that was not the case. The plaintiff company was established in October 2005. Ms Luo was employed shortly thereafter. However, from the inception of the company until August 2006, Ms Luo's aunt (Chiu San Lo's sister) was employed full time in the business. Her name was Zaihao Luo. She gave evidence that she worked seven days a week. She also gave evidence that Ms Luo generally worked only two days a week.
The aunt left in August 2006 because she had come to Australia in August 2005 on a one-year visa. For the period of her employment, it appears that she was the person primarily responsible for maintaining the financial records of the company. She kept a record book in which she manually recorded financial information including sales cash receipts and amounts to be banked from time to time (exhibit C).
Accordingly, I do not accept that Ms Luo had sole responsibility for the management of the company's sales cash receipts for the whole of the relevant period. Conversely, however, I am satisfied that Ms Luo played a greater role than she was prepared to admit. In my view it is clear that Ms Luo was employed in the business at the request of her father (Chiu San Lo's younger brother) to represent his interests.
Ms Luo stated in her affidavit that it was Chiu San Lo's wife, Kim Lo, who first invited her to work as a casual salesperson in the shop (affidavit sworn 7 December 2010 at paragraph 32). Kim Lo disputed that evidence. She said that Ms Luo started working in sales at the shop as that was her (Ms Luo's) father's intention.
Chiu San Lo also said that Ms Luo was employed by Yet Son at the request of her father. He stated that her duties involved "acting on behalf of Mr Luo as the company administrator; collecting all sales income; acting as accountant by preparing the company books and records; delivery of furniture to purchasers' addresses; liaison with customs; liaison with accountants and procuring cash from the plaintiff to me for the purpose of purchasing furniture" (affidavit sworn 17 November 2009 at paragraph 7).
I accept the evidence of Chiu San Lo and Kim Lo on that issue. Each impressed me as endeavouring to give an honest and complete account of events. Further, their account finds support in the fact that Ms Luo's employment came to an end when her father's involvement in the business came to an end.
Chiu San Lo said that, until Ms Luo's resignation in April 2007, he did not participate in the day-to-day management of the business at all. He said that he was paid a regular "award", since his name was "used in the licence" (T26.44 to 27.4). He also said that he was paid a salary for helping in the business, but it was not clear whether that was in addition to the "award". He said that he was not normally physically present at the company's premises at Camperdown but would sometimes assist by doing errands, including delivering furniture and collecting payment; arranging for the transfer of funds overseas to the defendant's parents and banking cash revenue into Yet Son's bank account. He said, "from the very beginning, [the company] was all operated and in control by [Ms Luo]" (T25.44).
Chiu San Lo's evidence on that issue found support in the evidence of an employee of the company, Jin Biao Guo. He said (at T125):
A. INTERPRETER: Because during that time I was not authorised to issue any document. It's only under circumstances when I was authorised by them to follow their instructions to write step by step. So that's why it was not, I'm sure, how they would normally write it for the order.
Q. Yes. Now when you say you were authorised by "them", whom do you mean by "them"?
A. INTERPRETER: So, for example, when I went to work and Kelly was the not there and/or when Lo Chiu San's elder sister was there but she didn't know English, then I would be told to write.
Q. Who would tell you to write?
A. INTERPRETER: It could be Kelly, it could be the eldest sister of Lo Chiu San. Her name was Zaihao Lou.
Q. And it also could be Chiu San Lo?
A. INTERPRETER: Basically, during my time there I rarely saw him and he was rarely in the office. From my recollection I basically didn't see him at all during my time there.
Ms Luo admitted on the pleadings that she was employed by Yet Son as the manager and bookkeeper/accountant for the furniture business conducted by Yet Son subject only to the following qualification:
Admitted except that of the total period of the defendant's employment from November 2005 to early April 2007 it was only in the period from early December 2006 to March 2007 that the defendant's original duties of customer service, cash handling and occasional handling of creditors were extended to keeping records of the plaintiff's sales and expenses.
I am satisfied that Ms Luo accepted the extended duty of keeping records of the plaintiff's sales and expenses earlier than early December 2006. The record book contains an entry for 11 August 2006 noting that Zaihao Lou handed over an amount of cash to Ms Luo that day. Zaihao Luo gave evidence that she was about to return to China and that she had to return the cash she had on hand (T247 and page 171 of exhibit B). On that basis I accept, as submitted on behalf of the plaintiff, that Ms Luo accepted responsibility for recording the company's sales receipts on 11 August 2006.
It is clear that, before 11 August 2006, Ms Luo was not solely responsible for the management of cash received by the business and its treatment in the records of the company. Conversely, however, it is clear that Ms Luo had more responsibility for those functions than she was prepared to admit. She gave a version of events suggesting that her average day at the shop involved little more than polishing furniture and minding the fort. I do not accept her account of those matters. It is clear that Ms Luo had a substantial role in the management of cash received by the business before the departure of the aunt and a greater role after that date.
Ms Luo said that the handling of cash was usually left to the aunt. However, she said that, as part of sales, customers would sometimes give her (Ms Luo) cash for deposits or instalments. She said that only happened when the aunt was busy with other customers and that otherwise she rarely handled money. She said that, upon receiving cash, she would immediately hand it over to her aunt, who recorded all the cash received. Ms Luo stated that the takings each day would then be handed to Chiu San Lo when he returned to the shop at the end of each day.
Ms Luo acknowledged that, from November 2006, she worked longer hours at the shop, since she had finished her final exams by then. She stated that she was working three or four days a week at that time. I am satisfied that she was primarily responsible for managing the company's cash sales receipts from the date on which her aunt returned to China. I am further satisfied that she played a substantial role in that task before August 2006.
Chiu San Lo also acknowledged that he received cash on behalf of the company from time to time, both when making deliveries to customers and when performing "occasional shifts" at the company's retail premises. However, he said that it was the defendant who determined how it was dealt with (statement dated 12 November 2010 at paragraph 5(a)):
If money was to be received from customers during deliveries, the defendant would tell me what to do with the money. She would tell me to either give it to her the next time I saw her or bank it or keep it on hand to send to her parents. If I was told to keep it on hand I had to sign her records being the cashbook to acknowledge that I had the amount of the company's cash on hand. I state I never used the company's cash for my own personal use and never banked the company's money into my own personal account (emphasis added).
Chiu San Lo said that, if he received cash when performing shifts at the retail premises, he dealt with it as described in that statement. He said that he sometimes arranged for the transfer of money overseas via telegraphic transfer to Ms Luo's parents. He also said that he sometimes banked money collected by the company into its bank account.
Chiu San Lo's wife, Kim Lo, also evidently dealt with the company's cash. She said that, until Ms Luo's resignation in early April 2007, Ms Luo would occasionally request her to send money overseas via telegraphic transfer to her (Ms Luo's) parents or to bank money into Yet Son's bank account.
The unchallenged evidence of Chiu San Lo and Kim Lo that Ms Luo gave them money to send to her parents overseas is significant. According to Mr Lo's evidence, Ms Luo would give him amounts of $10,000 and even up to $20,000 in cash and he or his wife would transfer that money overseas (T53). He said (T52.42):
A. INTERPRETER: Most of the times the money was sent to her father and her mother. However, there was another person in China that the money was sent to. There was my eldest sister, because it is not good for her parents, mother and father, to receive the money too often. And my eldest sister after receiving the money would pass the money to her parents.
On the one hand, that evidence supported the plaintiff's contention that the defendant assumed primary responsibility for the management of the company's cash income. On the other hand, it reveals that large sums of cash received by the company were sent overseas. The evidence does not establish that those amounts were accounted for as income in the records of the company. It is difficult to see how the transfer of such funds could be characterised as conversion (a dealing with a chattel in a manner repugnant to the immediate right of possession of the plaintiff) when it was done by and with the knowledge of the plaintiff's sole director.
Termination of defendant's employment
According to Chiu San Lo, on 5 April 2007 his younger brother Mr Luo "sold his share in the plaintiff to Mrs Liao". That change was not reflected in ASIC's records for the company as at 1 July 2007. As at 1 July 2008, ASIC records revealed that Zhao Yong Luo was no longer a member and that Chiu San Lo had become the holder of 500 of 1000 issued shares. In any event, it was common ground that Ms Luo's employment came to an end on 3 April 2007, evidently as a result of her father's decision to dispose of his shares.
Chiu San Lo had been overseas since 20 March 2007 and returned to Australia on 3 April 2007 (a Tuesday). It appears that at least one purpose of the trip was to discuss the future of the business. During that time, Zhao Yong Luo had said that, since he would no longer be an owner of the business, Ms Luo should resign and hand over operations to Chiu San Lo.
Events after the defendant's resignation
Chiu San Lo states that, following Ms Luo's resignation, he undertook an inspection of Yet Son's business and discovered a number of anomalies. He says that he observed a large amount of furniture missing from the shop and warehouse and found sales books that had been torn up and stapled back together. He says customers were complaining that their furniture hadn't been delivered.
Chiu San Lo was particularly concerned by the records concerning a sale of a large amount of furniture to Xiao Mei. The detail of that transaction is considered below. For present purposes, it is sufficient to record that the manner in which the sale had been recorded aroused Chiu San Lo's suspicions.
Chiu San Lo says that he also inspected Yet Son's bank account and noticed that there had been no deposits from sales over the preceding two-week period. He says that he rang Ms Luo and asked "where is the missing money?" She responded "I will sort this out later on".
It is admitted by the defendant on the pleadings that, as at the date of her resignation, she had the sum of $24,255 on hand derived from sales of furniture the property of Yet Son but which she had not banked into Yet Son's bank account. It was further admitted that, upon demand by Chiu San Lo, Ms Luo repaid that sum.
Cash banked by the defendant
Ms Luo gave evidence that there was a falling out between her father and Chiu San Lo which prompted Chiu San Lo to travel to China to discuss the future of the business. That was evidently the trip taken by Chiu San Lo between 20 March and 3 April 2007.
Ms Luo stated that, while Chiu San Lo was overseas, she received all of the cash from sales at the shop. She said that she was instructed by Chiu San Lo to record all transactions in a sales record book during that week. Ms Luo said that she asked Kim Lo if she could give her the cash from those transactions. According to Ms Luo, Kim Lo responded "No need, your uncle is coming back soon. Just hang on to it and you can work it out slowly with him when he comes back". Kim Lo had no recollection of any such conversation.
During that time, Ms Luo called her father in China to ask whether any more of a specific piece of furniture would be available. He initially told her that there would be no more furniture and to clear as much stock as she could. At that time, she understood that Chiu San Lo was thinking of closing down the business due to the breakdown in the relation between him and Ms Luo's father.
However, several days later, according to Ms Luo, her father called her again and said "your uncle has changed his mind. He does not want to sell the shop now. He wants to give me some money to buy me out".
Ms Luo stated that her father told her that Chiu San Lo was to pay him $2 million RMB to leave the business. She says her father asked her how much cash she had from the clearance sale. She told her father she had approximately $20,000 AUD. She says her father told her to hold on to the money, as her uncle had not yet paid her father. According to Ms Luo, the exchange rate at that time meant that RMB $2 million was equivalent to approximately $350,000 AUD.
Ms Luo said that she followed her father's instructions and that, by the time Chiu San Lo returned from China, she had collected $24,255 AUD. She said "I kept this money in my HSBC bank account because it was too much money and I was not going to keep it on me".
According to Ms Luo's version of events, she volunteered that information when her uncle returned to Australia. As set out above, Chiu San Lo's version of events is that he noticed no money had been banked and that he chased her up.
Ms Luo's banking records tendered at the hearing show that she made three cash deposits into her account after Chiu San Lo went overseas as follows: $10,000 on 22 March 2007; $10,000 on 28 March 2007 and $8,000 on 5 April 2007. It follows that, as to the amount of $8,000, the cash was banked after Chiu San Lo had returned to Australia.
It was common ground that, after Chiu San Lo demanded the return of the cash collected by Ms Luo during his absence, some of the cash was repaid to Yet Son in a series of electronic transfers. Ms Luo made three transfers in the sum of $5,000 and one in the sum of $4,255 from her own account. She also transferred an amount of $5,000 from a joint account in the name of Ms Luo and her partner, Lianghai Chen. Interestingly, an amount of $8000 had been deposited into that account on 28 March 2007 but the defendant was not cross-examined about that. She said that the reason she transferred part of the funds from that account was that her own account had a daily limit and her uncle was pressing her for the money (T148.29).
The total amount transferred was $24,255. Ms Liu said that was the amount due to the plaintiff calculated according to sales and expenses, including her own wages. She gave no reconciliation of that calculation in her evidence in the proceedings. She said that she showed Chiu San Lo the calculation and he checked it (T150), but that was not put to him. The evidence does not establish that Chiu San Lo in fact accepted any such calculation knowing that more than that had been banked. The statement of claim alleges that Ms Luo informed Chiu San Lo that she had the sum of $24,255 on hand derived from sales of furniture and that he demanded the return of that sum. I am satisfied that is what occurred. I do not accept that he was given a reconciliation that revealed the full amount banked by the defendant.
I do not accept that Kim Lo refused to bank the company's cash and told Ms Luo to hold onto it. I am satisfied that Ms Luo banked $28,000 of the company's cash into her own bank account during that period and that she had no authority to do so. I am satisfied that her doing so amounted to conversion of $28,000 of the plaintiff's cash.
I suspect that the defendant also banked $8000 of the company's cash into the joint account with Lianghai Chen. However, since she was not cross-examined on that issue, I do not think I can make an adverse finding in that respect.
Earlier cash bankings
The defendant's bank statements reveal that, between 15 December 2005 and 5 April 2007, the period of her employment with the plaintiff, she banked a total of $86,250 into her bank account (including the $28,000 discussed above). The plaintiff invited the Court to find that those deposits represented the conversion of cash belonging to the plaintiff.
The plaintiff said that part of the money came from her parents in China (T154). She said that they gave her cash and then she deposited it in the bank. She agreed that their cash dried up after April 2007. She said her father came to Australia twice, once in 2005 and once in 2006, and each time gave her a lump sum of about $9,500. There was no single deposit in that sum, although there was a deposit of $7000 in May 2006. The only deposit in 2005 that falls within the relevant period (the period of employment) was a deposit of $600. The defendant's father did not give evidence.
The defendant also said that her mother gave her money when she (the defendant) went back to China, twice in 2005 and once in 2006. It is only the 2006 trip that is relevant for present purposes. The defendant's mother gave evidence in which she confirmed that she gave the defendant $9,500 in cash in 2006 (T273). I am simply unable to be satisfied one way or the other as to whether that occurred or whether that was the source of any cash banked by the defendant.
Finally, the defendant said that she also received cash from her boyfriend, who was working in a job in which he was being paid in cash. She said that he gave her about $1000 per week. She said part of the cash deposits into her account came from that source (T160). It was put to the plaintiff in cross-examination that the cash deposits stopped, coinciding with the end of her employment. She accepted that the deposits were no longer recorded as cash, but explained that, after that date, she made cash deposits through a post office using her EFTPOS card, which accounted for the different recording. She said that her boyfriend was the only source of those later deposits. Her statements showed a total of $24,150 deposited by that method between 30 July 2007 and 26 August 2008.
The defendant ultimately did not call her boyfriend as a witness to corroborate that evidence. She attempted to do so before closing her case. However, since she had not served a statement from him in advance, and had provided only an extremely vague proof of evidence unsubstantiated by any documents, I upheld an objection by the plaintiff to that course. In doing so, I invited the defendant's counsel to renew the application the following morning if documents to substantiate the boyfriend's contentions could be provided to the plaintiff so as to obviate the prejudice arising from the lack of notice. The application was not renewed.
I found the defendant's evidence on the issue of her cash deposits highly unsatisfactory. Apart from the single deposit of $7000 in May 2006, the cash deposits made during the period of her employment by the plaintiff bear no relationship to the lump sums from her parents which she described. However, having regard to the clear proof required to establish allegations which amount in substance to fraud, I simply cannot be satisfied that each amount deposited by the defendant during that time was an amount appropriated by her from the sales revenue of the company. I strongly suspect that at least some of them were, but that is not enough for present purposes.
Sale to Xiao Mei
It remains to consider the significance of the unusual transactions identified by Chiu San Lo after Ms Luo's employment came to an end. The first was the sale to Xiao Mei (that person was referred to in the evidence variously as "he" or "she". The confusion is probably explained by the helpful evidence of the interpreter in these proceedings who noted that, in Chinese, there is no gender in the third person).
The sale to Xiao Mei aroused Chiu San Lo's suspicions for two reasons. First, he said the sale price as recorded appeared too low. The sale was entered in Yet Son's books at $14,200 (Annexure A to Chiu San Lo's affidavit sworn 17 November 2009). Chiu San Lo considered that the retail price of the items listed was somewhere between $20,000 and $25,000.
Secondly, Chiu San Lo noticed that two invoices appeared to have been generated in respect of the same sale. The invoices were dated a week apart. One appears to record a sale price of $14,200, payment of a deposit of $1,200 and a balance unpaid of $13,000. The other appears to record the same sale price, payment of a deposit of $200 and a balance unpaid of $14,000. The rest of each invoice is in the Chinese language (apart from the name). According to Chiu San Lo, the invoices listed "slightly different inventory".
The creation of two invoices would not have enabled the defendant to conceal the appropriation of cash from the company. On the contrary, it would have generated the appearance of a shortfall in cash receipts. I do not think anything can be made of the two invoices to support the plaintiff's claim.
Chiu San Lo attempted to contact the customer, without success. Six months later, a person by the name of Xiao Mei came to the shop and purchased an entertainment unit. Ms Luo was no longer employed by Yet Son by that time. Chiu San Lo delivered the entertainment unit to Xiao Mei's house and noticed a large amount of furniture of the kind sold by Yet Son. He ascertained that it was the same Xiao Mei who had made the earlier purchase.
Xiao Mei subsequently confirmed having paid at least $18,700 for the items purchased in March (statement of Chiu San Lo dated 12 November 2010 at paragraph 24(a)(iii)). Chiu San Lo confronted Ms Luo in respect of that transaction (affidavit sworn 17 November 2009 at paragraph 49). He states they had a conversation in the following terms:
He said: Why is the amount the customer paid so different from the one you wrote in our records?
She said:I don't know.
He said:I want you to come forward with the presence of the customer to verify this matter.
She said:I did not take the money and I do not have time to come. I did the accounts and I know what is in the books. I will report to ATO if you chase up this matter. I will cause you big trouble if your pursuit (sic) this matter further.
Dispute with Mr Tran
A separate problem arose on 7 April 2007, several days after Ms Luo's resignation. A customer, Mr Van Ly Tran, came to collect furniture for which he had paid a deposit of $9,000. Mr Tran told Chiu San Lo that Ms Luo had managed his lay-by arrangement and accepted his deposit. When Mr Tran came to collect the furniture on 7 April 2007, Chiu San Lo could not find it in the warehouse. He states that Mr Tran "became furious and demanded to speak to the defendant over the phone". During that conversation, Chiu San Lo says he overheard Mr Tran threatening to call the police if the furniture or his deposit were not forthcoming. Mr Tran then handed the phone to Chiu San Lo, who said to Ms Luo "you must bring the money back immediately because the police are on their way". He states Ms Luo agreed to do so.
According to Chiu San Lo, Ms Luo spoke to him a few days later, saying:
I returned the money into the company's bank account, you can check if it came through or not. I have returned all the money I took and there was no more left but I will report to the Tax Office if you contact the police because I know and I have everything to do with the business to make you in big trouble.
On 29 November 2007, Chiu San Lo made a complaint to police about the sale to Xiao Mei and the banking of company cash by the defendant into her own account during his absence overseas. The complaint also referred to Mr Tran's complaint, but only in the context that by withholding the company's cash, the defendant had left Chiu San Lo unable to meet his demand for a refund.
According to Chiu San Lo, Ms Luo called him a few months later and said "I didn't think that you would really call the police. Did you need to make such a big deal of the matter? By you doing this, I now know what I have to do".
Ms Luo evidently then contacted the Australian Taxation Office, as she had previously threatened to do in the event that Chiu San Lo contacted police to complain about her management of the affairs of the company. As already noted, the Tax Office subsequently conducted an audit of the plaintiff company in which a substantial shortfall in the reporting of cash sales was identified, resulting in the issue of revised tax assessments.
Defendant's account of Tran and Xiao Mei transactions
Ms Luo stated that she had a clear recollection of the transactions with Mr Tran and Xiao Mei. She said that her aunt had sold Xiao Mei several pieces of rosewood furniture for which a deposit had been paid. However, Xiao Mei subsequently failed to pay the instalments. Some time later, Xiao Mei turned up at the shop and said that she had decided not to buy the rosewood furniture. Instead she chose a set of furniture made of chicken wing wood. According to Ms Luo, that was the same set that, unbeknownst to Ms Luo, had already been put on lay-by for Mr Tran. It was implicit in Ms Luo's evidence, also she did not say so expressly, that Mr Tran's set on lay-by was sold to Xiao Mei.
Ms Luo said that, when her uncle called her to find out where Mr Tran's furniture was, she reminded him that there was another set of that furniture in the warehouse. She agreed that she had spoken on the phone directly to Mr Tran. She said that their conversation went as follow:
Mr Tran: I want a refund but he [Chiu San Lo] told me that you stole all the money.
Defendant:I have roughly about $20,000 but I am waiting for him to transfer $2 million RMB to my parents because he owes my parents money. Once the transfer clears, I will return him the money.
Ms Luo stated that, later that day, she called her mother, who told her that Pengqun Liao had already remitted that $2 million RMB to her parents on behalf of Chiu San Lo. Her mother told her to release the money to Chiu San Lo.
However, according to Chiu San Lo's evidence, the customer "Xiao Mei Xu came to the shop and confirmed what she had purchased in March 2007 by writing down the details on a blank piece of paper". The details were written in Chinese (Annexure L to Chiu San Lo's statement dated 12 November 2010). However, Chiu San Lo's evidence as to what the note said was ultimately admitted without objection. According to his evidence, the note confirmed that Xiao Mei Xu purchased pieces in rosewood, not chicken wing wood.
To add to the confusion, Chiu San Lo's translation of the note omits any reference to two words in English in the original, which read "trade in".
For all the investigations undertaken on behalf of the plaintiff in respect of those transactions, I am unable to be satisfied that they reveal the appropriation of any cash from the company by the plaintiff. Whilst there is a firm basis for suspicion in that respect, there is simply no clear forensic path to that conclusion.
Other alleged anomalies in particular transactions
Mr Lo undertook extensive investigations into the company's affairs during the period of the defendant's employment in an attempt to establish other transactions revealing fraud on her part. The inquiries undertaken were set out at great length in the statements of Chiu San Lo and his daughter, Donna Tanamal. Ultimately, however, they did not establish any single instance of clear fraud on the part of the defendant. Mr Lonergan did not even address the individual transactions in closing. I do not think it is necessary to consider them further.
Confrontation after the commencement of proceedings
These proceedings were commenced on 25 November 2009. In May 2010, Chiu San Lo and Ms Luo had a chance encounter in Guangchou in China. Each gave a different account of that conversation, and each propounded it as in some supporting their respective cases.
According to Chiu San Lo, the conversation went as follows:
Defendant:I regret going to the tax office, saying a few words and causing so much trouble. I am really sorry. But do you want to sue me to death? I do not have money to fight this case. Also I am not working because I just gave birth.
Chiu San Lo:But there really are so many problems with the recording of your sales invoices. I don't have money to pay for solicitor fees either but I am forced to go to court because the Tax Office is chasing me for the money you took. You made me send the money to your parents and now they have it all and then you go and contact the Tax Office. I don't know what you're doing. You did all the bookkeeping and it's all your writing [emphasis added].
Chiu San Lo said Ms Luo asked him if they could sit down and talk it over but he declined as he was too angry.
According to Ms Luo, the conversation went as follows:
Defendant:Why did you lodge a false statement of claim?
Chiu San Lo:I have no choice because the Australian Tax Office ("ATO") [as written in the defendant's affidavit] sent me a tax penalty notice, the penalty is AUD$200,000. I don't want to pay the penalty, so I'm suing you to avoid paying the penalty. The ATO will not chase me for the penalty because I have lodged the statement of claim, because I told the ATO that you stole the money.
Ms Luo's affidavit recorded that Chiu San Lo had also then said "and I gave many untrue reasons to let the ATO believe that you took the money". However, those additional words were included in her affidavit due to an error on the part of her solicitor. When checking the draft affidavit, she had told him that Chiu San Lo did not say those words "but he was admitted that by silence". According to her version, the conversation continued:
Defendant:You know you lodged the claim which was false. You will not win, at the end of the proceedings, you will still need to pay for the penalty.
Chiu San Lo:Not really, I have many tricks which can make you lose the case, and also on the civil case there is no definite win or loss, it can turn out to be 50:50. You should not have reported to ATO that I did not pay you proper superannuation. The ATO audit only happened because you reported me to ATO, and ATO also audited my personal tax and investments. You know in Australia, everyone does things like tax evasion, everyone likes payment by cash to avoid the high taxes. You should not have reported me to ATO to make things difficult for me.
Defendant:This is not my fault, you are the employer, you should have paid me the proper superannuation. But you did not pay and you teamed up with your accountant Herman Chang to force me sign a statement in order to get my superannuation payment. You know this is illegal.
Although the conversation occupied some attention during the hearing, I do not think that evidence ultimately assists in the determination of the issues in these proceedings. Mr Lo's version of the conversation does not amount to an admission of any great significance by the defendant. His part in the conversation is consistent with his own case but does not go any way to proving it. Significantly, what he said to her confirms his awareness that cash revenue of the company was being sent overseas.
As to Ms Luo's version, I do not accept that Mr Lo intended to acknowledge that his claim was "false". Ms Luo's account is no doubt coloured by her interest in so contending. Having seen them both in the witness box, I do not accept that Mr Lo intended to acquiesce in the proposition that any aspect of his claim against Ms Luo was false.
Conclusion
With a measure of reluctance, I have concluded that the plaintiff has failed to discharge its onus of proof as to almost the whole of its claim. There is one small exception. I am satisfied on the balance of probabilities that the defendant deliberately converted $28,000 of the company's cash by banking that amount into her own bank account after 20 March 2007. As admitted on the pleadings, she told her uncle that the amount she had on hand that had not been banked into the company's bank account was $24,225. It follows that she converted the amount of $3,775 of the company's cash to her own use, and the plaintiff is entitled to a verdict in that amount. This should not be regarded as derisory. The simple fact is that, upon careful analysis, the plaintiff's claim is established to that extent, and only to that extent.
There will be a verdict for the plaintiff in the sum of $3,775.
I will hear the parties as to costs.
Decision last updated: 23 July 2012
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