Worldtel NZ Limited v Kim HC Auckland CIV-2009-404-001158
[2011] NZHC 1178
•30 September 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2009-404-001158
BETWEEN WORLDTEL NZ LIMITED Plaintiff
ANDJAE KAP KIM First Defendant
ANDSEONG HEE HAN Second Defendant
Hearing: 8-11, 15 August 2011
Appearances: A E Liew for Plaintiff
D J Rooke and T C Wu for Second Defendant
Judgment: 30 September 2011 at 3:00 PM
JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 30 September 2011 at 3:00 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date……………………..
Solicitors: A E Liew, P O Box 60306, Titirangi, Waitakere 0642
Fax: (09) 966-3812
David Rooke Law, P O Box 64342, Botany Downs, Manukau 2142Fax: (09) 277-7960
WORLDTEL NZ LTD V KIM HC AK CIV-2009-404-001158 30 September 2011
Introduction
[1] The plaintiff, Worldtel NZ Limited, is a provider of telecommunications services including the wholesale supply of call-cards under the brand I-Phone. Worldtel sold its I-Phone cards through independent distributors, one of which was EzyTel Limited (in liquidation). The defendants, Mr Kim and his wife, Ms Han, were the shareholders and directors of EzyTel. Between 2003 and 2009, the first defendant, Mr Kim, was also the managing director of Worldtel. Worldtel alleges that the defendants converted a large number of I-Phone cards, and dishonestly failed to account for the proceeds of both phone cards and “top-up” payments on reactivated I-Phone cards.
[2] Mr Kim returned to Korea in 2009 and Worldtel has obtained judgment against him by way of formal proof. This judgment deals only with the allegations against Ms Han, namely:
(a) Conversion of I-Phone cards;
(b)In the alternative, money had and received/knowing receipt in relation to the proceeds of sale from conversion of the I-Phone cards;
(c) Dishonest assistance in relation to the proceeds of sale of the converted I-Phone cards and top-up fees.
[3] Worldtel also asserted conversion by Ms Han of various financial records of which Ms Han acknowledged having possession and was willing to return. During closing submissions I made a consent order at the request of the parties that Ms Han forthwith deliver up all documents that she holds belonging to Worldtel. I do not need to consider that cause of action further.
Background
I-Phone cards
[4] I-Phone cards are sold with embedded call values between $5 and $75 and are used to make phone calls at nominated rates up to the face value of the card. Each card bears a serial number and each is assigned a PIN number matched to the serial number on the card. To activate the card the purchaser dials into Worldtel’s automated I-Phone centre and enters the PIN number of the card. The computer at the I-Phone automated centre verifies the PIN number and matches it with the serial number of the card, after which the purchaser can begin his or her call. The computer at the I-Phone automated centre monitors the length of the call and destination, applies the relevant rate and debits the value of the call from the credit available on the card.
[5] When the available credit on the card has been used up the card expires. It can, however, be re-activated by purchasing new credits, known as a “top-up”. Top- ups can be purchased in two ways. The first is by calling Worldtel’s top-up number and buying more credits. Alternatively, the user can buy a new I-Phone card and transfer the credit from that card to the old card, continuing to use the original PIN number.
Worldtel’s relationship with EzyTel
[6] Mr Kim came to New Zealand in 2003. Ms Han and their daughter had arrived about a year before. Mr Kim was introduced to a shareholder of Worldtel, Mr Thomas Lee, through Mr Lee’s wife, who attended the same church as Ms Han. Mr Lee offered Mr Kim a salaried position as Worldtel’s general manager and a distributorship, which would be held by EzyTel.
[7] EzyTel did not have a written distribution agreement with Worldtel. The terms of the distributorship were agreed orally between Mr Kim and Mr Lee. Mr Kim did not give evidence. According to Mr Lee, EzyTel was entitled to purchase phone cards at a discount of 70% of the face value of the cards. The cards were to be paid for at the time they were despatched. It was for EzyTel to determine
the price at which it would sell the cards to retailers. Typically it sold at about 75% of the face value of the card, leaving a net margin of 5%. Ms Han confirmed that this was her understanding of the agreement.
[8] Mr Kim began work in mid-2003 and soon afterwards became a director of the company. His responsibilities included the dispatch of I-Phone cards from Worldtel’s stock and managing the top-up facility for expired I-Phone cards. He held the electronic key required for access to Worldtel’s top-up facility, which could be undertaken either at his office or remotely from any computer.
[9] On Mr Lee’s evidence Mr Kim’s salary was only $2,000 per month, so it seemed that Mr Kim’s income was to come mainly from EzyTel. However, Mr Kim, who had worked as an engineer in Korea, found selling difficult. In late 2008
Mr Lee began to suspect irregularities in the supply to retailers of I-Phone cards. He appears not to have confronted Mr Kim directly but, instead, advised him of his intention to re-arrange the management responsibilities within Worldtel so that another Worldtel employee would take over responsibility for stock control. Mr Kim was unenthusiastic about this idea.
[10] On 10 February 2009 there was a meeting at which Mr Lee made it clear that Mr Kim was to effect transfer of these duties. On 12 February 2009 Mr Kim did not come to work. He could not be contacted on his mobile phone and a search of his office revealed that business and financial records belonging to Worldtel were missing. It soon became evident that Mr Kim had simply returned to Korea. Ms Han claims that he has not been in direct contact with her since February 2009. She remains in New Zealand with her daughter and seems to have no plans to return to Korea.
Discovery of Mr Kim’s wrongdoing
[11] Through its investigations, including searches of its offices and of Ms Han’s house (pursuant to a search order executed on 6 March 2009), Worldtel discovered the following: large stocks of I-Phone cards were missing from Worldtel’s premises and unaccounted for, there were empty I-Phone boxes at Ms Han’s house, top-ups of
expired phone cards had been undertaken but the corresponding top-up charges were unaccounted for, invoices had been issued in both EzyTel’s and Worldtel’s names by the defendants for phone cards sold to retailers but the payments were unaccounted for, and retailers had been instructed by the defendants to pay by electronic transfer directly into EzyTel’s ASB account.
[12] In advancing its claim against Mr Kim, who took no steps in the proceeding and was eventually debarred from defending, Worldtel obtained an order for an account to be taken. An accountant, Anthony McCullagh, was appointed for that purpose. Worldtel relied on the evidence from Mr Lee as to the results of the search order and from Mr McCullagh as to his analysis of records held by both EzyTel and Worldtel to prove the conversion of the I-Phone cards and failure to account for the proceeds of the sale of the phone cards and top-up fees.
[13] Mr McCullagh’s report was provided on 26 July 2011. Mr Rooke, who appeared for Ms Han, had not had an opportunity to thoroughly assess the report but did not seek further time, nor leave, to adduce accounting evidence in reply.
[14] Mr McCullagh reviewed Worldtel’s stock records between February 2005 and February 2009, the despatch list kept by Mr Kim of I-Phone cards released to Ezytel, and invoice books for that period. From these sources of information, he established that during that period EzyTel had obtained a total of 50,918 I-Phone cards with a
total wholesale value of $811,404.[1]
[1] There is an error in the table on p8 of Mr McCullagh’s report in which the wholesale value of the
$75 cards has been miscalculated, resulting in the incorrect total of $814,682.50.
[15] Assessment of the loss of top-up fees was hampered by the lack of records prior to May 2006. For the period May 2006 to February 2009 the records showed a total of 4,355 top-ups with a total valule of $216,038.71. Of these, 1,838, with a value of $77,126.50, had been processed by credit card. This meant that a balance of
$138,912.21 for top-ups was unaccounted for and should have been paid to Worldtel.
[16] The extent of loss from the unaccounted for top-ups between February 2004 and April 2006 could not be determined but, because of the clear evidence of
conversion of cards and failing to account for the proceeds of cards during that period, Mr McCullagh assumed that Mr Kim was also engaged in fraud in respect of top-up charges prior to May 2006. Mr McCullagh produced an estimate of the losses before May 2006 using the known number of credit card transactions for top-ups during that period and the fact that credit card transactions accounted for 36% of top- up transactions in the later period. Mr McCullagh has estimated a total value of
$87,960.42 worth of top-ups for the February 2004 to April 2006 period and an estimated balance of $56,294.67 being the number of those top-ups not paid by EzyTel to Worldtel.
[17] Mr McCullagh also analysed bank statements belonging to both Worldtel and EzyTel to identify payments to Worldtel that would offset the losses. During the relevant period there were payments from EzyTel’s bank account to Worldtel’s bank account totalling $1,116,872. Of these, however, only $701,220 related to EzyTel. The balance related to other wholesalers. There were also payments made by one particular wholesaler, i-Tel, to EzyTel totalling $771,524.50 which should have been forwarded on to Worldtel but only $607,941.07 of which was so paid, with EzyTel wrongly retaining $163,583.43.
Conversion of I-Phone cards
[18] Worldtel alleges that Mr Kim converted I-Phone cards by taking them without paying for them and that Ms Han is also liable in conversion through assisting in the sale or delivery of the cards. Worldtel has sued Ms Han on the basis that she and Mr Kim were joint tort-feasors, though it is clear from the differing nature of the alleged wrongful acts that they were concurrent tort-feasors whose respective actions resulted in the same loss.
[19] Conversion is the intentional dealing with another’s goods in a way that is inconsistent with the owner’s rights. The circumstances that can amount to conversion are varied, as Lord Nicholls observed in Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5):[2]
[2] Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883, 1084; [2002] 2
WLR 1353 at 1366.
Conversion of goods can occur in so many different circumstances that framing a precise definition of universal application is well nigh impossible. In general, the basic features of the tort are three-fold. First, the defendant’s conduct was inconsistent with the rights of the owner (or other person entitled to possession). Second, the conduct was deliberate, not accidental. Third, the conduct was so extensive an encroachment on the rights of the owner as to exclude him from use and possession of the goods. The contrast is with lesser acts of interference. If these cause damage they may give rise to claims for trespass or negligence, but they do not constitute conversion …
Mere unauthorised retention of another’s goods is not conversion of them. Mere possession of another’s goods without title is not necessarily inconsistent with the rights of the owner. To constitute conversion detention must be adverse to the owner, excluding him from the goods. It must be accompanied by an intention to keep the goods …
[20] Only Mr Kim had access to the I-Phone cards at Worldtel’s premises and only he (in his capacity as a director and employee of Worldtel) could have removed them. Because of EzyTel’s distributorship the mere removal of the I-Phone cards from Worldtel’s premises would not, in itself, have constituted conversion. But the evidence was clear that EzyTel was expected to pay for phone cards at the time they were uplifted. Mr Kim’s liability for conversion was therefore conversion by taking, being the unjustified of taking of goods with the intention of asserting dominion over them.
[21] Mr Liew, for Worldtel, accepted that Ms Han could not have known that the cards were stolen when Mr Kim brought them home. It was clear that she was not privy to his actions on Worldtel’s premises. She maintained that Mr Kim told her that the cards were paid for. Unless he chose to tell her that he had taken the cards without paying for them (and there is no evidence of that), she could not have known whether the cards were stolen or acquired legitimately for the purposes of EzyTel’s distributorship.
[22] However, the act upon which Worldtel relies to prove the conversion against Ms Han is her involvement in the delivery and selling of the I-Phone cards to retailers. All that is required is that these acts were intentional; it is irrelevant that
Ms Han did not realise that she was dealing with stolen goods.[3]
[3] Helson v McKenzies Ltd [1950] NZLR 878.
[23] Ms Han cannot be said to have done anything wrong in merely receiving the cards. But on her own evidence she delivered cards to retailers, wrote invoices and collected cash and cheques. These acts were, of course, deliberate. Whether or not she knew that the cards had been taken from Worldtel without payment does not affect the fact that her deliberate supply of cards to retailers deprived Worldtel of its rights in respect of the cards and therefore amounted to conversion.
[24] This finding is subject to one caveat; Mr McCullagh’s calculation of the number of cards issued to EzyTel includes a number of $30 and $75 cards. But Ms Han was clear in evidence that the only cards she dealt with were $5, $10, $20 and $50. There was no evidence to contradict that and, given Mr Kim’s involvement, there is insufficient evidence to conclude that Ms Han converted any
$30 or $75 cards.
Money had and received/knowing receipt
[25] The second cause of action is directed towards the payments received in payment for I-Phone cards. Although stated to be a cause of action in money had and received, there was confusion about the true nature of the cause of action being advanced because of the pleading of dishonesty on Ms Han’s part, which is not consistent with a claim for money had and received. Further, in submissions Mr Liew asserted that Ms Han had dishonestly received money (consistent with knowing receipt) and was therefore liable to account for the money received as a constructive trustee.
[26] For the reasons that follow I have concluded that, although there was evidence to support a claim for money had and received, it was insufficient to prove any resultant loss. However, the facts are sufficiently pleaded to also support a cause of action in knowing receipt and I therefore deal with both.
Money had and received
[27] A claim for money had and received is a personal restitutionary remedy available at common law based on unjust enrichment through the innocent receipt of
the plaintiff’s money. In Lipkin Gorman (a firm) v Karpnale Ltd[4] Lord Templeman cited from Hudson v Robinson in which Lord Ellenborough CJ described this cause of action:[5]
... an action for money had and received is maintainable whenever the money of one man has, without consideration, got into the pocket of another
…
[4] Lipkin Gorman (a firm) v Karpnale Ltd [1988] UKHL 12 at 564.
[5] Hudson v Robinson (1816) 4 M & S 475.
[28] From Millet J’s decision in Agip (Africa) Ltd v Jackson[6] the following propositions emerge:
… The common law claim for money had and received is a personal and not a proprietary claim and the cause of the action is complete when the money is received. With only limited exceptions, it is no defence that the defendant has parted with the money. The claim does not depend on any impropriety or want of probity on the part of the defendants.
[6] Agip (Africa) Ltd v Jackson [1990] Ch 265.
[29] Ms Han would not be liable for money paid into EzyTel’s account electronically, since the money did not come into her hands. To the extent that she received cash and cheques from retailers she would be liable in money had and received. But, while Ms Han acknowledged receiving cash and cheques, there was no specific evidence of the occasions on which that happened or the payments that were made. The only retailers who gave evidence said that they made payments electronically. The evidence is inadequate to identify which amounts of cash or which cheques were collected by Ms Han as opposed to Mr Kim. In these circumstances, the claim for money had and received must fail.
Knowing receipt
[30] Between 2005 and 2009 substantial sums were transferred from EzyTel’s bank account to accounts held jointly by Mr Kim and Ms Han and by Ms Han and the home-stay student living with them. In 2005 $120,000 went into these accounts, in 2006 it was $292,352, in 2007 it was $316,857, in 2008 it was $29,500, and in
2009 $11,000. I accept that the sums paid during 2005, 2006 and 2007 must have
included money obtained through the conversion of phone cards and unlawful
retention of top-up charges. The issue is whether Ms Han should be personally liable for some or any of the losses sustained during this period as a result of receiving these funds.
[31] A defendant who receives money or property obtained by fraud faces liability as a constructive trustee. In El Ajou v Dollarland Holdings plc Hoffman LJ identified the three elements of a cause of action in knowing receipt:[7]
[7] El Ajou v Dollarland Holdings plc [1994] 2 All ER 685, 700.
For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff, and thirdly, knowledge on the part of a defendant that the assets he received are traceable to a breach of fiduciary duty.
[32] The first two elements are easily satisfied. The real issue in this case is whether Ms Han had the requisite knowledge that the money coming into her bank accounts was traceable to Mr Kim’s breach of fiduciary duty.
[33] The knowledge required for liability for knowing receipt has been a difficult and developing question since Baden v Societe Generale pour Favoriser le Development du Commerce et de l’Industrie en France SA in which Peter Gibson identified five types of knowledge that would satisfy the requirements of knowing
receipt.[8] Only the first three of these required dishonesy, being actual knowledge,
[8] Baden v Societe Generale pour Favoriser le Development du Commerce et de l’Industrie en FranceSA [1993] 1 WLR 509; [1992] 4 All ER 161.
knowledge obtainable but for “shutting one’s eyes” to the obvious, and knowledge obtainable but for wilfully and recklessly failing to make such enquries as an honest and reasonable man would make. The remaining forms of knowledge simply reflected a failure to act honestly and reasonably, these being knowledge of circumstances that would indicate the facts to an honest and reasonable person and knowledge obtainable from enquiries that an honest and reasonable person would feel obliged to make, having been put on notice as a result of his or her knowledge of suspicious circumstances.
[34] It is, however, clear now that in the UK Baden does not represent the test for knowledge in the context of knowing receipt; liability for knowing receipt requires
dishonesty. In Re Montagu’s Settlement Trusts; Duke of Manchester v National Westminster Bank Ltd & Ors Megarry VC considered the Baden categories as no more than “aids in determining whether or not the defendant’s conscience was affected in such a way as to require him to hold any or all of the chattels that he received on a constructive trust”.[9] He regarded the correct approach in determining the existence of a constructive trust through knowing receipt as being “whether the conscience of the recipient is sufficiently affected to justify the imposition of such a trust”.
[9] Duke of Manchester v National Westminster Bank Ltd & Ors [1992] 4 All ER 308 at 322.
[35] In Westdeutsche Landesbank Girozentrale v Islington LBC Lord Browne- Wilkinson rejected an argument that a recipient of money under a contract subsequently found to be void should hold the monies on trust even where he had no knowledge at the relevant time that the contract was void, observing at 988:[10]
[10] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] 2 All ER 961.
Equity operates on the conscience of the owner of the legal interest. In the case of a trust, the conscience of the legal owner requires him to carry out the purpose for which the property was vested in him (express or implied trust) or which the law imposes on him by reason of his unconscionable conduct (constructive trust) ...
Since the equitable jurisdiction to enforce trusts depends on the conscience of the holder of the legal interest being affected he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience i.e. until he is aware that he is intended to hold the property for the benefit of others in the case of an express or implied trust or in the case of a constructive trust of the factors which are alleged to affect his conscience ...
(emphasis added)
[36] This approach was cited with approval by the UK Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele.[11] Referring to Baden and subsequent cases that had treated constructive knowledge (as opposed to actual knowledge/dishonesty) as sufficient to succeed on knowing receipt[12] Nourse LJ pointed out that these cases were ones primarily concerned with claims in knowing
[11] Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437.
[12] Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393; Agip(Africa) Ltd v Jackson [1990] Ch 265; Eagle Trust plc v SBC Securites Ltd [1993] 1 WLR 484.
assistance rather than knowing receipt, concluding at 455:
What then, in the context of knowing receipt is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405, the recipient can “conscientiously retain [the] funds against the company” or in the words of Sir Robert Megarry VC in Re Montagu’s Settlement Trusts [1987] CH 264,
273, “[the recipients] conscience is sufficiently affected for it to be right to
bind him by the obligations of the constructive trustee” but if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.
For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. But test in that form, though it cannot, anymore than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisation have led. Moreover, it should better enable the court to give commonsense decisions in the commercial context in which claims in knowing receipt are frequently made, paying equal regard to the wisdom of Linley LJ on the one hand and of Richardson J on the other.
(emphasis added)
[37] The other members of the Court, Ward LJ and Sedley LJ, agreed with this conclusion, without adding any further reasons. The decision in Akindele has been referred to in subsequent New Zealand cases but without deciding what the position should be here.[13] The issue of knowledge, however, is of consequence in this case.
[13] Kings Wharf Coldstore Ltd (in receivership and in liquidation) v Wilson HC Wellington (2005) 2
[38] I respectfully accept the reasoning Re Montagu’s Settlement Trusts and Westdeutsche Landesbank Girozentrale. In determining the type of knowledge required to render a person liable as a constructive trustee as a result of the receipt of funds acquired through fraud (and which they may no longer have control over) it is the effect on that person’s conscience that should be the determinative factor. That effect could not safely be found to exist without a court being satisfied that the receiver knew, when in receipt of the funds, that they were impressed with a trust. I therefore proceed on the basis that the test in New Zealand is that articulated by Nourse LJ in Westdeutsche Landesbank Girozentrale, namely knowledge that would
make it unconscionable for the receipient to retain the benefit of the money received.
[39] Mr Liew submitted that Ms Han did have knowledge of facts that would have caused an honest person to make enquiries, namely the transfer of large sums of money from EzyTel’s account into the personal bank accounts which were shown on EzyTel bank statements as having been effected by Ms Han. In asserting that Ms Han deliberately refrained from enquiring as to the source of the payments, Mr Liew relied on the following cross-examination:
Q: Now when all those money came into your joint account did you ever ask where that money came from?
A: No I didn’t ask.
Q: And you did not want to ask did you? A: No. I don’t know what you mean.
[40] I do not place the same weight on the last answer as Mr Liew invited me to do because the transcript does not fully convey its tenor. It was evident at several points in Mr Liew’s cross-examination that Ms Han had difficulty understanding the nature of the questions. This is no criticism of Mr Liew’s cross-examination, which was clear and concise. It was, rather, a function of the inherent difficulties in cross- examining through an interpreter together with Ms Han’s general lack of comprehension of many of the areas on which she was being cross-examined. I have concluded from the manner in which Ms Han answered this question that she was genuinely perplexed as to what the question meant.
[41] This still leaves the fact that Ms Han knew that sizeable amounts of money were coming into her personal accounts. Particularly during 2006 and 2007 the amounts were at a level far beyond what could have come from a 30% commission on phone cards that retailed for between and $5 and $75. Ms Han also knew that cheques were being banked into EzyTel’s account, which was not usual business practice. However, I am not satisfied that Ms Han did, or should have, realised that the funds were obtained through fraud on Worldtel until 6 March 2009 when she was served with the search and freezing orders.
[42] Ms Han said that she did not actually know what Worldtel’s business was and had only been to its premises once. Although she knew that Mr Kim was involved in the management of Worldtel, there was no evidence that she understood exactly what
role he played or what he earned. I have already found that Ms Han did not know (until after Mr Kim had left New Zealand) that the I-Phone cards were converted. Ms Han said that Mr Kim had told her all the cards they sold had been paid for. In relation to the top-up charges there was no evidence that Ms Han even understood how the top-up function operated, let alone that Mr Kim was failing to account for top-up charges received.
[43] Ms Han said in evidence that she never saw the EzyTel bank statements and had never undertaken any internet banking herself. She explained that because the EzyTel account had initially been set up in her name the bank required to talk to her in the event of an electronic transaction undertaken with the use of a netcode. According to Ms Han, Mr Kim would call the bank and the bank would ask to speak to her and then she would hand the phone back to Mr Kim to complete the transaction. She denied effecting the transfers and there was no evidence from the bank concerned as to its procedures or why Ms Han’s name would have been shown on the statement as having effected the transfer.
[44] Ms Han’s description of the fear and bewilderment she felt the day that the search order was executed struck me as genuine, as did her claim to have had very limited involvement in EzyTel’s business. One time she asked Mr Kim how much EzyTel made from selling the cards and was told $1,000 per month. Other times she asked how the business was going and was told “okay”. Otherwise, however, they were both tired and did not talk much. I accept Ms Han’s evidence that her role was to keep house, look after her daughter and the home-stay child who lived with them and undertake tasks such as writing invoices, delivering cards and collecting money as directed by her husband. On the evidence, I am not satisfied that Ms Han knew what the transfers involved and the minor part she played could not be regarded as dishonest.
[45] It follows that Ms Han is only liable for the knowing receipt of funds or assets that were derived from Mr Kim’s fraud on Worldtel and were under her control when she was served with the search and freezing orders on 6 March 2009.
Dishonest assistance
[46] The final cause of action relates to the money received by EzyTel from the proceeds of sale of converted I-Phone cards and top-up charges not accounted for. It is alleged that by invoicing the retailers, delivering invoices, collecting money and effecting transfers of funds to the personal bank accounts Ms Han assisted in Mr Kim’s fraud in respect of Worldtel.
[47] A person who does not actually receive property in breach of a trust but dishonestly assists in another’s breach of trust is nevertheless liable for the loss. The requirements are as stated by the Privy Council in Royal Brunei Airlines sdn bnd v Tan in which Lord Nicholls concluded:[14]
[14] Royal Brunei Airlines sdn bhd v Tan [1995] 2 AC 378 at 392.
Drawing the threads together, their Lordships’ overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. “Knowingly” is better avoided as a defining ingredient of the principle and in the context of this principle the Baden [1993] 1 WLR 509 scale of knowledge is best forgotten.
[48] Earlier in the judgment Lord Nicholls spelt out what was meant by dishonesty in this context:
Whatever may be the position in some criminal or other contexts (see, for instance, Reg v Ghosh [1982] QB 1053), in the context of the accessory liability principle acting dishonestly or, with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another’s property he will
not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.
In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others’ property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it carries a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless.
(emphasis added)
[49] The test in Royal Brunei was ostensibly adopted by the House of Lords in Twinsectra Ltd v Yardley & Ors[15] but interpreted so as to require, in addition to conduct of a dishonest nature, the need for the dishonest assister to recognise that what he or she was doing would be regarded as dishonest by honest people.
[15] Twinsectra Ltd v Yardley & Ors [2002] UKHL 12.
[50] The Twinsectra variation on the Royal Brunei test was greeted cautiously in New Zealand. In US International Marketing Ltd v National Bank of NZ Ltd (where the facts did not require the point to be decided) Tipping J referred to it with apparent acceptance but both Anderson J and Glazebrook J expressed reservations.[16]
[16] US International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589 (CA).
Those reservations were vindicated by the Privy Council’s subsequent explanation of Twinsectra in Barlow Clowes International Ltd (in liquidation) v Euro Trust International Ltd which confirmed the Royal Brunei test in its original form.[17]
[17] Barlow Clowes International Ltd (in liquidation) v Euro Trust International Ltd [2006] 1 WLR 1476.
[51] This is also now the position in New Zealand following the Court of Appeal’s decision in Westpac New Zealand Ltd v Map & Associates Ltd in which Arnold J, giving the reasons for the Court, concluded:[18]
[18] Westpac New Zealand Ltd v Map & Associates Ltd [2010] NZCA 404.
[46] Accordingly, we consider that a bank will be liable for dishonest assistance where it has actual knowledge of the circumstances of the transaction (the subjective element) such as to render its participation contrary to normally acceptable standards of honest conduct (the objective element).
[52] I have already considered the nature and extent of Ms Han’s knowledge. She did not know that the cards were stolen and she did not know that the top-up charges were not being accounted for. She did know that substantial funds were coming into her and Mr Kim’s personal accounts but (until the search and freezing orders were served on her) did not know that they were derived from a fraud. Taking into account all the circumstances of Ms Han’s relationship with Mr Kim and the way in which EzyTel was operated I do not consider Ms Han to have acted dishonestly. There can be no doubt that the level of payments coming into personal accounts held in Ms Han’s name during 2006 and 2007 were, objectively, suspicious. But I am not satisfied that Ms Han had the level of knowledge required to make her failure to enquire dishonest.
Result
[53] Ms Han is liable to Worldtel:
(a) In conversion for the wholesale value of the converted $5, $10, $20 and $50 I-Phone cards; and
(b)In knowing receipt to the extent that money traceable to the conversion of phone cards and failure to account for top-up charges was still in Ms Han’s hands (whether in money or assets) at 6 March
2009.
[54] Worldtel has sought an order for an account. Although I was initially doubtful about the utility of such an order, given the extensive work already done by Mr McCullagh, it is clear that further work will be required. I therefore make an order for an account to be taken by Mr McCullagh. His assessment should identify:
(a) The loss to Worldtel from the supply to retailers of stolen I-Phone $5,
$10, $20 and $50 cards;
(b)The extent to which monies derived from the sale of I-Phone cards and top-up charges are still held in any bank account controlled by Ms Han; and
(c) The extent to which monies from I-Phone cards and top-up charges have been used to acquire assets in which Ms Han has an interest or are under her control.
The plaintiff may file a memorandum as to costs by 14 October 2011. The defendants may reply by 21 October 2011 and the plaintiff may respond by
28 October 2011.
P Courtney J
NZCCLR 1042 (HC); PGG Wrightson Ltd v Wai Shing Ltd HC Auckland CIV-2003-404-6579, 23
February 2006.
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