Commonwealth of Australia v South Pacific Cruise Lines Ltd & Ors [1998] FCA 438

FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - application for summary judgment - no affidavit filed in defence - application for adjournment - failure of respondent to comply with directions of Court. Federal Court Rules - O 20 r 1 In re Goldcorp Exchange Ltd (In Receivership) (1995) 1 AC 74 - applied Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 - cited COMMONWEALTH OF AUSTRALIA -v- SOUTH PACIFIC CRUISE LINES LTD & Ors NG 741 of 1997

FOSTER J 22 APRIL 1998 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 741 of 1997

BETWEEN: commonwealth of australia

Applicant

AND: south pacific cruise lines ltd (ACN 076 749 794)

first Respondent

Gregory Stephen adams

second respondent

cgi financial services pty ltd (acn 072 940 437)

third respondent

JUDGE: FOSTER J

DATE OF ORDER: 22 APRIL 1998

WHERE MADE: SYDNEY

THE COURT ORDERS THAT: 1. Summary judgment be given against the second respondent. 2. Costs be awarded against the second respondent in the substantive proceeding to date. 3. Costs in this motion be awarded against the second respondent. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 741 of 1997

BETWEEN: commonwealth of australia

Applicant

AND: south pacific CRUISE lines ltd (ACN 076 749 794)

first Respondent

Gregory Stephen adams

second respondent

cgi financial services pty ltd (acn 072 940 437)

third respondent

JUDGE: FOSTER J

DATE: 22 APRIL 1998

PLACE: SYDNEY

REASONS FOR JUDGMENT (Extempore) Before dealing with the motion brought by the applicant, the Commonwealth of Australia ("the Commonwealth"), for summary judgment, I will consider an application which has been made in this matter by the second respondent, Mr Gregory Stephen Adams ("Mr Adams"), at the completion of the evidence adduced on behalf of the application for summary judgment against him. That application is, in effect, for an adjournment to enable the second respondent to deal with matters of defence by way of affidavit. This application is made in the context where the substantive proceedings themselves have been set down for trial now for some time and directions have been given for the filing of evidence by the respondent in relation to those proceedings. No evidence has been filed by the second respondent to contest evidence filed on behalf of the applicant in those substantive proceedings. No evidence has been filed in relation to this notice of motion although O 20 r 1 of the Federal Court Rules clearly requires that once an allegation has been made on oath by an applicant as to the belief that there is no defence to its claim, the respondent should then provide evidence on affidavit indicating the existence and nature of a defence. In summary, there has been a total failure to comply with the specific directions of the Court, both in relation to the substantive proceedings and to this notice of motion. Mr Adams has indicated from the bar table the matters he would wish to deal with if he were given the opportunity to file affidavits. They cover matters of detail as to amounts allegedly expended by the companies in relation to the contract to provide services. More generally, they relate to matters going to the existence or non-existence of a trust situation with respect to the Commonwealth's payment to him of the moneys in question. He indicated, in making those submissions, that he recognised that some fiduciary responsibilities were involved in the receipt of moneys. Other matters were raised. In all the circumstances, including the fact that the application for adjournment is opposed, I can see no basis upon which I can reasonably grant it. I refuse the application, the matter must simply proceed as it is currently constituted. I turn, then, to the application for summary judgment, brought by the Commonwealth against Mr Adams. This application was originally also brought in respect of the first respondent, South Pacific Cruise Lines Ltd ("SPCL") and the third respondent, CGI Financial Services Pty Ltd ("CGI"). The Court has been advised that both those companies have been placed under administration. In the circumstances, the applicant does not seek to proceed against those companies to obtain a summary judgment. The notice of motion in respect of those companies has been stood over to the date when the substantive proceedings will be heard. The Commonwealth has, however, sought to proceed against Mr Adams, and I have been taken to all the evidence upon which it relies in order to obtain a summary judgment for the payment to it of an amount for equitable compensation. Mr Adams was, at all relevant times, a director of the two companies to which I have made reference and I am satisfied he was in a position of substantial, if not total, control of their activities. I do not propose to deal with the facts in these short reasons at any great length, since they are fully detailed in the affidavit evidence that has been placed before me. It is clearly established that the Commonwealth, through the Department of Employment Education Training and Youth Affairs ("DEETYA") entered into a contract with the first respondent, SPCL, on 16 May 1997. By that contract it undertook to provide to SPCL funds to enable it to organise a training program, for a number of long term unemployed persons. The training was to be in the hospitality industry and was to culminate in the employment by SPCL of such trainees as graduated from the training program in certain cruise operations to be conducted by a cruise vessel out of the Port of Brisbane in the State of Queensland. The cruise operation was to commence late in 1997. The operation did not commence because, as is clear, it was not financially possible for SPCL to undertake it. However, the moneys payable under the contract, and which are at issue in these proceedings, being an amount of $2,235,839, were provided to SPCL in accordance with the terms of the contract. The amount in question was not the full amount for the service fee that was to be paid, it was a first payment comprising 80 per cent of the full fee as provided for in clause 15 of the contract. It was not intended that SPCL would itself undertake the training requirements provided for in the contract with DEETYA. It is quite clear that at all times it was intended that the training be undertaken by a corporation, William Angliss 2000 Pty Ltd ("WA2000") which was well established in the hospitality training industry. It is also clear that it was intended at all times, not only to undertake the training of the relevant trainees for the purpose of their ultimate employment by SPCL, but also to be the recipient of the whole amount of the first payment of the agreed training fee. The training parties, namely, SPCL and WA2000 had entered into an agreement of subcontract with the concurrence of DEETYA. The overall effect of the contractual arrangements was that DEETYA would contract with SPCL for the training, with the condition that that training would be the subject of subcontract to WA2000. Indeed, a further subcontract to an organisation, which I shall refer to simply as "Russo", was also contemplated and entered into, with that organisation to provide certain aspects of the training. The contractual documents do not refer in their terms to the first payment as being paid to SPCL for the purpose of its being held in trust for payment to WA2000 for the performance of the training contract, nor do they provide in their terms that any amounts not expended in the performance of that trust, should be, in effect, the subject of a resulting trust in favour of the payer, the Commonwealth. It is put to me, however, that all the circumstances of this case indicate with clarity that a trust situation in fact existed, and not merely a contractual relationship. The trust relied upon is a type not uncommonly referred to as a "Quistclose trust". I have been referred to what appears to be the latest statement of the elements of that trust, which is to be found in In re Goldcorp Exchange Ltd (In Receivership) (1995) 1 AC 741, a decision of the Privy Council. The statement in question is to be found at page 100. It is in the following terms and I quote: "That a sum of money paid by the purchaser under a contract for the sale of goods is capable in principle of being the subject of a trust in the hands of the vendor is clear. For this purpose it is necessary to show either a mutual intention that the moneys should not fall within the general fund of the company's assets but should be applied for a special designated purpose, or that having originally paid over without restriction the recipient has later constituted himself a trustee of the money." The case of Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 is referred to. In my view, it is amply demonstrated in these proceedings that a trust of this nature has occurred. The contract makes it quite clear that the moneys are to be used for the designated purpose of providing for the training of the trainees. In those circumstances, it is perfectly plain that the moneys were paid to SPCL for the purpose of being paid on to WA2000 or other nominated subcontractors for the purpose of paying their fees for the training of the contemplated workforce on SPCL's cruise boat. The money was to be paid into a nominated bank account. In that regard, clause 4.7 of the general conditions of the contract provided that:- "You must deposit and retain all funds provided by us in an account which must be used exclusively for LMP funds provided by us. The account must be located in Australia with an established Australian financial institution such as a bank, building society or credit union." The nominated bank account was with the Hong Kong Bank and the money was paid into that account. I am quite satisfied that Mr Adams, as a director of SPCL, was aware that the money was to be received by that company in trust for the designated purpose and to be used for no purpose other than the payment to the training organisations. The evidence of Mr Beck, in his affidavit sworn 22 December 1997, indicates to me that if Mr Adams was not fully aware of this at the outset of the contract, he was made aware of it, in no uncertain terms, before any significant disbursements of this money occurred. I am also satisfied from material that has been placed before me, being correspondence between Mr Adams and a banking organisation, Pacific Bank Ltd ("Pacific Bank"), that Mr Adams was aware that moneys which he had forwarded to that bank as part of an attempt to obtain finance for the enterprise itself, had been forwarded, with his knowledge, without the concurrence of the Commonwealth and in breach of the trust under which the money had been received by SPCL. One of the letters to which I have been taken, and I will not quote from it, makes it quite clear that Mr Adams himself was not unaware that what he had been doing with the money could involve criminal implications. Put shortly, the money was not expended for the training purposes for which it was designated. A certain portion of it was so expended but a balance of more than $700,000 was not. That money was used, in breach of trust, by SPCL to make payments for purposes other than the purposes of training. A number of payments were made to a company which is the third respondent, CGI, of which, as I have indicated, Mr Adams was the director and financial controller. Moneys were also paid out to the Pacific Bank to which I have made reference. These appear to have been application moneys - of a not inconsiderable amount - which were designed to enable financing arrangements to be put in place for the purpose of SPCL's business. These financing arrangements were obviously being sought as fairly desperate measures because, unless they were put in place, it was obvious, to the knowledge of Mr Adams, that the Commonwealth would become aware that the moneys provided to SPCL had been expended in breach of trust. The finance was not made available by Pacific Bank. Mr Adams sought to obtain a refund of the amounts forwarded to it as application moneys. The context in which that application was made makes it quite clear to me that he was well aware that the activities engaged in by the company, in relation to the funds provided to it, were unlawful. Other moneys were paid out to other organisations and persons. A Mr Booker appears in the evidence as having been the recipient of some $140,000 from the moneys provided by the Commonwealth. It is unnecessary for me to recount any further facts. I am satisfied that Mr Adams knew of the trust situation and am satisfied that he knew that by not providing the moneys for the designated purpose of training, the companies, which he was controlling, were acting in breach of trust. To that extent he clearly assisted in the breach of trust and became liable for it according to ordinary equitable principles. The applicant seeks damages in the form of equitable compensation. The amount unaccounted for, that is, the amount over and above what was paid properly to WA2000 for training operations, is $733,897 and I think it appropriate that I award that sum to the applicant as equitable compensation by way of summary judgment in these proceedings. Interest, in accordance with clause 4.13 of the general conditions of the contract is also sought. It is sought from 12 September 1997, the date of the commencement of these proceedings. It is appropriate that such interest be awarded. I make an order in general terms for the payment of interest. The calculation of the interest can be attended to later and brought before the Court in the form of short minutes. It is appropriate that I order the costs of this notice of motion be paid by the second respondent. As the effect of the judgment I have given is that Mr Adams, as second respondent, is now removed from the proceedings, it is also appropriate that he pay the costs of the Commonwealth to date in relation to those proceedings brought against him, and I so order. I direct that short minutes of these orders be brought in within seven days. I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.