FEDERAL COURT OF AUSTRALIA PermissionCorp Pty Ltd v Pegasus International Marketing Pty Ltd [2012] FCA 295 Citation: PermissionCorp Pty Ltd v Pegasus International Marketing Pty Ltd [2012] FCA 295 Parties: PERMISSIONCORP PTY LTD (ACN 119 988 519) v PEGASUS INTERNATIONAL MARKETING PTY LTD (ACN 116 550 353), NICHOLAS DECHNICZ and JOSHUA MCKENZIE File number(s): NSD 2218 of 2011 Judge: YATES J Date of judgment: 27 March 2012 Catchwords: EQUITY – breach of fiduciary duty owed by employee to employer – constructive trust imposed over proceeds from breach knowingly received by third party facilitating the breach Legislation: Bankruptcy Act 1966 (Cth) s 58 Corporations Act 2001 (Cth) s 206B Cases cited: Barnes v Addy (1874) LR 9 Ch App 244 Concut Pty Ltd v Worrell (2000) 176 ALR 693 Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (7th ed, LexisNexis Butterworths, 2006) Date of hearing: 23 March 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 18 Counsel for the Applicant: Mr D Mackay Solicitor for the Applicant: Unsworth Legal Pty Ltd Counsel for the Respondents: The Respondents did not appear IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2218 of 2011 BETWEEN: PERMISSIONCORP PTY LTD (ACN 119 988 519) Applicant AND: PEGASUS INTERNATIONAL MARKETING PTY LTD (ACN 116 550 353) First Respondent NICHOLAS DECHNICZ Second Respondent JOSHUA MCKENZIE Third Respondent JUDGE: YATES J DATE OF ORDER: 27 MARCH 2012 WHERE MADE: SYDNEY THE COURT: 1. DECLARES that the first respondent holds the sum of $173,906.52 on constructive trust for the applicant arising from the second and third respondents' breaches of fiduciary duty owed to the applicant. 2. ORDERS that the first respondent pay the said sum to the applicant. 3. ORDERS that the first respondent pay the applicant's costs. Note: Settlement and entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2218 of 2011 BETWEEN: PERMISSIONCORP PTY LTD (ACN 119 988 519) Applicant AND: PEGASUS INTERNATIONAL MARKETING PTY LTD (ACN 116 550 353) First Respondent NICHOLAS DECHNICZ Second Respondent JOSHUA MCKENZIE Third Respondent JUDGE: YATES J DATE: 27 MARCH 2012 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The applicant has sued the respondents in respect of certain activities carried out in alleged breach by the second and third respondents of the fiduciary duties they each owed the applicant as their employer. Relying on essentially the same facts, the applicant has also alleged that the respondents have contravened s 18 of the Australian Consumer Law. 2 The second respondent was employed by the applicant in the period 8 October 2008 to 8 December 2011. At the time his employment ceased, the second respondent was employed as a Senior Business Development Manager. 3 The third respondent was employed by the applicant in the period 27 April 2010 to 8 December 2011. At the time his employment ceased, the third respondent was employed as a Business Development Manager. During his employment with the applicant, the third respondent reported to the second respondent. 4 The applicant is in the business of providing email marketing services on behalf of its clients. It carries on that business by sending emails that market the goods or services supplied by its clients. The applicant has a database of email addresses. On occasion it contracts with third parties to provide it with email addresses that can be used in carrying on that business. 5 The applicant's case is that, unbeknown to it, the second respondent was the sole shareholder and director of the first respondent and that, in the period August to November 2011, the second and third respondents, acting together and ultimately for their own benefit, "negotiated" contracts on behalf of the applicant with the first respondent under which the first respondent agreed to supply email addresses to the applicant for use in carrying on its business. The second and third respondents caused the first respondent to issue tax invoices to the applicant in respect of those contracts, which the applicant subsequently paid. As things turned out, no email addresses were provided by the first respondent in performance of those contracts. 6 The applicant says that the second and third respondents owed it fiduciary duties, including a duty not to place themselves in a position where their personal interests were in conflict with the interests of the applicant as their employer; that by "negotiating" the contracts between the applicant and the first respondent they were acting for their own benefit in breach of those duties; and that the first respondent received payments from the applicant knowing of the breaches of duty that had taken place. 7 The applicant also says that the respondents made certain representations to it in trade or commerce, including a representation that the first respondent carried on an independent business that was not connected with any person employed by the applicant. It says that the making of that representation, and indeed the whole of the respondents' conduct, was conduct that was misleading or deceptive in contravention of s 18 of the Australian Consumer Law. 8 On 9 December 2011 the applicant obtained freezing orders against the respondents for the amount of $173,906.52. On the same day the applicant filed its originating application and statement of claim in support. The respondents have filed defences in answer to the statement of claim. Those defences have admitted many of the factual allegations pleaded in the statement of claim. 9 Since those defences have been filed, the second respondent has presented a debtor's petition and, from 9 February 2012, has been a bankrupt. One consequence of the second respondent's bankruptcy is that, except with leave of the Court, it is not competent for the applicant to take any fresh step against the second respondent in this proceeding: s 58(3)(b) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). Another consequence is that the second respondent is disqualified from managing corporations: s 206B(3) of the Corporations Act 2001 (Cth). The second respondent is, therefore, disqualified from managing the first respondent. A further consequence is that the second respondent's property, including his share in the first respondent, has vested in the Official Trustee in Bankruptcy: s 58(1)(a) of the Bankruptcy Act. The Official Trustee in Bankruptcy has advised that it does not intend to become involved in the applicant's proceeding against the first respondent. 10 On 19 March 2012 orders were made, by consent, against the third respondent, effectively disposing of the proceeding against him. 11 Thus the proceeding remains active against the first respondent only. The hearing of that proceeding took place on 23 March 2012. The applicant advanced its case as one of breach of the fiduciary duties it had pleaded. It did not advance its case based on alleged contravention of s 18 of the Australian Consumer Law. 12 The first respondent has made the following admissions in its defence filed on 23 December 2011: (a) The second respondent was its sole shareholder and director. (b) Between August and November 2011 the second respondent caused the applicant to enter into contracts with the first respondent for the supply of email addresses. (c) The second respondent did not disclose to the applicant that he was acting for the first respondent or that the second respondent was the first respondent's sole shareholder and director. (d) The first respondent did not supply any email addresses to the applicant. (e) The second respondent did not inform the applicant that either he or the third respondent had a financial interest in those contracts. (f) The second respondent caused tax invoices to be issued by the first respondent to the applicant. (g) The applicant made payments in respect of some, but not all, of the tax invoices issued by the first respondent. (h) Those payments were made into a bank account nominated by the first respondent. (i) The first respondent directly profited from the contracts. 13 I have also been taken to a number of business records which show that the first respondent received payments for the total amount of $173,906.52 from the applicant in payment of various tax invoices issued by the first respondent to the applicant. 14 The applicant made the following submissions: (a) The relationship between employee and employer is one of the accepted fiduciary relationships: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-97. (b) The critical feature of a fiduciary relationship is that the fiduciary undertakes or agrees to act for or on behalf of, or in the interests of, another person in the exercise of a power or discretion that will affect the interests of that other person in a legal or practical sense: Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 698. (c) A fiduciary is liable to account for a profit or benefit if it was obtained (i) in circumstances where there was a conflict or possible conflict of interest or duty, or (ii) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position: Hospital Products at 107. (d) A fiduciary is open to the same remedies as an actual trustee, including a declaration of trust, an order to transfer property, an account of profits and an order for payment, or a tracing order, whichever may be the appropriate and useful remedy or remedies as the facts stand at the time of trial: Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 at 495. (e) Persons who receive trust property become chargeable if it is established that they received it with notice of the trust: Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89 at [110]-[113]. 15 I am satisfied on the evidence that the various payments made by the applicant in respect of the invoices issued by the first respondent were sums received by the first respondent as a consequence of the second and third respondents' breaches of fiduciary duty to the applicant. The second and third respondents owed a duty to the applicant not to act so as to place themselves in a position in which their personal interests were in conflict with the applicant's interests. On the evidence before me, they each plainly acted in breach of that duty. 16 I am also satisfied that the first respondent was complicit in those breaches and, with knowledge of the breaches, received payments from the applicant. Those sums remain identifiable in the hands of the first respondent. In the circumstances, the first respondent has become "chargeable" for those sums: Barnes v Addy (1874) LR 9 Ch App 244 at 251-252; Farah Constructions at [112]. 17 The first respondent should account for the sums it has received. One way of achieving this is to grant the declaratory relief sought by the applicant to the effect that the first respondent holds those sums on constructive trust for the applicant: see the discussion in JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (7th ed, LexisNexis Butterworths, 2006) at [1330] and [1333]-[1340]. I will therefore grant that relief. I will also order the first respondent to pay the sums held in trust to the applicant. 18 The first respondent should pay the applicant's costs. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate: Dated: 27 March 2012