No. 1 O'Connell Street Asset Management Pty Ltd v Premier Finance Pty Ltd & 3 Ors [2002] NSWSC 404

New South Wales Supreme Court

CITATION : No. 1 O'Connell Street Asset Management Pty Ltd v Premier Finance Pty Ltd & 3 Ors [2002] NSWSC 404 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4099/01 HEARING DATE(S) : 29 April 2002 JUDGMENT DATE : 10 May 2002

No. 1 O'Connell Street Asset Management Pty Ltd (Plaintif) PARTIES : Premier Finance Pty Ltd (First Defendant) John Robert Preston (Second Defendant) Avstar Aviation Pty Ltd (Third Defendant) JUDGMENT OF : Campbell J

COUNSEL : J W Stevenson (Plaintiff) SOLICITORS : Blake Dawson Waldron (Plaintiff) CATCHWORDS : CONTRACT - misappropriation by service provider - right to recover money misappropriated - no question of principle LEGISLATION CITED : Corporations Act 2001 (Cth) Supreme Court Act 1970 CASES CITED : Black v S Freedman & Co (1910) 12 CLR 105 DECISION : Order for repayment of money misappropriated, plus interest.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

CAMPBELL J

10 MAY 2002

4099/01 NO. 1 O'CONNELL STREET ASSET MANAGEMENT PTY LTD v PREMIER FINANCE PTY LTD & 3 ORS JUDGMENT 1 HIS HONOUR: The plaintiff manages a CBD office block known as 1 O'Connell Street Sydney. It manages the building for the owner, Harina Company Ltd. 2 From May 1998 to 9 March 2001 Mr John Preston provided financial, accounting and related services to the plaintiff. It was part of his responsibility to look after payment of the regular outgoings connected with the running of a CBD office building. 3 Mr Preston's services were provided on terms which came to be finalised in an agreement made on 4 September 1998 between the plaintiff, Mr Preston, and Premier Finance Pty Ltd (called, in that agreement "the Contractor"). Mr Preston was referred to in the agreement as the "Nominated Employee". The agreement was one, of a familiar type, whereby a company agreed to provide services, and to provide those services through a nominated employee, on terms whereby that nominated employee did not become an employee of the entity for whom the services were provided. 4 The agreement contained the following provisions: "1.3 The Contractor will provide the Services through the Nominated Employee. … 1.5 The Contractor will … carry out the Services with all necessary professional skill and diligence. … 1.8 The Contractor [and] the Nominated Employee … will comply with the reasonable requirements of the Company or the Managing Director in connection with the provision of the Services. … 1.9 … the Nominated Employee agrees to comply with the terms of this agreement and acknowledges these obligations by signing this agreement. … 4.1 In consideration of the Contractor providing the Services the Company shall pay the Contractor at the rate specified in schedule 2 of this agreement or such other rate as may be agreed in writing between the Company and the Contractor (the "Fee"). 4.2 The Contractor agrees that payment of the Fee constitutes full payment for the Services and is in full and final satisfaction of all entitlements of the Contractor under or arising from this agreement. 4.3 The Contractor agrees to submit monthly invoices in respect of the Services rendered by the Contractor and to comply with such procedures as the Company requires from time to time for the substantiation of expenses. … 9.2 The Contractor shall be solely liable for and indemnify and hold harmless the Group against all liability, damage, loss, expense, costs and proceedings of any nature whatsoever arising out of or in connection with the services … 10.2 The Contractor agrees to hold the Group indemnified and keep it indemnified against any liability to pay or remit Tax arising out of or connected with the provision of the Services under this agreement. For the purposes of this clause "Tax" means any tax payable or remitable under the Income Tax Assessment Act 1936 Commonwealth (as amended) or otherwise …" 5 Schedule 1 to the agreement stated the amount of the Fee as being $5,796 per month. 6 The agreement did not make provision for any separate execution by Mr Preston in his own right. Mr Preston signed it as a director witnessing the affixing of the common seal of Premier Finance Pty Ltd. 7 Notwithstanding that Mr Preston did not sign the agreement separately in his own capacity, there is no real doubt that the agreement governed the relations between the parties. Mr Preston has sworn (in a portion of an affidavit which was tendered by the plaintiff) "On 4 September 1998 the plaintiff entered into a Service agreement with the first defendant and myself. The first defendant was the "Contractor" and I was the "Nominated Employee". The contractor undertook to provide financial, accounting and related services and these services were provided through me as the Nominated Employee." 8 At a staff Christmas party in 1999, Mr Brock, the Managing Director of the plaintiff, came to hear that Mr Preston had been paying various accounts of the plaintiff using his American Express card, as a way of building up membership rewards (or Frequent Flyer Points). Mr Preston was away on holidays at the time. When Mr Preston returned from holidays in January 2000, Mr Brock told him that the practice must cease forthwith. Mr Brock wrote a memorandum to Mr Preston, on 12 January 2000, saying: "It has recently been brought to my attention that a number of company account may have been settled by way of personal credit cards, with the cardholder then claiming reimbursement from the company. Unless you receive prior approval from myself to do so, which would only be considered in times of emergency, I would like to advise you that this practice should cease forthwith. Please comply with the traditional company accounting/bill paying procedures via the Accpac system." 9 Notwithstanding this instruction, Mr Preston continued to pay various of the plaintiffs accounts using his credit card, and later reimbursing himself. In the last week of February in 2001, it came to Mr Brock's attention that Mr Preston had been continuing to do this. The particular incident which brought it to Mr Brock's attention was that a penalty charge of $5,029 had been added (plus GST of $502.91) onto the electricity accounts payable in connection with the building, as a "premium" charge of 1.4% for paying the bill by credit card. It was Mr Preston's refusal to reimburse the plaintiff the amount of this "premium" plus GST which led to the contract pursuant to which Mr Preston's services were provided to the plaintiff, being terminated. 10 After Mr Preston had departed from the plaintiff, it was discovered that there were significant discrepancies in the plaintiff's accounts, relating to amounts for the payment of which Mr Preston was responsible. It appeared that not only had he been paying suppliers using his credit card, and subsequently reimbursing himself from the company's funds, but he had been "reimbursing" himself for more than the amounts which he had paid. 11 These proceedings were commenced on 17 August 2001. At that time there was evidence which suggested that Mr Preston was about to leave Australia. An Anton Pillar order, and a Mareva order, were made on the day that the proceedings were commenced. 12 The proceedings were begun against Premier, Mr Preston, and Avstar Aviation Pty Ltd ("Avstar"). Avstar is a corporation connected with Mr Preston, which had received some of the amounts of money which Mr Preston had taken from the plaintiff's bank account, when "reimbursing" himself. 13 At a later stage, a fourth defendant, No. 16 O'Connell Street Pty Ltd, was added. That defendant did not appear at the hearing. I was informed by counsel for the plaintiff that a notice of discontinuance against that defendant has been signed, and the plaintiff sought no orders against the fourth defendant at the hearing. While the Notice of Discontinuance was not available in the court file, or tendered, the court rules should be adequate to dispose of any costs questions which might arise from the discontinuance. 14 The first, second and third defendants had previously appeared by the one solicitor. On 22 April 2002 that solicitor filed a Notice of Ceasing to Act. 15 I was informed by counsel for the plaintiff that Avstar had gone into liquidation on the Friday before the hearing commenced. The plaintiff did not seek orders against Avstar. Though a question was raised of whether the plaintiff would seek leave, under section 471B Corporations Act 2001 (Cth), to proceed against Avstar, no such application was made. 16 The first and second defendants did not appear at the hearing. The plaintiff seeks orders against them, for the amounts by which Mr Preston reimbursed himself excessively, and interest. 17 In calculating the amount of the plaintiff's claim, allowance has been made for various recoveries which the plaintiff has made. 18 The plaintiff's claims arise from 21 money transfers, of which three are credits. Those 21 money transfers can be broken down, however, into several discrete categories. Category 1 – Rate Payments to Sydney City Council 19 The council rates for the year ended 30 June 2000 were payable in four instalments, the first instalment being $138,181.19, and each other instalment $138,140.10. The council rates for the year ended 30 June 2001 were payable in four instalments, each of $142,002.00. 20 Mr Preston caused each of these payments to be made by effecting electronic transfers of funds from the plaintiff's bank account, to the account of Avstar. In relation to the year ended 30 June 2000, however, he sent to the Avstar account, not the four instalments which were actually due, but six instalments. Hence, on 28 March 2000, and again on 3 April 2000, an amount of $138,140 was transferred from the plaintiff's account to Avstar's account. These are Claims 2 and 3. 21 Further, he caused a payment of rates to be made on 29 September 1999 using an Amex Card. Amex subsequently declined to honour that payment. This resulted in the building owner coming to owe an amount of rates of $57,140.10. This is Claim 1. 22 On 25 August 2000 an amount of $7,723.80 was transferred from the plaintiff's bank account to the Avstar account. This amount equals 50% of the increase in rate payments for the 2001 financial year, by comparison with the rate payments for the 2000 financial year. The payment was contrary to the plaintiff's procedure for payment of invoices, and Mr Preston was not authorised to make the payment. This is Claim 4. 23 Likewise, in relation to the various other amounts which I have described as being made from the plaintiff's account to Avstar's account in connection with the payment of rates, the payment was not authorised, and was contrary to the ordinary procedures for payment of accounts, adopted by the plaintiff. 24 The plaintiff has recovered, or received the benefit of, various amounts which can be sourced to Mr Preston. On 31 August 2001 and 3 September 2001 (shortly after the present proceedings were commenced) amounts totalling $47,000 were paid to the Sydney City Council, in reduction of the plaintiff's liability for rates. The plaintiff accepts that this payment came from Mr Preston. This is Claim 5 (which is a credit). On 2 September 2001 the plaintiff received a total of $204,588.02, being the proceeds of sale of some real estate under Mr Preston's control. This is Claim 6 (another credit). On 2 October 2001 a further amount of $72,410 was paid in reduction of the plaintiff's liability to Sydney City Council for rates. The plaintiff accepts that Mr Preston was the source of that payment. This is Claim 7 (another credit again). Overpayments of Contract Fee 25 When Mr Preston started performing work for the plaintiff, the fee payable to Premier was $5,796 per month. There were subsequent increases in the fee. From March 1999, the monthly fee was $6,085.62. From March 2000, the monthly fee was $6,390.18. There were four occasions when Mr Preston caused the Avstar bank account to be credited with the amount of the monthly fee twice in a month. The extra payments have been identified as a payment of $5,795.83 on 13 November 1998, of $5,795.83 on 4 February 1999, of $6,085.62 on 6 April 1999, and of $6,085.62 on 3 February 2000. These are Claims 8, 9, 10 and 11. $5,000 Payment on 1 September 2000 26 On 1 September 2000 an amount of $5,000 was transferred from the plaintiff's account to the Avstar account. This amount was not authorised, and no invoice exists in relation to it. This is Claim 12. GST Bonus 27 On 23 January 2001, two amounts, each of $5,500, were debited to the plaintiff's bank account, and transferred to Avstar's bank account. In Avstar's bank pass sheet, each credit of $5,500 is identified as "GST bonus". These amounts were not authorised to be paid by the plaintiff to Mr Preston or any company connected with him. These are Claims 13 and 14. Miscellaneous 28 On 8 September 2000 two amounts, each of $500, were transferred from the plaintiff's bank account to the Avstar account. On 14 February 2000 a further amount of $500 was transferred from the plaintiff's account to the Avstar account. None of these amounts was authorised. These are Claims 15 and 16. Electricity Credit Charge "Premium" 29 Over the period from 15 September 2000 to 16 February 2001 Mr Preston caused the plaintiff's electricity bills to be paid by credit card. This caused each bill to incur a "premium" charge of 1.4% of the amount which would otherwise have been the charge for services. Further, GST, at 10%, was charged on the amount of that "premium". In consequence, an amount of $5,029 was paid as "premium" over the period 15 September 2000 to 16 February 2001. An amount of $502.91 was paid as GST on that amount. 30 Mr Preston made arrangements for this "premium", and amount of GST, to be included in the amount of outgoings of the building which were charged to tenants, under provisions in the tenants' leases. However, once the payment of the "premium" and GST was discovered, Mr Brock caused the tenants to be credited with the amount of the "premium" and GST. Hence, the amount is a loss which the plaintiff has incurred. These are Claims 17 and 18. Travel and Computer Expenses 31 On 2 May 2000, Mr Preston caused to be transferred an amount of $4,025 from the plaintiff's bank account to Avstar's bank account. It is noted on the pass sheet of Avstar's bank account as "JP travel costs". At around the time this debiting occurred, Mr Preston was to travel to the United Arab Emirates. The Abu Dhabi Investment Authority is the entity which ultimately controls Harina. Mr Preston was going on holidays, in any event. Mr Brock took the opportunity of Mr Preston's holiday for him also to call to see people connected with the Abu Dhabi Investment Authority, to explain matters connected with the plaintiff's business. Mr Brock told Mr Preston that he would authorise reimbursement of one economy airfare, and one night's accommodation at a hotel which he nominated, to a maximum of $3,000. Thus, to the extent of $1,025, the reimbursement of Mr Preston's travel expenses was excessive. The plaintiff is entitled to recover that $1,025 back. This is Claim 19. 32 A further amount of $899 was debited to the plaintiff's bank account on 3 May 2000, and credited to Avstar's account, with the notation "JP travel". That amount is likewise not authorised, and the plaintiff is entitled to recover it back. This is Claim 20. 33 On 5 June 2000 an amount of $11,710.76 was transferred from the plaintiff's bank account to Avstar's account, and bears the notation "computer/travel" on Avstar's pass sheets. Mr Brock had authorised Mr Preston to spend up to $4,000 on purchase of two laptop computers. To the extent of $7,710.76, therefore, the payment made on 5 June 2000 is in excess of what was authorised. This is Claim 21. Legal Basis of Plaintiff's Claim 34 The present case was conducted without pleadings. At the hearing, the plaintiff sought to support its claim on the basis of a breach of the contract made 4 September 1998 between Premier, Mr Preston, and the plaintiff. 35 Each of the payments which I have identified, other than the three credits, is a clear breach of contract. The express terms breached are clause 1.5, 4.2 and 4.3. As well, there would be an implied duty of fidelity, analogous to that which the law implies in contracts of employment, which was breached. 36 As both Premier, and Mr Preston, are parties to the contract, the claim can be made against each of them. Further, the indemnity contained in clause 10.2 provides a route through which liability can be brought home to Premier. 37 The plaintiff also relied upon Black v S Freedman & Co (1910) 12 CLR 105 for the proposition that money stolen by an employee from his employer was trust money. Analogously, it was argued, money which Mr Preston caused to be paid without any authority from the plaintiff's funds, was trust money in the hands of Avstar. Mr Preston was, it was submitted, knowingly involved in the breach of trust. 38 I am not satisfied that this route to liability has been made out. When the money was in the plaintiff's own account, it was not trust money – it was the plaintiff's own money. While it is true that, once Avstar received the money, Avstar would hold it on trust, liability could be sheeted home to Mr Preston if he was knowingly concerned in any breach of trust involved in Avstar disposing of the money. However, the case has not focused on what happened to the money once it arrived in Avstar's bank account. I do not think there is an evidentiary basis to enable me to conclude that there is any particular sum of money for which Mr Preston would be liable on the basis that he had been knowingly concerned in a breach of trust. Quantum of Principal Claimable by Plaintiff 39 The net amount of principal claimable by the plaintiff is $73,575.35. It is made up as shown in the document entitled "Amended Schedule 1" annexed to this judgment. Interest 40 As well as reimbursing more than the amount of expenses of the plaintiff which he had paid by credit card, Mr Preston arranged things so that there was a timing difference between when he made the "reimbursement" transfer to a bank account under his control, and when payment was actually made of rates to the council. This had the effect that Mr Preston was able to use the plaintiff as his banker. The plaintiff claims that it is entitled to interest, at the rate prescribed as appropriate to section 94 of the Supreme Court Act 1970, for every day when money had been paid from the plaintiff's bank account to Avstar, but had not been paid to the Council. In my view, this is right in principle. 41 As well, the plaintiff claims interest on the additional monthly fee payments, on the amount of "premium" plus GST paid on the electricity invoices, and on the amount of overpayment of computer and travel expenses. In principle the plaintiff is entitled to each of those heads on which interest is calculated. 42 When the defendants did not appear at the hearing, it was not possible to adopt the usual expedient of requiring the solicitors for the parties to agree on the quantum of interest payable. Thus, I directed that the plaintiff file an affidavit which verified the quantum of interest payable, if the plaintiff's claim were to succeed entirely. Pursuant to that direction, an affidavit of Rossano Zaurrini sworn 1 May 2002 has been filed. I accept the interest calculations verified by that affidavit. They are annexed to this judgment as Schedule 2 and Schedule 3. The plaintiff is entitled to receive interest in the sum of $73,533.65, in accordance with those Schedules. When that interest is added to the principal to which the plaintiff is entitled (see paragraph 39 above) the total judgment to which the plaintiff is entitled is $147,109. Costs 43 Part 52A, Rule 33 of the Supreme Court Rules has the effect of limiting the amount of costs recoverable in relation to certain claims when a plaintiff recovers a comparatively small sum of money, and the claim could have been brought in the Local Court or District Court. However, under Part 52A Rule 33(1)(a) the limitations imposed by the rule apply, "to proceedings in the Common Law Division or entered into the Commercial List on a claim for debt, damages, or other money." Thus, the rule does not, in its terms, apply to the present proceedings, being proceedings in the Equity Division. 44 Even though the rule does not apply to the present proceedings, it is still necessary to exercise a discretion about whether a costs order should be made, and if so what kind of costs order. 45 As the plaintiff has succeeded in the litigation, the usual costs rule would be that costs would follow the event. I see no reason, in relation to the present case, why this usual rule should not apply. 46 As to the extent of the costs order which should be made, counsel for the plaintiff submits that: