New South Wales Supreme Court CITATION : Grocers of Wyong v Retech Global [2004] NSWSC 488 HEARING DATE(S) : 26 May 2004 JUDGMENT DATE : 26 May 2004 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : No express trust established CATCHWORDS : TRUSTS - intention to create trust - trusts where word "trust" not used - no payment into separate account - commercial transaction - constructive trusts arising from same facts as alleged express trusts - TRUSTS - tracing - bank account divided by client into sub-accounts some of which are in debit - whether tracing through those sub-accounts possible Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia and Others [1991] 30 FCR 491 Commonwealth of Australia v Booker International Pty Ltd [2002] NSWSC 292 CASES CITED : Henry v Hammond [1913] 2 KB 515 Hospital Products Limited v United States Surgical Corporation and Others (1984) 156 CLR 41 Walker and Others v Corboy and Others (1990) 19 NSWLR 382 Grocers of Wyong Pty Limited - Plaintiff Retech Global Pty Limited (Subject to Deed of Company Arrangement) - First Defendant PARTIES : Retail Technology & Services Limited (Subject to Deed of Company Arrangement) - Second Defendant Ronald John Dean-Willcocks - Third Defendant Nicholas Craig Malanos - Fourth Defendant Ian James Purchas - Fifth Defendant FILE NUMBER(S) : SC 1524/04 COUNSEL : P Ryan - Plaintiff M Christie - Defendants SOLICITORS : SL Lawyers - Plaintiff Kemp Strang - Defendants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J WEDNESDAY 26 MAY 2004 1524/04 GROCERS OF WYONG PTY LIMITED v RETECH GLOBAL PTY LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) & ORS JUDGMENT – Ex Tempore (Revised 3 June 2004) 1 HIS HONOUR: The plaintiff in this matter claims a declaration that a particular sum of $43,250 was held on trust for the plaintiff. 2 The plaintiff is a company which operates an IGA Supermarket in Wyong in New South Wales. Mr Michael Johnson is a director of the plaintiff who had responsibility for the transactions from which this dispute arises. The first defendant is a company which carried on a business which included the supply and installation of point of sale equipment and software for retailers. Mr Brian Wilson was a sales representative who acted for the first defendant concerning this transaction. The Contract for Sale, and Payment of the Deposit 3 Mr Johnson began negotiations with Mr Wilson in September 2003 for the supply of some equipment for the supermarket in Wyong. On 1 October 2003 the first defendant sent a quotation for the supply of that equipment. The quotation form had a printed statement on it, "We will submit formal documents to you for signing when you accept this quotation. Retech Global will only be bound when those formal documents are signed by its authorised delegates". Notwithstanding that statement, it appears as though no formal documents were ever submitted or ever signed, apart from the first defendant sending to the plaintiff, on 9 October 2003, an invoice for the equipment. It had been agreed orally between Mr Johnson and Mr Wilson in early October that the equipment, which was all identified in the quotation, and shown in that document as having a total cost of $86,578.98, would require a deposit of $43,250 to be paid. The tax invoice dated 9 October likewise showed that a deposit in that amount was required. 4 It was the intention of the plaintiff to acquire the equipment on lease, from National Australia Bank. Mr Johnson contacted the man he dealt with at the National Australia Bank soon after 9 October, to arrange for the bank to pay the deposit. Mr Johnson was told that it was not possible for the bank to make a partial payment for equipment which was going to be leased. The man from the bank suggested that the plaintiff extend its overdraft, so that the deposit could be paid by the plaintiff, from its overdraft. 5 Soon after that conversation, Mr Johnson telephoned Mr Wilson and inquired whether the first defendant would accept an initial payment of $43,250 direct from the plaintiff. He explained that upon completion of the contract the National Australia Bank would forward the contract amount to the bank account nominated by the first defendant, and that as a result the first defendant would have been overpaid by $43,250. Mr Wilson said to Mr Johnson words to the effect of, "I have confirmed with officers within Retech that this arrangement will be acceptable to Retech and we will return the excess funds when the gross amount is received by us from the NAB." 6 On 16 October 2003, after that conversation with Mr Wilson, Mr Johnson signed the lease documentation with the National Australia Bank. 7 On 17 October 2003 an amount of $43,250 was electronically transferred from the bank account of the plaintiff to a bank account of the second defendant, with the Bank of New Zealand. While $43,250 is the amount which the plaintiff submits is held on trust, it is not this particular sum of $43,250 that the trust is said to attach to. Banking and Accounting Arrangements of the Defendant's Group 8 It is appropriate here to explain something about the banking arrangements of the group of companies to which the first and second defendants belonged. 9 The first defendant is a subsidiary of the second defendant. The second defendant has eleven subsidiaries in all. The banking for the group is conducted through the Bank of New Zealand. There is a single bank account maintained with the Bank of New Zealand, which is bank account 485011700 ("the 700 account"). That account is maintained in the name of the second defendant. Its title is, "Retail Technology and Services Limited BNZA Business Cheque Account". There is no overdraft arrangement concerning that account and it has at all times between 1 October 2003 and 9 December 2003 been in credit. The lowest balance to which it has sunk in that time is $34,235 on 28 October 2003. In the period from and including 28 November 2003 - a date when the NAB paid the purchase price of the equipment into the account - the balance did not sink below $120,000, until 9 December 2003. The significance of that date will appear later. 10 If a deposit or electronic fund transfer intended for any company in the group was made by any party outside the group, it would be credited to the 700 account. 11 The practical mode of operation of the one bank account by all the companies in the group involved the use of some computer software. Companies in the group had established a total of twelve sub-accounts relating to the 700 account. There was one account for each subsidiary in the group and another account referred to as the "unallocated" account. Financial officers of companies in the group downloaded data concerning the 700 account each day. When the data was downloaded, if the remittance advice accompanying a deposit or transfer to the 700 account indicated a sub-account to which the funds should be allocated, the software would automatically credit that sub-account with the amount of the deposit or transfer. If there was no such indication the software would credit the funds to the unallocated account. An employee of the group was responsible for clearing the unallocated account, and transferring any funds in the unallocated account to the appropriate sub-account each day. The only financial statements which the Bank of New Zealand sent to the second defendant were accounts for the 700 account as a whole. The various sub-accounts were ones which were maintained in the books of the group, but were not maintained in the books of the bank. As Mr McPhee, who had been the company secretary of the second defendant put it, "You are actually operating within one bank account". 12 In practice, the combined total of the balance of the various sub-accounts always equalled the balance of the 700 account. 13 I said that the 700 account always operated in credit. Sometimes, though, some of the sub-accounts had a debit balance. If some of the sub-accounts had a debit balance, the amount of the debit balance in that sub-account was necessarily one which was more than off-set by credit balances from one or other of the other sub-accounts. 14 I now return to the chronological narrative. Allocation of the Deposit to a Sub-Account 15 When the $43,250 deposit was electronically transferred on 17 October 2003 it was transferred into the 700 account. There was no indication attached to that deposit about it being intended for any particular sub-account, so the computer software allocated it to the unallocated account. An officer of the group to which the defendants belonged then allocated it to a sub-account of the first defendant, known as the 003 sub-account. Payment of the Final Instalment, and Attempted Repayment of Amount of Deposit 16 On 20 November 2003 the installation of the equipment was complete. On 28 November 2003 NAB transferred the purchase price of $86,578.98 to the 700 account, by an electronic transfer. The accounting software for the group automatically allocated that amount to the 003 sub-account. 17 The records which the group maintained of the 003 sub-account showed that, at all times after 27 November 2003, that sub-account was in debit. 18 On 3 December 2003 the second defendant drew a cheque on the 700 account for $43,250, made payable to "IGA Supermarkets Wyong", and sent it to the plaintiff. The plaintiff received the cheque on 5 December 2003 but did not bank it immediately. 19 On 9 December 2003 administrators were appointed to both the first and second defendants. The administrators froze the 700 account. 20 Also on 9 December, Mr Wilson telephoned Mr Johnson and told him that Retech had been placed in voluntary administration. Mr Johnson asked him, "What is the status of the $43,250 that is to be repaid to Grocers?" Mr Wilson replied, "I can assure you that the funds will clear". 21 Mr Johnson arranged a special clearance of the cheque which had been received, but it was dishonoured. His attempts to receive payment from the administrators since then have been unsuccessful, though, against the possibility that the plaintiff might not succeed in the case now being heard, a proof of debt has been lodged with the administrators. The Defendants' Deed of Company Arrangement 22 A Deed of Company Arrangement has now been entered by the first and second defendants. It is expected that a dividend will be paid this coming Friday. Initial indications were that this dividend would be twenty-nine cents in the dollar and it would be a final dividend. I am told from the bar table that there is now some doubt whether it will be the final dividend. Whatever the exact situation is concerning payment of dividends, the plaintiff would receive considerably less than $43,250 if its only right was to receive a dividend under the Deed of Company Arrangement. The Plaintiff's Trusts Contentions 23 The plaintiff asserts that the circumstances in which the second defendant came to receive the $43,250 more than the purchase price of the equipment are such as to impose an express trust, or alternatively a constructive trust, on funds in the 700 account. The trust property, it says, is $43,250 of the $86,578.98 which NAB transferred to the 700 account on 28 November 2003. Express Trust 24 I consider first the contention that there is an express trust. It is axiomatic that before there can be an express trust there must be identified trust property, an identified trustee, and an intention to create a trust. In the present case, the plaintiff's contention is that the identified trust property is $43,250 of the $86,578.98 which the second defendant received on 28 November 2003. The plaintiff asserts that, when the second defendant received that sum, even though the sale transaction was one with the first defendant, the relationship between the first and second defendant was such that the second defendant knew or ought to be taken to know all the relevant circumstances which resulted in that surplus amount being paid to the second defendant. The plaintiff submits that the trustee is the second defendant which received the money, or, alternatively, if the transfer to the 003 sub-account is something which is legally effective as between the plaintiff and the defendants, that the relevant trustee is the first defendant. None of those propositions has been questioned by the defendants. It is the element concerning intention to create trust that the defendants contest. 25 The conversation between Mr Johnson and Mr Wilson, where Mr Wilson undertook to return the excess funds when the gross amount was received by Retech from the NAB, did not actually use the words "trust", but that is not itself a fundamental obstacle to the creation of an express trust. It is possible for courts to hold that there is an intention to create a trust, by considering the language used and the circumstances of the case. The authorities concerning that area of the law are collected in Commonwealth of Australia v Booker International Pty Ltd [2002] NSWSC 292 at [33] to [45]. I will not set those authorities out fully here. 26 In the present case, the money which the NAB paid was, in accordance with the instructions of the plaintiff, paid into the 700 account. One of the obligations of a trustee, indeed a fundamental obligation of a trustee, is to keep the trust assets separate, so that they can be administered in accordance with the terms of the trust. In Henry v Hammond [1913] 2 KB 515 at 521 Channell J said: "It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is a trustee of that money and must hand it over to the person who is his cestui que trust. If on the other hand he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he pleases, and when called upon to hand over an equivalent sum of money, then, in my opinion, he is not a trustee ... but merely a debtor." 27 As Priestley JA made clear in Walker and Others v Corboy and Others (1990) 19 NSWLR 382 at 385, Justice Channell in this passage makes the first inquiry the question of the terms on which a person receives the sum of money. This does not mean, however, that the court starts from some prima facie position, that if there is no payment into a separate account, or obligation to pay into a separate account, there is no trust. Rather it will be from the detailed facts of the case itself that the court draws its conclusion about whether there is an intention to create a trust. 28 Consistently with that approach in Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia and Others [1991] 30 FCR 491 Gummow J says that the payment into the separate bank account is a useful but by no means conclusive indication of an intention to create a trust. 29 One matter which is of significance concerning whether there is an intention to create a trust is that the present circumstance involves a commercial transaction. In Walker v Corboy at 398 Meagher JA said: "A fourth circumstance going in the same direction is the general reluctance of the courts to extend the law of trusts into ordinary commercial transactions." 30 I am not persuaded that the circumstances here are such that anything more was undertaken by Mr Wilson than a personal obligation that the excess funds would be returned when the gross amount was received from NAB. 31 Some reliance was placed by the plaintiff on the fact that, as soon as NAB paid the full purchase price, Mr Wilson caused the cheque for the $43,250 to be sent to the plaintiff. This is an example of subsequent conduct being used as evidence of the parties' intentions at an earlier time. I leave to one side whether such evidence could properly be relied on if all it showed was Mr Wilson's subjective intention at an earlier time. Whatever the situation is concerning that matter, I do not regard Mr Wilson's sending the cheque promptly as a fact which is of assistance in making a choice between whether it was a personal obligation to repay the funds which was undertaken or an obligation to hold the funds on trust. It is equally consistent with either alternative. 32 Mr Wilson's remarks on 9 December 2003, to the effect of "I can assure you that the funds will clear," is, if anything, something more consistent with there being a personal obligation to pay than with a trust relationship. Constructive Trust 33 I turn to the question of whether there is a constructive trust. The Statement of Claim in the present case pleads the agreement about repayment of excess funds between Mr Wilson and Mr Johnson and that (in substance) the "excess funds" were indeed received but were not paid back. There are no facts alleged as giving rise to a constructive trust beyond the ones which are alleged to give rise to an express trust. The plaintiff relied upon some statements in the dissenting judgment of Sir Anthony Mason in Hospital Products Limited v United States Surgical Corporation and Others (1984) 156 CLR 41 at 107 to 108 where his Honour said that certain profits or benefits obtained by the fiduciary were held on constructive trust. It was submitted that the defendant owed a fiduciary duty because it was a trustee. Even leaving aside any question about whether the principles expressed by Sir Anthony Mason in that case are ones which have the assent of the majority, that way of putting the argument does not permit the constructive trust to arise in circumstances where the express trust is not established and no other type of fiduciary relationship is alleged. There is no basis, in my view, in the pleaded facts for concluding that there is a constructive trust, rather than merely an arrangement between debtor and creditor. I note the remarks of Gummow J in Re Australian Elizabethan Theatre Trust at 508, that "There is force in the submission that constructive trusts should not readily be imposed in favour of parties which have failed in their attempts to show the necessary facts for a consensual arrangement by way of express trust ..." Whether Tracing not Possible 34 Another contention which the defendant made is that, even if there was a trust established and attaching to the $43,250, any propriety remedy sought today must fail, because of the way that the 003 sub-account has always been in overdraft. It is unchallenged that there can be no tracing through a bank account in overdraft. 35 There is a difficult question of analysis about how tracing would operate in the type of banking arrangement which I have earlier outlined. Ordinarily tracing is the process of identifying an asset or assets concerning which the holder cannot deny that an equitable proprietary obligation exists. Here the only asset in question seems to be the debt which Bank of New Zealand owes to the second defendant, of the credit balance in the 700 account. Arguments were put concerning whether the sub-accounts ought to be regarded as being like bank accounts, so that there could not be tracing through a negative balance in them, or whether they were mere internal arrangements of the group of companies to which the defendants belonged. Some consideration was given in the argument to whether the sub-accounts were or were not analogous to individual client ledger accounts which a solicitor maintained, concerning a trust account which that solicitor maintains with a bank. In circumstances where I am not persuaded that there was any trust relationship at all, it is not necessary to consider these further questions. 36 I order the Statement of Claim be dismissed. (Application for costs. Application opposed). 37 HIS HONOUR: The defendant seeks an order for costs, which the plaintiff opposes. The basis on which the plaintiff opposes it is that the defendant has been slow in providing information, that it was only last week that the defendant's affidavit was made available, and indeed only today that a defence was filed. The defendant's affidavit in question is an affidavit which goes into the details of how the accounts and sub-accounts relate to each other. 38 While it is true that the defendants have been slow in making this information available, that is not something which has affected the reasons for the litigation being decided in the way it has. The plaintiff has failed, fundamentally because its unchallenged evidence does not establish either an express trust, or a constructive trust. 39 I order the plaintiff to pay the cost of the defendant. ********** Last Modified: 06/07/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.