New South Wales Supreme Court CITATION : Frontier Touring Co Pty Ltd v Peter Rodgers & Anor [2005] NSWSC 668 HEARING DATE(S) : 29/04/05 JUDGMENT DATE : 8 July 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : Barrett J DECISION : Decision of liquidator varied CATCHWORDS : CORPORATIONS - winding up - appeal against rejection of proof of debt - TRADE AND COMMERCE - misleading or deceptive conduct - pre-contract representations by one party as to that party's future conduct - contract as made contains promises based on the representations - whether representations actionable under Trade Practices Act ss.51A and 52 - TRUSTS AND TRUSTEES - money paid under commercial contract not to be applied by recipient except in particular ways - part applied in unauthorised way - whether breach of resulting trust in favour of payer - equitable compensation for breach of trust Corporations Act 2001 (Cth), s.1321 LEGISLATION CITED : Trade Practices Act 1974 (Cth), ss.51A, 52 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Edmonds v Donovan [2005] VSCA 27 Futronics International Pty Ltd v Gadzhis [1992] 2 VR 217 Gould v Vaggelas (1985) 157 CLR 215 Hill v Rose [1990] VR 129 CASES CITED : HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 79 ALJR 190 Holt v Biroka Pty Ltd (1988) 13 NSWLR 629 Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2005] NSWCA 68 Twinsectra Ltd v Yardley [2002] 2 AC 164 Frontier Touring Co Pty Limited - Plaintiff PARTIES : Peter Rodgers (as liquidator of Kidz.net Services Pty Limited) - First Defendant Kidz.net Services Pty Limited - Second Defendant FILE NUMBER(S) : SC 5508/04 Mr C.R.C. Newlinds SC/Ms V.E. Whittaker - Plaintiff COUNSEL : Mr B.J. Skinner - Defendants Swaab Attorneys - Plaintiff SOLICITORS : Eakin McCaffery Cox - Defendants LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY, 8 JULY 2005 5508/04 – FRONTIER TOURING CO PTY LIMITED v PETER RODGERS (AS LIQUIDATOR OF KIDZ.NET SERVICES PTY LIMITED (IN LIQUIDATION)) & ANOR JUDGMENT 1 The plaintiff claims to be a creditor of Kidz.net Services Pty Ltd ("Kidz.net") and to be entitled accordingly to prove in the winding up of that company. To that end, the plaintiff lodged a proof of debt dated 15 March 2004 with the liquidator, Mr Rodgers. By notice dated 24 September 2004, the liquidator rejected the proof of debt. The plaintiff now appeals to the court under s.1321 of the Corporations Act 2001 (Cth) in respect of the liquidator's decision to reject the proof of debt, contending that the court should order that the proof of debt be admitted. 2 The court's function under s.1321 is to determine the appeal and to "confirm, reverse or modify" the liquidator's decision. The section does not distinguish between different types of decisions. It is available as a means of reviewing the exercise of a liquidator's discretion or a decision on a matter of business judgment. In cases of that kind, the court's main concern is to see whether the liquidator acted unreasonably or in bad faith. But in cases such as the present where the decision under challenge is a decision with respect to the admission of a proof of debt, the court takes a different approach. That approach was described by Brennan and Dawson JJ in Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at pp.340-1: "The proceedings thus instituted, though often referred to as an 'appeal' from the liquidator's decision to reject, are originating proceedings which the court hears de novo: Re Bird's Stores Pty Ltd (1931) 37 Arg LR 94; Re Kentwood Constructions Ltd [1960] 1 WLR 646; [1960] 2 All ER 655; Re Trepca Mines Ltd [1960] 1 WLR 1273; [1960] 3 All ER 304. In such a proceeding, a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary, defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. If the liquidator relies on those special defences which allow him to go behind a judgment, an account stated, a covenant or an estoppel in order to ascertain the true liability of the company, he is none the less in the role of an adversary. The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator is a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation." 3 The alleged debt the subject of the proof of debt dated 15 March 2004 was described as follows: "This is to state that the company was 3 October 2002 [sic], and still is, justly and truly indebted to Frontier Touring Co Pty Ltd ACN 005 602 602 in the sum of five hundred and eighty-five thousand five hundred and sixty-two dollars and seventy-eight cents ($585,562.78). Date Consideration Amount Remarks Principal claim in proceedings no 5232/1999 $416,666.66 $166,666.66 paid on 14/8/1998 $250,000.00 paid on 17/9/1998 Interest $168,896.12 See attached schedule $585,562.78 " 4 The attached schedule refers to interest sums totalling $168,896.12, being interest on the respective principal sums ($166,666.66 and $250,000) from the dates of payment at Supreme Court rates. 5 By describing the "consideration" as "Principal claim in proceedings 5232/1999", the proof of debt is recognised as directing attention to claims brought by the plaintiff against Kidz.net by way of cross-claim in those proceedings. There is no need to refer to any aspect of the proceedings except the present plaintiff's cross-claim. That cross-claim has its basis in circumstances surrounding and constituting a transaction to which the plaintiff became party in August 1998. 6 On 14 August 1998, the plaintiff and Kidz.net entered into a written contract. It is necessary to refer to a number of its terms. In reading them, it is necessary to remember that Kidz.net was formerly National Net Pty Limited and that it is referred to in the agreement as "National Net". Relevant terms of the written contract were as follows: "2.1 National Net shall arrange for the formation of an American company (referred to as 'the US entity'). 2.2 The parties intend to establish and develop the business of the US entity ultimately for the purpose of sale at an appropriate time in the future. … 3. The shareholding in the US entity shall be held as to eighty percent (80%) to National Net and, contingent upon the performance of the obligations in Clause 8, as to twenty percent (20%). 7.1 National Net shall grant the exclusive rights and interests to operate and distribute the Product in the Territory to the US entity. 7.2 Frontier acknowledges that this Agreement applies only to the Product and does not apply to any other product or business of National Net. 8. Frontier shall pay National Net an amount of Two hundred and Fifty thousand US dollars (US$250,000.00) as follows: 8.1 upon execution of this Agreement pay an amount of One Hundred thousand US dollars ($US100,000.00); and 8.2 within one (1) calendar month of the date of execution of this Agreement pay an amount of One Hundred and Fifty thousand US dollars (US$150,000.00). 9. National Net shall only expend the Capital to: 9.1 transfer funds to the US entity; 9.2 pay formation costs of the US entity; or 9.3 prepare, operate, distribute and promote the Product in the Territory. 10. The amount of Two Hundred and Fifty thousand US dollars (US$250,000.00) shall be paid by the US entity to Frontier (referred to as 'the Frontier payment') on the following terms: 10.1 Until such time as the Frontier payment is made in full, interest at the rate of Twelve and a half percentum (12.5%) per annum shall apply from the date this Agreement to the date payment is made on the balance remaining unpaid, calculated on daily basis. 10.2 The Frontier payment shall be repaid from the proceeds of Net Profit of the US entity's operations prior to any distribution to shareholders until the entire Frontier payment together with interest referred to in Clause 10.1 has been paid. 10.3 Should the Frontier payment together with interest due under Clause 10.1 fail to occur within eighteen (18) months of execution of this Agreement, National Net shall allot 50,000 shares or five percent (5%) of the issued capital of National Net (whichever is the greater) to Frontier which Frontier acknowledges shall be in full and final discharge of the debt owed by the US entity to Frontier pursuant to this Clause 10. … 12.1 It is acknowledged that although the US entity cannot be bound by this Agreement, the US entity shall be controlled by the parties. The parties shall ensure that the US entity enters an agreement in the same terms as this Agreement (as can be applied to the US entity) upon its formation. 12.2 Upon the formation of the US entity, National net shall execute such further agreement with the US entity as may be necessary to more effectively secure the grant referred to in Clause 7.1 of this Agreement. 13.1 National Net shall grant Frontier the first right of refusal to operate and distribute the Product on the same terms as this Agreement, mutatis mutandis, for the Territories of United Kingdom and Asia, subject to the remainder of this Clause 13. 13.2 The Capital shall be One Hundred thousand UK pounds and Two Hundred and Fifty thousand US dollars in relation to the Territories United Kingdom and Asia respectively. 13.3 The option contained in this Clause shall be exercised in the following manner: (a) National Net shall give Frontier two (2) calendar months' written notice that a Territory or Territories shall become available for operation at the expiration of those two (2) calendar months. (b) Frontier may at its option and before the expiry of those two (2) calendar months enter an Agreement with National Net on the same terms as this Agreement mutatis mutandis (subject to Clause 13.2) for the Territory or Territories identified in the notice from National Net. (c) Should Frontier not take up the option pursuant to Clause 13.3(b), National Net may offer the Territory or Territories to a third party or operate the Territory or Territories itself." 7 The plaintiff says that the plaintiff paid to Kidz.net US$100,000 on or about 14 August 1998 and US$150,000 on or about 18 September 1998. Frontier's first claim is a claim for damages for breaches of contract as follows: (a) failure of Kidz.net to repay the funds on 14 February 2000 or at all; (b) sale of its business by Kidz.net in or about May 1999; (c) failure of Kidz.net to apply the funds by (i) transfer to the United States company which Kidz.net agreed to form; (ii) use as formation expenses of that United States company; or (iii) use in preparing, operating, distributing and promoting the Kidz.net business in the United States of America, South America and Canada. (d) failure of Kidz.net to allot to Frontier 50,000 shares or 5% of its issued share capital; (e) failure to transfer to Frontier 20% of the shareholding in the United States company; (f) failure to grant the exclusive right and interest to the United States company to operate the Kidz.net business in the nominated territories; (g) failure to give Frontier the first right of refusal before selling the Kidz.net business to a third party. 8 Frontier's second contention is that there was a total failure of consideration and that it is entitled to recover the total sum outlaid as money had and received. 9 The plaintiff's third claim is a claim for damages for conduct actionable under s.52 of the Trade Practices Act 1974 (Cth) in the form of representations by Kidz.net to Frontier that, if Frontier paid the funds to Kidz.net, Kidz.net would apply and deal with them only in the specified ways. 10 The plaintiff's fourth claim is a claim for breach of trust. The plaintiff says that, upon payment of the funds by Frontier to Kidz.net, Kidz.net became a trustee of the funds, the beneficiaries being the United States company and Frontier. The terms of the trust were, it is said, that the funds would only be used for the purposes specified in the written contract and that any part not so applied would be held for Frontier. 11 The defendants do not deny that two sums were paid by the plaintiff to Kidz.net in conformity with the contract. Agreed Australian dollar equivalents of US$100,000 and US$150,000 were paid, being A$166,666.66 on or about 14 August 1998 and A$250,000 on or about 17 September 1998. Evidence about the deployment of these funds was given by Mr Reardon, a former executive of Kidz.net. His evidence is, in substance, that A$232,852.07 was applied for the purposes of the Kidz.net business in the United States and $123,280.27 was applied for the purpose of the Kidz.net business in Australia. This evidence is given by reference to a large number of separate cheques and information available to Mr Reardon as to the purpose for which each cheque was drawn. As to cheques for a further $68,515.56, Mr Reardon is unaware of the purpose for which the funds were applied but says that he has no reason to believe that they were applied for the purposes of the Kidz.net business in the United States. 12 I have already set out the terms of Frontier's proof of debt. The notice of rejection by the first defendant as liquidator is dated 24 September 2004 and reads in part as follows: "My grounds for disallowance of your claim are as follows: The liability of the company is denied by the directors of Kidz.Net Services Pty Limited (In Liquidation). A review of the documentation surrounding the claim would indicate that the status of the $250,000 principal loan claim of Frontier Touring Co. Pty Limited, if valid, has altered from that of a creditor to a shareholder as the subject loan was not repaid within 18 months of the agreement entered into between Kidz.Net Services Pty Limited (In Liquidation) and Frontier Touring Co. Limited. I have not received substantiation in relation to the $166,666.66 portion of the claim." 13 The liquidator thus dealt with the claim purely by reference to the contract. My first task is to review that treatment. 14 In my opinion, the contract cannot possibly be regarded as one under which Frontier lent money to Kidz.net. It was, rather, a contract under which Frontier paid money to Kidz.net in return for Kidz.net's promises as to what it would do with that money. Clause 10, although oddly worded, is clear enough as to its meaning. The only promise by Kidz.net in clause 10 is a promise to allot shares in Kidz.net to Frontier as stated in clause 10.3 in the event there specified, that is, if "the US entity" does not make payments to Kidz.net as specified in clauses 10.1 and 10.2. Kidz.net did not promise to procure the making of the clause 10.1 and 10.2 payments by the US entity which, when the contract was made, did not exist. Nor did Kidz.net promise to answer for any default in payment by the US entity. The contract shows clearly enough, in my opinion, that the parties actively turned their minds to the possibility that the US entity would not make the clause 10.1 and 10.2 payments and made express provision covering that eventuality – namely, that Frontier would receive an allotment of shares in Kidz.net. That eventuality also encompassed the possibility that the US entity would never come into existence. So far as due performance of clause 10 is concerned, the only breach to which Frontier can point is failure of Kidz.net to allot shares as required by clause 10.3. That breach could not conceivably have supported the claim for $585,562.78 advanced by means of the proof of debt now in issue: Kidz.net is now in liquidation and probably insolvent, so that neither 50,000 shares nor 5% of its issued capital could be said to have a value of that magnitude. 15 On the materials before me, however, it does appear that Kidz.net committed a separate breach of contract, as against the plaintiff, by expending part of the total sum of A$416,666.66 (the equivalent of the aggregate of US$100,000 and US$150,000) otherwise than as provided and allowed by clause 9. The words "shall only expend" must be taken to have involved a promise by Kidz.net not to expend except in the ways specified in clause 9.1 to 9.3, although the words do not, as I read them, entail a promise that the moneys would be fully expended in that way: to have retained the whole or part in unexpended form would not have been a breach. 16 The evidence before me shows that A$123,280.27 was expended for the purposes of the Kidz.net business in Australia. That application of funds by Kidz.net entailed breach by it of the promise that the two sums to be paid by Frontier to Kidz.net under clause 8 would not be expended by Kidz.net except in the ways stated in clauses 9.1 to 9.3, The same conclusion is not available in relation to the expenditures for which Mr Reardon is unable to offer an explanation: the purposes for which they were undertaken cannot be said to involve breach of (or, for that matter, consistency with) clause 9. 17 But the apparent breach of clause 9 by Kidz.net cannot in any sense be said to have justified a proof of debt for $585,562.78, although it might have warranted a proof for such sum as represents damages assessed in the ordinary way in relation of a breach of a contractual promise not to apply moneys except in a stated manner. I put the matter thus because, given the structure of clauses 9 and 10, it cannot be said that the actual quantum of the sum paid over to Kidz.net but misapplied by it necessarily reflects a proper assessment of the damage occasioned by the breach. 18 I consider next the claim based on an allegation of total failure of consideration. It is not a viable claim. The funds paid by the plaintiff to Kidz.net were, to a certain extent, expended and applied in accordance with the contractual obligations of Kidz.net and the legitimate contractual expectations of the plaintiff. 19 I deal next with the claim based on s.52 of the Trade Practices Act. The relevant representations of Kidz.net are said by the plaintiff to be representations made by that company through Mr Duffy that (a) Kidz.net would only expend the funds for the purpose of (i) transferring funds to the US entity; (ii) paying the formation costs of the US entity; (iii) preparing, operating, distributing and promoting the Kidz.net business in the nominated territories; (b) all of the funds would be deployed in those ways; (c) the funds, together with interest at the rate of 12.5% per annum from 14 August 1998 would be repaid to the plaintiff within eighteen months from 14 August 1998; (d) if the funds and interest were not paid on or before 14 February 2000, Kidz.net would allot to the plaintiff 50,000 shares or 5% of its issued share capital (whichever was the greater); (e) Kidz.net would transfer to the plaintiff 20% of the shares in the US entity; (f) Kidz.net would grant the exclusive right and interest to the US entity to operate the Kidz.net business in the territories; and (g) Kidz.net would grant to the plaintiff the first right of refusal to operate the Kidz.net business in the United Kingdom and Asia. 20 The evidence relied upon in this part of the case is in the affidavits of Mr Jacobsen, Mr Righi and Mr Felice. The first two are former directors of the plaintiff who were involved in relevant discussions and negotiations in 1998 with Mr Duffy, then managing director of Kidz.net. Mr Felice was an associate of Mr Duffy. 21 Mr Jacobsen deposed to meetings attend by Mr Duffy, Mr Felice, Mr Righi and himself at which conversations between him and Mr Duffy took place as follows: "I: 'We will offer you $250,000.00. It is only a loan and it has to be used in the US territory. We can't do it for less than a 15 percent share of the Kidz.net business in the US Territory. To be happy we would like more.' Duffy: 'We will get back to you. I want you to be happy.' I: 'We would also like the first right of refusal in all of the other territories, that is, the UK and all of Asia.' Duffy: 'I will take that on board.'" … "Duffy: 'Phillip we will repay the money within 18 months. We only need a loan. You can also have the first option in the other Territories. We are going to make you a fortune. 'We will pay you interest on the money but it won't be a problem as we are going to make so much money from this. 'If we don't repay the money within 18 months, we will give Frontier 50,000 National.net shares or 5 percent of National.net issue share capital, whichever is the greater'. [I understood this to mean that Frontier would receive those shares as a penalty, without foregoing it rights of repayment of the US$250,000.00.] Duffy: 'It is agreed that National.net will give Frontier 20 percent shareholding of the US entity upon provision of US$250,000.00 from Frontier.' I: 'This money is only to be spent in the US territory for the formation costs of the US company and operating and promoting the business in the US territory.' Duffy: 'No problem. We are right here in Australia anyway. We have plenty of sponsors and it is already going to take off here. Frontier will have the exclusive right and interest to the US company to operate the Kidz.net business in the US territory.' I: 'Don't embarrass me here either as I don't want to look like an idiot. I am a CPA and don't want to look as though I'm throwing my partners' money away.' Duffy: 'I am a lawyer and can't afford that either.'" … "Duffy: 'We need the money from Frontier quickly, as soon as possible.' [I understood that the money was needed in order to get the US operations up and running.] I: 'Not until we get a signed agreement.'" These conversations are said by Mr Jacobsen to have taken place on separate occasions in the sequence set out. 22 Mr Righi's affidavit relates conversations as follows: "Felice: 'We need US $500,000.00 in order to establish the Kidz.net business in the USA, South America and Canada. If you can invest that kind of money, we will give you a 10 percent share in the business and produce in the USA, South America and Canada.' I: 'Why can't we get involved in Australia?' Duffy: 'Australia is 100 percent subscribed. There are no more interests left in Australia. We have a large number of sponsors. We don't have any more sponsorships available. There is no more money available from those sponsors in Australia.' At the end of the meeting I said to Duffy words to the effect: 'It was good to meet you. The next step will be for us to go back and speak with our partners. I will let you know if we are interested in taking it further.'" … "I: 'I have spoken with Phil and Michael. We will lend you the $250,000.00 if we can also get 15 percent of the American operations of Kidz.net.' Duffy: 'Are you going to be happy with that?' I: 'We can live with 15 percent.' Duffy: 'What will make you happy?' I: 'We would like 20 percent, but can live with 15 percent.' Duffy: 'I want you to be happy. Will 20 percent make you all happy?' I: 'Yes.' Duffy: 'Then it's agreed. Kidz.net will give Frontier 20 percent of its shareholding in the American operations.'" … "Duffy: 'The funds to be provided by Frontier will be used exclusively for the formation costs of the American business entity and for the promotion of the Kidz.net business in America. The strategy is to launch Kidz.net in the US with a view to establishing the business and floating the American business entity on the NASDAQ exchange. Any further international expansion in the rest of America and the UK, Europe and Asia will be deferred until the completion of the launch in the American market. Frontier will also have first right of refusal to participate in business to the rest of the world.'" … "I: 'There are so many partners involved in the deal, it is going to be very hard to make decisions. We have all our partners including Michael Gudinski, Frank Stovala and Michael Chugg. There are also investors associated with Brad and Roger. It will be impossible to have all of these people making decisions about the business. We should form a board so that these decisions can be made.' Duffy: 'I agree.'" Again, the conversations took place at different times in the sequence stated. 23 I also quote paragraphs 32 and 33 of Mr Righi's affidavit: "On numerous occasions during the said meetings and telephone discussions, Duffy also said words to the effect: (a) 'Kidz.net will transfer Frontier's money to the US company established by Kidz.net to pay for the formation costs of that company and preparing, operating, distributing and promoting the Kidz.net business in the US, South America and Canada.' (b) 'Kidz.net will give Frontier the exclusive right and interest to the US company to operate the Kidz.net business in the US, South America and Canada.' (c) 'Kidz.net will also give Frontier the right of first refusal to operate the Kidz.net business in the UK and Asia.' (d) 'In return for the capital provided by Frontier, we will transfer 20 percent of the Kidz.net shareholding in the US company to Frontier.' (e) 'I will never live it down with Roger (referring to Felice), if I let you down. Roger and I are good mates. I feel obliged to you. I will not let you down.' (f) 'I give you my personal guarantee that you will get your money back with interest.' I recall on that one occasion having a conversation to the following effect: I: 'I don't want to end up with egg on my face. Phil and Michael are not really into this deal. They are going with my word. I trust you. They are trusting me.' Duffy: 'I guarantee that you will get your money back. We will all make money out of this. I will not let you down.'" 24 Mr Felice's evidence is consistent with these accounts. 25 Mr Jacobsen's evidence is that, after the meetings at which the conversations reported by him took place, he engaged in correspondence with Mr Duffy and the plaintiff's solicitor in relation to the preparation and signing of an agreement between the parties. He recalls that once the form of the agreement was settled, it took some time to get Mr Duffy to execute it. He cannot recall the precise circumstances of the signing of the agreement but does recall that the agreement was signed before the plaintiff paid any money to Kidz.net. Mr Righi also refers to the signing of the agreement and says (in paragraph 36 of his affidavit): "I would not have entered into the Agreement, or agreed that Frontier pay any money to Kidz.net, unless all of the following conditions were contained in the Agreement: (a) Kidz.net would only expend Frontier's money to form the US entity and to prepare, operate, distribute and promote the Kidz.net business in the US; and (b) Frontier would receive at least 20 percent of the shares in the US entity; and (c) Frontier's money would be repaid within 18 months, together with interest; and (d) if Frontier's money was not repaid within 18 months, Frontier would receive 5 percent of the share capital of Kidz.net or 50,000 Kidz.net shares, whichever was the greater; and (e) the US entity would receive the exclusive right and interest to operate the Kidz.net business in the US, South America and Canada; and (f) Frontier would be given the first right of refusal to operate the Kidz.net business in the UK and Asia." 26 The argument advanced by the plaintiff is that the various representations made by Mr Duffy on behalf of Kidz.net are actionable in their own right on the basis of ss.51A and 52 of the Trade Practices Act. The plaintiff's case is that the statements that the funds would only be used for specified purposes, that a sum equal to that paid would be restored by the US entity with interest by 14 February 2000 failing which the plaintiff would receive shares in Kidz.net, that Kidz.net would arrange for the plaintiff to have 20% of the shares in the US entity, that Kidz.net would grant to the US entity the exclusive right to operate the Kidz.net business in the territories and that Kidz.net would give the plaintiff the first right to refusal in relation to the United Kingdom and Asia were all representations by Kidz.net with respect to future matters as referred to in s.51A. As a result, the plaintiff contends, an absence of reasonable grounds on the part of Kidz.net for the making of the representations caused them to be misleading (s.51A(1)), so that, under s.51A(2), the burden in any proceedings would be upon Kidz.net to show that it had reasonable grounds. From there, the plaintiff argues that, because, in this case, the defendants do not attempt to put forward any such reasonable grounds, the representations are placed by s.51A within the ambit of s.52 and the non-correspondence between the subject matter of the representations and the events which eventually unfolded means that a breach of s.52 is established and the various statutory consequences, in terms of orders of the court, would be available, including orders requiring payment of $585,562.78 by Kidz.net to the plaintiff. 27 Representations embodied in a contract and having contractual force may also be the source of liability under s.52 and corresponding State provisions. Thus, Kearney J said in Holt v Biroka Pty Ltd (1988) 13 NSWLR 629 at pp.634-5: "As to acts within a contractual relationship not being capable of misleading a person already entitled to have the company perform its contractual obligations the distinction is drawn in L Grollo Darwin Management Pty Ltd v Victor Plaster Products Pty Ltd (1978) 33 FLR 170; 19 ALR 621; (1978) ATPR 40-072 and in Ransley v Medical Benefits Fund of Australia Ltd (1980) ATPR 40-160, between the bare making of a contract and representtations or promises as to the carrying into execution of such contract. If a party to a contract additionally represents that he will carry out the contract and that it will be carried out in a particular manner, as has happened in the present case, I consider that such representations or promises are capable of constituting the requisite conduct under s 42. The mere fact that there is a remedy under the general law for breach of contract and a remedy under the Fair Trading Act in relation to representations or promises made within a contractual context, merely means that there is an overlap so as to give the Act a concurrent operation with the common law." 28 But as Ormiston J pointed out in Futronics International Pty Ltd v Gadzhis [1992] 2 VR 217 at p.238, it does not follow that every unfulfilled contractual promise amounts to misleading or deceptive conduct. His Honour said (at p.239): "In my opinion the mere acceptance of the promise by a promisee cannot ordinarily be characterised as being led into error. In the usual case the consequence would be that the promisee has enforceable rights. It is hard to believe that normally any promisee with ordinary contractual rights would then describe himself as having been deceived or misled. It is only when it becomes apparent that the promise cannot be enforced, because, for example, it is either unenforceable or the promisee's rights are valueless or diminished, that one may return to the original promise to inquire whether that promise was of so little substance that it can be concluded that the promisee was indeed misled or deceived in the first place, at the time of his acceptance of the promise. Thus it may then be seen that the promisor originally had no intention to perform his promise or that he originally had no capacity or ability to perform it. Now, however, by reason of s10A (and S51A) the inquiry is apparently broader for one must also inquire whether at the relevant time the promisor had reasonable grounds for making any implicit representation (where relevant) that he intended in the future to perform his contractual promise, and for this purpose the onus of proof is reversed. Nevertheless the section does not say in what circumstances a representation as to a future matter shall be implied from a contractual promise." 29 The matter was recently summed up by the High Court (Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ) in HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 79 ALJR 190 as follows (at p.194): "Since the enactment of s 51A, there has been authority that a breach of promise may contravene s 52 in its operation with s 51A if there is an implied representation by the promisor of an intention or capacity to perform the promise, and there are no reasonable grounds for making that representation." 30 In the present case, the evidence indicates quite clearly that the various representations were representations as to what Kidz.net was prepared to offer by way of contractual promise and accept by way of contractual obligation. The representations were made in the context of a business negotiation between persons who clearly saw a formal contract as the expected culmination of the negotiation. The contract was in due course prepared and executed. Mr Jacobsen deposed that when, in the last conversation quoted by him, Mr Duffy said that Kidz.net needed the money from the plaintiff "as soon as possible", he replied, "Not until we get a signed contract". The plaintiff thus put store by incorporation of the various representations into a contract so that the plaintiff would have the benefit of contractual promises. Mr Righi's evidence also makes clear the importance that the plaintiff attached to the incorporation of the representations into a contract. I quote again the opening words of paragraph 36 of his affidavit: "I would not have entered into the Agreement, or agreed that Frontier pay any money to Kidz.net, unless all of the following conditions were contained in the Agreement :" [emphasis added] 31 These aspects of the evidence of both Mr Jacobsen and Mr Righi lead, in my opinion, to two important conclusions: first, that the several representations made by Kidz.net through Mr Duffy were pre-contract representations as to what Kidz.net was willing to undertake by way of contractual obligation in the form of specific contractual promises, as distinct from representations as to the future conduct of Kidz.net; and, second, that the representations were received and relied upon by the plaintiff for that purpose alone. The plaintiff, in entering into the contract, paying over money in conformity with it and declining to pay except under an executed contract, did not act on the faith of or by reference to the pre-contract representations. It relied upon the fact that it had extracted from Kidz.net contractual promises in terms of the representations. As Mr Righi said, he would not have allowed the plaintiff to pay over the money except in the context of a contract containing provisions binding on Kidz.net in terms corresponding with the various statements made on Kidz.net's behalf in the course of negotiations. In short, the plaintiff, in the person of Mr Jacobsen and Mr Righi, distrusted the pre-contract representations and wanted to see them turned into contractual terms (as they in due course were). Such lack of reliance on them is, of itself, enough to deprive the plaintiff of the ability to obtain statutory relief in reliance upon ss.51A and 52 of the Trade Practices Act by reference to the representations: see Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2005] NSWCA 68 where the well-known approach in Gould v Vaggelas (1985) 157 CLR 215 was applied. 32 It remains to consider the trust-based case advanced by the plaintiff briefly outlined at paragraph [10] above. The payments of A$166,666.66 and A$250,000 were made by the plaintiff to Kidz.net in conformity with the contract. As I have already noted, Kidz.net was bound by contract not to expend those funds otherwise than as stated in clauses 9.1, 9.2 and 9.3. It is the plaintiff's contention that, in the circumstances, Kidz.net not only became subject to that contractual promise with respect to the application of the funds but also became a trustee of the funds under principles most often associated with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. The nature of such a trust was described by Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164 at p.186: "It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract. As North J explained in Gibert v Gonard (1884) 54 LJ Ch 439, 440: 'It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given. He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose.' The duty is not contractual but fiduciary." 33 Lord Millett regarded a Quistclose trust as "an entirely orthodox example of the kind of default trust known as a resulting trust" (at p.186). He continued: "The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and insofar as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower's power or duty to apply the money in accordance with the lender's instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money. Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower's mandate while it is still capable of being carried out, must depend on the circumstances of the particular case." 34 In the present case, as I have already said, the relationship of the plaintiff and Kidz.net was not that of lender and borrower. In conceptual terms, the plaintiff may be regarded as having settled funds on Kidz.net so that Kidz.net might apply them in the manner stated. This, to my mind, reinforces the applicability of the resulting trust principles referred to in Twinsectra. The plaintiff paid money to Kidz.net (and Kidz.net accepted it from the plaintiff) for a stated purpose, so that Kidz.net came to hold the money upon trust to apply it for that purpose and, in default, to hold it for the plaintiff. Clearly implicit in the trust was a duty on the part of Kidz.net not to apply the money otherwise than in fulfilment of the stated purpose. That duty was accordingly a fiduciary duty. 35 The subject matter of the trust and the concomitant fiduciary duty was each of the sums in Australian dollars actually paid over by the plaintiff, being the sum of A$166,666.66 paid on or about 14 August 1998 and the sum of A$250,000 paid on or about 17 September 1998. The evidence shows that A$123,280.27 was applied otherwise than for the purpose for which the moneys were paid by the plaintiff and received by Kidz.net. This is the sum that, on Mr Reardon's evidence, was applied for the purposes of the Kidz.net business in Australia, a purpose foreign to that stated in clause 9 of the agreement. According to Mr Reardon's evidence, A$232,852.07 was applied for the clause 9 purpose. The balance (that is, the difference between the total of A$416,666.66 paid by the plaintiff to Kidz.net and the total of A$356,133.34 positively identified by Mr Reardon) may or may not have been applied towards the stated purpose. That is something that Mr Reardon was unable to determine and since, in a proceeding of this kind, the party challenging the rejection of the proof of debt bears the onus of showing the amount for which that party should be admitted as a creditor, I cannot take the view that there was a breach of trust as to that balance. The breach of trust must therefore be regarded as consisting of (and being confined to) Kidz.net's having applied $123,280.27 otherwise than for the clause 9 purpose. 36 The default of Kidz.net as a fiduciary must be approached in a context where the part of the trust property to which the breach relates (in the form of A$123,280.27 out of the total funds paid by the plaintiff to Kidz.net) has been dissipated. The circumstances are therefore not such as to warrant any proprietary remedy by way of restitution or account. They require an award of equitable compensation, the purpose of which, as stated by Tadgell J in Hill v Rose [1990] VR 129 at p.143 (in a passage approved by the Victorian Court of Appeal in Edmonds v Donovan [2005] VSCA 27), is "to place the party who suffers following the breach of duty as nearly as possible in a position in which he would have stood had there been no breach". His Honour also said: "The method of calculation of monetary compensation will vary according to the nature of the fiduciary obligation whose breach is to be redressed. It might be appropriate to compensate the plaintiff's loss by reference to the defendant's gain, as in McKenzie v McDonald [[1927] VLR 134]. Compensation may be awarded, however, in an appropriate case whether or not the defendant has made any pecuniary gain." 37 Equitable compensation would, in this case, be assessed as the wrongfully dissipated sum together with an interest factor. The interest factor would recognise and recoup for the plaintiff the benefit that Kidz.net may be taken to have obtained (by way of avoiding the need to find funds elsewhere) by appropriating the sum in question. The interest element would appropriately be calculated at Supreme Court rates for the period from the later advance (which should be taken to be 17 September 1998) to the date of commencement of the winding up. 38 The appropriate disposition of the plaintiff's s.1321 appeal in respect of the liquidator's decision to reject the proof of debt in the sum of $585,562.78 is that the court should modify the decision so that the rejection applies to only so much of the sum of $585,562.78 as exceeds the aggregate of $123,280.27 and interest thereon computed in the way I have described. 39 I direct that, within fourteen days, the parties file short minutes of orders giving effect to this decision. Submissions on costs should be exchanged between the parties and forwarded to my Associate within 28 days. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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