Supreme Court New South Wales Medium Neutral Citation: H. Polesy & Co Pty Limited -v- Peter Wayne Cherry [2011] NSWSC 1336 Hearing dates: 11 October 2011 Decision date: 11 October 2011 Jurisdiction: Equity Division - Commercial List Before: Hammerschlag J Decision: Each of the first defendant and the second defendant to account to the plaintiff for $11,200. The plaintiff to pay the second defendant's costs in the amount of $7,000. No other orders as to costs Catchwords: EQUITY - account of profits Category: Principal judgment Parties: H. Polesy & Co Pty Limited - Plaintiff Kon Bochrinis - Second Defendant Representation: Counsel: C. Lambert - Plaintiff T. Best - Second Defendant Solicitors: O'Brien Lawyers - Plaintiff SDR Law - Second Defendant File Number(s): 2010/318449 EX TEMPORE Judgment 1HIS HONOUR: On 6 October 2011, after a two day hearing I gave judgment in favour of the plaintiff against the second defendant and ordered that there be an inquiry and an account of profits. 2Judgment had earlier been given against the first defendant and similar orders made. The first defendant had not appeared to defend the claims against him. 3On 6 October 2011 I made directions for the plaintiff to serve the account for which it contended and for the second defendant to respond. I gave the plaintiff leave to issue a subpoena to the first defendant to obtain documents. Some documents were produced 4The Inquiry took place before me today. 5The plaintiff read the affidavit of Mr Neil Moreton sworn 10 October 2011 to which was attached the plaintiff's construction of the account of profits for which it contended based on information in it's possession. Mr Moreton was cross-examined. 6The second defendant tendered a number of documents and called the first defendant (who appeared for the first time) viva voce. He was cross-examined. 7The first defendant made it clear that he understood that the inquiry concerned not only the second defendant but him as well and I invited him to make submissions. He declined. 8The evidence is in an unsatisfactory state, amongst others, because of the absence of relevant primary documentation. 9The plaintiff says that the defendants have not made available information which it needs. This is clearly the case in respect of some items, in particular, deductions claimed in respect of transport and storage to which fuller reference will be made later. 10The defendants say that much of the documentation was left behind and was on the first defendant's computer in the office at the plaintiff's premises which he vacated when he was dismissed. He says that there were hard copies there as well. 11On the one hand, the plaintiff has the onus of establishing profit. On the other hand, some of the information necessary to enable it to do so with any degree of accuracy is within the defendants' camp and has not been produced. I must, therefore, do the best I can on the material available. 12Compete Textiles, the joint enterprise of the defendants, was financed predominantly by the second defendant advancing funds under the Deed of Acknowledgement of Debt signed on 7 October 2009. Under it, he advanced $42,000 and has been repaid $28,000. He is still owed $14,000. 13The loan funds were used primarily to pay the cost of importation of two containers of goods, to which I will refer respectively as "shipment 1" and "shipment 2". 14The plaintiff has approached the matter by attempting separately to assess the profit earned on the sale of the goods comprised in each shipment. In addition, it says that Compete Textiles bought 700 SB flat white commercial sheets for $6,545 which it surmises were sold for $8,085 (including GST) yielding a gross profit of $2,135. 15The first defendant's evidence is that the transaction for the sale of the sheets did not occur. 16As to shipment 1, the plaintiff's account discloses a profit figure of $16,798.03 (after deductions for customs duty, GST, clearance and cartage but not any other operating expenses). 17The defendants accept this figure. The first defendant says the amount approximates his estimation of the profit made on the first container standing alone. 18As to shipment 2, the information available establishes the importation of products but does not establish how much of it was sold. The plaintiff contends for a profit based on an assumption that all of it was sold at the prices at which it, in the ordinary course of its business, would have sold them. On this basis, the profit of $33,365.21 would be yielded. 19The first defendant's evidence is that only about 50 per cent of the shipment was sold and that the profit yielded was of the order of $8,000. The unsold inventory is apparently in storage at Heidelberg. 20The defendants, however, did not produce any records enabling any assessment of how much of the second shipment was sold and for how much. 21The plaintiff's analysis of bank account material produced by the defendants indicates business expenses of $2,290.30. The defendants have produced no primary documents or other evidence to support any other figure. 22The defendants do not approach the matter on a shipment by shipment basis. 23They produced a reconstructed profit and loss account prepared by the first defendant. They suggest that there were total sales of $100,136.38 and that the cost of goods sold was $77,835.29, yielding a gross profit of $22,301. They contend there were operating expenses of $15,221.44 made up as to transport and storage of $12,665, postage of $91.50, professional services of $900 (being an amount paid to the first defendant according to him) and GST of $1,028.94. This would yield net profit of $7,079.65. The operating expenses are unvouched. 24As to the transport and storage figure, which is the bulk of the operating expenses contended for by the defendants, critical difficulties for them are that firstly, their evidence does not establish the transport and storage figure; secondly, a significant portion of these alleged expenses was paid or payable to the second defendant's transport business and it is not clear how much of this, if any, is a profit component; thirdly, the figure extends beyond the date on which Compete Textiles ceased actively trading. 25I do not consider that the evidence establishes that any credit should be given to the defendants for these operating expenses. Giving no credit for them means that, on the defendants' figures, the profit is $22,301.09. 26As a crosscheck, taking the defendants' concession in respect of shipment 1 of $16,798 plus $8,000 on shipment 2 would yield a profit of $24,798. Were I to deduct the documented operating expenses of $2,290 conceded by the plaintiff, the profit is $22,508, almost exactly the same as the figure yielded by the first approach of taking Compete Textiles' gross profit as disclosed in its reconstructed profit and loss account, but giving no credit for any operating expenses. 27The defendants produced a balance sheet (reconstructed by the first defendant) which discloses assets of $28,388.15 comprising of accounts receivable (which I assume is included in the sales revenue figure of $14,396) and inventory at cost of $13,992. 28The balance sheet discloses liabilities of $21,564.94 comprising a loan account to the second defendant of $14,000 (being the balance unrepaid under the Deed of Acknowledgement of Loan earlier referred to), $6,000 owed to his company Conway Transport, GST of $1,028.94 and a bad debt provision of $536 . This results in a retained profit of $6,823.21. 29These figures are unvouched. However, the retained profit figure approximates the net profit they contend was earned, but adopts as an expense the unsupported amount stated to be owing to Conway Transport. 30What is also apparent on the defendants' figures is that there is sufficient value in the assets still held to cover the outstanding obligation under the loan to the second defendant. 31The median point between the two profit figures of $22,301 and $22,508 (reached as described above) is $22,404. 32I assess at $22,400 the profit earned by the defendants' joint enterprise, Compete Textiles, from the illicit activities of the first defendant knowingly assisted by the second defendant. 33No submissions were made that there were any additional just allowances to be taken into account. No evidentiary material was placed before the Court which would establish that income tax was payable by either of the defendants either at all or at any particular rate which would enable it to be taken into account if this were required. 34The parties accepted that each of the defendants had an equal share in the enterprise and that in the event that I made an order each would be obliged to account for one half of the profit which I found. 35Each is accordingly liable to account to the plaintiff for $11,200. 36The plaintiff and the second defendant made submissions as to costs. No submissions were made by the first defendant. 37Given the findings against the first defendant and the fact that, albeit that the amount found against him is modest, the plaintiff has succeeded entirely against him, the first defendant is to pay the plaintiff's costs of the proceedings against him. 38The position as between the plaintiff and the second defendant is different. The plaintiff abandoned significant claims which it had brought against the second defendant including for confidential information and on statutory counts. It succeeded on the limited basis of obtaining a modest amount representing one half of the profits made by the illicit conduct of the enterprise Compete Textiles up to and including 9 July 2010. 39At about 3.00pm on the first day of the hearing on Tuesday 4 October 2011, counsel for the plaintiff informed me that a third party witness, Mr Prochilo, whom it wished to call, had been subpoenaed to be present on 6 October 2011 and that he had no other witnesses. Counsel for the second defendant, as he was entitled to do, took the position that he should be entitled to cross-examine Mr Prochilo before deciding whether to call evidence. The result was that the proceedings were adjourned to 6 October 2011. On that day, however, the witness did not appear and the plaintiff did not seek any steps to be taken to ensure his attendance. 40Leaving aside the wasted time on 4 October 2011, the second defendant's legal representatives, who are from interstate, had to stay in Sydney for an extra day and the parties are agreed that the wasted costs as a result of the plaintiff's inability to call its witness should be assessed at $7,000. I hereby assess them accordingly. 41Each of the parties directed what might on one view be described as Calderbank letters to the others early in the proceedings. The plaintiff's Calderbank called for admissions by the second defendant of conduct which has not been established (in relation to the confidential information and statutory counts). I think little weight is to be attributed to it. 42The second defendant's letter offered $2,000 as costs, undertakings in relation to confidential information, but offered nothing in the way of admission of conduct nor compensation. I also think that it is of little weight. 43The plaintiff contended that I should make a Sanderson Order requiring the first defendant in effect to pay the costs of the plaintiff incurred in pursuing the second defendant. I do not think that is an appropriate course, particularly given the first defendant's non-participation in the proceedings and the fact that the plaintiff abandoned significant parts of its claim against the second defendant. 44In the exercise of my discretion, taking all of the circumstances into account, I consider that the plaintiff is to pay the second defendant's costs earlier referred to of $7,000. I make no other orders as to costs as between the plaintiff and the second defendant. ********** 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. Decision last updated: 07 November 2011