Supreme Court New South Wales Medium Neutral Citation: Horticulture Innovation Australia Ltd v Westley [2015] NSWSC 1292 Hearing dates: 31 August 2015; further written submissions 2 September 2015 Decision date: 03 September 2015 Jurisdiction: Equity Before: Stevenson J Decision: Plaintiff not entitled to trace funds misappropriated by the defendant into funds in court; plaintiff entitled to equitable compensation and judgment against defendant equal to the amount of the misappropriation; parties to bring in short minutes Catchwords: EQUITY – funds misappropriated by defendant employee from plaintiff employer – whether particular funds used for plaintiff's benefit; REMEDIES – whether plaintiff entitled to trace misappropriated monies into funds in court – whether funds in court should be paid out to plaintiff or to competing creditors of the defendant – whether defendant entitled to a credit in respect of GST input credits Legislation Cited: A New Tax System (Goods and Services Tax) Act 1999 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Black v S Freedman & Co [1910] HCA 58; 12 CLR 105 Foskett v McKeown [2001] 1 AC 102 Gagner Pty Ltd (t/as Indochine Cafe) v Canturi Corporation Pty Ltd [2009] NSWCA 413 Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82; 61 NSWLR 75 Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589 Westdeutsche Landesbank [Girozentrale] v Islington London Borough Council [1996] AC 669 Texts Cited: P W Young, C Croft and M L Smith, On Equity, (2009, Lawbook Co.) Category: Principal judgment Parties: Horticulture Innovation Australia Ltd (Plaintiff) Luke Christopher Westley (Defendant) Shauntelle Benjamin (First Interested Party) Shannon Brown (Second Interested Party) Julia Dray (Third Interested Party) Kimberly Hodgson (Fourth Interested Party) Owen Little (Fifth Interested Party)) Alice Osborn (Sixth Interested Party) Matthew Predney (Seventh Interested Party) Nicholas Richard (Eighth Interested Party) Justin Smith (Ninth Interested Party) Riley Sutton (Tenth Interested Party) Brody Toombs (Interested Party) Rowena Vila (Twelfth Interested Party) Representation: Counsel: C N Bova (Plaintiff) B Green (Defendant) M Gaven (Interested Parties) Solicitors: Gilchrist Connell (Plaintiff) Navado Lawyers & Solicitors (Defendant) Bird & Bird (Interested Parties) File Number(s): SC 2015/202419 Judgment Introduction 1. The plaintiff, Horticulture Innovation Australia Ltd ("HIA"), is a not-for-profit research and development corporation associated with Australia's horticultural industries. 2. HIA assumed this role in November 2014. Hitherto a different entity, Horticulture Australia Ltd ("HAL"), carried out that, or a similar role. In November 2014 HIA replaced HAL as the relevant operative entity, and on 24 November 2014 HAL assigned its assets, including its choses in action, to HIA. 3. The defendant, Mr Westley, is a former employee of HAL and HIA. He commenced employment with HAL in January 2011 and with HIA in November 2014. Mr Westley was employed as Manager, Marketing Services. He was responsible for developing and managing marketing and promotional programs undertaken by HIA and HAL for the Australian apple and pear industries. In fulfilling these responsibilities, Mr Westley had delegated authority to approve the payment of invoices up to the value of $300,000, provided that such invoices related to those marketing and promotional programs. 4. Between June 2014 and June 2015, Mr Westley misappropriated funds, first from HAL and then from HIA. For that reason, Mr Westley was summarily dismissed on 7 July 2015. 5. By reason of the matters set out at [2] above, it is common ground that HIA is entitled to recover funds that Mr Westley misappropriated from either company. 6. For the most part, Mr Westley used the misappropriated funds to pay costs and expenses associated with a theatrical production known as "Avenue Q". Mr Westley was the executive producer of that production, which was staged at the Enmore Theatre from 2 July 2015 to 18 July 2015. Mr Westley does not dispute that he used misappropriated funds totalling $277,180.77 for that purpose. 7. Mr Westley also does not dispute that he misappropriated two further amounts (totalling $2,486) from HIA, which he used to pay obligations owing by an online dog treats business, known as "Café Barkery", that he conducted with his former wife. 8. HIA alleges that Mr Westley misappropriated further amounts in respect of what the parties described as the First and Second Rova invoices (a total of $40,359 including GST), the Quentin Eyers invoice ($5,720 including GST) and the Bingham Cup invoice ($5,000). Mr Westley disputes that he misappropriated the full amount referable to the two Rova invoices and any of the amounts referable to the Quentin Eyers or Bingham Cup invoices. I deal with these matters later in these reasons. 9. HIA's total claim is summarised in the table annexed to these reasons. The proceedings 1. These proceedings were commenced on 10 July 2015. On that date, Bergin CJ in Eq made a freezing order against Mr Westley. 2. Pursuant to an order made by Sackar J on 17 July 2015, the owner of the Enmore Theatre, Century Venues, paid into Court $433,575.61 ("the Funds in Court") on 29 July 2015. That payment had the effect of causing the freezing order to cease to operate. 3. It is common ground that the Funds in Court represent the proceeds of ticket sales for the Avenue Q production less certain expenses that Century Venues claims to be due to it (for a licence fee for use of the theatre, an "event resources" fee and other like matters). Mr Westley said that the total ticket sales were $775,598. 4. It is common ground that, on 29 July 2015, Century Venues was indebted to Mr Westley in an amount equal to the Funds in Court. 5. HIA's primary case is that, of the Funds in Court, an amount equal to the misappropriated funds that Mr Westley used to finance the Avenue Q production comprise traceable proceeds of those misappropriated funds and are impressed with a trust in its favour. 6. Mr Westley disputes that claim and wishes to utilise the Funds in Court to make payments totalling $343,858.20 in respect of expenses he incurred in staging the Avenue Q production, including $330,613.70 owing by him to cast and crew from the production. The appearances 1. Before me, Mr Bova of counsel appeared for HIA and Mr Green of counsel appeared for Mr Westley. 2. Ms Gaven of counsel sought, and was granted, leave to appear for 12 members of the Avenue Q production cast and crew ("the Interested Parties"), to whom $116,320 of the $330,613.70 to which I have referred is owing. 3. I have had the benefit of helpful submissions from each of Mr Bova, Mr Green and Ms Gaven. 4. Much of what appears in these reasons, especially as to uncontroversial background facts, is taken, with gratitude, from those submissions. Misappropriation of funds for the Avenue Q production 1. In its statement of claim, HIA has made detailed allegations as to the manner in which Mr Westley misappropriated funds, including those used by him for the purposes of the Avenue Q production. 2. In his defence, Mr Westley has either admitted or, by failing to traverse the allegations, is taken to have admitted (see Uniform Civil Procedure Rules 2005 r 14.26) the following matters: 1. between June 2014 and June 2015 he acquired goods and services from third parties for the Avenue Q production (including a non-exclusive licence from the copyright owner, Hal Leonard Australia Pty Ltd); 2. when those goods and services were supplied, the third parties issued him invoices which described the services provided and stated that they were in respect of the Avenue Q production; 3. shortly after receiving such invoices, he created, or caused to be created, false invoices directed to HIA or HAL, which were in the same amounts as those he received from the suppliers but which deleted all references to the Avenue Q production; 4. neither HIA nor HAL acquired services of the kind referred to in these invoices; 5. nonetheless, Mr Westley authorised payments by HIA or HAL to the relevant suppliers; 6. he thereby misappropriated the $279,666.77 referred to at [6] and [7] above; and 7. he thereby breached his fiduciary, contractual and tortious duties to HIA and HAL. The factual matters in dispute The Rova invoices 1. On 8 June 2015 and 15 June 2015, Rova Media Pty Ltd sent Mr Westley two invoices. The first was for $7,095 (including GST) for: "PRODUCTION & INSTALLATION (TAXI BACKS) Panels: 150 prismatic panels Campaign: Avenue Q". 1. The second was for $33,264 (including GST) and was stated to be in respect of: "MEDIA (TAXI BACKS) Campaign: Avenue Q Active Days: 15/06/2015 – 12/07/2015". 1. "Taxi backs" are the advertising panels which appear fixed to the boot lid of taxis. 2. Consistently with the fraudulent practice I have outlined above, Mr Westley altered those invoices by deleting the reference to "Campaign: Avenue Q", before causing HIA to pay them. 3. Nonetheless, Mr Westley asserted, in one of his affidavits, that half of those expenses "related to marketing and advertising services in respect of HIA's business, specifically the production and installation of 'taxi backs'". 4. Mr Westley annexed to his affidavit a photograph of the rear of a taxi which displays a taxi back reading "Refresh Yourself" (a slogan which Mr Bova accepted was one associated with HIA). 5. Apart from Mr Westley's assertion, there is no explanation in the evidence as to how, when or why the photographed taxi bore the "Refresh Yourself" taxi back. 6. What is in evidence is an exchange of emails between Mr Westley and Ms Melissa Jovanovski, National Sales and Marketing Manager of Rova, between 12 February 2015 and 10 March 2015, which reveal the provenance of the two Rova June 2015 invoices. Those emails make clear that Mr Westley ordered the 150 taxi backs referred to in Rova's 8 June 2015 invoice for the Avenue Q production, and not for any purpose associated with HIA's business. 7. Mr Green called on a notice to produce addressed to HIA which called for production of invoices received by HIA from Rova concerning any "Refresh Yourself" taxi back promotion. 8. In response to that call, Mr Bova stated that there was nothing to produce. 9. I do not see how those events take the matter any further. The one example of a "Refresh Yourself" taxi back in the photograph annexed to Mr Westley's affidavit remains unexplained (other than by Mr Westley). On the other hand, the email exchange to which I have referred satisfies me that what Mr Westley ordered from Rova was a "campaign" involving 150 taxi backs for the Avenue Q production. That is precisely the subject of the two Rova invoices that Mr Westley manipulated and used to misappropriate from HIA an amount equal to the total of the two invoices. 10. In those circumstances, I do not accept Mr Westley's explanation. HIA is entitled to include the amounts of the two Rova invoices in its claim against Mr Westley. The Quentin Eyers invoice 1. Mr Eyers is an audio producer who, at Mr Westley's request, composed a club song for the Eastern Suburbs District Rugby League Football Club Ltd ("the Club"), called the "Rooster's Theme Song". 2. On 6 January 2014, Mr Eyers sent Mr Westley an invoice addressed to HAL for $5,720 (including GST) in respect of the composition, arrangement, recording and production of the Rooster's Theme Song. Mr Westley caused HAL to pay that invoice. 3. At the time of that invoice, there was on foot a sponsorship agreement between HAL and the Club (trading as Sydney Roosters) pursuant to which the Club granted HAL certain "sponsorship benefits", including match day signage and other like matters. In exchange, HAL agreed to pay to the Club a total of $22,500 during the 2014 NRL season. The agreement makes no mention of HIA sponsoring the composition and recording of any team song. 4. Mr Westley's affidavit evidence about this matter was as follows: "This expense is a legitimate HAL business expense relating to work undertaken by Quinten [sic: Quentin] Eyers in relation to the sponsorship of Easts Rugby Club. Following on from the sponsorship of the Easts Rugby Mascot in 2013, Aussie Apples embarked on a marketing project to provide additional promotional benefits to the Aussie Apples brand. More specifically, the services supplied by Quinten [sic] Eyers were in relation to the development of a new club song, which was subsequently promoted and supported by Aussie Apples." 1. I understand that "Aussie Apples" is the name of a marketing project associated with HIA and HAL. 2. During cross-examination, in answer to a question from me, Mr Westley agreed that the second half of the last sentence of that paragraph was false, and that the "new club song" was not "subsequently promoted and supported by Aussie Apples". 3. As I have mentioned, as Manager, Marketing Services of HIA and HAL, Mr Westley had delegated authority to approve invoices up to the value of $300,000, provided that those invoices related to marketing and promotional programs for the Australian apple and pear industries. 4. I do not accept that Mr Westley's engagement of Mr Eyers to compose and record the Rooster's Theme Song can be said to be related to any such programs. It is not mentioned in the sponsorship agreement to which I have referred. Mr Westley referred to it as a "side project" in the email he sent to Mr Eyers on 8 October 2013. And contrary to what Mr Westley swore to be true in his affidavit, it has not been used in any promotion associated with the "Aussie Apples" project of HIA or HAL. 5. I am satisfied that Mr Westley had no authority to make the payment to Mr Eyers and that HIA is entitled to recover this amount from him. The Bingham Cup invoice 1. The Bingham Cup is a rugby tournament associated with the International Gay Rugby Association. 2. On 20 June 2014, the Bingham Cup Organising Committee sent Mr Westley an invoice for $5,000 for "Bingham Cup 15 Donation / Sponsorship". 3. Mr Westley arranged for HAL to pay that invoice. 4. As a result of the payment of HAL of the 20 June 2014 invoice, Mr Westley became a member of the "Bingham 15", which entitled him to passes to all Bingham Cup events. 5. Mr Westley gave the following evidence concerning this payment: "This expense is a legitimate HAL business expense relating to the sponsorship of the Bingham Cup, as the Aussie Apples brand was broadening its demographic appeal. In addition to the sponsorship of the Bingham Cup which was being played for the first time in Australia, this also involved the supply of fruit and juice to the event to strengthen the partnership with the community." 1. In cross-examination, Mr Westley said: "As part of our sponsorship of Bingham Cup we not only gave $5,000 we also gave apples and juice to the event. As part of each day of the event there was quite a bit of coverage for Aussie Apples. No there was no signage or ads in programmes or anything like that but I certainly believe that Aussie Apples got the benefit from the event. … Often Aussie Apples was referred to and as an ambassador of the brand I talked that brand up everywhere." 1. Mr Bova tendered the text of a speech given at the opening ceremony of the Bingham Cup on 28 August 2014. 2. The text of that speech acknowledges "fantastic corporate support" from a number of entities. Neither HIA nor HAL was mentioned as a corporate sponsor. The text of the speech also contains an acknowledgement of "all those who made individual contributions including our Bingham 15". The list of individual contributors included Mr Westley as one of the seven members of "our Bingham 15". 3. I do not accept that the payment of the Bingham Cup invoice related to any marketing or promotional programs of HAL or HIA. As Mr Westley must have known, membership of the "Bingham 15" benefited no one but himself. I do not accept that Mr Westley was authorised to make the payment. I am satisfied that HIA is entitled to recover the payment from him. Tracing 1. Mr Bova submitted that HIA was entitled to trace that part of the misappropriated monies that Mr Westley used to fund expenses associated with the Avenue Q production to the Funds in Court. 2. Where money is stolen, it is trust money in the hands of the thief: Black v S Freedman & Co [1910] HCA 58; 12 CLR 105 per O'Connor J at 110. 3. In Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589 White J said at [40]: "Where property is stolen, the property is trust property in the hands of the thief and can be traced into the hands of a third party who receives the property otherwise than as a bona fide purchaser of the legal estate for value without notice. The property is trust property in the hands of the thief because the thief is bound in conscience to hold the property on behalf of its true owner. Whether the trust is characterised as a resulting trust (Robb Evans of Robb Evans & Associates v The European Bank Ltd (2004) 61 NSWLR 75 at 100-101), or as a constructive trust (Westdeutsche Landesbank [Girozentrale] v Islington London Borough Council [[1996] AC 669] per Lord Browne-Wilkinson at 716), the trust is of an institutional rather than a remedial character. It arises because the conscience of the thief is bound." 1. So far as concerns tracing, the relevant principles are stated in P W Young, C Croft and M L Smith, On Equity, (2009, Lawbook Co.) at [12.820] as follows: "Tracing is a process whereby a wronged plaintiff may, instead of obtaining a personal remedy against a defendant (usually damages), recover the property into which the wrongdoer has 'invested' the plaintiff's property. There is a distinction between 'tracing' and 'following'. 'Following' is the process of pursing the same asset as it moves from hand to hand, while 'tracing' is the process of identifying a new asset as a substitute for the original asset [Foskett v McKeown [2001] 1 AC 102 at 127; and Robb Evans of Robb Evans & Associates v European Bank Ltd (2004) 61 NSWLR 75 at 103-104]." 1. In Robb Evans, Spigelman CJ, with whom Handley and Santow JJA agreed, at [133] cited with approval the familiar observations of Lord Millett in Foskett v McKeown at 128: "'Tracing is…neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property." 1. Tracing involves a question of fact. Lord Steyn said in Foskett v McKeown: "[i]n truth tracing is a process of identifying assets: it belongs to the realm of evidence" (at 113). As Lord Millett succinctly put the matter: "[t]racing is the process of identifying a new asset as the substitute for the old" (at 127). Similarly, in Robb Evans, Spigelman CJ spoke of "any property into which the stolen property has been converted" (at [113]). 2. Thus, the matter for consideration in this case is whether the Funds in Court (that is, the gross ticket sales less the amounts deducted by Century Venues) can be said to be: 1. the "property into which the stolen property has been converted"; 2. the "new asset" of HIA which is the "substitute for the original asset" (being the funds misappropriated by Mr Westley); 3. "what has happened" to the funds misappropriated by Mr Westley, such as that they can now "be properly regarded as representing" the money that Mr Westley misappropriated; or 4. the property in which Mr Westley "has invested" the money he misappropriated. 1. "What has happened" to the misappropriated funds is that Mr Westley used them to purchase goods and services used to stage the Avenue Q production. The services (including the licence from the copyright owner, Hal Leonard Australia Pty Ltd) have been rendered, and nothing more remains of them. The goods purchased with the misappropriated funds, or whatever has become of them, may well represent "new assets" which can be characterised as a "substitute" for the misappropriated funds, and thus may be amenable to a tracing claim. 2. The same cannot be said for the Funds in Court. The Funds in Court comprise what remains of the amount that many thousands of individual patrons of the Enmore Theatre paid for tickets to the Avenue Q production over the several weeks during which the production was staged. 3. Although Mr Westley used the misappropriated funds to fund the enterprise that led to those patrons purchasing tickets, the provenance of the ticket proceeds is so distinct from that of the misappropriated funds that they cannot, in my opinion, be seen to represent "what has happened" to the misappropriated funds. Nor can they be seen as "representing" or being a "new asset" of HIA which is a substitute for the misappropriated funds. 4. For those reasons, my opinion is that HIA cannot trace the misappropriated funds into the ticket sale proceeds, and thus into the Funds in Court. HIA's alternative claim for compensation 1. Mr Green, whilst resisting HIA's tracing claim, accepted that HIA is entitled to equitable compensation from, and judgment against, Mr Westley for the amount of his misappropriation, together with interest at Court rates. 2. Part of the monies misappropriated by Mr Westley corresponded with the component of the invoices sent to Mr Westley said to represent GST. 3. Accordingly, HIA has included in its claim against Mr Westley an amount equal to such amounts and interest thereon. 4. In that regard, Mr Green submitted that HIA's claim should be reduced to take account of "tax credits" (which Mr Green estimated to be in the order of $30,000) said to be available to HIA. 5. Both Mr Bova and Mr Green drew my attention to Gagner Pty Ltd (t/as Indochine Cafe) v Canturi Corporation Pty Ltd [2009] NSWCA 413, in which Campbell JA (with whom Macfarlan JA and Sackville AJA agreed) said at [151]: "In summary, as the GST legislation currently stands, if the plaintiff in an action for tort is registered for GST purposes, and stands to receive an input credit for any GST payments incurred in making good its damage, and there is no impediment to the plaintiff receiving the full benefit of the input credit, that GST amount should be excluded from the quantum of damages recoverable". 1. But the funds corresponding to GST that HIA seeks to recover were not incurred by it "in making good its damage". They are simply a component of the funds misappropriated by Mr Westley. Nor has Mr Westley established that HIA "stands to receive an input credit" for the relevant amounts, or that "there is no impediment to [HIA] receiving the full benefit of the input credit". Indeed, it seems unlikely that Mr Westley could establish these matters, as the goods and services in question were not acquired by HIA or HAL for a "creditable purpose" (the carrying on of their enterprises) for the purposes of ss 11.5, 11.15 and 17.5 of the GST legislation (A New Tax System (Goods and Services Tax) Act 1999 (Cth)). They were acquired by Mr Westley, using monies he misappropriated from HIA and HAL, for the purposes of his own enterprises. 2. For those reasons, I do not accept Mr Green's submission. The Funds in Court 1. HIA has failed to establish its entitlement to trace the funds misappropriated by Mr Westley into the Funds in Court, and thus has failed to establish that any part of those funds are held by Mr Westley on trust for it. 2. UCPR r 41.11 provides that funds in Court "may not be paid out of court except to the party entitled". 3. Prima facie, the party entitled to the Funds in Court is Mr Westley. HIA and the Interested Parties (as well as the other Avenue Q cast and crew) are unsecured creditors of Mr Westley. 4. Both Mr Bova and Ms Gaven submitted that I should order the payment out of the Funds in Court to HIA and the Interested Parties (respectively). However, the Funds in Court are insufficient to satisfy the debts owing to both HIA and the Interested Parties (let alone the other cast and crew). There is no evidence before me as to Mr Westley's capacity to meet these obligations, otherwise than from the Funds in Court. Were I to accede to the submissions of either Mr Bova or Ms Gaven, I would be giving a preference to the party they represent, at the cost of the other party and at the cost of any other creditor of Mr Westley (including the other cast and crew). I do not think it appropriate that I take this course. I see no reason to place any of these parties in a position of advantage over the others. 5. I propose simply to order that the Funds in Court be paid out to Mr Westley. 6. If Mr Westley's assets are not sufficient to meet all of his obligations, the matter will have to be dealt with in insolvency. Conclusion 1. I invite the parties to bring in short minutes to give effect to these reasons. ********** Schedule of invoices (MFI 1) (21.2 KB, pdf) 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: 03 September 2015