Supreme Court New South Wales Medium Neutral Citation: Deloitte Services Pty Ltd v HBO EMTB Interiors (NSW) Pty Ltd (In Liquidation) [2016] NSWSC 1597 Hearing dates: 25/10/2016, 26/10/2016, 27/10/2016, 28/10/2016 and 01/11/2016 Date of orders: 15 November 2016 Decision date: 15 November 2016 Jurisdiction: Equity - Commercial List Before: McDougall J Decision: Plaintiff entitled to damages or compensation from third defendant in the sum of $3,636,368 plus interest. Parties to bring in draft orders. Catchwords: TRADE PRACTICES – misleading or deceptive conduct – whether first and second defendants engaged in misleading or deceptive conduct by over-invoicing for amounts owed – where representations as to payment practice were made by the first and second defendants – whether the representations were relied upon by the plaintiff – whether the third defendant was involved in the contravention – Australian Consumer Law, ss 2, 18 CONTRACT – building and construction – whether there was an established payment practice which applied to all project management contracts – where payment practice differed from process of certification and payment different from written contracts entered into – whether contract or arrangement in place that permitted defendants to over-invoice – whether first and second defendants under-paid contracts for work completed EQUITY – trusts – whether second defendant was a trustee of the monies paid by the plaintiff into a trust account – whether the particular account is a trust account – whether second defendant breached its obligations as trustee – whether third defendant procured any breaches CORPORATIONS – insolvent trading – whether first and second defendant was insolvent during the relevant period – whether first and second defendants incurred a debt during the relevant time period Legislation Cited: Competition and Consumer Act 2010 (Cth), Schedule 2 Australian Consumer Law Corporations Act 2001 (Cth) Category: Principal judgment Parties: Deloitte Services Pty Ltd (Plaintiff) HBO EMTB Interiors (NSW) Pty Ltd (In Liquidation) ACN 003 507 622 (First Defendant) HBO EMTB Projects Pty Ltd (In Liquidation) ACN 096 519 201 (Second Defendant) Kevin Michael Fitzgerald (Third Defendant) Brian Rogut (Fourth Defendant) Mauricio Cordoba (Fifth Defendant) George Fitzgerald (Sixth Defendant) Representation: Counsel: D R Stack (Plaintiff) T D Tzovaras (Third Defendant) Solicitors: Bridges Lawyers (Plaintiff) Tzovaras Legal (Third Defendant) File Number(s): 2014/131496 Judgment 1. HIS HONOUR: In 2011 and 2012, the plaintiff (Deloitte Services) engaged one or other of the first and second defendants (respectively, "Interiors" and "Projects") to provide project management services for the fitout of office premises. Those services were provided by Projects even when Interiors was the counter-party to the contract. 2. Deloitte Services says that, under the arrangements (the imprecision is deliberate) made between it and Projects: 1. Projects was required to certify payment claims made by the contractor engaged to undertake the fitout work; 2. having done so, Projects was to invoice Deloitte Services for the amount so certified; 3. Deloitte Services was to pay the amount invoiced into a "client monies trust account" ("the trust account") maintained by Projects; and 4. Projects was then to pay the certified amount of the progress claim to the contractor. 1. Deloitte Services says that Projects has failed to account for (in round figures) $3.6 million. Of that sum, Deloitte Services says: 1. $1.3 million had never been claimed at all by the contractors: that is to say, Projects over-invoiced Deloitte Services for (in total) $1.3 million more than the contractors had claimed; and 2. $2.3 million, which was owing to the contractors and was paid to Projects, was not paid to the contractors. 1. Deloitte Services sues to recover the amount of $3.6 million. The defendants are: 1. Interiors and Projects, each of whom is in liquidation (the Court has granted Deloitte Services leave to bring the claim against those companies); 2. Mr Kevin Fitzgerald, who at all material times was the managing director and controlling mind of the group of companies (the HBO+ EMTB Group) of which Interiors and projects formed part (I shall refer to him as "Mr Fitzgerald"); 3. Mr Rogut, a director of Interiors between 2001 and July 2012, and the person responsible for the day to day operation of Projects' business and for overseeing the project management services provided by it to Deloitte Services; 4. Mr Cordoba, who was the finance manager and group financial controller of the HBO+EMTB Group between March 2010 and November 2011, and the chief financial officer of the Group from 2 October 2012 until May 2013; and 5. Mr George Fitzgerald (Mr Fitzgerald's son), who was the "commercial manager" of the HBO+EMTB Group from February 2012 until May 2013. 1. Deloitte Services has settled its claims against Mr Rogut, Mr Cordoba and Mr George Fitzgerald. Accordingly, these reasons in substance deal only with the claim made against Mr Fitzgerald. Nature of the claim against Mr Fitzgerald 1. Deloitte Services says that Projects engaged in misleading or deceptive conduct, and unconscionable conduct, by over-invoicing Deloitte Services for contractors' progress claims, and by failing to pay those contractors all the amounts actually due to them. In those circumstances, Deloitte Services says, Projects breached ss 18, 20 and 21 of the Australian Consumer Law (ACL) or, if they are relevant, cognate provisions of other legislation, and that it suffered loss as a result, being the sum of $3.6m (see s 236 of the ACL). Deloitte Services says that Mr Fitzgerald was involved in those contraventions (see s 2 of the ACL) so as to make him equally liable, with Projects, for the loss and damage caused. 2. Alternatively, Deloitte says, Projects was a trustee of the monies paid to it. It held those monies on an express trust, or alternatively a "purposes" trust, requiring it to pay to the contractors the amounts actually due to them, and to refund any over-payment to Deloitte Services. Deloitte Services says that by not paying contractors, and by not repaying the total of the over-invoiced amounts to Deloitte Services, Projects breached its duties as trustee. Deloitte Services says that Mr Fitzgerald procured those breaches, or alternatively was knowingly involved in them, in either case so as to be liable for the consequences co-ordinately with Projects. 3. Alternatively again, Deloitte Services says that Projects was insolvent from at least July 2012 until the date (23 May 2013) when it fell into voluntary administration. (Deloitte Services says that the same is correct in respect of Interiors.) Deloitte Services says that, over that time period, there were reasonable grounds for suspecting that each of the companies was insolvent, and that Mr Fitzgerald, as a director, is liable for the debts that they incurred over that period. Deloitte Services says that those debts include the two components I have identified of the total, $3.6 million, that it claims. 4. In what follows, I shall for the most part ignore any distinction between Interiors and Projects. Interiors was the party that contracted with Deloitte Services on one occasion. Projects contracted with Deloitte Services on all the other (five) relevant projects. For convenience, I shall for the most part treat the contracts as being between Deloitte Services and Projects. Where necessary a reference to "Projects" encompasses "Interiors". 5. Projects was entitled to remuneration for its project management services. That remuneration was calculated as a percentage of the cost of the works. Because Projects over-invoiced Deloitte Services for the cost of the works, it claimed more, by way of fees, than was actually due. The net amount that Deloitte Services says was overpaid (after allowing for various, non-contentious, adjustments) is, in round figures, $80,000. In its pleaded case, Deloitte Services sought recovery of that sum also from Mr Fitzgerald, on one or other of the bases summarised above. Mr Stack of Counsel, who appeared for Deloitte Services, stated in his closing submissions that this claim was not pressed. 6. There are other claims made against Interiors or Projects that do not affect Mr Fitzgerald. They include claims in deceit, claims for monies had and received, claims for breach of contract and restitutionary claims. It is not necessary further to describe those claims. The issues for decision 1. Mr Tzovaras, solicitor, who appeared for Mr Fitzgerald, said in his closing submissions that the issues for decision were (and I paraphrase): 1. was there some payment practice between Deloitte Services and Projects including the elements referred to at [2] above; if there was, what were its terms? 2. Did Projects over-invoice Deloitte Services? 3. Did Projects fail to pay all claims by building contractors? 4. Did Projects overcharge Deloitte Services for fees? 5. If the previous questions are answered in favour of Deloitte Services, did Projects engage in misleading or deceptive conduct, or unconscionable conduct, in breach of ss 18, 20 or 21 of the ACL? 6. If the previous question is answered in favour of Deloitte Services, was Mr Fitzgerald involved in those contraventions? 7. Did Projects hold monies paid to it by Deloitte Services on trust for the purposes only of paying contractors or repaying Deloitte Services? 8. If the previous question is answered in favour of Deloitte Services, did Projects breach the terms of that trust? 9. If the previous question is answered in favour of Deloitte Services, did Mr Fitzgerald induce or procure those breaches of trust, or was he knowingly involved in them, so as to be liable to Deloitte Services for the consequences of the breach? 10. Was Projects insolvent at any time between July 2012 and May 2013? 11. In the circumstances briefly described, did Projects incur a debt in respect of the over-invoiced amounts, the amounts not paid to contractors, or the overcharged service fee? 12. Is Mr Fitzgerald liable in respect of any such debts? 1. Although Mr Stack framed his submissions differently, he accepted that the essential issues to be decided were those that I have set out. Accordingly, in these reasons, I shall resolve those issues, and then return to the claims that Deloitte Services makes, to the extent that those claims are pressed. 2. I note that I was presented with five lever arch folders of authorities. In the result, the outcome of this case (like so many others) depends entirely on its own facts. The relevant principles are well-known. I see no reason to lengthen these reasons by citing authority for the basic propositions that, in my view, dictate the legal consequences of the facts as I find them. The witnesses; credibility 1. Deloitte Services called the following witnesses: 1. Mr Wardrop, who at the relevant time was a partner in Deloitte Touche Tohmatsu (DTT), and who is presently a consultant to DTT. From 2000 to 2013, Mr Wardrop managed the business operations of Deloitte Services; 2. Ms Fish, who at the relevant time worked for CB Richard Ellis, managing the DTT account. Ms Fish was not required for cross-examination; 3. Mr Marsh, the managing director of QB Interiors Pty Limited and QB Interiors (NSW) Pty Limited (together, QBI). QBI was the building contractor for five of the six relevant projects; 4. Mr Woodley, a partner of DTT, who was not involved in the relevant projects but who analysed certain financial records in a way that, ultimately, was not contentious. Mr Woodley was not required for cross-examination; 5. Mr Rogut; and 6. Mr Cordoba. 1. The affidavits sworn by Messrs Rogut and Cordoba were prepared at a time when they were still active defendants. It follows that, at the time those affidavits were sworn, neither man had any interest in favouring the case propounded by Deloitte Services. 2. Mr Fitzgerald relied on his own affidavit. Mr George Fitzgerald had sworn an affidavit, but it was not read. 3. In my view, those of the witnesses called by Deloitte Services who were cross-examined (Mr Wardrop, Mr Marsh, Mr Rogut and Mr Cordoba) sought to give honest, truthful and complete evidence. I accept each of them as a witness whose evidence may be relied upon. Although some attack was made on Mr Wardrop's credibility, it failed. The same may be said as to Mr Rogut. There was really no challenge to the evidence of Mr Marsh or Mr Cordoba, nor to their credibility. 4. Of course, since Ms Fish and Mr Woodley were not cross-examined, I accept their evidence, so far as it goes. 5. I formed an adverse view of Mr Fitzgerald's credibility. There were numerous occasions during his cross-examination where his evidence was inconsistent with what he had said in his affidavit, and other occasions where it was inconsistent with contemporaneous documents. Mr Fitzgerald was aggressive, argumentative and non-responsive throughout his cross-examination. He sought at every opportunity to foist self-serving answers on Mr Stack in the course of cross-examination. 6. Mr Fitzgerald's evidence in cross-examination was replete with material that had not been mentioned in his affidavit (nor had it been put, as it should have been, to the relevant witnesses for Deloitte Services). I formed the very strong impression that Mr Fitzgerald preferred advocacy to accuracy, and that expediency, rather than truth, was the lodestar by which he steered his evidentiary course. 7. I have come to the conclusions that: 1. in general, I am not prepared to accept Mr Fitzgerald's evidence unless it is consistent with the probabilities, viewed objectively; or consistent with contemporaneous documents; or corroborated by other, acceptable evidence; or against interest; and 2. to the extent that there is a conflict between Mr Fitzgerald's evidence and that of the witnesses called by Deloitte Services, I prefer their evidence to his. Factual background and relevant contractual terms 1. Deloitte Services provided services to DTT that included securing leases of properties from which DTT entities could carry on their business, and procuring the fitout of those premises to meet DTT's requirements. DTT is a group of companies and individuals that carries on business from 14 locations in Australia. It provides audit, tax, consulting, financial advisory, risk management and related services. 2. In October 2002, after a tender process, Deloitte Services retained the architectural practice controlled by Mr Fitzgerald. This practice, which comprised a number of entities, is what I have called the HBO+EMTB Group. Under that retainer, Group companies were to provide design and project management services for office premises to be occupied by DTT. 3. In practical terms, one company within the HBO+EMTB Group would provide design services to Deloitte Services, and another company would provide project management services. 4. In 2002, Deloitte contracted with Interiors for the provision of project management services. As I have said, in the later contracts that are the subject of this claim, the project management contract was with Interiors on one occasion and, on the other five, with Projects. In broad outline, the contractual duties of Interiors or Projects (as the case may be) up to the making of a contract between Deloitte and a contractor comprised: 1. the preparation and issue of tender documents (presumably, based on designs prepared by another HBO+EMTB Group entity); 2. analysing the tenders received and making a recommendation to Deloitte Services; and 3. once Deloitte Services had selected a contractor to carry out the works, issuing a letter of acceptance to that contractor. 1. The tender documents stipulated, in the usual way, that Deloitte Services was the principal and that the contract between Deloitte Services and the successful tenderer was to be on specified terms (a modified version of the AS 4000 form of contract then current). 2. The tenders and resulting contracts were all for lump sums, subject to variation, and payable by progress claims at specified intervals. 3. The letter of acceptance that Interiors or Projects issued to the successful contractor confirmed that the contractor's tender had been accepted, so as to bring into existence a contract between that contractor and Deloitte Services on the terms of the tender. 4. Once work started, the contractual services provided by Interiors or Projects comprised: 1. receipt of (usually monthly) progress claims from the contractor; and 2. analysis and certification of those progress claims. 1. It is Deloitte's case that in about June 2003, Projects offered a payment service to Deloitte Services. According to Mr Wardrop, that service was offered by Mr Rogut in discussions that may have taken place in the course of several conversations. Mr Wardrop said that those discussions included words to the following effect (affidavit, para 39): Brian said: Deloitte needs to work out how they want to pay contractor claims. There are two ways which this can be done. Either HBO can approve how much is properly payable to contractors, and Deloitte can then pay all of those claims directly to each of the contractors. Or HBO can issue Deloitte an invoice to cover all contractor claims in relation to contracts on behalf of Deloitte. Deloitte can pay those monies into HBO's client monies trust account. HBO will then on pay those monies to each of the contractors. This account has been set up specifically for the purpose of on paying amounts to contractors. I said: What do your other clients do? Brian said: Both ways. I said: What are the benefits of paying the money to HBO into trust rather than paying contractor claims directly? Brian said: Some clients like to pay the money to HBO because it is simpler. HBO will manage all the contractor claims and will issue an invoice to you for all those claims together. HBO will take on the administrative task in managing all the contractor claims. Deloitte can pay those monies into trust. HBO will then manage the payment of those monies to each contractor. Businesses do it both ways, so it's a matter for Deloitte what they want to do. I said: That sounds good so let's go that way. 1. On 30 June 2003, Mr Rogut sent an email to Mr Wardrop which stated: Please find attached progress claim in the form of a Tax Invoice to cover contractor claims in relation to contracts let (sic) on behalf of Deloitte Services Pty Ltd. Payment can be made via EFT in accordance with the details identified on the invoice. Processing of these funds within the week would be appreciated in order to meet contractor payment requirements. Please contact me should you wish to discuss this further. Regards, Brian 1. The next day, Mr Rogut sent a further email to Mr Wardrop, which stated: … This certifies that under the terms of the Agreement, between the parties, the sum of this Certificate is payable by the Principal to the Project Manager, on account for work carried out under the Agreement. This certificate is not negotiable. This Payment Claim is made under the Building & Construction Industry Security of Payment Act 1999 EFT Details: Bank: Commonwealth Bank of Australia Branch: 48 Martin Place Sydney NSW 2000 Account Name: HBO EMTB Construction Pty Ltd (Client Monies Trust Account) BSB: XXXXXX Account No.: XXXXXXXX 1. At the time, Projects was known as HBO EMTB Construction Pty Ltd. It changed its name to HBO EMTB Projects Pty Ltd at some time thereafter. Nothing turns on the change of name. 2. Mr Rogut (whose affidavit was sworn almost a year after Mr Wardrop's) did not deny Mr Wardrop's account of the conversation set out at [31] above. Mr Rogut said that to his knowledge, Projects had always operated a "client monies trust account", of the kind referred to in the email of 1 July 2003. He said that he had had numerous conversations with Mr Fitzgerald over many years in which Mr Fitzgerald said words to the following effect: All claims [sic] for construction work are to go into the client monies trust account and is [sic] only to be spent on the contractor claims for the project. All money in the trust account is sacrosanct and is not to be touched. 1. As a result, Mr Rogut said, his understanding at all times was that the trust account was to be used only for the payment in and payment out of amounts owing to contractors and consultants. 2. Mr Fitzgerald said that until he read Mr Wardrop's affidavit, he had no knowledge of the conversation between Messrs Wardrop and Rogut set out at [31] above. He said that he did not agree to the payment practice set out in that paragraph. Mr Fitzgerald went further, saying that he had spoken to Mr Rogut, asking whether Mr Rogut had had that conversation with Mr Wardrop, and that Mr Rogut had denied having done so. 3. In my view, that last aspect of Mr Fitzgerald's evidence is false, and knowingly so. It was not put to Mr Rogut that he had had a conversation with Mr Fitzgerald in the terms alleged by Mr Fitzgerald. 4. Mr Fitzgerald denied having said words to the effect of those attributed to him by Mr Rogut. He said that the account in question "was not operated as a trust account in respect of works performed for and payments received from Deloitte in payment of [Projects'] invoices". I do not accept Mr Fitzgerald's denial, and I do accept Mr Rogut's evidence as to what was said. 5. It was Mr Fitzgerald's idea to give the account in question the name "client monies trust account". It is clear that he so described the account in an attempt to ensure that "if anything went wrong with our business" the money of clients would be protected. He gave the following evidence (T128.13-.42): Q. Do I take it from that evidence that it was you that decided to set up this account with the designation, "Client moneys trust account?" A. Yes. Q. You say, do you not, that that designation was created by you for internal purposes? A. Yes. Q. In respect of internal purposes, I take it that what you are intending to convey is that you wanted a description of this account which described to HBO personnel the nature of the account. A. I don't understand what you mean by - by HBO personnel. Q. You say that the designation-- A. Yes. Q. --for the account-- A. Yes. Q. --was for "internal purposes", do you not? A. Yes. Q. What I'm asking you is, is the reference to internal purposes a reference to allowing people within HBO, through the designation, to understand the nature of the account? A. Yes, I suppose that's true. Q. So you chose words that you thought best described the nature of this particular account, did you not? A. Yes, I guess at the time, I thought it was the right thing to do, yes. 1. Mr Fitzgerald also said (T131.19-.25, T142.24-.34): Q. Well, why was it that you chose the name "trust account"? A. Because if any - if anything went wrong with our business my - the advice at the time - don't forget this - this was going back - this - this was well before CBA, I think we have the same accounts with - with the ANZ 10 years before that. Naively, maybe, we thought that if anything happened that no one could touch that money without talking to us or to the clients as to who the money belonged to. … Q. Well, I'm asking you to focus on clients. Why did you think clients would be protected - and let me add this to the question - would be protected in circumstances where "anything went wrong with our business"? A. Because if there's any money in that account then we - there would be some protection for all of us, I think that was the general intention. Q. The position is this is it not: if there were any moneys left in that account those moneys would be returned to clients to the extent that those clients had paid those moneys in for a particular purpose and those moneys had not been used to fulfil that purpose, correct? A. Yes. 1. Those purposes could only be served if Projects were a trustee, having no beneficial interest in those monies (or at least, in so much of them as was paid for the purpose of enabling Projects to pay contractors). 2. Mr Fitzgerald was of the view that money in the trust account was held "on behalf of … clients". He added that Projects could have some interest, but only for fees due to it. In so far as the money was held "on behalf of … clients", the purpose was the payment of contractors (see, generally, T130-131; it is not necessary to set out the relevant passages). 3. In all the circumstances, and despite Mr Fitzgerald's attempts in cross-examination to evade the proposition that the account was a trust account as the law understands such things, it is thus inherently likely that he would have said to Mr Rogut words of the kind set out at [35] above. To the extent that Mr Fitzgerald asserts that Projects could have recourse to the trust account for satisfaction of fees due to it in its own right, that could only be correct in a broad sense (and leaving aside the apparent mingling of trust monies with the trustee's own money) if Projects had invoiced Deloitte Services for those fees and the amount of those fees had been paid into the trust account. This twist does not detract from the conclusion that I have just expressed. 4. I find that Mr Wardrop did have a discussion with Mr Rogut to the effect that set out at [31] above. I add that Mr Fitzgerald accepted that Mr Rogut was effectively the "director" of Project's business and project management services, and was competent to enter into contracts and engagements on Projects' behalf. 5. On 20 January 2011, Deloitte Services and Interiors made a Project Management Agreement for the first of the fitout projects that are the subject of these proceedings. In that contract, Interiors agreed to provide the "services" described in Item 1 of Schedule 2. Those services were described broadly as "Project Management". They comprised some 25 separate aspects of project management work, which included the following: 1.15 Call for quotations for the fitout works. 1.16 Assess contractor submissions and recommend appointment of specialist contractors and suppliers. 1.17 Arrange the issue of "Approved for Construction" documentation. 1.18 Administration of building fitout contracts. 1.19 Inspection of the site to maintain quality and program control. 1.20 Review shop drawings and other contractor submissions. 1.21 Assess progress claims and issue progress certificates. 1.22 Assess variations and obtain client approvals. 1.23 Assess extension of time claims and provide notices to contractors. 1.24 Lead and report on defects inspections. 1.25 Monitor rectification of defects. 1. For those services, Interiors was to be paid fees in accordance with Item 1 of Schedule 6. That item provided for payment of a percentage fee of 7% of the "defined cost of the project". 2. The tender documents were in fact prepared by Projects. They stated that the successful tenderer would be required to enter into a fixed lump sum contract with Deloitte Services. They stated, further, that the conditions of contract would be in accordance with AS 4000, and that the payment terms would be as follows: 14. Payment Terms The Contractor is to submit a Payment claim on the 20th of each month. A Payment Schedule may be issued within ten (10) business days of receipt of the payment claim. Upon receipt of this Payment Schedule the Contractor will issue a Tax Invoice for the amount stated on the Payment Schedule, which will be due and payable within 45 calendar days of receipt of an original compliant Tax Invoice. If no Payment Schedule is issued, then the Contractor may issue a Tax Invoice for the amount stated in the Payment Claim. 1. Projects recommended QBI as the contractor whose tender was to be accepted, and Deloitte Services accepted that recommendation. Projects wrote to QBI confirming acceptance of its offer. The letter stated that the acceptance was "on behalf of Deloitte Services … for the works as set out in the tender documents and in accordance with the particulars as set out in this letter of acceptance…". It stated, further, that the conditions of contract would be in accordance with AS 4000. 2. The form of contract that was proffered with the letter of acceptance nominated Deloitte Services as the principal, QBI as the contractor, and Projects as the superintendent. It specified that payments to the contractor were to be made at Level 3, 75 Elizabeth Street Sydney, which was Projects' office address at the time. 3. Clause 37 dealt with payment. I set out subclauses .1, .2: 37.1 Progress claims The Contractor shall claim payment progressively in accordance with Item 28. An early progress claim shall be deemed to have been made on the date for making that claim. Each progress claim shall be given in writing to the Superintendent and shall include details of the value of WUC done and may include details of other moneys then due to the Contractor pursuant to provisions of the Contract. 37.2 Certificates The Superintendent shall, within 14 days after receiving such a progress claim, issue to the Principal and the Contractor: a) a progress certificate evidencing the Superintendent's opinion of the moneys due from the Principal to the Contractor pursuant to the progress claim and reasons for any difference ('progress certificate'); and b) a certificate evidencing the Superintendent's assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract. If the Contractor does not make a progress claim in accordance with Item 28, the Superintendent may issue the progress certificate with details of the calculations and shall issue the certificate in paragraph (b). If the Superintendent does not issue the progress certificate within 14 days of receiving a progress claim in accordance with subclause 37.1, that progress claim shall be deemed to be the relevant progress certificate. The Principal shall within 7 days after receiving both such certificates, or within 21 days after the Superintendent receives the progress claim, pay to the Contractor the balance of the progress certificate after deducting retention moneys and setting off such of the certificate in paragraph (b) as the Principal elects to set off. If that setting off produces a negative balance, the Contractor shall pay that balance to the Principal within 7 days of receiving written notice thereof. Neither a progress certificate nor a payment of moneys shall be evidence that the subject WUC has been carried out satisfactorily. Payment other than final payment shall be payment on account only. 1. There is no need to go to the definitions of the italicised words, save to note that "WUC" means "work under the contract". 2. QBI carried out its side of the contract with Deloitte Services. It issued five progress claims, totalling $7,969,699. Projects did not certify and pass on to Deloitte Services each of those progress claims. Instead, it sent three invoices to Deloitte Services, for amounts totalling $8,597,527. Nor did Projects pay all the amounts claimed by QBI in its progress claims. The total paid by Projects to QBI, in some five instalments, was $6,088,457. 3. I do not propose to go to the detail of the remaining five contracts. In three cases, Deloitte Services contracted in writing with Projects for the provision of project management services. In two cases, the contract was oral. In each case, the services provided were as I have described, and (with appropriate allowances) the contract was performed in the manner that I have described. In each case, overall, Projects over-invoiced Deloitte Services, by amounts varying from $17,017 to $474,487. In one case, the contractor was underpaid (by about $400,000). In the remaining four cases, the contractor appears to have been paid the amount claimed by it. 4. In all cases, Projects' invoices to Deloitte Services described the work the subject of the claim and the amount owing, and required payment into Projects' "client monies trust account" (in some cases so described, and in other cases designated only by the BSB and account details). In all cases, Deloitte Services paid the invoiced amount into that account. 5. It is convenient to note at this point that, contrary to evidence given by Mr Fitzgerald in cross-examination, Deloitte Services paid promptly, usually within 10 to 21 days of receipt of the invoice. Mr Fitzgerald sought to suggest that the over-invoicing practice was justified in part because Deloitte Services was a slow payer, so that by the time its payment was received, there would be more owing to the contractor than had been claimed in the contractor's previous progress claim. In my view, that evidence was false. I cannot say if it was knowingly false, but at the very least it was recklessly so. 6. With that summary of the facts, I turn to the issues as I have identified them at [12] above. The payment practice (issue 1) 1. Essentially for the reasons I have given already, I conclude that the payment practice on which Deloitte Services relies was established in about June 2003, and was understood both by Deloitte Services (through Mr Wardrop) and by Projects (through Mr Rogut) to apply to all the project management contracts thereafter made (whether with Interiors or with Projects). 2. I give no credence whatsoever to Mr Fitzgerald's denials of the existence of the payment practice. First of all, his evidence on that topic is infected by the knowingly false evidence he gave as to Mr Rogut's denial (to him, in conversation) of the latter's conversation with Mr Wardrop. Secondly, the existence of the practice is confirmed abundantly by the vast mass of documentary material (comprising some 20 lever arch folders) relating to the various projects, the subject of this claim. Thirdly, Mr Rogut's evidence confirms the existence and implementation of the practice. Fourthly, Mr Fitzgerald's evidence in cross-examination recognised that the practice had existed (see at [61], [62] below]. 3. It will be noted that, under the contracts between Deloitte Services and the various contractors, the contractors were required to send their progress claims to Projects for certification. Once certified, the claims were to be provided to Deloitte Services, which was to pay the amount certified to the contractor. That practice was not followed in any case. Why would the parties have engaged in the practice they did, requiring Deloitte Services to pay the certified amount into the trust account, if there were not some such practice recognised and (at least purportedly) followed by each of them? 4. Mr Fitzgerald's evidence in cross-examination was somewhat different to his affidavit evidence. In cross-examination, he was taken to para 39 of Mr Wardrop's affidavit (see at [31] above). Mr Fitzgerald gave the following evidence in relation to that paragraph (T182.4-.27): Q. That is a process with which you were well aware was it not? A. Yes. Q. You were well aware of that back in 2003 let me suggest to you. A. I was well aware of what? Q. Of that offer being conveyed to clients. A. No, well, yes, sorry, being conveyed to clients, full stop, yes, I was. Q. And being conveyed to Deloitte. A. I was - I don't know whether I - I was - I was aware of it then, but I was aware at some stage that there was a difficult with Deloitte's paying directly. Q. You became aware that what - sorry, I withdraw that. In 2003 you were well aware that what was offered to Deloitte and other clients on Projects was a procedure where the client could either pay the contractor directly or they could pay the monies into the client monies trust account and Projects would use those monies to pay the contractor, correct? A. That was one of the vehicles that we used, yes. Q. You were aware of that back in 2003, weren't you? A. Aware of it as a practice within the company? Q. As a practice. A. Yes. 1. Mr Fitzgerald was questioned about the payment practice asserted by Deloitte Services. He gave the following evidence T172.12-.40: Q. Now since 2003 Projects to your knowledge offered clients a service whereby it agreed to deal with contractors on behalf of the clients, did it not? A. Yes it did. Q. And that service involved the following matters - and I'll put all the five matters, and then you can tell me A. Sure. Q. -you agree. And that what I'm about to put to you is described in various places as "the payment practice". A. Sure. Q. And we'll proceed on that basis if you would. The contractor would send a progress claim or invoice to Projects. Projects would determine the sum that was properly payable to the contractor under the progress claim. Projects would then issue an invoice to Deloitte for the sum which Projects had determined was properly payable to the contractor. Deloitte would then pay the sum claimed in Project's invoice into the client moneys trust account and the sum so paid by Deloitte was to be used and only to be used to pay the relevant contractor. A. I broadly agree with that, yes. Q. And as you understood it that was one of the services that was offered to clients of Projects since 2003, was it not? A. It that when Projects came into - you mean - you - your talking about Construction and Projects or - or - Q. Well, Construction and Projects. A. Yeah, yeah, yeah, sorry. I guess so, yes. 1. I should note that Mr Fitzgerald tried immediately to withdraw that concession (T183.-.8). That does nothing more than support my view that, with the limited exceptions I have described, Mr Fitzgerald's evidence is unreliable and should not be accepted. 2. Mr Fitzgerald said, more than once, that monies so paid by Deloitte Services to Projects could only be used for the purpose of paying the relevant contractor (or consultant, where relevant) (see, by way of example only, T173-175). I do not propose to set out that evidence. I do however note that it was consistent with Mr Fitzgerald's evidence as to why the account was set up with the name that it bore (see at [41] above). 3. I find that Projects did offer to Deloitte Services a payment service under which, instead of following the process of certification and payment set out in the contracts made between Deloitte Services and contractors: 1. Projects would examine progress claims made by contractors and satisfy itself as to the amount properly payable; 2. Projects would invoice Deloitte Services for the amount that it considered to be payable to the contractor; 3. Deloitte Services would pay the invoiced amount into the trust account (whether or not it was so called at the relevant time); and 4. Projects would then pay the amount certified to the contractor. 1. I find, further, that from June 2003 on, Deloitte Services and Projects conducted their mutual business on the basis of that practice, notwithstanding the terms of their contracts and notwithstanding the terms of Deloitte Services' contracts with QBI and other contractors. For reasons I give later, I am satisfied that the contractors were aware of that practice and, at least while they were being paid, prepared to accept it. Over-invoicing (issue 2) 1. Mr Rogut admitted in his affidavit that from time to time, he issued an invoice to Deloitte Services for more than the amount of the progress claim received from the relevant contractor. He said that he knew that this should not have been done, and that the invoices were incorrect and inaccurate, but that he did so on express instructions from Mr Fitzgerald. Mr Rogut said, further, that when he objected to those instructions, Mr Fitzgerald made threats, and intimidated him into complying. 2. In his affidavit, Mr Fitzgerald denied giving any such instructions to Mr Rogut. In the course of cross-examination, Mr Fitzgerald went further, suggesting that in any event, Deloitte Services had agreed that Projects might over-invoice in the way that was done. Thus, Mr Fitzgerald said, it was appropriate that from time to time Projects would do so. 3. None of that evidence appears in Mr Fitzgerald's affidavit. In my view, it was false. It was in this context that Mr Fitzgerald gave the evidence to which I have referred at [56] above, which if not knowingly false was recklessly so, to the effect that Deloitte Services was a slow payer (T160.39-.41): Q. Who do you say is notoriously late? A. I said Brian was late in sending invoices in the first place and Deloittes were late in paying them. 1. In fairness, the first part of that answer seems to be correct, to the extent that Mr Rogut does appear to have been late in passing on some of the contractors' progress claims. Indeed, in most cases, Mr Rogut issued fewer invoices to Deloitte Services than he had received project claims from the contractor (in one case, the reverse happened: Projects issued more invoices to Deloitte Services than it had received progress claims from the contractor). Thus, it is possible (although I have not undertaken an analysis on an invoice by invoice basis) that some of the invoices issued by Projects to Deloitte Services might have claimed the total of more than one progress claim given by the contractor to Projects. 2. Nonetheless, even on Mr Fitzgerald's view of what was appropriate, the total amount invoiced by Projects to Deloitte Services, in respect of each contract and overall, should have equalled the total amount paid or payable to the contractors. In fact, as I have indicated, the total over-invoiced was of the order of $1.3 million. Mr Fitzgerald's attempts to explain away that inconvenient truth were less than convincing. 3. I do not accept that Mr Rogut over-invoiced of his own volition. On the contrary, I accept that he did so over his protests, upon the express instructions of Mr Fitzgerald. Mr Rogut had no reason whatsoever to invoice Deloitte Services (or any other client) for more than the amount actually payable. Mr Fitzgerald had every reason to try and get more money into the HBO+EMTB Group. As I shall show when discussing the case based on insolvent trading, the HBO+EMTB Group (at least in Australia) over the period from July 2012 to May 2013 was chronically short of money and chronically unable to pay its debts as they fell due. Further, and as Mr Fitzgerald must have known, creditors (including not only contractors but also the Australian Taxation Office (ATO)) were pressing for payment. 4. It might seem strange that I classify contractors as "creditors of (in the particular case) Projects". I should explain that usage. It is clear from the evidence of Mr Marsh that the arrangements overall between QBI, Projects and Deloitte Services included that Deloitte Services would pay the amount of QBI's claims to Projects, and Projects would onpay those amounts to QBI. Thus, although under the AS 4000 form of contract (and having regard to the terms of the tender documents) the direct contractual relationship was between Deloitte Services and QBI, and it was Deloitte Services that was liable to pay QBI, the reality was that a different payment model was adopted. In that (contractually inaccurate) sense, contractors who were party to arrangements of the kind that I have described – that is to say, who accepted them as the way in which they would get paid – regarded themselves as creditors of Projects. I should add to this that in May 2013, shortly before Projects and Interiors went into voluntary administration, Deloitte paid QBI $1,881,448 in satisfaction of all amounts then owing. Thereafter, QBI completed the relevant works, and was paid direct by Deloitte Services. 5. I do not accept that there was an arrangement or understanding in place between Projects and Deloitte Services under which the former was entitled to invoice the later, in respect of any particular construction work, for more than the amount of the certified progress claims received from the contractor. On the contrary, I find that there was no such arrangement or understanding. In coming to that conclusion, I take into account not only that it is directly inconsistent with the evidence of Mr Wardrop and Mr Rogut, but also that they were not cross-examined as to its existence. I take into account, also, that Mr Fitzgerald made no mention of it in his affidavit. 6. Once that conclusion is reached (and in my view, no other is open on the evidence as a whole), it is clear that, over all the contracts in question, Projects over-invoiced Deloitte Services as claimed. The total of the amounts invoiced to Deloitte Services for all six relevant fitout projects (and paid by Deloitte Services to Projects) was $16,903,595. The total amounts of the progress claims given by Contractors to Projects was $15,548,492. The total amount over-invoiced was, therefore, $1,355,103. Under-payments to contractors (issue 3) 1. There is no dispute as to the figures. The total amount paid to contractors (against progress claims totalling $15,548,492) was $13,267,227. The total short payment was, therefore, $2,281,265. 2. The overall discrepancy between the total of the amounts invoiced to and paid by Deloitte Services, and the total amounts paid by Projects to the various contractors, is $3,636,368. 3. Even by the sometimes relaxed standards of the construction industry, those facts and figures indicate gross dishonesty on the part of Mr Fitzgerald, given my conclusions that the over-invoicing was carried out at his direction, and that his excuses for it are false. 4. Before I leave this topic, I should note that on 1 May 2013, after a meeting between Messrs Wardrop and Fitzgerald, Mr Fitzgerald sent an email to Mr Wardrop which admitted, with one exception, almost every cent now said by Deloitte Services to be owing. In two cases, the amount admitted is exact. In three cases, the variance is minimal. In one case, there is a variance of about $21,000 (the admitted overpayment is $82,818, whereas the proven amount actually overpaid was $103,732). Overcharging service fees (issue 4) 1. It seems that Projects claimed its service fees by reference to the amount actually invoiced to Deloitte Services, not by reference to the value of the building works as determined by the contractors' progress claims. It is not contentious that, in those circumstances, the net amount over-claimed was of the order of $80,000. There is no need to be more precise, since the claim is not pressed either against Projects or against Mr Fitzgerald. The ACL claims (issue 5) 1. Deloitte Services says that when one takes into account the nature of the project management services provided by Projects, and the existence and terms of the payment practice, and has regard to the terms of each invoice issued by Projects to Deloitte Services (including the requirement for payment into an account that, either expressly or by reference to its account details, was the so-called "client monies trust account"), Projects made the following representations: 1. the amount claimed by the contractor did not exceed the sum invoiced for that contractor's work to Deloitte Services; 2. the contractor was entitled to payment of the sum stated in Projects' invoice to Deloitte Services; 3. Deloitte Services was liable to pay that sum; 4. upon payment of that sum into the trust account, Projects would pay it to the contractor; and 5. if (or to the extent that) the sum paid by Deloitte Services to Projects was not paid by Projects to the contractor, it would be repaid to Deloitte Services. 1. I should note that none of the invoices in question contained any profit or fee component for Projects. Each purported to state only the amount due to the relevant contractor for the particular project, together with GST. Project management fees due to Projects were invoiced and paid separately. 2. In my view, Projects made each of the representations alleged. Its contractual obligation (leaving aside the payment practice) was to analyse all progress claims, determine the amount properly payable, and certify that amount to Deloitte Services for payment by Deloitte Services to the contractor. That contractual scheme was modified by the payment practice, but only as to the way in which Projects would inform (for want of a better word) Deloitte Services of the amount payable to the contractor, and the way in which that would be paid. 3. Nothing in the payment practice suggests that there was to be any departure from, or variation to, Projects' obligation to analyse each progress claim, determine the amount properly payable to the contractor, and inform Deloitte Services of the amount so payable. Nothing in the payment practice suggests that Deloitte Services was to pay any other amount into the trust account, or that any amount so paid in was to be paid other than to the contractor. 4. In my view, each of the first three of the five alleged representations follows necessarily from the form of the invoices themselves, having regard to Projects' contractual obligations as project manager. The fourth and fifth representations follow from the first three, and from the existence and terms of the payment practice, including specifically that Projects' invoices to Deloitte Services required payment into the trust account. 5. Section 18 of the ACL provides: 18 Misleading or deceptive conduct (1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in Part 3-1 (which is about unfair practices) limits by implication subsection (1). 1. In my view, it is plain that each of the first three representations made by Projects was false, and misleading or deceptive, because: 1. the total sum claimed was less than the sum invoiced by Projects to Deloitte Services; 2. the contractor had not claimed, and was not entitled to be paid that sum; and 3. Deloitte Services was not liable to pay that sum. 1. As to the fourth and fifth representations (which were as to future matters), neither Projects nor Mr Fitzgerald has shown that there was any reasonable basis for believing them, for thinking them to have been true, or to represent what was likely or expected or intended to happen, at the time they were made. In short, the reversed "onus" imposed by s 4(2) of the ACL has not been discharged, and those representations must be taken to have been misleading or deceptive at the time they were made. 2. The evidence shows quite clearly that over this period (June 2012 to May 2013), substantial sums – totalling $7.1 million – were transferred out of the trust account into an account operated by a company known as HBO+EMTB Services, at the direction of Mr Fitzgerald. That company appears to have been the central bank for the HBO+EMTB Group's Australian operations. 3. Further, in circumstances where to the knowledge of Projects (both through Mr Rogut and through Mr Fitzgerald) the sums invoiced by Projects to Deloitte Services exceeded the amounts claimed by contractors, it must have been obvious that the over-invoiced amounts at least would be diverted to some purpose other than payment to contractors or refund to Deloitte Services. What was the point of deliberately (as I find it was) over-invoicing, if the over-invoiced amounts at least were not to be used to fund the general operations of the HBO+EMTB Group? 4. Finally, it is clear that Deloitte Services, through Mr Wardrop, relied on those representations when making the payments claimed by Projects' invoices. 5. In those circumstances, it is not necessary to consider whether, in all the circumstances, Projects contravened ss 20 or 21 of the ACL. I will say only that whilst I have some difficulty in seeing that general law unconscionability (s 20) is relevant, the extended class of unconscionability for which s 21 applies might be relevant in the present case. But it is unnecessary to express a concluded view. 6. Finally, I note that if (for some reason that is not presently apparent) it is not the ACL that is relevant but some cognate legislation (a matter on which no one addressed), what I have said would apply equally to misleading or deceptive conduct under that cognate legislation. Knowing involvement (issue 6) 1. Section 2 of the ACL defines the word "involved": a person is involved, in a contravention of a provision of this Schedule or in conduct that constitutes such a contravention, if the person: (a) has aided, abetted, counselled or procured the contravention; or (b) has induced, whether by threats or promises or otherwise, the contravention; or (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention. 1. In my view, there can be no doubt that, in the sense of the definition, Mr Fitzgerald was "involved" in Projects' contraventions of s 18 of the ACL. He knew of the facts that amounted to contraventions. And with that knowledge, he participated in – indeed, caused or directed or procured to be done – the acts that amounted to contravention. 2. As to knowledge of the facts: Mr Fitzgerald well understood what were Projects' obligations as a project manager. He knew of the payment practice. He knew (because he directed it to be done) that Projects was invoicing Deloitte Services for more than the amounts claimed by contractors. 3. Further, Mr Fitzgerald knew of – because he directed – the payments out of the trust account for purposes other than those permitted. As I have said, the very purpose of directing Mr Rogut to over-invoice Deloitte Services must have been to ensure that there were surplus funds in the trust account that could be applied to discharge other obligations either of projects or of other companies in the HBO+EMTB Group. 4. Mr Fitzgerald appeared to think – if his evidence in cross-examination is to be believed – that it was acceptable to "borrow" from the trust account. However, he accepted that all "borrowings" had to be repaid (T137.8-.38). 5. In fairness to Mr Fitzgerald, he did suggest that where Projects had invoiced Deloitte Services for fees due to Projects in its own right, and those fees were paid into the trust account, Projects was entitled to pay them out for its own benefit (T137.40-.45; it is not necessary to set out the passage). Whether or not it was technically acceptable for a trustee to act in that way may be left to one side. The broad justice of the position is undeniable. However, the defalcations (for that is what they are) from the trust account have nothing to do with fees owed to Projects, and everything to do with monies wrongfully paid out of the trust account to fund the ongoing operations, at least within Australia, of the HBO+EMTB Group. 6. In looking at Mr Fitzgerald's role as the person who procured the contraventions, it is necessary to note that he was the only director (styled as "managing director") of Projects. He established the trust account, and chose that designation for it. He intended that Projects would use the account to hold monies on behalf of clients, and apply them for the specified purpose. He was always one of two necessary signatories for the account, and was always the person who decided on what amounts should be paid out of it, when payments should be made, and for what purposes. 7. Mr Fitzgerald understood, specifically, that "fundamentally", money paid into the trust account by a client for a particular purpose belonged to that client until the money had been used for that purpose (T140.21-.24; it is not necessary to set out the passage). That understanding was qualified, of course, by his assertion that Projects could "borrow" from that account, as long as it repaid the borrowing. 8. Mr Fitzgerald gave the following evidence (T150.12-.50): Q. Now you didn't think that you were free to use moneys in the client moneys trust account for those kinds of purposes, did you? A. Yes. Q. Some of the moneys held in the trust account, I had understood your evidence to be, were moneys that you could only borrow from, is that right? A. Yes. Q. And if you borrowed those moneys they had to be repaid - A. Yes, fundamentally, yep. Q. - to the account? A. Well, to - to - yes, or to - or to the - I suppose so, yes. Q. In order to fulfil the purpose for which - A. Yes. Q. - the moneys had been deposited into the account, correct? A. Well, that's - that's where it gets a bit tricky. So what do you mean, the - if a purpose generally is payment of contractors, yes. Q. In respect of the payment of contractors, moneys that had been paid in for that purpose could only be used for that purpose, correct? A. Yes. Well, I don't really understand the question sorry. Q. You couldn't use those moneys to satisfy, for example, wages that were due within the HBO group could you? A. We could if we paid the money back I guess. Q. So the only way in which you could make use of the moneys as you understood it was to borrow those moneys from the trust account, is that right? A. Sorry, just repeat the question. Q. The only way that you could make use of moneys within the trust account, which were paid in for construction purposes, was that if you borrowed those moneys, is that right? A. Well - well, it depends whether the moneys in the construction account were for design and construct, were for fees, or were for direct payments to - in - in some shape or form to - to a contractor. 1. Again, the broad justice (if not the technical accuracy) of the proposition relating to monies owing to Projects or indeed other HBO+EMTB Group companies in their own right may be accepted. Leaving those matters aside, it is apparent from this passage that Mr Fitzgerald knew that monies paid into the trust account by clients against invoices for progress payments due to contractors should only be applied for that purpose. 2. In causing those monies to be paid out for other purposes, Mr Fitzgerald directed or procured the acts which falsified the relevant representation. 3. Further, Mr Cordoba's evidence makes it clear that Mr Fitzgerald: 1. was informed immediately when Deloitte Services deposited money into the client monies trust account; and 2. authorised the payment of all contractors' invoices. 1. Although Mr Fitzgerald denied the first of those matters, I prefer and accept Mr Cordoba's evidence. As to the second proposition, I think that Mr Fitzgerald essentially accepted it (see, generally, T188-190); but if I am wrong in this, I would, still, accept Mr Cordoba's evidence on the point. 2. Mr Fitzgerald never told Deloitte Services that Projects reserved to itself the right to use, for purposes other than those for which they had been paid in, monies deposited by Deloitte into the trust account. Nor did he cause or direct anyone else to do so. In my view, Mr Fitzgerald must have been aware that Deloitte Services paid monies into the trust account on the faith of the representations to which I have referred, and on the assumption that those representations would be honoured. Existence, terms and breach of a trust (issues 7, 8) 1. Were it necessary to deal with these issues, I would conclude that Projects was a trustee of the monies from time to time paid by Deloitte Services into the trust account. There are two alternative reasons for that conclusion: 1. the trust was an express trust, based on what Mr Rogut told Mr Wardrop; what was said in the emails and invoices to which I have referred earlier; and on the very designation of the trust account itself (coupled with the intention of Projects, formulated by Mr Fitzgerald, in setting up the account and so designating it). 2. Alternatively, the trust is a "purpose" trust: the monies were paid in for the specific purpose of paying contractors' progress claims (as purportedly "certified" by Projects' invoices in response to which the payments were made) and thus were held either for application to that purpose or on a resulting trust in favour of Deloitte Services. 1. It follows that Projects is liable to account to Deloitte Services for the total of the overpayments and the misapplied payments (that is to say, both the payments beyond what was due to contractors and payments that were not in fact applied against what was due to contractors). As I have said earlier in these reasons, the total is $3,636,368. 2. Although it probably has no practical significance, I should deal briefly with the position of Interiors. It was the contractually engaged project manager for one project only – the first of the six relevant ones in 2012 – 2013. It appears to have delegated or subcontracted its responsibilities to Projects. However, the fact remains that it was liable to perform the duties, and if its delegate or subcontractor misbehaved, that is no excuse. 3. On the uncontested figures, the over-payments on that project amounted in total to $2,509,070. Mr Stack made no submissions as to why it was that Interiors, rather than Projects, should be held liable to account as a trustee (or on the basis of knowing involvement in the breach of trust) for this sum. To the extent that Deloitte Services seeks an order against Interiors, that could be accommodated through one of the alternative ways in which it puts that claim (see at [11]) above. Accessory liability (issue 9) 1. It is clear that Mr Fitzgerald procured Projects' breaches of trust. It was he who authorised and directed that money be paid out of the trust account for purposes other than those for which they had been paid in. Specifically, over the period from August 2012 to May 2013, Mr Fitzgerald directed that about $7.1 million be paid out of the trust account into the "central bank" account maintained by HBO+EMTB Services. 2. In doing those things Mr Fitzgerald knew, essentially for the reasons I have given in discussing his involvement in the breaches of s 18 of the ACL, of all the facts that made those payments out, or misapplications, breaches of trust. Even if Mr Fitzgerald honestly believed that trust money could be "borrowed" as long as it was repaid (and I do not find that he held any such belief), that could not excuse him. 3. In my view, therefore, Mr Fitzgerald is liable to account to Deloitte Services for the sum of $3,636,368. Insolvent trading (issue 10) 1. In my view, it is clear that Projects was insolvent at all material times between July 2012 and May 2013. The evidence is compelling. 2. First, Projects was unable to pay its debts by their due dates, or within some reasonable time thereafter. It owed $1.45 million to the ATO, and could not pay that amount. It had to establish a payment plan with the ATO. 3. Second, accepting that in law the claims of QBI and other contractors were not debts owed to them by Projects pursuant to some contract, they were, nonetheless, obligations that Projects was legally bound to pay. It was legally bound to pay them because it had been put in funds to do so by Deloitte Services, and because, on the terms of the payment practice, it was bound (including as a trustee) to apply the funds for that purpose. It was unable to do so. As I have said, the evidence reveals that, overall, Projects failed to pay contractors some $2,281,265, although it had been put in funds by Deloitte Services to enable it to make those payments. 4. Next, it is clear from the evidence that the very purpose of the over-invoicing scheme was to garner cash needed by the HBO+EMTB Group to meet its obligations. It is equally obvious that Mr Fitzgerald regarded the trust account as some sort of cash cow, from which the insistent mouths of creditors of group companies could be satisfied. 5. Mr Fitzgerald said that he caused large sums of money to be paid into the HBO+EMTB Group's Australian operations: by implication, to keep them afloat. Some of those monies came from HBO+EMTB Group's operations in Asia. Others, according to Mr Fitzgerald, came from a company known as Polmaze Pty Ltd: a company that he controlled, which was the ultimate owner of the shares in the HBO+EMTB Group companies. 6. I accept that a company may be entitled to report on a going concern basis if it has a guarantee of support, and if that guarantee is worthwhile. There was no evidence of any guarantee. At the most, the evidence was of informal and ad hoc support. I do not think that this "Peter and Paul" business model is one that the law recognises as demonstrating solvency. 7. Between July 2012 and May 2013, Projects' current debt grew from $36,387 to $4,865,022. That is a clear indication of insolvency, particularly when considered against Projects' temporally corresponding inability to pay contractors despite having been put in funds to do so. 8. That growth in current debt could not have come as a surprise to Mr Fitzgerald. On 16 July 2012, Mr Mistry (an accountant then in the employ of the HBO+EMTB Group) sent cashflow forecasts to Mr Fitzgerald. For Australia, that forecast predicted a cash shortfall of $1,805,000 as at 20 July, increasing to $2,530,000 by 27 July and to $3,539,000 by 3 August. 9. In December 2012, the Group sought to deal with its shortage of cash by applying for a "short term advance" of $1.5 million from its bank, the Commonwealth Bank of Australia (CBA). It offered as "collateral", what it said were "invoices due from Deloitte by the end of this week, $4.2M". CBA was unwilling to provide that advance, or even a much lesser advance of $500,000, without basic information including more financial information as to the group, and Mr Fitzgerald's "balance sheet" and tax returns. In the event, no overdraft was granted. When Deloitte paid the invoices (which of course, were invoices sent by Projects for contractors' progress claims), the proceeds were used to provide much-needed working capital for the HBO+EMTB Group. 10. The evidence is replete with contractors' demands for payment, and promises made (including by Mr Fitzgerald) for payment, which promises were not met. 11. As I have said, Projects was insolvent for the whole of the period from July 2012 to May 2013. I note, although I do not regard it as having any particular probative significance, that this was the provisional opinion of Projects' liquidators. The material to which I have referred confirms that their provisional opinion was correct. 12. Further, the material to which I have referred makes it plain that Mr Fitzgerald must have appreciated that Projects was insolvent. Consequences of insolvency (issues 11, 12) 1. The liquidators of Projects have given consent under s 588M(2) of the Corporations Act 2001 (Cth) to Deloitte Services' bringing the insolvent trading claim against Mr Fitzgerald. However, in my view, it is by no means clear that the claim should succeed, even though Projects was insolvent at all relevant times and Mr Fitzgerald must have appreciated this. The real problem seems to me to be that it is difficult to argue that Projects incurred a debt in the relevant sense. 2. As between Projects and Deloitte Services, Projects was obliged to apply payments made by the latter to the purposes for which they were made. It has misapplied those payments to a considerable extent, and is liable to account accordingly. I am not sure (and Mr Stack's submissions did not really address the issue) that, in those circumstances, Projects could be said to have incurred a debt to Deloitte Services, so as to attract the operation of s 588M(3) of the Corporations Act. 3. Mr Stack submitted that there were debts incurred when Mr Fitzgerald caused "borrowings" to be made from the client monies trust account. That must be so. But they were not debts incurred by Projects. No doubt, they were debts incurred by the "borrower". But the insolvent trading claim was not put on the basis of the insolvency of those "borrowers". 4. In circumstances where the matter was not fully argued, I am not prepared to conclude that the insolvent trading claim has been made good. Summary of conclusions 1. In my view, Interiors is liable to Deloitte Services at least for the overpayment of $2,509,070 in respect of the one project where Interiors was contractually the project manager. It is liable for that sum because, in breach of the express terms of its contract and in breach of the payment arrangement, it sought (by its apparent agent Projects) payment of that sum, on the basis that it was lawfully payable to QBI, but did not pay the money to QBI. 2. Were it necessary to do so, I would conclude that Interiors breached s 18 of the ACL, essentially for the reasons given earlier in relation to Projects, and thus is liable in damages pursuant to s 236 of the ACL. 3. Projects, which acted as the project manager for all the projects (and was appointed as such for five of them) contravened s 18 of the ACL. It is liable for the full amount either over-invoiced or misapplied, $3,636,368. To the extent that it matters, Projects is also liable to account to Deloitte as a trustee for that sum. 4. Mr Fitzgerald was knowingly involved in Projects' contraventions of s 18 of the ACL, and is co-ordinately liable, for the same amount, under s 236. He is also liable to account as a constructive trustee, by reason of his procuring of (or at the very least, knowing involvement in) Projects' breaches of trust. 5. In principle, it appears that between them Interiors and Projects have over- claimed about $80,000 for their fees (after allowing for the offsets that Deloitte Services has applied). Since there is no basis on which they can be rendered jointly liable, nor any basis for apportioning that sum between them, I say no more. As I have noted, Mr Stack indicated that this claim was not pressed. 6. In light of those conclusions, it is unnecessary to consider that claim in so far as it involves Mr Fitzgerald as an accessory. 7. Deloitte Services has succeeded against the only "live" defendant, Mr Fitzgerald. I see no reason why costs should not follow the event. 8. Deloitte Services is also entitled to interest. I have not performed the necessary calculation. The parties should do that. 9. I make the following orders: 1. direct the plaintiff to provide to the third defendant by 22 November 2016 a draft of the orders that it seeks, and a schedule of calculations of interest. 2. Direct the third defendant to respond by 25 November 2016. 3. Stand the matter over to 9:30am on 29 November 2016 before me for entry of judgment. ********** 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: 15 November 2016