HIS HONOUR: Economic liberalism produced the concept of a company that could carry on business with limited liability. The Companies Act 1856 (19 & 20 Vict. c 47) gave effect to this concept the only condition being that the company use the word "limited" in its name. In recent times a new form of economic liberalism has led to the widespread collapse of large corporate groups. Those dealing with these failed companies were often left lamenting. This forced parliaments to impose liability on officers to make good the debts of their company when it failed. Initially this liability was limited to cases of fraudulent conduct (see s 304 of the Uniform Companies Acts of 1961). The circumstances in which that liability is now imposed have been broadened: see e.g. ss 588M to 588U and 592 of the Corporations Law.Courts have also been asked to reconsider and expand the circumstances in which liability will be imposed upon officers of an insolvent company who have been involved in the activities of the company that have caused persons dealing with it to suffer loss: see J D Heydon, "Directors' Duties and the Company's Interests" in P Finn (ed.) "Equity in Commercial Relations" (1987).This case is an example of an action brought by an innocent person who has suffered loss at the hands of a limited liability company that was not able to make good that loss leaving the innocent person to look to others to obtain recompense. The applicant (Compaq) seeks to recover damages or equitable compensation of $766,025.55 from the respondents. Each respondent is a former officer of Hisoft Corporation Pty Ltd (Hisoft). The first six respondents were its directors, the seventh respondent was its financial controller and the eighth respondent was its national distribution manager when the relevant events occurred. The action concerns an agreement made on 5 June 1992 by which Compaq appointed Hisoft to act as its agent to sell computer products to certain nominated purchasers. The agency agreement authorised Hisoft to collect the money due from the sale of those products and obliged Hisoft to "hold such monies upon Trust for Compaq" (clause 6.1) and "upon receipt of any such monies to immediately credit the Compaq Bank Account as nominated by Compaq" (clause 6.2). Between 6 June 1992 and late September 1992 Hisoft sold computer products that were supplied to it under the agency agreement. But in breach of the agency agreement Hisoft sold some of those products to purchasers who had not been nominated as purchasers for the purposes of the agreement. In further breach of the agency agreement Hisoft failed to pay to Compaq the money that it received from the sale of those products. In aggregate Hisoft failed to account to Compaq for $766,025.55 and it is this sum which Compaq seeks to recover in the proceeding. The manner in which Compaq puts its claim is as follows. First it contends that Hisoft contravened s 52(1) of the Trade Practices Act 1974 (Cth) and that the respondents Messrs Merry, Bunnett, Horman and Thomson participated in that contravention and are therefore liable to make good any loss suffered as a consequence of it. Section 52(1) of the Trade Practices Act provides: "A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive." Where a person suffers loss or damage in consequence of conduct that is in contravention of s 52(1) that person may recover the amount of that loss or damage not only from the corporation whose conduct contravened s 52(1) but also from any person involved in the contravention: see s 82(1). For this purpose a person involved in a contravention includes a person who (i) has aided, abetted, counselled or procured the contravention (s 75B(1)(a)), (ii) has induced the contravention (75B(1)(b)) or (iii) has been knowingly concerned in or party to the contravention (s 75B(1)(c)). It is alleged that before the agency agreement was made Mr Bunnett represented to Compaq that the means by which Hisoft would perform its obligation to account for the proceeds of sale were that it would cause its banker to collect the proceeds of cheques received from purchasers which cheques would include monies not on trust for Compaq and to pay directly to Compaq that portion of those cheques which related to goods sold under the agency agreement. Then it is alleged that on and after 5 June 1992 Hisoft represented to Compaq that if Compaq supplied products to Hisoft under the agency agreement Hisoft would (i) sell the products only to the nominated purchasers, (ii) hold the proceeds of sale of those products on trust for Compaq, (iii) immediately upon receipt of the proceeds of sale of those products pay the same into Compaq's bank account, and (iv) cause the proceeds to be paid to Compaq by the means represented by Mr Bunnett. These representations are said to have been made on each occasion when Hisoft requested Compaq to supply computer products under the agency agreement. It is not in dispute that Hisoft sold a considerable portion of the computer products which it received under the agency agreement to persons other than nominated purchasers. It is also not in dispute that Hisoft failed to account for the proceeds of sale of those products. Accordingly, if the representations were made, Hisoft contravened s 52(1) of the Trade Practices Act and Compaq suffered loss as a consequence of that contravention. The issue then is whether Messrs Merry, Bunnett, Horman and Thomson aided, abetted or procured or induced or were knowingly involved in or party to that contravention and hence liable to make good the loss.
The second cause of action is based on the allegation that Hisoft owed fiduciary duties to Compaq (i) to sell the computer products procured under the agency agreement only to nominated purchasers, (ii) to hold the proceeds of the sale of those computer products on trust for Compaq, (iii) immediately upon receipt of the proceeds of the sale of those products to pay the same into Compaq's bank account, (iv) as Compaq's agent appointed under the agency agreement, to account to it for the proceeds of sale of any stock sold by Hisoft on behalf of Compaq and (v) to give effect to the representation made by Mr Bunnett and to inform Compaq if it was not doing so. It is then alleged that each of these duties was breached and that the respondents Messrs Merry, Payes, Bunnett, Sharp and Krass knowingly caused, procured, permitted or assisted those breaches. Implicit in this allegation is that each of those respondents (other than Mr Bunnett) was aware of the terms of the agency agreement, was aware of the representation said to have been made by Mr Bunnett and was actively involved in Hisoft acting in breach of its fiduciary duties. As against Mr Bunnett it is not contended that he had actual knowledge of the dealings between Hisoft and Compaq under the terms of the agency agreement. Nor is it alleged that he knew of the terms of that agreement. The allegation against him is that he was under a duty to ascertain what was the relationship between Hisoft and Compaq and that he intentionally refrained from making the necessary enquiries. Thus it is said that his knowing involvement in the breach of fiduciary duties should be inferred. It is necessary to say something about the law that governs accessorial liability in connection with a contravention of the Trade Practices Act and also in connection with a breach of fiduciary duty. There was only passing reference to the relevant principles during argument no doubt for the reason that the applicable principles were not in dispute.A contravention of s 52(1) of the Trade Practices Act can occur regardless of whether the corporation is acting honestly or reasonably: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197. But where it is sought to make a person liable as an accessory to a contravention of s 52(1) based on s 75B it is necessary to establish that the person has intentionally participated in the contravention. To establish intentional participation it must be proved that the person has knowledge of the essential matters that make up a contravention of s 52(1): see generally Yorke v Lucas 158 CLR 661; Edwards v R (1992) 173 CLR 653. In this regard knowledge means actual and not constructive knowledge. For example it would not be sufficient merely to show that the person charged with accessorial liability had shut his eyes to the obvious if that is intended to be a substitute for actual knowledge: Giorganni v R (1985) 156 CLR 473. Of course, where there is a combination of suspicious circumstances and a failure to make an enquiry it may be possible to infer knowledge of the relevant essential matters: Pereira v Director of Public Prosecutions (1989) 63 ALJR 1 at 3.In the case of a person who has assisted in a breach of trust or breach of fiduciary duty the criterion for liability is that stated by Lord Selborne LC in Barnes v Addy (1874) 9 Ch App 244 at 255, namely "assist(ance) with knowledge in a dishonest and fraudulent design on the part of the trustee." For a time it was suggested that there could be no accessorial liability for a breach of trust or breach of fiduciary duty unless the breach itself was dishonest or fraudulent: see e.g. United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157 at 253; compare Belmont Finance, supra; International Sales & Agencies Ltd v Marcus [1982] 3 All ER 551; Carl Ziess Stiftung v Herbert Smith & Co [1969] 2 Ch 276; Belmont Finance Corporation Ltd v Williams Furniture (No. 2) [1980] 1 All ER 393 at 405; Baden Delvaux & Lecuit v Societe General pour Favouriser le Developpement [1983] BCLC 325. But this was not the view expressed in all cases (see e.g. Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 1 WLR 1555 at 1580 and 1582) and it was decisively rejected by the Privy Councilin Royal Brunei Airlines Sdn Bhd v Ming [1995] 2 AC 378; see also Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 where Stephen J (at 412) referred to knowledge "of fraud or breach of trust". In Royal Brunei Airlines the Privy Council identified dishonesty as "the touchstone of liability". Lord Nicholls said (at 389) that acting dishonestly means:
"[S]imply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subject characteristics of dishonesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honesty conduct is not subjective conduct. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because to sees nothing wrong in such behaviour. …Unless there is very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."
I propose to decide this case in accordance with the foregoing principles. In adopting this course I will apply doctrines relating to breach of trust (i.e. the principles set out in Barnes v Addy and Royal Brunei Airlines) to breaches of fiduciary duty. It is not universally accepted that this is a proper approach; see e.g. United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157 at 253; compare Belmont Finance, supra; International Sales & Agencies Ltd v Marcus [1982] 3 All ER 551. But it is an approach that is appropriate in this case if only for the reason that the fiduciary duties that are alleged to subsist arise from an express trust.At the trial Compaq called four witnesses, Mr Ian Penman its managing director, Mr Vaughan (Rick) Sharp its financial controller, Mr Brenton Pittman one of its managers and Mr John Hannelly its corporate lawyer. Each of these gentlemen was cross-examined. In addition many documents were tendered in evidence. When Compaq closed its case counsel for the respondents said they wished to submit their clients had no case to answer: that the evidence led could not sustain the causes of action pleaded. Respondents' counsel also said that they wished to submit that I should not put them to their election not to call evidence as a condition of hearing their "no case" submission. After hearing short argument I declined to rule on whether the respondents should be put to their election until I had heard argument both in relation to the "no case" submission and on whether the respondents should be required to make an election. I took this course because it seemed to me that some development of the argument whether there was a case to answer, an argument that would expose the precise way in which the respondents attacked Compaq's case, would assist in the resolution of the issue whether I should require the respondents not to call evidence. This approach was adopted by Fullagar J in Union Bank of Australia Ltd v Puddy [1949] VLR 242 and was approved by the Full Court of the Supreme Court of Victoria in Protean (Holdings) Ltd v American Home Assurance Co [1985] VR 187. Having now heard full argument on both issues the course that I have decided to take is to rule on the "no case" submission without requiring the respondents to elect not to call any evidence. First I will explain why I have arrived at this decision and then I will deal with the substantive issues. The source of the power and the manner in which the Federal Court should deal with a "no case" submission appears to be uncertain. In Rasomen Pty Ltd v Shell Company of Australia Ltd (1997) 75 FCR the Full Court suggested that the answer was to be found in s 79 of the Judiciary Act 1903 (Cth) which provides that the laws of each State, including the laws relating to procedure, shall except as otherwise provided by the Constitution or the laws of the Commonwealth, be binding on courts exercising Federal jurisdiction in that State. On the other hand, in Trade Practices Commission v George Weston Foods Ltd (No. 2) (1980) 43 FLR 55, Davies J suggested that s 79 did not apply and that the matter was to be regulated by principles developed by the Court itself under its own rules, in particular O 35 r 1. It is not necessary to enter this controversy for the reason that there appears to me to be no difference in the approach taken by the Supreme Court of Victoria from that taken by the Federal Court in those cases where the Federal Court was proceeding on the basis that it was not required to apply State law. There is a settled rule of practice that when counsel for the plaintiff closes his case and counsel for the defendant wishes to submit that there should then and there be judgment for the defendant, counsel for the defendant must elect to call no evidence. This is the practice laid down for judges in the United Kingdom by the authorities including Alexander v Rayson [1936] 1 KB 169, Parry v Aluminium Corporation [1940] WN 44 and William H Muller & Cl Algemeene v Ebbw Vale Steel Iron & Coal Co Ltd [1936] 2 All ER 1363. The practice has been followed in Victoria (see e.g. Hannah v Stott [1928] VLR 168; Humphrey v Collier [1946] VLR 391, Union Bank of Australia v Puddy, supra; Protean, supra,), in New South Wales (see e.g. Wickstead v Browne (1992) 30 NSWLR 1) and in South Australia (see e.g. Residues Treatment Trading Co Ltd v Southern Resources Ltd (1989) 52 SASR 54). The practice was approved by the High Court in Tozer Kemsley & Millbourn (Australasia) Pty Ltd v Collier's Interstate Transport Service Ltd (1955-1956) 94 CLR 384 at 401-402. The Federal Court has also adopted this practice in a number of reported cases including James v ANZ Bank Group Ltd (1986) 64 ALR 3547; TPC v George Weston, supra, and Rasomen, supra.There are good reasons for the practice. If the judge rules in favour of a "no case" submission and enters judgment for the defendant and that judgment is overturned on appeal it would be necessary to order a new trial: Puddy, supra, at 46. Further, as Herring CJ observed in Jones v Peters [1948] VLR 331 at 333:
"[I]n the ordinary case it is most undesirable that [the plaintiff's] evidence should have to be reviewed twice during the course of the trial, first by itself at the close of the plaintiff's case, and then later along with any evidence called for the defendant."
But like most rules, the practice is not inflexible. The judge always retains a discretion whether there should be adherence to it. For example, if the case can be decided on a question of law without the need to examine the evidence departure from the rule will usually best serve the interests of justice: Residues Treatment, supra, at 68; Puddy, supra, at 245. See also Stevenson v Barham (1977) 136 CLR 190 at 202-201 where the High Court said that an objection to jurisdiction can usually be made by a party without being put to his election. Another instance where a departure from the rule would be justified is in a case where fraud is alleged. It was accepted by the Full Court in Protean that in such a case normally it would be wrong to require a party to subject himself to cross-examination if there really was no evidence of fraud against him: see [1985] VR at 236 where Puddy's case is cited as authority. And there will be other circumstances where the justice of the case will permit the court to determine a case at an early stage: for a broad view of the discretion see J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA) (No. 2) (1992) 38 FCR 458.
In Residues Treatment (at 68)Perry J categorised the circumstances in which a "no case" submission could be made as:
"1. Where no reference at all to the evidence is required.
2. Where a reference to the evidence is required only to establish that there is an evidentiary hiatus or failure to adduce any evidence as to an essential element in the cause of action.
3. Where it is argued that on a consideration of the evidence adduced by the plaintiff taken at its highest from the plaintiff's point of view, the evidence could not support the causes of action pleaded.
4. The situation where it is contended that although there is some evidence to support the plaintiff's claim, it is so weak and unreliable that it should be dismissed without calling upon the defendants."
His Honour said that cases in categories 1 and 2 should not involve an election but that the general practice should be applied to cases in categories 3 and 4.
In my view, the cases to which I have earlier referred do support the view that when the "no case" submission is based on some proposition of law that does not require attention to the evidence it will often be the case that the moving party is not put to his election. On the other hand, the authorities show that category 2 cases do fall within the general rule (see e.g. Protean at 239) although departure from it may be more readily allowed by the court in the exercise of its discretion.
When ruling on a "no case" submission where there has been no election, if the judge considers that the evidence could sustain a finding against the moving party, or where the evidence is finely balanced so that it is not clear whether such a finding could be made, the judge should rule against the submission: Protean, supra, at 215. In considering the submission the judge should take a view of the evidence that is most favourable to the respondent party.
In Australian Securities Commission v Macleod (1993) 40 FCR 155 Drummond J said (at 157) that if a "no case" submission required a consideration of the evidence the obligation of the judge was to accept the evidence of the respondent party in its entirety, drawing all inferences that were open on that evidence in favour of that party and ignoring all evidence and inferences that could be drawn from that evidence in favour of the moving party. I think that this is stating the position too highly in favour of the respondent party and is not a proposition that is supported by the two cases cited by Drummond J as authority for it. The two cases are Hocking v Bell (1945) 71 CLR 430 and Trade Practices Commission v Allied Mills Industries Pty Ltd (No. 4) (1981) 37 ALR 225.
The true position was explained by Tadgell J in Protean. There his Honour was considering a case where the moving party based its "no case" submission on the contention that the respondent party's evidence was unsatisfactory, unreliable or equivocal. His Honour said that the judge must be able to assess the quality of the evidence. He explained [1985] VR at 239:
"Were it otherwise, the Judge, being the tribunal of fact, would be placed in an impossible position: he would have to assess the validity of the case for the respondent party without being able to assess the worth or weight of the evidence led in support of it … If it falls to the Judge to decide whether he could find for the respondent party on the evidence so far led, it is quite unrealistic to expect him to do so without being able to consider all questions which bear on the sufficiency of the evidence and without power to draw or to decline to draw all inferences from the evidence given on which the respondent party might seek to rely."
Hocking v Bell is not a case that is directly in point. The question that was being considered by the High Court in that case was in what circumstances should a judge allow a case to go to the jury. The court said that the question for the judge is whether the plaintiff's evidence, if uncontradicted, might sustain a verdict in his favour. If there is contradictory evidence it is for the jury and not the judge to resolve the conflict. In TPC v Allied Mills, Shepherd J did say (at 241) that for the purposes of a no case submission the judge must proceed on the basis "that the [applicant's] evidence has been accepted in its entirety and that all inferences reasonably open have been drawn in its favour." In my opinion this statement does not deny to the trial judge the obligation to evaluate the evidence and it certainly does not impose on the trial judge an obligation to ignore evidence given by the respondent party that is favourable to the moving party or to ignore inferences that might be drawn from that evidence that are favourable to the moving party. If his Honour meant what Drummond J drew from the sentence just quoted, and I doubt that he did, then it is in conflict with what was said by the Full Court in Protean and I prefer the views expressed in the latter case.
Moreover, it appears to me that there is no reason in principle why a judge should be required to resolve a "no case" submission that requires some evaluation of the evidence (as will often be the case) by ignoring those parts of the evidence that support the moving party's case. It might be one thing to say that where there is a conflict of evidence the judge should not attempt to resolve that conflict on a "no case" submission: see Corporate Affairs Commission v Green (1978) VR 505 at 514. But where evidence is unfavourable to the respondent party and is not in conflict with other evidence or when an inference may be drawn that is unfavourable to the respondent party and is not in conflict with a favourable inference that may be drawn it is inconceivable that either the evidence or the inference should be ignored.
The following are the factors that have persuaded me not to put the respondents to their election. First and foremost is the nature of the allegations that are made against them. To adopt the words of senior counsel for Compaq it is alleged that the respondents were involved in a "scam" to defraud Compaq. That is to say, Compaq's case is that the respondents acted dishonestly by taking steps that would result in money that was held on trust or that was to be held on trust for Compaq being diverted to Hisoft to help overcome its own lack of funds. The cause of action where it is alleged that the respondents procured a breach of trust requires proof of dishonesty. The cause of action alleging a knowing participation in a contravention of the Trade Practices Act requires proof that the participants were involved in the deliberate misleading of Compaq. The respondents should not be required to call evidence or submit themselves to cross-examination if a sufficient case of wrongdoing has not been established against them.
Secondly, the efficient disposition of this case also suggests that the respondents should not be put to their election. In pursuance of a direction made by the Court all parties filed affidavits of the witnesses which they intended to call. Therefore, I know that if the respondents do go into evidence they may call up to 13 witnesses including the respondents themselves. I would anticipate that the respondents' evidence would occupy well over a week in court sitting time. The considerable expense that would be incurred by the respondents were they required to take that course, in the event that they go into evidence, suggests to me that they should not be required to do so before the merits of Compaq's case have been ruled upon.
Finally, having heard full argument on the "no case" submission I cannot ignore the impression that I have formed about the weaknesses in Compaq's case. Indeed, during the course of that argument senior counsel for Compaq very properly accepted, I do not put it as highly as conceded, that Compaq had a weak case against some of the respondents in particular Messrs Horman and Thomson and perhaps Mr Bassat as well.
Accordingly, both the interests of justice and the efficient disposition of this case indicate that the respondents should not be put to their election.
I can now turn to the substantive issues. I propose to deal with those issues in the following way. First I will set out the evidence that has been led by Compaq. Then, by reference to those matters that Compaq must prove in order to make out its case to the requisite standard, I will determine whether that evidence could establish the facts that are needed to be proved. In undertaking that task I will draw all inferences that might reasonably be drawn from the proved facts taking a view of the matter that is most favourable to Compaq.
Compaq imports and distributes computers and computer related products. Hisoft sold computer products. A large proportion of the computer products which it sold were purchased from Compaq. Between 1988 and 1992 the supply of computer products increased significantly to the point where monthly sales to Hisoft were of the order of $1.75 million. This represented around 30 per cent of Hisoft's purchases.
Hisoft acquired its computer products from Compaq under two agreements. The first, an Authorised Dealer Agreement, entitled Hisoft to purchase computer products from Compaq on terms and conditions which it is not necessary to mention save to note that payment for the products was required to be made 30 days after invoice. However, by a long course of dealing, payment was not expected until the last day of the month following the delivery of the invoice.
The second agreement was described as a Public Sector Agency Agreement. By that agreement Hisoft was appointed Compaq's agent to sell computer products to government departments and statutory corporations. Although appointed as an agent for sale the agreement provided that Hisoft was liable to pay for the computer products that it sold on behalf of Compaq within 30 days of invoice if Compaq had not received payment from the purchaser within that time. Hisoft was to receive a commission in respect of all products sold at the rate specified in the agreement.
During the financial year ended 30 June 1992 Hisoft was not trading profitably. By February 1992 its trading losses exceeded $900,000. Hisoft was only able to pay its debts as and when due because one of its major suppliers, IBM Australia Ltd (IBM), had provided it with a short term loan of $1.5 million and had agreed to defer payment of accounts totalling $2 million. IBM provided this assistance because it was considering whether to purchase Hisoft. It had been granted an option to do so. In addition the National Australia Bank (NAB), Hisoft's banker, was providing it with support presumably by not calling up money that was due to the bank.
As at 1 January 1992 Hisoft could acquire computer products from Compaq provided its indebtedness to Compaq did not exceed $2.5 million. In February 1992 Hisoft asked that this limit be increased to $4 million. This was agreed in mid-March 1992. However, it did not take long for Hisoft to reach its new limit. Accordingly, some new arrangement had to be made if Hisoft was to continue to increase the volume of Compaq products that it was dealing in.
In April and May 1992 Mr Penman had a number of meetings with Mr Merry and Mr Bunnett. Mr Rick Sharp was present at some of those meetings. At one meeting Mr Merry suggested to Mr Penman that one method by which Hisoft could increase its turnover of Compaq products without exceeding its credit limit was to sell those products on behalf of Compaq and pay the purchase price, when received from the purchaser, into Compaq's bank account. This proposal was not significantly different from the arrangement embodied in the Public Sector Agency Agreement save that it did not impose any obligation upon Hisoft to satisfy the obligations of a purchaser if those obligations were not met. Mr Penman did not indicate acceptance of the proposal. On the other hand, nothing that Mr Penman said would suggest that some arrangement along the lines proposed might not be agreed to enable Hisoft to sidestep the credit limit that affected its dealings under the agreements that were then in place.
At all events, a short time after this conversation Mr Bunnett spoke to Mr Rick Sharp about the same subject. During their conversation (Mr Rick Sharp put it as having occurred in April 1992 but it is likely to have been a little later, probably in May 1992) Mr Bunnett mentioned the proposal that Hisoft enter into an agency agreement to sell computer products on behalf of Compaq. Mr Bunnett said that under such an arrangement Hisoft would not be purchasing computers from Compaq and thus the credit limit imposed by Compaq would not be a bar to the arrangement. Mr Bunnett said that the proposal had been suggested by Mr Payes. Nothing was resolved during this discussion.
According to Mr Rick Sharp he again discussed the matter with Mr Bunnett in May 1992 at a meeting at which Mr Hannelly was present. It will be recalled that Mr Hannelly was Compaq's corporate lawyer. It seems clear that Mr Michael Sharp (the fourth respondent) was also present at this meeting. His file note of the meeting was tendered in evidence by Compaq. It records the meeting as having occurred on 3 June 1992. That this was the date of the meeting is confirmed by other evidence, in particular a facsimile transmission from Mr Hannelly to Mr Bunnett dated 4 June 1992 which refers to the meeting as having taken place on the previous day.
The meeting lasted between 30 and 45 minutes. Mr Hannelly was not present the whole time. At the meeting there was a long discussion concerning the way in which the proposed agency agreement could operate including the measures that would be involved in invoicing the products to be supplied and how payment would be made for those products. Mr Rick Sharp said that the products should be kept physically separated from other goods in Hisoft's warehouse and should be labelled or noted as products held under the agency agreement. Mr Bunnett proposed that the method of payment be that Hisoft would receive the proceeds of sale from the purchasers and that it would then pay Compaq the amounts due to it by cheque to be paid into an account to be opened at NAB. Mr Rick Sharp said that he could not accept this proposal. He said that the proceeds of sale should be paid directly into Compaq's bank account. He was at pains to point out that Compaq wished to receive its money "at the point of receipt by direct transfer" and that he did not want any part of that money paid into Hisoft's account. But there was a problem with this suggestion. Almost all cheques that were to be received from purchasers would include an amount to which Hisoft was entitled. That amount would be either Hisoft's commission on the sale or the price of goods sold to the purchaser that were not goods sold under the agency agreement. Accordingly, it was necessary to establish some other mechanism by which the proceeds of a cheque could be divided between Hisoft and Compaq. Mr Hannelly suggested that it may be possible for a purchaser's cheque to be deposited by Hisoft and the proceeds "split" into a Compaq account and a Hisoft account. Mr Bunnett said that he would speak with Hisoft's banker to ascertain whether it was possible to "split" a cheque in this way. According to Mr Hannelly, it was agreed that Mr Bunnett and Mr Pittman would work out the details.
Shortly after this meeting Mr Hannelly prepared a draft agency agreement and forwarded a copy by facsimile transmission to Mr Bunnett on 4 June 1992. On 5 June 1992 he sent a revised copy of the draft to Mr Bunnett again by facsimile transmission. It was executed by Hisoft on that day and returned to Compaq.
Also on 5 June 1992 there was a discussion between Mr Pittman and Mr Bunnett concerning the manner in which clause 6.2 of the agreement would to be implemented. Clause 6.2 was designed to accommodate the wishes of Compaq that it would receive payment of money that was due to it without that money passing through Hisoft's account. Mr Pittman's evidence is that he said to Mr Bunnett "with reference to paragraph 6.2 of the agency agreement, please endorse in favour of Compaq all cheques received from nominated customers and have those cheques paid into Compaq's account." According to Mr Pittman Mr Bunnett replied: "Yes, that will be fine."
Mr Pittman said that when he used the expression "endorse in favour of Compaq all cheques" he did not literally mean that those cheques should be endorsed over to Compaq. He knew that Compaq would not be entitled to receive the total amount of each cheque written by a purchaser. Mr Pittman gave the following explanation:
"Q. So there would never be a situation in which cheques would be paid, with endorsement, directly into the account. That couldn't happen, could it?
A. Not the full amount of the cheque.
B. So it wouldn't be a cheque. At best, if Mr Sharp's expectation was correct, it would be a transfer of a portion of the proceeds of the cheque?
A. Yes
C. Which would mean, wouldn't it, that the cheque would have to be paid into the Hisoft account at NAB and that a transfer would immediately take place providing Compaq with the proceeds to which they were entitled?
A. Yes.
Q. Is that what you expected?
A. That's what I expected.
Q. It isn't what you told Mr Bunnett is it?
A. No, I've used - the word "endorsed" I've used incorrectly and I wasn't expecting 100 per cent of the cheque to come into Compaq.
Q. You weren't expecting the cheque to go into Compaq's account, were you?
A. Yes, the proceeds of the cheque.
Q. So, trying to be fair, Mr Pittman, would you agree that clearly as a result of that phone message Mr Bunnett would have received some confused or mixed message from you about what exactly was to happen?
A. Yes."
Mr Rick Sharp also had a conversation with Mr Bunnett about this same subject. He said that the conversation occurred several days after the meeting on 3 June 1992. (He did not concede that the earlier meeting had occurred on 3 June but, as I have said, it is clear that it did). Mr Rick Sharp said that he was told by Mr Bunnett that Hisoft's bank had agreed to "split" a purchaser's cheque at the point of deposit and that Hisoft would direct its bank to remit those funds directly to Compaq's bank account.
Dealings under the agency agreement commenced almost immediately after its execution. The agency agreement had attached to it a schedule of 7 purchasers who were to be the nominated purchasers, that is those purchasers to whom computer products could be sold. Further purchasers (13 in all) were added to the list later in June 1992.
In the period 5 June to 30 June 1992 Compaq delivered goods to Hisoft under the agency agreement to the value of approximately $2.623 million. The volume of monthly business ran at a slightly reduced level until September 1992.
The means by which Hisoft accounted to Compaq for its share of the payments received from purchasers was as follows. The purchasers' cheques were delivered to Hisoft's banker, the NAB, for collection. On each day that a cheque was or several cheques were delivered to the bank Hisoft drew a cheque on its account made payable to Compaq in the amount due to Compaq. It then paid that cheque into Compaq's account with Westpac using a deposit book that had been provided to it by Compaq. On the day of each deposit Hisoft wrote a letter to Compaq, marked to the attention of Mr Pittman, that was in the following terms:
"Dear Brenton,
We wish to advise that a deposit has been made into the Compaq account today for $--- representing the following invoices.
Invoice No Amount"
The invoices that were listed (by their invoice number) were the invoices raised by Compaq for the goods in respect of which the deposit was being made. Each invoice identified the purchaser to whom computer products had been sold. Each invoice had been sent to Hisoft.
It is not clear how NAB dealt with the cheques that it had received from Hisoft. For example, the evidence does not disclose whether NAB credited Hisoft's account with the amount of each cheque before the proceeds had been collected from the purchaser's bank. Nor does the evidence disclose whether NAB met the cheques drawn in favour of Compaq before the proceeds of the purchasers' cheques had been collected. In the absence of such evidence I will assume that NAB acted in accordance with usual banking practices and only credited Hisoft's account when it obtained the funds from the purchaser's bank.
The agency agreement (by clause 6.8) imposed upon Hisoft an obligation to provide Compaq with a monthly credit report, a monthly Account Receivable Detailed Ageing Report and a detailed stock listing of all Compaq's stock in the possession of Hisoft that had not been invoiced to a purchaser to enable Compaq to reconcile what it had invoiced to Hisoft and what Hisoft had invoiced.
On 12 July 1992 Mr Pittman telephoned Mr Thomson, the eighth respondent, and asked him to provide the reports and stock listing for the month ended 30 June 1992. A short time later Mr Pittman was sent what he described as a "credit report". When Mr Pittman examined this report it indicated that the amounts outstanding to Hisoft in respect of goods that had been delivered to it under the agency agreement totalled $1,752,046. This was approximately $1 million less than the amount which, according to Compaq's records, should have been outstanding.
This caused Mr Pittman to repeat his request for the two reports and the stock listing that Hisoft was required to provide. At the time Mr Pittman was not unduly concerned about the discrepancy he had discovered. He was of the view that the discrepancy was likely to be the result of Hisoft holding stock that it had not delivered or invoiced to nominated purchasers. On 13 August 1992 Mr Pittman received an aged trial balance report as at 31 July 1992 from Mr P Davidson, the credit manager of Hisoft. This report still left Mr Pittman in the position where he could not reconcile the discrepancy of approximately $1 million.
Toward the end of August 1992 Mr Pittman received another "credit report" from Mr Thomson. From this report it still appeared that Hisoft had not sent out invoices for stock which it had received from Compaq to the value of approximately $1 million.
By this time Mr Pittman had become quite concerned about the position. On 4 September 1992 he placed a hold on the delivery of stock for new orders that were placed under the agency agreement and on 24 September 1994 he and Mr Penman went to Hisoft's offices in Melbourne to discuss the discrepancy.
At Hisoft's offices Messrs Pittman and Penman met Mr Merry and Mr Thomson. After exchanging greetings Mr Merry said to Mr Penman that Hisoft had "lost" or "banked" approximately $1 million of Compaq's money and he apologised that this had occurred. Mr Merry then took Mr Penman to his office and Mr Pittman went with Mr Thomson to meet Mr Horman who was to explain why the amount of approximately $1 million had not been paid to Compaq.
According to Mr Horman the problem that arose was that when Hisoft received agency stock into its warehouses it was not always identified as agency stock. He explained that while Hisoft had established a separate location for agency stock in its warehouses the warehouse staff did not always recognise agency stock as such and this had caused it to become mixed with other stock. Further, Mr Horman explained that the computer facility instituted by Hisoft to accommodate agency stock did not properly record agency stock so that the sale of some of that stock had not been invoiced to the agency account. It was the proceeds of the sale of this stock that had not been paid to Compaq.
Mr Pittman said that he then spent three to four hours with Mr Horman tracing some of the stock that had been supplied by Compaq under the agency agreement. He said "in each case we found that the goods had been shipped by Compaq and clearly labelled as [agency stock] but that, when arriving at Hisoft's warehouse, they had been placed in the consolidated stock area. Some of the stock had been delivered to non [agency agreement] nominated customers."
Immediately after this meeting Compaq ceased to supply computer products to Hisoft under the agency agreement and on 15 October 1992, at the request of its directors, NAB appointed a receiver to take possession of the property of Hisoft.
Subsequent to the appointment of the receiver, Mr Pittman was given access to the books and records of Hisoft. There were 1,200 boxes of documents and Mr Pittman spent in excess of 80 hours inspecting them. In the course of that inspection Mr Pittman sought to discover evidence that might suggest that Hisoft had deliberately misappropriated money that belonged to Compaq. He could find no such evidence. His examination of the documents confirmed the explanation provided by Mr Horman for the $1 million discrepancy. In other words, while Hisoft had failed to account for the proceeds of the sale of agency stock in the amount of approximately $1 million, those proceeds represented the sale of stock that had not been marked as agency stock. Mr Pittman looked for but could find no example of Hisoft having misappropriated the proceeds of the sale of agency stock that had clearly been marked as agency stock.
As a result of his inspection of the books and records Mr Pittman was able to identify eleven examples where agency stock had been supplied by Hisoft to non-nominated purchasers. He prepared a summary of those examples and that summary was tendered in evidence. The examples relate to computer products worth approximately $180,000. However, there is nothing to suggest that the examples are not representative of what had occurred in relation to the remainder of the stock the proceeds of the sale of which found their way into Hisoft's bank account. Of the eleven examples all but one related to orders that had been placed in June 1992. The one exception is an order that was placed on 16 July 1992. Further, eight of the eleven examples concern computer products that were delivered to purchasers in June 1992. Finally, many of the examples concern goods that were received into stock at Hisoft's Sydney warehouse.
This is a sufficient exposition of the facts for present purposes. However I should explain why it is that Compaq sues to recover $766,025.55 and not the $1 million approximately that Mr Pittman discovered had been misappropriated by Compaq. Subsequent to the appointment of the receiver Compaq made a claim on the receiver to recover, among other things, money that had been collected on the sale of computer products supplied under the agency agreement. The receiver accounted to Compaq for such money and the present claim represents the unpaid balance of that $1 million.
On the evidence that has been led has Compaq established that it could succeed in its claims against the respondents? To answer this question it will be necessary to consider the claims against each respondent because it is possible that Compaq has established a case against one or more but not all of the respondents. In that event it will also be necessary to consider whether it is appropriate to enter judgment in favour of some but not all respondents.
To make out its claim under the Trade Practices Act Compaq must first establish that Hisoft contravened s 52(1) of the Act in the manner alleged. The respondents directed little if any argument to this issue and it would be fair to describe the submissions made on their behalf as proceeding on the assumption that a contravention had occurred.
This notwithstanding, it is still necessary to discuss in a little detail how it is alleged that the contravention occurred. Earlier in these reasons I set out the representations which it is alleged were made by Hisoft. The first three representations derive from the provisions of the agency agreement. They are promises made by Hisoft in that agreement. A promise made in an agreement, if uncontradicted, may be treated as a representation as to a future matter in appropriate circumstances: Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217. The final representation is based on the statements made by Mr Bunnett before the agency agreement was executed. Although not expressly asserted in the statement of claim the allegation is that this representation induced Compaq to enter into the agency agreement and also induced it to continue to supply computer products to Hisoft under that agreement.
It is possible that the representation attributed to Mr Bunnett was made before 5 June 1992. The conversation during which it was suggested that the proceeds of customers' cheques would be "split" took place on 3 June 1992. Mr Rick Sharp said the conversation in which Mr Bunnett made the representation occurred "several days later". From this evidence it is doubtful whether the representation was made before the agency agreement was executed. I note that Hisoft sent its executed part of the agency agreement to Compaq by facsimile transmission at around noon on 5 June 1992. The evidence is silent as to when Compaq executed its part of the agreement and forwarded it to Compaq, but it is clear enough that the parties treated the agreement as having come into operation on 5 June 1992 because Compaq began to supply computer products under that agreement from 6 June 1992 according to Mr Pittman. Thus, if the conversation with Mr Bunnett did occur "several days" after the conversation on 3 June 1992, it would not be possible for the representation to have been made before the agency agreement was executed. I do not take "several days" to mean one and one half days.
However, there is one piece of evidence that requires me to proceed, at least at this stage of the case, on the basis that the representation attributed to Mr Bunnett was made before the agreement was executed. Although Mr Rick Sharp said that his conversation with Mr Bunnett occurred "several days" after 3 June 1992 that evidence was given in an affidavit where Mr Rick Sharp was setting out sequentially the events as they occurred. And in that regard Mr Rick Sharp placed the conversation as having occurred before he was shown a draft of the agency agreement. Unlikely as this may seem, as I must proceed on an analysis of the facts that is most favourable to Compaq, I will act on the basis that the fourth representation was made before the agency agreement came into existence.
On the present state of evidence it is also necessary for me to find that I should act on the basis that Mr Bunnett did say to Mr Rick Sharp what he is alleged to have said. The evidence of both Mr Rick Sharp and Mr Hannelly is to the effect that there was a discussion about "splitting" customers cheques between Compaq and Hisoft. Further, Hisoft's own documents speak of this procedure. I refer in particular to a document entitled "Banking Procedure" that contains instructions directed to Hisoft's credit managers and controllers in relation to their dealings with Compaq. The relevant part of this document reads:
"With reference to cheques received paying invoices for the Compaq Agency Agreement, the following procedure is to apply:
1) Allocate all cash as appropriate to clients accounts.
2) Advise Alan Gardiner when this is complete.
3) Accounts department will run a National Report available to determine what amounts have been allocated to the specific sub accounts.
4) Alan Gardiner or Mike Egan will then advise you of the amount split banking between the National Australia Bank and Westpac (Compaq's account).
5) Run a banking summary for the National Australia Bank cheques which will be the total amount of all cheques less the Westpac amount.
6) Complete the Westpac banking slip as enclosed.
7) Kindly note where couriers are utilised to collect cheques, these cannot be banked by the couriers for debtors accounts with sub accounts, specifically, allocated for Compaq sales. The couriers must return these cheques to your office."
I draw attention to this document because it uses the words "split" in connection with the cheques to be received from purchasers. I appreciate the word is given a different meaning from that given to it in the discussion with Mr Rick Sharp and Mr Penman. In the document it does mean what Mr Pittman thought it meant as he explained it in the extract from his evidence that is set out earlier in these reasons. However, I should not reject the evidence of Mr Penman and Mr Rick Sharp notwithstanding the understanding of Mr Pittman confirmed as it is by the Banking Procedure document, at least not on a "no case" submission.
The way in which it is alleged that the representations constituted misleading or deceptive conduct in contravention of s 52(1) is that they were continuing representations as to future matters, that Hisoft knew that the representations had not been, were not being, and would not be fulfilled and, in those circumstances, when Hisoft continued to procure the supply of stock under the agency agreement without notifying Compaq that the representations had not been, were not being and could not be fulfilled, Compaq was led to believe that they were being fulfilled. It is also put that the representations were in respect of future matters within the meaning of s 51A of the Trade Practices Act and after the date when Hisoft knew that the representations had not been, were not being, and would not be fulfilled, Hisoft ceased to have reasonable grounds to make those representations.
It will be seen that Compaq's case depends upon it being able to establish that Hisoft knew that the representations, or the promises that gave rise to those representations, were not being satisfied. If this was a proceeding brought against Hisoft it is by no means clear that Compaq would be required to go so far to make out a case that Hisoft had contravened
s 52(1): see the discussion by Ormiston J in Futuretronics, supra, especially at 233-241. But this case is concerned with accessorial liability where it is necessary to prove intentional conduct.
It is clear, in my view, that there is no evidence that establishes or from which it could be inferred that, before the existence of the $1 million discrepancy was raised with Hisoft, Hisoft knew it was selling agency stock to purchasers who had not been nominated to purchase that stock. Nor is there any evidence that establishes or from which it could be inferred that Hisoft knew that it was failing to account to Compaq for the proceeds of the sale of some of the agency stock before the discrepancy was brought to its attention.
The evidence shows that, except for two or three isolated instances, the improper dealing with agency stock occurred in the first few weeks of trading under the agency agreement. This conclusion is derived from the following facts. First, the $1 million discrepancy that was identified by Mr Pittman in mid-July 1992 was a discrepancy that existed as at 30 June 1992. The size of that discrepancy did not increase thereafter. Second, the eleven examples of misappropriated stock identified by Mr Pittman also show that most of the improper sales related to stock that was received in June 1992. The conclusion is confirmed by the evidence of Mr Pittman.
Compaq contends that the financial condition of Hisoft in May and June 1992 and in the following months was critical. It says that it was essential for Hisoft to obtain funds to restore some measure of profitability. Thus it was alleged that Hisoft had a motive to breach the agency agreement and appropriate to itself money that was due to Compaq and that it should be inferred that it deliberately did so. Compaq also contends that the breaches of the agency agreement were so extensive (it points to the misappropriation of approximately $1 million) such that it should be inferred that the contraventions were deliberate.
I reject these submissions. True it is that Hisoft was in poor financial circumstances. True it also is that an injection of an additional $1 million would have significantly improved its financial condition. But I am of the very clear view that at the close of the applicant's case these facts do not allow an inference to be drawn that Hisoft deliberately misappropriated money belonging to Compaq. In the first place it could hardly have been expected that a deliberate misappropriation of a very large amount would remain undetected for more than a few weeks. Once a misappropriation was discovered that would be an end of the agency agreement: an agreement with Hisoft's largest supplier. In the second place it is likely that a deliberate misappropriation of around $1 million would, when discovered, have spelt the destruction of the Hisoft business. None of its suppliers could be expected to continue to do business with it in those circumstances. In the third place a deliberate misappropriation would have exposed the respondents to a risk of criminal prosecution for serious offences and the likelihood, if there was a successful prosecution, of imprisonment. And all this for a short-term benefit? I cannot suppose this to have been the case.
It is not possible to say with any precision when it was that Hisoft (that is to say the controlling mind of Hisoft) became aware that some of the agency stock was not being sold to nominated purchasers and that the proceeds of the sale of that stock were not being paid to Compaq. However, according to the present state of the evidence, it is likely that Hisoft only became aware of those matters some time in late August or early September 1992. It will be recalled that it was in mid-July 1992 when Mr Pittman alerted Hisoft to the fact that there was a discrepancy in stock to the extent of around $1 million. No doubt steps were put in place by Hisoft to discover why there was this discrepancy. However, it does not appear that the cause had been discovered before the second credit report was sent to Mr Pittman by Mr Thomson at the end of August 1992. Mr Thomson knew the reason why the credit report was required, namely to enable Mr Pittman to ascertain the cause of the discrepancy. If Hisoft had discovered the cause by then, sending the credit report was a subterfuge. There is no evidence from which I can conclude that at this time Hisoft was engaging in a deliberate deception of Compaq, a deception in which Mr Thomson would be an active participant.
Compaq does point to two matters which it says should give rise to an inference that Hisoft was aware of the misappropriation as early as July 1992. The first is an allegation that on one occasion Hisoft lodged duplicate purchase orders for products purchased by the same purchaser. The argument is that Hisoft was intentionally submitting one false purchase order to obtain stock to sell on its own account. Having regard to the large volume of business between the two companies it would not be surprising if one or two errors of this type did occur and, as I say, only one has been discovered. This incident is not sufficient to carry the inference that Compaq seeks to draw from it. The most likely explanation, and the only one that is reasonably open, is that there was a mistake in the ordering of products.
The second matter is the likelihood that nominated purchasers who did not receive the products which they had ordered because those products had been sold to others would have made complaint about non delivery thus leading to the discovery of the problem. This proposition proceeds on the assumption that such complaints, if made, would have been brought to the attention of the directors of Hisoft and not dealt with by the staff who were responsible for the delivery of goods and that the directors would then have discovered the true position. I accept as a reasonable inference that some nominated purchasers may have complained that they did not receive the goods that they had ordered. When those complaints would have been made is difficult to say. It is possible that that may have been made some time in July 1992 having regard to the fact that it was in June 1992 that agency stock was sold to non-nominated purchasers. However, I am unable to accept that it is reasonable to infer that these complaints would have been drawn to the attention of the directors. I think it much more likely that the staff who received the complaints would have taken steps to procure stock for the complaining purchasers by one means or another and would not have passed on the complaints to a director.
This still leaves a short period during which it may be inferred that Hisoft had ascertained the cause of the problem but failed to inform Compaq of it. Doing the best I can on the evidence I would estimate that period to be of the order of two to three weeks. Does the failure to inform Compaq of the fact that its products had been improperly dealt with and that its money had been paid into Hisoft's bank account constitute misleading or deceptive conduct?
There is no doubt that a failure to provide information can constitute conduct which is misleading or deceptive. For the purposes of s 52(1) "engaging in conduct" is defined in
s 4(2)(a) as a reference to doing or refusing to do any act and by s 4(2)(c) a reference to refusing to do an act includes a reference to refraining (otherwise than inadvertently) from doing that act. So, when the complaint is that s 52(1) has been infringed by conduct that involves either refusing or refraining from doing an act, before that conduct is actionable it must have been deliberately engaged in: see Rhone-Poulenc Agrochimie SA v Uim Chemical Services Pty Ltd (1986) 68 ALR 77 at 84; Edgar v Farrow Mortgage Services Pty Ltd (in liq) [1992] ATPR 46-096 at 53-375; Zaknic Pty Ltd v Svelte Corporation Pty Ltd [1996] ATPR 46-159 at 53-362; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 42; Diversified Mineral Resources NL v CRA Exploration Pty Ltd [1995] ATPR 41-381 at 4284.
Accordingly, to determine whether Hisoft has contravened s 52(1) by failing to inform Compaq that it had discovered what had happened to the agency stock and the proceeds of the sale of that stock, it must be established that such failure was deliberate.
On the evidence I cannot conclude that the failure was deliberate. Hisoft knew that Compaq was carrying out an investigation to ascertain the cause of the discrepancy. At a meeting on 24 September 1992 Hisoft did disclose what had occurred. As I have said, I think it likely that Hisoft only became aware of what had occurred shortly before this meeting took place and there is nothing to indicate that it deliberately withheld the information from the time that it was first ascertained until the time of the meeting. Having regard to the gravity of the problem I would infer that Hisoft's directors thought it best to provide the explanation at a meeting with senior executives of Compaq rather than explain the matter in correspondence or by telephone. Whilst I accept that Hisoft did not immediately upon discovery of the breaches inform Compaq of them its failure to do so for a short time does not suggest that it deliberately withheld that information.
Thus far I have been dealing with the first three representations about which complaint was made. The fourth representation (being that concerned with the manner in which Hisoft would deal with the proceeds of sale) can now be dealt with.
In my view the manner in which Hisoft dealt with the cheques which it received in payment for the computer products constituted a breach of clauses 6.1 and 6.2 of the agency agreement. Hisoft was not entitled to deposit the proceeds of those cheques into its own bank account: to do so constituted a breach of the trust created by clause 6.1 and an arguable breach of the promise contained in clause 6.2. The manner in which it dealt with those monies was also in breach of the representation made by Mr Bunnett notwithstanding that it may have accorded with the understanding of Mr Pittman to which reference has been made earlier.
However, the question that must be considered is whether, on the facts of this case, Hisoft engaged in misleading conduct by reason of its failure to inform Compaq of the way in which it was dealing with the cheques that it received from the purchasers. I do not think that such a finding can be made. On each occasion that Hisoft deposited a purchasers' cheque into its bank account it immediately drew a cheque on that account for the amount due to Compaq and deposited that cheque into Compaq's account. On the same day that the deposit was made Hisoft advised Compaq that the deposit had been effected. Hisoft did not engage in any pretence that it had "transferred" funds into Compaq's bank account nor did it indicate that its banker was transferring funds into Compaq's bank account. However, Mr Pittman had available to him, on a daily basis, the bank statements that disclosed that money was being deposited into Compaq's bank account. As Mr Pittman frankly conceded in his evidence it would have been apparent to him, had he given the matter a moment's consideration, that the money that was received from the sale of agency stock was coming into Compaq's account by the deposit of a cheque and not by way of bank transfer. In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199 Gibbs CJ said of s 52:
"It seems clear enough that consideration must be given to the class of consumers likely to be affected by the conduct. Although it is true, as has often been said, that ordinarily a class of consumers may include the inexperienced as well as the experienced, and the gullible as well as the astute, the section must in my opinion be regarded as contemplating the effect of the conduct on reasonable members of the class. The heavy burdens which the section creates cannot have been intended to be imposed for the benefit of persons who failed to take reasonable care of their own interests. What is reasonable will of course depend on all the circumstances."
Thus to determine whether conduct is misleading it is necessary to take account of the whole of the relevant conduct. The conduct does not consist only of the representation. The conduct includes the depositing by Hisoft of its cheques into Compaq's account and advising Compaq that those deposits had been made. In my opinion the totality of this conduct was not misleading. If Mr Pittman had turned his mind to the contents of the letters he received and the contents of the bank statements that he obtained from Westpac he would have appreciated what was the true position.
Notwithstanding the findings I have made I propose to consider whether Messrs Merry, Bunnett, Horman and Thomson were knowingly concerned in the contraventions of the Trade Practices Act on the assumption, contrary to my view, that such contraventions did occur. There are two reasons why this is appropriate. First, serious allegations have been made against those respondents and they are entitled to my views concerning their conduct. Second, in the event that this case goes further and it turns out that I am wrong in the conclusions that I have thus far reached, it is desirable that I deal with this allegation.
The starting point must be the evidence of Mr Pittman where he explained that, as a result of his investigations, and they were detailed investigations, he reached the conclusion that what had caused the sale of agency stock to non-agency purchasers was that agency stock had not been properly segregated. For the reasons I have given I do not regard this as advertent conduct. On the contrary, the evidence points to the conclusion that it was inadvertent.
Further there is no evidence from which it could be inferred that until some time in September 1992 or thereabouts any person within Hisoft was aware that agency stock had not been segregated from other stock. It seems clear enough that the failure to keep agency stock separated from other stock in Hisoft's warehouses led to that stock being sold as non-agency stock and thus led to the proceeds of the sale of that stock being banked by Hisoft into its own account and treated as its own money.
Compaq says that the breaches of the agency agreement were so serious that this must have been reported to the directors and for the same reason it says that the breaches must be regarded as having been deliberately undertaken with the concurrence of some of the directors. I disagree. It is true that the breaches were both serious and extensive. But Mr Pittman's explanation of them, an explanation given after an extensive investigation to ascertain the cause of the problem, suggests that the only reasonable inference to be drawn is that the breaches would not have been discovered by these respondents until some event had alerted them to the problem and investigations were undertaken by them to ascertain the cause.
More to the point however, is the fact that there is no evidence to suggest that any of Messrs Merry, Bunnett, Horman or Thomson had any involvement in the events that led to agency stock being sold to customers not entitled to acquire that stock. Nor is there any evidence from which it could reasonably be inferred that these respondents were in some other way involved in agency stock being improperly dealt with. The same is true in relation to the misappropriation of the proceeds of the sale of that stock. It might be reasonable to infer that Messrs Horman and Thomson were involved in dealings with Compaq. Mr Horman appears to have been involved on the accounting side and Mr Thomson, the national distribution manager, certainly had some part to play in Hisoft obtaining extended credit from Compaq. But this is a far cry from an involvement in the improper sale of agency stock and the misappropriation of funds. I think that the suggestion that these respondents were involved in these breaches is quite unsupportable.
The position was different by about September 1992. By then Messrs Horman and Thomson would have known that agency stock had been improperly dealt with and that the proceeds of the sale of that stock had been misappropriated. I fix the time of knowledge as September 1992 for reasons already explained. I have no doubt that it should also reasonably be inferred that some time in September 1992 the directors of Hisoft (perhaps other than Mr Bassat for reasons to be explained later) would have been informed of the problem. But by then Hisoft had already received the sum of approximately $1 million that should have been paid to Compaq save for a few isolated amounts that were improperly received thereafter.
Finally, it is necessary to consider whether Compaq has sufficiently made out its claim that Messrs Payes, Sharp, Bassat and Krass knowingly procured Hisoft to breach the fiduciary duties it owed to Compaq.
At the outset I should indicate that I have no doubt that Hisoft was under a duty in equity to sell agency stock only to nominated customers, to hold the proceeds of the sale of that stock on trust for Compaq and to account for those proceeds by paying them to Compaq immediately after they were received. Those obligations would arise from the trust and the agency established by the agency agreement: compare Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384 at 408-409. The respondents did not contend to the contrary.
However, the allegation that Hisoft was under a duty to give effect to Mr Bunnett's representation and to inform Compaq it was not doing so is of a different order. I take it to be an established principle that, speaking generally, a fiduciary is not under an obligation to make disclosures to the person with whom he is in a fiduciary relationship. As Gaudron and McHugh JJ said in Breen v Williams (1995-1996) 186 CLR 71 at 113:
"[T]he laws of this country do not … impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed."
In other words, equity imposes proscriptive and no prescriptive obligations: see also National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (unreported Lindgren J, Federal Court, 28 May 1998); J Glover, "Commercial Equity - Fiduciary Relationships" at para 5.1.
What Compaq must establish to make good its claim is that (a) each relevant respondent knew of the terms of the agency agreement in June and July 1992, (b) each relevant respondent was aware that the agency agreement was being breached in the relevant respects, and (c) each relevant respondent caused, procured, permitted or assisted in those breaches. It would also need to be shown that the respondents' conduct was dishonest in the sense explained by Lord Nicholls in Royal Brunei Airlines but such a finding would necessarily follow if the other elements of the cause of action are established. An honest person would not assist in the breaches of duty that occurred in this case.
It is clearly established that Mr Bunnett knew of the terms of the agency agreement. A draft had been sent to him by Mr Sharp. It may be inferred that Mr Payes also knew of the terms of the agency agreement because it was he who suggested that such an agreement should be proposed to Compaq. I think the same inference should be drawn in relation to Mr Merry because he also had some involvement in the negotiations with Compaq that led to the making of the agreement and it is likely that he was informed of the outcome of those negotiations. Mr Sharp plainly knew of the terms of the agreement because, in his capacity as solicitor to Hisoft, he reviewed the initial draft and sighted the agreement in its final form. However, there is no evidence from which it could be inferred that Mr Krass knew anything of the agreement. On one view it might be possible to suppose that, being a director, he was informed of the contents of the agreement or was given a copy of it. However, the evidence discloses that the agreement was not discussed at a meeting of directors and, in the absence of some fact that would suggest that Mr Krass had some active involvement in the affairs of Hisoft, I cannot infer that he knew anything at all about the terms of the agency agreement even if I was to suppose that he knew of its existence.
In the case of Mr Bassat the position is clear. Compaq tendered an affidavit sworn by Mr Bassat because it was perceived that it contained some admissions that could be used against him. In that affidavit Mr Bassat deposed that he had never seen the agency agreement. He says that he was instructed to have no involvement with Compaq for the reason that Mr Bassat is a director of IBM who had become a director of Hisoft "to investigate and work towards an alliance between IBM and Hisoft." I am entitled to take the whole of his affidavit into account unless it appears that what he says in it is improbable or otherwise inconsistent with other evidence in the case: see Sharp v Hotel International Ltd [1969] VR 103 at 109-110. Mr Bassat's evidence is neither improbable nor is it inconsistent with other evidence called by Compaq.
I can deal with the remaining two elements of the cause of action together. I suppose that my conclusions in respect of them will be apparent from what has gone before. There is no direct evidence to show that these respondents were aware of the breaches of duty when those breaches occurred. So much is readily conceded by Compaq. Its case is a circumstantial one. But there are no circumstances that have been raised from which it could be inferred that these respondents knew anything at all about what was happening with the agency stock. The sole foundation upon which Compaq relies to establish knowledge on the part of these respondents (apart from Mr Bassat) is that the other directors knew of the breaches and would have informed them of their existence. I have already found that the other directors had no such knowledge. And there are no other facts from which the inference of knowledge could be drawn. The same is true of Mr Bassat. The contention that he wilfully refrained from making enquiries about the position of Compaq, presumably because he was aware of some circumstance that required him to undertake an enquiry, is not supported by any evidence whatsoever.
I should also say, lest I am wrong about this, that there is also no evidence to support the allegation that any of these respondents procured a breach of the duties owed by Hisoft. There is no evidence that indicates that these respondents played any part in the dealings between Comaq and Hisoft. For all I know they may have played no part in those dealings at all. As was pointed out during argument I do not even know whether any of these respondents were in Australia when the relevant events occurred. All I have is conjecture and conjecture is not a basis upon which to found an inference of the type that Compaq seeks to establish.
For the foregoing reasons the proceeding in so far as it relates to the alleged contravention of the Trade Practices Act and the alleged procuring of breaches of fiduciary duty must be dismissed with costs. There is still one cause of action that must be dealt with the hearing of which has been deferred. The parties should bring in short minutes of orders to give effect to these reasons. Those orders should make provision for the interlocutory steps to be taken in respect of the outstanding cause of action.