Australian Receivables Ltd v Tekitu Pty Ltd

r Stores Pty Ltd (in liq) (1948) 76 CLR 463 Duncan Davis Pty Ltd v Hurstbridge Abattoirs [1995] 1 VR 279 Emwest Products Pty Ltd v Olifent (1996) 22 ACSR 202 FAI Insurances Ltd v Pioneer Concrete Services Ltd (1987) 15 NSWLR 552 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102 Forster v Jododex Australia Pty Ltd [1972] HCA 61; (1972) 127 CLR 421 Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 Gardner v Dairy Industry Authority New South Wales (1977) 18 ALR 55; 52 ALJR 180 Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 Hanson v Radcliffe Urban District Council [1922] 2 Ch 490 Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 Ibeneweka v Egbuna [1964] 1 WLR 219 Ingot and Ors v Macquarie and Ors [2004] NSWSC 1136 James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 Jones v Dunkel (1959) 101 CLR 298 Liquor National Wholesale Pty Limited v Redrock Co Pty Limited [2007] NSWSC 392 Lofts v MacDonald (1974) 3 ALR 404 Meyers v Casey [1913] HCA 50; (1913) 17 CLR 90 Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583 National Commercial Banking Corporation of Australia v Batty [1986] HCA 31; (1986) 160 CLR 251 Norfolk Plumbing Supplies Pty Ltd v Commonwealth Bank of Australia (1992) 6 ACSR 601 Parsons v McBain [2001] FCA 376; (2001) 109 FCR 120 Paul A Davies (Australia) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440; (1983) 1 ACLC 1091 Perkins v State Bank of South Australia (1993) 61 SASR 246 Power v Ekstein [2009] NSWSC 130 Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 102 ALR 681 Re Bradford Roofing Industries Pty Ltd (in liq) & Companies Act [1966] 1 NSWR 674 Re Cummins (t/a Nam Constructions); Ex parte Harris v ARC Engineering Pty Ltd (1985) 62 ALR 129 Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361 Re Global Finance Group Pty Ltd [2002] WASC 63; (2002) 26 WAR 385 Re Goldcorp Exchange Ltd; Kensington v Liggett [1995] 1 AC 74; [1994] 2 All ER 806 Re Hallett's Estate; Knatchbull v Hallett; Cotterell v Hallett (1879) 13 Ch D 696; [1874-80] All ER Rep 793 Re Jonton Pty Ltd [1992] 2 Qd R 105; (1991) Q ConvR 54 - 392 Re Joscelyne; Allen's Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4 Re Judiciary and Navigation Acts (Advisory Opinions Case) (1921) 29 CLR 257 Re Oatway; Hertslet v Oatway [1903] 2 Ch 356 Re Sharpe; Ex parte Trustee of the Bankrupt's Property v Sharpe [1980] 1 WLR 219 Re Sabri; Ex parte Brien v Australian & New Zealand Banking Group Ltd (1996) 137 FLR 165 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Reynolds Bros (Motors) Pty Ltd v Esanda Ltd (1983) 8 ACLR 422 Robertson v Grigg (1932) 47 CLR 257 Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378 Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 Scott v Scott (1963) 109 CLR 649 Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) [1986] 3 All ER 75 Stephenson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536 Taylor v White (1964) 110 CLR 129 Twinsectra Ltd v Yardley [2002] 2 AC 164 University of New South Wales v Moorhouse & Angus & Robertson (Publishers) Pty Ltd (1975) 133 CLR 1 West v Mead [2003] NSWSC 161; (2003) 13 BPR 24,431 Texts Cited: Halsbury's Laws of Australia (online edn) Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th edn) Scott and Fratcher, The Law of Trusts (4th edn, Vol 1) Category: Principal judgment Parties: Australian Receivables Ltd (Plaintiff/First Cross-Defendant) NCO Australia Pty Ltd (Second Cross-Defendant) Tekitu Pty Ltd (First Defendant/First Cross-Claimant) Ross Edward Smith (Second Defendant/Second Cross-Claimant) Lynette Mary Smith (Third Defendant/Third Cross-Claimant) Representation: Counsel R J Brender with A Ahmad (Plaintiff/Cross-Defendants) N Cotman SC with Ms M Fisher (Defendants/Cross-Claimants) Solicitors Forbes Dowling Lawyers (Plaintiff/Cross-Defendants) Malcolm Johns and Company (Defendants/Cross-Claimants) File Number(s): 07/257468

Judgment 1HER HONOUR : These proceedings relate to disputes that have their genesis in the sale in 2007 by the first defendant (Tekitu) to the plaintiff (Australian Receivables) of what may broadly be described as a debt collection business (known as Statewide Mercantile Services) then carried on by Tekitu. Although the relevant contracts by which the assets and business were transferred (there being two separate contracts dealing with different aspects of the debt collection business) were entered into in January 2007, the effective date was specified in each as being 30 November 2006. The purchase price under the main contract was payable in successive tranches (the detail of which I will describe in due course). 2Disputes arose between the parties not long after completion as to the implementation of the arrangements in relation to the sale. Those disputes related, on the one hand, to the amount outstanding in respect of the second instalment of the purchase price due in April 2007 (including the precise quantum payable by Australian Receivables in respect of that instalment), claims by Tekitu in respect of business expenses said to have been incurred on behalf of Australian Receivables and, later, as to the quantum of the second earn-out payment due by Australian Receivables and, on the other hand, to the claim by Australian Receivables that moneys required to be remitted to it under the terms of the Sale of Business Agreement had been wrongly retained in Tekitu's bank accounts and that there had been breaches of various warranties given by Tekitu in the agreement. 3After correspondence during the course of 2007 in relation to various of the matters in dispute, Australian Receivables made demand in October 2007 for the retained moneys. In response to that demand, Tekitu's lawyers acknowledged that certain funds (described as 'set-off funds') were being held in a bank account to the credit of Tekitu (though it seems that some or all of the set-off funds to which the letter referred had already been transferred out of the Tekitu account and into an account of Tekitu's directors). Meanwhile, unbeknownst to Tekitu, Australian Receivables had adopted its own system of set-off by treating in its internal accounts various amounts claimed by Tekitu (that were not apparently disputed by Australian Receivables) as having been paid by way of "loan reconciliation". 4In due course the disputes between the parties led to the commencement of these proceedings and an application by Australian Receivables for interlocutory relief. On 1 November 2007, when the summons filed by Australian Receivables was first returnable, an undertaking was given by the defendants (on a without admissions basis and on the giving by Australian Receivables of the usual undertaking as to damages) for the immediate transfer of the sum of around $300,000 to their solicitors' trust account to be held pending further order of the Court. Undertakings were also given, on the same basis, in effect requiring the giving of notice by Tekitu before the expenditure of any money or entry by it into any transactions other than a transaction involving periodic payments not exceeding $5,000 in total and the giving of notice by Tekitu's directors and shareholders (the second and third defendants, Mr Ross Edward Smith and Mrs Lynette Mary Smith), as to any further encumbrance of or dealings with their residential property. An irrevocable direction was agreed to be given to the defendants' banker to the effect that, upon completion of the release of any guarantees provided by the defendants in respect of property leases covered by the parties' agreement, any amounts securing each guarantee were to be paid to the defendants' solicitors' trust account. 5The sum of $330,000 was paid into the defendants' solicitors' trust account (and then transferred to a controlled moneys account) on 6 November 2007 following the giving of the above undertakings. A further sum of $1,314 was subsequently paid into that controlled moneys account on 15 November 2007, as representing the balance of that portion of the retained moneys that had been withdrawn by Tekitu's directors from Tekitu's trading account in October 2007. 6The orders made in relation to the moneys held in the controlled moneys account were varied on 6 December 2007 to permit the payment (without admission) of $106,707 to Australian Receivables out of that account. Between then and August 2008, three further amounts were paid to Australian Receivables (namely, amounts of $15,774.00, $38,893.00 and $16,500.00), each representing moneys released by lessors in respect of rental guarantees given in relation to property formerly leased by Tekitu. (The first two of those amounts were paid out of the funds held in the controlled moneys account referable to the funds that had been withdrawn from the Tekitu trading account; the third came directly from the lessor in question. There is an issue, which I consider later, as to the characterisation of the first two such payments due to what was described as a timing "hiccup" with the payment of moneys in and out of the controlled moneys account.) 7In all, Australian Receivables has received (without admission) payments totalling $177,874.00 in four tranches during the period from 6 December 2007 to 25 August 2008. Australian Receivables claims a declaration that it is entitled to retain the moneys so paid to it. 8As at the date of the hearing there remained a sum of $224,607.72 held in the controlled money account. Australian Receivables contends that this sum is impressed with a trust in its favour. Tekitu denies this and contends that it represents no more than security for any adverse judgment in these proceedings (or in the alternative that any trust is limited to the sum presently retained in the account less $54,667 being the sum of the two payments (of $15,774 and $38,893) that were paid out of the account to Australian Receivables prior to receipt of released rent guarantee funds in the same amounts). The significance of the trust claim is that Tekitu is now under external administration. 9On 14 December 2007, the defendants filed a notice of motion in effect seeking to be discharged from the undertakings they had given. Australian Receivables filed an opposing notice of motion for the remaining sum held in the controlled moneys account to be released to it. A further notice of motion was filed in March 2008 for the release to Australian Receivables of moneys held by Tekitu in one or more B-pay accounts. 10The opposing interlocutory applications were heard by Brereton J in April 2008. In his Honour's reasons, reference was made to the explanation that had been given by the Smiths for the way in which the sum of $330,000 had been paid following the 1 November undertaking (namely, that this amount had been paid by them personally on the basis that the withdrawal from Tekitu's trading account in October 2007 had been a payment to them by Tekitu in reduction of their directors' loan accounts). His Honour considered that the correspondence between the parties and the terms of the undertaking made it plain that what had happened in substance was that the payment to the directors in reduction of their loan accounts (as at 1 November 2007 apparently not hitherto having been disclosed) was reversed and those funds were notionally, if not actually, restored to Tekitu whence they had come. His Honour was of the view that the intent of that payment was that the funds that Tekitu held (or had immediately prior to the payment to the Smiths held) should be paid into the solicitors' trust account. 11Brereton J made orders on 4 April 2008 restraining the defendants (until further order) from dealing with the fund held by their solicitor (pursuant to the undertaking that had been given by them on 1 November 2007) and restraining Tekitu, and the Smiths, respectively, from alienating or encumbering assets as identified in the orders (in the case of Tekitu, its assets to the extent that they exceed $200,000, and, in the case of the Smiths, any real property asset) without notice to Australian Receivables' solicitors of their intention to do so (such notice to be given in accordance with the orders then made by his Honour). 12The opposing claims now before me are: (a) a claim by Australian Receivables (to which I will refer as the retained moneys claim) for the payment to it of the moneys said to have been wrongly retained in the Tekitu trading account after completion of the Sale of Business Agreement (which Australian Receivables contends were moneys held by Tekitu on trust for it and for any shortfall in which it says the Smiths are personally liable on a second limb Barnes v Addy ((1874) LR 9 Ch App 244) claim); (As a result of the insolvency of Tekitu, the balance of the retained moneys claim is not pursued against it, except to the extent that it might offset any proven Tekitu cross-claim (though the balance (at least to the extent of $88,100) is pursued personally against the Smiths on the Barnes v Addy claim).) (b) a cross claim by Tekitu (which it also raises by way of set-off against the retained moneys claim) for moneys owing by Australian Receivables to it in respect of both the outstanding balance of the second instalment of the purchase price for the sale of the business which was due on 9 April 2007 (the quantum of which turns on the validity of the various adjustments contended for by Australian Receivables, which it says operate to reduce that amount to almost nil, and other adjustments claimed by Tekitu) and the second earn-out payment; as well as for damages for alleged breaches by Australian Receivables of the Sale of Business Agreement and of the service agreements entered into at the time of the sale for the provision of services by each of Mr and Mrs Smith to Australian Receivables; and (c) claims raised by Australian Receivables by way of defence to the Tekitu cross-claim for alleged breach of warranties by Tekitu under the Sale of Business Agreement in relation to the amount for which provision was made in respect of employees' long service leave entitlements in the financial accounts of the business and as to the alleged overdrawing of commission in respect of a particular client (IAG) account. 13Insofar as a claim was also made by Australian Receivables in its Further Amended Statement of Claim for relief in relation to moneys held in bank accounts referred to as the B-pay accounts (in respect of which it is said that Tekitu was liable to account but over which no proprietary interest is now claimed), this was ultimately pressed by Australian Receivables as part of its defence to Tekitu's set-off claims. The adjustment to be made in this regard was agreed by the parties as being $1,457.48 in favour of Australian Receivables of (rather than the $17,041 initially claimed), the balance being referable to the reimbursement to Tekitu of bank fees incurred in relation to the B-pay account. Hence, there is no issue remaining for determination in respect of the B-pay dispute. 14The principal breach of contract alleged by the Tekitu parties against Australian Receivables is that, in breach of clause 2.2 of the Sale of Business Agreement, Australian Receivables failed after completion to conduct the debt collection business in the usual course and instead conducted it in a way that materially prejudiced the basis for the calculation of the two earn-out payments to Tekitu for which provision was made in the contract as part of the overall purchase price. In submissions this allegation was based principally on the comparative diminution in the financial results of the Statewide Mercantile Services business after Australian Receivables took control of the business, although allegations are also made in the pleadings as to particular aspects of the conduct of the business by Australian Receivables said to be in breach of the clause and as to the alleged failure of Australian Receivables to take opportunities to expand the business (either existing at the time of sale or introduced by Mr Smith after the sale). Tekitu contends that, but for Australian Receivables' breach of clause 2.2, the earn-out amounts owing to Tekitu would have exceeded the earn-out amounts calculated on Australian Receivables' records. 15There has been what might be described as an ongoing refinement or reconciliation of the figures in dispute between the parties over the period from 2007 onwards. By the close of the hearing, there was a measure of agreement in relation to various of the claims (not only in relation to the B-pay claim referred to above). There was a concession by the defendants that there had been an overpayment of salaries to Mr and Mrs Smith of $5,656.92 for the period after Australian Receivables took control of the business and I was informed on 10 June 2011 that there had also been agreement reached as to the figure of $29,749.62 (included in the reconciliation schedule handed up on 6 June 2011 by Counsel for Australian Receivables (Mr Brender)) by way of adjustment referable to "SMS November debtors unpaid". 16The parties are now agreed as to the following adjustments in relation to the April 2007 purchase price instalment (as reflected in the Schedule to the Defence to the Further Amended Cross-Claim and adopting in general the descriptions used in that schedule): Instalment due on 9/4/07 $250,000.00 Less First Instalment Payment April 2007 (29,000.00) Less Second Instalment Payment July 2007 (73,583.11) Sub-total (balance owing to Tekitu) $147,416.89

Less agreed Cash Settlement Adjustment owed to Australian Receivables (33,925.39) Plus agreed Trade Creditors Payback 4,580.06 Less agreed December 2006 Loss in favour of Australian Receivables* (160,775.62) Plus adjustment agreed in respect of incorrect posting re December 2006 loss 26,187.62 Plus reimbursement to Tekitu re Payroll Salaries and Tax 94,609.55 Plus reimbursement to Tekitu for superannuation 43,878.39

Less SMS November Debtors unpaid (29,749.62) Revised sub-total (owing to Tekitu) $92,221.88

Less agreed set-offs for creditor payments (69,369.08) Less agreed adjustment for overpaid Smith salaries (5,656.92) Less agreed adjustment re Bpay claim (1,247.73) Further revised sub-total (owing to Tekitu) $15,948.15

(*There remains in dispute the adjustment to be made in respect of December debt portfolio commission/revenue from the acquired debt portfolio.)

17Where there remained a dispute was as to how much was to be allowed for what was described as the "commission adjustment for acquired debts" and for amounts in respect of software rental, consulting fees and business expenses claimed by Tekitu (as to which Australian Receivables admits a portion only of each of those claims) and whether any amount should be allowed for the Ricoh and Commander claims by Tekitu. 18The amount in dispute as to those items is as follows: [Commission Adjustment for Acquired Debts] : Tekitu claims that total revenue of $56,321 should have been included, requiring an adjustment in its favour of $33,912 since commission of approximately $22,000 has already been included in the calculations; Australian Receivables accepts only an adjustment of $5,512.56 in Tekitu's favour, thus the amount in dispute is $50,808.44 [Software Rental] : Tekitu claims $31,462.21 of which Australian Receivables accepts it owes $23,825.56, leaving in dispute $7,626.65 [Consulting Fees] : Tekitu claims $48,507.26 of which Australian Receivables accepts it owes $39,927.26, leaving $8,580.00 in dispute [Business Expenses] : $94,832.40 of which Australian Receivables agrees $89,998.30, leaving in dispute only $4,834.10 in respect of an outstanding legal invoice for advice in relation to property lease issues [Ricoh legal fees] : Tekitu's claim being $5,845 for legal costs in successfully defending a claim by Ricoh for unpaid rental payments [Commander] : for which no monetary amount is claimed, simply an indemnity 19There is thus a difference between the parties of around $70-75,000 in respect of the adjustments required to be made to the second purchase instalment payable to Tekitu. (As I understand it, the portion now accepted by Australian Receivables as owing in relation to the above disputed adjustments has been included in the schedule attached to the Defence to the Further Amended Statement of Cross-claim and it is only any additional amount that would need to be included if there is a determination in Tekitu's favour on any of those items.) 20As to the earn-out payments due under the Sale of Business Agreement, Australian Receivables admits that $122,117.28 is owing to Tekitu for the second earn-out payment. However, it raises a set-off claim by reference to the amounts it claims for alleged breach of warranties in relation to an alleged overdrawing of commission in respect of the IAG account ($119,548.98) and for increased long service leave provisioning (now put at $40,079.33). (Tekitu, which denies any breach of warranty, maintains that there is an adjustment to be made in its favour in respect of the second earn-out payment by reason of the damages it claims for the alleged breach by Australian Receivables of clause 2.2.) 21The Further Amended Statement of Cross Claim also sought relief in relation to matters relating to security deposits that had been placed by Tekitu with the National Australia Bank to support bank guarantees provided by the bank as security for property leases that later became the subject of the Sale of Business Agreement (see paras [72]-[80]). It was alleged that, in breach of Australian Receivables' obligations under clauses 8.1 and 8.7 of the Sale of Business Agreement, Australian Receivables had failed to effect the assignment of all the property leases and had failed to replace all of the security deposits (it being particularised that a sum of $23,501 was still on deposit with the bank). Of the $78,078.60 placed with the bank by way of security deposits, a total of $54,577.60 has since been released by the bank and paid without admission to Australian Receivables by Tekitu. 22Tekitu claimed to have suffered damage by being deprived of the benefit of the use of the $78,078.60 and the incurring of additional legal expenses and contended that the second cross-defendant (NCO) was liable to indemnify the cross-claimants in relation to the said breach (by reference to the guarantee given by it in clause 10.4 and indemnity in clause 10.5 of the Sale of Business Agreement). That cross-claim is denied. In particular, it is alleged by Australian Receivables that the Tekitu parties have themselves failed to use reasonable endeavours in relation to the assignment of the property leases and that they were in breach of undertakings given in respect of the release of the security deposits (and hence disentitled from bringing the claims in the abovementioned paragraphs of the cross-claim). 23During argument before me this aspect of the claim was not pressed and I do not understand it to remain in issue. Issues remaining for determination at close of hearing 24The issues remaining in dispute at the close of the hearing, and now requiring determination, can be summarised as set out below: (i) Australian Receivables' retained moneys claim (both against Tekitu and against Mr and Mrs Smith personally); (ii) Tekitu's cross-claim for the balance of the $250,000 purchase payment due on 9 April 2007, requiring a determination as to what adjustment is warranted in respect of the following matters: (a) what has been referred to as the December acquisition commission; (b) Tekitu's claims in respect of software rental; and (c) reimbursement of the claimed business expenses (in relation to Ricoh printers, Commander voice data systems, and legal fees referrable to the property leases). (iii) Claims as to breach of contract: (a) the alleged under-provisioning in the accounts by Tekitu for employee long service leave entitlements (said by Australian Receivables to be a breach by Tekitu of various warranties); (b) the alleged shortfall (or overdrawing by Tekitu of commission) from the IAG account (again, said by Australian Receivables to be in breach of various warranties); (c) Tekitu's claim in relation to the respective earn-out period payments (beyond the $122,117.28 conceded by Australian Receivables to be outstanding) namely, Tekitu's claim for damages for alleged breach by Australian Receivables of the obligation to carry on business as usual during the earn-out periods; and (d) Tekitu's claim for consultancy fees under the Smiths' service agreements. 25In summary, Australian Receivables contends that it is entitled to the whole of the moneys presently held in the controlled moneys account (without deduction), namely $224,607.72, and to retain the whole of the sums previously paid by the defendants on a without admission of liability basis. It also contends that any amount found to be owing to Tekitu as to the balance of the April 2007 purchase price instalment (once the various adjustments have been taken into account, including the agreed amount to reflect the overpayment of salaries to the Smiths of $5,656.92) is no more than $15,583.52 and that this sum (together with the second earn-out payment it concedes is payable) is to be set off against the amounts claimed by Australian Receivables for the IAG trust account shortfall ($119,548.98) and the increase in long service leave provisioning (of at least $40,079.33) such that no amount is now due to Tekitu. Summary 26For the reasons set out below, I am of the view that: (i) as to the first issue identified above:

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: 01 November 2011