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