Cambridge Electronics v McMaster [2005] NSWSC 198 | Case summary

2009/03 CAMBRIDGE ELECTRONICS PTY LTD v MALCOLM McMASTER JUDGMENT 1 McDOUGALL J: The plaintiff sues its former sole director, the defendant, to recover the total of a number of payments that, it says, the defendant caused to be made out of the plaintiff's bank account for his own benefit whilst he was its sole director. The payments and transfers were made on some 41 occasions over a period of time from July 1998 until August 2000. None of the payments was recorded in the company's primary accounting records. However, at the time each of the payments was made, the present sole director of the plaintiff, Mr Robert Safi, was able to operate on its bank accounts. He has said, and I accept, that he did not cause any of the payments in question to be made. 2 The transactions in question comprise 37 effected by cheque and four effected by electronic funds transfer. In almost all the 37 cases where the payment was made by cheque, the cheque butt is missing. In some cases, the book, of which the cheque formed part, is available but the butt has been cut out. In other cases, the entire book is missing. In a few cases, the cheque butt is available but is blank, except as to the amount of the cheque. In a few cases, the cheque butt is available and contains some information as to the payment. In those cases, the amount for which the cheque was presented and paid varies from the amount stated in the cheque butt. 3 The payments made by electronic funds transfer were made to or for the benefit of a loan account which is established by hearsay evidence, admitted by me pursuant to s 64(2) of the Evidence Act 1999, to be a loan account in the name of the defendant with St George Bank. 4 The plaintiff's case is that, in the circumstances, there is a sufficient inference that, on the balance of probabilities, the payments made by cheque were made either to or for the benefit of the defendant, and that they were not intended to be made either by way of gift to the defendant or in discharge of some obligation owed by the plaintiff to the defendant. The plaintiff says that the position applies a fortiori in the case of the four payments made by electronic funds transfer. 5 As I have said, the defendant was, at the time each of the payments was made, the sole director of the plaintiff. As such, he owed duties, including fiduciary obligations to act in the best interest of the company as a whole and, in substance, not to cause the assets of the company to be applied other than towards legitimate purposes of the company. Further, he owed statutory obligations requiring him to ensure that there were maintained proper accounting records for the plaintiff. 6 If the amounts in question were applied in satisfaction of some debt or other obligation owed by the plaintiff to the defendant, one would have expected them to be recorded in this fashion in the company's accounts. One would expect there to have been some evidence of the underlying debt or obligation, and some evidence that it was satisfied or reduced through the transactions in question. Equally, if the amounts were intended to have been paid by way of gift, one would expect this to have been properly recorded in the accounts of the plaintiff. As I have said, there is no record that would support the proposition that the payments were made in discharge of some obligation or by way of gift. 7 Indeed, the evidence goes the other way. After Mr Robert Safi took over the management of the company, he requested Mr Phillip John Lupton, an accountant, to prepare financial returns for the years ended 30 June 1999, 2000 and 2001. (This was done in May 2001, so the returns of 30 June 1999 and 30 June 2000 were then overdue.) Mr Lupton was able to carry out that task, but in the course of performing his work he noted that there was no evidence to show that the cheques and payments in question were for company purposes; indeed, he noted that they were not recorded at all. 8 In the course of preparing accounts, the plaintiff caused its present financial controller, Ms Joanne Louise Rankmore, to make enquiries. She had started to work with the plaintiff when the defendant was its sole director. When the defendant left, and when it was realised that there were no records of the payments in question, she made enquiries, including of the defendant. He told her that he did not have the relevant records and that they were "in his drawer or otherwise in the office somewhere". He said that if Ms Rankmore looked and could not find them, she should contract him again. Ms Rankmore made further enquiries but could not find the missing records. Although she then sought to contact the defendant on a number of occasions, she could not speak to him. 9 In my judgment, there is an inference properly available on the evidence, that the payments were not made for a legitimate purpose of the company, and that they were not made by way of gift. There are a number of circumstances that justify the drawing of that inference. The first is that at the time each of the payments was made, the defendant was the sole director of the plaintiff and owed it the fiduciary obligations to which I have referred. The second is that the defendant, by deduction from the evidence of Mr Robert Safi, caused each of the payments to be made. The third is that the defendant should have, but did not, cause any of the payments to be recorded in the primary accounting records of the plaintiff. The fourth is that the defendant did not cause the basic records - ie, the cheque butts - to be kept in the greatest number of cases; and that as to those that were kept, they were either incomplete or inaccurate. In other words, I think, the defendant sought to conceal the primary evidence of the transactions. The fifth matter is that the evidence does not disclose any legitimate purpose of the company - specifically, any obligation owed by the company to the defendant - that would justify the payments. The sixth is that there is no basis on which to infer the intention to make a gift: a fortiori where, as is the case, the prospective donor is owed fiduciary obligations by the prospective donee. 10 There has been some debate in the authorities as to whether, where a payment is made at the request of someone and for his benefit, there is an implied obligation to repay. The position in England appears to be that such an obligation can be implied. See Seldon v Davidson [1968] 2 All ER 755. However, that is not the position in Australia. See Heydon v Perpetual Executors Trustees and Agency Co (WA) LDD (1930) 45 CLR 111; Gray v Gray [2004] NSWCA 408 and Schmierer v Taouk (2004) 207 ALR 301. 11 Nonetheless, as White J pointed out in the case last referred to at 313 [60], where there is no obvious purpose for a payment made by a company to its director or shareholder, one should not infer that there is a gift. The better inference, in his Honour's view, in those circumstances, is that there was an implied obligation to repay. 12 In the present case, if the evidence had been contested and the defendant had appeared, it might have been possible to infer that there was some more malign purpose than the simple purpose of making a gift. However, in circumstances where the defendant has not appeared and, where the evidence has not been tested, I do not think that I should go so far. It is sufficient to conclude, as I am satisfied the evidence entitles me to conclude, that the payments were not intended to be made by way of gift and that the payments, although on the face of things made for the benefit of the defendant, were not intended to discharge any obligation owed by the plaintiff to the defendant. 13 In those circumstances, as both White J in Schmierer, and the High Court in Heydon, pointed out, it is open to infer that the payments were by way of loan and are repayable on demand. 14 I have adverted to the circumstance that the defendant did not appear to contest these proceedings. However, the proceedings were commenced in the District Court. The defendant filed notice of grounds of defence. Because that defence raised an issue as to a purported deed of release dated 19 April 2001 (shortly before the defendant ceased to be, and Mr Robert Safi became, the sole director of the plaintiff), the proceedings were transferred to this Court. The defendant appeared in this Court; indeed, at one stage he sought security for costs. However, his solicitor served him with a notice of ceasing to act in mid July 2004. Thus, whilst the defendant did not appear, I am satisfied that it is appropriate to proceed to judgment in his absence. I am fortified in that because on 3 March 2005 additional affidavits, which were read in these proceedings, were left at the defendant's place of residence. Clearly, the defendant would have inferred from that that the proceedings remained alive. 15 The issue relating to the deed of release has not been agitated before me because the defendant has not appeared. It would have been open to the plaintiff to prove the deed of release and to submit that, in substance, it should be found to be not binding upon it because it was executed in breach of fiduciary duty. However, since the deed of release arises under a defence advanced by the defendant that is not pressed, it was not necessary for the plaintiff to do so. 16 In all the circumstances, I have concluded that the evidence makes good the plaintiff's claim. It is therefore entitled to judgment in the amount sought, namely, $140,510.35 together with interest. Interest should run at the rate from time to time applicable under the Rules on each of the payments that constitute the amount, from the date when each of those payments was made (as proved by Mr Lupton's affidavit sworn 12 August 2004) up until the date of entry of judgment. 17 The plaintiff is also entitled to its costs of these proceedings. For the avoidance of doubt the costs payable by the defendant to the plaintiff include the costs of the proceedings commenced in the District Court and transferred to this Court. 18 I stand the proceedings over to 9.30 am on Friday 11 March 2005 for the making of orders consistent with these reasons.

Cambridge Electronics v McMaster

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