I C Pipes Pty Ltd v DGS Trading Pty Ltd

The plaintiff's case against the second and third defendants

1. The plaintiff read the following affidavits: 1. Mr Luke Moore dated 14 May 2021, 1 October 2021 and 24 March 2022; and 2. Ms Emma Levett dated 25 February 2022.
2. The exhibits to the above affidavits were marked as separate exhibits.
3. The plaintiff is a limited company. Its business includes the maintenance of sewerage and stormwater drains and pipes.
4. Mr Luke Moore is a director of the plaintiff.
5. In 2015 the plaintiff obtained a contract with Comdain Infrastructure (Comdain) to provide work to the Sydney Water Corporation (SWC). In order to perform this contract, the plaintiff needed more staff.
6. On 9 August 2016 the plaintiff employed the second defendant as NSW Contract Manager. There was a contract of employment which formed the basis of a breach of contract claim. This claim was ultimately not pressed, the plaintiff deciding to rely on a breach of fiduciary claim only.
7. In November 2018 the plaintiff employed a Mr Anthony McGee as a field technician.
8. Ms McGee, Mr McGee's wife, was the sole director of the first defendant. As mentioned, this company is now in liquidation and has taken no part in the proceedings.
9. On 6 March 2019 the plaintiff entered into a Rental and Purchase Agreement (the Agreement) with the first defendant in respect of an Isuzu truck. The intent of the Agreement was to enable the first defendant to fulfill its obligations in respect of the SWC work. For example, the first defendant was to clean and inspect pipelines and drains on behalf of the plaintiff. The equipment on the truck was an integral part of performing this work.
10. Rates were agreed between the plaintiff and the first defendant pursuant to a memorandum of understanding that had been concluded on 11 March 2019.
11. Following the Agreement with the first defendant, Mr McGee stopped working for the plaintiff as an employee, but carried on as a subcontractor employed by the first defendant. The first defendant, after 11 March 2019, began doing the work that had previously been performed by Mr McGee as an individual.
12. In April 2019 Mr Moore became concerned that the plaintiff was not receiving invoices for the work being done by the first defendant. He raised his concerns with the second defendant.
13. The second defendant then set up a process to deal with payment of work performed by the first defendant. The process included the preparation of a "recipient created tax invoice". This method was not used with any other client.
14. The method worked in this way: the first defendant sent the plaintiff closed-circuit television (CCTV) reports and daily timesheets. The CCTV reports were details of the footage that had been taken of drains and pipes in the course of the first defendant's subcontract work for the plaintiff.
15. Upon receipt of the reports and timesheets, the plaintiff, by the second defendant, prepared an Excel spreadsheet which showed the amounts claimed by the first defendant and the amounts assessed by the plaintiff. The spreadsheet was sent to the first defendant for comment.
16. Following any comment and any consequent revisions, the second defendant, prepared an invoice which was sent to the first defendant. The first defendant then confirmed the invoice as correct and, after this was communicated to the plaintiff, it was checked by Mr Moore and then paid.
17. After payment, the second defendant would then send an invoice to Comdain which would include the work done for the first defendant as well as any work that had been done by the plaintiff.
18. In April 2020 Mr Moore noticed what he considered to be some duplication in the invoice system. In July 2020 he decided to perform an audit. He asked the second defendant to help him with the audit.
19. On 7 August 2020 the second defendant sent Mr Moore an email stating that he had identified duplicated payments of $51,742.60. Almost two hours later the second defendant sent Mr Moore another email stating: "Now at $77K… I did not realise it was this bad. Apologies."
20. Two weeks later, on 21 August 2020, the second defendant gave notice of his resignation from his employment, to take effect from 11 September 2020.
21. Mr Moore informed the first defendant of the overpayment and requested that future invoices be credited to expunge the excess funds. Some negotiations then followed with the first defendant.
22. Ultimately the first defendant conceded overpayments of $98,977, which it repaid.
23. On 17 November 2020 the plaintiff commenced proceedings in the District Court against the first defendant to recover overpayments that had been made and not refunded. Documents produced under subpoena revealed payments from the first defendant to the second and third defendants. Mr Moore analysed the documents and observed that: 1. from 1 September 2019 until 21 December 2019 the second defendant had received "wages" from the first defendant totalling $8,400; and 2. from 1 December 2019 until 31 December 2020 the second defendant had received "consultancy fees" from the first defendant in the sum of $346,909.61. Of this sum, $316,534.99 had been received by the second defendant during the period of his employment with the plaintiff.
24. The relationship between the first defendant and the second defendant had previously been unknown to Mr Moore.
25. The revelations from the subpoenaed documents led the plaintiff to expand its claim so as to join the second, third and fourth defendants to the proceedings. This was done after the matter had been transferred to this Court on 9 March 2022.
26. On 29 April 2021 Mr Moore instructed, through his solicitors, Ms Emma Levett, a forensic accountant, to prepare an analysis of the financial material that had been obtained through the subpoenaed documents. Ms Levett conducted two separate audits, to ascertain the following: 1. what was the extent of payments made to the first defendant for work that had not been done by the first defendant, or for work that had been done by the first defendant but charged above the agreed rate? and 2. what payments had been made by the first defendant to the second and third defendants.
27. The audits performed by Ms Levett revealed the following: 1. the plaintiff had paid the first defendant $400,283 for work that had not been done by the first defendant; 2. the first defendant had repaid $98,977, leaving an outstanding balance of $301,306; 3. the plaintiff had paid the first defendant $37,065, representing amounts in excess of the agreed rates. Of this sum, $11,071 had been repaid, leaving a balance of $25,994; 4. during the period of the second defendant's employment with the plaintiff, the third defendant had paid the second defendant $8,400 and had paid the third defendant $232,827; 5. the amounts in the preceding subparagraph represent the plaintiff's claim for monies paid in consequence of the second defendant's breach of fiduciary duty; and 6. other amounts had been paid to the second defendant, but they were all payments made after the second defendant resigned his employment from the plaintiff.
28. The defences filed by the second and third defendants admit that the second defendant was employed by the plaintiff between 9 August 2016 and 11 September 2022. They further admit that during this period the second defendant owed a fiduciary duty to the plaintiff to the following effect: 1. to not use his position for profit or personal gain; and 2. to not put himself in a position of conflict with the plaintiff.
29. Had the second and third defendants not made the above admissions as to a fiduciary duty, I would have found such a duty existed, principally derived from the senior position held by the second defendant, and in particular his role in the creation of the invoices by which the plaintiff paid the first defendant.
30. The second defendant's "secret" dealings with the first defendant, both personally and via the third defendant, were clearly in breach of the above fiduciary duties.
31. The nature of the duties owed by an employee were set out by Gageler J in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited & Anor (2018) 265 CLR 1; [2018] HCA 43 from [67]: "67. The fiduciary duty that an employee has to an employer within the scope of the relationship of employment, no less than the fiduciary duty that any other person in a fiduciary position has to any other person to whom the fiduciary duty is owed within the scope of the venture or undertaking in respect of which the person in the fiduciary position has undertaken or assumed a responsibility to act in the exclusive interests of that other person, is a duty of 'absolute and disinterested loyalty'. That duty of loyalty is imposed in equity by means of two overlapping 'proscriptive obligations'. Each proscriptive obligation, or 'theme', is 'descriptive of circumstances in which equity will regard conduct of a particular kind as unconscionable and consequently attracting equitable remedies'. 68. 'The first', often referred to as the 'conflict rule', 'is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest.' The unconscionability which attracts equitable remedies in circumstances where the conflict rule alone is invoked lies not so much in receipt by the fiduciary of the benefit or gain (over which the fiduciary need not have control) as in retention by the fiduciary of the benefit or gain which in conscience ought to be disgorged to the principal. 69. 'The second', often referred to as the 'profit rule', 'is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of [the] fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing [the fiduciary's] position for [the fiduciary's] personal advantage.' The unconscionability which attracts equitable remedies in such circumstances lies in pursuit by the fiduciary of self-interest, or, more precisely, in pursuit of an interest other than the exclusive interest of the principal."
32. The second defendant, purporting to act on behalf of and in the interests of the plaintiff, created, or at least assisted, in the production of invoices. This, in turn, lead to overpayments being made to the first defendant and subsequent payments from the first defendant to the second and third defendants. The payments included amounts for work that had either not been done or should have been done at a lower rate. The second defendant, who later received monies from the first defendant, was unquestionably using his position for profit or personal gain.
33. The absence of the second defendant from the hearing has resulted in there being no excuse, if one could be contemplated, for the second defendant's actions.
34. I have already observed that the third defendant was the alter ego of the second defendant. The monies received by the third defendant from the first defendant were the product of the breach of fiduciary duty by the second defendant. In Barnes v Addy (1874) LR 9 Ch App 244 Lord Selborne LC said, at 251: "Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees."
35. In relation to the third defendant, bearing in mind that the third defendant was a "one man" company, the man being the second defendant, the company had received "and become chargeable with some part of the trust property" (the first limb of Barnes v Addy).
36. I am therefore satisfied that orders should be made against both the second and third defendants. There will be a difference between the amounts to reflect the $8,400 received directly by the second defendant, but not by the third defendant.

The cross-claim

1. On 15 February 2022, in the District Court, the second and third defendants filed a cross-claim. It is an allegation of defamation.
2. On 9 March 2022 the matter was transferred to this Court, seemingly at the instigation of the District Court. Notably, the plaintiff did not request the transfer so no cost penalty arises consequent upon the amount it will recover.
3. The plaintiff filed a defence to the cross-claim in this Court on 21 July 2022.
4. The plaintiff sought an order that the cross-claim be dismissed for the following reasons: 1. there is no evidence to substantiate the claim, the second defendant not having appeared; 2. the details given of the claim do not meet the requirements of r 14.30 of the Uniform Civil Procedure Rules 2005 (NSW); there is no description of the imputations, there is no description of the alleged publications and generally there has been a failure to particularise; 3. based on the assertion in the cross-claim that a "cease and desist letter" was sent to Mr Moore on 1 October 2020, it must follow that the defamatory publications were made before that date. There is no evidence of a "concerns notice", so that the limitation period of 12 months from publication remains in place (s 14B of the Limitation Act 1969 (NSW)); and 4. the cross-claim is therefore time barred.
5. I am satisfied that all of the reasons given in the preceding paragraph have been established or are otherwise correct, so that the cross-claim must be dismissed.
6. I note that I considered adjourning the cross-claim under r 13.6 of the Uniform Civil Procedure Rules, but I rejected this approach because of the extensive internal failings of the cross-claim, as seen above.

Orders

1. I make the following orders: 1. The second defendant (Mr Sam Blanch) is to account to the plaintiff (IC Pipes Pty Ltd) in the sum of $241,227 for profits in equity arising out of his breach of fiduciary duties owed to the plaintiff. 2. The third defendant (Blanch Consulting Pty Ltd) is to account to the plaintiff in the sum of $232,827 for profits knowingly received by reason of the second defendant's breach of fiduciary duties owed to the plaintiff. 3. The plaintiff is entitled to interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) up to the date of these orders. 4. The cross-claim is dismissed. 5. The second and third defendants are to pay the costs of the plaintiff in respect of the plaintiff's claim and the cross-claim. 6. The parties have liberty to apply in respect of any different costs order.

Amendments 12 September 2023 - (No 2) added to case title 15 November 2023 - Jurisdiction amended to Equity DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 November 2023