Mainland Holdings Ltd v Szady

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4095/99 MAINLAND HOLDINGS LTD v ARTHUR EMIL SZADY JUDGMENT 1 The plaintiff carries on a number of business operations in Papua New Guinea. A poultry division was conducted under the trading name Niugini Tablebirds ("Tablebirds"). It specialised in the production, distribution and marketing of fresh frozen and live day-old chickens. The defendant was employed by the plaintiff as marketing manager of Tablebirds. His contract of employment was summarily terminated on or about Friday 27 November 1998. 2 Tradeserve PNG Ltd ("Tradeserve") was registered as a company on 22 December 1993. From about June 1994 it supplied packaging materials to the plaintiff for Tablebirds products. Two invoices were raised with respect to these supplies, one for the physical product and another said to be for service fee, artwork, printing plates, moulding, production and other like descriptions. The plaintiff alleges that portion of the second invoice payments was received by the defendant as a secret commission. The plaintiff also alleged that the defendant had an interest in Tradeserve. The evidence does not make out that contention. A company search did not include the defendant as a shareholder. 3 The evidence relied upon by the plaintiff is circumstantial. It comprises evidence of admissions made by the defendant, together with an analysis made by an accountant of records made available to him from which he concluded that the defendant's expenditure exceeded his known sources of funds and there was a positive correlation between his unknown income and the second invoices raised by Tradeserve. 4 Paul Robert Stobbs was the general manager of the plaintiff. He was provided with some documents by a solicitor. On Monday 23 November 1998 he confronted the defendant with these documents at a meeting also attended by Colin Wakefield, the financial controller of the plaintiff and Brett Carter, the operations manager of Tablebirds. 5 The documents included two pages of a facsimile from Pacific Packaging Ltd which the defendant recognised as the handwriting of Gordon Allan, a director and shareholder of Tradeserve. They were in the following terms: "From about September 1994 when Tradeserve began operations I entered into a system of 'separate invoicing' with Tablebirds.

This involved 2 orders being given for a purchase, one order to ourselves or to the supplier and to be paid to ourselves or the supplier.

The second order was made to ourselves for intangibles such as 'artwork', 'printing plates', 'service fees' or 'commission'. This was usually paid when order for the purchase of goods was paid.

I was then advised by Arthur Szady how he wished the second order payment to be made. Usually 60 % was made by cash, credit card payment by draft or TT or to an account in Australia (Commonwealth, Box 8, W. Ryde. A/c 2271-0014-581) by draft or TT. The majority were in cash.

The remaining 40% of the payment was profit for Tradeserve, I did not use the money for my own purposes. I was advised to show the drawings as being for 'Bluebole Pty Ltd' an Australian company I was told Arthur owned. Address 110 Arthur Terrace, Redhill, Qld.

Occasionally other suppliers invoices were given to me to cover drawings. One from J Seeto two from a Malaysian supplier of promotional items. As far as I am aware, payments are still being made with orders placed on Tradeserve for labels, film, meat trays. Orders have been placed on us here for egg boxes and have been invoiced for 'service fee' or 'commission' - none of this has gone back to Arthur and is our genuine profit margin. From what I understand, even with the separate order for fees etc, our prices were still competitive with other suppliers, especially as this aspect of our profit margin was not subject to duty by Tablebirds.

From February 97 I had a Vanuatu registered company "Tradeserve NZ". This was used to deposit commissions here. Orders were sent to me in NZ, paid to Tradeserve NZ in NZ dollars and banked in Vanuatu. Then payments made to Arthur. The remainder (approx 30-40%) remained here in the company account.

Orders to Tradeserve PNG continue and I assume payments to AS. The remainder being at the discretion of Isaac Minicus, though I know of at least one payment registered as for Bluebole as actually Minicus payment for his AMEX account." 6 The remaining document was a copy of a facsimile transmission from Isaac Minicus who, with his wife, was the original director and shareholder of Tradeserve. The copy in evidence is indistinct but appears to be in the following terms: "Gordon: Re: Tablebirds Refer our telecom today. The following matters have to happen before we talk new arrangements with Arthur. 1) Invoices 0495, 0496 and 0497 total NZ$55,190.55 paid to Tradeserve immediately. 2) Balance of NZ$11,500 held back for "Trades in NZ" paid to Tradeserve… 3) Order of NZ$50,000 received by TPNG (balance on 5 FCLS orders) to 100720, 100723 & 100725. They gave us an order for $10,000 on Order for commissions of NZ$10,740 on Order Nos 099739 and 100707. I said to you all splits will happen here at Tradeserve PNG or the Tax Office will start raiding Tablebirds and individual accounts in NZ and Vanuatu and Australia. I will investigate this. Please bear this in mind and let's play fair. Of course we can always "extradite" you back to PNG to explain with Arthur how you perpetrated this … to defraud Tablebirds and Tradeserve the amount of K495,000 (in excess) and maybe more. Please bear this in mind… Isaac Minicus."

The final amount is difficult to read and could be K405,000. 7 Mr Stobbs also had at the meeting a copy of a writ of summons taken out of the National Court of Justice of Papua New Guinea by Tradeserve against Gordon Allan alleging the wrongful drawing of cheques and the wrongful telegraphic transfers of the funds of Tradeserve without authority. The particulars in the statement of claim were as follows. Date Cheque No Payee Amount Amount Details (K) (O/S) 17.01.96 630781 Bluebole P/L 6,000.00 Commission 15.02.96 630798 Bluebole P/L 4,950.00 Commission 07.03.06 634826 Bluebole P/L 12,973.00 Commission 03.05.96 634887 J F Seeto 14,200.00 Purchase 13.05.06 634891 Bluebole P/L 7,985.00 Purchase 31.05.96 T/T Bluebole P/L-AS 4396.11 4932.00 Purchase 14.06.96 641574 Bluebole 5,985.00 Purchase 08.08.96 707866 Bluebole 4,950.00 Purchase 13.08.96 707873 Bluebole 4,945.00 Purchase 19.08.96 707877 Bluebole 4,555.00 Purchase 20.09.96 707924 Bluebole 9,985.00 Purchase 23.09.96 T/T Com.Bank/Aussi 15,033.23 Purchase 24.09.96 707934 Bluebole 9,950.00 Purchase 08.10.96 707949 Bluehole 8,400.00 Purchase 03.12.96 T/T Com Bank/Aussi 4,040.10 Purchase 03.12.96 T/T Com Bank/Aussi 4,026.29 Purchase K122,368.73 $4,932.00

Bluebole Pty Ltd was registered as a company in Australia on 19 February 1993. The defendant and his then wife became its sole directors soon afterwards. 8 Mr Stobbs' version of what happened at the meeting on Monday 23 November 1998 was that upon putting the documents to the defendant, words to the following effect were said: "Stobbs: What is your side of your story. Szady: It is all lies. Stobbs: You have never received any money from Tradeserve? Szady: That is correct. I have not received any. Stobbs: Are you a shareholder in Tradeserve? Szady: No, I am a silent partner. My involvement in Tradeserve is not 60-40. Its more like 50-50."

Mr Stobbs said he went through each of the payments set out in the statement of claim in the Papua New Guinea proceedings asking words to the effect: "Did you receive a payment of x kina " for each of the payments. Mr Stobbs then deposed to the following conversation: "Szady: I did not receive any payments. Stobbs: You did not have a payment to JE Seeto for 14,200 kina? Szady : Yes they did pay that. Stobbs: What about your CBA Account? Szady: Oh, I had one payment to that. Stobbs: Pick a date. When? Szady: I am not sure. Stobbs: 23 September 1996? 3 December 1996? Szady: I am not sure. Stobbs: Well can you remember the amount? Szady: I am not sure. Stobbs: Well, I will tell you how much they were for. 15,033 kina and two others totalling 8,066 kina. Szady: I don't know. Maybe I received 36,000 kina. 15,000 kina of this was repayment of loan to Tradeserve. Stobbs: Can you give me a cheque number? Szady: No, I paid him in cash. Stobbs: You kept 15,000 kina in cash in your house? Szady: Yes. Stobbs: Arthur, no one keeps that kind of cash in their homes. What about payments to Bluebole? Szady: I have never received any payments to Bluebole. Stobbs: Are you sure? Szady: Yes. Stobbs: I want you to write down your version of events. Colin and I will come to see you tomorrow. Colin can you have the notes that you have taken typed up and we will all sign this as a record of the conversation that happened in this room." 9 Mr Wakefield's recollection of the conversation was, for the most part, consistent with the recollection of Mr Stobbs although not as detailed. After Mr Stobbs had presented the defendant with the three sheets of paper, Mr Wakefield recalls the following: "Stobbs: Arthur can you explain what has been said in these documents? Szady: I don't know what they are talking about."

Mr Wakefield recalls Mr Stobbs then producing the particulars from the statement of claim and recalls the following conversation: "Szady: All right, yes, I did have a business interest in Tradeserve, but more or less as a silent partner. I did receive, from memory, about 40,000 kina over a period of time from Tradeserve. Stobbs: Are you sure Arthur? That was all your involvement was? Szady: Yes. Stobbs: Arthur, I want you to provide a full account of your financial dealings with Tradeserve and also provide financial information in relation to Bluebole Pty Ltd. Szady: All right, I will need some time, but I will be able to do that." 10 Mr Wakefield made some notes during the meeting which contained a reference to: "shares in company - silent partner", "three payments plus one J Seeto", "50/50 share of profits", "K20,000 (in total)" which Mr Wakefield could not explain in cross-examination. "Cheques were his K36,000" which Mr Wakefield said in cross-examination was in relation to the funds received by the defendant provided on other documentation that he had at the time. He explained his reference to about K40,000 in his affidavit as a reference to K36,000. The note also contained: "September A/C Bluebole nothing to Bluebole does not know" which Mr Wakefield explained in cross-examination meant that the defendant had said he did not know anything about payments going to Bluebole. There was another reference to "silent partner" and finally " September 94 (commissions) not a director" the significance of which, Mr Wakefield said in cross-examination he did not recall. 11 Following the meeting Mr Wakefield typed up the following minutes: "Minutes of meeting held at Tablebirds boardroom on Monday 23rd November, 1998 at 1.30 pm. Subject: Investigation into allegations that Arthur Szady had business dealings with Tradserve PNG and Pacific Packaging that suggested a conflict of interest and perhaps fraud Present Paul Stobbs, Colin Wakefield, Bbrett Carter & Arthur Szady 1. All present were given a copy of 2 faxes - one from Tradserve PNG and another from Pacific Packaging. Arthur Szady was asked to read it and did so. 2. Arthur Szady admitted that he had shares in the company however he was a silent partner. This was some years ago and he has had no interest in these companies since that time. He stated that he was never a director. 3. He stated that during his involvement with Tradeserve that he shared in profits 50/50. He estimated that he received K36,000 over a period of time. (3 payments to himself and one to J Seeto). 4. At no stage was he aware of any payments that were made to Bluebole Pty Ltd (Arthur's Australian company). 5. Arthur said he would give a written report addressing these allegations including back up documentation ie bank statements. 6. Colin Wakefield to come up with a list of all commission payments made to Tradserve since September, 1994. 7. Colin Wakefield to obtain a company search on Tradserve PNG via A C Fox and Associates detailing directors and shareholders. 8. Meeting closed at 1.50 pm."

The minutes were signed by Mr Wakefield, Mr Stobbs and Mr Carter. 12 The defendant's version of the conversation was more restrictive. Significantly, it contained no admission of receipt of K36,000 or any other sum. The defendant said that Mr Stobbs handed him two sheets of paper and the following exchange took place: "Stobbs said: Read these and then comment on them. I read the documents and said: I can't make much sense out of Isaac's fax. Gordon did pay me some money, but it was to repay money I lent him over a period of time. I never got paid anything from Tradeserve. I never got any commissions from Tradeserve. I didn't know that the money that Gordon was paying me came from Tradeserve. All the money Gordon paid me was in bank cheques. I have no idea where the money came from. Stobbs said: I want statements for Bluebole and the bank account in West Ryde. I want you to put everything on paper. I said: Ok, that's not a problem, except that I don't have them with me. I'll need some time to get them." 13 Mr Bellamy who appeared for the defendant submitted that I should prefer the evidence of the defendant to that of Messrs Stobbs and Wakefield. He pointed out that in cross-examination Mr Stobbs agreed that a number of elements referred to in the defendant's affidavit formed part of the conversation: "I can't make much sense out of the facts", "look, I haven't received any money at all from Tradeserve". The defendant said that he had lent money to Mr Allan and that Mr Allan had paid money back to him from time to time. Mr Stobbs agreed that the defendant said: "I never got any commissions from Tradeserve". Mr Stobbs had not mentioned the word "commissions" in his affidavit. He was asked whether he had any explanation for its omission. He said he did not. 14 Mr Stobbs was cross-examined on the statement in the minutes prepared by Mr Wakefield that the defendant admitted that he had shares in Tradeserve. Mr Stobbs agreed that at the meeting the defendant said: "I get 50% of the profits but I don't own shares". Mr Stobbs asked him how he could get 50% of the profits if he was not a shareholder. At the time of the meeting he believed it was a possibility that the defendant was a shareholder. At one stage in his cross-examination Mr Stobbs said you cannot get dividends out of a company without being a shareholder. It was submitted that this constituted a revision of his evidence. I do not regard it as such. Mr Stobbs said on a number of occasions that he doubted the defendant's statement that he was not a shareholder on the basis that he could not see how one could receive 50% of profits or dividends of that magnitude without being a shareholder. 15 In the recollection of a witness of a conversation which took place over three and a half years ago, it is natural that there will be some variation in recollection. None of the matters above mentioned cause me to question the creditability of Mr Stobbs whom I regarded as a forthright witness. There is a conflict between the defendant's denial of shareholding in Tradeserve and what is recorded in the minutes. It is apparent that Mr Stobbs did not believe the defendant's assertion. The statement in the minutes that the defendant admitted he was a shareholder is wrong but it does not cause me to discredit the affidavit and other testimony of Mr Stobbs. Significantly, there is a reference to K36,000 both in Mr Wakefield's handwritten notes and in those minutes. That is not a figure likely to be plucked out of the air by persons colluding to fabricate. It adds verisimilitude to the account of Mr Stobbs and tends to controvert the version of events given by the defendant. 16 It was submitted that there were a number of discrepancies between the affidavit of Mr Wakefield and the minutes and between the handwritten notes and the minutes. Mr Wakefield said in cross-examination that his recollection was as per his notes. That the defendant initially said he had shares in the company, however he was a silent partner and received three payments from Tradeserve and a payment to J Seeto. It was submitted that there was a significant discrepancy between his statement in the affidavit that the defendant had received about K40,000 and the K36,000 mentioned in his notes. Mr Wakefield was slow but deliberate in his answers in cross-examination. He relied on his notes and the minutes in preparing his affidavit and candidly accepted that he would need to refer back to those documents to answer questions about the content of the conversation. As with Mr Stobbs, I see no reason to doubt the veracity of Mr Wakefield who impressed me as a careful person. The suggestion of inconsistency between K40,000 and K36,000 is rejected. The contemporaneous notes corroborate the K36,000 recalled by Mr Stobbs and is totally consistent with Mr Wakefield's recollection of about K40,000. 17 In cross-examination, the defendant said that following this meeting he tried to contact Gordon Allan but did not succeed in doing so until he returned to Australia. He was very angry. Beyond saying that Mr Allan said he prepared the document for his solicitors for the defence of the case against him by Tradeserve, the defendant could remember nothing else of what he said to Mr Allan or Mr Allan said to him. I formed an unfavourable view of the defendant. These answers were evasive. It does not ring true that a man, angry at his implication in fraudulent activity by a colleague, would not remember the salient portion of a conversation such as this. Where there is a conflict in the evidence, I prefer that of Messrs Stobbs and Wakefield to that of the defendant. 18 Mr Bellamy criticised the plaintiff for failing to call Mr Carter. The evidence was that Mr Carter swore an affidavit in the proceedings but Mr Stobbs had no idea were he was. Having completed his contract, he went back to South Africa and Mr Stobbs had not heard from him since. In those circumstances, I draw no inference adverse to the plaintiff from the absence of Mr Carter as a witness. 19 It was common ground that the next morning, Tuesday 24 November 1998, Mr Wakefield gave the minutes to the defendant and he refused to sign them. 20 The defendant gave evidence that later on Tuesday 24 November 1998 he had a conversation with Mr Carter to the following effect: "I said: What do you think I should do. You know about the double invoicing, Stobbs knows about it, all the managers know about it. If this gets out, it's not going to look good for the company, because the company has been avoiding paying duty. Carter said: I suggest you ring Stobbs and have a meeting with him and discuss what he wants to do about it." 21 I have difficulty in accepting that this conversation took place. It was suggested to Mr Stobbs in cross-examination on a number of occasions that the raising of two invoices by Tradeserve saved the plaintiff the payment of customs duty. Mr Stobbs explained that this was not so. Customs duty was introduced to Papua New Guinea in 1994 and was calculated on the landed price cif of the product. Since Tradeserve was importing the product from its New Zealand affiliate, Mr Stobbs explained that the duty was payable by Tradeserve and taken into account in its quotation to the plaintiff. Mr Stobbs said he did not care how many invoices were raised by Tradeserve, provided the agreed price was not exceeded. It was only when, perhaps in 1997, the arrangements changed and the plaintiff imported product directly from the New Zealand company and Tradeserve rendered a separate invoice for what had been its profit margin, that any liability for customs duty fell upon the plaintiff. In light of this evidence, which I accept as patently correct, I have serious doubts as to the alleged conversation with Mr Carter. 22 True it is that Mr Wakefield said in cross-examination that he thought the purpose of the split invoice system was to minimise duty. Mr Wakefield did not recall when the system was introduced and he may well have been referring to the altered arrangements under which the plaintiff was importing goods directly from New Zealand. In any event, the cogent evidence, which accords with the structure of customs duty, was that given on more than one occasion by Mr Stobbs. I do not accept the defendant's evidence of a separate conversation with Mr Carter on Tuesday 24 November 1998. 23 On Tuesday 24 November 1998 a further meeting took place at which Mr Stobbs indicated he was terminating the defendant's employment. The versions of the conversations recalled by Messrs Stobbs, Wakefield and the defendant differ but, in my view, nothing turns upon the conversation other than the indication that the employment was being terminated. Mr Stobbs told the defendant to return on Friday 27 November 1998 to pick up his things. 24 A further conversation occurred at the house of the defendant on Wednesday 25 November 1998. Mr Stobbs said that he asked for the written report which was not forthcoming and the following interchange took place:

"Szady: I want to leave the country. Stobbs: Arthur, how much have you actually taken? Szady: About 60-70,000 kina." 25 Mr Wakefield's recollection was that the defendant said he did not get any money from Isaac Minicus or Tradeserve nor any credit card payments or payments to J Seeto. He said he lent Gordon Allan K15,000 because he was in financial difficulty. He was asked where the record was and said he paid in cash. He was asked his expenditure which he gave at a K110 per week, to which Mr Stobbs said he would spend more money than that. The defendant responded that he won money at golf, coins and calcuttas and said he wanted to leave the country to be with his family. Mr Stobbs said: "Come in on Friday and pick up your belongings". 26 The defendant's version was that on being asked his expenses he said he did not have a clue. He paid bills when they came in. He won K15,000 in a golf tournament. When asked what was happening with Tradeserve he said he lent Gordon Allan money and Gordon Allan paid him back whenever he could. In cross-examination, Mr Stobbs agreed that the defendant had told him that he won K15,000 in a golf tournament and that he lent money to Gordon Allan who paid him back whenever he could. 27 In my view it is unnecessary for me to resolve the differences in recollections. If the defendant admitted to taking K60,000-K70,000 from Tradeserve, my findings in relation to the evidence of Mr Potter establishes that that figure was a gross understatement. 28 I find that the defendant in his conversation with Messrs Stobbs and Wakefield on Monday 23 November 1998, admitted complicity with Gordon Allan in a fraudulent arrangement to receive secret commissions from Tradeserve consequent upon its issue of a second invoice to the plaintiff with respect to products acquired for Tablebirds. 29 Mr Potter had before him a copy of an affidavit by Gordon Allan in proceedings in the Supreme Court of Queensland between the defendant and his then wife and the plaintiff in which Mr Allan, contrary to the facsimile, denied that he made any payments from second invoices to the defendant and alleged that the defendant had lent him approximately K50,000 to K60,000 which he repaid from time to time. He also had a copy of an affidavit of the defendant sworn in the Queensland proceedings setting out a history of properties bought and sold by him and his then wife together with bank statements and contracts of sale. The defendant alleged that the purchase of a property at 22 Normanby Terrace, Kelvin Grove, Brisbane was funded from joint savings of him and his then wife, rental income from that property, a property at Red Hill, Brisbane and a property at Condell Park, New South Wales and the proceeds of sale of the Condell Park property and the Red Hill property. 30 From the cheque payment remittance forms maintained by the plaintiff recording payments to Tradeserve and its related New Zealand company in the period April 1994 to October 1998, Mr Potter concluded that payments totalled K2,372,348.47. Of this amount, payments under second invoices for alleged services totalled K1,567,120.23. 31 Mr Potter indicated that there were conflicting explanations for the second invoices. He was not asked to accept either explanation, but rather to examine the available records to ascertain the flow of funds in the defendant's banking records. Mr Potter pointed out that if the defendant received 60% of the second invoices in accordance with the facsimile of Gordon Allan, he would have received K940,272.14. On the other hand, if the defendant's assertions and those of Mr Allan in his affidavit were correct, the defendant's receipts in excess of salary and other known income would be significantly less. 32 Mr Potter conducted an analysis to establish the extent to which the available records showed that the income of the defendant exceeded his salary and other known sources, to establish the extent to which his financial position and living expenses exceeded his income from known sources and to establish the extent of the relationship, if any, between the second invoice payments and the defendant's unknown income. 33 Having carried out these investigations, Mr Potter concluded that the defendant's total known income converted into Australian dollars was $750,367 while his total expenditure was $1,238,278 and when an adjustment for net movements in bank accounts was made, the shortfall of known income to expenditure was $478,667. Of this amount Mr Potter identified amounts totalling $172,288 as originating in Papua New Guinea and/or from parties related to Tradeserve. In addition, Mr Potter analysed a further $531,701 unexplained cheques and cash deposits giving a total $703,989. 34 Mr Potter said that it was possible, because of incomplete banking records available to him, that the unexplained income included salary income not identified by him of $225,323, rental income not identified by him but referred to in the defendant's affidavit of $164,518, remuneration in the form of the "pool" asserted by the defendant of $56,055, unmatched bank account transfers of $23,205, deposits to Australian accounts from ANZ bank in Papua New Guinea (the records of which were not available) of $56,200 and the loan repayments alleged in Gordon Allan's affidavit of $31,590 leading to what Mr Potter described as a most conservative estimate of $147,098. The plaintiff maintained a salary sacrifice arrangement known as the pool. An employee could have part of his salary paid in the form of a discharge of expenses provided the payment constituted a tax deduction to the plaintiff. 35 Next, Mr Potter analysed the excess of expenditure of the defendant over known sources of income at $487,912 reduced to $161,903 with similar adjustments to those to arrive at his most conservative estimate. Mr Potter concluded that the defendant was living well in excess of his known means in the period in question in the range from $162,000 to $488,000. 36 Finally, Mr Potter plotted on a time graph, a line showing 60% of the second invoice payments to Tradeserve and a line showing the excess of expenditure over known income of $478,667. Mr Potter concluded that in the period from January 1995 to January 1998 the graph displayed a high correlation between the defendant's unknown income and the second invoices raised by Tradeserve. 37 Mr Potter arrived at the following conclusions: "In my opinion, the available banking and other records of Mainland and Mr Szady for the period January 1993 to December 1998 reveal the following: (a) Mr Szady's expenditure on property and living exceeded his known salary, rental and interest income and spouse business related income by $478,667. This appears to have been funded by income from unknown or unexplained sources.

(b) Unknown income includes PNG related income of $172,288 which can be directly linked to amounts transferred from bank accounts in PNG and NZ, and $306,379 of other cheque and cash deposits into his various bank accounts in Australia. (c) After taking into account possible over estimates asserted by Mr Szady, the most conservative amount for income unexplained is $147,098.

(d) Mr Szady's net improvement in real property wealth is $213,000 for the period April 1994 to December 1998. This was largely as a result of mortgage repayments. (e) Unknown or unexplained income was a significant portion of the repayment of mortgages for the Arthur Terrace and Normanby Terrace properties.

(f) Mr Szady was living well in excess of his known means in the period in the range of $162,000 to $488,000.

(g) There is a positive correlation between Mr Szady's unknown income and the Tradeserve Service invoices." 38 Mr Potter prepared a second report after he had been provided with a copy of the first affidavit of the defendant read in these proceedings, various records of the plaintiff with respect to the pool, various vouchers and cheques obtained from the Commonwealth Bank of Australia and a copy of an affidavit of Isaac Minicus. 39 In his first affidavit, the defendant said that he lent K50,000 to K60,000 to Mr Allan who made repayments from time to time. He said he won considerable sums gambling and playing golf and set out the history of investments in Australia. He set out a series of arguments with respect to Mr Potter's first report and set out total receipts of $1,030,862 made up of salary, pool, annual leave and mid-year break, rent, property sales, expense reimbursement of payments on his American Express card, payments received from Gordon Allan, a payment from Tradeserve, payments received from Mr Wakefield, reimbursement of overseas purchases on behalf of friends and golf tournament winnings. He maintained a surplus of receipts over expenditure of $266,301. He argued that the relevant period of inquiry should be from November 1994 when the first payment was made to Tradeserve and November 1998 when he received his last payment from the plaintiff. 40 Mr Potter analysed these matters. He did not accept the dates suggested by the defendant for the inquiry of 1 November 1994 to 30 November 1998 but adopted that period to enable an analysis of the differences between him and the defendant to be made. He concluded that his most conservative estimate of unknown income increased from $147,098 to $153,582 and the items of difference between him and the defendant were as follows: "I have determined my original most conservative estimate for income unexplained of $147,098 is relatively unchanged as a consequence of adopting Szady's relevant period and additional information that has become available. I calculate the amount unexplained to be $153,582. Having considered Szady's affidavit of 16 September 2001 I am of the opinion the significant disagreement between us as to unexplained income approximates as follows: $ Pool and Travel Entitlements 58,214 Reimbursements for friends est. 53,600 Golf winnings 60,000 Understatement of Szady period revenue 9,257 Total differences $181,071

I am unable to reconcile the difference between my figure of $153,582 and Szady's $181,071 above." 41 The defendant swore a further affidavit dealing with matters in the second report of Mr Potter. Of that material, Mr Potter said he was unable to identify golf winnings alleged to be of the order of $60,000 by the defendant as dates within the relative period had not been specified. Likewise, moneys received from friends on account of overseas purchases by the defendant's former wife of $5,120.24 could not be reconciled with receipts during the relevant period. Finally, the defendant said that upon further researching the matter he now accepted that he had received all pool payments. Mr Potter said that this would cause him to revise his second report to increase the figure of $153,582, but he could not give a specific revised figure. 42 Mr Potter's reports were not seriously challenged in cross-examination. Mr Potter did not accept the proposition that if he had all relevant documentation he should be able to identify the amount of excess income in the defendant's financial records. Mr Potter said that it was fairly clear there were a lot of cash payments so it would be unusual to find all the suspect income going through a bank account. It was an instance of a cash economy. This opinion is made out by the fact that each of the cheques referred to in the statement of claim in the Papua New Guinea proceedings which was said to be made out to Bluebole Pty Ltd and, in one case, J F Seeto were, in fact, all made out to cash. 43 Mr Potter did accept that the greater the discrepancy between the excess of income over expenditure and the 60% of Tradeserve second invoices, the less the likelihood of the theory that 60% of the second invoices was the source of the discrepancy. However, Mr Potter said that while it was a harder proposition to make it was not unusual for there to be such a wide discrepancy. 44 Mr Potter's evidence was not met by expert evidence tendered on behalf of the defendant. I accept his conclusions and, in particular, that the most conservative estimate of the unexplained income of the defendant in the relevant period was an amount in excess of $153,582. Consideration must be given, however, to the alleged golf winnings and the alleged reimbursements by friends. 45 The defendant said he won between K12,000 and K14,000 in a Ho Chi competition. That evidence was supported by his former wife, Kathryn Mary Mitchell. Michael John Illidge, a member of the Lae Golf Club of which the defendant was captain, said the defendant won approximately K10,000 to K12,000 at this competition in May 1998. In his oral evidence he increased this figure to K20,000 on the basis of a discussion he had with another member of the Club. As already indicated, the Defendant sought a restriction in the period of the investigation of Mr Potter. The Ho Chi competition falls outside that period and is to be excluded from consideration. 46 The defendant said he won $20,000 in a Calcutta in May 1994. He said that this figure was included in his estimate of winnings from gambling of K60,000. It, also, should be disregarded as it falls outside the relevant period. 47 The defendant said he won $11,000 in an annual ANZAC holiday competition in Melbourne in 1997 which he banked in Australia. Yet he could point to no record of such banking and accepted that the records had been examined by Mr Potter and he could find no evidence of such a deposit. 48 The defendant also claimed that he won money at golf playing a Daytona betting competition. He accepted that the rule was that the winnings were put on the bar, the winner only taking whatever was left over. The defendant did not bring to account any costs associated with his gambling winnings. I find that gambling winnings did not account for any significant portion of the $506,226 unexplained income. Furthermore, I am of the view that gambling should not be added to the possible overestimates which Mr Potter took into account to arrive at his most conservative figure of $153,582. 49 In his second affidavit, the defendant said that he and his then wife were able to identify $24,441.40 as reimbursements by friends for goods purchased overseas and payments for restaurant expenses for groups of friends. This figure is substantially less than the figure of $53,600 identified by Mr Potter in his second report as a difference between his analysis and the claims of the defendant. Furthermore, in cross-examination the defendant conceded that several of the items were not maintainable where he used his credit card to pay a restaurant. The entire amount was claimed rather than the amounts reimbursed by his friends. Many items he could not explain. 50 Again, I reject the suggestion that the $506,226 of unexplained income is accounted for to any significant extent by reimbursements from friends. In my view Mr Potter's most conservative figure of $153,582 should not be reduced for such reimbursements. 51 Included in the possible overestimates in Mr Potter's figure of $506,226 is an amount of $12,693 with respect to Colin Wakefield which is accepted by the plaintiff. In the calculation of possible overestimates there is an amount with respect to pool expense reimbursement of $51,232. The defendant said that upon further examination by him, there were no outstanding pool amounts. 52 On the evidence, therefore, the inference to be drawn in the absence of explanation by the defendant of his receipts in excess of those from identified sources, is that they came from secret commissions or secret profits from the plaintiff's payment of second invoices to Tradeserve. On the best basis for the defendant the amount of unexplained income is in excess of $140,889 (Mr Potter's most conservative figure of $153,582 less the acknowledged $12,693) increased for the acknowledged full payment from the pool in a figure which could not be stated by Mr Potter but with respect to which he had made an adjustment for possible overestimate of $51,232. On the worst basis for the defendant, the amount of unexplained income is $493,533 ($506,226 less $12,693). 53 Upon an application in the Queensland proceedings by the defendant and his then wife for removal of a caveat over the Normanby Terrace property, the court ordered the removal of the caveat and that $175,000 from the proceeds of sale of the property be deposited in an interest bearing with Ramensky Lawyers, the defendant's solicitors. The parties agreed that the plaintiff would discontinue the Papua New Guinea proceedings, the plaintiff would discontinue the Queensland proceedings and the plaintiff would commence the current proceedings in New South Wales. It was agreed that the unsuccessful party in these proceedings would pay the other party's costs of the Papua New Guinea proceedings, the Queensland proceedings and the application to remove the caveat. 54 In these proceedings, the plaintiff seeks a declaration that the defendant holds the $175,000 plus interest as a constructive trustee in favour of the plaintiff and an order that the moneys in the interest bearing account be paid to the plaintiff. 55 I infer from the evidence before me that the defendant received portion of the proceeds of the second invoices raised by Tradeserve against the plaintiff as secret commissions or secret profits in an amount at least as great as $175,000. 56 The hearing was adjourned to enable Mr Minicus to travel from Papua New Guinea to be available for cross-examination. An affidavit sworn by him had been filed on behalf of the defence. In the result, that affidavit was not read and Mr Minicus was not called as a witness. I was invited to draw the inference that his testimony would not have assisted the defendant (Jones v Dunkel (1959) 101 CLR 278 at 308, 312). Mr Bellamy submitted that the inference should not be drawn where some prejudice or jeopardy would be caused to a witness if called as, for example, where proceedings are pending concerning the witness which was said to be the case with respect to Mr Minicus (Cross on Evidence (1996) par 1215). It is unnecessary for me to resolve these rival contentions because I have reached the conclusions set out above without the necessity of drawing such as inference. 57 It was submitted on behalf of the defendant that evidence ought to have been called from Tradeserve. That would not, in my view, have served any useful purpose. Payments to Tradeserve by the plaintiff were proved by the summary in Mr Potter's report of the Tradeserve invoices rendered to the plaintiff, the plaintiff's order books and the plaintiff's cheque payment remittance forms. That cash payments were made by Tradeserve, wrongly attributed to Bluebole Pty Ltd and J Seeto, were sufficiently proved by the photocopies of the cheques referred to in the statement of claim in the Papua New Guinea proceedings which were in evidence before me. I was invited to draw an inference adverse to the plaintiff for its alleged failure to call Mr Minicus and documentary evidence from Tradeserve. I decline to draw any such inference. 58 The Evidence Act 1995, s 140 prescribes the standard of proof in civil proceedings as the balance of probabilities and provides that the court may take into account in deciding whether it is so satisfied the nature of the cause of action or defence, the nature of the subject matter of the proceedings and the gravity of the matters alleged. This provision reflects the common law position. In Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362 the High Court discussed the quality of persuasion required for this purpose, when the law requires the proof of any fact the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. In civil matters the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal: "But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters "reasonable satisfaction" should not be produced by inexact proofs, indefinite testimony, or indirect inferences. Everyone must feel that, when, for instance, the issue is on which of two dates an admitted occurrence took place, a satisfactory conclusion may be reached on materials of a kind that would not satisfy any sound and prudent judgment if the question was whether some act had been done involving grave moral delinquency."

To similar effect is the statement of the majority of the High Court in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449-450. 59 The finding of facts set out above I have made bearing this imprimatur in mind. 60 The contract of employment between the plaintiff and the defendant was governed by the laws of Papua New Guinea. Clause 17 contained a covenant by the defendant to declare to the group general manager of the plaintiff any shareholdings with a value exceeding K1,000 in any company competing with or dealing with the plaintiff. Since I have found that the defendant had no interest in Tradeserve, that provision was not enlivened and the question whether it covered the field does not arise for decision. 61 The plaintiff contends there was an implied term of the employment of the defendant that he faithfully serve the plaintiff, account to the plaintiff for all moneys received in performance of his duties in purchasing packaging materials for Tablebirds, not make any secret commissions or personal profits in the performance of those duties and observe duties of good faith, honesty and fidelity toward the plaintiff. 62 In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 the Privy Council held that: "… for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

See, also, Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. The same principles apply in Papua New Guinea ( Yarlett v New Guinea Motors Pty Ltd [1985] PNGLR 14). 63 In Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 96-97, Gummow J, then a member of the Federal Court, expressed the view that while equitable remedies to some extent regulate the quality of contractual performance, "it required a leap of faith" to translate them into an implied term as to the quality of contractual performance. On the other hand, Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 268 expressed the view that prevailing community expectations required the implication in all contracts of a duty upon the parties of good faith and fair dealing. The authorities are collected and discussed by Finn J in Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 at 188-198. In Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 at 445 the High Court declined to consider the debate. The occasion was inappropriate in light of the acceptance by both sides of such an obligation. 64 If it were necessary for me to resolve the issue, I would imply a term in the contract of employment casting a duty on the defendant to act in good faith and with fidelity to the plaintiff. There is no express term of the contract inconsistent with such an implied term. It is reasonable and equitable. It gives business efficacy to the contract which is silent with respect to fiduciary duties. The implication of such a term is obvious and can be clearly expressed. In my view there is much to be said for the view of Priestley JA. I would not, however, imply any further terms. In particular, I would not imply a term forbidding the taking of secret commissions or personal profits or a term undertaking to account for any moneys received. They are not necessary to give business efficacy to the contract. The taking of a secret commission or personal profit would constitute a breach of the implied term for good faith and fidelity giving rise to a claim for damages. An undertaking to account comes close to implying a contractual obligation to provide an equitable remedy. In contract, only compensatory damages are available. An account of profits is not available (Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 at 196). At least this was the accepted position prior to the House of Lords decision in Attorney-General v Blake [2001] 1 AC 268 that in exceptional circumstances an account of profits could be ordered for breach of contract. I do not regard that exceptional case as justifying the implication of a term requiring an account of profits. 65 In light of my refusal to imply an obligation approaching an account of profits, it becomes unnecessary to determine the precise nature of any terms to be implied in the contract of employment because, as appears below, the plaintiff has elected for an account of profits for breach of fiduciary duty in preference to damages for breach of contract. 66 The relationship between employee and employer is one of the accepted fiduciary relationships. An employee is subject to a general duty to serve an employer with good faith and fidelity (Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 Ch 169). Contractual and fiduciary obligations may co-exist between the same parties (Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-97). Finn, Fiduciary Obligations (1977) at 267 points out that implied terms in a contract of employment that an employee serve the employer with good faith and fidelity, mirror the obligations arising out of the fiduciary relationship. This approach was endorsed by the High Court in Concut Pty Ltd v Worrell (2000) 75 ALJR 312 at 318. It follows that if any implied term as to good faith and fair dealing were implied in the defendant's contract of employment, the taking of secret commissions or secret profits from Tradeserve was in breach of that implied term and in breach of the fiduciary duty the defendant owed to the plaintiff. 67 In Nocton v Lord Ashburton [1914] AC 932 at 956-957 Viscount Haldane LC described the remedies upon a breach of fiduciary duty to be an account of profits, the replacement of property improperly acquired or the making of compensation therefore. Where the fiduciary is liable to account, the fact that the plaintiff has suffered no detriment is irrelevant. In Boston Deep Sea Fishing and Ice Company v Ansell (1888) 39 Ch D 339 the defendant as managing director of a company contracted for the construction of fishing smacks for the company and took a commission from the shipbuilders. The defendant was a shareholder in an ice company which paid bonuses to shareholders who were the owners of fishing smacks who employed the company to supply ice. The defendant received bonuses for contracting to have ice delivered to the fishing smacks of the plaintiff. Notwithstanding that the plaintiff could not have received the bonuses from the ice company, the defendant was held liable to account for them. At 367-368 Bowen LJ said: "…the money which is sought to be recovered must be money had and received by the agent for the principal's use; but the use which arises in such a case, and the reception to the use of the principle which arises in such a case, does not depend on any privity between the principal and the opposite party with whom the agent is employed to conduct business - it is not that the money ought to have gone into the principal's hands in the first instance; the use arise from the relation between the principal and the agent himself. It is because it is contrary to equity that the agent or the servant should retain money so received without the knowledge of his master. Then the law implies a use, that is to say, there is an implied contract, if you put it as a legal proposition - there is an equitable right, if you treat it as a matter of equity - as between the principal and agent that the agent should pay it over, which renders the agent liable to be sued for money had and received, and there is an equitable right in the master to receive it, and to take it out of the hands of the agent, which gives the principal a right to relief in equity."

See also Reading v Attorney General [1951] AC 507, Consul Development Pty Ltd v DPC Estates Pty Ltd (1974-1975) 132 CLR 373 at 394, Warman International Ltd v Dwyer (1994-1995) 182 CLR 544 at 556-562. 68 In this case the inescapable inference is that the defendant's share of the second invoices raised by Tradeserve found their way into the Australian investments of the defendant and his then wife and ultimately into the Normanby Terrace property from the proceeds of sale of which the $175,000 held by the defendant's solicitors, emanates. 69 It used to be the case that if a fiduciary took a bribe in money, the fiduciary was a debtor only to the beneficiary and did not hold the money as trustee. The consequence was that the beneficiary could not claim the money specifically or any property purchased with it (Lister & Co v Stubbs (1890) 45 Ch D 1). 70 In Attorney General for Hong Kong v Reid [1994] 1 AC 324 a Crown servant in Hong Kong, in breach of his fiduciary duty to the Crown, accepted bribes which he used to purchase two properties in New Zealand. The defendant was sentenced to prison and ordered to pay to the Crown the value of his assets which could only have been derived from the bribes. The Privy Council held that the Crown servant held the property acquired with money obtained from bribes on constructive trust to the Crown. Lister & Co was disapproved. Reid has been followed in Australia (Zobory v Commissioner of Taxation (1995) 64 FCR 86). I am asked to take a similar approach in this case. The plaintiff limits its claim to an account of profits to the moneys held by the defendant's solicitors. 71 It is a cardinal principle of equity that the remedy be fashioned to fit the nature of the case. Both parties have invited me to follow the approach I took in Acme Office Service Pty Ltd v Ludstrom [2000] NSWSC 277. There, both parties conducted their cases upon the basis that the court would decide all issues before it including an ultimate amount to be paid to the plaintiff if it was successful. I followed that course and made an order for restitutionary relief in an amount calculated to restore to the plaintiff profits wrongly earned in breach of fiduciary duty. Here the appropriate order is to declare that $175,000 from the proceeds of sale of the Normanby Terrace property was held by the defendant in trust for the plaintiff and an order that the defendant cause his solicitors to pay that sum and accrued interest thereon to the plaintiff. 72 The plaintiff elected to have an account of profits, at the latest, in counsel's submissions in reply. In Acme I followed Dr Martens Australia Pty Ltd v Bata Shoe Co of Australia Pty Ltd (1997) 75 FCR 230 in holding that the election need not be made until the close of evidence and, possibly, not until just before final judgment. I find that the election between an account of profits for breach of fiduciary duty and damages for breach of contract was properly made. 73 It is not in dispute that the receipt by the defendant of the secret commissions or secret profits justified summary termination of the contract. Nor could it be in light of the authorities. Conduct which in respect of important matters is incompatible with the fulfilment of an employee's duty or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee is a ground of dismissal (Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 at 81-82). 74 In a cross-claim, however, the defendant claims outstanding holiday pay, repatriation costs, transportation costs and payment in lieu of notice of termination of his contract of employment. While admitting that the receipt of secret commission or secret profit justified the termination of the contract, the defendant argues that he is still entitled to these payments. 75 Clause 8.a of the employment agreement provided for five weeks annual leave entitlement which, subject to approval, could be accumulated. A schedule of holidays taken by the defendant showed that in the period from 27 June 1994 to 7 October 1998 he took 161 days or over 32 weeks of holidays. The contract of employment was dated 16 July 1993. In the period to 15 July 1998 he was entitled to 25 weeks annual leave which he had exceeded when his contract was terminated. Mr Stobbs was not cross-examined with respect to the schedule. I find that the defendant was not entitled to any outstanding holiday pay. 76 Clause 13 of the employment agreement provided that on satisfactory completion of the contract, the company would repatriate the defendant and dependent family members living with him by issuing economy class air tickets for the journey from Lae to the place of recruitment. The defendant was summarily dismissed and his contract terminated. There was no satisfactory completion of it. I find that the plaintiff was not in breach of cl 13. 77 Clause 14.a of the contract provided that on termination, the plaintiff would pay for the transportation of the employee's personal baggage from Lae to a destination of the employee's choosing up to an amount not exceeding an allowance of K8 per week from the starting date with the company to 1 January 1990 and thereafter at the rate of K10 per week. The defendant claimed an amount of K10,800 under this provision. Clause 14.a must be read in the light of cl 13. The former required satisfactory completion. Clause 14.a operates, in my view, upon termination of the contract in accordance with its terms and does not arise in circumstances where, as here, the contract was terminated for misconduct. 78 I take a similar view to the defendant's claim for payment in lieu of notice under cl 3.a. It provided for early termination by the employee giving three months' notice in writing or the company giving the same period of notice in writing or payment of salary in lieu. In my view the clause was not invoked when the defendant was summarily dismissed for misconduct. 79 I find that the defendant is not entitled to any moneys with respect to the termination of his contract of employment. 80 The defendant alleged in the cross-claim that his Suzuki Vitara motor vehicle was seized by the plaintiff. He sought damages for conversion and, in the alternative, a declaration that the proceeds of sale were held in trust for him. Mr Stobbs gave evidence that the vehicle was seized by J E Seeto Ltd, the landlord of the defendant. Mr Stobbs guaranteed the payment to Mr Seeto of outstanding rent if the vehicle was released to him. He caused valuations to be made, one of which was in evidence. It put the value at K4,000-K5,000 and, if repairs were carried out, at approximately K8,000. 81 The plaintiff's workshop, which turns over company vehicles, sold the vehicle for K7,000 having been instructed to get the best price possible. The proceeds of sale were deposited with Warner Shand Lawyers in trust subject to the claim of J E Seeto Ltd. That the former landlord of the defendant had a claim for outstanding rent was not put in issue by the defence. The plaintiff claimed to set-off any obligation against moneys due to it from the defendant's solicitors. I think it preferable to declare that the moneys are held in trust for the defendant subject to the claim of J E Seeto Ltd. I would otherwise dismiss the cross-claim. 82 Since the plaintiff never asserted any right to the funds otherwise than by way of set-off, the defendant should pay the plaintiff's costs of the cross-claim. The defendant should pay the plaintiff's costs of the action. 83 Security for costs was ordered. I will discharge that order and make necessary directions for the release of the undertaking of Westpac Bank - PNG - Ltd. I direct the parties to bring in short minutes of orders to give effect to these reasons for judgment.

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