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[2008] QSC 213
Supreme Court of Queensland
2008-09-10
Daubney J
Original judgment source is linked above.
Tucker & Cowen for the applicant first, second, third and fifth respondents
Boyd Legal for the respondent first and second applicants
[1] The First, Second, Third and Fifth Respondents in the principal proceeding have applied to strike out certain paragraphs of the Further Amended Statement of Claim ('FASOC'). (Despite their appellations in the principal proceeding, it is convenient for present purposes to refer to them as 'the applicants').
[2] Virgtel Ltd and Virgtel Global Networks NV (the First Applicant and the Second Applicant in the principal proceeding, but the 'respondents' for the purposes of the present application) have brought the principal proceeding to vindicate claims they make against the applicants on behalf of Virgin Technologies Ltd ('VTL'), which is named as the Sixth Respondent to the principal proceeding. The respondents' action is derivative in nature, and on 6 April 2006 De Jersey CJ gave leave nunc pro tunc for the respondents to commence and continue the proceeding, as a derivative action on behalf of VTL, against, inter alia, the applicants[1].
Harvey Zabusky and his wife Amalia Zabusky are the parents of Erez Zabusky. At the heart of the principal proceeding are allegations of dealings and misdealings in connection with the ownership of shares in, and in the business of, VTL, which is a company registered in Nigeria. Harvey Zabusky was a director of VTL. In broad terms, the principal proceeding would seek to pursue a case on behalf of VTL to the effect that Mr Zabusky improperly diverted very large amounts of money away from VTL and into the hands of his family (and corporate entities associated with them).
I observe, in as neutral terms as possible, that the principal proceeding is hotly contested. The protagonists are, on the one side, Mr Van Leeuwen, who had indirectly acquired an interest in VTL, and the Zabusky family, particularly Harvey Zabusky, on the other.
It is unnecessary, and probably undesirable, for me to delve any more deeply into the background of the matter, because the application with which I am presently concerned can be determined on the face of the challenged pleading.
I will shortly turn to consider in detail the applicants' complaints about the FASOC. It is necessary for me to give some context to what follows by referring briefly to some matters of principle and practice.
Under the post-Judicature Act adversarial system of civil litigation which is now regulated in this State by the Uniform Civil Procedure Rules, pleadings identify the dispute or disputes between the parties on which the Court is called to adjudicate. An integer of that process of identification is that 'the function of pleadings is to state with sufficient clarity the case that must be met'[2]. Brennan J (as he then was) commenced his judgment in Banque Commerciale SA en Liquidation v Arkhil Holdings[3] by citing the following statement of Jessel MR in Thorp v Holdsworth[4] about the object of pleadings:
'The whole object of pleadings is to bring the parties to an issue, and the meaning of the rules of Order XIX. was to prevent the issue being enlarged, which would prevent either party from knowing when the cause came on for trial, what the real point to be discussed and decided was. In fact, the whole meaning of the system is to narrow the parties to definite issues, and thereby to diminish expense and delay, especially as regards the amount of testimony required on either side at the hearing.'
[8] The term 'issue' in this context does not mean merely a dispute about facts; rather, an 'issue', adjudication of which may involve determination of disputed facts, is:
'that which, if decided in favour of the plaintiff, will itself give a right to relief, or would, but for some other consideration, in itself give a right to relief; and if decided in favour of the defendant will in itself be a defence.'[5]
'Under the modern system of pleading the issues are, or ought to be, ascertainable from the pleadings which allege only the ultimate facts selected by reference to principles of law giving rise to the right of relief claimed, or the defence relied upon.'
[10] The corollaries to, and consequences of, the definition of the issues in dispute between the parties through the pleadings include that:
(a) The parties are (or should be) aware of the case which each is to meet;
(b) The ambit of disclosure is limited to those documents 'directly relevant to an allegation in issue in the pleadings'[8];
(c) The identified issues determine the allocation of the burden of proof in respect of those issues at trial, with each party thereby necessarily informed of the matters it must prove in its case;
(d) A matrix is provided for the determination of the relevance (or otherwise) of evidence proposed to be led at trial;
(e) The judge is informed of the issues on which adjudication is required.
[11] Points (b), (c) and (d) have obvious costs and efficiency ramifications for parties to litigation.
[12] When one has regard to the central role, and important functions, performed by pleadings in the adversarial system of civil litigation in Queensland, it can immediately be seen that pleadings are not merely formal, nor purely formulaic, documents. Hence the requirements of Rule 149(1):
(a) be as brief as the nature of the case permits; and
(b) contain a statement of all the material facts on which the party relies but not the evidence by which the facts are to be proved; and
(c) state specifically any matter that if not stated specifically may take another party by surprise; and
(d) subject to rule 156, state specifically any relief the party claims; and
(e) if a claim or defence under an Act is relied on - identify the specific provision under the Act.'
[13] Rule 150 then further sets out a range of matters which must be specifically pleaded.
[14] The matters of form mandated by these rules need, however, to be applied for the purpose of ensuring that the pleadings fulfil their functions. To approach pleadings otherwise would ignore the fundamental principles on which the UCPR are based:
- the purpose of the Rules is to facilitate the just and expeditious resolution of the real issues in civil proceedings at a minimum of expense - Rule 5(1);
- accordingly, the Rules are to be applied by the courts with the objective of avoiding, inter alia, undue technicality and facilitating the purpose of the Rules - Rule 5(2).
[15] Whilst it is appropriate and necessary, therefore, to keep the functions of pleadings firmly in mind when considering their adequacy in a particular case, that must be done in a reasonable, realistic and pragmatic way. Perfection in pleading practice is a salutary aspiration, but is not an end in itself. Similarly, to the extent that pleadings are a tool to assist in facilitating 'the just and expeditious resolution of the real issues in civil proceedings', pleadings are an undoubtedly important, but not the exclusive, means to that end. As Millhouse J said in the Full Court of the Supreme Court of South Australia[9]:
'The day has well passed when decisions are based on the state of the pleadings, irrespective of the facts or justice.'
[16] These considerations are, in my opinion, also relevant when a judge is called on to strike out a pleading or part of a pleading under Rule 171, particularly if it is contended that the offending pleading 'has a tendency to prejudice or delay the fair trial of the proceeding' - Rule 171(1)(b). This is the concept used in relation to pleadings which it is said do not state the allegations clearly against the opposing party such that the opponent is left in doubt about what is alleged.[10] It has long been held that the power to strike out is not mandatory but permissive, and confers a discretionary exercise based on the quality and surrounding circumstances of the offending pleading[11], including, I might add, due regard to the function of the pleadings and appropriate observance of the fundamental principles set out in
Before turning to the particular matters which presently require decision, I should record that the applicants had several complaints going to the pleading and particularisation of the damages sought to be recovered in the principal proceeding. In the course of argument before me, however, it was agreed by the parties that those matters did not require an immediate decision and could be 'parked' for the time being, and that the pleading matters on which I am now to rule ought be confined to what might generically be described as the pleadings on liability.
[18] Paragraphs 63 and 64 of the FASOC plead an agreement ('the Gateway Agreement') entered into on 8 April 2002 between VTL and Gateway Communications (UK) Ltd, being 'an International Telephony Services Agreement to establish an international telephony communications network between Nigeria and the United Kingdom, and through the United Kingdom to all other global destinations', asserting inter alia that:
- (para 64.2) the value of telephony services provided by VTL to Gateway substantially exceeded the value of the services provided by Gateway to VTL, and
- (para 64.3) the sums payable by VTL and Gateway to each other in payment for services rendered in each calendar month, and any profit- sharing adjustment called for by the Gateway Agreement, were set off against each other in a monthly statement prepared by Gateway and provided to Harvey Zabusky on behalf of VTL ('Gateway statements').
'65. In the period from December 2002 until June 2003, the Gateway statements listed under the section "Summary of Inbound Calls" the total minutes of calls representing telephony services provided by VTL to Gateway ("call minutes"), and the average sales price per call minutes, for the period covered by the statement.
67.1 had management responsibility on behalf of VTL for implementation of the Gateway Agreement;
67.2 was, by reason of having negotiated its terms with Gateway, familiar with the Gateway Agreement and with the pricing of call minutes provided thereunder;
67.3 had access to Automatic Network Switch ("ANS") data generated by VTL's computer systems which informed him of the number of call minutes in any given period;
67.4 was therefore able to, and did, or alternatively was able to but chose not to, check the accuracy of the total call cost notwithstanding that the Gateway statements no longer disclosed the call minutes or the average call cost.
[20] The first complaint goes to the tension between the allegation in paragraph 66 that the specified Gateway statements no longer recorded the total call minutes or the average sales price per call minute (which allegation is effectively repeated in paragraph 67.4) and the allegation in paragraph 68 that the specified 'Gateway statements understated the true number of call minutes'.
[21] Despite this apparent mis-statement in paragraph 68, I consider the sting of that paragraph to be apparent from its final clause, namely that each of the specified Gateway statements understated the total call cost payable by Gateway to VTL for that month. I do not think the applicants can be in any doubt as to what is being alleged in this regard.
[22] The applicants next complain about the alternative allegations made in paragraphs 67.4 and 69, contending that the respondents have attempted to plead alternative and inconsistent positive and negative cases in equity and in law without properly isolating the facts relevant to each.
[23] The pleading of alternatives is expressly permitted by Rule 154(1):
'A party may make inconsistent allegations or claims in a pleading only if they are pleaded as alternatives.'
[24] Counsel for the applicants contended that the form in which the alternative cases is pleaded in these paragraphs contravenes the long-standing principle that, if alternative cases are alleged, the facts ought not be mixed up, leaving the defendant to pick out the facts applicable to each alternative case, but the facts ought be distinctly stated so as to show on what facts each alternative of the relief sought is founded.[12]
With respect, I have no difficulty in reading the alternatives posited in paras 67.4 and 69. They are:
(a) Harvey Zubusky was able to and did check the accuracy of the total call cost, notwithstanding that the Gateway statements no longer disclosed the call minutes or the average call cost, and thereby knew of the Gateway understatements.
(b) Harvey Zubusky was able to, but chose not to, check the accuracy of the total call cost, notwithstanding that the Gateway statements no longer disclosed the call minutes or the average call cost, and thereby ought to have known of the Gateway understatements.
[26] This is not a case in which it can be determined on a summary basis whether, in truth, Mr Zabusky actually checked the accuracy of the total call cost or whether he was able to, but chose not to, check the accuracy of the total cost. That is a question of fact which a judge will need to determine on the evidence at trial.
[27] Importantly, however, this plea is not one in which the respondents seek to plead inconsistent sets of facts in the alternative in circumstances where one of those versions must be known to the respondents to be false. Such pleadings have long been held to be embarrassing, and liable to be struck out.[13]
Accordingly I would reject these complaints by the applicants.
[29] The applicants challenged paragraphs 71 to 73A of the FASOC. In order to put them in their context in the pleading, it is necessary to set out from paragraph 70:
'70. At all material times, by reason of his position as a director of VTL, further or alternatively by reasons of his position as a senior employee of VTL, Harvey Zabusky owed to VTL:
70.1 fiduciary duties requiring him to act at all times in and about the performance of his duties and the exercise of his powers in the best interests of VTL and not otherwise ("Harvey Zabusky's fiduciary duties"); and
70.2 a duty of care requiring him to take all reasonable care in and about the performance of his duties and the exercise of his powers so as not to cause or allow economic harm to come to VTL ("Harvey Zabusky's duty of care").
71.1 failed to inform his fellow directors of VTL of the Gateway understatements;
71.2 failed to cause VTL to take any action against Gateway so as to recover the sums lost to VTL by reason of the Gateway understatements;
71.3 subsequently purported to settle on behalf of VTL all claims which VTL may have had against Gateway, and to release Gateway in respect of same ("the Gateway settlement"), without requiring Gateway to recompense VTL for the Gateway understatements.
72.1 inform his fellow directors of VTL of the Gateway understatements; or
72.2 cause VTL to take any action against Gateway so as to recover the benefit lost to VTL by reason of the Gateway understatements.
73.1 in the case of the Gateway payment for December 2003, in the sum of US$190,944.91, to himself, from which he then paid US$80,000 to Erez Zabusky;
73.2 in the case of all of the Gateway payments after December 2003, to other persons or entities associated with himself, including but not limited to Commslogic; and
73.3 in the case of payments required of Gateway pursuant to the Gateway settlement, being 4 payments each in the sum of US $150,000, to Commslogic;
73A. Further in breach of Harvey Zabusky's fiduciary duties, alternatively in breach of Harvey Zabusky's duty of care, in respect of services provided to Gateway for Gateway's operations in Sierra Leone, namely Teleport and Backhaul to Telehouse, London of 512KBPS Duplex, Harvey Zabusky directed Gateway to make payment not to Vertical Corporation, nor to VTL, but rather to other persons or entities associated with himself ("the Gateway Sierra Leone payments").'
[30] The applicants raised two points of semantics:
(a) The use of the word 'purported' in paragraph 71.3, it being submitted that a 'purported' settlement is, by definition, no settlement at all. In argument, however, counsel for the applicants accepted that the paragraph could reasonably be read as meaning that Harvey Zabusky, purporting to act on behalf of VTL, settled the claims in question. In its context, that is a reasonable reading of the sub-paragraph;
(b) The use of the word 'veracity' in paragraph 72, it being said that one cannot verify from a document information which does not appear in it. It is more than tolerably clear, however, that the allegation in paragraph 72 that Harvey Zabusky failed to check is the same cognate allegation as is pleaded in paragraph 67.4, in which it was said, relevantly, that he was able to, but chose not to 'check the accuracy of the total call cost'. Checking veracity and checking accuracy are not quite the same thing - the former carries a connotation that one is searching for the truth, whereas the latter tends to suggest exactitude. On a practical level, however, the use of the word 'veracity' in paragraph 72 could hardly be said to be confusing and, when read in its wider context, the paragraph sufficiently informs the applicants of the substance of the allegation.
[31] The applicants then complained about the allegation of knowledge in paragraph 71, contending that 'axiomatically Zabusky cannot have had the actual knowledge pleaded in paragraph 71 and therefore couldn't have done the things pleaded in paragraphs 71.1 and 71.2'. That point is really answered by my reading of the alternative cases postulated in paragraph 67.4 and 69, as set out above in [25]. Indeed, when one winds the microscope back a notch from minute focus on the words of paragraph 71, it is clear that the case of which notice is given in paragraph 71 is premised on the first of those propositions, while the alternative case in paragraph 72 is premised on the second.
[32] The applicants criticised the respondents for casting these cases in the alternative - one for breach of fiduciary duties, premised on a finding of relevant knowledge, and the alternative case in negligence, founded on a breach of the duty of care articulated in paragraph 70.2 comprised in a failure to check and thereby discover the Gateway understatements. It was said that the respondents should be required to elect which of these cases will be advanced at trial, it being argued that these alternative cases are impermissible. As noted above, however, this is not a case like Issitch v Worrell, in which the appellant sought to plead alternative positive, but radically different, factual averrals in relation to matters within her own knowledge in circumstances where she must have known one of those versions to be false. In the present case, findings by the trial judge in relation to what Mr Zabusky did or did not know and do are required, and will determine which of the alternative cases advanced by the respondents will be activated.
[33] In respect of paragraph 73.2, the applicants' essential complaint was of a lack of specificity in terms of pleading the particular payees, particularly when the general allegation pleaded extends to unidentified 'other persons or entities associated with' Harvey Zabusky. The applicants say, with some force, that given the history of this matter, and the investigations which the respondents have (or should have) undertaken before pleading this allegation, a pleading in such general terms is indefensible.
[34] For their part, the respondents point to the particulars of the loss pleaded later under paragraph 74 (which really only go to quantify the amount of the alleged diverted funds, not the identification of the payees), and the fact that interlocutory processes, including disclosure, are yet to be completed. The respondents also say that the applicants' approach in this respect is unrealistic, noting the practical difficulties of giving precise particulars of the kind which the applicants demand, and call in aid the observations of McPherson J (as he then was) in Adsteam v Queensland Cement [1985] 1 Qd.R 127 (a case concerning allegations of a wrongful understanding between parties) at 133:
'If such [a wrongful] understanding does exist, it is extremely unlikely that the plaintiffs will be in a position at trial to adduce direct evidence that the defendants arrived at it. That is to say, it is improbable in the extreme that they will be able to prove that the understanding alleged was arrived at on a particular day or days, or between identified individuals acting on behalf of named companies, etc. In a practical sense it is impossible to expect the plaintiffs to give precise particulars of matters of that kind. However, that does not mean either that the plaintiffs' pleading must be struck out for want of particularity, or that they are relieved of the duty to give any particulars at all. The defendants are entitled to be apprised before trial of the nature of the plaintiffs' case. Their right to be so apprised must be accommodated to the nature of the case itself, which is one that sets up the existence of an understanding of a kind which, as I have said, is not likely to be established by direct evidence.'
[35] I observe immediately that the present case is distinguishable from that under consideration in Adsteam v Queensland Cement - the difficulties associated with giving particulars of another person's 'understanding' are readily apparent, but in the present case what ought be achievable is some specification of the payments alleged to have been diverted.
[36] Similar criticisms were made by the applicants of the generality of the allegation in paragraph 73A that the payment was made 'to other persons or entities associated with himself'.
[37] In a practical sense, I do not think these pleaded allegations are so general as to fail to communicate to the applicants the case which the respondents would seek to mount. That is not to say, however, that these allegations are sufficiently particularised. Rule 157(a) provides that a party must include in a pleading particulars necessary to define the issues for, and prevent surprise at, the trial. To that end, one of the specific functions of particulars is to limit the generality of the pleadings - Saunders v Jones (1877) 7 Ch D 435. I accept that detailed particularisation of these allegations may be difficult, and that the respondents may not yet be able to provide further particulars. Equally, however, I am conscious of the need for the applicants to be fully informed of the case which will be made against them at trial, particularly insofar as that concerns payments alleged to have been made to, for example, Mr Zabusky's family members. Whilst, for the reasons I have already expressed, I would presently be disinclined to strike out these paragraphs of the pleading, I should also indicate that I would expect the respondents to provide further and better particulars of these allegations by, at latest, the close of the interlocutory processes. Indeed, in argument, it was indicated by counsel for the respondents that, since the time the FASOC was settled, further information has come to hand which will assist in the process of particularisation.
[38] The applicants' next complaints concerned, relevantly, paragraph 77 of the FASOC. Again, in order to put that paragraph into context, it is necessary to set out paragraphs 75-77:
'75. At all material times the United Kingdom telecommunications provider British Telecom ("BT") used the services of VTL to connect telephone calls the end destination of which was Nigeria.
77.1 directed BT to make the BT payments not to VTL's Dutch Account nor otherwise to VTL, but rather to other persons or entities associated with himself;
77.2 alternatively, failed to take any steps to ensure that VTL received the benefit of the BT payments.'
[39] It is certainly the case that the allegations made in paragraph 77 could have been set out more clearly. The complaint is that it confuses the allegations made in respect of the alleged breach of fiduciary duties and alleged breach of duty of care. A fair reading of the paragraph as a whole, however, is that the allegations made in paragraph 77.1 are those directed to the alleged breach of fiduciary duties, while the alternative allegations in paragraph 77.2 are directed to the alternative case of a breach of duty of care. True it is that greater clarity could have been achieved if the respondents had pleaded the alternative cases separately, rather than seeking to roll them up compendiously into one paragraph. Nevertheless, I consider that the paragraph adequately communicates the alternative cases which the respondents advance in this regard.
[40] Paragraph 77.1, however, does suffer from a lack of appropriate particularity by referring only to 'other persons or entities associated with' Mr Zabusky. The observations I made above concerning paragraph 73.2 and 73A apply equally to paragraph 77.1.
[41] As previously noted, it is unnecessary for me to deal at this stage with the applicants' complaints about the particularisation of damages set out under paragraph 78 of the FASOC.
[42] Paragraphs 83 and 84 of the FASOC allege, in effect, that Harvey Zabusky was responsible for invoicing, and ensuring that payment was received by VTL from, a number of identified corporate customers operating businesses in Nigeria (referred to as 'the Local Customers'). Paragraphs 85 and 86 then plead:
'85. In breach of Harvey Zabusky's fiduciary duties, alternatively in breach of Harvey Zabusky's duty of care, in respect of the services provided by VTL to the Local Customers during at least the period from January 2004 until 30 August 2004 Harvey Zabusky:
85.1 directed the Local Customers to make some or all of the payments due to VTL from them not to VTL, but rather to other persons or entities associated with himself;
85.2 alternatively, failed to take any steps to ensure that VTL received the benefit of some or all of the sums that were due form, or alternatively were paid by, the Local Customers.
(I have omitted the lengthy particulars given under paragraph 86).
[43] The applicants complained about the compendious nature in which the alternative cases of breaches of fiduciary duties and breach of duty of care have been pleaded, but again a fair reading indicates that the allegations in paragraph 85.1 are directed to the breach of fiduciary duty case, while paragraph 85.2 is concerned with the negligence case. Paragraph 85.1 also suffers from the lack of particularity in relation to identification of the persons or entities associated with Mr Zabusky to whom it is alleged payments were made.
[44] Paragraphs 85 and 86, however, contain a further vice, which does not appear elsewhere, by referring, in paragraph 85.1, to Mr Zabusky directing the Local Customers to make 'some or all' of the payments due to VTL to the other entities, and in paragraph 86 to VTL suffering loss and damage 'namely some or all' of the amounts particularised. The use of this phrase was sought to be justified in argument before me as merely 'lingo'. Lingo it may be, but it is unhelpful and uninformative lingo. The difficulty with the phrase is that it permits the respondents to adopt, and compels the applicants to address, a scattergun approach, without the applicants ever actually articulating which particular payments are the ones relied on for the purposes of paragraph 85.1, or which particular payments are the ones which form the foundation of the claim for damages pleaded in paragraph 86. This is an example, I think, of wording which does not permit the applicants to be appropriately apprised of the case they are required to meet. Nor is it a form of pleading which can be cured by the ordering of particulars, because the very use of the phrase necessarily defies the appropriate narrowing of the issues. Particulars might be provided of many payments, but if the allegation remains that 'some or all' of the those payments are the ones relied on by the respondents, no further clarity of issue emerges.
[45] Paragraphs 85 and 86 should be struck out and re-pleaded.
[46] Paragraphs 87-92 of the FASOC are as follows:
'87. Since 1999, the Respondents (other than VTL) have collectively enjoyed a large and unexplained improvement in their financial position, in that:
87.1 in 1999 Harvey Zabusky admitted to Van Leeuwen that he needed the sum of US$80,000 and that he could not afford to pay that sum (and accordingly borrowed that sum from Van Leeuwen at that time);
87.2 Erez Zabusky has never had substantial savings or assets;
87.3 since 1999 Amalia Zabusky has been able to substantially improve The Panorama, including by the installation of an in-ground swimming pool and tennis court, without mortgaging that property to fund such improvements;
87.4 in about July 2002 Erez Zabusky was able to settle the purchase of his present home at 6-8 Waterfall Way, Tallai (being the land comprising Lot 3 on RP 905711) ("Waterfall Way") for a purchase price of $420,000 without mortgaging that property to fund such purchase (albeit that, for reasons presently unknown to the Applicants, in or about June 2005 Erez Zabusky mortgaged that property to Amalia Zabusky ostensibly to secure a debt in the sum of $750,000).
87.5 in about August 2004 Amalia Zabusky was able to pay the purchase price of approximately $5.3 million to settle the purchase of the Robina units, plus taxes and charges, while borrowing only approximately $2.6 million from the ANZ Bank to fund that purchase;
87.6 in or about 2004 and 2005 Commslogic was able to fund the establishment of a substantial telecommunications business in South East Queensland, including but not limited to funding the purchase of office fittings and fixtures, office equipment, motor vehicles, highly sophisticated satellite telephone equipment and information technology systems, and the payment of staff wages during the business establishment phase; and
87.7 since 1999 Softquest has been able to fund the establishment of a software development business including by payment of staff wages during the business establishment phase.
88.1 the quantum of funds diverted by Harvey Zabusky from VTL as alleged in paragraphs 63 to 86 above; and
88.2 the otherwise unexplained improvement in the financial position of the Respondents (other than VTL) during the period when those sums were being diverted as alleged -
it is to be inferred that all or a substantial part of the acquisitions of assets constituting that improvement has been achieved with the funds so diverted.
89.4 proceeds of the sale of the assets of Commslogic (having waived its rights against the third party purchasers for value of those assets);
89.6 any other asset or assets of the respondents (other than VTL) or any of them as are found to have been purchased, contributed to, improved or enhanced in value with funds improperly diverted from VTL -
in each case to the extent that they are found to have been purchased, contributed to or improved with funds improperly diverted from VTL.
Knowing receipt by Erez Zabusky of Gateway payment
91.1 the source of the Gateway December 2003 payment being Gateway;
91.2 the absence of any entitlement of Erez Zabusky to receive the Gateway December 2003 payment in his own right;
91.3 Erez Zabusky's knowledge, by reason of his then employment by VTL, and by reason of his relationship with his father Harvey Zabusky, that the Gateway December 2003 payment ought to have been paid to VTL and not to him
or one or more of those matters, Erez Zabusky knew at the time of receiving Gateway December 2003 payment that it had been paid to him as a consequence of a breach or breaches by Harvey Zabusky of the Harvey Zabusky fiduciary duties.
92.1 holds the Gateway December 2003 payment as constructive trustee for VTL;
92.2 further or alternatively, holds any asset acquired by him by using Gateway December 2003 payment as constructive trustee for VTL;
92.3 further or alternatively, is obliged to account to VTL in respect of the Gateway December 2003 payment.'
[47] The applicants' complaints about these paragraphs are as to matters of form and substance.
[48] I will deal firstly with the challenge to paragraphs 90-92. Counsel for the applicants pointed to a perceived discrepancy between paragraph 91.2, which pleads that 'the source of the Gateway December 2003 payments [was] Gateway' and paragraph 73.1 in which it is pleaded that Harvey Zabusky paid US$190,944.91 of the Gateway December 2003 payment 'to himself, from which he then paid US$80,000 to Erez Zabusky'. It was submitted that the plea in paragraph 73.1 put a case that Erez Zabusky had received money from his father, not VTL, and that this showed 'that there is no case of him knowingly receiving money belonging to the company [i.e. VTL]'.
[49] It is clear that the respondents, by this pleading, are seeking to set up a case of 'knowing receipt' under the first limb in Barnes v Addy, recently re-stated by the High Court in Farah Constructions v Say-Dee Ltd[14] as:
'Persons who receive trust property become chargeable if they received it with notice of the trust.'
(For the purposes of this pleading argument, the respondents should have the benefit of the assumption referred to by the High Court at [113] that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary.)
[50] Paragraph 91.1 is pleaded as a material fact relied on to support the conclusion that 'Erez Zabusky knew at the time of receiving Gateway December 2003 payment that it had been paid to him as a consequence of a breach or breaches by Harvey Zabusky of the Harvey Zabusky fiduciary duties.'
[51] Even on the facts alleged in paragraph 73.1, it is strictly accurate in paragraph 91.1 to describe Gateway as the 'source' of the Gateway December 2003 payment. That fact is put up by the respondents as material to the case that Erez Zabusky had the requisite knowledge to fall under the first limb of Barnes v Addy. Whether that is accepted at trial is another point entirely.
[52] This pleading in its present form is unremarkable, and gives proper notice of the respondents' case. I would reject the complaint founded on the wording of paragraph 91.1.
[53] The applicants' criticisms of the form of paragraphs 87-89 focused on the assertion that paragraph 87 pleads numerous evidentiary allegations and then seeks to plead an inference arising out of that evidence. A difficulty on the face of the pleading is that, whilst the alleged diversions by Mr Zabusky are, elsewhere in the pleadings, said to have occurred from mid-2003 to August 2004, paragraph 87 pertains to matters dating back to 1999. Counsel for the applicants, however, quite properly agreed in argument with the notion that a different structuring of the allegations could lead to a better form of pleading, i.e. if the matters asserted in paragraphs 87.1-87.7 were pleaded as distinct allegations, the pleading (as material facts) of the diversion of funds by Harvey Zabusky, with it then being alleged as a material fact (inferred from the matters pleaded) that all or a substantial part of the acquisitions were achieved with the diverted funds.
[54] Were this the extent of the applicants' complaints, I would not have required these paragraphs to be re-pleaded. The fact that counsel for the applicants quite properly agreed with me as to an alternative 'better' form in which these allegations could be cast in strict point of pleading practice really also served to make good the point that paragraph 87, in its present form, adequately, if imperfectly, conveyed with sufficient clarity the notion that, at trial, the judge will be asked to make findings in terms of paragraphs 87.1-87.7, make findings about the monies allegedly diverted by Harvey Zibusky, and reach conclusion as to the consequent extent of the improvements in the applicants' financial position.
[55] The applicants, however, further contended that the pleas in paragraphs 87-89 are fundamentally defective in substance. The issues raised in this regard at the hearing before me subsequently generated three supplementary outlines of submissions from the applicants and two supplementary outlines from the respondents, with successive outlines and responses cast in increasingly acerbic terms. The thrust of the applicants' contentions really came down to the point that, whilst the case pleaded by the respondents was that Harvey Zabusky, in breach of his fiduciary duties to VTL, authorised third party debtors of VTL to pay the amount of their indebtedness to unidentified persons or entities associated with Harvey Zabusky, 'none of this constitutes a diversion of VTL's money to anyone, and it cannot be the basis for a claim to trace into the assets of the third party recipients'. An ancillary submission advanced by the applicants was to the effect that, even if Harvey Zabusky did procure the diversion of funds away from VTL by instructing the debtors to pay money to others, his conduct was intra vires (in his capacity as a director of VTL), and the consequences of his fraudulent conduct were voidable rather than void such that the transactions, not having been avoided, remain effective unless and until impugned.
[56] It seems to me that the fundamental difficulty with paragraphs 87-89 is that they do not clearly articulate, and thereby give the applicants notice of, the case which will be advanced in support of the 'constructive or resulting trusts' which are positive in paragraph 89 and which are said to found the entitlement to relief against the applicants other than Harvey Zabusky in respect of property in the hands of those other applicants.
[57] I observe parenthetically that the reference to 'resulting trusts' in paragraph 89 is, I suspect, otiose and apt to confuse. A resulting trust is one under which the trust property reverts or 'results' to the settlor by reason of an intention presumed by law in the absence of an intention of the settlor.[15] This reversion or 'resulting' of the trust property occurs in two circumstances, as described by Lord Browne-Wilkinson in Westdeutsche Bank v Islington L.B.C.[16]:
"Under existing law a resulting trust arises in two sets of circumstances: (A) where A makes a voluntary payment to B or pays (wholly or in part) for the purchase of property which is vested either in B alone or in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the money or property is held on trust for A (if he is the sole provider of the money) or in the case of a joint purchase by A and B in shares proportionate to their contributions. It is important to stress that this is only a presumption, which presumption is easily rebutted either by the counter-presumption of advancement or by direct evidence of A's intention to make an outright transfer: see Underhill and Hayton, Law of Trusts and Trustees, pp. 317 et seq.; Vandervell v. Inland Revenue Commissioners [1966] UKHL 3; [1967] 2 A.C. 291, 312 et seq.; In re Vandervell's Trusts (No. 2) [1974] Ch. 269, 288 et seq. (B) Where A transfers property to B on express trusts, but the trusts declared do not exhaust the whole beneficial interest: ibid. and Quistclose Investments Ltd. v. Rolls Razor Ltd (In Liquidation) [1970] A.C. 567. Both types of resulting trust are traditionally regarded as examples of trusts giving effect to the common intention of the parties. A resulting trust is not imposed by law against the intentions of the trustee (as is a constructive trust) but gives effect to his presumed intention."
[58] There is nothing in the respondents' pleaded case to suggest that either of these circumstances attach to any of the transactions sought to be impugned by the respondents. Rather, it is more than tolerably clear that the respondents would seek to claim that the Court ought construe the circumstances of the deprivation of benefit from VTL, and the diversion of funds to which VTL was entitled, into property in the hands of the applicants, such as to call in equity for the remedial response of the imposition of a constructive trust.[17]
Nor is it to the point that, if the charges of breaches of fiduciary duty are made out against Harvey Zabusky, he may be liable to pay equitable compensation. These paragraphs of the FASOC seek to set the foundation for relief against parties other than Harvey Zabusky.
One of the reasons for the protracted debate between the parties as to the case sought to be advertised in these paragraphs is a degree of lack of consistency in the respondents' articulation of their own case. In the pleading of the various transactions identified between paragraphs 63 and 87 of the FASOC which are said to be infected by Harvey Zabusky's breach of fiduciary duty, only one of those is pleaded as involving a payment to him, namely the December 2003 Gateway payment of US$190,944.91, from which it is said he paid US$80,0000 to Erez Zabusky. Each of the other transactions is specifically pleaded in terms not that he himself received money which should have been paid to VTL but that he directed the payee to make payment 'to other persons or entities associated with himself' - paragraphs 73.2, 73A, 77.1 and 85.1. Yet the respondents used various formulations in their written submissions to describe their case:
"2. The applicants' case is that, in breach of those fiduciary duties, Mr Zabusky directed that certain customer debtors of VTL pay the amount of their indebtedness not to VTL but to Mr Zabusky personally, or to entities with which he was personally associated, including, ultimately, members of his family: in other words, Mr Zabusky intercepted and stole those funds which VTL's customer debtors paid in order to discharge their indebtedness to VTL: c/f Zobory v Commissioner for Taxation [1995] FCA 1226; (1995) 64 FCR 86 at 88."
"3. Mr Zabusky and his privies in the theft of VTL's funds, then used those funds to purchase or improve certain real property."
"14. The consequence is that those funds, received by the fiduciary, Mr Zabusky, or his privies, were held on trust for VTL; and are able to be traced into the real property assets purchased or improved with them."
"18. There can be no suggestion that Mr Zabusky was beneficially entitled to the funds he received from VTL's customer debtors: he received those funds on behalf of VTL, and was obliged to hand them over to it."
"26. In the present case, there can be no doubt that Mr Zabusky received the funds as a result of wrongful conduct in breach of his fiduciary duty to VTL: see Jalmoon [1997] 2 Qd R 62 in which the reasons for judgment of Pincus J and Helman J and, separately, Ambrose J, are contingent on an acceptance of the fact that when a controller of a company directs that funds due to the company be paid instead to him personally, he is in breach of his fiduciary duties to the company."
[61] Much ink was spilt in written submissions on the assertion on behalf of the applicants that, because Harvey Zabusky did not divert money from VTL itself, but rather directed third party debtors to pay money due to VTL to others, there is no basis for a claim to trace into the hands of those associated with Harvey Zabusky who ultimately received the money and applied it to acquire or improve property in their names. In many respects, however, this argument was a red herring. As Lord Millett explained in Fosket v McKeown[18], one does not trace a physical asset itself, but the value inherent in it. Moreover, as his Lordship said:
'Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant's property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. If he held only a security interest in the original asset, he cannot claim more than a security interest in its proceeds. But his claim may also be exposed to potential defences as a result of intervening transactions. Even if the plaintiffs could demonstrate what the bank had done with their money, for example, and could thus identify its traceable proceeds in the hands of the bank, any claim by them to assert ownership of those proceeds would be defeated by the bona fide purchaser defence. The successful completion of a tracing exercise may be preliminary to a personal claim (as in El Ajou v Dollar Land Holdings p/c [1993] 3 All ER 717) or a proprietary one, to the enforcement of a legal right (as in Trustees of the Property of FC Jones & Sons v Jones [1997] Ch 159) or an equitable one.'
[62] See also his Lordship's observations in Boscawen v Bajwa[19].
Even if it be right that what is traced is the value of the money diverted away from VTL and into the hands of the applicants (other than Harvey Zabusky), that does not of itself constitute a claim or provide a remedy against those applicants. What this part of the pleading lacks, in my view, is proper expression of the material facts which will be relied on to assert the remedy of the imposition of a constructive trust on those applicants. Nor is it an answer to say simply that this is a case of a company director breaching his fiduciary duties by diverting money to which the company is entitled into the hands of those associated with him. As Thomas JA said in Ferrari Investment (Townswille) Pty Ltd (in Liq) v Ferrari [1999] QCA 230; [2000] 2 Qd R 359 at 369:
"The directors are personally liable for the breach of such a duty. As their own new company received the benefit of such breaches with full knowledge of the relevant facts it inter alia became accountable as a constructive3 trustee." (underlining added)
- Is it to be contended that the constructive trusts ought be imposed because those applicants were knowing recipients of those funds, i.e. by application of the first limb in Barnes v Addy? This is the case pleaded against Erez Zabusky in paragraphs 90-92, but it is not pleaded in respect of the allegations made in paragraphs 87-89.
- Is it to be contended that the constructive trust oughts be imposed because those applicants gave Harvey Zabusky knowing assistance, i.e. under the second limb in Barnes v Addy? Under that limb, those other applicants will be held liable if they are found to have assisted Harvey Zabusky, as a fiduciary, with knowledge of a dishonest or fraudulent design on Harvey Zabusky's part. That statement of principle is taken from Farah Constructions v Say-Dee Pty Ltd[20]. Further in that judgment, the High Court made it clear[21] that the law in Australia is that there are four categories of 'knowledge' for the purposes of the second limb in Barnes v Addy:
(iii) Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;
(iv) Knowledge of circumstances which would indicate the facts to an honest and reasonable person.
[65] But it is also clear, as the High Court observed in Say-dee[22] that allegations of this nature are so serious as to need to be pleaded and particularised.
Or is it to be contended that there is some other basis for the imposition of the constructive trusts to be advanced against those applicants other than Harvey Zabusky, and if so what are the material facts on which the respondents will rely in advancing that case?
There is a further difficulty relating to the temporal disconnect between paragraphs 87 and 88, to which I referred above in the context of considering the form of those pleadings. Paragraph 88 calls for an inference to be drawn that the improvements in the assets of the respondents other than Harvey Zabusky were achieved with the diverted funds. The pleaded diversions first occurred in 2003, but paragraph 87.3 refers to asset improvements by Amelia Zabusky 'since 1999', and, more starkly, paragraph 87.4 refers to Erez Zabusky settling a purchase of property in about July 2002. It is not at all clear how it is said, for example, that the purchase by Erez Zabusky in July 2002 was achieved with funds which were not diverted until the following year.
For completeness, I should also say that it is unnecessary for me to deal with argument by the applicants as to the transactions being voidable and not void, but would note that the case is not concerned with the status of the transaction as between VTL (by Harvey Zabusky) and the third party payees, but with the consequences of alleged frauds committed on VTL by its diversion.
The cumulative effect of these deficiencies compels me to conclude that paragraphs 87-89 ought be struck out and re-pleaded.
1. That paragraphs 85, 86, 87, 88 and 89 of the Further Amended Statement of claim filed 15 January 2008 be struck out;
2. That the Applicants, Virgtel Ltd and Virgtel Global Netwrks NV, have leave to replead by filing and serving a further amended Statement of Claim by 1 October 2008;
3. That the application to strike out paragraphs 66, 67, 68, 69, 71, 72, 73, 73A, 90, 91 and 92 of the Further Amended Statement of Claim filed 15 January 2008 be refused;
4. That the striking out application otherwise be adjourned to a date to be fixed.
Virgtel Ltd & Anor
Zabusky & Ors
(1990) 169 CLR 279
(2007) 230 CLR 89
(1995) 64 FCR 86
(1916) 22 CLR 490
(1996) 126 FLR 341
(2000) 172 ALR 586
(1999) 196 CLR 101