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Supreme Court 14 January 2004

NCR Australia v Credit Connection

[2004] NSWSC 1

Fraud & dishonesty
EQUITY CONSTRUCTIVE TRUSTEESHIP KNOWING ASSISTANCE CORPORATIONS AUTHORITY OF OFFICERS AND AGENTS

Citation: NCR Australia v Credit Connection [2004] NSWSC 1
Court: Supreme Court of New South Wales, Equity Division
Date: 14 January 2004
Judge(s): Austin J

Background

The plaintiff, a large technology company selling ATMs and computer hardware, engaged the first defendant, a credit collection agency, to collect debts owed by the technology company's customers. The arrangement ran from approximately December 1996 to 1998. The collection agency received money from third parties and held those funds on trust for the technology company before remitting them.

The technology company alleged that between October 1998 and March 1999 the collection agency misappropriated funds by making three categories of unauthorised deductions: charging "litigation costs," taking commissions on payments received directly by the technology company from its own customers, and charging commissions above the agreed rate of 12%. The total claim was approximately $671,644.

The technology company sued the two directors and sole shareholders of the collection agency (now in liquidation) personally, relying on equitable principles to hold them liable as constructive trustees. A central factual dispute was whether two deeds dated 11 August 1998 and 18 November 1998, which the directors said authorised the deductions, had ever been validly authorised by the technology company. That question turned on whether the technology company's national credit manager, Mr Cannon, had actual or ostensible authority to bind the company to those deeds.

  • Whether the collection agency held the collected funds on trust for the technology company
  • Whether the deductions taken by the collection agency amounted to misappropriations in breach of that trust
  • Whether the two deeds purportedly authorising the deductions were validly executed and binding on the technology company
  • Whether the national credit manager had actual or ostensible authority to bind the technology company to engage a mercantile agent and to execute the deeds
  • Whether the directors were liable as constructive trustees under the second limb of Barnes v Addy, on the basis that they knowingly assisted in a dishonest and fraudulent breach of trust
  • Whether the male director and the female director each had the requisite knowledge of the misappropriation
  • What claims, if any, were available against Mr Cannon personally

Decision

Austin J found that the collection agency received and held the collected funds as agent and trustee for the technology company. The three categories of deductions were not authorised by the technology company and constituted misappropriations in breach of trust.

The validity of the two deeds was central to the defence. The court examined the organisational structure of the technology company in detail, including its delegation of authority arrangements, to determine whether the national credit manager had the authority he purported to exercise. The court found that the deeds were not validly authorised by the technology company, meaning the directors could not rely on them to justify the deductions or to support their set-off defence based on the collection agency's cross-claim.

On the knowing assistance claim, the court found that both directors were liable as constructive trustees under the second limb of Barnes v Addy. The male director was found to have been actively involved in and aware of the misappropriation. The female director, though less active in the company's affairs, was found to have had sufficient awareness of what was occurring.

The claims against Mr Cannon, the former national credit manager, were not finally resolved. The court found the evidentiary record might support findings of breach of good faith and fidelity obligations, but declined to make final determinations without further submissions from the technology company on quantum and the precise relief sought.

Orders Made

• Proceedings stood over for further brief hearing
• Directions to be given for preparation of written submissions on quantum of recovery, the case against Mr Cannon, and costs
• NCR to propose orders to deal with its claims against Mr Cannon and make supplementary submissions to support those proposed orders

Note: The judgment concluded by directing the parties to file further written submissions on quantum of recovery, the claims against Mr Cannon, and costs. The proceedings were stood over for a further brief hearing. Final orders had not been made at the time of this judgment.

Key Takeaways

  • Under the second limb of Barnes v Addy, a director who knowingly assists in a trustee's dishonest and fraudulent breach of trust is personally liable as a constructive trustee, even where the trust relationship was with a separate corporate entity the director controlled.

  • A less active director is not automatically insulated from knowing assistance liability; the court found sufficient awareness of the misappropriation on the part of the female director despite her more peripheral involvement in the company's day-to-day operations.

  • The usual authority of a national credit manager was examined as a matter of fact and corporate structure; the outcome depended on the specific delegation arrangements in place, meaning the title of an officer alone does not resolve questions of ostensible authority.

  • Where deeds purportedly authorising conduct are found to be invalid for want of corporate authority, defences and set-offs built entirely on those deeds also fall away.

  • Sufficient evidence may exist to support a finding of breach of an employee's duty of good faith and fidelity, but a court may decline to make final orders on such claims if the plaintiff has not developed the case on loss and damage in its submissions.

Legislation and Cases Referenced

Legislation
- Corporations Act 2001 (Cth), ss 127, 129
- Commercial Agents and Private Inquiry Agents Act 1963 (NSW), ss 4, 6, 26, 28, 29, 31, 33A, 34, 39B

Cases
- Barnes v Addy (1874) LR 9 Ch App 244 (the foundational knowing assistance principle)
- Royal Brunei Airlines v Tan [1995] 2 AC 378
- Consul Development Pty Ltd v DPC Estates Pty Ltd (1995) 132 CLR 373
- Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
- Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146
- Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72
- Deputy Commissioner of Taxation v Clark (2003) 45 ACSR 332
- Reuters Australia Pty Ltd v The Credit Connection Pty Ltd [2000] NSWSC 221
- Palette Shoes Pty Ltd (in liq) v Krohn (1937) 58 CLR 1
- Henry v Hammond [1913] 2 KB 515
- Walker v Corboy (1990) 19 NSWLR 382
- Jones v Dunkel (1959) 101 CLR 298
- Henderson v Merritt Syndicates Ltd [1995] 2 AC 145
- Breen v Williams (1997) 186 CLR 71