Citation: Commonwealth Bank of Australia v Mohamad Saleh & Ors [2007] NSWSC 903
Court: Supreme Court of New South Wales, Equity Division (Commercial List)
Date: 28 August 2007
Judge(s): Einstein J
Background
The Commonwealth Bank brought proceedings to recover approximately $7 million advanced under a receivables finance facility granted to TDM Australia Pty Ltd, a wholesaler of electrical products. The Bank alleged it had been induced to grant the facility by fabricated financial statements portraying TDM as generating around $20 million in annual sales, when the stated purpose for the facility was itself a fabrication.
Multiple actors were alleged to have participated in the fraud, including two brothers who had been directors of TDM, a subsequently appointed sole director, and an accountant who prepared financial statements, receivables schedules, and letters certifying key facts about TDM's operations. Once the Bank advanced the funds following settlement, the proceeds were rapidly disbursed across a range of recipients, including family members of the principal defendants.
The Bank sought relief not only against those it alleged actively perpetrated the fraud, but also against individuals and entities said to have received the funds as volunteers, including members of the Saleh family and various corporate and banking parties. The proceedings engaged a wide range of legal theories and a substantial volume of expert evidence.
Legal Issues
- Whether the defendants engaged in misleading and deceptive conduct, deceit, and negligent misstatement in procuring the receivables finance facility
- Whether the Bank could trace the proceeds of the fraud into the hands of recipients, including alleged volunteer recipients
- Whether restitutionary claims for mistaken payment were established
- Whether claims in rem over identified property could be sustained
- What principles governed an award of exemplary damages and whether such an award was appropriate
- The extent of each defendant's liability, including the appropriate treatment of defendants who did not appear or who had reduced involvement (such as Mr Petts, against whom only nominal damages were ultimately sought)
- The reliability and weight of expert evidence concerning document examination and computer deep memory analysis
Decision
Einstein J found in favour of the Bank across its principal claims, holding that an elaborate fraud had been perpetrated upon it through the provision of fabricated financial statements and false representations about TDM's financial position. The court was satisfied, applying the elevated standard of proof appropriate for serious fraud allegations (consistent with the principles in Briginshaw v Briginshaw), that the key defendants had participated in conduct constituting deceit and misleading and deceptive conduct.
The court considered in detail the principles governing equitable tracing, drawing on authorities including Foskett v McKeown and Agip (Africa) Ltd v Jackson, and examined whether the Bank could follow the disbursed funds into the hands of recipients. The analysis distinguished between those who received funds as volunteers, and addressed the circumstances in which a proprietary remedy or personal liability could be established against downstream recipients.
On exemplary damages, the court reviewed the governing principles, including those articulated in Cassell & Co Ltd v Broome and XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd, and considered whether the conduct of particular defendants warranted such an award beyond compensatory relief.
As for the second defendant Mr Petts, the Bank elected during final address to limit its claim against him to nominal damages of $1. The court accepted that the evidence at hearing had materially reduced the apparent degree of his culpability compared with what had been assumed when a default judgment was initially obtained against him.
Orders Made
• The parties are to bring in short minutes of order on which occasion:
- The matters reserved for submission may be argued
- Any issues with respect to the proposed orders may be argued
- Costs may be argued
• The judgment be corrected by the removal of the heading to paragraph 264 and by the removal of paragraph 264 itself
The judgment noted that the Bank was entitled to declarations and orders as detailed in the reasons, and directed that short minutes of order be brought in. A further hearing was reserved to address outstanding matters including costs, any issues of duplication or double counting in the proposed orders, and certain reserved matters identified during the judgment.
Key Takeaways
- Fabricating financial statements to induce a bank to advance funds under a receivables finance facility can ground liability in deceit, misleading and deceptive conduct, and negligent misstatement simultaneously, depending on each defendant's role.
- Equitable tracing principles allow a defrauded plaintiff to pursue proceeds that have been rapidly disbursed to third parties, including volunteer recipients, subject to established limitations on following funds through mixed accounts and identifying surviving assets.
- A defendant's apparent degree of culpability can shift materially during a hearing, and a plaintiff is not bound to maintain its original damages claim if the evidence reveals a more limited role; the court accepted nominal damages of $1 against one defendant where the Bank conceded the evidentiary case for substantial damages had not been made out.
- Exemplary damages remain available in fraud cases where compensatory awards are insufficient to reflect the court's condemnation of the defendant's conduct, but their award is governed by established principles requiring careful analysis of the nature and gravity of the wrongdoing.
- The Supreme Court applied the slip rule under rule 36.17 of the Uniform Civil Procedure Rules 2005 to remove a paragraph that had been inadvertently included from a party's document rather than from evidence before the court, confirming that clerical errors can be corrected before final orders are made without altering the substance of the reasons.
Legislation and Cases Referenced
Legislation:
- A New Tax System (Goods and Services Tax) Act 1999 (NSW)
- Corporations Act 2001 (Cth)
- Evidence Act 1995 (NSW)
- Fair Trading Act 1987 (NSW)
- Financial Transactions Reports Act 1992 (Cth)
- Trade Practices Act 1974 (Cth)
- Uniform Civil Procedure Rules 2005 (NSW), rule 36.17
Cases:
- Agip (Africa) Ltd v Jackson [1992] 4 All ER 451
- Black v S Freedman & Co (1910) 12 CLR 105
- Boscawen v Bajwa [1996] 1 WLR 328
- Briginshaw v Briginshaw (1938) 60 CLR 336
- Cassell & Co Ltd v Broome [1972] AC 1027
- Foskett v McKeown [2000] 3 All ER 97
- Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298
- In re Diplock: Diplock v Wintle [1948] Ch 465
- James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62
- Lamb v Cotogno (1987) 164 CLR 1
- Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449
- XL Petroleum (NSW) Pty Ltd v Caltex Oil (Australia) Pty Ltd (1985) 155 CLR 448
- Watson v Foxman (1995) 49 NSWLR 315