Salvation Army (PNG) Property Trust v Jorgensen and Vagi [1997] PGNC 151; N1644 (20 November 1997)

Unreported National Court Decisions

N1644

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

WS 157 OF 1996
SALVATION ARMY (PNG) PROPERTY TRUST
PLAINTIFF
V
IVAR JORGENSEN
FIRST DEFENDANT
REX VAGI (ALSO KNOWN AS VEVAO PYAMA)
SECOND DEFENDANT

Waigani

Woods J
12 November 1997
13 November 1997
20 November 1997

MASTER AND SERVANT - breach of fiduciary duty – profits obtained by an employee dishonestly by virtue of employment – use of a bogus company and bank account to increase costs of goods procured for the company and increased amounts retained by employee – right of employer to profits.

Cases Cited

Reading v Attorney-General [1951] UKHL 1; [1951] 1 AER 617

Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488

Counsel

M Wright for the Plaintiff

K David for the Defendants

20 November 1997

WOODS J: This matter is a claim for certain declarations over profits and monies said to have been converted and for damages for breaches of the fiduciary relationship the defendants had with the plaintiff.

The claim is that the plaintiff is a corporation which owned and operated a printing business known as Salpress or Salvationist Press and in such bus it employedloyed the defendants as the General Manager and the Financial Controller respectively and that the defendants in those capacities breached their fiduciary relationship as employees and procured monies to themselves by wrongfully profiting from business dealings entered into purportedly for the benefit of Salpress.

The following is not disputed:

The Plaintiff is a corporation under Statute and able to sue,

The Plaintiff owned and operated a printing business known as Salpress or Salvationist Press,

The First Defendant was employed by the plaintiff in the position of General Manager of Salpress,

The Second Defendant was employed by the plaintiff as the Financial Controller of Salpress,

The Defendants in these positions were responsible for and had effective control of the management of Salpress.

Evidence has been presented to the court of certain dealings involving the purchase of paper for Salpress from overseas suppliers. The evidence is that Salpress purchased its paper supplies from certain companies in Australia namely Paper House and Raleigh Paper Co Pty Ltd. These purchases were done by the two defendants in their capacity as General Manager and Financial Controller of Salpress. However the evidence reveals that instead of making the purchases direct from Paper House and Raleigh the defendants created a bank account under the title of ‘IVI Group’ and channelled the paper purchases through that name and bank account. This was done by ordering the paper needs through the name of Salpress, the invoices for these orders would go to IVI Group who would raise a separate invoice to Salpress for an amount greater than the original invoice. The defendants would then arrange for payment to be made to IVI from Salpress for this inflated invoice, the money would go into the IVI account and then a separate cheque would be raised from the IVI account to raise an overseas bank draft to pay the Raleigh or Paper House invoice. This final bank draft would be forwarded to the Australian Company under cover of a Salpress letter. At all times the Australian companies believed they were dealing directly with Salpress. However in fact the cost of the paper supplies to Salpress was being inflated by the loading going into the IVI bank account. The two defendants were the only signatories to this IVI account. IVI had no corporate or registered name existence, it appears to be merely a name placed on a bank account operated by the two defendants. There was no evidence of any company documents or company or business records or tax returns or otherwise for the operation of any entity called IVI or IVI Group. It appears at the end of the evidence to be merely a scam bank account to cream off profits from dealings between Salpress and suppliers of products to Salpress.

The evidence comes from an investigation by an Accountant into the operations of Salpress over a two year period from 1^st January 1994 to 31 December 1995 and this investigation shows that overpayments were made into the IVI bank account of a total of K53,106.88 for purchases of paper from Paper House and Raleigh Paper Company during that period.

The two defendants do not deny in court that they were the signatories to the IVI account, although the evidence suggests that when first confronted by officers of the plaintiff they stated that they had no knowledge of IVI or of these dealings. They suggest that there was nothing wrong with the way they operated through the IVI account to make purchases of paper from Australian supplier companies. They suggest that the extra amounts between the invoiced amounts from the Australian Companies and the price paid by Salpress to IVI was to cover costs such as duty and handling charges however they are unable to represent any documentation or accounts or receipts to support these other charges. They are unable to provide any real explanation for the need to superimpose a company like IVI group. They are not able to produce any records or certificates to support the business or name existence of such a company or business. The first defendant states that he was able to obtain better purchasing terms for paper from the Australian companies through the use of the name IVI Group however there is no evidence of this at all as at all times it appears that the Australian suppliers always assumed that they were dealing direct with Salpress and the way payments were made to them they appeared to have no knowledge of what IVI was.

The law is quite clear. Equity will not allow a fiduciary to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. In this case the defendants were employed to manage and run the business of Salpress to the best of their ability for the advantage of the Salvation Army Property Trust. And this would include to ensure they purchased the necessary goods and products at the most advantageous prices for the operation of the business. So to arrange the buying in such a way that an extra cost was added to the price of goods for which there was no reason or benefit and to take that extra cost to themselves with no authority from their employer was clearly a breach of their duty to the Trust to ensure the business was run on the best of terms for the Trust. By being the signatories and beneficiaries of this IVI bank account the defendants had clearly entered into arrangements where their personal interests conflicted with that of their employer. As was said by Lord Denning in the case Reading v Attorney-General which was considered by the House of Lords in [1951] 1AER 617:

In my judgement it is a principle of law that if a servant takes advantage of his service and violates his duty of honesty and good faith to make a profit for himself, in the sense that the assets of which he has control, the facilities which he enjoys, or the position which he occupies, are the real cause of his obtaining the money as distinct from merely affording the opportunity for getting it, that is to say, if they play the predominant part in his obtaining the money, then he is accountable for it to the master. It matters not that the master has not lost any profit nor suffered any damage . nor does it matter that the master could not have done the act himself. If the servant has unjustly enriched himself by virtue of his service without his master’s sanction, the law says that he ought not to be allowed to keep the money, but it shall be taken from him and given to his master, because he got it solely by reason of the position which he occupied as a servant of his master.

Having thus taken profits or monies in breach of their fiduciary duty to their employers the defendants as fiduciaries are liable for the profits wrongly made upon a count for money had and received and in equity for an account of profits as in the above case.

I am satisfied on the evidence that both defendants are equally liable. They were both signatories to the IVI account. The second defendant Rex Vagi suggested that he did not know anything about the dealings with the account but he was evasive in all his answers and had apparently contradicted himself at the time the investigations were made yet later admitted that he had two different names. In his evidence he seemed to know all about the dealings and arrangements with the IVI account yet he could give no explanation as Financial Controller for Salpress for the so called extra charges he talked about.

I find that the defendants by virtue of their employment with the plaintiff as General Manager and Financial Controller respectively were under a duty to serve the plaintiff with good faith and fidelity.

I find that the defendants breached the implied terms of their employment by procuring to themselves monies properly belonging to the Plaintiff and wrongfully profited from business dealings conducted between themselves through the medium of IVI or IVI Group and the plaintiff. I find that in breach of their duties the defendants have failed to account to the plaintiff for monies improperly applied and received by themselves on behalf of the plaintiff.

Whilst an appropriate remedy would be to order that an inquiry be conducted as to the application of all property, profits and monies received by the defendants, it has been submitted to me that because of the long time lapse, and the circumstances of both the plaintiff and the defendants that such an inquiry would be pointless. The investigations conducted by the plaintiff and the evidence presented to this court have disclosed dealings that clearly show some monies wrongly obtained and it may be sufficient to rest on these amounts. Also the investigations conducted by the plaintiff have discovered certain assets which have had restraining orders issued on them. I am satisfied that in accordance with certain principles such as those stated in the case Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488 it would be appropriate for the court to place a lien upon the assets of the defendant.

I find there is sufficient evidence that amounts of K10,860.50 and K42,246.38 have been wrongfully obtained by the defendants through their operations of the IVI account. I am further satisfied that the plaintiff has incurred further costs in conducting an investigation into these activities of the defendants in breach of their duty to the plaintiff. I am satisfied that an amount of K 5,566.49 incurred in accountancy fees for this investigation are part of the damages that the plaintiff has suffered.

I declare that all property into which the said property, profits, and monies have been converted is held by the first and second defendants and each of them or by any company in which the first and second defendants are directors and shareholders or by any other person for and on behalf of the first and second defendants upon trust for the plaintiff and I order that the defendants procure that the same be transferred and paid to the Plaintiff.

I order judgement for the Plaintiff against Ivar Jorgensen and Rex Vagi in the sum of K58,673.37.

I order interest on that amount at 8 percent from the date of issue of the writ to date which assesses at K8,256.05.

I order that the balance held in the bank account in the name of IVI Group held at Westpac Bank PNG Waigani Branch no 718781801 of K3,988.97 together with the balance of the bank account held in the name of Ivor Jorgensen at Westpac Bank PNG Ltd Boroko Branch No 620178820 of K18,096.13 together with any interest that may have accrued be paid to the plaintiff forthwith.

ON COSTS

The Court has been asked to exercise its discretion to award the Plaintiff its costs on a solicitor-client basis on the submission that the defendants by their action in running to a full trial with no real defence in their evidence has caused further costs and therefore damages to the plaintiff Trust over and above the normal legal costs that would be allowed. Costs are a matter for the discretion of the court. In the circumstances of this case and the complete lack of any defence and the fact that the plaintiff is a leading charitable trust I will exercise my discretion and I Order that the defendant is to pay the plaintiff’s costs on a solicitor-client basis as covered in Order 22 Rule 35 of the National Court Rules.