Federal Court of Australia

ACN 002 402 146 Pty Ltd (manager appointed) (in liq) (formerly known as Tome Bros Pty Ltd) v Ken Crossman & Co Pty Ltd [2022] FCA 749

ORDERS

THE COURT ORDERS THAT:

1.    The originating application be dismissed.

2.    Subject to orders 3 and 4, the applicant must pay the respondent’s costs of the proceeding as agreed or taxed.

3.    If a party wishes to vary order 2 the party may file and serve notice of the proposed varied order and a written submission in support, together with any affidavit required, as well as consent to the issue of costs being determined on the papers or a request for a further hearing, within 14 days.

4.    Any party served with documents under order 3 may, within a further 14 days, file and serve notice of any proposed varied order sought and a written submission in support, together with any affidavit required, as well as consent to the issue of costs being determined on the papers or a request for a further hearing.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

FARRELL J:

Introduction

1    From 1 July 1998 until 1 May 2013, the applicant, Tome Bros Pty Ltd, carried on business as a real estate agent under a licence issued by the New South Wales Department of Fair Trading (Department) numbered 238626 (Licence).

2    Section 36(1) of the Property, Stock and Business Agents Act 1941 (NSW) (the 1941 Act) provided as follows (emphasis added):

36 Money to be paid to trust account

(1)    All moneys received for or on behalf of any person by any licensee shall be held by the licensee or, where the licensee is employed by a corporation, by the corporation, exclusively for such person, to be paid to such person, or to be disbursed as the person directs, and until so paid or disbursed the moneys shall be paid into a bank, building society or credit union operating in New South Wales to a trust account, whether general or separate, and retained therein.

In any case where the licence is held by a corporation the trust account shall be in the name of the corporation and in any other case the trust account shall be in the name of the licensee or of the firm of licensees of which the licensee is a member. The words “Trust Account” shall appear in the name of the trust account and in the description of the trust account in the books and records of the licensee and also on all cheques drawn on the trust account.

Section 3 of the 1941 Act defined “moneys received for or on behalf of any person” to include “moneys held for or on behalf of any person, whether originally received for or on the person’s behalf or not”.

3    The 1941 Act was repealed with effect on 31 August 2003. The Property, Stock and Business Agents Act 2002 (NSW) (2002 Act) came into effect on 1 September 2003. Subsections 86(1) and (2) of the 2002 Act were to essentially the same effect as s 36(1) of the 1941 Act and the definition of “moneys received for or on behalf of any person” were defined in the same way in s 3 of the 2002 Act.

4    From 1 July 1998 until 1 May 2013, Tome maintained two trust accounts with National Australia Bank (NAB), one in respect of the Rockdale office (Account 8112) and one in respect of an office at Brighton Le Sands (Account 2697). They are referred to collectively as the Trust Accounts.

5    James Cochineas was one of Tome’s directors from 15 April 1982 and its sole director from June 2006 (see [37] below).

6    It is an agreed fact that for periods ending 30 June 2002 to 2009, NAB bank statements for the Trust Accounts were created by one or more officers of Tome using a computer-generated program and pre-printed NAB letterheads (False NAB Statements). The False NAB Statements overstated the cash balances for the Trust Accounts. There was a deficiency in the Trust Accounts which was the consequence of withdrawals made from the Trust Accounts by one or more officers of Tome for their own purposes, and not for Tome’s benefit.

7    While s 38D of the 1941 Act was in force, for each year ending 30 June, Tome was obliged to:

    Within three months of the prescribed day in every year, cause the books, papers, accounts and other documents relating to any moneys held in a trust account kept in accordance with s 36 of the 1941 Act (records) to be audited by a person qualified under s 38E of that 1941 Act to act as an auditor: s 38D(2)(a). From 15 July 2002, that was a person qualified to be a registered company auditor under the Corporations Act 2001 (Cth): s 38;

    Lodge the auditor’s report on the audit with the Director-General of the Department: s 38D(2)(b); and

    Obtain from the auditor a copy of the report signed by the auditor and preserve it for a period of three years after the date on which the report was made: s 38D(4).

The auditor’s report was required to be in a form approved by the Director-General: s 38D(2B).

8    Section 38E of the 1941 Act provided that:

    A person is qualified to be an auditor if he or she was a registered company auditor within the meaning of the Corporations Act or if the person was nominated by the person whose records were to be audited and approved by the Director-General: s 38E(1); and

    If, in the course of making an audit of records for the purposes of s 38D, the auditor discovers that any breach of the 1941 Act or the regulations has been committed, that there is any discrepancy relating to the trust account or that the records are not kept in such a manner as to enable them to be properly audited, the auditor must fully set out those facts in the auditor’s report and forward a copy of the report to the Director-General: s 38E(2).

9    Section 111 of the 2002 Act is to the same effect as s 38D of the 1941 Act. Sections 115 and 116(1) and (2) of the 2002 Act are to the same effect as s 38E of the 1941 Act.

10    At all material times, the respondent, Crossman & Co Pty Ltd, carried on a business of providing accounting and auditing services. The late Kenneth William Crossman was a director of Crossman & Co from 19 July 1989 to 20 November 2012. Mr Crossman died on 30 August 2013. Crossman & Co charged a fee in each of the years 2000 to 2009 for the audit of Tome’s Trust Accounts.

11    It is common ground that:

    Between 2002 and 2009, Mr Crossman, a registered company auditor, completed and signed Auditor’s Reports in relation to the Trust Accounts for the purposes of s 38D of the 1941 Act or s 111 of the 2002 Act;

    Those Auditor’s Reports were unqualified;

    False NAB Statements were given to Mr Crossman for the purposes of the audits in 2002 to 2006 and 2009; and

    The 2002 to 2009 Auditor’s Reports were lodged with the Department. There is an issue between the parties as to who provided the Auditor’s Reports to the Department.

12    Each of the 2002 to 2005 Auditor’s Report Booklets included the following statements on the front page, each accompanied by “Yes” and “No” check-boxes:

    The first statement was: “Breaches have been listed in Schedule 4 of this report”; and

    The second statement was: “A qualified summary is listed in Schedule 5 of this report”.

Mr Crossman checked the “No” check-box accompanying each of those statements. Schedule 4 was entitled: “Summary of Breaches of the Act and/or Regulation”. It included a column headed “Description and Extent of Breach”. Schedule 5 was entitled “Summary Review Memorandum” and stated “This memorandum summarises the reasons for issuing a qualified audit report and is to be completed after considering the results of all procedures followed to complete the Report”. Schedules 4 and 5 were completed with the word “Nil”.

13    The reported closing balances of the Trust Accounts as at approximately 30 June in 2002 to 2005 were set out in Schedule 1 of each of the relevant Auditor’s Reports lodged with the Department. The reported closing balances reflected the False NAB Statements, not the actual closing balances of the Trust Accounts based upon duplicate statements obtained by the liquidator from NAB [(see [16] below)] as demonstrated by the chart set out at [50] below.

14    Each of the 2002 to 2005 Auditor’s Reports contained handwritten pages headed “Trust Bank reconciliation statement as at [date] June [year]” (each a reconciliation statement) in respect of each of the Trust Accounts. For each of those years, the reconciliation statement referred to “credit balances per bank statement” in the amount of the reported closing balances not the actual closing balances of the Trust Accounts. At [51] below is a summary of the information in those reconciliation statements.

15    The checklist set out under the heading “Part 2 – Trust Audit Report Checklist” in each of the 2002 to 2005 Auditor’s Reports contained the question “Do reconciliation statements accurately reflect the reconciliation of the balance(s) of the trust account(s) with the balance(s) of the cash book(s)?” (reconciliation question). The check-box for the reconciliation question was marked “Yes” in each of those Auditor’s Reports.

16    On the application of the Australian Taxation Office, this Court ordered Tome to be wound up in insolvency on 1 May 2013. The Court also ordered that Michael John Morris Smith be appointed as its liquidator. On 15 May 2013, the Director-General of the Department appointed the liquidator as manager of Tome’s business.

17    Division 3 of Part 10 of the 2002 Act relates to claims on the Property Services Compensation Fund (Compensation Fund or Fund) established under Div 1 of Part 10. Sections 170, 171, 173 and 177 (which occur in Div 3 of Part 10) are relevant in these proceedings. I note that ss 175 and 180 contain limits on the amounts that may be claimed against or paid out of the Fund and s 179 enables the Secretary to require the production of documents in support of claims.

18    At all relevant times, s 170 defined “pecuniary loss” as follows:

pecuniary loss from a failure to account includes:

(a)    all costs (including the legal costs and disbursements of making and proving a claim), charges and expenses that a claimant has suffered or incurred as a direct consequence of the failure to account, and

(b)    all interest on money or other valuable property that a claimant would have received but for the failure to account for the money or other property, with that interest calculated to the date on which the Secretary determines the claimant’s claim or a judgment is recovered against the Secretary in relation to the Compensation Fund in respect of that money or other property.

19    At all relevant times, s 171(1)-(4) of the 2002 Act defined “failure to account” as follows:

171 Meaning of “failure to account”

(1)    In this Division, a reference to a failure to account is a reference to a failure by a licensee to account for money or other valuable property entrusted to the licensee or an associate of the licensee in the course of the carrying on of the licensee’s business as a licensee.

(2)    This Division applies only to a failure to account that arises from an act or omission of the licensee or associate.

(3)    For the purposes of this Division, it does not matter that the failure to account occurred after the licensee ceased to be licensed, if the money or other valuable property concerned was entrusted to the licensee (or an associate of the licensee) before the licensee ceased to be licensed.

(4)    This Division applies whether the failure to account, or the act or omission, took place before or after the commencement of this Division.

20    At all relevant times, s 173 of the 2002 Act provided as follows:

173 Claims against Compensation Fund

(1)    The Compensation Fund is held, and is to be applied, for the purpose of compensating persons who suffer pecuniary loss because of a failure to account.

(2)    A person who claims to have suffered a pecuniary loss because of a failure to account may make a claim against the Compensation Fund, but only if the claim is made in writing to the Secretary within:

(a)    a period of 12 months after the person has become aware of the failure to account, or

(b)    a period of 2 years after the date of the failure to account,

whichever period ends first.

(3)    However, a claim caused by a failure of a licensee (or an employee or agent of a licensee) to lodge a rental bond with the Rental Bond Board may also be made at any time within one year after the termination of the tenancy agreement.

(4)    A licensee does not have a claim against the Compensation Fund in respect of a pecuniary loss suffered in connection with the licensee’s business as a licensee because of a failure to account.

(5)    Subject to this section, the Secretary may receive and allow, in whole or in part, any claim against the Compensation Fund at any time after the relevant failure to account arose.

(6)    The Secretary may disallow any claim, in whole or in part, in appropriate cases. In particular the Secretary may disallow a claim to the extent that pecuniary loss was suffered as a result of a failure to mitigate loss or was occasioned by unreasonable delay in making a claim.

21    I note that prior to 8 July 2016, “Director-General” appeared in s 173 where “Secretary” appears in s 173 after that date. That is also true in relation to s 177 set out below. I note that under s 3 of the 2002 Act “Secretary” is defined to mean (relevantly) the Commissioner for Fair Trading.

22    At all relevant times, s 177 of the 2002 Act provided as follows:

177 Subrogation

(1)    On payment out of the Compensation Fund in settlement in whole or in part of a claim under this Act, the Crown is subrogated, to the extent of the payment, to all the rights and remedies of the claimant against the licensee, or the former licensee, in relation to whom the claim arose, or any other person.

(2)    A certificate given by the Secretary certifying that a specified amount has been paid out of the Compensation Fund in settlement in whole or in part of a claim under this Act is evidence of the matter certified.

(3)    In the enforcement of any rights or remedies to which the Secretary is subrogated under this section for the purpose of recovering an amount paid out of the Compensation Fund, the amount is taken to be a debt due to the Crown and may be recovered accordingly.

(4)    The Secretary may exercise the rights and remedies to which the Secretary is subrogated under this section in the name of the Secretary or in the name of the claimant concerned.

23    From May 2013, the Department received claims relating to Tome made against the Compensation Fund pursuant to s 173(2) of the 2002 Act in an aggregate amount of $1,863,002.62.

24    A certificate dated 11 November 2014, issued under s 177(2) of 2002 Act (2014 s 177 certificate), stated that the amount of $1,237,927.37 had been paid out of the Compensation Fund in settlement of 94 claims made on the Fund pursuant to s 173(2) of the 2002 Act “because of a failure to account” by Tome, a former licensee. I note that s 177 also appears in Div 3 of Part 10 of the 2002 Act.

25    On 27 July 2018, the Commissioner for Fair Trading lodged a proof of debt with the liquidator stating that Tome was indebted to the Commissioner for Fair Trading in the amount of $1,477,440.27 arising from “claims for compensation on Property Services Compensation Fund”. I note that, at that time, s 3 of the 2002 Act defined “Secretary” to be the Commissioner for Fair Trading and if there was no Commissioner, the Secretary of the Department of Finance, Services and Innovation.

26    It is an agreed fact that a certificate dated 12 June 2019 was issued under s 177(2) of the 2002 Act (2019 s 177 certificate). The 2019 s 177 certificate stated that the amount of $1,477,440.27 had been paid out of the Compensation Fund in settlement of 115 claims made on the Fund pursuant to s 173(2) of the 2002 Act in respect of pecuniary losses suffered because of Tome’s failure to account for deposits to the Trust Accounts. A further 12 claims were pending for an amount of $273,605.52. The parties agreed to proceed on the basis that the 2019 s 177 certificate was validly issued notwithstanding that it was executed by a person who identified their position as being an Acting Director, Industry Standards & Bonds, rather than “Secretary”.

27    Also on 12 June 2019, the Department provided the liquidator’s solicitors with a schedule outlining claims made by beneficiaries of the Trust Accounts. That list is exhibit MJMS20 in these proceedings. Exhibit MJMS20 sets out a list of 115 claims resolved by payment from the Compensation Fund in an aggregate amount of $1,477,440.27. It sets out the date the claim was made on the Fund and the date on which cheques were drawn to effect payment of approved claims. In general, those claims relate to a failure to account for rent but they also relate to failure to account for bonds, strata plan funds and sales deposits

28    These proceedings were commenced on 1 March 2019.

Claims at trial

29    At trial, Tome claimed that, by reason of the “yes” response to the reconciliation question and the reported closing balances set out in Schedule 1 of the 2002 to 2005 Auditor’s Reports, Crossman & Co contravened s 52 of the Trade Practices Act 1974 (Cth) (TPA).

30    Tome said that, had those contraventions of s 52 of the TPA not occurred and the Department instead received qualified 2002 to 2005 Auditor’s Reports (that is, had the check-boxes on the front page of the Auditor’s Reports been marked “Yes” instead of “No” and the related Schedules 4 and 5 been completed accurately rather than with “Nil”), the following would have occurred. The Department would have investigated the Trust Accounts, it would likely have discovered serious defalcations in relation to the Trust Accounts at the hands of one or more of its officers, its Licence would have been cancelled and Tome would have been stopped from trading. In this regard, it relied on an affidavit of John Marc Saminaden sworn on 20 August 2019. Mr Saminaden was an investigator employed as such by the Department from November 1997.

31    Tome said that it suffered loss or damage by those contraventions of s 52 of the TPA in the amount of the claims that the Department paid to customers of Tome in respect of whom Tome had received moneys in the Trust Accounts for which it failed to account. It says the loss was incurred when the Department lodged the proof of debt with the liquidator on 27 July 2018. In this regard, it relied on the decisions of the High Court in Wardley v Western Australia (1992) 175 CLR 514 (Wardley) and Travel Compensation Fund v Tambree (2005) 224 CLR 627 (Tambree). Counsel for Tome submitted that there is no evidence of any call to account being made on Tome before the liquidator was appointed.

32    Tome said that, subject to any reduction under the proportionate liability legislative scheme that commenced on 26 July 2004, namely s 87CB of the TPA, Crossman & Co is liable to pay Tome:

(a)    Damages of $1,447,440.27 under s 82 of the TPA, being the amount certified in the 2019 s 177 certificate; and

(b)    Interest up to judgment from 27 July 2018 pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth).

33    Tome accepted that, on the balance of probabilities, Mr Cochineas was a concurrent wrongdoer.

34    At trial, Crossman & Co accepted that:

35    However, it was Crossman & Co’s position that:

(a)    The response to the reconciliation question and the reported closing balances in the 2002 to 2005 Auditor’s Reports were representations made by Mr Crossman, not Crossman & Co. It points to the features of the Auditor’s Reports set out at [43]-[46] below. It says that the Court should draw the inference that an officer or officers of Tome sent the Auditor’s Reports to the Department having regard to the fact that copies of the 2003 to 2005 Auditor’s Reports and the 2002 Licensee Trust Moneys Return by Mr Cochineas with sender’s stickers attached were found in Tome’s files and those documents appear in the Department’s files;

(b)    Tome was not misled by those representations and therefore could not be said to have suffered loss “by” that misleading conduct;

(c)    NAB was the legal owner of money deposited in the Trust Accounts and Tome’s loss occurred when money was removed from the Trust Accounts. Tome’s claims are time barred because, under ss 82(2) and 87(1CA) of the TPA, there is a six-year limitation period calculated from the time loss was first sustained. Accordingly, any claims which related to defalcations that occurred before 1 March 2013 are time barred. The occurrence of a later substantial loss does not prevent the whole claim being barred: Winnote Pty Ltd v Page (2006) 68 NSWLR 531 at [66]; and

(d)    It relies on the defence in s 1318 of the Corporations Act.

36    The parties agreed that there were 15 issues for determination by the Court. However:

    Issues 4 to 6 no longer arise because, although auditor’s reports for the periods ended 30 June in 2010 to 2012 purporting to relate to the Trust Accounts were lodged with the Department, at trial, Tome accepted that they were not prepared by Mr Crossman, that his signature on the documents given to the Department was forged and that Crossman & Co did not charge a fee for those audit reports; and

    Issue 14 no longer arises because, at trial, Tome did not rely on misleading statements in the 2009 Auditor’s Report which it had pleaded, Crossman & Co’s claim to limit its liability under the Accountant’s Scheme and the Institute of Accountants’ Scheme under the Professional Standards Act 1944 (NSW) is not available.

Further Background

37    Records maintained by the Australian Securities and Investments Commission (ASIC) indicate that Tome’s directors were as follows:

    Mr Cochineas, from 15 April 1982 to date;

    Kathleen Hazel Cochineas (Mrs Cochineas), between 15 April 1982 and 22 September 1992;

    John Con Tsatallios, between 19 December 1986 and 1 December 1993;

    Luben Petkovski, between 1 December 1993 and 8 October 2004; and

    Kathy Nicolis, between 8 October 2004 and 31 May 2006,

its company secretaries were:

    Mrs Cochineas, between 15 April 1982 and 22 September 1992;

    George Cassim, from 2 October 1990. No retirement date is given although Mr Cassim is described as a former secretary; and

    Mr Cochineas, from 22 September 1992 to date, and

its shareholders were Mr Cochineas (8 shares) and Mrs Cochineas (2) shares. Mr Tsatallios is a former shareholder for 2 shares.

38    The records maintained by ASIC in relation to Crossman & Co reveal that:

    Mr Crossman was a director and company secretary of Crossman & Co between 19 July 1989 and 20 November 2012. He formerly held 30 shares;

    His wife, Jennifer Dean Crossman, was a director from 19 July 1989 to 14 February 2014. She formerly held 19 shares;

    James Arthur Dermondy was a director from 4 April 2013 until 6 March 2019. He held 1 share; and

    Lynette Marion Fernance has been a director since 2 September 2010, a company secretary since 20 November 2012 and she currently holds all of the issued shares.

39    Ms Fernance has been the practice manager of Crossman & Co since April 1997. She worked closely with Mr Crossman. Ms Fernance swore an affidavit dated 10 October 2019 and she was cross-examined. I understand her evidence to be that Mr Crossman suffered from dementia for some time before his death but she only observed signs of it in the last six to eight months of his life, when she took over the role of company secretary.

40    Crossman & Co charged Tome a fee for auditing the Trust Accounts in each of the years 2000 to 2009. Copies of invoices for those years are annexed to Ms Fernance’s affidavit together with a retainer letter dated 29 October 2006. Ms Fernance found those documents in Crossman & Co’s books and records. The retainer letter had a subject line relating to audit of trust accounts audit for the period ended 30 June 2005. Although the retainer letter suggested that any of Mr Crossman, Mr Dermody, Ms Fernance and two other named people might work on the audit, it is Ms Fernance’s evidence that Mr Crossman alone performed Tome’s Trust Account audits, taking about a day each year. Ms Fernance sat with Mr Crossman to discuss the work done in order to prepare the invoices for the fees which ranged between $1,039.50 and $2,791.80. Although Ms Fernance could find no other retainer letter in Crossman & Co’s records, it appears to be a pro forma letter, with the date, name and address completed by hand, and it suggests it will remain in force until arrangements change. Ms Fernance could not say whether there had been other such letters.

41    It is the liquidator’s evidence that Mr Cochineas produced copies of the False NAB Statements to Scott Andrew Martin, an employee of Smith Hancock Chartered Accountants, soon after the liquidator’s appointment. Mr Cochineas explained to Mr Martin how the False NAB Statements were generated with the assistance of Tome’s then bookkeeper and advised that withdrawals from the Trust Accounts were disguised as commissions.

42    The prescribed form for the 2002 to 2005 Licensee Trust Moneys Return and the prescribed form of the 2002 to 2005 Auditor’s Reports Booklets varied slightly over that time.

43    The 2002 Licensee Trust Moneys Return form relevantly included the following in Part B:

If you, the licensee named above received or held trust moneys during the year ended 30 June 2002

1.    …

2.    a prescribed auditor must audit the books, papers, accounts and other documents related to the moneys held

3.     That auditor must complete the enclosed Certificate of Audit of Trust Account 2002 Auditors Report

4.    …

5.    this form and the Certificate referred to at 3 above must be lodged with the Department of Fair Trading by you no later than 30 September 2002 or within 14 days of the Certificate being received from the auditor but before·30 September 2002. You are solely responsible for lodgement within the required time.

44    The 2003 Licensee Trust Moneys Return form advised that:

If trust moneys held – Certificate Auditor’s Report Booklet and Part 2 to be completed only

If the licensee corporation DID HOLD trust moneys in its own right, during the year, the books, papers accounts and other documents relating to those moneys must be audited by a registered company auditor. The auditor must complete the attached Certificate of Audit of Trust Account 2003 Auditor’s Report Booklet. An authorised officer of the corporation must complete Part 2 only of this form and sign and lodge it along with the completed Certificate, as shown on the reverse side. Where this licensee corporation is in partnership lodge together the forms of all of the partners with the one Certificate of Audit of Trust Account Auditor’s Report Booklet of the partnership.

Penalties – if not lodged by the required date then severe penalties can apply – see reverse side.

45    The 2004 and 2005 Licensee Trust Moneys Return forms advised that if the licensee received or held trust moneys:

Instead you must have the books, papers, accounts and other documents relating to those moneys audited by a registered company auditor. The auditor must complete the attached Certificate of Audit of Trust Account [year] Auditor’s Report Booklet.

Where you are in a partnership lodge together the forms of all partners with the one Certificate of Audit of Trust Account Auditor’s Report Booklet of the partnership.

□    Tick this box if the complete report is qualified in Schedule 4 or 5     Licensee signature _____________________________ / /20

Penalties Note below

Failure to lodge the correct audit documentation by the required date can result in you being served with a penalty notice fine of $1100, or alternatively, court prosecution action being taken resulting in a fine up to·$11000. Additionally, if trust moneys are held, a failure to lodge the Certificate of Audit of Trust Account 2004 Auditor's Report Booklet on time can result in show cause action for the disqualification of your licence, requiring your business to have to cease trading from the date of the determination.

…

46    The front page of the 2002 to 2005 Auditor’s Report Booklets required the auditor to complete the form with the auditor’s name (completed with “Kenneth William Crossman”), auditor’s registration number (“3680”), the licensee’s name (Tome) and licence number (“238626”) and sign as “Reporting Auditor”. The auditor was also required to state when the books and records from which the auditor’s certificate was prepared were provided and to date and sign the Auditor’s Report. The information contained on the front page of those Auditor’s Reports is summarised in the table below.

47    I note that:

(a)    The chart at [46] above derives from exhibit MSJM22, which comprised documents which were part of the first tranche of documents produced by the Department under subpoena in these proceedings. Included in those documents was a 2001/2002 Licensee Trust Moneys Return signed by Mr Cochineas bearing a sender’s sticker (CN7437909);

(b)    The 2003 to 2005 Auditor’s Reports produced by the Department bear sender’s stickers in the same position and with the same numbers as those found in Tome’s files by Mr Martin shortly after the liquidator was appointed. The sender’s stickers are respectively CN4701800 (2003), CN6829872 (2004) and CN2262567 (2005). Those documents are reproduced in exhibit MJMS15, being a bundle of documents taken from Tome’s files by Mr Martin. For the 2002 to 2005 Auditor’s Reports, MJMS15 appears to include the same information as those filed with the Department which appear in MJMS22, although some pages are ordered differently. A copy of Mr Cochineas’ 2002 return was not included in exhibit MJMS15 while copies of his 2003, 2004 and 2005 returns were included; and

(c)    The copies of Mr Cochineas’ Licensee Trust Moneys returns included in exhibits MJMS15 and MJMS22 for the periods to 30 June in each of 2002 to 2005 indicate that Mr Crossman witnessed Mr Cochineas’ signature at Rockdale on the same dates as the dates of the 2002 to 2005 Auditor’s Reports noted in the chart.

48    As noted above, the question of who sent the 2002 to 2005 Auditor’s Reports to the Department is in issue. On the balance of probabilities, I am persuaded that it is more likely that Mr Cochineas or another officer of Tome posted the Auditor’s Reports with Tome’s Licensee Trust Moneys Returns and personal returns for Mr Cochineas and others such as Anthony Papadopoulos and Nick Dellis who were employees of Tome. This is because:

(a)    Under the 1941 and 2002 Acts and having regard to what is said on the front page of the Licensee Trust Money Returns, at all relevant times, it was Tome’s obligation to file its Licensee Trust Moneys Return together with the Auditor’s Report in each year;

(b)    Copies of documents bearing sender’s stickers were produced by the Department and those same documents were found in Tome’s files;

(c)    Mr Cochineas’ personal Returns for 2002 to 2005 indicate that Mr Crossman was at Tome’s Rockdale office on the day he witnessed Mr Cochineas signing those Returns and the Auditor’s Reports for the same years are dated the same date as Mr Cochineas’ Returns; (see [46] above); and

(d)    The only copies of the Licensee Trust Moneys Returns and Auditor’s Reports found in Crossman & Co’s Tome file were sent to Crossman & Co’s lawyers by the liquidator’s lawyers on 14 March 2014.

49    Mr Saminaden’s evidence was to the following effect:

(a)    Through his experience of working as an investigator in the Department and regularly interacting with the people working in the audit assessing area, in licensing and in enforcement, by 2002, he became familiar with the work processes and structure of the Department in the regulation and licensing of real estate agents. His comments refer to procedures and practices within the Department in the period 2002 to 2005 and are based on that experience;

(b)    Real estate agents had to renew their licences each year. One of the conditions of renewal was that, if they had held trust funds during the year, an auditor’s report relating to the licensee’s trust accounts had been lodged with the Department;

(c)    Auditor’s reports (which were in paper form) were “triaged” by the Department’s assessment unit. An auditor’s report was unqualified if check-boxes relating to the two statements set out at [12] were marked “No” and “Nil” was written in the relevant Schedules. That would enable an assessor to move on to another report. If those check-boxes were marked “Yes” it would have caused an assessor to open the audit report and look at the responses given in it, including notes in all attached schedules and answers to the questions posed in the checklist in Part 2 of the Audit Report;

(d)    Unless a qualification was trivial or presented little obvious risk and it could be resolved upon examination of the report itself, the audit report would be referred for investigation. A deficiency in a trust account would have led to an investigator attending the real estate agent’s office without notice. Once on site, the investigator would perform an inspection of client files and trust accounts, including primary records of individual transactions;

(e)    If the findings of the investigation suggested a high risk to consumers, the matter would be referred for enforcement action. Possible enforcement actions included alerting the licensing system not to renew the licence, appointing a manager or receiver over the real estate agency’s business, the suspending the licensee’s licence, and approaching the Local Court for cancellation of the licence;

(f)    The assessor of Tome’s 2002 Auditor’s Report would have referred it for investigation if:

(i)    at 30 June 2002, the amount in Tome’s “Trial Balance” was $217,174.41 for Account 8112 and $36,643.72 for Account 2697;

(ii)    Tome’s bank reconciliation recorded the amount held as being $168,846.92 for Account 8112 and $43,658.61 for Account 2697; and

(iii)    the check-box answer to the reconciliation question in the 2002 Auditor’s Report was “no”; and the check-boxes for the questions set out at [12] above had been marked “yes” on the front page of that report;

(g)    If the reconciliation question had been answered “no”, then ordinarily, the details of the deficiency or misappropriation of trust funds would have been noted in Schedule 4 and summarised in Schedule 5 to the audit report. If it had not been, then that would cause the investigator to try to find out what the deficiency was and why there was a deficiency. If the details of the deficiency were stated in Schedule 4 to the report, then the investigator would try to find out from the auditor all he or she could about the deficiency and the reasons for it. Either way, the investigation of a reported deficiency would inevitably have included an investigator’s attendance without notice at Tome’s office; and

(h)    If the investigation revealed (or confirmed) the deficiency and/or the cause of the deficiency, the investigator ordinarily should have referred the matter for enforcement. In that instance, enforcement action may have involved appointing a receiver over the business and the possibility of pursuing an application notice requiring a licensee to appear before a Local Court to show cause why the licence held by the corporation should not be cancelled and why the licensee should not be disqualified either permanently or temporarily from holding a licence. Further, depending on the evidence and the alleged causes to the deficiency, enforcement may result in the consideration of the possibility of taking criminal action under the Crimes Act 1900 (NSW).

50    The reported closing balances of the Trust Accounts set out in Schedule 1 of the 2002 to 2005 Auditor’s Reports and the actual closing balances based upon duplicate statements obtained by the liquidator from NAB (exhibit MJMS13) were as follows:

51    The following charts are derived from the reconciliation statements in the 2002 to 2005 Auditor’s Reports:

52    It is clear from a comparison of the False NAB Statements for the 2003 to 2005 periods with the reconciliation statements for the same periods that the reconciliation statements did not accurately reflect the “direct deposits” referred to in the False NAB Statements. I accept Tome’s submission that that should have been a basis for Mr Crossman to question the information given to him had the audit of the Trust Accounts been conducted properly.

53    One notable feature of the charts at [51] is the amount of the unpresented cheques in each year compared to the actual balances of the Trust Accounts in the chart set out at [50] above. As the liquidator observed, the deficiency in the Trust Accounts worsened over time and there was not enough money in the Trust Accounts in each successive year to meet unpresented cheques. The parties accept that the inference to be drawn is that, from 2002, Tome was delaying payment to its customers from the Trust Accounts to prevent cheques being dishonoured, so that later deposits into the Trust Accounts were used to meet earlier obligations incurred.

54    This was demonstrated in a report dated 9 December 2016 prepared by the liquidator for the Department in relation to defalcations in the two-year period to 1 May 2013. In relation to misappropriation of a sales deposit relating to a property in Toomevara Street, Kogarah discussed in his 9 December 2016 report, the liquidator gave evidence that:

    The contract of sale for the Toomevara Street property was dated 15 June 2012 and it provided for the payment of a deposit of $75,000.

    A deposit of $74,600 was paid in two tranches, $1,878 on 13 June 2012 and the balance of $72,722 was paid on 25 June 2012. Those payments are reflected in Tome’s sales ledger and NAB’s bank statement for Account 8112;

    By letter dated 23 January 2013, the vendor’s solicitors advised Tome of settlement of the sale;

    Amounts on account of payment of Tome’s commission ($2,000 and $5,000), for plumbing ($2,389); for “Bardella” ($1,200) and advertising ($1,000, $1,300 and $800) were drawn on Account 8112 between 12 February and 1 March 2013. The vendor denied ever having received an Exclusive Agency Agreement from Tome and there was none with respect to the Toomevara Street property in Tome’s books and records. The liquidator noted that those payments constitutes a breach of s 55 of the 2002 Act in that a real estate agent has no entitlement to commission or expenses without an agency agreement signed by the principal and a copy of the agreement being served on that person within 48 hours;

    The balance of Account 8112 at 30 June 2012 was $91,220 and its balance at 3 July 2013 was $40,554.51. Accordingly the balance was less than the total deposit amount of $74,600 at that date. The liquidator therefore took 3 July 2013 to be the date on which the deposit funds for the Toomevara Street property were misappropriated; and

    The liquidator’s analysis of cheques drawn on Account 8112 between 25 June 2012 and 3 July 2013 indicate that, upon receiving moneys that were held in trust for another party (including the deposit held in trust for the vendor of the Toomevara Street property), Mr Cochineas released cheques (some of which were replacement cheques for much older cheques) to selected landlords to pay rental income relating to significantly earlier periods (for instance, November 2010).

55    The report also related to a property in Dunlop Street, Roselands in respect of which he undertook a similar exercise. The report indicated that:

    A contract for sale was signed and a deposit of $50,000 paid into Account 8112 on 20 December 2012. The vendor denied that he had signed an Exclusive Agency Agreement and said his signature had been forged. The transaction with the purchaser who paid that deposit did not proceed to exchange of contracts.

    Tome’s records indicated that the balance of Account 8112 as at 31 December 2012 was $673,238. The actual balance of Account 8112 at that date as disclosed in NAB bank statements was $60,294. In cross-examination, the liquidator accepted that at that time, Account 8112 should have held both the $50,000 deposit on the Dunlop Street property and the $74,600 deposit on the Toomevara Street property.

    Due to limitations on Tome’s software, the liquidator could not determine the balance of Account 8112 according to its records as at 2 January 2013, but the liquidator took the deposit to have been misappropriated on that day because the actual balance of Account 8112 at 2 January 2013 was $47,493. Tome deducted $1,315 on account of advertising of the Dunlop Street property from the account on 4 January 2013.

    Analysis of cheques presented between 21 December 2012 (the day after the deposit on the Dunlop Street property was received) and 2 January 2013 indicates that the presented cheques were drawn in early November 2012 with the result that various landlords received rental income from moneys held for the vendor of the Dunlop Street property.

I note that the sale of the Dunlop Street property to a different purchaser did ultimately proceed and Tome was directed to account for the deposit to the vendor on 28 February 2013.

56    In cross-examination, the liquidator accepted that, even though the focus of his investigation for the purposes of his report to the Department was the two-year period prior to 1 May 2013, misuse of funds predated 1 May 2011.

57    None of the False NAB Statements or working papers appear in Crossman & Co’s file for Tome. It is Ms Fernance’s evidence that the only documents in the file are invoices for the audits for the years 2000 to 2009 and copies of documents lodged with the Department which were provided to Crossman & Co by the liquidator in March 2014. Although Crossman & Co does have a policy for disposal of records (a “retention” policy that files would be retained for five years, archived for a further two years and then destroyed), her evidence in cross-examination was that she does not think that the Tome file ever contained working papers.

58    Having regard to:

    Mr Crossman’s apparent failure to appreciate important anomalies in Tome’s records, for instance, the large amounts of unpresented cheques year on year, the fact that some “direct deposits” recorded in reconciliation statements did not match the False NAB Statements and some False NAB Statements appeared to end abruptly in the middle of the page at a date which was not a month end;

    The lack of working papers, copies of bank statements or (prior to March 2014) copies of Auditor’s Reports for Tome in Crossman & Co’s Tome file, the dearth of which I do not attribute to a document retention policy; and

    Mr Crossman’s apparent reliance on the False NAB Statements obtained from Mr Cochineas rather than ever obtaining statements directly from NAB, particularly in light of the anomalies identified above,

I accept the submission made by counsel for Tome that Mr Crossman’s audit was not to an acceptable standard, whether due to incompetence or a disability resulting from the slow onset of dementia. The possibility that Mr Crossman might have been “in on the crime” was not asserted by Tome.

Issues 1 to 3

59    Section 52(1) of the TPA provides that a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.

60    Crossman & Co accepts that, in the circumstances described at [50] to [52] above:

    The “Yes” response to the reconciliation question was a representation to the Director-General or the Department that the reconciliation statements accurately reflected the reconciliation of the balances of the Trust Accounts with the balances of the cash books and that was not true; and

    The reported closing balances in Schedule 1 of the 2002 to 2005 Auditor’s Reports did not accurately reflect the true closing balances;

    Each of those representations made to the Department or the Director-General was accordingly misleading; and

    Those misrepresentations were made in trade and commerce.

61    The response to the question of whether or not s 52 of the TPA was thereby contravened in the case as pleaded depends on whether that conduct is attributable to Crossman & Co. That is a question of fact to be determined in the light of all the relevant circumstances and the pleadings: Cassidy v Saatchi & Saatchi Australia Pty Ltd [2004] FCAFC 34; 134 FCR 585 (Cassidy) at [40] (Moore and Mansfield JJ).

62    Crossman & Co submitted that the conduct discussed at [60] above was not its conduct because:

    The impugned representations were contained in the 2002 to 2005 Auditor’s Reports which were prepared and signed by Mr Crossman as “Reporting Auditor” and completed on the front page as discussed at [46] above;

    The opinions expressed in the 2002 to 2005 Auditor’s Reports are Mr Crossman’s;

    Section 115 of the 2002 Act was only amended with effect on 1 July 2013 to permit “authorised audit companies” to provide audit reports under that Act. There is nothing in the form or content of the 2002 to 2005 Auditor’s Reports which would provide any reason for the Department to think that the auditor was anyone other than Mr Crossman, even if it was theoretically possible (as Tome contends) for a company to be an auditor during the relevant period. There is no evidence that anyone other than a registered company auditor was approved by the Director-General (as envisaged by s 38E of the 1941 Act or s 115 of the 2002 Act) to provide those Auditor’s Reports;

    The relevant perspective for determining the issue of who engaged in the conduct is the perspective of the representee. (I understand this proposition to derive from Cassidy at [28] on which Crossman & Co relied). The fact that Crossman & Co carried on a business of providing accounting and auditing services to companies and other organisations does not bear on the question of what is represented to the Director-General or the Department by the Auditor’s Reports. Nor is the character of representations contained in the Auditor’s Reports altered by the fact that Crossman & Co issued invoices to Tome for their preparation because those arrangements were unknown to the Director-General or the Department and were not the subject of representations to the Director-General or the Department; and

    Contrary to submissions made by Tome, the 2002 to 2005 Auditor’s Reports were sent to the Department by Tome (a proposition that I accept for the reasons given at [48] above).

63    Although Crossman & Co’s name does not appear on any of the 2002 to 2005 Auditor’s Reports, I am persuaded that Mr Crossman’s conduct in preparing and signing the Auditor’s Reports and expressing the opinions that he did in them is conduct of Crossman & Co as principal. That is because:

    Tome engaged Crossman & Co to provide audit reports to the Department. That is apparent from the fact that Crossman & Co charged Tome for such reports in the period from 2000 to 2009. It is also apparent from the retainer letter (see [40] above). Although there is only one retainer letter in evidence (as it was the only one in Tome’s file in 2019), Ms Fernance did not exclude the possibility that there were other retainer letters issued;

    Mr Crossman was a director of Tome;

    There is no reason to think that contracting to do that work for Tome on behalf of Crossman & Co or Mr Crossman undertaking it by conducting an audit of the Trust Accounts and producing auditor’s reports for the purposes of the 1941 or 2002 Acts was outside the scope of Mr Crossman’s actual or apparent authority. Crossman & Co’s business was to provide accounting and auditing services. Ms Fernance’s evidence supports a finding that it was a small business led by Mr Crossman who was a member of the Institute of Chartered Accountants and a registered company auditor. It appears that Mr Crossman was the guiding mind of Crossman & Co as he was qualified to provide accounting and audit services, he was one of two directors (the other being his wife) and he was the majority shareholder. There is no evidence that his wife was similarly qualified or had a role in determining the work undertaken by Tome;

    I do not consider it necessary that Crossman & Co be itself qualified to conduct an audit of the Trust Accounts in order to be the principal responsible for representations made by Mr Crossman in the conduct of the work and to be held liable for those misrepresentations: see Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502;

    I do not consider it determinative that Crossman & Co was, as far as the Department or the Director-General was concerned, an undisclosed principal. While being named on material which includes an impugned representation may be a factor in determining whether or not a corporation has engaged in conduct for the purposes of s 52 of the TPA, in my view it is an over reading of Cassidy at [28] to view it as determinative that the corporation is not named in the document containing the representation; and

    Although I have accepted that (contrary to Tome’s argument that Crossman & Co filed the 2002 to 2005 Auditor’s Reports) Tome sent them to the Department, I do not consider that fact determinative on this issue. The purpose of the 2002 to 2005 Auditor’s Reports was to alert the Department to defaults in the conduct of trust accounts by real estate agents. So much is apparent from the questions on the front page of the reports and Schedules 4 and 5 and the obligations imposed on auditors by s 38E(2) of the 1941 Act and s 116(1) of the 2002 Act to report defaults to the Department. Crossman & Co was retained and paid by Tome for Mr Crossman to provide auditor’s reports containing those representations to Tome for Tome to provide to the Department. Crossman & Co therefore must be taken to have known that the Department would use the auditor’s representations in the 2002 to 2005 Auditor’s Report for the purpose of fulfilling its functions which include renewal of Tome’s Licence or taking acting to suspend or cancel the Licence.

Issues 4 to 6

64    These issues relate to the 2010-2012 Auditor’s Report and are no longer in issue.

Issues 7 to 9

65    These issues are as follows:

    Issue 7: whether Tome suffered loss and damage “by” any contravention of s 52 of the TPA by Crossman & Co;

    Issue 8: whether Tome’s loss and damage is the claim for $1,477,440.27 made by the Department in its proof of debt lodged with the liquidator; and

    Issue 9: whether Tome’s claimed cause of action accrued or arose, if at all, before 1 March 2013 such that they are time-barred by force of s 82(2) of the TPA.

66    Section 82(1) of the TPA relevantly provides that “a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of … Part V … may recover the amount of the loss or damage by action against that person or against any person involved in the contravention”. Section 82(2) provides that an “action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued”.

Tome’s submissions

67    Tome’s case in relation to issues 7 to 9 is as follows:

(a)    By Crossman & Co’s contraventions of s 52 of the TPA and the Department’s positive act of reliance on the misleading representations in the 2002 to 2005 Auditor’s Reports which underlie those contraventions, the Department (a third party) acted to Tome’s prejudice (by renewing the Licence) and Tome has thereby suffered loss, being the liability to pay the Department $1,477,440.27 which arose from its failure to account to beneficiaries of the Trust Accounts;

(b)    Tome’s case is therefore one of indirect causation and it relies on the Full Court’s decision in Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 (Janssen-Cilag). While it is Tome’s position that Mr Cochineas’ defalcations were outside the scope of his authority and they were made without Tome’s knowledge, Tome says its knowledge is not relevant to claims of this kind since it is not necessary that Tome have been misled or deceived by the representations in the 2002 to 2005 Auditor’s Reports. In Janssen-Cilag, the applicant was not misled by the respondent’s misleading conduct, consumers were misled and their actions led to the applicant losing market share and the applicant knew that the respondent’s conduct was misleading;

(c)    Neither claimants on the Compensation Fund nor Tome suffered actual economic loss at the time of the defalcations because there was no relevant “failure to account” as defined in s 171 of the 2002 Act (see [19] above) at that time. In this regard, Tome relies on s 36(1) of the 1941 Act (see [2] above) and s 86 of the 2002 Act which is in similar terms;

(d)    Tome concedes that it is possible that, at the time of the defalcations, Tome may have sustained a detriment in a general sense. However, at the time of each of the defalcations, whenever they may have occurred, any loss to Tome was contingent on a formal claim against Tome being made by the beneficiaries of the Trust Accounts or the Department for amounts in respect of which Tome failed to account. Tome relies on the High Court’s decision in Tambree and the decision of the plurality in Wardley at 527;

(e)    Tome says it suffered actual loss when the Commissioner for Fair Trading lodged the proof of debt with the liquidator. It relies on the decision of the Full Court in King v Yurisich [2006] FCAFC 136; 153 FCR 78 (Sundberg, Weinberg and Rares JJ) (King), a case which considered the limitation periods associated with a claim of misleading or deceptive conduct under s 52 of the TPA against an auditor in connection with the Travel Compensation Fund. At [65], the Court observed (emphasis in submissions):

In the present case, just as in Tambree, the fund sought the reports from Lane Moller and Mr Young, as accountant and auditor of Jaja, to protect itself against the risk of loss. Just as in the decision of the High Court, there was always a possibility that Jaja could trade illegally, without a licence. Here, the misleading and deceptive and negligently prepared reports in the 2000 renewal documents, were a cause of the fund continuing Jaja’s participation in the compensation scheme. That exposed the fund to the very risk of loss at the time Jaja collapsed. When the loss became actual, by the making of claims which enlivened the fund’s obligation under cl 15 of the deed, the fund suffered loss. Until that occurred, it suffered no loss.

68    Tome says that Crossman & Co is correct that Tome has the burden of proving that it is liable to the Department in the sum of $1,477,440.27 and how it is liable. It also accepts that the relevant liability is not established by mere receipt of the proof of debt by the liquidator. In its submissions in reply at [23], Tome submitted that its pecuniary loss arose as follows:

(a)    Tome “failed to account”, within the meaning of s 171 of the 2002 Act, to certain beneficiaries of the Trust Accounts (claimants);

(b)    From 27 May 2013, each of the claimants made claims under s 173 of the 2002 Act against the Compensation Fund in respect of their pecuniary loss suffered because of Tome’s failure to account. The total amount of the claims was $1,863,002.62 as disclosed by the schedule of individual claims produced by the Department which is set out in exhibit MJMS20. Exhibit MJMS20 sets out the names of individual claimants, the reason for each of the individual claims and the amount paid in relation to each of the individual claims;

(c)    Then, from May 2013, under s 173(5) of the 2002 Act (see [20] above), the claimants were paid an aggregate of $1,477,440.27 out of the Compensation Fund in settlement in whole or part of their claims and:

(i)    On payment of the claims out of the Compensation Fund, the Secretary became subrogated to all the rights and remedies of the claimants under s 177(1) of the 2002 Act (see [22] above);

(ii)    The Secretary issued the 2019 s 177(2) certificate. That certificate evidences not only that payment of $1,477,440.27 was made out of the Compensation Fund but also that it was made in settlement of 115 individual claims on the Fund made under s 173 of the 2002 Act. Tome says there is no requirement to evidence individual causes of action and that such a requirement would render s 177(2) wholly otiose, however, it has put exhibit MJMS20 into evidence; and

(iii)    The 2019 s 177(2) certificate is then the basis for the issue by the Commissioner for Fair Trading (that is, the Secretary) of the proof of debt. That is the manner in which the Department sought to recover the debt due to the Crown under s 177(3) of the 2002 Act. I note that the proof of debt predated this certificate.

69    Tome notes that s 177(1) of the 2002 Act subrogates the Secretary to all of the rights and remedies of the claimants on the Compensation Fund. It accepts Crossman & Co’s arguments that:

(a)    The conferral of rights of subrogation alone does not confer on the subrogated person an independent cause of action in its own right; and

(b)    It does not change the position that the causes of action are those of the claimants; and

(c)    The loss or damage that may be recovered by the enforcement of those rights is the loss suffered by the claimants.

70    It says, however, that s 177 of the 2002 Act goes further than any of the statutory schemes for subrogation in the Legal Practitioners Act 1898 (NSW), the Legal Profession Acts 1987 and 2004 (NSW), the Real Property Act 1900 (NSW) and the Travel Agents Act 1986 (NSW) and the related cases on which Crossman & Co relied. It says that (emphasis in submissions):

(a)    First, s 177(2) provides that a certificate may be issued as evidence of the payment out of the Compensation Fund in settlement of the individual claimants’ causes of action;

(b)    Second, it relies on s 177(3) which provides that “in the enforcement of any [of those] rights or remedies … for the purpose of recovering an amount paid out of the Compensation Fund, the amount is taken to be a debt due to the Crown and may be recovered accordingly”. Tome says that s 177(3) provides to the Crown an independent cause of action and makes Tome indebted to the Crown in the amount paid out of the Compensation Fund in settlement of the claims; and

(c)    Tome has not been able to identify any similar provisions in any of the versions of the Acts on which Crossman & Co relies.

71    Accordingly, Tome suffered loss and its cause of action against Crossman & Co accrued under s 82 of the TPA when the Commissioner for Fair Trading lodged the proof of debt dated 27 July 2018 with the liquidator. In the alternative, Tome says that it may have first suffered economic loss on 13 May 2013, when the Department received the first claim against the Compensation Fund. Either way, as these proceedings were commenced on 1 March 2019, they were commenced within the six-year limitation period established by s 82(2).

Crossman & Co’s submissions

72    Crossman & Co says that:

(a)    This is not a case of indirect causation such as Janssen-Cilag. It is not a case where misleading conduct caused others (that is, the Department) to act to Tome’s direct prejudice, or where an innocent party’s act, by its very nature, caused Tome’s loss. Tome was not a passive victim of misleading conduct;

(b)    Where a plaintiff claims to have suffered loss by its own actions or omissions, coupled with misleading conduct by the defendant, the plaintiff must show that it was misled. Tome cannot show that it was misled by the 2002 to 2005 Auditor’s Reports and its own conduct forms part of the asserted causal chain. The case Tome has brought properly falls in the category of case exemplified by Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58 at [152] as considered in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2008] NSWCA 206; 73 NSWLR 653 at [22] (Giles JA) [81] (Hodgeson JA) [617]-[618] (Ipp JA). The principles expressed in those cases are not confined to investments.

(c)    Tome is not the subrogated party under the 2002 Act. Section 177 of the 2002 Act is awkwardly drafted; note the inconsistencies in references to the Crown and the Secretary in s 177(1), (3) and (4). However, on the assumption that the misalignment of references to the Crown and the Secretary can be reconciled:

(i)    Section 177(1) creates in the Secretary a right of subrogation in relation to the claims paid out of the Compensation Fund. Subsections 177(3) to (4) clearly depend for their operation on the subrogation effected by s 177(1);

(ii)    Section 177(2) only provides that a certificate issued under that provision is evidence of payments made out of the Compensation Fund. That is, it establishes the premise of s 177(1) that amounts have been paid out of the Fund, it has no other effect;

(iii)    Under s 177(4), the Secretary may exercise the rights and remedies to which the Secretary is subrogated under s 177(1) and proceed on the claimant’s causes of action in either the Secretary’s name or the claimant’s name;

(iv)    Contrary to Tome’s position, s 177(3) does not create a new debt due to the Crown. Tome’s submissions relating to s 177(3) appear to proceed on the basis that s 177(3) operates to make Tome Bros indebted to the Crown in the amount paid out of the Fund. That is not how s 177(3) operates. It is protective of the Crown’s interest in the judgment sum obtained in an action brought by the Secretary, whether it is in favour of the Secretary or the claimant. The Secretary will be obliged to account to the claimant for any excess it obtains in litigation over the amount paid to the claimant from the Fund, less costs and expenses. Section 177(3) is thus directed to the adjustment of the interests of three parties which is characteristic of subrogation. Tome’s interpretation of s 177(3) is wholly inconsistent with the subject matter of the subrogation and the fact that the Crown does not acquire its own cause of action under s 177; and

(d)    Tome Bros is not the subrogated party under the 2002 Act. But it contends that it is liable to a subrogated party. Tome has the burden of proving that it owes $1,477,440.27. It must therefore adduce evidence of the various individual claims which claimants who have been paid out of the Compensation Fund have against Tome. Tome does not establish its liability by the liquidator’s receipt of the proof of debt or the information set out in exhibit MJMS20, which only sets out when 115 claims were made against the Compensation Fund and when those claims were paid.

73    Crossman & Co accepts that, as damages are the gist of the cause of action under s 82(2), the cause of action does not accrue until the applicant suffers actual loss or damage: Wardley at 525-526 (Mason CJ, Dawson, Gaudron and McHugh JJ). It says that, in the context of a claim for economic loss, loss or damage may be understood as the harm suffered to a claimant’s economic interests: Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613 at [24], (French CJ, Hayne and Kiefel JJ).

74    Crossman & Co says that:

(a)    It accepts that if Tome makes good its case of contravention in relation to the 2002 Auditor’s Report, there is no need to address causation in relation to any of the subsequent Auditor’s Reports;

(b)    Tome accepts that defalcations occurred before 15 May 2013 and facts that are common ground compel the conclusion that they occurred before 1 March 2013;

(c)    Well-established legal principle demonstrates that Tome came under an actual (not contingent) liability immediately when defalcations from the Trust Accounts occurred. That actual liability was a form of economic loss which completed any statutory cause of action that Tome had against Crossman & Co;

(d)    According to well-established banker-customer law, Tome was the legal owner of a chose in action against NAB, not the moneys standing to the credit of the Trust Accounts. Moneys notionally “in” the Trust Accounts was money NAB owed to Tome as its customer and it was payable on demand by way of “withdrawal”: see Citigroup Pty Limited v National Australia Bank Limited (2012) 82 NSWLR 391 (Citigroup) at [41] (Barrett JA);

(e)    The interests of the beneficiaries of the Trust Accounts were engrafted as a restriction on the way Tome’s interest as legal owner of the Trust Accounts may be utilised: Carter Holt Harvey Wood Products Pty Ltd v The Commonwealth (2019) 268 CLR 524 at [82] (Bell, Gageler and Nettle JJ), [106] (Gordon J agreeing), [32] (Kiefel CJ, Keane and Edelman JJ)to similar effect;

(f)    When a payment from a bank account is an authorised one (as between banker and customer), the payment justifies a commensurate reduction in the debt that the bank owes to its customer: Citigroup at [41]. To that extent, the customer’s chose in action against the bank is reduced in value, effective immediately. As between Tome and NAB, Tome is taken to have the benefit of the withdrawals made by authorised signatories (such as Mr Cochineas). But that does not alter the fact that Tome did not have the benefit of the withdrawals;

(g)    When moneys were misappropriated from the Trust Accounts, Tome came under an immediate obligation to make good or restore those moneys. The obligation of a defaulting trustee is essentially one of effecting restitution to the trust estate: see Maguire v Makaronis (1997) 188 CLR 449 at 469-470 (Brennan CJ, Gaudron, McHugh and Gummow JJ); Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 212-214 (Street J). The loss of trust funds occurred as soon as they were wrongly disbursed and the rights or causes of action of the beneficiaries of the Trust Accounts for the misappropriated funds crystallised at that time: Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at [25], [34]-[35], [50], [63], [69] (Gleeson CJ, McHugh, Gummow, Kirby and Hayne JJ);

(h)    Tome’s position as a trustee meant that defalcations from the Trust Accounts both immediately reduced the value of its own chose in action and made it immediately liable to restore the trust fund. Both were a form of loss or damage for the reasons explained by Brennan J in Wardley at 536:

A plaintiff may suffer economic loss or damage in a number of ways: by payment of money, by transfer of property, by diminution in the value of an asset or by the incurring of a liability. Whether loss or damage is actually suffered when any of those events occurs depends on the value of the benefit, if any, acquired by the plaintiff by paying the money, transferring the property, having the value of the asset diminished or incurring the liability. If the plaintiff acquires no benefit, the loss or damage is suffered when the event occurs.

(i)    The argument that Tome’s loss was, at the time of defalcation, only contingent cannot be sustained. The conclusion in Wardley that no loss had been suffered before demand was made was based on the proper construction of the indemnity given by the State of Western Australia which was the subject-matter of that case. The plurality found that the fact of entry into the indemnity did not generate an “immediate non-contingent liability to pay”: Wardley at 524. There was no loss before there was an “actual or present liability”: Wardley at 525. It is therefore clear that an actual or present liability is a form of loss or damage. It is sustained when that liability is incurred. See also Wardman v Hatfield [2003] NSWCA 283 at [22]-[23] (Tobias JA); and

(j)    The evidence relating to the Toomevara Street property and the Dunlop Street property demonstrates that at least some of the claims paid out of the Compensation Fund accrued earlier than 1 March 2013.

Consideration

75    I accept Crossman & Co’s submission that this is not an appropriate case for the application of the principles accepted by Lockhart J in Janssen-Cilag. Crossman & Co’s conduct was misleading and an innocent third party (the Department) was induced to allow Tome’s Licence to be renewed or continue as a result. But that innocent third party’s conduct did not, by its very nature, cause Tome’s loss. Tome was not passively affected by any action or want of action by the Department. Here, Tome filed its 2002 to 2005 Licensee Trust Money Returns to which the 2002 to 2005 Auditor’s Reports were attached and it continued to trade. The officer of Tome who signed the Returns (Mr Cochineas) had full knowledge of the defalcations and the misleading nature of the Auditor’s Reports. That officer acted within his authority in signing the Returns. Accordingly, Tome’s own conduct formed a link in the causal chain. In my view, the evidence discloses that Mr Cochineas was the guiding mind of Tome, notwithstanding that in 2002 to 2005 he was not the sole director: he was the only continuing director, he was a continuing secretary, he was the substantial majority shareholder and he was the only continuing licensee. The other directors were employees who answered to him. I therefore do not accept that Tome’s losses were caused by Crossman & Co’s conduct in contravention of s 52 of the TPA. Accordingly, the answer to Issue 7 is “no”.

76    Even if I am not correct in that view, I am also not satisfied that Tome has demonstrated that its loss is in the amount of $1,477,440.27 claimed in the proof of debt dated 27 July 2018 or that that is when its loss first accrued, the matters raised by Issues 8 and 9.

77    It is useful to consider the terms on which the Trust Accounts were constituted. Trust Accounts maintained before 1 September 2003 were governed by s 36(1) of the 1941 Act (see [2] above) and those maintained on and from that date were governed by s 86 of the 2002 Act. It is likely that s 86 of the 2002 Act has the most bearing, given that later deposits to the Trust Accounts were used to meet Tome’s obligations to pay earlier depositors when the time came for payment. Relevantly, s 86 provided as follows:

86 Trust money to be paid into trust account

(1)    Money received for or on behalf of any person by a licensee in connection with the licensee’s business as a licensee:

(a)    is to be held by the licensee or (if the licensee is employed by a corporation) by the corporation, exclusively for that person, and

(b)    is to be paid to the person or disbursed as the person directs, and

(c)    until so paid or disbursed is to be paid into and retained in a trust account (whether general or separate) at an authorised deposit-taking institution in New South Wales and approved by the Secretary for the purposes of this Part.

78    I note that s 3 of the 2002 Act defines the phrase “moneys received for or on behalf of any person” to include “moneys held for or on behalf of any person, whether originally received for or on the person’s behalf or not”.

79    I do not accept Tome’s submission (based on Wardley and Tambree) that Tome’s actual loss or damage occurred only at the time that the beneficiary of one of the Trust Accounts made a demand on Tome. Tome’s case gives too universal an application to the factual basis of the decision in Wardley. Wardley dealt with when an indemnifier first suffered loss under a deed of indemnity. The High Court accepted that the indemnifier suffered a contingent loss at the time the event occurred giving rise to the right of the indemnified party to call on the indemnity. However, it found that actual loss (founding a right to damages under s 82 of the TPA) occurred only when the indemnity was called upon. Tome also sought to rely on Tambree and King and the concept of a “failure to account” in support of its contention that demand by the beneficiary is necessary. However, the Compensation Fund had no obligations before a beneficiary made a demand and the liability was contingent on a “failure to account” as defined in s 171 of the 2002 Act having occurred within a specified period under s 173 of the 2002 Act. Tome’s position is not the same as the State of Western Australia or the Compensation Fund because it had a continuing obligation to make good the defalcations and misappropriations in its dealings with the Trust Account.

80    However, I also do not accept Crossman & Co’s submissions on this topic without qualification. I do accept that Tome was the legal owner as trustee of the debt owed by NAB in the amount of the balance of the Trust Accounts and that, as a trustee, Tome had a continuing obligation to make good any diminution in that trust property due to the defalcations. That is so, even though the language of s 86 of the 2002 Act suggests that moneys in the Trust Accounts remain the money of the person on whose behalf money was paid into the Trust Account.

81    I am not satisfied that Tome suffered actual loss for the purposes of s 82(2) of the TPA when the defalcations occurred. In saying this, I have had regard to Wardley at 527 as follows:

The kind of economic loss which is sustained and the time when it is first sustained depend upon the nature of the interest infringed and, perhaps, the nature of the interference to which it is subjected. With economic loss, as with other forms of damage, there has to be some actual damage. Prospective loss is not enough.

When a plaintiff is induced by a misrepresentation to enter into an agreement which is, or proves to be, to his or her disadvantage, the plaintiff sustains a detriment in a general sense on entry into the agreement. ... But, as will appear shortly, detriment in this general sense has not universally been equated with the legal concept of “loss or damage”. And that is just as well. In many instances the disadvantageous character or effect of the agreement cannot be ascertained until some future date when its impact upon events as they unfold becomes known or apparent and, by then, the relevant limitation period may have expired. To compel a plaintiff to institute proceedings before the existence of his or her loss is ascertained or ascertainable would be unjust.

82    The issue of when Tome suffered actual loss is fact dependent. It is necessary to take into account the following matters:

(a)    This is a case where many defalcations occurred over a long period. During that time, later deposits were used to pay claims made on the Trust Accounts by earlier depositors to the Trust Account. Accordingly, Tome incurred an obligation to make good a defalcation in relation to money person A deposited in the Trust Accounts when that defalcation occurred, that is, when Mr Cochineas made a withdrawal of that money for his own purposes. However, it incurred no actual loss at that time because there were other moneys in the Trust Accounts on which it could draw. If person B’s moneys are used to pay person A, and on the assumption that A is innocent and due to the disbursement of the funds over time money B contributed cannot be traced into the hands of A, the relevant misappropriation for the determination of Tome’s loss is the obligation to pay B. That occurred on a rolling basis over time until there are insufficient new funds available to pay those depositors to whom Tome has remaining obligations. Assuming that the last person who deposited money is Z, whose money was used to pay Y, Tome relevantly accrues an obligation to Z when the misappropriation of its money occurred;

(b)    Moneys were paid into the Trust Accounts for many purposes and under different arrangements. So much is clear from exhibit MJMS20. Sales deposits were received by Tome as stakeholder and the time for payment out of the Trust Accounts are likely to have been set by the terms of the sale contract and/or the terms under which Tome was engaged to act for the vendor. Rental receipts were obtained on behalf of landlords which might be expected to be governed by the written or other terms of Tome’s engagement to receive those funds. Tome also received rental bonds. Tome held moneys on behalf of strata bodies corporate in respect of which there would commonly be management agreements. It might be expected that at least some of those arrangements did not require demand but rather the simple happening of an event, for example, the deposit of rent in the Trust Account or advice that a settlement had occurred so that a deposit may be released. It therefore cannot be said that, in all cases, Tome’s accrual of loss depended on a demand being made.

83    There is insufficient evidence before the Court as to the time at which relevant defalcation or misappropriation occurred in relation to funds contributed by depositors to the Trust Account that founded the payments out of the Compensation Fund on which the proof of debt relies. It was necessary for Tome to provide that evidence so that its loss could be quantified. Exhibit MJMS20 is inadequate for that purpose. I accept Crossman & Co’s submission that the evidence concerning the Toomevara Street and Dunlop Street properties demonstrates that those misappropriations giving rise to Tome’s actual liability occurred before 1 March 2013.

84    I also do not accept that s 177(3) of the 2002 Act creates a new obligation of Tome on the basis of which the limitation period in s 82(2) of the TPA may be calculated. In my view:

(a)    Section 177(1) subrogates the Secretary (presumably in right of the Crown) to all rights and remedies of claimants on the Compensation Fund against a licensee to the extent of payment the claimant received out of the Fund. Such subrogation simply puts the Secretary in the shoes of the claimant against Tome who has been paid out of the Fund. For reasons previously given, as against Tome, a right of action accrued at the time funds contributed by or for the benefit of the claimant were stolen;

(b)    A certificate issued by the Secretary under s 177(2) is evidence only that an amount has been paid out of the Fund in settlement in whole or in part of a claim. This provides a simple procedure for the Secretary to prove that payments have in fact been made in relation to claims. I consider that the utility of the certificate would be enhanced in relation to any individual claim if it contained a schedule of the claims in respect of which the payments were made, rather than noting that it was paid in respect of 115 claims. I do not accept that this provision has the effect of putting beyond question that the Secretary correctly determined claims on the Compensation Fund so that it does not, in my view, have the same conclusive status as a tax assessment issued by the Commissioner for Taxation;

(c)    There is nothing in the language of s 177(3) alone or taken with s 177(2) which suggests that subrogated claims are new claims in respect of which time commences to run when payment is made out of the Compensation Fund. The purpose of s 177(3) is to facilitate enforcement of rights and remedies to which the Secretary is subrogated by conferring on the amount paid out of the Compensation Fund the status of a debt due to the Crown which may be recovered accordingly. Historically, debts due to the Crown enjoyed privileges of priority over debts owed to citizens but such privileges have generally (but not exclusively) been eliminated by legislation enacted over time. I do not understand such privileges to extend to avoiding time bars on the commencement of an action which accrued outside the limitation period;

(d)    Further, s 177(4) allows the Secretary (not the Crown as such) to exercise the subrogated rights and remedies in the Secretary’s name or in the claimant’s name. Accordingly, if, at the time the Secretary takes action against a licensee in respect of a claim paid out of the Compensation Fund, the claim would be time barred under the Limitation Act 1969 (NSW) if brought by the claimant, the action taken by the Secretary will also be time barred. It would be open to a defendant to demonstrate that the claims were statute barred at the time that the Secretary’s enforcement action of the subrogated right commenced.

85    Since I have found that the answer to issues 7 to 9 is “no”, the remaining agreed issues for determination no longer arise.

Conclusion

86    Tome’s application should be dismissed. Tome should pay Crossman & Co’s costs as agreed or taxed. I will make provision for the parties to file submissions to vary the position with respect to costs within 14 days.

Associate:

Dated:    28 June 2022