(New South Wales) The manager and a sales representative of TECO set up separate competing business. Anderson with his wife, began a new company Mallory Trading Pty Ltd which acted as a a fraud on TECO. On learning of each others acts, they joined forces and diverted business and profits from TECO. In July 1977 Toy resigned from TECO to work full time for Mallory Trading; and in November 1977 Anderson was dismissed, whereupon he, too, began to work full time for Mallory Trading. In February 1978 they incorporated another company, Mallory Timber Products Pty Ltd (‘Mallory Timber’) to which they transferred the business of Mallory Trading. TECO sought an account of profits and declaration of trust of the businesses of Mallory Trading and Mallory Timber and of the shares in both companies held by Anderson, Toy and their respective wives.
Held: Kearney J approved this statement by Dr PD Finn in Fiduciary Relations: ‘The fiduciary’s liability for gains is a liability as trustee and for trust property. It is, as will be seen, one which can give rise to personal actions against a fiduciary. It can give rise to actions in rem to recover extant trust property.’
The trust property was extant: ‘It is clear that the business had its genesis in the resources and facilities of TECO which were available to Anderson and Toy. It is also clear that they did take advantage of such resources and facilities so as to cause life to be breathed into the mere shell of Mallory Trading, bearing in mind that the business of Mallory Trading was built upon cash flow and sales. The whole substance of Mallory Trading as a viable business enterprise stemmed from the resources of TECO which were utilized in Mallory Trading. The outstanding features of the nurturing of Mallory Trading are that its executives were being paid by TECO, its customers were TECO customers, and its products were significantly derived from TECO products . . the whole of the TECO business (including, not only physical facilities such as telephones, motor cars and expense accounts) were used; but also its intangible elements such as marketing methods, knowledge of customers and goodwill were also resorted to in building up Mallory Trading. Another significant feature is that the inevitable result of the defendants using TECO as the vehicle to establish Mallory Trading as a going concern was that TECO was gravely harmed. It not only lost the orders that were misappropriated, but this in turn led to the loss of customers and substantial damage to its goodwill . . There can be no doubt that the creation and development of Mallory Trading dealt a crippling blow to the business of TECO.
Every opportunity which Mallory Trading has received is directly traceable to resources and benefits provided by TECO, even of time and efforts expended by Anderson and Toy for which TECO was paying. Every advance made by Mallory Trading was also due to the advantages of the tangible and intangible resources and facilities provided from TECO. In truth, the business of Mallory Trading was carved out of the business of TECO, and thus ought to be treated as being, as at July 1977, held on trust for TECO.’
July 1977 was the date when Toy resigned from TECO. Kearney J then dealt with a number of arguments relating to subsequent events. The real issue was whether the trust property represented by the business of Mallory Trading remained extant. The defendants’ first submission was that the business of Mallory Timber was a fresh unrelated business free from any trust. The judge described that as ‘insupportable’: ‘I regard the business carried on by Mallory Timber products as representing the trust property of which Mallory Trading was originally the trustee.’ The defendants submitted that if there was any liability after July 1977, the liability should be limited to an account of profits, and should not extend to a declaration that the business was itself held on trust; whatever the position might have been in July 1977, the continued carrying on of the business had been wholly due to the defendants’ own efforts; and that any benefit attributable to the trust as it existed in July 1977 had been displaced. Kearney J dealt with this submission as follows: ‘The fact that the trustee carried on a business and improved it by its own exertions did not, in my view have the effect of extinguishing the trust property as so to terminate the trust. The business, as a trading enterprise, continued to subsist as an identifiable item of property. The fact that the business may have been enhanced through the efforts of the trustee cannot affect the continued existence of the trust.’ The defendants ‘ submitted that any account should be limited to former customers of TECO, and that the extent of sales to those customers could be readily ascertained from the accounts. Kearney J rejected that submission too. He said that this submission took: ‘too limited a view of the extent of the benefit represented by the existence of the business of Mallory Trading as a going concern. While its attributes included the connection with former TECO customers, it also had the inherent capacity as an established business to expand the range of its customers and products.’
He concluded: ‘It seems to me that the present case falls within the second example stated by Upjohn J [in Re Jarvis], namely that the Mallory companies are accountable as constructive trustees of the business. The contribution of skill and industry by all the defendants to the continued carrying on of the business can be adequately provided for by the making of proper allowances, as indicated by Upjohn J I consider that, in determining the form of relief to be granted, not only is Upjohn J’s first example inappropriate to the facts of the case, but also that justice can be done, in the circumstances of this case, by making the declaration of trust as to the business on the footing of all just allowances.
. . The trust property remains identifiable in the hands of the trustee, and TECO is entitled to have the benefit of it, subject to the efforts of the defendants being duly remunerated.
Additionally, although there is no evidence at present, the defendants may be able to establish upon the taking of accounts of profits, that assets comprised in the business have been contributed by them from sources other than those generated by the business itself. If so, it may further be possible to show that consequently a proportionate interest in the business exists in favour of the defendants, or that they are entitled to a specific item of property, or to a charge upon the trust property as a whole.’
Judges:
Kearney J
Citations:
[1980] 2 NSWLR 488
Jurisdiction:
England and Wales
Cited by:
Cited – Ultraframe (UK) Ltd v Fielding and others ChD 27-Jul-2005
The parties had engaged in a bitter 95 day trial in which allegations of forgery, theft, false accounting, blackmail and arson. A company owning patents and other rights had become insolvent, and the real concern was the destination and ownership of . .
Lists of cited by and citing cases may be incomplete.
Commonwealth, Trusts
Updated: 01 July 2022; Ref: scu.230345