Pipe dreams – Manager ordered to repay employer after receiving benefits

A recent decision in the Supreme Court of New South Wales has seen a former manager and his consulting company ordered to pay the manager’s former employer a total of $474,054 between them. The finding was made on the basis that the manager and his consulting company had received profits as a result of the manager’s breach of his fiduciary duty to his former employer.

Background 

I C Pipes entered into an agreement with a company called DGS Trading (DGS) for DGS to provide services which I C Pipes was required to provide under a contract for services with a third entity.

After concerns that I C Pipes was not receiving invoices for the work performed by DGS, Mr Blanch, who was employed by I C Pipes as its NSW Contract Manager, set up a billing process which involved him creating ‘recipient created tax invoices’ for DGS. This billing process was not used for any other clients of DGS.

Following an audit, it was discovered that there were significant duplications in the billing system created by Mr Blanch, and shortly after that time Mr Blanch resigned.

I C Pipes initially issued proceedings against DGS seeking to recover the balance of significant over payments that had not been refunded following negotiations.

However, evidence in the proceeding unveiled payments from DGS to Mr Blanch and his company, Blanch Consulting Services, including $8,400 in wages and $346,910 in consultancy fees, the majority of which were received while Mr Blanch was employed by I C Pipes. A forensic analysis of the evidence showed that I C Pipes had paid $400,283 for work that DGS had not performed, and $37,000 in fees in excess of agreed rates.

I C Pipes had not been aware of a relationship between DGS and Mr Blanch or his company. I C Pipes ultimately joined Mr Blanch and Blanch Consulting Services to the proceeding.

Breach of fiduciary duty

In the defence filed by Mr Blanch, he admitted to owing a fiduciary duty to I C Pipes not to use his position for profit or personal gain, and not to put himself in a position of conflict with I C Pipes.

Acting Justice Elkaim of the Supreme Court of New South Wales stated that if Mr Blanch had not made this admission, he still would have found that a fiduciary duty existed due to the senior position held by Mr Blanch and his role in the creation of the invoices through which I C Pipes paid DGS.

Ultimately it was held that Mr Blanch created or at least assisted in the creation of the invoices that led to the significant overpayments from I C Pipes to DGS, and that Mr Blanch “was unquestionably using his position for profit or personal gain” in later receiving significant payments from DGS, including payments made to his consulting company.

Mr Blanch was ordered to pay $241,227 as an account of profits in equity arising out of the breach of his fiduciary duty to I C Pipes. His company, Blanch Consulting Services, was also ordered to pay to I C Pipes $232,827 as an account of profits knowingly received because of the breach of Mr Blanch’s fiduciary duty to I C Pipes. The court also made an order requiring Mr Blanch and his company to pay I C Pipes’ costs.

Claims against former employees

Ultimately, it was only through the course of the proceeding against DGS and its reliance on forensic analysis that I C Pipes became aware of the extent of Mr Blanch’s wrongdoing, as well as the monies received by him and his consulting company as a result.

Although this case was ultimately successful based on evidence that showed Mr Blanch had breached his fiduciary duty to I C Pipes, there are a number of different avenues available to employers looking to take action against former employees and Gadens is well placed to assist in these matters.

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Authored by:

George Haros, Partner
Nick Nassios, Lawyer