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Fraud and more than Barnes v Addy – VSCA on accessorial liability for breach of fiduciary duty or trust

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In the wake of a fraud the missing money has sometimes vanished for good – spirited overseas perhaps or lost to the fraudster’s gambling habit. There may be a lack of other assets held by the fraudster against which any judgment could be executed. This is why claims that can be made against third parties who were not the fraudsters themselves but were sufficiently involved in what happened, can be so important. In some circumstances, even where they did not receive the stolen or misappropriated money, the third party’s involvement as an accessory is such as to make them liable, and losses can be recovered from them.

On Tuesday the Victorian Court of Appeal handed down its decision in Harstedt Pty Ltd v Tomanek [2018] VSCA 84. It is a significant judgment for their Honours’ remarks as to the different forms of accessorial liability for breach of fiduciary duty – it is not confined only to the second limb of Barnes v Addy (knowing assistance). Further, the judgment is significant for the principles it identifies as to what will constitute “assistance” for the purposes of the second limb (knowing assistance). There is also useful guidance in relation to the five Baden catetogories of knowledge relevant to knowing assistance.

The judgment was unanimous. The bench comprised their Honours Santamaria, McLeish and Niall JJA. I will briefly summarise the facts and decision in this case, before laying out the learnings to be gained from this judgment.

The facts

The appellant Harstedt Pty Ltd had invested $250,000 in one of those investment schemes which in hindsight was probably too good to be true. Investors were promised sizeable profits to be generated by the investment of capital by a humanitarian organisation. Investors deposited money into a CBA account in the name of the corporate vehicle Apollo Development Enterprises Pty Ltd, which they were told was a ‘non-depleting amount’; the funds were to be held inviolate and were not to leave the account.  They were told CBA had agreed to lend three times the amount held in the account, which presumably was to be used to generate profits via the investment platform. In the event, however, the funds (over $4m) were transferred to an account in Spain where they vanished without a trace.

Harstedt sued the company Apollo and others associated with Apollo, including the company secretary Mr Tomanek. Harstedt made various claims, including fraudulent breach of trust by Apollo and a claim against Mr Tomanek for knowing assistance under the second limb of Barnes v Addy. Harstedt was successful at trial against Apollo, but dismissed the claim against Mr Tomanek. Harstedt appealed.

On appeal the Court of Appeal held that Mr Tomanek knew of the essential facts which constituted the dishonest and fraudulent breach of trust by Apollo (see [105]-[108]). However the appeal failed, primarily on the basis that Harstedt had not established “assistance” on the part of Mr Tomanek. Their Honours held that on the evidence, and on the case as advanced (see below), Harstedt had not established anything beyond knowledge on the part of Mr Tomanek of Apollo’s dishonest and fraudulent design. That knowledge, in and of itself, did not facilitate Apollo’s breach of trust and cause the loss arising therefrom. On the evidence, it was insufficient to constitute “assistance” in the relevant sense (see [119]-[121]).

1.Fraud may give rise to different claims against third party accessories 

Note that on the facts of this case, the claim of knowing receipt (first limb of Barnes v Addy) was not considered, nor was there any question of tracing or following the money. This appeal decision only considered the case where a third party may be liable as an accessory to another’s breach of trust or fiduciary duty.

As their Honours acknowledged, the state of the law on accessorial liability in this context has been riddled with uncertainty and disunity; they set out the relevant authorities and case law in footnotes which I have not reproduced here.

Their Honours observed at [68] that there are different forms of accessorial liability for breach of fiduciary duty, which must be kept distinct. Their Honours identified two forms of liability and went on to describe two other situations in which accessorial liability for breach of fiduciary duty may arise. The two forms of accessorial liability their Honours set out were –

  1. Knowing assistance in the breach – the second limb of Barnes v Addy. This was the claim brought in this case. To be liable under this form, the breach of duty or trust must amount to a ‘dishonest and fraudulent design’ (see [68] and the elements set out at [70]). Note, however, that the dishonesty required is on the part of the fraudster, not the third party (see [97] and see also Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [160], [163] and [179]).
  2. Knowing inducement or immediate procurement of the breach. The High Court in Farah drew attention to a line of cases preceding Barnes v Addy in which it was accepted that a third party might be liable as an accessory to a breach of trust (or, their Honours noted, fiduciary duty) on this basis. Procuring or inducing a breach of fiduciary duty is distinct from participating in it (see [68]). The Full Federal Court in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 observed that for this head, as with corporate alter ego cases (see next) it is not necessary to show any dishonest or fraudulent design here, or improper purpose on the part of the trustee or fiduciary (see [245] of Grimaldi; see [161] of Farah). Their Honours in Harstedt sets out the cases under this head at footnote 28 and 29, but see also Marriner v Australian Super Developments Pty Ltd [2016] VSCA 141 and the decision of Sloss J at first instance in Australian Super Developments Pty Ltd v Marriner [2014] VSC 464 from [274].

The two “other situations” their Honours discussed at [69] in which accessorial liability for another’s breach of fiduciary duty may arise were –

  1. Alter ego of the wrongdoer. Their Honours described this as where a company is the corporate creature, vehicle, or alter ego of a wrongdoing fiduciary or trustee, and the wrongdoer uses the company to secure the profits or inflict the losses of their breach (see [69], citing Grimaldi at [243]). In these cases the corporate vehicle is fully liable for the profits made from, and the losses inflicted by, the fiduciary’s wrong. I note that as the Full Federal Court observed in Grimaldi, the basis for third party liability in these cases is said to be that the company had full (imputed) knowledge of all of the facts, and either has a “transmitted fiduciary obligation” or “jointly participated” in the breach. Liability does not turn on the need to show dishonesty, although it often provides the reason for the interposition of the company. (See [243] of Grimaldi.)
  2. Trustee de son tort. This is where the third party is not a trustee but nevertheless presumes to act as a trustee and then commits a breach or profits from the position. In those circumstances the third party can be liable as a trustee de son tort (see [69], citing Mara v Browne [1896] 1 Ch 199, Nolan v Nolan [2004] VSCA 109 at [25]-[29]).

I will not launch into a doctrinal debate about these forms of liability here, although I note that pleadings in these cases need to be carefully considered and framed. However it is worth pausing to comment further on the basis of liability  for number 1 immediately above – where the third party is the corporate alter ego of the wrongdoer. Regarding that type of case, it has been noted it is ‘rather artificial’ to use Barnes v Addy to explain this liability (see [243] of Grimaldi.) Having said that, in Grimaldi, Mr Grimaldi’s company Murchison Pty Ltd was found liable for Mr Grimaldi and Mr Barnes’ diversions of money away from Chameleon Pty Ltd…under both limbs of Barnes v Addy (knowing assistance and knowing receipt). Murchison Pty Ltd was also found liable for aiding and abetting the contraventions of ss181 and 182 of the Corporations Act committed by Mr Barnes as was Mr Grimaldi. (See [312]-[321] where the trial judge’s findings are set out, and the Full Court’s agreement with those findings at [322]-[345] of Grimaldi). As an aside, I note that the defendants had claimed the diverted funds were payments properly posted to their loan accounts – see what the Full Federal Court had to say about that at [336] – the funds were not stolen but they were misappropriated.

I note too that in 2012 in Grimaldi, the Full Federal Court outlined four “quite different manifestations of [third party] participation” in another’s breach of fiduciary duty or breach of trust, rendering them liable in equity. These were framed somewhat differently to those identified here by the Victorian Court of Appeal; for those interested, see Grimaldi at [243]-[248]. My 2012 article discussing the Full Federal Court’s decision in Grimaldi may be read here, and my 2012 discussion of the issue of de facto directors and officers as dealt with in the judgment may be read here. Mr Grimaldi was unsuccessful in obtaining special leave to appeal to the High Court – see here.

2.Assistance  

As noted above, this week’s judgment in Harstedt is also significant for the principles it identifies as to what will constitute “assistance” in the breach of trust or fiduciary duty for the purposes of the second limb (knowing assistance).

Their Honours acknowledged that the authorities offer little guidance, and that plainly whether a third party has assisted relevantly is a question of fact for each case. However their Honours distilled two principles as having emerged from the authorities and commentary on this point (at [116]-[118]) –

  1. There will be assistance where, but for the action or inaction of the third party, the breach of fiduciary duty would not have occurred. Their Honours observed that a common example is the role of a bank or other financial intermediary the function of which is essential to effect a transaction that amounts to a breach of trust.
  2. There may also be assistance where the third party has facilitated a breach of fiduciary duty that would have occurred in any event. (emphasis added)

Before any bankers reading this sit up in alarm at their Honours’ comment under principle 1 immediately above, it should be noted that a finding of assistance alone will not be enough to found liability as an accessory. Indeed there are four necessary elements of liability under the second (knowing assistance) limb of Barnes v Addy. These were set out by their Honours at [70], citing Farah and Grimaldi, and are –

  1. The existence of a fiduciary duty owed by the fiduciary (trustee or otherwise),
  2. A ‘dishonest and fraudulent design’ on the part of the fiduciary,
  3. Assistance by the third party in that design, and
  4. Knowledge on the part of the third party of the circumstances constituting that design.

Turning briefly then to the last of these – knowledge.

3.The Baden categories of knowledge

Their Honours’ judgment in Harstedt also provides useful guidance in relation to the five Baden categories of knowledge relevant to ‘knowing assistance’ at [85]-[87].

The Baden categories are –

  1. Actual knowledge
  2. Wilfully shutting one’s eyes to the obvious
  3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make,
  4. Knowledge of circumstances which would indicate the facts to an honest and reasonable person, and
  5. Knowledge of circumstances which would put an honest and reasonable person on inquiry.

Their Honours noted that the first two speak for themselves. In Harstedt, their Honours’ findings as to Mr Tomanek’s knowledge of the three essential facts which constituted the dishonest and fraudulent breach of trust by the company Apollo fell into the first and second categories (see [105]-[108]).

As to the third category – wilfully and recklessly failing to make inquiries as an honest and reasonable person would make – their Honours observed that this ‘involves such a calculated abstention from inquiry as would disentitle the third party to rely upon lack of actual knowledge of the trustee’s or fiduciary’s wrongdoing’ (see [86]).

I pause to note that last year in Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101, Hargrave J found the third category of knowledge on the part of the director and general manager of the betting company which had unknowingly received over $2m in stolen funds, as at the date they then credited it to the fraudster’s betting account. His Honour took the view that based on what (little) they did know, the inquiries they made were manifestly inadequate. He held that they ought to have made the ‘simple inquiry’ of identifying and contacting the depositors of the stolen funds, and asking if they intended to pay the money to the sports betting company for the benefit of the customer claiming it. My article reviewing and analysing that case can be read here.

As to the fourth category – knowledge of circumstances which would indicate the facts to an honest and reasonable person- their Honours observed that this category ‘is designed to prevent a third party setting up his or her own “moral obtuseness” as the reason for not recognising an impropriety that would have been apparent to an ordinary person’ (see [86]).

The fifth category derives from the doctrine of bona fide purchaser for value without notice (see [86]).

The Court of Appeal noted that the High Court in Farah endorsed the Baden scale and indicated that knowledge falling within any of the first four categories, but not the fifth, represents the law in Australia (see [87]).

Conclusion…and a window left open – omission/acquiescence

The Victorian Court of Appeal’s judgment in Harstedt is worthwhile for practitioners to be across. Their Honours’ remarks as to the different forms of third party liability as an accessory to breaches of fiduciary duty or trust are instructive. Further, the judgment contains useful guidance as to what will constitute “assistance” for the purposes of the second limb (knowing assistance), and as to the five Baden catetogories of knowledge.

One final aspect: Their Honours noted that Harstedt advanced its case as to “assistance” as one of active involvement by Mr Tomanek. Their Honours remarked that Harstedt did not contend that Mr Tomanek’s “assistance” comprised his acquiescence with the breach, which acquiescence caused the loss. Therefore, so their Honours noted, it was unnecessary to decide whether an omission or acquiescence may amount to “assistance” under the second limb (see [119]). Their Honours observed that the authorities on this point appear to be in disharmony. They set out a list of such cases at footnote 84.

Clearly their Honours have left this matter open. It raises interesting questions as to whether a failure to stop a fraud could constitute “assistance”; whether sitting on one’s hands could be held to be enough to facilitate a fraud, sufficiently to amount to “assistance” and satisfy that element of a claim for liability in respect of the fraud against a third party. I would speculate that may depend upon the knowledge of the third party. If the third party’s level of knowledge of the fraud reaches a high enough Baden category, then a failure to take any action to stop the fraud may be more likely to be found to constitute sufficient “assistance” in the fraud. It will be interesting to see what happens in the cases to come.

Sino Iron v Worldwide Wagering – a case of fraud and restitution “with the lot”

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It has not been a good week in Australian courts for sports betting enterprises. On Thursday Tabcorp was fined $45million for breaching anti-money laundering and counter-terrorism financing laws. To less publicity, the day prior, the Victorian Supreme Court found another sports betting company and individuals and companies associated with it were liable for the consequences of receipt of stolen funds of over $2million. The case is Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd [2017] VSC 101.

This was a case of fraud and restitution “with the lot” – the issues raised by the fraud and addressed in the judgment include money had and received (the stolen funds), Black v Freedman trusts and when they arise, Barnes v Addy claims against third parties for knowing receipt of trust funds and knowing assistance in breaches of trust, the Baden categories of knowledge, when knowledge of an agent will be imputed to the principal, the change of position defence, indefeasibility of title and the fraud and in personam exceptions, tracing issues, and more.

The facts as found by the Court

The two plaintiff companies were involved in the development of Australia’s largest magnetite mining and processing project, the Sino Iron Project, conducted at Cape Preston in the Pilbara, Western Australia. They incurred large debts to a company called Monadelphous Engineering Associates Pty Ltd.

The fraudster, pretending to be an authorised representative of Monadelphous, contacted the plaintiffs and directed payment of Monadelphous’ invoices to be paid into a new bank account. The bank account details given were those of the fourth defendant, a company incorporated in Norfolk Island called Worldwide Wagering Pty Ltd. Worldwide carried on an international sports betting business under the name “Pinnaclebet”.

The plaintiffs paid a total of $2,147,689 into Worldwide’s ANZ bank account on 30 May 2016. Worldwide’s sole director Mr H (the fifth defendant), and its general manager Mr O (the sixth defendant), initially suspected fraud when the funds were paid into their company’s account, as there had been a similar theft from La Trobe University about two weeks earlier. They reported it to the police. However they then spoke with a Worldwide customer known to them, a Mr S, who claimed an entitlement to bet with the funds, and on 1 June 2016 they arranged for Worldwide to credit the stolen funds to Mr S’s betting account. Mr O and Mr H gave evidence this was after checking by email with the police (see [140]-[142]), although the judge found on the evidence that the emails to the police excluded important information including Mr S’s surname, to protect Mr S from further enquiries by the detective (see [193]-[200]).

The stolen funds were then gambled on international sporting events. Most bets were lost. Worldwide paid out $550,000 to Mr S on winning bets. The Court found that most of the approximately $2million was used by Worldwide, Mr H, or related companies. The defendants admitted they had actual knowledge of the fraud at 1.13pm on 7 June 2016, six days after crediting the funds to Mr S’s betting account, and after Mr S had placed his last bet. However after that time, the stolen funds continued to be used by the defendants or related companies (see [8]). This included a sum of nearly $796,000 which passed through a related company The Odds Broker and was used by Mr H to purchase a bank cheque, which was then used to settle the purchase by Mr H and Mr O as tenants in common in equal shares of a property at Bondi Junction. See [6] – [12] of the judgment for summary details of the application of the funds. After Mr S’s last bet, the remaining credit in Mr S’s betting account was $70,479.40, which was later repaid to the plaintiffs.

The plaintiffs claimed the balance of the stolen funds ($2,077,210) or their specific traceable proceeds, on multiple grounds. See the list of claims held to have been successfully made out, in the next section below .

The defendants’ arguments included that prior to the time they had actual knowledge of the fraud, they were entitled to rely on Mr S’s statements that the stolen funds belonged to him or those for whom he acted as agent and were legally obtained. Hence, so they contended, the stolen funds were received by Worldwide, and thereafter dealt with by it and the other defendants, as a bona fide purchasers for value without notice of the fraud. They argued the change of position defence (see below). They also argued that Worldwide did not receive the stolen funds on trust as alleged, because at the time of receipt it had no knowledge of the fraud. (See [23]) They succeeded in this last contention, although it only delayed the arising of the trust for 48 hours after receipt of the funds. The question of when the Black v Freedman trust arose is discussed below.

THE SHORT VERSION 

For those wanting a short summary of the outcome of the decision, here it is: The Court held the plaintiffs had established an entitlement to relief on the following (co-existing and overlapping) grounds –

First, for $2,077,210 against Worldwide on the basis of:

  1. the common law claim for money had and received;
  2. the proprietary claim under Foskett v McKeown principles; and
  3. breach of its Black v Freedman trust obligations.

Second, against Mr H and Mr O for $2,077,210 for knowingly assisting Worldwide to breach its Black v Freedman trust obligations.

Third, against Mr O for knowingly assisting Worldwide, The Odds Broker and Mr H to breach their respective Black v Freedman trusts by disposing of the traceable proceeds of the stolen funds comprised in the $800,000 transferred from Worldwide’s ANZ account to a bank account of The Odds Broker, from whence it was transferred to personal bank accounts of Mr H.

Fourth, against Mr H for the traceable proceeds of the stolen funds comprised in the $800,000 on the basis of:

  1. money had and received; and
  2. knowing receipt of trust property.

Fifth, against Mr H and Mr O for the traceable proceeds of the stolen funds comprised in the $345,000, for knowingly assisting Worldwide to breach its Black v Freedman trust obligations.

Sixth, against Worldwide for proprietary relief in the form of an equitable charge over the Worldwide ANZ account to secure the traceable proceeds of the stolen funds remaining in that account.

Seventh, against Mr H and Mr O for proprietary relief in the form of an equitable charge over the Bondi Junction property to secure the traceable proceeds of the stolen funds used to purchase that property.

Eighth, against Worldwide for $8,500 as an account of profits made from its breach of trust.

Each of these findings involved rejection of the change of position and bona fide purchaser for value without notice defences, on the ground that the defendants did not act in good faith at relevant times because of their knowledge of the fraud to the level of the third Baden category (wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make). The indefeasibility defence also failed.See [452]-[462] for these conclusions. The proceeding was adjourned to allow further evidence and submissions before determining tracing issues.

For those interested in reading more about the claims and defences argued in this case, and a discussion of the legal principles involved, read on.

THE LONG VERSION

1. Knowledge of the fraud

In making his findings as to knowledge, Hargrave J first set out the 5 so-called “Baden categories of knowledge” at [27], derived from the well-known 1993 UK decision. The level of knowledge required to be proven to succeed in a relevant claim or defence varies according to the particular claim or defence. The Baden categories of knowledge are –

(1) actual knowledge;

(2) wilfully shutting one’s eyes to the obvious;

(3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;

(4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and

(5) knowledge of circumstances which would put an honest and reasonable person on inquiry.

(For a further discussion of these categories, see my 2012 article on Grimaldi v Chameleon Mining here.)

None of the parties alleged that Mr S was a party to the fraud. His Honour remarked that that remained an open question (see [63]), and applied the rule in Jones v Dunkel to drew an adverse inference from the defendants’ failure to call Mr S to give evidence (see [201]-[203]).

The defendants admitted they had actual knowledge of ‘a suspicion of’ the fraud at approximately 1.13pm on 7 June 2016, several hours after an ANZ officer initially told Mr H of it. By 1.13pm Mr H believed the stolen funds were ‘likely’ to have been fraudulent deposits and instructed a staff member to freeze Mr S’s betting account. The Court found that Mr H had actual knowledge of the fraud in the first Baden category from the time he gave that instruction on 7 June. (See [98]-[99])

Worldwide, Mr H and Mr O contended that at the time the stolen funds were credited to Mr S’s betting account 6 days prior, on 1 June 2016, they had made all reasonable inquiries to satisfy themselves that Mr S was entitled to bet with the funds (see [157]). Hargrove J did not accept these submissions.

His Honour took the view  that the knowledge that they had admitted to having at that time constituted circumstances which would have led an honest and reasonable person in their position to have made further inquiries before crediting Mr S’s account with the stolen funds. Thus they should have made those inquiries, including the ‘simple inquiry‘ of ascertaining the identities of the depositors of the stolen funds (the plaintiffs) from the internet bank statements, and contacting them to ask if the deposits had been made by the plaintiffs for the purpose of the international sports betting customer claiming the funds. His Honour found that had they done so, the fraud would have been revealed and Mr S’s betting account would not have been credited (see [158]-[159]).

That finding is suggestive of Baden category 5, possibly 4. However the Court went further, and held that Mr H and Mr H acted wilfully and recklessly in failing to make the ‘simple inquiry’ – see Baden category 3 above. His Honour observed that they also had a commercial motive to want to believe Mr S’s claims, being their plan to expand the business’s turnover and customer base to ready it for sale from which they each stood to profit. As a result, his Honour found, they accepted as true flimsy information from a man with, at best, a mixed reputation, and made only superficial inquiries (see [168]-[179]).

His Honour made his findings to the Briginshaw standard (see [180]-[182]). He found that the defendants had knowledge of the fraud in the third Baden category at the time Mr H and Mr O issued the instructions for Mr S’s betting account to be credited with the stolen funds, and thus before any bets were placed. If that were wrong, his Honour held that the defendants had that level of knowledge after the account was credited but before any bets were placed, or alternatively, prior to the final $1.3m in bets were placed on the morning of 7 June (see [272]).

2. Claims in restitution based on mistaken payments, money had and received

The principles his Honour identified from the authorities were these (see [275]-[279], [286]- [288]) –

  1. When money is paid under a mistake of fact, the person paying the money may recover it from the recipient in a common law action for money had and received. Recovery depends upon whether it would be inequitable for the recipient to retain the benefit. Retention may not be inequitable if the recipient has changed its position on the faith of the receipt and thereby suffered a detriment:  Australian Financial Services Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; (2014) 253 CLR 250, 568 per French CJ;
  2. Direct receipt is unnecessary; indirect receipt by a volunteer of traceable proceeds of the money paid by mistake is enough: Fistar v Riverwood Legion & Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732, 746 [62]-[64];
  3. In a common law action based on money paid by mistake, it is not necessary for the plaintiff to allege or prove that the retention of the money received by the defendant would be inequitable. That is a matter for defence, on which the defendant bears the onus: ASFL v Hills Industries at 593 [66]-[67]; David Securities Pty Ltd v CBA [1992] HCA 48; (1992) 175 CLR 353, 379;
  4. One such defence is change of position. Gageler J in AFSL v Hills Industries proposed two conditions for proof of this defence –
    1. That the defendant has acted or refrained from acting in good faith on the assumption that he/she/it was entitled to deal with the payment received. The defendant need not have relied on knowledge derived from the payer.
    2. That by reason of having so acted or retained from acting, the defendant would be placed in a worse position if ordered to make restitution of the payment than if the defendant had not received the payment at all. The detriment need not always be financial. If it is, it need not be established with precision. It can be an opportunity forgone. However it must, in every case, be shown by the defendant to be substantial: ASFL v Hills Industries at 625-626 [157];
  5. This formulation has been accepted by the Victorian Court of Appeal as consistent with the defence and the principles on which it is based as set out by the majority in AFSL v Hills: Southage PL v Vescovi [2015] VSCA 117; (2015) 321 ALR 383, 399 [65].
  6. A defendant relying on a change of position defence who, prior to the change of position, wilfully and recklessly fails to make such inquiries as an honest and reasonable person would make in all the circumstances (i.e. once they have knowledge to the 3rd Baden category), does not act in good faith on the assumption that he, she or it is entitled to deal with the mistaken payment (which is the 1st of Gageler J’s two conditions for this defence): Macquarie Bank Ltd v Sixty Fourth Throne PL [1998] 3 VR 133, 143-144.

The plaintiffs’ claim under this head was against Worldwide for all of the $2.14 million stolen funds (less the approx $70,000 balance at the end, already repaid), and against related company The Odds Broker for $800,000, and against Mr H for $800,000.

The Court held that the defendants could not avail themselves of the defence here because they had sufficient (Baden category 3) knowledge of the fraud at the time each bet was accepted (see [282]). Worldwide was held liable to the plaintiffs for money had and received for the approx $2million.

The Odds Broker and Mr H argued they were not direct recipients of the stolen funds from the plaintiffs. As regards The Odds Broker, $800,000 was paid to it from the Worldwide ANZ account which was substantially comprised of traceable proceeds of the stolen funds (see [290]). There was no evidence The Odds Broker provided any consideration for the payment or changed its position on the faith of the receipt. On the evidence, it did not act in good faith. It was held liable to the plaintiffs for the traceable proceeds of the $800,000 as money had and received.

As regards Mr H and the $800,000 on-paid by The Odds Broker to Mr H’s personal accounts and applied towards the purchase of the Bondi Junction property, the tracing exercise was not straightforward. However even on the defendants’ case, $731,349.45 of the $800,000 was traceable to the Bondi Junction property. The Court found Mr H did not act in good faith because he had the requisite degree of knowledge. Mr H was held liable to the plaintiffs for $800,000 (or its traceable proceeds) as money had and received. ( See [286]-[294])

3. The Black v Freedman trust on which Worldwide held the funds for the plaintiffs – and when it arose

Hargrove J considered the nature of the trust created by receipt of stolen moneys under the Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105 line of authorities from [306]. His Honour discusses these principles –

  1. Black v Freedman has been treated in Australia as a settled law that a thief holds stolen property on trust for the victim: Levy v Watt [2014] VSCA 60; (2014) 308 ALR 748, 766 [65] (see [313]);
  2. For volunteer recipients of stolen money from the fraudster:  a person entirely innocent of a fraud who comes to know that he or she has received and still retains the proceeds of, or taken advantage of, a fraud to which he or she was not party, cannot knowingly seek to retain those proceeds or that advantage without, in effect, becoming a party to that fraud and liable accordingly: Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230, 253 [92] (see [314]);
  3. The innocent recipient’s liability is limited to the amount of the stolen funds (or their traceable proceeds) remaining in the hands of the innocent recipient at the time sufficient knowledge of the theft is obtained: Heperu at 264-268 (145]-[163] (see [315]);
  4. In summary, a third party who receives stolen money as a volunteer is only obliged to account to the beneficial owner of the stolen property on Black v Freedman principles to the extent the recipient holds the stolen property or its traceable proceeds at the time the recipient obtains sufficient knowledge of the theft (see [316]).

(In relation to the first principle above, I note in passing that whilst that proposition is settled law, there has been much controversy about whether this is indeed the correct proposition for which Black v Freedman stands. In Fistar v Riverwood Legion and Community Club Ltd [2016] NSWCA 81; (2016) 91 NSWLR 732 at [37] Leeming JA noted this and discussed the cases and academic writings . Leeming JA noted the principal perceived difficulty is that it is said that a thief can have no title to stolen property and so cannot become a trustee for the true owner. His Honour preferred the view on this of Dr Fox expressed in his 2008 book Property Rights in Money, that what the thief is treated as having is legal possession, and therefore a possessory legal title which is capable of being held on trust. A mere finder of a chattel who has nothing more than possession, has a right against other putative possessors who lack better title. This extends even to thieves. But the thief’s right to possess is exigible only against others, not against the true owner: see Bride v Shire of Katanning [2013] WASCA 154 at [72] per Edelman J (with whom Newnes JA agreed). I note that there are other points of controversy concerning Black v Freedman, including whether the reasons there were confined to property disposed of by those in a fiduciary position.)

His Honour concluded that a trust did not arise upon Worldwide’s receipt of the stolen funds. It had not been proven it had sufficient knowledge of the fraud when it received them on 30 May 2016 (see [316]). However, when the defendants did acquire sufficient knowledge of the fraud on 1 June 2016, Worldwide became liable in equity to account to the plaintiffs for the stolen funds, all of which were still in its hands. The Court held that from that time, Worldwide was a trustee of those funds for the plaintiffs under either a constructive or resulting trust (see [325] and the citations of Heperu at [154]-[155] and Sze Tu v Lowe [2014] NSWCA 462 at [141]-[162]).

4. Knowing receipt – Barnes v Addy first limb

On the findings of knowledge already made, it was held The Odds Broker knowingly received the $800,000 with sufficient knowledge of the fraud. The Odds Broker thus became liable to account to the plaintiffs for that amount as a constructive trustee. It breached that trust by paying the $800,000 or its traceable proceeds to Mr H (see [326]).

Similarly, Mr H received the on-payment from The Odds Broker with knowledge of the fraud. Mr H gave evidence he did not know the money was sourced from the stolen funds when he received it into his bank account. However it was held this made no difference, because Mr O knew all the relevant facts and acted as Mr H’s agent in arranging the transfer of the $800,000 to Mr H’s account to enable the purchase of the property. Mr O’s knowledge was attributable to Mr H, so Mr H knowingly received the traceable proceeds of the $800,000 and thus became liable to account to the plaintiffs as a constructive trustee for that amount. He beached that trust when Mr O, as Mr H’s agent, used the traceable proceeds to purchase the Bondi Junction property (see [327]).

5. Knowing assistance – Barnes v Addy second limb

To be liable under the second limb of Barnes v Addy for knowing assistance, his Honour pointed out at [331] that it must be established that –

  1. The defendant assisted a trustee or fiduciary in a breach of trust or fiduciary obligation;
  2. That breach of trust or fiduciary obligation is characterised by the Court as a ‘dishonest and fraudulent design’, and
  3. The assistance was given with the requisite degree of knowledge of that dishonest and fraudulent design.

As to the third element – the requisite degree of knowledge by the recipient – it was accepted that Baden categories 1 to 4, but not category 5, are sufficient for both the first and second limbs of Barnes v Addy. This is consistent with authority: Farah Constructions (2007) 230 CLR 89, 163-4 [177]; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296, 362 [262]; Mathieson Nominees v Aero Developments [2016] VSC 131 [166]. Category 5 is a form of constructive notice, rather than knowledge, and is considered insufficient. (See [332])

The Court concluded at [359] that –

  1. Mr H and Mr O knowingly assisted Worldwide to breach its trust obligations in respect of the whole of the stolen funds and hence each was liable to the plaintiffs for equitable compensation for the unpaid balance of that amount (just over $2million),
  2. Mr H and Mr O were also liable for knowing assistance in respect of the traceable proceeds of the stolen funds comprised in payments totalling $345,000,
  3. Mr O was liable for knowingly assisting Worldwide and The Odds Broker to breach their respective trust obligations regarding the traceable proceeds of the stolen funds comprised in the $800,000,
  4. Mr O was also liable for the traceable proceeds of the stolen funds comprised in the $800,000 for knowingly assisting Mr H to breach his Black v Freedman trust obligations, by using those proceeds to purchase the Bondi Junction property.

These liabilities overlapped with each other and other grounds of liability.

The plaintiffs also made proprietary claims over assets which remained to hand, including the Bondi Junction property.

6. Traceable into the Bondi Junction property?

The plaintiffs claimed entitlement to a proprietary remedy against the property in the form of a charge or equitable lien. This was on the basis that the Bondi Junction property was purchased with a bank cheque sourced from the traceable proceeds of the stolen funds comprised in the $800,000. (Hargrove J noted here that the plaintiffs’ claims against the Bondi Junction property were also established on the basis that Mr H funded the purchase of it in breach of his Black v Freedman obligations, with Mr O’s knowing assistance. See [364])

His Honour noted the following tracing principles –

  1. The beneficial owner of misappropriated property can recover it or its traceable proceeds from the person holding the asset, subject only to the defence that the holder is a bona fide purchaser for value without notice: Foskett v McKeown [2000] 1 AC 102, 129, 108-9, 115;
  2. Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset: Foskett v McKeown, the ‘basic rule’ stated by Lord Millett at 131.

Here, the plaintiffs’ property was constituted by their choses in action against their bank representing funds held to their account, including the stolen funds. When their bank mistakenly paid the amount of the stolen funds to Worldwide, the plaintiffs’ property was extinguished and Worldwide obtained a chose in action against its bank ANZ, which became the traceable substitute for the plaintiffs’ former property. In turn, further traceable substitutes for lesser amounts were created by the subsequent movement of the $800,000 (or its traceable proceeds) to the bank accounts of The Odds Broker and Mr H and, subsequently, the relevant bank cheque and the Bondi Junction property (see [365]).

In accordance with Lord Millett’s ‘basic rule’, the plaintiffs had elected to claim a charge on the Bondi Junction property to secure their personal claims against Mr H and Mr O for the traceable proceeds of the stolen funds comprised in the $800,000. Subject to the defendants’ defence based on indefeasibility of title, the Court held those claims should succeed (see [367]).

7. Is this claim against the property defeated by indefeasibility of title?

The defendants argued that Mr H and Mr O’s title to the Bondi Junction property was indefeasible by operation of s 42 of the Real Property Act 1900 (NSW). The merits of this argument turned on whether the events in this case brought it within the fraud exception to indefeasibility of title, as provided in s 42(1).

Hargrove J noted it has been held that –

  1. ‘Fraud’ in s 42(1) means ‘actual fraud, moral turpitude’ or ‘dishonesty of some sort’: Farah Constructions (2007) 230 CLR 89, 169 [192]; Bahr v Nicolay (No 2) (1988) 164 CLR 604, 614 (see [373]);
  2. The 3rd Baden category of knowledge is a species of actual knowledge (as opposed to constructive knowledge): Farah Constructions (2007) CLR 89, 163 [174] (see [375]);
  3. Causing registration on title in circumstances of wilful blindness (failing to make such enquiries as an honest and reasonable person would make) may be dishonest, and was categorised by Tadgell JA as fraudulent in Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] 3 VR 133, 143-4 (see [375]).

The Court found that Mr O’s actions in causing his registration as an equal proprietor of the Bondi Junction property were dishonest (at [375]). It found he wilfully and recklessly failed to make such enquiries as an honest and reasonable person would make before instructing a staff member to credit the stolen funds to Mr S’s betting account on 1 June 2016, thus allowing the stolen funds to be used to place bets on that account. This fell within the 3rd Baden category of knowledge. Other evidence of Mr O’s showed that the $800,000 transferred from Worldwide to The Odds Broker  was directly referable to the stolen funds (see [376]). Moreover, on the defendants’ admissions of when they acquired actual knowledge of the fraud at 1.13pm on 7 June 2016, Mr O completed the purchase after obtaining this actual knowledge. He nevertheless proceeded to do so.

Notably, his Honour observed at [378]: “Although Mr O… may not have appreciated that his actions were dishonest, they were.” His Honour so found based on the evidence, and on the High Court’s observation in Farah Constructions at [173] that: “As a matter of ordinary understanding, and as reflected in the criminal law in Australia, a person may have acted dishonestly, judged by the standards or ordinary, decent people, without appreciating that the act in question was dishonest by those standards.”

The Court also found that Mr H’s registration as an equal proprietor of the Bondi Junction property was procured by fraud for which he was responsible (from [379]). The plaintiffs contended that even if Mr H did not know the money in his personal bank account used to purchase the bank cheque to buy the property was sourced from the stolen funds, he had authorised Mr O to act as his agent in obtaining the moneys required for settlement of the purchase and that Mr O’s knowing use of the stolen funds should be imputed or “brought home” to Mr H as principal.

On this question of attributing the knowledge of an agent to the principal, at [389] Hargrave J noted the reasoning of the High Court in Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2; (2015) 254 CLR 425 as follows –

  1. The title of a registered proprietary may be invalidated on the ground of fraud ‘brought home’ to the registered proprietary or to his agents: Cassegrain 436-7 [32], citing Assets Co Ltd v Mere Roihi [1905] AC 176, 210;
  2. Whether fraud by an agent will be brought home to the registered proprietor depends upon the ‘scope of authority and whether the agent’s knowledge of the fraud is to be imputed to the principal [registered proprietor]’: Cassegrain 439 [40]. This involves consideration of why the fraudster’s knowledge should be imputed to the registered proprietor: Cassegrain 439 [41];
  3. It is not sufficient to impute the agent’s fraud to the registered proprietor whether the registered proprietor is ‘no more than the passive recipient of an interest in land’: Cassegrain 439 [41];
  4. In order to bring fraud home to the registered proprietor, it is necessary to show that the agent’s fraud was within the scope of the agent’s authority given by the registered proprietor: Cassegrain 439 [42].

In the present case, the Court found Mr H gave a broad general authority to Mr O to move funds between the relevant accounts and he expected that the money required to complete the purchase of the property would be moved into his personal account from one of the accounts Mr O was authorised to operate. Hargrave J found that Mr O’s authority was sufficiently broad to encompass using the stolen funds if that was the only available source at the time to enable completion of the purchase. The Court found that given that Mr H had the same knowledge of the fraud as Mr O at relevant times, and thus acted dishonestly in instructing Mr O to arrange for Mr S’s betting account to be credited with the stolen funds, the Court was satisfied on the evidence that Mr O’s broad authority encompassed him acting fraudulently by using the stolen funds to complete the purchase if that was necessary. (See [391]-[392])

8. The in personam exception to indefeasibility of title

In addition to the statutory fraud exception to indefeasibility of title under s 42 of the Act, Hargrave J went on to find that indefeasibility also did not accrue as the in personam exception to indefeasibility of title was also made out. His Honour noted that in personam exception was generally described as existing ‘in relation to certain legal or equitable causes of action against the registered proprietor’ in Farah Constructions (2007) 230 CLR 89, 169 [193]. This language echoes the requirement that the in personam exception depends on the establishment of a known legal or equitable cause of action: Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] 3 VR 133, 146-7. (See [394]) Hargrave J also noted the statements of Brennan J in Bahr v Nicolay (No 2) (1988) 164 CLR 604, 653 to the effect that the in personam exception does ‘not infringe the indefeasibility provisions of the Act. Those provisions are designed to protect a transferee from defects in the title of the transferor, not to free him from interests with which he has burdened his own title‘.

On the findings in this case, the plaintiffs’ claim for an equitable lien or charge over the Bondi Junction property arises from their establishing the known legal causes of action based on (1) Foskett v McKeown tracing principles, (2) Mr H’s breach of his Black v Freedman trust obligations, and (3) knowing assistance in that breach by Mr O. The Court held that the conduct of Mr H and Mr O, before registration of their interests as proprietors of the Bondi Junction property, had burdened their interests. (See [394]-[397])

(Sidenote: Hargrave J’s seemingly unexamined acceptance here that a knowing assistance Barnes v Addy claim is a personal equity which may defeat indefeasibility of title under the in personam exception appears to be directly inconsistent with obiter in the judgment last year of Vickery J in Mathieson Nominees Pty Ltd v Aero Developments Pty Ltd [2016] VSC 131. In that decision his Honour noted the debate on this point between various courts and confirmed the effect of ratio in Farah Constructions v Say-Dee [2007] HCA 22; 230 CLR 89, 140 [193]-[196] to the effect that a claim under Barnes v Addy is not a personal equity which defeats statutory indefeasibility of title. See my review of the Mathieson Nominees decision and discussion of this issue here.)

9. Traceable into the Worldwide ANZ account? Mixed funds

His Honour discussed the tracing issues that arose here at [398]-[435]. There were complications. He sets out a useful review of the competing tracing rules and principles that may be applied in cases of tracing into (and out of) mixed funds – see in particular at [408]-[422].

In the end Hargrave J concluded more evidence was needed to finally determine the tracing issues, much of which he noted was in the hands of the defendants. His Honour adjourned the proceeding to allow further evidence and submissions as to the remaining tracing issues – see [423]-[430] and [434].

For completion, I should note that an additional claim was made for recovery of the stolen funds under s 2.6.3 of the Gambling Regulation Act 2003, but was unsuccessful (see [440]-[450]).

Conclusion

The judgment is only two days old, so we cannot yet know whether an appeal will be pursued. In the meantime, on a practical level, the case stands as a salient warning to betting companies and those associated with them, and potentially similar entities which may receive questionable deposits into accounts held with them. Each case will turn on its own facts, and certainly here there was, amongst other things, an unusually timely warning of another fraud just 2 weeks prior. However in circumstances where a recipient is put on enquiry in some way, before on-paying or releasing the funds, it may be prudent to make the so-called ‘simple inquiry’ as described by Hargrave J at [158]-[159]: to seek to ascertain the identity of the depositor of the funds, contact them, and inquire as to whether they intended to make the deposit or payment to the benefit and for the purposes of the person or entity claiming to be entitled to access or control the funds. It is worth bearing in mind that whatever the circumstances are, the Baden categories of knowledge (see above) direct attention to what would an honest and reasonable person consider or do in those circumstances and with that awareness. As this case illustrates, a failure to meet that standard may have significant consequences for recipients of suspicious payments

Barnes v Addy claims and indefeasibility of title

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In a Victorian Supreme Court decision handed down last week, Vickery J has confirmed that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions (ss 40-43) of the Transfer of Land Act 1958 (Vic) (TLA). The case also illustrates when a security interest described as an “Instrument of Charge” may, despite the words used, give rise to an equitable mortgage, rather than a charge. The case is Mathieson Nominees Pty Ltd v Aero Developments Pty Ltd [2016] VSC 131.

The case involved a claim by the plaintiff (Mathieson Nominees) that it was entitled to an equitable charge over vacant subdivisional land at Point Cook in Victoria (the Property), and that it had an interest in the land capable of supporting a caveat.

Broadly, the facts of the case were these:

The plaintiff Mathieson Nominees had loaned funds of $250,000 to a company called Sprint Homes Pty Ltd to enable it to pay the deposit to purchase the Property from VicUrban. Sprint Homes was unable to raise the funds to pay the balance of $4.5m plus GST and settle the purchase. Its director registered a new company Aero Developments Pty Ltd (the defendant) and Sprint Homes nominated this company to take the transfer of land as nominee under the contract of sale (without notifying Mathieson Nominees).  The defendant Aero Developments subsequently completed the purchase, after a change of ownership and directorship, and became registered on title.

Mathieson Nominee’s loan to Sprint Homes for the deposit had been supported by several securities. One of these was a fixed and floating charge granted by the borrower Sprint Homes under an executed Instrument of Charge. The terms of this instrument included that the Charged Property was all the present and future property of Sprint Homes, wherever situated, that it was a fixed charge on all present and future estates and interests in land, and that Sprint Homes must not, without the consent of Mathieson Nominees, dispose of or otherwise deal with the Charged Property. The Instrument of Charge was registered with ASIC.

Within 6 months – Sprint Homes went into voluntary administration, Mathieson Nominees lodged a caveat over the Property claiming an interest as chargee and appointed a receiver and manager over Sprint Homes, Sprint Homes went into liquidation, and Aero Developments lodged an application with the Registrar of Titles to have Mathieson Nominees’ caveat removed. Mathieson Nominees commenced these proceedings.

In this proceeding, Mathieson Nominees sought various declarations and orders, including –

  • that Mathieson Nominees is entitled to an equitable charge over the Property, and
  • (in summary) that it have possession of and be at liberty to sell the Property.

(It abandoned an allegation that the registration of Aero Developments as proprietor of the Property was affected by fraud within the meaning of ss 42 and 44 of the TLA. It also at trial did not pursue its claims against two other defendants, being the director of Sprint Homes and a related company.)

In the judgment, the Court dealt with a number of issues worth noting.

1. Whether the Instrument of Charge gave rise to an equitable mortgage rather than an equitable charge? 

Even though the relevant instrument was termed an “Instrument of Charge”, there was a question in this case as to whether it instead gave rise to an equitable mortgage. Vickery J observed that this is a matter of the proper construction of the relevant instrument.(See [65]-[89])

His Honour discussed the four kinds of consensual security over property – pledge, contractual lien, equitable charge and equitable mortgage, and noted that an equitable lien may also arise by operation of law. Vickery J canvassed the authorities, particularly as to equitable charges and equitable mortgages.

In relation to equitable charges, his Honour in reviewing the authorities cited inter alia cited the description of the essence of an equitable charge given by Gillard J in AVCO Financial Services v White [1977] VicRp 62; [1977] VR 561, 563 –

“An equitable charge for a debt is a security whereby only a right to payment of the debt out of the property is conferred by the owner of the property to the holder of the security. The remedy of the holder of the security on default in payment of the debt was to apply to a court of equity to have the property sold and the proceeds paid into court.”

Vickery J also noted that an equitable charge is to be distinguished from a purely contractual arrangement giving rise to no proprietary right.

As to the distinction between a charge and equitable mortgage, his Honour quoted from Sykes and Walker where the authors observe:

“The most important result, so far as the difference in substance is concerned, is that the equitable mortgagee has the potentiality of full beneficial ownership through the process of foreclosure; the equitable charge as such can never attain to the position of full beneficial owner.”

His Honour noted the authors of Fisher and Lightwood’s Law or Mortgage state that:

“The principal remedies of the charge are [judicial] sale and the appointment of a receiver.”

His Honour then considered the facts in this case, and held that the Instrument of Charge which gave rise to the security claimed by Mathieson Nominees, when read as a whole, gave rise to an equitable mortgage and not an equitable charge. It gave immediate rights to Mathieson Nominees in the event of default, including the right to take possession of the property. Although Mathieson Nominees could seek a court order in aid of the enforcement process, this was not a pre-condition to enforcement. Its remedies were not confined to a judicial sale and the appointment of a receiver. (See [84]-[87]) However, little turned on this conclusion, in the end. (See [89])

2. Whether the Instrument of Charge became enforceable against the nominated purchaser Aero Developments

Mathieson Nominees argued that the Property was subject to a charge in favour of Mathieson Nominees when it was purchased by Sprint Homes, and the charge remained in place as an encumbrance on the Property, despite the nomination of a substitute purchaser.

In short, after a consideration by Vickery J of the contractual effect of the nomination, this contention was defeated by his Honour’s conclusion that Aero Developments acquired an indefeasible title upon becoming the registered proprietor of the Property pursuant to ss 40-43 of the TLA.

In the oft-cited passage from the judgment of Barwick CJ in Breskvar v Wall (1971) 126 CLR 376, 385-6, the effect of the Torrens scheme of registration of land was described thus –

“The Torrens system of registered title of which the Act is a form is not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietary formerly had, or which but for registration would have had. the title it certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor.”

His Honour observed that the scheme of the Torrens legislation is such that, with very few exceptions, a purchaser who becomes the registered proprietor of an interest in land title takes free from all unregistered interests, whether he has notice of them or not (see [128]).

Vickery J noted that the statutory fraud exception arises where there is dishonest conduct on the part of the registered proprietor whose title is challenged. The emphasis in the authorities is on actual fraud on the part of the registered proprietor, although his Honour commented it has been suggested that it may be based on actual knowledge that a fraud was committed or wilful blindness to that possibility (see [124]).

Here statutory fraud was not pressed by the plaintiff, but the in personam exception to indefeasibility was sought to be relied upon. As the Privy Council said in Frazer v Walker, indefeasibility “in no way denies the right of a plaintiff to bring…a claim in personam, founded in law or equity, for such relief as a court acting in personam may grant“. However such claims must be brought under established causes of action, whether legal or equitable. Not all established causes of action, however, will found an exception on indefeasibility of title (see issue 4 below).

Thus the answer to this question of whether the Instrument of Charge became enforceable against the nominated purchaser Aero Developments, depended upon the answer to the next question.

3. Whether Mathieson Nominees had an in personam right capable of defeating the title of Aero Developments

(a) Was there any conduct on the part of Aero Developments giving rise to a personal equity which could defeat indefeasibility of title?

Vickery J held that there was no conduct on the part of Aero Developments, either before registration of its interest or after it, which gave rise to any personal equity in Mathieson Nominees such that the interest of Aero Developments as registered proprietary ought to be rendered subject to the Instrument of Charge (see [131]).

Aero Developments had changed hands and had new directors shortly before taking transfer of the land from VicUrban, and the evidence was that when it did so, it took title without any knowledge of any intention on the part of Sprint Homes or its director Mr Evans to defeat the claims of Mathieson Nominees, if ever that was their intention (see [133]). His Honour held that Aero Developments took the transfer of the Property without notice, actual or constructive, of the equitable mortgage comprised in the Instrument of Charge of Mathieson Nominees ([135] and [153]-[154]). In doing so, he noted that when Aero Developments took its transfer there was no caveat lodged against the title by Mathieson Nominees ([136]).

(b) Did Mathieson Nominees have a Barnes v Addy claim for knowing receipt and/or knowing assistance against Aero Developments

Vickery J considered the pleadings, arguments, authorities, and evidence, and held that they did not ([155]-[197]).

I pause here to note:

For those unfamiliar with what a Barnes v Addy claim is – it is a claim brought by a plaintiff not against the wrongdoer who has acted in breach of trust or of fiduciary duty, but against a third party. Third party liability is more commonly pursued by claimants where misdirected funds or property has ended up in the hands of a third party, and/or where the wrongdoer is insolvent or bankrupt. However, certain elements must be established before such a claim can succeed.

In 1874 Lord Selborne made his now famous remark in Barnes v Addy as to the liability of third parties for the breaches of duty of others in two types of cases. What he actually said was this –

“[S]trangers are not to be made constructive trustees…unless [they] receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

Stemming from this brief, deceptively simple remark, much case law and academic writings have ensued. There have been shifting doctrinal analyses about the two “limbs” of Barnes v Addy (being “knowing receipt” or “knowing assistance”), debate as to the level of knowledge required under each limb (largely now settled in Australia) and debate as to the level of “dishonest and fraudulent” design required to be shown on the part of the party who acted in breach of trust or fiduciary duty as an element of the “knowing assistance” limb (there is something of a WASCA (Bell) v NSWCA (Hasler) battle being waged on this issue; I am inclined to see Hasler as the better view (link)).

Returning to the present case, here Mathieson Nominees had argued that the director of Sprint Homes Mr Evans in breach of his fiduciary duty to Sprint Homes had procured for the benefit of Aero a windfall to the detriment of Sprint Homes and its creditors ([158]). However his Honour held that on the evidence there was no breach of any relevant fiduciary duty on the part of Mr Evans to his company Sprint Homes ([171]-[194]). There were sound commercial reasons for the nomination of Aero Developments to complete the contract, and no breach of duty arose.

There having been no breach of trust, there was none of which Aero Developments, its directors and relevant agents could have known. There was no Barnes v Addy claim available to Mathieson Nominees, under either limb ([196]-[197]).

4. A Barnes v Addy claim does not defeat indefeasibility of title under the TLA

Importantly, Vickery J went further and confirmed that it has been authoritatively determined that a claim under Barnes v Addy is not a personal equity which defeats the indefeasibility provisions of the TLA, observing that “the dust has settled” on the issue ([198]-[206]).

In Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 Tadgell JA, with whom Winneke P agreed, held at 156-7 that a claim under Barnes v Addy was not a personal equity which defeated indefeasibility of title, saying:

“[T]o recognise a claim in personam against the holder of a mortgage registered under the TLA, dubbing the holder a constructive trustee by application of a doctrine akin to “knowing receipt” when registration of the mortgage was honestly achieved, would introduce by the back door a means of undermining the doctrine of indefeasibility which the Torrens system establishes…In truth, I think it is not possible, consistently with the received principle of indefeasibility as it has been understood since Frazer v Walker and Breskvar v Wall, to treat the holder of a registered mortgage over property that is subject to a trust, registration having been honestly obtained, as having received trust property. The argument that the appellant is liable as a constructive trustee because ‘it had ‘knowingly received’ trust property should in my opinion fail.”

While there had been some debate about this in Queensland ([199] and [203]) and in Western Australia where four judges of the Full Court of the WA Supreme Court followed the reasoning of Tadgell JA and Winneke P in Macquarie Bank v Sixty-Fourth Throne ([204]), in Farah Constructions v Say-Dee [2007] HCA 22; 230 CLR 89, 140 [193]-[196] the High Court resolved the question by adopting the observations of Tadgell JA in Macquarie Bank, and applying it –

“In Macquarie Bank v Sixty-Fourth Throne Pty Ltd Tadgell JA (Winneke P concurring, Ashley AJA dissenting) held that a claim under Barnes v Addy was not a personal equity which defeated the equivalent of s 42(1) in Victoria, namely the Transfer of Land Act 1958, s 42(1)… (at [193])

“That reasoning…applies here…”. (at [194])

“Although the Court of Appeal [ie the NSW Court of Appeal in Farah Constructions v Say-Dee] referred to Macquarie Bank v Sixty-Fourth Throne Pty Ltd on another point, it did not refer to that case or LHK Nominees Pty Ltd v Kenworthy in relation to indefeasibility. It ought to have followed those cases.” (at [196])

Vickery J concluded that although this outcome has been the subject of academic criticism, Farah Constructions v Say-Dee on the issue of indefeasibility has settled the law in Australia. [206]

In the end, his Honour held, Mathieson Nominees’ claims under Barnes v Addy must fail. The caveat was ordered to be removed from the title to the Property.

Take-aways

This decision is a useful reminder of the importance for lenders of lodging caveats on the title of property when a caveatable interest in property is created in their favour. In this case, the Instrument of Charge was executed by Sprint Homes on 18 April 2008, registered with ASIC on 2 June 2008 , but a caveat on the title of the Property (for the payment of the deposit on which the funds had been loaned) was not lodged until 22 January 2010 – 11 days after administrators were appointed to Sprint Homes and 3 months after Aero Developments had been registered on title.

It also contains a useful consideration of when an instrument of security may give rise to an equitable charge or an equitable mortgage, which can run contrary to the name given to the security by the parties, as it did here, and will turn more upon the proper construction of the instrument and the rights that accrue to the secured party under the agreement.

Finally, this judgment confirms that it is settled law in Australia, since the High Court’s decision in Farah Constructions v Say-Dee in 2007, that a claim under Barnes v Addy is not a personal equity which can defeat indefeasibility of title in Torrens land (see [205]-[206]).

There may remain those who will still seek a way to argue around this conclusion, but the High Court’s decision in Farah v Say-Dee – which dealt with both limbs of Barnes v Addy – is likely to present a sizeable road-block to such an attempt.

For more about Barnes v Addy claims (both limbs), the level of knowledge required to establish them (of the Baden categories of knowledge) and the dishonest and fraudulent design on the part of the party in breach of trust or fiduciary duty required to be established for the “second limb”, knowing assistance, see my 2012 article reviewing the Full Court of the Federal Court’s decision in Grimaldi v Chamelon Mining NL (No 2) [2012] FCAFC 6, which may be read here.

Comment

It is not only freehold titles to which these principles apply. Registration of leases of greater than 3 years under s 66 of the TLA also operate to confer leasehold title upon the registering lessee, and indefeasibility of that title under ss 40-44 of the TLA (see Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [51]) and Quest Rose Hill Pty Ltd v The Owners Corporation of Strata Plan 64025 [2012] NSWSC 1548 at [72]-[78]. Similarly, a mortgage acquires indefeasibility upon registration, pursuant to s 74 and ss 40-44 of the TLA: see Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 at 156-7, where the registered title in question was that of a mortgagee. And by way of a recent illustration, last year in Perpetual Trustees Victoria Ltd v Xiao [2015] VSC 21, Hargrave J confirmed that the fact that the mortgagor’s signature on a mortgage did not, in the absence of fraud on the part of the mortgagee finance company, affect the indefeasibility of the mortgage when registered (see [82]) or the ability of the financier to enforce the mortgage (but only to the extent of the covenant for payment contained in the mortgage – see [83]-[85] – referring to Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188, 196) – see further [86]-[107].

 

Newflash: The Banks win special leave to appeal Bell Group to the High Court

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It is being reported that this morning, Westpac and the other 19 banks in the Bell Group litigation have won special leave to appeal their loss last year in the West Australian courts to the High Court of Australia.

At first instance in 2008 the Banks were ordered by his Honour Justice Owen to pay about $1.58 billion to the liquidators of Bell Group (link). Their appeal of that decision to the Court of Appeal of the West Australian Supreme Court failed – see that judgment here. This morning, the full bench of the High Court granted the Banks special leave to appeal.

The brief media report may be read here. And thus Australia’s reportedly most expensive and longest-running court case continues…