Adams v Holloway - [2017] SADC 50

District Court of South Australia
(Civil)
ADAMS v HOLLOWAY & ORS
[2017] SADC 50
Judgment of His Honour Judge Slattery (ex tempore)
7 April 2017
EQUITY - TRUSTS AND TRUSTEES - THE CESTUI QUE TRUST
In July 2005 the plaintiff was advised by her son Leith Adams to look to make an investment of the sum of $270,000 that had been borrowed against the plaintiff’s unencumbered house property in order to earn a living income of between $3,000 - $4,000 per month. To achieve an income of between $3,000 - $4,000 per month from such an investment, it was necessary to achieve a before tax and cost of funds return of between 14% and 15% per annum.
At the same time and again following the advice of her son Leith Adams, the plaintiff agreed for the settlement of the Malbara Investments Trust and the appointment of Ma and Pa Pty Ltd, a company that she controlled to be appointed as corporate trustee. That company was then to receive the sum of $270,000 for the investment and to be the vehicle through which she was to receive distributions of between $3,000 and $4,000 per month.
In August, September or October of 2005, Leith Adams became aware of the possibility of an investment in a venture proposed by the defendant Holloway involving the building of units on the Adelaide foreshore and at Port Lincoln. This proposed venture was discussed in a conversation between Leith Adams, Holloway and the defendant Morrison. Leith Adams and Morrison were known to each other and were friends. Morrison was known to the plaintiff. Prior to 2001, Holloway had acted as the accountant for the plaintiff and formerly for her late husband.
The venture proposed in the initial discussion between Leith Adams, Holloway and Morrison did not proceed. In October 2005, Leith Adams was present during a telephone discussion between Holloway and Morrison which occurred when Leith Adams and Morrison were at Tanunda. Holloway invited Morrison to invest $250,000 in a high risk high return investment with projected annual returns of between 10% and 50%. Leith Adams was not privy to that conversation and learnt of its detail after it ended. Morrison refused Holloway’s invitation.
Leith Adams then advised his mother to invest in the venture proposed by Holloway whilst acting under the mistaken belief that the proposal put by Holloway to Morrison concerned the building of units. Morrison and Holloway were not aware of the misunderstanding of Leith Adams about that conversation.
At the time, Leith Adams was facing serious criminal charges relating to misappropriation of investors’ funds from his own business. Leith Adams persuaded the plaintiff to use the borrowed sum of $270,000 to invest in the venture proposed by Holloway to Morrison. Knowing the certainty of his own incarceration, Leith Adams then eventually persuaded Morrison to use his company, Glen Elvie Pty Ltd, to purchase units in the BDB Unit Trust of which the defendant Aknot Pty Ltd was the trustee and of which Holloway was the sole director and shareholder.
In October 2005, Glen Elvie Pty Ltd became the legal owner of 270,000 units issued in the BDB Unit Trust and it held those units beneficially for the Malbara Investment Trust. Leith Adams made the whole of the arrangements for the transfer of purchase money for the units from the account of the plaintiff, to the Malbara Investment Trust, to Glen Elvie Pty Ltd and finally to Aknot Pty Ltd.
In October 2005, Leith Adams was found guilty of some of the charges he faced and was eventually imprisoned for a term of 4 years with a 2 year non-parole period.
In the period between October 2005 and December 2006, Holloway looked for an opportunity to invest an amount of $1.2million that he had gathered from a series of investors by their purchase of the units in the BDB Unit Trust. At that time, and until about 2007, Holloway was not aware of any relationship between Glen Elvie Pty Ltd and the trustee of the Malbara Investment Trust.
Some time during 2006, Holloway caused to be paid away to a company in Hong Kong called Eternal Good Pty Ltd operated by two of the investors in the BDB Unit Trust the whole of the trust funds of $1.2million. This company allegedly invested the trust money in a currency exchange day trading scheme and in which the whole of the funds of the unit holders were lost. At the time that these events occurred, Holloway remained unaware of the relationship between Malbara Investment Trust and Glen Elvie Pty Ltd and the status under which Glen Elvie Pty Ltd held the units in the trust.
Aknot Pty Ltd as trustee did not purport to exercise any controls over this investment, abrogated its responsibilities as trustee to an entity in Hong Kong where it exercised no controls of any nature over the investment. Aknot Pty Ltd did not keep or maintain proper accounts, did not prepare cash statements, general ledgers, balance sheets or any other form of financial record of and about the investment of the trust funds with Eternal Good Pty Ltd. Aknot Pty Ltd did not know what investments were to be made by Eternal Good Pty Ltd using the trust funds, what was the risks of any such investment, how it was to occur, where and over what period it was to occur and in what type of product the investment would be made.
The plaintiff now claims to be the trustee of the Malbara Investment Trust and in that capacity sues Morrison under an alleged loan agreement and Aknot Pty, Glen Elvie Pty Ltd and Holloway for direct and accessorial liability on the basis that they were all guilty of misrepresentation and accessorial conduct. The plaintiff further seeks orders under s 12AC of the ASIC Act for the consequences of allegedly unconscionable conduct.
Held:
The plaintiff’s claim as pleaded fails:-
1. Holloway and Aknot Pty Ltd were unaware of the involvement of the Malbara Investment Trust in the purchase of 270,000 units in the BDB Unit Trust;
2. Holloway and Aknot Pty Ltd made no representation to and had no contact with the Malbara Investment Trust, the plaintiff or any of the Adams’ interest in and about the purchase of the 270,000 units in the BDB Unit Trust;
3. As Holloway and Aknot Pty Ltd were unaware of the position of the Malbara Investment Trust or any Adams’ interest, they were not and could not have acted unconscionably towards them and as a result, no liability arises under s 12CA Asic Act or under any other Act;
4. The relationship between the Malbara Investment Trust and Glen Elvie Pty Ltd was an implied or constructive trust arising by operation of law under which Glen Elvie Pty Ltd legally owed the 270,000 units in the BDB Unit Trust beneficially for the (trustee of the) Malbara Investment Trust;
5. Glen Elvie Pty Ltd fulfilled all of its obligations as trustee under such a trust including accounting for any redemption received from Aknot Pty Ltd;
6. At no time was any loan made by Malbara Investment Trust to Morrison or Glen Elvie Pty Ltd and that relationship was at all times as trustee and cestui que trust;
7. No claim arises under the third party action against Leith Adams as no claim has been made out against the defendants by the plaintiff.
Observations
8. Aknot Pty Ltd breached the whole of its duties as a trustee of the BDB Unit Trust in allowing or causing the investment of the trust fund in an investment in Hong Kong of which it knew nothing and about which it could not exercise any controls or responsibilities;
9. The claims and rights of action that exist between a cestui que trust and the trustee of the trust for breach of duty as a trustee;
10. The liability of a director of a corporate trustee for breach of trust by that trustee where that director made the decisions that constituted the breach of trust and which decisions were a breach of the relevant duties owed by such a director to the corporate trustee;
11. The liability of Holloway as the director of Aknot Pty Ltd, the trustee of the BDB Unit Trust;
12. Whether and to what extent liability may arise under Chapter 5C and Chapter 7 of the Corporations Act when the invitation to invest is made to less than 20 persons in respect of a unit trust.
13. That if, within time, the plaintiff had through Glen Elvie Pty Ltd taken an action directly against Holloway and Aknot Pty Ltd or alternatively caused Aknot Pty Ltd to bring an action against Holloway, there was available a cause of action under which Holloway could be asked to compensate Aknot Pty Ltd for the loss and damage sustained as a result of Aknot Pty Ltd acting in breach of its duties as a trustee of the BDB Unit Trust.
Jacobs’ Law of Trusts 7th ed, LexisNexus Butterworth, JD Heydon and MJ Leeming; Corporations Act s 9, s 79, s 601 ED, s 706, s 707, s 708, s 709, s 710, s 760, s 761A, s 763A, s 763B, s 764A, s 766A, s 766B, s 769C, s 791A, s 911A, s 911B, s 911C, s 912A, Chapter 5C, Chapter 6D; Trustee Act s 7, s 8, s 84B; Trustee (Investment Powers) Amendment Act 1995 Generally; On Equity Young, Croft and Smith, Lawbook Co, 2009; Kerr on Fraud and Mistake McDonnell and Monroe (1952) p 1; ASIC Act (2001) s 12CA ; Limitations of Actions Act s 48; Ford H, Lee WA, Bryan M and McDermott P, Principles of the Law of Trusts (Thomson subscription service) at [14.3030]; Charlesworth on Negligence RA Percy MA, Sweet and Maxwell Ltd (1971), referred to.
Fouche v The Superannuation Fund Board (1952) 88 CLR 609; ASC v AS Nominees (1995) 62 FCR 504; Daniels v Anderson (1995) 37 NSWLR 438; Charitable Corporation v Sutton (1742) 2 Atk 400; Barnes v Addy (1874) LR 9 Ch App 244; Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89; Briginshaw v Briginshaw (1938) 60 CLR 336; Baden v Societe Generale [1993] 1 WLR 509, discussed.
Erwin v Shannons Brick, Tile and Pottery Co Ltd (1938) SR (NSW) 555; Clay v Clay (2001) 202 CLR 410; Caffrey v Darby (1801) 6 Vses Jun 488; 31 ER 1159; Clough v Bird (1838) 3 Ny and Cr 490; 40 ER 1016; Nocton v Lord Ash Burton [1914] AC 932; Maguire v Makaronis (1997) 188 CLR 449; Charles v Federal Commissioner of Taxation (1954) 90 CLR 598; Sidey v Huntly (1900) 21 LR (NSW) Eq 104; Learoyd v Whiteley (1887) 12 App Cas 727; Cowan v Scargill [1985] Ch 270; Freeman v Fairlie (1817) 3 Mr 27; White v Lady Lincoln (1803) 8 Ves 363; Charitable Corporation v Sutton (1742) 2 Atk 400; Attorney General v Wilson (1840) 10 LJCh 53; Joint Stock Discount Co v Brown (1869) LR 8 Eq 381; Wilson v Lord Bery (1880) 5 QBE 518; Shuster v North American Mortgage Loan Co (1942) 40 ME 2 d 130; 7 G Ranching Co v Stewart Title and Trust of Tucson (1981) 627 P 2 d 1088; Young v Murphy (1994) 13 ACSR 722; Biala Pty Ltd v Mallina Holdings Limited (1993) 11 ACSR 785; Derry v Peek (1889) 14 App Cas 337, considered.

ADAMS v HOLLOWAY & ORS
[2017] SADC 50
The parties

In this action, the plaintiff Barbara Adams sues in her capacity as a trustee of the Malbara Investment Trusts and not in her personal capacity. In the course of this trial, a Mr Chatham has appeared by leave of the court as a McKenzie friend for Barbara Adams.
The first defendant, Holloway, was an accountant. He has now retired. He is a former director of the second defendant Advantage Business Specialists Pty Ltd and was the sole director and shareholder of the third defendant. An accounting practice associated with the first defendant and related to the second defendant formerly did the accounting and tax work for the family of Barbara Judith Adams. That family previously operated as farmers at Francis in south eastern South Australia.
The second defendant is a corporation which operated through the first defendant as an adjunct to the accounting practice. The third defendant Aknot Pty Ltd of which the first defendant was the sole director and shareholder but which is now de-registered, was the trustee of the BDB Unit Trust. There is no evidence before me of the state of that trust and it appears to have fallen into abeyance or disuse. There is no evidence that it has been wound up. The first defendant appears to have arranged for the settlement of that trust.
The fourth defendant Mr Morrison was a friend of the plaintiff Mrs Adams as well as being the friend of her son Mr Leith Adams the third party in the proceedings. Mr Morrison had been involved in promoting a number of the same commercial matters with Mr Leith Adams but not under any business connection such as a company, partnership or joint venture.
The fifth defendant Glen Elvie Pty Ltd is the trustee of the LR Morrison Family Trust; Glen Elvie is not sued in its capacity as trustee of that trust. It purchased 270,000 units in the BDB Unit Trust on or about 18 October 2005. The circumstances surrounding purchase of those units and the resultant consequences of that purchase are the substance of this action.
Mr Leith Adams, the son of Barbara Judith Adams, was joined to this action by the defendants as a third party.
A factual summary, the result and findings
Prior to on or about 18 October 2005, Barbara Adams was a client of the accounting firm with which Mr Holloway was associated. It traded under the name Advantage and it operated as accountants, tax agents and financial advisers. Mrs Adams' husband passed away in 2003. Mr Holloway through Advantage was engaged by Mrs Adams in relation to her late husband's estate. Mr Holloway attended to the completion of some of the accounting issues and the introduction of solicitors to finalise the administration of the deceased estate.
Following the death of Mrs Adams’ husband and in the administration of her estate, Mrs Adams became the registered proprietor of an unencumbered property at Highbury in South Australia. By survivorship she also became the owner of the farm at Francis. That farm was sold and after expenses a capital amount of $600,000 was generated.
At the behest and following the advice of Leith Adams, the proceeds of the sale of the farm were invested in a company called Anglo Far-East Pty Ltd which was at the time a gold and silver bullion trader. The purpose of that investment was to provide a cash flow for Mrs Adams to live on; at the time Mrs Adams owned more capital and assets than was allowed for her to receive a pension.
The original investment in Anglo Far-East Pty Ltd which I am satisfied was arranged by Leith Adams with involvement from other persons, originally provided a cash flow of about $3,000 a month. That changed in about July 2005 when Mrs Adams was informed that the structure of the investment was changing and it was no longer to be a cash flow account but a capital growth account; the investment was not redeemed at that time.
I am satisfied on the evidence that Mr Leith Adams was the person who controlled and made all the decisions on this investment on behalf of his mother. I am also satisfied that sometime during 2006 that investment was redeemed; there is no evidence of the amount received on redemption or what was done with those funds.
In the middle of 2005 Mrs Adams obtained a line of credit of $320,000 from what was initially described as Perpetual Securities but later Accend. She obtained that line of credit by using the Highbury property as security for the arrangement. That advance came at a cost of a fixed rate of interest of 7.48% on funds drawn down for the first 12 months of its operation. There was to be a variable interest rate after that time. The evidence is that the interest rate did not vary after that first twelve months.
I am also satisfied that this loan was arranged by Mr Leith Adams together with a friend of his, Mr Phil Lohrey. Mr Leith Adams gave evidence that Mr Phil Lohrey at that time worked for a firm called Bulletproof Asset Protection. This business apparently specialised in asset protection. I have significant doubts whether that business could boast such skills but I do not need to make any findings on that topic. Regardless, this line of credit arrangement was fraught. If it was drawn down, it attracted a cost of funds and so it was no different from Mrs Adams borrowing to sustain herself.
Mr Leith Adams gave evidence that the loan was to soak up equity in the house at Highbury. He suggested that Mrs Adams might be at risk of losing the house due to a family dispute regarding the estate of his late father. There was no evidence from Mrs Adams on this topic and I am not prepared to accept that evidence of Leith Adams. I consider that for the reasons that I set out below, this scheme was doomed to fail. I also consider that in the formation of the scheme Mrs Adams was very badly advised. She was commercially naïve and she trusted her son Leith to advise her. That trust was hopelessly misplaced.
That proposition is easily tested. The cost of the funds borrowed by Mrs Adams was 7.48% and it was planned to invest those funds to generate a similar income for Mrs Adams as she had received from Anglo Far East. Any investment by Mrs Adams using those funds must at the very least achieve a return of not less than 7.48% plus expenses, less any tax exposure that might have been payable by Mrs Adams in relation to that investment. She had previously been receiving about $3,000 per month and therefore at that rate of income, of $36,000 per year, she would have been a taxpayer and was required to lodge tax returns. Thus it may be roughly estimated that Mrs Adams needed to generate an income of a return on the capital of about 14% to 15% per annum to maintain her cash position per month.
At about this time Mr Lohrey, who was not a solicitor and who had no legal training, arranged for a trust to be settled. It was called the Malbara Investments Trust. The evidence is that Mr Leith Adams and Mr Lohrey suggested the settlement of this trust. Mrs Adams had and has no understanding of trust arrangements. There is no evidence of the qualifications of Mr Lohrey to advise on such matters. The deed of settlement establishing the Malbara Investments Trust is at p.118 of Exhibit P1. A company called Ma and Pa Pty Ltd was incorporated in 2005. Mrs Adams was the sole director and shareholder of that company. Ma and Pa Pty Ltd was appointed as the trustee of the Malbara Investments Trust. The beneficiaries of the trust were within a fixed group or range, namely, Mrs Adams and her four children. Ma and Pa Pty Ltd is now deregistered.
The court heard in evidence, but without any proof, that Mrs Adams is now the trustee of the Malbara Investment Trust. I will proceed on that basis because in the end it makes little difference to the result in this matter: if the position were otherwise I would have required proof of this contention.
In her evidence Mrs Adams did not explain the reasons for the creation of the line of credit other than she was advised to do so. She originally stated that Mr Morrison was involved in the arrangements for the creation of the line of credit, but that was later corrected in further evidence. I would reject any suggestion that Mr Morrison had any involvement in the obtaining of the $320,000 loan and I find that he was not so involved.
It was clear from all of the evidence before the court that Mrs Adams did not completely understand what she was investing in despite the discussions she had with Leith Adams and Mr Lohrey. She did not understand the concept of trusts nor did she understand the risks associated with any investment of the borrowing made under the line of credit secured over the Highbury property. She did not understand the return that she would need to generate on the investment of such funds to pay for the cost of funds, tax and other expenses.
She thought that the loan of $320,000 was to be used for living expenses but it required investment of this capital sum in an income generating venture in order to receive a return for income. Mrs Adams gave evidence that after further discussions with both Mr Lohrey and Mr Leith Adams she made a decision to make an investment in the BDB Unit Trust. She said that the intention was to provide a stream of income. Her understanding of the BDB Unit Trust was that she would gain an income through the trust's building of units. She could only have obtained that understanding from Mr Leith Adams. In so deciding, she adopted suggestions made to her by Leith Adams. In evidence, Mrs Adams attempted to convince me that these investments were the result of her considered decisions. I am unable to accept that evidence and I am satisfied that all decision making rested with Mr Leith Adams. Mrs Adams adopted his suggestions and the investments that he proposed and then authorised.

Mrs Adams said in her evidence that Mr Morrison was also involved in discussions about the investment in the BDB Unit Trust. I do not accept that assertion because it was later disclosed in cross- examination that Mrs Adams was confused and that Mr Morrison was not present for any conversations with Mr Lohrey, Mr Adams and herself.
I am satisfied that the advice in relation to the investment of the BDB Unit Trust came only from Mr Leith Adams and I am satisfied that he advised his mother to invest in that trust. I am also satisfied that that advice followed a telephone conversation between Mr Holloway, the first defendant, and Mr Morrison that was overheard by Mr Leith Adams when he and Mr Holloway were in Tanunda.
In that telephone conversation Mr Holloway asked Mr Morrison to invest in the unit trust. It was after Mr Morrison stated that he did not have any funds that another conversation occurred between Mr Morrison and Mr Leith Adams. An earlier conversation had occurred between Mr Morrison, Mr Holloway, and Leith Adams at a hotel in Adelaide concerning the investment in building units. That conversation went nowhere. It was Mr Holloway doing no more than speculating “in the air” about the possibility of setting up such an investment. For reasons which are completely unclear to me Leith Adams seized upon this conversation and made an assumption that whatever Mr Morrison and Mr Holloway were talking about in the Tanunda phone call, it was about the investment in the building units.
In purchasing the units in the BDB Unit Trust, Mrs Adams was of the impression that she would be receiving a return of between $3,000 and $4,000 per month. She thought it was a building project. Both of these pieces of information could only have come from Leith Adams. There is also no evidence that she was told of any loan to Mr Morrison or to Glen Elvie Pty Ltd, and any assertion of that fact can only have come from Leith Adams. For reasons that I will discuss, no loan arrangement was ever made.
I am satisfied that the investment in the BDB Unit Trust was made through payment from the account of the trustee of the Malbara Investments Trust with the Lutheran Laymen's League (LLL) to the account of Glen Elvie Pty Ltd, a company which Mr Morrison controlled. I am satisfied that Glen Elvie held those funds in the course of a fiduciary relationship of an implied trust or a constructive trust arising by virtue of the circumstances and by operation of law.
I am mindful that as Sir Frederick Jordan explained,[1] a trust is a fiduciary relationship but every fiduciary relationship is not a trust.[2] In the 7^th edition of Jacobs’ Law of Trusts[3] the learned authors at [202] state as follows:-
The distinguishing element of a fiduciary relationship is that its purpose or essence is to serve exclusively the interest of others or, put negatively, it is a relationship in which the parties are not free to pursue their separate interests...
[1]    Erwin v Shannons Brick, Tile and Pottery Co Ltd (1938) SR (NSW) 555 at 563.
[2]    See also Clay v Clay (2001) 202 CLR 410 at [35].
[3]    LexisNexus Butterworth: JD Heydon and MJ Leeming.
It is well accepted that fiduciaries and trustees owe different duties. The learned authors at [208] state as follows:-
Trustees and fiduciaries owe fiduciary duties, which are breached in different ways and breaches give rise to different remedies at the suit of different plaintiffs. The High Court has said:[4]
Whilst the trustee is the archetype of the fiduciary, the trust has distinct characteristics. In particular, where a trust is created by will or settlement in traditional form, the trustee holds title to property on behalf of beneficiaries or for charitable purposes. If the trust be still subsisting, the objective of an action to recover loss upon breach of trust is the restoration of the trust fund. The right of beneficiaries is to have the trust fund reconstituted and duly administered, rather than to recover a specific sum for the sole use and the benefit of any beneficiary. Indeed no one particular beneficiary may have sustained a present and individual loss. This may be so if the trust is a discretionary trust or no interest vests, either in interest or possession before the termination of a prior interest. Further, the particular breach of which complaint is made may be consequent upon failure in observance of one or other of the duties which attend trust administration, such as those to make only authorised investments and to use due diligence and care in the administration of the trust. 19^th century authorities such as Caffrey v Darby[5] and Clough v Bird[6] concerned failure to observe these rules for due administration rather than that disloyalty and conflict between interest and duty which was considered in Nocton v Lord Ash Burton.[7]
A useful rule of thumb is that ordinarily, trust property does not vest in a fiduciary and so, in that circumstance, a fiduciary would not be described as a trustee. The position is different where a property is vested in a fiduciary. One example of an ordinarily recognised fiduciary relationship is that of agency. Such a relationship can also constitute a trust relationship where trust property is vested by the principal in the agency. This will not include money but only actual title to property. There is also a difference in that, as an agent, that person may only deal with the property strictly in accordance with the directions of the principal. Such an agent has no powers or discretion as might normally be expected of a trustee.
[4] Maguire v Makaronis (1997) 188 CLR 449 at 473.
[5] (1801) 6 Vses Jun 488; 31 ER 1159.
[6] (1838) 3 Ny and Cr 490; 40 ER 1016.
[7] [1914] AC 932.
In the present case, the investment by Glen Elvie Pty Ltd in the issued units of the BDB Unit Trust occurred in circumstances where the funds for that investment were all provided by the trustee of the Malbara Investment Trust. The payment of funds was made through the bank account of Glen Elvie Pty Ltd to Aknot Pty Ltd as the trustee of the BDB Unit Trust. In return, the units were issued and those units were always legally owned by Glen Elvie Pty Ltd. There was no assignment of any interest in those units to the trustee of the Malbara Investments Trust. In those circumstances, the units constituted the trust assets held by Glen Elvie Pty Ltd in trust for (the trustee of) the Malbara Investments Trust.
Glen Elvie Pty Ltd was in a position where it was more than merely in a fiduciary relationship. This was because Glen Elvie Pty Ltd legally owned the units in its name for the benefit of the Malbara Investments Trust. Although in one sense it could be described as a mere conduit because it continued to hold the units in its own name, Glen Elvie Pty Ltd was clothed with the obligations of a trustee only in respect of those units. The difference in this instance is that Glen Elvie Pty Ltd did not have any discretion about the investment of the funds belonging to the Malbara Investments Trust. To that extent, it did not fulfil one of the usual categories of the position of a trustee, namely the discretion to invest. The absence of that discretion is not fatal in any sense to a finding that Glen Elvie Pty Ltd at all material times acted as a trustee when holding the units in the BDB Units Trust for the benefit of the Malbara Investments Trust.
That trust relationship obliged Glen Elvie to account for the receipt of any returns on that investment to the trustee and to account for the receipt of the corpus of the investment amount on redemption. For reasons that remain unexplained the investment failed and all of the funds were lost. The evidence shows that there has been a return of only $50,000 to the plaintiff through Glen Elvie; this resulted from the redemption of units.
I am satisfied that the plaintiff's pleaded claim fails. All of the decisions for the investment of the $270,000 were made by, at the behest of and under the control of Mr Leith Adams. Mr Leith Adams had a conversation with Mr Holloway and Mr Morrison in Adelaide in August, September, or October 2005 about the possible investment of an amount in the building units on the foreshore of Adelaide but nothing came of it. The discussion was no more than the musings of Mr Holloway about investment possibilities.
The later October conversation occurred when Mr Holloway called Mr Morrison at the time Mr Morrison and Leith Adams were in Tanunda. Mr Leith Adams heard only half the conversation and later Mr Morrison told him generally the outline of the proposal suggested by Mr Holloway. Mr Leith Adams misunderstood what he was told and assumed that it was an investment in some form of building scheme that would repay an investor with a fixed return. It was then that Mr Leith Adams persuaded the plaintiff trustee to invest in the scheme.
I am not satisfied of the reasons given by Mr Leith Adams for using Mr Morrison as an intermediary. The evidence discloses that Mr Morrison was asked on the first occasion whether he would be the conduit of the investment in the BDB Unit Trust and he refused. A second offer was made in which he was offered 50% of the return as a fee for the use of his company to make the investment. He agreed to this proposal and the investment was made through Glen Elvie Pty Ltd. That is why I am satisfied that Glen Elvie Pty Ltd was a trustee in respect of the receipt of those funds and the legal ownership of those units.
Mr Leith Adams set up all of the bank accounts and the bank transfers constituting the sum of $270,000 but he did not ascertain the nature of the investment. He gave the instructions to Mr Morrison without first identifying the investment, the risks associated with it, who was responsible to control this investment and its performance. As a result, Glen Elvie was a trustee only in relation to the legal ownership of the units issued for the purchase price of $270,000, for the proceeds earned on the investment and the accounting for the corpus upon redemption; Glen Elvie fulfilled these obligations.
Once the investment failed, Glen Elvie was under no further obligations as trustee and there was no further accounting to be done.
I am satisfied for the reasons which I will set out below that this result can only be lain at the feet of Leith Adams and I make the following findings:
1.No representation was ever made by Mr Holloway or Aknot Pty Ltd to Leith Adams or to the trustee of the Malbara Investments Trust.
2.No contract was ever entered into between Mr Adams or Ma and Pa Pty Ltd or Mrs Adams with Mr Holloway or Aknot Pty Ltd.
3.Glen Elvie Pty Ltd was only dealing with Mr Holloway and Aknot Pty Ltd in its capacity as a trustee for the Malbara Investments Trust as cestui que trust.
4.Glen Elvie's only obligation was to invest funds as directed and then to account as trustee, which I am satisfied has occurred.
5.Leith Adams did not receive confirmation of the nature of the unit trust investment. Whatever may have been thought by Mr Leith Adams, his beliefs in relation to the investment were mistaken.
6.Mr Holloway thought that Aknot Pty Ltd as trustee of the BDB Unit Trust was dealing with Glen Elvie Pty Ltd.
7.Mr Holloway knew nothing of the involvement of Ma and Pa Pty Ltd or Mrs Adams until 2008 or 2009.
8.Neither Mr Holloway or Aknot Pty Ltd or the Advantage Business Specialists Pty Ltd had any legal or other form of relationship with Ma and Pa Pty Ltd involved with, arising out of or as a consequence of the investment in the unit trust.
9.Subject to one matter that I will discuss later the pleaded case of the plaintiff, whether at common law, statute or in equity, does not give rise to any right, duty, interest or obligation between the plaintiff, Ma and Pa Pty Ltd, Mr Holloway, the second defendant or the third defendant arising from the investment in the unit trust. There was no contract of loan with Glen Elvie Pty Ltd and no debt was owed by Mr Morrison. If it was suggested to be a loan, it could only have been a loan to Glen Elvie Pty Ltd but I am satisfied that none existed. Glen Elvie acted as a trustee and fulfilled its obligations to the trustee of the Malbara Investments Trust.
The plaintiff’s claim in this action fails.
The pleaded case: the statement of claim is not sustainable on the facts
I turn to the pleaded case in the statement of claim. I am satisfied that para.7 cannot be sustained. It alleges an agreement in the following terms:-
Prior to and on 18 October 2005 the first and fourth defendants by themselves and the first defendant as an officer servant and agent of the second defendant and the fourth defendant as an officer servant and agent of the fifth defendant represented to the plaintiff that if she deposited with them $270,000 (the principal sum) for 12 months from 18 October 2005 they would pay her interest on the principal sum at the rate of 20% per annum together with the profit they would derive from a property development project amounting to a total amount of 30% per annum.
PARTICULARS
The defendants warranted to the plaintiff that the principal sum would be deposited by them in a term deposit for 12 months and not be ‘touched’ or withdrawn by them but held as security for the defendant’s borrowings for their property development project. The principal sum interest and profits would be repaid to the plaintiff at the end of 12 months.
There was no evidence before the court of any such agreement and no party pressed the court to make a finding of such an agreement.
I am satisfied that there was never an arrangement between any of the parties whereby there would be a guaranteed payment of 20% per annum together with a further payment of 30% per annum on the investment sum of $270,000. There is no evidence suggesting that such an agreement was made, was discussed as a possibility or was even contemplated by the parties.
I am of the view that para.8 of the statement of claim is wrong. That paragraph reads as follows:-
8.As a consequence of the inducements made to her by and on behalf of the defendants the plaintiff withdrew the principal sum from her account with the Lutheran Laypeople’s League and by electronic transfer the money was paid into the account of the fifth defendant in its capacity as trustee of the L R Morrison Family Trust.
I am satisfied from the evidence of Mr Morrison that Mr Leith Adams made all of the arrangements to facilitate the transfer of the capital amount of $270,000 to Glen Elvie Pty Ltd and then to Aknot Pty Ltd as trustee of the BDB Unit Trust. Mr Morrison had nothing to do with those transactions except to be aware of them and be aware of the obligations that were consequently accepted by Glen Elvie Pty Ltd in its capacity as trustee.
Para.9 is an allegation about a document. It reads as follows:-
9.The first defendant by himself and as servant agent and representative of the other defendants prepared and procured the plaintiff to sign a document in respect of her advancing the principal sum to and on behalf of the defendants. The plaintiff has never sighted or signed the document. The defendants have failed and refused to give the plaintiff a copy of the document.
PARTICULARS
The plaintiffs requests of the defendants for a copy of the document have been responded to with a direction that she contact the defendant’s solicitor. When contacted by the plaintiff the defendant’s solicitor informed the plaintiff that he had no instructions to release it or a copy of it to her.
There is no evidence about this alleged document and there is no evidence that such document ever existed.
The allegation in paragraph 10 reads as follows:-
10.At or about the time the plaintiff transferred the principal sum to the account of the fifth defendant the third defendant as trustee of the BDB Unit Trust issued 270,000 units in the trust to the fifth defendant. The defendants conspired with each other and themselves to pretend to the plaintiff that the creation of the units in the BDB Unit Trust gave the plaintiff security for the principal sum. That pretence was false and the plaintiff’s money was unsecured but the plaintiff did not know that. Had the plaintiff known that the money was to be unsecured she would not have advanced it to the defendants.
There is no evidence before the court of any conspiracy and none has been proved. There is also no evidence of any representations about any security and for the reasons that I will set out hereunder, there was no representations made to the plaintiff, Mrs Barbara Adams to Ma and Pa Pty Ltd or to Mr Leith Adams.
Paragraph 11 of the statement of claim reads as follows:-
11.During the first 12 months that the defendants had the use and control of the principal sum they paid no interest or other monies to the plaintiff. On maturity of the term the defendants requested to extend the term for repayment of the principal sum but to pay interest for a further 12 months compounding and the plaintiff agreed.
This paragraph is wrong in fact; the defendants did not have the use and control of the principal sum and the moneys were accounted for on the receipt by Glen Elvie Pty Ltd.
Paragraph 12 pleads as follows:-
12.During the second 12 months that the defendants had the use and control of the principal sum they paid no interest or other monies to the plaintiff. On maturity of the second term the defendants requested to extend the term for repayment of the principal sum but to pay interest for a further 12 months compounding and the plaintiff agreed.
There is no evidence to sustain these allegations. I am satisfied that any returns earned were paid. Further, any redemptions requested were made.
Paragraph 13 and 14 of the statement of claim reads as follows:-
13.During the third 12 months that the defendants had the use and control of the principal sum they paid no interest or other monies to the plaintiff. The plaintiff made a demand for the re-payment of the principal sum interest and profits and the defendants failed and refused to pay the plaintiff.
PARTICULARS OF THE PLAINTIFF’S CLAIM FOR INTEREST
Year 1 2005/6 $270,000 @ 20% pa -          $54,000
Year 2 2006/7 $324,000 @ 20% pa -          $64,800
Year 3 2007/8 $388,800 @ 20% pa -          $77,760
Year 4 2008/9 $466.560 @ 20% pa -         $93,312
Year 5 2009/10 $559,872 @ 20% pa -        $111,974.40
Year 6 2010/11 $671,846.40 @ 20% pa -    $134,369.28
Year 7 2011/12 $806,215.68 @ 20% pa -    $161,243.14
$697,458.82
14. The conduct of the defendants was unconscionable and in breach of s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth).
The allegations in para.13 are wrong factually and there was no such agreement in existence. The allegations of fact in para.14 are unsustainable on the evidence and I will develop that finding later in these reasons.
The plaintiff has not been able to prove on the evidence any aspect of its pleaded case and cannot sustain the pleaded causes of action. That is not to say that I have formed a view that there were no causes of action open to be pleaded by the plaintiff.
The evidence
I turn then to the evidence. Mrs Barbara Adams gave evidence that in 2003 she sold the family farm at Francis in the south east and generated about $600,000 after debts were discharged. She then came to live at the Highbury address. She became the proprietor of the Highbury home by survivorship after the passing of her husband. The property was unencumbered and freehold. Following the advice of her son Leith, she invested $600,000 in Anglo Far- East Pty Ltd and received a dividend flow of $3,000 per month but that was stopped in about mid-2005.
Mrs Adams went into that investment at the suggestion of her son Leith Adams. He was familiar with the principals/proprietors of the Anglo Far East business. This was a speculative investment in gold and silver bullion trading. It appears that Anglo Far-East changed the terms of the investment at its own election. This coincided with the ending of the monthly payments on this investment and its conversion to a capital fund. Thus the investment changed from a term investment with returns to an investment in a capital fund with a return upon redemption of the investment.

At about that time Leith Adams, with Mr Phil Lohrey, a friend of his, advised her to arrange a line of credit with Perpetual Securities later called Accend, using the Highbury house as security. This is a peculiar arrangement because whatever was to be done with the corpus of the loan, it carried a cost of funds that had to be covered after tax before any benefit could come from its use. At the outset the credit line was fully drawn down and was placed into a term deposit with the ANZ Bank. There is no evidence of the name of the account holder. The full corpus of funds invested amounted to $320,000.
Mr Lohrey arranged for the line of credit; he then arranged for the settlement of the Malbara Investments Trust and the appointment of Ma and Pa Pty Ltd as the corporate trustee. Mrs Adams knew nothing of those arrangements. She did not understand them and understood less about the settlement and operation of trusts.
Interest on the investment of that money in the term deposit with the ANZ Bank was paid into an account with LLL held in the name of Malbara Investments Trust. Eventually the full corpus of that fund was paid out of the ANZ term deposit and into that account.
Mrs Adams gave evidence that after further discussions with Mr Lohrey, Leith Adams and Mr Morrison, the decision was made to invest the funds from the term account into the Malbara Investments Trust. I do not accept this evidence and she later changed that evidence to correctly say that that decision was made in company with Leith Adams and Mr Lohrey. There is no evidence that the defendant Mr Morrison was in any way involved in any of the decisions made about this account. He had no detailed knowledge of these arrangements.
Mrs Adams was aware that once the money went into the Malbara Investments Trust Account it would be used to make an investment. She understood notionally at least that such an investment was intended to supply her with sufficient income on which she could live. She did not then receive a pension. She wished to be restored to the same position that she was formerly in with the Anglo Far East investment. That return was achieved from an investment of $600,000 and the amount to be invested under this scheme was about $300,000.
I am satisfied that Mrs Adams had little or no proper understanding of what this transaction was about. She had no contact with Mr Holloway or with Mr Morrison about it; she only spoke with Mr Leith Adams and Mr Lohrey about it and all the information that she possessed she gained from them. Her understanding was that the purpose of the investment was for the building of home units and for a guaranteed fixed income of $3,000 to $4,000 per month. This understanding was wrong, it was never a possibility and it could only have been given to her by Leith Adams. This collocation of events also amply displays the ignorance of Leith Adams about these matters. Only he could have given this information to his mother and it indicates that in so doing Leith Adams was operating under a complete misapprehension of the facts.
As will become clear, Leith Adams thought that he was guiding the Malbara Investments Trust into an investment in building units with some form of guarantee of a fixed return. There is no evidence of the basis on which he believed that there would be a fixed return. The reality was completely different. Mr Holloway did not know as at October 2005 where he could or should place this “book” of money including the $270,000 investment from Glen Elvie Pty Ltd. In the end the money was placed with other investors for use on day trading on currency movements. This did not occur until much later and it follows that in October 2005 Holloway had no basis to give Mr Morrison or anyone else an estimate of a return on investment.
Mrs Adams had known Mr Morrison, a farmer from Wangaratta for quite some time through her son Leith. They were friends. She had known of the existence of his company, Glen Elvie Pty Ltd. She knew of the payment made to Glen Elvie of $270,000 (P1, p.6), that occurred on 18 October 2005. She knew nothing of the status and character of the way that Glen Elvie received and dealt with those funds.
Mrs Adams agreed that this investment was made directly as a result of what Leith Adams told her and her expectancy that it would earn $3-4,000 per month but she cannot recall over what period that was to occur. She also recalls that the payments were stopped after she received about $50,000 but she thinks that she would have been in receipt of a pension by that time.
Mrs Adams intended by her evidence to give me the impression that she was the decision maker on these commercial matters. She also continuously reminded me that she had only been a farm housewife and usually deferred to others. I am satisfied that this is what occurred in this investment of the funds borrowed by the Malbara Investments Trust. Mrs Adams deferred to and followed the advice of Leith Adams. It was he who promoted the accumulation of the fund, the settlement of the trust and the investment with Holloway through Glen Elvie Pty Ltd. Mrs Adams had no understanding of these arrangements.
As a result of these events and the failure of the investment of the $270,000, she has had to sell the house at Highbury in about 2008. She wanted to redeem the investments in the BDB Unit Trust and she asked her son to do so but that has been unsuccessful. The Highbury home was sold in order to discharge the debt to Accend. She later had some discussions with Mr Holloway, which she said occurred on the steps outside of his office and Mr Holloway said to her words to the effect that payment would be forthcoming. That payment was never made and I can place little store on this alleged conversation because it was not sufficiently specific and it occurred well after the relevant event.
Mr Holloway is the controller of the trustee of the BDB Unit Trust and Mr Morrison through Glen Elvie Pty Ltd, paid the $270,000 to Aknot Pty Ltd in its capacity as trustee of the BDB Unit Trust.
Mrs Adams said in evidence that she authorised the payment of this sum to Aknot Pty Ltd through Mr Morrison because she felt as though Mr Morrison was managing the funds for her. I reject that evidence. I think that is a view that was introduced to Mrs Adams by Leith Adams. It is wrong because at no time was Mr Morrison managing funds for anyone. Glen Elvie held the investment in the units on trust for the Malbara Investment Trust. That investment was the only instruction given to Glen Elvie and so that company performed its obligations. It was also to account for returns on that investment subject to its 50% profit entitlement.
All of these events were associated with the upcoming criminal trial against Leith Adams that had been ‘in the wind’ since 2002. Mrs Adams knew that Leith Adams was incarcerated for a period of over 12 months. He was incarcerated on his evidence for about 18 months. He then had six months on home detention and had a two year non-parole period. I will discuss those matters later.
She recalls that the document Exhibit P1 p.39 was created. It was her understanding that the authority given to Mr Morrison to direct Mr Holloway to make payments was because Mr Morrison was managing the money. She had no concept that the direction was given because Mr Morrison controlled the company, Glen Elvie. She did not know that Glen Elvie Pty Ltd held the investment, on trust for the trustee of the Malbara Investments Trust.
Mrs Adams authorised the letter of demand, Exhibit P1 p.42. She said it was drafted by her son Leith. He faxed it to her and she returned it to him signed. It contains an allegation that a loan was made to Mr Morrison. I do not accept that any such loan has been proved on the evidence before the court. The assertion of the loan is factually wrong; it was suggested by Leith Adams. Mrs Adams did not have any idea why the letter used the term 'loan' and she did not know whether any response was received to that letter. She had no separate understanding that a loan was made to Mr Morrison. None has been proved and the relationship of trustee and cestui que trust was created between the trustee of the Malbara Investments Trust as beneficiary and Glen Elvie as trustee of the investment.
Mrs Adams was also unaware fully of the letter sent by Mr Francis, solicitor, to Leith Adams, which is Exhibit P1 p.46. It refers to an agreement. Mrs Adams agreed that she was aware from the time the investment was made that it would be repaid as and when funds become available. She really did not understand what the arrangements were because she did not understand the trust relationship that I have explained above.
I am also satisfied that later there must have been some discussion between Mrs Adams and Leith Adams about a trust relationship. She gave evidence that at one stage (she did not know when) that she believed that the funds were to be held in trust for a month. I am unable to accept any assertion that Glen Elvie was the entity through which the funds were to be invested for only a month. There is no evidence to support this assertion which must have originated with Leith Adams. Mr Morrison was not aware of such an arrangement and I accept his evidence on that issue.
Mrs Adams was also shown Exhibit P1 p.49, which is a letter from Leith Adams to the solicitor Francis. It states that the $270,000 was to be deposited into a term deposit with Mr Tony Holloway, in Adelaide for a period of 6 to 12 months, and the proceeds would be invested and split 50/50 between Ma and Pa Pty Ltd and Glen Elvie Pty Ltd. An inference arises that by this time Mrs Adams was aware of some different arrangement in relation to the investment of the funds, the involvement of Glen Elvie Pty Ltd and the arrangement as referred to by Mr Morrison's solicitor in his letter of reply. This information confirms my earlier stated views that all of the other contentions of Mrs Adams were wrong factually and the cause of these errors originated from Leith Adams.
Mrs Adams agreed that the repayment of the loan to Accend was required to be paid in the amount of about $1,900 per month, that the loan repayments were made from capital, and that she only had a passing understanding of the application for the issue of units and what that all meant. She had no independent understanding of the arrangement for the issue of units. She did not know what arrangement had been made and who had responsibility to control the investment. She had allowed all of those arrangements to be made by Leith Adams. She lived in a fog of ignorance and misunderstanding caused largely by her son Leith.
Mrs Adams was cross-examined and I do not intend to stay at any length with the matters raised with her on cross- examination. She said that she decided to invest in the BDB Unit Trust after consultation with Mr Leith Adams, Mr Morrison and Mr Lohrey, and that Mr Holloway was not involved. I do not accept that evidence insofar as it would involve Mr Morrison in that investment decision. I am satisfied that at the time the investment decision was made, it was done at the behest of Leith Adams and Mr Lohrey. Certainly neither Mr Morrison nor Mr Holloway were involved.
The confusion of Mrs Adams was shown when in answer to questions in cross-examination about the corpus of $270,000 and its repayment, she said that she could not distinguish between a loan and an investment. She confirmed in cross-examination by the second defendant that Leith Adams and Phil Lohrey did not have a conversation with Mr Morrison and Mrs Adams about the investment. She was told about the property development project by Leith Adams. She said that she learned from Leith Adams that he had discussed it with Mr Morrison. She agreed that she did not carry out the electronic transfer of funds, that she did know of the involvement of Glen Elvie Pty Ltd and that she relied on Leith Adams for all of this information.
Leith Adams told her that he thought Glen Elvie Pty Ltd was a better choice to use (as the investment vehicle) because he didn't think that he would be around and he wanted the money put with someone he could trust. At the same time she knew that Leith Adams was a director of a corporate finance broker that had misappropriated funds belonging to clients. In evidence there are letters written by Leith Adams to Ross Morrison from gaol in 2006 and early 2007. These reveal his concerns about how the investment in the unit trust was progressing. Somewhat naively, he refers to the possibility of a future investment in Anglo Far East of the capital to be redeemed from the BDB unit trust. He refers to a plan ‘A’ and “the boys”. Mrs Adams did not know what plan A was, but she knew that “the boys” referred to in correspondence were Philip Judd and Simon Heaps from Anglo Far-East Pty Ltd.
Mrs Adams was also labouring under the (false) misunderstanding that the prosecution of Mr Adams was “a load of rubbish” and it would be thrown out. However, she said that at the time that the investment was made, she was desperate to obtain for herself a steady income because she had no income, and she was receiving no return on the investment of $600,000 with Anglo Far East Pty Ltd. It was in that context that she understood that discussions had occurred between Leith Adams and Mr Morrison, with an aim to procure Mr Morrison's involvement in an investment through Glen Elvie Pty Ltd. However, she left all of those matters to Mr Leith Adams.
Mrs Adams did not know that Leith Adams arranged for the setting up of the account for Glen Elvie, for the transfer of funds from her account to the Malbara Investments Trust and then to Glen Elvie. She was not aware that Leith Adams had transferred the funds out of the Glen Elvie account on 18 October 2005. Therefore as the controller of the trustee or as trustee herself she had no knowledge of what was happening with the funds of the trust. She had received no communication from Mr Morrison or Mr Holloway about that transaction. She did not understand the transaction because she understood it was an investment in building units and she certainly did not understand that it was to be an investment in the BDB Unit Trust.
In the end, she denied that her son induced her to invest in the BDB Unit Trust. I reject that evidence because it cannot withstand scrutiny. In my opinion Mr Leith Adams controlled the Malbara Investments Trust. He controlled this investment and he controlled the flow of money from the account of (Ma and Pa Pty Ltd) the trustee to Glen Elvie Pty Ltd and then on to Aknot Pty Ltd in consideration for the issue of 270,000 units in that trust. I am satisfied on the evidence of Mrs Adams that he made all of the decisions.
Mr Holloway gave evidence. He is 72 years of age and has a background in accounting. He commenced his accounting work in Australia in 1967. He worked in various places in Western Australia and in South Australia. He initially commenced his business as Holloway & Co in about 1976. The name of the business was changed to the Advantage Group in 2001. It had a number of employees and divisions. The divisions were Advantage Taxation, Advantage Business Specialists and Advantage Financial Planning. Mr Holloway only worked in business development and not accounting after 2001.
Mr Holloway agreed that he was responsible for the setting up of the BDB Unit Trust. This was the first transaction of this type that he had ever done. In doing so, his intention was trying to help people increase their assets. He had no skills to manage any aspect of the business of the BDB Unit Trust and his only skills were from an accounting background. He admitted that he invited members of the public to subscribe for units. He was aware of what he described as the 12/2/20 rule, which derives from the application of s 708 of the Corporations Act.[8]
[8] Corporations Act 2001 s 708.
This “rule” reflects the requirements of s 708 of the Corporations Act. This section is to be found within Chapter 6 of the Act which is concerned with offers requiring disclosure to investors. Offers do not need to meet the disclosure requirements of this Part if the offer is made to less than 20 investors in any 12 month period and the amount raised does not exceed $2,000,000.[9]
[9] See s 708(1), (2), (3), (4) and (5) Corporations Act; c.f. ss 706, 707, 709 and 710 Corporations Act.
He did not seek any legal advice in establishing this trust. He thought that he was establishing a fixed relationship with the parties using the unit trust vehicle. He had a longstanding relationship with Hume Taylor solicitors but he did not involve them in the setting up of this trust because of costs. He did not seek advice of that firm about any aspect of this arrangement.
His decision to set up the trust occurred immediately before it was put into action on 10 October 2005. He was the settlor and founder of the trust. He drew the trust deed, even though he is not a solicitor. He used precedents from previous documents and he obtained no legal advice in so doing.
The trustee of that trust was Aknot Pty Ltd, a company incorporated a considerable time prior. It was a shelf company and, as he said, the purpose of the trust was just for business and investment utilising the widely couched terms of a trust deed. He said that the trust was settled because there were two clients that had wished to enter into this type of arrangement.
It was not clear what this type of “arrangement” meant. Ultimately it became an explanation of day trading on the international money market. Mr Holloway had no experience in such things. As far as he was concerned what he was setting up was a vehicle to become involved in a high returns/high risk venture and he was looking for higher returns than were available in 2005 in the Australian economy, despite Australia having a relatively stable and prosperous economy at the time. The risky and speculative nature of the plan is quite obvious. Mr Holloway was planning to use clients’ money in a scheme about which he had no knowledge or experience. The delay in the commencement of the scheme informs the conclusion that Holloway had to rely on others to tell him what to do. Despite this, Holloway appears to have given no thought to the risks, what obligations the trustee might have and what considerations had to be resolved for the protection of the fund. Holloway did not have even the most rudimentary financial statements available for the trust to at least create some trail to trace the funds. Even worse, Holloway, as controller, caused the trustee to completely abrogate its responsibilities by paying over the trust fund to an overseas third party without having any documentation.
He said he was not aware of high risk/high return investments in Australia at the time and he was attracted to geared bank trading, where you pay a fee, rent money from the bank and then trade on an inter-day basis on those funds. Traders trade for four days a week, 41 weeks of the year. The normal expected rate of return is about 1 per cent per day. This, of course, depends upon the success of the trading.
Holloway’s evidence tends to suggest that this idea of trading evolved over a period of time. It was not in his mind when he gathered the “book” of funds in October 2005 and the plan was not implemented until much later. There is no evidence to suggest that Holloway pursued this one plan until he found the way to implement it. The process seems to have meandered over many months until in the end Holloway paid over the money to a Mr Bastian and a Mr Cuttler, two expat Australians living in Hong Kong. These were the two investors known to Holloway in October 2005. There is no evidence of the qualifications, experience, skill level or capacity of these two men. There is also no evidence as to what they agreed to do for Aknot Pty Ltd and on what basis.

Holloway said he became aware that whoever wished to invest funds in such trading has to show that there was a sufficient bank of funds available to cover risk. He said that he made a number of attempts to do this in Australia but he had no success with Australian banks. He used what I consider to be a hindsight explanation that there may have been some association between the funds and a criminal connection (referring to Leith Adams) but I think it is more likely that the stricter Australian bank controls would not let him do what he intended to do.
Mr Holloway spoke of a number of intermediaries. He said that one was Glen Beynon and that he used Beynon as an intermediary. He eventually learned that it was necessary to gather together a million US dollars to use as a trading amount. Exhibit D1-8 shows the accumulation from different investors of that million dollars, including the $270,000 from Glen Elvie Pty Ltd.
A decision was made not to do the investing within Australia as he found that overseas banks did not want to deal with Australians. Eventually Mr Cuttler and a Mr Bastian, two of the investors, established a company in Hong Kong called Eternal Good Pty Ltd. Those people took control of the funds, with the agreement of Mr Holloway. There is no evidence of their skills to commercially use funds of this nature. Thus, without any type of inquiry about where the funds were to be invested, what regulatory controls existed, what protections for investors existed and how might the capital of $USD I million be protected, Holloway through Aknot Pty Ltd paid over the whole of the trust funds of the unit investors held by Aknot to Eternal Good Pty Ltd. This amount included the $270,000 invested by the Malbara Investments Trust.
Holloway said that as far as he understands the situation, attempts were then made to invest in the day trade money market. The trading, according to Mr Holloway's understanding, was not successful. The money was lost. He never received a full explanation of how the funds were lost. I have very serious doubts about the accuracy of that evidence.
There were no documentary record of bankings, or trading and no proof of funds expended or received. Therefore, in relation to the conduct of the business of the unit trust, Aknot did not control the trust fund once it was paid over to Eternal Good Pty Ltd and it was left to the discretion of that company as to its investment. Therefore Aknot Pty Ltd abrogated all of its duties and obligations as trustee to an entity about which it knew nothing.
Mr Holloway at one stage in evidence expressed the view that the money was never traded but that was at a time when he says he had no experience at all of this type of investment. This emphasises starkly the complete ignorance of Mr Holloway about these matters. The investment lost one million dollars of trust funds, and he can offer no explanations for that result.
Mr Holloway said that he had a phone call with Mr Morrison on or about 10 October 2005. The phone call was to inquire whether Mr Morrison was prepared to make an investment in the BDB Unit Trust. He told him that they (and there was no explanation of who “they” were) were attempting to put funds together for trading. Morrison said that he had no funds. Later - and he cannot recall how much later - Mr Morrison called back to say he had funds in the LLL account of Glen Elvie, from someone that he knew.
Mr Holloway had known of Mr Leith Adams. He had become aware of Mr Leith Adams when he assisted Barbara Adams with the conduct of her late husband’s estate in early 2004. He understood the involvement of Mrs Adams that later occurred with Anglo Far-East Pty Ltd. He cannot explain why it was that there is no formal records of the investments made by Aknot Pty Ltd as trustee of the BDB Unit Trust. He is aware of the redemptions that were sought by Glen Elvie Pty Ltd and he is aware of the payments that were made to Glen Elvie Pty Ltd.
He was asked questions about why it was that some of the funds were channelled through the Aknot Pty Ltd account with HSBC. For example, an amount of money in the sum of $200,000 was channelled through that account and appeared to belong to a Mr Darryl Joseph Kiel. There was no explanation as to why Mr Kiel used this account for the transfer of that money to another country.
A further $199,000 came into the account on 2 April 2007. This was from Mr Cuttler. A further $249,963.49 then came into the account on 5 April. Those funds were to be sent to Zhan Wen Jie in Hong Kong on 15 May 2007. There is no explanation why Mr Cuttler did not send those funds directly. I have serious concerns about the nature of these transactions.
Ultimately, when the investment went bad, Mr Holloway informed Mr Morrison that there were no more funds and there could be no more redemptions. He was notified that the investment had gone bad by Mr Bruce Cuttler, who then lived in Hong Kong. He was the person with Mr Bastian who Mr Holloway entrusted to invest the funds. Mr Holloway said and I accept that it was not until 2008 that he became aware of Mrs Adams' involvement. He said the BDB Unit Trust had not been wound up although Aknot had been deregistered.
One matter that arose in cross-examination related to a redemption certificate concerning some 25,000 units. The document is in the tender book, Exhibit P1 p.68, and it purports to indicate that 25,000 units owned by Glen Elvie Pty Ltd were redeemed. The evidence discloses that there was no redemption of that amount on that day and Mr Holloway said that that was in error. About $50,000 was generated through other redemptions.
In cross-examination Mr Holloway said that he had a vague recollection of Leith Adams telling him that the funds invested actually belonged to Barbara Adams but this was considerably after the event. This evidence was that in October 2005 he was not aware of the involvement of the Adams family interests in the purchase of the 270,000 units. Mr Holloway had made no representation directly or indirectly to Leith Adams or Mrs Adams. He had only spoken to Mr Morrison in the Tanunda conversation. After the initial refusal and some days later Mr Morrison contacted him again to say he would invest after putting together some money. Mr Holloway was not informed about where Mr Morrison had obtained the funds. Mr Holloway had no information linking the Adams interests with the investment by Glen Elvie Pty Ltd.
This means that every duty owed by Aknot Pty Ltd as trustee of the BDB unit trust was owed to Glen Elvie Pty Ltd. In turn this means that for the Adams interests to have sued Mr Morrison and Glen Elvie Pty Ltd obviates the possibility that this court could fashion a remedy on the facts as proved regardless of whether such a cause of action was pleaded. I leave aside from that discussion any comments on the expiration of time limits.
Mr Morrison gave evidence. He is a 63-year-old man who has a background mostly in farming, and then later in agricultural contracting and other commercial ventures. He had done a lot of network marketing and met Mr Leith Adams in the early 2000s at an investment seminar through a common associate. In his travels Mr Morrison stayed occasionally with the Adams family at the Highbury address. He understood that Mr Adams was a finance broker and he believed that his business was to market mortgages as a broker.
At the time that they met, Mr Adams was closing his business in Horsham. Both he and Mr Adams had come from a background of farming families; Mr Morrison had left farming in the early 1990s. He had no form of business with Mr Adams but they travelled together from time to time promoting the various products they were each marketing.
He became aware of Mr Holloway when Mrs Adams sold the farm. He was aware that a meeting was organised at Mr Holloway's office for the members of the Adams family and the members of Anglo Far-East regarding an investment. From that time on, his relationship with Mr Holloway developed into a bit of a “coffee shop” type association in company with Mr Leith Adams.
He recalls a conversation in Tanunda. Mr Adams and he were in Tanunda presenting a product for Amway. They were out having a coffee. He received a telephone call from Mr Holloway. Mr Holloway said words to the effect that there was an opening for an investment of around $250,000 for a particular project that was a high risk high returns venture that may bring returns of between 10 per cent and 50 per cent. Mr Morrison said 'I don't have that sort of money.' It was a brief conversation. It was after that conversation that Leith Adams asked what the conversation was about. He told him. Mr Morrison could not recall any earlier conversation in relation to a building investment.
At about that time he also had a conversation with Mr Adams about his upcoming criminal court trial. He was told by Mr Adams that there were some people that had been involved in his business that were causing trouble and he indicated he did not expect that the criminal court case would go anywhere and that it should be thrown out.
A few days after that conversation Mr Adams called Mr Morrison and said that he had some funds and could he invest them through Mr Morrison in whatever it was that Mr Holloway was offering. Mr Morrison initially refused but there was a second conversation when Morrison was offered 50% of the return on the investment. As a result of Morrison’s agreement to that offer, the money was then placed with Mr Holloway. Mr Morrison said he had no computer or laptop skills so Mr Adams did all the work associated with the transfer of the funds.
Glen Elvie Pty Ltd, a company controlled by him and the trustee of his family trust, had a bank account at the Commonwealth Bank. He did not want the money going through that account. He was aware that Mr Adams had an account at LLL, so Mr Adams offered to set up the account there for Glen Elvie Pty Ltd. Mr Morrison had no computer skills and watched as Mr Adams opened the bank account for Glen Elvie with LLL. He watched the funds being transferred out of the various accounts into the account of Glen Elvie and then from Glen Elvie to Aknot Pty Ltd as trustee of BDB Unit Trust.
Mr Morrison said and I accept that he had no ongoing role in the management of the funds. He said he really did not know where the money was going because he had not previously heard of the BDB Unit Trust. In the phone call at Tanunda Mr Holloway said only that it could be a six-month project but that was on the optimistic side. It could be six months, it could be 12 months. It was a “best efforts” project.
Mr Morrison said he knew Mrs Adams was running short of money by February 2006 and he also became aware at that time that funds had been borrowed against Mrs Adams' house at Highbury. He became aware of ‘plan A’ after the funds had been transferred when Mr Adams was working as a presenter/promotor for Anglo Far-East. Mr Adams appeared to have some concern about the provenance of the funds invested with Anglo Far-East. Mr Adams put to him that he was very concerned about the criminal court case bearing down on him (Mr Adams) and that he and his mother were desperate for some funds to be generated. I am satisfied that the plan A that is referred to is a further investment in Anglo Far-East that was under consideration by Mr Adams at the time using funds belonging to the Malbara Investments Trust. Mr Morrison also said that some time prior to this Leith Adams had mentioned borrowing funds to invest and Mr Morrison advised strongly against that type of arrangement.
In cross-examination Mr Morrison confirmed and I accept that whatever was said in the Tanunda conversation was very sketchy. I am satisfied that when Mr Holloway rang Mr Morrison he was speaking of the investment in the BDB Unit Trust. It was not until Mr Morrison rang Mr Holloway back at the behest of Leith Adams that he would have understood that what he was talking about was an investment in the BDB Unit Trust. I accept that Mr Morrison did not give much thought to this unit trust. Glen Elvie Pty Ltd was acting upon the direct instructions of Leith Adams and Mr Morrison had no money of his own in this investment.
Mr Leith Adams gave evidence. He said that there was a gross misunderstanding with Mr Morrison. He said that since his release from prison he has been chasing Mr Morrison about an agreement that was put into place between himself and Mr Morrison in relation to the use of the funds. I reject the evidence of Mr Adams because it has no credibility. Mr Leith Adams said he did not think whatever the agreement was that it was in writing but rather thought it was just a gentleman's agreement with Mr Morrison that the money was to be a loan. I reject that version as untenable.
Mr Adams then gave evidence that he had faced 90 criminal charges but none of them had any foundation. In answer to my questions he said that he had operated a company trading as Wizard Home Loans and the difficulties that he was facing arose out of the Wizard Home Loans operations. He said that the only way to fund the setup of the Wizard Home Loans venture was through venture capital and a number of people had placed funds with him to use as venture capital. He admitted that he was charged because those funds could not be repaid but he said there was no misappropriation of funds, every dollar was accounted for and there was no fraud. I reject that version of events. At paragraph [62] of the judgment of the appeal court[10] the members of the court said as follows:[11]
The respondent's offending course of conduct extended over a period which was slightly in excess of two years. It involved 13 victims and theft of a large sum of money, namely $231,500. The respondent treated the monies invested by victims or deposited with him as his own using those monies for his own purposes. The sentencing judge in the course of the plea correctly described the respondent as having used the funds in a manifestly dishonest fashion to pay his and his family's personal debts and to pay the debts and expenses of the business. Some of the funds were utilised to make repayments of capital or interest owing to other investors in addition to the use of funds for personal purposes which is apparent from the summary of facts with which the court was provided. Funds were utilised for other personal items including the maintenance of a speedboat. The respondent did not use any of the funds for the purposes for which they were given to him. For an extended period he continued to conceal his conduct when the victims made enquiries as to their investments or deposits.
[10] [2006] VSCA 149.
[11] The DPP appealed successfully against the leniency of the sentence.
I am satisfied that the evidence given to me by Mr Leith Adams about these issues is untrue and I reject it.
Mr Adams said that in August, September or October 2005 over a lunch at an Adelaide hotel he heard Mr Holloway speaking to Mr Morrison about seeking funds to go into a term deposit to be used to build flats in the Glenelg foreshore and in Port Lincoln. Mr Holloway was setting up the term deposit. These funds were to be used as collateral or backing for a loan and they intended to do a back to back loan against that fund. This conversation occurred sometime in 2005. Nothing was heard of that suggestion following that conversation. Mr Morrison and Mr Holloway cannot remember the conversation.
Mr Leith Adams was present in Tanunda when Mr Morrison received a phone call from Mr Holloway. Mr Adams was not privy to the conversation but he knew Holloway was calling. He had by then made the arrangements about the borrowing of the $320,000. He said he felt that there was a threat to that money from his sister arising from her dissatisfaction about her treatment from her father's estate.
There are a number of difficulties that I have with that evidence. The first is that as would ordinarily be the case, the father's estate would have been left to the mother and then to the children or to the children equally if the mother predeceased them. There may have been some separate gifts given, however, because the fund of $600,000 was available from the sale of the farm property, it is difficult to see why the $320,000 borrowing arrangement was put into place as a guard against any challenge by the sister.
He agreed that he was the person who introduced the asset management strategy and Mr Lohrey’s advice about the creation of the trust. He said that the loan was approved on the basis of the cash flow received from the Anglo Far-East investment. He said his agreement with Mr Morrison was that if he put the funds up for the investment then Morrison would pay the interest. Further, he asserted that Mr Morrison wanted to use the $270,000 to make the investment. I reject that evidence.
Mr Adams said that he thought that the money would be going into building home units as per the first conversation over lunch. He made that assumption. This admission is more evidence of the recklessness of Mr Leith Adams in the way he approached this whole matter and the investment of these borrowed funds.
He said that any delay in relation to actioning the failure to redeem the money or the amount of what he described as a loan to Mr Morrison was because he was in gaol. That is probably correct. There may have been discussions in relation to the rollover of the investment but the evidence in relation to that is unclear.
In any event Mr Leith Adams was responsible for the delivery of letters of demand to Mr Morrison and later to Mr Holloway. I have already referred to the letter of demand sent to Glen Elvie Pty Ltd at p.42 of Exhibit P1. It is addressed to Account number holder 126337. Glen Elvie Pty Ltd was the account holder for an amount with the LLL of that account number. I have rejected that contention of a loan for the reasons expressed above.
In the letter dated 16 April 2009[12] which was the second letter to Mr Morrison from Leith Adams, concern is expressed about the handling of his mother's account. He refers to an agreed return of capital and interest due and payable. He then alleges that under Mr Morrison's duty of care, funds were transferred to Mr Tony Holloway as the director of Aknot Pty Ltd as trustee of the BDB Unit Trust. It is implicit in that paragraph that Mr Leith Adams is saying he did not know that that transfer had taken place. I am satisfied on the evidence both in Exhibit P1 and from the oral evidence of Mr Morrison that Mr Leith Adams was quite aware of the arrangements for the funds to be transferred to Aknot Pty Ltd.
[12] Exhibit P1, p 44.
I do not accept the factual assertions in this letter as accurate even though Leith Adams had no understanding about the activities of Aknot Pty Ltd. This is one of the principal difficulties in this matter. Leith Adams made the decision to invest the funds with Aknot Pty Ltd as trustee of the BDB Unit Trust. He used Glen Elvie Pty Ltd as an intermediary and that company held the units in trust for the Malbara Investments Trust. Glen Elvie Pty Ltd knew nothing of Leith Adams’ ignorance of Aknot Pty Ltd’s role or the plan for the use of the funds. Holloway as the controller of Aknot Pty Ltd knew nothing of these matters. He understood that Glen Elvie Pty Ltd was the investor.
Mr Leith Adams was aware of the letter in response at p.46 of Exhibit P1. That letter was sent by Mr Francis, solicitor. He then sent a letter of 11 May 2009, at p.47 of Exhibit P1 that was drawn by a solicitor, no doubt after receiving the advice of a solicitor on the material facts. There is a telling paragraph in the letter. It reads:
From this construction of undisputed facts it is of relevance that the funds in question (presumably the $270,000) were to be held in trust for my mother, your client (Mr Morrison) accepting the role of trustee. This remains my position.

As important, is the obligation upon a trustee to obtain the appropriate advice necessary to enable that trustee to meet the standard required prior to making any particular investment. The general principle is that a trustee must seek advice on matters which the trustee does not understand and this will be particularly pertinent where the trustee intends to make an investment about which a trustee has little or no understanding. Except to the extent that the trustee could sincerely (and implicitly this must mean on an informed basis) disagree, it is necessary for the trustee to accept the advice received and to act upon it.[22] For a trustee to have a sincere disagreement with advice cannot be something that happens in some uninformed way because another overriding obligation upon the trustee is to fulfil the duty to act honestly.
[22] Cowan v Scargill [1985] Ch 270 at 289.
The learned authors of Jacobs’ Law of Trusts in Australia[23] described the matters to which trustees must have regard at [1815] of the text as follows:-
[23] 7^th edition, the Honourable JD Heydon and the Honourable MJ Leeming,LexisNexis Butterworths.
[1815] The uniform legislation provides that, without limiting the matters that a trustee may take into account when exercising a power of investment, the trustee must take account of certain listed matters so far as they are appropriate to the circumstances of the trust. They are as follows:
(a) the purpose of the trust and the needs and circumstances of the beneficiaries;
(b) the desirability of diversifying trust investments;
(c) the nature of and risk associated with existing trust investments and other trust property;
(d) the need to maintain the real value of the capital or income of the trust;
(e) the risk of capital or income loss of appreciation;
(f) the potential for capital appreciation;
(g) the likely income return and the timing of income return;
(h) the length of the term of the proposed investment;
(i) the probable duration of the trust;
(j) the liquidity and marketability of the proposed investment during, and at the end of, the term of the proposed investment;
(k) the total value of the trust estate;
(l) the effect of the proposed investment for the tax liability of the trust;
(m) the likelihood of inflation affecting the value of the proposed investment or other trust property;
(n) the cost (including commissions, fees, charges and duties payable) of making the proposed investment; and
(o) the results of a review of existing trust investments.
(Citations omitted)
In the present circumstances, Aknot Pty Ltd fulfilled none of these duties and I find that it was in breach of its duties as a trustee. There was also a further breach by the trustee Aknot Pty Ltd in failing to give full information as and when required and to keep and render proper accounts. This general obligation is of long standing.[24] Section 84B of the Trustee Act reads as follows:-
84B—Records to be kept by trustee
(1) A trustee shall keep such records relating to his administration of the trust property as may be prescribed.
(2) A trustee shall, at the request of—
(a) the Public Trustee; or
(b) another trustee of the trust; or
(c) a beneficiary under the trust,
produce the records kept by the trustee in pursuance of this section for inspection and permit the Public Trustee, the other trustee or the beneficiary (as the case may be) to examine and make copies of those records.
[24] Freeman v Fairlie (1817) 3 Mr 27 at 42.
A curiosity is that the reference in s 84B(1) is to “records… as may be prescribed…” I have been unable to find a prescription of those records within the Trustee Act. The learned authors of Jacobs’ Law of Trust in Australia[25] suggests that in the absence of a prescription of the records, the general law obligation is to “…keep proper accounts extending to keeping evidence of payments…”[26]
[25] Supra at [1713].
[26] White v Lady Lincoln (1803) 8 Ves 363 at 369
In evidence before the court, Aknot Pty Ltd was unable to show that it has kept and rendered proper accounts and it was not able to produce to the court full information about the investment of the trust funds when required. All that the court was shown were bank statements showing the inflow and outflow of money. That information is indicative only of the movement of money. It does not assist in assessing the conduct of the trustee.
In the absence of any relevant information which accords with the obligations upon the trustee under the Trustee Act as well as those obligations which fall upon the trustee under general law and equitable principles, I am satisfied that Aknot Pty Ltd was in breach of the terms of the BDB Unit Trust in making the investment as was described by Mr Holloway in his evidence. I am consequentially of the opinion that Glen Elvie Pty Ltd as trustee or through the trustee of the Malbara Investments Trust, had a right of action against Aknot Pty Ltd for breach of its duties as trustee.
Accepting that any investment in units in the trust carried the understanding of the high risk high return nature of the investing, the finding of a breach of duties by Aknot Pty Ltd as trustee remains. The reasons are that even accepting that background, Aknot Pty Ltd did not fulfil any of the most basic obligations imposed upon a trustee. It could not explain the investment into which the trust funds were placed, who actually controlled the investment, how the investment operated and what were the risks of this type of investment. It knew none of these things because it did not know where the trust funds went or what became of them. This is a wholesale abrogation of duties as a trustee.
I am told that Aknot Pty Ltd has been deregistered. I am not given any information about the current wherewithal of the BDB Unit Trust. I am told in evidence that the trust has not operated for more than 10 years although it has not been wound up. I have not received in evidence any financial statements or tax returns relative to that trust. It appears that to pursue Aknot Pty Ltd in its capacity as trustee would be a worthless exercise because Aknot Pty Ltd is unable to access any trust assets for an indemnity in relation to its conduct as a trustee. Therefore, any action by Glen Elvie Pty Ltd or the trustee of the Malbara Investments Trust would be fruitless. The only potential claim could be against any person who is knowingly concerned in that breach of trust. It is to that issue which I now turn.
I am satisfied that when making the investment of the trust funds, Aknot Pty Ltd was required to exercise the power of investment in accordance with the requirements of s 7 of the Trustee Act and in particular s 7(1)(b), (2) and (3). There is no evidence before me that the trustee reviewed the performance of the investments, had regard to any provision of the trust instrument in relation to the investment and most importantly exercised the care, diligence and skill that a prudent person of business would exercise in managing the affairs of other persons. Mr Holloway was the sole director and shareholder of Aknot Pty Ltd and therefore he was properly to be seen and understood as the guiding hand and mind of that company. For all intents and purposes he was the trustee. Any person managing the affairs of other persons is required to exercise a high degree of caution. Thus, Mr Holloway in his role as the guiding hand and mind of the company must treat the obligations of the company as trustee differently from those in respect of the company’s position as a corporation. Put simply, the expectations properly to be had of trustee and directors differ. This was explained by Clarke and Sheller JJA in Daniels v Anderson[27] when their Honours said at p 494:-
While the duty of a trustee is to exercise a degree of restraint and conservatism in investment judgments, the duty of a director may be to display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested.
[27] (1995) 37 NSWLR 438.
It is then necessary to review the position where the trustee is a company. This was thoroughly considered by Finn J in ASC v AS Nominees[28] as follows:-
Where the trustee is itself a company the requirements of care and caution are in no way diminished. And here, unlike with companies in general, these requirements have a flow on effect as into the duties and liabilities of the directors of such a company. It was established early – largely it would seem from case law on charitable and municipal corporations – that at least when, and to the extent that, directors of a trustee company are themselves “concerned in” the breaches of trust of their company, they are liable to the company according to the same standard of care and caution as is expected of the company itself: Charitable Corporation v Sutton (1742) 2 Atk 400; Attorney General v Wilson (1840) 10 LJCh 53; Joint Stock Discount Co v Brown (1869) LR 8 Eq 381; Fouche v Superannuation Fund Board (1952) 88 CLR 609.
To affirm such a limited coalescence in the standard of care of directors and trustees in the case of directors of trust companies is not to reignite the arid debate on whether directors are trustees… it is merely to say that in this context the duties of trusteeship of the company can give form and direction to the common law and statutory duties of care and diligence imposed on directors, where the directors themselves have caused their company’s breach of trust…
[28] (1995) 62 FCR 504 at 514.
Fouche v Superannuation Fund Board concerned an appeal from the Supreme Court of Tasmania (Morris CJ) on the liability of directors of a corporate trustee that provided funding to a developer for the development of a boutique hotel on an undeveloped broad acre property. The lending commenced as a mortgage agreement to purchase the property and then followed much larger lending that was ‘blue sky’ in nature and was made on the potential value of the property once the boutique hotel had been developed upon it. The funding was purportedly made in accordance with the terms of a funding deed but there were breaches of that deed. At the heart of the problem was a director Mr Rule, who was given too much authority and too little supervision. His reckless disregard from the requirements of the contents of lending instruments and the obligations of being a director was the genesis of the problems that led to the lending apocalypse for the trust. There were a number of actions and cross actions but pertinently here, there was an action against the former members of the board about significant payments that were allegedly made ultra vires, in breach of the duties which the former members of the board owed to the corporate trustee and that were in breach of the trust upon which the board held the monies for investment.
The High Court held that by its inherent nature the investment was a breach of trust. The High Court upheld the claims against the former members of the board which had been dismissed at first instance by Morris CJ. At pp 640 – 641 the High Court (Dixon J, McTiernan J and Fullagar J) said as follows:-
Apart from this, however, we are of the opinion that all the former members of the board are personally liable to make good any loss incurred. We do not think it necessary to consider either the question whether the transaction was, in the strict sense, ultra vires the board, or the question whether the individual corporators were, in any sense or for any purpose to be regarded as trustees. Nor do we think it relevant to enquire whether they owed any and what duty to the contributors to the fund whom the learned Chief Justice regarded as beneficiaries under the trust. We do not think, indeed, that the contributors are beneficiaries in the proper sense: they have, of course, an interest in the trust fund which would probably give them standing in the court of equity, but they have not such a beneficial interest in the fund as has an ordinary cestui que trust. The trust is not a trust for persons but for statutory purposes. But, while considering the correctness of much of what the Chief Justice has said as a matter of general principle, we can see no escape from the view that the individual members of the board owed a duty to the corporation which they constituted and for whose property and affairs they controlled and managed. Nor can we doubt that this duty is enforceable in equity. The board being plaintiff, and the duty being owed to the board, the case is not like Wilson v Lord Bery.[29] On the other hand it finds a very close analogy in Joint Stock Discount Co v Brown.[30] The learned Chief Justice seems to have thought, that if the members of the board owed any duty to anybody, it could only be enforced by action for damages – presumably at common law – and he said that the pleadings contain no claim for damages and that no damage had been proved. But whatever the position might be at law, the plaintiff board is seeking an equitable remedy and, the administration of a trust fund being involved, it is clear that there is ample jurisdiction in equity to give the appropriate relief if a breach of duty is proved.
With regard to the nature of the duty, we are of the opinion that it does not differ materially from the duty which rests on trustees in relation to investments. The duty is not so onerous as it once was… it is a duty of reasonable care – the care which an ordinary prudent man of business would take. In Charitable Corporation v Sutton[31] a bill was filed for relief against individuals in respect of alleged breaches of trust by an incorporated trustee. Lord Hardwicke throughout treats the individual defendants as in effect occupying the position of trustees and he says:
…if upon enquiry before the master, there should appear to be a supine negligence in all of them… I will never determine that they are not all guilty.[32] It would be strange if the position were otherwise.
One cannot help feeling a degree of sympathy for the members of the board… firstly because they had no qualifications for the task of investing trust funds and secondly because in consequence they relied very largely on Rule’s judgment. But the standard is to be applied is the standard of the reasonable prudent man of business and it is nothing to the point that they were not men of business at all. Having regard to all the facts and circumstances set out in an earlier part of this judgment, we can see no escape from the view that all four defendants were guilty of gross negligence in assenting to the investment which is attacked, and that all are liable to make good any loss resulting therefrom.
[29] (1880) 5 QBE 518.
[30] (1869) LR 8 Eq 381.
[31] (1742) 2 Atk 400.
[32] Ibid at 645.
I refer to the penultimate line of the above quotation from Fouche in which the High Court referred to the concept of “gross negligence”. The expression “gross negligence” was, in the past, often used as a descriptor of the conduct of a trustee who or which may, because of such conduct, lose a right of indemnity from trust assets. It is well settled[33] that the trustee has a personal liability for any contract made on behalf of the trust estate and the trustee then has a right of indemnity against the trust assets for all properly incurred costs, charges and expenses arising from such a contract. This right carries the presumption that the entry into the contract is not inconsistent with the execution of the purposes of the trust. That right is described by Ford and Lee[34] as a right of indemnification of a trustee from the trust asset, the trustee having acted within power, in good faith, with the requisite degree of care and diligence that a person of ordinary prudence would exercise in the conduct of their affairs. My researches have found very little to assist in explaining the way in which “gross negligence” can be defined. The fifth edition of Charlesworth on Negligence[35] at page 10, paragraph 10, says as follows:-
“Degrees of Negligence Used in the sense of meaning careless conduct it is true to say that there are degrees of negligence. As used in the expressions ‘gross negligence’, ‘ordinary negligence’ and ‘slight negligence’, it is clear that the term negligence means carelessness and that these expressions mean gross carelessness, ordinary carelessness and slight carelessness respectively. When Rolfe B. said that he ‘could see no difference between negligence and gross negligence, that it was the same thing with the addition of a vituperative epithet’,[36] he was using ‘negligence’ in the sense of a breach of duty to take care and his criticism was justified. That is not to say, however, that the expression ‘gross negligence’ has always the same meaning as ‘negligence’. It is an expression in regular use among lawyers and to deny it a meaning would be pedantic. It is intended to denote a high degree of careless conduct such as where a defendant did not intend a particular consequence to happen but nevertheless he must have been able to foresee its occurrence and in this sense it is of considerable practical utility.
Used in the sense of meaning a breach of the duty to take care, there are no degrees of negligence. ‘Epithets’ applied to negligence, so far as the common law is concerned, are really meaningless. Negligence is well known and well defined. A man is either guilty of negligence or he is not guilty of negligence. Gross negligence is not known to the English common law so far as civil proceedings are concerned.”[37]
[33] Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367
[34] Ford H, Lee WA, Bryan M and McDermott P, Principles of the Law of Trusts (Thomson subscription service) at [14.3030].
[35] RA Percy MA, Sweet and Maxwell Ltd (1971).
[36] Wilson v Brett (1843) 11 M & W 113
[37] Pentecost v London District Auditor [1951] 2 KB 759 per Lynskey J at p764
I will assume for the present discussion that the reference by the High Court to “gross negligence” is intended to denote a “high degree of careless conduct”.
In assenting to the investment in the day trading scheme Holloway was guilty of a high degree of careless conduct. Indeed, he may be called upon to make good the losses sustained by the trustee and the beneficiaries of the trust as a result of the investment. Consistent with the approach in Fouche, as the sole director of the corporate trustee, Holloway owed a duty of care to Aknot Pty Ltd of which he was the guiding hand and mind and whose affairs he controlled and managed. That duty is enforceable in equity and provides a remedy to the company against Holloway; any action to enforce that remedy would ordinarily be brought in the name of Aknot Pty Ltd. The cause of action is for breach of the duty owed by Holloway and is measured by the test of the care that an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.[38] Holloway would be required to make good the whole of the loss suffered by the trustee as a result of his “gross negligence”.
[38] Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 516
I have also considered whether Mr Holloway may be found to be liable as an accessory. Those principles were discussed by Finn J in ASC v AS Nominees at p 523 as follows:-
Legal decision and scholarly opinion in common law jurisdictions are converging in the view that at least what is known as the second (the knowing assistance) limb of the rule in Barnes v Addy[39] is a fault based form of accessorial liability. For present purposes that liability rule can be formulated (conservatively) as one which exposes a third party to the full range of equitable remedy available against a trustee if that person knowingly or recklessly assists in or procures a breach of trust or of fiduciary duty by a trustee: Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
As has long been recognised in case law in the United States – see e.g. Shuster v North American Mortgage Loan Co (1942) 40 ME 2 d 130; 7 G Ranching Co v Stewart Title and Trust of Tucson (1981) 627 P 2 d 1088 – this form of liability is one of no little significance to the directors of a trust company for the very reason that, often enough, it would be their own conduct in exercising the powers of the board which causes their company to commit a breach of trust. They are, in other words, particularly vulnerable to this rule. Recent Australian case law is demonstrating an appreciation of this: see e.g. Young v Murphy (1994) 13 ACSR 722; Biala Pty Ltd v Mallina Holdings Limited (1993) 11 ACSR 785 at 832.
[39] (1874) LR 9 Ch App 244 at 251-252.

The most recent pronouncement on the application of the rule in Barnes v Addy[40] is the decision of the High Court in Farah Constructions v Say-Dee Pty Ltd.[41] In that decision, the High Court considered the application of the first and second limbs of the rule that was stated by Lord Selborne LC at 251-252 as follows:-
Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest or fraudulent design on the part of the trustee.
[40] Ibid.
[41] (2007) 230 CLR 89.
The two limbs relate to a person being an agent receiving and becoming chargeable with some part of trust property and secondly, assisting with knowledge in a dishonest and fraudulent design on the part of trustees. In Farah Constructions, the High Court overruled the decision of the NSW Court of Appeal and found that the defendants were not recipients of the trust property and became chargeable with some part of the trust property. The court then turned its attention to whether they were knowing participants in a dishonest and fraudulent design. The court held (at [170]) that such an allegation is so serious that it ought to have been pleaded and particularised and the assessment required by Briginshaw v Briginshaw[42] kept in mind. From [171] the High Court considered the requirement of knowledge expressed in the second limb. At [177] the court held as follows:-
The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.
[42] (1938) 60 CLR 336.
The four categories of Baden[43] referred to were as follows:-
23Actual knowledge;
24Wilfully shutting one’s eyes to the obvious;
25Wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make;
26Knowledge of circumstances which would indicate the facts to an honest and reasonable man.
[43] Baden v Societe Generale [1993] 1 WLR 509.
On this second limb and on the question of the meaning of dishonest and fraudulent design, the High Court held, after stating that the law of Australia is as that stated in Consul at [179] as follows:-
What then of the phrase “dishonest and fraudulent design”? Since the widening of the second limb of Barnes v Addy beyond breaches of express trust, attempts commonly are made in corporate insolvencies to render liable on this footing directors, advisers and bankers of the insolvent company. This makes a proper understanding of the second limb important, lest its application prove unjust. As Lord Selborne LC said in Barnes v Addy (1874) LR 9 Ch App 244 at 251:
There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them.
The relevant passages in Consul establish for Australia that “dishonest and fraudulent designs” can include not only breaches of trust but also breaches of fiduciary duty; but any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent.
In the comments of Finn J in ASC v AS Nominees at p 523, his Honour referred to the breadth of the second limb of the Barnes v Addy accessorial liability ground as covering those persons who knowingly or recklessly assist in or procure a breach of trust or a fiduciary duty by a trustee. In so doing, his Honour appears to have been paraphrasing the third of the four categories of Baden and interpolating the disjunctive “or” between the words knowingly and recklessly. It is unclear to me whether there is a difference between the formulation of accessorial liability under the second limb of Barnes v Addy in the decision of Finn J in AS Nominees and the decision of the High Court in Farah Constructions at [171] – [182].
I have already found that Aknot Pty Ltd was in breach of its duties as a trustee and that Mr Holloway was, in equity, knowingly concerned in that breach as a director and is answerable to Aknot Pty Ltd as a director. For the same reasons, Mr Holloway failed to honestly apply his mind to the task of the trustee. That task was to make an investment in accordance with the whole of the legal, equitable and statutory duties imposed upon the trustee. He completely abrogated that task to persons of whose skills and abilities he knew nothing and whose capacity and wherewithal he knew even less. But that is not to say that he was fraudulent in that task. Gross stupidity and incompetence is not necessarily fraudulent. A definition of fraud is elusive. The learned authors of “On Equity”[44] at [5.10] say as follows:-
[5.10] “Fraud” is a word with many shades of meaning. Kerr on Fraud and Mistake[45] considers various definitions of “fraud”, notes that none is really sufficient, and concludes that:
Fraud… may be said to include properly all acts, omissions, and concealments which may involve a breach of legal or equitable duty, trust or confidence, justly reposed, and are injurious to another, or by which an undue or unconscientious advantage is taken of another. All surprise, trick, cunning, dissembling and other unfair way that is used to cheat any one is considered as fraud.
“Fraud” means different things at law and in equity. At common law, the term connotes actual dishonesty or conscious wrongdoing. It is best exemplified in the tort of deceit, where a false statement of existing fact is made deliberately, or recklessly, without belief in its truth, with the intent that it be acted on by another, but which is in fact acted upon to the damage and detriment of that other: see Derry v Peek.[46]
[44] Young, Croft and Smith, Lawbook Co, 2009.
[45] McDonnell and Monroe (1952) p 1.
[46] (1889) 14 App Cas 337 at 374; see also Snell (2005) at [8-06].
There is no doubt that Mr Holloway has committed a breach of his legal and equitable duties as a director of the company Aknot Pty Ltd. But it is far more difficult to know whether he has with the requisite degree of intention acted in a way that is intentionally injurious to another or has taken unconscientious advantage of that other. I am unable to say on the evidence that there has been any actual dishonesty or conscientious wrongdoing on his part. I am unable on the evidence before me to make a finding of fraudulent conduct of Mr Holloway.
I content myself with the fact that reliance may be placed upon the principles that are set out in the decision of the High Court in Fouche. In Fouche, the High Court did not need to discuss the application of the accessorial liability principles in Barnes v Addy. The High Court applied the well settled principles of the liability of directors of corporate trustees that are in breach of duties as trustees qua the trust and are liable to the corporate trustee according to the same standard of care and caution as is expected of the company itself.
The Corporations Act
By Act 122 of 2001, s 3 in Schedule 1 which came into effect on 11 March 2002, financial services and markets became further regulated under the Corporations Act (CA). The relevant sections are to be found from s 760 CA. Here I am concerned with financial products and the promotion and invitation to persons to invest in financial products. Under s 761 CA, a financial product has the meaning given by Division 3. Section 763A CA provides the general definition of a financial product as a facility through which or through the acquisition of which a person does one or more of making a financial investment or managing a financial risk. For s 763B CA a person makes a financial investment when a person gives money or money’s worth to another person and the other person uses the contribution to generate a financial return or other benefit for the investor. The investor intends that the other person would use the contribution to generate a financial return or other benefit, or alternatively the other person intends that the contribution will be used to generate a financial return or other benefit.
The question here is whether the invitation by Mr Holloway for an investment to be made in the BDB Unit Trust was an invitation to invest in a financial product to generate a financial benefit. Section 764A CA defines specific things that are financial products. These include a security which is defined in s 761A CA as being a share in a body. This definition specifically excludes any reference to a unit as a unit trust and I am also mindful of the operation of s 708 CA discussed above.
For s 766A CA a person provides a financial service if that person provides financial product advice which, for s 766B CA means a recommendation or a statement of opinion that is intended to influence a person to make a decision about a particular financial product. If an unlicensed person or any licenced person makes any misleading statement about a future matter connected with a financial product, then, s 769C CA liability will arise pursuant to s 791A CA. Also s 911A CA prescribes the need for an Australian Financial Services Licence for any person who carries on a financial services business. If s 911A, s 911B, s 911C and s 912A CA apply then Division 6 of Part 7.6 has application. This governs the liability of financial services licensees for representatives. This assumes that the Advantage company has the appropriate licence and that Mr Holloway is a representative of the licensee. The licensee, Advantage, would then become liable for the representation of the licensee and is susceptible to a claim for loss and damage. There is no evidence before me of whether the Advantage company had an appropriate licence for Part 7.6 of Chapter 7 of the Corporations Act or if Mr Holloway is a licensee. If those things were proven, the Advantage company may be found liable for any misrepresentations made by any representative of it such as Mr Holloway. This will occur only if the definition of financial product extended to the units in this unit trust. I am unable to find any authority to indicate that the definition of financial product so extends. I am unable to make any finding about potential liability on this basis. I am similarly unable to make any finding of the liability of Mr Holloway of the Advantage group under s 12CA ASIC Act (2001). I also mention s 79 CA for the sake of completeness. It reads as follows:-
Section 79 Involvement in contraventions
A person is involved in a contravention if, and only if, the person:
(a) has aided, abetted, counselled or procured the contravention; or
(b) has induced, whether by threats or promises or otherwise, the contravention; or
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.
If the relevant Advantage company has been in breach of the Chapter 7 obligations, then there can be no doubt that Mr Holloway was directly or indirectly knowingly concerned in such a breach. He would also have personal liability. For the reasons already expressed, I am not in a position, on the evidence, to discuss this matter further or to make any findings pertinent to this topic.
In the result, the case pleaded by the plaintiff must be dismissed because no cause of action has been made out against the defendants against whom the relevant causes of action were pleaded. Notwithstanding, I am of the view that if a properly formulated action was brought against Mr Holloway within time, there were good prospects of success of the plaintiff’s claim against him personally. The causes of action in respect of those claims are now well out of time and in the absence of fraud proved against Mr Holloway, it would be difficult, if not impossible, to bring a fresh action for equitable relief against Mr Holloway. The only other possibility would be that the plaintiff may satisfy the requirements of s 48 of the Limitations of Actions Act. There is no information before me on that topic.
The plaintiff’s claim against each of the defendants must be dismissed.
As the plaintiff's claim in respect of each cause of action that I am able to identify as arising on the facts as pleaded and proved before me fails, the third party claim fails for the same reason. The orders of the court will be that the action of the plaintiff is dismissed. The third-party action is dismissed. The plaintiff shall pay the costs of the fourth and fifth defendants. The first, second and third defendants shall pay the costs of the third-party.