Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd
[2015] VSCA 9
•12 February 2015
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2013 0165
| AUSTRALASIAN ANNUITIES PTY LTD (in liquidation) (receivers and managers appointed) (ACN 006 313 408) | Appellant |
| V | |
| ROWLEY SUPER FUND PTY LTD (ACN 129 688 455) | Respondent |
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| JUDGES: | WARREN CJ, NEAVE JA and GARDE AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 2 September 2014 |
| DATE OF JUDGMENT: | 12 February 2015 |
| MEDIUM NEUTRAL CITATION: | [2015] VSCA 9 |
| JUDGMENT APPEALED FROM: | Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2013] VSC 543 (Almond J) |
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EQUITY – Fiduciary duties – Corporate trustee – ‘Knowing receipt’ of trust property by private superannuation fund – Individual trustees – Claim under first limb of Barnes v Addy (1874) LR 9 Ch App 244 - Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 and Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 followed – Whether corporate trustee of a superannuation fund is a volunteer - Cook v Benson (2003) 214 CLR 370 considered – Existence of a debtor/creditor relationship – Whether equitable relief should be refused – Nature of equitable relief – Equitable compensation – Interest in equity – Appeal allowed – Equitable compensation ordered.
CORPORATIONS LAW – Duties of directors – Duty to act bona fide in the interests of the company – Duty of directors where company is corporate trustee – Informed consent by shareholders – Ratification – Where company insolvent or risk of insolvency – Interest of creditors.
SUPERANNUATION – Self-managed superannuation fund - Trust deed – Duty of individual trustees – Duty of corporate trustee – Whether trustee of a self-managed superannuation fund is a volunteer – Recovery of monies from superannuation fund.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr L Glick QC with Mr O Bigos | Norton Gladhill |
| For the Respondent | Mr M Osborne QC with Ms C Pierce | Shiff & Company |
WARREN CJ:
This appeal concerns an action for knowing receipt and restitution brought by the appellant (the plaintiff at trial), Australasian Annuities Pty Ltd (in liq) (receivers and managers appointed) (‘AA’), against the respondent (the defendant at trial), Rowley Super Fund Pty Ltd (‘RSF’), in circumstances where funds were diverted from AA to a superannuation fund of which RSF was trustee. AA seeks to recover these payments, which it alleges were diverted in breach of fiduciary duties owed by AA’s sole director, Steven Rowley.
The claims arose following the failure of AA to repay moneys advanced to it by Macquarie Bank Ltd (‘Macquarie’) in 2007. Macquarie subsequently appointed a receiver and manager who brought the action in AA’s name.
Background
AA was incorporated on 10 August 1984. From 12 September 1984 until 14 June 2011 Steven Rowley was a director of AA. From 8 May 1998 until 14 June 2011 he was the sole director.[1] Mr Rowley held one of two issued shares in AA, his wife Barbara held the other. Mr and Mrs Rowley, along with their two sons Adam and Adrian, worked in the business.
[1]Mr Rowley was the second defendant at trial, however following his being declared bankrupt, the action proceeded only against RSF.
AA carried on business in the financial planning sphere, acting exclusively as a service trust providing management, administration, accommodation and staffing services for London Partners Pty Ltd (‘London Partners’). London Partners had no employees of its own, and minimal expenses beyond the payment of service fees to AA.
AA has, at all material times, been the trustee of the Rowley Family Trust, a discretionary trust of which each of the Rowley family members are beneficiaries, but not the only beneficiaries.[2]
[2]The trust deed details the objects of the trust which includes members of the extended Rowley family.
Essentially, the arrangement between London Partners and AA was such that each year London Partners paid to AA (in its capacity as trustee of the Rowley Family Trust) a service fee equivalent to 95% of the client commissions received by London Partners. London Partners held the relevant financial services licence.
RSF was incorporated on 13 February 2008 and has been the trustee of the Rowley Superannuation Fund (‘the Super Fund’) since that date. At all material times RSF has had four directors, being each of the Rowley family members: Steven, Barbara, Adam and Adrian. Prior to RSF’s appointment as trustee of the Super Fund, the four RSF directors were the trustees of the Super Fund.
AA’s claims concern amounts diverted from AA and paid to the Super Fund, effected by Steven Rowley, which AA alleges were in breach of the fiduciary duties he owed to AA. The payments were characterised as either employer contributions, eligible termination payments or self-employed contributions.
The claims arose following the failure of AA to repay monies advanced to it by Macquarie under a facility agreement. Macquarie subsequently appointed a receiver and manager who brought the action in AA’s name.
The facility agreement
Macquarie was banker to Steven Rowley, AA and London Partners. In December 2006, Steven Rowley and Adam Rowley approached Jamie Melville of Macquarie about borrowing $2.5 million to invest in superannuation before the end of the financial year. The reason for the proposed borrowing was that during the course of the 2006-07 financial year, the Federal Government allowed a one-off opportunity for individuals to invest $1 million into superannuation on a non-concessional basis. Steven Rowley initially intended to borrow the money himself but later said AA would be the borrower. Following discussions with his (and AA’s) accountants, Murdoch Partners, and consultation with the Remuneration Strategies Group, Steven Rowley devised a tax-effective strategy for the investment. The strategy involved:
·AA borrowing money from Macquarie such that the interest on the borrowing would be tax deductible to AA;
·AA making maximum employer super contributions on behalf of Steven, Barbara, Adrian and Adam Rowley, which would not be taxable in their hands because they were not receiving that money as salary;
·AA making ‘eligible termination payments’ to Steven and Barbara Rowley, which would be more tax-effective (than ordinary wages and expenses) because the ‘eligible termination payments’ would be taxed at concessional rates; and
·Steven Rowley and Barbara depositing those amounts into the Super Fund.[3]
[3]See Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2013] VSC 43 [8] (‘Reasons’).
On 7 May 2007, Steven Rowley signed a facility agreement with Macquarie (‘the Facility Agreement’) on his own behalf and on behalf of AA, London Partners and other Rowley entities. The Facility Agreement provided for a facility limit of $2.5 million with the stated purpose being to ‘assist with superannuation contribution’. Security for the loan included a registered first ranking fixed and floating charge over the whole of the assets and undertakings of London Partners and AA. At one stage, Mr Melville asked whether Macquarie could obtain security over the superannuation fund; Steven Rowley told him that this was not possible and was illegal.
On 15 May 2007, Steven Rowley emailed Mr Melville stating that the proceeds of the loan would be paid into the Super Fund for Barbara and himself in the form of employer contributions, eligible termination payments and self-employed contributions. On 17 May 2007, Macquarie advanced $2.5 million to AA pursuant to the Facility Agreement.
The relevant transactions
During the financial years ending 30 June 2007 and 30 June 2008, Steven Rowley effected a number of payments by AA to the Super Fund, either directly or indirectly, as follows.
In the financial year ending 30 June 2007, a sum of $1,341,528 (‘the First Sum’) comprising:
·$225,560 transferred directly by AA into the Super Fund’s account; and
·$1,115,968 being part of moneys transferred by AA to the personal account of Steven and Barbara Rowley, which was immediately transferred to the Super Fund’s account.
In the financial year ending 30 June 2008, a sum of $372,296.99 (‘the Second Sum’) comprising:
·five payments totalling $204,088.72 transferred directly from AA’s account to the Super Fund’s account;
·a payment of $118,583.27 to the personal account of Steven and Barbara Rowley which was then immediately transferred to the Super Fund’s account; and
·a payment of $49,625 for stamp duty on the purchase of a property for the benefit of the Super Fund.
The financial records of AA and RSF variously characterised those transactions as employer super contributions, eligible termination payments and loans to Steven Rowley.
In addition, Steven Rowley had from time to time taken monies from AA and debited them to a loan account which he held with AA. The debit balance of the account for the year ending 30 June 2008 was $3,285,405. The account appeared in AA’s general ledger and was incorporated in the company’s accounts for the relevant financial years as an asset described as ‘Loan S Rowley’. However, the loan was unsecured and not subject to interest.
Preparation of financial statements
At the end of each financial year, it was Steven Rowley’s practice to:
·direct that Murdoch Partners be provided with copies of the general ledger for AA (which incorporated the general ledger for London Partners);
·request Murdoch Partners to prepare annual financial statements for AA, AA in its capacity as trustee of the Rowley Family Trust, and London Partners; and then
·request Murdoch Partners to prepare tax returns for each of these entities as well as himself, Barbara, Adrian and Adam (and their wives), and other entities Steven Rowley controlled.
Steven Rowley’s standing instruction to Murdoch Partners was to prepare accounts and tax returns in a manner which was consistent with relevant regulatory and taxation laws, and which was also the most commercially effective for the relevant company, trust or individual. To give effect to this, Murdoch Partners would sometimes retrospectively make balance day journal adjustments to re-characterise the accounting treatment of some transactions.
Steven Rowley was aware that depending on a range of circumstances, the income received by himself or other family members in any given year may have been paid as ordinary wages, superannuation or as a distribution of trust profits.[4]
[4]Reasons [15].
The proceedings below
In the proceedings in the Trial Division, AA sought to recover the First and Second Sums (or their traceable proceeds) from RSF on the basis that Steven Rowley, in diverting them to the Super Fund, breached his fiduciary duties to AA. AA made two claims: the first claim sought a declaration of a constructive trust and equitable compensation or an account of profits for knowing receipt of payments made by Steven Rowley under the first limb of Barnes v Addy;[5] the second sought restitution, either personal or proprietary, by RSF on the basis that the Super Fund received the funds as a volunteer.
[5](1874) LR 9 Ch App 244, 251-2 (‘Barnes v Addy’).
The Trial Judge described the central issues as:
whether Steven Rowley breached fiduciary duties owed to AA by facilitating the transfer of funds from AA to the Rowley Superannuation Fund (‘Super Fund’) during the financial years 2007 and 2008, and if so, whether those funds or their traceable proceeds are held by RSF, the current trustee of the Super Fund, on constructive trust for the plaintiff; alternatively whether RSF is liable to the plaintiff for money had and received.[6]
[6]Reasons [2].
In deciding the matter, the Trial Judge considered seven questions. These and his Honour’s answers were as follows:
1.Did Steven Rowley breach fiduciary duties owed to AA in his capacity as director?
Yes.
2.Did the shareholders of AA prospectively assent to the transactions?
No.
3.Did the shareholders of AA ratify the transactions?
No.
4.Was there ‘knowing receipt’ of trust property by RSF?
No.
5.Was RSF a volunteer?
No.
6.Does the subsistence of a debtor/creditor relationship prevent the maintenance of AA’s equitable claim?
His Honour found it unnecessary to decide.
7.Is AA disentitled to equitable relief on the basis of unclean hands?
His Honour found it unnecessary to decide.
Breach of fiduciary duties
The Trial Judge outlined the defining characteristics of the fiduciary relationship between director and company.[7] Relevantly his Honour noted that, at common law, a director must act in good faith and in the interests of the company, must not exercise powers for improper purposes and must avoid conflicts of interest. AA submitted that the diversion of AA’s funds effected by Steven Rowley in the form of super contributions, eligible termination payments and substantial loans to himself were in breach of each of these duties. The Trial Judge agreed.
[7]Ibid [22]–[35].
In his Honour’s view ‘the best interests of the company cannot have been served by such improvident arrangements’[8] and Steven Rowley exercised his powers as sole director, ‘for the collateral and improper purpose of obtaining substantial and direct personal benefits’.[9]
[8]Ibid [41].
[9]Ibid [52].
Steven Rowley’s evidence at trial was that he equated benefits to his family with benefits to the company.[10] However, the Trial Judge was not satisfied that Steven Rowley ‘gave even token consideration to the interests’ of AA, or ‘that he gave any consideration to what was in the interests of the beneficiaries’ of the Rowley Family Trust.[11]
[10]Ibid [42].
[11]Ibid [49].
The Trial Judge noted the inconsistent terms on which Steven Rowley caused AA to borrow and lend funds.[12] While Steven Rowley arranged for AA to borrow $2.5 million on commercial interest rates and fees, and on terms that the principal was repayable by 31 January 2011, he then lent most of the money to himself in the form of undocumented, unsecured and interest-free loans.[13]
[12]Ibid [61].
[13]Ibid [16].
RSF submitted that AA was the trustee of the Rowley Family Trust, a discretionary trust under which AA had wide discretionary powers as to the distribution of the income and capital of the trust.[14] The Trial Judge was not satisfied however that the powers under the trust deed were so wide that AA could make any payment it liked.
[14]Ibid [37].
The Trial Judge also concluded that Steven Rowley acted in breach of his duty to avoid conflicts of interests[15] because he ‘advanced his personal circumstances or those of his family at the expense of AA directly and of the other beneficiaries of the Rowley Family Trust indirectly.’[16] RSF submitted that where the directors and shareholders are one and the same, the concept of any conflict between the interests of a director and the interests of the shareholders is ‘much less acute’. The Trial Judge said however:
In this case, the directors and the shareholders are not identical. Steven is the sole director but he and his wife Barbara each own one of the two shares in the company. There is the additional factor that the company is a trustee. In considering whether there is a possibility of conflict, in my view account must be taken of the fact that the company owes a fiduciary duty to the beneficiaries. In this case, there are the personal interests of the sole director, the interests of the shareholders of the company, and the interests of numerous beneficiaries, which include but are not identical to the interests of the directors or the shareholders. There is a ‘significant’ or ‘real or substantial’ possibility of conflict between those interests. [17]
[15]Ibid [61].
[16]Ibid [57].
[17]Ibid [60] (citations omitted).
Prospective assent and ratification
At trial, RSF submitted that Steven and Barbara Rowley as shareholders of AA assented to the transactions or, alternatively, that they ratified them. The Trial Judge held that Barbara Rowley, as the second shareholder of AA and beneficiary of the Rowley Family Trust, had limited knowledge of the transactions Steven Rowley effected and therefore could not have assented to them. In his Honour’s view, Barbara Rowley had only a ‘vague idea’ of the transactions and was unable to remember whether she was consulted about any of them before they were made.[18] While she may have had some general discussions about the overall strategy with Steven Rowley, she was not in a position to give fully informed consent.[19]
[18]Ibid [67].
[19]Ibid [68].
Similarly, the Trial Judge did not accept that Barbara Rowley had ratified any breach of director’s fiduciary duties. His Honour was not persuaded by any evidence that Barbara attended meetings at which the financial accounts were approved, or that such meetings in fact occurred at all.[20] Further, aside from a general understanding of the strategy from Steven Rowley, Barbara Rowley was not familiar with, and did not review, the contents of the relevant financial statements[21] and, even if she had, the statements did not expose the transactions in sufficient detail such that Barbara Rowley would have been able to ratify them.[22]
Knowing receipt
[20]Ibid [80].
[21]Ibid [82].
[22]Ibid [84].
At trial AA submitted that RSF was liable for ‘knowing receipt’ of trust property under the first limb of Barnes v Addy. The Trial Judge observed, rightly, that to establish liability on this ground AA was required to establish that RSF received trust property with knowledge that it was trust property being misapplied or transferred pursuant to a breach of fiduciary duty or trust.[23] Further, the level of knowledge must fall within one of the Baden[24] categories, namely:[25]
i.actual knowledge;
ii.wilfully shutting one’s eyes to the obvious;
iii.wilfully and recklessly failing to make such enquiries as an honest and reasonable person would make; or
iv.knowledge of circumstances which would indicate the facts to an honest and reasonable person.
[23]Ibid [91], citing Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ASCR 285, 303.
[24]Baden v Société Générale Favouriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (‘Baden’), 575–576.
[25]Reasons [91]–[92].
It was clear that Steven Rowley had actual knowledge of the transactions as he facilitated them. He did so either in his capacity as one of the four trustees of the Super Fund prior to 13 February 2008 (the date on which RSF was created and became the corporate trustee of the Super Fund) or as one of RSF’s four directors thereafter.
The majority of the relevant transactions occurred prior to 13 February 2008 when RSF was incorporated. For these transactions it was necessary for the appellant to establish that each of the family members had the requisite level of knowledge. AA pleaded that it could be inferred from asserted facts that each had knowledge falling within Baden categories (ii) to (iv). The asserted facts relied on by the appellants related to, inter alia, the close family relationship, the fact that the RSF financial statements showed the payments from AA and the fact that Barbara, Adam and Adrian Rowley were each aware that they were not entitled to employee benefits (including employer superannuation contributions) from AA.[26]
[26]Ibid [97].
After reviewing the evidence, the Trial Judge was not prepared to infer that Barbara, Adam or Adrian Rowley individually had the requisite knowledge. His Honour said:
After carefully considering the evidence, I am not prepared to infer that Barbara, Adrian or Adam individually had the requisite knowledge. For reasons previously given, Barbara did not have the requisite knowledge either at the time she received monetary benefits or at the time the monetary contributions were received by the Super Fund. Likewise, Adrian and Adam did not have the requisite knowledge, at least at the time the monetary contributions were received by the Super Fund, having no involvement with the transactions in question. In relation to the payment of a deposit on the Keilor North property ($99,000) and stamp duty on the Garbutt property ($49,625), there was no evidence that Barbara, Adrian or Adam had any knowledge of these transactions at the time the Super Fund received the contributions. This in itself is enough to dispose of the plaintiff’s knowing receipt claim.[27]
[27]Ibid [98].
At trial, instead of its pleaded case, AA submitted that at the time of receipt only Steven Rowley had knowledge but that his knowledge (either as a co-trustee before 13 February 2008 or as co-director of a corporate trustee of RSF after that date) should be imputed to the other trustees or directors because:
·at all relevant times, Steven Rowley acted as agent for the co-trustees or co-directors such that his knowledge should be imputed to Barbara, Adrian and Adam Rowley as his principals; and
·Barbara, Adrian and Adam Rowley did not fulfil their duties to make reasonable enquiries regarding the funds received by the trust and left it to Steven Rowley to fulfil their duties.[28]
[28]Ibid [95].
RSF submitted that it was impermissible for AA to advance such a case because it was not pleaded.[29] Rather, only knowledge under the Baden categories was pleaded. The Trial Judge accepted that AA should be confined to its pleaded case, however for completeness his Honour went on to address in some length the submissions made with respect to agency and a trustee’s duty to make enquiries.[30]
[29]Ibid [98].
[30]Ibid [99]–[130].
AA submitted that Steven Rowley acted as his family’s agent because Barbara, Adam and Adrian Rowley had ‘abdicated responsibility’ to Steven for the transactions, for which Steven Rowley alone devised the strategy and effected pursuant to his discretion.[31] The Trial Judge recognized that knowledge of an agent may be attributed to the principal.[32] However his Honour said that in the present case:
there was no express or implied request by Barbara, Adam or Adrian for Steven to act on their behalf (jointly or individually) in relation to the relevant transactions or more generally with regard to their wages, salaries, entitlements or superannuation. Steven made all the decisions without seeking instructions, obtaining consent from or informing Barbara, Adrian and/or Adam before decisions were made or implemented. There is no evidence that the other trustees knew that the transactions would be effected until they were effected.[33]
In his Honour’s view, Steven Rowley acted on his own rather than ‘on behalf of’ others.[34]
[31]Ibid [101].
[32]In support, his Honour referred to passage in Sargent v ASL Developments Ltd (1974) 131 CLR 634, 658-9.
[33]Reasons [103].
[34]Ibid [104].
Agency aside, AA submitted that the individual trustees were under a duty to make reasonable enquiries as to the circumstances of funds acquired and that equitable constructive notice includes notice of facts that could have been discovered by conducting such enquiries.[35] Further, AA submitted that a trustee who leaves his or her duties to be fulfilled by a co-trustee is jointly liable with that co-trustee. The Trial Judge addressed a number of cases relied on by AA in support,[36] each of which his Honour distinguished and held did not assist AA’s case.
[35]Ibid [105].
[36]Namely, Sargent v ASL Developments Ltd (1974) 131 CLR 634; Chambers v Minchin (1802) 7 Ves Jun 187; Jones v Collins (1891) 12 LR (NSW) 247.
RSF submitted that Steven Rowley’s knowledge could only be imputed to the co-trustees if Steven was appointed as each of their agents, for which there was no sufficient evidentiary basis in this case.[37] Further, RSF submitted that the terms of the trust deed provided that all decisions, authorisations and exercises of powers or discretions required unanimous resolution and reflecting the principle that each trustee must exercise his or her own discretion and turn their minds to relevant transactions.[38] The Trial Judge accepted each of RSF’s submissions.
[37]Reasons [111].
[38]Ibid [112]–[113].
His Honour said:
Absent agency, the knowledge of Steven is not to be imputed to the other trustees of the Super Fund. Mere negligence will not suffice to ground constructive notice in this context. There must be some lack of probity such as a conscious refraining from making an enquiry. In this case, there is no evidence of anything in the nature of a conscious refraining from making enquiry by Barbara, Adrian or Adam or of any other aspect of their behaviour touching the conscience. I accept that the other directors of RSF relied on Steven Rowley, the accountants, Murdoch Partners and other advisers in relation to the transactions which led to contributions being made to the Super Fund. Indeed, there were indications of over-reliance but I am not satisfied that any of them (Barbara, Adrian or Adam) wilfully shut their eyes to the obvious, wilfully and recklessly failed to make appropriate enquiries, or knew of circumstances indicating that the contributions to the Super Fund came from trust property being misapplied or transferred in breach of fiduciary duty. [39]
[39]Ibid [116] (citations omitted).
AA ran a similar agency argument regarding the transactions after 13 February 2008 when RSF was trustee of the Super Fund and its directors were each of the four Rowley family members. AA submitted that the knowledge of Steven Rowley as co-director of the corporate trustee should be imputed to the other co-directors.[40] The Trial Judge rejected this for the same reasons outlined above.[41]
[40]Ibid [117].
[41]The majority of the super contributions were received by the Super Fund when the individual family members were trustees. AA submitted however that when RSF became the trustee in February 2008, the relevant sums or their traceable proceeds were vested in it under s 45 of the Trustee Act 1958 (Vic) and were subject to the same defects of title that affected title of the previous trustees: see Reasons [131].
However, his Honour said that where an individual is the ‘directing mind and will’ of a company, his or her state of knowledge may be imputed to the company, not because he or she is an agent but because the individual may be regarded ‘as the company’.[42] RSF, while it did not dispute this, submitted that the case was not pleaded in that manner. Further, RSF submitted that there was no evidence to infer that Steven Rowley was the directing mind and will of RSF; Steven’s evidence in chief at trial focused on his activities at AA not RSF and similarly there was minimal evidence given by the other family members relating to the management of RSF.[43] The Trial Judge agreed that there was minimal evidence directed to the activities of RSF and, therefore, held there was no sound basis on which to conclude that Steven Rowley was the directing mind and will of RSF after 13 February 2008.[44]
[42]Reasons [118], citing El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 695.
[43]Ibid [118]–[127].
[44]Ibid [128]–[129].
Was RSF a volunteer?
AA submitted at trial that RSF should be liable as the recipient of trust property because it received the trust property without providing any consideration to AA, and was therefore a volunteer.[45] AA submitted that RSF was either liable for monies had and received (personal claim) or liable to account to AA as constructive trustee of the money or its traceable proceeds (a proprietary claim).[46]
[45]Ibid [131].
[46]Ibid [132].
RSF submitted that it was a bona fide purchaser for value; that the trustees (first the individuals, later RSF) were required to deal with the funds vested in the trustee upon terms and conditions set out in the trust deed and therefore gave valuable consideration.[47] AA disputed whether the fulfilment of obligations could constitute valuable consideration.
[47]Ibid [133].
The Trial Judge considered the case of Cook v Benson,[48] in which the High Court (by majority) dismissed an appeal by a trustee in bankruptcy seeking orders for repayment of monies paid to three superannuation funds on the basis that the trustees of the superannuation funds were not purchasers in good faith for valuable consideration. The Trial Judge distinguished the present case in a number of ways. However, in his Honour’s view, Cook was still applicable to the Rowley super fund because:
[the] distinguishing features [were] not sufficient to displace the underlying principle that the trustee of a superannuation fund provides valuable consideration by providing rights and benefits to a member in exchange for his or her contribution.[49]
[48](2003) 214 CLR 370 (‘Cook’).
[49]Reasons [142].
His Honour considered, therefore, that the individual Rowley family members, and later RSF, did provide valuable consideration for the relevant superannuation contributions.[50]
[50]Ibid [146].
Debtor/creditor relationship and unclean hands
As his Honour was not minded to grant relief to AA, the Trial Judge did not find it necessary to rule on submissions regarding any debtor/creditor relationship or unclean hands. The Trial Judge did however briefly set out the relevant principles regarding each issue.[51] On the existence of a debtor/creditor relationship, his Honour commented that such a relationship would not bar AA’s personal claim but did not decide the issue of whether it would also bar a proprietary claim.[52]
[51]Ibid [148]–[160].
[52]Ibid [152]–[153].
Grounds of appeal
By Notice of Appeal dated 31 October 2013, AA set out four grounds of appeal:
1.The learned trial judge erred in holding that the trustees of the Rowley Superannuation Fund did not have knowledge (to the requisite degree for a claim in knowing receipt under the first limb of Barnes v Addy) in respect of the funds which they received. Specifically, the learned trial judge erred by inter alia:
(a)holding that it was impermissible for AA, on its pleading, to advance a case based on the attribution of Steven Rowley's knowledge to the co trustees;
(b) holding that Steven Rowley's knowledge could not be or was not imputed to the co-trustees;
(c)not holding that Steven Rowley's knowledge was sufficient to constitute knowledge on the part of the trustees.
His Honour should have held that the trustees did have the requisite degree of knowledge, and that they were knowing recipients of trust property.
2. The learned trial judge erred in not holding that the respondent had knowledge (to the requisite degree for a claim in knowing receipt under the first limb of Barnes v Addy) in respect of the funds which it received. Specifically, the learned judge erred by not holding that the knowledge of Steven Rowley, as a director of the respondent, could be and was imputed to the respondent.
3. The learned trial judge erred in holding that the trustees of the Rowley Super Fund gave valuable consideration for the receipt of the funds and hence were not volunteers, but were bona fide purchasers for value without notice. Specifically, the trial judge erred by applying Cook v Benson. His Honour should have held that the trustees were not bona fide purchasers for value without notice, as they were volunteers and/or had the requisite degree of notice.
3 The learned trial judge erred in not holding that there was no bar to the appellant obtaining equitable proprietary relief on the ground of a debtor/creditor relationship.
In response, RSF filed a Notice of Contention dated 11 December 2013. That Notice outlines a number of grounds:
1.The learned trial judge should have held that Steven Rowley (SR) in his capacity as a director of Australasian Annuities Pty Ltd (AA) did not breach fiduciary duties owed by him to AA by facilitating the making of contributions to the super fund either directly by AA, or indirectly, on behalf of individual family members to the super fund.
2.Further to paragraph 1 and more specifically, the learned trial judge should have held that in circumstances where AA was solvent at the time of the transactions and acted in accordance with the wishes of its shareholders, Steven Rowley had not breached duties:
(a) to act in good faith and in the interests of AA;
(b) to exercise powers for improper purposes;
(c) to avoid a conflict of interest.
3.The learned trial judge should have held that the alleged breaches by SR of the following duties:
(a) to act in good faith and in the interests of AA;
(b) to not exercise powers for an improper purpose,
were not breaches of a duty of a fiduciary nature.
4. The learned trial judge should have held that in circumstances where AA was solvent, had acted in accordance with the wishes of its shareholders, and was not acting in breach of its duties as trustee, the interests of AA and its shareholders were co-incident such that there was no conflict of interest between the interests of the shareholders and the company.
5. The learned trial judge should have held that insofar as SR breached duties owed to AA and that the duties were of a fiduciary nature (both of which are not accepted), the moneys received by the super fund did not constitute trust property for the purposes of liability under the first limb of Barnes v Addy (first limb Barnes v Addy liability).
6. The learned trial judge should have held that insofar as SR breached duties owed to AA, that the duties were of a fiduciary nature and the moneys received by the super fund constituted trust property (all of which is disputed), SR did not have the requisite knowledge of the breach, such as to give rise to first limb Barnes v Addy liability, assuming that SR's knowledge could be imputed to the super fund (which is also disputed).
7. The learned trial judge should have held that insofar as SR breached duties owed to AA, that the duties were of a fiduciary nature, the moneys received by the super fund constituted trust property and that SR had the requisite knowledge of the breach (all of which is disputed) the shareholders of AA consented to the breaches, both prospectively and retrospectively, such that it was not permissible for AA to seek relief founded upon those breaches.
8. The learned trial judge should have held that the subsistence of a relationship of debtor and creditor between SR and AA and the fact that payments had been made by AA to SR, and to Barbara Rowley, Adrian Rowley and Adam Rowley by way of wages and superannuation payments operated as a bar to AA's claim.
9. The learned trial judge should have accepted the evidence of SR to the effect that in about late 2006, SR was approached by Mr Jamie Melville from the Macquarie Bank Limited (Macquarie) who suggested that he invest $1 million into superannuation and that Macquarie would lend the moneys to fund that contribution, and made findings to that effect accordingly.
10. Having made the finding referred to in paragraph 9, and further or alternatively in circumstances where Macquarie was a party to the facility agreement which provided that the purpose of the loan to AA was to assist with superannuation contributions, the learned trial judge should have dismissed the claim brought by the appointed receivers of Macquarie in the name of AA, on the basis that Macquarie lacked clean hands.
In combining the grounds from the Notices of Appeal and Contention, the parties appear to contest most of the findings of the Trial Judge. Therefore the main issues on appeal mirror the questions asked by the Trial Judge. I shall deal with each of the questions answered by his Honour in turn.
Question 1. Did Mr Rowley breach fiduciary duties owed to AA in his capacity as director?
RSF contended that while directors owe a duty of care to a company of a fiduciary nature, one has to assess that duty and any conflict in the context of the circumstances of the company. It argued that the company was a closely held family company, and in reliance on the decision of Brereton J in ASIC v Maxwell,[53] posited that where there is an identity of interest between the shareholders and directors the requirement to prevent self-interested dealing is less acute. Therefore, RSF submitted that as AA was solvent when it made the transactions, the interests of the director and those of the shareholders and thus the company were identical.
[53]Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373, 398.
Moreover, RSF argued that the Trial Judge was in error by seeking to distinguish between Steven Rowley’s roles as sole director and as shareholder (with his wife). It submitted that the distinction drawn between Steven Rowley’s personal interests as a director and the interests of the shareholders is artificial for four reasons. First, it ignores the fact that AA is a family company; secondly, the payment from AA went to Steven and Barbara Rowley’s joint bank account before going to the Super fund; thirdly, the ultimate destination of the funds was the Super Fund which was set up to benefit the Rowley family members; and fourthly, the party affected by the alleged conflict did not regard it as a conflict and made no complaint.
Finally, RSF submitted that the Trial Judge erred in taking into account the interests of the beneficiaries of the Rowley Family trust in assessing whether Steven Rowley had breached his fiduciary duty. It argued that none of the beneficiaries complained about the transaction, all were related to Steven and Barbara Rowley, and the fact that the trust is a discretionary trust means that their interests should in no way affect the assessment of whether Steven Rowley breached his fiduciary duty.
In response, AA contended that his Honour was correct to find a breach of fiduciary duty. It argued that the loan was clearly imprudent for AA, as it gave rise to significant liabilities as against its own assets and cash flow. Further, it contended that the payments were clearly made in an imprudent fashion as a substantial proportion of the payments were made as early employee termination payments for which neither Steven nor Barbara Rowley were eligible. With this factual matrix in mind, AA argued that the actions of Steven Rowley fit within the well-established rule that a director who directs company funds to himself by way of loan or otherwise is in breach.
On the issue of the nature of the company, AA argued that the powers conferred upon Mr Rowley as a sole director of AA could not be exercised to gain some personal advantage, and he did not even give token consideration to the interests of the company or the beneficiaries of the trust. Further, it noted that as AA was in the position of trustee it had to take into consideration the interest of the beneficiaries, regardless of the fact that they were objects of the discretionary trust. This is because, on AA’s argument, even members of a discretionary trust have the powers to compel a trustee to comply with their obligations under the trust deed. Finally, AA contended that the class of objects of the trust was wider than AA’s shareholders of Steven and Barbara Rowley. Thus the fact that the trust deed did not compel AA as trustee to distribute AA’s assets to anyone highlights the distinction between the interests of the trust and the interests of Steven Rowley and his wife and children.
It is clear, as the Trial Judge noted, that a director owes fiduciary duties to a company as a separate legal entity, and not to that company’s shareholders or creditors.[54] Mason J set out the nature of a fiduciary relationship in Hospital Products Ltd v United States Surgical Corp[55]:
The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.
…
It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed.[56]
[54]Reasons [26]; see also Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 168, 178-9.
[55](1984) 156 CLR 41.
[56]Ibid 96-7.
As a result of that fiduciary relationship a director owes a number of separate, though intertwined duties, including a duty to act in good faith and in the interests of the company,[57] a duty to avoid conflicts of interest,[58] and a duty not to exercise powers for an improper purpose.[59]
[57]Re Smith & Fawcett Ltd [1942] Ch 304, 306; Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1, 182.
[58]Hospital Products (1984) 156 CLR 41, 103; Chan v Zachariah (1984) 154 CLR 178, 198; Boardman v Phipps (1967) 2 AC 46, 124.
[59]Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187, 218.
The fiduciary duty owed by a director to a company is somewhat expanded when the company is a trustee company. This was explained by Robson J in Re S & D International Pty Ltd (No 4),[60] where his Honour stated:
The basic common law duty of a director is that he or she must act bona fide in what he or she believes is in the best interests of the company as a whole. This duty is encompassed in s 181[of the Corporations Act2001 (Cth)]. In this instance, S&D acted as a trustee of the unit trust and the best interests of the company were clearly to act properly in accordance with the trust deed and in the interests of the unit trust. In other words to ensure that the trustee exercised its powers honestly and in the best interests of the beneficiaries of the trust.[61]
[60](2010) ACSR 595.
[61]Ibid 657.
In my view, the Trial Judge made no error of law in rejecting the contention of RSF. There are a number of factors that lead me to this conclusion. First, at the relevant time Steven Rowley was the sole director of AA: he was under a duty to ensure that the powers of the company were exercised for a proper purpose. In exercising his powers, he clearly assumed the interests of AA and the interests of RSF and the Rowley family were one and the same. That is not the case. AA was the trustee of the Rowley Family Trust. Trustee companies and their directors have specific obligations.
Steven Rowley’s actions and evidence at trial indicated that his actions fell far short of his obligations as a director.[62] He did not consider the legitimate interest of the beneficiaries, indeed he stated in his cross-examination that he did not look at the transactions from the point of view of the company but of the shareholders. Furthermore, Steven Rowley appeared to do with the trust as he pleased, effecting transactions to benefit himself and his family members while having little or no regard to the fact that AA was the trustee of a trust.
[62]Reasons [49].
Secondly, the loan from Macquarie was manifestly imprudent. AA was a company with few assets, and while its financial arrangements with London Partners were profitable, the loan from Macquarie put it into a difficult financial position. AA had liabilities of over $3.5 million, $2 million of which was the loan to Macquarie, while on the other side of the ledger its major asset consisted of a number of unsecured loans to Steven Rowley. Further, once AA was given the money it then either transferred that money to the Super Fund or loaned that money to Steven Rowley. It was not used for the benefit of the company; to the contrary, the loans were provided to Steven Rowley without security.
Moreover, a substantial amount of the loaned funds was used as eligible termination payments. The Trial Judge was critical of these payments as he made a finding that Steven Rowley had no intention to retire at the time the payments were made.[63] Such actions were clearly imprudent, not in the best interests of AA or the beneficiaries of the Rowley Family Trust, and give rise to a conflict of interest between the interests of Steven Rowley and those of AA. Further, the payment of the eligible termination payments may have been in breach of relevant tax legislation.
[63]Ibid [56].
Thirdly, Steven Rowley’s actions were clearly for the benefit of him and his family. As I have already noted, there was no evidence that Steven Rowley gave any thought to the interests of AA or the beneficiaries of the Rowley Family Trust. What is even more alarming, is that alongside this failure to take into account the interests of shareholders and beneficiaries, Steven Rowley’s actions were intended to and did result in significant financial benefits to the Rowley family.
It follows that I would answer yes to Question 1. Hence his Honour was correct.
Question 2. Did the shareholders of AA prospectively assent to the transactions?
RSF’s main contention was that while his Honour was correct in finding that shareholders could assent to a breach before during or after a transaction, his analysis in finding that the shareholders had not assented was in error. It argued that Barbara Rowley’s assent was either simultaneous or retrospective. While she was unfamiliar with the precise structure, the respondent submitted that Steven Rowley told her of the particular opportunity, and that the Court was bound to assess the level of Barbara Rowley’s knowledge in the particular circumstances.
In this case, RSF argued that Barbara Rowley had delegated to her husband the responsibility of conducting the affairs of AA for their family. Accordingly, it submitted that it was not open to her to complain about his conduct.
AA submitted that its sole function was as the trustee of the Rowley Family Trust, therefore, any unanimous consent needed to be from the persons interested in the trust (i.e. the objects). The director had to take into account whether the transactions were for the benefit of the beneficiaries of the trust, yet there was no evidence of disclosure of the transactions to them. In relation to Barbara Rowley’s assent, AA argued that she could not have given fully informed consent because of her lack of knowledge. It emphasised that there was no evidence of Barbara being given information that the average commercial man in the street would think she should have in relation to the transaction.
In order for the shareholders of AA to assent to the transaction, they must provide fully informed consent.[64] The High Court has held that the issues of whether there was consent and whether it was fully informed are a questions of fact that must take into account the surrounding circumstances in each case.[65] In Buttonwood Nominees Pty Ltd v Sundowner Minerals NL,[66] Young J outlined the nature of the information that must be provided to the shareholders in order to obtain fully informed consent:
Accordingly, although there is the obligation to give full information, it is quite clear that this does not require the directors of a company to give to the shareholders every piece of information which might conceivably affect their voting. The obligation is to indicate the information which they consider the shareholders should have, plus that information which it would be obvious to the average commercial man in the street that they should have.[67]
[64]Maguire v Makaronis (1997) 188 CLR 449, 466.
[65]Ibid.
[66](1986) 10 ACLR 360.
[67]Ibid 362.
I am not persuaded, on the evidence given at trial, that Barbara Rowley gave fully informed consent to the transactions. First, she was unable to remember whether she had consented to the transactions or whether she was consulted about them. The transcript of Barbara Rowley’s cross-examination indicated that she had little to no knowledge of the amounts transferred or even of the nature of the transactions:
In 2006/2007 large amounts of money were transferred to the Rowley Superannuation Fund. Were you aware about that at the time?---I didn’t know the details of things because Steven was the one who looked after our finances. He’s a financial planner. He looked after all that sort of thing.
So you relied upon him to do these things and he would tell you things if and when it became necessary to do so?---Yes, when there were things to be done or whatever, he would tell me.
So in 2007, if you look at the first page of the document “Payments sought to be recovered”, you will see reference to a number of transfers there. Am I right to suggest to you that you wouldn’t have been consulted before any of those payments were made from the company or to the superannuation fund?---Look, I can’t remember these, you know, exact dates or anything. All I can say is that Steve would consult me about things when it was necessary.
But in respect of those payments you don’t recall ever being consulted about any of those before they were made?---I can’t remember very much of those times.[68]
[68]See Reasons [67].
Secondly, the Trial Judge was not persuaded that Barbara Rowley had attended the accountant’s office on the days the accounts were signed by her and her husband.[69] His Honour stated:
An issue arose as to whether Barbara gave her assent by her attendance at AA’s meetings at its accountants’ office on Whitehorse Road, Mont Albert in December 2007 and on Cotham Road, Kew in December 2008. I am not satisfied that meetings occurred on or about these dates. The evidence on this issue was extremely vague and unsatisfactory. Barbara could not recall whether she attended a meeting on 28 December 2007 or on 29 December 2008. She did not know whether she read the financial statements at or about that time and in any event, did not do so in detail because she said she depended upon Steven to explain anything imperative.[70]
[69]Ibid [75].
[70]Ibid.
There is nothing to indicate that Barbara Rowley provided fully informed consent to the transactions. Therefore the answer to Question 2 is no. His Honour was correct. I would add that AA had the burden of proof on this point and plainly it failed to present and elicit sufficient evidence to make out its case.
Question 3. Did the shareholders of AA ratify the transactions?
RSF argued that his Honour erred in holding that Barbara could not retrospectively approve of the transaction because AA was insolvent. It argued in effect a constructive consent by virtue of the fact that Barbara Rowley consented to the transactions in her witness statement filed and relied on at trial. It submitted that his Honour’s decision would inappropriately fetter the ability of shareholders to approve a transaction when the company is solvent at the time of the breach but not at the time of the approval.[71]
[71]See Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722, 732; Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425, 444.
In response, AA argued that Barbara Rowley could not retrospectively consent to the arrangement as she had insufficient knowledge, and the first time she set out her purported consent was in her witness statement. By that time, AA submitted, the company was insolvent and therefore it was too late to ratify the arrangement. AA rejected RSF’s submission on the timing of the insolvency arguing that the time for determining the application of the restriction under insolvency law is not the time of breach, but the time of the purported ratification. It contended that at no time, even when Barbara Rowley provided her witness statement at trial, did she have sufficient knowledge of the transactions to give informed consent.
It is open for shareholders to retrospectively ratify an act done by a director that would ordinarily be in breach of his or her fiduciary duty.[72] This requires, similarly with assent before breach, fully informed consent.[73] The Trial Judge was correct in rejecting that Barbara Rowley had the requisite knowledge to provide fully informed consent retrospectively. His Honour accepted this as a finding of fact.[74] In addition to these factual findings, and as I have already observed, Barbara Rowley’s cross-examination did not elicit sufficient or indeed any knowledge of the nature of the transactions. Barbara Rowley’s witness statement includes the following statement:
I now know that AA as trustee of the Rowley Family Trust made various payments to my husband and I, of employee superannuation contributions, of eligible termination payments and of employer superannuation contributions for myself and as well for Adam and Adrian. I am also now aware that AA as trustee of the Rowley Family Trust made various loans to Steven. I am aware that the payments were reflected in the accounts of AA which had been prepared by Murdoch Partners. As a beneficiary of the Rowley Family Trust and as a shareholder of AA, I consent to and approve of the making of those payments.
[72]Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, 150, 157; Furs Ltd v Tomkies (1936) 54 CLR 583, 592; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722, 732.
[73]Buttonwood Nominees Pty Ltd v Sundowner Minerals NL (1986) 10 ACLR 360.
[74]Reasons [83].
However, the transcript of Barbara Rowley’s cross-examination reveals a witness who appeared to have little understanding of the transactions as they occurred.[75] It is unclear what kind of information Barbara Rowley analysed and whether she actually comprehended the transactions that took place. Little value attaches to the alleged consent in the witness statement: RSF carried the burden but failed to establish that it amounted to a ratification.
[75]Ibid [67].
Furthermore, RSF has even more difficulty when one assesses the asserted ratification against the backdrop of Macquarie’s position as a creditor. In Kinsela v Russell Kinsela Pty Ltd,[76] Street CJ held:
It is, to my mind, legally and logically acceptable to recognise that, where directors are involved in a breach of their duty to the company affecting the interests of shareholders, then shareholders can either authorise that breach in prospect or ratify it in retrospect. Where, however, the interests at risk are those of creditors I see no reason in law or in logic to recognise that the shareholders can authorise the breach. Once it is accepted, as in my view it must be, that the directors’ duty to a company as a whole extends in an insolvency context to not prejudicing the interests of creditors the shareholders do not have the power or authority to absolve the directors from that breach.[77]
[76](1986) 4 NSWLR 722 (‘Kinsela’).
[77]Ibid, 732.
This meant that because of AA’s insolvency Barbara Rowley is unable to ratify the breach by her husband. I do not accept the contention that a court should focus on the timing of the breach as opposed to the ratification. The authorities are clear that once the company is insolvent, the ability of the shareholders to ratify the action is removed.[78] It would be perverse to allow shareholders to ratify a breach of fiduciary duty which may reduce the pool of assets available to creditors.
[78]See Kinsela (1986) 4 NSWLR 722, 732; Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425, 444.
I would therefore answer no to Question 3. There was no error of law by his Honour.
Question 4. Was there knowing receipt of trust property by RSF?
Before outlining the submissions of the parties on this question, it is important to set out the principles on knowing receipt. In order for RSF to be liable, AA must show that RSF received trust property and knew that the property was trust property being misapplied or transferred pursuant to a breach of fiduciary duty or trust.[79]
[79]Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ASCR 285.
The level of knowledge required was outlined by the Gibson J in the English High Court of Justice in Baden v Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France SA.[80] His Honour set out four categories of knowledge which give rise to knowing receipt under the first limb of Barnes v Addy, being:
i.actual knowledge;
ii.wilful blindness;
iii.wilful and reckless failure to make such inquiries as an honest and reasonable person would make; or
iv.knowledge of circumstances which would indicate the facts to an honest and reasonable person.[81]
[80][1993] 1 WLR 509.
[81]Ibid 575-576.
AA emphasised that for most of the transactions the trustees of the Super Fund were Steven, Barbara, Adrian and Adam Rowley. AA first took issue with the Trial Judge’s decision regarding its change of case from pleadings at the trial. It argued that his Honour took an unduly narrow view of the statement of claim. While AA accepted that its particulars set out the knowledge of each trustee, it contended that the material fact, being the knowledge of the family members, was supported by the particulars, including the knowledge of Steven. Further, it submitted that in its opening submissions at trial AA made clear it would run a case of attribution of Steven Rowley’s knowledge and there was no complaint at that point from the Trial Judge or RSF, the only criticism coming in a brief mention in RSF’s closing at trial.
To reiterate, his Honour held:
Senior Counsel for the plaintiff did not formally abandon the pleaded case that it could be inferred from the asserted facts that Barbara, Adrian and Adam each had the requisite knowledge, but made no submissions to this effect. RSF submits that it is impermissible for the plaintiff to advance a case based on constructive knowledge, namely that Steven’s knowledge can be treated as the knowledge of the other trustees, as that case was not pleaded. I accept that RSF pleaded to and defended a case brought on the basis of knowledge of each of the individual trustees (within categories (ii) to (iv) above). In my view, the plaintiff should be bound by its pleaded case. No application was made to amend the pleadings to advance an alternative basis for the plaintiff’s knowing receipt claims. After carefully considering the evidence, I am not prepared to infer that Barbara, Adrian or Adam individually had the requisite knowledge.[82]
[82]Reasons [98].
AA sought to impugn the decision of the Trial Judge regarding attribution. Citing Cumming v Austin,[83] it contended that where a trustee knows of the receipt of funds, he or she is under an obligation to inform the other trustees of the receipt and to disclose the source of the funds. In this instance, AA submitted, Steven Rowley failed to do so. In effect, AA argued that the four trustees should be taken as having acted on the instruction to place the money into each respective superannuation account in the Super Fund.
[83](1902) 28 VLR 347 (‘Cumming’).
In particular, AA emphasised the comments of Madden CJ:
I have no doubt it would have been just as effectual as the most formal notice to them, and under ordinary circumstances, the knowledge of one of several trustees is the knowledge of all of the transaction affecting the trust. But the rule is laid down in Browne v Savage and in Willes v Greenhill that, where the trustee who gets knowledge is himself a beneficiary under the trust as well as a trustee, and it is he himself who assigns his interest to a third party, then his knowledge of that assignment, as assignor does not affect his brother trustees with knowledge of the transaction, because it is to his interest to conceal the fact that he has parted with his beneficial interest … But it is different in the case of a trustee who becomes an assignee of an interest in the trust fund, because there his interest is to inform his brother trustees to protect himself, and therefore the Court assumes that his knowledge is that of his brother trustees.[84]
[84]Ibid 354-5 (citations omitted)
Further, AA argued that it was clear that Steven Rowley was acting as the agent of the other trustees as each of the family members relied upon and trusted him in relation to the management of the superannuation fund. In the alternative, AA submitted that Steven Rowley’s knowledge could be imputed to the other members of his family as he was the controlling mind of the Super Fund and RSF.
Further, AA submitted that the Trial Judge’s reasoning and decision was contrary to public policy. It argued that it would make little sense to require knowledge of all trustees, especially in cases of attribution of knowledge as opposed to attribution of blame. Counsel for AA submitted in the argument on appeal that these moneys were tainted moneys. He sought to draw an analogy, suggesting that if Steven Rowley stole $100 and put it in the Super Fund it would offend every principle of law to suggest that the fund can keep the money because the three other members of the fund did not know it was stolen.
In relation to the knowledge of RSF as a trustee, AA contended that the Trial Judge erred in finding that RSF did not have the knowledge of the breach. It argued that the law attributes knowledge of a director to a company, and that it does not need to be imputed to co-directors. Further, as a consequence of the Trustee Act1958 RSF takes the moneys in the trust subject to the same defects of title, and therefore would be liable to a knowing receipt claim.
RSF’s primary submission was that Steven Rowley did not have actual knowledge of the breach. It argued that while he had knowledge of the facts, that knowledge should be distinguished from knowledge of the breach.
In the event that the Court were minded to find knowledge of the breach, RSF argued that there is difficulty in attributing the knowledge of one trustee to another. It submitted that the actions of one trustee cannot bind or commit the trustee where there is more than one trustee. RSF argued that to do so would undermine the personal nature of the role that a trustee has as an individual to the trust, as opposed to a collective of trustees.
Finally, RSF contended that Cumming can be distinguished as that case dealt with a trustee’s notice of an assignee’s interest as opposed to notice of a breach of fiduciary duty.
Pleadings
Before turning to assess the issue of knowing receipt, it is necessary to consider RSF’s argument that AA should not be allowed to run the attribution arguments on the basis that it pleaded only the actual knowledge of each trustee.
The Further Amended Statement of Claim dated 25 March 2013 outlined AA’s pleadings in relation to the knowing receipt claim against the various members of the Rowley family. The Statement of Claim provided:
24B. In receiving the First Sum and the Second Sum from the plaintiff (as set out in paragraphs 13 and 13C above), or alternatively in receiving $225,560 of the First Sum and $253,713.72 of the Second Sum (as set out in paragraphs 13A and 13D above), the Rowley Family:
(a) were wilfully blind to; or alternatively
(b)wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make in relation to or alternatively
(c)had knowledge of circumstances which would indicate the facts to an honest and reasonable man of,
the fact that the amounts so received constituted trust property being misapplied or transferred pursuant to breaches of fiduciary duties by Steven Rowley.
Particulars
Steven Rowley had the requisite level of knowledge, as he was the primary wrongdoer as set out in paragraphs 21 and 2lA above.
It may be inferred that Barbara Rowley had the requisite level of knowledge from the following facts: (i) she is the wife of Steven Rowley and the mother of Adam Rowley and Adrian Rowley, (ii) she was a shareholder of the plaintiff, (iii) she was the addressee of bank statements which showed payments from the plaintiff into an account in the name of Steven Rowley and Barbara Rowley, (iv) the Super Fund's bank statements showed that payments came out of the plaintiff's account or the account in the name of Steven Rowley and Barbara Rowley (v) the Super Fund's financial statements for the years ended 30 June 2007 and 30 June 2008 showed the payments, (vi) she attended a meeting of members of the plaintiff at which it was resolved to adopt the financial statements for the financial year ended 30 June 2007, which showed the company's liabilities increasing from $1.873 million to $5.134 million (largely attributable to the Macquarie Facility) and the main corresponding increases in assets were loan - S Rowley (increase from $1.571 million to $2.966 million) and beneficiary loans (increase from $22 805 to $656 318), and (vii) she knew she was not eligible for employment benefits, including employer superannuation contributions and eligible termination payment, from the plaintiff.
It may be inferred that Adam Rowley had the requisite level of knowledge from the following facts: (i) he is the son of Steven Rowley and Barbara Rowley and the brother of Adam Rowley [sic], (ii) he was a recipient of the bank statements for account number 117045294 in the name of Steven Rowley and Adam Rowley [sic] as trustees for the Super Fund held with Macquarie, (iii) he attended a meeting on 18 December 2006 with Macquarie (as described in activity notes prepared by Macquarie) at which there was discussion about the Facility and, among other things, Steven Rowley stated that he was waiting on final legislation to determine how much he would be able to roll over into super if he sold part of the business to his sons (iv) he received an email from Jamie Melville at Macquarie dated 11 April 2007 which described the structure of the Facility and that it would be paid into superannuation, (v) the Super Fund's financial statements for the years ended 30 June 2007 and 30 June 2008 showed the payments and (vi) he knew he was not entitled to employee benefits. including employer superannuation contributions, from the plaintiff.
It may be inferred that Adrian Rowley had the requisite level of knowledge from the following facts: (i) he is the son of Steven Rowley and Barbara Rowley and the brother of Adam Rowley, (ii) the Super Fund's financial statements for the years ended 30 June 2007 and 30 June 2008 showed the payments, and (iii) he knew he was not entitled to employee benefits, including employer superannuation contributions, from the plaintiff.
The pleadings clearly indicate, as his Honour outlined in his judgment, that AA sought to prove in its pleadings that each individual member of the Rowley family had the requisite level of knowledge. The purpose of pleadings is to inform the other party of the case it seeks to run at trial, to define the cause of action and to assist in highlighting the areas of controversy. Burchett J in Multigroup Distribution Services Pty Ltd v TNT Aust Pty Ltd[85] explained the purpose of pleadings in this way:
The primary function of (a statement of claim) is to tell the defending party what the claim is he has to meet. That is a matter of elementary and natural justice; the claim cannot be answered until it is known. When a sufficient defence has been filed to a sufficient statement of claim, a further function will generally have been performed — that of defining the question or questions for decision. This definition is required … from an early stage, or else discovery and other interlocutory procedures are likely to prove misdirected, wasteful and unproductive.[86]
[85](1996) ATPR 41-522
[86]Ibid 42,769.
While it is correct that a failure to amend a pleading does not preclude a verdict on facts that have emerged in a trial,[87] parties are generally bound by what they have pleaded and cannot, without leave, go into matters that are not included in the pleadings.[88] This was not a case where evidence of imputation of knowledge was led without objection:[89] in RSF’s ‘Outline of Key Propositions ‘provided at the end of the trial, it set out that AA had not pleaded the case of imputed knowledge.
[87]See Water Board v Moustakas (1988) 180 CLR 491, 497
[88]Philipps v Philipps (1878) 4 QBD 127 at 133; Woolley v Broad [1892] 2 QB 317; Zierenberg v Labouchere [1893]2 QB 183
[89]See Miller v Cameron (1936) 54 CLR 572, 577.
His Honour was correct to hold AA to its pleaded case. However, for completeness I will address the arguments in relation to imputed knowledge.
Individual trustees
I turn first to whether the knowledge of Steven Rowley can be imputed to either the individual trustees before 13 February 2008 or to other directors of RSF after that date. The argument of RSF that Steven Rowley did not have the requisite knowledge to give rise to a claim in knowing receipt is misconceived. While it is correct that knowledge of the transactions is different to knowledge that the property transferred is in breach of his fiduciary duty there was sufficient evidence to support the finding that Steven Rowley knew that the transfer of moneys from AA to the Super Fund was in breach of his fiduciary duties. Steven Rowley treated the loan moneys as if they were his own, with little regard for the interests of the shareholders or of the trustees of the Rowley Family Trust. Further, the Trial Judge found that he made eligible termination payments to both himself and his wife when neither had an intention to retire.[90] These facts indicate that Steven Rowley had the requisite knowledge required to give rise to a claim of knowing receipt against him.
[90]Reasons [56].
In relation to the individual trustees, the general position in equity, as noted by Stephen J in Consul Development Pty Ltd v DPC Estates Pty Ltd,[91] is that the courts should be reluctant to extend the application of the doctrine of constructive notice because of equity’s concern with the conscience of the party.[92] His Honour cited a number of authorities[93] which emphasised the court’s concern for extending such a doctrine, namely because it attached liability to an individual on the basis of an assumption that the person does not know the relevant facts.[94]
[91](1975) 132 CLR 373.
[92]Ibid 412-413.
[93]Milne v James (1910) 13 CLR 168; English and Scottish Mercantile Investment Co v Brunton [1892J 2 QB 700; Joseph v. Lyons (1884) 15 QBD 280.
[94]Ibid 413, see also English and Scottish Mercantile Investment Co. v. Brunton [1892J 2 QB 700, 708.
This position is strengthened by the terms of the trust deed of the Super Fund which explicitly set out that all decisions and authorisations and any exercise of power required the unanimous consent of all persons or a majority of those at a meeting.
Furthermore, as the Trial Judge noted, it is clear that negligence would not suffice to bring the individual trustees under the first limb of Barnes v Addy; there had to be some lack of probity such as a conscious refraining from making enquiries.[95] Without seeking to traverse the full body of the facts presented at trial, I am not persuaded that the Trial Judge erred in finding that the knowledge of Steven Rowley could not be imputed to the other trustees.
[95]Reasons [116], citing Denis SK Ong, Trust Law In Australia (The Federation Press, 4th ed, 2012), 528-553; DPC Estates Pty Ltd v Grey & Consul Development Pty Ltd [1974] 1 NSWLR 443, 458-9; Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89.
First, the reliance by AA on Cumming is misguided. That case concerns whether knowledge of the assignment of an interest is in the knowledge of each trustee. It does not deal with knowing receipt, and the importance of the conscience of each trustee and the liability attached to that consciousness. The inherent nature of knowing receipt involves equity acting against third parties to a transaction and effectively divesting them of the moneys received. Cumming deals with an entirely different scenario.
Secondly, the Trial Judge rejected the contention that there was some form of agency between Steven Rowley and the other three trustees.[96] Nor did he accept that there was a lack of probity or some form of wilful blindness so as to attract liability in knowing receipt on all trustees.[97] There was nothing in the evidence given at trial which would lead me to doubt these conclusions.
[96]Reasons [104].
[97]Ibid [116].
Thirdly, counsel for AA sought to advance the point that the trustees should be taken as having knowledge on the basis that they acted on the instruction of Steven Rowley to put the money in the respective trust accounts. I reject such a submission. It runs contrary to the established principles in equity regarding knowing receipt.[98] In Consul Development, Stephen J was clear in rejecting the application of constructive knowledge to the first limb of Barnes v Addy. His Honour held:
That proof of knowledge is essential is not in doubt; Consul has not intermeddled with any trust property so as to make itself a trustee de son tort and without proof of knowledge no remedy will lie against it for participation in the dishonest scheme of the fiduciary, Grey. The applicable principle is that enunciated by Lord Selborne in Barnes v. Addy. Strangers to a trust may have extended to them the responsibility imposed by equity upon trustees if they make themselves trustees de son tort or are “actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust”. But strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers unless they “receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.[99]
[98]See Consul Development (1975) 132 CLR 373, 408; Milne v. James (1910) 13 CLR 168, ; English and Scottish Mercantile Investment Co. v. Brunton [1892J 2 QB 700; Joseph v. Lyons (1884) 15 QBD 280.
[99]Consul Development (1975) 132 CLR 373, 408.
The decision of the High Court in Farah Constructions v Say-Dee Pty Ltd[100] highlights the difficulty in AA’s case. In Farah one of the issues was whether the wife and daughters of the trustee, Mr Elias, who were all principals of Farah Constructions in addition to Mr Elias, could be taken to have known of Mr Elias’ breach of fiduciary duty. The High Court consistently rejected the argument that the daughters or Mrs Elias were either the agents of Mr Elias or were effectively put on notice of the nature of the transactions.[101] The Court (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ) held:
Even if such changes were made, they would not assist the respondent: Mrs Elias and her daughters would fall outside para (i) of the respondent’s proposal. This is because even if Farah is assumed to have been in breach of fiduciary duty, Mrs Elias and her daughters have not been shown to have known, or to have had reason to know, the essential facts which constitute the breach.[102]
[100](2007) 230 CLR 89.
[101]Ibid.
[102]Ibid 145 [122].
It follows that I do not accept that the individual trustees had knowledge of the breach of fiduciary duty under categories (i) to (iv) in Baden. No error has been made out.
RSF
There is little doubt that an individual, whether an employer or director, can be taken to be directing the mind or will of a company with that individual’s knowledge being imputed to the company. This was outlined in the early twentieth century by Viscount Haldane in Carrying Co Ltd v Asiatic Petroleum Co Ltd:[103]
My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must be consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.[104]
[103][1915] AC 705
[104]Ibid 713.
In Tesco Supermarkets Ltd v Nattrass,[105] the House of Lords was concerned with whether the actions of a supermarket manager would bind the company in relation to breaches of the relevant trade practices provisions in the United Kingdom. Lord Reid set out the way in which the law ascertains the mind or will of a company:
I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.[106]
[105][1972] AC 153.
[106]Ibid 170; approved in Hamilton v Whitehead (1988) 166 CLR 121, 127.
Senior Counsel for AA sought to argue that when one examines RSF, Steven Rowley was clearly the directing mind of the company. As a result of his knowledge of the breach of fiduciary duty, RSF has the requisite knowledge under the first limb of Barnes v Addy. Further, in order to capture the majority of funds that were transferred to the Super Fund before RSF was set up as the trustee company, AA argued that RSF was liable as a constructive trustee from the time it learnt of AA’s right to the funds in the Super Fund.
His Honour dismissed a similar argument at trial on the basis that there was not enough evidence to support the proposition. It is important to set out the Trial Judge’s reasons for rejecting AA’s argument:
Steven gave evidence as to his perception of the propriety of the relevant transactions, including that, as a director and shareholder of AA and as a beneficiary of the trust of which AA was trustee, he authorised and saw nothing irregular or improper in AA advancing money to himself, as long as those amounts were recorded in his debit loan account with AA. Steven also gave evidence with respect to the financial standing of AA, the nature of AA as a family company and the adverse financial consequences which resulted from the effects of the global financial crisis in September 2008. According to Steven, the adverse consequences were exacerbated because AA had recently moved to larger premises at a higher rent and had invested substantial money in the fit-out and equipment.
It is not necessary to further elaborate on this evidence, save to note that Steven’s evidence (in chief and under cross-examination) focused upon management of the business activities of AA and not the management of the activities of the corporate trustee, RSF.
Similarly, there was minimal evidence given by Barbara, Adrian and Adam relating to management of the activities of RSF.
Barbara gave evidence to the effect that she relied on Steven with respect to the operation of the Super Fund. She was aware of the fact that financial statements had been prepared for the Super Fund for the years ending 30 June 2007 and 30 June 2008, although she had not read them. She understood that financial statements had been prepared by Super Concepts Pty Ltd, a company which she understood had particular expertise.
The trial judge accepted RSF’s submissions to the effect that:[204]
[204]Reasons [111]-[114].
(a) Steven’s knowledge can only be imputed to the co-trustees if Steven was appointed agent of each of them with respect to the receipt of the monies, and there was no sufficient evidentiary basis for such a finding;
(b) the terms of the trust deed for the Super Fund provided that where the trustee consists of individual trustees, all decisions and authorisations and any exercise of powers or discretions required unanimous resolution of those persons or by a majority at a meeting of such persons;[205] and
(c) the trust deed reflected the principle that where there is more than one trustee, each trustee must exercise his or her discretion and each must address their minds to relevant transactions.
[205]Super Fund Trust Deed clause 6(b)(ii).
Referring to the judgment of Stephen J in Consul Development Pty Ltd v DPC Estates Pty Ltd,[206] the trial judge accepted that “courts have been markedly reluctant to extend the application of the doctrine of constructive notice” due to “equity’s concern for the state of conscience of the defendant”.[207]
[206](1975) 132 CLR 373, 412-3 (‘Consul Development’).
[207]Reasons [115].
There considerations led the trial judge to conclude:
Absent agency, the knowledge of Steven is not to be imputed to the other trustees of the Super Fund. Mere negligence will not suffice to ground constructive notice in this context. There must be some lack of probity such as a conscious refraining from making an enquiry. In this case, there is no evidence of anything in the nature of a conscious refraining from making enquiry by Barbara, Adrian or Adam or of any other aspect of their behaviour touching the conscience. I accept that the other directors of RSF relied on Steven Rowley, the accountants, Murdoch Partners and other advisers in relation to the transactions which led to contributions being made to the Super Fund. Indeed, there were indications of over-reliance but I am not satisfied that any of them (Barbara, Adrian or Adam) wilfully shut their eyes to the obvious, wilfully and recklessly failed to make appropriate enquiries, or knew of circumstances indicating that the contributions to the Super Fund came from trust property being misapplied or transferred in breach of fiduciary duty.[208]
[208]Reasons [116] (footnote omitted).
In submitting that Steven Rowley’s knowledge could be imputed to the other trustees (aside from any agency), Senior Counsel for AA strongly relied on the decision of Madden CJ in Cumming v Austin.[209] This decision established the principle that where one of several trustees, who is also a beneficiary under the trust fund, assigns a beneficial interest in the trust fund to a stranger, the assignor’s knowledge of such assignment does not affect co-trustees with knowledge of the transaction, because it is to the interest of the assignor, to conceal the fact of the assignment. On the other hand, where one of several trustees becomes an assignee of an interest in the trust fund, knowledge of the assignment is imputed to co-trustees, because in such a case, it is in the interest of the assignee to inform co-trustees for the assignee’s own protection.[210]
[209](1902) 28 VLR 347 (affirmed in Cumming v Austin (1903) 28 VLR 622).
[210]Ibid 354-5, following Browne v Savage [1859] 4 Drewry 635 and Willes v Greenhill [1860] 29 Beav 376.
Senior Counsel for AA drew particular attention to a passage in the reasons of Madden CJ where it was stated that the knowledge of the trustees of the assignment was as good as the giving of notice of the assignment:
If they had had real knowledge, I have no doubt that it would have been just as effectual as the most formal notice to them, and, under ordinary circumstances, the knowledge of one of several trustees is the knowledge of all of the transaction affecting the trust.[211]
[211]Ibid 354.
In my view, the appellant’s reliance on Cumming v Austin[212] is misplaced. The case is concerned with a priority dispute between persons both of whom claim to be entitled to a beneficial interest in a trust. It involves the question of what constitutes the giving of notice to trustees in these circumstances. It is not a ‘knowing receipt’ case nor does it concern a Barnes v Addy claim.
[212](1902) 28 VLR 347.
The trial judge held that the knowledge of Steven Rowley could not be imputed to the individual trustees of the Super Fund. There was no agency. Mere negligence was not sufficient to ground constructive notice. There must be some lack of probity such as a conscious refraining from making an inquiry. There was no evidence of anything in the nature of a conscious refraining from making enquiry by Barbara, Adrian or Adam Rowley. There was no wilful shutting of eyes to the obvious; reckless failure to make appropriate enquiries or knowledge of circumstances indicating that the contributions came from trust property misapplied or transferred in breach of fiduciary duty.[213]
[213]Reasons [116].
In Consul Development[214] Stephen J[215] made it clear that the use of doctrines of constructive knowledge in the context of Barnes v Addy claims would extend the scope of liability well beyond that contemplated in that decision:
That proof of knowledge is essential is not in doubt; Consul has not intermeddled with any trust property so as to make itself a trustee de son tort and without proof of knowledge no remedy will lie against it for participation in the dishonest scheme of the fiduciary, Grey. The applicable principle is that enunciated by Lord Selborne in Barnes v. Addy. Strangers to a trust may have extended to them the responsibility imposed by equity upon trustees if they make themselves trustees de son tort or are “actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust”. But strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers unless they “receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.[216]
[214]Consul Development was followed in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 155 [147] where the Court considered that it was not necessary to go beyond the considered dicta of the three members of the majority in Consul Development.
[215]Barwick CJ agreeing at 376-7; Gibbs J at 396 referred to the Barnes v Addy principle as extending to the case “where a person received trust property and dealt with it in a manner inconsistent with the trusts of which he was cognizant”.
[216]Consul Development (1975) 132 CLR 373, 408 (footnotes omitted).
Stephen J then pointed out that the extension of the concept of knowledge as stated in Barnes v Addy to include constructive knowledge would cause inconsistency with the requirements and criteria set out in that decision if liability were to be established:
It is said, however, that when Lord Selborne spoke of knowledge this must be taken to include constructive knowledge. Neither his Lordship's language in Barnes v. Addy nor other authorities, apart from two recent decisions of Chancery judges, appear to me to support that view. Lord Selborne contemplated that a necessary ingredient of this liability as constructive trustee was the existence of “fraud and dishonesty” on the part of the stranger, “of knowledge or suspicion on his part of an improper or dishonest design in the transaction”. It was for evidence of this that he examined the facts before him, concluding that the third party “never knew nor suspected any dishonest purpose, or believed that any actual fraud would result from what was done; and if that be a true interpretation of the facts, I certainly, for one, am unable to hold him responsible”.[217]
[217]Ibid (footnotes omitted).
After identifying areas of the law where doctrines of constructive notice are employed such as investigation of title in real property dealings, banking transactions and chattel pledges, Stephen J highlighted the serious danger of injustice if doctrines of constructive notice were used to establish Barnes v Addy liability:
The most common operation of the doctrine of constructive notice is in dealings in real property where for centuries investigation of title has been the usual concern of business
“in dealing with real property, as in other matters of business, regard is had to the usual course of business; and a purchaser who wilfully departs from it in order to avoid acquiring a knowledge of his vendor's title is not allowed to derive any advantage from his wilful ignorance of defects which would have come to his knowledge if he had transacted his business in the ordinary way”
(Bailey v. Barnes, per Lindley L.J.). In such a case negligence in making inquiries may constitute constructive notice. Perhaps too, in the transaction of banking business a usual course has evolved so that the same may be said of bankers.
But the courts have been markedly reluctant to extend the application of the doctrine of constructive notice. In Milne v. James, Griffith C.J. said that it was now settled that the doctrine ought not to be extended and both Barton and O'Connor JJ. in separate judgments quoted in full the observations of Lord Esher M.R. in English and Scottish Mercantile Investment Co. v. Brunton, in the course of which he said, speaking of the doctrine of constructive notice:
“Of late years, after the doctrine had been invented and put into form, the Chancery Judges saw that it was being carried much farther than had been intended, and they declined to carry it further. In a series of cases Lords Cottenham, Lyndhurst, and Cranworth, Lord Justice Turner, and the late Master of the Rolls, Sir George Jessel, have said that the doctrine ought not to be extended one bit farther; all the Judges seem to have agreed upon that. In Allen v. Seckham, I pointed out that the doctrine is a dangerous one. It is contrary to the truth. It is wholly founded on the assumption that a man does not know the facts; and yet it is said that constructively he does know them.”
Joseph v. Lyons provides an instance in which both Cotton L.J. and Lindley L.J. refused to apply to a pledge of chattels the doctrine of constructive notice, a doctrine which each regarded as having already been pushed too far. Lindley L.J., in Manchester Trust v. Furness, vigorously attacked the attempted extension of constructive notice to commercial transactions, regarding it as appropriately confined to dealings with land and estates; like views were subsequently expressed by the Court of Appeal in Greer v. Downs Supply Co.[218]
[218]Ibid 412-3 (footnotes omitted).
The views expressed in Consul Development are similar to those adopted in the United Kingdom. Sir Robert Megarry VC in Re Montagu’s Settlement Trusts[219] said as to the fundamental difference between the questions which arise in respect of the doctrine of purchaser without notice on the one hand and the doctrine of constructive trusts on the other:
The former is concerned with the question whether a person takes property subject to or free from some equity. The latter is concerned with whether or not a person is to have imposed upon him the personal burdens and obligations of trusteeship. I do not see why one of the touchstones for determining the burdens on property should be the same as that for deciding whether to impose a personal obligation on a [person]. The cold calculus of constructive and imputed notice does not seem to me to be an appropriate instrument for deciding whether a [person’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee.[220]
[219][1987] Ch 264.
[220]Ibid 272-3.
This passage was later described by Nourse LJ in Bank of Credit and Commerce International (Overseas) Ltd v Akindele[221] as a passage which “plumbed the distinction between notice and knowledge”. After a comprehensive review of English, Canadian and New Zealand authority, Nourse LJ concluded:
What then, in the context of knowing receipt, is the purpose to be served by a categorisation of knowledge? It can only be to enable the court to determine whether, in the words of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2), the recipient can “conscientiously retain [the] funds against the company” or, in the words of Sir Robert Megarry V-C in In re Montagu’s Settlement Trusts, “[the recipient’s] conscience is sufficiently affected for it to be right to bind him by the obligations of a constructive trustee”. But, if that is the purpose, there is no need for categorisation. All that is necessary is that the recipient’s state of knowledge should be such as to make it unconscionable for him to retain the benefit of the receipt.
For these reasons I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense decisions in the commercial context in which claims in knowing receipt are now frequently made, paying equal regard to the wisdom of Lindley LJ on the one hand and of Richardson J on the other.[222]
[221][2001] Ch 437, 452 (Ward and Sedley LJJ agreeing).
[222]Ibid 455 (citations omitted).
In Maronis Holdings Ltd v Nippon Credit Australia Ltd,[223] Bryson J of the Supreme Court of New South Wales observed that the decision of Bank of Credit and Commerce International (Overseas) Ltd v Akindele[224] demonstrates a clear view in England that knowing receipt does not depend on dishonesty or want of probity, but does depend on knowledge. As a result:
there seems to be little room in the state of opinion in England for associating constructive notice with recipient liability. The difficulties of applying to constructive trusts the concept of constructive notice taken from the law relating to equitable interests in land titles were observed on by Megarry VC…[225]
[223](2001) 38 ACSR 404.
[224][2001] Ch 437, 448-454.
[225]Maronis Holdings Ltd v Nippon Credit Australia Ltd (2001) 38 ACSR 404, 528 [477].
The doctrine of constructive notice derived from Cumming v Austin[226] may assist in the resolution of disputes where there are conflicting claims following the assignment of a beneficial interest in a trust fund by or to a trustee but it has no application beyond that context. Its adoption here would significantly extend the scope of Barnes v Addy claims well beyond that expressed in that and subsequent decisions. It would result in direct inconsistency with the requirements set out in that decision if liability is to be established. It would bring with it serious injustice to innocent persons who have no knowledge in fact but are to be imputed with constructive knowledge of breaches of fiduciary duty and improper dealings.
[226](1902) 28 VLR 347.
The result would be that Barbara, Adrian and Adam Rowley who had no knowledge of the transactions undertaken by Steven Rowley would nonetheless be taken as having imputed knowledge. They would be liable for AA’s loss in circumstances well beyond those contemplated in Barnes v Addy. Such an outcome would be unfair and unjust.
As a result, I reject AA’s submission that Barbara, Adrian and Adam Rowley are liable under the first limb of Barnes v Addy on the basis of constructive knowledge.
As Lord Selborne LC said in Barnes v Addy:
It is equally important to maintain the doctrine of trusts which is established in this Court, and not to strain it by unreasonable construction beyond its due and proper limits. There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them.[227]
[227](1873-74) LR 9 Ch App 244, 251.
Senior Counsel for RSF also maintained that it was not open on the pleadings and particulars provided by AA in the proceeding to hold that the individual trustees were imputed with the knowledge of Steven Rowley. Having regard to the view that I have arrived at that the individual trustees are not in any event to be imputed with the knowledge of Steven Rowley, it is unnecessary to consider this submission.
Was RSF a volunteer?
Senior Counsel for AA submitted that the trial judge erred in holding that the trustees of the Super Fund gave valuable consideration for the receipt of the funds and were consequently not volunteers. He contended in substance:
(m) in title disputes and restitutionary claims, ‘valuable consideration’ requires the performance of the promise; the promise itself is insufficient;
(n) the High Court decision of Cook v Benson[228] relied on by the trial judge was distinguishable:
[228](2003) 214 CLR 370.
(1) as it arose in the statutory context of s 120 of the Bankruptcy Act1966 (Cth) whereas the present proceeding is a general law claim; and
(2) because in Cook v Benson, the funds were paid to independent superannuation trustees independent of the payer in arms-length transactions, as rollovers, whereas here the Rowley family members had been members of the Super Fund for some time, and the fund trustees were under existing obligations to pay benefits in accordance with the trust deed; and
(o) the trustees were volunteers and could not discharge the onus of establishing that they were ‘bona fide purchasers for value without notice’.
In rejecting AA’s claim that the trustees and RSF were volunteers, the trial judge held that the distinguishing features were not sufficient to displace the underlying principle that the trustee of a superannuation fund provides valuable consideration by providing rights and benefits to a member in exchange for his or her contribution:
Although the Super Fund is a self-managed fund, it is bound by the terms of its deed to operate in a similar fashion to commercial superannuation funds as distinct from a trust arrangement where beneficial ownership is not transferred. Similar to Cook, contributions have been made to the trustee(s) of the Super Fund, for the purpose of providing superannuation benefits to members (Clause 1(f)). When contributions are made to the Super Fund, they are vested in the trustee(s) and administered in accordance with the terms in the deed (Clause 11(a)). This includes keeping and providing records and accounts to members (Clause 13(c), (f), (g)), crediting the contributions to the appropriate Accumulation Account (Clause 12(b)), effecting policies with an insurer (Clause 34), and investing the money in accordance with the investment strategies of the fund (Clause 15). Like the members in Cook, the members are entitled to death and retirement benefits in accordance with the terms of the deed governing the fund (Clauses 27, 31–32, 48–56), and have enforceable rights under the deed (Clauses 6(d), 6(e), 8(b)).[229]
[229]Reasons [143].
In my opinion, the decision of the trial judge is correct:
(p) the trustees of the Super Fund received the contributions as trustees for the benefit of the members in accordance with the provisions of the trust deed of the Super Fund;
(q) the trustees’ consideration was not executory – the individual trustees and later RSF held the contributions made by or on behalf of the members in accordance with the provisions of the trust deed; and
(r) as in Cook v Benson,[230] the payments were made in return for the obligations undertaken by the individual trustees of the Super Fund and later RSF to provide the respective members for whom the sums had been contributed with the rights and benefits to which the member would become entitled under the rules of the Super Fund. Those rights contributed substantial and valuable consideration for the contribution.
[230](2003) 214 CLR 370, 382.
Did the existence of a debtor/creditor relationship bar AA’s equitable claim?
In Grimaldi v Chameleon Mining NL (No 2),[231] the Court said:
Even though the constructive trust is a discretionary remedy in this setting – …– it might be thought that in the case of a loan or purchase in breach of fiduciary duty equity could, if it were necessary and/or appropriate, simply impose a constructive trust over funds acquired under a contract of loan or purchase with the claimant being put on such terms as are necessary to do equity to the other party recipient. However, as Giles JA noted in Robins (at [82]): “[t]hat is not done”. Rescission of the contract is required if proprietary relief is being granted though not if a personal remedy, ie compensation, is sought: Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd.
[231](2012) 200 FCR 296 [277] (citations omitted).
In this proceeding, AA seeks personal and proprietary relief against RSF for the ‘knowing receipt’ claim. AA also made a personal claim for money held and received. In relation to the personal claims, the trial judge held that the existence of a debtor-creditor relationship between AA and Stephen Rowley made no difference.[232]
[232]Reasons [152].
On appeal, RSF now accepts that the trial judge was correct in holding that the debtor/creditor relationship did not bar the personal claim. However, it submits that AA is not able to maintain its constructive trust claim, because Macquarie has not rescinded the loan contract with AA, and cannot now do so having exercised rights under it by appointing a receiver.
The claim is made by AA against RSF. The appointment by Macquarie of a receiver to AA does not affect AA’s proceeding against RSF. Nor does the existence of a claim by AA against Steven Rowley prior to his bankruptcy. It does not debar AA from proceeding against RSF for proprietary and personal relief. The principal reasons for the election are to guard against the claimant having the benefit of both the personal remedy and the proprietary remedy and to protect third party rights.[233] These interests are not at risk in the current proceeding. AA seeks equitable compensation if this appeal is successful. The need for a proprietary remedy may arise later, but it is not sought by AA at this time. The submission must be rejected.
[233]Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 [277]; Robins v Incentive Dynamics Pty Ltd (2003) 175 FLR 286 [82].
Should AA be denied equitable relief?
Senior Counsel for RSF submitted that Macquarie facilitated the transaction it subsequently complained about, and knew of the purpose for which the funds were to be advanced and of the specific structure to be deployed to give effect to that purpose. He further submitted that the equitable right that Macquarie asked the Court to protect was brought into existence by its own conduct. As a result, he contended that there was an immediate and necessary relationship between Macquarie’s conduct and the equity claimed.
Although it was not necessary to decide, the trial judge held in substance:[234]
[234]Reasons [156]-[160].
(s) the conduct of Macquarie did not suggest any impropriety;
(t) the conduct of Macquarie was not immediately or necessarily related to the equity sued for;
(u) Macquarie embarked on a legitimate commercial transaction by providing at Steven Rowley’s request lending facilities to AA for proper purposes;
(v) Macquarie did not participate in or encourage any breach of Steven’s fiduciary duties in his capacity as a director of AA; and
(w) there was no evidence that Macquarie gave, or was asked to give advice about how AA could direct superannuation benefits to Steven Rowley and his family in a way that complied with his obligations as a director of a trustee company.
I agree. There is no substance in RSF’s complaint that AA should be denied equitable relief. RSF’s submission as to Macquarie’s conduct generally must be rejected as:
(x) the plaintiff is AA – not Macquarie;
(y) Macquarie is not a party to the proceeding;
(z) AA is now in liquidation and receivers and managers have been appointed;
(aa) Steven Rowley is in breach of his fiduciary duties as a director to AA;
(bb) Macquarie was not asked to advise and did not advise Steven Rowley as to how or whether AA could direct superannuation benefits to Steven Rowley or other members of his family;
(cc) Macquarie did not participate in any way in Steven Rowley’s breach of fiduciary duties to AA; and
(dd) Macquarie’s conduct is not improper in any way – it has not been shown that it is guilty of misrepresentation, breach of duty, unconscionable conduct, or any other wrongdoing or misconduct.
Relief
For the reasons given, I would allow the appeal. RSF, as trustee of the Super Fund, is liable to AA for the knowing receipt of funds diverted to RSF by Steven Rowley in breach of his fiduciary duties as a director of AA. The knowledge of Steven Rowley is imputed to RSF. The liability of RSF arises under the first limb of Barnes v Addy. The claim made by AA against RSF as a volunteer fails.
A total of $1,674,744.99 was paid by Steven Rowley out of AA’s account over the period of 18 May 2007 to 18 June 2008 into the Super Fund for his personal benefit and for the benefit of other members of the Rowley family. It makes no difference that RSF at the direction of Steven Rowley put some funds into the names of family members. RSF received $1,674,744.99 when it took over the Super Fund as trustee on 13 February 2008 or subsequently when further payments arranged by Steven Rowley were made to it. This includes the funds obtained by RSF from the pre-incorporation transactions. The amount of $1,674,744.99 should be repaid by RSF to AA. Because there is no evidence of the present financial position of RSF before the Court, and a proprietary remedy may be needed in the future, I would reserve to AA the right to apply for further or other relief, including proprietary relief, should this be necessary to recover the monies which AA is entitled to have returned to it.
Interest
AA is entitled to equitable compensation from RSF together with interest. Senior Counsel for AA contended that the interest should be calculated at the Macquarie Bank Base Rate compounding on the last day of each month and calculated on the date of payment of each payment into the bank account of the Super Fund until the date of the orders of the Court. He submitted that the rates of interest found in the Facility Agreement should be adopted by the Court.
Senior Counsel for RSF submitted that AA had no entitlement to charge interest to RSF at the rates of interest set out in the Facility Agreement. AA had led no evidence to justify the charging of interest on that basis, nor referred to any relevant authority. He contended that no evidence or argument had been advanced to explain why an award of compound rather than simple interest was necessary in order to do justice to the parties in this case.
The submission by RSF that compound interest should not be awarded should be accepted. The object of equitable compensation is to restore persons who have suffered loss to the position in which they would have been if there had been no breach of equitable obligation.[235] The interest awarded in equity is not punitive.[236] The decision whether to award simple or compound interest is discretionary, and is determined on the facts of the case. Neither party descended to evidence as to what has become of the superannuation contributions to the Super Fund made on behalf of Steven Rowley and the other members of the Rowley family. There is nothing to show whether the funds have been invested profitably by RSF, and if so to what extent profits have been made since they were received. The financial statements of RSF since 2007-2008 are not before the Court. It is not shown that the award of compound interest is necessary to ensure that RSF does not retain any profit that it has made, or that it should be stripped of a financial gain. Steven Rowley gave evidence that he believed he was acting lawfully when he made the payments challenged in these proceedings. The other Rowley family members who have benefitted from the investments in the Super Fund had little if any knowledge of what was taking place. It is a case for the award of simple interest.
[235]O’Halloran v RT Thomas & Family Pty Ltd [1998] 45 NSWLR 262, 272 (Spigelman CJ).
[236]Wallersteiner v Moir (No 2) [1975] 1 QB 373; Harrison v Schipp [2001] NSWCA 13 [129].
As to the rate of interest, the court does the best that it can to do justice in the circumstances of the case. A rate of 4% was adopted for many years.[237] The mercantile rate of 5% was often subsequently applied.[238] In some cases the standard rates for interest upon judgments have been applied.[239]
[237]See Re TennantMortlock v Hawker (1942) 65 CLR 473, 507-8.
[238]See Re Dawson [1966] 2 NSWR 211, 219.
[239]Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2006] NSWSC 480 [13]; Morgan Equipment Co v Rodgers[No 2] (1993) 32 NSWLR 467; Murdocca v Murdocca [2002] NSWSC 505.
Over the period since 2007, and since September 2008 prevailing bank interest rates have fallen to substantially lower levels than prevailed prior to the global financial crisis. Doing the best that I can to be fair to both parties, and in the absence of evidence as to how RSF invested the funds received by it, I consider an interest rate of 6% should be adopted. This represents a balance between the higher rates of interest available before the global financial crisis and the lower rates available subsequently. The Court is entitled to use its own experience and memory of rates during the relevant period. Evidence is unnecessary.[240]
[240]Meerkin & Apel v Rossett Pty Ltd [1999] 2 VR 31 [11] (Charles, Callaway and Batt JJA).
In my view, the appeal should be allowed, and the judgment and orders of the trial judge set aside. There should be judgment in the proceedings against RSF in the amount of $1,674,744.99 together with interest calculated at 6% per annum from the dates of the respective payments until the date of the orders of the Court. Liberty should be reserved to AA to apply to the Trial Division of the Court for further relief, including proprietary relief, in the event that RSF does not comply with the orders of this Court.
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