Commissioner of Australian Federal Police v Cornwell

[1990] FCA 704

JUDGMENT No.. 70%. /.%..-

CATCHWORDS

CUSTOMS ACT - PECUNIARY PENALTIES FOR PRESCRIBED NARCOTICS DEALINGS - consideration of ss. 2433, 243F and 2435 - whether

a trustee's right of reimbursement for expenditure was a charge or encumbrance wlthin S. 243J - whether it was just within S. 243F that an order be made to provide for reimbursement of the lntervener - dictum that S. 243F(1) should not be narrowly construed.

Customs Act 1901, ss. 2433, 243F and 2435

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COMMISSIONER OF THE AUSTRALIAN FEDERAL POLICE V. BRUCE RICHARD	;
CORNWELL & ORS
NG 489 of 1986	[,
L
Burchett J. Sydney
19 December 1990

IN THE FEDERAL COURT OF AUSTRALIA )

1

NEW SOUTH WALES DISTRICT REGISTRY ) NG 489 of 1986

1

GENERAL DIVISION 1

BETWEEN:  COMMISSIONER OF THE AUSTRALIAN
FEDERAL POLICE

Applicant

AND :  BRUCE RICHARD CORNWELL

First Defendant

BARRY RICHARD BULL

Second Defendant

BRIAN ERNEST JELLEY

Intervener

CORAM: Burchett J.
PLACE: Sydney

DATE : 19 December 1990

SHORT MINUTE OF ORDER OF THE COURT

THE COURT ORDERS THAT the intervener be directed to bring in, on a date to be fixed, short minutes of orders in conformity with the reasons of the court.

NOTE:	Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA	)
)
NEW SOUTH WALES DISTRICT REGISTRY )	NG 489 of 1986

)

GENERAL DIVISION 1

BETWEEN:  COMMISSIONER OF THE AUSTRALIAN
FEDERAL POLICE

Applicant

AND :  BRUCE RICHARD CORNWELL

First Defendant

BARRY RICHARD BULL

Second Defendant

BRIAN ERNEST JELLEY

Intervener

CORAM: Burchett J.
PLACE: Sydney

DATE : 19 December 1990

REASONS FOR JUDGMENT

BURCHETT J.:

The defendant Cornwell pleaded guilty in September 1987

to serious charges relating to the importation of prohibited

drugs into Australia, and was sentenced to a long term of	imprisonment. In addition to securing his prosecution, the
Commissioner of the Australian Federal Police ("the Commissioner of Police") brought the present proceedings, on behalf of the Commonwealth, for the imposition of a pecuniary penalty upon him, and also upon the defendant Bull, under s .
243B of the customs Act 1901 ("the Act"). On 14 August 1989,
Morling J. ordered the defendant Cornwell to pay to the Commonwealth of Australia a pecuniary penalty in the sum of $6,900,000. Morling J. ordered, too, that the Official Trustee in Bankruptcy pay the applicant's costs out of certain property of the defendants the subject of orders made pursuant to S. 2433 of the Act, and that, pursuant to S. 243G(1), the Official Trustee pay to the Commonwealth out of the property of the defendant Cornwell, held pursuant to S. 2433, an amount equal to the liability of that defendant in respect of the pecuniary penalty. His Honour then made an order which is of significance for the present matter. It was in the following terms :

"The provisions of orders [here were specified the orders already referred to requiring the Official Trustee in Bankruptcy to pay the costs and pecuniary penalty out of property the subject of orders made under S. 2433 of the Act] are not to apply to the property of the first defendant described in the Schedule hereto (being property that came into the possession or under the control of the Official Trustee in Bankruptcy by orders made pursuant to S. 2433 of the Act in these proceedings on 31 October 1986 and 5 February 1987) during the pendency of the Notice of Motion filed in these proceedings on 24 April 1989 on behalf of Brian Ernest Jelley."

The schedule to this order contained a reference to the title	to real property in Queensland known as unit 12, Little Cove
Court, Park Road, Noosa Heads, and moneys standing to the credit of Homebeech Limited (a company incorporated in the United Kingdom) in a solicitors' trust account. These reasons for judgment are concerned with the notice of motion of the intervener, Mr Jelley, named in the last-mentioned order, by which he asserts an interest in the property described.
Mr Jelley carries on business in London, under the firm name B & D Jelley Services, in the role of a provider of investment services. A large part of his business concerns arranging and managing off-shore transactions on behalf of clients. Mr Jelley's involvement with the defendant Cornwell followed an introduction in early 1983 by a third party, who may have been a solicitor. At about that time, Mr Jelley was taking steps, through the use of a shelf company controlled by him (the company Homebeech Limited), to acquire the residential unit at Noosa Heads, later to be mentioned in the orders of Morling J. Mr Jelley's original intention was to purchase this unit on behalf of a number of investors, clients of his, who resided in the United States. In order to make Homebeech Limited a suitable vehicle to hold the investment, a director and secretary, resident off-shore (in Denmark), both being nominees of Mr Jelley, were appointed, and the shares in the company were transferred to other off-shore nominees of Mr Jelley, being companies incorporated in Gibraltar. However, after these arrangements had been made, the United States investors appear to have grown cold about the idea of
purchasing the property at Noosa Heads.
It was at this time, shortly prior to 25 July 1983, that Mr Cornwell expressed interest in the purchase of a home unit in the building in question. Mr Jelley, who had been informed that Mr Cornwell was a man of substantial wealth, involved in large scale investments and also in large scale gambling on horse races in Australia and elsewhere, arranged for Mr

Cornwell to replace the United States investors as the client

on whose behalf the unit was to be acquired in the name of	.,
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Homebeech Limited. He informed Mr Cornwell that the unit was
available for AUD$350,000, and on 25 July 1983 Mr Cornwell
handed to him a sum in United States dollars equivalent to	I :

AUD$362,400.90. The sums actually required to complete the l:

purchase in Australia were $27,500 (refund of the amount of	I
the deposit paid on behalf of the United States investors and	!.
to be refunded to them) and $337,548.71 (balance payable on
I . i
completion, together with stamp duty and other expenses).	Mr
Jelley remitted these sums, meeting the short fall of	I
approximately $2,647 from other funds of, or available to, his	L
firm.
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Although a further sum of US$400,000 was deposited by Mr i

Cornwell with Mr Jelley, that was for a specific investment in a proposed gold mine in Queensland, and no further moneys were received in respect of the home unit at Noosa Heads. Various expenses were incurred in relation to the structure of Homebeech Limited, with its nominee shareholders and officers,	purchase of furniture for the home unit and other items	relating to the management of the investment. These were met
by Mr Jelley's firm, partly out of its own moneys and partly out of moneys held on behalf of other clients and available for investment. I understand the total to be in the vicinity
of $40,000 to $50,000, but it was accepted at the hearing that
if Mr Jelley establishes an entitlement to relief in respect of these moneys, the amount can be worked out later.

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It is unnecessary to trace the detail of subsequent events, but in due course Mr Jelley was informed, by a	!
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representative of the National Crime Authority, of Mr	i':
Cornwell's involvement in illicit drug dealing, and the Noosa	/ i
Heads property was sold, the proceeds of sale (in the net sum of $251,289.97) being deposited in a special account pending resolution of the questions raised in this matter. By then, orders had been made, which are referred to in the later orders of Morling J., under S. 2433 of the Act, directing the Official Trustee to take control of property of M r Cornwell including the property represented by his interest in the unit at Noosa Heads and in moneys derived from it.
Section 2433 authorizes certain officials, including the Commissioner of Police, to apply to the court for an order of a kind plainly designed by the Parliament to ensure that property of a person believed to have engaged in narcotics dealings shall be preserved and made available to meet any order imposing a pecuniary penalty which may later be made.
pendency of the proceedings, but nothing turns on the (There were certain amendments to the legislation during the
applicability of these amendments, so that it is sufficient to
refer to the section and related provisions as they now stand.) Where the court is satisfied that the circumstances so require, it is empowered to direct that the Official Trustee take custody and control of such property. By S. 243E(2)(d), the court may "include in the order such provision (if any) in relation to the operation of the order as the Court thinks fit", but this provision does not authorize the court to include in its order a provision postponing the operation of the order. Subsection 4 provides:

"Without limiting the power of the Court under

paragraph (2)(d), the order against property -

(a) may set out conditions subject to which the order is to apply to all of that property, or to a specified part of that property;

An order having been made, S. 243F(1) empowers the court

"at any subsequent time, [to] make such orders in relation to that property as the Court considers just and, without limiting the power so conferred on the Court, the Court may, at any time or from time to time, make an order -

(a)	varying the original order in respect of the property to which it relates or any provision included in the original order by virtue of paragraph 243E(2)(d);
(b)	regulating the manner in which the Official Trustee may exercise its powers or perform its duties under the original order;
(c)	determining any question relating to the property to which the original order relates, including any question relating to the liabilities of the owner and the exercise of

the powers, or the performance of the duties, of the Official Trustee, with respect to the property to which the original order relates;

The court is also empowered by S. 243H(1), inter alia, where "the Court is satisfied that it is, in all the circumstances, proper to do so," to revoke the order. Such a revocation does not prevent the making of a further order (eubsec. 2).

The effect of an order under S. 2433 is elaborated by S. 243J, by virtue of which, upon the making of the order, there is created, by force of the statute, a charge on all the property to which the order relates to secure the payment to the Commonwealth of any pecuniary penalty that may be imposed in the relevant proceedings. Section 2435(3)(a), however, makes that charge "subject to every charge or encumbrance to which the property was subject immediately before the order was made".

Mr Jelley, as intervener, seeks to establish, by virtue of these provisions, that he is entitled to the benefit of a charge over the moneys representing Mr Cornwell's interest in	I
t
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the unit at Noosa Heads, or that it is just that the court	F:
should make orders securing to him a benefit out of those	r
moneys equivalent to the expenditure he incurred in respect of	I
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the acquisition and management of the unit on behalf of Mr	I,
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Cornwell.	I.
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Mr Jelley gave evidence of a conversation he said he had i

with Mr Cornwell at the time he received the equivalent in	i
v .

United States dollars of $362,400.90. He said he pointed out c

that there would be a shortage, and that Mz: Cornwell responded	I#
by giving him express authority to hold the property as	i
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security against any moneys laid out in respect of it.	~ o t h	i
i

in cross examination of Mr Jelley and in submissions, counsel	I
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for the Commissioner of Police hotly debated whether anything	:.
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of the sort was ever said. He based himself substantially	, ,

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(though not solely) on M r Jelley's failure to provide such an account of the transaction in earlier versions of his arrangements with Mr Cornwell. However, no version was given till sometime after the event, and several versions relied on were really concerned with other questions. What Mr Jelley swore in evidence is by no means an improbable story; indeed, what is improbable is that a man with considerable experience in handling investments, and a long background in banking, would have paid out money on the other side of the world, on behalf of a client, without even the assurance of any express authorization to do so. Yet that must have happened, if nothing was said. On the whole, I think it is likely that, if the precise words set out in Mr Jelley's affidavit were not used, at least something was said to a similar effect.

In any case, it seems to me that the submission put on behalf of the Commissioner of Police misconceived the position. Mr Jelley was an express trustee, who had received a large sum of money on trust to invest it in a particular way

The contemplated aode of investment involved the acquisition and to manage the trust property on behalf of Mr Cornwell.	of the unit at Noosa Heads in the name of Homebeech Limited,
and the incurring of the necessary expenses related to the home unit and to the use of the company (with nominee officers and shareholders) as a vehicle to hold the title. Plainly, a resulting trust arose, of which Homebeech Limited was the trustee, when the purchase was completed in its name but with money supplied by Mr Jelley. I think, upon a proper analysis,

M.K Jelley was the beneficiary of the resulting trust, but, of

course, he held his interest under that trust upon the express trust for Mr Cornwell. The alternative view of the matter would see Homebeech Limited as the trustee for Mr Cornwell, but in that case Mr Jelley would be entitled to recover from Homebeech Limited the moneys he advanced to it, and it would have a claim, as a trustee, to reimbursement out of the trust property in respect of liabilities incurred in the carrying out of the trust. That claim would be similar to the claim which, on the view that I take, Mr Jelley has as a trustee.

The fact that a trustee has a right to repayment, out of trust property, of sums properly paid in the discharge of the trust, and that the trustee's right is not a mere claim h personam but is the first charge on the property, was declared by Lord Romilly M.R. a very long time ago: Re The Exhall Coal ComDanv (Limited). Re Blecklev (1866) 35 Beav. 449 at 452-453; 55 ER 970 at 971. Lord Romilly said:

the trustee of the mine, including the fixtures, the

that Mr Bleckley is entitled to this sum. He was "On considering the whole matter, I am of opinion

plant and machinery; he is the owner of this property at law, and when called upon to account in equity, he is entitled to deduct, out of trust property in him, all that is necessary for the purpose of repaying him the sums he has properly paid, and of indemnifying him against such sums as he is liable to pay in the discharge of his trust; and, in my opinion, this liability to repay and to indemnify him is the first charge on the property."

This authority is cited in Jacobs' Law of Trusts in Australia
5th ed. S.. 2102, where it is stated:

"[A] trustee is entitled to be reimbursed out of the trust property in respect of all the charges and expenses properly incurred in the execution of the trust; this is the position at general law, and in all States the trustee legislation provides that a trustee may reimburse himself, or pay or discharge out of the trustee [U] property all expenses incurred in or about the execution of his trusts and

powers. Further, the purely equitable right goes beyond the statutes by making the right of reimbursement and indemnity a first charge on the trust property."

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The whole position is quite elaborately stated in Scott on The Law of Trusts 4th ed. vol. IIIA S. 244. I I

Scott says:

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"The trustee may advance his own money in discharging obligations properly incurred by him in the administration of the trust, and is then entitled to reimbursement out of the trust estate for the amount so advanced. . . . Where the trustee incurs an obligation on behalf of the trust estate, it is frequently the individual obligation of the trustee; but if the obligation was properly incurred by him in the administration of the trust he is entitled to discharge it out of the trust property. He has, in other words, not merely a right of reimbursement where he has made payment out of his individual funds, but he has a right of exoneration, a power to use the trust property in discharging the obligation."

In S. 244.1, Scott draws the conclusion:

"A trustee who is entitled to reimbursement or exoneration for expenses properly incurred in the administration of the trust cannot be compelled to surrender the trust property to the beneficiaries until his claim for reimbursement or exoneration has been satisfied. He has in other words a security interest in the trust property."

It follows that it is quite irrelevant whether M r Cornwell purported to give an express charge over the trust property to Mr Jelley. The charge arose out of the proper use by Mr Jelley of his own funds for the purposes of the trust. Nor is it relevant, as was contended by counsel, that some of the funds used did not belong beneficially to Mr Jelley, but represented other trust moneys held on behalf of other persons. As between Mr Cornwell and Mr Jelley, the funds were advanced by Mr Jelley for the purposes of the trust of which M r Cornwell was beneficiary. That other persons might have a beneficial interest in the charge thereby created in favour of Mr Jelley does not affect Mr Jelley's right, either against Mr Cornwell or against the Commonwealth, in relation to the relevant property of Mr Cornwell. An authoritative illustration of the last point is to be found (if any is required) in In re Roberts, deceased. Public Trustee v. Roberts [l9461 Ch. 1 at 8, where Evershed J. affirmed'"the right of ... executors to claim as chargees" against policy moneys received under a life policy, they having paid some of the premiums by the use of estate moneys.

been created within the meaning of S. 243J(3), there would If, however, no "charge or encumbrance" were held to have

remain the power of the court under S. 243F(1) to make such

orders in relation to the property as the court considers

just. I cannot conceive that it would be just for the

beneficial interest of Mr Cornwell to be made available to the

Commonwealth freed of the obligation to reimburse Mr Jelley

for expenditure which gave value to that beneficial interest,

and which Mr Cornwell would have been bound to allow to be

recouped out of the property. Section 2433 is an integral

part of a legislative scheme one object of which is to attach	1;
the property of certain criminals in order to make certain	I., I
that pecuniary penalties are not evaded, while at the same	-. ,

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time providing for the avoidance of prejudice to the rights of

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innocent third parties. It is, perhaps amongst other things,	I
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in order to ensure that third parties are protected that the	l i
court is empowered by S. 243F to make, at the time of the	I
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order or at any subsequent time, such orders in relation to	I
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the property as the court considers just. This provision may	;
authorise orders, in some circumstances, directed towards other ends than the preservation of the rights of third parties, but at least it includes the preservation of such rights. In my opinion it is important that S. 243F(1) should not be narrowly construed; a remedy as drastic as that provided by S. 2433, and the sections associated with it, should be able to be applied with a maximum of flexibility in the interests of fairness to all those who may be affected.
Two additional claims are made by Mr Jelley. These relate to a property at Hunters Hill, and an investment in a

scheme to establish a gold mine in Queensland.

The property at Hunters Hill was the subject of a proposed purchase, again to be effected in the name of a company. The idea was conceived in about September 1983, when

Mr Jelley was in Sydney. According to Mr Jelley, Mr Cornwell

said he would be providing Mr Jelley with the purchase price, and asked Mr Jelley to arrange for payment of the deposit, for which a sum of $39,554.27 was required. Mr Jelley pointed out that he was still waiting for some further money in respect of the unit at Noosa Heads, in response to which Mr Cornwell said: "You've still got the security on that property." M r Jelley said: "Do I understand that we still hold that security and that that security will be for this Hunters Hill transaction?" Mr Cornwell replied "Yes." On that basis, Mr Jelley claims to be entltled to a charge over the proceeds of the Noosa Heads unit to secure the amount of the deposit, together with a relatively small amount of legal fees owing in respect of the Hunters Hill transaction. The deposit was forfeited, as M r Cornwell changed his mind and did not go ahead with the transaction.

In this case also, counsel for the Commissioner of Police submitted that I should not accept Mr Jelley's evidence of an express agreement to charge the money advanced against Mr Cornwell's interest in the Noosa Heads unit. But the Hunters

Hill transaction involved the payment of a deposit only, so that no property, which could be used as security, was	received by Mr Jelley in exchange for the money outlaid. He
would surely have wanted some protection, and there is nothing improbable about the particular agreement he alleges. If the transaction was not tied to the earlier arrangement involving Noosa Heads, but simply involved an unsecured loan, I do not think it would have been entered into without at least a clear promise to pay a stated amount of interest. Unsecured loans

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commonly attract a reward commensurate with the extra risk.	t ~.
It was not suggested there was any contract of that kind.

In all the circumstances, I accept the evidence of Mr Jelley on this issue.	It is, as his counsel pointed out, a	1 '
, ' t.

significant matter in support of his credit that he did not	1:.
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claim any wider pledge by Mr Cornwell in respect of other	. ,
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advances, of substantially larger amounts, made in respect of
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the gold mining venture. That assists me to accept him in 3

respect of the more limited claims he does make.

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Even so, it is not clear that the Hunters Hill expenditure can be regarded as incurred in relation to an	c
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extension of the trust in pursuance of which the Noosa Heads unit was acquired. But if there was no extension of that trust, there was a separate arrangement involving a pledge by
Mr Cornwell of his beneficial interest under the trust which
had acquired the Noosa Heads unit. In my opinion, that express pledge is sufficient to enliven the court's jurisdiction under S. 243F(1). I think it is just that an
order should be made reflecting Mr Jelley's right to security	against Mr Cornwell's interest in the Noosa Heads unit, so far
as concerns the Hunters Hill transaction.
The final matter is the claim in respect of substantial sums expended in respect of the gold mining venture. As I
have said, this claim was not supported by any evidence of any	i l
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express agreement that Mr	Jelley was to have security against

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Mr Cornwell's interest in the unit at Noosa Heads. Nor can

the gold mining venture be regarded as an activity entered , -

into in pursuance of the trust. It was a distinct enterprise I.

into which Mr Jelley, as trustee of a quite separate trust in	!
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respect of the sum of US$400,000, sank all of that money, upon	t
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Mr Cornwell's instructions, together with a further sum in	1 :
excess of half a million dollars of his own money and money of other clients. This venture was always recognised to be speculative, and the clients involved had invested their money for the purpose of speculation. In my opinion, there is no basis upon which it can be concluded that the expenditure of any of this money gave rise to any relevant charge or encumbrance within the meaning of S. 2435, or to any claim to the making of an order under S. 243F(1). Accordingly, the intervener fails in respect of the sums involved in the gold mining venture.
I direct the intervener to bring in, on a date to be fixed, short minutes of orders in conformity with these
reasons, including an order providing for the payment of the	costs of both the applicant and the intervener out of the fund
representing the assets of the trust (the unit at Noosa Heads and the moneys formerly held on behalf of Homebeech Limited).
/ . ..

I certify that this and the preceding fourteen (14) t -

Daaes are a true copy of the Reasons for Judament - , . _

herein of his

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Dated: 19 December 199 d c//

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Counsel for the Applicant:	Mr S. Rushton
Solicitors for the Applicant:	Commonwealth Director of Public Prosecutions
Counsel for the Intervener:	Dr G.A. Flick
Solicitors for the Intervener:	Messrs Primrose Couper Cronin Rudkin by their Sydney agents Messrs Teece
Hodgson & Ward
Dates of hearing:	9 and 31 May 1990 and
4 June 1990