Community Living Options Inc v McDougall
[2016] SADC 80
•11 July 2016
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
COMMUNITY LIVING OPTIONS INC v MCDOUGALL & ANOR
[2016] SADC 80
Judgment of His Honour Judge Slattery
11 July 2016
EQUITY - TRUSTS AND TRUSTEES - IMPLIED TRUSTS - CONSTRUCTIVE TRUSTS - BREACH OF FIDUCIARY OBLIGATIONS
The first defendant was employed by the plaintiff as Business and Finance Manager. In that role the first defendant misappropriated large amounts of cash from the plaintiff’s bank accounts.
In a series of transactions the first defendant misappropriated the sum of $32,000 that was channelled through a number of bank accounts controlled by the first defendant, or the second defendant or both of them. The plaintiff does not contend that the second defendant was in respect of this claim a knowing recipient of its funds or was reckless as to that fact. The sum of $32,000 was received into the bank account of the first defendant and was then used to purchase a BMW motor vehicle.
The plaintiff seeks a proprietary remedy in rem and seeks an order that the first defendant hold the BMW motor vehicle on a constructive trust for it.
Held:
1. The first defendant holds the BMW motor vehicle on a constructive trust for the plaintiff; the process of tracing in equity leads to the grant of the equitable remedy.
2. The plaintiff is entitled to an in rem order for the transfer to it by the second defendant of the BMW motor vehicle.
3. Order accordingly.
Observations about: stay of proceedings where criminal proceedings are brought in respect of the same issues; whether and to what extent common law tracing remedies are available; and the operation of the rules of tracing in equity.
District Court (Civil) Rules Rules 131, 233 and 243; Young, Croft and Smith, 'On Equity' Thomson Reuters 2009 paragraph [12.830]; JD Heydon and MJ Leeming, 'Jacobs’ Law of Trust in Australia' LexisNexis Butterworths Australia 2006 paragraph [2702] on pp 669-670; Dal Pont, 'Equity and Trusts in Australia' 6th edition, Thomson Reuters 2015. paragraph [39.30] , referred to.
Blackburn & Anor. v Logos Research & Ors [2015] SADC 175; Barnes v Addy (1874) LR 9 Ch App 244; Selangor United Rubber Estates Limited v Cradock (a bankrupt) (No.3) [1968] 1 WLR 1555; Woolworths Ltd v Olson (2004) 184 FLR 121; Victoria University of Technology v Wilson [2004] VSC 33; Flegg v Hallett [2015] 1 Qd R 191, applied.
Taylor v Plumer (1815) 105 ER 721; (1815) 3 MS 62; Foskett v McKeown [2001] 1 AC 102; Roxborough v Rothmans of Pall Mall Australia Limited (1995) 95 FCR; (2001) 208 CLR 516; Scott v Scott (1963) 109 CLR 649; Boscawen and Ors v Bajwa and Ors [1996] 1 WLR 328; Agip (Africa) Limited v Jackson and Ors. [1992] 4 All ER 451; El Ajou v Dollar Land Holdings PLC & Anor [1993] EWCA Civ 4; Robb Evans and of Rob Evans and Associates v European Bank Limited (2004) 61 NSWLR 75; Re Diplock’s Estate, Diplock v Wintall [1948] Ch 465; Sinclair v Broughan [1914] AC 398; In Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696; Scott v Scott (1963) 109 CLR 649; Zobory v Commissioner of Taxation (1995) 64 FCR 86; Banque Belge pour L’Etranger v Hambrouck [1921] 1 KB 321; Lipkin Gorman (A Firm) v Karpnale Limited [1991] 2 AC 548, discussed.
Tang Man Sit v Capacious Investments Limited [1996] 1 AC 514; Brady v Stapleton (1952) 88 CLR 322; Re Oatway [1903] 2 Ch 356; Muschinski v Dodds (1985) 160 CLR 583; McFarlane v Commissioner of Taxation (1986) 13 FCR 356; Rawluk v Rawluk (1990) 65 DLR (4th) 161; Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41; Warman International Ltd v Dwyer (1995) 182 CLR 544; Re Magarey Farlam Lawyers Trust Account (No. 3) (2007) 96 SASR 337; Puma Australia Pty Ltd v Sportsman’s Australia Limited (No. 2) (1994) 2 Qd R 159; Russell Gould Pty Ltd v Ramangkura [2014] NSWCA 310, considered.
COMMUNITY LIVING OPTIONS INC v MCDOUGALL & ANOR
[2016] SADC 80JUDGE SLATTERY
By application dated 30 March 2016 the plaintiff Community Living Options Incorporated (the plaintiff) sought orders against the first defendant Theresa Leigh McDougall in the following terms:-
1. A declaration that the black BMW sedan motor vehicle registration S572 AYX, vehicle identification number WBAPG76050NK99575 (the BMW) currently registered in the name of the first defendant is held by the first defendant on constructive trust for the plaintiff;
2. An order that the plaintiff’s claim against the first defendant be reduced by $32,000 being the amount of the claim which is attributable to the purchase by the first defendant of the BMW;
3. An order that this action continued in relation to the remainder of the plaintiff’s claim;
4. An order that a warrant of possession in relation to the BMW addressed to the Sheriff of this honourable Court be issued;
5. An order that the first defendant pay the plaintiff’s costs of and incidental to this application.
The application was issued pursuant to Rules 131, 233 and 243 of the District Court (Civil) Rules. Rule 233 gives the Court power to make an order for summary judgment in respect of portion of the claim brought by a plaintiff against a defendant. The principles applicable to the operation of Rule 233 are well settled.[1]
[1] See the discussion in Blackburn & Anor. v Logos Research & Ors [2015] SADC 175.
On 7 April 2016 I heard argument in this matter. I made the following orders:-
1. Orders in terms of the Minutes of Order this day amended and signed by me;
2. I will publish my reasons for the decision (reflected in the Orders) in due course.
The minutes of order read as follows:-
THE COURT DECLARES that:
1. The black BMW sedan motor car, registration number S562AYX, vehicle identification number WBAPG76050NK99575 (‘the BMW’) is and remains the property of the plaintiff.
AND THE COURT ORDERS that:
2. The plaintiff’s claim against the first defendant be reduced by $32,000, being the amount of the claim which is attributable to the purchase by the first defendant of the BMW.
3. This action continue in relation to the remainder of the plaintiff’s claim.
4. The first defendant forthwith deliver up the BMW to the solicitors for the plaintiff and do all things necessary to facilitate the plaintiff having the use of the BMW, together with registration papers and all records relating to the BMW.
5. A copy of this order be served on the Registrar of Motor Vehicles and the Registrar upon being so served with a sealed copy of this order do all things necessary to register the BMW in the name of the plaintiff.
6. The first defendant pay the cost of and incidental to this application.
7. Liberty to apply.
At that time I said I would deliver my reasons for judgment. These are those reasons.
Evidence
In the application, the plaintiff read the affidavits of Margaret Watson‑England sworn 14 December 2015 (FDN2) and four affidavits of Samuel Peter Ross de Cure sworn 11 February 2016, 30 March 2016; 1 April 2016 and 8 April 2016. There were no objections raised to the receipt by the Court of any of this evidence. I will proceed to rely upon it accordingly.
Background
This matter first came before me on the 14 December 2015 on an application by the plaintiff for a freezing order against the assets of the first defendant Theresa Leigh McDougall (McDougall). I made a freezing order on that day which has been varied from time to time. The freezing order restrained McDougall from dealing with or disposing of any of her assets, ordered that she provide details of her assets and that she also provide the details of all of the funds transferred from the bank accounts of the plaintiff by or at her direction. It is necessary to explain some of the background to those orders.
The plaintiff is a not for profit organisation and its principal purpose is to provide the infrastructure to support people with disabilities. McDougall was first employed by the plaintiff in 2013 in the position of Business and Finance Manager. She was answerable to Ms Watson‑England. In that role, she had access to the operation of the banking facilities of the plaintiff and this included the responsibility to transfer funds from the bank account of the plaintiff with Bank SA for the payment of, for example, the creditors of the plaintiff. In order to take access to the bank account of the plaintiff, it was necessary for McDougall to have access to a “dongle” provided by Bank SA to her employer as well as a password also provided by her employer. When transactions are to take place, a second person who also is required to have a dongle and a password must be involved in the transaction. I understand a “dongle” is a form of security token. A dongle may typically be a hardware device required by some computer programmes and may be required to be placed into an input device so that a reading of security status of the device can occur and, in turn, for access to be given to e.g. bank accounts.
In early December 2015, Ms Watson-England was informed by the Assistant Business Manager of the plaintiff that a number of irregularities had been identified in the accounts of the plaintiff which as far as she could tell constituted payments made by the plaintiff but for which there was no matching invoices requiring payment. The employee who raised this issue was a subordinate of McDougall. No direct or immediate action appears to have been taken by the plaintiff in relation to these reported irregularities. Inferentially at least, the matter was raised with McDougall at that time. Some time later, a further report was received from the business manager by Ms Watson-England which indicated that payments were coming out of the plaintiff’s bank account but there were no matching invoices for those payments.
Enquiries were then made of staff including McDougall and as a result of not receiving satisfactory answers to those enquiries, the firm of accountants Moore Stephens was retained to investigate the irregularities. Those investigations highlighted that there were irregularities in relation to banking reconciliations. After investigations were conducted including with Bank SA, it was disclosed that there was a number of transfers to an account held with Bank SA in the personal name of McDougall. These transactions were investigated and none of those transactions were found to be connected to any genuine invoice referable to the business of the plaintiff but appeared to be transfers made by or at the direction of McDougall to her personal bank accounts. Further investigations followed and these indicated that payments were also made to other bank accounts associated with McDougall. These included to a bank account operated by a business called AM Direct, the proprietor of which was McDougall’s husband, the second defendant as well as to Smart Access Accounts, Freedom Business Accounts, joint Freedom Cheque Accounts and McDougall’s Complete Freedom Account. Payments were found to have been made to the personal accounts of McDougall and the second defendant as well as to a business account of the second defendant.
In order to resolve this application it is not necessary for me to make any decision as to whether there was any knowing receipt by the second defendant of those funds according to equitable principles that are well understood.[2]
[2] Barnes v Addy (1874) LR 9 Ch App 244; Selangor United Rubber Estates Limited v Cradock (a bankrupt) (No.3) [1968] 1 WLR 1555 at 1590.
In this action, the plaintiff has now filed a second Statement of Claim against McDougall and the second defendant. The plaintiff alleges that McDougall was employed between 3 June 2013 and 11 December 2015 and pleads, at paragraph 6, the terms of her employment contract including that she agreed that she would not take advantage of her position to the detriment of the plaintiff, that she would perform her duties in good faith, that she would faithfully carry out her duties in relation to access to online banking and that she would faithfully operate the access to online banking facilities of the plaintiff with its bankers. These duties carry the usual hallmarks of employees who hold particular positions of trust and who ordinarily may owe elevated obligations of a fiduciary nature to their employers.[3] This included the duty of loyalty and not to misuse the position for her own advantage. This is commonly called the “non-profit” rule and the “no conflict” rule. A fiduciary may not use her position for financial advantage.
[3] Woolworths Ltd v Olson (2004) 184 FLR 121 at 193, VictoriaUniversity of Technology v Wilson [2004] VSC 33.
At paragraph 7 of the second Statement of Claim, the plaintiff alleges that McDougall has made unauthorised transfers of the funds belonging to the plaintiff and has used those funds in a number of ways which are set out in paragraph 8 of the pleadings. The pertinent pleading for this purpose is paragraph 8.2 which relevantly reads as follows:-
The funds derive from the unauthorised transfers were used:-
8.2 In part towards the purchase of a black BMW car particulars of which are set out in Schedule 2.
In paragraph 9 of the second Statement of Claim, the plaintiff pleads no participation by the second defendant in the purchase of the BMW car. Under this Rule 233 application, the plaintiff seeks no orders against the second defendant. It will be necessary to explain in detail the transactions which led to the purchase of a BMW car by McDougall on 5 February 2014 for the amount of $32,000 (cash). Based upon all of the evidence before me I am satisfied that all of the funds used to purchase that motor vehicle were sourced from the (bank) funds belonging to the plaintiff. The whole of the $32,000 used by McDougall in the purchase of the vehicle belonged to the plaintiff.
I turn to those matters now.
Community Living operated a bank account with Bank SA.[4]
[4] Second affidavit of Samuel Peter Ross de Cure sworn 30 March 2016 paragraph 19.1.
Between 28 January 2014 and 4 February 2014, withdrawals were made from the plaintiff’s bank account as follows:-
1. On 28 January 2014, withdrawal of $2,673.88.
2. On 28 January 2014, withdrawal of $3,500.00.
3. On 30 January 2014, withdrawal of $3,173.05.
4. On 1 February 2014, withdrawal of $2,660.00.
5. On 3 February 2014, withdrawal of $5,188.24.
6. On 3 February 2014, withdrawal of $1,484.39.
7. On 3 February 2014, withdrawal of $5,950.00.
8. On 3 February 2014, withdrawal of $2,673.88 and
9. On 4 February 2014, withdrawal of $4,510.00.
I am satisfied from the affidavit evidence that each of those withdrawals was undertaken without the authority of the plaintiff and that McDougall caused each of the relevant transactions to be undertaken.[5]
[5] Affidavit of Samuel Peter Ross de Cure sworn 30 March 2016 paragraphs 22-38; affidavit of Latefee Hodge sworn 1 April 2016 paragraph 5.
I am also satisfied from the evidence that the funds that were misappropriated from the account of the plaintiff were transmitted through a number of accounts and then back into one of the accounts controlled by McDougall. The tracing process in relation to those funds is set out in various tendered affidavits, the pertinent parts of which read as follows:-
9. The funds derived from the Relevant Transactions were applied as follows:
Date
Amount
Debit Account
Credit Account
28/01/2014
$3,500.00
Community Living
Mr McDougall’s Complete Freedom Account[6]
28/01/2014
$2,673.88
Community Living
Smart Access Account[7]
30/01/2014
$3,713.05
Community Living
Smart Access Account[8]
03/02/2014
$5,188.24
Community Living
Ms McDougall’s Complete Freedom Account[9]
01/02/2014
$2,660.00
Community Living
Joint Freedom Cheque Account[10]
04/02/2014
$4,510.00
Community Living
Freedom Business Account[11]
03/02/2014
$1,484.39
Community Living
Smart Access Account[12]
03/02/2014
$2,673.88
Community Living
Smart Access Account[13]
03/02/2014
$5,950.00
Community Living
AM Direct CBA Account[14]
[6] Transaction A disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[7] Transaction B disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[8] Transaction C disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[9] Transaction D disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[10] Transaction E disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[11] Transaction F disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[12] Transaction G disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[13] Transaction G disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[14] Transaction H disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
10. The funds derived from each of the Relevant Transactions were then immediately further transferred and can be traced into Ms McDougall’s Complete Freedom account as follows:
Date
Amount
Debit Account
Credit Account
29/01/2014
$3,500.00
Mr McDougall’s Complete Freedom Account
Ms McDougall’s Complete Freedom Account[15]
29/01/2014
$2,600.00
Smart Access Account
Ms McDougall’s Complete Freedom Account[16]
31/01/2014
$3,700.00
Smart Access Account
Ms McDougall’s Complete Freedom Account[17]
03/02/2014
$5,188.24
Community Living
Ms McDougall’s Complete Freedom Account[18]
04/02/2014
$2,600.00
Joint Freedom Cheque Account
Ms McDougall’s Complete Freedom Account[19]
04/02/2014
$4,700.00
Freedom Business Account
Ms McDougall’s Complete Freedom Account[20]
03/02/2014
$4,100.00
Smart Access Account
Ms McDougall’s Complete Freedom Account[21]
03/02/2014
$5,950.00
AM Direct CBA Account
Ms McDougall’s Complete Freedom Account[22]
[15] Transaction A disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[16] Transaction B disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[17] Transaction C disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[18] Transaction D disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016. Note: There was no intermediate account for this transaction.
[19] Transaction E disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[20] Transaction F disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[21] Transaction G disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
[22] Transaction H disclosed within the aide tendered by the plaintiff and SDC4 to the affidavit of de Cure sworn 30 March 2016.
I am satisfied that between 29 January 2014, the date of the first deposit of $3,500.00 until 4 February 2014, being the final deposit in the amount of $5,950.00 (made on the day before the cash withdrawal on 5 February 2014 of $32,000.00), the balance of the amount of the funds held in McDougall’s Complete Freedom Account was in an amount which exceeded the accumulating aggregate of the amounts of each of the relevant transactions.[23] I have compared the opening balance on 29 January 2014, the input credits for funds of the plaintiff that were misappropriated by McDougall from the plaintiff’s bank account, other credit inputs and the closing balance on 4 February 2014. The opening credit balance was $1,752.24; the credit payments totalled $32,338.24; the other credit payments was $600 and the closing balance was $34,690.48. The opening credit balance plus the sum of $600 is in the sum of $2,352.24. When that sum is deducted from the closing credit balance of $34,690.48, the difference is, logically, the amount of funds misappropriated from the plaintiff by McDougall.
[23] Affidavit of de Cure sworn 30 March 2016 paragraphs 22-38 and paragraph 40.
McDougall then withdrew the sum of $32,000 in cash from that Complete Freedom Bank SA account on 5 February 2014. At some time between 5 February 2014 and 12 February 2014 McDougall paid the amount of $32,000 for the purchase of a black BMW motor vehicle. Stamp duty was payable upon that transaction in the amount of $1,220 and there was an administrative transfer fee of $22, in total $1,242.00. The BMW motor vehicle was registered in the name of McDougall from 12 February 2014.
The plaintiff seek orders for the return to it of the motor vehicle. The plaintiff has thereby made an election between two remedies namely the usual remedy at common law for damages or a proprietary remedy in rem which seeks a declaration of the interest of the plaintiff in the BMW motor car. This is not to say that such a remedy will always be available. The availability of such a remedy will be discussed post. In these types of situations it is often the case that damages are not an attractive remedy because defendants who engage in this type of conduct are often insolvent when their conduct is exposed. Alternatively they often become insolvent following exposure of their conduct.
The settled law appears to be that when faced with alternative remedies, a plaintiff may only be required to make an election between two inconsistent remedies (damages or an order in rem) at the time when judgment is being entered against a defendant. At that time a Court is unable to make orders which would give the plaintiff both of two alternative remedies. A plaintiff would be at liberty to choose which is the most advantageous remedy and, ordinarily, a Court will facilitate a plaintiff by making relevant orders in order to achieve a position where that plaintiff may be in the best position possible to make the appropriate choice between the alternative remedies. The assistance a Court can give may be for orders for discovery or the provision of information so that the plaintiff has sufficient information, which the plaintiff ought to have, before deciding upon a remedy.[24]
[24] See Tang Man Sit v Capacious Investments Limited [1996] 1 AC 514 at 518, 519 and 521D-522C.
I am assured by the plaintiff that it is in a position to seek for an order for a proprietary remedy against the motor vehicle. It is therefore in a position where it may make that election and consequentially it has amended its Statement of Claim to remove any application on its part for any other type of orders in relation to the motor vehicle, especially for damages. That is not to say that the plaintiff may be entirely put out of a claim for damages in respect of the motor vehicle. That will be a matter for the plaintiff in due course and need not be considered further by me here.
The issue of a stay of the civil proceedings
In this action, a matter which has occupied a significant amount of Court time has revolved around the question of the position of McDougall and whether criminal proceedings were to be commenced against her connected with her activities as an employee of the plaintiff. The question for consideration is if such proceedings were commenced, whether there may be a stay of these proceedings. The principles applicable to the question of whether there may be a stay of proceedings are summarised by Flanagan J in Flegg v Hallett.[25] I adopt the decision of his Honour on this topic and I refer in particular to his Honour’s discussion of the authorities at [26] et seq. of that decision. His Honour decided that a defendant must discharge the burden of showing that it is just and convenient that a plaintiff’s ordinary rights should be interfered with; this requires a balancing of justice between the parties based on all relevant factors including the defendant’s right to silence. The defendant must show that there is a real and not merely a notional danger of injustice in the criminal proceedings. Although it has not become necessary for me to decide the matter, I would not accept the proposition that merely because the criminal proceedings had been commenced, McDougall has an automatic right to seek a stay of the civil proceedings or that, by operation of principle, the civil proceedings would be automatically stayed.
[25] [2015] 1 Qd R 191.
In due course, McDougall was charged with 337 offences of misappropriation. The question of a stay of these civil proceedings has not arisen in this matter because I am now informed by counsel for McDougall that she has agreed to plead guilty to those charges.[26] The second defendant has also been charged with criminal offences; the Court is not aware of the position about those charges and it need not consider them further.
[26] I was also told that there needs to be a correction of the Information recording the charges but that fact should not delay my decision in this matter and is irrelevant to these issues.
I am satisfied from the submissions made to me and the material before me that McDougall does not contest this application for summary judgment brought by the plaintiff, she seeks no stay and she does not contend that a stay automatically arises; and she does not seek to contradict the application of the plaintiff in any way. In those circumstances I consider that it is not necessary for me to further canvass issues in relation to a stay of proceedings and I am free to decide the question before the Court in relation to the application for summary judgment. There is no real danger of injustice in relation to the criminal proceedings involving McDougall where the plaintiff now contends for its remedy at law or in equity. It is that matter to which I now turn.
Tracing
The plaintiff submitted initially that primarily it seeks a remedy at common law in tracing. As will become clear later in these reasons the plaintiff amended its application to claim for an order that McDougall holds the BMW under a constructive trust for the plaintiff as a cestui que trustent. On the common law remedy, the plaintiff submitted that if it can show that its property has come into the hands of another person without the agreement of the plaintiff (even if it was to pass into the hands of other people) then if the property is still the same property then it can be traced into the hands of the recipient. This submission tends to restate in a different form the common law principle of “nemo dat quod non habet”. The learned authors “On Equity”[27] suggests that at common law there was no remedy available other than damages except in cases of detinue where a return of a chattel could be ordered. The learned authors suggest that tracing at common law was unnecessary because if only a true owner could convey a good title, then a person holding an asset owned by another who had not conveyed good title, would have no title in the asset at all. There are minor exceptions.
[27] Young, Croft and Smith, Thomson Reuters, 2009, at paragraph 12.830.
In relation to money, the same authors suggest that as “money has no ear mark” the common law did not develop a rule of tracing and that this in part was bound up with the Statute of Frauds and the parole evidence rule in relation to whether or not, by parole evidence, a Court could make a declaration that land was held on trust. It was only when Equity (after 1726) admitted such evidence that a plaintiff was able to follow money into land. The learned authors suggest that the concept of common law tracing appears to have derived from a misunderstanding of the decision of Lord Ellenborough in Taylor v Plumer[28] and that because the principles have been applied for so long particularly in the last 30 years, English law has built upon a fallacy such that fiction has become orthodoxy.[29]
[28] (1815) 105 ER 721; (1815) 3 MS 62.
[29] At page 877.
The learned author of Jacobs’ Law of Trust in Australia[30] have expressed very similar views in no less emphatic language. In paragraph [2702] on pp 669-670 the learned authors say:-
… the securities in the possession of the fraudulent stockbroker in Taylor v Plumer, … had been signed by his principal, which were held by him as bailee, to which he never had legal title, and which (because the common law treated the pieces of paper as chattels apt to be converted) were capable of supporting a tracing claim at common law by their owner. Second, much of the reasoning is cast in the language of unjust enrichment and restitution, which is not, in Australia, a free-standing cause of action. Third, it has now been convincingly demonstrated (by Messrs Khurshid and Matthews) that Taylor v Plumer decided nothing as to “common law tracing”. The plaintiffs were the assignees in bankruptcy of the stockbroker of the defendant. The defendant had seized certain securities and bullion from the stockbroker as he sought to flee the country, and the plaintiffs brought an action in conversion in respect of that property. The plaintiff’s title came from the bankruptcy legislation but it provided that property in the possession of a factor (such as a stockbroker) empowered (as was so here) to dispose of it for his principal (the defendant) was to be treated as trust property and as such did not vest in the assignees on the factor’s bankruptcy. Thus the plaintiffs had no statutory or other right to immediate possession to challenge the defendant’s actual possession, certainly where any right of the plaintiffs was subject to the equitable rights of the defendant. This explains the repeated references by Lord Ellenborough to the assets in question as trust property, in interesting example of recognition at law of equitable titles before 1873. It follows that cases which rely on Taylor v Plumer as authority that A has sufficient right to possession to maintain an action in conversion against B where B has without the authority of A exchanged A’s property with C for some other asset, are misconceived. It is worth noting that in Re Hallett’s Estate Sir George Jessel MR made quite plain his belief that Lord Ellenborough in discussing tracing was dealing with equity not law. (my underlining)
[30] JD Heydon and MJ Leeming; LexisNexis Butterworths Australia 2006.
The authorities relied upon by the plaintiff
The plaintiff relied upon the decision of the Court of Appeal of England in Boscawen and Ors v Bajwa and Ors.[31] This case concerned wrongful transfer of money out of a solicitor’s trust account in discharge of a mortgage prior to settlement taking place on a property. The settlement anticipated the discharge of the mortgage but the purchase on the settlement fell through. The collapse of the settlement occurred after the vendor’s solicitors who had received the money from the transferee’s solicitors in anticipation of the settlement then used the same money to discharge a mortgage on the property and so benefit their clients. The plaintiff obtained a charging order against the property and then claimed against the vendor and the Building Society which had granted the mortgage for an order for possession and sale of the property. The Building Society sought an order by way of subrogation to the rights of the mortgagee and therefore to a charge on the proceeds of the sale of the property in priority to the plaintiff. It was the Building Society that had made an advance for the purchase of the property to be secured by the first legal charge.
[31] [1996] 1 WLR 328.
The decision of the Court of Appeal was written by Millett LJ. Commencing at page 330, His Lordship held that the firm Hill Lawson, the purchaser’s solicitor had not in any sense acted dishonestly or in bad faith and did nothing more reprehensible than act precipitately in anticipation of the clearance of another cheque. As a result of their action, money was applied in partial discharge of a legal charge without obtaining the completion of the sale and the execution of the new mortgage in favour of the next lender. At page 334, Millett LJ turned his attention to the question of tracing and subrogation. He there set out an explanation of tracing[32] where his Lordship said:-
Tracing properly so called however is neither a claim nor a remedy but a process. Moreover it is not confined to the case where the plaintiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistance. It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of the beneficial interest in the property which the defendant handled or receives. Unless he can prove this he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant’s unjust enrichment was at his expense.
[32] His Lordship largely repeated these comments in Foskett v McKeown [2001] 1 AC 102 at 128.
In my opinion, it is clear that his Lordship was here dealing with the equitable principles of tracing and, in the more traditional sense, the question of restitution. These are the principles that are referred to by the learned authors of “On Equity” at page 877 paragraph [12.830]. The language of restitution following unjust enrichment belongs more in common law principles whereas here, assuming the success of the plaintiff the principles of equity give rise to an equitable title to property. And it is to be recalled that different from the position in England, in Australia unjust enrichment is a unifying concept rather than a principle.
Further at page 334 of the decision in Boscawen, Millett LJ said as follows:-
If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant’s behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. But this is only one of the proprietary remedies which are available to a court of equity. If the plaintiff’s money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the sum by which the value of the defendant’s land has been enhanced by the use of the plaintiff’s money.
It is to be recalled that these consequential orders that a Court exercising equitable jurisdiction may make are matters of remedy not causes of action. It is also clear that Millet LJ was speaking of the exercise of the Court’s equitable jurisdiction. It will be in the exercise of the Court’s equitable jurisdiction that it would declare a remedial constructive trust and, as a consequential order, require a defendant to transfer her property in specie to a plaintiff.
In Australia regard must be had to the principles enunciated in Roxborough v Rothmans of Pall Mall Australia Limited.[33] If the common law offers a remedy, then the Court will not allow an election to be made to trace in equity where the solvency of the person who owes the legal obligation is not in doubt. In the case at bar an asset has been purchased using a fund misappropriated over a period of 5 days in breach of an employer’s fiduciary duty. Wherever possible, equity will follow that fund into the new asset and it will use a flexible approach. For example it will allow the cestui que trustent to take that part of the asset as bears the proportion to the whole as the misapplied trust monies bore to the purchase price.[34] In this case it was the whole amount of the purchase price. The approach of Millett LJ in Boscawen was based upon the application of equitable principles in order to fashion the appropriate remedy; his Lordship was also prepared to grant a remedy of subrogation. Relying on Boscawen, the plaintiff contends that McDougall held the legal title of the BMW motor vehicle beneficially for the plaintiff on a constructive trust.
[33] (1995) 95 FCR; (2001) 208 CLR 516.
[34] Scott v Scott (1963) 109 CLR 649 at 661.
The plaintiff also relied upon the decision of the Court of Appeal in Agip (Africa) Limited v Jackson and Ors.[35] The decision of the Court of Appeal was written by Fox LJ. His Lordship held at page 463:-
Tracing at law does not depend upon the establishment of an initial fiduciary relationship. Liability depends upon receipt by the defendant of the plaintiff's money and the extent of the liability depends on the amount received. Since liability depends upon receipt the fact that a recipient has not retained the asset is irrelevant. For the same reason dishonesty or lack of inquiry on the part of the recipient are irrelevant. Identification in the defendant's hands of the plaintiff's asset is, however, necessary. It must be shown that the money received by the defendant was the money of the plaintiff. Further, the very limited common law remedies make it difficult to follow at law into mixed funds.
[35] [1992] 4 All ER 451.
At page 466 of the same report, his Lordship held as follows:-
Tracing in Equity
Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property. Equity, on the other hand, will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to Baker Oil and onwards. It is, however, a prerequisite to the operation of the remedy in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being. There is no difficulty about that in the present case since Zdiri must have been in a fiduciary relationship with Agip. He was the Chief Accountant of Agip and was entrusted with the signed drafts or orders upon BdS.
In Agip, the wrongdoer, the Chief Accountant of Agip, wrote cheques and money orders in favour of his partners by fraudulently altering the name of payees on 28 payment orders. He had been entrusted with those payment orders and he diverted the payments to recipients of his own choosing. Those recipients were either companies controlled by his partners or a company controlled by an employee of the partners and the funds received were over USD$10.5million.
The plaintiff relied upon this decision as authority for the proposition that a person entrusted with the management of a bank account was a fiduciary in that capacity. For the reasons that I have earlier set out, I do not think there can be any doubt about that proposition.
The plaintiff also relied upon the decision of Millett LJ in the Chancery Division in El Ajou v Dollar Land Holdings PLC & Anor.[36] In that decision, at page 733j, his Lordship referred with approval to the decision of Fox LJ in Argip (Africa) Limited which stated the principle settled by Re Diplock’s Estate, Diplock v Wintall[37] that:-
…It is a prerequisite of a right to trace in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being…
[36] [1993] EWCA Civ 4.
[37] [1948] Ch 465.
These principles are discussed by Lord Millett in Foskett v McKeown.[38] In his decision in Re Sutherland, Campbell J (in the New South Wales Supreme Court) decided that he would not follow the decision of Re Diplock concerning the application of Clayton’s Case where there were two beneficiaries whose trust money had been paid into a mixed banking account from which drawings were subsequently made. His Honour relied in particular upon the decision in Sinclair v Broughan.[39] Campbell J discusses Sinclair v Broughan at pages 391-400. His Honour summarised one effect of the decision of the House of Lords in Sinclair v Broughan at page 413 as follows:-
As well, as Sinclair v Brougham makes clear, the principle which underlies tracing can sometimes result in members of a class being entitled to an equitable interest in property, even in circumstances where an individual member of that class could not discharge the onus of proof to trace into individual assets. Further, it is not as though tracing is the only remedy which a beneficiary has when there has been a breach of trust. While the first duty of a trustee who has mixed assets in breach of trust is to put back into the trust fund such of the trust assets as still remain in his hands, such a trustee also has a duty to make good the trust fund from his own assets. This personal obligation of the trustee means that tracing is usually only of practical importance in circumstances where the trustee has disappeared or is insolvent.
[38] (2001) 1 AC 102.
[39] [1914] AC 398.
The plaintiff also referred to and relied upon the decision in Re Hallett’s Estate.[40] This case concerned a mixed fund of trust money. The fund contained some of the fiduciary’s own money and the fiduciary made withdrawals from the fund to purchase property. The Court of equity presumes that a fiduciary will be honest before he is dishonest and so if there is a mixture of trust monies and the fiduciary’s own money in the account, then the money withdrawn will be deemed to be the fiduciary’s own personal money for as long as this could be done without resorting in any way to the trust funds. After that time, the rule in Clayton’s Case may be applied. In Hallett’s Case Jessell MR was of the view that the beneficiary could not elect to take either a personal or a proprietary remedy as the property purchased had not been purchased with the trust fund only. The fund used had included monies belonging to the fiduciary. Equity would grant the beneficiary a charge over the property independent of the amount laid out by the fiduciary. The same approach was adopted and applied in the decisions of the High Court in Brady v Stapleton[41] and Scott v Scott.[42] Re Hallett’s Estate applies where funds of money are mixed between the fiduciary’s own money and money belonging to the beneficiary. And it is not as if equity is in some way circumscribed in the way in which it could assist the beneficiary.[43] In Zobory v Commissioner of Taxation,[44] Burchett J said at page 91 as follows:-
[40] In Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696.
[41] (1952) 88 CLR 322.
[42] (1963) 109 CLR 649.
[43] See Re Oatway [1903] 2 Ch 356.
[44] (1995) 64 FCR 86.
But the equitable ownership of the moneys taken and invested by (a fiduciary) does not depend upon a court declaring the existence of a constructive trust. This was pointed out by Beaumont J in MacFarlane at 368,[45] where he cited the judgment of Deane J in Muschinski v. Dodds[46] as follows:-
Equity acts consistently and in accordance with principle. The old maxim that equity regards as done that which ought to be done is as applicable to enforce equitable obligations as it is to create them and, notwithstanding that the constructive trust is remedial in both origin and nature, there does not need to have been a curial declaration or order before equity will recognise the prior existence of a constructive trust: cf. Scott, Law of Trusts 3rd ed. (1967), vol. V, para 462.4. Where an equity court would retrospectively impose a constructive trust by way of equitable remedy, its availability as such a remedy provides the basis for, and governs the content of, its existence inter partes independently of any formal order declaring or enforcing it.
The passage in Scott on Trusts to which Deane J refers includes the following:
Where the title to property is acquired by one person under such circumstances that he is under a duty to surrender it, a constructive trust immediately arises... The beneficial interest in the property is from the beginning in the person who has been wronged. The constructive trust arises from the situation in which he is entitled to the remedy of restitution, and it arises as soon as that situation is created.
So clear is this proposition that it was possible for A.J. Oakley in his learned article “The Precise Effect of the Imposition of a Constructive Trust”, published in Equity and Contemporary Legal Developments 427, to state (at 433) that "it seems to be universally accepted that the general rule is that a constructive trust takes effect from the moment at
which the conduct which has given rise to its imposition occurs". For this rule, he cites the decision of the Supreme Court of Canada in Rawluk v Rawluk (1990) 65 DLR (4th) 161, where Cory J, with the concurrence of Dickson CJC, Wilson and L'Heureux-Dubé JJ, expressed (at 176) his complete agreement with the view of Professor Scott that “(t)he beneficial interest in the property is from the beginning in the person who has been wronged… the admixture of the applicant’s own funds or property to some extent with the trust monies held by him does not seem to assist… If the result were that there is now an inextricably intermixed fund, the consequence would simply be that the whole of it is held on trust. This conclusion has been repeatedly stated. In Hospital Products Limited v United States Surgical Corporation[47] Mason J referred to “the situation where the fiduciary has so mixed an indeterminate profit with his own property as to render the identification of the gain impossible”. He said:-There... the whole will be treated as trust property, except so far as he may be able to distinguish what is his own… The proposition that equity does not punish a fiduciary by making him account for more than he actually received as a result of his breach of duty may also need to be modified to take account of profit acquired by a fraudulent fiduciary through a combination of trust property and his own property or efforts. It may well be that equity in such circumstances will not seek to apportion the gain.
In Warman International Ltd v Dwyer (1995) 182 CLR 544 at 561-562 the joint judgment of the High Court states:-
It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to the defendant's breach of fiduciary duty and the profits attributable to those earned by the defendant's efforts in investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own.
[45] McFarlane v Commissioner of Taxation (1986) 13 FCR 356.
[46] (1985) 160 CLR 583 at 614.
[47] (1984) 156 CLR 41 at 109-110.
I think it is necessary to attempt to draw together the various threads of principle as they apply to tracing at “common law” and tracing in equity. I have earlier mentioned the decision in Taylor v Plumer. That case concerned a draft of money that was entrusted to a banker to pay bills for his principal but the money was misapplied by the banker who purchased American stock and bullion and intended to abscond with it. He was intercepted and surrendered to the principal the securities of the American stock and bullion and the principal sold the whole and received the proceeds. The principal was held to be entitled to withhold the proceeds from the assignees of the broker who became bankrupt on the day on which he so received and misapplied the money. Lord Ellenborough held:-
It makes no difference in reason or law into what other form different from the original the change may have been made, whether it be into that of promissory notes for the security of money which was produced by the sale of the goods of the principal… or into other merchandise… for the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money and mixed and confounded in a general mass of the same description.
In his decision in Re Hallett’s Estate; Knatchbull v Hallett,[48] Sir George Jessel MR said that the part of Lord Ellenbourough’s judgment after the words “as long as it can be ascertained to be such” was incorrect. At page 717, Sir George Jessel MR said (of those words):-
Now that is correct (that is everything prior to the words ascertained to be such). Now there comes a point which is not correct, but which I’m afraid only ceases to be correct because Lord Ellenborough’s knowledge of equity was not quite commensurate with his knowledge of the rules of the common law.
[48] (1879) 13 Ch D 696 at 717.
It is apparent that the Master of the Rolls considered that when making his decision in Taylor v Plumer, Lord Ellenborough was dealing with and discussing equitable principles. That approach is consistent with the decision of the High Court in Brady v Stapleton.[49] In the Robb Evans decision, Spigelman CJ at [134] emphasised the distinction between what was described as a right to trace and a proprietary right. His Honour held that tracing was best viewed as a process that could lead to a remedy and this approach was applied by Debelle J in his Honour’s decision in Re Magarey Farlam Lawyers Trust Account (No. 3).[50]
[49] (1952) 88 CLR 322.
[50] (2007) 96 SASR 337 at [117].
The restriction upon the common law approach was the requirement of an ability to follow the property because the plaintiff was able to maintain a legal title to the property in the hands of the wrongdoer. Before me, the plaintiff submitted that if this property (the cash misappropriated) became mixed with other property not belonging to the plaintiff, then the common law gave no remedy because the common law could not give the plaintiff a right to trace. The usual authority cited in support of this proposition is Taylor v Plumer. For the reasons that I have already set out, there must be some doubt whether Taylor v Plumer is a case about common law tracing. That said, the common law rule has been referred to with approval in a number of Australian authorities[51] however there are authorities to the contrary.[52]
[51] Puma Australia Pty Ltd v Sportsman’s Australia Limited (No. 2) (1994) 2 Qd R 159 at 162-163; Russell Gould Pty Ltd v Ramangkura [2014] NSWCA 310 at [32] per Barrett JA.
[52] Banque Belge pour L’Etranger v Hambrouck [1921] 1 KB 321 at 335-336 per Atkin LJ; Agip (Africa) Limited v Jackson [1991] Ch 547 at 565-566 per Fox LJ; Lipkin Gorman (A Firm) v Karpnale Limited [1991] 2 AC 548 at 574 per Lord Goff.
As I have set out earlier, the equitable tracing rules require a finding of a breach of fiduciary duty but still provided a remedy where there was a mixture of property including a mixture of funds through accounts and a mixture of funds with funds belonging to the wrongdoer.[53]
[53] Re Hallett’s Estate at 711; Toksoz v Westpac Bank Incorporation (2012) 289 ALR 577 at [8] and [9].
The High Court has also held that an employee who steals money from his employer holds that money on trust for the employer.[54] In this respect, Professor Dal Pont in the 6th edition (2015) of his text “Equity and Trusts in Australia”[55] says at paragraph [39.30] as follows:-
Griffiths CJ identified the stolen money in the account as trust money without explaining why whereas O’Connor J viewed the matter in more encompassing terms saying:
“Where money has been stolen, it is trust money in the hands of the thief and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person’s hands. If, of course, that other person shows that is come to him bona fide for valuable consideration and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not.”
The trust money referred to by their Honours is not money under an express trust and so must take its characterisation as either a resulting trust or a constructive trust. There is case law supporting both such characterisations.[56] Each proves problematic though, because the thief ordinarily acquires no property in what is stolen and cannot give a title to it even to a good faith purchaser; he or she therefore cannot hold the title in the stolen property necessary to be a trustee. What the Courts are doing, then, is artificially changing the character of the stolen money or property to bring it within the supposed limits of equity’s power to trace. In any case, as a resulting trust, it is odd to speak of the presumed intention of a person who has done no act to transfer title to her or his money or property. And the foundation for the imposition of a constructive trust in this context remains to be articulated by the Courts; if it is based on the notion that property obtained by fraud is automatically held by the recipient on a constructive trust for the victim, it is inconsistent with the law that applies to the parallel scenario of property transferred under a voidable contract induced by fraud, when no proprietary entitlement arises prior to rescission.
[54] Black v S Freedman and Co (1910) 12 CLR 105 at 108 per Griffiths CJ and 110 per O’Connor J.
[55] Thomson Reuters 2015.
[56] El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 at 734 per Millett J (resulting trust); Robb Evans at [116] per Spigelman CJ (resulting trust).
The learned author summarises his views at [39.35] by referring to the remedial nature of the constructive trust and the Court’s power to backdate its proprietary effect because the Court grounds the remedy in the unconscionable denial of a beneficial interest in property so depriving the legal owner after the event of title to the property. These principles were discussed by Burchett J in Zorbory.
I have formed the view that the plaintiff is entitled to a process of tracing remedy into the motor vehicle.[57] I consider that little is to be gained by an attempt to reconcile whether Lord Ellenborough’s decision in Taylor v Plumer concerns the process of tracing at common law or the process of tracing in equity.
[57] Dal Pont at [39.05] says: “Thus although sometimes described as a remedy, tracing is best viewed as a process that can lead to a remedy. Successful tracing confers no rights, but may be a precondition to the exercise of rights; once tracing is successfully completed there remains a separate enquiry as to what, if any, rights exist in respect to the assets found at the end of the tracing claim.” (citations omitted)
If it be accepted that in Taylor v Plumer, Lord Ellenborough was referring to common law tracing when he said that it matters not what the thing misappropriated has been changed into as long as the thing can be ascertained as such by following the nature of the thing itself, then I would agree with the submissions of the plaintiff about the limitations of the process of common law tracing where the subject of the tracing claim is mixed with other property not belonging to the plaintiff. This is despite indications to the contrary in Banque Belge, Agip and Lipkin Gorman. But if it appears to be the position that Lord Ellenborough was only discussing the process that can lead to a remedy (that is tracing in equity and not in law) then the submissions of the plaintiff do not need further consideration. And it is to be recalled that Sir George Jessel MR in Re Hallett’s Estate certainly considered that the decision in Taylor v Plumer centred in the process of (tracing) in equity.
One of the decisions referred to below is Foskett v McKeown where Lord Millet and Lord Hoffman suggest in obiter that there is little point in maintaining a distinction between tracing in equity and at law.
In my researches I have ascertained a number of identifiable threads that may be summarised in a series of principles. The summary ends at the suggestion in Foskett v McKeown that there is little point in maintaining a distinction between tracing in equity and law. The High Court of Australia has not seen fit to reason in that way but has preferred to rely upon the flexibility of the approach of equity. As becomes clear hereunder, that is the approach to be adopted in this case.
I consider that the relevant principles concerning both the common law position and the position in equity about the process of tracing that may lead to a remedy are as follows:-
1. A legal owner of property with a good claim at law (over the property) will not and cannot elect to trace an equity especially where there is no issue of solvency of the person who owes the obligation at law;[58]
[58] Robb Evans and of Rob Evans and Associates v European Bank Limited (2004) 61 NSWLR 75 at 143.
2. This principle will also include money received by a collector in the form of, for example, tax where that recipient is both solvent and retains the benefit of the monies collected;[59]
[59] Roxborough v Rothmans of Pall Mall Australia Limited (1995) 95 FCR 185 at 271 [119] per Gyles J.
3. If the remedy offered by the common law meets the case, then resort should not be had to equitable remedies and in particular trust remedies;[60]
[60] Roxborough v Rothmans of Pall Mall Australia Limited (2001) 208 CLR 516 at 534 [46] per Gummow J.
4. If the legal remedy available is adequate there will be no occasion to consider whether a constructive trust arises;[61]
[61] Ibid at 537 [57]; Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566 at 584 [42]; Guimelli v Guimelli (1999) 196 CLR 101 at 113 [10].
5. The expression “common law tracing” ordinarily refers to actions in conversion or detinue or for money had and received;
6. At common law, where a malfeasor exchanged a plaintiff’s money for a chattel it was possible to claim the chattel as the product of or as a substitute for the original thing;[62]
[62] Sinclair v Broughan [1914] AC 398 at 419; Re Diplock [1948] Ch 465 at 518; Taylor v Plumer (1815) 3 M and S 62.
7. In the case of money, equity follows the money even if put into a bag and mixed with other funds or if that money becomes mixed into an indistinguishable mass of property, by taking out the same quantity;[63]
[63] Re Hallett’s Estate at 719, 720.
8. The principles in Re Hallett’s Estate extends to money paid into a bank account and so losing its identity as money and applies to money physically existing or to any other kind of personal property to which it could, as a matter of practical possibility, be applied;[64]
[64] Brady v Stapleton (1952) 88 CLR 322 at 338. Money paid into a bank account is connected to a credit in the account. Technically that money belongs to the bank which matches that credit against the credit belonging to the account holder.
9. An asset may be within an indistinguishable mass if there is no practical reason for differentiating one asset from another of the same type or within the mass itself but that circumstance does not affect the situation where it is possible to take a portion of that asset to make good the equitable remedy such as a constructive trust. This is because “the real distinction which equity draws is between the case where it is, and the case where it is not, practicable to give effect to the rights of the cestui que trust by appropriating to him a specific severable part of the available property.”[65]
[65] Ibid at 339.
10. Where monies have been withdrawn from an account by a trustee and an asset has been purchased using that money, the Court will assume the trustee intended that this investment would be for the benefit of the fund;[66]
[66] Re Oatway [1903] 2 Ch 536; Scott v Scott (1963) 109 CLR 649 at 664; Boscawen v Bajwa [1995] 4 All ER 769 at 778.
11. Where an asset is purchased using a mixed fund then the beneficiary is entitled to assert a lien upon the property purchased using that fund to secure the amount misapplied;[67]
[67] Scott v Scott at 661.
12. Where property is purchased in breach of trust with a mixed fund, the beneficiary may, if the property is specifically severable, elect to take such part thereof as bears the same proportion to the whole as the misapplied trust monies bore to the purchase price;[68]
[68] Ibid at 661.
13. The following principles are derived from the speech of Lord Millett in Foskett v McKeown[69]:-
[69] [2001] 1 AC 102 at 131 per Lord Millett.
1.A plaintiff has a right to elect to follow the asset or trace the value of the asset (at 127B);
2.Tracing is part of the law of property, not the law of unjust enrichment and therefore it is not dependant on the discretion of the Court (at 127E);
3.The plaintiff’s interest in the property is traceable except for when there has been the intervention of a bona fide purchaser for value without notice (at 127G);
4.Tracing does not concern the physical asset itself, but the value inherent in it (at 128C);
5.Hence, tracing is neither a claim nor a remedy (at 128E);
6.A successful completion of a tracing exercise can proceed to three types of claims, personal, proprietary and equitable (at 128F);
7.A fiduciary relationship will only be relevant to the type of claim which can be maintained by the plaintiff;
8.Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner (at 127C);
9.Different from the concept of “following” tracing is the process of identifying a new asset as the substitute for the old (at 127C);
10.Where an old asset has been employed by, for example a bank and has never been transformed or substituted into anything else, then that old asset continues to exist and still exists and therefore no process of substitution of one asset for another will occur.[70]
[70] See: Robb Evans at [139] to the same effect.
The plaintiff initially relied upon English authorities to support the proposition that where there is a tracing exercise in relation to money, the remedy of tracing would be allowed where the money can be traced from one account to another. This, it was contended, will found a common law remedy and there is no need to establish any wrongdoing by any party who may be the recipient of the funds. Therefore the Court would not enquire into any breaches of duty including breaches of fiduciary duty by those others and whether the monies are impressed with a trust.
The plaintiff suggested that the usual example was if a bank inadvertently transferred funds to a wrong account and those funds were then transferred into another account. As long as the funds were identifiable, even absent any wrongdoing on anyone’s part, there would be a remedy available against the fund or the property acquired with the fund. These submissions reflect in part the concern of the plaintiff to avoid any suggestion of there having been a mixed fund which may be described as an indistinguishable mass (Brady at 338-339) or to avoid the limitations of the common law that a plaintiff had no title to money in the hands of a third party and was left to a remedy in conversion of the fund and damages.
Having regard to the decided authorities, there is a dichotomy of views about the status of the decision of Lord Ellenborough in Taylor v Plumer and whether it in any way informs the principles or the “metes and bounds” of that which is described as common law tracing. So much is clear from the majority decision in Brady (at 337) where Dixon CJ and Fullager J appears to have readily accepted the criticisms by Sir George Jessel MR of that portion of Lord Ellenborough’s judgment about the ability of equity to place a charge on the “indistinguishable mass” and equity’s ability to follow the money. In Brady the High Court accepted that equity may trace into a particular part of an asset which constituted part of that indistinguishable mass. On the other hand, other Australian decisions at the intermediate appellate level (Puma Australia and Russell Gould) have accepted the common law limitation as set out in the now well-known passage that was not accepted by Jessel MR in Re Hallett’s Estate. And it is doubtful if Fox LJ in Agip or Atkins LJ in Banque Belge accepted the position and implicitly accept that Lord Ellenborough was wrongly stating the principles applicable when the process leads to an equitable remedy.
The High Court did not appear to consider the decision in Taylor v Plumer as being an example of a common law tracing decision on the facts of that case and because ultimately it turned on the application of equitable principles. And I think that the issue has been resolved by the decision in Brady, Scott and Foskett. I consider that the imperative described by Gummow J in Roxborough to first have regard to common law principles has no application here because of the quite specific fiduciary relationship between the plaintiff and McDougall and because of the use made of the various external bank accounts through which McDougall channelled the money.
In support of its amended application for relief under Rule 233, the plaintiff submitted that equity gives a wider remedy but it is an element of the equitable remedy that the funds must be impressed with a trust from the beginning. The plaintiff relies upon a letter from McDougall’s solicitors dated 5 April 2016 from Websters Lawyers addressed to Cusoff Cudmore Knox of that date. The letter relevantly reads as follows:-
…
Our client will not oppose the application for summary judgment…
…
In order to save costs our client instructs us to make an open proposal to your client as follows:-
1.
2. That she assign to your client all assets which will be sequestered to a trustee in bankruptcy.
3. That your client otherwise discontinue these proceedings with no liabilities as to costs.
The purpose of making an offer in these terms is to pre-empt an additional burden of the costs of a trustee in bankruptcy… we understand that there are no other creditors and that if this course of action is adopted then you will not need to obtain orders in rem.
…
The plaintiff submitted that it is thus proved on the balance of probabilities that McDougall was involved in the transfer of funds and that she therefore had knowing involvement in that transfer. I have already accepted that the very specific duties of McDougall’s position of employment as the Business and Finance Manager of the plaintiff and the trust reposed in her by the plaintiff placed her in a fiduciary position (especially, for example in relation to the control of and operation of the plaintiff’s bank accounts). The plaintiff did not purport to attempt to extend the fiduciary relationship but as I have already indicated the special nature of that relationship is sufficient to give rise to the types of the fiduciary duties that I have outlined earlier. Having regard to the very particular nature of the bank account, the arrangements made for its operation and the intrinsic control of McDougall over the bank account, I accept the submissions of the plaintiff.
I do not entertain any doubt that as McDougall was largely in control of the conduct of the bank accounts and was authorised to transact on that account for the plaintiff, McDougall owed a fiduciary duty of honesty, good faith and an obligation not to profit from that position of trust. As a fiduciary, McDougall was prevented from using the bank account for an improper purpose. The plaintiff emphasised, inter alia, that many of the transactions undertaken by McDougall in breach of her fiduciary duty using the bank account of the plaintiff took place after hours at times which can be described as unusual. The inference arising, particularly for those transactions which took place very late in the evening, was that those transactions were not done in accordance with the ordinary procedures which would require a second person to be involved and that McDougall caused each of those relevant transactions to be undertaken. The absence of any person who may be described as the second person at those times indicates that McDougall intentionally adjusted or used the system to her own benefit. I need not conjecture about how she achieved this end.
I am satisfied on the plain inferences arising on all of the evidence that has been admitted by the Court, that McDougall was the author of the transactions, those transactions were a breach of her fiduciary duty because they were unauthorised and they wrongfully enriched McDougall at the expense of the plaintiff. I am satisfied that in the period between 28 January and 4 February 2014, McDougall accumulated the sum of $32,000 in her bank account directly from funds misappropriated from the bank account of the plaintiff. I am satisfied on the evidence put before me that the contentions of the plaintiff are correct.
I am satisfied on the basis of the evidence before me that the amount of $32,000 was derived from money misappropriated between 28 January 2014 and 4 February 2014. At one level and as a matter of inference it is arguable that there was no mixing of those funds, as that term would be commonly understood. This is because on the evidence an inference arises that McDougall used the account of her husband, the Smart Access Account, the AM Direct Account, the Freedom Business Account and the joint Freedom Cheque Account as a method of channelling funds into the Complete Freedom Account which she controlled. The transactions all followed the same pattern: McDougall misappropriated the plaintiffs funds from its own bank account, paid those funds into one of several accounts above mentioned and then immediately paid the same amount of money into her Complete Freedom bank Account. On one view this was no more than a process that was employed as an elaborate ruse to attempt to avoid detection of the offending conduct or in the end, its sequelae. The method used by McDougall was a ruse to enable the transfer of money into her own account. In doing so she (momentarily) mixed those funds with other funds in those amounts that belong to others. I do not have any regard to the accounts used that held the personal funds of McDougall.
The difficulty however is apparent: McDougall used other bank accounts of other persons/entities in the process of siphoning money into her Complete Access account. The argument put against the above (common law) proposition is that by virtue of the very process of channelling these funds, it becomes necessary to use equitable principles in order to obviate the strictness of the common law rule. I consider that the common law principles discussed in Roxborough require a sufficient level of satisfaction about the certainty of the claim at law of the beneficial owner of the property. Absent that level of satisfaction and where equitable remedies are available, use can be made of those equitable remedies. Adopting the passage from Scott on Trusts to which Deane J referred in Muschinski: the title to the BMW has been acquired by McDougall in circumstances where she is under a duty to surrender it.
In those circumstances, the actions of McDougall in “laundering” the funds belonging to the plaintiff through a number of bank accounts, ultimately received by herself and then used to purchase the BMW motor vehicle have the following legal consequences. The first is that the fund has been used to purchase the BMW and so the plaintiff is entitled to an order in its favour for the transfer to it of the motor vehicle.
The second is that following the decision of the High Court in Brady, Scott and the decision of Sir George Jessell MR in Re Hallett’s Estate, McDougall holds the legal title of the BMW as a constructive trustee beneficially for the plaintiff. The plaintiff stands as the only cestui que trust under such a trust. This is because equity must follow the money into the asset and the fiduciary duties owed by McDougall were breached and give rise to the trust obligations. I consider that McDougall holds the BMW motor vehicle on constructive trust for the plaintiff.
I am satisfied that the plaintiff succeeds on paragraph 1 of its application for summary judgment.
The plaintiff also pointed out other ancillary matters that should be discussed. There is evidence that some expenses has been paid by the plaintiff in relation to the maintenance of the BMW motor vehicle. In my opinion, equity would not require any accounting to be made by the plaintiff to McDougall in that respect. McDougall was a fiduciary holding an asset which had from the very date of its purchase been impressed with a constructive trust in favour of the plaintiff. McDougall had an obligation to preserve the asset. The monies expended by McDougall fall into the category of funds necessary to be expended to preserve the asset in an ordinary fiduciary relationship. I am satisfied that no expense may be claimed by McDougall as if an ordinary expense of a trustee which may be satisfied from the trust estate.
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