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88 C.L.R.] OF AUSTRALIA.

609

[HIGH COURT OF AUSTRALIA.]

FOUCHE .

A p p e l l a n t

;

P l a in t if f ,

AND

THE SUPERANNUATION FUND BOARD

R e s p o n d e n t .

D e f e n d a n t ,

FOUCHE . .

A p p e l l a n t

;

D e p e n d a n t ,

AND

THE SUPERANNUATION FUND BOARD

R e s p o n d e n t s .

AND OTHERS ....................................

P l a in t if f s a n d

D e f e n d a n t s ,

ON APPEAL FROM THE SUPREME COURT

OP TASMANIA.

Trusts and Trustees—Superannuation Fund Board—Body corporate having no

H. C. OF A.

legal personality except in its capacity as trustee—Investment of trust moneys

1951-1952.

on mortgage—Certain sums paid out on authority of executive officer of trustee,

but ivithout atdhority of trustee—Certain sums payable in future—Breach of

Melbottene,

trust ah initio—Rights and liabilities of borroiver—Liability of executive officer

1951,

—Liability of members of hoard to board—Gross negligence—Chairman of

Oct. 16-19,

hoard acting as horroweFs solicitor—Right of hoard to account of fees received— 22-24;

Superannuation Act 1938-1950 (Tas.) (2 Geo. VI., No. 41—No. 72 of 1950), 1952,

SS.4, o.—Trustee Act 1898-1941 [Tas.) (62 Viet., No. 34—5 Geo. VI. No. 17),

Feb. 6.

ss. 5 (1) (vi.), 50—Public Officers Protection Act 1934 (Tas.) (25 Geo. V., No.

Dixon,

65—25 Geo. V., No. 78), s. 4.

McTieriian

and

The Superannuation Act 1938-1950 (Ta.s.) provides for the establishment of

Pullagar J J.

a fund, to be known as “ The Superannuation Fund ”, and for the setting up of a body corporate, the “ Superannuation Fund Board ”, having the manage ment and control of the fund and charged with the duty of investing the monej's belonging to the fund in any investment authorized by law for the investment of trust mdneys. The Trustee Act 1898-1941 (Tas.) provides by s. 5 (1) (vi.) that trustees may invest trust funds “ on first mortgage of real

VOL.

L X X X V III .—39

610 HIGH COURT

[1951-1952.

H. C. OF A.

ostalo ill TaHiriiiiiia ”. In |)iir.siianc,e of its [lower.s of inve.stment, the board,

1!)51-11)52.ol which the memhors wore K., as chairman, and three other persons, lent

£11,500 to

on the security of a country jirojierty valued at £5,500. Sub-

Fofciho

IKseciiKMitly, F. apiiroachcd R., as the executive officer of the board, for a 'I’llH

lurtlior loan of £50,000 in order to convert, at a total cost of £80,000, the

iSrPEKANNUA-

TIONhomest(iad on tlie mortf^aged property into a large tourist hotel for which

Fundhe had obl-aincd a provisional certificate for a licence. R. requested plans,

H o a r d .which were supplied by h'., and submitted to a valuer, who, in a written

valuation, valued the ])ro|)erty, when comjileted, at £68,000, such sum being made up of £4-,000, the value of the land, and £64,000, the value of the buildings, arrived at by taking the estimated cost of the buildings, £80,000, and deducting 20 ])cr centum on account of present abnormal building costs. The valuer considered the property a good security for a loan of £4,5,000. R. made no inquiry from F. as to hi's ability to finance, over and above the sum of £41,500, the completion and the furnishing of the hotel, nor was any attention directed to the question whether the hotel would be a profitable venture. The board resolved that it was prepared to advance to F. an addit ional £41,600 at 4:̂ per centum per annum for a term of five years. F. thereupon engaged R., who was a solicitor, to act for him in connection with the loan, for which services F. gave a promissory note to R. for £175. A deed, drawn up by R., was executed between the parties whereby F. covenanted to convert the homestead into a modern tourist hotel, and the board covenanted to grant a loan of £41,500, which F. covenanted to repay on 25th May 1952. Under the deed the amount was to be payable to F. by 23rogress payments, each repre senting four-fifths of the amount certified by an architect, app>roved by the board, to be the value of the work done and the materials apj)lied to the com pletion of the hotel since the last previous j)ayment. Under the authority of R. a sum of £2,500 was paid to F. without any certificate and thereafter, on R.’s authority, sums were j)aid from time to time to F. on architect’s certificates, none of which complied with the provisions of the deed, until a total of £21,900 had been paid by the board to F. At that stage, as a result of publicity over the matter, the members of the board resigned. F. commenced an action against the reconstituted board, claiming, inter alia, certain progress payments allegedly due under the deed and a declaration that he was entitled, upon complying with the terms of the deed, to receive from the defendant jrayments, from time to time, up to the total of £41,500. The board, by its counter-claim against F. and by a separate action against F. and the former members of the board, claimed inter alia, a declaration that the deed and the jjayments made under it, amounting to £21,900, were ultra vires the board and in breach of the duty which the former members of the board owed to the board and in breach of the trusts upon which they held the moneys for investment. The former members of the board, by their defences, claimed, inter alia, that they were entitled to receive and had not received notice of action under s. 4 of the Public Officers Protection Act 1934 (Tas.), and that they were entitled to be relieved from personal liability for any breach of trust, under s. 50 of the Trustee Act 1898-1941 (Tas.) because they had acted

88 C.L.R.] OF AUSTRALIA.

611

honestly and reasonably, and ought fairly to be excused for the breach of H. C. o f A.

trust.

1951-1952.

H dd : (1) That by reason of its inherent nature the investment was a

o t j c h e

breach of trust ab initio.

T h e

(2) That the claim by F. to enforce his contract with the board failed

SU PEEANHHA-

because (a) the contract was in breach of trust and it could not be enforced

TION

F u n d

against the board as trustee ; and (b) it could not be enforced against the

B o a r d .

board x^ersonally, because it was a corporation, having no legal personality

except in its capacity as trustee.

(3) That the board was entitled as an incident of equitable relief to the immediate repayment of the sum of £21,900 from F. because F., knowing that the moneys were being paid to him out of a trust fund and knowing all the facts which made the transaction a breach of trust, was not in a position to defeat or delay the equities of the board.

(4) That R., in his capacity as an executive officer of the board, was personally liable for any loss sustained by the fund by reason of the trans action, because, only having authoritj^ from the board to make payments to F. on production of certificates complying with the requirements of the deed, he had paid away moneys of the board without authority.

(5) That all the former members of the board were liable for any loss sus tained by the fund by reason of the transaction, because they were guilty of gross negligence in assenting to the loan to F., and (a) since they could not be said to have acted reasonably, s. 50 of the Trustee Act 1898-1941 (Tas.) was inapplicable and (b) since the duty, which, it was alleged, they had broken, was not a pubhc duty but a duty owed by them to the board, they were not entitled to notice of action under s. 4 of the Public Officers Protection Act 1934- (6) That R. was hable to account to the board for moneys received by him

from F., by way of costs, for acting as F.’s solicitor in the transaction.

Per curiam : The contributors to the superannuation fund have an interest in the fund which would probably give them standing in a court of equity, but they have not such a beneficial interest in the trust fund as has an ordinary cestui gue trust. The trust is not a trust for persons but for statutory purposes.

Decision of the Supreme Court of Tasmania [Morris C.J.) varied.

A pp e a l from the Supreme Court of Tasmania.

On 30th August, 1949, Francois Fouche commenced an action in the Supreme Court of Tasmania against the Superannuation Fund Board, a body corporate incorporated by the Superannuation Act 1938-1950 (Tas.). The plaintiff, by his statement of claim delivered 28th September, 1949, claimed (a) a declaration that he was entitled, upon complying with the terms of an indenture dated 25th May 1948, to receive from the defendant payments from time to time up to the total of £41,500 ; (b) the sum of £3,100 due under

612 HIGH COURT

[1951-1952.

H. C. oir A. indenture ; (c) specific performance of the defendant’s 1951-1952. Qovenants in the said indeaiture ; (d) £5,000 damages in addition

F o i l OHIO

to specific ])orformance ; (e) in the alternative the sum of £25,000

V.danuiges in lien of specific performance. The defendant, on 11th

T hk

S u r i o R i N m i I h d O , delivered a defence to the statement of claim and TIONcounterclaimed against the plaintiff for the following relief, (a) A

Fond

B o a h h .declaration that the indenture dated 25th May 1948 and payment

of £21,900 by certain former members of the Superannuation Fund Board, namely James Roland Rule, Harry Vernard Biggins, Claude Goodwin Wadley and Arthur White, to the plaintiff were ultra vires the board and in breach of the duty which the said former members of the board owed to the board and in breach of the trusts upon which the said former members of the board held the said moneys for investment, (b) A declaration that the plaintiff, Francois Fouche received the said moneys with notice of the said

breach of trust,

and interest thereon, (d) All necessary accounts and inquiries, (e) An order for the realization of the said security, (f) A declaration that the board is entitled to and has lawfully rescinded the contract contained in the said indenture and is not obliged to pay any further moneys to the plaintiff thereunder, (g) A declaration that the board is not obliged to advance any further moneys under the said indenture until it is satisfied that an adequate water supply is available successfully to carry on the business of the hotel referred to in the indenture.

On 16th September 1949 the Superannuation Fund Board com menced an action against the said Francois Fouche and James Roland Rule, Harry Vernard Biggins, Claude Goodwin Wadley and Arthur White. The relief claimed by the statement of claim, delivered 20th September 1949, was the same as that claimed in the counterclaim by the Superannuation Fund Board in the action in which Francois Fouche was plaintiff. By their defences, the defendants Rule, Biggins, Wadley and White, gave notice of their intention to rely on the Trustee Act 1898-1941 (Tas.), ss. 10, 11, 27, 50 and on the Puhlic Officers Protection Act 1934 (Tas.), s. 4. On 28th October 1949 those defendants issued a third party notice against Francois Fouche claiming that tlniy were entitled to be indemnified by him in respect of any liability they might have to the Superannuation Fund Board under any of the claims made by it, and also in respect of any costs which they might incur in defending the action.

On 21st May 1950 Morris C.J. heard, and determined in favour of the Superannuation Fund Board, the question whether s. 4 of

88 C.L.R.] OF AUSTRALIA.

613

the Public Oncers Protection Act 1934, afforded any defence to the

defendants Rule, Biggins, Wadley and White.

195^^52.

The actions were tried together before Morris C.J. The facts

pquchb

as found by the trial judge so far as material appear from the

following extracts from his judgment, delivered 29th September

1950: TION'

F und

“ Mr. Fouche first conceived the idea of erecting a large luxury tourist hotel in 1947 when he obtained an option over a property at Old Beach known as ‘ Ballarton ’, for £5,500. In September 1947 he purchased the property and instructed his solicitors . . . to arrange finance for it, he finding £500 of his own money. His solicitors arranged a first mortgage to the Superannuation Fund Board for £3,500, and a second mortgage to a Mr. G. H. Voss for £1,500. On 12th December 1947 he obtained from the Licensing Court for the District of Brighton a provisional certificate for a hcence for an hotel to be established on Ballarton in accordance with certain sketch plans drawn by an architect, Mr. Dorney, which envisaged the incorporation of the existing homestead in the new hotel.

B oabd .

Mr. Rule . . . was chairman of the Supernnuation Fund Board. His salary was £250 per annum compared with the other members £75 per annum. The other members of the board were Mr. Biggins, Mr. Wadley and Mr. White. Mr. Rule was considered by himself and by the other members as chief executive officer of the board as no doubt he was. I t was he who had all the discussions with Mr. Fouche.

Early in March 1948, Mr. Fouche, having met Mr. Rule . . . on the occasion of the mortgage transaction, approached him with a request for a loan of £50,000 to finance the building of the hotel. On Mr. Rule’s requesting plans, further plans drawn by Dorney but differing somewhat from those furnished to the licensing court, were submitted. These were sent to Mr. Edney Moore, a Hobart valuer, for valuation. There was a conflict of evidence as to whether Mr. Moore was instructed to value only a large circular wing, which was a feature of the plans, or the whole project. Whatever his instructions, he valued only the circular wing, and on being then asked to value the whole structure was unable to do so because of his pending departure from Tasmania. Meanwhile, another set of plans in a practically completed condition, also drawn by Mr. Dorney, were sent to Mr. E. C. Tregear, another valuer, who in due course furnished a valuation which concluded as follows :— ‘ Valuation—I am of opinion that it will cost a t least £80,000

G14

HIGH COURT

[1951-1952.

H. C. OF A. to complete the buildings according to the plan, and I value the

i9r)i-i!)o2. property when completed at £68,000 made up as follows :—

F oucheValue of land . . . . . . . . . .

£4,000

Estimated costs of new buildings

T h eas per plan . . . .

£80,000

SUPEKANNUA-

TION

Less a deduction of 20% for

Funi>abnormal building costs .. £16,000

B oard .

£64,000

£68,000

and I consider the property a good security for a loan of two-thirds of this amount, namely £45,000. I have not taken into consider ation the undoubted increased value that will be attached to the hotel when it is in operation with the licence attached, and as this value will be a very considerable item, it would provide additional value to the security in excess to the above-mentioned figures of my valuation

Mr. Rule, having mentioned to the other members of the Super annuation Fund Board in March 1948 that Mr. Fouche was applying for a loan and at a subsequent meeting that Mr. Edney Moore had misunderstood his instructions and because he was going to the mainland would not have time to complete the valuation but would say it would cost between £75,000 and £80,000, formally brought the application for the loan before the board at its meeting of 5th May, 1948. After discussion, the matter was deferred in order that written evidence of the availabilty of sufficient water for the hotel might be obtained. I t came before the board again at a meeting on 19th May 1948 when the loan was approved, the minute of the decision reading—‘ Resolved that Mr. Fouche be informed that the board will be prepared to advance an additional £41,500 at 4|- per cent for a term of five years ’. On Mr. Rule’s informing Mr. Fouche of the board’s decision, Mr. Fouche who had only recently learned that Mr. Rule was a solicitor, asked him if he would act for him in doing the necessary legal business in connection with the loan. Mr. Rule agreed and in due course, Mr. Voss having agreed to post pone his second mortgage, prepared a further charge, had it executed by Mr. Fouche and Mr. Voss, collected a cheque from Mr. Fouche for out-of-pockets and stamp duties and saw to the registration of the documents. He accepted from Mr. Fouche a promissory note for £175 payable in twelve months for his own legal charges as solicitor for the mortgagor and mortgagee.

I do not find that Mr. Rule was in any ŵ ay fraudulent or that he wilfully subordinated the board’s interests to his own personal

88 C.L.R.] OF AUSTRALIA.

615

profit. There was no ‘ scheme ’ between himself and Mr. Fouche relating to it and I find that Mr. Fouche was quite unaware tha t

C. of A. 195^1^52.

Mr. Rule did not have the authority of the board to make professional

j ôuche

charges.

The further charge, after reciting the first and second mortgages supbeannua- and the request for the loan, witnessed that, in consideration of the

TION F und

advances to be made, the mortgagor convenanted to pay £41,500

B oard .

on 25th May 1953 with interest at 4̂ - per cent and in the meantime to construct the hotel in accordance with the plans and specifi cations submitted to and approved by the mortgagor, and having done so, to obtain and preserve a licence for it. After the conveyance and proviso for reconveyance and Voss’ postponement, the docu ment provided—‘ Provided always and it is hereby expressly agreed and declared that the said sum of Forty-one thousand five hundred pounds shall be payable to the mortgagor by progress payments which shall represent four-fifths of the amount certified by an architect (approved by the mortgagee and appointed at the cost of the mortgagor) to be the value of the work and materials applied towards the completion of the said hotel since the payment of the last previous advance and the final balance of the said sum shall be payable on the like certificate that the said hotel has been satisfactorily completed in accordance with the plans and speci fications approved by the mortgagee Provided also that if the test by boring now proposed to be carried out by the mortgagor on the said land fails to establish the fact that an adequate supply of artesian water is obtainable therefrom the mortgagee may withhold payment of so much of the said sum as it may think necessary until the mortgagee is satisfied that an adequate water supply is available successfully to carry on the business of the said hotel ’.

Mr. Touche’s ability to complete the hotel was not made the subject of any very serious inquiries. Mr. Rule said that ho knew that Mr. Fouche had conducted a cabaret business in Hobart during the war, as he believed, successfully. But he knew no details of his actual financial position. He made inquiries from some of his friends, whose names were not disclosed to me, who said that they thought Mr. Fouche’s financial position good. He learnt that Mr. Fouche owned a house property at Sandy Bay valued at some £6,000 but that it was mortgaged, but for what amount he did not inquire. He accepted Mr. Fouche’s assurance that he would be able to complete the building as some concrete company, only vaguely referred to, and two gentlemen, Mr. Holyman and Mr. Johnson, were showing an interest in it, and even if that did not come to anything he would float a small company to complete it.

G16 HIGH COURT

[1951-1952.

H . 0 . OF A .

In fact, Mr. Fouche had between his approach to Mr. Rule and

IS)5l-l!)52.tlic granting of the loan in May—i.e. on 14th April—given a bill

F o u c u bof sale to the Commercial Bank of Australia Ltd. over certain

V.refrigeration ecjuipment which he had purchased to secure payment

'I’HB

S lU ’ERANNUA-of the sura of £400. His financial position as deposed to by himself

TIONin the course of the trial, was as follows ;—he had purchased the

Funj)

B o a r d .Sandy Bay property in 1943 for £3,100 and mortgaged it in 1943

for £2,100.

In August 1947 he added a further mortgage for £1,200

to the Launceston Building Society. He later paid off the mortgage to the Launceston Building Society and increased the mortgage to £G,000 and ultimately raised £7,500 on the security of the Sandy Bay property. He owned Ballarton purchased for £5,500 and mortgaged, as already set out, for £5,000. He owned a property known as ‘ Glovers ’ adjoining Ballarton, which he purchased for £1,700 and mortgaged to the Launceston Building Society for £1,200. He says he had expended about £3,000 on plant and labour and materials on the property and that £1,000 worth of material was at that time on the property. I t did not appear, however, whether the plant or material had been paid for or whether the plant was being obtained on hire purchase. He said he had realized approximately £3,000 on the sale of his cabaret business. He had also moneys which were the earnings from the cabaret business and wrestling ventures promoted by him, and that at the time of his negotiations with Mr. Rule he had £2,000 remaining in cash on his person. He had an overdraft at the Bank of Australasia for two, three, four or five hundred pounds—he was not sure of the amount. He did not produce any bank books. He said he had got together a quantity of personal property, furniture and so forth, to be used in the hotel when built. He owed income tax £1,285 for which the commissioner later issued a writ and proceeded to execution.

The further charge was registered on 11th June 1948. On the same day Mr. Fouche asked for and obtained from Mr. Rule a progress payment without an architect’s certificate for £2,500 in respect of plant purchased and preliminary work and materials on the site.

Mr. Dorney was approved by Mr. Rule as architect for the purpose of giving certificates and remained the certifying architect until 24th December 1948 when he was succeeded by Mr. Haslock, who was in turn approved as architect—this time by resolution of the board. During Mr. Dorney’s period a number of changes to the plans were made, the principal one being the addition of a new front involving in Mr. Dorney’s estimate an increase in cost of £22,000.

88 C.L.R.] OF AUSTRALIA.

617

When Mr. Haslock took over, further changes in the plans were

made of a somewhat substantial nature . . .

1951^52.

There was no building contract for the erection of the building.

Louche

Mr. Fouche paid for all labour and materials himself, and made

an arrangement with one Barker, a builder, to pay him £2,000 sjjpbrannua-

TION F und

for the use of his plant and his supervision and work on the building,

Barker having already estimated that the job would take one year B oard .

to complete.

Progress certificates ŵ ere given by Mr. Dorney and Mr. Haslock amounting in all to £31,250, including one for £2,500 to cover the amount originally advanced by Mr. Rule without a certificate. The total amount of payments made was £21,900. Mr. Rule author ized the drawing of cheques for these progress payments. No tests for artesian water were carried out on the mortgaged property, but tests were made on an adjoining property known as ‘ Compton South ’ and on ‘ Glovers ’, proving the availability of water there in certain quantities. No rights over this water were included in the further charge. Towards the middle of 1949 this loan received publicity following a report of the Auditor-General and the matters being mentioned in parliament. As a consequence, on 10th June 1949 the members of the Superannuation Fund Board resigned.

I t is apparent that the board’s money was the first money going into the erection of the building and that to the extent of four- fifths of the ‘ value of labour and materials supphed towards the completion of the hotel since the last previous advance ’.

Taking the ‘ value of the labour and materials supplied towards the completion of the hotel ’ to be either the cost to Mr. Fouche or, as is suggested in Halsbury’s Laws of England, 2nd ed., vol. 3, p. 247, the value of the work done measured by the proportion it bears to the whole of the completed work, the amount being advanced was four-fifths of a sum which the board had been advised should be discounted by 20 per cent to get at its real worth because of present abnormal building costs. When all but the final one-fifth retainable until completion had been advanced the board would have as its security a partially completed building . . . The house which originally stood on the land had ceased to exist except as part of the unfinished structure. I t is true that if sufficient security is taken for its completion the fact of a building’s being unfinished is not necessarily an objection in itself—see per Lord Herschell in Rae v. Meek (1)—but here there was nothing resembling security for completion and it was still to be ascertained whether finance could be obtained to

(1)

(1889) 14 App. Cas. 558, at p. 671.

GIS

HIGH COURT

[1951-1952.

H. (.. oir A. Hjiving regard to Mr. Fouche’s financial position, it seems ])rol)ahle that he Avill have difficulty in finding the one-fifth Foiu'ii n of the cost of work and materials in each progress certificate not

V.found by the board, without having to give security over the

T hk

iSui*i5K\NNHA- P’’<jp<̂ '''fy. flut wlien the board has advanced all but the one-fifth TION retaiuable until completion, the board’s four-fifths and his one-fifth,

KI'N I)

ISOAKII.however provided, will only amount together to £41,500. Yet it will cost £80,000 to build the hotel . . . A by no means fantastic risk is that a second mortgagee not being forthcoming and other efforts at finance failing, a half finished building might be thrown on the board’s hands for realization for what it would bring. I t does not need any argument that the discounted cost of the work and materials then would not bear any relation to its value. Who can say what would be got for it, the construction committed to the lay-out of a luxury hotel standing in rural surroundings miles from any town or centre of population. Of course, Mr. Fouche may without difficulty succeed in arranging finance or in floating a company, but on the foregoing considerations I think few would hesitate to describe the investment as hazardous.

But that is not the end of it. Assuming finance is found to complete it, but as a business it is not a success and the security is thrown on the board’s hands, as a huge building for sale for what it will bring for use for some other purpose—I have the evidence of Mr. Edney Moore, an expert valuer and a gentleman well acquainted with the real estate market in Tasmania, that there is no known market for such a building situated in country surround ings in a place like Old Beach. Possibly, he said, some religious body might buy it, possibly some school, but there is a grave risk that it would be completely unsaleable at anything lilce its value as bricks and mortar. Both Mr. Moore and Mr. Waldron, the chief valuer for the Commonwealth, gave me their opinions, which I accept, that the value of an hotel as an hotel cannot be considered except in connection with the business being conducted in it, and it is completely dependent upon that business. I t is speculative.” The trial judge, upon the facts set out above, held (a) that the sum of £21,900 advanced by the Superannuation Fund Board to Francois Fouche had been laid out in breach of trust, the investment being speculative and hazardous ; (b) that Francois Fouche received trust funds with knowledge that they were lent to him in breach of trust because (i) he was fixed with knowledge of the contents of Acts of Parliament, and the Superannuation Act 1938-1950 provides that the superannuation fund is a trust fund ; (ii) he knew the circumstances which made the investment hazardous and of a

88 C.L.R.] OF AUSTRALIA.

619

speculative character ; (iii) the application of the maxim ignorantia

juris hand excusat made it unnecessary that, knowing the facts,

he should have known that those facts do in law amount to a breach

Louche

of t r u s t ; (c) tha t the investment was intra vires the Superamiua-

tion Fund Board ;

(d) that if there was any liability in the individual supebannua-

TION F und

members of the Superamiuation Fund Board to the board, it was

enforceable only by way of damages, and no damage had been

B oard .

proved; (e) that the Superannuation Fund Board was entitled not to be satisfied at the present stage and was not satisfied that an adequate water supply was available to the hotel, although his Honour thought that probably sufficient water would be available ; if) that the professional costs paid by Francois Fouche to Mr. Rule, without the knowledge or approval of the Superannuation Fund Board, constituted a profit, the opportunity to make which came to Mr. Rule by reason of his fiduciary position as chairman of the board. Accordingly judgment was given for the Super annuation Fund Board against Fouche for repayment of the amomit advanced, being £21,900, within two months, and for realization of the security in default of repayment, and against Rule for the sum of £175 being the amount of costs he had received from Fouche, for Rule, Biggins, Wadley and White against the Super annuation Fund Board, and for Fouche against Rule, Biggins, Wadley and AUhite on the third partji proceedings.

From this judgment in the two actions Fouche appealed to the High Court of Australia and the Superannuation Fund Board, Rule, Biggins, Wadley and White gave notice of their intention to contend that the judgment was wrong.

S. C. Burbury K.C. (with him W. 0. Hodgman), for Fouche. The trial judge was wrong in assimilating the position of a mortgagor to that of a third party dealing with trust moneys with knowledge of a breach of trust. There is no suggestion of fraud or dishonesty on the part of the borrower, nor did he participate in or procure the breach of trust. He approached the chairman of the board in good faith for a loan to assist him in the erection of an hotel. The board granted the loan but took insufficient care in inquiring into the security and advanced an excessive amount. The investment was a breach of trust because of carelessness on the part of the board. The board having entered into the contract of loan and having lent Fouche £21,900 in pursuance of it, seeks to escape the consequences of its breach of trust by obtaining repayment from the mortgagor, contrary to the terms of the mortgage deed. There

620 HIGH COURT

[1951-1952.

H. ('. OF A. ig jjQ principle upon which an innocent borrower of trust funds U)o .̂^52. pg called upon to repay the amount lent to him otherwise

F ouche

in pursuance of the contractual terms of the mortgage unless

the transaction is ultra vires.

The mortgagor is not in the position

Tuk

S r I’EKANNUA of a stranger getting into possession of trust money and being saddled

TIONwith liabilities of the trustee because he knows of some dishonest

F und

design on the part of the trustee.

[He referred to Modern Equity

H o a r d .

by H. G. Ilanbury, 5th ed. (1949), p. 374; Barnes v. Addy (1).] This is not the case of a dishonest breach of trust by trustees and a third party being made liable because he is a participator in their dishonesty. No doubt it was an improper investment because sufficient precautions were not taken but it was an investment within the corporate powers of the board and the mortgage is valid. [He referred to the Superannuation Act 1938-1950 (Tas.), ss. 4, 5, 7, 15 and 16 ; the Trustee Act 1898-1941 (Tas.), s. 5.] I t was simply a case of the board investing without allowing a sufficient margin. Is a borrower under such circumstances liable immediately to repay the amount of his loan ? The transaction, may be described as an intra vires breach of trust. The trustees failed to exercise their discretion prudently and in accordance with proper principles in making this particular investment. [He referred to Underhill’s Law of Trusts and Trustees, 10th ed. (1950), p. 319 ; Godefroi on Trusts and Trustees, 5th ed. (1927), p. 368 ; In re Bentley’s Yorh- sliire Breweries Ltd. (2) ; Re Tyndall (3).] An investment in real estate (a type of investment authorized by the trust) but amounting to a breach of trust in the particular circumstances of the investment stands on an entirely different footing from an investment in a security of an unauthorized description. See In re Salmon ; Priest V. Uppleby (4) ; Ashburner’s Principles of Equity, 2nd ed. (1933), p. 150 ; In re Lake ; Ex parte Howe Trustees (5) ; In re Turner ; Barker v. Ivimey (6) ; Budpe v. Gummow (7). The transaction is no more invalid than a sale by trustees would be where the price obtained is below the market value. The trustees may be hable but not the innocent party to the transaction. A classification of the cases where third persons have been held responsible for breaches of trust shows that an innocent borrower of trust moneys lent in breach of trust does not come within any of the categories. The categories are :—1. Constructive trustees—solicitors, agents, brokers, &c., who handle moneys as trust moneys and whom equity puta

(1) (1874) L.R. 9 Ch. App. 244.(5) (1903) 1 K.B. 439.

(2) (1909) 2 Ch. 609, at p. 619. (6) (1897) 1 Ch. 536.

(.3) (1913) S.A.L.R. 39.(7) (1872) L.R. 7 Ch. App. 719.

(4) (1889) 42 Ch. D. 351.

88 C.L.R.] OF AUSTRALIA.

621

in the position of constructive trustees. [He referred to Blyth v. Fladgate (1).] 2. Beneficiaries who instigate a breach of trust and

take the benefit of i t ; 3. A third person who knowingly takes the

Louche

benefit of a breach of trust committed dishonestly and fraudulently

T h e

by a trustee for his own benefit and for the benefit of the third

Su pe r a n n u a

person; 4. Strangers into whose hands the trust money has come tio n

F und

who are not purchasers for value without notice of the breach of

B oard .

trust. A mortgagor to whom trust moneys are advanced does not come under any of these four categories. [He referred to Modern Equity by H. C. Hanbury, 5th ed. (1949), p. 374 ; Hill v. Simpson (2); Gray v. Lewis (3); Wilson v. Moore (4); Commentaries on Equity Jurisprudence by Mr. Justice Story, 1st English ed. (1884), p. 872.] He does not stand in a fiduciary position to the fund. He takes as borrower. [He referred to Stroud v. Gijoyer (5); CMlling- worth V. Chambers (6) ; In re Dixon ; Heynes v. Dixon, per Collins L.J. (7); Lewin on Trusts, 15th ed. (1950), pp. 727, 728 ; AshburneTs Principles of Equity, 2nd ed. (1933), p. 143; Ernest v. Croysdill (8) ; 51 Harvard Law Review (1937), p. 177 ; Lister & Co. v. Stubbs (9) ; Ellis V. Goulton (10).] The position of the borrower should be assimil ated to that of a purchaser for value without notice. A borrower can not be fixed with notice of the imprudent exercise by trustees of a discretion to invest in real estate. The borrower did not and could not know the basis on which the board exercised its discretion. If the board had any equitable remedy against Fouche, it was guilty of laches and acquiescence. The board advanced £21,900 to the borrower over a period when he was constructing the hotel and had completely committed himself to the project. The board took no step to set aside the mortgage or recover the moneys advanced until twelve months after the first amount was lent. This is a case of a corporate body seeking rehef, but the defence of laches and acquiescence is open. [He referred to Crook v. Corpor ation of Seaford (11); Limitations of Actions in Equity, by J . Brunyate, 1st ed. (1932), pp. 186, 191 ; Modern Equity by H. G. Hanbury, 5th ed. (1949), p. 55 ; Hourigan v. Trustees Executors and Agency Co. Ltd., per Rich J. (12), per Dixon J. (13); Halsbury’s Laws of England, 2nd ed., vol. 13, p. 217.]

(1) (1891) 1 Ch. 337.(7) (1900) 2 Ch. 561, at p. 583.

(2) (1802) 7 Ve.s. Jun. 152, at p. 166

(8) (1860) 2 De G. F. & J. 175 [45

[32 E.R. 63, at p. 68].

E.R. 589].

(3) (1869) L.R. 8 Eq. 526.(9) (1890) 45 Ch. D. 1.

(4) (1834) 1 My. & K. 337 [39 E.R.

(10) (1893) 1 Q.B. 350.

709].

(11) (1871) L.R. 6 Ch. App. 551.

(5) (1860) 28 Beav. 130, at p. 141 [54

(12) (1934) 51 C.L.R. 619, at p. 630.

E.R. 315, at pp. 319-320].

(13) (1934) 51 C.L.R., at p. 651.

(6) (1896) 1 Ch. 685.

iV22

HIGH COURT

[1951-1952.

H. ( \ OF A. II. S. Baker (witli liim R. C. Wright), for the Superannuation moi-iuo-j.Fund Board. The Superannuation Fund Board is constituted by

F om in

the Superannuation Act 1938. The superannuation fund is under

its management and control. I t is an investment corporation.

Tun

Nri'KKANNl'A-

The only relevant class of investment in the Trustee Act 1898-1941

TION

(Tas.) ap])cars in s. 5 (1) (vi.) which provides that a trustee may

Fond

Bo\ki).invest any trust funds in his hands on first mortgage of real estate

in Tasmania. The investment in question was not a trust investment at all. Section 5 of the Trustee Act does not say that any investment on real estate is a trust investment. I t gives a list of classes of investments from which the trustees must select proper investments. An investment in a copper mine or a gold mine might be on first mortgage of real estate but it would not be an authorized investment. The advances from the Fund for the building of the hotel were speculative and hazardous. [He referred to Learoyd v. Whiteley (1); In re Whiteley ; Whiteley v. Learoyd (2) ; In re Salmon; Priest V. Uppleby, per Cotton L.J. (3); In re Turner; Barker v. Ivimey (4).] The circumstances of the advances made by the board show breach of trust both in the nature of the investment and in the management of the advances. I t was a speculative building loan at each stage on unfinished buildings with no security for their completion. [He referred to Rae v. Meek, per Lord Herschell (5) ; Mara v. Browne (6) ; Palmer v. Emerson (7); Vnd.erhilVs Laiv of Trusts and Trustees, 10th ed. (1950), pp. 331, 332 ; In re Somerset; Somerset v. Earl Poulett, per Kekeivich J. (8) ; Re Walker ; Walker

V. Walker (9).] The loan should supply the money to finish the hotel, not to commence it. Here the board’s money went in first. Even if the investment was authorized each advance was unauthor ized at the time it was made. Not one of the architect’s certificates was a correct document of title in the hands of the mortgagor. None of them followed the terms of the mortgage. Neither of the architects employed even knew the terms of the mortgage, and either used printed forms or else words which had no relation to the requirements of the mortgage. The first advance of £2,500 was made by Rule without any certificate whatever. The evidence of the valuers which the trial judge accepted showed that there was no known market for such a building at the place where it was being built. This was not a “ first mortgage of real estate ”

(1) (1887) 12 Api3. Cas. 727.

(6) (189.5) 2 Ch. 69, at p. 83 ; (1896)

(2) (1886) 32 Ch. D. 196.

1 Ch. 199.

(3) (1889) 42 Ch. D. 351, at p. 368.(7) (1911) 1 Ch. 758, at p. 766.

(4) (1897) 1 Ch. 536.(8) (1894) 1 Ch. 231, at p. 246.

(5) (1889) 14 App. Cas. 558, at pp.

(9) (1890) 62 L.T. (N.S.) 449, at p.

570-571.

452.

88 C.L.R.] OF AUSTRALIA.

623

within the meaning of s. 5 of the Trustee Act 1898-1941. The land H. C. op A. had already been mortgaged to the board. The purpose of these 1951-1952.

further advances was to enable the building of an hotel. The further

F ouche

charge was only a mortgage of an equity of redemption and a

mortgage of future property which is only an equitable interest,

As work and materials were applied to the building of the hotel

TION F und

by means of the money advanced in instalments by the board,

B oard .

these materials came within the terms of the mortgage. A first mortgage of real estate must be a mortgage of a legal estate but this further charge being on future property was only a mortgage of an equitable interest. I t is merely a contract to charge a building when it comes into existence. I t creates executory obligations on

either side.

I t only becomes realty in the future as the materials

are “ applied ” to the building. [He referred to Palette Shoes Pty. Ltd. {In Liquidation) v. Krolin, per Dixon J. (1) ; Malick V. LJoyd {Official Assignee) (2) ; King v. Greig ; Recli7ier, Claimant (3).] Thus the security which the board obtained merely “ savoured of realty ” without being the substance of realty. See Mortimore V. Mortimore, per Lord Campbell L.C. (4). An equitable mortgagee by deed who sells in exercise of his power of sale cannot convey the legal estate vested in the mortgagor. See In re Hodson and Howes' Contract (5). The learned trial judge was wrong in holding that the ex-members of the board were not personally liable. If the corporate act was beyond the power of the board, the corporators are liable regardless of any reasonable care or honesty. [He referred to Street on LfUra Vires, 1st ed. (1930), pp. 295, 297, 298 ; Iti re Sharpe ; In re Bennett; Masonic and General Life Assurance Co. v. Sharpe, per Lindley L.J. (6) ; Ernest v. Nicholls (7).] If the corporate act was intra vires but a breach of trust, then the corporators may escape liability only by showing that they acted with reasonable care. [He referred to Sheffield and South Yorkshire Permanent Building Society v. Aizlewood (8) ; In re New Mashonaland Exploration Co. (9) ; Lagunas Nitrate Co. V. Lagunas Syndicate, per Lindley M.R. (10).] The correct standard of reasonable care to apply depends upon the nature and the functions of the corporate body concerned. There is a great difference between the position of directors of a trading company in which reasonable commercial risk is legitimate and

(1) (1937) 58 C.L.R. 1, at p. 26.(6) (1892) 1 Ch. 154, at pp. 165-166.

(2) (1913) 16 C.L.R. 483, at pp. 488

(7) (1857) 6 H.L.C. 401 [10 E.R.

490. 1351].

(3) (1931) V.L.R. 413.

(8) (1889) 44 Ch. D. 412, at pp. 413,

(4) (1859) 4 De G. & J. 472, at j).

450.

475 [45 E.R. 183, at p. 184],

(9) (1892) 3 Ch. 577, at p. 587.

(5) (1887) .35 Ch. D. 668.(10)

(1899) 2 Ch. 392, at pp. 422-423

024 HIGH COURT

[1951-1952.

H. C. OK A. trustees of a trust investment corporation like the present. I t comes t)ack entirely to the standard of reasonable care for persons Fovrnu Position of trustees, and the principles of Learoyd

V. SuKEHANNUA- brcach of trust. The trust instrument was an Act of Parliament

V. Whiteley (1) a,pply. Fouche took all the moneys with notice of

TIONand he is, therefore, assumed to be familiar with it. Also the

F ond

chairman of tlie board accepted employment as his solicitor to settle and complete the mortgage. I t would be part of the chair man’s duty to acquaint the borrower with any breach of trust in the making of the advances. Fouche was in no sense a person who took the advances without notice actual or constructive. The trial judge found as a fact that he knew all the facts. He knew that he was getting trust funds. He was familiar with Tregear’s so-called valuation. He engaged the chairman of the board as his solicitor just a t the moment when the mortgage was about to be prepared. [He referred to Halsbury’s Laws of England, 2nded., vol. 8, p. 75 ; Macgregor v. Official Manager of the Dover and Deal Railway and Cinque Ports, Thanet and Coast Junction Co. (2).] If a borrower takes an unauthorized loan in breach of trust he cannot separate the loan from the trust. Equity adds an equitable obligation to the legal obligation of the loan and declares him to be a trustee. See Lewin on Trusts 15th ed. (1950), p. 727. All the cases cited to the contrary are distinguishable. The only borrower who is protected is the innocent purchaser for value without notice. [He referred to Halsbury’s Laws of England, 2nd ed., vol. 33, pp. 329, 330 ; Gray v. Lewis (3) ; Gibert v. Gonard (4).] Indivi dual members of a corporation have long been held personally liable for breach of trust in the exercise of the corporation’s powers. [He referred to Charitable Corporation v. Sutton (5); Attorney- General V. Wilson (6) ; In re French Protestant Hospital (7) ; In re James ; Bagot’s Executor and Trustee Co. Ltd. v. McGregor (8) ; Barnes v. Addy (9) ; Soar v. Ashwell, per Bowen L.J. (10).] The chairman. Rule, is also personally liable on the ground that he was the chief executive ofhcer of the board. He authorized all pay ments personally and signed all cheques. The former members of the board should not be relieved from liability under s. 50 of the Trustee Act 1898-1941. The members other than the chairman cannot excuse themselves on the ground that they relied upon the

B oaiu).

(1) (1887) 12 App. Cas. 727.

(6) (1840) 10 L.J. (Ch.) 53, at pp. 55,

(2) (1852) 18 Q.B. 618, at p. 631 [118

56; Cr. & Ph. 1, atpp. 23etseq.

E.R. 233, at p. 238].

[41 E.R. 389, at pp. 396 et seq.].

(3) (1869) L.R. 8 Eq. 526, at p. 543.(7) (1951) 1 Ch. ,567.

(4) (1885) 52 L.T. (N.S.) 54.(8) (1949) A.L.R. 637, at p. 639.

(9) (1874) L.R. 9 Ch. App. 244.

(5) (1742) 2 Atk. 400 [26 E.R. 642].

(10) (1893) 2 Q.B. 390, at p. 396.

88 C.L.R.] OF AUSTRALIA.

625

chairman who is a solicitor. Each trustee must form his own

individual judgment and not rely upon his co-trustee. Rule is

strictly accountable to the board for any profits that he has obtained

Louche

incidentally through the exercise of his duty as chairman. See

JJnderhilVs Laiv of Trusts and Trustees, 10th ed. (1950), pp. 376, supeeaxnua-

377 ; Halsbim/s Laws of England, 2nd ed., vol. 35, pp. 221, 279 ;TION

F und

Widtney v. Smith (1) cannot be relied upon to justify Rule in

B oa ed .

taking payment of costs. In that case no conflict of interest and duty arose. There were no executory obligations to be fulfilled. [He referred to In re Corsellis ; Lawton v. Elwes, per Cotton L.J. (2).] The later cases show that the trustee is accountable for any gains he receives because of the opportunity created by his being a trustee. [He referred to Williams v. Barton (3) ; In re Macadam ; Dallow V. Codd (4); Reading v. The King (5).]

C. I . Menhennitt, for Rule. On the facts, there was no breach of trust by Rule because (a) the security for the mortgage was valued by Tregear, who was competent to value i t ; (b) hotel security is not in itself speculative or hazardous ; (c) to advance money on an unfinished building is not in itself imprudent. See Rae v. Meek, per Lord Herschell (6) ; (d) it was not improper to advance two- thirds of the value of the security. The whole question here turns upon the capacity of the mortgagor to finance the balance and Rule obviously believed that the mortgagor could finance the balance. Rule was motivated only by a desire to obtain an invest ment bearing a higher rate of interest than that on Government stock. All substantial terms of the transaction had been agreed to before Rule commenced to act as solicitor. The rule that a trustee may not place himself in a situation in which his interest conflicts with his duty has no application to contracts made before the fiduciary relationship is entered into : see In re Taylor ; Howitt V. Union Trustee Co. of Australia Ltd (7). Consequently, Rule was not prevented from charging a fee for his professional work. [He referred to Whitney v. Smith, per Seluryn L.J. (8), per Gijfard L.J. (9).] Rule and the other members of the board are not liable for money which has not been misappropriated to their own use, but paid out to a third person. I t was never intended that they should be liable for wrongful payments under ss. 62, 69 of the

(1) (1869) L.R. 4 Ch. App. 513.

(5) (1949) 2 K.B. 232, at pp. 235

(2) (1887) 34 Ch. D. 675, at pp. 684

236.

685. (6) (1889) 14 Ajjp. Cas. 558, at p. 571.

(3) (1927) 2 Ch. 9, at p. 11.(7) (1950) A.L.R. 984.

(8) (1869) L.R. 4 Ch. Apjj., at p. 519. (9) (1868) L.R. 4 Ch. App., at p. 521.

(4) (1946) Ch. 73.

VOL.

L X X X V III .—40

()2(i HIGH COURT

[1951-1952.

ir. oi.’A. Su'p(rannuation Act 1938-1950 (Tas.). The same considerations i(t.)l-lii.)2. a])j)ly to the iiuhdental function of investing funds. As

F o r c i i K

corporators f.he meml)crs of tlie lioard occupy a special position.

1 He n'fcMTcd t,o Mill v. Hawker, jier Blackburn J. (1), per Denman J.

S riM C K .A N N i'A - ‘̂̂ >'Anbal(l (3); Wilmn w. Lord Bury, per L.J. (4), 'I’llH

TI ONper

Bmnuvdl L.,1. (5).| Alternatively the members of the board

H o a h o .are only liable for (a) acts which are ultra vires the board ; (b) mis- l''r N1)

apimipriathm of money ; (c) misfeasance ; (d) gross negligence. [He rel'eiTcd to Lagunafi NUrate Co. v. Lagunas Syndicate, per Rower ,1. (G), per Lindley M.R. (7); In Re National Bank of Wales Ltd. (8) ; In Re Fa.ure Electric Accumulator Co. (9) ; Overend <h Gurney Co. v. Gibb, per Lord Hatherley L.C. (10) ; Tur- (juand. V. Marshall (11) ; Leeds Estate Building and Investment Co. v. SheyAierd (12) ; Great Eastern Railway Co. v. Turner (13); Smith V. Anderson, per James L.J. (14) ; Charitable Corporation v. Sutton (15); Attorney-General v. Wilson (16); In re French Protestant Hosjntal (17) ; In re James ; Bagot’s Executor and Trustee Co. Ltd. v. McGregor (18); Regal {Hastings) Ltd. v. Gulliver, per Lord Russell of Killowen (19); Palmer’s Company Law, 18th ed. (1948), p. 168 ; Palmer’s Company Precedents, 15th ed. (1931), pp. 662 et seq,; York and North-Midland Railway Co. v. Hudson (20); Ferguson V. Wilson (21); In re Forest o f Dean Goal Mining Go. (22); Parker V. McKenna (23); Young v. Naval, Military, and Civil Service Co-operative Society of South Africa LJd. (24); Joint Stock Discount Co. V. Brown (25); In re Exchange Banking Co. (26) ; In re Anglo- French Co-operative Society ; Ex parte Felly, per Jessel M.R. (27) ; In re Oxford Benefit Building and Investment Society (28) ; In re Sharpe ; In re Bennett; Masonic and General Life Assurance Co. V. Sharpe (29); In re Lands Allotment Co., per Limiley L.J. (30);

(1) (1875) L.R. 10 Ex. 92, at p. 94.

(16) (1840) 10 L.J. (Ch.) 53, at pp. 55,

(2) (1875) L.R. 10 Ex., at p. 98.56 ; Cr. & Ph. 1 at. pp. 25 et

(3) (1875) L.R. 10 Ex., at p. 99.seq. [41 E.R. 389, at pp. 397

(4) (1880) 5 Q.R.D. 518, at pp. 525

et seq.].

527. (17) (1951) Ch. 567, at p. 570.

(5) (1880) 5 Q.B.D., at p. 537.

(18) (1949) A.L.R. 637, at p. 639;

(6) (1899) 2 Ch. 392, at p. 418.

(1949) S.A.S.R. 143, at p. 146.

(7) (1899) 2 Ch.; at p. 435.

(19) (1942) 1 All E.R. 378, at pp. 387,

(8) (1899) 2 Ch. 629, at p. 671.

388.

(9) (1888) 40 Ch. D. 141, at p. 156.(20) (1845) 16 Beav. 485 [51-E.R. 866].

(10) (1872) L.R. 5 H.L. 480, at pp.

(21) (1866) L.R. 2 Ch. App. 77.

486, 487.

(22) (1878) 10 Ch. i). 450, at pp. 451,

(11) (1869) L.R. 4 Ch. App. 376, at

452.

p. 386.

(23) (1874) L.R. 10 Ch. App. 96.

(12) (1887) 36 Ch. D. 787, at pp. 798

(24) (1905) 1 K.B. 687.

800. (25) (1869) L.R. 8 Eq. 381.

(13) (1872) L.R. 8 Ch. App. 149, at

(26) (1882) 21 Ch. D. 519.

])p. 151, 152.

(27) (1882) 21 Ch. D. 492, at p. 501.

(14) (1880) 15 Ch. 1). 247, at p. 275.(28) (1886) 35 Ch. D. 502.

(29) (1892) 1 Ch. 154.

(15) (1742) 2 Atk. 400 [26 E.R. 642].

(30) (1894) 1 Ch. 616, at p. 631.

88 C.L.R.] OF AUSTRALIA.

627

Learoyd v. Whiteley, per Lord Halsbury L.C. (1); In re Whiteley ;

Whiteley v. Learoyd, per Cotton L.J. (2), per Lindley L.J. (3); i9o^^52.

In re Somerset', Somerset v. Earl Poulett {!)', In re Bentley’s York-

Louche

shire Breweries Ltd. (5) ; In re Salmon ; Priest v. Uppleby (6) ;

Sheffield and South Yorkshire Permanent Building Society v. Aizle- superannua.-

TION F und

wood (7).]

In the present case the loan was not ultra vires the

board. Nor were the members of the board guilty of negligence.

B oard .

On the contrary the evidence shows that now, after £21,900 of the loan has been made, the security is valued at £55,000. Therefore, the case against the members of the board can be put no higher than that the loan, although authorized, was imprudent. On the evidence it has not been shown to have been other than prudent. If the members of the board did commit a breach of trust s. 50 of the Trustee Act 1898-1941 (Tas.) is applicable. On the evidence they acted honestly and reasonably, and they ought to be excused from personal liability for the breach of trust. If the loan was intra vires but not prudent, the members of the board would be liable for the deficiency only, although Rule might be liable to hand over the promissory note received for costs. [He referred to Eals- bury’s Laws o f England, 2nd ed., vol. 33, p. 310; In re Salmon', Priest V. Uppleby, per Kekewich J. (8), per Cotton L.J. (9), per Fry L.J. (10) ; In re Somerset; Somerset v. Earl Poulett, per Kekewich J. (11) ; In re Whiteley ; Whiteley v. Learoyd, per Cotton L.J. (12).] The members of the board should have received notice of action under s. 4 of the Public Officers Protection Act 1934 (Tas.). That Act applies to officers of a public body. See Greenwell v. Howell, per Collins L.J. (13). The acts were done in intended or actual execution of a statute, the Superannuation Act 1938-1950, s. 5. Alternatively, they were done in the execution of a public duty. The duty is public because of the nature of the Superannuation Act. See ss. 26, 27, which lay down the obligation of the State of Tasmania. I t does not matter that the duty is owed only to a limited class of the public. [He referred to Goodisson v. Byrne, per FitzGibbonJ. (14); Edwards v. Metropolitan Water Board, per Bankes L.J. (15); Sharpington v. Fulham Guardians (16); Attorney-

(1) (1887) 12 App. Cas. 727, at

(9) (1889) 42 Ch. D., at pp. 368,

pp. 730-732.

369.

(2) (1886) 33 Ch. D. 347, at pp. 353,

(10) (1889) 42 Ch. D., at pp. 370, 371.

354. (11) (1894) 1 Ch., at p. 257.

(3) (1886) 33 Ch. D., at p. 357.(12) (1886) 33 Ch. T)., at pp. 3.54-355.

(4) (1894) 1 Ch. 231.(13) (1900) 1 Q.B. 535, at p. 540.

(5) (1909) 2 Ch. 609, at p. 619.(14) (1938) I.R. 580, at p. 600.

(6) (1889) 42 Ch. D. 351.(15) (1922) 1 K.B. 291, at p. 302.

(7) (1889) 44 Ch. D. 412, at p. 4.50.(16) (1904) 2 Ch. 449.

(8) (1889) 42 Ch. D., at pp. 356-358.

C28

HIGH COURT

[1951-1952.

H. C. oir A.

gcfi(>fal V. Company of Proprietors of Margate Pier and Harbour (1).]

191^^52. must be in bona-fide execution of the statutory duty. The Focciuc of })roof is on those who allege absence of bona tides. [He referred

V. to G. Scammell and Nephew Ltd. v. Hurley, per Scrutton L.J. (2);

SurKRANNUA- J d a l e s w o r t l i (3) ; Cook v. Leonard, per Bayley J. (4).] TIONThe Public Officers Protection Act 1934 is available whether the act

PUNU

B oard .is ultra vires or a breach of duty, but intra vires. See Halsbury’s

Laws of England, 2nd ed. vol. 26, p. 294 ; Greenway v. Hurd (5). I t does not matter that the acts are done by a corporation. See Bradford Corporation v. Myers (6); Goodisson v. Byrne, per O’Byrne J. (7).

T. D. Simpson, for Biggins, Wadley and White.

■

Cur. adv. vuU.

1952, Feb. 6.

The Coubt delivered the following written judgment

These are appeals from judgments of the Supreme Court of Tasmania {Morris C.J.) in two actions which were heard together. Before considering the nature of the actions it will be convenient to refer to two Tasmanian statutes and then to state in general terms the facts which gave rise to the litigation.

The Superannuation Act 1938-1950 (Tas.), has for its object the provision of pensions and other benefits for members of the pubhc service of Tasmania and their dependants on death or retirement from the service. I t provides for the establishment of a fund to be known as the superannuation fund, into which are to be paid (a) the contributions to be made by public servants as provided by the Act, (b) payments to be made by the State as provided by the Act, and (c) all income derived from the investment of the fund. The fund is placed by the Act under the “ management and control ” of a board called the Superannuation Fund Board, which is to consist of four members. Section 15 of the Act provides that “ The Board shall be a body corporate, having perpetual succession and a common seal Section 5 provides that “ The Board shall invest the moneys belonging to the Fund from time to time when ever practicable, and any such investment may be in any invest ments authorised by law for the investment of trust moneys ” .

(1) (1900) 1 Ch. 749, at p. 753.(5) (1792) 4 T.R. 553 [100 E.R. 1171].

(2) (1929) 1 K.B. 419, at pp. 427, 429.(6) (1916) 1 A.C. 242.

(3) (1937) 58 C.L.R, 369.

(7) (1938) I.R., at pp. 588, 589.

(4) (1827) 6 B. & C. 351, at pp. 364 355 [108 E.R. 481, at pp. 482 483].

88 C.L.K.] OF AUSTRALIA.

629

H. C. oir A,

Part II of the Trustee Act 1898, as amended, deals with the investment of trust funds. Section 5 authorizes the investment of

1951-1952.

trust funds in a number of specified ways. The only authorized

FotrCHB

investment here material is “ first mortgage of real estate in

T h e

Tasmania ” . Section 10 provides that a trustee lending money g

UPEEANNHA-

on the security of any property on which he can lawfully lend shall TIOH

Fund not be chargeable with breach of trust

hy reason only of the propor

B o a e d .

tion borne by the amount of the loan to the value of the property,

nixon J.

if it appears that in making the loan the trustee was acting upon McTiernan J.

a report as to the value of the property made by two valuators

Pullagar J.

whom he reasonably beheved to be competent, instructed and employed independently of any owner of the property, and the amount of the loan does not exceed two-thirds of the value of the property as stated in the report, and the loan was made under the advice of such competent valuators expressed in the report. Section 11 provides that, where a trustee improperly advances trust money on a mortgage security which would at the time of the investment be a proper investment in all respects for a smaller sum than is actually advanced, the security shall be deemed an authorized investment for the smaller sum, and the trustee shall only be liable to make good the smn advanced in excess thereof with interest.

In 1947 and 1948 the members of the board were Messrs. J. R. Rule, H. V. Biggins, C. J. Wadley and A. White. Rule was president of the board. As such, he received a salary of £250 per annum. The other members received £75 per annum. Rule was a qualified solicitor and a retired member of the public service. Biggins was a schoolmaster. Wadley and White were railway employees. I t seems reasonably clear that the other members of the board, were content to leave everything more or less in the hands of Rule, that he acted as an executive officer of the board, and that the decisions of the board were generally made on the recom mendation of Rule.

In 1947 Francois Fouche obtained from the board a loan of £3,500 to enable him to purchase a property known as “ Ballarton ”, situate at Old Beach on the left bank of the Derwent above Hobart and some fourteen miles by road from that city. The purchase price of the land was £5,500, of which Fouche provided £500 himself. The balance of £1,500 he obtained on loan from one Voss. The title to the land was under the general law. To secure the respective loans Fouche executed a first mortgage of the land to the board, and a second mortgage of the land to Voss. The board’s mortgage was executed on 26th September 1947. The personal covenant

g:50

HIGH COURT

(1951-1952.

ir. ('. OK A. To.qniml repayment of tlie principal sum on 24th September 1952. iitr)i-i!)52. ,q; f;|,e cetit, rcdiicible to 4^ per cent. No

l''oi'niK

serious criticism has been made of this investmient of the board’s

funds. It is a later transaction that is attacked.

T u n

iSu i’HUANNl'A-Halhu'ton is a firoperty of some sixty-five acres, and there stood TIONuj)on it a substantial building of a residential ctiaracter. Before

HoAKI).aaid lit the time when he purchased it Fouche seems to have enter tained the project of erecting on the land a large modern tourist Jicncnian’.i. hotel, a.nd to that end he caused certain sketch plans to be prepared ,1'uiiagiu J. architect named Homey. These jilans, in the words of the learned Chief ,J ustice, “ envisaged the incorporation of the existing homest(aul in the new hotel ” , On 12th December 1947 Fouche obtained from the licensing court a provisional certificate for a licence for a liotel to be erected on the land in accordance with these plans. In March 1948 he approached Rule, whom he had met in connection with the transaction already mentioned, with a recjuest for a loan of £50,000 to enable him to finance the building of the hotel. The matter was brought before the board by Rule at meetings held on 5th and 19th May 1948, and on the latter date a resolution was passed unanimously by the board approving of further advances to Fouche of £41,500—a sum which, with the £3,500 already advanced, would make a total of £45,000. The times at which, and the conditions on which, the further advances were to be made, and the security which was to be taken for this repay ment appear to have been left to Rule. What the board approved Avas simply a loan of £41,500 for five years a t 4 | per cent.

Rule proceeded to prepare an instrument which has been referred to as a deed of further charge. Voss was made a party to this deed as consenting to the postponement of his second mortgage to the board’s “ further charge ”. The deed was executed by Fouche and Voss on 25th May 1948. I t does not appear to have been sealed by the board, but no point was made of this either at the trial or on the hearing of the appeals. I t may be mentioned in passing that, in and about the preparation and execution of the deed. Rule was engaged by Fouche as his solicitor, and charged Fouche a fee of £175, for which sum Fouche gave him a promissory note. The gross impropriety and illegality of this is obvious.

The deed described itself as supplemental to the mortgage of 26th September 1947. The mortgagor covenanted to repay the sum of ,£41,500, which was to l)e a,dvanced, on the 25th May 1953 and to pay interest at the rate of 5 per ceiif' reducible to 4-| per cent. He further covenanted that he would “ without avoidable delay cause the existing dwellinghouse on the land to be enlarged and

88 C.L.R.] OF AUSTRALIA.

631

converted into a modern tourist hotel in accordance with the

H. C. OF A.

plans and specifications therefor submitted to and approved by

1951-1952.

the mortgagee ” . Certain very inadequate provisions follow with

F o fc h e

regard to the licence and the conduct of the business of the hotel.

T he

The deed then proceeded to prescribe the conditions on which the

SUPER.'^NNUA-

sum of £41,500 was to be advanced to Fouche. I t was provided TTON

F und

that that sum was to be payable to Fouche by progress payments F oard .

representing four-fifths of the amount certified by an architect

nixon J.

(approved by the mortgagee and appointed at the cost of the McTiernan J.

mortgagor) to be the value of the work and materials applied

Tullagar J.

towards the completion of the hotel since the payment of the last previous advance, and that the final balance of the said sum sliould be payable on the like certificate that the hotel had been satis factorily completed in accordance with the plans and specifications approved by the mortgagee. The deed finally provided that “ if the test by boring now proposed to be carried out by the mortgagor on the said land fails to establish the fact that an adequate supply of water is obtainable therefrom, the mortgagee may withhold payment of so much of the said sum as it may thinly necessary until the mortgagee is satisfied that an adequate water supply is available successfully to carry on the business of the said hotel ” . On 11th June 1948 a sum of £2,500 was paid, on the authority of Rule, to Fouche without any architect’s certificate. Thereafter sums totalling £6,000 were paid on six “ certificates ” given by Dorney. In December 1948 Dorney was no longer able to attend to the business, and another architect, named Haslock, took his place. At a meeting of the board held on 21st January 1949 it was resolved “ that Mr. E. J. Haslock be appointed architect in place of Mr. Dorney ” . On “ certificates ” signed by Haslock further sums totalling £13,000 were paid to Fouche, the last being a sum of £1,000 on 31st May 1949.

In the meantime the Auditor-General had, not unnaturally, become interested in the matter. The nicer features of the whole transaction have not so far been expressly pointed out, but, even on the facts barely narrated above, the Auditor-General might well be pardoned for viewing the whole matter with grave suspicion, as indeed he seems to have done. He raised certain pertinent questions, and the matter was discussed in Parliament and received publicity in the local press. Moved by these events, all the members of the board resigned on 10th June 1949, but not before Rule had caused an additional sum of £400 to be paid to Fouche, although he must have known that, on the certificates given to date, Fouche had been overpaid. The total amount paid to Fouche was thus

032 HIGH COURT

[1951-1952.

H. C. OF A. £21,900. On the resignation of the former members of the board, members were in due course appointed, and the whole position

F o u c i i k considered by the re-constituted board.

On 12th August 1949

the new board wrote a letter to Fouche in which it said that it TIONconnexion with your mortgage to the Board I t added The

T he

S l ’ I’ERANNUA-

had “ resolved to make no further progress payments to you in

Fund

H o a r d .Board requires immediate repayment of all moneys advanced

together with interest to date of repayment ” . By a further letter

Dixon J.

McTiernan J. of 16th August 1949 it informed Fouche’s solicitor that it had been

I’Tillagar J.

advised that “ the investment of £45,000 in your client’s property at Old Beach ” was a breach of trust, and that it proposed to institute appropriate proceedings in the Supreme Court. I t added that it regarded Fouche as having committed breaches of contract in that he had not adhered to the o rig inalp lans and specifications ”, and had not expended the moneys advanced “ in accordance with the terms of the mortgage ” . I t accordingly, it said, “ elected to rescind the mortgage ”.

Fouche thereupon commenced his action against the board, which was the first of the two actions which came before Morris C.J. By his statement of claim he claimed the sum of £3,100 as the balance of “ progress payments presently due and payable by the defendant to the plaintiff ” . He also sought to enforce the board’s covenant to advance to him a total sum of £41,500 in accordance with the terms of the deed of further charge. The board delivered a defence and counterclaim, and also commenced an action of its own, naming as defendants, in addition to Fouche, the individual members of the board who had authorized the transaction in question with Fouche, viz. Rule, Biggins, Wadley and White. By its counterclaim the board sought declarations that the advances made to Fouche were “ ultra vires ” and in breach of trust, and that Fouche had received them with notice of the breach of trust, an order for the replacement of the sums advanced, all necessary accounts and inquiries and an order for the realization of the security. In its action it sought the same relief against all five defendants, including an order that they should “ replace ” all moneys actually advanced to Fouche other than the original sum of £3,500. I t need only be added that the four ex-members of the board, who were defendants in the board’s action, issued a third party notice, by which they claimed to be indemnified by Fouche in respect of any liability which might be held to rest upon them.

On the hearing of the actions a very considerable amount of evidence and argument was devoted to two contentions of the board which, as will be seen, we do not find it necessary to consider.

88 C.L.R.] OF AUSTRALIA.

633

The first was tha t the board was entitled at common law to

“ rescind ” , and had “ rescinded ”, its contract with Fouche, so

far as that contract bound it to advance further sums to Fouche.

F ouche

This contention was, of course, advanced in answer to Fouche’s

T h e

claim to enforce that contract.

I t rested on certain alleged breaches superannua-

by Fouche of his part of the contract, which breaches were said tio n

to go to the root of the contract. These breaches consisted of

departures from the original plans of the hotel. Modified plans had

——

been prepared by Haslock when he succeeded Dorney as architect McTfeman j . As to this, his Honour foimd and declared that the board was entitled not to be satisfied, and was not satisfied, that an adequate water supply was available upon the land. His Honour dealt with what we regard as the main issues in the actions by declaring that the investment of the sums advanced to Fouche (apart from the original £3,500) and the covenant to advance further sums con stituted breaches of trust, and that Fouche had received the sums advanced to him with notice that their payment was a breach of trust. He ordered Fouche to repay to the board on or before 29th November 1950 the sum of £21,900 with interest a t per cent, and he ordered that, in default of payment, the mortgage security be realized, and that the board be paid out of the proceeds the amount due to it. He held that the claim against the four ex members of the board failed, but he declared that Rule was not entitled to retain as against the board any sum paid to him by Fouche by way of costs. There are appeals to this Court by every party to the actions.

for the building, and his Honour found that these new plans would

involve a total expenditure of some £20,000 more than the original

plans. He, however, like ourselves, did not find it necessary to

consider the legal consequences of this departure, which was said

by Fouche to have been sanctioned by Rule. The second contention

of the board was based on the clause in the deed of further charge

relating to water supply. This also, of course, was directed to

Before considering the position generally it is necessary to examine a little further the nature and incidents of the transaction which is impeached. Even from what has so far been said it would appear that the investment was of a hazardous and speculative nature. Even if the hotel were duly erected without delay or mischance, the value of the security would depend entirely on the success and prospects of the business to be carried on. The learned Chief Justice accepted the evidence of two expert witnesses, Messrs. Edney Moore and Waldron. The former said that there was no

(K54 HIGH COURT

[1951-1952.

H. ('. OK A, ].;iiown maxkct for such a building situated in country surroundings ■ "*“• in a- pla.ce like Old Reach. Both said that the value of a hotel as

F o u n i K a, hotel cannot be considered except in connection with the business

being conducted in it. The fate of two luxurious country hotels TIONthe ])r('c-a.rious character of such investments. But there were

Thu

S m ’ K I t A N N l ’ A -

in New South Wales, which was cited in evidence, aptly illustrates

l*'l'NO

Hoaui).features about the transaction in this case which make it appear in a very much worse light than the ordinary case of an investment lUc'j'ion'Ia'Ii.r. <>u mortgage of property of dubious value. No serious inquiries iMiii.ig.u ,1. made about matters which were obviously important, the most elementary precautions were neglected, and very special risks which ŵ ere obvious seem to have been ignored. On this part of the case we are in complete agreement with the Chief Justice. If he erred at all, it was not on the side of severity. No serious inquiry was made about Fouche’s means or his prospects of being able to finance the building of the hotel, which, according to the original estimate, was to cost £80,000. Fouche appears in fact to have had no substantial means. Rule was content with the vaguest assurances about what Fouche could or might do, and the rest of the board, if they thought about the matter at all, were content with whatever Rule told them. The deed of further charge refers to plans and specifications, but there were no specifications in existence. There v/as not in existence at any time any contract with any builder ; there appears to have been some sort of loose arrangement between Fouche and a man named Barker, but even in this no price was mentioned.

What purported to be a “ valuation ” was obtained from a man named Tregear, but this document, though specious, will not bear a moment’s examination. After observing, in effect, that the hotel should be quite a nice hotel when completed, the docu

ment concludes :

“ I am of opinion that it will cost at least £80,000

to complete the buildings according to the plan, and I value the property when completed at £68,000 . . . and consider the property a good security for a loan of two-thirds of this amount, namely £45,000 ”. I t is explained that, for purposes of valuation, the estimated cost must be discounted by 20 per cent, for abnormal building costs, and the author adds that he has not taken into consideration “ the undoubted increased value that will be attached to the hotel when it is in operation with the licence attached ”. This is a “ valuation ” of a completed hotel based on cost. For the purposes for which it was intended it was not really a valuation a t all. I t could not possibly justify the transaction which followed. I t is obviously true, as expert witnesses said, that cost in such cases

88 C.L.R.] OF AUSTRALIA.

635

H. C. OF A.

is no guide to value.

I t is also obviously true that a hotel cannot

be valued apart from the business carried on in it. The witness

1951-1952.

Edney Moore, who was also invited by Rule to make a “ valuation ” F ouche

excused himself on the ground that the “ job was too big ”, but

T he

he said in evidence : “ I t was impossible to make a valuation.

Su per a n n u a

I couldn’t make a valuation ” . Mr. Waldron, the chief valuer for tio n

F und

the Commonwealth, was of the same opinion. No “ valuation ” B o a r d .

other than Tregear’s was obtained.

Dixon .J.

The position with regard to the vital matter of v'ater supply was, to say the least, extremely dubious. An opinion was indeed obtained

McTiernan J.

Fullagar J.

from the Government Geologist that sufficient artesian water could be got, but this opinion related not to Ballarton but to an adjoin ing property. The provision in the deed as to water was, of course, worthless as a protection to the board.

Other matters might be mentioned. For instance, the provision in the deed for architect’s certificates gave no real protection to the board. These, as the witness Adrian Akhurst, who had had long experience as manager of a trustee company, said, ought to have been based on added value. But it is unnecessary to pursue the matter further. I t is perfectly obvious that the whole trans action amounted to a gross breach of trust. I t was, of course, as the Chief Justice observed, not altogether impossible that the proposed hotel might prosper, but, regarded as a trustee investment, the proposition was an absurdity.

The manner in which advances were made under the deed was not less open to censure than the transaction itself. Indeed it is the most damning feature of the whole case, revealing, as it does, a reckless disregard of the interests of the board and the safety of the fund. For the fact is that no certificate complying with the requirements of the deed was ever given, although a total sum of £21,900 was paid out of the fund to Fouche. Nineteen “ certifi cates ” in all were obtained by Fouche, six being given by Dorney and thirteen by Haslock. The last four were given after the resigna tion of the old board, and were not honoured. I t has already been mentioned that the first payment of £2,500 to Fouche was made without anything that even purported to be a certificate. Of the certificates given by Dorney, one (on which a payment of £1,000 was made on 12th November 1948) is undated and merely says “ I certify that £1,250 is due on job at Ballarton, Old Beach ”. The remaining five are on a printed form. They read : “ I hereby certify that Mr. F. Fouche is entitled to receive ” a named sum “ on accoimt of contract to works to hotel at Old Beach in accor dance with terms of agreement ” . The words “ in accordance

6:K) HIGH COUKT

[1951-1952.

IT. c . A. terms of agreement ” are part of the printed form. In fact

J!)rmmo2.

j)omey never inquired about, and did not know, the terms of the

FouciiE ” agreement This, of course, accounts for the fact that the

certificates did not certify wliat the agreement required to be

Tuk

SUIMJHANNUA-certihed. Haslock, like Dorney, did not know the terms of the

TIONagreement, and did not bother about such a trifle. His firsd certi

Fund

.Boakd.ficate was given on 24th December 1948. The material part of it

said merely : “ We hereby issue our first certificate in favour of

Dixon .r.

Mi'Tioruan ,T. F. Fouche Esq. on the above project ”. The second did not difî er

Jb'iillagar J.in substance. The next five said : “ we issue a certificate in your

favour on the above project based on your statement covering labour and materials The eighth “ advised having checked the current account for materials used and services supplied as submitted by you ” and stated that these were found to be in accordance with the work done and to warrant a progress payment of £3,750. This certificate was given six days after the previous certificate, which had been for £1,250. The ninth (the last which was honoured) said : “ We advise having checked on the cost of labour and general expenses regarding the above to date. We find these warrant a progress payment to date of £1,250 On each of these certificates Fouche received a sum equal to four fifths of the amount to which the certificate said that he was entitled. They were thus treated as meaning something that none of them could possibly mean. But the important point is that none of them certified what the deed required to be certified.

I t has been necessary to deal with the facts of the case at con siderable length, but, when once the facts are understood, the case may be disposed of comparatively shortly. Such difficulties as it presents do not arise from any doubt as to the commission of very serious breaches of trust. The execution of the deed, with the obhgations which it imposed on the board, was a breach of trust. And every payment under it was a breach of trust and a misapplication of the board’s funds in a sense which will be con sidered later. Such difficulties as the case presents relate to the remedies to be applied in a somewhat peculiar situation. The case seems to us to be very plainly a case in which a trustee would be held liable for any loss resulting from the investment, but it is not the ordinary case in which a security ha,s been realized for less than the amount invested. And the trustee is a corporation which has no assets worth mentioning apart from the funds which it holds in trust. Up to a point, however, the position seems reasonably clear, and we think that most of the difficulties disappear when the nature of the breach of trust is properly understood.

88 C.L.R.] OF AUSTRALIA.

637

As to tlie nature of the breach of trust, we agree with the learned Chief Justice of Tasmania.

C. of A.

I t is no mere case of a trustee advancing

too much on a proper security. The case is not touched either by

jopche

s. 10 or by s. 11 of the Trustee Act 1898. The investment was of

‘

T he

such a kind that it ought never to have been made at all for any

SUPERANHUA-

amount large or small. The case is like Re Whiteley ; Whiteley v.

TIOH F und

Learoyd (1), but is a much more glaring case. There the hazard B o a r d .

attached to the carrying on of an existing business on the land.

Dixon J.

Here there is a twofold hazard attaching to th e erection of a building McTiernan J.

and the carrying on of a business in the building after erection.

Fullagar J.

Considering that the full amount of £3,500 for which the land was a proper security had already been advanced on it, it is perhaps open to argument, and Mr. Baker did indeed argue, that the invest ment was not made on “ first mortgage of real estate ” within the meaning of the Trustee Act. But we do not think that this technical question is of importance. What is important is that the investment was, in itself and by reason of its inherent nature, and not merely because of the investment of an excessive amount, a breach of trust. The words of Lindley L.J. in In re Whiteley (2) apply with redoubled force to this case. Speaking of the investment there in question he said :—“ A security of so hazardous a nature as this, though in one sense and to some extent a real security, is not a proper security for trust money ; it is not in truth a real security for any sum beyond the value of the land as land. The security for more than this value is the solvency of the borrower, and the trade carried on by him ” (3). In Royds v. Royds (4), although the security was found to be ample in point of value, the whole case proceeded on the footing that the investment was in breach of trust because of the hazardous nature of the security. The import ance of the fact that the vice of the investment lay in its inherent nature is this. I t follows that there was a breach of trust ah initio, and that a t any moment early or late after the execution of the deed, equity would be both able and bound, at the suit of any competent plaintiff, to do everything necessary both to prevent the breach of trust from being carried out or further carried out, and to redress the position and restore the trust fund.

I t will be convenient to deal first with the claims of Fouche, which present no difficulty. These are, in substance, two in number. Each is based on a common law right said to arise from the contract between Fouche and the board, but the first is a claim for a common

(1) (1886) 33 Ch. D. 347;12 App.

(3) (1886) 33 Ch. D., at pp. 356, 357.

Cas. 727.

(4) (1851) 14 Beav. 54 [51 E.R. 207].

(2) (1886) 33 Ch.D. 347.

(>3S

HIGH COURT

[1951-1952.

ir. ('. OP A. rcniody, and the second is a claim for an equitable remedy.

" 1 -

claim for £3,100, claimed as the balance of progress

Korc'iiB

payments on certificates given by Haslock as architect. The

certilica-tes relii'd u[)on were, all given after the members of the

'I’ll 15

Si' I 'K K A N N L IA -

“ old” board had resigned, and are dated respectively 29th June,

rtON 2(ith Jidy, 20th July and 11th August 1949. The total amount

Kl'Nn

“ certified ” is £7,000. Four-fifths of this is £5,600, and, after giving B o a r d .

IMxou J.credit for the sum of £2,500, which was paid without any certificate, .Mcricniiui J.

the halajice claimed is £3,100. There are, in our opinion, two answers

I uii,i„ai J. claim. The first has effect at law, and the second in equity. The first is that none of the certificates on which reliance is placed complies with the requirements of the deed of further charge. The four certificates in question are no better than their prede cessors, which have already been considered. The deed requires certificates as to “ the value of the work and materials applied towards the completion of the hotel since the payment of the last previous advance ”. Of the four certificates in question, the first says that “ labour and general expenses on the pioject ” for the period from 31st May to 28th June “ warrant a payment as follows ”. The second says that Fouche’s “ accoiuits submitted for materials and services provided on the project ” have been “ checked ”, and that it is found that these “ warrant a progress payment to date as follows ”. The third, which was given on the same date as the second, says : “ On inspection we find that labour and general expenses on the project for the period 28th June to 25th July warrant a progress payment as follows ”. The fourth (dated 11th August 1949) is based on “ statements submitted regarding the initial -works performed on the project during the period July 1947 to June 1948 ” and says that “ after investigating the position, it seems apparent that a progress payment is warranted for the period ” . I t is clear that none of these certificates complies with the requirements of the deed.

The second answer to Fouche’s first claim is that a court admin istering law and equity concurrently, as does the Supreme Court of Tasmania, could not, in the circumstances of this case, adjudge that a plaintiff recover money from a defendant who would be guilty of a breach of trust in paying it. The answer to Fouche’s second claim is that it seeks the aid of equity to enforce a contract made in breach of trust and to compel future breaches of trust. There were also claims for damages, but those cannot be sustained. These propositions are perhaps not self-evident. They should be explained.

88 C.L.R.] OF AUSTRALIA.

639

In tlie kind of case with which a court of equity would commonly be called upon to deal, A, a trustee, contracts to lend a sum of

money to B. He intends to lend it out of the trust fund in his charge,

F ouche

and is on the point of lending trust moneys. A beneficiary, or the

T h e

Attorney-General, seeks an injunction to prevent the breach of

8 u pb ea n n u a -

trust. An injunction must, of course, go. But the granting of the TION .

F und

injunction will not affect any rights which B may have against

B oard .

A at law.

B may well have rights against A. personally, but he

Di.\oii J.

could have no right against A in respect of the trust fund—no

McTiernan J. Tullagar J .

right against the trust fund. So here Fouche, if he had been dealing with an ordinary trustee, although the promise was intended by A to be performed by a use of the trust fund, inight well have had a remedy against A personally for breach of contract although he could not compel A to use the trust fund in performance of his contract. But Fouche was not here dealing with an ordinary trustee. He was dealing with a corporation, which not merely had no assets other than assets held on trust, but which could not, as a corporation,' make a contract to lend money except out of trust funds in its hands. If the contract is in breach of trust, it cannot be enforced against the corporation as trustee ; it cannot be enforced against the trust fund. And it cannot be enforced against the trustee personally, because the trustee is a corporation which has no legal personality except in its capacity as a trustee. From this point of view, which is, in our opinion, the correct point of view, it does not matter whether the deed or anything done under it was, in the strict sense, ultra vires the corporate trustee or not. I t could not possibly be held binding on the corporate trustee.

In our opinion, Morris C.J. rightly dismissed Fouche’s claims. The judgment of the Court in Fouche’s action, however, merely adjudges that the plaintiff recover nothing on his claim. We think it should be varied so as to make it quite clear that the claim for equitable relief is dismissed also.

The claims made by the board must now be considered. Because the case is, in our opinion, plainly one in which a trustee must be held liable to make good any loss resulting from his breach of trust, and because it is equally clear that the corporate trustee cannot make good any loss except out of its own trust fund, it is desirable, if not indeed necessary, to consider first the question of the personal liability of the individual corporators. On this point we find our selves, with respect, in disagreement with the learned Chief Justice of Tasmania.

So far as Rule is concerned, we regard it as clear that he is personally liable to make good any loss that may be sustained by

f)40 HIGH COURT

[1951-1952.

H. C. OF A. tlie svipcrann nation fund liy reason of the “ investment ” in question.

ior)i-i<)r)2.The question of liis responsibility does not depend merely on his

F o i ’CllE

position as a “ corporator He was in substance, if not in name,

an executive ollicer of the corporation. No payment made to Fouche

T he

Sui'E lWNNF.'V-

had the express and individual authority of the board as such.

, TIONEach payment was made by cheque signed by Rule and the secretary

unh

H o a k I).of the board (who was not made a defendant in the board’s action).

Dixon ,T.

Rule must be taken to have had the authority of the board to make

Jlc'J'iornan ,T. I''ullngar J.payments to Fouche, but only to make payments on production

of certificates complying with the requirements of the deed. I t has been seen that no certificate was ever given complying with the deed. Rule, therefore, is simply in the position of having paid away moneys of the board without authority.

Apart from this, however, we are of opinion that all the former members of the board are personally liable to make good any loss incurred. We do not think it necessary to consider either the question whether the transaction was, in the strict sense, ultra vires the board, or the question whether the individual corporators were, in any sense or for any purpose, to be regarded as trustees. Nor do we think it relevant to inquire whether they owed any and what duty to the contributors to the fund, w'hom the learned Chief Justice regarded as beneficiaries under the trust. We do not think, indeed, that the contributors are beneficiaries in the proper sense : they have, of course, an interest in the trust fund which would probably give them standing in a court of equity, but they have not such a beneficial interest in the fund as has an ordinary cesiui que trust. The trust is not a trust for persons but for statutory purposes. But, while conceding the correctness of much of what the Chief Justice has said as matter of general principle, we can see no escape from the view that the individual members of the board owed a duty to the corporation which they constituted and whose property and affairs they controlled and managed. Nor can we doubt that this duty is enforceable in equity. The board being plaintiff, and the duty being owed to the board, the case is not like Wilson v. Lord Bury (1). On the other hand it finds a very close analogy in Joint Stock Discount Co. v. Brown (2). The learned Chief Justice seems to have thought that, if the members of the board owed any duty to anybody, it could only be enforced by action for daniages—presumably at common law—and he said that the pleadings contained no claim for damages, and that no damage had been proved. But, whatever the position might be at law, the plaintiff board is seeking an equitable remedy, and, the

(1) (1880) 5 Q.B.D. 518.

(2) (1869) L.R. 8 Eq. 381.

88 C.L.R.] OF AUSTRALIA.

641

administration of a trust fund being involved, it is clear that there

C. of A.

is ample jurisdiction in equity to give appropriate relief if a breach

1951-1952.

of dutv is proved.

V With regard to the nature of the duty, we are of opinion that

.r'OTIUTIF

it does not differ materially from the duty which rests on trustees „

in relation to investments. The duty is not so onerous as it once

tio n

was. In modern times it is regarded as defined by Speight v. Gaunt (1) and In re Whiteley ; Whiteley v. Learoyd (2). I t is a duty of reason

Dixon J .

able care—the care which an ordinary prudent man of business McTiernan .1.

would take. In Charitable Corporation v. Sutton (3) a bill was

Fullagar J.

filed for relief against individuals in respect of alleged breaches of trust by an incorporated trustee. Lord Hardivicke throughout treats the individual defendants as in eff'ect occupving the position of trustees, and he says : “ If upon inquiry before the Master, there should appear to be a supine negligence in all of them . . . I will never determine th a t they are not all guilty ” (4). I t would be strange if the position were otherwise.

One cannot help feeling a degree of sympathy for the members of the board other than Rule—firstly because they had no qualifi cations for the task of investing trust funds, and secondly because, in consequence, they relied very largely on Rule’s judgment. But the standard to be applied is the standard of the reasonably prudent man of business, and it is nothing to the point that they 'were not men of business at all. Having regard to all the facts and circum stances set out in an earlier part of this judgment, we can see no escape from the view that all four defendants were guilty of gross negligence in assenting to the investment which is attacked, and that all are liable to make good any loss resulting therefrom.

I t was argued that the ex-members of the board, or at least Messrs. Biggins, Wadley and White, ought to be relieved from liability under s. 50 of the Trustee Act. This is not, in our opinion, a case for the application of that section at all. I t may be assumed that all acted honestl}^ but it is impossible to say that they acted reasonably. Judged by the only possible standard, it is difficult to imagine anything more ^treasonable than their conduct.

I t was said that no order could or should be made, because it was not proved that any loss had been or would be incurred, and that the only evidence as to the value of the land with the uncom pleted building on it was that it was worth £55,000, which would indicate that there would be no loss. But, in the light of what was

(J) (J883) 9 App. Cas. 1.(3) (1742) 2 Atk. 400 [26 E.R. 642].

(2) (1886) 3.3 Ch. D. 347; 12 App.

(4) (1742) 2 Atk., at p. 406 [26 E.R.,

Cas 727.

at p. 645].

VOL.

L x x x v in .— 41

042 HIGH COURT

[1051-1952.

U. ('. (M-'A. Hjiid i)y jViesHrs. Waldron and Edney Moore, this evidence as to value (iarries no weiglit. The evidence as a whole suggests a suffi- Foi'ciin <'i('ntly strong ))rol)al)ility of loss to justify making a declaration

r .

of liability a,ga,inst Mt^ssrs. Rule, Biggins, Wadley and White. In

i S r i ' K R A N N I ' A - ca.s(‘, it is untliinkal)le that a further sum of £20,000 odd

T I U N sluudd he paid to Kouche out of a fund held on trust for public

l-'l'NI)

])ur])oses, and this na^ans that something in the nature of a “ winding up ” nvuM talx'c place;. It is, ttierefore, convenient and proper that

| { ( ) A R I ) .

n i x o n

,T.

.Mr’l ' i m m i i .1. the position of everybody concerned should be defined in these

K ii lU igar .1.

proceedings.

The cx-members of the board relied on s. i- of the Public Officers Protection Act 1934 (Tas.), which provides that no proceeding shall be brought against any person for or in respect of any act done by such person in pursuance or in execution, or intended execution, of any Act or of any public duty or authority or in respect of any alleged neglect or default in the execution of any such Act, duty or authority unless notice of the intended proceeding has been served on such person one month before the proceeding is com menced. No notice before action was given in the present case. The point Avas raised as a preliminary point of law, and was dealt with by Morris C.J. in chambers some six months before the action came to trial. The order of Morris C.J. was adverse to the defendants and there was no appeal from it. This, however, by reason of the provisions of r. 20 of section III of the Appeal Rules of this Court, does not preclude the defendants from raising it on appeal to this Court against the final judgment in the action. We do not find it necessary to say more on this point than that, in our opinion, the order of the learned Chief Justice was right for the first reason given by him. The proceeding is a suit in equity by a statutory corporation against former members of the corporation. The duty alleged to have been broken is not a public duty but a duty owed to the corporation itself.

I t remains only to consider the relief actually given by the Chief Justice on the board’s counterclaim and in its own action. The main point argued in this connexion was that Fouche, who coven anted by the deed to repay the principal sums advanced to him on 25th May 1953, could not be ordered to repay such sums before that date. We think that the real answer to this argument is that, for reasons already given, the deed is not binding on the board. From this it follows that, even if the money could not be recovered at law before 26th May 1953, there is nothing in the deed that can stand in the way of the board when it seeks the aid of equity to redress the breach of trust and, as an incident of the redress,

88 C.L.R.] OF AUSTRALIA.

643

to recover moneys wrongfully paid away.

I t is not indeed clear

that the moneys could not he recovered at law forthwith because 1951-1952.

they were paid away on certificates produced by Fouche which

F ouche

did not comply with the terms of the deed, and it might well be

suggested that an action for money had and received would lie.

I t is unnecessary, however, to consider this question, for it is m

TION F und

equity that relief is sought, and the position in equity seems clear

B oard .

enough.

I t is impossible for Fouche to maintain that, in respect

Dixon J.

of the moneys paid to hhn, he stands in the position of a bona fide McTiernan J.

purchaser for value without notice. In order to refute that sugges

Fullagar J.

tion it is quite enough to say that he knew that the moneys were being paid to him out of a trust fund, and he knew all the facts which made the transaction a breach of trust. Even if this were not enough, as we think it is, there is the added fact that he must be taken to have known that all the moneys paid to him were paid to him without performance of a condition prescribed by his agreement with the board, for he never produced a single certificate which complied with the terms of that agreement. In respect of moneys so obtained under such circumstances, he cannot maintain that he occupies any such position at law as can enable bim to defeat or delay the equities of the board.

In reaching the above conclusion we have not overlooked that part of Mr. Burhury's careful argument in which he submitted, with extensive citation of authority, that Fouche could not be brought within any of the categories of persons, other than trustees, who have been held liable in respect of breaches of trust. We do not, however, regard the principles and authorities cited as apposite to the position of Fouche in the present case. Here nobody is seeking to make Fouche liable for any loss occasioned by the breach of trust which has been committed. Fouche is unquestionably under an obligation to repay to the board with interest all the moneys received by him from the board, and nobody seeks to impose any further obligation upon him. The only question is whether the board can rely only on the personal covenant in the deed of further charge or whether it can claim an order for immediate repayment as an incident of equitable relief. For reasons given, we are of opinion that equity has ample power not only to prevent the com mission of further breaches of trust under the contract to commit them, but to undo the whole indefensible transaction, and, as incidental thereto, to make any necessary order for the immediate payment of moneys by Fouche.

In the view which we take it is not necessary at this stage to deal with the third party claim by the former members of the

644 HIGH COURT

[1951-1952.

If. ('. OF A. i)oar(l to be indeimiifiod by Fouclie. Those defendants are iointly and severally liable to make ^mod any loss incurred by the invest- Fouciiio but tlu ̂ amount of that loss will not be ascertained until y the j)roi)erty has been realized and the extent to which Fouche

8 ui ' hu."n n u a - nieet his ])crsonal liability is known or capable of estimation.

TlON

Lib('rty to apply should be reserved specifically as to the third

Ktn I)

l iO A H O .party claim, as well as generally. We think that the orders in

l^ixon J. favour of the board should be made only in the board’s action and IUcTii'ninii ,1.

should not be duplicated on the counterclaim in Fouche’s action.Fullugur ,1.

I t is clear that Rule must account to the board for any moneys received by him from Fouche by way of costs. He is liable to account to the board for any moneys so received by him from any mortgagor to the board, but relief was only sought in respect of his transaction with Fouche. As to this, the order made by the Chief Justice should stand. If it is desired to make any specific application in respect of the promissory note or any moneys paid by Fouche in redemption of it, this may be done under the general liberty, which will be reserved, to apply to the Supreme Court.

Although we propose to vary it slightly, we think that the order made by the learned Chief Justice in the board’s action, apart from its exoneration of the defendants other than Fouche, was substan tially correct. Although we have regarded the deed of further charge as not binding on the board in equity and consequentially unenforceable against it at law, we are of opinion that moneys which were actually advanced under it became charged on the land, the legal ownership of which was already vested in the board by virtue of the earlier mortgage deed. We did not understand this

to be disputed. . '

The orders of tJiis Court will he as follows :—

1. In the action Fouche v. Superannuation Fund Board—

Order of Supreme Court varied by deleting the words “ And that on the counterclaim the defendant is entitled to the declarations hereinafter set forth"' and all the ivords follow ing except the order as to costs. In lieu thereof adjudge that on his claims for payment of moneys and for damages the plaintiff do recover nothing against the defendant. Order that the claims of the plaintiff for a declaration and specific performance do stand dismissed and that no order he made on the counterclaim. Otherwise appeal of Fouche dismissed with costs. On appeal of board no order except that the costs thereof be paid by Fouche.

88 C.L.R.] OF AUSTRALIA.

645

2. In the action Superannuation Fund Board v. Fouche and

others—■

l95l-l9o2.

Appeal of board allowed. Appeals of defendants dismissed. Vary Order of Supreme Court as follows:—

F ouche

T h e

(a)

By deleting par. 3 thereof.

In lieu thereof order that defendant Su per a n n u a -

Fouche do on or before 30̂ /z- April 1952 pay to plaintiff

F und

the sum of £21,900 with interest thereon at 4J per cent

B oard .

from Ith April 1949 to date of payment and that in default of such payment the premises the subject of the deed of further charge of 2btli May 1948 be sold with the approbation of a judge of the Supreme Court and that the moneys to arise from such sal^ be lodged in the Supreme Court to the credit o f this action and subject to further order with liberty to apply.

{b) By deleting par. 5 thereof and all the ivords following. In lieu thereof declare that defendants James Roland Ride, Harry Vernard Biggins, Claude Goodwin Wadley and Arthur White are jointly and severally liable to make good to the superannuation fund all loss which has accrued or may hereafter accrue by reason of the making of the deed of further charge of2bth May 1948 or by reason of the payment of any moneys paid or purporting to be paid to defendant Fouche under and in pursuance of the said deed. Remit cause to Supreme Court. Liberty to defendants Ride, Biggins, Wadley and White to apply with respect to their third party claim against defendant Fouche, and to all parties to apply as they may be advised. Order that defendants pay plaintiff's taxed costs o f the action and of the appeal to this Court.

Solicitors for Fouche, W. C. IIodgman, Viohaxt, by Moule, Hamil ton & Derham.

Solicitors for the Superannuation Fund Board, Finlay, Watchorn,

Baker & Solomon, Hobart, by Pi. L. Cross & Wood.

Solicitors for Rule, Bruce Piggott & Jennings, Hobart, by Alexan der Grant, Dickson & King.

Solicitors for Biggins, Wadley and White, Simpson & Simpson, Hobart, by Alexander Grant, Dickson (& King.

R. D. B.

Fouche v Superannuation Fund Board

6 February 1952