Harstedt Pty Ltd v Tomanek

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2017 0080

HARSTEDT PTY LTD (ACN 078 656 630)	Applicant
v
MARIJAN TOMANEK	Respondent

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JUDGES:	SANTAMARIA, McLEISH and NIALL JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	20 March 2018
DATE OF JUDGMENT:	10 April 2018
MEDIUM NEUTRAL CITATION:	[2018] VSCA 84
JUDGMENT APPEALED FROM:	[2017] VCC 834 (Judge Macnamara)

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TRUSTS AND TRUSTEES – Breach of trust – Knowing assistance – Where corporate trustee committed fraudulent breach of trust – Where director of corporate trustee held liable as knowing assistant under second limb of Barnes v Addy (1874) 9 Ch App 244 – Where trial judge dismissed claim against another third party – Whether third party assisted trustee with knowledge of trustee’s dishonest and fraudulent design.

EQUITY – Accessorial liability – Knowing assistance – Requirement of knowledge – Categories of knowledge and effect of consent – Whether dishonesty by third party an element of knowing assistance – Whether third party had knowledge of essential facts constituting breach of trust – Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 applied.

EQUITY – Accessorial liability – Knowing assistance – Requirement of assistance – Where beneficiary alleged active involvement by third party – Whether third party assisted in dishonest and fraudulent design – Whether third party’s conduct facilitated breach of trust – Where no evidence of active involvement – Appeal dismissed.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr D G Robertson QC with Ms R T Campbell	Katherine Moorhouse Perks
For the Respondent	Mr D G Collins QC with Mr A M Donald	Bowman & Knox

SANTAMARIA JA
mcLEISH JA
NIALL JA:

Introduction

This appeal arises out of a failed investment scheme known as a private placement program. Under the scheme, investors were promised profits which were to be generated by the investment of capital by a humanitarian organisation. The applicant, Harstedt Pty Ltd (‘Harstedt’), sought to invest in the scheme and deposited the sum of $250,000 into an account in the name of Apollo Development Enterprises Pty Ltd (‘Apollo’). The account was described as a ‘non-depleting account’; funds were to be held inviolate and were not to leave the account. Other investors also deposited funds into the account. Several months later, a director of Apollo and another investor arranged for the funds in the account, including the sum deposited by Harstedt, to be transferred to an account in Spain that was not in the name of Apollo. The funds were transferred without Harstedt’s knowledge or consent. In the event, the funds vanished without a trace.

Harstedt commenced a proceeding in the County Court against Apollo and others including the respondent, Mr Tomanek, who was the secretary of Apollo. Harstedt contended that Apollo had committed a fraudulent breach of trust by transferring the funds deposited by Harstedt overseas into an account not in the name of Apollo. Relevantly, it also contended that Mr Tomanek was liable as a knowing assistant under the second limb of Barnes v Addy.[1] The trial judge entered judgment in favour of Harstedt against Apollo. He dismissed the claim against Mr Tomanek. Harstedt now seeks leave to appeal against the dismissal of that claim.
[1](1874) 9 Ch App 244.

For the reasons that follow, the application for leave to appeal should be granted, but the appeal should be dismissed.

Factual background

The director of Harstedt, Jeffrey Olsen, had been a stockbroker for about 15 years. In late 2006, Mr Olsen was approached by Noel Carter. Mr Carter said that he had an investment proposal. The investment was described as a ‘private placement program’ for a not-for-profit humanitarian organisation called the ‘Isaiah 61 Foundation’. The Isaiah 61 Foundation was said to use investors’ capital to make substantial profits under an agreement whereby profits would be shared jointly among investors. Mr Carter asked Mr Olsen whether he would be interested in introducing his clients to the project. Mr Olsen said that he was not interested in the proposal as it offered no capital protection.

On 3 March 2007, Mr Olsen attended a conference at Mr Carter’s office in South Melbourne. At that meeting, Mr Olsen was introduced to Stephen Moriarty. Mr Moriarty outlined a proposal which was said to meet Mr Olsen’s concerns about capital protection. Mr Moriarty said that funds contributed by Australian investors would stay in Australia in a ‘non-depleting’ account and that the funds would not leave that account.

On 23 March 2007, Mr Olsen attended a further meeting, on this occasion at the Commonwealth Bank of Australia (‘the CBA’) in Bourke Street, Melbourne. At that meeting, he was introduced to the respondent, Mr Tomanek, as well as to Jose Lopez and Graeme Robinson.

At the meeting, Mr Lopez explained the proposal. It involved gearing. An investor would deposit, say, $100 into an account in the name of Apollo, and the CBA would lend $300 for each $100 deposited. In effect, the proposal was that that money would earn 300 per cent over a nine-month period.

At this stage, various groups seemed to have been involved in the proposal, including Harstedt as trustee of the Olsen Family Trust; Fortuna Developments Enterprises Pty Ltd as trustee for the Fortuna Developments Trust, the directors of which were Raymond Pryor and Geoffrey Sullivan; Valerosa Pty Ltd as trustee for the Lopez Family Trust, the directors of which were Mr Lopez and Mrs Lopez; Aurora Development Enterprises Pty Ltd, as trustee of the Aurora Development Trust, the director of which was Mr Moriarty; and NGS Financial Solutions Pty Ltd (‘NGS’), the directors of which were Mr Carter and Mr Robinson.

At the time, Mr Tomanek was the company secretary of Apollo.

Documents circulated at the meeting suggested that NGS was the facilitator of the scheme; the scheme involved investors depositing money into an account in the name of Apollo at the CBA; the CBA would provide a standby letter of credit; and multiple confidentiality agreements would be signed.

During March and April 2007, various discussions took place between the prospective investors with a view to agreeing the basic principles for the investment.

On 25 April 2007, a meeting was arranged to take place at Mr Moriarty’s residence in Geelong. Mr Olsen travelled to that meeting with Mr Carter and Mr Robinson. During the trip, Mr Robinson told Mr Olsen that Mr Carter and NGS would receive 30 per cent commission on the profits of the scheme.

There were about 30 people present at the meeting at Mr Moriarty’s residence. The only people whom Mr Olsen knew were Mr Carter and Mr Robinson. Mr Lopez was introduced as a businessman who had made money in property development and the refurbishment of offices. Mr Lopez described the scheme. However, he said that the matter was confidential. He said that the proposal had been successful overseas and identified a prominent Australian-born businessman as a previous investor. Mr Tomanek was introduced as Mr Lopez’s accountant.

At the meeting, Mr Olsen asked several questions about the security of the arrangement. He was told that there would be three signatories on the CBA account — Mr Lopez, Mr Tomanek and Mr Moriarty — and that the account would always be ‘a non-depleting account’. Mr Olsen insisted on himself being a signatory on the CBA account. He gave evidence that, at the meeting, Mr Tomanek told him, ‘You will just have to trust us’. After a vote, it was resolved that Mr Olsen’s signature would be on the CBA account.

On 30 April 2007, Mr Olsen emailed Mr Robinson stating ‘that the Olsen Group’ (Harstedt as trustee of the Olsen Family Trust) would ‘deposit $250,000 immediately subject to everyone’s approval of this email’. The conditions were as follows:

1.All written agreements between the parties are signed off and resolutions giving that person/s the approval to sign are noted by the Olsen Group. If this is not done then the Olsen Group would have the right to seek immediate return of all funds lodged in the Apollo Trust Account.
2.That if the first ‘trade’ is not completed by June 30th 2007 then the Olsen Group has the right to ask return of its collateral/capital contributions to Apollo ie as verbally agreed previously its intention is to ‘invest’ for the full term of the 13 months providing the undertaking that the first trade will be completed by no later than June 30th.
3.That Apollo provides a Statement on Apollo letterhead that it is satisfied that the purpose for the investment by the Olsen Group will offer material Corporate benefit to the Olsen Group.
eg it would determine that Olsens Group percentage unit/‌shareholding within Apollo. A letter would be prepared by the Olsen Group for the authorised signatory of Apollo to sign.
4.That the CBA puts into place, as directed by Apollo, all signatory safeguards to the funds invested in the Apollo Trust Account.

On 2 May 2007, Harstedt deposited $250,000 into an AUD account held by the CBA in the name of Apollo (‘the AUD account’), using an account number which Mr Carter gave to him. Harstedt did not make any further deposits thereafter.

On 31 May 2007, Mr Olsen received a letter dated 31 May 2007 on Apollo’s letterhead addressed to Mr Carter, who was described as ‘Introducer of Harstedt Pty Ltd’. The letter stated:

We confirm that your client Harstedt Pty Ltd has completed all pre-qualification requirements in respect to the signing of the non-circumvention, non-Disclosure Agreement and we further confirm receipt of A$250,000 from Harstedt Pty Ltd into the CBA Apollo Development Enterprises Pty Ltd Account No 3866 1010 9876 on Wednesday May 2, 2007.
These funds will be held as a condition of the [private placement program], in a Non-Depleting Account for thirteen months and will be blocked and reserved and under no circumstances can the funds in the account be depleted. The CBA has agreed to these clear instructions.

The letter was signed by Mr Moriarty ‘on behalf of the directors of Apollo Development Enterprises Pty Ltd’. The letter was headed ‘Confirmation of Receipt of Funds from Harstedt Pty Ltd by Apollo Development Enterprises’.

Mr Olsen contacted one Wilson of the CBA and informed him that he was to be an authorised signatory to the Apollo account. Mr Wilson demurred, apparently on the basis that he accepted instructions only from Mr Carter, Mr Moriarty or Mr Tomanek.

On 17 August 2007, Mr Lopez emailed Mr Moriarty and Mr Tomanek what appeared to be a form of consent that was to be given to investors. The text of the email reads as follows:

I refer to our recent conversation and confirm the following.
We wish to avail ourselves of opportunities that you have in private placement programs as soon as possible.
We are aware of the difficulties that have surrounded your attempts to negotiate flexible banking arrangements with the Commonwealth Bank, which would allow private placement programs to commence.
Due to the above, we are prepared to release our investor’s funds [sic] from the Apollo Development Enterprises Pty Ltd (Apollo) account and transfer the funds to another account under the following conditions.
1. The funds are still in an account under the name and control of Apollo.
2.All other conditions in our agreement apart from the bank that hold [sic] the account remain the same.

On 18 August 2007, NGS sent a letter to Mr Lopez containing the text that is extracted above. The letter was signed by Mr Carter.

Mr Olsen gave evidence that he was unaware of the existence of the letter sent by NGS to Mr Lopez. Mr Olsen said that the letter had not been sent with his (Mr Olsen’s) approval or concurrence.

In late August 2007, Mr Olsen had learnt that a decision had been made ‘to send the funds from Apollo offshore’. Mr Olsen emailed Mr Robinson of NGS asking several questions:

Noel [Carter] mentioned to me on Friday that the decision had been taken to send the funds from Apollo offshore. I was flabbergasted because it wasn’t mentioned on Wednesday evening when he and I had a long chat regarding the options open to Joe [Lopez] and Steve [Moriarty] if the CBA didn’t come to the party on the Thursday.
…
Could you please confirm with Noel that I need to know the following:
1. Where the funds are now; country, bank, account number
2. Under whose control: who the signatories are to the account
3.The terms of the fund’s deposit eg do they stay for the 13 months from now or from May?

What has happened is contrary to everything I originally said to the investors ie
- funds would stay in Australia
- funds would be under our (Olsen Group) control at all times – capital guarantee

- there would be a 10% penalty fee for a ‘quick’ transaction.
I have to be able to explain why all of this has changed.
Noel will understand the cause for these questions.

On 26 July 2007, the sum of AU $4,772,185.98 was debited from the AUD account, into which Harstedt had previously deposited the sum of $250,000. It is unclear where those moneys were kept between 26 July 2007 and 7 September 2007.

On 7 September 2007, Apollo established a USD account with the CBA in the name of ‘Apollo Development Enterprises Pty Ltd’ (‘the USD account’).

On the same day, the sum of approximately US $4.2 million was credited to the USD account.

On 10 September 2007, the sum of US $4.1 million was transferred from the USD account to an account held in the name of ‘Back Away S.L. Banco Guipuzcoano’ in Spain (‘the Back Away account’). Mr Lopez and Mr Moriarty signed the request for wire transfer to the Back Away account. The funds have since disappeared.

ASIC examination

On 14 April 2008, Mr Tomanek was examined by the Australian Securities and Investments Commission (‘ASIC’) pursuant to s 19 of the Australian Securities and Investments Commission Act 2001 (Cth). The transcript of the ASIC examination was in evidence at trial. It forms an important part of the evidence upon which Harstedt relies in the application for leave to appeal.

During the ASIC examination, Mr Tomanek gave evidence that the scheme, in the form of a ‘private placement program’, was designed to raise capital overseas for humanitarian programs and that, ‘if you get on at the ground level, you can get better than bank interest return’. When asked how the scheme operated, Mr Tomanek said that he was ‘not really au fait with practicality, how it works’. He said that the scheme was in a platform overseas and that the ‘platform holder’ has ‘given us certain guarantees in writing’ in relation to the custody of the investment funds and the location of those funds.

Mr Tomanek provided representatives of ASIC with a document which he said Mr Lopez had sent to him. According to Mr Tomanek, that document stated that the funds were ‘invested with this platform, and the thing is Back Away SL, and Apollo Development Enterprises’. Mr Tomanek said that a ‘Don Diago Moreno Romero’, the platform holder, has ‘given us an SKR, which is a safe-keeping receipt’ valued at €169,005,100, to guarantee repayment of the investment funds. He said that ‘we are beneficiaries’ of that receipt, which was like a bank guarantee.

Mr Tomanek gave evidence that Apollo was incorporated in April 2007 ‘so that I could basically keep a record of the money that was put in from friends’. He added:

So, to me, that was the easiest and most cleanest way of handling the money that goes in, and there’s always a record and control. I’ve got to legally do a tax return for it and everything else, so I felt that all the people – all parties were covered.

Mr Tomanek also gave evidence that he told investors that their funds would be kept in an account held by the CBA, in the name of Apollo, and that those funds would be returned at the end of the investment period. He agreed that, initially, the funds were ‘sitting securely, not to be touched’. Mr Tomanek said that ‘we’ve got complete control’ of the funds in the scheme while those funds were held in the AUD account. On the CBA’s involvement in the scheme, he said:

Basically, what happened with the Commonwealth Bank, they said to us that we can put the money into their account, and the money will be put into [an] account which could not be touched by anybody. All we had to produce for the private placement program was that the money was secured …
The money had to be in an account which [the private placement program] could visually see, and make sure it’s legit, and it was in the account. And the bank said they could do that. Then subsequently, the bank, for whatever reason, they said, ‘We couldn’t participate’.

According to Mr Tomanek, when the CBA said that it could no longer participate in the scheme, Mr Tomanek told ‘his guys’ — the investors whom he had introduced to the scheme — that, if they wanted to leave their funds in the scheme, the moneys had to be transferred overseas. In order to subscribe to the scheme, Mr Moriarty and Mr Lopez calculated that some AU $4.472 million had to be transferred overseas. Some investors left their funds in the scheme; others withdrew.

In relation to the transfer of the investors’ funds overseas, Mr Tomanek gave the following evidence:

Q:       Well, were you involved in the transaction?
A:       Not the transfer, no.
Q:       Well, who did that?
A:       Jose. Sorry, privilege. Jose and Steve.
Q:       Do you know where they actually sent it to?
A:       Privilege. No.
Q:       You didn’t think to ask them at any point?
A:       Privilege. I trust Jose.
Q:       Has he told you, subsequently, where he transferred that money to?
A:       Privilege. He told me it went to a bank in Spain.[2]

[2]Mr Tomanek also gave evidence that he had never had online access to the bank accounts of which he was signatory because he ‘left it in the hands of Steve [Moriarty] and Joe [Lopez].’

Later, the following exchange took place:

Q:Well, let’s move on to the overseas transfers … what was your understanding of the moneys that were going to go overseas? Can you tell us, from your own perspective?
A:Privilege. The money that was going overseas was going to be placed in a private placement program so that people who have put money in with us would get a return.
Q:Did you – well, yourself, or were you aware if investors were told what level of return they might receive?
A:Privilege. I spoke to my people and what everybody else – what Steve [Moriarty] said to his, I don’t know.

Mr Tomanek gave evidence that he told ‘his guys’ that ‘the money is better than bank interest’. The following exchange also took place:

Q:Did you say their moneys were going to be held in the name of an account Apollo?
A:Privilege. Initially, yes. Before we went overseas.
Q:So, then, when overseas [sic], did you tell them that it was not going to be held in it?
A:Privilege. Yes.
Q:What was the difference between if it was going to happen in Australia, if you did the deal in Australia?
A:Privilege. If it was in Australia, the money was in our account, we had full control of it. If the guy skipped for whatever reason, we had the money. Privilege. The money went overseas, hence, we refunded people. And we said to them, the money will be placed in the program. We will have a safe-keeping receipt covering our money, and hence I’m showing you the paperwork.

When the topic of the transfer of the investors’ funds overseas was revisited, Mr Tomanek said:

My client, my mates, I have told them the money is overseas. Privilege. And that Jose is negotiating on our behalf. Privilege. And the platform is under a confidentiality agreement. Privilege. What Steve [Moriarty] said to his guys, I wasn’t there, if he spoke to them. I don’t know what he said to them.

Mr Tomanek gave evidence that he, Mr Moriarty, Mr Lopez and Mrs Lopez were signatories on three accounts held by the CBA, including the account in which investors’ funds were deposited. He said that, after some time, Mr Moriarty and Mr Lopez changed the settings on each account so that it could be operated with the authorisation of one signatory. The account which held the investors’ funds was closed after those funds were transferred overseas. Mr Tomanek said that he had met with Mr Lopez monthly ‘to discuss how much money was going to be going out’ from Apollo. He also said that he personally had prepared financial accounts for Apollo.

When asked whether he was aware of the terms of the release of the investors’ funds from the private placement program, Mr Tomanek said:

Privilege. The private placement is for a 13-month period. And privilege. We envisage the money being invested 12 September. Privilege. We put the money in April. Had the bank not reneged on what they were doing, the money would have been invested in June, and they would have had their money back in June of this year. Hence, the money had to go overseas and it was invested in September …

Mr Tomanek also gave evidence that Mr Lopez had been trying to negotiate with Mr Romero for the return of the investors’ funds. He said that Mr Lopez was a party to a number of confidentiality agreements which prevented him from disclosing information about the investment.

Summary of proceedings

By writ and statement of claim filed on 28 October 2015, Harstedt brought a proceeding against Apollo, Mr Lopez, Mr Tomanek and Mr Moriarty. It claimed $1,422,183.15, which represented the full return on the investment, including the $250,000 deposit that it paid. Initially, the claims were based in contract and misleading and deceptive conduct.

Each of Apollo, Mr Lopez and Mr Tomanek filed a defence. They pleaded, among other things, that the claims by Harstedt were statute barred under the Limitation of Actions Act 1958.

Several months later, Harstedt was granted leave to file an amended statement of claim. It alleged that, by transferring the moneys from the AUD account to the USD account and, later, the Back Away account,[3] Apollo had committed a fraudulent breach of trust by the implementation of a dishonest and fraudulent design. It also alleged that Mr Lopez and Mr Tomanek were liable as third parties in that design. Harstedt said that, between September 2007 and September 2011, Apollo acknowledged its indebtedness to Harstedt by a series of emails. Harstedt abandoned its claim for the full return on the investment and, instead, claimed $250,000 in equitable compensation from Apollo, Mr Lopez and Mr Tomanek. It also claimed interest under s 58 of the Supreme Court Act 1986.
[3]Reasons [119]–[120]. The trial judge said that, in its pleadings, Harstedt referred to the transactions that led the $250,000 deposits to be remitted from Apollo’s CBA account to the Back Away account as ‘the withdrawal’; the defendants referred to the transactions as ‘the transfer’. The trial judge recounted (at [120]): ‘Over the objection of [counsel for the defendants], I permitted [Harstedt] to amend its Statement of Claim to broaden the definition of “withdrawal” and to extend to each of the steps which led the funds from the original [CBA] account in Australia to the Back Away Account in Spain. A similar amendment was consequentially adopted by the first to third defendants in their Defences.’

Apollo, Mr Lopez and Mr Tomanek amended their defences. The defence filed by Apollo was, in substance, the same as those filed by Mr Lopez and Mr Tomanek. Relevantly, Apollo alleged that Harstedt was not a beneficiary of the trust of which Apollo was trustee and therefore did not have any rights against it with respect to the $250,000 deposit.[4] It alleged that, in April 2007, Harstedt, Mr Lopez, Mr Tomanek and others entered into an agreement to participate in the investment scheme.[5] It also alleged that that agreement was varied on 21 August 2007 such that Apollo, with the consent of the beneficiaries and with Harstedt’s knowledge, agreed to transfer part of the pooled capital of the investors to a bank account as directed by a trader, Mr Romero. In the event, Mr Romero directed that the moneys be transferred to the Back Away account. In July and August 2007, each participant was given an opportunity either to withdraw their participation in the scheme or authorise the transfer.[6] Apollo alleged that, in July 2007, Harstedt caused the transfer to the Back Away account to be authorised and that the transfer was implemented with Harstedt’s knowledge. It said that an employee of Banco Guipuzcoano, or the solicitor for Mr Romero, misappropriated the funds. Apollo denied that it had implemented a dishonest and fraudulent design. It denied that Mr Lopez, Mr Tomanek and Mr Moriarty were liable as third parties.[7] It also denied that it, Mr Lopez or Mr Tomanek had acknowledged any indebtedness to Harstedt. It maintained that Harstedt was aware of the transfer, which it said occurred with Harstedt’s prior knowledge and consent.
[4]Instead, said Apollo, any rights which Harstedt had were ‘rights as against the trustee of the Aurora Development Trust and/or … as against NGS Financial Solutions’. It will be recalled that the director of Aurora was Mr Moriarty and the directors of NGS were Mr Carter and Mr Robinson. Apollo pleaded: ‘[N]otwithstanding that a sum of $250,000 was paid into [Apollo’s CBA account] by agents of [Harstedt], [Harstedt] (for reasons advantageous to [Harstedt] and by reason of agreements made between it and the trustee of the Aurora Development Trust and NGS Financial Solutions Pty Ltd … in law, the payment of the said sum of $250,000.00 was made by the trustee of the Aurora Development Trust as a beneficiary of the [Apollo] Trust … by reason of which any and all rights in law and/or equity attaching to the sum of $250,000.00 … were held by the trustee of the Aurora Development Trust’.
[5]Apollo alleged that the agreement was partly oral and partly to be implied.
[6]Apollo alleged that the transfer to the Back Away account was made in reliance upon representations from Banco Guipuzcoano and the solicitor for Mr Romero ‘that the money could not be withdrawn without the prior consent of [Apollo]’. See Reasons [112].
[7]So too did each of Mr Lopez, Mr Tomanek and Mr Moriarty.

The trial of the proceeding took place between 27 March 2017 and 3 April 2017. Mr Olsen was the only witness who gave evidence. Relevantly, Harstedt tendered the transcript of the ASIC examination of Mr Tomanek. At the close of Harstedt’s case, the three defendants made a no case submission. The trial judge put them to their election.[8] The trial judge suggested, and both counsel agreed, that the matter proceed to closing submissions. Both counsel also agreed that no adverse inference could be drawn against Apollo or any of the other defendants based upon their failure to call any viva voce evidence.[9]
[8]In Protean (Holdings) Ltd v American Home Assurance Co [1985] VR 187, Young CJ described (at 215) the procedure that follows a no case submission as follows: ‘When a trial judge has to consider an application to be allowed to submit that there is no case to answer, whether by a defendant or by a plaintiff, he must first decide whether he will allow such a submission to be made without requiring the party wishing to make the submission to elect to call no evidence.’ See also the remarks of Tadgell J at 237–8.
[9]Reasons [123]–[124].

On 9 May 2017, the trial judge entered judgment in favour of Harstedt against Apollo and Mr Lopez. He dismissed Harstedt’s claim against Mr Tomanek. Mr Moriarty had not appeared and judgment was entered against him in default of appearance.

On 31 May 2017, the trial judge ordered that Apollo and Mr Lopez pay to Harstedt the sum of $250,000, together with interest in the sum of $31,780.82.[10] He also ordered that Apollo and Mr Lopez pay the costs of Harstedt and that Harstedt pay 25 per cent of the costs of Mr Tomanek.
[10]Ibid [235]. The trial judge said that there was no basis for an award of interest under s 58 of the Supreme Court Act 1958. In the event, the trial judge awarded interest against Apollo and Mr Lopez at the trustee rate of 8 per cent per annum from the date on which the proceeding was filed.

Reasons of the trial judge

In his reasons, the trial judge held that, on the face of the arrangements between Apollo and Harstedt, a trust was established with Apollo as trustee, Harstedt as beneficiary and the trust property as the capital sum of $250,000, representing the money that Harstedt deposited into Apollo’s CBA account.[11] The trial judge found that Harstedt participated in the scheme on the assumption ‘that the $250,000 would be held inviolate in a “non-depleting” account’.[12]
[11]Reasons [173], [179].
[12]Ibid [192].

The trial judge held that Apollo breached its obligations as trustee in parting with the $250,000.[13] He also held that Apollo’s breach of trust was fraudulent and dishonest[14] and that there was ‘both a dishonest or fraudulent design on the part of Apollo and the requisite assistance by the second defendant, Mr Lopez’, as to make him liable as a third party under the ‘second limb’ in Barnes v Addy.[15] The trial judge concluded that ‘there was no consent or acquiescence on the part of Harstedt which would immunise Apollo and Mr Lopez from liability for what they did’.[16]
[13]Ibid [180].
[14]Ibid [185], [192]
[15]Ibid [197].
[16]Ibid [231].

In dismissing the claim against Mr Tomanek, the trial judge held that Mr Tomanek had no ‘knowledge of the dishonesty of Apollo’s breach of trust’.[17] In reaching this conclusion, the trial judge made findings based on evidence given by Mr Tomanek during the ASIC examination.[18] In particular, it will be recalled that ASIC raised the issue of the transfer of the investors’ funds to the Back Away account in Spain. Mr Tomanek explained that ‘[t]he money that was going overseas was going to be placed in a private placement program so that people who have put money in with us would get a return’. When asked if he was ‘aware if investors were told what level of return they might receive’, Mr Tomanek replied, ‘I spoke to my people and what everybody else – what Steve [Moriarty] said to his, I don’t know’. Mr Tomanek also gave evidence that, initially, he told his investors that the moneys were to be held in the name of an account held by Apollo. Mr Tomanek said that, when those moneys were to be transferred overseas, he told his investors that the moneys would be held in the name of Apollo.
[17]Ibid [208]–[209].
[18]Ibid [203]–[206].

The trial judge considered Harstedt to be among the group of investors whom Mr Tomanek regarded as being controlled by Mr Moriarty.[19] Mr Tomanek referred to this group colloquially as Mr Moriarty’s ‘guys’ or ‘people’. Crucially, the trial judge found:

[Mr Tomanek’s] evidence of the transfer and knowledge and consent relative to it is perfunctory, but I take it to mean that ‘his people’ knew and approved of the transfer and he assumed that Mr Moriarty had informed and obtained express or implied consent from ‘his people’, including Harstedt.

[19]Ibid [206].

The trial judge concluded:

With some hesitation, and in light of what I will be saying below about consent and acquiescence, I believe this evidence does not establish knowledge of the dishonesty of Apollo’s breach of trust.
As a result, the claim against the third defendant, Mr Tomanek, must fail.[20]

[20]Ibid [208]–[209].

Finally, the trial judge declined to award interest under s 58 of the Supreme Court Act 1986 on the sum of $250,000 deposited by Harstedt. He did so apparently on the basis that the trust of which Apollo was trustee in respect of that sum was an express trust.[21]
[21]Ibid [235].

Application for leave to appeal

On 27 June 2017, Harstedt filed an application for leave to appeal against the orders of the trial judge that Harstedt’s claim against Mr Tomanek be dismissed and that Harstedt pay 25 per cent of the costs of Mr Tomanek.

Harstedt has sought leave to appeal on the following four grounds:

1.The learned Judge erred in finding at paragraph [207] of his Reasons for Judgment (‘the Reasons’) that the Respondent’s evidence to the Australian Securities and Investments Commission (‘ASIC’) was or meant that he assumed that one Stephen James Moriarty (the Fourth Defendant in the County Court) (‘Moriarty’) had the consent of the investors introduced by him, including the Applicant, to the transfer of the trust moneys to an offshore account not controlled by the trustee of the trust (the First Defendant in the County Court) when in fact the Respondent had said to ASIC that he did not know what Moriarty had said to the investors introduced by him.
2.The learned Judge erred in holding at paragraph [207] of the Reasons that the evidence did not establish knowledge by the Respondent of the dishonesty of the trustee’s breach of trust when in fact the Respondent was aware of all of the circumstances which rendered, in the absence of the consent of the beneficiaries of the trust, the transfer of the trust moneys to an offshore account not controlled by the trustee dishonest but did not think and had no reason to think that the Applicant, as a beneficiary of the trust, had consented to such transfer.
3.The learned judge ought to have found that the Respondent knowingly assisted the trustee in the transfer of the trust moneys to an offshore account not controlled by the trustee, a transaction which, in the absence of the consent of the beneficiaries of the trust, was a fraudulent breach of trust, the Respondent not thinking and having no reason to think that the Applicant, as a beneficiary of the trust, had consented to the transaction.
4.The learned Judge erred in holding at paragraph [235] of the Reasons that section 58 of the Supreme Court Act 1986 is not applicable to the Applicant’s claim but ought, instead, to have allowed interest thereon, under that section, from 30 June 2008 at the rates from time to time prescribed under the Penalty Interest Rates Act 1983.

First proposed ground of appeal: impugned finding of fact

By its first proposed ground of appeal, Harstedt contended that it was not open to the trial judge to find that Mr Tomanek assumed that Mr Moriarty had obtained Harstedt’s consent to the transfer of the investors’ funds overseas.

In its written submissions, Harstedt pointed to the evidence given by Mr Tomanek in the ASIC examination which, according to Harstedt, showed that Mr Tomanek did not know what Mr Moriarty had told the investors introduced by Mr Moriarty, one of whom was Harstedt, about the proposed transfer of the trust moneys to an offshore account not controlled by Apollo. Harstedt contended that the trial judge’s finding that Mr Tomanek assumed that Mr Moriarty had informed and obtained express or implied consent from ‘his people’, including Harstedt, is contrary to the uncontested evidence given by Mr Tomanek during the ASIC examination.

During the hearing of the application for leave to appeal, senior counsel for Mr Tomanek conceded that the trial judge erred in finding that Mr Tomanek assumed that Mr Moriarty had obtained Harstedt’s consent to the transfer of the investors’ funds overseas. That concession was properly made.

There is no evidence or basis from which to infer that Mr Tomanek assumed that Mr Moriarty had informed and obtained any consent, whether express or implied, from the investors whom Mr Moriarty had introduced to the scheme, including Harstedt. On the contrary, a review of the transcript of the ASIC examination reveals that, on the topic of the transfer of the investors’ funds overseas, Mr Tomanek did not know whether Mr Moriarty had spoken to ‘his guys’ at all. True it is that Mr Tomanek initially gave evidence to this effect in response to a question whether he was aware if investors were told what level of return they might receive from the investment of their funds overseas. However, later in the ASIC examination, Mr Tomanek made clear that he ‘wasn’t there’ when Mr Moriarty had spoken to ‘his guys’, including Harstedt, about the details of that investment.[22] The inference that Mr Tomanek assumed that Mr Moriarty obtained consent, even implied consent, from his investors in relation to the transfer of the funds overseas was simply not open on the evidence.
[22]See [36] above.

In reaching this conclusion, we note that the impugned finding was not based upon the trial judge’s assessment of the credibility or demeanour of any witness. In reviewing a written record of the evidence given by an individual during an examination by a corporate regulator in 2008, the trial judge did not enjoy any of the usual advantages with respect to the evaluation of credibility and the ‘feeling’ of a case which an appellate court cannot always fully share.[23] Nor could he; Mr Tomanek elected not to give evidence following a no case submission. The entirety of the evidence given by Mr Tomanek was contained in the transcript of the ASIC examination. This Court is in as good a position as the trial judge to evaluate the worth of that evidence.
[23]Fox v Percy (2003) 214 CLR 118, 126 [23] (Gleeson CJ, Gummow and Kirby JJ). Cf Southern Colour (Vic) Pty Ltd v Parr [2017] VSCA 301 [48] (Santamaria, Kaye and Ashley JJA).

Harstedt has made out its first proposed ground of appeal. However, in order to succeed in the appeal, in so far as the appeal concerns the dismissal of its claim based upon knowing assistance against Mr Tomanek, Harstedt must establish each of the elements of that claim. The second and third proposed grounds of appeal concern different elements of that claim. It is therefore convenient to deal with those grounds together before reaching a conclusion on the disposition of the appeal.

Second and third proposed grounds of appeal: knowing assistance

The second and third proposed grounds of appeal are directed to establishing two elements of the same cause of action: accessorial liability under the ‘second limb’ of Barnes v Addy, which is commonly described as liability for ‘knowing assistance’.

By its second proposed ground of appeal, Harstedt contended that the trial judge erred in holding that the evidence did not establish knowledge on the part of Mr Tomanek of the dishonesty of Apollo’s breach of trust such as to give rise to liability under the ‘second limb’ of Barnes v Addy. Harstedt said that Mr Tomanek was aware of all of the circumstances which, in the absence of the consent of the beneficiaries of the trust, rendered dishonest the transfer of the trust moneys to an offshore account not in the name of Apollo. Further, Harstedt said that Mr Tomanek did not think, and had no reason to think, that Harstedt, as a beneficiary of the trust, had consented to that transfer.

By its third proposed ground of appeal, Harstedt contended that the trial judge ought to have found that Mr Tomanek knowingly assisted Apollo in the fraudulent breach of trust.

Accessorial liability for breach of fiduciary duty

It should be observed immediately that the trial judge and the parties in their submissions, both at trial and in the application for leave to appeal, have proceeded on the footing that the principles which determine whether Mr Tomanek is liable as a third party for Apollo’s breach of trust are those that derive from what is known as the ‘second limb’ of Barnes v Addy. In that case, Lord Selborne LC said:

[S]trangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.[24]

[24]Barnes v Addy (1874) LR 9 Ch App 244, 251–2.

It will be seen from this passage that the first exception to the principle that agents of trustees are not to be made constructive trustees is where ‘those agents receive and become chargeable with some part of the trust property’. This form of liability is often called the ‘first limb’ of Barnes v Addy. At no stage was it contended in the present case that Mr Tomanek had received or otherwise benefitted in any way from the misappropriation of the trust property held by Apollo.

The second exception, as described in the passage, is where the agents of trustees ‘assist with knowledge in a dishonest and fraudulent design on the part of the trustees’. This form of liability is often called the ‘second limb’ of Barnes v Addy. The issues that arise in the second and third proposed grounds of appeal call for an application of the principles concerning the liability of a third party who, broadly speaking, has participated or assisted in a breach of fiduciary duty (including breach of trust) by another.

The state of the law on accessorial liability in this context has been riddled with uncertainty and disunity. To emphasise this point any further would be to traverse needlessly many adjectives and descriptors.[25] In more recent times it appears that judicial misgivings have, to some extent, receded.[26]
[25]See, eg, Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, 358 [249] (Finn, Stone and Perram JJ) (‘Grimaldi’) (‘The extent of discord both within and between common law jurisdictions as to what should be taken to be the contemporary burden of the principles enumerated by Lord Selborne [in Barnes v Addy (1874) LR 9 Ch App 244] is marked to the point of being Babel-like’); W Gummow, ‘Knowing assistance’ (2013) 87 Australian Law Journal 311, 311 (‘One may fairly observe of much of this case law [containing detailed consideration of what was said by Lord Selborne in Barnes v Addy] that, no doubt reflecting the submissions made to the courts, it is at once somewhat over elaborate and myopic’). See generally D Ananian-Cooper, ‘The Liability of Third Parties for Breaches of Trust or Fiduciary Duty: A comparative look at five themes across four jurisdictions’ in G A Weaver and C R Craigie, Thomson Reuters, The Law Relating to Banker and Customer in Australia, vol 5 (at Update 68) [25-1701], P Ridge, ‘Equitable accessorial liability: Moving beyond Barnes v Addy’ (2014) 8 Journal of Equity 28; J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 8^th ed, 2016) 258–66 [13.33]–[13.40].
[26]See Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 (‘Farah’); Grimaldi (2012) 200 FCR 296; Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609 (‘Hasler’).

There are different forms of accessorial liability for breach of fiduciary duty. They must be kept distinct. Whilst much of the discussion in the authorities on accessorial liability for breach of fiduciary duty is focussed upon the second limb of Barnes v Addy, such liability is not limited to that limb.[27] The High Court in Farah drew attention to a line of cases preceding Barnes v Addy in which it was accepted that a third party might be liable as an accessory to a breach of trust (being also a breach of fiduciary duty) where he or she had knowingly induced or immediately procured the trustee’s breach.[28] The liability of a third party who procures or induces a breach of fiduciary duty is distinct from the liability of a third party who participates in that breach.[29] However, in order for the latter to be liable under the second limb of Barnes v Addy, the breach must amount to a ‘dishonest and fraudulent design’. This element is briefly explained below.
[27]Farah (2007) 230 CLR 89, 159 [161] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ); Grimaldi (2012) 200 FCR 296, 356 [242], 357 [245]–[246]; Hasler (2014) 87 NSWLR 609, 625 [67] (Leeming JA, with whom Barrett and Gleeson JJA relevantly agreed). Cf R P Austin, ‘Constructive Trusts’ in P D Finn, Essays in Equity (Lawbook, 1985) 202.
[28]Farah (2007) 230 CLR 89, 159 [161], citing Fyler v Fyler (1841) 3 Beav 550, 561–2, 567–8; Alleyne v Darcy (1854) 4 I Ch R 199, 209; Eaves v Hickson (1861) 30 Beav 136; C Harpum, ‘The Stranger as Constructive Trustee’ (1986) 102 Law Quarterly Review 114, 141–4. See generally J Dietrich and P Ridge, Accessories in Private Law (Cambridge University Press, 2015) 240–2. Dietrich and Ridge observe that ‘procurement’ and ‘inducement’ have been used interchangeably by the courts.
[29]Hasler (2014) 87 NSWLR 609, 626–7 [76]–[78] (Leeming JA, with whom Barrett and Gleeson JJA relevantly agreed). Indeed, Professor Gummow observes that the circumstances in which accessorial liability was imposed upon the third parties in Fyler v Fyler (1841) 3 Beav 550 and Eaves v Hickson (1861) 30 Beav 136, which the High Court cited (at 159 [161]) in Farah (2007) 230 CLR 89, did not answer the circumstances captured in the two ‘limbs’ in Barnes v Addy. See W Gummow, ‘Knowing assistance’ (2013) 87 Australian Law Journal 311, 315–7. See also Harnett v Yielding (1805) 2 Sch & Lef 549, 559; Lee v Sankey (1872) LR 15 Eq 204; Midgley v Midgley [1893] 3 Ch 282, 290, 301, 304; Attorney-General v Corp of Leicester (1844) 7 Beav 176; Andrews v Bousfield (1847) 10 Beav 511; Charlton v Coombes (1863) 4 Giff 382; Efstratiou v Glantschnig [1972] NZLR 594, 599; Elders Trustee and Executor Company Pty Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193, 238-9. See generally P Ridge, ‘Equitable accessorial liability: Moving beyond Barnes v Addy’ (2014) 8 Journal of Equity 28.

There are at least two other situations in which accessorial liability for breach of fiduciary duty may arise.[30] The first is where a company ‘is the corporate creature, vehicle, or alter ego of wrongdoing fiduciaries who use it to secure the profits of, or to inflict the losses by, their breach of fiduciary duty’.[31] In such cases, the company ‘is fully liable for the profits made from, and the losses inflicted by, the fiduciary’s wrong’.[32] The second is where the third party is not a trustee but nevertheless presumes to act as a trustee and then commits a breach of trust or profits from the position.[33] In these circumstances, the third party is liable as a trustee de son tort.[34] Neither of these situations has arisen in the present case.
[30]See generally J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 8^th ed, 2016) 261 [13.35].
[31]Grimaldi (2012) 200 FCR 296, 357 [243], 415 [556].
[32]Ibid 357 [243]. See, eg, Cook v Deeks [1916] AC 554, 565; Green & Clara Pty Ltd v Bestobell Industries Pty Ltd (No 2) [1984] WAR 32.
[33]Hasler (2014) 87 NSWLR 609, 625 [69] (Leeming JA, with whom Barrett and Gleeson JJA relevantly agreed); Williams v Central Bank of Nigeria [2014] AC 1189, 1213 [54] (Lord Neuberger).
[34]See Mara v Browne [1896] 1 Ch 199. In that case, Smith LJ said (at 209): ‘What constitutes a trustee de son tort? It appears to me that, if one, not being a trustee and not having authority from a trustee, takes upon himself to intermeddle with trust matters or to do acts characteristic of the office of trustee, he may thereby make himself what is called in law a trustee of his own wrong, that is, a trustee de son tort, or as it is also termed, a constructive trustee.’ See generally Nolan v Nolan [2004] VSCA 109 [25]–[29] (Ormiston, Chernov and Eames JJA).

Turning then to the second limb of Barnes v Addy, the necessary elements of liability under that limb, as conventionally understood in Australia, are:

(a) the existence of a fiduciary duty owed by the fiduciary (as trustee or otherwise);

(b) a ‘dishonest and fraudulent design’ on the part of the fiduciary;

(c) assistance by the third party in that design; and

(d) knowledge on the part of the third party of the circumstances constituting that design.[35]

[35]Farah (2007) 230 CLR 89, 159 [160]; Grimaldi (2012) 200 FCR 296, 361 [259].

Harstedt’s contentions in the application for leave to appeal are devoted largely to establishing the third and fourth elements. At the risk of some confusion, these two elements will be evaluated in the order in which they were argued, which reflects the order in which they appear in the proposed grounds of appeal: first knowledge and then assistance. For completeness, the first two elements — the existence of a fiduciary duty and a ‘dishonest and fraudulent design’ on the part of the fiduciary — will be addressed briefly.

A preliminary issue: What was the breach of trust?

In order to place into context much of the discussion that follows, and in particular the discussion of the elements of ‘knowledge’ and ‘assistance’, it is necessary to consider the circumstances that gave rise to Apollo’s breach of trust.

As explained above, there were four events that took place between 26 July 2007 and 10 September 2007 that culminated in the disappearance of the investors’ funds.[36] Those events are as follows:
[36]See [23]–[26] above.

(e) On 26 July 2007, the sum of AU $4,772,185.98 was debited from the AUD account. It is unclear where those moneys were kept between 26 July 2007 and 7 September 2007.

(f) On 7 September 2007, Apollo established the USD account.

(g) On the same day, the sum of approximately US $4.2 million was credited to the USD account.

(h) On 10 September 2007, the sum of US $4.1 million was transferred from the USD account to the Back Away account.

Mr Tomanek pleaded each of these events in his further amended defence. He referred to the first three of these events collectively as ‘the Transfer’. However, later in his pleading, Mr Tomanek referred to ‘the Transfer’ as ‘the transfer into the Back Away Account’.

During oral argument, senior counsel for Harstedt contended that the transactions set out above should be treated collectively as one single transaction rather than separate transactions. He argued, however, that the transaction comprising the debiting of the AUD account and the crediting of the USD account was, on its own, a breach of trust because its purpose was to facilitate the later transfer of the investors’ funds to the Back Away account. He also relied upon answers given by Mr Tomanek during the ASIC examination in which, so it was argued, Mr Tomanek identified the three actions as necessary to overcome the CBA’s refusal to play the role assigned to it under the original proposal.[37]
[37]The evidence does not disclose precisely what the promotors of the scheme envisaged the CBA would do and what it was that the CBA refused to do that was said to have prompted the need to transfer the moneys overseas. See [31] above.

In his oral submissions, senior counsel for Mr Tomanek contended that the three transactions should be seen as separate from one another. He said that the only relevant transaction that constituted a breach of trust was the transfer to the Back Away account, since that was the only transaction that caused loss to the investors.

In his reasons, the trial judge said that ‘Apollo breached its obligations as trustee in parting with [the] $250,000’ deposited by Harstedt.[38] Later, in the context of discussing the liability of Mr Lopez, the trial judge said:

Mr Lopez was aware of the requirement to hold the investment deposit inviolate. When he contemplated moving the bank account, he solicited a consent to what would otherwise have been a breach of trust albeit he sought this from the wrong party, NGS, the introducer, not Harstedt the trust beneficiary. Then he signed documents to move the money to the `Back away’ account which was not in accordance with the consent sought. It might be thought that Mr Lopez and Apollo took this course hoping for the best. A trustee and anyone who knowingly assists him to use his trust fund on a wager is no less dishonest because they hope the bet will be successful. They know the transaction is a breach but do it anyway. This is what Apollo and Mr Lopez did.[39]

[38]Reasons [180].

[39]Ibid [198].

Consistently with the passage extracted above, and the earlier finding with respect to Apollo’s parting with the capital sum of $250,000 deposited by Harstedt, it seems to me that the only transaction which constituted the breach of trust was the transfer of the sum of $250,000 from the USD account, being an account in the name of Apollo, to the Back Away account. This accords with the trial judge’s finding that the breach of trust occurred when Apollo parted with the sum of $250,000 deposited by Harstedt — a finding which has not been impeached. It may be inferred, as Harstedt argued, that the purpose of the transactions on 26 July 2007 and 7 September 2007 was to facilitate the transfer of the investors’ funds to the Back Away account. However, this is beside the point. As far as the evidence goes, the funds were held in an account in the name of Apollo until 10 September 2007, when they were transferred to the Back Away account — an account over which Apollo had no control. Harstedt has not established that such control was lost at any earlier time. We reject the contention that the two earlier transactions, whether by themselves or collectively, constitute a breach of trust.

It is now convenient to consider, in turn, each of the elements of liability under the second limb of Barnes v Addy.

Existence of fiduciary duty

It is common ground between the parties that, at the time of the transfer of the investors’ funds (including the $250,000 deposited by Harstedt into the AUD account) to the Back Away account, Apollo, as trustee of an express trust, owed a fiduciary duty to Harstedt in respect of that sum.[40] This element need not be considered any further.
[40]Ibid [173], [179].

‘Dishonest and fraudulent design’

The requirement that there be a ‘dishonest and fraudulent design’ on the part of the fiduciary means that the breach of fiduciary duty itself must be dishonest and fraudulent.[41] The meaning of ‘dishonest and fraudulent’ in this context was considered in Westpac Banking Corp v The Bell Group Ltd (in liq) (No 3)[42] and Hasler.[43] These cases reveal a difference in opinion as to what constitutes a dishonest and fraudulent breach of trust.[44] In the present case, nobody has impeached the trial judge’s conclusion that Apollo’s breach of trust had been dishonest and fraudulent.[45] The parties’ submissions do not disclose any difference in opinion on the meaning of the term ‘dishonest and fraudulent design’. It is therefore unnecessary to consider this element any further.
[41]Farah (2007) 230 CLR 89, 164 [179].
[42](2012) 44 WAR 1 (‘Bell’).
[43](2014) 87 NSWLR 609.
[44]See Bell (2012) 44 WAR 1, 383 [2121], 383–4 [2123], 384 [2125]–[2126] (Drummond AJA, with whom Carr AJA relevantly agreed). Cf Hasler (2014) 87 NSWLR 609, 614 [11] (Gleeson JA), 628–35 [84]–[120], 636 [124] (Leeming JA, with whom Gleeson JA agreed).
[45]Reasons [185], [192], [197].

Knowledge
Knowledge as a necessary element of knowing assistance

In his written submissions, Mr Tomanek contended that, in claims under the second limb of Barnes v Addy, ‘[t]he touchstone of liability as an accessory is dishonesty’. He added that ‘[a] liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in breach of a trust or fiduciary obligation’. In support of these propositions, he cited Royal Brunei Airlines Sdn Bhd v Tan.[46] He went on to discuss liability in terms of dishonesty without any reference to the requirement that there be a dishonest and fraudulent design on the part of the fiduciary.
[46][1995] 2 AC 378 (‘Royal Brunei’).

In the light of the statement by the High Court in Farah of the law in Australia on accessorial liability under the second limb of Barnes v Addy,[47] the principles upon which Mr Tomanek relies in his written submissions are wrong and should not be applied by this Court.[48] So much was conceded by senior counsel for Mr Tomanek during oral argument in the application for leave to appeal.
[47]See [97] below.
[48]As explained below, in Farah (2007) 230 CLR 89, the High Court rejected the proposition that dishonesty of the third party was an element of knowing assistance.

The applicable principles may be stated briefly. A third party will not be liable for knowing assistance unless he or she knew, or had reason to know, of the dishonest and fraudulent design on the part of the fiduciary.[49] It is not necessary to show that the third party acted dishonestly.[50] Such liability is distinct from the liability of a third party who procures or induces a breach of fiduciary duty.[51]
[49]Grimaldi (2012) 200 FCR 296, 361 [259]. See also Nicholson v Morgan (No 3) (2013) 8 ASTLR 277, 292–4 [61]–[68] (Edelman J).
[50]Farah (2007) 230 CLR 89, 160 [163].
[51]Ibid. See [68] above.

It has been customary, though not without some controversy,[52] to analyse the requirement of knowledge for accessorial liability for breach of fiduciary duty by reference to the following five categories set out by Peter Gibson J, acting on an agreement between counsel, in Baden v Société Générale pour Favoriser le Dévelopment du Commerce et de l’Industrie en France SA:[53]
[52]Agip (Africa) Ltd v Jackson [1990] 1 Ch 265, 293 (Millett J); Royal Brunei [1995] 2 AC 378, 392 (Lord Nicholls); Imobilari Pty Ltd v Opes Prime Stockbroking Ltd (in liq) (recs and mgrs apptd) (2008) 252 ALR 41, 50–1 [28] (Finkelstein J). See also J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 8^th ed, 2016) 261–2 [13.36]. In Grimaldi (2012) 200 FCR 296, 361, Finn, Stone and Perram JJ cautioned (at 361 [260]) against ‘the use of formulae’ to solve problems. Generally speaking, equity eschews rules lest it lose sight of the various ways in which conduct may be unconscionable.
[53][1992] 4 All ER 161 (‘Baden’).

(i) actual knowledge;

(j) wilfully shutting one’s eyes to the obvious;

(k) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;

(l) knowledge of circumstances which would indicate the facts to an honest and reasonable person;

(m) knowledge of circumstances which would put an honest and reasonable person on inquiry.[54]

[54]Ibid 235, 242–3.

Each of the first two categories speaks for itself. The third category ‘involves such a calculated abstention from inquiry as would disentitle the third party to rely upon lack of actual knowledge of the trustee’s or fiduciary’s wrongdoing’.[55] The fourth category is ‘designed to prevent a third party setting up his or her own “moral obtuseness” as the reason for not recognising an impropriety that would have been apparent to an ordinary person’.[56] The fifth category derives from the doctrine of bona fide purchaser for value without notice.[57]
[55]Grimaldi (2012) 200 FCR 296, 361 [261]. See also Belmont Finance Ltd v Williams Furniture (No 1) [1979] Ch 250, 267 (Buckley LJ).
[56]Grimaldi (2012) 200 FCR 296, 361 [261], citing Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 398 (Gibbs J) (‘Consul’).
[57]Grimaldi (2012) 200 FCR 296, 362 [261].

The High Court in Farah endorsed the Baden scale and indicated that knowledge falling within any of the first four categories, but not the fifth, represents the law in Australia.[58]
[58]Farah (2007) 230 CLR 89, 163–4 [177]–[178]. See also Consul (1975) 132 CLR 373, 398 (Gibbs J), 412 (Stephen J). Barwick CJ agreed with Stephen J.

The trial judge’s finding as to Mr Tomanek’s knowledge

It is convenient to diverge briefly to examine the precise basis upon which the trial judge held that Mr Tomanek was not liable for knowing assistance. It will be recalled that the trial judge held that the evidence did not establish that Mr Tomanek had knowledge of Apollo’s dishonest and fraudulent design.[59] The trial judge’s conclusion appeared to be founded on two factual findings: first, the investors whom Mr Tomanek had introduced to the scheme ‘knew and approved of the transfer;’ and secondly, Mr Tomanek ‘assumed that Mr Moriarty had informed and obtained express or implied consent from “his people”, including Harstedt’.
[59]See [51] above.

Leaving aside the error in the second finding, which is discussed above,[60] the relevance of that finding to the trial judge’s conclusion on Mr Tomanek’s knowledge is not entirely clear. There are three ways in which that finding might have been relevant to the trial judge’s conclusion.
[60]See [50] above.

First, it may be the case that, on the facts which Mr Tomanek believed to exist — a belief which, according to the trial judge, was informed by an assumption ‘that Mr Moriarty had informed and obtained express or implied consent from “his people”, including Harstedt’ — Apollo was not acting in breach of trust by transferring the investors’ funds overseas.

Secondly, it may be the case that the trial judge thought that Mr Tomanek was not liable because Mr Tomanek did not have the requisite degree of knowledge that Harstedt, among other investors, had not given informed consent to Apollo’s breach of trust. If this was the basis upon which Mr Tomanek was exculpated from liability for knowing assistance, it is wrong in point of principle. Proof of absence of a principal’s informed consent is not an element of establishing liability for knowing assistance.[61] Rather, proof of the existence of such consent may only be relied upon as a defence to a claim for knowing assistance. As Leeming JA explained in Hasler:

Let it be assumed that a third party knows of the essential facts which, absent fully informed consent, amount to a breach of fiduciary duty which is a dishonest and fraudulent design. If that third party continues to participate in what prima facie amounts to a dishonest and fraudulent breach of fiduciary duty without inquiring whether there is fully informed consent, then the third party is liable. It is not necessary for the plaintiff to take the further step of proving knowledge of the absence of fully informed consent. Once in possession of knowledge of what would otherwise amount to a dishonest breach of duty, an honest and reasonable person in the position of the third party would make inquiries. If there is no other evidence as to the third party's state of mind, the third party will have the requisite knowledge to be rendered liable to account as a constructive trustee.[62]

[61]Hasler (2014) 87 NSWLR 609, 613 [3] (Barrett JA).

[62]Ibid 639 [140] (Leeming JA, with whom Barrett and Gleeson JJA relevantly agreed) (emphasis added).

Thirdly, it may be the case that the trial judge found that, in so far as he may have believed that the investors whom Mr Moriarty had introduced to the scheme (including Harstedt) had consented to the transfer, Mr Tomanek was not dishonest. If that is the case, as the discussion below makes clear, that would also have been wrong in point of principle. It is not necessary to show, as an element of knowing assistance, that the third party acted dishonestly.[63]
[63]That this is a possible interpretation of the use to which the trial judge was putting his finding that Mr Tomanek assumed that Mr Moriarty’s ‘people’ had consented, see [77] above (‘A trustee and anyone who knowingly assists him to use his trust fund on a wager is no less dishonest because they hope the bet will be successful. They know the transaction is a breach but do it anyway.’) (emphasis added).

The purpose of bringing these matters to the fore is to highlight the importance of expressing lucidly the path of reasoning that leads to the conclusion whether a third party has the requisite knowledge to be liable as a knowing assistant. For, in most cases, the question of knowledge will be a vexed issue. As a starting point, one must ask whether the third party (giving assistance) has knowledge of the essential facts constituting what is prima facie a dishonest breach of duty in which he or she is assisting.[64] If so, then, without more, the third party will be liable. The onus then lies on the fiduciary to prove that the principal gave fully informed consent. Such consent, if it be proved, operates by way of defence only. It is not necessary to prove knowledge of the absence of fully informed consent. Nor must it be shown that the third party acted dishonestly.
[64]Hasler (2014) 87 NSWLR 609, 639 [139] (Leeming JA, with whom Barrett and Gleeson JJA relevantly agreed).

Rejection of Royal Brunei in Farah

As mentioned above, the root of Mr Tomanek’s initially misplaced reliance upon the principles that ‘[t]he touchstone of liability as an accessory is dishonesty’ is the decision in Royal Brunei.[65] In that case, which involved a claim under the second limb of Barnes v Addy, Lord Nicholls of Birkenhead, delivering the advice of the Privy Council, expressed the following principle:

A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. ‘Knowingly’ is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden scale of knowledge is best forgotten.[66]

[65]See [82] above.

[66]Royal Brunei [1995] 2 AC 378, 392.

Three observations should be made about this passage. The first is that it conflates the liability of a third party who procures or induces a breach of fiduciary duty with the liability of a third party who participates in that breach. As the High Court noted in Farah,[67] it represents a general principle of accessory liability in equity.
[67]Farah (2007) 230 CLR 89, 160 [162].

Secondly, the principle expressed in Royal Brunei shifts focus from the third party’s knowledge of the dishonest and fraudulent design on the part of the fiduciary to the dishonesty of the third party itself. It signifies a departure from the conventional understanding of liability under the second limb of Barnes v Addy by imposing liability with respect to any breach of fiduciary duty so long as the third party itself was objectively dishonest.[68] It further dispenses with the ‘knowledge’ requirement explained above. Until Farah, this was the principle that had been applied by Australian courts.[69]
[68]See also Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2006] 1 WLR 1476, 1481 [15] (Lord Hoffmann) (‘Barlow Clowes’).
[69]Hasler (2014) 87 NSWLR 609, 621 [47]. See, eg, Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1, 87 [405] (Spigelman CJ, Sheller and Stein JJA). On a recent rejection of this approach, see Comgroup Supplies Pty Ltd v Products for Industry Pty Ltd [2016] QCA 088 [54] (Margaret McMurdo P, Atkinson and Mullins JJ).

Thirdly, and most importantly, the High Court in Farah chose not to adopt the general principle of accessory liability expressed in Royal Brunei. In doing so, it maintained the distinction between the liability of a third party who procures or induces a breach of fiduciary duty and the liability of a third party who assists or participates in that breach.[70] The Court made it plain, in relation to claims under the second limb of Barnes v Addy, that the dishonest and fraudulent design must be on the part of the fiduciary;[71] that it is not necessary to show that the third party acted dishonestly;[72] and that ‘knowledge’, which may be categorised according to the Baden scale, is a necessary requirement.[73] In the present case, Mr Tomanek’s conduct falls to be assessed on this basis.
[70]Farah (2007) 230 CLR 89, 160 [163]. See also J Dietrich and P Ridge, Accessories in Private Law (Cambridge University Press, 2015) 223–6.
[71]Farah (2007) 230 CLR 89, 159 [160], 164 [179].
[72]Ibid 160 [163].
[73]Ibid 163–4 [175]–[178].

Did Mr Tomanek have knowledge of Apollo’s dishonest and fraudulent design?

In its written submissions, Harstedt contended that Mr Tomanek had knowledge of the fact that the investors’ funds would not be held by Apollo once those funds were transferred overseas and that Apollo had acted dishonestly unless he (Mr Tomanek) knew or believed that the beneficiaries of the trust had consented. Harstedt said that, based on the evidence given by Mr Tomanek in the ASIC examination, he had no knowledge or belief that the beneficiaries had consented.

Harstedt pointed to other evidence which, it said, established that Mr Tomanek had knowledge of the dishonesty of the transfer of the investors’ funds to the Back Away account in Spain. It referred to the letter sent by Mr Carter, a director of NGS, to Mr Lopez on 18 August 2007 as a ‘form of consent proffered’ by Mr Lopez. Harstedt noted that that letter provided for the investors’ funds to be transferred to an account controlled by Apollo, not to an account controlled by a third party. It argued that, by that letter, Mr Tomanek was notified that Harstedt was being asked to consent to a change of bank, not to a change of the person holding the investors’ funds. Harstedt submitted that Mr Tomanek did not seek to obtain any assurance in relation to the investors introduced by Mr Moriarty other than the letter dated 17 August 2007, which Harstedt said was ‘unsatisfactory’.

During oral argument, senior counsel for Harstedt contended that Mr Tomanek knew the terms on which the investors’ funds were held on trust — that is, the funds were to be held inviolate in an account in the name of Apollo. Senior counsel contended that this Court should infer that Mr Tomanek knew that on 26 July 2007 the investors’ funds were debited from the AUD account, which was in the name of Apollo, for the purpose of transferring them overseas to an account not in the name of Apollo.[74] It was submitted that Mr Tomanek knew that consent from the investors was necessary in the light of his seeking the consent of the investors whom he had introduced to the scheme to the transfer of their funds overseas.
[74]See [75] above.

Senior counsel for Harstedt also referred to evidence given by Mr Tomanek in the ASIC examination that the scheme was secured by a ‘safe-keeping receipt’, which was akin to a bank guarantee.[75] It was submitted that this revealed a process which was part of a broader transaction involving the transfer of the investors’ funds away from an account in the name of Apollo to another account for the purposes of implementing the scheme.
[75]See [29] above.

In his written submissions, Mr Tomanek contended that the trial judge was correct in his finding that the evidence did not establish knowledge on the part of Mr Tomanek of Apollo’s dishonest and fraudulent design. Mr Tomanek also contended that neither the email of 17 August 2007, nor the form of consent attached to it, shows that he had prior knowledge of the transfer of the investors’ funds overseas. At the hearing before this Court, senior counsel for Mr Tomanek did not supplement these submissions. Instead, his oral submissions focussed upon the element of assistance, which is considered below.

In our opinion, in so far as there is any disagreement between the parties as to whether Mr Tomanek had knowledge of Apollo’s dishonest and fraudulent design under the second limb of Barnes v Addy, the short answer is that it is more probable than not that Mr Tomanek did have such knowledge.

The evidence at trial with respect to Mr Tomanek’s state of mind was scant. The totality of that evidence comprised the email correspondence from Mr Lopez on 17 August 2007 and the evidence given by Mr Tomanek during the ASIC examination. The latter, in particular, must be viewed in its context: the evidence was given some seven months after the transfer of the investors’ funds to the Back Away account and almost nine years before the trial of the present proceeding; it was given to a regulator whose agenda aligned only faintly with the issues which were determined by the trial judge; and, while it is not made plain in the above summary of the evidence, both the regulator and the examinee frequently made reference to documents which were relevant to the financial affairs of Apollo, among other companies, and which were not tendered at trial. It must also be borne in mind that each of Apollo, Mr Lopez and Mr Tomanek made a no case submission and, as a price of having this considered, elected not to give evidence at trial if the no case submission failed. Had Mr Tomanek given evidence, it is conceivable that there would be a stronger foundation from which to assess his state of mind before and at the time of Apollo’s breach of trust.

Notwithstanding the limitations of the evidence at trial, we are satisfied, on the balance of probabilities, that Mr Tomanek knew of the essential facts which constituted the dishonest and fraudulent breach of trust by Apollo. In reaching this conclusion, we note that this Court is in as good a position as the trial judge to determine the question of Mr Tomanek’s knowledge, the answer to that question being based upon a review of the documentary record. Such knowledge is apparent from (a) the evidence that Mr Tomanek gave to ASIC; (b) the circumstances of his receiving the form of consent circulated by Mr Lopez on 17 August 2007;[76] and (c) his seeking the consent of the investors whom he had introduced to the scheme.[77] In this regard, three points should be made.
[76]This form of consent did not envisage the transfer of the investors’ funds away from Apollo.
[77]This separate request for consent did envisage the transfer of the investors’ funds away from Apollo.

First, Mr Tomanek had actual knowledge that Apollo was the trustee of the investors’ funds or at least actual knowledge of the arrangements which constituted the trust relationship.[78] Those arrangements included that the funds were to be held inviolate in a ‘non-depleting account’ held by the CBA, in the name of Apollo, where they were initially ‘sitting securely, not to be touched’.
[78]Twinsectra Ltd v Yardley [2002] 2 AC 164, 202 [136] (Lord Millett dissenting); Barlow Clowes [2006] 1 WLR 1476, 1483–4 [28]. Cf Carl Zeiss Stiftung v Herbert Smith & Co [1969] 2 Ch 276, 298 (Sachs LJ); Baden [1992] 4 All ER 161, 234–5; Yeshiva Properties No 1 Pty Ltd v Marshall (2005) 219 ALR 112, 118 [22] (Bryson JA, with whom Mason P and Beazley JA agreed).

Secondly, while it is not apparent when the decision had been made to transfer the investors’ funds overseas to an account not in the name of Apollo, it is plain from Mr Tomanek’s evidence to ASIC that he had actual knowledge that such a decision had been made. He knew that it would be necessary to seek the consent of the investors, whose funds were initially deposited with Apollo on the understanding that those funds would be kept according to the arrangements described above. This knowledge is to be inferred from his seeking consent from the investors whom he had introduced to the scheme.

Thirdly, Mr Tomanek received, by email, the form of consent circulated by Mr Lopez on 17 August 2007. At the time of his seeking consent from the investors whom he had introduced to the scheme, it is to be inferred that Mr Tomanek had actual knowledge of, or at least wilfully shut his eyes to, the obvious discrepancy between the circumstances described in the form of consent — namely, that those funds would remain in an account in the name of Apollo — and the fact that the investors’ funds would be transferred overseas to an account not in the name of Apollo.

For these reasons, Mr Tomanek had knowledge of Apollo’s dishonest and fraudulent design.

Assistance

The evidence in the present case also raises difficult questions about whether Mr Tomanek’s conduct at the time of the implementation of Apollo’s dishonest and fraudulent design amounted to ‘assistance’ in that design under the second limb of Barnes v Addy. Before discussing the relevant legal principles, it is convenient first to examine what is said to constitute the evidence of Mr Tomanek’s assistance in the transfer of the investors’ funds to the Back Away account in Spain.

Mr Tomanek’s conduct

In its written submissions, Harstedt contended that Mr Tomanek assisted Apollo in its dishonest and fraudulent design, and specifically the transfer of the investors’ funds to the Back Away account in Spain, since he was one of the three individuals who conducted the investment scheme on behalf of Apollo and attended to its business affairs. In support of this contention, Harstedt pointed to the email sent by Mr Lopez to Mr Moriarty and Mr Tomanek attaching the form of consent. It observed that the subject of that email was ‘recent conversation’. It also set out numerous parts of the transcript of the ASIC examination in which Mr Tomanek used the words ‘we’, ‘us’ and ‘our’ to describe the group of three individuals who were the human agents of Apollo and who attended to Apollo’s business affairs. According to Harstedt, this revealed that Mr Tomanek was directly involved in the transfer of the investors’ funds overseas.

During oral argument, senior counsel for Harstedt pointed to several features of the present case which, he said, amounted to assistance by Mr Tomanek in Apollo’s dishonest and fraudulent design. He observed that Mr Tomanek was part of the ‘central’ management of Apollo and of the scheme itself. He also said that, in various parts of the ASIC examination, when describing how the transfer of the investors’ funds to the Back Away account was effected and how this became necessary after the CBA withdrew from the arrangement, Mr Tomanek’s use of the first person plural pronoun revealed that he was referring not only to Apollo but also to its human agents, including himself.

Senior counsel for Harstedt further contended that Mr Tomanek’s assistance in Apollo’s dishonest and fraudulent design is also evident in his role as company secretary of Apollo; as a signatory to its bank accounts, including the AUD account; and as a promoter of the scheme. Further, Mr Tomanek gave evidence to ASIC that he himself had prepared the accounts of Apollo and met with Mr Lopez monthly ‘to discuss how much money was going to be going out’ from Apollo. It was submitted that Mr Tomanek’s assistance is also shown by his being part of the email chain containing the form of consent circulated by Mr Lopez on 17 August 2007.

In his written submissions, Mr Tomanek argued that Harstedt has failed to prove that he had assisted in the dishonest and fraudulent design or that he participated in the fraudulent breach of trust by Apollo. He further contended that his use of words such as ‘we’, ‘our’ and ‘us’ when recalling events during the ASIC examination is not clear and cogent evidence of assistance or ‘actual participation’ in Apollo’s dishonest and fraudulent design. He submitted that neither the email of 17 August 2007, nor the form of consent attached to it, showed that he had prior knowledge of the transfer of the investors’ funds to the Back Away account.

During oral argument, senior counsel for Mr Tomanek contended that Harstedt’s case was being advanced on the basis that the conduct of Apollo should be imputed to Mr Tomanek. Senior counsel argued that Harstedt had not put forward any evidence of Mr Tomanek’s assistance in Apollo’s dishonest and fraudulent design. He argued that assistance must amount to the facilitation of, or the taking of steps to assist or participate in, the breach of trust in such a way that the assistance causes the loss arising from the breach of trust. He further contended that acquiescence cannot constitute assistance under the second limb of Barnes v Addy. It was submitted that Mr Tomanek’s act of seeking consent from the investors whom he had introduced to the scheme did not facilitate the breach of trust.

Did Mr Tomanek assist in the dishonest and fraudulent design on the part of Apollo?

The authorities offer little guidance on the meaning of ‘assistance’ in a dishonest and fraudulent design. Plainly, whether a third party has assisted is a question of fact and, in practical terms, the ways in which a third party may provide assistance are myriad.[79] However, there are at least two principles that emerge from the authorities and commentary on this point.
[79]C Mitchell, ‘Assistance’ in P Birks and A Pretto (eds), Breach of Trust (Hart Publishing, 2002) 171 (‘There are of course many ways to facilitate the commission of a primary breach as the human imagination can contrive’.) See also Baden [1992] 4 All ER 161, 234 [246].

First, there will be assistance where, but for the action or inaction of the third party, the breach of fiduciary duty would not have occurred.[80] A common example is the role of a bank or other financial intermediary the function of which is essential to effect a transaction that amounts to a breach of trust.[81]
[80]J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 8^th ed, 2016) 265 [13.39]; Thomson Reuters, Ford and Lee: The Law of Trusts (at 1 March 2017) [22.10140].
[81]See, eg, Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 All ER 1073; Karak Rubber Co Ltd v Burden (No 2) [1972] 1 All ER 1210; Rowlandson v National Westminster Bank Ltd [1978] 3 All ER 370; Baden [1992] 4 All ER 161, 234 [246].

Secondly, there may also be assistance where the third party has facilitated a breach of fiduciary duty that would have occurred in any event.[82] It is difficult to see how, in view of equity’s broad concern with preventing unconscionability,[83] a third party in these circumstances could not be liable under the second limb of Barnes v Addy, even if there is evidence to suggest that the commission of the primary breach was a foregone conclusion.
[82]Balfron Trustees Ltd v Peterson (2001) 151 NLJ 1180 [21] (Laddie J). See also Thomson Reuters, Ford and Lee: The Law of Trusts (at 1 March 2017) [22.10140].
[83]See, eg, Cochrane v Cochrane [1985] 3 NSWLR 403, 405 (Kearney J); Bofinger v Kingsway Group Ltd (2009) 239 CLR 269. See also W Gummow, ‘Knowing assistance’ (2013) 87 Australian Law Journal 311, 319.

Harstedt advanced its case as one of active involvement by Mr Tomanek. At no stage did it contend that Mr Tomanek had acquiesced in Apollo’s dishonest and fraudulent design such that that acquiescence caused the loss arising from Apollo’s breach of trust. It is therefore unnecessary to decide whether, or when, an omission or acquiescence may amount to assistance in a dishonest and fraudulent design under the second limb of Barnes v Addy.[84]
[84]The authorities on this point appear to be in disharmony. See Brinks Ltd v Abu-Saleh (No 3) (The Times, 23 October 1995); Nightingale Finance Ltd v Scott (Ch D, 18 November 1997); Bare Land Condominium Plan 8820814 v Birchwood Village Greens Ltd (Alberta QB, 30 November 1998); Goose v Wilson Sandford & Co (No 2) (Ch D, 25 January 1999); Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1; Lurgi (Australia) Pty Ltd v Gratz [2000] VSC 278; Treaty Group Inc v Simpson (2001) 103 ACWS (3d) 1072; Banque Nationale de Paris v Hew [2001] 1 SLR 300; Re-Engine Pty Ltd (in liq) v Fergusson [2007] VSC 57.

In our opinion, Harstedt has not established anything beyond knowledge on the part of Mr Tomanek of Apollo’s dishonest and fraudulent design. It has not pointed to any active involvement by Mr Tomanek in that design. Even if, contrary to the conclusion above,[85] the first debiting of Apollo’s account on 26 July 2007 could be classified as a breach of trust, Harstedt has not established that Mr Tomanek had assisted in that breach. During oral argument, senior counsel for Harstedt conceded that he could not point to any individual act by Mr Tomanek that facilitated the transfer of the investors’ funds that was held to be a breach of trust in the same way that he could with respect to Mr Lopez and Mr Moriarty. The fact that Mr Tomanek sought consent from the investors whom he had introduced to the scheme reflected the fact that he knew that the actions of Apollo, as effected by Mr Lopez and Mr Moriarty, amounted to a breach of trust. However, it does not permit an inference that Mr Tomanek assisted in that breach of trust.
[85]See [78] above.

Mr Tomanek’s knowledge, in and of itself, did not facilitate Apollo’s breach of trust and cause the loss arising therefrom. That knowledge is insufficient to constitute assistance in the relevant sense. There was no evidence, for example, that Mr Tomanek was responsible in any way for the debiting of the AUD account on 26 July 2007 or that he gave any instructions to the CBA with respect to any of the transactions on 26 July 2007, 7 September 2007 or 10 September 2007. Such evidence as there was showed that those instructions came from Mr Lopez and Mr Moriarty. They alone signed the transfer instructions in relation to the transfer from the USD account to the Back Away account. Their conduct was what facilitated Apollo’s breach of trust.

In both its written and oral submissions, Harstedt placed much emphasis on Mr Tomanek’s role as one of the three individuals who conducted the scheme on behalf of Apollo and his involvement in Apollo’s business affairs. Harstedt also drew attention to Mr Tomanek’s role as secretary of Apollo, as a signatory to its bank accounts, including the AUD account, and as a promoter of the scheme. In our opinion, these matters do not establish assistance in the relevant sense. It is one thing to say that a company officer is in the inner sanctum of a company, has certain responsibilities within it and attends to its business affairs. But it is entirely another to say, in circumstances where the company is a trustee that has committed a breach of trust through the implementation of a dishonest and fraudulent design, that that person assisted or participated in that dishonest and fraudulent design solely by reason of his or her responsibilities or role within the company, and nothing more. The evidence in the present case simply did not establish that Mr Tomanek had assisted in Apollo’s dishonest and fraudulent design under the second limb of Barnes v Addy.[86]
[86]No case was propounded that the knowing assistance comprised the failure by Mr Tomanek to take steps that he was capable of taking to prevent the breach of trust.

Harstedt having failed to establish that Mr Tomanek had assisted in Apollo’s dishonest and fraudulent design, the claim against Mr Tomanek must fail. The application for leave to appeal in respect of the second and third proposed grounds should be granted, but the appeal should be dismissed.

Fourth proposed ground of appeal

The fourth proposed ground of appeal concerns the trial judge’s refusal to award interest to Harstedt under s 58 of the Supreme Court Act 1986 on the sum of $250,000 that Apollo had misappropriated.

In the light of our conclusion that the appeal should be dismissed, Harstedt is not entitled to judgment against Mr Tomanek. Accordingly, the question of the measure of interest upon any such judgment does not arise. Moreover, the trial judge had no occasion to determine interest in respect of Harstedt’s claim against Mr Tomanek. As such, the fourth proposed ground is not properly a ground of appeal at all. The application for leave to appeal on the fourth proposed ground should be refused.

Conclusion

We would grant leave to appeal on each of the first three proposed grounds of appeal but refuse leave on the fourth proposed ground of appeal. We would dismiss the appeal.

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Harstedt Pty Ltd v Tomanek [2018] VSCA 84

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10 April 2018