LHK Nominees Pty Ltd v Kenworthy

[2003] HCATrans 426

[2003] HCATrans 426

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P123 of 2002

B e t w e e n -

LHK NOMINEES PTY LTD

Applicant

and

MAUREEN ADA KENWORTHY (AS ADMINISTRATRIX OF THE ESTATE OF LIONEL KENWORTHY)

Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON THURSDAY, 23 OCTOBER 2003, AT 3.43 PM

Copyright in the High Court of Australia

MR D.H. SOLOMON:   May it please your Honours, I appear with my learned friend, MR J.C. GILES, for the applicant.  (instructed by Solomon Brothers)

MR W.S. MARTIN, QC:   May it please your Honours, with my learned friend, MR N.J. TIMONEY, I appear on behalf of the respondent.  (instructed by Stables Scott)

GLEESON CJ:   Yes, Mr Solomon.

MR SOLOMON:   Your Honours, the principal issue here, where we say the Court should grant special leave, is the question of what is the fraud exception in the Torrens system Transfer of Land Act (WA) legislation to mean, in the context of breaches of trust?  In this matter, the facts are relatively simple.  There was a company trustee of a family trust.  The three sons of Mr Lionel Kenworthy, whose administratrix is the respondent, were the beneficiaries.  There was a company as trustee; the sons were directors.

GLEESON CJ:   Yes, but trustee of a family trust, and what was the asset?

MR SOLOMON:   The asset was a riverfront house.

GLEESON CJ:   The matrimonial home?

MR SOLOMON:   Yes, of Mr Lionel Kenworthy and his second wife.  The trust was established by the boys’ mother, who died in the 1970s, and it was established before she died, with the boys as the beneficiaries.  The widower remarried, it became his home, but the house was in the name of the trustee company.

GLEESON CJ:   How did that come about?

MR SOLOMON:   It had been put into the trustee company in the 1970s.

GLEESON CJ:   By whom?

MR SOLOMON:   I think, yes, it was with money sourced from the widow.  So she had established a trust with her money, the beneficiaries of which were her sons, but, as it then turned out, their father exercised considerable influence over the sons.  The sons gave uncontested evidence about how the trust operated.  One was cross‑examined, but not on this issue, and the other was not cross‑examined at all, and the third’s witness statement went in and he was not actually formally called.

GUMMOW J:   There seems to be all sorts of evidentiary curiosities and deficiencies at trial.

MR SOLOMON:   With respect, the evidence is clear, because there was no cross‑examination of the boys about this.  What happened, which is uncontested, is that their father said to them “This needs to be transferred, because I can save on rates”, brought them a transfer document to sign.  There was no contract ‑ ‑ ‑

GLEESON CJ:   The finding was that he honestly believed that.

MR SOLOMON:   That who honestly believed it?

GLEESON CJ:   The father.

MR SOLOMON:   Yes, but he was deceased.  He did not give any evidence.

GUMMOW J:   There was no finding of dishonesty against him, was there?

MR SOLOMON:   What there is, your Honour, is a finding that the transfer was for $150,000.  There was uncontested valuation evidence on our side that the property was worth more than double that.

GLEESON CJ:   The answer to Justice Gummow’s question appears at page 35, paragraph 75, does it not?

I am not satisfied that the plaintiff has succeeded in showing dishonesty on the part of Lionel Kenworthy.

MR SOLOMON:   That is true, and that is why the case is a suitable vehicle, because it is a question that – the only evidence was this.  He was deceased, he could not be called.  But what the transfer of land document showed – and this was uncontested –  was that because there was no contract by way of offer and acceptance, as things are done in this State, the stamp office had adjudicated on value and had it valued, and the transfer which shows the stamp office valuation showed that the stamp office had adjudicated it at $338,000.  Our valuer said it was worth $330,000 at the time.  The consideration on the transfer was $150,000.

So what the dissenting judge in the Full Court, Justice Wallwork, found was that he must have known that stamp duty was assessed at double the price that was paid.  That, as an objective fact – what else could we do in the circumstances where the man was deceased – was to show that objectively he had caused a property to be transferred to himself at a price of $150,000, had paid stamp duty which had been adjudicated by the stamp office at a value of $338,000.  We say that if dishonesty, within the meaning of the fraud exception with respect to breach of trust, is to be looked at objectively, those objective facts are sufficient in themselves to say, an honest person does not cause ‑ ‑ ‑

GUMMOW J:   We are not just talking about that.  We are talking about the Torrens system, are we not?  We are talking about registered title.

MR SOLOMON:   Indeed, we are talking both, your Honour, that is true.  We actually, in this case, have both Barnes v Addy limbs arising.  We have recipient liability and we also have accessorial liability.  Where does the Torrens system fit in with this?

Justices Anderson and Steytler, in their joint judgment, said, well, that is not enough to constitute fraud.  The minority in Macquarie Bank v Sixty‑Fourth Throne in Victoria, Justice Ashley, would say it was.  The majority in Tara Shire Council, decision in Queensland last year, would say it was.  But the majority in Macquarie Bank and the majority in this case would say it is not.  Then, one looks at this case and says, well, the other evidence that was given, which was accepted because there was no cross‑examination, was that the two sons who were the directors of the trustee company were told by their father “Do not worry, the trust will get this property back”.

Now, where we did not succeed with Justices Anderson and Steytler was that there was no proof that Lionel Kenworthy did not have an intention to cause the property to go back to the trust at some time when he transferred it.  My submission with respect to that is simply this.  Objectively, if the trust was to be protected in that way and it is known that it is being transferred at a significant undervalue, it was relevant involvement, accessorily, in a breach of trust, to allow the transfer to go through without the trust being protected ‑ ‑ ‑

GLEESON CJ:   Breach of trust by whom?  By your client?

MR SOLOMON:   The breach of trust was by the company trustee, which transfers the property at a significant undervalue.

GLEESON CJ:   That is your client?

MR SOLOMON:   My client.  Of course, there has never been a problem with a trustee pursuing a remedy with respect to a breach of trust, whether it is the same trustee or a replacement trustee, as against a person who has received the property.  So we have this assurance that is given that it will be protected, although nothing is done before the conveyance to protect the trust.

My question is this, your Honours.  How does one reconcile the Full Court’s decision, the majority here, with this Court’s decision in Bahr v Nicolay?  In Bahr v Nicolay, there was an assurance given by a purchaser that the purchaser would honour an option to purchase in favour of a third party, noted on an offer and acceptance, but that was all.  That was said to give rise, for differing reasons between Chief Justice Mason and Justice Dawson’s judgment, on the one hand, and the joint judgment of Justices Wilson and Toohey, and then the separate judgment of Justice Brennan – at the end of the day, the third party succeeded, because a trust was held to be established that bound the conscience of the purchaser and the purchaser was liable. 

So, in one sense, it was fraud, according to the Chief Justice and Justice Dawson.  It was not fraud, according to Justices Wilson and Toohey, but there was an in personam remedy, and Justice Brennan apparently held it was not fraud, although that is not clear.  He just dealt with it as a matter of trusts; one being an express trust, one being a constructive trust.

So, what is it about that case that succeeded, but this case that cannot succeed, that you have a transfer at a manifest undervalue – less than 50 per cent, evidence given that there was an assurance that the trust would get it back, but nothing was done to protect the trust ‑ ‑ ‑

GLEESON CJ:   If you accept for the moment that there is no evidence of dishonesty and, in particular, no evidence that the assurance was not given in good faith, what have you in this case except the bare fact of a transfer at an undervalue?

MR SOLOMON:   Only, I suppose, this, your Honour, that to give an assurance like that in good faith would require that one puts in place steps before the conveyance to protect the trust.  One cannot just give an assurance that “Well, you will get it back some time” and do nothing about it.  In a sense, to not do anything about it, to allow the conveyance to go through and thereby to have title in Mr Kenworthy personally – he caused the transfer to himself – to do that is inimical to the concept of good faith, is my respectful submission.  For him to have been involved in that way, if it were not for the Torrens system, he would plainly have received trust property and known of the breach of trust. 

My learned friend points out to me the majority in the Full Court held, because Justices Anderson and Steytler held, as well, agreed with Justice Wallwork, that he must have known it was at an undervalue.  So a majority of the Full Court held that in those circumstances it was $150,000, less than half of the value.  The stamp duty shows that it had been valued at that amount and he had paid stamp duty on it.  There was a majority that held he knew it was at an undervalue. 

So there is a transfer of trust property, in breach of trust, to a recipient who knows it has been transferred to him at an undervalue, in breach of trust.  He has also given an assurance that the trust will be protected and he does nothing to cause that to happen.

We say that, but for the Torrens system, of course, one could succeed against him.  So when one looks at the various pronouncements – I will not have time to read the cases, such as Stuart v Kingston, that I have mentioned.  It is an old case now, but it was a three‑judge coram, and it largely, in the end, turned upon the fact that the disposition, which was a breach of trust, had been approved by a judge in South Australia in the 1890s.  But, apart from that – that is how it seemed to turn for the Chief Justice, Sir Adrian Knox, and Justice Starke – Justice Higgins’ analysis, in terms of breach of trust, was to say this type of conduct ‑ transferring property, causing it to be transferred to oneself knowing it is at a great undervalue, is fraud, within the meaning of section 68. 

He said it again in very similar terms in Templeton v Leviathan, which was the case about whether the registrar could be compelled to register a transfer where it was apparent there was a breach of trust.  Then one has Justice Kitto’s judgment in Latec Investments v Hotel Terrigal, which a majority approved the passage in Figgins v SEAA and Corin v Patton.  Your Honours are well familiar with the words, it is not all species of equitable fraud that are excluded from the concept of fraud.

What we say about this case is where one has a transfer that a majority hold is at a known significant undervalue by a person who has exercised considerable influence over his sons, the directors, in causing it to happen, knows it is at an undervalue, assures them that the trust will be protected and does nothing for it – if that is not fraud within the exception, or if it is not an in personam claim which can be made despite the fraud exception, then the fraud exception has gone too far. 

What is more, the decision just cannot be reconciled with Bahr v Nicolay, and when one has Tara Shire Council v Garner, which I will not read from, reaching the opposite conclusion from this case by a majority in Queensland, with one dissentient, this case by a majority decided the other way in Macquarie Bank v Sixty‑Fourth Throne in Victoria, the Court, with respect, should deal with these issues.

In dealing with these issues, there are subsidiary points which are very live and appropriately dealt with in this case.  For instance, on the “knowing recipient” argument, there is a line of argument that knowing receipt should be dealt with purely as a receipt‑based liability – Lord Millett favours that view in Twinsectra – and then one would then look to defences to that type of a claim.  That argument would be very live on this appeal; that this has been trust property received, transferred at an undervalue.  Is that the element necessary for “knowing receipt”, as Lord Millett would have it, or is “knowing receipt” requiring knowledge of the breach of trust? 

If so, what level of knowledge?  One often hears spoken of the five categories of Re Baden knowledge, bearing in mind the majority finding that Mr Kenworthy knew that the property was being transferred at an undervalue.  Furthermore, what is the type of knowledge that is required for the second limb of “dishonest assistance”, as it is put in Royal Brunei v Tan?  Dishonestly procuring or assisting in a breach – what level of knowledge is required there?  All of those issues are the subject of considerable academic and judicial debate that would warrant this Court pronouncing on them and they arise – both “knowing receipt” and “dishonest procuring and assisting” – in this case.

Whether it is objective knowledge – the House of Lords split in the Twinsectra Case on whether the level of knowledge means that it is objectively wrong and subjectively known to be wrong.  There is a majority in the House of Lords that held that.  Lord Millet was against it; he said dishonesty is objective.  We say that it would be appropriate for this Court to determine that point because here this is the paradigm case for objective analysis.  One simply has the facts of what happened, uncontested by the two sons; it is simply a matter of inference, with respect, to their late father, because he was not alive to give evidence, and one could simply make findings from the transfer itself and from the objective fact. 

Is that objective knowledge sufficient, or did we have a requirement, as Lord Hutton and Lord Hoffmann held in Twinsectra, to show that he subjectively knew it was dishonest?  Now, quite what the Full Court decided about that split in the passage your Honours mentioned to me ‑ ‑ ‑

GUMMOW J:   Did we not decide a case of Bank of South Australia v Ferguson, or something like that, when Sir Gerard Brennan was Chief Justice?

MR SOLOMON:   Yes, your Honour. 

GUMMOW J:   I do not think that gives you much encouragement on the indefeasibility argument, does it?

MR SOLOMON:   What it did make clear, with respect, is this ‑ ‑ ‑

GUMMOW J:   Unlike Bahr v Nicolay, it is a joint judgment of five members of the Court, I think.

MR SOLOMON:   Yes, it is.  What it held, as I understand it, is that the fraud exception does not give rise to a cause of action.  The fraud exception, when established, opens the range of legal and equitable remedies ‑ that as long as you then have a cause of action known to law or equity, you can pursue it, if there is relevant fraud.  The fraud itself is not a statutory cause of action, it is a statutory gateway.  That was the real principle there.

GUMMOW J:   And what is the size of the gateway?

MR SOLOMON:   The size of the gateway is that, as Lord Nicholls put it in Royal Brunei, honest people do not do stuff like this.

GUMMOW J:   No, no, the size of the gateway in Ferguson, that we were talking about.

MR SOLOMON:   Very different facts from here, your Honour, and far more limited.  Far more limited knowledge was involved in Ferguson’s Case, but the principal issue, as I understood the decision, was to clarify, as the decision does, that the question of fraud as the exception opens the right to then pursue legal and equitable remedies as if the Torrens system did not apply.

GUMMOW J:   The question is, what do you mean by fraud?  That is the question, is it not?

MR SOLOMON:   Yes, and that is the issue that is now very uncertain with this decision and Tara’s Case, Macquarie Bank v Sixty‑Fourth Throne and Bahr v Nicolay – and add to that Ferguson, your Honour, that would be appropriate.

GUMMOW J:   I do not think Ferguson is uncertain at all.  It seems to have been given insufficient attention in some of these State cases after it.  Ferguson is talking about red‑blooded fraud.

MR SOLOMON:   This is red‑blooded.

GUMMOW J:   Well, there is no finding of red‑blooded fraud here.  That is the problem. 

MR SOLOMON:   There is a finding that he knew it was transferred to himself at a significant undervalue.  We say that has to be sufficient in

equity and sufficient for construing the fraud exception to amount to fraud.  That is consistent with Latec, it is consistent with Stuart v Kingston and earlier cases.  Otherwise the interplay, as it is discussed in Tara Shire Council, of equity and the statute ‑ ‑ ‑

GUMMOW J:   You want to turn indefeasibility into something like bona fide purchaser for value without notice.

MR SOLOMON:   No.

GUMMOW J:   That is not one of the objectives of the Torrens system.

MR SOLOMON:   No, no, I am not suggesting that at all.  We are saying this case goes a long way further than that, your Honour, and it is an appropriate vehicle to elucidate the obvious contentions amongst different State courts.  I think my time is up, your Honours.  As the Court pleases. 

GLEESON CJ:   Thank you.  We do not need to hear you, Mr Martin.

The decision of the Supreme Court of Western Australia in this matter, both at first instance and on appeal, turned on the particular and unusual facts and circumstances of the case.  The case is not a suitable vehicle for consideration of the wider issues of principle sought to be raised by the applicant.  In addition, we are not persuaded that the interests of justice require a grant of special leave to appeal.  The application is refused with costs.

We will adjourn until 9.15 tomorrow morning.

AT 4.04 PM THE MATTER WAS CONCLUDED