LHK Nominees Pty Ltd v Kenworthy

[2002] WASCA 291

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT  :   THE FULL COURT (WA)

CITATION:   L H K NOMINEES PTY LTD -v- MAUREEN ADA KENWORTHY (as Administratrix of the Estate of LIONEL KENWORTHY) & ANOR [2002] WASCA 291

CORAM:   WALLWORK J

MURRAY J
ANDERSON J
STEYTLER J
PULLIN J

HEARD:   4 JUNE 2002

DELIVERED          :   23 OCTOBER 2002

FILE NO/S:   FUL 133 of 2001

BETWEEN:   L H K NOMINEES PTY LTD

Appellant

AND

MAUREEN ADA KENWORTHY (as Administratrix of the Estate of LIONEL KENWORTHY)
First Respondent

MAUREEN ADA KENWORTHY
Second Respondent

Catchwords:

Equity - Equitable principles - Trust property transferred in breach of trust - Claim against recipient under both limbs of Barnes v Addy (1874) LR 9 CL App 244 - Whether claim defeated by indefeasibility provisions of Transfer of Land Act 1893 (WA) - Whether fraud for the purposes of s 68(1) and s 134 of Transfer of Land Act 1893 - Whether in personam right existed

Real property - Torrens system - Property transferred in breach of trust - Claim under both limbs of Barnes v Addy (1874) LR 9 CL App 244 - Whether claim defeated by indefeasibility provisions of Transfer of Land Act 1893 (WA) - Whether fraud for the purposes of s 68(1) and s 134 of Transfer of Land Act 1893 - Whether in personam right existed

Trusts - Misappropriation of trust funds by trustee - Whether proved by evidence

Evidence - "Books" - Corporations Act, s 1305(1) - Highlighting for purpose of identifying challenged entries in accounts of company - Whether highlighting is a "matter stated or recorded in the book" for the purposes of s 1305(1) - Weight to be given to highlighting as evidence of irregularity

Corporations - "Books" kept by a corporation - Corporations Act, s 1305(1) - Highlighting for purpose of identifying challenged entries in accounts of company - Whether highlighting is a "matter stated or recorded in the book" for the purposes of s 1305(1)

Legislation:

Administration Act 1903 (WA), s 8, s 9

Corporations Law, s 60(1)(b), s 9, s 1305(1)
Rules of the Supreme Court 1971 (WA), O 20 r 9
Supreme Court Act 1935 (WA), s 24(4)

Transfer of Land Act 1893 (WA), s 4, s 68(1), s 134, s 200

Result:

Appeal dismissed

Category:    A

Representation:

Counsel:

Appellant:     Mr D H Solomon & Mr J C Giles

First Respondent           :     Mr J C Curthoys

Second Respondent       :     Mr J C Curthoys

Solicitors:

Appellant:     Solomon Brothers

First Respondent           :     Stables Scott

Second Respondent       :     Stables Scott

Case(s) referred to in judgment(s):

Agip (Africa) Ltd v Jackson [1990] Ch 265

Assets Co Ltd v Mere Roihi [1905] AC 176

Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504

Bahr v Nicolay (No 2) (1988) 164 CLR 604

Barnes v Addy (1874) LR 9 Ch App 244

Barry v Heider (1914) 19 CLR 197

Bartlett v Barclays Bank Trust Company Ltd (No 2) [1980] Ch 515

Baumgartner v Baumgartner (1987) 164 CLR 137

Birtchnell v The Equity Trustees Executors and Agency Company Ltd (1929) 42 CLR 384

Blomley v Ryan (1956) 99 CLR 362

Breen v Williams (1996) 186 CLR 71

Breskvar v Wall (1971) 126 CLR 376

Bridgewater v Leahy (1998) 194 CLR 457

Brockway v Pando (2000) 22 WAR 405

Butler v Fairclough (1917) 23 CLR 78

Caratti v The Queen (2000) 22 WAR 527

Clay v Clay (2001) 202 CLR 410

Coles v Trecothick (1804) 9 Ves. Jun. 235; 32 ER 592

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373

Corozo Pty Ltd v Total Australia Ltd [1988] 2 Qd R 366

Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371

Doneley v Doneley [1998] 1 Qd R 602

Ex Parte Lacey (1802) 6 Ves. Jun. 625; 31 ER 1228

Foskett v McKeown [2001] 1 AC 102

Frazer v Walker [1967] 1 AC 569

Giumelli v Giumelli (1999) 196 CLR 101

Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198

Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; (1999) 151 FLR 191

Jones v Dunkel (1959) 101 CLR 298

Keith v R Gancia & Co Ltd [1904] 1 Ch 774

Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16

Laws Holdings Pty Ltd v Short (1972) 46 ALJR 563

Leros Pty Ltd v Terara Pty Ltd (1992) 174 CLR 407

LHK Nominees Pty Ltd v Kenworthy [2001] WASC 205

Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491

Macquarie Bank Ltd v Sixty‑Fourth Throne Pty Ltd [1998] 3 VR 133

Maguire v Makaronis (1997) 188 CLR 449

Mayer v Coe [1968] 2 NSWR 747

McKenzie v McDonald [1927] VLR 134

McPherson v Watt [1877] 3 AC 254

Muschinski v Dodds (1985) 160 CLR 583

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170

New Zealand Netherlands Society (Oranje) Inc v Kuys [1973] 1 WLR 1126

Pyramid Building Society (In liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188

Ravinder Rohini Pty Ltd v Krizaic (1991) 30 FCR 300

Re Coomber [1911] 1 Ch 723

Re Montagu's Settlement Trusts [1987] 2 WLR 1192

Re Robinson's Settlement; Gant v Hobbs [1912] 1 Ch 717

Re Vassis; Ex parte Leung (1986) 9 FCR 518

Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378

Sargent v ASL Developments Ltd (1974) 131 CLR 634

SGIC v Sharpe & Sharpe (1996) 126 FLR 341

Sistrom v Urh (1992) 40 FCR 550

Tara Shire Council v Garner [2002] QCA 232

Tate v Williamson (1866) LR 2 Ch App 55

Twinsectra Ltd v Yardley [2002] 2 WLR 802

Valoutin Pty Ltd v Furst (1998) 154 ALR 119

Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1926] AC 101

White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169

Wicks v Bennett (1921) 30 CLR 80

Williams v Scott [1900] AC 499

Yew v Port Swettenham Rubber Company Ltd [1913] AC 491

Young v Murphy [1996] 1 VR 279

Case(s) also cited:

Aequitas Ltd v Sparad No 100 Ltd (2001) 19 ACLC 1006

Allen v Rochdale Borough Council [2000] Ch 221

Austin v Austin (1906) 3 CLR 516

Baden Delvaux & Lecuit v Societe Generale Pour Favoriser le Development du Commerce [1993] 1 WLR 509

Bailey v Federal Commissioner of Taxation (1977) 136 CLR 214

Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566

Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1

Biala Pty Ltd v Mallina Holdings Ltd (No 4) (1993) 13 WAR 83

Black v S Freedman & Co (1910) 12 CLR 105

Bride v Australian Bank Ltd [2000] WASC 116

Brown v Heffer (1967) 116 CLR 344

Browne v Dunn (1893) 6 R 67

Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187

Clay v Clay (1999) 20 WAR 427

Collings v Lee [2001] All ER 332

Commonwealth Bank of Australia v Smith (1991) 42 FCR 390

Conlan v Registrar of Titles (2000) 24 WAR 299

Cowan de Groot Properties Ltd v Eagle Trust plc [1992] 4 All ER 700

Dare v Pulham (1982) 148 CLR 658

Dempster & Biala Ltd v Mallina Holdings Ltd (1994) 13 WAR 124

Duke Group Ltd (In Liq) v Pilmer (1994) 63 SASR 364

Eromanga Hydrocarbons NL v Australis Mining NL (1988) 13 ACLR 804

Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672

Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 87 FCR 134

Fouche v Superannuation Fund Board (1952) 88 CLR 609

Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liq) (1965) 113 CLR 265

Lonrho plc v Fayed (No 2) [1992] 1 WLR 1

Lord v Spinelly (1991) 4 WAR 158

Luby v Newcastle-Under-Lyme Corp [1965] 1 QB 214

MacMillan Inc v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 387

Manning v Cory [1974] WAR 60

Mansard Developments Pty Ltd v Tilley Consultants Pty Ltd [1982] WAR 161

Newton v Gapes (1910) 12 WALR 86

Ninety Five Pty Ltd (In Liq) v Banque Nationale de Paris [1988] WAR 132

Queensland Mines Ltd v Hudson (1978) 52 ALJR 399

R v Connell (1995) 14 ACLC 32

Re Abrahams Will Trusts [1969] 1 Ch 463

Re HIH Insurance Ltd (2002) 41 ACSR 72

Re Vandervell's Trusts (No 2) [1974] Ch 269

Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246

Soar v Ashwell [1893] 2 QB 390

Speight v Gaunt (1883) 9 App Cas 1

Taylor v Davies [1920] AC 636

West Sussex Properties Ltd v Chichester District Council [2000] EWCA Civ 2005 (unreported 28 June 2000)

Westdeutsche Bank v Islington London Borough Council [1996] AC 669

Wickham Developments Ltd v Parker BC 9505952 (Unreported Queensland Court of Appeal, 20 June 1995)

Zobory v Commissioner of Taxation (1995) 64 FCR 86

1. WALLWORK J:  This is an appeal from a decision of a Judge of the Supreme Court dismissing a claim by the appellant (plaintiff) against the respondents arising from alleged breaches of trust in connection with the sale of a home in Mount Pleasant in May 1990 by the plaintiff to Mr Lionel Kenworthy (the deceased) and from an alleged misapplication of the plaintiff's moneys by the deceased.

Background

1. The plaintiff company was at all relevant times the trustee for the Lionel Housden Kenworthy Trust constituted by a Trust Deed dated 3 October 1975.  The first defendant, Mrs Kenworthy, was sued in her capacity as administratrix of the estate of the deceased who died on 14 February 1997.  Mrs Kenworthy was also sued in her personal capacity concerning an alleged misapplication of trust money arising from the cashing of a cheque for $7000 drawn on the trustee company's bank account.  It was alleged that Mrs Kenworthy had used the proceeds from the cheque for her own benefit knowing that the trust was not indebted to her.

2. At the trial written statements from the deceased's three sons were admitted into evidence.

3. In his statement, Mr Lindsay Kenworthy said he became a director of the plaintiff on 12 November 1980 because the deceased (his father) asked him to do so.  He said that until the deceased's death, the deceased had had day to day control of the plaintiff company.  Mr Lindsay Kenworthy said that he did not have any day to day involvement.  His role as a director of the plaintiff was to sign documents when asked to do so.  He said the deceased was able to sign cheques on the plaintiff's bank account and had sole control of the plaintiff's finances.  Board meetings were not held to discuss any of the investments which were made by the plaintiff.

4. Mr Lindsay Kenworthy said that from about 1984 the plaintiff's sole function had been as trustee of the LHK Trust.  It did not carry on any separate business.  Its main investments were in mortgages brokered by Blackburne & Dixon and Global Finance.  There was also a subdivision of some land at Muchea.  He said the plaintiff owned the home at 141 The Esplanade, Mount Pleasant the sale of which was a subject of the action.

5. Mr Lindsay Kenworthy said that when a new investment was to be made by the plaintiff which required his signature, he had usually received a telephone call from the deceased who would later hand him the relevant document for signature.  He generally asked the deceased what the document was for.  He made a practice of briefly looking at the document without reading the whole of it.  He would look at the amount of the investment and the property description but read nothing further.  He therefore had some knowledge of the sums being invested by the plaintiff.  He had never rejected a proposal or transaction his father had brought to him.  He had never spoken to anyone at Blackburne & Dixon or Global Finance while his father was alive.  He said he had trusted his father and accepted what he said.  He had not investigated any of the investments on their merits and had done nothing more than quickly look at documents and sign where his father "told me to".  He said he did not recall ever questioning his father about any of the investments made by the plaintiff.

6. With respect to the subdivision of the property at Muchea he said his father had told him that the plaintiff was subdividing the property into six lots.  That was the first time he had been told anything about the subdivision.  His father had told him that the property had already been surveyed and that he only needed some documents signed to complete the subdivision.  His father had handed him a document or some documents and asked him to sign them.  He had then signed them.  He said he had had no input into, and had not been consulted in relation to, the decision to subdivide the property at Muchea.  At one time he had asked his father why the property had been subdivided.  He had been told that the plaintiff had run out of money.  His father had told him that the plaintiff needed the money because interest rates were lower and the plaintiff was not earning the income it had been earning from its investments.  His father had also said that the plaintiff had lost $30,000 on a deal.  He did not know which deal his father had been referring to.  He had not been told what had happened or how the loss had been incurred.  He said his father had not consulted him about the prices at which the subdivided lots were sold and he had not spoken to a real estate agent in relation to those lots.  He recalled signing documents in connection with at least some of the lots.  On each occasion his father had given him a document and told him to sign that document.  He had done so and not questioned the price.  He had told his father that the top three lots should be sold first because he knew they had better grazing potential.

7. With respect to the sale to the deceased of the relevant home at Mount Pleasant, Mr Lindsay Kenworthy said that the plaintiff had owned that home in trust.  The transfer to his father had happened without prior warning to him.  His father had handed him a transfer form for the property and had told him that the document was a transfer form for it.  His father had told him that the transfer was necessary because the plaintiff could not afford the rates on the property any longer and that if it was transferred into his father's name, his father, as a pensioner, would get a 50 per cent reduction in the rates.  His father had said that "the outcome would be the same."  Mr Lindsay Kenworthy said it had been his understanding that the property would ultimately be transferred back to the trust.  He had not discussed the sale price with his father.  He had taken no other advice in relation to the transfer.  He had just signed it.  At the time he did not know whether the price was paid by his father, as his father controlled the plaintiff's finances.  He said his father had not told him that the property was being transferred to him at less than the market value.  He had said nothing about the price and Mr Lindsay Kenworthy had not enquired.

8. Mr Dennis Kenworthy said he also was a director of the plaintiff.  He had been born on 9 March 1962 and was appointed a director of the plaintiff on the 4 December 1987.  He said he became a director of the plaintiff because his father "told me to."  He said:

   "I recall being told by my father shortly before I became a director of the plaintiff that I had to be a director of the plaintiff because my father could not be a director.  He said he could not be a director because of his pension."

9. Mr Dennis Kenworthy said his mother had died in 1979 and a substantial portion of the plaintiff's assets had been given to the trust by his mother.  His father had made it clear to him that he (Dennis) was doing the family duty in looking after his father.  He had just accepted that being a director of the plaintiff was his role in the family.  He had accepted that, as a director of the plaintiff, he would do as his father told him.  Whilst a director of the plaintiff, until his father's death, he had had no day to day involvement in the plaintiff.  His only involvement had been to sign documents which his father had asked him to sign.  No directors' meetings had been held to consider or approve the plaintiff's actions.

10. Mr Dennis Kenworthy said he had not questioned his father's decisions or directions.  He had been raised by his mother and father not to question his father's decisions.  It had been impressed on him by his parents that his father would act in the best interests of the family.  He had trusted his father to make the right decisions for the benefit of the family.

11. He said that in 1984 his father had ceased carrying on business and had retired and commenced to receive a pension.  Until then he had operated a business as a builder.  From his father's retirement in 1984 the plaintiff had solely acted as the trustee of the trust.  In or around 1984 all trading operations of the plaintiff had ceased.  That was when the back half of the block at 141 The Esplanade, Mount Pleasant had been sold.  His father had told him that the reason the back half of the block had to be sold was for a cash flow, as the plaintiff was no longer earning an income from the businesses it had operated.  His father had said that the rates on the lot would be greater over time than the increase in the land value.

12. Mr Dennis Kenworthy said that at all times when he was a director of the plaintiff, his father had been the major shareholder.  Throughout the time he was a director of the plaintiff whilst his father was alive, he had acted in accord with his father's instructions.  He had always done so.  There had never been any negotiations between his father and himself.  His father had always told him "that what he wanted me to do (which I invariably did) was in our (meaning Lindsay, Trevor and my) best interests."  Mr Dennis Kenworthy said that when his father wanted him to do something as a director, for example to sign various documents, "he would say that it was in our (which I understood to mean Lindsay, Trevor and my) best interests to do whatever it was that he was proposing."

13. He said that whilst he was a director of the plaintiff and until his father's death, his father had control of the plaintiff's finances.  During that time various investments had been made by the plaintiff.  They had included a property investment (land at Muchea) and loans made initially through Blackburne & Dixon and later through Global Finance.  He said that his father's invariable practice in relation to the loans made by the plaintiff through Blackburne & Dixon and Global Finance was that his father would give him a letter from Blackburne & Dixon or Global Finance.  The letter would contain a description of the borrower, the land and the money being lent.  He said that when his father had given him documents from the two firms concerned, he had generally looked at them briefly and read through them to look for any glaring mistakes.  When he did this his father would invariably tell him that the investment was a good investment or the best investment available.  He had never made any investigations of his own and had never spoken to anyone from Blackburne & Dixon or Global Finance about loans made by the plaintiff.  His only input had been to briefly read through the documents and then sign the documents where his father indicated he should sign.  He had not rejected any of the proposals brought to him by his father.

14. With respect to the property at Muchea, he said he had had no input into the decision to subdivide the land.  He recalled the sales of two or three of the lots.  He recalled signing either or both, the offer and acceptance or transfer forms.  He recalled that probably on each occasion his father had told him that the sale was the best that could be done.  In each case he briefly read through the document to look for glaring errors.  He had not rejected a proposed sale of any of the lots or conducted any investigations of his own or spoken to the real estate agent about the sales.

15. With respect to the property at 141 The Esplanade, he recalled being told by his father that the cost of rates on the back lot was greater than the growth of the property value.  His father had told him that the back lot should be sold.  His father had said it was an issue of cash flow.  He had no knowledge of a restrictive covenant being created at the time of the sale.

16. With respect to the sale of the home on the front of the block at 141 The Esplanade, he said that the plaintiff had owned that home in its capacity as trustee of the plaintiff.  He recalled his father bringing him a transfer form.  His father had told him that the reason for transferring the home into his (his father's) name was "to save on rates" or words to that effect.  His father had said that the rates charged on 141 The Esplanade would be halved if he owned the property because he was a pensioner.  His father had said that the property "would come back to us" and that "there was nothing to worry about", or words to that effect.  He said that as he always did, he had followed his father's direction.  He had quickly looked through the transfer document and signed the transfer.  He had not considered the value of the property at the time or whether the transfer was at market price.  His father had not told him that the sale was far less than the market value.

1. The statement from the deceased's third son, Mr Trevor Kenworthy, was admitted into evidence by consent.  He was not cross‑examined and the contents of this statement are referred to later in these reasons.

2. The trust deed was also admitted into evidence.  Clause 11 of the trust deed provided that:

   "11.Subject always to any express provisions to the contrary herein contained every discretion vested in the Trustees shall be absolute and uncontrolled and every power vested in them shall be exercisable at their absolute and uncontrolled discretion PROVIDED THAT notwithstanding anything contained in this Deed:

   (a)the Trustees may before exercising any discretion or power vested in them or making any determination hereunder consult the wishes of the Guardian (if any),

   (b)Where a Guardian is named in the schedule:

   (i)The Trustees shall not make a nomination or declaration of the exclusion pursuant to Clause 1(b) hereof nor exercise any power contained in clauses 7(a), 7(b), 7(c), 8(v), 8(y) and 19 hereof except with the consent of the Guardian.

   …"

3. The deceased was also the appointor and as such was able under cl 16 to remove any trustee and appoint a new trustee.  Clause 16 provided that:

   "16(a)The Appointor and on the death of the last surviving Appointor such other person as he shall have appointed to act as Appointor and in default of appointment his legal personal representative shall be entitled by instrument in writing at any time and from time to time:

   (i)to remove any Trustee hereof.

   (ii)to appoint any additional Trustee or Trustees.

   …"

4. It seems that the deceased could sign any cheques for the trustee company.  As Anderson and Steytler JJ point out the deceased received from the bank all the statements of the trust's accounts at the bank.  The deceased knew that the trustee company did not trade and existed only as trustee for the family trust.  There is no dispute that he knew which bank accounts contained trust funds, and that he controlled the financial and property affairs of the trust and trustee company.

5. It was not disputed that the deceased purchased the trustee company's property at a gross undervalue.  His reason was that a saving in rates could be achieved because he could use his status as a pensioner to obtain a discount.  The deceased promised to transfer the land back to the trustee.

Judgment at trial

1. In his reasons for judgment the learned trial Judge said that at the time the transfer of the Mount Pleasant home to the deceased was signed, the deceased had not been a director of the plaintiff.  The evidence showed that the directors of the plaintiff had been content to leave the administration of the plaintiff to the deceased, subject to discussion and their agreement to his proposals.  His Honour said he did not think the evidence of the directors went so far as to establish that they had been accustomed to act in accord with the deceased's directions or instructions, but only that they were accustomed to accept the deceased's advice as to the best interests of the plaintiff.  Importantly, his Honour said:  "Nor is there any evidence that that advice was not in the best interests of the plaintiff."

2. That last comment will be discussed later in these reasons.

3. His Honour said that there had been no cross‑examination of either Dennis Kenworthy or his brother Trevor; also that Mrs Kenworthy had elected not to give evidence, save for a document tendered by consent.

4. His Honour found that Mr Lindsay Kenworthy had had no day to day involvement with affairs of the trust until 1997 despite being a director of the plaintiff; further that his evidence had indicated that he was at all relevant times content to leave the management of the plaintiff's affairs to the deceased.  His Honour said he did not think that Mr Lindsay Kenworthy's evidence showed that the deceased had acted as a director of the plaintiff at the material times; that the deceased seemed to have consulted regularly with Mr Lindsay Kenworthy about the affairs of the plaintiff, answering any questions put to him, and discussing the nature and need for the various documents which were signed by Mr Lindsay Kenworthy from time to time.

5. His Honour said that Mr Dennis Kenworthy had been content to leave the management and day to day activities of the plaintiff entirely to the deceased.  Also, that whilst a director of the plaintiff, and until the deceased's death, Mr Dennis Kenworthy had had no day to day involvement in the plaintiff.  His only involvement had been to sign the documents his father asked him to sign.  He had not questioned his father's decisions or directions.  His Honour said that Mr Dennis Kenworthy had said that until his death, his father had had control of the plaintiff's finances.

6. With respect to the deceased's third son, Mr Trevor Kenworthy, his Honour said that his statement had been admitted into evidence by consent.  He had not been cross‑examined on it.  In that statement, Mr Trevor Kenworthy had said that he had been not aware of and had not consented to the transfer of the home to the deceased for $150,000.  He had been unaware of the transfer and did not know the price of it.  He had learnt about the transfer when the deceased had told him of it approximately a year after it had happened.  He had thought there was nothing he could do about it and so he had accepted it.  At that time the deceased and he had had a strained relationship.

7. Mr Trevor Kenworthy said that during his time as a director he had done as instructed by his father and had not questioned him - "I just did as I was told."  He said that until he heard of the transfer he had trusted that his father had been doing the right thing by himself and his brothers.

8. The learned Judge referred to a valuation of the home by an expert, Mr Christie, which had been tendered into evidence by consent.  That valuation had indicated that the value of the property at the date of the transfer was $330,000.  His Honour said:

   "That valuation seems irrelevant on the pleadings as the plaintiff does not seek to rely upon the objective true value of the property at the date of the transfer but rests solely upon the valuation by the Valuer General."

9. With respect, I do not think that comment is correct.  The plaintiff had pleaded that the consideration of $150,000 for the transfer of the property was grossly inadequate.  Although in the particulars it is said that the value of the property at the time of the transfer was assessed by the Valuer General at $338,125, resulting in payment of stamp duty on the transfer of $10,300, in my view, that does not do away with the significance of the evidence of Mr Christie which was admitted by consent.  His evidence was relevant to the question of whether the purchase price of $150,000 was grossly inadequate.

10. It was pleaded in the statement of claim that the deceased knew that the consideration was grossly inadequate and did not inform the directors of the plaintiff of that fact.  It was also pleaded that due to the grossly inadequate price, the property was transferred to the deceased in breach of trust and that the deceased was thereby unjustly enriched.  Alternatively, it was pleaded that the deceased dishonestly procured, further or alternatively assisted in a breach of trust by the plaintiff in transferring the property to him at a substantial undervalue and that further or alternatively, the deceased knowingly received property of the trust which was transferred to him in breach of trust.

11. The learned Judge said:

    "Nor does the plaintiff plead that there was a failure on the part of the plaintiff to make all necessary enquiries as to the appropriate value of the property before executing the transfer.  While, therefore, it would probably be reasonable to infer from Mr Christie's valuation that there had been such a failure on the part of the plaintiff, there is no pleading of such failure to which that valuation would be relevant."

12. In my view the pleading that the deceased had knowingly received property of the trust which was transferred to him in breach of trust and had dishonestly assisted in a breach of trust by the plaintiff in transferring the property to him at a substantial undervalue were pleadings to which the valuation was relevant.  Also, in my view, Mr Christie's valuation was very relevant to the facts of the case.

Relevant Law

1. In Professor Finn's "Fiduciary Obligations" (1976) it is stated at 169:

   "Equity has long recognised that where a person has acted for another in some way in the management or disposition of that other's property - in a position of 'a confidential character' - he is in a somewhat privileged situation if he contracts to purchase property dealt with in that position.  His engagement has afforded him the opportunity to acquire a knowledge of the property - a knowledge which may permit him to purchase on favourable terms.  He does not, however come to the purchase as a stranger.  He is not 'perfectly independent' of his vendor.  And equity will not regard the contract as one between independent parties.  The confidential position held by the purchaser greatly limits his contractual freedom.  Thus treated for example, are purchases by agents, trustees or solicitors of property dealt with in the agency, trust or retainer.  While such purchases are not totally prohibited - and this, on occasion, has been a cause for judicial regret - they are transactions 'of great delicacy… which the Court will watch with the utmost diligence.'"

2. At 170 Professor Finn says:

   "Whenever a person (F) is acting or has acted in a confidential position for another (B) in relation to specific property, any purchase by (F) of that property for himself or for another is voidable at the suit of (B) unless (F) can show that (B) was aware of and consented to (F)'s dealing, and can prove that the transaction was fair, ie:

   (1)That full value was given for the property; and

   (2)That he disclosed to (B) any and all the information which he has acquired concerning the value of the property, and concerning the contract itself."

3. In my view, the question of the onus of establishing that "the transaction was fair" is of great importance in this appeal.

4. At 171 Professor Finn says:

   "The genus is the relationship of service, that is, a relationship where (S) undertakes for (B)'s benefit to provide some service in relation to (B)'s property or financial affairs, or to property which in law must be dealt with for (B)'s benefit.  The particular species of service relationship which the courts will hold to be confidential are those where (S) is being relied upon not only to act competently in discharging his service, but also to protect and/or to advance (B)'s interests."

5. The Professor continued:

   "The idea of rendering a service for another in relation to his property or financial affairs permeates the cases on confidential position: (S) is acting as 'a servant' for (B); has 'undertaken to act for (B)'; has been 'employed' to sell, or to manage, or to advise; has bound himself to apply his skill and knowledge for (B)'s benefit."

6. At 184 Professor Finn says:

   "all that equity requires of a purchaser occupying a confidential position is that he obtain the fully informed consent of those for whose benefit he acts, to his purchase."

7. Professor Finn says:

   "If a fiduciary is to maintain his purchase he must be able to show that his beneficiary was aware of and consented to the purchase, and that the transaction was fair, ie, that full value was given for the property after a full disclosure was made to the beneficiary.  The fiduciary carries the onus throughout of justifying the transaction.  He does not discharge that onus by showing simply that the beneficiary was aware that he was the purchaser."

8. Professor Finn refers to Williams v Scott [1900] AC 499 at 508:

   "The burthen of proof that the transaction was a righteous one rests upon the trustee, who is bound to produce clear affirmative proof that the parties were at arms length; that the cestui que trusts had the fullest information upon all material facts; and that, having this information, they agreed to and adopted what was done."

9. At 185 the Professor says:

   "So long as the beneficiaries consent to a purchase of trust property at its full value after full information given, the purchase will be unimpeachable either because the beneficiaries will be regarded as the 'de facto' vendors, or because they will have acquiesced in the sale."

10. The Professor continues:

    "To maintain his purchase, the fiduciary must be able to show that the transaction was a fair one.  Ordinarily this will necessitate his proving (1) that he gave full value for the property, and (2) that he has disclosed to his beneficiary any and all the information he has acquired concerning the value of the property, and concerning the contract itself.  While these two requirements may be logically distinct, in practice they almost invariably telescope into each other."

11. In McKenzie v McDonald [1927] VLR 134 at 144 Dixon AJ (as he then was) referred to the words of Fletcher‑Moulton LJ in Re Coomber [1911] 1 Ch 723 at 728 ‑ 729 where it was said:

    "The nature of the fiduciary relation must be such that it justifies the interference.  There is no class of case in which one ought more carefully to bear in mind the facts of the case, when one reads the judgment of the Court on those facts, than cases which relate to fiduciary and confidential relations and the action of the court with regard to them."

12. Dixon AJ said at 145:

    "Did the defendant occupy such a position of confidence towards the plaintiff as to bring him within the equitable requirements of full disclosure and fair and open dealing?  In my opinion he did.  He assumed the function of advising and assisting a woman in a difficult situation in the acquisition of a residence by means of the disposal or pledging of her property."

13. His Honour said:

    "He proceeded to advise her upon the wisdom and practicality of raising money by mortgage, and acted for her in an effort to do so.  He undertook the sale of her farm, and acquired such information as he could in relation to it, and offered his counsel as to its condition and the price she had asked and in effect should ask.  In this circumstance he was, in my opinion, an agent who came within 'the rule of the Court; which, however, does not prevent an agent from purchasing from his principal, but only requires that he shall deal with him at arm's length, and after full disclosure of all that he knows with respect to the property'… ."

14. At 145 Dixon AJ said:

    "This is part of 'that great rule of the Court, that he who bargains in matter of advantage with a person placing confidence in him is bound to show that a reasonable use has been made of that confidence; a rule applying to trustees, attorneys, or anyone else': per Lord Eldon Gibson v Jeyes [1801] 6 Ves.J. 266 at 278; 31 ER 1044 at 1050."

15. It was pleaded in the statement of claim that the deceased did not inform the appointed directors of the plaintiff that he had purchased the property at a grossly inadequate price.  It was also pleaded that the property was transferred to the deceased in breach of trust and he was thereby unjustly enriched.  There are also the other alleged breaches of trust referred to in par 9 of the statement of claim.

16. His Honour found that he was prepared to assume that the deceased had actual knowledge of the Valuer General's assessment.  The transfer had been signed and sealed on 27 May 1990 and registered on 5 October 1990 after having been referred to the Valuer General for assessment of stamp duty.

17. His Honour found that the evidence of Mr Lindsay Kenworthy and Mr Dennis Kenworthy established that prior to the execution and stamping of the transfer the deceased had told them of the proposal to transfer the property to himself for $150,000.  Knowing that, they had executed the transfer.

18. The learned Judge said:

    "The conclusion that the plaintiff agreed therefore, at least, orally to transfer the property to Lionel Kenworthy for the consideration stated is, I think, inescapable."

19. His Honour found that the evidence disclosed the existence of a prior oral agreement between the plaintiff and the deceased for the sale of the property at a consideration of $150,000 and that the transfer executed by the plaintiff clearly evidenced that the contract and had been duly stamped.  His Honour noted that the plaintiff had full authority under cl 19 of the Trust Deed, in its absolute discretion, to sell, transfer, hire, lease or dispose of any real or personal property of the trust fund and that therefore, subject to a right of rescission, the transfer was effective to convey the legal and beneficial ownership in the property to the deceased.

20. His Honour noted that the plaintiff had not sought to exercise any equity to rescind the contract and had in fact denied the existence of any contract for the sale of the property.

21. His Honour said:

    "It is true that plaintiff's counsel submitted that, 'If … the Court considers it cannot grant any equitable relief other than rescission without first decreeing rescission, it should do so.' "

22. His Honour found that:

    "The plaintiff's claim to recover the purchase price (albeit alleged - but not so pleaded - to be a part of moneys allegedly misappropriated by Lionel Kenworthy) is inconsistent with a claim for rescission.  (So, for what that is worth, is the alternative claim to a charge over the property).  Mr Solomon informed me that the plaintiff would acquiesce in a reduction of the amount claimed as having been misappropriated by the sum of $150,000.  In my opinion, the pleadings in this matter (which have not relevantly been amended) are inconsistent with that approach.  The plaintiff is bound by its pleadings."

23. In Ravinder Rohini Pty Ltd v Krizaic (1991) 30 FCR 300 at 314, 315 Wilcox J said:

    "However, I do not think that it follows that the respondent is precluded from resisting the appeal by reference to a case of breach of fiduciary duty.  The purpose of pleadings is to disclose the facts upon which a party relies.  If a pleading discloses facts, proved at the trial, which entitle a party to succeed, it does not matter that the pleader did not realise that those facts disclosed a cause of action or defence other than the one to which they were directed.

    …

    In Swinfen v Lord Chemsford (supra) the new case was raised at the trial, although belatedly.  Other considerations intrude where a case is raised for the first time on appeal.  Sometimes it may be unfair to allow a new case to be raised at that stage; evidence might have been directed to the question.  This point was made by Lord Watson in delivering the advice of the Judicial Committee of the Privy Council in Connecticut Fire Insurance Co v Kavanagh [1892] AC 473. The Judicial Committee specifically accepted the accuracy of the rule applied in Swinfen v Lord Chelmsford 'to the effect that, when a declaration discloses a certain state of facts, the plaintiff may recover upon the liability which the facts disclose'.  But Lord Watson added (at 480):

    'When a question of law is raised for the first time in a court of last resort, upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is not only competent but expedient, in the interests of justice, to entertain the plea.  The expediency of adopting that course may be doubted, when the plea cannot be disposed of without deciding nice questions of fact, in considering which the court of ultimate review is placed in a much less advantageous position than the courts below.  But their Lordships have no hesitation in holding that the course ought not, in any case, to be followed, unless the court is satisfied that the evidence upon which they are asked to decide establishes beyond doubt that the facts, if fully investigated, would have supported the new plea.'

    This approach has been applied in Australia: see Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; Green v Sommerville (1979) 141 CLR 594 and Wayde v New South Wales Rugby League Ltd (1985) 59 ALJR 798."

1. SGIC v Sharpe & Sharpe (1996) 126 FLR 341 was a decision concerned with an insurance claim for flood damage. At 344 Millhouse J said:

   "Pleadings in an action are to define the issues between the parties.  Sometimes - perhaps this is one of those times - the pleadings may not do so at all or only imperfectly.  As a rule, though, depending on the course of the hearing, that may not matter because the issues become quite plain as the hearing proceeds and no party is put to a disadvantage.  That, I think, was so here.  The day has well passed when decisions are based on the state of the pleadings, irrespective of the facts or justice."

2. Similar to Sharpe (supra) is the approach taken in Laws Holdings Pty Ltd v Short (1972) 46 ALJR 563. Estoppel was not pleaded but caused the result of the trial. The result was upheld in the Queensland Full Court and in the High Court. The facts were that the plaintiffs performed contract joinery work for the defendant building company. After a time the defendant's building works were taken over by a company associated with the defendant. The plaintiffs were not aware of this and continued to invoice the defendant, there being no change in the way in which the plaintiffs continued to be engaged. The defendant accepted the plaintiff's invoices and knew they were being sent by mistake. The company associated with the defendants became insolvent.

3. The trial Judge raised estoppel during the final address of the defendant's counsel.  No objection was made that estoppel was not pleaded, nor was a request made to obtain evidence to address the issue.  The plaintiffs did not ask to amend the pleadings.

4. In the High Court Menzies J said at 566:

   "It is clear I think that the learned Judge who heard this action in the Supreme Court of Queensland was left in the unenviable position of having to decide a case in which the parties had not really come to grips.  The claim was the value of work done and goods supplied over a period.  Indebtedness was denied upon the pleadings and the onus of proving it lay on the plaintiffs.  The plaintiffs' real case, however, as his Honour discovered, was that although the evidence did not show the defendant had actually ordered the goods and work … the circumstances were such that it should not be permitted to deny its liability…"

5. At 567 his Honour said:

   "I also agree that, having regard to the course of proceedings at the trial, the state of the pleadings did not preclude the learned trial Judge from doing justice by giving effect to his aforesaid conclusions about the course of dealing between the parties."

6. At 567 Walsh J said:

   "The appellant sought to rely … upon the fact that the respondents did not raise by their pleadings any question of estoppel.  In the Full Court Matthews J was of the opinion that the course of the trial might well have been different if estoppel had been pleaded and he considered that judgment for the respondents ought not to stand.  He added that he had been concerned as to the proper course to be adopted in those circumstances, but had no need to resolve that question, because the other members of the Court were of opinion that the appeal should be dismissed.  If it be supposed that the Full Court had decided that, because estoppel was not pleaded, the appellant had been deprived of opportunities which otherwise it would have had to deal with the question of estoppel by calling further evidence or in some other way, but had decided that all the other grounds of appeal failed, I think it would not have been right in those circumstances for the Full Court to order that judgment in the action be entered for the appellant.  Ordinarily the remedy which would have been appropriate for that Court to give in consequence of such a defect in the trial would have been to order a new trial of the action.  But the appellant did not include in its notice of appeal to the Full Court any application for the grant of a new trial and that application has not been included in its notice of appeal to this Court.  During the hearing of the appeal learned counsel for the appellant stated he did not contend that there should be a new trial.

   Therefore … the appellant ought not now be allowed to complain of the defect in the pleadings … in any event, it would not be right to grant to the appellant in respect of that defect the only remedy which it has sought, namely, a final determination of the action in its favour."

7. Gibbs J, with whom Stephen J agreed, pointed out at 571 that while the rules indicated that estoppel should be pleaded they did not state a consequence for non‑compliance - his Honour referred to the words of Buckley LJ in Re Robinson's Settlement; Gant v Hobbs [1912] 1 Ch 717 at 728 where His Lordship said:

   "The effect of the rule is, I think, for reasons of practice and justice and convenience to require the party to tell his opponent what he is coming to the Court to prove.  If he does not do that the court will deal with it in one of two ways.  It may say that it is not open to him, that he has not raised it and will not be allowed to rely on it; or it may give him leave to amend by raising it, and protect the other party if necessary by letting the case stand over.  The rule is not one that excludes from the consideration of the Court the relevant subject matter for decision simply on the ground that it is not pleaded.  It leaves the party in mercy and the Court will deal with him as is just."

8. His Honour went on to approve of a situation where if it is plain that all parties come into Court prepared to try the question of estoppel "it was not necessary to be troubled about the exact form of the pleadings".  In that respect he thought 'all necessary amendments must be treated as being made": Keith v R Gancia & Co Ltd [1904] 1 Ch 774.

9. Blomley v Ryan (1956) 99 CLR 362 is another case which reflects the above approach. In an action for specific performance the defendant was allowed to add a counterclaim for rescission after completion of the evidence. It was the evidence which provoked the leave - disclosing the existence of an unconscionable bargain.

10. The position in Equity is enshrined in legislation. Section 24(4) of the Supreme Court Act 1935 (WA) states:

    "The Court, and every Judge thereof, shall recognise and take notice of all equitable estates, titles, and rights, and all equitable duties and liabilities appearing incidentally in the course of any cause or matter, in the same manner in which the Court in its equitable jurisdiction would have recognised and taken notice of the same in any suit or proceeding duly instituted therein before the commencement of the Supreme Court Act 1880."

11. In this case the evidence discloses that the deceased knew he was handling trust property.  The trust deed at cl 11 documented a prominent role for him in conduct of the trust's affairs.  He received all the bank accounts.

12. His Honour referred to the dicta of Gaudron, Gummow and Kirby JJ in Bridgewater v Leahy (1998) 194 CLR 457 at par 124 and par 127 where their Honours said:

    "Once a Court has determined upon the existence of a necessary equity to attract relief, the framing, or, as it is often expressed, the moulding of relief may produce a final result not exactly representing what either side would have wished.  However, that is a consequence of the balancing of competing interests to which, in the particular circumstances, weight is to be given."

13. His Honour said that he did not think that the decision in Bridgewater v Leahy could be read as permitting the grant of a rescission of a contract in the circumstances of the present case, where the plaintiff had not exercised an equity to rescind.  He said that rescission of a voidable agreement requires a clear and unequivocal act of rescission by the rescinding party - Sargent v ASL Developments Ltd (1974) 131 CLR 634.

14. His Honour found that there was no evidence establishing knowledge in the deceased as to the value of the property at any time before he became aware of the Valuer General's assessment.  He said that there was no evidence of dishonesty on the part of the deceased in relation to the transaction save for the fact that he became aware of the Valuer General's assessment at the time of the transfer.  He said the pleadings suggested that the deceased's knowledge of the Valuer General's assessment, derived as it was from the fact that his settlement agents prepared, stamped and registered the transfer, arose after the registration of the transfer and not before.  He also found that as the plaintiff had not established that the deceased was aware of the Valuer General's assessment prior to the registration of the transfer, the plaintiff had failed to show dishonesty on his part.

15. In my view, the learned Judge has not in this part of his reasons allowed sufficiently for the business acumen and experience of the deceased, his local knowledge and the extent of his fiduciary responsibilities towards the appellant's property.

16. With respect to recipient liability, his Honour referred to the reasons of Anderson J in the Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; (1999) 151 FLR 191 at par 79 where his Honour said:

    "Recipient liability may be established if the defendant had actual or constructive knowledge at the time he received the relevant property that:

    (a)it was trust property and

    (b)it was being misapplied.

    The defendant will be taken to have constructive knowledge if it is proved that he wilfully shut his eyes to the obvious; that he wilfully and recklessly failed to make such enquiries as an honest and reasonable man would make in the circumstances; and that he knew of circumstances which would indicate the true facts to an honest and reasonable man.  If all that is proved is that the defendant had knowledge of circumstances which would put an honest and reasonable man on inquiry, that is not enough: see Koorootang at 85 and 105."

17. The learned trial Judge applied Anderson J's reasoning and said that neither the pleadings nor the evidence established what the plaintiff was required to prove in order to make out a claim based on recipient liability.

18. In my view that finding is against the weight of the evidence in the case, which to a great degree was not in contest.

19. His Honour said that the plaintiff's claim to the existence of a constructive trust in any event must fail in the absence of the avoidance (were that possible) of the transfer by rescission of the voidable contract between the plaintiff and the deceased.

20. His Honour concluded by saying that he was not satisfied that the plaintiff had succeeded in showing dishonesty on the part of the deceased; and that the property formed part of the deceased's estate and would accrue to the beneficiaries thereof on intestacy.  Those beneficiaries included the three sons of the deceased (who are beneficiaries of the trust) and also his widow.

On Appeal

1. The appellant trustee company appealed against the decision on a number of grounds.  It is relevant to the appeal that the original action could have proceeded in a number of different ways.

2. Firstly, in my view of the evidence, the deceased acquired the property of a trustee company in a manner which involved a breach of trust by the directors of the company.  In essence the directors were negligent in carrying out their duties to the company.  Generally they did not protect the company's assets as they were required by law to do.

3. In Bartlett v Barclays Bank Trust Company Ltd (No 2) [1980] Ch 515 a trustee was held liable for failing to maintain proper oversight of its investment. It is a breach of trust to invest trust moneys in unauthorised investments or if the trustees retain assets which should have been sold and the assets fall in value. If trustees postpone a sale for too long causing loss to the trust estate, it is a breach. Trustees have been held liable for loss caused in running a business by reason of their failure to supervise the conduct of the manager they had appointed.

4. Secondly, in this case, the deceased was the father of the two relevant directors, who effected the transfer of the property to him at his request for less than half its value.  The deceased had considerable commercial experience as a builder and investor; also with his knowledge of the neighbourhood where the home was, it is fair to assume that he would have had an approximate idea of the value of it.  At the time of the transfer of the property to him in my view he was in a fiduciary relationship with the company and the two relevant directors.  He was the effective operator of the company.  His sons, the directors, trusted him and had left the management and the direction of the company's affairs to him.  They depended upon him for his advice.

5. In certain defined circumstances persons in a fiduciary position are liable to account as if they were trustees.  In their "Principles of the Law of Trusts" (2nd ed) Professors Ford and Lee state that such persons are made accountable for gains they have improperly made by virtue of their position or relationship when their duty and their personal interests could have been in conflict.  Further that a constructive trust may be imposed as a cautionary or deterrent remedy to enforce the observance of a fiduciary duty not to prefer personal interest over duty to the principal.

6. The learned authors say that a court may order a person to account for gains made as a fiduciary or that there may be an order to pay compensation for loss caused (equitable compensation).  A transferor can also have a transfer set aside as against a volunteer claiming through the transferor.  A constructive trust can be the appropriate remedy where a fiduciary uses his position to make a gain without the informed consent of the principal.

7. In my view, in this case, as stated above, the deceased was a fiduciary who should not have acted against the interests of the trustee company or its property.  He was supposed to be acting for the benefit of the beneficiaries.

8. In McPherson v Watt [1877] 3 AC 254 at 270 Lord Blackburn said:

   "If he purchases from his client in a matter totally unconnected with what he was employed in before, no doubt an attorney may purchase from one who has been his client, just as any stranger may do, honestly telling the truth and without any fraudulent concealment, but being in no respect bound to do more than any other purchaser would do.  But when he is purchasing from a person property with respect to which the confidential relation has existed or exists, it becomes wrong of him to purchase without doing a great deal more than would be expected from a stranger.  In some cases it may turn upon this; that the attorney having been the general agent of the seller, has acquired an intimate knowledge of the condition of the property, and not only learnt as much as the seller himself knows, but perhaps a good deal more.  In those cases he has acquired the knowledge as being the general agent of the vendor, and he has an unfair advantage in consequence, and there must not be an abuse of the knowledge which he has so acquired.  In other cases the general agent has acquired an influence over his client, I may say an undue influence, and there have been many more cases of a similar character…"

9. The deceased was connected to the trust property by the trust deed.  From the outline of evidence he knew he was dealing with trust property.

10. In Tate v Williamson (1866) LR 2 Ch App 55 at 61 Lord Chelmsford said:

    "… the courts have always been careful not to fetter this useful jurisdiction by defining the exact lines of its exercise.  Wherever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that influence is possessed by the other, and this confidence is abused or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to obtain the advantage, although the transaction could not have been impeached if no such confidential relation had existed."

11. In Ex Parte Lacey (1802) 6 Ves. Jun. 625; 31 ER 1228 Lord Eldon said:

    "…the Law supposes him to have acquired all the knowledge a trustee may acquire; which may be very useful to him; but the communication of which to the Cestuy que trust the Court can never be sure he has made, when entering into the new contract, by which he is discharged."

12. In Coles v Trecothick (1804) 9 Ves. Jun. 235; 32 ER 592 at 597 at 247 Lord Eldon said:

    "…a trustee may buy from the cestui que trust, provided there is a distinct and clear contract, ascertained to be such after a jealous and scrupulous examination of all the circumstances, proving, that the cestui que trust intended the trustee should buy; and there is no fraud, no concealment, no advantage taken by the trustee of information, acquired by him in the character of trustee."

13. A fiduciary is not bound to account for a gain derived by virtue of his position if the fiduciary can show that the principal gave informed consent.  The onus of proving consent is on the fiduciary - Birtchnell v The Equity Trustees Executors and Agency Company Ltd (1929) 42 CLR 384 at 398 per Isaacs J. The fiduciary has to show that there was "full and frank disclosure of all material facts" - New Zealand Netherlands Society (Oranje) Inc v Kuys [1973] 1 WLR 1126 at 1132.

14. In this case, the trustee made a disposition of the property in a breach of trust procured by the deceased recipient.  In such a case there can be two main remedies - one is a liability to restitute the trust property or its traceable proceeds and the other is a liability to pay equitable compensation to restore any loss of trust property or to account for improper gains.

15. Alternatively, a stranger also can be liable for breach of trust - Re Montagu's Settlement Trusts [1987] 2 WLR 1192. The knowledge in the stranger which is important is; (a) actual knowledge; (b) wilfully shutting one's eyes to the obvious; (c) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; (d) knowledge of circumstances which would indicate the facts to an honest and reasonable person; (e) knowledge of circumstances which would put an honest and reasonable person on inquiry: Ford and Lee at 2217.

16. A fundamental inquiry is whether a defendant's conscience was affected in such a way as to require that the defendant be subjected to an order of a court of equity - Re Montagu's Settlement Trusts (supra) at 1205.  When deciding whether a recipient had the knowledge to constitute unconscionability the court allows for the attributes of that particular person in assessing his or her awareness of facts about the property.

17. Want of probity on the part of a stranger can be understood as not being confined to subjective dishonesty in particular circumstances but as extending to a failure to make the inquiries which a hypothetical reasonable and honest person would make in the light of facts known to the stranger.  Ford and Lee contend that a stranger could, for example, be assisting a trustee who is inadvertently making an improper investment.

18. In Barnes v Addy (1874) LR 9 Ch App 244 Lord Selbourne said that the responsibility (of a trustee) may be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust.  Ford and Lee say:

    "It is only when a stranger gets control of the trust property and knowingly acts inconsistently with the trust, or a stranger induces a breach, that a stranger's personal liability as constructive trustee can extend to loss caused by a breach that is not dishonest."

19. Ford and Lee contend that if the reason for the stranger's gain is another person's breach of duty, even if not dishonest, and the stranger knows of that breach, it is unconscionable that the gain should be retained.

1. Where a stranger's participation in a trustee's breach goes beyond assistance and consists in inducing the trustee to commit a breach, the stranger will be held liable to compensate a beneficiary for loss caused by a breach of trust.  Where the stranger knew that what the trustee was being induced to do was not in accord with the terms of the trust; the stranger would only be liable with subjective knowledge, knowledge derivable by inference from facts subjectively known and knowledge shunned wilfully or recklessly.  Where a stranger knowingly induces an innocent breach of trust the stranger is primarily liable to restore the loss.

2. An agent can become personally liable as a constructive trustee for loss caused by the agent receiving the property and dealing with it in a manner that is inconsistent with a performance of a trust of which the agent is cognisant.  An agent with subjective knowledge of the terms of a trust who deals with trust property in a way not authorised by those terms may be held personally liable.

Indefeasibility

1. The appellant plaintiff - the previous registered proprietor - sought recovery from the estate of the person who took the land and which is the current registered proprietor.

2. The transfer to the deceased was registered and it is necessary to consider whether he and/or his administratrix obtained the advantages of indefeasibility. The latter can be dealt with by reference to s 9 Administration Act 1903, which subjects all the real estate vested in her to the trusts subsisting over it.  It could also be said that only property capable of being vested by the deceased was available for administration.  Transfers by the deceased, a fiduciary, to himself at an undervalue without informed arms length consent from his principal would not be so capable.

3. In Macquarie Bank Ltd v Sixty‑Fourth Throne Pty Ltd [1998] 3 VR 133 Tadgell JA said at 143:

   "… to abstain deliberately from reasonable enquiry for what the enquiry will reveal, to choose to shut one's eyes to the obvious - to assume a state of 'wilful blindness' - or otherwise generate a state of contrived ignorance, may of course be dishonest."

4. On the terms of the deed the deceased was all but in name a trustee.  The directors were entitled to expect he would act in their interests and for the purposes of the relationship.

5. On the evidence the deceased had knowledge.  His conduct in arranging the sale to himself at an undervalue given his position in the trust deed and his long standing activity in relation to the trust's affairs (the evidence indicates he had for years invested the trust funds in property) focuses attention on the deceased's obligation to deal fairly between himself and his principal, the trustee company, by obtaining a fully informed arms length consent to the transaction.  It is the reality of the deceased's fulfilment of that obligation which will determine whether his estate can rely on the register.

6. Another way of looking at the indefeasibility issue is to conclude that the deceased knew that the trust deed conferred only powers of consent and appointment on him.  Yet the outline of the evidence above indicates that he exceeded the deed's mandate and controlled the trust's affairs in such a way that he bought for himself a valuable trust asset at a significant undervalue without a fair open and arms length dealing with the trustee and its beneficiaries (the directors).  It is significant that 7 years went by without the deceased fulfilling his promise to return the land to the trust.

7. At trial it was for the estate to prove an informed consent to the deceased's purchase.  Pleading mere consent and not contesting the evidence was not a sufficient response to a pleading which brought out at least some kind of fiduciary character in the relationship amongst other things, by describing the deceased as a director of the trustee.

8. The evidence indicates that the deceased knew the beneficiaries/directors of the trustee company had an actual well founded reasonable expectation that he would act to protect the trust's interests (see the factors discussed by Finn J in Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 521). He was obliged to obtain a fair market price for trust assets.

9. Ejectment under s 199 and s 200 Transfer of Land Act is a response.  An equitable charge over the land is another response.  An equitable charge can arise where the court is satisfied it would be unconscionable for a party to retain property beneficially to the exclusion of another party.  Many family arrangements over land have brought imposition of an equitable charge, despite the wishes of the registered proprietor and the absence of dishonesty or moral turpitude.

10. There is enough evidence to infer that the deceased breached his fiduciary duty to the trust by arranging the sale of the trust property to himself at a significant and objective undervalue.  The register can, then, be rectified.

Conclusion

1. In my opinion, the appellant's claim with respect to the home should succeed and the Court should hear further from the appellant as to the precise orders required - see par 4 of the Notice of Appeal.  Any necessary adjustments to the accounts of the appellant would then be made.

2. The reason for this view is that at the trial the persons concerned all knew what the issues were.  I do not see how the respondent could be said to be unfairly prejudiced if such an order was made.  The respondent had the chance to call any relevant evidence and chose not to do so.  As stated above and in any event, most of the relevant evidence was not really in dispute.  It is too blatant a case for the appellant's claim to fail on grounds concerned with an alleged failure to plead it correctly.

3. In essence the statement of claim pleaded dishonesty by a fiduciary/director when the deceased bought valuable trust property for himself, without paying full value.  That was the gist of the action.  Greater particularity was not necessary to put the defendant on notice of the kind of claim which had to be answered.  Fiduciary law operates to put on the defence a burden of proving that the impugned transaction was fair, open and at arms length.  That is the only way the courts can be sure the fiduciary has acted correctly.

4. The administrator of the estate holds the property subject to s 9 of the Administration Act 1903.

The Second Claim

1. The second claim was in one paragraph and it was:

   "Prior to his death Lionel Kenworthy over a period of years misappropriated from the trust for his own benefit a total of approximately $380,000."

2. As his Honour said in his reasons for judgment, that plea of misappropriation raised very serious allegations of dishonesty against the deceased and the standard of proof required to establish it was a high one.

3. His Honour said that the plaintiff had pleaded the cause of action in the barest terms and had relied upon the fact that Mr Lindsay Kenworthy and his brother Dennis had marked with a yellow highlighter those items of expenses which they thought were not expenses of the Trust.  Neither explained in detail each item of alleged misappropriation but contented themselves with the broadest allegation, very largely unsubstantiated, that the items highlighted could not possibly have been incurred for the benefit of the Trust.

4. His Honour said that the plaintiff had not gone to the trouble of a detailed analysis of the items allegedly misappropriated by the deceased and it was apparent that both witnesses had had no day to day involvement with the plaintiff at the material times.

5. His Honour came to the conclusion that:

   "On the basis contended for by the plaintiff and agreed to by the defendants, that the books (from which expression I exclude the highlighting of certain entries) are prima facie proof of what they record and are accurate, I find that the plaintiff has not established that Lionel Kenworthy misappropriated 'approximately $380,000' or, indeed, any sum nor that he drew from trust funds any amount in excess of his loan account.  In relation to the loan account (which started with a credit of some $60,000) Mr Solomon affirmed in his oral address that there could be no complaint as to drawings against that account up to the figure mentioned."

6. In my opinion, his Honour was clearly correct in finding that the plaintiff had not established the misappropriation alleged.  Overall the evidence offered in support of the claim was not convincing.

7. The learned Judge discussed the evidence of Mr Lindsay Kenworthy who said that he had been involved in the yellow highlighting of entries in the cash books which books had been prepared by the accountants employed by the plaintiff.  The process had involved him, his brother Dennis and another person who was not called to give evidence, marking in yellow "everything that was not associated with the trust … other than the 'drawings' which were not marked in yellow".  The totals of the highlighted items and the "drawings" were carried into the accounts and shown as part of a loan account in the name of the deceased.

8. His Honour concluded that the accountants had prepared the accounts in the light of information given to them by Mr Lindsay Kenworthy and Mr Dennis Kenworthy.  His Honour referred to the fact that Mr Lindsay Kenworthy had had no day to day involvement with the affairs of the Trust until 1997 despite being a director of the plaintiff.  His evidence had indicated that he was at all relevant times content to leave the management affairs of the plaintiff to the deceased.

9. His Honour said that Mr Lindsay Kenworthy had gone through the cheque butts years after the dates when the cheques were made out.  He had identified the handwriting on the cheque butts which was put to him as that of the deceased.  He had said that the entries in the cash books in the column headed "Drawings" represented the amounts reflected in the cheque butts which he, Mr Lindsay Kenworthy, considered were not attributable to the Trust but were, he thought, for the deceased's personal benefit.  Those items were not highlighted.

10. His Honour said that the term "Drawings" was not derived from the primary documents but applied to those items which Mr Lindsay Kenworthy considered to represent amounts taken by the deceased for himself.  His Honour said that in carrying out the relevant exercise, Mr Lindsay Kenworthy had apparently had regard to the cheque butts and to his recollection of what was happening during the years in question when, as his Honour said, he had had no day to day involvement with the affairs of the plaintiff.

11. His Honour came to the conclusion that Mr Lindsay Kenworthy seemed to be impugning the veracity of the cheque butts in spite of the fact that it was no part of the plaintiff's case, as his Honour understood it, that the deceased had falsely recorded misinformation on the cheque butts pursuant to a fraudulent scheme to steal moneys from the trust.

12. His Honour said that as he understood the plaintiff's case, it was that the cheque butts correctly recorded the matters therein but that the payments were made for purposes other than the Trust's.  His Honour also commented on the reasons given by Mr Lindsay Kenworthy for having highlighted the relevant items in the cash book.  It was Mr Lindsay Kenworthy's opinion that where there were round figures, this displayed a "pattern" of misappropriation.  He had highlighted those items accordingly.  He had also highlighted items where cheque butts showed a payment to a named payee but Mr Lindsay Kenworthy thought the amount of the payment was excessive.

13. With respect to one item which his Honour referred to, his Honour said:

    "Although he [Lindsay] did not expressly say so, I have the impression that he thought this item to be a false entry masking a payment to Lionel Kenworthy personally."

14. In another instance his Honour thought the reason for the highlighting was not apparent.  Mr Lindsay Kenworthy had said that the only time he had been involved with the accounts was after 1997.  His Honour said that Mr Lindsay Kenworthy's evidence in respect of the "pattern" indicated the basis of his approach to many of the items, namely, that the matter stated on the relevant cheque butt was false.  His Honour said that that was entirely inconsistent with the plaintiff's case that the matters in the primary documents were to be accepted as true and correct.  It was also inconsistent with the fact that, for example, in relation to the second defendant's Subaru motor vehicle, no attempt had been made to disguise the nature of the payments relating to that vehicle.  At the relevant time, when payments for the Subaru motor vehicle were made, the financial statements revealed and the plaintiff's counsel had conceded, that there had been a loan account in favour of the deceased owing to him by the trust in an amount of some $60,000.

15. His Honour said he was not satisfied that the evidence of Mr Lindsay Kenworthy as a whole established on a balance of probabilities that an amount in excess of $60,000 was expended by the deceased for purposes other than those of the trust.  His Honour applied the correct test as to the standard of proof - Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 at 172.

16. One interesting exchange which his Honour pointed to was as follows:

    "Then lower down, the entry for fuel you were asked about cheque 95, which is on page 1572.  Do you see that's payable to the people called Martin's Corner?  Do you have that there?

    "Yes I do, yes.

    Do you know what that is?

    No idea at all.

    Is that a reason you highlighted it?

    That's correct, yes."

17. His Honour discussed the evidence of Mr Dennis Kenworthy concerning the exercise of going through the cash books.

18. I agree with his Honour's comment that this claim was based on:

    "the broadest allegation, very largely unsubstantiated, that the items highlighted could not possibly have been incurred for the benefit of the Trust."

19. It was argued for the appellant that the non‑trust payments could not be set off against the $60,000 owing to the deceased because the $60,000 had been completely used up in the payment for The Esplanade. It was also submitted that what his Honour ought to have done was approach the question from the point of view of the reversal of the onus of proof by virtue of cl 1305 of the Corporations Law.  That had the effect that payments which were cogently seen to have been misappropriations, were misappropriations unless proved otherwise.  It was submitted that that had been made clear in the Full Court judgment in Caratti and also in the judgment of Finklestein J in the decision of Valoutin Pty Ltd v Furst (1998) 154 ALR 119 cited at par 135 of Caratti, the effect of which was a reversal of the onus.  It was submitted that the learned trial Judge had erred in placing a further onus on the plaintiff in saying that it had to prove each particular payment.

20. It was further submitted that Mr Dennis Kenworthy had not been cross‑examined.  He had contributed to the process of identifying payments as misappropriations and that should be taken into account.

21. His Honour dealt with that contention by saying that Mr Dennis Kenworthy knew nothing about the Trust at the time.  He said a similar thing concerning Mr Lindsay Kenworthy's evidence.

22. It was submitted for the appellant that with respect to the effect of cl 1305, no evidence was led the other way. Reliance was placed on Goldberg J's judgment in White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169.  Further, it was submitted that Dennis had not been put on notice at any time that he was to be found not to have known anything about the Trust or the payments.

23. Reliance was placed for the appellant on the balance sheet at AB 314 which showed that in 1996 the loan to the deceased amounted to $375,417.75.  That calculation was said to have reflected the yellow highlighting.  It was submitted that the deceased could not but have known he was receiving Trust property.  He could not but have known that it was also money not owed to him by the Trust when one took into account that the $150,000 purchase price had taken up what was remaining of any money owed to him.  Reliance was placed on the words of Lord Millett in Twinsectra Ltd v Yardley [2002] 2 WLR 802 at par 105 as supporting the proposition that the deceased should be held liable because he had sufficient knowledge for constructive notice that he was receiving Trust property. It was also submitted that there was a question whether an honest person would have regarded the conduct as being dishonest - Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] 2 AC 378. It was also submitted that the deceased had actual knowledge of what the position was; that the evidence was quite clear that there had never been any consent to the relevant payments to the deceased by Mr Lindsay Kenworthy or Mr Dennis Kenworthy, the two directors at the time. Consent by the directors had never been suggested at the trial.

24. It was pointed out for the appellant that no financial records had been kept during the relevant time at all; that it had been only after the deceased's death that "the boys" had discovered that the financial records had not in fact been kept; that there had been no evidence from the respondent or any evidence that the relevant sums were loans. Further, it was submitted that it had not been pleaded that the claim should have been pleaded in debt and not as a misappropriation. Further, there was no notice of contention that the money was a debt - O 63 r 9. Reliance was also placed on the reasons of Burchett J in Re Vassis; Ex parte Leung (1986) 9 FCR 518 at 527 for the proposition that a duty to reimburse trust funds was an equitable debt.

25. It was contended for the respondent that the books spoke for themselves concerning what the expenses were.  There was not a cause of action unless it was proved that the expenditure was otherwise than for the benefit of the Trust.  The learned trial Judge had looked at all the relevant evidence in detail and had basically rejected the attempts to attack the prima facie record.

26. It was conceded that the deceased had been the signatory on the relevant cheques said to reflect the misappropriation, but it was contended that, prima facie, he had the authority of the plaintiff to sign the cheques.  That then led to the question whether the payments, being payments he was authorised to draw cheques for, were prima facie authorised by the company. Misappropriation would only be proved upon it being established that there were some limits on his authority. It was submitted for the respondent that there was no evidence of dishonesty. Clause 1305 provided that what was stated in the books was prima facie evidence of the correctness of what was there.

27. The respondent submitted that a question was whether the learned trial Judge had been correct when he said that the Trust owed the deceased $65,000 when it apparently had not.  It was submitted that the fact that the deceased had been drawing money, which on the face of the books appeared to have been for his own purposes rather than for the Trust purposes, was not evidence of any misappropriation.  The proposition was put that some of the expenses were not obviously for the deceased's purposes.  It had not been proved that they were.  The learned Judge had not been satisfied that the drawings which, on their face appeared to be for purposes other than the purposes of the company, were in excess of the amount of the loan account.

28. It was submitted that the accounts and tax returns prepared by the accountants had been said by Mr Lindsay Kenworthy to be correct.  Those accounts had shown the relevant amounts as a loan.  They did not show the money as misappropriated.  Even if there was an excess taken by the deceased over and above the amount which was said to be owing to him under his loan account, that had been shown as a loan and not as a misappropriation.  That raised the question whether there was authority for the deceased to borrow money and whether or not that was consistent with the terms of the Trust.  That matter was not explored at the trial.

1. Counsel continued by suggesting that the onus was on the first respondent to plead "indefeasible title", but then said at AB 2811:

   "but I don't think the matter needs to go off on a pleading point in any event because we are plainly within the species of fraud contemplated by section 68 of the Transfer of Land Act."

2. As I have said above, in my opinion it was for the appellant to plead and prove fraud on Mr Kenworthy's part in order to defeat Mr Kenworthy's otherwise indefeasible title.

3. Since dictating the foregoing, the Court has been referred to the decision of the Queensland Court of Appeal in Tara Shire Council v Garner [2002] QCA 232, which was delivered after the hearing of this appeal. In that case, Atkinson J at [88] (McMurdo P agreeing) quoted a passage from the dissenting judgment of Ashley AJA in Macquarie Bank (supra) and at [89] said that the passage was "more in accordance with principle" and more effectively balanced "the protection afforded to trust property against its knowing receipt by a third party and the protection afforded to the title of registered proprietors".  Davies JA dissented and agreed with the majority in the Macquarie Bank case.

4. I still prefer the reasoning of Tadgell JA (Winneke P agreeing) in the Macquarie Bank case, but in view of the Tara Shire Council case I should explain why this is so in some more detail.

5. In the Macquarie Bank case, the bank held a mortgage of land of which Sixty-Fourth Throne Pty Ltd was the registered proprietor.  The mortgage was a forgery, being the work of Michael Kandy who was the son‑in‑law of the directors of Sixty‑Fourth Throne Pty Ltd.  The trial Judge held that the bank had not committed any fraud.  The Court of Appeal agreed there was no fraud.  The passage from Ashley AJA's reasons in the Macquarie Bank case, and quoted by Atkinson J, is set out below.  The passage followed a reference to the opinion of Tadgell JA that absent fraud registration rendered the bank's title indefeasible.  Ashley AJA then said:

   "To accept such a position is, in my respectful opinion, effectively to deny the operation of a remedy which squarely falls within the in personam exception to indefeasibility, an exception which undoubtedly exists as a basis for indirect attack upon registration separate from the direct attack available by reliance upon statutory fraud.  The approach accepts that, speaking generally, improper receipt of trust property can give rise to a constructive trust.  But it says that, in the case of a dealing with trust property which is Torrens system land, recourse to imposition of such a trust is in part unnecessary; for dishonest receipt will constitute statutory fraud.  Otherwise the possible scope of the remedy is denied application.  The consequence of that approach is that the full range of operation of the particular remedy is emasculated.  The proposition that an equity may be recognised and enforced so long as it involves no conflict with the indefeasibility provisions has not prevented the High Court from imposing constructive trusts so as to recognise equities in cases where the transfer of real property was effected at different stages in the course of events giving rise to the equities: thus Bahr, Muschinski and Baumgartner.  In my opinion this court is not obliged to, nor should, deny the applicability of the constructive trust remedy in a case such as this.  It is one thing to say (in the context of transfer) that, absent fraud, a potential transferee is not to be affected by notice, actual or constructive, of any trust.  It is a quite separate matter to say that such a person is to be unaffected by notice, actual or constructive, of a breach of trust.  Likewise, I consider, by analogy in the case of a mortgage of land.  Moreover, it has been said that the purpose of indefeasibility is to protect a transferee from defects in the title of the transferor; not to free the transferee from interests with which he has burdened his own title.  To deny the applicability of the in personam remedy now under discussion would not, I think, achieve that outcome."

6. The dispute between the members of the Queensland and Victorian Courts of Appeal is whether the only exceptions to indefeasibility are the statutory exceptions, or whether an in personam claim not based on fraud of the registered proprietor is also an exception.

7. The conclusion that Ashley AJA has reached is based on Bahr v Nicolay (supra), as can be seen from p 162 of the Macquarie Bank case, where he says that the "necessary balance" between indefeasibility and "in personam" claims or remedies is disclosed by Bahr v Nicolay.  It is therefore necessary to closely analyse the reasons for decision in Bahr v Nicolay.

8. In Bahr v Nicolay, the Bahrs sold to Nicolay on condition (cl 6) that the land would later be resold to the Bahrs.  Nicolay then sold to the Thompsons, and cl 4 of that agreement contained a provision whereby the Thompsons acknowledged the agreement between the Bahrs and Nicolay.  The Thompsons became the registered proprietors and refused to sell back to the Bahrs.  The "real question" (629) was whether the Thompsons acquired a title which was indefeasible.

9. Mason CJ and Dawson J held that:

   (a)fraud means "actual fraud, dishonesty of some sort, not what is called constructive or equitable fraud …" (page 614 quoting Lord Buckmaster in Assets Co Ltd v Mere Roihi), but that such definition did not mean that "all species of equitable fraud stand outside the statutory concept of fraud".  Thus the collusive and colourable sale by a mortgage company to its subsidiary, was a plain case of fraud (614);

   (b)fraud includes fraud in obtaining a transfer or registration and "dishonest repudiation of a prior interest which the registered proprietor has acknowledged" (615);

   (c)clause 4 of the Nicolay/Thompson agreement created a trust in favour of the Bahrs as third parties.  The trust was an express trust.  The effect of the trust was that the Thompsons held the land subject to such rights as were created in favour of the Bahrs by the agreement between the Bahrs and Nicolay (618 through to the first paragraph on 619); and

   (d)in the alternative, the conduct of the Thompsons "constituted fraud" and fell within the statutory exception  (619).

10. Brennan J considered that the second respondents ("Thompsons") had been guilty of fraud and that the Thompsons' registered title was therefore defeasible and subject to the Bahr's claim, because it fell within the statutory exception of fraud in s 68 (see 654‑656).

11. Wilson and Toohey JJ in Bahr v Nicolay said:

    (a)(after stating, as I have mentioned above, that the "real question" was whether the Thompsons had acquired a title which was indefeasible) that:

    "The question may be further refined by asking – having regard to ss 68 and 134 of the Act, was there in any relevant sense fraud on the part of the [Thompsons]? Unless there was such fraud, the [Thompsons] hold their title free of any interest the [Bahrs] have by reason of cl 6, subject to any claim in personam that may lie against the [Thompsons]." (629);

    (b)the fraud referred to in s 68 and s 134 is actual fraud, involving some act of dishonesty on the part of the person whose title is sought to be impeached (630);

    (c)it is equally clear that to acquire land with notice of an unregistered interest such as a lease, to become the registered proprietor and then to refuse to acknowledge the existence of the interest, is not of itself fraud (630);

    (d)evidence going no further than to show that when the Thompsons took a transfer of the land from Nicolay and became the registered proprietors, they were aware of the Bahrs' agreement with Nicolay allowing the Bahrs to purchase the land at an agreed price "cannot amount to fraud within the meaning of ss 68 and 134" (631);

    (e)the evidence fell short of establishing that the designed object of the transfer from Nicolay to the Thompsons was to cheat the Bahrs of a known existing right (636);

    (f)however, the evidence did establish that the Thompsons took a transfer knowing of cl 6, accepting an obligation to resell to the Bahrs and communicating that acceptance to Mr Callard (the Thompsons' agent) but banking on the Bahrs' inability to find the money necessary to implement the clause (637);

    (g)the finding in (e) above led "irresistibly" to the conclusion that the Thompsons understood through Mr Callard that Nicolay would not sell the land unless the Thompsons agreed to be bound by the obligation in cl 6 which required Nicolay to resell to the Bahrs.  The Thompsons bought the land on the understanding common to the Bahrs and Nicolay that they were so bound, and cl 4 was included to give effect to that understanding (638); and

    (h)by taking a transfer of the land on that basis:

    "and the [Bahrs'] interest under cl 6 constituting an equitable interest in the land, the [Thompsons] became subject to a constructive trust in favour of the [Bahrs] … If it be the position that the [Bahrs'] interest under cl 6 fell short of an equitable estate, they none the less had a personal equity enforceable against the [Thompsons]. In either case ss 68 and 134 of the Act would not preclude the enforcement of the estate or equity because both arise, not by virtue of notice of them by the [Thompsons], but because of their acceptance of a transfer on terms that they would be bound by the interest the [Bahrs] had in the land by reason of their contract with the first respondent."

12. Thus, Mason CJ and Dawson J considered that the Thompsons were express trustees but that they were also guilty of fraud.  Brennan J held there was fraud.

13. Wilson and Toohey JJ concluded that the Thompsons did not set out to "cheat" the Bahrs of a known existing right, but found that the Thompsons bought the land on the understanding that they were bound and that cl 4 was included to give effect to that understanding.  That strikes me as coming close to a conclusion that there was fraud on the part of the Thompsons.  However, their judgment seems to have been understood by commentators as concluding that there was no fraud.  Their Honours held that some equitable estate or "personal equity" not involving fraud gave rise to an in personam claim, which could be enforced notwithstanding the indefeasibility provisions of the legislation.

14. Ashley AJA bases his decision in the Macquarie Bank case upon the reasoning of Wilson and Toohey JJ.  He also refers to Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137 to support his conclusion. In both of those cases, and in Bahr v Nicolay, the defendant was the primary wrongdoer, attempting to ignore an obligation to share or convey the land with or to the plaintiff.  In none of those cases was the defendant a party who merely had notice of an earlier interest or notice of third party fraud.  All three cases are of the type described by Brennan J in Bahr v Nicolay (653), where he said:

    "… the title of a purchaser who not only has notice of an antecedent unregistered interest but who purchases on terms that he will be bound by the unregistered interest is subject to that interest.  Equity will compel him to perform his obligation."

15. See also (655).

16. Reference was also made by Atkinson J in the Tara Shire Council case [89] to the decision of de Jersey J in Doneley v Doneley [1998] 1 Qd R 602. Doneley's case and a number of others (as to which see "Equity, Restitution and In Personam Claims under the Torrens System" (1998) 72 ALJ 258) proceed on the assumption that even though the registered proprietor had not been guilty of fraud, that nevertheless a Barnes v Addy "knowing receipt" would defeat the registered proprietor's title.  There is no suggestion in Doneley's case (if the land was Torrens title land) that the parties holding registered interests challenged the assumption.  Tadgell JA in the Macquarie Bank case has concluded that the assumption is incorrect.

17. I prefer the reasoning of Tadgell JA and Winneke P in the MacquarieBank case, and of Davies JA in the Tara Shire Council case.  That being so, the appellant had to prove fraud on the part of Mr Kenworthy if it was to succeed.

18. There are different ways in which the appellant might have pleaded a case of fraud (depending on the facts).  For example, if Mr Kenworthy fraudulently misrepresented the value of the land to the appellant directors and  they were induced by the misrepresentation to transfer the land, and if those facts had been pleaded and proved, then that would have amounted to fraud.  See, for example, Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491.

19. In short, the case to be advanced depends on what was pleaded.  It may also depend upon how the case was conducted, but it must be borne in mind that allegations of fraud must be distinctly pleaded and a plaintiff will not be able to mount a case on appeal outside the pleadings unless it is clear beyond question that the allegation of fraud was carefully identified and the parties conducted the case on the basis that fraud, as identified, was an issue.  It would be a very rare case for an allegation of fraud to be conducted outside of the pleaded case.

20. It is now time to look at what was pleaded and what was not pleaded.

21. The statement of claim does not plead as a material fact that the appellant, by its directors (Lindsay and Dennis Kenworthy) who made the decision to sell, breached its duty in the exercise of the discretionary power to sell, by failing to make any enquiries about the value of the Mount Pleasant land at the time the directors placed their signature and seal on the transfer.

22. The appellant's counsel, however, submits that the case was conducted in this way even if not pleaded.  He points to witness statements filed by the appellant.  Lindsay Kenworthy's statement contains a sentence which reads: "I took no advice in relation to the transfer".  Dennis Kenworthy's statement reads in part:

    "… I did not take any advice about the transfer of 141 The Esplanade.  I did not consider the value of 141 The Esplanade nor whether the transfer was at market price." 

23. On the pleadings, that evidence was not relevant because the appellant did not plead, as a material fact, that the directors' failure to make enquiry was the conduct which established a breach of trust by the appellant.  No objection was made by the respondent to these two pieces of evidence.  Objection should have been made, and the evidence should have been ruled irrelevant to any pleaded issue.  There was no cross‑examination of Lindsay Kenworthy directed to his knowledge about the value of the land and what enquiries he made concerning its value.  Dennis Kenworthy was not cross‑examined at all.  The lack of cross‑examination is explicable, however, because the pleadings did not direct any attention to the conduct of the two directors.  Counsel for a party does not have to cross‑examine a witness in relation to subjects which are irrelevant to any pleaded issue.

24. In any event, accepting, as I do, the reasoning of Tadgell JA in the Macquarie Bank case, a "knowing receipt" case, even if made out, will not defeat Mr Kenworthy's registered interest.

What was pleaded?

1. The pleaded case for the appellant was that Mr Kenworthy:

   (a)exercised effective control of the appellant until 2 February 1997 and

   (b)was a director of the plaintiff by operation of s 60(1)(b) of the Corporations Law and its statutory predecessors.

2. Paragraph 4 refers to the transfer by "the plaintiff" to Mr Kenworthy.  Paragraph 5 contained a plea that the consideration of $150,000 was grossly inadequate, and par 6 directs attention to Mr Kenworthy's conduct and not to the conduct of the two directors.  It is pleaded that Mr Kenworthy:

   (a)had actual or constructive knowledge of the matter pleaded in par 5 and

   (b)did not inform the appointed directors.

3. Paragraph 8 pleads that by reason of the matters pleaded in pars 3 to 7, the property was transferred to Mr Kenworthy in breach of trust.

4. In my opinion, such a pleading concentrated the mind of the parties, and of the Court, on the conduct of Mr Kenworthy on the basis that he was the decision maker on behalf of the appellant and that he was also the recipient of the land. The pleadings make it clear that the "breach of trust" pleaded in par 8.1 relies upon the preceding paragraphs, the first of which (par 3) was that Mr Kenworthy at all material times "exercised effective control of the plaintiff until 2 February 1997" and "was a director of the plaintiff by operation of s 60(1)(b) of the Corporations Law …". That is, as it was put in submissions before this Court - Mr Kenworthy was the controlling mind and will of the trustee – his acts and decisions were the decisions of the trustee. That being so, the person whose conduct had to be analysed in deciding the issue about whether there was a breach of trust or not, was Mr Kenworthy.

5. In effect, the pleaded case was almost a "self dealing" case.   See Clay v Clay (2001) 202 CLR 410 at [51]. That is, Mr Kenworthy, acting for and on behalf of the trustee, sold to himself. The directors were "mere puppets" (to quote counsel for the appellant). That case failed. It is clear that his Honour in his reasons concentrated on the pleaded case. At par 9, his Honour referred to the submission on behalf of the defendant that the witness statements did not disclose that Mr Kenworthy was a director of the plaintiff, even in an extended sense, and this submission was upheld. That conclusion is not challenged in the notice of appeal.

6. As to the alternative plea, ie that Mr Kenworthy exercised effective control of the appellant, his Honour found at par 11 of his reasons:

   "I do not think that the evidence of the directors goes so far as to establish that they were accustomed to act in accordance with Lionel Kenworthy's 'directions or instructions' but only that they were accustomed to accept his advice as to the best interests of the plaintiff … To suggest, as Mr Solomon did in his submissions, that 'the directors acted as Lionel Kenworthy's puppets' put the matter too highly, in my view."

7. The notice of appeal does not challenge the trial Judge's conclusion that the directors were not Mr Kenworthy's puppets, nor his conclusion that they were not accustomed to act in accordance with his directions or instructions.

8. The trial Judge, at par 64, said that there was no evidence to support a finding of wilful blindness "on the part of the directors who executed the Transfer in his favour", and that is followed by the statement "Nor is that pleaded".

9. The reasons for decision therefore concentrated on the issue about Mr Kenworthy's conduct.  In my view, the trial Judge decided the pleaded case.

10. In view of the appellant's submission that the case was conducted below by reference to the breach of trust based on the conduct of the two directors, this Court called for the outline of submissions filed on behalf of the appellant at trial.  This was to allow this Court to see whether the appellant had alerted the respondent to the fact that it intended running a case at trial which was not in accordance with the statement of claim.  The outline of submissions ran for 17 pages and cited a large number of authorities.  When the solicitors for the appellant sent this document to this Court, it was accompanied by a letter referring to par D.11 and D.15.5. as showing that the "proprietary remedy" was relied on at trial.  Paragraph D11 read:

    "The plaintiff (subject to a defence of bona fide purchaser for value without notice, which is not pleaded) has had a proprietary right to the property at all times from the moment of receipt by Lionel Kenworthy: Foskett v McKeown [2001] AC 102 @ 108, 115 and 127‑9; Jacobs @ [2714]. The plaintiff's primary right is a proprietary interest in the property held by the recipient, which right the plaintiff holds for the benefit of the beneficiaries of the LHK Trust."

1. D15.5 is to similar effect.  Neither paragraph submits that the breach of trust occurred as a result of the inadequate enquiry made by the two directors of the appellant.  I have also read the closing submissions made by counsel for the appellant.  I cannot see anywhere throughout those submissions, a reference to a breach of trust as a result of the conduct of the two directors of the appellant.  At appeal book p 2809, counsel for the appellant said this to the trial Judge:

   "To come back to my notes about the breach of trust, this is para 16 of the notes, it was suggested yesterday that we haven't pleaded sufficient facts to make out a breach of trust.  With the greatest of respect, we are not here to plead causes of action like pleaders in the common law system prior to the common law procedure acts of 1852 to 1854 used to do.  We are here to plead facts and the remedy emerges from the facts.  That's fairly elementary, post judicature act pleading.

   What we have pleaded are the facts.  We pleaded his effective control in paragraph 3.  We pleaded the transfer, its registration and the price.  We pleaded that that consideration was grossly inadequate and particulars of why.  We have pleaded that Mr Kenworthy had actual or constructive knowledge of that matter by reason inter alia that his settlement agents prepared stamped and registered the transfer.

   We pleaded he didn't tell the appointed directors of those matters.  We pleaded that the property was previously held prior to registration as trustee and we say it was transferred in breach of trust and that he was also unjustly enriched …"

2. It can be seen that there is nothing in that summary to suggest that the breach of trust was constituted by the conduct of the two directors of the appellant.  I repeat that even if this had been the appellant's case run outside the pleadings, then knowledge by Mr Kenworthy of the breach of trust by the directors (and therefore the trustee) would not avail the appellant.  Such a case would have been a "knowing receipt" case.  Such a case does not defeat Mr Kenworthy's registered interest.   Macquarie Bank case per Tadgell JA.

3. I should add that counsel for the respondent denies that the case was fought on an issue outside the pleadings.

Is it too Late to Entertain the Case Contended for on Appeal?

1. The question is whether it is now too late to allow the appellant to turn attention to the state of knowledge, or the conduct, of the two directors who executed the transfer.  In my view, it is too late.  Further, there is no point in the appellant doing so because, at best, it amounts to a "knowing receipt" case, not a case of fraud.  In case I am wrong in adopting the reasoning of Tadgell JA in the Macquarie Bank case, I will say why I think that it is too late to entertain such a case.

2. Quite different issues would have arisen if the attention of the parties and the Court had been directed to the conduct of, and the knowledge of, the two directors about the value of the property.  The duty of a trustee exercising a discretionary power is to act honestly and in good faith.  Mere carelessness or honest blundering will not negative good faith.  On the other hand, trustees exercising discretionary power must not act irresponsibly, capriciously or wantonly.  If the appellant was to allege that its own directors did not act bona fide, then that would have to be pleaded and proved.  Although the two directors said they took no advice in relation to the transfer, there was no investigation at trial about whether or not they had some existing knowledge about the value of the house.  It cannot be assumed that they did not know about the value of the home just because they made no inquiry when the transfer was presented to them.  Such an assumption would not be based on any evidence.   The pleadings did not require any evidence on the point.

3. A court will presume that a trustee has acted bona fide, and the onus of proving male fides lies on those impeaching the trustee's action.  See Jacob's "Law of Trusts in Australia", 6th ed, par 1609‑1616.  In my opinion, it is now too late for the appellant to run a case based on the fact that the two directors had breached their duties and that Mr Kenworthy took the property knowing that to be so.

4. In ground 4 of the notice of appeal, the appellant seeks to set up a Barnes v Addy "knowing receipt" case but relies upon what is in ground 3. The contention that there was "no defence of indefeasible title under s 68 of the Transfer of Land Act 1893 … pleaded or proved by the first respondent …" does not avail the appellant.  If the appellant was to succeed, then the onus was on the appellant to plead fraud and to prove fraud as pleaded.

Is There Any Challenge to His Honour's Findings Supporting his Conclusion that There was no Dishonesty by Mr Kenworthy?

1. Ground 3 of the notice of appeal complains that the trial Judge erred in finding that Mr Kenworthy was not "dishonestly involved" in the appellant's breach of trust.  In this ground, it is clear that the breach of trust is alleged a breach by reason of Mr Kenworthy's conduct (not the lack of inquiry by the two directors).  Ground 3 of the notice of appeal is, in effect, a contention that the appellant should have succeeded on a Barnes v Addy "knowing assistance" claim.  As I have said, to make out such a claim, it is necessary to show that Mr Kenworthy was guilty of actual fraud, personal dishonesty, or moral turpitude.

2. This ground of appeal is argumentative in form.  It argues for the case that the appellant was advancing before the trial Judge but does not allege an error on the part of the trial Judge in relation to any finding of fact.

3. The trial Judge deals with the allegations which were before him in relation to the sale of 141 The Esplanade from par 41 through until par 50.

4. At par 75, his Honour then concluded, "I am not satisfied that the plaintiff has succeeded in showing dishonesty on the part of [Mr] Kenworthy".  The only ground which challenges that finding of his Honour is ground 3, and the thrust of the sub‑paragraphs in it is directed to the appellant's pleaded case that Mr Kenworthy was the controller of the appellant.  See, for example, grounds 3.5, 3.8 and 3.9.  As I have already observed, his Honour concluded that Mr Kenworthy did not exercise effective control over the appellant.  That conclusion is not challenged in the notice of appeal.

Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198

1. Ground 1 contends that there was no contract before the transfer was registered and that Hancock's case did not apply.  The trial Judge concluded that there was a contract and that the contract for the sale of property had to be rescinded before a constructive trust could be imposed.  This conclusion was based on Hancock's case.  Ground 2 contends that Hancock's case was wrongly decided and should be overruled.

2. In my opinion, it was unnecessary for the trial Judge to consider whether or not there was a voidable agreement and whether or not there should or should not have been rescission before the appellant's claim could succeed.

3. Mr Kenworthy is the registered proprietor of the land, and the only way in which his title is defeasible is if it can be shown by the appellant that Mr Kenworthy was guilty of fraud. If such finding had been made, then s 200 of the Transfer of Land Act empowered the Court to cause the transfer and the entry in the register.

4. The trial Judge found that he was not satisfied that dishonesty had been shown on the part of Mr Kenworthy, ie he was not guilty of fraud.

5. I would dismiss grounds 1 and 2 for those reasons.

6. As a result, I would dismiss the appellant's appeal in relation to the Mount Pleasant land.

The Misappropriation Claim

1. I agree with Wallwork J's conclusion that the appeal concerning the misappropriation of money should be dismissed for the following reasons.

2. In the statement of claim, the appellant claimed that:

   "Prior to his death, [Mr] Kenworthy, over a period of years, misappropriated from the Trust for his own benefit a total of approximately $380,000.00."

3. Particulars were sought as to how the sum of $380,000 was made up.  The particulars supplied by the appellant read:

   "The amounts listed in the plaintiff's discovered documents numbers 107 and 108 listed under the heading 'Dwgs' [Drawings] and those entries in those documents highlighted in yellow.  Equivalent entries appear, although unmarked, in the cheque butts discovered as plaintiff's discovered documents numbers 73‑99."

4. In the notice of appeal, the appellant claimed that the sum of $225,417.79, or alternatively $375,417.79, was misappropriated.

5. The sum of $375,417.79 was an amount which appeared in the Lionel Housden Kenworthy trust balance sheet as at 30 June 1997 as a current asset under the heading "Receivables" and with the description "Loan Lionel Housden Kenworthy".

6. The evidence‑in‑chief of one of the directors, Lindsay Kenworthy, was given partly orally and partly in the form of a written statement.  His written statement revealed that Mr Kenworthy had not filed a tax return or prepared accounts since 1990.  The financial records were delivered to accountants.

7. In the course of producing the accounts, the accountants "produced two cashbooks".  Lindsay Kenworthy's written statement reads at par 20:

   "Once those cash books were produced I, together with my then de facto partner and with assistance from my brother Dennis, went through those cash books and the plaintiff's cheque butts and identified a large number of payments that were not possibly associated with the LHK Trust.  I have highlighted those payments in the cash books.  I approached that task conservatively.  For example, there are payments such as payments to HBF which, on further consideration, could not possibly have been for the LHK Trust but for which I have not highlighted.  There are very many such examples.  One example of a payment which was not for the benefit of the LHK Trust is the entry for 8 August 1994.  That is a payment of $20,000.00, apparently for a car.  The LHK Trust does not own a car.  I can explain why each entry is highlighted."

8. In his oral evidence, Lindsay Kenworthy said that the column headed "drawings" were his father's drawings.  He said they were not associated with the trust.

9. Dennis Kenworthy's statement revealed that he was involved in the process of checking the payments.  He makes it clear, however, that this was mostly undertaken by Lindsay Kenworthy.  His statement says at par 33:

   "I am certain that a very high percentage of the payments were not made for the purpose of the trust.  For example, there was no reason for the trust to be making payments to HBF."

10. He makes it clear that Lindsay Kenworthy undertook the bulk of the highlighting task.  At par 34 he says:

    "Lindsay undertook the task of going through the cash books and highlighted those payments that were obviously not made for the purpose of the LHK trust."

11. There was extensive cross‑examination of Lindsay Kenworthy.

12. In his reasons for decision, the trial Judge gave examples of deficiencies in Lindsay Kenworthy's evidence.  I need not repeat what his Honour has set out in par 25 to par 27 of the reasons.

13. His Honour noted that Lindsay Kenworthy was of the opinion that there was a "pattern" of misappropriation.  However, the examples that his Honour set out led him to find that there was no drawing in relation to personal expenditure relating to Mr Kenworthy beyond the amount that was then due to Mr Kenworthy by the trust.  His Honour, at par 29 of his reasons, refers to the amount owing to Mr Kenworthy in an amount of "some $60,000".  As at 30 June 1990, the balance sheet does show under the heading "current liabilities" and under the sub‑heading "beneficiaries loan accounts", that the sum of $62,882.65 was owing to Mr Kenworthy.

14. I now turn to deal with the first ground of appeal, which complains that the trial Judge erred in not accepting that the cashbook "as marked up" proved the misappropriation of funds.  This Court was not asked to embark on the task of deciding whether or not each highlighted item was a misappropriation or not.

15. The appellant contends only that the Court should have accepted that all of the yellow marked items were misappropriated sums. The appellant argues that s 1305 of the Corporations Law switched the onus onto the first respondent to prove that there was no misappropriation.

16. In my opinion, that contention cannot be accepted for these reasons.

17. First, the yellow highlighting, even if it formed part of the books, says nothing about misappropriation. They remain yellow marks, whether s 1305 applies or not.

18. Secondly, in my opinion, the yellow marks are not part of the cashbook. Section 1305 applies to the contents of the cashbooks, which were prepared and then delivered by the accountants to the directors. The cashbooks contain words, letters, figures and symbols. The yellow marks simply highlight some of those words, letters, figures and symbols. In short, s 1305 does not apply to the yellow marks on the cashbook.

19. The total of the yellow marked items were totalled and the total included in the balance sheets of the trust and shown as a current asset under an item styled "receivables".  The word "receivable" is a neutral word meaning "awaiting receipt of payment" (see the Macquarie Dictionary; "receivable").

20. The appellant's argument that the evidence of the directors about all of the monies marked yellow being misappropriated, ignores his Honour's reference to the evidence adduced in cross‑examination, which revealed that many items highlighted were not examples of misappropriation.

21. In my opinion, this aspect of the appeal should be dismissed.

22. The result is that the appeal should be dismissed in its entirety.