Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd (ACN 123 123 124)
[2020] VSCA 305
•27 November 2020
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S EAPCI 2020 0007
| MILFOIL PTY LTD | Applicant |
| v | |
| COMMONWEALTH BANK OF AUSTRALIA LTD (ACN 123 123 124) | Respondent |
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| JUDGES: | BEACH, McLEISH and SIFRIS JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 5 November 2020 |
| DATE OF JUDGMENT: | 27 November 2020 |
| MEDIUM NEUTRAL CITATION: | [2020] VSCA 305 |
| JUDGMENT APPEALED FROM: | [2019] VSC 504 (Lyons J) |
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EQUITY – Trusts – Inconsistent dealing with trust property – Requirement of knowledge – Baden category (v) not sufficient – Knowledge of bank not sufficient to fall within Baden category (iv): Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161.
PRACTICE AND PROCEDURE – Appeal – Leave sought to amend grounds of appeal to raise Baden category (iii) – Not argued before trial judge – Leave refused.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr M Osborne QC with Mr R Boadle | Goldsmiths Lawyers |
| For the Respondent | Mr P Bick QC with Dr A Trichardt | Clayton Utz |
BEACH JA
McLEISH JA
SIFRIS JA:
Introduction
The critical issue in this application for leave to appeal, as originally constituted and prosecuted, until the morning of the hearing of the application, was whether the respondent, Commonwealth Bank of Australia (‘the Bank’) knew of circumstances which would indicate to an honest and reasonable person that a deposit in the sum of $245,749.23 (‘the Deposit’), on 30 September 2009, by EDH Pty Ltd (‘Ed Harry’) into an account held at the Bank in the name of Mercury Brands Group Pty Ltd (‘MBG’) was the trust property of the applicant, Milfoil Pty Ltd (‘Milfoil’) and that the transfer of the Deposit to Australian Horizons Trading Pty Ltd (‘AHT’) by the Bank represented an inconsistent dealing with trust property.[1]
[1]Milfoil alleged knowing receipt on the part of the Bank within the first limb of Barnes v Addy (1874) LR 9 Ch App 244. The judge held that because the account was in credit there was no relevant receipt by the Bank. There is no challenge to this finding. However, the judge held that if and to the extent that the Deposit was trust property and the Bank was aware, within the relevant Baden categories (see footnotes 3 and 4 below) that the Deposit comprised trust funds it could be found liable for inconsistent dealing.
A judge of the Trial Division of the Court held that save for the amount of $31,432.78, Milfoil failed to establish that the balance of the Deposit was trust property and in any event, the Bank and an honest and reasonable person in the position of the Bank, would not have been aware of circumstances that would indicate that the Deposit comprised any trust property.[2] The sole proposed ground of appeal, as originally constituted, was a limited challenge to these related findings. Milfoil contended, contrary to the judge’s findings, that the entire Deposit comprised trust property and the Bank had constructive knowledge of circumstances, within category (iv) of the Baden[3] categories, that indicated that the entire Deposit comprised trust property, that is that the Bank had knowledge, when the transfer to AHT was made, of circumstances which would indicate to an honest and reasonable person that the Deposit comprised trust property.[4] There was no challenge to the judge’s finding that the knowledge of the Bank did not fall within the Baden (i) or (ii) categories. The Baden (iii) category was not argued at trial.
[2]Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd [2019] VSC 504 (‘Reasons’).
[3]Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161 (‘Baden’).
[4]The other Baden categories are: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.
At the commencement of the hearing, senior counsel for Milfoil advised the Court that Milfoil does not challenge the judge’s finding that $203,995.40 of the lump sum Deposit does not comprise trust funds and that the appeal would not be pursued to such extent. It is common ground, as found by the judge, that the balance of the Deposit, in the amount of $31,432.78 comprises trust property. As a consequence of Milfoil’s concession, this case, commenced over seven years ago about events that occurred more than eleven years ago, comes down to an amount of $31,432.78.
Milfoil did not file an amended notice of appeal or amended written case but made further specific oral submissions in relation to its revised case. This is not meant as a criticism. However, in the written case the revised case is dealt with as part of the broader issues as originally propounded. We have, therefore, dealt with the broader case where necessary or appropriate or to provide context.
For reasons that follow, we agree with the judge that Milfoil has failed to establish that when the transfer to AHT was made the Bank was aware of circumstances which would indicate to an honest and reasonable person that the sum of $31,432.78 being part of the Deposit, comprised trust property.
Relevant facts
In mid-2009, Mercury Brands Ltd (‘MBL’), through its subsidiary MBG (‘the Mercury Group’), was in the business of importing and distributing clothing to major retailers. The Mercury Group was in financial difficulty. Its principal banker, the Bank, had been progressively reducing finance available to it and the group was unable to obtain alternative finance and make payment to its Chinese suppliers for stock that had been ordered.
In early July 2009, Milfoil entered into an agreement with MBG for Milfoil to make payments to secure the release of stock from 13 of MBG’s Chinese suppliers[5] for on-sale by MBG to its wholesale customers, on Milfoil’s behalf. In light of MBG’s financial position, it was agreed by Milfoil and MGB that:
[5]It is not clear whether MBG or MBL ordered the goods from the Chinese suppliers. However, nothing turns on this point.
(a) Milfoil would purchase the stock from the overseas suppliers. The stock would be invoiced to, and be the property of, Milfoil;
(b) MBG would then arrange for the stock to be kept separate and delivered to its wholesale customers, with the customers to make payments directly to Milfoil, either by paying invoices which MBG issued naming Milfoil as the payee or by MBG directing payment to Milfoil; and
(c) the proceeds of sale of the stock received by Milfoil would first be applied in repayment of the principal amount paid by Milfoil, plus interest and an agreed fee of $70,000, with the balance of the proceeds and/or the remaining stock then released to MBG,
(‘the Milfoil Scheme’).
On 3 July 2009, Milfoil paid $509,471.16 (‘the Milfoil Advance’) to 13 of MBG’s Chinese suppliers and the Chinese suppliers released stock to MBG. This was not the only stock purchased by MBG. The failure of MBG to create an accurate record or list of the stock purchased with the Milfoil Advance and track that list with goods sold and payments received, has effectively resulted in this proceeding.
The stock purchased with the Milfoil advance (‘the Milfoil Stock’) was not invoiced to Milfoil. MBG’s customers were not directed to make payments to Milfoil. The result was that MBG received payment from the sale of the Milfoil Stock purchased with the Milfoil Advance into the account of MBG with the Bank. There was no difference between payment for Milfoil Stock or any other stock. The payments were all deposited into the same bank account.
On 17 September 2009, the board of directors of MBG appointed Stan Traianedes (‘Traianedes’) as voluntary administrator of MBG (‘the Administrator’).
On 18 September 2009, the Bank appointed Ian Carson and Craig Crosbie of PPB as receivers and managers of MBG and MBL (‘the Receivers’).
An employee of MBG prepared a spreadsheet entitled ‘reconciliation working paper’ which purports to record the Milfoil Stock. It was provided to Milfoil on
29 September 2009. A revised version (‘RWP’) was prepared on 30 September 2009. There is a note at the top of the revised version stating that it was ‘Prepared 30.9.09 by Taleea Brown employed by P.P.B as Receivers for the CBA. The sums listed are the landed US$ amounts not the higher AUD equivalent with a 40% margin added.’
The RWP records five invoices for Ed Harry. Four of the five invoices indicated payment dates at the end of October: two on 30 October and two on
31 October 2009. One invoice, number 628320 (‘Invoice 628320’) indicated payment on 30 September 2009. The amount of Invoice 628320 recorded in the RWP is $32,238.74. However, when this invoice was paid, Ed Harry deducted a discount of $805.96 and paid the amount of $31,432.78. This amount formed part of the lump sum Deposit. The invoices comprising the Deposit were set out in a remittance advice provided by Ed Harry with payment of the Deposit. Invoice 628320 is the only invoice listed on both the remittance advice and the RWP.[6] The Bank was not provided with the remittance advice.
[6]In the remittance advice, it is broken up into two invoices: 628320 and 628320A. Nothing turns on this.
On 30 September 2009, the Bank received the RWP.
By a Business Sale Agreement dated 1 October 2009 (‘the Agreement’), MBG’s business was sold by the Administrator to AHT. Under the Agreement, AHT purchased all of the Assets and the Business (as defined) of MBG as at 30 September 2009, for an amount which ensured that all the money MBG owed to the Bank would be repaid (approximately $2.2 million). The assets sold included the debts owing to MBG from its customers, but the amounts owed to Milfoil by MBG’s customers were ‘Excluded Assets’ and remained the property of Milfoil.
As noted above, under the Agreement, AHT purchased the assets of MBG. Clause 1.3 of the Agreement provided that, effective close of business on 30 September 2009, MBG unconditionally and irrevocably assigned to AHT all its right, title and interest in the Trade Debtors (being trade debts as defined). It also provided that to the extent any Trade Debtors are paid to MBG or the Administrator, they would hold that amount on trust for AHT and immediately account for and pay that amount to AHT.
The Receivers resigned shortly before the execution of the Agreement, apparently because of concerns they may be breaching s 420A of the Corporations Act 2001 (Cth). Compliance with s 420A was not an issue in the proceeding.
On 30 September 2009, a lump sum amount of $245,749.23 was deposited by EDH Pty Ltd by electronic funds transfer (‘EFT’) into an account held by the Receivers at the Bank in the name of MBG. We have called this the Deposit. The account was styled Mercury Brands Group Pty Ltd — Receivers and Managers Appointed (‘the Receivers Account’). At all times the Receivers Account operated in credit. The Receivers Account was opened on 23 September 2009 and closed on 27 October 2009. As noted, the Deposit included an amount of $31,432.78 referable to Invoice 628320.
However, some trade debtors had made payments shortly before close of business on 30 September 2009 and this fact was the subject of discussion as part of negotiating the Agreement. On 1 October 2009, a Deed of Acknowledgement was executed by AHT, Traianedes as Administrator on behalf of MBG and Adam Vincent on behalf of the Bank.
Under the Deed of Acknowledgment, in consideration for AHT agreeing to waive the condition in cl 2.1(d) of the Agreement (that the Trade Debtors at Completion would be at least $3.4 million), MBG and the Administrator agreed that debts which had been owing to MBG and ‘presented prior to Completion‘ were to be remitted to AHT. The amounts paid, the relevant customer and relevant account (most of which were CBA accounts) were listed in the Deed of Acknowledgment. The amounts totalled $746,606.53. Relevantly, these amounts included the sum of $245,749.23 (which included Invoice 628320) received from ‘Ed Harry’ into the Receivers Account. Ed Harry’s name was also in the RWP.
The Deed of Acknowledgment provided that:
(1)MBG and Mr Traianedes agreed that the amounts referred to were the property of AHT and form part of the Assets under the terms of the Sale Agreement; and
(2)the Company and the administrator directed the receivers and the CBA to pay and transfer those funds to AHT.
A Deed of Direction was executed by Traianedes as Administrator on or about 1 October 2009. Among other things, under the Deed of Direction, the Administrator authorised the Bank to pay to AHT the amounts in the Deed of Acknowledgment held in the Receivers Account. Relevantly, these amounts included the lump sum of $245,749.23 (which included Invoice 628320) received from ‘Ed Harry’ into the Receivers Account.
Further, on 1 October 2009, Vincent sent a letter to the Administrator confirming on behalf of the Bank that he would immediately direct the former Receivers to make the payments set out in the Deed of Direction.
MBG customers made payments for stock that had been delivered to them. The payments comprised three funds: (a) payments made to AHT, (b) payments made to the Receivers, and (c) payments made to the Administrator.
In January 2010, the Administrator made an application for directions to the Federal Court of Australia in relation to amounts received by the Receivers, the Administrator and AHT for various invoices identified in the RWP.
Milfoil was added as a party to the application for directions, and the matter proceeded inter partes.
Finkelstein J decided that Milfoil was entitled to three sums comprising
(a) $237,029.33 that had been collected by AHT, (b) $35,499.43 that had been collected by the Receivers, and (c) $22,246.91 that had been collected by the Administrator. In doing so, Finkelstein J decided that the sums were derived from the sale of stock described in the RWP.[7] His Honour accepted that the RWP was the only evidence that connected Milfoil with the Milfoil Stock and that it was sufficiently reliable. However, his Honour did not find that the stock identified in the RWP ‘comprised the totality of the Milfoil Stock’.[8]
[7]Traianedes in his capacity as Deed Administrator of Mercury Brands Group Pty Ltd (subject to deed of company arrangement) v Mercury Brands Group Pty Ltd [No 2] [2010] FCA 1140.
[8]The Bank contended, on a pleading summons before a judge of the Court (not the trial judge), that Finkelstein J did so find and that there was accordingly an issue estoppel: Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd [2016] VSC 223. The decision in its favour was reversed on appeal by this Court in Milfoil Pty Ltd v Commonwealth Bank of Australia Ltd [2017] VSCA 256 at [125]–[129] (Santamaria JA, Tate JA and Whelan JA agreeing at [1] and [2]).
Apart from interest payments in July and August 2009, Milfoil only received $92,896.82 from MBG before the appointment of the Administrator. It has only received $57,815.03 since that time, being the sum of the two amounts collected by the Receivers and the Administrator referred to in the previous paragraph. Milfoil did not receive the amount of $237,029.33 from AHT because AHT went into liquidation.
Milfoil commenced the proceeding below by way of writ, filed on 1 October 2013 against the Bank for receiving the proceeds of sale of the stock purchased with the Milfoil Advance with knowledge of Milfoil’s interest in that stock. This was on the basis that the proceeds of sale of the stock purchased with the Milfoil Advance were deposited into accounts held with the Bank by MBG or the Receivers appointed to MBG. The original claim was for over $3 million. In its amended claim, Milfoil sought to recover stock allegedly purchased with the Milfoil Advance of $509,471.216 (which allegedly had a wholesale value of at least $2,043,250) from the Chinese suppliers (allegedly with a retail value to MBG of at least $3,090,538). In its final address at trial, however, Milfoil only sought to recover from the Bank the unpaid portion of the Milfoil Advance. This unpaid portion was allegedly $486,754.34. This application for leave to appeal, as originally constituted, as noted above, sought relief relating to the Deposit, that is $245,749.23.
Milfoil’s revised application for leave to appeal concerns Invoice 628320. The sole revised proposed ground of appeal is whether the Bank knew of circumstances that would indicate to an honest and reasonable person that the sum of $31,432.78 being part of the Deposit transferred to AHT comprised ‘Milfoil’s trust proceeds’.
Milfoil claimed that the Bank first became aware of the Milfoil Stock during a conversation between Terrence Reynolds of Milfoil and Salvatore Barbagallo of the Bank on 10 August 2009. Milfoil also claimed that the Bank was aware of its interest due to a series of events in late September and early October 2009.
Judge’s reasons
After a detailed examination of the knowledge of the Bank and all of the relevant facts and circumstances the judge concluded that, although the Bank was aware of the general nature of Milfoil’s involvement or assistance provided to MBG, the Bank was not aware that the Deposit comprised or included trust property and the circumstances did not indicate to the Bank and indeed would not have indicated to an honest and reasonable person that the Deposit comprised or included trust property. A critical focus by all parties was on the RWP. By reference to the RWP, and other evidence, the judge concluded that, other than in respect of Invoice 628320 in the sum of $31,432.78, Milfoil had failed to establish that the Deposit comprised trust funds.
The circumstances did not give such indication essentially because Milfoil could not establish and it was far from evident that any part of the Deposit comprised trust funds. In short, the documentation did not contain any correlation between the Deposit, being a lump sum, and the invoices relating to such payment being specifically referrable to the stock purchased by Milfoil. The Deposit could have been for stock unrelated to the Milfoil Stock.
In particular and relevantly, the judge found that, other than in respect of Invoice 628320 in the sum of $32,238.74, the invoices relevant to the Deposit, set out in a remittance advice provided by Ed Harry at the time of the Deposit, were not recorded in the RWP, the primary record of Milfoil Stock. The Bank did not receive the remittance advice. To the extent that the Deposit comprised invoices for Milfoil Stock not recorded in the RWP, the judge found that there was no evidence that the balance of the Deposit in the sum of $214,316.45 was in respect of Milfoil Stock and therefore trust property.[9] Although this amount is no longer pursued, the circumstances, as outlined, provide some context to the sole revised proposed ground of appeal.
[9]Reasons [367]–[368], [534]–[536].
In relation to Invoice 628320, the judge said:
I am unable to conclude that these circumstances would indicate to an honest and reasonable person in the shoes of the CBA that the $245,749.23 from Ed Harry included payment of invoice 628320 referred to in the RWP.
This is for a number of reasons. First, the amount received from Ed Harry on 30 September 2019 was a lump sum: it was not broken down into invoice payments. Second, the RWP did not inform the reader that invoice 628320 was in fact paid on 30 September 2009, only that 30 September 2009 was the anticipated date for payment. However, the RWP did indicate that this invoice had been paid to Mercury by the time the RWP had been prepared.
Third, the Acknowledgement Deed made plain that the administrator acknowledged that the sum of $245,749.23 received from Ed Harry was the ‘property ’of AHT and formed part of the Assets to be sold to AHT. It then provided that the administrator irrevocably and unconditionally directed the CBA to pay that sum to AHT. This was then confirmed by the Direction Deed. These are significant factors to be taken into account in determining what a honest and reasonable person would appreciate in all the circumstances. This is in a context where it was the administrator, in charge of the books and record of Mercury, who was in the best position to determine whether payment for invoice 628320 was in fact included in the $245,749.23.
In my view, further enquiries were required before an honest and reasonable person in the shoes of the CBA would know that the $245,749.23 in fact contained payment of invoice 628320 in the RWP.
As a result, it has not been established that the CBA had knowledge consistent with Baden category (iv).
I have considered whether an honest and reasonable person would know from all these circumstances that the payment of $245,749.23 did contain some of the proceeds of the sale of stock in the RWP. For the reasons set out above, I am unable to reach that conclusion. I remain of the view that further information was required.[10]
[10]Ibid [546]–[551].
Proposed ground of appeal
There is only one proposed ground of appeal and it is in the following terms:
The Bank had constructive knowledge, within Baden category 4, that $245,749.23 was Milfoil’s trust proceeds, and the Bank subsequently dealt with those proceeds inconsistently with their trust character and the learned primary judge should have found accordingly.
As a result of the concession, the amount of $245,749.23 should be amended to $31,432.78.
Milfoil also sought leave to rely on the Bank’s knowledge within the Baden (iii) category in circumstances referred to below. This was not argued at trial and leave was opposed by the Bank.
Applicant’s submissions
The gravamen of Milfoil’s submission is that the constructive knowledge or indication that part of the Deposit being Invoice 628320 comprised trust funds, arises out of ‘five pieces of actual knowledge held by the Bank.’ It is as well to set out these five items in full:
(d) First, it is more likely than not that by at least 10 August 2009 the Bank had actual knowledge of the Milfoil advance, Milfoil’s interest in the stock, the fact that one of the debtors was Ed Harry, the terms of the Milfoil agreement generally and that fact that some of Milfoil’s money had been or might be received by the Bank.[11] Put differently, the Bank had actual knowledge of the terms of the trust and the trust character of any funds it received representing proceeds of the Milfoil advance.
[11]Ibid [223], [447].
(e) Second, the Bank had actual knowledge of the RWP on 30 September 2009[12] which identified Ed Harry as one of the recipients of Milfoil’s stock. The Bank had actual knowledge that the RWP represented debtors that were, upon receipt by the Bank, going to be paid to Milfoil.[13]
[12]Ibid [307], [323].
[13]Ibid [327].
(f) Third, by reason of its involvement in negotiating the Agreement,[14] the Bank had actual knowledge that:
[14]Ibid [312]–[313], [321]–[324].
(i) amounts owed by third parties to Milfoil, received by the Bank and identified in the RWP (including Ed Harry), did not form part of the amounts to be transferred to AHT by reason of the terms of the Agreement;[15] and
[15]Ibid [311], [316]–[318], [323]–[324].
(ii) the RWP identified the stock owned by, and debts owing to, Milfoil.[16]
(g) Fourth, the Bank had actual knowledge on 1 October 2009 that it had received $245,749.23 from Ed Harry.[17]
(h) Fifth, it can be inferred that the Bank had actual knowledge of the need for a process to ensure that any of Milfoil’s proceeds received by the Bank, as evidenced in part by the RWP, were identified and not transferred to AHT.[18]
[16]Ibid [328].
[17]Ibid [337]–[338], [543]–[544].
[18]Ibid [354]–[357].
Relying on a finding by the judge that the Bank was told that money from Ed Harry might be deposited into an account operated by the Bank, and its invariable practice to take legal advice where it was told that someone else’s money might be deposited into the account, Milfoil submits that the Bank, by failing to do so, did not act as an honest and reasonable person would have acted. Milfoil submits that an honest and reasonable person would have known that money received from Ed Harry, that is the Invoice 628320 payment, was probably Milfoil proceeds.
Milfoil contends that the Bank’s processes for identifying Milfoil proceeds were, as found by the judge ‘far from adequate’ and that it should not be permitted to hide behind such inadequate processes as a justification for not recognising the Deposit, and in particular that part of the lump sum Deposit comprising Invoice 628320, as part of the Milfoil proceeds, recognition that would have been apparent to an honest and reasonable person. In particular, Milfoil contends that the Bank should have had procedures in place to identify the commercial reality that lump sum payments are often made comprising many underlying invoices. Milfoil contends that hiding behind the inadequate procedure constitutes ‘moral obtuseness’, affects the conscience of the Bank and brings such conduct within Baden (iv).[19] In the circumstances, an honest and reasonable person would have recognised that the sum of $31,432.78 was Milfoil proceeds.
[19]Reference was made to Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 398 (Gibbs J); Grimaldi v Chameleon Mining NL [No 2] (2012) 200 FCR 296, 361 [261] (Finn, Stone and Perram JJ).
Milfoil contends further that by failing to give an explanation of its inadequate processes and by not undertaking further enquiries it was open to the judge to infer that the Bank had actual knowledge of the relevant circumstances within the Baden (iv) category.
Milfoil contends that the judge should not have regarded the Deed of Acknowledgment and the Deed of Direction as significant factors on the question of the Bank’s knowledge particularly in circumstances where after execution of the Deeds the Bank attempted to reconcile the amounts received with those set out in the RWP. In oral submissions Milfoil contended that there was no evidence of any investigation or inquiries by the Administrator or the Bank, prior to the execution of the Deeds, and that the only interest of the Administrator and the Bank was to obtain a waiver by AHT of cl 2.1(d) of the Agreement, in order to enable the funds to be paid to the Bank.
Milfoil contends that having questioned the accuracy of the RWP, the judge was wrong to proceed on the footing that the Deposit did not correspond with invoices in the RWP, particularly having acknowledged that the RWP was never intended to and did not exhaustively identify the Milfoil proceeds. Accordingly, the judge should not have assessed the knowledge of the Bank solely by reference to the RWP but rather more generally from the circumstances referred to.
Although these contentions related to the broader appeal as originally constituted, but now limited to Invoice 628320, we did not understand Senior Counsel for Milfoil to abandon them, and we have read and considered them in light of the concession. Further specific submissions relating to Invoice 628320 and the revised case are referred to below.
Respondent’s submissions
The Bank has for the most part followed and accepted the reasoning of the judge.
The Bank contends that the fact that it knew that there was some kind of trust arrangement was not sufficient and that Milfoil was required, but failed, to establish that the Deposit comprised trust funds (other than in the amount of $31,432.78) and that the Bank had the requisite knowledge that it received the proceeds of trust property. Knowledge of the receipt of a lump sum, without allocation or reference to invoices, was, notwithstanding receipt of the RWP later that day, insufficient. The Deposit could not be linked to the invoices in the RWP and it was not enough, it was contended, that Ed Harry was a customer listed on the RWP and it had made a payment. This possibility required further investigation and was not within the Baden (iv) category.
The Bank contends that the Deed of Acknowledgement and the Deed of Direction were, as held by the judge, significant documents and that the Administrator ‘could be trusted to understand the affairs of Mercury’ and ‘should have a good understanding of the business and records of Mercury’ and was accordingly in the best position to make a judgment as to whether the Deposit or any part thereof comprised trust funds.
The Bank contends that the fact that the Bank accepted that a process to identify trust funds was necessary and important did not amount to knowledge that it had received or dealt with trust funds, in circumstances where the RWP and other documents in the Bank’s possession did not so indicate. The fact that the Bank could have done a better job is not sufficient and does not constitute actual knowledge as contended by Milfoil.
The Bank submits that the judge did not rely solely on the RWP as containing a record of the Milfoil Stock for the purpose of assessing what the Deposit related to, but also on the Deeds and the knowledge and position of the Administrator. In any event there was no other record of the Milfoil Stock.
Although these contentions related to the appeal as originally constituted we have read and considered them in light of the concession made by Milfoil. Further submissions, specifically directed to Invoice 628320 and the revised case are dealt with below.
Analysis
The authorities are not in dispute. The case at trial and on appeal was conducted on the basis of the Baden categories of knowledge. It is convenient to set them out again:
(i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.[20]
[20]Baden [1992] 4 All ER 161, 235 [250] (Peter Gibson J).
The present case relevantly involved a circumstance where it was not said that the receipt of the trust property involved the relevant knowledge, but rather the later dealing with that property, having acquired the relevant knowledge in the interim. In this way, Milfoil sought to attach liability to the Bank based on inconsistent dealing with trust property, rather than knowing receipt.[21] In particular, the Bank had ‘swept’ the Deposit held by it in the Receivers Account into the account of AHT on 7 October 2009.
[21]Agip (Africa) Ltd v Jackson [1990] Ch 265, 291 (Millett J).
The issue in this application for leave to appeal is whether the Bank had knowledge of circumstances which would indicate to an honest and reasonable person that part of the lump sum Deposit, that is Invoice 628320, comprised trust funds. In relation to the other four invoices comprising the Deposit, part of the issue required a consideration of what precisely comprised Milfoil Stock and therefore trust funds for the purpose of assessing such knowledge. These were essentially questions of fact and evaluation. In our opinion and as has now been conceded, properly in our view, it was open to the judge to conclude that the Bank did not have such knowledge and that Milfoil had failed to establish that the other four invoices comprised Milfoil Stock.
However, it is common ground that, unlike the other four invoices, Invoice 628320 relates to Milfoil Stock, is recorded in the RWP, and payment thereof comprised trust funds. The sole remaining question is whether there were circumstances that would indicate to an honest and reasonable person that the payment of Invoice 628320, being a part of the lump sum Deposit, comprised trust funds. The judge held that there were not. In our opinion, it was open to the judge to make such a finding, and having conducted a review of the evidence we consider that the judge was correct.
In summary, for the reasons set out below and by reference to the RWP, there was nothing to indicate to an honest and reasonable person that the lump sum Deposit included payment of Invoice 628320. Further, other than the RWP, there are no other documents or information that so indicated to the Bank.
The Deposit was made by EDH Pty Ltd on 30 September 2009, directly into the Receivers Account by EFT. It was a lump sum of $245,749.23 comprising five separate invoices, including Invoice 628320, the only invoice listed in the RWP.
At the time of the lump sum Deposit it may be accepted and the evidence establishes that the Bank was aware of the general nature of the arrangements between Milfoil and MGB. In fact, the Bank had been aware since the meeting on
10 August 2009, as found by the judge.
Between 10 August 2009 and 30 September 2009, although there was much activity, there were no relevant documents, discussions, facts or circumstances that affected or added to the knowledge of the Bank of the Milfoil Scheme and in particular whether any stock held by Ed Harry related to or formed part of the arrangements and comprised the Milfoil Stock. Various lists were prepared purporting to identify the Milfoil Stock and reconcile the Milfoil Stock with payment by Milfoil to the Chinese suppliers. Ultimately the records and lists, not provided to the Bank, were ‘far from accurate’.[22] As noted earlier, on 17 September 2009, MBG appointed the Administrator and on 18 September 2009 the Bank appointed the Receivers.
[22]Reasons [275].
Up to this point, that is prior to 30 September 2009, it is in our view clear that, as found by the judge, there was no information or indication to the Bank that any stock held by Ed Harry was Milfoil Stock and therefore Excluded Assets with the consequence that any payment would effectively comprise trust funds for the benefit of Milfoil.
However, between 30 September 2009 and 7 October 2009, three specific events took place. First, the Bank received the RWP on 30 September 2009 which included Ed Harry as a retail customer, one of five. Secondly, the Bank was involved in the negotiations for the sale of the business of MGB to AHT and in particular was aware of the definition of Excluded Assets being debts owed by third parties to Milfoil collected by MBG. Thirdly, the Bank was a party to a Deed of Acknowledgment and a Deed of Direction, both dated 1 October 2009, confirming that the entire Deposit was the property of AHT and not part of the Excluded Assets and directing that the Receivers pay the amount to AHT. The payment to AHT was made on 7 October 2009. The Deed of Acknowledgment was executed by the Bank, AHT, MGB and the Administrator. The Deed of Direction was executed by the Administrator.
The three events referred to, albeit over a short period of time, added to the knowledge of the Bank. As a result the Bank was aware:
(i) That Ed Harry was a customer of MBG.
(j) That the RWP recorded that:
(i) five invoices had been issued to Ed Harry;
(ii) two invoices anticipated payment on 30 October 2009;
(iii) a further two invoices anticipated payment on 31 October 2009;
(iv) Invoice 628320 anticipated payment on 30 September 2009;
(v) payment was received in respect of Invoice 628320; and
(vi) the full amount of Invoice 628320 was a loan amount owing to Milfoil.
(k) That the Milfoil Stock included some Ed Harry stock that was excluded from the sale to AHT.
(l) That the Deposit ($245,749.23) was referrable to Ed Harry stock and together with other amounts formed part of a larger amount of $625,969 to which AHT was entitled and which was paid to AHT pursuant to the Deed of Direction.
The judge held that this knowledge was not sufficient to indicate that Invoice 628320 and indeed the entire Deposit comprised trust funds. The judge referred to a number of authorities and said:
However, the Full Court of the Federal Court considered the requisite degree of knowledge for knowing receipt in Grimaldi v Chamelon Mining NL (No 2) (‘Grimaldi’). The Court held that Baden categories (iii) and (iv) were sufficient to impose liability for knowing receipt as they are consistent with equity’s concern for the state of conscience of the defendant. That rider is important: recipient liability is ‘fault based’. The Court in Grimaldi adopted the comments of Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd that ‘[u]nconscionability cannot be fictionalised, and the grounds on which constructive trust liability is imposed should be real and substantial’.
The principles in Grimaldi have been followed by other intermediate appellate courts.
As to the nature of Baden categories (iii) and (iv), the Full Court in Grimaldi said:
The first two categories of ‘knowledge’ require no comment. The third involves such a calculated abstention from inquiry as would disentitle the third party to rely upon lack of actual knowledge of the trustee’s or the fiduciary’s wrongdoing. The fourth reflects what seems to have been accepted provisionally by three judges of the High Court in Consul Developments. It is, in essence, an understandable, objective, default rule designed to prevent a third party setting up his or her own ‘moral obtuseness’ as the reason for not recognising an impropriety that would have been apparent to an ordinary person ... . It is the surrogate of actual knowledge.[23]
[23]Reasons [444]–[446] (citations omitted).
This concerned the knowledge requirement in respect of knowing receipt. The judge applied the same reasoning to inconsistent dealing.[24]
[24]Ibid [515]–[516].
In our opinion the knowledge of the Bank, although more detailed and specific, as at the time of transfer of the Deposit to AHT, as a result of the events referred to, is not sufficient to compel a conclusion of ‘fault’ or concern at the ‘state of conscience’ of the Bank or of the Bank failing to recognise an impropriety. In particular, the facts known to the Bank did not indicate to an honest and reasonable person that the Deposit included payment of Invoice 628320.
The Milfoil Scheme was not implemented as contemplated. The Milfoil Stock was not separately invoiced in the name of Milfoil with a direction that payment be made directly to Milfoil. In fact, there are no contemporaneous documents of any evidential value that record precisely what comprised the Milfoil Stock. The scheme contemplated, as was necessary, a precise documentary trail, linking, tracking and reconciling the stock paid for by Milfoil, the stock supplied to the customers and payment made for such stock. This did not happen. The stock was mixed, deposits into the bank account were mixed and there were no separate records kept. Payment was not made to Milfoil directly and payment received by MBG in relation to Milfoil Stock, to the extent that it could be identified, was not held separately in trust. In short, the recording of the Milfoil Stock for the necessary identification and payment purposes was entirely inadequate and there is not much, if any, dispute about this.
However, the position regarding Invoice 628320 is different. The RWP is the only practical or working document that purports to record the Milfoil Stock.[25] Finkelstein J regarded the RWP as sufficiently reliable, and although this non-contemporaneous and specifically created document, given its intended purpose, does not track or link all the stock recorded therein to the acquisition of the stock by Milfoil, it does make clear that the goods the subject of Invoice 628320 comprised Milfoil Stock, that the invoice had been paid and that the proceeds of payment were due to Milfoil. That suffices to show, in all the circumstances, that those proceeds were held on trust for Milfoil.
[25]In particular the Bank was not provided with the Ed Harry list referred to in footnote 26 of the Applicant’s written case.
The difficulty for Milfoil is in showing that the Bank had knowledge linking the payment of Invoice 628320 to the Deposit. There is no evidence that the Bank was provided with a copy of the remittance advice provided by Ed Harry at the time of the Deposit. The remittance advice details, by reference to invoices, how the amount of $245,749.23 is made up. Invoice 628320 in the amount of $32,238.74, listed in the remittance advice is the only invoice recorded on the RWP. As pointed out, no other document was available to the Bank. This means that Ed Harry paid, as part of the Deposit, Invoice 628320, recorded on the RWP and part of the Milfoil Stock to which Milfoil was entitled.
There are a number of matters that inform our opinion that the transfer of the lump sum Deposit, including Invoice 628320, did not constitute an inconsistent dealing.
First, a lump sum of $245,749.23 was received from EDH Pty Ltd. It was paid by EFT into the Receivers Account. The amount, a lump sum payment, was not broken down into invoices. The RWP provided no guide or indication that the lump sum amount or any part thereof was referrable to Milfoil Stock. It could not simply be assumed. There was no indication, without the remittance advice, that the Deposit referred to the Ed Harry invoices in the RWP. In any event, the total of the invoices in the RWP does not add up to $245,749.23 but a lesser amount, namely, $203,995.40. Further, as noted by the judge, four of the five invoices recorded in the RWP had payment dates of 30 and 31 October 2009, that is, a month later.
Secondly, the Administrator executed the Deed of Acknowledgment and the Deed of Direction and confirmed the Deposit was the property of AHT and formed part of the assets sold and that AHT was entitled to the funds. The Administrator irrevocably authorised and directed the Bank to pay the sum of $625,969 (which included the amount of $245,749.23) to AHT. As found by the judge, the Administrator was in the best position to make such assessment as indeed he did. Neither Deed provides the Bank with the contended indication or knowledge. The Deed of Acknowledgment does the opposite. It confirms that the Payment (together with the other amounts referred to) ‘are property of [AHT] and form part of the Assets, under the terms of the Agreement.’ Further, the Administrator, on behalf of MBG, and having considered the position, confirms that ‘they irrevocably and unconditionally waive any right to the Funds [including the Deposit]’. The Deeds do not in any way refer to or confirm that any part of the Deposit relates to the Milfoil Stock. As noted, they do the opposite.
We reject the submission that the evidence did not establish that necessary inquiries were made by the Administrator or the Bank and that their only interest was to ensure that the funds were paid to AHT and as a consequence the Bank. This was not put to the Administrator or any of the Bank’s witnesses, as it would have to have been, or raised before the judge. In our opinion, the Bank was not required to adduce any evidence of such inquiries. There is no reason why the Bank was not entitled to accept the position taken by the Administrator at the time and as recorded in the Deed of Acknowledgment. The Administrator was exercising an independent statutory function and had the best knowledge of the affairs of MBG. The judge properly regarded the Deeds as significant factors.
However, on 7 October, and after further investigation, the Administrator confirmed that the Deposit included the sum of $31,432.78 which related to Invoice 628320 which formed part of the Milfoil Stock. As referred to above, the difference between Invoice 628320 recorded in the RWP at $32,238.74 and the amount paid by Ed Harry in the sum of $31,432.78 is a discount of $805.96. This discount is set out in the remittance advice that the Bank did not receive. Although the Bank does not contest, as found by the judge, that the sum of $31,432.78 was Milfoil’s trust property, it contends that it did not have the necessary category Baden (iv) (or any other relevant category) knowledge. For the reasons given, we agree.
We agree with the judge that ‘further enquiries were required before an honest and reasonable person in the shoes of the Bank would know that the $245,749.23 in fact contained payment of Invoice 628320 in the RWP’[26] and indeed payment in an amount lower than the invoice, representing the discount, explicable only by a document that the Bank did not receive. At best for Milfoil this could fall within category (v) of Baden, that is knowledge of circumstances which would put an honest and reasonable person on inquiry.[27] Even if it is accepted that the Bank’s process was ‘far from adequate’[28] or that the Bank could have done more, this does not provide a sufficient positive basis to conclude that the knowledge of the Bank fell within category (iv) of Baden. For the reasons given, it did not.
[26]Reasons [549].
[27]Knowledge within category (v) of Baden is not sufficient. See Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, 398, 412 (Stephen J).
[28]Reasons [357].
Given the lump sum payment, comprising the Deposit, without any breakdown or identification, or the means thereof, it is necessary to assess whether anything in the RWP, the only document in the possession of the Bank and relied on by all parties as comprising the Milfoil Stock, indicates that a small part of the lump sum Deposit constituted the payment of Invoice 628320. As already noted, the total of the invoices recorded on the RWP is $203,995.40, not easily reconcilable with the Deposit in the sum of $245,749.23. Further, as noted, four of the five invoices were not due for payment until the end of October, not easily reconcilable with a lump sum payment on 30 September 2009. The question then is whether there is anything in the RWP, in relation to Invoice 628320, that links it to the lump sum Deposit. Is there anything in the recording of that invoice in the RWP that indicates, without further enquiry, that it was part of the Deposit?
Milfoil contends by reference to Invoice 628320, listed in the RWP, that the Bank was aware that Invoice 628320 comprised trust funds. We have upheld that submission. It was then contended by Milfoil that the Bank should have put two and two together and was not entitled to rely on the conclusion and decision of the Administrator as recorded in the Deeds to the effect that the entire amount of the Deposit did not represent Milfoil Stock and did not constitute Excluded Assets under the Agreement. It was submitted that there was no evidence that the Administrator had made any such enquiry at the time and that the Administrator and the Bank simply wanted to ensure that the amount of $746,605.53 was, through AHT, paid to the Bank.
In these circumstances, it was submitted that the conduct and knowledge of the Bank was reckless and wilful and fell within Baden (iii) (wilful and reckless failure to inquire). Thomas Brooks, the Bank officer who was responsible for identifying trade debts belonging to Milfoil and who had also been involved in the negotiation and execution of the sale documents, was not cross examined on these matters and Baden (iii) was not argued below.
Brooks gave evidence about the steps taken by him to monitor the various accounts including the Receivers Account. In his Witness Statement dated 24 October 2018 he gave the following evidence:
I approached the identification of receipts claimed by Milfoil with reference to the RWP. My practice was to review the statements for the First, Second, Third and Fourth Accounts on about a weekly basis to determine if there had been any receipts from MBG customers and, of those receipts, whether any corresponded to a payment from a customer of MBG in a sum which matched an invoice amount specified in the RWP. For example, if a receipt was recorded as having been paid by Kmart in the sum of $28,371.60, it would have been known to me that it was in payment of the invoice numbered 629604 specified in the first line of the RWP. Throughout the course of my role as Client Manager of the Sale for the CBA, I did not identify any receipts corresponding to payment of any invoice set out in the RWP.
I sent a list of the receipts I identified from MBG’s trade debtors to
Mr Traianedes or Mr Moss and sought confirmation that they were trade debts to be swept to AHT. Once I had that confirmation, I arranged for the confirmed receipts to be swept to AHT or, in the case of receipts in the sum of $37,584.19 identified in December 2009, I caused those funds to be offset against a payment due from AHT to the CBA of $70,000 in relation to employee entitlements.
We do not accept that the reference to and details of Invoice 628320 in the RWP indicate, on the face of the document and without more, to a reasonable and honest person in the position of the Bank, that the amount representing Invoice 628320 formed part of the Deposit. Further enquiries were necessary to determine whether the Deposit included Invoice 628320. It was not sufficiently evident and could not be assumed despite the reference to payment received and being due to Milfoil. Without the remittance advice, which specifically referred to Invoice 628320 and the discount, an enquiry was necessary. Further, any enquiry of the Administrator at the time would have confirmed, as indeed it did,[29] that the lump sum Deposit did not comprise trust funds, consistently with the Deed of Acknowledgment.
[29]See [78] above.
We do not consider that the Bank was required to adduce evidence of the matters recorded in the Deed of Acknowledgement. We also do not accept the proposition that the only consideration of the Bank and the Administrator was to ensure that the funds referred to in the Deed were transferred to the Bank. The Deed speaks for itself and neither Brooks nor the Administrator was cross examined on the contended proposition, which is suggestive of serious misconduct.
We do not propose to grant leave to Milfoil to rely on category Baden (iii). The issue was specifically not raised before the judge and it is now too late. In order to be allowed to take the point now, Milfoil would, at the very least, have had to cross-examine relevant bank witnesses on the issue. It is therefore not open to Milfoil to contend by way of appeal that the conduct of the Bank in not making the relevant enquiries was wilful and reckless.
Conclusion
In the final analysis we do not consider that a reasonable and honest person in the position of the Bank would have known that a single line item (Invoice 628320) in a document (RWP) was part of a lump sum payment (the Deposit) made on the day the document was provided.
Leave to appeal should be granted but the appeal should be dismissed.
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