Re French Caledonia Travel Service Pty Ltd (in liq) - [2003] NSWSC 1008

No judgment structure available for this case.

Reported Decision:
48 ACSR 97
59 NSWLR 361
(2004) 22 ACLC 498

Supreme Court

CITATION: Re French Caledonia Travel [2003] NSWSC 1008

HEARING DATE(S): 27 August 2003

JUDGMENT DATE:
24 November 2003

JURISDICTION:
Equity

JUDGMENT OF: Campbell J

DECISION: Clayton's Case not applicable in distribution of trust monies. In particular circumstances of this case, liquidator justified in pari passu distribution amongst claimants on trust fund

CATCHWORDS: TRUSTS - remedies of beneficiaries - mixing of money held on trust for several beneficiaries in bank account - insufficiency of account to meet claims on it - how insufficiency should be borne - whether Clayton's Case applicable to decide proprietary interests in money remaining in account - CORPORATIONS - winding up - liquidator of company which held money of several beneficiaries in trust account - liquidator's responsibility concerning distribution - whether Clayton's Case applies - BANKING AND FINANCIAL INSTITUTIONS - banker and customer and business of banking generally - present role of Clayton's Case - CORPORATIONS - winding up - liquidator's application for directions - application concerning one question in which representative of affected class appointed, and concerning other questions where no representative of affected persons appointed - who bound by decision - TRUSTS - money paid into trust account - whether trust created - PRECEDENT - effect of first instance decision altered on appeal - PRECEDENT - decisions of English Court of Appeal - PRECEDENT - effect of judge's decision about legal rights arising in a factual situation which he has held does not exist - CORPORATIONS - winding up - liquidator of company which is trustee of assets, and has other assets - when liquidator's costs paid from assets subject of security - when liquidator's costs payable from trust assets

LEGISLATION CITED: Companies Act
Companies Act 1962 (SA)
Corporations Act 2001 (Cth)

CASES CITED: 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377
Adamopoulos v Olympic Airways SA (1991) 25 NSWLR 75
Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662
Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082 Chesterman J, 27 March 2001, unreported
Australian Securities and Investment Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719
Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424
Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (receiver and manager appointed) (1994) 49 FCR 334
Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (in liquidation) and Anor [2000] HCA 25; (2000) 202 CLR 588
Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22
Behrens v Bertram Mills Circus Ltd [1957] 2 QB 1
In Re Berkeley Applegate (Investment Consultants) Ltd (in liquidation); Harris v Conway [1989] 1 Ch 32
In Re Birkbeck Permanent Benefit Building Society [1912] 2 Ch 183
Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833
Brady v Stapleton (1952) 88 CLR 322
Bristol-Myers Squibb Co v F H Faulding & Co Ltd (2000) 170 ALR 439
In Re British Red Cross Balkan Fund; British Red Cross Society v Johnson [1914] 2 Ch 419
Brown v Adams (1869) LR 4 Ch App 764
Buckley v Gross (1863) 3 B&S 566
Burt v Barry & Roberts Ltd [1956] QSR 207
Clayton's Case; Devaynes v Noble (1816) 1 Mer 572; 35 ER 781
Commissioner of Stamp Duties (Q) v Jolliffe (1920) 28 CLR 178
Cook v Cook (1986) 162 CLR 376
Cory Brothers & Company Limited v The Owners of the Turkish Steamship Mecca [1897] AC 286
Creak v James Moore & Sons Proprietary Limited (1912) 15 CLR 426
Deeley v Lloyds Bank Limited [1912] AC 756
In Re Diplock; Diplock v Wintle [1948] 1 Ch 465
Re Eastern Capital Futures Ltd (in liquidation) [1989] BCLC 371
Re Farmer [1939] Ch 573
Federal Commissioner of Taxation v St Helen's Farm (ACT) Pty Ltd (1981) 146 CLR 336
Federation Insurance Limited v Wasson (1987) 163 CLR 303
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
Firth v Centrelink [2002] NSWSC 564; (2002) 55 NSWLR 451
Foskett v McKeown [2001] 1 AC 102
French Caledonia Travel Service Pty Ltd (in liquidation) - Application of Roderick Mackay Sutherland [2002] NSWSC 641; (2002) 42 ACSR 524; (2002) 20 ACLC 1486
Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674
Garcia v National Australia Bank Ltd (1998) 194 CLR 395
Re Global Finance Group Pty Ltd (in liq) [2002] WASC 63; (2002) 26 WAR 385
Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301
Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158
In Re Guardian Permanent Benefit Building Society (1882) 23 ChD 440
Hagan v Waterhouse (1991) 34 NSWLR 308
In Re Hallett's Estate; Knatchbull v Hallett (1879) 13 Ch D 696
Hancock v Smith (1889) 41 ChD 456
Hepburn v TCN Channel Nine Pty Ltd [1984] 1 NSWLR 386
Re Hobourn Aero Components Ltd's Air-Raid Distress Fund [1946] 1 Ch 86
Re Hobourn Aero Components Ltd's Air-Raid Distress Fund [1946] 1 Ch 194
Hodges & Hurley v Kovacs Estate Agency Ltd [1961] WAR 19
Hopkinson v Rolt (1861) 9 HL Cas 514
Jacobs v London County Council [1950] AC 361
Re James R Rutherford & Sons Ltd [1964] 1 WLR 1211
James Roscoe (Bolton) Limited v Winder [1915] 1 Ch 62
Joachimson v Swiss Bank Corporation [1921] 3 KB 110
Re Jones (Deceased); Ex parte Mayne (1953) 16 ABC 169
Jones v Bartlett (2000) 205 CLR 166
In Re Joscelyne; Allen's Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4
Kauter v Hilton (1953) 90 CLR 86
In Re Kayford Limited (in liquidation) [1975] 1 WLR 279
Keefe v Law Society of New South Wales (1998) 44 NSWLR 451
In Re Laughton [1962] Tas SR 300
Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353
Lippmann Gorman v Karpnale Ltd [1991] 2 AC 548
London Jewellers Ltd v Attenborough [1934] 2 KB 206
In Re Marine Mansions Company (1867) LR 4 Eq 601
Re Martin [1953] QSR 37
Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215
Murray v Scott (1884) 9 App Cas 519
Mutton v Peat [1899] 2 Ch 556
Mutton v Peat [1900] 2 Ch 79
Natwest Markets Australia Ltd v Mannix (1995) 7 BPR 14,668
In Re Oatway; Hertslet v Oatway [1903] 2 Ch 356
Re Ontario Securities Commission and Greymac Credit Corp (1986) 30 DLR (4th) 1
Re Ontario Securities Commission and Greymac Credit Corporation (1988) 52 DLR (4th) 767
In Re Oriental Hotels Company; Perry v Oriental Hotels Company (1871) LR 12 Eq 126
Osborne v Rowlett (1880) 13 ChD 774
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
Parr's Banking Company Ltd v Yates [1898] 2 QB 460
Pennell v Deffell (1853) 4 DeGM&G 372; 43 ER 551
In Re Regent's Canal Ironworks Company; Ex parte Grissell (1875) 3 ChD 411
Re Registered Securities Ltd [1991] 1 NZLR 545
Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch); [2003] 2 All ER 478
Scott v Scott (1963) 109 CLR 649
Sharah v Healey [1982] 2 NSWLR 223
In Re Sherry; London and County Banking Company v Terry (1883) 25 Ch D 692
Shirlaw v Taylor (1991) 31 FCR 222
Shoreline Currencies (Australia) Pty Ltd (in liquidation) and the Companies (New South Wales) Code (Kearney J, 14 October 1988, unreported)
Sibbles v Highfern Proprietary Limited (1987) 164 CLR 214
Sinclair v Brougham [1914] AC 398
Spence v Union Marine Insurance Co Ltd (1868) LR 3 CP 427
In Re Stenning; Wood v Stenning [1895] 2 Ch 433
Stephens Travel Service International Pty Ltd (receivers and managers appointed) v QANTAS Airways Ltd (1988) 13 NSWLR 331
Re Stillman & Wilson (1950) 15 ABC 68
In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99
Re Thomas Mortimer Limited [1965] Ch 186
In The Trusts of the Abbott Fund; Smith v Abbott [1900] 2 Ch 326
Re Universal Distributing Co Ltd (1933) 48 CLR 171
Re Walter J Schmidt & Co 298F 314 (1923)
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669
Re Wilson [1940] Ch 966
Windsor Mortgage Nominees Pty Ltd (as trustee) v Raymond Griffith Cardwell (1979) ACLC 40-540
Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70
Re Yeovil Glove Co Ltd [1962] 3 All ER 400
Re Yeovil Glove Co Ltd [1965] Ch 148

PARTIES :
Roderick Mackay Sutherland - First Applicant
French Caledonia Travel Service Pty Limited (in liquidation) - Second Applicant

FILE NUMBER(S): SC 3173/02

COUNSEL: Golledge, solicitor - First Applicant
A Lo Surdo - QT Travel Pty Limited

SOLICITORS: The Argyle Partnership - First Applicant
Norton White - QT Travel Pty Limited

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

24 NOVEMBER 2003

3173/02 RODERICK MACKAY SUTHERLAND RE; FRENCH CALEDONIA TRAVEL SERVICE PTY LIMITED (IN LIQUIDATION)

PART A - INTRODUCTION

1 HIS HONOUR: On 15 January 2002 Mr Roderick Sutherland was appointed as administrator of French Caledonia Travel Service Pty Limited (“the Company”). A second meeting of creditors held on 11 February 2002 resolved that the Company be wound up. Mr Sutherland has become the liquidator.

2 The Company operated a business as a travel agent. Nearly all of its business involved selling travel packages, including airfares, accommodation and transfers to travel agents, on behalf of customers of those travel agents. As well, it sold such packages to travellers directly.

3 After Mr Sutherland was appointed administrator some travellers who had made bookings through the Company, paid for those bookings, and had travel documents issued, found that some of those travel documents were not honoured. Other travellers who had made bookings or paid deposits, but not received travel documents, could not get back from the Company the amount which they had paid. Some providers of travel services honoured travel documents which had been issued, but have not been paid for the services which they provided.

4 At the time of the administration commencing, the Company had a bank account with the Commonwealth Bank entitled “French Caledonia Travel Service Pty Limited Trust Account” (“the Trust Account”) which was in credit in an amount of a little under $97,000. It had another account entitled “French Caledonia Travel Service Pty Limited General Account” (“the General Account”), which was in credit in an amount of a little less than $8,000. It had a third account, of a type known as a Cash Deposit Account with the Commonwealth Bank, which was also entitled “French Caledonia Travel Service Pty Limited Trust Account” (“the CD Account”). At the start of the administration, that account was in credit a little over $75,000.

5 The Commonwealth Bank had a fixed and floating charge over the whole of the assets and undertaking of the Company. Under that charge, it has taken the money standing to the credit of the General Account, some chattels, and a few other assets of no great value. The only assets which remain are the amounts in the Trust Account and the CD Account.

6 In the ordinary course of operating its business, the Company received monies into the Trust Account. For any traveller’s booking, it was usual for the Company to receive at least two payments – a deposit at the time the booking was made, and one or more further payments. Money would be credited to the Trust Account by:

(a) a traveller or travel agent sending a cheque to the Company, which the Company would bank,

(b) a travel agent making a direct deposit into the bank account of the Company, or

7 In the ordinary course of the business, payments by the Company to providers of travel services would be made from the Trust Account.

8 From time to time the Company would transfer round sums from the Trust Account to the CD Account. Money in the CD Account earned a higher rate of interest than money in the Trust Account. From time to time, there would be transfers of money back from the CD Account to the Trust Account, again in round sums. The only dealings with the CD Account were transfers to and from the ordinary Trust Account, in this fashion.

9 From time to time, the Company would also transfer round sums from the Trust Account to the General Account.

10 When the Company purchased air tickets, it did so on the terms of a Passenger Sales Agency Agreement made on 1 November 1994 between itself and the International Air Transport Association (“IATA”). That agreement authorised the Company to sell air passenger transportation services on behalf of the various airlines. Clause 7.2 included provision that:

“All monies collected by the Agent for transportation and ancillary services sold under this Agreement, including applicable commissions which the Agent is entitled to claim thereunder, shall be the property of the Carrier and shall be held by the Agent in trust for the Carrier or on behalf of the Carrier until satisfactorily accounted for to the Carrier and settlement made.”

11 By early June 2002, the liquidator had received various claims to monies held in the Trust Account and the CD Account. Those claims came from airlines, individual travellers, and various travel agencies which claimed to have paid the Company for travel services which were ultimately not provided. The liquidator had received claims of approximately $1.43 million. If those claims were all properly payable, that meant there would be a deficiency on the two accounts of in excess of $1.25 million.

12 The liquidator has had difficulties in analysing those claims because the books and records of the Company were not adequately kept. There was no documentation which explained how the round sums which were transferred from the Trust Account to the General Account were made up. While the Company would have had an entitlement to commission, which it would ultimately be entitled to receive from the gross price paid to it by or on behalf of a traveller, there was no documentation which demonstrated that those round sums consisted only of commission. When a money intermediary paid money to the Company, it was frequently on account of bookings of more than one traveller; the liquidator did not have individual transaction listings from each of the money intermediaries. He did not have details of all travellers who had paid money into the Trust Account and who had not had their travel arrangements honoured. Nor did he have copies of all bank transactions relating to deposits and withdrawals on the Trust Account.

13 The liquidator approached the Court for directions under section 479(3) Corporations Act 2001. The application sought certain orders concerning the payment of the liquidator’s costs, and also an order that he would be justified in distributing the balance of the funds in the trust accounts:

“pro rata between all persons who in the [liquidator’s] opinion, or as determined by the Court, have a claim on the trust accounts and who:

(a) Have previously made claim to such fund to the [liquidator]; or

(b) Make claim following the giving of notice in accordance with order 1 above within the time specified in the notice.”

14 On 19 July 2002 I gave directions that the liquidator would be justified in giving notice to all claimants on the monies in the Trust Accounts by:

(a) delivery to the International Air Transport Association,

(b) faxstream to all travel agents to whom the Company sold travel packages,

(c) delivery to all persons or their legal representatives who have indicated their intention to make a claim on the funds in the said account,

(d) delivery to the Travel Compensation Fund,

(e) advertisement in Travel Week magazine, and

(f) by notice in a Sydney daily newspaper.

I also directed that the liquidator would be justified in providing notice of the application by serving:

(a) a copy of the Originating Process on any person lodging a claim with him, and

15 In reasons for judgment given concerning those directions (In the Matter of French Caledonia Travel Service Pty Ltd (in liquidation) – Application of Roderick Mackay Sutherland [2002] NSWSC 641; (2002) 42 ACSR 524; (2002) 20 ACLC 1486) I noted that, while the giving of notices inviting claims would set the outer limits of the class amongst whom division of the monies in the Trust Account could occur, there was a problem, which could not be solved by a simple application for advice, about the manner in which the money in the Trust Account should be divided. That problem concerned whether the money in the Trust Account should be divided amongst the people who claimed to be beneficiaries of it in accordance with the rule in Clayton’s Case (Clayton’s Case; Devaynes v Noble (1816) 1 Mer 572; 35 ER 781), or in accordance with some form of rateable division.

16 After those directions were given the liquidator was able, by working through the bank accounts backwards from 15 January 2002, to identify what he called “the FIFO date”. This was the date which, if the correct way of appropriating payments in and out of the Trust Account and the CD Account was on a “first in first out” basis, was the date on which the first payment of money which remained in those accounts at the time of the Company going into administration had been paid into the Trust Account. After that date, QT Travel Pty Limited (“QT”) paid into the Trust Account an amount of $2,082.80, in connection with travel booked on behalf of Mr Gregory and Ms Skinner. Mr Gregory and Ms Skinner had paid QT for that travel by charging it to their credit card. They did not receive the services they had paid for, and their credit card provider then gave Mr Gregory and Ms Skinner a credit for the amount they had paid to QT for the travel, and ‘back-charged” QT for that amount. Hence it was QT which bore the loss arising from the travel arrangements being dishonoured. It has made a claim on the liquidator for the amount of that loss.

17 If the correct way of ascertaining the beneficial ownership of monies in the Trust Account is by applying Clayton’s Case, then QT would be entitled to receive back the whole of the $2,082.80 which it paid into the Account on 9 January 2002. On 25 June 2003 I ordered that QT Travel Pty Ltd be added as a defendant in these proceedings to represent the class of potential beneficiaries (including itself) to the monies in the Trust Accounts of the Company, being the class identified by the application of the principles in Devaynes v Noble (Clayton’s Case). QT was represented by counsel at the hearing. By agreement the costs of QT have been capped at $10,000.

Who This Judgment Binds, Concerning What

18 When a representative of the class of potential beneficiaries who would take if Clayton’s Case were applicable has been made a defendant and argued in these proceedings, and the solicitor who argued the case for the liquidator presented argument to oppose a distribution in accordance with Clayton’s Case, people who are members of that class are bound by the result of the proceedings so far as the applicability of Clayton’s Case is decided: Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 680. All questions other than the applicability of Clayton’s Case decided in this judgment are decided as on a liquidator’s ex parte application for directions. Thus, the answers I come to concerning questions other than the applicability of Clayton’s Case are ones which will, if the liquidator has made a full and fair disclosure of the material facts, entitle him to act in accordance with the direction without incurring personal liability to any of the persons in whose interest the liquidation was conducted: Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674. No other rights or liabilities of persons not represented in the proceedings are affected by this judgment.

Is the Money Held on Trust?

19 That the Trust Account and the CD Account were each called a “trust account” does not as a matter of law necessitate a conclusion that monies paid into them were held on trust. All relevant circumstances must be examined in order to determine whether the Company really intended to create a trust: Commissioner of Stamp Duties (Q) v Jolliffe (1920) 28 CLR 178; Kauter v Hilton (1953) 90 CLR 86 at 100; Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (in liquidation) and Anor [2000] HCA 25; (2000) 202 CLR 588 at [33]. But opening an account entitled “trust account”, and paying into that account money received from customers in payment for services which they have not received at the time of payment, is a powerful indication that a trust is intended: In Re Kayford Limited (in liquidation) [1975] 1 WLR 279. There are no countervailing factors of any significance. The liquidator is justified in proceeding on the basis that money standing to the credit of the Trust Account and the CD Account are monies which are held on trust. So far as monies collected for airlines are concerned, which also found their way into the Trust Account or the CD Account, Clause 7.2 of the IATA agreement would provide a separate basis for the existence of a trust of those monies. In circumstances where payment for airline services found its way into the Trust Account or the CD Account, and those services were actually provided, the trust would probably be in favour of the airline; if the services were not provided the trust would probably be a resulting trust in favour of the person who paid the money. It is not, however, necessary to make a final decision about this – what matters for present purposes is that the monies paid into the Trust Account were each held on trust, that money held on trust for many different beneficiaries has become mixed in the Trust Account and the CD Account, and that there is now not enough money in those accounts to pay all the beneficiaries.

PART B – CLAYTON’S CASE

Clayton’s Case Itself

20 Devaynes v Noble; Clayton’s Case (1816) 1 Mer 572; 35 ER 781 related to how the liabilities of a partnership of bankers to a customer should be borne amongst the partners. Devaynes was a member of a partnership of five bankers. Clayton was a customer of that partnership. At the time of Devaynes death, Clayton’s account with the partnership had a credit balance. The four surviving partners continued on the banking business, but became insolvent some time later. Clayton continued to make deposits to, and withdrawals from, his account with the partnership during the time that the four surviving partners operated it. At the time of the bankruptcy of the four surviving partners, the partnership owed Clayton a significant sum. The estate of Devaynes was solvent. Hence Clayton tried to throw liability onto Devaynes’ estate, to the extent he could.

21 At the death of Devaynes, Clayton’s account with the partnership had a balance of £1,713 in credit. After the death of Devaynes, and before paying any more money into the account, Clayton drew out money which reduced his cash balance to £453. Thereafter, he continued to make both payments and withdrawals of large sums. At the time of the bankruptcy of the remaining four partners, his cash balance exceeded £1,713.

22 Clayton alleged that the estate of Devaynes remained a debtor to him in the sum of £453 (minus the proportion attributable to £453 of dividends he had received from the bankruptcy of the surviving partners).

23 The problem which required solution in Clayton’s Case was one involving identification of the debtor, in a relationship between banker and customer. It arose from the need to decide which of two potential debtors – the partnership of five, or the partnership of four – continued to owe a debt to Clayton. That problem was solved by appropriating payments out of the bank account, to work out whether the debt which was owing by the partners to Clayton at the time of Devayne’s death had been repaid or not.

24 Sir William Grant MR held that Clayton’s claim failed. He noted (at 605-608 of Mer; 791-792 of ER) that the common law contained two irreconcilable strands of authority concerning the way in which an appropriation was to be made in the situation where a debtor owed several debts to a creditor, and made a payment which did not completely repay those debts. One strand of authority was derived from the civil law, the other was one which the common law had developed for itself. Sir William distinguished both those strands of authority from the case before him by saying (at 608 Mer; 793 of ER)

“They were all cases of distinct insulated debts, between which a plain line of separation could be drawn. But this is a case of a banking account, where all the sums paid in form one blended fund, the parts of which have no longer any distinct existence … In such a case, there is no room for any other appropriation than that which arises from the order in which the receipts and payment take place, and are carried into the account. Presumably, it is the sum first paid in, that is first drawn out. It is the first item on the debit side of the account, that is discharged, or reduced, by the first item on the credit side. The appropriation is made by the very act of setting the two items against each other. Upon that principle all accounts current are settled, and particularly cash accounts. When there has been a continuation of dealings, in what way can it be ascertained whether the specific balance due on a given day has, or has not, been discharged, but by examining whether payments to the amount of that balance appear by the account to have been made? You are not to take the account backwards, and strike the balance at the head, instead of the foot, of it. A man’s banker breaks, owing him, on the whole account, the balance of £1,000. It would surprise one to hear the customer say, “I have been fortunate enough to draw out all that I paid in during the last four years; but there is £1,000, which I paid in five years ago, that I hold myself never to have drawn out; and, therefore, if I can find anybody who was answerable for the debts of the banking house, such as they stood five years ago, I have a right to say that it is that specific sum which is still due to me, and not the £1,000 that I paid in last week”. That is exactly the nature of the present claim. Mr Clayton travels back into the account, ‘til he finds a balance, for which Mr Devaynes was responsible; and then he says – “that is a sum which I have never drawn for. Though standing in the centre of the account, it is to be considered as set apart, and left untouched. Sums above it, and below it, have been drawn out; but none of my drafts ever reached or affected this remnant of the balance due to me at Mr Devaynes’ death.” What boundary would there be to this method of re-moulding an account?

“If appropriation be required, here is appropriation in the only way that the nature of the thing admits. Here are payments, so placed in opposition to debts, that, on the ordinary principles on which accounts are settled, this debt is extinguished.”

25 Sir William Grant also relied upon the fact that the customer had not informed the banker that any other method of appropriation was to be adopted, and had received statements of account drawn up as though a first-in first-out method of appropriation was being adopted. At 610 of Mer, 793 of ER:

“He makes no objection to it – and the report [of the Master] states that the silence of the customer after the receipt of his banking account is regarded as an admission of its being correct. Both debtor and creditor must, therefore, be considered as having concurred in the appropriation.”

26 A third reason for reaching the conclusion that Clayton’s claim failed was that Clayton drew from the account immediately after the death of Devaynes. At 611 of Mer, 794 of ER:

“… he drew, and that to a considerable extent, when there was no fund, except this balance, out of which his drafts could be answered. What was there, in the next draft he drew, which could indicate that it was not to be paid out of the residue of the same fund, but was to be considered as drawn exclusively on the credit of money more recently paid in? No such distinction was made; nor was there anything from which it could be inferred. I should, therefore say, that on Mr Clayton’s express authority the fund was applied in payment of his drafts in the order in which they were presented.”

The Mecca

27 Cory Brothers & Company Limited v The Owners of the Turkish Steamship Mecca [1897] AC 286 was a case where Cory held four bills of exchange given by a company which owned both the Mecca and the Medina. Two of the bills had been given for necessaries supplied to the Mecca, two had been given for necessaries supplied to the Medina. After some threats by Cory to seize both vessels, the owners arranged for a lump sum of £900 to be paid, on Cory undertaking not to enforce its claim against the two vessels for three months. Cory wrote a letter, acknowledging receipt of the £900, which listed the four bills which had been received, the amount of each bill, various incidental expenses, set out the total of the bills and those expenses, and deducted £900 from it, to show a balance due of £401.

28 When, after expiry of the three-month period of grace, the £401 balance was still unpaid, Cory began an action in rem against the Mecca. The owners alleged that the listing of the bills in the receipt (which put a bill relating to the Medina for £630 last in the list) had the effect that the £900 had been appropriated to payment of the bills which related to the Mecca, and hence no sum remained owing in connection with the Mecca. The House of Lords rejected that contention. Each of Lord Halsbury LC, Lord Herschell, Lord Macnaghten and Lord Morris was of the view that Clayton’s Case did not apply. Lord Halsbury LC said, at 290, that the rule in Clayton’s Case:

“… is not an invariable rule of law; but the circumstances of a case may afford ground for inferring that transactions of the parties were not so intended as to come under this general rule.”

“… is not an account current; there is no setting one item against another; credit is given for the £900 at the end of all the items. They are all separate transactions, and, although on one piece of paper, seem to represent only historically the transactions as they occurred.”

29 Lord Macnaghten set out the general principles of law concerning appropriation of payments by a debtor to a creditor, at 293-4:

Clayton’s Case

30 He went on to quote various authorities to the effect that the rule in Clayton’s Case provided, in situations where there was a current account between parties, a presumption of what the intention of the parties was concerning appropriation of payments, but that that presumption could be rebutted or modified by other evidence. He held that the giving of the receipt did not amount to an appropriation of the £900 to any particular debt, that Cory had made clear that it reserved the right to arrest whichever of the vessels it could lay hands on, and that by the time of the arrest of the Mecca no appropriation of the £900 had been made.

31 In the nineteenth century case law and textbooks it is common to find a current account with a banker spoken of as a series of loans and repayments. Some examples of this understanding are collected in Joachimson v Swiss Bank Corporation [1921] 3 KB 110 at 116, 120-121, and 122. If the account was one that was maintained in credit, each deposit was a loan by the customer to the bank; every time the bank met a draft or cheque drawn on the account it repaid in whole or part one or more of those loans. If the account was one where there was an overdraft, each occasion when the bank allowed the account to go into overdraft, or further into overdraft, by meeting a cheque or draft drawn on the account, was the bank making a loan to the customer; the customer from time to time repaid one or more of those loans, in whole or part, by making deposits into the account. The rule in Clayton’s Case was a rule for appropriating payments made by a debtor in such a running account. For credit accounts, where it was the bank which was the debtor, the function of the rule in Clayton’s Case was to decide which of the loans made by the customer to the bank was repaid when the bank met a cheque or draft. For overdraft accounts, where it was the customer who was the debtor, the function of the rule in Clayton’s Case was to decide which of the loans which the bank had made to the customer was repaid by a deposit into the account.

32 This nineteenth century understanding of how a banking current account operated was clarified significantly, and altered somewhat, by the decision in Joachimson v Swiss Bank Corporation [1921] 3 KB 110. It held that for a bank account in credit, a demand is a necessary precondition to the customer having a cause of action to recover all or part of the balance of the account (though service of a court initiating process or a garnishee order can itself be sufficient demand, and there are various other implied terms arising from the relationship on banker and customer). In Joachimson at 127 Atkin LJ rejected the proposition that a current account can be analysed as a simple contract of loan, with a superadded obligation of the bank to honour the customer’s drafts to any amount not exceeding the credit balance at any time. He said "I think there is only one contract made between the banker and its customer. “— ie, when a customer sues the bank to recover money in its current account, the customer is suing on the banker-customer contract, not suing for repayment of a loan or set of loans constituted by deposits.

33 Clayton's Case continues to be part of the law in Australia: Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 676. It operates by providing a presumption concerning the debtor’s intention in making a payment on a current account, which operates only in the absence of some other agreement or direction or reason for not applying the presumption: Creak v James Moore & Sons Proprietary Limited (1912) 15 CLR 426 at 433 per Griffiths CJ; Deeley v Lloyds Bank Limited [1912] AC 756 at 771 per Lord Atkinson; Re British Red Cross Balkan Fund [1914] 2 Ch 419; Sibbles v Highfern Proprietary Limited (1987) 164 CLR 214 at 222; Natwest Markets Australia Ltd v Mannix (1995) 7 BPR 14,668 at 14,674. Appropriation of payments within a current account is a task which needs to be performed, even if the current account is no longer seen as constituting a series of debts which can be sued on.

34 The sort of situations where the principle in Clayton’s Case is used, apart from the situation in Clayton's Case itself of deciding who is the debtor when a partnership of debtors changes, include:

· In the application of the Limitation Act to a debt owing to a bank on an overdraft account. If the contractual arrangements are such that a demand is not a prerequisite to the accrual of a cause of action, time runs separately in relation to each advance from the date it is made, and Clayton’s Case is used to determine which advance is the oldest which has not been repaid (Parr’s Banking Company Ltd v Yates [1898] 2 QB 460; Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833).

· If the bank with a first mortgage over property, as security for the debt in a current account, receives notice of a second mortgage over that same property, the bank will not be entitled to priority for advances made after the date it receives notice of the second mortgage: Hopkinson v Rolt (1861) 9 HL Cas 514. If the bank’s mortgage secures a debt in a current account, and the bank, after receiving notice that the customer has granted a second mortgage over the mortgaged property, permits the customer to continue to operate on the account, the effect of the rule in Clayton's Case will be that fresh deposits to the account are treated as paying off the debt for which the bank had security: Deeley v Lloyds Bank Limited [1912] AC 756; Sibbles v Highfern Proprietary Limited (1987) 164 CLR 214 at 222. Conversely, if the bank has a guarantee of a customer's current account, and receives notification of the death of the guarantor, it can (unless prevented from doing so by contract) prevent the rule in Clayton's Case from operating to reduce the amount guaranteed by opening a new account and requiring all deposits thereafter made to be made to that account: In Re Sherry; London and County Banking Company v Terry (1883) 25 Ch D 692.

· If a section, such as section 588FJ Corporations Act 2001, invalidates a floating charge given by a company within six months of the commencement of its winding up, except the extent of any cash paid to the company at the time or subsequently to the creation of the charge, the amount of "cash paid to the company“ by a financier with whom the company already has a current account in overdraft is decided, in accordance with Clayton's Case, by treating payments made by the company as appropriated to the earliest advances, and each withdrawal from the account as a fresh advance, regardless of whether the net balance of the account increases: Re Thomas Mortimer Limited [1965] Ch 186; Re Yeovil Glove Co Ltd [1962] 3 All ER 400 at 407, 409; Re Yeovil Glove Co Ltd [1965] Ch 148; Re James R Rutherford & Sons Ltd [1964] 1 WLR 1211.

PART C – THE MAIN ENGLISH CASES TO RE: DIPLOCK

35 I will deal first with the main English cases which bear upon the problem of how the money in the Company’s trust accounts should be allocated. In this judgment I will use the expression "the Problem" as meaning "how the balance remaining in a bank account containing funds held on more than one trust is allocated amongst the beneficiaries of those trusts, when the balance in the bank account and any assets purchased from the bank account are insufficient to satisfy the claims of all the beneficiaries." The focus of this Part will be to see what, if any, precedent there is for applying Clayton’s Case to decide the Problem, and also to consider to some extent what support in principle there is for applying Clayton’s Case to decide the Problem.

Pennell v Deffell

36 Pennell v Deffell (1853) 4 DeGM&G 372; 43 ER 551 was a suit for the administration of the deceased estate of Green, who had been one of the official assignees of the Court of Bankruptcy. Pennell was his successor in that office. Green had maintained two bank accounts, one with the Bank of England, the other with the London Joint Stock Bank. Each account was in his own name; neither was described as a trust account or in any other way made reference to his official capacity. Into each account he paid both monies received in his official capacity which he held on trust for various bankrupt estates, and monies of his own. From one account, that with the Bank of England, he drew money both for the purpose of administering the various bankrupt estates, and for his own private purposes. From the other account, that with the London Joint Stock Bank, he withdrew money only for his own private purposes. The Master, on an inquiry, was able to identify, in the periods concerning which there was any dispute, which payments in and out were for private purposes, and which for administration of the bankrupt estates, and, in the latter case, to which particular bankrupt estate each payment in or out related. The Master held that during the disputed period Green had taken more out of the Bank of England account for his private purposes than he had paid in for his private purposes, and that the whole of the balance standing to the credit of that account at the time of his death belonged to various bankrupt estates and was recoverable by Pennell. The Master held that the whole of the London Joint Stock Bank account apart from £85-odd, was recoverable by Pennell.

37 On appeal, Lord Romilly MR decided that the balances in both accounts were part of the general estate of the testator – ie, no part of them was held on trust. Against that decision, Pennell appealed a second time, “on behalf of the several persons interested in those trusts.” (381 of 4 DeGM&G; 555 of ER) to the Court of Appeal in Chancery. The Master’s factual findings were accepted as accurate, and the appeal turned on the legal consequences of those findings. The appeal succeeded largely, but not completely.

38 In relation to the account with the Bank of England, an amount £648 of undoubted trust money stood to the credit of the account on 3 October 1849. After that date, withdrawals were made from the account, partly for Green’s private purposes, and partly for trust purposes, totalling £470. Those withdrawals occurred over the period to 20 October. Various sums of money were paid into the bank account after 3 October, all of which apart from an amount of £72 paid in on 5 October was trust money. The method by which Knight Bruce LJ proceeded was to say that the total withdrawals from the account (£470) had to be regarded as being taken from the opening balance of £648. That meant that the £72 of Green’s own money, which had been paid in on 5 October, was still there at the time of his death, and Pennell could not have it. Pennell was entitled, however, to the balance.

39 A similar methodology was applied to the account with the London Joint Stock Banking Company. The opening balance of that account as at 31 December 1848, of £642 15s 7d, and the next payment in, of £210, were items which the Master found were Green’s own money. The total withdrawals from the account during 1849 were £796 4s 7d. If all those withdrawals were treated as being taken first from the opening balance, and then from the deposit of £210, it would leave £56 11s of the deposit of £210. That £56 11s was money which Green’s executors were entitled to. The other deposits which had been made to the account during 1849 were allocated so that the executors were entitled to the total amount of those other deposits which had come from Green’s private sources, and Pennell was entitled to the rest.

40 It is to be noted that even though Green had paid funds of various different bankrupt estates into his bank accounts, the funds held on trust were treated, in the reasons for judgment, as though they were held on a single trust. Concerning the Bank of England account, where trust funds had been misappropriated, there was no finding about how the loss would fall between the various bankrupt estates. Thus Pennell v Deffell is only authority for the proposition that Clayton’s Case is to be used to allocate a loss in a mixed account between the trustee and the beneficiary. It is not an authority which itself deals with the question of how the loss is to be distributed between several beneficiaries whose funds are mixed in a bank account. Its reasoning could readily be extended to that sort of case, however, to require the application of Clayton’s Case.

Brown v Adams

41 Brown v Adams (1869) LR 4 Ch App 764 concerned a solicitor whose client had paid £5,000 into the solicitor’s general banking account, for the purpose of investment on mortgage. The investment was never made. At the time of the payment in, the solicitor’s bank account was a little over £4,000 in credit. After the payment in, the solicitor paid in various amounts of his own, and withdrew over £18,000. At the time of his death around £2,700 remained in the account. Sir G M Giffard LJ held that the client’s money had been completely withdrawn. He said, at 767:

“There can be no question that at law, as between a banker and his customer, the debt is extinguished by the first payments made, and it would be an extraordinary thing if the debt could be in existence in equity when it is extinguished at law.”

42 Brown v Adams is, like Pennell v Deffell, a case which dealt only with the application of Clayton’s Case as between trustee and beneficiary whose monies were mixed in a bank account. It did not itself deal with how losses were to be borne between two beneficiaries whose money was mixed in a bank account.

In Re Hallett’s Estate – An Account of the Case

43 In Re Hallett’s Estate; Knatchbull v Hallett (1879) 13 Ch D 696 was an action for administration of the deceased estate of a solicitor. The plaintiff in the action was one of the solicitor’s general creditors. Other claimants against the estate were the trustee of the solicitor’s marriage settlement, and one of the solicitor’s clients, Mrs Cotterill. There was a dispute as to their respective entitlements to money standing in the solicitor's bank account.

44 At the start of business on 3 November 1877 the solicitor's bank account had (simplifying figures somewhat) £1,796 standing to its credit. On 3 November he paid in £341, concerning which he had a fiduciary obligation to account to Mrs Cotterill. On 14 November he paid in two amounts. The bank account records the order in which they were paid in. First he paid in £770, a sum which he had a fiduciary obligation to hold on the trusts of the marriage settlement. Then he paid in £1804, which was another amount concerning which he had a fiduciary obligation to account to Mrs Cotterill. Each of the payments connected with Mrs Cotterill was one where Hallett had sold an asset of Mrs Cotterill, which his obligation had been to keep in specie. Hallett, then, before his death, drew out various sums for his own purposes, so that the balance to his credit at the time of his death (if nothing more had been paid in by him after 14 November) would have been £1,708. He had, however, paid in other sums, so that he had at the time of his death a balance at his bankers of £3,029. For a reason which does not appear from the report, only £2,600 of this amount was paid into court to the credit of an action for the administration of his estate.

45 The reported case was a priority dispute about entitlement to that £2,600. The trustees of the marriage settlement claimed the whole amount of £770. Mrs Cotterill claimed £1,708, on the basis that that was the sum remaining in the banker’s hands out of the proceeds of the sale of her assets. It is to be observed that the total amount claimed by the trustees and Mrs Cotterill together was £2,478, which was less than the £2,600 paid into court.

46 The trial judge, Fry J, held that the two creditors to whom Hallett owed a fiduciary obligation prevailed over the general creditors, but that the rule in Clayton's Case applied as between the two creditors to whom Hallett owed a fiduciary obligation. He specifically rejected (at 703-704) an argument that the amount which remained in the bank account should be divided rateably between the trustees of the marriage settlement and Mrs Cotterill. In consequence, as Mrs Cotterill’s money had been paid in last, she had established her right to the £1,708 she claimed, and the trustees of the marriage settlement received nothing.

47 Appeals against the decision of Fry J by the general creditors were dismissed (13 Ch D at 705–724). Insofar as the general creditors disputed the decision of Fry J that the trustee of the marriage settlement prevailed over the general creditors, the argument turned on a question of fact, concerning whether certain bonds from which the £770 was derived had been appropriated to become assets of the marriage settlement. Fry J's decision on that point was upheld (706-707). Insofar as the general creditors disputed the decision of Fry J that Mrs Cotterill prevailed over the general creditors, it sufficed that Mrs Cotterill established that Hallett had owed her a fiduciary obligation concerning the asset which he had wrongly sold, and (because various earlier statements that "money has no earmark“ no longer applied to prevent tracing in equity into a mixed fund) that fiduciary obligation enabled Mrs Cotterill to trace into the bank account and obtain a charge over it – and that charge meant that she prevailed over the general (unsecured) creditors (707-724).

48 As well, the trustees of the marriage settlement and Mrs Cotterill both appealed against the decision that the claim of the trustees was to be governed by Clayton's Case. Mrs Cotterill’s appeal involved a repudiation of the argument which she had put to Fry J. Fry J summarised the argument which she put to him (at 701) by saying

Clayton's Case

49 Mrs Cotterill had not, at first instance, made a claim to anything larger than £1708, and the case had been argued at first instance as though that £1,708 was part of the £1,804 paid into the account on 14 November. She did not make any claim at all to the £341 which had been paid into the account on 3 November. Presumably, this stance was taken because her counsel assumed that the application of Clayton’s Case would result in her money being eroded, in part, by drawings which Hallet made for his own purposes after 14 November, notwithstanding that Hallet paid money of his own into the account after 14 November.

50 The appeal by the trustees and Mrs Cotterrill succeeded. The basis of the appeal succeeding, so far as Jessel MR was concerned, was that a trustee who created a mixed fund was presumed, consistently with honesty, to draw his own money out first. If the trustee mixed his own coins with trust coins in a bag, and drew some coins out of the bag, he would be presumed to be taking his own money out first -- and the fact that the money was in a bank account, instead of a bag, made no difference. At 727-8 he said:

"it is obvious he must have taken away that which he had a rights to take away, his own £100. What difference does it make if, instead of being in a bag, he deposits it with his bankers, and then pays in other money of his own, and draws out some money for his own purposes? Could he say that he had actually drawn out anything but his own money? His money was there, and he had a right to draw it out, and why should the natural act of simply drawing out the money be attributed to anything except to his ownership of money which was at his bankers."

51 Baggallay LJ gave a fuller account of the facts than had been given below, including the fact (731) that the balance to the credit of the account never fell below the aggregate of the two sums of money which had been paid in on 14 November. He says (731) that if the principle that the drawings of Mr Hallett will be appropriated to his own money standing in the account from time to time, were to be applied thoroughly, Mrs Cotterill would have been entitled to the full sum of £1,804 of her money which had been paid in on 14 November, and not merely to the £1,708 which she claimed.

52 Thus, there never was any competition, on the appeal, between the respective claims of the trustee of the marriage settlement, and Mrs Cotterill. Both were able to be satisfied in full, as to the claims which they had made at first instance. The judgment on the appeal showed that Mrs Cotterill could well have succeeded had she made a more ambitious claim at first instance, but on appeal she was limited by the case she had put at first instance. Thus the decision in the Court of Appeal provides no authority as to whether or not the rule in Clayton's Case ought apply to decide the Problem.

53 There are, however, some dicta in the Court of Appeal in Hallett’s Case about the role which Clayton’s Case plays in tracing. Jessel MR said, at 728, that the rule in Clayton’s Case was:

Clayton’s Case

“Now, first upon principle, nothing can be better settled, either in our own law, or, I suppose, the law of all civilised countries, than this, that where a man does an act which may be rightfully performed, he cannot say that that act was intentionally and in fact done wrongly. A man who has a right of entry cannot say he committed a trespass in entering. A man who sells the goods of another as agent for the owner cannot prevent the owner adopting the sale, and deny that he acted as agent for the owner. It runs throughout our law, and we are familiar with numerous instances in the law of real property. A man who grants a lease believing he has sufficient estate to grant it, although it turns out that he has not, but has a power which enables him to grant it, is not allowed to say he did not grant it under the power. Wherever it can be done rightfully, he is not allowed to say, against the person entitled to the property or the right, that he has done it wrongfully. That is the universal law.”

“coins in a bag”

Clayton’s Case

54 At 738 Baggallay LJ noted that in Pennell v Deffell (1853) 4 De M&G 372; 43 ER 551 the court had stated

Clayton's Case

cestuis que trust

"that such presumption was liable to be rebutted, or its effect modified, by any equities affecting Mr Greenwood, and those claiming through him, unless there was sufficient reason to the contrary."

(“Greenwood” is presumably a misnomer for “Green”.)

Pennell v Deffell

“the obligation … of attributing to the trustee, when the circumstances would admit of it, an intention to act honestly”

Pennell v Deffell

55 He went on to say, at 743:

"It may, of course, happen that, through the acts of a trustee, whether wilfully dishonest or not, the ultimate balance may not be sufficient to meet the full amounts of all the trust monies which may have been paid into a blended banking account, and the question then raised may be as to the various claims in respect of distinct trusts; in such a case the strict application of the general rule of appropriating in order of date the drawings out to the payments in may, and probably would, be correct.".

obiter dicta

56 Thesinger LJ dissented, on the ground that previous authority, namely Pennell v Deffell, required a different conclusion to that which the majority had arrived at.

In Re Hallett’s Estate – Matters Arising

57 The decision of the majority in the Court of Appeal in Hallett was inconsistent with Pennell v Deffell in the most direct way – Hallett came to a different conclusion to the conclusion which would have been arrived at if Pennell v Deffell remained good law. When Pennell v Deffell was expressly considered by Jessel MR and Baggallay LJ, and they came to a different conclusion to that which Pennell v Deffell dictated, Pennell v Deffell must be regarded as overruled. Though Brown v Adams was not expressly referred to, it should be regarded as impliedly overruled. In In Re Oatway [1903] 2 Ch 356 at 360 Joyce J said that Brown v Adams ought not be followed since the decision in In Re Hallett’s Estate.

58 The headnote to the report of Hallett, at 696, includes the statement

cestuis que trust

Clayton's Case

59 Insofar as Fry J decided that the trustees of the marriage settlement lost in a competition with Mrs Cotterill, this is indeed the basis of his decision. However, it is not a decision which survived the Court of Appeal. In the Court of Appeal, the trustees of the marriage settlement succeeded in recovering the money they claimed, and, as we have seen, there was no occasion for a competition between the two cestuis que trust. When the result in the Court of Appeal is different to the result achieved in the Court below, the reasons for which the court below reached its conclusion is not part of the ratio decidendi of the case. Even if the ratio decidendi is more than the principle upon which the case is decided (as Jessel MR stated in Osborne v Rowlett (1880) 13 ChD 774 at 785) and extends to any point of law that is put in issue by the parties and which the judge decides that he should resolve (Bristol-Myers Squibb Co v F H Faulding & Co Ltd (2000) 170 ALR 439 at 482-483; [2000] FCA 316 at [148]-[160] per Finklestein J; cf Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 417-418 [56]-[59]), a dissenting judgment in an appellate court cannot provide a binding authority (Federation Insurance Limited v Wasson (1987) 163 CLR 303 at 314; Jones v Bartlett (2000) 205 CLR 166 at 232 per Kirby J.) A first instance decision altered on appeal can be of no higher precedent status than a dissenting judgment on appeal. As Aikin J said in his dissenting judgment in Federal Commissioner of Taxation v St Helen’s Farm (ACT) Pty Ltd (1981) 146 CLR 336 at 410 "… there is no basis on which one point in the judgment of a primary court should be regarded as authoritative where the judgment is reversed on other grounds.” Thus, the decision of Fry J can be at best only a persuasive precedent. Even though my task is to decide if Clayton’s Case should be applied in New South Wales to solve the Problem, it is still of some relevance to enquire whether decisions which have applied Clayton’s Case to solve the Problem in England are binding authorities within the English legal system. Also relevant are the number of such decisions, the courts each was made by, and the time at which each was made.

60 In considering how persuasive the decision of Fry J is, it is relevant that he was not very happy with it himself. He said, at 699:

Clayton’s Case

Pennell v Deffell

Clayton’s Case

cestuis que trust

61 There are two respects in which the judgments in the Court of Appeal in Hallett’s Case do not seem, considering them today, to sit happily with Fry J’s decision at first instance. The first arises from the way that both the majority judgments in the Court of Appeal explain how an equitable obligation can attach to the proprietor of a bank account in which trust money and his own money are mixed by using the analogy of a bag into which coins belonging to first the trustee, then the beneficiary, are placed, and from which the trustee withdraws coins. The trustee is presumed to act honestly, and so to draw his own coins out first. At one level of legal analysis, there is a vast difference between a credit in a bank account, and money in a bag. The first is an inchoate chose in action (inchoate because of the need to make demand before there is a cause of action that can be sued on), while the second is a chose in possession. Coins in a bag are each separate and individually identifiable things, even though coins of the one denomination are for most practical purposes interchangeable, and adding more coins to a bag is simply adding an additional number of things of that type to the bag. In contrast, a debt owed by a banker to a customer is a single thing – an obligation to pay X dollars – and the client’s paying more money into a bank account results in the creation of a different thing – an obligation to pay some larger number than X dollars. However the purpose of the activity that the Court of Appeal was engaged in was working out whether the defaulting solicitor could, conscientiously, deny that some of the money which remained in the bank account – the inchoate chose in action to pay the balance to the customer - was money of a particular client. For that purpose, there was no difference between a bank account, and coins from various sources placed in a bag. Functionally, the bank account and coins in the bag operated identically. In other words, the tracing exercise which the Court of Appeal engaged in was one in which the actual legal character of the bank account, as being a debt owed by the banker, was unimportant. Yet the rule in Clayton's Case is a rule which is concerned with the appropriation of payments made between debtor and creditor who have a running account. It is odd to apply it for the purpose of tracing, when the tracing exercise focuses on the functional operation of the bank account rather than its legal attributes.

62 The second is that there is some arbitrariness in saying that Clayton’s Case may not be used to decide whether a withdrawal should be appropriated to the money of the trustee, or the money of the beneficiary, but that it is in order to use Clayton’s Case to appropriate a withdrawal between two beneficiaries. And there is more than arbitrariness to it if a trustee has mixed together money of two trust funds, and dissipated part of the mixed fund, for conscionable behaviour on his part is not determined only by reference to the relationship between him, and each beneficiary. As well, conscionable behaviour on his part should take into account the relationships between the two beneficiaries. Both these matters give rise to some further caution about accepting the decision of Fry J.

63 There is another respect in which the reasoning of the decision of the Court of Appeal itself in Hallett’s Case causes discomfort. The majority in Hallett’s Case noted that the rule in Clayton's Case operates by presumption of intention concerning which money is being drawn out. They held that, in the circumstance where the trustee had choice about drawing out his own money and the beneficiary’s money, he ought be presumed to draw his own money out first.

64 There are two difficulties with this. The first is that it is hard to see why, in principle, the presumed intention of the trustee should have any role to play at all in these circumstances. After all, the fact that trust monies have become mixed with the trustee’s own money in itself shows that there has already been a breach of trust. The fact that the question even arises of which of the beneficiaries’ money will be treated as being withdrawn shows that the trustee has no money of his own in the account. At least in circumstances where the trustee is intending to withdraw the money to dissipate it, that means he is contemplating a further breach of trust. When a trustee has wrongfully taken property from a trust fund, his first obligation is, so far as the trust property can be seen as remaining in his hands, to make restitution – ie, to put back in specie into the trust fund whatever of the trust property he still retains. Tracing is the means by which the Court identifies what property of the trust the trustee still retains, for the purpose of the Court crafting orders which aim to make the trustee perform this obligation. When the task which equity is engaged in here is deciding how the trustee must act in dealing with the property he retains, given that he has engaged in a breach of trust in the first place, it is hard to see why the trustee’s intentions, which are not actual intentions but rather intentions presumed pursuant to a rule of law, should be given effect to. There are cases where a trustee’s actual intention about which beneficiary’s money it is that he has withdrawn has been given effect to: Re Stillman & Wilson (1950) 15 ABC 68; Re Global Finance Group Pty Ltd (in liq) (supervisor appointed) and Global Mortgage Investments Pty Ltd (in liq); Ex parte Read and Herbert (as liquidators of Global Mortgage Investments Pty Ltd and as liquidators of Global Finance Group Pty Ltd) [2002] WASC 63 at [189]-[194]; (2002) 26 WAR 385. As well, if the trustee had not mixed the funds of the two beneficiaries he would still have had a power to choose which of the beneficiaries would be the victim of his misappropriations. However it is difficult to see why that process of giving effect to the intention of the trustee about which trust he will breach should be taken any further than necessary, by presuming a trustee to have intentions he does not actually have.

65 The second difficulty is that Clayton’s Case is concerned with an intention to appropriate arising between banker and customer. The presumption that a trustee has intended to act honestly is one which arises between trustee and beneficiary. There is no reason why the banker ought be presumed to know of, or be in any way affected by, this presumption of honest intention between trustee and beneficiary. In the ordinary course of applying Clayton’s Case to a bank account in credit, it is the action of the banker in drawing up the account which effects the appropriation – why should that be altered in any way, as both Jessel MR and Baggallay LJ seem to think it is, by an intention which the trustee is presumed to have in his relationship with the beneficiary? All those difficulties and discomforts are resolved by a different analysis of how tracing operates, which emerges in cases discussed later in this judgment.

Hancock v Smith

66 In Hancock v Smith (1889) 41 ChD 456 the plaintiff was an execution creditor of the defendant, seeking to garnishee funds standing in the defendant’s bank account. The defendant was a stockbroker, who used that account only for transactions involving his clients’ money. The broker identified the funds in the account as belonging to four named clients. Two of those clients satisfied the Chief Clerk they had a claim to money in the account. The claim of the remaining two was considered by North J in chambers, and rejected. Those two then moved North J to discharge his order rejecting their claims. Concerning both of those clients, payments of clients’ money into the account could be identified. However if the bank account was analysed in accordance with Clayton’s Case, the payments in and payments out were such that none of the money of either of those clients remained. North J refused to vary his order rejecting their claims. He accepted that all monies paid into the account were trust monies, and (at 459)

In Re Hallett’s Estate

67 For the reasons which I have already given, this statement of North J is not an accurate statement of what In Re Hallett’s Estate decided. The Court of Appeal decided that Clayton’s Case did not apply as between trustee and beneficiary, because it was inconsistent with honesty on the part of the trustee for it to apply. And the decision of Lord Justice Fry did not “settle” anything, in the sense of creating a precedent which was a binding one within the English legal system, about whether Clayton’s Case applied as between two beneficiaries.

68 North J’s decision was reversed in the Court of Appeal. This means that, like the decision of Fry J at first instance in Hallett, his decision is at best a persuasive precedent.

69 The Court of Appeal was satisfied that the plaintiff could not receive the funds in the account, because a garnishee was entitled only to funds in the bank account which were the defendant’s own property, and all the funds in the bank account were the property of clients, whoever they might have been. The Court of Appeal then received new evidence, from the broker, to the effect that the only money he paid into the account was money of clients, that he had satisfied from the account the purposes for which all clients except the four claimants had paid him the money, and that the amount in the account was equal to the amount he had received from those four client, plus some small transfer fees which he had paid for clients without withdrawing them from the account. In light of that evidence, the Court of Appeal decided that the appeal should succeed. Lord Halsbury LC said, at 461:

Clayton’s Case

70 Cotton LJ said, at 461:

Clayton’s Case

71 Fry LJ, at 462 said:

Clayton’s Case

In Re Hallett’s Estate

Clayton’s Case

cestuis que trust

In Re Stenning

72 InRe Stenning; Wood v Stenning [1895] 2 Ch 433 involved the insolvent estate of a deceased solicitor, which was being administered by the court. The solicitor had mixed client monies and his own monies in a bank account. A client, Mrs Smith, claimed the right to be paid in specie the sum remaining in that bank account at the solicitor’s death. Payments had been made into the account as follows:

Date	Item	Amount
13 March	Money of Mrs Smith	£593
23 April	Money of client T	£999
21 August	Money of client C	£1,094
30 August	Money of client D	£500

73 The balance of the account as at 31 August was £1,088. From some source other than the account the solicitor had paid Mrs Smith part of the amount due to her, so that at the time of his death she was entitled to £448. From 13 March to the date of the solicitor’s death the balance of the bank account had always exceeded £448. None of the other clients T, C or D had made a claim in specie to the amount in the bank account, though client T had proved as an ordinary creditor for £999.

74 North J denied Mrs Smith’s claim. North J’s preferred reasons (at 435) was that the money received from Mrs Smith was not received on trust, but rather as a loan at interest.

75 His Honour then considered what would happen if the money paid in on 13 March was money held on trust for Mrs Smith. North J held that, on that hypothesis, Mrs Smith’s money had all been paid out prior to 31 August. He said, at 436:

In Re Hallett’s Estate

Clayton’s Case

76 This statement is, in my view, an obiter dictum. It also suffers from the same defects, insofar as it relies on In Re Hallett’s Estate, as does North J’s earlier judgment in Hancock v Smith.

77 In coming to the view that this statement of North J is an obiter dictum, I accept that if a judge gives two reasons for a decision, both reasons are binding: Behrens v Bertram Mills Circus Ltd [1957] 2 QB 1 at 25; London Jewellers Ltd v Attenborough [1934] 2 KB 206 at 222; Jacobs v London County Council [1950] AC 361 at 369; Re Martin [1953] QSR 37; Burt v Barry & Roberts Ltd; ex parte Barry & Roberts Ltd [1956] QSR 207. However In Re Stenning is not a case where the judge gave two reasons, each of which he regarded as applicable to reality as he found it, for coming to his decision. Rather, it was a case of the type described by Cross, Precedent in English Law (Oxford University Press, 2nd ed 1968) at 58-59:

obiter dicta

ratio

Mutton v Peat

78 In Mutton v Peat [1899] 2 Ch 556 Byrne J said in a dictum at 560 that the rule in Clayton’s Case applies “as between cestuis que trust in an appropriate case”, but held that in the case before him Clayton’s Case did not apply because the bankers had specifically appropriated monies in a way inconsistent with it. That decision was reversed on appeal: Mutton v Peat [1900] 2 Ch 79. The Court of Appeal reversed the decision of Byrne J on a question of fact, and made no mention of Clayton’s Case. Consequently, Mutton v Peat provides no authority in favour of the application of Clayton’s Case to the Problem.

Re Oatway – Account of the Case

79 In In Re Oatway; Hertslet v Oatway [1903] 2 Ch 356 involved a trustee who paid £3,000 of trust money into his own banking account (which was then in credit), purchased shares with money withdrawn from the account, then spent the rest of the money in the account. Joyce J held that the beneficiaries of the trust were entitled to the proceeds of sale of the shares. When a trustee mixes trust money and his own money in a bank account, and there is a credit in the bank account (at 360):

Clayton’s Case

ex post facto

80 Even though the amount standing in the account at the time the shares were purchased included money which was the trustee’s, of an amount greater than the purchase price of the shares, this did not mean that the trustee was entitled to the shares: (at 361)

“… he was never entitled to withdraw the [purchase price of the shares] from the account, or at all events, that he could not be entitled to take that sum from the account and hold it for the investment made therewith, freed from the charge in favour of the trust, unless or until the trust money paid into the account had been first restored, and the trust fund reinstated by due investment of the money in the joint names of the proper trustees which was never done.”

81 The purchase price of the shares was less than the £3,000 of trust money which had been paid into the bank account. Though the shares rose in value somewhat between the time of purchase and time of sale, the proceeds of sale were less than £3,000. Because the beneficiaries had a charge over the shares for £3,000, they were entitled to the whole of the proceeds of sale.

185 These examples show how it cannot be said that, as a matter of law, a fund in which assets of several beneficiaries have become mixed should always be distributed amongst all beneficiaries, pro rata to their claims.

Tracing Principles Applied to Classes

186 As Crace-Calvert’s Case and Sinclair v Brougham show, it is possible for there to be tracing which does not depend upon identifying the transmogrifications which the assets of a particular beneficiary have gone through. Sometimes, a liquidator seeking to administer a fund will know nothing more than that the fund is held on trust, and that there are a number of potential claimants to the fund, whose merits he cannot on any rational basis distinguish between. In such a situation, it may be appropriate for the court to direct a liquidator that he is justified in distributing the fund amongst the claimants proportionately to their claims. It is relevant to this that in Sinclair v Brougham the fact of monies being mixed was enough for the House to decide that there should be a pro rata distribution, and the paucity of evidence meant that there was no reason to depart from a pro rata distribution.

187 Sometimes, however, there might be facts which show that claimants fall into particular classes, such that the amount of the charge which one class has on the assets which remain is likely to be a smaller proportion of the amount of their money which went in than is the case with another class. If, for instance, there was a time when a trust account was completely depleted, beneficiaries whose money went into that trust account before the day of depletion could not have any equitable right at all to the sum which stands in the account at the date of trial. If the account in which the mixing occurred at any time reached a particularly low level, it may be that those people whose money was paid into the account before that low level was reached ought be accorded a smaller dividend on the amount of their claim than people whose money was paid in after that low level was reached. In carrying out such calculations, estimation and inference can be appropriate if precise evidence is not available.

188 Sometimes, likewise, there might be facts which showed that claimants fall into particular classes such that one class has a higher priority for the charge it can establish than does the other class.

189 While a liquidator must distribute funds of the company, or under his control through the company being trustee of trusts, in accordance with legal entitlements of people to those funds, the Court’s findings about what legal entitlements exist depend upon the evidence which is placed before the Court, and inferences properly drawn from that evidence. When distribution of a fund is made by reference to classes of claimants, the available evidence is frequently evidence about the nature of a fund and the types of contribution which have gone into it. It is because the evidence is at this level of generality that the court reaches conclusions about the beneficial ownership of the fund by saying that it is divided amongst claimants in some particular way. If ever the court is able to give a remedy founded on tracing some individual claimants, it is because evidence is available which enables the property of those individual claimants to be more specifically traced. It should not be a cause for surprise that evidence of these different types can lead to different types of conclusion.

190 It is possible to recognise that, on the basis of evidence of a liquidator’s investigations taken to a certain stage, distribution among claimants proportionately to their claims is proper, while at the same time recognising the theoretical possibility that further investigation might turn up facts which showed, in some way, inequality amongst the various claims. If ever a liquidator is in significant doubt about whether he ought conduct further investigations to see whether any such facts emerge, he can always ask the Court for directions on that topic.

191 In Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353 the Ontario Court of Appeal held that beneficiaries whose money had been mixed in an account, and wrongly depleted, should share whatever balance remained in the account pro rata to their contributions, without regard to the “lowest intermediate balance rule”. One reason for this conclusion was pragmatic – that performing the calculations required to identify the proportions in which the fund was held following each deposit or withdrawal would be extremely complicated in principle, and often not achievable in fact. The second was that the fund was a blended fund, and when it was wrongly depleted it was the fund as a whole which was wrongly depleted, not any particular beneficiary’s contributions.

192 I do not accept that either of these reasons leads to a conclusion that, always and regardless of the facts of the individual case, the lowest intermediate balance rule has no part to play in deciding how a mixed fund of several beneficiaries should be distributed in specie. As to the first reason, whether performing the calculations to carry out a full tracing exercise is complicated, or achievable, will depend upon the particular case being considered. Further, it is not as though the only available alternatives are full analysis of every transaction in the account, and dividing between all claimants equally. As to the second reason, while it is true that, when a depletion occurs from a fund, it is the fund as a whole, as it exists at that time, which is depleted, accretions to the fund after that time are, self evidently, not affected by that depletion.

193 In the present case, the liquidator puts no facts before the Court which lead to a conclusion that the various claimants ought be divided into various classes which are given different dividends. There is no reason to believe that there are any assets purchased from the accounts, into which some beneficiaries can trace but not others. The funds available are comparatively small, and likely to be completely, or substantially, depleted by the liquidator’s own costs if the liquidator tried to carry out a more extensive analysis of the accounts. In these circumstances, the liquidator is justified in distributing amongst all the claimants, proportionately to their claims as assessed by him.

PART F – LIQUIDATOR’S COSTS

194 The liquidator seeks an order that he is entitled to recoup all of his costs and expenses (including his remuneration) of acting, initially as administrator, and thereafter as liquidator of the Company, from the trust accounts and prior to any distributions to any beneficiary. The Company has no assets whatsoever available for distribution to its general creditors – all the assets it held which were not subject to trusts have been taken by the secured creditor under its security.

195 Section 556(1) Corporations Act 2001 provides:

“Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:

(a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business;

(b) if the Court ordered the winding up – next, the costs in respect of the application for the order (including the applicant’s taxed costs payable under section 466);

(c) next, the debts for which paragraph 443D(a) entitles an administrator of the company to be indemnified (even if the administration ended before the relevant date) except expenses covered by paragraph (a) of this sub-section and deferred expenses …

(de) next, the deferred expenses …”

196 Section 556(2) defines “deferred expenses” in a way which includes the remuneration of a relevant authority. It also defines “relevant authority” as including both a liquidator, and an administrator.

197 In some circumstances, a liquidator is able to recover some remuneration, and some reimbursement of expenses, even from property which is the subject of a security. Section 561 Corporations Act 2001 provides that certain amounts payable by a liquidator may be paid in priority over the claims of a chargee in relation to a floating charge created by the company. Those amounts are, broadly, amounts payable to employees of the Company, whether incurred before or after the commencement of the winding up.

198 As well, a liquidator can have an equitable right to be paid expenses and remuneration in carrying out some of his activities, which has priority over even a secured creditor. Such an equitable right arises in two types of cases. The first is where the liquidator has realised the mortgaged property, in which case certain costs of realisation are payable from the mortgaged property (In Re Marine Mansions Company (1867) LR 4 Eq 601 at 611-612, where there was no objection to the liquidator being paid; In Re Oriental Hotels Company; Perry v Oriental Hotels Company (1871) LR 12 Eq 126 at 132-133, where allowance of the costs of realisation was not consented to; In Re Regent’s Canal Ironworks Company; Ex parte Grissell (1875) 3 ChD 411 at 422, 423; Re Universal Distributing Co Ltd (1933) 48 CLR 171 at 175 per Dixon J; Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215 at 221 per Murphy J, 229-230 per Tadgell J (same principle applied to a receiver)). As well, sometimes, if a liquidator incurs costs of preserving mortgaged property (which is such things as “… the repairing of property, paying rates and taxes, which would be necessary to prevent any forfeiture, or putting a person in to take care of the property” – In Re Regent’s Canal Ironworks Company; Ex parte Grissell (1875) 3 ChD 411 at 427) the liquidator can recover those expenses in priority to a security holder. Subject to those limited exceptions, the expenses of a winding up and liquidator’s remuneration must be paid from whatever assets of the company are left after secured creditors who choose not to surrender their securities have realised those securities.

199 Section 545 Corporations Act 2001 provides:

“(1) Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property.”

200 The exceptions which are brought in by the words “subject to this section” are that a liquidator can be directed to incur a particular expense if a creditor or contributory requests the Court or ASIC to direct the liquidator to do so, and indemnifies the liquidator for the amount expended, and that in all events the liquidator must lodge all documents (including reports) which the Act requires him or her to lodge with ASIC. Thus, subject to these exceptions, if a liquidator does not have assets from which his fees and expenses can be paid, he is not obliged to continue to carry out the work involved in the liquidation.

201 When a company which carries on no activities other than being the trustee of a trading trust goes into liquidation, the proper costs and expenses of the liquidator can be met from the assets of the trust: In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99. King CJ reached this conclusion on the basis that a trustee had a personal right to be indemnified from the trust assets for expenses the trustee has incurred in the administration of the trust, and a lien over the trusts assets to secure that right of indemnity. The trustee also has a personal right to resort to the trust property and pay expenses of administration of the trust from the trust assets, without first paying those expenses himself. When a trustee which is a corporation goes into liquidation, those personal rights, and that lien, are assets which are divisible in the liquidation. (King CJ says they pass to the liquidator – page 104, 105, 107, 109. This is not, with respect, strictly correct, as the rights of the company remain with the company, and the liquidator acquires powers to deal with the assets of the company in lieu of the directors, but this detail does not affect the validity of the main thrust of his Honour’s argument.) The liquidator can, by using those personal rights and that lien, resort to the trust property to discharge all liabilities which the trustee incurred in administration of the trust before winding up supervened. Because those liabilities are in law the liabilities of the trustee, section 292 Companies Act (now section 556 Corporations Act 2001) requires those pre-liquidation liabilities to be discharged in the order of priority there laid out, thus giving the liquidator a priority over pre-liquidation creditors of the trust business.

202 The question of the priority of the liquidator’s costs, expenses and remuneration over the beneficiaries of the trust King CJ dealt with as follows, at 110

Companies Act

other

unsecured debts

Re Enhill Pty Ltd

In Re Universal Distributing Co Ltd (in liquidation)

203 This reasoning remains applicable under the Corporations Act 2001. Section 556 of that Act, setting out the order of priority of payments, contains the critical word “other” - section 556(1) says “Subject to this Division, in the winding up of a company, the following debts and claims must be paid in priority to all other unsecured debts and claims …”

204 Jacobs J reached the same conclusion as a matter of construction of certain provisions of the Companies Act 1962 (SA) relating to liquidations. He relied upon the provision establishing priority of debts (section 292, analogous to section 556 Corporations Act 2001), the provisions enabling a liquidator to be appointed by the Court (section 221, 222 and 231 Companies Act 1962 (SA), analogous to section 459P, 461 and 472 Corporations Act 2001), and provisions entitling the court-appointed liquidator to remuneration (section 232 Companies Act 1962 (SA), analogous to section 473 Corporations Act 2001). His Honour says, at 113, that pre-liquidation creditors of the trust,

“subject to section 292”

“Looking at the whole legislative scheme, therefore, I can find nothing in the language or structure of the legislation to deny the proposition that, in a case such as this, s 292 can operate upon the trust asset to provide for the remuneration of the liquidator in priority to other claims, more particularly as the other provisions of s 292 would seem clearly to be available to regulate the rights of creditors inter se. To hold otherwise would defeat, or at least frustrate, the legislation. The liquidator is appointed by the Court, and is answerable to the Court, and is clearly entitled to remuneration for his services whether fixed by the Court or by the creditors whose proofs have been admitted. He would not be available to act at all unless the Act is allowed to speak according to its tenor; and indeed, unless the Act so speaks, the Court itself would be in no better position to recover the costs and expenses of the winding up, if the winding up were undertaken by the Court without the intervention of a liquidator. I cannot think that the legislature intended such a result, and I am not persuaded that the language of the Act, or the general law, compel such a result.”

205 In Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 McLelland J reached the same conclusion, that the remuneration of the liquidator of a corporation which is trustee of a trading trust and has no other activities can be paid from the trust property.

206 Where a corporation which is trustee of a trust, but also conducts other activities, goes into liquidation, different considerations arise. The assets which are divisible among the creditors of the company are those which are the property of the company. This emerges from section 555 Corporations Act 2001, which says:

property of the company

“property of the company”

207 However there is an equitable principle whereby a liquidator who performs tasks in the administration of trusts of which the company is trustee can be granted remuneration for those tasks out of the assets held on trust. In In Re Berkeley Applegate (Investment Consultants) Ltd (in liquidation); Harris v Conway [1989] 1 Ch 32 at 50-51 Edward Nugee QC said:

In Re Marine Mansions Co,

Scott v Nesbitt

Phipps v Bordman

208 The application of this principle was summarised by Morrit J in Re Eastern Capital Futures Ltd (in liquidation) [1989] BCLC 371, at 375 by saying:

“… they are not entitled to remuneration as liquidators for their work done in relation to the trust assets, but the Court has jurisdiction to allow them remuneration out of the trust assets if thought fit.”

“The liquidators should retain remuneration out of the trust fund equal to what they would have got if the trust moneys had been the company’s own moneys.”

“… the trust money should be notionally aggregated with the company’s assets, the scale … should then be applied to the aggregate so as to calculate the total remuneration to which, on this hypothesis, the liquidators would be entitled. That proportion of the total remuneration which the trust assets bears to the aggregate of the trust and the company assets, should be paid or retained as remuneration out of the trust assets.”

209 The principle in Berkeley Applegate was applied by McLelland J in Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-687. McLelland J noted, at 688, that no ready distinction could be drawn

“between work done and expenses incurred by the liquidator in the winding up, on the one hand, and work done and expenses incurred in administering property held by the company as trustee, on the other hand.” (688)

“do all such … things as are necessary for winding up the affairs of the company … “

Corporations Law

“winding up the affairs of the company”

Corporations Law

“a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property”

Re Berkeley Applegate (investment Consultants) Ltd (in liq)

“the company did not (at least to any significant extent) either carry on a business as trustee, or incur debts in that capacity”

210 In 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 Finkelstein J said, at 385

“These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.

The position is a little more involved as regards work done and expenses incurred in what may be described as general liquidation matters. If that work is unrelated to the beneficiaries and their claims it is difficult to see whether costs could be charged against their assets. In the case of a company which has carried on the business of trustee it might be that much of the work involved in the liquidation is chargeable against trust assets if it can be shown that the liquidation is necessary for the proper administration of the trust. But it is unlikely that this will be so where the company did not act solely as trustee or at least did not act in that capacity to a significant extent. In that event, the liquidator will be required to estimate those of his costs that are attributable to the administration of trust property and only those costs will be charged against the trust assets.”

211 The overlap there is, in the duties of a liquidator of a corporate trustee, between some of the activities which he carries out qua liquidator, and some of the activities which he carries out as the person with administrative control of the trustee, is of particular importance in this case. Even though a liquidator needs to go to court to have it established that he has a right of remuneration from trust assets for work done in administering them, that right is one which is not accorded the liquidator in the exercise of some kind-hearted discretion of the Court, but is accorded to him in accordance with equitable principle. The liquidator’s right to receive such a payment, when the factual circumstances are made out, is every bit as much a matter of legal right as is a solicitor’s “fruits of the action” lien (Firth v Centrelink [2002] NSWSC 564; (2002) 55 NSWLR 451), or a provisional liquidator’s lien over property he or she has preserved (Shirlaw v Taylor (1991) 31 FCR 222). As Lord Browne-Wilkinson said in Foskett v McKeown [2001] 1 AC 102, at 109:

“The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary. This case does not depend on whether it is fair, just and reasonable to give the purchasers an interest as a result of which the Court in its discretion provides a remedy. It is a case of hard-nosed property rights.”

212 To the extent that the liquidator does work which would entitle him both to remuneration as liquidator, and also to payment in accordance with the principle recognised in Berkeley Applegate, there is a situation where two funds – the distributable property of the company, and the trust assets – are each liable to bear that expense. If two funds are both liable to meet an expense, principle ordinarily requires that there be contribution between the two funds in meeting that expense. As this is a case where there are no assets of the company available to meet the liquidator’s general expenses it is not necessary to decide whether, if there were both trust assets, and other assets of the company, available to meet expenses of the liquidator which fell into this “overlap” area, there is any reason to deny the application of contribution in the case of the liquidator of a corporate trustee. (Arguments for denying it and requiring the liquidator to resort primarily to the non-trust assets, so far as liquidator’s remuneration were concerned, though possibly not concerning out-of-pocket expenses, might possibly be put by analogy with a trustee’s inability to make a profit from his trust. An argument against denying it might be put that the trust beneficiaries ought not freeload on the general creditors concerning an expense for their mutual benefit.) The usual principle concerning contribution is that if one of two parties each liable to pay some particular amount is insolvent, the other party must bear the whole of that amount. The other party will have a right of contribution against the insolvent party, which would be provable in the bankruptcy or liquidation of the insolvent party. Whether or not contribution is available in cases where there are both trust assets and non-trust assets available to meet a liquidator’s expense in the “overlap” area, the equitable lien recognised in Berkeley Applegate means that all costs of the liquidator properly attributable to the administration of the trust assets can be paid from the trust assets. Thus, a liquidator has done work which is attributable equally to the winding up of the company, and the administration of trust assets, and there are no assets of the company at all to meet his expenses in doing so, the expenses are payable solely from the trust assets.

213 However in no circumstances will the liquidator be able to recover from the trust assets the expense of doing any work which could not be fairly categorised as administering the trusts. Further, as Finkelstein J noted in 13 Coromandel Place at 586, if a liquidator is administering, through the company of which he is liquidator, more than one trust,

Suco Gold,

214 In the present case, the liquidator relied on the decision of Young CJ in Eq in Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301. After reviewing the cases which I have just been considering, his Honour said, at [21]:

“It may be that in a particular case, beneficiaries under a trust will be able to show that it is inappropriate for the whole of the costs of the liquidation to be loaded onto the trust assets. However, the present does not appear to be such a case. The general rule is that the whole costs of the liquidator are charged on the trust assets.”

215 Contrary to the liquidator’s submission, I do not read the last sentence just quoted from his Honour‘s judgment as the articulation of any new principle. I do not read it as anything more than an empirical generalisation, about how cases where an application is made to charge costs of the liquidator on trust assets often work out. That sort of an empirical generalisation does not relieve the Court, or a liquidator, from applying appropriate principles to a particular case, to arrive at the result which is appropriate for that particular case. That the last sentence just quoted does not have the significance which the liquidator’s submission seeks to read into it emerges clearly from the fact that his Honour, in the first sentence I have just quoted, expressly recognises that particular cases will result in the whole costs of the liquidation not being borne by the trust assets.

216 The liquidator also relied upon Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424. There concerning a company in liquidation which was trustee of a trust, and also had other activities, Pullin J said at [94]

“In my view, the whole of the costs of the liquidator of Rowena should be charged upon the trust assets because, as I have said, the trust creditors will have personal claims against Rowena … as well as claims as beneficiaries to the trust property. That being so, the general administration associated with winding up Rowena will concern creditors, and this includes trust creditors.”

217 The liquidator, consistently with his submission that he ought be entitled to charge all costs of the administration on the trust assets, has not presented evidence which quantifies the costs which would be properly chargeable against the trust assets in accordance with the principles I have referred to in this judgment. Because there is no legal principle which entitles the liquidator to have all his costs out of the trust assets, regardless of the individual circumstances, there is insufficient evidentiary basis for me to now make an order which will finally dispose of the liquidator’s claims for remuneration. Orders can be made, on the usual basis, permitting the liquidator his costs of these proceedings from the trust assets. Any further allowance of remuneration, costs, charges and expenses which should be made prior to any distribution being made to the beneficiaries of the two trust accounts, would require further evidence.

1. The Court directs that the First Applicant is justified in distributing the funds held in the trust accounts of the Second Applicant in the following order of priorities:

(a) First, to a maximum of $10,000 in discharge of the reasonable costs and expenses of QT Travel Pty Limited incurred in its participation in these proceedings (on an indemnity basis);

(c) Next, in payment of such further remuneration, costs, charges and expenses of the First Applicant as the Court might subsequently approve;

(d) Next, pari passu amongst all those individuals who:

(i) have made claims in response to the notification issued by the Liquidator pursuant to section 60 of the Trustee Act 1925 ; and

(ii) have produced evidence adjudged by the Liquidator to be corroborative of the existence of a proprietary claim against the trust account.

**********

Last Modified: 11/25/2003

Citations

Re Sutherland; French Caledonia Travel Service Pty Ltd (In Liq) [2003] NSWSC 1008

Most Recent Citation

Cases Citing This Decision

316

Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20

Bruton Holdings Pty Limited (In Liquidation) v Commissioner of Taxation & Anor [2009] HCATrans 185

Tjiong v Chang (No 2) [2025] NSWCA 96

Cases Cited

33

Statutory Material Cited

3

In the Matter of French Caledonia Travel Service Pty Limited (in liquidation) - Application of Roderick Mackay Sutherland [2002] NSWSC 641

Addy v Commissioner of Taxation [2021] HCA 34

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CITATION:	Re French Caledonia Travel [2003] NSWSC 1008
HEARING DATE(S):	27 August 2003
JUDGMENT DATE:	24 November 2003
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	Clayton's Case not applicable in distribution of trust monies. In particular circumstances of this case, liquidator justified in pari passu distribution amongst claimants on trust fund
CATCHWORDS:	TRUSTS - remedies of beneficiaries - mixing of money held on trust for several beneficiaries in bank account - insufficiency of account to meet claims on it - how insufficiency should be borne - whether Clayton's Case applicable to decide proprietary interests in money remaining in account - CORPORATIONS - winding up - liquidator of company which held money of several beneficiaries in trust account - liquidator's responsibility concerning distribution - whether Clayton's Case applies - BANKING AND FINANCIAL INSTITUTIONS - banker and customer and business of banking generally - present role of Clayton's Case - CORPORATIONS - winding up - liquidator's application for directions - application concerning one question in which representative of affected class appointed, and concerning other questions where no representative of affected persons appointed - who bound by decision - TRUSTS - money paid into trust account - whether trust created - PRECEDENT - effect of first instance decision altered on appeal - PRECEDENT - decisions of English Court of Appeal - PRECEDENT - effect of judge's decision about legal rights arising in a factual situation which he has held does not exist - CORPORATIONS - winding up - liquidator of company which is trustee of assets, and has other assets - when liquidator's costs paid from assets subject of security - when liquidator's costs payable from trust assets
LEGISLATION CITED:	Companies Act Companies Act 1962 (SA) Corporations Act 2001 (Cth)
CASES CITED:	13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 Adamopoulos v Olympic Airways SA (1991) 25 NSWLR 75 Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082 Chesterman J, 27 March 2001, unreported Australian Securities and Investment Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719 Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424 Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (receiver and manager appointed) (1994) 49 FCR 334 Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited (in liquidation) and Anor [2000] HCA 25; (2000) 202 CLR 588 Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22 Behrens v Bertram Mills Circus Ltd [1957] 2 QB 1 In Re Berkeley Applegate (Investment Consultants) Ltd (in liquidation); Harris v Conway [1989] 1 Ch 32 In Re Birkbeck Permanent Benefit Building Society [1912] 2 Ch 183 Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833 Brady v Stapleton (1952) 88 CLR 322 Bristol-Myers Squibb Co v F H Faulding & Co Ltd (2000) 170 ALR 439 In Re British Red Cross Balkan Fund; British Red Cross Society v Johnson [1914] 2 Ch 419 Brown v Adams (1869) LR 4 Ch App 764 Buckley v Gross (1863) 3 B&S 566 Burt v Barry & Roberts Ltd [1956] QSR 207 Clayton's Case; Devaynes v Noble (1816) 1 Mer 572; 35 ER 781 Commissioner of Stamp Duties (Q) v Jolliffe (1920) 28 CLR 178 Cook v Cook (1986) 162 CLR 376 Cory Brothers & Company Limited v The Owners of the Turkish Steamship Mecca [1897] AC 286 Creak v James Moore & Sons Proprietary Limited (1912) 15 CLR 426 Deeley v Lloyds Bank Limited [1912] AC 756 In Re Diplock; Diplock v Wintle [1948] 1 Ch 465 Re Eastern Capital Futures Ltd (in liquidation) [1989] BCLC 371 Re Farmer [1939] Ch 573 Federal Commissioner of Taxation v St Helen's Farm (ACT) Pty Ltd (1981) 146 CLR 336 Federation Insurance Limited v Wasson (1987) 163 CLR 303 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 Firth v Centrelink [2002] NSWSC 564; (2002) 55 NSWLR 451 Foskett v McKeown [2001] 1 AC 102 French Caledonia Travel Service Pty Ltd (in liquidation) - Application of Roderick Mackay Sutherland [2002] NSWSC 641; (2002) 42 ACSR 524; (2002) 20 ACLC 1486 Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 Garcia v National Australia Bank Ltd (1998) 194 CLR 395 Re Global Finance Group Pty Ltd (in liq) [2002] WASC 63; (2002) 26 WAR 385 Re Greater West Insurance Brokers Pty Ltd [2001] NSWSC 825; (2001) 39 ACSR 301 Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 In Re Guardian Permanent Benefit Building Society (1882) 23 ChD 440 Hagan v Waterhouse (1991) 34 NSWLR 308 In Re Hallett's Estate; Knatchbull v Hallett (1879) 13 Ch D 696 Hancock v Smith (1889) 41 ChD 456 Hepburn v TCN Channel Nine Pty Ltd [1984] 1 NSWLR 386 Re Hobourn Aero Components Ltd's Air-Raid Distress Fund [1946] 1 Ch 86 Re Hobourn Aero Components Ltd's Air-Raid Distress Fund [1946] 1 Ch 194 Hodges & Hurley v Kovacs Estate Agency Ltd [1961] WAR 19 Hopkinson v Rolt (1861) 9 HL Cas 514 Jacobs v London County Council [1950] AC 361 Re James R Rutherford & Sons Ltd [1964] 1 WLR 1211 James Roscoe (Bolton) Limited v Winder [1915] 1 Ch 62 Joachimson v Swiss Bank Corporation [1921] 3 KB 110 Re Jones (Deceased); Ex parte Mayne (1953) 16 ABC 169 Jones v Bartlett (2000) 205 CLR 166 In Re Joscelyne; Allen's Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4 Kauter v Hilton (1953) 90 CLR 86 In Re Kayford Limited (in liquidation) [1975] 1 WLR 279 Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 In Re Laughton [1962] Tas SR 300 Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353 Lippmann Gorman v Karpnale Ltd [1991] 2 AC 548 London Jewellers Ltd v Attenborough [1934] 2 KB 206 In Re Marine Mansions Company (1867) LR 4 Eq 601 Re Martin [1953] QSR 37 Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215 Murray v Scott (1884) 9 App Cas 519 Mutton v Peat [1899] 2 Ch 556 Mutton v Peat [1900] 2 Ch 79 Natwest Markets Australia Ltd v Mannix (1995) 7 BPR 14,668 In Re Oatway; Hertslet v Oatway [1903] 2 Ch 356 Re Ontario Securities Commission and Greymac Credit Corp (1986) 30 DLR (4th) 1 Re Ontario Securities Commission and Greymac Credit Corporation (1988) 52 DLR (4th) 767 In Re Oriental Hotels Company; Perry v Oriental Hotels Company (1871) LR 12 Eq 126 Osborne v Rowlett (1880) 13 ChD 774 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Parr's Banking Company Ltd v Yates [1898] 2 QB 460 Pennell v Deffell (1853) 4 DeGM&G 372; 43 ER 551 In Re Regent's Canal Ironworks Company; Ex parte Grissell (1875) 3 ChD 411 Re Registered Securities Ltd [1991] 1 NZLR 545 Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch); [2003] 2 All ER 478 Scott v Scott (1963) 109 CLR 649 Sharah v Healey [1982] 2 NSWLR 223 In Re Sherry; London and County Banking Company v Terry (1883) 25 Ch D 692 Shirlaw v Taylor (1991) 31 FCR 222 Shoreline Currencies (Australia) Pty Ltd (in liquidation) and the Companies (New South Wales) Code (Kearney J, 14 October 1988, unreported) Sibbles v Highfern Proprietary Limited (1987) 164 CLR 214 Sinclair v Brougham [1914] AC 398 Spence v Union Marine Insurance Co Ltd (1868) LR 3 CP 427 In Re Stenning; Wood v Stenning [1895] 2 Ch 433 Stephens Travel Service International Pty Ltd (receivers and managers appointed) v QANTAS Airways Ltd (1988) 13 NSWLR 331 Re Stillman & Wilson (1950) 15 ABC 68 In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99 Re Thomas Mortimer Limited [1965] Ch 186 In The Trusts of the Abbott Fund; Smith v Abbott [1900] 2 Ch 326 Re Universal Distributing Co Ltd (1933) 48 CLR 171 Re Walter J Schmidt & Co 298F 314 (1923) Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 Re Wilson [1940] Ch 966 Windsor Mortgage Nominees Pty Ltd (as trustee) v Raymond Griffith Cardwell (1979) ACLC 40-540 Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 Re Yeovil Glove Co Ltd [1962] 3 All ER 400 Re Yeovil Glove Co Ltd [1965] Ch 148
PARTIES :	Roderick Mackay Sutherland - First Applicant French Caledonia Travel Service Pty Limited (in liquidation) - Second Applicant
FILE NUMBER(S):	SC 3173/02
COUNSEL:	Golledge, solicitor - First Applicant A Lo Surdo - QT Travel Pty Limited
SOLICITORS:	The Argyle Partnership - First Applicant Norton White - QT Travel Pty Limited