Re The Official Trustee in Bankruptcy & Anor v Ex parte Bailetti, G. & Sons & Ors

Re: THE BANKRUPT ESTATE OF ROSS DANIEL HODBY and THE OFFICIAL RECEIVER for and
on behalf of THE OFFICIAL TRUSTEE IN BANKRUPTCY
And: COLIN LEO KLAU; GLENYS KAY KLAU; GLENCOL PTY. LTD.; R.S.C. RYMILL PTY.
LTD.; PATRICIA JANE RYMILL; KRAKAT PTY. LTD.; MICHAEL BERNARD HART; MAUREEN
HART; DONALD PATRICK PLUNKETT; JOYCE SUSANNAH SMART and PAUL KERTESZ
Ex parte: G. BAILETTI & SONS & OTHERS and KRAKAT PTY. LTD.
No. 910/11 of 1986
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Fisher J.(1)

CATCHWORDS

Bankruptcy - Tracing moneys through accounts of bankrupt land and finance broker - accounts in confusion - whether unregistered mortgagees entitled to moneys secured - quasi-fiduciary relationship between investor mortgagees and bankrupt - moneys of mortgagees not "fairly identifiable".

Bankruptcy Act 1966.

HEARING

ADELAIDE

#DATE 16:4:1987

ORDER

The Official Receiver is entitled, subject to any application which may be made by any party not before the Court or who has not received notice of this application to trace his own money into the sum of $586,000, to the said sum of $586,000 being portion of the sum of $800,603.45 standing in Court to the credit of the account entitled "Estate of Ross Daniel Hodby - Krakat" together with accrued interest thereon for the benefit of the estate of the bankrupt.

The question whether the said sum of $586,000 should be held by the Official Receiver for the benefit of the unsecured creditors of the bankrupt who prove in his bankruptcy or for those unsecured creditors who contributed to the monies in the control of the bankrupt from which the said advances were made to Krakat Pty. Ltd. be adjourned for further consideration.

The question whether the Official Receiver of Krakat Pty. Ltd. or any other and if so which other person or persons is entitled to the balance of the said sum of $800,603.45 in excess of the said sum of $586,000 and the question of any other consequential directions under sub.s.134(4) of the Bankruptcy Act be adjourned for further consideration.

I reserve the question whether the costs of the parties to the hearing or any particular portion thereof should be paid out of the bankrupt estate.

I grant liberty to the parties to speak to the Minutes of these Orders at 2.15 p.m. this afternoon in Chambers upon any party intending so to speak giving notice to the other parties.

Note: Settlement and entry of orders is dealt with in Bankruptcy Rule 124.

JUDGE1

In this matter the Official Receiver, for and on behalf of the Official Trustee in Bankruptcy ("the Official Receiver") as trustee of the bankrupt estate of Ross Daniel Hodby ("the bankrupt") filed a notice of motion on 6 March 1987 seeking certain orders and directions in the administration of the bankrupt's estate. The notice of motion was accompanied by points of claim whereby the Official Receiver claimed to be entitled to the sum of $800,603.45 together with accrued interest thereon which sum had in accordance with earlier orders hereinafter mentioned been paid into Court by a company named Krakat Pty. Ltd. ("Krakat").

However for reasons which will hereafter become apparent the contest before me on this hearing related only to portion of this sum, namely $586,000 the entitlement to the balance being a matter of dispute with Krakat and I deferred consideration of this until a subsequent occasion. The Official Receiver claimed the sum of $586,000 ("the mortgage sum") for the benefit of the general body of unsecured creditors of the bankrupt or alternatively for the benefit of another class of creditor, namely creditors whom I will hereafter call "investor creditors". As however those of the unsecured creditors who are not investor creditors were not represented before me I also deferred for subsequent consideration any question of differentiation between various classes of creditors. I can say however that it does appear probable that the ultimate order which should be made is that this mortgage sum together with the proceeds of other investments made with funds provided by the investor creditors should be divided amongst that class of creditors rateably as in the absence of any capacity to trace into particular securities these creditors may have a charge upon the securities or other investments made out of investors' funds.
The hearing proceeded as a contest between the Official Receiver claiming on behalf of the bankrupt estate and those of the investor creditors who were named as mortgagees in an unregistered mortgage executed by Krakat to secure advances to it by the bankrupt. Most of these creditors, whom I will call "the mortgagees", contended through counsel that by a process of tracing they or some of them were entitled to the sum of $586,000 in the proportions set out in favour of each of them in the unregistered mortgage. None of these creditors however filed points of defence or tendered oral or affidavit evidence but attended at the hearing to press their claims by counsel. There was some discussion concerning the form of the proceedings but it suffices to say that the parties accepted that I should treat the Official Receiver's claim as an application for orders under sub.s.30(1) of the Bankruptcy Act 1966 ("the Act") together with directions under sub.s.134(4) ancillary to or consequential upon any orders made under sub.s.30(1).
The matter comes before this Court in the following circumstances which are not greatly in dispute and which I relate in substantial reliance upon a detailed and careful affidavit of Dean Richard Govan. Mr. Govan has had the day to day conduct in the Official Receiver's office of the estate of the bankrupt. In so far as that affidavit is concerned with the general state of the bankrupt's affairs and his assessment thereof, the material therein was accepted by the parties at the hearing. However on certain specific matters the facts in his affidavit were supplemented by evidence from him and from the bankrupt and by certain documents being mainly records maintained by the bankrupt.
The bankrupt presented his own petition on 17 October 1986. Prior to that time he engaged in business in South Australia as a landbroker, being licensed as such under the Land and Business Agents Act 1973 of this State. He also carried on business as a finance broker, the activities of which business will be related subsequently in some detail. The bankrupt carried on his land broking business under the business name "Ross D. Hodby & Associates". The finance broking business was conducted by a company Hodby Nominees Pty. Ltd. under the business name "Archer Finance Brokers". However, between 4 June 1986 and 1 July 1986 a company of which the bankrupt was a director, Domitix Pty. Ltd, was the proprietor of this business name. During the course of these activities the bankrupt received substantial sums of money from investor creditors for investment by him on secured loans for relatively short terms. It appears it was intended that these loans would be secured by mortgages over real estate. At the time of his bankruptcy he lodged a statement of his affairs in which he stated, in respect of unsecured creditors, a deficiency of $2,069,157.00 These unsecured creditors were persons whom I have called investor creditors and who had placed funds with him for investment on first mortgage. Frequently however no mortgages were obtained or were available as security for the investment of such funds. The bankrupt also listed 109 additional investor creditors whom he described as secured creditors for amounts totalling $2,799,700. However the entitlement of these creditors, amongst whom were the mortgagees in this matter, to security is at least very dubious and the shortfall of $2,200,000.00 estimated by the bankrupt is unrealistically low. For a number of reasons Mr. Govan assessed at 13 March 1987 the deficiency in the estate as approximately $3,000,000. Proofs of debt at that date totalling $4,200,000 had been received and the most substantial asset got in to date which might be available for unsecured creditors was a number of amounts totalling in excess of $1,000,000 which had been paid into Court pursuant to orders made subsequent to the date of bankruptcy.
Prior to his bankruptcy the bankrupt operated a number of bank accounts under the following titles:

(a) Ross D. Hodby & Associates Trust Account No. 00174-0664

(b) Ross D. Hodby & Associates Office Account No. 00174-0672

(c) Ross D. Hodby No. 2 Account No. 02730-6421

(d) Archer Finance Brokers Account No. 00100-1589

(e) Archer Finance Brokers No. 2 Account No. 02734-5033

Also during the period 1 May to 29 August 1986 a further trust account was conducted under the name Ross D. Hodby & Associates No. 2 Trust Account.

The trust account specified in (a) above was the account which the bankrupt was obliged to keep and have audited annually as a licensed landbroker. It appears that it was last audited for the year ending December 1983, although thereafter the bankrupt was permitted to hold a licence notwithstanding the lack of an auditor's certificate. The bankrupt gave evidence in his public examination, which is still not concluded, that Archer Finance Brokers ("Archer Finance") was intended to conduct the finance broking side of the business, whilst Ross D. Hodby & Associates would conduct the conveyancing side of his business. Archer Finance was intended to receive funds from the bankrupt's clients for investment and to arrange for these funds to be lent out on first mortgage securities. It would also receive interest from borrowers and disburse the same amongst the bankrupt's clients. However for many years prior to bankruptcy this distinction was abandoned and funds received were paid arbitrarily into various of the bankrupt's accounts, frequently to restore a particular account to a credit balance.
Mr. Govan stated in his affidavit that he was satisfied that the trust account, and monies standing therein to the credit of the clients, was used for unauthorised purposes and that significant deficiencies in the bank accounts of Archer Finance were the result of unauthorised dealings with clients' funds. The bankrupt acknowledged in his public examination that he commenced using clients' monies for unauthorised purposes in 1978-1979 when he withdrew the sum of approximately $80,000 from his trust account to discharge a personal liability. He had not thereafter reimbursed the trust account this sum.
During his public examination the bankrupt agreed that very many irregularities had occurred in the operation of the accounts and his dealings with his clients' funds and their securities. Stated generally and briefly these irregularities comprised, inter alia, discharging mortgages without receiving the loans secured thereby, paying interest to clients whose funds had not been invested, not applying funds for the specific purpose for which they were remitted, making unsecured advances or his clients funds and preparing inaccurate mortgages.
For a substantial number of years prior to bankruptcy, the bankrupt advanced very considerable sums of his clients' monies to Krakat and other associated companies. These funds were frequently advanced unsecured, no accurate record of such advances was maintained and in at least one instance a mortgage securing the sum of $479,000 was discharged without receiving any repayment of the principal sum secured thereby. There is no doubt that at the time the transaction which falls for consideration in this matter was undertaken, persons associated with Krakat were placing considerable pressure on the bankrupt who was in consequence incapable of acting as a free agent.
As Forster J. said in his reasons for judgment in relation to another transaction being matter No. 910/1 of 1986 the "tangled affairs" of the bankrupt were in a "confused mess", and there was a great deal of mixing of funds in Hodby's trust account which was in a state of "considerable disarray". I endorse these comments which further investigation of this and another transaction the addresses in both of which were heard simultaneously reveal to be, if anything, understatements of the the state of the bankrupt's affairs.
When this state of affairs became apparent to the Official Receiver he made an application to this Court for the purpose of attempting to hold the position pending further investigations. The persons named as respondents in the title to this matter were the respondents to that application. On 22 December 1986 I made an order with injunctions the first paragraph of which was as follows:

"The respondents, all persons named in the statement of affairs of the bankrupt which is annexed hereto and marked "A", either as secured or unsecured creditors, all other creditors or persons claiming to be creditors of the bankrupt and all those persons whose names are set out in the schedule hereto and marked "B" and all persons other than those set out in the said schedule "B" who have at any time borrowed monies on loans or otherwise made through the agency of the bankrupt or any company with which the bankrupt may have been associated or otherwise from funds placed with him and those loans or some part thereof remain due and owing including all such loans in which the principal sum remains outstanding be and are hereby restrained until further order from paying or receiving any monies whether by way of interest or principal with respect to any such loans otherwise than pursuant to this order or any further order made herein."

Since that date there have been numerous applications to the Court, as envisaged by and pursuant to para. 7 of this order, by mortgagors and by mortgagees for the purpose of varying the order to enable mortgages to be discharged. The matter heard by Forster J. was one of these applications. In most instances when a varying order has been made, the monies notionally secured by the mortgages have been directed to be paid into Court for investment by the District Registrar pending further orders. Krakat made such an application and the sum of $800,603.45 abovementioned was paid into Court as a condition of the variation of the order. This particular order permitted a discharge of the unregistered mortgage securing the sum of $586,000 and the charging of the mortgaged properties with a further mortgage in favour of a third party.
It is against this background that I turn to the particular transaction before me, which I have identified as "the Krakat transaction". It concerned an unregistered mortgage purporting to secure advances totalling $586,000 which sum represents portion of the monies paid into Court as related in the preceding paragraph. The memorandum of mortgage was in standard form, secured on four certificates of title and was subject to a specified first mortgage. Krakat was the mortgagor, the consideration being $586,000 and the mortgagees stated to be as set out in "Annexure A". The mortgagees were not required to sign and did not sign the mortgage and there was evidence that Annexure A did not form part of the memorandum of mortgage at the time of its execution by Krakat. The memorandum of mortgage was dated 29 August 1986, was sealed by Krakat and signed by two persons named as joint borrowers. Annexure A sets out the mortgagees as follows:

"G. BAILETTI & SONS of 192 Hindley Street Adelaide 5000 as regards the sum of $97000.00

SYDNEY HORSELL of 50 Chamber Street Henley Beach 5022 Leading Hand Fitter as regards the sum of $32500.00

FRANCIS LEONARD THOMAS of 6 Deakin Street Blair Athol 5084 Retired and JOAN ANITA THOMAS his wife as regards the sum of $30000.00

WALTER ALLEN WINDSOR of 26 Iluika Street Glenelg 5045 Retired as regards the sum of $48000.00

ALBERT THOMAS MUDGE of 5 Short Crescent Beaumont 5066 Retired and NEOLINE McINTOSH MUDGE his wife as regards the sum of $27000.00

GLENCOL PTY. LTD. of 2 Morrison Street Ceduna 5690 as regards the sum of $27000.00

COLIN LEON KLAU of 12 Morrison Street Ceduna 5690 Professional Fisherman and GLENYS KAY KLAU his wife as regards the sum of $51000.00

ARTHUR ALBERT TURNER of Minlaton 5575 Retired as regards the sum of $46000.00

HENRIK JOANNES van ZYTVELD of 8 Lawn Street Panorama 5041 Pastry Cook and JANNETTA FRANCINA van Zytveld his wife as regards the sum of $27000.00

LOLA PAISH of 1 Myrtle Street Prospect 5082 Widow as regards the sum of $47000.00

ALICE THOMPSON NOMINEES PTY. LTD. of 289 Flinders Street Adelaide 5000 as regards the sum of $20000.00

PAUL KERTESZ of 4a Towers Terrace Edwardstown as regards the sum of $8500.00 and SUZIE KERTESZ his wife as regards the sum of $22000.00

R.S.C. RYMILL NOMINEES PTY. LTD. of 14 Bartley Crescent Wayville 5034 as regards the sum of $78000.00

EILEEN BARTLETT of 3/8 Winston Street Somerton Park 5044 Retired as regards the sum of $25000.00 ----------- $586000.00"

The mortgagees Hendrik Joannes van Zytveld, Jannetta Francina van Zytveld, Lola Paish and Eileen Bartlett were not represented during the hearing although given notice of the proceedings and a representative of the mortgagee Alice Thompson Nominees Pty. Ltd. was informally present in Court during portion of the hearing.
During his public examination the bankrupt gave some evidence concerning the circumstances of the Krakat transaction. In his affidavit Mr. Govan gave a summary of this evidence and there was no objection and no challenge in cross-examination to this summary. Mr. Govan summarized the bankrupt's evidence in respect of the Krakat mortgage in the following terms:

"(a) the persons named therein as mortgagees were not the persons who had truly advanced such funds to Krakat Pty. Ltd.;

(b) the funds had been paid to Krakat Pty. Ltd. between the 9th day of April 1985 and the 2nd day of July 1986 and such funds belonged to the bankrupt's clients and were paid into the bankrupt's trust account or the account of Archer Finance Brokers for the purpose of investment to be secured by a first mortgage;

(c) the true amount of advances to Krakat Pty. Ltd. made through the bankrupt's trust account or accounts conducted by Archer Finance Brokers was $903,091.40;

(d) the figure of $586,000.00 was agreed as the amount owing by Krakat Pty. Ltd. after some dispute between the bankrupt and George Karounos. It appears the said George Karounos took a dominant role in negotiations about these matters between Krakat Pty. Ltd. and the bankrupt. A threat by George Karounos to expose the bankrupt's defalcation to his clients in part caused the bankrupt to agree to the figure of $586,000.00 as being the figure actually advanced;

(e) the bankrupt could not positively identify the persons whose funds were applied to this transaction and in many cases could positively depose to the fact that the persons named as mortgagees in the said mortgage bore no relationship to the persons who had truly advanced such funds."

There was also in evidence a schedule of amounts advanced by the bankrupt to Krakat during the period 9 April 1985 to 2 July 1986 which the bankrupt confirmed in his public examination. He said they were amounts advanced from the various accounts into which investor creditor's funds had been deposited and which advances had been made to Krakat. During his evidence to this Court he agreed that the sums referred to in items 16 and 26 were not within this category and in addition the total amount was incorrectly shown as $963,091.40 whereas it should have been $903,091.40. This error was however purely arithmetical.

"AMOUNTS PAID TO KRAKAT PTY. LTD.

Date Cheque Account Amount Payee

1 9/4/85 10123 Trust A/C $ 45,000-00 Krakat P/L 2 9/4/85 10129 Trust A/C $ 55,000-00 Krakat P/L 3 24/4/85 10664 A F B $ 50,000-00 Krakat P/L 4 13/5/85 10772 A F B $ 25,000-00 Krakat P/L 5 14/6/85 4124 A F B $ 25,000-00 Krakat P/L 6 15/7/85 107091 Trust A/C $ 25,000-00 Krakat P/L 7 13/8/85 4620 A F B $ 60,000-00 Krakat P/L 8 13/12/85 11637 Trust A/C $ 20,000-00 Krakat P/L 9 1/5/86 11947 Trust A/C $ 25,000-00 Krakat P/L

10 12/5/86 12171 A F B $ 10,000-00 Krakat P/L

11 12/5/86 12519 Trust A/C $ 20,000-00 Krakat P/L

12 12/5/86 12520 Trust A/C $ 10,000-00 Krakat P/L

13 16/5/86 12544 Trust A/C $ 10,000-00 Krakat P/L

14 20/5/86 12546 Trust A/C $ 12,091-40 Baker McEwin

15 21/5/86 12273 A F B $ 25,000-00 Krakat P/L

22/5/86 Rogers & Co

16 27/5/86 A/C Bloch $ 75,000-00 Krakat P/L

17 23/5/86 12285 A F B $ 26,000-00 Hagim P/L

18 27/5/86 12562 Trust A/C $ 40,000-00 Krakat P/L

19 5/6/86 73967 A F B No.2 $ 10,000-00 Krakat P/L

20 10/6/86 124439 A F B No.1 $ 25,000-00 Krakat P/L

21 11/6/86 124449 A F B No.1 $ 15,000-00 Krakat P/L

22 19/6/86 486603 A F B No.1 $ 20,000-00 Krakat P/L

23 24/6/86 788123 A F B No.2 $ 20,000-00 Krakat P/L

24 24/6/86 788124 A F B No.2 $ 15,000-00 Krakat P/L

25 27/6/86 122041 Trust A/C

No.2 $ 20,000-00 Krakat P/L

26 1/7/86 Direct from

State

Bank A/C Kotaras $160,000-00 Krakat P/L

27 2/7/86 121028 Ross D. Hodby

& Assoc $ 60,000-00 Krakat P/L ---------- $963,091-40"

The bankrupt conceded that none of these advances had been contemporaneously recorded by him as having been made by any one or more of the mortgagees and none were secured.
The Krakat mortgage was entered into in the following circumstances. For a number of years the bankrupt had been providing from monies of his clients to Krakat and two associated companies Karta Pty. Ltd. and Vimited Pty. Ltd. At the beginning of 1985 Krakat had given security for advances made to it totalling $479,000. The security was inadequate in that it was a charge by way of mortgage on a single piece of land said to be valued at $100,000. Certain of the bankrupt's clients were named as mortgagees in that mortgage for sums totalling $179,000 and Hodby Nominees Pty. Ltd. was named as mortgagee in respect of $300,000. That company, Mr. Hodby said, was inserted as nominee for various unnamed investor creditors. In the early months of 1985 Krakat was seeking further advances from the bankrupt and agreed that if the mortgage for $479,000 was discharged, it would execute a second mortgage for $600,000 over a number of title deeds which together comprised the Plympton Park Super Centre. This mortgage was intended to secure, it was said, both portion of the previous loan of $479,000 and subsequent advances.
In April 1985 the bankrupt commenced making the further advances set out in the table above. Notwithstanding the fact that Krakat failed to execute the new mortgage securing $600,000 the earlier mortgage was discharged on 17 February 1986 by the mortgagees without any payment thereunder being made by Krakat.
During the middle months of 1986 arrangements were made by a company Domitex Pty. Ltd., representing the Karounas family interests, to take over the bankrupt's businesses. He was to be a director (one of three) and an employee of the company. When these arrangements were abandoned, in circumstances not here relevant except as mentioned below, the bankrupt negotiated with a Mr. George Karounas to obtain security for advances made by him to Krakat as well as to Vimited and Karta, the two associated companies. He said that there was friction and he was under much pressure from Mr. Karounas at this time, particularly as the latter had proposed, during the discussions concerning the acquisition of the bankrupt's business, that his clients be notified that much of the funds placed with the bankrupt by investor creditors had no or inadequate security. Krakat indicated that it would grant a security by way of second mortgage but only for advances totalling $586,000. Notwithstanding the fact that the bankrupt contended that substantially more had been lent to Krakat, he was obliged to accept security limited to this sum.
A mortgage was prepared and subsequently executed on 29 August 1986. It appears probable that it did not at that time contain the list of mortgagees. What happened on this score can be explained in the bankrupt's words, namely "we started with the $586,000 and we tailored the mortgagees' names to fit that". At the time the bankrupt was completing this mortgage he was also engaged in obtaining security from the other two companies, Karta and Vimited, for the loans he had made to them of his clients' moneys.
Having obtained security for $586,000 from Krakat the bankrupt then proceeded to allocate the mortgage sum to various of his investor clients. At the same time he likewise allocated the security he obtained from Karta and Vimited. This he did in reliance upon and by reference to his records, such as they were. He purported to keep two separate record cards in respect of his clients, an ostensibly yellow card recording secured loans and a white card recording unsecured investments. These cards were not maintained with any accuracy particularly as many advances originally secured were not transferred to other cards when the particular sums were re-lent without security. From the cards of clients which recorded unsecured loans or loans which he knew to be unsecured he selected varying amounts and entered the names and particular amounts in the schedule to be annexed to the Krakat mortgage. He said that in fact it was quite perchance as to which of the three mortgages a particular investor was alloted. There is also no doubt that his selection of the names of mortgagees and the amounts for which each was to receive security was both arbitrary and haphazard. He was only motivated by a desire to obtain some security for clients whose funds were at that time without security. A Mrs. Bartlett, for example, whose name was entered on the Krakat mortgage was fortunate to be included for $25,000 only because she was substituted for another person whose name had earlier been entered and subsequently deleted. The bankrupt agreed that he left in the original amount of $25,000 but deleted the name of a person who had been included incorrectly because he had been allocated security elsewhere.
It was against this background that counsel for the mortgagees had to attempt to preserve the rights of his clients in the mortgage. He conceded that he was not in a position to challenge the facts established by Mr. Govan and the bankrupt or to make any specific assertions on behalf of his clients as to what happened to their monies in relation to the mortgage. It is fair to say that generally it was well nigh impossible to trace the funds of his clients into this particular security. Certainly his clients funds were originally paid into one or other of the various accounts which the bankrupt handled and there was some information in the record cards of the investments made from time to time by the bankrupt. However many of the record cards were written up subsequent to the allocations in the Krakat mortgage and thus record only the allocation and not the fact of an advance to Krakat. The cards which were current at the time of the allocation gave in most instances no assistance to an attempt to trace a particular investor's funds into this security. Counsel conceded that only in the case of the mortgagees Walter Allen Windsor and Paul Kertesz was there any information recorded which could possibly assist in tracing.
In the case of Mr. Windsor his record card as written up subsequent to the entry of his name in the Krakat mortgage indicated as follows:

"Ref File Security Interest Rate Princ

D29 Bailetti-Karta 546-548 Marion $340.00 17% 48,000 "Norkon" Rd, Plympton "Pint" 2-4 Aldridge Ave Plympton $340.00

D20 Windsor- Crittenden Rd Com Loans Smithfield $550.00 16.5 4,000"

His previous record card recorded as follows in respect of possibly relevant transactions and to the extent that the card is legible;

"Ref File Security Interest Rate Princ M91 Innes-Norkon $340.00 17% 24,000 A line has been marked through this entry and D29 written thereon

M91 Stephenson-Pint Collins St $340,00 17% 24,000 A line has also been marked through this entry and D29 written thereon.

The later record card certainly fails to coincide with the Krakat mortgage as it recorded Mr. Windsor as having been allocated security in the Karta and not the Krakat mortgage. However on the assumption that this is an error made in recording it can be accepted that the bankrupt purported to allocate Mr. Windsor portion of the security in the Krakat mortgage.

In the case of Mr. Kertesz his record card as written up subsequent to the Krakat transaction recorded as follows, to the extent relevant;

"Ref File Security Interest Rate Princ. D29 Bailetti Krakat

"Salotti" 187.50 8,500 subsid 6,500"

The bankrupt said that by the word "subsid" he thereby recorded that Mr. Kertesz had been allocated security to the extent of $8,500 in the Krakat mortgage, being portion of an amount of $15,000, and that the balance of $6,500 was unsecured.
His earlier card recorded as follows:

" File Security

3.85 Black-Salotti Carrington St, Adelaide 187.50 15.00 15000"

The headnote to In re Diplock (1948) Ch 465 correctly summarizes the principles upon which the equitable right to trace into a mixed fund or the assets acquired therewith is based. A person may trace his money into a mixed fund or investment provided that -

(a) there was originally such a fiduciary or quasi-fiduciary relationship between the claimant and the recipient of his money as to give rise to an equitable proprietary interest in the claimant

(b) the claimant's money is fairly identifiable

(c) the equitable remedy available i.e. a charge on the mixed fund or the assets does not work an injustice.

In this matter I find that there was such quasi fiduciary relationship at least between the client investors and the bankrupt. The question remains whether the money of Mr. Windsor or Mr. Kertesz is fairly identifiable and if it does whether an entitlement to trace on their part would work an injustice on the other client investors.
In the case of Mr. Windsor it was said that his records show that his monies, namely $48,000 which originally had been loaned to Norkon and Pint were a repayment by them lent to Krakat. Alternatively these amounts were unsecured at the time of the Krakat mortgage and the bankrupt attempted to give Mr. Windsor security by allocating to him portion of the monies secured by the Krakat mortgage.
In carrying out his investigations of the source of the monies advanced to Krakat during the period 9 April 1985 to 2 July 1986 Mr. Govan said that Mr. Windsor was the only person named in the Krakat mortgage who could possibly be identified as having advanced funds to the bankrupt which could have been advanced to Krakat. He said this because on 27 June 1986 Mr. Windsor paid three sums, namely $36,918.50, $2,188.80 and $892.70, totalling $40,000 into the Ross D. Hodby & Associates Trust Account No. 2. these three sums formed portion of an amount of $109,786.86 paid to the credit of that account on that day. On the same day $20,000 was advanced by the bankrupt to Krakat.
There are a number of grounds upon which I find that Mr. Windsor's money is not "fairly identifiable" in the Krakat mortgage which grounds are additional to the fact that his second card shows him as being included in the Karta mortgage. This money can not be identified as being portion of the amount of $40,000 paid in on 27 June 1986 and advanced to Krakat on that day. Mr. Windsor's record card shows that $40,000 was advanced to or at least included in a "Com Loans" (Community Loans & Finance Pty. Ltd.) security and thus not available to be advanced to Krakat or allocated to the Krakat mortgage. In any event it was the sum of $48,000 for which Mr. Windsor has been included in the Krakat mortgage, not $40,000. Furthermore there is no justification for concluding that in advancing $20,000 to Krakat on 27 July 1986, it was Mr. Windsor's share of the $109,786 paid in on that day which was passed on to Krakat. Equally there was no evidence that repayment of the Norkon and Pint mortgages provided the funds which were allocated security in the Krakat mortgage. The correct conclusion is that Mr. Windsor had paid a number of sums of money to the bankrupt which were invested unsecured and the bankrupt used the opportunity of the Krakat mortgage to attempt to provide Mr. Windsor security with some security.
In respect of the $8,500 for which Mr. Kertesz was included in the Krakat mortgage it is equally difficult to trace his money into the advances secured by that mortgage. It again appears that his presence as a mortgagee in that mortgage can be more likely explained as an attempt to obtain for him some security. The bankrupt said in his evidence that prior to the date of the Krakat mortgage Mr. Kertesz had with others advanced monies to one Salotti. His share was $15,000 and his card records the date 3-85. There are further notations on the card in respect of the Salotti mortgage, namely "M79" which has been struck out and then a pencil note "change to M79 Finance Vimited" which appears to indicate that the sum of $15,000 was to be included in the Vimited mortgage granted at about the same time.
The bankrupt justified the granting of security to Mr. Kertesz for portion of the sum of $15,000 on the basis that the Salotti mortgage had been assigned to a Mr. Blunden for $65,000. This amount was paid into the Ross D. Hodby & Associate Trust Account on 27 May 1986 and provided the funds for a drawing of $24,500 and another drawing of $40,000. The latter amount was identified as an advance on that day to Krakat and the amount of $24,500 as a payment to M.S. McLeod Finance Limited. The bankrupt's evidence was that Mr. Kertesz's $15,000 formed portion of the $40,000 paid to Krakat on the same day, and in consequence it was said that it was fairly identifiable and thus appropriately included in part in the Krakat mortgage. How he on the other hand was able to say that it was not appropriated to the $24,500 paid to M.S. McLeod is not clear.
I am not justified in finding that Mr. Kertesz's amount of $8,500 is fairly identifiable as having been invested by way of loan to $15,000 to Krakat which was subsequently secured to the extent of $8,500. I find the record cards quite unsatisfactory as a starting point and the bankrupt has very little independent recollection of the transaction. There was of course a period of 2 months, between 27 June 1986 to 26 August 1986 between the date of the alleged advance and the date of the allocating of security. In respect of all other mortgagees I find that the bankrupt allocated security without reference to whether or not their funds had in fact been advanced to Krakat. There is no reason to find that he acted otherwise in respect of Mr. Kertesz and the fact that he only received security for portion of his alleged advance supports the contrary finding. Furthermore his record card indicates the date "3-85" in relation to the Salotti mortgage, and if that recorded the date of the advance to Salotti the bankrupt had for many years prior thereto been mixing funds in his accounts and advancing monies improperly. My view is that I should not find that Mr. Kertesz's money is "fairly identifiable" and furthermore that to find that he can trace into the mortgage fund would work an injustice on other investor clients. The fact that there is perhaps a greater prospect in his case of identifying his money in the advance of $40,000 to Krakat and thus an appropriately allocated security is entirely fortuituous.
It is my opinion that none of the mortgagees can trace their moneys into this secured advance to Krakat and that the Official Receiver is entitled to the moneys in Court on this account for the benefit of the bankrupt's estate. In making this finding I have obtained considerable assistance from the decision of Dunn J. in Windsor Mortgage Nominees Pty. Ltd. v. Cardwell (1979) Australian Company Law cases 40-540 a matter in which the facts have considerable similarity to those before me. In both cases the crucial documents, a declaration of trust in Windsor Nominees and the Memorandum of Mortgage in this instance, bore no relationship to the reality of the particular situations. I leave open the question whether, as against the unsecured creditors, the investor clients generally are entitled to a charge on these monies, amongst other proceeds of investments, when they return to the bankrupt's estate.
The Official Receiver has placed before the Court all information he has been able to obtain on the question of tracing. It is however remotely possible that further relevant material may exist and it is necessary to be careful not to exclude persons who are not presently before the Court and who seek to rely on such material. A number of mortgagees were represented on this hearing and therefore the matter of the Krakat transaction is completely disposed of against them and they are bound by my orders. Other mortgagees were given notice and the opportunity to appear and they also are bound. However care must be taken, as it was in Sinclair v. Brougham (1914) AC 398 to preserve the rights of persons other than the mortgagees to take steps to trace if they can produce adequate material. Needless to say such was the state of the bankrupt's records and such was his conduct that they will not find it easy to succeed.

The orders I make are as follows:
I declare that the Official Receiver is entitled, subject to any application which may be made by any party not before the Court or who has not received notice of this application to trace his own money into the sum of $586,000, to the said sum of $586,000 being portion of the sum of $800,603.45 standing in Court to the credit of the account entitled "Estate of Ross Daniel Hodby - Krakat" together with accrued interest thereon for the benefit of the estate of the bankrupt. I adjourn for further consideration the question whether the said sum of $586,000 should be held by the Official Receiver for the benefit of the unsecured creditors of the bankrupt who prove in his bankruptcy or for those unsecured creditors who contributed to the monies in the control of the bankrupt from which the said charges were made to Krakat Pty. Ltd.
I also adjourn for further consideration the question whether the Official Receiver or Krakat Pty. Ltd. or any other and if so which other person or persons is entitled to the balance of the said sum of $800,603.45 in excess of the said sum of $568,000 and the question of any other consequential directions under sub.s.134(4) of the Bankruptcy Act. At this stage I reserve the question whether the costs of the parties to the hearing or any particular portion thereof should be paid out of the bankrupt estate. I grant liberty to the parties to speak to the Minutes of these Orders at 2.15 p.m. this afternoon in Chambers upon any party intending so to speak giving notice to the other parties.

[1987] FCA 241

16 APRIL 1987