Westpac Banking Corporation v Earthwise International Limited

[2005] NSWSC 1037

CITATION:	Westpac Banking Corporation v Earthwise International Limited & Ors [2005] NSWSC 1037
HEARING DATE(S):	4 October 2005
JUDGMENT DATE :	4 October 2005
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Order that fund be paid out of Court to new trustee and distributed pro rata amongst beneficiaries.

CATCHWORDS:	TRUSTS - MINGLED FUND - DISTRIBUTION - Trust funds of numerous investors mingled in various accounts in breach of trust - shortfall in trust funds - principle upon which trust fund should be distributed to beneficiaries.
CASES CITED:	Sutherland Re; French Caledonia Travel Service (2003) 59 NSWLR 361
PARTIES:	Plaintiff: Westpac Banking Corporation First Defendant: Earthwise International Limited 2nd Defendants: GFC Management Ltd and HSS Japan KK 3rd Defendant: Akemi Imamura & Co Ltd 22nd Defendant: Global Eye Consultants Co Ltd 44th Defendant: K. Network Co Ltd 52nd Defendant: Kenji Hasegawa 62nd Defendant: KP Corporation 83rd Defendant: Nicholas Assets Ltd 90th Defendant: Sewin International Ltd 103rd Defendant: Takashi Kanda 112th Defendant: Urban Development Co Ltd 126th Defendant: Yutex
FILE NUMBER(S):	SC 1684/02
COUNSEL:	H.K. Insall SC - 2nd, 3rd, 22nd, 44th, 52nd, 62nd, 83rd, 90th, 103rd, 112th and 126th Defendants
SOLICITORS:	- Henry Davis York: Plaintiff - Baker & McKenzie: 2nd, 3rd, 22nd, 44th, 52nd, 62nd, 83rd, 90th, 103rd, 112th and 126th Defendants

LOWER COURT JURISDICTION:

Ex tempore

Introduction

1    These proceedings originated by way of interpleader proceedings commenced by Westpac Banking Corporation (“Westpac”) concerning the ownership and disposition of a fund of some $19M held by Westpac in three accounts. The accounts had been opened by the First Defendant, Earthwise International Limited (“Earthwise”). 2    The evidence demonstrates clearly that the money was procured from a number of investors in Japan by means of fraudulent representations by a person called William McCray, a US citizen. Mr McCray was convicted in the USA of many counts of fraudulent conduct in November 2003, and has been sentenced to a substantial term of imprisonment. 3    The funds now in question were solicited by Mr McCray and others under the guise of an investment scheme promoted in the names of two companies, Earthwise and International Forex of California. Earthwise is the First Defendant in these proceedings, and the remaining Defendants are Japanese investors whose money found its way into the accounts now held by Westpac in the name of Earthwise. 4    There is no appearance today for Earthwise. Its solicitors filed a Notice of Ceasing to Act some time ago. Westpac has not taken any active part in these proceedings since commencing them, and the conduct of the proceedings has been exclusively in the hands of the Second and following Defendants (“the Investors”). I am satisfied that Earthwise has been duly notified that these proceedings were to be heard today on a final basis, and that it is appropriate to proceed in its absence. 5    The Investors have prepared lengthy and careful affidavits setting out the facts and circumstances which I here narrate in outline. Those facts are summarised in submissions on behalf of the Investors, which I have made an exhibit in these proceedings, and which will remain with the papers. I have taken the submissions as containing a correct statement of the facts for the purposes of this application. 6    There is no doubt that the funds now held in the Westpac accounts are the proceeds of a fraudulent investment scheme promoted by Mr McCray in the name of Earthwise. There is no doubt that the funds were solicited from the Investors upon the representation that they would be held in separate accounts in the names of those investors, and that they would, in effect, be trust funds and treated as such. I have no doubt on the evidence that the money held by Westpac was, indeed, trust funds. 7    It is also clear from the evidence that the funds of all the Investors have been mingled in such a way as to make tracing a difficult exercise. However, it is not necessary to investigate further the possibility of tracing, because the principle upon which the funds are to be disbursed is not founded upon the impossibility of a tracing exercise, as I will state shortly. 8    The funds now held are insufficient to return to the Investors the amounts which they invested in full. There have been unauthorised withdrawals from the funds held by Westpac, and the inference is clearly open that those withdrawals were made dishonestly in the interests of Mr McCray and his associates. 9    The funds are now held in Court, having been paid in earlier this year, and the mechanism for disbursement proposed is that the funds be paid to a trustee, who will then administer the distribution process. The only question which really needs determination is as to the principle upon which the funds are to be distributed.


How should the trust funds be distributed?

10    In my view, the law is now clear. Where trust funds of a number of different beneficiaries have been mingled and the amount of the mingled fund is less than what would be necessary to restore to each beneficiary that beneficiary’s entitlement in full, distribution of the mingled fund is made pro rata, i.e., in the proportion that the amount contributed by each beneficiary bears to the total of the fund available for distribution. 11    That principle is now established in a number of decisions of this Court, which are summarised and reviewed by Campbell J in Sutherland Re; French Caledonia Travel Service (2003) 59 NSWLR 361. His Honour there observes that the principle upon which the Court acts does not found upon impossibility or difficulty in carrying out a tracing exercise. It is a principle which is applicable wherever a mingled trust fund is insufficient to pay the beneficiaries in full. 12 The active Defendants who have prosecuted these proceedings represent all the Japanese investors. I am satisfied that all parties who are interested in the fund have been joined as parties and are either before the Court or else have been notified, as in the case of Earthwise, and have declined to appear. 13 It seems to me that the orders that the Investors seek are in principle warranted, and should be made.


Should the Investors’ costs be paid out of the trust fund?

14    The Investors who have actively prosecuted their claims to payment out of the fund in Court seek costs out of the fund on an indemnity basis. I think that jurisdiction is given to order costs to be paid out of the funds by the following circumstances. 15    The action by the Investors can properly be classified as an action by beneficiaries against a trustee to compel due administration of the trust fund. There is no doubt that Earthwise held the subject moneys upon trust, although upon trust for many different beneficiaries and therefore upon many different trusts. However, by reason of misapplication by Earthwise, the money which ought to have been held in separate trust accounts has been mingled in three accounts, of which Earthwise was the trustee. 16    The Investors can trace their trust moneys into the Westpac accounts and are beneficiaries of the funds in those accounts. They have, therefore, a right to the proper administration in law of the trusts to which those funds are subject. The Investors are seeking, in essence, the removal of the present trustee of those funds, that is, Earthwise, and the vesting of the trust funds in a new trustee, that is, Mr Reidy, so that the trusts may be administered by the payment out to the beneficiaries in the manner contemplated by the orders. 17    In those circumstances, it seems to me that this proceeding is analogous to an action brought by beneficiaries for the due administration of a trust fund, so that the trust fund may properly be burdened with the costs of the proceedings if a costs order against the delinquent trustee would be fruitless. 18    Accordingly, I think there is a proper basis for making the orders which are set out in the Short Minutes. I have inserted in paragraph 39 that costs will be assessed and I have added in paragraph 6 that the orders will be passed and entered forthwith. I am satisfied that the orders should be made. 19    I make a declaration in terms of paragraph 1 of the Short Minutes of Order signed by me, dated today and placed with the papers. I make directions in accordance with paragraphs 2, 3, 4, 5, 6 and 7 of the Short Minutes of Order. I make an order in terms of paragraph 3 of the Short Minutes of Order. 20    I stand the matter into the Registrar’s list on Monday, 3 April 2006. I also direct that all exhibits be returned, except for exhibits 2D 18, 2D 19, 2D 20, 2D 21, 2D 22 and 2D 23.
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