Alesco Corporation Limited ACN 008 666 064 v Te Maari

Solicitors: Corrs Chambers Westgarth (Plaintiff) File Number(s): 2014/224790

The Claims

1. HIS HONOUR: The Plaintiff, Alesco Corporation Limited, brings proceedings against Sireen Te Maari (also known as Sireen Sharqawi) ("the first Defendant") and her husband, Stefan Te Maari ("the second Defendant"), in which it seeks, principally, proprietary relief in the form of a constructive trust or, alternatively, an equitable charge, over two properties, one at Twin Creeks Road, Luddenham ("the Luddenham Property") and the other at Birkdale Crescent, Liverpool ("the Liverpool Property"), arising out of the use of moneys said to have been misappropriated by the first Defendant whilst she was an employee of the Plaintiff. It is alleged that the second Defendant, relevantly, knew of the misappropriations so as to justify the grant of personal, as well as proprietary, relief, against him. A judgment for a monetary sum is also sought against the second Defendant.

Procedural History

1. The Plaintiff filed a Statement of Claim on 11 September 2014. It had previously filed a Summons on 30 July 2014, and subsequently filed an amended Summons on 29 October 2014.
2. There is evidence from Mr A Caruana, a licensed Commercial Agent, in an affidavit sworn on 30 July 2014, deposing to personal service of the Summons, and other documents, upon the first Defendant on 30 July 2014 (at which date, she was the only named Defendant).
3. A freezing order was made by Robb J, as Duty Judge, on 30 July 2014, which was extended with some minor amendments, and with the consent of the first Defendant, by me, as Duty Judge, on 13 August 2014. On each occasion, the Plaintiff, by counsel, gave the usual undertaking as to damages.
4. On 20 August 2014, when the first Defendant was present in Court, White J, as Duty Judge, without opposition by her, made a number of orders relating to the continuation of the freezing order. In addition, with her consent, his Honour made an order that judgment be given for the Plaintiff against her for the sum of $1,963,927.40 "without prejudice to the Plaintiff's claim for proprietary relief". His Honour also ordered the Plaintiff to file a Statement of Claim on or before 4 September 2014, and permitted service of the Statement of Claim upon the first Defendant to be effected by email.
5. The amount the subject of the judgment to which the first Defendant consented included the amount the Plaintiff identified, as at 30 July 2014, as having been misappropriated by her ($1,715,692.05), interest calculated up to 13 August 2014 ($97,726.18), estimated costs and disbursements ($132,447.50) and, I assume, additional interest between 13 August 2014 and 20 August 2014. The amounts to which I have referred are the amounts set out in a copy letter dated 11 August 2014 from the Plaintiff's solicitors to the first Defendant (Ex. J in these proceedings).
6. Following the hearing, and in accordance with the court's request for updated calculations that would disclose more precise amounts, including interest calculated from the date of the judgment, the court received a document, headed "Plaintiff's Quantum Calculations", a copy of which appears to have been sent to each of the Defendants under cover of an email dated 9 April 2015, and which includes the following calculations: "Plaintiff's Quantum Calculations Claim against the First Defendant Amount Judgment entered on 20 August 2014 Amount misappropriated $1,715,692.05 Interest to 18 August 2014 $99,253.85 Interest is calculated based on the dates and amounts of the payments made by the Plaintiff (as set out in Schedules A, B and C of the Statement of Claim) using interest rates prescribed by Practice Note SC Gen 16 Actual solicitor-client costs to 4 August 2014 $42,512.00 Estimated further solicitor-client costs to 13 August 2014 $21,358.50 Actual investigation costs to 4 August 2014 $45,111.00 Estimated further investigation costs to 13 August 2014 $40,000.00 Total of judgment entered on 20 August 2014 $1,963,927.40 Post-judgment interest to 1 April 2015 Interest on $1,963,927.40 in the period 20 August 2014 to 1 April 2015 $102,447.06 Interest is calculated using the interest rate prescribed by Practice Note SC Gen 16 (being 8.5%) for 224 days

Note, interest on the judgment debt continues to accrue (at 8.5% pa) a rate of $457.35 per day."

1. As, in due course, I shall require the Plaintiff's counsel to provide Short Minutes of Order reflecting my reasons for judgment, and as it is likely (for reasons to which I shall come) that the Defendants will attend when I deliver judgment, I shall allow them to make any submissions on the calculations set out above that they may care to make.
2. A copy of the Statement of Claim was served upon the first Defendant, as an attachment to an email dated 11 September 2014, sent to her (Ex. A), from Mr M J Cessario, a solicitor having the carriage of the matter with Ms E C Bell, under the supervision of Mr S Delaney, of the Plaintiff's solicitors.
3. There is evidence, given by Ms C Spartalis, a licensed process server, that the Statement of Claim was personally served upon the second Defendant, at the Liverpool Property, on 11 September 2014. With it was a letter, dated 11 September 2014, from the Plaintiff's solicitors (under the signature of Mr Delaney) confirming that he had 28 days "to file any defence".
4. In fact, no defence has been filed, or served, by either Defendant. Neither Defendant has provided any reason for the failure to do so.
5. The matter was listed before the Registrar a number of times thereafter. Directions were made for the further conduct of the proceedings. The court's record of proceedings indicates that the first Defendant appeared on one occasion (on 28 October 2014) and the second Defendant did not appear on any occasion.
6. By letter dated 16 October 2014, (under the signature of Mr Delaney), addressed to both Defendants, the Plaintiff's solicitors forwarded proposed Short Minutes of Order, which included an order permitting the Plaintiff to amend the Summons, an order for the listing of the proceedings for a one-half day hearing, "the usual order for hearing" and an order granting liberty to apply. In the body of the letter, an explanation was provided of what the Plaintiff sought.
7. (Although the Summons was subsequently amended, it was acknowledged, at the hearing, by counsel for the Plaintiff, that there was, in fact, no real need to have done so in view of the order by White J that the matter should proceed by way of pleadings. The court was informed that the amendments included the proprietary, and other, relief that the Plaintiff then sought, which relief had, in any event, been included in the Statement of Claim, and had been completed for abundant caution.)
8. On 10 November 2014, the matter was listed by the Registrar, for hearing, before me, on 1 April 2015. There was no appearance by either of the Defendants before the Registrar on that day.
9. When informed that the matter was listed before me, my Associate, at my request, informed the solicitors acting for the Plaintiff, by email dated 11 February 2015, that the matter was listed for a pre-trial directions hearing at 9:30 a.m. on 4 March 2015, before me. As there was no information on the court file as to where, or how, either Defendant might be contacted, the Plaintiff's solicitor was also requested to advise the Defendants of the date of the pre-trial directions hearing.
10. The evidence reveals that the Plaintiff's solicitors forwarded a copy of my Associate's email to the Defendants by email dated 11 February 2015. The evidence also reveals, that on about 18 February 2015, Mr Cessario had a telephone conversation with the first Defendant, who acknowledged receipt of the email dated 11 February 2015.
11. At the pre-trial directions hearing on 4 March 2015, Mr M Izzo of counsel appeared for the Plaintiff. Again, there was no appearance by, or on behalf of, either of the Defendants. After the matter was called, I made the following directions: "The Court: 1. Directs that each party deliver to Hallen J's Chambers, in hard and soft copy, an Outline of Submissions, which is to include an index of affidavits upon which it is intended to rely, by 4:00 p.m. on Wednesday, 18 March 2015, and serve same on the other parties by the same date and time. 2. Directs that any affidavit of service of documents or otherwise upon each of the Defendants be delivered to Hallen J's Chambers by 4:00 p.m. on Wednesday, 25 March 2015. 3. Dispenses with the requirement for a Court Book."
12. At my request, shortly after the conclusion of the pre-trial directions hearing, my Associate sent an email to the Defendants (whose email address was now known to the court) confirming the directions that had been made.
13. There is evidence from Mr L Spartalis, a licensed process server, in two affidavits, each sworn on 17 March 2015, that he personally served each of the Defendants, on 11 and 12 March 2015, respectively, with a copy of the Statement of Claim dated 11 September 2014 and each of the affidavits upon which the Plaintiff intended to rely in these proceedings.
14. Mr Cessario deposes to the fact that he sent an email to the Defendants, on 18 March 2015, to which was attached the Plaintiff's Outline of Submissions to which I shall refer. (There is nothing to suggest that the document attached to the email was other than in readable form: Austar Finance Group Pty Ltd v Campbell [2007] NSWSC 1493; (2007) 215 FLR 464 at [49] and [55].)
15. There is in evidence, a copy email, from each Defendant, acknowledging receipt of the Plaintiff's Outline of Submissions.
16. Mr Cessario also sent a hard copy of the Outline of Submissions by pre-paid express post on 18 March 2015.
17. On 18 March 2015, my Associate received an email, under the name of the first Defendant, stating "I refer to my conversation with you yesterday and confirm that we don't have any submissions to make prior to 1 April." A few minutes later, my Associate received another email, under the name of the second Defendant, which stated "I refer to above email and confirm that I will not be making any submissions."
18. On 25 March 2015, I requested my Associate to send another email, in the following terms, to the solicitors for the Plaintiff and to each of the Defendants: "Dear Mr Delaney and Ms Te Maari and Mr Te Maari, You will be aware that this matter is listed for hearing on Wednesday, 1 April 2015 before his Honour. There are no affidavits on the Court file from either Defendant. Please confirm that no affidavits have been served on which it is intended to rely. If any affidavits are to be relied upon, please deliver the original of each to me as soon as possible. The Plaintiff relies on a number of affidavits identified in Paragraph 3 of the submissions dated 18 March 2015 from Mr M Izzo. Please note that there is an exhibit to the affidavit of Emily Catherine Bell affirmed 17 October 2014 which is not with the Court file. A copy of the exhibit should be delivered to me as soon as possible. Finally, I confirm that the matter is listed for one half day on Wednesday, 1 April 2015."
19. Mr Cessario responded, by email, addressed to my Associate, with a copy to the Defendants, that there had been no suggestion by either of the Defendants of an intention to rely upon any affidavits at the hearing. Later the same day, the Plaintiff's solicitors delivered the exhibits to Ms Bell's affidavits, as well as the exhibits to other affidavits, which were to be relied upon, to my Chambers.
20. The first Defendant also responded, by email dated 25 March 2015. She wrote: "We don't intend to rely upon any affidavit evidence."

No appearance at the Hearing by the Defendants

1. Prior to the hearing commencing on 1 April 2015, the matter was called three times outside the court without response. It was called again, after the short adjournment, when I continued the hearing, again, without response. Accordingly, the Defendants being absent when the trial had been called, it was necessary, first, to consider whether to proceed with the trial so far as concerned the claim for relief in the proceedings: Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), rule 29.7.
2. UCPR, rule 29.7 , relevantly, provides: "(1) This rule applies when a trial is called on. (2) If any party is absent, the court: (a) may proceed with the trial generally or so far as concerns any claim for relief in the proceedings, or (b) may adjourn the trial..."
3. In relation to UCPR, rule 29.7, I wrote, in NSW Trustee and Guardian as Executor of the Will of Michael Robert Walsh (Deceased) v Gregory [2012] NSWSC 681, at [18]-[20]: "The clear purpose of UCPR rule 29.7 is the efficient dispatch of court business. However, in dispatching court business, I cannot ignore the right of a defendant to be informed, or, at least, to be made aware, of a trial date. It is a fundamental principle that a party who may be adversely affected by the making of court orders has a right to be heard: Cameron v Cole [1944] HCA 5; (1944) 68 CLR 571, in which Rich J said (at 589): 'It is a fundamental principle of natural justice, applicable to all courts whether superior or inferior, that a person against whom a claim or charge is made must be given a reasonable opportunity of appearing and presenting his case. If this principle be not observed, the person affected is entitled, ex debitojustitiae, to have any determination which affects him set aside, and a court which finds that it has been led to purport to determine a matter in which there has been a failure to observe the principle has inherent jurisdiction to set its determination aside. ... In such a case there has been no valid trial at all.' In the circumstances, the first issue to address is whether I am satisfied that it is appropriate to proceed in the absence of the Defendant or of anyone representing her. A party is 'absent' within the meaning of the rule, when the trial is called on, only if it can be shown that he, or she, has knowledge, or notice, of the date of the trial, and is not physically present, or not represented. In other words, before the rule can be relied upon, there should be proof that the absent party has been given reasonable notice of, or has knowledge of, the date of the trial."
4. I had earlier written, in Smirski v Macander [2010] NSWSC 929, at [34]: "It is to be remembered that the primary considerations on whether to proceed ex parte concern whether there is urgency; whether irreparable damage would flow from making an ex parte order; whether hardship would flow to a party against whom an order is made and whether such an order can be set aside: Ndjamba v Toyota Finance Australia Ltd [2010] NTSC 23, per Blokland J at [8]."
5. I referred to these principles more recently, in Gould v Purtle [2014] NSWSC 493 and in Oxley v Oxley [2014] NSWSC 1606.
6. Of course, I must also have regard to the obligations imposed by s 56 to s 60 of the Civil Procedure Act 2005 (NSW). Section 56 emphasises that the overriding purpose of the Act and the rules of court, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in dispute in the proceedings. The court is required to give effect to the overriding purpose when it exercises any power given to it by the Act or by the rules of court. Section 57 in turn requires the court to have regard to specified matters. Section 58 requires the court, in deciding whether to make any order or direction for the management of the proceedings, to act in accordance with the dictates of justice, and the court must have regard to the provisions of ss 56 and 57. These sections recognise the fact that delay and case backlog are matters which affect not only the public cost in delivery of justice, but the court's ability to provide individual justice, and that the reforms introduced by the Civil Procedure Act promote the provision of individual justice notwithstanding that they may have adverse effects on the claims of individual parties in particular circumstances: Hans Pet Constructions Pty Limited v Cassar [2009] NSWCA 230, per Allsop P, at [37].
7. I have, of course, remembered that the Defendants have been unrepresented. However, that does not mean that they should be treated, by reason of that fact alone, with greater consideration than litigants who are legally represented.
8. In all the circumstances of the case, I was satisfied that I should proceed to hearing despite the failure of each of the Defendants to appear. To further delay the conclusion of the proceedings, when there was no explanation given for each Defendant's non-appearance, would not have been in the interests of justice and would not be in accordance with the overriding purpose of the Civil Procedure Act and the rules of court, in their application to civil proceedings, to facilitate the just, quick and cheap resolution of the real issues in dispute in the proceedings. Each of the Defendants had been made aware of the hearing date.
9. Also, I was unable to see any utility in the adjournment of the proceedings, in the absence of any explanation for her, and his, failure to appear, and where there was no reason to believe that each would be more likely to appear on any adjourned date. It is important to note in this regard, that each Defendant, in the email dated 18 March 2015, to my Associate, gave no indication that an adjournment would be sought. There was no ground on which, in my view, it would have been appropriate for the court to adjourn the hearing, of its own motion.
10. Since it was the Defendants who had failed to appear, the Plaintiff was entitled to prove its claim so far as the burden of proof lies upon it, and, if it could establish that it was entitled to the relief claimed, and such other relief as is consistent with what was sought, the court could proceed to make final orders: Ritchie's Uniform Civil Procedure (NSW) [29.7.5], referring to Stone v Smith (1887) 35 Ch D 188 and Kingdon v Kirk (1887) 37 Ch D 141; see also Satz v ACN 069 808 957 Pty Ltd [2010] NSWSC 365, at [64].
11. As stated, I am satisfied that the Defendants knew of the date of the hearing. I am also satisfied that they have been provided with a copy of the principal documents to be relied upon and that every reasonable effort has been made to allow each to participate in the balance of the proceedings.
12. Finally, I am informed by my Associate, that on 7 April 2015, the first Defendant telephoned her asking whether judgment had been delivered, and confirming that each of the Defendants wished to be present when it was delivered. My Associate confirmed that each of the Defendants would be contacted, by email, a few days before the reasons for judgment were to be delivered and that has been done by email dated 27 April 2015 sent to each of the parties.

The Conduct of the Hearing

1. The Plaintiff's Statement of Claim, as part of the standard form, included a notice to the Defendants to the following effect: "If you do not file a defence within 28 days of being served this statement of claim: • You will be in default in these proceedings. • The court may enter judgment against you without any further notice to you. The judgment may be for the relief claimed in the statement of claim and for the plaintiff's costs of bringing these proceedings. The court may provide third parties with details of any default judgment entered against you."
2. The Plaintiff's submissions include in [4], the following submission: "In circumstances where the defendants have not filed a defence, the allegations of fact contained in the Statement of Claim (SOC) are deemed to be admitted by them: UCPR rule 14.26. The defendants have been notified that [the Plaintiff] proposes to rely on this rule (evidence to this effect will be filed by 25 March 2015 in accordance with the Court's directions)."
3. There is, or at least there may be, a difficulty accepting this submission, because the rule relied upon may not apply where no defence at all is filed by a defendant.
4. In Sneddon v State of New South Wales [2012] NSWCA 351, Macfarlan JA, at [152], after referring to the relevant rule, wrote: "The use of the word 'the' in the expression in (a) 'in the pleading in response' indicates that that sub-rule is concerned with a situation where a pleading is in fact filed, not one, as here, where there is a failure to file a responsive pleading. The point only arises in relation to a defence as r 14.27 expressly deals with the absence of a reply to a defence, providing that there is an implied joinder of issue on that defence. Thus, the consequences of failing to file a defence are in my view not dealt with by r 14.26 but by Part 16 of the UCPR concerning default judgment."
5. Basten JA, another member of the Court of Appeal in that case, did not specifically refer to UCPR rule 14.26, but at [80], noted that: "The claim being for unliquidated damages, the appellant was entitled to enter judgment upon the defendant's default, for damages to be assessed and for her costs: r 16.7(1)."
6. Meagher JA, the third member of the Court of Appeal, at [183], simply noted that the "default judgment against Mr … was entered under UCPR r 16.7(1) 'for damages to be assessed'".
7. Other cases suggest a different position in a case where the defendant does not file and serve a defence. One such case is Macdonald v Australian Securities and Investments Commission [2007] NSWCA 304; (2007) 73 NSWLR 612, in which the plaintiff had commenced civil penalty proceedings against a number of defendants, eight of whom were natural persons and two of whom were trading corporations. Before the trial Judge, the claimant contended that to require him to file any defence would contravene the privilege available to natural defendants in civil penalty proceedings. The proposition was advanced in absolute terms: no defence should be ordered to be filed, then, or at any stage of the proceedings.
8. Young CJ in Eq (as his Honour then was) ordered the defendants to file and serve unverified defences and pursuant to s 14 of the Civil Procedure Act dispensed with the requirement that the defences be verified by affidavit (UCPR rule 14.23). His Honour's orders were the subject of an application of leave to appeal.
9. In the Court of Appeal, Mason P, at [49], stated: "Indeed, a defendant who refuses to file a Defence exposes him or herself to a most significant prejudice. Without filing a Defence the allegations in the statement of claim stand admitted. It would then be open for the moving party (here ASIC) to apply for judgment according to the nature of its claim for relief (see UCPR r 16.3)."
10. Also see, Quality Bakers Australia Pty Ltd v Yassin Modern Bakery Pty Ltd (trading as Yassin Lebanese Bakery) [2007] NSWSC 804, per Brereton J, at [2]; Norco Co-Operative Limited v Kelly [2010] NSWSC 719, per Lindgren AJ, at [2]; and Australian & New Zealand Banking Group v RQA Accountants Pty Ltd [2013] NSWSC 165, per Adamson J, at [32]. I have expressed a similar view in French Consulting Pty Limited v Lawson Stuart Donald [2011] NSWSC 584, at [9] and in Konica Minolta Business Solutions Australia Pty Ltd v Vongkeneta [2013] NSWSC 486, at [8].
11. The question whether UCPR rule 14.26 applies where no defence at all is filed, was the subject of some debate, and was described as "an interesting point and one which will need to be determined at an appropriate time", by F Marks ADCJ in McDonald v Centennial Newstan Pty Limited [2012] NSWDC 218, at [16]. (An appeal from his Honour's decision, bearing the medium neutral citation GIO General Limited v Centennial Newstan Pty Ltd [2014] NSWCA 13 did not touch upon "the interesting point".)
12. I turn next to UCPR Part 16. UCPR rule 16.1 provides that "[t]his Part applies to proceedings commenced by statement of claim". In this case, the proceedings were not commenced by Statement of Claim but by Summons. (It may be that the rule applies in any event because White J ordered that the matter proceed by pleadings: UCPR rule 6.6(2).) I shall pass over this and assume that by operation of UCPR rule 16.1, the Part applies to these proceedings.
13. Because the first and second Defendants did not file a Defence, within 28 days after service on each of the Statement of Claim, or at any other time, (UCPR rule 14.3(1)), each is regarded as being "in default": UCPR rule 16.2(1)(a).
14. UCPR rule 16.3 deals with the case where defendants are in default. It allows the plaintiff to apply for judgment under UCPR Part 16 "according to the nature of his or her claim for relief". Unless the court otherwise orders, such an application for judgment must be accompanied by an affidavit of service of the statement of claim and an affidavit in support of the application. There is no statement, in this particular rule (although there is in other parts of UCPR Part 16), of what is to be included in the affidavit in support of the application.
15. UCPR rule 16.10 provides that "[w]hatever the plaintiff's claims for relief against a defendant in default, the court may, on application by the plaintiff, give such judgment against the defendant as the plaintiff appears to be entitled to on his or her statement of claim".
16. UCPR rule 16.3(1A) provides: "(1A) Unless the court otherwise orders, an application under this rule: (a) may be dealt with in the absence of the parties, and (b) need not be served on the defendant."
17. Because this sub-rule permits the matter to be dealt with in the absence of the parties, and because it does not require any notice of motion to be served upon the defendant, the philosophy behind these rules must be that the court is entitled to conclude that the failure to file a defence represents an acceptance of the allegations of fact stated in the statement of claim and an admission of those allegations. Of course, the use of the word "may" in UCPR rule 16.3(1) means the court is not obliged to do so. It is clear that the discretion afforded is broad and unconfined.
18. In addition, it seems to me that, in a case where a defendant has not filed a defence, a plaintiff should not be disadvantaged in relying upon the rule that permits facts in the statement of claim to be taken to be admitted, whilst a plaintiff, in a case where a defendant has filed a defence but has not traversed an allegation in the statement of claim in that defence is entitled to take advantage of such a rule.
19. In this case, it is important to note, in summary, that: (a) neither of the Defendants gave evidence; (b) neither was present at the hearing; (c) no explanation was proffered for not filing a defence or giving evidence, and for not being present at the hearing when it is clear that each was served with the Statement of Claim and each was advised of the hearing date; (d) the first Defendant consented to judgment being entered against her for the whole of the amount that the Plaintiff asserts was misappropriated, plus interest and costs; (e) the second Defendant does not dispute that during the relevant period unexplained deposits were received into the various bank accounts, in his name and in the name of both Defendants; and (f) there is no evidence as to any legitimate, or honest, source of those deposits.
20. The court is entitled to draw an inference from these matters. The court is also entitled to draw an inference, because of the magnitude of the deposits into the joint bank accounts, or into the account in his name, that the second Defendant knew, or ought to have known, those funds were not legitimately obtained by the first Defendant.
21. In this regard, I refer to Toksoz v Westpac Banking Corporation [2012] NSWCA 199; (2012) 289 ALR 577, Allsop ACJ (as his Honour then was) wrote, at [8]-[10]: "Money can be traced notwithstanding an inability of the follower to connect each link in the chain of accounts. Commonsense and reasonable inference play their part, especially if there is fraud involved and if there is a lack of explanation, when the circumstances cry out for honesty to be explained, if it can be. A number of cases reveal a sensible robust approach to the tracing of moneys from theft: R v Powell (1837) 7 Car & P 640; 173 ER 280; Harford v Lloyd (1855) 20 Beav 310; 52 ER 622; Black v S Freedman & Co [1910] HCA 58; 12 CLR 105; Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548; El Ajou v Dollar Land Holdings Plc [1993] 3 All ER 717; and see the discussion in L D Smith, The Law of Tracing (Clarendon Press, 1997) at 263 and the other cases there cited. The expression 'tracing by exhaustion' is sometimes used. Where the facts as proved are sufficient to permit the inference that moneys have been received or property bought without there being an honest source available to explain the wealth and the sums or value can be seen as referable to the following party's property wrongfully obtained, such that the inference is open that the wrongfully obtained funds were the source of the wealth, the funds can be so treated. One does not need to be able to show every link in the chain of accounts from and through which the money passed. Inferences will be more easily drawn, as here, in circumstances where the funds were stolen, the person who is said to have provided the funds was one of the thieves who stole money from the follower, when the recipient has an apparent close relationship with the thief, which recipient gave no value for it, has no personal source of income and gives no explanation as to the source or circumstances of the receipt of the money or any honest source of it. None of this is the expression of a principle of law. It is the expression of the available approach to fact finding in the presence of fraud and lack of explanation when plainly called for."
22. It is also to be noted that, had each of the Defendants appeared, she and he would have been given the opportunity to cross-examine any of the deponents whose affidavit was read by the Plaintiff. Neither has chosen to exercise that right, with the result that the court may assume, unless the evidence is inherently illogical, fanciful, or unreliable, that the unchallenged evidence is not in contest and is accepted by the Defendants: Knight v Maclean [2002] NSWCA 314, per Heydon JA (Meagher JA and Young CJ in Eq agreeing), at [34]; Hamod v State of New South Wales [2011] NSWCA 375, per Beazley JA (with whom Giles and Whealy JJA agreed), at [336]-[340]; Bauskis v Liew [2013] NSWCA 297, per Gleeson JA (with whom Beazley P and Barrett JA agreed), at [109]-[111].
23. There can be no suggestion that the evidence in any of the affidavits that have been read is based on an incorrect, or incomplete, history, or upon unproven assumptions. Nor is there any evidence which contradicts the Plaintiff's evidence. There is simply no reason for concluding that the present case is not a proper one to make the assumption to which I have referred.
24. However, so as to avoid any concern by the Defendants regarding how I have proceeded, I confirm that I have been taken to, and have read, the evidence relied upon by the Plaintiff relating to its claim against each Defendant, and have not relied, solely, on admissions taken to have been made by the failure to file a defence, or inferences to be drawn from the failure to contest the Plaintiff's claims in any way.
25. I have also borne in mind s 140 of the Evidence Act 1995 (NSW) and that there should be clear and cogent proof of serious allegations.
26. I should specifically mention that the Plaintiff, by its lawyers, has filed, and served, all of the evidence that they have been able to, which evidence leaves me comfortably satisfied of the facts to which I shall refer. In addition, by the tender of a summary of the financial transactions (Ex. H), using the information contained in the other exhibits which contain a copy of the primary bank documents obtained on subpoena, there can be little doubt that the amounts claimed by the Plaintiff are payable. (I permitted the tender, at the hearing, because it seemed to me that no prejudice could be suffered by the Defendants.)
27. (There were only two amounts, being in relation to the five per cent deposit paid on the purchase of the Liverpool Property and the stamp duty on the contract for sale where the primary documents were not available. However, there is other evidence, including Ex. K, which enables me to be satisfied that the amounts claimed are, in fact, what they are said to be and that they were paid out of the identified bank account. I shall return to this topic later in these reasons.)
28. It would be remiss of me not to express my gratitude to the Plaintiff's counsel, and to the Plaintiff's solicitors, for the manner in which the case was prepared and presented. The amount of work that has been done to establish what probably could have been expressly admitted by each of the Defendants is obvious.

A Narrative of the Facts

1. The Plaintiff, at all material times, was engaged in the sourcing, manufacture and distribution, of industrial brands to the retail, building, renovations and construction sectors. Prior to December 2012, it was a publicly listed company, but on 12 December 2012, it became a controlled subsidiary of DuluxGroup Limited ("Dulux").
2. The first and second Defendants are, and were, at all relevant times, husband and wife.
3. The first Defendant was employed by the Plaintiff between about 23 June 2008 and about 28 February 2013, as its Assistant Company Secretary, and by Dulux, from about 1 March 2013 until 5 August 2014, as "HR Business Partner B&D, Parchem & ATA".
4. The first Defendant's employment was terminated on about 5 August 2014.
5. During the course of her employment, the first Defendant's salary package was between $100,000 and $115,000 per annum, plus superannuation.
6. Since approximately 2 April 2002, the second Defendant has been the sole registered proprietor of the Liverpool Property, in which he and the first Defendant have resided.
7. The Liverpool Property is subject to a registered mortgage to the National Australia Bank ("the NAB mortgage"), which mortgage secures amounts owing by the Defendants in respect of a bank account conducted by them with the National Australia Bank ("the NAB Liverpool mortgage account"). The amount secured by the mortgage, as at 16 June 2014, was $295,750.63: Ex E/361.
8. There was no evidence of the current amount of the debt, or of any notice of default issued to the second Defendant, by the National Australia Bank, in relation to the secured debt.
9. Since about 25 October 2011, the Defendants have been the joint registered proprietors of the Luddenham Property.
10. The registered Transfer of the Luddenham Property reveals that the purchase price was $522,000. I am also satisfied that the deposit paid by the Defendants on the Contract for purchase was 5 per cent of the purchase price ($26,100) and that the stamp duty was about $18,980 (Ex. K).
11. Diamantina Designer Homes Pty Ltd ("Diamantina") was retained by the Defendants to construct a house and other improvements on the Luddenham Property. The original Contract sum (exclusive of GST) between the Defendants and Diamantina was said to be almost $1.4 million, of which $1,080,720.57 had been paid by the Defendants by 17 September 2014: Ex. D/Tab 8.
12. The Luddenham Property is subject to a registered mortgage to the Commonwealth Bank of Australia ("the CBA mortgage"), which mortgage secures amounts owing by the Defendants in respect of a bank account conducted by them at that Bank ("the CBA Luddenham mortgage account").
13. The Plaintiff's solicitors received a letter dated 13 January 2015, from the legal representatives of the Commonwealth Bank of Australia, informing them that the repayments due under the mortgage granted by the Defendants secured on the Luddenham Property were in arrears, and that the Bank had "served a notice pursuant to section 88 of the National Credit Code and section 57(2)(b) of the Real Property Act 1900", with which notice they had not complied. The letter also stated that the Bank intended to exercise its power of sale over the Luddenham Property and asked whether the Plaintiff would provide a withdrawal of caveat.
14. The Notice of Default disclosed that the payout figure under the mortgage, as at 7 October 2014, was $482,629.14 and that the arrears, as at that date, were $10,003.40, together with "Enforcement Expenses" of $333.13. There is no evidence of the current amount of the secured debt.
15. The Plaintiff's solicitors responded by letter dated 30 January 2015. That letter included the following: "We are obtaining instructions from [the Plaintiff] regarding the possible withdrawal of its caveat. One matter of concern to [the Plaintiff] is to whom the surplus proceeds of the sale of the Property will be paid. In this regard, [the Plaintiff] understands that there will be surplus proceeds following payment of all fees, costs and expenses of any sale of the Luddenham Property and any amounts paid to discharge the mortgage to your client. Given [the Plaintiff's] claim against Mr and Mrs Te Maari, and the circumstances giving rise to the claim, [the Plaintiff] wishes to ensure that the surplus not be paid to the mortgagors pending determination of [the Plaintiff's] proceedings. Instead, [the Plaintiff] proposes that the surplus be paid into Corrs' trust account, or be paid into Court. Please let us know your client's position with regard to the payment of the surplus proceeds. Assuming your client is indifferent as to how any surplus sale proceeds are accounted for, and Mr and Mrs Te Maari will provide an appropriate direction allowing the funds to be paid into trust or Court, we anticipate that our client will be amenable to making a withdrawal of caveat available at settlement. Would you also please advise as to the status of the sale of the Luddenham Property, including details as to any work proposed to be done to the property prior to sale, the proposed sale campaign and possible timing of a sale."
16. In a letter dated 20 March 2015, from Gadens Lawyers, on behalf of the Commonwealth Bank, to the Plaintiff's lawyers, the following appears: "We are instructed that: 1. our client is currently taking steps to exercise its power of sale over the Property; and. 2. our client has a policy of building insurance in place for the Property. However, the above information is provided by way of response to your queries only. The information is not provided for the purposes of any reliance by your client. Our client reserves all of its rights, in their entirety."
17. There is no evidence that the Commonwealth Bank's solicitors have disclosed any other information about steps taken to sell the Luddenham Property since that time.
18. Between about May 2011 and about September 2011, the first Defendant generated tax invoices, purportedly issued by Spruson & Ferguson, an existing customer of the Plaintiff, totalling $69,512.74. She presented these invoices to the Plaintiff's accounts payable staff, and caused the amounts shown on the invoices to be paid into the account shown on the invoice, being an account which was conducted in her sole name with the National Australia Bank ("the NAB George St account"): (Ex. H/Schedule A). Needless to say, this was done without the knowledge, or consent, of the Plaintiff. There was no intention by the Plaintiff to make a gift of the amounts to the first Defendant.
19. Between about May 2011 and about July 2014, the first Defendant generated tax invoices, purportedly issued by Historic Houses Trust, another existing customer of the Plaintiff, totalling $794,480. She presented the invoices to the Plaintiff's accounts payable staff, and caused the amounts shown on these invoices to be paid into an account held in the second Defendant's sole name at the National Australia Bank ("the NAB Liverpool account"): Ex. H/Schedule B. Needless to say, this was done without the knowledge, or consent, of the Plaintiff. There was no intention by the Plaintiff to make a gift of the amounts to the first Defendant.
20. Between about April 2012 and about June 2014, the first Defendant generated tax invoices, purportedly issued by Spruson & Ferguson, totalling $851,699.31. She presented these invoices to the Plaintiff's accounts payable staff, and caused the amounts shown on the invoice to be paid into a bank account conducted by the Defendants with the Commonwealth Bank of Australia ("the CBA account"): Ex. H/Schedule C. Needless to say, this was done without the knowledge, or consent, of the Plaintiff. There was no intention by the Plaintiff to make a gift of the amounts to the first Defendant.
21. The following payments were made from the NAB George St account by the first Defendant: (a) $24,077.53 to the NAB Line of Credit account on 16 September 2011: Ex. H/Schedule D; (b) $26,100 to the vendor of the Luddenham Property in respect of the five per cent deposit for the purchase of that property on 19 May 2011 (Ex. H/20); (c) $19,000 to the Office of State Revenue in respect of stamp duty payable on the purchase of the Luddenham Property on 23 August 2011: Ex. H/20.
22. In respect of the Luddenham Property, between 27 April 2012 and 10 July 2014, the following payments were made out of the CBA account: (a) $91,725 to the CBA Luddenham Mortgage Account held in the names of the first and second Defendants; (b) $612,000 to Diamantina to construct a house and other improvements on the Luddenham Property; (c) Amounts totalling $109,507 paid to an account, held in the second Defendant's name, with the National Australia Bank ("the NAB Line of Credit Account").
23. Between about 18 May 2011 and about 11 July 2014, $631,846.25 was paid from the NAB Liverpool account, held in the names of the first and second Defendants into the NAB Line of Credit Account, held in the name of the second Defendant.
24. From the NAB Line of Credit Account between 23 May 2011 and 14 July 2014, the following amounts were paid: (i) $468,720.57 to Diamantina to construct a house and other improvements on the Luddenham Property; (ii) $5,000 to the CBA Luddenham Mortgage Account; and (iii) $82,280 to the NAB Liverpool Mortgage Account, in respect of the Liverpool Property.
25. The judgment for $1,963,927.40 given by White J in favour of the Plaintiff against the first Defendant includes the amounts identified above, interest and estimated costs, as has been previously identified (Ex. J).

The Plaintiff's Submissions

1. The Plaintiff's primary position is that it has a proprietary interest in the Luddenham Property and in the Liverpool Property. It submitted that it may claim an interest over the Luddenham Property under a constructive trust, because its money was used to partly finance the purchase of the property, make improvements to it, and in order to repay part of the mortgage.
2. There might have been a question whether the Plaintiff's interest is a proportionate interest only, or comprises the entire beneficial interest in the property subject to an allowance to the Defendants for work done or payments made by them enhancing the value of the property. The difference would be material only if the value of the property has risen since it was acquired by the Defendants.
3. However, the Plaintiff made an important concession, at T29.20, during the course of submissions, as follows: "We do not seek any profit. What the plaintiff seeks is repayment of the $1.9 million-odd plus interest and costs…"
4. Alternatively, the Plaintiff submitted that it may claim an equitable charge over the Luddenham Property to secure repayment to it of $1,222,650.57, being part of its moneys spent on the Property by way of payment of deposit and stamp duty, mortgage repayments and improvements made to it.
5. The Plaintiff recognises that any interest it obtains under a constructive trust or by way of equitable charge is subject to interest of the Commonwealth Bank as registered mortgagee (Ex. D/Tabs 1 and 2).
6. The Plaintiff submitted that it may claim an interest in the Liverpool Property under a constructive trust, reflecting the extent to which its money has been used to improve the second Defendant's equity in the property by repaying the mortgage over the property.
7. Alternatively, the Plaintiff submitted that it is entitled to an equitable charge over the Liverpool Property to secure repayment to it of $82,280, being the amount of its moneys spent by way of mortgage repayments on the Liverpool Property.
8. The Plaintiff recognised that any interest it obtains under a constructive trust or by way of equitable charge is subject to interest of the National Australia Bank as registered mortgagee (Ex. D/Tabs 4 and 5).
9. The payments made from the CBA Account which the Plaintiff seeks to trace are $91,725.00 used to pay the Luddenham mortgage; $612,000 which was used to pay Diamantina; and $109,507 paid into the NAB Line of Credit.
10. The Plaintiff submitted that it is not necessary to connect every payment made into the CBA Account with a corresponding payment out to each of the CBA Luddenham Mortgage Account, Diamantina or the NAB Line of Credit respectively. While the CBA Account also comprised funds paid in from sources other than the Plaintiff, the fact that those funds have wrongfully been mixed with the Plaintiff's funds means that it is not obliged to appropriate debits to credits to ascertain whose money has gone where.
11. The Plaintiff submitted that it is entitled to choose to treat profitable withdrawals as its own and withdrawals that are dissipated as belonging to the defendants: Hagan v Waterhouse (1991) 34 NSWLR 308, per Kearney J, at 358; Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230, at [114]-[116]; Boscawen v Bajwa [1995] All ER 769; [1996] 1 WLR 328, per Millett LJ, at 335.
12. As $91,725.00 was used to pay the Luddenham mortgage, the Plaintiff is entitled to seek a charge by way of subrogation over the Luddenham Property: Boscawen v Bajwa, at 335; Re Cook v Italiano Family Fruit Co Pty Ltd (in liq) [2010] FCA 1355; (2010) 276 ALR 349, per Finkelstein J, at [84]-[99]; Heperu Pty Ltd v Belle, at [135].
13. Similarly, it was submitted, that the Plaintiff is entitled to seek a charge, by way of subrogation, over the Luddenham Property representing the sum by which the value of the land has been enhanced by the improvements as $612,000 was used to pay Diamantina to construct a home and improvements on the Property: Boscawen v Bajwa, at 335; Re Cook v Italiano Family Fruit Co Pty Ltd (in liq), at [91].
14. The Plaintiff also seeks to trace the amounts paid into the NAB Line of Credit: (a) the $109,507 paid from the CBA Account; (b) the $631,846.25 paid from the NAB Liverpool Account; and (c) the $24,077.53 paid from the NAB George St Account.
15. It was submitted that the fact that the NAB Line of Credit was held jointly by both Defendants caused no obstacle to tracing the funds into the accounts as the second Defendant was not an innocent third party, and is therefore in the same position as the first Defendant. A third party who knew or ought to have known that the moneys received by him were trust moneys cannot avail himself of the more favourable tracing rules that apply to an innocent volunteer who innocently mixes trust money with his own: Boscawen v Bajwa at 337-338 per Millett LJ.
16. This inference can be drawn from the surrounding circumstances in relation to the second Defendant. It is necessary to note that very large sums of money were involved, that the bank statements show the source of those funds, namely the Plaintiff, which was, at the time, the first Defendant's employer, that the first Defendant's income was between $100,000 and $115,000 per annum for each of the three years the funds were deposited, that significant amounts were paid out of the bank accounts and spent on the properties, and that there is no other explanation for the deposit of those amounts advanced, it is inconceivable that he could not have appreciated that he and the first Defendant had received a very large amount of money to which they were not entitled. It is highly unlikely, in my view, that he would not have known that the funds deposited had been unlawfully obtained.
17. In any event, a Black v S Freedman & Co trust binds a volunteer recipient who has no knowledge of the theft at the time of receipt of the funds but acquires such knowledge while the funds remain in his hands (whether in original form or traceable product): Sze Tu v Lowe at [142], [145], [158]. The Plaintiff submitted that by the time the proceedings were commenced, the second Defendant must be taken to have known that the Plaintiff's money was stolen by the first Defendant and paid into bank accounts held by him or him and his wife jointly. It follows that the Plaintiff is entitled to follow the stolen funds into any assets still held by either the first Defendant and/or the second Defendant which represent their traceable substitute.
18. The $45,100 paid from the NAB George St Account for the purpose of a deposit and stamp duty on the purchase of the Luddenham Property could be traced into that property since that money was used to contribute to the acquisition of the property. It is submitted that the Plaintiff is entitled to either a proportionate share of the property itself by way of constructive trust, or a charge to secure its claim for the money misapplied: Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102, at 130-132 per Lord Millett; Paul A Davies (Aust) Pty Ltd (in liq) v Davies [1983] 1 NSWLR 440, at 455-456 per Mahoney JA.
19. It is irrelevant that the payment of the $45,100 is only alleged to have been effected by the first Defendant and came directly from an account held in her name alone. The second Defendant, as a joint owner of the Luddenham Property, received the benefit of $45,100 contribution as a gift and had no better entitlement to retain that benefit than did the first Defendant: Foskett v McKeown, at 132; Sze Tu v Lowe, at [459]-[460].
20. The Plaintiff also submitted that it is entitled to seek a charge by way of subrogation over the Luddenham Property to secure repayment of the $5,000 from the NAB Line of Credit account used to pay the Luddenham mortgage.
21. Likewise, the fact that $468,825.57 from the NAB Line of Credit Account was used to pay Diamantina to do work on the Luddenham Property entitles the Plaintiff to seek a charge by way of subrogation over the Luddenham Property representing the sum by which the value of the land has been enhanced by the improvements.
22. The fact that $82,280.00 from the NAB Line of Credit account was used to pay the Liverpool mortgage entitles the Plaintiff to seek a charge by way of subrogation over the Liverpool Property to secure repayment of that sum.
23. It was submitted that none of this was affected by the fact that the NAB Line of Credit Account was occasionally in debit. While it is usually not possible to trace through an account which is overdrawn and remains so after trust money is paid into it (e.g. Russell Gould Pty Ltd v Ramangkura [2014] NSWCA 310; (2014) 313 ALR 367, at [33]), the current position is different for two reasons. First, the Line of Credit was not always in overdraft and often went into credit (especially after payment of moneys from the Plaintiff): see Ex. E/Tab 4. Secondly, given the large sums involved, it is clear that, as a matter of substance, it was the Plaintiff's monies rather than the Defendants' overdraft which was used to fund the repayments on the mortgages and the improvements to the Luddenham Property. In those circumstances, tracing through the account is permissible notwithstanding that it was occasionally overdrawn: Hagan v Waterhouse, at 358, per Kearney J.
24. In the alternative to recognising a constructive trust or equitable charge arising from the application of the rules of tracing, a court may impose a constructive trust by way of remedy over property which a wrongdoer has derived on account of his or her wrongdoing: Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; (2012) 287 ALR 22, at [256]. Such a constructive trust is available on the "profit" principle, that is, a trustee must account to the trust for any unauthorised profit which was made from his or her position as trustee, subject to an appropriate allowance for any contribution made by the trustee towards achieving that profit: Paul A Davies (Aust) Pty Ltd (in liq) v Davies; Lewin on Trusts (18th ed 2015, Sweet & Maxwell) at [41-052]-[41-053]. A trustee for this purpose includes a trustee whose status as such arises under the principle in Black v S Freedman & Co. Such a person is in the position of an express trustee in so far as he or she has a duty to get in the trust estate: Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82; (2004) 61 NSWLR 75, at [116].
25. The Luddenham Property was purchased by reason of the fact that the Defendants had access to the Plaintiff's funds which they used to pay for the stamp duty and deposit. In addition, large sums of the Plaintiff's money have been spent on repaying the mortgage and enhancing the value of the property by building a house and other improvements on it. In all the circumstances, the Plaintiff submitted that it is entitled to a constructive trust over the Luddenham Property.
26. A constructive trust is also available in relation to the Liverpool Property on the ground that the use of the Plaintiff's money has enabled the second Defendant to increase his equity in the property to the extent of $82,280.00. The payments having been made by the second Defendant with knowledge of the fact that the moneys used were misappropriated from the Plaintiff, he must disgorge any profit he obtains as would an express trustee misapplying trust moneys. In the circumstances, the Plaintiff is entitled to an interest under a constructive trust over the Liverpool Property, that interest reflecting the proportionate amount of its contribution to the equity in the Liverpool Property as compared to the second Defendant's own contributions.
27. The Plaintiff submitted that irrespective of whether the second Defendant retained the funds stolen from the Plaintiff (or their traceable proceeds), he could be required to pay compensation for the loss resulting from misapplication of those funds or to account for gains made from them under the first limb in Barnes v Addy (1874) LR 9 Ch App 244; Grimaldi v Chameleon Mining NL (No 2), at [253].
28. Of the monies misappropriated from the Plaintiff by the first Defendant, $1,646,149.59 went directly into accounts held by the second Defendant ($851,669.59 into the CBA account, held jointly by the Defendants, and $794,480.00 into the NAB Liverpool Account, held by the second Defendant alone). Of the remaining $69,512.74 which was paid into the NAB George St Account held by the first Defendant alone, $24,077.53 was subsequently transferred to the NAB Line of Credit held by the second Defendant.
29. It follows that a total of $1,670,227.12 of the Plaintiff's monies has passed through accounts held solely or jointly by the second Defendant.
30. It was submitted, that the second Defendant: (i) had actual knowledge; or (ii) ought to have known because:

• he wilfully shut his eyes; or
• he wilfully and reckless failed to make such enquiries as an honest and reasonable person would make; or
• he had knowledge of circumstances which would indicate the facts to an honest and reasonable person, that these funds were fraudulently obtained.

1. Knowledge at any of these levels sufficed to ground liability for knowing receipt of trust property for the purposes of the first limb of Barnes v Addy; Grimaldi v Chameleon Mining NL (No 2), at [259]-[269].
2. Trust property, in this sense, included a trust arising under the principle in Black v S Freedman & Co, which is a trust that arises immediately on acquisition of the fraudulently obtained property: Sze Tu v Lowe, at [148]; Robb Evans of Robb Evans & Associates v European Bank Ltd, at [111], [160]-[161].
3. It followed, so it was submitted, that the second Defendant is subject to a personal liability to pay the Plaintiff $1,670,227.12 representing the quantum of the Plaintiff's funds received by him.
4. The Plaintiff submitted that, to vindicate the Plaintiff's proprietary entitlements, orders should be made under UCPR rule 27.1, for judicial sale of each of the Liverpool Property and the Luddenham Property. This has been described as the standard remedy for an equitable chargee: Sood v Christianos [2008] NSWSC 1087, per Brereton J, at [16]. In ordering such a sale, the Court will ensure that the holders of priority interests are protected: Sood v Christianos, at [22].
5. The course the Plaintiff proposes is for the sale to occur and the moneys to be paid into Court (subject to a deduction for selling costs). This will enable the holders of priority interests (namely, CBA in respect of the Luddenham Property and NAB in respect of the Liverpool Property) an opportunity to receive their prior entitlement to the proceeds of sale. It will also enable Diamantina to seek to establish any proprietary entitlement it may claim to hold over the Luddenham Property on account of unpaid work. The Plaintiff has notified the banks and Diamantina that this is the course it proposes to take (Ex. D/Tabs 11 and 12).
6. It is proposed that orders for the sale of the Liverpool Property be stayed pending sale of the Luddenham Property. If a sufficient return is generated from the sale of the Luddenham Property there may be no need for the Liverpool Property to be sold at all.
7. Finally, to protect against the eventuality that insufficient funds are available from the sale of either the Luddenham Property or the Liverpool Property, orders should also be made requiring the second Defendant to account in the sum of $1,670,227.12.

The Law

1. In Young, Croft & Smith, On Equity (2009, Thomson Reuters), at [12.820], the learned authors describe tracing as "a process whereby a wronged plaintiff may, instead of obtaining a personal remedy against a defendant (usually damages), recover the property into which the wrongdoer has 'invested' the plaintiff's property" and as "the process of identifying a new asset as a substitute for the original asset".
2. Thus, tracing is "the process by which a claimant who has been deprived of property (the 'original property') seeks to assert title, whether legal or equitable, to other property (the 'target property') because the target property has, in some way, been acquired from exploitation of the original property. The process involves establishing an unbroken chain of transfer and transformation from the original property to the target property": see, M Stone and A McKeough, "Tracing in the Age of Restitution" (2003) 26(2) University of New South Wales Law Journal 377. It is the means by which the court identifies the target property, for the purpose of crafting orders which aim to allow the claimant to recover its property. It is a precursor to the assertion of a personal or a proprietary claim either at common law or in equity: Cashflow Finance Pty Ltd v Westpac Banking Corporation [1999] NSWSC 671, per Einstein J, at [452].
3. In his book The Law of Tracing, Professor Lionel D Smith (Clarendon Press, 1997), points out, at 299, that: "The process of tracing is simply the proof of a series of exchanges. This process cannot create rights ex nihilo. What it can do is allow rights to be transmitted from one asset to another."
4. He goes on to state, at 299-300, that: "[I]n making a proprietary claim, the plaintiff must separately establish (a) the source of his proprietary rights in the first instance, and (b) his ability to trace from the subject matter of his original proprietary rights into the subject matter to which he now makes a claim."
5. In Boscawen v Bajwa, at 776-777, under the heading "Tracing and Subrogation", the following passage appears: "Equity lawyers habitually use the expressions 'the tracing claim' and 'the tracing remedy' to describe the proprietary claim and the proprietary remedy which equity makes available to the beneficial owner who seeks to recover his property in specie from those into whose hands it has come. Tracing properly so-called, however, is neither a claim nor a remedy but a process. Moreover, it is not confined to the case where the plaintiff seeks a proprietary remedy; it is equally necessary where he seeks a personal remedy against the knowing recipient or knowing assistant. It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of a beneficial interest in the property which the defendant handled or received. Unless he can prove this he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant's unjust enrichment was at his expense. In such a case, the defendant will either challenge the plaintiff's claim that the property in question represents his property (i.e., he will challenge the validity of the tracing exercise) or he will raise a priority dispute (e.g., by claiming to be a bona fide purchaser without notice). If all else fails, he will raise the defence of innocent change of position… If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant's behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. But this is only one of the proprietary remedies which are available to a court of equity. If the plaintiff's money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant's land has been enhanced by the use of the plaintiff's money. And if the plaintiff's money has been used to discharge a mortgage on the defendant's land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff. Subrogation, therefore, is a remedy, not a cause of action… It is available in a wide variety of different factual situations in which it is required in order to reverse the defendant's unjust enrichment. Equity lawyers speak of a right of subrogation, or of an equity of subrogation, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose whenever it thinks it just to do so. The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. A constructive trust arises in the same way. Once the equity is established the court satisfies it by declaring that the property in question is subject to a charge by way of subrogation in the one case or a constructive trust in the other."
6. In Foskett v McKeown, Lord Steyn, at 113, put it this way: "In truth tracing is a process of identifying assets: it belongs to the realm of evidence. It tells us nothing about legal or equitable rights to the assets traced."
7. Tracing is different from "following". In Foskett v McKeown, Lord Millett, at 127 and 128 wrote: "[Tracing and following] are both exercises in locating assets which are or may be taken to represent an asset belonging to the plaintiffs and to which they assert ownership. The processes of following and tracing are, however, distinct. Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. … Tracing is also distinct from claiming... It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim."
8. In Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230, Allsop P (as the learned President then was), at [89], summarised the principles in the following way: "Tracing has been said to be neither a claim nor a remedy, rather the process by which a claimant demonstrates what has happened to its property, identifies its proceeds and the persons who have handled or received them; and the successful completion of a 'tracing exercise' may be a preliminary to the making of a personal or proprietary claim, to the extent such is available…"
9. Thus, by the process of tracing, a claimant demonstrates what has happened to its property, identifies its proceeds, identifies the person who has, or the persons who have, handled, or received, its property, and justifies its claim that the proceeds can properly be regarded as representing the claimant's property. The process identifies the traceable proceeds of the claimant's property and enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of its claim: F M Custodians Limited v McKenzie, McKenzie and North harbour Trustee Company Limited as Trustees of the McKenzie Trust [2010] NZHC 1374. When completed, the court can then determine what rights, if any, the claimant can, on the particular facts, assert, and whether on those facts, the claimant's rights will be personal, proprietary, legal or equitable. As was written by Campbell J in Sutherland Re; French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361, at [64], "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."
10. Where property or its product is deposited into an account that is mixed with other moneys, ("mixed funds"), a plaintiff may be able to trace its moneys into those mixed funds and obtain an equitable charge on the mixed funds: Re Diplock [1948] Ch 465, at 520-523.
11. Equity does not allow money to be traced into a bank account which is overdrawn and remains so after the money is paid into it. In Rae v Russell [2012] NZCA 536, at [43], the rationale was explained by the Court of Appeal of New Zealand (O'Regan P, French and Asher JJ): "In the case of a payment into an overdrawn account, there is no new asset created, as there is no debt of the bank to the account holder that is created, and the account holder gains no chose in action against the bank. Instead, the account holder's debt to the bank is in whole or in part repaid. The monies paid by the account holder can no longer be identified and there is no property or replacement asset that can be restored."
12. Also see, Russell Gould Pty Ltd v Ramangkura, per Barrett JA (with whom Bathurst CJ and Ward JA agreed), at [33]. However, his Honour noted, at [37]: "…[T]racing into the real property might have been possible on the basis that the provider of the money that caused the mortgage debt to be discharged was subrogated to the property right of the mortgagee whose debt was paid out…"
13. Where money has been stolen or misappropriated, equity imposes a constructive trust on the thief immediately upon receipt of those stolen moneys: Blackman v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105, per O'Connor J, at 110; Creak v James Moore & Sons Pty Ltd [1912] HCA 67; (1912) 15 CLR 426, at 432; Australian Postal Corporation v Lutak (1991) 21 NSWLR 584, per Bryson J, at 589; Robb Evans v European Bank Limited [2004] NSWCA 82, per Spigelman CJ, at [27]; Menzies v Perkins [2000] NSWSC 40, per Hunter J, at [9]; Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, per Lord Browne-Wilkinson, at 716; Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589, per White J, at [40].
14. In Sze Tu v Lowe [2014] NSWCA 462, per Gleeson JA (with whom Meagher and Barrett JJA agreed) wrote, at [141]-[152]. "Black v Freedman is authority for the proposition that 'where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character' (O'Connor J at 110). See also Griffith CJ at 108-109 (Barton J agreeing at 110). Where the thief makes a gift of the funds to a third party, the volunteer recipient is amenable to equitable jurisdiction. In Black v Freedman the volunteer recipient had no notice of the theft at the time of the receipt but discovered it while the funds were still in her hands. In such a case the equitable obligation arises when this knowledge is acquired: Black v Freedman at 109 (Griffith CJ); Agip (Africa) Ltd v Jackson [1990] Ch 265 at 291 (Millett J); Port of Brisbane Corporation v ANZ Securities Ltd [2002] QCA 158 at [33] (McPherson JA; Davies JA and Mullins J agreeing); Lurgi (Australia) Pty Ltd v Gratz [2000] VSC 278 at [74]-[75] (Byrne J). As Millett J explained in Agip (Africa) Ltd v Jackson at 291, when describing the liability of a person who receives for his own benefit trust property transferred to him in breach of trust: He is liable as a constructive trustee if he received it with notice, actual or constructive, that it was trust property and that the transfer to him was a breach of trust; or if he received it without such notice but subsequently discovered the facts. In either case he is liable to account for the property, in the first case as from the time he received the property, and in the second as from the time he acquired notice. In Heperu Pty Ltd v Belle (Heperu) [2009] NSWCA 252; 76 NSWLR 230, Allsop P, at [92] summarised the effect of the principle in Black v Freedman with respect to a volunteer recipient as follows: A person entirely innocent of a fraud who comes to know that he or she has received and still retains the proceeds of, or taken advantage of, a fraud to which he or she was not a party, cannot knowingly seek to retain those proceeds or that advantage, without, in effect, becoming a party to that fraud and liable accordingly. Later, at [154]-[155], Allsop P emphasised that the claim in Black v Freedman was a claim against the assets in the volunteer's hands or so much as was still remaining (whether in original form or traceable product). His Honour continued: To call the volunteer recipient a constructive trustee and to call upon him or her to account as a constructive trustee (because he or she upon discovery of the fund or asset belonging to another has become one) does not mean the volunteer comes under personal liabilities, independently of, or beyond, the obligation to restore the fund or asset and any attendant obligation. He or she does not, for instance, become liable to pay damages for the moneys received that led to the fund or asset being created, as if he or she were a knowing participant in the fraud. It is also important to recognise that the trust rests on the existence of property rights and in that sense is not purely remedial. The court declares that a trust exists and existed (though the innocent volunteer did not know it)... Tracing can be used to follow the proceeds of fraudulently obtained property or funds: Heperu at [93] citing as examples Black v Freedman itself and Creak v James Moore & Sons Pty Ltd [1912] HCA 67; 15 CLR 426 at 432. The use of tracing as a process of demonstration or proof of what has happened to property is well recognised: Foskett v McKeown [2001] 1 AC 102 at 128; Robb Evans of Robb Evans & Associates v European Bank Ltd (Robb Evans) [2004] NSWCA 82; 61 NSWLR 75 at [133]; Toksoz v Westpac Banking Corporation [2012] NSWCA 199; 289 ALR 577 at [7]. I will return to the topic of tracing under Issue C when dealing with the challenge to the factual finding of Gzell J that KST used partnership funds in the acquisition of the three properties. Whether the trust based on a Black v Freedman claim is more properly characterised as a resulting trust: (Robb Evans at [112]-[117]); or a constructive trust: (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] NLJR 877; AC 669 at 716 (Lord Browne-Wilkinson)), the trust is properly viewed as being of an institutional rather than simply a remedial character. It arises because the conscience of the thief is bound: Heperu at [154]-[155]; Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589; 63 ACSR 429 at [40] (White J). In Robb Evans, Spigelman CJ said (at [113]) that the thief holds any property into which the stolen property has been converted on trust in a manner which should be seen as automatic. That is, a trust arises immediately upon the acquisition of the property, not when recognised by a court. He continued (at [115]): If appropriately characterised as 'constructive', the trust that arises upon receipt of stolen funds by an active participant in the theft is of an institutional rather than remedial character… The authors of Jacob's Law of Trusts in Australia (7th ed, LexisNexis Butterworths) observe (at [1310]) that there is a remedial flavour about various constructive trusts, including that in Black v Freedman. Nonetheless they state (at [1311]) that 'it does not follow that the constructive trust in such cases is 'remedial' in the sense that it first has existence and effect only upon the Court making its decree'. The authors point out that in Black v Freedman, O'Connor J meant (at 110) that the thief became a trustee forthwith. The institutional character of such a constructive trust may be seen as 'connoting a relationship which arises and exists under the law independently of any order of the Court': Muschinski v Dodds [1985] HCA 78; 160 CLR 583 at 614 (Deane J), although his Honour doubted (at 613) that there was any perceived dichotomy between institutional and remedial constructive trusts, preferring to view a constructive trust both as an institution and a remedy. In Grimaldi v Chameleon Mining NL (No 2) (Grimaldi) [2012] FCAFC 6; 200 FCR 296 the Full Federal Court (Finn, Stone and Perram JJ) at [504]-[505] distinguished the remedial use of the constructive trust from those cases where, on proof of particular facts in a given context, the circumstances are 'construed' as giving rise to a constructive trust. Earlier, at [256], the Court noted the distinction between those cases 'where a constructive trust is sought to be imposed by way of remedy on extant property which a delinquent fiduciary or a third party participant in fiduciary or trust wrongdoing has derived on their own account as a result of their wrongdoing' and those cases 'where the property or interest sought to be recovered (or its traceable proceeds) is, or had been, the property of the claimant'. The Court continued (at [256]) by observing that in the former cases, the constructive trust is used as a remedy in addition, or as an alternative, to the well accepted personal remedies available against fiduciaries and knowing participants in fiduciary wrongdoing. In the latter cases, proprietary relief by way of imposition of a constructive trust should be granted 'if appropriate': Grimaldi at [255]. The latter category may be taken to include cases based on the Black v Freedman claim.
15. The process of tracing, in the context of misappropriated money, was described by Lindsay J in Helou v Nguyen [2014] NSWSC 22, at [102]-[104], as follows: "The plaintiffs' bear the onus of proving that money stolen from them can be traced into the real estate acquired, and developed, by the defendants after the theft. However, in circumstances in which Mr Nguyen deliberately took steps to conceal his possession and deployment of cash, the defendants cannot complain if the Court more readily draws an inference against their interests than it might otherwise have done had they offered a reasonable, alternative explanation of transactions analysed in the process of tracing what became of the plaintiffs' property. The complexity that can attend the process of tracing money should not obscure the purpose, and nature, of the exercise. It involves a demonstration, by an application of logic and experience to evidence, of what has in fact happened to identified property, with changes of form, over time. It is a process of identification to ascertain whether property can be traced from one form to another, culminating in a finding that property in its current form can properly be regarded as a substitute for the claimant's original form of property: Foskett v McKeown [2001] 1 AC 102 at 128, approved in Robb Evans of Robb Evans & Associates v European Bank Limited (2004) 61 NSWLR 75 at 103 [131] - 105 [148] and Heperu Pty Limited v Belle (2009) 76 NSWLR 230 at 252 [89]; Re Global Finance Group Pty Limited (2002) 26 WAR 385 at 406 [94] et seq, approved in Commonwealth of Australia v The Official Trustee in Bankruptcy as the Trustee of Property of Stephen Vasil [2004] NSWSC 1155 at [21]. In the absence of any reasonable, alternative explanation of transactions emanating from the defendants' side of the record, and having regard to the context in which transactions took place, a fair inference is that Mr Nguyen deployed the plaintiffs' cash in the acquisition and development of real estate in the names of himself and his wife."
16. Lord Dunedin, speaking in terms of proprietary rights in the context of a tracing claim, wrote in Sinclair v Brougham [1914] AC 398, at 431: "Now I think it is clear that all ideas of natural justice are against allowing A to keep the property of B, which has somehow got into A's possession without any intention on the part of B to make a gift to A."
17. This, as other cases, make clear that the conscience of the wrongdoer is immediately so affected by her or his fraud that she or he is regarded as holding the property on a constructive trust for its owner.
18. In the present case, it is the proprietary remedy that the Plaintiff seeks. That remedy does not depend upon whether the wrongdoer has obtained a profit. As Lord Millett explained in Foskett v McKeown, at 129: "Conversely, a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds, but he need not show that the defendant has been enriched by its receipt. He may, for example, have paid full value for the property, but he is still required to disgorge it if he received it with notice of the plaintiff's interest."
19. However, it must be able to identify its property by the conventional principles applicable to tracing. As was stated in Re Diplock, at 521: "The equitable remedies pre-suppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself."
20. In this case, the Plaintiff asserts, and, in my view, it has established, the continued existence of the money taken by the first Defendant as latent in each of the Liverpool Property and the Luddenham Property.
21. If the Plaintiff succeeds in establishing the proprietary remedy, it seeks, in the alternative, an equitable charge over each the two properties. For the equitable charge to attach, in each case, it must attach to existing assets that derive from the misappropriated funds. There must be a nexus. By tracing, the necessary nexus has been established and the proprietary remedy, by way of equitable charge, may be made effectual.
22. The proprietary remedy is not discretionary. As Lord Browne-Wilkinson explained in Foskett v McKeown: "If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no room for any consideration whether, in the circumstances of this particular case, it is in a moral sense 'equitable' for the purchasers to be so entitled. 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."
23. I turn next to subrogation.
24. In Orakpo v Manson Investments Ltd [1978] AC 95, Lord Diplock, at 104, defined subrogation as being: "[A] transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place by operation of law in a whole variety of widely different circumstances."
25. His Lordship continued: "Some rights by subrogation are contractual in their origin, as in the case of contracts of insurance. Others, such as the right of an innocent lender to recover from a company moneys borrowed ultra vires to the extent that these have been expended on discharging the company's lawful debts, are in no way based on contract and appear to defeat classification except as an empirical remedy to prevent a particular kind of unjust enrichment."
26. However, in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335, Gibbs ACJ, at 348, wrote: "It was said by Lord Eldon that a right of subrogation arises by force of 'that equity, upon which it is considered against conscience, that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the Court, placing the surety exactly in the situation of the creditor'. The principle underlying the doctrine is that it would be inequitable for a creditor, by choosing not to resort to remedies in his power, to cast the whole of the obligation on the surety…" [Footnotes omitted]
27. Santow JA in Highland v Exception Holdings Pty Ltd (in liq) [2006] NSWCA 318; (2006) 60 ACSR 223 discussed the basis and application of subrogation in both Australian and English law, at [94]-[103], in this way: "Although subrogation is undoubtedly a recognised remedy, the doctrinal basis for equitable subrogation in Australian law remains unsettled. In the United Kingdom, the House of Lords has expressly established that subrogation is a remedy premised on the prevention of unjust enrichment. This was settled in Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] 2 WLR 475, where Lord Hoffmann said (at 487-488): It is important to remember that, as Millett LJ pointed out in Boscawen v Bajwa [1996] 1 WLR 328, 335, subrogation is not a right or cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say that the charge is 'kept alive' for the benefit of the plaintiff, what they mean is that his legal relations with the defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched. [emphasis added] Prior to Banque Financiere, an even broader basis for application of the doctrine had been articulated namely 'reason and justice'. For example, in Orakpo v Manson Investments Ltd [1978] AC 95, Lord Salmon said (at 110): The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. It is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be. More recently, in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291 (15 March 2004) (CA), Neuberger LJ affirmed that the doctrinal foundation for equitable subrogation was indeed unjust enrichment, stating the following as the second of thirteen principles summarising the law of subrogation in England (at 33): Secondly, subrogation is a remedy primarily aimed at preventing unjust enrichment. That is clear from what was said by Lord Diplock in Orakpo v Manson Investments Ltd [1978] AC 95 at 104C-D, and it has been recently repeated by Millett LJ in Boscawen at 335C, and by Lord Hoffman and by Lord Clyde in Banque Financiere respectively at 231G-H, and 237D-E. Banque Financiere has not been generally accepted in Australia on this point. Therefore the second principle stated by Neuberger LJ cannot be taken as a statement of Australian law (cf Port of Brisbane Corporation v ANZ Securities Ltd [2001] QSC 466 (at 70) where that decision was cited but not on this issue). In Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd [2003] NSWSC 1072 at 50 Bryson J referred to the approach of Lord Hoffman in Banque Financiere in the following terms which I would adopt: I would respectfully say that Lord Hoffman's relation, at 234, of subrogation to unjust enrichment was not articulated in the authorities to which his Lordship referred, and is not established in Australian case law. In my understanding explanation of subrogation in terms of restitution and unjust enrichment was introduced by Millett LJ in Boscawen v Bajwa [1996] 1 WLR 328 at 334, and was not earlier found. Lord Hoffmann's reference to the law of restitution does not, in my respectful opinion, provide an explanation for the mortgagor's being treated as bound, in equity, to treat the person who paid off the previous mortgage as entitled to security under it. Restitution would provide a basis for treating the mortgagor as obliged to restore to the person who paid it the amount which had been paid to the mortgagee: the concept is inadequate for also treating the mortgagor as obliged to hold the payer secured. This is particularly clear where, as in this case, and in other cases where subrogation has been held to exist, the mortgagor in fact had no dealings with the payer, or where the payer believed that he was getting security under arrangements in which the mortgagor was not in fact involved. To my mind it is enough to see subrogation as an entitlement which equity accords to the payer, firmly established by judicial decisions notwithstanding that a satisfactory doctrinal basis is difficult to identify, and notwithstanding that classification of the mortgagor's position as unconscionable seems very attenuated. See also Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) [2005] NSWSC 1317 at 13 per Windeyer J. On this issue, Meagher, Heydon and Leeming (Equity Doctrines and Remedies, 4th edition, 2002) state at [9-075]: Regrettably, the House of Lords in Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 ; [1998] 1 All ER 737 formulated subrogation as a remedy available only when the narrow calculus of unjust enrichment so dictated, an approach at odds with the equitable origins of the doctrine and the authorities referred to above … Those authorities included Butler v Rice [1910] 2 Ch 277; [1908-10] All ER Rep 1017; Ghana Commercial Bank v Chandiram [1960] AC 732; Boscawen v Bajwa [1995] 4 All ER 769; [1996] 1 WLR 328, and Orakpo v Manson Investments Ltd (above). In David Securities Pty Ltd v Commonwealth Bank (1992) 175 CLR 353 Mason CJ, Deane, Toohey, Gaudron and McHugh J cast unjust enrichment as a 'concept', not a 'definitive legal principle' (at 378), notwithstanding Deane J's reference to it in Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 as a 'unifying legal concept'. The principles underlying subrogation in Australia were considered by Kearney J in Cochrane v Cochrane (1985) 3 NSWLR 403. His Honour stated what he saw as the fundamental basis of subrogation (at 405): This principle is based on equity's concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should be affected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out. As a corollary to this basis for the principle, there is no occasion for equity to intervene by way of subrogation where there is available to the third party a remedy at law or in equity sufficient to avoid an unconscionable result. This is premised on a distinct basis, albeit necessarily imprecise, of unconscionable dealing rather than the concept of unjust enrichment. Equitable subrogation has not since emerged as one of those known restitutionary categories foreshadowed by Deane J in Pavey & Matthews (above) under the rubric of unjust enrichment; see generally Gareth Tilley, 'Restitution and the law of subrogation in England and Australia', (2005) 79 ALJ 518; Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) (above) at 13 per Windeyer J."
28. In Abou-Hamad v Darwish [2012] NSWSC 231, at [61], I wrote: "As has recently been pointed out in Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26, by Barrett JA (with whom Campbell JA and Sackville AJA agreed): 73 In Boscawen v Bajwa … at 335, in a passage approved by the High Court in Bofinger v Kingsway Group Ltd [2009] HCA 44 at [94], Millett LJ described the foundation of subrogation as an equity that arises from the conduct of the parties on well-settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.' …[T]here are Australian cases that have assumed that subrogation is available as a remedy when funds have been misapplied and are traceable to a payment discharging a debt: Gertsch v Atsas (1999) 10 BPR 18,431, [19]-[20]; National Australia Bank Ltd v Rusu [2001] NSWSC 32, [51]; Raulfs v Fishy Bite [2008] NSWSC 1195, [25]; Lygon Nominees Pty Ltd v Zeccola (unreported, Supreme Court of Victoria, Mandie J, 26 May 1998); Cook, Re; Italiano Family Fruit Co Pty Ltd (in liq) [2010] FCA 1355; (2010) 190 FCR 474."
29. More recently, in Angus Carnegie Gordon in his capacity as liquidator of Lyon Form Pty Ltd (in liq) v Leon Plant Hire Pty Ltd (in liq) [2015] NSWSC 397, Black J discussed several cases where subrogation was applied in the context of misappropriated funds. His Honour wrote, at [70]: "… [P]rinciples of subrogation have also been applied in circumstances where monies have been paid out in breach of duty and a third party, who knowingly receives those monies, applies them to pay down a loan or mortgage. In Re Diplock; Diplock v Wintle [1948] Ch 465, the Court of Appeal held that the discharge of a loan secured over property by wrongfully paid funds did not give the person entitled to those funds any interest in the property over which the security was discharged. However, in Boscawen v Bajwa above at 335, Millett J took a contrary view and observed that, where a plaintiff's money which was wrongfully paid out has been used to discharge a mortgage on a defendant's land, then the Court may treat the land as subject to a charge by way of subrogation in favour of the plaintiff. In Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230 at [135], Allsop P (with whom Campbell JA and Handley AJA agreed) observed that the views of Millett LJ in Boscawen v Bajwa were to be preferred to the reasoning in Re Diplock. In Cook v Italiano Family Fruit Company Pty Ltd [2010] FCA 1355; (2010) 80 ACSR 680 at [92], Finkelstein J also noted that several Australian and United Kingdom cases have treated subrogation as available as a remedy when funds have been misapplied and are traceable to a payment discharging a debt. His Honour noted that subrogation was available even if funds had been received by a creditor in good faith, for value and without notice and tracing was not available. His Honour there held that, where funds of a bank has been misapplied in breach of trust, and the bank had suffered loss, it should be subrogated to the rights of creditors who had been paid out with its funds since it would be unconscionable for the creditors to benefit from a windfall obtained by the breach of trust."
30. Finally, I turn to the alleged actual or constructive knowledge of the second Defendant of the misappropriated funds.
31. In Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (5th ed 2015, Butterworths) at [8-270], the following appears: "A person is deemed to have constructive notice of all matters: (a) of which the person would have received notice if the person had made the investigations usually made in similar transactions; and (b) of which the person would have received notice had the person investigated a relevant fact which had come to that person's notice and into which a reasonable person ought to have inquired. It follows that all cases in which a person is said to have constructive notice of a fact or thing are cases in which the person has failed to inquire, either sufficiently or at all."
32. In SCEGS Redlands Ltd v Barbour [2008] NSWSC 928, Rein J held that there should be judgment for the second defendant, concluding at [48], that: "… [the plaintiff] has failed to establish notice of the fraud or notice of a fact which was known to [the second defendant] that would have made an ordinary person suspicious, and therefore has not established actual or constructive notice, or relevant 'fault' on the part of [the second defendant]. Nor has it established that [the second defendant] has benefited from the deposit of funds to the joint accounts."

Determination

1. I am satisfied that the first Defendant did misappropriate the funds of the Plaintiff. It would be inequitable to allow her to retain any part of the funds that she misappropriated to herself or to herself and the second Defendant.
2. I am also satisfied that the second Defendant knew, or ought to have known, that the funds that were transmitted into his, or the joint account with the first Defendant, were funds that did not emanate from a legitimate source. Similarly, he knew, or ought to have known, that the significant amounts used to pay for the construction of the Luddenham Property also did not have a legitimate source.
3. The absence of any reasonable, alternative explanation of the transactions, given by the Defendants, taken with the context in which transactions took place, leads to me being satisfied that the Defendants deployed the Plaintiff's funds in the acquisition and development of the real estate to which I have referred in the manner to which I have referred. The inferences that may be drawn from the second Defendant's complete silence are obvious.
4. Finally, it is highly likely, in this matter, that the misappropriation of the funds by the first Plaintiff, and the manner in which the funds were used, would have made an ordinary person, in the position of the second Defendant, suspicious, particularly where he did benefit from the deposit of funds into the joint accounts and otherwise.
5. In all the circumstances, I am satisfied that the Plaintiff is entitled to a remedy against each of the Defendants. However, before a constructive trust is imposed as a remedy, the court must decide whether, having regard to the issues in the litigation, other means are available to quell the controversy, and it will only generally impose a constructive trust if no other appropriate remedy is available which is capable of doing full justice: Bathurst City Council v PwC Properties Pty Ltd [1998] HCA 59; 195 CLR 566 at [42]; Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 at [10].
6. Rather than a constructive trust, however, it seems to me that an available remedy is to impose an equitable charge on each of the Liverpool Property and the Luddenham property, such charge to be for the amount that the Plaintiff has established as having been utilised in relation to each property. In this way and in the relevant circumstances, any unconscionable result will be avoided. The imposition of relief by way of equitable charge is justified by the matters to which I have referred above and will sufficiently protect the Plaintiff's interests in all the circumstances of this case.
7. In addition, I am satisfied that the Plaintiff is entitled to obtain judgment against the second Defendant in the sum sought. It also claims interest under s 100(1) of the Civil Procedure Act, which section relevantly provides that: "In proceedings for the recovery of money (including any debt or damages or the value of any goods), the court may include interest in the amount for which judgment is given, the interest to be calculated at such rate as the court thinks fit: (a) on the whole or any part of the money, and (b) for the whole or any part of the period from the time the cause of action arose until the time the judgment takes effect."
8. There is no reason why it should not be entitled to interest under the section. Supreme Court rates claimed by the Plaintiff are appropriate in all the circumstances. It has been kept out of its money, in respect of which the second Defendant has had a benefit. It should be compensated accordingly.
9. On the findings made against the second Defendant, an order for the assessment of his costs liability on the indemnity basis is open and appropriate. His conduct is such that an indemnity costs order can properly be made.
10. In the circumstances, the Plaintiff is entitled to: (a) A judgment, as against the second Defendant for the payment of money in a sum representing the amount misappropriated from the Plaintiff ($1,670,227.12) together with an award of pre-judgment interest under s 100 of the Civil Procedure Act. (b) A declaration that so much of the judgment debt obtained as against each Defendant as represents the amount traced into the Luddenham Property and an award of pre-judgment interest under s 100 of the Civil Procedure Act, together with interest accruing after judgment on that portion of the judgment debt, pursuant to s 101 of the Civil Procedure Act, constitutes an equitable charge on the Defendants' title to the Luddenham Property (subject to the rights of the Commonwealth Bank of Australia as registered mortgagee). (c) A declaration that so much of the judgment debt obtained as against the second Defendant as represents the amount traced into the Liverpool Property and an award of pre-judgment interest under s 100 of the Civil Procedure Act, together with interest accruing after judgment on that portion of the judgment debt, pursuant to s 101 of the Civil Procedure Act, constitutes an equitable charge on the second Defendant's title to the Liverpool Property (subject to the rights of the National Australia Bank as registered mortgagee). (d) An order for costs calculated on the indemnity basis, together with interest on such of the costs that have been paid by the Plaintiff to its solicitors.
11. The Plaintiff also seeks orders for the sale of each of the Liverpool Property and the Luddenham Property. In light of correspondence from the Commonwealth Bank, to make an order, at this stage, without the court knowing the current steps that it has taken to sell as mortgagee, would be premature. Similarly, I have stated that the position of the National Australia Bank is not known.
12. In addition, it seems to me that the Defendants jointly, in respect of the Luddenham Property, and the second Defendant, solely, in respect of the Liverpool Property, ought to be given an opportunity to discuss with the Plaintiff, and, if appropriate, with each of the registered mortgagee, steps that might be taken to effect an orderly sale of each Property.
13. Because of the involvement of each of the registered mortgagees, I consider that I should not make any orders for sale at this time. Rather, I am prepared to grant liberty to the Plaintiff to apply to obtain orders for the sale of each Property. Notice should, of course, be given of any such application not only to the Defendants but also to each registered mortgagee.
14. In the event that the parties cannot reach a solution, within a reasonable time, which solution satisfies the Plaintiff in regard to the orderly sale of each Property, and upon receipt of the appropriate evidence regarding notice of its intention to seek orders for sale being given to each registered mortgagee, orders for sale may be made (subject to any challenge by either or both mortgagees).
15. I direct the Plaintiff to provide to my Associate, within 21 days, proposed Short Minutes of Order giving effect to these reasons for judgment and the orders proposed taking into account calculations of interest to which reference has been made. (I have allowed a longer period to enable the above matters to be attended to in the hope that the Short Minutes of Order might deal, consensually, with the orderly sale of each Property.)
16. Needless to say, a copy of the proposed orders should be provided to the Defendants as soon as reasonably possible and each should inform the Plaintiff's solicitors of any objections to the orders proposed. If they have no objections, I shall make the orders in Chambers.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 May 2015