Australian Securities Commission v Melbourne Assets Management Nominees Pty Ltd

The Nature of the Proceedings 9 As I have noted, the Trustee's application is made pursuant to s 134(4) of the Bankruptcy Act. The predecessors to this provision include s 20 of the Bankruptcy Act 1869 (UK) (32 & 33 Vict, c 71) and s 89 of the Bankruptcy Act 1883 (UK) (46 & 47 Vict, c 52). These enactments are also part of the "legislative pedigree" of what is now s 479(3) of the Corporations Law, which empowers a liquidator to apply to the Court for directions "in relation to any particular matter arising under the winding-up": Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, at 677, per McLelland J. This language is in substance identical to that used in s 134(4) of the Bankruptcy Act. 10 There is a good deal of authority concerning the nature and scope of the power conferred by s 479(3) of the Corporations Law, not all of it consistent. In Re G B Nathan, after a careful review of the authorities, McLelland J reached this conclusion (at 679): "The historical antecedents of s 479(3), the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction." His Honour went on to say (at 679-680) that modern Australian authority confirms the view, expressed by Blackburn CJ in Re Security Provident Fund Limited (1984) 73 FLR 264 (S Ct ACT), at 265, that s 479(3) and its predecessors do "not enable the court to make binding orders in the nature of judgments.... The function of a liquidator's summons for directions is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation". Similar views have been expressed by the Full Court of the Supreme Court of Victoria in Murdoch v Crawford [1986] VR 97, at 99 and in other authorities cited by McLelland J, at 680. 11 McLelland J acknowledged in Re G B Nathan that there have been cases in which a court, in proceedings commenced as a liquidator's application for directions, has made orders declaratory of substantive rights. In his view, the court's procedures are sufficiently flexible to change the nature of the proceedings, where it is appropriate to do so to avoid cost and delay. As his Honour noted, in some cases representative orders have been made for this purpose: see Re Securitibank Ltd [1978] 1 NZLR 97, at 105-107 (where Barker J exercised the inherent jurisdiction of the Court to give directions to the liquidator as an officer of the Court). Nonetheless, McLelland J emphasised the need to observe the distinction between the two kinds of proceedings. He said (at 680) that a fundamental change in the character of the proceedings should not be permitted unless all parties consent or will not suffer injustice. 12 In Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334, Northrop J took a somewhat different view of s 479(3). His Honour (at 352) could see "no logical reason why final orders binding on other persons cannot be made ...under s 479(3) with respect to other subject matters...where the parties affected have been given the opportunity to be heard". 13 McLelland CJ in Eq (as his Honour had become) returned to the topic in Re J W Murphy & P C Allen (1996) 19 ACSR 569. He expressed the opinion that Northrop J's decision in Melbourne Asset Management was founded on a "misconception" as to the effect of two earlier decisions (Re Reid Murray Holdings Ltd (in liq) [1919] VR 315 and Re Gapes Interstate Transport Pty Ltd [1970] 2 NSWR 365) upon which Northrop J had relied. According to McLelland CJ in Eq, neither decision involved an application by a liquidator for directions under the equivalent of s 479(3) of the Corporations Law; each concerned an exercise of the inherent jurisdiction of the Court. His Honour saw no reason to depart from the views he had expressed in Re G B Nathan. 14 Given the common historical antecedents and language of s 134(4) of the Bankruptcy Act and s 479(3) of the Corporations Law, there is much to be said for the view that both provisions should be construed in the same manner. If this view is correct and if the views expressed in Re G B Nathan are also correct, it would follow that an application under s 134(4) of the Bankruptcy Act is not an appropriate vehicle, of itself, to determine the substantive rights of creditors as against a trustee in bankruptcy or of creditors among themselves. On the other hand, s 134(4) must be read in the context of s 30(1) of the Bankruptcy Act. This sub-section provides that the Court has full power to decide all questions of law or of fact in any case of bankruptcy and may make such orders as the Court considers necessary for the purposes of carrying out or giving effect to the Act. Section 30(1) might suggest that the Court, when exercising the power conferred by s 134(4), may make binding orders on third parties at least in certain kinds of bankruptcy cases, provided the requirements of procedural fairness are met. The significance of s 30(1) of the Bankruptcy Act, if any, was not addressed in submissions. 15 It is not necessary in the present case to reach a final view as to the proper construction of s 134(4) of the Bankruptcy Act. The Trustee emphasised that he is merely seeking directions from the Court and does not wish the Court to make an authoritative determination of the rights of the various classes of creditors. The Trustee accepted that any directions given by the Court will not give rise to any conclusive determination as between the estate of the Bankrupt and creditors claiming that certain assets are held in trust for them or are subject to an equitable charge. He also accepted that the directions will not protect him against claims by creditors who assert that assets are held in trust for them Any directions (assuming full and fair disclosure of material facts) will merely protect the Trustee from claims by unsecured creditors or the Bankrupt arising out of any alleged breach of his duties as Trustee by so acting: Re G B Nathan, at 681. 16 None of the represented creditors suggested that any different view should be taken of the scope of the proceedings. No creditor or class of represented creditors sought representative orders. None sought orders that would enable the Court finally to determine the rights of creditors among themselves or as against the Trustee. The approach adopted by the represented creditors was not a mere oversight, since the procedural issue was specifically raised in written submissions and the limited nature of the Trustee's application was canvassed at the hearing. While the creditors' approach might be thought a little surprising, having regard to the resources invested in the present proceedings, I do not think it appropriate to depart from the path agreed to by all those who have appeared and made submissions. 17 A court is not bound to give directions under s 134(4) of the Bankruptcy Act simply because a Trustee asks for them: Re Driller (1972) 21 FLR 159 (Fed Ct Bkptcy). Moreover, the directions must be sought "in respect of a matter arising in connexion with the administration of an estate". As I have indicated, the questions posed by the Trustee seem to assume that the Court can and should determine the priorities of the various classes of creditors, both among themselves and as against the Trustee. Whether or not it is appropriate to answer the questions posed by the Trustee, I think it is correct to say that the application for directions is "in respect of a matter arising in connexion with the administration of the estate". The "matter" is the proper distribution among the various classes of creditors of the moneys presently standing to the credit of the Trustee and of the platinum bars held on behalf of the Trustee. I think the best course is to address the issues debated by the Trustee and the represented creditors in order to determine what directions, if any, should be given in respect of the relevant matter.

The Facts 18 The Trustee tendered an agreed statement of facts. Each of the represented creditors accepted that the statement, so far as it went, was accurate. Mr Einfeld acknowledged that there were significant gaps in the statement, but attributed these primarily to the failure of the Bankrupt to maintain adequate business records. It must also be said that the agreed statement is ambiguous in a number of respects. Notwithstanding the limitations of the agreed statement, the Trustee and the represented creditors were in agreement that I should proceed by reference to that document. Accordingly, the following account is taken from the agreed statement and should be read with the facts already recounted. 19 All moneys received by the Bankrupt from the sale of Bullion, jewellery and giftware, in the course of trading as the Perth Bullion Exchange, were deposited by him into the Perth Bullion Exchange Account maintained with Westpac Banking Corporation in Sydney. Payments in respect of liabilities incurred by the Bankrupt from his trading activities as the Perth Bullion Exchange were paid from the same account (and no other). Until January 1995, the Bankrupt also conducted a finance broking business under the name Elsass Finance Co. Moneys received and expended in connection with this business were deposited into and paid from a separate account. The conduct of the finance business did not affect the balance from time to time in the Perth Bullion Exchange Account.

Category A Creditors 20 The customers classified as Category A creditors dealt with the Bankrupt in person (at his offices in Martin Place, Sydney), by telephone or in writing. Orders were placed either orally (if the customer attended in person or placed the orders by telephone) or in writing. Category A creditors were informed, prior to placing orders for Bullion, that they could take delivery of the physical stock, but that the stock could be left securely with the Perth Bullion Exchange. They were also informed that, if they chose to leave the Bullion with the Exchange, it was always available for sale by or delivery to the customer. The agreed statement does not make it clear whether all Category A creditors were given this information. 21 Upon request, the Category A creditors were shown a price sheet for the relevant day, completed in handwriting. A sample price sheet annexed to the agreed statement recorded the buying and "buy back" prices for ingots of gold, which were said to be available in sizes ranging from half an ounce to 50 ounces, and for coins. The price sheet also recorded postage and insurance rates, presumably for customers wishing to take physical delivery of Bullion. 22 At least five of the customers categorised as Category A creditors received an information brochure. The brochure included the following passages: "The Perth Mint is one of the four accredited bullion stampings available in Australia which is accepted worldwide and the only one with Government backing. All ingots are clearly stamped as to their weight and assay and all those above 2 ˝ ozs in weight are individually numbered. ... Ingot Preparation Fee: This is a fee charged by the Mint for making up each individual ingot. The amount varies according to the ingot sizes and ranges from $9 to $70 for gold, and $4 to $16 for silver. ... PAYMENT Payment must be received by us before an order is placed with the Mint. As the price of gold and silver varies daily, if you wish to purchase at a particular day's price the whole transaction must be completed (i.e. payment received by us and the order placed) on the same day. ... STORAGE FACILITIES The Perth Bullion Exchange agrees to store these ingots free of charge under the best security available on the condition that we may use the physical bullion in the normal course of our business. ... DELIVERY: The majority of ingots are available for immediate delivery if required and all transactions can be conducted on a confidential basis." It will be seen that the information recorded under the heading "STORAGE FACILITIES" is to the same effect as notations on documents issued to individual customers classified as Category B creditors. Apparently, customers who received the information brochure, but who did not receive an invoice or storage certificate recording that the Perth Bullion Exchange was entitled to use the physical bullion in the ordinary course of business, were recorded by the Trustee as Category A creditors, rather than as Category B creditors. 23 According to the agreed statement, Category A creditors were informed that the Bankrupt was backed by the Mint and that the Bullion was insured against theft. They also understood that they were entitled to take delivery of the whole or part of the Bullion they purchased from the Perth Bullion Exchange. The manner in which this information was conveyed to Category A creditors has not been made clear. 24 Where a Category A creditor proceeded with an order for Bullion, he or she would either transfer the required funds to the Perth Bullion Exchange Account or pay the Bankrupt the appropriate amount in cash or by cheque. The Category A creditors would also provide a password to the Bankrupt. That password would be noted in handwriting in what was described as an "alphabetical journal". The journal recorded the customer's name and address, password and the current quantity of Bullion stored. It appears from extracts from the journal attached to the agreed statement of facts that, as transactions occurred, notations would be made in the entry for the particular customer recording the new current balance of gold stored. The notations recorded the gold stored on behalf of particular customers by reference to the size of the particular ingot or ingots (for example, "2 x 5 oz Gold"). 25 The Category A creditors each received from the Bankrupt an "Invoice" or a "Bullion Order". The Bullion Order, for example, took the following form:

"BULLION ORDER Date of Order: 2nd November 1987 PRICE OF DAY: Silver $10.50 per Fine Ounce Gold $693.50 per Fine Ounce . ONE x 2.5 OUNCE PERTH MINT GOLD INGOT $693.50 x 2.5 x .996 = $1,739.32 PREPARATION FEE = $ 12.50 $ 1,739.32 BROKERAGE FEE = 25.68 $1,765.00 . Total Cost of Order $1,765.00 Deposit Paid PAID IN FULL Balance on Delivery NILL[sic] Received by [Name] DELIVERY: THE ABOVE INGOT IS BEING STORED BY THIS EXCHANGE - FULLY COVERED BY INSURANCE AND FREE OF STORAGE CHARGE UNTIL REQUIRED." If an invoice were issued, it contained a notation in the same terms as the last sentence on the Bullion Order. 26 If a customer paid cash for ingots or took delivery of ingots he or she received a document headed "Cash Sale/Purchase" which recorded the quantity of gold (by ounces) originally stored (if any) and the quantity held after the most recent transaction. This document did not contain a statement to the effect of that included in the Bullion Order or invoice. 27 The practice of the Bankrupt, once the customer had paid for the Bullion purchased (and funds had cleared) was as follows: · the Bankrupt requested the Mint to supply a specific quantity of Bullion and informed the Mint of the delivery destination (the Bankrupt's premises or a bank at which the Bankrupt maintained a safety deposit box); · the Mint did not receive any of the customer's details and was never asked to deliver Bullion directly to the customer; · the Bankrupt was informed by the Mint of the funds required to effect the transaction and the Bankrupt forwarded the requisite amount by telegraphic transfer from the Perth Bullion Exchange Account; · Bullion supplied by the Mint in the form of ingots heavier than five ounces was stamped with an ingot identification number, the weight and purity of the ingot and the mark of the Mint, but not with a customer name or password; and · when Bullion was received by the Bankrupt, it was not stored in a manner that enabled it to be identified with any particular order or customer. 28 The agreed statement says that it is unclear whether the Mint supplied the Bankrupt with an order number in respect of any given purchase from the Mint (no purchaser order having been found). It is also not known whether the Mint forwarded to the Bankrupt an invoice or docket number. Nor is it known whether the Bankrupt gave the Mint a series of orders, each corresponding to a particular order placed by a customer, or whether he simply aggregated the quantities required. (The Trustee did not adduce evidence as to what inquiries, if any, were made of the Mint to clarify these matters.) 29 If a Category A creditor required delivery of the whole or part of the Bullion to which he or she was entitled, the following practice was followed: · the customer gave instructions to the Bankrupt in writing, by telephone or in person; · the customer provided the Bankrupt with his or her password and also provided identification and documents evidencing his or her entitlement, such as an invoice or Bullion Order; · the Bankrupt examined the storage book to confirm the details of the quantity and type of Bullion held in the name of the particular customer; · the Bankrupt then located a quantity of Bullion matching the customer's instructions from the Bullion held at his premises or in safety deposit boxes and removed that quantity of Bullion from storage; · the Bankrupt amended the storage book to take into account the quantity of bullion to be delivered to the customer; · the Bankrupt delivered the bullion to the customer who usually signed either the invoice or Bullion Order to confirm receipt; and · the documents signed by the customer were retained by the Bankrupt. 30 A customer could elect to sell Bullion held on his her behalf back to the Bankrupt at the posted price of the day, less brokerage, Mint preparation fee and other expenses. If the customer made this election, the Bankrupt ascertained the price of the buy-back by reference to the daily price sheet. The Bankrupt arranged for a cheque, usually a bank cheque, to be paid to the customer and noted the cheque details on a document entitled "Bullion Buy-Back". This document recorded the quantity of Bullion bought by the Bankrupt from the customer and the price paid. It also recorded the quantity of Bullion retained in storage on behalf of the particular customer. The Bankrupt made an entry in the day journal, recording details of the transaction and any cheque or receipt number. (The day journal was a bound ledger recording, or at least apparently intended to record, all dealings in Bullion on a daily basis, by reference to date, name of customer, quantity of bullion or coins and cheque details.) 31 From the late 1980s, the Bankrupt prepared from time to time a document headed "Audit for Insurance Purposes". The document stated that the records of the Perth Bullion Exchange showed that a specified quantity of precious metals was held on behalf of the customer and requested the customer to contact the Exchange urgently if there were any discrepancies. However, none of the Category A creditors received any such audit certificate. The agreed statement does not make it clear whether an audit certificate was prepared in respect of each of the Category A creditors.

Category B Creditors 32 From the late 1980s, the Bankrupt ceased to offer customers storage free of charge of Bullion purchased by them. Presumably in consequence of this change of policy, the Bankrupt altered his practices with respect to customers purchasing Bullion. 33 So far as category B creditors were concerned, the Bankrupt followed the same procedures as he employed for category A creditors, but subject to important exceptions. In general, the Bankrupt informed category B creditors before they placed orders that they could store Bullion with the Perth Bullion Exchange, but that the Bankrupt preferred that he should be able to use part of the customer's Bullion to satisfy urgent requests from jewellers or others requiring gold. The customers were told that the Bankrupt wished to be able to supply these urgent requests on the same day. He stated that he would immediately order sufficient gold from the Mint to replace the gold "borrowed" from the customer. He explained that this arrangement avoided the need to retain substantial quantities of gold in storage in order to meet urgent requests. 34 Although this explanation was provided to most category B creditors, the agreed facts indicate that not all received advice to this effect. However, all category B creditors received either an invoice or a Bullion Order recording the relevant transaction. In each case, the invoice or Bullion Order had the following endorsement stamped, written or printed on it: "The Perth Bullion Exchange agrees to store these ingots free of charge under the best security available on the condition that we may use the physical bullion in the normal course of our business". Each category B creditor also received a document entitled "Storage Certificate". This recorded the date, the customer's name and address, the quantity and type of Bullion and the amount paid by the customer. The Storage Certificate also included an endorsement using the same wording as that on the invoice or Bullion Order. The agreed facts do not make it clear when, in the ordinary course, a category B creditor would receive his or her storage certificate. 35 The Bankrupt kept, at his premises, copies of the information brochure to which I have already referred. As has been seen, that document included a statement in the same form as the endorsement on the invoice or Bullion Order supplied to Category B creditors. Although perhaps it is not entirely clear, the agreed statement suggests that each of the category B creditors received a copy of the information brochure.

Category C Creditors 36 The procedures adopted with respect to category C creditors were precisely the same as those for category B creditors. I was informed that the three Category C creditors (of whom only one was represented in the proceedings) had placed orders with the Bankrupt for a total of fifteen ounces of platinum. The Bankrupt held no platinum at the date of the sequestration order. However, the Mint subsequently informed the Trustee that it "held ten ounces of platinum in an unallocated metal account on behalf of the Perth Bullion Exchange". The Mint also stated that: "a) unallocated metal is not marked in any way and cannot be identified in the physical form; b) the client owns a specific allocated but undivided interest in a portion of a pool of precious metals held by Gold Corporation and its subsidiaries, and does not have title to specific coins or bars."

Category D Creditors 37 Category D creditors are the trade creditors of the Bankrupt.

The Perth Bullion Exchange Account 38 Between 1989 and 20 November 1996 (the date of the sequestration order), the Perth Bullion Exchange Account went into overdraft from time to time. By way of example, on 16 June 1995 it was in overdraft in the sum of $147,387.48. It was last in overdraft on 18 July 1996, to the extent of $4,854.09.

Position at Date of Bankruptcy 39 The agreed statement records that, as prices for Bullion fell and the Bankrupt's business deteriorated, the Bankrupt progressively sold all his stock of Bullion and "so far as the Trustee can determine", all proceeds were deposited into the Perth Bullion Exchange Account. The statement does not specify the period of time over which these sales took place. At the date of the sequestration order, the Bankrupt retained no Bullion whatsoever. He was, however, in possession of giftware, jewellery and fixtures which, as I have noted, the Trustee sold at public auction.

The Legislation 40 Section 58(1) of the Bankruptcy Act provides that, where a debtor becomes bankrupt, "the property of the bankrupt" vests forthwith in his or her trustee. The expression "the property of the bankrupt" is defined in s 5(1) to mean, relevantly, "the property divisible among the bankrupt's creditors". 41 Section 116 of the Bankruptcy Act identifies the property divisible among the bankrupt's creditors. Section 116, insofar as relevant, is as follows: "(1) Subject to this Act: (a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy...; ... is property divisible amongst the creditors of the bankrupt. (2) Subsection (1) does not extend to the following property: (a) property held by the bankrupt in trust for another person. ...". Thus, insofar as the Bankrupt held funds in trust for any of the creditors, at the date of the sequestration order, those funds did not form part of the property divisible among his creditors. Submissions 42 It was common ground among the Trustee and the represented creditors that the available records did not permit the tracing of any payments made by creditors or received by the Bankrupt into the Perth Bullion Exchange Account. The Trustee and the represented creditors all accepted, therefore, that the equitable remedy of tracing was not available in relation to the funds held by the Trustee in the First and Second Accounts.

Trustee 43 The Trustee did not adopt an entirely neutral role in the proceedings. He submitted that, on the evidence, no group of creditors could claim priority over any other group and that the available funds should be distributed among all creditors pari passu. As I followed Mr Einfeld, his contentions were as follows: (i) On the agreed facts, no finding could be made that the bankrupt placed orders for Bullion with the Mint precisely corresponding to the orders placed by any creditors or category of creditors. In other words, it could not be inferred that the Bankrupt held quantities of Bullion at any given time corresponding to the purchases made by creditors. In these circumstances, no trust could have ever arisen in favour of an individual creditor or category of creditors in relation to the physical stocks of Bullion. There was simply no identifiable trust property. (ii) Even if the agreed facts permitted a finding that the Bankrupt acquired quantities of Bullion matching the quantities purchased by creditors, no trust could have arisen in favour of any creditor in relation to Bullion acquired by the Bankrupt. There was no appropriation of stock by the Bankrupt to particular purchases and thus no means of identifying specific Bullion held at any given time with any particular customer. (iii) If, contrary to submission (ii), a constructive trust arose in favour of some creditors over Bullion or funds acquired by the Bankrupt, the trust did not assist any creditors to assert priority in relation to the funds now held by the Trustee. Since neither the trust property nor the trust funds could be traced into the moneys now held by the Trustee, none of the creditors could claim that the moneys were held in trust for them. (iv) Insofar as any creditors relied on the principle stated by the Privy Council in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1072, at 1074, to claim an equitable charge over the funds held by the Trustee, Mr Einfeld submitted that that principle was not good law. Alternatively, the decision in Space Investments did not apply in the present circumstances. Category A Creditors 44 Mr Condon made the following submissions on behalf of the Category A creditors: (i) When the Bankrupt acquired Bullion matching the orders placed by Category A creditors, those creditors acquired property in the Bullion. They did so because, on the evidence, the Bankrupt appropriated the Bullion to the orders placed by Category A creditors. Even if the quantities of Bullion did not precisely match the orders, the Bankrupt segregated quantities of Bullion in a pool from which Category A creditors could redeem their entitlements. The effect of this was to give the Category A creditors an interest in the segregated stock, as tenants in common, proportionate to their respective entitlements: Re Stapylton Fletcher Ltd [1994] 1 WLR 1181 (Ch D). (ii) By wrongfully selling the Bullion owned by the Category A creditors, the Bankrupt obtained unlawfully a monetary gain at their expense. He also breached his contractual obligations to store the Bullion on behalf of the Category A creditors. Since the Bankrupt had cultivated an expectation that the interests of the Category A creditors would be safeguarded, it would be unconscionable for him to retain the proceeds of sale. Accordingly, equity would impose a constructive trust over the proceeds in favour of the Category A creditors. (iii) In the alternative, the Bankrupt owed fiduciary obligations to the Category A creditors, since he undertook to act on their behalf, or in their interests, as the custodian of their property. The Bankrupt breached his fiduciary duties by selling the Bullion and retaining the proceeds. In these circumstances, equity would impose a constructive trust over the proceeds. (iv) Mr Condon conceded that the Category A creditors could not rely on tracing remedies to enforce any constructive trust imposed in respect of the Bullion or proceeds of sale. However, Space Investments stood for the principle that a constructive trust or equitable charge may be imposed on particular assets, not because property of the claimant has been followed into those assets, but because it would be unconscionable for the holder of the assets to assert a beneficial title thereto as against the claimant: Stephenson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536, at 552, per Gummow J. That principle applied in the present case. (v) The effect of the trust or charge in favour of the Category A creditors was that the funds held by the Trustee (to the extent of the trust or charge) could not constitute "property divisible amongst the creditors of the bankrupt" within the meaning of s 116(2)(a) of the Bankruptcy Act. Thus the Category A creditors were entitled to priority over all other creditors, none of whom could assert a beneficial interest in the First and Second Accounts.

Category B Creditors 45 Mr Stomo argued that the Category B creditors were in the same position as the Category A creditors, notwithstanding that they had received documentation stating that the Bankrupt would store their ingots on the condition that "we may use the physical bullion in the normal course of our business". He submitted that there was a principal-agency relationship between the Category B creditors and the Bankrupt. The sale by the Bankrupt of Bullion from the pool breached fiduciary duties owed by the Bankrupt as the agent of the Category B creditors. The sale of Bullion could not be described as being in the normal course of the Bankrupt's business. Moreover, the Bankrupt had represented to most Category B creditors that he would use Bullion for emergencies only and would replace the Bullion used for this purpose immediately. 46 It followed, according to Mr Stomo, that the Category B creditors could also rely on the principle in Space Investments. They were entitled to the same priority as Category A creditors and ranked above the unsecured creditors.

Category C Creditors 47 Mr Aitken's principal submission was that the Category A and Category B creditors were not entitled to priority over the Category C creditors. However, he also argued that the Category C creditors were entitled to priority over the others. He submitted that the platinum held by the Mint on behalf of the Bankrupt had been segregated from the general stock of platinum and appropriated to the purchasers of platinum. Accordingly, on the principle applied in Re Stapylton, the Category C creditors were tenants in common in the Bankrupt's stock of platinum in the proportion each of their purchasers bore to the Bankrupt's holding.

Category D Creditors 48 The Category D creditors adopted the Trustee's submissions.

Category A Creditors 49 It is convenient to consider first the position of the Category A creditors. Mr Stomo did not suggest that the Category B creditors could be in any better position than the Category A creditors. Thus if it cannot be said, for the purposes of this application, that the Category A creditors enjoy priority over the unsecured creditors, the Category B creditors cannot be entitled to any such priority. 50 As I have pointed out, the present application seeks only directions from the Court and not the final determination of the rights of creditors against the Trustee and among themselves. It is not surprising, given the deficient record-keeping of the Bankrupt, that the evidence is incomplete. Even so, the limitations of the evidence are significant. Among other gaps, the evidence does not clarify when the various creditors purchased Bullion from the Bankrupt; whether the Bankrupt placed orders with the Mint precisely matching purchases made by customers and, if so, whether this practice continued at all material times; whether the Bankrupt stored Bullion purchased by customers separately from his own stocks and, if so, for how long that practice continued; and whether and when intermingling of Bullion stocks occurred. Moreover, it must be remembered that the classification adopted by the Trustee has been made simply for the purposes of identifying groups of creditors whose interests might diverge. The circumstances of each individual creditor have not been the subject of evidence. 51 Despite the gaps in the evidence, two conclusions can be reached readily enough from the available material. The first is that, as the Trustee and all represented creditors agreed, the Category A creditors, insofar as they might be able to establish that the Trustee held Bullion and/or funds received from the sale of Bullion in trust for them, cannot trace either the Bullion or the funds into the assets held by the Bankrupt at the date the sequestration order was made. By that date, the Bankrupt had disposed of the entirety of his stock of Bullion. Further, the represented creditors accepted that it was impossible to trace any funds received from the sale of Bullion into the First and Second Accounts. It follows that Category A creditors cannot avail themselves of tracing remedies in support of any constructive trust imposed on the Bankrupt in relation to the Bullion or the proceeds of sale. This, in my opinion, is a matter of considerable significance. 52 Secondly, I do not think that the Category A creditors can make out their claim that the Bankrupt owed them fiduciary duties, such as to give rise to a constructive trust in their favour over the proceeds derived from the sale of the Bullion. The position is somewhat complicated by the absence of clear information concerning the quantities of Bullion held by the Bankrupt and the relationship at any given time between the quantities in storage and the orders placed by Category A creditors. Nonetheless, the Category A creditors' claim that the Bankrupt owed them fiduciary duties rested on little more than mere assertion. It is difficult to see how a fiduciary relationship could have arisen between the Bankrupt and the Category A creditors. 53 In Re Goldcorp Exchange Ltd [1995] 1 AC 74 (PC), a case with some similarities to the present, the Privy Council rejected an argument that a company holding itself out as willing to vest bullion in a customer, and to hold it in safe custody on the customer's behalf, was a fiduciary. In the present case, there is no doubt that the Bankrupt was under a contractual duty to store Bullion ordered and paid for by Category A creditors and that, subject to evidence concerning the individual circumstances of particular creditors, the sale of the Bullion by the Bankrupt breached that duty. However, as their Lordships pointed out in Goldcorp (at 98) the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself. In this case, as in Goldcorp, the creditors did not suggest that the Bankrupt owed any duties as a fiduciary beyond his contractual obligations or, perhaps, beyond duties flowing from the creditors' proprietary rights in the Bullion stored on their behalf. As their Lordships said (at 98), "high expectations do not necessarily lead to equitable remedies". In my opinion, therefore, the argument of the Category A creditors, insofar as it is based on fiduciary duties owed to them by the Bankrupt, can be put to one side. 54 The absence of a fiduciary relationship does not dispose of the claims by Category A creditors that the Bankrupt held Bullion or the proceeds of sale of Bullion in trust for them (although it is significant for an argument I address later). As I have explained, the Category A creditors relied on other grounds to support the contention that equity would have imposed a constructive trust in respect of the Bullion or the proceeds of its sale. In my view, however, there are considerable difficulties in the path of resolving this question in the present proceedings. In particular, the agreed statement of facts leaves a number of crucial factual questions unresolved. 55 The point can be illustrated by one of the arguments put by Mr Condon. He relied on Re Stapylton for the proposition that, where a trader segregates quantities of stock corresponding to the quantities sold to customers, property in the stock passes to the customers even without allocation of the stock to particular customers. In Re Stapylton, a company stored wine for customers and maintained a card index showing the names of customers and the number of cases allocated to each. The customers' wine was segregated from the company's trading stock. Later, the stored wine was broken up, many index cards lost and some of the cases disposed of. Judge Baker QC held that each customer whose wine was stored had become a tenant in common of the segregated stock held from time to time, on a proportionate basis. 56 According to Mr Condon, it followed from Re Stapylton that each Category A creditor was a tenant in common of the Bullion stored in the Bankrupt's safes, notwithstanding that no means of identification was impressed on the Bullion and notwithstanding that the quantity of Bullion at any given time may have been less than the aggregate entitlement of the customers. As has been seen, this proposition formed a pillar of Mr Condon's argument that equity would impose a constructive trust over the proceeds of sale of the Bullion in favour of the Category A creditors. 57 The gaps in the agreed facts make it very difficult to decide whether the analysis in Re Stapylton can be applied to the circumstances of the present case. The statement does not make it clear whether the Bankrupt segregated Bullion ordered by Category A creditors from his own trading stock. On the assumption that he did, the statement does not address whether and, if so, when he ceased to segregate the Bullion held on behalf of the Category creditors. Nor does the statement say whether the Bankrupt's holding of Bullion ever precisely matched, in aggregate, orders placed and paid for by Category A creditors. (In Re Stapylton, the segregated holdings of wine did match purchases by customers: see [1994] 1 WLR 1181, at 1185). It seems to me less than satisfactory to attempt to draw inferences from an agreed statement of facts that simply does not address these issues. In essence I am being asked to engage in guesswork, but without the guidance provided by the rules governing the burden of proof in adversary litigation. 58 These evidentiary deficiencies do not necessarily lead to the conclusion that the Trustee's application for directions should be refused. In the circumstances of the present case, I think it is possible, subject to a matter to which I shall refer, to provide directions to the Trustee without determining whether equity would have imposed a constructive trust in favour of the Category A creditors in respect of Bullion stored by the bankrupt or the proceeds derived by him from the improper sale of Bullion. I am prepared to assume, in favour of the Category A creditors, that equity would have acted in this way (but not, for reasons already given, on the basis that the Bankrupt owed fiduciary duties to them). Even if that assumption is made, I do not think that on the material before me, the Category A creditors can make out a claim that they are entitled to receive a distribution from the Bankrupt's estate in priority to the claims of other creditors. 59 The claims of the Category A creditors rested heavily on much-criticised observations made by the Privy Council in Space Investments. Their Lordships made these observations when considering the hypothetical position of a bank trustee which had unlawfully borrowed trust moneys. Lord Templeman said this (at 1074): A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee to protect the interest of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank. Where an insolvent bank goes into liquidation that equitable charge secures for the beneficiaries and the trust priority over the claims of the customers in respect of their deposits and over the claims of all other unsecured creditors. This priority is conferred because the customers and other unsecured creditors voluntarily accept the risk that the trustee bank might become insolvent and unable to discharge its obligations in full." It has been said that this analysis "arguably represents a high-water mark for the rights of tracing claimants": M Christie, "Tracing" in P Parkinson (ed), The Principles of Equity (1996), at 840. 60 As the English Court of Appeal has pointed out, Lord Templeman's observations were obiter, since the Privy Council in Space Investments held that the bank trustee was authorised by the trust instrument to deposit trust money with itself as banker. Accordingly, there was no misappropriation by the bank: Bishopsgate Investment Ltd Management (in liq) v Homan [1995] Ch 211, at 217, per Dillon LJ. Nonetheless, in a subsequent case, Sir Robin Cooke, who had been a member of the Board in Space Investments, took Lord Templeman's observations as authoritatively establishing that a distinction is to be drawn between "trust beneficiaries not taking a risk of insolvency and lenders taking that risk": Liggett v Kensington [1993] 1 NZLR 257 (NZ CA), at 274. For this reason, Cooke P held in Liggett that "unallocated purchasers" of gold bullion from a trader (that is, purchasers of bullion which was to be stored in vaults by the trader on their behalf in an undifferentiated mass) could claim priority over a bank which held a debenture over the trader's assets. Gault J also found in favour of the unallocated purchasers in Liggett, on similar grounds. McKay J dissented. 61 The majority decision in Liggett was reversed by the Privy Council on appeal,in Goldcorp, to which reference has already been made. Interestingly enough, although the advice of the Privy Council was delivered by Lord Mustill, the Board included Lord Templeman. Lord Mustill rejected the broad construction of the observations in Space Investments. He said this (at 104-105): "Their Lordships...find it difficult to understand how the judgment of the Board in [Space Investments], on which the claimants leaned heavily in argument, would enable them to overcome the difficulty that the moneys said to be impressed with the trust were paid into an overdrawn account and thereupon ceased to exist: see, for example, In re Diplock [1948] Ch 465. The observations of the Board in the Space Investments case were concerned with a mixed, not a non-existent, fund." His Lordship also endorsed what might be thought to be the conventional view of equitable tracing remedies expressed by the Court of Appeal in 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. If the fund, mixed or unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, of course, award damages but specific relief would be out of the question. It is, therefore, a necessary matter for consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief." 62 As was pointed out in Bishopsgate, at 219, the Privy Council in Goldcorp approved the decision of Sargant J in James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62. It was there held that trust moneys could be traced into the general account of the trustee only to the extent that the ultimate credit balance did not exceed the lowest balance of the account in the intervening period. Any payment of further moneys by the trustee into the account could not be appropriated to the replacement of the trust money, at least in the absence of proof of a specific intention: James Roscoe, at 69; Bishopsgate, at 219. 63 Lord Mustill in Goldcorp appeared to accept (at 109) that, where a bank uses all borrowed moneys as a mixed fund for lending or investing, any trust funds unlawfully borrowed by the bank trustee are "latent" in the property acquired by the bank and will support an equitable lien over that property for the recovery of the trust money. But it is clear that his Lordship rejected the broad view of Space Investments. It was for this reason that the Court of Appeal in Bishopsgate held that, where a trustee corporation improperly paid trust funds into overdrawn bank accounts maintained by a third party, the liquidator of the trustee could not trace the funds into assets held by the third party, whether by way of equitable charge or otherwise. 64 It follows then that, on the current English authorities, the Category A creditors cannot enforce an equitable charge or other remedy in respect of the First and Second Accounts. As is conceded, orthodox tracing remedies are not available. The wider construction of Space Investments has been rejected. Since this is not a case of a banker trustee, the narrow view of Space Investment does not assist the creditors. 65 The Category A creditors nevertheless relied on the dissenting judgment of Gummow J in Stephenson Nominees to support their contention that they were entitled to an equitable charge over the First and Second Accounts. Gummow J pointed out (at 552) that a "constructive trust may be imposed upon a particular asset or assets not because pre-existing property of the plaintiff has been followed in equity into those assets but because, quite independently of such considerations it is, within accepted principle, unconscionable for the defendant to assert a beneficial title thereto to the denial of the plaintiff." His Honour went on to say (at 556) that where the beneficiary of a constructive trust deals with the constructive trustee as a fiduciary and the general creditors do not do so, the case for preferring the fiduciary claimants is "more readily apparent". In that context, his Honour referred with apparent approval to the dicta in Space Investments. There is nothing to indicate, however, that Gummow J would have applied Space Investments to a case, such as the present, where there was no pre-existing fiduciary relationship between the constructive trustee and the claimants. Similarly, Melbourne Asset Management, in which Northrop J applied (at 358-359) Gummow J's observations, was a case involving a fiduciary relationship. 66 The gaps in the agreed statement prevent me reaching any conclusion as to whether equity would have imposed a constructive trust in favour of the Category A creditors over Bullion held by the Bankrupt or over the moneys received by him in consequence of the sale of the Bullion. However, on the material before me, even if the Category A creditors could show that the Bankrupt held the Bullion or the proceeds of sale on a constructive trust for them, they cannot establish that the Trustee holds the funds in the First and Second Accounts in trust for them or subject to a charge in their favour.

Category B Creditors 67 The documentation provided to Category B Creditors included a condition that the Bankrupt was entitled to use the physical bullion acquired for them "in the normal course of [his] business". In view of that condition, it is difficult to see how the Category B creditors could take advantage even of the broader interpretation of the principle in Space Investments. It would seem that the Category B creditors, by accepting the condition enabling the Bankrupt to deal with the Bullion in the ordinary course of his business, voluntarily accepted the risk of his bankruptcy. In any event, as I have indicated, it was not suggested by Mr Stomo that the Category B creditors could be in any better position than the Category A creditors.

Category C Creditors 68 It follows from what I have said that, on the material before me, the Category A and Category B creditors cannot establish priority over the other creditors, including the Category C creditors. 69 The Category C creditors, however, claimed to be entitled to priority in respect of the platinum held by the Mint for the bankrupt. I am not prepared to find that, for the purposes of the directions sought by the Trustee, the Category C Creditors are tenants in common of ten ounces of platinum held by the Mint on behalf of the Trustee. All that is known, according to the agreed facts, is that the Mint holds a total of ten ounces of platinum for the Bankrupt, but not in an identifiable physical form. There is nothing in the material before me to indicate that the platinum held on behalf of the Bankrupt has anything to do with the Category C creditors, let alone that it was allocated by the Bankrupt in order to satisfy the orders placed by the Category C creditors. There is therefore no factual basis for directing the Trustee to accord the Category C creditors priority in relation to the ten ounces of platinum or the proceeds of sale of that quantity of platinum.

Should Directions be Given? 70 I do not think it is appropriate to answer the questions Mr Einfeld presented for determination. As I have explained, they seem to assume that the role of the Court on an application for directions under s 134(4) of the Bankruptcy Act is to determine authoritatively the priorities among the various categories of creditors. Whatever the correctness of that assumption, the Trustee and all represented creditors accepted that the present proceedings were not an appropriate vehicle for making binding determinations as to the rights of the creditors. To provide answers to the question posed by the Trustee would imply that the Court was in fact making rulings binding on all creditors (whether or not represented) and on the Trustee himself. Given the way the proceedings were conducted, I do not think that this is the appropriate course. 71 I have had some doubts as to whether I should give any directions at all. As Mansfield J observed in Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357, at 371, a case concerning s 479(3) of the Corporations Law, the existence of a substantial factual dispute will often be a reason not to give directions. In the present case, the difficulty is not so much a substantial factual dispute, but the absence of evidence on significant issues. 72 Despite the difficulties created by the evidentiary gaps, I think the preferable course is to give a direction to the Trustee that he would be justified in distributing the property divisible among the Bankrupt's creditors, including the funds in the First and Second Accounts and the platinum held by the Mint on behalf of the Bankrupt's estate, among creditors of the Bankrupt pari passu. The Trustee and the represented creditors have all incurred substantial costs in agitating the issues. All creditors have been given an opportunity to appear. All represented creditors concur that directions should be given concerning the distribution of funds held by the Trustee, although they had differed as to what those directions should be. The Trustee has acknowledged the limited effect of any such directions. It would be unfortunate in these circumstances if, at the end of a drawn-out process, the Trustee and creditors were denied the benefit of directions that, as a practical matter, may enable the administration of the estate to proceed to completion. 73 I shall stand the application over until 11 March 1999 at 9.30 am, to give the Trustee an opportunity to state whether he wishes to have the benefit of the direction I am prepared to give and, if so, to make any submissions as to the form it should take. I shall also give the parties and represented creditors an opportunity to make submissions as to costs. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Associate: Dated: 25 February, 1999 Counsel for the Applicant: Mr M Einfeld QC with Mr J Johnson

Solicitor for the Applicant: Webster O'Halloran

Counsel for the represented Category A Creditors: Mr M Condon

Solicitors for the represented Category A Creditors: Lane & Lane Counsel for the represented Category B Creditors Mr C Stomo Solicitors for the represented Category B Creditors Craddock Murray & Neumann Counsel for the represented Category C Creditors And Solicitors for the represented Category C Creditors Minter Ellison Counsel for the represented Category D Creditors Mr L Aitken Solicitors for the represented Category D Solicitors Gilbert & Tobin Mr J Chippindall Peter Wayne Date of Hearing: 1 February 1999

Date of Judgment: 25 February 1999