Mr Adams signed that on behalf of Apollo.
79 The letter also included a guarantee, in the following terms:
"I Greg Adams, do hereby personally guarantee to repay the amount of $140,000 in the event of the failure of Apollo Automated Services Pty Ltd or Passport Travel Insurance."
80 Mr Adams signed this guarantee also. Though the letter did not say so, Mr Booker had told Mr Adams, and Mr Adams had agreed, that the $140,000 to be lent would need to be repaid by 30 June 1996.
81 Part of the reason for Mr Booker wishing to have the $140,000 loan then outstanding repaid, and then make a fresh advance to Apollo of the same amount, was that the $140,000 which was outstanding as at May 1995 did not have the benefit of any guarantee from Mr Adams.
82 On 30 June 1995, Apollo repaid $140,000 to Booker International, thereby reducing to zero the amount it owed to Booker International.
83 On 3 July 1995 Booker International made a fresh advance of $140,000 to Apollo.
84 Throughout the year to 30 June 1996, Mr Booker reputedly impressed on Mr Adams that the loan had to be repaid by 30 June 1996. Notwithstanding this, the loan was not repaid, by 30 June 1996. Mr Booker knew as at 30 June 1996 that Apollo was not in a position to repay the loan, and that Mr Adams was not in a position to repay it.
85 Every couple of months after 30 June 1996, Mr Booker asked Mr Adams where he was going with his product, and what stage he was at with chartering a cruise vessel and getting people in place to operate it. Mr Adams kept on telling him that he was, "just about there", and would be able to pay shortly.
86 In March 1997, SPCL moved into offices located on the same floor as Booker International's office. Thereafter, there was frequent informal contact between Mr Adams and Mr Booker about the progress of his cruise ship enterprise. Mr Booker knew that SPCL was the company through which Mr Adams was working to develop this enterprise, and that he was the only executive working out of the SPCL offices in the building. Mr Booker knew that Mr Adams was seeking Government assistance for the training of crew for the vessel, but Mr Booker did not know whether Mr Adams had been actually successful in obtaining that government assistance. Mr Booker knew that Mr Adams had tried to charter a vessel, on a couple of occasions, but had not succeeded in doing so. This information came to Mr Booker because it was proposed that Booker International would arrange the hull insurance for any vessel which was chartered.
87 By 30 June 1997, it was Mr Booker's understanding that Apollo was "looking shaky". He had been expecting the repayment of the loan of $140,000 to come out of income generated by the second version of the insurance product, through sales to cruise passengers, but by that time there had, of course, been no such sales. However, Mr Booker did not know whether Apollo, or Mr Adams, had any other sources of funds from which it might possibly have been able to be paid.
88 On 30 June 1997, SPCL wrote a cheque for $140,000, payable to Booker International. Mr Adams gave it to the Administrative Accountant/Manageress of Booker International, Ms Jelinek. Ms Jelinek banked the cheque on 30 June 1997. Mr Adams did not say anything to Mr Booker about this cheque. Mr Booker came to know that the cheque had been received within 24 hours of the cheque being banked. He was told about it by Ms Jelinek, who told him that Mr Adams had paid his debt back. The cheque was written on the account into which the Commonwealth had sent money on 10 June 1997. No other money had been paid into that account between 10 June 1997 and 30 June 1997.
89 Up to that time, Mr Booker had been applying regular pressure to Mr Adams to arrange for the repayment of the debt. Once the cheque was received he stopped applying that pressure.
90 The printed cheque form, on which that cheque was written, showed that the cheque was drawn on, "South Pacific Cruise Lines Ltd Settlement Account". Booker International's bank deposit slip records the drawer of the cheque as being, "South Pacific Cruise Lines P/L". The cash receipts book of Booker International for June 30, shows an amount received from "Sth Pacific Cruises" of $140,000, which is recorded in the "Sundries" column of the cash receipt book.
91 It was not until about September or October 1997, when there was some adverse publicity surrounding SPCL, that Mr Booker became aware that either Apollo, or SPCL, was actually in any trouble. In fact, Apollo had been placed in liquidation by a court order on 13 May 1997.
No Consideration for the Payment?
92 The Commonwealth contends that, in the event that there is a trust of the money which SPCL received on 10 June 1997, Booker International must repay the $140,000 it received out of that money, because Booker International provided no consideration for the payment.
93 Booker International asserts that, if there were a trust, it would still not be obliged to repay the $140,000 because, even though it had provided no consideration to SPCL, it provided consideration to Mr Adams for the payment, in the form of a discharge of his liabilities under the guarantee.
94 The claim which the Commonwealth brings against Booker International is a claim for a personal remedy, not a proprietary remedy. The Commonwealth expressly disclaims any attempt to trace the $140,000 into an asset remaining in the hands of Booker International. In circumstances where a proprietary remedy is claimed, there would be obvious scope for a defence of bona fide purchaser for value without notice. When a proprietary remedy is claimed, whether or not value was given, can be a relevant enquiry in connection with that defence.
95 The Commonwealth submits that where, as here, someone has received trusts monies, without giving value, there is a personal obligation on the recipient to refund an amount equal to the amount which was received.
96 In support of that proposition, the Commonwealth relies on Black v S Freedman & Co (1920) 12 CLR 105. In that case, Mr Black had a practice of stealing from his employer. He paid three amounts of stolen money - £460, £200 and £94.10 - into his wife's savings bank account. An amount of £250 was withdrawn from the wife's savings account, and used to purchase "circular notes" in Mrs Black's name. The question for decision in the High Court was whether the amount remaining in the wife's bank account, and the circular notes, could be recovered by Mr Black's employer. The case was both argued, and decided, as a tracing claim. Counsel for the appellants, at 106, submitted "once the money had been through the bank it had passed into currency and could not be followed." Griffith CJ, at 106 described the plaintiffs claim as:
"As against the wife they claimed to recover part of that money, which they say came into her possession and is identified as the stolen money, and which she received under such circumstances that she is bound to repay it to the plaintiffs."
97 Concerning the payment of £460 into the wife's account, Griffith CJ concluded, at 107, "That sum, therefore, I think can be identified as part of the stolen money." Concerning the £200 paid in, his Honour also concluded, "That sum can also be identified as being the stolen money" (at 107). At 108, his Honour said, "I think therefore that it is a reasonable inference - though it is not so strong as with respect to the other two sums - that the £94.10 can also be identified as part of the stolen money." And in relation to the "circular notes" his Honour said, at 108:
"I think that is sufficient evidence that that sum of £250 was his money, and that the notes were only taken in her name as a blind. Taking all these transactions together, I have no doubt that the whole amount claimed by his wife, consisting of the four sums I have mentioned, can be identified as part of the stolen money."
98 His Honour then went on to apply principles concerning "following trust property". At 109, after quoting from the judgment of Sir George Jessel MR In Re: Hallett's Estate (13 Ch D 696, at 708) he said that the assets were adequately identified in the hands of the wife, and continued (at 109):
"Of course it is not sufficient if the money is taken by the other party bona fide for valuable consideration. There the money cannot be recovered back. But it has been laid down in cases decided long ago that if the alienee is a volunteer the estate may be followed into his hands whether he had notice of the trust or not."
99 He went on to hold that Mrs Black was a volunteer, concluding this part of his reasoning by saying, "The money is identified; it came into her hands as a volunteer, and she is liable to repay it." (at 109)
100 Barton J concurred. O'Connor J also agreed, saying (at 110):
"Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person then it may be followed into that other person's hands. If, of course, that other person shows that it has come to him bona fide for valuable consideration and without notice, it may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not."
101 The judgment of O'Connor J likewise shows that the claim being pursued against Mrs Black was put on a proprietary basis, not on a personal basis. If follows that the decision in Black v Freeman cannot assist the Commonwealth in making good its present contention.
102 The Commonwealth also submits that, as a beneficiary of the trust, it can sue to recover the amount by which Booker International has been unjustly enriched. The Commonwealth says that such restitution is available where a defendant has been enriched in consequence of a wrong, and a breach of trust is such a wrong. The Commonwealth relies on Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 by analogy. Lipkin Gorman was a case concerned with a common law action for money had and received. Though the monies which were the subject of the action were monies paid from a solicitor's trust account, it was the solicitors (ie the trustee) which brought the action, not the beneficiary. Hence, the Commonwealth says, it is only by analogy that Lipkin Gorman is applicable in the present situation.
103 The Commonwealth accepts, however, that in any such action by a beneficiary to recover money, the defences available in a restitutionary action would also be available. Those defences were stated by Goff J in Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd [1980] QB 677, at 695, in a passage adopted by Mason CJ, Deane, Toohey, Gaudron and McHugh JJ in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, at 380:
"(1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact.
(2) His claim may however fail if
(a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or
(b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principle on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; or
(c) the payee has changed his position in good faith, or is deemed in law to have done so."
104 David Securities was also a common law action for money had and received. The Commonwealth says that, like Lipkin Gorman, it should be applied by analogy in the present case.
105 There have been more detailed discussions than this of the circumstances in which a beneficiary of a trust has a right in personam to recover the value of trust property which has been paid, in breach of trust, to someone from whom recovery is sought. (Jacobs Law of Trusts in Australia, 6th edition para [2318]-[2320], Ford and Lee, Principles of the Law of Trusts [17280] - [17300], [17320] - [17360], [22780].) I propose to assume the correctness of the legal position which the Commonwealth puts.
106 In the present case, the liability of Mr Adams under the guarantee which was one which had crystallized by 30 June 1997. The guarantee was one which was performable in either of two events, namely the failure of Apollo, or the failure of Passport Travel Insurance. By 30 June 1997 the former of those events had occurred, even though Mr Booker was not aware that it had occurred.
107 There is a difference of opinion in the authorities as to whether it is possible for "A" to discharge a debt which "B" owes to "C", unless "B" authorises, or subsequently ratifies, the payment, or there is some legal compulsion on "A" to make the payment (City Bank of Sydney v McLaughlin (1909) 9 CLR 615 at 633; Goff v Jones, The Law of Restitution, 5th edition page 17, Stoljar, The Law of Quasi Contract, 2nd edition page 166). In the present case, that debate does not have room to operate. Here, Mr Adams, by handing to Ms Jelinek the cheque for $140,000, clearly assented to it being used to discharge his liability under the guarantee. When Mr Adams was the Chief Executive Officer of SPCL, the payer, he had ostensible authority to make the payment with SPCL's cheque. No question has been litigated about whether the assumptions of regularity of corporate conduct derived from section 128 and section 129 Corporations Law (and it was the Corporations Law which was the relevant statute in 1997) have been displaced.
First Limb of Barnes v Addy?
108 An alternative ground on which the Commonwealth would seek, if there were a trust of the money it paid to SPCL on 10 June 1997 to enforce its claim for recovery from Booker International is that Booker International falls within the first limb of Barnes v Addy (1874) LR Ch App 244.
109 Barnes v Addy concerned the circumstances in which someone who is acting as an agent for trustees can himself be required to bear the responsibility of a trustee, if the transaction in which he acts is one where the trustee acts in breach of trust. The plaintiffs were the Barnes children, who had an interest in remainder (consequent upon a life estate in their mother) in a share of the residue of their grandfather's estate. The will had appointed three executors and trustees but eventually, through deaths, only Mr Addy remained as trustee. He was married to one of the testator's daughters, who also had a life estate, with remainder to her children, in a share of the testator's residue.
110 Mr Barnes had bought litigation against Mr Addy, charging him with breach of trust. That litigation was settled, on terms that it be dismissed, that the plaintiffs bear their own costs, and the costs of the trustees be paid out of residue. Afterwards, Mr Addy, disgruntled, decided to retire from being trustee of the share of residue held for the Barnes family, and to appoint Mr Barnes as trustee in his place. Mr Addy called on his solicitor, Mr Duffield, to draw the necessary document. Duffield advised against adopting this course, which advice Mr Addy refused to accept. Mr Duffield then advised that Mr Addy should take a deed of indemnity from Barnes. Mr Duffield consulted a former solicitor for the trustees (Mr Parker) who declined to approve of the deeds. Mr Addy, told of this, remained insistent that the transaction should proceed.
111 Duffield then told Barnes that he did not proceed further unless the drafts were approved by some solicitor on behalf of Barnes' wife and children. Barnes then engaged Mr Preston for that purpose. Preston wrote to Mrs Barnes pointing out that the transaction would give Mr Barnes full power over the funds, to do as he liked with. Mrs Barnes wrote in reply that she was fully aware of the proposed arrangement, and wished it to be carried through.
112 The deeds to effect the change in trustee were then executed. No sooner was the trust fund transferred into Barnes' name than he sold it, and used the proceeds in his own business. The proceeds were lost when Barnes became bankrupt within a year. By the litigation, the Barnes children sought relief against Mr Addy, and against the two solicitors, Duffield and Preston. The Vice-Chancellor had held that Addy was liable for breach of trust in connection with the loss of the funds, but that the two solicitors were not liable. The appeal to the Court of Appeal in Chancery was against the dismissal of the bill brought against the two solicitors. Counsel for the two solicitors were not called on, and the judgment of the Court of Appeal in Chancery was given ex tempore. It was in that context that Lord Selborne LC made his oft quoted remarks, at 251-252.
"It is equally important to maintain the doctrine of trusts which is established in this court, and not to strain it by unreasonable construction beyond its due and proper limits. There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and unequitable applications of them.
Now in this case we have to deal with certain persons who are trustees, and certain other persons who are not trustees. That is a distinction to be borne in mind throughout the case. Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves de son tort , or actually participating in any fraudulent conduct of the trustee to the injury to the cestui que trust . But on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps, of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. Those are the principles, as it seems to me, which we must bear in mind in dealing with the facts of this case. If those principles were disregarded, I know not how anyone could, in transactions admitting of doubt as to the view which a court of equity might take of them safely discharge the office of solicitor, of banker, or of agent of any sort to trustees. But, on the other hand, if persons dealing honestly as agents are at liberty to rely on the legal power of the trustees, and are not to have the character of trustees constructively imposed on them, then the transactions of mankind can safely be carried through; and I apprehend those who create trust do expressly intend, in the absence of fraud and dishonesty, to exonerate agents of all classes from the responsibilities which are expressly incumbent, by reason of the fiduciary relation, upon the trustees."
113 It is to be observed that, in this passage, Lord Selborne LC is not purporting to give an exhaustive account of when a recipient of trust property is liable in equity either to return the property in specie, or, by a personal remedy, to make good any loss which the trust estate has suffered. Rather Lord Selborne LC is talking about when it is that liability will be imposed on those who act as agents for trustees. Second, his Lordship is not saying that every time an agent receives trust property in breach of trust the agent bears a liability - the agent must not only receive, but also "become chargeable with", some part of the trust fund. Barnes v Addy was a case where the remedy sought against the solicitors included a declaration that the solicitors were (at page 250) "liable and bound to answer for and make good" the trust fund which had been transferred to Mr Barnes, "and also the amount of the dividends which would have accrued and become due upon or in respect of the same sum, in case it had not been transferred to Barnes; for all necessary and proper accounts" and costs. It is in this context, of a dispute about liability to recoup the trust fund, and taking of accounts, that the notion of a recipient of trust money "becoming chargeable with" part of the trust fund needs to be understood. In connection with the main matter at issue in the proceedings, namely the role which the solicitors played in Mr Barnes becoming substituted for Mr Addy as trustee, the solicitors had not received any part of the trust fund, so Lord Selborne LC's lack of explanation of the concept "and become chargeable with some part of the trust property" is hardly a surprise.
114 There was one aspect of the case in which Mr Duffield did actually receive part of the trust fund, namely when, following the litigation which Mr Barnes had brought against Mr Addy which was settled, Mr Duffield received his costs from the trust estate. Concerning that, however, Lord Selborne LC at 255 said:
"…First of all, that there is nothing before us to shew that such an application was improper on the part of Mr Addy, the trustee; but, secondly, that if it had been, the solicitor could not possibly have been held on that account responsible."
115 It is in later case law that the articulation of what has become known as the "first limb in Barnes v Addy" has occurred. Of recent times it has become common to refer to liability under the first limb in Barnes v Addy as "recipient liability", and liability under the second limb in Barnes v Addy as "accessory liability".
116 The Commonwealth submits that Booker International has received trust property in circumstances which fit within the third of the Baden categories of knowledge, and that that suffices for imposition of liability under the first limb in Barnes v Addy. The reference to Baden is a reference to the decision of Peter Gibson J in Baden Delvaux v Sociéte Generale [1993] 1 WLR 509, at 575-576, where his Lordship noted five different mental states:
"(i) actual knowledge;
(ii) wilfully shutting ones eyes to the obvious;
(iii) wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make;
(iv) knowledge of circumstances which would indicate the fact to an honest and reasonable man
(v) knowledge of circumstances which would put a reasonable man on enquiry."
117 The Commonwealth relied on Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16, at 105, where Hansen J said:
"… I am persuaded both as a matter of principle and precedent that a distinction does and should exist between the criterion for accessory liability and that of recipient liability. In my opinion given the nature of those two claims (the former being a claim that a third party acted as an accessory to a principal wrongdoer and thereby committed a wrong himself, the latter being a restitution-based claim that the defendant has been unjustly enriched at the expense of a trust beneficiary), there are strong grounds supporting the existence of a rational and principled distinction between the two limbs of Barnes v Addy . In my view, that distinction is represented by the proposition that it is not necessary to establish that the defendant acted dishonestly or with a want of probity in order to establish his liability as a recipient of misapplied trust property. In my judgment, recipient liability may be established when the defendant has constructive knowledge at the time he received the relevant property that (a) it was trust property and (b) it was being misapplied. I take "constructive knowledge" in this context to mean knowledge falling within any of the first three categories of knowledge defined by Peter Gibson J in Baden . I think too that knowledge falling within the fourth category may likewise constitute the relevant constructive knowledge, for the difference between the categories are a matter of degree in which there may be blurring at the edges. I do not think that knowledge in category five is sufficient, on the assumption that cases in that category are properly to be characterised as ones where the defendant is guilty only of mere carelessness."
118 I propose to assume, without deciding, that this statement of the law is correct, subject to it being narrowed, in accordance with the Commonwealth's submission, to requiring knowledge to fall within one of the first three categories in Baden before liability exists.
119 As I have found that there was no trust in existence, it necessarily follows that Mr Booker could not have had knowledge, of any of the five Baden categories, that the money paid to Booker International was trust property, and was being misapplied. However, I can make some findings which might bear upon this question, if an appellant court were to disagree with my finding that there was no trust.
120 First, there was no tinge of dishonesty in Mr Booker's acceptance of the money. He did not know that SPCL had had any government money made available to it. He had no reason to believe that the money which was received was anything other than SPCL's own money. The purpose for which the loan was originally made, namely the development of the Passport Insurance product, had at least some connection with the proposed business of SPCL, in that it was Mr Adams' intention, known to Mr Booker, that every passenger on the cruise ship would be required to take out travel insurance as part of a "package". While the premium for that policy would be payable to the underwriter of the policy, the writing of insurance policies was still going to be intimately connected with the cruise ship business. Further, Mr Adams was the Chief Executive Officer of SPCL. Further, the particular piece of property which was being passed to Booker International was money, in the form of a cheque. In connection with some types of property, like land, it is usual for someone proposing to take a transfer to make enquiries, to satisfy himself that the transferor is indeed entitled to make the transfer. That is not usually so when the property being transferred is money. Admittedly in the present case, the transfer was being made by a third party cheque. However, there is no reason to believe that anything appeared on the face of the cheque to indicate that the monies being paid were trust monies. While there is sometimes some commercial reluctance to accept third party cheques in payment of debts, that reluctance is adequately explained by the risk that the person who accepts such a cheque might be guilty of the conversion of it, if the person who gave the cheque to him did not have good title to it.
121 The cross-examination of Mr Booker established that Mr Booker was anxious to have the $140,000 repaid and was applying as much pressure as he could to Mr Adams to achieve this. There is also the following response in cross-examination.
"Q. By that stage [June 1997] you had no concern as to the source from which the money came?
A. No concern? No interest."
122 It was not put to Mr Booker that he had failed to make any particular type of enquiries, that a person who was honest and reasonable would make particular types of enquiries, or that he suspected that there was something odd about the source of the money from which Mr Adams repaid the $140,000. Indeed, Mr Booker never saw the cheque by which the payment was made - all he knew about the payment was what Ms Jelinek told him. While the bank deposit slip, and cash receipts book, of Booker International both show that the payment was made by South Pacific Cruises, it is not shown that those particular entries ever came to Mr Booker's attention. In those circumstances, I would not hold that Booker International had wilfully and recklessly failed to make such enquiries as an honest and reasonable man would make.
Commonwealth of Australia v South Pacific Cruise Lines LTD
123 In Commonwealth of Australia v South Pacific Cruise Lines Ltd (22 April 1998) unreported Foster J gave summary judgment against Mr Adams, for money which Mr Adams had received from SPCL. He awarded equitable compensation, and accepted that a trust relationship existed between the Commonwealth and SPCL.
124 I am conscious that I have come to a different decision to that of Foster J. It is only after very careful consideration that I would differ from a decision of his Honour. However, the case before Foster J was one where Mr Adams appeared in person, and his Honour had, it appears from the reasons for judgment, no effective contradictor for the Commonwealth's contention that a trust existed.
Orders