Commonwealth of Australia v Davis Samuel Pty Ltd and Ors

Commonwealth of Australia v Davis Samuel Pty Ltd and Ors - [2013] ACTSC 146 - ACTSC 2013 case summary — Zoe

[835]

The variations between more precise formulations of the principle governing the liability [of a person in a fiduciary relationship] to account are largely the result of the fact that what is conveniently regarded as the one 'fundamental rule' embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the 'use of fiduciary position' doctrine is but an illustration or part of a wider 'conflict of interest and duty' doctrine ... the two themes, while overlapping, are distinct. Neither theme fully comprehends the other and a formulation of the principle by reference to one only of them will be incomplete. Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee. ... That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed. In some, perhaps most, cases, the constructive trust will be consequent upon an actual breach of fiduciary duty: e.g., an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. In other cases, however, there may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: e.g., the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. The principle governing the liability to account for a benefit or gain as a constructive trustee is applicable to fiduciaries generally including partners and former partners in relation to their dealings with partnership property and the benefits and opportunities associated therewith or arising therefrom.

[1036]

The High Court in Farah did not settle the knowledge/notice requirement in relation to recipient liability. Nonetheless, from at least the 1990's and in the wake of the Baden classification, judges had begun in recipient liability cases to generalise from what had been said both by Gibbs J (at 398) and by Stephen J (at 412) with whom Barwick CJ agreed, about the insufficiency of traditional, or category (v), constructive notice - though not of category (iv) notice - as a basis for personal liability. To allow that, as Stephen J commented, would be 'to disregard equity's concern for the state of conscience of the defendant': at 412; see eg Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 at 103G; Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd at 105; Hancock Family Memorial Foundation at 209; Tara Shire Council v Garner [2002] QCA 232; [2003] 1 Qd R 556 at [66]- [72]; Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025; (2003) 47 ACSR 285 at [54]- [60]; see also United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 252-254. In Kalls Enterprise Pty Ltd (in liq) v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 - a decision which post-dates Farah Constructions - the New South Wales Court of Appeal applied Baden's categories (i)-(iv), but not category (v) to a knowing receipt claim. Kalls Enterprise in turn has been applied subsequently: see eg Horfman v MG Kailis Pty Ltd [2009] WASC 166; Fodare Pty Ltd v Shearn [2011] NSWSC 479.

There is, in other words, an established line of judicial decision and opinion both at first instance and in intermediate courts of appeal spanning at least 20 years adhering to the view taken in the above cited cases. We do not consider that that view is plainly wrong and should be rejected. On the contrary! Finally, for the sake of completeness, we should note we do not consider that what was said by Bryson J in Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd [2001] NSWSC 448; (2001) 38 ACSR 404 at [469]-478] is inconsistent with that view. Commendably, his Honour emphasised the fault based character of recipient liability: '[u]nconscionability cannot be fictionalised, and the grounds on which constructive trust liability is imposed should be real and substantial': at [471].

[1529]

In discussing how the funds would be invested Allan Endresz said that Davis Samuel would be appointed as an advisor to the company to invest the funds and share any profits and that the funds would be used for share trading in companies that Davis Samuel or CTC were mounting takeover bids on. I was reassured to hear that a reputable Funds Adviser was to supervise the investment.

Muir said something to the effect that he would become a director to the company once he had sorted out his relationship with [his partner]. I recall him saying words to the effect 'I'll come on as a director when I have sorted out my life with [his partner]. I'll have more time by July when my contract runs out'. He then said that in the meantime he wanted me to get underway with the paperwork and establish the company so that it would be ready as soon as possible to participate in the business as we had been discussing. Allan Endresz said there would always be 'plenty of funds left in (the companies) to cover management fees and other costs.' I regarded my role to be limited by these arrangements.

Allan Endresz offered to send a draft of a Unit Trust Deed that could be used to set up a two company trust structure. He explained how it worked so that profits were able to be distributed from the trust company into a holding company and not directly into individual hands and how the control and ownership were easy to move. He illustrated it on a whiteboard. Fees for management and other costs could then be paid out of the holding company. I was clear that the funds were working capital for a long term venture and were to be employed as a revolving investment fund directed by Davis Samuel through David Muir.

Muir said that he would be the point of contact with Allan Endresz and that I was to deal with Muir. I agreed to keep communications with Allan Endresz to essential contact only so as not to double up or waste people's time. It was made clear to me by Muir and Allan Endresz that takeover activity was the primary focus and that I was engaged only on a 'need to know' basis. Other activities planned would be undertaken as the way was cleared by resolution of CTC v's ASX litigation and finalisation of the Petroz bid. I agreed to act as director of these companies acting as trustee for the funds and managing the books. At no time was I concerned that what was being proposed was improper or illegal. I believed that the legal requirements were being met by Endresz' family lawyers and that everything was reputable and well supervised.

I was flattered about being asked to be involved and the potential business prospects that the arrangement seemed to offer. I had the clear impression that Allan Endresz was recruiting people to assist in his plans for expansion of CTC and the takeover bids he was planning. I felt I had been fortunate to be invited to join a group of wealthy and experienced investors (the Endresz family) and was excited at the prospect of being involved in Company takeover activity.

Muir and I drove back to Canberra on the same day.

[1977]

But at some stage Mr Muir became invited in to, involved, however it occurred in to your discussions, isn't that right? --- That's correct.

Now, who initiated that? Was it you? --- Look, it could've been just a general discussion that occurred about our activities that he was interested in, particularly from what we're doing with CTC, and we would have initiated yes, that we're doing an acquisition in relation to [TNG].

So you believe that you would've told Mr Muir that Davis Samuel was looking at a possible acquisition of [TNG], is that right? --- Yes, that would've been right, yes.

And did you tell him that with a view to him assisting you in funding that investment? --- We generally let David know, as I can remember back then that Davis Samuel would seek funding from a number of sources in relation to takeovers, and that it was of interest to David, yes. There's an opportunity to raise funds for the takeover.

Well, you knew, didn't you, that he worked for the Commonwealth of Australia? --- We knew that he had a consulting contract with the Commonwealth, but he was at liberty to do other activities that he was doing.

Well, so did you discuss in August/September 1998 a number of possible investment proposals with him that you and Mr Cain had discussed? --- I don't recall there was a number of them, I think the [TNG] one was the one that David was interested in what Davis Samuel was doing.

Well, on the first occasion that you discussed with Mr Muir the possibility of investment in [TNG], what did you say to him? --- Look, in general terms it was a case of Davis Samuel was looking at a controlling acquisition of [TNG], we were looking to see if there's funding available from any sources, and that's what we were going to proceed with.

Did you ask him to go and look for funding? --- I don't recall that I asked him. I think he put to us that if he can be involved he'll see if he can find sources, he's got some contacts that might be interested in funding for us so I don't think it was a case of us sitting there asking him specifically for funding.

[2369]

(a) Apparent authority operates as an estoppel preventing a principal from asserting that the principal is not bound by a contract where the principal has held the agent out as having authority.

(b) The holding out may be of a general character, arising for example out of an office or position in which the principal places the agent, or it may be specific to a particular transaction. The holding out may take the form of the setting up of an organisation or structure which presents to outsiders an appearance of authority in the agent.

(c) The holding out must be conduct by the principal, not the agent. A third party cannot rely upon the agent's own representation as to authority. But this does not mean that the agent's conduct is to be ignored. The principal may hold out the agent as having authority by permitting the agent to act in a certain way or to make representations about himself or herself, or the principal may hold the agent out by equipping or arming the agent with a document or thing which enables the agent to assert authority with the hallmark of authenticity.

(d) The holding out may also result from permitting an agent to act in a certain manner, or by equipping or arming the agent, or by a failure to take proper safeguards against misrepresentation by the agent.

(e) The principal's conduct is to be assessed as a whole and in its totality.

(f) The apparent strictness of the approach in Russo-Chinese Bank and in Armagas in relation to the known existence of a limitation upon the agent's authority must be read in the light of the High Court's emphasis in Pacific Carriers upon the need to consider the totality of the principal's conduct, and in the light of the High Court's analysis in Crabtree Vickers and in Pacific Carriers of the circumstances in which an agent's assertion of authority may, in the particular context, be a representation or holding out by the principal. As the decision in Essington well demonstrates, the issue is to be resolved upon an analysis of the particular facts of each case. In a particular case a known limitation upon an agent's authority might prevent an estoppel from arising. It seems to me that that would not invariably be the case, as it is necessary to assess the whole of the principal's conduct in the particular circumstances, and, in particular circumstances, a holding out may exist which it would be inequitable to allow the principal to resile from, notwithstanding the existence of a known limitation upon the agent's authority.

[2373]

It is undoubted that a person who deals with an agent, whose authority he [or she] knows to be limited, as the plaintiff knew in this case, does so at his [or her] peril, in this sense, that should the agent be found to have exceeded his [or her] authority his [or her] principal cannot be made responsible. While the several authorities cited ... establish, in their Lordships' opinion, the proposition that, in order that the principle of 'holding out' should in any given case of agency apply, the act done by the agent, and relied upon to bind the principal, must be an act of that particular class of acts which the agent is held out as having a general authority on behalf of his principal to do; and, of course, the party prejudiced must have believed in the existence of that general authority and been thereby misled. In other words, if the agent be held out as having only a limited authority to do on behalf of his principal acts of a particular class, then the principal is not bound by an act done outside that authority, even though it be an act of that particular class, because, the authority being thus represented to be limited, the party prejudiced has notice, and should ascertain whether or not the act is authorized. In their Lordships' view, there is no evidence that the fraudulent compradore had, or was believed to have, or was held out as having, any authority beyond the strictly limited one already mentioned. He was authorized to arrange the details of the negotiations for the 'telegraphic transfers' of money to be submitted to the manager for approval, but he had no authority to receive money for the purpose of such transfers until those details had been so submitted and approved of, that is, until a binding contract had been entered into by the manager on behalf of the bank to transmit the money on the terms approved of when received. The bank had not, by any negligent or improper act on their part, allowed the compradore to be apparently invested with an authority beyond or greater than the limited authority which the plaintiff knew him to possess. Everything which he was by them permitted to do from the beginning to the end of the business was as consistent with the exercise of this limited authority as it was with the exercise of a wider or more general authority. There cannot therefore be any estoppels as against the bank in respect of any of the steps in the transaction, since they have not done or permitted anything by which the plaintiff was deceived.

[2902]

The simplest case is where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his [or her] own benefit. In such a case the beneficiary is entitled at his [or her] option either to assert his [or her] beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund. He [or she] will normally exercise the option in the way most advantageous to himself [or herself]. If the traceable proceeds have increased in value and are worth more than the original asset, he [or she] will assert his [or her] beneficial ownership and obtain the profit for himself [or herself]. There is nothing unfair in this. The trustee cannot be permitted to keep any profit resulting from his [or her] misappropriation for himself [or herself], and his [or her] donees cannot obtain a better title than their donor. If the traceable proceeds are worth less than the original asset, it does not usually matter how the beneficiary exercises his [or her] option. He [or she] will take the whole of the proceeds on either basis. This is why it is not possible to identify the basis on which the claim succeeded in some of the cases.

Both remedies are proprietary and depend on successfully tracing the trust property into its proceeds. A beneficiary's claim against a trustee for breach of trust is a personal claim. It does not entitle him [or her] to priority over the trustee's general creditors unless he [or she] can trace the trust property into its product and establish a proprietary interest in the proceeds. If the beneficiary is unable to trace the trust property into its proceeds, he [or she] still has a personal claim against the trustee, but his [or her] claim will be unsecured. The beneficiary's proprietary claims to the trust property or its traceable proceeds can be maintained against the wrongdoer and anyone who derives title from him [or her] except a bona fide purchaser for value without notice of the breach of trust. The same rules apply even where there have been numerous successive transactions, so long as the tracing exercise is successful and no bona fide purchaser for value without notice has intervened.

[3230]

The reasons informing the imposition of liability on knowing recipients or assistants and, more particularly, the nature both of their liability relative to that of the delinquent trustee or fiduciary and of the remedies available against them have been the subject of significant recent (mostly academic) debate ...

We can for the most part pass the controversies by. There is relative certainty in the law we need to apply to issues raised in the appeal.

First, it is uncontroversial that the liability of a third party under either limb of Barnes v Addy is a personal, fault-based, one. The available remedies are not limited to an account of profits made or to pay compensation to restore the trust or for the loss occasioned by his or her wrongdoing. They can extend, as earlier noted, to the award of proprietary relief where this is appropriate: see generally [Warman International Ltd v Dwyer (1995) 152 CLR 544]

...

Thirdly, where the third party is not the fiduciary's alter ego, the fiduciary and the third party will ordinarily be only severally liable for the profits each makes in consequence of the breach of fiduciary duty or breach of trust in which it participated/was a recipient: see generally Warman at 569. Each is not responsible for the other's profits as we earlier indicated - hence the burden of the observation of the plurality in Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48; (2011) 282 ALR 685; 86 ALJR 14 at [106] (Michael Wilson & Partners Ltd):

... this Court has held that liability to account as a constructive trustee is imposed directly upon a person who knowingly assists in a breach of fiduciary duty. The reference to the liability of a knowing assistant as an 'accessorial' liability does no more than recognise that the assistant's liability depends upon establishing, among other things, that there has been a breach of fiduciary duty by another. It follows ... that the relief that is awarded against a defaulting fiduciary and a knowing assistant will not necessarily coincide in either nature or quantum. So, for example, the claimant may seek compensation from the defaulting fiduciary (who made no profit from the default) and an account of profits from the knowing assistant (who profited from his or her own misconduct). And if an account of profits were to be sought against both the defaulting fiduciary and a knowing assistant, the two accounts would very likely differ.

...

Fourthly, beyond the corporate alter ego cases we referred to earlier, there may well be a further exception to the above general principle. It is that, if the fiduciary and the third party assistant or recipient act in concert to secure a mutual benefit, be this to misappropriate trust property for a particular mutually beneficial purpose or to participate in a breach of fiduciary duty to secure a mutual advantage (eg a business opportunity), they are jointly and severally liable to the wronged beneficiary/principal to restore the trust or to account for the profits made.

...

Fifthly, in the case of knowing receipt, where some or all of the trust property received no longer exists (or is not traceable) and so cannot be returned, the knowing recipient is obliged (no less than the wrongdoing trustee) to restore the trust fund by way of monetary compensation for the assets which have been lost

[3312]

(a) Failing to exercise any or adequate control or supervision over David Muir and to effect adequate safeguards and precautions against, and for the detection of, unauthorised dishonest or mistaken payment or investments of Commonwealth funds by him.

(b) Failing to make any or adequate enquiry as to whether and how David Muir could deal, or had dealt, with the Commonwealth's funds.

(c) Failing to take any or adequate precautions to prevent and detect David Muir's abuse of the Commonwealth's trust and confidence in him and deception of third party payees of Commonwealth funds.

(d) Having in place a system relating to the payment of Commonwealth funds which was inadequate in that:-

(i) it permitted one person, with knowledge of the computer system and the log-on and password of an officer responsible for processing payments, having the ability to make payments of millions of dollars of Commonwealth Funds, as David Muir (according to the Commonwealth's case) did with the April Funds and the September Funds.

(ii) it did not prevent one person from acquiring such knowledge and making such payments or for detecting that he had done so.

(e) permitting its consultant the twenty-eighth defendant Darren Smailes, through the Chief Executive Officer of the Department of Finance and Administration, to have authority to secure approval for David Muir and Callform to have an access code to a Department computer programme which permitted access to the Commonwealth's funds and failing to supervise and detect adequately or at all the action Darren Smailes in bringing about the April and September Funds Transfers through such computer access authorised for David Muir and Callform.

(f) Failing to institute and maintain a system which contained adequate safeguards and precautions against, and for the detection of, unauthorised dishonest or mistaken investment of Commonwealth funds in the Contracts Management Group area or the Business Closures Section area.

(g) Failing to have in place the safeguards and precautions which were subsequently instituted or recommended within the Commonwealth by way of change in order to prevent or detect the unauthorised, dishonest or mistaken payment of Commonwealth funds. The best particulars that the counter-claimants can give before completion of discovery and interrogatories is by reference to the contents of the Commonwealth's internal e-mails on this subject in January and February 1999 and the Commonwealth's document entitled "Payments Investigation. Changes in Financial Procedures in Contract Management Group".

At a glance

Court

Decision date

Source

Judgment (3486 paragraphs)

Commonwealth of Australia v Davis Samuel Pty Ltd and Ors (No 7) [2013] ACTSC 146 (1 August 2013)

Parties

Legislation Cited (30)

Cases Cited (185)