The Appeal by the Liquidators
149 The four grounds of appeal are set out above (at [83]).
150 With respect to ground 1, the liquidators submit that her Honour erred in viewing the contest as one between Sonray and Efax when in fact the contest was between the contributors to the Tainted Segregated Accounts on the one hand and Efax on the other. They point to the fact that they made it clear before the primary judge that Sonray itself made no claim to a beneficial interest in the BHP shares. In my opinion, the liquidators' submission that there had been a miscarriage of justice because the real question has not been heard and determined must be rejected. This case is not in any way like Warburton v Altson (1889) 15 VLR 94. The primary judge clearly knew that the alternatives were to uphold Efax's claim or to hold that the BHP Shares should be placed in the pool for the benefit of the persons entitled to share in the pool. Whether her analysis was correct is a matter raised by the other grounds of appeal and considered below.
151 With respect to ground 3, the liquidators did not seek to make a great deal of this ground saying "it was only there to show the further confusion within the segregated account".
152 The liquidators refined their grounds of appeal, and in essence they put two arguments.
153 The liquidators' first argument was that the relationship between Efax and Sonray was purely contractual and not what might be considered the ordinary relationship between a client and his or her broker. It was said by the liquidators that the critical matter from Efax's point of view was the account balance from time to time, rather than the ownership of particular property. As I understood it, on this argument, when Sonray purchased shares on instructions from Efax, it did so in its own right. The submission was that Efax and other clients in a similar position were "running account clients" rather than clients with special rights within the dichotomy identified by White J in Re Goode, Ex parte Mount (1974) 4 ALR 579 at 586-587 (see also Beconwood Securities Pty Ltd and Anor v Australia and New Zealand Banking Group and Others (2008) 246 ALR 361 at 375 [57] per Finkelstein J). On this argument, Sonray was the owner of the BHP Shares.
154 The liquidators' second argument was that the primary judge erred in concluding that Efax had paid for the BHP shares. They submitted that either there was, in the circumstances, no power to appropriate monies from the ANZ AUD Segregated Account, or if it had occurred, the result was no different from the result which followed when an asset was acquired by payment from a Tainted Segregated Account where all of the contributors to the Segregated Account could trace their monies into the asset acquired.
155 With respect to the liquidators' first argument, there was a dispute between the parties as to whether the argument had been put to the primary judge. It is clear that there was an argument put to the primary judge about the effect of clause 4 (ix) of the Client Agreement and the primary judge construed the clause as relating to collateral benefits such as commissions or rebates. The liquidators argued before this Court that clause 4 (ix) was but one example of a number of clauses in the Client Agreement which supported the conclusion that the relationship between Efax and Sonray was no more than a relationship of debtor and creditor. They referred to a number of other clauses in the Client Agreement. None of the other clauses to which the Court was referred are discussed by the primary judge. That suggests that the broader argument was not put to her. At the same time, the liquidators were able to point to the following paragraph in their written submissions before the primary judge:
Likewise, at common law, a client who deals with his stockbroker on a running account basis stands in a debtor/creditor relationship, and not that of trustee/beneficiary (Re Ararimu Holdings Ltd [1989] 3 NZLR 487; Re Goode, ex parte Mount (1974) 4 ALR 579; Southern Cross Commodities v Ewing (1988) 91 FLR 271). The facts here suggest that clients dealt with Sonray on a running account basis.
A footnote to this paragraph is in the following terms:
The client agreements provide for set-off of accounts and positions: clause 8(x). Each client account on a Trading Platform displayed the client's net position and calculated interest on the basis of that net position: see White Label Partner Operational Guidelines. Further, many of the client agreements expressly contemplated that the client would not take an interest in the financial products purchased and only had a right to the return of funds equivalent to their net balance.
156 In view of this submission, it is difficult to see how it can be said that the point was not raised before the primary judge. It appears to have been raised, although perhaps not all of the arguments now marshalled in support of it were raised. In any event, I will address the argument.
157 In support of their argument that the client's right under the Client Agreement was not to particular financial products, but "to liquidate the holdings that it had and take money from Sonray", the liquidators referred to the fact that the Client Agreement related to a broad range of financial products. In that respect, they referred, not only to the wide definition of financial product in clause 2 of the Client Agreement, which it is not necessary to set out, but also to clause 8 h) and j):
8. Deposits and Margins
The Client agrees and acknowledges that:
…
(h) The Client is responsible to pay any deficit owing to Sonray after closure, and if the Client defaults or refuses such payment, Sonray may apply the proceeds of any assets held by Sonray against that deficit;
…
(j) Should the Client fail to meet a call, Sonray may without prejudice to any other rights or powers under this Agreement, and in its absolute discretion, close out, without notice, any or all of the Client's exchange traded or over-the-counter financial product contracts;
158 The liquidators also referred to clause 9 (c) and clause 16 (b) of the Client Agreement:
9. Commissions, Fees and Expenses
…
(c) where amounts are payable by one party to the other, netting principles shall apply to enable the party owing the larger amount to pay the excess only to the other party. Amounts may be converted into the same currency in line with clause 4 (x) of this Agreement.
…
16. Termination
…
(b) Unless otherwise agreed in writing between the parties upon termination of this Agreement Sonray will close out all of the Client's exchange traded or over-the-counter financial product transactions and will close out, abandon or exercise any option not yet exercised at Sonray's discretion.
159 The liquidators submit that although the notion to "close out" transactions referred to in clause 16(b) would not ordinarily suggest the sale of physical stock, such as shares, bonds and other securities, read as a whole clause 16 (b) gave Sonray authority to sell all financial products including shares, upon termination. It therefore supported their argument that the Client Agreement did not envisage the client owning shares acquired pursuant to the client's instructions.
160 I do not accept the liquidators' first argument.
161 The Client Agreement clearly creates an agency relationship between Efax and Sonray. It provides that Sonray will deal or instruct third parties to deal "on behalf of [Efax]" in the financial products and it will utilise the execution and settlement services of appropriately licensed third parties "on behalf of [Efax]" (clause 4 (i)(ii)). Under the heading in clause 6 of "Authorisations and Instructions" the following appears:
(a) The Client hereby authorises Sonray to trade in the financial products on their behalf pursuant to the prior approval and instruction of the Client, or otherwise in accordance with Sonray's rights elsewhere under this Agreement;
…
(f) The Client has appointed Sonray as its agent for the purposes set out in this Agreement and conferred upon Sonray authority to do, or omit to do, all things reasonably necessary to perform its functions and all things reasonably incidental to the performance of its functions;
162 Clause 4 (ix) does not advance the liquidators' first argument. It does not state that legal or equitable ownership of shares, for example, purchased pursuant to a client's instructions are a benefit or right obtained by Sonray upon registration of an exchange traded or over-the-counter transaction. What is a benefit or right within the clause is left open.
163 Clause 8 (h) and ( j) simply reflect the fact that the Client Agreement includes a wide range of financial products and clause 9 (c) reflects the fact that, from time to time, each party may owe money to the other party.
164 Clause 16 (b) refers to closing out financial product transactions and, in my opinion, on the face of it that is not apt to include the sale of shares purchased on the instructions of, and for, a client.
165 Finally, it seems to me that clause 13 (c) (vi) of the Client Agreement supports the notion that when a client instructed Sonray to purchase shares on his or her behalf and the transaction was effected, then property in the shares vested in the client. That clause and the clause to which it refers (that is, clause 13 (a)) are in the following terms:
(a) The Client acknowledges and agrees that where one of the following events occurs, Sonray may take any such action provided in Clause 13(c) below:
i. the Client fails to meet a call for a deposit or margin or make any other payment when due under this Agreement;
ii. the Client is not contactable by Sonray (and has not made alternative arrangements) within the time specified by Sonray in order for Sonray to obtain instructions (where required);
iii. the Client dies or becomes of unsound mind, or the partnership is dissolved or ceases to exist for any reason;
iv. the Client suspends payment of its debts, makes any composition with its creditors, has a receiver appointed over some or all of its assets, takes or has any proceedings taken against it in bankruptcy or takes or allows any steps to be taken for its winding up (except for a solvent amalgamation or reconstruction approved in advance in writing by Sonray) or anything similar to any of these events happens to the Client anywhere in the world;
v. the Client fails in any respect fully and promptly to comply with any obligations to Sonray under this Agreement or otherwise or if any of the representations or information supplied by the Client are or become inaccurate or misleading in any material respect;
vi. any guarantee, indemnity or security for the Client's obligations is withdrawn or becomes defective, insufficient or unenforceable in whole or in part;
vii. this Agreement has been terminated;
viii. it becomes or may become unlawful for Sonray to maintain or give effect to all or any of the obligations under this Agreement or otherwise to carry on its business or if Sonray or the Client is requested not to perform or to close out a transaction (or any part thereof) by any governmental or regulatory authority whether or not that request is legally binding; or
ix. Sonray considers it necessary to do so for its own protection.
…
(c) if any event referred to in Clause 13(a) above takes place, Sonray shall at its absolute discretion be entitled, but not obliged, to, and at the expense of the Client:
…
vi. satisfy any obligation the Client may have to Sonray out of any property, money or security belonging to the Client in Sonray's custody or control, and enforce any such asset or security (at the Client's expense) held by Sonray in such manner as it deems appropriate, but to a maximum amount equal to all sums due or to become due to Sonray from the Client;
166 Before dealing with the liquidators' second argument it is convenient to address some matters raised by the liquidators or Eagle Securities in the course of their submissions.
167 First, one or both of them referred to the fact that the banking records for the ANZ AUD Segregated Account showed that, between the two deposits by Efax in January 2010 and the purchase of the BHP shares in April 2010, the account balance rose and fell, but, in particular on 9 February 2010 the balance fell from $3,056,611.09 to $561,611.09. Secondly, the liquidators referred to Efax's account which showed that Efax dealt in a range of financial products between 5 March 2010 and the purchase of the BHP shares in April 2010. I should mention that the documents showing the dealings by Efax are in the name of Saxo because Sonray used Saxo's trading platform which generated the information in its ledger. In other words, Saxo's electronic records were Sonray's electronic records. Thirdly, the liquidators referred to the fact that they had identified 47 defalcations on the ANZ AUD Segregated Account between Efax depositing its monies in January 2010 and the purchase of the BHP shares in April 2010.
168 These matters may be accepted. In other words, it may be accepted that Efax cannot show that its monies were used to purchase the BHP Shares. However, as Efax submitted on appeal, and as the primary judge found, Efax's claim does not involve a tracing exercise.
169 The next matter concerns the legal ownership of the BHP Shares. The liquidators submitted that Efax did not hold legal title to the shares because it was not registered as the holder of the shares. The primary judge rejected that submission by reference to provisions in Part 7.11 of the Corporations Act and operating rules of the ASX. Although the liquidators on appeal challenged that conclusion, the challenge was not an essential part of their argument. Efax sought to uphold the primary judge's conclusion, but said that, in any event, the appeal should be dismissed on other grounds. Eagle Securities submitted that Efax did not hold legal title to the BHP Shares and that submission is essential to its claim because it argues that the case is one of competing equities and that its equity, together with the other contributors to the Tainted Segregated Accounts, ought to prevail. However, for reasons I will give, its case fails even on the assumption that Efax did not hold the legal title to the BHP Shares. In those circumstances, it is not necessary for me to consider whether Efax held the legal title to the BHP Shares.
170 Before examining the liquidators' argument in further detail, it is important to note the following matters. There is no dispute about the fact that the vendor of the BHP Shares has been paid, although whether he or she was paid by Saxo or UBS is unclear. The liquidators' case is that Efax did not pay or provide consideration to Sonray for the purchase of the BHP Shares. Efax does not suggest that it paid or provided consideration for the purchase of the BHP Shares to any other party. Nor did Efax suggest that it can succeed in its claim to the BHP Shares if it did not pay or provide consideration for the purchase of the shares to Sonray. The argument of Eagle Securities relates to a different stage of the transaction. It contends that monies from the Tainted Segregated Accounts were in fact paid to Saxo for the purchase of the BHP Shares and that the contributors have a tracing claim in relation to the shares, irrespective of the dealings between Efax and Sonray. Details of the argument of Eagle Securities are set out below. Two aspects of that company's argument should be noted at this stage. First, it will not be necessary to consider the argument if the liquidators' argument is accepted. Secondly, the proposition that monies from the Tainted Segregated Accounts were paid to Saxo for the purchase of the BHP Shares does not appear to have been advanced before the primary judge. In fact, in this Court the liquidators said in their written submissions the following:
Due to a quirk in Sonray's dealings with Saxo and as a result of the subsequent settlement between them, Sonray has not been required to pay or reimburse Saxo for their purchase.
171 As I have said, Eagle Securities did not appear before the primary judge, even though the Court was told it had notice of the application.
172 The liquidators' second argument involved the following steps. First, that when Efax deposited monies with Sonray in January 2010, Sonray, subject to any contrary instructions from Efax as to the application of the monies came under a personal obligation to repay the monies to Efax. Furthermore, by reason of s 981H of the Corporations Act, Sonray's chose in action against the ANZ Bank in relation to the ANZ AUD Segregated Account was impressed with a trust in favour of Efax. Those propositions are correct.
173 Secondly, by reason of the defalcations and deficiencies, Sonray's chose of action against the ANZ Bank in relation to the ANZ AUD Segregated Account could not be the subject of any dealing without the approval of all the contributors which, of course, Sonray never had. That proposition is correct.
174 Thirdly, the liquidators submit that the reduction of Efax's debt to Sonray with respect to the purchase price of the BHP Shares by reference to the ANZ AUD Segregated Account was no different than if monies had been paid out of the account to the provider as occurred in the case of Sonray's dealings with Interactive Brokers. There was no legitimate or lawful appropriation, transfer, credit, application or payment of monies within clause 9 (b) of the Client Agreement, and to the extent that there was an appropriation, it was no different in effect to a payment with similar legal consequences.
175 In support of their argument, the liquidators referred to well-established principles about the effect of book entries in certain circumstances. Where the parties agree, then entries in books of account can affect legal relations between them in the sense that they can have the same effect as monies passing between them: Manzi v Smith (1975) 132 CLR 671 at 674 per Barwick CJ. Leaving aside cases where a transaction is a sham (that is, steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any legal consequences: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 ("Equuscorp v Glengallan") at 486-487 [46]), entries in books of account give rise to legally effective transactions under which it can be said that money has been paid: Equuscorp v Glengallan at 485-489 [43]-[56]. The point was made by Finkelstein J in Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358 at 366 [26] in the following terms:
There is every reason to permit a payment to be made by a book entry. Often it is simply a short-hand for money or a cheque being handed across the table and money or a cheque being handed back. It would be entirely inconsistent with modern commercial life if a payment due by one person to another could not be effected in this manner. At any rate, that is how the law has progressed. See, for example Manzi v Smith (1975) 132 CLR 671; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471. All that is required is an actual agreement by the relevant parties that payment be made by means of entries in books of account: Manzi v Smith 132 CLR at 674. The agreement may be express or it may be inferred. In the case of a bill of exchange, however, in the absence of an express agreement the court will not readily infer an agreement that the payment, which must otherwise be in money, may be made by some other means.
176 The liquidators' submission was that, at best, the entries in Efax's account with Sonray debiting the purchase price of the BHP Shares had the same effect as if Sonray had repaid its debt to Efax from the ANZ AUD Segregated Account and then Efax had paid Sonray for the purchase price of the BHP Shares. I say "at best" because the liquidators' submission was that the payment was not effective because it was a purported payment from a deficient mixed fund and subject to the equitable interests of all contributors. The liquidators submitted that in terms of clause 9 (b) of the Client Agreement, there was a purported appropriation, but it was not a "legitimate" (as the primary judge put it) or lawful appropriation.
177 I do not accept the liquidators' argument. Upon the deposit of $3,176,000 by Efax with Sonray, Efax had, among other things, a chose in action in debt against Sonray for that amount. That chose in action was enforceable against Sonray and it was not restricted to any particular account held by Sonray. Upon placing the orders for the purchase of the BHP Shares, Efax became liable to pay the purchase price to Sonray. In other words, Sonray had its own chose in action in debt against Efax. Sonray "appropriated" Efax's chose in action against it in satisfaction of its chose in action against Efax. Although Efax thus paid Sonray for the purchase of the BHP Shares it was not a payment from the ANZ AUD Segregated Account or indeed any other Tainted Segregated Account. The word "monies" in clause 9 (b) includes, in my opinion, choses in action. In the alternative, the same result is reached by an application of clause 9 (c). The application of "netting principles" means that Efax's debt to Sonray in relation to the BHP Shares has been discharged.
178 In my opinion, the liquidators' appeal must be dismissed.