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[2012] FCAFC 140
Federal Court of Australia (Full Court)
2012-10-05
Jagot JJ
Original judgment source is linked above.
Introduction 1 I have had the benefit of reading in draft the reasons for judgment of Besanko J. I agree with his Honour's distillation of the facts and the issues which arise on the appeal. I agree with his conclusion on the first issue (although for different reasons), but I do not agree with his conclusion on the second. It follows that in my opinion the appeal should be allowed. 2 The appeal arises from directions made by the primary judge under s 511 of the Corporations Act 2001 (Cth) (the Corporations Act) in an application by the Liquidators of Sonray Capital Markets Pty Ltd ("Sonray") a company which, until its collapse in June 2010, conducted a substantial financial services business. 3 Sonray carried on a business of providing financial product advice and services to its clients about trading in a wide range of financial products. It provided access through online trading platforms to overseas service providers to enable clients to trade in those financial products. 4 Efax Pty Limited ("Efax"), which is the trustee of a family trust, was a client of Sonray. Efax's trading activities were governed by a written agreement called the "Client Agreement and Disclosure Document". That Agreement was dated 23 July 2009, although it appears to have been executed in late August 2009. 5 In April 2010, Efax instructed Sonray to purchase a total of approximately 78,000 shares in BHP Billiton Ltd (the BHP shares) which were acquired through a trading platform provided to Sonray by an overseas banking institution, Saxo Bank A/S ("Saxo"). 6 Although Efax provided funding to Sonray in an amount of $3 million prior to the acquisition of the BHP shares, those funds were deposited into a bank account held by Sonray which had been the subject of numerous defalcations. The purchase price for the BHP shares was not paid out of the "tainted" bank account. Rather, it was paid by Saxo using its own money or by way of credit arrangements between Saxo and another overseas bank, and Sonray debited Efax's ledger account with the purchase price of the BHP shares. 7 Title to the BHP shares was registered in the name of a custodian. Sonray provided Efax with a form of transfer which would have enabled the BHP shares to be transferred to Efax but the transfer was not effected before Sonray entered into voluntary administration. 8 The questions which arise in the appeal affect Efax and a large number of other Sonray clients who traded through the Saxo trading platform, as well as other clients who traded through platforms made available by another overseas service provider. This is because the Liquidators of Sonray seek a direction allowing them to pool shares purchased on the instructions of Efax class investors with the proceeds of funds attributable to all other Sonray clients which would then be distributed rateably amongst all of the clients. 9 The essential question in the appeal is whether, as the primary judge held, Efax is entitled to resist the claim for pooling on the ground that it is entitled to the BHP shares in specie. 10 This question turns, in part, upon the terms of the contract between Efax and Sonray, under which Sonray was appointed as Efax's agent, and upon the fact that the purchase price for the BHP shares was not paid out of the tainted bank account. 11 That bank account was a statutory account maintained by Sonray under ss 981A and 981B of the Corporations Act. Sonray maintained a number of such accounts which are referred to as "segregated accounts". The main segregated account kept by Sonray was the ANZ AUD Segregated Account. It had been deficient since February 2005 as a result of unauthorised dealings by Sonray. That was the account into which Efax deposited the sum of $3 million. 12 The Liquidators wish to apply the proceeds of sale of the BHP shares to meet the claims of all clients who deposited funds into the segregated accounts. Although the BHP shares were not purchased using funds from the ANZ AUD segregated account, if pooling were to occur, Efax and other creditors of the same class would in effect have their claims added back so as to be treated as part of the pool of investors.
Background 13 The relevant facts and the relevant aspects of the primary judge's reasons are set out in the reasons of Besanko J. I do not need to repeat what his Honour has said. Nor do I need to repeat his Honour's description of the grounds of appeal or his distillation of the issues. 14 However, since the first issue in the appeal raises the question of whether, in accordance with the contractual arrangements between Efax and Sonray, Efax was entitled to the BHP shares in specie, I will set out the relevant provisions of the Client Agreement.
The Client Agreement 15 The relevant provisions of the Client Agreement between Efax and Sonray are as follows:-
Issue 1 - Debtor/creditor or trustee/beneficiary 16 The first issue is, what was the relationship between Efax and Sonray. Was it a purely contractual one under which Efax's only rights were to claim as creditor for the balance of its account with Sonray. Or, was it of a fiduciary character under which Sonray held its rights to the BHP shares in trust for Efax. 17 As Besanko J points out, this issue appears to have been raised before the primary judge although all of the arguments addressed on the appeal do not seem to have been put to her Honour. 18 Indeed, the paragraph from the Liquidators' written submissions at first instance which is quoted by Besanko J was a very small part of a 30 page document. Needless to say, the footnote which his Honour has quoted had even less prominence. 19 Therefore it seems to me that the issue which was agitated on appeal was not at the forefront of the argument before the primary judge. Indeed, even on the appeal the parties did not refer to a number of the authorities which are central to this question. 20 Nevertheless, I am satisfied that the thrust of this argument was sufficiently addressed, in particular by Counsel for the Liquidators and Counsel for Efax so as to enable them to deal with it. However, it is unfortunate that the issue comes before the Court in a way that is different from the manner in which it was argued at first instance. Despite this, I do not consider that the Liquidators are precluded from raising the argument on appeal in accordance with principles stated by the High Court in authorities such as Coulton v Holcombe (1986) 162 CLR 1 at 7-8. 21 The primary judge dealt with the issue as one which was to be determined by the law of agency. She proceeded on the basis that Sonray was Efax's agent which was authorised by Efax to purchase the BHP shares. Her Honour said at [266] that only Sonray, as the agent for the purchase of the BHP shares, asserted any right to those shares in competition with Efax. 22 Her Honour went on at [270] to deal with the effect of the statutory trusts imposed on Sonray under the Corporations Act and the Corporations Regulations 2001 (Cth) (the Corporations Regulations), and the entitlement of Sonray to appropriate the consideration for the BHP shares out of the moneys received from Efax. That part of her Honour's reasons is relevant to the second issue and I will return to it later. 23 What is important for present purposes is the effect of her Honour's reasons at [272] which turn largely upon an application of the principles of the law of agency. 24 Importantly, her Honour found at [273] that, other than the step of causing the BHP shares to be registered in Efax's name, Sonray discharged all of its obligations under the Client Agreement and Efax discharged its obligations to pay for the BHP shares. 25 Her Honour rejected the Liquidators' submission that the BHP shares were held in a pool by Citicorp as custodian and that they were not identifiable to any particular Sonray client. She said at [274] that the submission: … is incorrect because Sonray purchased the BHP shares as Efax's agent, and, moreover, Sonray's business records identify that the purchase of these BHP shares by Sonray were referable only to Efax. … 26 Her Honour went on to note three other points at [275]-[277] as follows:- Sonray, as Efax's agent, has in its possession the transfer document which will enable Efax to be registered as the owner of the BHP shares; Sonray did not purchase the BHP shares in its own right but, rather, it purchased them for Efax on Efax's instructions; The contention that Efax has a mere claim as a creditor of Sonray is contrary to established principles of agency law, under which an agent, though not necessarily a trustee, is a fiduciary. 27 Her Honour then said at [278] that, in answer to the principle of agency law, the Liquidators relied on cl 4(ix) of the Client Agreement which provides that any benefit, and/or right obtained by Sonray on registration of a financial product is personal to Sonray. Her Honour rejected the Liquidators' submission as to the proper construction of the clause. She came to the view that the preferable construction is that it extends only to collateral benefits that Sonray was enjoying, such as commissions on rebates, rather than to proprietary rights. 28 I agree with the primary judge's view of the preferable construction of cl 4(ix). However, I do not consider that this provides a complete answer to the Liquidators' contention as to the nature of the relationship between Efax and Sonray. This is because, in my opinion, that question turns upon the application of principles stated in a number of authorities to the terms of the Client Agreement, considered in its entirety. 29 The relevant principles were clearly stated by White J in Re Goode; ex parte Mount (1974) 4 ALR 579 at 585-587. His Honour reiterated those principles, with one qualification (which is not relevant to this case) in Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 91 FLR 271 at 278-279. 30 In Re Goode at 585, White J accepted that while a stockbroker may, in some instances, be in a fiduciary relationship with a client, the fiduciary character of the relationship does not extend to the proceeds of every item purchased by the broker for the client. In particular, it does not extend to an item where, upon the facts of the case, it appears that the broker is not a trustee of each item, but that there is a running account, the balance of which is to be paid or recovered by the client. 31 White J stated the principle at 586 as follows:- An exception to the fiduciary relationship with its accompanying 'trust' or tracing rights exists where the client deals with the broker in a special way so as to evince an intention not to have his scrip held by his broker as fiduciary; such client rather looks for a balance of account and periodic payment of balances. Such a client is called a 'running account client' and his rights on insolvency are quite unlike those of the ordinary client. 32 His Honour went on to cite a number of authorities in support of the proposition that clients operating running accounts with a broker are mere creditors of the broker and are limited to proof of debt upon the insolvency of the broker. 33 The seminal authority, to which White J referred, is the decision of Phillimore J in King v Hutton [1899] 2 QB 555, which was affirmed on appeal by the Court of Appeal in King v Hutton [1900] 2 QB 504. 34 In that case, a client dealt with a stockbroker on an account which is described in the reports of the decision as a "speculative account". 35 The broker became insolvent and a dispute arose between his trustee in bankruptcy and a client as to who was entitled to a profit on the sale of certain stocks sold on behalf of the client. 36 The principle for which the case stands was stated by AL Smith LJ in the report of the appeal at 507. His Lordship stated that the accounts between the parties showed that the client was dealing in numerous transactions with the stockbroker and that balances were carried forward on a fortnightly basis. He said:- The meaning of this is, not that the broker was a trustee in respect of each item, but that there was a running account, the balance of which was to be paid or received by the defendant as the case might be. It is clearly a debtor and creditor account... 37 Another authority to which White J referred in Re Goode is the decision of Gibbs J in Re Hewson; ex parte Jamieson (unreported - Federal Court of Bankruptcy of NSW and ACT, No 554 of 1967). His Honour said at p 24 that as a general rule the relationship of a stockbroker and client is of a fiduciary character:- … but every dealing between broker and client is not necessarily of a fiduciary character (see e.g. King v. Hutton) and the question whether or not any fiduciary duty exists and if so its extent must depend on the intention of the parties as revealed in the contract between them. 38 The principles stated above are in accordance with those explained in some detail by all of the members of the NSW Court of Appeal (Priestley, Clarke and Meagher JJA) in Walker v Corboy (1990) 19 NSWLR 382. 39 In that case, the question which arose was whether an agent for sale was a trustee for the vendor of the proceeds of sale. Each of their Honours referred to the statement of principle of Dixon J in Palette Shoes Pty Ltd (in liq) v Krohn (1937) 58 CLR 1 at 30, that the relation of agency carries with it a duty to account so that if moneys are received in the course of the agency, the agent holds them specifically for the principal. However, their Honours were unanimous in pointing out that this is not a rule of universal application: see at 384 per Priestly JA; at 389 per Clarke JA; at 396 per Meagher JA. 40 The true rule was aptly stated by Meagher JA at 397. His Honour said that in order to determine whether the agent is a trustee it is necessary to look at the nature of the transaction, the provisions of the agreement between the parties and the whole of the circumstances attending the relationship between them. 41 All of their Honours in Walker v Corboy also referred to the test stated in the leading English authority of Henry v Hammond [1913] 2 KB 515. There Channell J said at 521 that if an agent is not bound to keep the money separate but is entitled to mix it with the agent's own funds then the agent is not a trustee of the money, but merely a debtor. 42 In the present case there are a number of provisions in the Client Agreement which suggest that in some instances the relationship between the parties was intended to be one of debtor/creditor on a running account. For example, cl 1, when read with the definition of "financial product" in cl 2 shows that the Client Agreement extended to a wide variety of trading in sophisticated financial instruments such as futures contracts, options, contracts for difference and warrants. A client who traded in these types of instruments would be likely to be one who operated on a running account whose entitlement would be that of a creditor, along the lines of the trader in King v Hutton. 43 There are a number of other clauses in the Client Agreement which might point toward such a conclusion. For example, there are acknowledgements by Efax of the speculative, high risk nature of dealing in the type of financial products which fall within the scope of the Client Agreement. As to this, see cl 3(x) and 12(b). 44 Also, cl 16(b) indicates that, on termination of the Client Agreement, Sonray had the right to close out the positions taken by Efax in exchange traded financial products so that Efax would be entitled to payment of any surplus in cash rather than in specie. 45 However, the effect of what was said by the Court of Appeal in Walker v Corboy is that the question of whether an agent holds property received in the course of the agency on trust for the client is not determined solely by the terms of the contract between the parties. Rather, it is necessary to look at other factors including the nature of the transaction and the course of trading between the parties. 46 I do not consider that the principle stated by Gibbs J in Hewson confines the enquiry to the terms of the contract. 47 The other factors discussed in Walker v Corboy are all critical to a determination of the intention of the parties which is a necessary consideration for a decision as to whether the relationship is fiduciary or, alternatively, debtor and creditor. 48 In the present case, it seems to me that the relationship is fiduciary. I therefore reach the same conclusion as the primary judge and Besanko J, although for different reasons. 49 There are a number of features of the transaction which point to the conclusion which I have reached. The first, and perhaps most critical one is the nature of the transaction itself. Clearly Sonray was an agent for Efax. That is plain from cls 3(xiv), 6(a) and 6(f) of the Cient Agreement. 50 Moreover, the transaction was one in which Sonray, as agent for Efax, purchased three large parcels of physical stock in the form of the BHP shares. The fact that Sonray employed the services of other parties with whom it was in a principal and agent relationship to execute and deliver the BHP shares does not alter the characterisation of the relationship between Sonray and Efax. 51 Although Efax traded through Sonray in derivatives following upon the deposit of moneys by Efax into the ANZ AUD segregated account in January 2010, it was the deposit of $3 million into that account by Efax in January which provided the source of funds that resulted in the purchase of the BHP shares. There was some trading on Efax's account between the time when the funds were deposited and April 2010 when the BHP shares were purchased but it is not clear whether the trading was carried out by Efax or whether it constituted unauthorised trading by Sonray. 52 In my opinion, the present case was in the nature of a one-off transaction for the purchase by Sonray as agent for Efax of a large parcel of shares in which the whole of the purchase price was paid in cash into Sonray's bank account. It is possible that the funds paid into the account in January were used to fund other transactions before the purchase of the BHP shares but the relevant transaction seems to me to be one in which the $3 million, or accretions to it from other dealings, provided the source of funds to pay for the shares. The facts in this case bear no resemblance to those in King v Hutton where the client was dealing in numerous transactions with the stockbroker who sent his client fortnightly accounts on which the differences were carried forward from statement to statement so as to constitute a running account between the parties. 53 Here, by contrast, as the primary judge found at [255], Sonray sent Efax a form of transfer which, had it been completed in time, would have permitted Efax to become registered as the legal owner of the BHP shares. 54 In addition the requirements of ss 981A and 981B of the Corporations Act and Reg 7.8.03 of the Corporations Regulations indicate that the funds which formed the basis for the purchase of the BHP shares were held by Sonray on behalf of Efax under the statutory trusts created by those provisions. These provisions are also reflected in cl 11 of the Client Agreement. It is plain as was said in Henry v Hammond that those funds were held on trust. 55 The absence of any statutory requirement for the keeping of separate accounts for the proceeds of sale was a factor to which Meagher JA pointed in Walker v Corboy at 397 as a powerful indication against the imputation of a trust. Here, the position is the reverse of that described by his Honour. 56 Notwithstanding my view that Sonray stood in a fiduciary relationship with Efax for the purchase of the BHP shares, the difficulty which arises is that the funds which Efax provided to Sonray were paid into a tainted account. For reasons set out in answer to issue 2, in my opinion it is this fact which precludes Efax from standing outside the directions for pooling sought by the Liquidators.
Issue 2 -Appropriation 57 The primary judge held at [207] to [273] that when Sonray debited Efax's ledger account with the amounts comprising the purchase price for the BHP shares this constituted a legitimate appropriation by Sonray under cl 9(b) of the Client Agreement of the consideration for those shares. By causing Saxo, and through it UBS, to purchase and complete the settlement of the BHP shares, Sonray was said to have discharged its obligation to Efax to account for the $3 million deposited in the ANZ AUD segregated account. 58 The analysis undertaken by Besanko J is to similar effect to that of the primary judge. 59 However, it seems to me that the flaw in this approach is that it fails to grapple with the way in which any right of appropriation may have been exercised. It seems to me that a proper approach to this question must take into account the fact that the appropriation had its source in moneys that were originally paid into the tainted ANZ AUD segregated account. 60 In my opinion it follows that the proper approach to this question is that the rules relating to deficient mixed trust funds discussed by Campbell J in Sutherland Re; French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 at [61]-[64] and [127] and McLure J in Re Global Finance Group Pty Ltd (in liq); Ex Parte Read (2002) 26 WAR 385 at [189]-[194] must be applied. The effect of these rules in the present case is to attract the requirement for pooling of the BHP shares, or their proceeds, in accordance with the directions sought by the Liquidators. 61 In coming to this view I have taken into account the steps involved in the payment of the purchase price for the BHP shares, the terms of cl 9(b) of the Client Agreement and the principles stated in the authorities mentioned above. 62 The starting point for determining the proper application of the principles is that, in my view, Efax's rights stem from the payments it made into the ANZ AUD segregated account. Two payments were made, the first of $176,000 on 18 January 2010 and the second of $3 million on 25 January 2010. 63 Those payments were therefore comprised of moneys which were impressed with the statutory trusts arising under s 981B of the Corporations Act. But at the time when the moneys were paid into the ANZ AUD segregated account there had been a large number of defalcations consisting of unauthorised dealings made by Sonray dating back to 2005. 64 It is true, as Senior Counsel for Efax emphasised, that the moneys paid into the segregated account were not used to pay for the BHP shares. But I do not consider that this enables Efax to stand outside the insolvent administration of Sonray. This is because the source of payment for the BHP shares must have come from the deposit of moneys into the statutory account or from dealings with those moneys between January 2010 when the deposits were made and April 2010 when the BHP shares were purchased. 65 The actual payment for the BHP shares is said to have been made by way of a book entry, that is to say, by Sonray debiting Efax's ledger account with payment of the purchase price for the BHP shares. I accept that, so long as payment by way of book entry is made in accordance with the agreement of the parties, payment may be made in that way: Manzi v Smith (1975) 132 CLR 671 at 674; Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358 at [26]. 66 I also accept that the appropriation of those funds was authorised by cl 9(b) of the Client Agreement. It was an appropriation of moneys "received by Sonray and held by Sonray on the Client's behalf" and it was made in payment of the amounts outstanding for the purchase of the BHP shares which were transactions effected by Sonray on Efax's behalf. 67 But a payment by way of a book entry can rise no higher than the facts which lie behind the entry which appears in the relevant books and records. Here, the Efax ledger account which was debited consisted of book entries made by Sonray which represented (or which purported to represent) Sonray's dealings on behalf of Efax with the funds which were deposited by Efax into the segregated account. 68 The money paid by Efax into the segregated account ceased to exist in its original form as soon as Sonray dealt with it. It would therefore seem to follow that the money ceased to be subject to the original statutory trust with which it was impressed: Re Goode at 585-586. The question of whether Efax may then have had an equitable right to trace the funds into the hands of Sonray as trustee does not arise because the claim in the present case was not argued on that basis. 69 Fundamental to Efax's submissions was the proposition that payment was not made from the segregated account and that Efax settled with Sonray for the purchase by relinquishing its rights to have Sonray account for the funds which it deposited. But this seems to me to ignore the fundamental proposition that Sonray was a defaulting trustee. Once this is accepted, the rules discussed by Campbell J and McLure J in the authorities mentioned above must apply: see Re Lehman Brothers International (Europe) (In Administration) [2010] EWCA Civ 917 at [67]-[72]. 70 In the present case, Sonray has purported by reason of book entries recording payment, and the delivery of a transfer form which would permit registration of the BHP shares, to allocate those shares to Efax. But as the careful analysis of the authorities recorded by McLure J in Re Global Finance at [189]-[194] demonstrates, a court is not invariably bound by a defaulting trustee's intentional allocation of losses to specific beneficiaries. Yet this would be the result of the position adopted by Efax because it would enable Efax to stand outside the insolvency of Sonray thereby preferring its position to those investors whose investments were purchased using funds directly drawn from the tainted account. 71 In Re Global Finance at [194] McLure J was prepared to accept such an allocation because she found the trust ledger records to be reliable and to provide an accurate factual foundation for moulding an appropriate solution to competing proprietary claims. 72 That is not the position in the present case. All that is known is that Sonray debited Efax's ledger account. But nothing more is known about how payment was effected. In my view, there is no escape from the proposition that what lay behind the book entry, and what supports it, was the initial deposit of funds and the dealing with those funds by a defaulting trustee. I do not see how, consistently with the principles discussed in Re Global Finance, Sonray as a defaulting trustee should be permitted to cause detriment to some investors and benefit others merely because the payments did not come directly from the tainted ANZ AUD segregated account.
Conclusion 73 It follows in my opinion that the appeal should be allowed and the directions for pooling sought by the Liquidators should be made. Since I accept the Liquidators' argument in the appeal, it is unnecessary for me to consider the appeal brought by Eagle Securities Ltd. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.
Associate: Dated: 5 October 2012 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 160 of 2012
BETWEEN: GEORGE GEORGES (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
JOHN ROSS LINDHOLM (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993
AND: SEABORN INTERNATIONAL PTY LTD (AS TRUSTEE FOR THE SEABORN FAMILY TRUST)
MARYLAND PTY LTD ACN 150 886 427 (AS TRUSTEE FOR THE NORWEGIAN TRUST)
ROLAND MARK WARD ABN 66 473 078 418 (AS TRUSTEE FOR THE AWARD SUPERANNUATION FUND)
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 250 of 2012
GEORGE GEORGES (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
JOHN ROSS LINDHOLM (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993
JUDGES: JACOBSON, BESANKO and JAGOT JJ DATE: 5 OCTOBER 2012 PLACE: ADELAIDE (heard in MELBOURNE)
Introduction 74 There are two appeals before the Court. In the case of both appeals a judge of this Court has granted the appellants leave to appeal. 75 In the first appeal (VID 160 of 2012), Mr George Georges and Mr John Ross Lindholm in their respective capacities as joint and several liquidators of Sonray Capital Markets Pty Ltd (in liquidation) ACN 104 482 993 and Sonray Capital Markets Pty Ltd ACN 104 482 993 ("Sonray") appeal against orders made by a judge of this Court ("primary judge") on 10 February 2012. The respondents to the appeal are six companies who were parties to the application which was determined by the primary judge and led to the making of the orders. For reasons which will become clear, only the sixth respondent, Efax Pty Ltd ("Efax"), appeared on the hearing of the appeal. Leave to appeal was granted on 26 March 2012. Although Sonray is also an appellant, it is convenient to refer to this appeal as the liquidators' appeal. 76 In the second appeal (VID 250 of 2012) Eagle Securities Limited ("Eagle Securities") appeals against the same orders which are the subject of the first appeal. The respondents to the appeal are Efax and the appellants in the first appeal. As with the first appeal, leave to appeal was granted on 26 March 2012. Eagle Securities did not appear before the primary judge even though the Court was told it had notice of the application. 77 Mr Georges and Mr Lindholm were appointed administrators of Sonray on 22 June 2010 and they were appointed liquidators of the company on 27 October 2010. 78 The liquidators brought an application for directions in relation to a number of matters under s 511 of the Corporations Act 2001 (Cth) ("Corporations Act") and s 63 of the Trustee Act 1958 (Vic). The application was heard and determined by the primary judge who delivered detailed reasons for the orders which she made on 10 February 2012: Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) [2012] FCA 75. The primary judge issued a corrigendum on 9 May 2012 and that led to certain alterations to the orders made on 10 February 2012, but those alterations are not relevant to the two appeals before this Court. 79 The two appeals relate to only one aspect of the primary judge's reasons and orders and that is her Honour's conclusion that, in relation to Efax, Sonray held certain shares not in its own right but as agent for Efax. It was accepted that there were other clients of Sonray who were in a similar position to Efax and that her Honour's conclusion would also apply to those clients. 80 In the liquidators' appeal, the leave granted is in the following terms: The applicants be granted leave to appeal from the directions of the Court on 10 February 2012 in proceeding VID 562 of 2010 insofar as they relate to Part E6 paragraphs 249 - 285 of the Reasons for Judgment in respect of Efax Pty Ltd and like Sonray Client accounts. 81 The judge who determined the application for leave also made orders concerning the reasonableness of the liquidators' conduct in appealing and the respective rights of the liquidators and Efax to be indemnified in relation to the application for leave and the appeal. 82 In the appeal by Eagle Securities, leave to appeal was granted in similar terms. Eagle's application to be appointed as a party in a representative capacity was dismissed. In the order granting leave to appeal there was a note that the applicant's submissions in the appeal were to be restricted to: (i) those matters not dealt with by the liquidators, and (ii) the contention that Sonray Clients (including the applicant and Efax) who paid monies into Tainted Segregated Accounts have a beneficial interest which may be traced or followed into the BHP shares. 83 In their appeal, the liquidators raise four grounds of appeal as follows: 1. The learned primary judge erred in characterising the application of Sonray Capital Markets Pty Ltd (in Liquidation) (Sonray) for a direction in relation to the 78,824 shares in BHP Billiton Pty Ltd (BHP Shares) claimed by Efax Pty Ltd (Efax) as a claim by Sonray to a beneficial interest in or right to those shares in its own right and not on behalf of the pool of investors: [266], [276], [285]. 2. The learned primary judge erred in treating differently the purchase of shares by clients using the Interactive Brokers trading platform and clients using the Saxo trading platform where: (a) funds equal to the purchase price of the shares were transferred from the deficient segregated account (IB); and (b) no funds appropriated to or earmarked for the purchase price of the shares were transferred from the deficient segregated account (Saxo); but in both cases Sonray made an appropriation equal to the purchase price in the client's ledger: [111], [268], [269], [270], [271], [272], [278], [284]. 3. The learned primary judge erred by failing to take into account trading by Efax on its account in the period between the deposits of funds by Efax into the ANZ AUD Segregated Account in January 2012 and Efax's placement of the orders to purchase the BHP Shares in April 2012 and the defalcations in connection with the ANZ AUD Segregated Account during the same period: [252], [253], [254]. 4. The learned primary judge erred in concluding that the beneficial ownership of the BHP Shares was solely determined by the law of agency: [284]; 84 There was a fifth ground of appeal, but that was abandoned. Although none of the four grounds were abandoned at the hearing, the liquidators' arguments on the appeal were refined in the manner indicated later in these reasons. 85 In its appeal Eagle Securities raises three grounds of appeal as follows: 1. The learned judge erred in failing to consider the argument put by the liquidators of Sonray that the Sonray clients who had paid money into the Segregated Accounts are the beneficial owners of the BHP Shares: [249]-[285] 2. The learned trial judge ought to have held that the moneys belonging to Sonray clients, which were standing in the Segregated Accounts, could be traced or followed into the BHP Shares. 3. The learned trial judge should have held that Efax, being a volunteer, has no interest (apart from any interest it has as a Sonray Client who paid money into Tainted Segregated Accounts) in the BHP Shares, or alternatively no interest in the BHP Shares which can take priority over the Sonray Clients who paid money into Tainted Segregated Accounts.
The operations of Sonray 86 There was no challenge to her Honour's findings as to the primary facts. 87 From 4 May 2005, Sonray was the holder of Australian Financial Services Licence Number 231151. Before Sonray went into administration on 22 June 2010 it provided financial product advice and services to its clients about trading in financial products, and it provided access to trading platforms to enable clients to trade in financial products. Before entering into commercial relations with Sonray, clients were required to sign a client application form entitled "Client Agreement and Disclosure Document" containing a set of terms and conditions, although the primary judge found that the requirement for the form to be signed was not always observed. From time to time, Sonray revised the terms and conditions of the form and ultimately there were 29 different versions. 88 Sonray offered its clients access to trading platforms made available by third parties through which clients could trade on global markets in a wide range of financial products, from derivatives through to shares. Sonray was not itself a market participant and was not able to execute trades on any market including the Australian Stock Exchange. The two major providers of trading and execution services were the Saxo Bank A/S ("Saxo") and Interactive Brokers LLC ("Interactive Brokers"). Clients of Sonray deposited money with Sonray and that money was held in accounts and was subject to a statutory trust in the case of each deposit by reason of the provisions of the Corporations Act. 89 Section 981A of the Corporations Act appears in Division 2 ("Dealing with clients' money") Subdivision A ("Money other than loans") of the Act. The section defines the money paid to a financial services licensee to which the Subdivision applies. Section 981B provides that the money to which the Subdivision applies is to be paid into an account which satisfies the requirements identified in the section. 90 Sonray had a number of accounts which were accounts within the meaning of s 981B of the Corporations Act. They were referred to by the primary judge as "Segregated Accounts". Clients of Sonray deposited funds into one or more of these Segregated Accounts where the funds were comingled with the funds of other clients. The Segregated Accounts were used by Sonray to receive deposits from Sonray clients in respect of margin calls and proposed trades, and to return funds to Sonray clients upon receipt of a withdrawal request. 91 In her reasons, the primary judge listed 18 Segregated Accounts maintained by Sonray and the balance in each of these accounts as at 3 July 2011. Sonray maintained eight accounts with the Australia and New Zealand Banking Group Limited ("ANZ Bank"). Three of these accounts - ANZ AUD Segregated Account, ANZ USD Segregated Account and ANZ Euro Segregated Account - were deficient in that there were insufficient funds in the accounts to meet all the entitlements of Sonray's clients as represented by their account balances on the Trading Platforms. 92 The main segregated account was the ANZ AUD Segregated Account. The primary judge made a number of findings concerning this account. The account had been deficient since February 2005. As at the date Sonray went into administration (that is, 22 June 2010), no Sonray client held shares that were purchased, or transferred in, prior to 16 February 2005. Between 17 March 2009 and 22 June 2010, there were unauthorised withdrawals from the ANZ AUD Segregated Account. The primary judge found, however, that there was no transfer from the ANZ AUD Segregated Account to Saxo of an amount appropriated to a Sonray client's account on a Trading Platform. Sonray did, from time to time, transfer money to Saxo solely in response to margin calls calculated on the global position of Sonray's Omnibus Account. That account is described below (at [100]). 93 The primary judge found that as a result of deficiencies, transactions between Segregated Accounts and other transactions, the funds in the three deficient Segregated Accounts referred to above (at [91]) and at least three other accounts - two HSBC AUD Segregated Accounts and a Macquarie Cash Management Account - (collectively referred to as "Tainted Segregated Accounts") had been so thoroughly mixed that it was now practically impossible to ascertain entitlements to each of the Segregated Accounts. The primary judge found that the Macquarie Cash Management Account was a Tainted Segregated Account because funds were transferred to it from the ANZ AUD Segregated Account. 94 In addition to Saxo and Interactive Brokers, Sonray had a contractual relationship with three other providers, being MF Global Australia Limited, Macquarie Equities Limited and Forex Capital Markets LLC. In the case of each of the five providers, Sonray entered into an arrangement with the provider to provide execution, clearance and settlement services to Sonray and a consolidated holding or "omnibus" trading account was established. Funds held in those consolidated or omnibus accounts were used by the providers to execute, clear and settle transactions for Sonray clients. Sonray would transfer funds from one of its segregated accounts to the consolidated or omnibus account of one of the providers as required to fund client trading or to meet client margin calls. Further details of the arrangements between Sonray on the one hand, and each of Saxo and Interactive Brokers on the other, are set out below. 95 The primary judge said that there were approximately 4,000 investors in Sonray who were affected by the application before her. Those investors, or as the primary judge referred to them, Sonray clients, were those persons who carried out transactions on the SonrayTrader (or, the Saxo Platform - an internet-based trading system owned by Saxo), Sonray Global (or the IB Platform - an internet based trading system owned by Interactive Brokers) and/or WebTrader (an internet based trading system owned by Sonray). Her Honour found that the trust fund and assets, save for distinguishable property, had been from the outset mixed and the subject of thousands of authorised deposits, withdrawals, transfers and other dealings. The trust fund and assets had also been the subject of substantial unauthorised withdrawals, dealings and trading, leading to losses in the order of $45.6 million. Her Honour found that Sonray's records were incomplete. 96 The primary judge made orders joining seven parties as contradictors to the application for directions by the liquidators. These parties represented Sonray clients who asserted an entitlement to trace or claim directly against a particular fund or asset which they contended should not be included in any pool of assets.
Sonray's relationship with providers 97 Sonray's contractual relationship with Saxo was contained in three agreements as follows: (1) The White Label Trading System Agreement dated 23 December 2003 as amended by 13 addenda and amendments (the White Label Agreement); (2) The Margin Trading Agreement with Institutional Client dated 23 December 2003 (the Margin Trading Agreement); and (3) The ISDA Master Agreement and Schedule to the ISDA Master Agreement both dated 23 December 2003 (the ISDA Master Agreement). 98 Under the White Label Agreement, Saxo agreed to provide what became known as the SonrayTrader. Under the Margin Trading Agreement, Saxo agreed to grant Sonray margin trading facilities including futures transactions, options transactions, contracts for difference transactions, spot and outright forward foreign exchange transactions and over the counter foreign exchange options. 99 The ISDA Master Agreement governed individual transactions between Saxo and Sonray. Under the Agreement the parties acknowledged that they had entered and/or anticipated entering into one or more transactions that would be governed by the agreement. Clause 1(c) of the ISDA Master Agreement provided that all transactions entered into in reliance on it formed a single agreement between Sonray and Saxo and that the parties would not otherwise enter into any transactions. 100 Rather than require Sonray to transfer funds to Saxo on a trade-by-trade basis, Saxo required Sonray to maintain a balance in an account known as an omnibus account which was sufficient to satisfy the overall requirement for coverage of Sonray's open margin positions ("Omnibus Account"). The Omnibus Account was tracked on a real time basis and included: (1) Sonray's overall cash balance with Saxo including the balance in various bank accounts held by Saxo (the Saxo ANZ Sonray account and the Saxo Float Account, among others); (2) Any unrealized profit and loss; and (3) The value of interests in equities, bonds and other financial assets held by Saxo in respect of Sonray. 101 From time to time, Saxo would make a margin call on Sonray. That would occur when the aggregate value in the Omnibus Account fell below a certain preset percentage of Sonray's total exposure to Saxo. To bring itself back within the margin, Sonray would reduce its exposure to Saxo in relation to open derivative positions and, further, or alternatively, increase the value of assets in the Omnibus Account. 102 The arrangement between Saxo and Sonray and the former's accounting system were such that Sonray could establish and maintain subaccounts with Saxo on its accounting systems and it could record deposits and withdrawals with respect to individual Sonray clients into the subaccounts maintained on the Saxo accounting systems. Those subaccounts could be used by Sonray to report to its clients. 103 From 22 January 2007 to March 2009, there was a netting arrangement between Sonray and Saxo so that total amounts at the end of each day were netted off to determine if Saxo had to provide funds to Sonray, or if Sonray had to provide funds to Saxo. From March 2009, the netting arrangement and the daily flow of funds between Saxo and Sonray ceased. From that month, cash flows between Sonray and Saxo were irregular and generally represented monies being sent to Saxo by Sonray in response to, or in anticipation of, margin calls on Sonray by Saxo. Funds which flowed the other way, that is, from Saxo to Sonray were the payment of commissions. 104 As at 29 June 2010, Saxo held shares in the name of a custodian to the value of USD16,135,896. As at 30 August 2011, the value of the shares was AUD18,433,805. The shares were lodged (it seems) as margin cover for the total amount owed by Sonray to Saxo from time to time. 105 Saxo used UBS AG, London Branch to purchase shares to fulfil the orders placed by Sonray. Saxo maintained a separate account with UBS for Sonray, other Australian clients of Saxo and non-Australian clients of Saxo trading in Australian financial products. The account was an Omnibus Account and there were subaccounts for each of Saxo's White Label clients. Saxo had nine White Label clients including Sonray. The purpose of the subaccounts was to record trades relating to the specific Australian White Label clients, but the subaccounts were not funded separately. All funding by Saxo took place "at the UBS Omnibus Account level" to use the words of the primary judge. 106 Saxo monitored the UBS Omnibus account and funds were paid in or withdrawn depending on whether there were insufficient funds or excess liquidity. 107 The primary judge found that at any given time the UBS Omnibus Account could have contained funds: 1. transferred from any of the bank accounts Saxo maintained in respect of its Australian White Label Clients; 2. originating from proceeds of sale of shares or instruments at the direction of any of the Saxo's Australian White Label Clients; 3. originating from proceeds of sale of Australian financial products by Saxo's non-Australian clients; 4. transferred from other UBS accounts maintained by Saxo; and 5. transferred from any of Saxo's 400 plus bank accounts with other banks. 108 Funds from one or more of the above sources could be and were used for trading to purchase new shares and products. Trading by Saxo's Australian White Label clients, whilst recorded on the relevant subaccount, would only be recorded on the UBS Omnibus Account when the trades could not be reconciled to a single subaccount. 109 I turn now to the primary judge's findings with respect to the contractual relationship between Sonray and its other major provider, Interactive Brokers. 110 Sonray and Interactive Brokers executed an agreement entitled "Interactive Brokers Consolidated Account Clearing Agreement" on 6 February 2006. The Agreement provided in clause 3 that Sonray was to introduce its clients to Interactive Brokers on an undisclosed basis, the Consolidated Account held with Interactive Brokers was to be in Sonray's name and that all transactions be effected through the Consolidated Account. Clause 13B(2) of the Agreement dealt with subaccounts, clause 13F(8) dealt with Interactive Broker's entitlement to liquidate any account and clause 19B required Sonray to indemnify Interactive Brokers for, inter alia, all costs and expenses in connection with "the care of the collateral". 111 Interactive Brokers maintained two Master Trading Accounts in the name of Sonray and they were referred to by the primary judge as the Sonray General I-Account and the Sonray CK Locke I-Account (together the Sonray Interactive Brokers Master Accounts). These Master Accounts were each linked with client specific subaccounts which were recorded in the names of Sonray clients and allocated account numbers using a format which was referred to by the primary judge as U-Accounts. This account structure was referred to by Interactive Brokers as a "non-disclosed broker" account. From Interactive Broker's point of view, such accounts had the following features: (1) Sonray brokers provided their clients with customer service, marketing, a registration process and cashiering functions; (2) Clients of Sonray brokers could electronically trade or the broker could input trades for the clients; and (3) Sonray brokers configured client accounts based on information provided during the application process. 112 The primary judge described the process whereby funds were placed in the ANZ AUD Segregated Account and then moved to Interactive Broker's bank account and the recording of this process: Interactive Brokers permitted Sonray's Cash Management Staff to log onto its website and record deposits and withdrawals with respect to client specific subaccounts. Each morning Sonray's Cash Management Staff conducted the Deposit Identification Process. Deposits by Sonray Clients to the ANZ AUD Segregated Account referenced with "U99999" related to Interactive Brokers (IB Deposits). IB Deposits identified by Sonray staff were entered into the "Interactive Brokers Transfers" section of the "Internal Saxo Transfer Spreadsheet". The IB Deposits were then transferred by electronic funds transfer from the ANZ AUD Segregated Account to an Interactive Broker's bank account, which was then allocated to either the Sonray General I-Account or the Sonray CK Locke I-Account. Transfers of funds could be effected by a bulk transfer of all IB Deposits for a given day or by separate transfers of each IB Deposit. 113 The primary judge also described the flow of funds the other way, that is to say, from Interactive Brokers to a Sonray client. It is not necessary for me to set out the details. 114 The primary judge found that the Interactive Broker client accounts have been in "closing only" mode since the date of the liquidators' appointment. Her Honour found that as at 5 July 2011, there was approximately $11.1 million held by Interactive Brokers in Sonray's Consolidated Account which sum included money recorded in individual subaccounts. 115 The difference between Sonray's arrangements with Interactive Brokers and Sonray's arrangements with Saxo was that a client of Sonray could not trade on an IB platform before money was transferred from a segregated account to Interactive Brokers whereas with Saxo that was not the case and Sonray and Saxo maintained in effect a running account. 116 There is no need to address Sonray's arrangements with the other three providers.
Defalcations 117 The primary judge found that between 16 February 2005 and 22 June 2010 there were at least 1049 unauthorised dealings and other breaches of trust by officers of Sonray which, directly or indirectly, affected the funds held in the ANZ AUD Segregated Account. The defalcations included the following: (1) Unfunded commissions being monies paid from the ANZ AUD Segregated Account to Sonray's general account and noted as commission. In some instances there were no corresponding deposits of commission into the ANZ AUD Segregated Account; (2) Over 300 net unfunded transactions accounting for approximately $35.6 million of the $45.6 million deficiency in the ANZ AUD Segregated Account; (3) Unfunded rebates paid to clients totalling approximately $1.5 million; (4) Margin manipulation by the chief executive officer of Sonray involving entering into trades on behalf of Sonray for the sole purpose of avoiding or responding to margin calls made by Saxo on the Omnibus account; and (5) Sonray diverting client funds of near $2 million into Sonray's general business account rather than a segregated account.
The Primary Judge's Reasons 118 The primary judge referred to the requirements in s 981A - H inclusive of the Corporations Act, including the trust which arises by reason of s 981H, and to the Corporations Regulations 2001 (Cth) ("Corporations Regulations") which make provision for how money in a segregated account is to be paid if a licensee ceases to be licensed or becomes insolvent (reg 7.8.03 (1)-(7)). Her Honour referred to the fact that the words "entitled" and "entitlement" in reg 7.8.03 are not defined in the Act or Regulations. Her Honour decided that, given the trust which arises by reason of s 981H of the Corporations Act, the words imported the principles applicable to trusts and, in particular, to deficient mixed trust accounts. Those principles provide that all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions, subject to any dealing and costs, or they are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds, and subject to such deductions. The primary judge referred to Sutherland Re; French Caledonia Travel Services Pty Ltd (in liq) (2003) 59 NSWLR 361 and Australian Securities and Investments Commission v Letten (No 7) (2010) 80 ACSR 401. Her Honour then noted that the Corporations Act and Corporations Regulations do not deal with the situation where it is not possible to work out precisely who is entitled to what monies in particular segregated accounts. It was common ground before the primary judge that in such circumstances all the Court could do was to permit the monies in the segregated accounts to be pooled with a view to their proportionate distribution. The basis for rateable distribution was the mixing of the funds (Sutherland Re; French Caledonia Travel Services Pty Ltd (in liq) at 400-401 [127] and 420-421 [187]). Her Honour noted that rateable distribution was subject to an important qualification, that being that it was not appropriate where the claimants did not have equal claims. 119 The primary judge then addressed the directions sought by the liquidators, and, in particular, directions as to pooling and the basis upon which a Sonray client's entitlement to be paid money from the Segregated Accounts was to be determined. 120 It was common ground before the primary judge that where shares or other financial instruments were purchased with money from a Tainted Segregated Account (see [93] above) or otherwise connected to a Tainted Transaction those shares or financial instruments must be sold and their proceeds pooled and that that included, subject to the claims of the contradictors, the Saxo shares. Furthermore, her Honour held that assets held by Interactive Brokers on behalf of Sonray clients which were funded (either wholly or partly) by money which passed through a Tainted Segregated Account, or was otherwise connected to a Tainted Transaction, should be pooled. 121 The primary judge then dealt with the claims of the various parties who had been joined as contradictors: Seaborn International Pty Ltd as trustee for the Seaborn Family Trust. Maryland Pty Ltd as Trustee for the Norwegian Trust Bon River Pty Ltd and Alisante Pty Ltd Ward as Trustee for the Award Superannuation Fund Efax Pty Ltd and like Sonray Client Accounts Travel Arcade Pty Ltd and Robert Joseph Seaborn 122 As I have said, the two appeals relate to the primary judge's reasoning in relation to Efax Pty Ltd ("Efax") and like Sonray Client Accounts. It is to that reasoning that I now turn. 123 Efax is the trustee of the Paul Leonard Scharrer Family Trust. On 5 June 2009, the company applied to open a trading account with Sonray. On 31 August 2009 it applied to open an account with E*Trade sponsored by Sonray as Efax's nominated financial adviser. In its application form Efax acknowledged or declared as follows: I/We authorise Sonray Capital Markets Pty Ltd to give effect to my instructions regarding execution and settlement of my/our securities transactions. I will be bound by all such instructions. 124 On or about 7 September 2009, Efax executed a "Sonray Client Agreement and Disclosure Document" which was said to be "version 10". I will call this agreement the Client Agreement. The primary judge found that, by the Client Agreement, Efax appointed Sonray as its agent. The following provisions of the Client Agreement were identified by the primary judge as being relevant to the issues before her: 1. PURPOSE The Client wishes Sonray to deal in exchange-traded and over-the-counter financial products on their behalf in accordance with the Client's instructions from time to time, and in accordance with the terms and conditions contained in this Agreement. 2. Interpretation … "agent" means a legal entity undertaking a transaction or function on behalf of another legal entity but in its own name; … 3. client representations and warranties … (xiv) In executing this Agreement, the Client will appoint Sonray as its agent for the purpose of dealing in financial products in accordance with the terms of this Agreement; 4. Client acknowledgements … (i) Sonray will deal or instruct third parties to deal on behalf of the Client, in the financial products; (ii) Sonray will utilise the execution and settlement services of appropriately licensed third parties on behalf of the Client in order to provide the services detailed in this Agreement; … (ix) any benefit or right obtained by Sonray upon registration of an exchange traded or over-the-counter financial products with a clearing house is personal to Sonray and such benefit or right shall not pass to the Client; 6. Authorisations and instructions (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; and (g) The Client will execute or otherwise authorises Sonray to execute all such agreements as required to enable the provision of the services contemplated in this Agreement. The Client appoints Sonray as the Client's attorney to do all things necessary to enter into such agreements on the Client's behalf. 11. Segregated accounts (i) All money and property deposited by the Client with Sonray, or received by Sonray on behalf of the Client, shall be segregated by Sonray and invested in accordance with applicable legal and regulatory requirements; … (iii) Whilst the Client's money and property is segregated from Sonray's money and property, it may be co-mingled with the money and property of other Sonray clients. 125 Sonray allocated the account number "SXHOO1855" to Efax and sometimes the account number carried the prefix "80700". 126 On 18 January 2010, the sum of $176,000 was transferred by Efax to the ANZ AUD Segregated Account and, on 25 January 2010, the sum of $3 million was transferred by Efax to that account. Letters from the ANZ Bank record the agent number as "3352293". The primary judge found, and it is not in dispute, that no deposits of those specific amounts were made by Sonray to the Saxo ANZ Sonray Account or the Saxo Float Account in the following months. 127 On the following dates, Efax placed orders with Sonray to buy a total of 78,824 shares in BHP Billiton Ltd: 16 April 2010 - 23,041 BHP shares; 22 April 2010 - 23,724 BHP shares; 28 April 2010 - 32,059 BHP shares. ("BHP Shares") 128 Each purchase was carried out in the same way and the primary judge described the purchase of BHP shares on 16 April 2010 by way of example. First, on 16 April 2010 Efax instructed Sonray to purchase 23,041 BHP shares. Sonray's activity log recorded the fact that on 15 April 2010 at 00:42:57 (GMT), an order was placed to buy 23,041 BHP shares in relation to "account 80700/SXHOO1855". Secondly, Saxo's records indicate that the order was placed with Saxo Bank A/S and lists account number "80700/SXH001855" and the "Counterpart ID" as "3352293". Thirdly, Saxo placed an order with UBS, and the order was settled on 21 April 2010. The statement did not refer to Efax. Fourthly, UBS then executed the order through UBS Securities Australia Limited ("UBS Securities"). 129 The primary judge said that if a Sonray client such as Efax used SonrayTrader to give instructions to acquire shares in a company listed on the Australian Stock Exchange, Saxo would not inquire as to the identity of that Sonray client and the instructions would be automatically routed to UBS Securities and UBS Securities would acquire the shares. The shares would be recorded in the UBS Omnibus Account and the particular subaccount of Saxo's White Label Account, in this case, Sonray. Finally, after the settlement of the order on 21 April 2010, Citicorp Nominees Pty Limited ("Citicorp Nominees") received from UBS settlement instructions in relation to the shares. The instructions did not refer to Efax. Sonray debited Efax's account with it in the sum of $1,000,357.10 and recorded the purchase of 23,041 BHP shares. 130 Sonray sent Efax a form entitled "Transfer of CHESS Sponsored Holdings - Out" ("Transfer Form"). The Transfer Form allowed a purchaser of shares to nominate the party in whose names the shares were to be registered. The form was signed on behalf of Efax and it stated that Efax required the BHP shares held in the custodial account identified below to be transferred to a Holder Identification Number in the name of Efax. "Citicorp Melbourne A/C UBS AG London Branch A/C IPB Segregated Client A/C Swift: CITIAU3X UBS Securities Custodial A/c No 2081220000 Further Credit: I00003202 (Designated Sonray A/c) PID: 20018 131 The transfer form was signed by Efax and sent to Sonray. Sonray received the form after it had been placed in administration. 132 The BHP shares are registered in the name of Citicorp and, in its holding record, it is shown as holding on behalf of UBS which is the broker having sent the instructions to purchase and to help to put them on its CHESS number (that is, Citicorp Nominees' Holder Identification Number or HIN) on behalf of UBS. 133 As at 22 June 2010, Efax's account summary on SonrayTrader indicated a cash balance of AUD41,039.62 and 78,824 BHP shares to the value of AUD3,167,199.45. The primary judge said that until recently, Citicorp still held the 23,041 BHP shares in CHESS account HIN 0000607339 on behalf of UBS. 134 The above findings are the primary judge's findings as to the orders which were effected. Her Honour also made findings about the funding of the various orders. First, her Honour found that Sonray did not pay any funds to Saxo between 3 March 2010 and 14 May 2010 and that the only transfer of funds between Saxo and Sonray in April 2010 was the payment by Saxo on 8 April 2010 of commission to Sonray of AUD774,969.57. Secondly, the funds used to purchase the BHP shares came from the UBS Omnibus Account. Saxo never deposited money in the UBS Omnibus account or any other account for the specific purpose of purchasing the BHP shares. For the period from 16 to 29 April 2010, the only AUD transactions recorded were a deposit of AUD 600,000 on 16 April 2010 from ANZ and a deposit of AUD100,000 from Saxo's CFD trading account with UBS. 135 BHP has paid dividends on the BHP shares and Efax, as purchaser, claims an entitlement to those dividends. 136 The primary judge said that there were 766 similar Sonray client accounts with account balances comprising shares held by Saxo with a value as at 22 June 2010 of $20,482,168.55. 137 The primary judge held that by reason of the express terms of the Client Agreement, Sonray was authorised and did act as Efax's agent in purchasing the BHP shares. Her Honour referred to NMFM Property Pty Ltd (No 10) v Citibank Ltd (2000) 107 FCR 270 at 386-387 per Lindgren J. 138 The primary judge held that Saxo knew that Sonray acted as an agent. Her Honour was prepared to assume that Saxo, although knowing of a principal, did not know the identity of the principal. 139 The primary judge said that the only party which asserted title to the BHP shares in competition with Efax was Sonray and that Sonray had no claim to the shares because at all times it was acting as Efax's agent. 140 Her Honour analysed the relationship between Sonray and Saxo. She said that Saxo at all times knew Sonray was acting for a principal, albeit unidentified. Sonray as Efax's agent engaged Saxo, a third party, to undertake certain tasks. Saxo made the purchase using its own monies or that of UBS and "on credit" at the instance of Sonray. There was no suggestion that Sonray was indebted to Saxo in relation to the BHP shares. 141 The primary judge then considered the financial relationship between Efax and Sonray. As to the two amounts Efax paid to Sonray in January 2010, her Honour held that those monies were subject to the statutory trusts imposed by s 981H of the Corporations Act and a common law obligation as agent to repay the monies upon request. Upon placing the orders for the BHP shares, Efax became obliged to pay Sonray or its agent the cost of the shares and any necessary commission or other incidentals. Under clause 9(b) of the Client Agreement, Sonray became entitled to appropriate the consideration for the BHP shares from the monies it received from Efax. That clause was in the following terms: 9. Commissions Fees and Expenses b) The Client authorises Sonray to appropriate, transfer, credit, apply or pay monies that may be received by Sonray or held by Sonray on the Client's behalf in payment of any amounts which may be outstanding by the Client to Sonray or Sonray's agent in a transaction effected on the client's behalf. 142 The primary judge held that each time Sonray debited Efax's account, there was a legitimate appropriation by Sonray of the consideration for each of the orders for the purchase of the BHP Shares. 143 The primary judge found that the only step to complete the instructions that was not completed was to cause the BHP Shares to be registered in Efax's name "by remitting the directions form at the request of Efax". 144 In addition to the above, the primary judge reached the following conclusions. First, Efax's agent, Sonray, had in its possession the document which would enable Efax to be registered as the owner of the BHP shares and it should comply with Efax's instructions and effect the registration. Secondly, the suggestion that Sonray was entitled to the shares was factually and legally incorrect, factually because Sonray did not purchase the shares in its own right, and legally, because any attempt to have done so would have contravened the prohibition in s 991B of the Corporations Act. That section draws a distinction between a financial services licensee entering into a transaction on the instruction of a person (that is, a client) and entering into a transaction on [its] own behalf. Thirdly, Sonray, as agent, could never have better title to the BHP Shares than Efax. Where legal title remains with the vendor, the equitable title is in the principal not the agent, and even where title had passed to the agent, he held the property as trustee for the principal. The primary judge rejected any suggestion that clause 4(ix) of the Client Agreement altered this well-established principle and she said that the preferable construction of this clause was that "it is dealing with any collateral benefits that Sonray may enjoy, such as commissions or rebates'. 145 With respect to a submission by the liquidators that Efax had not obtained legal title to the shares, the primary judge held that UBS Securities obtained legal title for its principal (Saxo) by force of s 1070A of the Corporations Act and the ASX Operating Rules. Her Honour said: It did so by settlement as agent of, or on behalf of Saxo, who was agent of Sonray who, in turn, was agent of Efax. 146 The primary judge said that Efax claimed title as purchaser through its agent whom it had paid, or caused to be paid and, contrary to the liquidators' submission, its claim did not involve a tracing exercise. 147 Finally, the primary judge referred to a Settlement Deed between Sonray, the liquidators, Saxo and HLB Mann Judd (Vic) Partnership. Under the Settlement Deed, Saxo and HLB Mann Judd agreed to pay Sonray a settlement sum of $18,500,000.00. No payment was to be made by Sonray to Saxo. Under clause 8 of the Settlement Deed, Saxo waived any right it had to prove in Sonray's liquidation, and under clause 3.4, Saxo agreed to transfer to Sonray "Shares", which term included the BHP Shares (Schedule 4). 148 Before leaving the primary judge's reasons it should be noted that in relation to the Interactive Broker Balance, being the entitlement of a Sonray client in respect of the trading platform (the amount of a particular Sonray Client's Proposed Adjustment Account Balance or Proposed Account Balance on the Client Fund), her Honour's conclusion was that assets held by Interactive Brokers on behalf of Sonray Clients which were funded (either wholly or partly) by money which passed through a Tainted Segregated Account, or was otherwise connected to a Tainted Transaction should be pooled.
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.
The Appeal by Eagle Securities 179 Eagle Securities put a series of propositions which it submitted led to the conclusion that the contributors to the Tainted Segregated Accounts, including itself and Efax, had a superior claim to the claim asserted by Efax alone. 180 Efax complained about Eagle Securities' lack of standing, suggesting that it was in no different position to other depositors or contributors and the interests of the depositors or contributors were represented by the liquidators. Whatever force that submission may have had, it is too late to raise it now. Nevertheless, it is the case that some of the propositions advanced by Eagle Securities were not advanced in the Court below. 181 It is convenient to begin by identifying the five propositions advanced by Eagle Securities. First, it submits that if Efax had a proprietary interest in the BHP Shares it was an equitable interest rather than a legal interest. The significance of the submission from the point of view of Eagle Securities is that ultimately it submits that the equity of the depositors or contributors prevails over any equity held by Efax. I am content to proceed on the assumption that any interest held by Efax was an equitable interest (see [169] above). 182 Secondly, Eagle Securities submits that the funds in the deficient Segregated Accounts were used for the acquisition of the BHP Shares and the depositors or contributors obtained equitable interests in the shares. 183 Thirdly, Eagle Securities submits that the equitable interests referred to in the second proposition arose as a result of the application of the rules of tracing and the relevant payments were set offs on the Omnibus Account for realised and unrealised profits on trading and the payment of margin calls by Sonray to Saxo. 184 Fourthly, even though Eagle Securities accepts that it is not able to establish that the relevant payments were made before the purchase of the BHP Shares, the payments can be traced into the shares because there was a close and substantial connection between the two. The submission was that tracing where an asset is acquired before payment was made, sometimes referred to as "backwards tracing", is permitted and the Court was referred to authority supporting, or at least discussing, that proposition: Foskett v McKeown [1998] Ch 265 at 283-284 per Sir Richard Scott V-C; Agricultural Credit Corporation of Saskatchewan v Pettyjohn (1991) 79 DLR (4th) 22 at [60]-[76]; Bishopsgate Investment Management Ltd (In Liquidation) v Homan and Others [1995] Ch 211 at 216-217 per Dillon LJ at 221 per Leggatt LJ; at 222 per Henry LJ; Re Global Finance Group Pty Ltd (In Liq) (Supervisor Appointed) (2002) 26 WAR 385; Hagan v Waterhouse (1991) 34 NSWLR 308; Mark Anthony Conlan as Liquidator of Rowena Nominees Pty Ltd v Trevor Connolly as Trustee for the Connolly Family Trust [2011] WASC 160. 185 Fifthly, Eagle Securities submits that the equity of the depositors or contributors prevails over that of Efax either because Efax was a volunteer, or because Efax must take responsibility for the disentitling conduct of its agent, Sonray. The Court was referred to Cash Resources Australia Pty Ltd and Others v BT Securities Ltd and Others [1990] VR 576 at 586 per Brooking J; Stephenson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536. 186 There are a number of difficulties with the argument advanced by Eagle Securities. The premise of the argument is that Efax has an equitable interest in the BHP Shares, but Eagle Securities never clearly articulated the nature of that interest or how it arose. If it arose by reason of the matters identified by the primary judge (and upheld by this Court in rejecting the liquidators' arguments) it leads to this question: in what sense can it be said that Efax was a volunteer for the purposes of the fifth proposition in light of conclusions that the vendor had been paid and that Efax had paid Sonray, that is, the purchaser had paid its agent? Another question is whether it is possible for Efax to have the prior equitable interest and, albeit, in common with other depositors or contributors, the later equitable interest. I do not need to pursue these issues and the substantial legal issues raised by the fourth proposition, because I am not satisfied that it should be inferred that the BHP Shares were paid for by funds or the proceeds of funds from the Tainted Segregated Account. The argument of Eagle Securities breaks down at this stage. 187 Although the primary judge made findings concerning aspects of the relationship between Sonray and Saxo, she did not make findings about whether or not funds of the depositors or contributors could be traced into the BHP Shares by reason of the application of set-offs in the Omnibus Account and the payment of margin calls by Sonray to Saxo. That was probably because of the way the liquidators conducted their case before the primary judge. Nevertheless, Eagle Securities asks this Court to draw the inference for which it contends. 188 The matters Eagle Securities advanced in support of the inference for which it contends are as follows. First, Saxo, in its letter dated 1 July 2010 to Sonray, identified an amount due and payable by Sonray to Saxo upon the termination of the agreement between the two parties. On the face of it, there is no reference to a debt arising from the purchase of the BHP Shares. 189 Secondly, there is no express reference to a debt in the Settlement Deed entered into in October 2011 leading to the inference, so it was contended, that the debt arising from the purchase of the BHP Shares had been dealt with prior to that time. Thirdly, the Omnibus Account or rolling credit system included, as her Honour found, unrealised profit and loss and Sonray made payments to Saxo for Margin Calls. In view of the first two matters, it is likely, it was submitted, that Sonray discharged its debt through this system involving as it did funds from the Tainted Segregated Accounts or financial products purchased with those funds. 190 The inference for which Eagle Securities contends is an available inference, but I am not satisfied on the balance of probabilities that it is the inference which should be drawn. Other matters which must be considered are as follows. First, the only finding the primary judge made directly relevant to this issue was that no claim was made by Saxo against Sonray and the meaning of the correspondence from Saxo to Sonray or the liquidators, at least from the perspective now advanced, was not explored in the Court below. Secondly, Saxo paid commissions to Sonray and the primary judge made a finding that an amount of $2,372,408.79 was paid by "inter-account transfer" from Saxo to Sonray's Omnibus Account. Thirdly, as far as payments for margin calls by Sonray to Saxo are concerned, one of the liquidators gave evidence before the primary judge that margin calls were made in relation to futures contracts and contracts for difference, "not on equities". Fourthly, it is clear from the evidence that officers of Sonray engaged in "house trading", whereby Sonray sought to protect itself from losses incurred on positions adopted for clients. This house trading appears to have involved the Omnibus Account. Finally, it is by no means clear that any debt in relation to the purchase of the BHP Shares was not released or extinguished by the Settlement Deed entered into in October 2011. None of these matters are in themselves decisive against the inference for which Eagle Securities contends, but together they lead me to the firm conclusion that that inference should not be drawn on the balance of probabilities. 191 The inability of Eagle Securities to show that monies from the Tainted Segregated Accounts, or the proceeds of those monies, were used to discharge the debt incurred by Sonray to Saxo in relation to the purchase of the BHP Shares means that its tracing claim must fail. 192 The appeal by Eagle Securities must be dismissed.
Conclusions 193 Both appeals must be dismissed. No question of costs arises in either appeal because of orders for indemnity made by the judge who gave leave to appeal. I am not disposed to alter or vary those orders. I certify that the preceding one hundred and twenty (120) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.
Associate: Dated: 5 October 2012 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 160 of 2012
ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: GEORGE GEORGES (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
JOHN ROSS LINDHOLM (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993
AND: SEABORN INTERNATIONAL PTY LTD (AS TRUSTEE FOR THE SEABORN FAMILY TRUST)
MARYLAND PTY LTD ACN 150 886 427 (AS TRUSTEE FOR THE NORWEGIAN TRUST)
ROLAND MARK WARD ABN 66 473 078 418 (AS TRUSTEE FOR THE AWARD SUPERANNUATION FUND)
judges: JACOBSON, BESANKO and JAGOT JJ DATE: 5 oCTOBER 2012 PLACE: adelaidE (heard in melbourne)
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 250 of 2012
GEORGE GEORGES (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
JOHN ROSS LINDHOLM (IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993)
SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993
JUDGES: jacobson, besanko and jagot jj DATE: 5 OCTOBER 2012 PLACE: adelaide (heard in MELBOURNE)
JAGOt j: 194 I have read the draft reasons for judgment of Jacobson J and Besanko J. 195 I agree with the resolution of the first issue. The relationship between Efax Pty Limited (Efax) and Sonray Capital Markets Pty Ltd (Sonray) in respect of the purchase of the BHP shares was not merely contractual. By reason of the proper construction of the client agreement and the nature of the particular transaction by which the BHP shares were purchased, the shares are held on trust for Efax. 196 I do not find the second issue easy to resolve. 197 Besanko J, in common with the primary judge, would reject the liquidators' second argument on the basis that Efax's payment for the BHP shares should be characterised as payment by way of the mutual extinguishment of Efax's chose in action against Sonray (which arose on the deposit of the $3,176,000 by Efax into the ANZ AUD segregated account) and Sonray's chose in action against Efax (which arose upon Efax placing the order for the purchase of the BHP shares). By this means it is said that Efax's payment for the BHP shares involved Sonray appropriating Efax's chose in action against it in satisfaction of its chose in action against Efax, such appropriation being reflected by way of book entry in Sonray's debiting of Efax's ledger. Accordingly, there was no payment from the payment from the ANZ AUD segregated account which had been tainted by Sonray's defalcations. 198 Jacobson J would uphold the liquidators' second argument on the basis that the consequences of Efax having paid the purchase price for the BHP shares into a bank account which had been the subject of Sonray's earlier and ongoing defalcations cannot be avoided by the concept of the appropriation and extinguishment of each chose in action. Although the purchase price for the BHP shares was not paid out of the "tainted" bank account but by Saxo Bank A/S (Saxo) using its own money or by way of credit arrangements between Saxo and another overseas bank, with Sonray debiting Efax's ledger account with the purchase price, in Jacobson J's view the appropriation had its source in moneys that were originally paid into the tainted ANZ AUD segregated account. As such, the rules relating to deficient mixed trust funds are inescapable. 199 I agree that the moneys paid into the ANZ AUD segregated account were not in fact used to pay for the BHP shares, the payment having been made by Sonray debiting Efax's ledger account with payment of the purchase price for the BHP shares. I agree that Sonray was entitled to appropriate funds in this way by cl 9(b) of the client agreement. I agree also, however, that what lay behind the book entry, and the only thing that supported the entry, was the initial deposit of funds by Efax into the ANZ AUD segregated account and that Sonray dealt with those funds as a defaulting trustee both before and after that deposit. I agree with Jacobson J that the facts of the present case are distinguishable from Re Global Finance Group Pty Ltd (in liq); Ex Parte Read (2002) 26 WAR 385; [2002] WASC 63 at [189]-[194]. I also consider that in these circumstances Sonray as a defaulting trustee could not by its book entry act to the detriment of some investors and the benefit of others (of which Efax was one) when the sole source of Efax's rights was payment into the tainted ANZ AUD segregated account. 200 Accordingly, I agree with the conclusion of Jacobson J on the second issue and with the orders his Honour proposes. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.
Georges
Seaborn International Pty Ltd
132 CLR 671, cited Mark Anthony Conlan as Liquidator of Rowena Nominees Pty Ltd v Trevor Connolly as Trustee for the Connolly Family Trust [2011] WASC 160, cited NMFM Property Pty Ltd v Citibank Ltd (No 10) (2000) 107 FCR 270, cited Palette Shoes Pty Ltd (in liq) v Krohn (1937) 58 CLR 1, cited Re Global Finance Group Pty Ltd (In Liq) (Supervisor Appointed); (2002) 26 WAR 385, cited Re Goode, Ex parte Mount (1974) 4 ALR 579, cited Re Hewson; ex parte Jamieson (unreported - Federal Court of Bankruptcy of NSW and ACT, No 554 of 1967), cited Re Lehman Brothers International (Europe) (In Administration) [2010] EWCA Civ 917, cited Re York Street Mezzanine Pty Ltd (in liq) (2007) 162 FCR 358, cited Southern Cross Commodities Pty Ltd (in liq) v Ewing (1988) 91 FLR 271, cited Stephenson Nominees Pty Ltd v Official Receiver (1987) 16 FCR 536, cited Sutherland Re; French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361, cited Walker v Corboy (1990) 19 NSWLR 382, cited Warburton v Altson (1889) 15 VLR 94, cited
[2002] WASC 63
(2008) 246 ALR 361
(1986) 162 CLR 1
(2004) 218 CLR 471
(1991) 34 NSWLR 308
(1975) 132 CLR 671
(2000) 107 FCR 270
(1937) 58 CLR 1
(2002) 26 WAR 385
(1974) 4 ALR 579
(2007) 162 FCR 358
(1988) 91 FLR 271
(1987) 16 FCR 536
(2003) 59 NSWLR 361
(1990) 19 NSWLR 382