Jones (as Trustee of the property of Heather MacNeil-Brown, A Bankrupt) v Southall & Bourke Pty Ltd

Federal Court of Australia|2004-07-01|Before: Crennan J

THE COURT ORDERS THAT:

The appeal be dismissed.
The appellant is to pay the respondent's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT CONSTITUTED BY McINNIS FM

BETWEEN: NORMAN KENNETH JONES (AS TRUSTEE OF THE PROPERTY OF HEATHER MACNEIL-BROWN, A BANKRUPT)

Facts 11 It is appropriate to consider in more detail the two transactions which are the subject matter of the appellant's claims, the charge of 7 July 1999 and the payment under that charge of $67,500 on 9 August 1999. 12 The bankrupt commenced employment with the respondent on 3 March 1986 as an accounts clerk. She was subsequently promoted to accounts manager, and remained in this position until her employment was terminated on 19 January 1999. 13 As the accounts manager, she was responsible for the control of the debtors/creditors ledger, balancing the cash registers and supervising banking and office duties and she held a position of complete trust with the company. She agreed with this description of her role. 14 She commenced annual leave on 16 December 1998 and on 22 December 1998 it was discovered that she had written an unauthorised cheque for $5,889.50 that was used to pay for landscaping costs at her house. When interviewed by the respondent about the theft she agreed to repay the stolen funds from her long service and holiday leave entitlements otherwise due at the termination of her employment. 15 Following the discovery of the theft the respondent conducted an audit. The audit was completed in late March 1999 and showed the bankrupt had stolen a total of $496,350.05 from the respondent between December 1990 and December 1998. The respondent contacted the local police on 28 March 1999 and reported those findings. Following the advice of Detective Phillip Kenny, charges were laid on 12 April 1999 for the theft of $138,551.12 in 241 incidents of theft between 1 July 1997 to December 1998. Having regard to the requisite standard of proof in criminal matters and to authorities such as Johnson v Miller (1937) 59 CLR 467, Detective Kenny's advice as to the charges to be laid is unremarkable and no inference arises from that advice in relation to the strength or otherwise of possible charges in respect of the balance of the stolen funds, being $357,798.93. 16 When confronted by the police the bankrupt admitted that she had stolen the funds. Before his Honour, the bankrupt was asked a series of questions about the relationship between the stolen funds and her acquisition of her house as follows: "[Mr Rosen] What were you doing with the money?- - -I was using the money on living expenses. That would cover all of your living expenses, whether it was all the bills that you had to pay, all the expenses that you were incurring? - - - Yes, the mortgage was paid out of the bank. But if you were not receiving that amount of money fraudulently from the company, you wouldn't have been able to meet all of these expenses, including the mortgage payments, would you? - - - That is ostensibly - or that is the reason why I did what I did. You did what you did to pay whatever expenses or outgoings that you were incurring over that period of time. Is that right? - - - That's correct. If you weren't extracting money from the company, you wouldn't have been able to meet those expenses, would you? - - - No, certainly not. You certainly wouldn't have been able to meet the mortgage payments on the house, would you? - - - The mortgage payment was made directly out of my bank account. Yes, I understand that, it was directly debited from your bank account? - - -Then I have nothing else to say regarding that payment. I have answered that question." 17 Eleven days after the charges were laid, the respondent's solicitors wrote to the bankrupt's solicitors who commenced acting for the bankrupt when the charges were laid. The respondent's solicitors advised that the respondent had noted a proposed sale of the bankrupt's house and that the respondent 'wishes to protect their (sic) position'. In addition, the respondent's solicitors made a demand that the bankrupt grant a registrable charge over the property as security for the bankrupt's obligation to repay the moneys owed to the respondent as a result of her thefts committed between 1 July 1997 and 15 December 1998. It was further indicated in that letter that a 'Mareva' injunction to freeze assets would be sought if the bankrupt did not consent to grant a security in respect of her obligations to repay the stolen funds. 18 The solicitors exchanged further correspondence on 24 May 1999 (demanding that the house be sold prior to the earlier of either the finalising of the criminal charges or within three months), 31 May (requesting an assignment of the bankrupt's superannuation funds plus a statutory declaration of assets on the basis that substantial assets other than the house would require renegotiation of any terms of settlement), and on 5 July 1999 (advising that counsel had been briefed on 29 June 1999 for the purposes of seeking Mareva relief but giving the bankrupt the option of avoiding the commencement of proceedings for the injunction by granting a registrable charge and giving consent to lodging a caveat over the house). 19 The bankrupt entered into an agreement for the sale of the house on 7 July 1999 and, on the same day, granted a charge in the respondent's favour for the sum of $70,000.00. The charge recited that this was "in consideration of Southall & Bourke Pty Ltd not commencing legal proceedings for recovery of the debt owed by me to them". The covering letter, dated 8 July 1999, from the bankrupt's solicitors contained a statement: "I note, by way of interest, that Ms MacNeil Brown has other debts that amount to almost $70,000 which just will not be paid." 20 On 9 August 1999, the property conveyancer engaged by the bankrupt forwarded to the respondent a cheque for $67,500.00 as the proceeds secured by the charge. By correspondence between 12 April 1999 and 7 July 1999, the parties had determined how much of the proceeds of the sale of the house the respondent would permit the bankrupt to retain to pay for a move to Melbourne. This accounts for the difference between the sum specified to be paid under the charge of $70,000.00 and the actual amount paid. The respondent by its conduct recognised the bank's first mortgage took priority over the right to restitution which it was seeking to exercise. 21 On 4 October 2000 the bankrupt pleaded guilty to the charges of theft totalling $138,511.12. She was convicted and sentenced to two years imprisonment, wholly suspended for an operational period of two years, and ordered to pay to the respondent the sum of $71,011.12 as "compensation for that company's loss" pursuant to s 86 of the Sentencing Act 1991 (Vic) ("the Sentencing Act"). That sum, together with the sum paid to the respondent pursuant to the charge of 7 July 1999 constitutes full restitution to the respondent for the thefts between 1 July 1997 and 15 December 1998. It seems clear, for the purposes of this appeal, that the County Court was informed of the restitutionary payment of $67,500.00, and that such payment was taken into account in the sentencing process. The bankrupt has not paid to the respondent the compensation ordered by the County Court. 22 On 30 September 1998 the bankrupt purchased the Alfredton house for $175,000.00 from the builder. She obtained a mortgage of $85,000.00 and said she otherwise used net proceeds from the sale of a previous house located at Wendouree. She gave evidence that she had bought that house some five years beforehand (which was while she was in the employ of the respondent). She stated that her interest in her previous house had been subject to a $50,000.00 mortgage in order to settle up with her husband after a matrimonial settlement had been reached. (It appears that the separation occurred in the mid 1990's, however no direct evidence was led on this point.) She said that when the Wendouree house was sold about $120,000.00 net was realised. 23 The bankrupt's income tax return for the financial year ending 30 June 1998 was in evidence and showed a gross income for that year of $28,284.00. There were no earlier tax returns before the Court. In respect of the thefts totalling $138,551.12 the amounts stolen averaged in excess of $7,000.00 per month over the eighteen month period. As a result of a caution given to the bankrupt by Barnes FM in respect of her alleged thefts prior to 1 July 1997 between December 1990 and 30 June 1997 she gave no evidence, nor was she cross-examined, about her ability to acquire equity in the previous house over five years whilst earning a salary at, or at times possibly below, the level indicated. 24 The bankrupt also gave evidence that she paid down the mortgage of $85,000.00 in respect of the Alfredton house by a periodical direct debit payment from the same account into which her salary was deposited. She gave no evidence, nor was she cross-examined, about whether she deposited any of the stolen moneys into that account for the purpose of paying off her mortgage. 25 The appeal was conducted before me on the basis that neither following nor tracing was possible in respect of the stolen funds. The respondent argued it was not essential in a constructive trust, by which was meant a claim in rem, that is an equitable proprietary claim, to be able to follow or trace the stolen funds to the proceeds from the sale of the house.

The Proceeding before the FEDERAL Magistrate 26 The appellant claimed that both the charge of 7 July 1999 and the payment made pursuant to the charge of $67,500.00 on 9 August 1999 were void against the trustee under the provisions of s 122, or alternatively under s 120, of the Bankruptcy Act. The claim under s 120 was not pressed on this appeal and I will not refer to it again. 27 In relation to s 122 the appellant submitted that he had satisfied the onus of proof under s 122(1). He then submitted that the deeming provisions of s 122(4)(c) were made out as the charge was not, on the evidence, given in the 'ordinary course of business' or made 'in good faith.' Thus, he submitted that the respondent could not rely on the statutory defences under s 122(2). 28 The respondent submitted that the statutory defences under s 122(2) were made out. The respondent also submitted that it has a proprietary remedy against the bankrupt in respect of her breach of fiduciary obligations to it, such that the proceeds of sale were the subject of a constructive trust, that is an equitable proprietary claim, or alternatively that it was entitled to an equitable lien or equitable charge, that is a personal equitable claim in respect of the proceeds. The respondent submitted that it received the money pursuant to the charge as a beneficiary under a constructive trust. See: Burns v Leda Holdings Pty Ltd (1987) 89 FLR 365. 29 His Honour dismissed the application with costs. His Honour found that at all times the respondent acted 'in good faith'. His Honour also found that a charge taken over the property to secure obligations arising as a consequence of fraud was done in the 'ordinary course of business'. 30 On the constructive trust issue, his Honour expressed his reasoning as follows: "[The bankrupt] had available to her a pool of resources including the fraudulently obtained money from her employer which either directly or indirectly she was able to apply to living expenses and payment of recurring costs including mortgage payments. The suggestion at one stage of the evidence by the bankrupt that payments of the mortgage were by way of direct debit from her bank account only reflects the method of payment and not the access to resources then available to the bankrupt to enable that method of payment to occur uninterrupted." 31 There was no dispute that the transactions under attack took place during the relation back period. Nor was there a dispute about the value of the consideration given for the charge. Arguments concentrated upon his Honour's findings in respect of s 122(2)(a) and s 122(4)(c) and the finding that it was appropriate on the facts to impose a constructive trust, that is a proprietary remedy in respect of the proceeds of the sale of the house. There are four issues to consider. First, whether his Honour was correct in finding that the respondent took the charge and payment 'in good faith' and that they were given 'in the ordinary course of business' within the meaning of s 122(2)(a). Second, whether he was also correct to find that the inferences referred to in s 122(4)(c) did not arise on the facts. Third, there is the issue of insolvency for the purposes of s 122(1) and finally, a question of whether his Honour was correct in finding that a constructive trust, that is a proprietary claim, existed in favour of the respondent in respect of the proceeds of sale from the house.

SEction 122(1) 32 It is convenient to treat as the first issue for determination on the appeal, whether the bankrupt's insolvency, as at the date of the charge or the subsequent payment of the amount secured by it, has been established by the appellant for the purposes of s 122(1). The appellant relied almost entirely on the evidence of the bankrupt and his own opinion as to insolvency. 33 There was no evidence from any creditor, no evidence of default judgments and no evidence of any demands for payments. The amount owed to unsecured creditors as set out in the bankrupt's statement of affairs was $58,924.42 made up of $43,706.80 in credit card debts for seven separate cards, $14,327.62 in store card debts for three separate cards and a $890.00 debt for removal costs. There was, in addition to these debts, the debt to the respondent due to the thefts. Her only recorded asset in the statement of affairs was household furniture valued at $5,000.00. 34 There was no evidence as to what the bankrupt had done with the funds which she had stolen other than her admission that she had used $5,889.50 for landscaping at her house and her evidence during the proceeding that she used $138,511.00 for what she called living expenses, citing as examples credit card bills, school fees and payments to her husband. She said that the school fees were $3,000.00 per year but no receipts were proffered, nor were there any details of bank accounts, credit card statements or payments made to her husband in the period during which she was convicted of stealing from the respondent. Such evidence as there is of her credit card statements consists of an ANZ Mastercard (credit limit of $11,000.00) and an ANZ Telstracard (credit limit of $4,000.00) for the period January 1999 to October 1999 following dismissal from her employment. Each credit facility was at or slightly above the limit but generally the minimum payment was met. On the one occasion when she did exceed her limit the credit provider in question offered her further credit. As to her evidence that she gave money to her husband regularly, apart from evidence that she took out a mortgage of $50,000.00 on the Wendouree house in order to pay out a matrimonial settlement it is not clear from the evidence what further money she was giving to her husband. Further, there was no evidence as to what use she put the sum of $357,798.93 (the stolen funds from 1990 to 30 June 1997) as she was cautioned during the hearing about giving evidence in respect of that sum. 35 As to the bankrupt's debt to the respondent, the respondent had valued and respected the bankrupt as an employee and even gave her a reference after her conduct had come to light. The respondent adopted a commercial arrangement in respect of the bankrupt's indebtedness which was to accept voluntary restitution of $67,500.00 and apply and obtain a Court order for restitution of the balance of $71,001.12. 36 His Honour made no express finding as to the proof of insolvency which may have been because his Honour found that the defences under s 122(2) had been made out. During an able argument by Mr Bigmore, counsel for the appellant, it was suggested by him that in the event that findings were made in his client's favour it would probably be necessary to remit the matter to his Honour for the purpose of making a finding on insolvency. In the light of the orders I propose to make it will not be necessary to take that course.

Section 122 37 Section 122 relevantly provides: "(1) A transfer of property by a person who is insolvent (the "debtor") in favour of a creditor is void against the trustee in the debtor's bankruptcy if the transfer: (a) had the effect of giving the creditor a preference, priority or advantage over other creditors; and … (2) Nothing in this section affects: (a) the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or (b) the rights of a person who is making title through or under a creditor of the debtor in good faith and who gave consideration at least as valuable as the market value of the property; or …. (3 ) The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection. (4) For the purposes of this section: . . . (c) a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect: (i) that the debtor was unable to pay his or her debts as they became due from his or her own money; and (ii) that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors."

Ordinary course of business - s 122(2)(a) 38 Whether a transaction is one made 'in the ordinary course of business' has not been construed as an act usual or common in the business of the creditor or debtor. In Robertson v Grigg (1932) 47 CLR 257 ("Robertson") at 265,Gavan Duffy CJ and Starke J said rather it is: "…a fair transaction and what a man might do without any bankruptcy in view." 39 In Downes Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463 at 477, Rich J dealt with the meaning of the phrase as follows: "It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation." 40 In considering the meaning of the phrase in Taylor v White (1964) 110 CLR 129 ("Taylor") at 136, Dixon CJ said: ". . . 'in the ordinary course of business' is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination.". Dixon CJ then referred at 136-137 to Lord Mansfield speaking about the phrase 'in a fair course of business' in Rust v Cooper (1777) 2 COWP 629 at 634; 98 ER 1277 at 1280: "If, in a fair course of business, a man pays a creditor who comes to be paid, notwithstanding the debtor's knowledge of his own affairs, or his intention to break; yet, being a fair transaction in the course of business, the payment is good; for the preference is there got consequentially, not by design: it is not the object; but the preference is obtained, in consequence of the payment being made at that time." 41 The historical development of the phrase has been dealt with comprehensively by Priestley JA in Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 ("Harkness") at 228-275, an analysis of great assistance in this case. It is not without interest, for the purposes of this case, that a number of cases from the late 18th and early 19th century there mentioned by Priestly JA involved debtors making payments after being arrested and confined or imprisoned in respect of the debt. In one of those, Holmes v Wennington (1790) 2 Bos & Pul 401 at 402; 126 ER 1350n at 1351, dealing with whether a payment made in consequence of an arrest was 'in the usual course of trade and dealing', Chief Baron Eyre said: ". . . arrests are now very frequent, not on the ground of insolvency, but of quickening payments, which are within the statute." A person of modern sensibilities might have some difficulty in conceiving of a payment made as a result of arrest and imprisonment for debt as being a payment made 'in the ordinary course of business' or within the earlier cognate phrase 'in the usual course of trade and dealing'. However, payment after being arrested and imprisoned was, to apply to those times the Robertson formula, 'a fair transaction and what a man might do without any bankruptcy in view' or Dixon CJ's formula from Taylor 'some usual process naturally passing without examination.' 42 It was submitted on behalf of the appellant that to repay stolen money could never be in the 'ordinary course of business' because the theft itself would be extraordinary. However, it is the characterisation of the payment which is subject to the phrase rather than the event which gave rise to the need to make the payment. The history of the development of the phrase indicates that the adjective 'ordinary' can mean something which is 'fair', 'usual' or 'unremarkable' in all the circumstances and is not confined to meaning, although it can include, something which is a 'common' or 'everyday' occurrence in the course of business. 'Extraordinary' is the antithesis for all those different shades of meaning. 43 A business person or a director of a trading company who knew a thief was selling property prior to being sentenced for crimes which were admitted would be derelict in failing to secure for the business or the company its right to restitution in or near the sentencing process. Our system of criminal justice encourages a thief to make restitution to a victim. For example the Sentencing Act relevantly provides: "1 The purposes of this Act are - … (i) to ensure that victims of crime receive adequate compensation and restitution; … 5 (2) In sentencing an offender a court must have regard to - … (g) the presence of any aggravating or mitigating factor concerning the offender or of any other relevant circumstances. … (2C) In sentencing an offender a court may have regard to the conduct of the offender on or in connection with the trial as an indication of remorse or lack of remorse on his or her part." An act of restitution can be taken into account on a plea of guilty or in respect of sentencing, including on the issue of suspending a custodial sentence, which is what happened here. Leaving aside the issue of how commonly thieves actually make restitution, which is not relevant, for a thief who can to make such restitution is unremarkable in these circumstances. However one describes a theft, the act of restitution is not extraordinary because our system of criminal justice encourages such conduct. 44 Accordingly, the restitutionary payment and the charge given by the bankrupt, which secured the payment, can be characterised as 'fair', 'usual' or 'unremarkable' occurrences in all the circumstances, despite not being actions which are 'common' or 'everyday' actions. That the charge was given following the discovery of a substantial fraud and that the charge was given and the payment made in return for the respondent forbearing to sue does not detract from this characterisation in the circumstances of this case. 45 The federal magistrate's application of legal principle on this aspect was correct. Grounds 2 and 3 of the appeal are not made out.

Good faith - s 122(2)(a) 46 It is well established that the 'good faith' referred to in s 122(2)(a) is the actual good faith or the subjective good faith of the payee. 47 In Harkness at 218,Clarke JA considered the complementary nature of the concepts of 'good faith' and 'in the ordinary course of business': "…it seems to me that both inquiries are essentially concerned with the reasons which led the debtor to pay (was it in the ordinary course of business?) and the creditor to accept (was it in good faith?) the payment." 48 It is necessary to consider the evidence for the purposes of both s 122(2)(a) and s 122(4)(c), the latter subsection providing that a creditor shall not be deemed to be a payee 'in good faith' if the payment was made in circumstances giving rise to an inference that the creditor knew or had reason to suspect the debtor was insolvent and the effect of payment would be to give a preference. Section 122(4) requires an assessment by the court of the payee's 'good faith' assessed objectively: the creditor does not have to negate the inference. See: Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 ("Queensland Bacon"). 49 The respondent led evidence that it always pursued debtors and had a very good record in respect of bad debts. There was also evidence that the charge was sought to secure restitution for theft. The magistrate accepted the credit of the respondent's officers. Each gave convincing evidence that they had no actual suspicion of the bankrupt's insolvency at any time despite being given notice of indebtedness of the bankrupt by way of letter of 8 July 1999 (after the charge had been given) and knowledge that at a certain point she was receiving Centrelink benefits. The magistrate accepted their evidence as it was open to him to do. Each in fact gave evidence that they did not accept the bankrupt was insolvent even at the time of the hearing before the federal magistrate, such views being based on the significant amount of money she had stolen from the respondent over an eight year period and also based on their decade-long knowledge of the circumstances in which she had lived in the country town of Ballarat. 50 As already noted, the criminal justice system encourages restitution in respect of theft. There is nothing unusual or remarkable about a thief giving such restitution. A sentence for theft can be affected by a restitutionary payment by the thief. It can be reduced in time or in some circumstances a custodial sentence can be wholly suspended. A payment, which is encouraged by the law, is capable of being a payment accepted in good faith by a creditor. So, it was open to the federal magistrate to find, on the evidence, that the respondent had discharged the burden on it under s 122(2)(a) and that 'good faith' existed when tested subjectively.

deeming provision - s 122(4)(c) 51 The appellant relied on two matters in respect of the federal magistrate finding that the facts did not support an inference which could be drawn under s 122(4)(c). The basis of the complaint was set out in ground 5 of the notice of appeal as follows: "The …finding that the giving of the charge and the making of the payment were done in 'good faith' is inconsistent with the evidence that: (a) the charge was sent under cover of a letter dated 8 July 1999 from Mr Jacobs, solicitor for the bankrupt (Ms MacNeil-Brown) to the conveyancing organisation dealing with the sale of the property which provided: 'Ms MacNeil-Brown has other debts that amount to $70,000 which just will not be paid'; and (b) the charge was given and the payment was made after the respondent knew that the bankrupt was receiving Centrelink benefits." In cross-examination the appellant's counsel sought to adduce evidence in support of the contention that the facts applied should have given rise to a 'reason to suspect' as considered by the High Court in Queensland Bacon at 303 per Kitto J and at 287 per Barwick CJ. It was suggested that this was supported by the respondent's acceptance of a charge over the Alfredton property for $70,000.00 for the bankrupt's indebtedness of $138,551.12 (initially described by the respondent's solicitor as "well in excess of $100,000.00") when it initially proposed terms of settlement for that debt by payment of $80,000.00 plus 50 per cent of the net proceeds of the sale of the Alfredton house. 52 The evidence indicated however that negotiations to secure restitution from the proceeds of sale of the house were commenced by the respondent as early as 23 April 1999, that is as soon as the sale was noticed and less than a fortnight after the criminal charges were laid. The respondent appeared to accept a charge in respect of a lesser amount in recognition of the bank's security by way of first mortgage and, it can be inferred, in recognition of its right to obtain an order for restitution under the Sentencing Act, which it pursued for the balance after receiving payment pursuant to the charge. 53 The letter of 8 July 1999 was received after the charge had been executed and two and a half months after initial insistence on security had been raised by the respondent with the bankrupt's solicitors. The proceedings threatened by the respondent had been proceedings for a Mareva injunction because of a fear that the bankrupt would not make restitution for her thefts without a Court order or security. There was no evidence suggesting insolvency prior to the letter of 8 July 1999. Simple debt proceedings would not necessarily have been the cause of action or the only cause of action in respect of any Mareva relief threatened by the respondent since the respondent would have been entitled to seek equitable relief by way of constructive trust or for an equitable lien or charge having regard to the circumstances of the thefts. The evidence was that the actions of giving and receiving a charge related to seeking restitution for theft rather than fear of insolvency. It was open to the magistrate to accept this evidence. 54 The principles to be applied in making findings under s 122(4)(c) as set out in Queensland Bacon at 287-288have been correctly applied to the facts and the magistrate's finding that the trustee was not entitled to the benefit of the inference under s 122(4)(c) cannot be upset. Grounds 4 and 5 of the appeal are not made out.

Constructive Trust 55 While strictly speaking it is not necessary to decide this point in the light of the decision I have made in respect of s 122(2) of the Bankruptcy Act, I consider it in case I am found to be wrong and also because both parties submitted it was an issue of significance, with the respondent submitting it was 'an overarching issue'. Property which is the subject matter of an equitable proprietary claim does not pass to the trustee in bankruptcy. Section 116 of the Bankruptcy Act relevantly provides as follows: "(1) Subject to this Act: (a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; (b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; (c) property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D; and (d) money that is paid to the trustee of the bankrupt's estate under an order under section 139E; is property divisible amongst the creditors of the bankrupt. (2) Subsection (1) does not extend to the following property: (a) property held by the bankrupt in trust for another person;" 56 It was submitted that the respondent was entitled to the proceeds of sale of the property as a beneficiary of the constructive trust, despite the fact that the stolen funds could not be followed to a fund or traced to a substituted asset, mixed fund, or mixed substitution, used in or for the purchase of the property. It was not in dispute that stolen money could be followed in the hands of a thief or a volunteer. See: Black v S Freedman & Co (1910) 12 CLR 105 ("Black"); Spedding v Spedding (1913) 30 WM (NSW) 81. Black seems to be an example of a constructive trust without any antecedent fiduciary relationship although on the facts of this case there was, in any event, a fiduciary relationship between the bankrupt as employee and the respondent as employer. See: Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 697-698, at [17]-[18]. It is also an example of a constructive trust arising by operation of law without the necessity for a curial order, a possibility recognised by the High Court in Muschinski v Dodds (1985) 160 CLR 583 ("Muschinski") at 614 per Deane J. The function of the court in such circumstances is to declare that a trust arose in the past as has been clearly done on a number of occasions concerning stolen money in the hands of a thief. See: Australian Postal Corporation v Lutak (1991) 21 NSWLR 584; Zobory v Federal Commissioner of Taxation (1995) 64 FCR 86; Fowkes v Deputy Director of Prosecutions [1997] 2 VR 506. 57 It was also not in dispute that stolen funds can also be traced when they have been used to acquire property either alone or by reason of being part of a mixed fund and such tracing can give rise to an equitable lien. See: Re Hallett's Estate; Knatchbull v Hallett (1880) 13 Ch D 696 at 709 per Jessel MR ("Hallett"); Foskett v McKeown [2000] 3 All ER 97 ("Foskett") at 123-125 per Lord Millett. 58 What was in dispute in this case was whether the ability to trace was essential to an equitable proprietary claim to the proceeds of the sale. 59 A number of preliminary observations can be made. First, tracing is an evidentiary process which is not confined to instances of seeking a proprietary remedy: it can also be used to prove a claimant is entitled to a personal remedy such as an equitable lien or charge. See: Re Goode; Ex parte Mount (1974) 4 ALR 579 at 585-586; Boscawen v Bajwa: Abbey National plc v Boscawen [1996] 1 WLR 328 at 334-335; Foskett at123-125 . Secondly, the remedy of constructive trust has been applied to diverse situations and the term 'constructive trust' is not confined to circumstances where a beneficiary can obtain a proprietary remedy based on tracing in equity. The term has also been applied in the context of forcing a defaulting fiduciary to make restitution in respect of property held unconscionably whether the mechanism for enforcing the liability is proprietary or personal. 60 In Scott v Scott (1963) 109 CLR 649 McTiernan, Taylor and Owen JJ said at [660]: "A trustee's liability to account for profits accruing to him may arise without any positive breach of trust; on the other hand a trustee may become liable to make good a misapplication of trust moneys with interest even though he has made no profit by the misapplication. But where the expenditure of moneys constitutes a breach of trust the remedies may overlap for the beneficiaries may have both a proprietary and personal remedy and, of course, if they choose to pursue the former this will be the full measure of the relief available to them." More recently in Muschinski Deane J said at 615: "…in this country at least, the constructive trust has not outgrown its formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of a particular case. In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date." 61 Also decided in that year was the case of Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. There Mason J said at 107-108: "A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position. Any profit or benefit obtained by a fiduciary in either of the two situations already described is held by him as a constructive trustee (Keith Henry & Co Pty Ltd v Stuart Walker & Co Pty Ltd (1958) 100 CLR 342 at 350). … In Beatty v Guggenheim Exploration Co (1919) 225 NY 380, Cardozo J observed (at p 386) that an agent or a partner who promised or covenanted not to engage in some other business does not, as a matter of course, become chargeable as a trustee for the profits of the forbidden venture. For this proposition he cited well-known authorities which included Dean v MacDowell(1878) 8 ChD 345, and Aas v Benham [1891] 2 Ch 244. He went on to say (at p 386): 'A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.' Later he said (at p 389): 'A court of equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief . . .' However, there is authority for the proposition that equity does not assume jurisdiction to punish a fiduciary for misconduct by making him account for more than he actually received as a result of his breach of fiduciary duty. In Vyse v Foster ((1872) LR 8 Ch App 309, James LJ said (at 333): "This court is not a court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one. In fact, it is not by way of punishment that the court ever charges a trustee with more than he actually received, or ought to have received, and the appropriate interest thereon. It is simply on the ground that the court finds that he actually made more, constituting moneys in his hands 'had and received to the use' of the cestui que trust." The decision of the Court of Appeal was affirmed by the House of Lords ((1874) LR 7 HL 318) without their Lordships reflecting on the passage which I have quoted. The proposition which I have stated based on the observations of James LJ needs to be modified in order to take account of the situation where the fiduciary has so mixed an indeterminate profit with his own property as to render the identification of the gain impossible. There "… the whole will be treated as trust property, except so far as he may be able to distinguish what is his own" (Brady v Stapleton (1952) 88 CLR 322 at 336, quoting Page Wood V-C in Frith v Cartland (1865) 2 H & M 417 at 418; 71 ER 525 at 526). The proposition may also need to be modified to take account of a profit in acquired by a fraudulent fiduciary through a combination of trust property and his own property or efforts. It may well be that equity in such circumstances will not seek to apportion the gain." 62 As these extracts from the authorities make plain, the term 'constructive trust' covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account. The difference between an equitable proprietary remedy and an equitable personal remedy, is that a constructive trust giving rise to an equitable proprietary remedy gives the beneficiary an 'ownership' interest in the property whereas personal remedies, such as an equitable lien or charge, give the beneficiary 'a security interest'. RP Meagher and WMC Gummow, Jacobs' Law of Trusts in Australia, 6th edn, Butterworths, 1997, pp 736-740; RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane's Equity Doctrines and Remedies, 4th edn, Butterworths, 2002, pp 200-210; AW Scott and WF Fratcher, The Law of Trusts, 4th edn, Little Brown and Company, 1989, Vol. V, s462. In the remedial context, it is for the court to choose the most appropriate remedy: see Giumelli v Giumelli (1999) 196 CLR 101; Warman International Ltd v Dwyer (1995) 182 CLR 544 ("Warman");. 63 These crucial distinctions referred to have been elucidated in a number of cases. See for example: Re Stephenson Nominees Pty Ltd v Official Receiver on Behalf of Official Trustee in Bankruptcy; Ex parte Roberts & Another (1987) 76 ALR 485 at 501-506 and Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corp [1999] NSWSC 671 ("Cashflow") at 464-470; Foskett at 122-125. These distinctions are particularly critical when dealing with rights against third parties or priority in insolvency cases. 64 The question then is whether the funds which resulted from the sale of the property in this case are held on a constructive trust for the respondent because it would be unconscionable for the thief to retain the proceeds, despite the fact that the moneys stolen could not be traced. The circumstances were that the thief, the bankrupt, made restitution out of such funds prior to criminal charges being dealt with and admitted in evidence that she could not have met her regular payments in reduction of her mortgage without having the stolen funds for her use in respect of "living expenses". 65 In contending for a constructive trust on this basis, the respondent argued that it did not have to trace in order to mount an equitable proprietary claim because of the authority of Hallett's case. On this basis it was argued that the bankrupt as a defaulting fiduciary, could not avoid a constructive trust by not identifying stolen funds or her funds in any asset acquired through a mixed fund. Hallett's case is confined to the proposition that a fiduciary will be held liable by way of an equitable lien in respect of a mixed fund despite not being able to identify components in the fund. The respondent here cannot identify a mixed fund and in seeking to uphold the federal magistrate's finding of a constructive trust gave only passing attention to the alternative remedies of an equitable lien or charge. This is understandable in the sense that the case was argued on the basis of upholding a finding giving a proprietary remedy, the alternative security remedy being one it was not necessary for the federal magistrate to consider. 66 The respondent also relied on statements of Lord Templeman in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co. (Bahamas) Ltd [1986] 3 ALL ER 75 at 76-7 ("Space Investments") to the effect that priority over unsecured creditors could be given to beneficiaries of the trust dealing with a bankrupt bank. Although beneficiaries could not trace misappropriated funds into funds used for the general purposes of the bank, unlike other customers of the bank, the settlor and beneficiaries of a trust do not accept the risk of insolvency of the bank as the bank acting properly would always be obliged to segregate the trust money. 67 The respondent also relied upon Westdeutsche Landersbank Girozentrale v Islington London Borough Council [1996] AC 669 ("Westdeutsche"), a test case concerning a bank's right to recover payments made pursuant to interest swap transactions subsequently held to be ultra vires the powers of a local authority. In Lord Browne-Wilkinson's judgment he set out four propositions which he described as non-controversial in relation to the law of trusts and the respondent relied in particular on the third proposition which was as follows: "(iii) in order to establish a trust there must be identifiable trust property. The only apparent exception to this rule is a constructive trust imposed on a person who dishonestly assists in a breach of trust who may come under fiduciary duties even if he does not receive identifiable trust property." 68 The submission on behalf of the respondent was that the general statements in these two cases, described by counsel as obiter dicta, supported the Magistrate's finding that a constructive trust was able to be declared over the proceeds despite an inability to identify (by tracing) trust property. However, as Einstein J observes in Cashflow, Space Investments concerned tracing into a mixed fund and the House of Lords in Gold Corp Exchange Limited treated the general observations in Space Investments as being narrower than the respondent asserts. 69 Further, bearing in mind that Westdeutsche overruled Chase Manhattan Bank NA v Israel British Bank (London) Ltd [1981] Ch 105 (which appeared to stand for the proposition that moneys paid as a result of a mistake, which could be traced, gave rise, without more, to a proprietary interest in such moneys for restitutionary purposes), the non‑controversial general statement relied on by the respondent must be put in context by specific observations made about the facts in the judgment. For example, Lord Browne‑Wilkinson at 716C said: "I agree that the stolen moneys are traceable in equity. But the proprietary interest which equity is enforcing in such circumstances arises under a constructive . . . trust." The general observations in the two English cases relied on by the respondent do not support any principle that an equitable proprietary remedy will exist in respect of stolen moneys despite an inability to trace such stolen funds in order to identify the property subject to the restitutionary claim. Although Black's case was a case concerned with following not tracing, such a principle would be inconsistent with the High Court's reasoning in Black's case and subsequent cases which followed it. 70 Due to the limited evidence available, the relevant period of the bankrupt's fraudulent activities is the eighteen month period between 1 July 1997 and 15 December 1998 during which the sum of $138,511.12 was misappropriated from the respondent. During this period the bankrupt directed $566.90 per month from her salary of $1,941.00 net per month to the payment of the ANZ mortgage over her Wendouree house, leaving the sum of $1,374.10 as her legally obtained income to be applied to her living expenses. It may be inferred, from the evidence, that upon acquisition of the Alfredton house, the bankrupt directed a slightly lesser ($566.66) amount on a monthly basis to the mortgage over that property and thus had a similar amount of legally obtained funds at her disposal. It is as well to emphasise that in these circumstances the misappropriated moneys could not be said to have been converted or changed in form representing the Alfredton house as there is no evidence as to how the bankrupt acquired the equity in her Wendouree house, the net proceeds of which went to the purchase of the Alfredton property, and the payment of her mortgage was clearly from her own funds, in fact salary from the respondent. 71 Tracing the stolen funds to the property the thief purchased through a mixed fund or otherwise is not possible on the evidence. This distinguishes the case from a number of cases which appear similar. In Attorney‑General (Hong Kong) v Reid [1994] 1 AC 324 ("Reid"), a senior government bureaucrat who ultimately became Director of Public Prosecutions for the government of Hong Kong accepted bribes and purchased properties with the bribe money. Lord Templeman said at 331-2: "When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient . . . The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom the duty was owed. In the present case, as soon as the first respondent received a bribe in breach of the duties he owed to the Government of Hong Kong, he became a debtor in equity to the Crown for the amount of the bribe. . . the false fiduciary held the bribe on constructive trust for the person injured." 72 This instantaneous constructive trust in respect of bribes is similar to the constructive trust described in Black's caseby O'Connor J in respect of stolen funds. Leaving to one side the distinction to be made between Reid's case and the reasoning of Gibbs CJ in Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 at 379 (that a recipient of a bribe was not a trustee of the property but only an equitable debtor), this case is clearly distinguished on the facts from Reid's case. In Reid's case the trial judge's finding that the Attorney-General for Hong Kong had established an arguable case that each of three properties had been acquired with moneys received as bribes had not been challenged. In this case, a finding that there is 'a sufficient connection' between the trustees defaulting fiduciary obligation to the respondent and property acquired from that breach is challenged. The respondent in its pleadings below did not seek to have any taking of account or enquiries to determine the amount (if any) of stolen money invested in the property or the proportion of the proceeds of sale attributable to stolen money. In any event, there was the caution given by the federal magistrate which I have already described. 73 In National Australia Bank Ltd v Rusu [2001] NSWSC 32 ("Rusu")at [1] - [5] Bryson J found it highly probable that the first defendant, an employee of the National Australia Bank ("NAB") in Campbelltown, had stolen from the bank safe $476,500 and in consequence was liable in debt but also liable to tracing and other equitable remedies in respect of dispositions of the funds. At the time of the hearing she was serving a sentence of imprisonment after conviction for larceny based substantially on the facts alleged against her by the bank. Relevantly, at issue in the case was the identification of the quantum of moneys that the second defendant, who had lived in a domestic relationship with the first defendant, had obtained from her and himself used and in respect of which he was to be accountable to the NAB on the basis of tracing where property to which the money was applied can be identified. His Honour did not find that the second defendant had participated in the theft of the money as a principal or that he received or handled the whole of the funds. On the evidence Bryson J found at [20] that following the date of the theft by the first defendant "[t]here was a marked change in [the second defendant's] access to funds, particularly to cash funds and in the circumstances of his close association with the first defendant, it should be concluded that he obtained these moneys from her and knew that they were stolen." 74 On the basis that prior to the theft the second defendant had been able only to meet minimum monthly payments on certain loans, and in fact had been threatened with the power of sale in respect of one of these, Bryson J traced various transactions which post-dated the theft in which the defendant had been able to apply sums of cash totalling $213,318.60 as those for which he was accountable to the NAB. The reasoning adopted by his Honour is at [21]: "In my view it should be inferred, as overwhelmingly probable, when the second defendant started to make purchases and expend moneys on a scale which would be unusual for the financial state of his concreting business, soon after the first defendant had stolen a large sum of money, that he obtained that money from the first defendant and that he knew that she had stolen it from her employer…he must have known facts which showed that the money was held by her on constructive trust for NAB from which the money had been stolen." 75 His Honour also reserved, for further consideration, the bank's claims for tracing to establish remedies against seized assets of the first and second defendant so that the bank could have an opportunity to establish whether it is entitled to an equitable charge over any particular assets. There are broad similarities in respect of the enhanced material lifestyle permitted of the second defendant in Rusu in consequence of the use of misappropriated moneys and the bankrupt in this case with respect to the purely anecdotal evidence of the bankrupt's lifestyle of "a wealthy person". For example, at the time of the initial discovery of her theft, she had returned from "eight or 10 days at the Gold Coast where she took her family and a friend of her son's", who was a relation of another employee of the respondent. However, the cases are clearly distinguishable on the basis that although the property to which the stolen money was applied could be identified in Rusu, there is no clear evidence as to where the stolen money in this case went. The earliest activity in the bankrupt's ANZ One bank statement was an entry for 29 July 1999 showing the account overdrawn by $497.66. It is the only such statement adduced in evidence. I have already referred to the bankrupt's mortgage payments as being debited from a legal source of funds. 76 There is no doubt that the courts will hold that moneys stolen, whether in cash or by cheque, by a fiduciary (that is the bankrupt) which can be traced remain the moneys of the beneficiary (that is the respondent): see for example Menzies v Perkins [2000] NSWSC 40 ("Menzies") at [8]; Cashflow at [406]; Australian Postal Corporation v Lutak (1991) 12 NSWLR 584 at 589. However, even if a constructive trust of this type arises, evidence that there was once property received which at the time of its receipt was subject to a constructive trust is insufficient to found judgment in favour of the respondent. What the respondent must provide, if it is to establish there is any property now held by the bankrupt that is to be declared to be subject to a constructive trust, a proprietary remedy, is that identifiable property subject to such trust is still held by the bankrupt. See: Menzies at [14-16]; Cashflow at [451]-[453]. On the evidence before the magistrate, this is the vital element which cannot be made out on the facts of this case. 77 In any event, there can no be doubt on the authorities, the bankrupt is liable to account to the respondent in respect of the stolen funds and the respondent is entitled to recover the loss even if the stolen funds or any product of them can no longer be identified. See: Foskett at 120-121. 78 On this aspect of the case there was no error in the federal magistrate's findings that the respondent had an immediate right to restitution on discovering the theft being at least a right to restitution for money had and received. His Honour was also correct to find that the bankrupt breached her fiduciary duty to the respondent by the theft. His Honour was also correct to find that the breach of fiduciary duty was of a kind which could attract a 'restitutionary remedy for unjust enrichment.' See: J Glover, 'Bankruptcy and Constructive Trusts', Australian Business Law Review, 1999, p101. 79 However, with great respect, I am of the view that his Honour then erred in finding that the fact that the bankrupt had a 'pool of resources' including the fraudulently stolen money which enabled her to pay her living expenses including her mortgage payments, gave rise, as a matter of law, to a constructive trust, that is an equitable proprietary remedy, in respect of the proceeds of sale of the house. That finding did not depend on or derive from the process of tracing because there was an absence of evidence in respect of tracing. On a correct application of the relevant legal principles discussed above, whilst not entitled, as a matter of law, to find there was an equitable proprietary remedy available, his Honour would have been entitled to find that the bankrupt held the proceeds subject to personal equitable remedies, including an equitable lien or charge or a liability to account as a defaulting fiduciary. The practical difference is the difference between the trustee in bankruptcy being disentitled to the proceeds because they are impressed with a constructive trust giving the respondent a proprietary claim to the proceeds of sale, and the trustee being entitled to the proceeds but holding them subject to the equities arising from the bankrupt's conduct as a defaulting fiduciary. See: Re Goode: ex parte Mount (1974) 4 ALR 579 at 595-597. Of the possible remedies the one most apposite to the facts is an equitable charge. Grounds 6 to 8 inclusive of the appeal are made out.

80 However, having regard to the appellant's lack of success on other grounds, the appeal must be dismissed and the appellant must pay the respondent's costs.

I certify that the preceding eighty (80) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Crennan.

Associate: Dated: 5 May 2004 Counsel for the Applicant: G Bigmore QC

Solicitor for the Applicant: Abbott Stillman & Wilson

Counsel for the Respondent: J Strahan QC T Rosen

Solicitor for the Respondent: Robert Richter & Associates

Date of Hearing: 10 March 2004 Date of Judgment: 5 May 2004

Federal Court of Australia Act 1976(Cth)ss 24(1)(d), 25(1A)

Bankruptcy Act 1966(Cth)ss 121(1), 122(2), 122(2)(a), 122(4)(c)

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