Unjust enrichment
184. By reason of Babanour accepting and retaining the significant amounts paid to him, Babanour was unjustly enriched at the expense of and to the detriment of KSE, in circumstances where he is obliged to return the funds and compensate KSE for funds he is unable to return.
Money had and Received
185. Further, the significant amounts received and retained by Babanour was money had and received to the use of KSE.
Damages
186. In consequence of the breaches of duty aforesaid, KSE had suffered loss and damage
PARTICULARS
KSE lost:
(i) the money belonging to KSE received by Babanour, as set forth in the Schedule of Particulars referred to in Paragraph 183; and.
(ii) further particulars of loss to be provided in due course.
187. By virtue of Babanour's knowing participation in the said breaches of fiduciary duty, good faith and fraudulent behaviour, Babanour is also liable to account to KSE in respect of the said losses.
188. Further, by virtue of being the beneficiary and recipient of KSE funds with notice of the breaches aforesaid, Babanour is liable to account to KSE for all benefits received by him or those associated with him, directly or indirectly for the significant payments made including:
(i) the amounts payable to Babanour in cheques as set forth in the Schedule of Particulars; and
(ii) other payments received by him as set forth in the Schedule of Particulars.
16 The only argument of any substance put forward by counsel for the plaintiffs, relied upon the decision of Tipping J in Marshall Futures Limited v Marshall [1992] 1 NZLR 316. In that case the plaintiff company breached the trust upon which certain funds of clients were held by paying those funds to an associated company. The action was brought against that associated company and its directors for knowing assistance in breach of trust. A motion to strike out the statement of claim was heard by Tipping J. At page 330 et seq of his judgment Tipping J said:
In the present case Marshall Futures Ltd has since the events in question gone into liquidation and it is now under the control of a liquidator. Although in strictly analytical terms it is the same legal entity as it was when the allegedly fraudulent breaches of trust occurred, the hands controlling it are now those of the liquidator and not those of the directors. There cannot be any suggestion that the liquidator's hands are unclean. In substance the liquidator, through the vehicle of the company, is suing on the first cause of action for the benefit of the clients of Marshall Futures Ltd whose funds have been lost. I agree that at first blush it may appear a little bizarre that the nominal plaintiff is asserting its own fraudulent breach of trust as part of its cause of action against its officers.
It seems to me however that in these particular and usual circumstances the corporate veil can reasonably be lifted to reflect the reality of what is going on. There can be no disadvantage or injustice to the defendants is no doing. They cannot of course be bound by any concession the plaintiff may make as is inherent in its cause of action that it was in breach of trust and dishonest. That must be fully proved against the defendants in the ordinary way.
The plaintiff must prove that the hands of those who were controlling it at the material times were unclean in such a way as to make it, the plaintiff, fraudulent. It must also be proved that the hands of all those who are alleged to have assisted were also unclean. I am not to be taken in this approach to be saying that a company in liquidation is in law a different person from the company before its liquidation. What I am saying is that in substance in the present case the company now in liquidation raises the first cause of action in essence as the agent of its creditors.
Mr Goddard also mentioned the maxim ex turpi causa non oritur actio. That maxim is normally applied to claims at law but is, I agree, the equivalent of the equitable maxim of clean hands. In equity the normal approach is of course that someone seeking the assistance of equity must come with clean hands. However dirty hands are not an absolute bar and the whole circumstances must be taken into account before consideration is given to defeating an equitable claim on the basis that the plaintiff has unclean hands. In the very unusual circumstances which prevail in this case I do not consider it inevitable that the plaintiff's claim must be so defeated and I do not consider it right to strike out the first cause of action on this basis, ie that the wrong plaintiff is suing.
17 This decision was made in a similar application to that which I am now considering, namely a strike out application. His Honour did not consider it inevitable that the plaintiff's claim must be defeated and therefore he did not consider it right to strike it out. It does not seem to me to be possible that there can be a difference in rights where a company is subject to a members voluntary winding up in the case where it is solvent and a case where there is a winding up on insolvency which may or may not ultimately result in some funds being available to the contributories. If a company guilty of fraud under one set of directors comes under the control of an honest set of directors that cannot make a claim which, if made by the company in the control of dishonest directors, would fail, into a claim that could succeed if brought when honest directors were in control. Subject to what I say in paragraph 19 the moneys which the plaintiff company seeks to recover are moneys to which the plaintiff company has no right, those moneys having been obtained through its fraud. The persons having a right to recover such moneys are those persons from whom they were originally received.
18 Each party provided detailed written submissions on the motion. It is helpful to set out paragraph 2 of the plaintiffs' submission in response to the applicant's written submissions, which is as follows:
2. The nature of the claim against Mr Babanour is that he assisted Mr Suleman, and his company Karl Suleman Enterprizes Pty Limited (KSE) in running a fraudulent and illegal investment scheme, and received benefits including payments in connection with those activities. The causes of action are knowing receipt or knowing assistance of a breach of fiduciary duty and/or trust under the principles set out in Barnes v Addy , fraud, money had and received, unjust enrichment and breach of fiduciary duties arising from agency. KSE is now in liquidation and the liquidators have also been appointed receivers to the fund of money that comprised the investment scheme. Judgment was entered against Mr Suleman, and a sequestration order has been made against his estate.
19 There seems to be some confusion. It is not pleaded that KSE was a trustee of investors' funds or in some way a fiduciary. The relationship between the investors and KSE was probably one of debtor and creditor. The fiduciary relationship between Babanour and KSE is pleaded to arise as a result of a contract of agency. In those circumstances the principles derived from Barnes v Addy of knowing receipt of trust funds and knowing assistance in breach of fiduciary duty are irrelevant. There is no claim of trust fund; there is no allegation of fiduciary duty to investor. Thus although a trustee in breach of trust can pursue a claim against a co-trustee for the purpose of reinstating the trust fund: see Young v Murphy [1996] 1 VR 279 at 279 et seq and the cases discussed there, that is not the claim made by the plaintiff here. Marshall Futures can be explained as the funds sought to be recovered were trust funds, although I appreciate that is not the basis of the reasoning.
20 While I consider this the clear result of the present pleading, s601FC(2) of the Corporations Act 2001 (Cth) provides, as did its predecessor under the Corporations Law, that "the responsible entity holds scheme property on trust for the members". In such circumstances a defaulting responsible entity might be able to recover against a defaulting co-trustee or against a person in knowing receipt of trust funds. Whether or not some such action should be thought available to KSE I need not determine, as it is not pleaded that the moneys were trust moneys. Nevertheless, the possibility of successfully establishing a case based on KSE being a trustee points in the direction of strike out rather than dismissal.
21 The claims for money had and received, and unjust enrichment and breach of contract if it can be found in the statement of claim, have all the hallmarks of the Highwayman's Case, Everet v Williams (1787) European Mag Vol II page 360; 35 LQR 197, a bill in equity for partnership accounts between highwaymen, the major difference being in the result as there both highwaymen were hanged, the solicitors for the plaintiff were arrested, charged and fined for contempt, and counsel who signed the bill ordered to pay the defendant's costs. These claims must be defeated by the defence of illegality. While that decision could be better made on a pleaded defence and trial of the issue raised it seems to me to be clear. I do not understand it could be suggested that where the purpose of the contract is to engage in an illegal transaction, the plaintiff being the moving party as principal, there is any basis upon which the defence would not succeed. No alleviating fact or consideration of the type considered in Nelson v Nelson (1995) 184 CLR 538 such as public interest or the exceptions considered by McHugh J at page 605 or the discretionary matters he considered at page 611 could allow recovery by a plaintiff principal in an illegal transaction of moneys received by an agent in payment for the agent's participation in the transaction. Insofar as the claims are equitable a defence of lack of clean hands must succeed against the plaintiff even if there might be some doubt were the defendant suing the plaintiff. Repentance or washing of hands could not help in an action where the improper conduct of the plaintiff resulted in payments which the plaintiff seeks to recover.
22 I stated in Cauvin v Philip Morris Limited [2002] NSWSC 736 paragraphs 23 and 24 that I considered a general pleading of unjust enrichment unsustainable unless founded on some distinct category such as failure of consideration or money had and received. I remain of that view but in that case I refused to strike out the relevant paragraphs considering it not unarguable. Here it is illegality which is decisive.
23 I conclude that the plaintiffs cannot succeed on the present pleading against the fifth defendant. I am not dealing with the pleadings as against the other defendants although the same decision would inevitably apply I would think. I am not able to say that a properly pleaded claim by KSE which alleged the investors' moneys were held on trust for them by KSE would not succeed. I consider the first plaintiff should have the opportunity to replead to make such a claim if it so wishes.
24 The receivers cannot succeed for the reasons I have stated. Their claim should be dismissed. I said during the hearing, and I remain of the view, that the receivers should consider taking the course of seeking expanded powers from the court to enable them to bring action in their own names. They would then be entitled to bring the action without the risk that KSE will inevitably still have under any amended pleading. In any event as I have said under the existing pleading there is no cause of action by the receivers.
25 The orders are as follows: