Lurgi (Australia) Pty Ltd v Gratz [2000] VSC 278

5. At all material times Lurgi, a company incorporated in Victoria, was an engineering design consultant whose business it was to obtain contracts in Australia and in the South East Asian region for the design and construction of major engineering projects. Its subsidiary, Lucon, was typically engaged by Lurgi to perform the construction work for these projects. Lurgi itself is a subsidiary of a German company, Lurgi AG, which is, in turn, a subsidiary of Metallgesellschaft AG, both of which companies are based in Frankfurt.

8. Mr Dietrich commenced working for the Lurgi organisation in Frankfurt in 1956. He was sent to Australia from 1982 to 1987 and, on a more permanent basis, in June 1989. He was from 1 June 1989 the joint managing director and later the sole managing director of Lucon. He became a member of the board of Lucon on 1 August 1989 and of Lurgi of 1 April 1991. He retained these positions until his retirement and return to Germany in March 1995. Mr Dietrich had the overall responsibility for all of Lucon's activities and he had the authority to approve invoices and sign cheques on behalf of Lurgi.

11. Mr Gratz commenced with the Lurgi organisation in Germany in 1970. In October 1980 he was sent to Australia as the commercial and financial coordinator of Lurgi in this country. In June 1988 he, too, became a director of Lucon. In March 1995 he was appointed managing director of Lucon, in succession to Mr Dietrich, and a director of Lurgi. Mr Gratz was also company secretary for Lucon from 1 June 1988 and for Lurgi from 22 December 1989. He relinquished all of these positions when he was summarily dismissed for misconduct on 28 April 1995.

14. As commercial and financial co-ordinator of Lurgi Mr Gratz was the chief financial officer of the company. He was directly responsible for all of its commercial and financial operations and for the various commercial officers and commercial managers who worked with project managers to implement its projects. He was in charge of commercial operations associated with the tendering and negotiating and formulating of contracts, with the procurement of equipment and in charge of its accounting and banking operations. He had authority to sign invoices, cheques and purchase orders on behalf of Lurgi and Lucon.

17. In broad terms, what was alleged before me was that Mr Gratz and Mr Dietrich contrived to defraud Lurgi and Lucon in a number of ways:

(a) By having sub-contractors and suppliers perform work or supply materials for them personally and charging the cost to Lurgi and Lucon.

(b) By causing sub-contractors and suppliers to submit claims to Lurgi and Lucon for work on Lurgi projects which work was never done. The payments received by them or part of those payments were paid directly or indirectly to Mr Gratz or Mr Dietrich or to persons or companies on their behalf.

(c) By causing sub-contractors and suppliers to submit spurious claims for cost escalation. The extra payments received by them or part of those payments were paid to Mr Gratz or Mr Dietrich or to persons or companies on their behalf.

THE PARTICIPANTS IN THE PROCEEDINGS

23. There are no less than five proceedings before the court arising out of these frauds. They have been brought by Lurgi and Lucon against twelve defendants. On 1 May 2000, I ordered that all of them be heard together and that the evidence in each be evidence in each other proceeding. The proceedings are no. 6456 of 1995, no. 6802 of 1995, no. 6803 of 1995, no. 6884 of 1995 and no. 5122 of 1997. A sixth proceeding, no. 6804 of 1995, in which Lurgi alone is plaintiff and Stable Engineering (Australia) Pty Ltd is defendant has been settled. I have, nevertheless, determined to deliver separate judgments dealing collectively only with those proceedings where there was a common interest in the defendants; the reason for my adopting this course is that some of the evidence led in one proceeding had a different value in others.

26. A feature of the trial was the failure of most of the twelve defendants to participate. Three of them are companies controlled by Mr Gratz or Mr Dietrich which have been deregistered and the proceedings against them were struck out. The proceeding against Mr Gratz who is still in gaol has been discontinued, presumably because of the compensation order made against him. Mr Dietrich and Jellwick Court Pty Ltd had been represented by a firm of solicitors until a few days before the trial commenced. On 26 April 2000 I gave leave to the solicitors for those parties to file Notices of Ceasing to Act and no new solicitors have been appointed. Likewise, on 1 May 2000 I gave leave to the solicitor on the record for Culvert Excavations Pty Ltd and Culvert Constructions Pty Ltd to file Notices of Ceasing to Act and no new solicitors have been appointed. I was told at the commencement of the trial that the claims against Ruth Jillian Hedrick and Stable Engineering (Australia) Pty Ltd had been settled in principle. They did not appear at the trial and, on day 16, I was told that the settlements had now been achieved and orders were then made by consent. It followed from this that, of the twelve defendants in all proceedings, only Ritzer Gallagher Morgan Pty Ltd and Pearse Joseph Morgan were represented throughout the trial. Petra Gratz, the former wife of Mr Gratz, with my concurrence, was represented only on those occasions when her interests were directly the subject of evidence or argument.

29. Finally in this introductory part, I shall now introduce a number of companies which were mentioned in the evidence.

35. These companies were sub-contractors which performed work for Lurgi and Lucon. A principal of these companies was James William Dean, who gave evidence at the trial. They are both defendants in proceeding no. 6884 of 1995 and Culvert Excavations is a defendant in proceeding no. 6802 of 1995.

Stable Engineering (Australia) Pty Ltd ("Stable Engineering")

39. Stable Engineering was a company which performed engineering and fabrication work for Lurgi and Lucon during the early 1990's. Its owner and director was John Buhagiar who gave evidence at the trial. This company is the defendant in proceeding no. 6804 of 1995 but this proceeding has been settled.

43. SPI was an insulation sub-contractor whose principal, Roy Charles Turner, gave evidence at the trial.

47. Baigent was a consultant engineer which provided those services for Lurgi and Lucon from 1988 and on occasions for Mr Gratz and Mr Dietrich personally. Andrew Harry Baigent, its managing director, gave evidence at the trial.

51. Sibley was a firm of builders which was engaged by Mr Gratz in the late 1980s to carry out building works at his home at Dingley and again in the 1990s at his properties at 17 May Street, Hampton, 299 Great Ocean Road, Apollo Bay and 15 May Street, Hampton. The firm also built a house for Mr Dietrich at 125 Palm Beach Drive, Patterson Lakes. Gilbert John Sibley of that firm gave evidence of carrying out this work and of raising spurious invoices, at the request of Mr Gratz and Mr Dietrich, on Lurgi and Lucon in order to obtain payment for it.

55. Transart performed joinery and cabinet work for Lurgi and for Mr Gratz at his private homes in Dingley and 17 May Street, Hampton. William Cox, its managing director, gave evidence at the trial.

59. Sandess, now deregistered, was a defendant in proceeding no. 6803 of 1995. It was registered on 19 June 1991 and was acquired by Mr Gratz in August 1991. He arranged for two family friends, Mrs Hedrick, a defendant in proceeding no. 6802 of 1995, and her husband, Peter James Hedrick, to become its directors. Mr Hedrick was a witness at the trial. He said that he understood that Sandess was to be trustee of a family trust, but there was no evidence of this trust. In its ASIC return the principal activity of Sandess was said to be that of engineering consultant but there was no evidence that it ever engaged in this activity. In June 1992 Mrs Gratz became director and secretary in place of Mr Hedrick and on 1 December 1992, a few days after his 18th birthday, Mrs Gratz's son, Gerrik Gratz, replaced Mrs Hedrick as the remaining director. Sandess was said to be controlled by Mr Gratz and a vehicle through which he passed money for his own benefit. Mrs Gratz and her son were also its only shareholders.

63. PRS, now deregistered, was a defendant in proceeding no. 6802 of 1995. It was registered on 3 June 1993 giving as its principal activity on its ASIC return that of trustee of the PRS Engineering Trust. There was evidence that, until March 1994, it carried on the business of engineers or fabricators at Morwell performing this work for Lurgi and Lucon. Its directors were Mr and Mrs Hedrick who were its two shareholders. It was said that these directors were appointed because Mr Gratz himself could not properly be seen to control a company carrying out contracts for his employers. The registered office of PRS was the office of Ritzer Gallagher Morgan Pty Ltd in Morwell. PRS was said to be controlled by Mr Gratz and a vehicle through which he passed money for his own benefit.

67. RGM was and is a company incorporated in 1987 to carry on the business of accountants in Morwell, Traralgon and Sale which had previously been conducted as a firm under the same name, Ritzer Gallagher Morgan. RGM is the firstnamed defendant in proceeding no. 5122 of 1997. Its director, Pearse Joseph Morgan, the second defendant in the same proceeding, gave evidence at the trial. He practised as a chartered accountant at its Morwell office. RGM and Mr Morgan were involved in the establishment of PRS in June 1993 and, on instructions from Mr Gratz, carried out various administrative, accounting and banking tasks for that company in the year or so following.

71. This company, now deregistered, was a defendant in proceeding no. 6802 of 1995. Consetra was registered in October 1991. Its first directors were Mr Hedrick and Mrs Gratz. Mr Hedrick resigned as director and secretary in favour of Mr Gerrik Gratz on 1 December 1992. In its ASIC return Consetra described its principal activity as that of engineering consultants but there was no evidence that it ever performed this activity. This company, too, was said to be controlled by Mr Gratz and a vehicle through which he passed money for his own benefit. Its shares were held as to 11 by Mrs Gratz and as to 1 share by her son.

75. Jellwick Court is a defendant in proceeding no. 6803 of 1995. It was registered on 21 December 1994. Its directors since 1 January 1995 were Mr Dietrich and his wife, Rosa Elizabeth Dietrich. Mr Dietrich told the KPMG investigator that it was set up to perform consultancy work. It was said to be a company controlled by Mr Dietrich and a vehicle through which he passed money for his own benefit.

80. In this proceeding Lurgi and Lucon are plaintiffs; the defendants are Mr Dietrich (secondnamed defendant) and Mrs Gratz (thirdnamed defendant). The proceeding against the firstnamed defendant, Mr Gratz, has been discontinued. The claim of the plaintiffs is contained in their further amended statement of claim filed on 29 September 1997. Mrs Gratz has filed no defence but no point has been made of this. The defence of Mr Dietrich is that filed on 15 October 1997.

83. In their claim Lurgi and Lucon allege, first, that Mr Gratz and Mr Dietrich, fraudulently and in breach of fiduciary duties owed to their employers, received from Lurgi $6,652,585 and from Lucon $1,222,617. It is said that Lurgi and Lucon are entitled to recover these sums from Mr Gratz and Mr Dietrich as moneys had and received to their use or as constructive trustees of those moneys. Alternatively, these sums are claimed on the basis that they were paid to sub-contractors and others in reliance upon the fraudulent representations of Mr Gratz and Mr Dietrich that they were properly payable. There is a further claim against Mr Gratz for $361,220 for sums paid to him by purchasers of cars which he caused to be sold by Lurgi and Lucon at an undervalue. Next, is a claim against both Mr Gratz and Mr Dietrich for $23,296 paid by Lurgi and Lucon for travel expenses to which the two men were not entitled.

86. Of the receipts totalling $7,875,202 referred to in the first claim, $5,363,499 was said to have been paid in the first instance to a number of sub-contractors or suppliers, most of whom are or have been defendants in one or other of these proceedings. A further $1,187,273 was paid by Lurgi ($793,149) and by Lucon ($394,124) to Mr Gratz's own company, PRS, in response to fictitious invoices. The payments made to the other sub-contractors and suppliers were particularised as follows:

90. Of these sums, $1,173,172 was said to have been on-paid to PRS between 11 April 1994 and 20 March 1995 by SPI ($980,167) and by Culvert Constructions ($193,005). The total amounts which in this way found their way directly or indirectly to PRS were therefore $2,360,445. Furthermore, of the sums paid to these sub-contractors and suppliers, $1,651,544 was on-paid to Sandess between 4 October 1991 and 24 August 1994 by SPI ($818,000), by Culvert Excavations ($72,750) and by Culvert Constructions ($760,794). All of these on-payments are said to have been made by the subcontractors and suppliers and PRS at the direction of Mr Gratz and Mr Dietrich in breach of their fiduciary duties and that the sums were received and held by PRS and subcontractors and suppliers as constructive trustees for Lurgi and Lucon or for one or other of them.

93. Next, it is said that in the same period, from 8 April 1994 to 20 March 1995, PRS passed on to Sandess payments totalling $290,000 and that in the same period $1,565,000 was paid to Consetra by PRS ($1,100,000) and by Sandess ($465,000). In each case, these payments were said to be part of the ill-gotten gains of PRS and Sandess and were procured by Mr Gratz fraudulently and in breach of his fiduciary duties. These payments take the total payments improperly received by Sandess to $1,941,544 and those by Consetra to $1,565,000. It is said that Sandess and Consetra received these monies as constructive trustees for Lurgi and Lucon.

96. The next allegation is that Sandess and Consetra paid part of the money they received in this way into a Westpac bank account in the joint names of Mr and Mrs Gratz. These payments total $1,422,897; $940,997 from Consetra (23 payments) and $481,900 from Sandess (17 payments). These sums received by Mr and Mrs Gratz in the joint account are said to have been fixed with a constructive trust in favour of Lurgi and Lucon. Alternatively, $371,900 (12 payments) of the payments made by Sandess into the joint account were said to have been made to Mrs Gratz herself and, therefore, to have been received by her subject to a similar trust.

99. Next, it is said that in April 1995 two payments totalling $137,500 were made from the joint account to Mrs Gratz' own bank account. These sums too were said to have been received by her subject to a constructive trust in favour of Lurgi and Lucon.

102. It is then put against Mrs Gratz that she knowingly and dishonestly assisted in certain, not clearly specified, breaches of fiduciary duty inasmuch as she authorised the payment of $35,000 by Sandess to Consetra on 18 May 1992, permitted Consetra to be used as a conduit for the proceeds of the frauds, and provided false corporate returns in respect of that company. This last allegation does not appear to have been pursued. The surprising consequence of this, it is alleged in paragraph 42, is that the sums totalling $1,565,000 received by Consetra from PRS and Sandess were held by her as constructive trustee for Lurgi and Lucon.

105. Accordingly, it is alleged that she holds subject to constructive trusts in favour of Lurgi and Lucon -

(b) $465,000, the total sum paid by Sandess to Consetra;

(c) $940,997, the sum paid by Consetra into the joint account;

(d) $481,900, the total sum paid by Sandess into the joint account, alternatively $371,900 of that sum; and

Lurgi and Lucon seek declarations to this effect and orders that she pay these sums to them.

114. I should add at this point that on day 15, immediately prior to the commencement of the final address by counsel for Mrs Gratz, counsel for Lurgi and Lucon sought further to amend their statement of claim. Some of these amendments were to correct insubstantial errors which had emerged at the trial and they were consented to and permitted. The following amendment, however, was opposed on behalf of Mrs Gratz. This amendment proposed to add two new paragraphs:

"37B. Between 18 May 1992 and 23 March 1993 payments were made from the Joint Account in the acquisition or improvement of assets of the Third defendant.

Particulars

The relevant assets were: (a) The property at 17 May Street, Hampton; (b) The property at 15 May Street, Hampton; (c) The property at 89-91 Great Ocean Road, Apollo Bay; (d) The farm at Romsey more particularly described in Certificate of Title Volume 10209 Folio 794. 37C. Further, on 21 March 1993 Consetra paid out of the on-payments made to Consetra the sum of $153,906 to purchase a property at Rosedale in the name of the third Defendant."

As a consequence, I was told that Lurgi and Lucon would seek specific orders that these properties are held by Mrs Gratz on trust for them or charged with the repayment of the stolen money. There was an immediate difficulty facing such an order inasmuch as it concerned the two May Street properties. The evidence before the court had shown that they had been sold by the Westpac Bank as mortgagee. Moreover, the Romsey property stood in the joint names of Mr and Mrs Gratz. Mr Gratz was no longer a party to the proceeding. In any event, I refused this late amendment on the basis that Mrs Gratz had, on the present pleadings, no present need to address the question as to the contribution made to the purchase of these properties from sources other than money stolen from Lurgi and Lucon and that to allow the amendment at this time would cause her irreparable prejudice.

119. The defence of Mr Dietrich filed on 15 October 1997 puts these allegations in issue insofar as they concern him. The solicitor for Mrs Gratz indicated to me that his client's position was that she did what she did innocently and without any dishonest intention; she merely performed acts at the direction of her then husband.

123. In this proceeding Lurgi and Lucon are plaintiffs. There were four defendants. The firstnamed defendant, PRS, and the secondnamed defendant, Consetra, have been deregistered and the claims against them have been struck out. The thirdnamed defendant, Culvert Excavations, was unrepresented. The claim against the fourthnamed defendant, Mrs Hedrick, has been, as I have mentioned, settled. On day 16 the proceeding against this defendant was dismissed by consent. The remainder of this proceeding is the subject of a separate judgment.

127. In this proceeding Lurgi and Lucon are plaintiffs. There are three defendants. The firstnamed defendant, Sandess, and has been deregistered and the claim against it was struck out. The secondnamed defendant is Mrs Gratz and the third defendant is Jellwick Court, which company was unrepresented.

130. In their further amended statement of claim filed on 29 September 1997, Lurgi and Lucon allege that Sandess knowingly received from SPI sums totalling $1,022,500, alternatively $817,000 which were impressed with a constructive trust in their favour. These moneys were part of the sums obtained by SPI pursuant to fictitious invoices raised on Lurgi and Lucon which were procured by Mr Gratz and Mr Dietrich. The plaintiffs say that Mrs Gratz had knowledge of the facts which give rise to the trust so that she too is liable to account to them for that sum. Alternatively, she is liable to account to them for $150,000 of that sum since it was she who prepared the fictitious Sandess invoice addressed to SPI upon which payment of that sum was made on 1 October 1991. In her defence filed on 7 February 1996 Mrs Gratz joins issue with these allegations.

133. The claim against Jellwick Court was that on 24 January 1994 it received a payment of $137,000 from Sandess. It is put that this was a voluntary payment and that, at the time it was received, Jellwick Court was aware of the facts which gave rise to the existence of the trusts over the Sandess funds. In its defence filed on 15 October 1997 Jellwick Court joins issue with these allegations.

137. This proceeding brought by Lurgi against Stable Engineering was, by consent, struck out with a right of reinstatement on day 16 of the trial.

141. In this proceeding Lurgi and Lucon are plaintiffs. There are two defendants, neither of which was represented at the trial. They are Culvert Excavations and Culvert Constructions. This proceeding is the subject of a separate judgment.

145. In this proceeding Lurgi and Lucon are plaintiffs. The defendants are RGM and Mr Morgan. The claim against the thirdnamed defendant, Moreseast Pty Ltd, has been remitted to the County Court. The remainder of this proceeding is the subject of a separate judgment.

149. This part of the plaintiffs' case was not challenged. Nevertheless, it involved serious allegations against an unrepresented defendant. I have accordingly examined with care the voluminous documentation produced in evidence to satisfy myself whether the allegations have been made out. Although the case falls to be decided on the balance of probabilities, I am mindful of the warnings of Dixon J in Briginshaw v Briginshaw.[1] I have examined the documents and other evidence offered in support of the plaintiffs' allegations of fraud by Mr Gratz and Mr Dietrich as set out in the 79 transactions which were identified by counsel. I am satisfied that all but three have been proved. I summarise my findings on this part of the case in the schedule which now follows.

* No evidence that the work was not done as invoiced.

162. It therefore appears that Lurgi paid under spurious invoices $6,366,656 and Lucon a further $1,420,583 to PRS, SPI, Culvert Constructions, Culvert Excavations, Baigent, Stable Engineering, Transart and Sibley. It appears, too, that Mr Dietrich was implicated in most of these transactions. He signed or counter-signed 44 of the cheques drawn by Lurgi or Lucon in payment of these invoices. He was implicated in a great many of the transactions by the evidence of the witnesses about them. His position in the company renders it likely that he was aware of what was happening and, in some cases, the benefit of the transaction has been shown to have accrued directly to him. No evidence was led on his behalf. I conclude that he was in breach of his fiduciary duty to Lurgi and Lucon or knowingly assisted in the breaches of duty by Mr Gratz which caused the losses which I have identified. He is, therefore, liable for those losses.

165. I should not leave this topic without making mention of the evidence of the suppliers and sub-contractors. There appeared in a report prepared by KPMG Hungerfords on behalf of Lurgi after the frauds were discovered the following statement:

"The long term construction industry has a long established reputation for corruption both internal and external to the organisation. The relatively high incidence of corruption is in part due to the highly competitive nature of the industry where many sub-contractors will make the most of any opportunity to ingratiate themselves to principals or senior management of their clients and potential clients including the payment of secret commissions in money or in kind."

John Charles Taylor, the managing director of Lurgi, said that he was aware of this reputation but that he had not seen much evidence of corruption in his 30 years' experience in the industry. Other witnesses agreed that the construction industry was afflicted with this reputation. If it has such a reputation this must be in no small part due to the practices which I have heard described by the witnesses before me. Evidence was given by Mr Dean, the principal of the two Culvert companies, and by Mr Turner, the principal of SPI, that they did not, at least at the beginning, see any illegality in raising spurious invoices at Mr Gratz's request. Mr Turner said that he thought that PRS and Sandess were subsidiaries of Lurgi and that he was being asked to move money around within the group and that this was just the way they handled their Australian operations. Mr Cox, the principal of Transart and Mr Sibley, who both billed private work to their client's employers were not asked about this. The engineers, Mr Buhagiar and Dr Baigent who, likewise, billed private work to Lurgi and Lucon were also not asked about this matter. They all said they did this at the request of Mr Gratz and sometimes of Mr Dietrich. Nothing was asked and nothing was said by these witnesses by way of explanation for this remarkable conduct. Perhaps they, as did Mr Morgan in proceeding number 5122 of 1997, would say that the significance of their conduct did not strike them. Since no impropriety was alleged against them in this proceeding, I make no finding about it. I would not, however, like it to be taken that any failure to make adverse comment on my part about the complaisance of these witnesses as an indication that I see, or indeed that the court sees, such conduct as an acceptable norm in the construction industry, or in any industry.

171. This claim concerns the sum of $137,000 which was received by Jelliwick Court on 24 January 1995 from Sandess. This money is said to represent part of the money received by Sandess from SPI which in turn received it fraudulently from Lurgi and Lucon.

174. The evidence shows that the payment of $137,000 from Sandess to Jellwick Court was made by cheque number 100058 dated 23 January 1995. Mr Dietrich told Peter David Morris, KPMG forensic accounting manager, that this was a "goodwill payment" from Mr Gratz, but it is clear that Mr Gratz channelled the money through Sandess.

177. I have no doubt that Mr Dietrich, who was the mind behind Jellwick Court, was well aware of the dishonest source of these funds. I infer this from my findings as to his general complicity in the systematic frauds on his employers. It follows that Jellwick Court is liable to Lurgi and Lucon for this sum.

181. Mrs Gratz said, as did so many witnesses in this proceeding, that she did what she did on Mr Gratz's instruction without any appreciation of his dishonest activities. She said that she did not doubt his honesty when, at Easter 1995, he was suspended by Mr Taylor on suspicion of fraud, nor when he was summarily dismissed for misconduct on 28 April 1995. She said that she suspected that something was amiss when, shortly after Easter, Mr Dietrich said to her husband that if he took "the blame for this" he, Dietrich, would give him, Gratz, his home at Patterson Lakes, but that it was not until August 1995 when members of the Police Fraud Squad came to her house that she truly realised what her husband had done.

184. It was not put against her that she was liable as a party to the frauds of her husband but that she was dishonestly involved in the movement of funds through Consetra and that she received the proceeds of her husband's fraud and that she was therefore liable to account for them to the true owners. This receiving claim was put on the alternative bases that she received the money simpliciter and that she received it knowingly.

187. The starting point for the claim against her was the proof of the frauds visited upon Lurgi and Lucon by Mr Dietrich and Mr Gratz. I have already set out my findings as to these. The proceeds of these frauds followed a complex series of routes, some using PRS, some Sandess, some Consetra or a combination of these. The first point at which the trail is of particular interest for present purposes is that where the tainted money was received by Consetra. Fifteen deposits totalling $1,565,000 are relied upon. They are summarised below.

195. I accept that all of these payments were made from fraudulently obtained money. I accept, too, that Consetra received these moneys knowing this fact. For these purposes, the knowledge of its de facto director, Mr Gratz, will suffice. What is alleged in paragraph 42 of the statement of claim is that Mrs Gratz holds the sums totalling $1,565,000 as constructive trustee for Lurgi and Lucon. She herself cannot be said to have received these payments. Although it is nowhere pleaded, it would seem that the basis of this allegation must be that she knowingly assisted, within the meaning of the first limb of the rule in Barnes v Addy[2], in the breaches of fiduciary duty by Consetra inasmuch as it dishonestly received these tainted funds.

198. I have examined the fourteen cheques in question and find that all, except the first, were signed by Mr Gratz. Cheque number 13621 was signed by Mrs Gratz. The deposit slips in evidence also show that all were deposited by Mr Gratz.

201. The evidence showed that, from the Consetra account a number of cheques were drawn. Again, I am satisfied that the sums withdrawn by these cheques were part of the fruits of the frauds committed by Mr Gratz and Mr Dietrich. In paragraph 32 of the statement of claim, twenty-three cheques are said to have been drawn on this account and paid into account number 530436 at the 600 St Kilda Road branch of the Westpac Bank standing in the joint names of Mr and Mrs Gratz. This was, she told me, the family bank account and the only one which she maintained. Cheques on that account might be signed by either her or her former husband. I set out below a summary of the twenty-three cheques. In the column headed "deposit" I identify those sixteen payments which were shown to have been deposited in the joint account.

210. All of these sixteen cheques, with the possible exception of cheque number 100056 which was not in evidence, were written and signed by Mr Gratz. An examination of the deposit slips shows that, of those sixteen deposits, all but three were made by him. The two cheques paid in on 20 December 1994 were deposited by Mrs Gratz and that deposited on 13 January 1995 was deposited by one Karole Thomson, whose identity is not known to me. The total value of the 16 cheques deposited in the joint account is $664,978.

213. Another aspect of Mr Gratz's fraud was to have SPI raise fictitious invoices on Lurgi and Lucon for which it would be paid. Sandess would in turn raise fictitious invoices on SPI so that this money, or most of it, would come within his control. Proceeding no. 6803 of 1995 concerns eight of these payments by SPI to Sandess of fraudulently received money. In paragraph 9 of the further amended statement of claim these payments are particularised but the banking records disclose that the sums actually received by Sandess were considerably less than those alleged. The deposits in the Sandess accounts, as I find them, appear in the following table. They total $864,250.

221. An examination of the bank records shows that four deposits were made by Mr Hedrick and three by Mr Gratz. One was not produced and the remaining deposit was by bank warrant.

224. The plaintiffs allege against Mrs Gratz in that proceeding that she knowingly assisted in the frauds of her then husband. Alternatively, they allege that she knowingly assisted in the receiving by Sandess of the first of these payments, inasmuch as she herself raised the Sandess invoice on SPI in response to which this payment was made.

227. Returning to proceeding number 6456 of 1995, the third group of payments, those alleged in paragraph 33 and 34 of the statement of claim, are payments made as the next step in the fraud process. They are eighteen payments said to have been made from Sandess in favour of the joint account.

230. I am satisfied that these payments were payments of money stolen from Lurgi and Lucon. The funds from which these cheques were drawn represented the fruits of the fraud of Mr Gratz and Mr Dietrich in the hands of Sandess. Sandess, as the creature of Mr Gratz, received these with knowledge of their tainted source and handled them as a knowing assistant in the fraud and breach of fiduciary duty of Mr Gratz, within the meaning of the Rule in Barnes v Addy. The details of the cheques are set out below, indicating in the deposit column the fourteen amounts which were in fact paid into the joint account.

238. All of these cheques, except that dated 8 November 1994 of which there was no evidence, were signed by Mr Gratz or by Mr Hedrick, who I take to have been acting on Mr Gratz's instructions. They total $501,900.

241. Finally, the claims against Mrs Gratz concern two cheques drawn on the joint account in her favour. They are cheque number 100474 dated 20 April 1995 for $87,500 and cheque number 100478 dated 28 April 1995 for $50,000. Each cheque was written and signed by Mr Gratz. He also deposited each of them in her newly opened account with the National Australia Bank.

245. Central to the case concerning Mrs Gratz was her state of knowledge of the dishonest activities of her then husband. She maintained her ignorance until well into 1995 and there was no direct evidence to contradict her. Counsel for Lurgi and Lucon, nevertheless urged me to reject her protestations and for the purpose they mounted a substantial circumstantial case against her.

248. I start with the facts which she incontestably knew. She told me that her husband in 1991 to 1995 enjoyed a substantial income comprising salary of $9,000 to $11,000 per month, a director's fee of $6,000 from Dry Coal and unspecified income of about $2,100 per month paid to him in Germany. She knew him to be a trained economist and a skilled and successful businessman. He must have been, too, a very plausible or persuasive man or both. She knew that he had set up Sandess and Consetra and later PRS.

251. Mrs Gratz is by training a laboratory assistant and she worked in that capacity with a doctor in Germany. Apart from some cleaning work for Lurgi she had no paid employment after she came to Australia in 1980 with her five year old son Gerrik. She struck me as an intelligent woman who had little experience in commercial matters. She said that her husband handled all of the financial affairs of the family other than the normal household bills which she paid.

254. She was pressed in cross-examination with a large number of tax returns and ASIC returns and a loan application which she signed. She said that she signed them without reading them at the request of her then husband. These documents showed that in 1993 and 1994 Sandess and Consetra had enormous turnover and substantial profits, some of which are shown as coming to her by way of dividend or salary. This is to be contrasted with her stated belief that she knew of no business activities which they conducted.

257. She was aware that she and her husband had since 1993 engaged in a spectacular spending spree, buying a number of properties and carrying out substantial renovations. The level of spending was such that it caused comment among Mr Gratz's fellow employees. By way of example, purchases of real estate in and after 1993 were a house property at 299 Great Ocean Road, Apollo Bay for $160,000 in early 1993; a house property at 15 May Street, Hampton, next door to their home, for $225,000 in September 1993; a unit at 5/25 Elizabeth Avenue, Broadbeach, Queensland purchased from Mr Dietrich for $110,000; a farm at Romsey purchased from Mr Dietrich in February 1995 for $127,000; two vacant commercial lots at 89-91 Great Ocean Road, Apollo Bay for $240,000 on 14 February 1995 and a farm at Rosedale purchased from Mr Dietrich for $153,000 on 23 March 1995. She said that she was unhappy about the money her then husband spent on properties and it was a cause of dissension between them. His explanation to her was that the money for the purchases was borrowed and secured by mortgages. The decisions to make these purchases where those of Mr Gratz and in the case of 89-91 Great Ocean Road, he did not tell her of the purchase at all.

260. I watched her carefully as she was extensively cross-examined on these and other matters. Her memory was often shown to be faulty and her evidence in some respects inconsistent with earlier statements by her or with established fact. I must say that I find it surprising that a wife of some 25 years would not have had doubts about the source of the substantial funds which were being spent by her husband at an increasing rate as March 1995 approached. I must, however, act upon evidence and not suspicion or speculation. I am unable to be satisfied that at that time she actually knew that her then husband was obtaining this and other money dishonestly from his employers. I do not find that she wilfully shut her eyes to the obvious. I am not satisfied that the facts she then knew would point to dishonesty in the mind of an honest and reasonable person, or that she recklessly failed to make enquiries about these matters which such a person would make.

264. The case against Mrs Gratz arising out of these receipts was, first, that she knowingly or dishonestly assisted in the breaches of fiduciary duty by authorising the first payment from Sandess to Consetra in the sum of $35,000 and that she permitted Consetra to be a conduit for the funds which were the product of her former husband's frauds.

267. For the purpose of such a claim Lurgi and Lucon must establish that, at the time she performed the acts of assistance, Mrs Gratz actually knew that funds had been dishonestly obtained so as to give rise to the existence of a constructive trust in favour of Lurgi and Lucon, or that she knew facts which would indicate this to an honest and reasonable person.[3]

270. The single payment in question was that made on 18 May 1992 by cheque number 136321 in the amount of $35,000 drawn on Sandess' account in favour of Consetra. The cheque was made out by Mr Gratz but signed by his then wife. She acknowledged her signature but said that she had no knowledge of the transaction. She said she often signed blank cheques when requested to do so by her then husband and that this must have been such a cheque. As I have mentioned, the deposit slip appears to have been made out and signed by Mr Gratz. On the same day he drew cheque number 026751 on the Consetra account for the same amount in favour of his wife. Although no deposit slip was produced, it would seem from the bank statements that this cheque was on the same day paid into the joint account which was, immediately prior to this deposit, overdrawn. This deposit in the joint account permitted it to support a cheque in the sum of $22,750 which was the deposit on the house property at 17 May Street.

273. It was submitted on behalf of Lurgi and Lucon that I should treat Mrs Gratz as an unreliable witness and therefore reject her explanation about the cheque. I decline to do so. I accept that her then husband handled the purchase of the 17 May Street property and that he gathered the funds from the Sandess cash management account via the Sandess cheque account and then via Consetra for the purpose. Why this was necessary is not clear. Why he had her sign one of the cheques when he might have done so is, likewise, unclear. I am not, however, prepared to infer that she was in May 1992 aware of the fraud which underlay the ultimate source of these funds or that the facts of which she was aware were such as would indicate this to an honest and reasonable person in her position. Moreover, I do not find that she wilfully shut her eyes to these facts or to the implications to be drawn from them.

276. Second, it was put that she knowingly assisted in the frauds of her then husband by permitting Consetra, a company of which she was a director and a majority shareholder, to be used as a receptacle and, in due course, a conduit for sums totalling $1,565,000 which it received from Sandess and PRS between 18 May 1992 and 3 February 1995 and which are detailed above at [47]. It will be recalled that, with the exception of cheque number 136321, she has been shown to have had no actual involvement in any of these receipts. She maintained in evidence before me that, at the relevant time, she had no reason to doubt the honesty of her husband or the accuracy of the explanations which he gave her. The requirement as to knowledge for a claim such as this involves a component of dishonesty as this is understood in equity. While it is tempting to look back at her state of mind when all the facts are known and the overall picture has emerged, I must look at it at the time of the transactions in question and in the light of the facts then known to her. I am unable to conclude that she played the role of a knowing assistant with respect to the Consetra receipts as counsel for Lurgi and Lucon contended.

281. It is convenient at this point to consider the similar allegation made in proceeding number 6803 of 1995 with respect to the Sandess receipts totalling $864,250 as detailed above at [52]. The dates of these receipts lie between 1 October 1991 and 12 August 1994.

284. Mrs Gratz is shown to have had an actual involvement only with the first of these transactions. She wrote Sandess invoice 673102 dated 16 September 1991 in response to which the payment was made. She was at that time not a director of Sandess; it was not until some ten days later that she became a signatory on its bank account. She said that she wrote the invoice at the request of her then husband on the basis that her writing was better than his. She said that she wrote the invoice at his direction for $50,000, less $30,000 PPS Tax, a net claim of $20,000. There was considerable debate as to whether her evidence on this point was accurate. A copy of the invoice in evidence had the figure "1" added in front of each of the figures $50,000 and $20,000. For my purposes, the point is not of significance except insofar as it reflects upon her credit. There is no doubt the invoice when sent to SPI was correct; correct, because it cannot be correct that PPS Tax payable on $50,000 is $30,000. The payment received from SPI was for $120,000. Mrs Gratz endorsed on the invoice that payment had been made by cheque on 30 September 1991. It was deposited in the Sandess account by Mr Gratz the following day. Whether Mr Gratz made the correction or she did, there is no doubt that she had an involvement in the transaction by writing the original invoice. If a finding on this matter is necessary, I am not satisfied that she inserted the added figures in the invoice. I accept that she wrote the invoice as she said, at the dictation of her then husband, but that she did so inaccurately and that she had no idea nor any reason to suspect that the transaction was a step in a process whose object and effect was to defraud Lurgi.

287. Having regard to this conclusion and to her lack of involvement in the other eight Sandess receipts, I do not find that she knowingly participated in the frauds of which they were undoubtedly a part.

291. In the case of the Consetra payments and the Sandess payments, the evidence shows that, as a joint owner of the bank account into which they were paid, she was a recipient of the fruits of the frauds. She said that she received these funds innocently without knowledge or the basis for knowledge of their fraudulent provenance. Before I turn to the facts it is convenient that I set out briefly the legal principles which are applicable to these claims.

294. The funds the subject of the Sandess Payments and the Consetra Payments were trust money. In each case Sandess and Consetra held the money on trust for one or other of the plaintiffs as the victims of the fraud. The Sandess Payments and the Consetra Payments were made in breach of that trust. In Black v Freedman,[4] the High Court treated stolen funds as being subject to a similar trust in favour of the true owner. Where, as in that case, the thief makes a gift of the funds to another, that other is amenable to equitable jurisdiction notwithstanding that the recipient had no notice of the theft for there is no valuable consideration for the payment.[5] In that case, however, the recipient had no notice of the theft at the time of receipt but discovered it while the funds were still in her hands. In such a case the equitable obligation arises when this knowledge is acquired.[6] The trust in such a case attaches only to stolen funds then in the hands of the recipient. Where these funds are no longer held by the recipient and tracing is possible, it would attach to other property in the hands of the recipient which had been purchased with those stolen funds.[7] I was pressed with an argument to the effect that liability in equity for such a receipt arises immediately the stolen funds are received notwithstanding that the recipient is ignorant of the theft. I do not think that this is correct. In Black v Freedman Griffith CJ puts it this way:

"I think that where a man pays a large sum of money to his wife, and no more appears, the inference is that it is a present. Therefore the doctrine of equity is applicable. The money is identified; it came into her hands as a volunteer, and she is liable to repay it. It was pointed out by Sir George Jessel, in a well known case, that a man may at a certain stage be innocent, but that, if he knows that he has got the advantage of a fraud to which he was no party and says he will keep it, then he becomes himself a party to the fraud and is liable to the jurisdiction of the Court of Equity."[8]

298. This is the principle which I shall apply to the present case. The funds in the joint account which, in accordance with conventional principle, represent the fruits of the frauds of Mr Gratz are fixed with a trust in the hands of the account holders only when this fraudulent source is known. If it should matter in this case I will treat as sufficient knowledge for this purpose any of the first four categories identified by Peter Gibson J in Baden v Soci,t, G,n,rale pour Favoriser le D,veloppement du Commerce et de l'Industrie en France SA.[9] The recipient has knowledge for my purposes where it is shown that they have:

(i) actual knowledge of the fraud or the breach of fiduciary duty from which the funds have been derived; or

(iii) wilfully and recklessly failed to make enquiries that an honest and reasonable person would make; or

(iv) knowledge of circumstances that would indicate the facts to an honest and reasonable person[10].

It may be that the knowledge required for a knowing receipt is less than that for a knowing participation, but this is of no moment given the findings I make. I am mindful, too, of the compelling reasoning of Hansen J in Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd[11] which would impose a strict liability upon a recipient subject to the recipient showing that the retention of the sums is not unconscionable. Nevertheless, like his Honour, I am content to leave for another day the question whether such liability should be imposed upon the recipient of misapplied trust money.

306. I return now to the facts. The Consetra Payments were deposited in the joint account on various dates between 15 May 1992 and 5 September 1995; the Sandess Payments from 15 October 1991 to 13 July 1995. The joint account, of course, stood in the name of Mr and Mrs Gratz. There is no doubt that he had actual knowledge of the frauds from which all of these funds were derived.

309. The state of knowledge of Mrs Gratz is more difficult. She accepts that in August 1995 when she was interviewed by the police she believed that her then husband had engaged in systematic fraud. In my judgment her relevant knowledge dates from Easter Sunday when Mr Gratz was suspended. This was 16 April 1995. She then knew that he was accused of serious dishonesty. This accusation made against the background of his previous conduct must have indicated to her that the sums passing through his hands were illicit. Her conduct thereafter shows her to be a woman who was concerned, as far as possible, to protect for the use of herself and her family the assets which she then knew were the product of her husband's dishonesty. She was aware that he borrowed $200,000 on 19 April following his suspension, a sum set aside to meet the expected legal and other expenses ahead. It was she who signed on 8 May 1995 transfers to Lurgi of the real estate which her husband had bought and then reneged, maintaining her title to them. She said that after that, after Easter, she was depressed and confused and, understandably so. I am, however, satisfied that, by this time, if it had not earlier occurred to her, she knew that most of the funds for the purchases which she had for some years enjoyed, had been dishonestly obtained from the plaintiffs.

312. With respect to the pre-Easter 1995 period, I am, with some hesitation, not prepared to find that she knew, in the sense that I use that word in this context, of these matters. I find that, prior to 16 April 1995, she, like so many other witnesses in this case, was a dupe of Mr Gratz. I do not find that she wilfully shut her eyes to the obvious or that she recklessly failed to make proper enquiries. Nor do I find that she knew facts which would indicate the true position to an honest or reasonable person.

315. I conclude, therefore, that the last three Sandess Payments, to a total value of $50,000 and the last three Consetra Payments to a total value of $34,978 which were received into the joint account after 16 April 1995 were so received when both account holders relevantly knew of their fraudulent origin. The earlier sums received by them in the joint account from the Sandess Payments and the Consetra Payments were so received when one only of the account holders had that knowledge. It was not submitted on behalf of the plaintiff that this was sufficient to bring the innocent account holder within the jurisdiction of equity. Limiting myself to the interest of Mrs Gratz alone in these payments, I conclude, therefore, as follows:

(a) insofar as any of the Sandess Payments or the Consetra Payments remained in the joint account on 16 April 1995, they too were then held by Mrs Gratz subject to a constructive trusts in favour of the plaintiffs;

(b) the last three Consetra Payments and the last three Sandess Payments when received into the joint account were received by her subject to similar trusts;

(c) any disposition of these payments after 16 April 1995 from the joint account, otherwise than by payment to the plaintiffs, is a breach of these trusts;

(d) insofar as Sandess Payments or the Consetra Payments are traceable to other assets standing in her name on 16 April 1995, Mrs Gratz holds those assets, or such of them as stand in her name, subject to the same trusts.

322. As at 16 April 1995 the balance standing in the joint account was $10,221.26 overdrawn. It would seem, then, that none of the proceeds of the frauds were, in this form at least, in her name on the date that she has been shown to have had relevant knowledge of their fraudulent origins. There is here no property upon which the constructive trusts can fasten. After 16 April 1995 the six payments from Sandress and Consetra totalling $84,978 were received on various dates into the joint account. These amounts were then held by her subject to the constructive trusts but they have since been disbursed and the joint account has been closed. Mrs Gratz must account for them.

325. Regrettably, the amendment to the statement of claim to trace these funds, the proceeds of the frauds into assets held by her on or after 16 April 1995 was made too late for this tracing task to be undertaken at this trial.

328. These two payments of $87,500 and $50,000 from the joint account to Mrs Gratz's own bank account both occurred after 16 April 1995. It is, however, clear from an examination of the bank statements of the joint account that they were not payments of money wrongly obtained from the plaintiffs. On 19 April 1995 Mr Gratz, perhaps apprehending the difficulties that lay ahead, borrowed $200,000 from the Westpac Bank and deposited it in the joint account. Prior to this deposit this account was overdrawn. The two Petra Gratz Payments were, therefore, made from these loan funds and not from the misappropriated funds. No question, therefore, arises as to any trust in respect of these payments when received by Mrs Gratz.

332. Against Mr Dietrich, Lurgi and Lucon claim, in proceeding no. 6456 of 1995, the sums paid by them as a result of the frauds in which he was involved. These sums, as I have found, are $6,366,656 from Lurgi and $1,420,583 from Lucon. They are claimed from Mr Dietrich as monies had and received by him, further "as constructive trustee of the said monies" and as damages for fraud. Orders are also sought that he account to the plaintiffs for all benefits improperly obtained by him. The evidence does not support orders that particular sums were received by him or that he received other specific benefits. The preferable analysis is that, as a knowing participant in the frauds, he should pay as equitable damages the sums lost by the parties defrauded.

335. Against Jellwick Court, Lurgi and Lucon claim in proceeding no. 6803 of 1995 an order that it is bound to account to them as constructive trustee of the sum of $137,000 received by it from Sandess. Alternatively, they seek payment of the sum. In my view, the proper order is for the payment of the sum as equitable damages. The question as to which of the plaintiffs was the source of these funds remains unresolved. In the circumstances, I would make an order in favour of both of them.

338. Against Mrs Gratz I have made findings that she was a knowing recipient of $84,978 which was paid into the joint account. This money she and her then husband held on trust for one or other or both of the plaintiffs. The money has now gone so that there can be no question of making declaratory orders that it is or has been so held. Counsel on her behalf submitted that, since the only remedy available in equity is that of tracing, the non-existence of the bank account means that no order may be made. I do not think that equity is so powerless. Her duty as trustee was to pay it to the true owners or to account to them for it. This she has not done. I will therefore make orders that she do so.

341. I shall hear counsel further as to the precise terms of the orders to give effect to these conclusions.

[1] [1938] HCA 34; (1938) 60 CLR 336 at 362.

[2] (1874) 9 LR Ch APP 244 at 251-2.

[3] Consul Developments Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373 at 398, per Gibbs J, and at 412, per Stephen J.

[4] [1910] HCA 58; (1910) 12 CLR 105 at 109, per Griffith CJ.

[5] [1910] HCA 58; (1910) 12 CLR 105 at 110, per O'Connor J; Menzies v Perkins [2000] NSWSC 40 at [10] per Hunter J.

[6] Agip (Africa) Ltd v Jackson [1990] Ch 265 at 291, per Millett J.

[7] Banque Belge Pour L'Etranger v Hambrouck [1921] 1 KB 321 at 330, per Scrutton LJ, and at 334-5 per Atkin J; Menzies v Perkins [2000] NSWSC 40 at [11] per Hunter J.

[8] [1910] HCA 58; (1910) 12 CLR 105 at 109.

[10] Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373 at 412, per Stephen J.

[11] [1998] 3 VR 16, especially at 76-105. See, also, Gertsch v Atsas [1999] NSWSC 898 at [92], per Foster AJ.