BETWEEN : MARK ANTHONY CONLAN AS LIQUIDATOR OF ROWENA NOMINEES PTY LTD

ROWENA NOMINEES PTY LTD (RECEIVERS & MANAGERS APPOINTED) (in liq)

MARK ANTHONY CONLAN AS LIQUIDATOR OF OAKLEIGH ACQUISITIONS PTY LTD (in liq)

TREVOR CONNOLLY AS TRUSTEE FOR THE CONNOLLY FAMILY TRUST

THE EXECUTOR OR OTHER PERSONAL REPRESENTATIVE OF THE ESTATE OF ANTHONY JOHN CROCI (Dec)

THE EXECUTOR OR OTHER PERSONAL REPRESENTATIVE OF THE ESTATE OF MAXWELL EDWIN LADYMAN (Dec)

THE EXECUTOR OR OTHER PERSONAL REPRESENTATIVE OF THE ESTATE OF KENNETH ARTHUR DICKSON (Dec)

Corporations - Applications for declarations and directions to liquidator - Whether proceeds of recovery of loans made by finance broker were assets of the broker not subject to any interest of any investor or borrower claimants under trust for their benefit

Trusts - Application for declarations and directions to trustee - Whether proceeds of recovery of loans made by finance broker were assets of the broker not subject to any interest of any investor or borrower claimants under trust for their benefit

Trusts - Tracing of funds - Tracing of funds paid into overdrawn bank account after drawing on that account to acquire asset in round robin transaction - Whether there is an exception to principle tracing not possible in such a case for the case where there was an intention to make such payment in to repay overdraft borrowing when borrowing was incurred - Whether there is a wider proposition allowing tracing even without such an intention

Corporations Act 2001 (Cth), s 479, s 601AD

Rules of the Supreme Court 1971 (WA), O 18 r 13, O 58 r 29, O 72 r 4

Trustees Act 1962 (WA), s 92

Agricultural Credit Corporation of Saskatchewan v Pettyjohn (1991) 79 DLR (4th) 22

Arakella v Paton [2004] NSWSC 13; (2004) 60 NSWLR 334

Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 106; (2003) 45 ACSR 419

Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424

Bishopsgate Investment Management Ltd (in liq) v Homan [1994] EWCA Civ 33; [1995] Ch 211; [1994] 3 WLR 1270

Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 40 WAR 53

Conlan v Registrar of Titles [2001] WASC 201; (2001) 24 WAR 299

Conlan v The Executor or Other Personal Representative as Executor of the Estate of Anthony John Croci (deceased) [2009] WASC 266

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471

Foskett v McKeown [1998] Ch 265

Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102; [2000] 2 WLR 1299

Hagan v Waterhouse) (1992) 34 NSWLR 308

IMF (Australia) Ltd v Meadow Springs Fairway Resort Ltd (in liq) [2009] FCAFC 9

James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62

Lundie v Rowena Nominees Pty Ltd (receiver & manager appointed) (in liq) [2006] WASCA 106

Re Diplock's Estate; Diplock v Wintle [1948] Ch 465

Re Global Finance Group Pty Ltd (In Liq) (Supervisor Appointed) [2002] WASC 63; (2002) 26 WAR 385

Re Goldcorp Exchange Ltd; Kensington v Liggett [1994] UKPC 3; [1995] 1 AC 74; [1994] 3 WLR 199

Re Mark Anthony Conlan (as liquidator of Oakleigh Acquisitions Pty Ltd [2001] WASC 230

Re Rowena Nominees Pty Ltd; Ex parte Conlan [2006] WASC 69

Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171

Shalson v Russo [2005] Ch 281

Shirlaw v Taylor [1991] FCA 415; (1991) 31 FCR 222

Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] UKPC 1; [1986] 1 WLR 1072

1 These were proceedings on an application for declarations, directions and other orders in relation to the distribution of certain amounts (the Present Proceedings). The Present Proceedings arose out of the collapse towards the end of the 1990s of the finance broking business of Mr Graeme Grubb. There have been a significant number of other proceedings in this court that arose out of that collapse. That finance broking business, Graeme Grubb Finance Broker (GGFB), was at all material times conducted through the second plaintiff, of which the first plaintiff is the liquidator. The fourth plaintiff is an entity which at all material times acted simply as a nominee of the second plaintiff, as a nominal lender and mortgagee. The third plaintiff is the fourth plaintiff's liquidator. The first defendants are chargees under a first registered company charge over assets of the second plaintiff: the fourth plaintiff is also a chargee under that charge. The second defendants are chargees by assignment under a second registered company charge over assets of the second plaintiff. The third defendant was joined as a representative party as a result of certain interlocutory orders made as I indicate below.

2 On 11 May 2006, following the publication of my reasons for decision in Re Rowena Nominees Pty Ltd; Ex parte Conlan [2006] WASC 69 (Re Rowena (2006)) in the proceedings CIV 2252 of 2004, I made orders, varied on 4 September 2006 (the Distribution Orders), for the holding, collection and distribution of amounts representing trust monies as identified in the definition of 'Fund' in the Distribution Order (the Fund) for the benefit of investors and borrowers parties to finance broking transactions in the GGFB (the Claimants). The Distribution Orders also provide for calculation of the distribution entitlements of the Claimants.

3 The declarations and directions in the Present Proceedings concerned certain amounts (the Grower Loan Proceeds) collected by the second plaintiff and arising out of loans (the Grower Loans) made by the second plaintiff to a number of parties (the Growers) who purchased lots in two projects. The Grower Loans were made under agreements with the Growers (the Grower Loan Agreements). The principal issue raised in the Present Proceedings in relation to the Grower Loan Proceeds concerned whether they are the property of the second plaintiff in its own right, and the Claimants have no proprietary interest in them.

4 There is a substantial, two-volume affidavit of Mark Anthony Conlan, sworn 5 November 2010 in support of the orders applied for in the Present Proceedings (the Conlan affidavit of 5 November 2010). At the hearing before me on 14 February 2011, I was provided with a further affidavit of Conlan of 10 February 2011 (the Conlan affidavit of 10 February 2011). There was also reference in the Present Proceedings without objection to a number of affidavits filed in earlier proceedings involving the plaintiffs in relation to certain relevant matters. I will return to some of those affidavits below.

5 The Conlan affidavit of 5 November 2010 included, as annexure 'MAC 24', an opinion of counsel, Mr R J Price, dated 3 November 2010 (the Price Opinion). The Price Opinion addressed the principal issue in the Present Proceedings, as well as another issue in them. That other issue was whether, if the Grower Loan Proceeds are the property of the second plaintiff in its own right, and none of the Claimants has a proprietary interest in them, the second plaintiff, as the trustee of the Fund, has an equitable lien for the legal and administrative costs and expenditures associated with the recoveries of the Grower Loan Proceeds. Mr Price also appeared before me as counsel for the plaintiffs.

6 There were earlier proceedings of a kind similar to the Present Proceedings, in respect of other amounts than the Grower Loan Proceeds. My reasons for decision in those proceedings, CIV 2284 of 2008, were published as Conlan v The Executor or Other Personal Representative as Executor of the Estate of Anthony John Croci (deceased) [2009] WASC 266 (Conlan (2009)). There were also other earlier proceedings involving the plaintiffs in relation to relevant matters, to which I will return.

7 At the hearing of 14 February 2011, after extensive argument, I indicated orders should be made in terms of a minute of proposed orders presented by counsel for the plaintiffs (the Orders of 14 February 2011). The Orders of 14 February 2011 substantially followed the orders sought as described in the application that commenced the Present Proceedings.

8 However, subsequently I called a further hearing on 17 February 2011, following which, in accordance with conclusions I indicated I had come to at that hearing, orders were made replacing the Orders of 14 February 2011 which, while substantially in the same terms as them, made a number of additions. At both hearings I indicated I would, in due course, publish my reasons for making the orders that were made at or following the hearing in question. These are those reasons.

9 I now set out the background to the Present Proceedings. I then describe certain procedural orders I made before the hearing of 14 February 2011 and the background to, and reasons for, the resolution at the hearing of 17 February 2011 of certain matters which relate to the making of orders replacing the Orders of 14 February 2011 with the orders following the hearing of 17 February 2011, being orders in substantially the same terms, but with provision for them to be set aside or varied.

10 I then outline the issues raised by the Present Proceedings, the submissions of counsel on the principal such issues and my resolution of them.

11 The final section of these reasons sets out the principal orders among the orders following the hearing of 17 February 2011.

12 In Re Rowena (2006) [3] - [18] there is an account of the background, in the collapse of the GGFB and its aftermath, to the making of the Distribution Orders. My account there also refers to accounts of that collapse, and of other proceedings in this court arising out of that collapse, in the decisions of Owen J in Conlan v Registrar of Titles [2001] WASC 201; (2001) 24 WAR 299 and of Pullin J in Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424. I will not repeat those accounts or my account in Re Rowena (2006).

13 However, it is useful to provide detail as to the Grower Loan Proceeds. The background to their recovery appears in another decision of Pullin J, in Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 106; (2003) 45 ACSR 419 (first ASIC case) [4] - [17], which, for convenience, I set out below:

Rowena traded as a mortgage broker under the name of Graeme Grubb Finance Broker. Graeme Grubb was a director of Rowena. Rowena maintained a trust account and received and paid into that account, moneys which it held on trust for many people as a result of Rowena's mortgage broking activity.

In 1998, Rowena became involved in two projects. The first was the Karri Oak Vineyard Project. The land on which this project was to be carried out was owned by Sandgate Corporation Pty Ltd and the manager was Karri Oak Ltd.

The second was the Ord River Sandalwood Project. The land was owned by the Ord River Land Corporation Pty Ltd and the manager was Ord River Sandalwood Corporation Ltd. The names indicate the nature of the projects.

Persons who were interested in participating in these projects were called growers. Growers were required to pay moneys if they were to participate. Growers could raise their own funds or borrow them. Rowena was to arrange the funds for growers who wished to borrow.

Several hundred growers applied for loans and were granted loans by Rowena. Rowena, by this method, arranged the loan of several million dollars.

I have been provided with an example of one of the standard loan agreements. Under the loan agreement, the 'lender' agreed to advance funds to the grower. Another clause recorded the grower's agreement to repay the loan on demand, which demand could be made in the circumstances specified.

The agreement identified the grower. The 'lender' was not identified. The agreement was executed by Rowena 'as attorney' for the lender. Thus, Rowena purported to act for an undisclosed principal. In fact, no principal lenders can be identified.

I now need to mention what happened when the advances were made to the growers. In this regard, I refer to pars 14.35, 14.36 and 14.38 of the report of the Royal Commission into the Finance Broking Industry, which reads in relation to the Karri Oak Vineyard Project:

14.35 In the absence of funds to meet the minimum subscription, a fundamental condition of the project failed, and it should have been aborted there and then. The reason it was not abandoned is that Grubb, the St George Bank, the trustee and some of the directors of Karri Oak Ltd participated in a round robin exercise. Because Grubb had not, by the critical date, rounded up in the Rowena Nominees trust account sufficient client loan funds ready to be advanced to those growers who applied for loans, the bank had to cooperate in this paper shuffling exercise by meeting cheques drawn by Grubb for sums in excess of the amounts in his bank accounts. This the Bank did. The round robin process created the misleading impression that the minimum subscription requirement had been fulfilled, that real funds had been paid to the management company, and that the project could legitimately proceed. The participants in the round robin process, whether deliberately or otherwise, obscured the true position - the lack of bona fide funds available as at 30 June 1998 to make loans to growers. In the transactions about to be described cheques went in a circle. No external funds were involved. By these commercially artificial transactions, the project was enabled to proceed.

14.36 Grubb drew a cheque in favour of Charters Securities. It was drawn on the Rowena Nominees account. Charters Securities drew two cheques on its trust account relative to the Karri Oak project. One was for $3,585,000 in favour of Karri Oak Ltd and the other was for $180,000 in favour of Sandgate Corporation. And Karri Oak Ltd drew a cheque payable to the Graeme Grubb Finance Brokers Trust Account in the sum of $3,650,000.

...

14.38 Had real funds been made available by Grubb, there would have been no need for the round robin to have occurred. In that event, the directors of Karri Oak, having received the subscription monies, would have had capital with which to work. They would have deposited such subscription monies with a conventional and secure deposit-taking institution, or made some other secure and conventional investment with them. Instead they lent the money to Grubb, unsecured. The detail follows.

Similar events occurred in relation to the Ord River Sandalwood Project. The effect of these round robin transactions is yet to be determined. It is the subject of litigation between St George Bank and Rowena. I was informed by counsel, however, that by these transactions the growers were credited with having paid the moneys to earn the interest in the projects, and that they are still participating in them.

It is not at all clear who provided the funds to Rowena in order to make the advance to the growers. It seems that some moneys came from the trust account. The trust account was in credit to the extent of approximately $200,000 on the day that the transaction took place. Insofar as that money was used, it was used without authority and therefore used in breach of trust by Rowena. The rest of the money may have been advanced by Rowena itself.

In my view, as between Rowena and the growers, it does not matter where Rowena obtained the money from in order to make the advance.

Insofar as Rowena used trust moneys to make the payment, it must, as trustee, take action to recover the moneys lost to the beneficiaries. Insofar as trust moneys were paid over in return for a promise to repay, the chose in action is an asset which would belong to the beneficiaries of the trust account.

The liquidator must do all things necessary for winding up the affairs of Rowena, and therefore he must take steps to identify assets of the company and to ascertain whether particular assets are beneficially owned by the company or others. See Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 688; 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377; Re Crest Realty Pty Ltd (No 2) (in liq) [1977] 1 NSWLR 664; Re Indopal Pty Ltd (1987) 12 ACLR 54 at 58. In my opinion, in the winding up, in the absence of some conflict making it inappropriate to do so, the liquidator (rather that a court appointed receiver or new trustee) should cause Rowena to recover trust assets. See the discussion in Re G B Nathan (supra) at 688 and Bastion v Gideon Investments Pty Ltd (in liq) (No 2) [2000] NSWSC 939; (2000) 35 ACSR 466 at [62] to [63]. If a real conflict arises, then a court appointed receiver or new trustee could be appointed, but the case for doing so must be a strong one: Yunghanns v Candoora No 19 Pty Ltd [2000] VSC 300 and Bastion's case (supra) at [64].

Insofar as Rowena is recovering money from growers on behalf of beneficiaries of Rowena's trust account, it may not be possible to identify the beneficiaries who can claim the money, and in due course the liquidator may have to approach the court to seek orders or directions about how the proceeds will be divided up among all of the beneficiaries. Insofar as the money recovered is Rowena's property, it will be dealt with in the liquidation in the usual way.

14 There is rather greater detail as to the Karri Oak Vineyard Project in Lundie v Rowena Nominees Pty Ltd (receiver & manager appointed) (in liq) [2006] WASCA 106 [3] - [17] (Steytler P; McLure JA agreeing). However, that additional detail does not appear to me to be significant for my purposes.

15 By reference to the account just provided, the Grower Loan Proceeds are the proceeds of recoveries from the Growers to whom loans were made in relation to the Karri Oak Vineyard Project and the Ord River Sandalwood Project by means of the 'round robin exercise' described (the Round Robin) plus interest: see below.

16 There is greater detail than appears above or in Lundie in relation to the Round Robin and its background, including the source of the funds employed, in the Conlan affidavit of 5 November 2010 [31] - [40], [43] - [50.10], and [60] - [62], which are as follow:

1. The Karri Oak Vineyard Project (Karri Oak Project) was established to carry on the business of cultivating and harvesting of grapes at Mount Barker, Western Australia. The land on which the vineyard was established was owned by Sandgate Corporation Pty Ltd (Sandgate). The Manager of the Karri Oak Project was Karri Oak Limited (Karri Oak). The Trustee of the Karri Oak Project was Charter Securities Pty Limited (Charter).
2. A prospectus was issued inviting members of the public to invest in the Karri Oak Project. A Grower in the Karri Oak Project was required to invest $25,000 per lot. A Grower was required to sign a lease and management agreement for each lot in which he invested.
3. For those investors who did not have funds available a loan for the full amount required was offered through Rowena.
4. A copy of the prospectus for the Karri Oak Project is attached marked 'MAC-13'. The prospectus also appears at page 636 of my First Affidavit. The prospectus for the Karri Oak Project provided for a minimum subscription equal to a take up of 100 lots. The minimum subscription had to be paid by 30 June 1998.

1. The Ord River Sandalwood Project (Ord River Project) was established to develop and carry on the business of planting and growing a sandalwood plantation at Kununurra, Western Australia. The land on which the plantation was to be established was owned by Ord River Land Corporation Pty Ltd (ORLC). The Manager of the Ord River Project was Ord River Sandalwood Corporation Ltd (ORSC). The Trustee was Charter.
2. A prospectus was issued inviting members of the public to invest in the Ord River Project. A Grower in the Ord River Project was required to invest $25,000 per lot. A Grower was required to sign a lease and management agreement for each lot in which he invested.
3. For those investors who did not have funds available a loan for the full amount required was offered through Rowena.
4. A copy of the prospectus for the Ord River Project is attached marked 'MAC-14'. The prospectus also appears at page 704 of my First Affidavit. The prospectus for the Ord River Project provided for a minimum subscription equal to a take up of 100 lots. The minimum subscription had to be paid within four months of the date of issue of the prospectus, that is by 15 August 1998. However, for reasons relating to taxation and other dates provided in the prospectus, the effective deadline for subscriptions was 30 June 1998.

1. Growers in the Karri Oak Project applied for loans from Rowena totalling $3,650,000. I attach marked 'MAC-15' a schedule that reflects -

39.1 the folio number ascribed by Rowena in its records to the loan transaction;

39.2 the name of the Grower;

39.3 the lot number; and

39.4 the amount of the loan.

1. Growers in the Ord River Project applied for loans from Rowena totalling $2,325,000. I attach marked 'MAC-16' a schedule that reflects -

40.1 the folio number ascribed by Rowena in its records to the loan transaction;

40.2 the name of the Grower;

40.3 the lot number; and

40.4 the amount of the loan.

1. In order to meet the minimum subscription required under each of the two prospectuses, Rowena was required, by 30 June 1998 (subject to paragraph 38 above), to pay to Charter the amount loaned to Growers, namely $5,975,000 (being $3,650,000 in respect of Karri Oak and $2,325,000 in respect of Ord River).
2. On 30 June 1998 Rowena did not have $5,975,000 in its Trust Account or anywhere else.
3. In order to meet the minimum subscriptions Graeme Grubb, on behalf of Rowena (and, possibly, other parties) engaged in a Round Robin transaction with St George Bank (Round Robin) whereby St George Bank advanced $5,975,000 to Rowena to pay to Charter on the basis that the same amount was returned to St George Bank.
4. The Round Robin raises complex legal issues. It has been pleaded and referred to in other proceedings in this Court involving Rowena. However, this Court has never had to make findings on the Round Robin or on its effect on the parties involved in or affected by it.
5. The Round Robin was also one of the subjects examined by the Royal Commission into the Finance Broking Industry.
6. I attach marked 'MAC-18' a bundle of documents that are relevant to an understanding of the facts relating to the Round Robin.
7. The first page of 'MAC-I 8' is a diagram that shows the movement of the funds, the subject of the Round Robin. Effectively, the funds flowed from Rowena's general bank account to Charter; from Charter to Karri Oak and Ord River; from Karri Oak and Ord River to the Trust Account; and from the Trust Account back to Rowena's general bank account. The details of the payments made are the following (a copy of each of the documents referred to is included in 'MAC-18'):

49.1 Rowena drew two cheques on its general bank account, being number 551089662 (General Account) dated 30 June 1998 in favour of Charter for $3,650,000 (cheque No 1044) and for $2,325,000 (cheque No 1045).

49.2 those two cheques were deposited by or on behalf of Charter on 30 June 1998. Evidence to that effect was given at a public examination that I conducted into the affairs of Rowena, and elsewhere.

49.3 according to the bank statements of the General Account, at the close of business on 30 June 1998 the account was $136,574.97 overdrawn (that is before the cheques for $5,975,000 were debited to the account).

49.4 Charter, according to evidence given, on advice from St George Bank that the two cheques had been cleared, drew the following cheques, each dated 3 July 1998 -

(i) in favour of Karri Oak for $3,585,000 (cheque No 2);

(ii) in favour of Sandgate for $180,000 (cheque No 1) which was for rental;

(iii) in favour of ORSC for $2,360,000 (cheque No 1); and

(iv) in favour of ORLC for $150,000 (cheque No 2) which was for rental.

49.5 Karri Oak drew a cheque dated 3 July 1998 for $3,650,000 (cheque No 3) in favour of Graeme Grubb Finance Broker Trust Account.

49.6 Karri Oak provided the cheque for $3,650,000 to Rowena with a letter, also dated 3 July 1998, which states as follows -

'Please find enclosed our cheque for $3,650,000.00 made out to your Finance Broking Trust Account.

The funds are to be invested in first mortgages on a 7-day call period, at an interest rate calculated daily at 12% per annum.

Would you please sign the attached copy of this letter to acknowledge having received our cheque and forward it to us with your Trust Account Receipt.'

The value of the cheque was credited to the Trust Account on 6 July 1998 with a 'value date' of 30 June 1998 ascribed to it (see paragraph 50.8 and 50.9 below).

49.7 ORSC drew a cheque dated 3 July 1998 for $2,325,000 (cheque No 2) in favour of Graeme Grubb Finance Broker Trust Account.

49.8 ORSC provided the cheque for $2,325,000 to Rowena with a letter also dated 3 July 1998 in exactly the same terms as the letter from Karri Oak. The value of the cheque was credited to the Trust Account on 6 July 1998 with a 'value date' of 30 June 1998 ascribed to it (see paragraphs 50.8 and 50.9 below).

49.9 Graeme Grubb t/as Graeme Grubb Finance Broker - Trust Account, that is the Trust Account, drew a cheque dated 3 July 1998 for $5,975,000 (cheque No 1028) in favour of Rowena Nominees Pty Ltd, that is the General Account. The value of the cheque was credited to the General Account on 6 July 1998 with the 'value date' of 30 June 1998 ascribed to it (see paragraphs 50.8 and 50.9 below).

1. I shall explain, as best as I am able, the entries that appear in the bank statements of the General Account and the Trust Account that relate to the Round Robin -

General Account

50.1 On 1 July 1998 the General Account was debited with the two cheques it drew in favour of Charter, namely for $3,650,000 (cheque No 1044) and $2,325,000 (cheque No 1045).

50.2 On 2 July 1998 the General Account was debited with the sum of $5,975,000 against the notation 'CHQS RETURNED'. However, the cheques were not physically returned to Charter and no notice of dishonour was endorsed on the cheques.

50.3 Notwithstanding the apparent dishonour of these two cheques Charter drew 4 cheques on its bank account whereby the full amount it received was paid out (paragraph 49.4 above).

50.4 Also, the cheque dated 3 July 1998 drawn on the Trust Account (cheque No 1028) for $5,975,000 to return the funds to the General Account does not appear as a credit on the bank statement of the General Account.

50.5 St George Bank posted certain of the debits and credits in the Round Robin to suspense accounts within the Bank. The details of these entries have never been satisfactorily explained.

50.6 In order that the bank statements of the General Account reflect the flow of funds under the Round Robin as at 30 June 1998, St George Bank made two journal entries which appeared on the statement of the General Account on 6 July 1998 with the notation 'value date 30.06.98'. The journal entries reinstate the payments to Charter for $3,650,000 and $2,325,000. The other journal entry establishes the credit for $5,975,000 in respect of the payment out of the Trust Account to the General Account.

Trust Account

50.7 On 3 July 1998 the Trust Account was debited with the sum of $5,975,000 in respect of the cheque (No 1028) it drew to repay this amount to the General Account.

50.8 However, neither the cheque drawn by Karri Oak for $3,650,000 (cheque No 3) nor the cheque drawn by Ord River for $2,325,000 (cheque No 2) in favour of the Trust Account was credited on the bank statement of the Trust Account.

50.9 In order to regularize the Trust Account, St George Bank effected a journal entry whereby, on 6 July 1998 the sum of $5,975,000 was credited to the Trust Account. The notation on the statement reads 'Value Date 30.06.98 Ord River/Karri Oak'.

50.10 The bank statement of the Trust Account shows that at close of business on 30 June 1998 the account was in credit for $185,263.38. At close of business on 6 July 1998, after the debit and credit each for $5,975,000 had been processed, the Trust Account was $24,424.72 overdrawn. The transactions processed between 1 July and 6 July 1998, other than the two entries for $5,975,000, are unrelated to the Round Robin.

...

1. As is apparent from the details of the Round Robin and from an examination of the bank statements of the Trust Account, the Round Robin had no impact on the amount of money in the Trust Account. All that happened is that a debit and a credit of $5,975,000 appeared on the bank statement of the Trust Account at the beginning of July 1998.
2. After the Round Robin the balance in the Trust Account was no less than it was before the start of the Round Robin, disregarding unrelated entries.
3. One consequence of the Round Robin is that Karri Oak and ORSC had claims against the Rowena Trust Account for the amounts they deposited in the Trust Account, namely $3,650,000 in respect of Karri Oak and $2,325,000 in respect of ORSC. Proofs of debt for these amounts were submitted by Karri Oak and by ORSC and were accepted by myself. Karri Oak was deregistered on 21 March 2010. ORSC, as a Trust Claimant, has participated in the distributions I have made from time to time to Trust Claimants.

17 The diagram showing the movement of funds the subject of the Round Robin referred to in [49] is an annexure to these reasons.

18 The Conlan affidavit of 5 November 2010 describes the actions taken by the second plaintiff, following the decision in the first ASIC case, to recover the monies from the growers who participated in the Karri Oak Vineyard Project and the Order River Sandalwood Project which, with interest those monies have earned, now make up the Grower Loan Proceeds: see [9] - [10]. The Grower Loan Proceeds are kept in a separate bank account which has earned interest: the total in that account, that is, the total of the Grower Loan Proceeds, as at 31 July 2010, was $3,444,917.82.

19 It is evident from the Conlan affidavit of 5 November 2010, at [65] and [69], that the costs of the second plaintiff or liability for them, including remuneration of the second plaintiff, in its recovery and holding of the monies that have become the Grower Loan Proceeds, have been borne by the Fund.

20 On 12 November 2010 I heard and made orders on an application by the plaintiffs for orders (the Orders of 12 November 2010) including ones of the following three kinds:

1. Joinder: that (under Rules of the Supreme Court 1971 (WA) O 18 r 13 and O 58 r 29(b)) a representative defendant for the Claimants (the proposed third defendant) be joined, with consequential orders (under Corporations Act 2001 (Cth) s 479(3)) to declare the first plaintiff would be justified as liquidator of the second plaintiff in incurring or causing it to incur a liability to pay or reimburse the legal costs of the representative defendant and applying part of the Fund for the purpose; and (under Trustees Act 1962 (WA) s 92) to declare the second plaintiff would be justified in permitting the use of the Fund for the purpose;
2. Service: service of the originating summons, the Conlan affidavit of 5 November 2010 and the order for directions sought be on the first and second defendants and on the proposed third defendant; apart from that service, service of the Conlan affidavit of 5 November 2010 be otherwise dispensed with, except that a copy of that document and any other material to be relied upon by the plaintiffs be made available for inspection by any person who had the right to be heard at the hearing of the originating summons at the offices of the solicitors for the plaintiffs; and
3. Other notice of the principal proceedings: notice be by circular letter to each investor and trade creditor of the second plaintiff listed in the relevant part of the Schedule to the Minute of Proposed Directions dated 5 November 2010 and to any other person who came to the attention of the plaintiffs as a potential claimant against the second plaintiff; notice also be by publication of an advertisement in each of The Australian and The West Australian newspapers and by making the originating summons, the Conlan affidavit of 5 November 2010 and the order for directions sought available on the home page of the website of the firm of which the first plaintiff is a member - such notice to be sufficient service on the Claimants and the unsecured and trade creditors of the second plaintiff.

21 It was not in contest before me at the hearing of 14 February 2011 that the effect of those orders would be to permit the court to make declarations and directions of the kinds sort in the Present Proceedings: see Conlan (2009) [13], referring to Arakella v Paton [2004] NSWSC 13; (2004) 60 NSWLR 334.

22 I considered that, while the orders as to notice, so far as they made that notice service on the Claimants, might be seen to be strictly unnecessary in view of the joinder orders, those orders were of value as substituted service on the Claimants so that any of them could, if they wished, seek to be separately represented. See O 72 r 4(1).

23 At the hearing of the present application on 14 February 2011 counsel for the plaintiffs frankly acknowledged that it had been their intention to include Ord River Sandalwood Corporation among the list of the investors in the Schedule, who it was intended should be all those Claimants of whom the first plaintiff was then aware. However, Ord River Sandalwood Corporation was not included on that list, and prior to the hearing on 14 February 2011 its solicitors had been contacted and then a letter dated 10 February 2011 sent to them. The letter attached material that the Orders of 12 November 2010 required to be sent to investors in the Schedule, as well as a copy of the originating summons in the present application, the Conlan affidavit of 5 November 2010, and the written submissions for the plaintiffs dated February 2011 (the Written Submissions for the Plaintiffs) and the draft submissions of counsel for the third defendant for the hearing of 14 February 2011, the latter not being materially different from the final written submissions for the third defendant (the Written Submissions for the Third Defendant). By letter dated 11 February 2011 to the solicitors for the first plaintiff, the solicitors for Ord River Sandalwood Corporation confirmed it did not wish to participate in the Present Proceedings and would abide by their outcome.

24 However, those letters were handed up to me at the hearing of 14 February 2011 without any affidavit as to the background to them that I have described.

25 Further, counsel for the plaintiffs acknowledged that no notice of the kind that, under the Orders of 12 November 2010, had been sent to Ord River Sandalwood Corporation had been sent to Karri Oak or, given its deregistration, the person or persons in whom any of its property had been vested. That person would appear to be the Commonwealth, in respect of any of Karri Oak's trust property (Corporations Act 2001 (Cth) s 601AD(1A)), or the Australian Securities and Investments Commission (ASIC), in respect of any of its other property (s 601AD(2)).

26 At the hearing of 14 February 2011, I had concluded I could make the orders sought by the plaintiffs with reasons to follow. However, following that hearing, I concluded that I needed to be properly satisfied that both Ord River Sandalwood Corporation and Karri Oak, through those in whom its property was vested, had had sufficient opportunity to be separately represented before me. I reached that conclusion in view of the fact not only had those companies been Claimants but, as the Price Opinion, the Written Submissions for the Plaintiffs and the Written Submissions for the Third Defendant made clear, the question of whether they, rather than any other Claimant, had any property entitlements in the Grower Claim Proceeds was likely - and indeed this was confirmed at the hearing of 14 February 2011 - to be central to the Present Proceedings. Further, the letter to Ord River Sandalwood Corporation dated 10 February 2011 itself expressed the view of its author that Ord River Sandalwood Corporation was 'probably unaware of the proceedings or the fact that the matter is listed for hearing on Monday next week'.

27 I accept, as counsel for the plaintiffs put to me at the hearing on 17 February 2011, which I reach shortly, that the third defendant was a representative defendant whose representation included both Karri Oak and Ord River Sandalwood Corporation: see the Orders of 12 November 2010, O 1.2. I further accept that there is clear authority that the fact that a represented party might not have been aware of proceedings is not necessarily of concern to the court: see Arakella [64] - [65] (Austin J), referring to authorities. Nor do I consider that there was any question of the adequacy of the representation of the interests of Karri Oak and Ord River Sandalwood Corporation in the hearing before me on 14 February 2011. In particular, I do not consider any question arose calling for a departure from the principle that a representative is not required to organise or participate in a consultative process to ascertain and then present the views of members of the represented group: [64].

28 However, the interests of Karri Oak and Ord River Sandalwood Corporation are, in my view, clearly distinct from those of the other Claimants. As counsel for the plaintiffs appeared to acknowledge at the 14 February 2011 hearing, any beneficial interest established in the Grower Loan Proceeds as a result of the tracing of their payment to Rowena would be an interest other than one calling for inclusion in the Fund under the Distribution Order. In view of that, it seemed to me that it would not be appropriate, without further argument than had occurred at the hearing of 14 February 2011, that in determining the issues which would affect any interests of such parties for me, I should rest simply on the general principles I have described, including from Arakella.

29 Accordingly, I called a hearing of the parties on 17 February 2011 to consider those matters.

30 At the hearing on 17 February 2011 counsel for the plaintiffs and for the third defendant addressed me on them. I was also provided with an affidavit of Jeffery Lin, a partner in the solicitors for the plaintiffs, sworn 17 February 2011.

31 As to Ord River Sandalwood Corporation, the Lin affidavit (see [3] - [5]) and annexures JL-1 and JL-2 provided background to what counsel for the plaintiffs had described to me at the hearing on 14 February 2011, and satisfied me that there had been a reasonable opportunity afforded to Ord River Sandalwood Corporation to participate in the proceedings in its own right.

32 As to Karri Oak, at the hearing on 17 February 2011 counsel for the plaintiff put forward three alternative courses of action.

33 One course of action was, as I understood it, to provide at least the material sent to investor clients of Rowena as listed in the Schedule to the Orders of 12 November 2010 to ASIC or the Commonwealth or both. I also understood this course of action to make no other change to the Orders of 14 February 2011, but rather to provide simply for notice of the proceedings to ASIC or the Commonwealth or both. I considered this course of action to be in effect a supplement to the third course of action proposed, below. As I concluded I did not prefer the third course of action, I would say no more about the first.

34 The second course of action was to allow for the extraction of the Orders of 14 February 2011 but with further orders to provide for service of those orders on ASIC or the Commonwealth or both, with liberty to them within a stipulated time to apply to set aside or vary the Orders of 14 February 2011, with an affidavit of service on them to be filed and served and the court to permit the first plaintiff to refrain from acting on the provision in the Orders of 14 February 2011 which approved him acting on those orders.

35 The third course of action was to make no further orders.

36 Counsel for the plaintiffs indicated they would be content with either the second or the third course of action, while counsel for the third defendant did not press either one on me in preference to the other.

37 However, counsel for the plaintiffs put to me that there was a reason to prefer the third course of action. That reason lay in the attention that Karri Oak could have been expected to have focussed on the Round Robin and its implications for the company. As I understood the submission I should conclude that, given Karri Oak had never claimed in the administration of Rowena an interest in the Grower Loan Proceeds (see the Lin affidavit of 17 February 2011, [10]), there was no unfairness in not providing notice to ASIC or the Commonwealth other than by means of newspaper and Web site announcements as provided for by the Orders of 12 November 2010. The reason to believe Karri Oak had focussed attention on the Round Robin and its implications for the company was three fold. One was the discussion of the Round Robin in the Royal Commission Report. See the references to the Royal Commission Report above, as well as those I will make later in these reasons, concerning the basis for the Royal Commission's findings as to the commerciality of the payments made by Karri Oak under the Round Robin. The second reason was the action Karri Oak had taken against St George Bank for damages arising out of the Round Robin in which it was known to Karri Oak's legal advisers that the second plaintiff had taken action to recover the Grower Loans (see the Lin affidavit of 17 February 2011 [11](d)). The third reason was that Karri Oak had submitted proofs of debt in the liquidation of Rowena in respect of payments it had made which formed part of the Round Robin (see the Conlan affidavit of 5 November 2010 [62]).

38 I considered that these considerations went some considerable distance towards addressing any suggested unfairness. However, as had been the case for Ord River Sandalwood Corporation, I considered there should be an opportunity of the sort actual notice to those in whom the property of Karri Oak was vested would afford to consider whether to make submissions to me concerning any proprietary interests it might have had arising under the Round Robin. I therefore considered I should make orders for those purposes, the second course of action. Those orders formed part of orders made following the hearing of 17 February 2011 to replace the Orders of 14 February 2011 (the Orders following the hearing of 17 February 2011). The Orders following the hearing of 17 February 2011 were to the same effect as the Orders of 14 February 2011 with some wording changes I consider immaterial, but adding that the plaintiffs were required to file and serve on ASIC and the Commonwealth the Orders following the hearing of 17 February 2011 as well as the Conlan affidavit of 5 November 2010, the Written Submissions for the Plaintiffs and the Written Submissions for the Third Defendant, among other documents. ASIC and the Commonwealth were to have liberty to apply to set aside or vary the Orders following the hearing of 17 February 2011 by making application and giving notice to the plaintiffs and the third defendant within 28 days of service on each of those materials.

39 Service on ASIC occurred on 4 March 2011, while service on the Commonwealth occurred on 7 March 2011. The 28-day period referred to expired without any application having been made either by ASIC or by the Commonwealth.

40 Accordingly the Orders following the hearing of 17 February 2011 ceased to be subject to the qualification I described.

1. Are the Grower Loan Proceeds the property of Rowena in its own right and the Claimants have no proprietary interest in them?
2. If so, was Rowena as trustee of the Fund entitled to an equitable lien on the Grower Loan Proceeds to secure payment to the Fund of the administrative and legal costs and expenses the Fund had borne in relation to the recovery of the Grower Loan Proceeds?
3. What provision should be made for the costs of the Present Proceedings?

42 At the hearing on 14 February 2011 there were oral submissions directed only to the first issue, and that principally in the respect I will indicate. There was no contest with respect to the plaintiffs' positions on the second and third issues.

Are the Grower Loan Proceeds the property of Rowena in its own right and have the Claimants no proprietary interest in them?

44 It was not in contest that this required the analysis of the Round Robin, and that in doing so round robin transactions may be considered legally effective in accordance with the relevant contracts or other legal forms objectively intended by the parties, absent proof the transaction was a sham: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 [46] - [47]. It was not contended that the Round Robin was a sham, nor was it evident to me that that was the case.

45 It was further not in contest that the source of the loans forming the basis of the Grower Loan Proceeds was the drawing on the overdrawn general account of Rowena that initiated the Round Robin. It was accepted that the only evidence that trust monies were paid over in return for a promise from the Growers to repay (see the first ASIC case [15]) was that matter in the records of Rowena identifying investors who had lent money to Growers in the Karri Oak Vineyard Project and the Ord River Sandalwood Project. However, it was common ground that that evidence was not reliable, it being more likely than not that the investors so shown had in fact provided funds by way of loan to the owners of the lands on which the Karri Oak Vineyard Project and the Ord River Sandalwood Project were to be established, respectively Sandgate Corporation Pty Ltd and Ord River Land Pty Ltd, with their loans secured by mortgages by those companies. On the evidence in the Conlan affidavit of 5 November 2010, I accept that that was the position. See [51] - [58], [59.1], [59.2]; see also the Conlan affidavit of 10 February 2011 [3].

46 It was also common ground that there was no evidence that Rowena had made any of the loans to the Growers forming the bases for the Grower Loan Proceeds as agent for any ascertainable principal, including any Claimant.

47 It was further common ground that there was no evidence Rowena had assigned the benefit of its agreements with the Growers to, or had declared that it held any debts arising under them on trust for, the Claimants or any of them.

48 It was still further common ground that, on the matters just described, the only basis for an assertion that the Grower Loan Proceeds were not the property of Rowena in its own right not subject to an interest in favour of the Claimants or any of them could be that the loans to the Growers forming the bases of the Grower Loan Proceeds were the traceable proceeds of value provided by the Claimants or one or more of them.

49 I took it that by traceable proceeds was meant proceeds which might be traced from property of a Claimant so as to permit a determination to be made that that person held an equitable proprietary interest in the proceeds: see Heydon, J D and Leeming, M J, Jacobs' Law of Trusts in Australia 7th ed (2006) [2703].

50 However, the fact that the proceeds are so traceable does not necessarily mean an equitable proprietary interest will be found: tracing is neither a claim nor a remedy. See Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102; [2000] 2 WLR 1299 (Foskett (HL)), AC (128) (Lord Millett); Re Global Finance Group Pty Ltd (In Liq) (Supervisor Appointed) [2002] WASC 63; (2002) 26 WAR 385 [94] (McLure J); and see Jacobs' Law of Trusts [2701]. Tracing is a process for identifying other property, resulting from a dealing or dealings with a person's property, with respect to which a proprietary interest may be asserted. See Global Finance [94]; Jacobs' Law of Trusts [2701].

51 I turn then to consider tracing in this matter. It was on this aspect of the present issue that the parties directed oral argument to me at the hearing of 14 February 2011.

52 It was common ground that the only possible basis for tracing here was in respect of the payment by Karri Oak and Ord River Sandalwood Corporation to Rowena's trust account where those monies were paid out of the trust account into Rowena's overdrawn general account to complete the Round Robin.

53 An immediate problem for tracing, as identified by the Price Opinion, was that tracing was sought through a payment into an overdrawn bank account, a drawing on which had previously been made for the purposes of lending to the Growers. These characteristics in my view raise separate but related issues, as indicated by my emphases.

54 There is a substantial body of authority for the principle that tracing is not possible through an overdrawn bank account. See Global Finance [129], referring to the 'overwhelming balance of authority' in that regard and citing Re Diplock's Estate; Diplock v Wintle [1948] Ch 465 (CA) (affd (1951) AC 251 (HL)), 521 (Lord Greene MR, Wrottesley and Evershed LJJ); James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62; Bishopsgate Investment Management Ltd (in liq) v Homan [1994] EWCA Civ 33; [1995] Ch 211; [1994] 3 WLR 1270; and Re Goldcorp Exchange Ltd; Kensington v Liggett [1994] UKPC 3; [1995] 1 AC 74; [1994] 3 WLR 199. However, her Honour in Global Finance [129] also referred to Hagan v Waterhouse) (1992) 34 NSWLR 308, 358 '(where the fact that a bank account used by trustees to purchase property was temporarily in overdraft was not allowed to prevent tracing into the purchased property)'.

55 The rationale for the principle is stated in Global Finance [135] as follows:

The rationale for the rule which prevents equitable tracing into an overdrawn bank account is that the property being traced must continue to exist in some form up to the time of, and through to, the traceable product. An overdrawn bank account is a debt owing by the trustee to the bank. The effect of a payment into an overdrawn account is to reduce or cancel the trustee's indebtedness to the bank. Tracing is a factual process and a trust fund or part of it which is dissipated cannot be traced. The extinguishment or reduction of the trustee's indebtedness is regarded in effect as the disappearance of the property.

56 However, there is some support for a possible exception to the principle, as described in Global Finance [133] referring to a view expressed by one member of the Court of Appeal in Bishopsgate Investment Management.

57 In Bishopsgate Investment Management pension fund monies held on trust by Bishopsgate Investment Management had been wrongly paid to, inter alia, bank accounts of another company, MCC, which at the time of payment were overdrawn or which later became overdrawn. The liquidators of Bishopsgate had claimed before Vinelott J that it was entitled to an equitable charge in priority to all other unsecured creditors of MCC on all of its assets for the full amount of the pension monies wrongly paid to MCC. The Court of Appeal dismissed the appeal against the order of Vinelott J that Bishopsgate could only claim an equitable charge in accordance with the recognised principles of equitable tracing, and these did not permit tracing through or into an overdrawn bank account.

58 McLure J in Global Finance [117] noted the following from Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] UKPC 1; [1986] 1 WLR 1072, 1074 (Lord Templeman) where his Lordship said this:

A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with an expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money into any particular asset belonging to the trustee bank. But equity allows the beneficiaries ... to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank.

59 McLure J in Global Finance later in her judgment, at [133] - [134], said this:

The Court of Appeal in Bishopsgate held that Lord Templeman could not have intended the dicta to apply to a situation where trust moneys had been paid into an overdrawn account. However, at least one member of the Court (Dillon LJ) thought that there may be one possible exception to a defence that moneys paid into an overdrawn account cannot be traced in equity which was described as the possibility of 'backward tracing'. According to Dillon LJ at p 1274 [Ch at 216 - 217] (adopting the judgment of Vinelott J in the Court below) this might apply:

... where an asset was acquired by [the defendant company] with moneys borrowed from an overdrawn or loan account and there was an inference that when the borrowing was incurred it was the intention that it should be repaid by misappropriations of [the plaintiffs'] moneys. Another possibility was that moneys misappropriated from [the plaintiffs] were paid into an overdrawn account of [the defendant company] in order to reduce the overdraft and so make finance available within the overdraft limits for [the defendant company] to purchase some particular asset.

Dillon LJ said it was at least arguable that there ought to be an equitable charge in those circumstances. Leggatt LJ rejected that possibility (at p 1278 [Ch at 222]).

60 I will call the possible exception, in the two cases specified, to which Dillon LJ referred in Bishopsgate Investment Management as quoted in Global Finance, the possible exception described by Dillon LJ. Only the first of the cases he refers to is relevant here.

61 I would add that the judgment of the third member of the Court of Appeal in Bishopsgate Investment Management is 'I agree with both judgments' (Ch at 222).

62 I would note from Global Finance the immediately succeeding paragraph to the paragraphs quoted above, [135], which appears to echo the language used by Leggatt LJ in Bishopsgate Management (222), and appears to me to indicate her Honour discountenanced the possible exception described by Dillon LJ. However, it also seems to me that her Honour refrained from expressing a final view, where the resolution of the matter of whether there was an exception in terms of either or both of the cases in the possible exception described by Dillon LJ was not necessary on the case before her. She did, however, apply the 'overdrawing rule', both by analogy and in combination with other principles: see [200] - [203] (the latter is the source of the quotation).

63 There is further judicial support for the possibility of an exception, at least in the first of the two cases referred to in the possible exception described by Dillon LJ, in one of the judgments in Foskett v McKeown [1998] Ch 265. An appeal against the decision in that case was allowed in Foskett (HL). However, for reasons which will shortly appear, I do not consider the appeal judgment reached the support I will describe.

64 Foskett (CA) was an appeal against an order for summary judgment for the claimants who were prospective purchasers of blocks of land. Each had been required to pay their purchase price in advance with the payments to be held on trust. Part of those trust monies were wrongly used to pay some of the premiums on a policy on the life of a person who, with an associate to whom the purchase monies were required to be paid, appears to have had control of the monies. The summary judgment was that the purchasers were entitled to a percentage of the proceeds of the policy represented by the extent to which the monies of the purchasers the trial judge found had been so used had contributed to the acquisition of the accumulated units that under the terms of the policy agreement were allocated to the policy.

65 The Court of Appeal held that the appeal against the order should be allowed, although there was a difference between the members of the court as to the order that should be made in its place.

66 Two members of the court, Sir Richard Scott V-C and Hobhouse LJ, held that a declaration should be made that the purchasers were only entitled to be repaid out of the proceeds of the policy (in effect, were entitled to an equitable lien for) such of the money as could be traced into premiums paid on the policy, it being accepted that at least the last two of the five years of the premiums paid on the policy could be so traced.

67 The third member of the court, Morritt LJ, held that a declaration should be made granting purchasers the right to 40% of the proceeds but subject to an increase of that percentage if at trial the purchasers could prove that purchasers' money was 'used to pay the whole or a part' (Ch at 303) of the premium paid on the third last year.

68 That last premium appeared to have been paid out of an account which had been in credit in an amount derived from purchasers' money. That credit was not sufficient to pay the premium, and the balance to pay the premium was thus derived from the overdraft facilities allowed on the account. However, very shortly after the payment there was a transfer into the account sufficient to repay the overdraft. It was contended for the purchasers that the transfer derived from their money.

69 Only one member of the Court of Appeal, Sir Richard Scott V-C, directly addressed the possible relevance of that contention, if it were made out, to the purchasers' asserted proprietary interest. He did so as follows (Ch at 283 - 284):

A conclusion in the purchasers' favour on this point cannot be made at this summary judgment stage. It may be, however, that at trial the purchasers will succeed in establishing that not only the £594.76 but also the money used to repay the overdrawing was their money. And it may be, indeed as at present advised I regard it as likely, that they will establish that it was Mr. Murphy's intention throughout to use purchasers' money to pay the 1988 premium. If that is the case, it does not seem to me at all obvious that the circumstance that the payment into the account of the purchasers' money was made very shortly after the payment of the premium, rather than before or at the same time as the payment, should be regarded as fatal to the purchasers' equitable tracing claim. The availability of equitable remedies ought, in my view, to depend upon the substance of the transaction in question and not upon the strict order in which associated events happen. Moreover, there is at least some authority which the purchasers could pray in aid: see Agricultural Credit Corporation of Saskatchewan v. Pettyjohn (1991) 79 D.L.R. (4th) 22 and 'Tracing into the Payment of a Debt' [1995] C.L.J. 290, 292-295. I would wish, for my part, to make it clear that I regard the point as still open and, in particular, that I do not regard the fact that an asset is paid for out of borrowed money with the borrowing subsequently repaid out of trust money as being necessarily fatal to an equitable tracing claim by the trust beneficiaries. If, in such a case, it can be shown that it was always the intention to use the trust money to acquire the asset, I do not see why the order in which the events happen should be regarded as critical to the claim.

70 The House of Lords, by a majority, in effect determined that judgment should be given in the terms of the declaration Morritt LJ would have made. None of the members of the House of Lords in Foskett (HL) discussed the passage from Sir Richard Scott V-C's reasons which I have quoted or considered the issue that passage addresses, and in my view none of their reasons reach that issue.

71 There is also judicial support for the first case in the possible exception described by Dillon LJ in Shalson v Russo [2005] Ch 281 [141] (Rimer J), referring to still further such support in another authority:

In case I were to conclude that the current account is to be regarded as overdrawn, Mr Smith submitted that the authorities do not impose an absolute bar on tracing. He relied on Dillon LJ's obiter observations in Bishopsgate Investment Management Ltd v Homan [1995] Ch 211, 216-217, to the effect that proof of a connection between the acquisition of a particular asset with money from an overdrawn account and misappropriation from a trust fund enabling the borrowing for the acquisition to be repaid might enable the beneficiary to trace into the asset, although Leggatt LJ, at pp 221-222, expressed a different view (Henry LJ simply agreed with both judgments, although his agreement could not have extended to this point). Mr Smith also relied on Evans-Lombe J's decision in Jyske Bank (Gibraltar) Ltd v Spjeldnaes (unreported) 23 July 1997, in which the judge expressed his preference for Dillon LJ's approach, although he had had no argument on the point. I too respectfully prefer Dillon LJ's approach. But even if it is well founded, I cannot detect any evidential connection between the Mosaique payments and the misappropriations of Mr Mimran's money which might be regarded as sufficient to enable it to be invoked in this case.

72 No other judicial consideration of the possible exception described by Dillon LJ was referred to in submissions to me, and I could find none. There was, however, a reference to a submission of counsel drawing on it in Dyson Technology Ltd v Curtis [2010] EWHC 3289 [20]. The matter was not explored in that decision, however.

73 A distinct issue is raised by the fact that Rowena's overdrawn general account was drawn on prior to the payment from the trust account. That issue relates to a case where an asset was acquired before a misappropriation: in such a case the asset might, of course, have been acquired from an account in credit.

74 In respect of any exception for cases of prior acquisition of the asset in question, I note what is said by Leggatt LJ in Bishopsgate Ch (221), that (emphasis in original)

there can be no equitable remedy against an asset acquired before misappropriation of money takes place, since ex hypothesi it cannot be followed into something which existed and so had been acquired before the money was received and therefore without its aid.

75 This proposition Leggatt LJ associated with the proposition, which also appears to be the basis for the principle with respect to tracing through an overdrawn bank account, that 'it is only possible to trace in equity money which has continued existence, actual or notional': Ch (221); and see Global Finance [135].

76 There is a statement of the same proposition, with a reference to Bishopsgate, in Foskett (CA) (289) (Hobhouse LJ).

77 It was not in contest that that none of the authorities on either of the cases referred to in the possible exception described by Dillon LJ had in fact applied such an exception so as to trace to an asset acquired by a drawing on an overdrawn bank account. In particular I note that in Shalson Rimer J could not 'detect any evidential connection' between the relevant assets and the misappropriations in question: [141].

78 However, I also note that in in Foskett (CA) at 283 Sir Richard Scott V-C referred to Agricultural Credit Corporation of Saskatchewan v Pettyjohn (1991) 79 DLR (4th) 22 (Sask CA) as authority which the purchasers 'might pray in aid' of tracing through amounts paid into the overdrawn bank account in Foskett. Agricultural Credit does appear to have involved a holding that tracing through an overdrawn bank account is possible, although there is no reference in that case to any support for an 'overdrawing rule' as referred to in Global Finance [129] read with [203]. See also Hagan (358 - 359) which also recognised such a possibility, also without noting any such support.

79 In Agricultural Credit the plaintiff had agreed to lend money to the defendants to permit them to buy cattle. Before the plaintiff had advanced the funds, the defendant had bought the cattle by drawing on an overdraft facility. The defendants subsequently used the funds advanced by the plaintiff to pay down the overdraft. The Saskatchewan Court of Appeal held the cattle had been purchased with that value. However, the case appears not to have been one where the court was concerned with anything in the nature of the possible exception I have been considering here. No argument before me was addressed to the case. However, it, and Hagan, may support a wider principle, a matter to which I will return. For now, I put both decisions aside.

80 Returning to the possible exception described by Dillon LJ I accept arguendo that Global Finance is authority in this court against the recognition of any such exception. However, even if an exception for either of the two cases referred to by Dillon LJ were to be recognised, I consider that a sufficient foundation for its application has not been laid in the evidence before me. In that respect I find myself in a similar position to that of Rimer J in Shalson.

81 It is not in contest that there is no direct evidence that when the drawing was made on Rowena's overdrawn bank account it was Rowena's intention it would be repaid by misappropriation of money paid by Karri Oak and Ord River Sandalwood Corporation. However, as indicated by the statement of the possible exception described by Dillon LJ such an intention may be established by inference. Indeed this may be expected to be necessary in most cases.

82 The only evidence which may found such an inference in this case that was advanced by counsel for the third defendant is set out in the Written Submissions for the Third Defendant as follows ([44]):

(a) The fact that the only likely 'lender' for the [Grower Loans] was Rowena ([first ASIC case] per Pullin J at [10], [13], [Lundie] per McLure JA at [79]) and so Rowena would have needed to be in a position to supply the funds;

(b) Rowena had already dissipated funds from the Investors so could not have intended to utilise those funds for the [Grower Loans] (although note the attempts by Rowena to link lenders and Growers - [Conlan affidavit of 5 November 2010] [59]);

(c) Karri Oak and [Ord River Sandalwood Corporation] did in fact deposit the funds back into Rowena rather than elsewhere, perhaps indicative of a pre-arrangement with those entities (noting the Royal Commission report at 14.38, as cited by Pullin J in [first ASIC case] at [11]; and

(d) The use of suspense accounts by St George Bank in a manner not explained ([Conlan affidavit of 5 November 2010] [50.5]).

83 However, in my view the evidence referred to is not sufficient to found an inference on the balance of probabilities that it was the intention of Rowena at the time of drawing the trust funds of Karri Oak and Ord River Sandalwood Corporation that they would be used to pay off the overdraft. There is in my view evidence in the attempts by Rowena to link other investors with Growers that it may have had an intention to pay off the overdraft from other sources. I further note in that regard that the cheque drawn on the trust account for $5,975,000 by Graeme Grubb trading as Graeme Grubb Finance Broker - Trust Account on 3 July 1998 was not shown as a credit on the bank statement of the General Account (Conlan affidavit of 5 November 2010 [50.4]). There were entries by St George Bank by way of debits and credits in the Round Robin in the suspense accounts with the Bank which were not satisfactorily explained ([50.5]).

84 There were journal entries made by the Bank appearing on the settlement of Rowena's General Account of 6 July 1998 which established the credit for $5,975,000 in respect of the payment out of the Trust Account ([50.6]). There is also a notation on a statement of St George Bank of that date, a copy of which is an annexure ('MAC 39') to an affidavit of Mr Conlan sworn 4 September 2000 in an application to the court for leave to institute proceedings for recovery of the Grower Loans, which might indicate the matter of the source of repayment may not have been under Rowena's control. The affidavit is among ones referred to in the Conlan affidavit of 5 November 2010 (see [6]) and was referred to at the hearing of 14 February 2011 without objection. The notation states:

OK - I note that the Bank retained full control over funds flows at all times [signed, dated '6/7/98'].

85 However, I note the author of the notation was not identified before me.

86 Further, there is no evidence that Rowena was or could be confident Karri Oak or Ord River Sandalwood Corporation would transfer the moneys they received back to Rowena.

87 All of this evidence in my view supports the inference that Rowena did not have the intention to use funds of Karri Oak and Ord River Sandalwood Corporation as they came to be used. I consider that evidence prevents me drawing the inference on the balance of probabilities from the evidence referred to in the Written Submissions for the Third Defendant of the intention that is in terms of the first case in the possible exception described by Dillon LJ.

88 I reach this conclusion notwithstanding that, as counsel for the plaintiffs frankly acknowledged, in a round robin transaction it might well be inferred that money would go as the money did in fact go. However, in my view that may not apply where more is known about the round robin and its context, as here.

89 I leave aside for the moment the fact neither Karri Oak nor Ord River Sandalwood Corporation has asserted any proprietary claim to the Grower Loan Proceeds. In my view this failure might suggest the view payment of their funds in the Round Robin was not a misappropriation, a matter to which I will return below.

90 There being no other evidence, I conclude that the possible exception described by Dillon LJ was not made out.

91 However, counsel for the third defendant also drew my attention to the proposition, advanced in commentary on the case of tracing through payment of a debt, that tracing in such a way should not depend on the intention of the wrongdoer at the time the debt was incurred to repay the debt by the misappropriation of funds of another. See the article referred to by Sir Richard Scott V-C in Foskett (CA) 283, Smith, Lionel D, 'Tracing into the Payment of a Debt' (1995) 54 CLJ 290, as matter, together with Agricultural Credit, that the purchasers could 'pray in aid' of tracing through amounts paid into the overdrawn bank account in Foskett. The proposition advanced in the article (the proposition) is (293):

However the matter is analysed, it seems clear that money which is used to pay a debt can be traced into what was acquired in exchange for the assumption of that debt. The incurring of the debt is the means of acquisition of that item, and the money being traced is the means of 'acquisition' or extinguishment of the debt.

92 Among the authorities the article says supports the proposition is Agricultural Credit. I should add that Hagan also appears to offer the proposition support.

93 However, as counsel for the third defendant acknowledged, the proposition has not been considered in terms in any of the authorities on tracing, and in particular none which have considered the possible exception described by Dillon LJ.

94 Further, it is difficult to see why, if the proposition should be considered at least possibly to be the law, it should not have been explored in them. Sir Richard Scott V-C in Foskett (CA) did not appear to me to entertain that possibility. In Agricultural Credit there is no indication it was irrelevant that the plaintiff's agreement to lend funds to the defendants was to enable them to acquire the cattle they did. Counsel for the third defendant did not attempt to support the proposition by reference to any of the authorities relied on by Dr Smith for that purpose in his article, or by reference to Hagan.

95 There is also the concern with the proposition that it might too readily be effective to give a form of security to a person (the person whose monies were misappropriated) otherwise an unsecured creditor of the wrongdoer in any insolvency of the latter. This is a concern Dr Smith himself recognised and sought to meet (see 304); indeed, it is a concern raised in respect of the possible exception described by Dillon LJ in McCormack, G, 'The proceeds of tracing' (1998) 19 Comp Law 80, 82.

96 Finally, the proposition appears to have no room for the principle that tracing is not possible through an overdrawn bank account which Global Finance recognises as I have indicated. Accordingly, I put the proposition aside.

97 In view of my conclusion that it has not been shown that Karri Oak's and Ord River Sandalwood Corporation's payments were traceable into the Grower Loan Proceeds, I do not need to consider two further contentions put to me by counsel for the plaintiffs.

98 The first such contention was that it was not evident that those payments were misappropriations by Rowena. As I understood the contention, this was because there were indications in the evidence before the Royal Commission that the officers of Karri Oak and Ord River Sandalwood Corporation who authorised the payment to Graeme Grubb trading as Graeme Grubb Finance brokers acknowledged that the investment in its terms was commercially nonsensical. See the affidavit of Mr Conlan sworn 15 April 2003 in COR 131 of 1999, annexure 'MAC 5' reproducing the Royal Commission Report [14.41], [14.42], [14.43] (Karri Oak) and [15.19] (Ord River Sandalwood Corporation). I understood the contention to be that I could draw the inference the directors of the relevant entity understood the payments would be used to fund the Round Robin which would avoid aborting the prospectus arranged for the Grower Loans. If so, there would be no misappropriation and no question of any beneficial interest derived from a misappropriation.

99 While I accept that if such an inference could be drawn that would be the case, I would have difficulty drawing it, given that it was common ground Karri Oak and Ord River Sandalwood Corporation had lodged proofs of debt in the liquidation of Rowena in respect of the payments in questions. However, it may be, as counsel for the plaintiffs appeared to suggest to me, that Karri Oak and Ord River Sandalwood Corporation got what they expected only initially, and, I would infer, claimed in respect of subsequent events. There is some support for such a suggestion in the fact, as was common ground, that neither Karri Oak nor Ord River Sandalwood Corporation had asserted a proprietary claim in respect of the Grower Loan Proceeds. At the same time, I consider I do not need to explore the matter any further.

100 The other contention counsel for the plaintiff put to me was that, in the event I found a beneficial interest was held by Karri Oak or Ord River Sandalwood Corporation or both, an accounting would need to be undertaken to determine if any amount would in fact require to be repaid by them under the Distribution Orders O 4(b)(iv)C. However, this matter also does not require further exploration.

Does Rowena as trustee of the Fund have an equitable lien?

101 As I have indicated there was no oral argument directed to this at the hearing of 14 February 2011. The matter is addressed in the Written Submissions for the Plaintiffs, which incorporate the relevant section of the Price Opinion. There is no reference to the matter in the Written Submissions for the Third Defendant.

102 In my view the second plaintiff as trustee of the Fund is entitled to an equitable lien on the Grower Loan Proceeds to secure payment to it of the amount of the administrative costs and the costs of solicitors and counsel borne by the Fund in relation to the recovery of the Grower Loan Proceeds and interest on the amounts paid in these respects and foregone by the Fund.

103 The basis for that conclusion is the body of authority primarily but not only on the equitable lien of a liquidator who has done work and realised property charged in favour of secured creditors and who has a right to be paid remuneration and expenses referable to that work out of the proceeds of the realisation in priority to the holder of the security interest. See Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171, 175 (Dixon J); Shirlaw v Taylor [1991] FCA 415; (1991) 31 FCR 222, 228 - 231 (Sheppard, Burchett and Gummow JJ) (referring also to authorities on trustees); Re Mark Anthony Conlan (as liquidator of Oakleigh Acquisitions Pty Ltd [2001] WASC 230 [11] - [15] (Owen J); IMF (Australia) Ltd v Meadow Springs Fairway Resort Ltd (in liq) [2009] FCAFC 9 [46], [63], [80] - [81] (North, Emmett and Rares JJ); Conlan (2009) [41] - [43]; and Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 40 WAR 53 [46] - [54], [66] - [77] (Buss JA; Wheeler and Pullin JJA agreeing) (referring to statements of principle broader than in relation to liquidators).

What provision should be made for the costs of the Present Proceedings?

104 As I have indicated, no oral argument was directed to me as to this issue. The issue is addressed only in the Written Submissions for the Plaintiffs and in brief. The orders the plaintiffs proposed were that the plaintiffs' and the third defendant's costs be paid out of the Fund. For the reasons indicated in Conlan (2009) [46] - [49] orders of that kind might properly be made here. By reason of the terms of the Orders following the hearing of 17 February 2011 which I set out below the qualifications expressed there are not applicable here.

Conclusion and final orders at the hearing of 17 February 2011

105 It is for the foregoing reasons the Orders following the hearing of 17 February 2011 were made. It is convenient I set out those orders other than those relating to ASIC and the Commonwealth, and the 'Dictionary' but only as to the terms to do with costs.

1. The Second Plaintiff as trustee of the Fund is entitled to an equitable lien over the Grower Loan Proceeds to secure payment to it of the amount of the Costs.
2. Subject to Order 1 hereof and the rights of secured creditors of the Second Plaintiff, the Grower Loan Proceeds are assets of the Second Plaintiff in its own right.
3. Pursuant to section 92 of the Trustees Act 1962 (WA), the Court approves the Second Plaintiff, as trustee, relinquishing any claim to the Grower Loan Proceeds other than in respect of the amount of the Costs.
4. Nothing in paragraph 3 affects any right, power or duty of the Second Plaintiff, as trustee, to recover any money for the Fund in connection with or arising out of any security granted by the Second Plaintiff to the Fourth Plaintiff or to any other person.
5. Pursuant to section 479(3) of the Corporations Act 2001 (Cth), the Court approves the First Plaintiff acting to:

5.1 cause the Second Plaintiff to pay the Costs from the Grower Loan Proceeds to the Fund; and

5.2 distribute the balance of the Grower Loan Proceeds thereafter remaining, in the liquidation of the Second Plaintiff having proper regard to the rights of persons having security over the assets of the Second Plaintiff.

1. The Costs recovered from the Grower Loan Proceeds be added to and form part of the Fund.
2. The Plaintiffs' reasonable and proper costs of and incidental to the application on a solicitor and own client basis, including costs of appearances on 12 November 2010, 20 December 2010, 14 February 2011 and 17 February 2011, be paid out of the Fund in accordance with the orders herein.
3. The Third Defendant's costs of and incidental to the application, including costs of appearances on 20 December 2010, 14 February 2011 and 17 February 2011, be paid out of the Fund in accordance with the orders made on 12 November2010.

...

Dictionary

The following words and phrases shall have the meanings attached to them as follows:

...

Costs mean:

(a) the Trustee's Administrative Costs and the Other Costs; and

(b) interest on the Trustee's Administrative Costs and the Other Costs at the rate applied from time to time to the account into which the Grower Loan Proceeds have been deposited, from the date or dates of payment of the Trustee's Administrative Costs and Other Costs until the date of payment to the Fund under Order 5.1 above.

...

Other Costs means:

(a) the amounts paid by the First Plaintiff out of the Fund to the Plaintiffs' solicitors and Counsel in relation to:

(i) the application to this Court under COR 131 of 1999; and

(ii) the Grower Actions.

(b) the Plaintiffs' reasonable and proper costs, charges, expenses and remuneration of and incidental to these proceedings on a solicitor and own client basis.

(c) an amount being the First Plaintiffs reasonable estimate of, or amount for, the proper and reasonable costs, charges, expenses and remuneration of the First Plaintiff in respect of distributing the Grower Loan Proceeds to secured creditors of the Second Plaintiff.

Trustee's Administrative Costs means the amount of the remuneration paid to the First Plaintiff from the Fund as approved by the Second Plaintiff's Committee of Inspection or by the Supreme Court of Western Australia, in relation to:

(a) the application to this Court under COR 131 of 1999; and

(b) the GrowerActions.

Annexure: Diagram of movement of funds the subject of the Round Robin

106 This is annexure 'MAC 18' to the Conlan affidavit of 5 November 2010.