A It's possible. I'm just not clear on the timing. "
39 This ambivalence is remarkable because of the document relied upon by Mr Harris as confirmation of the instructions he claimed he received from Mr McNally. The document is a memorandum addressed by Mr McNally to Mr Harris dated 22 February 2003 which stated :
" I refer to our telephone discussion on 21 February 2003 and confirm that I do not want the Oxiana shares placed in to the Harraw trust structure. Until I decide what to do with the shares, I want them in the name of Harraw Nominees Pty Ltd (the company) as trustee only for myself. "
40 Mr Harris' evidence was that he prepared this memorandum after receiving that instruction from Mr McNally and sent it to Mr McNally. He said that he later received through the post a copy of the signed written instruction and had no occasion to question the authenticity of Mr McNally's signature on the document. In his affidavit, Mr Harris deposed that "I recall this telephone conversation occurred on 21 February 2003 because I thought it ironic at the time that it occurred on the same date I had arranged for the incorporation of the company."
41 Mr Harris' subsequent ambivalence as to the timing of the conversation is surprising because if the conversation did not occur on 21 February 2003, as he conceded in cross-examination it might not have, the document dated 22 February 2003 would clearly be false.
42 I do not consider that the document is authentic. As noted above, it is common ground that the purported signature of Mr McNally's is a forgery, at least in the sense that it is not his usual signature and that it was written hesitantly having been copied backwards or upside down from another signature. The question is whether Mr McNally himself wrote the signature in such an unusual way or whether Mr Harris forged the signature in an attempt to bolster his evidence of the oral instruction.
43 The evidence of the handwriting expert, Mr Westwood, is significant not only for his conclusion that the signature on the memorandum was the product of some person attempting to imitate the form of a genuine "WA McNally" signature, but also for his conclusion that it is probable that the writer of the signature had used the signature on the deed dated 7 June 2003 as a model. Mr Westwood had been provided with at least 33 specimen signatures of Mr McNally. Whilst it is possible that there may have been other signatures of Mr McNally which were the same as his signature on the deed dated 7 June 2003 and which were used as a model for drawing the simulated signature on the memorandum dated 22 February 2003, I think it probable that Mr Harris used Mr McNally's signature on the deed of 7 June 2003 to create the signature on a document which he produced and backdated to 22 February 2003 as attempted corroboration of his evidence of the oral instruction given to him by Mr McNally. The suggestion advanced by Mr Harris that Mr McNally wrote his signature in a way which appeared to be a forgery so that he could later deny the instruction, is far-fetched. If, as Mr Harris said, Mr McNally decided not to transfer the Oxiana shares to Harraw Nominees before the trust had been established, there would be no reason for him to later seek to deny the giving of the instructions. The suggestion that he might seek to set up Mr Harris as a potential target for litigation by the beneficiaries of the trust by creating a false signature so that Mr Harris could be accused of forgery when he later sought to later rely on the instruction is convoluted in the extreme.
44 I do not consider that the memorandum dated 22 February 2003 corroborates Mr Harris' version of events. To the contrary, I accept Mr McNally's evidence that he did not sign the document. Mr Harris' production of the document discredits rather than corroborates his evidence that he received such an instruction from Mr McNally on 21 February 2003.
45 Moreover, my previous findings that the trust deed and the share transfer had been signed on the afternoon of 21 February 2003 coupled with Mrs McNally's evidence that she was with her husband during the course of the evening of 21 February 2003 and that he did not telephone Mr Harris, together with the fact that the records for Mr McNally's mobile phone disclosed no such call, all indicate that the telephone conversation deposed to by Mr Harris did not occur.
46 As noted at para [31] above, if the instruction alleged by Mr Harris were given, it would have made no sense to backdate the trust deed and the share transfer. Mr Harris said that he prepared the share transfer over the weekend and posted it to either Mr McNally or Mr Warton to be signed by them, and subsequently he received the signed form back from Mr McNally. The date of 21 February 2003 was typed as the "date signed". This would have been false. There would be no reason to state a false date of signing. There would be no reason to choose the date of registration of the transferee as the date of transfer of the shares. Having prepared the share transfer dated 21 February 2003 and intending to send it to Mr McNally or Mr Warton, there would be no reason for Mr Harris to backdate the trust deed to accord with the date on the share transfer form, and every reason not to do so if it were not intended that the shares be held for the beneficiaries named in the trust deed.
47 That is not to say that a later instruction was not given by Mr McNally to Mr Harris to deal with the Oxiana shares. For the reasons which appear below I consider that such an instruction was given. However, by that time the shares were trust property.
Deed Dated 7 June 2003
48 If Mr McNally signed the deed dated 7 June 2003 on or about that date and knew what he was doing, he and Mr Harris, by that time, were both treating the Oxiana shares as shares with which Mr McNally was then entitled to deal. The deed provided that Harris Johnsson Nominees assigned 250,000 shares in Sentinel to Mr McNally in consideration for the assignment by Mr McNally to Harris Johnsson Nominees of 781,000 Oxiana shares. Mr McNally gave evidence that he did not receive the document until May 2004 and he did not read it. He said that in September 2003 he had been promised 250,000 shares in Sentinel as consideration for his moving from Melbourne to Sydney to take up a position as finance director of Sentinel and as part of his remuneration for the work which he did for that company. He said that he received through the post from Mr Harris the deed and a share transfer. The documents came without a covering letter. Notwithstanding that fact, he did not read the deed or even notice that it provided for the inclusion of a date sometime in 2003. The deed was less than two pages long. Mr McNally deposed that he did not recall sending the documents back to Mr Harris, but it was common ground that he did so. In the course of discovery, both Mr McNally and Mr Harris produced original copies of the deed signed by them both.
49 Mr McNally deposed that he took the deed and the share transfer form to Slater & Gordon in Melbourne in May 2004 although he did not ask that firm for advice on the documents. He asked Slater & Gordon if they could process the share transfer form and was referred to another solicitor, a Mr Sesto. Mr McNally met with Mr Sesto or spoke to him in mid June 2004. He provided him with a copy of the share transfer form.
50 I do not accept that Mr McNally did not read the deed. On his own version of events, Mr McNally was under no pressure when the document was signed. He took the document to two different firms of solicitors. On his version of events, the deed was in some way associated with the transfer of the Sentinel shares. Mr McNally said that Mr Harris had told him that he needed to take the share transfer to a solicitor and that he, Mr Harris, could not deal with the share transfer form because he had been a director of Sentinel. On that version of events, as Mr McNally accepted, there would have been no reason for him to have returned the deed to Mr Harris.
51 Mr McNally's evidence as to the time at which the document was signed was corroborated by Mrs McNally. She witnessed Mr McNally's signature to the second page of the deed. She recalled witnessing the document at a new house in Melbourne to which she and her husband had moved in April 2004. Accordingly, she said that she was sure that the document had been signed in May 2004. She said that she scanned the document and that one word on the first page, namely "Sentinel", stood out. However, she did not scan the document closely enough to observe that it included the year 2003 in typewritten form on the first line of the document. I do not accept that Mrs McNally was able to identify the document in question as the document which she witnessed in 2004.
52 Unless Mr McNally and Mr Harris had agreed to the Oxiana shares being swapped for 250,000 Sentinel shares, there would have been no purpose in Mr Harris sending the deed to Mr McNally. Mr Harris had no reason to think that Mr McNally would not read the document.
53 It is far more likely that Mr Harris sent the document to Mr McNally to sign on or about 7 June 2003 and that Mr McNally signed and returned the document at that time. As at 7 June 2003, Mr McNally had become interested in the proposed float of shares in Sentinel. In April 2003, he was asked to become a director of the company. The promoter of the company was a Mr Anthony Aoun. In early May 2003, Mr McNally met Mr Aoun and they discussed the prospects of the company. The company owned certain real estate agencies and provided property management services. It provided property research advice through the internet. Mr McNally later alleged that he was seriously misled by Mr Aoun in relation to the company's financial position. He asserted that in early May 2003, he met with Mr Aoun and "we thought there were a lot of synergies in terms of vision and creativity. I further met Anthony in Sydney not long after and we again had similar convictions and Anthony reaffirmed his desire for me to belong to the team ...".
54 Sentinel was incorporated on 6 June 2003. Mr Harris, Mr McNally and Mrs Aoun were appointed directors on that day. On that day, 5,500,000 ordinary shares fully paid for $0.0001 each were issued to Harris Johnsson Nominees. Five million of those shares were held by Harris Johnsson Nominees as trustee for the Sentinel Property Trust and 500,000 were issued to it as trustee for the Harris Johnsson Rural Property Trust. The 5,000,000 shares issued to Harris Johnsson Nominees as trustee for the Sentinel Property Trust were held for the benefit of Mr Aoun or his family. It was proposed that the shares in Sentinel would be offered to investors for $3 each.
55 Mr McNally said that Mr Harris promised him half of the 500,000 shares in Sentinel for no consideration moving to Mr Harris, but as a reward or recompense for Mr McNally to move to Sydney to work for the company. In about May or early June 2003, he was told by Mr Harris and Mr Aoun that the profits for the Sentinel business were expected to be about $6,000,000 for the financial year ended 30 June 2003. He gave evidence that he would have regarded the deal outlined in the share swap agreement as being a very good deal if it had happened on 7 June 2003, subject to his doing due diligence. There was nothing irrational in the transaction described in the share swap agreement, except that Mr McNally was not entitled to deal with the Oxiana shares.
56 I do not accept Mr McNally's evidence that Mr Harris offered the Sentinel shares to him as a gift. There is no corroboration of that evidence. If Mr McNally were to be given shares in Sentinel as part of an inducement to him to work for Sentinel, it would not be expected that all of the shares to be so offered would come from Mr Harris' holding.
57 In support of his contention that the deed dated 7 June 2003 was not delivered until May 2004, Mr McNally pointed out that the share transfer for 250,000 Sentinel shares from Harris Johnsson Nominees to him is dated 17 May 2004. Mr Harris accepted that the share transfer was prepared at the same time as the share swap agreement and was sent to Mr McNally with two copies of the share swap agreement. Mr McNally resigned from Sentinel in about October 2003 having discovered that the financial position of the business was not as it had been represented to him. Mr Harris resigned as a director in about December 2003 as a result of his dissatisfaction with Mr Aoun. Mr Harris deposed that some time after Mr McNally resigned he told Mr Harris that he had lost the transfer and asked for Mr Harris to send him another transfer. This is a more likely explanation for the dating of the share transfer than Mr McNally's having signed and returned the share swap agreement in May 2004 without having read it.
58 Counsel for the plaintiffs said that Mr Harris had admitted in correspondence that the share swap was effected in June 2004, not June 2003. In a letter of 28 October 2004 to Arnold Bloch Leibler responding to demands made by that firm on behalf of Mr and Mrs McNally and their family, Mr Harris said:
" Prior to the share swap, effected in June 2004, McNally required HNPL to sell 100,000 OXR shares and for the sale proceeds to be given to Sentinel. This was done by me. ... Despite my counsel to him that he was proposing to exchange listed (more liquid) shares for unlisted (less liquid) shares, he was determined to proceed. I prepared a deed to give effect to the transaction and mailed it to him. I also told him that he should seek independent advice, both as to the nature of the transaction and the deed effecting it. The deed's date of execution is June 7th 2003 ... If McNally now claims that he did not agree to the share swap he is lying. To reiterate, not only did he agree to it, he initiated it. "
59 I accept Mr Harris' evidence that the date of June 2004 was a typographical error. It was always Mr Harris' position that the deed was executed in June 2003. He asserted that his company had acquired ownership of the Oxiana shares before they were sold. He was asserting in the letter that his company acquired such ownership from Mr McNally by virtue of the share swap. Given that the shares were sold in 2003, it was clearly a typographical error to say that the share swap was effected in June 2004.
The Hungarian Banking Scam
60 The strongest objective indication that Mr McNally did not understand that he had signed a share swap agreement concerns a transaction described in the evidence as the Hungarian banking scam. In about July 2004, a Mr Marcus Rose told Mr McNally of an opportunity to invest in a company he was promoting called Johnson's Well NL (later called Regis Resources NL), which he said potentially showed returns equal to, if not better than, those from Oxiana. Mr McNally expressed interest in investing. He told Mr Rose that he would like to invest a total of $800,000: $600,000 to come from him, and the other $200,000 from Mr Harris. Mr Rose asked him where he would get his $600,000. Mr McNally told him that it would be from the sale of the Oxiana shares.
61 This evidence had something in it for both sides. It showed that Mr McNally considered that he could deal with the Oxiana shares as if they were his own. Counsel for Mr Harris submitted that this was consistent with the instructions Mr Harris said he had received from Mr McNally that the Oxiana shares were to be held on trust for him, and not on the trusts of the Harraw discretionary trust. Counsel for the plaintiffs said that it corroborated Mr McNally's evidence that he did not appreciate that he had signed an agreement to assign the Oxiana shares in consideration for the transfer of shares in Sentinel.
62 At Mr McNally's request, Mr Harris agreed to apply for 16,000,000 shares in Johnson's Well NL for $800,000. The application was lodged on 4 August 2004. The application moneys were due on 6 August 2004, but were not forthcoming. I accept Mr Rose's evidence that in the course of a conference call between Mr Rose, Mr McNally and Mr Harris, Mr Harris said that the funds had been cleared from his account but had been diverted to Hungary. In fact, no payment was ever made.
63 Mr Harris' evidence was that he never intended to invest $800,000 in Johnson's Well NL. He said that he agreed to put in an application for the shares at Mr McNally's request because Mr McNally wanted to secure the right to the shares and needed some time to raise the money elsewhere. According to Mr Harris, he agreed to lodge the application to help Mr McNally, although he never intended to take up the shares. Mr Harris said that he sent Mr Rose two facsimiles on 4 August 2004. His evidence was as follows:
" In the first [facsimile] I indicated that I had sent an application form through and that I had cancelled a cheque which had been intended to pay for the shares. These statements were incorrect. In the second facsimile I enclosed a share application form and indicated that I had transferred funds to a solicitor's trust account as payment for the shares. This was also incorrect. It was never my intention to invest such a large sum in Johnsons Well Mining NL. I had originally only intended to assist McNally by giving him some time to find another investor. Ultimately, I became trapped in a deception. The deception served me no benefit at all. I was extremely embarrassed by the position I found myself in. "
64 Mr Harris denied that he had raised in a telephone conversation with Mr McNally and Mr Rose that he had paid for the shares but the funds had been diverted to Hungary. According to Mr Harris, Mr Rose asked him "what's this story about the Hungarian bank scam?", and that Mr McNally admitted to him that he, Mr McNally, had told Mr Rose that a cheque for $800,000 had gone missing and the money had ended up in Hungary. Mr Rose deposed that it was Mr Harris who raised the story of diversion of funds to Hungary to explain why the subscription moneys were not paid.
65 Mr Rose was a credible witness. I have no hesitation in preferring his evidence to that of Mr Harris. Whilst the story of the Hungarian banking scam adversely reflects on Mr Harris' credit, it is of only indirect relevance to the question of whether Mr McNally believed that he was then entitled to deal with the Oxiana shares. The story of funds being diverted to Hungary was raised because Mr Harris, at Mr McNally's request, had applied for the shares in Johnson's Well. The fact that he should give a false reason as to why the funds to subscribe for the shares were not forthcoming is not of primary importance. The false story was told because Mr Harris had made an application to subscribe for shares which he did not intend to fulfil.
66 I do not consider that either Mr Harris or Mr McNally told the whole story. If, as Mr McNally said, he believed the Oxiana shares were held by Harraw Nominees on the trusts of the Harraw discretionary trust, there is no reason he would have asked Mr Harris personally to have applied for shares with the subscription funds to come from the sale of Oxiana shares. He would have to have involved Mr Warton, and in all probability his wife, in a decision to sell the Oxiana shares. Nor would the application for Johnson's Well shares have been made in the name of Mr Harris, as distinct from Harraw Nominees. On the other hand, if Mr McNally had already sold the Oxiana shares, as Mr Harris contended, by exchanging them for shares in Sentinel, there is no reason that Mr McNally should have told Mr Rose that the subscription funds for the shares in Johnson's Well would come from the sale of Oxiana shares. Nor, prima facie, would there be any reason for Mr Harris to have agreed to assist Mr McNally by applying in his own name for shares which required the payment of $800,000.
67 There is at least one hypothesis which would explain the transactions, although it is not an hypothesis supported by evidence of either party. Nor was it put to either party. If Mr McNally and Mr Harris knew that the Oxiana shares had been held on the trusts of the Harraw discretionary trust and that the share swap agreement was in breach of trust, Mr McNally may have been able initially to persuade Mr Harris to put the proceeds of sale of the Oxiana shares towards subscription of shares in Johnson's Well, particularly as he could point to the fact that his investment in Sentinel shares had failed. I do not make any finding that that occurred. There was no evidence that it did. However, the possibility of such an alternative hypothesis shows that I should not discount the effect of the share swap agreement of 7 June 2003 merely because Mr McNally represented to Mr Rose that he could deal with the Oxiana shares, or because of Mr Harris' conduct in relation to the shares in Johnson's Well in 2004.
Conclusion in Relation to the Deed of 7 June 2003
68 I conclude that Mr McNally's signing and returning the share swap agreement dated 7 June 2003 corroborates Mr Harris' evidence that he was instructed by Mr McNally that the Oxiana shares should be held for Mr McNally. However, it does not follow that those instructions were given before the Oxiana shares became assets of the Harraw discretionary trust.
When Oxiana Shares Became Property of the Harraw Discretionary Trust
69 Clause 15 of the trust deed provided that future contributions could be made to the trust fund by, inter alia, any person transferring to the trustee any securities and directing the trustee to hold the securities upon like trusts as were contained in the trust deed. At the meeting of 21 February 2003, Mr McNally gave such a direction by stating that he would transfer to the trust his 781,000 Oxiana shares in his margin lending account and by then writing in the number of shares to be transferred onto the share transfer form and signing it.
70 The share transfer stated that the consideration for the transfer of the shares was a sum of $15,620, or two cents per share. This was very substantially less than the then market value of the shares. The consideration was not paid. As at 21 February 2003, Mr McNally remained the legal and beneficial owner of the shares. The shares were still registered in his name. Although the share transfer form contained a contract for valuable consideration for the transfer of the shares for a specified price to Harraw Nominees, the consideration had not been paid. No order would have been made for the specific performance of the contract. The shares in question were shares in a listed company. Damages would be an adequate remedy. On the other hand, the chose in action, being the contractual rights embodied in the share transfer, was trust property. The trust was completely constituted on 21 February 2003, even though the settlement sum of $10 was not paid.
71 There was delay in registering the transfer of shares. The transfer was registered on 8 April 2003. From that date the shares were trust property held on the trusts of the deed dated 21 February 2003. Mr McNally was not entitled to deal with them.
Timing of Mr McNally's Instructions to Mr Harris
72 I do not consider that Mr McNally and Mr Harris agreed to swap the Oxiana shares for the Sentinel shares to be transferred to Mr McNally, or that Mr McNally instructed Mr Harris to deal with those shares as if they were his property, before 8 April 2003. As noted in para [53] above, it was in early May 2003 that serious discussions started about Mr McNally taking up a position with Sentinel.
73 It is probable that it was in about May 2003 that Mr Harris and Mr McNally agreed that Mr Harris should take an assignment of the Oxiana shares in return for Harris Johnsson Nominees transferring 250,000 Sentinel shares to Mr McNally.
74 The deed of 7 June 2003 recited that Mr McNally was the holder of the 781,000 Oxiana shares. This was not the fact. Harraw Nominees had become the holder of the shares on 8 April 2003. The shares were transferred to Harris Johnsson Nominees on 5 May 2003. The transfer was registered on 7 May 2003. I do not consider that the false recital affects the substance of this transaction. It is probable that at about the time these steps were taken and discussions were on foot for Mr McNally to work for Sentinel that he and Mr Harris agreed that on the formation of the company proposed to be listed, Mr Harris would transfer 250,000 of the shares to Mr McNally in return for the Oxiana shares. I infer that it was in anticipation of that step that steps were taken to remove the shares from the control of Harraw Nominees. It is possible that there were discussions in April 2003 between Mr Harris and Mr McNally relating to the transaction which ultimately found expression in the deed of 7 June 2003. It was on 15 April 2003 that Mr Harris signed the statutory form for notification to ASIC of change to officeholders. In that form he represented that Mr Warton had ceased to hold office as a director on 15 April 2003. The form was lodged with ASIC on 22 April 2003. This was a prelude to Mr Harris dealing with the Oxiana shares and may have been the result of discussions then being conducted with Mr McNally. But having rejected Mr Harris' evidence that Mr McNally gave a countermanding instruction on 21 February 2003, there is no basis for saying that any such instruction was given prior to 8 April 2003.
75 I do not overlook the fact that neither Mr Harris nor Mr McNally said that it was in about April, May or June 2003 that Mr McNally told Mr Harris that he wanted to be able to deal with the Oxiana shares. It was not in either of their interests to do so. Acting on such an instruction from Mr McNally would not relieve Mr Harris from the consequences of causing Harraw Nominees to breach the trust. Nor was it in Mr McNally's interest to say so, as he would potentially be liable for inducing the breach of trust. As I have said, I do not regard either man as a reliable witness.
76 The most probable inference from the documentation is that the trust was established on 21 February 2003, the transfer of shares was signed by Mr McNally as transferor and by Mr Warton and Mr Harris as directors of Harraw Nominees on 21 February 2003, that transfer was registered on 8 April 2003 (a fact about which there is no dispute), the share transfer form from Harraw Nominees to Harris Johnsson Nominees was signed on 5 May 2003 (a fact which is not in dispute), and that transfer was made because Mr McNally and Mr Harris then contemplated the share swap agreement documented by the deed dated 7 June 2003. I accept that between 5 May 2003 and 7 June 2003 Mr Harris treated the Oxiana shares as held by Harris Johnsson Nominees on trust for Mr McNally. He was not, as the plaintiffs would have it, simply stealing the shares. Whilst the deed of 7 June 2003 recites that Mr McNally was the holder of the shares, the position of Mr Harris, and I consider also of Mr McNally, was that at that time they were treating Mr McNally as the beneficial owner of the shares and entitled to deal with them in the way provided for in the deed of 7 June 2003.
77 However, this was a breach of trust. I am satisfied that Mr Harris was conscious that it was a breach of trust. Mr McNally must also have realised that the transaction into which he was entering involved a breach of trust.
Liability of Mrs Harris
78 Mr and Mrs Harris are the directors of Harris Johnsson Nominees. Mrs Harris had no involvement in the day-to-day affairs of the company and left such matters to her husband. They have been effectively separated for nine years, but their financial affairs are still connected. The transfer of shares from Harraw Nominees to Harris Johnsson Nominees was executed under the common seal of Harris Johnsson Nominees and signed by Mr and Mrs Harris as directors of the transferee.
79 I accept Mrs Harris' evidence that although she is also a signatory to the joint bank account, the account is operated by her husband. He puts money into the account and takes money out without her questioning it. She was made a signatory to the account only because Mr Harris was worried that if something happened to him she would not have any money at all. She did not receive bank statements or know the source of money that was paid into the account. She signed the share transfer form for Harris Johnsson Nominees at Mr Harris' request without inquiry about the transaction. She signed the transfer of 650,000 Oxiana shares from Harris Johnsson Nominees to Harris Johnsson Partners as a director of Harris Johnsson Nominees. Again, she did that at Mr Harris' request. She did not ask about the share transactions. I accept her evidence that she did not ask her husband about the reasons for the transfer of the 781,000 shares from Harraw Nominees to Harris Johnsson Nominees or the transfer of 650,000 Oxiana shares from Harris Johnsson Nominees to Harris Johnsson Partners. She agreed that she was content to receive the shares (meaning she was content for the shares to be transferred to Harris Johnsson Nominees) on the basis that they reflected some sort of transaction her husband had been involved in. She had no involvement with Harris Johnsson Partners.
80 Mr Harris was the controlling mind of both Harris Johnsson Nominees and Harris Johnsson Partners. Harris Johnsson Nominees received the Oxiana shares with knowledge, through Mr Harris, that the shares were transferred to it in breach of trust. When Harris Johnsson Partners received the transfer of 650,000 shares on 15 August 2003, it knew, through Mr Harris, that the shares had been acquired by Harris Johnsson Nominees through a breach of trust.
81 Mrs Harris had no knowledge or notice that the Oxiana shares had been held on trust or were transferred to Harris Johnsson Nominees in breach of trust. She had no knowledge or notice that the proceeds of sale of the Oxiana shares paid into the joint bank account, whether pursuant to the sales made by Harris Johnsson Nominees or by Harris Johnsson Partners, represented the proceeds of the breach of trust.
82 Counsel for the plaintiffs submitted that because the transfer from Harraw Nominees to Harris Johnsson Nominees disclosed that the transfer was for nil consideration, Mrs Harris was put on inquiry as to why that was so. It was accepted that she did not receive the shares and that the only trust property she received was moneys paid into the joint bank account. The plaintiffs accepted that there was no evidence that Mrs Harris knew that such moneys were trust property but submitted that she was liable because she allowed her husband to deal with the moneys once they were received as he saw fit. Counsel acknowledged that they were unable to identify any authority that this was sufficient to render Mrs Harris personally liable to the plaintiffs for the proceeds of sale of the Oxiana shares paid into the joint account. (I leave aside any tracing remedy which may or may not still be available. It is not suggested that any of the proceeds of sale can be traced to Mrs Harris except if they can be identified in the joint bank account. There was no evidence about the state of that account and the plaintiffs indicated that if they were successful in establishing a breach of trust they may wish to pursue tracing remedies after discovery of information as to how the proceeds of sale have been dealt with.)
83 In Barnes v Addy, Lord Selborne LC said (at 251-252):
" Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort , or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust . But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. "
84 The plaintiffs did not contend that Mrs Harris was liable under the second limb of Barnes v Addy. For Mrs Harris to be liable under the first limb of Barnes v Addy it must be shown that she received trust property, which would include the moneys received from the sale of the shares in breach of trust, with knowledge or notice of the trust (Farah Constructions Pty Ltd at [112]). It was not shown that Mrs Harris received trust property for her own use and benefit. This is essential (Agip (Africa) Ltd v Jackson [1990] Ch 265 at 292). The mere fact that the moneys were paid into the joint account does not establish receipt for this purpose, it not having been shown that she was aware of the receipt or that she received any benefit from the receipt, or that the moneys remained in the account (National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251 at 268; Heperu Pty Ltd v Morgan Brooks Pty Ltd (No. 2) [2007] NSWSC 1438 at [127]-[130]).
85 In Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; (1999) 151 FLR 191; 32 ACSR 124, Anderson J said (at [79]):
" [79] As to recipient liability, there is less certainty about what must be proved to sheet home liability to the non-trustee but I adopt, with respect, the reasoning and conclusions of Hansen J in Koorootang Nominees Pty Ltd v Australia & New Zealand Banking Group Ltd [1998] 3 VR 16 on the question. In the first place, it is not necessary to establish that a recipient of trust property acted dishonestly or with want of probity. Recipient liability may be established if the defendant had actual or constructive knowledge at the time he received the relevant property that: (a) it was trust property and (b) it was being misapplied. The defendant will be taken to have constructive knowledge if it is proved that he wilfully shut his eyes to the obvious; that he wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make in the circumstances; and that he knew of circumstances which would indicate the true facts to an honest and reasonable man. If all that is proved is that the defendant had knowledge of circumstances which would put an honest and reasonable man on inquiry, that is not enough: see Koorootang (at 85 and 105)."
86 In Kalls Enterprises Pty Ltd (In liq) v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557, the Court of Appeal made no adverse comment on the parties' acceptance of this as an accurate statement of the law (at [176]). It confirmed that knowledge of facts that would show to an honest and reasonable person that property received was trust property, or was misapplied in breach of fiduciary duty, is sufficient to render the recipient liable under the first limb of Barnes v Addy (at [179]).
87 Mrs Harris did not even have notice of facts which would put a reasonable person on enquiry as to whether a fraud or breach of trust had been committed. She had no knowledge of facts which showed that there had been a breach of trust and no knowledge or notice that moneys received into the joint account were held on trust for any third person.
88 Accordingly, she is not shown to have received trust property for her own use and benefit, nor shown to have notice or knowledge which would render her liable under the first limb of Barnes v Addy had she done so.
89 The fact that Mrs Harris is not liable to a personal remedy does not exclude the possibility that the plaintiffs may be able to trace trust property into assets acquired by her otherwise than as a bona fide purchaser for value without notice. The plaintiffs submitted that if they established that a breach of trust had occurred they should be allowed the opportunity to investigate the availability of any tracing remedies after further inquiry. I did not understand that course to be opposed if the plaintiffs establish their claim that the Oxiana shares had been dealt with in breach of trust. That course is appropriate. Accordingly, the rejection of personal remedies against Mrs Harris does not lead to the conclusion, at this stage, that the proceedings against her should be dismissed in their entirety.
Liability of Mr Harris and Harris Johnsson Nominees
90 Mr Harris and Harris Johnsson Nominees are liable under both limbs of Barnes v Addy, to pay equitable compensation or to account for profits received; that is, for having received and become chargeable with trust property, and for having assisted with knowledge in a dishonest and fraudulent design on the part of Harraw Nominees. There is no dispute that Mr Harris' state of mind can be attributed to Harris Johnsson Nominees. Mrs Harris left it to Mr Harris to run the affairs of the company. Harris Johnsson Nominees took a transfer of the Oxiana shares with actual knowledge through Mr Harris that the transfer was in breach of the trusts of the Harraw discretionary trust. Whilst initially it did not receive the shares for its own use and benefit that position changed on entry into the deed of 7 June 2003 by which it transferred shares in Sentinel to Mr McNally in return for the assignment to it by Mr McNally of the 781,000 Oxiana shares. Whilst it gave value for the shares, it was not a bona fide purchaser for value without notice because it knew that the shares did not belong to Mr McNally but were required to be held on the trusts of the Harraw discretionary trust. It sold at least 131,000 of the shares and is liable to account for the proceeds of sale. It held the shares and the proceeds of the sale on constructive trust for the beneficiaries of the Harraw discretionary trust.
91 Mr Harris is liable under the first limb in respect of the proceeds of sale of the Oxiana shares paid into the joint bank account which he controlled.
92 In paragraph [76] I have found that Mr Harris did not simply appropriate to himself the Oxiana shares but that he agreed to Mr McNally being treated as the beneficial owner of the shares so that they could be swapped with the Sentinel shares to be transferred to Mr McNally. But I have also found in paragraph [77] that Mr Harris was conscious that this was a breach of trust. Mr Harris was acting as if he were the sole director of Harraw Nominees. In determining whether Harraw Nominees was engaged in a dishonest and fraudulent design within the second limb of Barnes v Addy, Mr Harris' state of mind and conduct is to be attributed to Harraw Nominees. In Consul Development Pty Ltd v DPC Estates Pty Ltd (1974) 132 CLR 373, Gibbs J (as his Honour then was) said (at 398):
" I respectfully agree with what was said in Selangor United Rubber Estates Ltd v Cradock [No 3] [1968] 1 WLR 1555 as to the meaning of 'dishonest and fraudulent' for the purposes of the rule. This expression is to be understood by reference to equitable principles and, as I have already indicated, in my judgment it includes a breach of trust or of fiduciary duty. "
93 In Farah Constructions, the High Court referred to this passage without disapproval, whilst not attempting any further explication of what is encompassed within the requirement of the second limb that the trustee or fiduciary be engaged in a dishonest and fraudulent design. In the context of dealing with the question of what is sufficient knowledge for a third party to be liable as an accessary under the second limb, the High Court did observe (at [173]) that:
" ... a person may have acted dishonestly, judged by the standards of ordinary, decent people, without appreciating that the act in question was dishonest by those standards. "
94 In Selangor, Ungoed-Thomas J said (at 1582-1583, 1590-1591) that what is a dishonest and fraudulent design on the part of trustees is not to be determined by reference to the criminal law, but to the principles applied by a court of equity in its administration of equitable relief. His Lordship accepted that the phrase referred to conduct which was morally reprehensible, but said it was undesirable to attempt an exhaustive definition.
95 Mr Harris must have known that by allowing Mr McNally to deal with the Oxiana shares as if they were his own he was acting to the immediate detriment of the beneficiaries of the trust. I have found that he was conscious that he was acting in breach of trust. The transaction was also of benefit to him because Harris Johnsson Nominees was to acquire the Oxiana shares from Mr McNally. Mr Harris said that he attempted to dissuade Mr McNally from exchanging the Oxiana shares for the Sentinel shares explaining that Mr McNally would be exchanging a liquid investment for an illiquid investment. He said that Mr McNally was determined to proceed. That evidence shows that Mr Harris regarded the exchange as being a good transaction from his point of view. He may have thought that Mr McNally would later replenish the trust fund, although there is no evidence that he did so because it was his case that the shares never became trust property. But even if he were of that view, I consider that his design, and hence the design of Harraw Nominees, was dishonest and fraudulent when considered by reference to equitable principles within the meaning of the second limb. The breach of trust was deliberate, was to the detriment of the beneficiaries, and Mr Harris stood to gain from the transaction.
96 Hence I conclude that both Mr Harris and Harris Johnsson Nominees are also liable as constructive trustees under the second limb of Barnes v Addy.
Conclusion as to Liability of Mr Harris and Harris Johnsson Nominees
97 The plaintiffs are entitled to recover at their election from Mr Harris equitable compensation for the loss of 781,000 Oxiana shares or an account, with interest, of the proceeds of sale of such shares paid to Mr Harris. As against Harris Johnsson Nominees, the plaintiffs are entitled to recover equitable compensation in respect of the loss of 781,000 Oxiana shares or, compensation for the loss of the 650,000 Oxiana shares transferred to Harris Johnsson Partners and an account, with interest, of the proceeds of sale of the 131,000 shares sold on 20 June and 21 July 2003. They are also entitled to an inquiry if they wish to pursue tracing remedies.
Liability of Harris Johnsson Partners
98 The shares held by Harris Johnsson Nominees were impressed with a constructive trust when they were transferred to Harris Johnsson Partners. Harris Johnsson Partners, through Mr Harris, was aware of all of the facts which gave rise to the trust. It is also liable to account as a constructive trustee under the first limb of Barnes v Addy in respect of the 650,000 Oxiana shares transferred to it on 15 August 2003 and to account for the proceeds of sale of those shares. There was no argument as to whether it was also liable under the second limb to pay equitable compensation for the loss of all 781,000 shares. By the time Harris Johnsson Partners became involved, the dishonest and fraudulent design of Harraw Nominees had been completed by the transfer of the shares to Harris Johnsson Nominees to be held for Mr McNally and the exchange of those shares for the Sentinel shares. In my view, Harris Johnsson Partners is liable only under the first limb of Barnes v Addy in respect of the shares it received.
Further Inquiry
99 In their outline of submissions, the plaintiffs contended that in November 2003 and May 2004 Mr Harris caused Harris Johnsson Partners to sell 150,000 of the Oxiana shares in two transactions. They submitted that the proceeds of the November 2003 sale were deposited to a bank account of Harris Johnsson Nominees and the proceeds of the May 2004 sale were deposited to the joint bank account. The statement of claim filed on 22 September 2005 alleged that on about 19 November 2003, Harris Johnsson Partners sold and transferred 50,000 Oxiana shares through a broker on the Australian Securities Exchange ("ASX") and that on or about 10 May 2004 it sold 95,000 Oxiana shares through the ASX. It was originally alleged that on about 3 June 2004, it transferred 500,000 Oxiana shares through the ASX and sold a further 5,000 shares through the ASX on 25 June 2004. These allegations were admitted. However, the allegations were removed from the further amended statement of claim filed on 20 December 2006. There was no admission on either the existing or earlier pleadings as to the application of the proceeds of sale of the shares, save for the shares sold between 7 May 2004 and 16 September 2005. If not agreed, this is a proper matter for inquiry. Harris Johnsson Nominees, Harris Johnsson Partners and Mr Harris are liable to account for proceeds of sale received by them whether the sales were made by Harris Johnsson Nominees or Harris Johnsson Partners.
Injurious Falsehood
100 As summarised at para [12] above, the conduct of Mr Harris said to give rise to a liability in tort was the preparation, signing and lodgment with ASIC of a Form 304 giving notice of change to officeholders. Mr Harris signed the form as director and secretary of Harraw Nominees on 15 April 2003. He certified that on that day, Mr Warton had ceased to hold office as director of Harraw Nominees. He lodged the form with ASIC. He was described as the lodging party and he gave as his address a post office box in Mittagong. The second action relied on as giving rise to liability in tort was the preparation, signing and lodgment with the Oxiana share registry of a standard transfer form for the transfer of the 781,000 Oxiana shares from Harraw Nominees to Harris Johnsson Nominees. Mr Harris affixed the common seal of Harraw Nominees Pty Ltd and signed the form for Harraw Nominees describing himself as "sole director & company secretary". He thereby represented that the transfer had been authorised by Harraw Nominees. It is necessary to consider both claims separately because different arguments may be available as to the vicarious liability of Licardy Harris & Co Pty Ltd and Mr Licardy in relation to the two claims.
101 Initially, on the incorporation of Harraw Nominees, Mr Andrews was the sole shareholder and director of the company. He received instructions from Mr Harris that Mr Harris and Mr Warton were to be appointed directors. He also received instructions from Mr Harris as to the intended registered office of the company. As sole director of Harraw Nominees, Mr Andrews passed resolutions that Mr Warton and Mr Harris be appointed as directors. His sole share was a redeemable preference share. He also passed a resolution for the redemption of that share and the issue of one share to each of Mr Harris and Mr Warton.
102 Mr Warton did not sign a consent to act as director but he agreed with Mr McNally and Mr Harris to accept an appointment as director. He signed the transfer of shares from Mr McNally to Harraw Nominees as a director of Harraw Nominees along with Mr Harris. I have accepted his evidence that he did so on 21 February 2003. Section 201D of the Corporations Act provides:
" 201D Consent to act as director