Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd

Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd - [1999] FCA 1820 - FCA 1999 case summary — Zoe

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REASONS FOR JUDGMENT THE COURT: 1 The cross-claim the subject of appeal in this proceeding was made in one of three proceedings involving the parties to this appeal. All related in various ways to the taxation affairs of Richard Walter Pty Limited (In Liquidation). Appeals to this Court were made in all three matters. In Macquarie Health Corp Ltd v Commissioner of Taxation [1999] FCA 1819 we considered those appeals other than the present. 2 The genesis of the cross-claim of present concern lies, apparently, in an observation of Lehane J in his dissenting judgment in Richard Walter Pty Limited v Commissioner of Taxation (1996) 67 FCR 243 at 264. In that proceeding the Full Court by majority affirmed the decision of Tamberlin J that loans totalling $7,355,581 made by Morlea Professional Services Pty Limited ("Morlea") on behalf of the Morlea Partnership to Richard Walter Pty Limited ("the Taxpayer") between 1981 and 1984 were shams and that the real transaction intended by Morlea and the Taxpayer was the transfer of the beneficial ownership of the moneys to the Taxpayer free of any obligation to repay. 3 The Morlea Partnership consisted of Morlea and Aborda Pty Limited ("Aborda") and these two companies held their respective interests in the partnership property on the trusts of the Aurelius Unit Trust and the Aborda Trust respectively. 4 The cross-claim brought by Morlea and by AT Holdings Pty Limited ("AT Holdings") as successor to Aborda is founded on what conventionally is referred to as the first limb of the rule in Barnes v Addy (1874) LR 9 Ch App 244: a person who knowingly receives trust property in breach of fiduciary duty or in breach of trust is liable as a constructive trustee for that property to those whose trust property it was: see generally Ford and Lee, Principles of the Law of Trusts, s 22730 ff; Parkinson (ed), The Principles of Equity, at 748-753. 5 The claim asserted that (i) in making the sham loans to the Taxpayer, Morlea both caused trust property of the Aurelius Unit Trust and of the Aborda Trust to be paid away in breach of trust, and was guilty as well of breaches of fiduciary duty as agent and partner of the Morlea Partnership (the trustees of the above trusts being the two partners of that partnership); (ii) the Taxpayer having received the sham loan moneys with knowledge of the breaches of trust and of fiduciary duty, the moneys were impressed with a constructive trust in favour of the Morlea Partnership and/or the beneficiaries of the Aurelius Unit Trust and the Aborda Trust; (iii) the moneys so received having been intermingled with the Taxpayer's own moneys, the whole of the Taxpayer's property was in turn subject to the constructive trust; (iv) part of that property included the debts owed the Taxpayer by four companies that were issued with notices under s 218 of the Income Tax Assessment Act 1936 (Cth) and that resulted in the payment by those companies into Court of $21,290,886; and (v) the Morlea Partnership and/or Morlea and AT Holdings as trustees respectively of the Aurelius Unit Trust and the Aborda Trust had, by virtue of the constructive trust, priority to the moneys paid into Court over any claims by the Commissioner of Taxation ("the Commissioner") or the liquidator of the Taxpayer. 6 For reasons we give below it is unnecessary for us to give detailed consideration to the substance of the constructive trust claim. Suffice it to say here that the claim must fail for reasons unrelated to its merits. Before indicating why this is so, it is necessary to outline at some length both the setting in which the sham loans were made and events occurring subsequent to those transactions that bear upon the survival of whatever constructive trust claims Morlea and AT Holdings might otherwise have been able to assert against the Taxpayer and its property. FACTUAL SETTING

General 7 In 1972 Dr Thomas Wenkart established a company to run a pathology laboratory ("the Pathology Business"). That business was to provide the cash flow for a group of companies associated with Dr Wenkart ("the Wenkart Group"). The Taxpayer, Morlea, Aborda and AT Holdings were members of the group (though they were incorporated at different times). The fees Dr Wenkart received for the provision of pathology services were paid over to Morlea. After paying running expenses, etc, Morlea paid the moneys on to the Taxpayer. It acted as financier of the Wenkart Group. In 1977 Geoffrey Holden (who at the time of the making of the cross-claim was or had been a director with Dr Wenkart of the above-named companies) assumed the position of financial controller of the Pathology Business. It is unnecessary to outline the detail of the business arrangements between the various companies prior to 1981.
The Corporate and Trust Arrangements 1981-1984 8 (1) In 1981 a restructuring within the Wenkart Group was effected so that the beneficial interest in the Pathology Business was vested in the Morlea Partnership and was conducted by Morlea for the partnership. 9 (2) The partners of the Morlea Partnership, Morlea and Aborda, were entitled to 95% and 5% respectively of the capital of the partnership and held their respective partnership interests on trust: in Morlea's case for the Aurelius Unit Trust; in Aborda's case, for the Aborda Trust. 10 (3) The unit holders in the Aurelius Unit Trust were Aurelius Commodus Investment BV ("Aurelius") (that held 99 of the 100 units of the trust) and Ventura Securities Inc ("Ventura") (that held the remaining 1 unit). Aurelius was a company incorporated in the Netherlands. Ventura was a limited partnership established in California, USA. In the case of Aurelius, its owner was in turn a member of a corporate chain that linked well-known tax havens in Europe and the Caribbean. It is unnecessary to detail that chain here. It would appear that Aurelius is now in liquidation and that the Ventura partnership has been wound up and the partners are no longer able to be located. 11 (4) The Aborda Trust is a discretionary trust the discretionary beneficiaries of which include Wenkart family members and the Taxpayer. 12 (5) The above trust, company and partnership arrangement was designed, as Tamberlin J held in Richard Walter Pty Ltd v Federal Commissioner of Taxation (1995) 95 ATC 4,440 at 4,446, to channel most of the income of the Morlea Partnership to Aurelius and so secure the benefit of an income tax exemption provided by Article 7 of the Australia/Netherlands Double Taxation Agreement. As will be seen below the tax effectiveness of the above arrangement was later closed off by legislation in 1984. This in turn led to a restructuring of the arrangement in the same year. 13 (6) In the period from 25 May 1981 to 30 June 1984 while the above trust-company-partnership arrangement was in place, Dr Wenkart continued to receive all fees for pathology services which were banked to the credit of his Macquarie Pathology Services account. Each working day amounts were transferred from that account to the account of Morlea as agent of the Morlea Partnership. Disbursements and expenses were paid from Morlea's account and surplus amounts remaining in the account were transferred to the Taxpayer every two to three days. The income tax returns for the Morlea Partnership showed loans to the Taxpayer as current assets of the partnership. The loan account balance of the Taxpayer in the books of the Morlea Partnership was as follows: For the year ended 30 June 1981 $1,707,500 For the year ended 30 June 1982 $3,376,302 For the year ended 30 June 1983 $5,428,989 For the year ended 30 June 1984 $7,355,581 The accounts of the Taxpayer showed these amounts as a liability due to the Morlea Partnership. 14 (7) In the income tax returns for the Morlea Partnership for the years of income ended 30 June 1981, 1982, 1983 and 1984 it was represented that the net income of the Morlea Partnership had been distributed as to 95% to Morlea as trustee of the Aurelius Unit Trust and as to 5% to Aborda in its capacity as trustee of the Aborda Trust as follows: Year of Income Share of Net Share of Net Income of Aborda Income of Morlea 1981 $102,955 $1,956,148 1982 $ 87,852 $1,669,195 1983 $ 77,135 $1,465,563 1984 $196,889 $3,740,898 15 (8) Correspondingly, in the income tax return of the Aurelius Unit Trust for the years of income ended 30 June 1981, 1982, 1983 and 1984 it was represented that (a) the net income of the trust estate included Morlea's purported share of the net income of the Morlea Partnership; and (b) the net income of the Aurelius Unit Trust had been distributed between its two presently entitled unit holders namely Aurelius and Ventura in the proportions of 99% and 1% respectively, as follows: Year of Income Present Entitlement Present Entitlement of Ventura of Aurelius 1981 $19,561 $1,936,587 1982 $16,691 $1,652,455 1983 $15,119 $1,496,778 1984 $37,409 $3,703,489 3. The 1984 Restructure and Associated Events 16 (1) As noted above, legislative amendment of the Income Tax (International Agreements) Act 1953 (Cth) had the effect of precluding Aurelius from securing the taxation advantage it had previously enjoyed. In consequence a restructuring of the arrangements for the Pathology Business was undertaken. 17 (2) On 30 June 1984 Macquarie Professional Services Pty Limited purchased the Pathology Business from Morlea for a consideration of $27,661,054 to be left outstanding at 15%. Importantly, that purchase price included the $7,355,581 recorded in Morlea's books as a current asset loan to the Taxpayer. The purchaser subsequently changed its name to Nika Management Services Pty Limited ("Nika") and will be referred to hereafter as Nika. 18 (3) Again on 30 June, it was resolved both to wind up the Morlea Partnership and to distribute to the partners in specie the debt due from Nika for the sale. Morlea, as trustee of the Aurelius Unit Trust, was entitled to $26,278,001 being 95% of the debt. The 5% entitlement of the Aborda Trust totalled $1,383,053. 19 (4) On 28 December 1984 the directors of Morlea, as trustee of the Aurelius Unit Trust, resolved to wind up the trust and to distribute the assets of the trust in specie to the unit holders according to their entitlements. The Minutes of that meeting were in the following terms: "PRESENT: T R Wenkart (Chairman) G A Holden MORLEA PARTNERSHIP: IT WAS NOTED THAT the Aurelius Unit Trust which was a partner in the Morlea Partnership was entitled, upon dissolution of the partnership on 30 June 1984 to its 95% share of the assets of the partnership, which as of close of business on 30 June 1984, was a debt due from Sesole Pty Limited, a company which has since changed its name to Macquarie Professional Services Pty Limited ("Macquarie"). The amount of the total debt due by Macquarie was $A27,661,054 and the amount thus due to Aurelius Unit Trust was $26,278,001. WINDING UP: IT WAS RESOLVED to wind up the Aurelius Unit Trust and that the assets of the Trust be distributed "in specie", to the unitholders according to the unit entitlement. IT WAS NOTED THAT the unitholders in the Aurelius are:- 1. Aurelius Commodus Investment B.V. 99 units

Ventura Securities Inc. 262,780.00 ACKNOWLEDGEMENT: The Chairman, as a Director also of Macquarie Professional Services Pty Limited, acknowledged that the debt due to the Aurelius Unit Trust would be split in the appropriate proportions." 20 (5) The provision of the Trust Deed under which Morlea acted was in the following terms: "16. Determination of Trust 16.1 The Trustee may at any time for any reason whatsoever and without any obligation to disclose the reason to Unit Holders and shall in any event prior to the Vesting Day determine the Trust hereby created. 16.2 In any case whereby the Trust hereby created is determined the Accountants shall take full and general account of the assets credits debts and liabilities of the Trust and of the transactions and dealings thereof and with all convenient speed such assets and credits shall be sold, realised and got in (with any Unit Holder being entitled to buy in upon such sale) and the proceeds applied in paying and discharging such debts and liabilities and expenses of and incidental to such determination of the Trust and subject thereto in paying in Australia to each Unit Holder any unpaid amounts which may be due to him and his share of the capital (if any) and the balance if any of such proceeds shall be divided amongst the Unit Holders in proportion to the units of which they are respectively registered as the holders upon the execution by such Unit Holders in favour of the Trustee of such releases as may reasonably be required by the Trustee and the delivery for cancellation to the Trustee or to such person as he appoints of the certificates for the units held by such Unit Holders respectively." 21 (6) By a loan agreement expressed to be effective from 28 December 1984 Aurelius, as holder of 95% of the Nika debt, formalised its relationship with Nika in relation to that debt in the following terms: "This agreement is effective as of 28th December 1984 by and between: MACQUARIE PROFESSIONAL SERVICES PTY LIMITED (previously called Sesole Pty Limited) hereinafter called "Macquarie" And AURELIUS COMMODUS INVESTMENT B.V., a private company with limited liability having its registered office at Westewagenstraat 60, Rotterdam, The Netherlands ("B.V."). WHEREAS 1. According to motions adopted during a meeting of Morlea Professional Services Pty Limited as Trustee of Aurelius Unit Trust it was resolved to wind up the Aurelius Unit Trust and that the assets of the Trust be distributed "in specie" to the unitholders according to their unit entitlement. To B.V., a debt due from "Macquarie" to the Aurelius Unit Trust of A$26,015,221.- - was distributed. 2. At a meeting of directors of Macquarie held in January 1985, it was noted that the Aurelius Unit Trust was wound up and that the debt of A$26,025,221. - - [sic] be due to B.V. at an interest of 15% calculated as of 1st July, 1984. 3. The parties to this agreement wish to further formalise the above through this agreement. NOW IT IS HEREBY AGREED AS FOLLOWS: 1. B.V. has lent to Macquarie and Macquarie has borrowed from B.V. the principal amount of A$26,015,221. - - ("the Loan") as of 28th December 1984. 2. The Loan shall be for an indefinite period of time and shall be repayable on demand. Macquarie may at any time redeem the loan or part of the loan. 3. The Loan shall bear interest at a rate of 15% per annum payable at the end of each calendar year, for the first time on December 31st, 1985. Interest payments will be made net of withholding taxes. 4. This agreement shall be governed by and construed in accordance with Netherlands law. IN WITNESS WHEREOF this agreement has been duly agreed in duplicate by the parties hereto on the day and year first above written." 22 (7) On 28 December 1984 Aurelius declared a dividend of $24,570,650, that dividend being later agreed to remain outstanding as an interest-bearing loan.

Introduction 29 Given the view we take of defences raised by the Commissioner to the constructive trust claims of Morlea and AT Holdings, it will be unnecessary for us to refer to the trial judge's treatment of those claims in any detail. We merely note at the outset that his Honour found that at the time the Taxpayer received the sham loan moneys it became a constructive trustee of that money, it having taken them with knowledge of Morlea's breach of duty in making the payment to it. 30 What is presently important, though, is not what the rights and liabilities of the Taxpayer and others may then have been, but rather what is the significance to be attributed to events that occurred subsequent to, and to the passage of time since, the making of the sham loans. The Commissioner both at trial and on this appeal has relied in a variety of ways on those subsequent events and on the passage of time for the purpose of submitting that the claims by Morlea and AT Holdings are now unsupportable in any event. As we agree with this submission we need only refer to three of the matters so raised: two because they provide answers to the claims, the third because of the significance attributed to it by the trial judge and by the Commissioner in this appeal. 31 The first is whether the claims of either or both of Morlea and AT Holdings are statute-barred in any event. The second is whether, in light of the termination of the Aurelius Unit Trust in 1984, Morlea could in 1998 properly institute the present claim as trustee of that trust. The third, distinctly, is whether the claims could now be brought by either Morlea or AT Holdings in consequence of the effects of the 1984 and 1989 restructures. In relation to the third of these we incline to a somewhat different view of the effects of the restructures not only from the trial judge, but also from both the Commissioner and the trustees. It is, though, unnecessary for us to express a concluded view given the view we take on the statute of limitations defence. This also relieves us of the need to seek further submissions on this matter. 32 Before considering each of the above in turn, we would make three observations. First, the clear emphasis in the trial judge's reasons is on the partnership and fiduciary related aspects both of the wrongs done by Morlea and the Taxpayer and of the relief sought. The cross-claim clearly allowed for such an approach to be taken. It also, though, pleaded the same matters in terms of trusts and breaches of trust. On this appeal the trustees have both criticised his Honour's refusal to consider their claims as trust related, and have made trust law an integral part of their submissions on appeal. As will become apparent, we consider that the claims based on breach of trust were properly open to the trustees to make and that trust rather than fiduciary issues lie at the core of the trustees' claims. 33 Secondly, it requires a willing suspension of disbelief to have the doctrines of trust law prayed in aid by Morlea and AT Holdings (as successor to Aborda) in the way they have when Morlea's and Aborda's use of the trust form as instruments of Dr Wenkart's purposes from time to time did no little violence to the law of trusts itself. Moreover, Morlea's posture in this proceeding is a heavily compromised one. While it now asserts it is acting in the interests of the Aurelius Unit Trust, it was the principal wrongdoer in the making of the sham loans and has only been stirred to action many years later, it having discovered apparently that trusteeship does, after all, carry obligations to beneficiaries. And the beneficiaries it now seeks to protect are variously in liquidation and wound up with its partners unable to be located. The collateral effect of what it seeks to achieve in this claim is, coincidentally, to relieve itself and its directors of their respective liabilities to the beneficiaries of that trust for their own wrongdoing: see Australian Securities Commission v AS Nominees Ltd (1995) 133 ALR 1 at 19. 34 Thirdly, other than to note that the trustees are the appellants in this proceeding and that their grounds of appeal relate to the trial judge's treatment of the substance of the constructive trust claim, it will be unnecessary to refer to those grounds in any detail given our view of the defences available against the trustees' claims.

An action on a cause of action in respect of a breach of trust is not maintainable if brought after the expiration of the only or later to expire of such of the following periods of limitation as are applicable: (a) a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims; and (b) the limitation period for the cause of action fixed by or under any provision of this Act other than this section." 36 For present purposes we are prepared to assume that the claims brought by Morlea and AT Holdings can properly be characterised as claims to recover trust property from the Taxpayer. The relief sought in the Further Amended Second Cross Claim in form asserts that the Taxpayer holds its property on constructive trust to the extent of the trust money it received from Morlea, for the benefit of (a) the Morlea Partnership or, alternatively (b) the Aurelius Unit Trust and the Aborda Trust. This said, we merely note that the claim in substance could well be said to be a personal action to recover the sum misapplied by Morlea plus compound interest thereon, these to be secured by a charge over the assets of the Taxpayer. 37 We would note additionally that, while making submissions on the constructive trust claim on the premise accepted by the trial judge that the Morlea Partnership loans to the Taxpayer were shams as found in the Richard Walter case, the Commissioner has contended as well that the findings there made gave rise to no estoppel as between the Taxpayer and the trustees, the latter not being parties to that proceeding. Accordingly it was open to the Commissioner to argue that, as between the Taxpayer and the Morlea Partnership, the debts were real and were due and enforceable. Given the view we take of the limitations defence in any event, it is unnecessary for us to consider this alternative contention. 38 To reiterate briefly the factual setting, the sums paid to the Taxpayer in breach of trust were paid over by Morlea between 1981 and 1984. AT Holdings replaced Aborda as trustee of the Aborda Trust in May 1997. The present cross-claim was brought initially by AT Holdings and was later joined in by Morlea. Morlea, Aborda and the Taxpayer had as common, sole directors Dr Wenkart and Mr Holden. The same two persons became directors of AT Holdings on its acquisition as a shelf company in May 1997. They relinquished their offices with AT Holdings in May 1998. The four new directors then appointed were all apparently related to Dr Wenkart. As at 6 August 1998 (the date of the last historical company extract put in evidence), Dr Wenkart and Mr Holden were the sole shareholders of AT Holdings. 39 Both the Commissioner and the Taxpayer pleaded the Limitation Act as a bar to the constructive trust claims. At the trial, the Commissioner submitted that the cross-claims were barred under s 47 because the common directors of Morlea and Aborda were aware of the facts relating to the payments to the Taxpayer and they must have been aware of the cause of action given the finding made by Tamberlin J that they never intended the moneys to be repayable. 40 The trial judge rejected this. Having emphasised that Dr Wenkart and Mr Holden engaged in the conduct concerning the payments in their capacity as directors of Morlea, his Honour then noted that Morlea itself was acting as agent of the Morlea Partnership. In light of the principle that the knowledge of a director will not be attributed to a company when the director is acting in fraud of the company against its interests, and without benefit to it - Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 31-32 - his Honour found: "The knowledge of Dr Wenkart and Mr Holden must be attributed to the Taxpayer since, in causing the payments to be made to the Taxpayer and to be received by it beneficially, they were acting for the benefit of the Taxpayer. Further, the knowledge of Dr Wenkart and Mr Holden is to be attributed to Morlea in its capacity as fiduciary agent of the Morlea Partnership. However, in relation to Morlea and Aborda as members of the Morlea Partnership, Dr Wenkart and Mr Holden, in causing the payments to be made, were acting wholly against the interests of those companies. Accordingly, their knowledge should not be attributed to Morlea in its capacity as a member of the Morlea Partnership. Nor is it to be attributed to Morlea in its capacity as trustee of the Aurelius Unit Trust. There is some artificiality in Morlea, under the same control, making the present claim. Nevertheless, the claim is now made by Morlea as a member of the Morlea Partnership. On the hypothesis under consideration, it is as a member of the Morlea Partnership that it has been deprived of property, albeit by its own conduct in its capacity as fiduciary agent for the Morlea Partnership." Likewise the knowledge of the two directors was not attributed to Aborda nor to AT Holdings. In consequence the Limitation Act was found not to be a bar to the present claim by Morlea and AT Holdings. 41 We are unable, with respect, to agree with his Honour's reasoning or conclusions. First, the finding of Tamberlin J in the Richard Walter case (at 4,452) was that, when the sham loans were made, the "real transaction intended by the parties" (ie Morlea and the Taxpayer) was the transfer of beneficial ownership without any obligation to repay. Morlea in consequence was found to know the true character of the payments made. Having that knowledge, and knowing that the moneys so paid away were trust moneys, the conclusion is irresistible that Morlea knew of the breaches of trust at the times they occurred. 42 Secondly, having that knowledge, Morlea had it for all relevant purposes both as an agent of, and partner in, the Morlea Partnership and as trustee of the Aurelius Unit Trust. Morlea the agent, Morlea the partner and Morlea the trustee were the same legal person throughout. There can be no question in circumstances such as the present of a legal person that has actual knowledge of a state of affairs being regarded as not having that knowledge depending upon which of its various possible capacities it happens to be acting in at the time. This is a quite different question from whether that knowledge ought be attributed to the person or persons for whom it may and does (or does purportedly) act, ie its principal, its partner, or its beneficiaries. 43 Thirdly, there is the question of Aborda's knowledge. This could, in the circumstances, have been derived on one or more possible bases, ie (i) Aborda's principal and agent relationship with Morlea: see Bowstead & Reynolds on Agency (16th Ed), 529 ff; (ii) its partnership relationship with Morlea; or (iii) its having as its sole directors the directors of Morlea. It would seem that only the third of these was put to the trial judge. 44 It is clear on the evidence at trial that (a) Aborda appointed Morlea as its agent to represent it in respect of all matters relating to the partnership; (b) Aborda was (or must be taken to have been) aware of the fact of the payments made by Morlea to the Taxpayer over the 1981-1984 period; and (c) Aborda was (or must be taken to have been) aware that the "loans" so made were purportedly made on behalf of the Morlea Partnership. As to the latter two of the above matters, the relevant balance sheets and income tax returns of the partnership record the loans. Furthermore, the circumstances of and surrounding the sham loans are distinctive. The three companies involved in the loans have the same two persons as their sole directors. The members of the Morlea Partnership - Morlea and Aborda - held their respective interests in the partnership on trust. Aborda for practical purposes surrendered the conduct of the partnership business to Morlea. In so doing it entrusted it in substance to the common directors of the two companies. And the "loans" themselves were not for the benefit of either Morlea or Aborda or of their respective trusts. 45 Aborda is, in effect, claiming for itself a veil of ignorance that concealed the true nature of the "loan" payments from it. It is Morlea's agency and the fraud on Aborda in what was done that provide the apparent justifications for Aborda being able to assert that ignorance, its own directors not participating as such in any decisions to make payments to the Taxpayer. 46 It is the case (a) that the directors of a company in a group having common sole directors nonetheless owe their fiduciary duties to the company whose powers they are exercising in a given instance: Walker v Wimborne (1976) 137 CLR 1; and (b) for the purposes of imposing civil liability on a company, the knowledge of a director will not be attributed to a company when "the director is acting totally in fraud of the company": Beach Petroleum, above, at 31; Duke Group Ltd v Pilmer (1998) 27 ACSR 1 at 337 ff. 47 The issue of imputed knowledge in the present case is not one related to the imposition of civil liability on Aborda in these proceedings (cf the Beach Petroleum case) - although we acknowledge that if Aborda had knowledge that Morlea was misappropriating partnership/trust property, it could in consequence be exposed to liability for allowing such misappropriation to continue and to go unremedied: see Re Brogden; Billing v Brogden (1887) 38 Ch D 546; see also Scott on Trusts (4th Ed), s 176. It equally is the case that the wrongs done by Morlea were as inimical to its own interests as trustee of the Aurelius Unit Trust as they were to Aborda's interests again as a trustee. Considered in trust terms the parties directly harmed by the sham loans were not Morlea and Aborda, but were the beneficiaries of the two trusts. Such harm as Morlea and Aborda could suffer in consequence of the payments would be for breaches of trust. They would be exposed to the same types of liability as would be the Taxpayer in virtue of its being a participant in Morlea's breach of trust. 48 The funding arrangement that resulted in the moneys generated by the Pathology Business being channelled to the Taxpayer, though involving the three companies - Morlea, Aborda and the Taxpayer (Aborda because it was a beneficial owner of that business) - only required the active participation of two of those companies (Morlea and the Taxpayer) once Aborda appointed Morlea its agent for all matters relating to the partnership. Though the legal agencies that set up the arrangement and then implemented it were separate legal persons, the animating intelligences were the two persons who were their common directors. In our view the fortuitous circumstance that one of the three companies - Aborda - was not required to be an active participant in the making of the payments does not assist Aborda. Both Morlea and Aborda (no less than the Taxpayer) were the instruments of Dr Wenkart's and Mr Holden's purposes. The two were the companies' "controllers": cf Endresz v Whitehouse (1997) 24 ACSR 208 at 228-229; see also Ford's Principles of Corporations Law, at paras 16.200 and 16.220 and the cases referred to therein. Because the companies were involved directly or indirectly in the loan transactions, they were in our view to be attributed with Dr Wenkart's and Mr Holden's knowledge of the true character of those transactions. Aborda was indirectly involved. Partnership property was paid away to its knowledge by its agent. That in the circumstances is enough to warrant the attribution to it of the knowledge of the two persons who were its directors. And as we noted above in relation to Morlea, once Aborda had that knowledge it had it in all capacities in which it might be acting including as trustee of the Aborda Trust. In consequence we disagree with the trial judge's conclusion on this matter. 49 We would add that the plethora of meetings of various companies in the Wenkart Group on 25 May 1981 that were held often minutes apart and that were orchestrated by Dr Wenkart and Mr Holden for the purpose of putting the 1981-1984 corporate and trust structure in place, is itself emblematic of the status of these companies as instruments of those two persons. 50 For reasons we give below our conclusion does not, in the setting of the Limitation Act,work to the disadvantage of beneficiaries of a trust whose trustee has knowledge attributed to in the above way. 51 Notwithstanding the two trustees in 1984 had knowledge of the relevant breaches of trust and of the Taxpayer's participation therein, the cross-claimants nonetheless submit that that knowledge does not preclude the bringing of the present cross-claim. We put to one side in this the distinct argument raised by AT Holdings as to its knowledge of the causes of action. As we understand it the trustees' submission is that the cross-claims are brought to vindicate not some right of each trustee, but the rights of the respective beneficiaries of the two trusts. Even though a trustee is itself a wrongdoer, it nonetheless is entitled to take proceedings to have a breach of trust redressed and, in general, it need not make the beneficiaries parties: Young v Murphy [1996] 1 VR 279 at 283: see also O 6 r 13 of the Federal Court Rules. A trustee that fails so to do runs the risk of itself committing a breach of trust: Young, at 281-282. If, though asserting the beneficiaries' rights, the trustee's own knowledge would allow the limitation period to run - and expire - the beneficiaries could be precluded from vindicating their rights without ever being aware within the limitation period that they had a cause of action originating in the trustee's own wrong. It is said that the legislative intent could not have been that s 47 was to have such an effect: cf Hawkins v Clayton (1988) 164 CLR 539 at 590. 52 The short answer to this submission, as we will indicate, is that the Limitation Act on its proper construction does not have the effect on beneficiary rights alleged by the trustees. There is, though, a number of preliminary matters to which we ought refer before turning to s 47 itself. 53 (i) While the right of a trustee in general to sue for breach of trust without making the beneficiaries parties is well established, it is not an absolute right. As Brooking J observed in Young,above, at 283: "If it can be said that for any reason the trustee should not be regarded as a party who will properly represent the interests of all beneficiaries, then he should not be regarded as able to sue without joining any beneficiary." 54 (ii) There are circumstances in which a beneficiary will have standing to bring an action on behalf of a trust in respect of a right of action vested in the trustee: see generally Ford and Lee, Principles of the Law of Trusts, s 17530: Halsbury's Laws of England (4th Ed reissue) vol 48, "Trusts", ss 941-942. In such a case, though, "he does so in right of the trust and in the room of the trustee. He does not enforce a right reciprocal to some duty owed directly to him by the third party": Parker-Tweedale v Dunbar Bank plc (No 1) [1990] 2 All ER 577 at 583. A beneficiary clearly has the right to institute a Barnes v Addy type claim of the present variety against a recipient party such as the Taxpayer: Young, above, at 281. But in this instance the right of a beneficiary to sue can properly be described as "direct" and not "derivative". The responsibility of the trustee to a beneficiary for a breach of trust is "extended in equity" to the third party constructive trustee: Barnes v Addy, above, at 251-252; and see eg Doneley v Doneley [1998] 1 Qd R 602. As is noted in Scott on Trusts, above, at s 294.1, of a claim against a third party recipient of trust property with notice of the breach: "The wrong that he commits is a wrong to the beneficiaries in taking or retaining the property after he has notice of the breach of trust, and he thereby incurs a liability to them unless, indeed, he is a bona fide purchaser. In this situation, therefore, the beneficiaries can maintain a suit in equity against the transferee, if he took with notice of the breach of trust or paid no value. It is true that the trustee, if he can be subjected to the jurisdiction of the court, should ordinarily be joined as a party. But this is in order that the whole controversy may be determined in a single suit, and not because the right of the beneficiaries against the transferee is only a derivative right through the trustee. Primarily the liability of the transferee is to the beneficiaries rather than to the trustee, and the right of the beneficiaries against the transferee is a direct right and not one that is derivative through the trustee." Emphasis added. See also Bogert, Trusts and Trustees (2nd Ed rev), s 955. 55 (iii) Scott highlights a consequence of the distinction between a beneficiary's direct as opposed to derivative right in the context of limitation of actions. Again commenting on a third party recipient with notice, it is said, at s 327.2: "The question then arises as to whether, if the trustee fails to sue the transferee until he is barred by the statute of limitations or by laches, the beneficiaries also are barred. Where the trustee transfers trust property in breach of trust to a third person who has actual knowledge of the breach of trust, it is clear that the beneficiaries will not be barred by the lapse of time merely because the trustee is barred. Where the trustee and the third person collude in a breach of trust, it would obviously be unfair to the beneficiaries to deprive them of a remedy against the third person merely because the trustee has failed to bring a suit to set aside the transfer. The beneficiaries have a direct right in equity against the transferee for participation in the breach of trust, and not merely a right against the trustee to compel him to sue the transferee. It is clear, therefore, that the beneficiaries should not be barred from maintaining a suit against the transferee unless they are themselves guilty of laches. This situation is very different from the one that arises where the third person does not collude with the trustee in a breach of trust but acts adversely to the trustee. In such a case, as we have seen, the right of action against the third person is in the trustee and not in the beneficiaries; if the trustee is barred, the beneficiaries are barred. However, where the trustee transfers trust property in breach of trust to a third person who knowingly participates in the breach of trust by receiving the property, the beneficiaries have an equitable right of action against the third person as well as against the trustee. Just as their right of action against the trustee will not be barred unless the beneficiaries are guilty of laches, so their right of action against the third person will not be barred if they are not guilty of laches. Accordingly, the beneficiaries will not be barred if they are under an incapacity, such as infancy or insanity. So also even if the beneficiaries are not under an incapacity, they will not be barred by laches if they do not know of the breach of trust." Emphasis added. See also Bogert, above, at s 955; Restatement of Trusts, Second, s 327. We would add that English law appears to have recognised a somewhat similar possibility in the limitation of actions setting where a beneficiary has a direct right against a third party: see Williams v Papworth [1900] AC 563; see also Soar v Ashwell [1893] 2 QB 390; In re Dixon; Heynes v Dixon [1900] 2 Ch 561; Halsbury's Law of England (4th Ed reissue) vol 28, "Limitation of Actions", s 1045; but cf Brunyate, Limitation of Actions in Equity, at 106 ff. 56 Turning now to s 47 of the Limitation Act 1969, it speaks of an action on a cause of action to recover trust property not being maintainable by (inter alia) a trustee or a beneficiary after twelve years from the date on which "the plaintiff … first discovers or may with reasonable diligence discover the facts giving rise to the cause of action and that the cause of action has accrued". 57 An action by the trustee to recover the trust property is an action "for the benefit of the trust estate": see Scott, above, at s 294.2. His right to bring such an action is but an aspect of his duty to get in the trust estate: Young v Murphy, above, at 281-282. In contrast, the action by a beneficiary against a third party recipient in such a case as the present is not precisely the same as that of the trustee. It is a direct action in respect of a wrong to the beneficiary. It has the same character as an action against the trustee for breach of trust. As Bogert notes, above, at s 955, "[t]he beneficiary is enforcing a cause of action belonging to him, and is not acting as a representative of the guilty trustee in realizing upon a claim held by the latter". In contrast to the usual situation concerning suits by trustees against third parties, the right of a trustee in such circumstances seems more appropriately to be described as a "derivative" one. 58 When one translates the above to the language of s 47, the section on its face accommodates the possibility (similar to that mentioned by Scott) of a trustee's action on its cause of action being statute barred because of the running of time from when the trustee had the requisite knowledge, but a beneficiary's action on his or her cause of action being still alive because he or she did not have the requisite knowledge from the time that the trustee did. A construction of the section which allows for this possibility is not only the natural one - it is the particular "plaintiff's" knowledge that determines when time begins to run - it also accommodates, as we have noted, historical distinctions drawn in trusts law itself. Not surprisingly that construction appears to give effect to the intention of the New South Wales Law Reform Commission. In its First Report on the Limitation of Actions (LRC 3) it commented on its proposed s 47 (at para 232): "we think it right that the limitation period should not begin to run until the beneficiary discovers or may with reasonable diligence discover the facts and his rights. We think this because it is possible, even with the best of trustees, that for a long time a beneficiary will have no reason to suppose that he is a beneficiary and because the claim can only extend to property which the defendant still has in his possession but ought never to have received." 59 We would add, finally, that the construction we place upon the section eliminates the proposed injustice to the beneficiaries upon which the very different construction proposed by the trustees in this case was premised. 60 Given our finding that both Morlea and Aborda had the knowledge referred to in s 47 by 1984, the limitation period then began to run against them as trustees in respect of an action against the Taxpayer of the present variety. It had expired in 1996. Insofar as Morlea is concerned its claim is barred and its action is not maintainable. Insofar as Aborda is concerned, a like result would have ensued if it had brought such a proceeding in 1997. Does it make any difference that it was Aborda's successor trustee, AT Holdings, that brought the claim? In our view it does not. AT Holding's right of action against the Taxpayer is vested in it in consequence of its being Aborda's successor. It received it subject to the same bar that it had come to acquire in Aborda's hands. In terms of s 47 of the Act, Aborda is the "person through whom [AT Holdings] claims". It is from the time that Aborda acquired its knowledge that time began to run.

The Termination of the Aurelius Unit Trust 61 Clause 16.1 of the Aurelius Unit Trust empowered Morlea as trustee to terminate the trust at any time. The power was executed on 28 December 1984. At the same time it was resolved to distribute the assets of the trust "in specie" to the unit holders. The trust's interest in the debt due to Morlea from Nika was distributed accordingly. It is not clear from the evidence whether the provisions of clause 16.2 of the trust deed were adhered to in the distribution. The beneficiaries moreover, are now in liquidation, have been wound up, or can no longer be located though we would note that the principal beneficiary, Aurelius, lent the totality of the distribution to it to Nika in a paper transaction. 62 In these circumstances the Court raised with Morlea the question whether it was competent for it to prosecute proceedings now as a trustee. The Commissioner had made submissions which, while relying in part upon the termination of the trust, did not raise the precise question of the effect of the termination. This question was nonetheless addressed by Morlea in its submissions. 63 Though Anglo-Australian authority on the consequences of termination of a trust in circumstances such as the present is slight: but see generally Ford and Lee, above, Ch 16; the principles to be applied are we consider not controversial and are well established in United States trust law. When a trust is terminated by the exercise of a power to terminate, neither the trust nor the trustee's powers are automatically brought to an end. As is noted in Bogert, above, s 1010 at 449-450, "the trust … continues for a reasonable time during which the trustee has power to perform such acts as are necessary to the winding up of the trust and the distribution of the trust property as are expressly given or reasonably implied from the trust instrument". Insofar as the trustee is concerned, then, it retains such powers and duties as are appropriate for the winding up of the trust: see Restatement, above,s 344; Scott, above, s 344. An obvious purpose of such powers is to enable the trustee to protect the trust property pending distribution: see Durand, "Powers of Trustees upon Termination of Trusts", (1945) 45 Col L Rev 865. 64 In the present case Morlea contends that in consequence of the breaches of trust that occurred between 1981 and 1984 it became Morlea's duty to restore the trust fund including the taking of proceedings to that end against the Taxpayer. That duty, it is said, was not lost on the exercise of the power to terminate. It, and the power to sue the Taxpayer, subsisted in the trustee until the duty was discharged. Morlea acknowledges that in relation to that duty it neglected for many years to discharge it and was to that extent again in breach of trust. 65 As we have previously indicated, the beneficiaries of the Aurelius Unit Trust possessed causes of action not only against Morlea but also against the Taxpayer directly in consequence of the Taxpayer's knowing receipt of the trust moneys in breach of trust. Once this state of affairs is appreciated, and bearing in mind the very limited purposes for which a trustee's powers endure after termination, Morlea was bereft of right or power to prosecute its cross-claim. As a trustee it was, and is, functus officio. Notwithstanding the duty of a trustee to get in the trust estate: see Young v Murphy,above, at 281-282; it was, on the termination of the trust, neither necessary or appropriate for Morlea then or thereafter to institute legal proceedings against the Taxpayer. Insofar as the claimed "trust asset" - the cause of action against the Taxpayer - was concerned, the beneficiaries themselves were at the time possessed of a right to sue the Taxpayer. There was thus no need for the trustee to "get in" this asset for distribution. The beneficiaries were, in substance, already possessed of it. Restoration of the trust was not necessary to protect them: cf Target Holdings Ltd v Redferns [1996] 1 AC 421 at 434-435. If proceedings were to be initiated it was for the beneficiaries to decide this as also by whom (themselves or their former trustee) it would be brought if their decision was to sue. Moreover, as we will indicate below, such was the effect of the 1984 and 1989 restructures that the power probably was not one appropriate to be exercised by the trustee in any event after termination without the consent of the beneficiaries. 66 Morlea rediscovered its instinct for its duties as trustee thirteen years after it last misapplied the funds in question. But having terminated the trust, it is now bereft of power to act as a trustee. Its contrition has come too late - if it is contrite at all. 67 We would add for the sake of completeness that neither the power to sue given Morlea by the trust deed nor the provisions of O 6 r 14 of the Federal Court Rules provide Morlea in the circumstances with the power it claims.

The 1984 and 1989 Restructures 68 The trial judge found that, in consequence of the restructures, neither Morlea nor AT Holdings had established that they were entitled to relief by way of declaration of trust against the Taxpayer. Put shortly, while finding that a constructive trust could be imposed on the Taxpayer's property to the extent of any loss suffered by the trusts by reason of Morlea's breach of duty, his Honour found that the effect of the restructures was to avert the loss the trusts previously has suffered. The sham loans were included in the property of the Morlea Partnership transferred to Nika. And as his Honour observed in his reasons for judgment of 28 October 1998: "on the completion of the sale of the Pathology Business by Morlea as agent of the partners, the partners received consideration in the form of the promise by Nika to pay the balance of the consideration. That consideration was, on the evidence before me, equal to the value of the property sold. That consideration was received by the members of the Morlea Partnership in their respective capacities as trustees of the Aurelius Unit Trust and the Aborda Trust. Those trustees, in turn, distributed to their respective beneficiaries, the consideration consisting of the indebtedness of Nika." 69 Addressing the effect of the restructuring directly in his reasons for judgment of 31 March 1999, his Honour observed: "There has been no offer by the Trustees, in their present capacities as trustees of the Aurelius Unit Trust and the Aborda Trust, to disgorge the benefit received as a consequence of the 1984 Transactions. Indeed, disgorgement by the beneficiaries to whom the benefit derived from the 1984 Transactions has been distributed may not be possible. There has been no claim for equitable compensation against the original trustees in respect of the payments in question. In the light of the benefits that accrued to the beneficiaries in consequence of the 1984 Transactions, it may be that there could be none. It has not been suggested that there could be such a claim against the original trustees. It would be anomalous, therefore, if the Trustees were nevertheless entitled to maintain a claim against the property of the Taxpayer that could entail the beneficiaries of the Aurelius Unit Trust and the Aborda Trust deriving a windfall gain." 70 We would note that, though his Honour was in terms concerned with the constructive trust claim arising from what he characterised as a breach of fiduciary duty, his reasoning in this judgment was focussed directly upon the principles that regulate the payment of compensation for breach of trust. It is unnecessary for us to consider the reasons for, or correctness of, this fusion though Morlea and AT Holdings in their submissions have invited us to do so. 71 The substance of their appeal is twofold. First, it is said that having found a constructive trust over the assets of the Taxpayer, the trial judge erred in making relief contingent upon proof of loss suffered. Secondly, it is alleged there was error in the conclusion that there was no loss, actual or potential. As to this latter they rely upon the possible claims variously of April Street and of Nika against the trustees for restitution arising from the fact that the consideration they paid for the Pathology Business included payment for an allegedly non-existent debt (ie the sham loans). 72 The Commissioner in contrast has submitted that the Taxpayer and the Trustees have in effect made reparation for the sham loans and the benefit of this has been passed on to the beneficiaries of the Aurelius Unit Trust and the Aborda Trust in the 1984 and 1989 restructures. In its written submissions the Commissioner ascribes the following effects and consequences to the restructures: "(1) Neither member of the Morlea Partnership suffered any loss; (2) April Street bought a debt owed by the Taxpayer. … [It] is still owed that debt and has lodged an informal proof of debt with the Liquidator of the Taxpayer in relation to it. Accordingly, the Taxpayer is still indebted to April Street in respect of the debt that it bought; (3) Further, there is no basis for contending that the Trustees have to give restitution to Nika. Any claim by Nika is dependent upon the Liquidator of the Taxpayer refusing to acknowledge the indebtedness of the Taxpayer to April Street. There is nothing to suggest that the Deeds [executed in the restructures] are not binding according to their terms. By reason of those Deeds, Nika purchased an asset from Morlea for value and sold it to April Street for value. Nika suffered no loss and has no restitutionary claim. Accordingly, Nika is now estopped from contending otherwise and the Cross-Claimants cannot maintain a claim that Nika and further or alternatively April Street cannot maintain: Grundt v The Great Boulder Proprietary Gold Mines Limited (1938) 59 CLR 641 at p. 676-677." Accordingly it is claimed that the circumstances would not justify the imposition of a constructive trust: Muschinski v Dodds (1985) 160 CLR 583 at 613-617. 73 In response Morlea and AT Holdings submit that the beneficiaries of the trusts lost no rights to enforce a constructive trust against the Taxpayer as a result of the restructure transactions. They were not parties to the transactions and did not authorise or consent to them in any way. 74 While we accept the Commissioner's submissions, also accepted by his Honour, that the restructures gave rise to actual debts against variously Nika and April Street, we do not consider that this necessarily makes out the Commissioner's conclusion of no constructive trust. It may, though for reasons not explored in the parties' submissions, be sufficient to disentitle the trustees from pursuing their claims to restore the trust property. We will briefly indicate why we consider this might be so though we express no concluded views on the matter as the parties have not had the opportunity to make submissions on the questions so raised. 75 When Morlea made the sham loans both it and the Taxpayer became severally liable to restore the moneys (or their traceable product) to the partnership-trusts or to pay compensation therefor (including, importantly, interest thereon: Re Dawson; Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 84 WN (Pt 1) NSW 399 at 407 ff; Mackay v Caugher (1875) 1 VLR (Eq) 56; Ninety-Five Pty Ltd (In Liq) v Banque Nationale De Paris [1988] WAR 132). So much is uncontroversial: see Maguire v Makaronis (1997) 188 CLR 449 at 469-470; Scott, above, ss 291.2-291.3; Ford and Lee, above, Ch 17; Waters, Law of Trusts in Canada, Ch 24. When the restructures occurred, what the trusts were given on account of the sale of the Pathology Business was neither the restoration of the moneys (or their traceable equivalent product) or a sum equal to the moneys misappropriated plus interest. They received a debt to the value of the sham loans plus interest at 15% on that debt. We would add in passing that when the Taxpayer for its part executed its deed of acknowledgment in 1989, it acknowledged its liability to pay an interest-free debt to Morlea. The restructures, in other words, did not constitute an actual (in the sense of precisely equivalent) restoration of the trusts. What the 1984 restructure did, seemingly as a form of intended reparation: cf James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 at 69; was to bring a new asset into the trusts by way of substitution for what was misappropriated - ie a debt equivalent in sum to the moneys misappropriated. That asset was treated by the trustees as being subject to the trusts and was dealt with accordingly. In the case of the Aurelius Unit Trust it was part of the larger debt distributed to that trust's beneficiaries on termination of the trust. 76 What we would emphasise is that insofar as the trustees were concerned, they intended to and did make the debt trust property and for the seeming purpose of remedying their breaches of trust. A trustee that so acts is clearly bound by its action: see In re Cozens; Green v Brisley [1913] 2 Ch 478; Taylor v London and County Banking Company [1901] 2 Ch 231 at 254; Bogert, above, s 929 at 495-496. The beneficiaries in turn would be entitled to the benefit of that new trust property. But would they be obliged to accept it? Or could they disclaim it in favour of suing either or both of the trustees and the Taxpayer for breach of trust and, in the Taxpayer's case, for its knowing receipt? And unless and until the beneficiaries disclaim (or have otherwise become disentitled to sue) can the trustees assert vis-ŕ-vis the Taxpayer that, the trusts not having been precisely restored (despite their own actions and intentions), they can recover in full from the Taxpayer in a suit in the asserted performance of their duty to restore the trust funds? The final question becomes the more pointed where, as here, the Taxpayer has subsequently (in the 1989 restructure) executed a deed acknowledging the debt for which the debt brought into the trusts was given by way of consideration. 77 These are not issues on which submissions have been made. We would merely indicate that they suggest there may be good reason why in such circumstances a trustee should be disentitled from suing a third party recipient either at all or else without joining the beneficiaries: cf Young v Murphy, above,at 283. In any event there can be no question of the beneficiaries obtaining double recovery by (a) retaining the benefit of the new trust property brought in by the trustee and (b) recovering in full from the third party: see Bogert, s 945 at 566. We would note that the possibility of double recovery was properly a matter of concern to the trial judge in his reasons for judgment of 31 March 1999.

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