NICHOLSON -v- MORGAN [No 2] [2012] WASC 296 (21 August 2012)

Supreme Court of WA|2013-01-07|Before: Corboy J

1 The plaintiffs allege that they agreed to purchase shares issued in Firepower Holdings Group Limited (FHGL). They further allege that as part of those agreements:

(a) Some of the plaintiffs (the MA Applicants) deposited money in a trust account (the MA trust account) maintained by the first and second defendant (Mr Morgan and Mr Alteruthemeyer), alternatively the third defendant (Maclma), a company that was related to Mr Morgan and Mr Alteruthemeyer.

(b) The money deposited in the MA trust account was to be used to pay for the FHGL shares that each MA Applicant had agreed to purchase. Accordingly, the money was to be held on trust:

(i) pending the transfer of FHGL shares from an identified vendor shareholder to an MA Applicant;

(ii) until Mr Morgan and Mr Alteruthemeyer, alternatively Maclma were notified by FHGL that share certificates had been issued to an MA Applicant in settlement of the sale and purchase of FHGL shares to that applicant.

2 The plaintiffs further allege that money was subsequently paid out of the MA trust account in breach of that trust - the money was not disbursed as part of any settlement of the sale and purchase of FHGL shares, no share certificates had been provided to any MA Applicant and no FHGL shares had been transferred to an applicant. It is also alleged that:

(a) Money paid out of the MA trust account passed through a bank account opened and operated with the seventh defendant (NAB). The bank account (the FIPL account) was styled in the name of Firepower Investments (Pte) Ltd (FIPL). It was opened on instructions given to NAB by Mr Timothy Johnston and Ms Melony Darroch.

(b) The money was transferred from the MA trust account to the FIPL account on instructions given to Mr Morgan and Mr Alteruthemeyer, alternatively Maclma, by Mr Johnston or by the fourth defendant, Mr Stein. Mr Johnston and Mr Stein knew the terms on which the money was held in the MA trust account and that FIPL, Mr Johnston and Ms Darroch were not entitled to the money.

(c) Mr Johnston or Mr Stein acted dishonestly by directing that money be transferred from the MA trust account to the FIPL account. Further, they knowingly participated in a breach of trust by Mr Morgan and Mr Alteruthemeyer, alternatively Maclma, by giving those directions.

(d) The money transferred from the MA trust account to the FIPL account was held on trust by Mr Johnston and Ms Darroch.

(e) The money held in the FIPL account was withdrawn and dissipated in breach of that trust. The breach was committed by Mr Johnston as he either withdrew the money or knew and approved of its withdrawal.

(f) NAB was a knowing participant in Mr Johnston's breach of trust and is liable to account for the money that passed through the FIPL account.

3 NAB has applied under O 20 r 19 (1)(a) Rules of the Supreme Court 1971 to strike out those paragraphs of the statement of claim that plead that it is liable to account as a knowing assistant in Mr Johnston's alleged breach of trust (SOC pars 65 76). I have concluded that the claim pleaded against NAB should be struck out as disclosing no reasonable cause of action. I have also concluded that the plaintiffs should be given an opportunity to re-plead their claim.

4 The plaintiffs' claim against NAB rests on allegations about the circumstances in which the FIPL account was opened and operated. In summary it is alleged that:

(a) CorpDirect Ltd and CorpSec Ltd were the sole director and secretary respectively of FIPL. It is further alleged that FIPL, CorpDirect and CorpSec were incorporated under the laws of Malaysia (pars 56 and 57).

(b) Neither Mr Johnston or Ms Darroch were directors or officers of FIPL nor were they the 'holder of any authority issued by FIPL' to open or transact on any Australian bank account (par 59). The wording of that plea of lack of authority is ambiguous. Is the expression 'the holder of' significant; that is, is it intended to allege that Mr Johnston and Ms Darroch could not have demonstrated that they were authorised by FIPL to open and operate the FIPL account had they been required by NAB to establish their authority? Alternatively, is the allegation that Mr Johnston and Ms Darroch were not, in fact, authorised by FIPL?

(c) Mr Johnston was a director of Firepower Operations Pty Ltd and TPS Firepower Pty Ltd (par 58A). He was also a director of FHGL (particulars to par 66.8).

(d) Firepower Operations and/or TPS Firepower had opened an account or accounts with NAB some time prior to 15 May 2006 and either or both corporations had been issued with an internet banking identification number that enabled the account(s) to be accessed and operated over the internet (par 58).

(e) By facsimile dated 17 May 2006, Mr Johnston and Ms Darroch requested NAB to open an account in the name of FIPL and to link that account with the account(s) operated by Firepower Operations and/or TPS Firepower. It is alleged that the effect of linking the accounts was that any person (referred to in the statement of claim as a 'Controller') who knew the identification number and password for the account(s) held by Firepower Operations and/or TPS Firepower could also access the FIPL account via the internet (par 60).

(f) NAB linked the FIPL account to the account(s) operated by Firepower Operations and/or TPS Firepower as requested by Mr Johnston and Ms Darroch (par 63).

(g) At no time was NAB provided with any authorisation by FIPL 'in relation to the opening of any bank account in FIPL's name or operation of any such bank account, including the linking of any such account with an internet password code for an account held in the name of a different customer' (par 62).

(i) 'by the opening and operation of any [linked bank account], [Mr] Johnston or [Ms] Darroch or any other Controller, whether or not they were in fact authorised to do so by FIPL, would be in a position to receive and disburse monies in the name of FIPL' (par 62A.1);

(ii) Mr Johnston and Ms Darroch 'would not require a FIPL account or accounts to receive and disburse monies in their own names' (par 62A.2);

(iii) persons depositing funds in the FIPL account would 'reasonably and properly' assume that the account had been opened and was controlled by persons who had been duly authorised by FIPL and that they were transacting with FIPL when, in fact, the account had been opened by Mr Johnston and Ms Darroch and was controlled by the Controllers so that persons placing funds in the FIPL account were transacting with the Controllers (par 62A.3).

5 It is alleged that NAB knew about the incorporation of FIPL in Malaysia and the particulars of its sole director and secretary. Obviously, it also knew, on the case pleaded by the plaintiffs, that FIPL had not provided any authorisation for the opening or operation of the FIPL account (par 61). It is further alleged that a reasonable and honest banker would have inferred from its knowledge about those matters and the matters referred to in par (h) above (the matters pleaded in pars 62A.1 to 62A.3) that:

(a) the Controllers would, from the date of opening of the FIPL account, be able to deposit or direct the deposit into the NAB FIPL account of third party funds in truth intended by those third parties to be paid to FIPL and then to disburse or transfer such deposited funds from the FIPL account;

(b) any such third party who intended the deposited funds to be paid to FIPL was exposed to the risk that the deposited funds would be disbursed by the Controllers and not by FIPL;

(c) any such third party would be exposed to such risk without knowing of such risk, or having any ready means of coming to know it;

(d) there was a real likelihood that the Controllers would receive monies in the name of FIPL;

(e) the monies in the FIPL account when not, alternatively were not likely to be, the property of the Controllers; and

(f) there was a real likelihood that the Controllers would disburse such monies.

... any Controller who received and disbursed monies in the name of FIPL would, or would likely do so without regard to the truly entitled party, whether:

(a) by receiving monies in the name of FIPL and disbursing those funds without authorisation from FIPL; or

(b) as a person acting, although not authorised, in the position of a director of FIPL.

6 As previously noted, it is alleged that Mr Johnston or Mr Stein dishonestly caused funds to be transferred from the MA trust account to the FIPL account with the result that the funds were held on trust by Mr Johnston and Ms Darroch for those plaintiffs whose deposits in the MA trust account had been transferred to the FIPL account (referred to in the statement of claim as the NAB Applicants or the NAB Claimants) (SOC par 71.1). The plaintiffs further allege that:

(a) the opening and operation of the FIPL account constituted a dishonest and fraudulent design on the part of Mr Johnston (par 73);

(b) the withdrawal of funds from the FIPL account by Mr Johnston and/or Ms Darroch and/or the Controllers constituted a breach of trust by Mr Johnston (he either withdrew the funds or knew and approved of the withdrawal of the funds by others) (par 73A);

(c) NAB assisted in the dishonest and fraudulent design of Mr Johnston by opening the FIPL account and by permitting withdrawals from the account by persons who were not authorised by FIPL to operate the account (par 74);

(d) NAB knew that Mr Johnston and Ms Darroch were not authorised by FIPL to request the opening of the FIPL account or to 'procure' the withdrawal of money from the account 'but knew that withdrawal of funds paid into that account could be performed by any Controller' (par 75);

(e) NAB knew of circumstances that would (par 75A):

(i) indicate to an honest and reasonable bank that the FIPL account could and would be likely to be used dishonestly or fraudulently by persons not authorised to do so;

(ii) suggest to a reasonable bank a dishonest and fraudulent design on the part of those seeking to open the account;

(f) NAB recklessly failed to make any enquiries about the entitlement of Mr Johnston or those in possession of the internet password allocated to the account(s) operated by Firepower Operations and/or TPS Firepower to access and withdraw funds deposited into the FIPL account without needing to be an authorised signatory to the account (par 75B).

7 Several points can be immediately noted about those allegations:

(a) They focus on NAB's knowledge about the possibility that persons might access the FIPL account without FIPL's authority. Similarly, NAB is alleged to have assisted in Mr Johnston's dishonest and fraudulent design by permitting withdrawals from the FIPL account by persons who were not authorised by FIPL to operate the account. The gist of much of the pleading is that NAB knew of the possibility that Mr Johnston and the Controllers could deal with FIPL's money and that it had facilitated those dealings, not that it knew that Mr Johnston and the Controllers could deal with money that was held in the FIPL account on trust for others (apart from FIPL) - and in particular, for the NAB Applicants or NAB Claimants who claim that NAB is liable to account to them.

(b) SOC par 62A.5 alleges that NAB knew that a Controller would or would be likely to deal with money in the FIPL account 'without regard to the truly entitled party'. However, that allegation is also concerned with unauthorised dealings with FIPL's money expressly in par 62A.5(a) and it is alleged by par 62A.5(b) that a Controller would receive and disburse money in the FIPL account as a 'person acting, although not authorised, in the position of a director of FIPL'.

(c) The allegation that NAB was not provided with any authority by FIPL relating to the opening and operation of the FIPL account and that they agreed to link the account to other internet accounts would be sufficient to establish that NAB knew that the Controllers could receive and disburse funds from the FIPL account 'without regard to the truly entitled party'. However, the allegation in par 62A.5 is that NAB knew that the Controllers 'would or would be likely' to do so. It is difficult to see how that allegation could be established by the facts pleaded and on which the allegation relies.

(d) Putting to one side the question of whether the matters alleged could, in law, constitute a Controller as a de facto director of FIPL, par 62A.5 relies on the matters pleaded 'above'; that is, on the facts alleged in SOC pars 56.1, 57, 62, 62A.1 - 62A.3 and 62A.4 (see the cross-references in par 62A.4). Consequently, the allegation in par 62A.5(b) is that NAB knew that:

(i) the Controllers would or would be likely to access the FIPL account;

(ii) they would, by doing so, gain access to money that could have been deposited by persons who had been mislead into believing that they were transacting with FIPL when, in fact, they were transferring funds to an account controlled by persons who were not authorised by FIPL to operate the account;

(iii) the Controllers were de facto directors of FIPL in those circumstances.

However, the most that could be established by the allegation made in par 62A.5(b) and the facts on which the allegation relies is that NAB knew that the Controllers owed a fiduciary duty to FIPL in relation to the money held in the FIPL account as the money did not belong to the Controllers but to FIPL - the money had been paid into the account by persons who had intended to transact with FIPL and thought they were doing so by depositing funds in the account.

(e) There is no allegation made in the statement of claim that NAB had actual or constructive knowledge of the true source of the funds paid into the FIPL account.

(f) There is an obvious distinction between knowledge that the Controllers were de facto directors of FIPL, owing fiduciary duties to FIPL and holding or dealing with money belonging to FIPL as constructive trustees and knowledge that Mr Johnston and Ms Darroch held the money in the FIPL account on trust for the NAB Applicants or NAB Claimants by reason of the matters alleged SOC pars 64 - 70 (SOC par 71.1).

(g) SOC par 75 pleads that NAB knew that Mr Johnston and Ms Darroch were not authorised by FIPL to open or procure withdrawals from the FIPL account 'but knew that withdrawal of funds paid into that account could be performed by any Controller'. NAB's knowledge about those matters is said to be 'by reason of' the matters referred to in pars 56 62A. However, the allegation of knowledge made in par 75 stops short of the allegations of knowledge pleaded in pars 56 62A and in particular, par 62A.5 - knowledge that the Controllers would or would be likely to receive and disburse money in the FIPL account without authority from FIPL, without regard to the 'truly entitled party' and acting as de facto directors of FIPL (par 62A.5) as compared to knowledge that any Controller could withdraw funds from the FIPL account (par 75; note that the differences include the shift from 'would' in par 62A.5 to 'could' in par 75). NAB's knowledge as pleaded in par 75 is referred to in pars 75A, 75B and 76 as the basis for allegations concerning its knowledge of a breach of trust by Mr Johnston according to the Baden categories (Baden v Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France SA note [1993] 1 WLR 509; [1992] 4 All ER 161). It is not clear whether the facts relied on to make the allegations in pars 75A and 75B include the matters pleaded in par 62A.5 in light of par 75.

(h) To the extent that the facts pleaded to in par 62A.5 are relied on to make the allegations pleaded in par 75A and 75B, those facts could only establish 'knowledge of circumstances' (the opening words of par 75A) about unauthorised use of the FIPL account to receive and disburse money intended for and belonging to FIPL. Consequently, the facts pleaded in par 62A.5 would indicate knowledge of the possible dishonest and fraudulent use of the FIPL account to misappropriate FIPL's money (par 75A.1) and a dishonest and fraudulent design concerning FIPL's money that involved breaches of fiduciary duties owed to FIPL or a breach of a constructive trust of which FIPL was the beneficiary (par 75A.2). Similarly, par 75B alleges knowledge to be imputed from enquiries that were not made 'in the face of the knowledge pleaded in paragraph 75'.

8 Affidavits were filed and served by the plaintiffs and NAB. However, the approach adopted by senior counsel for the parties at the hearing of the application (which properly focussed on the substantive issue to be determined) meant that it was unnecessary for the affidavits to be read. Rather, one document was received as an exhibit and another was provisionally received subject to a ruling on whether NAB should be permitted to amend its summons to include the grounds referred to in O 20 r 19(1) (b) and (c).

9 Exhibit 1 was the facsimile dated 17 May 2006 that contained the request to NAB to open the FIPL account. The facsimile included a facsimile transmittal sheet endorsed with the name and contact details of Firepower Group Ltd. The facsimile, as received by NAB, bore a transmission imprint indicating that it had been sent by Firepower Operations. The transmittal sheet identified the sender as Ms Darroch. She was described in the facsimile as 'office manager'. Mr Johnston also signed the facsimile, describing himself as 'Chairman'.

10 The facsimile requested NAB, 'as discussed', to establish a 'new operating bank account on behalf of Firepower Operations named Firepower Investments Pte Ltd'. The facsimile attached copies of a letter from the Labuan Offshore Financial Services Authority addressed to NAB and a company search report in respect of FIPL. The letter from the Financial Services Authority provided information concerning the incorporation of FIPL under the Offshore Companies Act 1990 (Malaysia) (the Offshore Act). The information provided referred to CorpDirect and CorpSec but made no reference to Mr Johnston or Ms Darroch. Similarly, the company search report did not refer to Mr Johnston or Ms Darroch.

11 However, there were several aspects of the documents transmitted that were identified by NAB as being relevant to the allegations of knowledge made by the plaintiffs (ts 61 62):

(b) the letter from the Financial Services Authority was addressed to Mr Chellew's branch of NAB;

(c) the information contained in the letter was said to have been provided to the Financial Services Authority by the 'respective trust company lodged or submitted to the [Authority] pursuant to the requirements of the [Offshore Act]';

(d) the letter from the Authority also stated that it was only for the use of the addressee and contained information that was confidential and legally privileged and that any person who obtained the information was subject to a nominated provision of the Offshore Act;

(e) the addresses given for CorpShare and CorpSec were the same as that given for FIPL;

(f) the company search report appeared under the letterhead of a company that had the same address as FIPL, CorpShare and CorpSec.

12 The purpose of identifying those matters was to suggest that they conveyed to NAB that Mr Johnston was connected with and authorised by Firepower Operations/FIPL to request that an account be opened on behalf of Firepower Operations in the name of FIPL, linked to accounts operated by other apparently related 'Firepower' entities and that, in fact, Mr Johnston was authorised by FIPL as he had supplied the documents attached to the facsimile (NAB's submissions, par 18). The plaintiffs disputed the inferences that NAB sought to draw from the facsimile (plaintiffs' outline of submissions, par 18 and following). I found that it was not necessary to reach a concluded view on NAB's submission having regard to the matters that are considered in the reasons that follow. At most, I noted that the documents indicated that there was, to NAB's knowledge, some connection between Mr Johnston, Firepower Operations and FIPL for the reasons that were submitted. I make no findings for the purpose of this application about the nature of that connection.

13 Exhibit 2P was a NAB account authority card for Firepower Operations signifying that Mr Johnston and Ms Darroch were authorised to operate four accounts held by Firepower Operations with NAB. Senior counsel for NAB contended that the account authority card was relevant as it established that NAB knew that Mr Johnston was authorised to give directions on bank accounts operated by Firepower Operations (ts 73).

14 Evidence is not admissible on an application to strike out a pleading on the ground specified in O 20 r 19(1)(a) RSC (see O 20 r 19(2)). Senior counsel for NAB frankly acknowledged that the purpose of the proposed amendment to NAB's summons was to enable exhibit 2P to be admitted into evidence. It was not otherwise suggested that the claim pleaded against NAB was scandalous, frivolous or vexatious or an abuse of the process of the court.

15 I do not consider that the proposed amendment to the summons should be permitted in those circumstances. False issues would be raised by allowing the amendment and the limitation imposed by O 20 r 19(2) should not be circumvented when the only issue to be determined is whether the pleaded allegations disclose a reasonable cause of action.

The principles relevant to the application to strike out

16 Interlocutory disputes over the adequacy of pleadings are discouraged in the case management regime that applies in this court: see the comments of the Chief Justice in Youlden Enterprises Pty Ltd v Health Solutions (WA) Pty Ltd [2006] WASC 161; 33 WAR 1. His Honour indicated that 'in very general terms' interlocutory pleading disputes would only be entertained by the court 'if the time and expense involved in their resolution is proportionate to the significance of the dispute to the just and effective resolution of the case' [2]. I accept that NAB's application satisfies that requirement having regard to:

17 The plaintiffs referred to the principles to be applied on an application to strike out a claim that were identified by Master Staples in Kimberley Downs Pty Ltd v Western Australia (Unreported, WASC, Library No 6414, 25 August 1986). I accept that those principles assist in identifying the approach to be taken. In particular, I accept that 'a court at first instance should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable possibility that, as the law develops, it will be found that a cause of action will lie'. The principles identified by Master Staples necessarily also incorporated references to General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125.

18 NAB identified in its written submissions eleven reasons why it contended that the statement of claim did not plead 'any facts which are capable of establishing that the bank acted dishonestly, by knowingly assisting the alleged dishonest and fraudulent design of [Mr] Johnston (ie, the alleged dishonest and fraudulent breach of trust by [Mr] Johnston)' (seventh defendant's submissions, par 16). That formulation of the claim made against NAB incorporated an element that, in my view, it was not necessary for the plaintiffs to plead and prove that NAB had acted dishonestly (see the discussion on the second limb of Barnes v Addy (1874) LR 9 Ch App 244 in the next section of the reasons).

19 The first reason identified by NAB as to why the statement of claim did not disclose a reasonable cause of action concerned the facts pleaded about its knowledge of the authority of Mr Johnston and Ms Darroch to open and operate the FIPL account. The remaining reasons concerned allegations made about NAB's knowledge of the allegedly dishonest and fraudulent design of Mr Johnston, including whether it knew that the design involved a breach of trust and/or dealings with trust property. The import of those reasons was captured in submissions that:

(a) the allegation that the bank knew of Mr Johnston's allegedly dishonest and fraudulent design rested on the plea that it knew that the FIPL account could and would be likely to be used dishonestly or fraudulently (seventh defendant's submissions, par 19);

(b) knowledge that an account could be operated dishonestly or fraudulently by a person who opened it was no more than knowledge of a risk of that occurring (par 20).

20 NAB also emphasised in its oral submissions the difference between the allegations made in pars 56 - 62A concerning the possible use, to NAB's knowledge, of the FIPL account to receive and disburse FIPL's money without its authority and the allegations made in pars 72 76 concerning NAB's liability to account to the NAB Applicants or NAB Claimants as a knowing participant in a breach of trust by Mr Johnston that involved the receipt and dissipation of money transferred from the MA trust account to the FIPL account.

21 In my view, the following propositions and considerations concerning the second limb of Barnes v Addy (1874) LR 9 Ch App 244 were relevant to whether the allegations pleaded against NAB disclosed a reasonable cause of action:

(a) Recent English authority has concentrated on the liability to account of third parties who have dishonestly induced a breach of trust: see, for example, Royal Brunei Airlines Sdn Bhd v Tan [1995] AC 378; Twinsectra Ltd v Yardley [2002] UKHL12; 2 AC 164 and Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 WLR 1476; 1 All ER 333. This has shifted the focus of English law from the third party's knowledge of the dishonest and fraudulent design of the trustee or fiduciary to the dishonesty of the third party itself ('dishonest' assistance rather than 'knowing' assistance).

(b) However, in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 the High Court re-affirmed that, 'as conventionally understood in Australia, the second limb makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary' [160]. The status of the recent English authority was left for further consideration; Australian courts were to continue to apply Lord Selborne's formulation of the second limb in Barnes v Addy, as explained in Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373 (SayDee [163]).

(c) Accordingly, it is not necessary for the plaintiffs to plead and prove that NAB acted dishonestly by assisting Mr Johnston.

(d) The High Court rejected a submission by the respondent in SayDee that 'a defendant who had not received a direct financial benefit "but has participated in a significant way in a significant breach of duty/trust with actual knowledge of the essential facts which constituted the breach should be liable to the beneficiary of the duty/trust for the consequences of the breach"' [183]. It did so because not all breaches of trust or fiduciary duty can be characterised as 'dishonest or fraudulent' [181] and the High Court could see no reason why the 'dishonest and fraudulent design' integer for liability should be abandoned [180]. The Court was conscious that 'breaches of trust and breaches of fiduciary duty vary greatly in their seriousness. Some breaches are well intentioned, some are trivial' [184]. Further, breaches by trustees and fiduciaries may be excused. Consequently, liability should not be unfairly imposed on third parties dealing with trustees and fiduciaries [179]:

Since the widening of the second limb of Barnes v Addy beyond breaches of express trust, attempts commonly are made in corporate insolvencies to render liable on this footing directors, advisers and bankers of the insolvent company. This makes the proper understanding of the second limb important, lest its application proves unjust. As Lord Selborne LC said in Barnes v Addy: 'There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them.' The relevant passages in Consul establish for Australia that 'dishonest and fraudulent designs' can include not only breaches of trust but also breaches of fiduciary duty; but any breach of trust or breach of fiduciary duty relied on must be dishonest and fraudulent.

(e) Considerable attention has also been directed to the question of what constitutes knowledge for a knowing receipt/assistance claim. The High Court accepted in Say-Dee that the first four of the five categories of knowledge agreed between counsel in Baden v Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France SA note [1993] 1 WLR 509; [1992] 4 All ER 161 were sufficient to hold a defendant liable in equity for knowingly assisting in a breach of trust or fiduciary duty [176] [177].

(f) The High Court in Say-Dee considered that the knowledge requirement was established by the judgment of Stephen J in Consul Development. As Owen J pointed out in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; 39 WAR 1 [4695] (by reference to the judgment of Austin J in NCR Australia Pty Ltd v Credit Connection Pty Ltd (in liq) [2004] NSWSC 1), in Consul Development:

... Stephen J:

(a) rejected the view that liability for knowing assistance would arise in cases of 'that species of constructive notice which serves to expose a party to liability because of negligence in failing to make inquiry'; and

(b) said it would be different if 'the defendant had consciously refrained from enquiry the fear lest he learned of fraud'; but

(c) cautioned that, to go further would be to disregard equity's concern for the state of conscience of the defendant.

(g) It is also to be noted that in Consul Development, Stephen J stated that (412):

The most common operation of the doctrine of constructive notice is dealings in real property where for centuries investigation of title has been the usual concern of business

'in dealing with real property, as in other matters of business, regard is had to the usual course of business and a purchaser who wilfully departs from it in order to avoid acquiring a knowledge of his vendor's title is not allowed to derive any advantage from his wilful ignorance of defects which would have come to his knowledge if he had transacted his business in the ordinary way'

(Bailey v Barnes, per Lindley LJ...). In such a case in negligence in making enquiries may constitute constructive notice. Perhaps too, in the transaction of banking business a usual course has evolved so that the same may be said of bankers.

(h) It is also relevant that Gibbs J observed in Consul Development (398):

It may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on enquiry, when the stranger's failure to ie has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all of the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all of the facts could escape liability because his own moral obtuseness prevented him from recognising an impropriety that would have been apparent to an ordinary man. (emphasis added)

(i) Less attention has been paid in the authorities and the extensive academic writing on Barnes v Addy to the question of what a third party must know to be liable to account. In particular, there is an issue in the case law over the extent to which an accessory must know of the existence of the trust (or fiduciary duty) and the detail of the alleged breach. In Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276, Sachs LJ stated that the third party must have had 'both actual knowledge of the trust's existence and actual knowledge that what is being done is improperly in breach of that trust' (379). However, in Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 Lord Millett stated (295):

It is no answer for a man charged with having knowingly assisted in a fraudulent and dishonest scheme to say that he thought it was 'only' a breach of exchange control or 'only' a case of tax evasion. It is not necessary that he should have been aware of the precise nature of the fraud or even the identity of its victim. A man who consciously assists others by making arrangements which he knows are calculated to conceal what is happening from a third party, takes the risk that they are part of the fraud practised on that party.

Rimer J adopted a more onerous view of what a third party must know in Brinks Ltd v Abu-Saleh (No 3) [1996] CLC 133. However, the Privy Council said in Barlow Clowes v Eurotrust [2005] UKPC 37; [2006] 1 WLR 1476; 1 All ER 333 (Lord Hoffmann at 341):

In Brinks ... Rimer J expressed the opinion that a person cannot be liable for dishonest assistance in a breach of trust unless he knows of the existence of the trust or at least of the facts giving rise to the trust. But their Lordships do not agree. Someone can know, and can certainly suspect, that he is assisting in a misappropriation of money without knowing that the money is held on trust or what a trust means: Twinsectra ...

(j) Care may required in considering English authority on this point as the search in English law is for the knowledge that an accessory must possess to be found to have acted dishonestly in assisting in a breach of trust. However, It should not be overlooked that Lord Millett referred in Agip to the third party consciously assisting by making arrangements which it knew were 'calculated' to conceal the true position from another party and that the risk that the accessory took was that the arrangements were part of a fraud 'practised on that party'. It is also relevant to note that his Lordship stated in Twinsectra that (202):

The gravamen of the charge against the accessory is not that he is handling stolen property, but that he is assisting a person who has been entrusted with the control of a fund to dispose of the fund in an unauthorised manner. He should be liable if he knows of the arrangements by which that person obtained control of the money and that his authority to deal with the money was limited, and participates in a dealing with the money in a manner which he knows is unauthorised. (emphasis added)

(k) It has been suggested that the position in Australia on what the third party accessory must know is not as clear as in England: see J Dietrich, 'The Liability of Accessories under Statute, in a Equity, and in Criminal Law: Some Common Problems and (perhaps) Common Solutions' [2010] MULR 106, 125. Reference was made in that article to the judgment of the New South Wales Court of Appeal in United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157, where it was suggested that the third party must recognise the trust or fiduciary relationship and must know of the facts constituting the breach of duty and that the facts indicated a breach. However, there was no reference to the more recent decision of the New South Wales Court of Appeal in Yeshiva Properties No 1 Pty Ltd v Marshall [2005] NSWCA 23; 219 ALR 112. There, Bryson JA (with whom Mason P and Beazley JA agreed) noted the possible difference between the requirements for a claim for accessorial liability in English law and the explanation of the second limb of Barnes v Addy in the judgment of Stephen J in Consul Development. His Honour considered that it was necessary to apply 'the Australian authority' and concluded that [22]:

In the application of Stephen J's test it is not necessary that the fraudulent scheme or purpose of the fiduciary or trustee should be fully known, or should be understood in any detail at all; the test is complied with if the known facts would communicate to a reasonable person a general understanding that there was a fraud, breach of trust or breach of fiduciary duty.

(l) Owen J in Bell cited with approval (at [4696] and see at [4742]) the following passage from the judgement of Austin J in NCR Australia regarding the effect of observations made by Gibbs J and Stephen J in Consul Development:

What seems to emerge from these observations is that liability arises where the defendant has assisted in the trustee's dishonest and fraudulent design and:

(a) has actual knowledge of the dishonest and fraudulent design; or

(b) has deliberately shut his or her eyes to such a design; or

(c) has abstained in a calculated way from making such inquiries as an honest and reasonable person would make, where such inquiries would have led to discovery of the dishonest and fraudulent design; or

(d) has actual knowledge of facts which to a reasonable person would suggest a dishonest and fraudulent design.

But there is no liability if the defendant merely knows facts that would have been investigated by a reasonable person acting diligently, thereby discovering the truth, where the defendant has innocently but carelessly failed to make the appropriate investigations.

(m) Barnes v Addy raised the question of whether third parties should be held liable when acting as agents for trustees where they perceived a risk that a breach of trust may be committed as a result of a proposed dealing with trust property but had no actual knowledge that the dealing was for a dishonest purpose. Mr Addy's solicitor, Mr Duffield, advised Mr Addy not to appoint Mr Barnes as sole trustee of a share of the trust fund pointing out that there was a risk that the fund could be misapplied if it was placed under the control of a single trustee (see at 246). Similarly, Mr Preston advised Mr Barnes' wife (the beneficiary of the relevant share of the trust fund) of the risk of appointing her husband as the sole trustee (248). Nevertheless, Mr Duffield and Mr Preston were held not to be liable for the subsequent breach of trust by Mr Barnes as they had no knowledge of his dishonest purpose.

(n) The allegations made by the plaintiffs against NAB are different to the circumstances considered in Barnes v Addy. Mr Duffield and Mr Preston actually averted to the risk of breach and counselled against the appointment of Mr Barnes as sole trustee. The plaintiffs allege that NAB did not consider who was authorised to open and operate an account for FIPL nor did it seek proof that Mr Johnston and Ms Darroch were authorised by FIPL. It is alleged that NAB is to be taken to have known of certain matters relating to the operation of the FIPL account as a consequence - the risk or likelihood of unauthorised transactions occurring on the FIPL account, a risk that an 'honest and reasonable bank' would have appreciated. However, as Justice Heydon observed in an article published in 1977, 'it follows from Barnes v Addy that knowledge of the dangers involved in certain conduct as a general rule is not enough: there must be "knowledge" of some likely actual irregularity in the particular transaction' (JD Heydon, 'Recent Developments in Constructive Trusts' (1977) 51 ALJ 635, 641; see also Lord Robert Walker, 'Dishonesty and Unconscionable Conduct in Commercial Life - Some Reflections on Accessory Liability and Knowing Receipt' [2005] SydLawRw 9; (2005) 27 Syd LR 187, 189).

(o) Lord Selborne was concerned in Barnes v Addy with the position of agents who deal with trustees. The High Court in SayDee shared that concern. The question of accessorial liability often arises in the context of agency relationships that are regulated by a developed body of rules and duties - for example, solicitor/client; accountant/client and banker/customer. An agent's constructive knowledge and its liability to account will be assessed against its duty to act on the principal's instructions, the terms of the agency and the law governing the relevant agency relationship (see The Bank of Scotland v A Ltd [2000] Lloyd's Rep Bank 271 for a striking example in relation to banks). Further, different aspects of an agency relationship may be relevant in a particular factual context. So, for example, the circumstances material to determining a bank's constructive knowledge may include whether it was the bank's customer that was the victim of the breach of trust or fiduciary duty (the bank having duties of care to enquire that may be relevant to assessing its knowledge), whether funds were misappropriated from a trust account held with the bank and whether the transaction in question was outside the ordinary course of banking practice or the bank's dealings with a particular customer (for example, the 'strange dealings' in Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580, 640 (Southwell J)).

The plaintiffs' claim further considered The allegation of knowing assistance

22 The plaintiffs allege in SOC par 76 that NAB knowingly assisted in a breach of trust by Mr Johnston by reason of the matters alleged in pars 72, 73, 75, 75A and 75B. The crossreferencing is apparently intended to incorporate the allegations made earlier in the statement of claim that are relied on to establish each element of the claim made against NAB. If so, it appears that a reference to par 74 has been inadvertently omitted.

23 Paragraph 72 pleads the breach of trust allegedly committed by Mr Johnston. The plea cross-refers to par 71.1. The allegations in par 72, when read with par 71.1, are that the funds deposited in the FIPL account were transferred from the MA trust account in breach of trust; that Mr Johnston and Ms Darroch held the funds in the FIPL account on trust for the NAB Applicants or the NAB Claimants; and that the funds were withdrawn from the account and dissipated in breach of that trust.

24 Paragraphs 72A and 73A plead the involvement of Mr Johnston in the withdrawal of the funds from the FIPL account. No complaint is made about the allegation that Mr Johnston held the funds in the FIPL account on trust. However, it is to be noted that SOC par 62A.3 alleged that the account had been opened by Mr Johnston and Ms Darroch but that it was 'thereafter controlled by ... the Controllers'. This is one of several points in the pleading where the plaintiffs' case on the relationships between FIPL, Mr Johnston, the Controllers, the FIPL account and who controlled FIPL and the FIPL account is uncertain.

25 Paragraph 73 alleges that the opening and operation of the FIPL account comprised a dishonest and fraudulent design on the part of Mr Johnston. The allegations made in the paragraph are prefaced by the plea, 'in the premises'. It is not clear whether the preceding matters to which the paragraph is intended to refer include the possible use of the FIPL account to mislead third parties who might deal with FIPL or whether the preceding matters are confined to the use of the account to receive and pass on funds sourced from the MA trust account; that is, what constitutes 'the design' of Mr Johnston is not clear from the pleading in par 73.

26 The High Court explained in Say-Dee that the purpose of the dishonest and fraudulent design integer is to identify those breaches of trust or fiduciary duty that are sufficiently serious to hold a third party who assists with the knowledge liable to account in equity. Accordingly, the design must relate to the breach; as the High Court emphasised, the breach must be dishonest and fraudulent. It follows that in this matter:

(a) The design cannot relate to the possible use of the FIPL account to mislead third parties into believing that they were dealing with FIPL. The possible use of the account for that purpose does not relate to the alleged breach of trust. It is not relevant to the characterisation of the breach - at most, it involved an alleged breach of fiduciary duties owed to FIPL - and consequently, it could not result in NAB being liable to account to the NAB Applicants or NAB Claimants. There is no allegation that any of the plaintiffs who claim against NAB were misled into depositing funds directly into the FIPL account in the mistaken belief that they were dealing with FIPL.

(b) Accordingly, the design alleged in par 73 could only be dishonest and fraudulent in a way that was relevant to the plaintiffs' claim if it involved the use of the FIPL account to receive and disburse funds that were held on trust by Mr Johnston as a consequence of the matters alleged in SOC par 71 and the preceding allegations on which that paragraph relies. That case is open on the present pleading, although the plaintiffs should be required to expressly plead the matters relied on to allege that Mr Johnston's design was dishonest and fraudulent.

27 It is not apparent how NAB can be held liable to account to the NAB Applicants or NAB Claimants for assisting persons to withdraw funds from the FIPL account without FIPL's authority. The pleaded claim assumes that NAB owed duties relating to the opening and operation of the FIPL account. The plaintiffs' submissions contend that NAB ought to have declined to open the account (par 39). That was said to be because '[NAB] knew enough to know that persons who were in the position of de facto directors of FIPL were seeking the power to receive and disburse monies as if they authorised to do so by the company and that there was not, or not likely to be, an honest purpose for doing so'. It is not clear from the pleading and that submission whether the duty posited (to not open the FIPL account) was owed by NAB to FIPL as a potential but not actual customer (if the account was not opened) and if so, on what basis or whether the duty was owed on some wider ground. That reflects the uncertainty in the pleading about the relationship between NAB, FIPL, the FIPL account, the Controllers, Mr Johnston and Ms Darroch.

28 It is also not entirely clear whether the plaintiffs allege that NAB owed a duty to FIPL, as its customer, not to permit the FIPL account to be operated without FIPL's authority. However, if that is the nature of the duty owed by NAB that underpins the allegations made in pars 56 - 62A, then by implication NAB would have acted 'reasonably and properly' on the plaintiffs' pleaded case had it acted on directions given with FIPL's authority. That, of course, is not the gravamen of the plaintiffs' claim. It is, however, an indication of the point that has already been made that the knowledge allegedly held by NAB and its conduct with that knowledge are, on the facts pleaded, divorced from the trust that is the subject of the plaintiffs' claim and the breach of trust about which they complain.

29 Paragraph 75 alleges that NAB knew that Mr Johnston and Ms Darroch were not authorised by FIPL to request the opening of and to 'procure' the withdrawal of funds from the FIPL account. It is further alleged that NAB knew that funds could be withdrawn from the account by any Controller.

30 Various aspects of the pleading of par 75 should be noted:

(a) The allegation made in that paragraph rests on the matters alleged in pars 56 62A. Those matters were considered earlier in the reasons.

(b) The allegation in par 75 is that NAB knew that Mr Johnston and Ms Darroch were not authorised by FIPL in relation to the account.

(c) There is no preceding allegation that Mr Johnston and Ms Darroch were not, in fact, authorised by FIPL to open the FIPL account or to procure withdrawals from the account. At most, it is alleged that Mr Johnston and Ms Darroch were not directors or officers of FIPL and were not the holders of any authority issued by FIPL. The ambiguity of that plea has already been noted. However, I have proceeded on the basis that the allegation in par 59, read with par 75, is that Mr Johnston and Ms Darroch were not authorised by FIPL to open and operate, or to allow others to access, the FIPL account. I accept the plaintiffs' submission that NAB is bound by that allegation of fact for the purpose of its application (subject to exhibit 1 having been received into evidence). However, the question raised is not whether the plaintiffs can prove that Mr Johnston and Ms Darroch were not authorised by FIPL but whether the pleaded facts could establish that NAB actually or constructively knew that they were not authorised.

(d) There is also no preceding allegation that Mr Johnston and Ms Darroch had, in fact, procured withdrawals. Paragraph 73A(c) alleges that Mr Johnston knew or approved of other persons (the Controllers) withdrawing funds from the account. There is a material difference between procuring a withdrawal by a 'Controller' and knowing and approving of the withdrawal.

31 The effect of pars 75A and 75B has been summarised earlier in the reasons. Three points should be noted about the allegations made in those paragraphs:

(a) the allegations depend entirely on the plaintiffs establishing the matters pleaded in par 75;

(b) there is no allegation that NAB had constructive knowledge of a matter that would have been disclosed in the ordinary course of conducting banking business (refer, the comments of Stephen J in Consul Development cited above);

The allegation that NAB knew that Mr Johnston and Ms Darroch lacked authority - SOC par 75 and pars 56 62A

32 The only facts alleged in pars 56 62A that are relevant to the allegation that NAB knew that Mr Johnston and Ms Darroch were not authorised to open the FIPL account and procure withdrawals from the account are that NAB knew that:

(a) CorpDirect and CorpSec were the sole director and secretary respectively of FIPL;

(b) FIPL had not provided any authorisation for the opening and operation of the FIPL account.

33 Consequently, the facts pleaded in pars 56 - 62A would only establish that NAB knew that no natural person was a director or secretary of FIPL and that it did not know the identity of any natural person who was authorised to open and operate the FIPL account on behalf of FIPL. Those facts would not establish that NAB actually knew that Mr Johnston and Ms Darroch were not authorised by FIPL to deal with the FIPL account; at most, the pleaded facts would establish that NAB did not know whether or not they were authorised. I accept the submission made by the plaintiffs that the matters alleged in SOC pars 56 62A, if established at trial, could not prove that NAB actually knew that Mr Johnston and Ms Darroch were not authorised by FIPL to request the opening of and to procure the withdrawal of funds from the FIPL account; that is, those matters could not sustain the allegation made in par 75. (The knowledge alleged in par 75 is actual knowledge as it constitutes knowledge of the circumstances relied on to make the allegations in pars 75A and 75B - see par (d) in the passage cited earlier from the judgment of Austin J NCR Australia.)

Par 75 cannot be sustained and the claim is to be struck out

34 The allegations made in pars 75A, 75B and 76 are cumulative, relying on allegations made earlier in the pleading. It follows from the conclusion immediately above concerning par 75 that the plaintiffs cannot establish the matters alleged in pars 75A, 75B and 76 from the pleaded facts. I accept NAB's submission that the claim against it should be struck out for that reason (with the plaintiffs being allowed to re-plead their claim). The allegations made in par 75 are central to the balance of the pleading.

35 Two questions arise if my conclusion about par 75 is wrong:

(a) are the facts pleaded in that paragraph (on the assumption that they are proved at trial) sufficient to establish the matters alleged in pars 75A and 75B;

(b) are the matters alleged in par 75A and 75B sufficient to establish that NAB knew of Mr Johnston's alleged dishonest and fraudulent design?

36 Those questions are, in my view, related. Further, I consider that the matters alleged in pars 75A and 75B are not sufficient to establish that NAB knowingly assisted in Mr Johnston's alleged breach of trust for the following reasons:

(a) As explained earlier, it is necessary to read the allegation that the opening and operation of the FIPL account constituted a dishonest and fraudulent design by Mr Johnston as referring to the use of the account to receive and transfer money sourced from the MA trust account money that was transferred out of the account in breach of trust and which was allegedly held on trust by Mr Johnston. It is that dishonest and fraudulent design which, in my view, NAB must have known about to be liable as an accessory to Mr Johnston's alleged breach of trust. Consistently with the reasoning of the High Court in SayDee, including its endorsement of the Baden categories of knowledge, the plaintiffs must allege facts that are capable of establishing NAB's knowledge of a dishonest and fraudulent design that relates to the breach of trust allegedly committed by Mr Johnston.

(b) As par 75 rests on the allegations made in pars 56 - 62A, the plaintiffs' pleaded claim is to the effect that NAB knew that Mr Johnston was not authorised by FIPL to withdraw funds from the FIPL account or to procure others to withdraw funds from the account and that consequently, he and/or the Controllers could or would be likely to dishonestly and fraudulently deal with money held in the account as de facto directors of FIPL. That suggests knowledge of a dishonest and fraudulent design by Mr Johnston to misappropriate FIPL's money involving a breach of duty owed to FIPL. However, those matters are not sufficient to establish that NAB knew of a dishonest and fraudulent design concerning the property of a trust of which the NAB Applicants or NAB Claimants are the beneficiaries. The necessary connection between the dishonest and fraudulent design, the alleged breach of trust and the liability to account to the NAB Applicants or the NAB Claimants is not pleaded. I accept for the purpose of this application that it is not necessary for the plaintiffs to plead facts that would establish that NAB knew all of the matters that are relied to allege that Mr Johnston was the constructive trustee of money belonging to the NAB Applicants or the NAB Claimants. However, they must plead facts that would establish that NAB actually or constructively knew that Mr Johnston was pursuing a design that was marked by dishonesty and fraud and which involved the breach of trust in which it is alleged to have participated and for which it is said to be liable to account.

37 The point can be further made by reference to the matters alleged in pars 75A and 75B:

(a) Equity assumes that a truthful answer will be given to an enquiry when there is a duty to enquire. That is the basis on which knowledge is imputed. The knowledge of an accessory under the third Baden category is knowledge of the dishonest and fraudulent nature of the breach of trust or fiduciary duty. Consequently, the enquiry that an honest and reasonable person would make must be such that it would have revealed (assuming truthful answers) the dishonesty and fraud that characterises the breach (see the passage from the judgment of Austin J in NCR Australia, approved by Owen J in Bell, that was reproduced earlier).

(b) That exposes particular difficulties with par 75B, when read with par 75. The facts pleaded in pars 56 62A, on which the allegation made in par 75 relies, concern the relationship between NAB, FIPL, the FIPL account and Mr Johnston. The enquiries that an honest and reasonable banker would make with knowledge of the matters alleged in pars 56 62A and 75 would appear to be:

(i) Who was authorised by FIPL to open the FIPL account? The plaintiffs do not plead the answer to that enquiry on their case - other than that Mr Johnston or Ms Darroch were not authorised by FIPL. More fundamentally, it is not possible to discern from the pleaded facts how the answer to that question would have disclosed a dishonest and fraudulent design by Mr Johnston relating to the breach of trust that is alleged.

(ii) Who was authorised by FIPL to withdraw funds from the FIPL account? Again, it cannot be seen on the facts alleged how the answer to that enquiry would be (as is ultimately the plaintiffs' case) 'noone as the funds do not "belong" to FIPL but to the NAB Applicants or NAB Claimants as the persons who deposited the funds in the MA trust account'. That is because the enquiry posed by the facts alleged in par 75 concerns who was authorised by FIPL to open and operate the FIPL account and not whether FIPL (or anybody else) was authorised to deal with funds allegedly transferred from the MA trust account in breach of trust.

(c) The pleading in par 75A.1 suffers from a similar difficulty. The allegation is that NAB's knowledge that Mr Johnston and Ms Darroch were not authorised by FIPL to request the opening of, or to procure the withdrawal of the funds from, the FIPL account would indicate to an honest and reasonable bank that the account 'could and would be likely' to be used dishonestly or fraudulently by persons not authorised to do so (that is, not authorised by FIPL). As I have indicated, that would suggest knowledge of the risk of a fraud being committed on FIPL. However, it would not indicate a dishonest and fraudulent design involving funds held on trust by Mr Johnston for the NAB Applicants or the NAB Claimants. The accessory under the fourth Baden category has constructive knowledge of 'the facts' that would be indicated to an honest and reasonable man by his actual knowledge - that is, the facts of the dishonest and fraudulent nature of the trustee's or fiduciary's breach.

(d) I consider that the views and conclusions expressed in the preceding paragraphs are consistent with the other authorities to which reference was made in the earlier discussion of the second limb of Barnes v Addy. The risk identified by Lord Millett in Agip was that a fraud may be practised on the party who was affected by the arrangements to conceal. He referred in Twinsectra to the accessory having knowledge of the arrangements by which the trustee or fiduciary obtained control of the fund with which it was entrusted, as well as knowledge of the limitation on the authority of the trustee or fiduciary to deal with the fund. With respect, I have some reservations about the test suggested by Bryson JA in Yeshiva in light of what was said by the High Court in Say-Dee - the references to a 'general understanding' and to 'fraud' may be too broad and it is clear that the breach of trust or fiduciary duty must be dishonest and fraudulent (which may be what his Honour intended to imply by his reference to fraud). However, relevantly the 'general understanding' to which his Honour referred must be of a breach of trust or breach of fiduciary duty or fraud. Necessarily, the general understanding must be about the breach or fraud that makes the accessory liable to account to a particular plaintiff who claims the benefit of the account.

38 There are two final matters to note about the allegations made in par 75A:

(a) Paragraph 75A.2 refers to a fraudulent and dishonest design 'on the part of persons seeking to open the [FIPL] account'. That is wider than the design pleaded in par 73 to the extent that it is intended to refer to persons other than Mr Johnston. Further and more significantly, it suffers from the ambiguity about the nature of the design referred to earlier in the discussion of the allegation made in par 73.

(b) Paragraph 75A.1 pleads knowledge by NAB of the risk of a dishonest and fraudulent and unauthorised use of the FIPL account. In my view, a third party is not liable merely because it knew of circumstances that would indicate to an honest and reasonable person the 'fact' that there was a risk that a trustee or fiduciary with whom it was dealing was pursuing a dishonest and fraudulent design. That is not knowledge that would satisfy the fourth Baden category. Knowledge of the possibility of a dishonest and fraudulent design is materially different to knowledge of the 'fact' of such a design. That is so even if the possibility can be characterised as 'would be likely'. The contrary view would be inconsistent with the findings in Barnes v Addy itself (see the earlier discussion of Barnes v Addy and the views expressed extra-curially by Heydon J). I should add that I would still have struck out pars 75, 75A, 75B and 76, and consequently, the whole of the claim alleged against NAB for the reasons given above had I concluded that knowledge of the risk of a dishonest and fraudulent breach of trust or duty was sufficient for the second limb of Barnes v Addy.

CITATION : NICHOLSON -v- MORGAN [No 2] [2012] WASC 296 (S)

SATTVIC PTY LTD as trustee for The Stein Super Fund

Practice and procedure - Costs - Special costs order - No new principles - Turns on own facts

Seventh Defendant : No appearance (heard on the papers)

1 The seventh defendant (NAB) successfully applied to strike out parts of the statement of claim as not disclosing reasonable cause of action. It now applies for a special costs order under s 280(2) of the Legal Profession Act 2008 (WA) (the Act). The plaintiffs do not consent to the application but have filed no submissions in opposition.

2 Section 280(2) of the Act provides that a court may make a special costs order where it is of the opinion that 'the amount of costs allowable in respect of a matter under a costs determination is inadequate because of the unusual difficulty, complexity or importance of the matter'. Accordingly, the court must form an opinion about two matters before it can make an order under the section: first, that the costs allowed by the applicable legal costs determination are inadequate and second, that the amount allowed is inadequate because of the 'unusual difficulty, complexity or importance of the matter'.

3 The principles relevant to an application under s 280(2) of the Act were summarised by the Chief Justice in Heartlink Ltd v Jones as Liquidator of HL Diagnostics Pty Ltd (in liq) [2007] WASC 254 (S) (by reference to s 215(2) of the Legal Practice Act 2003 (WA), the equivalent provision to s 280(2)):

(a) the policy considerations that should guide a court when addressing an application under s 280(2)/s 215(2) are first, that the court should not usurp the role of a taxing officer and second, that at least where party and party costs are concerned, the court should make an order that will give effect to the general principle of allowing the successful party to be compensated for their costs by the unsuccessful party [13];

(b) the word 'unusual' when used in s 215(2)/s 280(2) only qualifies the word 'difficulty'; it does not qualify the words 'complexity' or 'importance' [17];

(c) the inclusion of the word 'importance' allows the court to consider whether the work done was appropriate to the significance of the issues that arose in the litigation [19];

(d) whether an order should be made under s 215(2)/s 280(2) was a matter of 'impression rather than ... a matter of detailed evaluation' as the determination was ordinarily made before a taxation had been undertaken [20].

4 It is also relevant to note the observation of Templeman J in Fagan v Morien [2008] WASC 54 (S) that the expression 'unusual difficulty' suggests that the matter was more difficult than would ordinarily be expected in an application of the kind under consideration. Further, in O'Rourke v P & B Corporation Pty Ltd [2008] WASC 36 (S), the Chief Justice stated that:

... it seems to me that the word 'unusual' means unusual having regard to what one might describe as the usual run of civil cases. The question is not, for example, in this case, whether this was an unusually difficult, complex or important case for specific performance of a contract for the sale of land which at the time the contract was entered into was not subdivided. Rather, the question is whether this was an unusually difficult, complex or important case, having regard to the usual run of civil cases determined in the Supreme Court and generally in the District Court ...

It also seems to me that the assessment of the question of whether or not there is 'unusual difficulty, complexity or importance' is essentially a value judgment to be made by the court. [23] [24]

5 The material facts pleaded against NAB were complex but briefly stated, it was alleged that:

(a) Some of the plaintiffs had deposited money in a trust account (the Trust Account) maintained by the first and second defendants, alternatively, the third defendant. The money was held on trust pending settlement of the sale and purchase of shares issued or to be issued in Firepower Holdings Group Ltd (FHGL).

(b) Funds were transferred from the Trust Account in breach of trust.

(c) NAB allowed a bank account to be opened in the name of Firepower Investments (Pte) Ltd (FIPL). The account was linked to other internet banking accounts that were not held in the name of FIPL and which could be accessed by any person who knew the password for those accounts. NAB opened and linked the FIPL account without receiving an appropriate authority from FIPL.

(d) The opening, linking and operation of the FIPL account formed part of a dishonest and fraudulent design by, at least, one person associated with FHGL. The account was used as a conduit for receiving and transferring funds misappropriated from the Trust Account.

(e) NAB assisted in the dishonest and fraudulent design by opening the FIPL account and by permitting withdrawals from the account by persons who were not authorised by FIPL to operate the account. Funds were withdrawn from the FIPL account in breach of trust.

(f) NAB knew of circumstances that would indicate to an honest and reasonable bank that the FIPL account could and would be likely to be used dishonestly or fraudulently by persons not authorised to do so or which would suggest to a reasonable bank that the person who had requested that the account be opened and linked to other internet banking accounts was pursuing a dishonest and fraudulent design.

6 A number of difficulties with the pleading of a claim against NAB under the second limb of Barnes v Addy (1874) LR 9 Ch App 244 were identified in the primary reasons. One difficulty concerned whether the plaintiffs had alleged facts from which it could be inferred that NAB knew that persons associated with FHGL were not authorised to open and operate the FIPL account. Another difficulty concerned whether the plaintiffs had pleaded facts from which it could be inferred that NAB knew of a dishonest and fraudulent design that involved a breach of a trust of which the plaintiffs were the beneficiaries - that is, a dishonest and fraudulent design involving the misapplication of funds held on trust for some of the plaintiffs rather than a design involving the misappropriation of FIPL's property. The statement of claim alleged, in effect, that NAB had constructive knowledge of the possibility that the FIPL account could be operated for a dishonest purpose. That raised a question of law: could NAB be liable to account to the plaintiffs as a knowing participant in a breach of trust when it was not alleged that it had knowledge of a dishonest and fraudulent design involving the plaintiffs' funds but only knowledge of the possibility that the FIPL account might be operated without FIPL's authority for some dishonest purpose?

NAB's submissions on its entitlement to a special costs order

7 NAB relied on an affidavit made by Callum Peter Strike, a solicitor employed by the firm of solicitors who appeared for NAB, in support of its application. Mr Strike attached to his affidavit a number of letters exchanged with the plaintiffs' solicitors concerning NAB's complaints about the pleading of the claims made against it. He also provided evidence of the time spent and fees rendered by his firm and counsel in connection with the strikeout application. That evidence was given in the form of a table that indicated that his firm had expended 225:48 hours working on and appearing at the hearing of the application and counsel (senior and junior) had spent a total of 147:30 hours.

(a) The evidence concerning the time spent and fees rendered in connection with the application established that the limit imposed by the relevant item of the costs determination would prevent NAB from putting a reasonably arguable case to the taxing officer on the costs that ought to be awarded in a taxation.

(b) The issues raised in the application were clearly significant to NAB. The issues were also important as they raised questions concerning the circumstances in which a bank could become liable for the wrongdoing of others by processing transactions where there was no allegation that it had direct knowledge of any breach of trust or fiduciary duty or that it had acted dishonestly.

(c) The nature and seriousness of the allegations made against NAB and the magnitude of the proceedings commenced by the plaintiffs also demonstrated the importance of the application.

(d) The issues raised were unusually difficult or complex so that the application required a greater amount of work to be undertaken than would be allowed by the relevant scale item.

9 I accept that NAB is entitled to an order under s 280(2) of the Act having regard to the importance of the application and the complexity and unusual difficulty of the issues that were raised.

10 The relevant item in the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2012 (the Determination) for the application is item 10 (proceedings in chambers). The scale amount for that item is $10,560. That allows for an appearance by counsel at a one day hearing and two days preparation. I accept that this amount is inadequate having regard to the evidence provided by Mr Strike. I further accept that scale allowance is inadequate for each of the reasons identified in s 280(2) of the Act.

11 The mere fact that a successful party's solicitors and counsel have charged fees that exceed a scale item cannot, in itself, justify an order under s 280(2) in respect of that item. As the Chief Justice observed in Heartlink, the court must conclude that the amount of costs allowable for a scale item is inadequate because of the unusual difficulty, complexity or importance of the matter. In substance, the court is required to form a composite opinion. The actual fees rendered will obviously be relevant to the question of whether the costs allowed under the applicable scale items are inadequate but they may also indicate that the matter was unusually difficult, complex or important. That is especially where, as in this instance, the fees charged substantially exceeded the relevant scale item and there was no evidence (or submission in opposition) to suggest that the fees rendered were unreasonable or disproportionate having regard to the circumstances of the application.

12 The plaintiffs allege that NAB facilitated and participated in a dishonest scheme involving the misappropriation of a substantial amount of money from numerous investors in FHGL. The allegations are serious and ought to have been pleaded with the clarity and particularity of a plea of fraud. The claim pleaded against NAB failed to satisfy that requirement.

13 Further, the pleading raised a point of law that was fundamental to the question of whether it disclosed a reasonable cause of action against NAB. I accept that the question was important for the determination of the claims made against NAB and more generally, for the application of the second limb of Barnes v Addy to financial institutions operating deposit accounts. That question and the other issues raised in the strikeout application were unusually difficult and complex having regard to the usual run of civil cases and applications to strike out pleadings in those cases in this court and the District Court.

14 Finally, item 10 of the Determination provides for the cost of junior counsel appearing in chambers. However, it was appropriate for senior and junior counsel to appear for NAB in this instance having regard to the issues that were raised. The plaintiffs were also represented by senior and junior counsel. A certificate for second counsel has not been sought but I would grant a certificate if one is required.

15 Accordingly, I will make a special costs order under s 280(2) of the Act allowing NAB's costs to be taxed without regard to the maximum limit for item 10 of the Determination.

Offshore Companies Act 1990

At a glance

Court

Decision date

Before

Source

Judgment (179 paragraphs)

Par 75 cannot be sustained and the claim is to be struck out

Legislation Cited (3)

Cases Cited (2)