BETWEEN : PAUL DOUGLAS NICHOLSON AND THE OTHER PERSONS NAMED IN THE FIRST SCHEDULE

SATTVIC PTY LTD as trustee for The Stein Super Fund

Equity - Knowing assistance in a dishonest or fraudulent breach of trust - Elements of cause of action - Nature of trust pleaded - Sufficiency of the plea of constructive trust - Sufficiency of the plea of dishonest and fraudulent design - Sufficiency of the plea of assistance in the dishonest and fraudulent design - Sufficiency of the plea of knowledge of the dishonest and fraudulent design

Federal Court of Australia Act 1976 (Cth)

Paragraphs 56 to 76C of the sixth amended statement of claim struck out

Seventh Defendant : Mr C L Zelestis QC & Mr M Feutrill

Birks, P 'Equity in the Modern Law: An Exercise in Taxonomy' (1996) 26 UWAL Rev 26

Bryan, M 'Recovering Misdirected Money from Banks' in F Rose (ed) Restitution and Banking Law (Routeledge, 1998)

Elliott, S & C Mitchell, 'Remedies for Dishonest Assistance' (2004) 67 MLR 16

Harpum, C 'The Stranger as Constructive Trustee' (1986) 102 LQR 114

Millett, P 'Equity's Place in the Law of Commerce' (1998) 114 Law Quarterly Review 214

Mitchell, C & S Watterson, 'Remedies for Knowing Receipt' in C Mitchell (ed) Constructive and Resulting Trusts (Hart Publishing, 2010)

Mitchell, C et al (eds) Goff and Jones' Law of Unjust Enrichment (8th ed, 2011)

Rickett, C 'Equitable Compensation: Towards a Blueprint' [2003] Sydney Law Review 31

Stevens, R 'Why Do Banks Drop Out?' [2005] LMCLQ 101

1 The relevant pleaded facts in this application have not been proved. They have not even been subject to a defence. For the purposes of this strike out application they are required to be assumed to be true. Those facts are essentially as follows.

2 Solicitor trustees, or their company, (the MA Trustees) held money on trust for hundreds of investors who were intending to invest in Firepower Holdings Group Ltd. Following what is described in the pleading as a 'direction', the MA Trustees transferred millions of dollars from the trust account to an account held at another bank, the National Australia Bank Ltd (the Bank). The transfer was in breach of trust. The account to which the funds were transferred was an account entitled Firepower Investments Pte Ltd (the FIPL account) but held 'for and on behalf of' a different company called Firepower Operations Pty Ltd (FOPL). It was not held for Firepower Investments Pte Ltd (FIPL). Subsequently, FOPL withdrew and dissipated the funds.

3 The FIPL account was opened by the Bank in circumstances in which three requests had been made within 12 days, on three different letterheads. The persons who made these repeated requests asserted that large deposits were pending. The Bank was not given any authority from any person to transact FIPL business. The Bank was also provided with a company search which showed that none of the persons making the request was a director, officer or shareholder of FIPL and that FIPL's business was dormant.

4 The relevant investors are described in the pleading as the NAB Claimants. The NAB Claimants seek to bring a claim against the Bank for dishonest assistance in a breach of trust. Such a claim is sometimes described as the second limb of Barnes v Addy.[1] This is the only cause of action agitated against the Bank. Although the effect of some of the oral submissions by the NAB Claimants appeared to suggest that the receipt by the Bank was beneficial rather than ministerial,[2] no claim of resulting trust, nor direct claims based on tracing, knowing receipt, or unjust enrichment is pleaded.[3] No submissions were made on these issues, and I make no comment about them.

5 The claim against the Bank asserts that the Bank knowingly assisted a trustee with knowledge of a dishonest and fraudulent design on the part of the trustee. The dishonest and fraudulent design with which the Bank is said to have knowingly assisted is not the breach of trust by the MA trustees in disbursing the funds held on trust for them. The Bank is not alleged to have assisted or to have had knowledge of that breach of trust.[4] Instead, the claim is said to be that the Bank knowingly assisted in the breach of a constructive trust upon which FOPL held its rights against the Bank on trust for either FIPL or the NAB Claimants.

6 There are deficiencies in the pleading which are not merely formal matters. They concern the nature of the pleaded trust for FIPL, and key elements of the subject matter of the Bank's knowledge. The paragraphs of the pleading asserting the claim against the Bank must be struck out.

7 This application is brought by the seventh defendant, the Bank, to strike out the paragraphs of the plaintiffs' sixth amended statement of claim relating to the claim against the Bank. Alternatively, the Bank seeks a permanent stay of the claim against it on the ground that the claim is vexatious or would involve an abuse of process because it is manifestly without foundation.

8 This is the Bank's second strike out of the pleading. On 21 August 2012, Corboy J struck out the paragraphs of the plaintiffs' fourth amended statement of claim which concerned the claim against the Bank.

9 The Bank says that the pleading should be struck out because there are no pleaded material facts which disclose any arguable case that:

(i) there was a fraudulent and dishonest breach of trust, in which the NAB knowingly assisted, there being no plea of any such breach of trust at all;

(ii) there was a design which was fraudulent and dishonest, and which involved or related to a fraudulent and dishonest breach of trust or FOPL dishonestly receiving amounts paid into the FIPL account and dissipating them in breach of trust;

(iii) any amount paid into the FIPL account was held by FOPL on trust for FIPL;

(iv) the alleged conduct of the NAB assisted in the alleged design, or in a material element of an alleged dishonest and fraudulent breach of trust;

(v) the NAB had the requisite knowledge of any or all of the elements of the alleged design, or of a breach of trust by FOPL; or

(vi) the NAB had knowledge of an alleged breach of trust that was dishonest and fraudulent and by which the NAB Claimants lost their money.

10 There are two hundred and forty two plaintiffs in this action. The plaintiffs are divided into groups according to the person or persons against whom their claim is brought. The groups are as follows:

(i) The MA Claimants who bring their claim against the first, second and third defendants;

(ii) The Stein Claimants who bring their claim against the fourth defendant;

(iii) The Sattvic Claimants who bring their claims against the fourth, fifth and sixth defendants;

(iv) the NAB Claimants who bring their claim against the seventh defendant.

11 This strike out application is concerned only with the claim brought by NAB Claimants. In these reasons I will treat the NAB Claimants and NAB Applicants interchangeably. Nothing turns on the distinction for present purposes.

12 The relevant pleaded facts are assumed to be true only for the purposes of this application. They can be summarised as follows.

13 Mr Johnson was a director of FOPL and TPS Firepower Pty Ltd.

14 FOPL held bank accounts with the Bank which permitted remote electronic operation on the accounts.[5]

15 Mr Morgan and Mr Alteruthemeyer held funds in the 'MA Trust Account', in part on trust for the NAB Claimants, in relation to a proposed investment in Firepower Holdings Group Limited (FHGL).[6]

16 In circumstances described below, the Bank opened an account controlled by FOPL, but in the name of FIPL.

17 FIPL was a Malaysian company with a sole director which was a Malaysian corporation. Although it is pleaded that Ms Darroch was a director or officer of FIPL,[7] it may be that this is a typographical error because it is later pleaded, and was submitted on this application, that the pleaded company search of FIPL showed that Darroch was neither a director, officer, nor shareholder of FIPL.[8] I will proceed on the assumption that the latter is the intended pleading.

18 Mr Johnston or Mr Stein 'directed' the transfer of funds from the MA Trust Account to the 'FIPL account'. Both Mr Johnston and Mr Stein knew that FIPL had no entitlement to receive the funds.[9] In accordance with the directions, the transfer was made from the MA Trust Account to the FIPL Account. There were nine transfers ranging in amounts from $150,000 to $4 million.[10]

19 The money transferred into the FIPL account is described in the statement of claim as the 'No Entitlement Funds'.

20 The following paragraphs of the pleading are set out in full due to their importance to this application. The proposed amendments made during the hearing are incorporated in italics.

[71] Upon payment into the FIPL account, FOPL held the No Entitlement Funds (and choses in action represented by those funds) on trust for the NAB Applicants and NAB Claimants, further or alternatively, on trust for FIPL.

[72] The amounts held on trust for the NAB Applicants and the NAB Claimants, further or alternatively FIPL, and which were paid into the FIPL account were subsequently withdrawn by FOPL from the FIPL account and dissipated.

[72A] The withdrawal or transfer of funds by FOPL from the FIPL account was in breach of the trust pleaded in paragraph 71 above and dishonest in that FOPL knew that it had no entitlement to funds deposited into its account in the form of cheques drawn in favour of FIPL or by way of electronic transfers directed to an account in the name of FIPL.

[73] The opening and subsequent operation of a bank account by FOPL in the name of FIPL in the circumstances pleaded in paragraphs 56 to 60L and 70A (as to FOPL) above constituted a dishonest and fraudulent design on the part of FOPL and Johnston insofar as it allowed funds to which, to FOPL's and Johnston's knowledge, FOPL had no entitlement to be dishonestly received by FOPL and dishonestly disbursed by FOPL in breach of the trust pleaded at paragraph 71 above (the Design).

[74] By opening the FIPL account on the application of FOPL, and permitting withdrawals of monies from that account, NAB assisted in the Design.

21 The opening, establishment, and subsequent operation of the FIPL account with NAB, controlled by FOPL, permitted FOPL to receive and disburse funds to which it was not entitled, namely cheques drawn in favour of FIPL and electronic funds transfers directed to an account apparently of, or in the name of FIPL.[11]

22 By opening of the FIPL account on the application of FOPL, and permitting withdrawals from that account, NAB is alleged to have assisted in the dishonest and fraudulent design.[12]

23 NAB is alleged to have assisted in the design with knowledge.[13] The knowledge which the Bank is pleaded to have had is divided into 'knowledge', 'constructive knowledge', and wilful blindness. The facts which illustrate the knowledge of NAB can be broadly summarised as follows, using the definitions in the pleading.

24 The pleading of 'knowledge' alleges the following facts:

(ii) FIPL's sole director was a Malaysian company;[15]

(iii) FIPL's secretary was a Malaysian company; [16]

(iv) Mr Johnston was a director of FOPL, not FIPL, and Ms Darroch was not a director of FIPL either; [17]

(v) FOPL had an account in its own name with the Bank and could operate that account on the internet; [18]

(vi) Mr Johnston and Ms Darroch, asked the Bank urgently, on three occasions, to open an account and to link the account with the FOPL account. They said that there were several large deposits pending. [19]

(vii) The first request was for the Bank to open an account styled 'Firepower Investments Account'. [20] The latter two requests asked the Bank to open an account styled 'Firepower Investments Pte Ltd' (FIPL). [21]

(viii) The three urgent requests of the Bank were made on three different corporate letterheads over a period of 12 days. None of the corporate letterheads was a letterhead of FIPL. One of the corporate letterheads described a company which did not exist. [22]

(ix) Mr Johnston and Ms Darroch provided a company search of FIPL to the NAB. That search showed that neither of Mr Johnston or Ms Darroch, nor FOPL, nor any of the companies upon whose letterhead the requests were made was a director, officer or shareholder of FIPL. It also showed that the nature of FIPL's business was dormant. [23]

(x) Mr Johnston and Ms Darroch gave the NAB no other written evidence of authority or entitlement to open or transact upon an account in the name of FIPL. [24]

(xi) FIPL did not request or authorise NAB to open an account in its name. Nor did it request or authorise NAB to open an account in its name which could be controlled by another company.[25]

(xii) The opening and establishment of a bank account by one company in another company's name is outside the course of ordinary banking business.[26]

(xiii) NAB promptly opened the FIPL account and shortly afterwards linked the account so that it could be transacted upon by FOPL.[27]

25 The NAB Claimants also plead that the Bank had 'constructive knowledge of the facts that would have been disclosed in response to the following enquiries which would have been made by an honest and reasonable banker asked to open an account on behalf of FOPL in the name of 'Firepower Investments Pte Ltd'.[28] The pleaded enquiries[29] and the pleaded 'truthful answers'[30] are below:

(i) What legitimate reason did FOPL have to request the opening of a bank account on its behalf in the name of another company, namely FIPL?

FOPL had no legitimate reason to request the opening of a bank account on its behalf in the name of FIPL.

(ii) Why could FOPL not open its own bank account to receive the expected large deposits, or use an existing bank account if it had one?

No reason whatsoever in respect of funds payable to FOPL.

(iii) Why were FOPL, Johnston, Darroch, TPS Group Pty Ltd, and Firepower Group Ltd not able to provide the Bank with any written authorisation from FIPL to open a bank account in its name, operate that account and link that account electronically with other accounts held by FOPL with the Bank?

Because none of FOPL, Johnston, Darroch, TPS Group Pty Ltd, or Firepower Group Ltd had any written authorisation from FIPL to open a bank account in its name, operate that account or to link that account electronically with other FOPL accounts with the Bank. Further, in the case of Firepower Group Ltd, that company did not exist and so could not have been so authorised.

(iv) Did FOPL have any beneficial entitlement to the several large deposits that were expected to be received once the account in the name 'Firepower Investments Pte Ltd' was opened?

No, FOPL would have no legal or beneficial entitlement to the several large deposits that were expected to be received and banked in the FIPL account.

(v) Could FOPL, Johnston, Darroch, TPS Group Pty Ltd and Firepower Group Ltd provide the Bank with any written authorisation of FOPL by FIPL to deal with the funds to be deposited into the FIPL account?

(vi) What was the reason for the opening of an account by FOPL in the name of 'Firepower Investments Pte Ltd'?

To receive funds to which FOPL was not entitled, and to be able to disburse and deal with those funds without authorisation from such persons as were entitled to those funds (or the choses in action represented by those funds in the hands of the Bank), including substantial funds from the MA Trust Account which were held on trust for the NAB Claimants pending the transfer of shares in FHGL.

26 It is also pleaded that the Bank's failure to make the enquiries described above was sufficiently reckless as to fix the Bank with knowledge of the Design in which it assisted.[31]

Legal principles applicable to a strike out application

27 The legal principles relevant to an application to strike out a claim, or stay a proceeding on the basis that it is vexatious or an abuse of process are well known and were not in controversy.

28 In Spencer v The Commonwealth[32] French CJ and Gummow J explained, in the context of the Federal Court of Australia Act 1976 (Cth) s 31A(2) that the power to order summary or final judgment on the basis that the action is frivolous or vexatious or an abuse of process 'is one that should be exercised with great care and should never be exercised unless it is clear that there is no real question to be tried'.[33]

29 In Spencer, their Honours also distinguished the power to dismiss a proceeding from the power to strike out a pleading or parts of a pleading. The existence of a reasonable cause of action and the pleading of a reasonable cause of action remain distinct concepts.[34] As to the pleading of a reasonable cause of action, in Barclay Mowlem Construction Ltd v Dampier Port Authority,[35] Martin CJ explained that the advent of contemporary case management techniques and pre-trial directions 'should result in the court adopting an approach to pleading disputes to the effect that only where the criticisms of a pleading significantly impact upon the proper presentation of the case and its presentation at trial should those criticisms be seriously entertained'.

Application of principles concerning liability for knowing assistance

30 The principles which have become known, in shorthand, as 'knowing assistance' derive from the second limb of the decision in Barnes v Addy.[36]

31 The leading Australian statement of the principles concerning knowing assistance is in the decision of the High Court of Australia Farah Constructions Pty Ltd v SayDee Pty Ltd.[37] In that case, a joint judgment of the High Court explained that the conventional understanding of 'knowing assistance' in Australia[38]

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.

32 The expression 'dishonest and fraudulent design' appears to derive from the reference of the Lord Chancellor in Barnes v Addy[39] to the liability of those who 'assist with knowledge in a dishonest and fraudulent design on the part of the trustees'. The 'dishonest and fraudulent design' includes a breach of trust or breach of fiduciary duty.[40]

33 The Australian law in this area has developed in a different direction from the English authorities. This requires English authorities to be read with caution. In particular, both prior to, and subsequent to, Barnes v Addy, there were English decisions that recognised a separate source of liability for a defendant who knowingly induced or immediately procured a breach of trust.[41] This separate and distinct principle might now in English law have been subsumed into the 'knowing assistance' limb of Barnes v Addy. But it has not been so subsumed in Australia.[42]

(1) A breach of trust or breach of fiduciary duty

34 There is some novelty to the claim in this case which raises difficult questions of construction of the pleading. The novel question is the nature of the trust in relation to which the Bank is alleged to have knowingly assisted in a breach.

35 The statement of claim pleads that funds held in the MA Trust Fund were, in breach of trust, transferred to an account held 'for and behalf of' FOPL.[43] That account was styled 'FIPL'.[44] This is not the relevant breach of trust relied upon for the plea of dishonest assistance.

36 In written and oral submissions the NAB Claimants made it clear that the relevant breach of trust upon which the claim against the Bank relies is the withdrawal and transfer of funds by FOPL from the account held with the Bank (an account which was styled FIPL but held for and on behalf of FOPL).[45]

37 The first difficulty with this pleading is identifying the basis for the alleged trust by FOPL. This requires identification of the beneficiary of the trust. The statement of claim pleads that the beneficiary was either the NAB Claimants (FOPL Trust (i)) or FIPL (FOPL Trust (ii)). Mr Zelestis QC submitted that there is no pleaded foundation for FOPL Trust (ii).

38 The identity of the beneficiary of the trust is important because it determines the persons to whom the Bank is liable to account. Further, each of FOPL Trust (i) and FOPL Trust (ii) could potentially arise in different ways and, consequently, the facts, inquiries or circumstances to which attention is directed may be different in relation to each trust. Each pleading of a trust is considered separately below.

39 The pleading of FOPL Trust (i) asserts that FOPL held its rights or chose in action against the Bank on trust for the NAB Claimants. Two ways in which FOPL Trust (i) might arise are considered below.

40 FOPL Trust (i) might arise because the rights previously held on express trust for the NAB Claimants with their bank were transferred without proper authority to an account held by FOPL (through the account styled 'FIPL') with the Bank. Sometimes where rights held on an initial trust are transferred to another party without authority the new trust is described as an express trust. It might better be described as a constructive trust because, as on this pleaded case, FOPL did not expressly manifest any intention to hold its rights on trust for the NAB Claimants.[46]

41 If FOPL Trust (i) arises in this way then it must be based on the initial express MA Trust and a transfer, without authority, of the MA trust rights to FOPL.

42 The NAB Claimants submitted that there was a second way in which FOPL Trust (i) could arise. The submission was that the trust arose because FOPL had no entitlement to them. The NAB Claimants then referred to a line of authority where a constructive trust arises over rights received as a result of a theft or fraud.[47] The authorities referred to by the NAB Claimants are generally concerned with the situation in which the victim of the theft or fraud has been deprived of legal rights rather than rights as a beneficiary under a trust. But there was no dispute for the purposes of this application that a constructive trust could arise in favour of the initial beneficiaries where a 'theft' or 'fraud' has occurred in relation to rights about which they had an equitable interest.

43 In the leading case in this line of authority, Black v Freedman & Co,[48] Mr Black stole money from his employer and deposited some of it into his bank account. The High Court held that Mr Black held his rights against the bank on trust for his employer. A trust was recognised in relation to an account held by his wife into whose account Mr Black had subsequently made payments of funds withdrawn from his account as well as payments of other money subsequently stolen from his employer. O'Connor J said that '[w]here money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character'.[49] This statement has been endorsed on numerous occasions.[50]

44 Another leading case in this line of authority which was cited by the NAB Claimants was Creak v James Moore & Sons Pty Ltd.[51] In that case, cash and galvanised iron was stolen from the respondent company. The iron was sold to Mr Creak. The company recovered the proceeds of sale paid by Mr Creak to the thieves. One question for the High Court of Australia was whether the company could also recover, in an action for conversion, the value of the galvanised iron. The majority of the High Court held that the company could not. In the course of the reasons of Griffith CJ (with whom Barton J agreed) the Chief Justice explained that the company's rights to the proceeds of sale obtained by the thieves was an 'independent equitable title'.[52] Again, the theft and exchange of an asset owned by a plaintiff led to the creation of a trust of the exchange product in favour of the plaintiff.

45 The same principle has been recognised in cases of fraud with a resulting trust said to arise for the victims of the fraud.[53]

46 As I have mentioned, for the purposes of this application it was common ground that a constructive trust can arise due to the perpetuation of a fraud, with the beneficiaries of that constructive trust being the NAB Claimants because they initially held equitable rights in relation to the funds which were fraudulently disbursed by FOPL.

47 The alternative pleading of a trust is that FOPL held its rights against the Bank, or chose in action, on trust for FIPL. In oral submissions, Dr Bell SC focussed upon this trust. He submitted that FOPL Trust (ii) could arise because there were deposits or transfers intended for FIPL but obtained by FOPL without entitlement.[54]

48 There is insufficient foundation for the pleading that FOPL held its rights against the Bank on trust for FIPL. Despite the oral submission, it is not clear from the statement of claim whether the NAB Claimants are asserting that the trust in favour of FIPL arose because the funds transferred should have been accounted for by the Bank to FIPL. If this is intended to be the plea, then the reason why the Bank should have accounted to FIPL should be pleaded. For instance, it is not pleaded that the transfer instructions to the Bank, properly construed, were instructions to pay money to FIPL instead of, as occurred, to the account controlled by FOPL (which was styled 'FIPL'). Nor is any other basis pleaded upon which FIPL was entitled to the money.

49 The pleading in par 70A that FIPL had no entitlement to receive any funds is also inconsistent with the assertion that FIPL was entitled, subject to the possibility of a trust, to receive the funds.

50 Another inconsistency with the possibility that there was an intention for FIPL to receive the funds is par 70. That paragraph pleads that the trustees of the MA trust paid the money to the FIPL account (controlled by FOPL) in accordance with the 'directions' issued by Mr Johnston or Mr Stein which were (pleaded in par 67) to transfer the funds to the FIPL account (controlled by FOPL). The pleaded 'directions' were not to pay money to FIPL.

51 Putting aside this issue concerning the basis of a claim that the funds should have been received by FIPL, rather than in an account styled 'FIPL' but controlled by FOPL, there may be further issues concerning the effect of the FOPL Trust (ii).

52 One further issue arises from the submission by Dr Bell SC that there was no relationship between the Bank and FIPL at all.[55] If the proper construction of the transfer instructions was for payments to be made to FIPL, so that (as pleaded elsewhere) FOPL 'would have no legal or beneficial entitlement to the several large deposits'[56] then it may be that the effect of the absence of any relationship with FIPL would be that the Bank would hold the benefit of the funds received on resulting trust for the payer, the solicitor trustees.

53 The NAB Claimants said that a resulting trust with the Bank as trustee might be a possibility but they submitted that the chose in action, or rights created by the Bank in favour of FOPL, would be held by FOPL on constructive trust for FIPL as the intended recipient. No authority was cited in favour of, or against, that proposition and there was no detailed argument concerning it. It is sufficient to proceed on the basis that a constructive trust for FIPL might arise in this way if there were a sufficient foundation for it in the pleading.

54 If a constructive trust of FOPL's rights, held for FIPL, were properly pleaded then a further issue which might arise concerns the plea in par 71A. That paragraph suggests that the effect of the constructive trust of FOPL's rights for FIPL is that FOPL held its rights on trust for the MA trustees. In other words, FIPL is replaced as beneficiary of FOPL Trust (ii) by the MA trustees. The replacement of FIPL as beneficiary with the NAB Claimants is pleaded to occur because 'FIPL had no entitlement to the funds received' so the funds are held on trust by FOPL for the trustees of the MA Trust in favour of the NAB Claimants.[57] I received no submissions on the operation of this paragraph nor any submissions explaining why any trust in favour of FIPL is converted into a trust in favour of the MA trustees. It is not clear why, if a further trust should arise, FIPL must drop out rather than hold rights on any subtrust for the MA Trustees.[58]

55 There are also other questions which might arise at trial but which were not agitated on this strike out application. For instance, when is it meaningful to speak of 'breach' of a constructive trust? Would the Bank, as constructive trustee, owe fiduciary duties? In Farah, the High Court acknowledged that principles of knowing assistance had been widened beyond cases of 'express trust' to include breaches of fiduciary duties owed by those other than express trustees.[59] But a constructive trustee need not owe fiduciary duties if the constructive trust is merely the vehicle for specific restitution.[60] It is not necessary to consider any of these issues at this stage.

56 The meaning of the requirement that a design be 'dishonest and fraudulent' is not settled in Australian law. In Westpac Banking Corporation v The Bell Group Ltd (In Liq) (No 3),[61] Drummond AJA (Lee AJA agreeing on this point) said that he did 'not think the court in Farah is to be understood as having accepted that conduct by trustees or fiduciaries must involve an element of moral reprehensibility before it will satisfy the requirement of the second limb that it is 'dishonest and fraudulent'. There may therefore be uncertainty arising from this decision as to the scope of 'dishonest and fraudulent'[62] which, as I explain below, is a significant reason why serious caution should be exercised at the level of a strike out application before determining that the level of knowledge pleaded does not reach the threshold of showing knowledge of a dishonest and fraudulent design.

57 As to the pleading of 'design', Dr Bell SC submitted that par 73 pleaded that a dishonest and fraudulent design and/or breach of trust arose because the FIPL account was opened and operated by FOPL and Johnston, with the intention of disbursing money which would be held on trust by FOPL, in circumstances in which they knew they had no authority to disburse the money.[63]

58 There are two defects in par 73. First, the dishonest and fraudulent design of opening and operating the FIPL account is pleaded as something which allowed funds to be dishonestly disbursed in breach of trust. The submission of Dr Bell SC was that this paragraph should be construed to mean that the design was intended to allow the funds to be dishonestly disbursed in breach of trust.[64] The pleaded 'truthful answer' to a hypothetical enquiry 6 might also suggest that the NAB Claimants intend to advance such a case that the dishonest and fraudulent design concerned an intention dishonestly to disburse the funds.[65] But, as currently expressed, the pleading can not be construed in this way.

59 In light of the submission by Dr Bell SC it is not necessary to decide whether 'design' should be equated with 'purpose' so that a pleading of intention is always required. It is sufficient to say that there is a strong argument that this is the case. In Williams v Spautz,[66] in the context of the tort of abuse of process, Brennan J said that 'purpose' involves two elements: (i) the result which the transaction is capable of producing and (ii) the result which the transaction is intended to produce. In Hayes v Willoughby,[67] Lord Sumption (with whom Lords Neuberger and Wilson agreed) said that Brennan J's comments in Williams amounted to 'as much as can usefully be said in general terms about this protean concept' of purpose. In any event, since Dr Bell SC submitted that 'intention' should be pleaded as well as effect in the pleading of the design then this paragraph should be amended to make this explicit.

60 The second defect in par 73 is that the breach of trust to which reference is made is a reference to a breach, as pleaded in par 71, of either a trust of rights held by FOPL for FIPL or a trust of rights held by FOPL for the NAB Claimants. The deficiencies concerning the alleged trust for FIPL identified above in (1) also infect the pleading in par 73.

(3) The subject matter to which the knowledge and the assistance must relate

61 Before discussing the issues of assistance, and the extent or degree of knowledge which the Bank must have, it is necessary to consider the subject matter to which that knowledge and assistance must relate. As I have explained, the High Court in Farah Constructions described the subject matter to which the knowledge must relate as 'a dishonest and fraudulent design on the part of the trustee or fiduciary'.

62 There was dispute between the Bank and the NAB Claimants concerning the relevant subject matter to which the knowledge of a knowing assistant must relate. The submission of the Bank was that the dishonest assistant must have sufficient knowledge of a dishonest and fraudulent design involving a breach of trust to the NAB Claimants. The submission of the NAB Claimants was that it is sufficient that the dishonest assistant has the requisite degree of knowledge of a dishonest scheme involving a misappropriation of money, irrespective of the beneficiary of the trust. The correct view, as Corboy J concluded in Nicholson v Morgan (No 2),[68] is the submission of the Bank. To reiterate: the issue here is identifying the subject matter to which the knowledge must relate. As I explain below, the degree of the required knowledge of that subject matter is a different question.

63 In Nicholson v Morgan (No 2),[69] Corboy J held in the context of a different, and earlier, version of the statement of claim, that it was not sufficient to plead that the Bank knowingly assisted in a dishonest and fraudulent design by Mr Johnston involving a breach of a duty to FIPL. This was not sufficient to establish that the Bank knew of a dishonest or fraudulent design of which the NAB Claimants were the beneficiaries. His Honour considered that the relevant knowledge '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.'[70]

64 Dr Bell SC submitted that this involves too high a degree of particularity for the characterisation of the subject matter to which the Bank's knowledge must relate. He submitted that it should be sufficient to plead that the Bank knowingly assisted in a dishonest and fraudulent design involving a breach of trust to a third party generally. Therefore, he submitted, it is sufficient for the NAB Claimants to plead that NAB has knowledge of any breach of trust, which could include a trust of which FIPL is a beneficiary.[71]

65 In relation to the question of characterisation of the subject matter of the trust, I do not accept this submission. If the Bank assists, with sufficient knowledge of a breach of trust where FIPL is the beneficiary, then any obligation to account will be to FIPL. The nature of any accounting obligation is addressed later in these reasons. The key point is that the subject matter of the obligation will determine the person to whom duties are owed. As Peter Gibson J explained in Baden,[72] quoting Paget's Law of Banking:

[O]nce the banker is fixed with [knowledge of] the fiduciary nature of the account he has to bear in mind two somewhat conflicting influences. He has to consider the interests of the persons beneficially entitled, indirectly involving his own, and he has to recognise the right of his customer to draw cheques on the account and have them honoured. (emphasis added).

66 FIPL is not a plaintiff in this action. If the subject matter of the trust to which the Bank must have knowledge involves the rights of FIPL, then FIPL would be a necessary plaintiff, or party to the action.

67 A second point about the relevant subject matter is that it must concern a 'dishonest and fraudulent design' not merely a risk that a trustee was pursuing a dishonest and fraudulent design or that a dishonest and fraudulent design would be likely.[73] Even knowledge of a disputed claim that property of the defendant was to be held on trust has been held to be insufficient.[74]

68 Despite this, several paragraphs of the pleading appear to assume that it is sufficient that the facts would communicate to a reasonable person 'some likely or actual irregularity in relation to the opening and operation of a bank account in the name of 'Firepower Investments Pte Ltd'.[75] Dr Bell SC properly conceded during the oral hearing that this was not sufficient.[76] This is not merely a semantic point. The Bank is entitled to expect the proper subject matter of the allegation of its knowledge and assistance to be pleaded against it.

(4) The Bank's assistance in the dishonest or fraudulent design involving the breach of trust

69 The Bank's assistance is identified in the statement of claim as its conduct in opening the FIPL account on the application of FOPL, and permitting withdrawals of monies from that account.[77] Objection was taken by the Bank to the part of the pleading concerned with the alleged assistance by passive conduct of the Bank in permitting withdrawals.[78]

70 It may be that, if the opening of the FIPL account was done by the Bank with sufficient knowledge of the pleaded dishonest and fraudulent design then this would be enough to constitute knowing assistance. That is a possibility which cannot be foreclosed on this application. The effect of this conclusion is that it must also be sufficient for the NAB Claimants to pitch their case on assistance as including the passive conduct of the Bank in permitting withdrawals (and possibly, which is not clear, clearing cheques) in the alleged implementation of the dishonest and fraudulent design. As Peter Gibson J said in Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA,[79] the payment by a bank on the instructions of fraudsters may be sufficient assistance.

71 This element of the claim for knowing assistance is sufficiently pleaded.

(5) The degree of knowledge of the dishonest and fraudulent design

72 In Farah Constructions,[80] the High Court explained that it has become customary to analyse the degree of knowledge which the defendant assistant must have by reference to the five divisions of knowledge suggested in Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA.[81] The first four divisions are sufficient for the requirement of knowledge:

(iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;

(iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; and

(v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

73 The High Court said that the fourth degree of knowledge has the effect that 'the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons'.[82]

74 This focus upon the knowledge of the dishonest assistant may be a difference between Australian law and English law. In English law the focus is now upon the dishonesty of the assistant. The English courts follow the statement of Lord Nicholls, delivering the advice of the Privy Council, that the Baden scale of knowledge is 'best forgotten'.[83] But there are signs that this distinction has been eroded. In Grimaldi v Chameleon Mining NL (No 2),[84] the Full Federal Court (Finn, Stone, and Perram JJ) suggested that adherence to rigid or exclusive categories of knowledge may be inappropriate in determining whether a foundation for liability has been established under either 'limb' of Barnes v Addy:

Put compendiously liability both for knowing receipt and knowing assistance turns on what the third party knew, or had reason to know, of the circumstances constituting the breach of 'trust' (recipient liability) or the 'dishonest and fraudulent design' (assistance liability). It is here, as justly observed in Jacobs' (at [1335]), that the whole topic has 'become bedevilled by an obsessive refinement of distinctions between degrees of knowledge and notice'. What the authors have described as the 'zenith of complexity' was attained by Peter Gibson J in Baden v Société Générale pour Favouriser le Développment du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 at [250] where five categories of knowledge and notice were postulated...

The comment that should be made at the outset about this five-fold classification is that it tends to invite the use of formulae to solve problems. Unsurprisingly judges have cautioned against treating each category as an exclusive and rigid one.

75 This emphasis upon dishonesty echoes the comments of Millett J in Agip (Africa) Ltd v Jackson[85] who said, after reference to the five categories of knowledge that '[t]he true distinction is between honesty and dishonesty. It is essentially a jury question'.

76 If this is correct,[86] then one of the differences between English and Australian law in this area will have vanished, although the experience of the English with a test based upon 'dishonesty' tends to suggest that difficulties are not avoided by resort to such unitary criteria. Perhaps for this reason, all counsel in this application focussed upon the 'customary' approach in Australia of analysing the facts by reference to degrees of knowledge. I have taken the same approach, with the caution that the categories of knowledge should not be treated as rigid or immutable.

77 Several points must be made about the nature of the Court's enquiry into the extent of the Bank's knowledge of the alleged dishonest and fraudulent design.

78 First, when the authorities in this area speak of the 'knowledge' of an assistant, the relevant knowledge is either genuine subjective knowledge (Baden category (i)) or knowledge which the assistant is fictitiously deemed to have because of matters described above in Baden categories (ii), (iii) and (iv). A strike out application will generally be an inappropriate forum to resolve questions of the extent of knowledge which a person is deemed to have about particular facts based on the various Baden categories. This will be an intensely fact specific exercise. A further obstacle to any submission that a pleading of knowledge should be struck out because the extent of knowledge pleaded is insufficient is the authorities, such as in the Full Federal Court decision in Grimaldi which is quoted above, which emphasise that the factintensive determinations of deemed knowledge involve a 'zenith of complexity' and are 'bedevilled by an obsessive refinement of distinctions between degrees of knowledge and notice'. Yet another obstacle to striking out a pleading of knowledge on the basis that the extent of knowledge pleaded is insufficient is uncertainty, to which I have referred above, concerning the content of the subject matter about which the Bank must have knowledge. In particular, the finding that a 'dishonest and fraudulent' design does not require morally reprehensible conduct.

79 Secondly, although there may be a move towards an affinity between Australian and English law concerning to the relevant degree of knowledge which the knowing assistant must have, the subject matter of that knowledge is different in each country. Unlike Australia, the English approach appears to have conflated the liability for 'knowingly inducing or procuring a breach of trust' with the separate liability based upon the second limb of Barnes v Addy. In Australia, the knowing assistant must know of a dishonest and fraudulent design for the purposes of a claim based upon the second limb of Barnes v Addy.

80 Thirdly, although the subject matter about which the Bank must have knowledge is the dishonest and fraudulent design involving a breach of the trust to which the NAB Claimants are beneficiaries, it is not necessary that the Bank know of every detail of the dishonest and fraudulent design. To adapt what was said by Lord Hoffmann for the Privy Council in Barlow Clowes International Ltd v Eurotrust International,[87] it is arguable that a person can know that he or she is assisting in a dishonest misappropriation of money to which another person has rights without knowing that the money is held on 'trust' or even knowing what is meant by a trust.

81 In Yeshiva Properties No 1 Pty Ltd v Marshall,[88] Bryson JA (Mason P and Beazley JA agreeing) said:

In the application of Stephen J's test[89] 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.

82 This decision predated the decision of the High Court of Australia in Farah Constructions. In Nicholson v Morgan (No 2),[90] Corboy J expressed doubt about the generality in which Bryson JA expressed the relevant facts which must be indicated to the reasonable person based on that person's knowledge of the circumstances. It is sufficient to proceed on the basis, as Corboy J did, that although a general understanding is sufficient, the 'general understanding' must still concern the subject matter of a dishonest and fraudulent design that is alleged to make the Bank liable to account to the NAB Claimants.

83 The reference by Bryson JA to a 'general understanding' might apply to circumstances such as where the assistant knows of a dishonest and fraudulent design which would make the Bank liable to account to persons for whom money is held on an express trust without knowing the identity of any of the NAB Claimants. In Foxton v Manchester and Liverpool District Banking Co,[91] Fry J described as 'immaterial' the fact that the plaintiffs did not know of all the details of trust at the time; it was enough that they knew of the trust. In Baden,[92] Peter Gibson J said that the assistant

must know that there was a trust though I do not think it necessary that he should know all the details of the trust... He must know of the dishonest and fraudulent design of the trustee ... [although] it need not be knowledge of the whole design. What is crucial is that the alleged [assistant] should know that a design having the character of being fraudulent and dishonest was being perpetrated. Further he must know that his act assisted in the implementation of the design.

84 Fourthly, there was dispute between the parties on this application concerning a matter related to Baden category 3: wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make. There are three possible positions.

85 One possibility is that, as NAB Claimants' pleading assumes and as Corboy J held, '[e]quity assumes that a truthful answer will be given to an enquiry when there is a duty to enquire'.[93]

86 The Bank submitted that this proposition was not correct. Two cases cited by Corboy J in his reasons describe 'where such enquiries would have led to discovery of the dishonest and fraudulent design'.[94] On the other hand, there is authority which might support the proposition that truthful answers are presumed.

87 In Consul Development Pty Ltd v DPC Estates Pty Ltd,[95] Gibbs J quoted from Ungoed-Thomas J in Selangor United Rubber Estates Ltd v Cradock (No 3),[96] saying that where there is a failure to make enquiries which should be made, 'answers to inquiries are prima facie assumed to be honest'. Although Gibbs J did not finally decide the point, his Honour also said that the decision of UngoedThomas J had been followed by Brightman J in Karak Rubber Co Ltd v Burden.[97] These authorities were again quoted with approval by Simos J in Esanda Finance Corporation Ltd v Reyes.[98]

88 The second possibility is that there is no presumption that truthful answers will be given; this is a question for determination in light of all of the facts. The use of the expression 'knowledge' in categories 2, 3 and, sometimes, 4 of Baden involves a fiction. A defendant is deemed to have knowledge in various circumstances in which the defendant ought to have known of the facts. The proposition that a truthful answer is 'assumed' or 'presumed' is arguably fiction upon fiction. A true presumption exists when the existence of one fact generally means that another fact exists.

89 There is English discussion of the Selangor decision on this point which is subsequent to the decision of Gibbs J in Consul. In Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA,[99] Peter Gibson J explained that there is little space for the operation of a presumption, since the court must determine on the balance of probabilities what the answers would have been to the enquiries which were never made. But it was not necessary to determine the question in Baden, so his Lordship merely observed that this issue had been conceded before UngoedThomas J in Selangor United Rubber Estates Ltd v Cradock (No 3), and he also observed that no presumption had been applied by Brightman J in Karak.

90 A third possibility is that which was asserted by Millett J in the context of knowing receipt in Agip (Africa) Ltd v Jackson.[100] The approach of Millett J was to treat as irrelevant any 'hypothetical explanations' which might have been given by the wrongdoer if explanations had been sought. The reason given for this was that the assistant had no duty to make inquiry; any inquiry was for his own protection because if he does not make inquiry he is liable for his participation in the misapplication of the plaintiff's funds. Millett J said that '[i]f it were otherwise, [the assistant's] liability would depend on whether the fraudster would have been sufficiently inventive to be able to supply a plausible explanation if asked for one'.[101] His Lordship quoted from Sir John Romilly MR that '[a] more dangerous doctrine could not be laid down, nor one involving a more unsatisfactory inquiry'.[102] In Berwick-upon-Tweed Corporation v Murray,[103] Lord Cranworth LC said that '[p]erhaps inquiry might not have brought out the trust; but it does not lie in the mouth of William Murray to say this. He made no inquiry although the circumstances were such as ought to have induced him to do so ... I am clearly of [the] opinion that William Murray must be treated as a person who had notice of the truth'.

91 In light of (i) the conclusions I have reached on this application, (ii) the state of Australian authority to which I have referred, (iii) the nature of this hearing as a strike out hearing, and (iv) the absence of oral argument on this point, it is neither necessary nor appropriate to reach any concluded view. I proceed, as Corboy J did, only for the purposes of this strike out application on the basis that equity will 'presume' that truthful answers are given to enquiries.

92 The relevant pleading that the Bank had knowledge of the dishonest and fraudulent design was described above at [24] [26]. The pleading relied upon what was described as 'knowledge', 'constructive knowledge', and 'wilful blindness'. The pleading also asserts that these types of knowledge suffice for knowing assistance in three ways. The three ways in which the knowledge was relied upon were expressed as further or alternative pleas:

(i) The facts constituted by the Bank's 'knowledge' would communicate to a reasonable person that the opening and use of the FIPL account involved a fraud, breach of trust, or breach of fiduciary duty (Baden IV); and/or, knowledge of some likely or actual irregularity in relation to the opening and operation of a bank account in the name of 'Firepower Investments Pte Ltd'.[104]

(ii) The facts constituted by the Bank's Knowledge and the facts of its 'constructive knowledge' (based on various enquiries it did not make) would communicate to a reasonable person that the opening and use of the FIPL account involved a fraud, dishonest breach of trust, or dishonest breach of fiduciary duty (Baden III and IV); and/or, knowledge of some likely or actual irregularity in relation to the opening and operation of a bank account in the name of 'Firepower Investments Pte Ltd'.[105]

(iii) The Bank recklessly abstained from making various enquiries which an honest and reasonable banker with the Bank's Knowledge would have made, the truthful answers to which would have led the Bank to discovery of the Design (Baden III).[106]

93 Although great caution must be taken before striking out a pleading on the basis that it does not involve a sufficient pleading of knowledge, there are two critical deficiencies in the NAB Claimants' pleading of knowledge.

94 First, as I have already explained above, the alternative pleas of 'some likely or actual irregularity' are not pleas which relate the Bank's knowledge of the required subject matter of the dishonest and fraudulent design.

95 Secondly, and similarly, the pleas of 'a fraud, breach of trust or breach of fiduciary duty' in [92](i) (Baden IV) and [92](ii) (Baden III and IV) above are not pleas which relate back to the dishonest and fraudulent design. Although it is a highly fact intensive inquiry to determine the degree of knowledge which will be sufficient to constitute knowledge of the design, the knowledge cannot simply relate to a 'fraud, breach of trust or breach of fiduciary duty' in the abstract. It must be knowledge of the subject matter itself (ie the design).[107]

96 The Bank made various submissions concerning any pleaded loss by the NAB Claimants. For instance, part of the Bank's application concerned an allegation that there was no arguable case that the Bank had knowledge of an alleged breach of trust that was dishonest and fraudulent and 'by which the NAB Claimants lost their money'.[108] The Bank also submitted that the NAB Claimants must plead a design relating to 'dishonest conduct by which the relevant claimants lost their money'.[109] The Bank also submitted that the NAB Claimants suffered loss because of the payment from the MA trust account.[110]

97 That submission was understood by the NAB Claimants to be a submission that the NAB Claimants must prove that the relevant breach of trust was causative of the loss they suffered. To the extent that such a submission was made by the Bank, this section of my reasons explains why causation in this sense is not required to be pleaded at the level of a strike out application.

98 Although the language of 'compensation' and 'loss' is commonplace in equity today, it can sometimes be misleading to speak of recovery of a 'loss' from a trustee. The liability of a trustee was historically mediated through the remedy of account.[111] As Professor Birks explained, accountability was 'the backbone of the trustee's liability'.[112] There were two forms of account other than the account of profits.[113] The first was the account in common form. The second was the account taken on the basis of wilful default. As Kindersley VC explained:[114]

The one is a decree compelling him to account only for what he has received ... the other is a decree compelling him to account, not only for what he has received, but also for what he might, without his wilful neglect or default, have received, although he has not received it ... They proceed upon totally distinct grounds. The one supposes no misconduct; the other is entirely grounded on misconduct.

99 An account in common form taken from a trustee was not an exercise of quantification of loss. It required the trustee to account for a receipt and to justify any disbursements. In Re Stevens,[115] Lindley MR said that a wrongful disbursement 'can be set right by disallowing it when the [accounting party] brings in his account'. It was not a sufficient response to a disallowance, or falsification, that the disbursement would have been lost even if the trustee had acted properly.

100 The historic independence of the common account from compensation for loss was eroded by the reasoning, although not necessarily the result,[116] in the House of Lords in Target Holdings Ltd v Redferns.[117] That case was subsequently distinguished by the High Court of Australia where it was held that the obligation to repay trust funds arose 'by reason of some breach of trust or default in the performance of [its] duties as trustee' and the 'loss' of the trust funds occurred as soon as the trustee wrongly disbursed them.[118] The High Court explained that it was not to the point that, in addition to the breaches of trust, there may also have been dishonest and discreditable subsequent acts by third parties which led to the loss of the funds.[119]

101 The obligation to account for trust property may also be the reason why the High Court subsequently reiterated that when trust property is received 'causal questions do not arise. Where a defendant has received trust property ... with notice, the cause of action is complete without having to examine causation questions.'[120]

102 In Giumelli v Giumelli,[121] Gleeson CJ, McHugh, Gummow and Callinan JJ said that

[t]he term 'constructive trust' is used in various senses when identifying a remedy provided by a court of equity. The trust institution usually involves both the holding of property by the trustee and a personal liability to account in a suit for breach of trust for the discharge of the trustee's duties. However, some constructive trusts create or recognise no proprietary interest. Rather there is the imposition of a personal liability to account in the same manner as that of an express trustee. An example of a constructive trust in this sense is the imposition of personal liability upon one 'who dishonestly procures or assists in a breach of trust or fiduciary obligation' by a trustee or other fiduciary.

103 There may be a question at trial concerning the extent of the accounting liability to which a knowing assistant is subject as a 'constructive trustee'. One possibility is that the knowing assistant is subject, at least, to the same obligations to account as an express trustee.[122] But views differ on this question. It is not necessary to explore that issue on this application. It suffices to say that NAB's submission that causation of loss is essential should not be accepted on this application. For the purposes of a strike out application, it is not necessary to plead that the breach by the relevant trustee was causative of loss to the NAB Claimants in the sense that the loss would not have been suffered but for the breach.

104 Paragraphs 56 to 76C of the statement of claim by the NAB Claimants must be struck out.

105 The claim is brought solely on the basis of liability as a knowing assistant under the second limb of Barnes v Addy. The necessary pleading of knowledge by the Bank of a dishonest and fraudulent design by the trustee is deficient in a number of respects. As a broad summary the following are significant defects.

(1) Although it may not be necessary for all of the detail of the trust by which the FOPL funds were held to be known to the Bank, it is necessary for a pleading to allege that the Bank has a sufficient degree of knowledge of the existence of the trust (ie the subject matter). For the reasons explained above, the pleading of a trust in favour of FIPL cannot be sustained in its current form. This also affects other paragraphs of the pleading against the Bank.

(2) In relation to the dishonest and fraudulent design, it was submitted that the pleading was intended to convey that the opening of a bank account by FOPL in the name of FIPL was intended as part of a dishonest and fraudulent design, not merely that it had the effect of allowing the dishonest and fraudulent design. Paragraph 73 of the pleading does not currently convey that meaning.

(3) The paragraphs of the pleading which appear to assert that it is sufficient that the facts would communicate to a reasonable person 'some likely or actual irregularity in relation to the opening and operation of a bank account in the name of 'Firepower Investments Pte Ltd' cannot be sustained. The subject matter of the Bank's knowledge must be the dishonest and fraudulent design itself, not some risk of it.

(4) The pleas of knowledge of 'a fraud, breach of trust or breach of fiduciary duty' are not pleas of knowledge of the dishonest and fraudulent design. It is necessary to plead knowledge of the dishonest and fraudulent design. It is a separate, and highly fact intensive, question whether the particulars of knowledge pleaded will sustain that plea.

106 There are other minor matters identified in this reasons which, by themselves, might not be sufficient to sustain a strike out application. But the collective effect of the defects identified in these reasons requires that the pars 56 to 76C should be struck out.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : NICHOLSON -v- MORGAN [No 3] [2013] WASC 110 (S)

BETWEEN : PAUL DOUGLAS NICHOLSON AND THE OTHER PERSONS NAMED IN THE FIRST SCHEDULE

SATTVIC PTY LTD as trustee for The Stein Super Fund

Costs - Special costs order - Legal Profession Act 2008 (WA), s 280(2) - Whether costs should include costs of two counsel - Whether Scale limit should be removed

Legal Practitioners (Supreme Court) Contentious Business) Costs Determination 2012 (WA)

Legal Profession Act 2008 (WA)

1 Following my reasons for decision on this strike out application by the seventh defendant (the Bank), orders were made by consent. The parties were given liberty to file submissions and evidence concerning special costs orders sought. Consistently with the plaintiffs' position at the directions hearing that special costs orders were neither consented to nor opposed, the plaintiffs did not file any submissions on this application.

2 As I explained in my reasons for decision in this matter in Nicholson v Morgan (No 3),[123] the application with which I was concerned was the second strike out application by the Bank. The first strike out application, which was also successful, was heard by Corboy J, whose decision is Nicholson v Morgan (No 2).[124] After making orders striking out the application, Corboy J gave supplementary reasons granting a special costs order sought by the Bank under s 280(2) of the Legal Profession Act 2008 (WA) (the Act). His Honour's special costs order allowed the Bank's costs to be taxed without regard to the maximum limit for item 10(a) of the Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2012 (the Scale).

3 Item 10(a) of the Scale provides for the costs of one counsel for proceedings in chambers, with two days of preparation and one day of hearing. The hourly rate of counsel is $363 and the daily rate is $3,630. The total Scale costs provided for is therefore $10,560.

4 On this occasion the Bank seeks special costs orders which are more limited than those sought after the first strike out application. The Bank does not seek to have Item 10(a) of the Scale removed in its entirety. Instead, the Bank seeks orders that:

(a) The seventh defendant's costs of the strike out application dated 14 February 2013 include the cost of two counsel.

(b) The taxing officer have discretion pursuant to s 280(2) of the Legal Profession Act 2008 (WA) not to apply the monetary limit on costs (being $10,560) imposed by item 10(a) of the Legal Practitioners (Supreme Court) (Contentious Business) Costs Determination 2012 (WA), but shall otherwise apply the allowances for time permitted by that item.

5 The Bank does not submit that the time provided by the Scale is inadequate. The hearing took a half a day. The issues overlapped with the first application. However, the Bank submits that the monetary limit provided by the Scale, based on provision of a single counsel, is inadequate. The effect of the orders sought by the Bank will be to permit the taxing officer to tax the costs taking into account, if he or she considers it appropriate, (i) the cost of senior counsel and junior counsel; and (ii) without constraint of the Scale limits for the fees for senior counsel and junior counsel.

6 Section 280(2) of the Act provides for a threshold requirement before a special costs order can be made. That threshold is 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'. This means that there is a fairly arguable case that because of the unusual difficulty, complexity or importance of the matter the bill to be presented to the taxing officer may tax at an amount which is greater than the limit imposed by the Scale.[125]

7 Although the strike out application on the previous occasion concerned a pleading in different terms, there were a number of common issues raised in each application. On both occasions the essence of the issue concerned was whether the plaintiffs had properly pleaded a cause of action which might broadly be described as knowing assistance in a breach of trust.

8 I am satisfied, for the same detailed reasons given by Corboy J, that it was appropriate for the Bank to be represented by senior and junior counsel and that a limit of only one junior counsel is inadequate. In particular, the nature and seriousness of the allegations against the Bank, and the difficulty and complexity of the issues involved, mean that the amount of costs allowable in respect item 10(a) of the Scale, although not the time limit provided by that Scale item, is inadequate.

9 The remaining issue is whether a higher limit should be imposed, reflecting the Scale rates for senior and junior counsel for up to two days preparation and a half a day of hearing or whether, as the Bank's proposed orders contemplated, the taxing officer should be unconstrained by the Scale rates for senior and junior counsel for that period of preparation and hearing. It may be that in the absence of evidence and submissions on the point it will generally be inappropriate to depart from Scale rates for junior or senior counsel. However, in this case, I consider that the Scale rates for counsel and senior counsel are inadequate (in the sense explained above) taking into account the following matters:

(i) my impressions, knowledge and experience of the case;[126]

(ii) the previous orders of Corboy J and the evidence before him of counsel's costs; and

(iii) the desirability and benefit of the Bank being represented by the same counsel on the second strike out hearing before me.

10 Special costs orders will be made in the terms set out above in par 4.

[1] Barnes v Addy (1874) LR 9 Ch App 244, 251-252 (Lord Selborne LC).

[2] For different approaches see Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation [1988] HCA 17; (1988) 164 CLR 662, 675 and discussion in M Bryan 'Recovering Misdirected Money from Banks' in F Rose (ed) Restitution and Banking Law (1998); Uzinterimpex JSC v Standard Bank Plc [2008] EWCA Civ 819 [39] [40] (Moore Bick LJ; Laws LJ & Clarke MR agreeing); R Stevens 'Why do Banks drop out?' [2005] LMCLQ 101; Agip (Africa) Ltd v Jackson [1990] Ch 265, 292 (Millett J); C Mitchell et al (eds) Goff and Jones' Law of Unjust Enrichment (8th ed, 2011) 710 [28 10].

[3] Break Fast Investments Pty Ltd v Giannopoulos (No 5) [2011] NSWSC 1508 [34], [92] (Black J); Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380 [107] Allsop P citing Stephens v Board of Education of Brooklyn 79 NY183, 186 - 188.

[4] Submissions of the NAB Claimants [6].

[8] Submissions of NAB Claimants [17(d)].

[32] Spencer v The Commonwealth [2010] HCA 28; (2010) 241 CLR 118, 131 132 [24]

[33] Citing Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87, 99 (the Court).

[34] Spencer v The Commonwealth [2010] HCA 28; (2010) 241 CLR 118, 131 132 [23] citing White Industries Australia Ltd v Federal Commissioner of Taxation [2007] FCA 511; (2007) 160 FCR 298, 309 [47] (Lindgren J).

[35] Barclay Mowlem Construction Ltd v Dampier Port Authority [2006] WASC 281; (2006) 33 WAR 82, 84 [8].

[36] Barnes v Addy (1874) LR 9 Ch App 244, 251-252 (Lord Selborne LC).

[37] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89.

[38] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89.

[39] Barnes v Addy (1874) LR 9 Ch App 244, 251 - 252. (Lord Selborne LC).

[40] Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373, 398 (Gibbs J).

[41] Fyler v Fyler [1841] EngR 463; (1841) 3 Beav 550, 561 562, 567 568; [1841] EngR 463; (1841) 49 ER 216, 221, 223 224 (Lord Langdale MR); Alleyne v Darcy (1854) 4 I Ch R 199, 209 (Sir Maziere Brady LC); Eaves v Hickson [1861] EngR 831; (1861) 30 Beav 136, 141; [1861] EngR 831; 54 ER 840, 842 (Romilly MR); Midgley v Midgley [1893] 3 Ch 282, 301, 304 (Lindley LJ). See also C Harpum 'The Stranger as Constructive Trustee' (1986) 102 LQR 114, 141 144.

[42] Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193, 238 (Gummow J); Tableau Holdings Pty Ltd v Joyce [1999] WASCA 49 [32] (Steytler J; Owen J & Parker J agreeing); Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 [245] (the Court); Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; 39 WAR 1, 604 [4718] (Owen J).

[46] Calverley v Green [1984] HCA 81; (1984) 155 CLR 242, 261 (Mason & Brennan JJ), 270 (Deane J); Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253, 286 287 [105] [106] (Heydon & Crennan JJ).

[47] Written submissions of the NAB Claimants fn 2.

[48] Black v Freedman & Co [1910] HCA 58; (1910) 12 CLR 105.

[49] Black v Freedman & Co [1910] HCA 58; (1910) 12 CLR 105.

[50] Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 46 ACSR 504, 565 [314] (Giles JA); Evans v European Bank Ltd [2004] NSWSC 184 (2004) 61 NSWLR 75, 99 [111] (Spigelman CJ ).

[51] Creak v James Moore & Sons Pty Ltd [1912] HCA 67; (1912) 15 CLR 426.

[52] Creak v James Moore & Sons Pty Ltd [1912] HCA 67; (1912) 15 CLR 426, 432 433.

[53] Evans v European Bank Ltd [2004] NSWSC 184; (2004) 61 NSWLR 75, 99 [111] (Spigelman CJ; Handley & Santow JJA agreeing).

[58] Cf Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358 [57] (Collins LJ; Wall & Ward LJJ agreeing).

[59] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, 164 [179]; see also Transamerica Occidental Life Assurance Co v Toronto Dominion Bank (1999) 173 DLR (4th) 468, 489 (Osborne LJ).

[60] Giumelli v Giumelli [1999] HCA 10; 196 CLR 101, 112 [5] (Gleeson CJ, McHugh, Gummow & Callinan JJ); see also United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157, 253 (the Court).

[61] Westpac Banking Corporation v The Bell Group Ltd (In Liq) (No 3) [2012] WASCA 157; (2012) 89 ACSR 1 [2119] (Lee AJA agreeing at [1099]).

[62] Compare Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, 267 (Buckley LJ; Orr & Goff LLJ agreeing on this point); Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, 574 (Peter Gibson J).

[66] Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509, 532.

[67] Hayes v Willoughby [2013] UKSC 17 [9].

[68] Nicholson v Morgan (No 2) [2012] WASC 296 [36(b)].

[69] Nicholson v Morgan (No 2) [2012] WASC 296 [36(b)].

[70] Nicholson v Morgan (No 2) [2012] WASC 296 [37(d)].

[72] Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, 584.

[73] Nicholson v Morgan (No 2) [2012] WASC 296 [38(b)] (Corboy J); The Bank v A Ltd [2000] Lloyd's Rep Banking 271, 283 (Laddie J) affirmed on a different point in Bank of Scotland v A Ltd [2001] EWCA Civ 52; [2001] 1 WLR 751.

[74] Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch 276. Applied in relation to knowing assistance in Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA, [1993] 1 WLR 509, 575. See also Digital Cinema Network Pty Ltd v Omnilab Media Pty Ltd (No 2) [2011] FCA 509, [175] (Gordon J); Togito Pty Ltd v Pioneer Investments (Aust) Pty Ltd & Ors [2010] QSC 421, [117] (Margaret Wilson J).

[79] Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, 574 575.

[80] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2997) [2007] HCA 22; 230 CLR 89, 163 164 [174] [177] (the Court).

[81] Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, 575 576, 582 (Peter Gibson J).

[82] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, 164 [177].

[83] Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 2 AC 378, 392. But compare Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, 455 (Nourse LJ).

[84] Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296, 361 [259] [260].

[85] Agip (Africa) Ltd v Jackson [1990] Ch 265, 293 (Millett J).

[86] Cf Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; 39 WAR 1, 604 [4719] (Owen J).

[87] Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 WLR 1476, 1483 [28]. See also Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132, 177 178 (Smith J). But compare United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157, 253 (the Court).

[88] Yeshiva Properties No 1 Pty Ltd v Marshall [2005] NSWCA 23; (2005) 219 ALR 112, 118 [22].

[89] See Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) [1975] HCA 8; 132 CLR 373, 396.

[90] Nicholson v Morgan (No 2) [2012] WASC 296 [37(d)].

[91] Foxton v Manchester and Liverpool District Banking Co (1881) 44 LT 406, 408.

[92] Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, 575.

[93] Nicholson v Morgan (No 2) [2012] WASC 296 [37(a)].

[94] NCR Australia Pty Ltd v Credit Connection Pty Ltd (in liq) [2004] NSWSC 1 [168] [169] (Austin J); Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; 39 WAR 1, 599 600 [4696], 610 [4742] (Owen J).

[95] Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373, 396.

[96] Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1590.

[97] Karak Rubber Co Ltd v Burden [1972] 1 WLR 602.

[98] Esanda Finance Corporation Ltd v Reyes [2001] NSWSC 234 [97].

[99] Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, 584.

[100] Agip (Africa) Ltd v Jackson [1990] Ch 265, 295 296. See also United States Surgical Corp v Hospital Products International Pty Ltd [1983] 2 NSWLR 157, 253 (the Court).

[101] Agip (Africa) Ltd v Jackson [1990] Ch 265, 296.

[102] Agip (Africa) Ltd v Jackson [1990] Ch 265, 296 quoting Jones v Williams [1857] EngR 575; (1857) 24 Beav 47, 62; [1857] EngR 575; 53 ER 274, 280 . See also In re Alms Corn Charity [1901] 2 Ch 750, 762 (Stirling LJ); A L Underwood Ltd v Bank of Liverpool [1924] 1 KB 755, 789 (Bankes LJ).

[103] Berwick-upon-Tweed Corporation v Murray [1857] EngR 333; (1857) 7 De G M & G 497, 513.

[104] SOC [76] with the proposed amendment at the hearing included.

[107] Baden v Société Générale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, 608 (Peter Gibson J).

[108] Written submissions of NAB [64].

[109] Written submissions of NAB [43].

[110] Written submissions of NAB [44].

[111] See also Ierino v Gutta [2012] WASCA 222 [22].

[112] P Birks 'Equity in the Modern Law: An Exercise in Taxonomy' (1996) 26 UWAL Rev 26, 46.

[113] Much of the modern academic writing on this subject owes its genesis to an unpublished doctoral thesis by Dr Elliott, summarised well in C Rickett 'Equitable Compensation: Towards a Blueprint' [2003] Sydney Law Review 31.

[114] Partington v Reynolds [1858] EngR 461; (1858) 4 Drew 253, 255 256; [1858] EngR 461; 62 ER 98, 99 [265].

[115] Re Stevens [1898] 1 Ch 162, 170.

[116] P Millett 'Equity's Place in the Law of Commerce' (1998) 114 LQR 214, 227, cited in Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; 212 CLR 484, 502 [45] (the Court).

[117] Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] AC 421.

[118] Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; 212 CLR 484, 502 [44], 507 [63] (the Court).

[119] McCann v Switzerland Insurance [2000] HCA 65; (2000) 203 CLR 579, 588 [18] (Gleeson CJ), 621 622 [135] (Hayne J); Magnus v Queensland National Bank (1888) 37 Ch D 466, 471 472, 477, 479 480 (Bowen LJ).

[120] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2997) [2007] HCA 22; 230 CLR 89, 172 [199].

[121] Giumelli v Giumelli [1999] HCA 10; 196 CLR 101, 112 [4].

[122] S Elliott & C Mitchell 'Remedies for Dishonest Assistance' (2004) 67 MLR 16; C Mitchell & S Watterson 'Remedies for Knowing Receipt' in C Mitchell (ed) Constructive and Resulting Trusts (Hart Publishing, 2010) 115, 150 154.

[123] Nicholson v Morgan (No 3) [2013] WASC 110.

[124] Nicholson v Morgan (No 2) [2012] WASC 296.

[125] Heartlink Ltd v Jones As Liquidator of HL Diagnostics Pty Ltd (in liq) [2007] WASC 254 (S) [16] (Martin CJ).

[126] See Frigger v Lean [2012] WASCA 66 [82] (Allanson J; Murphy & Newnes JJA agreeing).