Paycorp Payment Solutions & Anor v Peter Singyin Chai & Anor

Judgment (ex tempore) 1HIS HONOUR: By notice of motion filed today the defendant seeks leave to amend its defence, effectively at the close of the plaintiff's case, in order to propound defences of illegality and unclean hands. In essence, the illegality or impropriety relied on is said to be that, if the plaintiff's evidence be accepted, then the purpose of constituting the trust which the plaintiff seeks to assert was essentially to facilitate a breach of fiduciary duty by Mr Caliguri in his office as a director of PLC. 2The proposition that what Mr Caliguri embarked upon involved a breach of his fiduciary (or corresponding statutory) duties is plainly arguable. It does not necessarily follow, however, that a defence of illegality or unclean hands would have good prospects of success. 3In Nelson v Nelson (1995) 184 CLR 538, five Justices of the High Court dealt in slightly different ways with the operation of the doctrine of illegality in respect of equitable rights. That well known case concerned a scheme, initially established after the first world war, whereby 'eligible persons' within the meaning of the (CTH) Defence Service Homes Act 1918 and the later (CTH) Defence Service Homes Australia Amendment Act 1988, (including retired servicemen and servicewomen and former servicemen and servicewomen's widows), were afforded advances at subsidised interest rates to assist in the purchase of a home. A criterion for eligibility was that the eligible person and their spouse did not own or have a financial interest in another house. In order to maintain eligibility for the scheme, Mrs Nelson arranged for the transfer of a property, to which she had contributed the whole purchase price, to her children. Then after falsely declaring that she did not own nor have an interest in another house, she obtained a subsidised loan under the scheme and purchased a further property. The transferred property was subsequently sold by the children, and Mrs Nelson sought a declaration that the proceeds of sale were held on trust for her, as she was the beneficial owner of the property, by operation of a resulting trust (she having contributed the whole of the purchase price), with the presumption of advancement rebutted. Significantly, the Act (and the amending Act) provided that, in the event that the statutory body administering the Act became aware that a person had made a false declaration in relation to their interest in another house, the corporation could require repayment of the moneys advanced, in whole or in part. 4Deane and Gummow JJ observed (at 552) that the case concerned a trust that was not directly contrary to the statutory provisions, but was associated with or in furtherance of an illegal purpose. Their Honours pointed out that the purpose of the Act would sufficiently be served by the penalties it provided, whereas denial of a resulting trust would cause prejudice to Mrs Nelson without furthering the objects of the legislation. Their Honours concluded (at 570-571): It is then submitted that the imposition of the additional sanction, the inability of the first appellant to enjoy the proceeds of what otherwise is her beneficial ownership of the Bent Street property, would not be an appropriate adjunct to the scheme for which the Act provides. That submission should be accepted. Further, the relevant provisions of the legislation ... show its purpose to be the provision of public moneys to facilitate the purchase of housing by eligible persons, but on the footing that the eligible person not own another dwelling ... it has consistently been the scheme of the legislation that, if the public moneys are misapplied, they are made recoverable by the Corporation or the Commonwealth. However, as the cases on the former s 35 demonstrate, the interest of the Corporation or the Commonwealth in the dwelling or the proceeds of sale thereof is co-extensive with the funds provided by it; if they be restored then effect may be given to a trust in respect of the balance of the equitable interest in the dwelling or the proceeds of sale thereof. 5Deane and Gummow JJ held (at 571-572) that Mrs Nelson was entitled to a declaration that she was the beneficial owner of the property, but that good conscience demanded that she take sufficient steps to satisfy the policy underlying the Act, namely by paying to the Commonwealth the difference between the amount of interest paid on the $25,000 advance under the scheme and the interest she would have been charged by the bank. 6Dawson J observed that the illegality alleged was not a breach of the Act, but was fraud involved in the obtaining of the subsidised loan (at 573). His Honour said that the illegality was not contingent on any policy revealed by the legislation, but arose from the fraudulent nature of Mrs Nelson's act (at 574), and that no policy of the Act shed any light on her conduct (at 582). His Honour pointed out that a party seeking to rebut the presumption of advancement in the case of a transaction for an illegal purpose was not forced to rely on his or her own illegality, in that while an illegal purpose may be evidentiary, it was not the foundation of the claim to rebut the presumption of advancement. His Honour stated (at 580): What must be established in order to rebut the presumption is that no gift was intended. There may be an illegal purpose for the transfer of the property and that may bear upon the question of intention, but it is the absence of any intention to make a gift upon which reliance must be placed to rebut the presumption of advancement. 7Dawson J also pointed out that the purchase of the house did not itself involve any fraud, and the relevance to the case of any illegal purpose was, at most, to explain why the purchase did not constitute a gift to the children (at 581). The position so described, it seems to me, is analogous with this case, in that while illegality of Mr Caliguri's purpose may be of evidentiary relevance, it is not the foundation of his claim to establish the trust. Nor did the establishment of the trust itself involve any illegality. 8Toohey J pointed out that no implication could be drawn that the Act prohibited the purchase of a house with the aid of a subsidy obtained by means of a false statutory declaration. His Honour said (at 594): The Act expressly prohibits the making of a false declaration as to ownership of another dwelling-house. It provides for the recovery of a subsidy obtained through such a false declaration. But the Act does not prohibit the purchase of a dwelling-house with the aid of a subsidy obtained by making a false statutory declaration. It says nothing about such a purchase. If there is any such prohibition, "that prohibition must be ascertained or identified by a process of implication". But no such implication can be drawn. 9Toohey J went on to observe that a relevant (competing) public policy was preventing injustice and the enrichment of one party at the expense of another. His Honour concluded (at 597): ... to refuse Mrs Nelson's claim is to give Elizabeth Nelson a "windfall gain" of nearly $200,000 with a corresponding detriment to Mrs Nelson. In those circumstances, there is no rule of public policy that demands that relief to Mrs Nelson must be refused. In particular there is no such rule that precludes giving effect to a resulting trust in her favour. 10McHugh J said (at 612): If courts withhold relief because of an illegal transaction, they necessarily impose a sanction on one of the parties to that transaction, a sanction that will deprive one party of his or her property rights and effectively vest them in another person who will almost always be a willing participant in the illegality. Leaving aside cases where the statute makes rights arising out of the transaction unenforceable in all circumstances, such a sanction can only be justified if two conditions are met. First, the sanction imposed should be proportionate to the seriousness of the illegality involved. It is not in accord with contemporaneous notions of justice that the penalty for breaching a law or frustrating its policy should be disproportionate to the seriousness of the breach. The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be assessed in a vacuum. The statute must always be the reference point for determining the seriousness of the illegality; otherwise the courts would embark on an assessment of moral turpitude independently of and potentially in conflict with the assessment made by the legislature. Second, the imposition of the civil sanction must further the purpose of the statute and must not impose a further sanction for the unlawful conduct if Parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct that breaches or evades the operation of the statute and its policies. In most cases, the statute will provide some guidance, express or inferred, as to the policy of the legislature in respect of a transaction that contravenes the statute or its purpose. It is this policy that must guide the courts in determining, consistent with their duty not to condone or encourage breaches of the statute, what the consequences of the illegality will be. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially disclose an intention that the only sanctions for breach of the statute or its policy are to be those specifically provided for in the legislation. Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies. 11Presumably, the statute or legal rule in question in this case is the United Kingdom equivalent of the (CTH) Corporations Act, 2001, and the rules of equity relating to fiduciary obligations, as applicable in England. 12Applying the observations of McHugh J, nothing has been put before me that would indicate a statutory or other legal intention that the rights arising out of a trust or nominee relationship between a nominal purchaser and an effective purchaser should be unenforceable in all relevant circumstances. To refuse to enforce such rights in this case would, it seems to me, be disproportionate to the conduct in question, and more importantly is not only not necessary to protect the objects or policies of the laws in question, but would not advance those objects and policies. 13In a sense the issue here is all the more remote, because it involves, in effect, weighing questions of public policy in New South Wales with the policy and laws of England. 14The laws in question provide sanctions and remedies for the benefit of the corporation to whom the fiduciary duty is owed. If there has been a breach of fiduciary duty, then PLC has rights and remedies against Mr Caliguri. To deprive him of his beneficial entitlement - if it transpires that he has one - for which he would be liable to account to PLC according to equitable principles on account of his (assumed) breach of fiduciary duty, would be to inflict on him a double penalty. 15For that last reason in particular, it seems to me that a defence of illegality would not likely succeed in this case. That conclusion is important in the context of the timing of this proposed amendment: even though I do not go quite so far as to hold that the defence is unarguable, its apparently poor prospects of success are a significant consideration in weighing all the factors that impact upon the discretionary evaluation of the present application. 16I would not accept the plaintiff's argument that a pleading of illegality or unclean hands would be bad for inconsistency [see (NSW) Uniform Civil Procedure Rules, r 14.18]. It would be quite permissible for the defendant to plead, "If you prefer the plaintiff's evidence to mine, then even on the plaintiff's version he must fail because of illegality or unclean hands". 17But the application is made very late. I do not accept the fundamental proposition in the defendant's explanation for this, that the defendant was not in a position to make such allegations until evidence emerged in the cross-examination of Mr Caliguri and Mr Carr. As long ago as late 2010, when the current dispute first arose, there were assertions in correspondence that the sale transaction was never put to shareholders of PLC as a sale to a company or entity controlled by Mr Caliguri, or an entity in which he was a beneficiary or otherwise interested, and that the position now advocated by him was inconsistent with how Paycorp PLC board viewed the transaction and what its shareholders were told: see, for example, the letter from Aequitas VTS Lawyers to Whittens dated 12 November 2010: ... The sale transaction was never put to the shareholders of Paycorp PLC as a sale to a company or entity controlled by Mr Caliguri or an entity of which he is a beneficiary or has an interest. The transaction was treated by the board of Paycorp PLC, of which Mr Caliguri was a member, as a sale to an independent and non-related entity controlled by Mr Chai. The position now advocated by Mr Caliguri is inconsistent with how the board of Paycorp PLC viewed the transaction and what its shareholders were told. ... 18In a letter from Whittens to Aequitas VTS Lawyers of 17 November 2010, it was asserted that the PCI Trust was created specifically for the purpose of acquiring an interest in Paycorp for the benefit of the Caliguri family and its associated companies; that that purpose was known by Mr Chai; and that it was plain that the PCI Trust and PCI Corporation were established by Mr Caliguri as an investment vehicle for acquisition of shares in Paycorp by his family and associated companies. 19More significantly, before an amendment application was made that was considered and dealt with by McDougall J earlier this month, the plaintiff's principal affidavit material sworn on 22 September 2011 had been served on the defendant, and in that material, Mr Caliguri deposed to a conversation with Mr Chai in January 2010 in which he said, inter alia, "I'm going to buy Paycorp back from the PLC. I wanted to use a nominee, because if I go in there myself they're going to charge me double because it's my business and they know that I want it back. You could act as my nominee because I want to get it at the best market price". 20By that time at the latest, there was ample material on which the present allegation could have been brought. As I have said, an amendment application was then made. But it did not include the proposed defences now sought to be raised. 21The plaintiff says that it could not meet the amendment now, at least without an adjournment, and although it has been argued that that complaint has not been elaborated in much detail, it seems to me a very reasonable proposition, especially in circumstances where inquiries - and potentially evidence - as to the laws of another nation might well be required. Accordingly, I accept that permitting this proposed amendment now will occasion some prejudice to the plaintiff. 22Accordingly, for the reasons that (1) the proposed defences have poor prospects of success; (2) there is insufficient explanation for why they were not raised sooner; and (3) permitting them to be raised now would occasion some prejudice to the plaintiff, I decline the application for leave to amend and dismiss the motion with costs.