Port of Brisbane Corporation v ANZ Securities Ltd [2001] QSC 466

RESTITUTION - where rogue employee fraudulently alters plaintiff's cheque - where rogue deposits cheque into defendant's trust account - where defendant told money for rogue's company - whether it was reasonable for the defendant to act on the representation - whether defendant unjustly enriched - whether defendant had changed its position - whether restitution ought be reduced by reason of the plaintiff's failure to safeguard its investments

EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - LIABILITY FOR BREACH OF TRUST - whether defendant held money on a resulting trust for the plaintiff or express trust for the rogue's company - whether relief for the breach of trust exonerated by the failure of the plaintiff's internal accounting procedures - whether Trusts Act 1974 (Qld) s 76 applies - whether the defendant acted honestly and reasonably

Trustee Act 1958 (Vic) s 67

Trusts Act 1973 (Qld) s 76

Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1987 - 1988) 164 CLR 662, referred to

Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105, referred to

Banque Financiere de la cite v Parc (Battersea) Ltd [1998] UKHL 7; [1998] 2 WLR 475, followed

David Securities Pty Ltd v Commonwealth Bank of Australia (1991 - [1992] HCA 48; 1992) 175 CLR 353, referred to

Gowers v Lloyds and National Provincial Foreign Banks Ltd [1938] 1 All ER 766, cited

Hudson v Robinson [1816] EngR 244; (1816) 4 M & S 475, referred to

James v Oxley [1939] HCA 1; (1938) 61 CLR 433, discussed

Lipkin Gorman (a Firm) v Karpnale Ltd [1991] 2 AC 548, cited

Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149, referred to

Perel v Australian Bank of Commerce [1923] NSWStRp 61; 24 SR (NSW) 62, referred to

Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2000) 75 ALJR 1067, followed

re Windsor Steam Coal Co (1901) Ltd [1929] 1 Ch 151, referred to

State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350, applied

The King v Brown [1912] HCA 6; (1912) 14 CLR 17, referred to

Vandervell v Inland Revenue Commissioners [1966] UKHL 3; [1967] 2 AC 291, referred to

Westdeutsche Landesbank v Islington Borough Council [1996] UKHL 12; [1996] AC 669, referred to

Mr J C Sheahan SC and with him Mr L F Kelly for the plaintiff

Mr P D McMurdo QC and with him Mr T D North SC for the defendant

[1] CHESTERMAN J: Peter Hinterdorfer was employed by the plaintiff as an accounting officer for about seven years. He was a trusted employee who took advantage of his employer's confidence to apply $4,500,000 of its money to his personal use. He resigned early in November 1996 when his fraud was discovered and was later sent to gaol.

[2] In 1996 the pattern of the plaintiff's cash flow was such that it frequently had a substantial surplus of money on hand which it invested to best advantage. One of Mr Hinterdorfer's tasks was to examine the state of the plaintiff's accounts each day to determine what, if any, moneys were surplus and therefore available to invest. Having made the determination he would decide how to invest the moneys within guidelines drawn up for that purpose. He was responsible for investing the funds and recording investments so made. The concentration of these functions in one individual facilitated his theft.

[3] The misappropriation was premeditated. On 2 July 1996 Mr Hinterdofer incorporated a company, Windermere Investments Limited ("Windermere"), in the Turks and Caicos Islands, a geographically remote archipelago in the Caribbean which enjoyed a lax system of corporate regulation and supervision. He was the company's only shareholder and director.

[4] Sovereign Trust International Ltd ("Sovereign Trust") of 32 Hollywood Road, Central Hong Kong is, according to advertisements placed in Australian newspapers, a:

". . . Group (which) has offered specialist advice to both professionals and members of the public with an emphasis on utilizing [sic] offshore companies and trusts to protect assets and save tax. (It) has offices in 12 jurisdictions . . . throughout the world. (It) offer(ed) a professional, fast and highly confidential service. (It) offer(ed) incorporations in ALL jurisdictions but particularly recommends: . . . (Turks and Caicos Islands) . . ."

Mr Stuart Stobie was identified in the advertisements as someone to contact on behalf of Sovereign Trust.

[5] Mr Hinterdrofer learned of the existence of Sovereign Trust and of the services it could provide by reading one of its advertisements in a local newspaper. He approached it and authorised it to act on behalf of Windermere. It appears he told Mr Stobie or some other officer of Sovereign Trust that he anticipated that Windermere would shortly be put in funds which he wished to invest. The anticipated funds were, of course, the moneys he intended to steal from the plaintiff.

[6] The defendant is and was at times material to this action a stockbroker, more precisely, a licensed securities dealer.

[7] On 24 July 1996 Windermere, by Mr Hinterdorfer, made a written appointment of the defendant as its custodian and nominee. The purpose of the appointment appears to have been to enable the defendant to transact business on behalf of Windermere in its own name and to collect and hold Windermere's moneys and securities though it had to "account to the client in respect thereof".

The appointment also authorised Mr Stobie to act on Windermere's behalf "in connection with the . . . appointment . . . and (the defendant) may accept and act on instructions from (Stobie) . . .".

It should be noted that although Mr Stobie signed the appointment, no doubt to signify his acceptance of Windermere's agency for the purpose of giving instructions to the defendant, Windermere itself did not authenticate Mr Stobie's appointment. The document required its signature and provided space for it, together with space for a witness to the signature. Windermere did not sign that part of the document. What appears to have happened is that a Ms D'Cunna (or perhaps D'Cunha) signed it as a witness and identified herself by writing her name in the space provided for the witness' signature. The evidence did not identify Ms D'Cunna. She does not appear to have been an officer of Windermere. It is not known if she was an employee of Sovereign Trust.

It was a term of the appointment that if the client was a corporation it should deliver its memorandum and articles of association and a certificate of incorporation to the defendant. Windermere did not provide the documents, nor was it asked to.

It is obvious from the document that the signature on that part of the document which appointed the defendant custodian and nominee is not the same as that which appointed Mr Stobie. Windermere's common seal was applied to the defendant's appointment but not Mr Stobie's.

[8] The appointment of the defendant followed upon a telephone conversation between Mr Stobie and Mr Stewart, a stockbroker employed by the defendant. The two men had done business about a year earlier when Mr Stobie had contacted Mr Stewart and asked the defendant to buy shares in a telecommunications company recently listed on the Australian Stock Exchange. Mr Stewart does not appear to have been told the name of Sovereign Trust's principal on that occasion. It was not Windermere. Mr Stewart had no further contact with Sovereign Trust until about July 1996 when Mr Stobie telephoned to say he would "like to do some more business in the Australian Stock Market", and to open an account with the defendant for the transaction of that business. He identified his principal as Windermere. Mr Stewart arranged to send "the paperwork" to Sovereign Trust so an application to open an account could be made.

[9] On 20 August 1996 Mr Stobie sent Mr Stewart a facsimile. The transmission had a letterhead, "Windermere Investments Limited" and an address identical to that of Sovereign Trust. The message read:

AUD 4 million should be credited to the ANZ Securities Ltd Trust Account by the end of today. Can you utilise these funds to purchase the following stock . . . Commonwealth Bank receipts . . . Westpac . . . at market price . . . Any surplus funds . . . from these purchases are to be deposited into the V2 account. I will call you later today to confirm everything is acceptable."

The ".5" appears to have been a late addition to the message. It is in handwriting. The rest of the message was typed.

The V2 account was a cash management account in Windermere's name which the defendant could operate. It facilitated the settlement of share purchase contracts for overseas clients.

[10] On the same day, 20 August 1996, Mr Hinterdrofer prepared a cheque drawn on the plaintiff's bank, the Commonwealth Bank of Australia in the sum of $4,500,000. The payee was "A.N.Z.". In accordance with the plaintiff's procedures he also prepared a cheque voucher which showed the creditor (to use the plaintiff's terminology) to be "A.N.Z.". He made an entry in the plaintiff's prompt payments register also indicating that the payee of the cheque was "A.N.Z.". Mr Hinterdorfer took the cheque to Dr Tranberg, the plaintiff's general manager Development and Technical Services, and then to Mr Cooper, the plaintiff's general manager Trade and Commerce. Both signed it believing that the cheque was to be paid into an interest bearing deposit with the ANZ Banking Group Limited as an investment for the plaintiff. Both Mr Cooper and Dr Tranberg initialled the cheque voucher.

[11] The plaintiff's procedures were that a cheque voucher would accompany every cheque which required signature. The voucher would identify the purpose for which the cheque was drawn. It contained provision for the signature of the "cost centre authorising officer" who by his signature certified that the cheque was "a necessary expense" for the plaintiff. The authorising officer was the plaintiff's chief executive officer, Mr Rapson, or its general manager Corporate Services, Mr Peter Matthews. When Mr Hinterdorfer presented the cheque for signing and the voucher to be initialled, the voucher had not been signed by the authorising officer. Ordinarily a cheque for an amount in excess of $1m would be signed by the chief executive officer, but the general managers were authorised to sign if he were absent. It seems likely that Mr Hinterdofer chose his moment carefully and approached the two general managers who had least involvement with the plaintiff's financial affairs when both Mr Rapson and Mr Matthews were away. Both signatories believed the cheque was for a legitimate investment and that the certifying signature would be appended to the voucher on Mr Matthews' return to the office.

[12] Having obtained the two signatures to the cheque Mr Hinterdorfer altered the identity of the payee to "A.N.Z Securities Ltd - Trust Account" by typing in the words on the cheque "Securities Ltd - Trust Account". He also altered the identity of the creditor on the cheque voucher by adding the words "Banking Group" after the initials "A.N.Z.". The prompt payments register was similarly altered. Mr Hinterdorfer himself took the cheque to the head office of the Australian and New Zealand Banking Group Ltd in Brisbane and deposited it to the credit of the defendant's account 7750 98197. As the name of the account suggests it was one operated by the defendant in connection with the transaction of stockbroking business for its clients. Moneys standing to the credit of the account were not the defendant's own but moneys which it held on trust. The deposit made in this way gave the defendant no information about the payment. The identity of the payer and the intended beneficiary were unknown.

[13] Mr Hinterdofer concealed his fraud by making an entry in the investment register purporting to show that the $4.5m had been placed on an interest bearing deposit until 4 November 1996 at an interest rate of 6.95% per annum.

[14] Mrs Stamelos was an accounts clerk employed by the defendant in its administrative section. It was part of her duties to bank moneys paid by clients, and to draw cheques and process payments of moneys to clients. In both cases she prepared the necessary documents to record the transactions. On 20 August 1996 she was told by her superior Ms Bilton that a deposit of $4.5m was expected to be made into the trust account. One of her tasks was to obtain a daily bank statement for the defendant's trust account. Early on 21 August 1996 she obtained the bank statement for the previous day and noted that a deposit of that amount had been made. Ms Bilton had informed her that it was "for Windermere". Mrs Stamelos acted on that information and made an entry in the defendant's records to show that the money was held for Windermere. She, or some other administrative staff member, told Mr Stewart that Windermere had made the expected payment into the trust account and that the funds were cleared.

[15] The defendant dealt with the proceeds of the cheque credited to its trust account in accordance with instructions given by Sovereign Trust on behalf of Windermere. Mr Hinterdorfer had no direct contact with the defendant. His dishonesty was discovered on 4 November when the expected repayment did not occur.

[16] Between 21 August 1996 and 20 September 1996 the defendant traded in shares on behalf of Windermere. By cheques drawn on the defendant's trust account on 20 September and 7 October 1996 the balance in the account standing to Windermere's credit was remitted overseas. When the plaintiff discovered the fraud it inquired into the destination of its money and traced some of it into shares and bank accounts owned and operated by Windermere. The credit balances on the bank accounts were in Hong Kong dollars. These were exchanged into Australian dollars and paid to the plaintiff. The shares were sold and the proceeds likewise paid to the plaintiff. Altogether the plaintiff recovered $2,077,309.08. The cost of recovering its money was $200,000.

[17] The plaintiff seeks to recover the deficiency and interest from the defendant as restitution for unjust enrichment, that is moneys had and received, or alternatively as compensation for breach of trust, or as damages pursuant to a statutory cause of action arising from s 1324 of the Corporations Law.

[18] Before considering the causes of action it is convenient to deal with a further issue of fact. This is whether the plaintiff was careless in the manner in which it made its investments. The defendant submits that it was and that the carelessness should effect a reduction of the amount it should pay the plaintiff should it otherwise be found liable to do so. I have concluded that any carelessness on the part of the plaintiff in the way in which it handled its moneys is irrelevant to its claim to recover them. I will indicate my view of the evidence should it later be thought relevant to liability.

[19] The weakness in the plaintiff's system was that too many of the activities involved in the making and recording of investments were performed by the one man. Mr Hinterdorfer made the decision to invest; drew the cheque and accompanying voucher; obtained signatures on the documents; had possession of the cheque for the purpose of making the investment; made and kept the records of the investment. Had each of these activities been performed by a different person the fraudulent misapplication of invested moneys would have been impossible, or at least very difficult. Even if the task was divided between two people so that one made investments and the other, independently, recorded them, fraud would have been inhibited because it would have been detected immediately. Mr Hinterdorfer was able to conceal his dishonesty because he falsified the records. The number of accounting staff employed by the plaintiff was sufficient for it to divide the tasks among them without adding unduly to their responsibilities. Such a system was implemented very soon after the fraud was detected. There was no substantial reason why it could not have been put in place earlier.

[20] The plaintiff seeks to justify its conduct by pointing to audits of its activities, including a review of its investment practices, by senior, experienced, officers of the Queensland Audit Office. The report for the year ended June 1996 did not contain any criticism of those practices nor suggest any means by which they might be improved. A briefing note, provided for the Auditor-General in 1999 with respect to the fraud, reported that the audit prior to the defalcation:

". . . had revealed that there were procedures and controls in place to cover the type of transaction through which the fraud had been undertaken . . ."

[21] However Mr Scanlan, the executive director of the Queensland Audit Office involved in the 1996 audit conceded that the segregation of activities involved in making investments was a procedure that was within the plaintiff's capacity and was one that would have inhibited the misapplication of investment moneys. While he would not accept that the plaintiff's system was inadequate he agreed there was "scope for improvement in . . their system of internal control".

[22] Mr Rollason was the Auditor-General in 1996. He reported to the plaintiff in December of that year that:

"Overall the system and controls that were in place for the . . . 1995 - 96 financial year were adequate and accepted by audit, although audit was aware that the (plaintiff) was committed to maintaining cost-effective and efficient systems and procedures. For this purpose it would appear that undue reliance was placed on trust rather than on strict adherence to control procedures."

As Mr Rollason's evidence developed it appeared that the report contained an oblique criticism of the plaintiff's systems. A commitment to "cost-effective and efficient systems and procedures" is in reality a preference for reducing costs (to enhance profits) with consequent detriment to the standard of services. In other words the plaintiff did not, in the opinion of the audit office, spend enough time or money on "strict adherence to control procedures".

[23] I accept the evidence of Mr McComiskie that, essentially, two factors led to the fraud. They were (a) that after signature Mr Hinterdorfer, who caused the cheque to be drawn and signed, maintained control of it and that (b) no receipt or other evidence of the deposit was obtained or reconciled with the investment ledger. The segregation of these tasks to different people would have been a simple control, inexpensive to implement and within its existing staff capacity. Moreover it was an appropriate control for an entity of the plaintiff's size which had investments of about $19,000,000. The procedures which should have been in place were:

(a) adequate separation of duties between the preparer of the cheque and the person dealing with its subsequent signature, and

(b) proper evidence of ownership of the investment should have been obtained and reconciled to the investment ledger.

Had there been an employee other than Mr Hinterdorfer who recorded investments and reconciled them to a central register the fraud would have been discovered within a few days. Although some $620,000 were paid to Hinterdorfer or Sovereign Trust in Hong Kong on 23 and 26 August, the bulk of the stolen moneys remained in the defendant's account until 20 September. The system described by Mr McComiskie would have detected the fraud before much of the money was paid overseas.

[24] The plaintiff's right to recover the money seems well established. Lord Ellenborough CJ said in Hudson v Robinson [1816] EngR 244; (1816) 4 M & S 475 at 478:

"But an action for money had and received is maintainable wherever the money of one man has, without consideration, got into the pocket of another."

The statement was quoted with approval by Lord Templeman (with whom Lords Griffith and Ackner agreed) in Lipkin Gorman (a Firm) v Karpnale Ltd [1991] 2 AC 548 at 564.

Griffith CJ observed in The King v Brown [1912] HCA 6; (1912) 14 CLR 17 at 25:

"The action for money had and received lay whenever the defendant had received money which in justice and equity belonged to the plaintiff and when nothing remained to be done except pay over the money."

It cannot be doubted here that the defendant had no claim to the proceeds of the plaintiff's cheque which was paid into its account.

[25] The defendant did not dispute the applicability of the cause of action but resists the claim on two grounds: the first is that it was not in reality the recipient of the money. The defendant submits it did not have or receive it. Therefore it has not been enriched so there can be no possibility that it was unjustly enriched. The second ground is that it has changed its position on account of the payment so that it would be unfair to require it to repay the plaintiff.

[26] The first argument arises from the fact that the money was paid into the defendant's trust account. That fact alone constitute the moneys trust moneys. They were to be held by the defendant on trust, putting to one side for the moment the question of the terms of the trust and the identity of the beneficiary. At no time did the defendant have a beneficial interest in the money which it held as bare trustee. The submission is, in effect, that the money was never paid to the defendant but to the beneficiary of the trust. Reliance was placed upon the cases in which an agent who receives money which becomes the subject of a restitutionary claim pays it to his principal before notice of the claim. In such cases the agent is not liable to repay the money to the plaintiff. In Australia and New Zealand Banking Group Limited v Westpac Banking Corporation (1987-1988) 164 CLR 662 the High Court said (682):

"If money is paid to an agent on behalf of a principal and the agent receives it in his capacity as such and, without notice of any mistake or irregularity in the payment, applies the money for the purpose for which it was paid to him, he has applied it in accordance with the mandate of the payer who must look to the principal for recovery . . . In those circumstances, the benefit of the payment has been effectively passed on to the principal who will be prima facie liable to make restitution . . ."

See also Gowers v Lloyds and National Provincial Foreign Banks Ltd [1938] 1 All ER 766.

[27] It is noteworthy that the statement of principle makes it clear that the agent is liable to repay the money if he retains it, or has notice of the plaintiff's claim before paying the money to his principal or otherwise expending it on his principal's behalf. In such a case the agent could say what the defendant says, that he was not unjustly enriched because the money was never to benefit him: it was inevitably to be paid to the principal and could never confer a benefit on the agent. He is, nevertheless, liable to make restitution except in the special case postulated.

[28] If the defendant's contention were right it would have the consequence that the money would have been irrecoverable by the plaintiff had it remained in the trust account. As long as the defendant was the bare trustee of the money it could say it had not been unjustly enriched because it had not been enriched at all.

I cannot accept this as a correct statement of the law. As between plaintiff and defendant the defendant was enriched. The plaintiff's money was in its account, if not its pocket. It cannot matter that as between the defendant and a third party the defendant may not be entitled to the benefit of the money.

[29] The defendant cited no authority to support its submission. The absence of authority was said to be due to the emergent nature of the law of restitution which has not yet had to grapple with the situation of money paid to a trustee. I doubt this, and doubt even more that the defendant's proposal is a sensible way for the law to develop. The quite general exposition of principal by Lord Ellenborough and Griffith CJ is sufficient to catch moneys paid to a trustee in that capacity.

[30] The proposition is, I think, inconsistent with James v Oxley [1939] HCA 1; (1938) 61 CLR 433 in which the defendant was a firm of solicitors into whose trust account was paid a cheque for £425. The money was obtained as a result of an employee misrepresenting to the plaintiff the purpose for which it was wanted. The employee, by further misrepresentation to the firm, obtained from it two cheques aggregating the amount of the first cheque. The proceeds were stolen. The plaintiff, the payer of the first cheque, recovered the money from the defendants in an action for money had and received. The solicitors were relevantly in the same position as the defendant here. The money was paid to them as trustees. Latham CJ said (444):

"But the defendants, knowing that they had money belonging to some other person . . . took the responsibility of dealing with it in such a way that Rees got it. They had no authority from the plaintiffs to do so. The result is that they have not duly accounted for moneys belonging to the plaintiffs which were in their possession. The position would have been exactly the same if the defendants had never paid the money out of their account to any person."

". . . receipt of a payment . . . is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution . . ." (673).

[32] There is an air of unreality about the defendant's submission. Later in these reasons I conclude that on receipt of the money the defendant held the sum on a resulting trust for the plaintiff. As the only beneficiary, and being absolutely entitled to the trust estate, the plaintiff could call for the immediate payment of the money to it. The law would be odd indeed if in equity the defendant must pay the money over but at law be entitled to retain it because the money was held on a trust, and one for the plaintiff at that.

[33] To an extent one can sympathise with the notion which underlies the argument. In the ordinary case, if a recipient of money paid by mistake spends it he obtains some benefit, even if it be the purchase of transient pleasure. The position of the trustee is different. If it parts with the money it does so to benefit someone else and obtains no advantage for itself. The consequence is not, in my opinion, that payment has not been made to the trustee so that it has not been "enriched". If the trustee is to be excused from the obligation to repay, it must be on the basis that it changed position on receipt of the money so as to make it unjust to insist upon repayment.

[34] In David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1991-1992) 175 CLR 353, Mason CJ, Deane, Toohey, Gaudron and McHugh JJ said (385-6):

". . . a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. . . . the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his . . . detriment on the faith of the receipt. . . . the common element in all cases is the requirement that the defendant point to expenditure or financial commitment which can be ascribed to the mistaken payment. . . . In no jurisdiction, however, can a defendant resort to the defence of change of position where he . . . has simply spent the money received on ordinary living expenses."

The court approved the exposition of the defence by Professor Birks in his work An Introduction to the Law of Restitution, at p 410:

". . . the enriched defendant succeeds if he can show that he acted to his detriment on the faith of the receipt. . . . The defendant does not have to show what he did with the specific coins or property received or other property substituted for it. He only has to show that on the faith of his substance having increased he spent more than he would have done and so used up the increase."

[35] It may be noted that in Lipkin Gorman in which the House of Lords first recognised the availability of a defence of change of position the formulation of the principle by Lord Goff was in wider terms than those adopted by the High Court. Lord Goff said (579) that the defence should be available:

" . . . where an innocent defendant's position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. If the plaintiff pays money to the defendant under a mistake of fact, and the defendant then, acting in good faith, pays the money or part of it to charity, it is unjust to require the defendant to make restitution to the extent that he has so changed his position. . . . In other words, bona fida change of position should of itself be a good defence in such cases as these."

" . . . is likely to be available only on comparatively rare occasions."

The High Court limited the defence to those situations in which the defendant has changed his position on the face of the receipt, that is by reason of the payment itself. The limitation has been criticised by some on the ground that it unreasonably restricts the defence. The example usually given to show the unfairness of the limit is the case of an innocent recipient of moneys who had it stolen from him before he had a chance to repay it. His position would have changed, but not on the faith of the receipt. Nevertheless the scope of the defence in this country is as described by the High Court.

[36] The defence is not available to a defendant who has changed his position in bad faith, that is in spending the money with knowledge of the facts entitling the plaintiff to restitution, and it is only available to an innocent recipient of money, not one who has received it by wrong doing. Lipkin Gorman at 580. A defendant acts in bad faith if he spends the money knowing that he is not entitled to it but "snatched at the opportunity to use what he knew that he should return. That is a species of dishonesty." See Birks "Change of position: The Nature of the Defence and its Relationship to Other Restitutionary Defences" in Restitution: Developments in Unjust Enrichment edited by McInnes at p 58.

[37] There is no doubt the defendant acted in good faith. I accept the evidence of Mr Stewart that the defendant commenced buying and selling securities for Windermere utilising the moneys stolen from the plaintiff because he believed that the money had been lawfully credited to the defendant's trust account by or on behalf of Windermere. Mr Stewart had been told by Mr Stobie that $4.5m would be paid to the defendant's trust account on 20 August. On that day a deposit in that very amount was made. Mr Stewart assumed that it was Windermere's money.

[38] There is also no doubt that the defendant was an innocent recipient of the money.

[39] The plaintiff submits that the defendant did not change its position on the faith of the receipt. It relies upon State Bank of New South Wales Limited v Swiss Bank Corporation (1995) 39 NSWLR 350 a decision of the Court of Appeal of the Supreme Court of New South Wales on facts which are relevantly indistinguishable from this case. The court held that a bank which receives a mistaken payment has not acted on the faith of the receipt if it disburses the money in a manner not authorised by the payer. In that case, as in this, the disbursement was made in reliance on information provided by a client.

[40] The facts were that a dishonest employee of the Swiss Bank's New York office altered its records to make it appear that the State Bank had lent it USD 20 million for 24 hours. This false entry caused Swiss Bank to transmit that sum, plus interest, to the State Bank's New York office. The transmission occurred by means of an inter-bank transfer system which communicated the fact of the payment to the State Bank but did not contain any description of the customer for whose benefit the money was to be paid, nor an account number. The message was to the effect that State Bank should credit the payment "to the account (it kept) for customers". The money was in fact paid to the credit of an account conducted with State Bank by a company, Essington Ltd. It did so because its officers mistakenly believed a representation from Essington Ltd that a sum slightly in excess of USD 20 million would be paid to the State Bank for its account. The State Bank paid the money to Essington Ltd without making any inquiry of the payer, Swiss Bank, as to the identity of the customer for whose benefit the money was paid or otherwise how to deal with the payment. By the time Swiss Bank realised that it had been defrauded and requested a repayment from State Bank nearly all the money had gone to Essington Ltd.

"State Bank . . . submitted that it had paid away the funds believing in good faith that Essington Ltd was entitled to them. That "good faith" must, in our opinion, be linked to the payee acting on the faith of the receipt (repeating the emphasis in Davids Securities Pty Ltd (at 385)). . . .

It seems to us that knowledge derived otherwise than from the payer cannot be relevant in deciding whether a change of position by the payee occurred on the faith of the receipt. This view is supported by the following considerations. If the funds had been transmitted to State Bank . . . without explanation it could not possibly have treated itself as entitled to use them for any purpose without further inquiry from Swiss Bank. Similarly if the amount had been transmitted with a message saying `This is repayment of your overnight loan with interest', State Bank . . . could only have sent the money back for it knew it had made no such loan. In either case State Bank . . . could not have been acting on the faith of the receipt if it disbursed the funds to third parties. A bank which receives a mistaken payment and disburses it can only bring itself within the change of position defence if it shows that at the time of disbursement it knew or thought it knew more than the fact of receipt standing alone. This must be information which, if true, would entitle a payee to deal with the receipt as it did and that information must have come from the payer. . . .

The disbursement of Swiss Bank's money by State Bank . . . was not on the faith of the receipt . . . but on the faith of what (Essington Ltd) had told (it)."

[42] The defendant seeks both to distinguish State Bank and to criticise it.

[43] The distinction between State Bank and this case is said to be that the payer was not the plaintiff but Windermere, on whose instructions the defendant acted.

The submission is that when Hinterdorfer deposited the cheque at the ANZ bank in Brisbane he did so on behalf of Windermere. This characterisation of the act is said to follow from the fact that Hinterdorfer intended the money to go to Windermere and deposited it to an account which would result in the moneys being applied for Windermere's benefit. He had no authority from the plaintiff to deal with the moneys in such a way so he cannot have been acting on its behalf.

"Hinterdorfer had no authority to make (the) deposit for the plaintiff and . . . he or . . . his company made the payment, although with stolen property . . . the payment was just as much that of Windermere as it would have been with the use of cash stolen from the plaintiff or with the use of cash or a cheque obtained from an account into which funds stolen from the plaintiff had been placed."

I cannot accept this analysis of the facts, or the conclusion that Hinterdorfer was the payer. The plaintiff's cheque, dishonestly obtained by Hinterdorfer, and the proceeds of it collected from the plaintiff's bank and deposited to the defendant's trust account, always remained the property of the plaintiff. O'Connor J pointed out in Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105 at 110:

"Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person's hands."

Lord Templeman in Lipkin Gorman endorsed the proposition and noted its applicability "to a claim for money had and received".

No doubt Mr Hinterdorfer intended to deprive the plaintiff of its money by paying it into Windermere's account with the defendant. He was not authorised by the plaintiff to make the payment. But the money was never his. He may have been the instrument by which the payment was made, but he was not the payer. The plaintiff made the payment, unwittingly because of Mr Hinterdorfer's fraud, but it, not its dishonest servant, was the payer.

State Bank cannot be distinguished on this basis.

[44] I should accept the decision as authoritative unless I think it is plainly wrong. I do not. There is much force in the remarks of the court (356):

"Looked at on its own terms (State Bank's) submission has an element of the fantastic about it. It says that it received this very large payment with a message . . .: `Credit this to the account you keep for customers'. Nothing more than that. (State Bank's) case involves the propositions: (a) that it was for it to decide which customer should be credited; and (b) that it credited Essington Ltd because Essington Ltd asked it to do so. On the judge's findings what State Bank . . . did was not dishonest but on anybody's view it was not sensible and in our opinion it was not done on the faith of the receipt."

[45] Moreover the approach finds support in some older cases. Perel v Australian Bank of Commerce [1923] NSWStRp 61; (1923) 24 SR (NSW) 62 was in form an action in equity to redeem a mortgage. The real issue was whether the mortgagee bank could debit the mortgagors' account with the proceeds of cheques they had drawn in favour of the bank. The cheques were duly signed and were payable to the bank. A dishonest employee presented the cheques to the bank and persuaded a bank officer to give him in exchange a bank cheque payable to the employee's nominee. The funds were misappropriated. It was the proceeds of these cheques which were the disputed items in the account. Street CJ in Eq. said (75-76):

"The cheques drawn in favour of the bank conveyed no information as to the wishes of the drawers. Cheques might be drawn in that form for more reasons than one, and without some further instructions the bank could not know what was required of it. . . . A cheque drawn in that way is merely a direction to the bank to hold the amount for which it is drawn and to await further instructions as to its disposal. (Counsel) described the bank, not inaptly, as a trustee of the money in such a case. Then comes the question, for whom is it a trustee or to whom is it to look for instructions? I think that there can be only one answer. It must take its instructions from the drawers of the cheque . . . There may be cases in which, either from the course of dealing or from other circumstances, a bank may safely assume that valid authority has been conferred on someone else by the drawer of a cheque to give instructions on his behalf, but a banker is not justified in parting with his customer's money without his instructions . . ."

[46] There are passages to the same effect in James v Oxley the facts of which I have outlined. Rees was the dishonest servant. Latham CJ said 443-4:

". . . a partner in the defendant firm, became aware that the defendants had £425 in their bank account which did not belong to them. He was content to accept the statement of Rees . . . that it would be properly dealt with if it were paid out by cheques drawn in favour of the two named persons. The statement of Rees was false. Any inquiry which proceeded beyond Rees would have resulted in the discovery that the statement was false. . . . But the defendants, knowing that they had money belonging to some other person . . . took the responsibility of dealing with it in such a way that Rees got it."

There follows the passage I set out earlier (para 30). The defendants were held liable because they dealt with the money otherwise than on the instructions of the persons entitled to it. It was pointed out that the only sure way of ascertaining who was entitled to the money was to ask the person who paid it into the defendant's account.

[47] It is objected that these cases predate by many years the recognition of the defence of change of position to a claim for moneys had and received. I do not regard the cases, which were decided by very great judges, as obsolete. It is not to be supposed their Honours would have overlooked an obvious injustice if one in truth existed. All the cases require of a recipient of money, which is to be paid by it to a third party, is that he should ask the payer to identify the party.

[48] The defendant points to academic criticism of State Bank. In Lender Liability by O'Donovan at 459 there is a complaint that the courts' "interpretation of the change of position defence appears to require that the payee rely on a representation of the payer" which "has no place in an enrichment-related defence". It is asserted that the defence should be made out if the defendant acted in good faith and incurred a detriment after he had received the payment. It appears to be thought unfair that State Bank should have to repay the money when it was the victim of a sophisticated fraud.

I do not find this persuasive. The amount of money involved was very large indeed. It is surely not too much to require the recipient of such a sum to have a proper basis for deciding to whom it should be paid. If it did so there would have been no victim. The money would have gone back to Swiss Bank.

[49] In "Change of Position on the Faith of the Receipt" by Chambers, [1996] Restitution Law Review 103 at 107-8 the author criticises the statement in State Bank "that knowledge derived otherwise than from the payer cannot be relevant in deciding whether a change of position by the payee occurred on the faith of the receipt". He argues instead that the "important issue must always be whether the defendant honestly and reasonably believes it was entitled to the mistaken payment. The source of that belief can only be relevant to the question whether that belief was honestly and reasonably held". The requirement that a defendant act reasonably as well as honestly seems to introduce the consideration of whether the defendant acted carelessly in making the payment. The author, I think inconsistently, disputes this conclusion. He writes:

"There is no basis for denying the defence to State Bank because it acted carelessly . . .

where the defendant has acted honestly . . . the enrichment is erased . . ."

I find it difficult to disagree with the court in Swiss Bank that it was not sensible to disburse the money to a customer merely because the customer claimed it and without inquiry of the only person who could authoritatively indicate for whom the money was intended. I also find it difficult to understand how a defendant can act reasonably and carelessly with respect to a payment.

[50] Building upon Dr Chambers' article, Professor Bryan wrote in (1998) 26 Australian Business Law Review 93 at 98:

" . . . there is a confusion (in State Bank) between the identification of the acts constituting the change of position, which must be in reliance on the validity of the money received, and the inquiry into the bank's good faith, where evidence from any reliable source ought to be admissible. If a question is raised as to whether a bank is entitled to credit a payment to a customer's account evidence derived from the customer . . . will often be as relevant . . . as anything said or done by the . . . payer."

I cannot discern the confusion alleged to appear in the judgment. That aside, Professor Bryan appears to accept, at least implicitly, that the defence is not available unless an inquiry was made of a "reliable source" as to how the money should be spent. There is acceptance of the view that carelessness in the recipient is fatal to the defence.

[51] A similar criticism is made by Mr McInnes in "The Defence of Change of Position in the Law of Restitution" (1996) 24 Australian Business Law Review 313 at 315 where it is complained that:

"The insistence that the defendant's expenditure be based on information . . . derived from the plaintiff is misguided. Effectively, the Court . . . has introduced into the defence of change of position a requirement that the payee rely upon a representation by the payer. . . . Significantly, however, the defence of estoppel is distinguishable from the defence of change of position . . ."

" . . . the weight of case-law and academic opinion appears to lean to the view that the law should not come to the aid of those who fail to reasonably assist themselves . . ."

[52] I do not accept that the "insistence" is "misguided". The payments in State Bank, and in this case, were ambiguous in the sense that the recipients knew the money was not intended for them and the payments did not indicate for whom they were intended. The State Bank, and the defendant here, could not act on the faith of the payment without ascertaining how the money should be dealt with. The only certain way to resolve the ambiguity was to ask the payer to identify the intended payee.

[53] Professor Birks wrote in "Change of Position" (op. cit.)(at 58):

"The real difficulty comes with the recipient who ought to have known but did not make the inquiries which a reasonable person would have made. . . . there is no very strong case for protecting the security of the receipts of those who fail to take reasonable precautions on their own account. It seems best to bar the defence . . . wherever a defendant ought through reasonable inquiries to have discovered the defect in his entitlement. If this course is taken it will be necessary to bear in mind that in many contexts the standard of an inquiry . . . may not be very exacting. . . . It would arguably be better . . . if in commercial contexts the doctrine were kept under control, not by absolute exclusion, but by sensible application of the standard to everyday realities of commercial practice."

[54] The comment was not directed at the particular situation which arises in this case, and which arose in State Bank, namely where a payment is made to a recipient who is to deal with the money on behalf of another, or to pay it over to that other and the circumstances of the payment do not identify the intended beneficiary. They appear to have particular application to the situation. Of the authors to whose work I have referred only Dr O'Donovan contends that honesty is the only precondition to the availability of the defence. The others (although Dr Chambers is ambiguous on the point) accept that the recipient of a mistaken payment must take reasonable care to ascertain how the money is to be applied. If this be correct the criticism of State Bank comes down to a quibble whether it was reasonable for the defendant to act upon Essington Ltd's claim to the money, or whether the exercise of reasonable care required it to ask the payer whether the money was intended for Essington Ltd.

[55] There may be cases, as Street CJ pointed out in Perel, where the recipient of a payment may safely assume "that valid authority has been conferred on someone else by the (payer) . . . to give instructions on his behalf".

This may be the same as saying that the defence should be available where the disbursement occurs in reliance on "reliable" information from someone other than the payer. But the assumption will only be "safe", the information can only be "reliable" if it is reasonable in the circumstances so to regard it.

[56] I am far from sure that this understanding of the defence emerges from Lipkin Gorman or David Securities. Nevertheless I turn to consider whether it was reasonable for the defendant to act on the basis of Mr Stobie's intimation that the deposit was for Windermere's benefit.

[57] None of the defendant's officers sought to identify who paid the $4,500,000 into its trust account on 20 August 1996. Mr Stewart had been told by Mr Stobie that such a payment would be made on behalf of Windermere. It does not seems to have occurred to any member of the defendant's staff to verify that the payment made was in fact Windermere's. It was made in such a way as to give no information about its origin. It was unusual for payments to be made by a client directly into the trust account other than by telegraphic transfer which would identify the payer. This payment was made by the defendant's bank collecting the proceeds of the plaintiff's cheque and crediting them to the defendant's trust account. The defendant was given no record of the origin of the funds but they could have been traced by its bank. Such searches usually took two days but sometimes three. Had the search been undertaken it would have revealed that the payer was a statutory corporation, a public utility, with no obvious connection to the Lesser Antilles or a Chinese investment house. It is, I think, likely that had the defendant known who had drawn the cheque it would not have proceeded to transact business on behalf of Windermere without first ascertaining from the plaintiff whether it was in order to do so.

The defendant did not make inquires of the payer. The evidence satisfies me that the circumstances are not such that it acted carefully, or reasonably, in assuming that the payment was Windermere's, or that it could rely upon Mr Stobie's intimation for the assumption.

[58] Whether it was reasonable for the defendant to act upon Mr Stobie's assertion that the deposit was Windermere's is not a matter of intuition. The question was addressed in evidence, by two chartered accountants familiar with stockbroking practice and by a former stockbroker's manager of vast experience.

According to the evidence a stockbroking entity comprises two sets of functionaries: the dealers and advisers who interact with clients and buy and sell on their behalf, and the administrative staff whose task is to document transactions, collect money from clients and make payments to or on behalf of clients as well as to keep proper records and reconcile the accounts and bank statements. Mr Stewart was a dealer. It was no part of his function to ascertain whether the sum mentioned by Mr Stobie had been deposited to the defendant's account or to verify that money so deposited was, in fact, Windermere's. Those tasks were for the administrative staff on whom Mr Stewart relied for information.

[59] Mr Firth worked as an office manager and administrator for a number of substantial and reputable stockbroking firms for almost 30 years. In 1990 he became a full-time consultant to the Australian Stock Exchange where his duties were to develop the electronic clearing house system for settling transactions between brokers and to write the manual of procedures for the system.

The thrust of Mr Firth's evidence-in-chief was that it was not uncommon for funds to be deposited directly into a broker's trust account and that although the broker should have a system in place to allow the payment "to be identified to a customer" as a matter of practice a broker's staff would never "look to see who had drawn the cheque". The questions directed to Mr Firth in-chief did not sufficiently draw his attention to the particular aspects of the transaction in question, which is one in which payment was made into a broker's trust account unaccompanied by any indication of the purpose for which it was paid, the maker of the payment or the intended beneficiary of the payment. In that circumstance Mr Firth agreed that before he could deal with the money the broker had to ascertain who was "entitled to give instructions about" it. Moreover he thought that the only person who could give instructions was the drawer of the cheque deposited to the account.

When asked whether a broker could act on a client's claim to money deposited in the broker's trust account he thought it necessary that the broker make reasonable inquiries about the client's entitlement to the money, and that inquiries should be directed to the drawer of the cheque. Mr Firth thought that particular care should be taken when the client making the claim was new, that is to say, where the transaction involving the deposit was the first to be undertaken for that client. If, as well as being a first transaction, the client was a shelf company incorporated in a Caribbean tax haven the broker should be particularly careful to verify the claim. Mr Firth was adamant that a broker would never act upon the mere assertion of a "new" client to be the beneficiary of moneys paid anonymously into its trust account.

[60] The opposing expert opinions were supplied by auditors both of whom have considerable experience with trust accounts and stockbrokers. As one might expect the difference between them is not great but before analysing it, it is appropriate to summarise their evidence. According to Mr Eddy, a partner with Ernst & Young, there are three categories of payments into a trust account. They are:

(b) all cheques and cash deposited by a trustee using its bank account deposit book;

(c) any miscellaneous receipts for which the trustee does not have first hand knowledge as to the source of origin of the deposit.

[61] It is generally accepted trust accounting practice to prepare daily reconciliations of trust account transactions. The reconciliation would require the trustee to identify the person entitled to funds in the third category so as to confirm that the trustee is entitled to hold those funds and to ascertain on whose instructions the trustee should act in relation to the disbursement of the funds. Verification would extend to obtaining a copy of the cheque, or details of the cheque, from the bank to verify, independently of the client, that the client issuing instructions to deal with the money was the payee of the cheque or that the drawer was the client, or that the drawer independently confirms that the client was entitled to the proceeds of the cheque.

[62] Mr Eddy regarded Mr Hinterdorfer's payment as a miscellaneous receipt falling into his category 3. He thought that the defendant's administrative staff should have made inquiries of its bank to determine the payee and drawer of the cheque. These inquiries would have revealed that the plaintiff was the drawer and that neither Windermere nor Sovereign Trust were, on the face of the cheque, entitled to its proceeds. The need to make the inquiry was given cogency by the fact that the payment was the biggest single deposit into the account that day, and was a significant proportion of the total deposits on the day. Had the inquiry been made the defendant should have realised that the payment was unusual, in that a public corporation established to provide port services was trading in shares. This circumstance should have prompted an inquiry of the plaintiff.

In cross-examination Mr Eddy agreed that the purpose of the broker's inquiry with respect to a deposit in his category 3 was "to work out which client relates to which deposit" and "once the broker (has) a reasonable belief that a deposit relates to a particular client it doesn't . . . inquire further . . .".

However he adhered to his opinion that Windermere's bald assertion that it was entitled to the deposit was insufficient to give rise to a reasonable belief in the defendant that Windermere was truly entitled to the $4.5m. Mr Eddy thought that a trustee in receipt of anonymously deposited moneys "wouldn't normally go back to the client (claiming the moneys) to confirm they put the deposit in because you're trying to get some independent verification".

[63] The defendant's position was supported by Mr Dickinson, an audit partner with KPMG, with particular expertise in auditing stockbrokers' accounts. He describes two classes of deposits into a trust account, "identified" and "miscellaneous". In the first class he described three categories, the first two of which correspond to Mr Eddy's first two categories. Mr Dickinson's third category of "identified deposits" consists of "all cheques and cash deposits made by third parties into a trustee's bank account which are supported by instructions from a `known' client ie a client with an established account". Payments in the first class may be dealt with without inquiry. Mr Dickinson's third category of identified payments probably approximates Street CJ's description of circumstances in which a trustee may act on information other than that provided by the drawer of the cheque the proceeds of which are in contention.

The second class, "miscellaneous" receipts, are those "for which the trustee does not have proper instructions in respect of the source of origin of the deposit" with respect to which the trustee should identify the person entitled to the funds.

[64] Both experts agree as to the definition of miscellaneous receipts and that such receipts may not properly be dealt with by the trustee without making proper inquiries as to the person entitled to the moneys. It is explicit in Mr Eddy's report and I think implicit in Mr Dickinson's report, that those inquiries must go beyond questioning the client who claims them. The difference between the accountants is whether the payment made by Hinterdorfer should be regarded as a miscellaneous receipt, as Mr Eddy thought, or whether it should be regarded as falling within the third category of Mr Dickinson's class of identified deposits. Mr Dickinson urges this view because the deposit was "supported" by a communication from Windermere which was a client known to the defendant and which had an established account.

[65] The issue thus comes down to whether the payment was a miscellaneous receipt or whether, given the defendant's knowledge of Windermere and Sovereign Trust, it was an identified one. I prefer the opinions of Mr Firth and Mr Eddy that the course of dealing between the defendant and Windermere was insufficient to make the deposit "known" so that it was not reasonable to rely upon Windermere's asserted claim to the money. The weakness of Mr Dickinson's position can be seen from his cross-examination (T185:57 - 187:01):

" . . . In deciding who is a known client, . . . you would be thinking about someone with whom your firm had a history of dealings, is that right? - A history of dealings or has some other account open with them.

. . . You mean a history of dealings in respect of another account? -

No, what I mean is they have an account which is currently open with the broker.

So, you think a known client is someone who has walked in the door this morning and opened an account with you? - They could be.

. . . In some circumstances they would be and in some they would not be; is that what you are saying? - No I am saying they would.

Someone who walks in the door this morning and opens an account with you is a known client? - If they open the account, yes.

Which clients are not known clients? - By virtue of being a client I guess they are known, so no clients would not be known clients.

. . . On your understanding a known client is anyone who walks into the broker, gives a false name, false address, false business details, no information to back up any of their claims as to identity and opens an account? - If that account had been opened.

You don't think there's something faintly ridiculous about that? - No."

[66] Later Mr Dickinson agreed that his approach involved the trustee incurring a risk that it would pay money to someone not entitled to it and be called upon to refund it. When asked whether he thought that the level of inquiry he advocated was adequate he said (T189:08 - :20):

" . . . It's certainly the common practice a stockbroker would undertake given the timeliness involved.

. . . Is it adequate in your professional opinion . . .? - I'm not aware of any broker that would adopt that treatment. It's certainly a risk. All business issues carry risks . . . and the controls you need to have in place need to be practical and they need to be cost effective."

[67] On the evidence I am satisfied that the defendant could not reasonably deal with the moneys without identifying the drawer of the cheque and the intended payee. I do not accept that Windermere was, in Mr Dickinson's terminology, a "known" client. The payment in question was "miscellaneous". The following factors are relevant to the conclusion. The cheque was for a very large amount, even for a stockbroker used to dealing in large amounts. This was the first occasion on which the defendant had had any involvement with Windermere. Mr Stewart's previous dealing with Sovereign Trust was irrelevant because on that occasion Sovereign Trust was not acting on behalf of Windermere. All that was known of Windermere was that it was incorporated in the Turks and Caicos Islands a fact which, if anything, should have raised, rather than allayed, suspicions. Although there was nothing apparently unlawful in Windermere's or Sovereign Trust's dealings it was the fact that the latter's business comprised to a large extent the facilitation of investments for companies located in jurisdictions the laws of which made it difficult to identify principals or trace assets. There was no difficulty in ascertaining the drawer of the cheque. A telephone call to its banker would have produced the information in 2 or, at the most, 3 days. There is no suggestion that Windermere's instructions to buy shares were urgent. Even if they were, any delay would be the fault of Windermere who had not provided proper authentication of the payment. There was no identifiable risk in making the inquiry and there was a clear risk that money might be misapplied if the inquiry were not made. I am satisfied that had the defendant ascertained that the cheque had been drawn by the plaintiff and inquired of its officers whether the payment was authorised, Hinterdorfer's fraud would have been discovered. There was a chance that an inquiry of the plaintiff would have been directed by the receptionist to Hinterdorfer himself who would have concealed his fraud but the likelihood is that an inquiry would have been directed to a more senior officer who would at once have raised the alarm.

[68] There was a degree of slackness about the manner in which the defendant accepted instructions from Windermere. The authority did not appear to appoint Sovereign Trust as agent for Windermere. That part of the document had not been properly executed. As well the defendant did not comply with its own requirement that it be provided with a copy of Windermere's articles of association before transacting business for it.

Neither of these oversights was critical. Windermere did authorise Sovereign Trust to act on its behalf and ratified, or would have ratified, the business it instructed the defendant to transact. Nevertheless they indicate an unacceptable casualness on the part of the defendant.

[69] I am satisfied that it was not reasonable for the defendant to act on Mr Stobie's intimation that the money was Windermere's. If the defence of change of position requires a recipient to act reasonably in spending the money paid to it, I am satisfied the defendant did not act reasonably. I would also hold that the defence is not available because, applying the ratio in State Bank the defendant did not act on the faith of the receipt because it did not inquire of the payer, the plaintiff, how the money should be disbursed. Accordingly, I find that the defendant's second ground for resisting the plaintiff's claim in restitution is not made out.

[70] The defendant further argued that the amount which it should restore to the plaintiff, should its other arguments fail, ought to be reduced by reason of the plaintiff's failure to safeguard its investment. I have summarised the evidence on this point and expressed my conclusions. I refrain from such terminology as "negligence" or "reasonable care" in connection with this debate because they are suggestive of concepts which are alien to a claim for money had and received. The fact that had the plaintiff been careful in designing and implementing investment procedures its money would not have been paid does not affect its right to recover the money. At least the House of Lords thought so in Banque Financiere de la cite v Parc (Battersea) Ltd [1998] UKHL 7; [1998] 2 WLR 475. I accept the opinions as authoritative.

[71] There is no doubt that the defendant held the $4.5m on trust. The money was paid into its trust account and was, by definition, not money to which the defendant was, or claimed to be, beneficially entitled. The question is, on what trusts was the $4.5m held? The rival contentions are (1) on a resulting trust for the plaintiff and (2) on an express trust for Windermere.

The first contention is said to arise because the money was the plaintiff's and was paid to a trustee without any indication of the settlor's intention as to the disposition of the money. There was therefore a resulting trust pending instructions from the settlor. The plaintiff refers to the judgments in Vandervell v Inland Revenue Commissioners [1966] UKHL 3; [1967] 2 AC 291. Lord Upjohn (with whom Lord Pearce agreed) expressed the principle to be (312):

"Where A transfers . . . the legal estate in property to B otherwise than for valuable consideration it is a question of the intention of A in making the transfer whether B was to take . . . on trust and . . . on what trusts. If . . . the document transferring the legal estate . . . is silent, then there is said to arise a resulting trust in favour of A."

Lord Wilberforce was of the same opinion. He said (329):

"The conclusion, on the facts found, is simply that the option was vested in the trustee company as a trustee on trusts, not defined at the time, possibly to be defined later. But the equitable, or beneficial interest, cannot remain in the air: the consequence in law must be that it remains in the settlor."

[72] On the plaintiff's view of things that is what happened here. The money was paid by the plaintiff (Hinterdorfer being its agent for the purpose) to the defendant to be held by it on trusts which were not specified and for a beneficiary who was not identified. There was therefore a resulting trust in favour of the payer of the moneys, the settlor of the trust.

[73] The defendant's argument is that Hinterdorfer paid the money into the defendant's trust account expressly intending it to be held on trust for Windermere on terms which Windermere would advise. It is said that he made the payment not as agent for the plaintiff but for Windermere. The terms of the trust and the beneficiary are thus said to be identified.

[74] No doubt Hinterdorfer's intention was to benefit Windermere, but his intention was dishonest and cannot create a valid trust on the terms alleged. The authority of Black means that Hinterdorfer, having obtained the money by fraud, held it on trust for the plaintiff and could not divest himself of that trust. The trust he intended was unlawful because its purpose was to facilitate a fraud. Equity will not give effect to such a trust. Hinterdorfer's actual but dishonest intention could not overcome the trust imposed on the money by the fact that he stole it. The point is so obvious that the textbooks deal with it by very general statements. See Ford & Lee Principles of the Law of Trusts para 7220; Jacobs' Law of Trusts in Australia by Meagher and Gummow 6th ed para 902; Lewin Trusts 16th ed p 70.

[75] The matter can be tested this way. If the fraud had been discovered when the money was still in the defendant's bank account Windermere's claim to the money would not have been recognised over the plaintiff's. The express trust in favour of Windermere would not prevail over the plaintiff's right to recover its money but this is not because the express trust failed on discovery of the fraud. It failed at inception because the constituting intention was fraudulent. Whether or not Hinterdorfer made the payment as agent for the plaintiff, the money, in equity, was the plaintiff's and he could not strip it of that character. It follows that the supposed express trust is invalid and the money was held on a resulting trust for the plaintiff.

[76] The defendant disputes the conclusion that it held the deposit on trust for the plaintiff. It points out, correctly, that there was never an express trust of the money in favour of the plaintiff and argues that there could only be a constructive trust for the benefit of the plaintiff if it had sufficient knowledge of the facts to make it inequitable, or unconscionable, for it not to regard the money as belonging to the plaintiff. It refers to the judgment of Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington Borough Council [1996] UKHL 12; [1996] AC 669 at 705:

"Since the equitable jurisdiction to enforce trusts depends upon the conscience of the holder of the legal interest . . . he cannot be a trustee of the property if and so long as he is ignorant of the facts alleged to affect his conscience, ie until he is aware . . . in the case of a constructive trust, of the factors which are alleged to affect his conscience."

It is no doubt safe to accept that as a general principle. I am also prepared to assume for the sake of this argument that knowledge that the money was the plaintiff's should not be imputed to the defendant. There is no doubt it did not have actual knowledge of the origins of the deposit. It may therefore be right to say that there was no constructive trust of the moneys in favour of the plaintiff before the defendant disbursed it as Windermere directed. But the absence of a constructive trust from want of the circumstances necessary to give rise to it does not mean that there was not a resulting trust of the money in favour of the plaintiff. The money was held on trust: either on express trust for Windermere or a resulting trust for the plaintiff. There could only have been an express trust for Windermere if Mr Hinterdorfer's intention to create that trust is given effect. For the reasons given earlier, because his intention was fraudulent and the trust was intended to implement the fraud by transferring the money to Windermere, equity would not recognise it. The resulting trust remains.

[77] It is obvious that the defendant applied the plaintiff's money in breach of the resulting trust to hold the money for, or disburse it at the direction of, the plaintiff. The defendant mentions two more matters to deflect the liability that normally attaches to a defaulting trustee. It claims the court should exonerate it pursuant to s 76 of the Trusts Act 1973, or the equivalent provision in the Victorian Act, s 67 of the Trustee Act 1958. It argues that the failure in the plaintiff's internal accounting procedures are relevant to this inquiry.

[78] As well, it suggests that the plaintiff's carelessness should deprive it, in whole or in part, of its right to compensation from the trustee. The argument cannot be right. It appears to have been rejected by the High Court in Pilmer v Duke Group Limited (in liq) [2001] HCA 31; (2000) 75 ALJR 1067 at 1084 and 1102. I may leave my house having securely fastened it, or I may leave the doors open. In either case if a thief comes to my house and takes away some items of my property they remain my property. They do not become his because I carelessly left open the door thereby reducing the effort required to steal them.

Trusts Act s 76

"If it appears to the court that a trustee . . . is, or may be, personally liable for any breach of trust . . . but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust . . . then the court may relieve the trustee either wholly or partly from personal liability for that breach."

[81] For the reasons given earlier (para 57 - 68) when considering the defence to the plaintiff's restitutionary claims I conclude that the defendant did not act reasonably in paying the money, in breach of trust, to Windermere. In addition it should be said that the evidence revealed a lack of understanding in the defendant's staff of the need to ascertain that Windermere was entitled to the deposit. The only employees called were Mr Stewart, the stockbroker, and Mrs Stamelos the accounts clerk. Mr Stewart did not regard it as part of his duty to inquire into a client's entitlement to moneys in the trust account. The receipt and payment of moneys and their allocation to a client were matters for the administrative staff. Mr Stewart transacted business on behalf of a client once told by the administrative staff that the defendant had been put in cleared funds. Ms Bilton did not give evidence. There was no evidence that she was unable to testify. No member of the administrative staff senior to the accounts clerk was called to explain why nothing was done to verify whether the money was Windermere's. As far as the evidence goes no-one realised there was a need to do so.

[82] It is not necessary to consider whether the defendant ought fairly to be excused because an essential precondition to the exercise of the statutory power to exonerate for breach of trust has not been made out. I indicate, however, if it become relevant, that I consider that the plaintiff's own shortcomings are not relevant to this inquiry. The defendant submitted that the plaintiff's failure to implement a proper regime for handling the large amounts of money that were regularly invested is relevant to the question whether it ought fairly be excused for its breach of trust. Those failures facilitated Mr Hinterdorfer's fraud and the deposit of the money to the defendant's trust account but they played no part in the defendant's misapplication of them. Its dealings with the money were not influenced by anything the plaintiff had left undone. The money would not have been in its account had the plaintiff been more astute but that is not the point. What must be excused is the breach of trust. It is immaterial that the trust arose from circumstances made possible by the plaintiff's carelessness.

[83] It is not certain that stricter investment controls would have prevented Mr Hinterdorfer's fraud. Any procedure to forestall dishonesty can be overcome by the application of sufficient ingenuity or determination. The plaintiff submits that there is no proof that the shortcomings in its investment procedures were causative of its loss, in a sense that, on the evidence, Mr Hinterdorfer could have defrauded it whatever system was in place. So he might, but I think that as a matter of probability the segregation of tasks and, in particular, the verification and recording of the investment by an employee other than the one who made the investment would have deterred the fraud or led to its discovery in time to recover about $4,000,000 of the money.

[84] It would be impossible to conclude that the defendant ought fairly to be excused its breach of trust. The factors which made its conduct unreasonable operate against the finding. In addition the defendant is in a position akin to that of a professional trustee which must "be particularly careful to act strictly within the line of its duty and . . . establish a strong case before the court would apply the section in its favour": per Starke, Dixon and Williams JJ in Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149 at 165. In Re Windsor Steam Coal Co (1901) Limited [1929] 1 Ch 151 it was said (by Lawrence LJ at 164-5) that a trustee in business to make profits who is paid a commission from the trust fund should not be excused for breach of trust even had it "taken the best possible advice".

[85] The operation of the trust account was essential to the defendant's business. Section 866 of the Corporations Law obliged it to have such an account. By s 867 it had to pay into its trust account money held by it in trust for a client and moneys received from a client (with some exceptions). By s 869 the defendant was prohibited from withdrawing money from its trust account except:

"(a) to make a payment to, or in accordance with the written directions of, a person entitled to the money;

(e) to make a payment that is otherwise authorised by any law of the Commonwealth or of this or of any other jurisdiction."

The legislation was clearly meant to discourage any casual dealing by a stockbroker with its clients' moneys.

Given the statutory imperative to deal with trust moneys only in accordance with the instructions of those entitled to them and the strictness with which a trustee remunerated for its duty must adhere to the terms of the trust, it cannot be said that it is fair to excuse the defendant when it did not inquire, and perhaps did not realise that it should inquire, about the deposit from the only person who could with certainty identify the beneficiary of the trust.

[86] Accordingly, the defendant has not made out its entitlement to relief pursuant to the Trusts Acts.

[87] Having concluded that the plaintiff is entitled to recover its money on its two primary causes of action it is unnecessary to consider the third which is said to arise from the Corporations Law. The entitlement to recovery on this basis is, perhaps, controversial and should be deferred to a case where it is necessary to the outcome.

[88] There was disagreement about the amount to which the plaintiff was entitled should it succeed in the action, as it has done. The trust money was traced, as I mentioned, to bank accounts and securities held in Hong Kong. These were recovered and converted into Australian dollars. The conversion did not take place immediately. The plaintiff guessed rightly that the Australian dollar might fall. By waiting, the conversion produced about $50,000 more than would have been recovered had it been effected immediately upon discovering the assets. For a reason which I was never able to understand the plaintiff argues that the amount for which the defendant should be given credit is a fictional amount less than the sum actually received. I think it best to proceed on the basis of what was obtained in fact.

[89] In accordance with the letter delivered to my associate by the parties on 25 October 2001 I determine that the amount to which the plaintiff is entitled is $4,166,122.91. This includes interest at the agreed rate.