Supreme Court of WA|2002-04-05|Before: Lure J

Re Global Finance Group Pty Ltd (In Liq)(Supervisor Appointed) and Global Mortgage Investments Pty Ltd (in Liq); Ex Parte Simon Andrew Read and Jeffrey Laurence Herbert (As Liquidators of Global Mortgage Investments Pty Ltd and as Liquidators of Global Finance Group Pty Ltd) & Ors [2002] WASC 63 (5 April 2002)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : RE GLOBAL FINANCE GROUP PTY LTD (In Liq)(Supervisor Appointed) and GLOBAL MORTGAGE INVESTMENTS PTY LTD (in Liq); EX PARTE SIMON ANDREW READ and JEFFREY LAURENCE HERBERT (As Liquidators of Global Mortgage Investments Pty Ltd and as Liquidators of Global Finance Group Pty Ltd) & ORS

HEARD : 17-21 & 25 SEPTEMBER 2001, 13, 20 & 27 FEBRUARY & 14 MARCH 2002

MATTER : Sections 89 and 92 of the Trustees Act 1962 (WA)

GLOBAL FINANCE GROUP PTY LTD (In Liq) (Supervisor Appointed)

SIMON ANDREW READ and JEFFREY LAURENCE HERBERT (As Liquidators of Global Mortgage Investments Pty Ltd and as Liquidators of Global Finance Group Pty Ltd)

JEFFREY LAURENCE HERBERT (As Supervisor of Global Finance Group Pty Ltd) (In Liq)

ALL PERSONS IDENTIFIED IN GLOBAL FINANCE PTY LTD'S LEDGER CARDS AS AT 21 JULY 1999 AS MONEY MARKET INVESTORS

ALL PERSONS LISTED IN THE SCHEDULE TO THE APPLICATION OF THE SECOND APPLICANT DATED 13 SEPTEMBER 2000 AS BORROWERS

ALL PERSONS LISTED IN THE SCHEDULE TO THE APPLICATION OF THE SECOND APPLICANT DATED 13 SEPTEMBER 2000 AS INVESTORS

THIRLMERE CONSULTING AND FINANCIAL MANAGEMENT SERVICES

Trusts - Mixed funds in trust account operated by finance broker - Identification of claimants - Whether trust funds held on a Quistclose purpose trust - Tracing of funds into and out of trust account - Loss of funds in trust account - Allocation of loss - Whether rule in Clayton's Case applies - Whether pari passu principle should apply - Whether funds can be traced out of trust account to mortgages

Corporations Act 2001 (Cth), s 437(A), s 437(B), s 474 and s 479

13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 17 ACLC 500

AMKMK v Chettiar [1955] AC 230

Austin-Fell v Austin-Fell [1990] Fam 172

Australian Securities Commission v Buckley; Becke v National Australia Bank Ltd, unreported; SCt of NSW (Santow J); 20 December 1996

Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25

Carson v Wood (1994) 34 NSWLR 9

Commissioner for Stamp Duty (NSW) v Pearse [1953] UKPCHCA 2; (1953) 89 CLR 51

DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431

Federal Commissioner of Taxation v Galland (1984) 4 FCR 566

Federal Commissioner of Taxation v Galland [1986] HCA 83; (1986) 162 CLR 408

Foskett v McKeown [1998] Ch 265

Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143

Hancock v Smith (1889) 41 Ch D 456

Harman v Glencross [1986] Fam 81

Hospital Producs Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41

J&H Just (Holdings) Pty Ltd v Bank of New South Wales [1971] HCA 57; (1971) 125 CLR 546

Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533; (1999) 32 ACSR 430

Lord Provost of Edinburgh v Lord Advocate (1879) 4 App Cas 823

Maguire & Tansey v Makaronis [1997] HCA 23; (1997) 188 CLR 449

Mineral & Chemical Traders Pty Ltd v T Tymczyszym Pty Ltd (in liq) & Horn (1994) 15 ACSR 398

Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) [1999] FCA 1820

Oakleigh Acquisitions Pty Ltd (in liq); Ex parte Conlan [2000] WASC 41

Orakpo v Manson Investments Ltd [1978] AC 95

Re Berkeley Applegate (Investment Consultants) Ltd [1989] Ch 32

Re British Red Cross Balkan Fund [1914] 2 Ch 419

Re Corbenstoke Ltd (No 2) [1990] BCLC 60

Re Crest Realty Pty Ltd (No 2) (in liq) [1977] 1 NSWLR 664

Re G B Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674

Re Ontario Securities Commission and Greymac Credit Corporation (1985) 51 OR (2d) 212

Re Rhodesia Goldfields Ltd; Partridge v Rhodesia Goldfields Ltd [1910] 1 Ch 239

Re Staff Benefits Pty Ltd (in liq) [1979] 1 NSWLR 207

Re Stuart; Smith v Stuart [1897] 2 Ch 583

Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99

Re T H Knitwear (Wholesale) Ltd [1988] 1 Ch 275

Re Tilley's Will Trust [1967] Ch 1179

Roberts Petroleum Ltd v Bernard Kenny Ltd [1983] 2 AC 192

Stewart v Latec Investments Ltd [1968] 1 NSWR 432

Trustee of the Property of F C Jones & Sons (a firm) v Jones [1997] Ch 159

U T C Ltd (in liq) v N Z I Securities Aust Ltd (1991) 4 WAR 349

1 At all material times Global Finance Group Pty Ltd ("GFG") carried on business as a licensed finance broker pursuant to the Finance Brokers Control Act 1975 ("Control Act"). Global Mortgage Investments (WA) Pty Ltd ("GMI") was a wholly owned subsidiary of GFG.

2 On 19 February 1999, Jeffrey Herbert and Simon Read were appointed joint and several voluntary administrators of GFG. On 20 April 1999, the creditors of GFG appointed Messrs Herbert and Read as joint and several liquidators of GFG. On 23 July 1999, the Finance Brokers Supervisory Board ("Board") appointed Mr Herbert the supervisor of GFG's finance-broking business.

3 On 26 February 1999, Messrs Herbert and Read were appointed joint and several voluntary administrators of GMI. Messrs Herbert and Read were appointed joint and several liquidators of GMI on 25 April 1999.

4 GFG, GMI, Messrs Herbert and Read in their capacities as liquidators of GFG and GMI and Mr Herbert in his capacity as supervisor of GFG, have applied by originating summons for orders pursuant to s 89 and s 92 of the Trustees Act 1962 concerning the distribution of moneys held in trust by GFG and related matters. GFG had a single trust account. As at 19 February 1999 the balance in the trust account was $1,598,961.

5 GFG's principal activity consisted of the raising of funds from lenders ("investors") for the purpose of advancing secured loans to applicants for finance ("borrowers") in connection with property acquisitions and development.

6 In summary, this case concerns the identification of the persons entitled to claim from the trust account, how the funds are to be distributed between the claimants and the rights of investors to mortgages registered in GMI's name.

7 On 26 October 1999 the Court ordered that notice of the originating summons filed in the action be given by way of advertisement in "The West Australian" and by circular letter to each investor and borrower and other persons who may be a potential claimant.

8 In February 2000 the Court ordered that all persons who have a claim against the GFG trust account and mortgages held by GMI be bound by the orders and directions made in the proceedings.

9 In December 2000, March 2001 and August 2001 the second applicant caused circulars to be forwarded to all investors, borrowers and creditors advising them in relation to the proceedings and providing copies of orders made by the Court on 12 December 2000, 20 March 2001 and 24 August 2001. These orders related to, inter alia, the questions to be determined by the Court as preliminary issues. In order to fully appreciate the questions, it is necessary to firstly set out the relevant facts.

10 The applicants relied on a number of affidavits sworn by Mr Herbert. That evidence, largely uncontradicted, establishes the following facts. GFG was incorporated on 10 April 1989. At all material times its directors and shareholders were John Margaria and Albert Margaria.

11 GFG advertised for investment funds with particular emphasis on retirees. People responding to GFG's advertisements would usually be provided with relevant promotional material. At the same time as it was attempting to secure funding from investors, GFG sought and received applications for finance from prospective borrowers.

12 After receipt of applications for loan finance GFG would send a letter of offer to prospective investors in duplicate (known as a "Proposal Letter"). There were five types of Proposal Letter which reflected the nature of the proposed transaction as follows:

1. security property being purchased or refinanced, and all funds being expended at settlement;

2. security property being purchased or refinanced, with interest for the term of the loan to be held by GFG;

3. security property being purchased or refinanced, with buildings to be constructed thereon, and with both construction costs and interest for the term of the loan to be held by GFG;

4. security property being purchased or refinanced and subsequently subdivided, and with both subdivision costs and interest for the term of the loan to be held by GFG;

5. security property being refinanced enabling the borrower to raise working capital, with interest for the term of the loan to be held by GFG.

13 Recipients of Proposal Letters interested in taking up the offers were instructed to sign the attached copy of the Proposal Letter, indicate the amount of the loan they wished to make and return the duplicate copy to GFG.

14 Details of funds pledged by investors to particular investments were recorded by GFG on a pre-printed untyped form referred to by GFG personnel as a "scoreboard sheet". The information typically recorded on a scoreboard sheet was:

• the name of the proposed investor showing the date the Proposal Letter was sent, the response, the date of the response, the amount pledged and the date when funds would be available.

15 Once the required funds were agreed to be provided by investors for a particular investment as recorded on the relevant scoreboard sheet, GFG advised the borrower and instructed its solicitors to prepare mortgage documents. No loan agreement was prepared. However, the mortgage specified, inter alia:

16 The mortgage used standard terms for all transactions save where construction was proposed, in which case additional covenants relating to works were added. Attached to the mortgage provided to the borrower for signature were a statement of costs, mortgagor's authority, requisitions on title and certification by the company director.

17 The statement of costs was provided to the borrower at or prior to the date of execution of the mortgage. This document specified the:

(iv) inspection and settlement fees payable and sundry disbursements;

(v) rate of interest payable to the borrower for credit funds held.

18 The statement of costs was signed by the borrower to indicate acceptance of the specified terms.

19 After an application for finance was approved, a project number was allocated to the proposed loan, and a loan file (referred to as a "project file") was created. Each project file was labelled with the project number, the name of the borrower and the address of the property to be mortgaged.

20 Following execution of the mortgage and signing of the statement of costs, the mortgage was returned to GFG's solicitors for stamping. GFG's solicitors then contacted the borrower's settlement agent to arrange settlement. The solicitors would advise GFG of the funds required at settlement and GFG would draw cheques against the relevant project account and deliver them to the solicitors.

21 In the normal course of events, investors providing the relevant project funding were recorded as mortgagees on the mortgages. However, on occasions when not all loan proceeds were immediately required, a mortgage for the full amount of the proposed loan was prepared as soon as sufficient funds were raised to fund the settlement. The investors who had accepted the project and deposited their funds were documented as mortgagees, with GMI holding shares of the mortgage representing the unfunded portion of the loan.

22 Once the remaining funds were raised, the shares held by GMI in the mortgage were usually transferred to the new investors. This process involved GFG instructing its solicitors to prepare transfer documents, which were then circulated amongst the relevant investors for execution.

23 GFG managed all matters relating to the project loans on behalf of both investors and borrowers. Pursuant to, inter alia, the Proposal Letter, GFG agreed to act as the agent of the investors to "administer" all matters relating to the mortgage. GFG undertook that it would attend to the following matters on behalf of investors:

• supervision of drawdown of funds by the borrower;

• enforcement of mortgagees' rights against the borrower in the event of default;

• attendance at settlement and remittance of capital to investors on completion of loans.

24 Shortly after the appointment of Messrs Herbert and Read as voluntary administrators, the majority of investors with moneys in the GFG trust account at that date decided they did not wish the administrators to continue to provide the services hitherto provided by GFG as agent and formally terminated the agency arrangements.

25 GFG also provided services to borrowers. As the majority of the projects involved the raising of funds to cover interest payments to investors for the term of the loan, GFG attended to remitting monthly payments to investors on behalf of the borrowers by drawing against the funds in a project account ledger. At times when an investor wished to redeem funds during the term of the loan, GFG would attract a replacement investor and pay out the redeeming investor, often without the borrower being aware that investors were being changed.

26 As the expiry date of the loan term approached, GFG would determine from the borrower whether the loan was being finalised or extended. If the borrower requested an extension, a new interest rate would be negotiated and GFG would write to the investors in that project and offer an extension at the new rate. Any investors who wished to redeem their funds would be replaced by new investors attracted by GFG. GFG arranged all necessary documentation on the borrower's behalf.

27 When a borrower advised that a security property had been sold and it wished to finalise the loan, GFG would arrange the necessary discharge of the mortgage documents and forward these to investors for execution. Once the documents were in order, GFG would liaise with the borrower's settlement agent to arrange settlement and collect the sale proceeds necessary to pay out the investor's principal and interest, plus fees and costs due to GFG.

28 Funds received by GFG from investors and borrowers were receipted and deposited into a single trust account operated by GFG at the ANZ Bank, Mt Lawley Branch. The trust account was a cheque (current) account.

29 GFG maintained a trust ledger comprised of manually prepared ledger cards falling into three categories, being:

3. GFG Accounts (these generally recorded fees charged to investors and borrowers for services provided).

30 Funds received by GFG from investors were receipted and deposited into GFG's single trust account. The receipts indicated whether the funds were to be credited to a Money Market Account or a particular investment proposal referred to as a "project". Payments made by GFG in respect of projects were drawn ostensibly against the funds held in the trust account in respect of the particular project.

31 Generally, a separate ledger card or account was created for each new project, although occasionally multiple projects were consolidated into one ledger account.

32 All trust entries were recorded in the trust ledger accounts. Entries were posted from duplicate receipts (used to record receipt of all funds by GFG), chequebook butts and the journal register. Journal entries were raised by GFG from time to time to transfer balances from one ledger account to another.

33 All trust entries were recorded by Mrs June Margaria. Trust entries were often batched in bundles of several days' credits being posted first, followed by several days' debits and sometimes vice versa. The only time when all postings were up-to-date was at month end when trial balances were extracted and reconciled to the bank statement. Accordingly, it is difficult to establish the balance of a Project Account on any given day during a month without reconstructing the ledger for that month by re-entering all individual transactions in date order. The cost of that process is said by Mr Herbert to be prohibitive.

34 The balances on all trust ledger accounts were extracted by GFG at the end of each month and listed on a trial balance and the total of all balances reconciled with the trust account balance in the bank statement.

35 Mr Herbert deposes to the fact that the trust ledger accurately records the transactions which occurred including:

• the allocation of funds received to specific projects;

• the payment of moneys from Project Accounts to or on behalf of the relevant borrowers;

• the deduction from trust account balances of fees payable to GFG and the resulting transfer of balances to GFG Credit Accounts.

36 In addition, Mr Herbert found a number of transactions which he did not expect and which were not authorised by the investors. They included:

(i) the unauthorised transfer of balances between Project Accounts in the name of the same borrower or an entity controlled by that borrower (referred to as "borrower groups");

(ii) the payment of moneys from the trust account on behalf of borrowers in cases where there were insufficient funds in the Project Accounts to cover the payments and, hence the creation of overdrawn Project Account balances;

(iii) the drawing of fees by GFG in excess of the amounts it agreed it would draw.

37 Moneys received by GFG from investors in contemplation of future investment opportunities were deposited into the trust account and a ledger styled "Money Market Account" was created. Further, GFG receipts indicated whether funds were to be credited to a Money Market Account or a Project Account. In addition, moneys retained by GFG after a borrower's loan was repaid was included in a Money Market Account.

38 Identification of investors' moneys in this category is established from the Money Market Account ledger which correctly records receipt of funds, payment of funds to or on behalf of investors and the transfer of balances between individual Money Market Accounts and Project Accounts by way of journal entries.

39 Mr Herbert and his staff found no evidence of any material errors in relation to the transactions recorded in these accounts or unauthorised transfers of balances between individual Money Market Accounts or between Money Market Accounts and Project Accounts.

40 The mixing which is found to be commonplace between Project Accounts in borrower groups (discussed below) did not affect the Money Market Accounts.

41 Once loan approval was given and settlement occurred, a Project Account was opened in the ledger in the name of the borrower for the particular project.

42 From GFG's records, in particular its scoreboard sheets, receipts and Proposal Letters it can be clearly identified which projects were offered to, and accepted by individual investors, and which project individual investor's funds were credited to. However, the matter is complicated by the transfer, by journal entry, of balances from one Project Account in a particular borrower group to other Project Accounts in that group which, according to Mr Herbert's evidence but was done without the knowledge and consent of the investors. The journal entries started around mid-1995.

43 From the commencement of GFG's operations in July 1994 Mr Margaria had close relationships with a number of borrowers and raised numerous loans for them and companies controlled by them. They included Mr Dominic Casella and Mr Narbil Sadek. The Casella group was the largest of the borrower groups. As at 19 February 1999, 92 Project Accounts involving the Casella group were current and the funds in the relevant Project Accounts totalled approximately $455,000.

44 The Sadek Group comprised Westbid Pty Ltd, Kentucky Nominees Pty Ltd, Newrose Holdings Pty Ltd and Capri Developments Pty Ltd. Two Project Accounts in this group had credit balances totalling $122,000 and one account was overdrawn by $27,000. The remaining four accounts had a nil balance.

45 Although unauthorised transfers of balances between projects in borrower groups were frequent, Mr Herbert found no instances of the transfer of balances between Project Accounts in different borrower groups or between a Project Account and a Money Market Account.

46 Occasionally, multiple Project Accounts of a borrower were consolidated into one ledger account. Whilst consolidation of Projects generally occurred with properties at the same location, there were occasions where properties in totally different locations were consolidated.

47 Mr Herbert divides the Project Accounts into Category A and Category B. Category B Project Accounts relate to borrower groups in which the unauthorised transfer of balances between Project Accounts commonly occurred (Ex 4, Annex JLH1, par 58-59, par 175). Included within Category B are Project Accounts which have not received unauthorised transfers but from which unauthorised transfers have been made. In the Category A Project Accounts there has been no mixing (transfers in or out) of funds from other projects. In addition to the Casella and Sadek groups, the other Category B borrower groups are:

- Hillsfield group (this group is exceptional in that there is only one trust account ledger comprised of multiple loans and mortgages).

48 The unauthorised transfers between Project Accounts in borrower groups usually occurred when a borrower had credit funds in one project and needed funds in another project in circumstances generally where funds were required in the transferee account to:

(c ) repay principal to mortgagees in cases where sales proceeds were inadequate.

49 An example of the process is in Project 1238 in which the borrower is Selec Pty Ltd, a member of the Casella group. The project involved the development and sub-division of residential lots at Wattle Grove. The development was to be completed in two stages with proceeds from stage one sales to assist with the costs of developing stage two. As at September 2000, stage one was incomplete and a further $500,000 was required to complete it. The Project Account for Project 1238 was in evidence. It shows what is common to all Project Accounts which is that all funds in the Project Accounts are mixed. That is, there is no appropriations by GFG within the Project Accounts. The Project Account is summarised as follows:

Transfers to 7 other Casella Project Accounts (852)

Transfers from 2 other Casella Project Accounts 300

50 This summary highlights that only $3.105M was raised in lieu of the mortgage value of $3.3M, leaving a deficit of $195,000. Outward transfers of $852,000 exceeded inward transfers of $300,000 leaving a deficit of $552,000.

51 Of the total interest paid to investors of approximately $445,000, only approximately $17,000 came from the borrower. The remaining $428,000 was paid out of the investors' own funds.

52 Further, in the large borrower groups there were unauthorised payments to third parties not associated with any project or directly to the borrower for purposes not associated with a project.

53 There is evidence, which I accept, that GFG acted with the knowledge of a number of Group B borrowers (in particular Casella, Sadek, King and Johnson) in using the trust funds for unauthorised purposes: Ex 4, Annex JLH 2, p354, p355-358, p 364, p 386 and p 387.

54 A common occurrence in both categories of Project Accounts was the payment from the trust account of all fees and expenses payable by the borrower, such as the costs associated with the purchase of the security property and the mortgage. It is said these payments were not made with the knowledge or consent of the investors.

55 The trust account as a whole was never overdrawn. However Mr Margaria allowed certain Project Accounts to go into debit, generally in circumstances where:

(ii) there were insufficient funds to repay investors' loans at completion;

(iii) payments were made before all investment funds were received.

56 Mr Margaria allowed cheques to be drawn against the trust account and debited the payments to the Project Accounts when, in fact, the credit balances in those accounts were insufficient to cover the payments made.

57 As at 19 February 1999, 26 accounts were overdrawn totalling $206,675.66. Of the 26 accounts:

- 19 accounts were overdrawn as a result of interest payments being made to investors when insufficient funds were held in the trust account to the credit of the relevant Project Account;

- three accounts became overdrawn due to minor registration costs being paid from the relevant Project Account;

- one account became overdrawn as a result of the project not proceeding after investor funds were raised. After investor funds had been deposited to the Project Account ledger, the investors were paid interest from their own funds. Four months later, the borrower withdrew from the project which at that stage had still not commenced. The investors were repaid their full principal, leaving the Project Account overdrawn by the amount of the interest paid;

- the remaining three accounts became overdrawn as a result of the investors being repaid in full when the proceeds from the sale of the mortgaged property were insufficient to repay the mortgage.

58 Since 19 February 1999 Mr Herbert has pursued the borrowers for repayment of the overdrawn balances and has collected 12 overdrawn accounts totalling $30,354.85. Mr Herbert estimates that a further $40,000 may be collectable from the remaining overdrawn accounts.

59 Mr Margaria's explanation for allowing overdrawn accounts was that they were always "covered" by amounts owing to GFG in the trust account from the total of GFG Credit Accounts. Each month a trial balance was drawn up. A calculation of the total of the overdrawn Project Accounts less the total of GFG Credit Accounts was recorded on each monthly trial balance. This supports Mr Margaria's claim that overdrawn balances were permitted by him because, at least at each month end, they were covered by GFG Credit Account balances.

60 Mr Margaria's intentions are also confirmed in a letter from him to GFG's auditors in September 1996. He confirms that the overdrawn accounts are covered by GFG's funds in its Credit Accounts and suggests the use of this system was acceptable to the Board.

61 As at 19 February 1999 the total of the balances of the GFG Credit Accounts exceeded the total overdrawn balances of the Project Accounts.

62 Mr Herbert extracted from the trial balances as at each month end from 30 June 1996 the total of overdrawn account balances and the total GFG Credit Account balances (less any debit GFG balances) and compared the two. That analysis indicates that the total of GFG Credit Accounts always exceeded the overdrawn balances at the end of each month. However, on occasions the excess was engineered by means of a journal entry transferring funds from a Project Account in credit to an overdrawn account, the journal entry being reversed after the month end.

63 However, on dates between month ends, overdrawn Project Accounts exceeded total GFG Credit Accounts sometimes by significant margins. In the majority of cases, the deficit was the result of project payments being made before funds from investors who had committed funds to the project were received in full. Such deficits were extinguished by the subsequent receipt of investment funds.

64 It was suggested by the solicitors for a number of investors that a comparison of overdrawn balances and GFG Credit Accounts should be carried out on all days between month ends to ascertain whether on any day the former exceeded the latter. However, GFG prepared trial balances on a monthly but not daily basis. As GFG's trust account ledger was manual, a daily comparison of GFG Credit Account balances with total overdrawn balances could not be prepared automatically and would entail the calculation over nearly five years of all the daily sum of all GFG Credit Accounts and the daily sum of all Overdrawn Accounts. That exercise would take several weeks and possibly months and in Mr Herbert's opinion would not be feasible. I agree.

65 However, Mr Herbert carried out an analysis using an estimate of daily overdrawn balances. First he calculated the sum of all GFG Credit Accounts on a daily basis. To overcome the problem occasioned by the fact that entries were recorded on ledger cards out of date sequence as a result of the posting of entries in batches (which does not affect end of month figures) he calculated daily balances for Project Accounts with debit balances greater than $10,000 and for the period from 4 April 1996 he estimated the sum of small overdrawn balances (being an overdrawn balance of less than $10,000). For the period prior to 4 April 1996 Mr Herbert calculated the actual balances for small overdrawn balances. On the assumption that it would be unlikely that the total of small overdrawn balances would exceed $50,000 on any particular day, he allowed $50,000 as a provision for small overdrawn balances from 4 April 1996. In this way Mr Herbert calculated the daily GFG Credit Balances and the daily overdrawn Project Account balances, (the latter being the sum of actual large overdrawn balances and a provision of $50,000 for small overdrawn balances save for prior to 4 April 1996 when actual overdrawn balances were used rather than a provision).

66 This analysis identified nine periods in which the total daily overdrawn balances exceeded GFG Credit Balances. The periods were:

67 The reasons for the nine periods where overdrawn Project Account balances exceeded GFG Credit Balances are:

• settlement completed prior to receipt of full loans from investors - 7

• investors being repaid the full amount of their investment when sale proceeds from the secured property were insufficient - 1

• interest payments made to investors and borrowers cheque subsequently dishonoured - 1

68 The overdrawn Project Account balances were cleared by:

• receipt of investor funds which were committed prior to settlement - 4

• transfer of balances owed to the borrower by journal entry from other projects - 1

• partly from sales proceeds/partly from receipt of subsequent investor funds - 1

69 In all cases, funds were received into the particular projects within a relatively short period of time either from further investors' funds, from the borrower's own resources, from sales proceeds or by a transfer of balances. The receipts totally cleared the overdrawn Project Account balances and reinstated and restored the trust ledger accounts in full.

70 GFG charged investors collection fees for its services. They were charged by deducting a fee from the investors' monthly interest payments. This was accounted for by debiting the gross payment to the relevant Project Account and crediting the amount deducted (the fee) to the GFG Credit Account titled "Collection Fee".

71 The fees charged to borrowers are outlined above. Fees charged by GFG to both investors and borrowers were raised by way of journal entries whereby the charges were debited to the relevant Project Account and credited to the relevant GFG credit account.

72 In addition to GFG Credit Accounts there were GFG Debit Accounts. The Debit Account was styled "Series Bad Debts Account" into which Mr Margaria transferred the debit balances of some overdrawn Project Accounts by way of journal entry when he was of the opinion they were no longer collectable. Mr Margaria advised Mr Herbert that his intention in doing this was that GFG would assume the loss incurred by deducting the resulting debit balance from credit balances on GFG Credit Accounts.

73 As at 19 February 1999 the total of GFG Credit Accounts amounted to $283,506.28. The balances represented, at any time, GFG's ostensible entitlement to undrawn fees, which it retained in the trust account. GFG Credit Accounts comprised a number of separate ledger accounts including "Late Payment Penalties" (as at 19 February 1999 it was in the sum of $6,460.65) and "Money Market Interest" (as at 19 February 1999 it was in the sum of $15,319.76).

74 In relation to late payment penalties, from time to time borrowers were unable to remit interest as and when it was due. Instead of notifying investors that a default had occurred, GFG generally transferred balances from its GFG Credit Accounts into the relevant Project Account to enable the payment of interest to the investors to be made on the due date. When borrowers failed to remit the payment of interest by the due date the borrower would be charged a late payment penalty pursuant to the mortgage. When the payment was eventually made by the borrower, GFG would reverse the transfer to its GFG Credit Account, and credit the late payment penalty received from the borrower to the GFG Late Payment Penalty Account. In some instances when borrowers failed to remit interest payment on the due dates, GFG paid the interest due to the investors without transferring balances from its GFG Credit Account to cover the payments made and thus allowed the Project Account to become overdrawn until payment was received from the borrower. Although in such cases GFG had not provided a short term loan, it still transferred the late payment penalty from the Project Account into its Late Payment Penalty Account. The rationale for doing so was that the GFG Credit Accounts "covered" the overdrawn balance arising when the interest concerned was paid.

75 As to the Money Market Interest ledger, GFG generally had in excess of $1M deposited in its trust account. In order to maximise interest on the amounts deposited, GFG invested trust funds in various cash management accounts and term deposits ("Cash Investments").

76 Some of the interest earned on the Cash Investments was paid to investors with funds in the Money Market Account. The rate paid to investors was equivalent to the advertised ANZ Bank $50,000 - $100,000 cash management rate, which was below the actual rate GFG was receiving, given that the amounts invested were considerably larger than $100,000.

77 Prior to 1996, no formal consent was received from investors for the retention by GFG of the surplus interest earned on the Cash Investments. From September 1996, GFG obtained authorities from investors that acknowledged that GFG could retain the additional interest. The authority is in the following terms:

"I/We hereby acknowledge that any funds held by Global Finance Group Pty Ltd on our behalf pending placement into investment will be paid interest at the current ANZ Indicator money market rates of interest as declared from time to time for amounts of $50,000 to $99,000. I/We also consent to any surplus interest received above this rate by Global Finance Group Pty Ltd as a result of incentives provided to it by the Bank for bulk investments will be retained by Global Finance Group Pty Ltd to cover government charges and administration costs on investing these funds."

78 Borrowers were also paid interest for credit funds held in the Project Accounts. The rate paid to borrowers was generally one per cent less than the rate paid to investors. No formal consent was received from borrowers prior to 1996 for the retention of surplus interest by GFG. Sometime in 1996, the statement of costs indicated that GFG would retain the surplus interest. Since 1996 there were at least three variations to the clause. Two examples are in the following terms:

"Funds held on your behalf by Global Investments will be paid interest at the current money market rate of 5 per cent. Any surplus interest received by Global from its Bank as incentives for bulk investments will be retained to cover administration/government charges on these funds."

"Funds held on your behalf by Global Finance will be paid interest at the current money market rate of 3.5 per cent variable, indexed to movements in official cash rates. Any surplus interest received by Global from its Bank as incentives for bulk investments will be retained to cover administration/government charges on these funds."

79 Further, it was GFG's policy to charge brokerage fees at the commencement of a loan regardless of whether all funds were raised at the time. As at 19 February 1999 there was six Project Accounts in which brokerage fees had been charged to Project Accounts on the basis of the total amount of the loan when in fact the full amount of the loan had not been raised.

80 As at 19 February 1999 GMI was registered as mortgagee on certificates of title relating to 21 projects. GMI did not advance any of the funds loaned to borrowers. It is not in dispute that GMI held the mortgages as trustee.

81 There are basically three different scenarios in which GMI was registered as mortgagee. They were when:

(i) not all loan proceeds were required immediately and a mortgage for the full amount of the proposed loan was prepared as soon as sufficient funds were raised to fund the settlement. In such cases, the investors who had accepted the project were documented as mortgagees, with GMI holding shares representing the unfunded portion of the loan. Once the remaining funds were raised, the shares held by GMI in the mortgage were usually transferred to the new investors;

(ii) a new loan settlement was urgent and mortgage documents in favour of GMI were prepared simultaneously with Proposal Letters being sent to prospective investors. Once funds were received, settlement was effected and the GMI mortgage was registered. Subsequently, the shares in the mortgage held by GMI were transferred to the investors;

(iii) a loan was raised for a project where the relevant property was due to be strata titled or subdivided in the near future and new individual certificates of title were to be issued by the Land Titles Office. In these cases, a mortgage in favour of GMI was registered at the commencement of the loan. When the new titles were issued, the GMI mortgage was discharged simultaneously with the registration of individual mortgages in favour of the investors over the lots or units they had accepted, and had been allocated to them.

82 In all cases in which GMI is registered as mortgagee, it is possible to determine from the trust ledger cards the investors for whom the mortgage interests were intended to be held. In ten cases where GMI is registered as mortgagee, transfers of shares from GMI to the relevant investors had been prepared by GFG and were being circulated amongst the investors for execution at the date of Mr Herbert's appointment. In four cases the preparation of transfers from GMI to the relevant investors was not completed, apparently in error. In the remaining three cases, funds were not raised to fulfil the GMI portion therefore transfers are not appropriate.

(viii) Trust Account Balance as at Appointment of Voluntary Administrators

83 As stated earlier, the total GFG trust account balance as at 19 February 1999 was $1,598,961. Cheques issued but not presented amounting to $218,358 were cancelled after the appointment of the voluntary administrators. However, despite the unpresented cheques being cancelled, GFG's bankers continued to honour unpresented cheques after the date of the appointment.

84 In addition to funds in the GFG trust account represented by the balances in the GFG credit accounts the following amounts were recorded in the books of GFG as at 19 February 1999:

85 Based on proofs of debt submitted in the liquidation the non-trust claimants' claims total $528,031.24. Of that sum $475,100 is for the liquidator's fees and costs.

1. Whether the first or second applicants as the case may be are justified in treating the trust account records maintained by GFG and GMI as correctly recording the intention of GFG and GMI as trustees, on the basis that a presumption of regularity applies?

2. The effect (if any) at law and in equity:

(b) on the rights enjoyed by claimants on the trust account;

(d) on claimants to interests in mortgages held by GMI,

of the fact that at times an individual ledger account within the trust account became overdrawn.

3. Whether the first or second applicants as the case may be are justified in distributing the trust funds of which GFG is the trustee on the following basis:

(a) That the trust account maintained by GFG and the assets held by GMI are a single mixed fund to be apportioned amongst all claimants on the trust account in proportion to their claims on the trust ("the First Alternative"); or

(b) That the balances recorded in the trust account maintained by GFG be distributed according to the balances as recorded, and the interests held by GMI in any mortgage be transferred to those claimants whose names are recorded in GFG's books as having paid money to GFG for the purpose of being advanced to the mortgagor, on first mortgage security ("the Second Alternative"); or

(c) (i) The balance of money held for money market investors, as identified by GFG's ledger cards be returned to the money market investors in full, subject to a pro rata reduction for the first and second named first applicants' fees and costs, if required.

(ii) The credit balances of Project Accounts within Category A identified in the Schedule hereto be distributed to the relevant investors in cases where loans are in default or, otherwise, to the borrowers, subject to pro rata reduction for the first and second named first applicants' fees and costs, if required, and a pro rata reduction for the deficiency of the Project Accounts Overdrawn, if any.

(iii) The credit balances of Project Accounts within Category B identified in the Schedule hereto be grouped together to form pools of funds for each individual borrower group, and total funds held for each borrower group be distributed on a pro rata basis to the investors in each borrower group subject to a pro rata reduction for the first and second named first applicants' fees and costs, if required, and a pro rata reduction for the deficiency of the Project Accounts Overdrawn, if any, in accordance with the following formula:

Y = the total of all individual investors' claims against each individual borrower group.

The individual investor's claim, represented by "X" in the above formula, is calculated as follows:

I = Principal amount invested by the individual investor, less any partial return of principal, where applicable.

i1 = Sum of interest due from the date of investment to 19 February 1999, less the sum of interest paid to the investor, regardless of the source of payment.

P = The investor's pro rata share (based on the proportion of funds raised for a particular project) of the total legitimate payments made in respect of the subject property from funds applied/sourced from any Category B Project Account.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (579 paragraphs)

(viii) Trust Account Balance as at Appointment of Voluntary Administrators

(ii) The Claimants and the Basis of the Claims

(iii) The Ledger Records as a Potential for the Basis for Distribution

(iii) Project 1378 - Newrose Holdings Pty Ltd

Legislation Cited (4)

Cases Cited (21)