MATTER : Section 89 and 92 of the Trustees Act

OAKLEIGH ACQUISITIONS PTY LTD (IN LIQ) ACN 008 879 454

ROWENA NOMINEES PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQ) (SUPERVISOR APPOINTED) ACN 008 818 273

MARK ANTHONY CONLAN (AS LIQUIDATOR OF OAKLEIGH ACQUISITIONS PTY LTD)

MARK ANTHONY CONLAN (AS SUPERVISOR OF ROWENA NOMINEES PTY LTD)

MARK ANTHONY CONLAN (AS LIQUIDATOR OF ROWENA NOMINEES PTY LTD (IN LIQ))

Second Respondents : Mr D H Solomon & Mr B R Gannon

Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588

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

Barlow Clowes International Ltd (in liq) v Vaughan [1991] EWCA Civ 11; [1992] 4 All ER 22

Bishopsgate Investment Management (in liq) Ltd v Homan [1995] Ch 211

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

Boscawen v Bajwa [1995] EWCA Civ 15; [1996] 1 WLR 328

Foskett v McKeown [1998] Ch 265

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd [1988] FCA 202; (1988) 81 ALR 397

In re Diplock; Diplock v Wintle [1948] 1 Ch 465

Mann v Hulme [1961] HCA 45; (1961) 106 CLR 136

North American Land & Timber Company Ltd v Watkins [1904] 1 Ch 242

Re Eastern Capital Futures Ltd (in liq) [1989] BCLC 371

Re Goldcorp Exchange Ltd; Kensington v Liggett [1994] UKPC 3; [1995] 1 AC 74

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107

1 PULLIN J: This hearing concerns the trial of a preliminary issue ordered to be heard by Owen J. In short, the second respondents seeks an order that will result in Mark Anthony Conlan, the supervisor and liquidator of Rowena Nominees Pty Ltd, paying to the second respondents $655,000 held by Mr Conlan in a bank account. How this money came into the bank account is explained below.

2 In 1997, Hoylevans Pty Ltd ("Hoylevans") wished to borrow $655,000 to assist it in purchasing the Whitfords Tavern. Hoylevans asked Rowena Pty Ltd, trading as Graham Grubb Finance Broker ("GGFB"), to find a person wishing to lend that sum to it. GGFB found the second respondents ("HEK"), who were willing to advance the money if they received security.

3 On 3 July 1997, HEK paid to GGFB a cheque for $920,000.00. This was in order to provide GGFB with funds to allow it to advance moneys on HEK's behalf to Hoylevans in respect of the Whitfords Tavern transaction. This cheque was paid into GGFB's trust account at St George's Bank ("GGFB Account") along with other moneys, making a total deposit on 3 July 1997 of $1,205,000.00. Immediately before payment into the GGFB Account, it was overdrawn in the amount of $70,005.22. Immediately after the deposit of the $1,205,000.00, the GGFB Account showed a credit balance of $1,134,994.78.

4 Between this time on 3 July 1997 until 13 August 1997, various transactions occurred by way of debit or credit, each affecting the balance of the GGFB Account.

5 Three investors, in particular, deposited funds into the GGFB Account in this period. They were:

6 These persons expected that these moneys would be advanced to borrowers (but not Hoylevans) on security of registered mortgages over property (but not the Whitfords Tavern). No mortgage security was ever arranged for them by GGFB.

7 On 11 July 1997, Hoylevans and HEK executed a deed of company charge ("HEK Charge"), whereby Hoylevans covenanted to repay to HEK on demand, the money secured under the deed. The money secured was $655,000. The HEK Charge provided that no demand would be made before the repayment date, defined as 1 July 2000, if no event of default occurred.

8 The HEK Charge also contained a covenant whereby Hoylevans granted a fixed and floating charge over its property as security for repayment. The HEK Charge was never registered under the Corporations Law, but this does not affect the validity of the HEK Charge because Hoylevans has not gone into liquidation. The HEK Charge was therefore enforceable at law.

9 On 13 August 1997, settlement of the Whitfords Tavern took place and on that day GGFB drew a bank cheque in the sum of $854,701.58 payable to Hoylevans. This resulted in the GGFB Account being overdrawn in the sum of $637,079.25.

10 Between 3 July 1997 and 13 August 1997, the GGFB Account was always in credit but the balance fluctuated. The lowest intermediate credit balance was less than $150,000.

11 On 31 August 1999, Hoylevans was in default under the HEK Charge because stamp duty had not been paid, because the HEK Charge had not been registered as a charge under the Corporations Law as required in the HEK Charge, and because due interest had not been paid. As a result, on 31 August 1999 a notice of demand was served by HEK on Hoylevans.

12 Pursuant to the demand, the amount of $655,000 was paid by Hoylevans on 18 September 2000. However, it was not paid to HEK. Instead, the money was paid into a trust account of RSM Bird Cameron and given the title "Mark Anthony Conlan as Supervisor of GGFB as Trustee for F4885" ("Bird Cameron Trust Account"), the trust account used by Mark Anthony Conlan ("Conlan") in his capacity as supervisor of Rowena Pty Ltd (in liquidation) ("Rowena").

13 To understand why this happened, it is necessary to say something about some other events and circumstances. Speaking generally, GGFB did not maintain records as required by the Finance Brokers Control Act ("FBC Act"), and as result of that failure, and the misapplication of investors funds amounting to breaches of trust, Rowena collapsed in 1999. Conlan was appointed as supervisor under the FBC Act, and later as liquidator. The winding up of the company is a complicated one because many investors and borrowers had transacted business with GGFB. In order to gain control of events after the collapse of Rowena, Conlan commenced these proceedings by an originating summons dated 29 September 1999. In it he sought various declarations and orders, including a declaration that any borrower who had obtained a loan from any investor through GGFB might repay the loan by payment to Conlan in his capacity as supervisor, and that receipt by Conlan should be a valid receipt.

14 On 30 September 1999, Murray J granted an interlocutory injunction and made interlocutory orders, including an interlocutory declaration in the terms which I have referred to above. On 15 October 1999, Parker J granted an injunction, which is not relevant for present purposes.

15 On 15 June 2000, Owen J set aside the orders and declarations made by Murray J and Parker J. On the hearing before me, the parties made submissions which assumed that Conlan received the $655,000 pursuant to the provisions of one of the orders made by the Court and referred to above. A close examination of those orders makes it clear, however, that there is no court order authorising Conlan to now hold the moneys, and when the money was paid to Conlan there was no such order.

16 On 15 June 2000, Owen J made orders for the trial of preliminary issues in terms that:

"The following issues ('the Issues') be determined on an expedited basis ... namely:

1.1 the mortgages or charges listed in the schedule ('the Mortgages')?

1.2 the money secured by the Mortgages?

1.3 where any of the Mortgages have been discharged and the proceeds held pending determination of entitlement to the proceeds, those proceeds?"

17 I assume that orders 1.2 and 1.3 should be read as though the words "and charges" appear after the word "Mortgages". A mortgage by Hardie Developments Pty Ltd was one of the mortgages listed, and one of the charges listed was the HEK Charge.

18 On 12 September 2000, Owen J made further orders directing the determination of different preliminary issues from those referred to in his order of 15 June 2000. All of these new preliminary issues related to mortgages, to the mortgage of Hardie Developments Pty Ltd in particular, and to agency issues. I will call that order the Hardie Developments order.

19 I now refer to the correspondence which passed between Conlan and HEK's solicitors. On 30 September 1999, Conlan wrote to Jackson McDonald, the solicitors for HEK, referring to the fact that settlement under the HEK Charge was to occur on 1 October 1999. The last two paragraphs of the letter read:

"In terms of Court Orders issued by Justice Murray on 30 September 99 I am agreeable to settlement proceeding on 1 October 99 on the basis the settlement proceeds are lodged in a Trust Account under my control pending further instruction from the Supreme Court. For your information I enclose a draft copy of the Court Order and will forward a sealed copy as soon as they are available.

Please advise time and location of Settlement. ..."

20 The reference to the orders of Murray J was a correct reference, because at that time the orders of Murray J were on foot.

21 On 4 October 1999, Jackson McDonald wrote to Conlan's firm, Bird Cameron and Partners, asking for confirmation of the terms of the order made by Murray J on 30 September 1999 and enquiring whether Rowena had asserted that it had a legal entitlement to receive the $655,000 which Hoylevans was liable to pay to HEK and, if so, the precise legal basis for that claim.

22 On 15 June 2000, Owen J made his orders setting aside the Murray J orders, and on the same day he directed the hearing of the preliminary issues referred to above.

23 The next correspondence in the series was a letter, over a year later, dated 1 August 2000 from Conlan to Jackson McDonald, reading:

"I have received advice from the borrowers that National Australia Bank have approved finance to repay the above folio and that settlement is anticipated for 15th August 2000.

The loans to Hoylevans Pty Ltd are one of the four 'test cases' to be heard by Justice Owen.

As previously advised your client's security by way of a Company Charge was not registered.

...

I am agreeable to settlement proceeding on the basis that funds equal to the amount of your client's interest, received at settlement, being placed in a Trust Account under my control pending further directions from the Supreme Court.

..."

24 I do not know what the reference to "test cases" means.

25 Jackson McDonald responded by letter dated 2 August 2000 and stating inter alia that:

"Subject to specific instructions from our client, we do not have any difficulty, in principle, with the settlement proceeds being placed in a trust account under your control subject to your undertaking that the funds will not be disbursed otherwise than with the consent of our client, or pursuant to directions from the Supreme Court. However, given the commingling of the money, it would seem appropriate that the whole of the settlement proceeds (including sums due to other investors who were granted registered mortgages over land) be held in trust pending a resolution of the issues."

26 By letter dated 17 August 2000, Conlan wrote to Jackson McDonald, in the course of which the following paragraph appeared:

"Following settlement for the repayment of Hoylevans Pty Ltd various loans, all funds received at settlement will be placed in a properly maintained Trust Account under my control pending the outcome of an Application to the Supreme Court for further directions in this matter. Funds will only be disbursed from the Trust Account in accordance with those directions."

27 By letter dated 18 September 2000, Conlan wrote to Jackson McDonald advising that he had collected the settlement proceeds on that day and that the moneys had been placed into the Bird Cameron Trust Account. He said that this was "pending directions from the Supreme Court following the upcoming hearing in relation to the loans in the name of Hoylevans Pty Ltd". I do not know why this was said because by then the Hardie Developments order had been made and it did not contemplate any immediate resolution of the Hoylevans matter. Perhaps something else occurred which promised an early determination of the Hoylevans matter. The parties before me seem to have assumed that was so.

28 Owen J dealt with the questions posed in the Hardie Developments order in his decision Conlan v Registrar of Titles [2001] WASC 201; (2001) 24 WAR 299, which was handed down on 3 August 2001. His Honour found that the holder of a registered TLA mortgage was entitled to payment of the moneys secured under that mortgage. The contest in that case was between the registered mortgagee, who claimed entitlement to the moneys, and investors who had paid money to GGFB on the promise that moneys would be held on trust and paid over only in return for security. In breach of trust, GGFB paid over moneys of the latter investors without obtaining any security document.

29 The preliminary issue in relation to the HEK Charge ordered to be dealt with in the order of 15 June 2000 remained to be disposed of. Owen J, who by then had a good understanding of all the issues which were involved, was then appointed to conduct a Royal Commission, and after several directions hearings before other Judges, this matter was referred to me late in 2002. I am now dealing with preliminary issue 1.3 ordered to be heard in Owen J's order of 15 June 2000 in relation to the HEK Charge, namely "who is beneficially entitled to the proceeds of the [HEK Charge]".

30 The money which is now held by Conlan in the Bird Cameron Trust Account is claimed by HEK, and it asks this Court to answer the question which has to be dealt with as a preliminary issue, by declaring that HEK is beneficially entitled to the money.

31 Conlan has not released the money to HEK because he is concerned that there might (and I emphasise "might") be a claim by one or other of Finley, Bowron and Owens to those moneys. It was made clear to me by counsel representing Conlan that Conlan does not claim to represent the interests of Finley, Bowron and Owens. Conlan says that he has notified them of the existence of these proceedings. Conlan is concerned that they may claim that they can trace their moneys from the GGFB Account into the transaction between HEK and Hoylevans, and thence, after repayment by Hoylevans, into the moneys in the Bird Cameron Trust Account. As a result, Conlan has refused to release the moneys.

32 (I should pause to clarify one point. A bank account is not a fund of money belonging to those who deposit moneys, as explained by Lord Millett in Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102. However, it is convenient, if Finley, Bowron and Owens did seek to trace from the GGFB Account into the money now held by Conlan, to refer to the process of tracing as commencing with "money" in the bank account: Re Global Finance Group Pty Ltd [2002] WASC 63.)

33 HEK's claim can be explained in very simple terms. It had the benefit of the covenant in the HEK Charge, whereby Hoylevans promised to pay HEK $655,000 in the circumstances set out in the HEK Charge. Those circumstances arose. HEK therefore had a right, pursuant to the covenant, to demand and obtain payment from Hoylevans. In the absence of any valid reason for not doing so, Conlan should pay over the $655,000 held in the Bird Cameron Trust Account to HEK.

34 Conlan concedes that the charge is valid. In the initial stages of the dispute, Conlan argued that HEK was not beneficially entitled to the moneys in dispute because HEK could not trace its funds, or the value of its funds, from the GGFB Account to the moneys repaid by Hoylevans, and that it was necessary to do so before HEK could establish a right to the moneys in dispute. Conlan does not now advance that argument. It is as well that Conlan no longer advances that argument because it has no merit at all. HEK is not bringing a proprietary claim for the money it paid to GGFB and then tracing through to the fund now held by Conlan. As I have already stated, HEK simply demanded that Hoylevans perform the promise in the covenant, and Hoylevans complied with the demand. The money Conlan holds is the money paid in response to the demand.

35 As I have already noted, Conlan says that he is concerned that perhaps Finley, Bowron and Owens might have a claim to trace the value of the money they paid into the GGFB Account, into the money which was withdrawn by GGFB and paid to Hoylevans, and then into the money paid by Hoylevans and now held by Conlan.

36 If there were indeed rival claimants for the money held by Conlan, then he could interplead. However, he has not done so because neither Finley, Bowron nor Owens have made any claims to the money, although they know that Conlan holds the money. I am therefore somewhat puzzled by the continued existence of these proceedings. If Finley, Bowron and Owens are not claiming the money, then Conlan should have simply paid it over to HEK. It seems, however, that Conlan felt constrained by the fact that Owen J ordered that the question before me be answered as a preliminary issue.

37 Both Conlan and HEK agree that there is no evidence suggesting that either Hoylevans or HEK had any knowledge that GGFB was guilty of a breach of trust in any of its dealings with the GGFB Account at the time the transaction took place.

38 If that is so in fact, then I cannot understand why Conlan might be concerned about a potential claim by Finley, Bowron or Owens to trace moneys paid by them into the GGFB Account, then to Hoylevans, and then into the $655,000 paid by Hoylevans to Conlan and now held in the Bird Cameron Trust Account, because such a claim to those moneys would founder at the point where GGFB paid moneys to Hoylevans. If Hoylevans had no knowledge of any breach of trust by GGFB and if, as seems clear, Hoylevans gave value for the $655,000 received (in the form of the covenant to HEK to pay $655,000 on demand along with a fixed and floating charge over its property), then Hoylevans is a bona fide purchaser for value without notice. A person's right to trace will be lost if property reaches the hands of a bona fide purchaser without notice. If authority is needed, see Re Global (supra) at [120] and Gough and Jones, "The Law of Restitution", 5th ed at 110.

39 However, in the absence of any claim by Finley, Bowron or Owens to the money, it is not necessary for me to finally decide these points and nor is it necessary to join them as parties. The obiter views I have expressed about Hoylevans being a bona fide purchaser also fortify my view about why it is not necessary to join them as parties. The fact that Conlan thinks that Finley, Bowron or Owens might make a claim is not any reason for me to embark on a consideration of the law or the evidence in relation to a claim which has not been made, and which might never be made. There is no justiciable controversy between Finley, Bowron and Owens and HEK for me to decide: Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334. There is, of course, a real controversy between HEK and Conlan, because HEK claims the money and Conlan will not release it.

40 Before I answer the preliminary question, I should say something about the form of these proceedings. This action has resulted in the resolution of a number of issues. However, in my opinion, it is not satisfactory to use these proceedings in future as the vehicle for the resolution of all issues arising out of the collapse of Rowena and Oakleigh.

41 There are now over 450 documents on the court file. The hearing of this matter concerned only HEK and Conlan. As a result, it was necessary to make orders, in effect, removing parties and introducing HEK as a party for the first time. It was necessary for the parties to identify the documents on the file which were relevant to this dispute - there were less than 20. The proceedings are headed with a reference to s 89 and s 92 of the Trustees Act 1962, but those sections and that Act have nothing to do with the resolution of this case. If handled in conventional fashion, HEK would have issued a writ seeking a declaration that the moneys held by Conlan were held on trust for HEK and an order that the moneys be paid over to HEK. The only parties would have been Conlan and HEK.

42 If Finley, Bowron and Owens had made any claim to the money, then they could have been joined as parties and Conlan could have interpleaded and withdrawn. I have explained above why Conlan did not interplead and why no order was made joining Finley, Bowron and Owens.

43 I am not blaming the parties for what has happened because there was probably uncertainty about what to do in the immediate aftermath of the collapse of Rowena and Oakleigh. I do not criticise the efforts made by Conlan to freeze any dealings or transactions which had been instigated by the two companies.

44 However, what I do say is that, in future, if new issues arise, then careful consideration should be given to whether it can be resolved in the context of these proceedings or whether separate proceedings should be commenced.

45 All of this is not to deny that there may be questions still to be decided as a result of Owen J's orders of 15 June 2000 and 12 September 2000. I will have to consider that aspect if I am asked to deal with other issues on this file.

"The second respondents are beneficially entitled to the $655,000 paid by Hoylevans and held by Conlan in the Bird Cameron Trust Account."