Rheem Australia Pty Ltd v McInnes

Claims and issues for determination

1. Rheem seeks judgment against Mr McInnes for the amounts paid out, together with interest. Rheem also alleges that some of the stolen money can be traced into, or was applied to pay off loans over, certain assets which Mr McInnes still owns. Rheem seeks the imposition of an equitable charge on those assets to secure Mr McInnes' liability with respect to the monies in question.
2. Rheem also seeks the imposition of an equitable charge on certain assets of Mr McInnes' wife, Nicole Maree McInnes. Rheem does not allege that Mrs McInnes was involved in, or on notice of, any fraud by Mr McInnes. But Rheem claims that in two respects she received, indirectly and unknowingly, proprietary benefits from that fraud.
3. The first benefit concerns Mr and Mrs McInnes' family home, which is jointly owned by them. Rheem alleges that some of the proceeds of the fraud were used to pay off the mortgage debt on the property and to undertake building works on the house. The total is approximately $540,000. Rheem seeks to have the liability to repay that amount charged on Mrs McInnes' share of the property as well as Mr McInnes'.
4. The second benefit concerns the sum of $405,000 which Mr McInnes paid into a bank account belonging to Mrs McInnes in December 2018. The money came, via a jointly held bank account, from a saving account operated by Mr McInnes. After the proceedings began, the remaining money in Mrs McInnes' account, a sum of about $390,000, was frozen and then paid into court pending the determination of Rheem's claims.
5. Rheem alleges that the monies represent the traceable proceeds of Mr McInnes' fraud. To the extent that it is not successful in this allegation, Rheem seeks to have the gift of the monies to Mrs McInnes reversed on the ground that it was a disposition designed by Mr McInnes to defraud his creditors (Conveyancing Act 1919 (NSW), s 37A).
6. Rheem commenced the proceedings as plaintiff in January 2019. Initially Mr McInnes was the sole defendant. After freezing orders had been obtained, and Rheem had carried out further investigations, Mrs McInnes was joined as the second defendant in March.
7. According to Mrs McInnes, she and Mr McInnes separated in 2007, but continued to live at the same address. Since Rheem commenced these proceedings, Mrs McInnes has foreshadowed obtaining a formal divorce from Mr McInnes. She has not yet done so. But in August 2019, she commenced proceedings in the Family Court of Australia seeking orders for the division of the assets of the marriage under the Family Law Act 1975 (Cth) ("FLA"), s 79. I will refer to these proceedings as the "FLA proceedings".
8. The orders which Mrs McInnes seeks in the FLA proceedings would result in her receiving the whole of the former matrimonial home. These orders are not resisted by Mr McInnes, but their effect would be to deprive Rheem of an asset which would otherwise be available to meet its claims against Mr McInnes. This is because even if Rheem obtains the equitable charges which it seeks, those charges will be insufficient to satisfy the whole of Rheem's claim. In effect, the FLA proceedings are a contest between Rheem's claims and Mrs McInnes' claims to Mr McInnes' assets.
9. In September 2019, Mrs McInnes made an application to the Family Court to have Rheem injuncted from pursuing these proceedings until after the determination of the FLA proceedings. That application was refused in December. The FLA proceedings were later, by consent, transferred to this Court.
10. When the FLA proceedings were transferred, it was intended that these proceedings and the FLA proceedings would be heard together. Both cases were fixed for hearing on this basis. Two days were allocated. But it became apparent on the first day that there would be insufficient time to complete the hearing if it included the FLA claim.
11. In order to make the most efficient use of the time allocated, I decided to deal only with these proceedings and to defer the hearing of the FLA proceedings to some later point after I have given judgment in these proceedings. Should I find in Rheem's favour, questions may arise as to the enforcement of any orders to which Rheem may be entitled. I will deal with any such questions after delivery of judgment in these proceedings. At that point arrangements can also be made for the hearing of the FLA proceedings. It was also agreed that I should deal with the costs of these proceedings after delivering judgment.

Chronology of events

1. Mr and Mrs McInnes married in March 1992. Together they have four sons, who were born in November 1996; May 1999; September 2003; and January 2006.
2. In October 1998, Mr and Mrs McInnes bought the site of what was to become their matrimonial home. The property was at Menai in south western Sydney. At the time, the land was vacant. Mr and Mrs McInnes bought it with the intention of building a house.
3. The purchase price for the land was $234,000. This was funded by a loan from a non-bank lender, known as "Aussie Home Loans". The actual lender was Perpetual Trustees Australia Ltd ("Perpetual"). The amount borrowed (which included an amount for construction costs) was $260,000. Later, according to Mr McInnes, the loan was increased so as to fund the construction. The house was completed in around 2000.
4. Mr McInnes joined Rheem in February 2005. He was employed as "National Sales Manager". In January 2008 his position was renamed "General Manager Sales". This does not appear to have made any significant difference to his responsibilities. In his position with Rheem, Mr McInnes was responsible for managing the state sales managers who reported to him. He was also responsible for dealing with major customers, including the negotiation of terms of trade with those customers.
5. According to Mrs McInnes, at some point in the first half of 2007 she and Mr McInnes separated, but both continued to live at the Menai property. This evidence was not contested, and it fits with the evidence that Mrs McInnes established her own separate bank account at around this time: see [18] below. Although separated from Mrs McInnes, Mr McInnes continued to contribute his ordinary earnings from Rheem to their joint bank account so as to meet the family expenses.
6. In August 2007, the payments by Rheem which are the subject of these proceedings began. I describe the payments in more detail below. In most years the total amount paid was about $190,000.
7. The last payments which are the subject of Rheem's claim in these proceedings were made on 9 October 2018. On 12 October, Mr McInnes was made redundant. This had nothing to do with the claims made in these proceedings; Rheem simply reorganised its management structure and Mr McInnes' position disappeared. Mr McInnes later negotiated a new job with a competitor of Rheem called Dux.
8. Mr McInnes' redundancy was to take effect on 9 November. It was agreed between Mr McInnes and Rheem that he would work out a notice period of two weeks, expiring on 26 October. But on 25 October, Rheem became aware of information which led it to conclude that Mr McInnes had misappropriated some of its confidential commercial information. Rheem summarily dismissed Mr McInnes for this reason on 8 November.
9. A few days later, solicitors retained by Mr McInnes wrote to Rheem complaining about the circumstances of his dismissal. The main complaint was an allegation that Rheem had defamed Mr McInnes by letting other Rheem staff, and customers, know that he had been dismissed for misconduct. The solicitors also complained that Rheem had, in the course of its investigations, gained access to Mr McInnes' private emails. These complaints were rebuffed by solicitors acting for Rheem. The correspondence in evidence ends on 12 December.
10. Meanwhile, early in December, the payments which are the subject of these proceedings had attracted the attention within Rheem and an investigation had been launched. These proceedings were commenced, and an ex parte freezing order was obtained against Mr McInnes, on 18 January 2019.

Witnesses

1. Three employees of Rheem were called as part of its case. Their evidence went to Rheem's allegation that the payments were procured by fraud on Mr McInnes' part and I refer to it in more detail below. None of these witnesses was required for cross-examination.
2. Evidence was also given in Rheem's case by Simone Farrugia, a solicitor with DLA Piper, Rheem's solicitors in the proceedings. In her affidavits, Ms Farrugia summarised the flows of money from Rheem into the various McInnes' bank accounts, and the payments out of those bank accounts which are the subject of Rheem's proprietary claims, by reference to bank statements and other documentary evidence obtained on subpoena. This evidence could not of course rise any higher than the documents on which it was based, but only very limited objections were made to it and it was a convenient way to present the information. Ms Farrugia was not required for cross-examination.
3. Rheem also led evidence from Matthew John Gwynne. Mr Gwynne is a forensic accountant. He prepared an expert report expressing opinions as to the extent to which Rheem could trace into the assets which are the subject of its proprietary claims.
4. In order to prepare this report, Mr Gwynne was asked to make assumptions as to the proper rules to apply in the tracing exercise. Whether those rules were correctly stated was contested and counsel for Mrs McInnes objected to Mr Gwynne's report on the ground that it did not involve the application of any relevant expertise. Eventually I received the report on the basis that the relevance of Mr Gwynne's conclusions would be the subject of argument in due course. Mr Gwynne was not required for cross-examination
5. In the end, I have concluded that the proper rules to be applied for the purposes of tracing differ from those which Mr Gwynne used. His opinions on this question are therefore irrelevant. I am inclined to think that the objection taken by counsel for Mrs McInnes was justified, and the report was never admissible as evidence. But the report played no part in the argument before me and it is not necessary to consider it any further for the purposes of this judgment.
6. Mr McInnes initially had legal representation. On his behalf, his solicitors prepared and filed three affidavits from him dealing with his bank accounts and other assets. Later his solicitors ceased to act. He was self-represented at the hearing before me.
7. Mr McInnes elected not to give any evidence at the trial. Parts of his affidavits were tendered, without objection, by counsel for Rheem.
8. Two affidavits were also prepared by Mrs McInnes (who was represented by separate solicitors to Mr McInnes) dealing with her bank accounts and other assets. Those affidavits were read at the hearing before me. Because I did not proceed with the hearing of the FLA proceedings, the affidavit prepared by Mrs McInnes for the purpose of those proceedings was not read. Mrs McInnes was briefly cross-examined. No challenge was made to her credit.

Alleged fraud by Mr McInnes

1. One of Rheem's three witnesses in the proceedings was Christopher Russell Taylor, who is the Chief Operating Officer of Rheem. Mr Taylor was responsible for Rheem's investigation into the payments the subject of these proceedings. In his affidavit he summarised the findings of the investigation and exhibited the relevant documents.
2. The first of the payments in question was an amount of $11,000 paid on 24 September 2007. The payment was made in response to an invoice on the letterhead of "Pacific Plumbing Solutions" ("PPS") dated 24 August. The invoice description was "Agreed Advertising Program NSW Operations".
3. The invoice bears a note stating "Approved" with the signature of Mr McInnes. Prior to the payment being made, PPS was, in accordance with the usual practice used in Rheem's accounting department, entered into Rheem's computerised payments system as a supplier. The entry included the ABN and payment details provided on the invoice. Payment was then made by direct credit to the nominated account.
4. Between September 2007 and 30 June 2008 Rheem made eight payments to PPS totalling about $140,000. In 2008/2009 there were six payments totalling about $160,000. By 2009/2010 the payments had settled into a regular pattern of four annual payments, usually made in July, October, January and April. The total rose to about $190,000 in 2011-2012, where it stayed in later years.
5. The invoice narrations from January 2010 refer to quarterly claims for "Agreed advertising QLD/NSW/VIC/SA & WA as per agreement" and are signed and approved by Mr McInnes. The invoices for the previous payments (apart from the first) cannot be found but there is no reason to doubt that they would have followed the same pattern. Nor can any written agreement of the type referred to in the invoices be found in Rheem's records. This may, however, be because the records in question have been destroyed due to effluxion of time.
6. In fact PPS was a business name which Mr McInnes registered, with himself as the proprietor, in August 2007. The bank account details provided to Rheem were for an account opened by Mr McInnes at about the same time.
7. The ABN shown on the invoices for PPS existed in the ASIC register, but had been cancelled in January 2006. Its registered proprietor had been a company called "89 Pty Limited" which was deregistered at the same time.
8. The address shown for PPS on the first invoice was "C/Australia Post Office" in Station Street, Dundas. The invoices from January 2010 onwards showed an address in Parkview Avenue, North Parramatta. There is no evidence of Mr McInnes having operated a business at either address. In fact there is no evidence of Mr McInnes ever conducting any legitimate business activity through PPS. He appears to have used the name solely as a cover for receiving payments from Rheem.
9. In December 2014 the invoices from, and payments to, PPS ceased. They were replaced by invoices from, and payments to, a new entity called "South Pacific Plumbing & Maintenance Services Pty Limited" ("SPP"). Rheem's computerised payments system was altered so as to change the creditor details from PPS to SPP. The system contains a note recording that the changes were made by one of the operators at Mr McInnes' request.
10. The payments to SPP followed the same quarterly pattern as the preceding payments to PPS. The SPP invoices also contained the same narrative as the preceding PPS invoices had contained. The payment details were also the same, and Rheem's payments continued to be made to Mr McInnes' PPS bank account.
11. The SPP invoices were signed and approved by Mr McInnes as the PPS ones had been. This was confirmed by evidence from Charisse Memita, who has worked as a clerk in Rheem's accounts department since May 2016. In her affidavit, Ms Memita gave evidence of Mr McInnes leaving the invoices, as approved, on her desk, or giving her oral instructions to pay.
12. South Pacific Plumbing & Maintenance Services Pty Limited is a real company. It was registered with ASIC on 1 November 2012. ASIC records show that its sole director is a Jonathan Pillay and its principal place of business is an address at Newbridge Road in Chipping Norton.
13. Rheem's records also contain what purported to be a series of written agreements between Rheem and SPP for the provision of advertising services. There are four such written agreements which bear dates between January 2015 and December 2017. The terms of each of the agreements are identical, or virtually identical. They are signed by Mr McInnes on behalf of Rheem and purportedly signed by a Warren Kitcherman on behalf of SPP.
14. The address given for Mr Kitcherman in the agreements is one at Grainger Avenue, Mount Pritchard. This matches the address for SPP shown on the invoices. But Mr Kitcherman (if he exists) is not, and never has been, a director of SPP. The ASIC register contains no record of the Grainger Avenue address ever having been the principal place of business of SPP. On the evidence, SPP has never had anything to do with the provision of any advertising services to Rheem, nor did it receive any of the payments which are the subject of the proceedings.
15. Marc Skjellerup was the third Rheem employee who gave evidence. He worked in Rheem's sales department with Mr McInnes, in a subordinate managerial role. He gave evidence of a conversation with Mr McInnes in about 2016 or 2017 about the rebates being paid to SPP. He stated that they had a conversation in the following terms: Skjellerup: We are paying South Pacific Plumbing a rebate each quarter. Do you think that they are good value? That they're worthwhile? Do you think we can spend the money better? McInnes: South Pacific Plumbing are good value. If we don't support them, they will go to Dux and we will lose a lot of money. Don't worry about it.
16. What turned out to be the final quarterly invoice from SPP was dated 3 October 2018 and was approved for payment by Mr McInnes in the usual way. It covered the October to December 2018 quarter. On the following day, Mr McInnes presented Mr Sjkellerup and Ms Memita with another invoice for payment. The invoice was on a letterhead from a new entity called "Visual Plumbing". It was dated 1 October and was for $29,700. The narrative stated "Agreed advertising placement QLD, NSW & VIC as per agreement".
17. The invoice gave the address for Visual Plumbing as being in Tallowood Close, Alfords Point. Again there is no evidence of any advertising services being provided by that entity to Rheem. The payee bank account shown on the invoice was in fact one which belonged to Mr McInnes.
18. Mr Skjellerup's evidence was that when Mr McInnes presented the invoice they had a conversation in the following terms: McInnes: Here is an invoice for Visual Plumbing for payment. You should treat it the same way we have been treating South Pacific Plumbing over the past years. Skjellerup: What is the value of paying a plumber like Visual Plumbing this amount of money to promote Rheem products? McInnes: The deal is indeed worthwhile. Don't worry about it. Just process the invoice.
19. Mr Skjellerup's evidence about the conversation was confirmed by Ms Memita. She also gave evidence of a telephone call she received from Mr McInnes on the afternoon of 28 November (about three weeks after he had been dismissed). According to Ms Memita, Mr McInnes said: Rheem no longer need to accrue for South Pacific Plumbing and Visual Plumbing. You can just let the agreement for South Pacific Plumbing finish at the end of the year. Rheem will no longer receive future invoices from South Pacific Plumbing and Visual Plumbing since they will be moving to Dux next year.
20. At 7.35 am on New Year's Day 2019 Mr McInnes sent an email to Mr Taylor. The email stated: I hope you read and consider the below email. I am aware what has been going on at Rheem over past few weeks regarding me. The situation has dramatic consequences on my family and especially the boys and the two younger ones that are still at school which is what I'm really concerned about. As a father you would hopefully understand this. Is it possible to meet you (only) next week away from Rheem and explain my side of the situation before you commence any action. Kindly advise.
21. Mr Taylor responded briefly, indicating that he was out of the office. On 10 January he emailed back: I'm back in the office now. I understand you want a one-on-one meeting but could you please clarify what you would like to talk about. I am happy to consider a meeting but would need some idea of what you want to discuss and achieve. Otherwise, I am not sure a meeting is the best course, particularly given the circumstances surrounding your departure from Rheem, the disputes and the lawyers' involvement.
22. Mr McInnes replied: I just wanted to meet and put the redundancy matters behind us and move forward.
23. The communications in the evidence end at this point and no meeting took place. As already noted, Rheem commenced these proceedings eight days later, on 18 January.
24. Mr McInnes did not admit Rheem's allegations against him. But none of the evidence which I have just summarised was contested. In my view it is overwhelming. I am satisfied that the invoices were bogus and the payments were procured by fraud on Mr McInnes' part.
25. In particular, I accept the submission from counsel for Rheem that Mr McInnes' 28 November telephone call to Ms Memita, and his 1 January email to Mr Taylor, betray a consciousness of guilt. I am satisfied that the call to Ms Memita was made because Mr McInnes wanted Rheem to close off the SPP and Visual Plumbing creditor accounts, in the hope that they would not be investigated. And I think the terms of the 1 January email to Mr Taylor demonstrate that Mr McInnes had become aware that Rheem was on to him and was looking for some way to manage or delay the process.
26. The information about Rheem's investigation probably leaked to Mr McInnes before Christmas 2018, provoking the transfer of money to Mrs McInnes which I describe in more detail below, and then the email to Mr Taylor. Although Mr McInnes gave a different explanation for having sent the email when he replied to Mr Taylor on 10 January, I think that this was no more than an attempt to cover his tracks when he realised that Mr Taylor would not be drawn.
27. The payments made by Rheem to Mr McInnes as a result of his fraud are summarised in the following table: Calendar Year No. of payments Payment total Cumulative total 2007 6 68,200 68,200 2008 5 144,100 212,300 2009 5 161,508 373,808 2010 4 168,300 542,108 2011 4 187,000 729,108 2012 4 191,400 920,508 2013 4 191,400 1,111,908 2014 4 191,400 1,303,308 2015 4 191,400 1,494,708 2016 4 191,400 1,686,108 2017 4 191,400 1,877,508 2018 5 221,100 2,098,608

McInnes bank accounts

1. Before describing the payments which are relevant to Rheem's proprietary claims, it is necessary to identify the bank accounts operated by Mr and Mrs McInnes over the period from 2007 to 2018 into which monies stolen from Rheem flowed, directly or indirectly. There were ten such accounts. I set out below a brief chronological description of them. The amounts referred to in this section of the judgment are approximate.
2. I deal first with the accounts which were already in existence as at August 2007. There were three relevant accounts.
3. First, Mr and Mrs McInnes had a joint bank account with St George Bank ("SGB") known as a "Freedom" account. I will refer to this as the joint account. The joint account appears to have been established well before August 2007. Mr McInnes' regular salary from Rheem was paid into the account. So too were expense reimbursements and some of Mr McInnes' bonus payments from Rheem. The account was used to pay joint living expenses, and in particular the mortgage repayments to Perpetual on the Menai property.
4. Secondly, as at August 2007 Mr McInnes had his own savings account with SGB. This was known as a "Power Saver" account. Under his employment arrangements with Rheem, a portion of his salary was paid into this account. Initially, this was $100 per month. It increased to $600 per month from August 2008 onwards.
5. Thirdly, Mrs McInnes had a bank account of her own with the Commonwealth Bank of Australia ("CBA"). The earliest statement for this account which is in evidence is statement number 11 which was a quarterly statement issued in the fourth quarter of 2009. Assuming the earlier statements were also issued every quarter, the account would have been established in the first quarter of 2007, which is consistent with Mrs McInnes' evidence of the separation from Mr McInnes occurring in the first half of 2007.
6. In late August 2007, Mr McInnes opened the account into which the payments from Rheem in response to the fraudulent invoices from PPS, and later SPP, were paid. It was a business account with SGB, styled "Paul McInnes trading as Pacific Plumbing Solutions". I will refer to this account as the PPS account.
7. From September 2007, occasional deposits, apparently surplus monies put aside for saving, were made from the PPS account to the Power Saver account. The regular deposits of $600 per month from Rheem continued.
8. In June 2009 Mr McInnes opened another savings account with SGB. This was known as a "Direct Saver" account. The then current balance of the Power Saver account ($125,000) was transferred to the new account.
9. After June 2009, the monthly deposits of $600 in the Power Saver account continued but there were few other credits to the account and those other credits ceased completely in 2011. The monthly $600 deposits would be transferred out of the account soon after they were received. For practical purposes there was no money kept in the account.
10. In July 2010, Mr McInnes opened a bank account with the Australia & New Zealand Banking Group ("ANZ"). This was known as a "V2" account. Mr McInnes had an ANZ credit card which was paid by automatic direct debit from this account, and the account appears to have been established for that purpose. EFTPOS payments on that card were also debited to the account. The account was kept in balance by transfers from the PPS account.
11. After the opening of the Direct Saver account in June 2009, it received occasional deposits, apparently of surplus monies, as the Power Saver account had previously. These deposits came from both the PPS account and the joint account. The Direct Saver account was the source of a payment of $290,000 made so as to discharge the joint debt to Perpetual on the Menai property in mid-2010, as I describe in more detail below. The occasional deposits of apparently surplus monies into the account continued thereafter until September 2012, when its balance reached more than $320,000.
12. Meanwhile, in March 2012, Mr McInnes had opened yet another savings account with SGB. This was known as a "Maxi Saver" account. For several months the $600 payments transferred out of the Power Saver account were deposited to this account. Then in January and February 2013, there were two deposits of $100,000 each which came from other accounts of Mr McInnes. Thereafter there were no further deposits apart from the regular $600 transfers, and accumulating interest.
13. Then in July 2013 Mr McInnes opened a fourth savings account with SGB. This was known as an "Incentive Saver" account. The then current balances of the Direct Saver account ($230,000) and the Maxi Saver account ($210,000) were transferred to the new account. The transfers took place indirectly, through the Power Saver account, and in the process picking up a $600 receipt from Rheem which had not been transferred out of the Power Saver account.
14. From August 2013 onwards both the Direct Saver account and the Maxi Saver account remained open but had nil balances and were not used. The $600 receipts from Rheem were regularly transferred from the Power Saver account to the Incentive Saver account. For practical purposes all of Mr McInnes' savings were aggregated in the Incentive Saver account.
15. As will be described in more detail below, in 2014 and 2015 Mr McInnes bought two investment properties in Queensland. In each case he obtained bank finance and established a mortgage offset account to receive any income from the property and make the loan payments. He used monies from the PPS account and the joint account to keep the offset accounts in credit.
16. Over the period between July 2013 (when the Incentive Saver account was opened) and December 2018, the balance of the account fluctuated between a high of $540,000 and a low of $310,000. This reflected occasional transfers from the joint account, a substantial transfer to the PPS account, and some asset purchases to which I refer below. As I will also describe in more detail below, in December 2018 $400,000 was withdrawn from the Incentive Saver account and transferred (indirectly) to Mrs McInnes' CBA account, virtually exhausting the account.
17. By the time these proceedings began the funds in Mr McInnes' bank accounts had been almost completely dissipated. There was about $11,000 in the Incentive Saver account, less than $6,000 in the V2 account, and less than $100 in the PPS account. The offset accounts contained less than $5,000 between them.

Mortgage repayments on Menai property

1. Rheem bases its first proprietary claim on the mortgage repayments on the Menai property between 2007 and 2010. Prior to 24 September 2007, regular loan repayments had been made on the Menai property from the joint account. The repayments continued after that date. They were between $1,000 and $1,400 per fortnight.
2. On 17 May 2010, Mr McInnes made a payment of $290,000 to Perpetual, which accounted for nearly all the amount then outstanding under the loan. Three further fortnightly mortgage repayments were made (from the joint account), ending on 18 June. This left a loan balance outstanding of only $363. The mortgage was later discharged (presumably after this balance was cleared). The Menai property remains unencumbered.
3. The $290,000 came originally from the Direct Saver account. The amount was transferred to the Power Saver account on 11 May and then drawn out of that account to purchase a bank cheque which Mr McInnes then gave to Perpetual. This is the first component of Rheem's mortgage repayment claim.
4. The total amount paid in regular payments between 24 September 2007 and 18 June 2010 was $86,022. These payments came from the joint account. They represent the second component of Rheem's mortgage claim.

Griffin (Queensland) investment properties

1. In April 2014 Mr McInnes decided to buy an investment unit in a property development at White Ibis Drive at Griffin in Queensland. He paid a total of $35,400 between 16 April and 19 May covering the initial deposit and the balance of the purchase price. These payments were made from the PPS account.
2. Mr McInnes financed the purchase with a loan from Suncorp-Metway Bank. The loan amount was $260,000 which was drawn down on 7 October (presumably because the development was finished, and the purchase was completed, at around that time).
3. For the purposes of this loan, Mr McInnes opened an offset account with Suncorp from which the regular mortgage repayments were regularly debited. The property was rented out and income from the tenant was paid into the Suncorp account to help cover the financing cost. The difference between the income received from the tenant and the mortgage repayments was made up by payments by Mr McInnes as required.
4. Between October and December 2014, and then between May 2017 and October 2018, Mr McInnes paid a total of $16,500 from the PPS account into the Suncorp offset account. Between November 2014 and February 2016 he made payments totalling $16,000 from the joint account to the offset account.
5. The year after buying the White Ibis Drive property, Mr McInnes made a further similar property investment. This was in a development at Apple Circuit, also at Griffin in Queensland. Between 28 April and 12 October 2015 Mr McInnes paid a total of $162,990 to the vendor. Of this, $100,000 came from his Incentive Saver account and $62,990 from his PPS account.
6. The Apple Circuit property was also purchased with the assistance of bank finance, on this occasion from Westpac Banking Corporation. The amount borrowed was $320,000 which was drawn down on 14 October 2015.
7. As with the White Ibis Drive property, Mr McInnes opened an offset account with Westpac and made up the difference between the rental receipts and the mortgage expenses by making payments as needed. Between November 2015 and December 2018, Mr McInnes paid a total of $26,500 from the PPS account into the offset account.

Wisemans Ferry cabin

1. In January 2017 Mr McInnes purchased a demountable cabin at Wisemans Ferry in NSW. The cabin was located on a plot of land known as Ko-Veda Holiday Park. Mr McInnes entered into a contract, to which I will refer as the "site contract", with the owner and operator of the site. Under the terms of the site contract, Mr McInnes became the owner of the cabin. The cost of the cabin itself was $90,000 which Mr McInnes paid in two instalments, in January and February 2017. The first instalment of $10,000 was paid from the V2 account. The second instalment of $80,000 was paid from the PPS account.
2. Mr McInnes subsequently made quarterly payments to the proprietor of the park in accordance with the terms of the site contract. The payment was made up of a regular fee for use of the site, together with gas, electricity and other service charges. The total amount for which Rheem claims a charge on account of these payments, which is limited to the site fee component, is $22,190. Of this, $19,021 was paid from the PPS account between June 2017 and September 2018. The remaining $3,169 was paid from the V2 account in December 2018.

Power boat

1. In August 2017 Mr McInnes visited the Sydney Boat Show where he decided to buy a large runabout power boat. The total cost of the boat was $154,000. Mr McInnes paid an initial $1,000 (I assume as a holding deposit) by credit card. The remaining payments were made by instalments between 6 September and 16 December 2017. A total of $75,000 was paid from Mr McInnes' Incentive Saver account. He also paid $53,000 from the PPS account. The remaining amount, $25,000, was paid out of the joint account.
2. Rheem also included in its proprietary claim over the boat a payment of $791 made in January 2018. But the invoice to which the payment relates was for servicing costs of the boat. As it was not part of the purchase price I have ignored it in the balance of this judgment.

Improvements to Menai property

1. Rheem also made a proprietary claim with respect to expenditure on the Menai property by way of improvements, or work that Rheem characterised as involving improvements, between 2010 and 2018. The expenditure in question totalled $153,850. It fell into six categories.
2. First, on 29 October and 1 November 2010, Mr McInnes made payments totalling $3,439 to "Thermo Pools". It seems that this money was used to purchase a piece of solar heating equipment for the pool at the Menai property. The payments were made out of the PPS account.
3. Second, between 27 August and 30 November 2013 Mr McInnes made payments totalling $94,300 to a building business called "Project Eze". These payments were made for renovation work in the lounge/dining room. Again, they came from the PPS account.
4. Third, in 2016, Mr McInnes made some further small payments for electrical and roofing work at the Menai property. The payments totalled $2,240. Again these payments came from the PPS account.
5. Fourth, in around January 2017, payments were paid to a joinery business called "Dewood Interiors" for a desk, shelving and television cabinets. The total amount paid for this work was $9,245. The payments were made in January and March 2017 from Mr McInnes' V2 account.
6. Fifth, in November 2017, a payment was made for fence painting at the Menai property. The cost was $2,250 which was paid from Mr McInnes' PPS account.
7. Finally, between June and December 2018, Mr McInnes made a series of payments for bathroom work at the Menai property. The payments were made to a business called "Visual Bathrooms". All payments to Visual Bathrooms were made by Mr McInnes out of the PPS account. The total amount paid was $51,660.
8. It was not suggested that the Visual Bathrooms business had anything to do with the payment Mr McInnes fraudulently obtained from Rheem for "Visual Plumbing" in October 2018. At most the name of the legitimate business may have inspired the name that Mr McInnes used for his fraud.
9. Mrs McInnes was briefly cross-examined about some of this building work. She said that the work done in 2013-2014 involved taking up the carpet in the lounge/dining room and replacing it with good quality timber flooring like that used in the rest of the house. A window out on to the patio was replaced with bi-fold doors allowing access. There was also some electrical and plumbing work.
10. As I understood her evidence, Mrs McInnes acknowledged that these renovations opened up the house to the patio outside, although she said that following the renovation the room was largely used by the McInnes' children. She said that the result was "more practical" but at the same time the formal lounge/dining area had been lost. When it was suggested to her that this was an improvement she replied that she thought it was a matter of personal choice.
11. Mrs McInnes described the bathroom work done in 2018 as having involved the rebuilding of the two bathrooms in the house. Again this appears to have been a high quality job. Mrs McInnes acknowledged that over the eighteen years since the bathrooms had originally been constructed they had become "tired".

December 2018 transfers

1. Rheem's final proprietary claim concerned a group of payments totalling $405,000 which were made into Mrs McInnes' bank account in December 2018. She was joined to the proceedings on 18 March 2019 and what was left of those monies, which totalled $392,897, was paid into Court by Mrs McInnes on 26 March 2019.
2. The payments to Mrs McInnes originated with five transfers, totalling $400,000, made by Mr McInnes from his Incentive Saver account into the joint account. From the joint account Mr McInnes then made five transfers totalling $405,000 into Mrs McInnes' CBA account (thus picking up $5,000 from the joint account). The transfers from the Incentive Saver account to the joint account took place between 23 and 27 December, and the transfers from the joint account to Mrs McInnes' CBA account were initiated between 24 and 29 December (the last was received on 31 December; being inter-bank transfers, they were not immediate).

Mrs McInnes' knowledge

1. In her affidavit evidence, Mrs McInnes stated that her husband kept from her the payments by Rheem and the existence of the savings accounts into which some of the monies flowed. Indeed, she was unaware that he had even purchased the two investment properties at Griffin in Queensland. Mrs McInnes stated that at all times she believed that the expenditure of Mr McInnes of which she was aware was funded by legitimate earnings from Rheem. This evidence was not challenged.
2. According to Mrs McInnes, she was told about the transfers to her account in late December 2018 or early January 2019. She stated that Mr McInnes told her: I have deposited $400,000 into your Commonwealth bank account. It is my redundancy payment. My financial adviser said that I should deposit it into your account for tax purposes. This evidence from Mrs McInnes was not challenged either.

Flow and mixing of fraudulently obtained Rheem monies

1. PPS account: As already mentioned, until October 2018 the fraudulently obtained payments from Rheem were all paid into the PPS account. The total of those payments between 24 September 2007 and 9 October 2018 was $2,068,908.
2. From the PPS account statements, it is clear that Mr McInnes made extensive use of the account to fund personal expenditure (whether, and to what extent, this included personal expenditure attributable to his wife and children is not addressed in the evidence). The rest of the money was used for transfers to other accounts described below and (from April 2014 onwards) for payments towards the investment properties at Griffin, the Wisemans Ferry cabin and the expenditure on the Menai property already described.
3. Until 4 September 2017, there appear to have been few if any receipts of substance in the PPS account apart from the payments fraudulently obtained from Rheem. I propose to proceed on the basis that, up to that date, the payments out of the PPS account upon which Rheem bases its proprietary claims can be treated as having been derived exclusively from the fraudulent payments.
4. On 4 September 2017, Mr McInnes transferred $135,000 from the Incentive Saver account to the PPS account. As we will see, Mr McInnes had contributed some of his own funds to the Incentive Saver account. After that point, therefore, there may have been a mixing of untainted funds with the fraudulently obtained funds in the PPS account.
5. Joint account: As already mentioned, apart from the $600 paid monthly into the Power Saver account, Rheem paid Mr McInnes' ordinary salary and bonuses into the joint account. Ms Farrugia calculated that between 24 August 2007 and the last payment in November 2018 about $1.9 million flowed into the joint account from this source. Rheem also paid expense reimbursements totalling about $60,000 into the joint account over the same period.
6. The joint account was apparently used for payment of day-to-day living expenses. These included the regular loan repayments on the Menai property up until June 2010. Mr McInnes also made occasional payments of surplus funds (in particular, following receipt of bonuses from Rheem) into his savings accounts.
7. Overall the flow of funds into the joint account exceeded the day-to-day expenditure paid from the account. But there were occasional payments from the PPS account into the joint account. These took place between 8 November 2007 and 14 June 2011. They totalled $39,075. There was also a payment of $11,281 into the joint account on 13 November 2008 from the Power Saver account, which then contained mixed funds (see [142] below).
8. It follows that at some points after 8 November 2007, the joint account may have contained mixed funds. Counsel for Rheem did not however contend that any stolen funds remained in the account after 2011, and I proceed on the basis that after 2011 the monies in the joint account were untainted.
9. Power Saver account: Between 5 October 2007 and 16 May 2009, Mr McInnes made transfers totalling $118,417 from the PPS account to the Power Saver account. Thus, fraudulently obtained money passed via the PPS account into the Power Saver account.
10. As at 4 October 2007, the carried-forward balance of the Power Saver account was $18,113. This represented Mr McInnes' own money. The $600 monthly payments from Rheem which accumulated in the Power Saver account up to June 2009 were also untainted income. Thus from 5 October 2007 onwards, the Power Saver account contained mixed funds.
11. Direct Saver account: The Direct Saver account was established on 22 June 2009 with the transfer of $124,870 from the Power Saver account. At the time the Power Saver account contained mixed funds. As will be seen below, the payment to the Direct Saver account can be traced back to fraudulently obtained monies from the PPS account.
12. Between 1 September 2009 and 27 March 2012 Mr McInnes made transfers totalling $305,278 from the PPS account to the Direct Saver account. Over the same period, the $600 monthly payments from Rheem into the Power Saver account were transferred to the Direct Saver account. These payments were Mr McInnes' own money. Transfers totalling $147,555 were also made from the joint account to the Direct Saver account between 20 June 2009 and 16 October 2014. The transfers generally followed the receipt of bonus payments from Rheem into the joint account. These transfers would have been largely if not entirely untainted.
13. Monies were received into the Direct Saver account from the PPS account and from untainted sources both before and after the balance of the account was reduced to zero on 13 May 2010 as a result of the withdrawal of $290,000 to pay down the Menai property mortgage. Thus at all relevant times the Direct Saver account contained mixed funds.
14. V2 account: From the opening of the V2 account in July 2010 onwards, the money in it came from the PPS account. Between 13 July 2010 and 27 July 2018 Mr McInnes made 56 transfers from the PPS account to the V2 account. The transfers totalled $512,175. The account was used mainly to pay for personal expenditure by Mr McInnes on his ANZ credit/debit card (again, whether, and to what extent, this included family expenditure is not addressed in the evidence).
15. Apart from interest earned on the account, the transfers from the PPS account appear to have been the only credits of substance until October 2018. Then the $29,700 paid by Rheem on the fraudulent invoice from Vision Plumbing was paid into the account. This occurred on 9 October 2018.
16. For the purposes of tracing, therefore, the V2 account can be treated in the same way as the PPS account. That is, funds paid into the V2 account from the PPS account after the receipt of $135,000 on 4 September 2017 may have been mixed funds. Before then, the V2 account consisted entirely of monies derived from defrauding Rheem.
17. Maxi Saver account: After the establishment of the Maxi Saver account in March 2012, the $600 regular payments to the Power Saver account from Rheem were transferred to the new account. On 15 January 2013 Mr McInnes transferred $100,000 into the Maxi Saver account from the PPS account. On 2 February 2013 Mr McInnes transferred a further $100,000 to the Maxi Saver account from the Direct Saver account. Thus from 15 January 2013 onwards the monies in the Maxi Saver account represented mixed funds.
18. Incentive Saver account: The Incentive Saver account was established with transfers on 25 July 2013 (via the Power Saver account, picking up an additional $600) from the Direct Saver account ($232,429) and the Maxi Saver account ($210,337). As will be seen below, a substantial share of the monies paid into the Incentive Saver account from these sources can be traced back to monies fraudulently obtained from Rheem.
19. There were no transfers from the PPS account to the Incentive Saver account after it was established. Between 1 September 2014 and 15 November 2018 Mr McInnes made transfers totalling $179,058 from the joint account to the Incentive Saver account. Thus at all relevant times the Incentive Saver account contained mixed funds.
20. Suncorp offset account: Counsel for Rheem accepted that rent received from the White Ibis Drive property was to be treated as untainted. Between November 2014 and February 2016 the payments to keep the account in balance came from the joint account, which was also untainted. But at other times such payments came from the PPS account. This means that after the first group of payments between October 2014 and December 2014, the account would have contained mixed funds until those payments were exhausted. Again from May 2017 funds from the PPS account were paid in, giving rise to periods when the account would have contained mixed funds, but this is complicated further after 4 September 2017 by the payment of untainted funds into the PPS account.
21. Westpac offset account: The position is similar for the Apple Circuit property, except that all of the payments into the account came from the PPS account. Again from the receipt of monies from the PPS account (which began in November 2015) gave rise to periods of time when the offset account would have contained mixed funds, with a further complication arising for receipts after 4 September 2017.

Personal claim against Mr McInnes

1. I have found that Mr McInnes procured payments from Rheem totalling $2,098,608 by means of fraud. Rheem is entitled to judgment against Mr McInnes for this sum. The transaction being fraudulent, and no proper consideration ever having been provided for the payments, Rheem has a common law entitlement by way of restitution for monies had and received.
2. Furthermore, a thief who steals monies holds them on trust for the true owner: Black v S Freedman & Co (1910) 12 CLR 105. If the monies, or the traceable proceeds of the monies, are still in the thief's possession, the owner will have an equitable proprietary claim to the relevant assets. I deal below with the proprietary claims Rheem makes on this basis. For present purposes, it is enough to note that, even if the monies have been dissipated, the thief has a personal obligation to account for them.
3. Thus Rheem has an equitable personal remedy against Mr McInnes as trustee alongside its common law remedy by way of restitution. In each case the entitlement is to recoup the amount misappropriated by Mr McInnes. The entitlement will also carry interest. The statutory rate of interest applies at common law. It is also appropriate in equity: Akierman Holdings Pty Ltd v Akerman (No 2) [2020] NSWSC 970 at [222].
4. There is no need to consider Rheem's claims for damages or compensation under the Corporations Act 2001 (Cth), ss 1317H, 1041I. Indeed, given that Mr McInnes is indebted to Rheem for all of the monies misappropriated by him, the question of an award of damages for loss suffered by Rheem does not arise.

Personal claim against Mrs McInnes

1. The decision in Black v Freedman also establishes that where stolen monies are innocently received from the thief by a volunteer, once the volunteer is made aware of the true owner's interest, the volunteer holds whatever monies are left, or the traceable product of those monies, on trust for the true owner. The volunteer is under no obligation to the true owner until notified of the true owner's interest. But from that point onwards, the usual obligations of a trustee apply. The true owner has a personal obligation to account for the monies (or other traceable assets), and the true owner can trace into assets subsequently acquired by the volunteer with those monies.
2. Rheem relies upon this principle, or extensions of it, to make claims against Mrs McInnes with respect to monies paid to her or for her benefit and allegedly derived (albeit without her knowledge) from the monies stolen by Mr McInnes from Rheem. Rheem claims that Mrs McInnes is liable for: 1. payments on the mortgage of the Menai property (see [76] above); 2. expenditure on building work at the Menai property (see [91] above); and 3. the monies transferred to Mrs McInnes' bank account at the end of December 2018 (see [132] above).
3. In this part of the judgment, I will consider whether Mrs McInnes has any personal liability to Rheem (jointly with Mr McInnes) arising from any of these payments. Whether, if so, there is any proprietary liability I will address when I consider the other proprietary claims below.

Menai mortgage repayments

1. The Heperu litigation provides the template for Rheem's claim against Mrs McInnes. That litigation arose out of the misappropriation of the plaintiff's monies by the husband of the defendant, Ms Belle. The stolen monies were paid into an account with a financier, Perpetual, and then transferred to another account with Westpac. The monies in the Westpac account were partly stolen monies and partly monies which came from untainted sources. Monies from the Westpac account were used to make payments on the mortgage on a property jointly owned by Ms Belle and her husband.
2. The litigation resulted in four judgments. At trial, Palmer J found that Ms Belle was unaware of the thefts at the time of the mortgage repayments, and dismissed the plaintiff's claims against her: Heperu Pty Ltd v Morgan Brooks Pty Ltd (No 2) [2007] NSWSC 1438. On appeal, Palmer J's finding about lack of knowledge was upheld. But the Court of Appeal considered that Palmer J had erred in failing to deal with a potential restitutionary claim against Ms Belle: Heperu Pty Ltd v Belle [2009] NSWCA 252. This was the main judgment in the litigation and it is reported: 76 NSWLR 230.
3. Following further submissions, the Court of Appeal decided that such a claim was maintainable and remitted the assessment of the claim to the Equity Division: Heperu Pty Ltd v Belle (No 2) [2010] NSWCA 13. The assessment came before Slattery J who ultimately entered judgment for approximately $87,000: Heperu Pty Ltd v Belle [2011] NSWSC 1151.
4. I refer to the published judgment of the Court of Appeal and the judgment of Slattery J in more detail below. For present purposes, two points in the published judgment are relevant. First, the Court of Appeal concluded that Ms Belle was under a personal liability to repay to the plaintiff the value of the proprietary benefit derived from the receipt of the stolen funds, to the extent traceable in equity and still held by her at the time the claim was notified to her (at [153]). Secondly, the value of the proprietary benefit included monies received by way of reduction of the mortgage debt (at [135]).
5. These aspects of the decision were not disputed for the purposes of the present case. There are two issues for determination: 1. the extent to which the benefit represented by the Menai mortgage repayments can be traced to monies stolen from Rheem; 2. whether the quantum of that benefit is confined to repayments of capital, and excludes interest and fees.
6. Tracing: I will start with the $290,000 payment made out of the Direct Saver account to the mortgagee, Perpetual, on 11 May 2010 (see [69] above).
7. Between 24 September 2007 and 11 May 2010, stolen monies totalling $454,108 flowed into the PPS account from Rheem. Over the same period the untainted money paid into the joint account from Rheem would have totalled at least $400,000.
8. Between 24 September 2007 and 22 June 2009, when the contents of the Power Saver account were transferred to the newly opened Direct Saver account, Mr McInnes transferred $118,417 from the PPS account to the Power Saver account. Allowing for the carried forward balance of the Power Saver account and the regular $600 payments from Rheem, the untainted credits to the Power Saver account over the same period would have been at least $30,000.
9. On 13 November 2008, Mr McInnes transferred $11,281 from the Power Saver account to the joint account. The only other significant withdrawal from the Power Saver account over the period in question was the final withdrawal on 22 June 2009, which was $124,870.
10. After the $124,870 was paid into the Direct Saver account on 22 June 2009, and before 11 May 2010, there were further credits to that account both from the PPS account and from other sources. The credits from the PPS account totalled $139,063. They took place in September 2009 and April 2010.
11. Over the same period, the $600 monthly payments from Rheem into the Power Saver account were transferred to the Direct Saver account. Monies were also paid into the Direct Saver account from the joint account. There is no breakdown of the total figure for the transfers from the joint account to the Direct Saver account (the total was $147,555: see [117] above) but a review of the bank statements appears to show only one payment during the relevant period, being $60,000 on 1 September 2009.
12. The money flows are summarised in the following diagram:
13. The application of conventional tracing rules to the accounts in question would limit the traceable fraction of the $290,000 to $237,480, representing the monies in fact derived from the PPS account ($118,417 plus $119,063). This assumes that Rheem would elect to treat the $11,281 paid from the Power Saver account to the joint account as untainted funds; otherwise it would be deducted from the $118,417, leaving a traceable total of $226,199.
14. That calculation does not include interest accrued in the Power Saver and Direct Saver accounts attributable to the monies stolen from Rheem. I will return to this point in due course.
15. Rheem's approach in the present case differed from the conventional approach I have described. For the purposes of his report, Mr Gwynne was instructed to aggregate the balances of all of the relevant accounts and then apply conventional tracing rules to those aggregated figures. The result, as I understood it, was that fraudulently obtained monies which remained in the PPS account could be traced into the $290,000 withdrawal from the Direct Saver account even though those monies had not actually been paid into that account before the withdrawal.
16. Counsel for Rheem argued that it was legitimate to aggregate the bank accounts in this way. Counsel pointed out that over the whole period much more than $290,000 found its way from Rheem into the PPS account. Counsel submitted that, looked at in the broad, the monies stolen from Rheem increased Mr McInnes' total pool of assets and enabled him to make the $290,000 payment. It would be wrong, counsel submitted, if Rheem's ability to trace were limited by the circumstance that Mr McInnes chose to transfer only some of the stolen money to his savings accounts, from where the $290,000 was made.
17. In Heperu, six cheques in total, representing stolen monies, were paid from the Perpetual account into the Westpac account. The first was paid in August 2001 and the last in December 2002. If the monies derived from the Perpetual account were treated as being paid to the financier, then at various points the stolen monies were exhausted and there were no misappropriated funds in the Westpac account.
18. Before Slattery J, counsel for the plaintiff argued that the principles of tracing should be applied in what was described as a "looser" fashion. Counsel argued that over the period in question, the total amount paid into the Westpac account representing stolen monies was $1,744,000. The total amount of the mortgage repayments was $210,000. Counsel argued that as this was less than the total amount of stolen money, the full amount of the $210,000 could be traced.
19. Slattery J observed that the preliminary view of the Court of Appeal had been against this argument. He concluded that it was unsound. At [49] he said: In my view, this paragraph ([120]) upon which Heperu relies does not justify any departure from recognised rules for tracing misappropriated funds which are already carefully summarised by the Court of Appeal in paragraphs [111] to [116] of the same judgment. Indeed in [120] itself, the third sentence appears to me to strongly emphasise that what is required is "a careful process of examining the funds remaining at any given time in the Westpac account" in order to determine the destination of the proceeds of misappropriated cheques. In my view the applicable rules of tracing are clear: cf Re Sutherland; French Caledonia Travel Service Pty Limited (in liquidation) [2003] NSWSC 1008; 59 NSWLR 361. There is no basis for the looser view contended for. The only mortgage repayments made from the Westpac account that are referrable to misappropriated funds are those payments made when Westpac account had a sufficient credit balance of misappropriated funds within it, taken from the Perpetual account, to allow for the making of the whole or part of the mortgage payment. In this case, as the factual analysis above shows, that is a total amount of $118,932.10.
20. Despite Slattery J's decision, counsel for Rheem maintained that the "aggregated" approach should prevail in this case. Counsel relied on three appellate decisions in support of their submission.
21. The first was the decision of the Court of Appeal in Toksoz v Westpac Banking Corporation [2012] NSWCA 199. Mr Toksoz worked for a bank. He stole more than $800,000 from the bank's customers by means of identity theft. During the period of the thefts, his wife received deposits of more than $600,000 into bank accounts in her name or controlled by her. The source of the funds was not identified in the evidence. At the time Mrs Toksoz had no other recorded income apart from social security payments. She did not offer any explanation for the receipts.
22. The trial judge inferred that the deposits represented the proceeds of Mr Toksoz's fraud and his decision was upheld by the Court of Appeal. Allsop A-CJ gave the leading judgment. He said (at [8]-[9], citations omitted): [8] Money can be traced notwithstanding an inability of the follower to connect each link in the chain of accounts. Common sense and reasonable inference play their part, especially if there is fraud involved and if there is a lack of explanation, when the circumstances cry out for honesty to be explained, if it can be. [9] A number of cases reveal a sensible robust approach to the tracing of moneys from theft. The expression "tracing by exhaustion" is sometimes used. Where the facts as proved are sufficient to permit the inference that moneys have been received or property bought without there being an honest source available to explain the wealth and the sums or value can be seen as referable to the following party's property wrongfully obtained, such that the inference is open that the wrongfully obtained funds were the source of the wealth, the funds can be so treated. One does not need to be able to show every link in the chain of accounts from and through which the money passed. Inferences will be more easily drawn, as here, in circumstances where the funds were stolen, the person who is said to have provided the funds was one of the thieves who stole money from the follower, when the recipient has an apparent close relationship with the thief, which recipient gave no value for it, has no personal source of income and gives no explanation as to the source or circumstances of the receipt of the money or any honest source of it.
23. In Relfo Ltd v Varsani [2014] EWCA Civ 360 the sum of £500,000 was paid from the plaintiff's bank account in London to a bank account belonging to a company called Mirren in Latvia. The payment was made at the instance of Mr Gorecia, who was a director of the plaintiff. It represented a breach of his duties as a director.
24. Shortly afterwards, a payment was made by another entity, Interbank, to Mr Varsani in Singapore. There were close business links between Mr Gorecia and Mr Varsani's family. The payment represented the dollar value of £500,000, less 1.3 per cent. But there was no direct evidence to identify it with the monies paid out of the plaintiff's account to Mirren.
25. The trial judge inferred that the payment in Singapore had been arranged by Mirren, and that Mirren had later repaid Interbank. The judge concluded that the £500,000 misappropriated from the plaintiff's London bank account could be traced into the funds received by Mr Varsani in Singapore.
26. The Court of Appeal for England and Wales upheld the trial judge's decision. Arden LJ characterised the Singapore payment as a "substitution" for the London payment. The trial judge's inference was justified by the identity of the sums (apart from a difference of 1.3 per cent which suggested a fee of some sort). Nor did it matter that the payment by Interbank in Singapore preceded a reimbursement of Interbank by Mirren.
27. The third case was Federal Republic of Brazil v Durant International Corporation [2016] AC 297. The case concerned bribes paid to a Brazilian government official. The bribes were paid into a bank account known as the Chanani account. Payments were made from the Chanani account to an account known as the Durant account in Jersey, and then on to another account, called the Kildare account. The plaintiff sought to trace the whole of the bribe monies into those accounts.
28. It was argued on appeal for the defendants that not all of the bribe monies could be traced into the Durant bank account and thus into the Kildare bank account. This was because some of the bribe monies had been paid into the Chanani account after the corresponding payments had been made to the Durant account from the Chanani account (presumably either using other funds in that account, or overdrawing the account).
29. Lord Toulson, giving the judgment of the Privy Council, referred to two rules of tracing. The first is that in general there can be no tracing through a bank account, except to the extent that it is in credit. This rule may be expressed negatively, by saying that in general, there can be no "backwards tracing". "Backwards tracing" is tracing stolen money into a payment made out of a bank account when the payment was made before the stolen money was actually credited to the account.
30. The other rule to which Lord Toulson referred is the "lowest intermediate balance" rule. This means that where stolen money is paid into a bank account and the balance of the account fluctuates, and then a withdrawal is made, it is only possible to trace into the withdrawal by the minimum intermediate amount in the account. The rule was recently discussed by this State's Court of Appeal in Caron v Jahani (No 2) [2020] NSWCA 117 ('Courtney House').
31. Lord Toulson said at [38]: The development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect. If the court is satisfied that the various steps are part of a co-ordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry. The Board agrees with Sir Richard Scott V-C's observation in Foskett v McKeown [1998] Ch 265, 283 that the availability of equitable remedies ought to depend on the substance of the transaction in question and not on the strict order in which associated events occur.
32. He added at [40]: The Board therefore rejects the argument that there can never be backward tracing, or that the court can never trace the value of an asset whose proceeds are paid into an overdrawn account. But the claimant has to establish a coordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund. This is likely to depend on inference from the proved facts, particularly since in many cases the testimony of the trustee, if available, will be of little value.
33. On the pleadings, the defendants had alleged that the monies in question were bona fide commissions and that the commissions were paid from the Chanani account to the Durant account. The Privy Council was satisfied that the necessary factual link between the receipts into the Chanani account and the payments into the Durant account was present. The appeal failed.
34. In Toksoz the inference was available that Mrs Toksoz' assets had come from the stolen moneys because, on the evidence, she had no legitimate source of income. In the present case Mr McInnes did have a legitimate source of income from Rheem, the form of his salary and bonuses. While it is true that the $290,000 was less than the money stolen from Rheem over the period in question, it is also less than Mr McInnes' legitimate income over that same period.
35. Furthermore, Toksoz and Relfo were both cases where the Court was prepared to draw an inference of a connection between payments in the absence of actual evidence of money flows. But in the present case the actual flow of moneys is a matter of known fact. Nothing in Toksoz or Relfo authorises the Court to ignore those facts.
36. This leaves the decision in Durant. That case, however, clearly depended upon the establishment of some sort of "co-ordination", or other factual link, between the receipts and payments in question.
37. Counsel for Rheem argued that there was something suspicious in the way in which Mr McInnes moved monies between the PPS account, the Direct Saver account and then back through the Power Saver account to make the payment. Counsel submitted that the transactions had "no apparent legitimate purpose" and that this in some way justified a broader approach to tracing in the present case.
38. It is true that over the period from 2007 to 2018, monies from the Rheem fraud flowed, directly or indirectly, into no fewer than nine accounts owned or operated by Mr McInnes (the PPS account, the joint account, the four savings accounts, the V2 account and the two offset accounts). But in considering the way in which tracing should operate at any particular time, I can only consider the state of affairs at that time.
39. As at May 2010 fraudulently obtained monies had only flowed into four accounts: the PPS account, the joint account, the Power Saver account and the Direct Saver account. The joint account and the Power Saver account pre-dated the fraud. When the fraud began, Mr McInnes successfully concealed it from Mrs McInnes. The establishment of the PPS account and the transfer of monies from it into the Power Saver account, both of which were private accounts of Mr McInnes, are both perfectly understandable as steps taken in order to maintain that concealment.
40. These circumstances do not explain why Mr McInnes later established a second saving account in the form of the Direct Saver account. But it is not difficult to think of rational reasons why the Direct Saver account should have been opened along with the Power Saver account. It is well known that banks sometime offer incentives to customers to open new accounts, in the form of additional interest or other benefits.
41. The indirect payment from the Direct Saver account via the Power Saver account is not explained in the evidence. Possibly monies could not be withdrawn and paid to third parties from the Direct Saver account. But whether that is so or not, I do not think it matters. There is nothing in Mr McInnes' conduct which suggests he was aware of the tracing rules, let alone trying to exploit them in some way.
42. In Durant the bribery monies were paid into the Chanani account soon after the corresponding payments were made out of the account. On the facts, the payments out appear to have been made in anticipation of the bribery receipts.
43. The present case is quite different. The thefts by Mr McInnes only took place every three months or so. After the $290,000 was withdrawn for payment to Perpetual on 11 May, the next theft from Rheem was not until 15 July, when Mr McInnes received $42,350. There was no apparent pattern of payments being made out of the saving accounts in anticipation of stolen monies being received.
44. In my view, this was simply a case of Mr McInnes using the savings accounts to set aside a share of his ill-gotten gains. Then, when he had reached his savings target, he used the monies in the account to pay off the mortgage. There was no "co-ordination" between payments out of Mr McInnes' bank accounts and subsequent receipts of stolen money of the type in Durant.
45. For these reasons, none of the appellate authorities on which Rheem relied assist its argument. But none of them directly contradict Rheem's aggregated approach to tracing either. Their reasoning (and that of Slattery J in Heperu) address circumstances in which the conventional rules of tracing might not apply. Rheem can still maintain in the present case that those rules should apply, but on an aggregated basis.
46. Counsel for Mrs McInnes submitted that the aggregated approach to tracing was in fact contradicted by authority. Counsel pointed to decisions authorising the "pooling" of funds in different accounts for liquidation purposes, such as Georges v Seaborn International (2012) 288 ALR 240. Counsel submitted that such decisions implicitly recognised that, in the ordinary course, aggregation was not permissible. That was why special orders were required to authorise it.
47. But I am not sure that the pooling cases necessarily exclude an aggregated approach. The effect of pooling orders is wider than merely aggregating accounts. Such orders typically also depart from other features of tracing such as the lowest intermediate balance rule.
48. Nevertheless there are conceptual difficulties with tracing on an aggregated basis. In the present case, the nine relevant accounts included accounts with four different banks (SGB, ANZ, Suncorp and Westpac). A deposit account with one bank is quite clearly a different asset from a deposit account with another. If such accounts can be aggregated, then why could that not be done for other classes of asset, such as shares or real property? The effect would be in effect a floating charge over all of the defaulting trustee's assets, liquid or illiquid.
49. Limiting aggregation to the accounts held with a single bank would reduce, but not eliminate, the problem. Different accounts held with the same bank are still different assets, governed by their own defined terms and conditions. To take the most obvious example, different accounts may carry interest at different rates. The conventional application of tracing rules on an account-by-account basis permits the plaintiff to claim a share of the interest accruing on the account. How would that work if an aggregated approach were adopted? There is also the problem, again illustrated by the facts of the present case, of whether it is legitimate to aggregate individual and joint accounts.
50. The fact remains that counsel for Rheem did not point me to any case in which the aggregated approach to tracing has been used. The practice in the cases (including Heperu) has been to conduct tracing on an account-by-account basis. Even if it remains theoretically possible to adopt an aggregated approach, I do not think that is a step for me to take in this case.
51. I therefore conclude that, out of the $290,000 paid on 11 May 2010, $237,480 represents traceable proceeds of monies stolen from Rheem.
52. As I mentioned earlier, the figure of $237,480 does not take into account interest which may have accrued on the Power Saver account or the Direct Saver account between 2007 and 2009. Some proportion of that interest could be allocated to the stolen monies, although the calculation would be complicated. I will leave it open to Rheem to decide whether to pursue this question after I have published this judgment.
53. This brings me to the regular loan repayments payments made out of the joint account between 24 September 2007 and 18 June 2010 (see [186] above).
54. Over the period from 24 September 2007 to 18 June 2010, the transfers into the joint account from the PPS account totalled $27,075. These took place between 5 October 2007 and 11 January 2010.
55. The relevant money flows are set out in the following diagram:
56. There were six transfers from the PPS account to the joint account over the relevant period. Those payments ranged between $758 and $13,500. There is no discernible pattern to them. They appear to have been made as required to keep the account in funds. There were many payments out of the account apart from the mortgage repayments.
57. Again I see no justification for applying the "looser view" of tracing put forward by counsel for Rheem. There was no apparent "co-ordination" between the mortgage account payments and subsequent transfers from the PPS account, or thefts from Rheem. It is therefore necessary to apply the conventional tracing rules.
58. The first consequence of this is that the tracing claim is limited to the $27,075 paid from the PPS account to the joint account. Again there is a theoretical possibility of calculating the proportion of the interest accrued on the joint account attributable to those receipts.
59. But the picture is more complex. Payments of personal expenditure were also constantly being made from the account. The lowest intermediate balance rule must be applied. That may mean that not all of the $27,075 can be traced into mortgage repayments. The transactions following each transfer would have to be analysed for this purpose. Neither party attempted to do this in their submissions. If Rheem wishes to pursue its entitlement, that will need to be done.
60. That is not all. There is a further complication to which I now turn.
61. Exclusion of interest and fees: The $290,000 payment received on 17 May 2010 was a single payment on capital account. I did not understand counsel for Mrs McInnes to suggest that it contained any interest component. But the regular repayments extended over a long period and over that period the net reduction in the principal was much less than the total paid, because of the effect of interest and fees on the loan.
62. There were 73 fortnightly mortgage repayments over the relevant period. The first payment into the joint account did not take place until 8 November 2007. Because backwards tracing is not permitted, then no payment prior to that can be included. This leaves a total of 70 regular payments, totalling $82,164.
63. As at 7 November 2007, the mortgage account balance on the Menai property was $318,848. The effect of the mortgage repayments the subject of Rheem's claim was that between that date and 18 June 2010, the loan balance on the Menai property was reduced by $318,485. Excluding the $290,000 capital payment, the net reduction in the mortgage account balance was only $28,485. This means that out of the $82,164 in regular repayments, $53,679 went on interest and fees. Counsel for Mrs McInnes submitted that only the principal reduction should be counted.
64. The same question arose in Heperu. In its published judgment the Court of Appeal said (at [156]): To the extent that a lien or charge can be seen as a security interest for what was earlier paid (as distinct from what remains), there may be an injustice to the volunteer in imposing such a remedy. Here, the funds were used to pay interest and principal. It is not self evident that the interest payments increased the value of her equity. Of course, payments of interest kept alive the opportunity of the equity of redemption and of capital appreciation thereof. The relevance of this to a restitutionary claim is not, however, self evident. As I have already said, further borrowings on the security of the assets appear to have been made, which may have reduced or eliminated any equity. The properties may also have fallen in value.
65. Slattery J considered the question in detail. At [53] he referred to [158] of the published judgment where Allsop P referred to authority and stated that "retention of the fund is the gravamen of such a claim". Slattery J continued at [54]: In my view it is consistent with these authorities that the monies that Ms Belle paid in interest to maintain the equity of redemption in the Coffs Harbour and Potts Point properties are not properly part of the fund that she retains against which Heperu may have an order for restoration. That means that the actual mortgage payments made when there were misappropriated funds in the Westpac account totalling $118,932.10, which mortgage payments included interest and principal, are not the correct measure of the misappropriated funds Ms Belle retained when she received notice of the Heperu's claim. Rather, it is the figure of $86,970.01, which is the reduction in principal indebtedness on the mortgages, excluding any reduction in indebtedness attributable to non-misappropriated funds.
66. Counsel for Rheem argued that it should receive an entitlement based on the full amount of the loan repayments. Counsel argued that interest and fee payments kept alive the equity of redemption and the opportunity for capital appreciation of the property. In my view this argument was squarely addressed by Slattery J and I should follow his Honour's decision. Should Rheem pursue its entitlement, it will be necessary, having calculated the proportion of each transfer which can be traced into mortgage repayments, to make a further reduction so as to limit the entitlement to the reduction in principal over the relevant period. Although the point does not seem to have been taken in Heperu, it would seem as a matter of principle that this must be done separately for each transfer, by reference to the reduction in principal over the period between the date on which the transfer was received and the date on which the trust funds in the account attributable to that transfer were exhausted.
67. It may be that Rheem will conclude that the complications in this exercise mean that it is not worth pursuing. I will however give Rheem an opportunity to consider its position in that regard.

Menai building work

1. Counsel for Rheem characterised the payments for the building work which I have summarised above as "renovations and improvements" and sought a charge for the whole of those payments. But in Boscawen v Bajwa (discussed below) Millett LJ said: If the plaintiff's money has been applied by the defendant … not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant's land has been enhanced by the use of the plaintiff's money.
2. His Lordship's statement of principle is supported by earlier authority in Re Diplock [1948] Ch 465 at 547, to the effect that mere expenditure on property which does not necessarily improve its value cannot be the subject of a tracing claim. That is also consistent with the views of text-book writers: see, for example, Smith, Law of Tracing (Clarendon Press, 1997) at 241.
3. Counsel for Rheem nevertheless argued that its claim should not be limited to the increased value of the Menai property, if any, attributable to the building works. Counsel relied on Leighton Contractors [2016] QSC 223. The case involved a similar fraud by an employee, some of the proceeds of which were applied by the employee's domestic partner to improvements to their home. Boddice J awarded judgment for the full amounts expended.
4. Boddice J considered he was dealing with a personal, not a proprietary claim. Of course a Heperu claim is a personal one, but it depends upon the prior establishment of a proprietary interest in accordance with usual equitable principles. It is not clear to me that this was what Boddice J had in mind. He did not refer to the authorities I have mentioned. I do not think his decision is sufficient reason to depart from the principle reflected in those authorities.
5. It follows that I must ask what value now exists in the Menai property which can be attributed to the building works in question. There is no reason to think that there is any. The largest component of the expenditure was undertaken for work done in 2013 and 2014, and can be expected to have substantially depreciated. The bathroom work done in 2018, although relatively recent, had only restored the bathrooms from their previous "tired" state.
6. I see no reason to suppose that that work or any of the other work the subject of the claim would have represented a substantial contribution to the value of the property had it been sold in January 2019. Despite counsel's efforts in cross-examination, no concession was made by Mrs McInnes on this issue. In any event, if the works did contribute to the capital value of the property, there is no evidence as to how much that would be. The Court would not simply act on some sort of guess; it would, I would think, require expert valuation evidence.
7. I therefore reject the claim concerning the building works. It is not necessary to go into the question of tracing so far as payments after 4 September 2017 from the PPS account are concerned.

December 2018 transfers to Mrs McInnes' bank account

1. There was no dispute that a Heperu claim was available against Mrs McInnes with respect to the $405,000 which Mr McInnes paid from the joint account to Mrs McInnes' account in December 2018. The question was, to what extent could those monies be traced back to monies fraudulently misappropriated from Rheem.
2. As already noted, the initial deposit to the Incentive Saver account came from monies which had accumulated in the Direct Saver account (after 11 May 2010) and the Maxi Saver account. The monies in those accounts were mixed funds, having been derived in part from monies in the PPS account and in part through the joint account (together with the $600 regular monthly payments).
3. As at 11 May 2010, the balance of the PPS account (representing monies stolen from Rheem) was $58,554. Monies stolen from Rheem and credited to the PPS account between that date and the last credit in October 2018 were $1,614,800. Over the same period, payments into the joint account from untainted sources would have been approximately $1.5 million.
4. Between 11 May 2010 and the establishment of the Incentive Saver account on 25 July 2013, payments from the PPS account to the Direct Saver account (see [117] above) totalled $186,215. Payments from the PPS account to the Maxi Saver account (see [122] above) totalled $100,000.
5. There is no itemised list of payments from the joint account to the Direct Saver account over the same period but from the calculation at [144] above the amount appears to be $87,555. After the establishment of the Incentive Saver account on 25 July 2013, there were payments into it from the joint account which totalled $179,058.
6. Before the $400,000 was paid out of the Incentive Saver account in December 2018, there were some other substantial withdrawals. Mr McInnes transferred $47,219 to the joint account on 30 September 2003. He transferred $135,000 to the PPS account on 4 September 2017. On 9 October 2015 he paid $100,000 towards the purchase of the Apple Circuit property. On 17 December 2017, he made payments totalling $75,000 towards the purchase of the boat.
7. The relevant money flows are set out in the following diagram (for simplicity I have ignored the untainted $600 monthly receipts from Rheem which were credited to the Direct Saver account, then the Maxi Saver account, and then the Incentive Saver account):
8. As the diagram shows, the payments out of the PPS account into the Direct Saver and Maxi Saver accounts totalled $286,215. It is possible to trace those payments into the initial credits to the Incentive Saver account. But no further funds flowed, directly or indirectly, from the PPS account to the Incentive Saver account. Counsel for Mrs McInnes contended, and it was not disputed, that on the conventional application of tracing rules, Rheem's tracing claim was limited to $286,215.
9. Counsel for Rheem did submit that the "broader view" of tracing should be adopted, with the result that the whole of the $400,000 paid into the joint account should be treated as stolen monies. Apart from relying on the circumstance that the monies stolen over the period greatly exceeded $400,000, counsel also pointed to the multiple, and indirect, transfers which took place to get the monies from the Direct Saver account and the Maxi Saver account to the Incentive Saver account when it was established. Counsel submitted that there was no commercial purpose to Mr McInnes' actions and it should be assumed he was attempting to cover his tracks.
10. In conducting his case before me, Mr McInnes said he knew nothing about tracing and its arcane rules. Although this was not said on oath, there is no reason to doubt it. I do not know why Mr McInnes split up the payments and put them through the Power Saver account as he did, but I cannot see why he could have thought it would have protected him against discovery of his fraud, or pursuit of the monies. There may well be some other explanation. In any event, again there was no demonstrated co-ordination between the receipt of stolen monies and the $400,000 payment. Again, Mr McInnes simply seems to have used the Incentive Saver account to accumulate monies in the ordinary way.
11. For these reasons, I consider that the conventional rules of tracing should be applied. Counsel indicated that, should I reach that conclusion, Rheem would elect to treat all other payments out of the Incentive Saver account as payments of untainted monies, thereby maximising the amount which could be traced into the $400,000 withdrawal in December 2018.
12. Accordingly, Rheem can trace the sum of $286,215 into the monies ultimately paid into Court. Again there may be available some further adjustment for interest accrued on the relevant savings accounts and this can be calculated by Rheem if it wishes.
13. On the face of it, Rheem is entitled to judgment by way of restitution against Mrs McInnes. But, as I explain in more detail below, it may be necessary for Rheem to elect between taking such a judgment and obtaining other relief under the Conveyancing Act, s 37A. I will return to this at the end of the judgment.

Proprietary claim against Menai property

1. As already noted, a thief is treated as a constructive trustee of stolen monies. If monies which are the subject of a constructive trust, or their traceable proceeds, are used to purchase or improve an asset, the true owner has an equitable proprietary interest in the asset. In a case of stolen money, if the asset is purchased entirely with monies which are stolen, the true owner will be entitled to equitable ownership. If the stolen monies are mixed with the thief's own, the true owner will be entitled to an equitable charge to the extent that stolen monies contributed to its purchase or improvement: Heperu at [140].
2. For the purposes of the argument before me, it was accepted that the same principles would apply to a Black v Freedman claim against an innocent recipient of stolen monies. Thus, to the extent that monies stolen from Rheem could be traced into assets held by Mrs McInnes at the time she became aware of Rheem's interest, there may be a proprietary entitlement to those assets.
3. Two questions arise for the purposes of this case. One is whether a proprietary claim of this type is available where the monies have been used, not for the purchase or improvement of property, but to pay off a mortgage debt over it. The other is whether indefeasible title (Real Property Act 1900 (NSW), s 42) protects a registered proprietor of Torrens Title property from such a claim.

Indefeasibility

1. In the Heperu litigation, no proprietary relief was sought and no indefeasibility defence was pleaded (see the Court of Appeal's reported judgment at [46]). But indefeasibility was pleaded by Mrs McInnes in the present case. It is convenient to deal with this issue first.
2. In Break Fast Investments Pty Ltd v Giannopoulos [2011] NSWSC 1508 the defence was pleaded and had to be considered. That case likewise concerned belonging to a plaintiff which were misappropriated and could be traced, in part, into mortgage repayments. Black J dealt with the defence at [101]-[103]. His Honour reasoned that a Black v Freedman claim is based on the receipt of property. For the purposes of indefeasibility, it is analogous to a claim for knowing receipt of property under the first limb of Barnes v Addy. It is a consequence of the High Court decision in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 that such a claim is defeated by s 42. His Honour therefore concluded that a Black v Freedman claim is similarly barred.
3. The issue was considered again by the Court of Appeal in Sze Tu v Lowe (2014) 89 NSWLR 317. In that case the takings of a partnership business were appropriated by one of the partners to himself. This was characterised by the Court of Appeal as a form of theft for the purposes of the rule in Black v Freedman. Some of the monies were applied by the defaulting partner to the purchase of various shares of properties in the names of his children.
4. The Court of Appeal held that the children were protected by indefeasibility. Gleeson JA, who gave the leading judgment, said (at [241]): … the equitable obligation of a volunteer recipient of stolen funds does not arise until the recipient is put on notice of an unauthorised receipt of funds. If notice comes after the volunteer recipient acquires an indefeasible title, then the notice is too late to impose an equitable obligation on the recipient, as a constructive trustee, to restore the property to the victim of the theft. It is not to the point that the recipient is a volunteer. At [243] his Honour approved the reasoning of Black J in Break Fast as a "correct application of principle".
5. Counsel for Rheem challenged the conclusion in the present case that Mrs McInnes was protected by indefeasibility. But in my view no sufficient ground was shown to distinguish the decisions in Break Fast and Sze Tu. The observations of the Court of Appeal in Sze Tu are binding on me and I regard them as concluding this issue.
6. It therefore follows that no proprietary claim is available against Mrs McInnes with respect to her share of the Menai property.

Entitlement to proprietary relief for mortgage repayments

1. Counsel for Rheem contended that it was nevertheless entitled to an equitable interest in Mr McInnes' share of the Menai property. Counsel contended that the entitlement arose by subrogation, based on the equitable doctrine that a third party who pays off a mortgage is entitled to treat it as having been kept alive for his benefit.
2. In Boscawen v Bajwa [1996] 1 WLR 328, the purchasers of a property obtained approval from a building society (AN) for a loan to finance the purchase. In anticipation of the purchase proceeding, AN paid the loan monies into the trust account of the purchasers' solicitor and the solicitor paid the monies over to the vendor's solicitors. The monies were paid over on terms that they would be held for the benefit of AN pending completion. The vendor's solicitors applied the monies to pay off the vendor's mortgagee ("Halifax"), but the purchase did not proceed and no mortgage was ever granted to AN.
3. The purchasers obtained judgment against the vendor and took out a charging order. The question was whether AN had a proprietary entitlement to the proceeds of the property which took priority over the vendor's interest, and thus over the charging order. The trial judge held that AN did have such a proprietary entitlement, by way of subrogation. This decision was upheld by the Court of Appeal for England and Wales.
4. The leading judgment was given by Millett LJ. His Lordship first addressed an argument that the trial judge had wrongly conflated tracing and subrogation. Millett LJ said that the two doctrines are different in nature. They (at 335E-F): … arose at different stages of the proceedings. Tracing was the process by which [AN] sought to establish that its money was applied in the discharge of the Halifax's charge; subrogation was the remedy which it sought in order to deprive [the vendor] (through whom the appellants claim) of the unjust enrichment which he would thereby otherwise obtain at [AN's] expense.
5. His Lordship then addressed an argument that subrogation would not reflect AN's intentions. AN had not intended to be a secured creditor of the vendor. It had intended to be a secured creditor of the purchasers when the purchase was completed. Millett LJ said: In the present case the payment was made by [the vendor's solicitors], and it is their intention which matters. As fiduciaries [of AN, because they received the monies on trust], they could not be heard to say that they had paid out their principal's money otherwise than for the benefit of their principal. Accordingly, their intention must be taken to have been to keep the Halifax's charge alive for the benefit of [AN] pending completion. In my judgment this is sufficient to bring the doctrine of subrogation into play.
6. The relationship between "unjust enrichment" (referred to in the passage I have quoted at [233]) and subrogation was considered by the High Court in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269. At [94] the Court stated that subrogation is an equitable remedy which does not operate "at large or in an unprincipled fashion", and cited Boscawen as an example of its application in well-defined circumstances "which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff". At [95]-[96] the Court referred with evident disapproval to subsequent developments in England which treated subrogation as a generally available remedy for restitution in cases of "unjust enrichment", in particular the reasoning of Lord Hoffman in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 at 231.
7. The Court commented (at [97], citations omitted): … there is difficulty in identifying the "unjust" enrichment in subrogation cases, which necessarily involve multilateral, rather than bilateral, relationships. Further, as Bryson J later explained, the reasoning of Lord Hoffmann in Banque Financière does not: "provide an explanation for the mortgagor's being treated as bound, in equity, to treat the person who paid off the previous mortgage as entitled to security under it. Restitution would provide a basis for treating the mortgagor as obliged to restore to the person who paid it the amount which had been paid to the mortgagee: the concept is inadequate for also treating the mortgagor as obliged to hold the payer secured. This is particularly clear where, as in this case, and in other cases where subrogation has been held to exist, the mortgagor in fact had no dealings with the payer, or where the payer believed that he was getting security under arrangements in which the mortgagor was not in fact involved."
8. Elsewhere in the judgment quoted by the High Court, Bryson J stated that the doctrine rests on the mortgagor's conscience being bound. Reference to an actual or presumed intention on the payer's part to keep the mortgage alive is not necessary and may be confusing, especially if the presumed intention is fictitious (in the sense that it is contrary to the mortgagor's actual intention): Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd [2003] NSWSC 1072 at [48]-[49]. His Honour added at [50], immediately after the passage cited by the High Court: To my mind it is enough to see subrogation as an entitlement which equity accords to the payer, firmly established by judicial decisions notwithstanding that a satisfactory doctrinal basis is difficult to identify, and notwithstanding that classification of the mortgagor's position as unconscionable seems very attenuated.
9. In the Court of Appeal's published judgment in Heperu, the Court stated that the analysis by the Court of Appeal for England and Wales in Boscawen was to be preferred to the English Court of Appeal's previous decision denying subrogation in Re Diplock. But in that case, as I have already stated, no proprietary relief was sought.
10. Proprietary relief was sought in Break Fast. Black J dealt with it at [113]-[115]. His Honour considered that it would arguably be unconscionable for the mortgagors to deny the plaintiff an interest corresponding to the payments which were applied in reduction of the mortgage. But he considered that it was unnecessary to grant equitable proprietary relief. This was because the personal remedy based on restitution was sufficient to avoid an unconscionable result.
11. In the present case, I do not think that it is so clear that a personal right of restitution would be sufficient. Much of the money misappropriated from Rheem appears to have been consumed. Mr McInnes stated from the Bar Table that he is likely to go bankrupt as a result of the case.
12. In these circumstances, I intend to follow the view tentatively expressed by Black J. Rheem is entitled to trace the monies misappropriated from it into the loan payments. Mr McInnes is therefore not entitled to deny that the monies in question were held by him on trust for Rheem. His position is analogous to that of the vendor in Boscawen who was not entitled to maintain that the payment of AN's money to discharge his mortgage left him free of any proprietary obligation to AN.

Proprietary claims against other assets of Mr McInnes

1. I have already set out the principles which apply to the recognition of equitable proprietary interests in property derived from stolen monies which are retained by the thief. In this part of the judgment I apply those principles to the assets retained by Mr McInnes apart from his share of the Menai property.

Cabin

1. The payments used to purchase the cabin present no difficulty. Those payments totalled $90,000. The monies came from the PPS account and the V2 account, in January 2017. At the time, both accounts were derived solely from monies stolen from Rheem. There is no debate about tracing.
2. Rheem is therefore entitled to equitable proprietary relief. Although it is entitled on my findings to equitable ownership, it seems that Rheem is content with an equitable charge for the $90,000 paid.
3. I have already explained why I consider that the payments for the building work on the Menai property do not give rise to an equitable proprietary interest in that property. For similar reasons, I do not think that the site fee paid on the demountable cabin can be included in Rheem's equitable charge.

Boat

1. I am concerned here with the payments for the purchase of the boat which totalled $153,000. Rheem has elected, given my views on the applicable tracing rules, not to make any claim with respect to the $75,000 paid from the Incentive Saver account. Nor did I understand that there was any claim for a charge based on the $25,000 paid from the joint account.
2. This leaves the $53,000 paid from the PPS account. The complication is that this money was paid out after $135,000 had been transferred into the PPS account from the Incentive Saver account on 4 September 2017. Rheem has elected, given my views on the additional tracing rules, to treat that transfer as untainted monies. From that date onwards, therefore, the PPS account contained mixed funds.
3. It follows that the tracing rules must be applied to see whether any part of the $53,000 can be traced to monies fraudulently obtained from Rheem. Cousel for Rheem did not address this in their submissions. If the claim is to be pursued, they will need to deal with it.

White Ibis Drive property

1. As already noted, the purchase payments for the property, which totalled $35,400, came from the PPS account. The payments pre-dated 4 September 2017. There is thus no difficulty with tracing. Rheem is entitled to an equitable charge for this amount.
2. The claim based on the mortgage repayments through the Suncorp offset account is more complicated. Given my conclusions on tracing, the claim is confined to the $16,500 paid from the PPS account. But the same complexities arise as for the regular Menai mortgage repayments. It would be necessary to trace the monies received from the PPS account through the offset account into the loan repayments, and remove the component of the traceable repayments attributable to interest and fees. There would need to be a separate tracing exercise to determine the extent to which payments from the PPS account after 4 September 2017 represented funds from Rheem.
3. Again none of this has been done. It may or may not be worthwhile, and I leave it to Rheem's further consideration.

Apple Circuit property

1. As already noted, the purchase payments for the Apple Circuit property totalled $162,990. Rheem has elected, given my views on the applicable tracing rules, not to make any claim with respect to the $100,000 paid from the Incentive Saver account.
2. There is no tracing difficulty with the remaining $62,990, which was paid from the PPS account before any question of it containing mixed funds arose. Rheem is entitled to an equitable charge for this amount.
3. The payments into the Apple Circuit offset account from the PPS account, which totalled $26,500, give rise to the same complexities as for the White Ibis Drive offset account. Again I will leave it to Rheem to consider whether it wishes to pursue its entitlements in this regard any further.

Claims to monies in court

1. The monies held in Court represent the proceeds of $405,000 paid by Mr McInnes from the joint bank account to Mrs McInnes' account at the end of December 2018. Rheem makes two claims concerning these monies. First, Rheem claims ownership of the monies, or part thereof, by tracing through the Incentive Saver account and the joint account into Mrs McInnes' account. This is a proprietary claim, as equitable owner. Rheem secondly alleges that the $405,000 was paid by Mr McInnes in an attempt to defraud his creditors and is therefore caught by the Conveyancing Act, s 37A.

Equitable ownership claim

1. Monies paid into court to await the determining of an ownership dispute are not held by the court on trust for the true owner: Harmer v Commissioner of Taxation (1991) 173 CLR 264 at 273-274. But once the Court has determined the ownership question, it would usually treat the monies as belonging to the true owner and pay them out accordingly.
2. In the present case, Rheem has established that at the point at which the monies were paid into Court it was entitled to trace into those monies to the extent of $286,215 (together perhaps for some further amount for interest: see [129] above). This amount should be paid out to Rheem.
3. Rheem has failed to establish a proprietary entitlement to the balance. On the face of it, those monies should be paid out to Mrs McInnes who was the owner of the monies at the time they were paid into Court. But this may be affected by the Conveyancing Act, s 37A, to which I now turn.

Conveyancing Act, s37A

1. For the purposes of s 37A, a disposition is made with intent to defraud creditors if it is made in an attempt to defeat or delay recovery by creditors: Marcolongo v Chen (2011) 242 CLR 546 at [32]. I have already described the circumstances surrounding the payment. I am satisfied that the payments were made, first into the joint account and then by Mr McInnes on to Mrs McInnes' account, in an attempt to put them beyond the reach of Rheem, or at least to make it more difficult for Rheem to retrieve them.
2. It follows that Mr McInnes made the payments in question with intent to defraud creditors in the relevant sense. Because the payments were made by way of gift, the fact that Mrs McInnes was unaware of her husband's fraud is not a defence. The payments are thus caught by s 37A. The contrary was not argued.
3. The effect of s 37A is to render the disposition in question "void". The court may declare the disposition to have been void and make orders for restitution so as to reverse it and restore the property to the disponor. But that is not the only available relief. As I pointed out in Nguyen v Corbett (No 2) [2018] NSWSC 441, where the offending disposition has been made by way of gift, it is open to the court, rather than restoring the property in question to the donor, to leave it with the donee but order the donee to make that property available to the donor's creditors to satisfy the donor's debts. I referred to this as a "make available" order: see at [27].
4. In the present case, the monies in question have now been paid into court. If the Court decides to rescind the transaction, it can pay the monies which do not in equity belong to Rheem to Mr McInnes, and allow Rheem as unsecured creditor to pursue enforcement action. The other option is to pay the monies back to the donee, Mrs McInnes, subject to a "make available" order in favour of Rheem (and any other creditors).
5. At first sight, it might be thought that the choice of remedy under s 37A is not likely to make any difference. But if the Court makes orders which wholly avoid the transaction and restore the ownership of the monies to Mr McInnes, Rheem's restitutionary entitlements against Mrs McInnes with respect to receipt of the monies might abate. Arguably, in that event the Court would have declared that she never received any title to the monies in the first place, and the basis for the Heperu claim would fall away. Rheem may therefore have an election to make. (I should note that this would not affect Rheem's proprietary entitlement; that entitlement would be equally valid against Mr McInnes as against Mrs McInnes).
6. All of this is subject to a possible qualification. I assume that the freezing orders made in this case ae still current. Before paying out any money to Mr McInnes or Mrs McInnes the Court would need to consider whether there is a justification for continuing those orders, and, if so, whether that means the monies in court should be subject to the same regime.
7. I will invite submissions from the parties on these questions in due course.

Conclusions and orders

1. I have concluded that: 1. Rheem is entitled to judgment against Mr McInnes, on account of the monies obtained by him by fraud, in the amount of $2,098,608; 2. Rheem is entitled to judgment against Mrs McInnes (jointly with Mr McInnes), on account of the $290,000 repayment made on the Menai property mortgage on 17 May 2010, in the amount of $237,480; 3. Rheem is entitled to judgment against Mrs McInnes (jointly with Mr McInnes), on account of the repayments made on the Menai property mortgage from the joint account between 8 November 2007 and 18 June 2010, in a further amount not exceeding $27,075, to be calculated on the application of tracing rules in accordance with this judgment; 4. subject to any election Rheem may be required to make as a consequence of (9), Rheem is entitled to judgment against Mrs McInnes (jointly with Mr McInnes) on account of the payments totalling $400,000 received by her from their joint bank account in December 2018, in the further amount of $286,215; 5. the figures in (2), (3) and (4) are subject to increase by reference to interest earned on bank accounts through which the relevant payments are traced; 6. Rheem is entitled to an equitable charge over Mr McInnes' share of the Menai property in the amounts specified in (2) and (3), so as to secure the joint liabilities of Mr McInnes in (1) and Mrs McInnes in (2) and (3); 7. when the monies held by the Court were paid in, Rheem was entitled to an equitable charge over those monies in the amount specified in (4), and that sum should be paid out of Court in reduction of the joint liabilities of Mr McInnes in (1) and Mrs McInnes in (4); 8. the remaining monies in Court are the proceeds of dispositions by Mr McInnes in favour of Mrs McInnes which contravened the Conveyancing Act, s 37A; 9. those monies belong either to Mrs McInnes or to Mr McInnes in accordance with a further determination to be made by the Court, possibly involving an election by Rheem; 10. Rheem is entitled to equitable charges against the following assets of Mr McInnes to secure the following amounts: 1. White Ibis Drive property: $35,400; 2. Apple Circuit property: $62,990; 3. Wisemans Ferry cabin: $90,000; 1. Rheem may be entitled, subject to the application of tracing rules in accordance with this judgment, to a further equitable charges against the following assets of Mr McInnes to secure amounts not exceeding the following: 1. White Ibis Drive property: $16,500; 2. Apple Circuit property: $26,500 3. power boat: $53,000; 1. Rheem's proprietary claim against Mrs McInnes' share of the Menai property fails.
2. It will be necessary, if Rheem's entitlements in (3) and (11) are pressed, to calculate the value of those entitlements in accordance with the tracing rules described in this judgment. Rheem may also choose to calculate any increase in the figures in (2) (3) (if pressed) and (4) on account of interest in the relevant bank accounts. It will also be necessary to calculate statutory interest on the judgments in (1), (2), (3) (if pressed) and (4).
3. In the course of the trial there was a brief discussion concerning whether the amounts of the charges in (6), (7), (10) and (11) should carry interest at statutory rates. If there is any issue on this it will need to be considered and the amounts calculated.
4. It will also be necessary to consider what orders are to be made as a consequence of my conclusions concerning the Conveyancing Act, s 37A, including whether there is any requirement for Rheem to elect against accepting the judgment in (4).
5. There appear to be two consequential issues. The first is the effect of the judgment on the continuation of the freezing orders previously made against Mr McInnes and Mrs McInnes. The second is the incidence of costs.
6. I will direct Rheem to bring in a minute of order giving effect to this judgment, including the calculations to which I have referred, and proposing orders with respect to the consequential issues. If further written argument, or a further hearing, is required, that can be arranged with my Associate.
7. Finally, I note that counsel for Rheem indicated that no immediate order for judicial sale would be sought if Rheem succeeded in obtaining charges on any of the properties or the boat. Counsel suggested that practice required any such application to be made by way of separate proceedings. Whether that is correct or not, I think that any such application consequential on (6), (10) or (11) (if pressed) should be made in the FLA proceedings, which remain to be determined after these proceedings have been finalised.
8. The orders of the Court are: 1. Adjourn the proceedings to 19 October 2020, or such other date as the parties may arrange with my Associate. 2. Direct that the plaintiff confer with the defendants and, not less than two days before the adjourned date, submit a minute of order giving effect to this judgment and dealing with the consequential issues identified in this judgment.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 October 2020