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

Practice and procedure - Pleadings - Turns on own facts

Finance Brokers Control Act 1975 (WA), s 43, s 48

Application for leave to amend statement of claim dismissed

Agar v Hyde [2000] HCA 41; (2000) 201 CLR 552

Astrovlanis Compania Naviera SA v Linard [1972] 2 QB 611

Bailey v Commissioner of Taxation (Cth) [1977] HCA 11; (1977) 136 CLR 214

Barnes v Addy (1874) LR 9 Ch App 244

BCCI (Overseas) Ltd v Akindele [2001] Ch 437

Beach Petroleum NL v Johnson [1993] FCA 283; (1993) 115 ALR 411

Brambles Holdings Ltd v Carey (1976) 2 ACLR 176

Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373

Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658

Deputy Commissioner of Taxation (Cth) v Robinswood Pty Ltd [2001] WASC 191; (2001) 24 WAR 284

Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 5 ACSR 424

Fox v H Wood (Harrow) Ltd [1963] 2 QB 601

Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101

GW Young & Co (Ltd) v Scottish Union & National Insurance Co (1907) 24 TLR 73

Hancock Family Memorial Foundation Ltd v Belle Rosa Holdings Pty Ltd (1992) 8 WAR 435

Hancock Family Memorial Foundation Ltd v Porteous [2000] HCA 51; (2000) 201 CLR 347

Hancock Family Memorial Foundation v Porteous [2000] WASCA 29; (2000) 22 WAR 198

Johnson Tiles Pty Ltd v Esso Australia Ltd [2000] FCA 1572; (2000) 104 FCR 564

Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16

Lemon & Co Pty Ltd v Moran and Cato Pty Ltd [1921] VicLawRp 43; [1921] VLR 240

LHK Nominees Pty Ltd v Kenworthy [2001] WASC 205

Lord v Spinelly (1991) 4 WAR 158

Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd (1996) ATPR 41­522

National Bank of Australasia v Morris [1892] AC 287

Ninety Five Pty Ltd (In liq) v Banque Nationale de Paris [1988] WAR 132

North Kalgurli Mines Ltd v FFE Minerals Australia Pty Ltd [2000] WASC 218

Pilmer v The Duke Group Ltd (In liq) [2001] HCA 31; (2001) 180 ALR 249

Pyrenees Shire Council v Day [1998] HCA 3; (1998) 192 CLR 330

Queensland v Pioneer Concrete (Qld) Pty Ltd (1999) ATPR 41­691

Re Montagu's Settlement Trusts [1987] Ch 264

Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 76 ALJR 203

Russo v Bendigo Bank Ltd [1999] VSCA 108; [1999] 3 VR 376

Smith v Littlemore (1996) 15 WAR 289

Sovar v Henry Lane Pty Ltd [1967] HCA 31; (1967) 116 CLR 397

Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 WLR 802

1 PULLIN J: There is before me an application by the plaintiff to amend the statement of claim and an application by the defendant for further and better particulars of the statement of claim. Before I deal with those applications in detail, I should state some general principles.

2 Pleadings and particulars furnish a statement of the case sufficiently clear to allow the other party a fair opportunity to meet it. The aim is to ensure that the litigation is conducted fairly, openly and without surprises. Order 20 r 8 states that a pleading must contain, and contain only, a statement in a summary form of the material facts on which the party pleading relies but not the evidence by which those facts are to be proved. There is also a requirement that the statement must be as brief as the nature of the case permits.

3 Order 20 r 13 requires pleadings to contain particulars of the claim in relation to fraud or "any condition of the mind of any person" (including fraudulent intention) but not so where knowledge is pleaded. Order 20 r 13(4) provides:

"Where a party alleges as a fact that a person had knowledge or notice of some fact, matter or thing, then ... the Court may ... order that party to serve on any other party -

(a) where he alleges knowledge, particulars of the facts on which he relies; ...".

See Dow Corning Australia Pty Ltd v Girys [2001] WASCA 361. If fraud is alleged, meaning actual fraud or personal dishonesty or moral turpitude, the material facts will be of some conduct along with some superadded mental component, either intention to defraud or, alternatively, knowledge of circumstances which make the conduct fraudulent. If the latter is the case, then the material fact is the pleading of knowledge, and particulars do not have to be given at first unless requested and ordered by the Court.

4 A bank is not a trustee of the customer's money: R v Davenport [1954] 1 WLR 569. The bank borrows money from the customer and undertakes to repay on demand on receipt of an unambiguous written order from the customer. Any written order which requires the bank to pay a greater amount than the balance standing to the credit of the customer or his agreed overdraft limit, may be declined in toto: Bank of New South Wales v Laing [1954] AC 135. The bank may exercise a right of set-off between accounts which are in credit and those which are in debit: Union Bank of Australia Ltd v Murray-Aynsley [1898] AC 693.

5 If an account is overdrawn, then the customer is obliged to repay it pursuant to the contractual arrangement between the customer and the bank. The payment by the bank on an overdrawn account is a loan repayable on the terms agreed. In relation to trust accounts, a bank is not called on to supervise the trustee's operation: Gray v Johnston (1868) LR 3 HL 1. If, however, a bank has actual knowledge of any operation which constitutes an actual breach of trust, then the bank is liable to remedies at the suit of the beneficiaries or trustee: Gray v Johnston (supra).

6 In relation to overdrawn trust accounts, Weaver and Craigie, "The Law Relating to Banker and Customer in Australia", have the following to say:

"Trust accounts do sometimes become overdrawn, usually by inadvertence, but occasionally not. What then is the bank's position? Although there does not appear to be any specific authority, on general principles the overdraft would seem to be a debt incurred by the trustee for which the trustee alone would be liable and for which the bank could sue him. A cheque drawn when there are insufficient funds to meet it is a request for an overdraft: Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226 at 233.

The main danger to a bank, illustrated in the preceding paragraphs, when it permits a trust account to become overdrawn (apart from the possibility that the debtor may be unable to repay) lies in the later repayment of the debt. The bank knows that the account is normally a repository for trust moneys. Therefore, the extinction of the overdraft by the payment in of moneys which the bank is well aware are probably subject to a trust could make the bank privy to a breach of trust."

7 If a bank knows of a breach of trust, then it will be liable to the trustee or beneficiaries for any money misapplied by the trustee, even if the bank derives no benefit: Stephens Travel Service International Pty Ltd v Qantas Airways Ltd (1988) 13 NSWLR 331.

8 If, to the bank's knowledge, the trustee customer uses trust funds to pay off the customer's personal overdraft by a cheque drawn on the trust account, the transaction can be set aside. There is no right of set-off in relation to the balance of an account which the bank knows to be a trust account against the customer's indebtedness on other accounts: In re Gross; Ex parte Kingston (1871) LR 6 Ch App 632.

Third party liability in relation to breaches of trust

9 A third party recipient of trust property is liable to account - and liable for other remedies for those moneys - if he had:

(b) knowledge of the fact that the moneys were being misapplied.

10 In relation to a recipient, knowledge may be actual or constructive. It is not necessary in the case of recipient liability to prove dishonesty: Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; (1999) 151 FLR 191 at par [79].

11 In relation to accessorial liability, the third party must be shown to have had:

(b) knowledge of the fact that the moneys were being misapplied.

12 In this case, however, that is in the case of accessorial liability, constructive knowledge will not be enough: Armitage v Nurse [1998] Ch 241 and Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] 1 Ch 250. There must be actual knowledge. The participation with knowledge of the trust and knowledge of the misapplication must be characterised as dishonest before a claim against the accessory will succeed: Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] UKPC 4; [1995] 2 AC 378; and see also LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291. Dishonesty means not acting as an honest person would in the circumstances. Dishonesty is usually to be equated with conscious impropriety. However, honesty is not an optional scale with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.

13 In the Royal Brunei case, Lord Nicholls delivering the judgment of their Lordships, at 389 said:

"In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."

14 Section 48(1) of the Finance Brokers Control Act 1975 states that every finance broker shall maintain at least one trust account, designated as such, with a bank in the State and shall, as soon as practicable, pay to the credit of that account all moneys received by him for or on behalf of any other person in respect of loans negotiated or arranged by the finance broker or in respect of interest on such loans collected by him. Section 48(2) states:

"Moneys so paid into any such trust account shall not be available for the payment of the debt of any other creditor of the finance broker, ..."

15 That provision affects persons other than the finance broker, namely creditors of the finance broker, and that can include a bank in circumstances where the bank has advanced moneys to the finance broker. Section 48(3) provides:

"Loan moneys received by a finance broker in the course of negotiating or arranging a loan and moneys received by a finance broker in respect of interest on loans, shall not be withdrawn from his trust account except for the purpose of completing the loan or paying in accordance with subsection (4) the moneys in respect of interest on loans, or as otherwise authorized by this Act, or as otherwise authorized by the prior written consent of all parties to the loan.";

and s 48(4) provides:

"A finance broker shall pay moneys withdrawn from a trust account to the person or persons lawfully entitled or authorized to receive them."

16 I should also mention s 43, which authorises payment of commission if the finance broker is licensed.

17 I now turn to the pleadings in the case. The claim in this case is brought by the plaintiff as a trustee. The plaintiff is alleged to have been the defaulting trustee in the transactions which are under consideration, but that does not preclude the bringing of the action by that trustee. See "Assistance" in Birks and Pretto "Breach of Trust" (2002).

18 The statement of claim alleges that the plaintiff was a finance broker trading as Graeme Grubb Finance Broker. It pleads that s 48 of the Finance Brokers Control Act required the plaintiff to maintain a trust account and that, in fact, the plaintiff did maintain at the defendant bank, a trust account called the Graeme Grubb Finance Broker Trust Account. The first part of the statement of claim up to par 11 pleads that trust moneys, that is moneys of investors, were deposited to the account and that the trust account had debit balances on various occasions between 1996 and 1999.

19 I pause there to repeat what I have already mentioned, namely, that as soon as the account went into overdraft, the trustee was personally borrowing moneys from the bank repayable on the terms agreed between the bank and the plaintiff, or if not agreed, then on demand. The bank was then a creditor of the plaintiff because the account was overdrawn. Thereafter, if trust moneys were paid into the account, those trust moneys were being used to reduce the personal liability of the plaintiff to the bank, that being a misuse or misapplication of trust funds and a breach of s 48 of the Finance Brokers Control Act.

20 Those material facts, if proven by evidence at trial, reveal a breach of trust by the plaintiff. It is pleaded that the bank received the trust moneys. As recipient, the bank is liable to account for those moneys if it is pleaded and proved that:

(a) there is actual constructive knowledge of the trust; and

(b) the bank had actual or constructive knowledge of the fact that the moneys were being misapplied.

21 The bank would also be exposed to remedies as an accessory if it is pleaded and proved that the bank had:

(b) actual knowledge that moneys were being misapplied with the assistance of the bank, and

(c) if the bank's conduct can be characterised as dishonest,

that is, if it did not act as an honest person would do in the position of the bank.

22 Constructive notice or knowledge not amounting to dishonesty will not be sufficient in relation to the accessory claim, although I make mention here of the above quote from the Royal Brunei case, which indicates that lack of honesty in some circumstances will simply be the knowledge that trust moneys are being paid in reduction of a personal indebtedness. Therefore, it is open to the plaintiff to advance a case and argue that dishonesty will be proved by actual knowledge of the existence of the trust and actual knowledge that trust moneys were being paid into the overdrawn trust account.

23 It can therefore be seen that whether the claim is recipient liability or accessorial liability, it will be necessary for the plaintiff to plead and prove that the bank had knowledge of the existence of the trust.

"At all material times the Defendant knew or ought to have known that the moneys credited to the trust account were moneys held on trust by the Plaintiff and alternatively or could only be dealt with in accordance with s 48 of the Act and alternatively or was on inquiry as to those facts by reason of the following facts and matters ..."

25 This pleading would be acceptable in relation to the recipient liability claim because actual or constructive knowledge which is pleaded would be sufficient. However, in relation to accessorial liability, constructive knowledge is not sufficient.

26 Paragraph 11 of the statement of claim as it stands at the moment reads:

"By reason of the matters pleaded in paragraphs 7 to 10 the Defendant knew or ought to have known that the moneys it applied to the reduction of the debit balance of the trust account were being applied in breach of trust and in breach of statutory duty and the Defendant participated in such breach of trust and breach of statutory duty."

27 The language in this paragraph suggests that the pleader intended to rely on both recipient liability and accessorial liability. The paragraph cannot stand, however, because constructive knowledge suggested by the phrase "ought to have known" will not avail the plaintiff in relation to accessorial liability. The plaintiff seeks to delete that paragraph and to add a new par 11 which reads:

"By reason of the matters pleaded in paragraphs 7 to 10 herein:

11.1 The Defendant was in knowing receipt of trust property, for which it is liable to account to the Plaintiff;

11.2 Further or alternatively, the Defendant by allowing and facilitating transfers of funds from out of the trust account from time to time, dishonestly participated in a misapplication of trust monies, for which it is liable to account to the Plaintiff."

Particulars were provided of the "dishonest participation".

28 It is clear from the new par 11 that the intention of the pleader is to set up recipient liability in par 11.1 and accessorial liability in par 11.2. I will deal first with the attack on par 11.1. Paragraph 11.1 simply pleads that the defendant was in "knowing receipt" of the trust property. Lord Nicholls in "Knowing Receipt: The Need for a New Landmark" in "Restitution, Past, Present and Future", ed W R Cornish and others, says:

"... knowing receipts are time-honoured catchwords familiar to generations of equity lawyers. They slip easily off the tongue."

29 The difficulty with pleading merely that there was knowing receipt conceals what is known. What must be pleaded is knowledge of material facts which of course will differ from case to case. The pleader must specify the material facts said to be known.

30 If the plaintiff's case is, as counsel for the plaintiff submits, that the defendant was in receipt of trust property when it knew or ought to have known of the existence of the facts in par 8 and also that the bank knew that the trust moneys were credited to the account when it was overdrawn, then it would cover knowledge on both of these points; ie, the existence of the notice of the trust and existence of knowledge of the misapplication.

31 At the moment, the pleading only alleges knowledge of the trust which is picked up by reference back to par 8. It may be thought self-evident that the bank would have knowledge of the crediting of moneys into the overdrawn account, but we are here, of course, concerned with pleading points, and in my view it is necessary to expressly plead knowledge by the bank of the misapplication, which at the moment I consider has not happened.

32 It may appear by implication, but in a case of this kind I am of the view that it is necessary to expressly plead these points so that they are clearly identified and the parties can understand the points in issue so, if necessary, proper particulars can be sought. So for those reasons, I would not grant leave to amend par 11 in terms of the new par 11.1. I would grant leave to replead.

33 In relation to accessorial liability, par 11.2 pleads that the defendant allowed and facilitated transfers of funds "out" of the trust account from time to time. That at first confused me, but counsel for the plaintiff tells me that the intention is to plead that trust moneys were paid "into" the account when it was overdrawn, thereby discharging the bank's indebtedness. That should be tidied up.

34 A plea of "knowing" participation or "knowingly participating", in my view, is not enough. What has to be pleaded are the material facts from which the plaintiff will be able to argue that dishonesty is revealed. The incorporation by reference of par 8 in relation to knowledge of the trust will not do, because par 8 alleges actual and constructive knowledge as is evident by the opening phrase: "At all material times the defendant knew or ought to have known" the facts which are pleaded.

35 It is true that this can be easily remedied, but in my view it should be remedied so the plaintiff must plead the actual and not constructive knowledge of the defendant and the fact that the moneys were misapplied along with the other material facts to show knowledge on the part of the bank sufficient to prove dishonesty. In my view, this has not happened in the proposed par 11, nor does it happen in the particulars to par 11.2.

36 The critical aspects seem to me, as a result of argument from the bar table, that the bank knew that the account was overdrawn and that trust moneys were paid into that account in reduction of the debit balance, and it is knowledge of those facts which must be pleaded to support the cause of action. In my view, the pleading does not achieve that at the present time, so I would refuse leave to amend in terms of par 11.2, but I would grant leave to replead.

37 In relation to the second part of the statement of claim, leading up to par 14, it seems that there were various accounts operated by Graeme Grubb. There were 10 other accounts which are referred to in par 12.4 of the statement of claim. It seems that moneys were transferred from the trust account to the credit of these 10 other accounts, and it is alleged that these transfers were not transfers in accordance with s 48.

"By reason of the matters pleaded in paragraphs 7, 8, 12 and 13 the Defendant knew or ought to have known that the moneys it applied to the reduction of the debit balances of the Grubb Group of Accounts were being applied in breach of trust and in breach of statutory duty and the Defendant participated in such breach of trust and breach of statutory duty."

39 Again this is an unsatisfactory rolling up of the allegations in relation to knowing receipt and accessory liability, and the plaintiff seeks to amend to add a new par 14 which reads:

"By reason of the matters pleaded in paragraphs 7, 8, 12 and 13 herein:

14.1 The Defendant was in knowing receipt of trust property, for which it is liable to account to the Plaintiff;

14.2 Further or alternatively, the Defendant by allowing and facilitating transfers of funds from and out of the trust account from time to time and thencefrom into other accounts operated by the Defendant Bank, dishonestly participated in a misapplication of trust monies, for which it is liable to account to the Plaintiff."

40 This new par 14 does separate out the two separate claims of recipient liability and accessory liability, but again, in my view, it does not adequately plead out the material facts for the reasons which I have already mentioned in relation to par 11.

41 I should say that I am not encouraging the conversion of the statement of claim into what I call an opus magnum, as many pleaders seem to consider necessary in large money claims. The current pleaders are to be commended for keeping the pleading as brief as the nature of the case permits, but the problems which I have identified must be addressed.

42 I should deal with another aspect which was argued before me today. It has been suggested by counsel for the defendant that each misappropriation required its own allegation of knowledge, either of the existence of the trust or the misappropriation or misapplication. That would indeed turn the pleading into an opus magnum. I see no reason why the plaintiff, if it chooses to run its case in this way, cannot plead that knowledge of the trust was established at the opening of the relationship between the parties and that that knowledge continued on through the whole of the period under consideration. The same may be possible with respect to knowledge that trust moneys were credited to an overdrawn trust account and knowledge that this must have benefited the bank, but I think it is necessary to wait until the repleading to see how that emerges. Hope JA in Stephens Travel Service International v Qantas Airways (supra) at 359 indicated that a generalised approach is possible if the facts allow it in the particular case.

43 For the above reasons, I would refuse the application to amend, but grant leave to replead.

The Application for Further and Better Particulars of Statement of Claim

44 It is clear that some of the requests relate to matters which are going to be repleaded, and as a result of the submissions by counsel, it is only necessary for me to deal with one issue which relates to the request for particulars in relation to requests five and six, which seek particulars of par 8 of the statement of claim. The requests ask the plaintiff to identify the person or persons who had the knowledge which is to be attributed to the bank in par 8.

45 In fact, one of those persons has already been identified, but in other instances of knowledge referred to, or the facts relied upon known to the bank, it is not made clear which person had the knowledge to be attributed to the bank.

46 Knowledge of an appropriate employee may be attributed to the bank: Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1; [1972] AC 153. Argument has ranged over the issue about whether knowledge may be aggregated; that is, whether knowledge of one officer may be added to the knowledge of another to allow a conclusion that the combined knowledge is possessed by the bank. That question might arise, for example, if one officer of the bank knew of the existence of the trust but not the facts amounting to the breach and another officer knew of the facts showing that there was a breach of trust if that person had known of the existence of the trust but not, in fact, knowing about the existence of the trust.

47 It is a little difficult to see how that could arise in this case, but I do not know anything of the facts, and I simply note that this debate has taken place in the exchange of submissions. The relevant cases are Re Chisum Services Pty Ltd (1982) 7 ACLR 641 and Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 at 144.

48 In my view, it is not necessary to delve into this area of the law. That would be to anticipate a problem which may not arise. At the moment, the question is the more simple one. Does the plaintiff have to identify the person with the knowledge of the matters pleaded in par 8, or is it simply enough to say that the bank knew the facts?

49 In my view, the material fact is that a person knew the facts, and from that it can be argued that the bank had the knowledge. In my view, it is necessary to give particulars of the person alleged to have knowledge attributable to the bank, so that would result in an order that the question directed to who had the knowledge should be answered at this stage.