SCEGS Redlands Ltd v Alison Barbour & Anor

Supreme Court of NSW|2008-08-28|Before: Rein J

CITATION : SCEGS Redlands Ltd v Alison Barbour & Anor [2008] NSWSC 928

DECISION : Judgment for second defendant. Plaintiff to pay second defendant's costs.

CATCHWORDS : Employee misappropriates funds of employer and places these funds in joint bank accounts held with husband from whom she is separated - Husband's access to statements of account and control of accounts - Whether benefit to him - Whether failure to look at bank statements constitutes fault, rendering him liable to reimburse the employer

Croton v The Queen (1967) 117 CLR 326 James v Oxley (1939) 61 CLR 433 Lockwood v Vince (2007) 166 FCR 305 National Commercial Bank v Batty (1985-1986) 160 CLR 251 Heperu Pty Ltd & Ors v Morgan Brooks Pty Ltd & Ors (No 2) [2007] NSWSC 1438 McNally v Harris [2008] NSWSC 659 CASES CITED : Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 Banque Belge Pour L'Etranger v Hambrouck [1920] 1 KB 321 El Ajou v Dollar Land Holdings Pty Ltd [1993] 3 All ER 717 Consul Developments Pty Ltd v DPC Estate Pty Ltd (1975) 132 CLR 373 Farah Constructions Pty Ltd v Say-Dee Pty Ltd 203 CLR 89 National Australia Bank Ltd v Hokit Pty Ltd (1996) 39 NSWLR 377 Roxborough v Rothmans of Pall Mall (2001) 208 CLR 516 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548

Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (4th edn, Butterworths) TEXTS CITED : Goff and Jones, The Law of Restitution (4th edn, 1986) Manchester Trust v Furness [1895] 2 QB 539

SCEGS Redlands Ltd PARTIES : Alison Barbour Wayne Dungey

COUNSEL : Mr D.B. Studdy (Plaintiff) Mr D.A. Smallbone (with Mr D.P.O'Connor) (Second Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Date of Hearing: 26, 27, 28 August 2008 Date of Judgment: 5 September 2008

4095/06 SCEGS Redlands Ltd v Alison Barbour & Anor JUDGMENT 1 Rein J: The plaintiff ("the school"), for whom Mr D.B. Studdy of Counsel appears, operates a school known as SCEGS Redlands. 2 The first defendant, Ms Alison Barbour ("Ms Barbour") was employed by the school as a pay roll officer. 3 The second defendant, Mr Wayne Dungey ("Mr Dungey"), for whom Mr D.A. Smallbone with Mr D.P O'Connor of Counsel appears, was, until 2006, married to Ms Barbour, and there is a child of the relationship. They separated in 2000. 4 Ms Barbour, out of school monies, paid herself amounts totalling $729, 110.66 over a six-year period (from 2000 to 2006), to which she had no entitlement. She has, I was informed, been sentenced for her criminal misconduct. The school has, I was informed, obtained judgment against her. 5 Ms Barbour and Mr Dungey held the following accounts with Westpac Banking Corporation ("Westpac"): (1) Classic Account No 1 (57 4106) (2) Classic Account No 2 (57 8465) (3) NEVS Account (14 4263) (4) Premium Option Home Loan Account (82 1703) (5) Business Development Loan (NEVS) (14 4050) (6) Turramurra Home Loan (11 6391) (7) Turramurra Home Loan (11 8290) (8) Investment Property Loan (11 4580)

6 All of (1)-(7) are joint accounts, in the name of both defendants.

7 The accounts into which Ms Barbour paid the misappropriated monies, and total amounts for each account, were: (1) Classic No 2 Account - $342, 610.47 (2) NEVS Account - $183, 621.94 (3) Premium Option Home Loan Account - $202, 878.25 8 The school seeks to recover the amount of $729, 110.66 from Mr Dungey on the basis that the amounts had been received by Mr Dungey to the use of the school, but accepts that this must be reduced by amounts recovered by the school from Ms Barbour and others, leaving a balance claimed of $350,922.55. 9 The school had also pleaded its case on the basis of an equitable charge, but this was not pressed at the hearing.

10 Account 11 6391 and 11 8290 (i.e. (6) and (7) above) were home loan accounts in respect of 34 Geoffrey Street Turramurra ("the Turramurra property"), owned jointly by Mr Dungey and Ms Barbour. Ms Barbour held a one third interest from 1992, (having received that under a will), and she and Mr Dungey purchased the remaining two-thirds from Ms Barbour's brother in 1992, borrowing jointly $151,000 from Westpac, which took a mortgage over the property. The monthly repayment as at 2006 was $484 on the first loan, and $793 on the second loan. Payments were made out of the Classic Account No 1 (57 4106): see Exhibit 2, pp 207-418. The Classic Account No 1 was the account into which Ms Barbour paid her legitimate salary payments, and transfers from the three accounts into which she paid the misappropriated monies (see MFI 4 in which the movement of funds into Classic Account No 1 is summarised). 11 In 1995, Mr Dungey purchased a property at Jimboomba, Queensland, for $189,000 borrowing the purchase price from Westpac. Westpac Investment Property account 11 4580 (i.e. (8) above) was established in his name only, and a mortgage taken by Westpac over that property. Rent, (after deductions for costs and management expenses,) was paid into the Loan account by the managing agents for the property. 12 In 1997 or 1998 Ms Barbour and Mr Dungey established an account in joint names to use for their Amway business. Account number 57 8465 is known as Classic No 2 Account. It appears that the Amway business was not pursued with any vigour, but it was conducted as a partnership. 13 In 1999, Mr Dungey and Ms Barbour bought or established a business known as the North Epping Video Store. They borrowed $50,000 from Westpac for this endeavour, and a business cheque account, being account (3) above, the NEVS account, was established for the conduct of that business and a Business Development Loan Account ((5) above) was set up. 14 Account (4) above, the Premium Option Home Loan, is sometimes referred to as the car loan account, as it appears to have been established to enable Ms Barbour to purchase a vehicle: T18.10-14. It was not used only for that purpose. I shall refer to it as the car loan account for ease of reference. 15 The school accepted that Mr Dungey had no knowledge of the fraud perpetrated by Ms Barbour. Its case is that all of the $729,110.66 was paid into the three accounts jointly operated by Mr Dungey with Ms Barbour, and accepting that that fact alone is not sufficient to establish liability in Mr Dungey to repay the monies so credited, it asserts that there are a number of matters (including that fact) which "in justice and in equity" lead to Mr Dungey being required to repay the full amount less recoveries. As a fall back position, the school contended for a liability in Mr Dungey to pay an amount of $71,000 approximately or alternatively $190,000. It accepted a fourth possible outcome as open for an amount of $179,347.40. I will explain how those alternative figures were arrived at later. 16 The matters upon which the school relies are: (a) the accounts were joint accounts; (b) the NEVS account was a partnership account for the video business; (c) Mr Dungey took no steps to investigate the account over a six-year period, despite having no constraints on him doing so; (d) Mr Dungey had the ready ability to access the accounts over a six-year period, but simply decided not to do so (e) Mr Dungey in fact having bank statements for two of the accounts for some of the period but apparently not bothering to read them; (f) Mr Dungey admitting that if he had made the relevant inquiries earlier he would have discovered the fraud; (g) Mr Dungey having had the benefit of SCEGS' money by having the interest payments on the Turramurra loan discharged in accordance with the terms; and (h) SCEGS having lost a substantial sum of money through no fault of its own, which clearly could have been avoided by Mr Dungey exercising the control that he had over the accounts with the constructive notice that he had. 17 In its case, the school relied on a report of Price Waterhouse Coopers ("PWC"). Mr Dungey in his case relied on a report of Mr Seiffert, his accountant. The PWC Report links the 390 payments made out, as if to 5 employees of the school (who had previously retired), to the Classic Account No 2, the NEVS account, and the car loan account (see Exhibit A2, p 79). 18 MFI 4 is a summary of payments made from the Classic Account No 2, NEVS account and car loan account into Classic Account No 1. Classic Account No 1 was the account from which payments were made to meet mortgage payments. It will be seen that the total of all payments from those three accounts into Classic Account No 1 was $179,347.40. This is how the fourth possible outcome, referred to in [15], is calculated. The $71,000 is a total of the amounts paid into the NEVS account partnership and $190,000 is the total amount of misappropriations from the time Mr Dungey received copies of the bank statements (or some of them at least) in 2005. 19 I have referred to the fact that Mr Dungey and Ms Barbour separated in 2000. The misappropriations commenced shortly after that. 20 Mr Dungey gave evidence as to the arrangements between himself and his former wife, and of the terms of their divorce agreement and he was not challenged on any aspect of this evidence, which I shall summarise: (1) He moved out of the Turramurra property on 14 February 2000. Ms Barbour and their young son continued to reside there and Mr Dungey exercised visitation rights with his son by arrangement with Ms Barbour. (2) From early 2005, he had equal time with their son, by arrangement. (3) The Turramurra property was sold in 2006, pursuant to Family Court Orders made on 2 March 2006. (4) Mr Dungey paid part of his income into the Queensland Property Loan (11 4580) to cover mortgage instalments. (5) Net rentals from the Queensland property would be paid into Classic Account No 1, and this was the account from which Ms Barbour and Mr Dungey paid general and living expenses. After separation, Ms Barbour agreed to pay the instalments for the mortgage on the Turramurra property and Mr Dungey made no withdrawals. (6) After separation, it was agreed that Mr Dungey would continue to pay the net rentals from the Queensland property into the Classic Account No 1, in lieu of child support, and to Mr Dungey's observation Ms Barbour did provide adequately for their child. (7) After separation, Mr Dungey did not draw monies from or deposit monies to Classic Account No 1. (8) After separation, Mr Dungey did not draw monies from or deposit monies to Classic Account No 2 or the car loan account. (9) After separation, Mr Dungey continued to operate the video store until its sale in February or March 2003, and Ms Barbour agreed to continue to "do the books" for him and "help [him] out" (para 23 of Mr Dungey's affidavit), and to provide accounting details to Mr Seiffert. She also undertook the bookkeeping for and maintained the financial records for the Amway business. Mr Dungey attended to banking of the business income from the video store. (10) The video store or its stock was sold for $17,750, in February/March 2003. Mr Dungey says he thought the sale proceeds reduced the loan and that the NEVS account was then closed (para 24) when paid out with proceeds of the sale of the Queensland property for a net $114,000 (although it transpired that the account was not in fact closed). (11) There was, by consent orders in the Family Court, agreement to the sale of the Turramurra property (which it appears was the only property jointly owned as at 2006) and for Ms Barbour to receive 60% of the net proceeds and Mr Dungey to receive 40% of the net proceeds. (12) The payment into Classic No 1 Account of Ms Barbour's normal salary exceeded the home loan instalments for the Turramurra property. 21 Thus, in effect, on separation Ms Barbour had or took over complete control of the Classic No 2 Account, and the car loan account, and used the NEVS account for her own purposes after the video store business was sold and that account should have been closed. Ms Barbour also controlled Classic No 1 Account, but part of its use was a joint purpose of repaying the home loans. Being a joint holder does not exclude arrangements that alter the beneficial entitlement to monies in the account: see the discussion in Croton v The Queen (1967) 117 CLR 326 per Barwick CJ at p 332, with whom McTiernan J agreed, and see James v Oxley (1939) 61 CLR 433, 454 per Dixon J cited in Batty (infra); Lockwood v Vince (2007) 166 FCR 305 at [24] per Finkelstein J on the question of control. 22 There is no direct evidence before me of what use Ms Barbour made of having a total of $729,000 to which she was not entitled and drawing it out from the accounts. There is nothing to suggest that Mr Dungey received directly the benefit of any part of the monies that were misappropriated. There is material which is suggestive of Ms Barbour having a gambling problem (the numerous withdrawals of cash of $1000 on the same or next day) but I do not think that it has been established on the balance of probabilities, that she did. There is no analysis provided by the plaintiffs that Mr Dungey has been relieved of a liability to the bank or third party because misappropriated monies went into the three accounts or went from those accounts to the Classic No 1 account. For example, if it was clear that without the misappropriated monies, the mortgage debt could not have been met, or business loan repayments could not have been met, this would establish a benefit to Mr Dungey. Mr Seiffert's evidence is that funds other than the misappropriated funds were sufficient to pay all the obligations which Mr Dungey had jointly with Ms Barbour and that monies received into the NEVS account were not recorded in the partnership accounts so 16 is not made out. The school makes no claim to 'trace' or 'follow' the misappropriated proceeds, but as I have noted, limits itself to a claim for monies had and received. Whilst it is possible that Mr Dungey's son obtained a benefit that relieved Mr Dungey of a greater obligation than the net rentals from the Queensland property would entail, there was no argument advanced nor analysis offered of this kind. I am not persuaded that Mr Dungey has obtained any benefit from the misappropriated proceeds that were deposited into accounts which were in his name jointly with Ms Barbour, but over which he was not exercising control in a practical sense.

23 It is clear that none of the proceeds paid into the three Westpac accounts by Ms Barbour had any connection with any business operated by Mr Dungey, with or without Ms Barbour. 24 In relation to [16] (c) and (d) Mr Dungey had asserted by his affidavit that he had not received bank statements relating to the accounts after he had left the matrimonial home in 2000. 25 Mr Dungey did agree that had he looked at the contents of the statements, he would have seen deposits that were suspicious, and what he says was obvious to him in January 2006 when he discovered what looked like defalcations by Ms Barbour, would have been obvious if he had looked at the accounts earlier (Classic Account No 1): see T59 and see Exhibit A2, pp 254, 258, 270, 274 and 278. In respect of 16 the school has clearly lost a substantial amount of money, and had Mr Dungey looked at the statements earlier he would, on the balance of probabilities discovered the misappropriation at that time. I have earlier referred to the question of control and I shall return to the question of 'constructive notice' later. 26 Mr Dungey's assertion in his affidavit that after separation he had not received copies of any of the bank statements was demonstrated to be false, and his assertion for the first time in cross examination that he had asked the bank to stop sending him copies of the statements to his new address, but had taken no steps to inform the solicitors of this when he had recalled that fact some months before the hearing, and his evidence on the availability of online access which moved from denial of availability before 2003 to admission that it was available from 1999 (see T47, T48 and T72), lead me to have doubts as to his reliability on the extent of his access to bank statements. However, given the school's acceptance that he did not know about the misappropriations until January 2006, his unreliability on these points does not have any significance. 27 Given that the school eschewed any assertion that Mr Dungey knew that there were misappropriated monies in the account at any time prior to January 2006, it follows that he either did not examine the contents of the statements with any degree of care, or he did not examine them at all. His position is that he did not examine them at all, so 16 is made out subject to an argument that Mr Smallbone advanced which was that it would have been prying for Mr Dungey to have examined those accounts. Mr Dungey did not offer that as his explanation but rather said it was not his concern, and given that he was a joint account holder whose real property was mortgaged, and given that one of the accounts related to a business that he was, until 2003, operating, I do not accept that there was any constraint upon him examining the statements in hard copy or online if he had wanted to do so and obtaining copies of the statements that were not sent to him, had he wanted them. With respect to 16 and 16, these contentions are made out.

28 The formulation "in justice and in equity" referred to in [15] above is taken from National Commercial Bank v Batty (1985-1986) 160 CLR 251. Batty was relied on by both the school and Mr Dungey as the applicable authority in this area. It has been applied in this Court in Heperu Pty Ltd & Ors v Morgan Brooks Pty Ltd & Ors (No 2) [2007] NSWSC 1438; McNally v Harris [2008] NSWSC 659 per White J [84]; and see also Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 at [638] per Young CJ in Eq. 29 The facts in Batty were as follows. Mr Batty operated an accounting partnership with Davis. Davis, in January 1976, deposited the proceeds of two cheques obtained by him fraudulently into the partnership account. In February 1976, Davis removed those proceeds from the partnership account and used them for his own purposes. The party defrauded obtained judgment against the partnership's bank, and the bank claimed against Mr Batty. The High Court was concerned with a claim that had two separate elements. One was that Davis was a partner in the firm, and that pursuant to s 10 of the Partnership Act, Batty was liable, and secondly, that the partnership had and received monies to the use of the bank which rendered Batty liable to account. Gibbs CJ rejected the claim based on s 10 of the Partnership Act, because the monies or proceeds had not been obtained by Davis in the ordinary course of business of the partnership. 30 On the monies had and received claim, the Chief Justice expressed a doubt as to whether the monies credited were in fact monies of the bank, but on the assumption in favour of the bank that they were, he said: "The question is whether Mr Batty is liable because the monies went into the firm's account, without his knowledge and without his actual or apparent authority. Mr Batty did not deal with the money in any way nor expressly authorize anyone else to do so".

31 The Chief Justice noted that the Court of Appeal's finding that Mr Batty neither knew nor ought to have known that the monies were credited to the account was not challenged, but that the bank had argued that Mr Batty would have had the means of knowing if he had not left the operation of the account entirely to Mr Davis (p 264). Gibbs CJ rejected this argument after reviewing the authorities, saying: "Where, because of the action of a servant or agent acting outside the scope of his authority, or for that matter because of the action of a complete stranger, money has been paid into the account of the defendant, who has technically received it, although he is quite unaware of that fact, and the money is then misappropriated, still without the knowledge or intervention of the defendant, there seems to be no reason in justice or equity why the defendant should be answerable for the money simply because theoretically he had the means of knowing that the money was in the account. In principle, in those circumstances, the defendant ought not to be liable unless, before the money was misappropriated, he knew or ought to have known that he had possession or control of it. In other words, where the defendant has not had the benefit of the money, has not played any part in disposing of it and was ignorant of the fact that it was theoretically under his control, he should not be liable in the absence of fault on his part. That conclusion is not inconsistent with the words of Park J in Marsh v Keating [(1834) 2 CL&F 250 6 ER 149] or with the actual decision in Jacobs v Morris [[1901] 1 Ch 261; [1902] 1 Ch 810] and is supported by the remarks of Dixon J in James v Oxley [(1939) 61 CLR 433]. In the present case Mr Batty was not guilty of any want of ordinary diligence for failing to become aware that the money was paid into the account. He in fact discovered some time after the event what had occurred, but that was too late to enable him to prevent the misappropriation. From the time when the money was credited to the account until the time when it was withdrawn (some time during February 1976) Mr Batty neither knew nor ought to have known that he had (technically) possession or control of it. In these circumstances he is not liable to the Bank as for money had an received". 32 Wilson J agreed with the Chief Justice, adding that the means of knowledge is not itself sufficient - it is linked to what a defendant ought to have known (pp 270-271) and that defendants, whose calling requires diligence, may have knowledge imputed by reason of a failure to inquire. Brennan J held that the deposit of the cheques to the account was without authority, and no enquiry had been made by the Bank. Deane J dissenting was of the view that the Partnership Act applied and he did not need to consider the monies had and received claim (p 298). Dawson J agreed with Gibbs CJ and Wilson J, adding: "The credit entry in the partnership bank account was, for the purposes of the claim for money had and received, sufficient to establish that the money was paid, but the question remained whether it was paid to the firm having regard to the circumstance that it was not in fact used in, and did not otherwise enter into, the course of the partnership business. If that had been the case, then whether Mr Batty knew of it or not, he would have been liable as a partner, but as it was not, the question was whether, as explained by Dixon J in James v Oxley , the receipt by the partnership of the money in its bank account was a mere technical receipt involving no de facto control on the part of Mr Batty as a partner or whether he knew or ought to have known of its presence before it was withdrawn so that the firm, and he as a partner, might properly have been regarded as holding it to the use of the Bank. There is no basis upon which it might be properly said that Mr Batty knew or ought to have known of the presence of the money" (pp 299-300).

33 Returning to item (b) in [16], the fact that the NEVS account was a partnership account would seem to me to take the matter no further since in Batty it was a partnership account with which the Court was concerned. 34 The school submits that the facts of Batty are quite different to the facts here. In Batty, the two cheques were paid into the partnership account in January and the proceeds removed in early February, whereas here there have been many deposits of funds (390 in fact) over a six-year period. In Batty, the innocent partner had left management of the account to Davis, but the period in which the wrongdoing had occurred was very short. In the long period that Ms Barbour was removing monies from the school's bank account and placing them into the Classic No 2 Account, the NEVS account, and the car loan account, Mr Dungey had bank statements or access to the statements, the school submitted. 35 I will endeavour to break down the requirements referred to in the Chief Justice's formulation to assist in applying the principles to this case: (1) The fact that the account into which misappropriated funds are paid is a joint account with the fraudster is not sufficient to found liability; (2) If the joint account holder: (a) has not obtained the benefit of the misappropriated funds (b) has not played any part in disposing of those funds; (c) was ignorant of the fact that those proceeds were in the account then he will only be liable to the defrauded person on a count of monies had and received to the use of the defrauded person if there is 'fault' on his part; (3) The fact that the joint account holder had the means of learning that the misappropriated monies were in the account is not sufficient; (4) 'Fault', in this context, at the least includes knowledge of the joint holder that he was in possession or control of the misappropriated funds. I shall discuss further below the question of a wider meaning of 'fault'; (5) It follows from (2) that a joint holder can be liable to account even if he has obtained no benefit and not played any part in the misappropriation and even if the monies were deposited without any express or implied authority to the fraudster to place the proceeds in that account. 36 Whether or not misappropriated monies placed in an account and thereby mixed with other monies could be the subject of a claim for monies had and received was discussed in Banque Belge Pour L'Etranger v Hambrouck [1920] 1 KB 321 per Scrutton LJ at p 330, Atkin LJ at p 335 but no point was taken by the second defendant as to this here, perhaps on the assumption that the formulation of Gibbs CJ placed no significance on that aspect (it appears that the amount drawn out by Davis was the same as the total of the two cheques so that it might have been thought that there was no difficulty of identification). 37 The school argued that Mr Dungey had constructive notice of the defalcations. The argument had two parts - firstly, that because Mr Dungey knew he had the bank statements or access to them, he was on notice of a fact that ought to have lead to further inquiry; and secondly, that his failure to look at the contents of the bank statements over a 6-year period was imprudent conduct that no ordinary man of business would engage in. 38 I cannot accept the submission that knowledge that the bank statements were at hand or readily available could amount to knowledge of a fact that would or ought to have lead Mr Dungey to make further inquiries. 39 So far as the second aspect is concerned, I was taken to a passage in Meagher, Gummow & Lehane's Equity: Doctrines and Remedies (4th edn, Butterworths) at [8-270], which is in the following terms (emphasis added): " A person is deemed to have constructive notice of all matters : (a) of which he would have received notice if he had made the investigations usually made in similar transactions; and (b) of which he would have received notice had he investigated a relevant fact which has come to his notice and into which a reasonable man ought to have inquired . It follows that all cases in which a person is said to have constructive notice of a fact or thing are cases in which he has failed to inquire, either sufficiently or at all. The criterion of whether a total failure to make inquiries will affect a person with constructive notice is whether he has neglected to do that which is usually done by men of business in similar circumstances, as a matter of prudence with a view to their own security. It covers not only the case where there has been a deliberate abstention from inquiry in order to avoid possible notice, but on the view expressed in Ashburner on Equity , 2nd ed, pp 61-2, all other cases in which, intentionally or otherwise, a person abstains from inquiry in circumstances where a reasonable man would inquire. Thus, as was held in Robson v Flight (1865) 4 DE G J & Sm 608; 46 ER 1054, a purchaser who enters into a contract to accept a shorter title than he could have insisted on under an open contract, has constructive notice of all facts he would have discovered on an investigation of the title for the full period".

40 Mr Smallbone relied on the part emphasised. Mr Studdy relied on the balance. 41 The passage from Meagher, Gummow and Lehane which I have set out earlier is found in the chapter on Priorities. In The Law of Restitution by Goff & Jones (4th edn, 1986), at p.717, attention is drawn to the distinction between notice at common law and in equity. At common law, the learned authors observed, notice was equated with honesty, but in equity, notice has been more generously defined and a person may be deemed to have constructive or imputed notice of equitable interests affecting land: "…if he deprives himself of actual knowledge by failing to carry out or by abstaining from carrying out the usual and proper enquiries which would have been conducted by a reasonable and prudent purchaser". The authors accepted that the distinction is at first puzzling, but were of the view that it was based on sound principle, referring to a number of cases including Manchester Trust v Furness [1895] 2 QB 539, 545, although they noted the extension of an expanded view of notice to commercial transactions, which they decried (p 718). The description of constructive notice in conveyancing cases in Meagher, Gummow and Lehane is entirely consistent with the exposition of constructive notice in equity in Goff and Jones . 42 The latest edition of Goff and Jones (7th edn., 2007) at 42-003, refers to the words of Milett J that "there is no room for constructive notice in the strict conveyancing sense in a factual situation where it is not the custom and practice to make inquiry" in El Ajou v Dollar Land Holdings Pty Ltd [1993] 3 All ER 717, 739 and also to an assumption Milett J was prepared to make in that case: " that the recipient of misappropriated trust money is not expected to be unduly suspicious and is not to be held liable unless he went ahead without further inquiry in circumstances in which an honest and reasonable man would have realised that the money was probably trust money and was being misapplied": p 739. 43 The restrictive approach to constructive notice finds expression in the judgment of Stephen J (with whom Barwick CJ agreed) in Consul Developments Pty Ltd v DPC Estate Pty Ltd (1975) 132 CLR 373, at pp 410-413 and see Gibbs J (as he then was) at p 398, a decision the correctness of which was recently affirmed by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd 203 CLR 89, in which it was held that knowledge of circumstances relevant for the imposition of liability on a third party who is said to have assisted in the fraudulent and dishonest design of the trustee, where there has been a breach of trust, does not include knowledge of circumstances which would put an honest and reasonable man on inquiry, see pp 163-164 per the Court.

44 The question which arises here is what is comprehended by the term 'fault' in the formulation of Gibbs CJ in Batty. Mr Dungey, it is agreed, did not know that misappropriated funds had been placed in the accounts, and Batty is authority for the proposition that his having the means to ascertain that fact is not sufficient. 45 I have rejected the argument that knowledge of the existence of bank statements constitutes knowledge of a fact for that type of constructive notice. The school's case posits a second form of 'constructive notice', that is, where a person abstains from inquiry in circumstances where a reasonable man would inquire, but not by reason of any specific knowledge. Since it is agreed there was no actual notice and since, on my finding, there was no notice of a fact which ought to have invited suspicion (and further inquiry) the school must establish that the failure of Mr Dungey to examine bank statements over a six-year period which the school contends was imprudent, constitutes 'fault' within the meaning of the principles enunciated in Batty. It was submitted that there were no limitations on Mr Dungey's dealings with the account including the obtaining of information about them (see Mr Studdy's written submissions, para 38(b)). The school submits that Mr Dungey ought to have known what was in the accounts, which, after all, were joint accounts. 46 There are, I think, a number of problems with this argument: (1) Mr Dungey had assistance from Ms Barbour as bookkeeper of the NEVS business and he had agreed with her that he would make no further withdrawals from the other accounts nor deposit monies other than the rents to those accounts. The NEVS business had been sold by March 2003 and Mr Dungey had no reason to think that the account was still in use. It was after that date that Ms Barbour deposited misappropriated monies in the NEVS account: see MFI 2. (2) There has been no suggestion made that he had the slightest reason to doubt Ms Barbour's integrity and honesty until he discovered evidence of misappropriations in January 2006. In this regard, he was in the same position as the school. (3) Whilst I have held that Mr Dungey was able to obtain information about the accounts, it is not correct to say that there was no limitation on his dealings with the account. He had separated from his wife and had entered into arrangements in respect of the accounts that made examination of the statements of much less importance to him than would normally be the situation. I have earlier referred to Mr Dungey's lack of practical control of the accounts. (4) It is clearly open to regard the reference to "want of ordinary diligence for failing to become aware that the money was paid into the account" in the formulation of Gibbs CJ as equivalent to 'fault', and hence to treat the High Court as regarding imprudence as sufficient but that is a view which would seem to be consistent only with the wider view of constructive notice to which I have earlier referred. The concept of 'fault' is meaningful where a person has been made aware of a fact that would prompt a reasonable person to make enquiry, but it is not so easy to see 'fault' viz a viz a third party as encompassing a joint holder's need to act prudently for his own interests, unless perhaps the defendant falls into a class of persons whose calling requires diligence. That this is so is reinforced by reference to what Chief Justice Gibbs had earlier said in Consul Developments at pp 412-413 and his reference to Manchester Trust (supra) and similar cases in which the Court had, he noted, exhibited reluctance to expand the application of the doctrine of constructive notice. (5) Mr Smallbone referred to the refusal of the Court of Appeal in National Australia Bank Ltd v Hokit Pty Ltd (1996) 39 NSWLR 377 to accept the existence of a duty of care in a customer to the bank in the customer's management of his account and it would be surprising if owing no duty to the bank the joint holder here were to be treated as in effect liable to the school for failing to examine the joint bank accounts. Consideration of the theoretical underpinning of the action for monies had and received, which although an action at common law, imports notions of good conscience (see the detailed discussion by Gummow J in Roxborough v Rothmans of Pall Mall (2001) 208 CLR 516, pp 539-555, particularly at [62]-[64], [92], [94] and [100], and see Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 560 per Lord Templeman, where the need to establish that the defendant was unjustly enriched and remained unjustly enriched is set out), leads to no different conclusion. 47 I do not think that Batty should be read as holding that the type of constructive notice relevant in conveyancing transactions is applicable in the context of a claim for monies had and received against a person who does not exercise a specific calling where a particular level of diligence is expected, nor am I persuaded that Mr Dungey's failure to examine the bank statements constitutes, in all the circumstances, imprudence equating to fault, so as to warrant the imposition of liability to account for Ms Barbour's misappropriations, notwithstanding that he has had only limited control over the accounts and received no practical benefit out of the misappropriated funds.

Conclusions 48 In my view the school has failed to establish notice of the fraud or notice of a fact which was known to Mr Dungey that would have made an ordinary person suspicious, and therefore has not established actual or constructive notice, or relevant 'fault' on the part of Mr Dungey. Nor has it established that Mr Dungey has benefited from the deposit of funds to the joint accounts. None of the school's fallback positions avoids these difficulties, and it follows that in my view, there should be judgment for the second defendant with an order that the plaintiff pay the costs of the second defendant. An application for indemnity costs has been foreshadowed on the basis "that the claim was not reasonable, does not conform with recognised concepts and has operated oppressively on the second defendant". I do not presently think that the case is one in which the ordinary basis for costs should not apply, see UCPR Rule 42.2 and the notes to Rule 42.5 in Ritchie's Uniform Civil Procedure, but should the second defendant wish to ventilate this further I will give him an opportunity to do so. **********

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.

At a glance

Court

Decision date

Before

Source

Judgment (21 paragraphs)

Parties

Cases Cited (9)