Securities Exchanges Guarantee Corporation Ltd v Aird & Ors

Letter of Offer 13 From about September 1997 onwards each of the defendants made an offer to RCL and RetireInvest in terms which contained the following, appropriately amended for each defendant: My Claim against RetireInvest Pty Limited ('RetireInvest') and Ors 1. Background - Purported Dealing I refer to our recent discussions in relation to dealings in Securities purportedly on my behalf in the Relevant Period, particulars of which are included in but not limited to those set out in Schedule 1 (' Purported Dealings' ). 2. Background - Agreed Loss 2.1 As a direct or indirect result of the Purported Dealings, which may include unauthorised replacement of 'blue chip' Securities with speculative and other low quality Securities and alleged breaches of fiduciary and other duties, particulars of which are also set out in that Schedule ( 'Duty Breaches' ), I have suffered loss and damage, particulars of all of the loss and damage and the methodology of its calculation of quantum together with interest (if any), expenses (if any, other than those payable under clause 10) and Tax being as set out in Schedule 2 (' Agreed Loss '). Pursuant to that Schedule, I agree that the quantum of the Agreed Loss is $(relevant amount included) 2.2 As a result of the Agreed Loss, I have suffered significant financial detriment and lack the financial resources to pursue recovery of the Agreed Loss. 3. Choses in Action As a direct or indirect result of the Purported Dealings, the Duty Breaches or the Agreed Loss, I hold as at the date of this letter Securities (particulars of which are set out in Schedule 3) which are inconsistent with my investment objectives, financial situation and particular needs ( 'Speculative Securities" ) and I have or may have choses in action or causes of action (such present and future choses in action and causes of action collectively and individually, 'Assigned Choses' ) against any one or more of the following persons, (who were referred to as "the potential defendants"). 14 Those potential defendants included RetireInvest, and/or its past and present directors, employees, secretaries and other officers and/or its past or present security representatives including Ken Laming; Thompson Brindal together with the same categories of officers and representatives; the Australian Stock Exchange Ltd and any related Body Corporate; SEGC; the National Guarantee Fund and others (cl.3) 15 The Letter of Offer also contained the following: 4. Offer to RetireInvest Corporation Limited 4.1 I agree that the maximum amount potentially recoverable for the sale of the Speculative Securities and under the Assigned Choses is the Agreed Loss. 4.2 On the term and conditions which follow, as legal and beneficial owner of the Speculative Securities and the Assigned Choses, I offer to: (a) sell to RetireInvest Corporation Limited ( 'RCL" ) all of the Speculative Securities; and (b) assign to RCL a full equitable and beneficial interest in all my right, title and interest of whatever nature in the Assigned Choses (including any Monetary Award, Net Proceeds, Costs and other moneys derived from the Assigned Choses), such equitable and beneficial interest to be held by RCL absolutely for its own benefit. 4.3 I acknowledge and agree that RCL is the immediate holding company of RetireInvest Pty Limited and that, accordingly, RCL has a genuine commercial interest in any contract arising from acceptance of this offer in: (a) acquiring the Speculative Securities; (b) enforcing the Assigned Choses; (c) co-ordinating the making of claims against all or any one or more of the Potential Defendants; and (d) defining and limiting the exposure of RetireInvest Pty Limited as a subsidiary of RCL; and I undertake not to plead or allege in any legal or other proceedings that any contract arising from the acceptance of this offer is void, illegal or contrary to public policy and RetireInvest Pty Limited and RCL may plead this clause as an absolute bar to any such pleading or allegation. 4.4 The price payable on acceptance of the offer is the amount of the Agreed Loss, payable in the following 2 instalments: (a) as to 80% of the Agreed Loss, on acceptance less the amount of the Emergency Advance, provided that, if the Emergency Advance is greater than 80% of the Agreed Loss, the first instalment is nil; and (b) as to the balance of 20% of the Agreed Loss less any Permitted Deduction, within seven days after Claim Completion, subject always to me complying with all of my obligations under the contract formed by the acceptance of this offer ("contract") to the reasonable satisfaction of RCL, each instalment being allocated as follows: (c) as to the Speculative of Securities: the aggregate market price (based on the last sale price per Security recorded on Australian Stock Exchange Limited before the date of this offer) of the Speculative Securities multiplied by the percentage of the Agreed Loss applicable to that instalment; and (d) as to the Assigned Choses: the Agreed Loss, less the amount calculated in accordance with paragraph (c) multiplied by the percentage of the Agreed Loss applicable to that instrument.

There is then a formula in respect of the permitted deduction. 16 Clause 6 is as follows: 6 Effect of Acceptance 6.1 On acceptance of this offer, by force of this clause: (a) I must forthwith execute or effect sufficient transfers to RCL of all of the Speculative Securities and deliver to RCL any certificates, other documents of title or other written evidence of my ownership in respect of the Speculative Securities; (b) the Assigned Choses (together with any right to recovery on my part or payment to me or on my behalf, of Costs) are held by me on trust for RCL absolutely: (c) I agree that each such trust extends to any Monetary Award, Net Proceeds Costs and any other money in respect of all and any one or more of the Assigned Choses (other than as provided in clauses 4.4 and 10), whether actually received by RCL, by me or otherwise; and (d) the contract is formed having the terms and conditions, conferring the rights and imposing the obligations provided in this document. 6.2 If I receive any Monetary Award, Net Proceeds or Costs or other money in respect of all or any one or more of the Assigned Choses (other than as provided in clauses 4.4 and 10) then I must immediately pay the same to RCL, whether or not demand is made. 17 Clause 9 of the document provides as follows: 9 RCL's Right of Subrogation and My Full Co-Operation Undertaking 9.1 On acceptance of the Offer, RCL is subrogated to all of my rights, powers and remedies in relation to or in connection with all or any one or more of all or any one or more of the Purported Dealings, the Duty Breaches and the Assigned Choses and I must immediately as and when directed by RCL from time to time co-operate fully with RCL in commencing, instituting, prosecuting, compromising, discontinuing, defending, negotiating, completing and settling, or joining in doing so, any Proceeding. Without limitation, any such co-operation extends to co-operating in a timely manner, signing and lodging such documents (whether prepared by RCL or otherwise) and lodging such documents and promptly doing all such acts, matters and things as RCL in its absolute discretion considers necessary or desirable in commencing, instituting, prosecuting, compromising, discontinuing, defending, negotiating, completing and settling, or joining in doing so, any Proceeding. 9.2 Without limiting the generality of the foregoing of clause 7, I acknowledge and agree that: (a) any Proceeding may be commenced, instituted, prosecuted, compromised, discontinued, defended, completed and settled in my name without any reference to or consent of, me whether pursuant to the Power of Attorney or otherwise; (b) I must do everything RCL considers necessary or which RCL considers desirable to give full effect to the Contract. 9.3 I acknowledge and agree that time is of the essence of the Contract. 18 Clause 11 provides: 11. Duration of Provisions On transfer to RCL of the Speculated Securities, Claim Completion or payment or recovery of any Monetary Award, Net Proceeds or Costs, the provisions of the Contract will not merge and, to the extent any provision has not been fulfilled, will remain in force. 19 Clause 18 provided a number of definitions including the following: 'Assigned Choses' has the same meaning as in clause 3 and includes any amount or Securities (other than the Speculative Securities) held on trust for me, or any amount owing to me, by Thompson Brindal Limited on or before the date of this offer; 'Claim Completion' means the earlier of: (a) 30 June 1998; and (b) the date when in respect of each Listed Proceeding any one or more of the following occurs: (i) subject to sub-paragraph (ii), a final determination of the Court, tribunal or other adjudicative authority (including but not limited to SEGC in the Listed Proceeding); (ii) if one or more appeals are lodged in respect of such final determination, the final determination of the appeal or last appeal, as the case may be; (iii) if the Listed Proceeding comprises a claim on the National Guarantee Fund, SEGC allowing and paying the claim; (iv) settlement of the Listed Proceeding prior to being finally determined by the Court, or appeal; (v) the discontinuance, or striking out or, if the Listed Proceeding comprises a claim on the National Guarantee Fund, the proper disallowance of the claim by SEGC (other than disallowance pursuant to s 970A of the Corporations Law ). 'Listed Proceeding' means a claim on the National Guarantee Fund in accordance in Part 7.10 of the Corporations Law in respect of the Purported Dealings and any actual, proposed or contemplated Proceeding included in one or more notices given by RCL to me at any time in the period ending 31 December 1997 including any appeal from, defence to, counter-claim or action for contribution in respect of, any such Proceeding. 20 Each defendant also executed a Specific Power of Attorney appointing RCL and any director of RCL notified by the defendant for a period of seven years from the date of the Power of Attorney. The powers given were to "exercise or refrain from exercising any or all of the Appointor's rights or powers or both in relation to or in connection with the Appointor's right, title and interest in the Speculative Securities, the Assigned Choses and any Proceeding".

The Defendant's Claims on the Fund 21 RCL, pursuant to the Powers of Attorney, lodged the defendants' Claims under Division 7 of Part 7.10 of the Law with SEGC in October 1997. In Schedule 2 to the Claims RCL stated: RCL is presently engaged in the business of investigating and settling the compensation claims of affected Kent Town TB clients (KT Clients).

The RCL settlement process is designed to reinstate the fair value of losses directly incurred to KT Client portfolios in terms of missing or unauthorised investments . Missing investments are marketable securities which have either never been purchased (contrary to client instructions), or which were purchased and then subsequently sold without authority, either from the relevant KT Client or, according to KL [Laming], from KL. Unauthorised investments are marketable securities which have been purchased without the KT Client's authority. There are three main alternative methods that RCL has used to determine the fair value of losses: 1) Initially, RCL seeks to determine whether the relevant KT Client believes that any recent portfolio valuation represents an accurate reflection of authorised investments. If so, RCL reinstates any missing marketable securities at: (a) the historic statement valuation and add 6% pa interest through to date of the first instalment [see below]; or (b) current market value immediately prior to the first instalment date together with dividends foregone. 2) If the KT Client does not have confidence in any particular statement and there is unauthorised trading activity on the TB trust account, RCL offers a rate of return based upon cash deposited and withdrawn by the KT Client since inception of the TB account. The rate of return is designed to represent that generated by a blue chip share portfolio but will vary according to the length of time since initial investment and the particular marketable securities (if any) which the client originally instructed KL that (s)he wished to purchase. 3) In those instances where the KT Client has a clear recollection of instructions given to KL for the acquisition of particular securities, RCL reinstates the current market value of those particular marketable securities and include dividends foregone (irrespective of actual current holdings). In every instance, RCL takes into account any moneys received directly by the KT Client from closure of the TB trust account or from the sale of unauthorised marketable securities.

Marketable securities which have been purchased without a KT Client's authority and which remain registered in the KT Client's name at date of assignment of the cause of action are purchased by RCL at current market value in order to facilitate finalisation of the client compensation package. All such marketable securities have been/will be sold by RCL in such a manner as to optimise the overall sale proceeds. The main steps in the settlement process are as follows; i) RCL undertakes the necessary work to calculate the amount to which each KT Client is entitled. ii) The KT Client offers to assign the beneficial interest in his/her cause of action and speculative securities held to RCL. iii) The KT Client authorises RCL to pursue his/her claim. iv) RCL pays to the KT Client 80% of the amount of compensation within 7 days of the offer date. The remaining 20% will be paid on the earlier of (i) 30 June 1998, or (ii) the date the claim recovery is completed. v) RCL indemnifies the client for any additional legal costs incurred. vi) RCL pursues the claim against third parties on behalf of each relevant KT client. This information is provided to assist your understanding as to the early stages of the process undertaken by RCL to specifically identify losses caused to KT Clients as a result of unauthorised transfers of marketable securities by TB.

SEGC's Claim in these proceedings 22 SEGC claims a declaration as to whether it is open to the Board of SEGC to be satisfied that each of the defendants is not entitled to make a claim under s 957 of the Law because: (a) each of the defendants either was not or is no longer entitled to make a claim because they have each been fully compensated in respect of any loss allegedly suffered as a result of the unauthorised executions in respect of transferred securities ( the Loss Issue ); and (b) each of the defendants by entering into the Agreements with RCL and executing the Power of Attorney in favour of RCL thereby assigned their rights and remedies against certain third parties (including RetireInvest and Thompson Brindal) and thus rendered worthless SEGC's statutory rights of subrogation under s 980(2) and (4) of the Law, to which SEGC would be entitled in the event that it allowed the defendants' claims ( the Subrogation Issue). 23 Before turning to the consideration of these Issues it is appropriate to analyse the nature of the Fund, both by reference to the background to the establishment of the Fund and the statutory framework within which it exists and the defendants claims were made.

The National Guarantee Fund 24 Prior to the establishment of the National Guarantee Fund (the Fund) the individual exchanges of each State capital city maintained a Fidelity Fund under statutory direction. In New South Wales the Fidelity Fund was under the statutory regulation of Part VII of the Securities Industry Act 1970 (NSW). The major object of this Act was noted in the Second Reading Speech (Assembly 17.3.70 p.4362) to be to ensure that there was adequate protection of the public in the field of stock market investment. In relation to the establishment of the Fidelity Fund the following was said (at p 4366): Clause 47 requires a stock exchange to establish a fidelity fund, which in accordance with Clause 48 will be comprised mostly by the annual contributions of stockbrokers and the interest income from trust accounts already referred to. Clauses 49 to 53 provide the machinery for the setting up and management of the fund. Clause 54 contemplates that the fund will increase by stages to an amount of not less than $2,000,000. This sum, which under present trading conditions should be reached within a very few years, will not be the maximum amount of the fund, as its major source of income-the interest from trust account deposits-will continue to be paid in. It is difficult to estimate in advance what is likely to be the amount of the fund, but in its very nature it will be directly proportional to the amounts being dealt with by brokers.

One of the great virtues of the fund is that as the amounts held by brokers increase, so their trust account deposits will also increase and so also will the interest income paid to the fidelity fund increase. It is, therefore, very unlikely that a situation will arise in which the fund will not be able to satisfy any call that may be made upon it. When the fund reaches the figure of $2,000,000, every broker who had made twenty annual contributions is exempt from making further annual contributions, and on his retirement or death the exchange committee may, at its discretion, repay all or part of his annual contributions with or without interest. On the other hand, if the fund is reduced below $1,000,000, a broker who has been exempted shall again be required to pay contributions. Clause 55 enables the committee to impose levies if the fund is at any time insufficient to satisfy its liabilities, such levies not exceeding $5,000 in the aggregate, or $1,000 in any one year.

Clauses 58 and 59 set out the categories of claims which may be made on the fund. As both member brokers and non-member brokers must contribute to the fund, claims may be made in respect of both, and in respect of their employees. Claims may be made by any person who suffers pecuniary loss as a result of any defalcation by these persons, or if there is no right to claim in respect of a defalcation, the fund may be applied for the purpose of paying to the Official Receiver in Bankruptcy sufficient to make up the deficiency arising by reason of the available assets of a broker being insufficient to satisfy claims in his bankruptcy arising out of transactions in securities. In the latter case the law of bankruptcy would, of course, require that the payment be available to satisfy the claims of all creditors, not merely those relating to securities transactions.

The initial maximum total payment from the fund in respect of any one broker will be $250,000-disregarding any amounts subsequently reimbursed to the fund-but the committee may increase this limit, either generally or in a particular case. Clauses 60 to 66 provide the detailed machinery for the making, allowing and settling of claims against the fund. Clause 67 provides that if the amount at credit of the fund is insufficient to satisfy claims allowed, the amount available shall be apportioned as the committee thinks equitable, and unsatisfied claims shall be charged against future receipts of the fund while if the aggregate of allowed claims exceeds the payment limit, the total amount shall be appropriated and thereafter all claims against the fund shall be absolutely discharged. Clause 68 provides for a stock exchange to supplement its fidelity fund, in its discretion with fidelity insurance.

25 The stock exchange could at its discretion enter into a contact for fidelity insurance in relation to liability for claims under Part VII of the Act (s.68). This discretion was also contained in the later Acts, the 1975 Act and the Securities Industry Act 1980 (Cth) in respect of claims under Part IX of this latter Act. 26 As a step in the process of introducing uniform securities industry regulation across all States and Territories this Act was wholly repealed and replaced by the Securities Industry Act 1975 (NSW) (the 1975 Act). The Second Reading Speech noted the application of the Fidelity Fund was in terms "generally identical" to the earlier Act. The Attorney General stated (Assembly 18.11.75 p.2797) that he proposed to move an amendment in Committee to "restrict access to the fund to persons who suffer pecuniary loss". 27 Part IX of the 1975 Act regulated the Fidelity Fund. Under this Act a person who suffered pecuniary loss resulting from defalcation or fraud of a stockbroker was entitled to make a claim upon the Fidelity Fund for compensation for that loss (ss 97 & 98). 28 Pursuant to s 32 of the Securities Industry (Application of Laws) Act 1981 (NSW) the money in the Fidelity Fund of the Stock Exchange under Part IX of the 1975 Act was transferred to form part of the Fidelity Fund of the Stock Exchange under Part IX of the Securities Industry (New South Wales) Code which came into operation on the commencement of the Securities Industry (Application of Laws) Act 1981 (NSW). 29 In 1987 the Australian Stock Exchange and National Guarantee Fund Act 1987 (Cth) (the ASX & Fund Act) amended the Securities Industry Act 1980 (Cth) and established the ASX and the National Guarantee Fund (the Fund). The Fund was established under Part IXA in part by pooling the money contained in each of the State Fidelity Funds (ss 122CB; 122ZF(1)). Division 6 of the Act expanded the categories of circumstances in which claims could be made to include the making of a claim without the need to establish defalcation or fraud. One of the aims in the establishment of the Fund was to assist in maintaining investor confidence in the Australian securities markets. 30 The ASX & Fund Act introduced s 122ZC into the Securities Industry Act 1980 (Cth) which enabled the SEGC to enter into an insurance policy to indemnify the Fund for losses. The Explanatory Memorandum stated: The corporation may enter into an insurance policy which may indemnify the NGF against losses arising from meeting its obligations in guaranteeing performance of contracts and in meeting claims arising from a member's insolvency. A claimant against the NGF does not have any claim against the corporation's insurer, nor any specific right to claim any moneys paid under the insurance policy. 31 In 1989 reforms were introduced to remove the requirements for the transferor's signature to appear on security transfers. The removal of this requirement was intended to assist in the development of a more efficient securities market. This was effected in part by the repeal of s 194 of the Companies Act 1981 (Cth) and the introduction of new sections 194-194D by the Cooperative Scheme Legislation Amendment Act 1989 (Cth). These amendments were part of a legislative framework that was created to facilitate the ASX's pilot of the Flexible Accelerated Security Transfer system (FAST). Under the FAST system securities could be transferred without share certificates and without transfer signatures. 32 Pursuant to the new s194(3)(a) of the Companies Act 1981 (Cth) a designated broker was "taken to have been authorised to execute, and to have executed, the instrument on the transferor's behalf" where the instrument relating to the marketable securities was stamped with the broker's stamp who had authority to sell the securities. 33 It was an offence for a broker to transfer securities without the owner's authority and the broker was liable to indemnify all parties suffering loss as a result of the unauthorised transfer. Division 6A was subsequently introduced into the Securities Industry Act 1980 (Cth) to allow claims on the Fund for losses resulting from an unauthorised transfer of securities. 34 In 1991 the National Scheme under the Corporations Law replaced the previous co-operative system between the States and Territories. The provisions of Division 7 of Part 7.10 of the Corporations Law are substantially similar to Division 6A of the Securities Industry Act 1980 (Cth). 35 SEGC is obliged under the Law to keep the Fund and the Board of SEGC (the Board) is obliged to administer the Fund on SEGC's behalf (s 929(1)). The assets of the Fund are the property of SEGC and are kept separately from all other property and are held on trust for the purposes set out in the "Fund provisions" (s 929(2)). The Fund provisions are defined to include the provisions of Part 7.10 (s 920)). 36 SEGC, with the approval of the Minister, determines the minimum amount of the Fund (S936(1)). If the Fund is less than the minimum amount, SEGC may determine a levy is payable on leviable transactions (s 938(2)). The Fund is thus able to be replenished or constituted to the minimum amount. Other sources for the Fund include money recovered by or on behalf of SEGC in the exercise of a right of action that SEGC has under the provisions of Part 7.10 which include any rights pursuant to s 980(2): (s 930(g)). 37 In line with the provisions of previous legislation, s 982 of the Law enables the SEGC to enter into a contract of insurance for indemnity for liability regarding claims made on the Fund under Part 7.10. The terms of the Explanatory Memorandum were the same as that introducing s 122ZC, with the addition of a reference to the capacity to insure against losses incurred in meeting its obligations in respect of unauthorised transfers of securities. 38 The statutory right of subrogation was first introduced by s 65 of the Securities Industry Act 1970 (NSW). The Second Reading Speech makes no specific reference to the right. The reference to the relevant clause (clause 65) is on one view of it en passant, but on another, an intentional inclusion in the process of considering the entitlement to make claims on the Fund. The reference is as follows (at p. 4366); Clauses 60 to 66 provide the detailed machinery for the making, allowing and settling of claims against the fund. 39 The Second Reading Speech in relation to the 1975 Act also makes no specific reference to the right. It notes that the terms relating to the application of the fund, including the relevant clause (clause 104), are in terms generally identical to the previous Act (at p 2797). 40 Prior to the establishment of the Fund and the introduction of Division 6A of the Securities Industry Act 1980, s118 of Part IX of that Act provided: On the payment out of the fidelity fund of a stock exchange of any moneys in respect of a claim under this Part, the stock exchange shall be deemed to be subrogated to the extent of that payment to all the rights and remedies of the claimant in relation to the loss suffered by him from the defalcation or fraudulent misuse of property. 41 Although there has been no specific reference to the right of subrogation in the Second Reading Speeches in relation to the various Acts into which such right was introduced and retained, the Explanatory Memorandum to the Bill for the ASX & Fund Act stated at p 37; Where a contract guarantee has been invoked and the corporation has satisfied the claim, the corporation will have a statutory right of action against the defaulting member for the amount which the corporation has paid out of the Fund to satisfy the claimant. In effect, the claimant will have assigned his rights against the defaulting dealer to the corporation. 42 After the Fund was established, but prior to the introduction of Division 6A, s 122ZA was introduced into the Securities Industry Act 1980 (Cth) which provided: Subrogation of Corporation to claimant's rights etc 122ZA. (1) Where the Corporation: (a) allows under subsection 122J (2) or 122L (2) a claim made under Division 6 in respect of a sale of securities; or (b) allows under subsection 122K (2) or 122M (2) a claim made under Division 6 in respect of a purchase of securities; the Corporation shall be deemed to be subrogated to all the claimant's rights and remedies in relation to the sale or purchase, as the case may be. (2) Where the Board allows a claim made under Division 7 in respect of property, the Corporation shall be deemed to be subrogated to all the claimant's rights and remedies in relation to the property. (3) Where, by virtue of this section, the Corporation is to be deemed to be subrogated to a right or remedy that a person has against another person, then: (a) if the Corporation has reason to believe that an insurer may be liable to indemnify the other person in respect of the subject-matter of the right or remedy - the Corporation shall serve a notice on the insurer setting out particulars of the right or remedy and stating that the Corporation is, by virtue of this section, subrogated to the right or remedy; (b) an insurer that considers that it may be liable so to indemnify the other person may, whether or not the Corporation has served a notice on the insurer pursuant to paragraph (a), apply to be joined as a party to a proceeding that relates to the right or remedy and to which the first-mentioned person or the Corporation is a party; and (c) the first-mentioned person or the Corporation may, to the extent of the liability of an insurer so to indemnify the other person, enforce against the insurer a judgment or order obtained in such a proceeding in so far as the proceeding relates to the right or remedy. (4) Except as provided in this section, nothing in this Part affects a right or remedy that a claimant under Division 6 or 7 has against a person other than the Corporation.

43 After the introduction of Division 6A enabling a claim to be made upon the Fund in respect of unauthorised transfers, s 122ZA of the Securities Industry Act 1980 (Cth) was amended in 1989 by deleting the words "shall be deemed to be" subrogated (s122ZA(1)), and "is deemed to be" subrogated (s 122ZA(3)) and inserting in their respective places "is" subrogated. Such amendments were referred to as "minor drafting corrections" in the Explanatory Memorandum to the Bill for the Act. S122ZA(1A) was also introduced which provided: (1A) Where the Corporation allows a claim made under Division 6A in respect of loss suffered, in respect of securities, because of an unauthorised execution of a document, the Corporation is subrogated to all the rights and remedies that the claimant has in relation to the securities because of the unauthorised execution. 44 This right of subrogation is found in s 980 of the Law and s 980(2) which is relevant to unauthorised executions provides: Subrogation of SEGC to claimant's rights etc 980 (2) [SEGC subrogated to claimant's rights for unauthorised execution] Where SEGC allows a claim made under Division 7 in respect of an unauthorised execution (within the meaning of that Division), SEGC is subrogated to all the claimant's rights and remedies in relation to the conduct that constitutes the unauthorised execution.

A similar provision to s 122ZA(3) of the Securities Industry Act 1980 (Cth) is found in s 980(4) of the Law. 45 The Explanatory Memorandum to the Bill for the Law stated at p 715: Where a claim is made under Division 6, 7 or 8 and the SEGC has satisfied the claim, SEGC is subrogated to the rights the claimant has against the defaulting etc dealer. At the time that it satisfies the claim, the SEGC is to notify the defaulting dealer's professional indemnity insurer, which may elect to be joined as a party to any proceedings between the SEGC and the defaulting dealer. Any judgment obtained against the defaulting dealer by the SEGC may be enforced against the insurer unless the insurer has proved that the insurance policy does not cover the factual circumstances giving rise to the judgment.

The Provisions of the Law under which the Claims were made 46 The defendants claims upon the Fund are made under Division 7 of Part 7.10 - Unauthorised Transfer. Section 957 provides: Claim by transferor 957 If, as a result of the unauthorised execution, the transferor suffers loss in respect of any of the transferred securities, the transferor may make a claim in respect of the loss. 47 Ss 960 & 961 provide: How claim is to be satisfied 960 (1) [SEGC to allow claim] Where the Board is satisfied that a claimant under section 957 or 958 is entitled to make the claim, SEGC shall allow the claim. 960 (2) [Where claimant ceased to hold securities} If SEGC allows the claim and the claimant has, as a result of the unauthorised execution, ceased to hold some or all of the transferred securities, SEGC shall: (a) subject to paragraph (b), supply to the claimant securities of the same kind and number as those of the transferred securities that the claimant has so ceased to hold; or (b) if the Board is satisfied that it is not practicable for SEGC to obtain such securities, or to obtain such securities within a reasonable time - pay to the claimant the amount that, as at the time when the Board decides that it is so satisfied, is the actual pecuniary loss suffered by the claimant, in respect of the transferred securities, as a result of the unauthorised execution (other than loss suffered as mentioned in subsection (3)). 960 (3) [Amount paid to claimant] If SEGC allows the claim, it shall pay to the claimant the amount that, as at the time when the claim is allowed, or when the Board decides as mentioned in paragraph (2)(b), as the case requires, is the actual pecuniary loss suffered by the claimant, as a result of the unauthorised execution, in respect of payments or other benefits: (a) in any case - to which the claimant would have become entitled, as the holder of such of the transferred securities as the claimant has, as a result of the unauthorised execution, ceased to hold, if the claimant had continued to hold the securities concerned until that time; or (b) if the claim was made under section 958 - that the claimant has received as holder of any of the transferred securities. 960 (4) [Deemed transfer even without good title] For the purposes of this section, where securities are purportedly transferred from a person to another person, the first-mentioned person shall be deemed to cease to hold, and the other person shall be deemed to hold, the securities even if the other person did not by virtue of the transfer get a good title to the securities.

Discretionary further compensation to transferor 961 (1) [Inadequate compensation] If SEGC allows a claim made under section 957 and the Board is satisfied that the supply of securities, or the payment of money, or both as the case requires, to the claimant in accordance with section 960 will not adequately compensate the claimant in respect of a pecuniary or other gain that the claimant might, if the claimant had continued to hold the transferred securities, have made but did not in fact make, the Board may determine in writing that there be paid to the claimant in respect of that gain a specified amount that the Board considers to be fair and reasonable in all the circumstances. 961 (2) [SEGC to pay claimant] If a determination is made under subsection (1), SEGC shall pay to the claimant the amount specified in it.

48 Division 9 of Part 7.10 General Provisions relating to Claims is also applicable. The following sections are relevant: Power to SEGC to allow and settle claim 970 Subject to this Part, SEGC may, at any time after a person becomes entitled to make a claim, allow and settle the claim.

Claimant may be required to exercise right of set-off 970A If: (a) a person (in this section called the claimant ) has made a claim in respect of a liability of another person (in this section called the defaulter ); and (b) the claimant has a right, whether under an agreement or otherwise, to set off a liability of the claimant to the defaulter against the liability referred to in paragraph (a); SEGC may refuse to allow the claim until the claimant has exercised the right.

Successful claimant entitled to costs and disbursements 971 Where a claim is allowed, then, in addition to the claimant's other rights under this Part, the claimant is entitled to be paid out of the Fund an amount equal to the total of the reasonable costs of, and the reasonable disbursements incidental to, the making and proof of the claim.

Interest 972(1) [Board may pay interest] In addition to an amount that is payable to a person out of the Fund in respect of a claim, interest at the rate of 5% per annum or, if another rate is determined in writing by the Board, at that other rate, is payable to the person out of the Fund, on so much of that amount as is not attributable to costs and disbursements, in respect of the period beginning on the day on which the person became entitled to make the claim and ending on: (a) if the Board has made a determination under subs 983(1) to pay that amount in instalments - the day on which that amount would, if no such determination had been made and the money in the fund were unlimited, have been paid to the person; (b) if, because of insufficiency of the Fund, no part of that amount is paid to the person on the day on which that amount would, if the money in the Fund were unlimited, have been so paid - that day; or (c) otherwise - the day on which the amount is paid to the person. 972(1A) [Determining rate of interest] A rate of interest determined by the Board for the purposes of subs (1): (a) must not exceed the rate that, when the determination is made, is fixed by Rules of Court for the purposes of par 52(2)(a) of the Federal Court of Australia Act 1976; and (b) must not be less than 5% per year. Allowing of claim not to constitute admission 974 Where SEGC allows a claim, neither the allowing of the claim, nor any act done by SEGC as a result of allowing the claim, shall be taken for any purpose to constitute an admission by any person of liability in respect of any matter, other than an admission of SEGC of its liability in respect of the claim. Proceedings in the Court 976 (1) [Proceedings may be brought within 3 months after SEGC disallowance] Where SEGC has disallowed a claim, the claimant may, within 3 months after notice of the disallowance has been served on the claimant, or on the claimant's solicitor, in accordance with section 975, bring proceedings in the Court to establish the claim. 976 (2) [Proceedings may be brought where no decision] Where, as at the end of a reasonable period after a claim was made, SEGC has neither allowed nor disallowed the claim, the claimant may bring proceedings in the Court to establish the claim.

Form of Order of Court establishing claim 978 (1) [Court to direct SEGC to allow claim] Where, in a proceeding to establish a claim, the Court is satisfied that the claim should be allowed, the Court: (a) shall, by order, make a declaration accordingly and direct SEGC to allow the claim and deal with it in accordance with this Chapter; and (b) may, at any time after making the order, give upon application made by the claimant or SEGC, such directions relating to the claim as the Court thinks just and reasonable. 978 (2) [Costs at discretion of Court] In a proceeding to establish a claim, or in an application under paragraph (1)(b), all questions of costs are in the discretion of the Court. Subrogation of SEGC to claimant's rights etc 980 (2) [SEGC subrogated to claimant's rights for unauthorised execution] Where SEGC allows a claim made under Division 7 in respect of an unauthorised execution (within the meaning of that Division), SEGC is subrogated to all the claimant's rights and remedies in relation to the conduct that constitutes the unauthorised execution.

The Loss Issue 49 The procedure set up under the Law for claims pursuant to s 957 is: (1) the lodgement of the claim with SEGC by or on behalf of the claimant within 6 months (unless otherwise determined by the Board) after the day on which the claimant first became aware that the claimant had suffered loss as a result of the unauthorised execution; or if in response to a notice published by SEGC in a newspaper, before the last application day specified in the notice (unless otherwise determined by the Board); (s 959)

(2) the consideration by the Board of the pre-requisites to entitlement, which are: (a) that the claimant is a transferor, (b) that there has been an unauthorised execution by a dealer who was on the day of the unauthorised execution a member of a participating exchange and was, or had previously been, carrying on a securities business in the jurisdiction, and (c) that as a result of that unauthorised execution the claimant suffers loss; (s 957; 960; 961A)

(3) the decision by the Board as to whether it is satisfied that the claimant is entitled to make the claim; (s 960)

(4) the allowance or refusal of the claim by SEGC; (s 960)

(5) if the claim is refused, the notification by SEGC of that refusal to the claimant; (s 975)

(6) if the claim is allowed, the decision by SEGC as to (a) the kind and number of securities to be supplied to the claimant, or (b) if such supply is not practicable or obtainable within a reasonable time, the amount of the payment that has to be made to the claimant to compensate the claimant for the actual pecuniary loss: (s 960 (2) & (3))

(7) the consideration by the Board as to whether it is satisfied that the supply of securities or the payment of money, or both, will not adequately compensate the claimant in respect of a pecuniary or other gain that the claimant might have made if the claimant had continued to hold the transferred securities; (s 961)

(8) if the Board is so satisfied, and so decides, the determination in writing that there be paid to the claimant an amount that the Board considers is fair and reasonable in all the circumstances; (s 961).

(9) the supply of securities or the payment of an amount equivalent to the actual pecuniary loss to the claimant and, if applicable, the payment of any further compensation, to the claimant by SEGC; (s 960 (2) &(3); s 970).

Loss under Division 7 of Part 7.10 50 It is appropriate to consider the type of loss for which the Fund was established to compensate claimants in respect of Unauthorised Transfers under Division 7 of Part 7.10. 51 The legislative history of the original Fidelity Funds and the Fund demonstrates that the Fund was established to promote confidence in the Australian securities market. In one sense it might be seen as a safety net to give comfort to investors nationally and internationally, both corporate and individuals, who may have been otherwise unwilling to participate in the market. 52 Stock market vagaries aside, the Fund is available to be called upon to meet the losses suffered by investors in a variety of circumstances. Access to the Fund was increased when the amendments to the legislation enabled claimants to obtain compensation in certain circumstances without having to prove the previously necessary defalcation or fraud. In claims upon the Fund in respect of Unauthorised Transfers, the claimant must demonstrate that the loss for which a claim is made is "the result" of an unauthorised execution. In this case there is no issue that the loss suffered was as a result of such unauthorised execution. 53 In cases in which the claimant has ceased to hold the securities as a result of such execution, the Fund is required to either supply the claimant with the same kind and number of the securities which were lost or pay the actual pecuniary loss suffered (s 960(2)). The Board has to decide whether it is practicable to supply the claimant with securities of the same kind and number and that such supply can be achieved in a reasonable time. The "same kind" of securities might, but will not necessarily, be shares in the same company as were previously held by the claimant. They may be options of a particular kind. The Board is required to ascertain the kind of securities that were lost and then supply the same number of those securities. 54 If it is not practicable to supply or if supply cannot be made in a reasonable time, the Board is required to make a payment to the claimant. That payment is calculated on the presumption that the claimant would have continued to hold the securities until the time the Board decides that it is not practicable to supply the same kind and number of securities or that such supply cannot be achieved in a reasonable time. 55 The Board is also able to satisfy the claim by the supply of some securities together with a payment for the actual pecuniary loss. There may be circumstances in which the loss has not been "adequately compensated" by the supply of securities or the payment or both. In these circumstances the claimant may receive "further compensation" (s 961). In assessing whether to determine that further compensation should be paid the Board considers (a) whether the claimant might have made a "pecuniary or other gain" if the claimant had continued to hold the securities and (b) whether the supply of securities or payment of actual pecuniary loss or both has not adequately compensated the claimant. 56 The distinction between damages for the commission of a tort and damages for breach of contract is that in the former they are calculated as the amount necessary to put the injured party in, or as close as possible to the position as if the tort had not been committed, and in the latter, as the amount necessary to put the injured party in the same position as if the contract had been performed. 57 The circumstances in which a claimant may suffer loss may be quite complex and it will depend on the facts of each case. There may be an unauthorised series of transfers in which some may have resulted in a gain and others a loss, ultimately resulting in a pecuniary loss and a loss of opportunity to make a gain if the securities had been retained. To assess the "loss" for which the Fund may be called upon to compensate the claimant, the Board of the SEGC has the power to consider the whole of the circumstances and decide what is "fair and reasonable" (s 961(1)). 58 The scheme for the assessment of the claimant's loss under Division 7 may be viewed to be similar to the assessment of equitable compensation. The Board may calculate the actual pecuniary loss under s 960 but take the view that the payment of that amount will not adequately compensate the claimant "in respect of a pecuniary or other gain" that the claimant "might" have made if the securities had been retained. The introduction of the concept of assessing a gain that "might" have been made takes the matter beyond a comparison with the assessment of equitable compensation. 59 In the latter case the Court is required to have regard to probabilities. The Board does not seem to be so constrained. However it is to be expected that matters to be taken into account as to whether a particular claimant "might" have made a gain will include a review of the history of the claimant's investment pattern and financial capacity. Although the Board may have a less constrained approach to the assessment, there is the requirement to fix a figure that is "fair and reasonable". 60 A claimant who is entitled to make a claim under s 957 thus qualifies for consideration, at least, for the assessment of further compensation under s 961. Although the section does not use the expression "loss", it encompasses the concept of lost opportunity. This is additional to the payment of an amount for "actual pecuniary loss".

RCL's calculation of Agreed Loss 61 RCL referred to its arrangements with the defendants as a "settlement process" which it claimed was designed to reinstate the "fair value of losses directly incurred" by the unauthorised executions. It was RCL's assessment of the fair value that was referred to in the Letter of Offer as the "agreed loss". RCL advised SEGC that it used "three main alternative methods" to determine that fair value. 62 The first method used was in circumstances where the claimant believed that a recent portfolio valuation represented an accurate reflection of authorised investments. In such instances the calculation of the fair value was the "historic statement valuation" plus 6% per annum interest to the date of the first instalment, or the current market value immediately prior to the first instalment date together with dividends foregone. 63 The statement valuation approach in this method was predicated upon what RCL claimed to be a "belief" ascertained by RCL from the investors. It was also reliant upon an internal record of the defaulter with an arbitrary 6% increase to a date that may be well in the past. In contrast the SEGC as an independent body detached from any of the wrongdoers or their associates is required to assess the loss, if it is not supplying securities of the same kind and number, as at the date of its decision that supply will not be made. 64 The current market value approach in this method is also different from the manner in which the SEGC is required to satisfy a claim, particularly having regard to the fact that the market value fixed by RCL was as at immediately prior to the first instalment date. In contrast the SEGC is required to supply securities of the same kind and number or assess the actual pecuniary loss as at the date of deciding that supply of securities will not be made, on the assumption that the claimant would have held the securities until that date. 65 The second method used by RCL was in circumstances in which the claimant did not have confidence in any particular statement and there was unauthorised trading activity on the Thompson Brindal Trust account. In assessing the fair value and reaching the agreed loss RCL claimed it was attempting to achieve parity with a rate of return that would have been generated by a blue chip share portfolio with a proviso that it would vary according to the length of time since the initial investment and the particular securities which had been requested. The rate was based upon the cash deposited and withdrawn since the inception of the Thompson Brindal account. 66 This approach depended upon RCL's judgment as to whether a claimant had "confidence" in any particular statement. There was also apparent reliance upon a statement of Thompson Brindal as evidence of cash withdrawn and deposited. It may well be that the claimant's records of money paid to and received from Thompson Brindal may be more accurate. An explanation as to why these were not relied upon may relate to RCL's view that the claimants were financially unsophisticated. 67 There is the general reference to the attempt to equate the rate with a return from a "blue chip portfolio". There is no detail as to how RCL equated each individual's portfolio with such a comparative portfolio. Once again this is different from the task required of the SEGC. It is required to satisfy a claim with the supply of securities of the same kind and number previously held by the claimant or the payment of an amount to reflect the actual pecuniary loss or both. 68 The third method utilised by RCL is where the claimant had a clear recollection of the instruction given in respect of the securities authorised to be purchased and sold. The fair value was fixed at the current market value at the date of reaching the fixation of the agreed loss amount together with dividends foregone irrespective of current holdings. It may be that the market value current at the time of RCL's fixation of the agreed loss was less than the value at the time the unauthorised transfer was made, or at the time the claim was made, or at the time the Board considers the claim. 69 In each of the instances the subject of the three methods RCL informed SEGC that it "took into account", whatever that might mean, the moneys received by the claimant from the closure of the Thompson Brindal account or from the sale of unauthorised marketable securities. It is certainly not clear whether the fair value was reached by deducting such amounts from the various assessments under each method, however it is presumed that may be the case. 70 The agreed facts are carefully worded. In respect of this matter they state as follows: 18 Pursuant to the letters of offer, each of the defendants has received from RCL payment of the amount of the agreed loss, as specified under clause 2.1, in accordance with clause 4.4 of the letters of offer executed by each defendant. 19. The amount of the actual pecuniary loss suffered by each defendant as a result of the unauthorised execution in respect of the transferred securities which each defendant has ceased to hold, and in respect of payments or other benefits to which each defendant would have become entitled as holder of such transferred securities if the defendant had continued to hold the securities, does not exceed the amount of the agreed loss specified in clause 2.1 of the letter of offer executed by each defendant.

71 Thus the agreed position for the purposes of this hearing is that the amount of actual pecuniary loss is not greater than the Agreed Loss as calculated by RCL. There is no agreed fact as to whether the claimants might have made and did not make a pecuniary or other gain within the meaning of s 961. Therefore it is not conceded that the claimants would not qualify for consideration for a further fair and reasonable amount of compensation for the "loss", because they "might" have made and did not make a gain if they had continued to hold the securities the subject of the unauthorised transfers. 72 SEGC submitted that the defendants have been wholly compensated for their losses by the payments made to them by RCL and are therefore not entitled to make a claim on the Fund. The defendants submitted that the payments made by RCL are collateral payments and are therefore not to be taken into account by the Board in assessing whether the defendants are entitled to make their claims. They submitted further that even if they are taken into account the Board is not entitled to conclude that they do not presently suffer loss within the meaning of s 957 of the Law. 73 SEGC submitted that a claimant must have suffered loss at the time the claim is made under s 957 and must remain so suffering at the time the Board makes its decision pursuant to s 960. The correctness or otherwise of this submission requires an analysis of the obligations imposed upon SEGC and the Board in respect of the decision under s 960. 74 If the Board is satisfied that the defendants are entitled to make a claim under s 957 then s 960 provides that SEGC "shall" allow the claim. In claims in respect of other conduct for which claims may be made upon the Fund, the term "must allow" rather than "shall allow" is utilised (ss 954G; 954H; 954R; 954S; 954T; 954Z; 954ZA). This difference in terminology may have occurred because Division 7 or its predecessor was included in the legislation subsequent to the inclusion of the Divisions in which those sections in relation to the conduct in which the term "must allow" is used. In any event I do not see any significance in this difference. 75 Of more significance are the terms of s 970 in Division 9. It provides that, at any time after a person becomes entitled to make a claim, SEGC "may" allow and settle the claim. Such power is subject to the provisions of Part 7.10, which Part includes s 960. 76 Section 970 is the source of power for SEGC to allow and settle claims. That power is subject to the provisions of Part 7.10 and thus, in respect of a claim pursuant to s 957 which the Board is satisfied the claimant is entitled to make, SEGC "shall" allow the claim. Mr Robertson SC emphasised the term "is entitled" in s 960(1) and the requirement in s 960(3) for SEGC to pay to the claimant the amount that "as at the time when the claim is allowed" the "actual pecuniary loss suffered by the claimant". There is also the reference to the assessment of the actual pecuniary loss "as at the time when the Board decides" that supply of securities will not be made. 77 In my view the term "suffers loss" in s 957 means that at the time the claim is considered, the loss must be extant. The provision in s 960 that the consideration is whether the claimant "is entitled" to make the claim - rather than "was" entitled to make the claim supports such an interpretation. Characterisation of the defendants' contractual arrangement with RCL 78 In considering the facts of the case in respect of the defendants' claim the Board will have to decide whether it is satisfied that any of the defendants presently "suffer loss". Mr Robertson SC submitted that in this case each of the defendants has been "repaid" by RCL and is not suffering a loss. In those circumstances it is submitted that it would be open to the Board to conclude that it was not satisfied that each of the defendants is entitled to make a claim. 79 In support of this submission Mr Robertson SC relied upon the unreported judgment of the Court of Appeal of this Court in Registrar General v Gill & Anor Gleeson CJ, Mahoney & Priestley JJA 16 August 1994. That was a case in which the respondent Mrs Gill had suffered a loss by reason of the fraudulent conduct of her solicitor. The solicitor had custody of the Certificate of Title of Mrs Gill's property. He borrowed money from Fairstar Deposit and Securities Pty Ltd (Fairstar) upon the security of the land and forged and uttered a mortgage purportedly executed by Mrs Gill. Fairstar lodged the mortgage which was registered. When Mrs Gill discovered the fraud the debt was $199,000. 80 Mrs Gill made a claim upon the Solicitor's Fidelity Fund pursuant to s 57 of the Legal Practitioners Act 1898, which the Law Society accepted and paid out the debt that was owing to Fairstar. Fairstar gave a discharge of the mortgage which was registered. The Law Society then brought proceedings in the name of Mrs Gill and in its own name against the Registrar General. 81 The issue litigated at first instance was whether, having paid out Mrs Gill's claim against the Fidelity Fund the Law Society was, by right of subrogation, entitled to recover from the Registrar General the damages which Mrs Gill would have been entitled to recover had she by-passed the Fund and sued the Registrar General. That issue was resolved at first instance and on appeal in the Law Society's favour. Gleeson CJ and Priestley JA said at page 4 of the Butterworths Unreported Judgment print: This is not a case where some person voluntarily made a payment to Mrs Gill, or for her benefit, which relieved her of the loss, she had suffered through her solicitor's conduct, and which meant that in the ultimate result, she suffered no loss or damage by reason of that conduct. She pursued her legal rights against the Law Society which, by force of statute, then became entitled to enforce her rights against the Registrar General. 82 Mahoney JA had some doubts in respect of whether Mrs Gill was a person "sustaining loss or damages". His Honour's mind had wavered on that matter and he used the example of Mr Hawkins repaying Mrs Gill to assist him to reach a conclusion on the matter. If Mr Hawkins had repaid her, Mrs Gill could not recover damages against the Registrar General - or could only recover nominal damages. His Honour said at page 6 of the print: In the present case, the money was provided to her - or the mortgage discharge was obtained -as the result of the action of the Law Society pursuant to s 57 et seq of Act 1898. If that payment be treated as equivalent to a payment by Mr Hawkins, then in my opinion, Mrs Gill may not recover from the Registrar General. The problem is to characterise the payment made by the Law Society. If the payment made by Mr Hawkins had been made on his behalf by, eg, an insurer of him under a policy of insurance against professional malpractice, the result would, I think, be again that Mrs Gill could not recover from the Registrar General. It is at least arguable that a payment by the Law Society out of the Solicitors' Fidelity Fund is of this nature. Having regard to the judgment of Gleeson CJ and Priestley JA, it is not necessary for me to pursue the provisions of the Act or the nature of such a payment. The provisions are such that they do not compel a conclusion one way or the other. But, as the argument has suggested in the present case, the provision for subrogation of the Law Society to the rights of the claimant against "any other person" suggests that it was the intention that the loss should be borne by such "other person" and that the Law Society should not bear the ultimate burden of what had taken place…I accept that this is the effect to be given to the legislation. 83 In Law Society of New South Wales v Bruce (1996) 40 NSWLR 77 Giles CJ Comm D said at p 85: As was said of its predecessor, in Registrar General v Gill , while it is a question of statutory construction it is desirable that the provision be construed to achieve the same end as the equitable principles relating to subrogation, namely, to adjust the interest of three parties such as a creditor, a debtor and an insurer or surety so as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor. A corollary to the Law Society's subrogation is that a claimant should not retain any recovery for which he has been compensated out of the Fidelity Fund, and that is addressed by s 86 of the Act earlier set out…Together s 86 and s 90A demonstrate an intention that, in order to avoid double recovery by a successful claimant upon the Fidelity Fund and inequitable discharge of those who have wronged him, the claimant's rights, remedies and recoveries should be for the benefit of the Law Society. 84 SEGC submitted that this is a case in which RCL has voluntarily made a payment to the defendants which has relieved them of the loss they had suffered though the conduct of Thompson Brindal. The defendants did not pursue their legal rights prior to contracting with RCL to receive the payments.

A collateral payment? 85 Both parties have referred by analogy to personal injury cases. Upon occasions receipt of certain amounts by a party have been disregarded in assessing the party's loss on the basis that such were merely "collateral": Redding v Lee (1982) 151 CLR 117 at 123. 86 In National Insurance Co of New Zealand v Espagne (1961) 105 CLR 569, Dixon CJ in refusing to take into account the receipt of an invalid pension in diminution of damages caused by an accident which rendered the respondent an invalid, referred to the characteristic of a benefit "both independent of and cumulative upon whatever right of redress against others might arise out of the accident" (at 573). In the same case, although noting that it was not possible to enunciate an exhaustive rule on the vexed topic and that much will depend upon the terms of the statute governing the benefit conferred, Windeyer J said at 599-600: In assessing damages for personal injuries, benefits that a plaintiff has received or is to receive from any source other than the defendant are not to be regarded as mitigating his loss, if: (a) they are received or are to be received by him as a result of a contract he made before the loss occurred and by the express or implied terms of that contract they were to be provided notwithstanding any rights of action he might have; or (b) they were given or promised to him by way of bounty, to the intent that he should enjoy them in addition to and not in diminution of any claim for damages…..In both cases the decisive consideration is, not whether the benefit was received in consequence of, or as a result of the injury, but what was its character: and that is determined, in the one case by what under his contract the plaintiff had paid for, and in the other by the intent of the person conferring the benefit. The test is by purpose rather than by cause.

87 SEGC submitted that the character of the payments made by RCL to the defendants was not simply consideration for the assignment of all their rights against Thompson Brindal and other potential defendants. It was submitted that the payments represent the entirety of the compensation which the defendants are entitled beneficially to receive from any of the wrongdoers and that such payments were to compensate the defendants for losses suffered as a result of the unauthorised executions. 88 It was submitted that the purpose of the payments was to compensate the defendants for the losses they suffered as a result of the unauthorised executions. In this regard reliance was placed upon what was claimed to be the defendant's acknowledgment of such purpose in their submission to SEGC dated 28 January 2000 that; The affected claimant-investors of RetireInvest have been compensated by RetireInvest's holding company, (RCL), in respect of losses suffered as a result of Thompson Brindal's unauthorised activities (Ex B par 3 p.10); and The claimant investors have been compensated for their losses by RCL (Ex. B par 9.1 p 45). 89 It is also submitted by SEGC that the payments were not made independently of the existence of rights of redress which the claimants may have against wrongdoers. The payments were made for the purpose of RCL acquiring those rights from the defendants. This is so notwithstanding that the assignment was of an equitable interest only, leaving the bare legal rights of no value with the defendants. 90 In those circumstances Mr Robertson SC submitted that the contractual arrangements and the payments received do not constitute a transaction independent of, collateral to or disconnected from the loss suffered as a result of the unauthorised execution. The Board may therefore have regard to the payments received and it is submitted that it would be open to it to reach the conclusion that the defendants are not entitled to make their claims as they do not "suffer loss". 91 Mr Douglas QC submitted that SEGC has failed to recognise or give appropriate attention to the distinction between "loss" in s 957 of the Law and the concept of "actual pecuniary loss" in ss 960(2) and 960(3) of the Law. The defendants contend that the payment by RCL is a collateral payment and as such the Board is unable to take it into account in assessing whether the defendants are entitled to make their claims. In those circumstances it is submitted that it is not open to the Board to conclude that the defendants do not presently suffer loss. 92 Mr Douglas QC submitted that the consideration for the Speculative Securities and the assignment was not offered as a compromise of any claims and no release was offered by the defendants. The arrangement entered into has not affected or altered any "actual pecuniary loss". It is submitted that the well established approach that collateral payments were not taken into account in personal injury cases has now been applied to a wider category of cases and is applicable in this case: Monroe Schneider Associates Inc v No 1 Raberem Pty Ltd (1991) 33 FCR 1 per Burchett J at 26. 93 Mr Douglas QC relied upon the judgment of Hansen J in Farrow Finance Company Ltd (In liquidation) v A.N.Z. Executors & Trustee Co Ltd & Ors [1998] 1 VR 50 which was a case in which a liquidator sought directions from the Court. A large number of noteholders in Farrow Finance Company Ltd (In liquidation) (Farrow) represented by the Australian Securities Commission (ASC) sued the trustee of the notes and others for losses on the notes after Farrow went into liquidation. 94 The claims were settled by payment by the defendants of an amount which represented 85% of the face value of the notes and the ASC's costs. The liquidator, who was not a party to the proceedings or to the Settlement Deed, had previously paid a dividend. The liquidator advised the noteholders that he had decided to treat the settlement proceeds having been received by the noteholders first in payment of the interest accrued on the outstanding debt since the date of liquidation and then in reduction of the amount of the pre-liquidation debt as represented in the Proof of Debt lodged. 95 The noteholders contended that the liquidator should ignore the settlement payment and a major creditor contended that the liquidator should treat the settlement payment as reducing the principal outstanding on the notes. In was in those circumstances that the liquidator approached the Court for directions. 96 It was submitted against the noteholders that they might become the recipients of a seemingly undeserved windfall. Hansen J observed that the consequences which might flow from a particular result may properly be used to call into question the legitimacy of the result itself and continued at p 78: A remotely possible windfall is to be preferred to an immediate and definite one… it is not unknown for the common law to allow two forms of "compensation" to be paid to an injured person in relation to one loss. In such situations, one payment is not regarded by the law as compensation at all, but instead is regarded as a collateral payment.

And: True it is that there are a number of payments which are made to an injured person which might prima facie be thought to be "collateral", but which the law says must be taken into account in reduction of the quantum of the tortfeasor's liability. But that is because the law considers that those payments reduce the loss which the tort victim has suffered. …A defendant will not escape such liability by showing that a third party had paid the plaintiff a sum of money as a consequence of the defendant's breach, unless the defendant can show that the third party's payment operated by way of release.

97 McLelland CJ in Eq in Midland Montagu Australia Ltd & Anor v Harkness (1994) 35 NSWLR 150 analysed the problem in the following way at p 159: Generally speaking, where two (or more) persons (DI and D2) are severally liable to a third (C) for what is in substance the same amount whether by way of debt or damages (or for amounts which include a common component) (which amount or component I will for convenience call the common amount), C may pursue independent claims against D1 and D2, including the recovery of judgment against, or proof in the winding up or bankruptcy of, each or either, regardless of any judgment against, or proof in the winding up or bankruptcy of, the other, subject only to the rule against double satisfaction. The essence of that rule is that C is precluded from receiving in aggregate more than the full value of the common amount. (That rule does not apply to collateral payments, for example, from an insurer or volunteer: see Smoker v London Fire and Civil Defence Authorities [1991] 2 AC 502, Dawson v Sawatzky [1946] 1DLR 476 ). C cannot enforce payment from D1 of a sum which, when aggregated with sums already received from D2 in satisfaction of the common amount, would exceed the value thereof. 98 In his chapter "When Does Payment by an Intervener Discharge Another Party's Obligations in "The Law of Subrogation" Oxford 1994, C Mitchell expressed the following view (at p 20) with which some sympathy may be understandable: As a matter of principle it would be desirable if the rules in this area were simplified, and there are good reasons for thinking in particular that the courts should adopt a universal rule in the context of third-party payments of debt, to the effect that whenever an intervener pays another party's debt, the debt is automatically discharged. 99 Although the learned author expressed that view in respect of "debts", it may equally apply to losses for which a party is responsible. There is no universal rule and it is necessary to assess each case on its facts. In applying what Windeyer J said in Espagne at 599-600 it is necessary to ascertain whether RCL's payments were made "by way of bounty, to the intent that" the defendants should enjoy them in addition to and not in diminution of any claim for damages. 100 Windeyer J was of the view in Espagne that the decisive consideration was the character of the payment. In this instance it is determined by ascertaining RCL's intent in making the payment. What is clear from the Letter of Offer is the intention that the defendants are not entitled to keep any damages or monetary award that might be paid to them in proceedings against the potential defendants or as a result of a claim on the Fund. They have agreed to pay such amounts to RCL immediately on receipt, whether or not demand is made by RCL for that payment. The payments are therefore not intended to be enjoyed in addition to or as a bonus or bounty. 101 A feature to the contractual arrangements between RCL and the defendants is the purchase by RCL of the Speculative Securities. The purchase price of those Securities was agreed at the aggregate market price based on the last sale price recorded on the ASX before the date of the Offer multiplied by a factor contained in the formula in cl.4.4(c) of the Letter of Offer. The other portion of the amount paid by RCL to the defendants was calculated on the formula in cl 4.4(d) and allocated as consideration for the Assigned Choses. 102 On the facts before me there is presently no co-ordinate liability between RCL and RetireInvest as there was between National Mutual and Citibank in National Mutual Property Services (Australia) Pty Ltd & Ors v Citibank Savings Ltd and Others (1995) 132 ALR 514. The Deeds in that case recorded a release and there was no apportionment of the consideration. In this case the Letter of Offer does not include any express release and there is apportionment of the consideration, albiet the consideration is equivalent to the amount of the Loss the claimants have suffered as a result of the conduct of the potential defendants. 103 In this comparison it may be seen that the contractual arrangements are distinguishable from those with which Lindgren J was dealing in National Mutual v Citibank in which his Honour found the payments not to have been collateral payments. It is submitted that as the payments to the defendants in this case do not fall within the analysis of the payments in National Mutual v Citibank they are collateral. It is true that the circumstances of this case are different, however the character and purpose of the payment in this case requires further analysis in the light of the relevant provisions of the Law which provide for an entitlement to make a claim if the claimant suffers loss. 104 In this case RCL has provided detail in the Schedule to the Claims as to its intention in making the payments to the defendants. That is able to be read in conjunction with the Letter of Offer in ascertaining the character and purpose of the payments to determine whether such are able to be taken into account in the Board's assessment of whether the defendants presently suffer loss, thus entitling them to make a claim pursuant to s 957 of the Law. 105 RCL advised the SEGC that it was in the process of investigating "and settling the compensation claims" of the defendants. RCL also stated that the settlement process "was designed to reinstate the fair value of losses" the defendants incurred as a result of the unauthorised executions. That was the purpose of the payment and that was RCL's intention in making the payment. The Letter of Offer makes clear that the payments are not intended to be enjoyed as a "bounty" or bonus in addition to or cumulatively upon what might be recovered from any other source. 106 The way in which the Letter of Offer is structured may give the payments, to use Hansen J's description in Farrow, the "prima facie" presentation of collateral payments. However this presentation must be tested in the light of all the facts in this case, RCL's intention and the terms of the Law pursuant to which a claimant is entitled to make a claim on the Fund. 107 The payments, as they were intended, "reinstated", restored or put the defendants back in their former position or state. That former position or state was that which existed prior to the unauthorised executions and one in which they did not suffer loss. Having been restored to the position and taken advantage of that position it is my view that under the Law the defendants cannot claim they have not been so restored. I am of the view that the payments are not collateral payments for the purposes of a claim under Division 7 of the Law and are able to be taken into account by the Board. 108 However I am not of the view that it is appropriate to make the declaration sought. The statutory regime to which I have referred earlier requires the Board to assess the matter in far more detail than to assume that there is no "loss" within that meaning in Division 7 because RCL has chosen to assess the amounts in the particular manner to which reference has earlier been made. 109 Although there are Agreed Facts for the purposes of this hearing, it seems to me that the manner in which the calculations have been made by RCL requires scrutiny. There is an obligation on the Board to make its own assessment of the entitlement to make the claim. The process of that assessment will include the Board giving consideration to the terms of Division 7 referable to the calculation of the actual pecuniary loss and also the assessment of whether the defendants are entitled to further compensation pursuant to s 961 of the Law because they might have made and did not make a pecuniary or other gain by reason of the unauthorised transfers. 110 It may be that there is no "loss" presently suffered by the defendants, taking into account the payments made to them by RCL, however that will have to be assessed in the Board's consideration of the defendants' entitlement to make the claims having regard to the matters to which I have referred earlier. 111 I am of the view that the Board must make a more detailed analysis of these claims to comply with its statutory obligations pursuant to s 960. In those circumstances I refuse to make the declaration sought.

The Subrogation Issue 112 SEGC submitted that it would be open to the Board to conclude that the defendants are not entitled to make a claim on the Fund by reason of the assignment of their rights to RCL, thus rendering worthless SEGC's statutory right of subrogation under s 980(2) of the Law. The assignment is therefore said to be disentitling conduct. 113 In the insurance context the right of subrogation is not able to be exercised until the insured has been indemnified for the loss. In State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 Barwick CJ said at 241: The right of subrogation as it seems to me does not depend for its existence as a right upon the occurrence of a loss under the policy. Its exercise is of course dependent upon the payment of the loss but as a right it exists from the moment of the making of the contract of indemnity. 114 Similarly SEGC's statutory right of subrogation exists from the moment it allows the claim (s 980(2)). There is in the legislation a distinction between allowing a claim ( s960(1)), satisfying a claim (s 960 heading; s 970B) and settling a claim (s 970). SEGC is able to notify an insurer of "another person", against whom the claimant had a right or remedy, of its subrogated right to that right or remedy once it "allows" the claim (s 980(2) &(4)). 115 It is envisaged that there may be a delay between the time a claim is allowed and the time that the claim is satisfied. This is gleaned from the terms of s 960 in providing for the process after the claim is allowed for assessment as to whether the supply of securities is practicable and achievable in a reasonable time and if not the calculation of the actual pecuniary loss and thereafter a determination as to whether further compensation should be paid. In contrast to the insurance context it may be argued that by reason of the terms of s 980 the SEGC can exercise its right of subrogation prior to the allowed claim being satisfied. The Explanatory Memorandum refers to the right being exercised when the claim is "satisfied". That is certainly consistent with subrogation in the insurance context and appears to be the intention here. 116 SEGC's statutory right of subrogation is important as a matter of public policy. It provides a mechanism to obtain an important source of replenishment for the Fund which is available for claimants thus fostering the intended boost in and maintenance of confidence in the securities market. It also has the economic impact of keeping levies upon members at as reasonable a level as possible. 117 RCL's assigned rights are valuable contractual rights. It seems to me that if it was intended that s 980(2) renders void any contractual assignment to third parties express provisions to that effect would be necessary: Commonwealth v Hazeldell Ltd (1918) 25 CLR 552; Wik Peoples v Queensland (1996) 187 CLR 1. There is no such express provision. Equally it seems to me there would have to be express provision disentitling a claimant who has assigned rights to a third party from receiving compensation. There is nothing in the Law that supports such a conclusion. 118 The approach of reaching a conclusion from the absence of any statutory provision has been the subject of criticism as has the comparison with the model of private insurance in respect of a public welfare programme: J.G. Fleming (1974) Vol LII The Canadian Bar Review 103 at 111-112. The learned author was analysing, to use a neutral term, the decision of the Ontario Court of Appeal in Re Ledingham v Di Natale (1973) 31 DLR (3d) 18, in which the Court was interpreting the statutory right of subrogation conferred on the Hospital Services Commission pursuant to the Hospital Services Commission Act S 55(2) The Commission is subrogated to any right of an insured person to recover all or part of the cost of insured services from any other person including future insured services, and the Commission may bring action in the name of the insured person to enforce such rights and Regulations. 119 In that case the plaintiffs had recovered damages for personal injury suffered in a motor vehicle accident. The proceedings were brought by the plaintiffs on their own behalf and on behalf of the Commission. Some portion of the judgment amount was for insured services paid for by the Commission. The plaintiffs made application for payment from the Motor Vehicle Accident Claims Fund. The question was whether the Commission was entitled to share equally with the plaintiffs in the payment out of the Fund. 120 The trial judge, Keith J held that the language of the Act and Regulations, although being the language of insurance, should be interpreted to give a meaning to subrogation to make it only applicable to prevent an insured person from being unjustly enriched See also reference to subrogation as an equitable remedy against a party who would otherwise be unjustly enriched in Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221; see also Austin v Royal (1999) 47 NSWLR 27. In the circumstances Keith J ruled that the Commission was not entitled to participate in the payments from the Fund. The Court of Appeal overturned Keith J's decision and allowed the Commission to share equally with the plaintiffs in the Fund payment. 121 In delivering the judgment of the Court (MacKay, Kelly and Brooke JJ.A.), Kelly J.A. said at page 22: However, the rights of the Commission and the obligations of the insured are spelled out in a number of provisions in the statutes and Regulations from which I conclude that the word "subrogated" is not used strictly in its legally technical sense. Either it is used in its lexicographical sense or in a sense that reflects modifications of the technical sense to accommodate the obligation specifically created.

And at page 23: Had it been intended that the right of recovery should be deferred in favour of or preferred over other amounts for which the third parties would be liable, it surely would have been so provided. The absence of such a provision leaves the matter to be determined on the basis that the Commission's claim is neither prior to nor to be deferred to the claims of the plaintiff's for amounts other than that represented by the cost of the insured services. The Commission's claim stands along with every other claim and competes on an equal footing with other claimants who have claims on the available funds.

122 This judgment sparked vigorous debate. R.W McInnes suggested that the Court of Appeal decision was wrong on two grounds: (1973) Vol LI The Canadian Bar Review 658 at 666. The first was that it reversed the normal onus in statutory construction that it is a general rule that words must be taken in their legal or technical sense unless a contrary intention appears. The second ground was the argument that the decision subverted the basic doctrine of insurance in that the plaintiffs were required to supply funds of their own for services for which they had been paying premiums in order to be insured against. 123 J G Fleming suggested that McInnes' criticism was as "uncompelling as the pretence by the Court of Appeal to draw an inference from the absence of any statutory provision". Fleming's complaints were not so much about the outcome of the case as with the court's manner of reaching it. He opined at p 111: For surely, as previously pointed out, it is quite unrealistic to pursue the will-o'-the-wisp of a non-existent statutory intent. But for all that it does not follow that the model of private insurance is necessarily applicable to a public welfare programme, whether or not the latter can be described as a form of (public) insurance . For both private and public insurance the question is one of legal policy, dependent on the nature and function of the benefit in question. And these benefits are not in all respects alike. ………… What justifies treating the fiscal self-interest of a social security fund as paramount to or at least of equal importance, with the welfare interest of the beneficiary? To ask that question would have directed the court's attention to the real crux of the matter - calling for a policy analysis, not a capricious exercise in the canons of statutory construction. 124 It seems to me that the policy behind the conferring of the statutory right of subrogation on the SEGC was to ensure that the Fund had sources of replenishment so that confidence in the securities market was maintained. In line with this policy it would be expected the Fund should not be called upon to compensate a claimant who has prevented the Fund's replenishment by the assignment of the right of subrogation to a third party. If that policy is to be reflected in the statutory provisions it should be clear. It is not. 125 Reference has been made to instances in the insurance context in which insured persons have prejudiced the insurer's right of subrogation: State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd supra. Reference has also been made to surety contracts and the rights of guarantors in circumstances where the creditor breaches the contract or prejudices the guarantor's right of subrogation: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 559-560; Bond v Hongkong Bank of Australia Ltd and Ors (1991) 25 NSWLR 286; J O'Donovan & J Phillips The Modern Contract of Guarantee 3rd Ed. LBC p655-656. Insurance subrogation has been described as forming a category of its own S R Derham Set-Off 2nd Ed. Oxford at p 326 citing Oliver LJ in Barclays Bank Ltd v TOSG Trust Fund Ltd [1984] 1 AC 626 at 639. and in any event I am of the view that s 980 must be construed in the particular context of Part 7.10 in particular Divisions 7 and 9. 126 SEGC submitted that, in line with these cases and the approach adopted by Giles CJ Comm D in Law Society of New South Wales v Bruce, s 980 should be construed so as to achieve the same end as equitable principles relating to subrogation. It was submitted that such end would be to adjust the interests of SEGC, RCL and the defendants, as though they were respectively the guarantor, the debtor and the creditor. 127 In Law Society of New South Wales v Bruce, there was the specific statutory provision (s 86) which dealt with separate payments from the Fidelity Fund and another source and how such payments were to be adjusted. Indeed where there was a surplus over and above the pecuniary loss the section declared that such was a debt payable to the Law Society. The Law is silent in respect of such matters. 128 The earlier reference to the second reading speeches with the inclusion of the right of subrogation in a catch-all reference to the machinery provisions for the processing of claims in my view provides no assistance in the task of construing these provisions. This is not a case where equity should eke out what it perceives to be the policy of the statute in which the legislature is to be taken as having meant to say something, though it did not do so: J D Heydon, P L Loughlan "Statutes and Subrogation" in Cases and Materials on Equity and Trusts 5th Ed. Butterworths p 426. 129 In any event in the present situation it is not merely the absence of the statutory provision that leads me to the conclusion that the assignment is not disentitling conduct. There is an indication to the contrary. It is envisaged that there may well be circumstances in which the Fund may not be able to recover from defaulters or parties responsible for the claimant's losses. This indication is found in the provisions which enable the SEGC to insure against losses in respect of claims made on the Fund (s 982). 130 I am not of the view that it is open to the Board to be satisfied that the claimants are not entitled to make the claims because they have assigned their rights to RCL.

Declaratory Relief 131 There was a preliminary point raised by Mr Douglas QC that the Court should not entertain this application. It was submitted that the curious wording of the declaration sought - "whether it is open to the Board to be satisfied" - offends against the principle in Bass & Anor v Permanent Trustee Company Limited & Others (1999) 198 CLR 334. 132 It was submitted that even if the Court made the declaration sought the SEGC may proceed to allow part of the claim or refuse it on some other ground. It was submitted that the declaration would not bring finality to the matter. 133 The SEGC was effectively seeking a declaration "that it is open to the Board to be satisfied" the defendants are not entitled to make their claims because they do not suffer loss and/or they have assigned their rights to RCL. The SEGC was concerned to ascertain whether a certain approach it may adopt in the consideration of the defendants' claims was consistent with its obligations under Part 7.10 of the Law. 134 In this case there are agreed facts for ascertaining whether a declaration should be made which will effectively state that conduct which has not yet taken place will not be in breach of the Law. Therefore it is not accurate to characterise the matter as academic or hypothetical. This is properly part of the declaratory jurisdiction of the Court: The Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 per Barwick CJ at 305, was cited with approval in Bass at 356. 135 I am of the view that the application does not offend the principles in Bass. However for the reasons given in relation to the Loss Issue and the Subrogation Issue I refuse to make the declaration. I will hear argument on costs should the parties not be able to agree on a costs order.

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