the DEFENCE of unclean hands
160 The applicant claims declaratory relief (with respect to her beneficial ownership of the Kent Street property), a mandatory injunction that the respondent transfer the Kent Street property to her, and an order that accounts be taken of the amounts due to her for moneys paid as rent in respect of the property.
161 The respondent submitted that the applicant should be denied all relief because, in seeking to establish her beneficial entitlement to the Kent Street property, the applicant is forced to prove a mutual intention between herself and the bankrupt:
(a) to avoid or circumvent the statutory regime which governs the regulation of foreign ownership of land in Australia (being in particular s 26A of the FATA); and
(b) to mislead the Bank with a view to inducing it to make a loan to the bankrupt so as to facilitate the purchase of the Kent Street property when, had the true position been made known to the Bank, it is unlikely that any such loan would have been provided.
162 I am able to deal with the second of those matters in short measure. In my view a defence of unclean hands, on that basis, cannot be sustained in light of the findings of fact I have made: see [140]. The evidence does not show that the applicant and the bankrupt had a mutual intention to mislead the Bank as the respondent has argued, or that the Bank was misled in any material way in relation to its consideration of whether finance should be granted to the bankrupt for the purchase of the Kent Street property. Moreover, there is no evidence about what the Bank would or might have done with respect to advancing loan funds had it regarded itself as having been misled in some material particular.
163 It is necessary to say something more about the first matter.
164 Section 26A(2)(a) of the FATA provides that, where a natural person not ordinarily resident in Australia (such as the applicant) enters into an agreement by which he or she acquires a legal or equitable interest in Australian urban land (such as the Kent Street property) and does not, before entering into the agreement, furnish to the Treasurer a notice stating his or her intention to enter into that agreement, then that person is guilty of an offence, punishable on conviction by fine or imprisonment.
165 However, s 38 of the FATA provides that an "act" is not invalidated by the fact that it constitutes an offence against the FATA. The "act" referred to is the act of entering into the agreement, not the failure to give the required notice: Cordinup Resorts Pty Ltd v Terana Holdings Pty Ltd (1997) 143 FLR 18 at 20 and 30-31.
166 In Ikeuchi v Liu (2001) 160 FLR 94, Muir J (at [103]) said:
… s 26A is not directed to prohibiting agreements by non-residents to acquire Australian urban land or even the acquisition of such land. The section seeks to ensure the giving of notification to the Treasurer prior to the entering into of any such agreement to acquire so that the Treasurer may make a determination under s 21A. If the Act is to be construed as prohibiting the acquisition of land, the prohibition must thus be one which arises by implication. But, in my view, no such implication is possible in the light of s 38.
167 In the present case, the applicant did not give notice under s 26A(2)(a) of the FATA of her intention to acquire her beneficial interest in the Kent Street property. But the respondent's submissions were not directed to arguing that the applicant's failure to give such notice in respect of her intended acquisition resulted in a contravention of the Act, for which the applicant should thereby be denied the relief she claims. In short, the respondent did not rely upon a defence of illegality, as such.
168 Rather, the respondent's submissions had a different focus. He distinguished the defence of unclean hands from the defence of illegality. He contended that an applicant for equitable relief in respect of rights arising under or by virtue of a transaction, will be denied that relief if that person has engaged in conduct which has been, in a relevant respect, "improper in respect of [that] transaction". He submitted that where an applicant needs to prove his or her own "bad conduct", in order to prove the circumstances which he or she says entitles him or her to an equitable remedy, that bad conduct has an immediate and necessary relation to the equity sued for, and thus engages the doctrine of unclean hands.
169 In making these submissions, the respondent did not identify what constituted the applicant's "bad" or "improper" conduct, beyond the generalised contention that the applicant and the bankrupt had a mutual intention to avoid, specifically, s 26A of the FATA. In the context of that contention it is, of course, the applicant's state of mind that is of primary relevance, because the defence of unclean hands fixes on the requirement of good conscience as it affects the applicant for the claimed relief. It is thus necessary to consider what the evidence reveals in that regard.
170 I have already set out the terms of the 5 November 1996 letter and the subsequent conversation between the applicant and the bankrupt in relation to that letter. The letter informed the applicant that she could not be "the owner of a property here" and, on the applicant's version of the conversation, that "since you are not an Australian resident you cannot own a unit". According to the bankrupt's version of the conversation, she told the applicant that "you cannot register a unit in your name since you are not an Australian resident". None of these statements is correct: there is nothing in the FATA that imposes a blanket prohibition on a non-resident owning Australian urban land, such as the Kent Street property. There is, of course, the requirement of s 26A providing for the compulsory notification of an intention to acquire an interest in Australian urban land which, when given, might result in the Treasurer making an order prohibiting the proposed acquisition: see s 21A. But that is quite different to the information on which the applicant and the bankrupt were proceeding.
171 There is nothing in the letter or in either version of the conversation that speaks of the FATA or its actual requirements. This is not surprising. The evidence does not show that either the applicant or the respondent had any real understanding of the requirements of Australian law, beyond the rather vague anecdotal information that the bankrupt had received, which she, with her own imperfect understanding, then conveyed to the applicant. This evidence does not reveal that the applicant or the bankrupt had any notion of the machinery provisions of the FATA or, specifically, the requirements of s 26A, as those requirements might affect the acquisition of the Kent Street property, or apply more generally.
172 The applicant was tested on her state of mind on these matters in the course of her cross-examination. The effect of her evidence was that she "came to appreciate", some time before May 1997, that, as a non-resident, she could not lawfully own property in Australia in her own name. After her discussion with the bankrupt, she decided that, if a home unit property was purchased in the bankrupt's name, she could thereby avoid the restriction she understood to have been imposed by Australian law respecting the ownership of property by non-residents.
173 This evidence does not advance matters beyond what is apparent from the applicant's own evidence in chief. It proceeds on the same misunderstanding of Australian law, and in ignorance of the provisions of s 26A of the FATA.
174 The most that can be said of the evidence on these matters is that the applicant had a desire to avoid what she understood to be a restriction imposed by Australian law on the ownership of real property by non-residents. However, the evidence does not show that her desire was to do so by illegal or otherwise improper means. Her understanding was that a non-resident could not hold Australian real property in his or her own name. She believed that this restriction could be overcome by the bankrupt purchasing, and later registering, the Kent Street property in her (the bankrupt's) name. In that way the Kent Street property would be registered in the name of an Australian resident. There is no evidence that the applicant thought that, in those circumstances, her acquisition or retention of the beneficial ownership of the property would be illegal or otherwise improper.
175 As events turned out, the applicant's arrangement with the bankrupt could not, and did not, avoid the requirements of s 26A. But, more importantly for present purposes, the applicant and the bankrupt acted in complete ignorance of those requirements.
176 For these reasons, I am unable to see how it can be said that the applicant and the bankrupt had a mutual intention to avoid, specifically, s 26A of the FATA. Therefore I am not satisfied that the respondent has established the factual basis for the defence on which he relies.
177 I should add that, in any event, I am not persuaded that the defence would apply to deprive the applicant, unconditionally, of the relief she seeks.
178 In Ikeuchi Muir J dealt with a submission that equitable relief should be refused (in circumstances where notice under s 26A of the FATA should have been given) because it would undermine the policy of the FATA by making it advantageous for non-residents to conceal their acquisitions from the Treasurer.
179 Although it was not necessary for his Honour to decide that question, he made the following observations (at [106]):
Although there is some force in the submission that the efficacy of the Act is capable of being subverted by conduct such as that engaged in by the plaintiff, the Act, by the anti-avoidance provisions of s 38A, expressly acknowledges and addresses that matter. It is apparent that this section and the penalties provided for in s 26A, were thought by the legislature to constitute sufficient deterrence against avoidance of the Act's provisions. Section 38, which expressly excludes invalidity as a consequence of breach, exists notwithstanding the acknowledgement of the prospect of avoidance implicit in s 38A. Consequently, I do not accept the submission that public policy requires the denial of equitable assistance to the plaintiff. …
180 In Menezes v Salmon [2009] NSWSC 2 Macready AsJ dealt with the question of whether enforcement of a trust might further an illegal purpose in breach of the FATA. This was another case dealing with the failure to give notice under s 26A. Although no illegality or unclean hands had been pleaded, his Honour gave consideration to that question on the basis that it was relevant, generally, to the exercise of discretion to grant relief. In giving consideration to that question, his Honour rejected a submission that the imposition of a trust in favour of the plaintiff in respect of certain real property would be inconsistent with the policy of the FATA. His Honour noted that the provisions of the FATA did not make it illegal for a natural person not ordinarily resident in Australia to enter into a contract to acquire an interest in urban residential land when notice under s 26A had not been given, even though penalties were provided for the breach of the notice provision. His Honour reached the following conclusion (at [118]):
I would agree with plaintiff's submissions that by refusing the plaintiff his beneficial interest the Court would be imposing a further sanction where the parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct that breaches or evades the operation of the statute and its policies.
181 This conclusion followed upon his Honour noting that the plaintiff had accepted that, if successful, he must notify the Treasurer of his acquisition of an interest in the subject property: see at [116].
182 In Nelson v Nelson (1995) 184 CLR 538 a question arose, in a different context, as to the possible refusal of equitable relief in circumstances where a trust was asserted in respect of the proceeds of sale of a property tainted by illegality because of its association with, or furtherance of, a purpose contrary to the policy of the law.
183 In that case a mother paid the purchase price for a property that was transferred into the names of her two adult children. The purpose of the arrangement was to permit the mother to purchase another house with the benefit of a subsidy provided under the Defence Services Homes Act 1988 (Cth). She could not obtain that benefit if she already owned a house. The mother thereafter purchased a house with the benefit of the subsidy. The first house was subsequently sold and the mother asserted the existence of a resulting trust in respect of the sale proceeds.
184 The High Court did not decline to grant relief in the circumstances of that case. The majority (Deane, McHugh and Gummow JJ) were of the view, however, that the relief to be granted should be moulded "to do equity according to the requirements of good conscience": Deane and Gummow JJ at 571; see McHugh J at 617-618. A declaration was made that the sale proceeds were held on trust for the mother, conditioned on her prior payment to the Commonwealth of a sum calculated by reference to the difference between the subsidised rate of interest (which she had paid) and the usual rate of interest charged by the lending bank (which she should have paid). The minority (Dawson J at 581; Toohey J at 597-598) would have made an unconditional declaration of the mother's ownership of the sale proceeds.
185 These cases show that, if established, the defence of unclean hands does not operate inflexibly to deprive an applicant of all relief. Regard must be had to the circumstances of the case and, in particular, whether those circumstances require the applicant "to do equity according to the requirements of good conscience": Nelson at 571. No doubt the relevant circumstances will vary from cases to case. Where a breach of s 26A of the FATA has been shown, the decisions in Ikeuchi and Menezes indicate, by example, that the occasion to do equity does not necessarily arise, although, in Menezes, it was understood that the plaintiff would, if successful, then give notice of his property interest to the Treasurer.
186 The applicant has not submitted that, in the particular circumstances of this case, she was not under a legal obligation to give such notice prior to the purchase of the Kent Street property. Rather, she has submitted that the failure to give such notice would not automatically result in the withholding of the equitable relief to which she would otherwise be entitled. Had the defence of unclean hands been made out in the present case, I would not have denied the applicant the relief she seeks, but, because of the operation of the defence, I would have required her to give notice of her beneficial ownership of the Kent Street property to the Treasurer, as a condition of granting that relief.