Shields v Westpac Banking Corporation

Evans v European Bank Limited [2004] NSWCA 82; (2004) 61 NSWLR 75 Ilich v The Queen (1987) 162 CLR 110 CASES CITED: MBF Australia Limited v Malouf [2008] NSWCA 214 Shields v NSW Crime Commission [2007] NSWCA 309 Westpac Banking Corporation v Ollis [2007] NSWSC 956

Gail Anne SHIELDS (First Appellant) PARTIES: KOALA DEVELOPMENT PTY LIMITED (Second Appellant) WESTPAC BANKING CORPORATION (Respondent)

COUNSEL: C J DIBB (Appellants) J STEVENSON SC/ N KABILAFKAS (Respondent)

SOLICITORS: --- (Appellants) Henry Davis York (Respondent)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT DATE OF DECISION: 31 August 2007

LOWER COURT MEDIUM NEUTRAL CITATION: Westpac Banking Corporation v Victor Warren Ollis & Ors [2007] NSWSC 956

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40662/07 SC 50045/06

SPIGELMAN CJ HODGSON JA MACFARLAN JA

FRIDAY 17 OCTOBER 2008 Gail Anne SHIELDS and one other v WESTPAC BANKING CORPORATION Judgment 1 SPIGELMAN CJ: I invite Justice Hodgson to deliver the first judgment. 2 HODGSON JA: The proceedings giving rise to the judgment from which this appeal is brought arose out of transactions, occurring between June 2005 and January 2006, by which a Mr Ollis obtained just under $11 million from the respondent, Westpac. Westpac sued Mr Ollis and the two appellants, Ms Shields and Koala Development Pty Limited ("Koala"), claiming declarations that certain property of Mr Ollis and property of Ms Shields and property of Koala was held on trust for Westpac, and/or was subject to a charge in favour of Westpac for judgment against Mr Ollis for something over $11 million, and for other remedies. 3 In his judgment given on 31 August 2007, Einstein J held that Westpac was entitled to declarations that Mr Ollis held certain property on trust for Westpac; that certain property was subject to a charge in favour of Westpac in an amount in excess of $12 million; that Ms Shields held certain property on trust for Westpac; that certain further property was subject to a charge in favour of Westpac in the same amount; that certain further property was subject to a charge in favour of Westpac in an amount of something over $5 million; and that Koala held certain property subject to a charge in favour of Westpac in the latter amount; and also that Westpac was entitled to judgment against Mr Ollis in an amount of over $14 million. Orders giving effect to that decision were made on 6 September 2007. Ms Shields and Koala appeal from those orders. 4 The circumstances giving rise to the claim were set out as follows in par [4] of the primary judge's decision: (Westpac Banking Corporation v Ollis [2007] NSWSC 956). 5 The only challenge on appeal to that account is to the characterisation of Westpac's mistake as a "computer glitch". 6 The issues before the primary judge were set out by him in pars [5]-[13] of his judgment as follows: The claims against Mr Ollis

[5] The claims against Mr Ollis are put in the following three ways: i. that he is indebted to the Bank pursuant to the terms of the contract governing his account;

ii. that he fraudulently obtained money from the Business Account, knowing that he was not entitled to it;

iii. that he received money mistakenly paid to him by the Bank.

[6] The Bank seeks to trace the money received by Mr Ollis into the various ways in which it was used by Mr Ollis, Ms Shields and the third defendant, Koala Development Pty Ltd ('Koala'). The analysis of how the Bank's money was used is set out in Mr William's report annexed to his affidavit of 13 July 2007.

[7] Subject to some questions concerning interest, Mr Ollis, concedes his indebtedness to the Bank but denies the allegations of fraud. In his commercial list response he denies that he knew the Bank was honouring the cheques by mistake.

[8] There are some issues which arise concerning movement of the funds which he received, it being common ground that he did not acquire any real estate or other assets using the proceeds of the cheques, the Bank contending however that he retired considerable amounts of indebtedness secured over real estate with the Bank's funds and that the Bank is entitled to trace into that real estate in those circumstances.

[9] Mr Ollis has been in a de facto relationship with Ms Shields since 1993. She is in turn a director of the third defendant, Koala Development Pty Ltd.

[10] The claim made against Ms Shields is that: i. she received money from Mr Ollis for no consideration, knowing that he had obtained it fraudulently, alternatively, that it had been paid to him by mistake;

ii. she received property from Mr Ollis for no consideration, knowing that it had been paid for in whole or in part by money obtained by Mr Ollis fraudulently, alternatively, that had been paid to him by mistake.

[11] The Bank, in relation to its claim against Ms Shields for money paid under a mistake of fact, contends that she received the money and gave no consideration for it and accepts that to resist the Bank's claim, she would have to be shown to have been a bona fide purchaser for value without notice.

[12] The claim against Koala is that it received money from Mr Ollis knowing [through its director Ms Shields] that Mr Ollis was not entitled to it, alternatively, that it had been paid to him by mistake.

[13] By their amended commercial list response, both Ms Shields and Koala inter alia deny any form of wrongdoing and contend generally as follows: i. they deny receiving any cheques from Mr Ollis for no consideration; ii. Ms Shields contends that moneys were in fact borrowed from Mr Ollis who granted her a mortgage over real estate to secure the borrowings;

iii. Ms Shields contends that she was not aware of the source of the funds loaned to her;

iv. they contend that they believed that the money borrowed from Mr Ollis was legitimately held by him. Mr Ollis and Ms Shields fail to give evidence

[14] During the hearing Mr Ollis and Ms Shields elected not to read their affidavits and not to enter the witness box.

[15] Without being exhaustive the principles concerning onus in respect of a fraud claim may for present purposes be expressed as follows: i. there is a plethora of authority in support of the proposition that the Court is bound to see that a case of fraud is clearly proved. An allegation of fraudulent intent is one of the most serious allegations capable of being made. Actual dishonesty is said to be "the hallmark of fraud";

ii. the gravity of the allegation has been said to be such that whereas s 140(1) of the Evidence Act 1995 (NSW) stipulates a single standard of proof for all civil cases, namely the balance of probabilities, s 140(2) preserves the doctrine in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362; Pedler v Richardson (Unreported, Supreme Court of NSW, Young J, 16 October 1997) at 10-11. See also McLelland CJ in Eq in Watson v Foxman (2000) 49 NSWLR 315 at 319;

iii. more recently in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 the High Court [per the joint judgment of Mason CJ, Brennan, Deane and Gaudron JJ] has put the matter in the following terms (at 449-450): The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary "where so serious a matter as fraud is to be found". Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct. iv. The High Court has pointed out in Pascoe v Federal Commissioner of Taxation (Cth) (1956) 30 ALJR 402 at 403 [citing Cussen J in Cox v Smail [1912] VLR 274 at 283] that the evidence given by a man of his intention and state of mind, must: be tested most closely and received with the greatest caution. v. Courts have emphasized that the best evidence of a man's purpose is to look at what was actually done: ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) (1990) 27 FCR 460 at 482-483. 7 The primary judge made certain additional findings of fact that are summarised in a document prepared by Westpac, as follows: The Bank's Mistake

By mistake, the ATR facility was not cancelled or suspended when the Personal Account was frozen on 20 March 2004 (Red 29R & 31 U).

The Bank paid the cheques drawn by Ollis on the Business Account to the value of $10,955,362 by mistake (Red 32T).

Until 12 January 2006 no individual within the Bank knew of the drawings being made by Ollis on the Business Account (Red 32U).

The continual reversals of the replenishment transfers to the Business Account in the period March 2004 to December 2005 were not the product of any conscious willingness on the part of the Bank to allow Ollis to have access to the money (Red 41Z-42A).

Officers of the Bank's Corrections Area did not know that the ATR facility was allowing the transactions in the Business Account to be debited to the Bank's Suspense Account (Red 42B).

Ollis sought and had no overdraft facilities with the Bank (Red 400).

Ollis did not offer and the Bank did not seek any security in relation to Ollis's dealings with the Bank (Red 40O).

Ollis knew that the Bank was only prepared to contract with him on the basis that his Personal Account and Business Account were regulated by the ATR facility (Red 40P).

Ollis knew he did not have permission from the Bank to draw credit on the Business Account (Red 41U & 43I).

In February 2004 Ollis formed the opinion that there was a "glitch" in the Bank's computer system which enabled Ollis to write cheques on the Business Account which would be paid by the Bank by mistake (Red 39E).

Ollis knew at all material times, from the occasion [in February 2004] when he first learned of what he correctly surmised was a computer "glitch" that the Bank did not intend him to draw credit from the Business Account (Red 41T).

From 17 February 2004 Ollis knew that the only reason the Bank was honouring the cheques drawn on the Business Account was a "computer glitch" (Red 42W).

From that point on Ollis decided he would not "look a gift horse in the mouth" (Red 42Y).

The computer "glitch" was obvious to Ollis by looking at the statements he received for the Business Account and the Personal Account (Red 43A).

Ollis correctly inferred the nature of the Bank's error (Red 42P).

Ollis had actual knowledge of the cause of the Bank's error (Red 42Q).

From March 2004, when Ollis was told by the Bank's Collections Area that the Personal Account was overdrawn and that no further withdrawals will be allowed on the Personal Account, he knew that the replenishment transfers being made to the Business Account were not coming from funds from the Personal Account [but from the Bank's own funds] (Red 41W & 43O)

On 17 June 2005 Ollis made his last deposit to the Business Account (Red 321).

From 17 June 2005 to 11 January 2006 Ollis drew cheques on the Business Account to the value of $10,955,360.00 (Red 32J).

From June 2005 Ollis drew cheques on the Business Account having no intention to repay the proceeds of those cheques (Red 39G). Ollis did not intend to repay to the Bank the money drawn from the Business I Account (Red 44C).

On 17 January 2006, Ollis stated to the Bank that the if the Bank would not enter into a repayment agreement with him on the terms which he put forward the Bank would not "see anything" (Red 39K).

Ollis could not honestly have believed that, on the one hand, the Bank was pursuing him for a debt of around $36,000 in relation to the Personal Account while on the other hand was happy to advance him $11 million in unsecured, interest-free credit under the Business Account (Red 43H).

At all times Ollis knew that the Bank would not knowingly advance credit to him of any amount (let alone almost $11 million) because: (a) the Bank had made clear from March 2004 that no further withdrawals were permitted from the Personal Account;

(b) he had never provided any security to the Bank for any advance; and

(c) he had no capacity to repay a debt of the magnitude he incurred, (Red 43P-W).

Shields was intimately involved in Ollis's financial affairs (Red 39M & 460).

Ollis told Shields exactly from where and how he was obtaining the funds from the Business Account (Red 390 & 47K).

Shields had actual notice of the Bank's interests in the funds she received from Ollis (Red 46O).

Shields must have known that the funds she received from Ollis were not coming from any facility knowingly granted to Ollis by the Bank (or Bendigo Bank) (Red 46Y).

Shields received trust property from Ollis for no consideration and with notice of the breach of the trust (Red 47M). 8 There is a challenge on appeal to what is set out in that document only in relation to the characterisation of Westpac's mistake, in particular, its description as a "computer glitch", and in relation to the finding that Mr Ollis did not intend to repay Westpac. 9 On the basis of these findings, the primary judge held to the effect that Westpac's mistake was fundamental and precluded the formation of an intention to transfer money to Mr Ollis; that Mr Ollis knew that Westpac never intended him to draw credit and that he did not have Westpac's permission to do so; that Mr Ollis was simply defrauding Westpac; that Mr Ollis was, in the eyes of the law, to be regarded as having stolen Westpac's money; and that, accordingly, the money was, from the beginning, trust money in his hands. 10 The primary judge further held that Ms Shields, and hence Koala, received trust property from Mr Ollis for no consideration and, in any event, with actual notice of the facts giving rise to the trust. 11 Ms Shields and Koala rely on the following grounds of appeal: 1. His Honour erred in holding that the circumstances in which Victor Warren Ollis drew upon his accounts with the Respondent constituted larceny.

2. His Honour erred in finding that the consent of the Respondent to the drawings referred to in 1 above was vitiated by mistake.

3. Alternatively to 2 above, his Honour erred in holding that any mistake of the Respondent was a. fundamental mistake such as to make the drawings of Victor Warren Ollis larceny.

4. His Honour erred in finding (or, perhaps, holding) that the Appellants held property on trust for the Respondent.

5. His Honour erred in finding (or, perhaps, holding) that the Appellants held property subject to a charge in favour of the Respondent. 12 Mr Dibb, for the appellants, submitted that there was in place between Westpac and Mr Ollis an arrangement to the effect that Mr Ollis could apply for credit by submitting a cheque, in which case Westpac would have the option of either declining to honour the cheque or honouring it. In the circumstances that happened, Westpac honoured the cheques. Mr Dibb submitted that the mistake which gave rise to this was not a fundamental mistake, precluding the existence of an intention in the bank to transfer money to Mr Ollis. He submitted that the description of the mistake as a "computer glitch" was erroneous: the computer functioned correctly; and each of the transactions was rejected by the computer but then permitted to go through because of the actions of human officers of the bank. 13 Mr Dibb referred to Ilich v The Queen (1987) 162 CLR 110 and, in particular to the judgment of Wilson and Dawson JJ at 126, where they discuss what would be a fundamental mistake which would vitiate the apparent intention of a payer to make a payment. He submitted that the mistake in this case did not fall within that characterisation, and that accordingly the intention of the bank was not vitiated. 14 Mr Dibb also submitted that, there being no effort by Mr Ollis to conceal where the money went, it could not be inferred that he had no intention to repay. The reasonable inference was that he did intend to repay the money to the bank. 15 In all those circumstances, Mr Dibb submitted that the finding that Mr Ollis was substantially in the position of having stolen the money, and that a trust of the money in favour of Westpac arose immediately, was erroneous. 16 In my opinion there is some force in Mr Dibb's submission that characterisation of the mistake that led to payment of Mr Ollis' cheques as a computer glitch was not entirely accurate, although the evidence was that this was Mr Ollis' understanding and description of it. The payment of Mr Ollis' cheques occurred because of Westpac's mistakes in failing to cancel the ATR system at the time his personal account was frozen, and failing to detect that the automatic operation of that system was having the effect of paying Mr Ollis' cheques that should not have been paid. They were mistakes made by human beings and not computer glitches as such. However, in my opinion, they were plainly fundamental mistakes justifying the primary judge's finding that Westpac never intended to transfer money to Mr Ollis. 17 In my opinion, even though these mistakes were not in any of the categories actually referred to by Wilson and Deane JJ in Ilich, they nevertheless were fundamental and precluded the existence of an intention in the bank. Furthermore, the primary judge's finding that Mr Ollis knew that Westpac never intended to transfer money to him, and that he did not have Westpac's permission to draw out the money, was also justified. 18 The circumstance that Mr Ollis may have intended to repay Westpac at some future time if and when the transactions which he entered into may have borne fruit does not, in my opinion, preclude the finding that Mr Ollis simply intended to defraud Westpac and that, in the eyes of the law, he was to be regarded substantially as if he had stolen the money. 19 In those circumstances, in my opinion, the primary judge was correct to hold that a trust of the money arose immediately. This is in accordance with a number of recent decisions of this Court which have not been challenged, in particular Evans v European Bank Limited [2004] NSWCA 82; (2004) 61 NSWLR 75, Shields v NSW Crime Commission [2007] NSWCA 309 and MBF Australia Limited v Malouf [2008] NSWCA 214. 20 In my opinion, it does not matter whether the trust is characterised as a resulting trust or a constructive trust. It is true that some constructive trusts only arise by virtue of a court order; but other constructive trusts can arise immediately, and if this is to be characterised as a constructive trust, it is clearly in my opinion one which arose immediately. 21 For those reasons, in my opinion, the appeal should be dismissed with costs. 22 An application has been made for indemnity costs on the grounds that the appeal was hopeless. In my opinion, sufficient ground is not made out for making that order. 23 SPIGELMAN CJ: I agree. 24 MACFARLAN JA: I agree. 25 SPIGELMAN CJ: The order of the court is that the appeal is dismissed with costs. oOo

28/10/2008 - spelling of Justice Macfarlan's name corrected in heading. - Paragraph(s) heading 29/10/2008 - completed the sentence in [15] v. of the quote in par [6] - Paragraph(s) [6]

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