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IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST
WHITE J
Tuesday, 12 June 2007
3996/06 Wambo Coal Pty Ltd v Stuart Karim Ariff & 1 Or
JUDGMENT
1 HIS HONOUR: The first defendant, Mr Ariff, is the liquidator of the second defendant, Singleton Earthmoving Pty Ltd (In Liquidation), (“Singleton Earthmoving”). He was appointed administrator of Singleton Earthmoving on 28 September 2004 and became liquidator on 17 December 2004.
2 The plaintiff, Wambo Coal Pty Ltd (“Wambo”), seeks to recover from Mr Ariff and Singleton Earthmoving two payments totalling $46,130.15 which Wambo mistakenly made to Singleton Earthmoving on 10 September 2005 and 31 October 2005. Mr Ariff caused most of the moneys paid by Wambo to Singleton Earthmoving to be transferred to S Ariff Nominees Pty Ltd, a company which he controls, to reimburse it for disbursements it had paid, on his direction, in the liquidation of Singleton Earthmoving.
3 There is no issue that the moneys were paid by Wambo under a mistake of fact and that Singleton Earthmoving is liable to repay the moneys. However, Singleton Earthmoving is insolvent. Its assets will not satisfy Mr Ariff’s right to be indemnified against liabilities incurred by him in the liquidation, let alone satisfy creditors entitled to prove in its liquidation. Moreover, Wambo is not entitled to prove in the liquidation as its claim did not arise until after the day on which Singleton Earthmoving’s winding-up is taken to have begun (Corporations Act 2001 (Cth), s 553(1)). That is not to say Wambo cannot recover from Singleton Earthmoving any property still held by Singleton Earthmoving which is held on trust for it.
4 Proceedings against Mr Ariff were commenced in the Local Court. On 4 September 2006, Barrett J made orders by consent transferring the proceedings to this court, giving leave to the plaintiff pursuant to s 500(2) of the Corporations Act to commence and maintain the proceedings against Singleton Earthmoving, and joining it as a defendant.
5 The issue in these proceedings is whether the liquidator, Mr Ariff, is required to disgorge all or some of the moneys paid. He has sought to apply the moneys to satisfy his right to be indemnified against liabilities incurred by him in his conduct of the liquidation. The principal questions arising on the application are:
1. whether Singleton Earthmoving held the moneys received from Wambo on trust for Wambo, either immediately on their receipt, or at any time before their being paid to S Ariff Nominees Pty Ltd; and if so
2. whether Mr Ariff can be compelled to account for the moneys which S Ariff Nominees Pty Ltd received on his direction, or which were paid on his direction to satisfy his liabilities;
3. whether Wambo can maintain a direct restitutionary claim against Mr Ariff;
4. whether Mr Ariff can be required to disgorge the payments on the principles in Ex Parte James (1874) LR 9 Ch App 609; and
5. what remedy is available against Singleton Earthmoving.
Background Facts
6 On 31 July 2004, Singleton Earthmoving issued an invoice to Wambo for $50,804.60 for services provided to Wambo. On 31 August 2004, it issued a further invoice for $15,830.10 for further services which it had provided.
7 The invoice of 31 July for $50,804.60 was paid on 30 August 2004.
8 On 28 September 2004, Mr Ariff was appointed as administrator of Singleton Earthmoving. In about late September 2004, Mr Ariff notified Wambo of his appointment as administrator of Singleton Earthmoving and directed that payment of invoices issued by Singleton Earthmoving be paid into a nominated account administered by Mr Ariff on behalf of Singleton Earthmoving.
9 On 30 September 2004, Wambo paid the invoice of $15,830.10 into that nominated account. From that date, Wambo was not a debtor of Singleton Earthmoving.
10 On 16 October 2004, two directors of Singleton Earthmoving provided Mr Ariff with a report as to the affairs of that company pursuant to s 475 of the Corporations Act. The report stated that as at 28 September 2004, Wambo was indebted to Singleton Earthmoving in the sum of $20,384.10. That figure comprised two sums being an amount of $4,554 and the debt of $15,830.10. The debt of $4,554 had been paid on 9 September 2004. As noted above, the debt of $15,830.10 was paid on 30 September 2004.
11 On 17 December 2004, the creditors of Singleton Earthmoving resolved that the company be wound up. Mr Ariff was appointed liquidator.
12 Another company, Quensor Pty Ltd, also provided services to Wambo. Quensor traded under the name Bernie Wood Singleton Earthmoving. Between 31 August 2005 and 1 October 2005, Quensor, trading as Bernie Wood Singleton Earthmoving, rendered eleven invoices to Wambo totalling $46,130.15.
13 On 10 September 2005, Wambo made a direct debit transfer of $27,714.50 to the bank account of Singleton Earthmoving earlier nominated by Mr Ariff. On 31 October 2005, it made another direct debit transfer, this time of $18,415.65 to that account. The account was styled “Singleton Earthmoving Pty Ltd (Administrator Appointed) Trading Account”. Those payments should have been made to Quensor. When it made those payments, Wambo did not owe any money to Singleton Earthmoving.
14 On 5 October 2005, Mr Ariff directed payment of $27,800 to S Ariff Nominees Pty Ltd to repay disbursements in the liquidation of Singleton Earthmoving which had been paid by S Ariff Nominees Pty Ltd. Mr Ariff deposed that at the time he made this payment, he believed that Wambo owed Singleton Earthmoving $66,634.70. He said that he formed this belief because the company’s computerised accounts and MYOB ledger showed that invoices of 31 July 2004 and 31 August 2004 for $50,804.60 and $15,830.10 (totalling $66,634.70) had not been paid. They had been paid, but the payment had not been entered into the MYOB ledger. On Mr Ariff’s being appointed as administrator, he took possession of the company’s computer. He and his staff made no changes to the MYOB accounting package to update the company’s transactions.
15 In early November 2005, Wambo’s accountant learned that the payments had been made to Singleton Earthmoving by mistake. On 8 November 2005, Wambo’s solicitors, Sparke Helmore, wrote to Mr Ariff advising that the two payments of 30 September and 31 October 2005 had been made in error. They demanded repayment.
16 Mr Ariff replied on 18 November 2005. He stated that:
“Your client was a debtor of Singleton Earthmoving upon my appointment as a voluntary administrator on 28 September 2005 (scil 2004). Accordingly, I am currently reviewing the company records to ensure no amounts are outstanding to the company in respect of this debt. I will advise further following my investigations.”
17 Sparke Helmore wrote again on 30 November 2005 to Mr Ariff. Sparke Helmore advised that they had spoken to a Mr Duggan of Mr Ariff’s office who had told them that the requested cheque was being organised and would be sent to them. They complained that Mr Ariff’s letter of 18 November 2005 was inconsistent with what they had been told and repeated that the payments totalling $46,130.15 had been made incorrectly. They asserted that Mr Ariff was aware that the payment had been made incorrectly.
18 Mr Ariff replied on 2 December 2005. He advised that:
“Following my review of the company records, the debtor’s ledger details two invoices which remain outstanding by your client totalling $66,634.70. I attach herewith outstanding invoices for your attention.
As you are aware I have received $46,130.15 from your client, I request your client immediately forward the shortfall outstanding to the company in the amount of $20,504.55 made payable to Singleton Earthmoving Pty Ltd (in liquidation) within 7 days sent care of this office. Failure to comply will leave me no alternative but to instigate recovery proceedings without further notice to you or your client.”
19 Enclosed with his letter were copies of Singleton Earthmoving’s invoices of 31 July and 31 August 2004.
20 The banking records in evidence did not show precisely the balance of the Singleton Earthmoving account before and after each of the relevant transactions. As at 6 September 2005, the account was in credit in the sum of $360.14. So far as the evidence reveals, the next transaction on the account after that date was the crediting of $27,714.50 on 30 September 2005 being the first payment received from Wambo. This would have increased the credit balance to $28,074.64. There was a deduction of account fees of $10 before the transfer of $27,800 on 5 October 2005 to S Ariff Nominees Pty Ltd reducing the credit balance to $264.64. There was a further debit of $242 on 11 October 2005 for payment of counsel’s fees reducing the credit balance to $22.64. After the credit of $18,415.65, being the second payment from Wambo on 31 October 2005, and the deduction of two bank charges totalling $21.20, the account would have been in credit in the sum of $18,417.09 as at 30 November 2005. On 2 December 2005, Mr Ariff drew a cheque for $16,500 in favour of S Ariff Nominees Pty Ltd. A further payment of $1,100 was made from the account on 23 December 2005, again, apparently, to “Stuart Ariff Insolvency Administrators”, that is, S Ariff Nominees Pty Ltd. Bank charges of $11.20 were deducted on 30 December 2005. A further sum of $550.00 was paid from the account for counsel’s fees, at an unspecified date. These debits would have reduced the credit balance to $255.89. In all probability, that balance would have been exhausted in account fees charged by the bank during 2006, but there was no evidence about it.
21 On 19 January 2006, Sparke Helmore wrote again to Mr Ariff. They gave details of the payments of the two invoices of 31 July 2004 and 31 August 2004. The first payment of $50,804.60 was made to Singleton Earthmoving‘s bank account number 547103177 on 30 August 2004. The second payment of $15,830.10 was made to the account opened by Mr Ariff as administrator for Singleton Earthmoving on 30 September 2004. They enclosed copies of the remittance advices for the transactions. They gave details of the invoices provided by Quensor and confirmation that the invoices in question were for work carried out by that company and not by Singleton Earthmoving.
22 There appears to have been no response to that letter. On 23 February 2006, Wambo commenced proceedings in the Local Court against Mr Ariff for the recovery of the amount of $46,130.15 and interest.
23 The Local Court proceedings were transferred to this Court.
24 Between 14 July 2005 and 30 November 2005, S Ariff Nominees Pty Ltd paid legal expenses totalling $81,971.73. These expenses were incurred in relation to litigation in which Mr Ariff unsuccessfully sought to establish that Singleton Earthmoving was the owner of certain items of plant and equipment whose ownership was in dispute.
Wambo’s Claim
25 There were no pleadings other than a statement of claim filed in the Local Court. It merely pleaded the payments by mistake into the “administration account” and claimed repayment from Mr Ariff. However, the account in question was an account of Singleton Earthmoving. It, and not Mr Ariff, received the payments. By a separate document called an originating process which Wambo was given leave to file in this court, Wambo claimed:
1. A declaration that the payments made by the plaintiff to the account of the second defendant on 10 September 2005 and 31 October 2005, totalling $46,130.15, during the period of administration under the control of the first defendant as administrator of the second defendant, were payments made by mistake.
2. A declaration that the second defendant at all material times after the payments referred to in paragraph 1 above held the proceeds of the payments upon trust for the plaintiff.
3. A declaration that the first defendant at all material times in relation to the trust fund, in his capacity as administrator and subsequently liquidator of the second defendant, owed a fiduciary duty to the plaintiff in relation to the moneys referred to in paragraph 1 above.
4. A declaration that the utilisation by the second defendant under the direction and control of the first defendant as liquidator of the second defendant of the moneys referred to in paragraph 1 above constituted a breach of the fiduciary duties owed by the defendants to the plaintiff.
5. An order that the defendants paid to the plaintiff the amount of $46,130.15.
26 Wambo submitted that Singleton Earthmoving held the payments totalling $46,130.15, made on 10 September and 31 October 2005, on trust for it. It also submitted that Mr Ariff owed a fiduciary duty to it in relation to the moneys paid to Singleton Earthmoving and that he breached those duties by disbursing the moneys paid by Wambo. It claimed that Mr Ariff knew or turned a blind eye to the fact that Wambo was not a debtor of Singleton Earthmoving when the funds were disbursed from Singleton Earthmoving’s account. Its submissions did not clearly distinguish whether the claim against Mr Ariff was made under the first or second limb of Barnes v Addy (1874) LR 9 Ch App 244 at 251-252, or whether it was based on his owing a fiduciary duty to Wambo. It also cited the concept of unjust enrichment in support of a submission that equity required the moneys to be restored as it would be unconscionable for Mr Ariff and Singleton Earthmoving to retain the benefit. Passing reference was made to Ex Parte James.
27 Because Mr Ariff, as the liquidator of Singleton Earthmoving, was the controlling mind of Singleton Earthmoving at the time the moneys were received, and because he directed the payments from Singleton Earthmoving’s account, his knowledge or belief as to whether Singleton Earthmoving was entitled to the payment, or whether the moneys had been paid by mistake, is critical to the determination of the issues raised.
Did Mr Ariff Hold the Money Paid by Wambo on Trust for Wambo at the Time of Receipt?
28 Counsel for the plaintiff submitted that:
“the fund when it was held in the account of [Singleton Earthmoving] under the control of [Mr Ariff] was ... held in effect on trust for the plaintiff and the dispersal of those moneys out of the account of [Singleton Earthmoving] by [Mr Ariff] constituted a breach of that trust or a breach of the duty which he had as an ‘officer’ of [Singleton Earthmoving] relating to dealings with property of third parties such that both of the defendants are liable to pay the fund as held to the plaintiff.”
29 If this submission amounts to a contention that Mr Ariff was a trustee of the money otherwise than by becoming liable as a constructive trustee on either limb of Barnes v Addy, then I would reject it. The money was not paid by Wambo to Mr Ariff. It was paid to the company. Unless Wambo retained the beneficial ownership in the money paid, it became part of the assets of Singleton Earthmoving. The fact that Mr Ariff, as liquidator, controlled the account to which the moneys were paid does not mean that he, as distinct from the company, was the original recipient of the payments.
30 Nor does the fact that Mr Ariff owed fiduciary duties as liquidator render him liable as trustee. He owed his fiduciary duties as liquidator to the company, to the creditors as a whole, and to the contributories, but not to Wambo. Only if he became liable as a constructive trustee would he owe a fiduciary duty to Wambo and be liable to account for trust property received by him, or to compensate Wambo for providing or assisting in a breach of trust.
31 Mr Ariff’s liability depends upon whether Singleton Earthmoving held the mistaken payments on trust for Wambo, and if so, whether he is liable as a constructive trustee for having received and become chargeable with trust property, or for knowingly assisting in a dishonest and fraudulent design on the part of Singleton Earthmoving (Barnes v Addy at 251-252).
Did Singleton Earthmoving Hold Mistaken Payments on Trust for Wambo?
32 Counsel for Wambo submitted that on the basis of the reasoning in Chase Manhattan Bank NA v Israeli-British bank (London) Ltd [1981] Ch 105, as applied in Young v Lalic [2006] NSWSC 18 at [63], Wambo retained the equitable property in the money it paid by mistake and the recipient of the mistaken payment was subject to a fiduciary obligation to respect that proprietary right. Counsel submitted that Wambo was entitled to recover the amount of the mistaken payment by way of tracing.
33 In Chase Manhattan Bank NA v Israel-British Bank (London) Ltd, the Chase Manhattan Bank paid the same amount of just over US$2,000,000 twice to the defendant’s bank account. The second payment was made by mistake due to a clerical error. The defendant was later wound up. As the authorities then stood, Goulding J held that the right of the payer to trace the mistaken second payment depended upon whether the payment into the wrong hands gave rise to a fiduciary relationship at 119. His Lordship concluded that a person who pays money to another under a factual mistake retains an equitable property in it and the conscience of the other is subjected to a fiduciary duty to respect his proprietary right (at 119). His Lordship held that the payer of money paid under a mistake retains the equitable property in the money paid and is entitled to trace those funds until they are received by a bona fide purchase for value without notice.
34 In Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, Lord Browne-Wilkinson disagreed with this reasoning. His Lordship said (at 714):
“... First, it is based on a concept of retaining an equitable property in money where, prior to the payment to the recipient bank, there was no existing equitable interest. Further, I cannot understand how the recipient's 'conscience' can be affected at a time when he is not aware of any mistake. Finally, the judge found that the law of England and that of New York were in substance the same. I find this a surprising conclusion since the New York law of constructive trusts has for a long time been influenced by the concept of a remedial constructive trust, whereas hitherto English law has for the most part only recognised an institutional constructive trust ... “
35 In Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corporation [1999] NSWSC 671 (at [478]), Einstein J held that the decision in Chase Manhattan had, in effect, been overruled by the House of Lords in Westdeutsche. His Honour said that Lord Browne-Wilkinson had authoritatively rejected the proposition that, without more, receipt of money paid under a mistake renders the recipient a trustee and leaves the payee holding an equitable proprietary right in the money. This is also the view of the leading Australian texts (Meagher, Heydon & Leeming, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies, 4th ed (2002), Chatswood, LexisNexis Butterworths at [14-010]; Jacobs’ Law of Trusts in Australia, 7th ed (2006) Chatswood, LexisNexis Butterworths at [2703]).
36 In Westdeutsche Landesbank v Islington London Borough Council, both Lord Browne-Wilkinson (at 708) and Lord Goff (at 689) summarised the law of resulting trusts as applying to the voluntary payment of money as well as to the voluntary transfer of property (compare Moore v Whyte (No. 2) (1922) 22 SR (NSW) 570 at 575). However, Lord Browne-Wilkinson did not suggest that the result in Chase Manhattan could be supported on the principle that, in the absence of evidence to the contrary, equity presumes that if A pays money to B without consideration, and in circumstances where there is no presumption of advancement, A does not intend to transfer the beneficial interest in the money to B. Assuming, without deciding, that, at least by analogy to cases where money is paid into a joint account (Russell v Scott (1936) 55 CLR 440; Palmer v Bank of New South Wales (1975) 133 CLR 150), the principles of resulting trusts can apply to the payment of money, as well as to payments for the purchase of property, or to transfers of property, those principles do not avail Wambo in this case. First, no argument was advanced on this basis. Secondly, the law of resulting trusts is based upon presumptions as to the transferor’s actual intentions. Wambo intended to part with the ownership of the money which it paid. Its mistake was either in thinking that the account into which the money was paid was an account for Quensor trading as Bernie Wood Singleton Earthmoving, or, its mistake was that it owed Singleton Earthmoving for the services for which it had received invoices of $46,130.15. In either case, it did not intend to retain any equitable property in the money paid.
37 Accordingly, I do not accept that Singleton Earthmoving held the moneys paid into its bank account on trust for Wambo at the time the moneys were received.
38 In Westdeutsche Landesbank Girozentrale v Islington London Borough Council, Lord Browne-Wilkinson also said (obiter) (at 715) that:
“Although I do not accept the reasoning of Goulding J, Chase Manhattan may well have been rightly decided. The defendant bank knew of the mistake made by the paying bank within two days of the receipt of the moneys. The judge treated this fact as irrelevant ... but in my judgment it may well provide a proper foundation for the decision. Although the mere receipt of the moneys, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust: see Snell’s Equity, page 193; Pettit, Equity of the Law of Trusts; 7th ed (1993) p 193; Metall und Rohstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 Qb 391, 473-474.”
39 The defendant submitted that this reasoning was unconvincing (citing Meagher Gummow & Lehane’s Equity: Doctrine and Remedies at [14-015] and in any event, was obiter and did not form part of the law of England and Wales. The reason for the last proposition is that Lord Browne-Wilkinson said (at 716) that although it might be in accordance with principle to impose a remedial constructive trust on the defendant who knowingly retained property of which the plaintiff had been unjustly deprived, it still remained to be decided whether English law should follow the United States and Canada in adopting the remedial constructive trust.
40 The remedial constructive trust is part of the law of Australia. No such difficulty arises in Australia where the High Court has endorsed the remedial constructive trust in Muschinsky v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137 (and see Bathurst City Council v P W C Properties (1998) 195 CLR 566 at [40]-[41]). However, I respectfully doubt whether a trust based on the retention of moneys known to have been paid by mistake would be properly categorised as a remedial constructive trust. Where property is stolen, the property is trust property in the hands of the thief and can be traced into the hands of a third party who receives the property otherwise than as a bona fide purchaser of the legal estate for value without notice. The property is trust property in the hands of the thief because the thief is bound in conscience to hold the property on behalf of its true owner. Whether the trust is characterised as a resulting trust (Robb Evans of Robb Evans & Associates v The European Bank Ltd (2004) 61 NSWLR 75 at 100-101), or as a constructive trust (Westdeutsche Landesbank v Islington London Borough Council per Lord Browne-Wilkinson at 716), the trust is of an institutional rather than a remedial character. It arises because the conscience of the thief is bound.
41 In the same way, where property is acquired by fraud and there is a complete failure of consideration, the trust arises immediately on the receipt of the property (Orix Australia Corporation Ltd v Moody Kiddell & Partners Pty Ltd [2005] NSWSC 1209 at [155]-[156] and cases cited). So, in Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658, referred to with apparent approval in Re Goldcorp Exchange Ltd [1995] 1 AC 74 at 104, where the payee received payment from its principal of moneys which were not impressed with an express trust, but which were to be used in performance of a contract which the payee knew could not take place, the payee held the payment on trust for the payer from the time of its receipt. The circumstances which created the trust in Neste Oy were that the payee knew (as was the fact) that there could be no performance under its contract, so that there was a total failure of consideration for the payment, and the payment could not in conscience be retained. The trust was an institutional trust which attached to the moneys from the time of receipt.
42 I do not see why, in principle, a constructive trust arising from the retention of moneys known to have been paid by mistake, and for which there was no consideration, would not arise from the time the payee acquired such knowledge, if the moneys paid could still be identified at the time such knowledge was acquired. Such a trust is as much an institutional trust as a trust imposed on property in the hands of the thief.
43 The payments made by Wambo to Singleton Earthmoving were not only made by mistake. They were also made for no consideration. It would be against conscience for Singleton Earthmoving to use the moneys as its own once it knew of Wambo’s mistake. Notwithstanding the criticism of this passage from the speech of Lord Browne-Wilkinson in Meagher, Gummow and Lehane’s Equity: Doctrine & Remedies at [14-010], in my view, his Lordship’s admittedly obiter statement is consistent with principle. It is consistent with those cases in which a constructive trust is declared over property obtained by fraud where no consideration was provided for the payment (Bankers Trust Co v Shapira [1980] 1 WLR 1274 at 1282; Stocks v Wilson [1913] 2 KB 235 at 245, 247; Neste Oy v Lloyds Bank plc at 665-666; Westdeutsche at 716; Barrett & Sinclair v McCormack [1999] VUCA 11 in the passage cited in Orix Australia Corporation Ltd v Moody Kiddell & Partners Pty Ltd at [158]). The recipient’s conscience is bound only upon being aware of the mistake. But once the recipient is aware that, by a mistake, he has got something for nothing, a proprietary remedy is appropriate. The fact that the company is insolvent does not affect this conclusion. It would be an unwarranted windfall for the company’s creditors to share in the payment (compare Re Polly Peck International plc (in administration) (No. 2); Marangos Hotel Co Ltd & Ors v Stone [1998] 3 All ER 812 at 825-827). There is no question in this case of interfering with the statutory scheme for the order of priority of debts recoverable from the company.
44 Lord Browne-Wilkinson referred to the constructive trust as arising after the recipient “learned” of the mistake. The emphasis is on the recipient having actual knowledge of the mistake so that its conscience is bound. A deliberate failure to inquire for fear of knowing that which the payee would rather not know may be equated with knowledge. Where the question is whether money becomes trust property because of the knowledge of the payee that it was paid by mistake and without consideration, as distinct from the question whether a recipient of property already impressed with a trust is bound by the trust, the appropriate question is whether the payee has such knowledge of the mistake as to affect his conscience because he is aware that he is not entitled to deal with the money as if he were the beneficial owner (see Re Montagu’s Settlement Trusts; Duke of Manchester v National Westminster Bank Ltd & Ors [1987] Ch 264 at 278, 279, 285 (a case of liability of a recipient of trust property)). I am inclined to think that the appropriate analogy is with the knowledge required to render a third party liable as a constructive trustee under the second limb of Barnes v Addy, that is, for knowingly participating in a breach of trust, although not receiving trust property. For the purposes of the second limb of Barnes v Addy (at 251-252), a defendant will be treated as having knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary if the defendant has (a) actual knowledge, or (b) wilfully shuts his or her eyes to the obvious, or (c) wilfully and recklessly fails to make such inquiries as an honest and reasonable person would make, or (d) has knowledge of circumstances which would indicate the facts to an honest and reasonable person (Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 at [174]-[178]).
Knowledge of Singleton Earthmoving that Moneys were Paid by Mistake.
45 Mr Ariff’s mind was the mind of Singleton Earthmoving. Mr Ariff denied knowing that the moneys had been paid by mistake. He deposed that when he transferred the sums of $27,800 and $16,500 (and presumably also the further sum of $1,100 on the same day and the sum of $550 at some unspecified time later), he believed that Wambo owed Singleton Earthmoving $66,634.70.
46 It is remarkable that, if he had that belief, he should not have made demand on Wambo for payment of this sum in the year following his appointment as administrator. However, this was not a matter put to him in cross-examination and I would not reject his evidence on this ground.
47 Whilst it is clear that the MYOB ledger accounts to which Mr Ariff referred as the basis for his belief that Wambo was a debtor did in fact show Wambo as a debtor, Mr Ariff should have known that this was not the case. A simple check of the banking records (which he had), would have revealed that the MYOB ledgers were not up to date. He knew that the MYOB ledgers had not been updated since at least the commencement of the administration. However, the question is not whether Mr Ariff ought to have known that Singleton Earthmoving was not entitled to the moneys received, but whether he did know that they had been paid by mistake, or whether he wilfully shut his eyes to that possibility, or wilfully and recklessly failed to make inquiries, or had actual knowledge of the circumstances which would indicate the facts to an honest and reasonable person. It was not until 8 November 2005 that Mr Ariff was notified by Wambo’s solicitors that the two payments made on 30 September and 31 October 2005 had been made in error. By this time, Mr Ariff had already disbursed the first payment of $27,714.50 by paying $27,800 to S Ariff Nominees Pty Ltd. The second payment by Wambo of $18,415.65, made on 31 October 2005, had not been disbursed.
48 I do not reject Mr Ariff’s evidence that on 5 October 2005, when he made the first payment of $27,800 to S Ariff Nominees Pty Ltd, he believed Wambo was a debtor of Singleton Earthmoving. Although the bank records were available to him to show the true position, there is no evidence that he had checked them. I do not infer that at that time, he wilfully or recklessly failed to make inquiries as to whether Wambo had owed any money to Singleton Earthmoving. The receipt must have come as a surprise. But in the absence of cross-examination as to why he had not chased up the debt earlier if he believed it was owed, I do not infer that he believed the payment was mistaken. Wambo has not shown that, prior to the disbursement of the first payment, Singleton Earthmoving had learned that the payment was mistaken.
49 Prior to disbursing the second payment on 2 December 2005, Mr Ariff had been told of Wambo’s claim that the moneys had been paid by mistake. He told Wambo’s solicitors on 18 November 2005 that he was “currently reviewing the company records to ensure no amounts are outstanding to the company”. I can infer that he did so.
50 I do not accept Mr Ariff’s evidence that, even after reviewing the company’s records, following Sparke Helmore’s letter of 8 November 2005, he continued to believe that when the two payments were made Wambo was a debtor of Singleton Earthmoving. He had the bank statements which showed that the debts shown on the MYOB ledger had been paid. He knew that the MYOB ledger was not up to date. His review must have shown that the debts of $66,634.70 shown on the MYOB ledger were not claimed to be outstanding in the directors’ report as to affairs, which showed a debt of only $20,384.10 as at 16 October 2004.
51 It is true that Mr Ariff wrote on 2 December 2005, asserting that his review of the company records showed that the debtors’ ledger revealed two invoices as being outstanding. It is a serious finding that at the time he wrote this letter, he knew or was wilfully shutting his eyes to the obvious fact that the debtors’ ledger was wrong, or that he wilfully and recklessly failed to inquire as to whether the debts shown on the debtors’ ledger had been paid. I nonetheless do draw that inference.
52 I do so more readily because Mr Ariff persisted in his contention even after Sparke Helmore wrote to him on 19 January 2006 providing chapter and verse as to when the two invoices had been paid and enclosing copies of the remittance advices. He could not possibly have been ignorant of the true facts after receipt of Sparke Helmore’s letter of 19 January 2006. On his own evidence in cross-examination, he became aware of the true position in late February or early March 2006. Yet, as late as 27 April 2006, Mr Ariff swore an affidavit in the Local Court on a motion to set aside default judgment to which he attached a draft defence. In his draft defence, which he swore to be true, he alleged that all money received from Wambo had been applied to money owing by Wambo to Singleton Earthmoving. On 19 May 2006, in an answer to a request for particulars of that allegation, Mr Ariff through his solicitors, Catalyst Legal, provided a copy of the directors’ report as to affairs noting Wambo as a debtor in the amount of $20,304.10, and attaching an extract from the “sales register” of the company, identifying Wambo as a debtor in the amount of $66,634.70. This was the same MYOB ledger showing outstanding invoices of $50,804.60 and $15,830.10 being invoices dated 31 July 2004 and 31 August 2004. On his evidence before me, Mr Ariff knew at that time that those debts had been paid prior to the receipt of moneys from Wambo. Yet, in April 2006, Mr Ariff was still prepared to swear that he believed it to be true that the payments had been applied to money owing by Wambo. This was brazen.
53 Mr Ariff also swore that from his investigations of Singleton Earthmoving’s affairs, the MYOB ledgers were kept up to date and were generally accurate. This was not true. Mr Ariff gave oral evidence that upon being appointed administrator, his staff loaded the MYOB software onto their computer but would have made no changes to the MYOB ledger. Therefore, any payments received after the commencement of the administration, or any payments received before its commencement which had not been entered onto the ledger, would not be recorded on the ledger.
54 When Mr Ariff wrote his letter of 2 December 2005, he had available to him a ledger showing that two invoices were outstanding. However, he also knew that the ledger recording those invoices and payments against them had not been kept up to date. He had the bank statements which showed what moneys had been received. He had said he would review the company’s records, and I conclude he did so. I do not conclude that he lied in saying he believed the debts shown in the invoices were still outstanding. However, I am satisfied that, having found one document which provided a plausible basis for the retention of the moneys, even though he knew that the document had not been kept up to date, he wilfully and recklessly failed to make further inquiries for fear of learning that which he did not want to know.
55 In my view, prior to the disbursement of moneys on and after 2 December 2005, Mr Ariff had sufficient knowledge that the moneys paid by Wambo on 31 October 2005 had been paid by Wambo by mistake and that Singleton Earthmoving had no right to keep the moneys to impress the moneys still held by Singleton Earthmoving with a constructive trust.
56 There is some inaccuracy in talking of the trust property being moneys paid by Wambo held by Singleton Earthmoving. The moneys paid by Wambo became the property of the bank, which became Singleton Earthmoving’s debtor. Mr Ariff did not produce all the relevant bank statements, but I can infer that as at 30 November 2005 and up to 2 December 2005, the account was in credit for $18,417.09. This was the amount of the second payment, and the unexpended balance ($1.44) of the first payment. The debt of $18,417.09 can be specifically identified as the property held on trust for Wambo. There was no mixing with any other moneys paid into the account.
Mr Ariff’s Liability as a Recipient of Trust Property
57 Counsel for Mr Ariff argued that even if S Ariff Nominees Pty Ltd could be required to disgorge the moneys it received, Mr Ariff could not have any liability as a recipient of moneys allegedly belonging to Wambo. S Ariff Nominees Pty Ltd is not a party to the proceedings. Wambo did not apply for it to be joined as a party.
58 Mr Ariff deposed that the disbursements in relation to Singleton Earthmoving had been incurred by S Ariff Nominees Pty Ltd. Mr Ariff denied that he personally received any of the moneys paid by Wambo to Singleton Earthmoving.
59 However, the office of liquidator is a personal office. If S Ariff Nominees Pty Ltd incurred expenses in the winding-up of Singleton Earthmoving, it could only have been because the liquidator incurred those expenses and S Ariff Nominees Pty Ltd paid them on his direction. The only person entitled to be indemnified out of the assets of Singleton Earthmoving in respect of expenses incurred in its liquidation was the liquidator. If A, being entitled to receive money from B, directs payment to C, A is as much the recipient of the payment as if he had physically received it and then transferred the moneys to C. Although Mr Ariff directed payment to S Ariff Nominees Pty Ltd, he was the recipient of the payments.
60 A payment of $550 was made to Mr Allen of counsel. I infer that he was retained by Mr Ariff to appear in the proceedings. During the course of submissions, I was referred by counsel without objection to those proceedings (Singleton Earthmoving Equipment Hire Pty Ltd v Singleton Earthmoving Pty Ltd (in liq) & Anor [2005] NSWSC 989; and [2005] NSWSC 1334). Mr Ariff was a party to those proceedings. He did not lead evidence as to the terms of counsel’s retainer. I infer that he incurred a personal liability for counsel’s fees, either to the solicitors or to counsel directly, for which he was entitled to indemnity from the company’s assets. Payment directly by the company would discharge his liability. It is the equivalent of receipt of the moneys by him and his using the payment to discharge his liability. It is in the same category as the payments to S Ariff Nominees Pty Ltd.
61 Singleton Earthmoving was bound by a constructive trust to account to Wambo for the moneys which it had retained and which it knew had been paid to it by mistake. It was a breach of that trust for the moneys to be paid to S Ariff Nominees Pty Ltd or to Mr Allen on Mr Ariff’s direction.
62 The plaintiff’s submissions did not clearly distinguish whether Mr Ariff was sought to be made liable under the first limb or under the second limb of Barnes v Addy. Liability under the second limb ofBarnes v Addy requires knowing assistance in a dishonest and fraudulent design on the part of the trustee or fiduciary (Farah Constructions Pty Ltd v Say-Dee Pty Ltd at [174]-[175], [179]). A claim that Singleton Earthmoving’s breach of trust was dishonest and fraudulent would need to have been pleaded and full particulars given. Liability under the first limb requires notice that the property is received in breach of trust. Knowledge of the facts constituting the relevant breach of trust which constitutes constructive notice of the breach of trust, even if it is not recognised as such by the defendant, will suffice (Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 at 411-412; Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 1 WLR 1555 at 1581). A shutting of the eyes to the obvious or want of probity will suffice. The same facts which establish that Singleton Earthmoving held the debt of $18,417.09, being the credit balance in its bank account, on trust for Wambo, because Mr Ariff as its liquidator, wilfully shut his eyes and failed to make inquiries for fear of establishing that that was so, suffices to render him liable as a constructive trustee for the moneys taken to have been received by him, because they were paid on his direction.
63 There was no pre-existing fiduciary relationship between Wambo and Mr Ariff. Counsel for Wambo argued that because a liquidator owed fiduciary duties, he owed those duties to Wambo. The fallacy of that argument needs no explication. In Robb Evans & Associates v European Bank Ltd (2004) 61 NSWLR 75, Spigelman CJ, with whom Handley and Santow JJA agreed, said (at 107, [160]) that:
“In my opinion, it is an essential aspect of accessorial liability for ‘knowing receipt’ that the act of transfer of the property — relevantly the deposit by Benford with the respondent — must be in breach of a fiduciary obligation.”
64 His Honour was careful to describe the required fiduciary obligation as one which exists at the time the property is transferred. His Honour did not say that the trust on which the property is held must arise from a pre-existing fiduciary obligation. Thus, a volunteer who receives money from a thief can be required to account for it because the property was held by the thief on a constructive trust for the true owner of the property (Black v S Freedman & Co (1910) 12 CLR 105). In such a case, the fiduciary obligation arises from the circumstances in which the constructive trust is imposed. In other words, it is the constructive trust which creates the fiduciary obligation. The transfer of the property in breach of the constructive trust is a transfer in breach of the fiduciary obligation. The transfer of the moneys received from Wambo by Singleton Earthmoving, after Singleton Earthmoving had knowledge of the facts which gave rise to the constructive trust, was a breach of its fiduciary obligations to Wambo.
65 I conclude that Mr Ariff is liable to account as a constructive trustee for the moneys he is taken to have received, after he had knowledge that the payments made by Wambo were made by mistake. Those are the three payments totalling $18,150.00 made on his direction.
66 I do not consider that Mr Ariff is liable to account under the first limb of Barnes v Addy for the balance of $255.89. That credit balance was reduced by the payment of bank fees, but there was no evidence as to whether he was personally liable for such fees. There is no evidence that he directed payments of bank fees in the exercise of his right of indemnity from the company’s assets.
Direct Restitutionary Claim
67 Counsel for the plaintiff contended that the plaintiff was entitled to restitution because the defendants had been unjustly enriched, and it was unconscionable that they retain the benefit of the defendant’s payment. There is no issue that Wambo has a claim in restitution against Singleton Earthmoving for the receipt of both payments. But that is a personal remedy of no value. If the submission was that such a personal remedy is available against Mr Ariff, it is sufficient to say that the submission was not developed, and, in any event, would appear to be unfounded (Farah Constructions Pty Ltd v Say-Dee Pty Ltd at [130]-[158]).
Rule in Ex Parte James
68 Only fleeting reference was made in the plaintiff’s submissions to Ex Parte James. No submissions were made as to the present basis for or status of the principles in Ex Parte James. No submissions were addressed to whether the rule could be applied to persons in the position of Mr Ariff who was appointed liquidator in a creditor’s voluntary winding-up and not pursuant to an order of the Court. The submission went no higher than saying that payments made by Mr Ariff to himself when he was on notice of the mistake was contrary to “the basic principles of In Re James (sic) of a liquidator or trustee in bankruptcy effectively taking an unfair advantage of his position.”
69 I have decided that Wambo is entitled to relief on other grounds in respect of payments made by Mr Ariff after he had knowledge that Wambo had paid by mistake. The plaintiff did not foreshadow that it would be placing any reliance on the principles in Ex Parte James except for this fleeting reference in the course of final submissions. Mr Ariff was entitled to prior notice if the principles were to be relied on. The argument was not developed. Accordingly, counsel for Mr Ariff made no detailed submissions in relation to the application of the principles in Ex Parte James. In these circumstances, it would not be fair to Mr Ariff to consider whether he could be liable to make restitution of the first payment on such a basis.
Orders
70 For these reasons, there will be judgment for the plaintiff against the first defendant (Mr Ariff) for $18,150.00 together with interest at the prescribed rates from 2 December 2005.
71 The plaintiff did not prove that Singleton Earthmoving still holds any part of the sum of $18,417.09 which it held on trust for the plaintiff, or any property into which such moneys could be traced. Accordingly, I will not make a declaration that any property is held by the second defendant on trust for the plaintiff. In all probability, the small balance in the account has been consumed in bank fees.
72 Wambo is entitled to personal remedies against Singleton Earthmoving. Singleton Earthmoving is liable in restitution for the moneys paid by Wambo by mistake. It is also liable to account as trustee for the $18,417.09 which it held on trust for Wambo after it became aware of the mistake. The latter liability is subsumed in the former. In any event, Wambo cannot prove in the liquidation of Singleton Earthmoving because its claim arose after the winding-up is taken to have begun. As there will be no return to creditors, this is academic. There will be judgment for the plaintiff against the second defendant in the sum of $46,130.15, with interest at the prescribed rates on $27,714.50 from 10 September 2005, and $18,415.65 from 31 October 2005. However, the plaintiff will be restrained from seeking to enforce the judgment against any assets of the second defendant without leave of the court. As it appears there are no assets, this again, is academic.
73 The exhibits may be returned after 28 days. I will hear the parties on costs.
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