Newsflash – High Court denies special leave to Mr Grimaldi

I have previously written an article, as well as a number of posts, discussing the Full Federal Court of Australia’s important decision earlier this year in Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6.

Today the High Court of Australia denied special leave to appeal to Mr Grimaldi. The transcript is not yet available online, but I will post an update when it is and I have had a chance to review it.

In the meantime, my article is here and my earlier posts are here (fact overview and list of issues addressed in judgment), here (de facto directors and officers) and here (synopsis of my article mentioned above). In the article itself I review the judgment and discusses some of the key issues of equity law which arose in this important decision, including such issues as Barnes v Addy, secret commissions/bribes, directors’ fiduciary duties and equitable remedies.

New Article on Grimaldi v Chameleon Mining NL – Barnes v Addy, Secret Commissions, Directors’ Fiduciary Duties, Equitable Remedies

I have added a new article to my website entitled  - Barnes v Addy, Secret Commissions/Bribes, Directors’ Fiduciary Duties, Equitable Remedies – Grimaldi v Chameleon Mining NL – FCAFC.

My article reviews the judgment and discusses some of the key issues of equity law which arose in this important decision of the Full Court of the Federal Court of Australia. The title of the article is self-explanatory as to what those issues are, but it is worth noting that the article includes a consideration of -

• Whether Lister v Stubbs is now dead in Australia, with regards to secret commissions and bribes received by those in a fiduciary position;

• How a fiduciary (or involved third party)’s liability to account for wrongdoing is given effect by way of forms of equitable relief;

• Whether the level of knowledge/notice required to trigger liability for knowing receipt, the first limb of Barnes v Addy is now the same in Australia as for knowing assistance;

• Where there are multiple parties liable to account for the same loss/benefit, for example a wrongdoing fiduciary and a knowing assistant in the breach of duty, how is the liability “shared”? Are the fiduciary and third party jointly and severally liable? Or are they only severally liable?

• In Australia, has the multi-jurisdictional doctrinal controversy surrounding the “true nature” of knowing recipient liability now quelled? Is it established that it is not a question of property law; that a claim to a subsisting equitable interest in misdirected trust or corporate funds or property in the hands of a third party, or their traceable product, is entirely separate from a claim against the third party for knowing receipt? (And is it still the case that where a director disposes of corporate property in breach of fiduciary duty, the company cannot bring a proprietary claim against the third party recipient until the transaction has been avoided/rescinded?) Has the unjust enrichment explanation for third party knowing recipient liability been confirmed to have been put to bed?

The Federal Court Portal shows that Mr Grimaldi has lodged an application for special leave to appeal to the High Court, so we may await further developments in this case with interest – at least with regards to the claims against Mr Grimaldi.

The article can be accessed here and under the new menu item I have added to my website “My Articles and Case Reviews”. For a review of the judgment and its treatment of de facto directors and officers, see my earlier post here.

** Note that this article is to be published in the UK in an upcoming edition of Trusts and Estates Law & Tax Journal

Equuscorp Pty Ltd v Haxton – High Court’s latest pronouncement on the law of restitution

Yesterday afternoon the High Court handed down its long-awaited restitution law judgment dealing with claims for money had and received for failure of consideration – and their assignability – in Equuscorp Pty Ltd v Haxton; Eqquascorp Pty Ltd v Bassat; Equuscorp Pty Ltd v Cunningham’s Warehouse Sales Pty Ltd [2012] HCA 7. The full judgment is now on Austlii and can be read here.

This case involved five appeals from the Victorian Court of Appeal. In the High Court three judgments were written – one by French CJ, Crennan and Kiefel JJ, one by Gummow and Bell JJ, and one by Heydon J. Their Honours dismissed the appeals, which had the effect that the respondent investors were not liable to repay funds advanced to them under loans which had been assigned to Equuscorp.

Facts

The respondents had invested in tax driven blueberry farming schemes conducted in the north-east of NSW in the mid to late 1980′s, promoted by two brothers Anthony and Francis Johnson. Investments were made in the schemes in five separate tranches. Under the schemes, investors could enter into a loan agreement with a company called Rural Finance Pty Ltd whereby Rural would advance funds payable by the investors to other companies in the scheme group, pursuant to the schemes. The schemes were designed so that investors obtained an interest in a farm and farming business with the hope of future profits and capital appreciation, together with the immediate benefit of a significant tax deduction claimable against non-farming income.

Equuscorp was an arms length financier of the group of companies controlled by the scheme promoters, the Johnson brothers. In 1997, after the scheme collapsed, the receivers and managers of Rural sold the loan agreements between Rural and the investors to Equuscorp, assigning its interests under the loan agreements and the amounts of debts owing thereunder. As a rather striking side-note, at first instance Byrne J had found that at around the time of their assignment, the 638 loan agreements were worth $52,584,005. The consideration given for the assignment was $500,000.

Contrary to s 170(1) of the then Companies Code, no prospectus or valid prospectus had been registered when the schemes were promoted, when investors were offered a “prescribed interest” and were offered loans on favourable terms to invest. After taking the assignment, Eqquscorp sued investors to recover payments due to it under the loans.

The loan agreements were found to be unenforceable for illegality. (So held Byrne J at first instance; this was not challenged in the Victorian Court of Appeal or the High Court.) This is somewhat curious, as the making of the loan agreements was not expressly prohibited by the Code; what was illegal was the offering or inviting the public to subscribe for or purchase a prescribed interest . However it appears that Byrne J held the loan agreements to be unenforceable on the common law ground of being associated with or made in furtherance of an illegal purpose (see [22-27]).

Equuscorp claimed in the alternative for restitution of the advances made under the agreements as money had and received, for failure of consideration. Essentially, the questions for the High Court were these -

1. Did Rural have a right of restitution for money had and received (based upon a failure of consideration)?
2. If yes, was such a right assignable (to Equuscorp)?
3. If yes to both, was it assigned by Rural to Equuscorp?

The High Court answered those questions, broadly, as follows -

1. No, 5:1. An entitlement to restitution here would stultify the policy and objects of the Companies Code, being the protection of investors in the position of the respondents. The investors would not be unjustly enriched if they were not compelled to make restitution. (So  held French CJ, Crennan and Kiefel JJ [45]; also Gummow and Bell JJ [99]. Heydon J dissented, making some thought-provoking remarks worth considering [126-133, 134-149]. Note that at [137], Heydon J comments that despite what the Court of Appeal had held, there is no requirement of total failure of consideration in every case.)
2. Yes, assignable, 6:0. There was no cause of action available for Rural to assign to Equuscorp. But if there had been a right of restitution, such a right was capable of being assigned (Yes – French CJ, Crennan and Kiefel JJ [53]. Yes (tied up in yes to question 3) – Gummow & Bell JJ [74-5]. Yes – Heydon J [159])
3. Evenly split, 3 yes:3 no. The High Court was evenly divided on the question of whether, if there had been a right to restitution in Rural, it would have been assigned under the Deed. (No – French CJ, Crennan and Kiefel JJ [64], though they left open one aspect at [66]; Yes – Gummow & Bell JJ [74-9]; Yes – Heydon J [160-161]. Note that at first instance Byrnes J had answered yes; on appeal to the Victorian Court of Appeal – their Honours had answered no.)

Before closing, I will briefly address two aspects of this decision – the apparent state of play of unjust enrichment and the nature of claims for money had and received in Australia, and the reason why the majority found that in this case, there was no such right to restitution.

The Nature of claims for money had and received – right to restitution

At [29] French CJ, Crennan and Kiefel JJ discuss the history of claims for money had and received. They note that it was an offshoot of the old form of action of indebitatus assumpsit, which by the 17th century, had superseded the action of debt. They summarise how it went through a period of being thought to rest upon a theory of implied contract. This theory was rejected in Australia in 1987 by the High Court in Pavey & Matthews Pty Ltd v Paul, and in the UK in 1996 by the House of Lords in Westdeutsche Landesbank Girozentrale v Islington London Borough Council.

They maintain our High Court’s position that unjust enrichment does not found or reflect any “all-embracing theory of restitutionary rights and remedies”. What it does, they said, is refer to or explain categories of cases where the law does not permit one person to keep a benefit obtained from another. The concept of unjust enrichment explains the claim for money had and received, so their Honours said, in this way -

An enrichment of a defendant may be treated by the law as unjust by reason of a qualifying or vitiating factor such as mistake, duress, illegality or failure of consideration, triggering a prima facie obligation to make restitution to the plaintiff, subject to any defences such as the change of position defence (which would make an order for restitution, in turn, unjust). See their discussion at [29-30].

At [114] Gummow and Bell JJ make an enlightening observation. They observe that an action for money had and received is a legal action not an equitable suit, however it is settled in Australia that the action is a liberal action in the nature of a bill in equity. They observe for example that in the present litigation, were Equuscorp to succeed, a question would arise as to the relevance and quantification of any offsetting “tax benefit” which the respondents had received before the investment scheme collapsed.

Rural had no right to restitution here

Essentially, the majority held that where a contract is rendered unforceable by a law, a restitutionary claim will not lie where the allowance of that claim would defeat the policy of the law which made the contract unenforceable. (See Gummow and Bell JJ at [104].)  To permit recovery on an action for money had and received in such a case would stultify the statutory policy of protecting investors by imposing onerous obligations upon scheme promoters to comply with statutory requirements. They held that this was the case here. Rural was not an arms length financier. It was part of the group of companies involved in promotion of the schemes. It offered loan agreements on favourable terms in furtherance of an illegal purpose (offers to take up prescribed interests without the benefit of the protections required by the Code).

In contrast, restitution can be allowed where a contract or transaction is made or a tax is paid which was rendered “illegal” by a law which, for example, requires formalities which were not met, or which restricts legal capacity, as does the doctrine of ultra vires.

At [103], the basis for the High Court majority’s view as to there being no right to restitution here, is particularly well explained by Gummow and Bell JJ. Their Honours note that the determinative issue is whether the policy of the statute law (here s 170 of the Code) denies any scope for an action for money had and received. They observe that guidance on this issue can be gained by a statement by Professor Palmer in his 1978 treatise The Law of Restitution where he says this:

“The illegality of the transaction will preclude recovery of damages for breach, or any other judgment aimed at enforcement of the contract, and the problem is whether the plaintiff can nonetheless obtain restitution of values transferred pursuant to the contract. The fact that public policy prohibits enforcement of the contract is not a sufficient reason for allowing one of the parties to retain an unjust enrichment at the expense of the other. Such a retention is warranted only when restitution is in conflict with overriding policies pursuant to which the transaction is made illegal.”

The best part

I would like to finish, admiringly, with the opening paragraph of Heydon J’s judgment. For its deft eloquence, I find it one of the most enjoyable opening passages of a judgment I have read in a while:

“The relevant transactions are set out in the preceding judgments. Those transactions are redolent of tax avoidance, suggest a preference for the beauty of the circle to the bluntness of the straight line, and indicate a single group of minds in control of superficially different entities. There is about them something of the night. However, it was not squarely suggested that the transactions were shams or that their somewhat murky atmosphere was relevant to the legal issues in these appeals. Those issues are four in number…”

Grimaldi v Chameleon Mining NL (No 2) – FCAFC – Barnes v Addy, bribes and constructive trusts

Last week a Full Federal Court bench of Finn, Stone and Perram JJ handed down a long and highly significant judgment in the latest Chameleon Mining decision, concerning dealings involving the Iron Jack Tenements in Western Australia. The full judgment – 783 paragraphs long – can be read here. The judgment includes a detailed table of contents, which can take you directly to a particular legal issue if desired.

This is essentially a case of those in a fiduciary position failing spectacularly to uphold the standards required of them by their duties and position, and misappropriating funds, diverting opportunities for themselves/their own companies, and taking secret commissions, according to the Court’s findings. The significance of this case is for its authoritative pronouncement by the plurality on a range of important issues of equity law in this country. It is notable, and fortunate, that one of the three members of the Full Court Bench was an equity jurist of the calibre of his Honour Justice Finn. This issues are listed below. First, for an overview of the facts, as found by the Court -

Chameleon claimed that several of its directors including a Mr Barnes and a Mr Roberts were guilty of breaches of their fiduciary duties to the company, and contraventions of ss 180, 181 and 182 of the Corporations Act 2001 (Cth). Phillip Grimaldi was also sued by Chameleon for breach of fiduciary duties and the same provisions of the Act, as an alleged de factor director of Chameleon or an “officer” of the company. Mr Grimaldi was a director and the controlling mind of Murchison Metals Ltd, which was also sued by Chameleon. Two transactions were at the centre of the controversy.

The first, the “Cadetta Transaction”, involved the acquisition by Chameleon negotiated for it by Mr Barnes and Mr Grimaldi of gold mining tenements in consideration for an issue of its shares. By way of what was held to have been a secret commission to Mr Grimaldi, Chameleon issued 5 million shares to Murchison. Murchison provided no consideration to Chameleon for the issue of those shares. Immediately after the allotment of shares to Murchison, Grimaldi had Murchison sell them and pay the proceeds of that sale to Winterfall (which later became Crosslands Resources Ltd).

The second transaction was really a series of dealings.  Winterfall had contracted to buy the Iron Jack Tenements, but it ran out of money to pay the second instalment of the purchase price. Mr Barnes and Mr Grimaldi suggested Murchison acquire an interest in the project. Murchison and Winterfall signed Heads of Agreement under which Murchison would pay Winterfall $350,000 (which was needed to pay the Iron Jack vendors) plus Murchison would later effect a “reverse takeover” of Winterfall. Mr Grimaldi and Mr Barnes also negotiated a “spotter’s fee” for themselves in the form of shares in Winterfall (which they later exchanged for 10 million shares and 12 million options in Murchison).

Subsequently Grimaldi urged Chameleon, which had little cash, to raise capital ostensibly for exploration of a gold mine, by way of a share placement. With the knowledge of the principal Winterfall director Mr Zuks, 40% of Murchison’s payment obligation was made  by Chameleon. This was held to be a missappropriation of Chameleon’s funds from the capital raising. At least some of the rest was paid by Murchison to Winterfall, using funds it had raised from the above-mentioned sale of it shares in Chameleon. In the end, Winterfall completed its purchase of the Iron Jack Tenements and Murchison completed its reverse takeover of Winterfall. The findings show that Mr Barnes and Mr Grimaldi did very well out of the deals. Chameleon, however, did not.

As noted above, the significance of this long judgment lies in the authoritative pronouncement by the Full Federal Court on a number of highly important issues of the law of equity. I recommend that anyone practising in these areas read this judgment carefully. Again, it can be read here. For now, I simply provide a heads up as to the issues upon which this judgment will undoubtedly become an oft-cited authority. They are listed in the order in which they appear, rather than in order of importance, and they are as follows -

1. De facto directors
2. Directors duties and misappropriation of funds – ss 181 and 182 of the Corporations Act
3. Compensation under s 1317H of the Corporations Act, and whether profits can be sought without proof of loss
4. Corporate knowledge – the imputation of director’s knowledge to a corporation – “fraud on the company” exception
5. Fiduciary duties – conflict of interest and misuse of position
6. Fiduciary duties – Secret commissions / bribes
7. Barnes v Addy - both limbs – knowing receipt and knowing assistance **important discussion at [242-270]
8. Constructive trusts and tracing corporate property – including whether a transaction must be avoided before proprietary relief can be awarded
9. Equitable remedies – flexibility – fashioned to fit the case and do what is “practically just”
10. Liability to account and Account of profits – including where breach of duty is only one of several sources of profit – the “just allowance” device
11. Account of profits – including when parties may be jointly and severally liable for profits
12. Interest awarded where misuse of trust moneys – including re compound interest and periodic rests
13. Remedies re Barnes v Addy – including whether joint and several as between fiduciary and third party participants in knowing receipt or knowing assistance
14. Remedies re bribes / secret commissions – including Lister & Co v Stubbs not followed
15. Constructive trust being an available remedy if appropriate in the circumstances.

It will be interesting to see if special leave is sought to appeal to the High Court from this judgment.

William Co-Buchong v Citibank & NAB – fraud – mistaken payment by bank – defence of change of position

Last week’s decision by Hammerschlag J of the NSW Supreme Court in William Co-Buchong & Anor v Citigroup Pty Ltd & National Australia Bank Ltd [2011] NSWSC 1199 was an interesting contest between two banks, both of which had been the victim of fraud.

The plaintiffs were customers of both Citibank and NAB. Both banks were parties to the SWIFT international clearing house system of international funds transfers which facilitates electronic bank to bank fund transfers.

Citibank had transferred money via the SWIFT system from its customers’ account on the basis of a fraudulent faxed instruction, to those customers’ account at the NAB. The NAB then also received fraudulent instructions, by way of three International Telegraphic Transfer Application Forms, and paid out the money in three tranches to accounts held in various names at HSBC Hong Kong Ltd.

The plaintiffs from whose accounts at Citibank the funds had originally been drawn, sued claiming damages from both banks on the basis that moneys were paid out of their accounts without their knowledge or authority. As between the plaintiffs and the banks, those proceedings were settled, with the plaintiffs being made whole.

What remained on foot was the cross claims between the banks. Each claimed relief against the other on the basis that the other should bear the loss. The question became whether Citibank is entitled to be paid back the money it had paid over to NAB.

Cibitank’s claim was put exclusively as one for restitution. It had paid the money to NAB on the fundamentally mistaken belief that it had been so instructed by its customers. Absent restitution, claimed Citibank, NAB would be unjustly enriched.NAB’s defence was that it changed its position by paying away the funds on the faith of the receipt.

It became a significant point, that neither party asserted the other acted negligently or failed to meet any relevant standard of banking practice such as checking signatures against a signature verification system or checking that there were cleared funds in the relevant account.

From paragraph [19], his Honour discusses the change of position defence as considered by the NSW Court of Appeal in State Bank of New South Wales Ltd v Swiss Bank Corporation (1995) 39 NSWLR 350, and more recently again by the NSW Court of Appeal in Perpetual Trustees Australia Ltd v Heperu Pty Ltd [2009] NSWCA 84; (2009) 76 NSWLR 195. (Incidentally, I note that the High Court granted special leave in Heperu, and heard the appeal in May 2010, but the September 2010 High Court Bulletin disclosed that as at that month the case was either not proceeding or had been vacated.)

Hammerschlag J then considers these two Court of Appeal decisions. He discusses State Bank, and notes that at p355 of their judgment, the Court of Appeal held that to succeed in its defence of change of position in that case, the bank needed to show that it paid the money away “on the faith of the receipt”. His Honour then identifies three requirements from the Court of Appeal’s decision in State Bank, see p 356 of that judgement in particular, that NAB in this case would need to establish to succeed in their argument that their payment away of the funds was “on the faith of the receipt”, namely -

(a) it must have known or thought it knew more than the fact of the receipt standing alone;

(b) the information must have come from Citibank; and

(c) the information must be information which, if true, would have entitled NAB to deal with the receipt as it did [at 27].

Together with the mere fact of the payment, NAB received a SWIFT message which included information that the transaction was at the behest of its customers, the plaintiffs, and involved a transfer from their account at Ctitbank to their NAB account [at 30]. This was treated by his Honour as information from Citibank to NAB that it could treat the funds as being available for disbursement at the behest of the plaintiffs. However, were his Honour to have followed State Bank, Citibank would succeed because the NAB meets only two of the three requirements (i.e. it meets (a) and (b) but not (c) – see [28-31].

His Honour then discusses the NSW Court of Appeal’s decision in Heperu, decided 14 years after State Bank [from 32]. The Court of Appeal observed there that care should be taken not to overextend what was said in State Bank beyond the facts of that case. Hammerschlag J highlighted a passage from paragraph [133] of Heperu, to the effect that the payments there were taken to be on the faith of the receipts because they would not have been made unless the receipts had been recognised as valid…The payments would not otherwise have been made, the change of position being thereby causally linked to the receipt [at 37].

Applying that here, his Honour said at [38] that although the occasion for the withdrawal was the fraud of the imposter, NAB nevertheless undoubtedly recognised the receipt as valid. The receipt from Citibank was credited to the plaintiffs’ account as a consequence of the information in the SWIFT communication. Had it not recognised this validity, it would not have then paid away the money. His Honour found it significant, as mentioned above, that there was no assertion of any negligence or failure by NAB to meet banking practice [at 38].

Thus the necessary causal link, as articulated in Heperu is met though, as his Honour observed, not requirement (c) of the State Bank formulation. Hammerschlag J recognises that the two decisions by the same court are irreconcilable and, as Heperu is the later in time, finds he is bound to follow Heperu [at 40].

His Honour concludes that applying Heperu, Citibank must fail as NAB has succeeded in making out its defence of change of position [at 41].

His Honour refers finally to the 2010 article by the Hon Justice W M C Gummow Moses v Macferlan: 250 years on (2010) 84 ALJ 756, where Gummow J considers the change of position defence and expresses the view at p 762 that “Over-definition and dissection of the phrase ‘change of position’ may only serve to divert attention from what is the central question, whether it would be an inequitable result for the claimant to require repayment.”

Hammershclag J takes the view that also on this approach, NAB would succeed in its defence. Both banks were duped. However Citibank paid first without the customers’ authority as a result of which NAB credited the customers’ account rendering it vulnerable to the fraud to which it succumbed [at 43]. His Honour remarks that: “In these circumstances and where neither party criticises the other for falling for the fraud, it would lead to an inequitable result were Citibank to be made whole at the expense of NAB.”