wsa court decision, page-15

Bush lawyer again
I love this read for all those that dont care what previous directors did for their company>


ROBINS and Others v INCENTIVE DYNAMICS PTY LTD (in liq) and
Another
SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL
MASON P, STEIN and GILES JJA
11 December 2002, 9 April 2003 — Sydney
[2003] NSWCA 71
Trusts — Constructive trust — Company funds transferred to company in which
directors were majority shareholders — Breach of duty by directors — No benefit to
company — Knowing receipt of funds — Application of principles in Barnes v Addy
(1864) LR 9 Ch App 244 — Whether directors required to have dishonest or
improper intent at time of transaction—Whether rescission of contract required for
grant of proprietary relief.
Directors — Duties — Breach of duties — Funds transferred to company associated
with directors — Application of principle in Barnes v Addy — Knowing receipt —
Whether directors required to have dishonest or improper intent at time funds
provided — Corporations Law s 232(6).
The directors of Incentive Dynamics Pty Ltd (Incentive Dynamics) paid approximately
$375,000 to Coldwick Pty Ltd (Coldwick) for the purpose of Coldwick purchasing two
properties. Incentive Dynamics did not receive any benefit from the transaction, nor was
any benefit intended.
The liquidator of Incentive Dynamics alleged, inter alia, that the directors of the
company had breached their statutory and common law duties by making the advance to
Coldwick and claimed that Incentive Dynamics was entitled to a remedial constructive
trust over the properties purchased with the sums advanced. One of the statutory duties
alleged to have been breached was s 232(6) of the Corporations Law (CL) as the directors
of Incentive Dynamics were the majority shareholders in Coldwick.
The trial judge declined to give the proprietary relief sought on the basis that he was not
satisfied that at the time of the transaction, the directors of Incentive Dynamics did not
have a dishonest and improper intent.
Held, upholding the appeal by the liquidator:
Per Mason P (with whom Stein and Giles JJA agreed)
(i) Dishonesty or “improper intent” is not a necessary component of the duty imposed
by CL s 232(6). An objective test is applied to determine whether the standard of conduct
set by CL s 232 has been breached: at [54].
R v Byrnes (1995) 183 CLR 501; 130 ALR 529; 17 ACSR 551; Chew v R
(1992) 173 CLR 626; 107 ALR 171; 7 ACSR 481; Duke Group Ltd (in liq) v Pilmer
(1998) 27 ACSR 1, applied.
(ii) Unless Coldwick was intended to hold the properties on trust for Incentive
Dynamics, the funds of Incentive Dynamics transferred to Coldwick represented an
improper use of Incentive Dynamics officers’ positions to gain advantage for themselves
as major shareholders in Coldwick: at [56].
(iii) As the directors of Incentive Dynamics were unable to establish a basis for the
honest receipt of the funds by Coldwick, the transaction was an improper diversion of
Incentive Dynamics’ moneys in favour of an entity that, through its directors, was
complicit in and privy to the impropriety: at [58].
(iv) As they were also officers of Incentive Dynamics, the officers of Coldwick had actual knowledge of the circumstances in which the moneys were paid, which satisfied the
“knowledge” element of the Barnes v Addy cause of action: at [59].
Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR 580; Farrow Finance Co Ltd
(in liq) v Farrow Properties Pty Ltd (in liq) (1997) 26 ACSR 544; Belmont Finance
Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, applied.
(v) A remedial constructive trust is not precluded from being imposed merely because
of the form of the transaction by which the recipient received the funds.
Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393;
Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd (in liq)
(1997) 26 ACSR 544; Paul A Davies (Aust) Pty Ltd (in liq) v Davies
(1982) 1 ACLC 66; Rolled Steel Products (Holdings) Ltd v British Steel Corp
[1986] Ch 246; [1985] 3 All ER 52; Ninety Five Pty Ltd (in liq) v Banque Nationale
de Paris [1988] WAR 132, referred to.
Per Mason P (with whom Stein JA agreed)
(vi) Rescission is essential in cases in which a remedial constructive trust is sought and
where the transaction is, at best, voidable for breach of fiduciary or statutory duty.
Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd
(1996) 39 NSWLR 143; Halifax Building Society v Thomas [1996] Ch 217;
[1995] 4 All ER 673; Hancock Family Memorial Foundation Ltd v Porteous
(2000) 22 WAR 198, referred to.
(vii) A remedial constructive trust, being a discretionary remedy, was appropriate in the
circumstances of this case, as the funds could be traced into identifiable property in the
hands of the recipient and in light of the absence of third parties, such as creditors having
a legitimate claim on the assets of Coldwick: at [75], [76].
Per Giles JA
(viii) Requiring rescission is a way of ensuring that account is taken of the rights of third
parties before equity grants a proprietary remedy and of guarding against recovery under
the contract of loan as well having the proprietary remedy. In this case, the claim for the
proprietary remedy was not put forward on the basis of the funds being loaned to
Coldwick. Accordingly, no question of rescission arose: at [82], [83].
Cross-appeal
This was a cross-appeal seeking to have a personal money judgment set aside
and replaced with relief based upon a remedial constructive trust. The facts are
set out in the reasons for judgment prepared by Mason P.
F Whelan QC and J Chippendall instructed by Kemp Strang for the
cross-appellants.
M English, solicitor, instructed by English Kearns for the cross-respondents.
[1] Mason P. Complex proceedings in the Federal Court were concluded on
16 June 1998. On the evening before the High Court delivered judgment in
Re Wakim; Ex parte McNally (1999) 198 CLR 511; 163 ALR 270; 31 ACSR 99,
Mansfield J delivered a reserved judgment (Incentive Dynamics Pty Ltd (in liq)
v Robins [1999] FCA 808; BC9903241) and made ensuing orders.
[2] In light of Wakim, the Federal Court was without jurisdiction: the decision
was an “ineffective judgment” in the language of the Federal Courts (State
Jurisdiction) Act 1999 (Cth). However, pursuant to that Act corresponding
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 245judgments and orders were able to be made in the Supreme Court of New South
Wales on 2 March 2000 thus becoming amenable to the appellate jurisdiction of
this court.
[3] Several parties appealed or cross-appealed. The only proceedings remaining
in this court are those instituted by a notice of cross-appeal filed by Incentive
Dynamics Pty Ltd (in liq) (Incentive Dynamics) and its official liquidator (the
appeal).
[4] The Federal Court proceedings were commenced jointly by Incentive
Dynamics and its official liquidator. Various claims were propounded against
directors of Incentive Dynamics and persons (mainly corporations) associated
with them. The learned primary judge identified four categories of issues to be
determined by him. In the main, the separate categories address a common
substratum of facts. The categories were:
(1) that the directors and de facto directors of Incentive Dynamics breached
their statutory and common law duties by making advances to various
persons and corporations in circumstances in which it was improper to
do so;
(2) that the persons and corporations referred to in the amended statement
of claim were indebted to Incentive Dynamics in various amounts of
money whether as loans or otherwise;
(3) that the respondent Meissner received payments which in the winding
up of Incentive Dynamics had the effect of giving him preferences
within the meaning of the then operative provisions of the Corporations
Law;
(4) that the funds advanced by Incentive Dynamics to Coldwick Pty Ltd
(Coldwick) and to other persons which were used for the purchase of
property were advanced in circumstances which gave Incentive
Dynamics a proprietary interest in the various properties so acquired.
[5] The claims encompassed within issues 1, 3 and 4 were dismissed, but the
claims within issue 2 generally succeeded.
[6] One set of claims related to moneys totalling $375,064.63 paid by Incentive
Dynamics to Coldwick and used by Coldwick to purchase properties in South
Melbourne and Crows Nest. Mansfield J awarded Incentive Dynamics judgment
in that sum. (In the turmoil of the evening of 16 June 1998 Incentive Dynamics
apparently omitted to claim statutory interest on this debt: cf Federal Court of
Australia Act 1976 (Cth), s 51A.)
[7] The applicants had sought recovery of this money against the directors
(issue 1) and, among others, Coldwick (issue 2) as well as a declaration of
(remedial constructive) trust over Coldwick’s properties acquired with the money
(issue 4).
[8] Mansfield J rejected Incentive Dynamics’ claim for a remedial constructive
trust in relation to the two properties purchased with the money (ie the claim
arising under issue 4). It is this refusal of relief that forms the object of complaint
in the appeal.
Facts and primary findings
[9] At all material times prior to its liquidation on 15 April 1996 Incentive
Dynamics was owned and controlled by John Robins and his father Douglas
Robins, each of whom are now bankrupt.
[10] The company secretary was Jonathan Meissner. He was also found by
246 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)


Mansfield J to have acted as the treasury manager of Incentive Dynamics, but not
to such extent as to render him a de facto director: see at [224]–[226].
[11] Incentive Dynamics’ business was that of establishing and marketing
“incentive schemes” for employees of large companies.
[12] There were a number of other companies in the “Robins group”. These
were involved in public relations, marketing, advertising, travel services and
other services ancillary to the main business of the group. The group was
effectively controlled by John Robins. Meissner was the group treasurer.
[13] Coldwick was not part of the group in this sense. It appears to have been
established solely to be the corporate vehicle through which the properties at
South Melbourne and Crows Nest were acquired in 1991 and 1995 respectively.
Coldwick is described by Mansfield J as a property investment company.
[14] John Robins was issued with 75% of the issued shares in Coldwick, and
minority share holdings were held by Meissner and Mr A T Lorkin. Its directors
at all material times up to 1 July 1995 were John Robins, Meissner and Lorkin.
On 1 July 1999 John Robins resigned as a director and transferred his shares to
his sister, Rosemary Pollack who thereupon became a director in his place.
[15] Lorkin was an employee of one of the companies in the Robins group and
an associate of John Robins. He did not give evidence and his absence was
unexplained.
[16] Coldwick purchased the property at 48–52 Dow St, South Melbourne on
22 November 1991. The purchase price was $295,000. The deposit of $29,500
was paid by Incentive Dynamics. $196,500 was borrowed from a third party and
secured by mortgage. The balance of $69,000 plus $8307 for stamp duty were
paid by Incentive Dynamics.
[17] The property at 24 Falcon St, Crows Nest was purchased by Coldwick on
12 May 1995 for $560,000. Incentive Dynamics paid the deposit and the sum of
$119,281 required to complete the settlement. The remaining $420,000 was lent
by a bank.
[18] The financial records of Incentive Dynamics were not maintained in
accordance with s 286 of the Corporations Law. That provision obliged a
company to keep written financial records that correctly recorded and explained
its transactions, financial position and performance; and would enable true and
fair financial statements to be prepared and audited. It was found in particular that
the inter-company transactions between members of the Robins group, including
Coldwick, were not properly recorded in accordance with this standard.
[19] Many issues fought at trial related to proof of the underlying transactions
said to give rise to the equitable and statutory claims propounded by Incentive
Dynamics and its liquidator. The defendants put the applicants to proof and/or
asserted that there were offsets in their favour. In the main, Incentive Dynamics
was successful in light of favourable scraps of documentary evidence and the
unfavourable view formed by the trial judge as to the credibility of the
respondents John Robins and Meissner.
[20] As regards the Coldwick transactions, the primary judge determined in
effect that all moneys spent by Coldwick in the acquisition of the properties were
paid by Incentive Dynamics, with the exception of the sums advanced on
mortgage. The evidence as to the source of interest payments is unclear, possibly
because interest remained unpaid. However, nothing indicates that any money
came from Coldwick’s shareholders.
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 247



[21] The pleadings alleged against Douglas Robins, John Robins and Meissner
that they had committed breaches of trust and statutory duty and other defaults
in relation to a number of transactions, including the transfer of $375,065.03 to
Coldwick (amended statement of claim, paras 13–15). The relevant particulars
asserted that these wrongs were committed:
In causing or permitting to be advanced and lent funds of [Incentive Dynamics] to or
at the direction of [Coldwick] when such loan conferred no benefit upon [Incentive
Dynamics] and when no proper loan documentation was prepared, no security taken, no
interest paid or demanded and further in failing to take any steps to cause or endeavour
to cause such funds to be repaid to [Incentive Dynamics].
[22] The statutory duties allegedly breached included those arising under
s 232(6) of the Corporations Law, which then provided:
An officer or employee of a relevant body corporate shall not make improper use of
his or her position as such an officer or employee, to gain, directly or indirectly, an
advantage to himself or herself or for any other person or to cause detriment to the body
corporate.
(By the Corporate Law Economic Reform Program Act 1999 (Cth) s 232(6) was
repealed and substantially re-enacted as s 182 of the Corporations Law: see now
s 182 of the Corporations Act 2001.)
[23] Damages were sought against the defaulting officers (issue 1).
[24] What I shall hereafter refer to as the personal and proprietary claims
against Coldwick (ie issues 2 and 4) were pleaded in the following terms (the first
applicant being Incentive Dynamics, the first respondent being Douglas Robins,
the second respondent being John Robins, the third respondent being Meissner
and the fifth respondent being Coldwick):
(The personal claim):
16. Further and in the alternative, the first applicant claims as against the fifth
respondent for moneys payable by the said respondent to the first applicant being
moneys lent to the fifth respondent respectively by the first applicant as set out in
Schedule C.
(The proprietary claim):
FIFTH RESPONDENT’S PROPERTY
24. Further and in the alternative, the fifth respondent is the registered proprietor of
land at 48–52 Dow Street, South Melbourne in the State of Victoria, being the lands
comprised in Certificates of Title volume 4953 Folio 563, Volume 4854 Folio 639 and
Volume 3334 Folio 646 being certificates issued under the provisions of the Transfer of
Land Act 1954 of the State of Victoria (“the South Melbourne property”).
25. As at 22 November 1991 the fifth respondent was not indebted to the first
applicant and was controlled by the second and third respondents.
26. On or about 22 November 1991 the fifth respondent purchased the South
Melbourne property for the price of $295,000.00 and used the sum of $128,000.00
alternatively $98,500.00 provided by the first applicant as part of the purchase moneys,
and thereafter made further payments of not less than $8,681.25 in meeting the fifth
respondent’s mortgage obligations secured over the property and in refurbishing the
property.
27. The said sums were provided by the first applicant to the fifth respondent without
any material benefit to the first applicant and in breach of the duties owed by the first,
second, third and fourth respondents.
PARTICULARS
The applicants repeat the matters set out in paragraphs 13, 14 and 15.
248 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)
28. In the circumstances the fifth respondent holds its entire interest in the South
Melbourne property or alternatively an interest in the South Melbourne property
equivalent to the proportion of purchase moneys provided by the first applicant upon
trust for the first applicant.
29. Further and in the alternative, the fifth respondent is the registered proprietor of
property situated at 2nd Floor, 24 Falcon Street, Crows Nest, being the whole of the
lands in Certificates of Title 6/SP34683 and 7/SP34683 (“the Crows Nest property”).
30. On about 12 May 1995 the fifth respondent purchased the Crows Nest property
for the price of $560,000.00 and used the sum of $117,178.17 provided by the first
applicant as part of the purchase moneys.
31. The said sum was provided by the first applicant to the fifth respondent without
any material benefit to the first applicant and in breach of the duties owed by the first,
second, third and fourth respondents.
PARTICULARS
The applicants repeat the matters set out in paragraphs 13, 14 and 15.
32. In the circumstances the fifth respondent holds its entire interest in the Crows
Nest property or alternatively an interest in the Crows Nest property equivalent to the
proportion of purchase moneys provided by the first applicant upon trust for the first
applicant.
[25] These pleadings show that Incentive Dynamics and its liquidator were
inviting the court to find that the moneys were paid by way of loan for the
purpose of the personal claim. But the alternative proprietary claim was not thus
confined. It spoke of money having been “provided” by Incentive Dynamics
“without any material benefit to [Incentive Dynamics] and in breach of the duties
owed by” the persons who were Incentive Dynamics’ officers at the relevant
times.
[26] The proprietary claim was fought on the basis of the principles relating to
“knowing receipt” and remedial constructive trust.
[27] The trial judge addressed both the personal and proprietary claims against
Coldwick in the following terms:
The claim against Coldwick
[119] The South Melbourne property was settled on 22 November 1991. The
purchase price was $295,000. The deposit was $29,500. On the basis of the
documentary evidence, I find that that sum was paid by Incentive Dynamics.
[120] Coldwick borrowed $196,500 from a third party, secured by mortgage, towards
the settlement sum, leaving a balance payable of $69,000. The applicants claim that that
sum was also paid by Incentive Dynamics on behalf of Coldwick, together with $8,307
for the stamp duty payable on the transfer, making a total paid of $106,807 paid by it
in respect of the South Melbourne property. The records of Incentive Dynamics show
that, in fact, those monies were paid by it on account of the purchase of the South
Melbourne property. The defence to the claim was that those monies were, in reality,
monies held by Incentive Dynamics for John Robins, Meissner and Lorkin. In addition,
a document contemporaneous with the purchase of the South Melbourne property,
written by Meissner, confirms that Incentive Dynamics invested in the South Melbourne
property with two other persons (who I find to be Meissner and Lorkin) and lent monies
to Coldwick for that purpose. I place considerable weight on that document,
notwithstanding that Meissner said that it was inaccurate, particularly as I am reluctant
to place any weight on the evidence of John Robins and Meissner on matters such as
this.
[121] John Robins has given varying information as to the role of Incentive
Dynamics in relation to the purchase by Coldwick of the South Melbourne property.
One version was that the monies were advanced by Incentive Dynamics but on behalf
of himself, Meissner and Lorkin, and that they subsequently reimbursed Incentive
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 249Dynamics. In his statement, he said that the advances were provided to Incentive
Dynamics by RHM and Travellers Pty Ltd, but no records from either of those entities
were presented to confirm that. As I have concluded that he had little awareness of the
day to day conduct of the inter-company loans or provision of funds between members
of the Robins group, I think his statement reflects what he now thinks may have
happened rather than what did happen. He finally submitted that the monies advanced
by Incentive Dynamics were on account of a liability it then had to Nicholls-Cumming,
albeit improperly documented. That was not put to Morton or to any of the applicants’
witnesses. As the applicants point out in their submissions in reply, the analysis of the
journal entries by John Robins in that final submission does not have regard to other
apparently relevant journal entries. The picture contended for by John Robins does not
emerge.
[122] Meissner did not deal with this transaction in his statement. In his
evidence-in-chief, and in cross-examination, he suggested that the funding for the
purchase of the South Melbourne property largely came from RHM or
Nicholls-Cumming and that Meissner had contributed some $34,000 partly by cash and
partly by not seeking payment of certain monthly fees due to him by Incentive
Dynamics and that Lorkin had contributed $20,000 partly by cash and partly by not
claiming for fees due to him. Morton was dismissive of those assertions, by reference
to the records of Incentive Dynamics available to him, and because the records of
payments of fees by Incentive Dynamics to Meissner did not demonstrate any such
forbearance. In his own cross-examination, Meissner acknowledged that there was no
trading relationship between Coldwick and Incentive Dynamics. There was therefore no
reason why certain of the payments into Incentive Dynamics for the purchase of the
South Melbourne property, and the payments by Incentive Dynamics for that purpose,
should be referred to the Reconciliation File for later balancing out. Despite that, he was
unable to explain in a satisfactory way why the payments actually made by Incentive
Dynamics for Coldwick were not simply recorded, and the receipt of offsetting funds
also simply recorded. Further, although he asserted that the financial accounts of
Coldwick would display the picture that it was not indebted to Incentive Dynamics, he
did not produce those accounts. He was pressed to do so. His evidence was suspended
for some time, so there was no apparent reason why those records were not produced.
He is still a director of Coldwick, and it would have been an obvious thing to produce
those accounts if they bore out his assertions. His explanations for not producing those
documents were unsatisfactory, and as I have earlier observed, impact adversely on my
assessment of his reliability as a witness.
[123] Lorkin did not give evidence, although he was opened on as a proposed witness
for the respondents. He attended in the course of the hearing in response to a subpoena
to produce documents. There is no apparent reason why he could not have given
evidence.
[124] In my view, Lorkin was a person who was a witness naturally called by the
respondents. If Meissner’s evidence is correct, Lorkin could have confirmed it in
significant respects. He could have produced records which, to a large measure, would
have confirmed that evidence. The fact that he did not do so enables me to draw the
conclusions which I have drawn from the documentary material relied upon by the
applicants with more confidence. Similarly, the failure of either Meissner or Lorkin as
the directors of Coldwick to produce the records of Coldwick which Meissner said
supported his oral evidence gives me more confidence in reaching those conclusions; I
infer that, if produced, they would not assist the respondents’ case.
[125] Fettes also dealt with this transaction. He referred in detail to the various
journal entries giving rise to the applicants’ claim as ultimately formulated against
Coldwick, and to the lack of sufficient records to identify reliably how that liability was
built up. That paucity of records reflects the sort of difficulty confronting Morton, which
I have found was not his responsibility. It occurred because Meissner failed to make and
maintain sufficiently coherent and reliable records. Morton’s information was built up
with the aid of examinations conducted under the Law. In addition, I have the benefit
250 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)


of knowing that whatever monies were not the subject of external finance for the
purchase of the South Melbourne property (and for the Crows Nest property) came in
the first place from Incentive Dynamics. The issue is whether those payments were
made from monies held by Incentive Dynamics on behalf of John Robins, Meissner and
Lorkin, or whether those persons reimbursed Incentive Dynamics for those payments.
[126] The records of Incentive Dynamics demonstrate that $98,378.19 was
withdrawn from its bank at the time of settlement of the South Melbourne property, and
a payment of $8,681.25 paid on account of stamp duty and like expenses. The trial
balances show amounts owing by Coldwick of $183,873.83 at 30 June 1992, and
increasing to $239,173.08 by 30 June 1995 on the numbered account established during
the financial year in which that property was purchased. There are also some documents
which show the payment of what may have been part interest payments to a bank on
behalf of Coldwick.
[127] I find that Incentive Dynamics did largely finance Coldwick in the purchase of
the South Melbourne property. Whatever the intention of the participants at the time
may have been, I also find that it has not received from any entity the amounts which
it then paid or further amounts which it paid from time to time in relation to the
property. The fact that the amount owing on that account progressively increased
indicates to my mind that it represented an ongoing current liability to Incentive
Dynamics. It is not consistent with a once-off loan which was reimbursed either before
30 June 1992 or “reconciled” by somehow being offset by a debt of Incentive Dynamics
to another entity in the Robins group. I reject the evidence given by the respondents to
the contrary. I found it unconvincing. My conclusions are supported by the
contemporaneous memorandum of Meissner. In reaching that conclusion, I have also
had regard to the cheque butt apparently dated 28 November 1991 apparently drawn on
the Shinsay Pty Ltd account in favour of Incentive Dynamics for $17,000 with the
notation “Tony’s money to ID”. The writer of that cheque was not called to explain it
and it has not altered my conclusion.
[128] In my view, it does not follow that Coldwick holds its interest in the South
Melbourne property on constructive trust for Incentive Dynamics. The applicants relied
on Barnes v Addy (1874) LR 9 Ch App 244 and Farrow Finance Co Ltd (In Liq) v
Farrow Properties Pty Ltd (In Liq) (1997) 26 ACSR 544 in support of their claims to
such an interest. I do not think that those authorities advance the matter sufficiently in
the particular circumstances for the applicants to succeed in this aspect of their claim.
That is because I am not persuaded that either of the directors of Incentive Dynamics,
or Meissner, had any dishonest and improper intent at the time of the transaction, even
if their state of mind be attributed to Coldwick (cp per Hansen J in Farrow at 585–586).
Although the question remains to be determined whether the directors of Incentive
Dynamics are also liable for the various liabilities identified by the applicants and which
I find to exist, I do not find that in respect of the purchase of the South Melbourne
property they were consciously in breach of their duties to Incentive Dynamics, or that
their state of mind was such that, even if it were attributed to Coldwick, it would be
sufficient to render Coldwick as holding the South Melbourne property as constructive
trustee for Incentive Dynamics.
[129] Coldwick also purchased the Crows Nest property. The purchase price was
$560,000 of which $420,000 was procured from a bank. It was settled on 12 May 1995.
On 11 May 1995, Incentive Dynamics paid $119,281.95 to complete the settlement. By
30 June 1995, the trial balance shows that the amount then owing by Coldwick to
Incentive Dynamics in respect of the numbered account in which that sum was
advanced was $135,891.55, with an opening balance of $16,530 to make up the total
outstanding. How the $16,530 came to be owing is unexplained.
[130] It was suggested in evidence that Travellers Pty Ltd had paid in excess of
$100,000 towards the purchase of the Crows Nest property, by two cheques to Incentive
Dynamics of $52,000 and $80,000 drawn on 4 and 12 May 1995 respectively. Holland
gave some evidence to support the fact of such payments, but as I have found, I do not
think his level of involvement in the affairs of the Robins group was sufficient to place
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 251
any weight on his evidence as to why a particular payment of monies was made. There
is no cogent reason why Travellers Pty Ltd would make a payment into Incentive
Dynamics for the purposes of Incentive Dynamics on-lending that money to Coldwick.
Coldwick had no trading relationship with Travellers Pty Ltd so it could not have been
part of any reconciliation or balancing process. The account of Incentive Dynamics into
which the payment of $80,000 was made by Travellers was one used substantially for
a particular campaign account for Chez Nous Catering, and the matters put forward by
John Robins in his submission to explain the payment into that account were not
supported by Meissner in his evidence, although his ability to readily draw a cheque on
that particular account was said to be one of the reasons for the payment being made
in that way.
[131] Whether the payments by Travellers gave rise to a debt by Incentive Dynamics
to Travellers or not, I find that those payments were not received by Incentive Dynamics
charged with any form of trust that they be applied to Coldwick for its purchase of the
Crows Nest property. I find that Incentive Dynamics advanced the funds to Coldwick
for its purchase of the Crows Nest property. As I am not persuaded that the directors of
Incentive Dynamics and Meissner had the intention to breach their duties to Incentive
Dynamics at the time Incentive Dynamics provided funds for the purchase of the Crows
Nest property, I reject the applicants’ claim that Coldwick holds its interest in the Crows
Nest property in trust for Incentive Dynamics.
[132] In my judgment, Incentive Dynamics is entitled to recover from Coldwick the
two sums of $239,173.08 and $135,891.55, making a total of $375,064.63.
[28] The document referred to at [120] is a note in Meissner’s handwriting
reading:
Coldwick
Incentive Dynamics invested in a property with two other people. As part of the deal
monies were lent to Coldwick to fund the purchase. These funds were to be repaid either
on profit share or when building is refinanced or on point of sale of building. Coldwick
is a company external to the group and it has a mortgage over its buildings through a
solicitor’s trust account.
[29] The claims for damages against the defaulting officers were addressed later
in the judgment: at [233]–[252]. These claims were rejected, but not always
because the officers were acquitted of the alleged breaches of duty. Regarding the
personal claims against Meissner and John Robins relating to the Coldwick
advances, Mansfield J said (at [249]):
I am not satisfied on the evidence that the judgments to be entered against Coldwick
. . . will be unmet in part. I am unable to find that, even if either Meissner or Robins
were in breach of duty, Incentive Dynamics will have suffered a loss by any such
breach.
[30] This left unresolved so much of the applicants’ proprietary claims against
Coldwick as depended on the same allegations of fiduciary and statutory
breaches against those officers. The lengthy passage that I have already set out
addressed those claims.
[31] In the upshot, Mansfield J entered money judgments against the several
respondents. The only one of present relevance was the judgment that Coldwick
pay $375,064.63.
Issues in the appeal
[32] At the hearing of the appeal, the cross-appellant was represented by
Mr Whelan QC and Mr Chippindall of counsel. The cross-respondent Coldwick
was represented by Mr English, solicitor who adopted the written submission
previously filed by Coldwick’s counsel. Mr English also made brief oral
252 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)submissions supporting the reasoning of Mansfield J. In particular, Coldwick
submitted that no sufficient level of conscious impropriety had been established
to ground either recipient liability or the element of unconscionability necessary
for a proprietary remedy. The money was advanced as a loan and recovery of the
principal plus statutory interest would be sufficient to satisfy Coldwick’s duty in
the circumstances.
[33] The substantive issue in the appeal is the rejection of Incentive Dynamics’
proprietary claim to the equity in the two properties. The cross-appellants accept
that they cannot have both the personal money judgment and the proprietary
relief they seek. They did not have occasion to elect, because the proprietary
claim was rejected, and wish to press the more advantageous relief. They seek to
have the personal money judgment in their favour set aside and replaced with
more valuable declaratory and substantive relief effectively vesting the entire sale
proceeds in Incentive Dynamics.
[34] Mansfield J’s critical finding was:
[128] In my view, it does not follow that Coldwick holds its interest in the South
Melbourne property on constructive trust for Incentive Dynamics. The applicants relied
on Barnes v Addy (1874) LR 9 Ch App 244 and Farrow Finance Co Ltd (In Liq) v
Farrow Properties Pty Ltd (In Liq) (1997) 26 ACSR 544 in support of their claims to
such an interest. I do not think that those authorities advance the matter sufficiently in
the particular circumstances for the applicants to succeed in this aspect of their claim.
That is because I am not persuaded that either of the directors of Incentive Dynamics,
or Meissner, had any dishonest and improper intent at the time of the transaction, even
if their state of mind be attributed to Coldwick ([cf 20] per Hansen J in Farrow at
585–586). Although the question remains to be determined whether the directors of
Incentive Dynamics are also liable for the various liabilities identified by the applicants
and which I find to exist, I do not find that in respect of the purchase of the South
Melbourne property they were consciously in breach of their duties to Incentive
Dynamics, or that their state of mind was such that, even if it were attributed to
Coldwick, it would be sufficient to render Coldwick as holding the South Melbourne
property as constructive trustee for Incentive Dynamics.
[35] A similar finding was made in relation to the Crows Nest acquisition:
at [131].
[36] The cross-appellants submit that the primary facts as found by Mansfield J
or disclosed incontrovertibly in the evidence reveal error of law in these
conclusions. Absence of dishonest or conscious improper intent on the part of
Incentive Dynamics’ directors and Meissner was not the end of the picture.
[37] Senior counsel for the cross-appellants took the court to passages in the
cross-examination of Meissner (Black appeal book, pp 275–6, 292–3, 312, 317)
and John Robins (Black appeal book, pp 394–5). These show that Incentive
Dynamics was the “cash rich entity” in the Robins group and that large amounts
of cash were lent in a “treasury style of operation” to other companies that needed
cash for various purposes.
[38] The evidence of Meissner (the group treasurer) also established that
Coldwick had no cash of its own. It was “just a company owning assets” (Black
appeal book, p 275). The moneys (apart from those borrowed on mortgage) spent
by Coldwick in the acquisition of the two properties had been “financed by
Incentive Dynamics” (Black appeal book, p 275). Meissner described the moneys
as having been lent, although there was (he acknowledged) no loan agreement,
no security taken and no benefit to Incentive Dynamics as regards the South
Melbourne acquisition (Black appeal book, p 292).
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 253
[39] John Robins did not dispute that Coldwick got the money from Incentive
Dynamics or that there was no loan agreement or security for the moneys
advanced (Black appeal book, p 394). He endeavoured to raise the case that the
moneys which came ostensibly from Incentive Dynamics were in truth advanced
from other sources or represented the discharge of some obligation owing by
Incentive Dynamics to third persons including himself. This is the “offset” case
which the primary judge rejected.
[40] Once this prop was knocked away, the case was one in which (to the
knowledge of the common officers of both Incentive Dynamics and Coldwick)
Incentive Dynamics received no benefit from Coldwick’s acquisition of the
properties with Incentive Dynamics’ money. Nor was any benefit intended.
[41] The rejection of the “offset” defence did not establish the precise basis
upon which the moneys were provided to Coldwick. Mansfield J held that the
money for South Melbourne was lent by Incentive Dynamics as an investment:
see at [120], [127]; see also the terms of the Meissner memorandum. By
implication, a similar position applied to Crows Nest, although there is no
express finding to that effect: cf [131]. The money judgment entered against
Coldwick rested upon this loan basis.
[42] This court was informed, without objection, that the evidence did not
suggest that Coldwick had assets of any worth other than the two properties, nor
did it have any creditors other than Incentive Dynamics.
[43] Some time after judgment in the Federal Court the two properties were
sold and the third party financiers were discharged. Incentive Dynamics was paid
the judgment debt of $375,064 from the net proceeds. The balance of the sale
proceeds have been invested to abide the outcome of this appeal.
Analysis
[44] The proprietary claim was based upon the concept of “knowing receipt”
stemming from the first limb of the so-called rule in Barnes v Addy (1874) LR
9 Ch App 244 at 251–2. Lord Selborne LC said that:
. . . strangers are not to be made constructive trustees merely because they act as the
agents of trustees in transactions within their legal powers, transactions, perhaps of
which a Court of Equity may disapprove, unless those agents receive and become
chargeable with some part of the trust property, or unless they assist with knowledge in
a dishonest and fraudulent design on the part of the trustees.
[45] The recipient cause of action may generate a personal obligation to make
restitution with interest of moneys received. In a proper case the unjustified
receipt can also be made the springboard for a proprietary claim such as a
(remedial constructive) charge or trust (as to the distinction, see Bathurst City
Council v PWC Properties Pty Ltd (1998) 195 CLR 566 at 585; 157 ALR 414 at
426).
[46] As indicated, the pleadings averred that the purchase money was paid in
circumstances conferring no benefit upon Incentive Dynamics and in breach of
various duties owed by Douglas and John Robins and Meissner.
[47] The statutory duties invoked are not confined to those precluding
conscious impropriety. These included s 232(6) of the Corporations Law which
forbade officers from making improper use of their position to gain an advantage
for themselves or others or to cause detriment to the body corporate.
[48] The appellants submit that the primary findings established that no interest
of Incentive Dynamics was advanced or intended to be advanced by the
254 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)Coldwick payments. There was therefore a clear breach of this statutory duty
(and its analogue in the general law) by the officers in control of Incentive
Dynamics given that they and their associate (Lorkin) were the shareholders of
Coldwick when the properties were acquired with Incentive Dynamics’ money.
[49] The appellants further submit that at the time of receipt Coldwick had
actual knowledge of the facts giving rise to the breach of duty, through its own
officers, John Robins and Meissner.
[50] It is also submitted that it would be unconscionable for Coldwick (and its
shareholders) to retain any benefit from the improper receipts. Accordingly, a
constructive trust should be imposed, rather than merely allowing personal
recovery of the moneys advanced.
[51] I accept these submissions, which are sufficient to uphold the cross-appeal.
[52] I shall, however, state my own reasons for upholding the appeal.
[53] It is unnecessary to consider the exact scope of the non-statutory fiduciary
duty that probably corresponds with s 232(6).
[54] The duty imposed by s 232(6) of the Corporations Law was clearly
breached by Incentive Dynamics’ controlling officers, Douglas and John Robins
and Meissner. Contrary to the finding of the primary judge, dishonesty or
“improper intent” (in a conscious sense) is not a necessary component of that
duty.
[55] Mansfield J’s reasons at [128] and [131] do not address s 232(6) in terms,
but they must be taken to have done so in their global rejection of the pleaded
proprietary claim. His Honour’s implicit requirement of proof of “dishonest and
improper intent” by officers “consciously in breach of their duties to Incentive
Dynamics” or an “intention to breach their duties” puts an unnecessary and false
gloss on s 232(6). In R v Byrnes (1995) 183 CLR 501; 130 ALR 529; 17 ACSR
551 the High Court was dealing with s 229(4) of the Companies (South Australia)
Code, which is in identical terms to s 232(6). Brennan, Deane, Toohey and
Gaudron JJ said (at CLR 514–5, citations omitted) that Chew v R
(1992) 173 CLR 626; 107 ALR 171; 7 ACSR 481 has (at CLR 514–15; ALR 538;
ACSR 560–1):
. . . rightly been taken to approve an objective test of impropriety. Impropriety does not
depend on an alleged offender’s consciousness of impropriety. Impropriety consists in
a breach of the standards of conduct that would be expected of a person in the position
of the alleged offender by reasonable persons with knowledge of the duties, powers and
authority of the position and the circumstances of the case. When impropriety is said to
consist in an abuse of power, the state of mind of the alleged offender is important: the
alleged offender’s knowledge or means of knowledge of the circumstances in which the
power is exercised and his purpose or intention in exercising the power are important
factors in determining the question whether power has been abused. But impropriety is
not restricted to abuse of power. It may consists in the doing of an act which a director
or officer knows or ought to know that he has no authority to do.
See also per McHugh J at 521–2. See also Duke Group Ltd (in liq) v Pilmer
(1998) 27 ACSR 1 at 300–5.
[56] The incontrovertible facts establish that, unless Coldwick’s assets were
intended to be held on trust for Incentive Dynamics from the outset (in which
case caedit quaestio), the payments for that company represented an improper use
of its officers’ positions to gain advantage for themselves as major shareholders
of Coldwick and for others (Coldwick itself and its other shareholder Lorkin). No
benefit accrued to Incentive Dynamics, while the officers (through their
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 255
shareholdings in Coldwick) reaped the benefit of having to spend nothing to
obtain enjoyment of the equity in two valuable assets.
[57] The principles relating to the “knowing receipt” of trust property limb of
the rule in Barnes v Addy are in considerable flux: see generally Lord Nicholls,
“Knowing Receipt: The Need for a New Landmark” in WR Cornish et al (eds),
Restitution: Past, Present and Future, Hart Publishing, Oxford, 1998;
Koorootang Nominees Pty Ltd v Australian and New Zealand Banking Group Ltd
[1998] 3 VR 16 at 78–105. Uncertainties surround the conceptual basis of the
claim, its relationship with the “second limb” in Barnes v Addy, its concept of
“trust property” that includes property that was not necessarily held in trust at the
time of misappropriation or misdirection, and the “knowledge” element
appropriate to trigger a personal or proprietary remedy against the recipient. The
problems are especially vexing in England which, unlike Australia, has not
embraced the notion of a remedial constructive trust: see Westdeutsche
Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at
714; [1996] 2 All ER 961 at 996; contrast Baumgartner v Baumgartner
(1987) 164 CLR 137; 76 ALR 75; Bryson v Bryant (1992) 29 NSWLR 188.
[58] This appeal is not the proper vehicle to plunge into these murky waters.
For one thing, the knowledge element touching the recipient is clearly established
in the present case. If Coldwick had been intended by Incentive Dynamics’
officers to be the corporate vehicle for holding Incentive Dynamics’ investments
in the two properties there would have been an express trust: caedit quaestio.
Since ex hypothesi it was not (according to Coldwick and its officers at least), and
since those very officers have failed in their attempt to suggest a basis for an
honest receipt of Incentive Dynamics’ moneys (ie the “offset” defence) it follows
that, in the circumstances established by the evidence, the transactions were from
start to finish an improper diversion of Incentive Dynamics’ moneys in favour of
a body which, through its directors was complicit in and privy to the impropriety.
[59] As officers of Coldwick, John Robins and Meissner had actual knowledge
of the circumstances in which the moneys were paid which satisfied the
“knowing” element of the cause of action, at whatever level it is required in the
uncertain jurisprudence: see Linter Group Ltd (in liq) v Goldberg (1992) 7 ACSR
580 at 623–4; Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd
(in liq) (1997) 26 ACSR 544 at 587–8.
[60] It is well established that the first limb of the rule in Barnes v Addy extends
to property protected by fiduciary or statutory fiduciary obligations such as are
presently involved. The process whereby an obligation to make restitution is
imposed upon a third party who (with requisite knowledge) receives money
belonging to a company that was misapplied by its officers in breach of their
fiduciary or equivalent statutory duty is explained by the English Court of Appeal
in Belmont Finance Corp v Williams Furniture Ltd (No 2) [1980] 1 All ER 393.
In that case, directors participated in a transaction involving the plaintiff
company giving financial assistance for the purpose of purchasing its own shares.
It is pertinent to observe that such breach did not involve the element of
dishonesty or conscious impropriety found vital by the primary judge.
[61] Buckley LJ said (at 405, citations omitted):
I now come to the constructive trust point. If a stranger to a trust (a) receives and
become chargeable with some part of the trust fund or (b) assists the trustees of a trust
256 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)with knowledge of the facts in a dishonest design on the part of the trustees to misapply
some part of a trust fund, he is liable as a constructive trustee (Barnes v Addy per
Lord Selborne LC).
A limited company is of course not a trustee of its own fund: it is their beneficial
owner; but in consequence of the fiduciary character of their duties the directors of a
limited company are treated as if they were trustees of those funds of the company
which are in their hands or under their control, and if they misapply them they commit
a breach of trust (Re Lands Allotment Co, per Lindley and Kay LJJ). So, if the directors
of a company in breach of their fiduciary duties misapply the funds of their company
so that they come into the hands of some stranger to the trust who receives them with
knowledge (actual or constructive) of the breach, he cannot conscientiously retain those
funds against the company unless he has some better equity. He becomes a constructive
trustee for the company of the misapplied funds. This is stated very clearly by
Jessel MR in Russell v Wakefield Waterworks Co, where he said:
“In this Court the money of the company is a trust fund, because it is
applicable only to the special purposes of the company in the hands of the agents
of the company, and it is in that sense a trust fund applicable by them to those
special purposes; and a person taking it from them with notice that it is being
applied to other purposes cannot in this Court say that he is not a constructive
trustee.”
In the present case, the payment of the £500,000 by Belmont to Mr Grosscurth, being
an unlawful contravention of s 54, was a misapplication of Belmont’s money and was
in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so
misapplied found their way into the hands of City with City’s knowledge of the whole
circumstances of the transaction. It must follow, in my opinion, that City is accountable
to Belmont as constructive trustee of the £489,000 under the first of Lord Selborne LC’s
two heads.
[62] Goff LJ agreed, adding (at 406–7) that:
However, the constructive trustee claim was formulated, both in the finally amended
statement of claim and in argument before us, in the two alternative ways stated by
Lord Selborne LC in Barnes v Addy, namely, receiving trust funds in such a way as to
become accountable for them and knowing participation in a dishonest and fraudulent
design on the part of the trustees. The second of those ways does depend on fraud or
dishonesty, but the first does not . . .
[63] Waller LJ agreed with each judgment on the constructive trust issue.
[64] These passages show how the Barnes v Addy principle can be applied to
money which is not trust money in the strict sense at the time of its
misapplication by directors acting in breach of their duties.
[65] Belmont also demonstrates that the (remedial) constructive trust capable of
being imposed by the court as the springboard for a personal or proprietary
remedy is not precluded merely because the recipient took the money under a
transaction having a particular form such as a gift, loan or purchase. If the
gift/loan/purchase transaction was itself part of a breach of appropriate fiduciary
or statutory duty on the part of the officers its mere form cannot stay the hand of
equity: see also Paul A Davies (Aust) Pty Ltd (in liq) v Davies (1982) 1 ACLC
66 at 69; Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246
at 298, 306–7; [1985] 3 All ER 52 at 88, 93–4; Ninety Five Pty Ltd (in liq) v
Banque Nationale de Paris [1988] WAR 132 at 173–6; Linter Group Ltd (in liq)
v Goldberg (1992) 7 ACSR 580 at 619, 623.
[66] Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd (in liq)
(1997) 26 ACSR 544 illustrates these propositions in relation to a loan
transaction. The plaintiff (FFC) applied $2.803m as a loan to a related company
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 257
(FP). The loan was in connection with the acquisition of a property at Queens Rd,
Melbourne by FP. FP was used as the vehicle in the group to undertake “one off”
property developments. The loan was made in circumstances involving breach of
the fiduciary duty of FFC’s directors to act in the best interests of FFC. The
breach was found on the test not only that the directors failed to consider the best
interests of FFC but also that an intelligent and honest director in their position
would have concluded, in the face of all the relevant facts and circumstances, that
the loan was not in the best interests of FFC: see at 580–5, where Hansen J
applied this test, while noting the reservation in this court’s decision in
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50;
11 ACSR 642. (This, in effect is the state of mind required in the passage from
Byrnes set out above.) The recipient corporation (FP), through its directors
common to the directors of FFC, had the requisite knowledge of the breach
sufficient to trigger liability under the recipient limb of Barnes v Addy.
[67] The fact that the breach of fiduciary duty resulted in a loan from FFC to
FP did not preclude FFC from ignoring the form and terms of the loan transaction
once it established FP’s recipient liability.
[68] A personal liability to make restitution of the moneys received would have
been of little benefit to FFC because FP was in insolvent liquidation and a third
party, Pyramid Building Society (PBS) held a first mortgage over the Queen’s Rd
property. FFC was, however, permitted to trace what were its moneys (through
the Barnes v Addy constructive trust) and use this as a springboard for a
proprietary remedy. Hansen J held (at 589) that:
FFC can trace . . . into the Queens Road property because that property was the direct
substitution of the money improperly transferred from FFC to FP (together with the
money lent by PBS to FP). From there, the plaintiff can trace into the proceeds of the
sale of that property — again, a direct substitute of the asset.
[69] In Farrow, PBS had knowledge of the breach of fiduciary duty, which
meant that its mortgage could not give it priority over the equitable interest in the
full proceeds of sale claimed by FFC through the combined operation of a Barnes
v Addy constructive trust and the process of tracing. (This added factor is not an
issue in the present case because the appellant only seeks the net proceeds of sale
of the two properties after discharge of the external mortgages.)
[70] Thus analysed, Farrow Finance is on all fours with the present case. The
plaintiff there claimed several remedies in the alternative, including personal
remedies against FFC limited to $2.803m, but it was entitled to elect in favour of
the more generous proprietary remedy based upon constructive trust: see at 565,
589–90.
[71] The imposition of a remedial constructive trust is discretionary.
[72] A loan contract entered into by a corporation in circumstances involving
statutory contravention may be void for illegality or merely voidable at the option
of the corporation. In Hancock Family Memorial Foundation Ltd v Porteous
(2000) 22 WAR 198, the Full Court of the Supreme Court of Western Australia
said (at 217–19) that Belmont and Rolled Steel Products were properly to be seen
as involving contracts void for illegality. The voidness meant that the court
imposing the Barnes v Addy constructive trust was not concerned to consider the
rights of third parties such as creditors.
[73] However, rescission is essential for cases (like the present one) where the
loan transaction is at best voidable for breach of fiduciary duty or an analogous
statutory duty: Greater Pacific Investments Pty Ltd (in liq) v Australian National
258 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)Industries Ltd (1996) 39 NSWLR 143; Halifax Building Society v Thomas
[1996] Ch 217 at 228; [1995] 4 All ER 673 at 681; Hancock Family Memorial
Foundation Ltd v Porteous (2000) 22 WAR 198 at 210ff. Affirmation, delay,
intervention of third party rights and inability to give counter-restitution may
cause any right to rescission to be lost.
[74] In some situations, an order for rescission will be at least a practical
necessity (Greater Pacific at 153). If such an order is sought independently or as
a step towards a remedial constructive trust based upon the process of tracing the
“trust” money into the hands of the recipient or into the property acquired by the
recipient with that money, the remedy is discretionary. In general, the court will
need to be satisfied that a remedial constructive trust (or charge if that suffices)
is necessary to protect the legitimate rights of the plaintiff and does no injustice
to the rights of third parties, such as creditors: see Daly v Sydney Stock
Exchange Ltd (1986) 160 CLR 371; 65 ALR 193; Australian Securities
Commission v Melbourne Asset Management Nominees Pty Ltd (rec and mgr
apptd) (1994) 49 FCR 334 at 358–9; 121 ALR 626 at 649; Giumelli v Giumelli
(1999) 196 CLR 101 at 113–14.
[75] A full proprietary remedy is not always necessary or appropriate and it is
not automatic. Sometimes the interests of innocent third parties such as creditors
will mean that the plaintiff will be confined to a personal remedy or the narrower
remedial constructive charge. But a remedial constructive trust will generally be
appropriate where profit can be traced into identifiable property in the hands of
the defaulting beneficiary or the agent of the defaulting beneficiary: see generally
R P Meagher, J D Heydon and M Leeming, Equity: Doctrines and Remedies,
4th ed, Butterworths, Sydney, 2002, at [5-250].
[76] A remedial constructive trust is entirely appropriate in the present case in
light of the absence of third parties such as creditors having a legitimate claim on
the assets of Coldwick. If it were relevant to consider the interests of shareholders
of Coldwick, which I doubt, I observe that they are John Robins (at to 75%) and
Meissner and Lorkin as to the balance. Their interests as shareholders are part of
the very problem to be addressed in the remedy designed to stop unconscionable
conduct that would result in unjust enrichment.
[77] The remedial constructive trust is not the medium for indulgence of
idiosyncratic notions of fairness and justice: Muschinski v Dodds
(1985) 160 CLR 583 at 615; 62 ALR 429 at 452 per Deane J. But here equity
would be abrogating its role of vindicating and protecting fiduciary relationships
and deterring improper profit-making conduct if it looked just at the capital sums
advanced under the “loans”. If only the loans were repaid, the defaulting officers
would be unjustly enriched in consequence of their own wrongdoing. They
would reap the fruits of their wrongdoing by taking the equity in the properties
acquired by the corporate shell Coldwick.
[78] This is not a case like Hancock where a remedial constructive trust was
inapt inter alia because loans made in breach of fiduciary duty by the controllers
of the plaintiff had already been enforced and discharged before the plaintiff
sought equitable relief touching the properties acquired with the loan proceeds.
In the present case, the alternative proprietary claim was raised in the pleadings.
Incentive Dynamics at all times acted on the basis that it was seeking to repudiate
the formal transactions (whatever they truly were) that both effectuated and
disguised the fiduciary and statutory breaches.
[79] I propose the following orders:
45 ACSR 244 ROBINS v INCENTIVE DYNAMICS (Mason P) 259
(1) Appeal allowed.
(2) Set aside order 3(d) made in the Equity Division of the Supreme Court
of New South Wales on 2 March 2000.
(3) In lieu thereof:
(a) declare that Coldwick Pty Ltd held its interest in the properties at
South Melbourne and Crows Nest on trust for Incentive Dynamics
Pty Ltd;
(b) order that the whole of the proceeds of sale of the several
properties (including accrued interest) other than what has already
been accounted for pursuant to the said order 3(d) be paid to the
second cross-appellant on behalf of the first cross-appellant.
(4) Cross-respondent to pay cross-appellants’ costs.
(5) Liberty to apply.
[80] Stein JA. I agree with Mason P.
[81] Giles JA. I have had the advantage of reading the reasons of Mason P in
draft. Subject to what follows, I respectfully agree with them.
[82] The president has referred to the need for rescission: [73]–[74]. If there
were loans, cases such as Daly v Sydney Stock Exchange Ltd (1986) 160 CLR
371 at 386–90; 65 ALR 193 at 203–5 and Greater Pacific Investments Pty Ltd
(in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 at 153
require rescission. Equity could simply impose a constructive trust over funds
acquired under a contract of loan which was a transaction in breach of fiduciary
duty. That is not done. Requiring rescission is a way of ensuring that account is
taken of the rights of third parties before equity grants a proprietary remedy, and
of guarding against recovery under the contract of loan as well as having the
proprietary remedy.
[83] Incentive Dynamics did not claim relief by way of rescission of what for
the personal claim it is alleged were loans by it to Coldwick. However, for the
proprietary claim it alleged not that money was lent to Coldwick, but that money
was provided to Coldwick. The claims were plainly in the alternative. Incentive
Dynamics’ position was that the money was provided to Coldwick and the
properties purchased with the money were held for it, but that if that were not so
it could recover the money as money lent. On its case for the proprietary claim,
there was no question of rescission. It was as if the money had been stolen by
Coldwick.
[84] Mansfield J’s upholding of the personal claim was in default of upholding
the proprietary claim. It was not founded on any overt loan transaction, but was
a characterisation of the provision of the money effectively for want of better
legal character. In those circumstances, I do not think that the requirement of
rescission stands in the way of the proprietary relief. Because the constructive
trust remedy is discretionary it is still necessary to consider any rights of third
parties, but on the facts of this case third party rights did not intervene. Incentive
Dynamics will be held to its preferred position that the money was provided
rather than lent, so there cannot be double recovery.
[85] I agree with the orders proposed by the president.
DAVID PRICE
SOLICITOR
260 AUSTRALIAN CORPORATIONS AND SECURITIES REPORTS CA(NSW)