Sixty Fourth Throne Pty Ltd v Macquarie Bank Ltd M101/1997 [1998] HCATrans 170 (19 May 1998)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M101 of 1997

B e t w e e n -

SIXTY FOURTH THRONE PTY LTD

Applicant

and

MACQUARIE BANK LIMITED

Respondent

Application for special leave to appeal

GAUDRON J

CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON TUESDAY, 19 MAY 1998, AT 11.02 AM

Copyright in the High Court of Australia

MR C.L. PANNAM, QC: If the Court pleases, I appear with my learned friend, MS J.A. DODDS STREETON, on behalf of the applicant. (instructed by Jerrard & Stuk)

MR A.C. ARCHIBALD, QC: If it please the Court, I appear with my learned friend, MR G.S. CLARKE, for the respondent, the Bank. (instructed by Deacons Graham & James)

GAUDRON J: Yes, Mr Pannam.

MR PANNAM: If the Court pleases. Your Honours, can we first identify the nub of the decision below that was against our client? Stated briefly, the point that was determined against us was this, that where a financier obtains registration of a forged third party mortgage over Transfer of Land Act land - - -

GAUDRON J: Can I just stop you there? There was another application at one stage by the Registrar of Titles.

MR PANNAM: That has been abandoned, your Honour.

GAUDRON J: That has been abandoned. Was the Registrar a party to the proceedings as between Sixty Fourth Throne and Macquarie Bank?

MR PANNAM: At the trial; played no part on the appeal but was heard as to the form of orders, because some orders have affected the Registrar's interest.

GAUDRON J: Yes, and there is no need for the Registrar to be here, is there?

MR PANNAM: No.

GAUDRON J: No, thank you.

MR PANNAM: Can I identify the point again upon which we failed?

GAUDRON J: Yes.

MR PANNAM: It was this. That where a financier obtains registration of a forged third party mortgage over Transfer of Land Act land, which forms part of the assets of a trust, as security for a loan, then that is not a receipt of trust property by the financier for the purposes of the "knowing receipt" limb of the doctrine of Barnes v Addy. The heart of the court's reasoning appears at pages 211 to 212 of the application book, where in Justice Tadgell's judgment with whom the learned President agreed, the nub of the point is really identified. Your Honours, it begins at line 15 and goes over to line 212 and, without reading it all, one can go to the conclusion at lines 25 on page 212, or line 20 on:

In truth, I think it is not possible, consistently with the received principle of indefeasibility as it has been understood since Frazer v Walker and Breskvar v Wall, to treat the holder of a registered mortgage over property that is subject to a trust, registration having been honestly obtained, as having received trust property. The argument that the appellant is liable as a constructive trustee because it had "knowingly received" trust property should.....fail.

So the highly technical point was that where the forged instrument is given effect to by registration, in those circumstances, because it was registration that created the title in the financier, that, therefore, the financier did not receive trust property.

GAUDRON J: Does not that rather direct attention to the real principle in Barnes v Addy, where you are fixed with breach of trust because of knowledge that there is a breach of trust, is it not?

MR PANNAM: Well, that is if - there must be knowing receipt of trust. First of all, you have to have received trust property and then there is a question, what knowledge did you have at the point of receipt? What the Court did was never get to the second question about the state of knowledge, they eschewed that and said, "No, there is no receipt of trust property". That is a kind of curious result when you think that when the mortgage comes to be exercised, the trust property disappears into the hands of the financier. In our respectful submission, as a matter of principle, that cannot be supported. The mere fact that title to the mortgage was obtained by registration is nothing to the point. The question is, what was the power over the trust assets that were created by the fact of the registration?

GAUDRON J: What is the content of "knowing"?

MR PANNAM: Well, that is the second question that the court did not deal with and that is part of our complaint.

GAUDRON J: I am not too sure that they are not rolled up in one.

MR PANNAM: In our respectful submission, they are two quite separate. First of all, you have to have a receipt of trust property, then the question is, "What knowledge surrounded your acquisition of that trust property?" Now, what the court did was not deal with, at all, the question of the state of knowledge but simply asserted, without very much reasoning, that there was no acquisition of the trust property, because that was achieved by the fact of registration. Now, that same argument or a similar argument was put and rejected in the Supreme Court of Queensland in Doneley's Case, and it has recently been rejected in the Supreme Court of Canada by a majority of four to three in a case to which we have referred.

GAUDRON J: Has it been rejected in circumstances in which it is, nonetheless, said that the financier acted honestly?

MR PANNAM: The question in the Canadian case was, "What was the state of knowledge of the financier", and they went on to deal with that, but the first point that was addressed there was, "Had there been a receipt of trust property?" The argument was, no, there had not, because the grant of a mortgage does not put into the hands of the recipient any trust property, and that was the argument that was rejected by a majority of four to three. We would say that if, in a circumstance like this, that you simply seize upon the fact of registration as saying, "Well, before then there was no title in the financier, because it was a forged instrument, it is the fact of registration that alone gives title to the financier, but because of that", for some unexplained reason that this passage at pages 211 to 212, "there is no receipt of trust property".

In our respectful submission, that is flawed, because if you can say one thing with confidence in the present case is, the third party security obligation was triggered, the whole case was about who was entitled to the property or the proceeds of its sale and when the property is realised by sale, or taken into the possession of the financier, it will be lost to the trust and it was lost to the trust by reason of the forged mortgage. In those circumstances, we would say there has been clearly a receipt. The critical question not addressed by the court was, "Well, with what state of knowledge was it received?".

GAUDRON J: Yes, now, is that not really your problem? You have to deal with whether there is any prospect of success in the face of a finding, and it was by the majority I think, that registration was honestly obtained.

MR PANNAM: Yes, and we would say that that is not conclusive because there are a legion of authorities in this Court that hold that the in personam equities still operate as between the person achieving - - -

GAUDRON J: Yes, but what is the in personam equity when the registration has been honestly obtained?

MR PANNAM: Well, there are two. The absence of fraud is not to the point. The question here was, we would want to argue that the circumstances surrounding the receipt of the mortgage was such to put on notice the financier that there had been irregularities in relation to the execution of the mortgage.

GAUDRON J: We understand that, but what does that equity give rise - what is that equity you assert?

MR PANNAM: Well, that equity would create the foundation for a constructive trust and the claim was - - -

GAUDRON J: Well, you need a bit more than the foundation. You come again to the knowledge, knowing receipt. Now, what is the knowing receipt?

MR PANNAM: The knowing receipt, we would say, is the state of knowledge that is sufficient for these purposes, and it is a point much debated in the English and New Zealand authorities, although not so much in Australia, is that a reasonable and honest person in the position of the financier in this case, had sufficient information available to cause concern as to the validity of the execution of the mortgage. And that, in our respectful submission, is the appropriate test.

GAUDRON J: For what?

MR PANNAM: For the attaching of a constructive trust under the receipt limb of Barnes v Addy.

GAUDRON J: No, it must be for a finding, must it not, of knowledge of breach of trust?

MR PANNAM: Yes, because it was a mortgage given by - - -

GAUDRON J: That does not seem to have been the way on which the case has been conducted.

MR PANNAM: Well, with the greatest of respect, your Honour, it was. It was the very argument that was put in the Court of Appeal. There were two limbs. It was said, there was a receipt rejected by the majority. If there was a receipt then there were two points. The first point was a knowing receipt, for the purposes of imposing a constructive trust under that limb of Barnes v Addy. Secondly, by reference not to trust principles but to surety principles, that under the doctrine of Barclays Bank v O'Brien in the House of Lords, here you had a person taking a security from a third party surety in circumstances where the facts indicated there was constructive notice of the irregularity in the grant of the security.

GAUDRON J: You would want this Court then to make new findings of fact?

MR PANNAM: No, we are content with the findings of fact that were made below.

GAUDRON J: The best you have though, is it not, is that there were some irregularities?

MR PANNAM: Well, there were a good many - - -

GAUDRON J: Not a finding of dishonesty, not a finding of knowledge of breach of trust?

MR PANNAM: But there were findings, both by the primary judge and by Justice Ashley in dissent, of wholesale irregularities connected with the transaction which we would say attracted, both for the purposes of the surety principle, constructive notice, and for the purposes of the Barnes v Addy point, the requisite degree of knowledge. Now, your Honours, so far as knowledge is concerned, this Court has never dealt with the question of what knowledge is required for the purposes of the receipt limb of Barnes v Addy. In Consul Developments it dealt with the other companion limb which is inducing or being an accessory to a breach of trust, but that case does not touch the present case of knowing receipt.

In the context of the knowing receipt cases, there has been an argument that is summarised in the rather lengthy extract from Justice Hansen's judgment in Koorootang, that we supplied the Court copies of, which details all of the English and New Zealand authorities, where a debate has raged now over the last ten or twenty years as to what the state of knowledge that is required should be. Is it simply dishonesty, in the objective sense, or is it a test that would have, would a reasonable and honest man in the circumstances of the recipient be put on inquiry that there was irregularity associated with the grant of the security?

Now, the grant of special leave in this case, would enable the Court to do the following things, in our respectful submission. First of all, to correct what, in our submission, is an error, namely, this proposition that a forged third party mortgage security in respect of TLA land, that is handed to a financier, does not constitute a receipt by the financier of trust property. In our respectful submission, that is incorrect. But, secondly, and more importantly perhaps, it would give the Court the opportunity to look at the recent debate in the authorities about the state of knowledge that is required for the purposes of the "knowing receipt" limb of Barnes v Addy and resolve, for this country, that debate.

Thirdly, it would also give the Court an opportunity of identifying the principles underpinning the principles that were stated by the House of Lords in Barclays Bank v O'Brien. We would say that the basis upon which the O'Brien suretyship analysis was put to one side by Justice Tadgell for majority in the Court of Appeal, is incorrect, and for that matter, Justice Ashley, in dissent, also agreed with this point. It was said that those suretyship principles only apply to resolve two competing rights. In the present case, there was no competing rights because, up until the point of registration, the financier had nothing and it was only at the point of registration that its right arose - there was no competing right - therefore, the principle did not apply.

In our respectful submission, that is a very cramped analysis of the principles underpinning Barclays Bank v O'Brien. Our submission is that there is no difference between - - -

GAUDRON J: Barclays Bank v O'Brien was a somewhat different situation from this.

MR PANNAM: In our respectful submission, the proper principle is, if one goes to the Barclays Bank principle, can I take the Court to page 236 where - and the Court will recall that was, of course, a case between husband and wife, but it is a more general principle. Can I take the Court to the extract from the judgment of Justice J.D Phillips in Fava's Case, where the principle is identified at line 7:

In my view, the decision of the House of Lords in Barclays Bank should be taken now as establishing that, at least in the case of a guarantee, where the transaction has been brought about through the wrongdoing of the principal debtor when securing the surety's signature to the guarantee, the surety will be entitled to have the transaction set aside as against the creditor, only if the principal debtor was, when obtaining the surety's signature, the agent of the creditor in a relevant sense, or if the creditor had either actual -

and we stress -

or constructive notice of the debtor's wrongdoing.

GAUDRON J: Again, you have got - even assume that being the case, where is your finding of constructive knowledge? It is not there, in this case.

CALLINAN J: Mr Pannam, it seems to me it becomes as strong as it gets at page 229, where Justice Ashley deals with it. It seems to fall far short, I would have thought, of constructive notice. His Honour begins to narrate the facts that he thought should, perhaps, have put the Bank on inquiry, but does it go any higher than that?

MR PANNAM: No, from page - perhaps starting on 228, where his Honour identifies the principle that he is going to attach to the facts, at line 11:

If it is right to say, having regard to circumstances to which I earlier referred, that the concept of constructive notice should here be given a broad application, so as to extend to cases in which a reasonable, honest man would have had knowledge of circumstances telling of the wrongful disposition of trust property - - -

CALLINAN J: I have read that, but the language changes, does it not, at page 230 about line 36:

I find it impossible to believe that, upon the material to which I have so far referred, a reasonable corporate citizen in Macquarie's place could be said not to have had knowledge of circumstances strongly suggesting that a possible misuse of trust funds was in train; and would not have taken even basic steps to elucidate the position.

That seems to be the high watermark of his Honour's findings in dissent.

MR PANNAM: Can we take the Court to page 233 at line 35 and his conclusion, after looking at all of the facts:

The circumstances to which I have adverted reveal a disgraceful tale of mismanagement.....which appears to have elevated form over substance when it thought that it had an attractive customer in its sights; and which, by its officers and agent, did not heed the clearest possible indications that it might very well be that trust property was being dealt with to the detriment of the trust. Macquarie ought be held accountable because its officers and solicitor agent were in possession at relevant times of information such as would tell a reasonable and honest person in their respective positions of the wrongful disposition by Kandy of trust property. Moreover, if it be relevant, Macquarie by its officers and solicitor agent was at relevant times in possession of information which at the very least must have put such a reasonable and honest person on enquiry - an enquiry which must have revealed Kandy's fraud.

Of course, this was all about the Bank's actual knowledge that Kandy was not a director of the company. So that we would say that the facts, when they are brought together as they were by his Honour in his dissenting judgment, lead to that conclusion. If that be correct, then the point that was not addressed by the majority is a point upon which we have reasonable prospects of success on appeal.

So that to bring the points together, the three of them are, first of all, the point which was really the point against us was wrong, in our respectful submission, namely, that there was no receipt of trust property. There clearly was, as Doneley's analysis and the Supreme Court of Canada's analysis shows. Secondly, the facts were such as to raise clearly the question as to what state of knowledge was required before Barnes v Addy liability would attach, and as the dissenting judgment's analysis shows and, indeed, the primary judge's analysis shows, there is sufficient there for our purposes to argue that if the test is that which was stated by Justice Ashley, the facts are attracted by it. Thirdly, there is the other question of suretyship law that there was, in this case at least we would say, constructive notice of the irregularity, the forged instrument, of such a kind to put the financier on notice. We would say those two bases form foundations for the in personam exceptions to the indefeasibility of title point. If the Court pleases.

GAUDRON J: Thank you. We need not trouble you, Mr Archibald

This case depends upon factual findings which might be differently evaluated by different minds. It is thus not a suitable vehicle for the elucidation of the point of principle which the applicant says arises in this case.

MR PANNAM: If the Court pleases.

MR ARCHIBALD: I ask for costs, if the Court pleases.

MR PANNAM: I cannot say anything.

GAUDRON J: The application for special leave to appeal will be dismissed with costs.

AT 11.23 AM THE MATTER WAS CONCLUDED