Eumina Investments Pty Ltd v Westpac Banking Corporation S44/1998 [1998] HCATrans 363 (9 October 1998)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S44 of 1998

B e t w e e n -

EUMINA INVESTMENTS PTY LIMITED

Applicant

and

WESTPAC BANKING CORPORATION

Respondent

Application for special leave to appeal

GLEESON CJ

GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 9 OCTOBER 1998, AT 10.19 AM

Copyright in the High Court of Australia

MR J.M. IRELAND, QC: If the Court pleases, I appear with my friend, MRS J.E. STUCKEY-CLARKE, on behalf of the applicant. (instructed by Eddy & Moloney)

MS R.S. McCOLL, SC: If the Court pleases, I appear with my learned friend, MR D. PRITCHARD, for the respondent. (instructed by Henry Davis York)

MR IRELAND: Your Honours have seen that this is an application for special leave from a decision of the New South Wales Court of Appeal which affirmed a judgment at first instance of Mr Justice Rolfe. The applicant was the trustee of a family trust whose funds were utilised by the respondent Bank in 1986 and 1987 to reduce - - -

GUMMOW J: Eumina Investments, is that at present the sole trustee?

MR IRELAND: Yes. The money was used by the Bank at a time when there were two trustees, Mr C.D. Renshaw, who later died, and Eumina, which continues as the surviving trustee of the settlement. The sums involved were $400,000 and $300,000 which were received respectively by the Bank in December 1986 and January 1987. The point made in the litigation against the Bank was that it had utilised the moneys constituted by those trust investments which it held accountable to the trust involving a breach of trust and to the knowledge of the Bank, bringing it within the first limb of the principle of Barnes v Addy.

GLEESON CJ: Is this the $700,000 you are referring to?

MR IRELAND: Yes, it has two constituents, 400,000 and 300,000.

GLEESON CJ: Yes. It is the case, is it not, Mr Ireland, that the decisions in the courts below turned largely upon the factual findings as to the circumstances surrounding the repayment of those amounts to Mrs Renshaw and her subsequent application of the moneys?

MR IRELAND: Not quite, your Honour. The determinative factual conclusion was that a meeting on 19 November 1986 between a bank manager and the individuals, who had two capacities, they were the debtors to the Bank on their own account, and they were directors - two of the directors, the only two directors of the trustees and one, Mr Renshaw, now deceased, was also a trustee. The factual conclusion was that an agreement was made answering the requirements of what the Court of Appeal stated to be the principle in Spargo's Case, having the effect of - and it would have to be a tripartite agreement.

GUMMOW J: Spargo's Case is all about whether there was a payment in cash in relation to some shares which is a requirement under the Corporations Law of the day.

MR IRELAND: Yes, to resist a liquidator's call for money.

GUMMOW J: Yes, that is right. There are plenty of cases, are there not, and Manzi v Smith 132 CLR 674 is one in this Court, which indicate that there may be, as a matter of implication or tacit understanding, what the Court would regard as an agreement which may be bipartite or tripartite.

MR IRELAND: To settle accounts.

GUMMOW J: Yes.

MR IRELAND: I accept that, your Honour.

GUMMOW J: There is no great shock about Spargo's Case, it was always in this case, I would have thought.

MR IRELAND: Well, no. It was never in it until Mr Justice Handley said two words in argument. It was not pleaded to be a ground - that is to say, a settlement of accounts was pleaded by the Bank, which held the onus, to be the answer to the factual problem as to why the trust moneys should not be treated as paid out by the trustees in beach of trust to their own advantage. It was never in the case in any live form. This is a case where it is an a fortiori case of a matter being - the case being determined upon a matter not agitated. Not only was it not agitated by the Bank at first level of decision, it was not mentioned by the Bank at the second level of decision. But, nevertheless, the Court of Appeal seizes upon this principle which it says is operative and of which this case is a classic example.

Our special leave point is: did anyone get the number of that truck? In other words - - -

GUMMOW J: Well, they might not have got the number of the truck but maybe they should have.

MR IRELAND: Yes. Our special leave point is that this matter was not agitated on any reasonable basis by the Bank at either level.

GUMMOW J: Assume you are right about that, and assume it had been agitated - - -

MR IRELAND: Yes, so what?

GUMMOW J: What would have happened?

MR IRELAND: Well, what would have happened is that his Honour factual conclusion - and I am referring to the passage in the President's judgment. The critical passage is at page 152 of the application book, about line 32:

What happened in substance and legal effect was that Mrs Renshaw as creditor made demand upon the trustees.....to repay the $700,000 as and when the then current investments matured. Those trustees.....responded to that demand.

Now, can I just - - -

GLEESON CJ: You use the word "matter" and you said "this matter was not litigated". The issue was, was it not, whether or not the $700,000 that was dealt with by the Bank in a manner that you described as involving a breach of trust or breach of fiduciary duty - - -

MR IRELAND: Or the receipt of trust moneys in breach of trust.

GLEESON CJ: Yes. The issue was whether that $700,000 was, at the relevant time, Mrs Renshaw's or the trust's.

MR IRELAND: Yes, but that involved two steps. It was uncontestably the trust's money as it stood in investment with the Bank. That was the point upon which the Court of Appeal reversed the trial judge.

GLEESON CJ: The trust owed $700,000 to Mrs Renshaw.

MR IRELAND: It did.

GLEESON CJ: Did it ever repay it?

MR IRELAND: Well, only if the decision is correct.

GLEESON CJ: That is the issue, is it not?

MR IRELAND: That is the issue.

GLEESON CJ: Because if the trust repaid the $700,000 then the consequence of that is the $700,000 was Mrs Renshaw's.

MR IRELAND: To deal with in defraying her indebtedness with her husband in the overdraft account. I accept that position. Therefore, it is eliding the question to say was it ever her money. It could only become her money again by a real decision of the trustees qua trustees to repay that loan at the time. So, it then became a matter of inference in point of fact whether that is what happened on 19 November 1986.

GLEESON CJ: Exactly, a matter of inference in point of fact.

MR IRELAND: Yes, I accept that. But that, in the context, as the Court of Appeal says, of a conclusion that an agreement was formed on that day and that that agreement satisfied the requirements of what the President called the principle in Spargo's Case. The Bank argued at trial that it became Mrs Renshaw's money again - if I can use that way of putting it - because there was a demand in respect of each amount, one made in December on the maturity of the first commercial bill and the other in January on the maturity of the IBD. That case was rejected and had to be rejected by the trial judge who said there was no evidence of a demand.

So, it had to be concluded, in the absence of any formality at all, that what happened in point of fact - and I embrace that - on 19 November 1986 constituted an agreement.

GLEESON CJ: Who committed the breach of trust in which the Bank - - -

MR IRELAND: The directors. It is really a breach of fiduciary duty which led to - - -

GLEESON CJ: Well, who committed the breach?

MR IRELAND: The directors.

GLEESON CJ: Who?

MR IRELAND: Mr and Mrs Renshaw.

GLEESON CJ: Mr and Mrs Renshaw.

MR IRELAND: Yes, because they used the family investment moneys to pay down their overdraft to the Bank.

GLEESON CJ: So, one possible way of characterising what happened is that Mrs Renshaw was in breach of her fiduciary duty, and another possible way of characterising it was that she behaved perfectly properly; that she was owned $700,000; she demanded the money back; got it back and then paid it in this way.

MR IRELAND: Yes. But the only way one can reach the second view of characterisation is by a conclusion of fact which is tied to the Court of Appeal's approach.

GLEESON CJ: For whose benefit is this litigation conducted?

MR IRELAND: For the benefit of the trust and the beneficiaries of the trust include the Renshaw family.

GLEESON CJ: Does that include Mrs Renshaw?

MR IRELAND: She is an eligible beneficiary but she is not the only beneficiary. Her children are objects of the trust as well. Can I just underline the matters why we say the conclusion in point of fact which I face up to is ex facie shaky and underpins the decision. First of all, the President said that one of the reasons why you could infer what I have called a fiction, that Mr and Mrs Renshaw are acting in two capacities in repaying the money and then utilising it legitimately in Mrs Renshaw's hands are that they are the sole shareholders of the company. That is just wrong in point of fact. It was importantly wrong because it was obviously there to strengthen the conclusion that there was nobody else to participate in the decision.

The second thing to note is that the investments which they were dealing with on this thesis of what happened were investments to which the Bank was then and there accountable.

GLEESON CJ: It would have been perfectly proper, would it not, for Mrs Renshaw formally to demand the money, to receive it and then pay it to the Bank?

MR IRELAND: That could have been done if - - -

GLEESON CJ: Well, why would you put a sinister construction on something that could have been done perfectly properly?

MR IRELAND: Because there were other calls on the trust. You see, these investments had been placed with the trust for a purpose. They had been placed to recoup losses which had been generated under a real arrangement, advised by the accountants and instigated by the trust, that it would get money without interest - - -

GUMMOW J: Well, instituted by the trustees.

MR IRELAND: Advised by the accountants to the trust and - - -

GUMMOW J: No, no, accountants can be trustees.

MR IRELAND: Yes, of course, instituted by those trustees.

GUMMOW J: The trustees being whom?

MR IRELAND: Mr Renshaw and Eumina.

GUMMOW J: And the directors of Eumina being - - -?

MR IRELAND: Mr and Mrs Renshaw.

GUMMOW J: Yes, all right.

MR IRELAND: So, there is no question but that everyone had the capacity to wear different hats. The issue is whether you should infer that that is what they were doing. The other view of it is that they never considered their position as officers of the trustee in the case of Eumina or as a trustee in the case of Mr Renshaw, and that is much more likely. But the view of the facts which the Court of Appeal took depended - and this is the essential special leave point - upon application of a principle which was never advanced at either level below as a basis for inferring an agreement, and that at all - - -

GLEESON CJ: Will you excuse me for a moment. I just wanted to mention to you, Mr Ireland and to Ms McColl, I actually forgot to do it at the commencement of these proceedings, that I hold a small parcel of shares in Westpac. If you wish to - - -

MR IRELAND: It is a common advantage, I think, among the Judges, your Honour, but not among the members of the Bar. We have never, at any stage - - -

GLEESON CJ: It is not a claim for sympathy.

MR IRELAND: We have never at any stage thought that that entered upon the matter and have never objected to that.

So that it really comes to this - can I just lists these factors which we say made the conclusion manifestly wrong. There was no suggestion at trial and no evidence that Mr and Mrs Renshaw ever considered themselves to be acting in more than one capacity. Two, the trustees accountants were not consulted concerning the termination of this loan. Three, the loan itself, the function for which it was established, was not exhausted because tax losses had not been recouped back at the point in time when this arrangement was said to be done, and that might have been a reason whereby the trustees had a duty to resist repayment of the loan until that agreement was fulfilled.

As I have said, contrary to the factual finding of the President, they were not the sole shareholders and, therefore, the inference that they acted, as it were, with all the relevant interests, was not permissible. Finally, as Mr Justice Fox said in - - -

GUMMOW J: If you were granted leave in this case, what would the ultimate order you would seek be?

MR IRELAND: That the surviving trustee, which is Eumina, recover, under the first limb of Barnes v Addy.

GUMMOW J: Not a new trial, surely?

MR IRELAND: No, the investments sums and that involves three inquiries: one, this inquiry about whether there was a breach of trust, and another inquiry, not determined below, as to requisite knowledge, because the Court of Appeal said the knowledge element in the first limb of Barnes v Addy does not need to be explored in point of fact here. So, there would be two factual examinations. But we bring the case to the Court on the footing that this has never been fairly advanced against us and never properly determined in a proceeding where the relevant arguments were agitated on both sides. That is the significant ground for special leave in this case.

GLEESON CJ: Yes, Ms McColl.

MS McCOLL: May it please the Court, we submit that this is not a case for special leave because, as the Court has already indicated to my learned friend, it is a case which turned on the particular facts. There is no miscarriage of justice because my friend was given an opportunity, if he chose to take, and debate the principles in Spargo's Case.

GUMMOW J: What do you say would be the result if, at this level, we now got into the facts anyway?

MS McCOLL: We say that the outcome would be exactly the same, and that was my final submission on introduction, your Honour, that whatever the court's decision, correctly or otherwise, applying Spargo's Case, the outcome would be exactly the same: whether or not there was a conclusion that these were trust moneys, and if one got to the stage of looking at the first limb in Barnes v Addy, it would be found that there was no way in which the respondent would be held accountable under that principle.

The case below was conducted on the basis, firstly, from the respondent's point of view, that the moneys were never trust moneys. We accept that at this stage, and for the purposes of argument, the Court of Appeal, in the case of the President, has found that that may be a matter for debate, and in the case of his Honour Mr Justice Handley, his Honour found that at the very least the moneys were a trust liability.

Nevertheless, the case was further run on the basis that in November 1986 there was an active decision on the part of Mr and Mrs Renshaw that the money should be applied for the purpose of reducing their partnership debts and that at the time that decision was made the Bank had been informed that the purpose for which the moneys were originally placed with the Bank, namely, to offset tax losses, had in fact been achieved. My friend said a moment ago that that was not the case. That appeared on a perusal of the accounts which, of course, the Bank was not privy to, to perhaps have been the case but, nevertheless, that was not information brought home to the Bank.

There was then a considerable body of evidence, we would submit, which supported the proposition that there had been a demand for repayment by Mrs Renshaw of her moneys. Firstly, there was a letter which is referred to in the judgments of both of the Court of Appeal and Mr Justice Rolfe dated 10 January 1987 calling for the repayment of the sum of $300,000. Secondly, the accounts of the trust demonstrated a repayment of that amount to Mrs Renshaw and a use of the $400,000 as a loan to the partnership, in fact. So, there was abundant circumstantial evidence, we would submit, and actual evidence upon which the court was entitled to come to the conclusion to which it did come, in fact, that the moneys were no longer trust moneys when they were applied by the Bank. That is yet another reason why we say the outcome of the case, were the Court to accept my friend's submissions about Spargo's Case, would have been exactly the same.

The court did not need to get to the principle in Spargo's Case to come to this conclusion, and it only used that case, we would submit, as an illustration of the proposition that there can be payment without actual exchange of cheques. It was just a simple illustration of the proposition that you do not need to have a circular payment of cheques to achieve payment.

So, we would submit that there is no matter of general importance. This Court would not want to look at what is set forth in my friend's application as the limits of the principle in Spargo's Case because of a factual and an inherent factual component of this case, and each of the other cases which are referred to in my friend's submissions. Each of those cases, it will be seen, turns essentially on various statutory interpretations of the meaning of "payment". That is not this case. This case is merely one which turns on an evidentiary proposition about what might constitute payment in the relevant circumstances.

So, we would submit that, on the first proposition, it is clear that the facts of this case support both the findings of the learned trial judge and the finding of the Court of Appeal, that by the time the moneys were paid to the respondent they were no longer, if they ever were, trusts moneys.

The next proposition is that, in any event, if that were an incorrect conclusion, the respondent cannot be found liable under the first principle in Barnes v Addy. Again, there were conclusions of the learned trial judge, the Court of Appeal not having found it necessary to come to this point, that there was no breach of trust essentially because his Honour held that there was no knowledge on the part of the Bank sufficient to draw to its attention the fact that there were trust moneys.

We have given the Court a reference to the relevant passages in our submissions but, in essence, his Honour Mr Justice Rolfe accepted the Bank manager as a witness of truth; accepted that he was not aware of the existence of a trust in relation to the investment, let alone its terms, let alone that there could be a breach of trust by the payment of the moneys lent to the trust and repaid by it to Mrs Renshaw and then utilised by the Bank in reduction of the partnership liabilities.

In those circumstances, your Honours, even if the first point is incorrect, we would submit that the ultimate outcome would be that there would be a finding that the first limb in Barnes v Addy was not satisfied. So, we would submit that, on that point as well, this is not a suitable vehicle for special leave, that the judgments below are not attended by any doubt, let alone any sufficient doubt, to attract a grant of special leave. If the Court pleases.

GLEESON CJ: Yes, Mr Ireland.

MR IRELAND: Just on the last point. I have accepted the position that the knowledge requirement of the first limb of Barnes v Addy was not determined by the Court of Appeal. The determination of the trial judge, which is relevant to this and in which my friend seeks to ask the Court to repose confidence is at 116 where Justice Rolfe says:

for Westpac to be guilty of any breach of trust -

I think he means participate or provide in the breach of trust -

it would have to be established that the creditor knows -

that is the Bank -

that the debtor has used trust funds to meet his obligations -

and then these words:

and that the creditor acted mala fide and with actual notice of the misapplication.

It was argued on appeal and would be maintained again that his Honour completely miscarried in applying the test. A bank is accountable where it knows trustees are using the moneys in which they stand in fiduciary obligation, as in the character of trustees, for their own account without any element of mala fides or notice of misapplication. It is a question of knowledge of the trust.

GLEESON CJ: Is it the case that as a matter of fact the purpose for which Mrs Renshaw had made this interest-free loan to the trust was exhausted?

MR IRELAND: No, it is not the case. As I have said, it is to recoup losses which it is clear that purpose had only been partially accomplished at the time of this transaction. Now, I think that is accepted by my friend in her submissions.

GLEESON CJ: Yes, thank you, Mr Ireland.

The Court is of the view that the decisions in the courts below turned largely upon findings of fact relating to the circumstances surrounding the repayment by the trust of its indebtedness to Mrs Renshaw. The Court is also of the view that the matter is not attended with sufficient prospects of achieving a different outcome to the litigation if special leave were to be granted. For those reasons special leave to appeal is refused.

What do you say about costs, Mr Ireland?

MR IRELAND: Nothing, your Honour.

GLEESON CJ: Do you ask for costs?

MS McCOLL: Yes, your Honour.

GLEESON CJ: The applicant is to pay the respondent's costs of the application.

We will adjourn for a brief time to reconstitute.

AT 10.41 AM THE MATTER WAS CONCLUDED