Efax Pty Ltd v Georges and Ors [2013] HCATrans 100 (10 May 2013)

Last Updated: 15 May 2013

[2013] HCATrans 100

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M104 of 2012

B e t w e e n -

EFAX PTY LTD ACN 001886120

Applicant

and

GEORGE GEORGES IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993

First Respondent

JOHN ROSS LINDHOLM IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993

Second Respondent

SONRAY CAPITAL MARKETS PTY LTD (IN LIQUIDATION) ACN 104 482 993

Third Respondent

SEABORN INTERNATIONAL PTY LTD (AS TRUSTEE FOR THE SEABORN FAMILY TRUST)

Fourth Respondent

MARYLAND PTY LTD ACN 150 886 427 (AS TRUSTEE FOR THE NORWEGIAN TRUST)

Fifth Respondent

ALISANTE PTY LTD ACN 067 268 802

Sixth Respondent

BON RIVER PTY LTD ACN 059 666 750

Seventh Respondent

ROLAND MARK WARD ABN 66 478 418 (AS TRUSTEE FOR THE AWARD SUPERANNUATION FUND)

Eighth Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 MAY 2013, AT 9.35 AM

Copyright in the High Court of Australia

MR N.A. COTMAN, SC: If the Court pleases, I appear with my learned friend, MR D.T. FORBES, for the applicant. (instructed by Hall and Wilcox Lawyers)

MR I.D. MARTINDALE, SC: May it please the Court, I appear with my learned friend, DR P.T. VOUT, for the first to third respondents. (instructed by Norton Rose Australia)

CRENNAN J: Thank you. Yes.

MR COTMAN: Your Honours, the judgment appealed from of the Full Court of the Federal Court of Australia found that shares acquired by my client, Efax Pty Ltd, and those of other clients of the business of Sonray, being some 700-odd acquirers of shares, were shares that ought be pooled, along with funds held by that company in statutory trusts for distribution on a prorated basis amongst the claimants on that fund, including the added back claims of the holders of shares.

The basis on which that was done was that my client had acquired shares on instructions given to its agent, Sonray. It had deposited funds with this agent, Sonray, ahead of the acquisition of those shares. The shares had been acquired, but in the reasoning of the majority of the Full Court, and in particular the judgment of Justice Jacobson, by reason of the fact that the trust fund into which moneys had been deposited by my client was deficient at the time of the deposit and deficient thereafter, there was, in effect, an equity in the contributors to that fund as a whole to call back into the fund the shares acquired by my client.

As a common law transaction which was the basis on which the matter was analysed by Justice Gordon at first instance and Justice Besanko in the minority in the Full Court, there was no doubt that my client had acquired the shares and had dealt with the question of payment for the shares by way of setoff of rights that it acquired against Sonray at the time that it paid moneys to Sonray and Sonray made the deposit into the statutory account in conformity with the Corporations Act.

CRENNAN J: But, why should the principles in relation to a mutual setoff trump, if I can be colloquial, the principles in relation to a deficient mixed fund, Mr Cotman?

MR COTMAN: Because, the principles in relation to setoff, the legal principles in relation to the personal rights of Efax as against Sonray, and therefore one has to look for, in effect, an equity that arises out of the existence of the deficient fund that can attach to or taint the legal rights and personal rights that Efax had by reason of the dealings with its agent.

CRENNAN J: Sonray could never have made the appropriation which it did make without the funds being in that mixed account.

MR COTMAN: It made no physical appropriation or abstraction of funds from the account.

CRENNAN J: It was a book entry, was it?

MR COTMAN: It was a book entry only, and the funds remained in the account so that contrary to the proposition in Justice Jacobson’s judgment that there is, in effect, an allocation of loss being occasioned by the book entries, there is no loss. What actually ends up happening is both the moneys originally deposited in the trust account and the shares acquired by Efax end up pooled in the fund with Efax being brought back in as a claimant on that fund as to one of those items only.

KIEFEL J: The source of the funds, the vendor was paid, so the source - - -

MR COTMAN: The vendor was paid by Saxo Bank, which was the correspondent actor to Sonray, and it did so under an arrangement with Sonray whereby it had a credit arrangement with Sonray.

KIEFEL J: Had a running account.

MR COTMAN: A running account.

KIEFEL J: But, even so, the funds in the running account were – the source of them must have been the account in question, must it not?

MR COTMAN: No, with respect, your Honour, because the running account was not settled as between Sonray and Saxo. So, the finding of the learned trial judge, and accepted in the Full Court, was no funds had passed between Saxo and Sonray during the whole of the period in which the relevant dealings were occurring apart, ironically, from funds going from Saxo to Sonray in respect of commission.

CRENNAN J: Saxo had a settlement though. Did not Saxo have some sort of settlement with Sonray in relation to whatever running account arrangements they had?

MR COTMAN: No, I am sorry, there has been subsequently a settlement between Saxo and Sonray in relation to disputes subsequent to the events.

CRENNAN J: In relation to the time in respect of which this transaction occurred?

MR COTMAN: There was no settlement between them, no passing of moneys occurred one way or the other, apart from the commissions in relation to the dealings that were occurring by Saxo at the instance of Sonray.

KIEFEL J: Your argument depends very much upon the fact of the book entry and what it conveys.

MR COTMAN: Our argument depends on the proposition that in circumstances where there were mutual obligations, that is to say, Sonray to us, by reason of our deposit of funds with Sonray in the first place, and then us to Sonray because of the terms of the agency agreement, having been triggered by an order for an acquisition of shares, those two rights got setoff and that is then recorded in the books by a recognition in the books of Sonray that the indebtedness to us has been reduced and instead there are shares recorded as having been acquired on our account.

KIEFEL J: Did Justice Jacobson consider that the books of account were not reliable?

MR COTMAN: Justice Jacobson apparently does, insofar as his Honour considered that Re Global Finance would not have assisted, though in the transactions with which we are concerned the books apparently are accurate insofar as they record the receipt of funds, they record the acquisition of the various parcels of shares that are made, because the books in fact were the common books of Saxo and Sonray. The Saxo accounting system was effectively also providing the Sonray books of account in relation to the client accounts that were recording these various transactions.

CRENNAN J: Because, many of the investors in the mixed fund were using the Saxo platform were they not?

MR COTMAN: They were all using the Saxo - - -

CRENNAN J: All using the Saxo platform.

MR COTMAN: So, their payment of funds to their agent also would have been recorded into this system, and it is in fact the balances on those accounts that the liquidator says is to be used as the basis for the allocation of the fund as pooled. I am, sorry, yes. I am reminded, of course, that within the client group of Sonray there were people using other platforms than the Saxo platform, I should say, my observations in relation to account-keeping related to those who were using the Saxo platform, there were also people using another platform which actually required the payment of funds by Sonray to the other broker before the broker would act on the instructions of a client of Sonray to purchase shares.

Those shares have been directed to be pooled because there actually was an abstraction of funds from the statutory account going to the other broking account in relation to each transaction, whereas in this case there is no abstraction of funds occurring in relation to the transactions concerning Efax Class. So that if the matter was analysed purely from a legal rights point of view, which is the form of analysis adopted by Justice Gordon and Justice Besanko, it is undoubtedly the case that in relation to the legal rights in the working out of the agency agreement my client is the purchaser of the shares.

KIEFEL J: Can I just be clear about that? Your argument relies upon the application of agency principles as the primary judge found?

MR COTMAN: Yes, and as Justice Besanko found insofar as it is as an aspect of the working out of the agency agreement, that is to say, the payment of money by the principal to the agent, the existence of rights between the agent and principal because of that payment, and then the coming into existence of a counter-right of the agent against the principal, and then the netting off of those rights by the agent.

CRENNAN J: Well, all judges in the Full Court accepted the agency agreement. It is just that the majority took the view that that was subject to the principles in relation to a tainted fund because moneys appropriated pursuant to, I think it was clause 9 b) of the agency agreement had to be assessed in those circumstances, that Sonray in that fund was holding moneys on behalf of the whole group of investors, not just holding money on behalf of Efax.

MR COTMAN: But, interestingly, the way in which Justice Gordon, for example, dealt with it below was that while it was described as a matter of appropriation, what her Honour says at page 93 of the book in paragraph 271 and 272, her Honour is of course using the language of setoff.

CRENNAN J: Yes.

MR COTMAN: That is to say, mutual extinguishment of rights.

CRENNAN J: Does her Honour deal with the argument put by the respondent here? That is to say that Justice Jacobson’s approach was correct, that is to say that any mutual setoff was subject to the circumstance that the moneys appropriated pursuant to that were originally deposited in a deficient mixed fund account.

MR COTMAN: I do not think that argument was as clear before her Honour as it came before the Full Court. But paragraph 276 at page 94 was the proposition, in effect, that Sonray would have acquired some title by reason of the deficient fund, and that is about as close as one gets to - - -

KEANE J: Now, if Sonray had actually taken the money out of the account and used it to buy the shares directly - - -

MR COTMAN: Then it would be indistinguishable from the international brokers aspect that her Honour Justice Gordon dealt with, and directed pooling, because moneys had been abstracted from the fund and therefore there was a loss to the fund unless the shares were brought back in.

KEANE J: But on your argument you are better off than if tracing were possible.

MR COTMAN: Quite.

KEANE J: And you are better off simply because Sonray purchased the shares on your client’s instructions.

MR COTMAN: No, your Honour, because the shares were purchased using the funds of Saxo under a credit arrangement between Saxo and Sonray, so that it would be as if we had said to our agent, will you give me my funds back, and the agent had obtained a loan from a bank and returned our funds to us, there being no abstraction of funds from the statutory trust account, and we are repaid our money because credit has been obtained from some third party source.

KEANE J: So you are better off because Sonray used its credit?

MR COTMAN: Yes, with Saxo.

KEANE J: With Saxo.

MR COTMAN: Yes. That is why we say that argument reduces to arguments about the legal position between the parties because the trust account is, in a sense, an incidental element of the transactions, not the pivotal element. As we have put in our written submission - - -

KEANE J: But is that not a rather unrealistic way of viewing it in the sense that Sonray would not have used its credit for Saxo if you had not made the deposit? That would have been an arrangement that would be quite alien to the client agreement.

MR COTMAN: The client agreement did not compel a depositor ahead of transactions, it certainly contemplated that that might happen, and it did of course happen.

KEANE J: Difficult to imagine as a matter of commerce that would have happened otherwise.

MR COTMAN: Quite. But that then simply leaves the question as to whether Sonray could have competed with the other participants in the fund to attempt to abstract from the fund the moneys that we had deposited without first making good its defalcations.

KIEFEL J: Could I take you to paragraph 64 in the Full Court’s reasons at Justice Jacobson’s reasons at special leave book page 150? His Honour accepts that the moneys actually paid into the segregated account could not be said to have been used for BHP, but the source of the payment must have come from the deposit of moneys into the statutory account or from dealings with those moneys. Do you say that is incorrect?

MR COTMAN: As a matter of facts and the tracing of the funds is done with great detail in the learned trial judge’s judgement, and indeed, it is common ground that the liquidator’s first position was it was a traceable situation, it did not become apparent that you simply could not trace - - -

KIEFEL J: They were too mixed.

MR COTMAN: - - - funds out of that account into the acquisition of any of these shares in the way that - - -

KIEFEL J: But his Honour is saying despite that that could have been the only source of the funds, is that not right?

MR COTMAN: It is just not right because the Saxo arrangement permitted the acquisition of the shares utilising Saxo’s funds, and how Sonray then settled with Saxo was a matter for Sonray.

KIEFEL J: But it would have only have settled using that account, would it not?

MR COTMAN: With respect, your Honour, no. It might have then borrowed funds from other parties or dealt with in a number of different ways. But, as I say, the difficulty is, to the extent that it sought to draw on the deficient fund in order to settle its liability with Saxo without first restoring the fund, it would have been doing something that it would be incapable of doing, looked at from the point of view of being a trustee.

KIEFEL J: But how does the agency argument work, that is the stepped agency argument through Saxo, unless appropriations are being made on behalf of the client from the account into which they have deposited?

MR COTMAN: Well, if your Honour means by appropriation of abstraction from - - -

KIEFEL J: Abstraction from the account.

MR COTMAN: It works because of the credit arrangement between Saxo and Sonray. One does not have to have abstraction because Saxo is funding the acquisition of shares on the account of Sonray as the agent, and not in relation to its position as trustee.

CRENNAN J: But Sonray, of course, is not just an agent, it is also a defaulting trustee.

MR COTMAN: Quite. But our dealings with it, in relation to the purchase of the shares, ours dealings with it as agent, as an incidental aspect of that moneys going to a statutory trust account in respect to which it is a trustee, but our legal rights as against Sonray as our agent remain, in our respectful submission, unaffected, and indeed, one would have thought that the trust account is in the nature of security for the performance of the legal obligations, rather than it being the primary relationship.

So that if the satisfaction of our legal claims can be made by the offsetting of another legal claim against us, then the question – while that discharges the trusts in relation to whatever moneys we paid in, that is an incidental effect, it is not the primary effect. We are not dealing with the primary issue of the trust as the primary relationship or the trust asset as the primary asset.

KEANE J: When you say that settling the transaction as between Sonray and Saxo was a matter for Sonray, is that right? I mean, can Sonray as a defaulting trustee take that position, that it is the master of its own destiny?

MR COTMAN: It can, so far as it is in a debtor/creditor relationship with Saxo. It is dealing with Saxo under the terms of a contract between it and Saxo under which it is entitled to have its clients place the orders and Saxo effect them. It may have been, for example, that if Sonray did not pay Saxo, Saxo might have sought to be subrogated to Sonray’s claims on the statutory fund to seek to have itself paid, but it would have to do so through the lens of Sonray and if Sonray is a defaulting trustee then, as the authorities tell us, the capacity to exercise that power of subrogation is limited by the extent to which the trustee, whose rights you are seeking to exercise, is a defaulting trustee.

But that is the way in which one would have to go about it. There is not, if you like, a direct link through. The whole accounting between the parties is being dealt with on the basis of the legal debts and legal claims between the parties with the trust’s position being, as I say, an incident of or a reflex of that, not the primary right. So it is that the trust claim that Efax might have had is, in fact, discharged by the setoff that is occurring in relation to the purchase of the shares. Efax could no longer sensibly say, we have now got a claim on the trust fund, because any right it might have had in relation to that previously has simply been extinguished, and extinguished, in this case, for the benefit of the whole of the balance of the contributories because neither Efax nor Sonray seek to abstract the funds from that account.

So what one in fact gets to under the analysis of the Full Court is in the nature almost of a windfall to the statutory fund because it ends up both with the shares and with the cash. But, most particularly, what is nowhere explained, and certainly the authorities that Justice Jacobson refers to, which is to say, the French Caledonia and Global Finance, both of those cases of course deal with the question of participation in the fund, on what basis were claimants of a mixed fund in the case of insolvency of the fund be allowed to participate, the Clayton’s Case principles or pro rata or whatever it happens to be, those authorities do not say anything on the question about what is in the fund other than to say, if tracing is available then the assets to the fund would include assets acquired with proceeds of the fund.

But that is not this case, and so that one, in effect, has an eliding or sliding between authorities dealing with participation in the fund into a proposition about what is in the fund, and very shortly the special leave point we say is whether the mere fact that incidental to a payment of money that creates legal rights there is a payment into a deficient fund, attaches to those legal rights an equity in favour of all the contributories to that deficient fund, because that is really the effect of what the Full Court has held is the result of the dealings in this case, and held so contrary to, we would respectfully submit, a strong dissent in relation to Justice Besanko and the analysis of Justice Gordon which, in our respectful submission, properly states the upshot of the dealings between the parties. I see the time. If your Honour please.

CRENNAN J: Thank you, Mr Cotman. Yes, Mr Martindale.

MR MARTINDALE: Efax’s claim to titles for the BHP shares is based only on their having paid for those shares by way of a setoff. The agency argument depends entirely upon the truth of that proposition, whether there has been a payment by Efax by way of a setoff. There is no suggestion that the claim could be supported in any way on the basis the title passed independently of payment.

CRENNAN J: Well, I think the point that has been made is that there has been no abstraction of funds, there has been an order put in for the shares, the shares have been bought and there has been a settlement between Saxo and Sonray.

MR MARTINDALE: Yes, that is so, your Honour. None of those things leads to the conclusion that the shares should stand outside the liquidation. If I may to try to seek to make that good. The primary focus of our learned friends and the court at first instance was on the terms of clause 9 b) of the client agreement, and it is whether that provision permits appropriation, and whether appropriation has been made pursuant to that clause that determines the question of whether payment has been made. It is not a question of the settlement between Saxo and Sonray at all.

KIEFEL J: Where do we see clause 9 b), Mr Martindale?

MR MARTINDALE: Yes, if your Honour please, it is at pages 139 and 140 of the special leave application book. So your Honour will see at the bottom of 139 that the client agrees to pay all amounts and in b), what the client authorises Sonray to do is to:

appropriate, transfer, credit apply or pay monies that may be received by Sonray or held by Sonray on the Client’s behalf –

There are no such moneys which could be taken or appropriated by Sonray for the simple reason that after the funds were deposited by Efax there were daily dealings by Sonray on the relevant account with funds going in and out. The evidence before the Full Court showed that the account balance had fallen to as low as 560,000 on 9 February 2010, long before these orders were place. The fund had been in deficiency for several years and by the time Sonray debited Efax’s client account ledger in purported recognition of payment of the cost of the BHP transactions Efax’s money was either already wholly or partly lost.

In addition, what money was in the segregated account and was held by Sonray in the relevant sense was either charged in favour of all the clients or was held for them as equitable tenants in common by reason of the rules applicable to a mixed efficient fund. So there was no way in which clause 9 b) could be engaged in accordance with its terms.

That leads to the additional point that we sought to make, which is that clause 9 b) is not even a setoff clause. What clause b) plainly says is that if Sonray has some of its client’s money and the time comes for the client to settle up Sonray can take that money. It is not a setoff clause at all. So the primary answer that Sonray makes to Efax’s claim is that Efax simply did not pay Sonray for the shares, by setoff, whether by mutual releases, which our learned friends say at 35 of their outline and 14 of their reply, or any other means amounting to a setoff.

Efax, not having paid for the shares, the door is open to try to work out who did pay for them and the possibilities are, as Justice Jacobson said, the payment for the shares must have had their origin in the way Sonray did business with funds going into the division’s segregated account and value being exchanged or even money being paid from time to time to Saxo, transactions were occurring on the Saxo platform in respect of Sonray clients, generating profits, generating losses, the question is: did Saxo have a claim against Sonray in respect of any unpaid shares?

Now, Justice Jacobson made the comment at 64 that my learned friend was taken to. In addition to that, if I may point to what Justice Besanko says about the state of accounts between Saxo and Sonray, and that is if may invite the Court to go to page 184 of the special leave appeal book. His Honour, at 188, refers to Saxo making a claim by a letter dated 1 July addressed to Sonray, which is after the administration:

identified an amount due and payable by Sonray to Saxo upon the termination of the agreement between the two parties.

In that letter, as his Honour says:

On the face of it, there is no reference to a debt arising from the purchase of the BHP Shares.

We are dealing with the BHP shares here as an example of the whole class of physical share purchases. In 189, if the Court pleases:

Secondly, there is no express reference to a debt in the Settlement Deed entered into in October 2011 leading to the inference, so it was contended, that the debt arising from the purchase of the BHP Shares had been dealt with prior to that time.

Now, the inference is that whatever indebtedness that there was arising from the purchase of shares, from time to time, had been satisfied before the administration commenced. At 190 his Honour says that “The inference . . . is an available inference”. His Honour was not satisfied that he should draw it. But the evidence is important on the question of payment because it strongly suggested that payment was not effected by that settlement.

In other words, there was not an outstanding item of money owing for shares purchased on behalf of Efax Class that was brought to account in the settlement. So the settlement is irrelevant on the issue of who paid for the shares, safe to say that it was not done by Saxo giving up a claim to be paid for, or paid in respect of the transactions that has given rise to any outstanding indebtedness.

KIEFEL J: Mr Martindale, what is the factual support for the finding of Justice Jacobson at paragraph 64?

MR MARTINDALE: In terms of the reasons, both in the Full Court and at first instance, all that can be said is that the factual support would be in the description given by her Honour at first instance as to how Sonray transacted with Saxo. Would your Honour excuse me for a moment?

KIEFEL J: Justice Besanko at paragraph 92, special leave book 159, said:

The primary judge found, however, that there was no transfer from the ANZ AUD Segregated Account to Saxo of an amount appropriated to a Sonray client’s account on a Trading Platform.

It did, however, transfer moneys when the margin call was made.

MR MARTINDALE: Yes, that is so. So the fact that there is no transfer at the relevant time is only a part of the picture because, of course, if Saxo and Sonray were operating a running account there was simply from time to time just the balance which was due either way, presumably due from Sonray to Saxo. So that when Saxo was executing trades for all the Sonray clients, money would go out and money would come in at Saxo’s end which would affect the balance on that running account. Indeed, the simple piece of evidence is that when the administration occurred and Saxo put in its notice of claim there was nothing owing in respect of shares, it was all about the effects of closing out derivative and synthetic transactions.

KIEFEL J: Given that the moneys seem to be so mixed and confused and the dealings rather confusing, does Efax’s argument come down to the book entries?

MR MARTINDALE: Yes. Efax relies solely on the book entry and on it being, as they say, a mutual release of Sonray releasing Efax from the obligation to put it in funds because the purchase transactions have occurred, and Efax releasing Sonray from any obligation to pay back the money that had been deposited or account to it for the money that had been deposited but seeks to give those rights work to do quite independently from the fact that the money had been deposited and was lost in a hopelessly deficient account.

KEANE J: The mutual release was a transaction not contemplated by the client agreement.

MR MARTINDALE: No, that is right, and the point we have sought to make is that the client agreement has two relevant provisions, there was clause 9 b) which had been principally relied upon in the reasons of the trial judge, and clause 9 c) which was also referred to by Justice Besanko as also leading to the same result, but in relation to clause 9 c), which is also to be seen at page 140 of the special leave appeal book, clause 9 c) is a netting clause and what we say about clause 9 c) is that it is not a setoff clause any more than 9 b) is, nor does it give rise to mutual release.

How it is put by our learned friends is that by clause 9 b) Efax agreed to release Sonray upon the occurrence of the events of shares being ordered on its instructions. Clause 9 c) is different of course. Clause 9 c) does not operate in these circumstances because no money is due and payable by Sonray to Efax to be netted off against money due and payable by Efax to Sonray. The situation between Sonray and Efax is quite different, Sonray is holding money in the statutory trust account, it could only become due and payable if Efax has ever made a demand for some of the money to be returned to it. It would not even be due and payable if Efax has exercised its other personal right, which our learned friends refer to, seeking and accounting for the state of the trust account as between Sonray and Efax, and at 9 c) we say on that basis - - -

KEANE J: So the setoff that the other side rely on is not a transaction that the client agreement contemplated, there is no other consensual basis for it in the evidence and the book entry, and to the extent that the book entry is relied upon as evidence of it, is on your case, and in Justice Jacobson’s view, just an accident?

MR MARTINDALE: Not just an accident. If I may say, what it is is what would occur had all things been operating as they should without any deficiency in that segregated account, because upon the trades being executed, as my learned friend said, Saxo’s trading platform made all the computerised entries and one of them would debit the client’s ledger account an amount of money for the transaction in question and credit its client ledger account with a value and an identity of a product, in this case physical shares, on other cases derivatives or whatever they may be, and Sonray was using those entries as its client ledgers.

Of course Saxo did not know there was a deficiency in the segregated account and Sonray did not tell it that it should do things differently because the money had all been spent somewhere else, so the book entry did not actually record what it would have been recording had there been no deficiency. But it was a deliberate - - -

CRENNAN J: Appropriation?

MR MARTINDALE: - - - application, clause 9 b), that is right.

CRENNAN J: Well, it would be treated as an intentional appropriation in terms of clause 9 b), but the question remains, the intentional appropriation has been made by a defaulting trustee.

MR MARTINDALE: Yes, it has, and on that point we would say it is right to say that, save in exceptional circumstances, the innocent contributors cannot be affected by the choices made by the defaulting trustee to throw the loss in one way or another by its book entries. There are cases in which that has been held to be effective to bind the clients, say, of a defaulting solicitor who intended to steal from a particular client’s estate. That is not this case, and one could find no support for giving those book entries a binding effect on the innocent contributors.

The elusive equity that my learned friend has said is the core of the special leave question comes down to this: we say that Efax did not pay, we say that there is evidence that the deed of settlement is not the answer. We come to the problematic position where it is impossible to disentangle all the transactions so as to perform a full audit or tracing exercise to work out just how and by whose money or value Saxo was satisfied with respect to all the share purchases so as to have no claim at the end of the day.

Justice Jacobson is making probably some assumptions by reference to the way Saxo and Sonray had been doing business when he says what he says in paragraph 64, but it is the impossibility or impracticability of pinning down who actually paid for the shares, not being Efax, not being the settlement that gives rise to the tracing equity.

It is the same response to the impossibility or impracticability of saying whose money that still is in the segregated account belongs without which of the clients, it cannot be done so it has to be pooled. It is the same with the impossibility or impracticability of identifying which money or value from which clients and in what manner and at what time went into the running account between Saxo and Sonray so as to eliminate any claim by Saxo against Sonray for share purchases.

KIEFEL J: Where did the onus lie in relation to the tracing exercise that you refer to?

MR MARTINDALE: At trial her Honour said that those wishing to assert or vindicate property have to show that it is theirs.

KIEFEL J: Efax?

MR MARTINDALE: Yes, in this case. But we say because it cannot be shown it really does not matter, if it cannot be shown it cannot be shown. The appropriate response is the one that has occurred, which is to pool the assets and avoid the rather ironical situation or ironical outcome of the share purchases on the platform that created the deficiency, as it were, coming out whole and the share purchases whose platform operator required to be put in funds having to pool their shares. The equity arises from that uncertainty between Efax not being the person who paid and between Sonray and Saxo settlement not being the mechanism of payment, there is an impenetrable uncertainty as to the identity of how they were paid for which can only be properly dealt with by a pooling order. Unless there is anything else, your Honour, those are our submissions.

CRENNAN J: Just before you do sit down, Mr Martindale, there is a paragraph in the written submissions of the applicants in relation to costs at application book 210, paragraph 71, to the effect that the cost of the special leave should be paid out of the segregated accounts in the same manner as occurred before the Full Court of the Federal Court. Do you have anything to say?

MR MARTINDALE: I do not have anything to say about that. If the Court pleases.

CRENNAN J: Thank you. Yes, Mr Cotman.

MR COTMAN: If your Honours please. In relation to setoff, your Honours, superadded to the question of the book entries that were referred to which, with respect, are not seeking to be an accounting for the trust fund, but are accounting for the dealings between Sonray and Efax in relation to the transactions that occurred between them. Superadded to those entries, which clearly were deliberately made, there was the fact that after those entries were made a CHESS transfer form was by Sonray to Efax in order to effect the transfer of the BHP shares on the registration system into the name of Efax, which was formally signed by Efax, sent back to Sonray, but the administration intervened so that that form was not then lodged.

That is dealt with, your Honours, at page 169 in the book in the judgment of Justice Besanko. It is also dealt with in the other judgments of the court, it was a common ground matter, it is at paragraph 130 on page 169. So that, so far as Sonray was concerned, it considered itself acquitted in relation to the transaction and sought to acquit itself of its obligations as agent by putting its principal in possession of the registration of the shares. When it is said by my learned friend it is not clear that the shares were paid for by Sonray, in our respectful submission, each of the judges below found that there was payment and there was payment made by the setoff.

So, that what is the point of argument between the majority of the Full Court and the other members of the court dealing with the matter is what is attracted to the setoff by reason of the setoff having, as Justice Jacobson puts it, its origins in the payment into the deficient account. That is where the equity arises, not out of any confusion or bemusement about who it was that paid for the shares or how it was they were paid for.

My learned friend adverted to the proposition that margin calls were made that discharged a balance of account. That was, with respect, not the evidence as to what was occurring below as contained in the judgment of Justice Gordon. There was not a settling of balance, there was a settling of margin calls made on the evidence in renewal to particular sorts of products such as derivatives that attracted margin, but not in relation to the share transactions.

The common ground before her Honour, and indeed, before the Full Court, was there was not payment made in relation to the share transactions. So that, in our respectful submission, what one is dealing with in relation to the accounting is not a trust accounting but an accounting for legal rights. The legal rights were given effect to, we discharged the onus in relation to the question of title by demonstrating that our agent had acquired shares in our behalf and we had dealt with the agent under the terms of the agreement, either with 9 b) or 9 c), or as we have put it in our written submissions, by setoff in fact, so that the onus then, in our respectful submission, became one of those contending that some equity displaced our title to those shares.

In that regard, the onus must lie on those contending that the mere fact that our original debt arose in relation to a transfer of moneys that were deposited to a deficient trust account would then give rise to an equity that would then travel through that debt to property acquired using that debt by way of a legal setoff in the dealings between the principal and the agent.

KEANE J: On this argument you do not rely on the book entry at all?

MR COTMAN: The book entry reflects the transaction that occurred, it is not the transaction itself.

KEANE J: So you do not need to worry about whether the book entry combined the innocent creditors?

MR COTMAN: No, because on no version are we a claimant on that fund, and were we seeking to set up the result of the book entry as a claimant in relation to the payments made in that fund, for example, then the issue would arise. But we accept that our agent performed all its functions according to its instructions, procured for us the shares and we settled with our agent by way of setoff of the mutual obligations as was entitled to do under 9 c), or do at common law, and in that regard we acquire the title and if someone wishes to displace that title then some good equity has to be shown. In my respectful submission, the basis that the propounding of the basis for that equity being we did not pay for the shares is contrary to everything found by every judge who has dealt with this matter at all levels.

The equity is said to arise simply from the fact that our moneys were paid into a deficient trust account. That is said to then taint any dealing we make with that property thereafter. Can I say this, your Honours, and I neglected to say it earlier, in relation to the question of the statutory trust accounts, they are a common feature, as your Honours would no doubt be aware, across a great many of the broking and agency arrangements where States and Commonwealth have used the mechanism of the statutory trust as a consumer protection mechanism. This is, we would respectfully submit, a reason why this issue is one that is likely to recur and is a matter of substantial importance in the way that matters work out, both between principal and agent and between the clients of those parties. If it please the Court.

CRENNAN J: Thank you, Mr Cotman. The Court will adjourn briefly.

AT 10.25 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.31 AM:

CRENNAN J: Justice Kiefel will deliver the Court’s decision.

KIEFEL J: At relevant times Sonray Capital Markets Pty Ltd provided financial advice and services to clients and access to trading platforms. Efax Pty Ltd was a client. Sonray maintained a bank account into which clients’ funds, including those of Efax, were deposited.

On the application of the liquidators of Sonray for directions, her Honour the primary judge, Gordon J, made orders pooling assets of Sonray, but effectively exempted from that order shares in BHP Billiton Ltd which had been purchased on the instructions of Efax. Her Honour applied principles of agency law to conclude that the shares were held for Efax and that Sonray had acted as its agent in that transaction.

A majority of a Full Court of the Federal Court (Jacobson and Jagot JJ, Besanko J dissenting), allowed an appeal from that order. The essential question, in their Honours’ view, was whether Efax had paid for the shares. The primary judge had held that it was incumbent upon Efax to show the source of the funds. This remained a matter of uncertainty on the facts. The Full Court held that when the appropriation in Efax’s books of account was made it was a defaulting trustee and that the entry was not reliable. It followed that the rules relating to mixed funds applied and the BHP shares could not be regarded as outside the pooled assets.

Given the particular difficulties of this case there are insufficient reasons to doubt the correctness of the Full Court’s decision to warrant a grant of special leave. Accordingly, special leave to appeal is refused with costs to be paid on the same basis as allowed in relation to the appeal to the Full Court of the Federal Court of Australia.

AT 10.33 AM THE MATTER WAS CONCLUDED