FEDERAL COURT OF AUSTRALIA Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025 CORPORATIONS – managed investment scheme – minimum subscription for interests not reached – whether subscription monies refundable by custodian or responsible entity TRUSTS – express trust – money paid by investors for particular purpose – purpose not satisfied – promise to refund money – whether promise creates trust – constructive trust – knowing receipt of trust property by responsible entity RESTITUTION – unjust enrichment – money had and received – total failure of consideration – money paid to third party – whether recoverable from third party WORDS AND PHRASES – "minimum subscription" Corporations Law ss601FB, 601FC Adams v Bank of New South Wales (1984) 1 NSWLR 285 Agip (Africa) Ltd v Jackson [1990] 1 Ch 265 Armstrong, Re; deceased [1960] VR 202 Australian & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 Baden Delvaux v Société Générale [1993] 1 WLR 509 Baltic Shipping Co v Dillon (1993) 176 CLR 344 Bank of Credit & Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321 Banque Financičre de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 Barnes v Addey (1874) LR 9 Ch App 244 Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 Black v Freedman & Co (1910) 12 CLR 105 Burley, In re; Alexander v Burley [1910] 1 Ch 215 Burton v Bevan [1908] 2 Ch 240 Chillingworth v Esche [1924] 1 Ch 97 Citadel General Assurance Co v Lloyds Bank (Canada) [1997] 3 SCR 805 Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178 Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd (1994) 182 CLR 51 Commonwealth Homes and Investment Co Ltd v Smith (1937) 59 CLR 443 Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 Doneley v Doneley [1998] 1 Qd R 602 DPC Estates Pty Ltd v Grey & Counsel Development Pty Ltd (1974) 1 NSWLR 443 Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 Hancock Family Memorial Foundation Ltd v Porteous (1999) 32 ACSR 124 Heartley v Nicholson (1875) LR 19 Eq 233 International Sales and Agencies Ltd v Marcus [1982] 3 All ER 551 Jalmoon Pty Ltd (in liq) v Bow (1997) 2 Qld R 62 Kauter v Hilton (1953) 90 CLR 86 Knight v Knight (1840) 3 Beav 148 Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16 LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 Mara v Browne [1896] 1 Ch 199 Martin v Andrews (1856) 7 El & Bl 1 [119 ER 1148] Mears v Western Canada Pulp and Paper Co Ltd [1905] 2 Ch 353 Moses v Macferlan (1760) 2 Burr 1005 [97 ER 676] National Motor Mail-Coach Co Ltd, In re; Anstis' & McLean's Claims [1908] 2 Ch 228 Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 Richards v Delbridge (1874) LR 18 Eq 11 Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246 Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 Royal Bank of Canada v The King [1913] AC 283 Royal Brunei Airlines Sdn Bhd v Tan (P.C.) [1995] 2 AC 378 Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555 Swain v The Law Society [1983] 1 AC 598 Tara Shire Council v Garner [2003] 1 Qd R 556 Tito v Waddell (No 2) [1977] Ch 106 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 Trust Company of Australia Ltd v Commissioner of State Revenue (2003) 77 ALJR 1019 Walsh Bay Developments Pty Ltd v Federal Commissioner of Taxation (1994) 29 ATR 311; (1995) 130 ALR 415 Westpac Banking Corp Ltd v Savin [1985] 2 NZLR 41 Williams, In re; Williams v Williams [1897] 2 Ch 12 Williams-Ashman v Price & Williams [1942] 1 Ch 219 Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363 Woodend Water Board and Maddock Lonie and Chisholm v Hyan Enterprises Pty Ltd (unreported, Full Court of the Supreme Court of Victoria, Murphy, Fullagar and Vincent JJ, 15 November 1990) RP Austin, 'Constructive Trusts' in PD Finn, Essays in Equity (1985), 196-241 Australian Law Reform Commission and the Companies and Securities Advisory Committee, Collective Investments: Other People's Money, ALRC Report No 65 (1993) S Barkehall Thomas, 'Knowing Receipt and Knowing Assistance: where do we stand?' 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(2003) 77 ALJ 358 Palmers Company Law, 25th edn (loose-leaf), vol 1 JUSTIN SPANGARO (on his own behalf and in a representative capacity) v CORPORATE INVESTMENT AUSTRALIA FUNDS MANAGEMENT LTD, AUSTRALIAN COTTON LTD (IN LIQUIDATION), CARDINAL FINANCIAL SECURITIES LTD, JOHN PATRICK MCGETTIGAN, GARRY MARTIN WHITE, JOHN CHARLES KERIN, THOMAS JAMES VALENTINE and JUSRINI WALZL (also known as JUNIE WALZL) V 3019 of 2001 FINKELSTEIN J 26 SEPTEMBER 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 3019 of 2001 BETWEEN: JUSTIN SPANGARO (on his own behalf and in a representative capacity) Plaintiff AND: CORPORATE INVESTMENT AUSTRALIA FUNDS MANAGEMENT LTD, AUSTRALIAN COTTON LTD (IN LIQUIDATION), CARDINAL FINANCIAL SECURITIES LTD, JOHN PATRICK MCGETTIGAN, GARRY MARTIN WHITE, JOHN CHARLES KERIN, THOMAS JAMES VALENTINE and JUSRINI WALZL (also known as JUNIE WALZL) Defendants JUDGE: FINKELSTEIN J DATE: 26 SEPTEMBER 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 This dispute arises out the promotion of a managed investment scheme known as the Australian Cotton Project. The scheme was regulated by Chapter 5C of the Corporations Law: see now Chapter 5C of the Corporations Act 2001 (Cth). Chapter 5C was introduced into the Corporations Law by the Managed Investments Act 1998 (Cth). It replaced the prescribed interest regime which was a dual party structure involving a manager and a trustee. A joint report by the Australian Law Reform Commission and the Companies and Securities Advisory Committee (ALRC Report No 65, 1993) found that the dual party structure was fundamentally flawed. In particular, the role of the trustee, originally intended to be that of a mere custodian, had evolved to the point where no-one understood the distinction between the respective roles and duties of the trustee and manager. There was confusion about which of them was responsible for the scheme. The joint report recommended, and the Parliament accepted, that for every scheme there should be a single entity (in due course called the responsible entity) in which the functions of both trustee and manager were united. The new legislation made provision for the appointment by the responsible entity of an agent to do anything that the responsible entity was authorised to do in connection with the scheme: s 601FB(2). One purpose of this subsection was to enable the appointment of a custodian to hold scheme property: Trust Company of Australia Ltd v Commissioner of State Revenue (2003) 77 ALJR 1019, 1034. The custodian did not assume the responsibilities of the former trustee. The responsible entity was accountable for the acts and omissions of its agent: s 601FB(2). Yet, as this case demonstrates, there is still uncertainty about the respective obligations of the responsible entity and an appointed custodian. 2 The object of the Australian Cotton Project was to develop land for cotton production and to grow and harvest cotton for sale. The land comprised 5,535 acres, approximately 12 km south of Cecil Plains on the Western Darling Downs in South East Queensland. The project was registered as a managed investment scheme under s 601EB in May 1999, with the first defendant, Corporate Investment Australia Funds Management Ltd (CIAFM), as the responsible entity. The project had a Constitution in accordance with ss 601GA and 601GB and a Compliance Plan as required by ss 601HA and 601HC. Each document was dated 14 May 1999. Subscription for interests in the project were promoted under a Prospectus dated 27 May 1999, which was registered under s 1020A. Pursuant to a Custody Agreement dated 9 June 1999, CIAFM appointed the third defendant, Cardinal Financial Securities Ltd (in liquidation) (Cardinal), as custodian for the project. 3 The plaintiff, Mr Spangaro brings this action on his own account and on behalf of other participants in the project. He seeks to recover the amount he paid by way of subscription for interests in the project, in addition to claiming other relief. He relies on a number of causes of action, some statutory and others based on the common law. As a result of an order made under O 29, at present only some of the causes of action are being dealt with. They arise out of Mr Spangaro's contentions that (i) monies paid for interests in the project were to be held by Cardinal on trust for the participants until the minimum subscription for interests were subscribed and, (ii) if the minimum subscription was not reached by 30 June 1999, Cardinal was obliged to refund the money. Mr Spangaro alleges that the minimum subscription was not achieved by 30 June 1999, yet Cardinal did not refund his money but paid it to CIAFM in breach of trust. Accordingly, Mr Spangaro claims that Cardinal is liable to make compensation for that breach. As against CIAFM, Mr Spangaro's principal claim is for money had and received, or restitution for unjust enrichment. 4 To understand the way the case is put it is necessary to analyse the nature of the project in some detail. The second defendant, Australian Cotton Ltd (in liquidation) (ACL), entered into a contract to purchase the Cecil Plains land, with settlement due on 31 December 1999. Each participant (that is, each person who acquired an interest in the project) would be entitled to occupy a portion of the land, consisting of approximately 3 acres. The right of occupation would be conferred through a participant holding 6,000 "A" class shares in ACL. The participants would then engage CIAFM to manage the project on their behalf. 5 To obtain the necessary working capital CIAFM had to sell a sufficient number of interests. In addition, ACL needed to raise capital to complete the purchase of the land, the contract price for which was $1.9 million. A prospectus was required for both purposes: see s 1018 read in combination with s 92(2). ACL proposed to issue 7,200,000 "A" class shares, each with a par value of $0.50. Every applicant for an interest in the project was required to subscribe for at least 6,000 "A" class shares. Additional shares could be acquired in parcels of 6,000. An applicant could choose to pay for his shares in full or partly pay each share to $0.32 and apply his entitlement to dividends to meet the balance of the issue price. If the share issue was fully subscribed the capital of ACL would increase from $1 to $3,600,001. According to the Prospectus the cost of an interest in the project was $7,570; made up of $7,520 for the management fee and $50 as a seed fee. CIAFM offered to sell up to 1,200 interests in the project which would raise $9,084,000 if fully subscribed. However, the project could go ahead if less money was received. The Prospectus records under the heading: "Minimum Number of Interests" that "Minimum subscription under this Prospectus is 200 Interests. If the minimum subscription is not reached by 30th June 1999, all will be returned to subscriber." 6 The Prospectus recites the fact that CIAFM appointed Cardinal as custodian. The Custody Agreement required Cardinal to establish "a separate account ('Application Monies Bank Account') into which application monies received from Participants for an interest in the Project [would] be deposited by CIAFM". The agreement contains no definition of "Application Monies" but does define "Participant" as "a person who holds an interest in the Project" and "Project" as the "Australian Cotton Project". Cardinal was also required to establish a "Project Bank Account" into which all cash receipts of the project would be deposited. 7 Returning to the Prospectus, the first page contains a brief summary of the investment. It contains the statement that: "All Application Monies will be held in a separate bank account in trust for the Applicants until the issue of the Interests." In the glossary one finds these definitions: "APPLICANT - Means a subscriber pursuant to the terms of this Prospectus for an Interest. APPLICATION MONIES - Means the amount payable by a Participant upon Application for an Interest (as specified in the offering document under which the Application is made), and which may be paid by way of cheque or other negotiable instrument drawn and accepted by a person acceptable to the Responsible Entity. INTEREST - Means the rights and obligations of a Participant as further described in Clause 4.2 of the Project Constitution." Towards the end of the Prospectus there is an important section headed "Additional Information". This contains a reference to the Constitution. It reads: "The Australian Cotton Project was constituted pursuant to the terms of a Project Constitution (the 'Project Constitution') between CIAFM and the Participants, dated 29 April 1999 [sic]. By applying for an Interest pursuant to the Project and entering into the Management Agreement, Participants become a party to, and are bound by the terms of, the Project Constitution… The Project Constitution with the Participants (a) becomes operative upon the achievement of minimum subscriptions under this Prospectus…" There is also a reference to the Compliance Plan. The Prospectus states that: "[a] Participant, by entering into The Australian Cotton Project Management Agreement becomes a party to the Project Compliance Plan." 8 The Additional Information contains a section headed "Application Money" which reads: "Application Monies are to be held in trust for the Participants and following establishment of the Project such monies and income are to be held by the Custodian as agent for the Participants and may only be utilised as provided for in the Project Constitution. Application Monies will be applied by the Responsible Entity in payment of the Participants' obligations under the Management Agreement." 9 The Management Agreement is found in schedule 1. According to this agreement, each participant "agrees to undertake the Business [of developing land for cotton production and growing and harvesting cotton for sale]" and "appoints CIAFM as [his] manager" for that purpose. The agreement provides that "the Business will commence on the date of the satisfaction of Expenditure Qualifying Conditions and due execution of the Management Agreement." Expenditure Qualifying Conditions is defined to mean "the achievement of minimum subscriptions under the Prospectus". Upon the issue of an interest, the Participants agree to pay CIAFM the management fee payable for the "Initial Period" (a period commencing with the issue of an interest and ending on 30 June 2000). The management fee comprises "$5920 in respect of each Interest representing prepaid Cropping…[and] an amount of $50 in respect of each Interest representing prepaid Seed". 10 The Prospectus contains instructions to those wishing to apply for shares in ACL or interests in the cotton project. In the section headed "Instructions to Applicants" two options are identified: option 1 for those wanting to purchase shares and option 2 for those wanting to purchase shares and participate in the project. The instructions give details on how payment for the shares and interest is to be effected. A person wishing to purchase an interest and partly pay for his shares has to lodge an application form (which is attached to the Prospectus) accompanied by "three cheques – a cheque for $1920 per parcel of 'A' Class Shares, crossed 'not negotiable' and made payable to 'Australian Cotton Ltd Capital Account', a cheque for $7,520 per Interest for the management Fee and a cheque for $50 per Interest for Seed fee. Cheques are to be crossed 'not negotiable' and made payable to 'Australian Cotton Project – Application Monies Account'." As well as lodging an application form, each applicant is required to sign a power of attorney appointing CIAFM as his attorney for the purpose of executing the Management Agreement. The Prospectus advises that upon an application being accepted, the Management Agreement will be executed by the attorney. 11 Turning now to the Constitution, the following provisions should be noted: In cl 1.1 there are these definitions: "'Application Money' means that amount payable by a Participant upon application for an Interest (as specified in the offering document under which the application is made), and which may be paid by way of cheque or other negotiable instrument drawn and accepted by a person acceptable to the Responsible Entity; 'Application Monies Bank Account' means an interest bearing, segregated bank account into which Application Monies will be deposited pending the issue of an Interest; … 'Commencement Date' means the date on which the first Interest is issued pursuant to the Prospectus; … 'Custodian' means Cardinal Financial Securities Limited for so long as it remains the Custodian of the Project or on cessation any custodian duly appointed by the Responsible Entity; 'Expenditure Qualifying Condition' means the achievement of minimum subscriptions under the Prospectus; … 'Participant' means a participant in the Project, being a person who from time to time holds an Interest …" 12 There are also the following relevant clauses: "2.1 The Project shall commence on the Commencement Date and shall terminate on [a particular] date... 4.2 An Interest shall consist of the Participant's rights and obligations under the Constitution and the Management Agreement and all other rights and obligations conferred or imposed upon a Participant under this Constitution. … 15.1 Each prospective Participant shall execute an Application Form attached to a current Prospectus and deliver it to the Responsible Entity together with all Application Money payable at that time pursuant to the terms of this Constitution and the relevant Prospectus. 15.2 In all Prospectuses and other representations relating to Interests, all cheques and other payment orders in respect of the applications for Interests be drawn in favour 'Australian Cotton Project – Application Monies Account'. 15.3 All Application Money paid by prospective Participants pursuant to the Prospectus or this Constitution shall be held on trust by an approved Custodian, for the prospective Participants in the Application Monies Bank Account, being a bank account established and kept by the Custodian solely for the purposes of receiving monies paid by prospective Participants pending the issue of Interests to the prospective Participants. … 27.1 The property of the Project shall comprise all Application Monies, cash receipts and other amounts, any monies borrowed, and a registered lease of the Land and shall only to be used for the purpose of the Project. … 27.3 The property of the Project shall be held on trust for the Participants by (a) the Responsible Entity, if an approved custodian is not required under the Law; or (b) an approved custodian. 27.4 All Application Monies will be held in the Participants Application Monies Bank Account until the commencement of the Project. Application monies on commence [sic] of the Project, cash receipts and any monies borrowed shall be held on trust by the Responsible Entity for the prospective Participant in the Participants Trading Bank Account…being a bank account established and kept by the Responsible Entity or approved custodian appointed by the Responsible Entity solely for this purpose. … 36.1 Under the terms of this Constitution, if by 30 June 1999 the Expenditure Qualifying Condition has not been satisfied then, subject to Clause 36.2 the Project will terminate. 36.2 The date of 30 June 1999 referred to in Clause 36.1 may be amended by the Responsible Entity by way of supplemental deed provided the supplemental deed is executed and approved by the Australian Securities & Investments Commission. … 37.2 The terms and conditions of this Constitution shall be binding on the Responsible Entity and each Participant and all persons claiming through them respectively as if they are party to this Constitution." 13 It is possible to draw the following conclusions from the foregoing provisions of the Prospectus, Constitution and Management Agreement. A distinction is drawn between "Application Money" and other money which an applicant is required to submit with his application form. "Application Money" refers to the amount required to be paid for an interest in the project. The balance of the money to be paid is for shares in ACL and does not form part of the "Application Money". The "Application Money" comprises the management fee ($7,520 per interest) and the seed fee ($50 per interest). The "Application Money" must be paid into an account styled "Application Monies Bank Account" maintained by Cardinal in its capacity as custodian. The money is to remain in that account until the minimum subscription is reached. Until the achievement of minimum subscription CIAFM is not entitled to issue any interest in the project. Nor is any money payable to CIAFM under the Management Agreement. In reality, there is no project until at least one interest has been issued. If minimum subscription is not reached by 30 June 1999 (a date which could have been but was not changed: clause 36.2 of the Constitution), then all monies in the "Application Monies Bank Account" must be returned to the applicants. If minimum subscription is reached on or before 30 June 1999, CIAFM may issue interests to the applicants (who then become participants) and apply the money in the "Application Monies Bank Account" towards satisfying the obligations of each participant under the Management Agreement. 14 Mr Spangaro learnt about the project from his financial planner. He was shown a copy of the Prospectus and a taxation ruling which is to the effect that certain expenses associated with the project are allowable deductions for defined income years, partly because they are incurred in carrying on the business of agriculture. Mr Spangaro decided to apply for six interests in the project and 36,000 partly paid "A" class shares in ACL. The amount required to be paid for the interests and shares was $56,940; $45,420 in respect of the interests (the aggregate of the management fees and seed fees) and $11,520 for the shares. According to the instructions in the Prospectus Mr Spangaro was required to complete the application form and send it to CIAFM with three cheques; a management fee cheque for $45,120, a seed fee cheque for $300 and a cheque in the sum of $11,520 for the partly paid shares. Mr Spangaro did not follow the instructions. On the advice of his financial planner he delivered only one cheque with his application form. This was a cheque for $25,120 drawn by a company Mr Spangaro controlled and made payable to "Australian Cotton Project – Application Monies Account". Upon its receipt by CIAFM, Mr Spangaro's cheque was deposited into the "Application Monies Bank Account" maintained by Cardinal. 15 To make up the balance that he was required to pay, Mr Spangaro took out a loan for $31,820 from Bridging Credits Pty Ltd. (This figure is taken from Mr Spangaro's affidavit; the loan agreement records the amount to be $32,610). Under the loan agreement Bridging Credits agreed to provide a bridging loan to enable Mr Spangaro to participate in the project. Mr Spangaro was required to repay the loan within thirty days. The loan was to be by cheque or promissory note "drawn by [Bridging Credits] on an Australian Bank, dated the day it is drawn", and made payable to Cardinal. The cheque or promissory note was to be delivered "on or before 30 June 1999". Bridging Credits took a form of security for the repayment of the loan. By a deed of deposit, CIAFM agreed to deposit with Bridging Credits any portion of the loan which it received from the custodian that was surplus to "[CIAFM's] immediate financial requirements". No interest was payable on the deposit. 16 I must now introduce Mr White. He is the managing director of CIAFM and the fifth defendant. In this action he appeared on his own account and (with my leave) on behalf of CIAFM. Mr White played a central role in the events giving rise to the dispute. Relevantly, his part begins with a letter dated 30 June 1999 which he wrote to Mr Russell, then the managing director of Cardinal. The letter reads: "I hereby confirm that CIAFM has received valid applications for 490 Interests in the Project. As you are aware a lease in respect of the land has been entered into. Also, the minimum level of subscriptions have been reached. The Expenditure Qualifying Conditions have therefore been satisfied. I can further confirm that farms have been allocated to each Participant. I understand that application monies of $3,709,300 (representing 490 Interests at $7,570 each) of which $519,610 deposited [sic] into the ANZ account maintained by Cardinal as Custodian for the Project and a further $3,189,690 has been deposited to the NAB account maintained by Cardinal as Custodian for the Project. Please draw two cheques from each of aforementioned account for the amount of $519,610 (ANZ) and $3,189,690 (NAB) respectively payable to: 'Corporate Investment Australia Funds Management Limited' " The following points about the letter should be noted. The first relates to terminology. The expression "Qualifying Conditions" which appears in the first paragraph can also be found in a number of the project documents including the Prospectus, the Constitution, the Management Agreement and the lease of the property on which the project was to be conducted. In each of those documents the expression is defined to mean the "achievement of minimum subscriptions under the Prospectus". The statement that the "Expenditure Qualifying Conditions have … been satisfied" is controversial for reasons which will soon become apparent. 17 The second point is that in accordance with the instruction Cardinal paid $519,610 to CIAFM out of the "Application Monies Bank Account" which was maintained with the ANZ Bank. The amount was paid in early July 1999. At the same time Cardinal drew a cheque in favour of ACL in the sum of $370,000 which represented subscription monies for ACL shares. This cheque was dishonoured. Cardinal drew replacement cheques for $300,000 and $70,000 which were paid to ACL in early July and early August 1999, respectively. 18 The third point concerns the sum of $3,189,690 referred to in the third paragraph. It will be remembered that Mr Spangaro borrowed money from Bridging Credits to fund his acquisition of interests in the project. So did most, if not all, other investors. In aggregate they borrowed $3,189,690. This is the amount referred to in the letter. 19 The next point relates to Mr White's statement that $3,189,690 had been deposited into the National Australia Bank Ltd (NAB) account maintained by Cardinal. I assume that the NAB account to which reference is made is the "Project Bank Account" which was established pursuant to the Custody Agreement. The statement that the money had been deposited into this account was false. Whether it was knowingly false is a matter to which I will return. Although the statement was false, in due course a Bridging Credits cheque for $3,189,690 was delivered to Cardinal. This occurred in October 1999. The cheque was not banked by Cardinal. In accordance with directions given by CIAFM, the cheque was endorsed in favour of, and then delivered to, CIAFM. Later the cheque may have been deposited with Bridging Credits, but this is not certain. 20 The final point concerns the statements that (i) CIAFM had "received valid applications for 490 Interests in the Project" and (ii) "the minimum level of subscriptions [had] been reached". The first statement was partially correct. CIAFM had received applications from persons wishing to acquire 490 interests in the project. Whether these applications were "valid" depends upon what was meant by that word. Assuming that it was intended to indicate that each application was regular on its face, the statement is unexceptional. On the other hand, if it meant any more than that the statement may be of doubtful accuracy. The second statement, that the minimum number of subscriptions had been received, is hotly disputed. To a large extent, the correctness of this statement depends upon the meaning to be given to the expression "minimum subscription" as it is used in the Prospectus. Once that meaning has been ascertained it will then be possible to determine whether minimum subscription had in fact been achieved by 30 June 1999. 21 It is convenient first to consider the meaning of the word "subscription" in the expression "minimum subscription". One possible meaning is the mere lodging of an application for an interest in the project. That meaning, however, can be dismissed out of hand. The Prospectus makes it clear that a person wishing to subscribe for an interest must, at the same time as he lodges his application form, also lodge a power of attorney form and deliver three cheques, one for the price of the shares, one for the management fee and one for the seed fee. There can be no valid application for an interest (and hence no subscription) in the absence of those cheques, or at least the delivery of one cheque for the total amount to be paid. 22 This immediately raises the question whether there can be a valid subscription for an interest on receipt of the application and power of attorney forms together with a cheque or cheques for the amounts to be paid, or whether it is also necessary for those cheques to have been presented and honoured. On one view, the meaning of the words "subscribe" or "subscription" involves the affixing of a written signature to a document which manifests an intention to give or pay some amount for a designated purpose, usually some purpose for the promotion of which numerous persons are pooling their means and efforts. I suppose that now, by common usage, a subscription need not be formal; nor must it be in writing. It may be oral and it may be implied from words or conduct. 23 There is, however, a contrary view. Historically, in deciding whether a minimum subscription had been subscribed for an allotment of shares, the price of the shares actually had to have been received. The making of a conditional payment by the delivery of a cheque would not suffice: Mears v Western Canada Pulp and Paper Co Ltd [1905] 2 Ch 353; In re National Motor Mail-Coach Co Ltd; Anstis' & McLean's Claims [1908] 2 Ch 228; Burton v Bevan [1908] 2 Ch 240. The reason for this was to ensure that there would be no bogus subscriptions. The intention of the company was to raise actual capital; not a bubble. 24 This meaning of "subscription" in this context was altered in England by the Companies Act 1928 (UK) which amended s 85 of the Companies Act 1908 (UK). The new section, as it appeared in the consolidated Companies Act 1929 (UK), provided: "39(1)No allotment shall be made of any share capital of a company offered to the public for subscription unless the amount stated in the prospectus as the minimum amount which, in the opinion of the directors, must be raised by the issue of share capital in order to provide for the matters specified in paragraph 5 in Part I. of the Fourth Schedule to this Act has been subscribed, and the sum payable on application for the amount so stated has been paid to and received by the company. For the purposes of this subsection, a sum shall be deemed to have been paid to and received by the company if a cheque for that sum has been received in good faith by the company and the directors of the company have no reason for suspecting that the cheque will not be paid." In Victoria, the Companies Act 1938 (Vic) followed the orthodox approach. Section 39(1) provided: "(a) No allotment shall be made of any share capital of a company offered to the public for subscription unless – (i) the amount stated in the prospectus as the minimum amount which, in the opinion of the directors, must be raised by the issue of share capital in order to provide for the matters specified in paragraph 5 of Part I. of the Fourth Schedule has been subscribed; and (ii) the sum payable on application for the amount so stated has been paid to and received by the company. (b) For the purposes of this sub-section, if a cheque for a sum payable has been received by the company, the sum shall not be deemed to have been paid to and received by the company until the cheque is paid by the bank on which it is drawn." The intention behind the Victorian provision was set out in the Explanatory Paper which accompanied the Companies Bill 1938. There it was said: "As the practice in regard to the receipt of application money differs in Victoria, [the English provision is altered to provide] that application money paid by cheque is not to be deemed to be received by the company until the cheque is paid by the bank on which it is drawn." In due course the Victorian model was adopted throughout the Commonwealth (initially in the relevant State legislation and later in federal statutes). It was, however, repealed by the Corporate Law Economic Reform Program Act 1999 (Cth) seemingly for no good reason, other than to give offerors more "flexibility" (R Baxt, et al, 'CLERP' Explained (2000), at [4-720]). Now a condition requiring the receipt of a minimum number of applications for securities is satisfied by the receipt of applications for that number of securities together with promises to pay for them. 25 There is much to be said in favour of adopting the strict meaning of "subscribe" when dealing with subscriptions for interests in a managed investment scheme. After all, the usual object of a minimum subscription clause is to ensure that the project has the required funds to undertake the venture in contemplation. It would be impossible to know if those funds are available if all that has been received are cheques or other negotiable instruments, the face value of which is equal to the amount to be raised. A number of cheques or instruments may be dishonoured and the payee or drawer (as the case may be) may not have the funds to make good the default. If the strict meaning is adopted the participants will know whether or not they have the capital needed for the project. 26 On the other hand both the Prospectus and the Constitution give the expression "minimum subscription" a different meaning. According to those documents, an applicant subscribes for an interest by lodging with CIAFM a written application form, a signed power of attorney and the required "Application Money" in the form of cheques for the amounts to be paid. If a sufficient number of applications are received (namely applications for 200 interests) then the minimum subscription will be reached. At that point CIAFM can accept an applicant as a participant in the project. I cannot find in the documents any requirement that an applicant's cheques must be presented and paid before CIAFM can accept the application. Of course, if CIAFM has any doubt about the credit-worthiness of an applicant it can defer accepting the application until the applicant's cheque has cleared. But it is not required to wait for that to occur before it accepts an application and "issues" an interest. 27 According to this view, to determine whether minimum subscription had been reached by 30 June 1999, it is only necessary to decide whether applications for 200 interests together with the requisite cheques, namely cheques with a face value which total $1,514,000, had been received by CIAFM. (I put to one side whether it is also necessary to show that CIAFM had in fact accepted applications for at least 200 interests by 30 June 1999 because the case was not argued on that basis). It may be accepted that each applicant delivered one or more cheques which, when added to the money borrowed by that applicant from Bridging Credits, had a face value equal to the amount to be paid for the interest or interests applied for. It may also be accepted that the applicants' cheques were delivered to CIAFM on or before 30 June 1999. At any rate Mr Spangaro has not proved otherwise. The only issue which remains is whether the Bridging Credits cheque for $3,189,690 (which made up the balance of the subscription money) was also delivered on 30 June 1999. 28 To answer this question it is necessary to consider the facts in a little more detail. Before turning to that task there are some preliminary observations to be made. The first, and most obvious, is that Mr Spangaro carries the burden of proving that minimum subscription was not reached by 30 June 1999. I make this observation because some of the submissions he made seem to have overlooked this obligation. The fact that Mr Spangaro must satisfy the burden takes on additional importance in this case, because the evidence is far from comprehensive. 29 This takes me to the second observation which concerns the state of the evidence. It turns out that there is no direct evidence which identifies the date of the delivery of the Bridging Credits cheque. It would have been easy enough to obtain that evidence. I can only speculate why the parties chose not to tender the evidence but instead chose to leave the point to be decided by a process of inference. Here my criticism is not directed solely to Mr Spangaro. Mr White knows exactly when the cheque was delivered because it was given to him. That much has been established. Yet he gave no evidence on this or any other topic. 30 The final matter concerns the defences taken on this issue. In neither their pleadings nor their written submissions does any defendant positively assert that the Bridging Credits cheque had been delivered by 30 June 1999. CIAFM and Mr White plead that "minimum subscriptions had clearly been met on 30 June 1999." CIAFM also contends that minimum subscription was achieved by 30 June 1999 by reason of its receipt of application forms, cash and executed bridging loan agreements. Cardinal says that minimum subscription was reached by 30 June 1999 because CIAFM had received applications for more than 400 (the actual amount may have been 490) interests in the project. The fourth, sixth, seventh and eighth defendants merely deny that minimum subscription was not reached by the required date. 31 What do the facts tell us? It is common ground that Bridging Credits drew a cheque for $3,189,690 and delivered it to CIAFM. It is also common ground that this cheque was lost and replaced by another cheque. The evidence establishes that the first cheque was drawn on 30 June 1999. First, the bridging loan agreements (I assume them to be in common form) required Bridging Credits to make the loans by 30 June 1999. Second, the Bridging Credits cheque stub is in evidence and it is dated 30 June 1999. Third, in a letter dated 21 October 1999 Mr Ansell, a director of Bridging Credits, made reference to the replacement cheque which he said "replace[d] our cheque dated 30 June 1999, which has been mislaid at the National Australia Bank." 32 However, the evidence about delivery is sparse. I have mentioned that on 30 June 1999 Mr White wrote to Cardinal confirming that CIAFM had received valid applications for 490 interests in the project and that the "minimum level of subscriptions [had] been reached". The letter alleged that "$3,189,690 [had] been deposited to the NAB account maintained by Cardinal as Custodian for the Project." The assertion that $3,189,690 had been deposited into the NAB account was not true. It is, however, possible that Mr White made the statement because he had received the cheque and, in accordance with CIAFM's obligation, left it at the NAB to be deposited into the account. At least the letter is some evidence that this is what occurred. 33 The evidence from Cardinal is helpful to an extent. In early 2000 Barkley Finance Corporation Ltd (Barkley Finance) replaced Bridging Credits as trustee of the trust from which the loans were made. On 3 May 2000 Mr Watson, the managing director of Barkley Finance, wrote to Cardinal about the cheque. In the letter Mr Watson said "documentation of the Trust indicates that a cheque in the amount of $3,189,690 was written and drawn on 30 June 1999 in favour of Cardinal Financial Securities Limited and I have received advice that this cheque was delivered by hand to the offices of Cardinal Financial Services [sic] Limited. [He later asked for] written confirmation that the aforementioned cheque was received by Cardinal Financial Securities Limited on 30 June 1999." Mr Russell's response was equivocal. He wrote: "I confirm that we received a cheque for $3,189,690 on or about30 June 1999and in turn drew a cheque to the same amount on 2 July 1999 payable to Corporate Investment Australia Funds Management Ltd. Neither of these two cheques were banked". Mr Russell's statement that the custodian's cheque was drawn on 2 July 1999 is important. He was asked about this incident during his cross-examination. He said that while he was aware that the Bridging Credits cheque had not been deposited into the NAB account before 2 July 1999, he "knew it was about to be deposited into that account." This suggests that Mr White received the cheque from Bridging Credits on 2 July in view of the required "round robin" dealing with the proceeds of that cheque. The same point emerges from Mr White's cross-examination of Mr Russell: "Q: In respect of that cheque, do you recall me visiting your offices and picking up the requisite cheque for approximately $3.1 million from yourself and a deposit slip for the account of – you know, the project account at Pitt and Hunter Street Branch? A: Yes. Q: Do you recall that I had either collected or was about to collect a corresponding cheque from Bridging Credits Pty Ltd" A: Yes. Q: Do you recall that I was about to go to the branch and hand to the bank officer the three deposit slips and the three cheques? A: Yes." 34 Further, in the course of their preparation for trial, Mr Spangaro's solicitors sought to discover when the Bridging Credits cheque had been delivered. They obtained the cheque stub from Barkley Finance but that did not provide the answer. So, on 22 March 2001 they wrote to Barkley Finance and requested: (i) "a copy of Bridging Credit Pty Ltd's National Australia Bank statement for the Australian Cotton Project Trust Account" (presumably a reference to the "Project Bank Account"); and (ii) Barkley Finance to instruct the NAB to trace the cheque in order to confirm the recipient's details. Mr Watson replied on 23 March 2001: "I agree that the information I have provided to you is not able to prove delivery of the promissory note and/or cheque on or before the relevant date. However, Australian Cotton Project Trust account statements and a trace of the relevant cheque will also be unable to prove that the promissory note and/or cheque was delivered to Cardinal Financial Securities as required. The information you request will simply indicate the date and nature of transfer of funds not date of delivery of promissory note and/or cheque. I believe only Cardinal Financial Securities is capable of providing the required evidence that delivery of the promissory note and/or cheque was on or before the due date. Further, as I believe the information you request will not prove delivery of the promissory note and/or cheque on or before the due date, I am of the opinion that supply of the requested information may be misleading or may be used misleadingly. I believe that to sufficiently satisfy your queries in regard to these matters you would need to seek information from Cardinal Financial Securities. I therefore direct you to Cardinal Financial Securities for satisfaction in these matters." 35 Finally, on this aspect there is a letter from Mr White to Mr Russell, which is dated 20 January 1999 but was written on 20 October 1999, as was subsequently conceded by Mr White. In this letter Mr White said that "it appears that the National Australia Bank has mislaid three cheques issued on or about 30 June 1999, each in the amount of $3,189,690" (my emphasis). Even at this point Mr White does not assert that the cheque had been delivered on 30 June 1999. 36 Does this evidence establish to the requisite degree of probability that the Bridging Credit cheque was not delivered by 30 June 1999? I incline to the view that it does. The principal factors which have led me to reach that conclusion include the following. First, as has been mentioned, the loans from Bridging Credits involved what I have referred to as a "round robin". I do not mean to suggest that there was anything improper in this. But the fact is that the loans made by Bridging Credits were unsecured, apart from the arrangement which required CIAFM to deposit with Bridging Credits so much of the loan money that it did not need. The Australian Cotton Project accounts for the period 1 July 1999 to 31 March 2000 describe this arrangement in the following way: "[i]n conjunction with the interim funding arrangements with Bridging Credits Pty Ltd, the Manager placed on deposit with the lender, an amount equivalent to the interim funding. This deposit is repaid in cash to the Manager when the Participants replace the interim funding with permanent finance facilities or pay out the loan in cash. The total amount of money to operate the Project is only available when the refinance of all interim funding arrangements have been completed." Logic suggests that the Bridging Credits cheque was delivered on the same day that Cardinal drew its cheque so that those cheques, together with a cheque from CIAFM to Bridging Credits for a like amount, could be presented at the same time. If Cardinal's cheque was drawn on 2 July 1999, it is likely that the other two cheques were drawn on the same day. The second reason is the failure by both Cardinal and Barkley Finance to confirm, in answer to direct questions, that the cheque was delivered on 30 June 1999. Third, there is Mr White's cross-examination of Mr Russell. Mr White was well aware of the importance of discovering when the cheque was delivered. His questions on this topic were intentionally ambiguous, in my opinion. Finally, there is the fact that Mr White declined to give evidence. He is the only party in a position to state positively when the Bridging Credits cheque was delivered. His failure to give evidence on this score is strong confirmation of what I, in any event, suspected, namely that the original cheque was handed to him on 2 July 1999. 37 What follows from this finding? According to the Prospectus, once it is established that the minimum subscription for interests in the project had not been achieved, all the subscription money had to be returned to the subscribers. But by whom was that money to be returned? 38 Before dealing with that issue, there is another which must be addressed. That issue is whether all the money which Mr Spangaro paid into the "Application Monies Account" was money subscribed for an interest in the project. It will be remembered that Mr Spangaro was required to pay $11,520 for shares in ACL and $45,420 for interests in the project. Mr Spangaro does not claim, and he is not entitled to claim, that he can recover the money he paid for the shares. Section 1037 of the Corporations Law as in force in 1999 prevents such a claim. An issue of shares in breach of a minimum subscription clause is not an invalid allotment, but rather a voidable transaction which Mr Spangaro has so far not sought to avoid: Commonwealth Homes and Investment Co Ltd v Smith (1937) 59 CLR 443; Buckley on the Companies Acts, 14th ed, vol 1 (1981) at 137; Palmers Company Law, 25th edn, vol 1 at para 5.745. It should also be noted that Mr Spangaro does not seek to recover from any defendant the amount he borrowed from Bridging Credits. Perhaps he has some arrangement with Barkley Finance about the repayment of the loan. At all events, his claim is confined to the recovery of $25,120 which found its way into the "Application Monies Bank Account". 39 The starting point for deciding to what account Mr Spangaro's payment should be attributed must be with the loan agreement with Bridging Credits. The loan ($31,820) was made for a limited purpose, namely "to provide short-term funding of the Borrower's participation [in the project]". I take this to mean that the loan was made solely for the purpose of financing the acquisition of interests in the project. That purpose was known to CIAFM who, it may be assumed, made the arrangements for Bridging Credits to provide the finance. It follows that Mr Spangaro's own money was needed in part to make up the balance of the price for six interests ($13,600) and in part to pay for the shares ($11,520). It is only the former amount which Mr Spangaro can recover in this action. 40 Upon the failure to achieve minimum subscription for interests in the project by 30 June 1999, did Cardinal hold $13,600 on trust for Mr Spangaro? A trust might be created by a promise made by one person to another that the first person will hold certain property on trust for the other. For the trust to exist it is necessary to decide whether that is what was intended by the promisor: Re Armstrong, deceased [1960] VR 202, 205. The intention to which I refer is the outward (or objective) expression of that intention and not the promisor's actual (or subjective) intention: Richards v Delbridge (1874) LR 18 Eq 11, 14; Re Armstrong [1960] VR at205-206; Tito v Waddell (No 2) [1977] Ch 106, 216; Walsh Bay Developments Pty Ltd v Federal Commissioner of Taxation (1994) 29 ATR 311, 319; affirmed (1995) 130 ALR 415. For all practical purposes the promisor's undisclosed intention is immaterial: Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178, 190-192 per Isaacs J (in dissent on other grounds). 41 The intention of the promisor may be evidenced in many ways. Usually one looks at what the promisor has said, whether orally or in writing: Knight v Knight (1840) 3 Beav 148, 149; In re Burley; Alexander v Burley [1910] 1 Ch 215. The intention can also be inferred from the nature of the transaction and the surrounding circumstances: Swain v The Law Society [1983] 1 AC 598, 621-622; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 121, 148-149; Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363, 370-371. It is sometimes appropriate to have regard to the promisor's conduct: Heartley v Nicholson (1875) LR 19 Eq 233, 242; Kauter v Hilton (1953) 90 CLR 86, 99. In all cases, however, it is not necessary to show that the promisor intended that the relationship he was wishing to create was that of trustee and beneficiary: In re Williams; Williams v Williams [1897] 2 Ch 12, 18. His knowledge of the character of the relationship is immaterial. 42 Cardinal's intention is to be found in the Prospectus and the Constitution. Although not a "party" to those documents, Cardinal was aware of their contents. It also knew that they would be circulated among prospective participants. It is implicit in the Prospectus that Cardinal would hold the Application Monies on trust for the applicants until minimum subscription was reached. I refer in particular to the summary on the first page, the section headed "Minimum Number of Interests" and the section headed "Application Money" in the Additional Information section. When reference is made to the Constitution this intention is no longer implicit; it is express. Clause 15.3 of the Constitution states that: "All Application Money paid by prospective Participants pursuant to the Prospectus or this Constitution shall be held on trust by an approved Custodian, for the prospective Participants in the Application Monies Bank Account." 43 Cardinal seeks to avoid the conclusion that it is the trustee first by pointing to the terms of the Custody Agreement which it says are inconsistent with such a finding. The Custody Agreement does provide that nothing in it "evidences or constitutes … Cardinal as trustee of the Project Property, other than as bare trustee holding the legal title to the Project Property, as agent for CIAFM". Two points can be made about this clause. In the first place, until minimum subscription has been achieved there is no "Project Property" upon which the clause can operate, for there is no project. Second, so far as the applicants are concerned the Custody Agreement does no more than evidence the secret intention of Cardinal. So, whatever may be its terms, they may be disregarded. 44 The second basis upon which Cardinal resists the conclusion that a trust has been established in favour of the applicants turns on s 601FC(2). Relevantly that section provides that it is "[t]he responsible entity [which] holds scheme property on trust for scheme members." Relying on this provision, Cardinal submits that the monies it received from the applicants were held for its principal, CIAFM. Put another way, Cardinal says that it held the Application Monies as agent for the true trustee, CIAFM. Consequently, so the argument goes, Cardinal did not owe the applicants any duty as trustee or indeed any equitable duty at all: compare Adams v Bank of New South Wales (1984) 1 NSWLR 285; Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371; Woodend Water Board and Maddock Lonie and Chisholm v Hyan Enterprises Pty Ltd (unreported, Full Court of the Supreme Court of Victoria, Murphy, Fullagar and Vincent JJ, 15 November 1990); Jalmoon Pty Ltd (in liq) v Bow (1997) 2 Qld R 62, 72. 45 Cardinal's second argument does not get off the ground. The assumption underlying it is that s 601FC(2) has application to the facts under consideration. That assumption is false. Section 601FC(2) does not apply in the present circumstances because there has never been any "scheme property" which could be held on trust for "scheme members". The reason is that there would never be a "scheme" in which members could participate until minimum subscription had been reached. The definitions of "scheme property" and "member" in the Dictionary to the Act make this plain. 46 It follows then that as at 1 July 1999 Cardinal held $13,600 in trust for Mr Spangaro. When it paid that money to CIAFM without the authority of Mr Spangaro, it acted in breach of trust and is liable to make good the default. 47 I now turn to the claim in restitution against CIAFM. Mr Spangaro alleges that CIAFM has been unjustly enriched at his expense by reason of CIAFM's retention of the amounts paid for the interests as well the amount subscribed for the "A" class shares. As I have said, Mr Spangaro cannot maintain any claim for the price of the shares. His claim is for the balance of the money paid. This claim against CIAFM appears to be based on the common indebitatus count of money had and received. Such a claim is personal in nature and grounded in the doctrine of unjust enrichment. The doctrine was explained by Mason CJ in Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd (1994) 182 CLR 51, 75: "Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss. Instead, it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched. As in the action for money had and received, the defendant comes under an obligation to account to the plaintiff for money which the defendant has received for the use of the plaintiff." 48 To obtain restitutionary relief, a plaintiff must demonstrate that: (i) the defendant was enriched; (ii) the defendant's enrichment was at the plaintiff's expense; (iii) the enrichment was unjust (according to defined categories developed in the cases); and (iv) no restitutionary or other defences would preclude restitution being made: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256-257; Australian & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662, 673; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 379, 392; Banque Financičre de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, 227, 234; Justice K Mason, 'Where has Australian restitution law got to and where is it going?' (2003) 77 ALJ 358. 49 The receipt by CIAFM of Mr Spangaro's Application Money is clearly an enrichment for the purposes of the claim. This necessarily follows from the fact that the Application Money belonged to Mr Spangaro and was paid to CIAFM in circumstances where it had no right to receive it. 50 The requirement that the defendant's enrichment be at the plaintiff's expense gives rise to an interesting legal issue. A plaintiff will usually bring a claim for money had and received against the person to whom he made the payment. Here, CIAFM received the Application Money from Cardinal, not Mr Spangaro. Is Mr Spangaro still entitled to maintain the claim? Clearly, the answer is in the affirmative. Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 is authority for this view. There a partner of a law firm had, without the firm's consent, drawn on the firm's account and spent the money at a gambling club. The firm brought a claim for money had and received against the club. Because the claim was not proprietary in nature, it was not alleged that money remaining in the hands of the club belonged to the firm. The issue before the House of Lords was whether the club was enriched at the expense of the rogue partner or at the expense of the firm. The House of Lords held that the club was enriched at the expense of the firm because it had received property belonging to the firm for no consideration. According to early authority, some of which was referred to in the speeches of Lord Templeman and Lord Goff, who delivered the leading judgments, this was sufficient to found an action for money had and received against a third party. One of the cases to which reference was made was the decision of the High Court in Black v Freedman & Co (1910) 12 CLR 105, 110 where O'Connor J said: "Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that other person's hands. If, of course, that other person shows that it has come to him bonâ fide for valuable consideration, and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not." As Lord Templeman noted (at 566), that decision was based in trust but "the reasoning applies equally to a claim for money had and received." Another important case referred to by the Law Lords was Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321 where (at 335-336) Atkin LJ said: "[a]s the money paid into the [appellant] bank can be identified as the product of the original money, the plaintiffs have the common law right to claim it, and can sue for money had and received." 51 The question whether CIAFM's enrichment was unjust, is not to be determined "by reference to some subjective evaluation of what is fair or unconscionable": David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR at 379. Instead, one must turn to the recognised categories of unjust enrichment to identify the basis for the obligation to make restitution. A common basis is when money has been paid for a consideration which has failed: Moses v Macferlan (1760) 2 Burr 1005, 1012 [97 ER 676, 680-681]; Royal Bank of Canada v The King [1913] AC 283, 296; Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516. In this context, "consideration" can be distinguished from consideration sufficient to form a contract and "it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise": Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, 48. There will be a "failure of consideration" where a payment has been made for a certain condition or purpose that is not fulfilled (including an unpromised future event), or in contemplation of a state of affairs which does not materialise: Martin v Andrews (1856) 7 El & Bl 1 at 4 [119 ER 1148, 1149]; Chillingworth v Esche [1924] 1 Ch 97; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR at 382; Baltic Shipping Co v Dillon (1993) 176 CLR 344, 389; Roxborough v Rothmans 208 CLR at 525, 557. As Professor Burrows points out in The Law of Restitution, 2nd edn, (2002) at 407, the distinction between a promised event and an unpromised event is immaterial because in both cases "the defendant's enrichment is the same in that, where the future event does not occur, the basis for the claimant's conferral of the benefit is undermined". Here, the unpromised event is the establishment of the project. It did not eventuate because minimum subscription was not reached. 52 In the context of restitutionary claims founded on failure of consideration it is important to note the historical requirement that any relevant contract be ineffective. That requirement may now have been dispensed with: Roxborough v Rothmans (2001) 208 CLR 516. Be that as it may, in the present case there was no contract between Mr Spangaro and CIAFM. A contract (the Management Agreement) may have come into existence if the conditions precedent had been satisfied. But they were not. 53 As regards the existence of a restitutionary or other defence (the fourth element of a money had and received claim), none were pressed. Mr Spangaro's restitutionary claim against CIAFM must therefore succeed. 54 While not the subject of an express pleading, on the facts as found it is difficult to resist the conclusion that CIAFM may also liable to Mr Spangaro as constructive trustee of the $13,600. Here I have in mind a claim based on the "first limb" of Barnes v Addey (1874) LR 9 Ch App 244. There Lord Selbourne said (at 251): "[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found…actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, 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." 55 The first limb of liability identified by Lord Selbourne is conventionally referred to as "knowing receipt" and the second as "knowing assistance". Lord Selbourne's dichotomy is not, however, devoid of criticism. For instance, it has been questioned by academics on the basis that its apparently axiomatic principles have been formulated in the absence of precedent and without an obvious rationale: M Bryan, 'Cleaning Up After Breaches of Fiduciary Duty – The Liability of Banks and Other Financial Institutions as Constructive Trustees' (1995) 7 Bond LR 67 at 70. While the principles concerning "knowing assistance" are arguably more coherent, the learning on the first limb is in danger of becoming a quagmire of conflicting propositions and rationales. That said, the authorities do reveal the elements which must be established to make out the claim. A plaintiff must prove that: (i) the defendant was in receipt of trust property; (ii) the defendant had knowledge that: (a) the property received was trust property; and (b) circumstances attendant on the transfer of that property made the transfer a breach of trust. 56 "Receipt" is taken to mean receipt in the recipient's own name or for the recipient's own benefit. It does not include receipt as an agent, as in the case of a banker for a customer or a solicitor for a client: Adams v Bank of NSW (1984) 1 NSWLR 285, at 290-292, 301; see also International Sales and Agencies Ltd v Marcus [1982] 3 All ER 551, 557; Citadel General Assurance Co v Lloyds Bank (Canada) [1997] 3 SCR 805 at 821-822; RP Austin, 'Constructive Trusts' in PD Finn, Essays in Equity (1985) at 228-229. This will be so even if the receipt involves a breach of trust by the principal: Mara v Browne [1896] 1 Ch 199; Williams-Ashman v Price & Williams [1942] 1 Ch 219. An agent may, however, be liable for "knowing receipt" if he acts outside the scope of his agency and misappropriates trust property: Williams-Ashman v Price & Williams; S Barkehall Thomas, 'Knowing Receipt and Knowing Assistance: where do we stand?' (1997) 20(1) UNSW Law Journal 1, 2-3). 57 The term "trust property" usually refers to actual tangible property or funds. However, where an errant fiduciary or trustee has obtained a non-financial advantage (such as confidential information or opportunity) by virtue of his breach of fiduciary obligations, that advantage may also constitute "trust property": DPC Estates Pty Ltd v Grey & Counsel Development Pty Ltd (1974) 1 NSWLR 443, 470. In Doneley v Doneley [1998] 1 Qd R 602, 612 de Jersey J said that "knowing receipt" contemplates not only receipt of trust property but also receipt of an interest in trust property which makes the recipient a direct beneficiary of the breach of trust. 58 "Knowledge" means a third party's knowledge that the relevant property was trust property being misapplied or transferred pursuant to a breach of fiduciary duty or trust: Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393, 405; Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16, 105; Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133, 163. The degree of knowledge required for liability to be established seems to vary according to whether a particular case concerns "knowing receipt" or "knowing assistance". For instance, it appears that it is not essential to prove dishonesty or want of probity in order to make a stranger liable for "knowing receipt": Ninety Five Pty Ltd (in liq) v Banque Nationale de Paris [1988] WAR 132, 173-174; Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR at 105; Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR at 164; Bank of Credit & Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, 448; Tara Shire Council v Garner [2003] 1 Qd R 556, 577. In Baden Delvaux v Société Générale [1993] 1 WLR 509, Peter Gibson J identified, in something like a descending scale, five categories of knowledge, to which regard might be had. They are: (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable person; and (v) knowledge of circumstances which would put a reasonable person on inquiry. In the context of accessorial liability for "knowing assistance", it has been suggested that this typology may lead to over-refinement: Agip (Africa) Ltd v Jackson [1990] 1 Ch 265, 293. In Royal Brunei Airlines Sdn Bhd v Tan (P.C.) [1995] 2 AC 378, Lord Nicholls said (at 392) that it should be "best forgotten". Recent English authority has, it seems, moved away from the Baden scale in favour of more simplified formulations, such as that propounded by Nourse LJ in Bank of Credit & Commerce International (Overseas) Ltd v Akindele [2001] Ch at 458, namely, whether the defendant's knowledge made it "unconscionable for him to retain the benefit of the receipt". 59 In Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 (a "knowing assistance" case) Gibbs J, making no distinction between "knowing assistance" and "knowing receipt", suggested (at 398) that it "may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger's failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious." Stephen J, with whom Barwick CJ agreed, also did not appear to distinguish between "knowing receipt" and "knowing assistance" cases in his judgment. Stephen J was similarly reluctant to accept a test of constructive notice based on failure to make inquiry, but (at 412) acknowledged that the position might be different if "a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust". In other words, the judgments of Gibbs and Stephen JJ appear to accept that constructive knowledge in the form of Baden category (iv) could ground liability for "knowing receipt" but that Baden category (v) would extend equity's arm too far. This limit has been endorsed in later cases: International Sales and Agencies Ltd v Marcus [1982] 3 All ER at 558; Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, 103; Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR at 105; Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR at 165, 170; Hancock Family Memorial Foundation Ltd v Porteous (1999) 32 ACSR 124, 142; Tara Shire Council v Garner [2003] 1 Qd R at 580. In contrast, there is a line of cases which support the view that constructive knowledge in all forms, including Baden category (v), will give rise to liability for "knowing receipt": Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER at 405; Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 1 WLR 1555, 1590 (where Ungoed-Thomas J made little distinction between the two limbs of Barnes v Addey); Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] 1 Ch 246, 306-307; Westpac Banking Corp Ltd v Savin [1985] 2 NZLR 41, at 53, 60, 63-64; Citadel General Assurance Co v Lloyds Bank (Canada) [1997] 3 SCR at 837; and LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291, at para 94. 60 For what it may be worth, I incline to the view that an action based on "knowing receipt" will succeed if the defendant possesses at least knowledge of circumstances which would indicate to an honest and reasonable person that the property received is trust property transferred in breach of trust or if the defendant has any level of knowledge higher on the Baden scale. The weight of judicial opinion supports this view. Were it necessary to do so in this case, I would find Mr White to have the requisite degree of knowledge when he wrote the letter of 30 June 1999 which Cardinal acted upon to pay over the application money. Mr White knew that the Bridging Credits cheque had not been delivered. He also knew that CIAFM was not entitled to the money. That is sufficient to render CIAFM liable as constructive trustee. 61 The plaintiff should bring in short minutes of orders within 14 days to give effect to these reasons. The orders should provide that as a condition of relief Mr Spangaro must apply to have his income tax assessments amended to remove any deduction relating to his interests in the project. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate: Dated: 26 September 2003 Counsel for the Plaintiff: Mr G McArthur SC Ms M Gordon Solicitor for the Plaintiff: Maurice Blackburn Cashman Appearing for the 1st & 5th Defendants: Mr G White Counsel for the 3rd Defendant: Mr A Kelly Solicitor for the 3rd Defendant: Herbert Geer & Rundle Counsel for the 4th, 7th & 8th Defendants: Mr P Bravender-Coyle Solicitor for the 4th, 7th & 8th Defendants: Thomas Nelson Counsel for the 6th Defendant: Dr B O'Hair Solicitor for the 6th Defendant: John Nicholl & Co Date of Hearing: 1 & 2 May 2003 Date of Judgment: 26 September 2003