New South Wales Supreme Court CITATION : Hillig v Darkinjung Pty Limited [2006] NSWSC 767 HEARING DATE(S) : 28/07/06 JUDGMENT DATE : 1 August 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Application stood over for formulation of orders: see paragraph 33 CATCHWORDS : PROCEDURE - undertakings to this court - claim by plaintiff that funds constituting defendants' sole assets held on trust for plaintiff - one defendant a trustee - consensual regime under which defendants undertake to court not to deal with such funds except by applying up to specified amount in paying expenses of proceedings - defendants seek increase in amount available for legal expenses - whether court may vary party's undertaking - whether court should discharge undertaking - need for opportunities for defendant trustee to seek judicial advice and for plaintiff to seek Mareva relief - defendants seek mandatory order that their bank pay cheques regularly drawn and presented up to certain amount - whether bank may be regarded as having notice of trust as distinct from undetermined (and unpredictable) claim LEGISLATION CITED : Aboriginal Land Rights Act 1983 Trustee Act, s.63 Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 Carl Zeiss Stiftung v Herbert Smith & Co [1969] 2 Ch 276 CASES CITED : Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 Gray v Johnston (1868) LR 3 App Cas 1 Macedonian Orthodox Community Church St Petka Inc v His Eminence Peter the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand [2006] NSWCA 160 Metropolitan Local Aboriginal Land Council v Metropolitan Aboriginal Association Inc [2003] NSWSC 104 Peter Hilig in his capacity as administrator of Darkinjung Local Aboriginal Council - Plaintiff Darkinjung Pty Limited - First Defendant Jeffrey John Bradford - Second Defendant PARTIES : David Pross - Third Defendant Greg Flanders - Fourth Defendant George Alexander Watts - Fifth Defendant Michael Stuart Jones - Sixth Defendant Commonwealth Bank of Australia - Second Respondent FILE NUMBER(S) : SC 2842/06 Mr D.H. Murr SC/Mr D.A. Smallbone - Plaintiff COUNSEL : Mr S.D. Epstein SC/Mr D.A. Robertson - Defendants Mr R. Jones, Solicitor - Second Respondent Patrick Woods & Company - Plaintiff SOLICITORS : Norton White Melbourne - Defendants John O'Sullivan - Second Respondent IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 1 AUGUST 2006 2842/06 PETER HILLIG AS ADMINISTRATOR OF DARKINJUNG LOCAL ABORIGINAL LAND COUNCIL v DARKINJUNG PTY LIMITED & 5 ORS JUDGMENT 1 At issue in these and related proceedings is the ownership of a large sum of money received by Darkinjung Local Aboriginal Land Council ("DLALC") as proceeds of the sale of land owned by it, which money was, in the first instance, transferred by DLALC to Darkinjung Pty Ltd ("DCo") to be held upon the trusts created by a trust instrument by which DCo was constituted trustee and, thereafter, transferred, as to certain amounts, by DCo to certain other companies ostensibly by way of loan. Those other companies are referred to as the "Enterprise Companies". It is convenient to refer to DCo and the Enterprise Companies together as the defendants. 2 Mr Hillig, the administrator of DLALC appointed under the Aboriginal Land Rights Act 1983 after the events to which I have referred, maintains that the trust of which DCo is supposedly trustee is invalid, that the transactions by which those moneys passed to the defendants were improper and are invalaid and that those moneys are held upon trust for DLALC. The contention of those companies is that the trust is valid, that the transactions were regular and valid and that the defendants are the true owners of the moneys (in the case of DCo, as trustee), free from lawful claims of DLALC. This description of the competing contentions is somewhat broad and general but sufficient for present purposes. 3 At various stages of the proceedings, the parties have asked the court to note consensual arrangements under which the defendants have agreed to hold relevant moneys intact subject, however, to certain specific sums being released and being made available from time to time on account of particular expenses. 4 On Friday afternoon last, the fourth day of the trial, the defendants moved on a notice of motion by which they sought two orders. The first is an order intended to supplement and vary the consensual arrangements with respect to the funds so that further moneys may be released for legal expenses. The second is an order concerning the Commonwealth Bank with which DCo maintains the account in which a large part of the moneys is deposited. I shall come to the Commonwealth Bank's position in due course. 5 As regards the first part of this motion, I was taken to evidence which satisfies me that a sum of $250,000 is required immediately (or virtually immediately) for legal expenses, given that some expenses already incurred are unpaid and that the case has another four (perhaps five) days to run. I am satisfied that there is a need for the payment of $100,000 on account of solicitors' costs for work already completed, $80,000 for counsel's fees for work already completed and $70,000 for counsel's fees still to be incurred in the remainder of the proceedings. 6 The order the defendants seek in respect of the release of funds can only be understood in the light of the present regime. That regime began on 15 June 2006 at the time when the court set the proceedings down for final hearing for four days commencing 25 July 2006. On that occasion, a number of orders were made by consent. Also by consent, the court noted an undertaking by the defendants: "Note the undertaking of the defendants that until midnight on 27 July 2006 or further order of the court, the defendants will not, by themselves, their officers, servants and agents, enter into any transaction, purchase, investment or other dealing that would or might result in drawing upon, spending, disbursing or giving any third party any charge or claim against (1) any of the proceeds of sale of land to Mirvac Ltd, Mirvac Projects Pty Ltd or any entity controlled by them; or (2) any of its assets derived therefrom. This undertaking does not apply to: (a) a payment of no more than $250,000 (inclusive of the amount of $100,000 referred to in the orders of Austin J made on 29 May 2006) for (i) costs and expenses of and incidental to these proceedings; and (ii) payment of accounting and administration costs due to National Management Consultants; …" 7 On 25 July 2006 (the first day of the trial), the court, by consent, noted a variation of the undertaking: "Note that the undertaking given by the defendants to the court on 15 June 2006 is varied by omitting the words 'midnight on 27 July 2006' and by inserting in the proviso after sub-paragraph (a)(ii) the words: '(b) an additional amount of $90,920 to be applied strictly for the purposes of the running costs of proceedings nos. 2842 of 2006 and 5634 of 2005 in this court for the remainder of this week, and, as to $920, for the payment of an insurance premium in respect of a building owned by the first defendant, provided that no part of the said sum of $90,920 is to be paid to National Management Consultants.'" 8 Also on 25 July 2006, the court, by consent, made the following order: "Grant liberty to the defendants to make further application for variation of the undertaking to increase the amount excepted in the proviso to the said undertaking, provided that such application is to be supported by an accounting in detail of the expenditure of the sum of $90,000 referred to in paragraph 1 of these short minutes." 9 The order the defendants now seek is as follows: "Vary the order of the Honourable Justice Barrett made 15 June 2006 by increasing the limit imposed under paragraph (a) of the undertaking recorded in paragraph 5 of the said order to $590,920." 10 This figure of $590,920 represents the $250,000 referred to in the undertaking noted by the court on 15 June 2006, the further $90,920 referred to in the undertaking noted by the court on 25 July 2006 and the additional $250,000 which the defendants now wish to apply towards legal expenses. 11 It is by no means clear to me how the court could make the order now sought. The court did not, on either 15 June 2006 or 25 July 2006, make an order with respect to the funds held by any of the defendants. It did no more than to note undertakings given by the defendants regarding application (or, more precisely, non-application) of moneys held by them which DLALC claims are properly to be regarded as held on trust for it. In particular, the court did not impose a limit upon expenditure by the defendants. Nor, importantly, did it positively authorise the expenditure of moneys on legal expenses. 12 The regime currently in place, as I view it, leaves the defendants at risk should it ultimately be found that the moneys expended as contemplated by the exception for legal fees and other matters are held upon trust for DLALC. Persons receiving those moneys may also be at risk in that event. 13 As things now stand, the defendants have given an undertaking to the court which is to operate until further order. They may, if they wish, ask to be released from that undertaking; and I am prepared to think that that is the effect of the application now before me – in other words, that the defendants seek, first, to be released from the existing undertaking (in its most recent form dating from 25 July 2006) and, second, to have the court accept in place of it an undertaking containing an exception for the enlarged amount for legal expenses. 14 The plaintiffs, of course, oppose any such position. They maintain that the court should not make an order releasing the existing undertaking. I am satisfied that, unless the original undertaking, as varied to this point, is either released and replaced by the new undertaking, the defendants will be unable to continue the defence of the proceedings. In the abstract, at least, that militates in favour of release of the existing undertaking and acceptance of the new undertaking (particularly where it is not matched by any undertaking as to damages) – but on the footing to which I have already referred, namely, that the court has not positively sanctioned any expenditure. 15 The defendants have not sought a positive order authorising them to expend moneys out of the disputed fund on the costs of the proceedings. Nor is it at all clear on what basis any such order could be sought. The relevant moneys are held and controlled by the defendants. They do not need the sanction of the court to deal with those moneys. DCo, of course, does not regard itself as the beneficial owner of the funds in its hands. Its position is that it holds the moneys upon the trusts created by the trust instrument to which I referred at the outset. As a trustee, DCo might approach the court for judicial advice under s.63 of the Trustee Act with respect to the application of funds in connection with the current proceedings. 16 An example of such an application for judicial advice in circumstances strikingly similar to those of this case is to be found in Metropolitan Local Aboriginal Land Council v Metropolitan Aboriginal Association Inc [2003] NSWSC 104. The ways in which such an application might be formulated and progressed are the subject of discussion in the judgments in Macedonian Orthodox Community Church St Petka Inc v His Eminence Peter the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand [2006] NSWCA 160. Of particular value is the following passage in the judgment of Hodson JA at [66] to [68]: "[66] The judicial advice sought in this case is to the effect that the trustee would be justified in using trust property in defending proceedings in which a claim is made to the effect that the trust requires this very property to be used, not as it is used by the trustee, but rather in accordance with decisions of the plaintiffs. Plainly, part of the plaintiffs' claim is that any use of the property to defend their claim would be a breach of trust. [67] In these circumstances, judicial advice to the effect that the trustee is justified in using the property for the purpose of defending this claim, which bound the plaintiffs pursuant to s.63(11), would protect the trustee against a subsequent claim by the plaintiffs that property actually used for that purpose, pursuant to the judicial advice, was so used in breach of trust, at least unless the plaintiffs could show that the judicial advice was given on the basis of facts that were incorrect or incomplete in some material respect. In that way, particularly having regard to the extent of trust property that could be thus affected, in my opinion the judicial advice would affect the rights of the trustee and the rights of the plaintiffs to a very substantial degree. It would do this to a far greater extent than in the more usual case where advice is sought about bringing or defending legal proceedings, in which the advice sought relates to claims by or against parties not associated with the trust itself. [68] So considered, in my opinion, despite these proceedings being s.63 proceedings, they are in substance adversarial. Provision for revocation of the advice does not alter this, in my opinion, as use of the property in reliance on the advice before revocation occurred would be protected, again unless its factual basis was impugned. This view is strongly confirmed by the circumstance that an interlocutory injunction has been granted that restrains the trustee from using the trust property for defending the proceedings except in accordance with such judicial advice." 17 It is significant that, in the present case, there is no interlocutory application by Mr Hillig directed towards preservation or freezing of the funds in dispute pending determination of his claims. An application of that kind would, in the present context of proprietary claims, raise questions as to the applicability, where a plaintiff claims ownership of a defendant's money rather than pursuing a claim for a monetary judgment, of principles which clearly recognise that there must be excepted from any interlocutory regime of a Mareva kind applications of funds for the costs of the proceedings: see generally Cardile v LED Builders Pty Ltd (1999) 198 CLR 380. Such an application would also raise questions about the need for Mr Hillig to give (or to cause DLALC to give) the usual undertaking as to damages. 18 My conclusion in relation to the first part of the present application is that I should discharge the existing undertaking given by the defendants but not until after there has been a reasonable opportunity for two steps to be taken: first, for Mr Hillig, as plaintiff, to seek, if minded to do so, an order of a Mareva kind with respect to the funds held by the defendants; and, second, for DCo to seek, if minded to do so, judicial advice in the way indicated by the Metropolitan Land Council case and the Macedonian Orthodox case. 19 I refer now to the second order the defendants seek: "Provided sufficient funds stand to the credit of the applicant's account, the Commonwealth Bank of Australia pay upon presentation cheques drawn by the applicant not exceeding the sum of $590,920 (including cheques presented and met since 24 May 2006 but excluding amounts paid to the respondent or Darkinjung Local Aboriginal Land Council)." 20 The "applicant", although in the singular, is the several defendants. The respondent is Mr Hillig. 21 The perceived need for the order concerning the Commonwealth Bank stems from the fact that, on 29 June 2006, Mr Hillig put the Commonwealth Bank on notice of his claim to the relevant funds, whereupon the Bank took the stance that it could not safely pay cheques drawn on the relevant account. On 25 July 2006, the Commonwealth Bank appeared by its solicitor as a respondent to the notice of motion with which I am now dealing. As I have already mentioned, a consent arrangement was reached on that occasion. Insofar as it involves the Commonwealth Bank, the regime is reflected in the court's having noted by consent a further undertaking: "Note the undertaking of the plaintiff to the Commonwealth Bank of Australia that in the event that the plaintiff is successful in establishing the said funds to be trust funds, the beneficial owner of which is Darkinjung Local Aboriginal Land Council, then the plaintiff will not bring any claim against the Commonwealth Bank of Australia in respect of payment of the said sum of $90,920 or any part thereof." 22 It is in the absence of any extension of the consensual regime that the defendants now press their claim for the making of a mandatory order against the Commonwealth Bank in the terms I have set out. 23 It may be said at once that the court will not make such a mandatory order. Apart from anything else, the terms of it are unacceptably broad. One need only mention the case where a cheque, duly drawn, is properly presented but, by that time, the drawer of the cheque has countermanded payment. The bank would breach the order if it did not pay the stopped cheque. As I presently see matters, it could only ever be appropriate for the court to make, at the suit of a customer, an order compelling payment of a cheque by a bank if the order were sought by reference to a particular cheque and the circumstances in which that cheque had been drawn and presented. 24 In the present case, an element of the context in which the bank's duties in relation to a particular cheque came to be considered would be its knowledge of the claims made by Mr Hillig to the effect that moneys in the accounts maintained with the bank are subject to a trust in favour of DLALC. It was submitted on behalf of the defendants that the bank will incur no prejudice or risk if it pays cheques in the ordinary course, despite its being on notice of the claims made by Mr Hillig on behalf of DLALC. Reference was made to a well-known passage in the speech of Lord Cairns in Gray v Johnston (1868) LR 3 App Cas 1 at p.11: "[I]n order to hold a banker justified in refusing to pay a demand of his customer, the customer being an executor, and drawing a cheque as an executor, there must, in the first place, be some misapplication, some breach of trust, intended by the executor, and there must in the second place … be proof that the bankers are privy to the intent to make this misapplication of the trust funds. And to that I think I may safely add, that if it be shown that any personal benefit to the bankers themselves is designed or stipulated for, that circumstance, above all others, will most readily establish the fact that the bankers are in privity with the breach of trust which is about to be committed." 25 It is clear, in my view, that knowledge of a claim is not sufficient to amount to notice of a trust or notice of misapplication of moneys. Carl Zeiss Stiftung v Herbert Smith & Co [1969] 2 Ch 276 involved circumstances for a firm of solicitors similar to those in which the Commonwealth Bank now finds itself. The plaintiffs in that case contended that a West German foundation held all its assets upon trust for the plaintiffs. The foundation had paid moneys to its solicitors out of those assets. The plaintiffs brought proceedings for an account against the solicitors alleging receipt of the moneys by them. It was also alleged that the solicitors, by reason of their knowledge of all the facts and matters averred and proved or to be proved in the main proceedings, had notice that the foundation's money belonged to the plaintiff. The claim against the solicitors failed. Central to the decision was a finding that the solicitors did not have notice of any trust affecting their client's assets. They had notice of claims only. Danckwerts LJ put the matter thus (at p.293): "Mr Harman's contention was that the defendant solicitors knew where the moneys that they received came from and knew that the source was trust funds. In my view this contention fails at the outset. What the defendant solicitors knew was that the moneys came from the West German foundation and they knew of the allegations contained in the proceedings brought against that foundation by the plaintiffs in which they were instructed to act as solicitors for the West German foundation. They knew that claims were being made against the West German foundation that all their property and assets belonged to the plaintiffs or were held on trust for them. But claims are not the same thing as facts. Mr Harman contended that for the purposes of the present issue all the allegations contained in the statement of claim in both the actions must be taken as true. That will not do. What we have to deal with is the state of the defendant solicitors' knowledge (actual or imputed) at the date when they received payments of their costs and disbursements. At that date they cannot have had more than knowledge of the claims above mentioned. It was not possible for them to know whether they were well-founded or not. The claims depended upon most complicated facts still to be proved or disproved, and very difficult questions of German and English law. It is not a case where the West German foundation were holding property upon any express trust. They were denying the existence of any trust or any right of property in the assets claimed by the plaintiffs. Why should the solicitors of the West German foundation assume anything against their clients?" 26 Sachs LJ said (at p.296): "The rule, as I understand it, is that no stranger can become a constructive trustee merely because he is made aware of a disputed claim the validity of which he cannot properly assess. Here it has been rightly conceded that no one can foretell the result of the litigation even if the plaintiffs were to prove all the facts they allege." 27 Edmund Davies LJ agreed that knowledge of a mere claim that a trust exists is insufficient to give rise to a constructive trust. 28 The nature of the knowledge necessary to give rise to a constructive trust was mentioned by Stephen J in Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373. After referring to Carl Zeiss, his Honour said (at p.398): "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. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escape liability because his own moral obtuseness prevented him from recognising an impropriety that would have been apparent to an ordinary man." 29 Equity is concerned with the state of a person's conscience. Generally speaking, a bank will act conscientiously in obeying its customer's mandate unless one of two situations prevails: either it has knowledge of matters which, according to the appreciation of Stephen J's "ordinary man", indicate invasion of someone else's rights; or "moral obtuseness" has prevented it from recognising such an invasion. Knowledge of a pending and unresolved claim entailing complex legal analysis is not sufficient. 30 In the present case, no one can possibly say whether the court will ultimately find that the moneys received by DCo and the defendants out of the funds of DLALC are held by them upon trust for DLALC. I venture to say that no one could answer the question with any degree of confidence even if all the facts alleged by Mr Hillig on behalf of DLALC were assumed to be established. A very great deal turns on the interpretation of the Aboriginal Land Rights Act and the application of legal principles to the facts. 31 In these circumstances, the basis on which the apprehensions of the Commonwealth Bank would turn out to be well-founded is, to say the least obscure – at least insofar as they relate to its continuing to pay in the ordinary course of business cheques apparently regularly drawn and presented. Nevertheless and for the reasons stated, it is inappropriate that the court make the broadly-stated order sought in the notice of motion. If any mandatory order is to be made, it could only relate to particular cheques. 32 Again, it is to be noted, as a matter of significance, that Mr Hillig, as plaintiff, has not foreshadowed any attempt to enjoin dealings with the assets of the defendants pending determination of the proceedings or to extend any such restraint to include restraint upon the Commonwealth Bank in respect of funds in accounts with it. 33 In the result, therefore, I intend to stand the interlocutory application over for a short time so that I may hear submissions as to the precise terms of the orders that should be made to give effect to these reasons. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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