Supreme Court New South Wales Medium Neutral Citation: Fodare Pty Ltd v Shearn [2011] NSWSC 479 Hearing dates: 24, 25 June 2010; 5, 6 May 2011 Decision date: 25 May 2011 Jurisdiction: Equity Division - Corporations List Before: Barrett J Decision: Short minutes to be brought in Catchwords: CORPORATIONS - directors - duties of directors - company's sole asset sold - sole director fails to account in any way for proceeds - vague statement as to part that it was used to pay unspecified debts - evidence as to another part that it was given to daughter-in-law to enable her to pay off her home mortgage - findings of breach of duty by director as to three sums - funding of "knowing receipt" by daughter-in-law as to one of these. Legislation Cited: Bankruptcy Act 1966 (Cth), s 120(2) Corporations Act 2001 (Cth), Part 2D.1 of Division 1, ss 180(1), 181(1), 182(1), 286, 344, 477(2)(m), 1317DA, 1317E, 1317H, 1317J(1) Evidence Act 1995, s 91 Uniform Civil Procedure Rules 2001, rule 35.5 Cases Cited: Baden v Societe Generale pour Favoriser le Development du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 Barnes v Addy (1874) LR 9 Ch App 244 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 Fodare Pty Ltd v Shearn [2010] NSWSC 737; (2010) 240 FLR 187 Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101 Ilhan v Ctinanovic [2009] NSWSC 160; (2009) 73 NSWLR 644 Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191; (2007) 63 ACSR 557 Magafas v Carantinos [2007] NSWSC 917 Peninsular and Oriental Steam Navigation Co v Johnson [1938] HCA 16; (1938) 60 CLR 189 Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474 Spellson v George (1987) 11 NSWLR 300 Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 1106 Category: Principal judgment Parties: Fodare Pty Limited - Plaintiff Doris Emily Elizabeth Shearn - First Defendant Kathleen Anne Hirtzell - Second Defendant Representation: Counsel: Mr J T Johnson - Plaintiff Mr M J Cohen - Defendants Solicitors: Garland Hawthorn Brahe - Plaintiff Dignam & Hanrahan - Defendants File Number(s): 2009/00289108 Judgment Parties 1These proceedings are brought by Fodare Pty Ltd ("Fodare"), at the instigation of its liquidator, Mr Clout, against Ms Shearn (who was a director of Fodare between 18 May 2001 and 22 August 2006) and her daughter-in-law, Ms Hirtzell. Ms Shearn's son, Mr Tubb, is Ms Hirtzell's husband. 2Mr Clout was appointed liquidator of Fodare upon the making of a winding up order on 6 March 2007. The applicant for winding up was Mr Bruce Dennis, a solicitor. Claims 3So far as Ms Shearn is concerned, the case Fodare seeks to make, shortly stated, is that: (a) Fodare (which was incorporated on 3 March 1989) was the trustee of the trusts of a settlement known as the Alexandria Trust which was established by deed dated 6 April 1989 and is a family trust of a familiar kind for the benefit of members of Ms Shearn's family; (b) Fodare, as trustee, acquired a property at Menangle Park in March 1989 for $195,000; (c) that property was sold to independent purchasers pursuant to a contract dated 22 July 2003 for $1,200,000; (d) the sale was completed on 1 December 2003; (e) the settlement moneys receivable by Fodare on settlement amounted to $1,081,736.41; and (f) those moneys were, to the extent of $634,957.79, applied by Ms Shearn, then the sole director of Fodare, in ways which involved breach by her of duties owed by her to Fodare as a director of Fodare. (There is also an element of Fodare's claim that concerns the deposit paid on exchange of contracts. I shall return to this.) 4The claims against Ms Hirtzell are "knowing receipt" and "knowing assistance" claims regarding part of the money said to have been misapplied by Ms Shearn. I shall return to this. Witnesses 5Evidence was given in the plaintiff's case by the liquidator, Mr Rowley, a partner in the liquidator's firm who has been involved in the work of this particular administration, and by Mr Bruce Dennis upon whose application the winding up order was made and whose role in relevant events will be mentioned presently. Each of those witnesses gave evidence on affidavit and was cross-examined. Documents were annexed to the several affidavits. Additional documents were tendered and admitted in the plaintiff's case. No affidavits were read in the defendants' case. Some documents were, however, tendered. Basic facts and central allegations 6It is not disputed that Fodare's Menangle Park property was sold as alleged, that settlement of the sale took place on 1 December 2003 and that the cheques received on settlement included the following: Perpetual Trustees Australia Ltd $423,862.12 Citibank Pty Ltd $251,488.85 The Alexandria Trust for Fodare Pty Ltd $383,468.94 7These proceedings concern the second and third cheques. No claim is made in respect of the sum of $423,862.12 paid to Perpetual Trustees Australia Ltd out of the settlement proceeds. 8Fodare maintains that the cheque in favour of Citibank Pty Ltd was given to Ms Hirtzell and that she used those moneys to pay off a mortgage debt to Citibank secured on a home owned by her and occupied by herself and her family. 9Fodare further says that the cheque in favour of "The Alexandria Trust for Fodare Pty Ltd" was deposited to the credit of a bank account of Ms Shearn, being an account entitled "Doris Shearn - The Alexandria Trust for Fodare Pty Limited". The solicitors who acted on the sale made the deposit and sent to Ms Shearn the deposit slip counterfoil stamped by the bank. 10It is accepted on both sides that Fodare itself never had a bank account, whether or not an account related to the Alexandria Trust. Ms Shearn herself described, in a liquidator's examination of 6 May 2008, what she did with the proceeds of the cheque for $423,862.12: "Q. Do you recollect having received that cheque at some later stage: A. I received it. I banked it. Q. Which account did you bank - A. I withdrew it and closed the account and I paid debts that were owing and I took out of it what was owing to me." 11The simple propositions on which Fodare relies are that the moneys comprised in the two relevant cheques were moneys of Fodare; that Fodare, in December 2003, owed a substantial sum to Mr Bruce Dennis, a solicitor; that Ms Shearn and Ms Hirtzell were aware of this indebtedness of Fodare; and that, because the sums of $251,488.85 and $383,468.94 were paid away in the way they were, Fodare did not have sufficient funds to pay what was owed to Mr Dennis. The Alexandria Trust 12There is a question whether the Menangle Park property was an asset of the Alexandria Trust and whether Fodare held it upon the trusts declared by the deed of 6 April 1989. 13In the liquidator's examination of 6 May 2008, Ms Shearn said that she understood that Fodare was the trustee of the Alexandria Trust. In response to a questionnaire administered by the liquidator, Ms Shearn said of the company that "its only role was as trustee for the Alexandria Trust". In the course of the examination, Ms Shearn also expressed a belief that Fodare held the Menangle Park property in trust for her personally. She said that she was unaware of the property being an asset of the Alexandria Trust. 14A belief on Ms Shearn's part that Fodare did not own the property beneficially is reflected by a number of statements by her in the course of the liquidator's examination that Fodare had no debts. She could not explain why one of the settlement cheques was drawn in favour of "The Alexandria Trust for Fodare Pty Ltd". In Federal Court proceedings about to be mentioned, the trial judge said that "[t]he evidence that the property was held by Fodare as a trustee was also highly dubious, to say the least" (in noting this, I do not intend to afford the observation any evidentiary value denied by s 91 of the Evidence Act 1995). 15The evidence does not enable me to say whether the Menangle Park property was an asset of the Alexandria Trust. In the end and for reasons that will emerge, nothing turns on that question so far as the case against Ms Shearn and Ms Hirtzell is concerned. The indebtedness to Mr Dennis 16At this point, it is relevant to trace the events that gave rise to the indebtedness to Mr Dennis. 17Ms Shearn became a bankrupt on 23 March 1993. In 1997, the Official Trustee in Bankruptcy, as trustee of her bankrupt estate, commenced proceedings in the Federal Court against Fodare, Ms Shearn, Ms Hirtzell and Mr Tubb. There was a cross-claim by Fodare against the Official Trustee. The basis of the Official Trustee's case was that the money used to purchase the Menangle Park property, including acquisition costs, was Ms Shearn's money and that she had made a disposition of it that was void against the trustee under s 120(2) of the Bankruptcy Act 1966 (Cth) as it then stood. 18The result, after hearings at first instance and on appeal, was that the disposition of $87,500 from a bank account held by Ms Shearn and Mr Tubb, which sum was part of the total purchase moneys of $195,000, was void against Ms Shearn's trustee in bankruptcy. There was no corresponding finding in respect of the balance of the purchase moneys. Judgment was given to the trustee against Fodare for $87,500 plus interest of $32,557.18 and it was ordered that the Menangle Park property be charged with the payment to the Official Trustee in Bankruptcy of the aggregate of $120,057.18. 19Fodare, Ms Shearn, Ms Hirtzell and Mr Tubb (plus, of course, the Official Trustee in Bankruptcy) were the parties to the Federal Court proceedings. 20Mr Dennis acted as the solicitor for Fodare, Ms Shearn, Ms Hirtzell and Mr Tubb in the Federal Court proceedings. Mr Robert Cameron appeared as their counsel and performed incidental work in chambers. 21Proceedings were in due course instituted in the District Court for the recovery of fees of both Mr Dennis as solicitor and Mr Cameron as counsel. In proceedings 5317/2004, Mr Dennis sued Fodare, Ms Shearn, Ms Hirtzell and Mr Tubb. In proceedings 5480/2005, Mr Cameron sued the same four defendants. On 17 June 2006, orders were made in each of these proceedings that claims against Ms Shearn, Ms Hirtzell and Mr Tubb be dismissed. That left outstanding claims by each of Mr Dennis and Mr Cameron against Fodare. In the case brought by Mr Dennis, he was, on 16 October 2006, given leave to proceed to summary judgment and the court awarded him judgment in the sum of $194,346.44 against Fodare on that day. He was also awarded costs. 22There was never a hearing on the merits in respect of Mr Dennis' claims. The present defendants say, by reference to a letter from Ms Shearn put into evidence by Fodare, that Ms Shearn had in fact made substantial cash payments to Mr Bruce Dennis's father, Mr Noel Dennis, who worked in Mr Bruce Dennis's practice as an employee (Mr Noel Dennis, it appears, was on friendly terms with Ms Shearn and her family). No attempt has been made to quantify this cash. The defendants' point is that, while there might be a judgment debt on the face of the record, the true position, if one goes behind the judgment, is that there is, in reality, no debt or a much smaller debt. 23The liquidator will no doubt have to address at some point the question of Fodare's indebtedness to Mr Dennis. That will logically be done in the context of a proof of debt lodged by him. It may be appropriate, at that point, for the liquidator to look behind the judgment: Ilhan v Ctinanovic [2009] NSWSC 160; (2009) 73 NSWLR 644. 24For the moment and for reasons about to be stated, it is not necessary to decide that matter. Ms Shearn - discussion 25While Fodare's pleaded case includes the allegation about the judgment debt and the awareness of Ms Shearn that payment out of the $251,488.85 and $383,468.94 left Fodare with insufficient funds to pay that debt, I do not think that that matter is of great significance. The propriety or otherwise of the application of corporate assets by a director is not judged according to whether it leaves the company unable to pay its debts, although if it does have that effect, the application of assets might much more readily be regarded as improper. Rather, the question is whether the assets are applied for purposes which are proper purposes. The matter was stated in a metaphorical way by Jessel MR in Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474 at 479 as follows: "In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes." 26In the present case, the money of the company may have been a trust fund in a real sense (in that it may have been an asset of the Alexandria Trust) but it was certainly a trust fund in the metaphorical sense referred to by Jessel MR. Either way, Ms Shearn, as the sole director in December 2003, was duty bound to safeguard Fodare's funds and to expend them only in discharge of liabilities properly incurred by the company and otherwise in pursuit of corporate purposes. Due and proper discharge of the director's duties in this respect does not allow the payment of funds to herself or members of her family by way of gift benefiting the payees or the other persons for the personal benefit of the director or her family members. 27The fiduciary nature of a director's relationship with his or her company is unquestioned. It is reflected in the statutory duties imposed by Division 1 of Part 2D.1 of the Corporations Act 2001 (Cth). A cardinal rule binding on a director is that the director's personal interest must always be subordinated to that of the company and the director must account to the company for any profit or gain obtained or received by reason of the fiduciary position. It follows that, if money of the company comes into a director's hands or under a director's control, the director must put it into the company's possession so that it is can be recognised as the company's property or, if that has not been done, stand ready and able to explain why the money was not been put into the company's possession and how and why the application of it in some other way was consistent with its status as an asset of the company. 28The need for records to be kept which enable receipts and payments by a company to be recognised and the reasons why moneys were received or paid by the company to be understood is not only a matter of prudent stewardship but also the product of statutory requirements to which a company is subject: Corporations Act , s 286. A director who fails to take all reasonable steps to comply with, or secure compliance with, those requirements contravenes s 344: see s 344(1). Dishonest contravention is an offence: s 344(2). In a case such as the present, where there is only one director, the need to ensure that adequate records are kept should be regarded as reflected in a duty of a fiduciary kind, akin to that to which a trustee is subject ( Spellson v George (1987) 11 NSWLR 300), to ensure that there is available to the company a means of being aware of what its property is and how it has been applied. 29The evidence leaves no doubt that Mrs Shearn did not perform that duty. After 6 March 2007, it was the liquidator who was capable of acting for the company and asserting for it the rights it had. The liquidator sought from Mrs Shearn the books and records of the company - indeed, all the company's property. She gave him nothing. She eventually favoured him with a report as to affairs stating that Fodare had no assets and no liabilities. In response to the accompanying questionnaire, Ms Shearn made statements that the company "did not trade", that it "had no assets", that "its only role was as trustee of the Alexandria Trust", that it operated no bank accounts and that the records of the company "were held by the company accountant Geoff Pont" (the liquidator asked Mr Pont for the records and was given a copy of one annual return). Questions about the keeping of prime books of account were answered "N/A" - no doubt signifying "not applicable". Ms Shearn also said that financial statements for the three years preceding winding up were not available because "no accounts were kept; the company had no income or assets". There is also a statement that the company had no tax liability. 30It might be inferred from what Ms Shearn said that she laboured under the misapprehension that a company the sole activity and function of which were to act as a trustee did not "own" property in fact vested in it or owe debts incurred as trustee. Whatever may be the explanation, the account she gave the liquidator in answer to the questionnaire shows, first, that the sums comprised in the two settlement cheques were never recognised by Ms Shearn as property of Fodare (whether in its own right or as a trustee) and, second, that she did not identify any records from which the destination of those sums or the purpose of their application might be understood. 31The true position was that Fodare owned the Menangle Park property and was entitled to the proceeds of its sale. Whether the property and its proceeds were owned beneficially by Fodare or were, in its hands, assets of the Alexandria Trust (or, as Ms Shearn suggested at one point, were held in trust for her) does not matter. Ms Shearn was obliged to ensure that the proceeds were not applied otherwise than for purposes and in ways that were consistent with the separate interests of Fodare (as the embodiment of the interests of its members and, if insolvency threatened, its creditors) or, if Fodare was a trustee, consistent with Fodare's duty as trustee to undertake the relevant trust and duly administer the trust property. And, for the reasons I have stated, Ms Shearn was required to ensure the availability of means for Fodare to see how the proceeds were applied and whether the manner of application was proper. As Latham CJ observed in Peninsular and Oriental Steam Navigation Co v Johnson [1938] HCA 16; (1938) 60 CLR 189 at 218, that a ny person who, as director, has in fact the disposition or control of the moneys or other property of the company may be ordered to bring in an account. 32A liquidator is armed with statutory means of obtaining information from company officers and compelling delivery to him or her of company property, including books and records. In addition, however, the liquidator has all powers necessary for winding up the affairs of the company and distributing its property: s 477(2)(m). Where the process of locating assets and getting them in entails assertion of the company's right to require a director to give an account of the application of company property by the director, the liquidator may impose that requirement; and there is no reason why that should not be done by means of proceedings such as these by which the liquidator seeks to bring the director to account for breach of duty. The director, as a litigant, may, as here, adopt the course of not giving evidence. But that course, of its nature, entails non-compliance with the requirement to give an account of the application of company property. 33Leaving to one side the deposit moneys, the complaint of Fodare, through the liquidator, centres on the cheques for $383,468.94 and $251,488.85 received on settlement of the sale of Fodare's property. In relation to the first cheque, there is an entire absence of records and information about the manner of its disposition, except that it went into a bank account maintained by Ms Shearn, that she then withdrew the whole and that she "paid debts that were owing and I took out of it what was owing to me". She made no attempt, either at the time, in response to the liquidator's inquiries or in these proceedings to identify the so-called "debts that were owing", to demonstrate that any such debts were owing by Fodare or to show a basis on which anything was "owing to me" by Fodare. 34In these circumstances, Ms Shearn was guilty of a serious breach of duty in relation to the sum of $383,468.94. She caused money of Fodare (whether or not an asset of the Alexandria Trust) to be applied in ways that cannot, on any objective basis, be seen to be consistent with Fodare's interests. 35The position in relation to the sum of $251,488.85 is somewhat more complex. All the observations I have made in relation to the other sum apply to it as well, save that Ms Shearn did not deposit it into her bank account and then withdraw it and spend it, as she did with the $383,468.94. There is no direct evidence of what happened to that cheque after its receipt on settlement. And significantly, the title to Fodare's property immediately before settlement recorded the registration of a mortgage in favour of Citibank. 36This last matter may give rise to an inference that Fodare was indebted to Citibank and that part of the settlement moneys were included in a cheque to Citibank so as to obtain on settlement a discharge of the mortgage by paying whatever it was that Fodare owed Citibank. If that were so, application of the $251,488.85 by payment to Citibank might be unexceptionable. 37There is, however, a significant matter, in this connection, that emerges from Ms Shearn's examination transcript. Her attention was drawn to the fact that, at the time of settlement of the sale by Fodare, there was a mortgage to Citibank recorded on the title. She was asked whether Fodare had ever borrowed money from Citibank. She answered in the negative, saying that she did not think that Fodare had ever borrowed anything. The examination continued: "Q. So if there was a mortgage registred on 92 Racecourse Avenue, Menangle Park, that would be a mortgage by way of guarantee would it? A. By way of either trust or guarantee I believe, I'm not sure of the legal situation. Q. In respect of a borrowing from Citibank Limited whose obligations were to use your words 'guarantee or trust' for the giving of the security? A. Privilege. The family would meet the payments, at no time has Fodare ever had any money. Q. Whose obligations was Fodare Pty Limited guaranteeing in respect of the mortgage in favour of Citibank Limited that was on the title to the property as at July of 2003? A. I have no knowledge." 38In the light of this, I conclude that, although Fodare's property was mortgaged to Citibank, there was no direct debt of Fodare to Citibank secured by the mortgage and that the principal debtor was someone else. It follows that, when $251,488.85 of the moneys receivable by Fodare on settlement was paid to Citibank, that payment did not discharge any direct indebtedness of Fodare to Citibank. Nor is there any basis for concluding that Fodare paid in response to a demand under, or otherwise by reference to any guarantee it had given of someone else's indebtedness to Citibank. 39Having regard to the foregoing and to conclusions about to be expressed in relation to Ms Hirtzell, the decision in relation to the $251,488.85 must be that, as with the sum of $383,468.94, Ms Shearn caused or allowed it to be paid away in a way that entailed no benefit to Fodare and that by so doing, she breached the duties owed by her to Fodare as a director of Fodare. 40I said at the start that there is an element of Fodare's claim that concerns the deposit under the contract for sale. The deposit of $120,000 was payable by three instalments. The claim in relation to it is based on the following part of the transcript of Ms Shearn's examination: "Q. Was any portion of the deposit released to Fodare Pty Limited after exchange? A. Nothing was released to Fodare. It was released to Doris Shearn. Q. And what did Doris Shearn do with the deposit that was released? A. Once again, I wouldn't know at this stage what I done with it. Q. Did you deposit it to a bank account? A. I wouldn't know that but I would presume I would. Q. Which bank account? A. I wouldn't know that either at this stage. Q. Have you repaid that money to Fodare? A. Pardon? Q. Have you repaid that money to Fodare? A. With privilege. I do not believe any money could be paid to Fodare because Fodare was not owed any money. Fodare was doing the owing." Ms Hirtzell - discussion 41I turn now to Ms Hirtzell and the case sought to be made against her. It is pleaded as follows: "In or about the receipt of moneys to satisfy the facility obtained by her from Citibank Pty Limited, the second defendant was knowingly involved in the breach of duty on the part of the first defendant of her duties referred to in paragraph 30 above and/or knowingly involved in the breach of duty on the part of the first defendant of her duties referred to in paragraph 30 above and/or knowingly in receipt of moneys paid to Citibank Pty Limited in breach of such duties." 42Particulars of this allegation refer to: (a) the retainer of Mr Dennis by all defendants to the Federal Court litigation, including Ms Hirtzell; (b) non-payment of Mr Dennis's costs (liability for which, as crystallised by the District Court judgment, was a liability of Fodare only); (c) Ms Hirtzell's directorship of Fodare until 18 May 2001; (d) Ms Hirtzell's knowledge of the Alexandria Trust; (e) Ms Hirtzell's knowledge that the moneys used to pay off her Citibank mortgage came from the sale of Fodare's Menangle Park property; and (f) representations made by Ms Hirtzell at a liquidator's examination on 5 August 2008. 43The evidence in respect of Ms Hirtzell is somewhat sparse. ASIC records show that she was a director of Fodare from 5 August 1989 to 18 May 2001 (Mr Noel Miller, then Ms Shearn's husband, was a director during the same period). Ms Hirtzell was thus not a director when the trust deed of the Alexandria Trust was executed on 6 April 1989. The director who attested the affixing of the seal to the deed is Ms Shearn (under her previous name of Miller). There is a signature as secretary that may be that of Noel Dennis. 44Beyond that (and noting my ruling of 6 July 2010 that the content of Ms Shearn's examination transcript is evidence against her only: Fodare Pty Ltd v Shearn [2010] NSWSC 737; (2010) 240 FLR 187), the only evidence about Ms Hirtzell's position comes from the transcript of her own examination on 5 August 2008, plus relevant documents. 45In the course of the examination, Ms Hirtzell stated that Fodare had no business activities while she was a director. She confirmed, however, that it was the trustee of the Alexandria Trust but said she was not familiar with the terms of the trust deed. When shown the trust deed, she said that she could not recall having seen it before. 46Ms Hirtzell was then asked whether the Alexandria Trust owned real estate while she was a director of Fodare. She replied in the affirmative and said that it owned the Menangle Park property. 47It is relevant next to quote the following passage from the transcript of Ms Hirtzell's examination: "Q. To your knowledge have you ever received any payment personally from the Alexandria Trust? A. Privilege. From Mrs Miller, Mrs Shearn. Q. From Mrs Shearn. When did you receive a payment from Mrs Shearn? A. About four or five years ago. Q. How much did you receive from Mrs Shearn at that time? A. $250,000. Q. And what was the purpose for the provision of money to you by Mrs Shearn of about $250,000? A. To help me financially. Q. Was that a loan by her? A. Privilege. Yes." 48Ms Hirtzell went on to say that she had not repaid the loan made to her by Ms Shearn, that the funds did not represent repayment by any of Ms Shearn, the Alexandria Trust or Fodare of any loan made by Ms Hirtzell. She also said that the terms of the loan by Ms Shearn were not reduced to writing, that the loan was repayable at "some future time" (but not a fixed time) and that the loan was interest-free and unsecured. The examination continued: "Q. What did you use the loan for? A. Privilege. To pay off a mortgage on my house. Q. Your house that you're referring to is 132 Racecourse Road? A. Privilege. Yes. Q. And are you the sole borrower in respect of the loan that was repaid at that time? A. Privilege. No. Q. Who was the other borrower? A. Privilege. My husband. Q. Could you give me the full name, please. A. Privilege. Kevin Tubb." 49Ms Hirtzell identified the mortgagee whose debt was paid off as Citibank. 50On 25 May 2001, a deed of release was executed by the Official Trustee in Bankruptcy, Fodare and Ms Shearn. It put an end to certain proceedings which the Official Trustee had brought in this court to enforce the charge in the Official Trustee's favour over the Menangle Park property that resulted from the Federal Court proceedings. The Official Trustee agreed to accept $105,000 from Fodare in satisfaction of its rights. The affixing of the common seal of Fodare to this deed was attested by Ms Hirtzell as "Company Secretary & Director" - she apparently signed even though she had ceased to be a director a few days earlier, in 18 May 2001. 51It is clear from this evidence that Ms Hirtzell was aware at material times that Fodare owned the Menangle Park property. The fact that she was a party to the Federal Court proceedings which centred on Ms Shearn's bankruptcy warrants a finding that Ms Hirtzell was also aware that Ms Shearn was a bankrupt at the time of those proceedings and therefore a person without means. The fact that Ms Hiirtzell signed the deed of release dated 25 May 2001 shows that she was aware of Fodare's obligation to pay $105,000 to the Official Trustee. Yet, when, in December 2003, she received $251,488.85 in the form of a bank cheque and used that sum to pay off the Citibank mortgage on her home, Ms Hirtzell maintains that she believed that she was receiving a loan from Ms Shearn which was for an unstated period and carried no interest and was not secured. 52Ms Hirtzell confirmed that the property mortgaged to Citibank was owned by her alone, even though she suggested that the borrowers from Citibank were herself and her husband, Mr Tubb. 53On these facts, it is possible to find (and I do find) that Ms Hirtzell received what she referred to as "$250,000" - in fact, $251,488.85 - from Ms Shearn four or five years before her August 2008 examination (in fact, in December 2003), that she applied the money in paying off a Citibank mortgage debt secured on her own home (referred to by her in her examination as "132 Racecourse Road") and that, at the time she did so, she knew that Ms Shearn was without significant means; also that she was aware of the sale of the Menangle Park property by Fodare that was completed in December 2003. 54The claim against Ms Hirtzell is brought under both the first, or "knowing receipt", limb of the so-called rule in Barnes v Addy (1874) LR 9 Ch App 244 and the second, or "knowing assistance", limb. 55The meaning and scope of the first limb were authoritatively confirmed by the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 . There was emphasis (at [116] ff) on the need to show a receipt of property by the person sought to be charged. That element must be taken to exist here since the payment to Citibank which caused Ms Hirtzell's mortgage debt to be satisfied entailed, in elided way, receipt of the money by her and payment by her to the bank. In addition, it must be shown that the recipient knew or had reason to know the essential facts that constituted the breach of equitable duty entailed in the making of the payment. 56The meaning and scope of the second limb were stated thus (at [160]): "As conventionally understood in Australia, the second limb makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary." 57The degree of knowledge that must be established is one of the following identified in Baden v Societe Generale pour Favoriser le Development du Commerce et de l'Industrie en France SA [1993] 1 WLR 509 at 575-576 and 582 and referred to in Farah Constructions at [174]-[178]: (a) a ctual knowledge; (b) wilfully shutting one's eyes to the obvious; (c) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (d) knowledge of circumstances which would indicate the facts to an honest and reasonable man; 58Although the High Court, in the passage identified, was discussing the second limb of Barnes v Addy , the same test for knowledge applies under both limbs: see Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA 191 at [176]; (2007) 63 ACSR 557 and Magafas v Carantinos [2007] NSWSC 917 at [12]. 59As at December 2003, Ms Hirtzell, according to statements made in her August 2008 examination, owed money to Citibank on the security of a mortgage of the home of herself and her family that was owned by her. In the circumstances then existing, she could not possibly have believed that Ms Shearn had $250,000 available to her with which to bestow benefaction on Ms Hiirtzell by lending her precisely the amount needed to clear the Citibank mortgage. Ms Hirtzell knew that Fodare's Menangle Park property had been the subject of proceedings associated with Ms Shearn's bankruptcy. She had herself been a party to those proceedings. Although her answers in the liquidator's examination were liberally peppered with protestations of inability to remember (just as the only content of her report as to affairs lodged with the liquidator is "N/A" and "not applicable"), it is, to my mind, clear that Ms Hirtzell was aware that Ms Shearn did not own the Menangle Park property and that, although Ms Hirtzell probably did not know the finer details, she must have been aware that Fodare had an ownership interest. 60Furthermore, Fodare's Menangle Park property was, up to the time of its sale, the home of Ms Shearn and members of her family. Ms Hirtzell and Mr Tubb had, at some stage, lived there as part of the family. Statements made by Ms Hirtzell in the course of her examination suggest that family members were in touch with one another in the usual way and, in particular, that Mr Tubb and Ms Hirtzell, as the son and daughter-in-law of Ms Shearn, were in normal contact with Ms Shearn. The Menangle Park property was sold with vacant possession. It may therefore be inferred (and I find) that Ms Hirtzell was aware of Ms Shearn's vacating the property at about the same time as the so-called "loan" was made by Ms Shearn to Ms Hirtzell. That, of necessity, must have caused the sale of the substantial asset and the availability of the substantial sum of money to become associated together in the mind of Ms Hirtzell, even if she did not have actual knowledge that the money that came into her hands, in the form of a bank cheque in favour of her mortgage lender, was part of the proceeds of the sale of the property. Conclusions 61Ms Shearn acted in breach of the fiduciary and corresponding statutory duties owed by her to Fodare by causing and allowing the sums of $383,468.94 and $251,488.85 received on settlement and the deposit of $120,000 earlier received to be applied as they were applied, that is, in the case of the $383,468.94 by being expended in ways that Ms Shearn briefly explained as set out at paragraph [10] above but did not record or seek to explain, in the case of the deposit in the way referred to at paragraph [40] above (again without any recording or attempt to explain) and in the case of the $251,488.85 by putting Ms Hirtzell in funds to enable her to pay off her Citibank mortgage. In none of those cases was there any attempt to say that the dispersal of the moneys entailed any benefit whatsoever to Fodare. Ms Shearn's vague references to the payment of debts and of what was owed to her do nothing to counter the strong inference that she caused the money to be spent in ways that had nothing to do with the welfare of Fodare. 62When I refer, in Ms Shearn's case, to "corresponding statutory duties", I am referring to the duties imposed by s 180(1), 181(1) and 182(1) of the Corporations Act . In the matter of application of the two relevant sums and the keeping of records of that application, Ms Shearn did not act with the degree of care and diligence that a reasonable person would have exercised if a director of a corporation in Fodare's circumstances and occupying the office and holding responsibilities corresponding with those of Ms Shearn; nor did she act in good faith in the best interests of Fodare and for a proper purpose; and she used her position improperly to cause detriment to Fodare by depriving it of the money belonging to it. 63As to Ms Hirtzell, I am of the opinion that, in the circumstances as I have described them, her state of mind when she received the sum of $251,488.85 was of at least within category (d) at paragraph [57] above and quite probably within category (b) or category (c). Her receipt was, in the relevant sense, a "knowing receipt" in respect of Ms Shearn's misapplication of funds belonging to Fodare. Ms Hirtzell therefore incurs liability under the first limb of Barnes v Addy for Ms Shearn's breach of fiduciary duty in respect of the $251,488.85. 64The evidence does not, however, warrant a conclusion adverse to Ms Hirtzell in relation to the second limb. It has not been shown that she acted with Ms Shearn or assisted her in the matter of misdirecting Fodare's funds. Relief 65Fodare is entitled to appropriate equitable relief against Ms Shearn for breach of fiduciary duties owed by her to Fodare and to a compensation order under s 1317H of the Corporations Act (the provisions of the Act referred to at paragraph [62] above being "civil penalty provisions" under s 1317DA). 66As regards the $251,488.85, Ms Shearn is liable to render to Fodare equitable compensation and statutory compensation in that sum together with interest from 1 December 2003 to the date of judgment, such interest to be computed in accordance with rule 35.5 of the Uniform Civil Procedure Rules 2005 as it now stands (see Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 1106 at [23]). 67As regards the $383,468.94, Ms Shearn is liable to render to Fodare equitable compensation and statutory compensation in that sum together with interest from 1 December 2003 to the date of judgment, such interest to be computed in the same manner. 68As regards the $120,000, Ms Shearn is liable to render to Fodare equitable compensation and statutory compensation in that sum together with interest. In the absence of evidence about the dates of misapplication of the three instalments of deposit, interest should be computed on the whole from the settlement date, 1 December 2003, to the date of judgment, again on the basis I have stated. 69Ms Hirtzell is liable to render equitable compensation to Fodare in the sum of $251,488.85 plus interest as already mentioned, such liability to be concurrent with that of Ms Shearn, so that they are jointly and severally liable for a single sum. In addition, however, it will be ordered that Ms Hirtzell's property which was freed from the Citibank mortgage by application of the $251,488.85 stand charged with the payment to Fodare of the equitable compensation so ordered. Such a charging order is warranted by principles of subrogation applicable where one person pays off another's mortgage and on the basis emerging from Giumelli v Giumelli [1999] HCA 10; (1999) 196 CLR 101. It also represents, in the circumstances, a variant of the remedial constructive trust commonly recognised as appropriate to "knowing receipt" cases. Tracing or following, as advocated by Fodare's counsel, is not appropriate since the moneys were not spent on the acquisition of the property. 70There are various claims for declaratory relief in Fodare's originating process. Most of those claims will be subsumed by the orders I have already outlined. It is not necessary to make declarations as to matters that are merely elements of the causes of action warranting those orders. 71To the extent that Fodare's claim for declarations had in contemplation declarations of the kind referred to in 1317E of the Corporations Act , the claim is precluded by s 1317J(1): Fodare Pty Ltd v Shearn (above) at [21] - [23]. 72In relation to the question whether the Menangle Park property was an asset of the Alexandria Trust at the time of its sale, I have already said that I am unable to come to a conclusion on that. Nor, I might say, do I consider these proceedings to be the appropriate vehicle to determine the question, given the obvious interest of the trust beneficiaries. Whether the liquidator sees fit in future to pursue that question will presumably depend on the success he has in making recoveries under the orders to be made in these proceedings. Only when there has been some meaningful recovery and the debts of Fodare have been ascertained will there be practical utility in addressing questions whether Fodare is the trustee of the Alexandria Trust and, if so, whether the proceeds of recovery in these proceedings form part of the assets of the Alexandria Trust and whether Fodare, as trustee, is entitled to be indemnified out of such assets for the debts as ascertained. 73Fodare seeks an order for the taking of an account from Ms Shearn. In light of the result reached, I do not consider that warranted. 74Ms Shearn and Ms Hirtzell will be ordered to pay Fodare's costs of the proceedings. 75I will direct that short minutes of orders giving effect to this decision be brought in. ********** 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 May 2011