Federal Court of Australia

ACN 002 402 146 Pty Ltd (manager appointed) (in liq) (formerly known as Tome Bros Pty Ltd) v Ken Crossman & Co Pty Ltd [2023] FCAFC 35

ORDERS

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The appellant is to pay the respondent’s costs as agreed or taxed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

Introduction

1    The resolution of this appeal turns on a correct understanding of how the appellant (formerly known as Tome Bros Pty Ltd trading as Tome Bros Real Estate) contended that it suffered damage by reason of the conduct of its auditor Ken Crossman & Co Pty Ltd (Crossman & Co) which misled a government regulator to think that the appellant’s audited trust accounts presented a true and fair view, when in fact one of its directors was a fraudster who was in the habit of regularly using trust money for personal purposes.

2    Between July 1998 and 1 May 2013, the appellant carried on business as a real estate agent in New South Wales. To do so it was required to be licenced. Licences were renewed annually subject to certain conditions including, relevantly in this matter, where an agent held trust funds, then for each completed financial year, the agent was required to lodge with the Department of Fair Trading (Department) an auditor’s report in a prescribed form. The appellant held trust funds in each financial year from 1998 to 2013. It engaged Crossman & Co to prepare the necessary audits from 2002. Mr Ken Crossman, a director, was the individual responsible. The audit reports ultimately in question as prepared by Mr Crossman were for the financial years 2002 to 2009.

3    The appellant maintained two trust accounts with the National Australia Bank. Between 2002 and 2009, the fraudster acting alone or in conjunction with one or more others, misappropriated trust money and falsified bank statements for the trust accounts. Mr Crossman relied on the false statements in preparing the audit reports. He reported closing cash balances at the end of each financial year which overstated the actual closing balances of the accounts. The errors were significant. For example, to 30 June 2022 the audit report stated that the respective balances were $653,484.25 in one account and $203,640.15 in the other, when in fact the actual balances were $217,174.41 and $36,643.72 respectively. This pattern of fraud and error by Mr Crossman was repeated in each other relevant year. In answer to a standard form question in each audit report: “Do reconciliation statements accurately reflect the reconciliation of the balance(s) of the trust account(s) with the balance(s) of the cash books(s)?” (the reconciliation question), he repeatedly answered “yes”. That answer was false in each relevant year. The respondent accepted at trial that on each occasion the answer was a misleading representation made to the Department and was made in trade or commerce by the respondent contrary to s 52 of the Trade Practices Act 1974 (Cth) (TP Act).

4    The primary judge found, and it is not now in issue, that if Mr Crossman had properly conducted the audit in each year by, in particular, obtaining bank statements directly from the National Australia Bank, he would have noticed that the accounts could not be reconciled: the audit reports would have disclosed that fact in at least the first audit year with the consequence that one or more officers of the Department would have investigated the appellant by conducting an independent audit. That further audit most likely would then have discovered the trust account deficiencies and the fraudulent conduct. Thereupon, the appellant’s licence would have been cancelled and its business shut down. The primary judge made each of these findings which are not now controversial: ACN 002 402 146 Pty Ltd (manager appointed) (in liq) v Ken Crossman & Co Pty Ltd [2022] FCA 749 (PJ) at [49]. If that had occurred in a timely way after Mr Crossman signed the 2002 audit report on 25 September 2002, the activities of the fraudster would have ceased and future loss of trust money would have been prevented.

5    The trial before the primary judge proceeded on a statement of agreed facts filed on 16 April 2020 with limited affidavit and oral evidence. That statement formulated 15 “issues for determination” by her Honour. Ultimately, only issues 7, 8 and 9 were controversial. Of those, issue 7 was:

Whether Tome suffered loss and damage “by” any contravention of s 52 of the [TP Act] by Crossman & Co.

6    To which her Honour answered “No”.

7    It is that finding which is central and determinative of the appeal. Although we do not endorse all of her Honour’s reasons, nonetheless her Honour’s answer was correct and the appeal must be dismissed.

The framing of the case on the causation and damage issues

8    In summary, the appellant’s amended statement of claim, as confined to the financial years 2002-2009, proceeded as follows. The appellant received various categories of trust money in the course of its business. Trust money was deposited to the trust accounts. Money was received on behalf of beneficiaries in the form of deposits for the purchase of real estate, the payment of rent by tenants and rental bonds. In each relevant financial year “significant numbers of cheques were drawn on the trust accounts but were not issued or sent to the requisite payees for weeks or sometimes months”. The accumulation of unpresented cheques masked the fact that the balance of the trust accounts was insufficient to meet all cheques drawn upon the accounts in each year. The fraudster misappropriated the difference. An initial difficulty with that contention, to which we later return, is that there was an accumulated deficiency in each trust account for years prior to the audit reports of Mr Crossman.

9    In each audit year, Mr Crossman did not take sufficient steps to investigate the closing balances as fraudulently misstated on the false bank statements. He did not, in particular, seek copies of the bank statements from the bank. Nor did he seek advice from the bank to independently verify the closing balances. If Mr Crossman had acted more diligently it is likely that the fraud would have been detected no later than the first audit year. In failing to detect the fraud, Mr Crossman misstated his opinion in each audit report to the effect that the trust accounts were maintained in accordance with various statutory provisions and that the reconciled balances were sufficient to meet “all trust creditors of the licensee entity as disclosed by the books of accounts and records”. Based on that opinion, Mr Crossman made the misleading representation to the Department by incorrectly answering the reconciliation question that we have set out. That conduct was contrary to s 52 of the TP Act.

10    The appellant caused each audit report to be lodged with the Department shortly after completion by Mr Crossman. The Department was in fact misled into thinking that the trust accounts were regularly maintained by the appellant and that there was no deficiency. In reliance upon that (incorrect) belief, the Department renewed the real estate licence of the appellant each year. The fraud was not exposed in a timely way and the fraudster continued to misappropriate trust money.

11    Eventually, in 2013, the activities of the fraudster came to light. A liquidator was appointed by orders made in this Court on 1 May 2013 upon application by the Deputy Commissioner of Taxation. The Director-General of the Department appointed a liquidator as manager of the appellant’s business on 15 May 2013.

12    The statutory scheme, which we address below, provides for a Property Services Compensation Fund (Fund) to compensate claimants for trust account default by licensed real estate agents. Many claims were made upon the Fund by clients of the appellant. The first claim was made on 27 May 2013. Ultimately, the clients were compensated in the total sum of $1,477,440.27. On 27 July 2018, the Commissioner for Fair Trading lodged a proof of debt in the appellant’s liquidation in that sum, which the liquidator accepted.

13    Senior counsel for the appellant accepted in oral argument that the appellant’s claim is for pure economic loss. He eschewed the proposition that properly understood it is a lost opportunity claim. He submits that the damage suffered by the appellant by reason of the misleading conduct of the respondent is its liability to the Department for that which is said to be a statutory debt and the damages claim as formulated is for $1,477,440.27 plus interest. As pleaded, maintained before the primary judge and confirmed in written submissions in the appeal, the date the appellant first suffered damage was said to be 27 July 2018. Before then, it was contended that damage was only contingent. This position was most explicitly articulated in the appellant’s written submissions to this Court in support of the appeal:

It was not until the Secretary first sought to recover the statutory debt on 27 July 2018, by lodging the Proof of Debt with the liquidator of Tome, that Tome suffered actual liability to the Department in the amount of $1,477,440.27. That is the precise identification of the loss which completed Tome’s cause of action against Crossman & Co. Properly understood, that is the loss that the primary judge should have borne in mind when considering the questions of quantum (Issue 2) and causation (Issue 3).

14    In oral submissions, and at the late stage of reply, the appellant’s claim shifted to embrace an alternative case said to be found in submissions that were put to the primary judge that:

In the alternative, Tome Bros may have suffered economic loss on 27 May 2013 being the date of the first claim received, and accepted, by the Compensation Fund, being a date after there was a relevant “failure to account” within the meaning of section 125 of [the Act].

15    Rightly, counsel for the respondent objected. That claim is not pleaded. That submission was concerned with the date of loss, not the character of the damage. The primary judge, quite understandably, did not deal with an un-pleaded case of that character and there is no ground of appeal that her Honour erred in that respect. At PJ [67] her Honour clearly sets out the submission put to her on behalf of the appellant: that actual loss (damage) was not suffered until lodgement of the proof of debt. The alternative claim is not mentioned in the appellant’s written submissions, primary or in reply, in this appeal. It is elementary that the appellant is bound by the conduct of its pleaded case below (Coulton v Holcombe (1986) 162 CLR 1) and the grounds of appeal to this Court. We reject this late attempt to radically reframe the appellant’s case in the alternative.

16    Returning to the case that was put to the primary judge, the appellant relied on certain statutory provisions the overall effect of which is, in its submission, to create a statutory debt owed by it to the Crown and that it suffered damage by reason of the misleading conduct of the respondent when the proof of debt was lodged for that liability on 27 July 2018. The provisions have altered over time. Initially, the Property, Stock and Business Agents Act 1941 (NSW) (1941 Act) applied. Later, it was replaced by the Property, Stock and Business Agents Act 2002 (NSW) (2002 Act) with effect from 1 September 2003. As we have noted, the 2002 audit report was signed by Mr Crossman on 25 September 2002. It was countersigned on behalf of the respondent on 24 and 25 September 2002 by several of its licensed agents. Despite the applicability of the 1941 Act to the first audit year in question and reliance on the proposition that the fraud would have been detected in late 2002 had the audit for the 2002 financial year been properly conducted, the focus of the appellant’s argument on appeal is upon the provisions of the 2002 Act and the pleading that claims were made upon and paid out of the Fund established by the 2002 Act. Some amendments have been made over the relevant time period to the 2002 Act, however, as each counsel was content to refer only to the version of that Act as in force as at 30 June 2013 (and it was not submitted by either counsel that any differences with earlier or later versions is material), it is that version that we consider. It should be noted, however, that the Secretary replaced the Director-General as the agent of the Crown by later amendment and references to either in these reasons are of no material consequence.

17    Part 10 of the 2002 Act established the Fund, contributions to it, claims upon and payments from it and the recovery of payments made in specified circumstances. Section 165 required the Director-General (defined as the Commissioner for Fair Trading of the Department) to establish and maintain the Fund. By s 166, the Fund comprised levy amounts paid by licensees, amounts contributed pursuant to other Acts, amounts received from the statutory interest account and income from the investment of the Fund. Section 167 permitted the Director-General to apply money held in the Fund to satisfy claims made upon it. Division 3 is concerned with claims made upon the Fund and relevantly provided as follows:

170 Definitions

In this Division:

…

failure to account has the meaning given in section 171.

pecuniary loss from a failure to account includes:

(a)    all costs (including the legal costs and disbursements of making and proving a claim), charges and expenses that a claimant has suffered or incurred as a direct consequence of the failure to account, and

(b)    all interest on money or other valuable property that a claimant would have received but for the failure to account for the money or other property, with that interest calculated to the date on which the Director-General determines the claimant’s claim or a judgment is recovered against the Director-General in relation to the Compensation Fund in respect of that money or other property.

171 Meaning of “failure to account”

(1)    In this Division, a reference to a failure to account is a reference to a failure by a licensee to account for money or other valuable property entrusted to the licensee or an associate of the licensee in the course of the carrying on of the licensee’s business as a licensee.

(2)    This Division applies only to a failure to account that arises from an act or omission of the licensee or associate.

(3)    For the purposes of this Division, it does not matter that the failure to account occurred after the licensee ceased to be licensed, if the money or other valuable property concerned was entrusted to the licensee (or an associate of the licensee) before the licensee ceased to be licensed.

(4)    This Division applies whether the failure to account, or the act or omission, took place before or after the commencement of this Division.

…

173 Claims against Compensation Fund

(1)    The Compensation Fund is held, and is to be applied, for the purpose of compensating persons who suffer pecuniary loss because of a failure to account.

(2)    A person who claims to have suffered a pecuniary loss because of a failure to account may make a claim against the Compensation Fund, but only if the claim is made in writing to the Director-General within:

(a)    a period of 12 months after the person has become aware of the failure to account, or

(b)    a period of 2 years after the date of the failure to account,

whichever period ends first.

(3)    However, a claim caused by a failure of a licensee (or an employee or agent of a licensee) to lodge a rental bond with the Rental Bond Board may also be made at any time within one year after the termination of the tenancy agreement.

(4)    A licensee does not have a claim against the Compensation Fund in respect of a pecuniary loss suffered in connection with the licensee’s business as a licensee because of a failure to account.

(5)    Subject to this section, the Director-General may receive and allow, in whole or in part, any claim against the Compensation Fund at any time after the relevant failure to account arose.

(6)    The Director-General may disallow any claim, in whole or in part, in appropriate cases. In particular the Director-General may disallow a claim to the extent that pecuniary loss was suffered as a result of a failure to mitigate loss or was occasioned by unreasonable delay in making a claim.

174  Legal proceedings

(1)    A person cannot, without the leave of the Director-General, commence any proceedings in relation to the Compensation Fund unless the person has made a claim and the Director-General has disallowed the person’s claim.

(2)    A person cannot recover from the Compensation Fund by way of any such proceedings an amount greater than the amount of pecuniary loss suffered by the person, after deducting from the total amount of the pecuniary loss:

(a)    the amount or value of all money or other benefits received or recovered from any source (other than the Compensation Fund) in reduction of the pecuniary loss, and

(b)    any such amount or value that, in the opinion of the Director-General, might have been received or recovered but for the person’s neglect or default.

(3)    Any proceedings in relation to any claim against the Compensation Fund are to be as for a debt due by the Crown and are to be brought in a court of competent jurisdiction. The proceedings do not lie against the Director-General.

(4)    In those proceedings:

(a)    all defences that would have been available to the licensee in relation to whom the claim arose are available to the Crown, and

(b)    all questions of costs are in the discretion of the court or, where the proceedings are tried with a jury, the judge presiding at the trial.

(5)    Any order for the payment of costs made by the Local Court operates as a judgment debt under the Civil Procedure Act 2005 and is enforceable as such under that Act.

(6)    No proceedings can be brought against the Crown in relation to a claim against the Compensation Fund after the end of:

(a)    a period of 6 months after the claimant has been notified that the claim has been disallowed, or

(b)    such longer period as the court may permit, on sufficient cause being shown and on such terms as it thinks fit.

175 Limits on amounts recoverable

(1)    The amount that a person may recover from the Compensation Fund cannot, in any case or in any event, exceed $500,000 or, if another amount is prescribed by the regulations, the prescribed amount.

(2)    The aggregate sum that may be applied in compensating all persons who suffer or incur pecuniary loss because of a failure to account, or of related failures to account, cannot exceed $2,000,000 or, if another amount is prescribed by the regulations, the prescribed amount.

(3)    The Director-General may disregard subsection (2) in the case of successive failures to account by a licensee, to the extent that the Director-General is satisfied that the failures are not connected.

(4)    If the total amount of claims or judgments (or both) exceeds the aggregate sum provided for by this section, the Director-General has an unfettered discretion to determine the division and allocation of the available money among the various parties (whether or not to the exclusion of any one or more of them).

…

177 Subrogation

(1)    On payment out of the Compensation Fund in settlement in whole or in part of a claim under this Act, the Crown is subrogated, to the extent of the payment, to all the rights and remedies of the claimant against the licensee, or the former licensee, in relation to whom the claim arose, or any other person.

(2)    A certificate given by the Director-General certifying that a specified amount has been paid out of the Compensation Fund in settlement in whole or in part of a claim under this Act is evidence of the matter certified.

(3)    In the enforcement of any rights or remedies to which the Director-General is subrogated under this section for the purpose of recovering an amount paid out of the Compensation Fund, the amount is taken to be a debt due to the Crown and may be recovered accordingly.

(4)    The Director-General may exercise the rights and remedies to which the Director-General is subrogated under this section in the name of the Director-General or in the name of the claimant concerned.

178 Recovery of payments from directors

(1)    This section applies when the payment of an amount out of the Compensation Fund has been made as a consequence of the act or omission of a corporation (including the payment of any amount to an administrator of the affairs and property of the corporation).

(2)    The Director-General may recover, jointly or severally, from any person who was a director or persons who were directors of the corporation at the time of the relevant act or omission, the amount of the payment as a debt in any court of competent jurisdiction.

(3)    In any proceedings for the recovery of an amount under this section, judgment is not to be entered against a defendant who proves that the act or omission occurred without the defendant’s express or implied authority or consent.

(4)    Proceedings may be brought for the recovery of an amount under this section whether or not the person against whom the proceedings are brought, or any other person, has been convicted of an offence in respect of the act or omission as a consequence of which the amount was paid.

(5)    When this section renders a person or persons liable to pay an amount as a consequence of an act or omission of a corporation, the payment by the person or either or any of those persons of the whole or any part of the amount does not render the corporation liable to the person concerned in respect of the amount so paid.

…

180 Satisfaction of claims and judgments

(1)     A claim or judgment against the Compensation Fund can only be satisfied to the extent of money in the Compensation Fund (either then or at a later time). No other money or property (whether of the Crown or otherwise) is available for that purpose.

(2)    If a number of claims or judgments (or both) against the Compensation Fund cannot be satisfied because of an insufficiency of money in the Compensation Fund, the Director-General has an unfettered discretion to determine the division and allocation of the available money among the various parties (whether or not to the exclusion of any one or more of them).

18    The appellant expressly disavowed that the Director-General, or later the Secretary, exercised any right of subrogation for any claimant as conferred by s 177(1). The case is that the effect of s 177(3) is to confer “an independent, separate cause of action against the licensee, or former licensee, to recover a statutory debt in the amount paid out of [the Fund]”. On that construction damage, being an actual liability, was not suffered by the appellant as a result of the misleading conduct of the respondent until 27 July 2018 when the proof of debt, equal to the total quantum of all claims paid out of the Fund, was lodged with the liquidator.

The decision of the primary judge

19    In rejecting that claim her Honour at PJ [75] accepted, on the causation question, that it is not necessary for the appellant to have been misled by the conduct of the respondent in order to have suffered damage caused by it. The decision of Lockhart J in Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 explains why. His Honour, in deciding a separate question on a pleading point, concluded that the causation requirement of s 82 of the TP Act, the suffering of loss or damage “by” the conduct of another person in contravention of the statute, did not “impose some general requirement that damage can be recovered only where the applicant himself relies upon the conduct of the respondent constituting the contravention of the relevant provision”: 529. Thus, in that case it was open to one corporation to claim that it suffered damage by the conduct of a competitor which had the effect of misleading consumers into buying less of the claimant’s product and more of the competitors. His Honour’s analysis has subsequently been referred to and approved on many occasions, notably by Gummow J in Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 528-529 and more recently by this Court in Chowder Bay Pty Ltd v Paganin [2018] FCAFC 25 at [61], Besanko, Markovic and Lee JJ who described cases of this type as “indirect reliance (that, is through a third party)”.

20    Her Honour rejected the causation claim of the appellant for three reasons. First, the fraudster was one of the directors of the appellant when the audit reports were lodged with the Department, his knowledge was its knowledge and therefore the appellant’s conduct was causative of the loss claimed: PJ [75]. Second, the appellant did not suffer damage at the time of each misappropriation because the pooling of trust money in each account allowed for the application of later deposits to pay out earlier clients whose funds had been stolen: PJ [82]. The appellant failed to lead sufficient evidence for her Honour to reconcile the ultimate claimants who were compensated by payment from the Fund by reference to the date of default for each: PJ [83]. Third, her Honour rejected the appellant’s argument that the effect of s 177(3) of the 2002 Act is to create an independent statutory right of action which crystallised upon lodgement of the proof of debt: PJ [84].

The appeal to this Court

21    There are three grounds of appeal:

(1)    The primary judge erred in finding that the Appellant’s loss was not the claim made by the Department of Fair Trading under s 177(3) of the [2002 Act] in its proof of debt lodged with the liquidator.

(2)    The primary judge erred at [76] of the judgment in concluding that she was not satisfied that the Appellant demonstrated that its loss was in the amount of $1,477,440.27 claimed in the proof of debt.

(3)    The primary judge erred at [75] of the judgment in concluding that the Respondent’s misleading conduct did not cause the Appellant’s loss.

22    The respondent relies on a notice of contention to the effect that dismissal of the appellant’s claim should be affirmed on the additional ground that any cause of action under s 82 of the TP Act arose, if at all, before 1 March 2013 and is time-barred: s 82(2). It is not necessary to deal with that contention. It is only necessary to address the first ground which is dispositive of the appeal.

23    Senior Counsel for the appellant submits in its written case that upon a proper construction of the statutory scheme, s 177(3) of the 2002 Act confers on the Director-General (and later the Secretary of the Department):

[A]n independent, separate cause of action against the licensee, or former licensee, to recover a statutory debt or a legal chose in action. Simply put, the Secretary sought to recover from Tome under s 177(3) the amount “paid out of the compensation fund” as “a debt due to the Crown” by lodging the Proof of Debt with the liquidator of Tome.

24    The appellant accepts that while the Secretary was subrogated to the rights and remedies of individual claimants against the appellant, those rights were not exercised but submits that “the fact of the subrogation enlivened the statutory debt under s 177(3)”.

25    In contrast, counsel for the respondent submits in his written case that, properly understood, the appellant’s claim is that its loss was not the claim made by the proof of debt but rather its liability for the amount of that claim. Further, the appellant accepted at trial that the subrogation effected by s 177(1) does not confer in favour of the Crown an independent cause of action and that construed in context, s 177(3) is facilitative and is only concerned with enforcement of the rights conferred. It is a deeming provision. Put shortly:

The purpose of such deeming provisions is to confer upon a debt the prerogative of priority, that being necessary as the debt is made payable to someone other than the Crown. By reason of s 177(4), a debt produced by the exercise of subrogated rights or remedies will be a debt in the name of either the Secretary or the claimant concerned.

(Citations omitted.)

Consideration

26    We commence by observing that the appellant did not frame its case as one of pure economic loss for lost opportunity, being the substantial prospect that if the respondent had not engaged in misleading or deceptive conduct by incorrectly answering the reconciliation question, then it is likely that the fraud would have been detected shortly after completion and lodgement of the 2002 audit. In that circumstance, it might have been said that the appellant suffered damage in that it was deprived of the opportunity of avoiding future loss: Badenach v Calvert (2016) 257 CLR 440; [2016] HCA 18 at [38]-[41], French CJ, Kiefel and Keane JJ.

27    Further, a curiosity of this matter is that the Secretary did not independently claim against the respondent that the misleading conduct caused loss to the Fund for which the respondent was liable to pay damages equivalent to the total amount of claims paid from the Fund, which is a point of distinction with cases where the administrator of a statutory compensation fund is the claimant for damage caused by conduct of a third party; see, for example Travel Compensation Fund v Tambree (2005) 224 CLR 627; [2005] HCA 69, Gleeson CJ, Gummow, Kirby, Hayne and Callinan JJ; King v Yurisich (2006) 153 FCR 78; [2006] FCAFC 136, Sundberg, Weinberg and Rares JJ; and Travel Compensation Fund v Travel Guide Pty Ltd (in liquidation) (1997) 72 FCR 371, Lehane J. For that reason, we do not find the appellant’s reliance on those cases of assistance in deciding the distinctly different claim in this case.

28    In claims for pure economic loss it is important to identify “with some precision” the damage claimed to have been suffered by reason of the impugned conduct: Hunt & Hunt Lawyers (a firm) v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10 at [25], French CJ, Hayne and Kiefel JJ. Their Honours continued by reference to Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 527:

[I]t was said that the kind of economic loss which is sustained, as well as the time when it is sustained, depends upon the nature of the interest infringed and in some cases, perhaps, upon the nature of the interference to which is subjected.

29    The appellant’s case is that the damage it suffered by the misleading conduct of the respondent is the statutory liability in debt which crystallized upon lodgement of the proof of debt, and not earlier. For that contention to succeed, the appellant must make out its submission that s 177(3) of the 2002 Act creates that liability and imposes it upon the respondent from the time the Secretary makes a claim.

30    In our view, that argument must be rejected.

31    The statutory scheme is clear. The Fund is established to compensate clients of licensed real estate agents in defined circumstances. Compensation is payable to claimants who make a claim. A claimant may only be a person who suffers “pecuniary loss because of the failure to account”: s 173(1), which expression is relevantly defined at s 171 as meaning “a failure by a licensee to account for money or other valuable property entrusted to the licensee” in the course of the business of the licensee. Plainly trust money is of that character. A trustee is primarily liable to account for trust money and is obliged to restore trust funds which have been lost or misappropriated in breach of trust: Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 215, Street J; Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2002] HCA 15 at [35], the Court.

32    Although the trust monies were pooled and placed into two separate bank accounts, that does not alter the individual trust obligation that the respondent owed to each client and for each sum received on trust. In this regard we differ from the reasoning of the primary judge at PJ [82] that “earlier depositors” did not suffer loss when the trust money was misappropriated because there was other money available in the trust account that was used to satisfy the claims. The error in that reasoning is that a breach of trust for an early depositor was not remedied by a subsequent breach of trust when funds of a later depositor were applied to “cover-up” the breach of trust. However, that difference is immaterial to the outcome of this appeal.

33    A person who claims to have suffered pecuniary loss because of the failure to account may claim upon the Fund, in writing and subject to a time limitation of 12 months after the person became aware of the failure to account or to 2 years from that event, whichever first occurs: s 173(2). There is however discretionary power to receive and allow claims beyond that time: s 173(5). Section 174 creates a statutory right of action in favour of a claimant against the Fund where a claim is made but disallowed. In that circumstance recovery proceedings are permitted for the amount of pecuniary loss suffered by the claimant and the claim is one “as for a debt due by the Crown”: s 174(3). In a proceeding of that type, defences that would have been available to the licensee are available to the Crown: s 174(4). Any judgment against the Fund can only be satisfied to the extent of money in the Fund: s 180(1).

34    Section 175 sets limits on the amount recoverable from the Fund of $500,000 per claim or $2 million in aggregate for multiple claims.

35    Dealing next with the provisions of s 177 which is central to the appellant’s arguments, the statutory text employs a term of art: subrogation. As is well understood, subrogation is a principle of equity which operates as explained by Gleeson CJ in Registrar-General v Gill (1994) 17 BPR 33,709 (Gill) at 33,713:

The equitable principles relating to subrogation aim to adjust the interests of the three parties, such as a creditor, a debtor and an insurer or surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor.

(Citation omitted.)

36    See also Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liquidation) (1978) 141 CLR 335 at 348, Gibbs ACJ.

37    Although the 2002 Act is concerned with statutory subrogation, where on payment out of the Fund the Crown is subrogated to all rights and remedies of the claimant against the licensee, but limited to “the extent of the payment” (s 177(1)), as Gleeson CJ further explained in Gill (at 33,713) in interpreting a statutory subrogation provision, the statute “ought to be construed so as to achieve the same end” as the equitable principle. In our view it is clear from the text and structure of the provisions of the 2002 Act that each of subparagraphs (2), (3) and (4) of s 177 operate in aid of the exercise of the statutory right of subrogation. Subparagraph (2) operates as an evidentiary provision. A certificate which certifies that an amount has been paid out of the Fund in settlement in whole or in part of a claim is evidence of that fact. It relieves the Crown of the burden of adducing evidence from individual claimants as to the amounts claimed and paid from the Fund. Subparagraph (4) is procedural: the rights conferred and the remedies subrogated may be exercised in the name of the Director-General or in the name of individual claimants.

38    Section 177 is to be contrasted with s 178 which expressly creates a statutory right of action for recovery against directors or former directors of a licensee at the time of the relevant act or omission. Recovery is for “the amount of the payment” from the Fund and is a debt recoverable in a court of competent jurisdiction. This provision does not depend for its operation on subrogating the Director-General to the rights of claimants upon the Fund. The appellant’s submission that the legislative intent was to create a similar statutory right of action at s 177(3) is not easily reconciled with the wording of s 178. Similarly, s 177 is to be contrasted with the statutory right of action that a claimant has against the Fund at s 174.

39    Within the sequence of those provisions, s 177(3) in our view is procedural. It works to facilitate the enforcement of the subrogated rights or remedies conferred by s 177(1): it does not create an independent debt unrelated to the subrogated rights and remedies. The “amount” which “is taken to be a debt due to the Crown” can only be an amount ascertained once the subrogated right has been established. The amount owes its existence to a successful exercise of the subrogated right in an action or, as in this case, where an action may not be prosecuted once a liquidation order is made, upon acceptance of a proof of debt by a liquidator.

40    Statutory provisions similar to s 177(3) are common. For example, in Commissioner of Stamps (WA) v West Australian Trustee, Executor and Agency Co Ltd (1925) 36 CLR 98 in relation to s 57 of the Income Tax Assessment Act 1922 (Cth) which provided:

Income tax shall be deemed when it becomes due and payable to be a debt due to the King on behalf of the Commonwealth…..

Higgins J said at 116 that:

The words of this section are not happily chosen, but they do not mean that there is nothing owing in the ordinary sense until the money becomes payable. This is a procedure section, and means that when proceedings have to be taken to recover the debt it is to be treated as a Crown debt, with any privileges and priorities the Crown debt has.

41    Counsel for the appellant, in arguing that s 177(3) is substantive and not procedural, relies on two passages in the judgment of Ward JA in New South Wales Land and Housing Corporation v Quinn [2016] NSWCA 338 at [70]-[71]. In that case, the court was concerned with the jurisdiction of the District Court to hear a statutory debt claim for unpaid rent and occupation fees. In the District Court, the claim by the Housing Corporation was dismissed for want of jurisdiction on the ground that the investing statute limited the jurisdiction of the court to an action which, if brought in the Supreme Court, would be assigned to the Common Law Division. In contrast, the Administrative Law Division of the Supreme Court was responsible for all proceedings and applications in respect of decisions made by a public body or public officer. The Court of Appeal allowed the appeal holding that the proceeding in the District Court was not in respect of a decision made by a public body. The passages from the decision of Ward JA do not assist the appellant’s arguments. It was not in dispute that s 57(5) of the Housing Act 2001 (NSW) conferred upon the Housing Corporation a statutory debt claim to recover an amount of a varied or cancelled rental rebate for a public housing tenant. The liability to pay arose from the fact of variation or cancellation. This explains her Honour’s observation at [71] that actions to recover monetary sums were typically assigned to the Common Law Division and: “There is no reason to think that the underlying source of the debt should make any difference to that result.” The case does not assist in the construction task presented in this appeal.

42    Contrary to the appellant’s arguments, the statutory scheme of the 2002 Act is “not uncommon” to adopt the expression of Meagher JA in Registrar-General of New South Wales v LawCover Insurance Pty Ltd [2014] NSWCA 241 at [43] when comparing the statutory compensation provisions of the Torrens Assurance Fund at Part 14 of the Real Property Act 1900 (NSW) where the Registrar-general is subrogated “to the claimant in respect of the claimant’s rights and remedies against any person in relation to” loss or damage suffered as a result of the operation of the Act (s 133(2)) with, inter alia, s 177 of the 2002 Act. At [40] his Honour observed of s 133(2):

In subsection (2) the rights are those of the party claiming compensation as against any other person in relation to the loss or damage which is the subject of that claim. This context makes plain that “subrogated” is used in each subsection in its well understood legal sense and describes the process “by which one party is deemed to have been substituted for another, so that he can acquire and enforce the other's rights against a third party for his own benefit. It is often said that a subrogated claimant ‘stands in the shoes’ of the party whose rights he is deemed to have acquired”: Mitchell and Watterson, Subrogation Law and Practice (Oxford University Press 2007) at [1.01].

43    At [44] his Honour construed s 177(4) of the 2002 Act as:

[An] express [provision] enabling a party to exercise the rights to which it is subrogated “in its own name or in the name of the claimant”. In the absence of such a provision the party having the benefit of the right of subrogation cannot exercise or enforce the relevant rights in its own name in an action to which the claimant has not also been made a party.

44    Similarly, for the reasons we have expressed, s 177(3) facilitates the enforcement of rights otherwise conferred upon the Director-General, and does not operate as a separate and independent statutory cause of action.

45    For these reasons, ground 1 of the appeal fails and it follows that the primary judge was correct to conclude that the appellant failed to establish an essential component of its action for damages pursuant to s 87 of the TP Act: it did not suffer the damage when the Secretary lodged the proof of debt with the liquidator on 27 July 2018. The appeal must be dismissed. There is no reason why costs should not follow the event.

Conclusion

46    We order as follows:

Associate:

Dated:    10 March 2023