FEDERAL COURT OF AUSTRALIA

Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Oswal (No 2) [2011] FCA 731

THE COURT ORDERS THAT:

1.    The amended statement of claim identified as Annexure A to the applicant’s submissions in opposition to strike out the application dated 10 June 2011 be struck out.

2.    The applicant have leave to file and serve a re-amended statement of claim within 21 days.

3.    The applicant pay 50% of the second and third respondents’ costs to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

INTRODUCTION

1    As described in Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Oswal [2011] FCA 424 (Burrup No 1), the applicant (the Receivers) seek recovery of substantial sums from the first respondent (Mr Oswal), the second respondent (Mrs Oswal) and the third respondent (Comical).

2    Mrs Oswal and Comical seek to strike out the statement of claim against them and to dismiss the proceeding against them.

3    In response to communications concerning the content of the pleading, the Receivers have filed an amended statement of claim (the ASC). In reply, Mrs Oswal and Comical claim that the ASC suffers from the same fundamental defects as the statement of claim.

4    The gravamen of the remaining complaints raised by Mrs Oswal and Comical are these. It is pleaded that part of the ‘benefits’ or payments received by them and set out in the ASC relate to payments allegedly made by Burrup Fertilisers Pty Ltd (BFPL) to third parties for the provision of services in relation to an existing and proposed residence owned by Mrs Oswal. It is said such payments to third parties and any benefits derived by Mrs Oswal would not be capable of being traced to the two properties owned by Mrs Oswal (the Oswal Residence and the Future Oswal Residence). Those payments, therefore, could not be the subject of ‘volunteer liability’ or liability for ‘knowing receipt’ under the first limb of Barnes v Addy (1874) LR 9 Ch App 244. Secondly, the failure to plead the date at which Mrs Oswal acquired the critical knowledge which might set up liability under either ground is said to be a key deficiency. Thirdly, Mrs Oswal complains that any claim based on her ‘involvement’ in alleged breaches of statutory duty by Mr Oswal must be based on actual, not constructive, knowledge. Therefore, to the extent that paragraphs of the ASC rely upon matters that she ‘ought to have known’, those paragraphs should be struck out. Mrs Oswal also complains that where her actual knowledge is said to be established from a request or requests by her for payments to be made, each such request is a separate material fact which must be expressly pleaded. Other less significant complaints are also raised.

5    As I understand it, the main contentions expressed by Mrs Oswal and Comical are that for the purposes of volunteer liability, liability can only accrue from the date of knowledge that property or traceable property which may have been previously acquired innocently by the volunteer has in fact been sourced from funds obtained by theft or fraud. Further, both for the claim advanced under voluntary liability and for the claim advanced under the first limb of Barnes v Addy (knowing receipt of trust property), only the trust property itself or traceable property, not benefits derived from the trust property, may be recovered.

6    In my view, for reasons which follow, some of the complaints are well made. However, the claim will not be dismissed. Leave to amend will be given.

AN OVERVIEW OF THE CLAIMS

7    As noted in Burrup No 1 (at [2] – [4]), BFPL pleads the following matters. Mr Oswal is a director and shareholder of BFPL. BFPL owns and operates a liquid ammonia plant in Western Australia. The Receivers allege breaches of Mr Oswal’s directors’ duties under the Corporations Act 2001 (Cth) (CA) and related equitable obligations. Claims are also made against Mrs Oswal and Comical for accessorial liability and receipt of benefits said to have been obtained from Mr Oswal’s breaches.

8    The Receivers allege that between 11 August 2008 and 17 December 2010 payments were made using BFPL funds to companies in which the respondents had personal or beneficial interests (the Payments). Some of the Payments were for the supply of goods and services while others were for the acquisition of real property and chattels. BFPL also claims that on or about 29 June 2009, Mrs Oswal entered into a written contract to purchase a property situated in North Dandalup, Western Australia for $8.9 million (the Pollard Property). BFPL states that during 2009 and 2010, payments from BFPL funds were made for the management, construction and development on the Oswal Residence and the Future Oswal Residence. In 2010, motor vehicles were purchased, using BFPL funds, for the personal use and enjoyment of Mr Oswal and/or Mrs Oswal. On 26 October 2010, a Fairline cabin cruiser (the boat) was purchased by Comical, controlled by Mrs Oswal, using BFPL funds.

Claims against Mr Oswal

9    As the managing director of BFPL, Mr Oswal was subject to duties and obligations imposed by the CA and equity on directors and officers. It is alleged that Mr Oswal breached s 181 and s 182 of the CA and his fiduciary duty by authorising the Payments (the Breaches). The Receivers claim that Mr Oswal had a personal interest in the Payments.

10    The Receivers claim that the Breaches resulted in BFPL suffering losses and damages totalling just over $97 million.

Claims against Mrs Oswal

11    The Receivers claim that Mrs Oswal received benefits from some of the Payments by improvements to the Oswal Residence and the Future Oswal Residence, in the purchase of the Pollard Property (the Properties) and the motor vehicles. These benefits were received ‘as a volunteer’ and/or were received with knowledge that the payments pleaded in para 45 of the ASC (the 2R Payments) were made from the proceeds of the Breaches and/or that she was knowingly involved in the Breaches.

12    BFPL plead that Mrs Oswal, at an unidentified date, was notified in writing that the 2R Payments were received or obtained by her or on her behalf as a result of the Breaches but has refused to acknowledge or account for the Receivers’ interest in the Properties.

13    Paragraph 45 of the ASC (the contents of which are relied upon in relation to each such claim), pleads three areas of ‘benefit’ ‘received’ by Mrs Oswal. They are the benefit of payments that Mr Oswal caused to be made by BFPL to:

(a)    DMG Construction, Design Management and Limited Edition Luxury Homes (these entities are listed as the recipients) for construction, maintenance, design, surveying and works carried out on the Oswal Residence and the Future Oswal Residence (para 45(a), (b), (c) and (d)) (the Residence Payments);

(b)    Mr George Pollard (Mr Pollard is listed as the recipient) in consideration for the transfer of land by Mr Pollard to Mrs Oswal, the Pollard Property (para 45(e)) (the Pollard Payments); and

(c)    Barbagallo Group and Westpoint Star for motor vehicles for the personal use and enjoyment of Mrs Oswal (para 45(f) and (g)) (the Vehicle Payments).

14    Mrs Oswal contends that a significant quantity of the payments to third parties were for the supply of services and not for the acquisition of real property or chattels. This is because the description of the payments made to DMG Construction and Design Management included payment for ‘maintenance, project management, architectural, design, surveying and engineering ...’. She says that other payments, for example, to Limited Edition Luxury Homes, may fall into this category.

15    The Receivers claim that Mrs Oswal is liable to compensate BFPL for almost $13.5 million. Alternatively, the Receivers claim that:

    the Properties are held on constructive trust for Mrs Oswal and BFPL in the same proportion as the value, including improvements, which the 2R Payments bear to the overall value of each of the Properties; and/or

    Mrs Oswal is liable to account for the value which the 2R Payments bear to the value of the Properties; and/or

    BFPL is entitled to trace the value amounts, including improvements, equal to the 2R Payments entitling it to an equitable charge over the Properties and motor vehicles.

Claims against Comical

16    It is alleged that with the consent of Mrs Oswal the boat was registered in the name of Comical but used and enjoyed by Mr Oswal. Therefore, Comical received the boat either as a volunteer and gave no consideration for it or received it in circumstances where Comical knew or ought to have known that it had been purchased as a result of the Breaches (the 3R Payments). Mrs Oswal had notice that the boat purchase was paid from the proceeds of the Breaches. Therefore, it is claimed that the boat is held on constructive trust for BFPL or alternatively, BFPL is liable to compensated for just over $2.7 million.

17    In summary, the Receivers’ claims against Mrs Oswal and Comical fall into three categories, namely:

(a)    ‘volunteer liability’ as that expression is used in cases such as Heperu Pty Ltd v Belle (2009) 76 NSWLR 230 (paras 45-48, 56, 58, 60 and 64 of the ASC);

(b)    ‘knowing receipt’, a reference to the first limb of the principle in Barnes v Addy (paras 49-53, 56, 59 and 61-64 of the ASC); and

(c)    ‘involvement’ within the meaning of s 79 CA in the Breaches by Mr Oswal (paras 54-55 and 65-66 of the ASC).

RELEVANT RULES AND PRINCIPLES

18    Order 11 r 16 Federal Court Rules (FCR) provide relevantly:

16    Embarrassment etc

Where a pleading:

(a)    discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading;

(b)    has a tendency to cause prejudice, embarrassment or delay in the proceeding; or

(c)    is otherwise an abuse of the process of the Court;

the Court may at any stage of the proceeding order that the whole or any part of the pleading be struck out.

19    Order 20 r 5 FCR relevantly provides:

5    Stay or dismissal (proceedings commenced on or after 1 December 2005)

(1)    This rule applies to a proceeding commenced on or after 1 December 2005 if the Court is satisfied that, for the proceeding generally or for a claim for relief in the proceeding:

(a)    the proceeding or claim is frivolous or vexatious; or

(b)    the proceeding or claim is an abuse of the process of the Court.

(2)    The Court may order that the proceeding be stayed or dismissed generally or in relation to the claim for relief.

…

20    For O 11 r 16 FCR, the application should be determined on the assumption that the allegations pleaded are true: Imobilari Pty Ltd v Opes Prime Stockbroking Pty Ltd (2008) 252 ALR 41 (at [4]-[5]).

21    The Court’s power to strike out a pleading under O 11 r 16 FCR is to be exercised with caution: Pharm-a-Care Laboratories Pty Limited v Commonwealth (No 3) (2010) 267 ALR 494 (at [15]).

22    However, a statement of claim will disclose no reasonable cause of action within the meaning of O 11 r 16(a) FCR if the allegations pleaded are ‘manifestly groundless’ or not ‘plausible enough to create a reasonable expectation that discovery will reveal evidence to support the claim’: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 (at 129); lmobilari (at [4]-[5]).

23    For the purposes of O 11 r 16(b) FCR ‘embarrassment’ includes a pleading that is ssusceptible to different meanings, contains inconsistent allegations, contains alternative allegations that are ‘confusingly intermixed’ or contains conclusions that are pleaded without pleading the material facts on which they are based: Bartlett v Swan Television & Radio Broadcasters Pty Ltd [1995] ATPR 41-434 (at 40,889).

VOLUNTEER LIABILITY

Applicable principles

24    Mrs Oswal and Comical accept that in equity a person who receives stolen or fraudulently obtained property or funds initially without knowledge of the theft or fraud and without providing consideration (for example, an innocent volunteer) and who subsequently becomes aware that the property or funds were stolen or fraudulently obtained, may have a liability to the rightful owner to the extent that the volunteer has retained the property or funds concerned, or other property into which the stolen property or funds are traceable.

25    However, they stress that:

(a)    The volunteer's obligation arises from notice of the theft or fraud, not from any wrongful conduct of the volunteer at the time that he or she received the property or funds: see Heperu (at [131] and [154]); and

(b)    The claimant must identify:

(i)    the precise date on which the alleged liability arose (for example, the date on which the volunteer is said to have become aware that the property or funds had been stolen or fraudulently obtained); and

(ii)    the original property or funds, or traceable proceeds thereof, that the volunteer is said to have retained at that time. In the case of multiple payments, each of these matters may differ.

26    These factors are said to be critical as the volunteer is not liable for damages or otherwise in respect of stolen property or funds that have been dissipated before the volunteer knows of the theft or fraud: Heperu (at [127]-[170]). Nor is the volunteer liable merely because he or she has ‘benefitted’ from receiving the property or funds.

27    Should the case against Mrs Oswal proceed to trial, Mrs Oswal also says that whether these principles are capable of extension to company funds allegedly misused in breach of directors’ duties will be in issue. However, for the purpose of this present application, that argument is not advanced.

Suggested pleading defects

28    Prior to the amendments, Mrs Oswal complained that para 45 of the statement of claim was a series of ‘rolled up’ allegations to the effect that she received ‘the benefit’ of certain payments, and that the benefit of those payments was traceable into certain property. The ‘rolled up’ nature of these allegations was said to be a serious deficiency. In addition, the claim relied on payments made to others, not property that she received. It was alleged that the amendments to para 45 in the ASC did not provide new information but merely brought forward information that had been contained in the Schedule to the statement of claim. Therefore, although the amendments improved the pleading, it was not sufficient and the complaints continued to apply.

29    A major issue raised in relation to para 45 was that it pleaded the ‘benefit’ as traceable into the Oswal Residence and the Future Oswal Residence in a conclusionary and ‘rolled-up’ manner. It failed to distinguish (by pleading material facts) between the ‘very different’ uses to which the Residence Payments were put in a context where, in the case of volunteer liability, it is essential to examine whether tracing is available. Also, in the case of a knowing receipt claim, it is essential to identify whether property has been ‘received’. In this respect, it is necessary to plead facts that show that Mrs Oswal’s interest or equity in the Oswal Residence and the Future Oswal Residence can be regarded as resulting from the particular payments to third parties, and that each of these payments increased the value of the Oswal Residence or Future Oswal Residence.

30    The problem can be illustrated, Mrs Oswal says, by taking the hypothetical example of a payment made to Design Management for some design services. This work may have led to some drawings the copyright in which may be owned by Mr or Mrs Oswal. The particular payment may be traceable into the drawings and the copyright, but would not be traceable into the Future Oswal Residence. Nor is there some increase in the value of that residence that can be attributed to such services: Heperu (at [120]-[172] especially at [131] and [144]-[157]).

31    Subsidiary complaints are that:

(a)    there is confusion and lack of specificity introduced by the notion of Mrs Oswal having ‘obtained’ the 2R Payments. This is compounded by the introduction of the conclusionary assertions (without material facts) that, alternatively they were obtained ‘on her behalf’ or ‘to her account’ (para 47).

(b)    in para 48, prior to the amendments, it was pleaded that Mrs Oswal has failed to account for ‘the value of the Property received, alternatively, obtained for her benefit’. It is argued that this is a different proposition as to what she is alleged to have received or obtained. It is not the 2R Payments or the benefit of the 2R Payments but ‘the Property’ and, in the case of the Oswal Residence and the Future Oswal Residence, it is the whole of the land and improvements at 72 Philip Road, Dalkeith and 2 Bay View Terrace, Peppermint Grove.

32    In light of my ruling on the more substantive issues, I consider these complaints fall away.

KNOWING RECEIPT

Applicable principles

33    Mrs Oswal contends that the first limb of the rule in Barnes v Addy applies to the receipt of trust property or trust funds, not ‘benefits’ derived from the payment of trust funds or the payment of funds in breach of fiduciary duty: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 (at [121]).

34    In Farah Constructions (at [121]) the Court said (footnotes omitted):

The change in the law in Australia for which the respondent contended was part of a more comprehensive submission that the law conform to the following three propositions.

“(i)    A third party who has directly received a financial benefit as a result of a non-trivial breach of trust or fiduciary duty should be accountable for that benefit to the fiduciary of the trust/duty if he/she knew or had reason to know of the essential facts which constituted the breach.

(ii)    A third party who receives such a benefit without knowledge of the essential facts constituting the breach should still be accountable unless, and to the extent that, a relevant defence can be established by them – such as bona fide purchaser for value without notice, or change of position.

(iii)    A third party who has not received such a benefit but has participated in a significant way in a significant breach of duty/trust with actual knowledge of the essential facts which constituted the breach should be liable to the beneficiary of the duty/trust for the consequences of the breach.”

Paragraph (i) is a modification of the first limb of Barnes v Addy, para (ii) reflects a theory of recovery based on unjust enrichment adopted by the Court of Appeal and para (iii) is a modification of the second limb of Barnes v Addy. Here it is only necessary to discuss para (i). Paragraph (i) has some similarities with the first of the Court of Appeal's findings about the first limb of Barnes v Addy. However, to substitute para (i) for the first limb of Barnes v Addy would be a radical change: it abandons the requirement for receipt of property, and it alters the notice test. To introduce a change of that kind would call for very careful examination of the possible consequences. That examination was not conducted in argument. In any event, in view of the availability of relief under the second limb of Barnes v Addy, and the protection of confidential information under the general law, no sufficient reason was demonstrated for any change to legal doctrine in the manner advocated by the respondent. (emphasis added)

35    Mrs Oswal contends that the only relevant pleading of ‘receipt’ for the purposes of the knowing receipt claim (paras 49 to 53) is in the last line of para 53, namely that ‘... [Mrs Oswal] received the Property knowing of that breach’ (emphasis added). That, it is said, is clearly not correct (being the whole of the Property). Paragraph 53 of the ASC pleads that Mrs Oswal received the benefit of the 2R Payments. It is argued that this pleading suffers from similar deficiencies as those that occur with the ‘volunteer liability’ claim in circumstances where it is necessary to show that property was ‘received’ not just ‘benefits’ (see Farah Constructions (at [121])).

36    Further, the allegation of knowledge is that there was receipt ‘knowing of that breach’ (in the last line of para 53). It is an allegation of actual knowledge of breach. It is said that this serious allegation is unsustainable in circumstances where the pleader, as an alternative, contends that Mrs Oswal ‘ought to have known’ that the alleged payments had been made by BFPL (para 51). I do not accept this submission. An alternative is not a contradiction.

37    Mrs Oswal also argues that the facts and circumstances alleged as giving rise to knowledge (those in paras 49, 51 and 52) are incapable of establishing the requisite knowledge. An essential factual element said to be missing is that Mrs Oswal had the requisite knowledge that neither she nor Mr Oswal had any entitlement to funds in the amounts of each of the 2R and 3R Payments.

38    In Farah Constructions (at [170]) the High Court said (footnotes omitted):

Had the Court of Appeal turned its mind to whether Mrs Elias and her daughters were liable as knowing participants in a dishonest and fraudulent design – an allegation the seriousness of which means that it ought to have been pleaded and particularised, and the assessment required by Briginshaw v Briginshaw kept in mind – it ought to have rejected the allegation. That rejection would follow from consideration of what was said in Consul respecting the second limb of Barnes v Addy, both in relation to “knowledge” and to “dishonest and fraudulent design”.

39    Mrs Oswal says that likewise, the making of the serious allegation against her demands specificity, all the more so when the case is that the requisite elements of liability applied to numerous transactions over a considerable period of time. This is lacking in a number of respects she says as:

(a)    no specifics of the apparently significant request(s) referred to in para 51(c), are provided;

(b)    no basis or details for the assertion in the same paragraph (and also in para 52(a)) that the 2R Payments were to discharge her ‘personal liabilities’ are supplied;

(c)    the allegations of ‘ought to have known’ in para 51 and 52 are unclear in a context in which there should be no lack of clarity. Is it to be argued that there was a failure to inquire? If so, this should be clearly stated and the circumstances giving rise to the need to inquire identified;

(d)    BFPL has failed to plead, as it needs to, that Mrs Oswal had the requisite knowledge at the time of each relevant receipt.

40    The pleading of knowledge for the purposes of the knowing receipt claim against Comical, it is said, suffers from the same deficiencies. This is because the knowledge is said to be that of Mrs Oswal as pleaded in the same paragraphs relied on for the knowing receipt claim against her (see the particulars to para 61).

INVOLVEMENT IN MR OSWAL’S BREACHES

Applicable principles

41    Mrs Oswal says that by relying on paras 45 to 53 (against Mrs Oswal) and paras 61 to 64 (against Comical) the pleading of knowledge clearly includes constructive knowledge which cannot give rise to liability.

42    Mrs Oswal and Comical say that:

(a)    the pleading of receipt of ‘benefit’ in para 45 and the pleading of receipt or obtaining the 2R Payments in para 46 are contradictory and cannot be allowed; and

(b)    the allegations of aiding, abetting, counseling or procuring and/or being knowingly concerned (paras 54 and 65) are serious allegations. There is a total absence of pleading of material facts to support them. They should not be permitted.

CONSIDERATION

General matters

43    The General Steel principles are clear. The power to strike out is discretionary and should be applied sparingly and exercised with ‘great caution’. It must be plain and obvious that the impugned portions of a statement of claim are unarguable before they will be struck out. An order for summary dismissal would be made only where it is clear that there is no real question to be tried or that it is hopeless or bound to fail or so clearly untenable that it should not be permitted to go to trial.

44    In Global Brand Marketing Inc v Cube Footwear Pty Ltd (2005) 65 IPR 44 Goldberg J said (at [22]):

22    Before the statement of claim can be struck out on the basis that it does not disclose a reasonable cause of action, the Court must be satisfied that the causes of action are unarguable, or are so untenable that they cannot possible succeed or are manifestly groundless in the sense explained by the High Court in General Steel Industries Inc v Commissioner for Railways (NSW); (1964) 112 CLR 125 at 129. Recently, in Spotwire Pty Limited v Visa International Services Inc; (2003) ATPR 41-949, Bennett J summarised the manner in which the test in General Steel has been applied (at 47,410, par [10]):

"Such an order would only be made where it is clear that there is no real question to be tried (SmithKlein Beecham (Australia) Pty Ltd v Chipman [2002] FCA 674; Douglas v Tickner (1994) 49 FCR 507) or that it is hopeless and bound to fail (Orchard v Comrie (1998) 80 IR 76) or clearly untenable (Faessler v Neale (1994) 29 IPR 1) or hopeless to the extent that it should not be permitted to go to trial (Bray v F Hoffman-La Roche (2003) ATPR 41-946; [2003] FCAFC 153 per Carr J). It must be plain and obvious that the impugned portions of a statement of claim are unarguable (Murex Diagnostics Australia Pty Ltd v Chiron Corp (1995) 55 FCR 194) or it must be very clear that there is no issue deserving of a hearing (Anderson v Commonwealth Bank of Australia [1995] FCA 787). However, proceedings will not be dismissed summarily merely on the ground that it appears, at the hearing of the motion, that the claim may fail (Australia Building Industries Pty Ltd v Stramit Corp Ltd [1997] FCA 1318)."

45    In my view, broadly speaking (and as a starting point only), as the submissions for Mrs Oswal and Comical illustrate, the ASC defines the issues with sufficient clarity to enable the respondents to understand the case that is sought to be made against them. Mrs Oswal and Comical understand the three bases of the pleading that they received as volunteers, further or alternatively, knowingly received and further or alternatively, knowing involvement in the Breaches.

46    However certain areas of substance in the complaints raised for Mrs Oswal and Comical have force.

The voluntary receipts claim

47    The Receivers have apparently recognised the potential difficulty in the nature of the original composite pleading and thus have addressed this difficulty by separating out, within para 45, specific payments made on specific dates to specific entities traceable into the specific residences (in the case of para (a), into the Oswal Residence, in the case of paras (b), (c) and (d), into the Future Oswal Residence).

48    The individual payments thus identified are, in turn, linked back to the total collection of payments set out in para 14 of the ASC. Consequential pleading amendments have been made to para 48 and to para 56 of the ASC separating out these payments.

49    However, Ms Williams for Mrs Oswal and Comical still makes a good point in my view. It will be necessary and critical to the voluntary receipts claim to identify the dates (or dates by reference to events) at which Mrs Oswal acquired knowledge of the Breaches leading to those payments she received. In Heperu (at [42]) Allsop P (with whom Campbell JA and Handley AJA agreed) said:

…

It should also be noted that for the purposes of the tracing claim (…) the relevant time to assess the facts is when the party receives notice of the claim or otherwise becomes aware that he or she has property paid for with the misappropriated funds of another. … (emphasis added)

50    The dates of the material knowledge have not been identified and should be.

Knowing receipt

51    The passage from Farah Constructions (at [121]) has been cited above (at [34]). The assertion made by Mrs Oswal and Comical is that the first limb of Barnes v Addy principle applies only to receipt of trust property or trust funds in contrast to ‘benefits’ derived from the payment of trust funds. Farah Constructions was concerned with the use of confidential information in the purchase of property (land). The High Court concluded that such information, not being in itself property, was not capable of being traced into the land that was acquired with the benefit of the confidential information. Simply indentifying the different nature of the property in Farah Constructions does not address the significance of the observations by the High Court (at [121]). The Court’s observations were not confined to any specific sort of property but were directed to general principle. In this case, what is allegedly removed from BFPL is property, i.e., cash that is used to improve the value of the Properties. In Farah Constructions, there was no tangible property removed from the company but rather confidential information was used. The Court held (at [120]) that confidential information, not being property, was not capable of being traced into the land that was acquired with the benefit of the information, noting:

… the expression “trust property” does not include information, whether confidential or not … But it does not follow under the law as it stands that the information which third parties obtain from a fiduciary is trust property, or that land bought by using that information is trust property…

52    In Heperu two main points relevant to the current debate were clarified. It was reiterated that there was an action at law in money had and received to restore the value of the proprietary benefit retained by a volunteer where the proprietary benefit is traceable in equity from misappropriated funds. In equity, there was also a personal equitable remedy ‘touching the volunteer’s conscience’ available to restore funds derived from misappropriations to the extent, as a volunteer, a volunteer retains the funds or their traceable products but only when there is notice of the claim (at [163]). Secondly, it was emphasised that the remedies at law and in equity should focus upon the value properly attributable to the earlier receipts derived from the misappropriated funds and still retained by the volunteer at the relevant time. If at least some of the payments (into mortgage accounts in that case) were referable to funds being the proceeds of misappropriated cheques, the funds could be traced in equity into the property (at [124]).

53    In Heperu, the Court of Appeal took the approach (at [157]) that the focus should be on the value of property attributable to the receipts derived from misappropriations and still retained by the volunteer at the relevant time. Allsop P (with whom Campbell JA and Handley AJA agreed) said:

157    The remedy, both at law and in equity should focus upon the value properly attributable to the earlier receipts derived from misappropriations and still retained by the volunteer at the relevant time. The proper approach to the assessment of this and its relationship to the funds received would be a matter for assessment. For instance, at law, it might be that the plaintiff would not be entitled to any increase in value of the asset into which funds were traced, though the position in equity may be that the plaintiff is so entitled: Scott v Scott; and cf The Law of Restitution Law in Australia at 128 [309].

54    The President continued to consider the passage in Farah Constructions and its effect noting that (at [160]):

… Farah Constructions was not dealing with an identified fund of money or property in the defendant's hands at the relevant time which through tracing at law or in equity can be seen to be one in which the plaintiff has an interest. Nothing in the case, as I read it, was intended to deny relief in a case such as Banque Belge pour l’Estranger, Black v S Freedman & Company, or here (if it be proved that Ms Belle held property in respect of which the appellants had a proprietary interest or over which they had a charge from the tracing of the proceeds of the misappropriated cheques).

55    This issue has also been the subject of analysis by the Queensland Court of Appeal in Quince v Varga (2008) 1 ASTLR 242. Following Farah Constructions, and having regard to what was said by the High Court (at [121]), the Queensland Court of Appeal came to consider whether payments made from misappropriated funds by a husband for the benefit of his wife were relevantly ‘received’ by her. The Court of Appeal (at [52]) considered that the appropriate rule to apply was that anyone who has control of trust property with knowledge of a relevant breach will have ‘received’ that property. The key feature which establishes liability is the ‘receipt’ of the property with knowledge that there has been some breach of trust. This application was consistent with the expression of the first rule in Barnes v Addy that the recipient must have received and become chargeable with some part of the trust property. At [49] to [52] in Quince Douglas J said (footnotes omitted):

49    In the circumstances it seems to me to be reasonable to treat those payments, apart from the ones made directly to her, as ones made for her benefit. The question is whether they were received by her. There is little authority on the point.

50    In Spangaro v Corporate Investment Australia Funds Management Ltd Finkelstein J said, without reference to authority: “‘Receipt’ is taken to mean receipt in the recipient's own name or for the recipient's own benefit.” A similar approach is taken in Glover, Equity, Restitution & Fraud, again without reference to authority.

51    Some of the discussion in Farah Constructions Pty Ltd v Say-Dee Pty Ltd suggests the need for caution in taking such an approach. When addressing a submission that a third party who has directly received a financial benefit as a result of a breach of trust or fiduciary duty should be accountable for the benefit, their Honours said that the proposal was a modification of the first limb of the rule in Barnes v Addy and would be a radical change, abandoning the requirement for receipt of property and calling for very careful examination of the possible consequences. Their Honours may have been concerned to avoid a restitutionary or "unjust enrichment" analysis of liability under the first limb of the rule. The learned authors of Jacobs' Law of Trusts in Australia say, for example:

"Some think that liability under the first limb of Barnes v Addy does not depend on acquisition of property with notice, but merely on unjust enrichment. These views have been expressed in cases, the decision of which did not call for their expression. These cases exhibit a violent approach to authority, and have already been subjected to convincing criticism."

[footnotes omitted]

…

52    A more principled approach may be that expressed by Millett J in Agip (Africa) Ltd v Jackson where his Lordship said that: " ... there is a receipt of trust property ... when a company's funds are misapplied by any person whose fiduciary position gave him control of them or enabled him to misapply them." From that passage it is argued in Thomas and Hudson, The Law of Trusts, that anyone who has control of trust property or who takes it into his possession such that it could be misapplied will have received that property, the key feature establishing liability being the receipt of the property with knowledge that there has been some breach of trust. That is also consistent with the expression of the first limb of the rule in Barnes v Addy that the recipient must have received and become chargeable with some part of the trust property. The ability to trace trust assets into the possession of the person would be relevant to that analysis. That seems to me to be the appropriate rule to apply and I am reinforced in that view by the authorities referred to by Holmes JA in her reasons on this point which I have had the advantage of reading after circulating these reasons in draft form. (emphasis added)

56    Holmes JA (at [2]) said (footnotes omitted):

I agree with Douglas J's view that receipt in this context extends to the traceable proceeds of trust property. His Honour's analysis is consistent with Lord Hoffmann's characterisation in El Ajou v Dollar Land Holdings plc & Anor of the requisite level of receipt: "the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff" and with the view of the learned authors of Lewin on Trusts:

"The equitable tracing rules may be utilised for the purposes of establishing a receipt by a defendant in connection with knowing receipt, and so it suffices if the value of trust property transferred in breach of trust is traced and the traceable proceeds then followed into the hands of the defendant.”

[citations omitted]

57    Of particular relevance to the current debate, it was held that receipt can extend to the traceable proceeds of trust property. Thus in Quince (at [53]), it was concluded that the wife had ‘received’ money directly into her account, the value of the car which was a present to her, the value of electrical goods purchased for her and the value of the repairs to the air-conditioning in her house.

58    Mrs Oswal’s alleged receipt of property in the form of motor vehicles, the interest in the Pollard Property and the value of residential improvements are arguably on a similar footing to such receipts for the purposes of the first limb of Barnes v Addy.

59    Moreover and perhaps more importantly for present purposes, such a claim must be regarded as being at least arguable in the General Steel sense on the basis of the pleaded facts. In concluding in favour of the Receivers that the receipts plea is arguable at a strike out level, I particularly take into account the considered analysis of the two Courts of Appeal of the passage in Farah Constructions relied upon by Mrs Oswal and Comical.

60    On the face of the ASC, it is asserted that Mrs Oswal is said to have received the benefit of the Residence Payments by reason of the fact that those payments were used to make improvements to the Oswal Residence and Future Oswal Residence. The claim is expressed by reference to the value which the improvements bore to the overall value of the properties. This is sufficient to respond to the concerns expressed by Mrs Oswal and Comical in relation to the ability to trace payments to third parties. The Receivers acknowledge that where third parties have performed services in respect of properties but such services have not enhanced the value of the properties, the claim will not extend to such payments. The amendments at para 56 of the ASC make it clear that Mrs Oswal received the benefit of payments to certain entities by virtue of the fact that those payments were then used in order to make improvements to certain properties. As the claim is expressed by reference to the value which the improvements bear to the overall value of the property, this form of claim is consistent with tracing principles. The claim does not, however, (which would not be consistent) go beyond the making of improvements to property and relate simply to performing services such as advice in respect of the property. The Receivers accept that where third parties have performed services in respect of the property but such services have not enhanced the value of the property, the claim no longer extends to such payments.

61    Mrs Oswal and Comical say that there is no distinction made between payments for goods and payments for services and there is no pleading of any material facts at all as to whether or not the Residence Payments were for things that resulted in an improvement in the property, that became incorporated in the property and/or improved the value of the property. There is simply a conclusion pleaded underneath each table that the amount of the 2R Payments is traceable into the value of improvements to the relevant property. It is argued that no attention has been given to the complex inquiry required to make out a claim based on volunteer liability which depends on the ability to trace the payments into the property. It is correct to say that much more than the current pleading will need to be established at trial for the claim to be made good. I can also see the merit in further clarifying this aspect now to respond to the complaints just cited. However the correct elements of the claim are now pleaded in the ASC and dismissing the claim is not warranted.

Accessorial liability

62    Dealing finally with the question of knowledge in relation to the accessorial claims, conditions of the mind are required to be pleaded but with the express exception of knowledge. The starting point is O 12 r 1(1) FCR which provides that a party pleading shall state in the pleading or in a document filed and served with it the necessary particulars of any claim, defence or other matter so pleaded. By r 3, a party pleading any condition of mind shall give particulars of the facts on which he or she relies but by r 3(2), ‘condition of mind’ in r 3(1) includes any disorder or disability of mind, any malice and any fraudulent intention, but does not include knowledge (see Lyons v Kern Konstructions (Townsville) Pty Ltd (1983) 70 FLR 135).

63    There is a clear distinction between an allegation that a person ‘knew’ a fact, on one hand and, ‘ought to have known’, on the other. The knowledge pleas raised against Mrs Oswal appear in several paragraphs. The starting point is para 49 which pleads that she knew or ought to have known that Mr Oswal was the managing director of BFPL for various reasons. In para 50, it is said that therefore, she knew or ought to have known that Mr Oswal owed the statutory and fiduciary duties to BFPL pleaded previously in the ASC. It is then pleaded in the ASC that she knew or ought to have known that the 2R and 3R Payments (which are set out separately by reference to date and amounts in para 45 and paras 57-58) had been made by Mr Oswal because of the fact that:

    he was the managing director of BFPL by reason of the matters pleaded in para 49(a), (b), (d) and (e);

    the only substantial source of revenue at the disposal of Mr Oswal at the time of the Payments was revenue derived from BFPL’s business;

    that she herself had requested Mr Oswal to arrange for the 2R Payments to be made to discharge her personal liabilities to the parties referred to in para 45 (notwithstanding, it might be added that the funds were from company funds);

    that she had also from time to time requested Mr Oswal to arrange for other payments to be made so as to discharge her personal liabilities or the liabilities of the companies associated with her and was aware from emails she had received that the requested 2 and 3R Payments were being made by BFPL at the direction of Mr Oswal;

    that she knew that the 2R and 3R Payments had in fact been made; and

    that she refrained from enquiring of Mr Oswal as to the source of the 2R and 3R Payments.

64    The next pleading of knowledge or knowledge that Mrs Oswal should have held is in para 52. This pleading asserts that she knew or ought to have known that Mr Oswal had caused the 2R Payments pleaded in para 45 to be made by BFPL in breach of his duties to BFPL because:

(a)    she knew that the 2R Payments were made in respect of her personal liabilities; and

(b)    she knew of the matter pleaded in para 39(a), (b), (c) and (d) insofar as they related to the claims pleaded in para 45 because those matters were obvious.

There is a further plea in para 61 which adopts the knowledge pleadings in relation to claims against Comical.

65    Those matters in para 39 were that none of the payments:

(a)    discharged liabilities or obligations of BFPL;

(b)    were intended to result in or did result in BFPL acquiring assets;

(c)    were made for any proper purpose of BFPL; or

(d)    otherwise benefited BFPL.

66    The paragraphs referred to above plead both actual knowledge and constructive knowledge.

67    The submission for Mrs Oswal that a plea of actual knowledge is unsustainable in circumstances where constructive knowledge is pled as an alternative cannot be accepted. It is an entirely conventional plea. The alternative plea of constructive knowledge, that is, matters which she should have known, is clearly an alternative.

68    However, the argument that the accessorial plea must rely only on actual knowledge not facts Mrs Oswal should have known, is correct. Involvement within the meaning of s 79 CA requires actual knowledge of the essential facts which constitute the offence or contravention. Constructive knowledge is not sufficient: Australian Securities & Investments Commission v Adler (2002) 168 FLR 253 (at [209] and [357]-[358]); Adler v Australian Securities and Investments Commission (2003) 179 FLR 1 (at [330]-[350]); Re PFS Wholesale Mortgage Corporation Pty Ltd (2006) 57 ACSR 553 (at [390]).

69    It follows that this aspect of the pleading needs to be clarified. Reliance on facts Mrs Oswal should have known for this limb of liability cannot be sustained.

70    On accessorial liability, there is another area of debate. The submission advanced for Mrs Oswal is that specific details of her knowledge must be pled in respect of every individual payment. The response of the Receivers to that is that to do so would lend itself to an ‘impenetrable forest of detail’ and that the pleading expressly states that Mrs Oswal knew that the payments had been made, necessarily implying that she had the requisite knowledge at all material times.

71    In my view, this response is partly correct but, as already indicated, the dates at which the knowledge was held by Mrs Oswal should either be identified or described. It should not be left open to implication, as contended for by the Receivers in argument, that she had the requisite knowledge ‘at all material times'. It may not necessarily be the case that the Receivers can identify in each instance precisely when the knowledge of the payments being made occurred. Nevertheless, it does appear to me that this is an important ingredient of the cause of action which should be pleaded either by reference to specific dates or, alternatively, by reference to specific events so that the time at which actual knowledge accrued is identified.

CONCLUSION

72    Two significant amendments to the pleading are required in my view. They are the dates of knowledge or the dates at which knowledge should have accrued and identification of whether it is reliance on actual, not constructive, knowledge for the accessorial plea.

73    There is no basis upon which the action should be dismissed. I give leave to the Receivers to re-plead.

74    The parties have shared mixed success. In addition to the deficiencies identified above (in [72]), the complaints about the composite ‘rolled up’ pleading were well made and the consequential amendment to the ASC was desirable. Beyond that, however, Mrs Oswal and Comical have not persuaded me as to the claimed defects. I consider it appropriate therefore that Mrs Oswal and Comical have 50% of their costs of the motion.

75    The following orders will be made:

1.    The amended statement of claim identified as Annexure A to the applicant’s submissions in opposition to strike out the application dated 10 June 2011 will be struck out.

2.    The applicant do have leave to file and serve a re-amended statement of claim within 21 days.

3.    The applicant pay 50% of the second and third respondents’ costs to be taxed if not agreed.

Associate:

Dated:    28 June 2011