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Cite as: April 2015 89 (4) LIJ, p.61

Knowing receipt of trust money – first limb of Barnes v Addy (1874) LR 9

Ch App 244

Australasian Annuities Pty Ltd (in liquidation) (receivers and managers appointed) v Rowley Super Fund Pty Ltd [2015] VSCA 9 (unreported 12 February 2015, No S APCI 2013 0165, Warren CJ, Neave JA and Garde AJA).

The plaintiff/appellant had paid moneys in excess of $2.5 million to the defendant/respondent (RSF) as trustee for a private insurance fund being a discretionary trust in which Steven Rowley, his wife, sons and others were beneficiaries. Mr Rowley was in effective control of the plaintiff. RSF became incorporated in February 2008 and each of the Rowley family members became directors of the company. Mr Steven Rowley had directed the payment of the funds to the respondent.

The plaintiff sought to recover the moneys under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 and on the further basis that the moneys had been received by the defendant as a volunteer.

The trial judge had answered a series of questions as follows:

Did Steven Rowley breach fiduciary duties owed to AA in his capacity as director? Yes.

Did the shareholders of AA prospectively assent to the transactions? No.

Did the shareholders of AA ratify the transactions? No.

Was there “knowing receipt” of trust property by RSF? No.

Was RSF a volunteer? No.

Does the subsistence of a debtor/creditor relationship prevent the maintenance of AA’s equitable claim? His Honour found it unnecessary to decide.

Is AA disentitled to equitable relief on the basis of unclean hands? His Honour found it unnecessary to decide.

In essence, the questions for determination before the Court of Appeal were whether there was “knowing receipt” of trust property by RSF, the defendant, and whether RSF was a volunteer.

On what constitutes “knowing receipt” under the first limb of Barnes v Addy, Warren CJ referred at [81] with approval to what had been said by Gibson J on the level of knowledge required in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, namely:

i. actual knowledge;

ii. wilful blindness;

iii. wilful and reckless failure to make such inquiries as an honest and reasonable person would make; or

iv. knowledge of circumstances which would indicate the facts to an honest and reasonable person.

Crucially, the question was whether the knowledge of Mr Steven Rowley could be imputed to either the other individual trustees of the discretionary trust or the other directors of RSF post-incorporation. The relevant principles are to be found in the decisions of the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 and Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373.

Neave JA and Garde AJA were of the view that the moneys had been knowingly received by the respondent (RSF). Neave JA said at [140]:

“I consider there was ample evidence that Steven Rowley was acting as the directing mind and will of RSF, in relation to the amounts transferred to RSF when it was established and thereafter. Steven Rowley was both a company director and the secretary of RSF. It was Steven Rowley who negotiated with Mr Melville of Macquarie Bank [the lender of the moneys paid to RSF] and who emailed him in May 2007 advising him that the proceeds of the loan should be paid into the Rowley Super Fund, which was initially held on trust by himself, his wife and their two sons, who later became directors of RSF. In Mr Rowley’s evidence he said that he regarded his business and his company as a family business and saw them ‘as one’. He said that he had made all the decisions relating to payments for superannuation and that he did not consult with his wife or sons”.

Garde AJA said at [281]:

“Steven Rowley was the directing mind and will of RSF on and after its incorporation. The four co-trustees were the conduit through whom funds taken from AA prior to the incorporation of RSF passed to RSF following its incorporation and appointment as trustee of the Super Fund. If the four individual Rowley family members had continued as co-trustees and RSF had never existed, their individual liability would stand to be considered in accordance with the principles which apply under the first limb of Barnes v Addy”.

It followed that it was not necessary to consider the question of knowing receipt on the basis that the individual family members had continued as co-trustees. His Honour nonetheless considered the question and concluded at [302] that it would be unfair and unjust to impute Steven Rowley’s knowledge to the other trustees if this had to be determined.

Warren CJ dissented. In her Honour’s view, there was insufficient evidence to establish that Steven Rowley was the controlling mind of RSF and she was therefore unwilling at [116] to impute his controlling role in the plaintiff/appellant to his role in RSF. Her Honour added at [117]:

“What AA is asking the Court to do, with respect, is to engage in top-down reasoning. Such an approach has been heavily criticised by the High Court and should be emphatically rejected. As happens in these types of cases the commercial expediency, cleverness, sharpness or even immorality that arises may confront. However, historically and consistently, the courts have set a very high standard to establish imputed or constructive knowledge” (endnotes omitted).

It followed that the appeal should be allowed. The Court of Appeal considered the additional question of whether RSF was a volunteer. If it was a volunteer, then the funds paid to it as the result of breach of fiduciary duty would be recoverable from it as a constructive trustee: (Warren CJ at [121]).

Reference was made to the decision of the High Court in Cook v Benson (2003) 214 CLR 370. Both Garde AJA and Warren CJ were of the opinion that the trial judge had been correct to conclude that RSF was not a volunteer. Warren CJ said at [121]:

“In the present case, the payments in question were made pursuant to arm’s-length, commercial transactions. The payments, at the direction of the first respondent, out of the funds due to him under the ISAS superannuation scheme, by way of contributions to other, commercially marketed, superannuation schemes, were made in return for the obligations, undertaken by the trustees of those schemes, to provide him with the rights and benefits to which he would in due course become entitled under the rules of each scheme. Those rights and benefits constituted substantial and valuable consideration for the contributions of the first respondent.

“It may be accepted that, if the first respondent had simply paid $80,000 to a person to hold on trust for him, the trustee would not be a purchaser for valuable consideration. In such a case, no issue under s120 [of the Bankruptcy Act 1966 (Cth)] would have arisen; the first respondent would have remained the beneficial owner of the $80,000 or the assets in which it had been invested, and the property of which he was the beneficial owner would have been available to his creditors. However, that is not what occurred in the present case. The trustees of the superannuation funds did not undertake to accept funds, hold them on trust for the first respondent, and administer them on his behalf” (end notes omitted).

Neave JA would have been inclined to distinguish Cook and hold that RSF was a volunteer.

The appeal was allowed.


PROFESSOR GREG REINHARDT is executive director of the Australasian Institute of Judicial Administration and a member of the Faculty of Law at Monash University, ph 9600 1311, email Gregory.Reinhardt@monash.edu. The numbers in square brackets in the text refer to the paragraph numbers in the judgment. The full version of this judgment can be found at www.austlii.edu.au.

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