SUPREME COURT OF QUEENSLAND

CITATION: Quince v McLaughlan & Anor; Varga v Quince; Quince v Varga & Anor [2008] QSC 61 PARTIES: NERIDA LYNNE QUINCE (applicant) v FRANCIS GUY McLAUGHLAN (first respondent) and CLINTON McLAUGHLAN (second respondent)

and

CAROL ANITA VARGA (applicant) v NERIDA LYNNE QUINCE (respondent)

and

NERIDA LYNNE QUINCE (plaintiff) v CAROL ANITA VARGA (also known as CAROL ANITA McLAUGHLIN and also known as CAROL ANITA McLAUGHLAN) (first defendant) and CLINTON GUY McLAUGHLIN (also known as CLINTON GUY McLAUGHLAN) (as trustee of the Clinton Hudson Trust) (second defendant) FILE NO/S: 4608 of 2007 5739 of 2007 6484 of 2007 DIVISION: Trial Division PROCEEDING: Civil Trial 2

ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 3 April 2008 DELIVERED AT: Brisbane HEARING DATE: 14, 15, 16, 29, 30 November, 6 December 2007 JUDGE: Lyons J ORDER: Orders to be made in accordance with paragraphs 171 to 173. Parties to be heard as to costs and as to the precise formulation of the orders. CATCHWORDS: EQUITY – GENERAL PRINCIPLES – FIDUCIARY OBLIGATIONS – PARTICULAR CASES – the plaintiff gave funds to a bankrupt in order that they be invested for a particular purpose – the bankrupt did not invest the funds as directed – the bankrupt deposited the funds into a trust bank account controlled by him and withdrew the funds for himself, the first defendant and the second defendant – whether a fiduciary relationship existed between the bankrupt and the plaintiff – whether the bankrupt breached his fiduciary duty to the plaintiff

EQUITY – GENERAL PRINCIPLES – TRUST AND TRUSTEES – CONSTITUTION AND CLASSIFICATION OF TRUSTS GENERALLY – CLASSIFICATION OF TRUSTS IN GENERAL – CONSTRUCTIVE TRUSTS – PARTICULAR CASES – the bankrupt deposited the plaintiff’s funds into a trust bank account, of which the second defendant was trustee – the bankrupt directed that the funds be withdrawn and applied to various things, some of which benefited the defendants – whether the first and second defendants ‘received’ trust property for the purposes of the rule in Barnes v Addy – whether the first and second defendants had knowledge of the bankrupt’s breach of fiduciary duty – whether the first and second defendants are liable under the first limb of Barnes v Addy

EQUITY – GENERAL PRINCIPLES – TRUST AND TRUSTEES – CONSTITUTION AND CLASSIFICATION OF TRUSTS GENERALLY – CLASSIFICATION OF TRUSTS IN GENERAL – CONSTRUCTIVE TRUSTS – PARTICULAR CASES –whether there was a fraudulent and dishonest design on the part of the bankrupt – whether the first and second defendants knowingly assisted in the dishonest and fraudulent design – whether the first and second defendants are liable under the second limb of Barnes v Addy

EQUITY – GENERAL PRINCIPLES – TRUST AND 3

TRUSTEES – CONSTITUTION AND CLASSIFICATION OF TRUSTS GENERALLY – CLASSIFICATION OF TRUSTS IN GENERAL – CONSTRUCTIVE TRUSTS – PARTICULAR CASES – whether the funds in the trust bank account are subject to a constructive trust – whether the first and second defendants are liable for the property which was subject to the constructive trust – what remedy is appropriate in the circumstances

SUPREME COURT PROCEDURE – QUEENSLAND – JURISDICTION AND GENERALLY – PROCEDURE UNDER RULES OF COURT – PLEADING –GENERALLY – the pleadings in the plaintiff’s case were narrow –the plaintiff’s pleadings were amended – whether the pleadings raised a good cause of action – whether the case must be decided in accordance with the issues raised on the pleadings – whether consideration of the issues raised on the facts would cause unfairness to the first and second defendants

Bankruptcy Act 1966 (Cth), Pt 10 Property Law Act 1974 (Qld), s 55 Supreme Court Act 1995 (Qld), s 47 Uniform Civil Procedure Rules 1999 (Qld), r 79

Baden v Societe Generale pour Favoriser le Development du Commerce et de l’Industrie en France SA [1993] 1 WLR 509, applied Banque Commerciale SA en Liquidacion v Akhil Holdings Limited (1990) 169 CLR 279; [1990] HCA 11, applied Barnes v Addy (1874) LR 9 Ch App 244, applied Breen v Williams (1996) 186 CLR 71; [1995] HCA 63, applied Bathurst City Council v PWC Pty Ltd (1998) 195 CLR 566; [1998] HCA 59, cited Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373; [1975] HCA 8, applied Benzlaw & Associates P/L v Medi-Aid Centre Foundation Ltd [2007] QSC 233, cited Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, applied Water Board v Moustakas (1988) 180 CLR 491; [1988] HCA 12, cited COUNSEL: P Baston for the plaintiff L Bowden for the first defendant and second defendant SOLICITORS: K L King & Associates for the plaintiff Broadbent Radich Sampson Ziukelis for the first defendant and second defendant

LYONS J: 4

The proceedings

[1] There are currently three interrelated proceedings in this matter. The substantive action involves Claim 6484/2007. The plaintiff in that action, Nerida Quince (“Quince”) seeks various forms of relief, including the declaration of a constructive trust over the assets of the first and second defendants namely Carol Varga (“Varga”), who is also known as Carol McLaughlan and her son Clinton McLaughlan (“Clinton”) as trustee of a family trust called the Clinton Hudson Trust (“CHT”).

[2] There are also two originating applications before the Court, namely BS4608/07 and BS5739/07. Originating application 4608/07 relates to an application for a Mareva injunction which was issued on 12 June 2007 freezing the assets of Varga, Clinton and Varga’s husband Francis McLaughlan (“McLaughlan”). The other application relates to the removal of a caveat lodged over the first defendant’s property at Sanctuary Cove on 19 June 2007. Quince lodged the caveat claiming an interest as “…beneficial owner of an estate in fee simple under a constructive trust”. At the end of the trial Counsel for the defendants advised that they were not at that stage pursuing their application for the variation of the Mareva injunction.

[3] At the commencement of the trial an Order was made pursuant to rule 79 of the Uniform Civil Procedure Rules 1999 (Qld) that the two applications be heard with Claim 6484/07. A further Order was made that evidence in each of the proceedings be evidence in the other proceedings. It was further ordered that the evidence in the proceedings was to be the existing affidavit material, as well as any oral evidence adduced at the hearing.

[4] The substantive questions that arise therefore essentially relate to whether the circumstances are such that the plaintiff is entitled to some relief and if so what relief against the defendants, whether declarations of a constructive trust should be made, and whether the caveat over the first defendant’s real property should be removed.

Relevant persons

[5] The plaintiff in BS4708/07, Quince, is a divorced mother of three children who at the time of the hearing had a contested property application which had not been determined by the Family Court of Australia. Her former husband was not providing any financial support and whilst she had no regular source of income, she owns the property she resides in on the Gold Coast.1 In 2006 Quince was in a relationship with a businessman Bruce McTaggart (“McTaggart”).

[6] McTaggart was the director of a company called Northern Territory Airline Services (“NTAS”). McTaggart and McLaughlan had been close friends for a number of years and they played golf together at the Sanctuary Cove Golf Club. They often played daily but at the very least three or four days per week. They became involved in business dealings including a property development at Agnes Waters in 2005 and in July 2006 McTaggart had borrowed $10,000 from McLaughlan at five per cent per month interest.

1 Transcript of Proceedings, p 54, ll 57-51. 5

[7] In late 2006 McTaggart was involved in an investment arrangement with McLaughlan where he gave monies to McLaughlan on the basis that he organised for contacts in Melbourne to lend the money out to borrowers who wanted short term loans and were prepared to pay seven per cent per month interest. McTaggart received five per cent per month interest on monies he gave to McLaughlan, with McLaughlan receiving two per cent for his role in setting up the transaction.

McLaughlan and his family

[8] McLaughlan is an undischarged bankrupt who was declared bankrupt in November 2005 with $1,718,536.53 in liabilities.2 He had previously entered into a Part 10 arrangement under the Bankruptcy Act 1966 (Cth) in January 2003 (“Part 10 Arrangement”) but had failed to make any payments. He currently has no assets and does not have a bank account.3 He has a criminal history including a conviction in Victoria in 1975 of eight counts of armed robbery for which he was sentenced to concurrent nine year terms of imprisonment.

[9] Varga has been married to McLaughlan for over 20 years and they have two sons, Clinton, aged 21 and Hudson, aged eight. The family home at Sanctuary Cove, in which they all reside, was purchased on 3 February 2005. At the time of purchase, which was after McLaughlan’s Part 10 Arrangement but prior to his bankruptcy, the property was registered in the first defendant’s maiden name of Carol Varga rather than her married name of Carol McLaughlan.

[10] The entire purchase price was borrowed by Varga from All State Home Loans and the property is subject to a mortgage of $978,608.55.4 The loan was arranged by the family’s former accountant, Greg Farrar (“Farrar”), who has run a mortgage broking business, SCB Mortgage Solutions, since his own bankruptcy some four years ago.5 In 2007 the property was listed for sale at $1.65 million.

[11] Clinton has just completed a degree in international business and returned to Australia from overseas for the hearing. He is the trustee of the CHT into whose bank account the monies were paid. The CHT was established on 1 June 2004 with Farrar as settlor and Varga as principal. The primary beneficiaries are Clinton and Hudson, with Varga and McLaughlan included as secondary beneficiaries.6

[12] The main asset of the CHT is 820,000 units in the Agnes Waters Rainforest Trust (“AWR Trust”) which is a Unit Trust. The trustee of the AWR Trust is Agnes Waters Rainforest Properties Pty Ltd. There were three Initial Unit Holders who held 100 units each in the AWR Trust, one of whom was Clinton as trustee of the CHT. The Deed was executed on 1 June 2004, with Clinton as one of the signatories as trustee of the CHT. Farrar and Clinton are both directors of Agnes Waters Rainforest Properties Pty Ltd which was registered with ASIC on 13 May 2004.7 Clinton has been both a director and secretary since that date. Clinton turned 18 on 1 May 2004.

2 Transcript of Proceedings, p 243, ll 7-9. 3 Transcript of Proceedings, p 195, ll 28-36. 4 Transcript of Proceedings, p 161, l 43. 5 Transcript of Proceedings, pp 176-177, ll 21-58 (176), 21-50 (177). 6 Exhibit CGM 1 to the Affidavit of Clinton McLaughlan, filed 22 October 2007. 7 Exhibit CGM 4 to Affidavit of Clinton McLaughlan, filed 22 October 2007. 6

[13] The only assets of the AWR Trust are three blocks of undeveloped rural land at Agnes Waters in Queensland which were purchased in July and September 2004.8 There is a mortgage of $1,200,000 over the property. There are no development approvals in place and in June 2007 Clinton indicated that considerable funds still needed to be expended to “…engage specialist consultants, etc. needed to obtain such development approvals”.9 The land has been owned for some three years but it would appear that no significant steps have been taken to advance the project in that time. There are 3,520,000 units in the AWR Trust and the CHT owns approximately 23 per cent of the AWR Trust.

The funds

[14] In December 2006 McTaggart advised Quince of the investment arrangement he had with McLaughlan. In order to take part in a similar arrangement, Quince borrowed monies from Aussie Home Loans with her home as security. Between 8 January 2007 and 30 January 2007 she gave cheques to McTaggart, totalling $415,000, made out to his company NTAS, to forward on to McLaughlan. On 27 March 2007, at McLaughlan’s direction, she made a further a cheque for $30,000 payable directly to the CHT. These payments were made as follows:

Date Amount Made Payable to

8/1/07 $120,000.00 Northern Territory Air Services Pty Ltd 16/1/07 $190,000.00 Northern Territory Air Services Pty Ltd 30/1/07 $105,000.00 Northern Territory Air Services Pty Ltd 27/3/07 $30,000.00 Clinton Hudson Trust Total $445,000.00

[15] It is clear that the monies paid to the NTAS account were immediately transferred by McTaggart into the bank account of CHT at McLaughlan’s direction.

[16] Initially interest payments were paid to the Quince and funds totalling $33,000 were paid as follows:

“Date Amount a) 12 February 2007 $6,000.00 b) 19 February 2007 $5,000.00 c) 12 March 2007 $6,000.00 d) 19 March 2007 $5,000.00 e) 12 April 2007 $6,000.00 f) 19 April 2007 $5,000.00

Total $33,000.00”

[17] The interest payment due in May was not paid and on 23 May 2007 Quince demanded the repayment of both principal and interest. This demand has gone

8 Exhibit CGM 5 to the Affidavit of Clinton McLaughlan, filed 22 October 2007. 9 Affidavit of Clinton McLaughlan, filed 21 June 2007, par 3(a)(iii). 7

unsatisfied. The $445,000 paid into the CHT bank account was completely withdrawn by June 2007 and the bank account was closed.

The relevant events

[18] The circumstances surrounding the payment of the sum of $445,000 to McLaughlan are in dispute and for reasons which I will set out later I accept the plaintiff’s version of events which are essentially as follows.

[19] Quince was told about the investment arrangement by McTaggart in early December and was initially reluctant to give monies to McLaughlan as she was very concerned about security as her former husband “…used to invest a lot and he lost a lot of money by doing exactly this.”10 However she was ultimately induced to make the payments of $445,000 on the basis of representations that were specifically made to her by McLaughlan that through his contacts, he could organise for her money to be lent out to borrowers in Melbourne at high interest rates for short periods. She was promised that both principal and interest was repayable on demand, that she would be paid five per cent interest per month on the money provided by her, and that security to the extent of twice the money provided by her would be sought before monies were loaned. She was also told that McLaughlan and his wife guaranteed repayment of all monies and that the property at Sanctuary Cove was promised by McLaughlan and Varga as security for the principal amount and the outstanding interest. Whilst she had been promised a written agreement prepared by McLaughlan’s lawyers in Melbourne, she was informed this had been delayed due to the Christmas holidays and Quince believed him. She knew that McLaughlan received a two per cent commission for his role in the transaction.

[20] There are three specific occasions that are identified as occasions when the representations were made by McLaughlan. The first was a charity ball at the Hyatt Sanctuary Cove in December 2006, the second was a meeting at the Red Rock Café, in January 2007 and the third was at the Mexicasa Restaurant in early 2007. On two of these occasions Varga was present. The promises of guarantees were made by McLaughlan when Quince and McTaggart were his guests at the charity ball on 16 December 2006. The investment was mentioned in Varga’s presence and when Quince indicated it all seemed too good to be true McLaughlan replied it was all “…aboveboard and legal.”11 When she had then asked how she could get her money back and what guarantees she would have McLaughlan stated that “…they only lent money on the basis of security twice the borrowing”12 and “…[t]hat Carol and he would not allow me to lose any money and would sell their home to guarantee the loan.”13 Varga was present when McLaughlan made these statements but it is clear he was doing all the talking and he made it quite clear that the investment was not only “safe” but that “they guaranteed” it.14

[21] The investment was then discussed further with McLaughlan at a meeting at the Red Rock Café in early January 2007, prior to Quince forwarding the cheque on 8 January.15 The promises were repeated to Quince and she pressed for a written

10 Transcript of Proceedings, p 59, 11 5-6. 11 Transcript of Proceedings, p 62, ll 4-5. 12 Transcript of Proceedings, p 62, ll 16-17. 13 Transcript of Proceedings, p 62, ll 10-30. 14 Transcript of Proceedings, p 62, l 15. 15 Transcript of Proceedings, p 58, ll 22-23; Affidavit of Bruce McTaggart, filed 29 May 2007 par 22. 8

agreement and the need for the paperwork to be done. McLaughlan told her “…if anything happened he would not let me lose my house, he would sell his house first.”16 She was also told that she could get her money back “...at any stage within 30 days.” She was also told not to mention the investment with anyone because the interest would be paid in cash.

[22] Once the first cheques were forwarded and there was no written agreement Quince became very concerned and would mention the need for a written agreement to McLaughlan on every occasion they met and would specifically ask17 McLaughlan if he had “…done the documents with the lawyer” but he was “…always so evasive about it”. She and McTaggart had a further conversation with McLaughlan at a dinner he was having with his family at the Mexicasa Restaurant in either January or February 2007, when they also discussed Varga’s birthday gift of a $90,000 Audi TT motor vehicle. Varga was also present during this conversation when Quince specifically requested the signed agreement which McLaughlan kept putting off.

[23] Quince received the interest payments as set out above in cash on six separate occasions. On five of those occasions McTaggart conveyed the money to her indicating they were from McLaughlan and on one occasion on 12 March 2007 the interest was given directly to her by McLaughlan. No written agreement was ever signed.

Why the defendant’s version is not accepted

[24] As I have indicated I accept the plaintiff’s version of events that the money was advanced pursuant to an agreement with McLaughlan to lend it out to borrowers in Melbourne. McLaughlan, however, had stated that the circumstances surrounding the payment of these cheques into the CHT were completely different. I have accepted the plaintiff’s version of events for a number of reasons which I will now set out.

18 [25] In his evidence McTaggart outlined his history of previous dealings with McLaughlan whereby he would give money to McLaughlan who would then give it to a Melbourne Finance Broker called ‘Kerb’ who would lend it out at high interest rates. He was told all the money was “…secured over property, with two to three times the security and documents are prepared through lawyers in Melbourne.” He was also told that “…[a]ll investments are for 60 days and then you can get your money back if you want to…” and that McLaughlan personally guaranteed any investment. McTaggart was told by McLaughlan that: “…[t]he way it works is that the monies go out and you get back five per cent on your investment. My return is two per cent per month commission. It is all safe with your investment secured by property worth two to three times the value. I personally guarantee it. If I had to, I would sell my house to repay you.”

19 [26] McTaggart gave evidence of forwarding monies to McLaughlan from both himself and his former wife Cheryl. Cheryl gave him a cheque for $80,000 and a further $18,000 in cash to invest with McLaughlan, with the cheque being made payable to

16 Transcript of Proceedings, p 60, ll 30-31. 17 Transcript of Proceedings, p 60, ll 20-21. 18 Affidavit of Bruce McTaggart, filed 29 May 2007. 19 Affidavit of Bruce McTaggart, filed 29 May 2007. 9

the CHT. He gave McLaughlan a further $150,000 of his own funds between 20 November 2006 and 2 February 2007. He received instalments of the five per cent interest on both investments in cash. Between 20 December 2006 and 5 May 2007 he received interest payments totalling $37,500 on 15 separate occasions on the day they fell due until 12 May 2007. Quince was present on one occasion when the interest payment in cash was made to him by McLaughlan.

[27] McTaggart gave evidence that he asked McLaughlan if Quince could be part of a similar arrangement and that he was present at the meeting at the Red Rock Café in early January 2007 when McLaughlan explained the arrangement to Quince and guaranteed the five per cent return and promised that it was secure.

[28] McTaggart also confirmed that around the time of Varga’s birthday in February 2007 he went to the Mexicasa Restaurant where the McLaughlan family dined regularly and raised the issue of the money that he, Quince, and his former wife Cheryl had given McLaughlan. He said to McLaughlan “…[w]e all need to know that we will get our money back. It may not seem like a lot of money to you, but to us it’s a huge amount.” He states that Varga was present when McLaughlan assured him it was totally secure and that they would sell their home to make sure they got their money back. He also states that Varga said that “…[y]ou have our guarantee.”20

[29] When McLaughlan gave evidence at the trial his version of events was quite different. McLaughlan stated that he had told McTaggart that he was looking for six or seven hundred thousand dollars to lend to the CHT so that it could engage in further business dealings. McLaughlan stated that McTaggart, who he knew to be very wealthy, said he was happy to lend him the money for that purpose but indicated that it would take him some time to get the money together as he had to realise some assets. Ultimately, however, he says McTaggart agreed to loan him the money on the basis that for the first 60 to 90 days, while McTaggart realised his assets, the loan would be at seven per cent per month interest. Once he realised the assets, however, the loan would be at seven per cent per annum. McLaughlan also states that as part of the deal a parcel of units from the AWR Trust would be made available to McTaggart at a reduced cost.

[30] McLaughlan stated that as McTaggart did not indicate where he was getting the money from, he did not know Quince was involved. He stated that he stopped paying the seven per cent interest because he only promised to pay the high rate for 90 days maximum, which had expired.

[31] There are, therefore, completely different versions of the circumstances surrounding the transaction whereby $445,000 ended up in the bank account of the CHT. Quince claims they were given to McLaughlan for the specific purpose of him giving them to contacts in Melbourne to lend at high interest rates to borrowers for short periods believing that the funds were repayable on demand and were guaranteed by McLaughlan and his wife. This version is supported by McTaggart.

[32] McLaughlan, however, states that the money was borrowed from McTaggart and was a loan which was advanced for the specific purpose of a cash injection into the CHT so it could continue its business ventures. McLaughlan’s version of events

20 Affidavit of Bruce McTaggart, filed 24 July 2007. 10

only emerged during the evidence he gave at the hearing on day four. McLaughlan’s version of events was not put to McTaggart or Varga who gave evidence on day one.

[33] In coming to a decision about the true nature of the transaction, I have considered the oral evidence given, the affidavit material which was filed, as well as a tape recorded conversation which occurred between Quince and McLaughlan on 23 May 2007. This recording, which was made some two weeks after the May interest payment was overdue, was secretly recorded by Quince’s daughter Chloe on a laptop computer. A transcript21 of the conversation is in evidence and is accepted by all parties as accurate.

The veracity of McLaughlan’s evidence

[34] I have considered all of the material very carefully and I consider that this tape recorded conversation contradicts McLaughlan’s evidence that he did not know Quince was involved.

[35] During the taped conversation Quince clearly indicates to McLaughlan that she needs a written agreement. Furthermore she states that promises had been made to her that she would get two to three times the security and that the amounts were only out on loan for 60 days. During their conversation McLaughlan does not dispute this and in fact says “…let’s formalise it and then everyone is happy.” I particularly note that in the conversation McLaughlan refers to the need for a written agreement at the very beginning, before it was specifically raised by Quince. He specifically refers at the outset to the “…need for an agreement, with the relevant securities in place by Friday.” I consider this statement supports Quince’s evidence that she was promised an agreement in writing evidencing the arrangements. I also consider that this endorses Quince’s evidence that McLaughlan “…had been avoiding me for a long time about this question of legality and securities.”22

[36] Furthermore, I consider that in the conversation McLaughlan confirms that the money was to be invested with third parties because there is a statement by him about the monies being “rolled over” on 19 June. He is referring to the money as if it is with a third party completely unassociated with him. McLaughlan in fact states that he was going to Melbourne to sort out the exact date that the money “rolls in”. None of this supports McLaughlan’s version of events. This clearly supports Quince’s version of events that it was to have been invested by him with others. It is clear that the money was not lent to him or to the CHT but rather he was to transfer it to third parties in Melbourne who would do the lending. In fact, he refers in the transcript to “…pulling everything out”,23 which supports the fact he was continuing to convey the impression that third parties were involved. The role he purported to play, on the tape to Quince, would appear to be similar to that of a “broker” in that he put two parties together – one party who wanted to invest the money and the other party who did the investing.

[37] In the conversation Quince also talks about her Family Court action with McLaughlan and says “ …I was a blabbermouth, I had to tell her [her solicitor]

21 Exhibit NQ2 to the Affidavit of Nerida Quince, filed 29 May 2007. 22 Transcript of Proceedings, p 67, ll 17-18. 23 Exhibit NQ2 to the Affidavit of Nerida Quince, filed 29 May 2007, p 13. 11

because I am going to Court on Monday, I had no choice I have been saying for ages I need something to show the judge that I’m getting a return on this.”

[38] McLaughlan stated that he had no dealings with Quince and that he only went along with what Quince said to him in the conversation to “cover” for his friend McTaggart who he claimed was actually receiving seven per cent on the money, but clearly only giving Quince five per cent. I do not accept McLaughlan’s evidence in this regard as I consider it to be completely implausible given the nature of the conversation between Quince and McLaughlan which indicates previous contact as evidenced by the exchange set out in the paragraph above. During the conversation, McLaughlan also promises to get $15,000 in cash for Quince, which would be an extraordinary promise if he was simply “covering” for McTaggart. I consider that it is more likely that he was buying time for himself.

[39] There is also a reference in the transcript to Quince saying she considered the whole arrangement had “too much risk”. McLaughlan in reply says “…and as I said to you umm and as Bruce said to you, that umm he would guarantee it. And that’s it.”24 This confirms that McLaughlan had previous conversations about the arrangement and, indeed, the inference is open from the conversation that he, himself, had guaranteed it. I consider this supports Quince’s version of events. McLaughlan extricates himself from this meeting by stating that he is on his way to an appointment with a court ordered psychiatrist because of a traumatic accident he was involved in. When asked at the hearing for the name of the psychiatrist he could not recall the name.25

[40] It is clear that Quince had initial misgivings, but that the promises made to her by McLaughlan ultimately satisfied her concerns and she believed that she had a guarantee that her money was safe. I accept that McLaughlan gave assurances about requiring security of twice the value of the loan and that he made statements to the effect that Quince would not lose her money and that he personally guaranteed the loan and would put their home up for sale if the money was not paid back. When the specific representation was put to him at the trial that he had promised to sell the family home if the funds were not forthcoming he stated, “...[t]hat’s not correct as I haven’t got a home.”26

[41] I do not accept the evidence of a fellow guest at the charity ball, Serena Gallo, that she could hear and remember every conversation that occurred in the group that night. I do not accept her evidence that because she did not hear such representations they did not occur.27 This is particularly implausible given there were 10 people in the group and it was in a busy ballroom.

[42] It is clear that I prefer the evidence of McTaggart and Quince to that of McLaughlan. I consider that the evidence McLaughlan gave was evasive28 and unsatisfactory. On numerous occasions29 he stated he did not understand the question when it was clear that he did, such as in the following interchange:30

24 Exhibit NQ2 to the Affidavit of Nerida Quince, filed 29 May 2007, p 13. 25 Transcript of Proceedings, p 247, l 25. 26 Transcript of Proceedings, p 222, ll 57-58. 27 Transcript of Proceedings, p 174, ll 18-25. 28 See for example Transcript of Proceedings, p 215, ll 1-30. 29 Transcript of Proceedings, p 221, l 38; p 228, l 6; p 236, ll 40-60. 30 Transcript of Proceedings, p 214, ll 35-40. 12

“And those funds were then transferred by you, some of them into your wife’s account, banking account at Suncorp Metway?-- I don’t get the meaning of that, sorry.

Okay?-- Could you rephrase it because I don’t want to be tricked.”

[43] He refused to directly answer questions that he was well able to answer, including how old he was.31 He could not remember the name of the cruise ship he went on in January 2007 or the destination.32 I also consider that he was deliberately misleading in relation to at least one of his answers.33 Ultimately, I consider that McLaughlan was an untruthful witness.

[44] Furthermore, the version of events given by McTaggart and Quince is supported by other evidence, including the taped conversation, as well as by the history of prior dealings with McTaggart. Furthermore the use made of the funds by McLaughlan does not support McLaughlan’s version of events that the funds were for “…further business deals.”

History of prior dealings

[45] The allegations made by Quince about McLaughlan’s representations are supported by evidence of McLaughlan’s previous involvement in similar arrangements. McTaggart gave evidence that he began investing sums with McLaughlan on the same terms as those alleged by Quince earlier in 2006 and began receiving interest payments. The evidence of Linda Ferries34 (“Ferries”) also indicates that she and her husband had lent money to McLaughlan with a promise of high returns. There is therefore a prior history of McLaughlan being involved in similar arrangements which supports the version of events given by Quince and McTaggart.

[46] I also accept that a rate of return of five per cent per month was offered. This representation of five per cent receives some support from the fact that interest payments were in fact paid by McLaughlan to Quince and the fact that interest was previously paid to McTaggart and Cheryl. They were all paid interest in the order of five per cent.

[47] Furthermore, there is evidence that McLaughlan had made a previous promise of a guarantee. The evidence of Ferries35 indicates that he made a similar guarantee in a previous transaction. The written documentation dated 23 March 2005 related to an advance by Ferries and Brad Howe (“Howe”) to McLaughlan of $140,000. The document provides that McLaughlan agreed to personally guarantee a buy back of shares in the following terms; “…Francis McLaughlan will sign this agreement and it will form a personal guarantee to do so.”36 Furthermore, this transaction also involved a promise that the monies advanced were repayable on demand with 14 days’ notice. Similarly, in this transaction an initial interest payment of $23,000 was paid but further interest payments were not forthcoming, despite frequent requests.

31 Transcript of Proceedings, p 228, ll 40-41. 32 Transcript of Proceedings, p 247, ll 45-60. 33 Transcript of Proceedings, p 218, ll 53-58. 34 Affidavit of Linda Ferries, sworn 21 July 2007. 35 Affidavit of Linda Ferries, sworn 21 July 2007. 36 Exhibit LF1 to the Affidavit of Linda Ferries, filed 24 July 2007. 13

[48] I therefore accept the evidence of McTaggart and Quince that McLaughlan made representations to induce them to provide monies to him. With respect to McTaggart I accept that the representations made to him were that McLaughlan gave money to a finance broker in Melbourne, who then lent it out at a high interest rate to borrowers who needed short term loans and who did not want to access banks. I accept that McTaggart was initially told by McLaughlan that all the loans were 60 day loans secured over property and that the documents were prepared through solicitors in Melbourne.

[49] I also accept that representations in similar terms were made to Quince by McLaughlan and that he offered to organise to put Quince’s money into similar ventures. I consider the evidence before me supports a finding that McLaughlan told Quince that the return on the money would be five per cent per month and that the investment was secure because security of two or three times the money lent was obtained and that he and his wife “guaranteed” it.

[50] I am satisfied that initially, the promises were made at the charity ball to which Quince went as McLaughlan’s guest. I am satisfied that subsequently, McLaughlan made specific representations to Quince at the meeting they had at the Red Rock Café prior to the first cheque being forwarded by her on 8 January 2007. I am also satisfied that the security arrangements and guarantees were then further discussed in January or February 2007 at the Mexicasa Restaurant when Varga was present and she endorsed that the investment was guaranteed.

What happened to the funds? 37 [51] Bank records indicate the movement of the funds after 9 January 2007 and the following table, based generally on those records, indicates the dates the cheques were presented, amounts involved and the payees that have been identified.38

Particulars Date Cheque No Payee Amount $ 17/1/07 53 Sanctuary Cove Golf and 32,500.00 Country Club 17/1/07 57 – Customer Cheque 1,904.00 18/1/07 Bank Cheque Withdrawal 4,400.00 F McLaughlan 22/1/07 59 – Customer Cheque 795.56 22/1/07 60 – Customer Cheque 1,383.27 24/1/07 56 Legends Hotel 5,000.00 24/1/07 58 Sanctuary Cove Golf and 5,000.00 Country Club 30/1/07 Bank Cheque Withdrawal 117,000.00 31/1/07 62 – Customer Cheque 1,344.15 31/1/07 63 All State Home Loans 5,000.00 (being mortgage payment on 1st defendant’s property at 7063 Riverview Crescent, Sanctuary Cove)

37 Exhibit 6. 38 Varga admits that cheques 63, 75, 81, 90 were paid into her account. 14

1/2/07 64 – Customer Cheque 1,898.00 1/2/07 66 – Customer Cheque 38,500.00 6/2/07 70- Customer Cheque 2,000.00 7/2/07 Bank Cheque - James Frizelle Automotive 47,500.00 Group -balance re 1st defendant’s Audi QTT 17Z 7/2/07 67 – Customer Cheque 5,000.00 7/2/07 69 C Varga 6,000.00 9/2/07 72 – Customer Cheque 80.00 12/2/07 73 – Customer Cheque 45.00 20/2/07 74 – Customer Cheque 27.00 22/2/07 75 C Varga 5,000.00 26/2/07 Bank Cheque Withdrawal Clive Anthonys Electrical 1,699.00 28/2/07 78 – Customer Cheque 65.00 28/2/07 76 – Customer Cheque 152.02 1/3/07 Bank Cheque Withdrawal Laser Sight Centres, 5,200.00 Helensvale 1/3/07 77 – Customer Cheque 49.00 2/3/07 80 – Customer Cheque 11,194.00 6/3/07 79 – Customer Cheque 800.00 8/3/07 81 C Varga 10,000.00 8/3/07 82 CG McLaughlan 3,000.00 14/3/07 83 – Customer Cheque 500.00 16/3/07 85 – Customer Cheque 8,000.00 20/3/07 84 – Customer Cheque 99.00 22/3/07 86 – Customer Cheque 2,378.15 22/3/07 87 – Customer Cheque 688.15 22/3/07 88 – Customer Cheque 65.00 28/3/07 89 – Customer Cheque 49.60 29/3/07 90 C Varga 10,000.00 3/4/07 91 – Customer Cheque 678.45 20/4/07 92 – Customer Cheque 100.00 16/5/07 93 – Customer Cheque 25.98 16/5/07 94 – Customer Cheque 1,476.75 16/5/07 95 – Customer Cheque 46.60 16/5/07 97 – Customer Cheque 149.40 25/5/07 Bank cheque 6169682 SCB Mortgage Solutions 5,000.00 Runaway Bay TOTAL $341,793.08

[52] In addition money was taken out of the account by means of cash withdrawals.

The use of the funds in the Clinton Hudson Trust 39 [53] A document prepared by Clinton gives particulars of the monies paid out of the CHT from January to June 2007 and where he considers the monies were paid. This document indicates that the money went to McLaughlan, Varga, Clinton, and the family, on living expenses or on loan repayments. By way of example the schedule prepared by Clinton shows payments for January as follows:

39 Exhibit 2. 15

Legend FGM Denotes Francis McLaughlan LE Denotes Living Expenses CV Denotes Carol Varga CM Denotes Clinton McLaughlan RL Denotes Repayment of loan MF Denotes McLaughlan Family

“January 10th $1000 FGM RL 11th $1000 FGM RL 12th $1000 LE MF 13th $300 LE MF 13th $300 LE MF 14th $1000 FGM RL 15th $1000 FGM RL 15th $5000 FGM RL 15th $4900 FGM RL 16th $5000 FGM RL 16th $1000 FGM RL 17th $1000 FGM RL 17th $5000 FGM RL 17th $4500 FGM RL 17th CH 57 $1904 Trust Distribution 17th CH 53 $32500 Sanctuary C. Membership 18th $3000 FGM RL 18th $4400 FGM RL 18th $1000 LE MF 19th $1000 LE MF 20th $795.56 LE MF 22nd $795.56 LE MF 22nd $1383.27 LE MF Body Corporate fees 22nd $5000 LE MF Legends Hotel 24th $5000 SCGCC Membership fees 28th $1000 FGM RL 29th $5000 FGM RL 29th $1000 LE MF 30th $1000 FGM RL 30th $5000 FGM RL 30th $117000 The Howes Management Trust for Purchase of Units In Agnes Water Rainforest Properties 31st $5000 FGM RL 31st $1000 LE MF 31st $1344.15 Trinity Lutheran College Cheque 62 School fees 31st $5000 Allstate Home Loans Cheque 63 (Consultant Fees SCB Mortgage Solutions)” 16

[54] The document also records similar payments out of the CHT in February, March, April and May of 2007. An analysis of this document indicates that large cash amounts from the CHT went to McLaughlan and are called loan repayments.

[55] There are no primary documents, however, which evidence the basis for Clinton’s analysis of the allocation of funds. It is clear that there is no documentation in evidence which confirms how the funds were spent. The particulars that were provided by Clinton indicate that essentially the monies were spent on payments to or for the family, including mortgage repayments, a car, school fees, golf club membership, electrical goods and living expenses, as well as some $140,000 to McLaughlan and payments to Varga and Clinton. There are no monies left in the CHT bank account and the account has been closed.

McLaughlan’s use of the CHT bank account 40 [56] McLaughlan acknowledged that he did not have a bank account and that he knew that any funds he earned over about $45,000 would have to go to his trustee in bankruptcy. Farrar, the former accountant, also confirmed that this was the known state of affairs.41 He also stated that he knew McLaughlan was “…advancing monies to the CHT on some indeterminate basis from time to time.”42

[57] McLaughlan acknowledged that he had keycard to access the CHT bank account and that he effected various transactions out of the CHT account using the keycard. The document prepared by Clinton indicates that significant funds in excess of $140,000 went directly to McLaughlan. Many of these funds were paid by cheques signed by Clinton.

[58] I consider that the money from Quince was paid at McLaughlan’s direction into an entity he had control over and which he could freely access. McLaughlan directed that the bulk of the money be paid from Quince to NTAS whereby McTaggart was to organise for the money to be immediately transferred to the CHT bank account. An inference which can reasonably be drawn from this arrangement is that this was to ensure there was no paper trail of money going directly to McLaughlan. Furthermore, McLaughlan had no bank account that the money could be paid into.

[59] It is clear from the evidence that cash cheques were given to McLaughlan or he drew large amounts of money directly from the CHT account, usually via ATM transactions, and that quite often there were multiple transactions involving many thousands of dollars over the course of one day.

[60] McLaughlan, however, is not a party to these proceedings. Quince has brought proceedings only against his wife and son.

[61] Quince alleged in the statement of claim that representations along similar lines to those made by McLaughlan were also made to Quince by Varga and Clinton. Therefore, the questions which arise are what role did Varga and Clinton play in relation to the transactions between McLaughlan and Quince, and what knowledge did they have of these transactions?

40 Transcript of Proceedings, p 195, ll 28-29. 41 Transcript of Proceedings, p 181, ll 25-30. 42 Transcript of Proceedings, p 175, ll 36-37. 17

Were direct representations made by Varga and Clinton?

[62] Clinton and Varga both gave evidence and denied that they had ever had any direct conversations with Quince in relation to the monies that she had paid to McLaughlan. Varga specifically denied having had discussions with Quince or McTaggart at either the charity ball function on 16 December 2006 or subsequently in January 2007 in relation to the investment monies.

[63] I do not consider that there is any evidence that either defendant knew the detail of the promises made by McLaughlan to Quince. They did not necessarily know, for example, that McLaughlan had promised Quince that her investment would return five per cent per month. Despite the pleadings, Quince in fact admitted in evidence that neither defendant had actually made direct representations to her about the details of the investment. She agreed that she had never met Clinton and had met Varga in social situations.43

[64] I am not satisfied that Varga or Clinton themselves made specific representations to Quince about the exact nature of the investment or the returns on the investment.

[65] I am not satisfied therefore that there was a specific agreement between Quince and either or both of the defendants. This part of the plaintiff’s claim must therefore fail.

[66] Neither do I consider that there is any evidence that McLaughlan, Varga, or Clinton induced Quince to borrow the money from Aussie Home Loans. McTaggart stated that he had assisted Quince in this regard.44

The knowledge of Varga

[67] I consider that there is clear evidence that Quince met McLaughlan on at least two occasions when Varga was present, once at the charity ball and later at the Mexicasa restaurant. I accept the evidence that on both these occasions Quince and McTaggart had conversations with McLaughlan, while Varga was present. These conversations included references to their investments with McLaughlan and that McLaughlan made promises about the investment being “safe” and that he and his wife “guaranteed it”. I accept that Quince made a specific comment about the investment at the charity ball in Varga’s presence.

[68] Quince then followed these representations up with a request for a written agreement and guarantees in January 2007. I accept that Quince became persistent about a written agreement after she had sent the first cheque and had not obtained any documentation. I consider that Varga was present during these interchanges at the charity ball and later at the restaurant and I consider, therefore, that the evidence does establish that Varga knew, in general terms, that her husband had obtained funds from Quince but was not aware of the specific representations or the precise nature of the agreement between them. I accept that Varga endorsed the guarantees being made by McLaughlan at the charity ball and later at the Mexicasa Restaurant.

The financial position of the family

[69] The evidence clearly shows that Varga did not work and neither did McLaughlan. Clinton earned pocket money in a car washing business. McLaughlan

43 Transcript of Proceedings, p 70, ll 15-21. 44 Transcript of Proceedings, p 41, ll 11-12. 18

acknowledged that the “…only source of funds” was from money provided by him in “…the form of a loan or a deal previously that I had brokered on behalf of the trust.”45 McLaughlan also acknowledged that the AWR Trust “…is not income producing at the moment.”46

[70] It is clear that Varga knew the precarious state of the family’s finances and that any significant sums earned would have gone to her husband’s trustee in bankruptcy.47 She was aware of the creation of the CHT on 1 June 200448 during her husband’s Part 1049 bankruptcy arrangement. In her evidence Varga stated that she was aware that she was the principal of the CHT.50

[71] It was put to Varga that when she purchased the house in Sanctuary Cove in 2005, just prior to her husband’s bankruptcy, she had “…no assets, no resources, you purchased it at close to 100 per cent borrowing, you put it in your name rather than Frank’s.”51 To this she responded in the affirmative. She also acknowledged that she had to pay $60,000 per year in mortgage payments and that the only source of income for the family came from her bankrupt husband. Varga also acknowledged that significant funds had been placed in her bank account and that they had come from the CHT.

[72] I do not accept any suggestion that Varga was just a simple housewife who was ignorant of what was going on. She had previously worked for the receiver company which had taken over the management of Fisherman’s Wharf on the Gold Coast when it had gone into receivership. She had been in business herself, having led the marketing department of her husband’s failed property development business and she had managed hotels and been a functions manager for various restaurants and venues. She knew of her husband’s bankruptcy and she would have been conscious of the fact that the family had no obvious means of support. Furthermore, she is the principal of the CHT and specifically acknowledged in her evidence that she was aware of the nature of the CHT.52 One of the stated powers of the principal in the Trust Deed was the power to “…remove any trustee from office” and the power to “…appoint any person or corporation to be Trustee hereof…”53

[73] Varga stated in evidence that she knew of McLaughlan’s bankruptcy. However she denied knowledge of his previous criminal history including the fact he had served a term of imprisonment for armed robbery. I do not accept Varga’s evidence in this regard. In his evidence McLaughlan clearly stated that his wife knew he had gone to gaol for “armed robbery” because he had told her.54 Clinton said in evidence that he knew of his father’s criminal history. I do not consider Varga’s evidence that she was not aware of McLaughlan’s criminal history to be credible given McLaughlan’s admission that he had told her; her son’s knowledge; the fact she had met McLaughlan when she was at high school;55 the length of their marriage; and the

45 Transcript of Proceedings, p 214, ll 14-16. 46 Transcript of Proceedings, pp 216-217, ll 56-60 (216); l 1 (217). 47 Transcript of Proceedings, p 151, l 22. 48 Transcript of Proceedings, p 95, ll 35-45. 49 Bankruptcy Act 1966 (Cth). 50 Transcript of proceedings, p 95, l 30. 51 Transcript of Proceedings, p 161, ll 43-45. 52 Transcript of Proceedings, pp 95-97. 53 Trust Deed dated 1 June 2004, cl 13.2. 54 Transcript of Proceedings, p 229, l 37. 55 Transcript of Proceedings, p 101, ll 1-2. 19

extensive period that the criminal history spans. Varga’s specific denial, therefore, raises serious issues as to her credit.

56 [74] Varga acknowledged that she knew Ferries and Howe. The affidavit of Ferries sets out an arrangement whereby McLaughlan had obtained funds from the couple in March 2005 and that Varga knew this.57 This investment involved the couple giving McLaughlan $140,000 made out to the CHT in March 2005 and had ended unhappily when they demanded repayment of the $210,000 ($140,000 plus interest) owing to them in late 2006. On 31 January 2007 a Deed witnessed by Clinton evidenced that $117,000 was repaid in cash to Ferries and Howe and that in addition they were also given 70,000 units in the AWR Trust.

[75] Varga gave evidence at the hearing of the fact that she knew that her husband’s property development business which she had worked in had “fallen through” about five years ago. She also gave evidence that her husband was a consultant and was mainly involved with a property development at Agnes Waters.58 She stated that she was unaware that her husband was involved in money lending transactions with people in Melbourne involving short term finance and believed he was earning money through his consulting business.

[76] Given that her husband was bankrupt and could not earn an income in excess of an amount of about $45,000 without it going to his trustee in bankruptcy, Varga had to know that her husband was not earning any significant funds from this consultancy. Furthermore, McLaughlan conceded in evidence that he did not, in fact, receive any income from the AWR Trust as a consultant and his evidence was that he had never told anyone that he earned money in this way.59 It is also clear that the AWR Trust owned undeveloped land some six kilometres from the town centre which did not have development approval. Varga stated that she had been up there60 and she also specifically acknowledged that she knew that the land at Agnes Waters was vacant land, had not been developed and had not been sold.61

[77] It is also uncontroversial that McLaughlan played golf almost daily at the Sanctuary Cove Golf Course. When Varga was asked how the family was paying for its expenses she replied, “…well I just knew that he was consulting up at Agnes Waters 1770, and he was earning income that way.”62

[78] Varga knew that her husband’s property development business had failed. However she maintained in evidence that she “…was under the impression that he was doing a property Trust thing, you know, a development up at 1770 and that was ample enough information for me.”63 Farrar agreed that the land was not producing any income and, indeed, agreed that things were taking a long time.64

[79] It would be extraordinary for Varga, who had previously worked in property marketing, to believe that consultancy fees in the order of half a million dollars

56 Exhibit LF1 to the Affidavit of Linda Ferries, filed 24 July 2007. 57 Transcript of Proceedings, p 162, ll 14-55. 58 Transcript of Proceedings, p 83, ll 45-46. 59 Transcript of Proceedings, p 246, ll 54-57. 60 Transcript of Proceedings, p 82, l 45. 61 Transcript of Proceedings, p 168, ll 4-6. 62 Transcript of Proceedings, p 83, ll 45-46. 63 Transcript of Proceedings, p 168, ll 18-22. 64 Transcript of Proceedings, p 182, ll 27-49. 20

would be earned when the property had not been developed and there had been no sales.

[80] I consider that Varga must have known that the consultancy business could not be generating any substantial income.

[81] Varga gave evidence that she knew her husband was withdrawing money out of the CHT at will. She admitted in evidence she “…wasn’t sure of the actual mechanics of the Trust and how it was being operated, but obviously it was being used, yes.”65 The evidence shows that Varga was being given cash from the CHT66 and expending large sums of money in the first six months of 2007, as was the rest of her family. A car worth about $87,000 was purchased as were whitegoods for the house, the mortgage payments were made, school fees were paid, the family dined out regularly and, indeed, Clinton’s twenty first birthday party was held at the prestigious Q1 Building. In addition, Sanctuary Cove membership fees of $32,500 were paid as well as Golf Club fees. A cruise was undertaken by the whole family.67

[82] I consider that given Varga’s presence during the conversations between Quince and McLaughlan, Varga knew that Quince was forwarding funds to McLaughlan. Varga also knew that because of his bankruptcy these funds could not go into an account in his name. Furthermore McLaughlan did not have a bank account in his name. I consider that Varga knew that the funds from Quince went into the account of the CHT. Not only was the CHT the obvious vehicle for the placement of the funds, but it was suddenly flush with funds and money was being spent from this source, including funds expended on her or made available to her or other members of the family.

[83] I consider that Varga knew the funds in the CHT were obtained from Quince and were not earned by McLaughlan from his consultancy business. Varga admitted that all the family financial information was available to her and she could have accessed it if she had wanted to. She acknowledged that “… paperwork was everywhere, but, yeah, it wasn’t hidden or anything from me but I didn’t obviously go and look for it either” and that she could have “…asked at anytime for an account of how Frank was getting money to support your lifestyle.”68

[84] If Varga thought that the money in fact represented consultancy fees, one would have thought that the funds would be judiciously managed to ensure they lasted until the next consultancy fees were payable. It cannot be ignored that funds totalling almost half a million dollars were spent in extraordinary haste within three months of the funds coming into the CHT bank account.

[85] Varga denied having been present when the guarantees were made by McLaughlan and denies that she ever made similar guarantees. On the basis of the concerns I have about the veracity of Varga’s evidence I accept Quince and McTaggart’s version of events that Varga was present and endorsed the guarantees.

[86] In summary then, I consider that Varga’s knowledge was as follows: (a) She knew of her husband’s criminal history;

65 Transcript of Proceedings, p 157, ll 45-50. 66 Transcript of Proceedings, p 98, ll 33-34. 67 Transcript of Proceedings, p 157, ll 20-25. 68 Transcript of Proceedings, p 167, ll 45-46. 21

(b) She knew of her husband’s bankruptcy; (c) She knew that any income earned by her husband in excess of a stated figure had to go to the trustee in bankruptcy; (d) She knew of the establishment of the CHT; (e) She purchased the home in which the family resided in her maiden name; (f) She knew funds had been advanced to McLaughlan by Ferries and Howe and that McLaughlan owed them $210,000; (g) She knew that McLaughlan was getting funds from Quince and that she had guaranteed the arrangement; (h) She knew that these funds were paid into the CHT; (i) She knew that there was no income from McLaughlan’s consultancy at Agnes Waters; (j) She knew large amounts of money were coming out of the CHT at her husband’s direction; and (k) She knew her expenses and the family’s expenses were all paid from money that came through the CHT.

The knowledge of Clinton

[87] Clinton agreed that as an International Business student he had studied accountancy and had an understanding of bookkeeping principles.69 He also agreed that he was fully aware of the setting up of the CHT and was told of his responsibilities as a Trustee.70 He also stated that he was a director of the AWR Trust.

[88] Clinton was aware that the large amounts coming into the CHT were coming from the NTAS, which he knew was McTaggart’s business. He also knew that there had been one cheque directly from the plaintiff to the CHT.71 He stated that he himself banked cheques for $120,000 on 9 January 2007, $190,000 on 16 January 2007, $105,000 on 30 January 2007 and that there was a further fourth cheque specifically made out to the CHT. Clinton had to be asking himself why there were large cheques coming into the CHT. Why had amounts totalling $445,000 come in during an 11 week period from 8 January to 27 March 2007?

[89] The CHT’s only assets were the shares in the AWR Trust and he knew that the only transaction in this regard was the 70,000 units which had been transferred to Ferries in January 2007 pursuant to an agreement which was signed by him whereby funds of $117,000 were repaid in cash to Ferries and Howe and that they were given the units in the AWR Trust.

[90] Accordingly he knew that he had made no arrangements for the transfer of shares in exchange for the funds of $445,000. It would appear there was no documentation to indicate to him why the funds had come in from NTAS and Quince.

[91] As a trustee he had to ask the questions ‘why was the CHT entitled to these funds?’ and ‘what was the true status of these funds in the hands of the CHT?’ Clinton stated in evidence that all monies coming into the CHT from his father were to be considered a loan from his father because of a document which he had drawn up in

69 Transcript of Proceedings, p 260, ll 50-58. 70 Transcript of Proceedings, pp 256-266, ll 26-38 (256), ll 29-35 (259), ll 40-41 (262), ll 28-29 (265), ll 57-58 (266). 71 Transcript of Proceedings, p 254, ll 27-28. 22

September 2006. This minute dated 21 September 2006, at the suggestion of the former family accountant Farrar, resolved “…[t]hat loans received from Francis McLaughlan are to be repaid when units held by the Clinton Hudson Trust in the Agnes Waters Rainforest Properties Unit Trust are sold or redeemed.”72

[92] The evidence indicates however that these funds did not come from his father. Clinton banked the cheques and none of them were in fact drawn by his father. Given the cheques were not drawn by his father he must have considered that they were funds which were paid into the CHT at his father’s direction.

[93] Even if the funds were paid in at his father’s direction I can find no objective basis for Clinton’s belief that funds totalling $445,000 paid into CHT from NTAS and Quince personally were loans from his father. There was no basis for him to consider that a Minute of September 2006 could accurately characterise that all payments into the CHT account into the future by his father or apparently at his father’s direction were loans from his father. He could not genuinely believe this when he knew that his father was not the drawer of the cheques and had no way of generating income because he did not work.73 Furthermore, Clinton had to be considering how his father, who was required to direct all earnings over a certain amount to his trustee in bankruptcy, had the capacity to loan the CHT large amounts of money.

[94] Clinton stated in evidence that he was withdrawing large amounts in January 2007 and giving them to his father because his father had to pay “…Bruce McTaggart for a business dealing he had with him.”74 The uncontradicted objective evidence however is that Clinton knew that most of the money had just come into the CHT from McTaggart’s company NTAS. Furthermore, Clinton signed all the cheques and none of them were made out to McTaggart.

[95] The evidence establishes that McLaughlan used the CHT bank account essentially as his own and that he had access to a keycard to do so.75 Clinton stated in evidence that his father “regularly” asked him for money from the CHT.76 It would seem that McLaughlan would withdraw amounts using a keycard at an ATM, but larger amounts required Clinton to write a cheque. It is clear that McLaughlan used the funds in the CHT as his own and that Clinton, the trustee, allowed this to occur. Clinton gave evidence that when he queried a cheque he was told by his father words to the effect “…[t]hat’s all you need to know”.77

[96] Clinton also acknowledged that he had personally received distributions from the CHT and that, amongst other things, the CHT paid for his twenty first birthday from the monies paid into it.

[97] Clinton acknowledged that whilst he was aware he had to keep proper and accurate records of the business dealings of the CHT he had never prepared any Business Activity Statements for it or filed a tax return for the CHT.78 He also accepted that

72 Exhibit 4. 73 Transcript of Proceedings, p 268, ll 21-55. 74 Transcript of Proceedings, p 256, ll 52-54. 75 Transcript of Proceedings, p 256, ll 29-39. 76 Transcript of Proceedings, p 256, l 11. 77 Transcript of Proceedings, p 285, l 21. 78 Transcript of Proceedings, p 35. 23

all he did was to file the bank statements in a box in a cupboard in his room, without making any contemporaneous notes of how the withdrawals could be accurately recorded.

[98] In relation to Exhibit 2, which Clinton stated was prepared by him to particularise the payments out of the CHT, he acknowledged that he had not relied on any other records, documents or contemporaneous notes to ascertain the basis of the payments.79 He also acknowledged that he did not have any records that substantiated his characterisations of the withdrawals as repayments of a loan to his father.80

[99] Exhibit 6 comprises the bank records of the CHT for the period 21 April 2006 until 8 June 2007. Those records show that initially the account on that date showed a balance of $15,000 deposited. Clinton indicated that in April 2006 a deposit of $121,000 had been made because they had sold some of the units in the AWR Trust.

[100] When the first of Quince’s monies were paid into the account on 9 January 2007, there was $63,000 in the account. The records clearly show that the amounts totalling $445,000 were deposited, with the last large deposit being $30,000 on 27 March 2007. The records show that the bank account had reduced to just $7,725 by 30 April 2007 and by 1 June 2007 was overdrawn by $41.68. Many of the withdrawals were ATM withdrawals in the order of $1,000, cash withdrawals in the order of $5,000 per withdrawal, but with cash withdrawals of up to $10,000 on some days. Cheques were also drawn on the account, including $117,000 made out to repay the Ferries, $47,000 to a car dealer, and other cheques drawing varying amounts including one for $38,500.

[101] In relation to the Minute dated 22 September 2006, Clinton agreed that at the time the Minute was created he was not able to tell that his father was owed money by the CHT:81 “Right. You agree that your father never owed you any money. The only evidence you have ever given is that you, as the trustee, owed him money?-- Yes.”

[102] Clinton indicated that the CHT did not have a bank account in that name or in any name and that there were no funds held on its behalf by anybody. It would seem, however, that the CHT still had its shares in the AWR Trust.

[103] What then was the knowledge of Clinton? I accept that there is no evidence that Clinton knew of the representations made by his father to Quince. However, I consider that Clinton knew that significant amounts were coming into the CHT and that they came from cheques drawn in favour of the CHT by McTaggart and Quince. There was no documentation or any evidence to indicate these funds belonged to the CHT and, in particular, no shares in the CHT were exchanged for the funds. He also knew that these funds had been directed into the CHT at his father’s direction and he knew that his father accessed the CHT bank account and was withdrawing large amounts of money without any real reference to him.

79 Transcript of Proceedings, p 266, ll 35-40. 80 Transcript of Proceedings, p 266, ll 21-42. 81 Transcript of Proceedings, p 274, ll 50-56. 24

[104] In summary then I consider that in relation to the CHT and McLaughlan, Clinton’s knowledge was as follows: (a) He was a business student and had studied accountancy subjects and had done bookkeeping at secondary school; (b) He knew of McLaughlan’s criminal history; (c) He knew of McLaughlan’s bankruptcy; (d) He knew that any income earned by McLaughlan in excess of a stated figure had to go to the trustee in bankruptcy; (e) He had been trustee of the CHT since June 2004 and knew of his duties as trustee; (f) He knew that McLaughlan was not employed and there was no income from the consultancy at Agnes Waters; (g) He knew that Ferries and Howe had been repaid $117,000 plus 70,000 shares in January 2007; (h) He knew large amounts of money were coming into the CHT at McLaughlan’s direction. He knew three cheques had come in from NTAS on 9, 16 and 30 January totalling $415.000 without any supporting documentation; (i) He knew the CHT had received a cheque from Quince personally for $30,000 on 27 March 2007 without any supporting documentation; (j) He knew that no shares had been transferred from the AWR Trust other than those transferred to Ferries and Howe; (k) He knew large amounts of money were coming out of the CHT at McLaughlan’s direction; (l) He knew the family’s expenses were all paid from money that came through the CHT; (m) He allowed McLaughlan to withdraw large amounts in cash with a Keycard from the CHT without substantiation as to the purpose of the withdrawal; and (n) He wrote cash cheques at McLaughlan’s request without keeping any contemporary documentation as to its purpose.

[105] As Trustee of the CHT, Clinton received funds of $445,000 into the CHT bank account. I consider that he knew, or ought to have known, that the funds were not a loan from McLaughlan and that the CHT had no entitlement to those funds. He also allowed another party to determine how those funds were to be expended. It is also clear that he has not kept proper records of the nature of the expenditure from the CHT.

[106] The essential question is what relief is available to Quince on the basis of these findings?

Was the money advanced a loan?

[107] The defendants have argued that the monies advanced by Quince have to be characterised as a loan from Quince to McTaggart and then from McTaggart to McLaughlan. Varga and Clinton have also admitted in the pleadings that the monies, as set out in paragraph 14 of these reasons, were paid but that the “…moneys were loaned to Francis Guy McLaughlan in the first instance and thereafter on loaned to Clinton Guy McLaughlan as the trustee of the Clinton Hudson Trust.” 25

[108] I do not consider that the provision of the monies to McTaggart by Quince was a loan to him as there is no evidence to support this. Furthermore, I do not consider that there was a loan to McLaughlan. Money was transferred to NTAS and then to the CHT for a specific purpose based on the representations McLaughlan had made. Put simply he was to act as the go-between or the broker in-between the person supplying the money and the person doing the lending out and he would get a percentage of the interest for this service.

[109] It is clear that McLaughlan directed where the money was to be deposited and then withdrew it, essentially, as he required it. He did not, however, at any time have actual legal title to the funds. They were not given to him as such.

[110] The defendants submit that the evidence is replete with indicia that the transaction Quince entered into with McTaggart was a loan transaction and that this is supported by reference to interest being paid at five per cent per month and that the amount was repayable on demand. As I have indicated I consider that the evidence indicates that funds were placed in his control for investment by McLaughlan with third parties. They were not a loan to him or to McTaggart. Because I consider there is no evidence that there was a loan, the authorities referred to by Counsel for the defendants in this regard are of no assistance.

Was McLaughlan a fiduciary?

[111] Whilst McLaughlan was given funds by Quince for a particular purpose, it is clear they were not put towards this purpose but instead the funds went into the CHT and were not forwarded on. These funds were then spent, as McLaughlan directed, essentially on himself and his family, within a three month period.

[112] The question that arises is whether or not McLaughlan was in a fiduciary relationship with Quince. Fiduciary relationships arise essentially when one party stands in a confidential relationship with another and good faith is required of one of the parties to the extent that there is a special duty owed which is greater than that required of complete strangers. The classic formulation of the duty is set out in Breen v Williams:82 “However the categories of fiduciary relationship are not closed and the courts have identified various circumstances that, if present, point towards, but do not determine, the existence of a fiduciary relationship. These circumstances, which are not exhaustive and may overlap, have included: the existence of a relation of confidence; inequality of bargaining power, an undertaking by one party to perform a task or fulfil a duty in the interests of another party; the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another; and a dependency or vulnerability on the party of one party that causes that party to rely on another.”

83 [113] As Professor Malcolm Cope states the identification of someone as a fiduciary does not require the existence of a contract or even that one party has been appointed to act on behalf of the other, and it may be sufficient that one party has

82 (1996) 186 CLR 71, 107. 83 Malcolm Cope, Equitable Obligations – Duties, Defences and Remedies (1st ed, 2007) 62. 26

“…assumed responsibility to act on behalf of the other.”84 It is also important to identify the subject matter over which the fiduciary duty extends.

[114] I consider that McLaughlan was in a fiduciary relationship with Quince because he was placed in a position whereby he exercised command or control over the property of Quince and he could only deal with it for her benefit or for purposes authorised by her.85 In my view McLaughlan was in breach of those duties in the way in which he dealt with those funds. As Professor Cope states, “…a breach of fiduciary duty arises when a fiduciary takes improper advantage of the confidence reposed for the benefit of the fiduciary.”86

Should a constructive trust be imposed upon the assets of the CHT?

[115] Quince claims that a constructive trust should be imposed on the funds placed into the CHT.

87 [116] When does a constructive trust arise? Jacobs’ Law of Trusts in Australia (“Jacobs”) states that in the case of a constructive trust the inquiry is not as to the actual or presumed intentions of the parties, but as to whether, according to the principles of equity, it would be fraud for the party in question to deny the trust. Usually the inquiry is whether the property has been acquired in such circumstances that the holder of the legal title to the property cannot, in good conscience, retain that interest and equity converts him into a trustee. What essentially occurs is that equity attaches legal consequences to the circumstances.

[117] As Jacobs explained, the constructive trust does demand, however, the staple ingredients of express and resulting or implied trusts, namely subject matter, trustee, beneficiary and personal obligation attaching to the trust property.88

89 [118] Professor Cope, in his book on constructive trusts, states: “What has come to be known as the constructive trust was formulated and developed as a means of making accountable certain persons in defined circumstances where the justice of the case required that they be accountable for the property.”

[119] Furthermore, a constructive trust can arise without compliance with formalities as to its creation. A constructive trust can arise without strict compliance with the requirements of the need to be in writing, which some express and inter vivos and testimony trusts require and, in particular, a constructive trust is often described as a trust:90 “…which arises by operation of law rather than from the intention of the parties express or implied. It is a trust imposed by a court as a result of the conduct of the trustee and very often contrary to the wishes and intentions of the constructive trustee.”

84 Malcolm Cope, Equitable Obligations – Duties, Defences and Remedies (1st ed, 2007) 62. 85 See Baden v Societe Generale pour Favoriser le Development du Commerce et de l’Industrie en France SA [1993] 1 WLR 509. 86 Malcolm Cope, Equitable Obligations – Duties, Defences and Remedies (1st ed, 2007) 62, 63. 87 John Heydon; Mark Leeming, Jacobs’ Law of Trusts in Australia (7th ed, 2006). 88 John Heydon; Mark Leeming, Jacobs’ Law of Trusts in Australia (7th ed, 2006) 255; Muschinski v Dodds (1985) 160 CLR 583. 89 Malcolm Cope, Constructive Trusts, (1992) 3. 90 Malcolm Cope, Constructive Trusts, (1992) 7. 27

91 [120] As Professor Cope states: “The obligation to account for the property was enforced by requiring the titleholder to deliver up the property or to acknowledge the rights of the others to the property and sometimes it was enforced by a declaration that created a personal liability to account…”

[121] The defendants have argued that a constructive trust does not arise in the circumstances of this case and that as a remedy it does not arise automatically upon the occurrence of some unconscionable conduct.92

[122] There are a number of well recognised categories of cases in which such a constructive trust arises and one such category is the rule in Barnes v Addy93 (“Barnes v Addy”).

The rule in Barnes v Addy

[123] The duties of a trustee and the duties of what are called strangers to the trust were discussed by Lord Selborne LC in the 1874 decision of Barnes v Addy where he set out what is now referred to as the rule:94 “Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury to the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.”

[124] The rule in Barnes v Addy has recently been discussed by the High Court of Australia in the decision of Farah Constructions Pty Ltd v Say-Dee Pty Ltd95 (“Farah”). As the High Court said in Farah, the form of liability in the first limb is known as “knowing receipt” and the liability in the second limb is known as “knowing assistance”. The Court stated:96 “Persons who receive trust property become chargeable if it is established that they received it with notice of the trust.

In recent times it has been assumed, but rarely if at all decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary.”

91 Malcolm Cope, Constructive Trusts, (1992) 9. 92 Bathurst City Council v PWC Pty Ltd 195 CLR 566. 93 (1874) LR 9 Ch App 244. 94 (1874) LR 9 Ch App 244, 251-252. 95 (2007) 230 CLR 89. 96 (2007) 230 CLR 89, 112-113. 28

[125] This High Court decision, whilst not expressly indicating whether it approved of the obiter dicta of the previous High Court decision of Consul Developments Pty Ltd v DPC Estates Pty Ltd97 (“Consul”), has indicated that it was wrong for a lower court not to follow it. It is clear therefore that the rule as it currently applies extends to a fiduciary and as I have indicated I consider McLaughlan was a fiduciary.

[126] In the 1975 decision of Consul, Gibbs J said, referring to the Lord Selborne’s decision in Barnes v Addy, that:98 “Although in this passage Lord Selborne speaks of dishonesty and fraud it is clear that the principle extends to the case where a person received trust property and dealt with it in a manner inconsistent with trusts of which he was cognizant…”

And later:99 “However, in my judgement, the principle under discussion extends to the case where a stranger has knowingly participated in a breach of fiduciary duty committed by a person who is not a trustee even though nothing that might properly be regarded as trust property - even property stamped with a constructive trust - has been received.”

And later:100 “I respectfully agree with what was said in Selangor United Rubber Estates Ltd v Craddock [No3] 80 as to the meaning of ‘dishonest and fraudulent’ for the purposes of the rule. This expression is to be understood by reference to equitable principles and, as I have already indicated, in my judgement it includes a breach of trust or fiduciary duty…It may be that it is going too far to say that a stranger will be liable if the circumstances would have put an honest and reasonable man on inquiry, when the stranger’s failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all facts could escape liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man.”

The first limb of Barnes v Addy

[127] The question therefore in the present case is whether the rule has any application. If it does the question is, which limb of the rule applies? The distinction between the two limbs of Barnes v Addy in this case essentially relates to whether or not Varga and Clinton have actually received misdirected assets.101 This question is important because as Rob Chambers states:102

97 (1975) 132 CLR 373. 98 (1975) 132 CLR 373, 396. 99 (1975) 132 CLR 373, 396-397. 100 (1975) 132 CLR 373, 398. 101 Rob Chambers, ‘Knowing receipt: Frozen in Australia’ (2007) 2 Journal of Equity 40, 45. 102 Rob Chambers, ‘Knowing receipt: Frozen in Australia’ (2007) 2 Journal of Equity 40, 45. 29

“This distinction is crucial. In both cases, the beneficiary of a trust obtains a right to payment from someone who is not a party to the trust, but the justification for imposing that obligation is not the same. The knowing assistant has knowingly aided a breach of trust and is liable to compensate the beneficiaries for the loss caused by the breach. Liability is triggered by the assistant’s intentional participation in the wrongdoing.

In contrast, the liability of the recipient is triggered by the receipt of value misdirected from a trust (or from the beneficiary of a fiduciary duty). Even if that liability also depends on the recipient having some notice of the breach…, it does not require intentional wrongdoing on anyone’s part. Very little culpability is needed because the recipient has received value at the expense of the beneficiary and is liable only for the value received.”

[128] The cases have established that if a person has received or become chargeable with trust property, there is a knowledge requirement before liability attaches. Before turning to the question of what knowledge is actually required, the first question which needs to be addressed is whether there has been receipt of property in breach of the trust by the defendants. Exhibit 2 shows where all of the funds have been expended – significant amounts have been shown to have gone directly into the CHT then into the hands of McLaughlan, Varga and Clinton or been spent on family living, including mortgage repayments and the purchase of an expensive car in Varga’s name.

[129] Do the actions of Varga and Clinton constitute knowing receipt? Has the first limb of the Rule in Barnes v Addy been satisfied? In particular, what has actually been received by Varga and Clinton?

Has there been the requisite receipt – where was the $445,000 paid?

[130] Given the inadequate details of the payments provided by Clinton, and particularly given there are very few source documents, it is impossible to ascertain with any certainty where the $445,000 has gone. It is clear, however, that all of the $445,000 was paid into the bank account of the CHT and as the trustee of the CHT, Clinton received the full amount of $445,000 as trustee on behalf of the CHT.

[131] Some of the monies were then paid to other parties, such as All State Home Loans, and some were not actually received into the hands of either Varga or Clinton but rather for their benefit. The $47,500 for the car was paid by McLaughlan and not Varga, and the SCB Solutions payment was in fact made to Farrar. Varga submits that an amount of $31,000 only was actually received by her. An examination of the records indicates that the funds were distributed at the direction of McLaughlan and they were distributed to McLaughlan, Varga, Clinton and for the use of the family.

[132] Clinton stated that in relation to what he received personally, the costs of his twenty first birthday were expended by McLaughlan rather than himself, and that the payment of the golf club fees were clearly for his father’s benefit. Clinton submits that only $5,000 was personally received by him. 30

[133] In relation to Varga, it is difficult to specify with any certainty what the precise amount is that she received and, in the circumstances, a broad brush approach is required.

[134] I consider that paragraph 51 of these reasons sets out some of the payments that are able to be considered as having been actually received by Varga or for her benefit. This figure includes $10,000 paid in relation to the mortgage to either SCB Mortgage Solutions or All State Home Loans, the amount of $47,500 for the car, plus another $31,000 paid directly into her account. This totals $88,500.

[135] In addition, I consider that Varga would have been liable to pay the school fees and, therefore, the payment of those fees was for her benefit. This totals $2,820.90. To this figure should be added all the electrical goods purchased for the house, which comes to $12,893. There are then repairs to the air-conditioning in the house which she owns at $2,378.15, as well as the Energex bill of $678.45.

[136] The total family living expenses are also calculated in Exhibit 2 and are set out in Appendix A to these reasons. I consider that the youngest son’s contribution to the family living expenses would be minimal and that, as there were three adults living in the home, Varga’s share of the total family living expenses would be in the order of one third of this total, which is a figure of $15, 402.06.

[137] The body corporate is also Varga’s liability and totals $1,383.27.

[138] There are legal fees totalling $16,000 paid during the period and I consider a notional one third should be considered to have been paid on Varga’s behalf, which is a figure of $5,300.

[139] I consider therefore that an amount of $129,355.83 has been received by Varga which has been calculated as follows: Monies received by first defendant Total payments received $88,500.00 School fees 2,820.90 Electrical goods 12,893.00 Repairs to air-conditioning 2,378.15 Energex bill 678.45 Third share total family living expenses 15,402.06 Body Corporate fees 1,383.27 Third share of legal fees 5,300.00 Total $129,355.83

Has there been the requisite knowledge to satisfy the first limb?

[140] The degree of knowledge required to satisfy the first limb is currently unclear and as Chambers recently stated in an article on the decision in Farah:103 “The High Court did not say whether it approved of the obiter dicta in Consul v DPC, but only that it was wrong for a lower court not to follow it. This leaves the Australian law of knowing receipt in limbo.”

103 Rob Chambers, ‘Knowing receipt: Frozen in Australia’ (2007) 2 Journal of Equity 40, 41. 31

[141] It would seem that the degree of knowledge required for the first limb is not as stringent as that required for the second limb. Muir J in Benzlaw & Associates P/L v Medi-Aid Centre Foundation Ltd104 (“Benzlaw”) considered that the decisions in Farah and Consul support the proposition that the knowledge requirement in the first limb of Barnes v Addy is satisfied in circumstances which fall within the first four categories of Baden v Societe Generale pour Favoriser le Development du Commerce et de l’Industrie en France SA105 (“Baden”).

106 [142] The first four categories as set out in Baden are (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; and (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man.

[143] The conduct of Varga and Clinton is such that they must have known that the monies sitting in the account of the CHT were not the property of the CHT and I consider that they must have known that those monies were, in fact, owned by someone else. There is no other explanation – McLaughlan was an unemployed bankrupt who spent most of his days playing golf. He had no known source of income and any monies that he earned needed to be declared to his trustee in bankruptcy.

[144] As previously stated, I consider that Varga must have known that the sums of money going into the CHT did not belong to the CHT and further, she must have known that these funds were then being put into her account or spent directly on her or the family’s living expenses. I consider that both defendants must have known that those funds were not available for distribution. To use the terminology of Consul, I do not consider that the actions of Varga and Clinton are “innocent” and, at the very least, they wilfully and recklessly failed to make such inquiries as an honest and reasonable man would make. I consider that they have indeed “wilfully shut their eyes to the obvious”.

[145] Accordingly, I consider that the first limb of Barnes v Addy has been satisfied in relation to both defendants. They knowingly received funds to which they had no entitlement. They have, however, received different amounts. I consider that Varga has actually received a figure of $129,355.83 and Clinton, as trustee of CHT, has actually received an amount of $445,000.

The second limb of Barnes v Addy – has there been knowing assistance? 107 [146] Margaret Lodge refers to the distinction between the two limbs and states that in the first limb the stranger has received the property, whereas the stranger in the second limb has not. Despite the distinction, the courts have imposed liability by way of constructive trust in both cases. Lodge concludes: “Thus the constructive trust has been employed in its character as a substantive institution as well as a remedy by which restitution may be compelled. In the first instance it has been employed as a means in itself for property held by the stranger is fixed with the trust whilst

104 [2007] QSC 233, [111] (Muir J). 105 [1993] 1 WLR 509, 575-576. 106 [1993] 1 WLR 509, 575-576. 107 Margaret Lodge, ‘Barnes v Addy: The Requirements of Knowledge’, (1995) 23 Australian Business Law Review, 25, 25. 32

in the second case it has been employed as a means to an end for it imposes a liability on the stranger to compensate.”

[147] The law of knowing assistance is governed by the decision of the majority in Consul which established that a person can become liable for knowingly assisting a breach of trust or fiduciary duty if the trustee is dishonest and fraudulent. It is not necessary that the assistant be dishonest. The usual elements that are required to be established in order to give rise to liability under this limb are usually identified as (i) assistance by the stranger; (ii) a dishonest and fraudulent design on the part of the trustees; and (iii) knowledge by the assistant.

[148] Turning first to the issue of whether there has been a fraudulent or dishonest design on the part of McLaughlan who was the fiduciary. It is clear that in Consul, Gibbs J did not categorise all breaches of trust or fiduciary duty as “dishonest and fraudulent” because he said the expression was to be understood by reference to equitable principles.108 Gibbs J extended this category of liability to a person who participates in a breach of a fiduciary duty by a fiduciary rather than a trustee.

109 [149] In Farah the High Court held that the conduct of Mr Elias was not dishonest and fraudulent and in any event even if there was a dishonest and fraudulent design there was no evidence that Mrs Elias and her daughters had any sufficient notice or knowledge of it. The facts in that case involved the failure by Mr Elias to advise Say-Dee that the Council regarded the amalgamation of the properties as essential to the development. The allegation of fraudulent and dishonest conduct in that case was effectively that Mr Elias had concealed the information in order to give himself the opportunity to secretly acquire the property.

[150] On the basis of the findings I have made earlier, I consider that there certainly was a dishonest design on the part of McLaughlan. On the facts, he clearly persuaded Quince to part with a sizeable sum of money for a particular purpose, but he then diverted those funds for his own purposes. It is clear from the decisions that there has to be some form of moral responsibility and I consider that has been established in the present case.

[151] Has there then been assistance by Varga and Clinton? This aspect has not been comprehensively addressed in any of the cases, but it is generally taken to mean any action by the stranger taken with the intention of furthering the trustee or fiduciary’s fraudulent and dishonest purpose. In the present case, the family were all living together and all had a part to play in what was effectively an arrangement to get Quince’s funds into the CHT and disbursed for family expenses in a very short space of time.

[152] The dishonest design in relation to Quince was part of a larger arrangement that the family was aware of whereby the house they lived in was in Varga’s maiden name and where a trust was set up which McLaughlan controlled. He organised for money to go in and then he drew it out at will. Both Varga and Clinton knew McLaughlan could not retain income in excess of $45,000. Both Varga and Clinton received and spent funds that had come to them at McLaughlan’s direction. Both Varga and Clinton knew McLaughlan had no right to the funds. They both knew

108 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 164. 109 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 165. 33

that he could not direct that these funds could come to them even if he had earned them legitimately. The most telling action by Varga and Clinton, however, is that they were part of an arrangement whereby $445,000 was dissipated in 12 weeks.

110 [153] Has there been the requisite knowledge? As the High Court said in Farah: “The result is that Consul supports the proposition that circumstances falling within any of the first four categories of Baden are sufficient to answer the requirement of knowledge in the second limb of Barnes v Addy, but does not travel fully into the field of constructive notice by accepting the fifth category. In this way, there is accommodated, through acceptance of the fourth category, the proposition that the morally obtuse cannot escape by failure to recognise an impropriety that would have been apparent to an ordinary person applying the standards of such persons.”

[154] I consider that not only has the first limb of the rule been satisfied, but that the second limb has also been satisfied not just because of the state of the knowledge of both defendants, but because there has been knowing assistance by them.

[155] In terms of Varga, the knowing assistance is comprised of her standing by when McLaughlan made the promises to Quince that her money was secure and that they “guaranteed it”. She then stood by when she knew large amounts were coming into the CHT and were expended on the family. As principal of the CHT with power to remove the trustee, she had then stood by when McLaughlan used the CHT as his own and directed the expenditure of the funds.

[156] In terms of Clinton, he knew that the funds coming into CHT could not have been loans from his father and did not come from him. He then allowed his father to spend the monies which had come into the CHT without sufficient regard to his duty as trustee.

[157] I consider that the behaviour of Clinton and Varga had “…consciousness of those elements of the transaction which make participation transgress ordinary standards of honest behaviour.”111

The pleadings issue

[158] Quince claimed the following relief:

1. An order that the first and/or second defendant is or are indebted to the plaintiff in the sum of four hundred and forty five thousand dollars ($445,000.00) together with outstanding interest accruing thereon at the rate of five per cent per month.

2. An order that a constructive trust be imposed upon the interest of the first defendant as owner of the property situate at 7036 Riverview Crescent, Sanctuary Cove, Hope Island in the State of Queensland (“the Sanctuary Cove property”) to secure the payment to the plaintiff of the sum of four hundred and forty five thousand dollars ($445,000.00) together with

110 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 163. 111 Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 161. 34

outstanding interest accruing at the rate of five per cent per month.

3. An order or declaration that the plaintiff is entitled to an equitable lien over the Sanctuary Cove property to secure payment to her of an amount equivalent to the sum of four hundred and forty five thousand dollars ($445,000.00) together with outstanding interest accruing at the rate of five per cent per month.

4. An order that a constructive trust be imposed upon the assets of the CHT to secure the payment to the plaintiff of the sum of four hundred and forty five thousand dollars ($445,000.00) together with outstanding interest accruing at the rate of five per cent per month.

5. An order or declaration that the plaintiff is entitled to an equitable lien over the assets of the CHT to secure the payment to the plaintiff in the sum of four hundred and forty five thousand dollars ($445,000.00) together with outstanding interest accruing at the rate of five per cent per month.

5A. Damages for breach of contract in the amount of four hundred and forty five thousand dollars ($445,000.00) together with outstanding interest accruing at the rate of five per cent per month.

5B. Interest on outstanding amounts pursuant to s 47 of the Supreme Court Act 1995 (Qld) at the rate of:

a) from 12 April 2007-30 June 2007, nine per cent per annum;

b) from 1 July 2007, 10 per cent per annum.

6. Such further or other order as the Court may make.

7. An order that the defendant pay the plaintiff’s costs on an indemnity basis.

[159] Quince also seeks relief pursuant to s 55 of the Property Law Act 1974 (Qld).

[160] Both Varga and Clinton submit that the Court should not decide the case otherwise than in accordance with the issues raised on the pleadings and that on the pleadings, as they were originally pleaded, Quince’s case was very narrow.

[161] Whilst the pleadings have been amended, Varga and Clinton submit that the pleadings do still not raise a good cause of action. Varga and Clinton submit, therefore, that the case should be determined strictly in accordance with the issues raised on the pleadings and rely on Banque Commerciale SA en Liquidacion v Akhil 35

Holdings Limited.112 Varga and Clinton also rely on Brennan J’s observation in that case where he said:113 “When the pleadings bring the parties to the issue, the court’s function is to determine that issue and to grant relief founded on the pleadings unless the parties are allowed to alter the issues at the trial without amendment of the pleadings …”

[162] Whilst Varga and Clinton accept that representations are relied on in the pleadings and that these representations form the basis of an inducement for Quince to obtain the loan from Aussie Home Loans, Varga and Clinton emphasise that it is not pleaded that there is any allegation of wrongdoing and, in particular, no specific allegation that there were lies told or that there has been any misrepresentation. Furthermore, Varga and Clinton submit that there is no allegation in the pleadings that in being paid the sums, Varga and Clinton received those funds knowing them to be trust funds. In Farah a similar point was taken, but it was submitted that on the basis of well established principles114 such a deficiency did not prevent reliance being placed on the point and the High Court, in its decision, resolved the question by determining that there was no unfairness in the circumstances of that case because, whilst not specifically pleaded, the issue had clearly arisen on the facts.

[163] I consider that in the current case no unfairness to Varga and Clinton has been established. Furthermore, r 156 in Uniform Civil Procedure Rules 1999 (Qld) provides as follows: “156 The court may grant general relief other than that specified in the pleadings irrespective of whether general or other relief is expressly claimed in the pleadings.”

Are there any other suitable remedies available?

[164] Varga and Clinton submit, relying on the authority of Bathurst City Council v PWC Pty Ltd,115 that a constructive trust is only imposed if there are no other suitable remedies available and does not arise simply upon the occurrence of some form of unconscionable conduct.

[165] I am not satisfied that in the circumstances of this case it has been established that there are other suitable remedies available against Varga and Clinton.

The form of relief

[166] It is clear that there are no funds in the CHT or, it would seem, in Varga’s bank account. The only asset Varga has is her interest in the property at Sanctuary Cove. As Lodge states:116 “One of the great difficulties in seeking compensation from those who, in breach of a fiduciary duty, have wrongfully deprived others of funds or property is that the defaulter is insolvent and the funds or property have been dissipated or transferred to jurisdictions where they have become unavailable. This has led the court to look to

112 (1990) 169 CLR 279. 113 (1990) 169 CLR 279, 288. 114 Water Board v Moustakas (1988) 180 CLR 491, 497. 115 (1988) 195 CLR 566. 116 Margaret Lodge, ‘Barnes v Addy: The Requirements of Knowledge’, (1995) 23 Australian Business Law Review, 25, 25. 36

others generally referred to as strangers who did not owe a duty to those who suffered loss but may have benefited from or assisted in the perpetration of the breach of duty.

In doing so the courts have recognised the tension between the need to compensate those who have suffered loss and the need to circumscribe the liability of others so that the imposition of liability is not unreasonable or inequitable.”

[167] The usual formula adopted by a court when imposing a constructive trust is a declaration that property is subject to a trust in favour of some person. If such a declaration was sought in this case, the declaration would be that the monies in the CHT were subject to a constructive trust. However, it is quite clear that the monies in the trust have been dissipated and were dissipated within some 12 weeks of their receipt into the CHT.

[168] The next question is whether Varga and Clinton are liable for the property which was subject to the constructive trust and which now has been dissipated. That is, should there be a declaration of liability as against both defendants in relation to that dissipation of the funds which were subject to the constructive trust? As Cope indicates, such a declaration is described as one of the means used to make someone account for property. Such a declaration is not dependant on there being specific property vested in the defendant because the relief is personal rather than proprietary in character. The relief is therefore in the form of a judgment for an amount of money, and not in the form of specific restitution of the property.

[169] Given this background, I adopt the analysis of Varga and Clinton, that there are really three issues before the Court. Whilst there were initially four issues, the application for the variation of the Mareva injunction has been abandoned and, therefore, there are three issues remaining. Firstly, whether any form of monetary judgment should be given against the first defendant Varga, secondly, whether any form of monetary judgment should be given against the second defendant Clinton as trustee for the CHT and, thirdly, whether the plaintiff Quince has any proprietary interest in Varga’s house and, therefore, whether the caveat should be removed.

[170] Having considered the plaintiff’s claim I consider the appropriate orders are as follows.

[171] Judgment should be entered against Varga in the sum of $445,000, together with interest to the date of judgment.

[172] Judgment should be entered against Clinton in the sum of $445,000, together with interest to the date of judgment.

[173] Quince, therefore, has an interest in Varga’s property at Sanctuary Cove such as to ground a caveat and the caveat, therefore, should not be removed.

[174] I will hear from counsel as to costs and as to the precise formulation of the terms of the orders. 37

Appendix A Living expenses for the McLaughlan Family January to May 2007 Date Amount $ January 12 1,000.00 13 300.00 18 1,000.00 20 1,000.00 22 795.56 22 1,383.27 22 5,000.00 29 1,000.00 31 1,000.00 31 5,000.00 February 2 500.00 9 1,000.00 9 (cheque 72) 80.00 11 1,000.00 12 (cheque 73) 45.00 13 200.00 13 500.00 15 1,000.00 18 1,000.00 19 1,000.00 20 (cheque 74) 27.00 24 1,000.00 28 1,000.00 28 (Cheque 78) 65.00 28 (Cheque 76) 152.02 March 1 (Cheque 77) 49.00 6 (Cheque 79) 800.00 9 900.00 13 1,000.00 14 (Cheque 83) 500.00 19 1,000.00 20 (Cheque 84) 99.00 22 1,000.00 23 700.00 24 400.00 25 300.00 25 300.00 26 83.57 26 300.00 27 200.00 28 200.00 28 (Cheque 89) 49.80 30 200.00 April 3 300.00 8 300.00 9 300.00 10 300.00 14 200.00 17 200.00 18 200.00 19 400.00 19 120.00 19 120.00 19 120.00 20 200.00 38

20 (Cheque 92) 100.00 21 300.00 21 100.00 22 200.00 22 120.00 22 120.00 24 300.00 25 700.00 30 300.00 May 2 300.00 2 300.00 2 120.00 2 120.00 2 100.00 3 200.00 6 200.00 6 100.00 7 150.00 7 200.00 7 120.00 9 100.00 9 120.00 9 80.00 10 100.00 11 400.00 16 300.00 16 300.00 16 300.00 16 (Cheque 93) 25.98 16 (Cheque 95) 46.60 16 (Cheque 97) 149.40 17 200.00 17 200.00 17 200.00 17 200.00 17 200.00 20 200.00 21 200.00 21 (Cheque 96) 1,365.00 22 200.00 19 100.00 30 180.00 Total $46,206.20

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