Civil claims for fraud and misappropriation

Briefed: Commercial Law Updates

What will the seminar cover?

A lawyer, a forensic accountant and counsel will examine, from the perspective of a claimant and affected third parties, the nature of relief that may be sought, including proprietary relief, the concepts of tracing, and management of claims for civil fraud or misappropriation.

In particular:

• The nature of relief that may be claimed – monetary and proprietary
• Issue to be considered when proprietary relief is sought with respect to real property
• The concepts of tracing and following; tracing through mixtures, tracing into debts and overdrawn accounts; backward tracing
• How does a forensic accountant manage and undertake the exercise of tracing: what instructions and information do they require?
• Managing clients, including seeking asset preservation orders, claims of privilege against self-incrimination and issues that arise in obtaining documents when undertaking the investigation process.

Who should attend?

Advisory and dispute resolution lawyers, in-house counsel, accountants and
insolvency practitioners.

PRESENTERS

Paul McQuade KC (Barrister, Level Twenty Seven Chambers)

Paul handles a wide range of complex commercial litigation matters, including banking and finance, charities, competition and consumer law including claims for misleading and deceptive conduct, contract law, equity, managed investment schemes, partnerships, property and leasing disputes, securities and trusts. He has also acted in a number of civil fraud cases and is a Chartered Accountant.

Lauren Gamble (Barrister, McPherson Chambers)

Lauren practices in a broad range of disputes but predominately in the areas of commercial and insolvency law. Prior to being called to the bar, Lauren practiced as a solicitor in litigation and dispute resolution at several law firms in Brisbane.

Mohammud Jaamae Hafeez-Baig (Barrister, Level Twenty Seven Chambers)

Jaamae has a broad commercial and public law practice, which encompasses equity and trusts, civil fraud and asset recovery claims, contract law, administrative law, constitutional law, corporations law, consumer law, insolvency, and succession law. In addition to advising on Australian law and appearing in Australian proceedings, he practises at the English Bar from Brick Court Chambers in London.

Daniel Hains (Director, Vincents)

Daniel leads Vincents Forensic Technology, a division of Vincents Forensic Services. Daniel is a Chartered Accountant and uses his experience in forensic accounting, data acquisition and analytics to provide expertise in financial matters, fraud investigations and commercial litigation engagements. He also works with our highly qualified computer forensics and eDiscovery experts to deliver solutions in the field of digital evidence.

Caitlin Connole (Principal, McInnes Wilson Lawyers)

Caitlin is a Principal in the McInnes Wilson Lawyers Dispute and Insolvency team and has over 15 yea

Did you miss previous seminars? Check out the seminar archive on Level Twenty Seven Chambers' website for the video recordings and associated materials produced by the speakers.

Want to join future seminars live, in person or online? Register your interest.

Website: www.level27chambers.com.au

Transcript

2:22

INTRODUCTION

Paul McQuade KC: Good evening, everyone. Thank you very much for attending our presentation today on civil claims, fraud and misappropriation. We've got a distinguished panel here tonight on the screen before you. In particular, we've got Jaamae, who's written a book on tracing, which I'll come to a minute, Daniel, who's got expertise in both ordinary forensic and the school computer forensics, and Caitlin, who's had a wide ranging experience with these types of claims, acting for both the person who has been the subject of the misappropriation and also have a Third parties in relation to claims. 

 
3:01

RELIEF THAT CAN BE CLAIMED 

Paul McQuade KC: As we know, there are many varieties of forward or misappropriation that occur. These are fact dependent and when I first started doing these claims, they evolved fictitious invoices, and I was surprised how many cases arose in relation to fictitious invoices. I've just listed in this slide some of the recent cases that have discussed. A number of the topics that we will be canvassing tonight, and as well, what I we tend to cover is from the solicitors perspective. How they approach the claims, also from Daniel be doing the forensic accounting perspective. Jaamae, of course, with his expertise and tracing, will address that, and Lauren and I will deal with the concept of receipt and indefeasibility, respectively. What we hope to do is to provide to you tonight an overview of the concepts and the challenges that occur in relation to these types of claims. When you get these claims, there's numerous types of nature claims that you can make, both in relation to personal, proprietary relief, their claims may include the numbers of the relief or claims I prefer to in this slide, and that includes the Property Law Act claims under section 228, of our Property Law Act, or section 37.8 of the conveyancing act. But there's two important concepts in relation to these types of claims, and one starts with the cycle of Black v Freedman, where money has been stolen is trust money in the hands of the wrongdoer, and that person cannot divest it of that character. The types and claims relief in relation to this appropriate money, to a large extent, standards extend from that principle further, where a volunteer who's receiving the money or its traceable proceeds holds that money on trust and is liable to account upon notice, upon being given notice of the interest of the claimant. I've also listed at the bottom slide a couple of cases which, if you're new to this area, they will provide you with a preliminary understanding of a number of the issues and particularly some of the complexity with tracing. In that case, the claimant was unable to fully trace all the appropriated proceeds. With respect to the solicitors perspective for Caitlin, Caitlin, you've acted for a number of clients who've been the subject of substantial misappropriations, and you've also acted for a spouse and/or partners of the wrongdoers, and they've thrown up a number of challenges as a lawyer, how do you approach these matters?

6:27

PRACTICAL TIPS AND FREEZING ASSET APPLICATIONS

Caitlin Connole: Sure. So, I mean, these matters normally come on unexpectedly, and it's a sense where you've got to act quite quickly, right? So, I try to just act fast and mitigate all current risks first, which is a very practical matter, and usually involves working with third parties. I like your expert to investigate what is actually happening and to also make sure that any live risks, like bank things and IT passwords are taken away immediately. You also usually got a pretty shocked client, even if you're acting for the person who has been wronged or on the other side of it, where you might have a respondent who might, for instance, be a spouse. So usually, it's about, at that point in time, making sure that you capture all the information you need by speaking to your expert about getting storage snapshots, which you know admissible later on, and contacting banks because one of the large challenges, as you know Paul, that comes up on a practical level in these cases is documentary evidence. Sometimes you're discovering something that's happened quite historically, so much so that you know some of the records that would actually normally prove up the case are no longer there. The other challenge that you practically come up against in these types of claims is a respondent who might claim self-incrimination privilege. So therefore, you know, the usual disclosure process or pleading process is very much a one sided process that you have to go through, and therefore you've got to look at other ways of obtaining documents, like notices on party and things like that. So I think the first thing that I do when these cases land is quickly speak to an expert, consider all those live risks, talk to employment teams, if you need to, and try to do it as much covertly as possible, when you think that there's obviously a chance that assets going to be dissipated so and then you turn your mind to the thing that we're all talking about here, which is raising asset orders and obtaining those. So, I won't run you through chapter and verse what the tests are for those but they're on the slide. And I think one of the best guidance notes to quickly pop your head into when these come up is the federal court guidance note, which runs you through the example orders things that should be in the supporting material, including things that you need to talk to your clients about from a solicitor's perspective, which is the usual undertaking as to damages that needs to be given, the undertaking to act expeditiously, to actually bring your actual course of action shortly after freezing orders are made, and also the usual requirement that comes from solicitors in relation to bringing fraudulent claims, and the seriousness of bringing such an allegation and making sure that you discharge your duty to explain that to your client, and they can appreciate that. 

10:00

Paul McQuade KC: So, what about ex parte applications? 

10:02

Caitlin Connole: Yeah, so obviously you've got the duty to be full of frame. So, you also need to make sure that so far as there are any other kind of defences for third parties involved that could be prejudice, that you've put that material on when it's on an ex parte basis.

10:22

Paul McQuade KC: And one of the things in Matters I've done with Cailtin, to do these cases as we notify the payment who's usually the claimant or representative the claim of the obligation that there is in relation to these ex parte applications, and we actually included in their affidavit to say that aware of it, so they then consciously are aware of the obligations and making proper investigations. And we also identify, as well, identified that possible defences, in relation to terms the application, and particularly some instances, like, I had with Caitlin, where whatever money was taken out of the bank account, or is it to be triggered as a client, for example. And we addressed that in relation to the application. At that time, we got a forensic accounting report from the instance, so we asked them to address that issue so we could identify the court that there wasn't triggers alone, records of the client. Are there any other tips, Caitlin, that you can think of? 

11:34

Caitlin Connole: Off the top of my head? I think you know, as well as doing those things that you want to also investigate what the current asset pool is, or the respondent by conducting the usual property searches and things. 

11:54 

Paul McQuade KC: So just Firstly, when do you go and see what you got this information? When do you think you should go and see your forensic accountant?

12:02

Caitlin Connole: As soon as possible. So, I think you engage with the forensic expert as soon as possible to because usually it's the case that the client comes to you because they have a feeling that something is suspicious, and it's not normally the case that they've got solid evidence of that being the situation. So, you obviously need to be able to make out for a freezing asset order your course of action and the reasonableness of your claim, so yeah, as soon as possible.

12:33

Paul McQuade KC: Alright now, I am going to go over to Daniel, and our forensic accountant here tonight and computer expert. Daniel, you have expertise in your forensics, including computer forensics, and have been involved in a number of civil fraud or misappropriation of claims in your career. Can you please explain what instructions you need for these claims, the information required to give us an overview of how you actually go about undertaking the forensic exercise of tracing?

13:05

MISAPPROPRIATIONS: EXPERT’S ROLE IN TRACING & ANALYSIS 

Daniel Hains (DH): Yeah, happy to do that. Thanks. Paul. Um, so we normally start with some informal discussions, but we're always very happy to get briefed with pretty detailed instructions. We certainly obviously we have to attach them to any report that we submit, and they're extremely useful for as a forensic accountant, when we have to get very quickly up to speed on, usually complex business structures, complex accounts and banking arrangements and what records are available, so the better instructions that we have, it can it's not only going to reduce the costs of a matter, but it will, it will get a report done far more quickly. So, we're looking for, usually, obviously, who are the principal parties, who's being represented, a detailed background as to what's occurred and also what investigations have been undertaken to date. So, what led to these suspicions, and they might have been discussed with, you as the instructed solicitor or barrister, and so we it really does help us get on top of the matter. Then we are looking at what evidence is available and whether or not we have to go out and get that ourselves on behalf of the parties, and that might involve computer forensic so I can get involved ex parte, where I'm appointed as an independent IT expert, where we're imaging computers, imaging phones, acquiring bank statements, hard copy or electronically. And that can be an important part. You often only get one chance to do that, so you have to make sure that you do it properly. So, if I could talk about the computer forensic side Paul. So, the benefits of the computer forensics are that you are it really protects both parties when you acquire things electronically. So, I'll be asked to come in. There might be a laptop, there might be a server, there might be just a folder that's relevant to a search order, and I will make a forensic image of that device or that folder, or that electronic, whatever has an electronic brain, then we can acquire that. What we acquire rather than just a right click, copy, paste, where things are being altered so, you'll alter the file properties, the metadata of a file last, for example, the last access date will be changed, and that can be really important in terms of the theft of intellectual property. when was the last time this file was written to or altered or printed or saved. When you redo a forensic image that's all preserved, and that's the point of that whole process, if you just do a copy paste, you might be losing important parts of that so I can attest to the fact that the exact copy or the exact image that we took on that day is exactly the same as what was on that computer, or this is, this is verifiable. So, we use processes to make sure that that occurs. They're usually called hashing or verification processes. So, we can verify the digital fingerprint of the evidence that we took to the original source, and anything that's acquired from that source, then is, you know, basically has integrity, so that can happen as well and often we'll ask our instructing solicitors to acquire bank statements for us. That's usually the main source of information. So, the two main sources are getting access to the online cloud accounting ledgers, and the second main source would be those bank statements, because they're independent. They weren't created by either party, they're created by the bank. So, we'd ask for those if we get them hard copy, then we'll scan those in make sure they're now electronic so that we can run our matching programs. If they're acquired directly from the bank, we'd be looking to get what's called a CSV file. You're probably all familiar with the CSV file, so that stands for comma separated values, which is just a massive text file containing all the all the records, the bank records, that we need. And we can then slice and dice that, convert it, analyse it. And most importantly, now we're using artificial intelligence where there has to be tracing, and there is a complex bank account structure. We've got some, we're training up and in fact, using some artificial intelligence to match transactions all through the cycle. So rather than having accountants do it, we've sort of crystallized those process down into some ones and zeros into some computer code, and the computer will often be able to do that for us. So, the better the records we get, the more quickly that can happen, and the better the output is. So, look to get those electronic records from banks quickly before they're frozen or locked down, or you have to get orders, try and get them from the client. That's really important.

17:29 

Paul McQuade KC: Does that AI cut down the amount of work you have to do then?

17:31

Daniel Hains: It does. So it's not perfect. So, we still have an accountant that reconciles everything make sure that it's right, but in terms of pulling out transactions that we want to look at and often it might just be, in a simple matter, might just be that they transferred money from their employer to their bookies bank account. So, we'll try and that's that's a very easy trace, where there's far more complex matters, where they've used funds to buy assets and those assets have been sold and if there's a rising property market, they might have improved their position, as a result of stealing our money, it might be mixed with mortgages, it might be mixed with loan funds. And so, we'll have to provide a report on what proportion of funds came from the alleged wrongdoing and provide a report for that. And that's getting back to how good the instructions are, and we, we're happy to get direction on that from our instructing lawyers. 

18:28

Paul McQuade KC: Can I raise this one? In your computer forensics, you've, again, you've identified preservation and metadata. All of us have come across this before, but can you just explain it?

18:41

Daniel Hains: So, metadata is just information about information. So, it's data about data. So, if you think of a letter or a bank transaction as being the actual data, then the metadata is, what date was it posted to the ledger? What date was this bank statement last printed? What properties does it have? Was it stored as an Excel spreadsheet? Or have they tried to fool us and hidden it as something else? So, Metadata is data about data, if you and the process I talked about, imaging preserves all of that, and it's read only, I can give that file to another computer expert, and they'll come up with the exact same answer as me, because they have the exact same evidence, well, hopefully, exact same evidence. Whereas, if we just sort of create that original source of evidence and we copy it out, store it somewhere, and open it up and change things and close it again, and then give that to someone else, then obviously it's, it's effectively not evidence anymore, because you've, tainted it by through your actions. 

19:38

Paul McQuade KC: And that's why you may sometimes client says, oh, “we'll just use our ordinary computer expert to just copy the copy the file”. 

19:49

Daniel Hains: Well, they don't want to go to court, and they generally don', they can't repeat their actions, and if they do, they'll come up with a different result, because things have changed in the days, weeks, months since they did that. Or the information is not available, so you're causing yourself perhaps undue problems by not doing it properly. So, the proper way is definitely to get a forensic image, or a verifiable image of things that are important, and have an expert be able to swear to that in court. 

20:16

Paul McQuade KC: Just briefly Dan, can you explain what you do to go forensic accountant, to go through the analysis, say, for a mixed tracing claim? What do you do? How do you approach it? 

20:29 

Daniel Hains: So again, we're only as good as the information that we get. So, we're looking at there might we might have to, we might have an incomplete record of what's occurred. So, we might have to get directions from lawyers as to what assumptions we need to make as to where funds were applied. But effectively the process is sorting things into a unified data table so that we can query, make our own queries on the data, provide tracing principles, to the software, or to our staff or to us as to what needs to happen. and if assets have been purchased, we'll look at the source asset. How are those funds applied? Was it a mixture of loans or equity? How did they pay for it? And basically, provide a report on our opinion on what’s occurred. 

21:21

Paul McQuade KC: So, when you using your Excel spreadsheets, for example, is that how you upload the data into the Excel?

21:28

Daniel Hains: Well as accounts, we're far more comfortable with Excel. The background to the AI is not excel. Background to the AI is a whole heap of code and what, generally, what's called SQL tables, but in terms of reporting and making queries and basically the portability of Excel, we still, we haven't found anything better than that, so we'll use that to trace things you can make. You can write code in Excel, make queries, match things. It's extremely easy to use for us and then the schedules that we'll prepare for report, for example, will generally come out of Excel. 

22:07

Paul McQuade KC: And if there’s a complicated trades and claim, do you usually get a summary of the principals you would require? 

22:20 

Daniel Hains: Yeah, we're very happy to get those. Very happy to get those. It certainly helps us direct our investigations. If we know how a case is to be argued, we're very happy to be able to say, look, we have this set of information, this set of assumptions, and we've applied the tracing principles as best we can in accordance with our instructions. So it is very helpful yes. 

22:41 

Paul McQuade KC: Okay, let's move on to then to Jaamae. You're a joint author with Jordan English of the Federation Press book on the Laws of Tracing. And can you please give us an overview of the concepts of tracing following? 

23:01

EQUITABLE TRACING CONCEPTS

Jaamae Hafeez-Baig: Thanks very much, Paul. I'm going to say a little bit about the concepts in this area, and then, if I have time, I'll take you through one example of a hard case you might encounter. But I want to caveat the discussion first by saying that this is it's a complicated area of law, there are some unsatisfactory aspects, there are some unsettled aspects. All I can give you is my best interpretation of the case or my best explanation of how this works. I'm going to start with very brief overview of tracing itself and there's a preliminary point here that because we're dealing with trust property, and just pause there, because we're dealing with trust property, you don't necessarily have to be in a case with an express trust or a family trust. This works just as well with constructive trusts. It works with black and Freedman constructed trusts, which Paul mentioned. So in fact, these rules are potentially applicable in any case involving stolen property, because it's a matter of restraint law that's sufficient to give rise to a trust. But we are dealing with trust property, and so we're concerned with the equitable tracing rules. We can put the common law tracing rules to one side, just as a preliminary point. This may seem unduly theoretical, but it's it's an important point to understand, and lots of misunderstandings have followed in this area from not grasping this point, initially. That is that we are dealing with two sets of proprietary rights. And the first is the legal rights, which are the rights held by the trustee. So, on the slide, I've got the example of title to house, title to a block of land. Those are the rights they hold on trust, and those are rights to the physical asset. Beneficiaries, rights under the trust are not rights to the physical asset. They are rights in relation to the legal rights. So, the subject matter is different. The subject matter of the trustees’ legal rights is the physical asset itself, but the subject matter of the beneficiary's equitable proprietary rights are the legal rights that are held on trust. And you'll see in a moment why this is important. And there are some slides, some authorities on the slide that make good proposition. Moving through to tracing, the first thing we need to do is distinguish between tracing and following. And this comes from the decision of the House of Lords in Fosco to McEwen, which is a leading case in the area. And one of the things Lord Millett said is that following is following the same asset as it moves from hand to hand. And I think respectfully, it's more accurate to say that following is about Locating the subject matter of a right as it moves from hand to hand. And because we're dealing with equitable proprietary rights, the subject matter is the legal right. So, you follow the legal right as it moves from hand to hand. 

25:54

Paul McQuade KC: Can you give an example that?

25:55

Jaamae Hafeez-Baig: Sure, sure. So, so, well, if I hold title to a motorcycle, and I convey that title to a motorcycle, I wish I hold on trust, and I convey that to a third party. If we were talking about so called Common Law, tracing, the subject of the right is the physical asset, and we will be following the physical asset around. But because we're talking about equitable tracing, the subject matter is my legal title to the motorbike, and if I convey that to a third party, we're following that legal title to a third party, regardless of where the physical asset is. That's the key point of distinction there.

Tracing is slightly different. Tracing Lord Millet tells us, is the process of identifying a new asset as a substitute for the old asset. Again, I think more accurate to say that we're talking about the subject matter of the rights. So, for our purposes, we're dealing with trust property. We're talking about certain equitable proprietary rights, being able to stand as a substitute for old equitable proprietary rights. And, just for convenience, I'm going to talk about these as the original rights and the substitute rights. So, for our purposes, we can say that tracing is concerned with the unauthorized use of rights, the original rights, to acquire or create new rights for substitute rights in circumstances which, generally speaking, must amount to a substitution. And so, I've got a very basic example on the slide of a trustee who holds legal title to a piano and who, in breach of trust, sells it in exchange for a bag of money. And so, the original rights are the trustee's legal title to piano, and the substitute rights are a trustee's legal title to the bag of money and those are connected by a substitution. If you can trace in this way, what's the actual effect? Right? What does the law give you, if you can show this sort of tracing link? In a nutshell, it is that the plaintiff has equitable proprietary rights against the substitute rights that they had against the original rights. So, in this example here, the rights the beneficiary had against the title of the piano, they would have similar rights against the title of the bag of money and in practical terms, what that means is the claims they might have had in relation to the piano, while it was still in the trustee's hands, they now have against the money. Now this is a fairly basic example, but you can see that when money is misappropriated and applied in various ways, this is what allows the beneficiary to assert claims against things which never had anything to do with the trust. If you have misappropriated money, bought a house, sold it, bought something else, sold it, bought a painting. This is what ultimately allows you to assert claims in relation to the painting, although they have nothing to do with the trust.

28:57

PM: Can I just interrupt? You Jaamae use the word substitute rights, and you do that in your book. Why do you do that?

29:03

Jaamae Hafeez-Baig: So the area of law has, has to have some limits. And I mean, if it didn't have any limits, we could say, well, as long as the trustee is appropriated the money, we'll just, we'll give you a charge over the trustee’s entire estate, it must be in there somewhere we'll give you a charge. But the law, I mean, that would be quite a drastic outcome, especially in the insolvency context, where you're then prejudicing unsecured creditors and preferring trust beneficiaries. And the line the law draws is that requirement of the substitution. That's only where you can identify substitution that you can trace. There are, those are the very basic principles. There are a lot of concepts. There's a lot of principles in this area of law. I've put an overview of, I put a list of some of them on the slide. I don't have time to go through them, but there are some references up there if you want to read further. There's also a bunch of cases which are called Hard Cases, which aren't necessarily straightforward. I do have some examples. I suspect I don't have time. 

30:06

Paul McQuade KC: We have got time. 

30:07

Example A: Trustee misappropriates money and uses it to pay an electricity bill

Jaamae Hafeez-Baig: A little bit? Alright. Well, the example I want to talk about is, I’ll go through them fairly quickly. The first example, Example A, Trustee misappropriates money and uses it to pay an electricity bill, or really any personal unsecured debt. Can you trace? The answer and I think this is settled is subject to one exception I’ll come to, no. And the best reason for that, in my view, is there is no substitution. Right? If you think about it, all the trustee has acquired in exchange for the use of the trust money is freedom from a debt. He’s had a debt discharge, he’s not acquired any right that you can trace into, there’s nothing to trace. And you will find in practice this will come up most in overdrawn bank accounts. Because an overdrawn bank account, when paying an overdrawn bank account, it just discharging an unsecured debt. So the Willaims v Peters case from Court of Appeal on the slide for example, if clear authority to discharge an overdraft, you cant trace. There is nothing to trace into. And, there are similar statements in the Russell Gould case that makes these sorts of points. 

31:23

Example B: Trustee misappropriates money and use it to pay off mortgage 

Jaamae Hafeez-Baig: Example B, changing it slightly, we have used the money to pay off a mortgage. Here, the general rule cant trace, but you might, because of the existence of the mortgage, have remedy in the law of subrogation. And what that means, it that where trust money is used to discharge or to reduce a debt that is secured, then the plaintiff will often be able to be subrogated to the extinguished security rights of the secured creditor. So, on the mortgage for example, the plaintiff would stand in the shoes of the bank and have security rights over the property that the mortgage was over, equitable security rights. The best illustration of this, I think is the decision Boscawen v Bajwa. It explained the rule of tracing verses the rule of subrogation and that was then picked up by the NSW Court of Appeal in Heperu v Belle, which you can have a look at. The key point is that this isn’t a remedy provided by the law of tracing. This is a law of subrogation Then finally.  

32:24 

Paul McQuade KC: Can I interrupt Jaamae, you have referred to the case Heperu v Belle, and I am going to talk about this later, the president identified for the purposes of receipt, that for example, in the Black v Freedman case, for example, the volunteers in the misappropriate funding induces the mortgage and that could be a claim, because of the value of that reduction that’s filled at that time they received notice. That can be a claim that’s made against a third-party volunteer who’s got notes because they have had their mortgage principal paid off. Does that fit in with substitution or is that a different concept?

33:13

Jaamae Hafeez-Baig: So, that is a money hadn’t received claim that the president was discussing and that effectively, it’s a personal restitution claim which depends on showing a traceable link. So, if you can show that, ultimately, the defendant received traceable proceeds, trace point equity. Then, whether or not you have a proprietary claim, you can bring a money hasn’t received claim, which is a personal claim for the amount. And, that depends on showing they have received a benefit. And it’s not a fault based claim, it is a common law institutional claim. And if they receive that money, I think the point your making Paul, is even if they paid down their mortgage that’s a benefit that they still have, they still retain. And on the basis of that reason, you would say they hasn’t received claim should still succeed. 

33:58

Paul McQuade KC: And that’s the time they got notice they could attain that benefit. And I’m going to raise this in a minute. I’ll just ask you to comment on that as far as the substitutions. 

34:08

Jaamae Hafeez-Baig: The important point there is that the tracing links are what takes you up to the point where you receive the money. The tracing links are what allow you to say that the money they receive is the traceable proceeds of the trust property. That’s the point at which the law of tracing finishes and your then into relating to the sorts of claims that president was discussing 

34:25

Paul McQuade KC: And that’s different to subrogation of course. 

34:37

Jaamae Hafeez-Baig: Yes, yes exactly. You’re talking about a Common Law restitution claim, subrogation is an equitable doctrine where you step into the shoes of the creditor who’s had their security discharged and it’s treated as being kept alive for your benefit. So, they can both arise is similar sorts of cases, but they are distinct doctrines. 

25:01

Example C: Trustee misappropriates money and uses it to pay off unsecured loan that had earlier been incurred to purchase a sportscar. 

Jaamae Hafeez-Baig: Final example C, a trustee misappropriates money and uses it to pay off unsecured loan that had earlier been incurred to purchase a sportscar. So, this is an unsecured loan but you have effectively acquired an asset on credit, and later you have discharged that debt using trust money, or traceable proceeds. In the Orthodox, the orthodox view here is you can't trace it, because when they've used the trust money to discharge the debt, they've received nothing in return. We're about to see example. 

Backwards tracing 

Jaamae Hafeez-Baig: A that's the Orthodox analysis. But there's a prospect here of what's called backward tracing. And effectively, what it means is the beneficiary can assert equitable proprietary rights against the title to the sports car, which was acquired before the misappropriated trust money was ever misappropriated. The orthodox view, was that neither English nor Australian permitted tracing in this way, which usually was one of the hard limits of this area of law.  That's been thrown into a bit of uncertainty by the 2015 decision of the Privy Council in Durant, which is on the screen and that, to summarize very brief terms, allowed backward tracing when you can show a coordination between the misappropriation and the acquisition of the asset, so you can show the trustee acquired the sports current credit knowing full well he or she was going to misappropriate trust money and use it to repay it. That's the logic. Question for us is whether that's good law in Australia and in Queensland, there hasn't been a lot of movement. there's the decision of Justice Bidice in the latent contractor’s case, where he applies it beyond that, there's not a whole lot of discussion of it in the Australian authorities. One decision I have found that wasn't cited is the decision of the full court in Moffett v Crawford, which seemed which, in fact, is about a piano held on trust. That decision seems to be authority in Queensland, squarely against the concept. Now there might be arguments about whether it's distinguishable, but on one reading, it's squarely against. So, which, which of those two cases you choose to emphasize probably depends on which side of the case you find yourself on. 

37:24

Paul McQuade KC: What about credit cards? If I purchase using my credit card and asset, and I then pay it off with stolen funds. Is that like treated as payment of an auto draft parent account, or how is it triggered? 

37:47

Jaamae Hafeez-Baig: A It’s an interesting example. I mean, I'm not sure there is so law of this, but there's really, there's two ways you can analyse it. You could say, well, a credit card is effectively just like cash, and so it doesn't involve any backward tracing. It's effectively just a substitution. When I buy something with my credit card, I'm effectively just exchanging my money. I'm not sure about that. I think the other, the other, the other possible analysis is that this is an instance of backward tracing, because when you buy something with a credit card, you're buying it on credit, and then at the end of the month you pay that off. And this actually came up in in labor contractors, and that was the way Justice Bidice analysed it. He said, well, this is, this is where the backward tracing comes in. This is the context in which he applied Durant. He said there was a sufficient connection between the purchasing of us of the asset on credit and the misappropriation of the trust money. And so, you could trace through it. 

38:45

Paul McQuade KC: So when, like a matter I was involved in with Cailtin where the property was purchased, they had a mortgage on the property, but used to use the stolen money to pay down the property, come and go facility, and then purchase other real property or assets with that. So that was, again, a very difficult question for us, and the concept effectively were we had to use the backwards tracing method to try and trace it to the further property that was purchased because the overdraft, sorry, the come and go facility was paid down using stolen money, then was drawn back again for the purposes of buying another real property or other assets. So, we had to, we pleaded in our Statement of Claim, that the come and go facility, was for the purpose, but when this misappropriated money was for the purposes of buying further property. So similar to what Jermaine just said, even to do with the overdraft account, there's a connection between the acquisition of the property through the debt, then coming to a facility in the misappropriation of money. So that's one and again, Jermaine raised valid points whether that concept is acceptable in Australia. 

40:11

Jaamae Hafeez-Baig: If I can have the guess at how the law will develop here, I think some form of backward tracing must be allowed because it cannot be correct that a fraudster can avoid all the tracing rules by buying the asset on credit first and then misappropriating the trust money.  It's just it's too easy of a scheme to get around the rules. Some form must be allowed. The real question, I think, will be the precise boundaries. And one possible boundary is the one set by the Privy Council in Durant. But no doubt there are other ways of framing the exception. I think that's where the real battleground is going to be. 

40:43

Paul McQuade KC: Jaamae can I ask you before we go on, a couple of questions you may not thought I'll ask. One thing is, like we're talking about substitutes, and Jaamae was talking about a substitute for tracing, looking at the substitute. So, and I've talked to Jaamae about this before. So, what happens, for example, of I had a car, I won't say me so someone else had a car and misappropriate money and spray painted the car. Is that? How does it? Does that? Is the spray painting the car a substitute?

41:23

Jaamae Hafeez-Baig:So, the cases on this are a bit unclear. I think the answer is, is clear as a matter of principle, no right. You already own the title to the car. The moment you have purchased spray paint with misappropriated trust funds, and while you own that can, that can is title to that can is the traceable proceeds of the money. But the moment you deplete it by spray painting the car, the spray paint becomes part of the car. It's the sort of chattel equivalent of fixtures, right? You install something when your land becomes part of the land, spray paint becomes part of the car. The car was something you owned beforehand. You already had those rights, that title, and so it's not a substitute for the trust money. 

42:02

Paul McQuade KC: And is that even in the case the car goes up in value?

42:05

Jaamae Hafeez-Baig: I think so. I think so. And same with land, if you improve land, the value of the land by increase, I don't think you can trace into the title of land, but, but accept that that sounds rather unfair, and I want to clarify all I'm saying is, the law of tracing doesn't give you rights there. You may well be able to say that, well, actually, the trustee is under a restitution obligation to pay back the amount of misappropriated trust money. And you might say that's secured by a lien over an equitable lien over the title to the car or title to the land. My point is simply those rights aren't rights the law of tracing the issue. If they exist, they probably come from the law of unjust enrichment.

42:45

Paul McQuade KC: So for example, if the wrongdoer owned had a property joint with a spouse or a de facto or third party, and some of the stolen money was used to renovate the house, put a deck out the back, or put a new kitchen, that's your thinking, not a substitute as such. And so, you can't trace into, use the tracing principles to get the proprietary relief into the house as such, by the extent of the money used for the renovations. 

43:20

Jaamae Hafeez-Baig:  Yes, yes. I think the better analysis as a matter of principle is you can't trace into the title of the house. It's titled you already owned. And there are, and they're not on the slide, there is a sort of very slim line of first instance authority emerging, which does seem to support the notion that you can trace in these sorts of circumstances, but I would suggest it's somewhat poorly reasoned, because some of the cases only assume the proposition, some of them don't cite the authorities, or the point,  some of them don't deal squarely with the issue. I mean Justice Bidice in contract, I think, permitted tracing in this sort of context. But he doesn't pick up, he doesn't discuss this as an issue of principle. I think he rather, just assumes that you can trace in this sort of scenario and permitting on the facts. So, we're still, we're still waiting on a decision which squarely raises the question of principle and gives us answer. 

44:07

Paul McQuade KC: Just also on this, thank you Jaamae, is in the concept slide, there a couple things to note. Down the bottom right, the faster tracing on a purchase of a value without notice. Can you just explain that?

44:31

Jaamae Hafeez-Baig:  Yep, so the classic example is, well a classic example is the payment of the electricity bill. Right? When the trustee misappropriates trust money and pays the electricity bill, the question I asked earlier was, can you trace? Well, there's nothing in exchange, so no question is, can you then follow? Right? The money has been given to the electricity company. Can you follow the title for that money into their hands? And because they are presumably innocent, they're unaware of the fraud, they would be a burnified purchase without notice. They're burnified because they don't know about the wrongdoing. They're without notice because they don't know about the wrongdoing, and they are a purchaser, because in exchange for the money, they have released their debt. They obviously have a claim against you. They've released that and so if you were to try and search any sort of proprietary claim against their title to that money, they would be able to invoke burnified approach to doctrine and say, look, I took legal title to the Money Free. Value of these equitable proprietary arts. That's the effect of that doctrine.

45:31

Paul McQuade KC: And what's the next you identity? Let's explain the dissipation on identifiability.

45:37

Jaamae Hafeez-Baig:  In essence, if you invest, sorry, if you purchase an asset and then dissipate the asset, you buy a book and you burn the book, or you use the money to pay for a nice meal or any number of things. But essentially, you can't. You can no longer identify the traceable proceeds of all of that

45:59

Paul McQuade KC: Like if you go on a holiday for example?

46:00

Jaamae Hafeez-Baig:  Yes. Yes, we would say you dissipated the trust money there, exactly. 

46:07

Paul McQuade KC: Now, the other thing is, this is probably a complex topic, but a lot of times we in our practices, or in these cases, have money going into, say, just give an example, in the wrongdoers bank account, and it goes into other accounts over the spouse or the backup third party, a joint account, and the money says there's transactions in the account. So, the time Caitlin comes to someone comes to Cailtin saying I think money has been misappropriate for my account. Time has passed, and they go on to Dan and get some advice. And he says, well, the money's fixed account. How do we, as lawyers guide Daniel as to what the principles are, and is there any, are these settled, or are they still disputes about the principles?

47:01

Jaamae Hafeez-Baig: So with a series of bank account transactions, I think with the help of a forensic accountant, you would be able to work out the chains where the money went. The question is, then whether you can trace or follow along those chains. And the rules, in part, depend on and sorry, they will involve mixing. Presuming there's other money in these accounts, they will involve mixing. And the rules change depending on whether what has been mixed is the wrongdoer’s money, their own money with trust money, or what has been mixed is the trust money with the money of some innocent third party. And I put some references on the slide. It's a little bit too complicated to go into now, but there are different rules for those two scenarios, and as to whether they're settled, I would say 90% of them are settled. There are some disputes around the edges how they apply in particular cases, but by and large, as the rules are settled. But in relation to mixing us between multiple innocent claimants, there was a fair bit of uncertainty. But the decision in Caron v Jahani on the slide, I think, has probably settled, most of that for the purpose of Australian law. 

48:06

Paul McQuade KC: Just something which comes with something, say the wrongdoer puts money into his own account and also deposits some misappropriate over the funds. How is that treated?

48:22

Jaamae Hafeez-Baig:  Sure. So, you have, let's take a very simple example. The trustee puts $100 of his own money into an account, and then misappropriates $100 of trust money and puts that into the account so you have $200. He then uses $100 to buy some shares and dissipates the remainder, uses them to pay for a holiday. Because the trustee has mixed trust money with his own money, he's created a single mixed fund, and he's created a problem here, because we don't know when he took out $100 to pay for the shares, whether he was using trust money or whether he was using his own money. We don't know when he paid for the holiday, whether he was using trust money or his own money, so you have to attribute the payments out of the account, shares in the holiday to the sources of money we knew were in the account. And classically, the way you resolve this problem is the rule in Re Hallet’s Estate and Re Oatway. The rule in Re Hallet’s Estate says that you treat the trustees having used his own money first. The rule in Re Oatway is an exception to that which can be used to say that actually used cross money. Slight spoiler alert, I think the better analysis of these supported by Australian authorities that there's actually just one principle, the subordination principle, which is that until the plaintiff beneficiaries claim is made good, the plaintiff beneficiary can point to any part of the mixed fund, if and anything derived from the mixed fund, and say, well, that that's where I'm going to make good my claim from that asset. And so, if this is correct, you can look at all the payments out of a bank account, find the one that results in some assets that are still there, and elect a trace along that pathway to the exclusion of the others. The rationale for this is the trustee’s interest is subordinated. Until the plaintiff's claim is made good, the trustee is not allowed to look at the mixed fund or anything acquired from the mixed fund and say, that's mine. Trustee can only do that once you've made good the plaintiff's claim. Okay.

50:24

Paul McQuade KC: Okay now, another one that comes up, including in relation to pooling clients, which we've talked about Jaamae, to make forward, particularly where there's claims mixed funds they pool, and it's the lowest intermediate balance rule. Or can you just explain that?

50:44

Jaamae Hafeez-Baig:  Sure, so the lowest intermediate balance rule is, putting me on the spot here Paul. If you have, if you picture a bank account that has $100 in it at the start, and that is added $100 of trust money. So, you have $200 we know the 100 trust money, 100 of the trustees. There's then several years of transactions, and at the end of it, the account still has $200. Now, if you ignore what happens in the interim, it's very tempting to say, well, there was $100 of trust money in there at the beginning, I'll have the $100 back thanks, it must still be in there. But when you look at the transactions that have happened in the in the meantime, let's say that at some point the balance of the account dropped to $50 right? You balance the account dropped to $50 and then later on, it went back to $200. When you look at all that, you can see that the maximum amount of trust money that can be left in that account is $50 because everything else was taken out. And so, the lowest intermediate balance rule is effectively that, you find the lowest intermediate balance, which in this case is $50 and that's the amount you want that you're tracing exercise is limited to. And the reason for that, the reason this is a rule, is that the trustee will later have put back in $100, $150 to get it back up to $200 but there's no there's no presumption or rule that deems them to have made good the misappropriation, the money they put back in is not trust money, unless you can show a specific intention. So it may be, in an unusual case, that they felt bad about the misappropriation, and they put back in $50, $70. I intend this to be trust money. Fine, you could then trace that as well. But in the ordinary case, you can't trace for more than the lowest intermediate balance. And this can actually be quite it can have quite a significant effect. In cases you might have many, many years of bank statements, and you're trying to trace the money along a large sum of money, if the account hits a zero or close to zero up. That's it. Unless you can work out where that money went, you can't then continue tracing through the bank accounts if the money then goes back up later on. That's I should say, there's the decision in Re French Caledonia Travel Service Pty Ltd [175] explains that very well. And the facts of James Roscoe, which where the rule is, where the rule originates, are a good demonstration.

53:02

Paul McQuade KC: Thank you. Thanks very much, Jaamae. That's when you get, as you can see from what Jaamae said, when you get to the point of having some complex bank account transactions, particularly going from mixed funds with other people involved who are don't have notice of the misappropriation. That's when, if you're working with forensic accountant and you know you're going to have to go to trial about this. The way I approach it is to substance everybody once knowing the facts, the assumptions they use or to apply in doing the forensic exercise. And again, it's been up to the legal team to justify those principles when they go to court, because if you don't get the right forensic tracing exercise done, the value of the court is diminished. And again, that case I pointed out before, where they didn't properly do the tracing exercise or were unable to and their claims were diminished as a consequence of that. Thanks very much Jaamae.

CONCEPT OF RECEIPT AND INDEFEASIBILITY: 

54:27

Paul McQuade KC: So, Lauren and I are going to talk about two concepts, being what's a receipt, and as well, the issue about indefeasibility and Lauren will talk about in the infeasibility. I want to talk about what's a receipt. So particularly the receipt issue comes up, just to give an example, as I said, before we get a volunteer who has received the misappropriated funds like they've received, and as I talked about in the Black and Freedman case earlier as knowing receipt, again, that requires certain knowledge. So, what I'm drawing looking at the concept of receipt at the moment. So, we know that from there's a decision that Queens embargo, which is our Queensland Court of Appeal. Both the two, the plurality of being one of the Chief Justice Holmes, is. I think she was Chief Justice, Tom and Douglas, I think Mackenzie on the field, they identified that Poppy may be received within its original ports traceable to proceed. So that's when you get the concept of Jaamae was involved, and with the help of Dan and the transport exercise to demonstrate someone's received say misappropriated funds, as I identified in the slide; The ethical closing rules can be used to establish receipt. So, what is the content concept of receipt? And when you're looking at this, besides the Quince v Varga decision, I also look at the Heperu Pty Ltd v Belle decision, because there's two different concepts, or concepts, for my purposes, three eliminated by those two decisions. There are other ones, but that's a good starting point. So, the wider concept of the receipt is when someone takes possession or control over trust property, but are subject to those two rules that I've identified in the slide. Proprietary possession interest must be received the recipient's own useful benefit. So, I just want to save their own use of benefit. Particularly I'm going to look at the benefit. And there's an issue that the receipt must be more than temporal legal control. Like again, in this case I had with Caitlin, if money goes into a joint account, for example, and both parties have can operate on that joint account, but the wrongdoer puts the money into the joint account with the spouse or the partner. Then the question is the partner or the spouse may be able to operate on that account, but has had they actually received it, they may not know the money, for example. So, in this relation to this hidden route decision, justice or something else, President The Court of Appeal and New South Wales identified that something more than temporal legal controls required, what must, what one must show that to get to the point that there's a receipt that they actually operated on the account they exercised that authority. And then they would, then they would be received. Can I just pause there as well? I haven't got time today. There's a number, and again, we've had this in another case with Caitlin, where we're acting for the spouse of the wrongdoer, but when, again, this is to do with receipts as well, when there's a number of principles which apply to operation of joint accounts in relation to who is entitled for the funds or the proceeds, if but from the money spent. But I won't go in that in today, because it's take too long. So, the Quince v Varga decision supports the proposition the payments being made to third party where there is and they've received, where they've actually traceable in their hands, but they actually provide a benefit. So, you don't have to physically get the receipt. You could get the benefit of the receipt, so that can still be a receipt in the broader concept. And if you want to have a look at this, Quince v Varga provides brief analysis of different types of scenarios where there's a receipt, and particularly the decision of Justice Douglas identifies with a particular receipt is receipt or not. For example, repairs to air conditioning units where the person got the benefit of both repairs was classified as a receipt. But I'll just point out that in relation to the decision that caused the appeal in Quince v Varga, there's a difference between the two decisions about reductions of mortgages, where Quince v Varga identified a reduction of mortgage wasn't a receipt. As I picked up with Jaamae earlier in the head group case, the President Court of Appeal identified, particularly for restitution reclaim, that reduction of the principal mortgages could be a receipt, this used in my term, where the restitutionary claim could be made, where that reduction of the principal is still there at the time that the volunteer gets notice of the misappropriation claim. And again, that decision was applied in the minutes case, which I've referred to earlier, in the in the in the PowerPoint slide. So can I just hand on to Lauren to discuss indefeasibility. 

1:00:01 

Lauren Gamble: Yes, and I'll be quite quick so that everyone can go home. So, I'm dealing with a situation where stolen monies wind their way into their hands or can be traced into the hands of, say, a spouse or a de facto who is a volunteer recipient of those funds and that is used to purchase a property in their name. So just to deal with that issue, I want to set out two basic propositions. The first is that the equitable obligation of a volunteer recipient doesn't arise until such time as they're put on notice of the misappropriation of the funds. And the second is that under our Torrens title system, a party who is registered on title gets the benefit of indefeasibility and that's so unless there's an exception that applies, such as the Fraud exception or In Personam exception. And a couple of the decisions that I have on the slide, such as Break Fast v Giannopoulos and the Sze Tu v Lowe decision, they deal with a situation considering whether a proprietary black and Freedman style claim gives is an exception to indefeasibility. And those cases say that, no, it's actually not. And the cases looked at the Barrack instructions in the High Court, where they said Black and Freeman style claim is akin to the first limb in Barnes v Addy, where that's also not an exception to indefeasibility. So essentially, where you have this situation where there's a volunteer recipient, and that may be a wife who is not on notice, that you may not have a proprietary claim in relation to the property that's held in their name. However, as Paul and Jaamae were discussing earlier, there may be a personal claim or restitutionary style claim for monies having received in relation to the value of anything, any benefit, proprietary benefit, derived from the misappropriated funds. I wasn't going to say much more than that, other than just a pleading point that Paul wanted me to raise. So, when you are acting for a volunteer in in this sort of style case, it's really important to raise in the feasibility in your pleading, in your defense. And if you're acting for the victim as a plaintiff, you might want to plead both your proprietary claim, your black and Freedman style claim, and as an alternative, your monies hadn't received claim.

1:03:16

Paul McQuade KC: Just on that the we have the indefeasibility. So, for the for the spouse, or the spouse view. So they if at the time they get notice of the claimant claim, to if say that property is purchased totally with the misappropriated funds then and there's no mortgage on it, they still retain the benefit of the misappropriated money. So even if there's not a proprietary claim because of indefeasibility, they still retain the benefit. Remember talking about receipt benefit, so there's still a restitution on the claim. So if, if you, if there's a defense of indefeasibility, assuming there's no just putting aside a mortgage, and so you can't get a proprietary claim, and you can get an asset preservation order. That preserves the property. So even if you get a judgment, you can execute on the spouse’s portion of property. Obviously, you can do it in the wrongdoers as well. So even though it's not a proprietary claim, you may still have a good claim asset preservation, preserve the property judgment. So, it's important to remember that about just you're not lost just because there's indefeasibly, there's a there's a restitutionary claim for monies haven’t received. Again, look at the mortgages, subrogation of mortgages, which Jaamae was talking about. So, there's lots of avenues there for the claimant to pursue. So, if the money's been used to fund habits that won't be there, you might have a money judgment that's not going to satisfy the client.

I think that's all we have tonight. So, thank you very much for participating in this presentation. Thank you very much.