Citation: Menzies v Perkins [2000] NSWSC 40
Court: Supreme Court of New South Wales, Equity Division
Date: 11 February 2000
Judge(s): Hunter J
Background
The first defendant, who had become bankrupt on his own petition in August 1999, was the sole director and controller of the second defendant, a company described as a shell created solely for the perpetration of fraud. Between approximately June and November 1998, the first defendant made a series of fraudulent misrepresentations to induce a finance company (Heller Equipment Finance Limited) to pay $1,107,500 to the second defendant, ostensibly for the purchase of amusement machines to be hired to the third plaintiff under a hire purchase agreement. The individual plaintiffs had guaranteed that agreement and mortgaged real property to support their guarantees.
No amusement machines were delivered. The defendants applied the fraud proceeds for their own benefit, using the funds to acquire specific assets including a yacht and a motor vehicle. When Heller terminated the hire purchase agreement and sued, the first and second plaintiffs paid $1.1 million to Heller under their guarantees and took an assignment of Heller's rights against the defendants.
The plaintiffs sought summary judgment against the first and second defendants, claiming damages for deceit and a declaration that the assets acquired with the fraud proceeds were held on constructive trust in their favour. The Official Trustee in bankruptcy, in whom the first defendant's property had vested, appeared but did not oppose the orders sought.
Legal Issues
- Whether summary judgment for damages in deceit was appropriate on the evidence.
- Whether the fraud proceeds and assets acquired with those proceeds were held on constructive trust in favour of the plaintiffs.
- Whether property held on constructive trust fell outside the bankrupt's estate vested in the Official Trustee under the Bankruptcy Act 1966 (Cth).
- Whether assets (specifically a yacht and motor vehicle) were sufficiently traceable to the fraudulently obtained funds to be caught by the constructive trust.
Decision
Hunter J granted summary judgment against both defendants on the basis of the extensive evidence and written submissions tendered by the plaintiffs. The first defendant consented to the orders, and the Official Trustee, while not consenting, did not oppose them. Because the orders affected the Official Trustee's interests and those of the second defendant, the application was heard on its merits rather than disposed of by consent.
The court found that the first and second defendants had applied the fraudulently obtained funds, totalling $1,115,500 (including $8,000 paid directly by the plaintiffs), to acquire specific assets rather than to deliver the contracted amusement machines. Applying the principle that proceeds of fraud and property acquired with those proceeds are held on constructive trust for the defrauded parties, the court held that a constructive trust arose over the identified assets in favour of the plaintiffs.
On the tracing question, the court was satisfied that both the yacht and the motor vehicle had been purchased out of the fraudulently obtained funds. In relation to the motor vehicle, the first defendant's own admissions and concessions made by his counsel in earlier proceedings, together with the receiver's evidence, supported the inference that trust funds had been used in its acquisition, even though the first defendant claimed partial ownership by a third party.
The court further held that property subject to the constructive trust did not form part of the bankrupt's estate vested in the Official Trustee. It noted that a claim for damages for deceit does fall within the Bankruptcy Act 1966 (Cth) (under s 82(2)), but property held on constructive trust is not available to creditors through bankruptcy. Damages in deceit were assessed at $1,324,433.60.
Orders Made
• Judgment and orders set out in schedule 2 made on 10 February 2000
• Award of damages in deceit in the sum of $1,324,433.60
• Finding that the Nissan vehicle is held on constructive trust for the benefit of the plaintiffs
Key Takeaways
- Proceeds of fraud and assets acquired with those proceeds are held on constructive trust in favour of the defrauded party, enabling the defrauded party to follow and recover specific property rather than merely pursuing a personal damages claim.
- Where a constructive trust is established, the trust property falls outside the bankrupt's estate vested in the Official Trustee under the Bankruptcy Act 1966 (Cth) and is not available for distribution to general creditors.
- A shell company created solely for the perpetration of fraud does not shelter fraud proceeds from a constructive trust claim; the controller's agency relationship with the company and his direction of its assets were sufficient to ground the trust.
- Tracing fraud proceeds into specific assets can be supported by admissions, concessions made by counsel in related proceedings, and evidence from a receiver, even in the absence of the defendant giving evidence at the hearing.
- Summary judgment is available in constructive trust and deceit claims where the evidentiary record is sufficiently detailed, including where the primary defendant consents and the interests of third parties (such as an Official Trustee) have been addressed on the merits.
Legislation and Cases Referenced
Legislation:
- Bankruptcy Act 1966 (Cth), ss 82(2), 116(2)(a)
- Trade Practices Act 1974 (Cth) (referenced in pleadings)
- Fair Trading Act 1987 (NSW) (referenced in pleadings)
Cases:
- Black v S Freedman & Co (1910) 12 CLR 105
- Australian Postal Corporation v Lutak (1991) 21 NSWLR 584
- Zobory v Federal Commissioner of Taxation (1995) 64 FCR 86
- Cashflow Finance Pty Ltd v Westpac Banking Corporation (unreported, Einstein J, 14 May 1990)
- Norilya Minerals Pty Ltd v Commissioner of State Taxation (1995) 16 WAR 266