Citation: Karl Suleman Enterprizes v George [2003] NSWSC 544
Court: Supreme Court of New South Wales, Equity Division
Date: 20 June 2003
Judge(s): Windeyer J
Background
The first plaintiff, Karl Suleman Enterprizes Pty Limited (in liquidation), had operated a large-scale fraudulent and unregistered managed investment scheme, essentially a Ponzi scheme. The company had appointed agents to solicit investor funds, offering returns that were paid from new investors' money rather than any genuine business activity. The scheme enriched its controller, Karl Suleman, at investors' expense.
The fifth defendant, one of those agents, had introduced investors, collected funds, prepared investment contracts, and received commissions and fees from the company in return. The second and third plaintiffs were the court-appointed receivers tasked with winding up the fund under section 601EE of the Corporations Act 2001, as well as acting as liquidators of the company.
The plaintiffs brought proceedings against the fifth defendant to recover the commissions and other moneys he had received. The fifth defendant applied to have the claims against him struck out or dismissed.
Legal Issues
- Whether the receivers (second and third plaintiffs) had any standing or pleaded cause of action to bring a claim against the fifth defendant in their own right as receivers of the fund.
- Whether the first plaintiff company (the fund controller) could recover commissions paid to its own agent for participation in an illegal scheme, under the heads of Barnes v Addy (knowing assistance), unjust enrichment, money had and received, or fraud.
- Whether the defences of illegality and lack of clean hands were, on these pleaded facts, necessarily fatal to the first plaintiff's claims.
- Whether the first plaintiff should be permitted to replead any claim, including one based on a trust over investors' funds.
Decision
Receivers' claim dismissed outright. The statement of claim pleaded no facts capable of grounding any cause of action by the receivers in their capacity as receivers of the fund. There was no allegation that investors' moneys were held on trust by the company for investors, and without such a foundation the receivers had no independent right to pursue the fifth defendant. Windeyer J dismissed the receivers' claim and noted that they could instead seek expanded powers from the court to sue in their own names, which would free them from the illegality problem that attached to the company.
First plaintiff's claim struck out. The company itself faced a fundamental obstacle: it was the principal that had operated the fraudulent scheme and had appointed the fifth defendant as its agent to carry out that scheme. The commissions paid to the agent were payments made in the course of an illegal enterprise. Windeyer J held that the illegality defence was decisive and that the company could not use the equitable heads of Barnes v Addy or unjust enrichment to recover those payments from its own agent.
Clean hands and illegality. In equity, a claimant must come with clean hands. Because the company's very participation in the fraudulent scheme gave rise to the payments it sought to recover, any equitable claim failed at the threshold. Windeyer J observed that repentance or subsequent clean conduct could not assist a plaintiff whose improper conduct had directly produced the payments in question. For the same reason, the general pleading of unjust enrichment could not survive given the illegality underlying the whole transaction.
Leave to replead. Windeyer J left open the possibility that a properly pleaded claim, alleging that investors' funds had been held on trust by the company for investors rather than belonging beneficially to the company, might survive the illegality objection. The first plaintiff was given 28 days to replead on that basis if it wished to pursue the fifth defendant.
Orders Made
- The claim of the second and third plaintiffs (receivers) against the fifth defendant was dismissed.
- The claim of the first plaintiff against the fifth defendant was struck out, with leave to replead within 28 days.
- In default of that amendment, the proceedings against the fifth defendant were to stand dismissed.
- The plaintiffs were ordered to pay the fifth defendant's costs of the notice of motion.
Key Takeaways
- A receiver appointed to wind up a managed investment fund under section 601EE of the Corporations Act does not automatically acquire a cause of action against third parties who received money from the fund; the pleadings must identify a factual and legal basis for such a claim, such as a trust over investors' funds.
- Where a company operates an illegal scheme and pays commissions to its own agent for participating in that scheme, the illegality attaches to the company's own claims and is not merely a defence that the agent asserts against outsiders.
- Under Barnes v Addy, unjust enrichment, and money had and received, the clean hands principle operates as a threshold bar against an equitable claimant whose own conduct directly generated the payments it seeks to recover.
- Repentance or subsequent dissociation from the wrongdoing cannot cure the clean hands problem where the relief claimed flows directly from the plaintiff's own illegal acts.
- A general pleading of unjust enrichment, unanchored to a recognised sub-category such as failure of consideration or money had and received, was regarded by Windeyer J as unsustainable, following his earlier observations in Cauvin v Philip Morris Limited.
Legislation and Cases Referenced
Legislation
- Corporations Act 2001 (Cth), ss 601EE, 601FC(2)
- Supreme Court Rules, Pt 29 r 6
Cases
- Barnes v Addy (1874) 9 Ch App 244
- Cauvin v Philip Morris Limited [2002] NSWSC 736
- Everet v Williams (1787) European Mag Vol II p 360; 35 LQR 197
- Marshall Futures Limited v Marshall [1992] 1 NZLR 316
- Nelson v Nelson (1995) 184 CLR 538
- Wilton v Commonwealth Trading Bank [1974] 2 NSWLR 96
- Young v Murphy [1996] 1 VR 279