Re Global Finance Group Pty Ltd (in liq)

(2002) 26 WAR 385
BC 200201518
[2002] WASC 63
[2003] ALMD 3037

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(Decision by: McLure J) Court:

Judge:
McLure J

Judgment date: 5 April 2002

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Decision by:
McLure J

Introduction

[1] At all material times Global Finance Group Pty Ltd ("GFG") carried on business as a licensed finance broker pursuant to the Finance Brokers Control Act 1975 ("Control Act"). Global Mortgage Investments (WA) Pty Ltd ("GMI") was a wholly owned subsidiary of GFG.

[2] On 19 February 1999, Jeffrey Herbert and Simon Read were appointed joint and several voluntary administrators of GFG. On 20 April 1999, the creditors of GFG appointed Messrs Herbert and Read as joint and several liquidators of GFG. On 23 July 1999, the Finance Brokers Supervisory Board ("Board") appointed Mr Herbert the supervisor of GFG's finance-broking business.

[3] On 26 February 1999, Messrs Herbert and Read were appointed joint and several voluntary administrators of GMI. Messrs Herbert and Read were appointed joint and several liquidators of GMI on 25 April 1999.

[4] GFG, GMI, Messrs Herbert and Read in their capacities as liquidators of GFG and GMI and Mr Herbert in his capacity as supervisor of GFG, have applied by originating summons for orders pursuant to s89 and s92 of the Trustees Act 1962 concerning the distribution of moneys held in trust by GFG and related matters. GFG had a single trust account. As at 19 February 1999 the balance in the trust account was $1,598,961.

[5] GFG's principal activity consisted of the raising of funds from lenders ("investors") for the purpose of advancing secured loans to applicants for finance ("borrowers") in connection with property acquisitions and development.

[6] In summary, this case concerns the identification of the persons entitled to claim from the trust account, how the funds are to be distributed between the claimants and the rights of investors to mortgages registered in GMI's name.

[7] On 26 October 1999 the Court ordered that notice of the originating summons filed in the action be given by way of advertisement in "The West Australian" and by circular letter to each investor and borrower and other persons who may be a potential claimant.

[8] In February 2000 the Court ordered that all persons who have a claim against the GFG trust account and mortgages held by GMI be bound by the orders and directions made in the proceedings.

[9] In December 2000, March 2001 and August 2001 the second applicant caused circulars to be forwarded to all investors, borrowers and creditors advising them in relation to the proceedings and providing copies of orders made by the Court on 12 December 2000, 20 March 2001 and 24 August 2001. These orders related to, inter alia, the questions to be determined by the Court as preliminary issues. In order to fully appreciate the questions, it is necessary to firstly set out the relevant facts.

Facts

(i) Background

[10] The applicants relied on a number of affidavits sworn by Mr Herbert. That evidence, largely uncontradicted, establishes the following facts. GFG was incorporated on 10 April 1989. At all material times its directors and shareholders were John Margaria and Albert Margaria.

[11] GFG advertised for investment funds with particular emphasis on retirees. People responding to GFG's advertisements would usually be provided with relevant promotional material. At the same time as it was attempting to secure funding from investors, GFG sought and received applications for finance from prospective borrowers.

[12] After receipt of applications for loan finance GFG would send a letter of offer to prospective investors in duplicate (known as a "Proposal Letter"). There were five types of Proposal Letter which reflected the nature of the proposed transaction as follows:

1.

security property being purchased or refinanced, and all funds being expended at settlement;

2.

security property being purchased or refinanced, with interest for the term of the loan to be held by GFG;

3.

security property being purchased or refinanced, with buildings to be constructed thereon, and with both construction costs and interest for the term of the loan to be held by GFG;

4.

security property being purchased or refinanced and subsequently subdivided, and with both subdivision costs and interest for the term of the loan to be held by GFG;

5.

security property being refinanced enabling the borrower to raise working capital, with interest for the term of the loan to be held by GFG.

[13] Recipients of Proposal Letters interested in taking up the offers were instructed to sign the attached copy of the Proposal Letter, indicate the amount of the loan they wished to make and return the duplicate copy to GFG.

[14] Details of funds pledged by investors to particular investments were recorded by GFG on a pre-printed untyped form referred to by GFG personnel as a "scoreboard sheet". The information typically recorded on a scoreboard sheet was:

•

the borrower's name and project number;

•

the address of the security;

•

the amount, interest rate and term of the loan;

•

security value and loan to value ratio;

•

the name of the proposed investor showing the date the Proposal Letter was sent, the response, the date of the response, the amount pledged and the date when funds would be available.

[15] Once the required funds were agreed to be provided by investors for a particular investment as recorded on the relevant scoreboard sheet, GFG advised the borrower and instructed its solicitors to prepare mortgage documents. No loan agreement was prepared. However, the mortgage specified, inter alia:

(i)

the interest rate payable;

(ii)

the commencement and repayment dates;

(iii)

the principal sum being advanced;

(iv)

the times and manner for payment of interest;

[16] The mortgage used standard terms for all transactions save where construction was proposed, in which case additional covenants relating to works were added. Attached to the mortgage provided to the borrower for signature were a statement of costs, mortgagor's authority, requisitions on title and certification by the company director.

[17] The statement of costs was provided to the borrower at or prior to the date of execution of the mortgage. This document specified the:

(i)

amount of brokerage payable;

(ii)

solicitors costs and stamp duty payable;

(iii)

FID/BAD costs;

(iv)

inspection and settlement fees payable and sundry disbursements;

(v)

rate of interest payable to the borrower for credit funds held.

[18] The statement of costs was signed by the borrower to indicate acceptance of the specified terms.

[19] After an application for finance was approved, a project number was allocated to the proposed loan, and a loan file (referred to as a "project file") was created. Each project file was labelled with the project number, the name of the borrower and the address of the property to be mortgaged.

[20] Following execution of the mortgage and signing of the statement of costs, the mortgage was returned to GFG's solicitors for stamping. GFG's solicitors then contacted the borrower's settlement agent to arrange settlement. The solicitors would advise GFG of the funds required at settlement and GFG would draw cheques against the relevant project account and deliver them to the solicitors.

[21] In the normal course of events, investors providing the relevant project funding were recorded as mortgagees on the mortgages. However, on occasions when not all loan proceeds were immediately required, a mortgage for the full amount of the proposed loan was prepared as soon as sufficient funds were raised to fund the settlement. The investors who had accepted the project and deposited their funds were documented as mortgagees, with GMI holding shares of the mortgage representing the unfunded portion of the loan.

[22] Once the remaining funds were raised, the shares held by GMI in the mortgage were usually transferred to the new investors. This process involved GFG instructing its solicitors to prepare transfer documents, which were then circulated amongst the relevant investors for execution.

[23] GFG managed all matters relating to the project loans on behalf of both investors and borrowers. Pursuant to, inter alia, the Proposal Letter, GFG agreed to act as the agent of the investors to "administer" all matters relating to the mortgage. GFG undertook that it would attend to the following matters on behalf of investors:

•

collection and/or payment of monthly interest;

•

supervision of drawdown of funds by the borrower;

•

registration of mortgage documents;

•

safe custody of security documentation;

•

enforcement of mortgagees' rights against the borrower in the event of default;

•

attendance at settlement and remittance of capital to investors on completion of loans.

[24] Shortly after the appointment of Messrs Herbert and Read as voluntary administrators, the majority of investors with moneys in the GFG trust account at that date decided they did not wish the administrators to continue to provide the services hitherto provided by GFG as agent and formally terminated the agency arrangements.

[25] GFG also provided services to borrowers. As the majority of the projects involved the raising of funds to cover interest payments to investors for the term of the loan, GFG attended to remitting monthly payments to investors on behalf of the borrowers by drawing against the funds in a project account ledger. At times when an investor wished to redeem funds during the term of the loan, GFG would attract a replacement investor and pay out the redeeming investor, often without the borrower being aware that investors were being changed.

[26] As the expiry date of the loan term approached, GFG would determine from the borrower whether the loan was being finalised or extended. If the borrower requested an extension, a new interest rate would be negotiated and GFG would write to the investors in that project and offer an extension at the new rate. Any investors who wished to redeem their funds would be replaced by new investors attracted by GFG. GFG arranged all necessary documentation on the borrower's behalf.

[27] When a borrower advised that a security property had been sold and it wished to finalise the loan, GFG would arrange the necessary discharge of the mortgage documents and forward these to investors for execution. Once the documents were in order, GFG would liaise with the borrower's settlement agent to arrange settlement and collect the sale proceeds necessary to pay out the investor's principal and interest, plus fees and costs due to GFG.

(ii) GFG's Accounting System

[28] Funds received by GFG from investors and borrowers were receipted and deposited into a single trust account operated by GFG at the ANZ Bank, Mt Lawley Branch. The trust account was a cheque (current) account.

[29] GFG maintained a trust ledger comprised of manually prepared ledger cards falling into three categories, being:

1.

Project Accounts;

2.

Money Market Accounts;

3.

GFG Accounts (these generally recorded fees charged to investors and borrowers for services provided).

[30] Funds received by GFG from investors were receipted and deposited into GFG's single trust account. The receipts indicated whether the funds were to be credited to a Money Market Account or a particular investment proposal referred to as a "project". Payments made by GFG in respect of projects were drawn ostensibly against the funds held in the trust account in respect of the particular project.

[31] Generally, a separate ledger card or account was created for each new project, although occasionally multiple projects were consolidated into one ledger account.

[32] All trust entries were recorded in the trust ledger accounts. Entries were posted from duplicate receipts (used to record receipt of all funds by GFG), chequebook butts and the journal register. Journal entries were raised by GFG from time to time to transfer balances from one ledger account to another.

[33] All trust entries were recorded by Mrs June Margaria. Trust entries were often batched in bundles of several days' credits being posted first, followed by several days' debits and sometimes vice versa. The only time when all postings were up-to-date was at month end when trial balances were extracted and reconciled to the bank statement. Accordingly, it is difficult to establish the balance of a Project Account on any given day during a month without reconstructing the ledger for that month by re-entering all individual transactions in date order. The cost of that process is said by Mr Herbert to be prohibitive.

[34] The balances on all trust ledger accounts were extracted by GFG at the end of each month and listed on a trial balance and the total of all balances reconciled with the trust account balance in the bank statement.

[35] Mr Herbert deposes to the fact that the trust ledger accurately records the transactions which occurred including:

•

the receipt of funds from individual investors;

•

the allocation of funds received to specific projects;

•

the payment of moneys from Project Accounts to or on behalf of the relevant borrowers;

•

the receipt of interest from borrowers;

•

the payment of interest to investors;

•

the deduction from trust account balances of fees payable to GFG and the resulting transfer of balances to GFG Credit Accounts.

[36] In addition, Mr Herbert found a number of transactions which he did not expect and which were not authorised by the investors. They included:

(i)

the unauthorised transfer of balances between Project Accounts in the name of the same borrower or an entity controlled by that borrower (referred to as "borrower groups");

(ii)

the payment of moneys from the trust account on behalf of borrowers in cases where there were insufficient funds in the Project Accounts to cover the payments and, hence the creation of overdrawn Project Account balances;

(iii)

the drawing of fees by GFG in excess of the amounts it agreed it would draw.

(iii) Money Market Accounts

[37] Moneys received by GFG from investors in contemplation of future investment opportunities were deposited into the trust account and a ledger styled "Money Market Account" was created. Further, GFG receipts indicated whether funds were to be credited to a Money Market Account or a Project Account. In addition, moneys retained by GFG after a borrower's loan was repaid was included in a Money Market Account.

[38] Identification of investors' moneys in this category is established from the Money Market Account ledger which correctly records receipt of funds, payment of funds to or on behalf of investors and the transfer of balances between individual Money Market Accounts and Project Accounts by way of journal entries.

[39] Mr Herbert and his staff found no evidence of any material errors in relation to the transactions recorded in these accounts or unauthorised transfers of balances between individual Money Market Accounts or between Money Market Accounts and Project Accounts.

[40] The mixing which is found to be commonplace between Project Accounts in borrower groups (discussed below) did not affect the Money Market Accounts.

(iv) Project Accounts

[41] Once loan approval was given and settlement occurred, a Project Account was opened in the ledger in the name of the borrower for the particular project.

[42] From GFG's records, in particular its scoreboard sheets, receipts and Proposal Letters it can be clearly identified which projects were offered to, and accepted by individual investors, and which project individual investor's funds were credited to. However, the matter is complicated by the transfer, by journal entry, of balances from one Project Account in a particular borrower group to other Project Accounts in that group which, according to Mr Herbert's evidence but was done without the knowledge and consent of the investors. The journal entries started around mid-1995.

[43] From the commencement of GFG's operations in July 1994 Mr Margaria had close relationships with a number of borrowers and raised numerous loans for them and companies controlled by them. They included Mr Dominic Casella and Mr Narbil Sadek. The Casella group was the largest of the borrower groups. As at 19 February 1999, 92 Project Accounts involving the Casella group were current and the funds in the relevant Project Accounts totalled approximately $455,000.

[44] The Sadek Group comprised Westbid Pty Ltd, Kentucky Nominees Pty Ltd, Newrose Holdings Pty Ltd and Capri Developments Pty Ltd. Two Project Accounts in this group had credit balances totalling $122,000 and one account was overdrawn by $27,000. The remaining four accounts had a nil balance.

[45] Although unauthorised transfers of balances between projects in borrower groups were frequent, Mr Herbert found no instances of the transfer of balances between Project Accounts in different borrower groups or between a Project Account and a Money Market Account.

[46] Occasionally, multiple Project Accounts of a borrower were consolidated into one ledger account. Whilst consolidation of Projects generally occurred with properties at the same location, there were occasions where properties in totally different locations were consolidated.

[47] Mr Herbert divides the Project Accounts into Category A and Category B. Category B Project Accounts relate to borrower groups in which the unauthorised transfer of balances between Project Accounts commonly occurred (Ex 4, Annex JLH1, para58-59, para175). Included within Category B are Project Accounts which have not received unauthorised transfers but from which unauthorised transfers have been made. In the Category A Project Accounts there has been no mixing (transfers in or out) of funds from other projects. In addition to the Casella and Sadek groups, the other Category B borrower groups are:

-

Johnson group

-

King group

-

Olympic Holdings group

-

Hillsfield group (this group is exceptional in that there is only one trust account ledger comprised of multiple loans and mortgages).

[48] The unauthorised transfers between Project Accounts in borrower groups usually occurred when a borrower had credit funds in one project and needed funds in another project in circumstances generally where funds were required in the transferee account to:

(a)

complete construction of Works;

(b)

pay interest to the mortgagees;

(c)

repay principal to mortgagees in cases where sales proceeds were inadequate.

[49] An example of the process is in Project 1238 in which the borrower is Selec Pty Ltd, a member of the Casella group. The project involved the development and sub-division of residential lots at Wattle Grove. The development was to be completed in two stages with proceeds from stage one sales to assist with the costs of developing stage two. As at September 2000, stage one was incomplete and a further $500,000 was required to complete it. The Project Account for Project 1238 was in evidence. It shows what is common to all Project Accounts which is that all funds in the Project Accounts are mixed. That is, there is no appropriations by GFG within the Project Accounts. The Project Account is summarised as follows:

[50] This summary highlights that only $3.105M was raised in lieu of the mortgage value of $3.3M, leaving a deficit of $195,000. Outward transfers of $852,000 exceeded inward transfers of $300,000 leaving a deficit of $552,000.

[51] Of the total interest paid to investors of approximately $445,000, only approximately $17,000 came from the borrower. The remaining $428,000 was paid out of the investors' own funds.

[52] Further, in the large borrower groups there were unauthorised payments to third parties not associated with any project or directly to the borrower for purposes not associated with a project.

[53] There is evidence, which I accept, that GFG acted with the knowledge of a number of Group B borrowers (in particular Casella, Sadek, King and Johnson) in using the trust funds for unauthorised purposes: Ex 4, Annex JLH 2, p354, p355-358, p364, p386 and p387.

[54] A common occurrence in both categories of Project Accounts was the payment from the trust account of all fees and expenses payable by the borrower, such as the costs associated with the purchase of the security property and the mortgage. It is said these payments were not made with the knowledge or consent of the investors.

(v) Overdrawing of Project Accounts

[55] The trust account as a whole was never overdrawn. However Mr Margaria allowed certain Project Accounts to go into debit, generally in circumstances where:

(i)

there were insufficient funds to pay interest;

(ii)

there were insufficient funds to repay investors' loans at completion;

(iii)

payments were made before all investment funds were received.

[56] Mr Margaria allowed cheques to be drawn against the trust account and debited the payments to the Project Accounts when, in fact, the credit balances in those accounts were insufficient to cover the payments made.

[57] As at 19 February 1999, 26 accounts were overdrawn totalling $206,675.66. Of the 26 accounts:

-

19 accounts were overdrawn as a result of interest payments being made to investors when insufficient funds were held in the trust account to the credit of the relevant Project Account;

-

three accounts became overdrawn due to minor registration costs being paid from the relevant Project Account;

-

one account became overdrawn as a result of the project not proceeding after investor funds were raised. After investor funds had been deposited to the Project Account ledger, the investors were paid interest from their own funds. Four months later, the borrower withdrew from the project which at that stage had still not commenced. The investors were repaid their full principal, leaving the Project Account overdrawn by the amount of the interest paid;

-

the remaining three accounts became overdrawn as a result of the investors being repaid in full when the proceeds from the sale of the mortgaged property were insufficient to repay the mortgage.

[58] Since 19 February 1999 Mr Herbert has pursued the borrowers for repayment of the overdrawn balances and has collected 12 overdrawn accounts totalling $30,354.85. Mr Herbert estimates that a further $40,000 may be collectable from the remaining overdrawn accounts.

[59] Mr Margaria's explanation for allowing overdrawn accounts was that they were always "covered" by amounts owing to GFG in the trust account from the total of GFG Credit Accounts. Each month a trial balance was drawn up. A calculation of the total of the overdrawn Project Accounts less the total of GFG Credit Accounts was recorded on each monthly trial balance. This supports Mr Margaria's claim that overdrawn balances were permitted by him because, at least at each month end, they were covered by GFG Credit Account balances.

[60] Mr Margaria's intentions are also confirmed in a letter from him to GFG's auditors in September 1996. He confirms that the overdrawn accounts are covered by GFG's funds in its Credit Accounts and suggests the use of this system was acceptable to the Board.

[61] As at 19 February 1999 the total of the balances of the GFG Credit Accounts exceeded the total overdrawn balances of the Project Accounts.

[62] Mr Herbert extracted from the trial balances as at each month end from 30 June 1996 the total of overdrawn account balances and the total GFG Credit Account balances (less any debit GFG balances) and compared the two. That analysis indicates that the total of GFG Credit Accounts always exceeded the overdrawn balances at the end of each month. However, on occasions the excess was engineered by means of a journal entry transferring funds from a Project Account in credit to an overdrawn account, the journal entry being reversed after the month end.

[63] However, on dates between month ends, overdrawn Project Accounts exceeded total GFG Credit Accounts sometimes by significant margins. In the majority of cases, the deficit was the result of project payments being made before funds from investors who had committed funds to the project were received in full. Such deficits were extinguished by the subsequent receipt of investment funds.

[64] It was suggested by the solicitors for a number of investors that a comparison of overdrawn balances and GFG Credit Accounts should be carried out on all days between month ends to ascertain whether on any day the former exceeded the latter. However, GFG prepared trial balances on a monthly but not daily basis. As GFG's trust account ledger was manual, a daily comparison of GFG Credit Account balances with total overdrawn balances could not be prepared automatically and would entail the calculation over nearly five years of all the daily sum of all GFG Credit Accounts and the daily sum of all Overdrawn Accounts. That exercise would take several weeks and possibly months and in Mr Herbert's opinion would not be feasible. I agree.

[65] However, Mr Herbert carried out an analysis using an estimate of daily overdrawn balances. First he calculated the sum of all GFG Credit Accounts on a daily basis. To overcome the problem occasioned by the fact that entries were recorded on ledger cards out of date sequence as a result of the posting of entries in batches (which does not affect end of month figures) he calculated daily balances for Project Accounts with debit balances greater than $10,000 and for the period from 4 April 1996 he estimated the sum of small overdrawn balances (being an overdrawn balance of less than $10,000). For the period prior to 4 April 1996 Mr Herbert calculated the actual balances for small overdrawn balances. On the assumption that it would be unlikely that the total of small overdrawn balances would exceed $50,000 on any particular day, he allowed $50,000 as a provision for small overdrawn balances from 4 April 1996. In this way Mr Herbert calculated the daily GFG Credit Balances and the daily overdrawn Project Account balances, (the latter being the sum of actual large overdrawn balances and a provision of $50,000 for small overdrawn balances save for prior to 4 April 1996 when actual overdrawn balances were used rather than a provision).

[66] This analysis identified nine periods in which the total daily overdrawn balances exceeded GFG Credit Balances. The periods were:

(i)

24 to 28 November 1994;

(ii)

27 September 1995;

(iii)

15 to 21 January 1996;

(iv)

5 to 7 July 1996;

(v)

4 to 11 February 1997;

(vi)

7 July to 3 August 1997;

(vii)

13 to 16 March 1998;

(viii)

30 April to 19 May 1998;

(ix)

1 to 28 July 1998.

[67] The reasons for the nine periods where overdrawn Project Account balances exceeded GFG Credit Balances are:

•

settlement completed prior to receipt of full loans from investors - 7

•

investors being repaid the full amount of their investment when sale proceeds from the secured property were insufficient - 1

•

interest payments made to investors and borrowers cheque subsequently dishonoured - 1

[68] The overdrawn Project Account balances were cleared by:

•

receipt of investor funds which were committed prior to settlement - 4

•

receipt of subsequent investors' funds - 2

•

transfer of balances owed to the borrower by journal entry from other projects - 1

•

partly from sales proceeds/partly from receipt of subsequent investor funds - 1

•

payment from borrower - 1.

[69] In all cases, funds were received into the particular projects within a relatively short period of time either from further investors' funds, from the borrower's own resources, from sales proceeds or by a transfer of balances. The receipts totally cleared the overdrawn Project Account balances and reinstated and restored the trust ledger accounts in full.

(vi) GFG Accounts

[70] GFG charged investors collection fees for its services. They were charged by deducting a fee from the investors' monthly interest payments. This was accounted for by debiting the gross payment to the relevant Project Account and crediting the amount deducted (the fee) to the GFG Credit Account titled "Collection Fee".

[71] The fees charged to borrowers are outlined above. Fees charged by GFG to both investors and borrowers were raised by way of journal entries whereby the charges were debited to the relevant Project Account and credited to the relevant GFG credit account.

[72] In addition to GFG Credit Accounts there were GFG Debit Accounts. The Debit Account was styled "Series Bad Debts Account" into which Mr Margaria transferred the debit balances of some overdrawn Project Accounts by way of journal entry when he was of the opinion they were no longer collectable. Mr Margaria advised Mr Herbert that his intention in doing this was that GFG would assume the loss incurred by deducting the resulting debit balance from credit balances on GFG Credit Accounts.

[73] As at 19 February 1999 the total of GFG Credit Accounts amounted to $283,506.28. The balances represented, at any time, GFG's ostensible entitlement to undrawn fees, which it retained in the trust account. GFG Credit Accounts comprised a number of separate ledger accounts including "Late Payment Penalties" (as at 19 February 1999 it was in the sum of $6,460.65) and "Money Market Interest" (as at 19 February 1999 it was in the sum of $15,319.76).

[74] In relation to late payment penalties, from time to time borrowers were unable to remit interest as and when it was due. Instead of notifying investors that a default had occurred, GFG generally transferred balances from its GFG Credit Accounts into the relevant Project Account to enable the payment of interest to the investors to be made on the due date. When borrowers failed to remit the payment of interest by the due date the borrower would be charged a late payment penalty pursuant to the mortgage. When the payment was eventually made by the borrower, GFG would reverse the transfer to its GFG Credit Account, and credit the late payment penalty received from the borrower to the GFG Late Payment Penalty Account. In some instances when borrowers failed to remit interest payment on the due dates, GFG paid the interest due to the investors without transferring balances from its GFG Credit Account to cover the payments made and thus allowed the Project Account to become overdrawn until payment was received from the borrower. Although in such cases GFG had not provided a short term loan, it still transferred the late payment penalty from the Project Account into its Late Payment Penalty Account. The rationale for doing so was that the GFG Credit Accounts "covered" the overdrawn balance arising when the interest concerned was paid.

[75] As to the Money Market Interest ledger, GFG generally had in excess of $1M deposited in its trust account. In order to maximise interest on the amounts deposited, GFG invested trust funds in various cash management accounts and term deposits ("Cash Investments").

[76] Some of the interest earned on the Cash Investments was paid to investors with funds in the Money Market Account. The rate paid to investors was equivalent to the advertised ANZ Bank $50,000 - $100,000 cash management rate, which was below the actual rate GFG was receiving, given that the amounts invested were considerably larger than $100,000.

[77] Prior to 1996, no formal consent was received from investors for the retention by GFG of the surplus interest earned on the Cash Investments. From September 1996, GFG obtained authorities from investors that acknowledged that GFG could retain the additional interest. The authority is in the following terms:

"I/We hereby acknowledge that any funds held by Global Finance Group Pty Ltd on our behalf pending placement into investment will be paid interest at the current ANZ Indicator money market rates of interest as declared from time to time for amounts of $50,000 to $99,000. I/We also consent to any surplus interest received above this rate by Global Finance Group Pty Ltd as a result of incentives provided to it by the Bank for bulk investments will be retained by Global Finance Group Pty Ltd to cover government charges and administration costs on investing these funds."

[78] Borrowers were also paid interest for credit funds held in the Project Accounts. The rate paid to borrowers was generally one per cent less than the rate paid to investors. No formal consent was received from borrowers prior to 1996 for the retention of surplus interest by GFG. Sometime in 1996, the statement of costs indicated that GFG would retain the surplus interest. Since 1996 there were at least three variations to the clause. Two examples are in the following terms:

"Funds held on your behalf by Global Investments will be paid interest at the current money market rate of 5 per cent. Any surplus interest received by Global from its Bank as incentives for bulk investments will be retained to cover administration/government charges on these funds."

"Funds held on your behalf by Global Finance will be paid interest at the current money market rate of 3.5 per cent variable, indexed to movements in official cash rates. Any surplus interest received by Global from its Bank as incentives for bulk investments will be retained to cover administration/government charges on these funds."

[79] Further, it was GFG's policy to charge brokerage fees at the commencement of a loan regardless of whether all funds were raised at the time. As at 19 February 1999 there was six Project Accounts in which brokerage fees had been charged to Project Accounts on the basis of the total amount of the loan when in fact the full amount of the loan had not been raised.

(vii) GMI Mortgages

[80] As at 19 February 1999 GMI was registered as mortgagee on certificates of title relating to 21 projects. GMI did not advance any of the funds loaned to borrowers. It is not in dispute that GMI held the mortgages as trustee.

[81] There are basically three different scenarios in which GMI was registered as mortgagee. They were when:

(i)

not all loan proceeds were required immediately and a mortgage for the full amount of the proposed loan was prepared as soon as sufficient funds were raised to fund the settlement. In such cases, the investors who had accepted the project were documented as mortgagees, with GMI holding shares representing the unfunded portion of the loan. Once the remaining funds were raised, the shares held by GMI in the mortgage were usually transferred to the new investors;

(ii)

a new loan settlement was urgent and mortgage documents in favour of GMI were prepared simultaneously with Proposal Letters being sent to prospective investors. Once funds were received, settlement was effected and the GMI mortgage was registered. Subsequently, the shares in the mortgage held by GMI were transferred to the investors;

(iii)

a loan was raised for a project where the relevant property was due to be strata titled or subdivided in the near future and new individual certificates of title were to be issued by the Land Titles Office. In these cases, a mortgage in favour of GMI was registered at the commencement of the loan. When the new titles were issued, the GMI mortgage was discharged simultaneously with the registration of individual mortgages in favour of the investors over the lots or units they had accepted, and had been allocated to them.

[82] In all cases in which GMI is registered as mortgagee, it is possible to determine from the trust ledger cards the investors for whom the mortgage interests were intended to be held. In ten cases where GMI is registered as mortgagee, transfers of shares from GMI to the relevant investors had been prepared by GFG and were being circulated amongst the investors for execution at the date of Mr Herbert's appointment. In four cases the preparation of transfers from GMI to the relevant investors was not completed, apparently in error. In the remaining three cases, funds were not raised to fulfil the GMI portion therefore transfers are not appropriate.

(viii) Trust Account Balance as at Appointment of Voluntary Administrators

[83] As stated earlier, the total GFG trust account balance as at 19 February 1999 was $1,598,961. Cheques issued but not presented amounting to $218,358 were cancelled after the appointment of the voluntary administrators. However, despite the unpresented cheques being cancelled, GFG's bankers continued to honour unpresented cheques after the date of the appointment.

(ix) GFG Assets - Other

[84] In addition to funds in the GFG trust account represented by the balances in the GFG credit accounts the following amounts were recorded in the books of GFG as at 19 February 1999:

(x) Unsecured Creditors

[85] Based on proofs of debt submitted in the liquidation the non-trust claimants' claims total $528,031.24. Of that sum $475,100 is for the liquidator's fees and costs.

Questions for Determination

[86] The questions for determination are as follows:

1.

Whether the first or second applicants as the case may be are justified in treating the trust account records maintained by GFG and GMI as correctly recording the intention of GFG and GMI as trustees, on the basis that a presumption of regularity applies?

2.

The effect (if any) at law and in equity:

(a)

on the trust account maintained by GFG;

(b)

on the rights enjoyed by claimants on the trust account;

(c)

on the interests in mortgages held by GMI; and

(d)

on claimants to interests in mortgages held by GMI,

of the fact that at times an individual ledger account within the trust account became overdrawn.

3.

Whether the first or second applicants as the case may be are justified in distributing the trust funds of which GFG is the trustee on the following basis:

(a)

That the trust account maintained by GFG and the assets held by GMI are a single mixed fund to be apportioned amongst all claimants on the trust account in proportion to their claims on the trust ("the First Alternative"); or

(b)

That the balances recorded in the trust account maintained by GFG be distributed according to the balances as recorded, and the interests held by GMI in any mortgage be transferred to those claimants whose names are recorded in GFG's books as having paid money to GFG for the purpose of being advanced to the mortgagor, on first mortgage security ("the Second Alternative"); or

(c)

(i)

The balance of money held for money market investors, as identified by GFG's ledger cards be returned to the money market investors in full, subject to a pro rata reduction for the first and second named first applicants' fees and costs, if required.

(ii)

The credit balances of Project Accounts within Category A identified in the Schedule hereto be distributed to the relevant investors in cases where loans are in default or, otherwise, to the borrowers, subject to pro rata reduction for the first and second named first applicants' fees and costs, if required, and a pro rata reduction for the deficiency of the Project Accounts Overdrawn, if any.

(iii)

The credit balances of Project Accounts within Category B identified in the Schedule hereto be grouped together to form pools of funds for each individual borrower group, and total funds held for each borrower group be distributed on a pro rata basis to the investors in each borrower group subject to a pro rata reduction for the first and second named first applicants' fees and costs, if required, and a pro rata reduction for the deficiency of the Project Accounts Overdrawn, if any, in accordance with the following formula:

Distribution to each investor in borrower group =

(X x Z)/Y


Where:

X = the individual investor's claim.

Y = the total of all individual investors' claims against each individual borrower group.

Z = the pool of funds for each borrower group.

The individual investor's claim, represented by "X" in the above formula, is calculated as follows:

X = (I + i1) - (P + F)


Where:

I = Principal amount invested by the individual investor, less any partial return of principal, where applicable.

i1 = Sum of interest due from the date of investment to 19 February 1999, less the sum of interest paid to the investor, regardless of the source of payment.

P = The investor's pro rata share (based on the proportion of funds raised for a particular project) of the total legitimate payments made in respect of the subject property from funds applied/sourced from any Category B Project Account.

F = GFG's fees in accordance with the Statement of Costs.

(iv)

All overdrawn project accounts be credited with sufficient funds from the GFG Credit Accounts to reduce the overdrawn accounts to a nil balance.

(v)

GMI's interest in mortgages be transferred to the investors who, according to the books and records of GFG, provided the funding for the particular project.

(vi)

All funds held on trust by the second applicant arising from the sale of the secured properties since the date of the second applicant's appointment, excluding any surpluses, be returned to the registered mortgagees from whom the funds were detained.

(vii)

(Consideration deferred pursuant to the Order of Owen J made 20 March 2001).

(viii)

(Consideration deferred pursuant to the Order of Owen J made 20 March 2001).

(ix)

That the journal entry dated 14 August 1998 in the amount of $142,821.99 in the accounts styled Australian Equities Corp Pty Ltd Account Numbers 1337-41 and Garon Pty Ltd Account Numbers 1345-65 and 1367-72 be reversed and substituted with a journal entry dated 14 August 1998 in the amount of $99,697.15.

(x)

The investments pertaining to Mr Margaria's related entities as listed below be made available for distribution amongst other trust account claimants on a pro rata basis:

Alpha Super Co Pty Ltd ("Alpha")

-

Alpha's interest of $10,000 in a registered mortgage from Garon Pty Ltd over Unit 3, 223 Rockingham Road, Spearwood.

-

Alpha's Money Market account of $174.19

Walbrook Investments Pty Ltd ("Walbrook")

-

Walbrook's Money Market account of $32.62

Thirlmere Consulting and Financial Management Services ("Thirlmere")

-

Thirlmere's Money Market account of $914.92

("the Third Alternative")

(d)

That the trust balance of each project account be adjusted by:

(i)

debiting the unauthorised transfer into each ledger;

(ii)

crediting each of those unauthorised transfers to the ledger from which the trust funds came;

(iii)

in the event that an unauthorised transfer came from either a borrower or a borrower groups' money market account, or other funds introduced by a borrower, then that authorised transfer be credited to that borrower's money market account.

(iv)

any negative trust balances be made up firstly from the borrowers' money market account, and secondly from the GFG credit account;

(v)

funds in the adjusted ledgers be distributed to the investors; and

(vi)

GMI's interest in mortgages be transferred to the investors who, according to the books and records of GFG, provided the funding for the particular project.

("the Fourth Alternative")

4.

Whether the first and second named first applicants in their capacity as liquidators of GMI are justified in treating interests in mortgages held by GMI as being held on trust for: (a) those investors whose names are recorded in GFG's books as having paid money to GFG for the purposes of being advanced to the relevant mortgagor; or (b) all beneficiaries of the GFG trust account?

5.

Subject to the rendering of proper accounts, are the first and second named first applicants entitled to be remunerated and indemnified, as quantified by a Master, from assets whether held on trust or otherwise by GFG or GMI for the reasonable costs, charges and expenses of:

(a)

identifying or attempting to identify trust assets;

(b)

conducting investigations into the records pertaining to the trust account by GFG and GMI;

(c)

recovering or attempting to recover trust assets;

(d)

realising or attempting to realise trust assets;

(e)

protecting or attempting to protect trust assets; and

(f)

distributing trust assets to the persons beneficially entitled to them?

6.

Should the fees of counsel and instructing solicitors who appear on this matter be taxed and paid out of the assets owned by GFG and the funds held by GFG as trustee in priority to all other claims or at all, and the assets held by GMI?

7.

Were the first applicants, in their capacity as voluntary administrators of GFG, lawfully entitled to pay the whole or any part and, if so, what part of the amount of $556,108.14 from the trust account between 19 February 1999 and 16 March 1999?

The Respondents

[87] Pursuant to orders made by Owen J on 14 November 2000, the respondents to the application are as follows:

[88] There was no appearance for the first, second and fifth respondents. A number of fourth respondents were separately represented either in person, by an agent or by legal counsel. It was brought to my attention in February 2002 that the first and second named applicants had a conflict of interest in that they, or a member of their firm, were at material times also the liquidators of a number of borrowers. New liquidators of the borrowers were appointed and appeared, by counsel, at an adjourned hearing on 14 March 2002.

The Trust Account and the Control Act

[89] Subject to any statutory provision to the contrary, a trustee is not permitted to mix funds with its own or with other funds: Lupton v White (1803) 15 Ves 432; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 171 ALR 568 at 579.

[90] S48 of the Control Act requires a finance broker to maintain a trust account. S48 of the Control Act materially provides:

"(1)

Every finance broker shall maintain at least one trust account, designated or evidenced as such, with a bank in the State and shall, as soon as practicable, pay to the credit of that account all moneys received by him for or on behalf of any person in respect of loans negotiated or arranged by the finance broker or in respect of interest on such loans collected by him.

(2)

Moneys so paid into any such trust account shall not be available for the payment of the debt of any other creditor of the finance broker, or be liable to be attached or taken in execution under the order or process of any court at the instance of any such creditors.

(3)

Loan moneys received by a finance broker in the course of negotiating or arranging a loan and moneys received by a finance broker in respect of interest on loans, shall not be withdrawn from his trust account except for the purpose of completing the loan or paying in accordance with subs(4) the moneys in respect of interest on loans, or as otherwise authorized by this Act, or as otherwise authorized by the prior written consent of all the parties to the loan.

(4)

A finance broker shall pay moneys withdrawn from a trust account to the person or persons lawfully entitled or authorised to receive them.

(5)

A finance broker shall -

(a)

keep full and accurate accounts of all money received or held by him on account of any other person and of all payments made by him of that money;

(b)

before the end of the next business day after the day on which the money is received or paid enter in the accounts particulars of the amount so received or paid and the person from whom it was so received or to whom it was so paid;

(c)

keep the accounts in such manner that they can be conveniently and properly audited; and

(d)

correctly balance the accounts at the end of each month."

[91] The term "trust accounts" is defined in s47 as meaning accounts relating to moneys received or held by a finance broker for or on behalf of any other person in respect of loans negotiated or arranged by the finance broker. A "finance broker" is defined in s4 as meaning a person who, as an agent, in the course of business negotiates or arranges loans of money for or on behalf of other persons.

[92] Owen J in Mark Anthony Conlan (as Liquidator of Oakleigh Acquisitions Pty Ltd) and Ors v Registrar of Titles & Ors [2001] WASC 201 ("Conlan") held that s48 of the Control Act authorises a finance broker to pay all trust moneys into one trust account but that the broker is under an obligation under s48(5) to account separately for the moneys of individuals on whose behalf funds are held. I agree with Owen J. However, the Control Act does not authorise a broker to mix trust funds with its own funds.

The Law of Tracing - General Principles

[93] Before addressing the specific questions, it is necessary to say something about the general legal principles that govern their resolution. The questions have been formulated by reference to the legal issues that arise in the law relating to tracing.

[94] It seems to be generally accepted that tracing is a process not a right or remedy. It is a means of identifying property in the hands of a third party: Boscawen v Bajwa [1996] 1 WLR 328 per Millett LJ at 334; Foskett v McKeown [2000] 2 WLR 1299 .

[95] Sometimes a distinction is made between "following", where the property the subject of the claim has not changed in form or substance, and "tracing" where the original property has been altered by exchange or acquisition, the exchanged property referred to as the "traceable product". In the event a claimant's objective is to establish a proprietary right to the traceable product by virtue of title, legal or equitable, in the original property, the claimant must be able to trace its original property through its various forms to the traceable product. That being the process, it is necessary to have a clear understanding of the nature of the claimant's property interest and when and how it arose in order to assess whether the claimant can trace to the traceable product: Re Goldcorp Exchange Ltd [1994] 3 WLR 199 at 222.

[96] Tracing rules exist at law and in equity. The rules differ. At law, a claimant can trace into but not out of a mixed fund, (Taylor v Plumer (1815) 3 M & S562) unless perhaps the claimant can prove that part of its money was actually paid out of the fund: Lipkin Gorman (a firm) v Karpnale Ltd (1991) 2 AC 548 . However, the equitable tracing rules allow a claimant to trace into and out of a mixed fund. The claimant has a charge or lien on so much of the mixed fund which remains (where the competition is between beneficiaries and a wrongdoer) and a charge or lien on property acquired with moneys traced from the fund: Boscawen v Bajwa (supra) at p336. Further, it is probably still the case that the right to trace in equity (but not of course at law) requires that the property being traced has passed into or through the hands of a fiduciary: Re Diplock's Estate; Diplock v Wintle [1948] Ch 465 (CA) affd (1951) AC 251 (HL); cf Foskett v McKeown (supra) at 1324 per Lord Millett.

[97] A mixed fund is one which contains funds from more than one source. It includes a bank account into which has been deposited funds belonging to a number of persons. In the case of funds standing to the credit of a bank account the relevant property is a chose in action, being a debt owed by the bank to the account holder. There is no difficulty in tracing property in the form of money or a negotiable instrument such as a cheque which is deposited into a bank account to its changed form of a chose in action against the bank: Foskett v McKeown (supra) at p1323 per Lord Millett. However, it is convenient and more easily comprehensible to refer to the claimant's entitlement as being to the money in the bank account and I will refer to it in that manner.

[98] Based on the GFG trust ledger accounts, the trust account contains money standing to the credit of GFG and other funds which GFG holds on trust for a variety of persons for whom it acted in its capacity as a finance broker. As the claimants claim equitable title to the funds, the equitable tracing rules apply. In order to trace in equity, a claimant must be able to establish that it held equitable title to the original property. Whether a claimant has equitable title to the property which is to be traced is to be answered according to the usual principles of property law: Re Goldcorp Exchange (supra) at p227.

[99] There are a number of general rules relating to tracing into a mixed fund. The rules are complex and not invariably applied. Further, it is necessary to distinguish the rules which apply to a mixing of trust funds with the trustee's own funds and the mixing of funds from different trusts, with or without the trustee's own funds. I will deal firstly with the rules relating to competing claims of beneficiaries and a defaulting trustee.

[100] Firstly, where a trustee mixes its own money with trust money, makes a withdrawal and dissipates the money, the trustee is assumed to have had an honest intention and drawn out its own money first. The beneficiaries of the trust are entitled to an equitable charge or lien on the whole of the remaining unused fund for the amount of the trust money: Re Hallett's Estate (1880) 13 Ch D 696; Brady v Stapleton (1952) 88 CLR 322 at 337-338.

[101] However, the principle in Hallett's case will only be applied where it provides a more satisfactory remedy for a beneficiary against a defaulting trustee: Re Oatway [1903] 2 Ch 356 . It was not applied in Re Oatway, where the money drawn out first was used to purchase shares and the balance of the trust fund was dissipated.

[102] Secondly, subsequent deposits by a trustee of its own funds into a mixed fund are not presumed to be impressed with the trusts in favour of the beneficiaries: James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 at 69; Bishopsgate Investment Management Ltd (in liq) v Homan [1994] 3 WLR 1270 . If the subsequent deposits are not impressed with the relevant trusts, the beneficiaries are only entitled to the lowest balance in the mixed fund between the date when the beneficiaries' money was deposited in the account and the date of the claim. This is known as "the lowest intermediate balance rule". The rule has also been applied in Australia: Re Laughton [1962] Tas SR 300; Re Joscelyne (1963) Tas SR 4; Whitehand v Jenkins, unreported; SCt of Vic (Ormiston J); 6 February 1987.

[103] However, subsequent deposits by a trustee of its own funds into a mixed fund will be impressed with the trusts in favour of the beneficiaries if the trustee intended to make restitution to the trust by appropriating the funds to the replacement of the trust moneys: James Roscoe (Bolton) Ltd v Winder (supra) at 69; Taylor v London & County Banking Co [1901] 2 Ch 231 ; Re Grey (No 2) (1900) 26 VLR 529 .

[104] It is said that a court should not attribute to a defaulting trustee an intention to restore property to the beneficiaries merely by reason of the fact that the trustee has paid moneys into the account from which the trustee has, in breach of trust, withdrawn moneys because it would mean that the trustee, not the court, could settle beneficiaries' and unsecured creditors' claims inter se: Ford HAJ and Lee WA, "Principles of the Law of Trusts", 3rd ed, Law Book Co, Sydney, 1996, para17276.

[105] Where there is a mixture by the trustee of the trustee's own funds with funds from more than one trust, the rules which establish the beneficiaries' claims as against the trustee's funds are first applied and thereafter the claims of the beneficiaries of the trust funds inter se come into play.

[106] Where a trustee mixes funds of different trusts and the amount in the mixed fund is inadequate to meet the beneficiaries' entitlements in full, the loss is usually allocated by applying one of three solutions or approaches. Those approaches are:

(i)

in accordance with the rule in Clayton's Case, being "first in first out";

(ii)

pursuant to the "North American" model whereby a withdrawal from the mixed fund is allocated in the same proportions as the different beneficiaries bear to each other at the moment before the withdrawal is made. That is, each debit to the fund is attributed to all existing claimants at the relevant time on a pro rata basis;

(iii)

pari passu in accordance with a person's contributions or claims to the mixed fund.

[107] The objectively determined intention of the claimants at the outset of the relevant scheme can determine the appropriate method of distributing a mixed fund which is inadequate to meet all valid claims: Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22 .

[108] The rule in Clayton's Case provides with respect to, inter alia, a current account containing mixed funds, that in the absence of a contrary intention, expressed or implied, a court will presume the intention of the parties to be that drawings out of the trust fund are to be allocated between the depositors on the basis that withdrawals were made in the same order in which deposits were made, that is, according to the "first in first out" rule: Devaynes v Noble; Clayton's Case (1816) 1 Mer 572 as explained in Cory Brothers & Co Ltd v Owners of the Turkish Steamship Mecca (The Mecca) [1897] AC 286 at 290 and 296.

[109] The North Americans have rejected the applicability of the rule in Clayton's Case to the resolution of competing entitlements of innocent beneficiaries to a mixed trust fund from which withdrawals have been made. They favour the North American model as detailed above on the basis that the rule in Clayton's Case is arbitrary, unfair and based on a fiction: Re Ontario Securities Commission and Greymac Credit Corp (1986) 55 OR (2d) 673.

[110] The English Court of Appeal in Barlow Clowes International Ltd (per Dillon LJ at 33 per Woolf LJ at 39 and per Leggatt LJ at 44) felt constrained by authority to reject a submission that the rule in Clayton's Case should not apply to competing claims by innocent beneficiaries to a mixed fund in which there is a deficiency. However, the Court of Appeal in that case accepted a narrower submission that the rule in Clayton's Case would not be applied if it would be impractical or result in injustice between the persons entitled to the fund or would be contrary to the intention, expressed or implied, of the claimants.

[111] In Barlow Clowes International Ltd, companies in liquidation had promoted and managed certain plans for investment in stock. However the funds were misapplied and at the time of the collapse the companies owed in excess of ?115M to 11,000 investors. The amount available for distribution was far less than the amount of the claims. The Court found that the investors intended to participate in a collective investment scheme by which their money would be mixed together and invested through a common fund. The presumed intention of the investors as determined at the commencement of the scheme (not when it had fallen apart) was that the rule in Clayton's Case would not apply and that all of the assets available for distribution would be shared pari passu rateably in proportion to the amounts due to the investors. The assets available for distribution included moneys already invested, moneys awaiting investment and moneys diverted into other assets.

[112] The rule in Clayton's Case has also been strongly criticised in Australia and has not been applied in recent times by any Australian Court to the distribution of a mixed trust fund: Re Shoreline Currencies (Australia) Pty Ltd (in liq), unreported; SCt of NSW (Kearney J); 14 October 1988 at 7 - 8 (pari passu); Windsor Mortgage Nominees Pty Ltd v Cardwell (1979) CLC 40-540 (pari passu); Hagan v Waterhouse (1992) 34 NSWLR 308 at 359 (pari passu); Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334 (pari passu); cf Hodges & Hurley v Kovacs Estate Agency Ltd [1961] WAR 19 at 222 and Austin v Khaliffe [1966] 2 NSWLR 632 .

[113] An issue which arises in connection with the pari passu solution is whether the lowest intermediate balance rule applies. The Canadians have answered this question in the negative: Law Society of Upper Canada v Toronto - Dominion Bank (1998) 169 DLR (4th) 353 . That was a case where a solicitor misappropriated moneys from his trust account at a bank. One day after the last misappropriation, a bank deposited moneys into the account. Shortly after the account was frozen. The account contained insufficient moneys to pay all the claimants. There had been many misappropriations over time but all had occurred before the bank deposited its moneys. The bank argued that the lowest intermediate balance rule should be applied.

[114] The Ontario Court of Appeal rejected the application of the lowest intermediate balance rule on the basis that it was complex and expensive to apply as it required a consideration of each account transaction. Further it was said to be irrational and arbitrary because it threw the loss on claimants who chanced to make earlier contributions. The Court favoured what it described as the "pari passu ex post facto" solution which involves the rateable sharing of the moneys remaining in the account by all contributors without regard to the timing of their contribution. This appears to be the approach applied in Barlow Clowes (supra). It is apparent from Lord Woolf's reasons that the solution which found favour in that case was one which had regard to the investors' claims and the assets available without regard to their timing. He said (at p 36):

"The third solution (and the only other solution canvassed in argument) is the pari passu ex post facto solution. This involves establishing the total quantum of the assets available and sharing them on a proportionate basis among all the investors who could be said to have contributed to the acquisition of those assets, ignoring the dates on which they made their investment."

[115] The Ontario Court of Appeal in Law Society of Canada (supra) rejected the notion that a person can only trace their own property with the consequence that once a beneficiary's money has left the fund because of misappropriations, it cannot be traced into subsequent additions to the fund that derive from the contributions of others, in the absence of some actual or presumed intention to replenish the fund.

[116] The Canadian Court makes the point that although the mechanics of the lowest intermediate balance rule have never been fully explained the application of the rule in a multiple beneficiary situation bears striking similarity to the North American model rejected in Barlow Clowes as not a live contender because of its complexity and cost. It was said that no authority has ever applied the lowest intermediate balance rule in circumstances involving rival claims of trust beneficiaries.

[117] However the lowest intermediate balance rule was approved in Re Goldcorp Exchange (supra) at p222 and in Bishopsgate Investments (supra). In Re Goldcorp Exchange, a company sold unascertained gold bullion to purchasers for future delivery. The Court of Appeal held that those purchasers did not acquire title, in law or in equity, to the bullion or retain title to the purchase moneys. Accordingly they had no right to trace the bullion or the purchase moneys paid to the company. However, Goldcorp had acquired another company, Walker & Hall Ltd, whose customers were able to show that title to the bullion had passed to them. Those claimants asserted a general equitable charge over Goldcorp Exchange's assets on the basis of Lord Templeman's dicta in Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1072 . In that case the Court held that beneficiaries could not claim trust moneys lawfully deposited by a bank trustee with itself as banker in priority to other depositors and unsecured creditors. However, Lord Templeman considered the position which would arise if a bank trustee unlawfully borrowed trust moneys. He said (at p1074):

"A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with an expended by the bank for the general purposes of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money into any particular asset belonging to the trustee bank. But equity allows the beneficiaries ... to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank."

[118] The Walker & Hall bullion had been mixed with other bullion and there were withdrawals and additions to the stock of bullion without the intention of replacing the bullion of the Walker & Hall claimants. The Court said that in those circumstances the lowest intermediate balance rule applied. However the Walker & Hall claimants went further and sought an equitable lien on all the company's property which was refused on the ground it would be inequitable. The Privy Council left for another day the correctness of Lord Templeman's dicta in Space Investments.

[119] Re Goldcorp Exchange supports the view that the theoretical underpinning of the law of equitable tracing is property law and not unjust enrichment. The plaintiff's property right to the traceable product is a response to and vindication of the plaintiff's rights in the original asset. However, this should not obscure the fact that a claimant who is entitled in equity to trace out of a mixed fund relies not on proving title to its specific property but on its equitable interest in the whole of the mixed fund pursuant to an equitable charge or lien: Boscawen v Bajwa (supra) at p 336.

[120] Finally, a claimant's right to trace is lost (and thus the equitable title arising by virtue of the equitable lien is defeated) if the property reaches the hands of a bona fide purchaser for value without notice: Re Diplocks Estate (supra) at 524.

Question 1 - Whether the Trust Account Records Reflect the Intentions of GFG and GMI

[121] The question is somewhat obliquely framed. I take it to refer to a number of separate but related issues concerning:

(a)

the accuracy and completeness (that is, reliability) of the trust account records;

(b)

whether the trust account records reflect GFG's and GMI's intentions relating to the appropriation of funds to and from the ledger accounts; and

(c)

the legal validity of the appropriations and the entitlements of the claimants to the moneys as recorded in the trust ledger accounts.

[122] Dealing firstly with reliability. The uncontradicted evidence of Mr Herbert is that:

(a)

immediately after his appointment on 19 February 1999 he engaged the services of the accounting firm BKR Walker Wayland to reconcile the trust account and to assist him in evaluating the validity of amounts held in the trust account on behalf of borrowers, investors and GFG. The finding of that reconciliation was that the balance of the trust account was supported by the ledger cards maintained by GFG, and confirmed that the balance of funds in the trust account as at the date of his appointment agreed with the balance of money in the trust account and the bank statements as at that date;

(b)

the balances on all trust ledger accounts were extracted by GFG at the end of each month and listed on a trial balance and the total of all balances reconciled with the trust account balance per the bank statements;

(c)

during the course of carrying out his duties, Mr Herbert and his staff perused virtually all ledger cards comprising the trust ledger. During the perusal, the arithmetical accuracy of the trust ledger was checked. Although it was prepared manually, it was, in general, arithmetically accurate. That is with the exception of a few errors which could easily be corrected, it accurately recorded the transactions which occurred through the medium of the trust account;

(d)

whilst there were many instances where unauthorised payments were made, they were, with few exceptions, accurately recorded and are easily identified;

(e)

the trust ledgers had been available to GFG's investors for approximately two years and they had not contested that the ledger cards accurately record the transactions;

(f)

based on a review of approximately 75 per cent of transactions on the ledger cards, and of the reconciliation of the ledger cards to the balance in the bank by BKR Walker Wayland, Mr Herbert is confident that the ledger cards record the transactions effected by GFG in the trust account - both authorised and unauthorised - with substantial accuracy;

(g)

the available accounting records of GFG were sufficient for him to form a view that, with a few exceptions which are easily corrected, the transactions in relation to investors' and borrowers' money were recorded with substantial accuracy in the trust account ledgers.

[123] There was one occasion when a cheque was drawn on the GFG trust account and made payable to the trust account. Mr Herbert explains the transaction in detail (Ex 4). I am satisfied that this single event explained as it is by Mr Herbert, does not derogate from Mr Herbert's conclusions.

[124] Thus, the evidence establishes and I find, that GFG had and used an accounting system which enables the applicants to accurately "track" (using the word in a non-technical sense) all the payments into and out of the trust ledger accounts being the Money Market Account, the Project Accounts and the GFG Accounts. The trust account records are in this sense, reliable.

[125] By reason of the nature and reliability of GFG's accounting system, I find that, subject to one caveat, the trust account ledger records reflect GFG's intentions relating to the appropriation of funds to and from the ledger accounts. The caveat relates to GFG's intentions on those occasions when Project Accounts were overdrawn. I address this issue when answering Question 2.

[126] However, the trust account ledger records do not necessarily correctly reflect, and cannot be determinative of, the entitlement of a particular person or persons to the funds shown in the trust account ledger records. Two examples will suffice to demonstrate the point. Firstly, the Project Accounts are in the name of the borrowers. However, whether or not the money is held by GFG in trust for the borrowers or the investors is not determined by GFG's intentions as reflected in the trust account records. Secondly, it has been submitted that GFG transferred funds from Project Accounts to the GFG Credit Accounts when it was not legally entitled to do so. The transfer by journal entry of funds to GFG's Credit Accounts does not determine its entitlement to do so. Thus, the trust account records reliably record the mechanical or factual aspects of the source and destination of funds paid into and out of the trust ledger accounts but not the legal entitlements connected therewith.

[127] The evidence dealing specifically with GMI is scant. It was a wholly owned subsidiary of GFG. It did not trade, raise finance or advance funds to borrowers. Its sole function was to hold registered mortgages as trustee. I infer that it acted at all times as the agent or alter ego of GFG and that GFG's knowledge and intentions can be attributed to GMI.

[128] I should make express what is implicit in these reasons. I do not rely on any presumption to support my conclusions on this question.

Question 2 - The Effect of Overdrawing Individual Ledger Accounts

(i) Legal Principles

[129] The overwhelming balance of authority is to the effect that a proprietary claim to the traceable product will fail if trust money is paid into an overdrawn account: Re Diplock (supra) at 521; James Roscoe (Bolton) Ltd v Winder (supra); Bishopsgate Investment Management Ltd (in liq) v Homan (supra); Re Goldcorp Exchange Ltd (supra); cf Hagan v Waterhouse (1992) 34 NSWLR 308 at 358 (where the fact that a bank account used by trustees to purchase property was temporarily in overdraft was not allowed to prevent tracing into the purchased property).

[130] The basis of the rule was stated by the Court of Appeal in Re Diplock as follows (at p521):

"The equitable remedies pre-suppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself."

[131] The Court of Appeal in Bishopsgate Investment endorsed this principle and rejected a submission that the Court should impose an equitable charge on all assets of a company in liquidation into whose overdrawn account trust moneys had been paid in breach of trust. That case concerned the assets of a pension scheme for employees of companies associated with Robert Maxwell. Large amounts of pension fund moneys held on trust by Bishopsgate had been improperly paid to, inter alia, bank accounts of a Maxwell company ("MCC"). At the time of the payment of the pension fund moneys into MCC's accounts, the accounts were overdrawn or later became overdrawn.

[132] The liquidators of Bishopsgate claimed that the company was entitled to an equitable charge in priority to all other unsecured creditors of MCC, on all MCC's assets for the full amount of the pension moneys wrongly paid to MCC. The liquidator did not rely on proving any particular intention of Maxwell or others in charge of MCC. Instead the liquidator relied on the general principle based on Lord Templeman's observations in Space Investments referred to earlier in these reasons.

[133] The Court of Appeal in Bishopsgate held that Lord Templeman could not have intended the dicta to apply to a situation where trust moneys had been paid into an overdrawn account. However, at least one member of the Court (Dillon LJ) thought that there may be one possible exception to a defence that moneys paid into an overdrawn account cannot be traced in equity which was described as the possibility of "backward tracing". According to Dillon LJ at p1274 (adopting the judgment of Vinelott J in the Court below) this might apply:

"... where an asset was acquired by [the defendant company] with moneys borrowed from an overdrawn or loan account and there was an inference that when the borrowing was incurred it was the intention that it should be repaid by misappropriations of [the plaintiffs'] moneys. Another possibility was that moneys misappropriated from [the plaintiffs] were paid into an overdrawn account of [the defendant company] in order to reduce the overdraft and so make finance available within the overdraft limits for [the defendant company] to purchase some particular asset."

[134] Dillon LJ said it was at least arguable that there ought to be an equitable charge in those circumstances. Leggatt LJ rejected that possibility (at p1278).

[135] The rationale for the rule which prevents equitable tracing into an overdrawn bank account is that the property being traced must continue to exist in some form up to the time of, and through to, the traceable product.

An overdrawn bank account is a debt owing by the trustee to the bank. The effect of a payment into an overdrawn account is to reduce or cancel the trustee's indebtedness to the bank. Tracing is a factual process and a trust fund or part of it which is dissipated cannot be traced. The extinguishment or reduction of the trustee's indebtedness is regarded in effect as the disappearance of the property.

[136] There is an obvious theoretical and practical overlap between this rule and the lowest intermediate balance rule.

[137] In this case the trust account was never overdrawn. However, individual Project Accounts did on occasions have negative balances. The tracing consequences of an overdrawn (internal) ledger account have not previously been considered in any reported judgment of which I am aware. For obvious reasons the answer to the question is linked with the use to which the trust account ledger records can legitimately be put for the purpose of the rules of equitable tracing. That in turn is affected by the identification of when and how the claimants proprietary interest arose and its nature. I digress to address these matters before answering Question 2.

(ii) The Claimants and the Basis of the Claims

[138] The range of potential claimants include:

(a)

the persons shown as the holders of the Money Market Accounts;

(b)

investors in Category A and B projects shown in the Project Accounts, being investors whose loans were current as at 19 February 1999 ("current investors");

(c)

borrowers in Category A and B projects shown in the Project Accounts, being borrowers whose loans were current as at 19 February 1999 ("current borrowers");

(d)

investors and borrowers in relation to closed transactions (that is, where the parties had settled the accounts between them prior to 19 February 1999) who may have a claim against GFG's assets in the trust account.

[139] That the current investors have a proprietary claim to the funds in the trust account was regarded by most parties as a given. Indeed the applicants' evidence tendered at the hearing in September 2001 did not directly address or descend to detail on some aspects of this important question.

[140] What is clear is that GFG holds the moneys in the trust account on trust for (at least) the Money Market Account holders and in, relation to the Project Accounts, either the current investors or current borrowers or, conceivably, both.

[141] The Project Accounts in credit at 19 February 1999 totalled approximately $1.052M as follows:

[142] These accounts are categorised by Mr Herbert in his evidence as follows:

[143] The category entitled "Funds held for completion of construction - Other", consisted of the following two projects:

[144] The borrower in Project 1309 completed construction of the project from its own resources, the security property has been sold and the investors have received the return of their principal funds. The borrower is claiming the balance of the funds in the Project Account. The determination of this dispute is the subject of Question 3(c)(vii) which has been deferred. I deal with Project 1386 in detail below.

[145] Save for those investors who claim an equitable interest in the GMI mortgages, all other current investors who provided promised funding were registered as mortgagees in their aliquot share of the intended security property. Prima facie, after settlement of the mortgage the investors' rights against the borrowers for default under the mortgage are in contract on the personal covenants in the mortgage or in property against the security property: see Re Shoreline Currencies (Australia) Pty Ltd (in liq), (supra).

Further, in ordinary circumstances a secured creditor to whom property has been mortgaged is not in a fiduciary relationship with the debtor. What room then for the introduction of a proprietary claim by the investors to the credit balances in the Project Accounts in the borrowers' names?

[146] By the conclusion of the hearing in September 2001 it had emerged that the applicants had not provided sufficient information on all the categories of funds identified by Mr Herbert to enable a determination on all issues. I requested the applicants to supplement their evidence on specific matters. They did so in a further affidavit from Mr Herbert sworn in February 2002 (Ex 28). On 14 March 2002 I heard from the parties on the matters in Mr Herbert's further affidavit. What was apparent from the further evidence was that the description of the categories of funds in the Project Accounts were accurate for Category A Project Accounts. For Category B Project Accounts, all that can be said is that with some minor exceptions there should have been funds, at least to the amount standing to the credit in the Project Accounts, corresponding with the applicants' description of that category. This distinction does not affect entitlements as between investors and borrowers but may affect investors' entitlements inter se.

[147] The first category of funds in the Project Accounts identified by Mr Herbert are funds held for the completion of construction of works in connection with the security property. GFG used a standard form mortgage where the loan funds were to be used in part to fund construction costs. To illustrate GFG's modus operandi both generally and in relation to such loans, I refer to Project 1386 in which the borrower was Australasia Property Link Pty Ltd. Mr Jarvis appeared for and represented the investors in this project, which is in Category A.

[148] Project 1386 was the last project funded from outside sources before GFG went into administration on the 19 February 1999. The Proposal Letter to the investors in Project 1386 is headed "Re: Joint First Mortgage Investment - $315,000 Your Portion -" and offered the addressee "the following first mortgage investment". The letter identified, inter alia, the borrower, the security, the amount of the loan (in this case $315,000), the term of the loan (12 months) and the purpose of the loan. The purpose is stated in the following terms:

"Funds have been requested to assist with the purchase and development of a display home in Sanctuary Waters Canning Vale as per the attached plans."

[149] Under the heading "Ability to Service" the letter of offer states:

"Interest payments on this loan are considered safe, as Global Finance Group Pty Ltd will retain interest payments for the construction period of six months which will be held in trust to be paid monthly to investors.

Construction funds will also be held by Global Finance Group Pty Ltd only to be released after careful inspection of work done. This method of operation has been carried out successfully with other parties in conjunction with Global Finance Group Pty Ltd on many occasions."

[150] The duplicate Proposal Letter is signed by the investor. Endorsed on the duplicate copy and signed by the investor is a statement in the following terms:

"I/We hereby accept the abovenamed investment and appoint Global Finance Group Pty Ltd as our Agent to administer all matters relating to the mortgage and confirm funds will be forwarded to your office."

[151] There were seven original investors all of which were registered as mortgagees of the security property. One investor transferred its registered interest in the Project 1386 mortgage, which is dated 24 December 1998, to a Mr and Mrs Pozzi on 15 February 1999, four days before GFG went into administration.

[152] The Project 1386 mortgage secures the "Moneys Hereby Secured" which includes the Principal Sum which is defined to include the "Principal Sum Now Agreed To Be Advanced". The Principal Sum Now Agreed To Be Advanced is defined as the sum of $315,000 "which shall be allocated as to the sum of ... $119,000 towards the cost of purchase of the Land subject to this Mortgage, Interest Capitalisation for six months and various finance and Mortgage costs and the balance being the sum of ... $196,000 for completion of the Works".

[153] The Project 1386 mortgage contains a covenant relating to Works in the following standard terms ("Works covenant"):

"That the Mortgagor will prior to the date for completion of works specified in the schedule construct on the Mortgaged Property and will complete in a proper and workmanlike manner ... and in accordance with the plans and specifications already submitted to and approved by the Mortgagee ... and with and subject to the approval of all local authorities and of the Mortgagee's inspector the Works referred to in the Schedule being the subject of the plans ('Works')...

...

That the Principal Sum Now Agreed to be Advanced shall be retained by ... Global in trust and paid to the Mortgagor who will accept the same in such manner as Global in its absolute discretion shall think fit and upon the certificate or certificates of Global's inspector that the construction of the Works is being properly carried out in accordance with the plans and the consents; and that the final balance of the Principal Sum Now Agreed to be Advanced shall be paid by Global on and not prior to the completion of the Works in accordance with the Plans and on production of the certificate in that behalf by the Mortgagee's inspector. The Principal Sum Now Agreed to be Advanced will be advanced at the times and in the manner mentioned in the Schedule...

...

In the event of default being made in the construction or completion of the Works in manner aforesaid or if the power of sale conferred or implied hereby shall be exercisable then the Mortgagee shall not be obliged to advance any portion of the Principal Sum Now Agreed to be Advanced not then advanced and it shall be lawful for the Mortgagee ... to enter upon the Mortgaged Property and to construct and complete the Works in any manner the Mortgagee may think fit ... and all moneys expended by the Mortgagee in such erection or completion together with interest thereon ... shall be payable by the Mortgagor to the Mortgagee on demand and shall in the meantime be charged on the Mortgaged Property and be deemed to be part of the Moneys Hereby Secured ..."

[154] Cl18 of the Schedule to the Project 1386 mortgage provides for the date of completion of the Works (14 June 1999), a description of the Works and the "Times for [and] manner of advances of the Principal Sum Now Agreed to be Advanced" in the following terms:

"From time to time at the written request of the Mortgagor and subject to the Mortgagor producing to the Mortgagee:

(a)

Copy of all Consents;

(b)

Works progress certificates from any Contractor or the Mortgagee's Inspector specifying:

(i)

the value of the works completed;

(ii)

the amount of the Principal Sum now agreed to be advanced previously advanced.

(iii)

the amount of the Principal Sum now agreed to be advanced now sort to be advanced;

(iv)

the value of the unfinished works;

(v)

that the works have been completed in accordance with the Plans and Consents;

(vi)

that the amount claimed does not exceed the following:

(a)

Completion of Slab $20,000

(b)

Ground Floor $30,000

(c)

Plate Height second Storey $30,000

(d)

Completion of Roof $58,000

(e)

Fitout $38,000

(f)

Completion and Occupation Certificate $20,000."

[155] The Project 1386 mortgage is a standard demand mortgage. The moneys secured are payable on demand provided that the mortgagees are not entitled to make demand or enforce the mortgage prior to the repayment date (14 December 1999) as long as the mortgagor complies with its obligations. However, the moneys secured are payable without demand in specified circumstances (cl5(9)) which includes default in payment of the monetary obligations under the mortgage or if the mortgagor is wound up, placed in official management or is insolvent.

[156] The power of sale is exercisable under the mortgage on satisfaction of the requirements in s106 to s108 of the Transfer of Land Act 1893 which requires notice of and time to remedy any default.

[157] The mortgagor is obliged to pay interest to the mortgagees on the full amount of the loan from the commencement date of the mortgage notwithstanding that the loan is not fully drawn down until some time later.

[158] The Proposal Letter for Project 1386 (as with all standard letters) refers to a "joint first mortgage". This is reflected in the terms (and effect) of the standard form mortgage which provides that the covenants and agreements "shall bind and be observed and performed by [the mortgagees] jointly and each of them severally".

[159] At Schedule C ^[F1] to these reasons is a copy of the Project Account for Project 1386. It shows the investors paying in their agreed share of the loan at different times and in some cases after the date of the Project 1386 mortgage.

[160] The Proposal Letter for Project 1386 refers to a sworn valuation on completion of construction of $450,000. The valuation was provided by Mr Ron O'Connor. The land was purchased for $96,000. The investors sold the land in July 2001 for $108,000 gross, approximately $102,000 nett. The amount standing to the credit of Project 1386 in its Project Account is $206,775.52. Mr Herbert confirms in his evidence that the balance standing to the credit of Project 1386 in the Project Account was for construction of the Works. No construction work was undertaken. The borrower is in liquidation with a nett deficiency of in excess of $1M.

[161] It was submitted by Mr Solomon on behalf of a number of investors, that in a situation where funds are to be drawn down progressively to fund construction, two trusts arise. The first is a trust in favour of the borrower/mortgagor ("Primary Trust") and the second is in favour of the investors/mortgagees ("Secondary Trust"). The analysis draws heavily on the purpose trust concept in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 as explained by Gummow J in Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681 at 691.

[162] The submission in substance was that:

(a)

the Primary Trust is to have the funds applied in meeting progress payments until the earlier of the completion of the project or on breach by the borrower;

(b)

until breach, the funds are held for the non-exclusive benefit of both the borrowers and the investors. Any payment out of the trust account in breach of the mortgage is a breach of both the Primary and Secondary Trust;

(c)

in the event the borrower is in breach, the purpose of the Primary Trust fails and that trust comes to an end in which event the investors/mortgagees obtain exclusive beneficial title to the balance remaining in the trust account pursuant to the Secondary Trust.

[163] A similar analysis in relation to a draw down facility mortgage used by Rowena Nominees Pty Ltd (trading as Graham Grubb Finance Broker) received some support from Owen J in Conlan (supra) at para368 - para369.

[164] The Quistclose decision confirms that a debtor-creditor relationship can co-exist with a trustee-beneficiary relationship. As a matter of principle, the addition of proprietary rights pursuant to a mortgage to the contractual relationship would not seem to alter that conclusion. In Quistclose, a company required a sum of money to pay its shareholders a dividend which it had declared. The declaration of dividend gave rise to a debt owing to its shareholders. A related company, Quistclose, advanced the moneys to the company for the purpose of paying the dividend. It was found that both companies had the mutual intention that the sum advanced was to be used exclusively for payment of the dividend to shareholders. The money was deposited in a specially opened account at Barclays Bank and the Bank was informed of the sole use to which the funds were intended to be put. Prior to its payment to shareholders, the company went into liquidation. The Bank claimed it was entitled to set off the amount in the dividend account against the amounts owed to the Bank. As explained by Gummow J in Re Australian Elizabethan Theatre Trust (supra), the House of Lords in Quistclose held that the mutual intention of Quistclose and the debtor company was to create arrangements which gave rise to a primary trust for the shareholders and if the dividend could not be paid to them, the money as a secondary trust was to be returned to Quistclose. Thus there was an express trust with two limbs rather than an express trust in favour of the shareholders and a resulting trust for Quistclose arising from the incomplete disposition.

[165] On the facts in Quistclose a tripartite situation arose between Quistclose, the borrower company and its shareholders who were the putative beneficiaries. A Quistclose type purpose trust can also arise in a bipartite as well as a tripartite situation: Re Nanwa Gold Mines [1955] 1 WLR 1080 ; Re Kayford [1975] 1 WLR 279 .

[166] However, it remains the case that to be valid, a private non-charitable trust must be for the benefit of individuals: Bacon v Pianta (1966) 114 CLR 634 . It is a question of construction as to whether the trust is for the benefit of any individuals with the specified manner or purpose for its use being secondary. In any event, where property is transferred inter vivos on an unenforceable purpose trust, the transferee holds the property on trust for the transferor but with power to apply the property for the stated purpose: Scott AW, "The Law of Trusts" 4th ed, Little Brown & Co, Boston, 1987, Vol 5 p66; Re Sayer [1957] Ch 423 .

[167] Whether a condition as to the use of money will amount to a trust depends upon the intention of the creditor and the debtor. Mutual intention is usually inferred from, inter alia, the nature of the transaction, the circumstances surrounding their relationship, the conduct and the language used by the parties: Re Australian Elizabethan Theatre Trust (supra) at 693.

[168] However, in this case the parties expressly state their intention and the consequences thereof in the Works covenant in the standard form mortgage. I have concluded that on its proper construction, the Works covenant has the effect of requiring GFG to hold the balance of the "Principal Sum Now Agreed To Be Advanced" from settlement on Primary Trust for the borrowers pending its payment to the borrower in accordance with the terms of the mortgage and on Secondary Trust for the investors.

[169] It cannot be the case that the parties intended that GFG hold the moneys on trust solely for the borrowers. In that event the borrowers, being sui juris, could terminate the trust and call for the fund. Nor could it be intended that the moneys be held on trust for the investors with GFG having the power or discretion to advance the funds to the borrowers. The borrowers had an entitlement to the funds in the event of due and proper compliance with their obligations. I am satisfied that the intention of the parties to the mortgage was to create a Primary Trust in favour of the borrowers for the purpose of completing the Works specified in the mortgage and a Secondary Trust for the mortgagees/investors which is activated in the event the purpose of the loan becomes incapable of being fulfilled. Delineating when that occurs is not without its difficulties. However, we are here concerned with unspent construction funds and I confine the analysis accordingly. I do not accept the submission that any breach of the mortgage (or other contractual document) results in the termination of the Primary Trust. That outcome is inconsistent with the Works covenant which expressly provides the circumstances when the investors/mortgages are relieved of their obligations to advance the remaining funds. That occurs:

"In the event of default being made in the construction or completion of the Works in the manner aforesaid or if the power of sale conferred or implied thereby shall be exercisable ..."

[170] However, the use of the trust funds for an unauthorised purpose means a reduction in the funds available for the Works which is a relevant default for the purposes of that clause.

[171] It appears that not all schedules to the mortgages were in identical form. In other Works mortgages tendered in evidence there was no equivalent to cl18(3)(b)(vi) in the Schedule to the Project 1386 mortgage. However in my opinion that omission makes no material difference to the analysis. It follows that the Secondary Trust in favour of investors has been activated for Project 1386 and for the Category B projects where funds have been transferred out for an unauthorised purpose.

[172] The second category of funds in the Project Accounts is funds held for payment of interest. As we have seen in relation to Project 1386, the letter of offer and the mortgage provided for GFG to retain interest for a specified period in its trust account. Most projects involved the raising of funds to cover interest payments to investors. GFG remitted monthly payments to investors by drawing against the funds in the Project Accounts. Prima facie, these funds at least insofar as Category A Project Accounts are concerned are held in trust for the investors. It is not in dispute that money held or received by an agent for its principal may be held on trust: Mann v Hulme (1961) 106 CLR 136 at 141; Burdick v Garrick (1870) LR 5 Ch App 233; Scott AW, "The Law of Trusts", 4th ed, Little Brown & Co, Boston, 1987, Vol 1 p95.

[173] However, the analysis is complicated as a result of the transfer of some mortgagee's interests during the term of the loan and the semi-automatic extensions of the loan/mortgage involving existing or new investors. In my view, the evidence establishes that the interest held in trust is intended by the relevant parties to be for the payment of interest to the investors to the relevant project as they exist from time to time. Former investors who were paid out in full, or at least the principal and interest owing, clearly have no claim to the interest in the trust account.

[174] Thus, in the event and to the extent that the borrower has defaulted in payment of interest, the investors have a claim against the trust fund for the amount retained by GFG for interest to be paid by the borrower pursuant to the mortgage.

[175] It may also be the case that the trust account contains interest payments collected by GFG from the borrower during the term of the loan and not comprising part of the loan funds. Those moneys would be held on trust by GFG (the collecting agent) for the investors.

[176] It emerged in Mr Herbert's February 2002 affidavit (Ex 28) that his description of the second category of funds did not accurately describe the source of the funds in all Project Accounts he had included in the category. In particular:

(a)

there are funds standing to the credit of Project Account 1063 (a Casella project) yet all investors to that account have been paid in full;

(b)

the funds standing to the credit of Project Account 1345-72 represents part of the proceeds of sale of an unencumbered unit. This is also a Casella project into which funds were transferred in and out.

[177] I will deal with these matters separately when considering Question 3(c)(vi).

[178] The third category of funds in the Project Accounts is investors' funds raised for loans not proceeded with. Those funds clearly belong to those investors, there being a failure of the purpose for which the moneys were advanced to GFG on behalf of the proposed borrower.

[179] The fourth category of funds in the Project Accounts is described as accounts in default with legal or other charges overdue equal to or greater than the balance held. The applicants conceded at the hearing in March 2002 that the description used was not the most appropriate. It covers Projects 1047, 1126 and a composite Project 1167-1171. In each case the borrower has not complied with its obligations and moneys owing to the investors exceed the funds in the accounts. Project 1047 is a Category A project where the amount standing to the credit of the account represents funds paid by the borrower to Global for the investor. The borrower has no entitlement to the moneys.

[180] Project 1126 is a Category B project in which the investors benefited from transfers of funds in from other Project Accounts associated with Mr Sadek. The money in the Project Account represents the rent paid by the tenant to GFG as a result of the borrowers' failure to pay interest since 1998. The borrower has no entitlement to the monies in these circumstances.

[181] The third is also a Category B project into which funds were transferred. The credit balance in the Project Account represents the accumulation of interest payments made by the borrower to GFG on account of the investors. The borrower has no claim to these funds.

[182] The fifth category of funds in the Project Accounts relates to small balances. In the case of eight projects the investors have been paid in full. In the case of Category A projects, the investors have no entitlement to the balances. In relation to one Casella project (1122) there is a small credit balance from the sale of part of the security property. Money was transferred into this project from other Project Accounts and is in Category B.

[183] In relation to Project 1049, the borrower is in default and the monies in the Project Account are monies received by Global in its capacity as controller of the security property pursuant to the security. This is not a Category A or B project. The borrower has no claim to the moneys which prima facie belong to the investors.

[184] Project 1237 is a Category A project in which the money in the Project Account was paid by the borrower to GFG for the investors. They are accordingly held on trust for the investors.

[185] Project 1328 is a Category A project in which the borrower is not in breach. The investors have no claim to these funds.

(iii) The Ledger Records as a Potential for the Basis for Distribution

[186] Question 2 presupposes that the trust account records can in appropriate circumstances be used as a basis for allocating losses from a mixed trust fund. The logical first question is whether the appropriations or earmarking by GFG represented in the trust ledger accounts can, as a matter of principle, be relied on for the purposes of allocating losses from a mixed trust fund. If the answer to that question is in the affirmative, the next question is whether "overdrawing" Project Accounts prevents reliance in whole or in part on the trust ledger records.

[187] Appropriations by "innocent" parties have long been recognised. The Court of Appeal in Re Diplock (at 551-552) considered the competing claims of the next of kin and a charity (The National Institute for the Deaf) to which the executors of a deceased estate had invalidly paid trust moneys. The moneys were initially paid into the charity's current account which was in credit. It was thus mixed with the charity's own funds. Subsequently, money representing the amount received by the charity from the executors was deposited in a separate capital account. For the purposes of the charity's own accounts, it treated the gift from the executors as having been carried to its capital account. It was held that the charity was bound by its own appropriation of the moneys from the estate to that account.

[188] The Court of Appeal in Boscawen v Bajwa (supra) also relied on an appropriation made in internal books of account. In this case, a building society made an advance to a purchaser for the purchase of property to be secured by a first legal charge. The moneys were held by the purchaser's solicitors in trust for the building society. The purchaser's solicitors subsequently transferred the money to the vendor's solicitors but to the purchaser's solicitors order pending completion of the purchase. The vendor's solicitors used the moneys to discharge a mortgage on the property. The purchase of the property did not proceed. The plaintiffs, being the vendor's judgment creditors, obtained a charging order against the property. The building society claimed it was entitled by way of subrogation to the rights of the mortgagee whose mortgage had been discharged. To succeed, the building society had to trace its funds to the discharge of the vendor's indebtedness to the mortgagee. The trust moneys had been paid into the vendor's solicitors general client account at a bank. The vendor's solicitors also held other funds in trust for the vendor although it was unknown whether they had been deposited into the general client account.

[189] There was no dispute that the building society could trace its funds into the vendor's solicitors general client account. However, it was said that there was no evidence that the vendor's own money, as distinct from the trust money, had not been used to pay the mortgagee. The plaintiffs argued that if the vendor's own moneys were held in the general client account, the trust moneys were mixed not only with moneys belonging to other clients but also with moneys belonging to the vendor. It was said the vendor's solicitors could be presumed not to have committed a breach of trust by resorting to moneys belonging to other clients but they were perfectly entitled to use the vendor's own money to discharge the mortgage. The building society submitted that the vendor's solicitors' ledger cards showed that the vendor's solicitors had appropriated the trust moneys towards the payment of the moneys to the mortgagee. Millett LJ said (at 336):

"The ledger cards were, of course, made up after the event, although long before any litigation ensued, so they are not primary evidence of actual appropriation; but they are reliable evidence of the appropriation which [the vendor's solicitors] believed that they had made.

I accept [the building society's] submission. It is not necessary to apply artificial tracing rules were there has been an actual appropriation. A trustee will not be allowed to defeat the claim of his beneficiary by saying that he has resorted to trust money when he could have made use of his own; but if the beneficiary asserts that the trustee has made use of the trust money there is no reason why he should not be allowed to prove it.

The second way in which the [building society] answers the appellants' submission is by reliance on equity's ability to follow money through a bank account where it has been mixed with other moneys by treating the money in the account as charged with the repayment of his money. As against a wrongdoer the claimant is not obliged to appropriate debits to credits in order to ascertain where his money has gone. Equity's power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour: ..."

[190] The situation of a single trust account with ledgers tracking deposits and withdrawals was considered in the United States in Re Moffitt, Zwerling & Kemler PC 875 F Supp 1152 (ED Va 1995). This decision was reversed on an unrelated aspect on appeal: United States v Moffitt, Zwerling and Kemler 83 F 3d 660 (4th cir 1996). In Re Moffitt, a client had paid money to a law firm on account of costs. The client, who was under investigation for drug trafficking, subsequently pleaded guilty to drug conspiracy and money laundering charges and the Court ordered forfeiture of all of the client's assets.

[191] The law firm had placed $10,000 from its client into its omnibus escrow account which contained money from other clients. Separate ledgers were kept for each client. The ledgers showed that only $3,695 of the $10,000 remained. The government contended that the escrow account was one bank account for tracing purposes and relied on the ruling Clayton's Case to claim that the full amount of $10,000 was subject to forfeiture. The trial Judge rejected the claim, saying (at p1167):

"The government's position is an unrealistic interpretation of the facts. First, the omnibus escrow account is not properly treated as one account if, in substance, it was not operated as one. Rather than opening a separate account for each of its clients, the Law Firm reasonably used one escrow account, but then maintained separate ledgers tracking the deposit and the withdrawals for each client. In so doing, the Law Firm took care not to spend one client's money on another's representation. In substance, the Law Firm acted as though each client's money was in a separate escrow account."

[192] However, in this case the appropriations in the books of account were made by a defaulting trustee, GFG, whose conduct caused the loss or shortfall in the trust funds. Prima facie it would be expected that great caution should be exercised before reliance is placed upon appropriations made in those circumstances. On the other hand, it has been suggested that the rule in Clayton's Case is based on the presumed intention of, inter alia, the trustee which must give way to the express contrary intention of the trustee if it allocates the loss to a particular beneficiary: Re Registered Securities Ltd [1991] 1 NZLR 545 .

[193] The Court in Re Stillman and Wilson (1950) 15 ABC 68 gave effect to a defaulting trustees intention to appropriate moneys from a particular beneficiary's account. One of the assets in a composition under the Bankruptcy Act was money deposited in a special bank account in the name of the debtors (members of a firm of solicitors). A substantial part of the money had been transferred from a trust account comprising sums paid by clients for investment. The debtors provided an annexure which purported to set out the balances and the persons entitled to those balances. The Judge said (at 71-72):

"This sum ... appears to be a balance of trust moneys as exhibited by the trust account of the firm of Abbott Beckett Stillman & Gray. One difficulty in dealing with this sum is whether it should be regarded as money available to all the trust creditors of the firm, or only those trust creditors who in the trust ledgers of the firm are set forth as being entitled thereto.

I think the sum should be held by the applicant in trust for those creditors expressed to be entitled thereto in the books of the firm.

I think, though with some hesitation, that where a trustee has the control of a mixed trust fund belonging to a number of beneficiaries and he purports to withdraw from this fund money on behalf of one of the beneficiaries and then uses this money not on behalf of the beneficiary but for his own purposes, the money so withdrawn should be regarded as that of the beneficiary on whose behalf it purported to be withdrawn. The matter depends upon the intention of the trustee."

[194] I do not accept that the Court is invariably bound by a defaulting trustee's intentional allocation of loss to specific beneficiaries. However, I have reached the conclusion that prima facie it is open as a matter of principle to rely on GFG's trust ledger records as a general basis for allocating losses. In stating this conclusion I am not intending to suggest that all the trust ledger records can or should be applied according to their terms. That cannot be so when unauthorised transactions in breach of trust have occurred which caused detriment to some investors and benefited others. The reasons for my conclusion on the use of the trust ledger records are as follows. Firstly, and most importantly, the trust ledger records are reliable as that term is used earlier in these reasons. Prima facie, they provide a substantially accurate factual foundation for moulding an appropriate solution to the competing proprietary claims. All payments into and out of the trust account can be tracked. Secondly, the trust account records reflect the trustee's contemporaneous intentions. Thirdly, reliance on the record is consistent with the statutory framework in which the trustee is permitted to mix trust funds coupled with a requirement to account separately for the moneys the subject of different trusts.

[195] The next question is what effect the overdrawing of a Project Account has, if any, on the applicability of a solution based on the trust ledger records.

[196] It is established by the evidence (and I find) that:

(a)

as at each month's end since June 1996, the total of the balances in the GFG Credit Accounts always exceeded the total of the overdrawn balance of Project Accounts;

(b)

GFG by its director, Mr J Margaria, intended that GFG's moneys in the trust account be used to cover the overdrawn Project Accounts.

[197] However, on some occasions the monthly total of the balances of overdrawn Project Accounts was manufactured by the unauthorised, albeit temporary, transfer of funds from Project Accounts in credit. Further, the second respondents say, with differing degrees of foundation, that at material times the GFG Credit Accounts were or might have been overstated because GFG was in breach of its duties as trustee in retaining late payment penalties paid by borrowers, in failing to account to investors and borrowers for the full interest rate GFG received on funds invested in Cash Investments or in prematurely debiting charges payable by borrowers. It is not possible on the limited information before the Court to determine whether such breaches occurred, the financial magnitude of any resulting overstatement of GFG's money in the trust account from time to time and whether the overstatement prevented coverage of the overdrawn Project Accounts with GFG's funds.

[198] Further, it is not in dispute that there were nine periods in which the total daily overdrawn balances exceeded GFG Credit Account balances. For all these reasons it is necessary to determine the effect on tracing of overdrawing the Project Accounts.

[199] "Overdrawing" a Project Account occurred when a withdrawal was made from the trust account for the benefit of a project when there was insufficient funds in the trust account from the investors to that project to cover the withdrawal. The effect of overdrawing a Project Account when the GFG Credit Account balances were inadequate to cover the payment is that funds held on trust for beneficiaries of other trusts would be used for the benefit of the transferee project (and that project's borrower and/or investors). The trust account records do not, by and large, record any specific appropriation or otherwise reflect any diminution in any other ledger account in those circumstances. However, the unappropriated diminution in the moneys available to other beneficiaries was almost invariably temporary. Funds were subsequently deposited into the overdrawn Project Account which had the effect of restoring the amount in the trust fund to the extent of the diminution.

[200] In order to determine the effect of an overdrawn ledger account it is first necessary to identify the property being traced. If regard is had solely to the trust account, the property is GFG's chose in action against the ANZ Bank: Foskett v McKeown (supra) per Millett LJ at 1323. At no stage did that chose in action disappear. GFG never become indebted to the bank (ie the trust account was never overdrawn). Accordingly, the overdrawn Project Accounts had no effect, in law and in equity, on the trust account. This is to be contrasted with the Grubb Finance trust account the subject of Owen J's decision in Conlan. In that case, Grubb's trust account with the bank was frequently in overdraft.

[201] However, the rationale for the rule against tracing into an overdrawn account can be illustrated by reference to the overdrawn Project Accounts in this case because the records reliably track payments into and out of the trust account. Thus, if the investors to Project X paid $1,000 to GFG for Project X and GFG withdrew $1,500 from the trust account and applied it for the proper purposes of Project X or in satisfaction of an obligation owing to or by the investors then the Project X investors' funds have been exhausted on authorised purposes and the investors would have no rights to the trust fund. Investors to Project X who made subsequent deposits which had the effect of reducing the overdraft to nil would also have no rights against the trust account in relation to those funds. What this example illustrates is that the trust records can be used to determine the extent of an investor's maximum claim to the funds in the trust account.

[202] There is no suggestion in the evidence that payments resulting in the overdrawing of Project Accounts were applied for the benefit of other projects or for GFG, in which case the investors would have suffered a loss of trust funds. However, even if that occurred, the overdrawing rule should apply by analogy to those parts of the trust ledger to which full effect is given. Claimants should not, as a matter of principle, be able to rely on the appropriations in the records only to the extent to which they advance their case. The claimants cannot approbate and reprobate. So, for example an investor in a Category A project who seeks to be quarantined from the losses arising from transfers between Category B projects must rely on its Project Account (and others) to say there has been no relevant mixing of funds for loss allocation purposes. The investors cannot then ignore the overdrawings to their account when that is perceived to be to their benefit.

[203] Further, there is no reason in principle why the overdrawing rule would not apply in combination with the other potential solutions for the allocation of trust fund losses, whether it be the rule in Clayton's Case, the North American approach, the pari passu solution or otherwise. This mirrors the existing debate concerning whether the pari passu solution incorporates the lowest intermediate balance rule. However, the extent of the claimants affected by the rule relating to overdrawn accounts may be relevant to the selection of the appropriate distribution solution in a particular case. For example, in this case, if reliance on the trust ledger accounts resulted in an arbitrary and ad hoc result across different types of accounts by virtue of the overdrawing of Project Accounts, the appropriate course may be to ignore all the ledger accounts and treat the fund in its entirety as mixed.

[204] However, in my assessment the rule relating to overdrawings does not have that impact in this case for the following reasons. The tracing rule in relation to overdrawn accounts only applies to claimants in relation to moneys deposited in the relevant account at any time when the account was, or became, overdrawn. Accordingly, the orthodox application of the rule does not produce an answer which necessarily affects all claimants at all relevant times.

[205] Even if the right to trace a specific deposit is lost because a Project Account is overdrawn, the question remains whether the claimants have an equitable interest in subsequent deposits made to the Projects Accounts once the account is (and thereafter) remains in credit.

[206] This is a variant of the issue considered in James Roscoe (supra) in the context of the lowest intermediate balance rule. The Court in James Roscoe was concerned with whether the trustees own funds subsequently deposited in a mixed account were impressed with a trust for the beneficiaries to replenish the trust fund. On the facts in that case no trust was proven. In this case, the question relates to moneys subsequently deposited by investors, borrowers (for payment of interest to investors) and in the case of Category B accounts, funds from other Project Accounts or from the borrower (or funds to which the borrower would otherwise be entitled).

[207] For practical purposes it is only necessary to consider the source and purpose of the funds in the Project Accounts as at 19 February 1999. The first category of moneys in the Project Accounts as at 19 February 1999 is moneys held for completion of construction. I deal firstly with Project Accounts where moneys were subsequently deposited by investors to that project for or in connection with Works mortgages. I exclude from the following analysis Category B Project Accounts. In the event the Primary Trust has not come to an end, the moneys standing to the credit of the project will be held on Primary Trust for the borrower regardless of the timing of investor payments into the Project Account or whether the Project Account has previously been in debit. This outcome is mandated by the terms of the mortgage. The point is a simple but important one. What is lost when an account becomes overdrawn is the right to trace funds which were on deposit and held by the trustee at any time when the account was or became overdrawn. However, in this case subsequent additions by investors to the Project Account are also subject to the Primary Trust discussed earlier. This is not a situation in which it is necessary to prove that the subsequent additions to the Project Account were made with the actual or presumed intention of replenishing money which had been wrongfully (in breach of trust) removed from the trust fund. That is obviously not possible because the investors were unaware of GFG's unauthorised dealings with the funds in the trust account. The focus here is on who has equitable title to the subsequent deposits.

[208] It is also necessary to analyse the position of the investors once the Primary Trust had come to an end and the Secondary Trust covers the field. I will assume that at some stage the Project Account became overdrawn and thereafter some of the investors deposited their agreed financial contributions to the project which had the effect of placing and maintaining the Project Account in credit. The investors are joint mortgagees in advancing and securing the loan. Accordingly, it is intended, and the Works mortgage as a matter of construction so provides, that the Secondary Trust of the moneys in the trust account is for the investors jointly, regardless of timing of payments by individual investors. That being the case, all subsequent additions to the trust fund by any of the investors in relation to a project are held pursuant to the Secondary Trust for all current investors who have complied with their obligations. No party in this case has suggested, and it cannot be the case, that after settlement the investors in a project should be treated individually rather than as a unit. The evidence establishes that the investors were aware (primarily from the Proposal Letter) that they were entering into a common enterprise with other investors whereby their moneys would be pooled and advanced to the nominated borrower on security of a registered mortgage over specified property.

[209] I am aware that this analysis goes beyond the point reached by Owen J in Conlan. Conlan is distinguishable for a number of reasons. Firstly, there were numerous overdrawings of the trust account. Secondly, it was not in issue that the investors lost their right to trace moneys on deposit when the trust account went into overdraft (Conlan at p23). No attention was given to the position in relation to subsequent additions to the trust account. I infer that was because there were no (or no accurate) individual ledgers clearly accounting for the moneys of individual investors or borrowers within the trust account structure (Conlan at p16). According to the reasons in Conlan, the broker had so badly mismanaged its trust obligations that there was little point in even reconstructing the ledgers (Conlan at p24). It would be impossible to reliably conclude anything in relation to Grubb's intentions.

[210] It is apparent that the analysis cannot apply to unauthorised additions to a Category B Project Account. If it was intended to give effect to the Category B Project Accounts, then for the purpose of the rule relating to overdrawings it would be necessary to ignore unauthorised additions to the Project Account (that is, funds belonging to investors in other Project Accounts or to a borrower who did not authorise the use of funds) in order to ascertain whether the account was in credit as at February 1999. This is so for all categories of funds. The exercise has not been undertaken by the applicants. I infer that is because the Third Alternative solution which is favoured by the applicants, does not give specific effect to the Category B Project Accounts.

[211] The second category of funds in the Project Accounts is funds held for the payment of interest. The evidence establishes, and it is not suggested to the contrary by any party, that in relation to Category A Project Accounts Mr Herbert has correctly identified the funds as being for the payment of interest. That being the case, the interest held is for the current investors jointly in proportion to their contribution to the mortgage.

[212] The analysis in relation to the first category of funds applies equally to the other categories of funds insofar as Category A projects are concerned.

(iv) Application of the Principles

[213] I turn now to answer Questions 2(a) and (b). Tracing at law is generally only concerned with being able to trace property into the hands of a defendant. Once it is established that a person received the claimant's funds without obtaining good title thereto, the claimant has a legal remedy against that recipient. It is irrelevant what happens to the traceable product thereafter: Lipkin Gorman (a firm) v Karpnale Ltd (1991) 2 AC 548 . Thus, if the claimants could prove legal title to the moneys paid to GFG it matters not that the account into which it has been paid becomes overdrawn. However this case concerns equitable title to the relevant moneys.

[214] As is apparent from my reasons thus far, I am of the opinion that the fact an individual Project Account within the trust account at times became overdrawn has no effect, at law or in equity on the trust account maintained by GFG. At no time was the trust account itself overdrawn.

[215] As to the effect on the rights of claimants on the trust account of individual ledger accounts becoming overdrawn, the answer is as follows. The overdrawing of individual ledger accounts within the trust account is only relevant if, and to the extent the ledger accounts are given specific effect to. In such a case, the tracing rule in relation to payments made into an account which is or becomes overdrawn applies by analogy to the overdrawn ledger accounts.

[216] However, the rule only affects tracing of funds deposited when the account is or subsequently becomes overdrawn. It does not affect subsequent additions to Project Accounts to which the claimants can establish equitable title at a time when the account is and thereafter remains in credit. Based on the evidence, I have concluded that in relation to Category A projects the investors have not lost the right to trace the funds to which they have a proprietary interest. In relation to Category B Project Accounts, the investors cannot establish any claim to a credit balance as at 19 February 1999 to the extent it is or may be attributable to the receipt of unauthorised payments.

[217] Questions 2(c) and (d) concern the GMI mortgages. There are two ways of analysing this matter. The first way is to rely on the equitable doctrine of tracing moneys out of the trust account to, or to the benefit of, the borrowers who provided the mortgages (in which case overdrawing is a relevant consideration). The mortgage is the traceable product, being the exchange product for the money paid out of the trust account. Alternatively, the investors would be subrogated to GMI's rights pursuant to the mortgage: Boscawen v Bajwa (supra). If the trust ledger records are ignored for the purpose of allocating losses and the pari passu principle is generally applied then all those who suffered a loss from the trust fund would be able to trace out of the trust account into the GMI mortgages and overdrawing would not be an issue.

[218] If the trust ledger accounts are given specific effect to, then for the reasons given in answer to Question 2(a) and (b), the overdrawing of the Category A Project Accounts does not prevent funds standing to the credit of a Project Account being traced out of the trust account into the relevant GMI mortgage. However overdrawing has the potential to impact on Category B Project Accounts.

[219] The evidence does not enable a determination of the actual impact of the rule relating to overdrawings on Category B projects. Another issue also arises. Where there have been payments into a Category B account, the individual ledger account is a mixed fund to which the usual rules apply because GFG did not make appropriations within a Project Account. Accordingly, it is not clear on the evidence whether or not the investors in these Category B projects can trace their money, to the exclusion of investors from transferor Project Accounts, to the GMI mortgages. However, it is unnecessary to take these matters further because of an alternative analysis supported by the evidence.

[220] That is to rely on an express trust of the GMI mortgage, in which case tracing does not arise because the investors who have paid their money for a specific registered mortgage are claiming the original property in the hands of the trustee, GMI. This approach was applied in Canada in Eron Mortgage Corp (Trustee) v Eron Mortgage Corp 1999 ACWSJ 19321 ; 86 ACWS (3d) 263. There is no reason in principle why a mortgage cannot be the subject of a trust. A trust must relate to specific property. The property may be real or personal, tangible or intangible, legal or equitable: Ford HAJ and Lee WA, "Principles of the Law of Trusts", 3rd ed Law Back Co, Sydney, 1996, para4000. A mortgage is property (being a combination of a contractual chose in action and a security interest in the mortgaged property). The conclusion that a mortgage can be held on trust is supported by Scott AW, "The Law of Trusts", 4th ed, Little Brown & Co, Boston, 1987, Vol 1, p103 para9. It also follows that the equitable tracing device of an equitable charge or lien can apply to a mortgage if it is a traceable product. No party has suggested to the contrary.

[221] It is established by the evidence, and not disputed by any party, that GFG and thus GMI intended that GMI hold its share in the relevant mortgages on trust for investors who paid to GFG their agreed investors share of the loan, which loan was intended by all parties GFG, GMI, the investors and the borrowers to be secured by the relevant mortgage. This trust of the relevant mortgage arises by way of express declaration of trust by GMI, there being the requisite certainties of intention, subject matter and object. In these circumstances an unregistered investor has a beneficial interest in its aliquot share of GMI's mortgage. GMI's intention is reinforced by the definition of "mortgagee" in its standard form mortgage to include "any person or persons... entitled to be registered as the proprietor of this Mortgage from time to time or at any time ..."

[222] On this analysis, the investors' equitable interest in the GMI mortgage is not dependent on tracing their funds out of the trust account to the borrower to be secured by the specific mortgage. For all relevant purposes, the tracing exercise ends once it is established that the investors paid their share of the loan to GFG in accordance with the Proposal Letter. There are two consequential issues that arise. Although the evidence does not establish that the GMI declarations of trust were in writing (as is required by s34 of the Property Law Act 1969 (WA)) that does not render the trusts invalid: Adamson v Hayes (1973) 130 CLR 276 . However, enforceability is not an issue because the applicants (including GMI) accept that it was GMI's intention to hold the mortgages on trust for the relevant investors. Even if it were an issue, the general body of investors could not in good conscience deny the existence and terms of the trust.

[223] Secondly, priority issues may be thought to arise in this way. The Category B accounts into which unauthorised payments are made are mixed in the trust ledger records, there being no relevant appropriation by GFG. Payments out of that mixed account to (or for) the authorised borrower in consideration of the registered mortgage cannot in all cases be tracked. In those circumstances all persons with entitlements to the mixed Category B fund can prima facie trace to the GMI mortgage by way of equitable lien or charge. That would certainly be the case if GMI held the mortgage beneficially. However, as it holds the mortgage as bare trustee by way of express trust for the relevant investors, the right of others to trace to the GMI mortgages is lost because the investors are bona fide purchasers for value without notice.

[224] For these reasons, the overdrawing of a Project Account has no effect on the entitlement of an investor who has paid its share of the loan to GFG for its aliquot share in the registered mortgage held in the name of GMI. This result also accords with commonsense and practical justice.

[225] Accordingly, the fact that individual ledger accounts were at times overdrawn does not have any relevant effect, at law or in equity, on the interests of GMI and the relevant investors in the mortgage.

The Distribution Alternatives

[226] The First Alternative proposes the pari passu ex post facto solution. The Second, Third and Fourth Alternatives depend upon the recognition and adoption, albeit in different degrees, of the appropriations and allocations made by GFG in its trust account records.

[227] No party supported the application of Clayton's Case or the North American model to the distribution of the trust fund in this case. I agree they should not be applied for the following reasons. The purpose of these and the other possible solutions is to allocate losses from the trust fund. Two points require clarification.

[228] Firstly, the purpose of the exercise is not to allocate losses which investors may have suffered as a result of any breach by GFG or the borrower of their contractual or other in personam duties, save to the extent that the loss overlaps with losses from the trust fund. However, the entitlement to the trust fund cannot be greater than the actual loss suffered by a claimant. In this case the majority of investors have or will receive part of what they bargained for, namely a joint interest in a registered mortgage of real property. Not all groups of investors in different projects will suffer losses in proportion to their contributions to or losses from the trust fund. Some investors who can establish a loss from the trust funds may suffer no actual loss as a result of, for example, the value of the security property. Some investors will have benefited from GFG's breaches of duty. Against that factual background, the rule in Clayton's Case is demonstrably arbitrary.

[229] Secondly, the large number of authorised withdrawals from the trust fund do not represent the relevant loss. Accordingly, for the purposes of the rule in Clayton's Case and the North American model it would be necessary for the applicants to identify all unauthorised withdrawals from the trust account which had caused a relevant loss (of trust funds). To identify the task is to provide at least part of the reason why these solutions are inappropriate. The large number of claimants and transactions involved and the task of identifying relevant withdrawals creating the loss to be allocated renders the solutions impractical and very costly. This was also the case in Barlow Close (supra) at p27-28, 35.

Question 3(a) - The First Alternative

[230] The First Alternative proposes the pari passu ex post facto solution for all claimants in relation to the moneys in the trust account and GMI's assets, which is intended to include a reference to the GMI mortgages.

[231] The question does not identify or differentiate between the different categories of claimants. I understand from the submissions of those supporting this solution, that it is intended to cover the claims of all investors and borrowers in relation to current and closed transactions as well as the holders of Money Market Accounts.

[232] No indication is given of how it is proposed to determine the nature and extent of claimants' entitlements, in particular, where investors have benefited from unauthorised payments. The claimants can be categorised for analytical purposes as follows:

(a)

Money Market Account holders;

(b)

investors in Category A projects who:

(i)

have a share in a registered mortgage; or

(ii)

are the beneficiaries of the trust of a GMI mortgage;

(c)

investors in Category B projects which have not received unauthorised transfers of funds from other project accounts who:

(i)

have a registered mortgage; or

(ii)

are the beneficiaries of the trust of a GMI mortgage;

(d)

investors in Category B projects in which there is a net gain (transfers in exceed the transfers out) who:

(i)

have a share in a registered mortgage; or

(ii)

are the beneficiaries of the trust of a GMI mortgage;

(e)

investors in Category B projects in which there is a net loss (transfers out exceed transfers in) who:

(i)

have shares in a registered mortgage; or

(ii)

are the beneficiaries of the trust of a GMI mortgage;

(f)

miscellaneous others such as borrowers, in relation to current transactions and investors and borrowers in relation to closed transactions.

[233] The losses from the trust fund arise from inter alia:

(a)

recorded unauthorised transfers between Project Accounts which have benefited one or more of:

(i)

the investors in the transferee project (as a result of the payment of interest or the use of funds which increase the value of the security property);

(ii)

the borrower and/or GFG by the use of transferred funds to pay moneys owing by the borrower to GFG;

(b)

the overdrawing of the Project Accounts as at 19 February 1999 (which also benefited one or more of the investors, borrowers and/or GFG).

(c)

unauthorised transfers from Category B Project Accounts to third parties or Category B borrowers personally (and not paid to or for the benefit of any other project).

[234] The evidence also establishes that even in relation to unauthorised transfers to Project Accounts, there is no necessary correlation between the amount transferred and the actual benefit received by investors in the transferee project.

[235] Further, as noted previously, the extent of the loss of trust funds has no necessary correlation with the extent of the financial loss (actual or potential) suffered by investors in different projects.

[236] In addition, investors with registered mortgages are protected to a very significant extent from claims against the security property by those who eventually carry the trust fund losses (even if that loss benefits the registered mortgagee) because of the doctrine of indefeasibility. Further, I am of the opinion that those who carry trust fund losses cannot trace that loss into the GMI mortgages which are held in trust for relevant investors because the investors are bona fide purchasers for value without notice. As stated earlier, that is a defence to a tracing claim.

[237] The pari passu solution is to be judged in that factual context. I accept that, prima facie, innocent beneficiaries should be treated equally inter se. Lord Millett put it in these terms in Foskett v McKeown (supra) at 1327:

"As against the wrongdoer and his successors, the beneficiary is entitled to locate his contribution in any part of the mixture and to subordinate their claims to share in the mixture until his own contribution has been satisfied. This has the effect of giving the beneficiary a lien for his contribution if the mixture is deficient.

Innocent contributors, however, must be treated equally inter se. Where the beneficiary's claim is in competition with the claims of other innocent contributors, there is no basis upon which any of the claims can be subordinated to any of the others. Where the fund is deficient, the beneficiary is not entitled to enforce a lien for his contributions; all must share rateably in the fund.

The primary rule in regard to a mixed fund, therefore, is that gains and losses are borne by the contributors rateably."

[238] The pari passu principle has been applied in a number of recent cases. In Windsor Mortgage Nominees Pty Ltd v Cardwell (supra) a company was formed to solicit and obtain money from members of the public to be lent by it on first mortgage security over freehold properties. A nominee company was formed to lend the money as trustee for the investors who provided the money. What was supposed to happen was that the nominee company was to execute a deed of trust in respect of a specified mortgage and the amount the investor contributed to the total loan secured by the mortgage. However the procedure was not followed. Not all money was invested in the first mortgage security. In many cases the moneys of more investors were purported to be allocated to particular loans than the principal advanced. In many cases the moneys of less investors were allocated than was required for the advance. In only three out of forty three mortgage transactions did the amount of the investors' funds allocated correspond with the sum lent. An investors' fund was often split and allocated to more than one loan.

[239] The evidence was that the receiver had found it impossible to trace the particular funds of any one investor into any one investment and as a result it was impossible to identify the funds of any particular investor with any particular security. The Court concluded that there was no proper and genuine system of appropriating investors' funds to particular investments and that it was impracticable to attempt the task of trying to trace particular investors' funds into particular investments. The declarations of trust that were given to investors bore no relationship to the reality of the situations. In those circumstances the Court ordered that there was no justification in law or equity for giving effect to some of the declarations of trust. It was accepted that the proper course was to deal with the assets as a common pool and distribute them pari passu among all the investors.

[240] A similar state of affairs occurred in Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334 . The scheme was similar to that in Windsor Mortgage Nominees in that the lender's nominee company held the relevant mortgages on trust for the investors. There was one bank account and the companies treated it as if the moneys were owned beneficially by them. Although separate accounts were kept with respect to each investor, the entries in the accounts bore no relationship to the true position. The liquidator was unable to reconcile particular mortgages with funds provided by particular investors. The Court said (at 360):

"The declarations of trust were fortuitous. In some cases, the amount said to be secured was greater than the amount named in the declaration. In some cases, no mortgage can be discovered. In some cases, mortgages were discharged but no repayments of the moneys lent were made by the mortgagor. In some cases, the declarations of trust were made in favour of investors who had not paid their money to MAM ... the payment of interest to investors bore no relationship to interest payments made by the borrowers. In many cases, upon repayment of principal moneys, those moneys were reinvested without the authority of the person named as mortgagee. In summary, it is clear that because of the mixture of funds in the 'trust account' and the lack of proper accounting methods which do not reveal the true position, there was no proper or genuine system of appropriating investors' funds to particular mortgages. As a result, it is impossible to trace funds into particular investments and to separate or apportion the moneys paid by individual investors."

[241] The Court held that all available moneys held by the liquidator and all the amounts from the realisation of the mortgage investments should be distributed between all investors in proportion to their respective claims.

[242] The fairness and equity of treating all claimants the same in allocating the loss is more obvious where all relevant property is available for distribution as in Windsor Mortgage, Melbourne Asset Management, Barlow Close International (supra), Re Eastern Capital Futures Ltd (in Liq) (1989) BCLC 371 and Re Registered Securities Ltd (supra). It is not so compelling where the trust fund losses cannot be traced out of the trust account into the mortgages.

[243] Indeed, I am satisfied that the pari passu solution is inappropriate in this case for the following reasons. Firstly, the solution fails to have due regard to the different categories of and grounds for claimants proprietary interests in the funds held in trust. Secondly, it focuses on the trust fund without reference to the larger picture which has a significant impact on the magnitude and allocation of the loss. Thirdly, the trust ledger records provide a reliable factual foundation on which to mould relief which is appropriate in the circumstances.

[244] For these reasons I answer Question 3(a) in the negative. Accordingly, it is unnecessary for me to decide whether in this case the lowest intermediate balance rule should apply in combination with the pari passu solution.

Question 3(b) - The Second Alternative

[245] The Second Alternative is in two parts. The first relates to the moneys in the trust account. The second relates to the GMI mortgages and proposes what I have previously stated should occur.

[246] The proposal in relation to the moneys in the trust account is that the balance as recorded in the trust ledger accounts is to be distributed to those claimants whose names are recorded as the investors. This aspect of the Second Alternative is inappropriate in relation to Project Accounts because it fails to allow for the legitimate claims of non-investors or address the wrongful allocation of trust funds between Project Accounts within borrower groups.

Question 3(c) - The Third Alternative

[247] The Third Alternative is multifaceted and inter-related with the result that in many cases the answers to the sub-questions are interdependent.

[248] I leave to one side the question of the payment of the first applicants' fees and costs. I deal with that matter when addressing Question 5. The essence of the scheme embodied in the Third Alternative is that:

(a)

all overdrawn Project Accounts be credited with sufficient funds from the GFG Credit Accounts to reduce the overdrawn accounts to a nil balance;

(b)

losses arising from unauthorised transfers between projects within a borrower group be borne by the investors involved in those projects;

(c)

the moneys standing to the credit of investors in the Money Market Accounts be paid to those investors;

(d)

the moneys standing to the credit of Project Accounts in Category A be paid to:

(i)

investors to that project in the event the loans are in default;

(ii)

otherwise, to the borrower.

[249] As stated earlier, the trust records are reliable. Accordingly, they can be used to identify the cause and extent of the trust fund loss and the projects which received a net benefit from unauthorised payments. Further, for the reasons already given, I have concluded that it is open to the Court to rely on the trust ledger records as a general basis for allocating losses. In my opinion it is just and equitable to do so in this case for essentially the same reasons which justify the rejection of the pari passu solution. In particular:

(a)

the trust fund losses as at 19 February 1999, were to the benefit of particular investors and to the detriment of other investors;

(b)

the extent of the loss of trust funds has no necessary correlation with the extent of the financial loss (actual or potential) suffered by investors in different projects;

(c)

the investors/mortgagees are substantially protected from equitable claims to the security property (or its proceeds) by the doctrine of indefeasibility and bona fide purchaser for value without notice.

(d)

accordingly, it is appropriate to differentiate between claimants and the trust records facilitate that outcome.

[250] I turn now to the detail of the proposed Third Alternative starting with how it is proposed that the losses be allocated. Dealing firstly with the losses arising from the overdrawn Project Accounts. The Third Alternative proposes that the funds in the GFG Credit Accounts be used to reduce the overdrawn Project Accounts to a nil balance. Although it may be proper accounting treatment to approach the matter in this way, the reality of the proposal is that the GFG funds are to be used to replenish the shortfall in the trust account as a result of the overdrawings. In the absence of GFG funds being made available in this way, the losses from the overdrawing will have to be allocated amongst some or all of the claimant/beneficiaries to the trust fund.

[251] I accept that a court should not be too ready to infer or attribute to a defaulting trustee any intention to use its funds to restore property to the affected beneficiaries of a trust. However, the evidence of GFG's intentions over a long period strongly support a finding of such an intention. Accordingly, in the absence of any valid competing claim to the moneys in the GFG Credit Accounts, those moneys should be applied in accordance with GFG's proven intention, which is that the funds be used to cover the overdrawn balances or in effect replenish the trust fund.

[252] Other potential claimants to moneys standing to GFG's credit in the trust ledger records are persons who may have proprietary claims to these funds because of an arguable breach by GFG of its duties in relation to, inter alia, the deduction of fees and treatment of late payment penalties.

[253] Mr Herbert's evidence is that it was GFG's policy to charge brokerage fees at the commencement of a loan regardless of whether all funds were raised at the time. This usually occurred in relation to construction loans when not all funds were required at settlement. As at 19 February 1999 there were six projects in which brokerage fees had been charged to Project Accounts on the basis of the total amount of the loan, which in fact had not been raised. Following the appointment of the voluntary administrators on 19 February 1999, GFG was no longer able to raise these additional funds. Mr Herbert calculates the overpayment of brokerage fees to be $84,800 and recommends that the brokerage charges be reversed from the GFG Credit Account. I agree with this recommendation. This reduces the account from $283,506.28 as at 19 February 1999 to $198,706.28. The reduced figure still exceeds the amount required to recover the overdrawn balances in the Project Accounts as at 19 February 1999.

[254] Notwithstanding widespread notification of this action, no other claims of this nature have been made or identified. Further, the cost of the applicants conducting investigations to determine where the GFG had at any time breached its duties in other respects which may (or may not) give rise to a proprietary claim to funds in the GFG Credit Accounts would be prohibitive and unreasonable in the circumstances. Indeed it is highly unlikely that investors or borrowers involved in transactions which have been closed would be able to prove a traceable claim. I see no reason to provide for potential claimants in relation to closed transactions.

[255] For these reasons and in all the circumstances, the appropriate course is to direct that GFG's intentions be implemented and that the moneys standing to its credit in the trust ledger records (less the unearned brokerage) be made available to cover losses occasioned by the existence of overdrawn accounts as at 19 February 1999. If investors and borrowers in relation to current transactions can within a reasonable timeframe (on which I will hear the parties) demonstrate a proprietary claim to funds in the GFG Credit Accounts then they should share pro rata in the surplus of the funds in the GFG Credit Accounts. Any unclaimed moneys can be added to the pool for Category B Projects.

[256] The allocation of losses arising from the unauthorised transfer of funds between and from Projects in borrower groups raises different issues. Mr Herbert recommends that the balances in the Money Market Accounts and the Category A Project Accounts be distributed to the relevant investors or borrowers and that the Category B investors (and borrowers) should bear the loss arising from the unauthorised transfer of funds from within borrower groups.

[257] Subject to the detail of the proposal in relation to Category A Projects, I agree with this recommendation. For the reasons already given, it is appropriate to differentiate between categories of claimants. The trust ledger records accurately identify the projects which have benefited from the unauthorised conduct, all of which are in Category B, and appropriate the loss to projects within Category B. Based on the trust ledger records, the relevant mixing of funds only occurred within Category B projects. The appropriation of the loss by GFG within the Category B groups was intentional. Indeed, in some cases money which might in other circumstances be regarded as prima facie belonging to a Category B borrower was applied to the benefit of Category B project investors to "compensate" for unauthorised withdrawals. Further, the investors in Category B who have suffered a net loss are secured for that loss pursuant to a registered (or soon to be registered) mortgage as well as from the trust fund. Not so the other categories of claimants who would have to rely on tracing to mortgages provided by the Category B borrowers. I see no reason in equity or fairness why these losses should be borne pro rata by all claimants to the funds in the trust account.

[258] The next question is how the losses between investors in Category B projects should be allocated. Two proposals have been advanced. The first, contained in the Third Alternative is as follows:

(a)

the balances in all the Project Accounts in the relevant borrower group be pooled;

(b)

the entitlement of investors in each project in the pool should be calculated on the basis of the proposed formula which is designed to adjust the balance on each Project Account for, inter alia, the unauthorised transfer of credit balances both into and from a project account;

(c)

the net effect of the adjustments will be, so far as it is possible to do so with the moneys in the trust account, to adjust individual investors entitlements for the effects of unauthorised transfers made by GFG both for their benefit and to their detriment. This is achieved by calculating the balance that should have been recorded on their Project Account but for the unauthorised transfers, and allocating the funds available in the borrower group pooled to the investors on a pro rata basis based on those adjusted balances.

[259] In essence the formula set out in Question 3(c)(iii) ("Formula") provides for each borrower group to be treated as one account which eliminates the mixing of moneys within Category B Project Accounts. Under the Formula, an investor in a Project Account from which unauthorised payments were made to other Project Accounts has a larger claim against the pool funds than, but for the Formula, would be the case as the unauthorised payments are excluded from P. On the other hand, an investor in a Project Account which received unauthorised payments from other Project Accounts that were used to pay interest to investors or meet legitimate project payments would have a reduced claim against the pool funds as these amounts would be included in i1 or P. The Formula was circulated to all investors and GFG's committee of inspection and has received wide support.

[260] Mr Herbert also recommends that if the third alternative is adopted he be directed to retain all certificates of title to the Category B security property to enable him to recover surpluses arising from the sale of those properties which surpluses would be added to the pool for Category B Projects and distributed to the investors in accordance with the formula. That course is desirable. I address its legal appropriateness when addressing Question 3.

[261] The other proposed solution is contained in the Fourth Alternative referred to in Question 3(d). It is proposed in effect that all unauthorised transfers affecting Project Accounts (credits and debits) be reversed and any negative trust balances be made up firstly from the borrowers Money Market Accounts (if any) and secondly from the GFG Credit Accounts. On its face, the proposal extends to all unauthorised transfers not just transfers recorded in the ledger records which were made between Project Accounts in borrower groups. It is Mr Herbert's evidence, which I accept, that significant time, cost and expense would be involved in implementing the Fourth Alternative according to its terms.

[262] However, it appears from the submissions advanced on behalf of the investors supporting the Fourth Alternative that it is intended to apply only to recorded unauthorised transfers between Project Accounts within borrower groups in Category B Projects. The applicants prepared a table (Ex 27) illustrating how the Fourth Alternative would work insofar as it affects the Casella group. A revised trust balance is shown which is calculated by adding the amount of transfers out of the Project Account to the actual trust balance shown in the Project Account as at 19 February 1999 and deducts the amount of transfers into the Project Account. The revised trust balance for the Casella group on that basis is $661,356 (dr). However, the total of the funds actually available in the relevant Project Accounts is only $409,377. The proponents of the Fourth Alternative do not explain what is meant by the "negative trust balances" in Question 3(d)(iv). I understand it to refer to the difference between the revised trust balance (being the moneys that should be in the account) less the actual trust balance (shown in the Project Accounts).

[263] The Fourth Alternative focuses on the net movements out of the Project Account in calculating and allocating the trust account loss for each Project Account without regard to the extent of investors' claims. For example, it has no regard to the use to which unauthorised payments were put. As stated previously, not all unauthorised payments were for the benefit of investors. Further, it has no regard to the use of borrower funds as well as the funds transferred from other Project Accounts in meeting the requirements of a particular project from time to time. It also wrongly assumes that the Category B Project Accounts could or should be given effect to without regard to the effect on tracing of the rule relating to overdrawings. Finally, it does not incorporate a proposal for allocating the loss between projects. It is apparent that the difference between the total of the maximum claim in the revised trust balances and the actual amount in the Project Accounts cannot be fully funded from the proposed sources.

[264] In my assessment, the calculation of the net claim as reflected in the formula in the Third Alternative is a fairer and more complete solution to the allocation of trust account losses than the Fourth Alternative. Accordingly, the formula in the Third Alternative should apply.

[265] I turn now to the detail of para(c)(ii) of the Third Alternative. Investors must establish that they have a proprietary basis for the claim to the funds standing to the credit of the Category A Project Accounts. In determining whether the moneys in a Category A Project Account should go to the investors or borrowers, it is necessary to examine the source and nature of the funds. Moneys in the first category of funds (because the default mechanism in the Works clause of the mortgage has been activated) and the second and third categories can be distributed to relevant investors. Initially there was insufficient information before the Court to conclude that the investors have a proprietary claim to funds in the fourth and fifth categories. It emerged from Mr Herbert's March 2002 affidavit that there is only one Category A project in the fourth category and the moneys in that account are held in trust for the investors. In relation to the fifth category of funds, the moneys in the Project Accounts for Projects 1049 and 1237 are held in trust for the investors. The money in the balance of projects in the small balances category is held in trust for the borrowers.

[266] I deal with the sixth category of funds when dealing with questions 3(c)(v) and (vi).

[267] In summary, the answer to the questions considered thus far are:

3(c)(i)

- Yes

3(c)(ii)

- A qualified yes

3(c)(iii)

- Yes

3(c)(iv)

- Yes

Question 3(c)(v) - GMI Mortgages

[268] For the reasons already given, GMI's interest in 18 of the 21 mortgages referred to earlier is held on trust for the investors who, according to the books and records of GFG, provided funding for the particular project pursuant to the agreement in the relevant Proposal Letter. However, this question is whether the mortgage should be transferred to the investors (no doubt to enable registration of the mortgage). That is a distinct issue. I first deal with the facts relating to three projects in which this issue arises.

[269] Project 1288 is a Category A project in which a number of investors did not receive a transfer of mortgage from GMI. The borrower was Riverland Heights Pty Ltd. There are 39 investors in the Riverland Heights Project, 10 of which are registered. All investors in this project supported the claim of the unregistered investors for the transfer of GMI's interest in the relevant mortgages to those investors. There were no unauthorised transfers into or out of this Project Account.

[270] The project was for an 81 lot sub-division which is partially completed. The Proposal Letter to investors stipulated that the purpose of the loan was for the acquisition and development of 175 acres of land, zoned and approved for sub-division. The Riverland Heights mortgage was registered on 11 February 1998 in the name of GMI. GMI as registered mortgagee transferred a number of shares in the mortgage to some but not all of the investors who had funded the project.

[271] The mortgage contains the standard Works covenant (in this case referable to the sub-division). The borrower has made no effort since 19 February 1999 to contribute to the completion of the project and has made no interest payment to the investors. As at 15 August 2001 the project was still not completed and development costs have exceeded the provision in the mortgage. The amount standing to the credit of the project account is $80,000 which is from the sale of a number of properties comprising the sub-division.

[272] Project 1290 relates to an advance of $30,000 to the borrowers, M W and S A McCaw. At the hearing Mrs Horn made submissions in relation to project 1290 which has some different features. GFG's records show that GFG advanced a loan of $30,000 to the borrowers on 18 December 1997. The net advance to the borrowers occurred by way of a transfer by journal entry from one of GFG's Credit Accounts to Project Account 1290 on 18 December 1997.

[273] By Proposal Letter dated 23 December 1987 from GFG to Mrs Horn, GFG offered Mrs Horn a second registered mortgage investment of $30,000, which was in effect to take out GFG's loan. Mrs Horn accepted the offer and paid to GFG on 23 December 1997 the sum of $30,000 which was shown in Project Account 1290. On the same day, there was a transfer by journal entry of $30,000 back to GFG's Credit Account. As at the date of appointment of the administrators to GFG, the second mortgage had not been registered. However, a mortgage in favour of GMI or GFG (the evidence is unclear on this point) had been prepared. I will assume that GMI is the registered mortgagee. Nothing turns on this point. Mr Herbert registered the mortgage believing that it would not detrimentally affect Mrs Horn's interest.

[274] It appears that the borrowers continued to make monthly interest payments direct to Mrs Horn. The security property has been sold and Mr Herbert has retained all funds from the settlement on the grounds that GMI was the registered mortgagee on the title. Mrs Horn seeks the return of the moneys held by Mr Herbert on trust. Project 1290 is in Category A. The Project Account did not at any stage go into overdraft. There was only one investor who contributed moneys to the project. Whether by way of tracing the funds out of the Project Account in reliance on the trust ledgers or by virtue of the creation of an express trust, I find that the second mortgage is held on trust for Mrs Horn.

[275] The third project is 1238. Mr Ryder made submissions in relation to this project in which the borrower is Selec Pty Ltd (a Casella Group company). As stated earlier, this is a Category B project which received unauthorised transfers into the account. Mr Ryder as trustee of the Ryder Superannuation Fund contributed loan funds but was not registered as transferee of a GMI mortgage. Mr Ryder supported the submissions presented on behalf of Project 1288 (Riverland Heights) and supported the proposal that GMI's interest in mortgages be transferred to the investors who according to the books and records provided funding for the particular project.

[276] I turn now to the question of whether the GMI mortgages should be transferred to the relevant investors (so that they can be registered). In my opinion that course would not be appropriate if it would prejudice claimants with other (unregistered) interests in the GMI mortgages. If the investors' claims to the GMI mortgages were entirely dependent on the right to trace then the answer would depend on whether and to what extent the trust ledger records are given specific effect to. If the trust ledger records are ignored and the trust fund loss was allocated to all claimants, then all claimants could trace into the GMI mortgages. If the appropriations in the trust account records are recognised and govern, then the investors in Category A Project Accounts can track their payments to the GMI mortgage. Not so the investors in Category B Project Accounts where unauthorised payments were received. Those Project Accounts are mixed and specific tracking out is not possible in all cases because no appropriations were made.

[277] However, the GMI mortgage investor claims are not solely dependent on tracing. I have found that GMI held the mortgages on an express trust for the relevant investors who are bona fide purchasers for value without notice of the claims of other trust account beneficiaries. Accordingly, the right to trace is lost against the GMI mortgage investors. That being so, I see no prejudice to other claimants whose rights against the GMI mortgages depend on tracing out of the trust fund. For these reasons Question 3(c)(v) is answered in the affirmative.

Question 3(c)(vi) - Funds From the Sale of Security Properties

[278] The facts are not in dispute. A number of mortgaged properties have been sold since the appointment of the voluntary administrators in February 1999. In a number of projects where inward transfers of funds from other Project Accounts occurred, Mr Herbert withheld from settlement and placed on trust the amount of the unauthorised inward transfers pending the court's directions as to how the problems arising from the mixing of moneys in the trust account should be resolved.

[279] The approach taken by Mr Herbert was that the amount of inward transfers was firstly deducted from any surplus sale proceeds and, if these were insufficient, then from the mortgagees' entitlements. In the case of multiple projects combined in one ledger, a pro rata portion of the unauthorised inward transfers was withheld from the settlement proceeds of each separate property included in the Project Account and placed on trust.

[280] To 30 June 2000, a total of $694,495 had been withheld. The intention of Mr Herbert was to protect the claims of investors in Category B Project Accounts in the event that the transfer of funds to relevant Project Accounts may give rise to a subrogated claim under the mortgage by investors from whose accounts the balances were transferred.

[281] It is appropriate to consider this question in the context of an example. Mr Reichhold appeared and made submissions (with leave) for Amlyn Pty Ltd as trustee for the Reichhold Superannuation Fund, in relation to Project 1170 in which the borrower was Enterprise Corp Pty Ltd. Funds from Project 1212 in which the borrower was Haskin Pty Ltd were transferred to Project 1170. Enterprise and Haskin comprised the Johnson Group.

[282] Mr Reichhold on behalf of Amlyn sought the release of moneys withheld by Mr Herbert from the registered mortgagees arising from the sale of the security property. The amount held has fluctuated but as at the date of the hearing was $98,952.75.

[283] The relevant details concerning Project 1170 are set out in an affidavit from Mr Herbert sworn in June 2001 (Ex 8). The facts are complex and it is unnecessary to detail them here for the purposes of answering the question. Suffice to say that as a result of a proposed subdivision of a supermarket located in the Westminster Plaza Shopping Centre, there eventuated a joint ledger card for Projects 1167, 1169, 1170 and 1171, which Projects were in relation to certificates of title that issued following the strata titling process.

[284] The funds transferred from the Project Account in the name of Haskin totalled $148,742.90. The money was used for the benefit of the Enterprise Projects and consisted of payment of interest to the mortgagees of Lots 11, 12, 15 and 16 and transfers to GFG's late payment charges ledger and brokerage ledger. Project 1170 related to Lot 16.

[285] The uncontradicted evidence is that the investors had no knowledge of the unauthorised transfers of funds between Project Accounts in Category B. Mr Reichhold confirmed that to be the case for Amlyn.

[286] The question is whether investors whose money was wrongfully transferred to other Projects have a proprietary claim or remedy in relation to the proceeds of sale of the security property. Mr Herbert recommends that, save for any surplus funds recovered from the relevant borrowers, all funds be returned to the registered mortgagees. None of the parties to the action who were represented at the hearing opposed Mr Herbert's recommendation that the funds be returned to the registered mortgagees. All parties were content to accept that the registered mortgagees had indefeasible title to the mortgage and that the limited exceptions to the indefeasibility principle had no application on the facts in this case. That is consistent with the reasons and analysis of Owen J in Conlan (at para158 - para200) with which I respectfully agree.

[287] However, that doctrine does not foreclose an in personam claim to surpluses based on, inter alia, subrogation or restitution for which a proprietary remedy may in particular circumstances be available. These matters were not addressed in any detail by any of the parties but in fact provide a basis for a claim to the surpluses arising from the sale of the security property.

[288] Mr Herbert recommends that any surpluses arising from the sale of the security properties in relation to Category B projects be added to the pool for investors in Category B projects (ie those who carry the loss under the Third Alternative). Although not elaborated on by the applicants or any other party, I understand the reference to "surpluses" to be the net sale proceeds for the security property less the amount due and owing to the registered mortgagees determined by reference to the funds actually advanced by the holders of the registered security, rather than by reference to the total amounts received by or to the benefit of the borrower which would include unauthorised receipts to the relevant project.

[289] Thus, the surplus potentially falls into two categories. Firstly, the amount being the difference between the amount received by or for the benefit of the borrower which is secured by the mortgage and the amount to which the mortgagees are entitled (having regard to the amount they advanced). In those circumstances, the surplus would arise from funds of other Category B investors. Those investors who have borne the loss could trace to that mortgage (and thus to the proceeds of sale) in respect of that surplus. Secondly, the surplus could also be the difference between the net sale price and the total amount secured by the mortgage. Casella Project 1255 appears to fall in this category. Prima facie that surplus belongs to the borrower. However, to the extent that a borrower had knowledge of or was a party to GFG's wrongful conduct (as principal or to the extent GFG was acting as the agent of the borrower) the persons who suffered a loss from the trust fund would have a propriety remedy to these funds under the principle in Barnes v Addy (1874) 9 LR Ch App 244 at 251-2. I am not satisfied on the evidence that GFG was acting as the borrowers agent in disbursing the trust funds. I make no determination on that matter. However, I am satisfied on the basis of Mr Margaria's statements (Ex 4, Annex JLH2) that GFG acted with the knowledge of a number of the Category B borrowers (Casella, Sadek, King and Johnson) in relation to the recorded transfers of funds used for unauthorised purposes. Accordingly, I agree with Mr Herbert's recommendation relating to the use of the surplus from the sale of Category B Project Account mortgages (save for the Hillsfield and Olympic groups in relation to the second type of surplus). Based on the principle in Barnes v Addy whether relying on the knowing receipt or knowing assistance limb, these funds, which include the funds in Project 1255 should be added to the pool for the relevant Category B borrowers. However, the surpluses should not be returned to the mortgagees of the Projects from which funds were wrongfully obtained except to the extent of their proven shortfall (loss) from the trust fund.

[290] Whilst on the subject of surpluses I propose to deal with Casella Projects 1063 and 1345-72. It is appropriate that moneys standing to the credit of each of the Project Accounts be paid into the Casella pool. Although all of the investors to Project 1063 have been paid in full, moneys had been transferred in from other Project Accounts. The money in Projects 1345-72 is part of the proceeds or sale of an unencumbered unit. The evidence establishes that GFG, on Casella's instructions, applied funds belonging to the Casella group to meet the shortfall on other Project Accounts caused by the use of trust funds for unauthorised purposes. This was an integral part of the GFG/Casella approach to the funds in the Casella related Project Accounts as a whole. I am satisfied that it was intended by Casella that the funds be for the account and benefit of the investors, that is, to replenish the trust fund.

[291] Accordingly, subject to the stated qualifications the answer to Question 3(c)(vi) is in the affirmative.

Question 3(c)(ix) - Reversal of Journal Entry

[292] Mr Herbert proposes that a journal entry dated 14 August 1998 for $142,821.99 in the accounts of Australian Equities Corp Pty Ltd ("AEC") Account Nos 1337 - 41 and Garon Pty Ltd Account Nos 1345 - 65 and 1367 - 72 be reversed and substituted with a journal entry dated 14 August 1998 in the amount of $99,697.15. The facts concerning this matter are set out in Mr Herbert's affidavits, being Exhibit 4 para13.4 and Exhibit 8 para6. The uncontradicted facts are that:

(a)

AEC purchased properties from Garon which involved the exchange of various properties plus the payment of cash;

(b)

the contemporaneous documents from the settlement agent handling the purchase indicated that an amount of $142,821.99 was payable to the vendor, Garon, and the amount was to be paid in two payments, $43,124.84 payable to Garon and $99,697.15 payable for GFG;

(c)

AEC's ledger card reveals that on 14 August 1998 a cheque was drawn in favour of Garon for $43,124.84 and then a journal was processed debiting AEC's account and crediting Garon's account with an amount of $142,821.99. However the journal entry should have been $99,697.15. Accordingly Garon was overpaid by $43,124.80;

(d)

a trace of the $43,124.84 cheque payable to Garon showed that it was credited to Professional Settlement Services' account with the National Australia Bank Ltd;

(e)

the Trust ledger card for AEC shows a debit balance of $683.13 and the Trust ledger card for the relevant Garon account shows a credit balance of $29,583.14.

[293] The reversal of the entry on 14 August 1998 and the addition of another journal entry dated 14 August 1998 in the amount of $99,697.15 would give rise to a debit balance of $13,541.70 in the Garon ledger. It is proposed that the debit balance be treated in the same manner as other overdrawn trust ledgers. Mr Herbert's proposal's are appropriate in the circumstances. Accordingly, the answer to Question 3(c)(ix) is in the affirmative.

Question 3(c)(x) - Mr Margaria's Related Entities

[294] The uncontradicted evidence is that:

(a)

the shares in Walbrook Investments Pty Ltd ("Walbrook") were at the material times held by GFG (one share), Mr John Margaria (one share) and Alpha Super Co Pty Ltd ("Alpha") (198 shares). Mr Margaria is the sole director of Walbrook;

(b)

the shares in Alpha are held by Mr Margaria (one share) and Mrs Margaria (one share). Mr and Mrs Margaria are directors of Alpha;

(c)

Mr and Mrs Margaria also traded under the name Thirlmere Consulting and Financial Management Services ("Thirlmere"). It appears Thirlmere supplied bookkeeping services to GFG.

[295] Mr Margaria's related entities have the following investments with GFG:

(a)

Alpha has an interest of $10,000 in a registered mortgage from Garon over a unit in Spearwood;

(b)

Alpha has a Money Market Account in the GFG Trust Account with a credit balance of $174.19;

(c)

Walbrook has a Money Market Account in the GFG Trust Account with a credit balance of $32.62;

(d)

Thirlmere has a Money Market Account in the GFG Trust Account with a credit balance of $914.92.

[296] I am not satisfied on the basis of the information in the affidavits filed in this matter that I am properly able to make any determination which would justify the court ordering the forfeiture of the relevant assets. It appears there is a separate action (CIV 2106 of 2000) in which mareva orders were sought in relation to Mr Margaria's assets. In the circumstances, the appropriate course is that the investments be held in trust pending the determination of the question whether Mr Margaria's conduct has been such that the claimants on GFG's trust account have a proprietary remedy in relation to those assets.

Question 3(d) - The Fourth Alternative

[297] For the reasons given earlier, this question is answered in the negative.

Question 4 - GMI Mortgages

[298] For the reasons given earlier, Question 4(a) is to be answered in the affirmative and Question 4(b) in the negative.

Question 5 - Liquidators' Costs

[299] Mr Herbert (in Ex 4 sworn in September 2000) deposed that the administrators and liquidators fees and costs (including costs payable to their solicitors, Clayton Utz) were approximately $276,000. His initial recommendation was that the fees be recovered from a number of sources including GFG's non-trust assets as well as from trust assets.

[300] However, in a subsequent affidavit sworn on July 2001 (Ex 9), Mr Herbert advised, and it was confirmed by the applicants' counsel at the hearing, that the liquidator's fees and costs for the protection, preservation and administration of the trust account, being the costs referred to in Ex 4 had been paid by the Finance Brokers' Supervisory Board.

[301] There was no evidence concerning the costs incurred by Mr Herbert in his capacity as supervisor of GFG. I speculate that that may be as a result of the decision of Owen J in Conlan that on a proper construction of the Control Act the powers of the supervisor are limited and do not extend to sorting out a trust account and assessing competing claims on it. However, it is unclear from Mr Herbert's March affidavit whether the outstanding costs which have not yet been paid by the Boards (totalling $28,524.09) were incurred in his capacity as supervisor or liquidator. However, the question refers solely to costs incurred by the liquidators and I answer it on that basis.

[302] As to the position of the liquidators, they have an equitable lien over the trust assets (excluding of course the proceeds of sale of security property payable to the mortgagees) for costs which have been reasonably incurred in the care, preservation and realisation of the trust property: Re Universal Distributing Co Ltd (in liq) (1993) 48 CLR 171 at 174: Mark Anthony Conlan (as Liquidator of Oakleigh Acquisitions Pty Ltd) & Ors [2001] WASC 230 at para12-15. That covers the matters in para(a) - para(f) of Question 5. Accordingly, the question is answered in the affirmative.

Question 6 - Payment of Legal Advisors

[303] This action raised issues of some novelty and complexity. In the circumstances it was reasonable for those groups of investors who elected to do so to be represented by legal counsel and solicitors. The Court has the power to award costs out of the trust funds: s37 of the Supreme Court Act. Accordingly, I have concluded that the fees of counsel and instructing solicitors who appeared in this matter ought to be paid out of the funds held by GFG as trustee, firstly from any surplus in the GFG Credit accounts after the allocations referred to earlier, otherwise by a pro rata deduction from the payments made to all categories of the beneficiaries.

Question 7 - Interim Payments to Investors

[304] Mr Herbert gave evidence (Ex 5, para3-6) that between 19 February 1999 and 16 March 1999 payments totalling $556,108.14 were made to investors. Mr Herbert was ordered to provide further details of the payments and did so (Ex 6, Annex JLH15). The evidence establishes that in the period 22 February 1999 to 23 August 1999 a total of $553,935.14 was paid from the trust account. The discrepancy with the earlier figure was satisfactorily explained. The payments from the trust account are categorised as follows:

(a)

unpresented cheques processed by GFG's bankers. As stated previously, on Mr Herbert's appointment as voluntary administrator he cancelled the unpresented cheques, which were subsequently honoured by the Bank without authority;

(b)

interest payment received from borrowers. This represents interest payments made to investors (who, according to the records of GFG, advanced the funds to the relevant borrower) from funds that were receipted into the trust account from borrowers specifically to make those interest payments;

(c)

interest payments due. This represents payments that were made to investors (who, according to the records of GFG, advanced the funds to the relevant borrower) from the credit balance of the trust ledger account for the project in which they invested. In all cases, the credit balance of the respective ledger account partly represented funds held to make interest payments to the investors for the initial term of the loan;

(d)

proceeds from the discharge of registered mortgages. This represents payments made to the registered mortgagees in satisfaction of their mortgage interest. The payments were made after GFG attended settlement on behalf of the registered mortgagees and collected the discharge proceeds from the borrower.

[305] Pursuant to s437A(1) of the Corporations Act, the administrator of a company while it is under administration may carry on the company's business and manage its property and affairs and may perform any function and exercise any power that the company or any of its officers could perform or exercise if the company were not under administration. Further, when performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the company's agent: s437B of the Corporations Act.

[306] Messrs Herbert and Read were appointed liquidators of GFG on 20 April 1999. Notwithstanding the appointment, GFG remained the trustee of the assets held for the various beneficiaries, in the absence of an order under s474(2) of the Corporations Act.

[307] The unsecured creditors of GFG are not affected in any way by the payments out of the trust account. The trust funds are not available to the unsecured creditors. The question is whether the payments made by the first applicants on behalf of GFG were in breach of trust. I see no proper grounds on which to reach that conclusion in relation to the payments referred to in para(b), para(c) and para(d) above. The moneys were paid to relevant beneficiaries for authorised purposes from a single trust account permitted by law. The fact that there is a shortfall in the trust account does not itself render the making of the payments a breach of trust. However, if it could be established that the applicants were at fault, they may be held accountable for any additional loss consequently carried by the remaining beneficiaries. Fault was not in issue in these proceedings. In any event, as a result of the outcome of this action, it appears (and this is by way of obiter) that no relevant loss will be suffered by the investors.

[308] The payments in subpara(a) were made directly against Mr Herbert's instructions and he has reserved GFG's rights against the bank if any losses are suffered in relation thereto. Accordingly, the answer to Question 7 is in the negative in relation to the payments intentionally made by the applicants.

Other Matters

(i) Project 1018

[309] Mr Stevenson appeared, with leave, for Margen Pty Ltd, an investor in Project 1018/1019, a Category B Project. The borrower was Selec Pty Ltd, a member of the Casella Group.

[310] Mr Stevenson filed a written outline of submissions on behalf of Margen in the form of an unsworn affidavit. Mr Herbert deposes to the facts relating to this matter in Ex 8. It is common cause that the credit balance in the Project Account is $233,661.31 (plus accrued interest).

[311] In his submissions, Mr Stevenson says that the borrower paid $250,000 into the Project Account on 30 November 1998 for the purpose of making monthly interest payments as well as for construction funds to complete the Works.

[312] Mr Herbert deposes that the amount of $250,000 was a transfer of funds from Project 1324 where the borrower was Travilla Pty Ltd, another company in the Casella Group. The facts are as follows. During October - November 1998 GFG raised funds totalling $600,000 from various lenders against the security of a property at Calca Peninsular, Streaky Bay, South Australia which was Project 1324. The Proposal Letter to potential investors in Project 1324 stated the purpose of the facility as:

"Funds have been requested to repay into company loans, which assisted with the purchase of the security property in a trade deal where 10 commercial factory warehouse units were traded for $1,350,000 in exchange for the Streaky Bay property at $1,200,000. The transaction settled in August when the National Australia Bank was paid out and the freehold certificate of the title is now available for the re-finance, the subject of this proposal. The proceeds of which will be used to make interest payments on existing loans."

[313] Of the funds raised for Project 1324, the sum of $518,640 was transferred on 13 November 1998 to a trust ledger card marked "Casella Group Working Capital Account ("Working Account"). On the same day, $250,000 was transferred from the Working Account to Project 1018/1019 and was recorded as "Loan to Selec 1018/1019".

[314] Mr Herbert provides a summary of the trust ledger for Project 1018/1019 as follows:

[315] The Proposal Letter to investors in Project 1018 stated that a loan of $600,000 was required to finance the construction of a medical centre and security was to be a first mortgage over a proposed new strata title unit. Investors were informed by the Proposal Letter that the market value of the unit was considered to be $995,000 and that twelve months interest and the construction funds would be held in trust by GFG with funds being released on a progressive draw down basis as the work was completed and inspected by GFG. Mr Stevenson's submission is that the advance to Travilla was available to Mr Casella to do with as he wished.

[316] I agree with Mr Herbert that the appropriate characterisation on the facts is that the funds raised against the Streaky Bay property were for general interest payments of the various Casella Group loans through GFG. Further, the records show that the funds from Project 1324 were on loan to Project 1018/1019. In the circumstances, the funds in the credit of Project 1018/1019 should be pooled with all other funds in the Casella Group.

(ii) Projects 1163 and 1238 - Ryder

[317] Mr Herbert in his affidavit sworn on 12 September 2000 (Ex 4), deals with matters relating to Project 1163 concerning a dispute between a number of people, including Mrs P G Ryder, to moneys standing to the credit of a Money Market Account.

[318] On 12 December 2001 Owen J ordered in relation to the dispute that:

"Until further order the funds on trust in the accounts styled Mr and Mrs Fletcher Money Market account and Mrs Ryder Money Market Account be held on trust pending determination of competing claims by Mr and Mrs Connolly, Mr and Mrs Mellor, Mrs Pass and Mr Pilpel."

[319] On 20 March 2001 Owen J ordered, inter alia, that this matter not be determined until after the determination of the questions set out earlier in these reasons.

[320] Mr Ryder, who appeared at the hearing, filed an affidavit sworn on 11 March 2001 concerning this matter. Mr Herbert foreshadowed (in Ex 8) that he proposes to file a further affidavit in response to Mr Ryder's affidavit for the purposes of the deferred hearing. Mr Ryder was informed at the hearing that the matter would be heard and determined at a later date in accordance with Owen J's orders.

(iii) Project 1378 - Newrose Holdings Pty Ltd

[321] Project 1378 in which the borrower is Newrose Holdings is a Category B Project Account. Newrose Holdings is a part of the Sadek Group.

[322] It is submitted on behalf of the investors that Project 1378 should be placed in Category A because there has been no unauthorised transfers into the Project Account. There was a small ($5,000) unauthorised transfer out. The trust balance in Project Account 1378 as at 19 February 1999 was $102,445. It is said that the trust fund should be paid to the investors pursuant to the Second Alternative or alternatively pursuant to the Third Alternative for Category A projects.

[323] The investors relied on an affidavit sworn by Mr Brian Burton on 28 June 2001 in support of their claim. By a mortgage dated 27 August 1988 Newrose Holdings mortgaged land in a number of certificates of title to secure the principal sum of $3,750,000. The term of the mortgage was 12 months, expiring on 14 August 1999 at which time the principal became due and owing. This was not a Works mortgage. It appears Newrose Holdings defaulted on the mortgage and has failed to repay the principal sum. The investors have obtained judgment for the moneys owing under the personal covenants and an order for possession of the land. The judgment debt has not been satisfied and possession of the land was subsequently taken by the investors. The land has been valued at significantly less than the judgment debt.

[324] The Project Account establishes that there has been no transfer of moneys into the Project Account and that the funds in that account can be tracked to the investors. The rationale for grouping Newrose Holdings in the Sadek Group does not fully apply because there has been no mixing of funds belonging to other investors.

[325] Mr Herbert also reviewed all projects in Category B and identified eight projects (including Project 1378) in which there had been no unauthorised payments into the project account. Of the eight project accounts, three (including Project 1378) would benefit from reclassification to Category A, whereas the other projects would benefit from remaining classified as Category B due to large amounts of funds transferred or paid out without authority from the respective investors.

[326] In the circumstances, I see no reason why the investors in the three projects which suffered as a result of having transfers out of their Project Accounts should be prejudiced as a result of inclusion in Category B. Those investors should have the right to elect to be treated in the same way as Category A project investors. However, in other respects the projects should be treated as Category B. In particular, any surpluses on sale of the security property should be added to the pool for Category B projects.

Power to Make Orders

[327] I had some initial reservations concerning the power of the Court to give binding directions affecting all relevant parties pursuant to s89 and s92 of the Trustees Act. The reservations stemmed from concern as to whether the applicants' recommendations effected a variation to any of the relevant trusts. After due consideration, I have concluded that they do not. I am faced with the task of deciding how to allocate losses arising out of a trust fund in which there is a shortfall. That process does not result in a variation to beneficiaries' rights. No party represented at the hearing submitted that the Court did not have the power to make the directions.