Doneley v Doneley [1997] QSC 138 [1998] 1 Qd R 602

IN THE SUPREME COURT OF QUEENSLAND No. 2285 of 1985 Brisbane Before Justice de Jersey [Doneley & Anor v. Doneley & Ors] BETWEEN: AND: SEAN GEORGE DONELEY First Plaintiff MATTHEW JUSTIN DONELEY Second Plaintiff JOHN JUSTIN DONELEY in his capacity as executor of the Estate of ANNE THERESE DONELEY JOHN JUSTIN DONELEY NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) ANTHONY MICHAEL CONNELLAN MARGARET ELSIE CONNELLAN JUDGMENT - de JERSEY J First Defendant Second Defendant Third Defendant Fourth Defendant Fifth Defendant Judgment delivered 30 July 1997 CATCHWORDS: Long term lease at nominal rental over trust land - bills of sale over equipment purchased with trust moneys - mortgages over trust land - whether trustee in breach - whether Bank as security holder liable under first limb of Barnes v. Addy. Counsel: Mr A.J. Morris Q.C. with him Mr D. Atkinson for the plaintiffs Second defendant in person Mr G.J. Gibson QC, with him Mr G.H. Brandis for the third defendant Mr R.G. Bain QC, with him Ms G.E. Spender for the fourth and i'1""cm ent i~ to b .... d'f . h "1"':"",.'1':...' ..;), B CC/ple 01 t, e purpose 0'1 research and private study It rlot to be resold or uS(:jd for repubiication in a.ny other wav without• • J PHiTnlGSion. -- 1 of 24 -- , , Solicitors Hearing Dates: Clewett Corser & Drummond for the plaintiffs Flower & Hart for the third defendant P. McNally for the fourth and fifth defendants. 30 June 1997 - 11 July 1997 -- 2 of 24 -- IN THE SUPREME COURT OF OUEENSLAND No. 2285 of 1985 Brisbane Before Justice de Jersey [Doneley & Anor v. Doneley & Ors] BETWEEN: SEAN GEORGE DONELEY First Plaintiff MATTHEW JUSTIN DONELEY Second Plaintiff AND: JOHN JUSTIN DONELEY in his capacity as executor of the Estate of ANNE THERESE DONELEY JOHN JUSTIN DONELEY NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) ANTHONY MICHAEL CONNELLAN MARGARET ELSIE CONNELLAN JUDGMENT - de JERSEY J Judgment delivered 30 July 1997 The case raises three main issues. Put broadly, they are: First Defendant Second Defendant Third Defendant Fourth Defendant Fifth Defendant 1. whether the trustee of land breached the trust by granting the parents of the beneficiaries a long term lease at a nominal rental; 2. whether the mother, having become trustee, herself later breached the trust by making the trust lands available as security for repayment of moneys owed by the -- 3 of 24 -- " 2 parents to the Bank; and 3. whether the Bank holds its interest under the securities on a constructive trust for the beneficiaries. I have found that although well motivated, the original trustee and later the mother did commit those breaches of trust, and that the Bank does now hold its interest under the securities on trust for her sons as beneficiaries. The plaintiffs are the sons of John Justin Doneley, the second defendant, and his deceased wife Anne Therese Doneley. Sean was born on 3 July 1975 and Matthew on 10 January 1997. Mr and Mrs Connell an , the fourth and fifth defendants, are their uncle and aunt. The plaintiffs' claims against the fourth and fifth defendants were compromised in the course of the trial. The plaintiffs are the beneficiaries of a trust over portions 1 and 14 in the County of Cogoon, Parish of Wagoo. Those portions contain 1,800 acres (approximately) of freehold land on the Balonne River near St George. The original trustee, Connell an Nominees Pty Ltd, purchased portions 1 and 14 in November 1984 for $76,800, and held the land on trust for the plaintiffs ("the boys") until the younger of them should attain 25 years of age (Ex. 8). That will occur in the ordinary course in 2002. In October 1984, Mr and Mrs Doneley had purchased a leasehold interest in portion 9. Portion 9 is adjacent to portions 1 and 14. Portion 9 contains approximately 10,000 acres. The Doneleys paid $440,000 for portion 9, which is called "Beardie". On about 21 January 1985 Connellan Nominees Pty Ltd leased the trust land - portions 1 and 14 - to Mr and Mrs Doneley (as from 7 November 1984 - Ex.9). The term of that lease is 50 years, and the rental is $1 per year. The lease was registered on 9 July 1985. The boys claim that the grant of that lease by their trustee was "manifestly improvident and contrary to (their) interests", and therefore a breach of trust. I may at -- 4 of 24 -- 3 once express my views on that claim. Connell an Nominees Pty Ltd had power to lease the trust land. It was nevertheless obliged to consider the prudence of doing so in the interests of the boys as beneficiaries: Fouche v. The Superannuation Fund Board (1952) 88 CLR 609, 641. A number of considerations combine to warrant the conclusion that the trustee breached the trust by granting this lease to Mr and Mrs Doneley. First, the 50 year term of the lease would not expire until the boys reached 57 and 59 years of age, whereas the trust was to mature upon the younger reaching 25. This feature at once renders the lease extremely vulnerable: Attorney-General v. Owen (1805) 10 Yes Jun 555, 559-60. Second, the nominal rent of $1 per year was obviously grossly inadequate. The valuer Mr Johnson gave evidence of a $9,500 to $12,000 annual rental, based only on the agistment of stock. Prior to the execution of the lease, Mr Doneley knew that the land was held on trust. He appreciated that it could fetch much more than $1 per annum rental. Because of the relationship between the Doneleys and their joint dealings, Mr Doneley's appreciation of these things should be imputed to Mrs Doneley as well. Even apart from that, anyone with rural experience in this area at that time would have appreciated the obvious inadequacy of a $1 per annum rental for this valuable land fronting the Balonne River. The only substantial effort to justify the granting of the lease centred on the prospect of Mr Doneley's making improvements on the trust land during the term of the lease. Mr Doneley conceded that before taking the lease, he did intend to make improvements on the trust land. He denied however that he gave any such assurance in exchange, as it were, for the taking of the lease. Significantly, the lease did not in terms oblige the lessees to make any improvements. There is no evidentiary warrant for -- 5 of 24 -- 4 concluding that any intention on Mr Doneley's part amounted to an obligation or undertaking: it was not even precise, far from approaching what might be considered enforceable. Mr Doneley said that the improvements he did make came about because the family operated the three portions as one, and that the improvements in fact predominantly benefited portion 9, the non-trust land. There is no doubt that in granting that lease over the trust land, Connell an Nominees Pty Ltd (of which Mr and Mrs Connellan were the directors) committed a breach of trust. 1 tum to the question whether the lessees, Mr and Mrs Doneley, are affected by that breach. That must be considered with reference to the concept of "accessory liability" discussed in Barnes v. Addy (1874) LR 9 Ch App 244, 251-2: "Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. " Mr and Mrs Doneley "received and became chargeable with some part of the trust property" when they took the leasehold interest in the freehold trust land. (I deal with this concept in detail more conveniently later on, when discussing the position of the third defendant with relation to certain securities.) There has been much debate about the degree of knowledge necessary to render a third party liable under this limb of Barnes v. Addy, another matter to which 1 will return in more detail. It suffices for the present to note that on any view of the authorities, Mr and Mrs Doneley bore the knowledge -- 6 of 24 -- 5 necessary to render them liable in respect of this breach of trust. That is because they knew of the existence of the trust, and knew all the circumstances mentioned above which combine to warrant the conclusion that the granting of the lease amounted to a breach of the trust. In the result, Mr and Mrs Doneley always held this lease as constructive trustees for the boys. Subject to the interest of any bona fide purchaser for value without notice, the boys might therefore now enforce the constructive trust through the extinguishment of the leasehold interest. On about 7 August 1987, Mrs Doneley became trustee of the trust land in place of Connell an Nominees Pty Ltd (which had in the meantime been renamed HB6 Pty Ltd). On 8 June 1989, Mrs Doneley, as such trustee, granted the third defendant Bank a bill of mortgage over the trust land. On the same date, Mr and Mrs Doneley, as lessees of the trust land, granted the Bank a bill of mortgage over the lease. The boys contend that the granting of those securities in favour the Bank constituted a breach of trust, for which the Bank is liable. They seek orders setting aside those securities. Before examining those claims, I will set out a little of the history of the farming operation as it had developed from late 1984. Much of this may usefully be gathered from the Bank's record of the contact it had from time to time with Mr and Mrs Doneley. Mr and Mrs Doneley were customers of the Bank's St George branch. In September 1984 the Bank lent them $250,000 (a "farm development loan") and provided a $50,000 overdraft facility. It must be said that their relationship with the Bank over the following 5 years was not entirely satisfactory. While the Bank continued to assist them financially as they developed the three properties - referred to in the evidence as "the aggregation" - the Bank's attitude was, at best for the Doneleys, ambivalent. The Bank plainly regarded their farming capacity as extremely doubtful. It continued to assist them -- 7 of 24 -- 6 financially, because it was appropriately secured, and no doubt hoped they would "tum the comer". But the Bank's support was full of misgiving. Because this attitude is relevant to my conclusions in other areas, I set out some references to support the view I have expressed. With relation to the Bank's assessment of Mr and Mrs Doneley's farming ability, the St George branch manager Mr King said that while he was at St George, Mr Doneley failed to grow any successful crop. At the trial last year when the Bank successfully sued for possession under its security over portion 9 (the non-trust land), Mr King noted that with Mr Doneley, "very little was completed on schedule". For example, the irrigation plan, to be completed in four months, took five years. A Bank diary note of 5 January 1987 said of Mr Doneley, that "with no crops of any significance since purchase and no stock it is not surprising that he is the subject of speculation". Mr King said that in his time at St George, the Doneley's income never exceeded their outgoings. Mr King recommended service of demand under Bank securities, in a memorandum of 15 June 1988. That was because, as he then put it, "the position is hopeless". A note dated 22 September 1989 confirmed the Bank's continuing scepticism: "(Mr Doneley) called in - as usual in trouble - this time serious". Mr King said that he doubted Mr Doneley's farming ability. So did the regional manager, Mr Redgen, and Mr Redgen considered that further advances would present a risk for the Bank in the absence of further security. The Bank went so far as to become quite anxious to forego the custom of Mr and Mrs Doneley. At the earlier trial, Mr King confirmed that the Bank had been trying to rid itself of their account since about June 1985. I offer the following references to the evidence to illustrate the depth of the Bank's concern in this respect. One may begin with Mr King's memorandum of 11 June 1986 in which he states: "Limit has expired however we do not consider renewal appropriate. Manager is of the -- 8 of 24 -- 7 opinion that we should rid ourselves of this business and pressure is being applied to that end". In a later memorandum of 23 July 1986, Mr King noted that while Mr Doneley had an application for re-financing pending with the Queensland Industry Development Corporation, the Bank had told him that it was "prepared to go along ... for the moment pending outcome". The regional manager, Mr Redgen, noted in the same memorandum that the Bank "was not prepared to advance further $70/80,000.00 for irrigation even with additional security as we see serviceability as suspect". In a memorandum later that year, dated 1 December 1986, Mr Redgen noted: "position is far from satisfactory and ... customer will not be able to repay our debts from income. The saving feature is the wife's expectancy from the family business ... ". By letter of 8 January 1987, he suggested that Mr and Mrs Doneley should re-finance their borrowings. Then in an internal memorandum of December that year, Mr Redgen pessimistically noted that the "loss of business to some other financial institution would be most welcome". In a further memorandum of 21 December 1987, the Bank noted that "past attitudes and past conduct of account would not encourage further lending". On 12 January the following year, the Bank noted that it "would prefer [for Mr and Mrs Doneley] to approach CDB or QIDC". In a customer interview record dated 29 January 1988, Mr King noted, with relation to a conversation with the Doneleys, that he "told them the bank would not be keen on increasing the borrowing to this extent ($100,000) and suggested they approach QIDC for assistance". Mr Redgen noted on 11 February 1988: "Agree with Branch manager's comments. Can see no point in going any further with these people in view of past attitude and account conduct". Then in a note dated 17 February 1988, Mr King said that: "Whilst security position safe enough we are far from satisfied as to future serviceability in the hands of these people. Past attitude and lack of co-operation make us very reluctant to 'get in deeper' even with additional security". In a file note of 17 -- 9 of 24 -- 8 February 1988 the Bank noted that it "would not object to loss of business", then on 18 February said: "It is therefore imperative that QIDC application be given priority". In this sceptical context, Mr Done1ey submitted a "cash flow budget" (prepared with DPI Dalby) to the Bank in 1988. Mr King noted his view on 25 July 1988 that it was "too generous for income and too low on expenses". The Bank in fact increased the financial facility on 8 June 1989 after another budget (which it prepared) of 15 May 1989, and then took the additional securities in relation to the trust land. Yet as late as 15 May 1989 Mr King had noted their credit application with these words: "Poor track record on business; lacking in management ability; successors to continue business? no; evidence of a sound ... surplus? no- dependent on seasons and prices; whether net profits are sound and improving? no- development has taken 4 years." Why then did the Bank increase its accommodation in June 1989 in response to the Doneleys' application of 15 May 1989? At least initially in his evidence, Mr King did not go so far as to claim that Mr and Mrs Doneley amounted to "a sound investment", but rather contended that by June they "deserved a chance to make it work". It was Mr Redgen who eventually approved the loan. He required that further security be found and described the increase as "really a final measure of assistance". (I later make some further observations on the Bank's attitude at this stage.) The Bank increased the farm development loan, which was in the name of Mr and Mrs Doneley, to $300,000, and the overdraft was put into the name "Doneley Pastoral Company". The additional security the Bank required was security over the trust property. According to a solicitor Mr Loughnan, then acting in another matter for Mr and Mrs Doneley, the St George branch accountant Mr Marks contacted him and told him to the effect that the Bank could not take "third party" security, but required "first party" security to support the additiona11ending. Shortly after that, on 6 June 1989, the Bank -- 10 of 24 -- 9 received a letter from Mr and Mrs Doneley's solicitors in this matter, Justin O'Sullivan and Edgar, referring to the formation of the Doneley Pastoral Company. The farm development loan (increased to $300,000) remained in the names of Mr and Mrs Doneley, but the overdraft was put into the name Doneley Pastoral Company. What occurred was that the Bank then reduced the overdraft by the $100,000 "transferred" to the farm development loan in the names of Mr and Mrs Doneley, leaving the overdraft at the level of approximately $22,000 in the firm name. The Bank had been made aware of the difficulty of having a trust secure the indebtedness of another party. Its Securities Services division in Brisbane had rung the alarm bells on 30 May 1989. On behalf of the plaintiffs I was urged to regard the so called partnership as "a sham, a mere chimera created solely to circumvent" that difficulty. The evidence does leave the circumstances of that "partnership" shrouded in considerable mystery. The business name was only registered on 21 June 1989, that is after the credit facility had been approved. Its partners were said to be Mr and Mrs Doneley together with Mrs Doneley as trustee for the boys. Yet the name Doneley Pastoral Company was registered only in the names of Mr and Mrs Doneley (and not, in addition, Mrs Doneley as trustee). No partnership deed ever found its way into the evidence. There is therefore no way of determining with any assurance whether the boys could have received a benefit from the partnership in exchange for the provision of the trust land as security. Significantly, the concept of the partnership was first raised in this context only after the advice from the Bank's security section in Brisbane, passed on by Mr Marks the accountant to the solicitor Mr Loughnan, to the effect that there were difficulties in taking securities from trusts and that the Bank wanted a "first party" security. It is important to remember that as at this time, as the branch manager Mr King -- 11 of 24 -- 10 saw things, Mr and Mrs Doneley were "broke" (p.304 tIs), yet enthusiastically seeking further funds. The Bank was prepared to oblige, but only provided it gained "first party" security over the trust land. There is much to favour the conclusion that in truth, the name Doneley Pastoral Company was no more than an alter ego for Mr and Mrs Doneley; that the partnership was an illusion, created to overcome what the Doneleys, probably having received the advice of the Bank and their own solicitors, regarded as a technical obstacle to the granting of the further security necessary to ensure the provision of additional funds by the Bank. I very much doubt that Mr and Mrs Doneley intended to give any real effect to this supposed partnership: cf. Snook v. London & West Riding Investments Ltd [1967] 2 QB 786,802. The plaintiffs challenge these mortgages over the freehold and leasehold interests again by reference to the first limb of Barnes v. Addy. One should first consider whether by granting the mortgages in respect of the trust land, Mrs Doneley committed a breach of trust. She had the power to do so, but was it a prudent exercise of that power: Fouche, p.641 ? For various reasons Mrs Doneley should be regarded as having committed a breach of trust. First, it was speculative and hazardous to offer the trust lands as security for the increased debt owed to the bank by (in all probability) Mr and Mrs Doneley themselves (Learoyd v. Whiteley (1887) 12 App Cas 727, 733). Second, in conveying a beneficial interest in the trust property to the Bank in order to secure her own debt to the Bank, Mrs Doneley breached the "self-dealing rule" (Snell's Equity 29th ed (1990) p.249, Tito v. Waddell [1977] Ch 106, 240). Third, and along similar lines, Mrs Doneley did by this transaction impermissibly profit personally from her position as trustee (Bray v. Ford [1896] AC 44, 51). I will now briefly elaborate on those three matters. -- 12 of 24 -- 11 From the boys' perspective, as beneficiaries of the trust, the grant of the mortgages was speculative and hazardous. It exposed the trust property to substantial risk, yet for no reasonably assured outweighing benefit. The risks are self evident, crystallized now where the Bank seeks to exercise powers upon default. Where was the potential benefit? In what follows, I have largely adopted the submission made in this area on behalf of the plaintiffs. If the supposed "Doneley Pastoral Company" partnership existed, there is nothing to indicate that the trust was to receive any particular share of any profits it might generate. Absent a contrary agreement, it may be that all partners were "entitled to share equally in the capital and profits of the business", and bound to "contribute equally towards the losses", pursuant to s.27 of the Partnership Act: that might theoretically give rise to benefit if there were any real prospect of profit. But on the evidence, the remote prospect of the supposed partnership's ever generating a profit is outweighed by the very real prospect that the trust property would become exposed to a liability for all firm debts, not only the further advance of $100,000, the total borrowings (amounting to some $500,000) from the Bank, but all other liabilities of the supposed partnership. On the other hand, if there was in fact no partnership, the possibility of any benefit to the trust is seen to be very remote indeed - as effectively conceded by Mr King (p.309). In the historically unlikely event of the parents' pastoral enterprise achieving a profit, that would not increase the rent of $1 per annum payable under the terms of the lease. While the lease subsisted, the beneficiaries had a chance that, if the parents' pastoral enterprise flourished, the value of the trust lands would be enhanced over the remaining 45 years of the lease, offering the beneficiaries the remote prospect of being left with a more valuable property in the year 2034. But even that prospect is diminished when it is acknowledged that, at the expiration of the term of the lease, the parents would -- 13 of 24 -- 12 be entitled either to remove their fixed improvements or to seek compensation, upon determination of the tenancy, pursuant to ss.155 and 156 of the Property Law Act. Without placing the freehold at risk by the granting of the mortgage, and without obtaining further advances from the Bank, the trust lands were capable of generating income, essentially risk free, in a variety of ways. The trust lands could have been leased, or made available for agistment. That could have yielded an income of between $9,500 and $12,000 per annum. Alternatively, without further improvements, the trust lands could have been used for grazing. The water rights attaching to them could have been turned to account, through their being made available at a fee to other agricultural properties in the district. What Mrs Doneley did as trustee was for forego a modest but safe and steady income, for the prospect of a potentially greater income but involving much greater risk. Even had the beneficiaries stood to receive increased income in the event that it paid off, it was still a breach of trust because it was not open to a trustee to make an investment of that speculative or hazardous character. But in fact the case is one in which the trustee placed trust property at risk, primarily to secure a possible advantage for herself, in her personal capacity, and for her husband - a benefit in which, even if it eventuated, there was no certainty of participation by the beneficiaries. A fundamental and overriding defence contention was that Mr and Mrs Doneley were justified - as was the Bank - in assessing the reasonableness of steps such as the offering of the trust property as security for the parents' debts, by reference to the interests of "the aggregation" of the three portions. Mr and Mrs Doneley plainly regarded the situation as one in which the interests of the boys coincided with the interests of the whole family: providing the trust land as support for the development of the aggregation was therefore in the boys' interests. No one doubts that Mr and Mrs Doneley, and the Bank, were well motivated in this matter. -- 14 of 24 -- 13 Yet Mr Morris QC, who appeared for the plaintiffs, submitted that principle required that Mrs Doneley, as trustee, exercise her fiduciary duty "solely by reference to the interests of the beneficiaries - not the interests of a wider group ... which included the beneficiaries". He relied on this statement of general principle in Ford & Lee: Principles of the Law of Trusts 2nd ed (1990) p.400: "Duty to act exclusively for the benefit of all the beneficiaries of the trust The duty to act exclusively for the benefit of all the beneficiaries of the trust marshalls the trustee's duty of loyalty to the service of the economic well-being of the trust fund and of the personal welfare of all the beneficiaries. With respect to the economic well-being of the trust the trustee's duty of loyalty complements the duty to preserve the trust assets by disabling the trustee from taking any unauthorised profit, from allowing any conflict to arise between the duty the trustee has undertaken and any interest he or she has, from undertaking any duty.which may conflict with the duty he or she has undertaken, and from setting up the rights of others against those of the beneficiaries." Those terms would suggest it is a stringent duty. On the other hand, Mr Gibson QC, who appeared for the Bank, submitted strongly that the case "can only be viewed sensibly when seen in the context of a single functional unit - "Beardie" - operated by and for the benefit of a family - the Doneleys - and comprising, at all material times, two mutually interdependent and synergistic elements". He included in the "Beardie" aggregation, all three portions, 1, 9 and 14. Mr Gibson referred to the "flexibility of equitable doctrines, and the accepted principle that the stringency and application of fiduciary obligations will vary according to the character of the relationship". See Hospital Products Ltd v. United States Surgical Corporation (1984) 156 CLR 41, 69, 102-4. As would be apparent from my earlier observations, I do however generally accept the position for which the plaintiffs have contended. But it is not necessary, perhaps, to draw the line too firmly with relation to these matters of principle. The reality is that -- 15 of 24 -- , ,', 14 providing the trust land for security purposes was, in the well established factual circumstances of this case, to expose the trust to substantial hazard and risk: the prospect of any ultimate return was speculative, far outweighed by the risk to the trust land. The history of the operation over the preceding years, and the sceptical objective assessments recorded by responsible Bank officers, could leave no reasonable ground for optimism as at June 1989. Plainly, in addition, Mrs Doneley was in these particular circumstances favouring her own interests, and personally profiting from her position. To the extent that her ultimate justification lay in the view that "what was good for the family was good for the boys", she simply ignored her obligation as trustee. In taking that approach, she failed properly, as trustee, to address the separate interests of the boys as beneficiaries, focusing rather on the interests of the family as a whole - and to that end, the best way of running the aggregation profitably. (I note, in passing, my own conclusion from the evidence that while the profitable operation of portion 9 was greatly assisted by use in conjunction with the trust lands, the reverse proposition was probably not true.) Mrs Doneley was not obliged, as trustee, to ignore the wider picture. But she should have considered this question: were the risks involved in granting the securities justified by the prospect that the parents' farming operation would go beyond generating enough profit to discharge their debt, and in addition lead to appreciable enhancement in the value of the trust lands? Properly considering the interests of the beneficiaries, she should clearly have answered "no" to that question, for the reasons I earlier expressed. What then of the Bank's liability? The boys seek to pin liability on the Bank, as constructive trustee, by reliance on the first limb of Barnes v. Addy; that is, as having "received and become chargeable with some part of the trust property". Mr Gibson challenged the plaintiffs' right to rely on this limb, on the ground that -- 16 of 24 -- 15 their pleaded case referred solely to the second limb, "assisting with knowledge in a dishonest and fraudulent design on the part of the trustees". Mr Morris disavowed any reliance on the second limb. I was addressed at length on whether the statement of claim was apt to raise the limb. In my opinion, it was sufficiently raised. But faced with that challenge, Mr Morris sought leave to amend as necessary (albeit very late in the proceedings), and I would, in the exercise of my discretion, have granted that leave. That is because Mr Gibson could raise no substantial reason why leave should not be granted (if necessary) - there was no suggestion, in particular, that the defendants would have called more or different evidence, or otherwise have conducted their cases differently. The point is therefore ultimately academic. The more substantial immediate question is whether, having taken the securities in relation to the trust property, the Bank "received some part of the trust property" in terms of Barnes v. Addy. Mr Gibson submitted that all the Bank thereby "received" was "a charge over that property, in other words, rights against the trust property as security for a debt. The taking of the mortgage over the trust lands did not effect a transfer of legal or equitable ownership of that property. It created in the Bank a chose in action, exercisable against that property in defined circumstances, which the law treats as an estate or interest in the property. " I was addressed on the basis that a stranger could only be regarded as "receiving" trust property if it obtained physical possession of the property, or an absolute interest in it. It is my contrary view that the Bank's receipt of the security interests in the property did bring it within the first limb of Barnes v. Addy. There is little direct authority on the point. In Carl Zeiss Stiftung v. Herbert Smith & Co (No.2), [1969] 2 Ch 276 at p.290, Dankwerts U approved a passage in the then current edition of Halsbury's Laws of England (3rd ed vol 38 p.858, para .1446) in these terms: "Where a person, whether gratuitously or for valuable consideration, acquires property, or an interest in property which is subject to a subsisting -- 17 of 24 -- 16 trust, he becomes a trustee of it for the purposes of the trust if he has either actual or constructive notice of the trust .... " (my emphasis). In EI Ajou v. Dollar Land Holdings pIc, [1993] 3 All ER 717, Millett J. approached the matter on the basis that a third party was a "knowing recipient" for the purposes of the "first limb" in Barnes v. Addy if, by the application of equitable tracing rules, the trust property could ultimately be traced into the hands of the defendant: pp.733ff. It may be said of the point made by Dankwerts U, that it was something of a passing reference, academic to the case before him, and not the subject of analysis elsewhere. Mr Gibson made all of those points. But it is nevertheless of some authority, especially drawing as it does upon Halsbury, and it supports the view I have taken. I respectfully consider Mr Gibson's submissions with relation to this aspect of the first limb to have been unduly restrictive. It is illuminating to consider the distinction between the two branches of the test. I accept the submission made for the plaintiffs, that "as a matter of principle, the distinction between the first limb and the second limb is a distinction between a third party who receives a benefit from the breach of trust, and a third party who assists in the breach of trust without receiving a benefit". The essential character of a first limb situation is proprietary. Consistently, a claim under that first limb has been likened to a tracing claim. On the other hand, a second limb claim is exclusively personal: it arises ex delictu from the third party's knowing assistance in the breach of trust, and has been described as analogous to a tortious cause of action. To my mind, therefore, and as a matter of principle, the distinction between the first and second limbs does not rest narrowly on whether the third party received actual possession of the trust property, or an absolute interest in it: it depends rather on whether the third party was a direct beneficiary of the breach, through having received property identifiable with the trust property the subject of the breach. -- 18 of 24 -- 17 I conclude that the Bank should be regarded as having "received" some part of the trust property, within the first limb of the test in Barnes v. Addy. Yet that is not enough to render the Bank a constructive trustee in favour of the boys. I was addressed comprehensively on the extent of knowledge of the breach required on the part of the Bank before it could be characterized in that way, with substantial reference to Consul Development Pty Ltd v. DPC Estates Pty Ltd (1975) 132 CLR 373 and Royal Brunei Airlines v. Tan [1995] 2 AC 378. It is not necessary for me to discuss those cases further, because all of the relevant Australian case law, together with the English and New Zealand authorities, would hold the third party liable if armed with "knowledge" of a kind referred to in any of categories 1, 2 and 3 identified by Peter Gibson J in Baden Delvaux v. Societe Generale [1993] 1 WLR 509, 575 - actual knowledge, wilfully shutting one's eyes to the obvious, and wilfully and recklessly failing to make the inquiries an honest and reasonable man would have made, and they are ample to cover this case - as will appear. I note however that Consul (pp.412, 376, 398) would additionally support the sufficiency of knowledge of that judge's fourth category, that is, knowledge of circumstances which would indicate the facts to an honest and reasonable man. When the Bank took the mortgages, it knew that Mrs Doneley held the freehold land on trust for the boys; that she was, jointly with her husband, indebted to the Bank, and a member of a (supposed) partnership for the benefit of which the further advance was sought; and that it, the Bank, was taking mortgages over trust property to secure those further advances. I have previously said that Mrs Doneley breached the trust, through giving the mortgages, because she conveyed to the Bank a beneficial interest in trust property to secure her own debt - thereby breaching the "self-dealing rule"; and because she thereby impermissibly profited personally from her position as trustee. -- 19 of 24 -- 18 Because of its knowledge of the matters I listed earlier, the Bank should be taken to have known all material facts necessary to establish those breaches of trust. It therefore fell within the first category of knowledge set out by Peter Gibson J. I additionally held Mrs Doneley guilty of breach of trust on the ground of her imprudence in committing the trust property in this hazardous and speculative way. I consider there is a substantial case that the Bank really did appreciate that the venture bore that character. I refer to my earlier observations on the Bank's assessment of Mr Doneley's farming capacity and managerial skills; its anxiety to lose the custom of Mr and Mrs Doneley; the risky nature of the undertaking to be funded from 1988; and the only qualified support. senior bank officers gave to the eventual increase in financial accommodation, on the basis that the Doneleys deserved one last chance. One surmises that the Bank was not really optimistic at all, but prepared to proceed provided it were fully secured. I found it difficult, against that background, to accept without reservation the more confident assertions of Bank witnesses (see, for example, Mr King at pp.270- 273) as to the position in June 1989 - witnesses who I thought sought to withdraw somewhat from what I consider was the true character of the matter at that stage: it was indeed a "final measure of assistance II , only reluctantly extended, and then only because the Bank could not itself lose, being fully secured. (See also Mr Redgen's evidence at p.396.) Looking behind any veneer, the Bank knew the downside of the Doneleys' operation: the Bank diaries themselves relate a graphic and depressing history. The only reasonable conclusion to be drawn, as at June 1989, was that providing the security of the trust property to support the further advances did in truth create real hazard and risk for that property, but with no associated substantial prospect of adequate return: the Bank was in a position to appreciate that. Further, just as Mrs Doneley failed to address properly -- 20 of 24 -- 19 the separate interests of the beneficiaries - in the manner I previously explained - so did the Bank. I therefore hold the Bank a constructive trustee of its interest under the mortgages over the freehold and leasehold trust property. The plaintiffs also seek relief against the Bank with relation to bills of sale given over farming plant and equipment. Mr and Mrs Doneley granted the bills of sale in favour of the Bank on 17 September 1990. Some of the plant and equipment is detailed in an annexure to the statement of claim (as well as being set out, of course, in the bills of sale). Mr and Mrs Doneley used that plant and equipment on the farming aggregation. The significance of the bills of sale for the present derives from the circumstance that the subject plant and equipment was purchased using moneys distributed to the boys as beneficiaries of the trust by August 1987. The trustee Connell an Nominees Pty Ltd had paid $87,472.95 and $100,791.15 for the benefit of the first and second plaintiffs respectively in 1987. Mr Doneley gave evidence that all of the equipment which later became subject to the bills of sale was purchased with the boys' trust distributions, save for a blade plough which he considered effectively worthless. I accepted his evidence about that, and that the blade plough had been made as an experimental piece from scrap metal. Prior to the execution of the bills of sale on 17 September 1990, the Bank had been made aware of the (trust based) origins of the relevant plant and equipment. In the first place, there was Mrs Doneley's letter to the Bank of 19 January 1988 in which she wrote that: "Taking into consideration that Connellan Nominees have paid for the majority of the plant and equipment during the past ten years on behalf of Sean and Matthew and myself, I would not be agreeable to any Bill of Sale being taken over the machinery. " -- 21 of 24 -- , " 20 Further, the Bank's file chronology of 26 April 1988 records: "Are seeking additional borrowing and Mrs Doneley is willing to give security over some freehold land but is not willing to give Bill of Sale over plant and machinery as most of this has been purchased by the Trust over the years". Mr King conceded that, during his time at the St George branch (that is, prior to January 1990), Mrs Doneley had told him that at least some of the plant and equipment was purchased with trust moneys. (Insofar as Mr Byrne (Mr King's successor) and Mr Graham (Mr Redgen's successor) said they believed the subject equipment belonged to Mr and Mrs Doneley personally, they had inadequately reviewed the information available to the Bank.} It is clear that Mr and Mrs Doneley sought the extra funds to secure the working of the irrigation for portion 9 rather than any development of the potential of portions 1 and 14. It is also clear that the bills of sale, like the mortgages, were to secure, at least in part, the farm development loan which was only in the names of Mr and Mrs Doneley. There is in these circumstances no reason to treat the bills of sale differently from the mortgages. The granting of them over the trust equipment amounted to a breach of trust in which the Bank is implicated on the basis of the first limb of Barnes v. Addy. I believe I have sufficiently indicated the evidence I accept. Broadly speaking, there was not much contention about it. But if further specific findings are sought, no doubt counsel will raise the matter with me. I therefore make the following declarations: 1. that the estate of the deceased and the second defendant hold their interest in the lease of portions 1 and 14 granted on 21 January 1985 on trust for the plaintiffs; 2. that the third defendant holds its interest in the mortgage (granted on 8 June 1989) of the freehold reversion of the said lands on trust for the plaintiffs; -- 22 of 24 -- 21 3. that the third defendant holds its interest in the mortgage (also granted on 8 June 1989) of the leasehold interest of the deceased and the second defendant in the said land on trust for the plaintiffs; 4. that the third defendant holds its interest in the bills of sale granted by the deceased and the second defendant on 17 September 1990 - so far as they cover items purchased using moneys distributed by the Connell an Trust for the use of the plaintiffs - on trust for the plaintiffs. (I have taken the form of the last declaration substantially from the form of relief claimed in para. 1 (d) of the prayer for relief in the statement of claim.) I will not at this stage make an order vesting the lands and that equipment in the plaintiffs. The land trust subsists until the younger of the plaintiffs reaches 25 years of age, which will not occur in the ordinary course until the year 2002. No doubt consideration should be given, if it has not already been given, to appointing a new trustee following the death of Mrs Doneley; and the Bank should be prepared to deliver up those securities if requested to do so by the trustee. In view of these apparently unresolved issues, I will grant general liberty to apply. I note in conclusion that none of the defendants pleaded a case for set off or compensation in respect of improvements effected by the parents while in possession of the trust property under the lease. There would have been a substantial answer to such a claim had it been raised, as covered by the plaintiffs' written submissions. But since no such claim was made, I need not consider that matter further. I also order the first, second and third defendants to pay the plaintiffs' costs (including reserved costs) of and incidental to the action, to be taxed. In conclusion, I record my thanks to counsel for their well presented, comprehensive final submissions, and my thanks to the State Reporting Bureau for a -- 23 of 24 -- 22 successful effort at computer based "real time" reporting which, through the virtually immediate availability of visible transcript, facilitated the expeditious disposition of the case. -- 24 of 24 --