Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2)

1. [1]

   BATHURST CJ: I have had the advantage of reading the judgment of the President in draft. I agree for the reasons given by him that in the particular circumstances of the present case the orders he proposes should be made.

2. [2]

   The present case proceeded on a number of assumptions which were undisputed on the appeal, in particular that the investors’ funds from the time of their investment were held either on an express trust or on a trust arising in accordance with the principles in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 or Black v S Freedman & Co Ltd (1910) 12 CLR 105; [1910] HCA 58. The juridical basis for the assumption that the funds at all times were held on such trusts is not entirely clear, but it is not necessary to investigate it on the appeal. However, it should be noted that if in fact the trust arose only at the time of the freezing order referred to by Bell P in his judgment, it would be necessary to investigate the terms of the trust prior to determining the appropriate method of distribution. It would also be necessary to consider whether such a trust could arise in an insolvency context and the fact that the imposition of the trust at that time would not only constitute the investors as secured creditors but alter the method of distribution among them by providing a different method of distribution from that required by s 559 of the Corporations Act 2001 (Cth).

3. [3]

   Further, it is by no means clear to me that it would be appropriate to apply the lowest intermediate balance method if the losses were incurred in the course of legitimate trading pursuant to the mandate given to Courtenay House Trading Capital Group Pty Ltd, in circumstances where such trading occurred without negligence or occurred as a result of a negligent breach of trust.

4. [4]

   Bell P has pointed out that it will be necessary in some circumstances to take the question of hotchpot into account. I agree with Bell P that it is desirable generally that this question be determined along with other questions in the same proceedings relating to the distribution of limited funds in a mixed or co-mingled account or accounts.

5. [5]

   Finally, the determination of distribution in accordance with the lowest intermediate balance method may be of such complexity that a liquidator would be justified and entitled to distribute on a pari passu basis.

6. [6]

   However, based on the relatively simple manner in which the present appeal was brought, it is unnecessary to consider these questions further. For the reasons given by Bell P, in the circumstances of the present case the lowest intermediate balance method of distribution is best calculated to do justice to those parties who are represented in the proceedings.

7. [7]

   BELL P: This appeal, which raises a classic insolvency conundrum, involves a contest between two groups of investors in relation to limited funds originally deposited in a Westpac bank account operated by Courtenay House Capital Trading Group Pty Ltd and Courtenay House Pty Ltd (together, CH), both now in liquidation but erstwhile operators of a Ponzi scheme: see In the matter of Courtenay House Capital Trading Group Pty Limited (in liquidation) and Courtenay House Pty Limited (in liquidation) [2018] NSWSC 404 at [10]; (2018) 125 ACSR 149 (Courtenay House).

8. [8]

   The contested funds are now held in a bank account controlled by CH’s liquidators (the Liquidators), and the present case was originally given life, as is frequently the case, by an application by the Liquidators for orders and directions about the manner in which they should distribute funds held in certain bank accounts to former clients of CH.

The conundrum – introduction and overview

1. [9]

   The conundrum concerns how limited funds in a bank account are to be distributed between investors whose funds were deposited into and co-mingled in that account over a number of years, and where there were innumerable deposits into and withdrawals from the account over that time.

2. [10]

   In Australia and a number of other common law jurisdictions, application of the rule in Devaynes v Noble (1816) 1 Mer 529; (1816) 35 ER 767 (Clayton’s Case) by which the earliest deposit into the bank account is presumed to have been the first withdrawn (that is, “first in, first out”) has been rejected as an appropriate solution to the conundrum which involves dealing with the interests inter se of investors or clients who invariably have been either defrauded or left short of funds by incompetent management. The rule in Clayton’s Case favours later investors over earlier investors.

3. [11]

   At least two other approaches are available and, as shall be seen, there are variations on these approaches. Indeed, what I describe below as the second alternative may fairly and best be understood as a variation on the first alternative as opposed to a true alternative to it.

4. [12]

   The first alternative approach is to distribute the fund rateably by reference to the amount of individual investments proportionate to the remaining limited funds in the bank account. This is described as the pari passu ex post facto (pari passu) approach. It is also described as the pro rata or “simple” pari passu approach.

5. [13]

   Unlike application of the rule in Clayton’s Case, the pari passu approach tends to favour earlier investors over later investors because it turns a blind eye to the fact that withdrawals from the fund over time will have proportionately reduced the quantum of deposits made prior to the withdrawals. Most graphically, where the account has been overdrawn, the pari passu approach ignores the fact that all deposits prior to the withdrawal that sends the account into debit will have been dissipated (assuming the withdrawn funds cannot be traced into a further asset or repository of value). On the other hand, the pari passu approach has the merit of arithmetic simplicity and consequent ease of application: all that is required in order to ascertain a claimant’s share is to divide the fund by the same proportion as one unpaid depositor’s contribution to the fund bears to that of other claimants.

6. [14]

   The second approach does not ignore the withdrawal of amounts from the fund over time, but treats any given depositor’s share as rateably reduced whenever there is any withdrawal from the fund. It is in that sense a variation of the pari passu approach, but will yield a different outcome depending on the time that individual deposits were made and any subsequent movements in the account. This is called the “lowest intermediate balance”, North American or “rolling charge” approach (lowest intermediate balance rule), (see Barlow Clowes International Ltd (in liq) v Vaughan [1991] EWCA Civ 11 (Barlow Clowes)). The reference to “North American” is because of the approach’s association with the well-known decision of Learned Hand J in In re Walter J Schmidt & Co 298 F. 314 (1923) (Re Walter J Schmidt), but in truth it had been employed in a number of earlier decisions of United States’ courts as noted by Professor Scott: see A W Scott, “The right to follow money wrongfully mingled with other money” (1913) 27 Harvard Law Review 125 at 134, fn 25 (Scott).

7. [15]

   The lowest intermediate balance approach is most consistent with the principles or rules of tracing, and has been considered by some judges and commentators as likely to produce the most equitable result, in the sense of a fair distribution between depositors, as it reflects the accounting reality as disclosed by a running bank account. It will favour more recent depositors or investors over earlier depositors or investors, not by means of a fiction or presumption of the kind animating the rule in Clayton’s Case, but rather by reason of the historical reality that later contributors’ deposits will not have been subject to as much dissipation by the fraudster or defaulting trustee or fiduciary as earlier contributors’ deposits will have been.

8. [16]

   A practical problem with the lowest intermediate balance approach, however, is that, depending on the number of depositors whose funds have been invested or deposited into a mixed or blended fund and depending on the extent of movements in that fund over time, including withdrawals, enormous complexity may (but will not always) arise in ascertaining the proportionate entitlement of persons with similar equitable claims over the fund. Given that this situation typically arises in an insolvency context, the costs involved in making the relevant calculations may be considered by liquidators to be too great so as to make the exercise worthwhile. In other words, the cost of the accounting exercise may exhaust or significantly erode the remaining fund so that the purpose of so doing may be wholly or partially frustrated.

9. [17]

   Which of the three different approaches is applied matters, because each approach yields a different financial outcome for depositors in or contributors to the mixed or co-mingled fund. The different financial outcomes resulting from the different approaches are well illustrated in the decision of Williams J in Re International Investment Unit Trust [2005] 1 NZLR 270 at [24] (International Investment Unit Trust), and in the Annex to the decision of Audrey Lim JC in Pars Ram Brothers (Pte) Ltd v Australian & New Zealand Banking Group Ltd [2018] 4 SLR 1404; [2018] SGHC 60 (Pars Ram); see also the examples given in S Kinsey and L Papaelia, “Distribution over a mixed fund – pragmatism prevails over esoteric tracing principles” (2012) 20 Insolvency Law Journal 264 at 268-269.

10. [18]

    There is room for debate as to which approach is the fairest and most consistent with principle or, as Williams J perhaps more aptly put it in International Investment Unit Trust at [73], which approach is “the least unfair result for the investors, bearing in mind that, regrettably, no method of distribution will result in perfect justice for all.” See also Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch) at [58] (Russell-Cooke).

11. [19]

    With this introduction and overview of the conundrum and the potential solutions to it in mind, it is next necessary to set out the factual background against which it arises in the present case before turning to the reasons of the primary judge and a fuller analysis of the problem and the parties’ competing contentions.

Factual background

1. [20]

   CH accepted funds from investors for the ostensible purpose of investment in foreign exchange trading from about 2010. It purported to offer investors various “financial products”, some of which were associated with political events, in the sense that trading profits were to be sought by leveraging off volatility in financial markets associated with matters such as the United States Presidential election and Brexit.

2. [21]

   Adopting the description of Black J (the primary judge), the two CH companies offered several forms of investments to investors, namely “standard products”, which comprised three different types of trading strategies described as “Swing”, “Extreme” and “Elite”, and “special products”, which were offered to existing investors based upon current affairs around the world, including the Brexit Special product. Consistent with its character as a Ponzi scheme but obviously unknown to investors, capital deposits from newer investors were used to pay purported returns on investment and purported returns of capital to earlier investors. Over the life of the Ponzi scheme, between $213 million and $248 million of funds was deposited by investors into the companies’ bank accounts and, contrary to the marketing of the companies as conducting a foreign exchange trading business, little foreign exchange trading was done. Further, that which was done incurred an overall loss. As Brereton J (as his Honour then was) observed in related litigation in Courtenay House at [10]:

3. [22]

   As described by the primary judge in the current proceedings, investors who decided to invest in CH were generally provided with an application form for the relevant investment strategy which they were asked to complete and return, but the companies did not provide consistent information and documents to investors. The Liquidators have not located a signed application form for every investor, and it was unclear which investors received what documentation. Some of the template application forms for standard products identified by the Liquidators from CH’s records stated that the funds deposited by the individual investor were to be held in the Companies’ “trading account held in trust”, although other forms do not expressly make that statement.

4. [23]

   On 21 April 2017 at 3.11pm, the Australian Securities and Investment Commission (ASIC) obtained ex parte freezing orders over CH’s assets and restrained the companies carrying on a financial services business until 1 May 2017: In the matter of Courtenay House Capital Trading Group Pty Ltd [2017] NSWSC 467. The orders were served shortly after 4.00pm on the same day. It should be noted that the Court found that there was a serious question to be tried as to whether Courtney House Capital Trading Group Pty Ltd had been carrying on an unregistered managed investment scheme in contravention of s 601ED of the Corporations Act 2001 (Cth) and whether both companies in the CH group were carrying on an unlicensed financial services business: [at] [3]-[4].

5. [24]

   A number of investors, presumably unaware of the facts that had led to the making of the freezing orders, made further investments with CH on 21 April 2017 and up to and including 26 April 2017. (It may be that the investments made on 21 April 2017 were in fact made earlier than 21 April 2017, and that 21 April 2017 is the date on which particular investors’ deposits were received as cleared funds in various bank accounts controlled by CH. The potential significance of this fact will be examined and explored later in these reasons.) A number of these investors had also invested with and through CH, and secured investment returns prior to 21 April 2017. (The significance of this is also considered at [181] - [182] below).

6. [25]

   At least immediately before the freezing orders were made, CH maintained two principal bank accounts, one with the National Australia Bank (NAB) and one with Westpac. Approximately $185 million had been deposited to the Westpac account since it was opened. It had a balance of approximately $21 million at the time of the Liquidators’ appointment on 16 May 2017. Approximately $29 million was held in the account with NAB at that time.

7. [26]

   The litigation before Brereton J in Courtenay House principally concerned whether or not the funds in the NAB account were held on trust for all investors and should be “pooled” and treated as funds mixed with the funds in the Westpac account, on the one hand, or whether the funds in the NAB account were only held on trust for those investors who had invested in a “financial product” known as “Brexit Special”, which was said to have been designed to exploit foreign exchange movements associated with the exit of the United Kingdom from the European Union, on the other hand.

8. [27]

   The issue of “pooling” where an insolvent company has conducted a number of “funds” or investment schemes via multiple accounts is typically the first stage in identifying which of a failed company’s assets will be available for particular depositors who have claims against the company in respect of their failed investments. Complex examples of this preliminary pooling exercise include Gordon J’s decisions in Australian Securities and Investments Commission v Letten (No 7) (2010) 190 FCR 59; [2010] FCA 1231 (Letten (No 7)) and Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) (2012) 288 ALR 240; [2012] FCA 75 (Sonray); Black J’s decision in Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994 at [44]ff (MF Global); and Brereton J’s decision in In the matter of BBY Ltd (Receivers and Managers appointed) (in liquidation) (No 2) (2018) 363 ALR 492; [2018] NSWSC 346 (Re BBY).

9. [28]

   In Courtenay House, Brereton J concluded that a basis for pooling CH’s NAB and Westpac bank accounts had not been established, and held that the funds held in the NAB account were the subject of an express trust in favour of those investors who had invested in the “Brexit Special” financial product: at [27]. This conclusion was based on a conventional analysis rooted in the identification of a sufficiently certain intention to create a trust: see, generally, Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26. His Honour also indicated that an alternative basis for his conclusion that the moneys were held on trust flowed from the application of the principles associated with Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (Quistclose) and Black v S Freedman (1910) 12 CLR 105; [1910] HCA 58 (Black v Freedman). As it happened, the funds held in the NAB account allowed for an almost complete reimbursement of funds to those who had invested in the “Brexit Special”.

10. [29]

    Because there were sufficient funds in the NAB account to reimburse all “Brexit Special” Investors, there was no contest between those investors who had invested in the “Brexit Special” financial product before 21 April 2017, and on or after this date, being the date on which the freezing orders were made. Accordingly, there was no need for his Honour to consider whether or not different principles applied to those who had made their investment before or after the freezing orders.

11. [30]

    Similarly, there was no need for his Honour to grapple with what I have described as the insolvency conundrum introduced at [9]-[19] above. Notwithstanding this, his Honour did observe at [34] that:

12. [31]

    In addition to the funds held in the NAB account which were the subject of Brereton J’s orders, the balance of CH’s funds (approximately $21 million) were, as I have noted at [25] above, held in a Westpac account. The contest in the present case concerns those funds and whilst the contest is, in one sense, quite narrow in its compass, it nevertheless raises important and difficult questions of principle.

13. [32]

    The contest, as presented to the Court, is between, on the one hand, some 505 investors whose net claims sum $57,358,634 (“net” because the Liquidators subtracted from outstanding capital investments “returns” on investment, which some investors falling within this class had received from the operators of the Ponzi scheme) and, on the other hand, some nine investors who were characterised in the Liquidators’ 2nd Report to the Court as the “Category E” and “Category F” investors.

14. [33]

    The Category E and Category F investors were, respectively, defined by the Liquidators as investors who deposited their funds in the Westpac account:

15. [34]

    The Category E and Category F investors were also somewhat confusingly described in the Liquidators’ 2nd Report as the Post-21 April 2017 Investors. I use the phrase “somewhat confusingly” by reason of the fact that the Category E Investors had in fact all made their investments on 21 April 2017.

16. [35]

    The Category E and Category F Investors are now, in effect, the Appellants in these proceedings, and it is convenient to refer to them collectively as “the Appellants” or, where necessary for context, the Post-21 April 2017 Investors, in the balance of these reasons.

17. [36]

    Certain details in relation to the Post-21 April investments are set out in the following table:

18. [37]

    It will be seen from the above table, in terms of account activity, apart from four deposits on 21 April 2017 amounting to $475,000, there was also a withdrawal of $60,000 on that day which represented a transfer from the Westpac account into another CH account with Westpac. No funds remain in the account to which that amount was transferred and the argument proceeded on the basis that that amount was irrecoverable.

19. [38]

    With the exception of one of the two $100,000 deposits made on 21 April 2017 which, according to their 2nd Report, the Liquidators noted was processed on that day prior to the making of the freezing order, it is not known one way or the other which of the other deposits shown to have been made on that day were received into the Westpac account prior to the making of the freezing orders at 3.11pm on 21 April 2017. It is also not known whether or not the transfer of $60,000 from the Westpac account occurred prior to or after the freezing order and, if after, whether it was within the conventional carve out for freezing orders which permits certain expenses to be incurred.

20. [39]

    By way of contrast to the account activity on and from 21 April 2017, the Liquidators noted in their 1st Report that, in the month prior to the freezing order, “there were 22 withdrawals and 42 deposits creating a significant mingling issue”. In the Liquidators’ 2nd Report, it was also noted that CH’s books and records were “not reliable”.

21. [40]

    In the Liquidators’ 2nd Report, four possible approaches were identified as to how the Category E investors should be treated. They can be summarised as follows:

22. [41]

    With regard to the deposits made into the Westpac account on 24 and 26 April 2017 by the Category F investors, apart from some de minimis deductions from the Westpac account on account of bank fees, the account was not depleted by any further withdrawals by CH (although it is not to be lost sight of that authorised expenditure by the Liquidators, including the payment of various legal costs, will have further diminished the quantum of funds available for either tracing by claimants or distribution by the Liquidators).

23. [42]

    In the Liquidators’ 2nd Report, it was stated that since the $300,000 invested on 24 and 26 April 2017 “can be clearly identified, it seems equitable that these funds should be returned to these investors less their pro rata share of the costs and expenses of the liquidation process”. The Report noted that it was intended to seek the Court’s direction as to whether this approach should be taken.

The proceedings at first instance

1. [43]

   At first instance, the primary judge had before him a number of interlocutory processes relating to the distribution of funds in the Westpac account.

2. [44]

   The Liquidators sought the following relief pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) Sch 2 to the Corporations Act (IPS) and s 63 of the Trustee Act 1925 (NSW):

3. [45]

   The Category E and Category F or Post-21 April Investors sought the following relief:

4. [46]

   The Liquidators did not play an active role on the question of the Post-21 April 2017 Investors’ contentions in the hearing before the primary judge, notwithstanding the views that they had expressed in their 2nd Report. Rather, this matter was debated between Mr Peter Caron (Mr Caron) and Ms Anke Seidlitz (Ms Seidlitz), representing the Post-21 April 2017 Investors and J P Melocco Pty Ltd (Melocco) representing the Pre-21 April 2017 non-Brexit Investors. Melocco contended for a pari passu distribution amongst all investors.

5. [47]

   What divided the two groups of investors was whether the funds held in the Westpac account should be shared on a simple pro rata or pari passu basis, or whether the deposits made on or after 21 April 2017 should be treated differently by reason of the fact that those deposits could be separately identified. If so, subject to accounting for the withdrawal of $60,000 from the Westpac account, provision for “hotchpot” and expenses, the Post-21 April 2017 Investors contended that they were entitled to recover all of their investments because it was plain that, except to the extent of the Liquidators’ expenses and the $60,000 withdrawal, if and in the event that it took place after the deposits had been made, the deposited monies representing those investments had not been dissipated.

6. [48]

   The primary judge held, in a finding not challenged on appeal, that the funds held in the relevant Westpac account were held on separate trusts for both the Pre- and Post-21 April 2017 Investors: In the matter of Courtenay House Capital Trading Group Pty Limited (in liquidation) and Courtenay House Pty Limited (in liquidation) [2019] NSWSC 1113 at [47].

7. [49]

   Unlike the position in Courtenay House, because of the variety of “products” that those investors invested in (or thought they were investing in) and differences in documentation in relation to those products and over time (see [22] above), the primary judge did not go through the exercise of ascertaining whether or not an express trust in favour of each investor arose on his, her or its investment being made. No criticism is intended of the primary judge in making that observation. It was unnecessary for his Honour to do so because of his Honour’s conclusion, consistent with the decision of Brereton J in Courtenay House, that both a Quistclose and Black v Freedman trust arose.

8. [50]

   Self-evidently, the investors’ separate trust funds had been mixed or co-mingled in the Westpac account and it must be remembered that, in this context, “the analogy with a properly constituted and properly managed trust fund is far from exact. Changes in the 'state of investment' of the fund which is being traced may occur in a totally random way”: El Ajou v Dollar Land Holdings plc (No 2) [1995] 2 All ER 213 at 221 per Robert Walker J (as his Lordship then was) (El Ajou (No 2)).

9. [51]

   The primary judge (at [43]) summarised the argument made on behalf of the Post-21 April 2017 Investors as to why there should not be a pari passu distribution, as follows:

10. [52]

    The learned primary judge, although accepting that these submissions had “real force”, concluded “with hesitation” that he was ultimately not able to accept them: at [45]. His Honour continued (at [45]):

11. [53]

    In the result, the primary judge concluded (at [47]) that:

12. [54]

    On the hearing of the appeal, the Court was informed that a “hotchpot” hearing had been heard earlier this year, and that Rees J is currently reserved on that matter.

13. [55]

    Without in any way pre-empting that decision, it suffices for present purposes to note that the doctrine of hotchpot requires “creditors to bring to account the value of their participation (or expected participation) in the other assets of the company”: Akers v Deputy Commissioner of Taxation (2014) 223 FCR 8; [2014] FCAFC 57 at [135], referred to with approval in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 368 ALR 390; [2019] HCA 20 at [163].

14. [56]

    As Barrett J (as his Honour then was) noted in Australian Securities and Investments Commission v Idylic Solutions Ltd [2009] NSWSC 1306; (2009) 76 ACSR 129 (Idylic Solutions):

15. [57]

    In the context of a mixed fund case, in Re Rowena Nominees Pty Ltd; Ex parte Conlan (2006) 199 FLR 415; [2006] WASC 69 at [71]-[72] (Rowena Nominees), Simmonds J observed that:

16. [58]

    In Australian Securities and Investments Commission v Letten (No 20) [2012] FCA 1283; (2012) 92 ACSR 630 at [73], Gordon J explained:

17. [59]

    It may be noted that, as their 2nd Report recorded, the Liquidators had to a certain extent engaged in an equalising of the claims of the Pre-21 April 2017 Investors by (a) excluding those investors who had, through their investments with CH, recovered the entirety of their capital outlay and in fact earned sizeable dividends over the years (funded by subsequent investors); and (b) reducing the claims of other investors who, whilst not having recovered the full extent of their investment through past dividends (also funded by subsequent investors), had nevertheless recovered a substantial part of their investment. These investors’ claims were treated by the Liquidators as “net” claims to reflect these partial returns (see [32] above).

Notice of Appeal

1. [60]

   By their Notice of Appeal, the Post 21 April 2017 Investors appeal from the decision of the primary judge and, in lieu of the orders made at first instance, seek a direction that the Liquidators:

2. [61]

   Representative orders were made by Basten JA on 2 December 2019 appointing the Appellants, Mr Caron and Ms Seidlitz, as representatives of the Post-21 April 2017 Investors, and Melocco (the Respondent) as representative of the Pre-21 April 2017 Investors: see Caron v Said Jahani and John McInerney as joint and several liquidators of Courtenay House Capital Trading Group Pty Ltd (In liq) and Courtenay House Pty Ltd (In liq) [2019] NSWCA 293.

3. [62]

   Similar submissions to those that had been made at first instance were ably advanced on behalf of the Appellants by Ms Beechey. Her argument drew on a number of authorities, although she was constrained to accept that no authority on which she relied was precisely on point. Mr Izzo SC, who appeared for the Respondent, sought to defend the decision of the primary judge and contended for application of the simple pari passu method.

The conundrum considered

1. [63]

   Before turning to the authorities and the parties’ arguments, some basic propositions should be stated in relation to the existence, nature and extent of interests held by CH, the Liquidators and the investors in the Westpac account.

2. [64]

   First and fundamentally, none of CH, the Liquidators, still less the investor depositors, had any legal interest in any funds deposited in the Westpac account. The nature of CH’s and then the Liquidators’ interest in that account was a single chose in action against Westpac: see Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 573-574; Foskett v McKeown [2001] 1 AC 102 at 110, 126 and 127; [2000] UKHL 29 (Foskett). The bank’s liability to CH and then the Liquidators was as to a single and undivided debt, without regard to the several items which, as a matter of history, contributed to the balance: see D Fox, Property Rights in Money (2008, Oxford University Press) at 1.43, citing Buckley J in In re Footman Bower & Co Ltd [1961] Ch 443 at 450. When various amounts are paid into an account, they form “one blended fund, the parts of which have no longer any distinct existence”: Clayton’s Case at 793, per Sir William Grant.

3. [65]

   The Liquidators, now having transferred the funds from the Westpac account to an account in their own name with their own bank, have a similar chose in action against their own bank. CH, before the liquidation, also held a chose in action against Westpac in respect of the funds from time to time in the Westpac account, providing it was in credit. It did not hold this chose in action on behalf of any one investor, nor was it divisible.

4. [66]

   As a result of the finding that CH was a trustee in respect of funds deposited by investors, CH owed equitable obligations as trustee to each investor and, the deposited funds having been mixed with the funds of other investors to whom similar obligations were owed, these obligations, as with those owed to other investors, are treated by equity as being secured by a charge over the blended fund (or more accurately, the chose in action against the bank) to the extent of the trust money. So much was made plain by Sir George Jessel MR in In Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 ChD 696 at 709, 711 and 717 (Re Hallett); see also Sinclair v Brougham [1914] AC 398 at 420-422, 441–442 and 459–460 (Sinclair v Brougham) and Sutherland Re; French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008 at [153] (French Caledonia).

5. [67]

   In Re Hallett, the Master of the Rolls referred to the “… the rule of Equity which gave you a charge – that if you lent £1000 of your own and £1000 trust money on a bond for £2000, or on a mortgage for £2000, or on a promissory note for £2000, Equity could follow it, and create a charge”: at 717. Earlier, the Master of the Rolls said “I do not like to call it a charge … but that is the effect of it”: at 711.

6. [68]

   Professor Scott used the language of a charge but also spoke of an “equitable lien … on the whole mass for the amount contributed by him”: Scott at 125. Gordon J, in Sonray at [83], citing L Gullifer (ed), Goode on Legal Problems of Credit and Security (4th ed, 2008, Sweet & Maxwell/Thomson Reuters) [6-11] to [6-14] (see also at [6.09]), used the description “equitable tenants in common” of the mixed fund as a whole, including its traceable proceeds, to describe the rights of contributors to a deficient mixed fund.

7. [69]

   All three labels – charge, equitable lien and equitable tenancy in common – recognise a form of equitable proprietary right able to be asserted against the mixed or blended fund, giving disappointed investors precedence over the insolvent company’s general creditors. In Stephenson Nominees Pty Ltd v Official Receiver; Ex parte Roberts (1987) 76 ALR 485 at 504, Gummow J observed that the security given by an equitable lien or charge affords a proprietary remedy. As Millett J (as his Lordship then was) once observed in this context, “[t]he charge itself is entirely notional” (see El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 at 737).

8. [70]

   The first of the passages cited in [67] above from Re Hallett was quoted by Dixon CJ and Fullagar J in Brady v Stapleton (1952) 88 CLR 322 at 337; [1952] HCA 62. At 337-338, their Honours applied the reasoning in Re Hallett to a mixed fund, saying:

9. [71]

   The characterisation of an innocent investor having a charge over an “indistinguishable mass” or mixed or blended fund to the extent of the contribution has taken root in the case law: see, for example, the cases collected by Austin J in ASIC v Tasman Investment Management [2006] NSWSC 943 at [55]; (2006) 59 ACSR 113 (Tasman Investment Management). An investor’s interest in a mixed fund under the lowest intermediate balance approach associated with Re Walter J Schmidt has been characterised as a “rolling charge” (see Barlow Clowes at 35), a description apt to capture the fact that the charge is one over a dynamic phenomenon, the value of which varies with movement on a bank account.

10. [72]

    In L D Smith, The Law of Tracing (1997, Oxford University Press) (Tracing) at 80, described extra-judicially by Edelman J as a “masterly monograph” (see J Edelman, “Understanding Tracing Rules” (2016) 16 QUT Law Review 1 at 8), Professor Lionel Smith, explaining the rights of innocent contributors to a mixed fund as against a wrongdoer, posited a slightly different characterisation of Equity’s response:

11. [73]

    The value of each investor’s charge will be represented by the amount of his, her or its deposit. Applying the language of charge to the facts of the present case, in one sense, it is correct to say that each investor had a charge over CH’s chose in action against Westpac (which now hovers over the funds held by the Liquidators in their bank account). But what if CH’s bank account containing mixed funds was temporarily overdrawn? Was the charge of those investors who had invested prior to this time lost, with all of the blended “trust” funds dissipated? Or does the charge remain, and its value increase as further funds are deposited from other innocent investors (or indeed from the wrongdoer)? Those new investors will also have the benefit of a charge but, on the second hypothesis, the value of their charge would be instantly diminished if the bank account, now in credit, was the only source of funds from which both the earlier and the later investors could recover their investments.

12. [74]

    As is plain, the charges held by all investors over the single chose in action represented by CH’s bank account were inadequate security, as the blended fund had been depleted by withdrawals, presumably to pay out earlier investors, given the Ponzi scheme that was being conducted by CH. The investors’ interests will have been further depleted by the authorised expenditure of funds by the Liquidators, including in relation to the conduct of this litigation.

13. [75]

    The critical questions then become how are the limited funds to be distributed between investors, and was there a principled basis in the present case to differentiate the Appellants from the balance of the investors represented by the Respondent. The answer to these questions involves the tackling of the conundrum introduced at [9]-[19] above.

14. [76]

    Before embarking on that exercise, one can put aside the situation where the evidence allows a court to conclude that a withdrawal or withdrawals from a mixed or blended fund was or were intended to be to the account of one particular beneficiary: see, for example, Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337; [2007] SASC 9 at [108]-[116] (Magarey); Re Global Finance Group Pty Ltd (in liq); Ex Parte Read (2002) 26 WAR 385; [2002] WASC 63 at [194] (Global Finance). As the New Zealand Court of Appeal observed in Re Registered Securities Ltd [1991] 1 NZLR 545 at 553 (Registered Securities), “[i]n such a case there is no apparent equity in that beneficiary entitling him to impose part of the loss on the other”. On the other hand, where purported records exist but bear no relationship to the true position, they will likely be disregarded: see, for example, Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (rec and mgr apptd) (1994) 49 FCR 334 at 360; (1994) 121 ALR 626 (Melbourne Asset Management); Georges v Seaborn International Pty Ltd (2012) 206 FCR 408; [2012] FCAFC 140 at [70].

15. [77]

    With that situation put to one side, attention can be turned to the three alternative approaches to the conundrum as to how to distribute limited funds of investors in a mixed, blended or co-mingled account.

16. [78]

    The rule in Clayton’s Case applies to the debtor/creditor relationship between a banker and its customer. It was initially supposed that the rule in Clayton’s Case applied to a circumstance where a fiduciary or trustee paid money of two or more trusts into a bank account and where they became mixed: see D A McConville, “Tracing and the Rule in Clayton’s Case” (1963) 79 LQR 388. Examples of this can be seen in In re Stenning; Wood v Stenning [1895] 2 Ch 433 and Hancock v Smith (1889) 41 ChD 456.

17. [79]

    The rule in Clayton’s Case was famously not applied, however, in Re Hallett, a case where there was one trustee and one beneficiary and the funds held on behalf of the beneficiary were mixed with those of the trustee/solicitor. The principal significance of the decision in Re Hallett lies in the subordination of the interests of a wrongdoer in a case where the wrongdoer has mixed his or her own funds with those of an innocent contributor. It was not concerned with a case where there was a blending in a mixed fund of the funds of multiple innocent contributors.

18. [80]

    Situations where the blended fund contains the funds of a wrongdoer and innocent contributor aside, in England, the rule in Clayton’s Case remains the starting point, albeit a readily displaced one, for resolving the conundrum as to the distribution of an inadequate mixed fund between innocent contributors: see, for example, Barlow Clowes at 33, 42 and 44; Russell-Cooke at [55].

19. [81]

    Clayton’s Case has not been applied in Australia, New Zealand, Singapore or Canada to a circumstance where the funds of innocent contributors have been mixed or blended in a bank account and there is a shortfall in funds available for recovery: see, for example, Hagan v Waterhouse (No 2) (1991) 34 NSWLR 308 (Waterhouse); French Caledonia at [160] and the cases there cited and [169]; Registered Securities at 553; Pars Ram; Re Ontario Securities Commission and Greymac Credit Corporation (1986) 55 O.R. (2d) 673; (1986) 30 DLR (4th) 1 (Greymac).

20. [82]

    In Waterhouse at 358, Kearney J endorsed the “emphatic pronouncement” in R P Meagher and W M C Gummow, Jacobs’ Law of Trusts in Australia (5th ed, 1986, Butterworths) at 695 that “Clayton’s Case regulates the state of account between banker and customer, and has nothing to say as to the relationship of trustee and beneficiary”. In Australian Securities Commission v Buckley (1996) 7 BPR 15,024 at 15,037 (Buckley), Santow J (as his Honour then was) said that this observation “begs the question as to the effect of the application of the relevant rules in a competition between two groups of beneficiaries for a single fund, whether in a bank account or otherwise”. In the current edition, J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (8th ed, 2018, LexisNexis Butterworths) at [27-11] (Jacobs), the position is clarified by the statement that “the rule in Clayton’s Case is inapplicable as between beneficiaries”.

21. [83]

    A powerful explanation for the inapplicability of the rule in Clayton’s Case to a circumstance such as confronts the Court in the present case was proffered by Learned Hand J in Re Walter J Schmidt (at 316):

22. [84]

    In making reference in the above passage to the equal bearing by beneficiaries of the depredations of the fund, one sees a manifestation of the pari passu approach to which attention is now turned although, as shall also be seen, Learned Hand J considered that the concept of bearing loss equally needed qualification by reference to the need to accommodate the “lowest intermediate balance” of the fund at any one time: see further at [106]-[129] below. As noted at [11] above and as will be explained further below, application of the lowest intermediate balance rule or method is, properly understood, in fact more of a refinement of, rather than a true alternative to, the pari passu rule or method.

23. [85]

    A very different approach to Clayton’s Case was taken by Astbury J in In re British Red Cross Balkan Fund; British Red Cross Society v Johnson [1914] 2 Ch 419 (British Red Cross). Justice Astbury’s judgment is a short but important one and bears reproduction in its entirety:

24. [86]

    This case, though a decision at first instance, has been cited on many occasions both in Australia and England, although Dillon LJ observed in Barlow Clowes (at 29) that the resulting trust reasoning upon which it appears to be predicated was misconceived because the objects of the trust were charitable, with the consequence that the surplus funds should have been treated cy-près. British Red Cross is also cited with apparent approval in the current edition of Jacobs at [27-11], as it had been in the first edition: K S Jacobs, The Law of Trusts in New South Wales (1958, Butterworths) at 159.

25. [87]

    On its face, the decision in British Red Cross, which was not cited to the primary judge nor, for that matter, on appeal, supports the primary judge’s conclusion in the present case and stands in the way of the Appellants’ argument. At least at a superficial level, it appears to be an example of the application of the maxim “equality is equity”. The learned authors, J D Heydon, M J Leeming and P G Turner, of Meagher, Gummow and Lehane’s Equity Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) at [3-130] identify the best summary of the purpose of this maxim as that given by P H Pettit in Halsbury’s Laws of England (4th ed, 1992 reissue, Butterworths):

26. [88]

    The pari passu approach to the distribution of a fund as between investors or contributors makes perfect sense in circumstances where all deposits were received at one time or, if not at one time, then before any material withdrawals from the fund were made, and where no subsequent deposits were made after those material withdrawals. As Debelle J observed in Magarey (at [120]):

27. [89]

    The pari passu approach may also be, and certainly has been, treated as appropriate where the nature of the investment involves investors knowing that their funds will be pooled with those of other investors for investment purposes. An example of this may be seen in the decision of Herring CJ in In re Australian Home Finance Pty Ltd [1956] VLR 1 at 11, where the Chief Justice noted:

28. [90]

    This decision was applied by Dunn J in Windsor Mortgage Nominees Pty Ltd v Cardwell (1979) ACLC 32,195 at 32,199 (Windsor Mortgage). Windsor Mortgage was in turn applied by Northrop J in Melbourne Asset Management at 353.

29. [91]

    In Idylic Solutions, Barrett J was dealing with a case involving a contest over the limited funds of two unregistered managed investment schemes, and an application for directions that the liquidator would be justified in taking certain steps in relation to the distribution of funds. At [47], his Honour said:

30. [92]

    Apart from the caveat implicit in his Honour’s use of the phrase “prima facie”, Barrett J placed a further important qualification on his endorsement of the pro rata approach, insisting that the investors bring into hotchpot the returns paid to them from the fund: see at [50] and [78] (and see [54]-[58] above).

31. [93]

    In the course of his analysis in Idylic Solutions, Barrett J put considerable weight on the nature of a common or collective investment pool, observing (at [74]) that:

32. [94]

    Similar reasoning to the pooled investment approach was applied by Williams J in International Investment Unit Trust at [74]-[76] and [81]. Williams J favoured the pari passu approach but with a significant qualification insofar as his Honour also recognised the proprietary claims of three investors who could show their funds had not been disbursed to other investors or otherwise withdrawn: see at [22]. These three investors had deposited their funds on 27 June 2003, some six days prior to the appointment of statutory managers under the Corporations (Investigation and Management) Order (No 2) 2003 (NZ).

33. [95]

    In Tasman Investment Management at [55], Austin J observed that:

34. [96]

    Similar approaches may be seen in Barlow Clowes; Australian Securities and Investments Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719; Westpac Banking Corporation v Earthwise International Limited [2005] NSWSC 1037 at [10]; Rowena Nominees; Hannan v Zindilis (2016) 51 VR 178; [2016] VSC 723; Russell-Cooke at [46] and [58]. In Barlow Clowes at 41, Woolf LJ was prepared to attribute to investors an intention to pool their funds by reference to their common misfortune even if, when making their investments, they had not contemplated or intended such a pooling.

35. [97]

    A similar simple pari passu approach was applied by the Ontario Court of Appeal in Law Society of Upper Canada v Toronto Dominion Bank (1998) 169 DLR (4th) 353; (1998) 42 OR (3d) 257 (Toronto Dominion). The Toronto Dominion Court described the “pari passu ex post facto” approach as one according to which remaining but insufficient funds in a blended account should be shared amongst depositors in proportion to their contributions, without regard to any intervening state of the mixed fund, an approach similar to that adopted in British Red Cross. Delivering the judgment of the Court, Blair J described this approach as the most “convenien[t]” and “workab(le)”: Toronto Dominion at [37].

36. [98]

    The decision is subject to cogent criticism by Professor Smith in his article, “Tracing in Bank Accounts: The Lowest Intermediate Balance Rule on Trial” (2000) 33 Canadian Business Law Journal 75. Professor Smith, who strongly favours the “lowest intermediate balance rule” which is discussed in greater detail below, observed that Toronto Dominion was inconsistent with the earlier decision of the same Court in Greymac, which had been approved by the Supreme Court of Canada (see Greymac Trust Co v Ontario [1988] 2 SCR 172) and which was not relevantly distinguishable. Professor Smith also attacked the rationale of the pari passu approach, as articulated in Toronto Dominion, as being one of “convenience”, trenchantly asking (at 88):

37. [99]

    A similar view as to the superficial though illusory fairness of the simple pari passu approach animated the judgment of Santow J (as his Honour then was) in Buckley at 15,038. In Barlow Clowes at 32, Dillon LJ observed that “[i]f the application of Clayton’s Case is unfair to early investors pari passu distribution among all seems unfair to late investors”. In Magarey, Debelle J put the matter rather clearly when his Honour said (at [120]) that “[t]here is no equity in requiring clients who had placed moneys into the trust account in 2005 to contribute to defalcations made several years earlier”.

38. [100]

    With typical flourish, the pari passu or rateable approach has been described by L W J Aitken as “appeal[ing] to those who were early beguiled into entrusting their funds to a defaulter”: see “Tracing into mixed funds” (2003) 77 ALJ 230 at 231. He goes on to note, however, presaging the current case, that “there will usually be one or two disaffected applicants who hope (the devil take the hindmost) to enjoy all the funds for themselves on the sound basis that they were last to pay in”.

39. [101]

    Toronto Dominion was considered by Campbell J in French Caledonia. His Honour identified the two proffered rationales for the Court’s decision and the rejection of the lowest intermediate balance rule. One reason was pragmatic, namely that performing the calculations required to identify the proportions in which the fund was held following each deposit or withdrawal would be extremely complicated in principle, and often not achievable in fact: at [191]. The second identified rationale was that the fund was a blended fund and, when it was wrongly depleted, it was the fund as a whole which was wrongly depleted, not any particular beneficiary’s contribution to it: at [191]. His Honour (at [192]) did not accept that either of these rationales led to a conclusion that:

40. [102]

    Toronto Dominion had a relatively short ascendancy in Canada, and subsequent decisions have seen the “lowest intermediate balance” approach associated with the Ontario Court of Appeal’s earlier decision in Greymac revived: see, for example, Boughner v Greyhawk Equity Partners Limited Partnership (Millenium) (2012) 111 OR (3d) 700; [2012] ONSC 3185, approved in [2013] ONCA 26; [2013] 5 CBR (6th) 113 (Boughner) and A Duggan “The Death and Resurrection of the Lowest Intermediate Balance Rule” (2017) 80 Saskatchewan Law Review 209 at 216-225, and the cases there cited.

41. [103]

    The pari passu approach was also endorsed, but subject to an important qualification, in Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 at 460-461 (Keefe), which involved an analysis of funds mixed in a solicitor’s trust account in circumstances where, by reason of defalcations by the solicitor, the balance of the account was inadequate to satisfy in full the claims of the various clients whose monies had been held in trust. Priestley JA referred to Waterhouse and to the then current edition of Jacob’s Law of Trusts in Australia (see R P Meagher and W M C Gummow, Jacobs’ Law of Trusts in Australia (6th ed, 1997, Butterworths) at 749-751) as warranting a rateable or pro rata distribution but, significantly, went on to say (at 461) that:

42. [104]

    Consistent with this observation, it has been argued that “an approach which pro rates all mixed funds without further consideration is too simplistic”: S B Thomas, “Clayton’s Case and the ‘common pool’ exception” (2004) 15 Journal of Banking and Finance Law and Practice 177 at 190. Professor Smith would describe it as “ahistorical”.

43. [105]

    The circumstance adverted to by Priestley JA in the passage extracted from Keefe at [103] above is that presented by the lowest intermediate balance rule which may be applied to a mixed fund into which deposits have been made at various times together with withdrawals – the familiar workings of a running bank account. As was noted at [13] above, application of the pari passu approach in that situation is apt to favour earlier depositors at the expense of later depositors, and the lowest intermediate balance rule, to which attention is now turned, is calculated to negative that advantage in a principled way.

44. [106]

    As was pointed out by Priestley JA in Keefe, pari passu distribution from a limited co-mingled fund becomes more complicated and potentially problematic from a practical (as opposed to principled) point of view, where it seeks to take into account and adjust rateable interests in light of ongoing deposits and withdrawals from the fund.

45. [107]

    Putting aside a case where the “value” of withdrawals from a blended or mixed account is itself able to be traced into assets or some other value, a question arises as to the significance of those withdrawals for the claims of the earlier depositors. Are those claims rateably reduced, or do they survive notwithstanding that at least some of the monies originally deposited have been dissipated in such a way that their value is lost? The lowest intermediate balance rule supports the first and rejects the second answer to this question (at least in cases where subsequent deposits to the blended fund are by innocent contributors rather than by the wrongdoer, in which case those deposits may be treated as repayments by the wrongdoer to the earlier depositors: see Scott at 133 and 137.)

46. [108]

    The lowest intermediate balance rule or rolling charge approach was accurately described in Toronto Dominion (at [14]) as stating that:

47. [109]

    In the Ontario Court of Appeal’s decision in Greymac which, as outlined at [98] above, was endorsed by the Supreme Court of Canada, the lowest intermediate balance rule was described as “pro rata sharing on the basis of tracing”: at 689. For reasons to which I shall return, this is a useful description, recognising the equitable proprietary nature of a contributor’s rights in a mixed or blended fund in a case such as the present. Such a description also reflects the fact that, as indicated at [11] and [84] above, the lowest intermediate balance rule is a refinement of the simple pari passu approach associated with cases such as British Red Cross. On the other hand, the use of the expression “pro rata” may be apt to confuse, and this may partly explain the (temporary) departure from Greymac by the Ontario Court of Appeal in Toronto Dominion.

48. [110]

    The lowest intermediate balance rule has been recognised in England: see, for example, James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62; Barlow Clowes at 35 and 44; Bishopsgate Investment Management Ltd (in liquidation) v Homan [1995] Ch 211 at 219 and 221; In re Goldcorp Exchange Ltd (In Receivership) [1995] 1 AC 74 at 104; but, cf Foskett noted at [64] above. In Federal Republic of Brazil v Durant International Corporation [2016] AC 297; [2015] UKPC 35 at [41], Lord Toulson, delivering the advice of the Privy Council, said that “[t]he Board does not doubt the correctness of the decisions in James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 and In re Goldcorp Exchange Ltd [1995] 1 AC 74.”

49. [111]

    The lowest intermediate balance rule was also endorsed by the New Zealand Court of Appeal in Registered Securities at 554 (discussed further at [130ff] below), and the High Court of Singapore in Pars Ram at [8] and [26]. It has also been applied in Jersey: In re Esteem Settlement [2002] JLR 53 at [111] (Esteem Settlement).

50. [112]

    There are also examples of it being applied or endorsed in Australia: see, for example, In re Laughton [1962] Tas SR 300 at 307; Whitehand v Jenkins (Supreme Court (Vic), Ormiston J, 6 February 1987, unrep); Buckley; and French Caledonia.

51. [113]

    As noted at [109] above, the lowest intermediate balance rule was applied in Canada in Greymac and, after a brief hiatus associated with Toronto Dominion, continues to be applied in Canada (see [102] above). It has been described as the general rule for allocating funds when there is a shortfall in a trust account or in an account that has been impressed with a constructive trust by operation of law: Easy Loan Corporation v Wiseman [2017] ABCA 58 at [57] (Wiseman). Two exceptions from this default position are where the lowest intermediate balance rule is unworkable, or where the beneficiaries expressly or impliedly intended another method of distribution: Wiseman at [57]. (As to the former, the Chief Justice has succinctly highlighted at [2] above the complexity that may arise depending on questions of timing, the precise terms of any trust and the nature of historic dealings with the fund(s) in question.)

52. [114]

    The lowest intermediate balance rule is also strongly supported by Professor Smith in Tracing, who views it as involving an entirely orthodox application of the rules of tracing: at 204-205 and 265. See also Professor Smith’s article noted at [98] above.

53. [115]

    In Barlow Clowes, Woolf LJ said (at 35) that application of the lowest intermediate balance rule in a case involving a mixed fund “should produce the most just result”. Similarly, Dillon LJ observed (at 33) that it was “the more logical method” of calculating a claimant’s share in a fund, and Leggatt LJ noted (at 44) that the “fairness of that course [was] obvious”. In French Caledonia (at [175]), Campbell J described the rule as “fundamental to a principled approach to tracing”, stating that:

54. [116]

    In similar vein, in Global Finance at [135]-[136], McLure J (as her Honour then was) noted the “obvious theoretical and practical overlap” between the lowest intermediate balance rule and the rationale for the rule which prevents equitable tracing into an overdrawn bank account, namely that “the property being traced must continue to exist in some form up to the time of, and through to, the traceable product.” This is consistent with the observation of Lord Mustill in Re Goldcorp Exchange Ltd [1995] 1 AC 74 at 105, that “moneys said to be impressed with [a] trust … paid into an overdrawn account … thereupon [cease] to exist.”

55. [117]

    In French Caledonia, Campbell J pointed out that “[t]he maxim ‘equality is equity’ does not require that the available funds be divided between all people who can establish that, at one time, they had a claim on a bank account in which property held on trust for several people have [sic] been mixed”: at [176]. His Honour referred to the need to determine a preliminary question, namely whether all the claimants on the fund have claims which are equal, observing (at [177]-[178]) that:

56. [118]

    Importantly, Campbell J observed that the requirement to bring into hotchpot benefits received from the fund is an illustration of a personal equity which results in the charge which one contributor has being held to be of lower priority than the charge which another contributor has: French Caledonia at [183].

57. [119]

    In Letten (No 7), Gordon J observed (at [279]) that:

58. [120]

    The objections to the application of the lowest intermediate balance rule rest not on principle, but in a practical concern relating to the cost and complexity of its application. That practical concern has its greatest potency the larger the number of contributors to the fund or funds in question, the longer the time of its operation and the more confused or obscure the state of the records. The economic feasibility of conducting such an exercise may also be affected by the size of the co-mingled fund; it may be too small to justify the cost that may be involved in applying the lowest intermediate balance rule, even if that were theoretically capable of taking place. In both Barlow Clowes at 28 and French Caledonia at [193], for example, the lowest intermediate balance rule approach was rejected for practical reasons, notwithstanding the acknowledgement of its logic and fairness, which have been noted at [115] above.

59. [121]

    Furthermore, even with the availability of computer programs to assist with the process of calculation and iterative recalculation that the lowest intermediate balance rule requires (a matter drawn attention to by Professor Smith almost 25 years ago: Tracing at 268-269; see also S Lowrie and P Todd, “In Defence of the North American Rolling Charge” (1997) 12 Denning Law Journal 43 at 58-59), the cost and expense may, as was observed by Henderson J in Charity Commission for England and Wales v Framjee [2014] EWHC 2507 (Ch) at [55], principally lie in the reconstruction of raw data. Fraudsters are not renowned for their commitment to orderly and immaculate record keeping, and even if capable of it, the creation and maintenance of an accurate and meaningful paper trail is not generally part of their modus operandi. So too, where there has been a corporate collapse resulting in limited co-mingled funds caused by mismanagement and incompetence, inadequate record keeping will frequently be symptomatic of that mismanagement.

60. [122]

    Whilst accepting that the authorities are not all one way, for the main part, the case law ties the application of the lowest intermediate balance rule in any given case to the availability of evidence to ascertain it, and the cost and complexity of assembling and analysing such evidence. In circumstances where either the parties have agreed that that would be too costly or complex (as in Barlow Clowes) or where the court reaches that view, the simple pari passu approach has been followed, not because it is superior as a matter of principle, but rather as a default position, being simpler in its application compared to the lowest intermediate balance rule and less arbitrary in its application than the rule in Clayton’s Case.

61. [123]

    But even where a liquidator and/or a court has formed the view that it is too costly or impractical to apply the lowest intermediate balance rule to the co-mingled fund as a whole for distribution purposes, that is not to deny the potential significance of the lowest intermediate balance rule to the case of a mixed fund in circumstances where an investor or contributor to the fund seeks to follow or trace into that fund to identify an equitable proprietary interest.

62. [124]

    The corollary of the lowest intermediate balance rule is that relatively clear property interests are not to be altered by reference to some notion of common misfortune: see MF Global at [78]; Re BBY at [83(6)]. Although both of these cases were principally concerned with pooling in the sense described at [27] above, the reasoning is analogous to a case such as the present.

63. [125]

    There is some tension between statements made in Australian authorities such as French Caledonia, MF Global and Re BBY, on the one hand, and at least the judgment of Woolf LJ (as his Lordship then was) in Barlow Clowes. In this context, Woolf LJ dealt with an argument that bears a very close affinity to that made by the Appellants in the present case, stating (at 41-42):

64. [126]

    This analysis would appear to deny the availability of tracing because of a deemed intention to pool. As Campbell J pointed out in French Caledonia (see at [117] above), the equities will not necessarily be equal at all unless one views the matter with hindsight as to the common misfortune of all investors, as Woolf LJ appears to do,

65. [127]

    The example with which Woolf LJ dealt in the passage from Barlow Clowes extracted at [125] above was not considered by either Dillon or Leggatt LJJ in that case, and both delivered separate judgments in which they did not express any agreement with Woolf LJ.

66. [128]

    In the conclusion to his judgment in Barlow Clowes, Woolf LJ articulated a flexible approach to what I have described at the outset of these reasons as a classic insolvency conundrum, stating (at 42) that:

67. [129]

    Leggatt LJ preferred the lowest intermediate balance rule over the simple pari passu approach, with the latter to be applied only in circumstances such as obtained in that case, namely where calculation by reference to the lowest intermediate balance rule proved to be “too difficult or expensive”: at 44.

68. [130]

    In Registered Securities, the Court of Appeal recognised the logic of the lowest intermediate balance rule when it observed (at 554):

69. [131]

    On the other hand, the New Zealand Court of Appeal went on to point out (at 555) that:

70. [132]

    This order closely mirrored that which had been made by the House of Lords in Sinclair v Brougham at 460. The decision of the Court of Appeal in Barlow Clowes may be similarly viewed as a pragmatic response in a case where a more principled approach, based on the lowest intermediate balance rule, was not practically available.

71. [133]

    The effect of the decision in Registered Securities was pithily summarised by McGechan J in McKenzie v Alexander Associates Ltd (No 2) (1991) 5 NZCLC 67,046 at 67,065 as follows: “where there can be tracing, there shall be tracing. Where there cannot, the ‘nearest approach practicable to substantial justice’ shall be taken.” This translates, in my view, to adoption of the lowest intermediate balance rule which is, as was pointed out in Greymac at 689, “pro rata sharing on the basis of tracing” (see [109] above), with application of the simple pari passu approach to be undertaken if application of the lowest intermediate balance rule is not feasible or possible. As Brereton J has observed, in this context, the language “not possible” or “impossible” does not mean impossible in any absolute sense, but rather not economically or reasonably practical: Re BBY at [57].

72. [134]

    The continued ability of particular investors to seek to trace into a mixed or co-mingled fund was also at the heart of Santow J’s reasoning in Buckley. His Honour said (at 15,038) that:

73. [135]

    As Lord Millett said in Foskett (at 127):

74. [136]

    A case bearing a very close affinity to the facts of the present case is the decision of Chesterman J in Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 82 (Enterprise Solutions). In this case, ASIC had sought orders pursuant to ss 1114 and 1324 of the Corporations Act restraining Enterprise Solutions from carrying on an investment advice business within the meaning of s 77 of the Corporations Act, and for consequential orders for repayment of monies obtained in consequence of their having acted as investment advisors.

75. [137]

    Enterprise Solutions had attracted investments from the public to participate in what Chesterman J described as “elaborate schemes”, which were designed to generate substantial profits from betting on racehorses in Australia and Hong Kong: at [1]. The money, however, was used for different purposes. The schemes had been held, in a prior hearing, to be unlicensed “managed investment schemes”: at [1].

76. [138]

    Receivers had been appointed to take possession of all of the assets of the schemes, with the exception of some monies that were said to be held by residents of Vanuatu. The actual application before Chesterman J was in relation to orders sought by the receivers to distribute the proceeds of the receivership. The receivers wished to pay the proceeds to those members of the public who had invested in the schemes, but they required an order for this purpose. The order that was sought was that they pay the net proceeds of the receivership rateably to those investors in the schemes who had been identified and whose proofs of debt had been admitted. As is typical in such cases, the proceeds which had been recovered by the receivers were significantly less than the amounts that had been invested by members of the public who had participated in the schemes.

77. [139]

    The investors had been advised of the proposal to distribute the fund rateably and, with one exception, there was no opposition to the proposal. Chesterman J observed (at [13]) that:

78. [140]

    Chesterman J also said (at [14]) that:

79. [141]

    As noted at [139] above, one investor opposed the rateable distribution, approval of which had been sought by the receivers. That was a Mr Collins, whose particular case Chesterman J described as “hard”: at [15].

80. [142]

    Mr Collins, who was a relatively late investor, sought, like the Appellants in the present case, to recover in full the amount of his investment, claiming that it could be traced from the bank account into which he paid it into funds obtained by the receivers. The detail of his investment and the subsequent activity on the bank accounts is of importance for understanding both the decision and the question of principle. That detail was set out by Chesterman J (at [17] – [19]) as follows:

81. [143]

    On these facts, Chesterman J concluded (at [20]) as follows:

82. [144]

    It may immediately be observed that, at least on its face, there was far more activity on the bank accounts in Enterprise Solutions after Mr Collins’ investment than was the case with respect to the investments made in CH on 21, 24 and 26 April 2017 by these investors who were represented by the Appellants in the current case. But the key point to be taken from Enterprise Solutions for present purposes is that it recognised the ability of an investor to seek to establish a proprietary claim. Principle and the ultimate order justifying a pari passu distribution by the liquidators in that case did not stand in the way of Mr Collins’ attempt to establish his claim. The proprietary claim simply did not succeed on the facts.

83. [145]

    Subject perhaps only to the existence of knowledge and intention on the part of investors whose funds have been co-mingled that their funds were always going to be treated as such (see [89]-[97] above), the lowest intermediate balance rule recognises the continuing vitality of “clearly discernible separate property rights” (Russell-Cooke at [35]), and is a means of identifying them.

84. [146]

    The value of particular investors’ interests in the co-mingled fund falls to be determined “on available evidence”: Sonray (at [86]). Where evidence is available, as it was in Greymac, Boughner, Esteem Settlement and Pars Ram, for example, the lowest intermediate balance rule has been applied and provides what, in my opinion, is the fairest, most equitable and principled outcome for the allocation of limited funds between investors.

85. [147]

    True it is that more recent investors will do better than earlier investors under this method, but that result follows from the application of established principle and respects the historical operation of the account in which funds have been co-mingled and the investors' underlying proprietary interests. This quintessentially factual approach is superior to the fiction or presumption upon which the so-called rule in Clayton's Case rests, and is also superior to the simple pari passu approach because, whilst incorporating a modified form of rateability, it is more consistent with equitable principle and the rules of tracing. The simple pari passu approach may also result in later investors whose funds were not, or were not significantly, dissipated, cross-subsidising earlier investors whose funds had, at least to some extent, been lost prior to any involvement of later investors.

86. [148]

    As Gordon J explained in Sonray (at [86]), “if a claimant can establish a remedy founded on tracing, the Court will grant relief founded on that evidence because it permits it to reach a different conclusion in respect of that claimant” compared to the result that would follow upon the application of a simple pari passu approach. To similar effect, in French Caledonia, Campbell J observed (at [189]):

87. [149]

    The importance of evidence to determine the most appropriate approach to distribution of a limited fund and the conduct of a reliable tracing exercise was also emphasised by Hargrave J in Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd (2017) 52 VR 664; [2017] VSC 101 at [423]-[430]. His Honour pointed out a number of issues upon which further evidence and submissions were required. The necessary analysis is a task for the party or parties wishing to invoke the lowest intermediate balance rule cf. Heperu Pty Ltd v Belle (2009) 76 NSWLR 230; [2009] NSWCA 252 at [121].

88. [150]

    In Re BBY, Brereton J made an important related point at [67], noting that liquidators and courts supervising them have to act on such evidence as is available, together with reasonably available inferences, without insisting on the proofs that would be required in a beneficiary’s claim. Earlier at [40], his Honour had observed that:

89. [151]

    In giving directions that a liquidator would be “justified” in taking a particular course, the Court is not determining equitable proprietary rights. Rather, the effect of such orders is to immunise the liquidator from personal liability, provided that he or she acts in accordance with the Court’s directions. As Black J observed in MF Global (at [8]):

90. [152]

    If a claimant insists on exercising a right to trace into a mixed fund, authorities such as French Caledonia, Sonray, Buckley and Registered Securities recognise that he, she or it may do so (even though the liquidator otherwise seeks the Court’s blessing for a pari passu distribution). This is an exercise in the vindication of proprietary rights or interests. Unlike the liquidator seeking directions, such a claimant will need to be able to establish, on the balance of probabilities, the proprietary interest claimed (as well as the fact that that interest is not required to be subordinated to that of other contributors by reason of the application of the principle of hotchpot or some other disentitling equitable consideration: see French Caledonia at [177] – [178], extracted at [117] above).

91. [153]

    The identification of an equitable proprietary interest as a result of tracing will generally be easier for those depositors or investors who have made their investments at a later point in time, because such deposits will either not have been eroded by withdrawals, or only rateably diminished by a smaller number of withdrawals than will be the case for earlier depositors.

92. [154]

    Whilst a liquidator might conclude that it would be impractical or excessively and counter-productively costly to engage in a full analysis of movements in the co-mingled fund or funds, including applying the lowest intermediate balance rule at the time of each withdrawal and to adjust the value of individual investors’ claims accordingly in order reliably to ascertain the claims of all investors, the exercise may not be nearly so daunting or expensive for those investors who have come late to the party, as it were.

93. [155]

    It should not be a cause for surprise that such investors would wish to take that course, and the authorities that have been referred to above on the whole permit such a course to be undertaken.

94. [156]

    This leads me to return to the facts of the present case.

95. [157]

    The Appellants submitted that a simple pari passu distribution was not appropriate where there were relatively clear property interests in the fund or where there was a rational basis to distinguish between claimants to a fund. They contended that:

96. [158]

    The Appellants emphasised that because, apart from the $60,000 withdrawal referred to in [37] above which occurred on 21 April 2017, CH did not dissipate any further funds from the Westpac account after and by virtue of the freezing order made at 3.11pm that day, the funds deposited on 21 April 2017 were clearly identifiable, with the position even clearer in respect of funds that had been deposited on 24 and 26 April 2017.

97. [159]

    The Appellants also invoked the negative proposition that the fact that two groups of investors has shared a “common misfortune” was not enough to deny one group their right to trace independently into a particular account, citing in support the observations of Santow J in Buckley (see at [134] above).

98. [160]

    The Respondent, on the other hand, submitted that every investor had suffered a misfortune and so should share in the working out of that misfortune rateably. The Respondent submitted that the moneys deposited by the Post 21 April 2017 Investors were no less mixed than those deposited before that date, as illustrated by the fact of the $60,000 withdrawal on 21 April 2017.

99. [161]

    The Respondent also, in supporting the primary judge’s reasoning, drew attention to the fact that there were deposits made into the Westpac account on 19 and 20 April 2017, the days immediately before the freezing order, as well as withdrawals on those days as set out in the following table:

100. [162]

     The purpose of these evidentiary references was to highlight forensically the relative similarity of position of those who had invested in the days prior to the freezing order on 21 April 2017 with the position of those who had invested on or after that day, and to make the point that different methods of distribution would be applied to them, with very different financial consequences. Thus, the Respondent submitted by reference to the table that:

101. [163]

     This resulted in the submission that, whilst the complexity of the exercise may increase exponentially the further back in time one goes, “that is not a reason to place the Post 21 April 2017 Westpac Investors in a special category”. The Respondent’s argument as to the similarity of position of the Pre- and Post-21 April 2017 Investors was thus deployed in favour of the simple pari passu approach being applied across the board, rather than one which permitted only the Appellants and the other investors they represented to follow their investments into the Westpac account.

102. [164]

     As Campbell J pointed out with great clarity in French Caledonia (at [177]-[178]), the simple pari passu approach is not necessarily to treat all investors equally, other than in a superficial sense, and the claims of investors who have been defrauded are not always equal (see [117] above). Application of the lowest intermediate balance rule permits the tracing of surviving proprietary interests, and that is in effect what the Appellants seek to do. Decisions such as Sinclair v Brougham, Registered Securities, Buckley and French Caledonia all accept that, where a party can identify through tracing his, her or its equitable proprietary interest in a mixed or co-mingled fund, such tracing should be permitted. In this context, application of the lowest intermediate balance rule best accords with both authority and long established rules of tracing designed to identify (not create) equitable proprietary interests.

103. [165]

     Application of what I have described as the simple pari passu or pro rata method or approach would result in the present case, for example, in the unsatisfactory consequence that fresh investments on and after 21 April 2017, the day CH’s accounts were frozen and the “business” was effectively shut down, being used to subsidise earlier investors who in fact had been defrauded. To adapt the language of Professor Smith to which reference has been made at [98] above, application of the simple pari passu approach is to force one victim to subsidise another in the face of evidence before the Court (namely that some or all of an earlier investor’s deposit had been dissipated) and openly to redistribute property.

104. [166]

     Notwithstanding the Appellants’ colourful submission that a pari passu order which applied to the Post-21 April 2017 Investors would have the “undesirable effect of extending the effect of the Ponzi scheme” and of undermining the beneficial effect of the freezing order obtained by ASIC, it follows from my analysis that there was no particular magic in 21 April 2017, that being the date of the freezing order. In a very real sense, that was an arbitrary or, as the Respondent submitted, “artificial” date in terms of the tracing of equitable proprietary interests in the Westpac account, and the ability to do so.

105. [167]

     It will be recalled in this context that the primary judge concluded at [45] of his judgment that:

106. [168]

     I agree with the primary judge that the date of the freezing order did not provide a principled basis for differentiating between investors on either side of that line. Indeed, as noted at [38] above, at least one of the investors whose interests were represented by the Appellants made the relevant investment prior to the freezing order, albeit on the same day, and as such bore a closer affinity with those investors who had invested on 19 and 20 April 2017.

107. [169]

     Where I disagree with the primary judge, however, is that the fact that there were other investors on the other side of the freezing order line should not, as a matter of principle, have prevented those investors whose interests were represented by the Appellants from tracing or following their investments into the Westpac account in order to identify their equitable proprietary interests. In this respect, I accept the Appellants’ submission that “[t]he fact that others do not press for their rights is not a proper basis to deny the Post 21 April 2017 Westpac Investors the relief they seek in reliance upon their rights”.

108. [170]

     It may well be that those who had invested on 20 April 2017, or 19 April 2017, or possibly 21 March or 21 February or 21 January 2017 or indeed, I would add, even earlier, could also have undertaken calculations by reference to the lowest intermediate balance rule or rolling charge approach in order to identify their equitable proprietary interests. Indeed, it may be that such investors could still do so, senior counsel for the Respondent submitting in this respect that such investors only had not done so because “they have not had representatives appointed who have been funded out of the trust assets to advocate their positions in this respect”.

109. [171]

     It would appear from the two Liquidators’ Reports that the Liquidators have not undertaken any tracing exercise other than, inferentially, in respect of the Post-21 April 2017 Investors. Whether or not earlier investors would wish to do so or have eschewed any interest in so doing is unknown, and whether or not they should be funded out of trust assets to do so was not a question explored on the appeal. The table set out at [161] above and the Respondent’s submissions referred to at [162] above suggest, however, that the exercise would not necessarily be overly complex at least for those investors who made their deposits on 19 or 20 April 2017.

110. [172]

     As has been observed both generally and specifically in the context of the present case, noting that there were 22 withdrawals and 42 deposits in the month prior to the freezing order (see [39] above), the further back into the history of a mixed account one travels, the more complex and costly is the tracing exercise.

111. [173]

     That is not to say that such an exercise cannot be done.

112. [174]

     It is equally not to say that a liquidator must undertake such a task if he or she makes a bona fide assessment that the costs and complexity of undertaking it are not justified and/or that the records of the company or companies in liquidation are such that the exercise may not be able to be reliably undertaken.

113. [175]

     In summary, therefore, whilst the learned primary judge’s disquiet at the different consequences for investors on either side of the freezing order line was understandable, that disquiet should not, in my opinion, have resulted in a denial of the relief the Post-21 April 2017 Investors sought.

114. [176]

     It should also be noted that the Respondent submitted that simple pari passu distribution was justified on the basis that a number of the investors who had invested on or after 21 April 2017 had also made earlier deposits and had secured returns so that they were, in this sense, “return” investors who had unwittingly benefitted from the operation of the Ponzi scheme. A table making good this submission was supplied to the Court.

115. [177]

     In my opinion, this argument would have relevance, if anywhere, in the hotchpot hearing (see [181] below).

116. [178]

     Before concluding these reasons, something needs to be said about the uncertainty that subsists with regard to the withdrawal of $60,000 on 21 April 2017, and whether or not that withdrawal occurred before or after the deposits on that day. In my opinion, this issue should be resolved by reference to the burden of proof. Where a party seeks to trace into a mixed fund in order to achieve a superior outcome to that which may be achieved by earlier investors by identifying a proprietary interest, it will be for that party to establish its interest. Where a bank account records both a withdrawal and a deposit on the same day but there is no evidence that the withdrawal predated the deposit of the funds into the account, the depositor will not have established that the withdrawal occurred prior to the deposit.

117. [179]

     In these circumstances, in my opinion, the effect of the withdrawal should be treated as having depleted the interest of those who made deposits on that day in the same proportion as those deposits bear to those made by other claimants on the account as at 21 April 2017. This is the third of the approaches referred to by the Liquidators in their 2nd Report (see [40] above) and was accepted as a proper approach by the Appellants in their written submissions in order to achieve “the most equitable outcome possible” in the circumstances of the case.

Conclusion and orders

1. [180]

   It follows from the above that I would make the orders sought by the Appellants in the Notice of Appeal (see [60] above).

2. [181]

   One matter should be noted for completeness. As is reflected in the orders sought in this appeal, the Appellants recognise that their claim is subject to an application of the principles of hotchpot. That may be because at least in the case of some of the Appellants, their “fresh” investments made on and after 21 April 2017 in substance, if not in form, represented a rolling over of an earlier “repaid” investment or re-investment of “dividends” received from earlier investments. It has also been noted at [54] above that a separate hotchpot hearing took place earlier this year.

3. [182]

   Whilst recognising that it may not always be possible, it is nonetheless desirable, in my opinion, from the perspective of minimising costs, that questions of hotchpot are resolved in the same hearing as more general questions relating to the distribution of limited funds in a mixed or co-mingled account or accounts.

4. [183]

   Finally, I note that in his Honour’s judgment appointing the Appellants and the Respondent as representative parties for the purposes of this appeal (see [61] above), Basten JA gave a direction and order or advice, pursuant to s 90-15 of the IPS and s 63 of the Trustee Act, that the Liquidators were justified in paying the legal costs and disbursements of the Appellants and Respondent incurred in relation to and incidental to the appeal and the Liquidators’ own costs of a submitting appearance in the appeal, calculated at the usual rates of the solicitors and counsel engaged by them, in an amount as approved by resolutions of the Committees of Inspection.

5. [184]

   I do not consider there to be any basis to depart from these orders. It may be noted, however, that to the extent that these costs deplete the size of the fund available for distribution, the claims on the fund by the Appellants and those investors they represent should be rateably reduced by these costs, so that the other investors do not end up subsidising the recovery by the Appellants and those investors they represent in a disproportionate way.

6. [185]

   MACFARLAN JA: I agree with Bell P.