Tracing Into Assets which have Increased in Value

In Preston, in the matter of the Forum Group of Companies Pty Ltd (in Liq) [2025] FCA 883 (1 August 2025), Cheeseman J, in the Federal Court of Australia, afforded useful commentary as to the application of the law pertaining to tracing in equity.  In the reasoning – as may be seen below – there was distinguished the operation of the principle in Scott v Scott (1963) 109 CLR 649, which provides:

It is, we think, important to observe that the liability of a trustee to account in such cases is not confined to a limited group of categories but extends to all cases where such a profit has, in fact, been made. We agree with his Honour’s analysis of the cases to which he referred and we agree with his conclusion. The argument to the contrary is, we think, based upon an erroneous conception of the true principle. No doubt it is true to say that in this case the estate was entitled to assert a lien upon the property purchased with the mixed fund to secure the amount misapplied. But it is erroneous to say that in the circumstances of this case this was the full measure of the relief to which the estate was entitled. It was, of course, conceded that where property is, in breach of trust, bought exclusively with trust moneys the beneficiaries may, instead of pursuing their personal right against the trustee, elect to take the property. Again it was conceded that where property is purchased, in breach of trust, with a “mixed fund” the beneficiaries may, if the property is “specifically severable”, elect to take such part thereof as bears the same proportion to the whole as the misapplied trust moneys bore to the purchase price. Property may be thought to be “specifically severable” where it consists of bonds or a parcel of shares: Brady v Stapleton (1952) 88 CLR 322. This may also be the position if the property purchased consists of a flock of sheep or a herd of cattle or so many bales of wool and so on though difficulties might arise where the severance could not be made at a point precisely commensurate with the amount of trust moneys misapplied

Cheeseman J wrote:

PART A — INTRODUCTION

[1]  In this Distribution Application Mr Jason Preston and Mr Jason Ireland, the applicants, seek judicial advice and directions in relation to the distribution of an array of assets realised following the collapse of various companies directly or indirectly involved in, affected by or benefitting from the Forum Finance fraud. That fraud is the subject of the liability judgment delivered in proceedings NSD616 of 2021, NSD681 of 2021 and NSD642 of 2021 (the Financier Proceedings): Westpac Banking Corporation v Forum Finance Pty Ltd (in liq) (Liability) [2024] FCA 1176 (Liability Judgment or LJ).

[2]  These reasons assume familiarity, and should be read together, with the Liability Judgment. In the main I have adopted the defined terms used in the Liability Judgment.

[3]  In the Financier Proceedings, the Financiers established that Mr Basile Papadimitriou (also known as Bill Papas), Mr Vince Tesoriero, their respective and jointly owned related companies and others were involved in a fraud principally perpetrated against Westpac Banking Corporation (WBC), Westpac New Zealand Ltd (WNZL) (together, Westpac), SMBC Leasing and Finance Inc (SMBC) and Societe Generale (together, the Financiers). Final orders granting relief were made on 21 May 2025 with further orders being made on 23 May 2025 and 4 June 2025 with reasons being delivered contemporaneously with these reasons: Westpac Banking Corporation v Forum Finance Pty Ltd (in liq) (Relief) [2025] FCA 882.

[4]  In the present proceeding, the applicants apply in their various capacities as either the joint and several liquidators of the relevant asset-holding corporate plaintiffs or as Court-appointed receivers and managers of trust property that is or has been affected in one way or another by the fraud. I will refer to Mr Preston and Mr Ireland as the applicants unless it is necessary to differentiate as to the particular capacity in which they are acting in a given context, in which case I will refer to them as either the liquidators or the receivers, as the context requires.

[5]  The applicants seek judicial advice, or direction, that they are justified in distributing the assets of each entity (which comprise mainly the net proceeds of the realisation of assets) in the order of priority which they have proposed. The application is supported by extensive evidence, some of which was addressed in the Liability Judgment, and expounded by written submissions which were further refined by the oral submissions made on this application.

[6]  In bringing the application, the applicants principally rely on s 90–15(1) of the Insolvency Practice Schedule (Corporations) (IPS) in Sch 2 to the Corporations Act 2001 (Cth). They also rely as necessary on various other sources of power, which I will address in Part G of these reasons.

[7]  The function of a liquidator’s application for directions is to give the liquidator advice as to the proper course of action to take in the liquidation: Re Force Corp Pty Ltd (in liq) [2020] NSWSC 1842; 149 ACSR 451 at [18] (Gleeson J). Provided that the liquidator has made full and fair disclosure to the Court of the material facts, the liquidator will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him or her in accordance with the direction: Re Force Corp at [19].

[8]  The circumstances of each of the corporate plaintiffs differ. That said, the following broad observations may be made. First, the assets (including those in which the corporate plaintiffs’ claim derives from the right of indemnity of a corporate trustee) are subject to complex competing claims by various parties. Secondly, there are insufficient assets to meet all of the relevant claims. Thirdly, in relation to each of the corporate plaintiffs that acted as a corporate trustee, the claimants may include, among others, the Financiers (including in respect of claims of a proprietary nature and claims based on statutory priority arising in respect of funding arrangements), secured and unsecured creditor claims (including claims based on rights of subrogation), claims by former external administrators, and claims of the Commonwealth of Australia as a “subrogated” employee creditor in respect of advances made pursuant to the Fair Entitlements Guarantee Act 2012 (Cth) (FEG). Fourthly, the claims in relation to each of the corporate plaintiffs often involve discrete asset pools where the identified claimants and the order of distribution may differ depending on the circumstances relating to the asset pool from which the distribution will be made. Finally, the order of distribution in respect of each asset pool of each of the corporate plaintiffs will have a material effect on the amount received by the individual creditors.

[9]  The applicants seek directions in order to enable them to properly distribute the available assets having regard to the nature of the competing claims in respect of those assets. This application requires the identification and consideration of complicated factual and legal issues. The Court has been considerably assisted by the thorough and careful work undertaken by the applicants and their legal representatives in the preparation and presentation of this application.

[10]  The applicants have framed this application in a way that is both practical and efficient by limiting the scope of the advice sought to points of legal principle and the proper order of distribution. They do not attempt at this stage to quantify any distribution amounts because the precise amounts will be contingent on the advice given and will necessarily be updated to take into account changes since the plaintiffs’ evidence was finalised to account for things such as interest accruing on cash at bank. Upon receiving and considering the advice given in these reasons, the applicants will undertake further work to calculate the precise amounts to be distributed to claimants, and will then proceed to make payments (unless at that point it becomes apparent that further directions of the Court are necessary).

…

PART F — OVERVIEW OF THE FACTUAL BACKGROUND

The related proceedings

[31]  As mentioned, this Distribution Application follows the Financier Proceedings. The Liability Judgment concerned the fraud perpetrated against the Financiers between September 2018 and June 2021 to obtain about half a billion dollars on the basis of falsified and fictitious equipment finance contracts: LJ [1]. The following findings made in the Liability Judgment are of present relevance.

[32]  The principal perpetrator and architect of the fraud was Mr Papas: LJ [4], [323], [1149], [1185].

[33]  An overview of the fraud is set out in Part C of the Liability Judgment. Relevantly, the fraud involved:

(1) Mr Papas creating, or causing the creation of, falsified equipment finance contracts and related documents, which were provided to the Financiers. Those contracts described fictional transactions and included forged signatures of counterparties and witnesses: LJ [327].

(2) On the basis of those documents, the Financers loaned funds to Forum Finance, Iugis NZ, Forum Enviro and Forum Enviro (Aust): LJ [41]–[45].

(3) The funds would then be transferred to FGFS which was used as the vehicle through which the fraudulently obtained funds were disbursed to a number of companies and persons associated with, and related to, Forum-related entities, Mr Papas and Mr Tesoriero. These funds were often disbursed by way of a loan as recorded on the FGFS balance sheet: LJ [43]–[48], [119], [327].

[34]  Mr Papas was found to be liable to the Financers for the fraud. From the time the funds were received from the Financiers, he held the money received on an imposed Black v Freedman trust: LJ [1149]. He was liable to account for those funds, and further liable to pay equitable compensation on the basis of breach of trust, knowing assistance and for knowing receipt: LJ [1150]–[1151], [1188], [1206].

[35]  Mr Tesoriero, Mr Papas’ business associate and very close friend, was found to have had actual knowledge of the fraud from the inception of the arrangements with Westpac and SMBC: LJ [437], [755], [918], [1155]. Accordingly, he held the money received on an imposed Black v Freedman trust: LJ [1156]. He was liable to pay equitable compensation on the basis of breach of trust, knowing assistance and for knowing receipt: LJ [1155]–[1158].

…

Tracing

General Tracing Principles

[206]  Other than Iugis Investments and Smartprint, which were not party to the Financier Proceedings, all the entities held the stolen funds received by them on trust, and are accordingly, obliged to account for those funds, including in respect of those funds paid away: LJ [1148], [1152], [1169], [1175], [1197], [1201], [1205].

[207]  Stolen funds in the hands of a thief are trust funds and cannot be divested of that character: Black v Freedman (1910) 12 CLR 105 at 110. Through tracing, a proprietary claim over an asset may be made by a victim where the trustee thief uses the stolen money to obtain the relevant asset. In Boscawen v Bajwa [1996] 1 QLR 328 Millett LJ said (at 334):

[Tracing] is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and if necessary which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of the beneficial interest in the property which the defendant handled or received.

…

If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant and overcomes any defences which are put forward on the defendant’s behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances…

[208]  The authorities recognise that a robust approach to fact finding in the context of tracing moneys and property in the context of theft or fraud is warranted: see, for example, Toksoz v Westpac Banking Corporation [2012] NSWCA 199; 289 ALR 577 at [9] (Allsop ACJ, Hoeben and Sackville JJA agreeing) citing R v Powell (1837) 7 Car & P 640 173 ER 280, Harford v Lloyd (1855) 52 ER 622, Black v Freedman, Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 and El Ajou v Dollar Land Holdings Plc [1993] 3 All ER 717.

[209]  In Toksoz, Allsop ACJ (Hoeben JA and Sackville AJA agreeing) said (at [8]–[10]):

[8] Money can be traced notwithstanding an inability of the follower to connect each link in the chain of accounts. Commonsense and reasonable inference play their part, especially if there is fraud involved and if there is a lack of explanation, when the circumstances cry out for honesty to be explained, if it can be.

[9] …The expression “tracing by exhaustion” is sometimes used. Where the facts as proved are sufficient to permit the inference that moneys have been received or property bought without there being an honest source available to explain the wealth and the sums or value can be seen as referable to the following party’s property wrongfully obtained, such that the inference is open that the wrongfully obtained funds were the source of the wealth, the funds can be so treated. One does not need to be able to show every link in the chain of accounts from and through which the money passed. Inferences will be more easily drawn, as here, in circumstances where the funds were stolen, the person who is said to have provided the funds was one of the thieves who stole money from the follower, when the recipient has an apparent close relationship with the thief, which recipient gave no value for it, has no personal source of income and gives no explanation as to the source or circumstances of the receipt of the money or any honest source of it.

[10] None of this is the expression of a principle of law. It is the expression of the available approach to fact finding in the presence of fraud and lack of explanation when plainly called for.

[210]  The authorities further recognise a number of claimant-favouring principles or presumptions that apply when a person seeks to trace. Of present importance is the principle that a delinquent trustee is presumed to dissipate their own funds prior to dissipating trust funds: Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696.

[211]  The ability to trace into property may be defeated if the relevant property has been dissipated: Foskett v McKeown [2001] 1 AC 102 at 130 (Lord Millett); Frontier Touring Co Pty Ltd v Rodgers [2005] NSWSC 668; 223 ALR 433 at [36]–[38] (Barrett J); Akers v Samba Financial Group [2017] AC 424 at [83] (Lord Sumption JSC). Equitable tracing presupposes “the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund”: Re Diplock at 521.

[212]  As is well-recognised, the ability to trace into property may also be defeated if the property was acquired by a bona fide purchaser for value without notice of the existing equitable interest: Foskett v McKeown at 130–132. The ability to trace subsists against a volunteer, although so long as he or she is not on notice of the equitable interest, the ability to trace is “fragile”, as the volunteer may dissipate the property, leaving no traceable product: Independent Trustee Services Ltd v GP Noble Trustees Ltd [2013] Ch 91 3 All ER 210 at [77]–[78] (Lloyd LJ).

[213]  In Heperu v Belle (2009) 76 NSWLR 230, Allsop P summarised the effect of the principle in Black v Freedman with respect to a volunteer recipient as follows (at [92]):

a person entirely innocent of a fraud who comes to know that he or she has received and still retains the proceeds of, or taken advantage of, a fraud to which he or she was not a party, cannot knowingly seek to retain those proceeds or that advantage, without, in effect, becoming a party to that fraud and liable accordingly…

Tracing into assets which have increased in value

[214]  Several of the entities purchased real property using a combination of Financier stolen funds and loan money from third-party lenders secured by mortgages over the property purchased, in circumstances where the property the subject of the security was later sold at an increased value. The applicants submit that as victims of the fraud, the Financiers are entitled to trace into the whole of the increase in value.

[215]  This issue arises in relation to the proposed distributions of the assets of the following entities:

(1) FGFS;

(2) 14 James Street;

(3) 5 Bulkara Street;

(4) 6 Bulkara Street;

(5) 26 Edmonstone Road; and

(6) 64–66 Berkeley Street.

[216]  The applicants submit that the principle in Scott v Scott [1963] HCA 65; 109 CLR 649 (McTiernan, Taylor and Owen JJ) is not presently engaged. Accordingly, they submit that as trust beneficiaries the Financiers’ tracing remedy is not limited to the proportionate share of the increase in value of an asset based on the proportion of trust funds, as against non-trust funds, used to purchase the relevant assets. The applicants submit that for the following reasons the Financiers are entitled to the whole of the increase in value of the assets into which their funds have been traced.

[217]  First, where, as here, the trustee or fiduciary does not purchase the asset with their own money and instead uses trust money combined with a loan secured by the asset being purchased, the trust beneficiary is entitled to the whole of increase in value of the asset. The applicants rely on Paul A Davies (Aust) Pty Ltd (in liq) v Davies (No 2) [1983] 1 NSWLR 440 (1982) 8 ACLR 1 in support of that proposition. In Davies, the directors of a company breached their duties by using company money, loaned to the directors, to purchase a real property in conjunction with a mortgage loan. President Moffit observed (at 448):

Accepting that it is appropriate to apply the principle applied by Hudson J in Scott in some cases, I think a distinction should be drawn and the principle not applied where the fiduciary does not provide his own money, but, having used trust money to provide the deposit and/or part of the purchase money so as to acquire an equitable interest in the property provides the balance by a mortgage loan on the security of the property. This is the view expressed by Scott on Trusts 3rd ed vol 5 p 3618. The provision of this money itself depends on the gain flowing from the breach of trust. In any event in the present case the two factors referred to are interrelated. It is difficult to think that when the sale was completed by the use of the mortgage loan moneys the procedures for the auction of this large country boarding house were not already well under way, so such mortgage money was provided on a bridging basis to enable the accrued gain to be realized. It can also be inferred that the whole of the balance of purchase money was provided by the bank without personal contribution by the respondents because of the increase in value of the property beyond the original purchase price.

(emphasis added)

[218]  In reaching the conclusion that the company was entitled to the whole of the increase in value, Moffit P and Hutley JA did not treat the loan money as personal money of the fiduciary. The provision of the loan moneys flowed from a breach of trust: Davies at 447 (Moffit P) and 449 (Hutley JA). Mahoney JA preferred to rely on the no profit rule: Davies at 456–457.

[219]  Davies was applied in Australian Postal Corporation v Lutak (1991) 21 NSWLR 584. In that case, Bryson J went further than the court in Davies by commenting that irrespective of how an investment is made, the trustee should not receive any profit. His Honour said (at 593):

In my opinion, if there is any difficulty of principle involved in understanding the judgments in Paul A Davies’ case the difficulty is why it would make a difference for entitlement to profits or gains whether or not the money which a trustee contributed to the mixed fund to make an unauthorised investment was all or partly his own or all or partly borrowed. The rule that a trustee may not derive a profit from his trust would seem to require that, irrespective of the source from which he raised his contribution, a trustee should not receive any profit related to that contribution; the whole of the profit of the investment should go to the beneficiary. That was the actual result in Paul A Davies’ case: see par (1) of the draft order of Hutley JA (at 452). The decision finally reached by Hudson J in Scott v Scottmay not be easy to reconcile with this principle but this part of his Honour’s judgment was not the subject of appeal to the High Court: see 109 CLR 649 at 657. In the High Court the principle was firmly restated with authorities (at 658, 659); see, too (at 661). The judgments in the Court of Appeal do not to my reading accept that if the amount borrowed from the Bank of New South Wales were treated as a capital contribution by the constructive trustees themselves, it would follow that they were entitled to a share in the profits.

(emphasis added)

[220]  Accordingly, where, in the present circumstances, an entity purchased real property using only Financier money and a loan, the applicants submit that the Financier(s) will be entitled to the full increase in value of that property. This proposition is consistent with the no profit rule: Lutak at 593; Scott v Scott at 658; Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; 132 CLR 373 at 377–378 (McTiernan J) and 392–398 (Gibbs J).

[221]  Secondly, even if the loan moneys were the relevant entity’s money by reason of them undertaking personal liability, that would not prevent the application of the no profit rule as noted by Mahoney JA in Davies. A trustee must account to the trust beneficiaries for any unauthorised profit which he has made from the trust or his position as trustee: Scott v Scott at 658; Consul Development at 377–378 (McTiernan J) and 392–398 (Gibbs J).

[222]  The entities here were participants in the fraudulent scheme orchestrated by Mr Papas and Mr Tesoriero. I accept the force of the applicants’ submissions as to the distribution proceeding on the basis that the Financiers are entitled to trace into the whole of the increased value of the relevant assets with the consequence that the entities do not retain any profit derived from the fraud. The applicants are justified in approaching the distribution on this basis in the manner reflected in the proposed distribution addressed below.

(emphasis added)

A link to the decision is here.