The High Court has allowed an appeal against a decision of the Court of Appeal of Queensland on the meaning and application of federal proceeds of crime legislation. The proceeds of crime proceedings follow a successful criminal prosecution of Steven Irvine Hart, the respondent in the one of the three High Court appeals, for his involvement in tax minimisation schemes. During that prosecution, the Commonwealth Director of Public Prosecutions obtained a restraining order on property under Hart’s ‘effective control’. When Hart was convicted in 2006, the restrained property became subject to automatic forfeiture under s 92 of the Proceeds of Crimes Act 2002 (Cth). The present proceedings involve two subsequent actions: first, an action by companies against the Commonwealth under s 102 of the Act claiming an interest in some of the forfeited properties (respondents in two of the three High Court Appeals) for their interests (or an equivalent value) to be transferred to them; second, an action by the Commonwealth DPP under s 141 of the Act seeking a declaration that any property the companies recover in this way be made available to pay any pecuniary penalty Hart was liable to pay. The companies generally succeeded in both actions at the trial in Queensland’s District Court in 2013 and following the Commonwealth’s appeal to Queensland’s Court of Appeal, with the Commonwealth ordered to pay the companies the value of their interests and denied the ability to use that money to pay a nearly $15M pecuniary penalty that Hart was ordered to pay to the Commonwealth in 2010.

The High Court (Kiefel CJ, Bell, Gageler and Edelman JJ, and Gordon J) unanimously allowed the Commonwealth’s appeal against the orders to pay the companies, but dismissed the Commonwealth’s appeal against the refusal to allow it to use the interests the company’s retained to pay off Hart’s pecuniary penalty. Justice Gordon’s judgment sets out the facts, background and orders. The plurality agreed with Gordon J (at [2]) on the facts, the orders and the dismissal of the Commonwealth’s appeal relating to offsetting the pecuniary penalty, but provided alternative reasons for allowing the Commonwealth’s appeal relating to order to restore the companies’ interests.

On the central issue of when a court must exclude an applicant’s interest in property from a forfeiture order, both judgments discuss three of the things that the applicant must establish on the balance of probabilities under s102 to succeed (plurality at [6]; Gordon J at [52]):

• “the property was not used in, or in connection with, any unlawful activity” (termed the ‘use condition’ by the pluraility and the ‘use limb’ by Gordon J)
• “the property … was not derived or realised, directly or indirectly, by any person from any unlawful activity” (termed the ‘derivation condition’ by the plurality and the ‘source limb’ by Gordon J)
• “the applicant acquired the property lawfully” (termed the ‘acquisition condition’ by the plurality and the ‘lawfully acquired limb’ by Gordon J)

A focus of both judgments is the middle of these questions. The Court unanimously rejected the Court of Appeal majority’s view that it is enough for the applicant to establish that the interest was not ‘wholly’ (as opposed to ‘partly’) derived from unlawful activity.

For Gordon J (at [88]–[99]), a broader reading is required by the ‘context’ of s102, the provision allowing third parties to escape forfeiture: ‘the surrounding words in s 102(3)(a), the purpose of s 102(3), the place of s 102(3) within s 102 and the overall statutory scheme.’ (at [94]). In particular (at [95]-[96]):

[T]he source limb is directed to ensuring that property that was derived by any person from any unlawful activity is not able to be transferred to a person who, potentially, was involved in the commission of the offence to which the forfeiture relates. It is stringent in its scope and intended reach. And consistent with that objective, the balance of s 102(3)(a) uses words of generality – the use limb requires the applicant to establish that “the property was not used in, or in connection with, any unlawful activity”. To read “derived” in s 102(3)(a) as “wholly derived” would be directly contrary to the purpose of s 102(3).
Further, s 102(3) is clearly intended to impose a higher bar for recovery than that provided under s 102(2) to a third party who was not involved in the commission of the offence to which the forfeiture relates. To read “derived” as “wholly derived” in s 102(3)(a) would place an applicant who may have been involved in the commission of the offence in a more advantageous position than an innocent third party under s 102(2). That cannot be the intended result.

Her Honour rejected the companies’ argument based on another provision’s use of the words ‘wholly’ and ‘partly’ as inconsistent with the above reasoning and also held that the use of those words were consistent with her reading of ‘derived’ (at [98].) The plurality’s reasoning only addressed the final matter: at [14]–[15]. On the meaning of ‘derived’ in s 102, Gordon J concluded (at [98]):

the statutory question is better approached by asking whether the extent and nature of the connection between the unlawful activity and the derivation is not insubstantial.

By contrast, the plurality held that ‘the derivation condition does not lend itself to detailed exposition in the abstract’, instead providing only non-‘exhaustive’ ‘examples’: at [16].

The balance of the judgments addressed the application of the three s 102 tests to various items of property (at [46): ‘three aircraft (the Sea Fury, the T-28 and the North American Trojan) and a motor vehicle (the Mercedes), all owned by Fighters; and four pieces of real property (Samara Street and Doonan’s Road, owned by Bubbling; Merriwa Street, owned by Nemesis; and Hangar 400, a sublease over Commonwealth land, registered in the name of Yak 3).’ As Gordon J observed (at [111]):

This task is complex. It is necessary to analyse the facts and contentions in relation to each asset in some detail. Each asset is considered by reference to the relevant findings of the primary judge, the approach of the Court of Appeal and then the issues in this Court, framed by the Commonwealth’s appeal grounds and any relevant grounds in the notices of contention filed by the Companies.

While Gordon J discussed each item separately for each limb, the plurality only observed that its support for the orders she made ‘is perhaps best illustrated by reference to four items of forfeited property.’ (at [18]).

In relation to the vehicles, Gordon J held that three failed the source limb: the Sea Fury, because 73% of its purchase funds may have been derived from Hart’s minimisation scheme the Mercedes, because it was purchased with a loan secured on the Sea Fury, and the T-28, because, 29% of its purchase funds were derived from Hart’s schemes. By contrast, the North American Trojan passed the source limb as it was not purchased using unlawful funds, and an illegally sourced $50,000 used to repair it did not increase its value; nevertheless, it failed the use limb, because the repair was a means to illegally launder the $50,000. The plurality made similar findings in relation to the T-28 and North American Trojan at [20]–[26], but did not discuss the other vehicles.

In relation to the real property, Gordon J held that one property (Samara St) failed the source limb as 30% of its purchase funds came from Hart’s scheme (rejecting an argument by the companies that the tax minimisation in that instance was merely negligent) and that a further two properties (Doonan’s Rd and Hangar 400) failed the use limb because they provided security for a fraudulently induced bank loan. However, a fourth property, Merriwa St, passed the use test as it was not used to secure the fraudulent loan and it was ‘rather unlikely’ that its separate mortgage influenced the bank to make the fraudulent loan. The plurality (at [27]-[30]) only discussed Doonan’s Rd and Merriwa St, expressly agreeing with Gordon J’s reasoning in relation to Merriwa St.

Justice Gordon then addressed ‘fixed and floating’ charges (or ‘mortgage debentures’) over all of the assets, that provided security for a $1.6M debt owed by the companies to Merrell, which ran a trust account used for Hart’s tax minimisation schemes. She held (at [270]) that:

the declarations and orders made had to take account of (1) the existence of the directly applicable Merrell Charge as well as the interrelationship between the liability for the indebtedness under all of the Merrell Charges and (2) the fact that each of the Merrell Charges vested in the Commonwealth on forfeiture, either absolutely or subject to any registration requirements.

Accordingly, she made such an order in relation to Merriwa St, the only property that the High Court held was not forfeited to the Commonwealth (at [271]).

Finally, Gordon J considered a question of construction about s 141, which allows the Commonwealth to require that property under the effective control of a criminal (i.e., Hart in this case) be used to meet any pecuniary penalty the criminal owes (i.e., the $15M order made against Hart in 2010.) The main issue was whether the relevant time for assessing effective control was the time of the initial restraint of the property (in 2003) or the time when the Commonwealth’s s 141 application was determined (a decade later.) Justice Gordon, with the plurality agreeing, held that the correct date was the latter (at [283]):

Consistent with the statutory language of ‘is’ in s 141(1)(c), the court must be satisfied that the particular property is not subject to the effective control of the person subject to a pecuniary penalty order at the date of the s 141 order.

As the Commonwealth had led no evidence that Hart was in effective control of the properties in 2013, the s 141 order could not be made (at [286]–[292]).

Consequently, Gordon J (with the plurality agreeing) dismissed the Commonwealth’s appeal against the refusal to make the pecuniary order, but allowed the Commonwealth’s appeals in relation to the orders excluding the companies’ assets from forfeiture to the Commonwealth (except for Merriwa St, where the exclusion was upheld but made subject to the Merrell charge.)