Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd

In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd, 1 the High Court has unanimously dismissed the appeal of a finance company that had made payments by mistake and sought to recover them. The court held that the recipients had changed their position to such an extent that any repayment would be inequitable. An interesting factual matrix provided the platform for a comprehensive analysis of the change of position defence, its application and exactly what the basis of restitutionary relief is in Australia.

Background

Richard Skarzynski was a director and shareholder in various companies in the Total Concepts Projects group (TCP). Mr Skarzysnki and his companies were supplied with equipment by Hills Industries Ltd (Hills) and Bosch Security Systems Pty Ltd (Bosch). As a result of these transactions, entities within TCP owed both Hills and Bosch a signi?cant amount of money.

Bymid-2009,businesswasnotgoingwellforMrSkarzynski and TCP had fallen into arrears. In late August 2009, Hills had made a number of demands for the repayment of certain debts. Additionally, Bosch had initiated proceedings, obtained a number of default judgments and garnisheed the bank accounts (Crystalised Claims).

In order to turn things around, Mr Skarzynski arranged with Australian Financial Services and Leasing Pty Ltd (AFSL) for it to purchase certain equipment from Hills and Bosch to be leased back to TCP. Mr Skarzynski presented receipts for the equipment to AFSL and it transferred the money into the accounts of Hills and Bosch. Mr Skarzynski directed Hills and Bosh to apply the funds to his existing debts. AFSL did not make any enquiries with Hills or Bosch concerning the receipts or the delivery of the equipment. Unfortunately for AFSL, the receipts were fabricated and did not relate to any equipment.

On the basis of the payment, Hills and Bosch discharged TCP's debts. Additionally, Bosch consented to the setting aside of the default judgments and the discontinuance of proceedings commenced.

Throughout the remainder of 2009, Mr Skarzynski entered into further lease agreements with AFSL and continued to trade with Hills and Bosch. Mr Skarzynski's fraud went undetected until late March 2010, when AFSL discovered its mistake.

On 6 April 2010, AFSL made a demand upon each of Hills and Bosch for repayment of the money it had paid to them as a result of the fraud.

Hills and Bosch each resisted AFSL's claim on the basis of their change of position. In particular, they relied upon the discharge of their debts, that they had ceased pursuing their recovery, and that they had continued to trade with TCP.

As such, AFSL ?led a statement of claim in the Supreme Court of New South Wales claiming repayment of the money transferred into the accounts of Hills and Bosch.

First instance

At ?rst instance, Einstein J held that AFSL was prima facie entitled to restitution of the amount mistakenly paid. 2

Justice Einstein rejected Hills's defence of change of position on the basis that, given TCP's debts, it was unlikely that Hills would have been able to recover a signi?cant amount of the debt — and, as such, any loss of opportunity to pursue TCP for the debt was essentially worthless.

In these circumstances, it was said that no detriment was made out.

In contrast to the position of Hills, Einstein J accepted Bosch's defence of change of position, given that it was able to demonstrate a "real detriment by way of actual extinguishment of a legal claim...