Nelson
vNelson

Judges: Deane J
Dawson J
Toohey J

Mchugh JGummow J

Legislative References:
Defence Service Homes Act 1918 (Cth) - s 4(1); The Act
Real Property Act 1900 (NSW) - The Act
Defence Service Homes Amendment Act 1988 (Cth) - The Act
Land Act 1962 - s 91; s 296
Aboriginal Land Rights (Northern Territory) Act 1976 (Cth) - s 19
Life Assurance Act 1774 (UK) - The Act
Crimes Act 1914 (Cth) - The Act
Banking Act 1959 (Cth) - The Act
Family Law Act 1975 (Cth) - Section 66B(1); The Act
Statutory Declarations Act 1959 (Cth) - s 11; The Act
Banking Act 1959 (Cth) - s 8

Case References:
-

Sydney

Judgment by:
Mchugh J

This appeal is brought by Mrs Bettie June Nelson ("Mrs Nelson") and her son, Peter John Nelson ("Peter"), against an order of the New South Wales Court of Appeal. That Court dismissed an appeal against an order made in the Equity Division of the Supreme Court by Master Macready. The Master held that Mrs Nelson had intended to retain the beneficial ownership of property that she purchased in the name of her children. However, he held that she was unable to rebut the presumption of advancement in favour of the children because the property was put in their names to facilitate a claim for a subsidy under the Defence Service Homes Act 1918 (Cth) ("the Act"), a subsidy which her ownership of the property prevented her from obtaining.

2. The appeal raises four questions:

(1)

Does the presumption of advancement apply when a mother conveys property to one of her children or when she provides the purchase price for a property that is conveyed to of one of her children?

(2)

Does the law permit a presumption of advancement to be rebutted when it is established that property was transferred to or money paid on behalf of another to further an illegal purpose or object?

(3)

If so, upon what principles does a court act in determining whether the presumption can be rebutted?

(4)

Does the law permit a presumption of advancement to be rebutted and a resulting trust enforced when it is established that property was transferred to or bought in the name of a another person for the purpose of obtaining a subsidy contrary to the provisions of the Act?

3. In my opinion, the appeal should be allowed. Although the presumption of advancement applies to transfers of property by a parent of either sex, the presumption is rebuttable. It may be rebutted even where the transfer was made for an illegal purpose unless the circumstances of the transfer are so injurious to the public interest that public policy requires otherwise. Nothing in the Act or its objects nor in the circumstances of this case provided any sound reason in public policy for the Supreme Court refusing to allow Mrs Nelson to rebut the presumption in this case. Consequently, her proven intention to retain the beneficial ownership of the property rebutted the presumption of advancement and gave rise to a resulting trust of the property in her favour.

The factual background

4. Mrs Nelson is the widow of John Wallace Nelson ("Mr Nelson"). They had two children, Elizabeth Nelson ("Elizabeth") and Peter. Prior to 1985 Mr and Mrs Nelson had lived in a property in Yasmar Avenue, Haberfield. In 1985 Mr Nelson bought a property in Windsor Street, Paddington with the intention of renovating and selling it. The Yasmar Avenue property was sold in early 1986 for $165,000. The Windsor Street property was sold in August 1986 for $188,500.

5. In August 1987, Peter and Elizabeth became the nominal purchasers as joint tenants of a property at 5 Bent Street, Petersham for $145,000. The purchase was completed on the day that Mr Nelson died, 4 November 1987, and the change of title was registered in their names on 18 November. The money for the deposit and the balance of the purchase price was drawn from the joint account of Mr and Mrs Nelson. The majority of this money came from proceeds of the sale of the Windsor Street property.

6. After the purchase of Bent Street, Peter arranged for the house to be renovated. Renovation was completed in June 1988. In about March or April of that year Mrs Nelson and Peter began to live in the house, but Mrs Nelson thought that the property was too large for a family home. In August 1989 she bought a property at Kidman Lane, Paddington in her own name. She intended to demolish the house on this land and build a new one. To fund the purchase, a loan of $150,000 was obtained. In addition, Mrs Nelson obtained another $25,000 as a subsidised loan pursuant to the provisions of the Act. To obtain that loan, Peter completed a form entitled "Subsidy Application" on his mother's behalf. In response to the question: "Do you or your spouse own or have a financial interest in a house or dwelling other than the one for which a subsidy is sought?", a tick was placed in the box beside the word "No".

7. In October 1990, the Bent Street property was sold for $400,000. Upon settlement and after discharging the mortgage, an amount of $232,509.83 remained. This money is invested in an interest bearing trust account in the name of the second respondents, who are Elizabeth's solicitors.

8. Mrs Nelson is the executrix of and sole beneficiary of Mr Nelson's estate. Probate was granted to her on 5 November 1991. In December 1991, she commenced proceedings in the Supreme Court of New South Wales seeking a declaration that Peter and Elizabeth held the proceeds of the sale of Bent Street in trust for her. She claimed a resulting trust on the basis that she and Mr Nelson had provided all the money for its purchase. In her cross-claim, Elizabeth alleged that her parents provided the funds by way of advancement for Peter and herself. In the Supreme Court, Master Macready held that the relationship of mother and adult child gave rise to a presumption of advancement. The Master also found:

(1)

Mrs Nelson had no intention to confer any beneficial interest in Bent Street or the proceeds of its sale upon Elizabeth or Peter;

(2)

one of the purposes of purchasing Bent Street in the names of Peter and Elizabeth was to preserve Mrs Nelson's entitlement to apply for a defence service home loan which would have been jeopardised if she had retained the legal interest in Bent Street;

(3)

the grant of a certificate of entitlement for the defence service home loan in respect of the Kidman Lane property was achieved by concealing Mrs Nelson's interest in the Bent Street property;

(4)

as a result, Mrs Nelson could not lawfully rebut the presumption of advancement and Elizabeth was entitled to a declaration that she was entitled to one half of the proceeds of the sale of the Bent Street property plus interest.

The presumptions of resulting trust and advancement

9. When a person ("the transferor") transfers property without consideration or purchases property and directs the vendor to transfer the title to another person, equity presumes that the transferee holds the property on a resulting trust for the transferor ^[223] . The presumption may be rebutted by evidence that the transferee received the property as a gift ^[224] . A different presumption arises where the relationship between the parties falls into a class where dependency, past, present or future, commonly exists or, at all events, commonly existed in the nineteenth and earlier centuries. If such a relationship exists, the transfer is presumed to be made for the benefit of the transferee ^[225] although the transferor may rebut the presumption by direct evidence or by inferences drawn from the circumstances ^[226] . Thus, a transfer of property without consideration by a father to a child ^[227] , a husband to a wife ^[228] , or an intending husband to an intending wife ^[229] is presumed to be made to advance the interests of the transferee. Until recently, however, the weight of authority favoured the conclusion that the presumption of advancement did not apply to transfers of property made without consideration by a mother to her child ^[230] . Sir George Jessel MR once said ^[231] that the presumption of advancement "arises from the moral obligation to give". He explained ^[232] the reason for the distinction between a voluntary transfer by a father to a child and one by a mother to a child as resting on the lack of any moral obligation on the part of "a mother to provide for her child". This explanation for the distinction must seem strange to most persons living in the late twentieth century, but it accords with the then widely held conception of the role of a wife in a late nineteenth century household and with the then legal rule that, upon marriage, the property of the wife became the property of her husband.

10. While the presumption of advancement continues to apply to transfers of property between father and child, consistency of doctrine requires that the presumption should also apply to transfers of property by a mother to her child. If the presumption of advancement arises, as Sir George Jessel thought, from the obligation of a father to provide for his child, the mother as well as the father now has a legal obligation to support their child ^[233] . But independently of any legal obligation of a mother, it would not accord with the reality of society today for the law to presume that only a father has a moral obligation to support or is in a position to advance the interests of a child of the marriage ^[234] . Consequently, the New South Wales Court of Appeal was right to hold in Brown v Brown ^[235] that the presumption of advancement applied as between mother and child as well as between father and child. The real question is whether the courts should continue to hold that the presumption applies to either parent.

11. The presumption of advancement is a consequence of the equitable rule that, when a person transfers property without consideration or purchases property and directs the vendor to transfer the property into the name of another, the transferee is presumed to hold the property on a resulting trust for the transferor. No doubt in earlier centuries, the practices and modes of thought of the property owning classes made it more probable than not that, when a person transferred property in such circumstances, the transferor did not intend the transferee to have the beneficial as well as the legal interest in the property. But times change. To my mind - and, I think, to the minds of most people - it seems much more likely that, in the absence of an express declaration or special circumstances, the transfer of property without consideration was intended as a gift to the transferee. That being so, there is a strong case for examining whether the presumption of a resulting trust accords with the effect of contemporaneous practices and modes of thought. If that presumption goes, there is no compelling reason for a presumption of advancement in the case of transfers of property by parents to children. Indeed, the presumption of advancement itself may not accord with contemporaneous practices and modes of thought.

12. A presumption is a useful aid to decision making only when it accurately reflects the probability that a fact or state of affairs exists or has occurred. As Murphy J said in Calverley v Green ^[236] "(p)resumptions arise from common experience ... As standards of behaviour alter, so should presumptions". If the presumptions do not reflect common experience today, they may defeat the expectations of those who are unaware of them. Nevertheless, as Deane J pointed out in Calverley ^[237] , the presumptions are "too well entrenched as 'landmarks' in the law of property ... to be simply discarded by judicial decision". Although the operation of the presumptions may sometimes defeat the expectations of transferors and transferees, it may be that many transfers of property have been made on the basis of the presumptions. If evidence was no longer available to confirm that property had been transferred to achieve a result in accord with the presumptions, serious injustice might be done to those who have dealt in the property. In the absence of knowledge as to what effect the abolition of the presumptions would have on existing entitlements, the better course is to leave reform of this branch of the law to the legislature which can, if it thinks fit, abolish or amend the presumptions prospectively.

13. The appellant contends that, if the presumption of advancement continues as a legal principle, it should be restricted to cases in which the inference of advancement would be drawn in the absence of evidence of intention. This is another way of suggesting that the presumption does not arise unless the circumstances surrounding the bare relationship of the parties are consistent with the presumption. It would mean that where, for example, "a widowed mother, of modest means, makes a payment of substantially the whole of her assets to contribute to the purchase of real estate, and legal title is vested in her adult, able-bodied sons" ^[238] , no presumption of advancement would arise because the mother had no moral obligation to give her assets to her adult and able-bodied sons.

14. If the presumption of advancement could be displaced by the objective circumstances of the relationship, the appellant might be able to succeed without disclosing her illegal purpose, for the facts of her case closely resemble the facts of the above example. But to accept the appellant's contention would seriously undermine the operation of the presumption of advancement. It would allow it to operate only where the surrounding circumstances were consistent with the presumption. It would also substitute an inquiry into the circumstances of the case for the automatic operation of the rule, thus increasing the uncertainty of property titles and promoting litigation. As long as the presumption of advancement continues to apply to property dealings, it should apply whenever the parties stand in a relationship that has been held to give rise to the presumption. The circumstances surrounding a relationship may be used to rebut the presumption, but they cannot be used to prevent it from arising.

15. Master Macready and the Court of Appeal proceeded on the basis that the presumption of advancement applied to the acquisition of the Bent Street property and was not rebutted by inferences from the circumstances of the relationship between Mrs Nelson and her children. However, the Master found that "there was no intention of Mrs Nelson to confer any beneficial interest on Elizabeth". Later in his judgment, he said "it seems fairly clear that a purpose for putting the property in the name of the children was to preserve (the) entitlement of Mrs Nelson to apply for a Defence Service's home loan on the basis that she would not be shown on the title deed". Both Master Macready and the Court of Appeal found that this purpose was unlawful and that, because her intention arose out of that purpose, a court, exercising equitable jurisdiction, could not allow her to prove her intention for the purpose of rebutting the presumption of advancement. It is this unlawful purpose of Mrs Nelson which raises the remaining questions in this case. To those questions I now turn.

Equitable relief and the consequences of statutory illegality

16. Mr Coles QC, counsel for Elizabeth, contends that the Supreme Court was correct in refusing to declare that Mrs Nelson was the beneficial owner of the property because equity will not permit a person to rebut the presumption of advancement and set up a resulting trust in respect of property that was transferred to effectuate an illegal purpose ^[239] . He asserts that this equitable rule is merely a particular application of a wider principle that a court of equity will not enforce an equitable proprietary interest arising from a transaction that had an illegal purpose and to which the claimant was a party ^[240] . In my opinion, these contentions are erroneous.

17. The courts, including courts exercising equitable jurisdiction, will not enforce an unlawful agreement or trust and, frequently will not enforce an agreement or trust that has been entered into for an unlawful purpose. But these propositions do not lead to the conclusion that a person who participated in the making or execution of such an agreement or trust never has a curial remedy. A court that finds that an agreement is unlawful or has an unlawful purpose has merely set the stage for a further inquiry: are the circumstances surrounding the agreement such that the court should deny a relevant remedy to the party seeking the assistance of the court? Certainly, many cases contain statements that, stripped of their factual context and read in ignorance of other decisions, support the contentions of Mr Coles. But I doubt that the common law or equity ever maintained a doctrine of illegality as disabling as that for which he contends.

18. The argument for Elizabeth naturally relied on the famous dictum ^[241] of Lord Mansfield that "(n)o Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act." ^[242] The principle contained in this dictum applies in both law and equity ^[243] . But it is subject to exceptions which allow relief to be granted despite the presence of illegality ^[244] . First, the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal ^[245] . Second, the courts will not refuse relief where the statutory scheme rendering a contract or arrangement illegal was enacted for the benefit of a class of which the claimant is a member ^[246] . Third, the courts will not refuse relief where an illegal agreement was induced by the defendant's fraud, oppression or undue influence ^[247] . Fourth, the courts will not refuse relief where the illegal purpose has not been carried into effect ^[248] . But Mr Coles claims that, whatever the scope of these exceptions in the courts of common law, they do not apply where a claimant seeks an equitable remedy to recover property that he or she has transferred to effectuate an illegal purpose. In this area, says Mr Coles, the general principle formulated in Holman v Johnson ^[249] has hardened into a fixed rule "that he who has committed iniquity shall not have equity; and what is required to invoke the maxim is no more than that the alleged misconduct has 'an immediate and necessary relation to the equity sued for'" ^[250] . Alternatively, Mr Coles contends that neither the common law courts nor the equity courts will assist a claimant who must rely on his or her unlawful purpose to make out a cause of action.

The wide principle

19. In Tinsley v Milligan ^[251] , all members of the House of Lords accepted that in the nineteenth century there was a "wide principle" that a court exercising equitable jurisdiction would not assist a claimant to recover property that had been transferred to another person for an unlawful purpose. At the very beginning of the nineteenth century, Lord Eldon LC said ^[252] in a well known passage that "the Plaintiff stating, he had been guilty of a fraud upon the law, to evade, to disappoint, the provision of the Legislature, to which he is bound to submit, and coming to equity to be relieved against his own act, and the defence being dishonest, between the two species of dishonesty the Court would not act; but would say, 'Let the estate lie where it falls'." Lord Eldon went on to say ^[253] that "the law will not permit secret agreements to evade what upon grounds of public policy is established". Courts exercising equitable jurisdiction have frequently applied this principle ^[254] . Thus, in Curtis v Perry ^[255] Lord Eldon refused to enforce a trust where partners had agreed that the ownership of certain ships should remain registered in the name of one partner to conceal the interest of the other partner who was a member of Parliament and liable to statutory penalties if the ships were employed under contracts with the government. The Lord Chancellor said ^[256] :

"(T)he object of keeping the ships registered in the name of Nantes, was, that a profit might be made by the employment of them in contracts with Government; and Chiswell was a Member of Parliament; who, the law says, shall not be a contractor. The moment the purpose to defeat the policy of the law by fraudulently concealing, that this was his property, is admitted, it is very clear, he ought not to be heard in this Court to say, that is his property."

In Gascoigne v Gascoigne ^[257] , the Divisional Court refused to enforce a trust where a husband had expended money in building a house on land under a lease of land taken in his wife's name for the purpose of protecting his assets from his creditors. Similarly, in Palaniappa Chettiar v Arunasalam Chettiar ^[258] , the Privy Council held that equity would not enforce a trust in respect of land transferred by a father to his son in order to defeat the operation of regulations governing the ownership of land on which rubber was grown. In giving the Advice of the Judicial Committee, Lord Denning applied Lord Mansfield's dictum.

20. In Tinsley, however, the House of Lords was divided as to whether the "wide principle" still represented the law.

Tinsley v Milligan

21. In Tinsley, the House held that the defendant was entitled to resist an ejectment action and obtain a declaration of part ownership in respect of property that had been purchased in the plaintiff's name to enable the defendant to claim social security benefits to which she was not entitled. The House held that, because the defendant did not need to plead or disclose her unlawful purpose in order to establish her case, she was entitled to equitable relief. Central to this question was whether the much criticised ^[259] decision of the Court of Appeal in Bowmakers Ltd v Barnet Instruments Ltd ^[260] , a case at law, applied in equity. In Bowmakers, the plaintiff recovered damages for the conversion of machine tools that were subject to hire-purchase agreements made in breach of the Defence Regulations. The Court of Appeal held that, despite the illegality of the agreements, the plaintiff could succeed in its claim because it could do so without founding its cause of action on the illegal agreements or pleading their illegality. Du Parcq LJ giving the judgment of the court said ^[261] :

"In our opinion, a man's right to possess his own chattels will as a general rule be enforced against one who, without any claim of right, is detaining them, or has converted them to his own use, even though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant's possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim."

22. In Tinsley, the majority of the House held that this principle also applied in equity. Lord Keith of Kinkel and Lord Goff of Chieveley dissented. Lord Browne-Wilkinson, who gave the leading speech, said ^[262] that, while the "wide principle" had applied in equity in the early nineteenth century, the principles of the law of illegality had developed throughout the century. He thought that with one exception ^[263] "none of the English decisions are decided by simply applying that principle". Lord Browne-Wilkinson said that, with the fusion of law and equity, the same principles of illegality applied in law and equity and that, as a result, the Bowmakers rule was applicable to the circumstances of the case ^[264] . This meant that the defendant succeeded in her counter-claim because the transfer of the property into the name of the plaintiff gave rise to a resulting trust in favour of the defendant and the plaintiff could not prove that the defendant had intended to transfer her beneficial interest in the property to the plaintiff. The defendant was therefore able to enforce the trust in equity because she did not have to plead or rely on the illegal purpose that motivated the conveyance.

23. Speaking for the minority, Lord Goff said that the reason that a court of equity would not assist a party to an illegality was "because he has not come to the court with clean hands" ^[265] . Thus, although an equitable interest may have arisen, equity will not enforce it where the interest is tainted with illegality. In Lord Goff's view, it does not matter that the plaintiff does not need to rely on or plead the illegality in order to establish his or her case. By whatever means "it comes to the attention of a court of equity that the claimant has not come to the court with clean hands, the court will refuse to assist the claimant" ^[266] . The minority, therefore, held that the Bowmakers rule is not applicable where equitable relief is sought.

The wide principle and the Bowmakers rule

24. I think that the majority speeches in the House of Lords in Tinsley were correct in denying the existence of the "wide principle". I doubt that Lord Eldon intended to lay down a rule to the effect that, if the purpose of a transaction was to defeat the operation of an Act of Parliament, equity would always refuse its remedies to a person who had participated in that transaction. It is true that, in Muckleston v Brown ^[267] , Curtis v Perry ^[268] , Cottington v Fletcher ^[269] and other cases, the judges of the Court of Chancery were dealing with trusts and agreements whose objects were to defeat the operation of Acts of Parliament and that they concluded that those trusts and agreements were not enforceable in equity. But that was obviously because, in the circumstances of those cases, the policy of the Acts required the courts to firmly suppress the use of trusts and agreements to avoid the operation of the legislation. Those decisions say nothing about legislation whose policy does not require such drastic remedies. Nor do they require a court of equity to disregard a circumstance that affects the real justice of the case and calls for the assistance of equitable remedies. It would be out of character for a court of equity to do so. In Lord Stowell's words: "A Court of Equity ... looks to every connected circumstance that ought to influence its determination upon the real justice of the case." ^[270]

25. With great respect to the view expressed by Lord Goff in Tinsley, I do not think that the clean hands doctrine constitutes or provides a sound basis for a special rule in equity. The illegality principle is one of general application; it is not limited to proceedings in equity. To say that in the equitable context it derives from the clean hands doctrine is to wrongly deny its conceptual links to the rule as it is applied in other areas. Further, it fails to recognise that the rationale for the two doctrines is distinct: the clean hands doctrine arises from the relationship between the parties to the proceedings, the illegality doctrine derives from public policy considerations. Accordingly, the majority of the House of Lords in Tinsley were correct in rejecting the "wide principle" as governing cases of illegality in equity. But that said, I do not think that this Court should adopt the majority's rule that a claimant cannot obtain relief in any court if that person must plead or rely on illegal conduct ("the Bowmakers rule").

The Bowmakers rule

26. A doctrine of illegality that depends upon the state of the pleadings or the need to rely on a transaction that has an unlawful purpose is neither satisfactory nor soundly based in legal policy. The results produced by such a doctrine are essentially random and produce windfall gains as well as losses, even when the parties are in pari delicto. To demonstrate the random nature of the assignment of substantive relief under the Bowmakers rule approved by the majority in Tinsley one has only to consider the application of that rule to the circumstances of the present case. If the rule were applied in this case, the determining factor would be whether a presumption of advancement arose. Only if it did, would Mrs Nelson need to answer the presumption of a resulting trust and rely on her illegal purpose. If the presumption of advancement did not arise, there would be no need to rely on the illegal purpose to rebut the presumption and the result would be the reverse. Thus, if Mrs Nelson had had the property placed in the name of a friend or relative - or anybody other than her children - she could recover the proceeds of the sale of the Bent Street property, notwithstanding her illegal purpose.

27. The Bowmakers rule has no regard to the legal and equitable rights of the parties, the merits of the case, the effect of the transaction in undermining the policy of the relevant legislation or the question whether the sanctions imposed by the legislation sufficiently protect the purpose of the legislation. Regard is had only to the procedural issue; and it is that issue and not the policy of the legislation or the merits of the parties which determines the outcome. Basing the grant of legal remedies on an essentially procedural criterion which has nothing to do with the equitable positions of the parties or the policy of the legislation is unsatisfactory, particularly when implementing a doctrine that is founded on public policy. In Tinsley, Lord Goff recognised the perverse nature of the rule adopted by the minority in that case in words that apply equally to the Bowmakers rule adopted by the majority judges. Lord Goff said ^[271] :

"It is important to observe that ... the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation."

At least the position of the minority in Tinsley had the virtue that the indiscriminate nature of the rule which they adopted did not depend on procedural issues.

28. The policy justification for the rule adopted in the minority speeches in Tinsley is that the harsh and indiscriminate nature of the rule will deter people from entering into unlawful agreements and trusts because they know that the courts will not provide them with equitable relief. Whether the rule adopted by the minority would be an effective deterrent is debatable ^[272] . However, the notion of deterrence seems a weak argument to justify the Bowmakers rule adopted by the majority in Tinsley. The defendant in Tinsley, for example, succeeded in recovering her property notwithstanding the unlawful purpose for which she transferred the property. Moreover, while the Bowmakers rule may impose severe losses on those who are forced to rely on the illegality, it also gives windfall gains to those who rely on the defence of illegality. In so far as the Bowmakers rule is a deterrent, it is also an incentive to illegality because it encourages those to whom property is conveyed to encourage transferors to carry out their unlawful purpose.

29. Furthermore, even if this random process of assigning losses and gains without regard to the substantive equities of a dispute is a disincentive to those who might enter illegal transactions, it does not follow that the Bowmakers rule is the most efficient rule to protect the community against the making of trusts and agreements for unlawful purposes. There are other rules that could achieve the same goals of legal policy through a less extreme and a more just process.

30. A final criticism of the Bowmakers rule adopted by the majority in Tinsley is that it may often defeat the intention of the legislature. Parliament almost invariably provides mechanisms for dealing with breaches of its laws. Those mechanisms sometimes include a provision that makes unlawful and unenforceable an agreement that defeats or evades the operation of the relevant law. If a particular enactment does not contain such a provision, the prima facie conclusion to be drawn is that Parliament regarded the sanctions and remedies contained in the enactment as sufficient to deter illegal conduct and saw no need to take the drastic step of making unenforceable an agreement or trust that defeats the purpose of the enactment ^[273] .

The present need for the doctrine of illegality

31. The doctrine of illegality expounded in Holman was formulated in a society that was vastly different from that which exists today. It was a society that was much less regulated. With the rapid expansion of regulation, it is undeniable that the legal environment in which the doctrine of illegality operates has changed. The underlying policy of Holman is still valid today - the courts must not condone or assist a breach of statute, nor must they help to frustrate the operation of a statute. As Mason J put it in Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd ^[274] , the courts must not "be instrumental in offering an inducement to crime or removing a restraint to crime". However, the Holman rule, stated in the bald dictum: "No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act" ^[275] is too extreme and inflexible to represent sound legal policy in the late twentieth century even when account is taken of the recognised exceptions to this dictum.

32. One of the most significant reasons for adopting a less rigid approach to illegality than the bald dictum in Holman or, for that matter, the Bowmakers rule adopted in Tinsley is that statutory illegality can arise in a number of different ways ^[276] . First, the statute may directly prohibit the contract or trust. Second, while the statute may not prohibit making the contract or trust, it may prohibit the doing of some particular act that is essential for carrying it out. Third, the statute may not expressly prohibit the contract or trust but the contract or trust may be associated with or made in furtherance of a purpose of frustrating the operation of the statute. Fourth, the statute may make unlawful the manner in which an otherwise lawful contract or trust is carried out. It would be surprising if sound legal policy required each of these forms of illegality to be treated in the same way. There is, for example, a vast difference between the performance of a contract for carriage of goods by ship that is overloaded in breach of the law and the making of a contract for the carriage of goods where the making of the contract is specifically prohibited ^[277] .

33. It is worth noting the approach in the cases in the English Court of Appeal which preceded, and were rejected by, the decision in Tinsley v Milligan and which sought a less rigid and dogmatic approach to illegality than is found in the Holman dictum. Those cases included cases in equity ^[278] , contract ^[279] and tort ^[280] . The effect of the approach developed by the Court of Appeal in those cases was summarised in the decision of that Court in Tinsley by Nicholls LJ who said ^[281] :

"These authorities seem to me to establish that when applying the 'ex turpi causa' maxim in a case in which a defence of illegality has been raised, the court should keep in mind that the underlying principle is the so-called public conscience test. The court must weigh, or balance, the adverse consequences of granting relief against the adverse consequences of refusing relief. The ultimate decision calls for a value judgment. The detailed principles summarised by Kerr LJ in the Euro-Diam case ^[282] , and distinctions such as that between causes of action which arise directly ex turpi causa and causes of action to which the unlawful conduct is incidental, are valuable as guidelines. But they are no more than guidelines. Their value and justification lie in the practical assistance they give to the courts by focusing attention on particular features which are material in carrying out the balancing exercise in different types of cases."

34. This approach confers a broad judicial discretion upon the judge to determine whether the grant of relief would affront "the public conscience". While it provides a ready means for a judge to do what he or she thinks is just in the circumstances of the particular case, it does so by means of an unstructured discretion. The so called "public conscience" test, although providing a flexible approach, leaves the matter at large. Greater certainty in the application of the illegality doctrine will be achieved if the courts apply principles instead of a vague standard such as the "public conscience". But what principles, consistent with the public policy underpinnings of the doctrine of illegality, should the courts apply?

35. If courts withhold relief because of an illegal transaction, they necessarily impose a sanction on one of the parties to that transaction, a sanction that will deprive one party of his or her property rights and effectively vest them in another person who will almost always be a willing participant in the illegality. Leaving aside cases where the statute makes rights arising out of the transaction unenforceable in all circumstances, such a sanction can only be justified if two conditions are met.

36. First, the sanction imposed should be proportionate to the seriousness ^[283] of the illegality involved. It is not in accord with contemporaneous notions of justice that the penalty for breaching a law or frustrating its policy should be disproportionate to the seriousness of the breach ^[284] . The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be assessed in a vacuum. The statute must always be the reference point for determining the seriousness of the illegality; otherwise the courts would embark on an assessment of moral turpitude independently of and potentially in conflict with the assessment made by the legislature.

37. Second, the imposition of the civil sanction must further the purpose of the statute and must not impose a further sanction for the unlawful conduct if Parliament has indicated that the sanctions imposed by the statute are sufficient to deal with conduct that breaches or evades the operation of the statute and its policies. In most cases, the statute will provide some guidance, express or inferred, as to the policy of the legislature in respect of a transaction that contravenes the statute or its purpose. It is this policy that must guide the courts in determining, consistent with their duty not to condone or encourage breaches of the statute, what the consequences of the illegality will be. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially disclose an intention that the only sanctions for breach of the statute or its policy are to be those specifically provided for in the legislation ^[285] .

38. Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless:

(a)

the statute discloses an intention that those rights should be unenforceable in all circumstances; or

(b)

(i)

the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct;

(ii)

the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and

(iii)

the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies ^[286] .

39. The adoption of these principles accords with the approach of this Court in the leading case of Yango ^[287] , particularly the judgment of Mason J. In Yango, the Court held that, although s 8 of the Banking Act 1959 (Cth) prohibited a body corporate from carrying on the business of banking without a licence, a mortgage and guarantees given to an unlicensed corporation in the course of carrying on that business were not void or unenforceable. The Court unanimously held that nothing in the statute made them void and that the separate question of illegal purpose should be determined by following the approach, suggested by Devlin J in St John Shipping Corporation v Joseph Rank Ltd ^[288] , of examining the terms of the statute to determine the impact of illegality on the enforceability of the contract. Mason J said ^[289] :

"The weighing of considerations of public policy in this case and the decision in favour of enforcing the contract is influenced by the form of the particular legislation. In this case the Act, as I have mentioned, is to a large extent directed to aiding the Government in executing its fiscal policy rather than regulating the relationship between banker and customer per se, a feature which lends support for the view that the provision of a large recurrent penalty for offences against s 8 is Parliament's determination of the consequences of breach of the section and as the only legal consequences thereof. There is much to be said for the view that once a statutory penalty has been provided for an offence the rule (sic) of the common law in determining the legal consequences of commission of the offence is thereby diminished - see my judgment in Jackson v Harrison ^[290] . See also the suggestions that the principle cannot apply to all statutory offences (Beresford v Royal Insurance Co Ltd in the Court of Appeal ^[291] , per Lord Wright; Marles v Philip Trant & Sons Ltd ^[292] , per Denning LJ, and that it would be a curious thing if the offender is to be punished twice, civilly as well as criminally (St John Shipping Corporation v Joseph Rank Ltd ^[293] , per Devlin J). The main considerations from which the principle ex turpi causa arose can be seen in the reluctance of the courts to be instrumental in offering an inducement to crime or removing a restraint to crime: Beresford's Case ; Amicable Society v Bolland (Fauntleroy's Case ^[295] )).

40. However, in the present case Parliament has provided a penalty which is a measure of the deterrent which it intends to operate in respect of non-compliance with s 8. In this case it is not for the court to hold that further consequences should flow, consequences which in financial terms could well far exceed the prescribed penalty and could even conceivably lead the plaintiff to insolvency with resultant loss to innocent lenders or investors."

The scheme of the Act

41. The Defence Service Homes Act 1918 provides assistance to members of the defence forces and certain other persons to acquire homes. The Act was substantially amended in 1988. The provisions of the Act both before and after the amendments are relevant because the contract to purchase the Bent Street property was entered into prior to the amendments although the illegal purpose of concealing Mrs Nelson's beneficial ownership of that property was only carried out after the amendments.

42. Prior to the amendments, s 20 empowered the Defence Service Homes Corporation to make a loan, referred to as an advance, to an eligible person to enable that person, inter alia, to purchase a home. Under s 21, the maximum advance available was $25,000. Subject to an irrelevant exception, an advance could not be made unless the Corporation was satisfied that the dwelling house was intended for use as a home for the applicant and the applicant's dependents and that neither the applicant nor the applicant's spouse was the owner of any other dwelling house (s 23). If the Corporation formed the opinion that money advanced under the Act had not been applied for the purposes for which it was advanced, the Corporation could call in the whole or part of the amount. The Act provided statutory remedies for the Corporation to recover that amount (s 27). Similarly, money advanced could be called up if, at the time of making the advance, the applicant had, falsely declared that neither the applicant nor the applicant's spouse was the owner of any dwelling house other than the one to which the advance related (s 32A).

43. In 1988 the scheme of the Act was altered following an agreement between Westpac Banking Corporation and the Commonwealth. Under that agreement, the Bank agreed to provide a loan, referred to as a subsidised advance, to a person whom the Commonwealth certified was entitled to such an advance and the Commonwealth agreed to provide a subsidy to the bank in respect of a subsidised advance. The legislative changes were achieved by the Defence Service Homes Amendment Act 1988 (Cth) which replaced Pts III-VI of the original Act.

44. Thus under the amended Act, applications can be made to the Secretary of the Corporation for a certificate of entitlement to a subsidised advance. The Secretary cannot issue such a certificate unless, relevantly, he or she is satisfied that the applicant does not own any dwelling house other than the house the subject of the application (s 18(1)(b)). Under the amending Act, the maximum advance upon which a subsidy is payable remains at $25,000. The amount received in relation to the Kidman Lane property was, therefore, the maximum possible advance.

45. If a certificate has been issued as a result of a false statement by the applicant or if that person was not entitled to a subsidy, the Secretary can cancel the subsidy (s 26). Where the subsidy has ceased to be payable, the Secretary may require the repayment to the Commonwealth of either the whole of the subsidy already paid, or such amount as the Secretary considers reasonable. If such a requirement is not complied with, the amount may be recovered as a debt due to the Commonwealth (s 29). The Secretary also has a discretionary power to write off the amount, waive the right of the Commonwealth to recover the amount or allow a person to repay the amount by instalments (s 30). Decisions under these provisions are reviewable both internally and by the Administrative Appeals Tribunal (ss 43-44).

46. In addition to the remedies within the Act itself, various provisions of the Crimes Act 1914 (Cth) impose criminal liabilities for conduct that infringes the Act. Relevant provisions are ss 29A, 29B, 29D and 86. Most relevant to the circumstances of this case is s 29B which provides:

"Any person who imposes or endeavours to impose upon the Commonwealth or any public authority under the Commonwealth by any untrue representation, made in any manner whatsoever, with a view to obtain (sic) money or any other benefit or advantage, shall be guilty of an offence. Penalty: Imprisonment for 2 years."

The result in this case

47. In this case, we are concerned with an agreement or transaction that was not, per se, illegal but which was entered into for an illegal purpose. If Mrs Nelson had never made the subsidy application, she would have fallen within the exception that is available when an illegal purpose is not carried out. It is only because a transaction, that was otherwise lawful, was carried out in order to achieve an unlawful purpose that the question of the impact of illegality arises.

48. As the examination of the Act has disclosed, it contains internal mechanisms for dealing with false declarations and applications by persons who are not entitled to subsidised advances. The Act recognises that ineligible persons may apply for subsidised advances and provides for recovery of the subsidy paid in relation to such persons. These provisions lend weight to the submission of the appellant that the policy of the Act will not be defeated if the Court enforces her equitable rights. They also suggest that the policy of the Act is not frustrated so long as there is recovery of the benefit given. This view is strengthened by the vesting of a discretionary power of waiver in the Secretary.

49. If the policy of the Act is not defeated by the Corporation waiving its right to recover a benefit wrongfully obtained, it is hard to see how the policy of the Act is defeated if a court exercising equitable jurisdiction enforced a resulting trust in favour of Mrs Nelson on terms that the benefit obtained under the Act must be repaid. The existence of criminal sanctions strengthens this analysis because the existence of a range of sanctions together with the omission of a provision that makes unenforceable any agreement made in breach of or to evade the Act is a powerful indication that no other sanctions are needed. Evidently, the federal Parliament saw the legislative sanctions and remedies as being sufficient to deal with unlawful conduct similar to that which has occurred in the present case. That being so, I can see no justification for the courts imposing a further sanction by refusing to enforce the legal or equitable rights of applicants under the Act, particularly when such a refusal may often result, as it does in this case, in a penalty out of all proportion to the seriousness of an applicant's conduct.

50. Of course, equity cannot condone Mrs Nelson's unlawful purpose or encourage it. So far as is possible, rights associated with or arising out of unlawful conduct should only be enforced on condition that the wrongdoer takes all lawful steps to overcome the consequences of that conduct. It will not always be possible for the claimant to do so or for the courts to impose terms designed to remedy the wrongdoing. For example, in Kasumu v Baba-Egbe ^[296] , legislation specifically prevented a money lender from enforcing any claim where there had been a breach of the Act. To grant relief to the borrower on terms that he or she restore to the moneylender any benefits obtained from that person would be contrary to the policy of the legislation ^[297] . In other situations, the inability of the court to mould appropriate terms may be a ground for refusing relief. For example, in Chettiar ^[298] , the facts of which are analogous to this case, the father sought to rely on an intention associated with an unlawful purpose to overcome a presumption of advancement. It would have been difficult, if not impossible, to formulate a condition by which the father could be required to do equity in order to obtain equitable relief. For in that case, as a result of his unlawful conduct, the father had obtained the benefit for 15 years of having the permissible rubber production of his land determined by the local district officer rather than by the Assessment Committee constituted under the Malayan Rubber Regulations of 1934. In circumstances where the authority responsible for administering the regulations was not a party to the proceedings, it was virtually impossible to assess the benefit gained and the public harm done as a result of the illegality. Where the court cannot evaluate the benefit that the claimant has derived from his or her unlawful conduct, the sound exercise of discretion may sometimes require the court to refuse any relief to the claimant.

51. However there are no difficulties in this case comparable to those in Chettiar. The benefit obtained is readily ascertainable. Mrs Nelson's breach of the Act will not be condoned if the Court enforces her rights on the condition that she restores to the Commonwealth the benefit that she obtained by her unlawful conduct. That means that she should forthwith repay to the Commonwealth such sum as represents the value of the subsidy given in relation to her subsidised advance, in other words the difference between the bank's home lending rate of interest at the time of the advance and the rate of interest that was payable in respect of the subsidised advance for the period of the advance. If such a condition is imposed, the policy of the Act will not be frustrated and the Court will not be condoning or encouraging unlawful conduct.

Conclusion

52. I agree with the orders proposed by Deane and Gummow JJ.