The Recovery of Property Transferred for Illegal Purposes

Published date01 January 1997
Date01 January 1997
The Recovery of Property Transferred for Illegal
Peter Creighton*
For many years it was thought to be a principle of public policy that, in a
property dispute between two parties in pari delicto, equity must let the loss lie
where it falls (‘the non-recovery principle’).
In Tinsley vMilligan,
the House of
Lords substantially qualified this principle, ruling that it does not prevent persons
from reclaiming property transferred for an illegal purpose where they can
establish their legal or equitable interest without relying on the illegality (‘the
non-reliance rule’). In particular, a person who could demonstrate an interest in
the transferred property by way of a resulting trust could recover that interest
because there was no need to rely on the illegal purpose underlying the
transaction. Since then, the Court of Appeal, in Tribe vTribe,
has confirmed a
further limit on the non-recovery principle, namely an exception where the
transferor makes a timely withdrawal from the illegal scheme. More recently, the
High Court of Australia has eroded the scope of the principle even further in its
decision in Nelson vNelson.
In his concurring judgment in that case, Dawson J
applied a significantly wider interpretation of the non-reliance rule than that
adopted in both Tinsley and Tribe. More importantly, the majority of the court
mounted a sustained attack on both the non-recovery principle and its refinement
in Tinsley, and introduced a new approach which is likely to reduce even further
the significance of illegality as a defence to a proprietary claim.
The facts
In Tribe vTribe, the plaintiff was the tenant of two dilapidated shops. Faced with
the landlords’ demands for expensive repairs, the plaintiff transferred his principal
asset, his shares in the family company, to his son, the defendant. No consideration
was paid for the shares, nor was it ever contemplated that it would be. The
plaintiff’s purpose, communicated to the son, was to defraud his creditors, by
creating the false impression that he had no means of meeting his liability to repair
the premises. The fraudulent scheme was never implemented, as the landlords’
claims were settled without the plaintiff making any representations regarding the
ownership of the shares. The danger having passed, the plaintiff sought to recover
the shares from the son, but the son resisted and raised a defence of illegality.
The Modern Law Review Limited 1997 (MLR 60:1, January). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA.
*University of Western Australia.
1 The equitable principle is usually traced back to the dictum of Lord Eldon in Muckleston vBrown
(1801) 6 Ves Jun 52, 69. It mirrors the common law doctrine enunciated by Lord Mansfield in
Holman vJohnson (1775) 1 Cowp 341, 343, that ‘[n]o Court will lend its aid to a man who founds his
cause of action upon an immoral or illegal act.’
4 (1995) 132 ALR 133.

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