FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - Moneys paid to solicitor as stakeholder under contract of sale of land - Contract terminated - Purchaser entitled to stake money - Solicitor wrongly paid out stake money to vendor - Solicitor executed Deed of Arrangement under Part X Bankruptcy Act 1966 (Cth) - Solicitor insured under professional indemnity policy - Purchaser claims right to indemnity and proceeds of insurance - Whether purchaser or all the creditors of the solicitor are entitled to the right to claim indemnity and the proceeds of insurance - Whether right to claim indemnity is “property” of bankrupt which vests in trustee - Whether right to claim indemnity and proceeds is property divisible amongst creditors - Whether indemnity and proceeds held on constructive trust for the purchaser

Bankruptcy Act 1966 (Cth) ss 5(1),  116(1), 116(2)(a), 117(1), 132, 134(1), 134(2), 187(1), 222, 229(1), 231(2), 236, 237

Corporations Law s 564

Legal Profession Practice Act 1958 (Vic) ss 40(1), 64(3), 88K, 88L

Re Harrington Motor Co Ltd; Ex parte Chaplin [1928] 1 Ch 105, applied

In re Richardson; Ex parte The Governors of St Thomas’s Hospital [1911] 2 KB 705, distinguished

The Bell Group Ltd (in liquidation) v Westpac Banking Corporation (1996) 22 ACSR 337, considered

Kitson v Hardwick (1872) LR 7 CP 473, considered

Seear v Lawson (1880) 15 Ch D 426, considered

Guy v Churchill (1888) 40 Ch D 481, considered

Ramsey v Hartley [1977] 1 WLR 686, considered

Re Nguyen: Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320, considered

Cotterill v Bank of Singapore (Australia) Ltd (1995) 37 NSWLR 238, considered

UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 251 and, on appeal, in 21 ACSR 457, considered

Re Movitor Pty Ltd (1996) 64 FCR 380, considered

Cummings v Claremont Petroleum NL (1996) 185 CLR 124, considered

Re Tosich Construction Pty Ltd; Ex parte Wily (1997) 143 ALR 18, 32, considered

Hood’s Trustees v Southern Union General Insurance Co of A’asia Ltd [1928] 1 Ch 793, applied

Potters v Loppert [1973] Ch 399, considered

Hastingwood Property Ltd v Saunders Bearman & Anselm (a firm) [1991] Ch 114, considered

Re Burman [1993] 1 Qd R 49, considered

Harrington v Hoggart (1830) 1 B & Ad 577, considered

Christie v Robinson (1904) 4 CLR 1338, considered

Henderson v Gray & Winter and Solicitors Liability Committee (Supreme Court of Victoria, Eames J, 20 Oct 1995, unreported), considered

Moshinski v Dodds (1985) 160 CLR 583, considered

Baumgartner v Baumgartner (1987) 164 CLR 137, considered

Goldsborough Mort & Co Ltd v Maurice (1937) 58 CLR 773, considered

Finn, Fiduciary Obligations (1977), para 231

Re: SILVERSTEIN; Ex parte: EVENAGE PTY LTD and SUTHERLAND and Anor

No VX7 of 1995

JUDGE:          NORTH J

PLACE:          MELBOURNE

DATE:            13 MARCH 1998

THE COURT ORDERS THAT:

1.         The answers to the separate questions are:

QUESTION (a):

“whether or not the right of the debtor to indemnity under a contract of insurance with the insurer, the secondnamed Respondent (as successor to the Solicitors Liability Committee), in respect of the debtor’s liability to the Applicant under a judgment ordered 28 July 1994 for it against him, has vested in the firstnamed Respondent as trustee”.

ANSWER:

The right of indemnity has vested in the firstnamed respondent as trustee.

QUESTION (b):

“whether or not any amount to be received by the firstnamed Respondent as trustee from the insurer under the policy in respect of that liability must be paid in full forthwith to the Applicant.”

ANSWER:

Any amount received by the first respondent from the insurer is not payable in full to the applicant.

2.         The further hearing of the proceeding is adjourned to a date to be fixed.

3.         A directions hearing is fixed for 10.15am on 20 March 1998.

4.         Costs reserved.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

Pursuant to orders made on 18 April 1997, there are two separate questions to be determined by the Court. They arise in proceedings brought by Evenage Pty Ltd (Evenage), the applicant, against Keith Laurence Sutherland (the Trustee), the trustee of a deed entered into under Part X of the Bankruptcy Act 1966 (Cth) (the Act) by Ronald David Silverstein for orders under s 222 of the Act declaring the deed void or, alternatively, under s 236 of the Act terminating the deed and for the sequestration of the estate of Mr Silverstein. Before setting out the questions, it will be useful to explain the background in which they arise.

On 21 May 1992, Evenage entered into a contract to purchase a shop in Dapto, New South Wales, for $2.24 million. Mr Silverstein was the solicitor for the vendor. Evenage paid a deposit of $224,000 to Mr Silverstein. The deposit was paid to him as a stakeholder. Before completion, Evenage discovered that the amount of rent payable by the tenant of the shop had been overstated by the vendor in the contract. Evenage refused to complete the contract because of the overstatement. Mr Silverstein then paid out the stake money at the direction of the vendor, and that money has not been recovered. In proceedings brought by Evenage against the vendor and Mr Silverstein in the Supreme Court of New South Wales, the vendor argued that Evenage was bound to complete and that Mr Silverstein had rightly accounted to it for the deposit. On 13 May 1994, Brownie J held that Evenage was entitled to terminate the contract and Mr Silverstein had not been entitled to account to the vendor for the deposit. On 8 July 1994, again in the Supreme Court of New South Wales, Santow J entered judgment for Evenage against Mr Silverstein for the amount of the stake money of $224,000. On 24 February 1995, Mr Silverstein executed a deed under Part X of the Act.

As a solicitor, Mr Silverstein held professional indemnity insurance with the Solicitors Liability Committee (SLC) against civil liability in connection with his practice. On 30 July 1996, Evenage commenced proceedings in the Supreme Court of Victoria against the SLC seeking payment to it of the indemnity provided by the SLC to Mr Silverstein. In the alternative, it claimed against the Law Institute of Victoria, representing the Solicitors Guarantee Fund (the Fund), on the basis that the circumstances in which Evenage lost its deposit through Mr Silverstein amounted to a defalcation which is compensable from the Fund. The SLC unsuccessfully applied in the Supreme Court of Victoria for a stay of the claim by Evenage, on the ground that Evenage has no standing to bring the proceedings against the SLC. An appeal was instituted but has been adjourned by agreement pending the outcome of this proceeding because the answer to the separate questions bear on the standing of Evenage.

In broad terms, Evenage argues that the right to indemnity and the proceeds of any claim are held either by Mr Silverstein or by the trustee on trust for Evenage and not for the general creditors of Mr Silverstein. If this argument is correct, Evenage has no interest in pursuing the application to avoid or terminate the deed of arrangement. Hence, it was convenient to determine those issues separately and in advance of the applications under s 222 and s 236 of the Act. The trustee made submissions to assist the Court to resolve the issues, which were to the general effect that the indemnity and the proceeds of the policy are held by the trustee for the general creditors of Mr Silverstein. The SLC, which is now called the Legal Practitioners Liability Committee (the Committee), has an interest in the question of Evenage’s standing to make a claim under the policy and, hence, I gave Evenage leave to join the Committee as a respondent. As a result, on 15 August 1997, the Committee was joined as the second respondent. It generally argued that the right to claim under the policy vested in the trustee, who held the proceeds for all the creditors of Mr Silverstein. Mr Silverstein’s position was that the right to indemnity remained with him and that he held the right to claim and the proceeds of any successful claim for Evenage.

The problem raised in this case is normally covered by legislation. In 1928, in Re Harrington Motor Co Ltd; Ex parte Chaplin [1928] 1 Ch 105, the Court of Appeal held that a person injured by another, where that other person had become bankrupt, had no claim to the proceeds of a policy of insurance which insured the bankrupt against liability for personal injury caused to others. The proceeds were held by the trustee for the general body of creditors. Atkin LJ recognised the unfairness of the situation, at 116-117:

“In this case I am of the opinion that the applicant has a real grievance, and if it were possible to decide for him I should very willingly do so. But it appears to me that the general rules of law which govern cases of insurance and indemnity have been laid down in such terms that it is impossible to make an exception in the particular class of cases of which this forms one, and I am bound to say that I myself should be well satisfied if, by the decision of a higher tribunal or by legislation, the general rule of law were altered so as to cover this particular case.”

The same view was expressed by Lord Hanworth MR, at 111, and Lawrence LJ, at 124. In response, bankruptcy legislation was amended to give the victim sole claim to such funds. In Australia, the present provision is s 117(1) of the Act, which provides:

“117 (1)  Where:

(a)       a bankrupt is or was insured under a contract of insurance against liabilities to third parties; and

(b)       a liability against which he or she is or was so insured has been incurred (whether before or after he or she became a bankrupt);

the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party to whom it has been incurred.”

This section applies when a person becomes bankrupt. It also applies to a deed of assignment made under Part X (s 231(2)). It does not, however, apply to a deed of arrangement (s 237(2)). I expect that the deed of arrangement provisions were intended to give the creditors maximum flexibility in devising appropriate arrangements concerning the debtor’s affairs. Such a deed may include a provision to the effect of s 117(1) but it does not do so by force of the Act. It is accepted by the parties in the present case that, if the deed under consideration is valid (a matter not presently under consideration), it is a deed of arrangement. It does not make separate provision for the proceeds of the policy.

I now turn to the terms of the separate question, which are:

“(a)     whether or not the right of the debtor to indemnity under a contract of insurance with the insurer, the secondnamed Respondent (as successor to the Solicitors Liability Committee), in respect of the debtor’s liability to the Applicant under a judgment ordered 28 July 1994 for it against him, has vested in the firstnamed Respondent as trustee;

(b)       whether or not any amount to be received by the firstnamed Respondent as trustee from the insurer under the policy in respect of that liability must be paid in full forthwith to the Applicant.”

The answers to these questions depend on the resolution of the following issues:

(i)         Was the right to claim an indemnity property of Mr Silverstein within the meaning of s 5(1) of the Act which vested in the trustee?

(ii)        Was the right to claim an indemnity property divisible among the creditors of Mr Silverstein?

(iii)       Does In re Richardson; Ex parte The Governors of St Thomas’s Hospital [1911] 2 KB 705 apply to the circumstances of this case?

(iv)       Was the right to indemnity or to the proceeds of the insurance policy held on trust for the benefit of Evenage?

I will deal with each of these issues in turn.

WAS THE RIGHT TO CLAIM AN INDEMNITY PROPERTY OF MR SILVERSTEIN WITHIN THE MEANING OF s 5(1) OF THE ACT WHICH VESTED IN THE TRUSTEE?

Mr Silverstein contended that his right to claim an indemnity from the Committee against liability to Evenage did not vest in the Trustee upon execution of the deed. Clause 2 of the deed provided:

“ASSIGNMENT OF DEBTOR’S PROPERTY

The Debtor assigns to the Trustee all of the Debtor’s right title and interest in and to the property described in the schedule upon trust to deal with according to this Deed. The Trustee agrees to hold the Debtor’s property upon the trusts set out in this Deed.”

The schedule provided:

“SCHEDULE

All the divisible property of the Debtor (the expression ‘divisible property’ having the meaning ascribed to it by section 187 of the Act and as if this Deed were a Deed of Assignment).”

“Divisible property” is defined in s 187(1) of the Act, as follows:

“‘divisible property’, in relation to a deed of assignment executed by a debtor, means the property, other than property that was acquired by, or devolved on, the debtor on or after the day on which he or she executed the deed, that would be divisible amongst his or her creditors under Part VI if he or she had become a bankrupt on that day”,

and “property” is defined in s 5(1) of the Act to mean:

“‘property’ means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property”.

When a person becomes bankrupt, their property is vested in a trustee by operation of the Act (s 58(1) and s 132). In the case of a deed of assignment entered into under Part X of the Act, there is, similarly, an express vesting in the trustee of the divisible property of the debtor (s 229(1)). There is no express statutory vesting of the property of the debtor in the trustee of a deed of arrangement (see Division 5 of Part X of the Act). However, it is implicit in the provisions generally relating to deeds of arrangement that property which is assigned to the trustee in the deed vests in the trustee by virtue of the operation of the Act. Thus, if the right to claim against the Committee was property of Mr Silverstein within the meaning of s 5(1) of the Act, then it vested in the Trustee upon execution of the deed.

Mr Silverstein contended that the right to claim against the Committee was not “property” within the statutory definition. He relied upon The Bell Group Ltd (in liquidation) v Westpac Banking Corporation (1996) 22 ACSR 337. In that case, some creditors of The Bell Group Ltd had agreed to pay the liquidator’s costs of pursuing claims of the company in liquidation against its bankers. The liquidator sought orders under s 564 of the Corporations Law to give those creditors priority in payment in the liquidation. Section 564 of the Corporations Law gave jurisdiction to the Court in that case only if “.... property .... has been protected or preserved by the payment of moneys or the giving of indemnity by creditors ....”. “Property” was defined in s 9 of the Corporations Law in terms which were relevantly the same as s 5(1) of the Act, although the words were arranged somewhat differently. Templeman J concluded that, in the context of the section, “property” included the proceeds of a money claim but not the right to recover such proceeds. Parliament did not intend s 564 to apply to an asserted cause of action prior to determination of the claim. His Honour said, at 348:

“.... until the outcome of the litigation is known, it cannot be said that ‘the property’ has in fact been protected. Money spent purportedly on the protection of a claim may prove to have been spent for no good purpose.

.... because an order made in advance of litigation must be hypothetical, or of uncertain operation, it is unlikely that parliament ever intended s 564 to apply in those circumstances.”

The question whether the right to recover the proceeds of a money claim could fall within the definition of “property” for purposes other than s 564 was left open. His Honour said, at 346:

“Even if that [the right to recover moneys by legal action] is a right which falls within the definition of ‘property’ in the Corporations Law, it does not avail the applicants. This is because if the right is property which can be protected or preserved by the payment of money, it is only the proceeds of that right which can be the subject of a s 564 order.”

In my view, much assistance can be gained in determining what is “property” in the present context from authorities which have dealt with the ability of a trustee to dispose of a bankrupt’s right to litigate. Section 134(1)(a) of the Act permits the trustee to “sell all or any part of the property of the bankrupt”. It has been held, in cases dating back to at least 1872, that a trustee may sell a right of action of a bankrupt under the equivalent of s 134(1)(a), on the basis that the right of action is property within the meaning of the section: Kitson v Hardwick (1872) LR 7 CP 473; Seear v Lawson (1880) 15 Ch D 426; Guy v Churchill (1888) 40 Ch D 481; Ramsey v Hartley [1977] 1 WLR 686; Re Nguyen: Ex parte Official Trustee in Bankruptcy (1992) 35 FCR 320; Cotterill v Bank of Singapore (Australia) Ltd (1995) 37 NSWLR 238; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 21 ACSR 251 and, on appeal, in 21 ACSR 457; Re Movitor Pty Ltd (1996) 64 FCR 380; Cummings v Claremont Petroleum NL (1996) 185 CLR 124; Re Tosich Construction Pty Ltd; Ex parte Wily (1997) 143 ALR 18, 32. In Cotterill, Bainton J comprehensively reviewed a number of these cases, at 245‑250, and I adopt his review. Insofar as these cases determined that the trustee was entitled to dispose of the bankrupt’s rights of action, the cases depended upon the proposition that the rights of action of the bankrupt had come into the hands of the trustee. This issue was directly addressed in a number of cases. Thus, in Seear, at 432‑433, Bacon V‑C said:

“Now the word ‘property’, as defined by the 4th section of the Bankruptcy Act includes things in action. The trustee obtains the bankrupt’s property under the 17th section on his appointment. The words are, ‘on the appointment of a trustee the property shall forthwith pass to and vest in the trustee appointed’, and he gets the property in no other way.

The first question to be decided is, does he get such a right of action as this under the 17th section? I should say it is quite clear that he does. It would be impossible to hold that it remained vested in the bankrupt so that he could after his discharge recover the estate for his own benefit. Therefore, under the words ‘property’, it vests in the trustee and is now in the trustee.”

In Guy, Chitty J said, at 486-487:

“Two points are clear, and the argument for the motion proceeded on the admission of counsel that they were indisputable. The first is, that the right to continue the action passed to Kemp as trustee in bankruptcy. The second is, that Kemp was entitled to sell this right even to a stranger. Both points are covered by the decision of the Court of Appeal in Seear v Lawson 15 Ch D 426.”

In Ramsey, the parties did not dispute that the bankrupt’s right of action vested in the trustee, and the Court did not question this agreement. Lane LJ, for instance, said, at 699:

“There is no dispute that these words are wide enough to cover and do cover the bankrupt’s right of action in tort against the fifth defendant, who is the appellant before this Court. Accordingly, on adjudication the right of action became vested in the trustee.”

In Cotterill, Bainton J explained the rationale of these decisions and its application to the New South Wales bankruptcy legislation, at 252, as follows:

“The New South Wales legislation is plainly modelled on the United Kingdom legislation which preceded it. Indeed, it has reproduced much of the language of the United Kingdom legislation. The reasoning which led to the decisions in Kitson v Hardwick, Seear v Lawson and Guy v Churchill was as applicable in New South Wales when its bankruptcy legislation was enacted, as it was in England when those cases were decided on the United Kingdom legislation as it then was. The underlying policy of the legislation is plain: it is that all the property of a bankrupt (with specified exceptions) should pass to the functionary, by whatever name called, whose task it was to get in that property, to realise it and to distribute the nett realisation among the creditors. To the extent that the property of the bankrupt included or consisted of a chose in action (whether a ‘bare’ chose in action, or one flowing from some property right) the legislation provided that it should pass to the functionary who was to realise it for the benefit of the bankrupt’s creditors.”

His Honour then set out the relevant Federal bankruptcy provisions, which were the predecessors of the present definition of “property” in ss 5(1), 58(1)(a), 132(1) and 134(1) & (2), and said, at 254:

This examination of the New South Wales and of the Commonwealth legislation leads me to conclude, first that both were modelled upon the United Kingdom legislation commencing with the Bankruptcy Act 1869; secondly, that the construction put upon that Act by the English decisions to which I have referred is equally applicable to and should be put upon the present Commonwealth Act; thirdly, that property of the bankrupt as defined in s 5(1) of the present Commonwealth legislation which passes to the Official Trustee and which may be realised by him includes what may be described as a bare chose in action such as one relying upon s 52 of the Trade Practices Act 1974 (Cth) and, finally, for the reasons enunciated by Brett LJ in Seear v Lawson and by Chitty J in Guy v Churchill that the bankruptcy legislation authorises a disposal which would, apart from such legislation, be champertous and for that reason not recognisable by any Court.”

In Movitor, Drummond J considered the validity of a proposed agreement between a liquidator and an insurance company whereby the insurance company was to finance legal action available to the company in liquidation against former directors for damages for breach of statutory duties and, in return, was to receive a share of the proceeds of litigation. He held that the agreement would be void as champertous unless it fell within a recognised exception. He said, at 389:

“One such exception, long established, is the rule that a trustee in bankruptcy may lawfully assign any of the bankrupt’s bare causes of action that have vested in the trustee on terms that the trustee is to receive a share of the proceeds of the litigation, if it is successful, although such an assignment is generally unlawful because it is regarded as involving maintenance and champerty.”

He then considered whether the transaction involved the sale of “property of the company” under s 477(2)(c) of the Corporations Law, which was relevantly the same as s 134(1)(a) and s 135(1)(a) of the Act. He said at 391-392:

“The expression in ss 134 and 135 of the Bankruptcy Act, ‘the property of a bankrupt’, is defined in s 5(1) of the Act to mean the property divisible among the bankrupt’s creditors pursuant to s 116 of the Bankruptcy Act and, in addition, ‘any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt’. The term ‘property’ is defined in s 5(1) to include ‘any estate interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property’. The term ‘the property of a bankrupt’, which the trustee in bankruptcy is given statutory power to sell, thus has an extremely wide reach. It includes a chose in action, although that term is not expressly referred to in any of the definition sections: cf Re Nguyen at 325. It also includes, by express definition, ‘any ... interest or profit, whether present or future, vested or contingent arising out of or incident to any such’ chose in action. In my opinion, the expression ‘the property of a bankrupt’, which the trustee has power to sell under the Bankruptcy Act, includes not only a chose in action regarded as the right to litigate, but also the whole or a share of the expected fruits of that chose in action: cf Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 314.”

The question whether a right of action vests in a trustee in bankruptcy was also directly raised and determined in UTSA. Section 48(5) of the English Bankruptcy Act provided:

“Where any part of the property of the bankrupt consists of things in action, such things shall be deemed to have been duly assigned to the trustee.”

It was contended by those parties opposing an assignment of the rights of action in that case that, while the rights of action held by a bankrupt pass to the trustee under s 48(5) of the English legislation, there was no equivalent provision in Australia and, consequently, a bankrupt’s rights of action do not pass to the trustee in Australia. Hansen J rejected this argument, at 268, as follows:

“The same result is achieved, in my opinion, by s 58(1) of the Australian Act which states:

Subject to this Act, where a debtor becomes a bankrupt: (a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee ....

Similarly, s 132(1) provides:

Subject to this section, where a trustee is appointed by the creditors, the property of the bankrupt passes to and vests in the trustee so appointed on the day on which the appointment takes effect.

The relevant question then under the Bankruptcy Act 1966 (Cth) is whether a bankrupt’s cause of action falls within the definition of ‘property’ which vests in the trustee. The Australian cases have held that it does.”

Movitor was one of the Australian cases to which his Honour referred. His Honour’s decision was upheld on appeal (21 ACSR 457).

In Cummings, the High Court held that a bankrupt has no standing to appeal against judgment against the bankrupt entered after the making of a sequestration order. Dawson and Toohey JJ held that the appeal was property which vested in the trustee. They said, at 145-6:

“While the definition of ‘property’ in the Act is cast in broad terms, it is a definition which requires consideration of what is meant by the word property itself. The answer to that question is not to be found directly within the definition. At the same time the scope of the word cannot be divorced from the context in which it appears (Hepples v Federal Commissioner of Taxation (1990) 22 FCR 1 at 9-10, 24-27). In that regard the respondents naturally stressed that the scheme of the Act is to vest in the trustee rights of the bankrupt, including some which would not traditionally be thought of as proprietary, subject only to the exceptions to be found in s 116(2). Gummow and Whitlam JJ, in referring to s 116, said (Fuller (1993) 43 FCR 60 at 66-67):

‘What is of present significance is that s 116 contemplates that were it not for the express exclusion, what might be called bare rights of action to recover damages for personal injury, rights not ordinarily assignable, would nevertheless be treated as property divisible amongst the creditors of the bankrupt and therefore as property which vested under s 58(1).’

The meaning of property in the Act, ‘real and personal property of every description’, is wide enough to include the right of appeal conferred by s 24 of the Federal Court of Australia Act. And that is so even where the appeal is against a judgment imposing a monetary obligation on the appellant.”

The majority (Brennan CJ, Gaudron and McHugh JJ) held that the right to appeal against a judgment against the bankrupt was not property within the statutory definition. However, they said, at 134:

“If the postulated appeal relates to property that became vested in the trustee on the bankruptcy, or if the postulated appeal relates to a claim by the bankrupt for money or property that would be vested on recovery in the trustee, the right to appeal is vested in the trustee, as the cases cited by Farwell LJ illustrate. But it does not follow that a right to appeal against a money judgment entered in an action against a bankrupt is property of the bankrupt and, on that account, vested in the trustee.”

Thus, a long line of cases establishes that a right of action held by a bankrupt is property within s 5(1) of the Act and vests in the trustee. In my view, these cases establish that “property” was used in the Deed of Arrangement to include Mr Silverstein’s right to claim indemnity under the insurance policy and to recover the proceeds of the policy.

WAS THE RIGHT TO CLAIM AN INDEMNITY PROPERTY DIVISIBLE AMONG THE CREDITORS OF MR SILVERSTEIN?

The Committee argued that the right to indemnity remained vested in Mr Silverstein by operation of the deed. The deed assigned to the trustee all the divisible property of Mr Silverstein, and divisible property was defined to have the meaning which it has in s 187, namely, property that would be divisible “amongst his or her creditors under Part VI if he or she had become bankrupt on that day”. Section 117, which is in Part VI, would have applied if Mr Silverstein had become a bankrupt on the date of the deed. The terms of that section have been set out earlier in these reasons. The Committee contended that the right to indemnity would vest in the trustee and the operation of s 117(1) would have meant that any amount payable under the policy would have been payable to Evenage alone, and not to the general creditors of Mr Silverstein. Consequently, that amount was not divisible property under s 187. It remained in the hands of Mr Silverstein. In my view, this argument fails to take account of the clear terms of s 116(1)(a) and (b) of the Act, which provide:

“116 (1)  Subject to this Act:

(a)       all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge;

(b)       the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge;

......

is property divisible amongst the creditors of the bankrupt.”

The right of indemnity and the amount received by way of indemnity fall within these provisions. Consequently, they are part of the divisible property of Mr Silverstein. Section 117(1) operates to direct the property into the hands of one of the creditors rather than all of the creditors. There is nothing in the provisions to suggest that property is not divisible property simply because it is divisible among some but not all creditors.

DOES RICHARDSON APPLY TO THE CIRCUMSTANCES OF THIS CASE?

Mr Williams, who appeared as counsel for Evenage, relied upon Richardson, to argue that the trustee held the right to claim indemnity and the proceeds of any successful claim for Evenage alone. In that case, Mr Richardson was the tenant of certain premises. His wife purchased the beneficial interest in the leases. Mr Richardson thus held the leasehold in trust for his wife. There were breaches of covenants which gave rise to a claim by the landlord against Mr Richardson and his wife. These claims were settled on the basis that the wife was to pay £520 to the landlord in full settlement of all claims. Mr Richardson became bankrupt. As he was trustee for his wife, the question arose in his bankruptcy whether the moneys paid by his wife by way of indemnity against the liability to the landlord was part of the bankrupt’s estate and divisible between all creditors, or whether the money was payable to the landlord alone. The Court of Appeal held that the moneys were payable to the landlord alone. Cozens‑Hardy MR said, at 711-712:

“The respondent says ‘This right to an indemnity which the bankrupt as trustee had against his cestui que trust is property which vests in me as his trustee in bankruptcy and I am bound to apply that like all other assets of the bankrupt for the benefit of all the creditors.’ But is that quite so? I cannot think it is. If and when he pays the amount of the debt he will have a right to treat the money, which he can then sue for from the person who is bound to indemnify, as part of the estate, but unless and until he pays I fail to see how it can be in accordance with justice and common fairness that he should be allowed to augment the estate of the bankrupt in a way which results in this, that the greater the liability the greater will be the advantage to the estate. The trustee cannot be allowed to say ‘I will take the money recovered under my right of indemnity against the claim of St Thomas’s Hospital and will apply it, not towards the satisfying the claim of the hospital in the way which the indemnity implies, but as part of the general assets, and I will give no effect whatever to the indemnity except so far as the hospital come in and prove for their claim in the bankruptcy.’ To allow that would be to allow a trustee to make a profit out of his position as trustee. It seems to me that it cannot be right that the trustee should be allowed to say more than this: ‘If I pay this amount to St Thomas’s Hospital then I can come against the cestui que trust’s estate and claim upon that, or, if I do not pay, then I will take proceedings to indemnify myself against the liability which I am under, giving effect to that indemnity in the only way in which effect can reasonably and properly be given to it by applying the money so recovered in the reduction or complete satisfaction, as the case may be, of the amount due to the hospital.’ With great respect to the learned judge, I am unable to agree with the conclusion at which he has arrived. I believe that this money is now in the proper hands, namely, the hands of the governors of St Thomas’s Hospital, and that there is no ground for treating it as in any way part of the general assets of the bankrupt for the purpose of being distributed amongst his creditors. For these reasons I think the appeal must be allowed.”

Fletcher Moulton LJ said, at 714:

“Therefore I come to the conclusion that, as a general principle, an indemnity like this can be used by the trustee only for the purpose of bringing about payment to the head creditor of the claim against which he is indemnified.”

In Harrington, Chaplin obtained judgment against a company for damages caused by an employee of the company in a motor vehicle accident. The company went into liquidation. It was insured against liability for such damages. The insurer paid the amount of the judgment to the liquidator. Chaplin argued that the liquidator should pay the moneys to him and not to the general body of creditors. In rejecting that argument, Eve J said, at 108-109:

“The plaintiff’s claim is put forward on the ground that there is, or should be, an equity binding the liquidator to apply the moneys towards satisfying the liability in respect of which they have come to his hands and not the less because they are insufficient to give the plaintiff the full compensation to which he has been held to be entitled. I fail to see how any such equity can be raised. The liquidator, as recipient of the fund, stands in no fiduciary relation to the plaintiff. The money has been recovered under a contract made between the company, and the insurers, to which the plaintiff was not and could not in the circumstances have been a party; he has no concern and was not in any way connected with the company and, indeed, probably did not know of its existence until its vehicle inflicted these injuries upon him. In these circumstances neither the company nor the liquidator can be treated as a trustee for him in enforcing the claim against the insurers. The decision in In re Richardson ([1911] 2 KB 705) is relied upon as supporting the plaintiff’s contention. I do not think it does. .... The Court held the former to be entitled on the short ground that if the moneys were applied in satisfying wholly or in part the claims of the husband’s general creditors, the husband would be making a profit out of his trusteeship. The husband could not use the indemnity arising not by contract but out of the relationship of him and his wife for his own benefit or for the benefit of his creditors generally, or indeed for any purpose other than bringing about payment to the reversioners of the particular debt against which the husband was indemnified, and the trustee in bankruptcy was in no better position. I do not think that decision or the reasoning on which it is founded has any application to the facts of the present case. Here the right of the company to be indemnified was created by a contract to which the plaintiff is no party, and I cannot see upon what ground he can be held to have any valid claim either at law or in equity to the moneys in the hands of the liquidator.”

His Honour’s decision was upheld in the Court of Appeal where Lawrence LJ said, in relation to Richardson, at 125:

“I confess to being very much puzzled by that case, and not for the first time on the hearing of this appeal. Even with Mr Stable’s assistance I have failed to understand the principle upon which it was decided. If that case had laid down any principle applicable to the facts of this case, we should be bound to follow it, but so far as I understand that case it did not nor did it purport to call in question the general principle that no person is entitled to claim the benefit of or to enforce a contract to which he is not a party or privy. Whatever may have been the ratio decidendi of that case, I do not think that it applies here; the facts there differed widely from the facts here.”

Atkin LJ said, also in relation to Richardson, at 123:

“The special facts of the case are very unlikely to occur again, and I think the decision must be read with special reference to those facts.”

In Hood’s Trustees v Southern Union General Insurance Co of A’asia Ltd [1928] 1 Ch 793, the question arose whether the proceeds of an insurance policy against liability for personal injury arising from the use of a motor vehicle vested in the trustee in bankruptcy of the insured, or whether the proceeds were directly available to the person injured by the bankrupt. Tomlin J followed Chaplin. In so doing, he said, at 805-806, in respect of Richardson:

“That is no doubt a different case. It rests on the equitable right, which every trustee has, to be indemnified by his cestui que trust, and it may be that there are distinctions between such a case and cases like In re Harrington Motor Co (44 Times LR 58, 59; since reported ante, p 105) and the one now before me. I have a difficulty in seeing that In re Richardson ([1911] 2 KB 705)  has any application to this case. At least if I have to choose between In re Richardson and In re Harrington Motor Co - and I have some difficulty in seeing how they can be reconciled - I think I must take the principles which are indicated in In re Harrington Motor Co as being the more appropriate to the particular case I am now deciding.”

An appeal to the Court of Appeal was dismissed, with their Lordships expressing complete agreement with the reasons of Tomlin J.

As I mentioned earlier in these reasons, there was a legislative response to reverse the unfairness revealed by Chaplin and Hood’s Trustees. The legislation is based on the assumption that those cases were correctly decided. In my view, they were correctly decided and I would apply them to the present case in preference to Richardson, for the reasons stated in those cases. Consequently, I do not accept Richardson as authority in this case for the proposition that the right to indemnity or the proceeds of the successful claim are held by the trustee for Evenage alone.

WAS THE RIGHT TO CLAIM AN INDEMNITY AND/OR THE PROCEEDS OF POLICY HELD ON TRUST FOR EVENAGE?

Section 116(2)(a) provides that property divisible among creditors of the bankrupt does not include:

“(a)     property held by the bankrupt in trust for another person”.

Evenage argued that, if it had claimed an equitable interest in the policy proceeds prior to the execution of the deed of arrangement, s 116(2)(a) would have operated to prevent the property passing to the trustee. Where, as here, the claimant does not assert the claim until after execution of the deed of arrangement, the property passes to the trustee but subject to the liabilities and equities which affected the property in the debtor’s hands. On this basis, Evenage argued that the trustee held the right to claim an indemnity and the proceeds of the policy on a constructive trust for Evenage.

Fiduciary constructive trust

The first basis upon which a constructive trust was alleged was that Mr Silverstein had a fiduciary obligation in relation to the stake money as a stakeholder in all the circumstances and/or as a solicitor. He held the stake money on trust for Evenage and the vendor to await the conclusion or termination of the contract of sale. Because the indemnity and any proceeds were provided in respect of Mr Silverstein’s involvement in the sale, the indemnity was itself held on a constructive trust for Evenage. Otherwise, it was contended, Mr Silverstein would make an improper gain as a fiduciary if he retained the right to recover or proceeds of the indemnity without accounting to Evenage.

Usually a stakeholder does not hold the stake money as trustee but is bound by contract alone to deal with the stake money in accordance with the wishes of the parties interested. However, circumstances may indicate that the parties intended that the stake money was to be held on trust: Potters v Loppert [1973] Ch 399, at 405-406; Hastingwood Property Ltd v Saunders Bearman & Anselm (a firm) [1991] Ch 114, Re Burman [1993] 1 Qd R 49, at 53; Finn, Fiduciary Obligations (1977), para 231. In the present case, special condition 6 of the contract provided:

“(a)     Pending completion or the rescission or termination of this Agreement (whichever in facts occurs), the Vendor’s Solicitor shall place the Deposit referred to in Item G (b) of the Particulars with Advance Bank Australia Limited. The Deposit shall be made in the name of the Vendors Solicitor as stakeholder for the Vendor and the Purchaser.

(b)       For the purposes of this Special Condition the expression ‘interest’ means the interest actually earned on the deposit less all stamp duty bank charges and the like payable in respect of the investment of the Deposit.

(c)        Any interest earned on such Deposit shall upon completion be payable to the Vendor and the Purchaser equally provided that:-

(i)         in the event of rescission or termination by the Purchaser the interest shall be payable to the Purchaser; and

(ii)        in the event of rescission or termination by the Vendor, the interest shall be paid to the Vendor.

(d)        The Vendor and the Purchaser each agree to give such directions and do such things as may be necessary to give effect to the provisions of this special condition.

(e)        The Vendor’s Solicitor shall not be responsible in any way for any loss occasioned by the investment of the deposit. The party entitled to the deposit on the completion rescission or termination of the Agreement (whichever in fact occurs) shall bear the risk of the loss of the deposit.”

This condition shows that the vendor and purchaser did not intend the stake money to become the property of Mr Silverstein. He was to keep it separate and identified as property to be dealt with according to their directions. Any interest earned on the stake money was to be payable to the parties providing the stake money and not to the stakeholder. Further, the stakeholder was not liable for loss of the stake money occasioned by its investment. Each of these provisions points clearly to an intention to create a trust. The cases have pointed to the absence of these very type of provisions to show that no trust was intended. Thus, the stakeholder’s ability to mix the stake money with their own funds, to retain interest earned on the stake money pending disposal, and liability for loss of the stake money point to an intention that the stake money be held on contractual terms alone: Harrington v Hoggart (1830) 1 B & Ad 577; Christie v Robinson (1904) 4 CLR 1338, at 1362. Thus, Mr Silverstein held the stake money as trustee. Further, if he received the stake money as a solicitor, which I assume for the purposes of the present argument, he was bound to place it in a trust account under s 40(1) of the Legal Profession Practice Act 1958 (Vic). The statutory requirement rendered him a trustee of the moneys: Re Burman, at 54. Thus, if the stake money was still in Mr Silverstein’s hands, or was traceable, Evenage would have rights against the stake money itself.

Evenage, however, contended that because Mr Silverstein held the stake money on trust and had dealt with it improperly, he held the right to indemnity and any proceeds on a constructive trust. The necessary nexus existed because the indemnity was provided in respect of the stake money. In my view, this step is not made out. I assume, in favour of Evenage, that Mr Silverstein was bound by s 88K of the Legal Profession Practice Act as a solicitor to take out insurance against liability for breach of duty as a solicitor acting as a trustee. The section prohibited the issue of a practising certificate to a solicitor unless the solicitor:

“(a)     has entered into a contract of professional indemnity insurance for that year with the Committee [SLC] and paid to the Committee [SLC] the contribution to the Fund payable in respect of that contract”.

Section 88L then provided:

“A contract of professional indemnity insurance entered into between the Committee and a solicitor or firm of solicitors in respect of a period entitles the solicitor or firm, subject to the terms and conditions of the contract, to indemnity from the Fund in respect of claims against the solicitor or firm first made during that period.”

The duty which Mr Silverstein had under the Legal Profession Practice Act was to enter into a contract which indemnified him for his liability. The contract of insurance between Mr Silverstein and the SLC took this form. For instance, clause 2(a) of the 1994 contract provided that:

“The Insurer will indemnify the insured against any civil liability in connection with the Practice in respect of which a claim is first made against the Firm during the Period of Insurance.”

Mr Silverstein had no obligation to take out a policy which provided for payment of the proceeds to Evenage. Nor did he in fact take out such a policy. It was not part of his arrangement with Evenage that Evenage would have access to the insurance moneys. In Henderson v Gray & Winter and Solicitors’ Liability Committee (Supreme Court of Victoria, 20 Oct 1995, unreported) Eames J held that clients had no right under such a professional indemnity policy to make a direct claim against the Committee for the proceeds of the insurance against liability for negligence committed against those clients. His Honour said, at 22-23:

“Had the solicitors expressly or impliedly contracted not only to insure the rights of the clients but also to hold any sums received from the insurers, under such a contract, for the clients, then a former client making a claim against the solicitor would have sufficient interest to seek a declaration that the proceeds of such indemnity policy were held in trust for the former client.

However, an obligation to insure, alone, would not be sufficient to create that entitlement. The contract must also provide that the proceeds of the policy were to be held for the benefit of the third party: Lees v Whiteley [1866] LR (Eq) 143, at 148-9; Halifax Building Society v Keighley [1931] 2 KB 248, at 255. Such an intention cannot be discerned in the contract here, nor is there any suggestion of such an interest being established by the legislation.”

While these conclusions related to a contract based claim, the same conclusions apply in this case and lead to the result that Mr Silverstein had no obligation to provide direct access by Evenage to the insurance policy. The policy was taken out by Mr Silverstein for his benefit alone. The Legal Profession Practice Act required that a solicitor enter into a contract of insurance, not into an arrangement whereby the client could make a direct claim for the proceeds. That situation can be contrasted with Part VI, Division 2 of the Legal Profession Practice Act, which establishes the Solicitors’ Guarantee Fund to compensate clients of solicitors guilty of defalcation. Section 64(3) expressly provides for the clients to make claims directly on the Fund, as follows:

“Subject to this Part every person who suffers pecuniary loss as provided in sub-section (1) of this section shall be entitled to claim compensation from the fund and to take proceedings in the Supreme Court as hereinafter provided against the institute in relation to the fund to establish such claim.”

Thus, the requirement to take out the policy did not, on its own, give rise to a fiduciary relationship between Mr Silverstein and Evenage in respect of the proceeds of the policy, or give Evenage any interest in the proceeds of the policy. Nor did the existing relationship as stakeholder solicitor create any duty on Mr Silverstein towards Evenage to provide direct access by Evenage to the insurance policy.

Unconscionable constructive trust

Evenage argued that the trustee holds the proceeds of the policy on a constructive trust for Evenage on the basis that it would be unconscionable for Mr Silverstein and, hence, the trustee to retain those funds. In Moshinski v Dodds (1985) 160 CLR 583, Brennan J said, at 608:

“There is no jurisdiction in an Australian court of equity to declare an owner of property to be a trustee of that property for another merely on the ground that, having regard to all the circumstances, it would be fair so to declare: Wirth v Wirth ((1956) 98 CLR 228, at 232); Hepworth v Hepworth ((1963) 110 CLR 309, at 318); Bloch v Bloch ((1981) 55 ALJR 701, at 705; 37 ALR 55, at 63). The flexible remedy of the constructive trust is not so formless as to place proprietary rights in the discretionary disposition of a court acting according to vague notions of what is fair.”

Deane J (with whom Mason J agreed) said, at 615-616:

“The fact that the constructive trust remains predominantly remedial does not, however, mean that it represents a medium for the indulgence of idiosyncratic notions of fairness and justice. As an equitable remedy, it is available only when warranted by established equitable principles or by the legitimate processes of legal reasoning, by analogy, induction and deduction, from the starting point of a proper understanding of the conceptual foundation of such principles: cf, generally, Sir Frank Kitto’s Foreword to the first edition (1975) of Meagher, Gummow and Lehane, Equity: Doctrines and Remedies, pp v‑vii, and see also, eg, In re Diplock ([1948] Ch 465, at 481‑482); Pettitt v Pettitt ([1970] AC 777, at 793, 801, 809, 825); Cowcher v Cowcher ([1972] 1 WLR 425, at 430; [1972] 1 All ER 943, at 948); Jacobs’ Law of Trusts in Australia, 4th ed (1977): Meagher and Gummow eds), pars 1301‑1302, 1325‑1329; Allen v Snyder ([1977] 2 NSWLR 685, at 689, 702ff); Oakley, Constructive Trusts, pp 1­‑10; Pettitt, op cit, pp 4‑6. Viewed as a remedy, the function of the constructive trust is not to render superfluous, but to reflect and enforce, the principles of the law of equity.

Thus it is that there is no place in the law of this country for the notion of ‘a constructive trust of a new model’ which ‘[b]y whatever name it is described, .... is .... imposed by law whenever justice and good conscience’ (in the sense of ‘fairness’ or what ‘was fair’) ‘require it’: per Lord Denning MR, Eves v Eves ([1975] 1 WLR 1338, at 1341, 1342; [1975] 3 All ER 768, at 771, 772); and Hussey v Palmer ([1972] 1 WLR 1286, at 1289-1290; [1972] 3 All ER 744, at 747). .... The mere fact that it would be unjust or unfair in a situation of discord for the owner of a legal estate to assert his ownership against another provides, of itself, no mandate for a judicial declaration that the ownership in whole or in part lies, in equity, in that other: cf Hepworth v Hepworth ((1963) 110 CLR 309, at 317-318). Such equitable relief by way of constructive trust will only properly be available if applicable principles of the law of equity require that the person in whom the ownership of property is vested should hold it to the use or for the benefit of another. That is not to say that general notions of fairness and justice have become irrelevant to the content and application of equity. They remain relevant to the traditional equitable notion of unconscionable conduct which persists as an operative component of some fundamental rules or principles of modern equity: cf, eg, Legione v Hateley ((1983) 152 CLR 406, at 444; Commercial Bank of Australia Ltd v Amadio ((1983) 151 CLR 447, at 461-464, 474-475).”

This latter passage was adopted by Mason, Wilson and Deane JJ in Baumgartner v Baumgartner (1987) 164 CLR 137, at 148. It is thus necessary to identify the equitable principle upon which the asserted constructive trust is based. In Baumgartner, the equitable principle was that equity:

“restores to a party contributions which he or she has made to a joint endeavour which fails when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them” ( at 148).

Evenage did not identify in this case any principle of equity by which the proceeds of the professional indemnity policy could be claimed by Evenage. In Henderson, Eames J rejected the argument that it was unconscionable to deny clients direct access to the professional indemnity insurance proceeds. One reason was that:

“.... there is no reason to believe that Parliament intended to create a scheme which gave an interest to clients in monies paid to solicitors, or due to solicitors, under the indemnity policy. It is to be noted that in the same Act, (Pt 5, Division 1: see, particularly, s 64), the Parliament provided a Guarantee Fund scheme whereby the clients had a direct right to make claims on the fund where they had been the victim of solicitor’s defalcation.”

Consequently, a constructive trust based on unconscionable conduct has not been made out.

Analogous constructive trust

A further basis upon which Evenage asserted the existence of a constructive trust was by analogy with those cases in which a bailee who has insured goods is entitled to recover the full value from the insurer but cannot retain the fund for the bailee’s own benefit. The bailee is a constructive trustee of the fund in equity: Goldsborough Mort & Co Ltd v Maurice (1937) 58 CLR 773, at 798. Dealing with the same argument in Henderson, Eames J said:

“.... those so-called analogous cases, as Mr Habersberger acknowledged, and as Ivamy expressly asserts, have been long recognised as being subject to particular rules whereby the court either implied a contractual obligation to insure on behalf of the owner of the goods (so that the owner was entitled to share in the proceeds of the policy), or where the person effecting the insurance intended to effect coverage for the interests of the owner as well as for his own interests. Neither is the case here.”

His Honour’s reasoning applies equally in the present case.

CONCLUSION

For the foregoing reasons, the right to claim the indemnity under the policy of insurance, and the right to the proceeds of that policy, is vested in the trustee and is held under the terms of the deed of arrangement for all the creditors of Mr Silverstein. The answers to the questions before the Court are therefore:

QUESTION (a):

“whether or not the right of the debtor to indemnity under a contract of insurance with the insurer, the secondnamed Respondent (as successor to the Solicitors Liability Committee), in respect of the debtor’s liability to the Applicant under a judgment ordered 28 July 1994 for it against him, has vested in the firstnamed Respondent as trustee”.

ANSWER:

The right of indemnity has vested in the firstnamed respondent as trustee.

QUESTION (b):

“whether or not any amount to be received by the firstnamed Respondent as trustee from the insurer under the policy in respect of that liability must be paid in full forthwith to the Applicant.”

ANSWER:

Any amount received by the first respondent from the insurer is not payable in full to the applicant.

The proceedings will now be listed for further directions on 20 March 1998 to deal with directions in respect of the remaining issues arising in the proceeding, and with the question of the costs of the proceedings for determination of the separate questions.