FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – administration of property – avoidance of settlement - payment of legal costs of alleged partnership action by bankrupt – alleged agreement between bankrupt and spouse respondent for him to bear such costs – whether such agreement void as against official receiver – whether spouse respondent held her proportion of such costs upon a constructive trust for the benefit of the applicant – whether spouse respondent bound to account in accordance with ordinary partnership principles.

Bankruptcy Act 1966 (Cth), s 120

Re La Rosa; Ex parte Norgard v Rocom (1990) 21 FCR 270, discussed

Jones v Dunkel (1959) 101 CLR 298, considered

RE: GRAHAM MARTIN BILLSON; EX PARTE OFFICIAL RECEIVER v  CHRISTINE MARIE BILLSON

WG 7057 OF 1998

JUDGE:          R D NICHOLSON J

PLACE:          PERTH

DATE:            24 SEPTEMBER 1998

GENERAL DISTRIBUTION

THE COURT ORDERS THAT:

The application be dismissed.

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

GENERAL DISTRIBUTION

REASONS FOR JUDGMENT

HIS HONOUR:  This application seeks declarations and orders in relation to the proceeds, legal fees and disbursements of an action brought in New Zealand (“the New Zealand action”) by Mr Billson (“the bankrupt”) and Mrs Billson (“the respondent”).  The application is brought under s 120 of the Bankruptcy Act 1966 (Cth) (“the Act”), alternatively on equitable and partnership grounds.

There was no appearance for the respondent.

The specific relief sought by the applicant is:  (1)  a declaration that the bankrupt and the respondent were jointly liable for legal fees and disbursements in the amount of $NZ30,024.70, charged by Divetts Barristers and Solicitors (“Divetts”) in relation to the New Zealand action (“the fees”); (2)  a declaration that of the $NZ38,790.11 distributed by Divetts to the respondent on or about 23 March 1998, $NZ15,012.35 constitutes divisible property of the estate of the bankrupt;  (3)  in the alternative, an order that an oral agreement between the bankrupt and the respondent entered into on or about September 1996, whereby the fees would be paid entirely out of the bankrupt’s share of any proceeds of the New Zealand action, is void as against the applicant pursuant to s 120 of the Act; (4)  an order that the respondent pay to the applicant the sum of $12,638.15 (being the equivalent of $NZ15,012.35) together with interest.

The application is supported by two affidavits.  The first is that of Alan Francois Carles, the applicant’s solicitor, sworn 23 July 1998 (“Mr Carles’ affidavit”) and the second is of Gillian Mary Love sworn 26 May 1998 (“Ms Love’s affidavit”).

Background

On 27 September 1996 the bankrupt (then not a bankrupt) entered into an agreement with the law firm of White Fox and Jones, represented by Mr P J Divett, in respect of fees relating to the New Zealand action.  Relevantly the agreement provided that in the event the action went to trial and resulted in recovery, he would pay the sum of $15,000.00 plus GST and disbursements to Divett and Associates.

The bankrupt was bankrupted on 8 November 1996 following presentation of his debtor’s petition.  During the course of the administration of the bankrupt’s estate the applicant became aware that the bankrupt and the respondent were pursuing the New Zealand action.  That action was allegedly a claim for damages arising out of a failed franchise business in which the bankrupt and respondent had allegedly been partners.

On 10 June 1997 the bankrupt first advised the applicant he and the respondent in partnership had operated a franchise business called “Pressed 4 Time” (“the franchise”) in New Zealand from 8 May 1993 to 10 December 1993 and had brought the New Zealand action in respect of it against a Mr Falloon.  He also advised the applicant he and the respondent were represented by Divetts in the action; that judgment for $75,864.75 had been handed down in their favour the previous day; and there was an oral agreement between the bankrupt and the respondent whereby the respondent would receive half of the proceeds of the New Zealand action, with the legal costs of that action to be paid entirely out of the bankrupt’s half share of the proceeds. 

Various correspondence between Divetts and the solicitors for the applicant is annexed to both Ms Love’s and Ms Carles’s affidavits.  The history of this matter as far as can be ascertained from that correspondence is as follows.

On 14 March 1997 Divetts wrote to the Manager of the Insolvency and Trustee Service Australia in Perth (“ITSA”) confirming that the bankrupt and the respondent were the plaintiffs in proceeding No 1838/96 (which I take to be the New Zealand action); that Divetts had acted for both the bankrupt and the respondent since 1 October 1996; that the proceedings had been settled; and legal costs and expenses incurred by the bankrupt and respondent were significant and likely to offset any sums payable pursuant to the settlement agreement.  Divetts again wrote to ITSA on 5 December 1997, referring to three letters from ITSA, none of which were in evidence before this Court.  Divett’s letter advised that judgment had been entered for the bankrupt and the respondent in the High Court at Christchurch on 9 June 1997 in the amount of $NZ75,864.75, which proceedings were commenced on their behalf in 1993.  It further stated that the writer of the letter, P J Divett, continued acting for the bankrupt upon leaving his employment with White Fox & Jones in September 1996; and that he had entered into an agreement with the bankrupt in relation to the costs of the New Zealand action.  He wrote:

“The writer entered into an agreement with Mr Billson on the issue of costs.  We understand this was the result of the agreement between him and his wife to which you refer.  …  The writer continued to represent Mr Billson for the purposes of the proceedings but despite our advice to you to the contrary in our letter of 14 March 1997, ceased representing Mrs Billson.  Mrs Billson has advised us in no uncertain terms that we were not acting on her behalf on the matter since the agreement with Mr Billson in September 1996.  On reflection we have to accept this.  Our instructions always came from Mr Billson, and in fact his wife did not even attend the hearing which took place in October 1996.  In our view the fact that she has profited from the proceedings is irrelevant to whether the agreement between her and her husband, and in turn with our firm are binding.”

After some discussion regarding enforcement of the judgment, the letter states:

“... we take the view that we are obliged to distribute the net proceeds of the proceedings, after deductions of our costs, in accordance with the arrangements between the Billsons’(sic) and his agreement with our firm, as subsequently amended … .  Perhaps you could advise how you would like Mr Billsons (sic) share of the proceeds remitted.”

The applicant’s solicitors replied by letter dated 10 December 1997.  The letter stated that the applicant did not accept Divett’s were entitled to distribute the proceeds of the New Zealand action on the basis set out in the 5 December letter.  It also purported to reserve the applicant’s right to pursue a claim for any losses if any distribution occurred without their client’s written consent.  In addition a full account of all legal costs incurred up to 10 December 1997 was requested.

Further correspondence passed between the respective solicitors concerning ownership and distribution of the funds.  This correspondence ultimately culminated in a letter dated 23 March 1998 from Divetts to the applicant’s solicitors advising:

“We have sought the opinion of counsel on this matter.  As a result of that opinion and written instructions we have received from Mrs Billson we have remitted the sum of $38,790.11NZD to her and enclose herewith our bankers draft for the sum of $8,765.42NZD being your clients share of the funds we hold.  We enclose our statement of account on the matter.”

The account referred to in the letter is set out below:

“Re:          BILLSON – FALLOON

A cheque in the amount of $A7,379.07 was also enclosed.

It is not apparent why the total amount of funds referred to in the account exceeds by $NZ1,715.48 the amount of $NZ75,864.75 advised by Divett’s to be the judgment award.  However, it is clear from the account the respondent was forwarded the sum of $NZ38,790.11.  That is the amount in relation to which the relief is sought.

Respondent’s position

The respondent did not appear at the hearing of this matter.  Accordingly no submissions regarding her position are before this Court and no evidence was adduced to rebut the assertions of fact made in the affidavits of Ms Love and Mr Carles.

In evidence is an affidavit of service sworn by Cheryl Lorraine Harrison on 12 June 1998 in which she deposes she personally served the respondent with the application in this matter along with a copy of Ms Love’s and Mr Carles’ affidavits.  A further affidavit of Mr Carles sworn 23 July 1998 deposes to the facts that the respondent failed to attend a directions hearing before the Registrar in this matter on 7 July 1998; that he has received no communication from her in relation to this application; and that on 20 July 1998 he forwarded by pre-paid post to the respondent at her last known address a letter from the District Registrar of this Court advising of the date and time of the hearing.

Legal character of a settlement

The Bankruptcy Legislation Amendment Act 1996 (Cth) (“the amending Act”) amended the Act by inserting a new section 120, effective from 16 December 1996.  Schedule 1 in Pt 2 of the amending Act states that the new section applies to bankruptcies when the date of bankruptcy is on or after 16 December 1996.  As the bankrupt’s bankruptcy commenced on 8 November 1996 the previous section 120 applies.  Sub-section 120 (1) and (2) of that Act state:

“120(1) A settlement of property, whether made before or after the commencement of this Act, not being:

(a)       a settlement made before and in consideration of marriage, or made           in favour of a purchaser or encumbrancer in good faith and for     valuable consideration; or

(b)       a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the    spouse of the settlor;

is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in bankruptcy.”

“Property” is defined in s 5 to mean “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”.  The term “settlement of property” is widely defined in s 120(8) to include any disposition of property.

The question of what constitutes a settlement of property for the purposes of the Act was considered by French J in Re La Rosa; Ex parte Norgard v Rocom (1990) 21 FCR 270.  There his Honour examined the same sections of the Act as fall for consideration here.  In that case the bankrupts had previously traded as motor vehicle dealers and wholesalers.  Via a series of transactions (found to be shams) involving the sale and immediate re-purchase, for a substantial premium, of the stock of car yards, the respondent in that matter received $290,000.  The Trustee in Bankruptcy sought declarations that the transactions were void and that the amount of the premiums received by the respondent constituted a voluntary settlement of property under s 120 of the Act, which amount should vest in the trustee.

Having found that the true nature of the transactions were short term advances by the respondent to the bankrupts to be “repaid virtually instanter by the return of the moneys with a substantial premium”:  (1990) 21 FCR 270 at 280, his Honour went on to examine the question of whether the payments were a “settlement of property” within the meaning of the section.  At 281-287 after a detailed analysis of the history of the legislation, of relevant authorities in Australia, the United Kingdom and Canada and of what had been intended by the changes introduced by the Act, his Honour concluded that the word “settlement” as used in the section bore the meaning of a disposition of property contemplating its retention in some form by the donee, rather than immediate consumption or dissipation (referred to by counsel for the applicant in this case as the “doctrine of retention”).  His Honour’s findings were confirmed by the Full Court in Re La Rosa; Ex parte Norgard v Rocom (Northrop, Davies & Lee JJ, Federal Court of Australia, 16 August 1990, unreported) where Northrop and Davies JJ (Lee J agreeing) said at p 6:

“... s 120 is not concerned with [just] any disposition of property but is concerned with dispositions of an enduring nature, that is to say, dispositions in the nature of a settlement.

Whether there was a settlement

It is contended there was a “disposition of property” by way of settlement for either of two reasons.  The first is the bankrupt encumbered his property (being his chose in action) with payment of his wife’s half share of the legal costs.  The granting of a security over property by a bankrupt for no consideration was held to be a settlement in Re Buggy; Ex parte Morton Neaves J, Federal Court of Australia, 24 March 1992, unreported at 22.

Alternatively it is submitted the agreement for all legal fees to come out of the bankrupt’s share of the proceeds of the court action was itself classifiable as a disposition or settlement of property because it amounts to the divesting of a right of property, namely the bankrupt’s chose in action to recover his full (partnership) entitlement to the proceeds of the court action:  Re Ward; Official Trustee v Dabnas Pty Ltd (1984) 3 FCR 112; Re Azoulay; Andrew v Townsend (1989) 90 ALR 37; Re Hyams (1971) 19 FLR 232 at 248-253.

It is further submitted on behalf of the applicant that the “permanent retention” requirement is present in this case.  It is said the respondent has received a benefit of an indemnity of the costs and expenses of the court action as a result of the agreement:  see La Rosa and cf Ward (1984) 3 FCR 112.  In the absence of a contradictor, it is submitted the Court should more easily infer this conclusion:  Jones v Dunkel.

Therefore it is submitted there was a settlement within two years of bankruptcy, voidable against the trustee because neither s 120(1)(a) or s 120(1)(b) apply to except that result.  In support of the submission that the exception in par (a) does not apply, it is contended there is no evidence of any valuable consideration flowing from the respondent.  Furthermore, it is said there are serious doubts as to the good faith of the respondent firstly, because the agreement was entered into only six weeks before bankruptcy and secondly, because the solicitor Divett told the trustee by letter dated 14 March 1997 he had acted for both the bankrupt and the respondent since 1 October 1996, but later retracted this in his letter of 5 December 1997.  In support of a submission that exception (b) does not apply, it is said the bankrupt did not hold the property as accruing from the agreement nor was it held in right of the respondent:  see In Re Bower Williams; Ex parte Trustee (1927) 1 Ch 441.

The difficulty with these submissions is they are all submitted on the problematic basis that an oral agreement was entered into between the respondent and the bankrupt.  The submissions describe the agreement as “the alleged agreement”.  It is expressly acknowledged in the written submissions that they only apply on the assumption the alleged agreement was entered into.

In my opinion it is pointless to consider the merits of these submissions given the absence of any proper evidentiary foundation for appropriate findings in relation to the existence of the oral agreement.

The evidence upon which the applicant relies is the statement in a letter from Divett’s of 5 December 1997 to ITSA in which it is stated “the writer entered into an agreement with Mr Billson on the issue of costs, we understand this was the result of the agreement between him and his wife to which you refer.”  Although a copy of the agreement between the writer and Mr Billson is enclosed with that letter, there is no further evidence other than the unsworn statement of Mr Divett in a letter that there was an agreement between the bankrupt and the respondent.  This is not only a case of hearsay, it is a case of hearsay upon hearsay.

The principle in Jones v Dunkel (1959) 101 CLR 298 at 312 and 319, is that where a person is “required to explain or contradict something” and it is within their power to tender the evidence which was not tendered, then in the absence of any evidence to the contrary being given by that person, it is open to the court to infer that any uncalled evidence would not have assisted that person’s case, and the trier of fact is then entitled to more readily draw any inference capable of being drawn from the evidence by reason of the opponent being able to prove the contrary, had he chosen to call evidence.  The evidence of the missing witness must be such as would have elucidated the matter.  This principle does nothing to assist the applicant because the point is not reached where it can be applied.

It must follow in my opinion that no order could be made by this Court in respect of an oral agreement which has not been proved.  One consequence which follows is that there is no evidence going to the presence or absence of consideration for the alleged agreement, a highly material issue for the application of s 120(1)(a) of the Act.  The alternative relief envisaged as the third limb of the applicant’s specific relief could not therefore be granted.

Equitable ground

It was further submitted that it is open to the Court to find the alleged agreement was not in fact entered into given the correspondence from Divetts of 14 March 1997 and 1 October 1996.  The applicant then contends that, if the agreement was not entered into, Divett must be found to be the trustee of the proceeds of the New Zealand action for the two beneficiaries, namely, the bankrupt (represented by the applicant) and the respondent.  It is asserted Divett was well aware of the dispute between the two beneficiaries as to their respective entitlements to the trust monies – that is, he was well aware the applicant was seeking 50 per cent of the net proceeds and the respondent was seeking all of the legal costs be paid out of the applicant’s share.  It is submitted that, despite his position as trustee of the funds, Divett acted as solicitor for one beneficiary (the respondent) against the other beneficiary (the applicant) in relation to the entitlements to the funds and took it upon himself to pay out the funds according to the respondent’s claim.  It is submitted this was done in circumstances evidencing a clear conflict of interest and amounting thereby to a breach of trust.  Accordingly it is said the respondent has received an “excess share” of the net proceeds of the court action such that she is bound to hold the excess monies upon a constructive trust for the benefit of the applicant:  see Consul Developments Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373.

Once again there is no secure evidentiary foundation for the factual premises upon which these submissions proceed.  The state of knowledge of Divett to the extent envisaged in these submissions is not open to inference from the available evidence.

The evidence before the Court simply does not allow it to get to the starting base from which these submissions can be considered.

The only evidence of the existence of the partnership is the statement in Ms Love’s affidavit of what the applicant was told by the bankrupt.  I have already found another aspect of the same advice, namely the existence of the oral agreement, is not established.  The exhibited correspondence from Divetts does not contain any statement confirmatory of the existence of a partnership.  The evidence is all secondary and hearsay.  It cannot lead to findings of the existence of a  conflict of interest and breach of trust.

Partnership

Finally it is submitted by the applicant that the respondent is bound to account to the applicant for the sum of the “excess” amount upon ordinary partnership principles.  It is said these principles, whether Western Australian or New Zealand, apply to the same effect:  see Higgins and Fletcher “Law of Partnership in Australia and New Zealand”, Law Book Company (7^th edn.) 1996 and the Partnership Act (WA) 1895 ss 16, 41(3), 572(b).

Again there is absent from the evidence any appropriate basis upon which the Court could make orders in respect of the alleged partnership.  Aside from the advice by the bankrupt of 10 June 1997 to the applicant that he and the respondent were in partnership, the only evidence that the New Zealand action was in respect of partnership monies are the assertions by the applicant’s solicitors in letters dated 17 and 25 February 1998.  In my opinion that is an entirely inadequate basis for this Court to exercise jurisdiction under the Partnership Act.  Furthermore, the respondent has not entered an appearance or otherwise submitted to jurisdiction so that any order requiring her to pay a sum to the applicant could not bind her.

Conclusion

For these reasons I consider the application should be refused.  That, of course, is not to say that should the evidentiary defects in the present case be capable of cure, the applicant could have a case heard on the above grounds.  At present, however, there is no appropriate basis for making any of the orders or declarations sought in the application.

Associate:

Dated:              24 September 1998