FEDERAL COURT OF AUSTRALIA

Pastro v Official Trustee in Bankruptcy [2000] FCA 744

BANKRUPTCY - mortgage granted to mortgagor’s brother and sister to secure previous loan - whether mortgage to sister void under s 120 or s 121 against trustee on mortgagor’s subsequent bankruptcy - sister entrusting all negotiations and arrangements to co-mortgagee except execution of mortgage - whether fixed with co-mortgagee’s knowledge of mortgagor’s inability to pay his debts and of purpose of scheme - whether co-mortgagee agent for sister by virtue of his exercise of “tutelary” functions.

Bankruptcy Act 1966, ss 120, 121

Bowstead on Agency (15th ed)

Official Trustee v Mitchell (1992) 110 ALR 484

Blackburn Low and Co v Vigors (1887) 12 App Cas 531

Sargent v ASL Developments Ltd (1974) 4 ALR 257

International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644

MARIA PASTRO  v  OFFICIAL TRUSTEE IN BANKRUPTCY the trustee of the property of RODOLFO SAVERIO PASTRO a bankrupt

S100 of 1999

RYAN, BRANSON and LEHANE JJ

ADELAIDE

2 JUNE 2000

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.         The appeal be dismissed.

2.         The appellant pay the respondent’s costs of the appeal, such costs to be taxed in default of agreement.

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

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

RYAN J:

1                     This is an appeal from a judgment of a Judge of the Court, Finn J, declaring, pursuant to ss 120 and 121 of the Bankruptcy Act 1966 (“the Act”), that a mortgage granted by the bankrupt in favour of the appellant over certain land at 45 Hancock Road, Campbelltown, and 10 Grandview Road, Magill in South Australia is void as against the respondent (“the Official Trustee”).

2                     The appellant (“Maria”) is the sister of the bankrupt against whose estate a sequestration order was made on 12 February 1996.  That order was based on an act of bankruptcy committed on 11 August 1995.  The mortgage was executed on 30 August 1994, apparently to secure repayment of a debt which the bankrupt acknowledged in a written agreement of the same date.

3                     That agreement recited, amongst other things, that:

A.        The lender advanced the sum of SIX THOUSAND DOLLARS ($6,000.00) (“the First Sum”) to the borrower on the 13th day of February 1990.

B.         The lender advanced the sum of SIX THOUSAND THREE HUNDRED DOLLARS ($6,300.00) (“the Second Sum”) to the borrower on the 20th day of June 1991.

C.        The lender advanced the sum of TWO THOUSAND TWO HUNDRED AND TWENTY THREE DOLLARS AND TWENTY TWO CENTS ($2,223.22) (“the Third Sum”) to the borrower on the 14th day of February 1992.

D.        The lender advanced the sum of TWO THOUSAND DOLLARS ($2,000.00) (“the Fourth Sum”) to the borrower on the 10th day of April 1992.

E.        The lender advanced the sum of FIVE THOUSAND DOLLARS ($5,000.00) (“the Fifth Sum”) to the borrower, on the third day of July 1992.

F.        The lender advanced the sum of SEVEN THOUSAND DOLLARS ($7,000.00) (“the Sixth Sum”) to the borrower on the 5th day of March 1993.

G.        The lender advanced the sum of THREE THOUSAND FIVE HUNDRED DOLLARS ($3,500.00) (“the Seventh Sum”) to the borrower on the 7th day of May 1993;

H.        The First Sum, the Second Sum, the Third Sum, the Fourth Sum, the Fifth Sum, the Sixth Sum and the Seventh Sum are due and payable by the borrower to the lender.

4                     The learned primary judge made a number of findings of background facts, none of which has been challenged on appeal.  Those findings disclose that, in mid 1985, the bankrupt (“Rodolfo”) commenced to conduct in partnership with his brother (“Luciano”) and his sister-in-law Maria, a restaurant business in Adelaide.  Rodolfo contributed $50,000 to the working capital of that business and Luciano and Maria, between them, contributed a further $50,000.  An additional $90,000 of working capital was borrowed from the ANZ Bank.  The business was conducted from premises held on lease by the partners.

5                     By 1989 the business was running at a loss and in that year the premises were destroyed by fire.  The partners later sued, unsuccessfully, in the District Court of South Australia to enforce a right under an insurance policy to be indemnified against loss arising from the fire.  On 19 August and 3 September 1993 that action was dismissed with costs on the ground that the fire had been deliberately lit by or under the direction of one or more of the plaintiffs.

6                     Consent allocaturs were later filed on 30 November 1994 and 13 June 1995, quantifying the plaintiffs' liability for costs of the action on the insurance policy in the respective amounts of $27,000 and $153,000.  The financial dealings between Rodolfo and Maria were summarised as follows in the reasons for judgment below (at paragraph 17):

“Maria made the advances to Rodolfo that are recited in the agreement of 30 August 1994.  Her evidence at the examination under section 81 of the Act in relation to them was that:

(a)       whenever he needed money he asked for it and she would give it to him;

(b)       he said he would repay it when he could;

(c)        she did not demand repayment at any time or threaten to sue him for it;  and

(d)       he told her in 1994 that he would not be able to repay her.”

7                     At all relevant times Maria lived together with Rodolfo and another brother, Emilio, at the Campbelltown property.  The learned primary judge referred in his reasons for judgment to an admission made by Rodolfo during his examination under s 81 of the Act that he knew by 1994 that he would not be able to pay all his debts.  The transcript of Rodolfo's s 81 examination records this exchange between Rodolfo, through an interpreter, and Counsel for the official trustee:

Mr Riggall:                    "So you certainly knew in August of 1994 that you would have to pay a lot of money out." 

The interpreter:             "Yes." 

Mr Riggall:                   "And you said to Maria and Emilio, 'Let's arrange that I’ll leave the houses to you.' " 

The interpreter:             "Yes, because ‑ ‑ ‑" 

Mr Riggall:                   "Because?" 

The interpreter:             "Yes, because I could see that I was not able to have anything else any more." 

Mr Riggall:                   "Who raised that suggestion?" 

The interpreter:             "I because I didn't want to cheat my brother with everything that they have done for me." 

Mr Riggall:                   "Yes.  And the family came before the outside creditors, of course" 

The interpreter:             "Yes, but they gave me the money."

Mr Riggall:                   "No.  This question is kind of important to me.  It was important for you to make sure that your family was paid ahead of the other creditors." 

The interpreter:             "They gave the money to me." 

Mr Riggall:                   "And because they had given the money to you it was very important to you to make sure that they got the money back." 

The interpreter:             "I didn't want to cheat my brother and my sister.  They gave the money to me." 

Mr Riggall:                   "You told Maria and Emilio that you were not able to work any more in 1994." 

The interpreter:             "Well, I was in the house.  They could see that."

Mr Riggall:                   "And they knew of the problems that you had as a result of losing the court case." 

The interpreter:             "I think that they knew." 

Mr Riggall:                   "Well, they must've known, surely." 

The interpreter:             "Well, that's what I'm saying.  Of course they must have known." 

That was, as his Honour noted, from the transcript of that examination at pages 15 to 16.  His Honour then quoted from another passage at page 19 in these terms:

The interpreter             "I said: 'Now I am ruined, I don't have anything any more.  All the work that I have done, it's all disappeared.'"

Mr Riggall:                   "Did you tell them why you were ruined?" 

The interpreter:             "Because of the way things went." 

Mr Riggall:                   "And you told them you would lose your houses?" 

The interpreter:             "Yes." 

Mr Riggall:                   "And rather than lose the houses outside the family you wanted to leave them to Emilio and Maria?" 

The interpreter:             "Yes, because they had given me the money." 

Mr Riggall:                   "You left them in no doubt that unless they could get the houses, they would not get their money back." 

The interpreter:             "That's what I said; that they had the houses and they could cover themselves with that for what they were owed."

Mr Riggall:                   "Unless they got the houses they would miss out entirely." 

The interpreter:             "I haven't understood that." 

Mr Riggall:                   "If you told them that if they did not grab the houses they would miss out." 

The interpreter:             "Of course if I didn't have any money.  What I could give them." 

The effect of Maria's evidence at first instance has been set out in these terms (at paragraphs 31 and 32) of his Honour’s reasons:

“Maria's affidavit evidence is that she did not discuss financial matters with Rodolfo.  Her version of her execution of the 30 August agreement is that:

"Some time after the fire Emilio asked me to sign a document, which he said would help me get my money back from Rodolfo - the document.  I did not really know what the document said but I signed it since Emilio had told me it would help me get my money back through Rodolfo's properties.  For me, the money I had loaned Rodolfo was a lot of money and some time had passed since I loaned the money and I was concerned about this."”

“In her oral evidence she indicated that Emilio explained the document to her before she signed it.  She had left it to him to have the agreement prepared and the mortgage executed.  In her s 81 examination she accepted that Rodolfo told her in 1994 that he would not be able to repay her.”

8                     The learned primary judge prefaced his findings of fact on the issues which were in controversy by saying (at paragraphs 48 and following):

“As will be apparent from my findings, I consider Emilio's evidence to be unreliable on matters crucial to the determination of this case.  I am satisfied that he had far greater insight into the course of, and state of, Rodolfo's affairs leading up to and at the time of the 30 August agreements, than his affidavit and oral evidence sought to suggest.  The conclusion that his posture of lack of knowledge of such matters was studied is all but irresistible.  .....

He clearly performed a strategic role in some number of transactions designed to protect and accommodate his brother's interests.  I refer to the Ebbtide loan, to the Westpac loan and to the costs payment of $20,000.  I do not consider these interventions to reflect other than a continuing, if not necessarily a constant and always fully informed, involvement in Rodolfo's affairs.  A theme in the evidence of the Pastros was that of "family".  I am satisfied that "family" loomed large both in the course of events - the loans, the accommodation, etc - that led to the 30 August agreements and in the steps taken in August to secure the position of Emilio and Maria.  It provided the explanation of their actions and objectives.”

“As to Maria, I am satisfied that, while she was kept relatively uninformed as to Rodolfo's affairs and circumstances, she was aware in 1994 of his inability to pay his debts.  But as I will indicate below, her actions in any event were contrived by her brothers and she cannot escape the consequences of that.”

9                     His Honour then reached these conclusions on the evidence (at paragraph 54 and following):

“(i)      The significance of family ties and purposes cannot be underestimated in evaluating the roles, actions and objectives of Rodolfo, Emilio and Maria.  Rodolfo's evidence at the s 81 examination is redolent of this as also are the ongoing financial relationships of the various family members and the circumstance of joint residence at Campbelltown of Emilio, Maria and Rodolfo. 

(ii)     Prior to instructions being given to Mr Meyer [the solicitor retained by the family] to prepare the mortgages now impugned, Rodolfo and Emilio were in my view aware that at that time Rodolfo both was unable to pay his debts and was in need of significant sums of money.  All three (including Maria) gave some evidence as to knowledge of Rodolfo's inability to pay his debts, though Emilio in particular sought to move the time at which he acquired his knowledge to a later period.  To that extent I do not accept Emilio's evidence.  In his case his awareness at the relevant time came, I am prepared to infer, from his own judgment of Rodolfo's circumstances consequent upon his borrowing $150,000.00 for Luciano and Rodolfo, but also from the communications made to him by Rodolfo concerning his affairs (see the s 81 examination evidence set out above).

(iii)      The evidence satisfies me that not only is Emilio financially astute, but also he has some level of sophistication in his understanding of financial relationships and dealings.  While I accept that the state of detailed knowledge he had of Rodolfo's circumstances may have varied from time to time, I do not accept that when he made his various strategic interventions as a financier, etc, in his brother's affairs he did so in relative ignorance of, and with indifference to, Rodolfo's circumstances.  Furthermore I do not accept Emilio's evidence that, when the Westpac loan moneys were used to buy Luciano's house and to clear Rodolfo's titles, that money would be used to cover all expenses including the costs from the insurance litigation.  Emilio was aware at the time that that case had been lost.  I am satisfied, despite their evasion on the matter, that in consequence of that loss, Rodolfo and Emilio then knew that Rodolfo would be exposed to a large costs liability.  I am also satisfied that when the Westpac loan moneys were applied to their particular purposes, Emilio knew they were being used to pay off ANZ Bank indebtedness and not the insurance litigation costs as well.

(iv)      I am unable to make comprehensive findings as to Rodolfo's precise level of indebtedness at the time of the 30 August agreements or of the actual extent of Emilio's knowledge thereof.  Nonetheless I am satisfied as I have indicated that both Rodolfo and Emilio knew that Rodolfo was then unable to pay his debts and that he had a large outstanding liability quite apart from what he owed his family members.  It probably is the case that Emilio was aware of other specific debts at the time and that additional money was being or would be sought from him.  I am satisfied furthermore that both were aware of Rodolfo's expectation that he would "lose his houses".

(v)       In his evidence in this proceeding Emilio sought to explain away his s 81 examination evidence that he wanted the mortgages because of some big accounts he had received.  In this he relied upon his mistake as to when he saw the accounts in question which he now says post-dates the instructions to his solicitors to prepare the mortgage.  It is the case that the letter from Rodolfo's accountant foreshadowing a near $6,00 tax liability post-dates the instructions by some days though not the execution of the mortgages and agreements.  However, in the light of my earlier findings, I do not consider the actual timing of the receipt of the accounts is of particular significance notwithstanding Emilio's direct reference to them in his s 81 examination evidence.  The matter of real significance was Emilio's knowledge of Rodolfo's inability to pay his debts and his need for more money.  I am prepared to infer that Emilio was made aware of that need quite apart from the accounts to which he referred in his affidavit evidence.

(vi)      I accept, as his file note indicates, that Mr Meyer received instructions from Emilio on 16 August 1994 to prepare the mortgages.  Nonetheless I am satisfied that prior to those instructions being given, both Emilio and Rodolfo were mutually aware of the significance of Rodolfo's indebtedness and that steps were needed to be taken to protect Emilio and Maria if they were not to be left empty-handed when the houses were lost as Rodolfo anticipated would happen according to his section 81 examination evidence.  That apprehension probably provided the goad to Emilio’s raising the question of loans to his brother when he met Mr Meyer for other reasons on 11 August 1994.  While I accept Mr Meyer's evidence that Emilio did not disclose to him the extent of Rodolfo's indebtedness, and while Emilio later is noted in the files as indicating to another solicitor in the firm that he "trusts [his] brother to pay him", I am satisfied that Emilio was far from frank with his lawyers.  The solution proposed by Mr Meyer (ie the mortgages) produced the result that the Pastros desired.  Though it is unnecessary for me to express a concluded view on the matter, it probably is the case that the advice given by Mr Meyer fell within what would have been anticipated of him by Emilio and Rodolfo.  In short I conclude that both at the time he gave his instructions to Mr Meyer, and at the time of the execution of the agreements and mortgages, Emilio was well aware of Rodolfo's inability to pay his creditors but concealed that knowledge from Mr Meyer.”

10                  As to Maria, his Honour's findings are recorded in this passage at paragraph 60:

“(vii)   Apart from her 1994 knowledge of Rodolfo's inability to pay his debts, Maria's understanding of Rodolfo's affairs and circumstances were slight.  Her actions, and in particular her lendings, were dictated by family ties.  They are consistent with no little deference to her brothers.  In her evidence at the s 81 examination Maria indicated she did not ask Rodolfo for the 30 August agreement;  that was Emilio's idea;  and that "Emilio said that we had to do something because he was also owed money."  The resultant agreements insofar as she was concerned were orchestrated by Emilio;  she did not read the documentation though Emilio explained it to her - she was told it would help her get her money - and she signed the agreement.  I have already referred to her view of Emilio's financial acumen.  In the circumstances and given the family relationship, I am prepared to infer that Emilio discharged a tutelary function for Maria in relation to protecting the debts owed her by Rodolfo and that she acquiesced in this.  While Maria, not Emilio, signed the 30 August agreement - so that in that respect there was no agency relationship - the object and purpose of the transaction was that arranged by Emilio.  As I will later indicate, Maria is to have Emilio's knowledge of the circumstances imputed to her. 

The relevant findings then conclude in paragraph (viii):

(viii)    “Whatever the precise extent of Rodolfo's debts, actual and anticipated, at the time of the 30 August agreements, I am satisfied that both Rodolfo and Emilio then understood these to be of such dimensions that, absent resort to the contrivance of the mortgages, Emilio and Maria would not have their debts repaid.  "Family" was not to be so "cheated" to use Rodolfo's words - hence the agreements.  I should add that I am satisfied both men then appreciated that the costs liability was likely to be of some magnitude - as it later proved to be - and that, following on the ANZ Bank debt and Rodolfo's inability to service that debt, protective measures were necessary if the debts owed Emilio and Maria were not to be lost.  Accordingly I am satisfied that Rodolfo intended to prefer Emilio and Maria at the expense of his other creditors, actual and anticipated.”

11                  Under the heading “Conclusions”, the learned primary Judge imputed to Rodolfo, when he entered into the agreements of 30 August 1994 and when he executed the mortgage, an intent to defraud his other creditors, saying (at paragraph 62):

“Rodolfo was seeking unfairly to prefer his family creditors over others.  I further find that Emilio was aware of, and participated in, this contrivance;  he was "privy to the fraud":  PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199 at 212;  see also Official Trustee v Mitchell (1992) 110 ALR 484 at 492ff;  and that in consequence he cannot for the purposes of s 121, be said to have "acted in good faith".  In making both of these findings, I acknowledge that the onus of proof in each instance is borne by the Official Trustee.”

12                  His Honour's conclusions in respect of the mortgage granted by Maria were in these terms (at paragraph 63-65):

“I have arrived at a similar conclusion in relation to the mortgage granted to Maria but by a somewhat different route.  I am prepared to assume for present purposes that at the time of 30 August agreement and mortgage, Maria did not have actual knowledge or suspicion of the attempt on Rodolfo's part to defraud his non-family creditors.  The case against her as pleaded and put is that her lack of good faith for s 120 and s 121 purposes derives from the imputation to her of Emilio's knowledge of the object and purpose of both mortgages, that imputation being a consequence of the agency role discharged by Emilio for her in relation to the 30 August agreement and the mortgage.

In the execution of the 30 August agreement, Emilio did not act strictly as Maria's agent:  he did not act, or purport to act, so as to effect legal relations between Maria and Rodolfo:  see International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644, and see generally Bowstead and Reynoldson Agency (16th Ed, 1996), Ch 1.  Nonetheless, as I have earlier found, Emilio performed a tutelary function for Maria in the transaction.

Having participated in contriving the scheme for his own and Maria's benefit, he acted as her protector, advisor and functionary in the bringing about and then the carrying into effect of the steps necessary to put that scheme in place.  He acted throughout with a knowledge of the purpose of the transaction that Maria, the beneficiary of the transaction, did not actually possess.  But Maria, in my view, had put herself in a position in which it was unnecessary for her to acquire anything but the most rudimentary appreciation of the nature of the transaction itself.  She had entrusted the preservation of her position to, had given her dependence and judgment to, Emilio in this matter.  And she took the benefit of the transaction.  The question this raises is whether in the circumstances, hers is a relationship with Emilio sufficient to justify the attribution to her of Emilio's knowledge of the nature and purpose of the scheme in which the mortgage was a part. 

13                  After referring to the judgment of a Full Court of this Court in Official Trustee v Mitchell (1992) 110 ALR 484 at 492 and the concept of wilful blindness as distinguished from that of ignorance caused by a failure to make more extensive inquiries, his Honour concluded (at paragraph 67):

“This case, though, is not one of wilful blindness and a lack of good faith cannot here be found on that basis.  However it is one in which Maria's ignorance is itself occasioned by the nature of the relationship which she voluntarily had with Emilio.  She entrusted Emilio with the carriage of the matter;  the scheme he helped devise was for her benefit;  and she entered into it at Emilio's behest after the most rudimentary explanation of its purpose.  Having so subordinated her knowledge of, and judgment in, the matter to Emilio she cannot, in taking the benefit of the transaction, be in a better position than Emilio would be if he was acting for himself.  The cocoon in which she so placed herself cannot avail her when the mortgage is impugned under s 120 or s 121.  She must be fixed with the knowledge of Emilio in the matter.  Indirect support for this conclusion of imputation in a "control-type" relationship where the transaction in question is for the benefit of the subordinate person, is provided in the observations of von Doussa J in Beach Petroleum No Liability v Johnson (1993) 115 ALR 411 at 566 to 574 on the imputation to a company in civil proceedings of the knowledge of a director.  I should add, for the sake of completeness, that the type of relationship and the operative knowledge in question here are far removed from that considered in Re Hatzimarcos ex parte Dixon (FCA, 11 September 1984, unreported) as not justifying imputation to a client of a solicitor's knowledge of a fact for s 120 purposes.”

14                  On behalf of the appellant it was contended that it was not open on the facts found by the learned primary judge to impute to the appellant knowledge, at the time when she executed the mortgage, of Rodolfo's inability to pay his debts.  Reference was made to Blackburn Low and Co v Vigors (1887) 12 App Cas 531.  In that case the plaintiffs had instructed a broker to reinsure an overdue ship.  The broker, while acting for the plaintiffs, received information material to the risk but did not communicate it to the plaintiffs and that broker effected a re-insurance for ₤800.  The plaintiffs then effected another reinsurance for ₤700 through another broker.  Before the latter insurance had been effected the ship was lost but neither the principal nor the second broker had any knowledge of the loss.  In an action to recover ₤700 on the second policy, the House of Lords held that the knowledge of the first broker was not to be imputed to the plaintiffs.  Lord Halsbury at page 535 identified the relevant principle in these terms:

“And Lopes LJ after stating the principle upon which the knowledge of the agent is the knowledge of the principal, explains it to mean that the principal is to be as responsible for any knowledge of a material fact acquired by his agent employed to obtain the insurance as if he had acquired it himself [17 QBD 579].  To the propositions thus stated I think no objection could be made;  but it is obvious that the words in the one judgment "agent employed to obtain the insurance," or in the other judgment the words "the underwriter," import that the particular contract obtained was, in the language of the statement of defence, a policy which the defendant was induced to subscribe by the wrongful concealment by the plaintiffs and their agents of certain facts then known to the plaintiffs or their agents, and unknown to the defendant, and which were material to the risk.”

And at page 537 his Lordship said:

“A broker is employed to effect a particular insurance.  While so employed he receives material information - he does not effect the insurance and he does not communicate the information.  How is it possible to suggest that the assured could rely upon the communication to the principal of every piece of information acquired by any agent through whom the [insurer] has unsuccessfully endeavoured to procure an insurance?

I am unable to accept the criticism by the Master of the Rolls upon the proposition that the knowledge of the agent is the knowledge of the principal.  When a person is the agent to know, his knowledge does bind the principal.  But in this case I think the agency of the broker had ceased before the policy sued upon was effected.  The principal himself and the broker through whom the policy sued on was effected were both admitted to be unacquainted with any material fact which was not disclosed.  I cannot but think that the somewhat vague use of the word "agent" leads to confusion.  Some agents so far represent the principal that in all respects their acts and intentions, and their knowledge may truly be said to be the acts, intentions and knowledge of the principal.  Other agents may have so limited and narrow an authority both in fact and in the common understanding of their form of employment that it would be quite inaccurate to say that such an agent's knowledge or intentions are the knowledge or intentions of his principal;  and whether his acts are the acts of his principal depends upon the specific authority he has received.”

15                  In the present case, on the facts found by the learned primary Judge, the relationship between Maria and Emilio was such that in all respects Emilio's acts, intentions and knowledge can truly be said to have been the acts, intention and knowledge of Maria.  There was no severance of the relationship, such as occurred in Blackburn Low and Co v Vigors, which could preclude the continuing imputation to Maria of Emilio's knowledge.  As well, Counsel for the appellant relied on the unreported judgment of Fox J in Re Hatzimarcos;  Ex Parte Dixon, (Federal Court, unreported, 11 September 1984).

16                  That, it will be recalled, was an authority distinguished by his Honour below.  In that case a bankrupt and his wife transferred a property to their two sons in consideration, effectively, of the discharge of an existing mortgage under which the parents could no longer make payments as they fell due.  The sale to the sons was recommended by the solicitor who then acted for the parents.  Fox J said at page 3 of the reasons:

“It is submitted that the solicitor for the respondents, who was also the solicitor for the bankrupt, had knowledge of the claim by the former employer at the time of the transfer, and either that he told them of the position so far as it affected bankruptcy, or that his knowledge of the bankruptcy position should be imputed to them.  The solicitor, in his capacity as solicitor for the person who subsequently became bankrupt, had knowledge of the claim, but there is nothing to indicate he adverted to it or indeed to the bankruptcy position at all, at the time of transfer.  Even if he had privately considered the matter of bankruptcy, there is in my view no proper basis for treating the parties or any of them as if they had the same knowledge.  The degree to which the claim was being pressed, and the general position concerning it at the time of contract or transfer, was not dealt with in evidence.  The District Court proceedings were not commenced until 14 December 1979.  The evidence of the solicitor is that he was concerned about the mortgage, and, although he gave oral evidence, motivation based on the debt allegedly due to the bankrupt's former employers was not put to him.  It is true that everyone knew of the arrears under the mortgage, but these were secured and there was no risk that they would not be paid.  I am unable to find that there was an absence of good faith.”

17                  In that case the only knowledge of the solicitor which could be imputed to the sons, as his Honour found, was knowledge of the parents' inability to make payments under the mortgage and not knowledge of the contingent liability of the father to the former employers.  In the present case, by contrast, the learned primary Judge was able to impute to Maria knowledge of Rodolfo's actual or impending insolvency.  I am unable to detect any factual or legal error in that imputation by his Honour. 

18                  An example of a case where more extensive knowledge of a solicitor has been imputed to a client is afforded by the case of Sargent v ASL Developments Ltd (1974) 4 ALR 257, where Stephen J, with whom McTiernan ACJ agreed, observed at page 268:

“Again, where a vendor so arranges matters that his solicitor undertakes on his behalf the carrying out of a conveyancing transaction as a whole he thereby not only authorises his solicitor to perform all necessary steps but also places the solicitor in the position of acquiring at first-hand knowledge of relevant facts, at the same time depriving himself of the opportunity of acquiring such first-hand knowledge.  If any such steps taken by the solicitor happen to constitute acts of affirmation of the continued existence of the contract they will be binding upon the client:  Provincial Insurance Co of Canada v Ledue (1874) LR 6 PC 224 at 239.  If they be unequivocal and are performed at a time when the solicitor has himself acquired knowledge of the facts giving rise to a right to rescind the contract, the client will, without the need to attribute to him the knowledge of his solicitor, be bound by those acts of affirmation as on an election;  the duly authorised conduct of the solicitor, who has acquired the relevant knowledge, will, without either conduct or knowledge on the client's part, constitute an effective election not to rescind the contract.  Hough v Guardian Fire and Life Assurance Co Ltd (1902) 18 TLR 273;  [Ayrey v British Legal & United Provident Assurance Co Ltd [1918] 1 KB 136] at 142.”

19                  Some criticism has been directed on behalf of the appellant to the introduction by the learned primary Judge into his reasons of the concept of a “tutelary” relationship between Emilio and Maria.  In my view his Honour, in using that expression, intended to signify no more than a relationship of principal and agent, which did not extend to conferring on Emilio authority to effect an alteration in the legal relations between Maria and Rodolfo.  That it did stop short in that way was acknowledged by his Honour at the end of para 60 of his reasons, where he said:

“While Maria, not Emilio, signed the 30 August agreement - so that in that respect there was no agency relationship - the object and purpose of the transaction was that arranged by Emilio.” [emphasis added]

20                  A power to alter the principal's legal position has traditionally been regarded as a key index of the character of being an agent.  See, for example, International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 644 at 652.  That was another authority, it will be remembered, which was cited by his Honour below.  However, there has been a tendency to extend the analysis of the relationship to include intermediaries engaged to conduct negotiations leading to the direct conclusion of a contract between the presumptive principal and a third party.  Thus, it has been observed in Bowstead on Agency, (15th ed) at page 12:

“Such an intermediary again draws attention to a constant tension of agency law.  Should the key factor be regarded as the internal relationship between principal and agent (which would include the canvassing agent within general agency law) or the external power of the agent to alter the principal's legal relations (which would by and large exclude him)?  Each is a typical feature of common law agency.  One, to identify agency, looks to the existence of the internal features - fiduciary relationship, undertaking to use best endeavours, remuneration on commission and so forth - as the typical ways of identifying the agent.  The other looks to the extent to which the person concerned can externally alter his principal's legal position.  Both are mentioned in the formulation of Article 1.  English law has traditionally treated the second as the key feature, and indeed it must be true to say that it was because of the agent's important external power to alter his principal's legal position that the internal fiduciary duties were imposed on him.  The development of this approach has been a strength of the common law of agency.  But in another sense the internal relation between principal and agent is the paradigm source of the agent's power, as explained above, and for this reason is selected in Article 1 as the starting point of doctrine.  Both features have roles to play.  The common law tendency to base the external relationship on the internal may (paradoxically) have led to insufficient separate analysis of the internal relationship.  This tends to be simply stated as involving general authorisation, and the main energy is devoted to formulating the external effects.  The result is that the common law has few rules ready to hand to assist in the interpretation of the typical relationships in which one person uses the services of another to act on his behalf.  While the strength of the external doctrine of agency should be maintained, the internal position between principal and various types of intermediary may require further analysis than the existing common law decisions provide.

21                  In my view, the learned primary Judge used the word "tutelary" quite appositely in the circumstances of this case to describe the internal relationship between Emilio and Maria.  For these reasons, I consider that the conclusion reached by the learned primary Judge was correct and the appeal must therefore be dismissed.

BRANSON J:

22                  I agree.

LEHANE J:

23                  I also agree.

RYAN J:

24                  The order of the Court is that the appeal be dismissed and that the appellant pay the respondent's costs of the appeal, such costs to be taxed in default of agreement.

Associate:

Dated:              2 June 2000