FEDERAL COURT OF AUSTRALIA

Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCA 567

ORDERS

THE COURT ORDERS THAT:

1.    The application is dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

NORTH J:

INTRODUCTION

1    The applicants, Gess Michael Rambaldi and Andrew Reginald Yeo, (the trustees) are the joint and several trustees of the bankrupt estate of Athina Alex. The trustees claim payment of $118,071.62 from the respondent, the Commissioner of Taxation of the Commonwealth of Australia (the Commissioner), as a preference under s 122 of the Bankruptcy Act 1966 (Cth) (the Act) and as property of Ms Alex divisible amongst her creditors under s 116 of the Act because it vested in the trustees under s 58 of the Act by operation of the relation back provisions in s 115 of the Act.

THE FACTS

2    The facts are not in dispute.

3    On 15 November 2013, Ms Alex failed to comply with a bankruptcy notice issued by the Deputy Commissioner of Taxation and thereby committed an act of bankruptcy.

4    On 18 March 2014, the Deputy Commissioner of Taxation presented a creditors’ petition seeking a sequestration order against the estate of Ms Alex.

5    On 1 June 2014, Quality Australia Investments Pty Ltd (QAI) entered into a loan agreement with Ms Alex and City Nominees Pty Ltd ATF The City No. 1 Trust (City Nominees) by which QAI agreed to lend Ms Alex and City Nominees $131,000.

6    The recitals to the loan agreement provided:

A.    The borrower has a net income tax debt with the Australian Taxation Office of approximately $85,000.00 not including General Interest Charges and penalties. The borrower is the sole director and shareholder of City Nominees Pty Ltd ATF The City Nominees no. 1 Trust (ABN 82 313 380 364).

B.    The Australian Taxation Office is in the process of serving Athina Alex (the borrower) with a Creditors Petition. Negotiation [sic] are on foot between Maria Bongiorno (Bongiorno Lawyers), Athina Alex’s legal representative and the Australian Taxation Office to reach a settlement.

C.    Athina Alex (the borrower) wants to borrow $126,000.00 to pay the income tax debt, GIC and penalties.

D.    Athina Alex further wants to borrow $5,000 to part pay the cost of the legal representation to Bongiorno Lawyers.

7    Clause  4 of the loan agreement entitled “Purpose” provided:

The Borrower must only use the loan for the purpose presented to the Lender, namely the payment of the Income Tax Debt relating to Athina Alex owed by her to the Australian Taxation Office and payment to borrower’s legal representative (Bongiorno lawyers). The lenders ‘cheque for the loan will be drawn on [sic] the Deputy Commissioner of Taxation.

[Emphasis added.]

8    Clause 5 of the loan agreement entitled “Drawings” provided:

The Loan has been drawn in one sum, namely, $131,000.00 payable to:

1.    Deputy Commissioner of Taxation $126,000.00.

2.    Bongiorno lawyers $5,000.00.

9    On 1 June 2014, Ms Alex and City Nominees signed an authority to pay authorising and directing QAI to pay the sum of $126,000 to the Deputy Commissioner of Taxation.

10    On or about 7 July 2014, the Deputy Commissioner of Taxation received a bank cheque issued by the Commonwealth Bank of Australia for $118,071.62 which was applied in payment of an income tax that was then owed by Ms Alex. There is no explanation why the cheque was less than the authorised amount, save that the amount of the cheque represented the then owing amount of income tax debt.

11    On 8 December 2014, a sequestration order was made against the estate of Ms Alex and the trustees were appointed.

RELEVANT STATUTORY PROVISIONS

12    Section 122 of the Act provides:

(1)    A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor’s bankruptcy if the transfer:

(a)    had the effect of giving the creditor a preference, priority or advantage over other creditors; and

(b)    was made in the period that relates to the debtor, as indicated in the following table.

(1A)    Subsection (1) applies in relation to a transfer of property by the debtor in favour of a creditor:

(a)    whether or not the liability of the debtor to the creditor is his or her separate liability or is a liability with another person or other persons jointly; and

(b)    whether or not the property transferred is the debtor’s own property or is the property of the debtor and one or more other persons.

13    Section 58 of the Act relevantly provides:

58 Vesting of property upon bankruptcy—general rule

(1)    Subject to this Act, where a debtor becomes a bankrupt:

…

(b)    after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.

14    Section 115 of the Act provides:

(1)    If a person becomes a bankrupt on a creditor’s petition … then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of 6 months immediately before the date on which the creditor’s petition was presented.

15    Section 116 of the Act provides:

(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; and

….

Is property divisible amongst the creditors of the bankrupt.

(2)    Subsection (1) does not extend to the following property:

(a)    property held by the bankrupt in trust for another person;

16    Although the written submissions of the parties traversed a range of issues, the only remaining issue now between the parties is whether the loan money was property of Ms Alex. If it was her property, the Commissioner accepts that the other elements of the claims would be established.

17    The trustees contend that the loan money was property of Ms Alex and City Nominees paid by QAI at their direction to the Commissioner.

18    The Commissioner contends that the loan money was not property of Ms Alex and City Nominees, but rather was held on a Quistclose trust for payment to the Commissioner, and, in default, on trust to be repaid to QAI.

19    Mr Fary, who appeared as counsel for the trustees, relied on a number of cases in which courts have found that the payment by a third party to a creditor amounted to the transfer of property at the direction of the debtor, and hence was recoverable by trustees in insolvency proceedings.

20    The trustees relied on a passage in Sheahan v Carrier Air Conditioning Pty Limited (1997) 189 CLR 407 in which Dawson, Gaudron and Gummow JJ said at 437:

No doubt, as the authorities indicate, there may be a payment made by the debtor within the meaning of s 122(1) where the debtor directs a third party who holds funds at the direction of the debtor or is otherwise obliged to the debtor to account to the debtor not by payment to the debtor but to a creditor of the debtor. Thus, in Re Stevens, it was said that the debtor "parted with his assets, and the payment which he himself should have received he has authorised to be made to the creditor, and it is just the same as if he had received payment himself and had himself handed such payment to [the creditor]". The result in that case was that the third party was to be treated as having acted on behalf of the debtor.

[Footnotes omitted.]

21    An example of such a situation referred to by the trustees was Commissioner of Taxation v Kassem [2012] FCAFC 124 in which the liquidator of Mortlake Hire Pty Ltd (Mortlake) successfully claimed repayment from the Commissioner of Taxation of amounts which had been paid by Antqip Pty Ltd (Antqip) to reduce Mortlake’s liability to the Commissioner. The primary judge found that the amount paid by Antqip to the Commissioner was a loan made by Antqip to Mortlake paid to the Commissioner at Mortlake’s direction. The Full Court (Jacobson, Siopis and Murphy JJ) said at [63]:

[T]he position in the present case is no different from that which would apply if Mortlake were to have borrowed the funds on overdraft from its bank and paid the creditor with those funds. Where an insolvent company makes such a payment to fully discharge an existing creditor during the relation back period the creditor cannot be heard to argue that the payment was not an unfair preference.

22    Then, the trustees relied on Re Emanuel (No 14) Pty Ltd (in liq), Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281 (Emanuel). Emanuel contracted to build a road on Bribie Island in Queensland. In doing so it incurred debts to sub-contractors including Blacklaw & Shadforth Pty Ltd (Blacklaw). ELFIC Limited (ELFIC) financed the project. Disputes between Emanuel and ELFIC arose and were ultimately settled by an agreement which, in part, provided that ELFIC would discharge the debts owed by Emanuel to Blacklaw. ELFIC discharged those debts. However, Emanuel shortly afterwards went in to liquidation. The liquidators sought repayment from Blacklaw. The liquidators claimed the payment to Blacklaw fell within s 588FA(1) of the Corporations Law (Cth). That section provided:

(1)    A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)    the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b)    the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

23    The particular issue addressed by the Court was whether Emanuel and Blacklaw were parties to the transaction within the meaning of the section. The Full Court (O’Loughlin, Branson and Finn JJ) concluded at 289:

[T]hat a course of dealing initiated by a debtor that is intended to, and does, extinguish a creditor’s debt can in its totality be a transaction for the purposes of Pt 5.7B of the Corporations Law notwithstanding that the achievement of that end can only be realised through the participation of a third party in a particular dealing (or dealings) within the overall transaction, being a particular dealing (or dealings) to which the debtor is not or may not be a party.

24    The Full Court further said at 289:

Clearly both Emanuel and Blacklaw were parties to that transaction even though neither was a party to all of its component elements.

25    Section 588FA(1) was introduced in 1992 by the Corporate Law Reform Act 1992 (Cth). Previously the Bankruptcy Act provisions concerning voidable preferences, including s 122, applied to corporations. The Full Court at 283 referred to a major difference between the two provisions as follows:

The then Bankruptcy Act 1966 (Cth), s 122 – there was a major amendment to it in 1996 - particularised the types of transactions (eg. “a conveyance or transfer of property”) which, if satisfying other specified conditions, would constitute a preference and for that reason would be void as against the trustee. In consequence, if a transaction was to be impugned, it had to be shown to be of one of the types specified.

In contrast to this, s 588FA refers only, and generically, to a “transaction” possessing certain characteristics. The s 9 definition, while exemplifying “transactions”, makes no attempt to define the word itself. We emphasise this for this reason. A benefit might well be conferred on a creditor in a dealing that would not have been caught by any one of the types of transaction specified in s 122. The dealing might, nonetheless, constitute a “transaction” for the purposes of s 588FA.

[Emphasis added.]

26    The Full Court also rejected the argument of Blacklaw that a Quistclose trust had been created but said at 290:

Even if, contrary to our conclusion, trusts of the Quistclose or Kayford forms were created there would, in the circumstances, be a very real question as to in whom the beneficial interest in the funds in Clayton Utz’s hands resided until the payment was made to Emanuel. But answering that question would not have any actual bearing on whether the transaction between the parties was as we have identified it to be. All that a trust finding would do would be to change the machinery employed by the parties in extinguishing Emanuel’s debt to Blacklaw.

27    Then, the trustees argued that Re Kitts; Ex parte: Bernard Putnin v Advanced Commercial Finance Limited [1992] FCA 796 (Kitts) was on all fours with the present case. Mr Kitts owed money to Advance Commercial Finance Ltd (Advance). Advance obtained a warrant of arrest which prevented Mr Kitts leaving on a trip to Thailand. Some friends of Mr Kitts raised money and paid Advance to discharge Mr Kitts’ debt. Mr Kitts then went bankrupt. The trustee claimed back the money paid to Advance as a preference under s 122 of the Act. French J stated the issue thus at [11]:

The question is whether the payment had the effect of giving that creditor a preference priority or advantage over other creditors. In this case that turns simply on the question whether it was made out of moneys lent to Mr Kitts and therefore forming part of his estate, or whether it was made by third parties, passing through his hands in a mechanical sense, but not forming part of his estate and therefore not having the effect of giving a creditor who received that money a preference, priority or advantage over other creditors.

28    French J found on the facts that $3,500 of the sum paid was a loan to Mr Kitts. As such it was part of his estate and Advance was required to repay it.

29    Mr Davies QC, who appeared with Mr Rosewarne as counsel for the Commissioner, relied on Barclays Bank Limited v Quistclose Investments Limited [1970] AC 567 (Quistclose) and a number of cases which have applied that authority both in Australia and in the United Kingdom in support of the conclusion that the loan money did not become part of the property of Ms Alex.

30    In Quistclose Rolls Razor Ltd (Rolls Razor) declared a dividend but did not have funds to pay it to the shareholders. Quistclose Investments Ltd (Quistclose) agreed to lend the necessary funds to Rolls Razor for the purpose of paying the dividend. Quistclose drew a cheque payable to Rolls Razor for the sum in question. Rolls Razor sent the cheque to Barclays Bank. In accordance with an agreement reached between the bank and Rolls Razor a special account was opened and the cheque deposited into that account. The bank agreed with Rolls Razor that the funds would only be used to pay the dividend. On the same day, Rolls Razor was placed into voluntary liquidation. The bank sought to retain the funds against the debit balance on Rolls Razor’s other accounts with the bank. Quistclose sought the return of the funds.

31    Lord Wilberforce with whom Lord Reid, Lord Morris of Borth-y-Gest, Lord Guest and Lord Pearce agreed said at 579 – 581:

There is no doubt that the loan was made specifically in order to enable Rolls Razor Ltd. to pay the dividend. There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd. to pay the dividend and for no other purpose. … The mutual intention of the respondents and of Rolls Razor Ltd., and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd., but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. …

That arrangements of this character for the payment of a person’s creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.

In Toovey v Milne (1819) 2 B. & A. 683 part of the money advanced was, on the failure of the purpose for which it was lent (viz, to pay certain debts), repaid by the bankrupt to the person who had advanced it. On action being brought by the assignee of the bankrupt to recover it, the plaintiff was nonsuited and the nonsuit was upheld on a motion for a retrial. In his judgment Abbott C.J. said, at p. 684:

“I thought at the trial, and still think that the fair inference from the facts proved was that this money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid. That has been done in the present case; and I am of opinion that that repayment was lawful, and that the nonsuit was right.”

The basis for the decision was thus clearly stated, viz., that the money advanced for the specific purpose did not become part of the bankrupt’s estate. The case has been repeatedly followed and applied.

…

These cases have the support of longevity, authority, consistency and, I would add, good sense.

[Emphasis added.]

32    Lord Wilberforce at 581 then rejected argument that the loan transaction gave rise to a legal action of debt and could not also give rise to an imputation of trust, as follows:

My Lords, I must say that I find this argument unattractive. Let us see what it involves. It means that the law does not permit an arrangement to be made by which one person agrees to advance money to another, on terms that the money is to be used exclusively to pay debts of the latter, and if, and so far as not so used, rather than becoming a general asset of the latter available to his creditors at large, is to be returned to the lender. The lender is obliged, in such a case, because he is a lender, to accept, whatever the mutual wishes of lender and borrower may be, that the money he was willing to make available for one purpose only shall be freely available for others of the borrower’s creditors for whom he has not the slightest desire to provide.

I should be surprised if an argument of this kind – so conceptualist in character – had ever been accepted. In truth it has plainly been rejected by the eminent judges who from 1819 onwards have permitted arrangements of this type to be enforced, and have approved them as being for the benefit of creditors and all concerned. There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see In re Rogers, 8 Morr. 243 where both Lindley L.J. and Kay L.J. recognised this): when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor’s assets) then there is the appropriate remedy for recovery of a loan.

33    In Re Veli; Ex parte AE Developments Pty Ltd v Scott (1988) 18 FCR 204 (Veli) Ryan J applied Quistclose. Mr Veli was a bankrupt. Mr Scott was his trustee in bankruptcy. Mr Veli leased prime movers from a finance company. He was negotiating an assignment of the leases of the prime movers to AE Developments Pty Ltd (AED). In order to induce the finance company to release the prime movers before the assignment was completed, AED gave Mr Veli a cheque to be paid to the finance company for that purpose. Mr Veli banked the cheque into his bank account. The bank then used the proceeds to reduce his overdraft. AED then claimed a return of the money and relied on Quistclose. Opposing this argument the trustee claimed that the money was the property of Mr Veli divisible among his creditors. Ryan J said at 209 – 210:

In my opinion the present case is even stronger than Barclays Bank Ltd v Quistclose Investments Ltd because there was no loan of the $20,000 by the applicant to Mr Veli. He was merely the conduit through which the money was to pass from the applicant to Morlend Finance, presumably because Mr Agushi believed that it was only in that way that arrears of rent due under the leases could be reduced before the leases had been formally assigned to the applicant or Seventh Aries Pty Ltd. Mr Veli accordingly stood in a fiduciary relationship to the applicant which is entitled to follow the money in his hands and through him into the hands of the Trustee.

The present case is analogous, in my view, to Re Watson; Ex parte Schipper (1912) 107 LT 783 where money was advanced to a bankrupt who gave a receipt for it as on account of his shares of the prospective takings from a theatrical performance. The money was then paid to the sheriff to secure the release of certain costumes to be used in the performance which had been seized in execution of a judgment debt under the mistake that they were the property of the bankrupt. A majority of the Court of Appeal held that the Official Receiver was not entitled to the money in the hands of the sheriff. Hamilton LJ, observed (at 784):

“Whatever else the parties by this transaction meant they did not mean that the money found by Messrs Broadhead should be money divisible among the bankrupt’s creditors, nor did anybody think that the money was going to the bankrupt. It was provided for one purpose only, and care was taken that it should be applied to that purpose and no other, and I can attach no meaning to the principle in Re Rogers; Ex parte Holland and Hannen (1891) 8 Morr 243 and Re Drucker; Ex parte Basden (No 1) [1902] 2 KB 55; [1902] 2 KB 237 that would not cover this case, and I can see nothing in the facts of this case to distinguish it.”

34    In Re Australian Elizabethan Theatre Trust; Lord v Commonwealth Bank of Australia (1991) 30 FCR 491 (Australian Elizabethan Theatre Trust) Gummow J observed at 499 that Quistclose had been applied in a number of cases in Australia. He explained the basis for such a trust at 500 – 501:

However, in the House of Lords, Lord Wilberforce said (at 580, 582) that a necessary consequence of the mutual intention of Quistclose and Rolls Razor to create arrangements which gave rise to a "primary" trust in favour of those entitled to the dividend was that if the dividend could not be paid for any reason, the money, as a "secondary" trust, was to be returned to Quistclose; the intention was clear to create the secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out. This characterisation of what occurred is indicative of an express trust with two limbs rather than an express trust in favour of the shareholders and a resulting trust in favour of Quistclose which arose by reason of an incomplete disposition by Quistclose of the whole of its interest in the money lent to Rolls Razor. But on either characterisation, Quistclose had a beneficial interest (although not at all relevant times an exclusive beneficial interest) in the money in question. Thus, it was not merely in the position of a lender with the benefit of a promise to repay. Nor was Quistclose a settlor who had fully settled a fund upon other parties and did so not retain for itself a beneficial interest sufficient for it to ensure performance of the trust.

Of course, the effect of the transaction, on either footing, was that the only benefit Rolls Razor could obtain from the loan would be that received from the use of the funds lent to discharge the particular indebtedness of Rolls Razor to the shareholders in respect of the dividend. …

But the essential reason why the insolvency law did not strike at the transaction in question in Quistclose was that the moneys represented by the cheque drawn by Quistclose in favour of Rolls Razor and banked in the special account of Rolls Razor never at any stage became the beneficial property of Rolls Razor. It acquired no more than what Dixon J called a dry legal interest … On its part, Quistclose had both contractual right to repayment out of the general assets of Rolls Razor, as a general creditor, and the beneficial interest in a fund, whether by way of resulting trust or as the second limb of an express trust.

[Emphasis added.]

35    In Legal Services Board v Gillespie-Jones (2013) 249 CLR 493 a barrister sought payment of his fees from the Fidelity Fund after funds provided by a client to his instructing solicitor had been misappropriated by the solicitor. Bell, Gageler and Keane JJ considered whether the funds were held on a Quistclose trust. They said at [119]:

Whether or not parties intend to create in a third party an interest that is appropriate to be created by a trust relationship falls in each case to be determined by reference to the outward manifestation of the intentions of the parties within the totality of the circumstances. Those circumstances centrally include the nature of the relationship between the parties together with such rights or obligations pertaining to that relationship as might arise under statute or at common law. "The contractual relationship provides one of the most common bases for the establishment or implication and for the definition of a trust"; a relationship established or regulated by statute can provide another basis. Such trust relationship as may arise to give effect to the inferred intention of the parties must mould to statutory rights and obligations of the parties. A trust relationship is not to be recognised or enforced, and is therefore not to be inferred, if and to the extent the trust relationship would give rise to rights or obligations inconsistent with those conferred or imposed by statute.

[Footnotes omitted.]

36    In that case Bell, Gageler and Keane JJ held that such a trust was inconsistent with the statutory regime governing solicitors’ practice which stipulated that the trust funds were held on behalf of the client.

37    The Commissioner then referred to Salvo v New Tel Limited [2005] NSWCA 281 as another example of the application of Quistclose in Australia. The appellants were investors who paid $750,000 to New Tel Ltd (New Tel) as part of a deposit for the purchase of Digiplus Investments Ltd. The acquisition did not proceed and the deposit was returned to New Tel. New Tel went into liquidation. The investors claimed repayment of the $750,000. The New South Wales Court of Appeal (Spigelman CJ, Handley JA and Young CJ in Eq) determined that the funds were held on trust for the investors and had to be returned to them. Spigelman CJ referred to Quistclose at [44] and continued:

45.    In Re EVTR Ltd [1987] BCLC 646 funds were advanced for the sole purpose of purchasing equipment. The money was used to pay a deposit for the equipment, but the company was placed into receivership before the equipment arrived. Most of the deposit was returned to EVTR. The Court held that the receiver could not retain the returned deposit money. The funds had to be returned to the lender. Dillon J said:

“On Quistclose principles, a resulting trust in favour of the provider of the money arises when money is provided for a particular purpose only, and that purpose fails.”

46.    Furthermore, Bingham LJ (as his Lordship then was) said at 652:

“Until the sums were paid out, the company plainly held them on trust to apply them for the stipulated purpose and no other. Had the purpose failed before payment, the case would have been indistinguishable from Quistclose. But that did not happen. The sums were applied for the stipulated purpose.

Then at [48] he said:

The reasoning in EVTR, where a deposit was returned by a third party, applies in the present case to support the conclusion that the original supplier of funds retained a beneficial interest in the funds.

After referring to what Gummow J said in Australian Elizabethan Theatre Trust at [501], Spigelman CJ concluded at [51]:

Here, the beneficial interest was similarly kept from New Tel. In my opinion, at all relevant times, the Investors retained a beneficial interest in the funds – although it was not an exclusive beneficial interest. At no time did the money become the beneficial property of New Tel.

38    Handley JA at [71] and Young CJ in Eq at [84] in substance agreed with the Chief Justice.

39    An example of the application of Quistclose in the United Kingdom is Twinsectra Limited v Yardley (2002) AC 164. Lord Hoffmann outlined the circumstances as follows:

9.    My Lords, Paul Leach is a solicitor practising in Godalming under the name Paul Leach & Co. Towards the end of 1992 he acted for a Mr Yardley in a transaction which included the negotiation of a loan of £1m from Twinsectra Ltd. Mr Leach did not deal directly with Twinsectra. Another firm of solicitors, Sims and Roper of Dorset ("Sims"), represented themselves as acting on behalf of Mr Yardley. They received the money in return for the following undertaking:

"1. The loan moneys will be retained by us until such time as they are applied in the acquisition of property on behalf of our client. 2. The loan moneys will be utilised solely for the acquisition of property on behalf of our client and for no other purposes. 3. We will repay to you the said sum of £1,000,000 together with interest calculated at the rate of £657.53 per day … such payment to be made [within four calendar months after receipt of the loan monies by us]."

10.    Contrary to the terms of the undertaking, Sims did not retain the money until it was applied in the acquisition of property by Mr Yardley. On being given an assurance by Mr Yardley that it would be so applied, they paid it to Mr Leach. He in turn did not take steps to ensure that it was utilised solely for the acquisition of property on behalf of Mr Yardley. He simply paid it out upon Mr Yardley's instructions. The result was that £357,720.11 was used by Mr Yardley for purposes other than the acquisition of property.

11.     The loan was not repaid. Twinsectra sued all the parties involved including Mr Leach.

Lord Hoffmann concluded at [13]:

In my opinion the effect of the undertaking was to provide that the money in the Sims client account should remain Twinsectra's money until such time as it was applied for the acquisition of property in accordance with the undertaking. For example, if Mr Yardley went bankrupt before the money had been so applied, it would not have formed part of his estate, as it would have done if Sims had held it in trust for him absolutely. The undertaking would have ensured that Twinsectra could get it back. It follows that Sims held the money in trust for Twinsectra, but subject to a power to apply it by way of loan to Mr Yardley in accordance with the undertaking. No doubt Sims also owed fiduciary obligations to Mr Yardley in respect of the exercise of the power, but we need not concern ourselves with those obligations because in fact the money was applied wholly for Mr Yardley's benefit.

[Emphasis added.]

Lord Slynn, Lord Steyn, Lord Hutton and Lord Millett agreed with Lord Hoffmann that the circumstances created a Quistclose trust in favour of Twinsectra.

40    Lord Millett examined the issue extensively. He said:

68.    Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and save to the extent to which he may have taken security for repayment the lender takes the risk of the borrower's insolvency. But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce. In the earlier cases the purpose was to enable the borrower to pay his creditors or some of them, but the principle is not limited to such cases.

69.     Such arrangements are commonly described as creating "a Quistclose trust", after the well-known decision of the House in Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567 in which Lord Wilberforce confirmed the validity of such arrangements and explained their legal consequences.

41    As to the effect of the undertaking provided by Sims, Lord Millett said:

73.    A Quistclose trust does not necessarily arise merely because money is paid for a particular purpose. A lender will often inquire into the purpose for which a loan is sought in order to decide whether he would be justified in making it. He may be said to lend the money for the purpose in question, but this is not enough to create a trust; once lent the money is at the free disposal of the borrower. Similarly payments in advance for goods or services are paid for a particular purpose, but such payments do not ordinarily create a trust. The money is intended to be at the free disposal of the supplier and may be used as part of his cash-flow. Commercial life would be impossible if this were not the case.

74.     The question in every case is whether the parties intended the money to be at the free disposal of the recipient: In re Goldcorp Exchange Ltd [1995] 1 AC 74, 100 per Lord Mustill. His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose, for as Lord Wilberforce observed in the Quistclose case [1970] AC 567, 580:

"A necessary consequence from this, by a process simply of interpretation, must be that if, for any reason, [the purpose could not be carried out,] the money was to be returned to [the lender]: the word 'only' or 'exclusively' can have no other meaning or effect."

…

75.    In the present case paragraphs 1 and 2 of the undertaking are crystal clear. Mr Sims undertook that the money would be used solely for the acquisition of property and for no other purpose; and was to be retained by his firm until so applied. It would not be held by Mr Sims simply to Mr Yardley's order; and it would not be at Mr Yardley's free disposition. Any payment by Mr Sims of the money, whether to Mr Yardley or anyone else, otherwise than for the acquisition of property would constitute a breach of trust.

76.     Mr Leach insisted that such a payment would, no doubt, constitute a breach of contract, but there was no reason to invoke equitable principles merely because Mr Sims was a solicitor. But Mr Sims' status as a solicitor has nothing to do with it. Equity's intervention is more principled than this. It is unconscionable for a man to obtain money on terms as to its application and then disregard the terms on which he received it. Such conduct goes beyond a mere breach of contract.

[Italics in original.] [Emphasis added.]

42    The final example relied on by the Commissioner was Analogy Pty Ltd (Receiver and Manager Appointed) (in liquidation) v Bell Basic Industries Ltd; Robson v Bell Basic Industries (Sup Ct, WA, Malcolm CJ, Kennedy and Anderson JJ, 23 August 1995, unreported). Leighton Contractors Pty Ltd (referred to by Anderson J as Leighton Constructions Pty Ltd) (Leighton) was the principal contractor for the construction of the Canning Vale Markets. Analogy Pty Ltd (Analogy) was a contractor engaged by Leighton to do paving and asphalt work. Analogy engaged Boral Bellpave (Boral) to execute some of its works. Analogy fell into financial difficulties. Boral was owed money and was not prepared to continue work without some form of assurance. Leighton agreed to advance $200,000 to Boral to be brought into account in the final calculation of the amounts owing between Leighton and Analogy, and Analogy agreed that the payment would reduce Analogy’s indebtedness to Boral. Analogy then went in to liquidation. Boral sued Leighton for the unpaid $200,000. Analogy’s liquidator countersued Boral and Leighton for a declaration that the arrangement by which Leighton was to pay Boral the $200,000 was void against the liquidator. Anderson J (with whom Malcolm CJ and Kennedy J agreed) said at 16:

I do not think it ever was intended that the $200,000 was to be generally available to Analogy or to its general creditors. It truly was to be a loan or advance for the particular purpose of payment to a particular creditor, Boral. Barclay’s Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at 581-582. It was not a sum which Leighton otherwise would have paid. The sum was plainly treated by the parties as repayable by Analogy should the final accounting not work out in Analogy’s favour. In these circumstances, payment of it to Boral would not disadvantage Analogy’s creditors. It would simply result in Leighton being an unsecured creditor (to the extent of $200,000) in substitution for Boral.

43    There is an essential distinction between the cases relied on by the trustees and the Quistclose cases relied on by the Commissioner. Both lines of authority address the situation where a third party makes a payment of the indebtedness of the debtor to the creditor. The cases relied on by the trustees are cases where the payment, although made direct to the creditor to the third party, is made from the property of the debtor. There is no intention in those cases that, if the payment to the debtor fails, the money is repayable to the third party. Kitts, on which the trustees place particular reliance, is an example of a simple loan to the debtor with a direction to the lender to pay the loan monies to a creditor without any provision that the money was only to be paid for that purpose. In Emanuel, there was no evidence that the parties intended a trust to be created. Further, the case involved a question arising, not under s 122 of the Act, but under s 588FA(1) of the Corporations Law, namely, whether the actors were parties to a transaction with a particular effect. Unlike the question arising under s 122 of the Act, s 588FA(1) may not require the debtor to transfer the debtor’s own property. Hence, Emanuel was directed to a different issue than that which arises in this case. Hence, the Court said that even if a Quistclose trust had been established the result would not have been different. A Quistclose trust would have been a different way of constituting the actors as parties to the transaction, as required by s 588FA(1).

44    In contrast to the cases relied upon by the trustees, the Quistclose cases involved a payment made for a particular purpose where the mutual intention of the parties impressed that property with a trust for repayment to the third party if the purpose failed.

45    In the present case the agreement between QAI, Ms Alex and City Nominees was in writing. The intention of the parties is to be gathered from the written agreement. That intention is disclosed in cl 4 where the borrowers agree to use the loan money for one purpose only, namely, payment to the Commissioner and to their solicitors. The transaction proceeded in accordance with the expressed intention. The substance of the transaction was identical to the transaction in Quistclose itself. There was one difference in the way the transaction was undertaken. In Quistclose the loan money was paid into the bank account of Rolls Razor whereas in the present case the funds went directly by cheque from QAI to the Commissioner. The trustees argue that this was a critical difference. In oral submissions Mr Fary said:

[T]he typical case is one where the bankrupt holds the funds, and it’s necessary to impose a trust to protect them from being misused, but that wasn’t the case here. The point is the very transaction we seek to impugn is the payment, which is the authorised use of the bank cheque. So there’s no sense in which there’s any trust at the moment of payment, and that’s the relevant time so far as the application of section 122 or the vesting provisions is concerned. In my submission, also (1) the Commissioner has not established a trust on the facts.

The reason for that is because it cannot be assumed that both parties intended there to be a trust created in circumstances where the transaction didn’t contemplate that the bankrupt would hold the funds at all. The transaction contemplated a payment at direction. You will recall that I took your Honour to an authority to pay. What that suggests is that the original intention, at least, was that QAI directly paid the Commissioner of Taxation the money so as to satisfy the purpose that’s recorded in the loan agreement. Furthermore, the payment was to be on a bank cheque drawn in favour of the Commissioner of Taxation. There’s simply no need for the imposition of any trust because the QAI had put in place safeguards to ensure that the money got used for its intended purpose and no other.

46    This argument should not be accepted. The machinery adopted by the parties only serves to confirm that they did not intend that the loan money would become the property of Ms Alex and City Nominees. The purpose of the parties was express, namely, that the money was to be used only for the payment to the Commissioner and the solicitors.

47    In oral submissions, Mr Fary also contended:

[C]ases like Veli, Quistclose, the insolvency intervenes prior to the achievement of the objectives of the trust, so to be a truly analogous case Athena [sic] Alex would become bankrupt holding a bank cheque and the question before your Honour is is that property of the bankrupt estate or is that property of QAI, whereas in the present case she has given the bank cheque to the Commissioner and that has effected the purpose so there’s no longer a need for there to be a trust at that point in time. The payment is made. It discharges the debt.

The question is not whether there was a need for a trust at the point of payment but rather what the parties intended the position to be at that point. The written agreement leaves no room for doubt that they intended the loan money to be provided only for the purpose of payment of the Commissioner and the solicitor.

CONCLUSION

48    In the result the loan funds paid by QAI were held on a Quistclose trust and did not become the property of Ms Alex and City Nominees. The money is therefore not recoverable by the trustees from the Commissioner. It follows that the application is dismissed with costs.

Associate:

Dated:    25 May 2017