Bankruptcy Act 1966; ss. 58, 116 - Kieran v Johnson - [1988] FCA 70 - FCA 1988 case summary

Federal Court of Australia|1988-02-25|Before: Ryan J

By its application dated 3 July 1987, A.E. Developments Pty. Ltd. ("the applicant") seeks declarations and consequential orders in respect of a sum of $20,000, most of which is now held by Mr. David Scott, ("the Trustee"), as

trustee of the bankrupt estates of Mr. and Mrs. Boni Veli,

On 14 May 1987 the applicant drew a cheque in favour of Mr. Veli for $20,000. Mr. Veli caused the proceeds of that

his name at the Bentleigh branch of the National Australia

Early in June 1987 the Trustee demanded that the National Bank account to him for the proceeds of the cheque, contending that it formed part of a bankrupt's estate. Mr. Dunn, the Senior Manager, Legal Services, of the National Bank, thereupon advised the applicant's solicitor that he proposed to comply with the Trustee's request unless restrained by a court order by 4.00p.m. on 17 June. That advice was confirmed as follows by letter dated 15 June

"The Trustee has advised that no satisfactory evidence has been submitted to him to show that

behalf of some other person. He has again requested payment of the balance of the account to him.

We confirm our verbal advice of 12/6/87 that we will accede to his request if we are not restrained by 4.00p.m. on 17/6/87."

In the afternoon of 17 June, the applicant unsuccessfully

The present application is said to be made pursuant to

s.178 Bankruptcy Act 1966 (Cth.) ("the Act") which provides:-

"If the bankrupt, a creditor or any other person is affected by any act, omission, or decision of the trustee, he may apply to the Court; and the Court may make such orders in the matter as it thinks just and equitable."

"1. A declaration that the sum of $20,000.00 being the proceeds of cheque numbered 590995

drawn by the applicant on the A.N.Z. Banking Group Ltd. paid by the debtor into Account Number 029505379 at the Bentleigh Branch of the National Australia Bank Ltd. was and is not of the nature after-acquired property which was acquired by or devolved on the Debtor, or property that was or 15 available for distribution amongst his creditors, or property which has vested in David Henry Scott as Trustee of the Bankrupt Estate of the Debtor pursuant to the provisions of the Bankruptcy Act 1966 (as amended).

An order that the said sum of $20,000.00, or such other sum as was paid by the National Australia Bank Ltd. to the respondent pursuant to his direction, be paid to the applicant.

A declaration that the proceeds of the said cheque for $20,000.00 was held upon trust for the applicant by the debtor and further or in

the alternative was andis the property of the applicant."

The trustee, in opposing that application, contends that the money represents "after acquired property of the bankrupt" and was vested in him in his official capacity

pursuant to s.58(1)(b) of the Act as soon as it was acquired

following grounds (as far as they were relevant at the

The applicant has not proved that the proceeds of its cheque No. 590995 credited to the bank account of the firstnamed bankrupt No. 029595379 at the Bentleigh Branch of the National Australia Bank Limited represent "property held by the bankrupt in trust for another person" within the meaning of paragraph 116 (2) (a) of the Bankruptcy Act 1966.

The proceeds of the said cheque have vested in the respondent as after-acquired property of the firstnamed bankrupt; but the respondent concedes that the said proceeds may be held by him "subject to the equities" of others, including the applicant.

The respondent has had no opportunity to investigate what "equities" might affect the said proceeds and, in particular, has not yet:-

(b) been able to hold examinations pursuant to Section 81 of the Bankruptcy Act 1966 of relevant officers of the National Australia Bank Limited who dealt with the male bankrupt's said bank account and accepted the applicant's said cheque; and

(c) determined whether to adopt or disclaim the interest of the bankrupts as lessees under the lease agreement dated 30 May 1984 between them and Morlend Finance Corporation (Vic) Pty. Ltd. (a copy of which is exhibit "MVG1" to the affidavit of Mark Victor Gandur sworn 20 July 1987 and filed herein on behalf of the

As shall become apparent, Mr. Veli, in evidence given at the hearing of this application, supported the contentions of the

In order to evaluate the competing claims to the proceeds of the cheque, it is necessary to describe in some detail the circumstances in which it was given to Mr. Veli

and paid to the credit of his account at the National Bank.

Until about April 1987, Mr. and Mrs. Veli conducted a road transport business in which they used two "Kenworth" prime movers, each the subject of a lease granted by Morlend Finance Corporation (Vic.) Pty. Ltd. ("Morlend Finance"). Performance of the lessees' convenants under those leases was secured by mortgages over two properties in Elsternwick, one of which was granted by Mr. Veli's parents to secure a personal guarantee which they had given to Morlend Finance. Apparently the property the subject of the other mortgage had earlier been sold by Mr. and Mrs. Veli and the proceeds had been applied to eliminate the arrears of rent due in respect of one of the prime movers, registered number IT 7888. As a result of that arrangement no further payments were due in respect of that vehicle until the last quarter of 1988 when the sum of $100,000, presumably representing its residual

value, will become payable. However, by about April 1987

arrears of rent due to Morlend Finance in respect of the other prime mover, registered number IT 1068, amounted to

In early April 1987, Mr. Veli approached Mr. Peter Agushi, the managing director of the applicant, whom he had known for some 15 years. He proposed that the applicant should take an assignment from himself and his wife of the leases of the prime movers by paying the arrears, and should enploy himself and other drivers to operate then. Mr. Veli further suggested that once the vehicles had been put in working order considerable profits could be made. He also discussed the possibility of the "applicant acting as a sub-contractor to Better Interstate Transport Services Pty. Ltd. ("B.T.S."), of which a Mr. John Spadaro was the managing director. Mr. Spadaro is apparently related to Mr Veli. Mr. Veli then detailed the routes along which the trucks would operate, weekly operating and insurance expenses and estimated weekly profits. Mr. Agushi, after expressing his interest in the proposal, directed Mr. Veli to ascertain the amount required to pay the arrears due to Morlend Finance, the payments which would fall due in the future and the terms upon which Morlend Finance would consent to any assignment of

Mr. Veli then arranged a meeting on 29 April 1987 between himself, Mr. Agushi and one Mark Gandur, the manager of Morlend Finance. At that meeting, Mr. Gandur indicated that his company had no objection to the proposed assignment provided that Mr. Agushi or the applicant paid the arrears due under the lease together with any outstanding repair costs. (Although there were no longer any arrears of rent due in respect of the prime mover IT 7888, it seems that Morlend Finance had repossessed both vehicles, of which one was stored in a yard at Thornbury and the other was held at the Wagga Wagga premises of Waugh & Josephson Ltd. in

In the following two weeks, Mr. Agushi decided that the

proposed transport business should be conducted by Seventh Aries Pty. Ltd., a company which he controlled and of which he was also the managing director. He agreed with Mr. Veli's suggestion that refrigerated vans be leased from B.T.S. for use with the prime movers which should be moved to the premises of B.T.S. to be put into working order. Apparently Morlend Finance intimated that it would release the prime movers to allow the latter step to be taken provided that Mr. Spadaro undertook in writing not to allow the prime movers to be removed from the premises of 8B.T.S. before all arrears of rent due to Morlend Finance had been

After receiving advice on 14 May 1987 from a Mr. Sabri, the accountant to the applicant, that an amount of $60,000 invested by it ina short-term interest bearing loan would not become available for investment in the proposed transport business until 20 May, Mr. Agushi obtained an overdraft facility for the applicant to an amount of $20,000. On the game day, 14 May, the applicant drew a cheque for that sum payable to Mr. Veli. That cheque was given to Mr. Veli with instructions to convert it into cash or a bank cheque and pay the whole amount of $20,000 to Morlend Finance. Mr. Agushi gave evidence, which I accept, that he believed that the

payment of $20,000 in reduction of the arrears of rent due from Mr. and Mrs. Veli might induce Morlend Finance to release the prime movers for work to be done on them at the premises of B.T.S. before a deed of assignment of the Velis' leasehold interest had been executed and the arrears of rent

Notwithstanding Mr. Agushi's instructions, Mr. Veli did not bank the applicant's cheque as soon as he might have. Instead, he travelled to Wagga Wagga to inspect the prime mover retained there by Waugh & Josephson Ltd. after first attending at the office of Morlend Finance and showing the cheque to Mr. Gandur. Mr. Veli then told Mr. Gandur, in effect, that Morlend Finance would receive the $20,000 if it agreed to release the prime movers into the possession of

B.T.S. Mr. Gandur's response was non-committal. It 1s

likely that Mr. Veli was concerned to protect the applicant's interests to some extent by deferring any payment to Morlend Finance until after he had satisfied himself that Waugh & Josephson Ltd. had properly carried out the repairs which it had been commissioned to effect. In any event, the weekend intervened and the cheque was not presented to the National

When he deposited the cheque with the National Bank,

Mr. Veli attempted to stipulate that he did so on condition that the whole of the proceeds be made available to him in

cash or by way of a bank cheque. However, the bank officer

to whom he spoke indicated that the National Bank would

notify him later that day of its attitude to that request.

Mr Veli's account at the National Bank, to the credit of which the proceeds from the applicant's cheque were to be paid, was overdrawn by $1,063.08 but the manager of the Bentleigh branch of the Bank, apparently after some communication from the Trustee, refused to allow Mr. Veli to withdraw any amount at all from that account after the applicant's cheque had been cleared. Subsequently, the National Bank notified the applicant's solicitor to the effect which I have already indicated, and the present proceedings were instituted on 17 June 1987. On the following day Mr. Veli's account at the Bentleigh branch of the National Bank was debited by an amount of $18,870.65,

presumably as a result of a payment to the Trustee, and the

It has been contended on behalf of the applicant that the proceeds from the applicant's cheque for $20,000 were impressed with a trust and so were not property divisible among the creditors of the male bankrupt as after-acquired property within s.116(1) of the Act, and had not vested in the trustee by virtue of s.58(1)(b) of the Act. Rather, it was argued, the proceeds from the applicant's cheque came

within the first of the exceptions in s.116(2)(a) as

"property held by the bankrupt on trust for another person".

Particular reliance was placed by Mr. Macaw on behalf of the applicant on the decision of the House of Lords in

Barclays Bank Ltd. v. Quistclose Investments Ltd. (19703 A.C.

In that case a company, Rolls Razor Ltd., which was in financial difficulties, obtained a loan of £209,719 8s. 6d. from the respondent to meet payment of an ordinary share dividend. The loan was made on the agreed condition that it be used to pay the dividend. The respondent's cheque was paid into an account opened specially for the purpose with the appellant bank. Before the dividend had been paid, the borrower went into liquidation. The respondent thereupon brought action against the borrower and the appellant bank to recover the amount of the cheque. It was held by the House of

Lords, dismissing the bank's appeal, that the arrangement for

the payment of the dividend gave rise to a relationship of a fiduciary character or trust, in favour, as a primary trust of the persons entitled to the dividend, and secondarily, if the primary trust failed, of the respondent which advanced the money. Lord Wilberforce, with whose opinion the other members of the House agreed, rejected an agrument that because the transaction involved a loan from the respondent to Rolls Razor Ltd. giving rise to a legal action of debt, the implication of any trust, enforceable in equity in the

respondent's favour was excluded. His Lordship observed, at

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 so0 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 ail 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 is is applied for the primary designated purpose (see In re Rogers, 8 Morr. 243

where both Lindley L.d. 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. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it."

In my opinion the present case is even stronger than Barclays Bank Ltd. v. Quistclose Investments Ltd. (supra) 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

Watson; Ex parte Schipper (1912) 107 L.T. Rep. 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 L.J., 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 8 Mor. 243 and Re Drucker C1902] 2 K.B. 55, 237 that would not cover this case, and I can see nothing in the facts of this case to distinguish it."

Iwas referred by Mr. Bigmore, who appeared for the Trustee, to Kieran v. Johnson (1815) 1 Stark. 109; 171 E.R.

417 which is cited at p.285 of McDonald Henry and Meek''s

Australian Bankruptcy Law and Practice 5th Ed. in support of

"In order to make the trustee in bankruptcy liable for money had and received by the bankrupt for a specific purpose, it is necessary to prove the money came into the trustee's hands with a knowledge of the specific purpose."

That involved an action in assumpsit for money had and

received by the assignees of a bankrupt to the use of the plaintiff. The money represented the proceeds of a bill of exchange which had been sent by the plaintiff to the bankrupt before his bankruptcy with instructions to apply it to specified purposes. Starkie's report of the case is more than a little elliptical, merely reciting on the question of notice that, "After the bill had been read, the learned Judge (Bayley J.) intimated that it would be necessary to prove that the product of the bill actually came into the hands of the assignees, with a knowledge on their part, of the purposes for which the bill was destined. Being unable to prove this the plaintiff was nonsuited." (The report of the same case in Rose's Bankruptcy Reports, Vol. 2, 463 is even

However Kieran v. Johnson has been consistently cited

in the successive editions of Halsbury, The Laws of England

as establishing that "The trustee in bankruptcy will not be personally liable in respect of property received by the bankrupt for a specific purpose, unless it is shown that the property came into the trustee's possession with a knowledge

of the purpose for which it was destined." {See e.g. 4th

In Montagu and Ayrton, The Law and Practice in Bankruptcy, 2nd Ed. (1844) it is noted under the heading "Assignees - Duties to Creditors" that "If the assignees act improperly, they are liable at law to the creditors." Then, after a reference to the inability of assignees to carry on the bankrupt's trade if one creditor dissents, Kieran v.

"To make assignees liable for money on a bill remitted to the bankrupt for a specific purpose, it must be proved that the produce of the bill came into their hands with a knowledge of the purposes for which it was destined."

See also Robson, A Treatise on the Law of Bankruptcy

4th Ed. (1881) p.473 where Kieran v. Johnson is cited in

support of the following proposition (emphasis added) :-

"But in order to make the trustee of the bankrupt Personally liable for the bills or moneys received by him in respect thereof it must be proved that the bills came into his possession

with a knowledge of the purposes for which they were intended." In my view, it is only when so understood in the

context of an attempt to impose personal liability on an

assignee or trustee in bankruptcy that Kieran v. Johnson can be reconciled with the cases in which recovery has been

permitted to a person who entrusted the money or property in

question to the bankrupt, such as Toovey v. Milne (1819) 2 B. & ALD. 683; 106 E.R. 514 and Re Watson; Ex parte Schipper

Accordingly, I am led to conclude that as between the applicant and the Trustee, the sum of $20,000 paid on 19 May 1987 to the credit of Mr. Veli's account at the Bentleigh branch of the National Bank is not property divisible amongst the creditors of the bankrupts but is repayable to the applicant. Mr. Bigmore, at the outset of his submissions, suggested that an application under s.178 was an inappropriate vehicle for the resolution of the real question between the applicant and the Trustee, because at the time when the application was issued there had been nothing which could be identified as a relevant "act, omission or decision" of the Trustee. However, it was very properly accepted on behalf of the Trustee that the circumstances as they emerged in the course of the application raised a matter in connexion with the administration of Mr. Veli's estate, in respect of which it was appropriate for the Trustee to seek the directions of the Court pursuant to s.134 of the Act. In the light of my conclusions on the substantive issue I propose, therefore, to declare that as between the applicant and the Trustee the sum of $20,000 paid on 13 May 1987 to the credit of the account of Boni John Veli at the Bentleigh

branch of the National Australia Bank is not property

divisible amongst the creditors of the bankrupt, and to direct that so much of that sum as is now in the hands of the

(16) preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Ryan.

Bankruptcy Act 1966; ss. 58, 116 - Kieran v Johnson

At a glance

Court

Decision date

Before

Source

Judgment (93 paragraphs)

Parties

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