Halsted (Bankrupt) v The Official Trustee in Bankruptcy, in the matter of... [2011] FCA 1242 | Case summary

REASONS FOR JUDGMENT 1 The applicant, William Anthony Halsted (Mr Halsted), had the misfortune to be injured in a motor vehicle accident in December 2004. Early the following year he engaged a firm of solicitors, Quinn and Scattini, to institute proceedings on his behalf for damages in respect of personal injuries and other loss and damage sustained by him in that accident. His injuries were such that thereafter he had a need for funds for living and other expenses pending the successful conclusion, so he hoped, of that court proceeding. Enter the third respondent, Ask Funding Limited, formerly known as Impact Capital Limited (Ask Funding). Ask Funding is and was engaged in the business of what is described as litigation funding. On two occasions, on 26 March 2007 and then on 30 May 2007, it advanced to Mr Halsted amounts of $10,000 subject to the terms and conditions found in loan agreements made on those dates together with related instructions given by Mr Halsted. 2 It will be necessary to return in some detail to the terms of those agreements and the instructions given by Mr Halsted shortly. For the present it may be said that they are in a standard form. It will be sufficient therefore to refer to the terms of but one of them. 3 To continue firstly with the chronology of events which has led to the present proceeding, it is necessary to record that in January 2010 Mr Halsted instituted proceedings in the Supreme Court of Queensland in respect of the cause of action in which he claimed damages in respect of the personal injuries and other loss and damage sustained by the alleged negligence of the tortfeasor in December 2004. Those proceedings in the Supreme Court of Queensland did not proceed to final judgment; instead, they were compromised. The effect of the compromise was that a sum came to be paid into the trust account of Slater and Gordon. That firm had, in the interval between when instructions were first given to Quinn and Scattini and the date upon which settlement moneys came to be paid, acquired the practice, including the goodwill, of Quinn and Scattini. 4 There is no longer any issue in this case that, whatever is the effect of the loan agreements the acquisition of the practice by Slater and Gordon had no material effect as between Mr Halsted and Ask Funding. It should also be recorded that on 9 September 2011 in this Court a declaration was made by Greenwood J that the net proceeds of Mr Halsted's personal injury settlement, presently being held in the trust account of Taylor David Lawyers in the amount of $216,969.27 (the disputed funds) does not form any part of the property divisible amongst the creditors of the bankrupt, Mr Halsted, by operation of s 116(2)(g) of the Bankruptcy Act 1966 (Cth). 5 In that declaration one sees reference to another misfortune which has befallen Mr Halsted in life. That other misfortune is that, pursuant to a debtor's petition filed on 29 September 2010, he became a bankrupt. Also on 9 September 2011, Greenwood J ordered that Mr Halsted's solicitors "be released from their undertaking dated 22 June 2011 to the extent of the sum of $75,000." His Honour further ordered that "The balance of the disputed funds be held in the trust account of Taylor David Lawyers, until the trial and determination of the remaining questions in this proceeding or earlier order of the Court." 6 The reference to an undertaking dated 22 June 2011 is a reference to an undertaking given as between the solicitors for Mr Halsted and the solicitors for Ask Funding in respect of what are termed, in the order of 9 September 2011, the disputed funds. Suffice it to say, the effect of the undertaking is that Mr Halsted's solicitors have undertaken to Ask Funding not to dispose of the funds pending the order of the Court in this proceeding. On the strength of the release from the undertaking and the declaration which his Honour made, the Official Trustee in Bankruptcy, who is the trustee of Mr Halsted's bankrupt estate, no longer remained a party to these proceedings. It should also be recorded that, by agreement between Mr Halsted and Ask Funding, Slater & Gordon, which was also originally a respondent to these proceedings, has also ceased to be a party. Mr Halsted was given leave to discontinue as against Slater & Gordon with no order as to costs. 7 The controversy which remains for resolution is, in short, whether Mr Halsted has either assigned in equity, charged or both, the proceeds of settlement in a way which obliges him to pay from the net proceeds the sum presently owed to Ask Funding? The sum presently owed is, inclusive of both principal and interest, $77,259.62. 8 There was originally a further issue as between Mr Halsted and Ask Funding, which was whether the settlement proceeds were, as a result of the agreements made on 26 March and 30 May 2007 respectively, held on trust to the extent of the amount owed to Ask Funding by him. In the end, today, that particular aspect of Ask Funding's case was not pressed, on the basis that in 2007 there did not then exist any property known as the settlement proceeds. 9 The principles to be applied in this matter were not the subject of any difference as between Mr Halsted and Ask Funding. Their application, though, to the facts of this case very much was. The relevant principle of law was stated in the speech of Lord Wilberforce, with whom the other members of the House of Lords agreed, in Swiss Bank Corp v Lloyds Bank Ltd [1982] AC 584 at 613 (Swiss Bank v Lloyds Bank). His Lordship there referred with approval to the advice of the Judicial Committee in an Australian case, Palmer v Carey [1926] AC 703; 37 CLR 545 (Palmer v Carey). In the latter case, at pages 706 to 707, Lord Wrenbury, delivering the advice of the Judicial Committee, stated: The law as to equitable assignment, as stated by Lord Truro in Rodick v Gandell (1852) 1 DeG M & G 763 at 777 - 778, is this: "The extent of the principle to be deduced … is, that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers." An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way, but if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of the creditor to pay the debt out of the fund. This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or change a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a Court of equity will decree specific performance. 10 It is not necessary to refer to the facts of Swiss Bank v Lloyds Bank, although the observation made of the documents in that case by Lord Wilberforce at page 616, that they were "not easy to interpret", has a present resonance. 11 Before departing from Swiss Bank v Lloyds Bank, reference may usefully be made also to the judgment of the Court of Appeal, which was delivered by Buckley LJ. The House of Lords affirmed the decision of the Court of Appeal. In particular, there is nothing in the speech of Lord Wilberforce which calls into question some observations which were made by Buckley LJ in relation to identifying whether or not an equitable charge has been created. His Lordship observed at page 595 to 596: It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties' intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor. His Lordship continued: But notwithstanding that the matter depends on the intention of the parties, if upon the true construction of the relevant documents in light of any admissible evidence as to surrounding circumstances, the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over the property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequence of their acts. 12 In the course of submissions, I was taken two local cases, which serve helpfully to illustrate the task at hand and the subtleties which attend whether or not the parties have, by the language employed by them, created an equitable charge. 13 The earlier of these cases is Re Toocooya Investments Pty Ltd (1978) 3 ACLR 252 (Re Toocoooya Investments). In that case a company had, prior to being placed in liquidation, written to its solicitors who were then acting on the sale of some of its real estate in the following material way: You are hereby directed to account to the Bank of New South Wales Woollahra Branch with all settlement proceeds due to the company. This authority is given for valuable consideration received and is irrevocable and is not to be cancelled without the authority of the Bank of New South Wales in writing. That direction was given in 1975. The winding up of the company commenced in January 1977. Between 21 February 1977 and 4 March 1977, the bank received moneys pursuant to this direction. The question in the case was whether that payment was void pursuant to the then s 227 of the Companies Act 1961 (NSW)? In the result, Needham J held that the effect of the direction which I have recited was, having regard to the events which had happened, an equitable assignment such that the moneys comprising the proceeds received on settlement in respect of the real estate were the subject of an assignment and were not property of the company as at the commencement of its winding up. 14 In the course of reaching that conclusion, and by reference to a judgment of Dixon J, as he then was, in Comptroller of Stamps (Victoria) v Howard Smith (1936) 54 CLR 614 at 621, his Honour observed in Re Toocooya Investments at 253: The intention to be sought is one to divest the title of the property from the assignor and vest it in the assignee. No particular form of words is necessary. 15 His Honour further observed at 254 that: I do not think it matters that no specific sum is mentioned in the letter, nor that the amount due to the company at that date may have been unascertained. These features existed in one or more of the cases to which I have already referred and were not held to be a barrier to the conclusion reached that a valid equitable assignment had been created. 16 Later in time is Jackson v Richards [2005] NSWSC 630 (Jackson v Richards). The question in that case was whether, by their language, it should be concluded that the parties intended that if a particular property were to be sold, the defendant's share of the proceeds of sale were to be kept separate from his other assets and a particular sum in respect of costs then paid from that separate fund? Having referred to a passage from the judgment of Buckley LJ in Swiss Bank v Lloyds Bank, White J stated at paragraphs 19 to 20 the following: 19. For such a charge to be created by an agreement to pay a debt out of a fund to come to the debtor, the parties must have agreed that the debtor would keep the fund separate from his other assets. 20. There was no express agreement between the parties that if the Drummoyne property were sold the defendant would keep his share of the proceeds of sale in a separate account which would be applied to meet his debt for costs. If the parties intended, or assumed that the defendant could add his share of the proceeds of sale to his other assets by, for example, crediting them to his existing bank account, or that he could use them to reduce any overdraft to the bank, or to discharge other debts, any such intention or assumption would be inconsistent with the plaintiffs having a charge over the proceeds. Very slight differences of language could produce different legal outcomes. If the defendant said, "I will pay your costs out of the proceeds of sale", that might imply that the proceeds of sale would be kept separate and the debt would be paid from the separate fund. On the other hand, if the defendant said "I will pay your costs when I receive the proceeds of sale", no such implication could be drawn. [References to authorities are not reproduced, emphasis added] 17 In the words which I have emphasised in that quote from Jackson v Richards lie the essence of the competing submissions before me. Has there been, having regard to the documents employed by the parties in the circumstances of this particular case, in effect, a statement (adopting by analogy the language from White J's judgment in Jackson v Richards), "I will pay the loan debt out of the proceeds of settlement", or has there been instead, in substance, a statement made, "I will pay the loan debt when I receive the proceeds of settlement"? Against that background, I turn to the language employed by the parties in the present circumstances. 18 As I have already observed, the agreements are in a standard form. The nature of the loan is apparent from cl 2.1 of the special conditions. It is there provided that cl 2.1(1): For the purposes of this Special Condition 2, "Net Settlement Proceeds" means the net amount of Settlement Proceeds. This amount should be the full Settlement Proceeds less mandatory or statutory costs, reasonable legal fees, disbursement charges, levies and/or duties including but not limited to court fees and taxes. 19 Clause 2.1(2) then provides: Notwithstanding any other provision of this Credit Contract, save Special Condition 2.2, in the event that the Net Settlement proceeds to the Borrower as at the Repayment Date are less than the Loan as at the Repayment Date, then the amount of the Loan will be adjusted to be equal to the Net Settlement Proceeds. 20 In effect, the loan is a type of what is accurately described in the heading to cl 2 of the special conditions as a "Non-Recourse" loan. The loan was also governed by standard terms and conditions. Within the standard terms and conditions, the following are material: 2. Acknowledgement 2.1 The Borrower acknowledges and warrants that the Borrower: (1) has received a copy of this Credit Contract before making the offer to the Lender(s) contained in this Credit Contract; (2) is not aware of any right, interest or encumbrance which adversely affects the Irrevocable Instruction or the Borrower's capacity to assign the charge the Borrower's beneficial interest in the Settlement Proceeds; and (3) and the Lender(s) have no agreement, arrangement or understanding that repayment will only be demanded on the occurrence or non-occurrence of a particular event. 3. Repayment of Loan 3.1 The Borrower must repay the Loan together with Interest on or before the Repayment Date. 3.2 The Borrower may repay the Loan including Interest or any part of the Loan at any time. … 5. Irrevocable Instruction 5.1 The Borrower must deliver and maintain an Irrevocable Instruction directed to the Borrower's Solicitor until the Loan is repaid in full. 5.2 The Borrower must not change the Borrower's Solicitor without first obtaining the Lender(s)'s consent in writing to do so. … 7. Mortgage 7.1 In consideration of the Lender(s) accepting the Borrower's offer to borrow from the Lender(s) the Amount of Credit on the terms and conditions of this Credit Contract, the Borrower agrees to grant to the Lender(s) the Mortgage, namely the Irrevocable Instruction and any other mortgages referred to in the Financial Table. … 12. No charge over Settlement Proceeds 12.1 While any money is owing to the Lender(s) under this Credit Contract the Borrower must not assign or create a charge or similar right in favour of a third party over any Settlement Proceeds payable to the Borrower in connection with the Borrower's claims in the Matter without written consent of the Lender(s) which shall not be unreasonably withheld. 21 A number of terms in the extracted clauses are defined by cl 1.1 of the standard terms. In particular "Irrevocable Instruction" and "Mortgage" and "Settlement Proceeds", these terms are: "Irrevocable Instruction" means an irrevocable instruction (relating to, among other things, repayment of the Loan from the Settlement Proceeds) by the Borrower to the Borrower's Solicitor on terms satisfactory to the Lender(s) "Mortgage" means the mortgage(s) described in clause 7 "Settlement Proceeds" means money paid or payable to the Borrower pursuant to any Settlement of the Borrower's claims in the Mater including any legal fees of the Borrower but does not include any employee remuneration, employment benefits or benefits under a superannuation scheme 22 The Irrevocable Instruction provides: I/we ("Borrower") irrevocably instruct and direct the Borrower's Solicitor to do the following unless advised in writing by the Lender to the contrary: 1. … 2. To pay to Lender as soon as practicable after the Borrower's Solicitor receives the Settlement Proceeds the amount of the Loan being: the Amount of Credit or the Maximum Amount of Credit (then outstanding); plus a further sum (being interest, fees, charges and other monies owing) to be notified to the Borrower's Solicitor in writing by the Lender from time to time as a first priority (unless otherwise agreed by the Lender). 3. … 7. To hold the Settlement Proceeds (to the amount of the Loan) on trust for the Lender pending payment to the Lender (or other Lender's advice in writing). 23 Read in isolation, it might be thought that cl 2 of the irrevocable instruction is of the type in the second of the alternatives posited by White J in Jackson v Richards at [20]. It is necessary though to look at the whole of the loan documents employed by the parties, not merely in isolation to one part of the irrevocable instruction. Further, it is necessary so to do against the background in which that loan agreement came to be entered into. When one does that, the better view, in my opinion, is that, as between Mr Halsted and Ask Funding, there has been a deliberate intention manifested to isolate a discrete fund from which whatever may be the principal and interest then owing is to be repaid. 24 In other words, the receipt of the settlement proceeds is not merely a date by reference to which a sum then owed by Mr Halsted to Ask Funding is to be repaid. Rather, the settlement proceeds are, as a matter of intention between the parties, to be the sum from which that amount then owing is to be repaid. It is true that the words "assign" or "charge" do not themselves appear in the loan agreement, or for that matter in the irrevocable instruction. That in my opinion is nonetheless how the document is to be read. Mr Halsted and Ask Funding have gone to a great deal of trouble in the loan agreement to ensure that the integrity of the fund, so far as the claims of third parties may be concerned, is preserved. That is why there is a warranty given, and that is why further there is to be no charging in favour of a third party of the fund without the permission of Ask Funding. Those clauses, in my opinion, are pointers to an intention that there is to be a discrete fund from which the amount owed to Ask Funding is to be paid. 25 Another pointer is the use, inelegant though it may be, of the word "mortgage" in the standard terms. True it is that when one looks to the definition in the standard terms one is cast back to the irrevocable assignment and that the language of the irrevocable assignment read in isolation is infelicitous. Nonetheless, when the loan agreement is read as a whole an intention for there to be a separate fund from which the amount owed is to be repaid is clear enough. 26 What has occurred here, in my opinion, is that for valuable consideration, on two occasions Mr Halsted has agreed that a fund, namely the net proceeds of settlement, will be applied in a particular way. Further, in so doing, an obligation has been imposed in favour of Ask Funding to pay the loan debt out of that fund. To return to the language of the passage quoted from Palmer v Carey by Lord Wilberforce in Swiss Bank v Lloyds Bank, there is in the circumstances of this case, a direction which was given originally to Quinn and Scattini, and assumed by Slater and Gordon, to pay from the identified settlement proceeds the loan debt owed to Ask Funding. What the parties have created is a valid equitable charge upon that fund which operates as an equitable assignment of that fund to that extent. 27 It follows from this that Ask Funding is entitled to the following relief: (a) a declaration that it is entitled to be paid the sum of $77,259.62 out of the settlement proceeds held in the trust account of Taylor David Lawyers on behalf of Mr Halsted; and (b) an order requiring Mr Halsted to take all steps and sign all documents and authorities as may be necessary to effect the transfer of $77,259.62 from that trust account either to Ask Funding or its solicitors. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

Halsted (Bankrupt) v The Official Trustee in Bankruptcy, in the matter of Halsted

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