McManus RE Pty Ltd & Anor v Ward

• Australian Elizabethan Theatre Trust, Re (1991) 30 FCR 491 - Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 - EVTR, Re; Gilbert v Barber [1987] BCLC 646 - Henry v Hammond [1913] 2 KB 515 CASES CITED : - Masters v Cameron ((1954) 91 CLR 353 - Salvo v New Tel Ltd [2005] NSWCA 281 - Twinsectra Ltd v Yardley [2002] 2 AC 164 - Typhoon 8 Research Limited v Sea Power Resources International Limited [2002] HKCA 365 - Walker v Corboy (1990) 19 NSWLR 382

McManus RE Pty Ltd (First Plaintiff) PARTIES : Peter John McManus (Second Plaintiff) Mervyn John Ward (Defendant)

COUNSEL : J.L. Trew QC, A.E. Maroya (Plaintiffs) M. Orlov (Defendant)

1 The First Plaintiff ("MRE") sues the Defendant ("Mr Ward") for the repayment of $75,000 which MRE paid to Mr Ward as a holding deposit on account of a proposed sale by Mr Ward to MRE of an interest in a hotel. The sale did not proceed. MRE requested Mr Ward to repay the money. Mr Ward refused. 2 By a Summons filed on 15 May 2008 MRE and the controlling director, Mr Peter McManus, sought the following relief: "1. A declaration that the sum of $75,000 paid to [sic] by the Plaintiff to the Defendant on 20 July 2007 was held in trust by the Defendant for the Plaintiff to be used as part of the deposit on any contract that the plaintiff may make with the Defendant for the purchase of a half interest in the property known as The Royal Oak Hotel Cessnock or to be refunded to the Plaintiff in the event that no contract was made.

2. An Order that the Defendant pay the sum of $75,000 to the Plaintiff together with interest from 20 July 2007." 3 Shortly before the trial was due to commence, Mr Ward's counsel advised counsel for MRE that Mr Ward would consent to the entry of judgment against him in the sum of $75,000 plus interest, and would consent to an order that he pay the Plaintiffs' costs as assessed or agreed. Judgment in those terms, subject to a modification, is to be entered by consent at the conclusion of these reasons. 4 What remains in dispute is whether, in addition to entry of judgment in a specified sum, the Plaintiffs are entitled to a declaration in terms of paragraph 1 of the Summons. The reason that this additional relief is sought is that the Plaintiffs believe that Mr Ward is in financial difficulties and may soon become bankrupt or may enter into a composition with his creditors. If the judgment is merely for an unsecured debt, MRE may have to join the queue of Mr Ward's unsecured creditors and may receive only a dividend out of his bankrupt estate rather than payment in full. If payment in full of an unsecured debt is made before Mr Ward's affairs come to be administered in insolvency, and he becomes insolvent shortly afterwards, there is a distinct probability that MRE will have to repay the money as a preference. It is for this reason that the Plaintiffs seek a declaration that the sum of $75,000 was never beneficially the property of Mr Ward but was held on trust for one or both of them. 5 The trust alleged by the Plaintiffs is not an express trust. It is said to be in the nature of a resulting trust implied by law because the holding deposit was paid to Mr Ward to be applied only for a specified purpose - i.e. as part of the proceeds of sale if the transaction proceeded - and that purpose has failed. The Plaintiffs rely upon cases such as Barclays Bank Ltd v Quistclose Investments Limited [1970] AC 567. 6 The point of principle raised does not seem to have been decided in any case which counsel has been able to find. The point may be of some wider significance because it is not unusual that a contract for sale of land will provide that the deposit paid on exchange will be immediately accountable to the vendor. In the absence of further express contractual provision, does the vendor hold the deposit on an implied trust for the purchaser until the sale is completed?

7 There is no dispute about the facts. Mr McManus' uncontested evidence is as follows. He and Mr Ward had been friends for some time. On 9 July 2007, they met for lunch to discuss the potential sale by Mr Ward to Mr McManus of a half-interest in a hotel owned by Mr Ward. Mr Ward said that the purchase price would be $1.6M. The conversation continued thus: "During the same meeting I [Mr McManus] asked [Mr Ward] 'Can I have access to the Hotel's books and records and also a copy of the valuation to which you have referred?' and [Mr Ward] said:- 'I am not going to give you this personal information. You pay me a holding deposit and then I will show you the books. I will give you my accountant's details and you can get the accounts direct from him. His name is Derek Eube.'

I said: 'How much deposit do you want?' He said: '$75,000.00.'

I said: 'I will do this as soon as possible and I will deposit it directly into your bank account. I will pay it as a sign of good faith.' He said: 'I will get you details of my bank account.'

I said: 'If it's not going ahead I will want my deposit back.' He said: 'Fine.'" 8 On 11 July 2007 Mr Ward's solicitor sent to Mr McManus' solicitor a draft contract for sale. It provided for a purchase price of $1.6M and a deposit of $160,000 which, by Special Condition 16, was to be released to Mr Ward upon exchange. There is no evidence that this condition was ever discussed between the parties, either before or after the draft contract was sent. Although the Plaintiffs see Special Condition 16 as having some bearing on the issue, I cannot. 9 On 20 July 2007, Mr Ward advised Mr McManus of the details of his bank account into which the sum of $75,000 was to be paid. An exchange of facsimiles on 20 July 2007 shows that on that day $75,000 was paid from the account of MRE into a bank account in the name of Mr Ward. The name of Mr Ward's bank account does not indicate that it is a trust account or a special purpose account. 10 Thereafter, information concerning the business of the hotel was provided to Mr McManus by Mr Ward and his accountant. No contract for sale was ever exchanged between the parties and no additional sum by way of deposit was paid to Mr Ward. 11 On 2 April 2008, Mr McManus formally advised Mr Ward that he did not wish to proceed with the transaction and requested repayment of the holding deposit. Shortly afterwards these proceedings were commenced. 12 It is clear from the evidence that at the time that the holding deposit was paid, there had been no discussion between the parties which could support a finding that they had an actual common intention that the holding deposit would be held on trust by Mr Ward pending a decision by Mr McManus as to whether he would proceed with the purchase. All that had been expressly agreed was that Mr Ward would repay the money if the transaction did not proceed. 13 There is no direct evidence as to whether Mr Ward's bank account into which the holding deposit was paid was a trust account or a special purpose account established to facilitate this particular transaction or, on the other hand, whether it was an existing account established by Mr Ward for his own benefit and for his general purposes. However, there are a number of circumstances from which an inference can be drawn. 14 First, there was never discussion between the parties that the holding deposit would be paid into a separate or special bank account. Second, Mr Ward said at the meeting of 9 July, "I will get you details of my bank account" , which suggests strongly that the account to which he was referring was already in existence. Third, the particulars of the bank account do not suggest in themselves any special purpose. Fourth, the money was paid into the bank account within a relatively short time after the discussion between the parties which suggests that Mr Ward did not need to set about opening a new account. Fifth, one would have thought that if the bank account was, in fact, specially opened to receive the holding deposit or used for no other purpose than the subject transaction, bank records subpoenaed by the Plaintiffs would have demonstrated that fact. None have been tendered. 15 For these reasons, I conclude that the holding deposit was paid into an account beneficially owned by Mr Ward and used for his general purposes.

16 Mr Trew QC, who appears for the Plaintiffs with Mr Maroya of counsel, submits that the common intention of the parties was that the holding deposit was to be used exclusively for a stated purpose, namely, to be applied towards the purchase price if the sale proceeded, and to be repaid to MRE if it did not. Thus, he says, Mr Ward was not free to use the money for any purpose he chose and the law will in such a case imply a trust. Mr Trew relies heavily on the following passage from the judgment of Lord Millett in Twinsectra Ltd v Yardley [2002] 2 AC 164, at 185. "[74] The question in every case is whether the parties intended the money to be at the free disposal of the recipient (see Re Goldcorp Exchange Ltd (in receivership) [1994] 2 All ER 806 at 823, [1995] 1 AC 74 at 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:

'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.' (See [1968] 3 All ER 651 at 654, [1970] AC 567 at 580.)

In the Quistclose case a public quoted company in financial difficulties had declared a final dividend. Failure to pay the dividend, which had been approved by the shareholders, would cause a loss of confidence and almost certainly drive the company into liquidation. Accordingly the company arranged to borrow a sum of money 'on condition that it is used to pay the forthcoming dividend'. The money was paid into a special account at the company's bank, with which the company had an overdraft. The bank confirmed that the money would only be used for the purpose of paying the dividend due on 24 July 1964. The House held that the circumstances were sufficient to create a trust of which the bank had notice, and that when the company went into liquidation without having paid the dividend the money was repayable to the lender." 17 In my view, the passage from Twinsectra upon which Mr Trew relies must be understood in its factual context, which is very different from the factual context of the present case. In Twinsectra , a lender was prepared to advance money upon the security of a mortgage to be provided by the borrower over property to be purchased by the borrower. A solicitor received the loan monies into his trust account pending acquisition of the property and settlement of the sale and mortgage. The solicitor paid the money to the borrower before settlement of the purchase and mortgage and the money was lost. It was clear that the solicitor had received the money from the lender as a trustee. The issue was whether, pending completion of the purchase and mortgage, he was trustee for the lender or for the borrower. The solicitor submitted that he was trustee for the borrower. The lender, relying on Quistclose , submitted that the solicitor was trustee for it. 18 Lord Millet referred to the nature of a Quistclose trust in the paragraph immediately preceding that relied upon by Mr Trew. The whole passage should be quoted. "[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 (see Re Goldcorp Exchange Ltd (in receivership) [1994] 2 All ER 806, at 823, [1995] 1 AC 74 at 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 …" 19 It is particularly significant that his Lordship says, in paragraph [73], that: "… 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." 20 No case has been found by Mr Trew in which part payment by a purchaser directly to a vendor on account of the purchase price, whether for land or goods, has been held to give rise to an implied or resulting trust (as distinct from an express trust created by agreement) if the sale does not proceed to completion. 21 Mr Trew relied on a number of authorities by way of analogy. The first was Masters v Cameron ((1954) 91 CLR 353 esp. at 364), but that case has to be understood in the context that the deposit for sale was held by an agent as stakeholder, clearly on a trust, and the question was: on trust for whom? The general position of a stakeholder is as stated by Handley JA in Salvo v New Tel Ltd [2005] NSWCA 281, at [79] thus: "A deposit under a contract of sale held by a stakeholder abides the outcome of the contract. If completion occurs it becomes the property of the vendor as part of the purchase price. If completion does not occur for reasons other than the default of the purchaser it is refunded to the purchaser."

It is implicit in Masters v Cameron and in the observations of Handley JA in Salvo that the stakeholder is a trustee pending completion of the sale, and the identity of the beneficiary depends upon whether or not the sale is completed. In Salvo , the deposit was found to be held on trust by the vendor only because the parties had expressly so agreed. 22 In all of the other cases relied upon by Mr Trew the funds in question were held either by an agent or a stakeholder to be applied for a particular purpose benefiting someone else or were held upon the terms of an express or implicit trust requiring repayment to the payer if the specific purpose failed: see, for example, Salvo (supra); Typhoon 8 Research Limited v Sea Power Resources International Limited [2002] HKCA 365, and Re EVTR; Gilbert v Barber [1987] BCLC 646. For example, the fund in Typhoon 8 was a security deposit under a lease and it was clear from the terms of the lease that the deposit was to be held by or on account of the lessor on trust for the lessee during the currency of the lease subject to deduction by the lessor to meet defaults of the lessee under the lease. 23 In Quistclose , the lender had paid the money to the credit of the borrower's bank account, so that although, in a sense, it was paid to a third party, the money was paid to the borrower itself. However, the critical fact was that the money was paid, not into the borrower's general account with the bank, which was in overdraft, but rather into an account especially established to pay a dividend to the borrower's shareholders. By reason of that fact, the Court could deduce a common intention that the borrower was to hold the money on trust until it was applied for the specified purpose.

24 In my view, the question in this case is to be determined, not by reference to supposedly similar or analogous factual situations in other reported cases, but by examining the particular facts in order to ascertain whether it can be deduced that the common intention of the parties was that the proposed vendor, Mr Ward, should not be free to use the holding deposit for his own purposes pending completion of the sale transaction but, rather, should account for it as trust monies if the transaction failed. 25 In cases where no express or clearly implicit intention to create a trust is shown, such as where the parties give no actual thought to the matter, whether or not there was an intention that the subject monies be kept separate from the other general monies of the recipient is often decisive of the question whether the recipient is a trustee or merely a debtor: see, for example Henry v Hammond [1913] 2 KB 515, at 531; Walker v Corboy (1990) 19 NSWLR 382, at 397 to 398; Salvo (supra) at [38]; Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491, at 505 to 506. If the borrower in Quistclose had not set up a special and separate account to receive the loan moneys in order to pay a dividend, and if the lender had paid the moneys into the borrower's overdraft account, it would have been impossible, on the other facts of the case, to deduce a common intention that the moneys were to be held on trust until the purpose of the loan was achieved. 26 In the present case, as I have noted, the evidence leads me to conclude that the holding deposit was paid into a bank account which was already in existence, and used by Mr Ward for his general purposes. 27 Accordingly, the evidence amounts to this: Mr McManus agreed to pay Mr Ward a holding deposit of $75,000 as a token of good faith. He agreed to the suggestion that the money be paid into Mr Ward's bank account. There was no express or implicit suggestion that the account was other than Mr Ward's existing bank account used for his own general purposes. Mr Ward agreed to repay $75,000 to Mr McManus if the transaction did not proceed. 28 In those circumstances, I am unable to find that the holding deposit was held upon any kind of trust by Mr Ward. Mr Ward's obligation to repay the money was merely as a debtor. For those reasons, I decline to make the declaration sought in the Summons. - oOo -

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