Bankruptcy - Bankruptcy notice - defect in statement of sum due - extension of time within which to dispute validity - deposit on sale of property pursuant to mortgage held by creditor - whether deposit money should be credited against judgment debt.

Bankruptcy Act 1966 s. 41(5)

Sale of Land Act 1962 (Vic) ss. 24-28

re Wilhelmsen; ex parte Gould and ors 66 ALR 189

re Clubb; ex parte Westpac Banking Corporation 93 ALR 123

re Taylor and ors; ex parte Taylor v Bill Acceptance Corporation Ltd 8 FCR 568

Adams v Bank of New South Wales (1984) 1 NSWLR 285

Ellis v Goulton (1893) 1 QB 350

Solicitors for the : Freehill Hollingdale and Page

The time within which Giovanni Tenuta and Dominic Tenuta may give notice to the petitioning creditor that they dispute the validity of bankruptcy notice 1766/1991 be and is hereby extended to and including 12 November 1991.

Bankruptcy notice 1766/1991 is not invalid by reason that the sum specified therein as the amount due to the creditor does not make allowance for the sum of $49,500 paid as deposit upon the sale of the property at 226 Woodland Street Essendon.

The hearing of the petition herein be adjourned to Wednesday, 4 December 1991.

The petitioner's costs of the proceedings in relation to the dispute as to the validity of bankruptcy notice 1766/1991 be taxed and paid by the debtors.

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

The facts relevant to this matter are not in issue and can be conveniently summarised thus:

1. On 8 February 1991 the petitioning creditor (the Bank) obtained

final judgment against the debtors in the Supreme Court of

Victoria for the sum of $1,613,508.68 (the judgment debt).

2. On 15 June 1991 in exercise of its power of sale as mortgagee of a

property at 226 Woodland Street, Essendon (the property), then

registered in the name of Dominic Tenuta, the Bank sold the

property at public auction for $495,000.

3. The purchasers of the property paid a deposit of $49,500 (the

deposit money) by cheque, which was deposited to the credit of the

bank account of the selling agent on 17 June 1991.

4. The deposit cheque was duly presented for payment and paid on 18

5. On 19 June 1991 Bankruptcy Notice 1766/1991 was issued by the

registry of the Bankruptcy District of the State of Victoria. It

was addressed to the debtors and demanded payment (or the

securing) of the sum of $1,603,508.68 (being the amount of the

judgment debt) within 14 days of its service.

6. No allowance was made in the bankruptcy notice for the deposit money.

7. On 20 June 1991 the selling agent paid the deposit money to the

8. The bankruptcy notice was served on each debtor on 22 June 1991.

9. On 5 July 1991 solicitors acting for Pina Tenuta gave notice to

the Bank's solicitors that she disputed the validity of the

bankruptcy notice on the ground that the sum specified in the

notice as the amount due to the Bank exceeded the amount in fact due.

10. Bankruptcy Petition VP 790 of 1991 (the petition) addressed to the

debtors was presented to the Federal Court of Australia, Victoria

District Registry, by the Bank on 29 August 1991. The act of

bankruptcy relied upon in the petition was the alleged failure of

the debtors to comply with the bankruptcy notice. The petition

alleges a continuing liability for the sum specified in the

bankruptcy notice and no allowance is made for the deposit money.

11. The petition was served on each debtor on 7 September 1991.

12. On 7 October 1991 upon the return of the petition, notice of

opposition was filed in Court on behalf of each debtor. The

grounds of opposition stated in the notice were:

i) that the bankruptcy notice incorrectly stated the amount due

to the Bank; and

ii) that personal service of the bankruptcy notice was not

effected on Giovanni Tenuta and Dominic Tenuta.

(The second ground has subsequently been abandoned.)

13. On 7 October 1991 the hearing of the petition was adjourned to 13

November 1991 and directions were given as to the filing and

service of affidavits relating to the notice of opposition. On 13

November 1991 the petition was further adjourned to 20 November 1991.

14. On 12 November 1991 solicitors acting for Giovanni Tenuta and

Dominic Tenuta gave notice that they disputed the validity of the

bankruptcy notice and indicated that an application would be made

to the Court for an extension of time.

15. By affidavits filed on 20 November 1991 the Bank's representatives

deposed to a continuing debt of $1,133,991.61 being the amount of

the judgment debt less the sum of $479,517.07 being the proceeds

of the sale of the property.

2. In the context of the facts recited, two questions fall for determination. First, whether the bankruptcy notice overstated the amount of the debt due by the debtors as at the date of issue of the notice, and second whether Giovanni Tenuta and Dominic Tenuta should be granted an extension of time to permit them to give notice out of time pursuant to section 41(5) of the Bankruptcy Act disputing the validity of the bankruptcy notice.

3. Although counsel for the parties regarded the second issue as not arising unless the first is decided in favour of Pina Tenuta, this is not necessarily so, and at my invitation, counsel argued the issue.

4. Section 41(5) of the Bankruptcy Act provides:

41(5) A bankruptcy notice is not invalidated by reason only

that the sum specified in the notice as the amount due to

the creditor exceeds the amount in fact due, unless the

debtor, within the time allowed for payment, gives notice to

the creditor that he disputes the validity of the notice on

the ground of the mis-statement.

5. Counsel for the debtors referred me to two authorities indicating that the Court had power to extend the time for giving notice pursuant to subsection 41(5) and counsel for the Bank conceded, in my view quite properly, that the power exists. (See re Wilhelmsen; ex parte Gould and others 66 ALR 189; re Clubb; ex parte Westpac Banking Corporation 93 ALR 123.)

6. In my view, as a matter of equity and commonsense an appropriate extension of time should be granted. Until the issue in relation to service of the bankruptcy notice was resolved (albeit by abandonment) it was not unreasonable that the two male debtors should not raise the question of validity as the time for doing so ran for a period of 14 days after service. However, the issue was raised by Pina Tenuta within time and has since remained unresolved. For practical purposes unless Pina Tenuta abandoned her contest to the validity of the bankruptcy notice, the question had to be decided before the petition could proceed. In any event, the notice of objection filed in Court on 7 October 1991 clearly raised the issue on behalf of all 3 debtors.

7. Whatever the outcome of the primary question before me, it cannot be said that the Bank or anyone else for that matter, has been prejudiced by the failure of Giovanni Tenuta and Dominic Tenuta to dispute the validity of the bankruptcy notice within the time specified.

8. I turn now to consider the validity of the bankruptcy notice. The debtors rely heavily, indeed entirely, upon the decision in re Taylor and others; ex parte Taylor v Bill Acceptance Corporation Ltd 8 FCR 568 and the authorities referred to therein. As counsel for the Bank sought to distinguish re Taylor on a number of grounds it is necessary to look to the facts of the case and the ratio of the decision.

9. The short facts of re Taylor as set out in the head note were as follows: The respondent exercising its power of sale under a mortgage entered into a contract for the sale of a hotel property. The balance of the proceeds of sale was paid to the respondent's solicitor in September 1984 under a settlement procedure whereby the money was to be held by the vendor's solicitor on trust pending the transfer of the liquor licence, which did not occur till December 1984. The respondent issued a bankruptcy notice in November 1984 which did not credit the amount paid to the solicitor's trust account. The applicants sought to set aside the bankruptcy notice.

10. At pp 569-70 of the report Spender J referred in detail to the sale of the hotel property and the contract entered into in relation to it. Central to the whole transaction was clause 37.1 of the contract which provided:

Completion of this Agreement shall take place on the date before the

date specified as the date for the hearing of the Application (as

hereinafter defined) in sub-clause 37.2 (or such other date as the

parties may agree) and upon completion the Purchaser will pay to the

Vendor's solicitors the balance of the purchase money payable

hereunder to be held by them in trust pending the Licence being

transferred to the Purchaser or its nominee pursuant to the

provisions of sub-clause 37.2 and the Vendor will hand over to the

Purchaser's solicitors all documents which should be handed over to

effect the completion of this Agreement which shall be held by them

in escrow pending the Licence being transferred to the Purchaser or

its nominee pursuant to the provisions of sub-clause 37.2

Immediately upon the Application being granted, the Vendor's

solicitors shall be entitled to account for the moneys held by them

pursuant to the provisions hereof.

11. ("The application" was defined in clause 37.2 as the application for transfer of the licence to the purchaser.)

12. Spender J's analysis of the contract provisions, expressed at p 570, was:

It is clear that the settlement procedure is intended to

take account of the licensing procedures in New South Wales,

that is, that the money is paid and the purchaser takes

possession on the transfer documents being handed over and

the next day machinery is set in train to obtain Licensing

Commission approval.

13. Later, at the same page, after identifying the major issue for determination as the time at which credit should be given for the sum paid to the mortgagee's solicitor's trust account he said:

The question then is one that falls to be decided on the

construction of the contract, the relevant provisions of

which I have set out above.

14. His Honour then proceeded to refer to a number of authorities including Adams v Bank of New South Wales (1984) 1 NSWLR 285 (from which he quoted a portion of the judgment of Moffitt P at p 291), and at p 571 expressed his assessment of the case before him thus:

In this case, the proper construction of the contract, in my view,

leads one to the conclusion that the moneys held in the vendor's

solicitor's trust account are held beneficially for the vendor even

though it, the vendor, was under a contractual obligation to dispose

of moneys in a certain way on the happening or non-happening of

defined events. There is nothing in this case to suggest that, using

the words of Adams case (supra), the solicitor has assumed or has had

imposed upon him some obligation as to the money held by him. He

holds that money as agent for his client, BAC.

In my view the only sensible interpretation of that clause and the

interpretation that must have been intended by the parties when they

used the term "completion" in cl 37.1, was that the vendor had a

right to the money, albeit a conditional right on 25 September 1984,

the fulfilment of the condition being outside the control of the

parties. As between vendor and purchaser all had been done that

could be done and, pending the decision on the application, it is a

binding agreement from which neither party can resile. As was held

in Smallman v Smallman (1971) 3 All ER 717, where an agreement was

reached in contemplation of divorce proceedings and was expressed to

be "subject to the approval in due course of the court", the parties

here are agreed on all essential matters; further in pursuance of the

agreement, possession, documents and, not least of all, money has

changed hands.

15. The decision in re Taylor is not authority for the bald proposition that money, being the proceeds of a sale of property, held in the trust account of the vendor's solicitor is in all cases held beneficially for the vendor. That was the result in the facts of the particular case, but it is a result which was arrived at upon the construction of the terms of the contract.

16. In the instant case, the general conditions of the contract provide in clause 5:

5. All moneys may be paid to the Vendor, his solicitor,

or at his solicitor's direction, save that the deposit

may be paid to the Vendor's agent.

8. Deposit

(1) The deposit shall be paid to the Vendor's Solicitors

as stakeholder. The parties hereto hereby authorise

the Vendor's Solicitors to invest the deposit in the

name of the Vendor's Solicitors with ANZ Bank at its

branch at 140 William Street, Melbourne on fixed

deposit for 7 days and then 24 hour call. The

interest to accrue on such deposit shall belong to the

Vendor unless the Purchaser shall be entitled to a

refund of the deposit, in which case the interest

shall belong to the Purchaser.

(2) For the purposes of paragraph (1) of this Special

Condition the expression "interest" shall be deemed to

mean the difference between all interest payable in

respect of the investment referred to in paragraph (1)

of this Special Condition and all stamp and other

duties payable in respect of such investment.

(3) The Vendor and the Purchaser agree that they shall

each give such directions and do all such things as

may be necessary to give effect to the provisions of

this special condition.

(4) The party entitled to the deposit on the completion or

termination of this Contract (whichever in fact

occurs) shall accept the interest actually earned on

the deposit in full satisfaction of its entitlement

thereto and shall make no claim whatsoever against the

Vendor's Solicitors arising from or related to

investment of the deposit pursuant to this clause.

17. At the time the bankruptcy notice was issued the deposit money was held to the credit of the selling agent's bank account and was transferred to the Bank's solicitors' trust account on the following day. Whilst it may be open to argue that on a proper construction of the contract the provisions of special clause 8 do not apply whilst the deposit is held by the vendor's agent, the provisions of the Sale of Land Act 1962 (Vic) leave no room for doubt as to the capacity in which the agent held the deposit from the time of its receipt until it was paid to the Bank's solicitor.

18. The statutory regime is established in Division 3 of Part II of the Sale of Land Act, and the relevant provisions for present purposes are as follows:

24. (1) Any deposit moneys received by a solicitor or

estate agent in the course of a transaction for the sale of

land shall be held by that solicitor or estate agent as a

stakeholder until -

(a) in the case of a cash transaction, the purchaser

becomes entitled to a transfer or conveyance of

the land; or

(b) in the case of a terms contract, the purchaser

becomes entitled to possession or to the receipt

of rents and profits -

at which time the deposit moneys may be paid to the vendor

in his own right or as the vendor directs.

(1A) Nothing in this section shall operate to prevent

the transfer of deposit moneys -

(a) from a solicitor acting for the vendor to

another solicitor acting for the vendor in

relation to the sale;

(b) from an estate agent to an estate agent acting

for the vendor in relation to the sale;

(c) from an estate agent acting for the vendor to a

solicitor acting for the vendor in relation to

the sale; or

(d) from a vendor to an estate agent or solicitor

acting for the vendor -

and any deposit moneys so transferred shall continue to be

held by the person to whom they are transferred as

stakeholder pursuant to the provisions of this Division.

(2) Where deposit moneys are received and held by a

solicitor as stakeholder pursuant to sub-section (1) they

shall be paid into a trust account established by that

solicitor pursuant to section 40(1)(a) of the Legal

Profession Practice Act 1958.

25. (1) Any deposit moneys received by a vendor in the

course of a transaction for the sale of land other than

deposit moneys released pursuant to section 27 shall be paid

within seven days after their receipt by the vendor -

(a) to an estate agent or solicitor acting for the

vendor; or

(b) into a special purpose banking account in a bank

in Victoria to be nominated by the vendor in the

joint names of the purchaser and the vendor.

.....

26. (1) Notwithstanding sections 24 and 25, where in a

transaction for the sale of land -

(a) the vendor rescinds the contract as the result

of a default by the purchaser, the vendor shall

be immediately entitled to be paid the deposit

moneys in his own right; or

(b) the purchaser rescinds the contract as the

result of a default by the vendor, the purchaser

shall be entitled to the immediate return of the

deposit moneys.

(2) Nothing in sub-section (1) shall limit or affect the

power of the court -

(a) to order the repayment of the deposit moneys

(whether that order is made pursuant to section

49(2) of the Property Law Act 1958 or

otherwise); or

(b) to relieve a purchaser against forfeiture of the

deposit.

27. (1) Where a solicitor or estate agent is holding

deposit moneys as a stakeholder under section 24, the

purchaser may by authorization in writing empower the

solicitor or estate agent (as the case may be) to release

those deposit moneys to the vendor in his own right or as

the vendor directs.

(2) Sub-section (1) shall only operate -

(a) where the contract is not subject to any

condition enuring for the benefit of the

purchaser; and

(b) where the purchaser has accepted title or may be

deemed to have accepted title.

.....

28. (1) Where any contract for the sale of land contains

provisions in contravention of this Division -

(a) those provisions shall be void and of no effect;

.....

19. The statute does not specifically define the term "stakeholder' nor were any submissions made as to its meaning. Accordingly I take it that the term is used in the Sale of Land Act in the normal sense of a person who has received money for the express purpose of holding it until it has been ascertained who is entitled to it.

20. Section 24 of the Sale of Land Act reverses the rule that the payment of a deposit to a vendor's solicitor on a sale by auction is equivalent to payment to the vendor. In Ellis v Goulton (1893) 1 QB 350, at p 352-3 Bowen L.J. said:

When a deposit is paid by a purchaser under a contract for

the sale of land, the person who makes the payment may enter

into an agreement with the vendor that the money shall be

held by the recipient as agent for both vendor and

purchaser. If this is done, the person who receives it

becomes a stakeholder, liable, in certain events, to return

the money to the person who paid it. In the absence of such

agreement, the money is paid to a person who has not the

character of stakeholder; and it follows that, when the

money reaches his hands, it is the same thing so far as the

person who pays it is concerned as if it had reached the

hands of the principal.

21. Clearly, in view of the provisions of s.24 it is no longer necessary in Victoria to make provision in a contract for the sale of land as to the capacity in which the vendor's agent is to hold the deposit money.

22. It is common cause that at the date of issue of the bankruptcy notice the deposit money was held by the vendor's agent in the course of a transaction for the sale of land and that (it being a cash transaction) at that time the purchaser had not then become entitled to a transfer or conveyance of the land, an event which, in terms of the contract, would occur upon payment in full of the purchase price at settlement. It necessarily follows as a matter of law that at the time the bankruptcy notice was issued, the deposit money was not held by the selling agent as agent for the Bank but as stakeholder, and that accordingly there was no occasion for the amount of the judgment debt as stated in the bankruptcy notice to be reduced by the amount of the deposit. The facts of the present case and the legal framework in which they arise are fundamentally different from those in re Taylor, and that decision is of no assistance in resolving the issue presently before the Court.

23. The bankruptcy notice is not invalid upon the grounds alleged by the debtors.