Sutherland v Hanna

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5506/03 RODERICK MACKAY SUTHERLAND AS TRUSTEE OF THE BANKRUPT ESTATE OF JOHN HANNA AKA JOHN MHANNA v JOHN HANNA AKA MHANNA & ANOR (N0 2) JUDGMENT

1 While an undischarged bankrupt, John Hanna exchanged contracts for the purchase of four blocks of land in the name John Mhanna. I found that Eman Kamel Shonoda, his wife, had no equitable interests in the properties. I concluded that the properties were vested in Roderick Mackay Sutherland as trustee of the bankrupt estate of Mr Hanna as after-acquired property divisible amongst Mr Hanna's creditors in terms of the Bankruptcy Act 1966 (Cth), s 58 and that Mr Sutherland was entitled to be registered as the proprietor of the properties. These matters are canvassed in my reasons for judgment of 30 September 2004. 2 The contracts for the purchase of the West Pennant Hills properties were exchanged on 29 November 2000. The contracts for the Kellyville Properties were exchanged on 19 December 2000. Mr Hanna was discharged from his bankruptcy on 8 July 2001. 3 Mr Hanna and Mrs Shonoda claim that one or other or both of them made payments in respect of the properties under mortgages and in discharge of rates, taxes, insurance premiums and other outgoings after the date of Mr Hanna's discharge from bankruptcy. They submit that I should order that the properties stand charged with the amount of those payments. Alternatively, they submit that I should order that the value of the interests that vested in Mr Sutherland be ascertained and, upon payment of that value together with interest, Mr Sutherland should be ordered to transfer the properties to Mr Hanna. Mr Sutherland submits that Mr Hanna and Mrs Shonoda are not entitled to recompense for any gratuitous payments made by them in the absence of unconscionability on the part of Mr Sutherland or an estoppel against him, neither of which issues were raised during the hearing and it is too late to reopen the hearing to determine these issues. 4 The problem arises because of the relatively short period between the vesting of the interests in Mr Sutherland and Mr Hanna's discharge from bankruptcy and the relatively long period between that date and the determination that Mr Sutherland was entitled to become the registered proprietor of the properties. Counsel were unable to point to any decision directly on point. 5 The after-acquired property of Mr Hanna that vested in Mr Sutherland upon its acquisition in terms of the Bankruptcy Act 1966 (Cth), s 58(1)(b) was that acquired by Mr Hanna up until the date of his discharge from bankruptcy. It could not be the case that property acquired by him after discharge vested in Mr Sutherland for the benefit of the creditors of his bankrupt estate. But that does not resolve the issues. While any payments made after 8 July 2001 did not enliven s 58(1)(b), they are to be considered in terms of voluntary payments made to preserve or benefit the property of another. 6 The general principle is that such payments do not give rise to a right of repayment. In Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234 at 248, Bowen LJ said: "The general principle is, beyond all question, that work and labour done or money expanded by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will." 7 In Hill v Ziymack (1908) 7 CLR 352 at 364 Griffith CJ, with whom the other members of the Court agreed, applied the principle to deny a lien over property to a person who voluntarily paid off a mortgage over that property that belonged to another under a mistake of fact that was not caused or contributed to by the mortgagor. 8 Reference was made to Ex parte James. In re Condon (1974) LR 9 Ch App 609 in which a creditor obtained execution against a debtor before his bankruptcy but paid the amount in question to the trustee in the mistaken belief that the trustee was legally entitled to the funds. The trustee was ordered to repay the moneys. Sir Williams James, LJ said at 614: "With regard to the other point, that the money was voluntarily paid to the trustee under a mistake of law, and not of fact, I think that the principle that money paid under a mistake of law cannot be recovered must not be pressed too far, and there are several cases in which the Court of Chancery has held itself not bound strictly by it. I am of opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in his hands money which in equity belongs to someone else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of bankruptcy ought to be as honest as other people." 9 That decision was followed in In re Clark (a Bankrupt) (1974) 1 WLR 559 on the basis that, in ignorance of the bankruptcy, the respondent had benefited the estate and it was manifestly unfair that it should be ordered to repay two cheques paid by the bankrupt during that period of ignorance. 10 In neither case was relief granted merely because the recipient of the benefit was a trustee in bankruptcy. In each case the trustee was unjustly enriched. 11 In Australia, the rigour of the basic principle is ameliorated where it would be unconscionable not to do so. In Morris v Morris (1982) 1 NSWLR 61 the plaintiff spent money on the defendants' property in the expectation, induced or encouraged by the defendants, that he would be able to live there indefinitely as a member of their family. McLelland J concluded that it would be unconscionable and inequitable that the defendants retain the benefit of the expenditure. His Honour imposed an equitable charge in the amount of the expenditure plus interest. He observed that in an appropriate circumstance the remedy might well be the imposition of a constructive trust. 12 Such was the remedy imposed in Muschinski v Dodds (1984-1985) 160 CLR 583. At 621 Deane J said that in assessing whether and to what extent the assertion or retention of legal entitlement would constitute unconscionable conduct, one was not left at large to indulge random notions of what was fair and just as a matter of abstract morality: "Notions of what is fair and just are relevant but only in the confined context of determining whether conduct should, by reference to legitimate processes of legal reasoning, be characterised as unconscionable for the purpose of a specific principle of equity whose rationale and operation is to prevent wrongful and undue advantage being taken by one party of a benefit derived at the expense of the other party…" 13 In O'Brien v Sheahan [2002] FCA 1292 the trustee in bankruptcy stood by for over four years before seeking vacant possession of the matrimonial home of the bankrupts. In that time they continued to make mortgage payments and carried out improvements to the property. In those circumstances, Carr J concluded that it would be unconscionable to allow the trustee to exercise those rights and he determined that the trustee was estopped from doing so. 14 A constructive trust in favour of Mrs Shonoda was claimed at hearing based upon her contribution to the discharge of the mortgages. The present issue was not raised. 15 The evidence that was before the Court did not suggest that Mr Sutherland caused or encouraged the continued payments. He was not aware of Mr Hanna's use of the name Mhanna until well after Mr Hanna's discharge from bankruptcy. He wrote on 11 July 2003 and it was only in response to that letter, on the evidence before me, that reference was made to the Kellyville properties and the West Pennant Hills properties. 16 Nor was evidence adduced of the augmentation in value of the properties resulting from the payments so as to ground an argument that on an objective valuation of the benefit conferred by Mr Hanna and Mrs Shonoda it would be unconscionable for Mr Sutherland not to have to pay for it. 17 Evidence of these matters would need to be adduced if a ground for imposing a constructive trust with respect to the post bankruptcy payments were to be established. There is insufficient evidence before me to justify the imposition of a constructive trust.

18 Reference was made to my decision in Stoklasa v Stoklasa [2004] NSWSC 518 in which I imposed an equitable charge in an amount to be determined by a Master. But the unconscionability was established by the evidence in that case. It is not established in this. I decline to make either order sought on behalf of Mr Hanna and Mrs Shonoda.

Last Modified: 10/26/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.