V R Dye & Co (a firm) v Peninsula Hotels Pty Ltd

V R Dye & Co (a firm) v Peninsula Hotels Pty Ltd - [1999] VSCA 60 - VSCA 1999 case summary — Zoe

[26]

This confusing evidence pointed to a difficulty which arose out of the absence of any detailed evidence as to the nature of Mr Dye's accounting practices and the "trust account" which he had chosen to open. There was a tendency in the course of argument below, as it seems there has been in other cases regarding accountants, to assume that the same regime applies to accountants which applies to solicitors in relation to their trust accounts, assuming for the present that those regimes are uniform across Australia which is by no means clear. However, it was agreed between the parties that there were no statutory controls over accountants and their trust accounts as there are with legal practitioners in this State. It also seems to be accepted that there were rules of conduct which the Institute of Chartered Accountants had promulgated for its members. At the end of argument pages from a handbook were handed up setting out the rules applicable to members of both the Institute of Chartered Accountants and the Australian Society of Accountants which it seems were "ethical" rules which members choose to abide by, but that document only came into operation on 1 April 1998. Subsequently counsel forwarded to the Court the rules of ethical conduct applicable to members of the Institute which it seems had been in operation from at least December 1995. It appears from rules 24 and following of those rules that members of the Institute were required to have their trust accounts audited. The rules otherwise imposed requirements not dissimilar, but not identical, to the later rules and to those applicable to solicitors under the Legal Practice Act 1996. Any member who held trust moneys was obliged under rule 7 to "establish and maintain a general trust account for client moneys". "Client moneys" were defined to mean any moneys of other persons coming into members' hands or control in the course of that member's practice but did not include, among other moneys, "fees paid in advance". The expression "trust account" was also defined to mean an account established by a member for clients "if kept for the sole purpose of receiving and holding deposits of client moneys and the withdrawal of client moneys from the account". Rule 11 prohibited a member from paying into a trust account any moneys other than client moneys received, but from that there was an exception under rule 12 "where part or all of the moneys received is attributable to professional costs ... and other proper outlays already incurred or disbursed". So rule 17 prohibited a member from withdrawing moneys from a trust account except for the purpose of making a payment to the client, making a payment authorised by law and "making a payment to the member for professional costs, reimbursement for disbursements paid ... and other proper outlays which payment shall be supported by authorisation in writing by the client for or on whose behalf the moneys received are held". It should be emphasised that none of these matters were put directly or indirectly to the appellant so that, in the end, it was left to inference as to whether the appellant was seeking to abide by the rules to which I have just referred or whether he had tried to set up some separate trust account for the purpose of the transaction here in issue.

[43]

For present purposes it is not necessary to set out the provisions which exempt persons receiving payments and the like by reason of their taking in good faith and for valuable consideration appearing in s.588FG. It should be noted, however, that s.588FA now contains in sub-s.(3) what appears to be a codification of the implied exception as to running accounts read into the earlier legislation and examined in such detail, albeit after the earlier provisions had been replaced, in Airservices and (at least to a degree) in Sheahan v. Carrier Air Conditioning Pty. Ltd. (1997) 189 C.L.R. 407. These exercises, which might otherwise seem exercises in futility while the companies legislation continues to undergo constant and piecemeal revamping, would appear to have continuing application, though cf. per Toohey, J. in Airservices at 526. Fortunately, it appears that the presently relevant provisions are intended to have no different effect, other than in minor respects, from those which made preferences voidable when the Companies Act of this State was no more than 253 pages long. That recent amendments were intended to have such a limited effect may be seen from the Explanatory Memorandum published for the Corporate Law Reform Bill 1992, especially paras.1033-1042, from Report No. 45 of the Law Reform Commission: "General Insolvency Inquiry" vol. 1 paras.629-638, and from the relatively few reported cases which have dealt with s.588FA: see, e.g., Re Emanuel (No. 14) Pty. Ltd. (in liquidation); Macks v. Blacklaw and Shadforth Pty. Ltd. (1997) 147 A.L.R. 281 esp. at 283 and Re Lanpac International Pty. Ltd. (In Liq): Jonas v. Automation House Pty. Ltd. [1998] VSC 9. Moreover what might appear to have effected an alteration to the law, this is, the provision now found in s.s.(3) of s.588FA is said in the Explanatory Memorandum (at para.1042) to be "aimed at embodying in legislation the principles reflected" in cases such as Queensland Bacon Pty. Ltd. v. Rees [1966] HCA 21; (1967) 115 C.L.R. 266. In substance that sub-section says that where "a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) ... and the company's net indebtedness is increased and reduced from time to time, as a result of a series of transactions", then s.s.(1) of s.588FA "applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction". Indeed, again for present purposes, only the newly introduced definition of "transaction" seems to have produced any effective change: Re Emanuel at 283.

[66]

In the present case the same process of interpretation and reasoning should be adopted so as to enable the Court to look at the totality of the dealings whereby the company engaged the appellant and agreed to pay for its services. That is not to say that the contract of engagement is the transaction or part of the transaction to be set aside, for even under the new definition what may be avoided under s.588FE is the disposition or other alteration to the assets of the company in favour of the preferred creditor, inasmuch as each disposition or transaction depletes or may deplete the total fund which would otherwise be available for distribution among the creditors. The new sections are in that sense consistent with the earlier provisions about which it was said that they were intended to make void every "change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst the creditors": see Burns v. Stapleton at 104. That is not say, however, that in order to ascertain the true nature of the disposition or other transaction one cannot look at the agreement or arrangement which led to that disposition or transaction. Clearly that must be so as the whole history of the law relating to "running accounts" over the years has demonstrated. Likewise with a payment resulting from a c.o.d. transaction, it is only possible to see that there is no real preference by knowing that there was an agreement which resulted in the transfer of goods or services to the company which took place at the same time. That the latter kind of dealing does not come within the unfair preference provisions was recently reiterated in the unreported judgment by Chernov, J. in Re Lanpac International [1998] VSC 9, which was not examined in detail in the course of argument but is merely an exemplification of a well-understood principle, as discussed in paras.40-44 of his Honour's judgment. As Chernov, J. expressed it (at para.42), a c.o.d. transaction does not usually create a preference as "the parties to them usually do not deal with each other as debtor and creditor". The critical words in s.588FA(1)(b) are those which qualify the nature of the receipt from the company as being "in respect of an unsecured debt that the company owes to the creditor ...".

[70]

Be that as it may, the effective transaction in this case had begun a fortnight earlier on about 19 June 1996 when the cheque for $8,500 was paid over to the appellant. The relevant "transaction" consisted of both that payment and the later drawing down of $4,154.90 in favour of the appellant, and, if it were relevant, the other later payments out which exhausted the original $8,500, albeit that some of those payments were not as originally contemplated. Looked at in that way there was a payment made in advance for the provision of services by the appellant which was effectuated only in part by the drawing down on 2 July. At the time the first stage of the transaction took place the appellant was not a creditor of the company: it was in exactly the same position as a person receiving a prepayment or obtaining payment in a c.o.d. transaction. The only difference was that effectuating the payment in this case was, for convenience, split into a number of stages. Each stage was essential to the whole of the transaction but neither should be looked at on its own. The objective purpose of the transaction which commenced with the payment of the cheque for $8,500 was to induce the appellant to provide services to be carried out in the future and, as the appellant was not then a creditor of the company, the ultimate effect of both that payment and the later drawing down was not to give a preference of the kind proscribed by s.588FA. The transaction was for present purposes the two-stage payment for those services, the price for which was not suggested to be in excess of their agreed value. The company obtained the benefit of those services in return for the "transaction" so agreed upon on 19 June. Having regard to "its actual business character" the final drawing down of $4,154.90 must be seen as "part of an entire transaction" which when carried out to its intended conclusion left the creditor without any preference priority or advantage over other creditors, to adapt the language used by the majority in Airservices (at 502).

[71]

The respondents, for their part, have contended, as they successfully did before both magistrate and judge, that this analysis of the dealings between the parties overlooks the fact that the original payment was paid into a trust account and therefore remained in the beneficial ownership of the company until the drawing down took place. So it was said that no part of the sum passed from the company until the appellant drew down the sum for its fees on 2 July 1996. To my way of thinking that overlooks the true nature of the transaction here agreed upon. The argument makes certain assumptions about the nature of the trust account in question, as to which no evidence was called on either side. It likewise would appear to make the assumption that the trust account in question was similar in nature to those opened by solicitors pursuant to their obligations under the Legal Practice Act. The rules of ethical conduct which might appear to apply to the appellant as a chartered accountant do not, however, have the sanction of law, at least so far as it was argued before this Court, and so they are to be applied as a matter of common sense in order to give assurance to their clients. If, however, a client agrees to a different mode of dealing with the money placed in a trust account, there is no bar to that agreement being effectuated. This was not a case where the moneys came into the appellant's trust account by chance, nor was it a case where the use of moneys in that trust account was left entirely to implication. It may be that these fees should not have been put with other client moneys in an ordinary trust account, though in fact a separate account was opened, and it may be that otherwise moneys should not be disbursed from a trust account except by authorisation in writing from the client company. But that was not what here occurred. The parties specifically contemplated that fees should be paid into a trust account and likewise contemplated that they would be drawn down without any further authorisation from the company. It was not alleged that what was done was in breach of trust: indeed, if it had been, the claim would not have been for a preference but for repayment of moneys taken in breach of trust. But in any event it is not what ought to have occurred which is relevant but what in fact occurred. The point was made by the Full Court in Re A. and J. Lazzarotto when in discussing Richardson (at p.7):

[78]

There are, however, compelling reasons in the present case why Higgins should not be treated as relevantly authoritative for deciding the present case. What there occurred was that a firm of solicitors had acted over the years for a company close to liquidation and also for one of its directors. One director had been charged with an offence which made it not inappropriate that the company should indemnify him in relation to his legal costs. The firm had told the director that it "required to be put in funds sufficient to recover the expected costs" and the director told the firm that the company would provide those funds. The firm seemed to have had no other direct dealings with the company on this issue, but the board of the company then resolved that it would pay $10,000 to the firm "for legal costs". No payment was then made but the resolution was made known to the firm. The director was then told by the firm that the trial costs would be greater and that it had to be put in funds to the extent of $15,000. Before the company had made any payment the director took possession of $15,000 of weekend takings of the company and handed it to a partner of the firm on 14 November 1983. The money was then placed in the firm's trust account. The trial took place that very day and two days later the director was acquitted. The following day the company's shareholders resolved that the director's payment to the solicitors should be ratified reciting, in terms of minutes drawn up by the partner of the firm, that the $15,000 had been paid into the trust account "on account of these costs". About a fortnight later, on 29 November 1983, a statement of account was prepared showing that some $14,172 had been incurred as relevant costs and disbursements in acting for the director (curiously from a date some nine months earlier) and it also gave credit in an equal amount which was there described as having been "transferred from Trust". (The balance of the $15,000 was admittedly paid in respect of earlier services and thus conceded to have been a preference.) Either on that day or some time later $14,172 was transferred to the appellant's Trust account to its general account.

[88]

One may fairly assume that the members of the Federal Court, who included at least two who had practised within the Territory, would have been familiar with the local requirements as to disbursement of trust moneys by solicitors, which were not otherwise set out in the judgment. It seems from the reasoning at 417 that those conditions had been satisfied by about 29 November 1983 but the conclusion there reached by the Court was that there was no right to the fees before that process had been exhausted and so it seems there could have been no agreement to pay those fees unless and until the conditions had been satisfied. With respect, I am by no means sure that that conclusion follows, for it is one thing to say that "the relationship of debtor and creditor necessarily arose on the completion by the appellants of their part of the bargain", but it is another thing to say that an agreement could not have been reached in advance for effectuating the payment of those fees by a transaction which involved two steps or stages. However, Higgins stands only for the conclusions reached in the peculiar circumstances of that case. The facts may seem similar but the way in which they came to pass was very different. There seems to have been no explicit agreement between the appellant firm and the company as to the way in which it was to be paid for services relating to the director's trial and, inasmuch as the board had a limited understanding as to the appellants' requirements, they were never carried out and were left to the director to put in train in what was clearly then an unauthorised manner. The retrospective ratification of the $15,000 payment cannot result in there being inferred some arrangement of the type here reached with the present appellant. Moreover, and more importantly, Higgins Case involved no analysis of the statutory provisions relating to voidable preferences, except by implication, and the real issue was the nature of the relationship between the parties, especially that which arose out of the trust there under consideration with the incidents which the Court there held to apply to the payment in issue.

At a glance

Court

Decision date

Before

Source

Judgment (93 paragraphs)