Re Fay Therese Wright A Bankrupt, and David Lewis Clout v Reginald Laurence Cruise and Christopher Charles Hagan [1984] FCA 38; 1 FCR 51 Bankruptcy (2 March 1984)

FEDERAL COURT OF AUSTRALIA

Re: FAY THERESE WRIGHT A bankrupt, and DAVID LEWIS CLOUT
And: REGINALD LAURENCE CRUISE and CHRISTOPHER CHARLES HAGAN
No. W312 of [1984] FCA 38; 1983
1 FCR 51
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
IN THE STATE OF NEW SOUTH WALES
THE AUSTRALIAN CAPITAL TERRITORY BANKRUPTCY DISTRICT
GENERAL DIVISION
Beaumont J.(1)

CATCHWORDS

Bankruptcy - Relation back - Claim by solicitor for petitioning creditor to lien over funds paid by judgment debtor. Bankruptcy Act, 1966

Bankruptcy - Administration - Property available for payment of debts - Relation back of trustee's title - Solicitor's lien over moneys paid in satisfaction of judgment debt - Claim of solicitor no greater than that of client - Prior knowledge of act of bankruptcy - Bankruptcy Act 1966 (Cth). The solicitor, then acting for the petitioning creditor, obtained payment in full of the judgment debt on the day his employee, unaware of that payment, obtained a sequestration order. The trustee of the bankrupt estate sought payment of the moneys and the solicitor claimed a lien in respect of costs and expenses, incurred on behalf of the petitioning creditor.

Held, that even if a lien could be established, it would bind only to the extent of the client's interest in the property and since the payment was liable to be set aside as within the relation back period or as a preference having regard to the state of knowledge of the petitioning creditor and the solicitor the solicitor could not sustain a claim to a lien.

Re Mosely; Ex parte Official Receiver (1953) 16 ABC 195, followed.

HEARING

1984, February, 28; March 2. 2:3:1984
APPLICATION.

The trustee of a bankrupt estate sought a declaration as to his entitlement to moneys held by a solicitor who claimed a lien in respect of costs and expenses.

J. F. Boultbee, for the applicant.

J. Faulkes, for the first respondent.

French, for the second respondent.
Cur. adv. vult.

Solicitors for the applicant: H. N. Chippindale & Co.

Solicitors for the first respondent: B. J. R. Fudge.

Solicitors for the second respondent: Hagan & Co.
B. A. GRAY.

ORDER

1. Declare that the second respondent has no lien over the sum of $6,282.73 the subject of this application.

2. Order that the second respondent pay the said sum to the applicant as trustee of the bankrupt estate of Fay Therese Wright.

Declaration accordingly with costs.

DECISION

This is an application made by the trustee of the bankrupt estate of Fay Therese Wright for a declaration that the sum of $6,282.73 held by the second respondent on behalf of the first respondent is the property of the applicant as such trustee. Consequential relief is also sought. The first respondent was the petitioning creditor on whose petition the estate of the bankrupt was sequestrated. The second respondent was then the solicitor for the first respondent.

In May 1982, the first respondent obtained judgment against the bankrupt in the District Court in the sum of $6,000 for moneys lent. In October 1982, the first respondent served upon the bankrupt a bankruptcy notice based on the District Court judgment. The bankrupt did not comply with the notice with the consequence that she committed an act of bankruptcy on 9 November, 1982. On 24 November, 1982, the first respondent presented a bankruptcy petition against the bankrupt, claiming to be a creditor in the sum of $6,000. The petition was returnable on 7 March, 1983 and on that date, the bankrupt appeared in person, applied for and was granted an adjournment of the petition until 18 April, 1983 on the ground that she was solvent and intended to pay the debt owed to the first respondent.

On 18 April, 1983, the bankrupt again appeared in person and informed the Court that she wished to deliver to the first respondent a bank cheque in the sum of $6,000 which she then held. However, a question arose as to the entitlement of the first respondent to be paid interest on the judgment. After hearing submissions from the parties, the Court adjourned the proceedings to 22 April, 1983.

In the afternoon of 22 April, 1983, a sequestration order was made against the estate of the bankrupt. However, it seems that, during that morning, the second respondent, the solicitor then acting for the first respondent, received in the mail from the bankrupt and banked to the credit of his trust account, bank cheques in the total sum of $6,282.73 (including interest on the said sum of $6,000). It would appear that, unfortunately, the solicitor employed by the second respondent having the conduct of the bankruptcy proceedings was unaware of the receipt of the bank cheques when he sought a sequestration order later that day.

The bankrupt has not sought to have her bankruptcy annulled, although her statement of affairs discloses a surplus of assets over liabilities in the order of $54,000.

In these proceedings, the applicant now seeks recovery of the sum of $6,282.73. The second respondent resists the relief sought and asserts a lien over the funds in question in respect of professional costs and disbursements said to be owing to him by the first respondent in respect of services rendered in certain other matters.

In support of his claim, the applicant submits that, by virtue of the provisions of s.116(1)(a) of the Bankruptcy Act, 1966, ("the Act") the funds in question are part of the property divisible among the creditors of the bankrupt which vests in him pursuant to s.58(1)(a) of the Act. He contends that the payment of $6,282.73 by the bankrupt to the second respondent as agent and trustee for the first respondent was a transaction which occurred within the relation back period (s.115); and that, by reason of the respondents' knowledge of the matter and the time when the payment occurred, the protective provisions of s.123 are not available here. He then submits that the claim to a lien now propounded by the second respondent cannot prevail against the applicant since the second respondent can obtain no better title to the fund in question than his client, the first respondent.

In my opinion, even if the second respondent were authorised to receive payment of the judgment debt on behalf of the first respondent (see Halsbury's Laws of England, 4th Ed. Vol.44 at pp.86-7), the payment is liable to be set aside and the funds representing the payment recovered as a transaction occurring within the relation back period (see Ponsford, Baker & Co. v. Union of London & Smith's Bank, Limited (1906) 2 Ch. 444 at pp.452-4). Given the confusion which occurred on 22 April, 1983 and, in particular, the ignorance of the solicitor having conduct of the matter of the fact that the cheques had been received from the debtor, it may well be that, even apart from questions peculiar to bankruptcy, such as relation back (s.115) or avoidance of preferences (s.122), the bankrupt may have been entitled to recover the moneys at law in a claim in quasi-contract for moneys paid on a total failure of consideration (see Stumore v. Campbell (1892) 1 Q.B. 314 at p.315) or, alternatively, in a proprietary claim in equity as moneys paid for a specific purpose which has failed (see Barclays Bank Ltd. v. Quistclose Investments Ltd. (1970) A.C. 567 at pp.580-2). But it is unnecessary to resolve these last questions since, on any view of the operation of either s.115 or s.122, the applicant, as trustee of the bankrupt's estate, is, in my opinion, subject to any lien which the second respondent may be able to sustain, entitled to recover the amount in question from that respondent.

It is well established that the "retaining" lien of a solicitor extends only to property delivered to him in his professional character. Thus, he has no lien on papers which he receives as mortgagee or trustee, although a solicitor trustee has a lien on the trust estate for all costs to which he is properly entitled as solicitor to the trust (see Cordery on Solicitors, 7th Ed. (1981) at pp.274-5; Halsbury, op. cit. at p.171; Sykes, Law of Securities, 3rd Ed. at p.561). Where money is paid to a solicitor for a particular purpose so that the solicitor becomes a trustee of that money, the solicitor's lien will not attach to the money unless it is allowed to remain in the solicitor's hands for general purposes with the client's express or implied consent after the particular purpose has been fulfilled or has failed (see Alessio v. Daniels - Kaye, J. Supreme Court of Victoria, unreported, 19 October, 1983 at pp.5-8). Thus, in such cases, a threshold question, essentially one of fact, arises as to whether the moneys were paid to the solicitor for a specially designated purpose on the one hand or were merely paid to him "in the ordinary course of his business as solicitor for the client" on the other (see Loescher v. Dean (1950) 1 Ch. 491 at p.495).

But, in any event, even if a lien could be established, it would be binding only to the extent of the client's interest in the property and third parties would not be bound by the lien, save to the extent to which the client might have rights against them (see Sykes, op. cit.; Re Mosely; Ex parte Official Receiver (1953) 16 A.B.C. 195 at p.199): the solicitor can have no better right than the client (see Halsbury, op. cit. at p.173). Given the liability of the payment to be set aside as within the relation back period or as a preference having regard to the state of knowledge of both respondents, it must follow, in my opinion, that the second respondent can sustain no lien over the funds in question for that reason alone (see Mosely, supra, at pp.199-200). In these circumstances, it is not necessary to determine the question of fact previously adverted to as to the basis upon which the funds were paid to the second respondent.

In the result, I propose to order that the second respondent pay the amount in issue to the applicant as trustee of the bankrupt's estate. I propose to make no order as to the costs of the proceedings.

I should add that, although a submission on the point was put, I express no view whatever on the question whether the bankruptcy should be annulled in the absence of any application in that behalf.

I make the following orders:

1. Declare that the second respondent has no lien over the sum of $6,282.73 the subject of this application.

2. Order that the second respondent pay the said sum to the applicant as trustee of the bankrupt estate of Fay Therese Wright.