Re Boni John Veli Ex Parte: AE Developments Pty Ltd v David Henry Scott As Trustee of Boni John Veli and Sandra Veli [1988] FCA 37 (25 February 1988)

FEDERAL COURT OF AUSTRALIA

Re: BONI JOHN VELI
Ex parte: A.E. DEVELOPMENTS PTY. LTD.
And: DAVID HENRY SCOTT AS TRUSTEE FOR BONI JOHN VELI AND SANDRA VELI
No. 576 of 1985
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Ryan J.(1)

CATCHWORDS

Bankruptcy - money advanced to bankrupt for specific purpose - nature of relationship between person advancing money and bankrupt - whether property divisible amongst creditors or property held in trust for another - title and liability of trustee in bankruptcy - circumstances where knowledge of trustee in bankruptcy of specific purpose with which money is impressed is relevant - result where primary trust fails - Bankruptcy Act 1966; ss. 58, 116 - Kieran v Johnson [1815] EngR 1132; (1815) 1 Stark 109; 171 ER 417 explained.

Bankruptcy Act 1966, ss. 58, 116

HEARING

MELBOURNE
25:2:1988

ORDER

As between the applicant, A.E. Developments Pty. Ltd. and the Trustee, David H. Scott, the sum of $20,000 paid on 19 May 1987 to the credit of the account of Boni John Veli at the Bentleigh branch of the National Australia Bank is not property divisible amongst the creditors of the bankrupt.

So much of the sum as is now in the hands of the said Trustee be paid to the said applicant.

Note: Settlement and entry of orders is dealt with by Bankruptcy Rule 124.

DECISION

By its application dated 3 July 1987, A.E. Developments Pty. Ltd. ("the applicant") seeks declarations and consequential orders in respect of a sum of $20,000, most of which is now held by Mr. David Scott, ("the Trustee"), as trustee of the bankrupt estates of Mr. and Mrs. Boni Veli, who both became bankrupt on 20 August 1985.

2. On 14 May 1987 the applicant drew a cheque in favour of Mr. Veli for $20,000. Mr. Veli caused the proceeds of that cheque to be collected and credited to an account standing in his name at the Bentleigh branch of the National Australia Bank Ltd ("the National Bank").

3. Early in June 1987 the Trustee demanded that the National Bank account to him for the proceeds of the cheque, contending that it formed part of a bankrupt's estate. Mr. Dunn, the Senior Manager, Legal Services, of the National Bank, thereupon advised the applicant's solicitor that he proposed to comply with the Trustee's request unless restrained by a court order by 4.00p.m. on 17 June. That advice was confirmed as follows by letter dated 15 June 1987:-

"The Trustee has advised that no satisfactory

evidence has been submitted to him to show that
the funds in the bankrupt's account are held on
behalf of some other person. He has again
requested payment of the balance of the account
to him.

We confirm our verbal advice of 12/6/87 that we
will accede to his request if we are not
restrained by 4.00p.m. on 17/6/87."

In the afternoon of 17 June, the applicant unsuccessfully attempted to obtain such an order from this Court.

4. The present application is said to be made pursuant to s.178 Bankruptcy Act 1966 (Cth.) ("the Act") which provides:-

"If the bankrupt, a creditor or any other
person is affected by any act, omission, or
decision of the trustee, he may apply to the
Court; and the Court may make such orders in the
matter as it thinks just and equitable."

5. The particular relief sought is specified in the application as follows:-

"1. A declaration that the sum of $20,000.00
being the proceeds of cheque numbered 590995
drawn by the applicant on the A.N.Z. Banking
Group Ltd. paid by the debtor into Account
Number 029505379 at the Bentleigh Branch of
the National Australia Bank Ltd. was and is
not of the nature after-acquired property
which was acquired by or devolved on the
Debtor, or property that was or is available
for distribution amongst his creditors, or
property which has vested in David Henry
Scott as Trustee of the Bankrupt Estate of
the Debtor pursuant to the provisions of the
Bankruptcy Act 1966 (as amended).

2. An order that the said sum of $20,000.00, or
such other sum as was paid by the National
Australia Bank Ltd. to the respondent
pursuant to his direction, be paid to the
applicant.

3. A declaration that the proceeds of the said
cheque for $20,000.00 was held upon trust for
the applicant by the debtor and further or in
the alternative was and is the property of
the applicant."

6. The trustee, in opposing that application, contends that the money represents "after acquired property of the bankrupt" and was vested in him in his official capacity pursuant to s.58(1)(b) of the Act as soon as it was acquired by Mr. Veli. By notice, dated 28 July 1987, of his intention to oppose the application, he relies on the following grounds (as far as they were relevant at the time of the hearing):-

"1. The applicant has not proved that the
proceeds of its cheque No. 590995 credited to
the bank account of the firstnamed bankrupt
No. 029595379 at the Bentleigh Branch of the
National Australia Bank Limited represent
"property held by the bankrupt in trust for
another person" within the meaning of
paragraph 116 (2) (a) of the Bankruptcy Act
1966.

2. The proceeds of the said cheque have vested
in the respondent as after-acquired property
of the firstnamed bankrupt; but the
respondent concedes that the said proceeds
may be held by him "subject to the equities"
of others, including the applicant.

3. The respondent has had no opportunity to
investigate what "equities" might affect the
said proceeds and, in particular, has not
yet:-

(a) ......

(b) been able to hold examinations pursuant
to Section 81 of the Bankruptcy Act 1966
of relevant officers of the National
Australia Bank Limited who dealt with
the male bankrupt's said bank account
and accepted the applicant's said
cheque; and

(c) determined whether to adopt or disclaim
the interest of the bankrupts as lessees
under the lease agreement dated 30 May
1984 between them and Morlend Finance
Corporation (Vic) Pty. Ltd. (a copy of
which is exhibit "MVG1" to the affidavit
of Mark Victor Gandur sworn 20 July 1987
and filed herein on behalf of the
applicant)."

As shall become apparent, Mr. Veli, in evidence given at the hearing of this application, supported the contentions of the applicant.

7. In order to evaluate the competing claims to the proceeds of the cheque, it is necessary to describe in some detail the circumstances in which it was given to Mr. Veli and paid to the credit of his account at the National Bank.

8. Until about April 1987, Mr. and Mrs. Veli conducted a road transport business in which they used two "Kenworth" prime movers, each the subject of a lease granted by Morlend Finance Corporation (Vic.) Pty. Ltd. ("Morlend Finance"). Performance of the lessees' convenants under those leases was secured by mortgages over two properties in Elsternwick, one of which was granted by Mr. Veli's parents to secure a personal guarantee which they had given to Morlend Finance. Apparently the property the subject of the other mortgage had earlier been sold by Mr. and Mrs. Veli and the proceeds had been applied to eliminate the arrears of rent due in respect of one of the prime movers, registered number IT 7888. As a result of that arrangement no further payments were due in respect of that vehicle until the last quarter of 1988 when the sum of $100,000, presumably representing its residual value, will become payable. However, by about April 1987 arrears of rent due to Morlend Finance in respect of the other prime mover, registered number IT 1068, amounted to approximately $37,000.

9. In early April 1987, Mr. Veli approached Mr. Peter Agushi, the managing director of the applicant, whom he had known for some 15 years. He proposed that the applicant should take an assignment from himself and his wife of the leases of the prime movers by paying the arrears, and should employ himself and other drivers to operate them. Mr. Veli further suggested that once the vehicles had been put in working order considerable profits could be made. He also discussed the possibility of the applicant acting as a sub-contractor to Better Interstate Transport Services Pty. Ltd. ("B.T.S."), of which a Mr. John Spadaro was the managing director. Mr. Spadaro is apparently related to Mr Veli. Mr. Veli then detailed the routes along which the trucks would operate, weekly operating and insurance expenses and estimated weekly profits. Mr. Agushi, after expressing his interest in the proposal, directed Mr. Veli to ascertain the amount required to pay the arrears due to Morlend Finance, the payments which would fall due in the future and the terms upon which Morlend Finance would consent to any assignment of the leases.

10. Mr. Veli then arranged a meeting on 29 April 1987 between himself, Mr. Agushi and one Mark Gandur, the manager of Morlend Finance. At that meeting, Mr. Gandur indicated that his company had no objection to the proposed assignment provided that Mr. Agushi or the applicant paid the arrears due under the lease together with any outstanding repair costs. (Although there were no longer any arrears of rent due in respect of the prime mover IT 7888, it seems that Morlend Finance had repossessed both vehicles, of which one was stored in a yard at Thornbury and the other was held at the Wagga Wagga premises of Waugh & Josephson Ltd. in exercise of a repairer's lien.)

11. In the following two weeks, Mr. Agushi decided that the proposed transport business should be conducted by Seventh Aries Pty. Ltd., a company which he controlled and of which he was also the managing director. He agreed with Mr. Veli's suggestion that refrigerated vans be leased from B.T.S. for use with the prime movers which should be moved to the premises of B.T.S. to be put into working order. Apparently Morlend Finance intimated that it would release the prime movers to allow the latter step to be taken provided that Mr. Spadaro undertook in writing not to allow the prime movers to be removed from the premises of B.T.S. before all arrears of rent due to Morlend Finance had been paid.

12. After receiving advice on 14 May 1987 from a Mr. Sabri, the accountant to the applicant, that an amount of $60,000 invested by it in a short-term interest bearing loan would not become available for investment in the proposed transport business until 20 May, Mr. Agushi obtained an overdraft facility for the applicant to an amount of $20,000. On the same day, 14 May, the applicant drew a cheque for that sum payable to Mr. Veli. That cheque was given to Mr. Veli with instructions to convert it into cash or a bank cheque and pay the whole amount of $20,000 to Morlend Finance. Mr. Agushi gave evidence, which I accept, that he believed that the payment of $20,000 in reduction of the arrears of rent due from Mr. and Mrs. Veli might induce Morlend Finance to release the prime movers for work to be done on them at the premises of B.T.S. before a deed of assignment of the Velis' leasehold interest had been executed and the arrears of rent had been paid in full.

13. Notwithstanding Mr. Agushi's instructions, Mr. Veli did not bank the applicant's cheque as soon as he might have. Instead, he travelled to Wagga Wagga to inspect the prime mover retained there by Waugh & Josephson Ltd. after first attending at the office of Morlend Finance and showing the cheque to Mr. Gandur. Mr. Veli then told Mr. Gandur, in effect, that Morlend Finance would receive the $20,000 if it agreed to release the prime movers into the possession of B.T.S. Mr. Gandur's response was non-committal. It is likely that Mr. Veli was concerned to protect the applicant's interests to some extent by deferring any payment to Morlend Finance until after he had satisfied himself that Waugh & Josephson Ltd. had properly carried out the repairs which it had been commissioned to effect. In any event, the weekend intervened and the cheque was not presented to the National Bank by Mr. Veli until 19 May.

14. When he deposited the cheque with the National Bank, Mr. Veli attempted to stipulate that he did so on condition that the whole of the proceeds be made available to him in cash or by way of a bank cheque. However, the bank officer to whom he spoke indicated that the National Bank would notify him later that day of its attitude to that request.

15. Mr Veli's account at the National Bank, to the credit of which the proceeds from the applicant's cheque were to be paid, was overdrawn by $1,063.08 but the manager of the Bentleigh branch of the Bank, apparently after some communication from the Trustee, refused to allow Mr. Veli to withdraw any amount at all from that account after the applicant's cheque had been cleared. Subsequently, the National Bank notified the applicant's solicitor to the effect which I have already indicated, and the present proceedings were instituted on 17 June 1987. On the following day Mr. Veli's account at the Bentleigh branch of the National Bank was debited by an amount of $18,870.65, presumably as a result of a payment to the Trustee, and the account was reduced to a nil balance.

16. It has been contended on behalf of the applicant that the proceeds from the applicant's cheque for $20,000 were impressed with a trust and so were not property divisible among the creditors of the male bankrupt as after-acquired property within s.116(1) of the Act, and had not vested in the trustee by virtue of s.58(1)(b) of the Act. Rather, it was argued, the proceeds from the applicant's cheque came within the first of the exceptions in s.116(2)(a) as "property held by the bankrupt on trust for another person".

17. Particular reliance was placed by Mr. Macaw on behalf of the applicant on the decision of the House of Lords in Barclays Bank Ltd. v. Quistclose Investments Ltd. (1970) AC 567. In that case a company, Rolls Razor Ltd., which was in financial difficulties, obtained a loan of 209,719 8s. 6d. from the respondent to meet payment of an ordinary share dividend. The loan was made on the agreed condition that it be used to pay the dividend. The respondent's cheque was paid into an account opened specially for the purpose with the appellant bank. Before the dividend had been paid, the borrower went into liquidation. The respondent thereupon brought action against the borrower and the appellant bank to recover the amount of the cheque. It was held by the House of Lords, dismissing the bank's appeal, that the arrangement for the payment of the dividend gave rise to a relationship of a fiduciary character or trust, in favour, as a primary trust of the persons entitled to the dividend, and secondarily, if the primary trust failed, of the respondent which advanced the money. Lord Wilberforce, with whose opinion the other members of the House agreed, rejected an agrument that because the transaction involved a loan from the respondent to Rolls Razor Ltd. giving rise to a legal action of debt, the implication of any trust, enforceable in equity in the respondent's favour was excluded. His Lordship observed, at 581:-

"My Lords, I must say that I find this argument
unattractive. Let us see what it involves. It
means that the law does not permit an arrangement
to be made by which one person agrees to advance
money to another, on terms that the money is to
be used exclusively to pay debts of the latter,
and if, and so far as not so used, rather than
becoming a general asset of the latter available
to his creditors at large, is to be returned to
the lender. The lender is obliged, in such a
case, because he is a lender, to accept, whatever
the mutual wishes of lender and borrower may be,
that the money he was willing to make available
for one purpose only shall be freely available
for others of the borrower's creditors for whom
he has not the slightest desire to provide.

I should be surprised if an argument of this kind
- so conceptualist in character - had ever been
accepted. In truth it has plainly been rejected
by the eminent judges who from 1819 onwards have
permitted arrangements of this type to be
enforced, and have approved them as being for the
benefit of creditors and all concerned. There
is surely no difficulty in recognising the
co-existence in one transaction of legal and
equitable rights and remedies: when the money is
advanced, the lender acquires an equitable right
to see that is is applied for the primary
designated purpose (see In re Rogers, 8 Morr 243
where both Lindley L.J. and Kay L.J. recognised
this): when the purpose has been carried out
(i.e., the debt paid) the lender has his remedy
against the borrower in debt: if the primary
purpose cannot be carried out, the question
arises if a secondary purpose (i.e., repayment to
the lender) has been agreed, expressly or by
implication: if it has, the remedies of equity
may be invoked to give effect to it, if it has
not (and the money is intended to fall within the
general fund of the debtor's assets) then there
is the appropriate remedy for recovery of a loan.
I can appreciate no reason why the flexible
interplay of law and equity cannot let in these
practical arrangements, and other variations if
desired: it would be to the discredit of both
systems if they could not. In the present case
the intention to create a secondary trust for the
benefit of the lender, to arise if the primary
trust, to pay the dividend, could not be carried
out, is clear and I can find no reason why the
law should not give effect to it."

18. In my opinion the present case is even stronger than Barclays Bank Ltd. v. Quistclose Investments Ltd. (supra) because there was no loan of the $20,000 by the applicant to Mr. Veli. He was merely the conduit through which the money was to pass from the applicant to Morlend Finance, presumably because Mr. Agushi believed that it was only in that way that arrears of rent due under the leases could be reduced before the leases had been formally assigned to the applicant or Seventh Aries Pty. Ltd. Mr. Veli accordingly stood in a fiduciary relationship to the applicant which is entitled to follow the money in his hands and through him into the hands of the Trustee.

19. The present case is analogous, in my view, to Re Watson; Ex parte Schipper (1912) 107 LT Rep 783 where money was advanced to a bankrupt who gave a receipt for it as on account of his shares of the prospective takings from a theatrical performance. The money was then paid to the sheriff to secure the release of certain costumes to be used in the performance which had been seized in execution of a judgment debt under the mistake that they were the property of the bankrupt. A majority of the Court of Appeal held that the official receiver was not entitled to the money in the hands of the sheriff. Hamilton L.J., observed at 784:-

"Whatever else the parties by this transaction
meant they did not mean that the money found by
Messrs Broadhead should be money divisible among
the bankrupt's creditors, nor did anybody think
that the money was going to the bankrupt. It
was provided for one purpose only, and care was
taken that it should be applied to that purpose
and no other, and I can attach no meaning to the
principle in Re Rogers 8 Mor. 243 and Re Drucker
(1902) 2 KB 55, 237 that would not cover this
case, and I can see nothing in the facts of this
case to distinguish it."

20. I was referred by Mr. Bigmore, who appeared for the Trustee, to Kieran v. Johnson [1815] EngR 1132; (1815) 1 Stark 109; 171 ER 417 which is cited at p 285 of McDonald Henry and Meek's Australian Bankruptcy Law and Practice 5th Ed. in support of the following proposition:-

"In order to make the trustee in bankruptcy liable
for money had and received by the bankrupt for a
specific purpose, it is necessary to prove the
money came into the trustee's hands with a
knowledge of the specific purpose."

21. That involved an action in assumpsit for money had and received by the assignees of a bankrupt to the use of the plaintiff. The money represented the proceeds of a bill of exchange which had been sent by the plaintiff to the bankrupt before his bankruptcy with instructions to apply it to specified purposes. Starkie's report of the case is more than a little elliptical, merely reciting on the question of notice that, "After the bill had been read, the learned Judge (Bayley J.) intimated that it would be necessary to prove that the product of the bill actually came into the hands of the assignees, with a knowledge on their part, of the purposes for which the bill was destined. Being unable to prove this the plaintiff was nonsuited." (The report of the same case in Rose's Bankruptcy Reports, Vol. 2, 463 is even more laconic.)

22. However Kieran v. Johnson has been consistently cited in the successive editions of Halsbury, The Laws of England as establishing that "The trustee in bankruptcy will not be personally liable in respect of property received by the bankrupt for a specific purpose, unless it is shown that the property came into the trustee's possession with a knowledge of the purpose for which it was destined." (See e.g. 4th Ed. Vol. 3 p. 356).

23. In Montagu and Ayrton, The Law and Practice in Bankruptcy, 2nd Ed. (1844) it is noted under the heading "Assignees - Duties to Creditors" that "If the assignees act improperly, they are liable at law to the creditors." Then, after a reference to the inability of assignees to carry on the bankrupt's trade if one creditor dissents, Kieran v. Johnson is cited as authority for this statement:-

"To make assignees liable for money on a bill
remitted to the bankrupt for a specific purpose,
it must be proved that the produce of the bill
came into their hands with a knowledge of the
purposes for which it was destined."

24. See also Robson, A Treatise on the Law of Bankruptcy 4th Ed. (1881) p 473 where Kieran v. Johnson is cited in support of the following proposition (emphasis added):-

"But in order to make the trustee of the bankrupt
personally liable for the bills or moneys
received by him in respect thereof it must be
proved that the bills came into his possession
with a knowledge of the purposes for which they
were intended."

25. In my view, it is only when so understood in the context of an attempt to impose personal liability on an assignee or trustee in bankruptcy that Kieran v. Johnson can be reconciled with the cases in which recovery has been permitted to a person who entrusted the money or property in question to the bankrupt, such as Toovey v. Milne (1819) 2 B & ALD 683; 106 ER 514 and Re Watson; Ex parte Schipper (supra).

26. Accordingly, I am led to conclude that as between the applicant and the Trustee, the sum of $20,000 paid on 19 May 1987 to the credit of Mr. Veli's account at the Bentleigh branch of the National Bank is not property divisible amongst the creditors of the bankrupts but is repayable to the applicant. Mr. Bigmore, at the outset of his submissions, suggested that an application under s.178 was an inappropriate vehicle for the resolution of the real question between the applicant and the Trustee, because at the time when the application was issued there had been nothing which could be identified as a relevant "act, omission or decision" of the Trustee. However, it was very properly accepted on behalf of the Trustee that the circumstances as they emerged in the course of the application raised a matter in connexion with the administration of Mr. Veli's estate, in respect of which it was appropriate for the Trustee to seek the directions of the Court pursuant to s.134 of the Act. In the light of my conclusions on the substantive issue I propose, therefore, to declare that as between the applicant and the Trustee the sum of $20,000 paid on 19 May 1987 to the credit of the account of Boni John Veli at the Bentleigh branch of the National Australia Bank is not property divisible amongst the creditors of the bankrupt, and to direct that so much of that sum as is now in the hands of the Trustee be paid to the applicant.