Re Leslie Roy Miles and Betty Joan Miles Ex Parte: National Australia Bank Limited v the Official Receiver In Bankruptcy [1988] FCA 409; 20 FCR 194 (25 November 1988)

FEDERAL COURT OF AUSTRALIA

Re: LESLIE ROY MILES and BETTY JOAN MILES
Ex parte: NATIONAL AUSTRALIA BANK LIMITED
And: THE OFFICIAL RECEIVER IN BANKRUPTCY
No. QLD E1133 of 1987
Trusts - Mortgages
[1988] FCA 409; 20 FCR 194

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
Pincus J.(1)

CATCHWORDS

Trusts - Quistclose trust.

Mortgages - proceeds of sale of mortgaged property by mortgagor - whether subject to or free from security.

HEARING

BRISBANE
25:11:1988

Counsel for the Applicant: Mr M.W.D. White

Solicitors for the Applicant: Thynne & Macartney

Counsel for the Respondent: Mr P.D.T. Applegarth

Solicitors for the Respondent: Callaghan & Reidy

ORDER

Declares that the applicant is secured as to the sum of $7,308.91 being part of the moneys paid to the Newsagency Council of Queensland on or about 25 August 1987;

Orders that the application filed on 28 September 1988 be otherwise dismissed;

Orders that there be no order as to costs.

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

DECISION

This is an application by the applicant bank for a declaration that the respondent holds certain sums on trust for it, that the applicant is a secured creditor in the estates of the bankrupts, Mr and Mrs Miles, and for other relief. Mr and Mrs Miles became bankrupt on 17 September 1987.

2. According to the original application, the sums in question are $33,997.23, or alternatively $7,308.91, but I ordered at the hearing, pursuant to application made, that the former sum be amended to $34,925.79.

3. The applicant's principal case is that the former sum or else the latter is held on a Quistclose trust in that moneys were paid away for the purpose of discharging liabilities for the bankrupts, which purpose has failed; the applicant says the trust arises because if not so paid, the moneys would have been received by the applicant as a secured creditor. As to the lesser sum, there is an additional argument, discussed below.

4. The securities which the applicant formerly held were two bills of sale executed on 26 June 1984 and 1 May 1985 respectively. They secured obligations of the bankrupts to the applicant on the bankrupts' then newsagency business and assets connected with it.

5. By a contract made in July 1987 - its precise date does not appear - the bankrupts agreed to sell that business and certain chattels for a sum of $105,000 plus stock at valuation; the latter was valued at $11,436. Settlement took place on 25 August 1987.

6. At the time the contract was made, the bankrupts were indebted to the applicant in a sum which appears to have been about $90,000 and indebted to other creditors in relation to their business in such sums that the sale price could not possibly discharge both sets of liabilities. Clause 33(b) of the contract for sale required the purchasers to -

"... pay in part payment of the purchase price on
the date of possession to the Newsagency Council of
Queensland (Hereinafter called "the Council") such
proportion of the purchase price as shall be
required by the Council in accordance with the
provisions of Rule 10(4) of the Rules of the
Council."

Rule 10(4) reads in part as follows:

"The Council may retain from the sale proceeds of
any newsagency business, pursuant to authorisation
given to the solicitors, conveyancers or agents of
the vendor, a sum sufficient to meet the final
accounts of all Constituent Members of the Council
for a period of four (4) weeks from date of
possession by the purchaser. If within that period
the newsagent produces receipts showing that
publications received by him up to the date of
possession have been paid for, the retention moneys
shall be released to the newsagent by the Council.
If after four (4) weeks the Constituent Members'
accounts remain unpaid payment will be effected by
the Council and any balance of retention monies
remaining thereafter will be paid to the vendor
newsagent.
If a vendor newsagent has not received a final
statement within four (4) weeks of the approved
takeover date, retained monies shall be released by
the Council."

7. The Council consists of five members, none of them being parties to the contract for sale just mentioned. Although not contractually bound by the Rules, as a practical matter the parties to the contract of sale were (it was common ground) obliged to include cl.33(b); otherwise the newsagency's "licence" from the Council would have been at an end, or at least in peril. What is meant by a "licence", in this context, is the right to sell newspapers within defined "territories".

8. The contract of sale could not, of course, proceed without the agreement of the applicant as grantee under the bills of sale which I have mentioned. According to the evidence, which I accept, the applicant agreed to the sale and to cl.33(b) being inserted and implemented for fear of adverse action by the Council.

9. The amount required by the Council under cl.33(b) was $45,300 and that was paid to it about the date of settlement; it proved to be an over-estimate. The applicant had the greater part of its debt paid at settlement, but a sum claimed to be presently $34,925.79 remains owing.

10. Shortly before the contract was settled, the bank wrote to the Council enclosing an order signed by the bankrupts authorising the Council to forward to the bank "moneys which you are holding or will be collecting on my behalf". That order was received by the Council after settlement, on 27 August 1987, and on the following day the secretary of the Council, Mr Edwards, telephoned the bank's manager informing him that the Council required an authority differently expressed. The authority was necessary under cl.33(c) of the contract of sale, reading as follows:

"Subject to the provisions of sub-clause (b) hereof
the balance of purchase monies shall be paid as
directed by the vendor or the vendors (sic)
solicitors".

11. In response to Mr Edwards' request, the bank sent a fresh authority dated 18 September 1987, which was received by the Council on 22 September 1987. It contemplated payment to the bank, as did the first authority.

12. In the meantime, the bankrupts had attained that status by filing their own petition, on 17 September 1987, as mentioned above. Four days later, on 21 September 1987, the Council paid them the sum of $7,308.91, being the surplus contemplated by Rule 10(4); they passed that sum on to the Official Receiver. The rest of the $45,300 was disbursed by the Council to its members. The applicant's claims, mentioned above, relate in the alternative to the sum so disbursed ($37,991.09) and to the surplus ($7,308.91).

13. It appears that the reason the Council did not wait for the second "correct" authority from the applicant, but paid the money to the bankrupts instead, was that the period of four weeks mentioned in Rule 10(4) had expired.

14. The balance of the $45,300 - i.e. that sum less the $7,308.91 which went to the bankrupts - was I have said paid to the members of the Council to which the bankrupts were indebted at the time of the sale of the business. After the bankruptcy, the Official Receiver asserted that the payment of that sum ($37,991.09) constituted a preference; not contesting that, the Council collected the money from the people who had received it and paid it back to the Official Receiver.

15. This dispute is, in a commercial sense, between a secured creditor, the applicant, and the general body of unsecured creditors represented by the Official Receiver.

16. There is in the affidavits much analysis by officers of the applicant of their respective states of mind, but little hard evidence as to the mechanics of the settlement of the contract. Discharges of each of the two bills of sale were executed on 19 August and I infer, although it is not directly proved, that the two discharges were handed over to the purchasers' solicitors on settlement. The effect of doing so was, plainly enough, to put an end to the applicant's interest in the mortgaged property as its legal owner and to enable that interest to pass to the purchasers. What is not quite so clear is whether the execution and delivery of the discharges entirely put an end to the applicant's rights as mortgagee and that point is discussed below.

17. In summary, the facts of the matter are that the applicant bank released the bills of sale to enable the grantors to sell the mortgaged property under a contract which required that part of the purchase price be paid to the Council. The idea was to enable payment of debts owed by the grantors to persons other than the applicant; under the contract, the surplus of moneys held by the Council and not required for payment of debts was to be, and was, returned to the grantors - i.e. the vendors.

18. The main contention put forward on behalf of the applicant was that part of the purchase price, which would otherwise have gone to the applicant mortgagee, was allowed by that applicant to be paid to the Council to enable discharge of the mortgagors' debts. That purpose having failed, so it was said, the sum in question was to be treated as held in trust for the applicant, insofar as it is a creditor - i.e. to the extent of $34,925.79, on its calculations.

19. The submission involves some consideration of precisely what was decided by the House of Lords in the Quistclose case, reported as Barclays Bank Ltd v. Quistclose Investments Ltd (1970) AC 567. There, money was lent by Quistclose to Rolls Razor Ltd to enable payment of a dividend which Rolls Razor had declared; the declaration gave rise to a debt owed by Rolls Razor to its shareholders. It borrowed the money to pay that debt (i.e. the total of the dividend) and the sum was paid into a new account with Barclays Bank Ltd, the bank being informed that the money in the account was to be used only for the purpose of meeting the dividend. Rolls Razor became insolvent before paying the dividend and went into liquidation, and the bank claimed to set off the sum in the dividend account against other indebtedness of Rolls Razor to it.

20. The House of Lords held that the money advanced by Quistclose was held in trust, there being a primary trust to pay the dividend and, if that could not be carried out, then a secondary trust for the benefit of the lender Quistclose.

21. In the judgment of Lord Wilberforce, with whom the other judges agreed, two lines of authority were dealt with. An example of the first is Toovey v. Milne (1819) 2 B & Ald 683, 106 ER 514, which was followed. That concerned the bankruptcy of one Maxton who, shortly before he became bankrupt, borrowed 120 pounds from his brother-in-law to pay his creditors. They were not paid (the reason does not appear) and Maxton repaid 95 pounds to the lender. The assignee unsuccessfully sued the lender for the 95 pounds, it being held that -

"... this money was advanced for a special purpose,
and that being so clothed with a specific trust, no
property in it passed to the assignee of the
bankrupt. Then the purpose having failed, there is
an implied stipulation, that the money shall be
repaid."

22. An example of the other line is Moseley v. Cressey's Company (1865) LR 1 Eq 405, which was distinguished. There, company promoters received money accompanying applications for shares, but the shares were never allotted. Sir W. Page Wood, V.C. held that there was no trust, partly at least because it was not contended:

"... that the Plaintiffs said or did anything
whatever when they paid in these moneys, or that
the bank constituted themselves trustees ..."
(p 410).

23. Lord Wilberforce distinguished this second line of authority, saying of the group of cases:

"They are merely examples which show that, in the
absence of some special arrangement creating a
trust ... payments of this kind are made upon the
basis that they are to be included in the company's
assets."

The remark appears significant, as implying a view that not all purposes of payment are within the principle of the Quistclose case.

24. The most general proposition for which the Quistclose case could sensibly be urged to constitute authority is that there is a trust in respect of any "property transferred for a specific purpose only and not therefore for the recipient's own purposes" - Carreras Rothmans Ltd v. Freeman Mathews Treasure Ltd (1985) Ch 207 at 222. In my respectful opinion, the Quistclose case does not necessarily go so far.

25. It is certainly authority that if A makes a loan to B for the express and sole purpose of payment of debts of B and that purpose remains unfulfilled, then there is in general a trust for the lender. One can argue for all sorts of extensions. It might be suggested that there is no logical reason why the same principle should not apply where the purpose of the loan is something other than payment of debts - e.g. purchase of property. Again, the quotation I have made from Carreras Rothmans suggest that there need be no loan of money, as long there is a transfer of some sort of property for a specific purpose. That decision supports an expansive view of the Quistclose principle, but neither it nor any other case I have seen directly governs the present facts.

26. To come closer to them, the applicant says that the party in the position of Quistclose need not have lent money and it is sufficient that it can show that by releasing its security it allowed to be paid away money to which it (the applicant) would otherwise have been entitled. The applicant must also say that it is unnecessary that the purpose of discharging debts fail entirely; here, the debts were in fact discharged, but the moneys had to be paid back under the law as to voidable preferences.

27. Another difference between this case and that decided by the House of Lords is that here, if there is no trust, the general body of creditors benefit; there, the contest in the House of Lords was between Quistclose and another single creditor (Barclays Bank), which claimed the right to set off the money in question against debts due to it. Although that makes a difference to what might be called the merits, the identity of Quistclose's opponent was not a factor taken into account by the House of Lords, nor could it be. (It is a curiosity of the Quistclose case that a claim which was made on behalf of the shareholders was abandoned before trial.)

28. Experience suggests that bankruptcy or the liquidation of an insolvent company often awkwardly interrupts the progress of an intended transaction or set of transactions. If goods are delivered under a contract of sale and the property has passed, but bankruptcy supervenes just before an intended payment is made for them, the vendor cannot get them back. He must submit to their being sold to satisfy the general body of creditors - or perhaps even more galling, to satisfy a secured creditor or one having statutory priority. The common sense claim of such an unpaid vendor to recover "his" goods rather than prove for the price may be no less appealing than Quistclose's claim to repayment of the money it advanced and the same may be said of any number of types of transactions interrupted by bankruptcy. This illustrates the unwisdom of extending the Quistclose principle to cover more situations in which money or property comes to the bankrupt, in contemplation of a transaction which bankruptcy forestalls.

29. It must be said in favour of the applicant here that it was secured, as Quistclose was not. Further, its agreement to let part of the proceeds of the sale of the property the subject of the security be applied towards payment of debts may be thought analogous to a simple payment of money, as in the Quistclose case. In my opinion, however, it would not be right to apply the Quistclose principle beyond the field defined by the House of Lords - i.e. actual payment of money, by the party claiming to be the beneficiary of a resulting trust, for the purpose of discharge of debts by the payee, that purpose having failed.

30. The applicant's assertion that it is entitled as beneficiary of a trust in respect of its interest in the $37,991.09 paid to and later repaid by the Council must be rejected.

31. Separate considerations apply with respect to the sum of $7,308.91, which was never paid out by the Council, but was, as I have explained, paid as a surplus to the bankrupt vendors and passed on by them to the Official Receiver.

32. There is authority suggesting the existence of a principle that a mortgage of property covers moneys received by the mortgagor representing a diminution in the mortgaged property: e.g. Law Guarantee and Trust Society, Limited v. Mitcham and Cheam Brewery Company, Limited (1906) 2 Ch 98, Noakes v. Noakes & Co., Limited (1907)1 Ch 64, Syme v. The Commonwealth [1942] HCA 29; (1942) 66 CLR 413 at p 421 (Latham C.J.) and 430 (Williams J.).

33. In Syme's case Latham C.J. said:

"When compensation is paid for a deprivation of
interest which diminishes the mortgagee's security,
the compensation is regarded as representing the
security pro tanto and it must be paid to the
mortgagee or preserved to meet his claims under the
mortgage ..." (p 421).

Consistently with that, when mortgaged property is sold by a mortgagor with the mortgagee's consent, the assumption is that the security applies to the proceeds. In conveyancing practice, I suppose the point is never tested, because the mortgagee attends at settlement and will not hand over a document releasing the mortgage except in exchange for so much of the purchase price as is necessary to discharge the mortgage debt. Here, that practice was not wholly followed, but $45,300 of the purchase price was allowed by the mortgagee to be paid away, although its mortgage debt was only partly discharged.

34. Clause 10(4) of the Rules quoted above obliges the Council to hold to the account of the vendor the surplus of moneys not needed for payment of the vendors' debts. The Quistclose principle applies, neatly enough, to the payment of money to the Council and there is a resulting trust of the surplus in favour of the vendors.

35. Did the applicant as mortgagee have an interest in that surplus? The purpose of paying out the debts due to the members of the Council might have been effected by the applicant's simply agreeing to the mortgagors' retaining enough to pay them out; had a surplus ensued in those circumstances, one would hardly doubt the mortgagee's entitlement to it, as mortgagee. In my view, the fact that it was the Council, not the mortgagors, which held the fund to pay the mortgagors' debts should not make any difference. The applicant's security at all times attached to the mortgagors' beneficial interest in the surplus. The execution by the mortgagors of the authorities addressed to the Council, mentioned above,is consistent with the view that the parties treated the surplus as an entitlement of the applicant as mortgagee.

36. The same reasoning cannot, however, save the applicant as to the moneys which were actually paid away by the Council. The applicant plainly lost its rights as mortgagee to the extent that the purchase price was used, with its consent, in payment of debts of the mortgagors and the refund of those moneys to the Official Receiver did not revive the security interest.

37. In the result, then, I hold and will declare that the applicant is secured as to the sum of $7,308.91 being part of the moneys paid to the Newsagency Council of Queensland on or about 25 August 1987. The application will otherwise be dismissed.

38. One possible order, as to costs, would be to give the applicant the costs of the application except insofar as they relate to the claim for $37,991.09 and to give the costs relating to that to the respondent. Such an order would be difficult to give practical effect to. Subject to anything the parties may have to say, I propose to make no order for costs.