Rimar Pty Ltd v Pappas [1986] HCA 9; (1986) 160 CLR 133 (11 March 1986)

HIGH COURT OF AUSTRALIA

RIMAR PTY. LTD. v. PAPPAS [1986] HCA 9; (1986) 160 CLR 133
F.C. 86/008

Bankruptcy

High Court of Australia
Gibbs C.J.(1), Mason(2), Brennan(3), Deane(4) and Dawson(5) JJ.

CATCHWORDS

Bankruptcy - Transaction by bankrupt with person dealing with him in good faith and for valuable consideration in respect of property acquired on or after his becoming bankrupt - Good faith - Whether negated by knowledge of bankruptcy - Valuable consideration - Whether required to move to bankrupt - Whether required to equate with what transaction takes from bankrupt estate - Bankruptcy Act 1966 (Cth), s.126(1).

Section 126(1) of the Bankruptcy Act 1966 (Cth) provides that "a transaction by a bankrupt with a person dealing with him in good faith and for valuable consideration in respect of property acquired by the bankrupt on or after the day on which he became a bankrupt is, if completed before any intervention by the trustee, valid against the trustee, and any estate or interest in that property which, by virtue of this Act, is vested in the trustee shall determine and pass in such manner and to such extent as is necessary for giving effect to the transaction".

HEARING

Brisbane, 1985, July 9, 10;
Canberra, 1986, March 11. 11:3:1986
APPEAL from the Supreme Court of Queensland.

DECISION

GIBBS C.J.: This is an appeal from a decision of the Full Court of the Supreme Court of Queensland, allowing an appeal from a judgment given by Thomas J. in favour of the appellant for $89,110.

2. There was a conflict of testimony at the trial, but the facts as found by the learned trial judge are as follows. The respondent, Pappas, speculated in land on the Gold Coast, which, in 1981, was in the midst of a land boom. He was associated with one Stanley Moore, an undischarged bankrupt, who acted as his "spotter", and for some purposes as his agent. In about March 1981, Pappas and Moore became aware that some land near Currumbin, known as Boonaroo Park, was available for sale and might profitably be sub-divided and resold. The sum of $300,000 was needed to enable the project to be financed. Pappas could not raise that sum and he brought two other persons, Turner and Coon, into the project. It was agreed that Turner and Coon would provide $150,000 between them, and that Pappas and Moore would provide the remaining $150,000, but the learned trial judge made no findings as to the arrangements made between Pappas and Moore regarding the provision of this sum. It was further agreed that a company, Wuringal Pty. Ltd. should purchase the land and that Turner and Coon would each take a 25 per cent interest in the company, that Pappas would have a 30 per cent interest and Moore a 20 per cent interest. Shares in that company were issued to the four men accordingly, and, in accordance with the agreement, Turner and Coon each contributed $75,000 and Pappas and Moore between them contributed $150,000, of which $100,000 was credited to Pappas and $50,000 to Moore. Part of the $150,000 so contributed, viz. $50,000, was paid to Wuringal Pty. Ltd. by a cheque drawn by the appellant, Rimar Pty. Ltd. ("Rimar") on 15 April 1981. The learned trial judge found that this $50,000 was advanced by Rimar pursuant to an oral agreement negotiated by Moore on behalf of Pappas on 14 April 1981 and that the advance was made on terms that $100,000 would be paid by Pappas to Rimar in six or seven months, i.e. by October or November 1981. Wuringal Pty. Ltd. had in March 1981 entered into a contract to buy the land, and in July 1981 resold it to a related company, Kerrawa Pty. Ltd., at a profit.

3. By 22 October 1981, $8,500 had been repaid to Rimar, apparently by Moore. On that day one Dixon, who controlled Rimar, presented Pappas with a document which had been prepared by his solicitors and asked him to sign it. Later that day Pappas said that he would do so if Dixon would sign an agreement which had in the meantime been prepared by Pappas' solicitors. Both documents were thereupon executed. The first document, which was signed and sealed, was in the following terms:

"THIS AGREEMENT is made the 22nd day of October
1981 BETWEEN CHRIS PAPPAS of Northcliffe Terrace,
Surfers Paradise in the State of Queensland
(hereinafter called "Pappas") of the one part and
RIMAR PTY. LTD. of 2 Huntingfield Road, Toorak in
the State of Victoria (hereinafter called "Rimar")
of the other part

A. Pappas is registered as the proprietor of
thirty shares in WURINGAL PTY. LTD. a company
incorporated in the State of Queensland and
having its registered office at Suite 10,
Centrepoint, 3290 Gold Coast Highway, Surfers
Paradise (hereinafter called "the Company").

B. On the 17th day of March, 1981 the Company
entered into a Contract to purchase certain
land from Tulse Pty. Ltd. having an area of
approximately 45.44 hectares, then being part
of the land contained in Certificate of Title
Volume 5952 Folio 25 (hereinafter called "the
said land").

C. Rimar advanced to Pappas the sum of $50,000 on
or about the 14th day of April, 1981.

D. Pappas agreed to repay the said sum of $50,000
to Rimar upon the Company effecting the sale
of the said land, together with 5% of the
Company's profits from resale available for
distribution or $50,000 (whichever was the
greater).

E. The said land was sold by the Company to
Kerrawa Pty. Ltd. pursuant to a Contract dated
the 29th day of July, 1981 (hereinafter called
"the Contract") and the sum of $100,000 is now
payable by Pappas to Rimar in the manner
hereinafter provided.

NOW THIS DEED WITNESSETH that in consideration of
these presents Pappas agrees to pay the sum of
ONE HUNDRED THOUSAND DOLLARS ($100,000.00) to Rimar
as follows:-

(a) The sum of $8,500.00, which has already been
received by Rimar.

(b) The balance, namely, $91,500.00 within seven
days of the date upon which settlement has
taken place of the sale of all lots comprising
the Stage 1 Development for the said land,
more particularly referred to in the Cash Flow
Schedule attached hereto or on the 1st day of
Feb. 1982 (whichever first occurs).

AS CONSIDERATION for the due payment by Pappas of
the said sum of $100,000.00 in the manner
hereinbefore provided PAPPAS HEREBY AGREES to
deposit with Rimar the scrip for shares No. 26 - 30
in the Company."

Then followed the signatures and seals of Pappas and Rimar.

4. The second document (Ex.1) was as follows:

"THIS AGREEMENT is made the 22nd day of October,
1981 BETWEEN CHRIS PAPPAS of Surfers Paradise
(hereinafter called "Pappas") of the first part,
STAN GORDON MOORE of Surfers Paradise (hereinafter
called "Moore") of the second part and RIMAR PTY.
LTD. of Melbourne (hereinafter called "Rimar") of
the third part

WHEREAS:-

(a) By an agreement bearing even date herewith
Pappas agreed to pay to Rimar the sum of
NINETY-ONE THOUSAND FIVE HUNDRED DOLLARS
($91,500-00) upon the settlement of the sale
of certain land by the company but not later
than the first February, 1982.

(b) Moore is beneficially entitled to certain
shares in WURINGAL PTY. LTD. (hereinafter
called "the company").

(c) Moore has instructed the company to pay the
sum of NINETY-ONE THOUSAND FIVE HUNDRED
DOLLARS ($91,500-00) to Rimar out of his share
of monies to be received from the company.

NOW THIS AGREEMENT WITNESSETH and it is agreed by
the parties hereto:-

1. Rimar hereby discharges Pappas from liability
of payment of the sum of NINETY-ONE THOUSAND
FIVE HUNDRED DOLLARS ($91,500-00) due to it as
set out in recital (a) hereto.

2. Moore will pay to Rimar the sum of NINETY-ONE
THOUSAND FIVE HUNDRED DOLLARS ($91,500-00) out
of monies to be come due to Moore from the
sale of the companies land when such monies
are so available.

3. Rimar agrees to extend the date for payment of
the monies due to it until funds are available
to the company."

The document went on to state that it was signed, sealed and delivered by all three parties, but in fact they signed and did not seal it.

5. It is common ground that at the time when these documents were signed both Pappas and Dixon knew that Moore was an undischarged bankrupt. He had in fact been made bankrupt in 1978 and did not receive his discharge until 1983.

6. Thomas J., at first instance, held that the two documents of 22 October 1981 were interdependent and should be read together, that there was good consideration for Rimar's release of Pappas and that if Rimar's rights were limited to the two documents it therefore could not succeed. However, he held that the oral agreement made in April 1981 was not merged in the agreements of October and that Rimar was entitled to sue on the oral agreement. He exercised the powers given by the Money Lenders Act 1916 (Q.), as amended, and ordered that Pappas be relieved of payment of $25,000, part of the interest agreed to be repaid, and gave judgment for Rimar for $66,500, plus $22,610 interest on the amount of the judgment.

7. In the Full Court it was held that the oral agreement made in April 1981 merged in the deed executed on 22 October 1981, and that the second, unsealed document, signed on 22 October 1981 (Ex.1) effected a novation and had the result that the obligation of Pappas under the deed was discharged and that Moore was substituted as a new debtor to Rimar. Their Honours further held that there was good consideration for the second agreement, notwithstanding that Moore was a bankrupt. Accordingly, judgment was entered in favour of Pappas.

8. Special leave to appeal was granted from this decision, limited to two grounds, namely (1) that the second document signed on 22 October 1981 (Ex.1) was contrary to the provisions of the Bankruptcy Act 1966 (Cth), as amended ("the Bankruptcy Act"), illegal and void and (2) that by reason of the operation of the Bankruptcy Act the discharge purported to be effected by Ex.1 was not supported by consideration.

9. The assumption that must be made to enable these grounds to be considered is that, if Moore had not been bankrupt, the acceptance by Rimar of the promise of payment by Moore in place of its cause of action against Pappas would have amounted to an accord and satisfaction and would have discharged the liability of Pappas to Rimar. The question then arises whether the fact that Moore was bankrupt makes any difference. In other words, did the fact that Moore was bankrupt make his promise to pay Rimar $91,500 out of his share of moneys to be received from Wuringal Pty. Ltd. illegal or illusory? The recital that Moore was beneficially entitled to shares in that company was incorrect. The shares, which had come into existence after Moore's bankruptcy, vested in Moore's trustee in bankruptcy as soon as Moore acquired them (Bankruptcy Act, s.58(1)(b)) and constituted part of the property divisible amongst Moore's creditors (Bankruptcy Act, s.116(1)). The description "monies to be come due to Moore from the sale of the companies land" must have been intended to refer to moneys distributed either by way of dividend or on a liquidation of Wuringal Pty. Ltd. It was submitted on behalf of Pappas that dividends paid on the shares would be "income" of which the bankrupt was in receipt within s.131 of the Bankruptcy Act, so that Moore would be entitled to retain them for his own benefit unless the Court made an order for payment to the trustee under s.131(2). Notwithstanding some general remarks in Falstein v. Official Receiver [1962] HCA 65; (1962) 108 CLR 523, at p 527, which may appear to support such a submission but which are not directed to this particular question, I am, as at present advised, not disposed to accept that a bankrupt is entitled to retain for his own benefit dividends paid on shares which have vested in the trustee. I need not decide that question, but may assume in favour of Rimar that the trustee, in whom the shares became vested, would be entitled to the income produced by the shares and bound to apply it for the benefit of the creditors. However, the fact that a transaction entered into by a bankrupt after his bankruptcy obliges him to make a payment out of after acquired property which vests in the trustee, or operates as an assignment of that property, does not necessarily mean that the transaction is invalid or ineffective. Section 126(1) of the Bankruptcy Act provides:

"A transaction by a bankrupt with a person
dealing with him in good faith and for valuable
consideration in respect of property acquired by
the bankrupt on or after the day on which he became
a bankrupt is, if completed before any intervention
by the trustee, valid against the trustee, and any
estate or interest in that property which, by
virtue of this Act, is vested in the trustee shall
determine and pass in such manner and to such
extent as is necessary for giving effect to the
transaction."

This section, which applies what is known as the rule in Cohen v. Mitchell (1890) 25 QBD 262, qualifies the property of the trustee to the extent of protecting the transactions mentioned in the section: In re Pascoe (1944) Ch 219, at p 226.

10. The transaction between Rimar and Moore, even if it involved an equitable assignment by Moore of his interest in the moneys to become due to him from Wuringal Pty. Ltd., would therefore be valid, in the absence of some effective intervention by the trustee, if it was entered into by Rimar in good faith and for valuable consideration. Section 126 is concerned with the good faith of the person dealing with the bankrupt; "and if he has dealt in good faith, the question of whether the bankrupt, as between himself and the creditors, is also dealing in good faith is immaterial": Cohen v. Mitchell, at p 267. In other words, it is the good faith of Rimar, and not that of Moore, that has to be considered. Clearly the fact that a person who dealt with a bankrupt had full knowledge of the bankruptcy does not make the transaction one that is lacking in good faith: Cohen v. Mitchell, at p 267; Hunt v. Fripp (1898) 1 Ch 675, at p 683; In re Bennett. Ex parte The Official Receiver (1907) 1 KB 149, at p 154; In re Behrend's Trust. Surman v. Biddell (1911) 1 Ch 687; Palmer v. Public Trustee [1916] HCA 45; (1916) 21 CLR 645, at p 662; Dyster v. Randall & Sons (1926) Ch 932, at p 940. In the present case there is no evidence that Rimar acted in bad faith. The transaction was a curious one, and indeed would appear to have been contrary to Rimar's interests, but there is nothing to support the suggestion that Rimar acted other than honestly and fairly, or had any intention of defeating Moore's creditors or depleting his estate at their expense.

11. The critical question then becomes whether in this transaction Rimar dealt for valuable consideration. The submission on behalf of Rimar is that the only consideration given by Rimar for Moore's promise to pay the $91,500, namely Rimar's discharge of Pappas, did not constitute "valuable consideration" within s.126(1) because it in no way resulted in any benefit to Moore's bankrupt estate. On behalf of Pappas it was submitted that it could be inferred that Moore had borrowed from Pappas the $50,000 which had been credited to him when the payment of the $150,000 was made to Wuringal Pty. Ltd. and that the result of the tripartite agreement of October 1981 was to release Moore from his liability to repay that sum to Pappas and that in consequence there was a benefit to Moore's estate. No findings were made by the learned trial judge to support that submission and in the present case, where very much depended on credibility, it would be quite impossible for the Court to infer from the skimpy and conflicting evidence that the effect of the transaction was to discharge Moore from an existing liability to Pappas. I therefore need not consider what the legal consequences of such a finding might be. The case must be considered on the footing that the consideration given to Moore did not benefit his estate. According to In re Behrend's Trust. Surman v. Biddell that circumstance is immaterial. In that case Swinfen Eady J. dismissed very shortly an argument that the transaction was not for value within the meaning of the rule in Cohen v. Mitchell because there was no resulting pecuniary benefit to the bankrupt which would result to his trustee, simply saying, at p.696, "there is no such limitation of the rule in Cohen v. Mitchell itself". Although we are not referred to any other case on this point decided on s.126 or the equivalent provisions of other bankruptcy legislation, the conclusion reached in In re Behrend's Trust. Surman v. Biddell is supported by the decisions on the avoidance of settlements. In In re Pope. Ex parte Dicksee (1908) 2 KB 169 a post-nuptial settlement was executed by a bankrupt in favour of his wife and children in consideration of the wife refraining from taking proceedings against him in the divorce court. It was held by the English Court of Appeal that the settlement was supported by valuable consideration and was valid against the trustee in bankruptcy. Cozens-Hardy M.R. said, at p.173: "I am unable to adopt the view that there must be either money or physical property given by the purchaser in order to bring the case within the exception. In my opinion the release of a right or the compromise of a claim, not being a merely colourable right or claim, may suffice to constitute a person a 'purchaser' within the meaning of s.47 (of the Bankruptcy Act 1883 (U.K.))." As Goff J. pointed out in In re Densham (A Bankrupt) (1975) 1 WLR 1519, at p 1527, in In re Pope. Ex parte Dicksee it was impossible to evaluate the benefit of the consideration and therefore impossible to see whether it was equal to the property given up or not. In that case, and again in In re Windle (1975) 1 WLR 1628, Goff J. expressly rejected the view that consideration has to replace something in the debtor's estate. He said in the latter case, at p.1637:

"It is clear that the consideration does not have
to replace anything in the debtor's estate for it
may be something which he has bargained shall be
provided for a third party, nor does it have to be
equal to that which has been taken out."

More recently in In re Abbott (A Bankrupt) (1983) Ch 45, at pp 54-55 and 57-58, Peter Gibson J. and Megarry V-C reached the same conclusion. Statutory provisions which deal with the avoidance of settlements, fraudulent dispositions and preferences have a different purpose from that of s.126(1). The former provisions are designed to prevent the property of the bankrupt from being put into the hands of others to the disadvantage of creditors. The main purpose of s.126(1), on the other hand, is to afford protection to third persons who deal with an undischarged bankrupt: see Herbert v. Sayer [1844] EngR 27; (1844) 5 QB 965, at pp 981-982; [1844] EngR 27; 114 ER 1512, at p 1518; Cohen v. Mitchell, at p 269; In re Pascoe, at p 225 and Thistlethwayte v. Gender Estates Pty. Ltd. (1976) 8 ALR 700, at p 703. The conclusion that the valuable consideration necessary to support a transaction under s.126(1) need neither move to the bankrupt, nor be equal to what has been taken from the estate in the transaction, follows even more clearly than in the case of settlements. It is no doubt right to say, in this case as in the case of settlements, that the consideration must have a real and substantial value and must not be merely nominal, trivial or colourable (see In re Abbott (A Bankrupt), at p 57 and Barton v. Official Receiver (1984) 58 ALR 328, at pp 333, 336, 344). The discharge of the obligation of Pappas to pay $91,500 which he admittedly owed to Rimar was clearly a consideration of real and substantial value.

12. The transaction by Moore with Rimar was therefore a transaction with a person dealing with a bankrupt in good faith and for valuable consideration in respect of property acquired by the bankrupt after he became a bankrupt. Unless the trustee intervened, it was valid against the trustee. The circumstance that the trustee might have intervened lessened the value of Moore's promise to Rimar but it did not make the promise illusory or invalid. If, for example, the administration of Moore's estate seemed to the trustee likely to result in a surplus to which Moore would be entitled under s.148 of the Bankruptcy Act, the trustee might have decided not to intervene, and there were of course many other circumstances (including, if it was the fact, that the trustee did not know of the transaction) that might have had the result that there would be no intervention. In any case the possibility of intervention was something that Rimar could consider in assessing the value of Moore's promise, but it did not mean that the promise was valueless.

13. There is no other reason to hold that the agreement (Ex.1) was illegal or void. It is well settled that a bankrupt can, after his bankruptcy, enter into contracts which are binding unless the trustee intervenes: Chitty on Contracts, 25th ed. (1983) vol.1, par.1364; Wild v. Tucker (1914) 3 KB 36; Dyster v. Randall & Sons, at pp 939-940; Gough v. Fraser (1977) 1 NZLR 279, at pp 285, 286. Indeed, the argument that if the transaction came within the protection of s.126(1) it was nevertheless illegal and void was not pressed.

14. For the reasons given, nothing in the law of bankruptcy had the consequence that the promise by Moore was illusory, invalid or illegal, or that the discharge by Rimar of Pappas from his liability to pay the amount which he owed was not supported by consideration.

15. I would dismiss the appeal.

MASON J.: For the reasons given by the Chief Justice I would dismiss this appeal.

BRENNAN J.: I would dismiss the appeal for the reasons stated by the Chief Justice.

DEANE J.: I agree with the judgment of the Chief Justice.

DAWSON J.: I agree with the reasons for judgment of the Chief Justice.

ORDER

Appeal dismissed with costs.