Burkitt, R.J. v Harts Pty Ltd
[1995] FCA 496
•14 Jul 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
GENERAL DIVISION )
) Estate No 1184 of 1993
BANKRUPTCY DISTRICT )
)
OF THE STATE OF QUEENSLAND )
RE:RAYMOND JOHN BURKITT
Debtor
EX PARTE:HARTS PTY LIMITED
Applicant
AND:PAUL DESMOND SWEENEY
Trustee/Respondent
AND:RE: RAYMOND JOHN BURKITT
Debtor
EX PARTE:PAUL DESMOND SWEENEY
Trustee/Cross-applicant
AND:HARTS PTY LTD
Cross-respondent
CORAM: RYAN J
PLACE: BRISBANE
DATE: 14 JULY 1995
MINUTE OF ORDERS
THE COURT ORDERS:
That the application by Harts Pty Ltd dated 10 March 1995 be dismissed with costs.
That the cross-application by the Trustee, Paul Desmond Sweeney, dated 10 April 1995 be dismissed with costs.
That liberty be reserved to any party to apply on not less than 72 hours' notice in writing to each other party.
NOTE: Settlement and entry of orders is dealt with in O 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
GENERAL DIVISION )
) Estate No 1184 of 1993
BANKRUPTCY DISTRICT )
)
OF THE STATE OF QUEENSLAND )
RE:RAYMOND JOHN BURKITT
Debtor
EX PARTE:HARTS PTY LIMITED
Applicant
AND:PAUL DESMOND SWEENEY
Trustee/Respondent
AND:RE: RAYMOND JOHN BURKITT
Debtor
EX PARTE:PAUL DESMOND SWEENEY
Trustee/Cross-applicant
AND:HARTS PTY LTD
Cross-respondent
CORAM: RYAN J
PLACE: BRISBANE
DATE: 14 JULY 1995
REASONS FOR JUDGMENT
RYAN J: By application dated 10 March 1995, the applicant Harts Pty Ltd ("Harts"), which carries on business as accountants, has applied to have set aside a notice under s 139ZQ of the Bankruptcy Act ("the Act") by which the Deputy Official Receiver required payment of the sum of $10,500 to Paul Desmond Sweeney ("the Trustee") as trustee of the bankrupt estate of Raymond John Burkitt. By a cross-
application dated 10 April 1995 the Trustee has sought the following relief:
A declaration that the payments of $10,500.00 to the respondent and $12,669.00 to the bankrupt from the trust account from the respondent were not payments in good faith and in the ordinary course of business;
That the said payments referred to in the last preceding paragraph are void against the applicant as trustee of the property of the bankrupt under the doctrine of the relation back;
An order that the respondent pay to the applicant the sum of $23,169.00 together with interest."
The evidence discloses that in or about August 1992 Mr Burkitt, as the principal shareholder of Dondale Pty Ltd ("Dondale") sought advice from Harts in respect of Dondale's heavy indebtedness to Circle Petroleum Pty Ltd ("Circle") and the need to resolve Dondale's liability for unpaid group income tax and prescribed payments tax and to prepare Dondale's current accounts. It was intimated to Mr Burkitt by Mr Steven Hart, a principal of Harts, that Harts could not provide further accounting services unless given some assurance that its fees would be met. Accordingly, on Mr Hart's advice, Mr Burkitt obtained a valuation of his own residential property at 9 Rocket Court Benowa ("the property"). The property was valued at $110,000 and, by a contract dated 12 October 1992, Mr Burkitt sold it to his two sons for that price. The sale and purchase was financed by a loan to the purchasers of approximately $80,000 from Citibank. The proceeds of the loan were used to discharge a loan of approximately $57,000 secured by a mortgage to the ANZ Bank and the balance of $23,169.00 after defraying adjustments and other expenses incidental to the sale was paid into Harts' trust account on 1 December 1992. In the meantime, on 17 November 1992, Mr Burkitt had failed to comply with a bankruptcy notice served on him on behalf of Circle to which he had guaranteed repayment of Dondale's debt. The property was transferred by Mr Burkitt to his sons on 23 November 1992.
On 10 December 1992 Harts wrote to the General Manager of Circle in these terms:
"I wish to advise that Mr Raymond John Burkitt has approached our firm to carry out the following procedures:
Correspond with his major Creditor Circle Petroleum (Q'Land) Pty Ltd and to advise we are holding an amount of $20,000 in our Trust account.
Mr Burkitt has authorised payment of this $20,000 to Circle Petroleum (Q'Land) Pty Ltd provided Circle Petroleum Q'Land Pty Ltd agreed to the following conditions:
(a)Circle Petroleum Q'Land Pty Ltd will receive cash payment of $20,000 and accept assignment of all outstanding Debtors of $84,656.78 as per list attached.
(b)Circle Petroleum Q'Land Pty Ltd to receive funds as above as full and final settlement of judgment debt of $315,197.03 and costs of $439.00 being a total of $315,636.03.
(c)Upon receipt of $20,000 cash Circle Petroleum Q'Land Pty Ltd to withdraw forthwith any applications to place Mr R J Burkitt in Bankruptcy.
(d)Mr R J Burkitt to continue to collect all funds received from outstanding Debtors and transfer to Circle Petroleum Q'Land Pty Ltd till full amount is collected or he receives alternate written instructions from Circle Petroleum Q'Land Pty Ltd regarding collection procedures.
Mr R J Burkitt sold his only property being his home and after payments to the secured Creditor and after costs an amount of $20,000 is surplus. This surplus together with his other asset of $84,656.78 for outstanding Debtors is offered to your firm for settlement of your Debt.
Please within 14 days from date of this letter can your firm advise us if it is willing to accept the offer together with the conditions. Mr R J Burkitt has further instructed us that if your firm does not accept his offer and would still wish to proceed to Bankruptcy then please let him know so the cash in our Trust account may be forwarded to the official Receivers Office upon receipt of sequestration order."
That offer was rejected by the following letter dated 23 December 1992 from Circle's solicitors to Harts:
"As you are aware we act on behalf of Circle Petroleum (Q'land) Pty Limited. Our client has handed to us a copy of your letter of 10th December, 1992 with instructions to reply.
As we understand the position the debts your client is offering to assign in favour of our client are not in fact the property of your client. The debtors on the list to which you refer are debtors of the company Dondale Pty Ltd. Furthermore, Dondale Pty Ltd granted in favour of our client a charge over all of its assets and undertakings on 28th December, 1988. That charge crystallized by reason of your client's default under the terms of the Mortgage document and our client has received some monies pursuant to its rights under the charge. It is also noted that the debts owing by Fountain and Downes are extremely doubtful and accordingly, even if your client was in a position to assign those debts the benefit of that assignment would in all probability be of little value.
Taking into account all of the circumstances our client is not agreeable to the offer made on your client's behalf and it intends to proceed with the bankruptcy."
On 8 February 1993, Harts addressed a memorandum of fees to Mr Burkitt for $5,500 which was explained as:
"Re:professional fees and outlays in carrying out instructions re correspondence, opinions regarding payment to Circle Petroleum (Qld) Pty Ltd for period 9th Oct '92 to 5th Feb '93 and numerous meetings and discussions regarding insolvency and bankruptcy procedures and carrying out client's instructions."
On 12 February 1993, an amount of $5,500 was deducted, with Mr Burkitt's written authority, from Harts' trust account in payment of the above invoice.
On 18 February 1993, the credit balance in favour of Mr Burkitt in Harts' trust account was extinguished. That was done first by appropriating $5,000, again with Mr Burkitt's written authority, in payment of another account rendered by Harts, this time for $5,000. The account was then reduced to a nil balance by paying $12,669 to Mr Burkitt.
Circle's bankruptcy petition against Mr Burkitt was issued on 21 April 1993 and on 22 June 1993 a sequestration order was made thereon.
THE PAYMENTS OF $10,500 TO HARTS
It is not disputed that these payments were made out of the property of Mr Burkitt who subsequently became bankrupt. Since they had the effect of giving Harts an advantage over other creditors of the bankrupt, the payments were prima facie void as a preference by force of s 122 of the Act. However, Harts seek to resist that conclusion by asserting that, as a result of the advice which they gave to Mr Burkitt, the property was realized for its full assessed value with a minimum of selling and related expenses. Had it not been realized in that way, so the argument went, it would probably have fetched far less on a forced sale by the Trustee with its attendant agent's commissions and legal and advertising costs. Indeed, it was suggested, it was not inconceivable that the difference between the sale price actually realized and that which would hypothetically have been derived from a trustee's sale might have approximated the surplus of $23,169 which found its way into Harts' trust account.
However, I have not been persuaded to accept the second premise of this argument. It has not been supported by valuation evidence other than the valuation of Mr Alleyn which Mr Burkitt himself obtained before the sale. It is not without significance that Mr Alleyn who swore an affidavit
filed on behalf of the Trustee in these proceedings, was not required for cross-examination with a view to confirming his initial valuation of 6 October 1992 or obtaining an opinion on the price likely to be realized from a Trustee's sale on the open market or the approximate costs which would have been incurred on such a sale.
Moreover, I am not persuaded that the work done by Harts which contributed to the presumptive benefit to Mr Burkitt's creditors as a whole was commensurate with the sum of $10,500 appropriated out of the moneys held on trust for Mr Burkitt. It is clear that the benefit was not wholly attributable to Harts' advice. Mr Burkitt himself obtained the valuation and procured his sons to purchase the property. In the second place, it is clear from Harts' memorandum of fees in respect of the amount of $5,500 that it covered the period from 9 October 1992 to 5 February 1993 and comprehended much more than advice to sell the property and an indication of the means by which the sale might be affected. It included advice and negotiations with Circle intended to stave off a bankruptcy petition which conferred no identifiable benefit on the generality of Mr Burkitt's creditors. There is no evidence of the services for which the second instalment of $5,000 was received. However, the inference which I draw from the later appropriation of that sum is that it was referable to services rendered after 5 February 1993 and connected with the sale of the property less closely (if at all) than the work described in the memorandum of 8 February 1993.
Also tending against the presumptive benefit to the creditors of Mr Burkitt being worth the full amount of $10,500 is the evidence of Mr Steven Hart that most of the work to which that amount was referable had been performed in connection with Dondale. On Mr Hart's assessment, no more than $2,000 of the total fee was in respect of accounting services and advice provided to Mr Burkitt in his personal capacity.
However, Harts sought to turn to its advantage the facts just described by contending that only $2,000 of the $10,500 deducted from the trust account was recoverable as a preference, the balance having been paid in respect of the separate relationship or debtor and creditor which had subsisted between Dondale and Harts. I reject that contention. A relationship of creditor and debtor is frequently created between the provider of goods or services and the person at whose request the goods or services are provided to a third party. In my view, the facts of the present case lend themselves to just such an analysis. Mr Burkitt effectively controlled Dondale and in giving instructions to Harts and obtaining accounting services apparently drew no distinction between the company's financial affairs and his own. That absence of distinction was reflected in Harts' acceptance of the provision of security for its future fees from the sale of an asset which was indisputably Mr Burkitt's own. It is also evidenced by Harts' references in the letter of 10 December 1992 to Circle as "his [Burkitt's] major creditor" and "his other asset of $84,656.78 for outstanding debtors" which on a strict analysis clearly belonged to Dondale. Finally in this context, Harts' memorandum of fees of 8 February 1993 was addressed to Mr Burkitt and drew no distinction between work undertaken for him personally on the one hand and for Dondale on the other.
These indications in combination have led me to the firm conclusion that a relationship of debtor and creditor existed at the relevant time between Mr Burkitt and Harts and that the whole sum of $10,500 was appropriated in satisfaction of the debt thereby created.
An alternative argument advanced on behalf of Harts was that the money which came into its trust account was the direct result of services which it had rendered thereby entitling it to a particular lien over the fund for its fees for those services.
A Full Court of this Court has recently examined in some detail in Worrall v Power & Power (1993) 46 FCR 214 the nature of the solicitor's particular lien over the proceeds of an order for costs obtained as a result of work undertaken by the solicitor. The principles which underlie the recognition of equitable rights arising in that way can be extended to apply to persons other than solicitors as a result of whose exertion a fund has come into existence. Thus, in Sympson v Prothero (1857) 26 LJ Ch 671 Page-Wood V-C observed, at 672:
"The principle upon which, I apprehend, the Court should proceed in these transactions is to consider how the fund has been obtained; and if you find that it has been recovered by the exertions of the party claiming the lien, it is but right that he should have his reward out of the fruits of his exertions."
See also Re Born [1900] 2 Ch 435 which was followed in Re Statewide Computer Services Pty Ltd [1992] Qd R 647.
Reliance on the principle embodied in the concept of a particular lien, as opposed to a general possessory or retaining lien, like that exercisable by solicitors over documents entrusted to them, draws attention away from the time at which the fund passed into the lienor's hands and focuses on the time at which the exertions bore fruit by creating an equitable interest in a fund in favour of the lienor. In my view that occurred in the present case when the contract of sale was executed which predated the available act of bankruptcy.
I was referred by Counsel for the Trustee to Meguerditchian v Lightbound [1917] 2 KB 298 by way of raising a doubt whether a lien of the kind claimed could ever arise over the fruits of advice or negotiation rather than litigation. However, that was a case in which the solicitors sought an extension of the lien to costs which had earlier accrued on the separate instructions of a client who had since died. The fact that the earlier costs had arisen out of circumstances related to those by reason of which the concessions, over which the lien was claimed, came into the hands of the solicitors, was held not to warrant the extension of the lien to those earlier costs.
I have already indicated the difficulty of identifying what part (if any) of the balance of the proceeds of the sale of the property can be regarded as the fruits of the exertions of Harts. The present case is clearly distinguishable on its facts from that in which a fund arises from a judgment which would not have been obtained at all but for the efforts of the solicitor. The claim of an estate agent to commission out of the proceeds of a sale which the agent has solely brought about might be assimilated to that of the solicitor in the latter case. In the present case, by contrast, the proceeds of sale owed their existence to a combination of factors of which Harts' advice was only one.
On any view, the lien to which Harts would be entitled, if it can bring itself within the principle just discussed, would only extend to the amount of a reasonable fee for advising Mr Burkitt to sell the property. That could not be more than a small part of the $10,500.00. However, it is unnecessary for me to quantify that amount or otherwise to resolve the difficulties to which I have just adverted. That is because the discretion as to whether any amount, and if so, how much, should be allowed to Harts for its exertions in bringing the fund into existence is reposed in the first instance in the Trustee of the bankrupt estate; see eg In Re Simonson; Ex
Parte Ball [1894] 1 QB 433 where Vaughan Williams J observed, at 437:
"But I am asked to say whether the trustee can properly make any allowance to either the accountant or solicitor in respect of the work which they did. What I understand to be the rule as to that matter is this: If the trustee in the exercise of his discretion thinks that the creditors have derived profit from the work which has been done at the direction of the debtor, the trustee may adopt those services and pay for them. But although that is to my mind the rule, I by no means think that it is a rule which would justify the trustee in at all liberally or freely spending the money of the creditors which the debtor or debtors may have thought fit to call before their bankruptcy.
...
But I am unwilling to say that there may not be a case in which the trustee may properly adopt a portion of the services. It is said here that the accountants prepared a statement of affairs which was very useful to the creditors at the time of this meeting, and enabled them to determine with full information what was the best course for the creditors to adopt. That particular item of charge is a charge for a service which I can quite understand the trustee might say was a very useful service, and he might pay for it. The solicitor may, for ought I know, necessarily have been employed to get that statement prepared; but I should have said prima facie that the employment of a solicitor for that purpose was quite unnecessary, and I should have thought that the debtors might have given their instructions directly to the accountant. At the present moment, not having the bill before me, I cannot say whether there are any services of the solicitor which the trustee may properly adopt and pay for as having been useful to the creditors. He must exercise his own discretion, and, when he has done so, then, if any one feels aggrieved by the exercise of his discretion, the matter may be brought before the Court; but the rule that I lay down, and intend that the trustee should act upon, is that he should be very strict in this matter of adopting services of this sort and paying for them, and he must go through the items of the bill of costs, and only pay for such items as he is clearly satisfied have been incurred in such a way as that a benefit to the extent of the charge has resulted to the creditors."
For this reason, I consider that whatever right Harts has, and whether or not it is properly to be characterized as a lien, it cannot be enforced either by "self-help" or an order of the court until the Trustee has bona fide considered whether to recognize the alleged right and, if so, in what amount.
Accordingly, Harts application to set aside the notice under s 139ZQ must be refused.
PAYMENT OF $12,661.00 TO THE BANKRUPT
Harts has sought to resist the Trustee's application that it reimburse this amount to him by invoking s 124 of the Act. That section provides:
"124. (1)Notwithstanding anything contained in this Act, a payment of money or delivery of property (including a security or a negotiable instrument) to, or in accordance with the order or direction of, a person who becomes, or has become, a bankrupt or a person claiming by assignment from him is a good discharge to the person paying the money or delivering the property -
(a)if, in the case of a payment or delivery made before the day on which the first-mentioned person becomes a bankrupt - it is made in good faith and in the ordinary course of business; or
(b)if, in the case of a payment or delivery made on or after the day on which the first-mentioned person became a bankrupt - it is made in good faith, in the ordinary course of business and without negligence.
The burden of proving the matters referred to in sub-section (1) lies upon the person who relies on the validity of the payment or delivery of property.
For the purposes of this section, a payment or delivery of property shall not be deemed not to have been made in good faith and in the ordinary course of business by reason only that, at the time of the payment or delivery, the person by whom it was made -
(a)knew or had reason to suspect that the person to whom, or in accordance with whose order or direction, it was made was unable to pay his debts as they became due from his own money; or
(b)had notice of the commission of an act of bankruptcy by that person or of the presentation of a creditor's petition against that person."
Here the payment was made before Mr Burkitt became bankrupt so it is incumbent on Harts prove only that it was made in good faith and in the ordinary course of business. Harts is not required to negative negligence. I adopt, with respect, the view expressed by Riley J in Re Hasler; Official Receiver v Bank of New South Wales (1969) 23 FLR 139 where his Honour observed, at 141:
"In my opinion, therefore, only the most general guidance can be got from the cases as to the meanings of the two expressions. Following that guidance as best I can, and considering s 124 by itself and in its context, I am of opinion that the good faith required by s 124(1) is good faith towards the general body of the bankrupt's creditors: cf In re Dalton [1983] Ch 336, at p 354; and that the expression "in the ordinary course of business" in s 124(1) bears the same meaning (expounded in Taylor v White (1963-64)) 110 CLR 129 as it does in s 122, which replaced s 95 of the Bankruptcy Act 1924."
In the present case, it is significant that the payment was made to the prospective bankrupt himself and not to one of his creditors. It was made without any attempt to disguise its nature or amount and was readily traceable. In the circumstances, it would require actual or constructive knowledge by the payer that the payee intended to dissipate the fund or otherwise put it out of the reach of the general body of creditors before a payment of this kind could be regarded as not having been made in good faith in the requisite sense.
The balance of the proceeds from the sale of the property was paid into Harts' trust account for the express purpose of offering the sum of $20,000 to Circle to persuade it not to pursue bankruptcy proceedings against Mr Burkitt. When that offer was rejected, the purpose for which the trust had been created was incapable of achievement. In the ordinary course of business, therefore, Harts was required to repay the money to Mr Burkitt or otherwise deal with it at his direction. It is true that in its letter to Circle of 10 December 1992, Harts contemplated that, upon receipt of a sequestration order, the money would be forwarded to the Official Receiver's Office. However, that passage also stipulated that it was Mr Burkitt who was to be advised whether Circle "would still wish to proceed to bankruptcy". I consider that the letter read as a whole did not evince an understanding that if the offer were rejected, the money in Harts' trust account would be retained for the general body of Mr Burkitt's creditors and not at his direction.
It is also not without significance that Circle allowed almost four months to elapse between its rejection of Harts' offer and the presentation of its petition, and that no steps were taken during that time, eg as may have been possible under s 50 of the Act, to prevent the return of the moneys to Mr Burkitt.
CONCLUSION
In the result, I refuse both Harts' application and the Trustee's cross-application. Harts must pay the Trustee's costs of the application dated 16 March 1995 and the Trustee must pay Harts' part of the cross-application of 10 April 1995. I shall reserve liberty to either party to apply in respect to the question of interest or otherwise as he or it may be advised.
I certify that this and the preceding thirteen (13) pages are a true copy of the reasons for judgment of his Honour Justice Ryan
Associate:
Date:
Counsel for the applicant/
cross-respondent: Mr D Martin
Solicitors for the applicant/
cross-respondent: Baker Johnson & Partners
Counsel for the respondent/
cross-applicant: Mr K Wilson
Solicitors for the respondent/
cross-applicant: Bayliss Rodgers
Hearing date: 10 July 1995
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