Gliderol v Hall No. Scciv-01-1139

[2001] SASC 355

GLIDEROL INTERNATIONAL PTY LTD  v  HALL
[2001] SASC 355

Magistrates Appeal:  Civil

Nyland J.

1. This is an appeal from a magistrate sitting in the civil jurisdiction of the Adelaide Magistrates Court.  On 19 July 2001, the learned magistrate entered judgment in favour of the plaintiff against the defendant for the amount claimed in the summons.  The plaintiff is the liquidator of L G Zieschang & Co Pty Ltd (“the company”) and is the respondent to this appeal.

   Introduction

2. The company was incorporated on 30 June 1983.  The company’s main business was the construction of residential housing.  Mr Gregor Zieschang (“Mr Zieschang junior”) took over the management of the company in the early 1990s.  Mr Zieschang junior ran the company as the manager, contracting out the building work to contractors and sub-contractors.

3. At some point during the latter half of the 1990s, the company began to fall behind in its payment to creditors.  An analysis of the company’s cash flow indicates that the company became unable to pay its debts as and when they fell due.  A large proportion of trade creditors were left unpaid after the usual trading terms of 30 days, and in some cases the debts became 90 days or older.

4. As a result of the inability to pay the debts due, the company was inundated with Magistrates Court claims, notices of intention to sue and statutory demands from creditors, debt collectors and solicitors.  Much pressure was being brought to bear on the company by creditors.  Some of the creditors began settling their accounts with the company by receiving 60 to 70 percent of the debts owed to them.

5. On 21 July 1998, the company made a payment of $32,153.46 to Kemps Mercantile Agency Australia Pty Ltd (“Kemps”).  This payment was made to satisfy the debts owed by the company to a number of creditors who were represented by Kemps, one of which was the appellant.  Subsequently, from the payment made to Kemps, the appellant received a sum of $11,364.72.

6. On 1 October 1998, the company petitioned for its own winding up due to the financial difficulties. On 10 November 1998, the company was wound up in insolvency pursuant to section 459A of the Corporations Law (“the Law”). On the same day, Mr Hall was appointed liquidator of the company.

   The present proceedings

7. The action brought in the Magistrates Court was a claim by Mr Hall that the sum of $11,364.72 received by the appellant amounted to an unfair preference and was therefore voidable under section 588FE of the Law.

8. At trial, the learned magistrate found that the company was insolvent.  He said (at para 12):

   “I am satisfied and I find that the [appellant] was a creditor in respect of an unsecured debt at the time when its payment was received and that the payment so received and which is now the subject of this claim was for a sum of money greater than that which the [appellant] would have received if the transaction were set aside and the creditor were required to prove to the [appellant] in a winding up of the company.”

9. The learned magistrate found that the payment was made at a time when the company was insolvent during the relation back period, and hence that the transaction was voidable under the Law. He said (at para 22):

   “The relation back [day] is defined by s 9 of the Law to be the day on which the application for winding up order was filed, namely, 1 October 1998. There is satisfactory proof of this.”

10. And further (paras 29-31):

    “I find, based upon the evidence of the liquidator, that the transaction happened at a time when the company was insolvent.  I am satisfied, again based upon the evidence of the liquidator, that the payment constituted an unfair preference.  It constituted an unfair preference because the payment received resulted in the [appellant] obtaining a greater sum than the [appellant] would have got had it been required to lodge proof for the debt in a winding up of the company.

    I find that the transaction (payment to the [appellant]) was entered into or an act done during a six month period from the relation back day.  The date of the transaction was 21 July 1998.  The relation back period is a period of six months running back from 1 October 1998 ie a period commencing 1 April 1998.

    The [respondent] has successfully established those matters which the company is required to prove to establish that the transaction is voidable.  Prima facie, it follows that an order should be made directing the [appellant] to repay to the [respondent] the benefit which it has received.”

11. These findings have not been challenged on appeal.

12. At trial, the appellant sought to invoke section 588FG of the Law, claiming that the payment was provided to the appellant for valuable consideration in good faith, and that the appellant had no reasonable grounds for suspecting, and no reasonable person in its circumstances would have had such grounds for suspecting, that the company was, or would become, insolvent in a way mentioned in section 588FC(b).

13. The learned magistrate, after considering the evidence, rejected the defence.  He said (at paras 58-59):

    “I am satisfied that the defence available to the [appellant] is not made out.

    It may be that the [appellant] received the payment in good faith.  But assuming that, it must also be established by the [appellant] that it had no reasonable grounds for suspecting the company to be insolvent and that a reasonable person in the [appellant’s] position would have had no such grounds for so suspecting.”

14. During trial, however, the appellant made an application to amend the defence, to insert a new paragraph 12A in the following terms:

    “Further, or in the alternative, the payment received for and on behalf of the [appellant] company was not made by Zieschang & Co Pty Ltd in Law but by a third party to Zieschang & Co Pty Ltd by the latter company as a trustee for the third party.”

15. The learned magistrate dealt with this matter in the following way.  He said:

    “73.The [appellant’s] submission that the monies paid to Kemps were paid by Mr Zieschang senior or in the alternative that there were monies forwarded by the company to the [appellant] as trustee of Mr Zieschang’s senior.  That is an argument which I reject (sic).

    ...

    82.In my view, there is insufficient evidence in this case to make a finding that the payment made by Mr Zieschang senior was made in circumstances where there was an intention that the monies received by the company be held in trust for Mr Zieschang senior or that the subsequent payment out of those monies was a transaction carried out by the company in its capacity as a trustee.

    ...

    84.Even if the evidence supported the finding which counsel for the [appellant] asks me to make, the payment of the company’s debt would still constitute a ‘transaction’ pursuant to the Corporation Law and would still be an unfair preference payment by the company to the [appellant].”

16. On the hearing of the appeal the appellant sought only to challenge the magistrate’s decision on the basis that His Honour had erred in finding that the payment by Mr Zieschang senior to the company was not made with intention of creating a Quistclose trust.

17. The grounds of appeal therefore raised two questions.  First, was the $90,000 advanced to the company impressed with a Quistclose trust (or some other equitable obligation) so that the moneys did not become the company’s property? Secondly, if so, does the fact of that trust prevent the liquidator of the company from recovering the funds as an unfair preference? Mr Barnett submitted on behalf of the appellant that if the Court were to answer both of those questions in the affirmative, then the appeal had to be allowed.

    Onus of Proof

18. The first question raises the crucial issue as to which party bore the onus of proving or disproving the existence of the trust.

19. The liquidator had the onus of establishing that the payment to Kemps was an unfair preference as defined by s 588FA of the Law. Mr Barnett submitted that it followed that the liquidator was also required to prove that the moneys paid out of the company’s account were “from the company” in the sense that the moneys came from the company’s assets, and not from moneys being held upon trust by the company.

20. However, this submission is in direct conflict with authorities which state that the onus of establishing the existence of a trust lies with the person asserting that the trust was created: Peter Cox Investments Pty Ltd v International Air Transport Association 161 ALR 105 per O’Loughlin J at 118 citing Re Armstrong [1960] VR 202 and Travel House of Australia; Browne (unreported, Murray J, Supreme Court of Victoria, 1978).  See also Re Armstrong (deceased) [1960] VR 202, per Herring CJ at 206; Herdegen v Commissioner of Taxation(Cth) (1988) 84 ALR 271 per Gummow J at 277. Where there is an unambiguous use of language establishing a trust, the onus then shifts to the other party to prove that the trust did not exist: Re Lamshed (deceased) [1970] SASR 224 per Bray CJ at 239 citing ReSteele (deceased) [1925] SASR 272. In the absence of clear and unambiguous use of language in this case, it is my view that the onus of proving the existence of a trust in the present case falls on the appellant.

    Quistclose trusts

21. Mr Barnett submitted, however, that even if the appellant bore the onus of establishing the trust, the onus had been discharged on the evidence at the trial, and the magistrate was therefore in error in making a finding to the contrary.  Mr Barnett submitted that the moneys paid by Mr Zieschang senior to the company were for a specific purpose, namely, to discharge the debt owed to the creditors represented by Kemps.  In this way, it was said that the arrangement was tantamount to the trust upheld in the case of Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.

22. In Quistclose, a company called Rolls Razor Ltd was in financial difficulty, with a significant overdraft.  To alleviate the financial difficulties Rolls Razor sought a loan of £1,000,000 from Barclays Bank.  However, despite the difficulty, the directors had recommended a final dividend of £209,719 8s 6d, which was approved at the company’s annual general meeting.  The company had no liquid assets from which to pay the dividend.  A condition precedent to the making of the loan by Barclays Bank was that Rolls Razor obtained finance to pay the dividend.  It managed to borrow the moneys from Quistclose Investments Ltd.  It was a condition of that loan that the moneys be used solely to pay the dividend.  Quistclose paid the £209,719 8s 6d into a special bank account specifically set up for the purpose of holding the moneys advanced by Quistclose.  Rolls Razor then went into liquidation, with the dividend still unpaid.  The House of Lords held that the moneys did not form part of the company’s assets for the purpose of the liquidation.  Lord Wilberforce in his judgment said of the trust (at 581-582):

    “… when the money is advanced, the lender acquires an equitable right to see that it 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.”

23. The concept of a Quistclose trust has been followed in Australia: Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association (1999) 161 ALR 105 per O’Loughlin J at 117. See also Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491 per Gummow J at 499.

    Co-existence of debtor/creditor and trust relationship

24. In the present case, the company had an overdraft facility with the Commonwealth Bank.  That account, as at 15 July 1998, was recorded as having a debit balance of $54,826.76.  On 16 July 1998, $90,000 was paid into the account by Mr Zieschang senior, putting the balance into credit in the amount of $35,173.24.  Then, on 21 July 1998, two cheques were drawn, one in the name of Kemps, thereby returning the account to a debit balance of $8,369.22.

25. Mr Zieschang junior said in evidence that the terms for repayment of the $90,000 were that he would be personally responsible for repaying the moneys.  There was no set repayment date, but it was accepted that the $90,000 would be repaid over the next 10 years, interest not being payable.  The payment of $90,000 was not secured by any assets of the company.  Mr Blight on behalf of the respondent submitted that the payment of $90,000 was in the nature of an unsecured loan, thus a debt and not a trust.  Hence, it was said that the company was entitled to use the moneys as its own, being under an obligation to repay it at some future date.

26. Mr Blight submitted that courts are generally reluctant to extend the law of trusts to commercial transactions, and that, as such the court should be similarly reluctant to find the existence of a trust in the present case, given the commercial nature of the transaction.

27. If, however, the situation gives rise to a need for equity to intervene, in my view, it is of no consequence that the transaction is of a commercial nature.  True it is that courts will be reluctant to interfere where a decision of a commercial nature has been made.  However, courts will not be reluctant to determine the legal and equitable rights of parties to a transaction simply because it is commercial.  Indeed, it is part of the court’s function to make such determinations.

28. It should be noted that Quistclose involved a commercial transaction. There was a commercial relationship between Quistclose and Rolls Razor of debtor/creditor, much like the present case. Lord Wilberforce rejected the submission that the existence of such nature necessarily excluded the finding of a trust relationship (at 581):

    “The second, and main, argument for the appellant was of a more sophisticated character.  The transaction, it was said, between the respondents and Rolls Razor Ltd., was one of loan, giving rise to a legal action of debt.  This necessarily excluded the implication of any trust, enforceable in equity, in the respondents’ favour: a transaction may attract one action or the other, it could not admit of both.

    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 …”.

29. As O’Loughlin J said in Peter Cox Investments Pty Ltd (in liq) v International Air Transport Association (at 115):

    “I favour the view that Quistclose merely stands as authority for the proposition that an apparent debtor-creditor relationship can incorporate a trust relationship when such a trust relationship accords with the mutual intentions of the parties.  This, I think, is a reflection of the views of Gummow J in Re Australian Elizabethan Theatre Trust.”

30. This is consistent with the comments of Gummow J in Re Australian Elizabethan Theatre Trust (at 502):

    “The striking feature of the Quistclose litigation was that, whilst previously it might have been thought that debt and trust were distinct and disparate norms, it was thereafter clear that in a given case the transaction under analysis might bear a dual character.”

31. However, Gummow J went further (at 503):

    “In Quistclose, the debate was whether that material disclosed a trust … or merely a loan; no other result was suggested.  But the facts in such cases are susceptible of infinite variation and the trust is a supple instrument … the borrower would hold the moneys borrowed as trustee of an express trust for the lender, subject to a mandate for the lender to use the fund to pay the creditors.  On that footing, there would be but one trust, created to give the lender security for its rescue operation of the financially unhealthy borrower, but not to render the creditors beneficiaries under any trust.  … where the lender has a distinct interest of his own in seeing that the money is applied to pay the creditors of the borrower, the borrower will be obliged, at the suit of the lender, to make these payments; if the creditors are notified by the lenders of the arrangements between the lender and the borrower, this may amount to an assignment to them of the lender’s rights against the borrower, thereby giving the creditors an equitable interest in the fund, in place of that of the lender.

    It also is to be borne in mind, as I have said, that dealings between two parties may give rise to equitable rights in a third party, falling short of those of a beneficiary against a trustee.  … They include equitable charges and liens and equitable personal obligations … In this field, the legal system in truth teems with established norms, and there is scarcely the need for another, dignified as the Quistclose trust.

    To speak of a Quistclose trust as if it were a new legal institution rather than an example of the particular operation of principle upon the facts as found is to set the listener or reader off on a false path.”

    Existence of a Trust

32. For a Quistclose trust to be formed, it was necessary that the mutual intention of Mr Zieschang senior and the company was that the moneys advanced by Mr Zieschang senior would only be used to pay the group of creditors represented by Kemps.  If so, then the consequence is that a failure to apply the moneys to the purpose as intended by both parties would create a resulting trust in favour of the party loaning the moneys, which, in this case, would mean that the moneys did not form part of the company’s assets for the purposes of the liquidation: Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] 1 Ch 207 per Peter Gibson J at 222. Mr Barnett submitted that the magistrate, in deciding whether Mr Zieschang senior intended to advance the moneys for a special purpose only, or intended merely to lend the moneys to the company for any purpose, ought to have regard to all of the circumstances of the advance, that is:

    ·    Mr Zieschang senior was the founder of the company, which was a family building company.

    ·    Mr Zieschang junior, his son, was in control of the company at the time the $90,000 was advanced.

    ·    The company was in dire financial straits and required an immediate injection of funds in order to bring the company’s overdraft within its limit and to pay certain specific long-standing creditors, all of whom were pressing for payment.

    ·    No interest was payable on the advance, nor was any security given by the company.  The repayment terms of the “loan” were vague.  There was no written agreement.  No proof of debt was ultimately lodged by Mr Zieschang senior.  The only apparent benefit obtained by Mr Zieschang senior for advancing the money to the company at that time and in those circumstances was the intangible benefit of keeping afloat the company established by him and protecting the family name.

    ·    The company dealt with the funds advanced consistently with the said law’s intentions and the terms of the trust.

1. There is no dispute that the advancement of moneys from Mr Zieschang senior were paid into the company account, nor is there any dispute as to the fact that part of that moneys were paid out of the account to Kemps for the purpose of discharging the debt owed to the appellant.  Mr Barnett cited Rose v Rose (1986) 7 NSWLR 679 at 686 and submitted that it was not necessary that the beneficiary of the trust know of its existence, although it appeared that the appellant, through its agents Kemps, was aware that the funds paid to it originated from someone other than the company.

2. Mr Barnett also submitted that if the intention to create a trust was clear, it did not matter that the trust property was not separately held: Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2001) 71 ALR 568. He also submitted that it did not matter that if the intention was clear, the funds advanced were mixed with non-trust funds. Re Kayford Ltd [1975] 1 All ER 604 at 607. Mr Blight submitted however that both cases could be distinguished, as neither related to a Quistclose trust.

3. The appellant relied on Mr Zieschang junior’s evidence at trial as establishing a mutual intention that the moneys be used for the sole purpose of paying the debts owed to specific creditors.

4. Mr Zieschang junior said that he sought the loan from his father to “help cut the overdraft down and pay out some of the creditors”.  It was important to both Mr Zieschang junior and his father to keep the company going as long as possible as the family had invested in the company over a number of years.  When the company was eventually wound up it was important to Mr Zieschang junior to “keep the company’s and family’s honour in good name”.

5. Mr Zieschang junior said that he indicated to his father that the requested loan would be “earmarked for certain specific commitments, certain debts and the overdraft”.  In particular, Mr Zieschang junior led his father to understand that the moneys were specifically for the use of reducing the overdraft and to meet the particular debts of the creditors represented by Kemps.  The evidence then continued (at 44):

   “Q.Was there ever any discussion about this money being paid by him, for example, direct to them, rather than putting it through the company cheque book.

   A.No.

   Q.It was always intended that it go through your company cheque book as it were.

   A.That’s right, yes.

   Q.Would you agree with me that in essence you got the money in trust from your dad to pay certain bills and you didn’t have permission to pay whatever bills you like.  You had permission to pay what you had arranged to do.

   A.Certainly the major creditors we discussed, yes.

   Q.So, in effect, you got at least $30,000 of that money on trust from your father to pay certain specific creditors.

   A.That’s right.

   Q.Whatever else you did with the rest of the money doesn’t matter but if you didn’t pay them that $30,000 you would be in breach of the arrangement with your father, wouldn’t you.

   A.Yes.

   Q.So you would agree that you had that money in trust for that specific purpose.

   A.Yes.”

6. Mr Zieschang junior was called by the respondent at trial, and the above evidence was elicited in cross-examination.  Mr Zieschang senior did not give any evidence.  Notwithstanding that matter, the appellant argued that it could be inferred from the evidence of the son, that his father had the intention that the moneys only be used to pay the creditors represented by Kemps.  In view of the way the evidence emerged at trial, however, and absent any evidence from Mr Zieschang senior (who was available to give evidence on behalf of the appellant), I consider that such an inference, if capable of being drawn, to be of limited weight.  In my opinion, the magistrate was entitled to find that the requisite mutual intention had not been proved on the balance of probabilities.

7. Further, in my view, three things tell against the existence of a Quistclose trust in this case.  First, the moneys were paid into the company’s account, and not into a separate account.  This is an important factor tending to suggest that a Quistclose trust was not intended: Re Australian Elizabethan Theatre Trust per Gummow J at 499.

8. Secondly, the $90,000 paid by Mr Zieschang senior into the company’s account was not the exact amount of the debts owed to the creditors represented by Kemps.  In Quistclose, the exact amount of the dividend was paid into the specified account.

9. Thirdly, only part of the moneys were paid to Kemps.  Two other cheques were drawn from the overdraft account, and, in particular, from the moneys paid into that account by Mr Zieschang senior.  The drawing of these cheques put the company’s account at a debit balance.  This tends to show that the moneys were not for the sole purpose of paying specific creditors.

10. In my opinion, the appellant failed to prove that it was the mutual intention of the company and Mr Zieschang senior that the moneys were to be used for the sole purpose of paying the debts due to particular creditors.  In light of this, it is unnecessary for me to address the question as to whether the existence of a Quistclose trust prevented the liquidator from recovering the payment as an unfair preference.

11. No error on the part of the magistrate has been demonstrated such as to require this Court to interfere.  The appeal is, therefore, dismissed.  I will hear the parties as to costs.