Harrington v Harrington Services Pty Ltd (In liq)

[2003] NSWSC 29

CITATION:	Harrington & Anor v Harrington Services Pty Ltd (In liq) & Ors [2003] NSWSC 29
HEARING DATE(S):	26 November, 2002 and written submissions concluding 3 December 2002
JUDGMENT DATE:	11 February 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Plaintiffs entitled to some, but not all, of relief claimed.
CATCHWORDS:	AGED CARE ACT 1997 (Cth) - CONSTRUCTION - Sale of allocated places under Aged Care Act - accommodation bond balances outstanding as at date of transfer - effect of scheme established by s.16-11(b) - debts and liabilities of transferor expunged. WORDS AND PHRASES - "Responsibilities". CONSTRUCTIVE TRUST - Subsidy rights under Aged Care Act allocated to lessee of nursing home business in substitution for subsidy rights under National Health Act 1953 (Cth) - on expiration of lease lessee purports to deal with subsidy rights inconsistently with lessor's rights - constructive trust imposed.
LEGISLATION CITED:	Aged Care Act, 1997 (Cth) - s.7-1, s.11-1, s.16-1, s.16-7, s.16-11, s.20-1, s.57-2, s.57-9, s.57-11, s.57-13, s.57-19, s.57-21 Aged Care (Consequential Provisions) Act 1997 (Cth) National Health Act 1953 (Cth)
CASES CITED:	- Aberdeen Town Council v Aberdeen University (1877) 2 App Cas 544 - Baumgartner v Baumgartner (1987) 164 CLR 137 - BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 - Keech v Sandford (1726) Cas t King 61 [25 ER 223] - Muschinski v Dodds (1985) 160 CLR 583
PARTIES :	Kenneth Harrington - First Plaintiff Jacqueline Dorothy Harrington - Second Plaintiff Harrington Services Pty Ltd (In liq) - First Defendant Robert William Whitton and David John Frank Lombe - Second Defendants
FILE NUMBER(S):	SC 1261/02
COUNSEL:	Bruce Monotti - Plaintiffs J.S. Wheelhouse - Defendants
SOLICITORS:	Tress Cocks & Maddox - Plaintiffs Coudert Bros - Defendants

Introduction

1    In this matter I gave judgment on 20 September 2002. When the matter was brought back for argument as to terms of the Orders to be made, two issues were raised which had not been explored at the hearing. Further submissions were made orally and subsequently in writing, culminating in a final set of written submissions from the Plaintiffs on 3 December 2002. 2    The issues are:

– what is the amount of the proceeds of sale of the fifty places allocated to the First Defendant (“Harrington Services”) under the Aged Care Act, 1997 (Cth) for which Harrington Services and its liquidators are liable to the Plaintiffs;

– are the proceeds of sale, the net balance of which is held in a separate account to abide the result of this case, to be paid out to the Plaintiffs or is the Plaintiffs’ only remedy to prove for the amount to which they are entitled as unsecured creditors in the winding-up of Harrington Services.

3    The issues arise in this way. In my earlier judgment I held that the nursing home business at Trentham conducted by Harrington Services was, in fact, leased to it by the Plaintiffs and that the fifty places allocated to Harrington Services under the Aged Care Act were assets of that business so that they were not available to be sold by the liquidators of Harrington Services for the benefit of the company’s creditors. 4    At the conclusion of the trial, the Plaintiffs submitted that they were entitled to damages for breach of an implied term in the lease that the assets and goodwill of the nursing home business be returned to them upon expiry of the lease. They claimed that the amount of damages was equal to the sale price of the fifty allocated places which was, they said, $2M. 5    The Plaintiffs had claimed, in the alternative, that if the fifty places allocated under the Aged Care Act did not form part of the assets of the leased business as from the date that the Aged Care (Consequential Provisions) Act 1997 (Cth) came into effect, then they were held by Harrington Services upon a constructive trust for the Plaintiffs. Further, in the alternative, the Plaintiffs claimed that if Harrington Services had acquired any beneficial interest in the allocated places, it had been unjustly enriched. 6 The relief sought by the Plaintiffs, in so far as is relevant, was as follows:

“(a) A declaration that on 1 October 1997 and at all material times thereafter all of the fifty places allocated under the provisions of the Aged Care Act 1997 (Cth) and the Aged Care (Consequential Provisions) Act 1997 (Cth) for the provision of residential care at Trentham Nursing Home were legally and beneficially owned by the plaintiffs.

(b) A declaration that the first defendant did not at any time have any right, title or interest in any of the said allocated places.

(c) A declaration that the plaintiffs are and were at all times since the sale by the defendants of the said allocated places entitled to receive the whole of the proceeds of that sale in the sum of $2,000,000.00.

(d) An order that the defendants account to the plaintiffs for all moneys received by them in respect of the sale of the allocated places, and for that purpose, an order for the taking of accounts and making of all necessary enquiries.

(e) An order that the defendants pay to the plaintiffs the said sum of $2,000,000.00 as moneys had and received to the use of the plaintiffs.

(f) Damages.

(g) Further or alternatively:

(i) A declaration that on 1 October 1997 and at all material times thereafter Harrington Services held the said fifty allocated places upon a constructive trust for the benefit of the plaintiffs absolutely.

(ii) A declaration that the whole of the said proceeds of sale of the allocated places, being $2,000,000.00, was received by the defendants upon trust for the benefit of the plaintiffs absolutely.

(iii) An order that the defendants pay to the plaintiffs the said sum of $2,000,000.00.

(iv) Damages for breach of trust.

(h) Further or alternatively:

(i) A declaration that on 1 October 1997 and at all material times thereafter the plaintiffs were entitled to be compensated by the first defendant for the value of the said allocated places.

(ii) A declaration that the defendants were upon the sale of the said allocated places liable to pay to the plaintiffs the whole of the proceeds of sale as compensation for the allocated places.

(iii) An order that the defendants pay to the plaintiffs the same sum of $2,000,000.00.”
7    In my judgment I had held that Harrington Services was obliged to transfer the fifty allocated places to the Plaintiffs at the expiry of the lease in accordance with a term implied by law in every lease: paras. 80, 81. The focus of the Plaintiffs’ submissions as to relief seemed to rest on their remedy in damages for breach of this implied term of the lease and, as I held that they would be entitled to that remedy, I did not think it necessary to deal with the other relief claimed. In fairness to the Plaintiffs’ Counsel, his apparent focus in oral submissions on the Plaintiffs’ remedy in damages may well have been the result of the fact that submissions on both sides had to be somewhat truncated because the time allotted for the hearing was rapidly drawing to an end. I note, however, that his written submissions, while certainly raising constructive trust and unjust enrichment, did little more than refer to well known cases rather than explaining the reasoning by which a constructive trust is said to arise in the circumstances of this particular case. 8    The debate which has been occasioned by the formulation of Orders now demonstrates the necessity for a close analysis of the relief to which the Plaintiffs are entitled.

Damages for breach of implied term

9    I remain of the view that in failing to deal with the allocated places at the direction of the Plaintiffs on expiry of the lease, Harrington Services was in breach of an implied term of the lease. The term is implied partly by law and partly in order to give business efficacy to the lease. That part of the term which is implied by law is, as I have said in paragraphs 80 and 81 of the earlier judgment, the obligation on the part of the lessee in every lease to transfer or surrender to the lessor the assets the subject of the lease at the end of the term. That part of the term which is implied in order to give business efficacy is a proviso to the term for surrender or transfer, to the following effect: “If surrender or transfer to the lessors themselves of any subsidy rights being part of the leased assets is not permissible because of the provisions of the relevant legislation, then Harrington Services will transfer the subsidy rights at the direction, and for the benefit, of the lessors in a manner which is permissible under the legislation” . In the present case, the Plaintiffs could have negotiated the sale of the allocated places to an “approved provider” under the provisions of Division 16 of the Aged Care Act in exactly the same way as the liquidators of Harrington Services have done pursuant to the Sale Agreement, and they could have directed Harrington Services to comply with the transfer procedures specified in that Division. 10    In my view, such an implied term satisfies the tests in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, at 283:


– the term is reasonable and equitable because it is in conformity with the overriding obligation of Harrington Services as lessee to surrender to the Plaintiffs the leased assets at the end of the lease;

– the term is necessary to give business efficacy to the term requiring surrender implied by law because complete surrender of the leased assets could not be achieved otherwise;

– the term ‘goes without saying’ because it could not have been the intention of the parties that the lessee should be entitled to keep for itself a valuable leased asset on the ground that a transfer or surrender to the lessors directly was not permissible under the legislation even though a transfer by direction for the lessors’ benefit could be permissible under the legislation;

– the term is capable of clear expression in the words which I have set out above;

– the term does not contradict any express term of the lease.

11    The Plaintiffs are entitled to damages for breach of this implied term of the lease. They do not submit that the quantum of damages is any more or less than the proceeds which the liquidators received for the sale of the fifty allocated places. 12    I note a submission of the Defendants that breach of the term implied by law in the lease for transfer or surrender of the allocated places caused no damage to the Plaintiffs because it was legally impossible for Harrington Services to transfer the places to the Plaintiffs directly. For the reasons which I have given, the implied term for surrender is not limited to requiring Harrington Services to transfer or surrender to the Plaintiffs directly. It follows that I cannot accept this submission.

Express trust

13    If the Plaintiffs simply elect for and obtain their remedy in damages for breach of a term of the lease, they would have to prove for the amount of the judgment debt as unsecured creditors in the liquidation of Harrington Services. This, of course, they wish to avoid and so they have claimed a constructive trust and an accounting on the basis of unjust enrichment. 14    In fact, however, the Plaintiffs do not need to rely on a constructive trust to obtain payment of the net proceeds of sale of the allocated places which are now held by the liquidators: they have the benefit of an express trust. 15    This is so because by their solicitor’s letter of 25 July 2001 to the liquidators the Plaintiffs, while asserting ownership of the allocated places, consented to the liquidators selling them on condition that the net proceeds of sale were separately retained pending a resolution of the litigation. By their solicitors’ letter dated 25 September 2001 the Plaintiffs reaffirmed that they had no objection to the proposed sale of the places subject to the condition that “the net proceeds of sale … be set aside pending agreement or court order with respect to beneficial ownership” . Net proceeds of sale were defined as meaning “$2M less the amount payable for GST and less the amount to be paid to bondholders” . 16    On this basis the sale of the allocated places by the liquidators proceeded and was completed on 21 December 2001. From the sum of $2M, the amount of $993,716.36 was deducted as owing to bondholders and either disbursed to them on completion or placed in a separate account for payment out in due course. A further sum of $181,818.18, representing GST on the sale, was deducted and is held in a separate account. The balance of the sum of $2M, namely $824,466, is held separately to abide the outcome of these proceedings in accordance with the letters of 25 July and 25 September 2001. 17    The agreement to hold the balance of net proceeds separately is pleaded in paragraphs 28 and 30 of the Plaintiffs’ Statement of Claim and is admitted by the Defendants in their Defence. Clearly, the sum of $824,466 held in the separate account is held upon an express trust for whichever party to the proceedings the Court finds was entitled to the benefit of the allocated places on expiry of the lease to Harrington Services. The Plaintiffs are, therefore, entitled to the amount standing to the credit of that separate account as beneficiaries and they are entitled to an order that that be accounted for to them.

Constructive trust

18    The Plaintiffs plead that the allocated places were held by Harrington Services as from the date of their allocation on 1 October 1997 upon a constructive trust for the Plaintiffs, so that the proceeds of their sale may be traced in equity and are, likewise, held upon a constructive trust. In my opinion, the allocated places were not held upon a constructive trust for the Plaintiffs as from the date of their first allocation. That is because they were held by Harrington Services, when allocated, in accordance with the terms of the lease of the nursing home business and they were not dealt with by Harrington Services during the term of the lease inconsistently with the Plaintiffs’ rights. However, equity will impose a constructive trust in favour of the Plaintiffs over the allocated places as from the date of termination of the lease, when Harrington Services and the liquidators refused to deal with the places in conformity with the Plaintiffs’ rights. My reasons for this conclusion are as follows. 19    Normally the lessee of realty or personalty is not a trustee for the lessor of the leased property. Legal title in the property remains with the lessor and the lessee has only a right of exclusive possession and enjoyment during the term of the lease. In this case, however, rights to subsidies under the Aged Care Act – which are not, strictly speaking, property but are closely analogous to property because the Aged Care Act permits the holder to sell them – were acquired by Harrington Services in circumstances in which they became part of the goodwill or assets of the leased nursing home business. But the acquisition could only be in the name of Harrington Services, not in the name of the Plaintiffs, because the allocation had to be made by the Secretary to an “approved provider” and the conditions in s.7-1, s.11-1 and s.20-1 of the Act had to be satisfied: see paragraphs 66 to 69 of the earlier judgment. Accordingly, Harrington Services became the “legal owner” of the allocated places, in so far as there can be ownership of subsidy rights under the Aged Care Act . 20    But while the Aged Care Act defines who was entitled to receive subsidy rights, and who therefore might be described as the “legal owner” of the subsidy rights, the Act does not stipulate that the recipient, or “legal owner” of the rights, must also be taken to hold those rights absolutely and without qualification. For example, as I pointed out in paragraph 75 of the earlier judgment, Harrington Services, as trustee of the Harrington Family Trust, could not have dealt with the allocated places for its own benefit during the term of the lease to the exclusion of the Harrington Family Trust. It could not have sold the allocated places and retained the proceeds for itself, saying that because the Aged Care Act permitted allocation of places only to it and not to the beneficiaries of the Harrington Family Trust, the allocated places were not trust assets. This is merely an elementary application of the rule in Keech v Sandford (1726) Cas t King 61 [25 ER 223]; see also Aberdeen Town Council v Aberdeen University (1877) 2 App Cas 544. 21 Where “legal title” to the allocated places was acquired by Harrington Services during the term of the lease but only because Harrington Services was the lessee of the leased business and only because it was continuing to conduct the leased business with the benefit of the Plaintiffs’ goodwill for which it had not paid (see paragraphs 76, 77 of the earlier judgment), then equity would regard it as against good conscience for Harrington Services to deal with the legal title to the allocated places inconsistently with the Plaintiffs’ rights upon termination of the lease. In response to such an inconsistent dealing, equity would impose a constructive trust on the allocated places. The applicable principle is explained by Deane J in Muschinski v Dodds (1985) 160 CLR 583, at 620:
"… the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do: cf Atwood v Maude (1868) LR 3 Ch App 369 at 374-5 and per Jessel MR, Lyon v Tweddell (1881) 17 Ch D 529 at 531.”

This passage was expressly approved and adopted by Mason CJ, Wilson and Deane JJ in Baumgartner v Baumgartner (1987) 164 CLR 137, at 148.

22    In the present case, the Plaintiffs leased to Harrington Services, inter alia, the goodwill of the nursing home business, a vital part of which comprised the existing subsidy rights under the National Health Act 1953 (Cth). By reason of those subsidy rights and the leased goodwill of the business, Harrington Services became entitled to the fifty allocated places under the Aged Care Act . It acquired those places in substitution for the subsidy rights which it previously had under the National Health Act in the course of, and for the purpose of, carrying on the business which it leased from the Plaintiffs. It was never specifically intended by the parties or specially provided in the lease that Harrington Services should continue to enjoy the benefits of subsidy rights, under whichever legislation they were provided, after the lease terminated. In that circumstance, equity will not permit Harrington Services, in good conscience, to assert or retain the benefit of the “legal title” to the allocated places as against the Plaintiffs, as the liquidators did when the lease expired. 23    For these reasons, I am of the view that the fifty allocated places were held by Harrington Services on a constructive trust for the Plaintiffs as at the expiry of the lease. 24    The critical question now arises: for what amount must Harrington Services and the liquidators account to the Plaintiffs in respect of the sale of the allocated places which were held upon a constructive trust? Put another way: what was the sale price of the allocated places and what, if any, deductions from the sale price were Harrington Services and the liquidators entitled to make before accounting to the Plaintiffs for the balance?

The amount for which Defendants liable

25    The Plaintiffs say that the amount for which the Defendants are liable, whether as damages for breach of the lease, or upon an accounting pursuant to a constructive trust, is not the amount actually received by the liquidators on completion of the sale and now held in the separate account but is, rather, the sum of $2M which, they say, was the purchase price paid for the places by the third party under the Sale Agreement. 26    The Plaintiffs say that what has happened is that the purchaser under the Sale Agreement agreed to pay $2M for the places but was required by the terms of the Secretary’s consent to the transfer to withhold from the sale price payable on settlement the amount necessary to satisfy Harrington Services’ debts to bondholders. Those debts were incurred by Harrington Services in the course of carrying on the leased nursing home business for its own benefit so that the debts to bondholders are debts of Harrington Services itself, not debts for which the Plaintiffs could ever have been liable. If Harrington Services had duly paid all of its debts to bondholders prior to settlement of the transfer of the allocated places, the Plaintiffs say, then Harrington Services would have received the whole of the $2M sale price and would have had to account to the Plaintiffs for the whole amount, subject only to the payments of Goods and Services Tax. In the result, the Plaintiffs contend, part of the proceeds of the sale of property beneficially owned by the Plaintiffs has been used to pay the debts of Harrington Services and Harrington Services and the liquidators must now account for that wrongful deduction. 27    At first blush, this argument had considerable attraction; however, in the light of the somewhat unusual provisions of the Aged Care Act and the scheme which those provisions establish for the transfer of allocated places, I have come to the conclusion that the argument cannot succeed. My reasons are as follows. 28    Patients at Trentham occupying “allocated places” under the Aged Care Act typically entered into an accommodation bond agreement with Harrington Services, the purpose of which was to provide payment in advance for residential care services to be rendered in the future. The accommodation bond agreements were expressed to be entered into pursuant to the provisions of the Aged Care Act and stipulated that in so far as they were applicable the provisions of that Act, inter alia, were to apply to the agreements: Clauses 1.1 and 1.2. 29 Part 4.2 Division 57 of the Aged Care Act is entitled “What are the responsibilities relating to accommodation bonds?” Section 57-2 sets out what are called “The basic rules about accommodation bonds”. In so far as presently relevant, the rules require that if an accommodation bond is charged by an approved service provider, an accommodation bond agreement as defined must have been entered into within a prescribed time: s.57-2(e). Section 57-9 defines an accommodation bond agreement as one containing specified terms, and s.57-11 provides that the requirements of Division 57 relating to accommodation bonds apply despite any agreement to the contrary. 30 Section 57-19 provides that the approved provider may deduct from the amount paid under accommodation bond agreement the amounts owed to the provider for services provided to the care recipient, in accordance with detailed provisions in the Act and in the User Rights Principles in force from time to time under the Act. The amount of the bond remaining to the credit of the care recipient after these authorised deductions is called “the accommodation bond balance”. 31 Section 57-21 provides for the refund of an accommodation bond balance. The section is in the following terms:

“(1) The accommodation bond balance in respect of an accommodation bond paid by a care recipient for entry to a residential care service must be refunded by the approved provider conducting the service if:

(a) the care recipient dies; or

(b) the care recipient ceases to be provided with residential care by a residential care service conducted by the approved provider (other than because the care recipient is on leave); or

(c) the residential care service ceases to be certified.

(2) The accommodation bond balance must be refunded to the care recipient in the way specified in the User Rights Principles.

(3) The accommodation bond balance must be refunded:

(a) if the care recipient is to enter another residential care service:

(i) if the care recipient has notified the approved provider of the move more than 7 days before the day on which the approved provider ceased providing care to the care recipient – on the day on which the approved provider ceased providing that care; or

(ii) if the care recipient so notified the approved provider within 7 days before the day on which the approved provider ceased providing that care – within 7 days after the day on which the notice was given; or

(iii) if the care recipient did not notify the approved provider before the day on which the approved provider ceased providing that care – within 7 days after the day on which the approved provider ceased providing that care; or

(b) in any other case – within 2 months after the day on which the event referred to in paragraph (1)(a), (b) or (c) (whichever is applicable) happened.”
32    Section 57-13 provides for what is to happen if the care recipient moves between residential care services:

“If:

(a) an accommodation bond has been paid by a care recipient for entry to a residential care service (the original service ); and

(b) the care recipient ceases being provided with residential care through the original service (other than because the care recipient is on leave); and

(c) the care recipient enters another residential care service within 28 days after the day on which the care recipient ceased being provided with care by the original service;

the maximum amount of the accommodation bond for the entry of the care recipient to the other service is the amount of the accommodation bond balance that was refunded or is payable to the care recipient under section 57-21 in respect of the accommodation bond referred to in paragraph (a).”
33    Thus far, the scheme of the Aged Care Act in relation to accommodation bonds may be seen as one which seeks to protect the rights of the care recipient, both in respect of the utilisation of the bond money for permitted purposes and for the return of the accommodation bond balance if the care recipient dies, if the original approved provider ceases to provide certified residential care, or if the care recipient moves to a residential care service conducted by another approved provider. 34 Section 57-21(1) requires the accommodation bond balance to be refunded by the approved provider who was conducting the residential care service at the time when the care recipient became entitled to the refund. This obligation is, however, subject to the scheme set in place by Part 2.2 Division 16 for the transfer of allocated places. Section 16-1 provides that the transfer is of no effect unless it is approved by the Secretary. If the transfer is approved, then as from the “transfer day” the transferee is taken to be the person to whom the place is allocated. “Transfer day” is defined as “the proposed transfer day specified in the application [for transfer] if the transfer is completed on or before that day” : s.16-7(1). So, for example, if a contract for the sale of allocated places is actually completed by the payment of consideration a week prior to the “transfer day” specified in the application for transfer, the “transfer day” for the purposes of the Aged Care Act nevertheless occurs a week later. 35    In the present case, the liquidators made application for a transfer of the Trentham allocated places on 22 November 2001. The Secretary’s delegate approved the transfer by letter dated 7 December 2001 subject to certain conditions and approved the transfer day as 21 December 2001. The conditions of approval included the following:

“The transfer of places to another person is granted subject to the following conditions:

…

(b) That the transferee meets the responsibilities that the transferor had, immediately before the approved transfer date, in relation to the refund of outstanding accommodation bond balances, in the following manner –

On the date of settlement of the sale of the approved places, the transferee will provide to the transferor individual bank cheques, with amounts made payable to the persons entitled to the refund of all outstanding accommodation bond balances. The said amounts represent the balance of the accommodation bonds that have not been returned by Harrington Services Pty Ltd (In Liquidation) to the former residents of Trentham House.”

Completion of the Sale Agreement took place on the approved “transfer day” and bank cheques were provided to the liquidators in accordance with condition (b) imposed by the Secretary’s delegate.

36    Section 16-11 provides:

“ Effect of transfer on certain matters

On the transfer day:

(a) any entitlement of the transferor to an amount of subsidy under Chapter 3, in respect of the place being transferred, that is payable but has not been paid passes to the transferee; and

(b) any responsibilities under Part 4.2 that the transferor had, immediately before that transfer day, in relation to an accommodation bond balance connected with the place become responsibilities of the transferee under Part 4.2; and

(c) the transferee is subject to any obligations to which the transferor was subject, immediately before that day, under a resident agreement or community care agreement entered into with a care recipient provided with care in respect of the place.”
37    Section 16-11(b) immediately strikes one as an unusual provision. Its subject matter is “responsibilities under Part 4.2 … in relation to an accommodation bond balance connected with” a transferred allocated place. “Responsibilities” is a rather general word: one might have expected the word “liabilities” when what is referred to is an obligation to refund an accommodation bond balance in the circumstances prescribed by s.57-21. But the use of the all encompassing word “responsibilities” becomes understandable when one examines s.57-21 and s.16-11 more closely. 38 The circumstances under which an accommodation bond balance may become refundable under s.57-21 are various. The bond balance is refundable if the care recipient dies or if the approved provider ceases to provide any residential care or certified residential care: subsection (1)(a), (b) and (c). The approved residential care may cease to be provided to the care recipient because the provider ceases to carry on its business or because the care recipient moves to another residential care service (subsection (3)(a)), or because the approved provider transfers the allocated place occupied by the care recipient to another approved provider under Part 2.2 Division 16. In all but the last of these circumstances the approved provider incurs an actual liability under s.57-21 to refund the accommodation bond balance which it must discharge within a specified time. 39 Special provision is made, however, for what is to happen when an approved provider ceases to provide care consequent upon the transfer of an allocated place. A transfer may occur where the transferor has ceased to provide residential care well prior to completion of the transfer of the allocated place. In such case the transferor will have incurred an actual liability to refund a bond balance under s.57-21(1)(b) well prior to the transfer date. On the other hand, a transfer may occur pursuant to the sale of the transferor’s business as a going concern, so that the day-to-day care provided to recipients does not cease and all that changes is the identity of the approved provider on and from completion. In such a case no liability on the part of the transferor to make refunds of bond balances under s.57-21(1)(b) could have arisen until the time of completion on the transfer day. 40 Section 16-11(b) operates upon the transferor’s obligations in respect of bond balances as those obligations were on the day before the transfer day. Accordingly, where the transferor transfers allocated places pursuant to a sale of the transferor’s business as a going concern and completion of the sale occurs on transfer day, it would not have been correct to refer to the transferor’s obligations as they were on the day before the transfer day as “liabilities” to make refunds under s.57-21 because, as at the day before completion, the transferor was still providing residential care so that s.57-21(1)(b) could not apply. 41    On the other hand, if the transferor was transferring allocated places when it had already long ceased to provide residential care, then it would have been correct to describe its obligations on the day before the transfer day as “liabilities”, because s.57-21(1)(b) would have already taken effect. 42    To cover these various possibilities, s.16-11(b) refers, not to “liabilities”, but to the broader concept, “responsibilities”. 43    What then is the effect of s.16-11(b)? Mr Monotti, in his persuasive argument, says that it merely creates an additional party against whom accommodation bond holders may have recourse, namely, the transferee of allocated places, and the transferor remains liable to make the refunds for which it is liable under s.57-21(1)(b). Accordingly, Mr Monotti says, when the transferee in the present case deducted from the sum of $2M the amounts payable to accommodation bond holders and, on settlement of the sale, paid those deducted amounts ultimately to the bond holders, what it was doing was discharging the still-existing debts of Harrington Services, for the benefit of Harrington Services, so that Harrington Services must be regarded as having received the full consideration of $2M. 44    I am unable to agree with this construction of s.16-11(b) and it is at this point, in my opinion, that the Plaintiffs’ case breaks down. 45    In my view, the effect of s.16-11(b) is, as submitted by Mr Wheelhouse, to expunge, upon the transfer day, all debts and liabilities, actual, contingent, prospective or potential, of the transferor in respect of accommodation bond balances as they were immediately prior to the transfer day. If completion of the transfer occurs on the transfer day then the scheme established by s.16-11 operates retrospectively so that at the stroke of midnight on the day prior to the transfer day the transferor is deemed to have had no further obligation of any kind to accommodation bond holders: such obligations as existed immediately prior to the stroke of midnight have become the obligations of the transferee. It is pointless to try to analyse how this transference of obligation might be explained according to the classical law of obligations, assignments of choses in action or novation. One must simply accept that the legislature has said that it is to be so and, therefore, the Courts must act on the basis that for all purposes it is indeed so. 46    Accordingly, when a transferee is paying out accommodation bond balances pursuant to its obligation under s.16-11(b) on or after the transfer day it is paying its own debts – it is not paying out the debts of the transferor on the transferor’s behalf. In the present case, the transferee was not, upon completion on the transfer day, applying part of the purchase price otherwise due to Harrington Services in reduction of Harrington Services’ own debts, liabilities or responsibilities. It was complying with a condition of the Secretary’s delegate, imposed as a condition of approving the transfer to the transferee, that the transferee pay its own debts, deemed to have been incurred pursuant to s.16-11(b) as at the time of completion of the sale, by means of a particular method, namely, by providing bank cheques in favour of the accommodation bond holders to the liquidator of Harrington Services. That such a method of payment to the bond holders should have been required by the Secretary’s delegate is not surprising because the liquidators of Harrington Services, having all of its records and being officers of the Court, were best placed to locate former patients of Trentham who were entitled to refunds of accommodation bond balances and to ensure that those bond holders actually received their payments. 47    That s.16-11(b) expunges the responsibilities of a transferor rather than merely imposing the same responsibilities on an additional party is, in my opinion, the true construction of that paragraph in the context of the section as a whole. Paragraph (b) says that “any responsibilities” – clearly meaning “all of the responsibilities” – of the transferor “become” the responsibilities of the transferee. The word “become” signifies a change in the “responsibilities” because there is a change in the identity of the person who owes those responsibilities. If paragraph (b) had meant to preserve the existing “responsibilities” of the transferor while imposing them in addition on the transferee, it would doubtless have used the formula: “without affecting the continuing responsibilities of the transferor under Part 4.2, any responsibilities under Part 4.2 … etc” . 48    This construction is consistent with the purpose of s.16-11 as a whole. That purpose is to substitute the transferee for the transferor, as at and from the transfer day, as the approved provider who has both the benefit and the burden of the scheme established by the Aged Care Act . By s.16-11(a), the transferee is to receive subsidies due but unpaid in respect of services which the transferor has rendered and to which the transferor would normally be entitled. Correspondingly, under s.-16-11(b) and (c) the transferee must take over from the transferor the burden of payment out of accommodation bond balances, for which the transferor normally would be liable. That burden may not be a heavy one in some cases because the transferee may be taking over the transferor’s business as a going concern, and may be applying accommodation bond balances to its own services to be provided to the bond holders, in accordance with s.57-13. 49    Doubtless the special burdens and the benefits created by the transfer scheme in s.16-11 are reflected in the purchase price struck by vendors and purchasers of allocated places. The purchase price would take account of the fact that the vendor will be statutorily relieved of “responsibilities” to refund accommodation bond balances but, on the other hand, will not receive outstanding subsidies for services already rendered while the purchaser will, as an additional cost of the purchase, have to assume responsibility for refunds of accommodation bond balances. 50    That Harrington Services and the third party under the Sale Agreement correctly recognised the payment of bond balances as discharging not Harrington Services’ own debts but the transferee’s debts imposed by s.16-11(b) is made clear from the terms of the Sale Agreement. Schedule 1 defined “purchase price” as:

“The amount, inclusive of GST, calculated as follows:

$2,000,000 minus an amount equal to the Purchaser’s liability in respect of the Accommodation Bonds as provided in clause 3.6.” [Emphasis added]

Clause 3.6 provided:

“ Accommodation Bonds

(a) The Purchaser acknowledges that pursuant to section 16-11(b) of the Aged Care Act, any responsibilities under Part 4.2 of the Aged Care Act that the Vendor had, immediately before the Completion Date, in relation to an Accommodation Bonds connected with the Places, become the Purchaser’s responsibilities under Part 4.2.

(b) The Purchaser further acknowledges that pursuant to section 16-11(c) of the Aged Care Act, the Purchaser is subject to any obligations to which the Vendor was subject, immediately before the Completion Date, under a Residency Agreement.

(c) On the Completion Date, the Purchaser will assume the responsibilities and obligations as referred to in clauses 3.6(a) and (b) and will pay all amounts required pursuant to the Aged Care Act. The amounts will be paid to the persons entitled to the Accommodation Bonds. Subject to clause 5.6, the Purchaser will hand to the Liquidators on the Completion Date, bank cheques made payable to the persons entitled to such Accommodation Bonds as directed in writing by the Liquidators, and the Vendor will ensure that those cheques are forwarded to such persons immediately after the Completion Date.

(d) The Parties acknowledge and agree that the amounts to be paid under clause 3.6(c), are not to be paid to the Liquidators and do not form part of the Purchase Price for the Places .” [Emphasis added]
51    For these reasons I conclude that the sale price of the allocated places for which Harrington Services is liable to account as constructive trustee or for which it is liable as damages for breach of the implied term of the lease of the nursing home business is not $2M but is, rather, the figure arrived at in accordance with the calculation in Schedule 1 of the Sale Agreement. As explained in paragraph 16 above, that figure is the amount presently held in the liquidators’ separate account, namely, $824,466, together with interest thereon. 52    As to liability for GST, the Plaintiffs concede that GST is payable in respect of the sale of the allocated places in a sum $181,818.18 and that they are liable to make that payment. That amount is presently held by the liquidators in another separate account. In my view, it is appropriate that, as a condition of the granting of equitable relief, the Plaintiffs be required to give a direction to the liquidators that they pay the GST to the Australian Tax Office on the Plaintiffs’ behalf so that all parties may be relieved from any further liability in that regard. The Plaintiffs assent to this condition, as I understand.

Orders

53    The Plaintiffs are entitled to a declaration in terms of paragraph (a) of the relief sought in the Statement of Claim. It is not appropriate to make the declaration sought in paragraph (b) because, during the term of the lease of the nursing home business, Harrington Services had a right, title and interest in the allocated places as lessee. The Plaintiffs are not entitled to a declaration in terms of paragraph (c) of the relief. A declaration should be made, however, that they are entitled to receive the proceeds of the sale of the allocated places calculated in accordance with Schedule 1 of the Sale Agreement and in accordance with these reasons. The Plaintiffs are not entitled to an order in the terms of paragraph (e) but they are entitled to an order for the payment to them of the amount of $824,466 held in the liquidators’ separate account, together with interest. 54    I would not make a declaration in the terms of paragraphs (g)(i) and (h)(i) because Harrington Services did not become a constructive trustee of the allocated places until the expiration of the lease of the nursing home business and the refusal of Harrington Services and the liquidators thereafter to deal with the allocated places at the Plaintiffs’ direction and for their benefit. 55    Declarations in terms of paragraphs (g)(ii) and (iii) and (h)(iii) would also be refused, for the reasons given in this judgment. 56    I will stand the proceedings over for a short time to enable the Plaintiffs to bring in Short Minutes of Order which reflect these reasons for judgment. I will then hear any argument as to costs of the proceedings.
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Last Modified: 02/12/2003