Holt, Julius Sefton v Hodgson, Anthony George

[1983] FCA 314

Re: JULIUS SEFTON HOLT
Ex parte: ANTHONY GEORGE HODGSON, JOHN ADAMS, SHANE MAGUIRE AND KATHLEEN MARY
HOLT
No. 287 of 1980
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF VICTORIA
GENERAL DIVISION
Sweeney J.

CATCHWORDS

Bankruptcy - application by the trustee of the estate of a bankrupt to recover proceeds of sale of property of the bankrupt which were paid to the bankrupt's wife by her solicitors - operation of the doctrine of relation back - whether wife's solicitors fell within the protective provisions of s.123.

Bankruptcy Act 1966: ss5; 40; 58; 115; 116; 120; 122; 123; 124; 132; 157; 188.

Bankruptcy Rules; R.135

HEARING

MELBOURNE

#DATE 3:11:1983

ORDER

THE COURT

1. declares that one-half of the net proceeds of the sale of the property described in Certificate of Title Volume 9108 Folio 958 (the Toorak property) was property of the bankrupt at the time be became a bankrupt.

2. declares that the thirdnamed respondent was beneficially entitled to only one-half of the net proceeds of sale of the Toorak property.

3. declares that upon the bankrupt having become a bankrupt the sum of $16,758.45 was held by the firstnamed respondent and the secondnamed respondent as part of the bankrupt's share in the proceeds of the sale of the Toorak property and that such sum vested in the Official Receiver in Bankruptcy.

4. orders that the firstnamed respondent and the secondnamed respondent pay to the applicant the aforesaid sum of $16,758.45.

5. orders that the first named respondent and the secondnamed respondent pay the costs of the applicant of and incidental to the application, including reserved costs, such costs to be taxed, if not agreed.

JUDGE1

Anthony George Hodgson (the applicant), as trustee of the estate of Julius Sefton Holt(the bankrupt), seeks the following orders:

(a) a declaration that one-half of the net proceeds of the sale of the property described in Certificate of Title Volume 9108 Folio 958 (the Toorak property) was property of the bankrupt at the time he became a bankrupt,

(b) a declaration that the thirdnamed respondent was beneficially entitled to only one-half of the net proceeds of sale of the Toorak property,

(c) a declaration that upon the bankrupt having become a bankrupt the sum of $16,758.45 was held by the firstnamed respondent and the secondnamed respondent as part of the bankrupt's share in the proceeds of the sale of the Toorak property and that such sum vested in the Official Receiver in Bankruptcy (the Official Receiver),

(ca) alternatively a declaration that the disposition (if any) made on 22 February 1980 by the bankrupt to the thirdnamed respondent of an interest in the Toorak property or alternatively in the sum of $16,758.45 being part of the bankrupt's share in the proceeds of the sale of the property is void as against the applicant pursuant to either the provisions of section 120 or section 122 of the Bankruptcy Act 1966 (the Act),

(d) an order that the firstnamed respondent and secondnamed respondent do pay to the applicant the aforesaid sum of $16,758.45,

(e) alternatively to (d) an order that the thirdnamed respondent do pay to the applicant the aforesaid sum of $16,758.45.

The firstnamed respondent, John Adams (Mr Adams), and the secondnamed respondent, Shane Maguire, (the solicitors) at all material times acted as solicitors for the thirdnamed respondent, Kathleen Mary Holt (Mrs Holt), the bankrupt's wife.

On 11 March 1980 the bankrupt signed an authority under s.188 of the Act authorising the applicant to call a meeting of his creditors and take over control of his property.

On 2 April 1980 a meeting of the bankrupt's creditors was held and adjourned to 16 April 1980. At a later hour on 2 April 1980 the bankrupt's own petition in bankruptcy was presented and accepted. On 2 May 1980 a meeting of creditors resolved that the applicant be appointed as trustee of the estate of the bankrupt (see s.157). The present application is made by the applicant in his capacity as trustee of the estate of the bankrupt and not as his former controlling trustee under Part X of the Act.

On 8 August 1974 the bankrupt became registered as the proprietor of an estate in fee simple of a property known as lot 2 Flaxbourne's Road, Moriac, being the whole of the land more particularly described in Certificate of Title Volume 9037 Folio 518 (the Moriac property). The bankrupt's wife did not at any time become registered as having any interest in respect of the Moriac property.

On 7 September 1976 the bankrupt and his wife became the registered proprietors of the Toorak property situated at 17 Brookville Road, Toorak.

The bankrupt retained Messrs Sali and McLindin, Solicitors, to act on his behalf when he sold the Moriac property on 15 August 1979 for $111,000.00. In December 1979 Messrs Sali and McLindin gave undertakings that they would not disburse any of the proceeds of the sale of the Moriac property without the prior authority of various parties, including the solicitors, in their capacity as solicitors for Mrs Holt.

The bankrupt and Mrs Holt separated on or about 13 December 1979. The solicitors acted on Mrs Holt's behalf in relation to the matrimonial dispute and the bankrupt instructed Mr Kennedy of Messrs Madgwicks, Solicitors, to act on his behalf.

In his affidavit sworn 23 February 1981 Mr Adams deposed as follows:

"4. On the 22nd day of February 1980 in a telephone conversation with the said Mr Kennedy I agreed upon a matrimonial settlement whereby the Thirdnamed Respondent agreed to accept one half of the net proceeds of the sale of the said matrimonial home situated at 17 Brookville Road Toorak (hereinafter called 'the Toorak property') together with a one half share of the net proceeds of sale of a property situated at Lot 2 Flaxbourne Road Moriac in the State of Victoria being the whole of the land described in Certificate of Title Volume 9037 Folio 518 which was registered in the name of the said Bankrupt (hereinafter called 'the Moriac property')."

The bankrupt and his wife agreed to auction the Toorak property and it was agreed between Mr Kennedy and Mr Adams that the solicitors would act therin for both vendors. The Toorak property was sold to Mr and Mrs Vodicka for the sum of $259,500.00 by contract of sale dated 27 February 1980. This contract contained a substitution clause pursuant to which the purchasers nominated Gowrie House Pty Ltd as the purchaser in their place and a substituted contract of sale between the bankrupt and his wife as vendors and that company as purchaser was executed on 20 March 1980. The sale was settled on 28 March 1980 and on 31 March 1980 the solicitors paid an amount of $57,555.96 to Mrs Holt which represented one half of the net proceeds of sale less an amount of $750.00 for costs owed to the solicitors by Mrs Holt. The final paragraph of the letter from Mr Adams to Mrs Holt dated 31 March 1980 read:

"As you are aware, we have made a further claim for a one half share in the nett proceeds of the sale of the farm at Moriac. We shall account to you in this amount when settlement has been completed with Mr Holt's trusteee."

On the same day Mr Adams wrote to the applicant, who was then the controlling trustee of the bankrupt pursuant to Part X of the Act, in the following terms:

"We refer to your letter of 24th March and advise that settlement of the sale of 17 Brookville Road, Toorak was completed last Friday 28th March, and we are holding the amount of $23,079.95 in our trust account. This amount is calculated as follows :-

Sale price $259,500.00

Less - agents's commission and advertising 6,930.40 - adjustments of rates 660.00 - our costs and disbursements 1,268.00 - balance due to first mortgagee (Trustees Executors) 134,029.69 - amount paid to H. Meltzer & Associates to satisfy Writ of Fi Fa 35,226.00 - one-half of net proceeds paid to Mrs. K.M. Holt 58,305.96 236,420.05

$23,079.95

Pursuant to the agreement made with Mr. Kennedy of Madgwicks, Mrs. Holt is further entitled to one-half share in the nett proceeds for the sale of the farm property at Moriac. Please let us have particulars of this amount and we shall account to you for the balance which we are holding in trust."

The amount of $35,226.00 was paid to Messrs H. Meltzer and Associates, Solicitors, in respect of an alleged debt owed by the bankrupt, out of the remaining half share of the net proceeds of sale, to which the bankrupt was entitled, and the balance of his half share, being an amount of $23,079.95 was paid by the solicitors into their trust account in the names of the bankrupt and his wife.

By letter dated 11 April 1980 the Official Receiver informed the solicitors that Mr Holt became bankrupt on 2 April 1980 and that it was the trustee of his estate and requested the solicitors to forward a settlement statement in respect of the sale of the Toorak property and claimed as an asset of the estate any moneys presently in their possession to which the bankrupt was entitled.

In their reply dated 17 April 1980 the solicitors stated: "Your claim that the balance of money held in our trust account is an asset of the estate is not admitted."

On 24 April 1980 Mr Adams wrote a letter to the Official Receiver, which was headed "Without Prejudice", in the following terms:

"Estate of Julius S. Holt - No. 287 of 1980 (C/H)

We enclose a copy of a letter received today from Messrs. Sali & McLindin in which they advise that they are holding the total amount of $33,516.88 in their trust account. We have informed them that upon payment to us of one half of this amount, namely $16,758.44, we are prepared to release them from their undertaking. This amount is due to Mrs. Holt in accordance with the settlement made with Mr. Kennedy of Madgwicks. Alternatively we would be prepared to deduct the said amount of $16,758.44 from the moneys we are holding in our trust account and account to you for the balance."

This letter was tendered in evidence by the solicitors.

On 28 May 1980, before he had received any reply to this letter to the Official Receiver of 24 April 1980, Mr Adams removed the amount of $16,758.44 from the trust account, deducted an amount of $750.00 for costs owed to the solicitors by Mrs Holt, and forwarded the remaining sum of $16,008.44 to Mrs Holt. On the same day he forwarded the balance that remained in the trust account, being the sum of $6,321.51, to the Official Receiver.

Messrs Sali & McLindin wrote to the solicitors on 19 June 1980 and advised them that the interest bearing deposit into which they had deposited the proceeds of sale of the Moriac property was due to be redeemed within seven days and that they intended to forward the proceeds to the applicant as trustee of the estate of the bankrupt.

The solicitors having stated by letter dated 30 June 1980 that they had no objection to this course, Messrs Sali & McLindin, on 8 July 1980, forwarded the sum of $34,145.32 to the applicant being the net proceeds of sale of the Moriac property together with interest that had accrued thereon.

On 11 July 1980 the solicitors wrote to Messrs Mallesons, the solicitors for the applicant, in the following terms:

"We refer to your letter of 3rd July 1980 and advise that Mr. & Mrs. Holt separated on 13th December 1979. As stated in our letter of 2nd July 1980 Mrs. Holt had agreed to accept one half of the net proceeds of sale of the Brookville Road and Moriac properties by way of settlement of jointly owned assets. This agreement was made prior to the auction of Brookville Road. No money was ""deducted"" as claimed in your letter. We have accounted to the respective parties in accordance with the agreed terms of settlement clearly set out above and also in our previous letter. The amount of $6,321.51 paid to the Official Receiver on 28th May 1980 was the full amount to which the Estate of Mr. Holt was entitled."

When the application came on for hearing there was no appearance by or on behalf of the thirdnamed respondent, Mrs Holt. Messrs Arnold Bloch, Leibler & Co, Solicitors, by letter addressed to The Registrar in Bankruptcy and dated 2 September 1983 informed him that "as of the 19th August 1983 our instructions to act on behalf of Kathleen Holt have been terminated by our client The Legal Aid Commission of Victoria by their letter to us dated 17th August, 1983."

During the course of the hearing an application by the solicitors for special leave pursuant to Rule 135(2) of the Bankruptcy Rules to use in evidence an affidavit which had been sworn by Mrs Holt and filed on her behalf in these proceedings was refused.

Counsel for the applicant stated that the primary claim for relief was against the solicitors, and that he only sought relief against Mrs Holt if the claim against the solicitors failed. He also stated that he did not rely upon paragraph (ca) of the application as against the solicitors, but that he relied upon that paragraph only as part of his alternative claim against Mrs Holt.

The case for the applicant against the solicitors was based upon the doctrine of relation back. The relevant sections of the Act as they apply in the present case prior to the 1980 amendments, provide as follows:

"58(1)(a) Subject to this Act, where a debtor becomes a bankrupt - the property of the bankrupt, not being after-acquired property, vests forthwith in The Official Receiver in Bankruptcy; - - -

116 (1) Subject to this Act-

(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge; and

(b) the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his discharge, is property divisible amongst the creditors of the bankrupt.

5(1) In this Act, unless the contrary intention appears-

"the commencement of the bankruptcy", in relation to a bankrupt, means the time at which his bankruptcy is, by virtue of section 115 of the Act, to be deemed to have commenced.

115(2)(a) The bankruptcy of a person who becomes a bankrupt by virtue of the presentation of a debtor's petition shall - if he has committed any act or acts of bankruptcy within the period of six months immediately preceding the date on which the petition was presented - be deemed to have relation back to, and to have commenced at, the time of the commission of that act, or the first of those acts, as the case may be; - - .

40(1)(i) A debtor commits an act of bankruptcy in each of the following cases: - . . . if he signs an authority under section 188 of this Act; - -."

It was submitted on behalf of the applicant that when the bankrupt's own petition was accepted on 2 April 1980, the property of the bankrupt vested forthwith in the Official Receiver pursuant to s58(1). This property by virtue of s116(1)(a) included all property that belonged to, or was vested in, the bankrupt at the commencement of the bankruptcy which was, by virtue of ss5(1); 115(2)(a) and 40(1)(i), 11 March 1980, being the date upon which the bankrupt signed an authority under s188 of the Act in favour of the applicant. This property then vested in the applicant on 2 May 1980 when he was appointed as trustee of the estate of the bankrupt (see s.132(1)). Accordingly it was submitted that the entitlement of the bankrupt as at 11 March 1980 as joint registered proprietor with his wife to receive one half of the proceeds of sale of the Toorak property had vested in the Official Receiver (see s.58(1) as it was prior to the 1980 amendment).

The solicitors received from the purchaser one half of those proceeds on 28 March 1980 as trustee for the bankrupt. Mrs Holt's half share of those proceeds, namely $58,305.96 less an amount of $750.00 for costs, was paid to her. The solicitors dealt with the bankrupt's half share as follows: the sum of $35,226.00 was paid to Messrs H. Meltzer & Associates to satisfy a writ of fieri facias which had been issued against the interest of the bankrupt in the Toorak property; the balance of the bankrupt's half share, namely $23,079.95, was paid by the solicitors into their trust account in the names of the bankrupt and Mrs Holt. It was submitted that the beneficial interest in that sum of $23,079.95 held in the solicitors' trust account had vested in the Official Receiver and then in the applicant.

The solicitors had accounted to the Official Receiver on 28 May 1980 for $6,321.51 of the $23,079.95 and it was submitted that they were liable to account to the applicant for the balance of $16,758.44 which the solicitors had in part forwarded to Mrs Holt and in part appropriated towards payment of their costs.

Counsel for the solicitors stated that his clients did not seek to rely upon the protective provisions of s124(1) of the Act, the burden of proof of which in this case would have rested with his clients. (see s124(2)).

The relevant sub-sections of section 123 of the Act as it applies to the present case prior to the 1980 amendments provide as follows:

"123(1) Subject to sections 118 to 122 (inclusive) of this Act, nothing in this Act invalidates, in any case where a debtor becomes a bankrupt-

(a) a payment by the debtor to any of his creditors;

(b) a conveyance, transfer or assignment by the debtor for valuable consideration;

(c) a contract, dealing or other transaction by or with the debtor for valuable consideration; or

(d) any transaction to the extent of a present advance made by an existing creditor,

if-

(e) the transaction took place on or before the date on which the debtor became a bankrupt;

(f) the person, other than the debtor, with whom it took place, did not, at the time of the transaction, have notice of the presentation of a petition against the debtor; and

(g) the transaction was in good faith and in the ordinary course of business.

(2) The burden of proving the matters referred to in paragraphs (e), (f) and (g) of the last preceding sub-section in relation to a transaction lies upon the person who relies on the validity of the transaction.

(3) For the purposes of sub-section (1) of this section, a transaction shall not be deemed not to have been in good faith and in the ordinary course of business by reason only that, at the time of the transaction, the person, other than the debtor, with whom it took place had notice of the commission of an act of bankruptcy by the debtor.

- - - - - - - - - - - - - - - - - - - - - -

(7) In this section-

'payment' includes the drawing, making or indorsing of a bill of exchange, cheque or promissory note;

'transaction' includes payment, delivery, conveyance, transfer, assignment, contract or dealing."

Counsel for the solicitors sought to rely upon the protection afforded by this section in two alternative ways. Firstly he submitted that the payment by Mr Adams on 28 May 1980 of the amount of $16,008.44 to Mrs Holt was an assignment of funds by the debtor for valuable consideration within the meaning of s123(1)(b) in settlement of his agreement reached on 22 February 1980 through his agent Mr Kennedy, and that the requirements of s123(1)(e), (f) and (g) had been proved. I reject this submission. The payment of $16,008.44 on 28 May 1980 clearly did not take place "on or before the date on which the debtor became a bankrupt" which was 2 April 1980.

Secondly it was submitted that there was a contract or dealing with the Toorak property within the meaning of s123(1)(c) in which the debtor's agent and the firstnamed respondent reached agreement on 22 February 1980, and that the requirements of s123(1)(e), (f) and (g) had been proved.

The alleged agreement said to have been reached on 22 February 1980 set out in paragraph 4 of the affidavit of Mr Adams to which I have already referred could not be of any assistance to the solicitors. If Mrs Holt agreed to accept one half of the net proceeds of the sale of the Toorak property together with one half of the net proceeds of sale of the Moriac property, as therein alleged, any such agreement would not have justified the payment by the solicitors to her from the proceeds of the sale of the Toorak property of an amount equal to the sum of a half share in the proceeds of that sale and of a half share in the proceeds of the sale of the Moriac property. The solicitors held only one half share of the net proceeds of the sale of the Toorak property on behalf of Mrs Holt. It was not open to them to make any payment to her out of the other half share of the proceeds of sale of the Toorak property, which they held on behalf of the bankrupt.

Counsel for the solicitors submitted that the court has an over-riding discretion not to give effect to the principle of relation back, and in the exercise of that discretion in this case it should have regard to the fact that the solicitors acted in good faith in the ordinary course of their business and that it would be grossly unfair to apply the principle in the circumstances of this case.

The language of the Act and the presence of the express protective provisions contained in sections 123 and 124 of the Act seem to me to tell against the existence of such an over-riding discretion. If such a discretion were held to exist, it would not be appropriate to exercise it in favour of the solicitors in the circumstances of the present case.

In my opinion the submissions of the applicant against the solicitors are well-founded and the application against them should succeed.

The Court

(a) declares that one-half of the net proceeds of the sale of the property described in Certificate of Title Volume 9108 Folio 958 (the Toorak property) was property of the bankrupt at the time he became a bankrupt.

(b) declares that the thirdnamed respondent was beneficially entitled to only one-half of the net proceeds of sale of the Toorak property.

(c) declares that upon the bankrupt having become a bankrupt the sum of $16,758.45 was held by the firstnamed respondent and the secondnamed respondent as part of the bankrupt's share in the proceeds of the sale of the Toorak property and that such sum vested in the Official Receiver in Bankruptcy.

(d) orders that the firstnamed respondent and the secondnamed respondent pay to the applicant the aforesaid sum of $16,758.45.

(e) orders that the firstnamed respondent and the secondnamed respondent pay the costs of the applicant of and incidental to the application, including reserved costs, such costs to be taxed, if not agreed.