Jalmoon Pty Ltd (in liq) v Bow

[1996] QCA 516

IN THE COURT OF APPEAL	[1996] QCA 516
SUPREME COURT OF QUEENSLAND

Appeal No. 49 of 1995.

Brisbane
[Jalmoon P/L (in Liq.) v. Bow]

BETWEEN:

JALMOON PTY LTD (IN LIQUIDATION)

(Plaintiff) Appellant

AND:

KEITH ROBERT BOW

(Defendant) Respondent

____________________________________________________________
_______

Pincus J.A. Ambrose J. Helman J.

___________________________________________________________________________

Judgment delivered 13 December 1996

Joint Reasons for Judgment of Pincus J.A. and Helman J.; separate concurring Reasons for
Judgment of Ambrose J.
___________________________________________________________________________

1.         APPEAL ALLOWED WITH COSTS.

2.         JUDGMENT ENTERED BELOW SET ASIDE, AND IN LIEU JUDGMENT ENTERED FOR THE PLAINTIFF IN THE SUM OF $108,905 PLUS INTEREST.

3.         ORDER THAT THE PARTIES BE ALLOWED 14 DAYS TO EITHER AGREE AS TO THE AMOUNT OF INTEREST OR TO MAKE FURTHER WRITTEN SUBMISSIONS AS TO THE RATE, PERIOD AND CALCULATION OF INTEREST.

___________________________________________________________________________

CATCHWORDS: Trusts - whether a solicitor holds funds on trust for a client when the funds are received by the solicitor on behalf of a client - money paid into solicitor trust account - Trust Accounts Act 1973, s. 76 - acted honestly and reasonably and ought fairly to be excused - knowledge of insolvency - fiduciary relationship.

Company law - doctrine of unanimous consent - sole director and shareholder.

Counsel:	Mr R Bain Q.C. for the appellant. Mr J McKenna for the respondent.
Solicitors:	Stephens & Tozer for the appellant Allen Allen & Hemsley (formerly Feez Ruthning) for the respondent.
Hearing date:	14 July 1995

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 49 of 1995.

Brisbane

Before Pincus J.A.
Ambrose J.

Helman J.

[Jalmoon P/L (in Liq.) v. Bow]

BETWEEN:

JALMOON PTY LTD (IN LIQUIDATION)

(Plaintiff) Appellant

AND:

KEITH ROBERT BOW

(Defendant) Respondent

JOINT REASONS FOR JUDGMENT OF PINCUS J.A. AND HELMAN J.

Judgment delivered 13 December 1996

This appeal concerns a claim by the appellant company ("the plaintiff"), now in liquidation, against its former solicitor to recover a sum of $111,205 which the plaintiff says was received by the defendant on trust for the plaintiff, but wrongly paid out to one Howard Ross Ivory. One of the questions is the right of the beneficial owner of a one-man company to direct the disposition of its funds.

By the statement of claim, it was alleged that the plaintiff instructed the defendant as its solicitor to sue Walker Civil Engineering (Qld) Pty Ltd ("Walkers") to recover the sum in question, that the claim was compromised and the terms of settlement reduced to writing, that under the settlement $111,205 was to be paid by Walkers to the plaintiff, that the defendant was constituted a trustee for the plaintiff of that sum, but the defendant paid the money to Ivory in breach of the trust. Although it is not explicit in the pleading, the plaintiff’s case was that the sum in question was paid by Walkers to the plaintiff by way of cheques drawn in favour of the defendant. The defence admits that there was an action brought on behalf of the plaintiff against Walkers to recover the money, but says it was brought by another firm of solicitors; it admits that the defendant acted on behalf of the plaintiff in effecting a compromise of the action and that the proceedings were compromised by a deed of settlement. Further, the defendant admits that a total of $111,205 was received from Walkers pursuant to the deed of settlement and that of that sum $103,890.75 was paid to Ivory, on the instructions of the plaintiff. By way of counterclaim the defendant contends that if the money in question was disbursed in breach of trust then the defendant acted honestly and reasonably and ought to be excused for the breach of trust.

There is a reply and answer which alleges that a Mr Keppie, an employee of the defendant, was the solicitor who acted for the plaintiff in the matter, who ought to have been aware of the duties and obligations imposed upon trustees, and of the fact that Ivory was in a fiduciary relationship with the plaintiff and was acting in breach of fiduciary obligations by applying the funds of the plaintiff to his own use. The pleading further alleges that Keppie knew at all times that the plaintiff had unpaid creditors and that by paying to or at the direction of Ivory the money in question, Keppie knowingly assisted Ivory to breach his fiduciary obligations. A separate complaint was made in the reply and answer about a sum of $7,314.75 said to have been appropriated by the defendant for fees.

Amendment

There is, on the pleadings, no dispute that the defendant received money from Walkers under the deed of settlement referred to in the pleadings. That point is important, because it was submitted before us that in a relevant respect the deed was in error and should be treated as rectified. That is a claim which was not before the primary judge and cannot be entertained now. Counsel for the defendant referred before the judge to a discrepancy between the deed and another document of 10 January 1985, referred to below, but refrained from seeking rectification of the deed. Such a claim would in any event have bordered on frivolity; the evidence of Keppie, whose recollection of events was understandably vague, could not have supported it adequately.

Secondly, it should be noted that the plaintiff’s reply and answer pleads explicitly that the defendant, by paying Ivory, knowingly assisted him to breach his fiduciary obligations to the plaintiff; that is raised only as a matter going to defence of the counterclaim, not as a basis upon which the plaintiff’s claim could be supported. But nothing could be clearer, from a perusal of the record, than that there was in contest the extent to which Keppie, the defendant’s employee who acted for the plaintiff in the relevant transactions, was or should have been aware that to pay the money over to Ivory would make Keppie a party to a breach of obligations owed by Ivory to the company. The state of Keppie’s mind, and in particular his thoughts about the propriety of making the payments to Ivory, was a question examined at considerable length. Further, a Mr K P Prior was called to support the assertion that what Keppie did was, if legally erroneous, nevertheless defensible; in the course of his evidence reference was made to Barnes v. Addy [1874] L.R. 9 Ch. App. 244.

The matters pleaded in the reply and answer to which reference has been made were added by amendment at the inception of the hearing, without objection, and thus the question whether by paying Ivory, Keppie knowingly assisted a breach of fiduciary obligations was placed in issue. After the evidence was concluded, leave was sought to amend the statement of claim by adding to it paragraphs which were, except for some minor differences in the amounts stated, identical with those which were already in the reply and answer, having been added by amendment. The learned primary judge took the view that unless there were "special" or "peculiar" circumstances, the amendments sought to be made to the statement of claim should not be allowed; his Honour refused leave to make them.

The question whether this was correct is not in our opinion of central importance; the plaintiff’s case based on the amendment is of an alternative kind, as its main contention is that the defendant acted in breach of trust. Nevertheless, it is desirable to deal with the application to amend.

It seems odd that a party might fail in a suit, not because the pleadings did not contain certain allegations, but because those allegations were to be found in a later pleading rather than an earlier one. As the learned primary judge acknowledged, it has been decided (Jiminez v. Jayform Contracting Pty Ltd [1993] 1 Qd.R. 610) that the provisions of O. 32 r. 1 of the Rules of the Supreme Court are available to applicants for amendment in the District Court; that rule permits the addition of a new cause of action out of time if it arises "out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment"; see subr. (2) and (5). Here, it could hardly be suggested that this test was not satisfied and the ground on which the primary judge rejected the application - that the applicant must at least show circumstances which are "peculiar" or "special" - is, with respect, erroneous. The authority relied on, Lynch v. Keddell (No. 2) [1990] 1 Qd.R. 10 has to do with a different question, namely joinder of parties out of time: see Hayward v. Darling Downs Aircraft Services Pty Ltd [1993] 2 Qd.R. 153. What the plaintiff sought to do was merely to move the allegations it had made about Mr Keppie’s state of mind with respect to the disbursement of the monies - a subject which had been firmly placed in issue by the defendant’s pleading - into the statement of claim. No peculiar or special circumstances had to be shown to achieve this modest goal, under O. 32 r. 1(5).

Fortunately, the conclusion that the amendment sought should have been allowed does not produce the result that the matter has to be tried again; what Keppie had in mind when participating in the payment of funds to Ivory was gone into thoroughly at the trial and the learned primary judge made findings on the subject.

Principal documents

The plaintiff company was acquired by Ivory and one Alexanderson in April 1984, the arrangement being that from the time of acquisition all money due to Ivory in his then functioning earthmoving business would be paid to the plaintiff.

In October 1984 the defendant was engaged by Ivory to act on his behalf, the plaintiff being at that time represented by another firm. In the same month, on 31 October 1984, a creditor wrote a letter to the defendant advising that the plaintiff had seven accounts with the creditor, all in arrears, the total overdue being in excess of $80,000. On 2 January 1985 the defendant wrote to the then solicitors for the plaintiff referring to a conference which had taken place at which, the defendant said, it was agreed that an amount owing by Walkers be paid to the creditor just mentioned in payment of arrears "owing in respect of certain machinery repossessed by" the creditor. The two letters just mentioned illustrate a proposition which was not disputed - that at material times the plaintiff was to the defendant’s knowledge insolvent. On 10 January 1985 there was a meeting of persons interested in the plaintiff at which, according to a note made by Keppie, it was agreed that Ivory would receive money due by Walkers - presumably meaning money which would otherwise have gone to the plaintiff.

On 14 January 1984 the defendant wrote to the solicitors for Walkers advising them that an agreement had been made "that all and any monies owing to the company [i.e. the plaintiff], inclusive of monies due to the company by your client, be paid to Jalmoon Pty Ltd by way of a cheque to be drawn to Keith Bow & Associates trust account". On 16 January 1985 there was a written agreement made between the plaintiff, Ivory and others, which included a recital that the plaintiff was to "retain and be entitled to the benefit of all debtors of the company as at the date of this agreement (inclusive of all monies owed by Walkers) ...".

This 16 January agreement is not the deed of settlement referred to in the pleadings. It is, nevertheless, of importance, since both Ivory and the plaintiff were parties to it and it left no room for doubt as to the entitlement of the plaintiff to the monies due from Walkers. The deed of settlement referred to in the pleadings also has Ivory and the plaintiff as parties; although the copy in the record is only partly executed, it was common ground that the deed became binding. The deed of settlement provides for payment of $111,205 to the plaintiff by Walkers; on payment of that sum the plaintiff agreed to discontinue a pending action against Walkers. On 30 January 1985 the defendant wrote to the then solicitors for the company enclosing a form of release concerning "payment of the Walkers money to Jalmoon Pty Ltd". On 31 January 1985 the defendant wrote to Whitehead Baxter & Associates the then solicitors for the company, urging them to have the release signed on the basis that ". . . the funds as agreed to become the property of Jalmoon Pty Ltd are required to ensure the continuing trading of the company". On 18 February, Ivory called on Keppie and told Keppie that he had tried to get Walkers to pay the money straight to him. Keppie noted:

"Found it was going to our T/A and wants us to give him the whole
$10,000".

The initial payment from Walkers was to be $10,000. On the same day, an accountant who had done work in connection with the company’s affairs, one Brokken, phoned Keppie. The note is:

"Brokken called - he is aware that Ivory wants the whole $10,000. What
about his fees? "

It seems clear beyond the possibility of serious argument that the money received from Walkers was paid to the defendant in discharge of Walker’s obligation to the company. The defendant, if not in strictness trustee of the money received for the company, was at least under a fiduciary obligation to the company in respect of the money. The defendant did not pay any of the money to the company; his contention is that he paid it at the company’s direction, that direction being given by Ivory.

Authority

According to counsel for the respondent, the issue of Ivory’s authority to instruct the defendant to pay the money out is the heart of the case; we agree with that analysis. At the relevant time Ivory was the sole director of the plaintiff; there was no properly constituted board. The case was conducted on the basis that Ivory did not as sole director, have the powers of the board. The Articles of Association which were in evidence, provided (Article 30) that "unless otherwise determined by resolution of the company the number of directors shall be not less than two nor more than ten". There was no evidence of any resolution altering that. The Companies Act 1981, s. 219(1) required that a proprietary company have at least two directors. It contained no provision saving the validity of acts of a board not properly constituted: cf. s. 114(3) of the South Australian Companies Act 1981. It is curious that there is a lack of authority on the question whether non-compliance with the numerical requirement in the Act is invalidating; however, it seems to be established that non- compliance with a numerical requirement as to the composition of a board in the Articles would ordinarily invalidate acts of a board not properly constituted: in re Alma Spinning Co. (1880) 16 Ch.D. 681, and re Sly, Spink & Co. (1911) 2 Ch. 430; I see no reason why the same principle should not apply to the statutory requirement. In its original form the defence set up that Ivory was at the time of each payment the sole shareholder and a director. By amendment, that allegation was deleted and replaced by two rather different allegations. One was that the company shareholders permitted Ivory to "personally manage and exercise all the powers of a plaintiff and thereby authorise and/or ratify the giving of the said instructions by the plaintiff", and another was that the directors of the plaintiff permitted Ivory to act as we have just mentioned. But as argued before us, the case for the defendant became that which had been deleted - i.e. that Ivory was the sole shareholder and a director at the relevant times - when the payments were made. The defendant obtained from Ivory, to justify payments to him of the Walkers money, authorities purporting to be on his own behalf as well as on behalf of the plaintiff; the proposition that Ivory was simply entitled to the Walkers money in his own right was, if advanced, not pressed.

It would seem to us pedantic to hold the defendant, in this respect, to his pleaded case; it does not appear that there is any additional evidence which could have been called on the point, by the plaintiff. But it is our opinion that the doctrine, conveniently called one of "unanimous assent", on which the defendant relies does not apply.

First, it was not established that at any relevant time Ivory was registered as holder of all the shares. It therefore appears to be necessary, in order to apply the doctrine in the present case, to hold that the principle of unanimous assent covers instances in which some or all of the persons who assent are not registered shareholders. To accept that proposition would, as it seems to us, introduce an additional element of uncertainty into the operation of a principle the present basis of which is itself unclear. In re Compaction Systems Pty Ltd and the Companies Act (1976) 2 N.S.W.L.R. 477 at 484, Bowen C.J. in Eq. referred to the absence of authority for the proposition that the principle of re Express Engineering Works Ltd [1920] 1 Ch. 466, being the leading case on unanimous assent, applies where all persons beneficially entitled to shares agree. At the time when his Honour made that remark there was direct authority on the point: in re Sander’s Limited [1932] 49 W.N. (N.S.W.) 220 at 221; it was held there that the relevant principle applies only to persons registered as shareholders. It is true that in some of the older cases one can find suggestions that persons not on the register may for various purposes be treated as shareholders, but that is not now an orthodox approach: see FCT v. Patcorp Investments Pty Ltd (1976) 140 C.L.R. 247 and the cases referred to at pp. 293, 294, 295; see also Kingston v. Keprose (1987) 11 N.S.W.L.R. 404 at 410-412.

Secondly, it is our opinion that the doctrine of unanimous assent does not apply to Ivory’s authority given to the defendant, purporting to be on behalf of the plaintiff company, because the defendant had absolutely no reason to think that the payment of the money to Ivory could have been for the benefit of the company. The only purpose which could be achieved by the defendant paying the money out to Ivory rather than to the plaintiff was the facilitation of Ivory taking the money for his own purposes. The plaintiff was, as we have observed, insolvent to the knowledge of the defendant, so that the effect of payment to Ivory rather than to the plaintiff was to take the money out of the reach of creditors, other than Ivory who perhaps claimed to be a creditor of the plaintiff: see Nicholson v. Permakraft (N.Z.) Ltd (1985) 1 N.Z.L.R. 242 at 250, referred to in A.N.Z. Executors & Trustee Company Limited v. Quintex Australia Limited [1991] 2 Qd.R. 360 at 366.

Looking at the matter more broadly, if the defendant’s contention were correct, then the consent of all the shareholders, informally expressed, would be sufficient to authorise anyone holding funds belonging to a company to pay them to the shareholders (or to anyone nominated by them) rather than to the company, even if the company were known to be insolvent. One would, in our view, need a strong authority to establish such an improbable rule.

Our conclusion, then, is that there was no legal justification for the defendant paying the money in question to or at the direction of Ivory, and in particular the defendant doing so was not justified on the only basis set up, i.e. that Ivory was the only shareholder and therefore entitled to act for the company. If, contrary to the conclusion just expressed, Ivory had the position for which the defendant contends that was a fiduciary position in relation to the company. We incline to the view that, if its main case failed, the plaintiff should succeed on its case as amended; but it is unnecessary to discuss that topic.

Solicitor as Trustee

The primary judge decided the action in favour of the defendant partly because he did not accept that the defendant dealt with the money in question as trustee for the plaintiff. There was in our opinion at least a fiduciary obligation resting on the defendant, in respect of the monies he received, payable to the plaintiff.

The judge referred in support of his conclusion that there was no trust to Adams v. Bank of New South Wales (1984) 1 N.S.W.L.R. 285 and to North Eastern Gold Mines NL v. Westaustralian Gold Mines Ltd (Full Court of Western Australia, 23 December 1993, unreported) and held that the defendant received the money in question as agent, not as trustee.

The point of time at which the question arises for consideration is that of receipt by the defendant of the monies referred to in the defendant’s letter of 14 January 1985, which mentioned that it had been agreed -

" . . . all and any moneys owing to the company [Jalmoon Pty Ltd], inclusive of moneys due to the company by your client, be paid to Jalmoon Pty Ltd by way of a cheque to be drawn to Keith Bow & Associates Trust Account ".

That is what happened in respect of each cheque from Walkers.

An essential element of a trust is a separation of legal ownership from equitable ownership; it is not necessary that there be a certainly identifiable beneficiary, but one must be able to posit that the person having legal ownership has not also the beneficial ownership. When each cheque was received by the defendant he became, it seems plain enough, the legal owner not only of the piece of paper on which the cheque was written, but also the chose in action which it evidenced. There was, according to the defendant’s case, some uncertainty in Keppie’s mind as to who was entitled to the money, but whoever might have been the true beneficial owner it was certainly not the defendant. It is not easy to see why the rights which the cheque gave the defendant were not held by the defendant on trust, whether or not the defendant also held those rights as agent for the company; of course, an agent may well be a trustee of money held for the principal: see e.g. Palette Shoes Pty Ltd v. Krohn (1937) 58 C.L.R. 1 at 30.

Professor Ford and Mr Lee say in the current edition of their work on the law of trusts that where Z pays money to Y so that Y can pay it to X, Y may be a trustee, an agent, or both - among other possibilities. Scott on Trusts (4th Ed.) Vol. 1 p. 94 mentions Brunner v. Edwards 12 A.2d 36 (1940) where "it was held that where the proceeds of the sale of trust property were given to an attorney to pay out on demand, he was a gratuitous custodian or depository rather than a strict trustee . . .". Reference to the report, however, reveals that what was held there was rather qualified: "The difficulty with appellant’s position is that the funds were not held in trust by Edwards in the sense in which she uses the term. Not every relationship of trust is a trust relationship in the strict sense". See also, as to the position in the U.S.; Scott Vol. 1 p. 165.

A useful starting point is consideration of bankruptcy of the solicitor; in that event the question whether money held is to be divided among the solicitor’s creditors depends on whether it is held "in trust for another person" - s. 116(2)(a) of the Bankruptcy Act 1966. It would seem improbable that a cheque made payable to a solicitor, but held by the solicitor on behalf of a client, could vest in the trustee in bankruptcy as part of the funds distributable among the solicitor’s creditors.

But a clear statement that in such circumstances the solicitor is not a trustee is to be found in an insolvency case, in re Hallett’s estate; Knatchbull v. Hallett [1879] 13 Ch.D. 696, at 702 per Fry J. Hallett had sold some bonds which he held for a client, the money being paid into Hallett’s bank account. Fry J. held that Hallett was not a trustee of the money for the client and went on:

" . . . but it appears to me that he was solicitor for her, that he was agent for her, and that he was bailee for her. I think, therefore, that he stood in what has been called a fiduciary relationship towards her ".

Accordingly, the judge held (703) that the client was entitled to the same relief as if Hallett had been her trustee. The case went to the Court of Appeal where the question was the application of the rule in Clayton’s case and it appears to have been unnecessary to determine whether the solicitor was in the strict sense a trustee.

In Stumore v. Campbell & Co. [1891] 1 Q.B. 314, solicitors were paid money by a client with the intention that it be used for a particular purpose which was never carried out. Esher M.R. treated the moneys as subject to a trust (316). The question whether moneys a solicitor holds on behalf of a client are held in trust can hardly depend upon whether the solicitor receives them from the client or from a third party. In each case, it is not necessary that there be an actual intention on the part of the payer to create a trust; that relationship is imputed by the law. In Plunkett v. Barclays Bank Limited [1936] 2 K.B. 107, again, a client paid a solicitor money for a particular purpose and that was treated as money held in trust (117). In re A Solicitor [1952] 1 Ch. 328 the effect of a solicitor’s bankruptcy was in issue and Roxburgh J. discussed the effect of the provision of the English bankruptcy legislation corresponding to s. 116(2)(a) of our Bankruptcy Act 1966. Roxburgh J. referred to Plunkett’s case and to Loescher v. Dean [1950] Ch. 491, which commented upon it;

Roxburgh J concluded that money held in a "client account" by a solicitor was property held by the solicitor on trust for another person, within the meaning of the bankruptcy legislation. Some of these cases were discussed by Clyne J. in re Jones [1953] 16 A.B.C. 169 in which a dispute about the effect of bankruptcy on a solicitor’s trust accounts was decided on the basis that the money was held by the solicitor in a fiduciary capacity; it was not determined whether or not the money was held by the solicitor as "trustee in a strict sense".

We come now to the two recent Australian cases, Adams v. Bank of New South Wales referred to above, being the first. There, a property subject to two mortgages was sold under the first mortgage and the proceeds paid into a solicitor’s trust account. A question arose as to the rights of the second mortgagee, who alleged that the first mortgagee held moneys on trust for it. Hutley J.A., with whose reasons Moffitt P. agreed, referred to the proceeds of sale as having been paid into "[the solicitor’s] trust account and held by him on trust for the appellant" (300), and said that the solicitors "did not receive part of the trust property by simply holding it on trust in the ordinary course of business for a trustee".

The point of this remark is that, so it was held, the first mortgagee held the surplus after sale in trust for the second mortgagee, and the expression "trust property" in the language just quoted was intended to refer to that trust; the solicitor held the money on trust for the client, but not on the trusts on which the client had obtained the money. Moffitt P. referred to the question whether a certain statutory provision imposed a trust on the mortgagee, in respect of proceeds of sale and went on:

" If on its true construction the section imposes a trust, it is the first mortgagee as vendor who is and has the obligations of a trustee. There is nothing in [the relevant provision] which places on others an obligation where none is placed under the general law e.g. where there is a trust under a settlement. A solicitor by receiving the money from a client who is the trustee and accordingly puts it in a separate account, namely an account exclusively for the client trustee, does not himself become a trustee of the money in either class of trust. He is neither required nor entitled to inquire into the rights of beneficiaries to the trust money ". (290)

His Honour was not concerned with the question whether, in relation to the client, the solicitor held the money as trustee, although admittedly some of the language used was rather broad. It will be noted that Moffitt P. emphasised the solicitor’s obligation under the Legal Practitioners Act 1898, s.(c)(1), to hold money "exclusively for his client who had entrusted him with the money and to disburse it as his client directed". That provision has no counterpart in the Queensland Trust Accounts Act 1973; cf. s. 8(1) of our Act, and in particular para. (d) of that provision.

In the Western Australian case, North Eastern Gold Mines N.L. v. Westaustralian Gold Mines Ltd, (above) a solicitor acting for a vendor received money from a prospective purchaser; the solicitor banked it in his trust account to the credit of the client, the vendor. The only question discussed in the case which is in any way relevant to the present was whether the solicitor held the money subject to a fiduciary duty, or in trust, for the purchaser (not a client). It was held that there was no such trust; the case does not appear to be of any assistance, since it does not concern the question whether money received from or on behalf of a client is held in trust for the client.

It is our view that in the ordinary case in which a solicitor receives money on behalf of a client, whether or not the money is paid by a third party, immediately upon receipt the relationship between the solicitor and the client is that of trustee and beneficiary. If, which we doubt, Moffitt P. intended to hold the contrary in Adams’ case, we respectfully disagree with his Honour’s view. Should there be no trusteeship here, then a fiduciary relationship is enough for the plaintiff’s purposes; as we have explained, an amendment sought, to set up a case that the defendant facilitated a breach by Ivory of a fiduciary relationship, should have been allowed.

The present case should in our opinion have been considered on the basis that on receipt of the various cheques which were paid to the solicitor by way of discharge of an obligation to the plaintiff, the solicitor held the moneys paid as trustee for the plaintiff, or at least in a fiduciary capacity.

Excuse under Trusts Act 1973

The question then becomes whether it should have been held that the defendant "acted honestly and reasonably and ought fairly to be excused . . ." - see s. 76 Trusts Act 1973. Relief under that provision, it should be noted, is not available to a mere fiduciary, not being a trustee within the definition in s. 5(1) of the Act.

The primary judge was quite satisfied that the defendant acted honestly and there is no reason to disagree with that view; the difficulty is the requirement of reasonableness. As we read the evidence, Keppie understood clearly enough that the money from Walkers was being paid to the defendant by way of payment to the company, not payment to Ivory; he admitted that he knew the plaintiff, not Ivory, was entitled to the money under the settlement deed. And the correspondencewe have referred to above made it perfectly clear that the defendant knew that what was contemplated, and what occurred, was a payment by Walkers to the plaintiff. Keppie, however, claimed to be uncertain as to whether it was permissible to pay the money out at Ivory’s direction; he never resolved that uncertainty.

He gave evidence that he spoke to counsel about the matter and was advised that if it could be shown that the money paid by Walkers related to work done by Ivory only, then Ivory could use the money. Counsel also suggested that Keppie see if Walkers would admit that fact, and produce receipts. That advice, it will be noted, had nothing to do with what has become the essential issue, namely whether Ivory had authority from the company to require payment to himself.

It is unnecessary for present purposes to discuss whether the advice was sound, for Keppie did not say he proceeded along the lines suggested. Plainly, what was meant was that evidence other than Ivory’s mere assertion of his entitlement to the money should be obtained; none was. What Keppie did was to speak to Ivory, who said that when the company invoiced Walkers it had used an order number which was Ivory’s. In truth, one would not expect the order number to be decisive of the question: who was entitled to the money paid by Walkers? But more importantly, whether Ivory’s assertion about the order number and his suggestion that this meant that he was entitled to the money were correct were matters Keppie did not check. His evidence was that he got counsel’s advice, not as to whether the money should be paid to Ivory, but as to how Ivory should treat it when received. Consistently with that approach, Keppie interested himself in the fate of the money after it was paid to Ivory; he suggested that Ivory obtain advice from accountants on that subject. It is not suggested either in the pleadings or by argument that in truth Ivory was entitled as against Walkers to any of the money, or that there was any basis for thinking that he was so entitled, other than his own assertions. Counsel for the defendant, in this Court, relied on the fact that Walkers produced to Keppie an order form of 19 March 1984, directed by Walkers to Ivory, as bearing on this question. But the relevance, if any, of that form was left unexplained.

It seems to us impossible to hold that the defendant’s conduct in paying out to Ivory, on Ivory’s direction, as beneficial owner of all the shares, was reasonable. In support of the claim to relief under the statute, evidence from an experienced commercial solicitor, Mr K P Prior, was called, but we can find nothing in that evidence which attempts to justify what the defendant did. Mr Prior was asked quite a number of questions about the practice of solicitors, but was never asked whether a competent solicitor would, while in possession of executed agreements demonstrating unequivocally that money paid into his trust account had been so paid in discharge of an obligation to a client company, pay all the money out to or at the direction of all the shareholders in the company, knowing it to be insolvent.

Conclusion

Counsel for the respondent raised two other questions. He suggested that perhaps Ivory had so far as Keppie was concerned ostensible authority to give directions to the defendant to pay the money to him; but Keppie gave no evidence to support that case. It seems clear that he did not question, or indeed think much about, Ivory’s assertion that he was entitled to be paid the money on producing an authority signed by him; nor can anything be pointed to, done by the company, which could have induced the solicitor to think that it had given such authority to Ivory. Counsel also argued that, if the solicitor had not paid the money to Ivory or at his direction, still it would probably have been lost to the company, for Ivory would ultimately have obtained it. This point does not seem to have been the subject of any pleading, or evidence; it was raised in argument below and the judge declined to make a finding about it in favour of the defendant. The argument involves one in constructing hypotheses as to what the defendant would have done if he had approached the matter more cautiously, having regard to the plain conflict between the interests of Ivory, on the one hand, and those of the insolvent company on the other. A similar argument which might have been advanced is that, if the defendant had declined to co- operate with Ivory, Ivory could probably have found another solicitor who was prepared to do so. The finding that a solicitor who holds money for A has without authority paid it to B gives the former a cause of action which is not destroyed by postulating that B might have obtained the money by some other means.

It follows that the appeal is allowed with costs, the judgment entered below set aside and in lieu judgment entered for the plaintiff in the sum of $108,905 plus interest, being the amount of money received from Walkers into the trust account and subsequently paid directly to Ivory ($103,890.75) or applied for Ivory’s purposes ($5,014.25). The remaining $2,300 out of $111,205 was on the evidence paid out for company purposes.

In view of the substantial period of time which has elapsed between the cause of action arising and the judgment of this Court, it is further ordered that the parties be allowed 14 days to either agree as to the amount of interest or to make further written submissions as to the rate, period and calculation of interest.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 49 of 1995

Brisbane

Before Pincus J.A. Ambrose J. Helman J.

[Jalmoon P/L (in Liq.) v. Bow]

BETWEEN:

JALMOON PTY LTD (IN LIQUIDATION)

(Plaintiff) Appellant

AND:

KEITH ROBERT BOW

(Defendant) Respondent

REASONS FOR JUDGMENT OF AMBROSE J.

Judgment delivered 3 December 1996

I have had the advantage of reading the joint reasons for judgment of Pincus J.A. and

Helman J. and adopt their statement of facts. I wish only to elaborate on the following matters:

The plaintiff (“the company”) was a shelf company which Mr. Ivory and Mr. Alexanderson

used as a vehicle for their joint operation of an earthmoving business when they agreed to pool their

equipment and business activities in April 1984.

Upon commencement of company operations 49 per cent of the shares were held by Mr.

Ivory and 51 per cent by Mr. Alexanderson; each was a director and there was another director

appointed at the instance of Mr. Alexanderson as an alternate director.

Earthmoving operations were carried on by the company for about six months when a

dispute arose between the two shareholders concerning inter alia whether money owed by a

customer of the company for work which in fact had been performed by Mr. Ivory prior to his

becoming a shareholder in the company was payable to him in his personal capacity or payable to
the company.

This dispute which could not be resolved resulted in a good deal of disharmony between

Mr. Ivory and Mr. Alexanderson. Eventually in November 1984 Mr. Ivory made an application to

have the company wound up on the just and equitable ground. Mr. Ivory and Mr. Alexanderson

had each contributed equipment and capital in exchange for their share holdings in and control of the

company. It was the contention of Mr. Alexanderson that Mr. Ivory had agreed to contribute to the

capital of the company his entitlement to payment for work he had done prior to taking shares in the

company. Mr. Ivory denied this assertion.

The company had taken over certain of the debts of Mr. Ivory and of course certain further

debts had been incurred in the course of company operations. The company did not have sufficient

net funds to meet the debts for which it was liable at the time of the dispute between Mr. Ivory and

Mr. Alexanderson.

One of the debtors of the company (Walkers) agreed that it was indebted to either Mr.

Ivory or the company for earthmoving work that had been performed by him. Mr. Ivory, on his

own behalf, and Mr. Alexanderson, on behalf of the company, claimed to be entitled to payment of

this sum.

Eventually this dispute involving Mr. Ivory, the company and Walkers was resolved by the

deed of settlement dated 31 January 1985 to which Pincus J.A. and Helman J. refer in their

judgment. Walkers agreed to pay to the company $111,205.00 in full settlement of its indebtedness

for the work performed. By this time the dispute between Mr. Alexanderson and Mr. Ivory had

been resolved. It is unnecessary the analyse the terms of the deed of settlement of this dispute

reached on 16 January 1985 but one consequence was that Mr. Alexanderson transferred all his

shares to Mr. Ivory and resigned as director of the company. Shortly afterwards a third director of

the company (an alternate director appointed by Mr. Alexanderson) also resigned. The transfer of

shares was not registered.

At all times material to the issues debated upon appeal therefore -

(I)	Mr. Ivory was the sole director of the Company and had been validly appointed as
one of two directors.
(ii)	Mr. Ivory was the registered shareholder of 49% of the issued shares in the
company.
(iii)	Mr. Ivory was the beneficial but not registered owner of the other 51% of the issued
shares in the company.

Mr. Keppie, the solicitor employed by the defendant who acted for the company in this

matter, had first commenced to act for Mr. Ivory in the course of the dispute he was having with Mr.

Alexanderson concerning the management of the company. He was involved in the dispute also as

to whether Walkers should pay Mr. Ivory or the company for the earthmoving work in fact

performed by him.

He attended settlement conferences while the winding up application on the just and

equitable ground was pending and when it was settled. He later drew up the Deed of Settlement

between Walkers, Mr. Ivory, Mr. Alexanderson and the company. By that time he was solicitor for

both Mr. Ivory and the company.

Under that Deed all parties agreed that the defendant should receive the sum of

$111,205.00 from Walkers and hold it for the company. For the reasons given by Pincus J.A. and

Helman J. it is my view that the defendant held the Walkers’ money as trustee for the company.

In the context of the negotiations between Mr. Ivory and Mr. Alexanderson for the

settlement of the winding up application on the just and equitable ground and the settlement

ultimately reached with Walkers about a fortnight later it seems clear enough that Mr. Ivory

regarded his gaining complete control of the company as entitling him to receive for his own

purposes the sum paid by Walkers to the company with his consent and that of Mr. Alexanderson.

It seems clear that he regarded his "buying out" of Mr. Alexanderson as having resolved the dispute as to whether he or the company should take the Walkers money. In this sense he seems to have

regarded himself after acquiring the interest of Mr. Alexanderson in the company as the "alter ego"

of the company and indeed this seems to have been the view taken also by Mr. Keppie when he

acceded to his request and paid out to him the monies which the defendant had received from

Walkers to hold on trust for the company.

When Mr. Ivory had gained the capacity to exercise complete control over decision making

on the part of the company (being the registered shareholder of 49% of the issued shares with

entitlement to become the registered shareholder of all but one of the balance of them), the

defendant who was his solicitor also become the solicitor for the company. This explains how it

came about after the tripartite agreement was reached, that the monies to be paid to the company by

Walkers for the work done by Mr. Ivory were to be paid by sending it to the defendant who by that

time was solicitor for that company as well as for Mr. Ivory.

The Companies (Queensland) Code at the relevant time provided in effect a statutory

regulatory scheme designed to permit persons to contribute funds for a joint venture operation with a

limitation on their liability to make further contributions - irrespective of the financial obligations and

losses which the pursuit of that joint venture might occasion.

The limitation of such liability of course is a very significant consideration when persons are

choosing whether to embark upon a joint venture as partners in which event their liability will be

unlimited (except in the case of a limited partnership) or to use a private company so that as

shareholders their liability will be limited to the funds they have actually advanced to their company

(whether in the acquisition of shares or otherwise) and to their personal liability under any guarantees

which might be required by persons advancing money or supplying goods and services to the

company.

The Companies (Queensland) Code at the time made provision to regulate the minimum number and appointment of directors for the management of company affairs. Under s.219(1) a private company was required to have at least 2 directors. Under s.219(5) failure to comply with

s.219 was made a criminal offence. There was, however, no prohibition of the company carrying on

business with only one director with consequences for so doing similar to those specified in s.82 for

a company carrying on business for more than 6 months with less than 2 shareholders. In fact the

Code is silent as to the capacity of a single director left to conduct company business upon the

resignation of all other directors.

Critical to the concept of and structure of a company is the notion that in essence it is a legal

abstraction. It is a corporation sole having an identity quite distinct from that of its shareholders and

its directors. Of its nature a company can act only through its statutory organs - its officers - and it

can give directions of the kind here in issue only by officers properly authorised under the Code and

the articles of the company acting strictly within the constraints of the relevant company legislation

and those of the articles of association.

Where a person deals with a company which acts through its officers with the ostensible

authority of the company, that person is not required to investigate in depth whether all the relevant

provisions of the Companies Act and the Company’s Articles of Association have been complied

with to confer actual authority on that officer. On the other hand of course, if the person knows that

there has been a failure to so comply and as a consequence that the officer has no actual authority to

so deal, then that person cannot rely upon any argument that that officer had ostensible authority, in

his purported dealings on behalf of the company.

Upon the facts of this case undoubtedly it would have been open to Mr. Ivory to become

the registered holder of all but a few of the issued shares and indeed to remain the beneficial owner

of all the registered shares. Under Section 82(1) of the Companies (Queensland) Code a private

company could not validly carry on business for more than 6 months after the number of

shareholders fell below 2. The terms of that section suggest that a company could carry on business

with less than 2 shareholders for up to 6 months. It would seldom be the case one might think that a private company having only one shareholder would have not less than two directors while it carried

on business for six months. Moreover s.82(1)(C) assumes that the company could still validly carry

on business for more than 6 months although the single shareholder would be liable for debts

incurred by the company carrying on business after the period of 6 months has elapsed. It would

have been a simple matter for Mr. Ivory to arrange the registration of the shares he had acquired

from Mr. Alexanderson in such a way as to comply with the share holding requirements of the

company legislation.

It is clear, having regard to the control that Mr. Ivory had after he acquired the beneficial

interest in Mr. Alexanderson's shares, that he could have moved to appoint a director or directors

so as to comply with the requirements of s.219(1) of the Companies (Queensland) Code that there

be at least two directors of the company.

It was clearly within his personal capacity to ensure compliance with all relevant statutory

requirements, concerning the holding of shareholders meetings and directors meetings which might

be necessary for the company to lawfully authorise or direct the defendant to pay to it the money

held in trust for it.

The most uncomplicated way for the company to be in a position to dispose of the funds

which the defendant held on trust for it was for it to direct the defendant to pay its trust account

cheque into the company’s bank account or to send it to the company at its registered office so that

it could pay it into its bank account. Such a course would have avoided the defendant having to

decide whether to pay the money to Mr. Ivory or to anybody else for that matter upon the

company's direction.

However, it does not seem that either Mr. Ivory or his solicitor - who was at that time also

the solicitor for the company - thought it desirable much less necessary to take such formal albeit

uncomplicated steps. Both seem to have proceeded upon the basis that in truth Mr. Ivory was the

alter ego of the company because he owned all the shares in it and as such was able to give lawful
directions to the defendant as solicitor for that company.

In my judgment the view that Mr. Ivory was the alter ego of the company is insupportable; it

disregards the fundamental principle that the identity of the company is different and distinct from

that of its shareholders and its decision making can only be effected by officers properly appointed

and acting in accordance with the Companies (Queensland) Code and with the relevant provisions

of the Articles of Association (if any).

To the extent that that principle has been modified by the doctrine of unanimous assent I

agree with Pincus J.A. and Helman J. that that doctrine has no application to the facts in the present

case.

Had the defendant sent to the company at its registered office, a cheque or cheques payable

to it drawn on his trust account, in my view, as presently advised he would have complied with his

obligations as trustee for the company. In my view, the defendant would not have been obliged nor

indeed even permitted to disregard a proper direction by the plaintiff company to remit to it monies

which he held on trust for it. I am further of the view, that no suspicion, which Mr. Keppie may

have entertained as to the intended purpose for which the money sent to the company was to be

used, would have warranted the defendant's refusal to pay the money to the plaintiff. Mr. Keppie

ought, in such circumstances of course, to have advised against disposing of the money in a way

which might amount to a preferential treatment of Mr. Ivory as a creditor. Indeed, counsel’s advice

on this very point seems to have been obtained at the time. Mr. Ivory seems to have taken the stand

that although he had agreed that the Walkers money should be paid to the company and not to

himself personally, he did not agree that the company was entitled to it. No doubt he was of the

view that his acquisition of control of the company from Mr. Alexanderson who was the one

asserting that the company was entitled to the money made it unnecessary to litigate this issue. Any

management decision on behalf of the company to admit the truth of Mr. Ivory’s assertion would of

course be subject to review by a liquidator in the event of the company being wound up - as it has been. However it is unnecessary to pursue consideration of this matter because the defendant did

not in fact take this course of action.

The evidence is clear that Mr. Keppie, at the time he paid the money to Mr. Ivory at his

request, knew -

(i)          that Mr. Ivory was the only shareholder of the company beneficially owning all the

shares in the company and being the registered shareholder of 49% of them and

(ii)         that Mr. Ivory was the sole validly appointed director of the company at the times

when he gave instructions that money held upon trust for the company be paid to

him and when he received that money from the defendant.

A critical question therefore is whether by reason of the requirement under s.219(1) of The

Companies (Queensland) Code that there be 2 directors of the company, Mr. Ivory ceased to have

the capacity to manage the company’s business affairs when the company’s other director resigned

leaving him sole director.

It was not contended that the mere absence of one of two directors deprives a remaining

director of his capacity to manage the business of the company - whatever effect that absence may

have on his capacity to give directions of the sort under consideration here.

It was contended that merely because his co-director had resigned and had not been

replaced by another director, Mr. Ivory could not act as director in spite of the fact that he had been

validly appointed as such and had not resigned.

I can find nothing in the Code to support that contention. In my view, the provisions of s.82,

if anything, suggest to the contrary.

No authority was cited to support this basic plank in one of the appellant’s principal

arguments.

In my view, Mr. Ivory, as sole director, was empowered to carry on the management of company business - at least to the extent of requesting the defendant to pay to the company monies he held on trust for it. Whether he was carrying on management of company business in directing

that money held on trust for the company be paid to another person (himself) is a different and more

difficult matter to determine.

The first question here is not the capacity of Mr. Ivory as sole director to decide that the

company appropriate the Walkers money for the purpose of settling the dispute between him and

the company: it is his capacity as sole director of the company to direct the defendant to pay money

held in trust for the company to him, rather than to the company. The second important question is

whether because the defendant, as solicitor for Mr. Ivory and the company, knew both of the

company’s insolvency and that Mr. Ivory sought settlement of a claim against it in respect of the

monies the defendant held in trust for it, he should have refused to comply with the direction given by

Mr. Ivory as its sole director to pay it to him. It is unnecessary upon the facts of this case to

consider what the position may have been if the direction had been to make payment of it to the

company for which it was held on trust.

On the first question one must keep in mind that the function of a director is to manage the

business of the company - vide Reg.66 of Table “A” and s.75(2) of the Code. Dealing with s.26 of

The Companies Act 1862 in Gibson v. Barton (1875) L.R. 10 QB 329 Blackburn J. observed at

p.336 “a manager would be in ordinary talk a person who has the management of the whole affairs

of the company; not an agent who is to do a particular thing or a servant who is to obey orders but a

person who is entrusted with power to transact the whole of the affairs of the company”.

Similarly in In Re Johnson & Co. (Builders) Ltd (1955) CH 634 Lord Denning M.R. at 661

observed -

“The word “manager” means a person who is managing the affairs of the company as a
whole.”

I refer also to the observations of Lord Greene in Shelley; Harcourt v. London City Council (1948) 1 KB 274 at 285 where considering the term “management” in the phrase “management, regulation and control of” houses in legislation which empowered Councils to provide rental

accommodation he said that “management” of council housing involved “what is done in connection

with the running, so to speak, of the accommodation”.

In my view it was within the legal capacity of Mr. Ivory, as sole director of the company, to

manage its business by directing the defendant to pay the money he held on trust for the company to

another person. There can be no doubt that a resolution to that effect passed by a properly

constituted board of directors would have justified such a direction. The only object of having such

a resolution would be to show that a majority of the members of the board decided to that effect. In

my view, the giving of such a direction is properly characterised as an act performed in the

management of the business of the company, and as such was within the actual authority of Mr.

Ivory bestowed upon him by the Code and by the Articles of the company as sole director. It was

as much within his capacity as sole director to give that direction as it would have been had he been

one of two directors who so resolved.

The second question is whether, having regard to his knowledge of the insolvency of the

company and the likelihood that Mr. Ivory intended to use the money if it were paid to him only for

the purpose of satisfying his own personal claim against the company in preference to the claims of

other creditors of the company, the defendant ought to have acceded to the direction of Mr. Ivory,

which in effect was that of the company for which he held the money on trust, that he pay that

money to Mr. Ivory.

The answer to this question must reconcile the duty of the defendant as trustee to comply

with the reasonable demands of its beneficiary as to the disposition of money it held on trust for it

with his duty not to be a party to a deliberate disposition of that beneficiary’s property which would

inevitably have the effect of reducing the value of company assets available to meet the claims of

other creditors of the company which to his knowledge was at that time insolvent.

I find the answer to this question difficult. In the end I conclude that although the defendant
would probably have been obliged to pay the money he held upon trust to the company if so

directed, whatever suspicions Mr. Keppie may have had as to what the company might do with that

money to the disadvantage of its creditors, he ought not, with his knowledge of that company’s

insolvency, to have acted upon the direction of the sole director of the company to pay that money

to him when to his knowledge that director claimed to be entitled to it in preference to other

creditors of the company.

In the first case it would have been the company which effected the ultimate disposition of

the money held in trust for it by the defendant. The defendant would have played no part in that

disposition; he would simply have complied with his obligation to put the beneficiary in control of the

money which he held in trust for it.

In this case however in doing as the beneficiary directed the defendant did something quite

different from putting it in control of that money; he in fact acted as the amanuensis of the company

which to his knowledge was seeking to achieve a preference over its other creditors at a time when

he knew or believed it to be insolvent. Mr. Ivory acted as director of the company in directing the

defendant to pay the money held upon trust for it to him. What the company proposed to do was

clearly designed to circumvent s.444 of the Companies (Queensland) Code Mr. Ivory and the

defendant both being aware of the company’s insolvency. The defendant must have or ought to have

realised that he owed a duty to the company not to act on its behalf in a way which would clearly

facilitate a “fraudulent contrivance” on its part at the instance of its director. See Taylor v. White

(1963-64) 110 CLR 129 at p.135-137 per Dixon C.J. and s.451 of the Code. There was clearly a

conflict between the interest of the company and that of Mr. Ivory. The company being insolvent

and considered as a legal entity independent of its shareholder and officer - albeit that its knowledge

and the management of its business was that of its officer for the time being - had to have regard to

the interests of its creditors generally in the conduct of its business and the legal consequences of the

relevant provisions of the Companies (Queensland) Code particularly ss.444 and 451. I refer to the discussion of the obligation of companies and their officers and shareholders insuch circumstances

by McPherson J. In A.N.Z. Executors and Trustee Company Ltd. v. Quintrex Aust. Ltd. (1991)

2 Qd.R 360 at pp. 365e 33 to 369e 25.

The defendant clearly breached the duty he owed to the company by actually assisting Mr.

Ivory have the insolvent company act outside the ordinary course of business in preferring his claim

as an alleged creditor to the claims of other creditors. The assistance he gave was the handing over

of the money he held on trust for the company to Mr. Ivory knowing that Mr. Ivory intended to use

it for his own purposes. The liquidator may pursue against the defendant on behalf of the company

an action for damages for breach of that duty.

I would allow the appeal and make the order proposed by Pincus J.A. and Helman J.