Re King, Christopher Martin v Ex parte RZO Pty Ltd
[1996] FCA 771
•30 AUGUST 1996
CATCHWORDS
BANKRUPTCY - rejection of proof of debt by Official Trustee - executor and beneficiary carrying on business of deceased - applicant paid debts of business and carried on business in exchange for right to acquire assets of business - monies paid by applicant to be credited to purchase of assets - whether a debt - whether debt of the estate - whether executor carrying on business for the purpose of realisation
Bankruptcy Act 1966 (Cth): s 104(1)
Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319
re: Christopher Martin King; Ex parte RZO Pty Ltd
(No. TB 656 of 1994)
Judge: Heerey J
Date: 30 August 1996
Place: Melbourne (heard in Hobart)
IN THE FEDERAL COURT OF AUSTRALIA )
)
EXERCISING FEDERAL JURISDICTION ) No. TB 656 of 1994
)
BANKRUPTCY )
)
BANKRUPTCY DISTRICT OF TASMANIA )
RE: CHRISTOPHER MARTIN KING
(deceased) a bankrupt
EX PARTE:RZO PTY LTD
Applicant
- and -
THE OFFICIAL TRUSTEE
Respondent
JUDGE: Heerey J
DATE: 30 August 1996
PLACE: Melbourne (heard in Hobart)
MINUTES OF ORDER
The Court orders that:
The decision of the Official Trustee made on 10 May 1996 to reject in full the applicant's claim against the estate for the sum of $113,444 be reversed.
The Official Trustee admit the applicant's amended proof in the sum of $128,163.58.
The Official Trustee pay the applicant's costs including reserved costs.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA )
)
EXERCISING FEDERAL JURISDICTION ) No. TB 656 of 1994
)
BANKRUPTCY )
)
BANKRUPTCY DISTRICT OF TASMANIA )
RE: CHRISTOPHER MARTIN KING
(deceased) a bankrupt
EX PARTE:RZO PTY LTD
Applicant
- and -
THE OFFICIAL TRUSTEE
Respondent
JUDGE: Heerey J
DATE: 30 August 1996
PLACE: Melbourne (heard in Hobart)
REASONS FOR JUDGMENT
This appeal from the Official Trustee's rejection of proof of debt arises in the matter of the bankrupt estate of Christopher Martin King who died on 16 September 1991. An order for administration under Part XI of the Bankruptcy Act 1966 (Cth) (the Act) was made on 13 December 1994.
Prior to his death C M King carried on as a sole proprietor the business of hiring out items such as sound, lighting and audio-visual equipment, power distribution display panels and marquees. The business was conducted under the names "Rentalite Zeta Organisation", "Rentalite Electric", "Rentalite Studios" and "Lansdowne Systems" from premises he owned at 117 Lansdowne Crescent, West Hobart. He also rented some premises at Salamanca Place which were used for storage.
By his will dated 9 July 1991 C M King appointed his brother Nicholas John King as sole executor and sole beneficiary. The will contained no express authority for N J King to carry on the business.
N J King had worked as an employee in his brother's business for some time but had little awareness of its financial position. Superficially it appeared that the business was profitable and that C M King was a man of substance. However the accounting records were in a very poor state. After his brother's death, N J King encountered an "avalanche of debts".
Mr Anthony Miller had been employed in the business by the deceased since March 1990. He continued to work after C M King's death. The income of the business was used to meet ongoing operating expenses and interest accruing on debts of C M King, including banking accommodation from the ANZ Bank. Mr Miller and N J King contacted creditors and asked among other things that they freeze all accounts of the estate and open new accounts under the name "N J King as trustee of the estate of C M King".
In February/March N J King called for tenders for the purchase of the business. The best offer received was $7800.
In March N J King told Mr Miller that he was unable to pay the debts and liabilities of the estate and asked for assistance. In his words, the business was in "a lot of strife". A meeting took place on 26 March. N J King told Mr Miller that the business would cease to trade at the end of the month.
About this time notice was given that the son and daughter of the deceased were commencing proceedings for further provision out of the estate under the Testators Family Maintenance Act 1912 (Tas). Their applications were subsequently filed in the Supreme Court of Tasmania on 15 and 21 July respectively.
Mr Miller arranged for the acquisition of a company for the purpose of acquiring the assets of the business formerly carried on by C M King. It is the present applicant RZO Pty Ltd. Its directors were N J King, Mr Douglas Edwards and Mr John Sutherland. Mr Miller was General Manager. Mr Edwards had been an employee of C M King. The initial shareholders were two companies associated respectively with Mr Edwards and Mr Sutherland. Mr Miller became a shareholder in July last year.
On 14 April a meeting was held at the Lansdowne Crescent premises between N J King, Mr Miller, Mr Edwards and Mr Sutherland. The following document was prepared and signed.
MINUTES
STATEMENT
Nichols [sic] King as Trustee for the Estate of the late CM King has requested financial assistance from RZO Pty Ltd for the Estate as the Estate no longer has any income and that ANZ Bank interest and other ongoing expenses will continue to compound increasing the liabilities of the Estate.
It was resolved and agreed by the Directors of RZO Pty Ltd that RZO Pty Ltd will lend money to make payments of accounts for
the "Estate of the late Christopher Martin King" of which Nicholas King is the Trustee on the basis of the following terms:
a.RZO Pty Ltd is interested in acquiring the assets of the Estate.
b.In return for services RZO Pty Ltd will have first option on the acquisition of assets of the estate.
c.All payments made to the Estate or its creditors by RZO Pty Ltd will be credited as payments towards the purchase of the Estate assets or repaid as a loan.
d.Nicholas King as Trustee for the Estate will sign the minutes of this meeting as acceptance of these terms.
It is noted that Nicholas King acting as Trustee for the Estate of the late CM King accepts the terms as described above and will sign the minutes of this meeting separately as a Director of RZO Pty Ltd and as Trustee for the Estate of the Late CM King.
The minutes are accepted by the Directors of RZO Pty Ltd.
Nicholas John King: (sgd) N J King
Douglas Wayne Edwards: (sgd) D W Edwards
John Finlay Sutherland: (sgd) J F Sutherland
Date: 14/4/92
Signed as Trustee for the Estate of the Late CM King.
Nicholas King: (sgd) Nicholas King
Date: 14/4/92
RZO commenced to carry on business about the date of this meeting. N J King had ceased business for some two weeks prior to that date.
RZO operated a similar kind of business to that carried on by C M King although it targeted a different market, namely the concert market, corporate business and conventional theatre. The business of C M King was concentrated on marquees, weddings, power distribution and display panels for exhibitions. RZO did not acquire any contracts or work in progress. It traded under its own name, although for a few months it used the same telephone numbers as the business operated by N J King.
Between 29 April 1992 and 18 July 1993 RZO paid a total of $128,163.58 in respect of what are said to be the debts and liabilities of the estate of C J King. The debts included interest due to the ANZ Bank, payments under vehicle and equipment leases and hire purchase agreements, rental of the Salamanca Place premises and sundry creditors of C M King and N J King in his capacity as executor of the estate.
On 10 June 1992 probate of the will of C M King was granted on the undertaking of N J King not to dispose of any of the assets, other than for the purpose of paying the debts of the estate, for a period of three months from the date of grant.
Payments by RZO under the 14 April 1992 agreement ceased as a result of an agreement reached at a meeting on 3 June 1993 attended by N J King, Messrs Miller, Edwards and Sutherland, Mr Hugh Murray of Archer Bushby (RZO's solicitors) and Mr Robert Whitehouse of Wise Lord & Ferguson (RZO's accountants). The minutes of RZO recording the agreement are as follows:
MINUTES
It was resolved and agreed by the Directors of RZO Pty Ltd that RZO Pty Ltd would from 3/6/93 cease to lend money to make payments of accounts for the "Estate of the late Christopher Martin King" of which Nicholas King is the Trustee or Executor of the will and a substantial beneficiary.
It was resolved and agreed by the Directors that RZO Pty Ltd would with the approval of the Trustee or Executor of the Estate of the Late Christopher Martin King to [sic] initiate the transfer and accept assignment of Esanda Finance leases, asset purchase and hire purchases to aid the estate by reducing the estate's liabilities.
It was resolved and agreed by the Directors that RZO Pty Ltd would write to the Trustee or Executor of the Estate of the Late Christopher Martin King advising of the withdrawal of financial backing and requesting formal long term contracts
relating to:
(a)The Leasing of the West Hobart Hall
(b)The rental of plant and equipment from the Estate
It was resolved and agreed by the Directors that RZO Pty Ltd would endeavour to recover monies paid to the Estate of the late Christopher Martin King totalling approximately $ 115,000 dollars.
It was resolved and agreed by the Directors of RZO Pty Ltd that rental monies for the West Hobart property and the Estate plant and equipment may be deducted from the monies already paid to the Estate.
The meeting concluded with Robert Whitehouse stating that as he was also the accountant for the Estate of the Late Martin King he would look into the Estate accounts, assets and liabilities in order to ascertain a current financial position.
End of Meeting
The minutes are accepted by the Directors of RZO Pty Ltd.
Nicholas John King: (sgd) Nicholas King
Douglas Wayne Edwards: (sgd) D W Edwards
John Finlay Sutherland: (sgd) J F Sutherland
Date: 3/6/93
Shortly thereafter agreement was reached for a lease of the Lansdowne Crescent premises to RZO at $8000 per annum plus rates, taxes and electricity for a period of two years with a further option for the same period. It was agreed the plant and equipment would be leased at $15,000 per annum. It is conceded that the "vast majority" of the monies due under these agreements has been paid, although much of the plant and equipment, and the Salamanca Place premises, were not in fact used by RZO.
At various times prior to June 1995 Mr Miller was involved in discussions with the directors of RZO (including N J King) concerning the purchase of the estate's plant and equipment. Many figures and proposals were canvassed from time to time.
Finally the figure of $33,095 was agreed upon on 13 June 1995. The basis of this figure was a valuation by an equipment supplier, Mr Kevin McCulloch, at that time.
On 8 March 1995 RZO lodged a proof of debt for ($133,119.57) in respect of a somewhat lower amount. (The amount of $128,163.58, the quantum of which is admitted, became the subject of an amended proof of debt.) On 10 May 1996 the Official Trustee rejected the claims on the following grounds:
THAT I am not satisfied that you have a debt provable in the estate.
THAT there is insufficient evidence available to determine the nature of any contractual relationship between RZO Pty Ltd and Mr Nicholas John King as executor of the deceased estate of Christopher Martin King which gives rise to any claim to a debt owing by the deceased estate.
THAT any debt that may be owing may more properly be described at [sic] debt owing by Mr Nicholas John King.
THAT alternatively any payments made by RZO Pty Ltd were payments properly made for the use of assets of the deceased estate from time to time.
An appeal is brought to this Court against that rejection of the proof of debt under s 104(1) of the Act.
Was there a Debt?
I find the minutes of 14 April 1992 constituted a valid contract between RZO and N J King as trustee of the estate of the late C M King. Counsel for the Official Trustee argued that any agreement was void for uncertainty in that the amount of money to be lent was not specified. I do not agree. The document was not drawn up by lawyers but it was intended to be an important document conferring rights and liabilities and the Court ought to give it
effect. I construe it as an agreement to lend such money as may be necessary to pay the debts of the estate, such loans to be set-off against the price for the anticipated purchase of the estate's assets. In an affidavit filed on behalf of the Official Trustee N J King deposes:
That from the time that RZO Pty Ltd was formed in about April 1992 until June 1993 the Company had the use of all of my deceased brother's business assets and there was a gentlemen's agreement that the Company would pay the deceased estate for the advantages it obtained from the use of those assets.
N J King was an honest witness and indeed was at pains to point out the understandable difficulties he has in recollecting detail. Nevertheless I am not satisfied that there was any such "gentlemen's agreement", or any agreement inconsistent with the agreement of 14 April 1992. There was no agreement as to any payment for use of the assets until 3 June 1993. I also do not accept the further argument of the Official Trustee that, if there was an agreement for a loan, it was not acted upon. There is no doubt that RZO made payments in satisfaction of debts. There is an issue as to whether those debts were debts of the estate of C M King or personal debts of N J King. But whatever the correct categorisation, there is no reason for thinking that they were not paid pursuant to the agreement of 14 April 1992.
Was There a Debt of the Estate?
The relevant principles are stated in the judgment of Latham CJ in Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319 at 324 (citations omitted):
An executor is entitled (apart from any express authority given by the will) as against both beneficiaries and estate creditors to carry on the business of his testator for the purpose of realization, but only for that purpose. In respect of debts incurred by him in so carrying on the business he is personally liable to the trading creditors - the debts are his debts and not the debts of his testator. But as against beneficiaries and both classes of creditors he is entitled to indemnity in respect of those debts out of the assets of the estate.
...
If an executor carries on a business otherwise than for the purpose of realisation and without authority given by the will of his testator, he acts at his own risk, the debts which he incurs are his debts, and he has no authority as against either beneficiaries or creditors to come upon the assets of the estate for the purpose of meeting them.
But if a beneficiary actually authorises him to carry on the business he is entitled as against that beneficiary to indemnity out of the estate in respect of the debts which, in the course of such carrying on, he incurs to the trading creditors. Similarly, if a creditor of the testator actually authorises him to carry on the business, he is entitled as against that creditor to a similar indemnity, which in each case enures by subrogation for the benefit of the new creditors.
In his affidavit N J King deposes:
That I did not operate my deceased brother's business for the purpose of selling it. It was my intention to operate his business firstly until the administration of his deceased estate was complete and then as the sole beneficiary because I wished to retain the business that he had commenced in 1956. I was never advised by the solicitors acting for the deceased estate that I was under an obligation as executor to sell the assets of the deceased estate. I ran the business of the deceased estate as if it were my business and as if it would be my business forever.
Notwithstanding that statement, I think the proper construction to be put on the actions of N J King was that he was carrying on the business for the purposes of realisation and that he entered into the loan arrangement with RZO to preserve the assets of the business until they could be realized. The loan arrangement with RZO was part of the realisation process, a form of bridging finance. The business assets were eventually sold to RZO and thus a realisation occurred. Had RZO not advanced the money to pay debts, the creditors would have seized the assets and there would be nothing to realise. Given the financial circumstances
of the estate, the option of N J King paying off all the estate creditors and taking the business by way of distribution in specie to himself as sole beneficiary was never going to be available. Even if it were, the vesting of the business in N J King as beneficiary would be a realisation and the borrowing of money to preserve these assets would be part of the realisation process.
Accordingly I find the debts were debts of the estate and RZO is entitled to be subrogated to N J King's claim against the estate.
I do not think there should be any set-off for any benefit that RZO might have got from use of the assets of the business prior to the agreement of June 1993. (It paid for use thereafter.) RZO ultimately paid $128,000 and then purchased the plant for $33,095, which seems to have been above market value. It thus received no benefit by way of credit against the purchase price for payment of the estate's debts prior to June 1993.
Between 14 April 1992 and June 1993 there was no agreement for payment by RZO for use of the estate's assets. One can infer that in April 1992 it would not have been expected that realisation of the estate would take as long as it did. Use of the assets by RZO is objectively to be seen as a likely purchaser of assets being given possession prior to completion in return for the (very considerable) advantage it conferred on the estate by agreeing to pay the estate's debts.
There will be an order that the decision of the Official Trustee made on 10 May 1996 to reject in full the applicant's claim against the estate for the sum of $113,444 be reversed. There will be a further order that the Official Trustee admit the applicant's amended proof in the sum of $128,163.58. There will be an order that the Official Trustee pay the applicant's costs including reserved costs.
I certify that this and the preceding ten (10) pages are a true copy of the reasons for judgment of his Honour Justice Heerey.
Dated:
Associate
Appearances
Counsel for the applicant: Mr A Douglas with Ms S Walker
Solicitor for the applicant: Archer Bushby
Counsel for the respondent: Mr P Wood
Solicitor for the respondent: Piggott Wood & Baker
Dates of hearing: 14 and 15 August 1996
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