Viscariello v Bernsteen Pty Ltd

[2005] HCATrans 435

[2005] HCATrans 435

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A55 of 2004

B e t w e e n -

LUIGI VISCARIELLO

Applicant

and

BERNSTEEN PTY LTD (IN LIQUIDATION)

Respondent

Application for special leave to appeal

GUMMOW J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

FROM ADELAIDE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 17 JUNE 2005, AT 1.14 PM

Copyright in the High Court of Australia

MR R.W. SALLIS:   If the Court pleases, I appear for the applicant.  (instructed by McNamara Business & Property Law)

MR M.C. LIVESEY:   If the Court pleases, I appear for the respondent.  (instructed by Minter Ellison)

GUMMOW J:   You need an extension of time, do you not?

MR SALLIS:   I am not aware of that, your Honour.  I have no instructions on that. 

GUMMOW J:   Well, have a look at page 131.

MR SALLIS:   Yes, my instructions, your Honour, was that had already been granted.  If my instructions are incorrect, then I am not presently in a position to address you on that other to rely on the ‑ ‑ ‑

GUMMOW J:   Is the extension opposed?

MR SALLIS:   There is no argument put in argument put in opposition to the extension.

GUMMOW J:   Very well.  Yes, it was only a delay of a week or so.  You have the extension. 

MR SALLIS:   I am most obliged to your Honours.  If your Honours please, the facts of this case are relatively straightforward and many of the facts are not in dispute for the purposes of this application.  The principles of law, however, which arise from those facts are complex, subtle and of general importance nationally.  Furthermore, some of those principles of law are not settled law within Australia, and I will refer to those principles of law shortly.  The application for special leave to appeal if granted would enable this High Court to establish those unsettled principles of law so that such principles could be applied by all courts, both federal and State, throughout Australia.

GUMMOW J:   That is all very interesting, Mr Sallis, but have a look at page 152 of the application book.

MR SALLIS:   Yes, your Honour.

GUMMOW J:   Paragraph 2.3:

the recognition that any claim for “proprietary relief” could be dealt with by the liquidator under the statutory proof of debt procedure;

and from that to the court.  Now, is that not the way to go in this procedure rather than challenge the original leave to proceed?

MR SALLIS:   Two responses to that, your Honour.  Firstly, all of the authorities that I have been able to find – and they appear in the book of authorities that your Honours have – in every instance the court has granted the leave and, in particular, I have given you cases where a person or entity claims a proprietary interest in the property.  In each one of those cases, including full superior courts, in every one of those cases the leave has been granted and, in fact, the courts, including the Full Federal Court, have said that where such a claim is made, that is, a proprietary right where the person making the claim says, “Look the property is mine.  It has never, ever become the property of the company”, and there is a trust and a breach of trust, then in every case the court has granted such leave and the courts go further and say in such cases the appropriate course of action is not to lodge a proof of debt but, in fact, is to seek the leave, and that is what we have done in this case.

GUMMOW J:   What is the answer to 2.4 on page 152?

MR SALLIS:   There was a second response, your Honour, to 2.3 and that is that there is grave doubt as to whether under the provisions of the Corporations Act in relation to lodging proofs of debt whether, in fact, an application seeking proprietary relief of this nature, namely a declaration of a trust and tracing, is, in fact, permitted under the provisions in the Corporations Act that deal with lodging proofs of debt.  So there is some real doubt as to whether, by lodging a proof of debt, we could make such a claim in any event.

The authorities that I have referred to in my book of authorities where the courts consistently say in relation to such claims the appropriate course is to apply for leave under section 500(2) of the Act, the courts say that that is the appropriate course because there is a proprietary right claimed and, in any event, even if a proof of debt was lodged – and that is very doubtful and some of the authorities express the doubt about the validity of that course of action – the courts say, in any event, that would be appealed and get into a court of law for the court of law to hear it in any event.  So it is much more appropriate rather than to lodge a proof of debt where there is doubt as to whether you can do it and then there is going to be an appeal to a court if the liquidator rejects that, it is much more appropriate to just take the quicker and more direct path, namely to apply for leave.  Now, I can refer ‑ ‑ ‑

CALLINAN J:   Mr Sallis, let us assume that is all correct for present purposes.  What do you say about the concurrent finding against you – and I think it was concurrent – that you had no arguable claim for proprietary relief? 

MR SALLIS:   I will cut to the chase, your Honours.

CALLINAN J:   On the simple application of In re Diplock. 

MR SALLIS:   Yes, if your Honours please, in my respectful submission, and if you read the judgment of the Full Court and the transcript, it becomes abundantly clear that why the Full Court said that the applicant had no proprietary right was because what the Full Court ‑ ‑ ‑

CALLINAN J:   Because the recipient of the money was either insolvent or it was in debit balance when the money was paid in.

MR SALLIS:   Correct, and in fact, your Honour, there is no dispute that the $158,000 was paid by the applicant to the company.  It is pleaded in the proposed statement of claim that that money was paid for a specific purpose to the company, namely to pay wages.  It is pleaded that that specific purpose was never complied with and in fact it is pleaded that the moneys were spent to pay for trading stock.  What the Full Court did was look at the bank account of the company into which the $158,000 had been paid and the Full Court said that prior to the liquidator being appointed and after the $158,000 had been paid, the bank account went into a debit balance. 

Now, that is agreed.  There is no dispute about that.  Therefore, the Full Court said whatever claim for a valid trust you may have and whatever right you may have had to trace your $158,000 and therefore you may have had a proprietary right, whatever your rights were under the lowest balance aggregate rule, if the bank account got into zero balance or debit balance, your right to trace and your proprietary right went. 

Now, the fundamental error that the Full Court made is that we never argued in any of the hearings below nor in the Full Court, nor have we ever pleaded, nor is there a scintilla of any argument, written or oral, at any stage in the lower courts or in the Full Court where we restricted our claim to the bank account.  We said that the $158,000 was paid by the applicant into the bank account of the company.  That is agreed.  We say that the company then used those funds to buy stock – because it was in the business of running retail stores, manchester stores, buying stock and then selling stock.  So what happened, and I put this argument fully in the transcript to the Full Court, what we did was the applicant paid the ‑ ‑ ‑

GUMMOW J:   Wait a minute, what happened to the stock? 

MR SALLIS:   Your Honour, that is the very point.  It is pleaded that at the time the liquidator took over, the assets ‑ ‑ ‑

GUMMOW J:   Just a minute, the stock was presumably sold at some stage, was it?

MR SALLIS:   Correct and then moneys, the proceeds of the sale, paid into that same bank account, your Honour.  That is the point that we are looking at the mixed fund or the mixed asset is not just the bank account.  It is all the assets of the company, namely the moneys in the bank account, but the stock that was purchased by those moneys and then when the stock was sold the moneys went into that same account.  Now, at the time that the liquidator was appointed ‑ ‑ ‑

GUMMOW J:   Yes.  Well, that does not require a different result.

MR SALLIS:   With respect, your Honour, we say ‑ ‑ ‑

GUMMOW J:   It is the one account you are talking about.

MR SALLIS:   Yes.

GUMMOW J:   And it went into a negative situation.

MR SALLIS:   But at the same time there was about $1.5 million worth of stock in existence and at the time that the liquidator took over, became the voluntary administrator and then the voluntary liquidator – and this is pleaded and it is not in dispute – the assets of the company, trading stock, was $1.3 million, so what we argued is if after we paid the $158,000 the assets of the company, the total assets, not just the bank account, went into a nil or debit balance, we agree that on the authorities there would be no right to trace, no proprietary right.  But at the time that the bank account was in nil balance, the company had about $1.5 million worth of stock, some of which had been purchased by those moneys, that is, the breach of the trust, and at the time that the liquidator took over there was precisely $1,304,000 in trading stock.  We say that is the mixed fund.  That is the fund – I call it a fund but it is really a mixed asset, and there is ample authority in the book of authorities ‑ ‑ ‑

GUMMOW J:   It is not a fund at all.

MR SALLIS:   It is an asset, your Honour, and there are many authorities, I can take you to them now, which say that when you pay money for a specific purpose, whether it is an express trust, a constructive trust, an implied trust, a resulting trust or a Quistclose trust, that you are not restricted to just tracing the money, no matter what the money is used for to buy an asset.  If it buys a horse, or any asset, you can trace into that asset.

GUMMOW J:   I understand that.  Any law student hopefully leaves law school knowing that, but I do not see how it solves this case.

MR SALLIS:   With respect, your Honour, we say that that is the point, with respect, that the Full Court missed, that all the Full Court looked at was the fact that the bank account of the company went into nil balance.  What it did not look at – and when you read the Full Court’s judgment and the transcript, the Full Court is totally oblivious to this, that there was still ‑ ‑ ‑

GUMMOW J:   No, they are not.  Look at page 120, paragraph 29:

The applicant does not assert that he is able to trace his monies into property acquired by the use of the monies in the company’s bank account.

MR SALLIS:   And, your Honour, with respect, that is a finding, but you will not find anything in the proposed statement of claim, anything in our submissions in the lower courts or in the Full Court or anything I said to the Full Court that supports that finding.  In fact, I put the exact opposite.  When one reads the transcript, I was putting in fact the very opposite argument to the Full Court, namely that you look at all of the assets, and I specifically refer in the transcript ‑ ‑ ‑

GUMMOW J:   Where are these assets?  What are they?  Who has property interests in them?

MR SALLIS:   The company, your Honour.  There is no argument.  The company had a bank account, it operated numerous retail stores selling manchester and it is very simple.  It had one bank account and it used that bank account to purchase manchester and sell it retail.  It is as simple as that.  So the $1.3 million was trading stock and we in fact plead the $1.3 million worth of trading stock, worth of assets, in the proposed statement of claim that was before all of the lower courts and the Full Court. 

Our argument in one sense is very simple.  We placed $158,000 into the bank account, and it was the only bank account, of the company.  The company used that money from time to time for various purposes, including purchasing stock.  The specific purpose for which the $158,000 was paid was for the company to pay wages and that was minuted and documented.  There is no argument for the purposes of this application that we plead that the company did not use any of the $158,000 paid for that purpose.

GUMMOW J:   What remedy do you seek?

MR SALLIS:   The remedies we seek, your Honour, are in the proposed statement of claim.  They are declarations of a trust and ‑ ‑ ‑

GUMMOW J:   No, what specific relief do you seek.  You want to get your claws into something.  Now, what is it?

MR SALLIS:   Yes, I can take your Honour to paragraph 39 which starts at page 45 of the application book.  To sum it up, we seek declarations that trusts exist and that a charge and a lien exists and we would seek to trace the moneys, your Honour, this way.  The $158,000 goes into the account, then it is used to buy stock, then the stock is sold and the net proceeds of the stock are paid into the account again.  The trading stock is worth about $1.5 million at the time that the bank balance is nil, so the assets of the company are not nil.  The bank account is nil but the assets, some of which have been purchased by the $158,000, are not nil, they are around about the $1.5 million mark, and at the time the liquidator is appointed, it is pleaded that the assets, being the trading stock, were $1.3 million. 

What happened then is that the liquidator sold the stock and has used some of that money to pay his fees, so ultimately what we are seeking are declarations about the existence of the trust or trusts; declarations that we have a charge and a lien over the assets; declaration that we have the right to trace or an order for tracing and then an order that the liquidator pay to the applicant the moneys ‑ ‑ ‑

GUMMOW J:   Trace into what?

MR SALLIS:   Into, your Honour, the $158,000 which was used to buy trading stock.

GUMMOW J:   You keep saying that over and over again.

MR SALLIS:   But I am trying to follow the tracing through, your Honour, I am trying to give your Honour the stages.  Then the stock was sold and the money was put in the bank account.

GUMMOW J:   We understand all that.

MR SALLIS:   Right, we have that recurring and then, your Honour, at the time the liquidator takes over, the trading stock is worth $1.3 million.  The liquidator then sells the trading stock and from some of the proceeds of that trading stock he pays his own fees.  So we are tracing into his fees and we are saying that the money he has taken for his fees have come from our $158,000 and we seek to trace through and the proprietary right we have is that the money, the $158,000, never, ever became the property of the company.  It always remained the property of the applicant unless the specific purpose for which the money was paid was actually complied with. 

Now, for the purposes of this application there is no argument that the $158,000 was used for the specific purpose for which it was paid, namely the payment of wages.  It is argued that it was used for the purchase of stock, that is, another purpose.

GUMMOW J:   Can you just look at page 157 please, Mr Sallis?

MR SALLIS:   Yes, your Honour.

GUMMOW J:   What is your answer to that?

MR SALLIS:   Which part of 157, your Honour?

GUMMOW J:   The Full Court was very well aware of the matters I have been raising with you.

MR SALLIS:   When one looks at the transcript and the judgment, your Honour, it is clear that the Full Court wrongly understood the applicant’s argument being that the applicant was seeking to trace only into the bank account.  There is nothing you will find in any of the material before you that supports that proposition – quite to the contrary.  If you look at my argument to Justice Besanko and the Chief Justice, you will clearly see that I was doing the opposite.  I was talking about all of the assets, and if you look at the proposed statement of claim, I do not know how much clearer we could be than that, pages 43 and 44, we actually in paragraph 28A on page 43 of the application book plead:

The advances are capable of being traced into the assets –

not the bank account, the assets –

of the first defendant –

and it goes on and then paragraph 29 pleads that:

Upon the second defendant’s appointment as voluntary administrator the total assets of the first defendant was in the approximate sum of ONE MILLION THREE HUNDRED AND FIFTY THOUSAND AND FOUR DOLLARS ($1,350,004.00).

And if you look at these ‑ ‑ ‑

CALLINAN J:   The administrator became the liquidator, is that what happened?

MR SALLIS:   Correct, your Honour, yes, he did, in fact within a week or two.

CALLINAN J:   What is your claim against the liquidator?  Would you not have a claim against the liquidator personally if everything else you said was right?

MR SALLIS:   Against both, your Honour, yes.  Yes, against both.

CALLINAN J:   Have you brought a claim against the liquidator personally?

MR SALLIS:   We have.

CALLINAN J:   Where is that?

MR SALLIS:   Our statement of claim was knocked out on the basis that we had no proprietary interest against the liquidator because of what the Full Court have said about having no arguable proprietary interest against the company.  We think that is wrong as well, but that is in another forum. 

GUMMOW J:   Yes.  Yes, Mr Sallis.

MR SALLIS:   Can I put this to your Honours, that the nub of this argument is I implore the Court, if your Honours have not already done it, to read through the book of authorities because the courts are very, very strong in their view that in situations like this where you are claiming moneys to be subject of a trust and a proprietary interest, namely, you are saying the money always remain the applicant’s, it never became the money of the company, that the appropriate course of action is to apply for leave to commence proceedings against the company under section 500(2) of the Corporations Act.  You may also sue the liquidator personally, but that is the appropriate course.  There is not one case I have been able to find ‑ ‑ ‑

GUMMOW J:   Yes, Mr Sallis.

MR SALLIS:   Yes, thank you, your Honour.  There are other issues as well, your Honour, namely, what is the criteria for granting leave under section 500(2)?  There are conflicting decisions amongst federal and State courts and I am not aware of any High Court decision that sets out those principles.  That begs the question, as in this case, where we are seeking a proprietary right and we are seeking an order basically that the liquidator pays us back our money because it was never the company’s money for him

to take to pay his fees, we are saying that such a case as this comes within the category of cases that satisfies section 500(2) for leave.

It is rather interesting that you probably have hundreds or thousands of applications per annum under section 500 for leave to commence or continue proceedings against companies in liquidation and yet neither I nor my learned friend nor any of the courts below have been able to find one High Court authority setting out the principles that apply to the granting of such leave.  As I have said, and it appears in my book of authorities, there are conflicting Full Court decisions on a federal and State level as to what the appropriate test is.  My time is up, your Honours, unless there is anything further.

GUMMOW J:   Thank you.  We will take a short adjournment.

AT 1.36 PM SHORT ADJOURNMENT

UPON RESUMING AT 1.42 PM:

GUMMOW J:   We do not need to call on you, Mr Livesey.

MR LIVESEY:   If the Court pleases.

GUMMOW J:   There was no error in the decision of the South Australian Full Court respecting the tracing of trust moneys into an overdrawn bank account, nor, having regard to what appears at page 157 of the application book in this Court, was there a case of denial of procedural fairness by the Full Court.  We say nothing respecting any personal cause of action against parties other than the company.  However, special leave is refused with costs. 

We will now adjourn until 2.15 pm.

AT 1.43 PM THE MATTER WAS CONCLUDED