Wilde, W.J. v Spratt, J.K
[1986] FCA 629
•24 DECEMBER 1986
Re: WILSON JOSEPH WILDE and ERNEST GEORGE HARRIS
And: JANELLE KAYE SPRATT; P. & S. DECO QUARRIES PTY. LTD.; ROBERT WILLIAM
PEACH and JOHN ROBERT REES
No. G 82 of 1986
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE SOUTHERN DISTRICT OF THE STATE OF QUEENSLAND
Fisher J.
Lockhart J.
Spender J.
CATCHWORDS
Bankruptcy - Compromise of action by trustee - no permission of creditors or leave of Court to compromise obtained - operation of sub-s. 135(4) Bankruptcy Act - meaning of "good faith" in para. 135(4)(b) - whether "without notice" in para. 135(4)(b) requires absence of knowledge of legal requirement that permission or leave to compromise be obtained.
Bankruptcy Act 1966 (Cth): sub-ss. 58(3), 314(2), 135(1), 135(4)
HEARING
BRISBANE
#DATE 24:12:1986
ORDER
The appeal be dismissed.
The appellants pay the costs of the respondents of this appeal.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
The courts have had occasion before to consider the meaning of the expressions "in good faith" and "without notice" in various contexts. In this appeal from a judgment of a single Judge of this Court (Pincus J.) the meaning of the expressions arises for consideration in the context of para. 135(4)(b) of the Bankruptcy Act 1966 ("the Act"). Section 135, so far as is relevant, provides:
"135(1) The trustee may, with the permission of the creditors granted by resolution passed at a general meeting or of the committee of inspection or with the leave of the Court, do all or any of the following things:-
(a) sell, by private contract, any property of the bankrupt having a value exceeding $20,000 or such greater amount as is prescribed for the purposes of s. 134;
. . .
(f) make a compromise in respect of any debt exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134 claimed to be due to the bankrupt, or any claim exceeding $20,000 or such greater amount as is prescribed for the purposes of section 134 by the bankrupt;
(g) make a compromise with a creditor or a person claiming to be a creditor in respect of a debt provable, or claimed to be provable, in the bankruptcy and claimed to exceed $20,000 or such greater amount as is prescribed for the purposes of section 134;
. . .
(4) The failure by a trustee to obtain the permission or leave required by sub-section
(1) in relation to a transaction by the trustee does not affect the validity of the transaction if -
(a) the transaction was for valuable consideration; and
(b) the person with whom it took place acted in good faith and without notice of the failure to obtain the permission or leave."
It is necessary to state the relevant facts for a proper understanding of the questions involved in this appeal. On 19 February 1979 Timothy John Spratt and his wife, Janelle Kaye Spratt (the first respondent) agreed to purchase as joint tenants from Statewide Investments Pty. Limited (In Liquidation) about seventeen acres of land at Keperra, Queensland for use as a quarry. Robert William Peach, the third respondent, discussed with Mr. Spratt the possibility of himself and his wife joining with Mr. and Mrs. Spratt in the purchase of the Keperra land and in the conduct of the quarry business. Agreement was reached and subsequently a company, P. & S. Deco Quarries Pty. Limited, the second respondent ("the company"), was formed for the purpose of acquiring the land on which the quarry business was to be conducted. The Keperra land is the principal asset of the company. The shareholders of the company at the relevant time were:
Shareholder Number of Shares
Mr. Peach 50,000
Mrs. Peach 50,000
Garry Peach (their son) 6,667
Mrs. Garry Peach 6,666
Gregory Peach (also a son) 6,667
Mrs. Gregory Peach 6,666
Mr. Spratt 26,667
Mrs. Spratt 6,667
160,000
Mr. and Mrs. Spratt had commenced operations on the Keperra land before the entry of Mr. and Mrs. Peach into the business arrangements. The company then acquired the land as purchaser. Later a further three acres were acquired, thus increasing the acreage of the quarry to about twenty acres. Mr. Spratt and Mr Peach conducted the quarry business for about nine months on terms which are not clear from the evidence. In 1980 Mr. Peach decided to cease his regular involvement with the business and an agreement was reached whereby Mr. and Mrs. Spratt were to lease the quarry from the company. A lease was executed on 27 June 1980 between the company as lessor and Mr. and Mrs. Spratt as lessees and they commenced to operate the quarry. The business was not successful and by 1981 Mr. and Mrs. Spratt owed a substantial amount in arrears of rent.
In 1981 the company commenced proceedings in the Supreme Court of Queensland (writ No. 2508 of 1981) against Mr. and Mrs. Spratt claiming $64,854.81 of which $50,786.19 represented arrears of rent and the balance represented various sums said to be due by Mr. and Mrs. Spratt to the company under the lease. Mr. and Mrs. Spratt filed a defence and counter claim alleging, amongst other things, that there had been waiver and discharge of the liability to pay arrears of rent, that the company entered upon the premises in breach of the lease and excluded them from exclusive occupancy. Mr. and Mrs. Spratt claimed $57,000 damages in their counter claim.
Action No. 2509 of 1981 was also commenced in the Supreme Court by the company against Mr. and Mrs. Spratt claiming recovery of possession of the Keperra land because of alleged breaches of the lease. Further proceedings (No. 2060 of 1982) were instituted by the company in the Supreme Court claiming recovery of possession of the premises from Mr. and Mrs. Spratt. All proceedings were defended. On 1 September 1981 the Supreme Court ordered that actions No. 2508 and No. 2509 be consolidated. On 30 June 1982 a Master of the Supreme Court ordered that the company be entitled to recover possession of the land and that it recover $43,200.21 against Mr. Spratt and Mrs. Spratt.
On 16 May 1983 Mr. Spratt was made bankrupt by order of this Court and John Robert Rees, the fourth respondent, was appointed trustee. Steps were taken to set the actions down for trial in the Supreme Court and the trial was fixed for 28 February 1985. As there were no funds in the estate Mr. Rees decided not to take any part in the trial. He attended the Supreme Court on 28 February 1985 to observe. When he arrived at the Court settlement discussions were in progress between the legal representatives of the company and Mrs. Spratt. Mr. Rees perceived the settlement proposals as being that Mrs. Spratt would purchase her husband's shares in the company from himself (Mr. Rees) for $15,000 and that she would transfer them together with the shares which she held in the company to Mr. Peach. Mr. Rees believed that if he got $15,000 for Mr. Spratt's shares it would benefit the estate as it would be difficult to find a buyer for a minority holding of shares in a private company whose shareholders had pre-emptive rights over the purchase of shares. On 1 March 1985 he was handed an agreement for the sale of Mr. Spratt's shares, signed by Mrs. Spratt as purchaser on 28 February 1985 which he signed.
Mr. Peach was also present at the Queensland Supreme Court House, Brisbane, on 28 February 1985. Settlement negotiations occupied a full morning. The offer, as he understood it, was that Mr. Rees would convey, as trustee, Mr. Spratt's shares to Mrs. Spratt for $15,000 and that she would transfer those shares together with her own shares in the company to Mr. Peach. She was to pay all costs of the Supreme Court actions. In the course of that afternoon and the following day the terms of settlement of the Supreme Court proceedings were settled and signed by counsel for the company and Mrs. Spratt. Mr. Peach said that he was at no stage aware that Mr. Rees had failed to obtain permission from the creditors or leave of the Court as required by sub-s. 135(1) of the Act to compromise the action. The agreement for the sale of Mr. Spratt's shares in the company to Mrs. Spratt or her nominee and Mrs. Spratt's shares to Mr. Peach was also executed. No objection to the validity of the agreement for the sale of the shares was communicated to Mr. Peach or his solicitors by anybody until June 1985, some four months after the agreement was signed. Mrs. Spratt has not paid the $15,000 or any part of it to the trustee, but Mr. Peach paid $15,000 into his solicitor's trust account and he asserts that he has always been willing to perform the agreement. Mr. Peach commenced proceedings for specific performance of the agreement whereby Mrs. Spratt was to transfer the total of Mr. Spratt's and Mrs. Spratt's holdings in the company to him.
The terms of settlement of the Supreme Court litigation provided so far as is relevant:
. that Mrs. Spratt was to transfer to Mr. Peach or his nominee the 6,667 shares held by her in the company at a price to be determined by the company's auditors (paragraph 1);
. that Mr. Rees, as trustee of the estate of Mr. Spratt, was to sell the 26,667 shares held by him in the company to Mrs. Spratt or her nominee for $15,000 (paragraph 2);
. that for the purposes of paragraph 2 Mrs. Spratt nominated Mr. Peach or his nominee as the party to whom the shares were to be transferred (paragraph 3);
. the action (i.e. No. 2508 of 1981) was to be adjourned by consent to the settlement list (paragraph 5);
. Mrs. Spratt was to pay the company's costs of the three proceedings (paragraph 6); and
. Mrs. Spratt was to be entitled to set off against those costs any costs which the company had been ordered to pay to her or her husband in the proceedings (paragraph 7).
On 1 March 1985 Master Lee of the Supreme Court of Queensland ordered by consent that action No. 2508 of 1981 be adjourned to the settlement list and that the company recover against Mrs. Spratt its costs of the actions.
Difficulties arose between Mr. Rees and persons interested in the administration of the estate. In June 1985 he tendered his resignation as trustee which was accepted by the Court on 27 June 1985. On his resignation there were no funds in the estate and no assets of Mr. Spratt had been realised. Prior to his resignation Mr. Rees had not been served with any application by the company for leave to continue any of the proceedings against Mr. Spratt.
Following the resignation of Mr. Rees, Wilson Joseph Wilde and Ernest George Harris, the appellants, were appointed as trustees in his place.
The trustees then commenced the proceedings in this Court which led to this appeal in which they sought, inter alia, a declaration that the agreement for sale of the shares of 28 February 1985 is void as against themselves as trustees; a declaration that the terms of settlement executed that day are also void as against them; and a declaration that any fresh steps taken in Supreme Court action No. 2508 of 1981 on or after the making of the sequestration order (16 May 1983) by the company as plaintiff were taken without the leave of this Court which is required by sub-s. 58(3) of the Act and are void as against the applicants as trustees. Sub-section 58(3) provides:
"58(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor -
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."
The case came before Pincus J. who, at the request of the parties, tried it in two stages; the first stage dealing with questions arising under sub-s. 58(3) of the Act and a further question as to whether the leave of the creditors or of the committee of inspection or of the Court was necessary under sub-s. 135(1), to sell Mr. Spratt's shares in the company or to make the compromise. The second stage was heard later by his Honour when he determined the questions of "good faith" and "notice" under sub-s. 135(4). His Honour gave two judgments, the first on 19 February 1986 and the second on 11 June 1986. The first judgment is not the subject of this appeal; but it is necessary to state the principal findings of his Honour in order to understand the basis upon which the second judgment proceded. His Honour held in his reasons for judgment of 19 February 1986 that:
although Mr. Rees had no funds to do so and did not instruct his solicitors to defend action No. 2508, counsel nevertheless appeared for both Mr. Rees as trustee of Mr. Spratt's estate (even though he was not joined as a party thereto) and for Mrs. Spratt when the matter was called on;
both the claim and the counter claim were implicity abandoned by the terms of settlement. Mr. Rees was a party to the compromise. Although not on the record in the case he was advised and represented by counsel and the document he signed, being the agreement for the sale of shares, was an important part of the settlement;
there was in substance an agreement to which there were three parties: the company, Mr. Rees as trustee of the bankrupt's estate and Mrs. Spratt. The terms of the agreement consisted of the agreement for the sale of the shares, the terms of settlement and the fact that both the claim and counter claim were abandoned;
there was a claim exceeding $20,000 within the meaning of para. 135(1)(f) in respect of moneys claimed to be due to the bankrupt and there was also a claim exceeding $20,000 by a person claiming to be a creditor, namely the company, within the meaning of para. 135(1)(g). There was a compromise in respect of each of those claims, the essence of which was that each claim was to be abandoned and as an important part of the compromise Mr. Rees agreed to sell the shares. The whole settlement was caught because it was a compromise in respect of each of the claim and counter claim and what the trustee purported to do therefore conflicted with sub-s. 135(1) as no permission or leave was obtained;
although leave of the Court was not obtained as required by para. 58(3)(b) of the Act the settlement was not thereby rendered invalid because there was no causal connection between the settlement and the steps taken in pursuance of the action which were designed to obtain a settlement. The sub-section did not directly affect the compromise;
notwithstanding that the action against Mr. Spratt was continued without leave under sub-s. 58(3), the compromise of the action to which the trustee was a party was not vitiated;
there was no failure to comply with para. 135(1)(a) of the Act because the relevant property the subject of the sale were the shares in question and his Honour held that they did not have a value exceeding $20,000.
Pincus J. made a declaration that on or about 28 February 1985 Mr. Rees made a compromise within the meaning of both paras. 135(1)(f) and (g) of the Act in respect of action No. 2508 of 1981. His Honour adjourned the matter for further hearing.
The further hearing took place on 11 June 1986 and his Honour gave his second reasons for judgment on 11 June 1986. He said that the transaction was clearly one for valuable consideration, a finding not challenged before us, and that the questions of good faith and notice referred to in para. 135(4)(b) were in issue before him.
On the question of good faith his Honour held that there were two elements involved in that notion. First, whether the transaction was entered into honestly. As there was no suggestion of dishonesty affecting the transaction in this case his Honour passed to the second element, namely, that there be nothing in the nature of a deliberate abstention from inquiry in order to avoid possible notice. His Honour rejected the argument that the requirement of good faith made necessary a rigorous scrutiny of the conduct of the company and Mrs. Spratt and he found that good faith does not require that they be innocent of any breach of the law associated with the compromise; whether the breach be deliberate or otherwise. His Honour found that the solicitors for the company, at least from July 1983, pursued the Supreme Court action against Mr. Rees as trustee knowing that to do so conflicted with the Act in the sense that no leave was obtained pursuant to sub-s. 58(3). His Honour said:
"I infer that they thought that aggressive tactics were desirable to induce a mood of compromise in the trustee".
His Honour rejected the argument that the deliberate pursuit of the action against the trustee without leave made the compromise one not in good faith. His Honour held that there was no reason to think that the pursuit of the matter without obtaining leave caused Mr. Rees to accept a settlement which he would not otherwise have regarded as satisfactory.
On the question of notice, his Honour said:
"It must have been evident to the respondents that the trustee had no permission or leave, but they were unaware of the necessity for him to do so. Their counsel noticed the provisions of sub-s. 134(2) but he did not advert to the possibility that the compromise of the action might fall within the provisions of sub-s. 135(1) and require the permission or leave there mentioned."
His Honour thus found that "the respondents" must have known that the trustee had not obtained permission from the creditors or the committee of inspection or leave of the Court to make the compromise, but that they were unaware of the requirement imposed by paras. 135(4)(f) and (g) to obtain that permission or leave.
His Honour made a declaration that the compromise made on or about 28 February 1985 was not invalidated by the failure of the trustee to obtain the permission or leave required by sub-s. 135(1) of the Act. He released the company and Mr. Peach from certain undertakings given in the proceedings and ordered the appellants to pay the company's and Mr. Peach's costs of and incidental to the proceedings. It is from this judgment of his Honour that the appeal is brought to this Full Court.
The grounds of appeal upon which the appellants rely are confined to the questions of good faith and notice in para. 135(4)(b).
Good FaithCounsel for the appellants relied upon the following findings of his Honour:
"I find, on the balance of probabilities, that the solicitors, at least from July 1983, pursued the matter against the trustee knowing that to do so conflicted with the Bankruptcy Act. I infer that they thought that aggressive tactics were desirable to induce a mood of compromise in the trustee."
It was common ground before us that the reference to "the solicitors" was to the solicitors for the company. It was submitted that those findings by his Honour supported the conclusion that the solicitors for the company wrongly put pressure on the trustee to make the transaction sought to be impugned. Counsel for the appellants argued that his Honour took a narrow view of the phrase "acted in good faith" in two respects. It was submitted that, whilst his Honour may have recognised that "good faith" in the context of para. 135(4)(b) extended beyond mere honesty, he failed to recognise that it extended generally to conduct affecting the conscience of the person. Reliance was placed upon Re Dalton (1963) 1 Ch 336 It was also submitted that his Honour confined the meaning and application of the expression "good faith" to conduct in the making of the relevant transaction whilst excluding considerations of conduct leading up to and causing the making of the transaction.
It was submitted that a person who knowingly pursues an action in deliberate breach of sub-s. 58(3) with the intention of inducing a compromise within para. 135(1)(f) or (g) does not act in relation to that transaction "in good faith" within the meaning of para. 135(4)(b).
The expression "good faith" appears frequently in the Act in various contexts; for example, para. 120(1)(a) which avoids voluntary settlements which are not, amongst others, settlements made in favour of a purchaser in good faith and for valuable consideration; sub-s. 121(1) which avoids fraudulent dispositions of property which are not dispositions for valuable consideration in favour of a person who acted in good faith; sub-s. 122(2) which protects from avoidance as a preference the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business and the rights of a person making title in good faith and for valuable consideration through or under a creditor of the debtor; para. 123(1)(g) which protects from invalidation under the Act transactions made in good faith and in the ordinary course of business; sub-s. 124(1) which protects payments of money or delivery of property in certain circumstances if the payment or delivery was made in good faith and in the ordinary course of business and in some cases without negligence; and sub-s. 126(1) which renders valid against the trustee certain transactions by a bankrupt with persons dealing with him in good faith and for valuable consideration in respect of after acquired property. These sections and their English counterparts have been considered before by the Courts. I shall mention only two decisions.
Re Dalton (supra) concerned the interpretation of s. 46 of the Bankruptcy Act 1914 (England) which provides that payment of money or delivery of property to a person subsequently adjudged bankrupt shall be a good discharge to the person paying the money or delivering the property if the payment or delivery is made before the date of the receiving order and without notice of the presentation of a bankruptcy petition "and is either pursuant to the ordinary course of business or otherwise bona fide". The counterpart of that section in the Act is s. 123.
Russell J., who delivered the judgment of the Court, said at pp. 354 and 355:
"Were they made bona fide? This consideration involves the state of mind of the payee. It requires good faith on his part which connotes some duty owed. To whom then does a person paying money to one who, to his knowledge, has committed an act of bankruptcy, or to his purported assigns, owe a duty? The answer must be, it appears to us, to the general body of his creditors. What is involved in good faith being shown to such persons? In our judgment, it goes beyond mere personal honesty: it requires more than absence of dishonesty, more than absence of a conscious attempt to defraud. If Mr. Bennett had made the payments with the knowledge that the process would result in some creditors being paid in full and others whistling for their money, we do not consider that the payments would have been made bona fide. In re Simms (1930) 2 Ch 22 Clauson J. held that bona fides was required under s. 45 and that, consequently, a transaction which, though perfectly well intentioned of its very nature tended to delay creditors, was not bona fide. It might well be that if a person in Mr. Bennett's position had a strong suspicion that the process of his payments would have the result mentioned above, but took pains to avoid finding out the truth, he could not be said to make them bona fide. But the situation in the present case was otherwise."
In Rimar Pty. Limited v. Pappas (1986) 60 ALJR 309 Gibbs C.J. (with whose reasons for judgment Mason, Brennan, Deane and Dawon JJ. agreed) said at p.311 in relation to sub-s. 126(1) of the Act:
"Section 126 is concerned with the good faith of the person dealing with the bankrupt; 'and if he has dealt in good faith, the question of whether the bankrupt, as between himself and the creditors, is also dealing in good faith is immaterial' . . . Clearly the fact that a person who dealt with a bankrupt had full knowledge of the bankruptcy does not make the transaction one that is lacking in good faith . . . In the present case there is no evidence that Rimar acted in bad faith. The transaction was a curious one, and indeed would appear to have been contrary to Rimar's interests, but there is nothing to support the suggestion that Rimar acted other than honestly and fairly or had any intention of defeating Moore's creditors or depleting his estate at their expense."
These and other decisions provide a useful basis for considering the meaning of "good faith" in para. 135(4)(b).
His Honour's finding that paras. 135(1)(f) and (g) required the trustee to obtain the permission of the creditors or of the committee of inspection or the leave of the Court to enter into the compromise of the litigation in this case was not challenged before us. Nor was there any challenge to his Honour's finding that failure to obtain that permission or leave would invalidate the transaction with which the compromise is concerned unless protected by sub-s. 135(4). The arrangements made on or about 28 February 1985 which led to the litigation in this Court in one sense had two elements. The first element was the sale of Mr. Spratt's shares by the trustee to Mrs. Spratt or her nominee (who was intended to be Mr. Peach). It was this element that concerned the trustee because he regarded the $15,000 as a fair price for the shares for the reasons already mentioned. The second element of the transaction was the settlement of the Supreme Court litigation in which the company was plaintiff and Mr. and Mrs. Spratt were defendants. The company claimed arrears of rent and other moneys under the lease between them. Mr. and Mrs. Spratt cross claimed against the company. The settlement involved the transfer to Mr. Peach of the shares held by both the trustee on behalf of the bankrupt and the shares held by Mrs. Spratt in the company, thus giving the Peach interests complete control of the company. It was because Mr. Peach was able to obtain those shares that he was prepared to forego the monetary claims in the litigation against the Spratts. Mrs. Spratt assumed the liability to pay the costs of the Supreme Court proceedings. Viewed as separate elements it is perhaps difficult to see how the first element answers the description of a compromise for the purposes of paras. 135(1) (f) and (g), but the view taken by the learned trial Judge was that the two elements must be viewed as one transaction and I respectfully agree. Any other conclusion would be unreal. I therefore approach the question presently before us on this footing.
In my view "good faith" for the purposes of para. 135(4)(b) involves the state of mind of the person who is engaging in the transaction with the trustee or dealing with the trustee. It connotes more than mere personal integrity or honesty, more than the absence of dishonesty and more than the absence of a deliberate or conscious attempt to defraud. It means good faith in relation to the general body of the creditors of the bankrupt and the absence of any intention to contravene the bankruptcy laws or to diminish the estate of the bankrupt at the expense of the creditors: Lee and Wace on The Law and Practice of Bankruptcy and Imprisonment For Debt, Australian Edn., 1884, pp. 433 and 436; Spratt's Law of Bankruptcy, 1953, p. 201. The evidence does not support the conclusion that any party to the "compromise", whether it be the trustee, Mrs. Spratt, the company or Mr. Peach, acted other than honestly or fairly or had any intention of defeating Mr. Spratt's creditors or diminishing his estate at their expense.
Acceptance of the trial Judge's finding that the company pursued its action for arrears of rent and damages under the lease, knowledge that leave to continue the action had not been sought or obtained pursuant to para. 58(3)(b) does not support the argument of the appellants that there was an absence of good faith on the part of the company or Mr. Peach. Knowledge of the absence of leave under para. 58(3)(b) together with other circumstances may have constituted "aggressive tactics" designed "to induce a mood of compromise in the trustee"; but that finding by his Honour does not, whether by itself or coupled with the relevant circumstances, support a finding of absence of good faith. If the trustee had wished to bring the Supreme Court proceedings to a halt because of the absence of the leave required by para. 58(3)(b) he could readily have done so, but he did not.
The appellants' case based on the absence of good faith fails.
Without NoticeI turn to the question whether the trial Judge erred in holding that notice under para. 135(4)(b) required knowledge of the legal requirement that permission or leave to enter into the compromise be obtained.
Counsel for the appellants argued that the trial Judge erred in construing para. 135(4)(b) as containing two elements with respect to notice; first, that it was necessary for the person with whom the trustee reached the compromise to have had actual notice of the fact that the trustee did not obtain permission or leave to make the compromise and, second, that the person knew of the statutory requirement to obtain permission or leave to make the compromise. His Honour relied in support of this finding on the decision of the High Court in Deming No. 456 Pty. Limited v. Brisbane Unit Development Corporation Pty. Limited (1983) 155 CLR 129 Counsel for the appellants argued that the notice to which the paragraph refers includes constructive notice as well as actual notice and that the persons with whom the compromise took place (Mrs. Spratt and the company) must in all the circumstances be deemed to have had notice that the law required that the permission of creditors or the committee of inspection or leave of the Court be given to the making of a compromise of the kind in question here for the compromise to be valid.
The use of the word "failure" in the context of para. 135(4)(b) of the Act, namely: "and without notice of the failure to obtain the permission or leave", suggests notice of something in the nature of failure, neglect or default on the part of the trustee to obtain the permission or leave required by sub-section (1). Knowledge that the trustee did not in fact obtain the permission or leave required by the sub-section does not amount to knowledge that he was required by the Act to obtain that permission or leave. The two concepts are not co-terminous in logic or fact.
In Deming No. 456 Pty. Limited v. Brisbane Unit Development Corporation Pty. Limited (supra) the High Court considered the meaning of the expression "after he first becomes aware of the failure" with reference to s. 49 of the Building Units and Group Titles Act 1980 (Qld.). Section 49 imposed on the "original proprietor" of the relevant lot an obligation to give to the purchaser of a lot or of a proposed lot a statement in writing as required by the section and, if certain events occurred thereafter, to give the purchaser notice in writing disclosing full particulars thereof. The section provided that, if the original proprietor failed to fulfil those obligations, the purchaser may, subject to certain restrictions, avoid the contract by written notice within 30 days "after he first becomes aware of the failure". It was held by Mason, Deane and Dawson JJ., Gibbs C.J. and Wilson J. dissenting, that a purchaser "first becomes aware of the failure" to comply with s. 49 when he knows that the statement containing the required information has not been given and that the fact that it has not been given is a failure to do something that the Act requires. Their Honours said at pp.150-151:
"In one sense, a person can be said to become aware that a statement containing the material prescribed by s. 49 has not been given even though he is unaware that s. 49 imposed upon the vendor any obligation at all to give such a statement. Knowledge that a thing has not been done at all necessarily amounts to knowledge that it has not been done in any of the ways in which it might have been done. But it does not amount to knowledge that the non-performance has the quality or character of a failure to comply with particular statutory provisions unless and until knowledge is acquired of those statutory provisions or of their relevant effect or of a conclusion that there has been a failure to comply with their terms. Thus, a person would not ordinarily be said to become aware of a "failure" to give a statement in compliance with s. 49 until he becomes aware both of the obligation to give such a statement and of the fact it has not been given. Similarly, a person who knew that a statement which he had received did not state the address of the vendor or set out the proposed by-laws which would apply to the "lot" which he was purchasing would be "aware" that the statement which he had been given did not contain that information but he would not ordinarily be said to be 'aware' of a 'failure' by the statement to comply 'in every respect with sub-sections (1),
(2) and (3)' of s. 49 unless he had some information as to the requirements of those sub-sections or as to whether the statement which he had been given satisfied them."
Gibbs C.J. in his dissenting judgment said at p. 138:
"Not without doubt, I have reached the conclusion that a purchaser becomes aware of a failure within s. 49(5) when he learns of the circumstances which amount to the failure, whether or not he knows that those circumstances reveal a non-compliance with s. 49(1) and (2). The sub-section in my opinion speaks of awareness of facts, and not of awareness of the legal complexion of those facts."
Wilson J. who was also in the minority said at p. 163:
"I agree with the view taken in successive cases by the Full Court '(that is of the Supreme Court of Queensland)' that the relevant awareness is of the facts which constitute the failure and not of the impact of the law upon those facts. Any other view is in my opinion quite untenable."
The construction placed upon s. 49 by the majority in Deming did not commend itself to the Privy Council in Boheto Pty. Limited v. Sunbird Plaza Pty. Limited (1984) 2 QdR 9 where Lord Templeman, in delivering the reasons for decision of their Lordships, described it at p. 13 as a "surprising" construction of the Act. The views of the majority in Deming do not govern the construction of para. 135(4)(b) of the Act since it is a very different provision from s. 49 of the Queensland statute there under consideration. Notwithstanding that fact and that the views of the majority did not find favour with their Lordships in Boheto, the passage from the reasons for judgment of the majority at pp. 150-151 cited earlier aptly describes the meaning of the "notice" provision in para. 135(4)(b). Although in some cases a person may have notice both that the trustee has not obtained the permission or leave to make a compromise required by sub-s. 135(1) and that the permission or leave was required by the sub-section, in other circumstances a person would have notice of the former but not necessarily of the latter. Also, absence of notice of the failure to obtain the permission or leave applies to each of the wide range of things mentioned in paras. (a) to (k) of sub-s. 135(1), and not only to the making of compromises of the kinds to which paras. (f) and (g) are directed.
Some of the things mentioned in the paragraphs (a) to (k) are perhaps clearer illustrations of the dichotomy between knowledge that leave has not in fact been obtained and the further knowledge that leave is required than is provided by paragraphs (f) and (g). The meaning of para. 135(4)(b) must, however, be the same with respect to each of the paragraphs of sub-section 135(1). This circumstance supports the view which I have of the dichotomy with respect to paragraphs (f) and (g), a view which I must confess I hold, however, with some reservations. It is, I think, true to say that it would generally be more difficult to establish that a person who acted with notice that the trustee made a compromise of the kind to which paragraphs (f) and (g) are directed without leave having been obtained did not have notice that leave was required than it would be to establish the dichotomous elements under certain of the other paragraphs of sub-s. 135(1). This becomes ultimately a question of fact.
In my opinion a person has notice of the trustee's failure to obtain the requisite permission or leave under sub-s. 135(1) when he has notice both that the permission or leave has not been obtained and that the fact that it has not been obtained is a failure to do something which the Act requires.
The trial Judge found:
"It must have been evident to the respondents that the trustee had no permission or leave, but they were unaware of the necessity for him to do so."
His Honour also said that the facts on this question of notice of the failure to obtain permission or leave were not in issue. His Honour's reference to "the respondents" in this context is not entirely clear to me, but it is probably a reference to Mrs. Spratt and the company; perhaps also to Mr. Peach. The company was propounding a claim for arrears of rent and other moneys due under the lease, the defendants being Mr. and Mrs. Spratt. Mr. and Mrs Spratt were counter claiming against the company for damages. The respective claims and counter claims were the subject of the compromise. In one sense Mr. Peach was also a Party to the compromise because his concurrence was central to the settlement. He controlled the company and he wished to acquire the Spratt shareholdings. He was prepared to forego the company's claim against the Spratts for rent and other moneys due under the lease provided he obtained all the Spratt shares in the company and an indemnity from Mrs. Spratt as to the company's costs in the various Supreme Court proceedings. However, nothing appears to turn on whether Mr. Peach was one of "the respondents" referred to by his Honour.
His Honour found:
"It appears that their counsel noticed the provisions of s.134(2) of the Act which set a limit of $20,000 on the value of property which may be sold by the trustee by private contract. He did not, however, advert to the possibility that the compromise of the action might fall within the provisions of s. 135(1), and require such permission or leave as is there mentioned."
This finding was not challenged before us
I am not entirely clear which particular counsel his Honour had in mind in making that observation. An affidavit was sworn by counsel who appeared for Mr. Rees and Mrs. Spratt in the Supreme Court litigation from which it is clear that he was aware of the requirement that approval was necessary for a sale of the shares in the company for a price exceeding $20,000, but it is not clear that he knew of the requirement that leave was necessary for making the compromise. An affidavit was also sworn by counsel who represented the company before the Supreme Court, but his affidavit is silent on the question of his knowledge concerning the requirements of paras. 135(1)(a), (f) or (g). He said, however, in the course of his oral evidence at the trial that this question had not occurred to him at the relevant time. Nor did any party challenge his Honour's finding that it must have been evident to the respondents that the trustee, Mr. Rees, had no permission or leave as required by sub-s. 135(1)(f) and (g). It was not asserted by counsel for the appellants before us that any of the relevant parties (who would appear to be Mrs. Spratt, the company and Mr. Peach) had actual notice of the fact that the law required Mr. Rees as trustee to obtain permission or leave to make a compromise of the kind mentioned in paras. 135(1)(f) or (g). The argument of counsel for the appellants was that the notice to which para. 135(4)(b) is directed includes constructive notice. I do not find it necessary to determine this question because the evidence in the case does not support a finding that the circumstances would have put any of the relevant parties on notice of the requirement of the law that tthe trustee obtain permission or approval to make a compromise of the kind mentioned in paras. 135(1)(f) and (g). It has not been established that his Honour's findings with respect to notice should be disturbed.
Before leaving this question of notice there is one matter to which I should refer. The effect of a trustee's failure to obtain permission or leave under sub-s. 135(1) is expressed by sub-s. 135(4) as not affecting the validity of the transaction if it was for valuable consideration and the person with whom it took place acted in good faith and without notice of the failure to obtain the permission or leave. But the section is silent as to the particular affect upon validity that results if the sub-section is inapplicable. Whether the failure of the trustee to obtain permission or leave renders the transaction invalid, void or voidable is a matter of some nicety which need not be decided in this case, especially since it was not argued before us. I sound a cautionary note about the trial Judge's finding:
"As there was no permission or leave granted (or applied for), the compromise must be held invalid unless it is saved by s. 135(4) . . . "
Sections comparable to s. 135 of the Act have existed for many years in bankruptcy legislation in this country, the United Kingdom and elsewhere, and they find their counterparts in comparable provisions of legislation relating to the winding up of companies where the approval of creditors or the committee of inspection or the leave of the Court is necessary for the liquidator to exercise certain of his powers. Different views have been expressed on this question in the field of winding up and are discussed in McPherson on The Law of Company Liquidation 2nd Ed. 1980 at pp. 219 and 220. It should also be noted that the courts, in their control over companies in liquidation, may give retrospective sanction in a proper case to action taken without the requisite approval first being obtained: Re Associated Travel, Leisure and Services Limited (1978) 1 WLR 547; and see McPherson on The Law of Company Liquidation at p. 219. I mention these matters because it would be wrong to assume that, because a person cannot bring himself within sub-s. 134(4), the relevant transaction is necessarily bad in law or unable to be sanctioned retrospectively. As sub-s. 134(4) does apply in this case these further questions do not arise.
I would dismiss the appeal with costs.
JUDGE2
In this matter I have had the advantage of perusing in draft form the reasons of Lockhart J. I agree with his conclusion that the appeal should be dismissed and his reasons therefor. There is nothing which I would wish to add to those reasons.
JUDGE3
I have had the advantage of reading in the draft form the reasons of Lockhart J., with which I entirely agree, and I agree the appeal should be dismissed.