CATCHWORDS Bankruptcy- Administration of bankrupt's estate - ' Application by Official Receiver that proceeds of sale of land are held on trust for the bankrupt - Intention to create a trust - Whether legally binding relations created. RE ROONEY DARCY WALL: EX Pare THe Orr RECAVER ANO 025. Lo.26A] 73 IS Prva O14 . IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: EX PARTE: ORDER © JUDGE MAKING ORDER : WHERE MADE: DATE OF ORDER : THE COURT ORDERS THAT: _ No. W. 359 of 1978 RODNEY D'ARCY WALL Bankrupt THE OFFICIAL RECEIVER Applicant MICHAEL IAN KEMMIS First Respondent ANTHONY F. MOULTON and BRUCE F, CORBEN carrying on business as C. DON SERVICE & CO. Second Respondents JOHN KEITH WILLIAM LOWE Third Respondent LOCKHART J. SYDNEY 13 AUGUST 1979 . At the commencement of his bankruptcy the bankrupt had a beneficial interest in the property being Lot 8° in deposited plan 26610 situate in Soldier's Point Road, Salamander Bay, nD New South Wales; . As at the date of the making of the sequestration ord against the estate of the bankrupt he was the 22/2 beneficial owner of the sum of $18,628.06 held by the second respondents and representing part of the proceeds of sale by the first respondent of the property mentioned in 1 above; That the applicant pay the costs of the second respondents as submitting respondents. Otherwise I make no order as to costs. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE No. W 359 of 1978 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: RODNEY D'ARCY WALL ; Bankrupt EX PARTE: THE OFFICIAL RECEIVER Applicant MICHAEL TAN KEMMIS First Respondeni ANTHONY F. MOULTON and BRUCE #. COKBEN carrying on business as C. DON SERVICE & CO. i Second Responden' JOHN KEITH WILLIAM LOWE Third Respondent REASONS FOR JUDGMENT LOCKHART J. | This is an application by the Official Receiver as trustee of the estate of Rodney D'Arcy Wall for a declaration that the sum of $18,628.06 ("the moneys") lodged on deposit with a building society and representing part of the proceeds of sale by the first respondent of land being Lot 81, in deposited plan No. 26610 in Soldier's Point Road, at Salamander Bay, New South Wales ("the property") is held 00/2 abiainiae Staller need tent ion ee nn ' -2- upon trust for the bankrupt's estate. The first and third respondents claim to be entitled to $14,000.00 of the moneys, the third respondent as to $9,000.00 and the first respondent as to $5,000.00. The respondents do not dispute that the bankrupt is entitled to the balance of the moneys. The second respondents, a firm of solicitors, Messrs. C. Don Service & Co., have placed the moneys on deposit pending the determination of these proceedings. Interest is accruing on the moneys from day to day and it is agreed by the parties that whoever is entitled to the moneys should be entitled pro rata to the interest. A sequestration order was made against the bankrupt on 25 May 1978. In about February 1973 the bankrupt and the first respondent had a discussion which led to the first respondent helping the bankrupt run his panel beating business known as A.S.R. Services. The first respondent gave evidence of the conversation as follows:- the bankrupt: "T am having a lot of difficulty in finding a suitable person to help me run my panel beating business A. S. R. Services. Woul you be interested?" the first respondent: "Yes, how can we arrange it?" the bankrupt: "The business is so run down it cannot afford to pay you a wage for the time being. Would you be prepared to come in ona profit sharing basis, and when tb business is getting on its feet } could then' draw a wage as well". the first respondent: "All right." ..-/3 ~3- The first respondent then worked six or seven days during most weeks up to twelve hours a day in the business. By mid June 1973 the business had improved and the bankrupt and the first respondent agreed to purchase a property jointly for the purpose of obtaining capital appreciation on resale, each to contribute one half of the purchase moneys and to divide the net profits after resale equally between them. The bankrupt and the first respondent agreed with the owner of the property to purchase it for $33,000.00. The bankrupt drew a cheque in favour of the owner, a Mr. Roland, in the sum of $500.00 once agreement had been reached between the parties for the purchase of the property. The cheque was drawn on the banking account of A.S.R. Service The purchase moneys were raised as to the bankrupt's share by a loan to him by a Mr. Groth in the sum of $15,000.00 for a term of twelve months at 10% fixed interest. The loan was secured by a registered first mortgage granted by the bankrupt's mother over certain land owned by her. The first respondent's contribution towards the purchase price was raised by a loan to him from Associated Securities Finance Limited in the sum of $18,000.00. It was a term of the proposed advance by that company to the first respondent that a first registered mortgage be granted over the property to secure the loan. The first respom ent told the bankrupt that Associated Securities Finance Limited would not advance the money if the bankrupt's name was on the title. He asked the bankrupt why this was. The bankrupt saic that it was due to some unfortunate business dealing TA -4- / . of his some years earlier. © On 29 November 1973 contracts were exchanged for the sale of the property to the first respondent. Payments were made from time to time in connection with the purchase and maintenance of the property over the period July 1973 to October 1975. Certain of those payments were made by 'the bankrupt, but generally out of the banking account of A.S.R. Services. In September 1973 the third respondent commenced to occupy part of the premises used by A.S.R. Services at 19-21 Park Road, Rydalmere to do mechanical work that was sub-contracted to him by A.S.R. Services. He was at that time employed in the Naval Police and did this work in his off duty periods. He was paid at a reduced labour rate to offset the cost of rental. In December 1973 the bankrupt approached the third respondent and requested him to open a banking account in the name of A.S.R. Mechanical Services. This account was opened and all income and expenditure of the sub~contracting work performed by the third respondent was channelled through it. The bankrupt and the third respondent were co-signatories to the account. In late December 1973 the third respondent went on annual leave from the Naval Police to South Australia. When he left,there was about $1,700.00 in the A.S.R. Mechanical Services! bank account. On his return four weeks later there was very little money in the account. He asked the 22/5 ' -5- bankrupt what had happened to the funds in the account to which the bankrupt said: "T have used them to buy a boat trailer and a burnt out Mercruiser engine and stern drive." The third respondent complained about this to the bankrupt to which he said: "Will you accept the Holden Utility (registration No. AAM-414) for the boat trailer?) I will transfer the rego to you on renewal in late November." The third respondent asked: "What about the balance?", And the bankrupt replied: "T'll replace it with a piece of equipment at some later date." The third respom ent then said: "Well it sounds a reasonable deal, I'll accept." In November 1974 the registration of the utility was transferred into the name of the third respondent as agreed. The first respondent agrees that it was the original intention of himself and the bankrupt that the property be acquired jointly. However, he says that in February 1974 he said to the bankrupt "we are not sharing costs equally. I am putting in $18,000.00 and you $15,000.00", As a result of that conversation, the bankrupt and the first respondent agreed that the bankrupt would have a 5/11ths share in the property and the first respondent would have a 6/11ths share The bankrupt made and. continued to make all payments in respect of his loan of $15,000.00 by cheques drawn on A.S.R. Services! bank account. The first respondent spoke oe /6 6 -6- to the bankrupt about this and the bankrupt replied: 7 "You are drawing a wage." In about March 1974 the first respondent was able to commence drawing wages of about $65.00 gross per week from A.S.R. Services. He had received no money before this and it was used to pay his instalments under the mortgage to Associated Securities Finance Limited. In addition to receiving wages, the first respondent was given rent free occupation of a house at Kenthurst. The property was leased by A.S.R. Services for storage of damaged vehicles and spare parts. The first respondent paid no rental in return for looking after the vehicles and spare parts. In March 1974 the bankrupt spoke to the third respondent at A.S.R. Services. He said words to the effect: "John, would you like to be production manager of the workshop." The third respondent said he was interested and the bankrupt said: : "There istnt enough money for you to draw any wages, but you can have 33 1/3rd per cent share of the profits from A.S.R." The third respondent agreed. At that time he was still receiving his income from the Naval Police. Towards the end of 1974, the third respondent began to have matrimonial difficulties over the amount of time he spent away from his wife working for A.S.R. Services with no remuneration. He approached the bankrupt who said: "Don't worry, on your discharge from the Naval eee /T Police I will provide you through A.S.R. with a house and a wage in addition to your share of the profits." When the third respondent was discharged from the Naval Police in March 1975, he went to work full-time at A.S.R. Services but there was no wage forthcoming. In about mid April 1975, the third respondent received his furlough cheque of about $3,600.00. He banked this as he was using his personal savings to pay for rent and general living expenses. About this time he was given a notice to vacate his service home at Ermington. He found a house in Castle Hill. He required a bond of $200.00 and advance rent of $200.00 He spoke to the bankrupt who gave him a cheque for $400.00. The third respondent then signed a six months lease of the house. The bankrupt made some payments of rental for the house by cheque. As several of those cheques were dis-— honoured owing to lack of funds, the third respondent used his own savings for rental and daily living expenses. Whilst at A.S.R. Services premises, in mid June 197 the third respondent received his Defence Forces Retirement and Death Benefits cheque for $4,036.66. The bankrupt saw him with the cheque and said: "John, the business is in dire straits as you know from what has happened to some of the rent cheques. Could you lend me that money and I will repay it as soon as the outstanding accounts have been paid." The third respondent agreed saying: 2/8 "You must fill in the reverse side and I will sign it." At 'the bankrupt's request the money was lent to General Marine Services, which was a separate business run by the bankrupt. During the next few months, the third respondent was directed by the bankrupt to work on boats on the water in various locations around Sydney and then to paint elevato doors. No remuneration was paid to him. In this period he noticed that cheques made payable to A.S.R. Services were being "signed across" by the bankrupt to General Marine Services and banked into its account at the Carlingford branch of the Rural Bank. By early 1975 the relationship of the bankrupt and first respondent was becoming strained. The first responden noticed that cheques payable to A.S.R. Services were being endorsed and paid into the banking account of General Marine Services at the Rural Bank, Carlingford branch. In or about August 1975 the first respondent asked the bankrupt to have a written document drawn up to establish the first respondent's share of the profits of A.S.R. Services. The bankrupt refused saying: "The property at Salamander is in your name and I don't have any writing to prove otherwise." The first respondent then asked the bankrupt what was his (the first respondent's) position in relation to General Marine Services, to which the bankrupt replied:- "The two business are, in effect, one and the same." 2/9 -9- The type of work carried on by A.S.R. Services and General Marine Services was of a similar nature as both involved mechanical repairs and spray painting, although General Marine Services related essentially to boats. By September 1975 the third respondent's savings were almost exhausted. He had not received any wages, share of profits or repayment of his loan. Often he had to deal with the creditors of the business who were demanding payment. He told the bankrupt that he was concerne about this and the bankrupt said: "Don't worry, General Marine Services is going to fire and make big money. You will be looked after handsomely." The first respondent gave evidence that in October "4975 the third respondent and the first respondent met the bankrupt and told him that they did not like the way the business was being run. They said they were not happy with the non payment of accounts and the bankrupt spending money on unwanted equipment. Either the third respondent or the first respondent said words to the effect: "General Marine Services has been started with the profits of A.S.R. Services and we are entitled to a 33 1/3rd percent share each in that business." The bankrupt said: "You have no claim on General Marine Services." He then told the first respondent: "Tf you pay me $18,000.00 personally, I will give you a 243% share." The bankrupt said to the third respon ent: 22/10 -10- tWe can work something out, but I will retain 51%", The first respondent replied: "That means you value General Marine Services at about $73,000.00. It only has equipment bought with A.S.R. Services money", The bankrupt made no reply. In the same conversation the first and third respondents told the bankrupt that they would not work for him any longer. The bankrupt said: "T don't want you claiming anything from me at some later date. I will pay you (meaning both the first and third respondents) so you will not have any claim on me at a later date. I will pay you to get you off my back. I will pay you $5,000.00 each. John, (meaning the third respondent) I will give you the tune scope to cover the trailer and I will repay your loan of $4,000.00". The third respondent replied: "That suits me, how about you (meaning the first respondent)", And the first respondent replied: "That suits me fine too", The third respondent gave evidence as to the October 1975 discussion as follows:- "The bankrupt said: "You must think I'm mad. If I give you pair an equal share partnership you would immediately out-vote me and run the business your way. You wouldn't have enough brains between you to run a brothel." The third respondent replied: "I am not interested in running a brothel; what Michael and I are interested. in is running this business as a panel shop and recouping what we have put into it, then making a profit. We are not interested in doing you out of anything. We want control of the spending so that the money is channelled into the right places, like the outstanding creditors for a start." ~11- The third respondent went on to say: | "We feel that the panel shop has all the : potential in the world if run correctly. We have worked damn hard these past couple of years and seen nothing - my mistake, Michael has been getting a wage for our labour. Our 33 1/3rd percent of the profits each that is, have been going into General Marine Services. We feel that we are entitled to our share. We certainly aren't going to go on working under these conditions." i | After the third respondent said this, the bankrupt replied: "This is my business and I am not going to have anybody else involved whatsoever, unless you (to the first respondent) wish to buy in and that will cost you $18,000.00 which will give you a 244 per cent share and you (to the third respondent) we will sort out something about your share but I will retain 51 per cent. The first respondent said: "Youtve got to be joking. You consider General Marine Services to be worth $73,000.00 when it has nothing except the equipment and that would not be here if A.S.R. hadn't supplied the cash to set it up." The bankrupt replied: "That is my offer and that is that." The third respondent said: "Phil Arnold is moving out of Harry's half of the shop next door soon. I think I will open up a mechanical shop there as I can!' see any future here." : The first respondent saids "Well, I will be leaving also." The bankrupt then said: "If you are going to leave, which suits me down to the ground, there are a couple of things we had better get straightened out right now, as I don't want you pair coming back at some later date laying claim to my.business. I will give you (directed to the third respondent) the tune scope which covers the boat trailer Mercruiser episode. I will repay your loan in full and 200/12 ~12- pay you an additional $5,000.00 for your work over the past years and partially compensate you for not having drawn any wages. And to you Michael (to the first respondent) $5,000.00 also. This will release me from any claim that you may make against myself or my business A.S.R. or General Marine Services." To which the third respondent replied: "That suits me fine, how about you Michael?" The first respondent said: "Suits me fine." The bankrupt said: "Now that's all settled, when are you going to leave?" The third respondent replied: "Philts moving out in about a month. I will have a talk with Harry and see what he has to say. In the meantime, I will remain and help you clean up some of the back log of panel work." The total received by the first respondent as wages up to October 1975 was about $9,000.00. Those drawings commenced in March 41974, although he started working in February 1973. In October 1975 the first and third respondents opened up business as "Park Road Motors" in premises next door to those occupied by A.S.R. Services. In early January 1976 the first and third respondents went to the front of A.S.R. Services premises and spoke to the bankrupt. The first respondent gave evidence that the bankrupt was asked when the two respondents could expect payment of their moneys to which the bankrupt said: 00/13 -13- "T do not have the money, why don't we sell Salamander and take the $14,000.00 from my share?". Both respondents agreed to this. The third respondent gave evidence of the January 1976 conversation. He said that the first and third respondents asked the bankrupt for their money, to which the bankrupt said: "T do not have any money, things are a bit tight at this particular time. Why not sell the property at Salamander Bay? The $14,000.00 can be taken out of my share", The first and third respondents agreed. The two respondents spent time and money in finding a buyer for the property. They finally found one. In mid 1976 the bankrupt came to the first respondent at 23 Park Road Rydalmere and asked: "Will you sign a second mortgage on the property to cover my debt to Volvo Penta of $30,000.00". The first respondent said: "T can't see any wisdom in doing that, the property is in the process of being sold". The bankrupt then left saying: "You'11 hear more about this". In about November 1976 the first respondent was informed by his solicitor that the bankrupt had lodged a caveat on the title of the property. The sale of the property was settled in April 1977. The sale price as $43,000.00 which was applied as follows: oe /14 ' ~14- $19,954.00 to discharge the first mortgage over the property 'held by Associated Securities Finance Limited. 432.11 for conveyancing fees and rate adjustments 1,576.04 paid to the first respondent as re- imbursement of rates and electricity accounts in respect of the property which he had paid previously. 2,409.79 paid to Mr. Joseph Romer, a creditor of the bankrupt in reduction of a District Court judgment debt. 18,628.06 balance held by the second respondents as solicitors for the first respondent. $43,000.00 On 7 October 1977, the bankrupt commenced proceedings in the Supreme Court of New South Wales in its Equity Division seeking a declaration that he was the beneficial owner of the moneys held by the _ second respondents and an order that they pay them to him. The first respondent filed a cross claim in those proceedings seeking a declaration that he was the beneficial owner of $5,421.77 of the moneys held by the second respondents, being a capital adjustment claimed to be due to him from the joint venture with the bankrupt in relation to the property together with a claim that the bankrupt owed him $5,000.00 for work perfcrmed by him for the bankrupt. The third respondent also lodged a cross claim alleging that the bankrupt owed him $9,782.33 being $5,000.00 for work performed by him for the bankrupt, $4,036.66 for pa aS money . / lent to the bankrupt plus $745.67 said to be the recoupment of one-third of procuration fees and costs in respect of the purchase of the property. \ on 24 November 1978 the second respondents applied to the Supreme Court to be released from an undertaking previously given by them to the court that they would not release moneys until the beneficial entitlement thereto had been determined. On 7 December 1978 the application now before me was filed in this court by the Official Receiver for a declaration as to the beneficial ownership of the moneys. On 8 December 1978 the Supreme Court declined the application by the second respondents to release the funds to the first and third respondents pending determination of the ownership of the moneys by this court. The bankrupt disputes that he owes $5,000.00 to each of the first and third respondents upon the grounds that they did not carry out the work claimed to be done by them. He disputes that the first respondent is entitled to any further funds from the joint venture between. them in relation to the property on the grounds that the bankrupt paid various expenses associated with the raising of his capital contribution of $15,000.00 and that he paid various other expenses of the joint venture which he had not recouped. He also claims that the loan of $4,036.66 «22/16 was satisfied by a transfer of assets in 1976. The claim of the first and third respondents of $5,000.00 and $9,000.00 respectively from the moneys is based on the October 1975 and January 1976 conversations only. No other basis was relied on. The facts, as I have found them, are based mainly on the evidence of the first and third respondents. Where the evidence of the first respondent or the third respondent conflicts with the evidence of the bankrupt, I prefer the evidence of the respondents. Each of those respondents and the bankrupt was cross-examined. I accept the first and third respondents as truthful and reliable witnesses. Ther evidence is inherently more probable than the evidence of the bankrupt, I observed allt witnesses in the witness box. The first and third respondent impressed me as witnesses of truth. Also certain material evidence of the first and third respondents, which lends support to their version of the facts, was not denied by the bankrupt. The critical evidence in this case relates to the October 1975 and January 1976 conversations. In my opinion, it is clear from the October 1975 conversation that the relationship of debtor and creditor was created between the bankrupt on the one hand and the first and third respondents on the other hand. The bankrupt agreed to pay the first respondent and the third respondent the sum of $5,000.00 each for the work done over the years by each of them for the bankrupt and for not having drawn wages and to release the bankrupt 226/17 =17- from any claim that either of them may have against the bankrupt or the business A.S.R. Services or General Marine Services. The bankrupt agreed to pay the third respondent $4,000.00 in respect of the loan that had been made by the third respondent to the bankrupt. I turn to the January 1976 discussion. The first and third respondents rely on that discussion as establishing a trust, express or implied, or a charge, express or implied, with respect to the propert or the bankrupt's share of the proceeds of sale thereof They do not rely upon a constructive trust. Mr. Bell who appeared for the first and third respondents contended that the evidence of his clients, assuming I accept it, which I do, was consistent with the bankrupt declaring or acknowledging himself as trustee of the property or the bankrupt's share of the proceeds of sale thereof as to $5,000.00 in favour of the first respondent and as to $9,000.00 in favour of the third respondent. He submitted in the alternative that an agreement for valuable consideration was established py the January 1976 discussion to constitute the trust mentioned above and that upon the property being sold the trust became fully constituted. It was submitted by Mr. Urquhart who appeared fo the Official Receiver, as trustee of the estate of the «2/18 bankrupt, that the January 1976 discussion was not intended to create legally binding relations between the parties and was merely a voluntary concurrence by the bankrupt to the sale of the property and the deduction from the proceeds of sale of the $14,000.00 which he had earlier (October 1975) acknowledged was the extent of his indebtedness to the first and third respondents. In Commissioner of Stamp Duties (Queensland ) v. Jolliffe (1920) 28 C.L.R. 178, Knox C. J. and Gavan- Duffy JJ. said at p. 181: "In our opinion the law is accurately stated in Lewin on Trusts 11th Edition at p. 85: 'It is obviously essential to the creation of a trust, that there should be the intention of creating a trust, and therefore if upon a consideration of all the circumstances the court is of opinion that the settlor did not mean to create a trust, the court will not impute a trust where none in fact was contemplated." . See also Field v. Lonsdale 13 Beav. 78 and Cook v. Fountain (1672) 3 Swans. 585 or 36 E.R. 984. There are many reported cases where parties have reached an agreement but have not intended to create legally binding relations: See Salmond & Williams: The Law _of Contract p. 21; Wyatt v. Kreplinger & Fernau 1933 1 K.B. 793 especially per Scrutton IL. J. at p. 806; Burns v. Manchester & Salford Wesleyan Mission (1908) 99 L.T. 579; Kemp v. Lewis 1914 3 K.B. 543; Rogers v. Booth 1937 2 All E.R. 751; Liscoe v. Henry (1926) 19 B.W.C.C. 810. 20/19 -19— A conversation along the lines of the January 1976 conversation would, I expect, be of not infrequent occurrence between a debtor and his creditors where the debtor is in financial difficulties. It would be going a long way indeed to hold that the result of the conversation is a trust or charge or an agreement to create one. If this were the result then so be it; but I do not think it is. In my opinion there was no intention by any of th parties to the January 1976 discussion to create a trust or a charge in respect of the property or the proceeds of sale thereof. It would be unreal to say that such conversation created a legally binding agreement between the debtor and the creditor. In the result the first and third respondents have failed to establish any beneficial entitlement to the moneys; but they have established that they are unsecured creditors of the bankrupt. As to costs, although the respondents have failed to establish their entitlement to the moneys as beneficiaries or chargees, they have established, contrary to the hankrupt's case, that they are unsecured creditors. Thus the case has facilitated the trustee's administration of the bankrupt's estate. Also, the first and third respondents have not denied that the bankrupt had a-beneficial interest in the property and therefore in the proceeds of sale; yet 222/20 -20- / . -' the first declaration sought in the application by the trustee assumes that there is an issue as to this. I am satisfied that there has not been at any material time, so far as these proceedings are concerned, a denial on the part of the first and third respondents of the beneficial entitlement of the bankrup' to some part of the proceeds of the sum of $18,628.06. In the circumstances in my opinion the proper order for costs is that each party pay his own costs except the second respondents who submitted to such ordez as the court may see fit to make. It is right that their costs be paid by the applicant but as submitting respondents. I make the following declarations and orders:~ 1. That at the commencement of his bankruptcy the bankrupt had a beneficial interest in the property being Lot 81 in deposited plan 26610 situate in Soldier's Point Road, Salamander Bay, New South Wales; 2. That as at the date of the making of the sequestration order against the estate of the bankrupt he was the beneficial owner of the sum of $18,628.06 held by the second respondents and representing part of the proceeds of sale by the first responder of the property mentioned in 1 above; oe /21 -21- / / 3. That the applicant pay the costs of the second respondents as submitting respondents. Otherwise I. make no order as to costs.