X46 CATCHHORDS BANKRUPTCY - Whether the Bankruptcy Motice be set aside - Whether Bankruptcy Notice mis-stated the amount due - Whether misleading - Construction of contract ~ When credit given for payment into - creditor's solicitor's trust account - Whether the offer of security made by the judgment debtors secures payment of the amount owing to the judgment creditor. Bankruptcy Act 1966 (C'wth.) s.41 Adams yv. Bank of New South Wales [1984] N.S.W.L.R.285 In the matter of the Companies tousensland) Code and in ¥ a the matter of Y.D. Ts raylor & Sons Pty.Ltd. (unreported Supreme Court of Queensland of 20 December, 1984) Gilshenan & Lutan v. Commissioner of Taxation (1984) 1 Qd.R.199. Walsh v. Deputy Commissioner of Taxation (198417 54 ALUR Smallman v. Smaliman £19713 3 All E.R.717 RE: KENNETH DUDLEY TAYLOR, GARY THOMAS DON, RENO CARGNELLO (a.k.a. RINO CARGNELLOQ) (Applicants) AND: BILL ACCEPTANCE CORPORATION LIMITED (Respondent ) Bankruptcy Notice No.1781 of 1984 CORAM - _SPENDER dU. BRISBANE 5_ JUNE, 1985 IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) No. 1781 of 1984 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: KENNETH DUDLEY TAYLOR, GARY THOMAS DOWN, RENO CARGNELLO (a.k.a. PINQ CAPGNELLO) EX PARTE: KENNETH DUDLEY TAYLOR, GAPVY THOMAS DOWN RENO CARGNELLO (a.k.a. REINO CARGNELLO) (Applicants) AND: BILL ACCEPTANCE CORPOPATION LIMITED (Respondent) MINUTE OF ORDER JUDGE MAKING ORDER Spender J. DATE OF ORDER 5 June, 1985 WHERE MADE Brisbane THE COURT ORDERS THAT: The bankruptcy notice be set aside. The judgment creditor pay the costs of the judgment debtor, including any reserved costs; to be taxed if not otherwise agreed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTPALIA ) GENERAL DIVISTON ) No. 1781 of 1984 BANKRUPTCY DISTRICT OF THE SQUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: KENNETH DUDLEY TAYLOR, GARY THOMAS DOWN, RENO CARGNELLO (a.k.a. RINO CARGNELLO) EX PARTE: KENNETH DUDLEY TAYLOR, GARY THOMAS DOWN RENO CAPGNELLO (a.k.a. RINO CARGNELLO) (Applicants) AND: BILL ACCEPTANCE CORPORATION LIMITED (Respondent) SPENDER J. 5 JUNE, 1985 REASONS FOR JUDGMENT This is an application to set aside a bankruptcy notice which was issued on 6 November 1984, and which claims a total amount of $1,432,317.03. The grounds set out in the application are as follows:- "1. That the said Bankruptcy Notice mis-states the amount due by the Deblors to the Judgment Creditor in that the amount specified in the Notice exceeds the amount, in fact, due. 2. That the offer of security made by the Debtors secures payment of the amount owing to the Judgment Creditor." The applicant also sought to have the bankruptcy notice set aside on the technical ground that a "Bankruptcy Notice may not be issued against more than one Judgment Debtor." On 22 June 1984, judgment was entered'in the Supreme Court of New South Wales for $1,358,387.27 against the judgment debtors. That judgment debt, which together with interest on the judgment debt founds the bankruptcy notice, arises out of a guarantee which the judgment debtors gave to the judgment creditor ("BAC") to secure a loan made by it in the re-financing of the purchase of the Tweed Heads Hotel by a company, Wyblue Pty.Ltd., in which the four judgment debtors together with three others are the directors. The loan was also secured by a first mortgage from Wyblue Pty Ltd to BAC dover the hotel property at Tweed Heads and a second mortgage over another property. On 24 July 1984, BAC, exercising its power of sale under the mortgage, entered into a contract for sale of the hotel property for §1,075,000 plus stock in trade to Twin Towns Services Club Ltd and a deposit was paid. The parties are agreed that nothing turns on the value of the "stock in trade" for present purposes. On 25 September 1984, the balance of the proceeds of sale was paid to BAC's solicitor under a settlement procedure set out in clause 37.1 of the contract. Clause 37.1 provides as follows :- "Completion of this Agreement shall take place on the date before the date specified as the Gate for the hearing of the Application (as hereinafter defined) in sub-clause 37.2 (or such other date as the parties may agree) and upon completion the Purchaser will pay to the Vendor's solicitors the balance of the purchase money payable hereunder to be held by them in trust pending the Licence being transferred to the Purchaser or its nominee pursuant to the provisions of sub-clause 37.2 and the Vendor will hand over to the Purchaser's solicitors all documents which should be handed over: to effect the completion of this Agreement which shall be held by them in escrow pending the Licence being transferred ta the Purchaser or its nominee pursuant to the provisions of sub-clause 37.2. Immediately upon the Application being granted, the Vendor's solicitors shali be entitled ta account for the moneys held by them pursuant to the provisions hereof." Clause 37.2 provides that the "Application" referred to in 37.1 is the application for the transfer of the licence to the purchaser or its nominee. Clause 37.3 provides:- "If for any reason the transfer of the Licence ' referred to in sub-clauses 37.1 and 37.2 is not approved on or before ninety (90) days from the date of this Agreement then at any time after that date the Vendor may by notice in writing to the Purchaser or its solicitors rescind this Agreement and the provisions of clause 19 will then apply." Clause 19 provides:- "Tf this agreement is rescinded (as distinct from terminated) pursuant to any express right to rescind (as distinct from a right to = terminate) conferred by this agreement, the rescission shall be deemed to be a rescission ab initio, and (a) the deposit and all other money paid by the Purchaser hereunder shall be refunded; and (b) neither party shall be liable to pay the other any sum for damages, costs or expenses, provided that (i) this exoneration shall not apply to the extent that any such damages, costs or expenses arose out of a breach of any term or condition contained or implied in the agreement; and (ii) where the Purchaser has lawfully received the benefit of possession, such other adjustment as is just and equitable in consequence of such possession, shall be made between the parties." It is clear that the settlement procedure is intended to take account of the licencing procedures in New South Wales, that is, that the money is paid and the purchaser takes possession on the transfer documents being handed over and the next day machinery is set in train to obtain Licencing Commission approval. That approval was in fact obtained on 24 December 1984. It is on this date that BAC says credit is to be given for the balance purchase price. The bankruptcy notice issued, as I have said, on 6 November 1984. In an affidavit sworn in these proceedings on 1 February 1985, Me Hall, BAC's Chief Manager Corporate Finance, says that as at that date the judgment debtors were indebted to BAC in the sum of $377,677.09. The major issue for determination is as to the time at which credit should be given for the sum in BAC's solicitor's trust account. On the applicants' view it is 25 September 1984 when the balance proceeds of sale was paid to the solicitor, before the issue of the bankruptcy notice, and on the respondent's view it is on 24 December 1984 when the Licencing Commission approval takes place, after the issue of the bankruptcy notice. It is clear that what is required is for the Lankruptcy notice correctly to state the amount that is owing under the judgment on which the notice is founded at the date of issue of the notice: Walsh v. Deputy Commissioner of Taxation (1984) 58 A.L.J.R. 368. The question then is one that falls to be decided on the construction of the contract, the relevant provisions of which I have set out above. It is to be noted that the vendor's solicitors are not parties to the contract, so that if any obligation be imposed on those solicitors, it must he properly construed as a promise by the vendor that his solicitor will act in a certain manner. It is submitted on behalf of the applicants that there is payment of the proceeds of the sale to the vendor, notwithstanding that the payment is made to the vendor's solicitor's trust account. In support of that submission the applicants rely on Adams v. Bank of New South Wales £19841 4 N.S.W.L.R. 285. In that case a first mortgagee exercised his power of sale under the mortgage and the proceeds of sale were paid into his solicitor's trust account and from there disbursed by the solicitor at the direction of his client contrary to the requirements of the Real Property Act 1900 (N.S.W.). Inter alia, a declaration was sought as to the liability of the solicitor for those actions. At p.290 Moffitt P. said:- "Thus at the time the proceeds of sale were paid to the solicitor in the present case, on no view was he a trustee of the money or a constructive trustee of it. His obligation was as provided in the Legal Practitioners Act 1898, s41(1), to hold it exclusively for his client who had entrusted him with the money and to disburse it as his client directed. The provision of the statute accords with the general law of agency. Depending on the terms of his retainer as solicitor for the trustee,-he may have an obligation to give proper and skilful advice to the trustee as his client as to the proper administration of the trust. Whether he does so or not, the responsibility rests with the client, who is the trustee, to discharge the obligations of the trust. Holding the money, as he does, as agent for the trustee, he does not hold it on behalf of the beneficiaries or owe them an obligation. It may be different if while holding the money on behalf of his client trustee, he assumes or has imposed upon him some obligation to a beneficiary or beneficiaries. He could assume such an obligation by giving, with the consent of his client, some enforceable undertaking as to the money held by him. He could have some obligation imposed on him by his being made a party to proceedings in which an undertaking to the court is extracted from him or in which an order or declaration is made by the court in terms which bind him to apply the money in some way for the benefit of a beneficiary. Nothing like this occurred in the present case." Reference was made also to Gilshenan and Luton v: Commissioner of Taxation (1984) 1 Qd.R. 199, In that case money was held to the credit of a client in the plaintiff solicitor's trust account, the client having given a written authority that the plaintiff could receive payment of costs from that money. A notice under 5.218 of the Income Tax Assessment Act 1936 (Com) issued to the plaintiff firm in respect of the''client and the question arose as to who was the owner of the money in the solicitor's trust account. Andrews S.P.J. held that to entitle a solicitor to recover costs out of monies held to the credit of a trust account a specified amount must be due, whether after taxation as taxed, or as set out in a bill of costs delivered and not objected to, or as authorised by the client. Until compliance with any of those conditions the money in the trust account remained the client's, subject to the plaintiff's retaining lien. His Honour said at p.206:- "Jt may be that upon eventual compliance with the requirements or conditions to which I have referred a solicitor may have recourse to money otherwise payable by him to his client (being a right to set-off one amount against another). His lien gives him no property in the client's money. He has a possessory right against his client. I think that, until payment may be insisted upon, legitimate claims of third parties are enforceable against the property, in this case, money." In this case, the proper construction of the contract, in my view, leads one to the conclusion that the monies held in the vendor's solicitor's trust account are held beneficially for the vendor even though it, the vendor, was under a contractual obligation to dispose of monies in a certain way on the happening or non-happening of defined events. There is nothing in this case to suggest that, using the words of Adam's case, supra, the solicitor has assumed or has had imposed upon him some obligation as to the money held by him. He holds that money as agent for his client, BAC. It was submitted for the respondent that regard should be had to clause 29 of the contract which provision deals with the deposit paid upon the signing of the agreement and the anterest which accrues thereon. Clause 29.2 provides that:- "All interest accrued on the deposit shall he shared equally by the Vendor and the Purchaser upon completion hereof and the risk of the investment shall be borne equally by the Vendor and the Purchaser." Clause 29 continues:- are interest accrued on the deposit aforesaid shall be the property of the Purchaser if for any reason this Agreement is rescinded. "29.3 Notwithstanding clause 29.2 above, all 29.4 Notwithstanding clause 29.2 above, in the event of termination of this Agreement for any reason whatsoever then the parties hereto shall be entitled to the interest accruing on the deposit in the same proportion as they are entitled to the deposit." , It ts the respondent's submission that to suggest that the monies be regarded as the monies of any particular person, in particular, in the sense of them having been paid to the petitioning creditor as the Bankruptcy Notice requires is not correct. It is submitted that the position is held in "limbo" until the licence is absolutely transferred. In support of that contention, the respondent referred to the judgment of his Honour Mr Justice G.N. Williams in the Supreme Court of Queensland In the matter of the Companies (Queensland) Code and In the matter of V.D. Taylor and Sons Pty Ltd (unreported 20 Décember 1984), a related decision, the petition in that case being presented by BAC against the debtor company as the drawer of a bill of exchange which formed part of the series of transactions entered into by Wyblue Pty Ltd in order to finance its purchase of the hotel. His Honour said at p.2 of his judgment:- "The petitioner commenced proceedings against, inter alia, the company in the Supreme Court of New South Wales and on 3 September 1984 obtained judgment in the sum of $1,422,599.08. But, by its terms, that judgment was stayed until either: (a) the plaintiff completes the contract of sale of the Tweed Heads Hotel, or (b) that contract of sale is terminated by either party thereto. It appears to me that whilst that stay remains, the liability of the company under that judgment is contingent. It does appear that the contract has now been completed in the conveyancing sense but the licencing authority in New South Wales has not yet transferred the liquor licence to the nominee of the purchaser and, in consequence, the purchase money is held in trust pending the taking of that step." in the circumstances his Honour dismissed the petition. 10, It is submitted that it cannot be said that the judgment creditor has been paid if the transaction under which he is to receive the monies is not complete. It is said that the vendor can only reasonably he credited with the money when there is some certainty about the outcome of the contract and, that in this case, the outcome of the contract is not certain until the licence is transferred absolutely. As regards the argument based on clause 29, it is to be noted that the relevant date for ail sub-clauses in clause 29 is "completion" and completion as defined in clause 37.1 is said to take place on the "date before the date specified as the date for the hearing of the Application". It appears then that, subject to clause 29.3 and 29.4, from the date of "completion" the vendor is entitled to the interest though, in accordance with clause 37.1, the vendor is not entitled :o have its solicitor account to it for the monies held by them until the application had been 'granted. In my view the only sensible interpretation of that clause and the interpretation that must have been intended by the parties when they used the term "completion" in clause 37.1, was that the vendor had a right to the money, albeit a conditional right on 25 September 1984, the fulfilment of the condition being outside the control of the parties. As between vendor and purchaser all had been done that could be done and, pending the decision on the application, it is a binding agreement from which neither party can resile. As was held in Smaliman v. Smallman ll. £19713 3 All E.R. 717, where an agreement was reached in contemplation of divorce proceedings and was expressed to be "subject to the approval in due course of the court", the parties here are agreed on all essential matters; further in pursuance of the agreement, possession, documents and, not least of all, money has changed hands. In Smallman, supra, Lord Denning M.R. (with whom Phillimore and Orr L. JJ. agreed) said at p.720:- "In my opinion, if the parties have reached an agreement on all essential matters, then the clause 'subject to the approval of the court' dees not mean There 1f na agceewent at all. There if an agreewent, but the operation of it is suspended until the court approves it. It is the duty of one party or the other to bring the agreement before the court for approval. If the court approves, it is binding on the parties. If the court does not approve, it is not binding. But, pending the application to the court, it remains a binding agreement which neither party can disavow. Orr LJ has drawn my attention toa useful analogy. Many contracts for the sale of goods are made subject to an export or import licence being obtained. Such a condition does not mean there is no contract at all. It is the duty of the seller, or the buyer, as the case may be, to take reasonable steps to obtain a licence. If he applies for a licence and gets it, the contract operates. If he takes all reasonable steps to obtain it, and it is refused, he is released from his obligation. If he fails to apply for it or to do what is reasonable to obtain it, he is in breach and liable to damages; see Brauer & Co (Great Britain) Ltd v. James Clark (Brush Materials) Ltd £19523 2 All ER 497 and A V Pound & Co Ltd v. M W Hardy & Co Inc. (19563 1 All ER 639, [1956] AC 588. Similarly when aman agrees to buy property 'subject to the title being approved by our solicitor', there is a binding contract. There is an implied promise by the buyer that he will appoint a solicitor and shall -consult him in good faith, and that the solicitor shall give his honest opinion. If the solicitor honestly disapproves, the contract does not bind. Bul until he does disapprove, the contract binds: see Hussey v Horne-Payne (1879) 4 App Cas 311 at 322, (1874-801 All ER Rep 716 at 721 and Marten v. Whale £1917] 2KB 480 at 486. Branca v. Cebarro (19477 2 All ER 101, (19471 KB 854 is on the same lines. oe Iam satisfied that the Bankruptcy Notice, at the time of its issue, clearly overstated the amount due by the judgment debtor to BAC under the judgment. Counsel for the respondent properly conceded that if I should be of the view that the bankruptcy notice mis-stated the amount due which, in this case would be an over-statement in the vicinity of $1,000,000, it could not seriously be contended on his client's behalf that the mis-statement came within s.306 and, as such, he conceded the notice would be misleading. In view of the conclusion that I have reached and the concessicn made by counsel for the respondent, I have considered what I ought properly to do as to the other ground stated in the application, that the offer of security made by the debtors secures payment of the amount owing to the judgment creditor, and as to the point taken at the hearing, that a bankruptcy notice may not be issued against more than one debtor, except in the case of a judgment against a partnership. The last point involves no finding of fact on my part, and so is strictly unnecessary for me to decide. As to the question of security for payment, s.41(2)(a)(ii) provides: 13. "The prescribed form of bankruptcy notice shall be such that the notice - (a) requires the debtor named init, withina specified time ... ta - (ii) secure the payment of the debt or sum to the satisfaction of the Court or the creditor or his agent, if any, specified in the notice or compound the debt or sum to the satisfaction of the creditor or his agent, if any, specified in the notice;..." The judgment debtors offer, by way of security, shares in a public listed company called Northern Queensland Company Limited. The judgment debtors offered the judgment creditor shares and options in that company by way of securing the debt. Ina telex of 14.12.84, they said:- . TAYLOR, WATSON, DOWN AND CARGNELLO THROUGH FAMILY TRUSTS HOLD SHARES AND CPTIONS IN A PUBLIC COMPANY CALLED THE NORTHERN QUEENSLAND COMPANY LIMITED WHICH WAS LISTED ON THE SYDNEY STOCK EXCHANGE ON THE 18TH OCT 1984. THESE SHARES ARE VARIOUSLY QUALIFIED AS DEFERRED APPLICATION AND VENDOR SECURITIES AND HAVE RESTRICTIONS ON SALE AND LISTING ON THE EXCHANGE. THE SHARES HAVE TRADED IN THE RANGE OF 17 CENTS TO 22 CENTS AND THE OPTIONS AT 6 CENTS. THE MAJORITY OF SALES OF SHARES HAVE BEEN 20 CENTS AND OVER. eee THE DEFERRED APPLICATION SECURITIES CANNOT BE LISTED ON THE EXCHANGE FOR A PERIOD OF THREE MONTHS FROM THE 18TH OCT 1984. VIZ 18TH JAN 1985. THE ADDITIONAL MONTH IS REQUESTED TO ENABLE US TO SELL ON THE MARKET IF WE WAVE NOT BEEN ABLE TO PLACE THEM BEFORE THE 18TH JAN 1985. --- WE WOULD BE PREPARED TO ALLOW YOUR CLIENT TO HOLD THE SCRIP FOR 3,500.000 DEFERRED APPLICATION SHARES AND 6,500,000 DEFERRED APPLICATION OPTIONS. IN THE EVENT THAT WE DO NOT PAY OUT THE DEBT BY THAT DATE YOUR CLIENT IS AT LIBERTY TO SELL THE SECURITIES. IN THAT EVENT IT IS A CONDITION THAT IT SELL THE OPTIONS FIRST AND THAT SALES BE IN AN ORDERLY FASHION SO AS NOT TO FLOOD THE MARKET." The judgment creditor was not prepared to accept the security that was offered. There is no specific power in the Act given to the Court actually to accept some form of security. The amount claimed to he owing as at the time of the hearing was $377,677.09. Mr. Down, in an affidavit sworn on 4 February, 1985, offered on behalf of the judgment debtors, a total of 2,894,656 shares and 2,596,956 options. Mr. Down, in that affidavit, swore that the shares were then trading between 14 and 16 cents and the options at 6 cents. In my opinion, the offer of such shares does not on the material before me satisfactorily secure the payment of the debt. No valuation material in support of the value of the security offered was led in evidence. If the shares could be disposed of at 14 cents per share, and the options at 6 cents a share, the realization would be a little in excess of $550,000. I am not satisfied that the sales of those volumes of shares and options could be made without significantly affecting the market price of the shares or 15. options. What amount would be realised on the disposal of those volumes of shares and options is, in wy view, a matter of rank speculation, T am not satisfied that the offer secures the payment of the debt. For the reason that the bankruptcy notice clearly overstated the amount due under the judgment, the debtor having given timely notice that they disputed the validity of the notice on the ground of the misstatement, I set aside the bankruptcy notice. I will hear the parties on costs. "9 fi p acceding Deed S/bjss POOF ratonns