CATCHWORDS Bankruptcy - creditor's petition based on default judgment - whether Court should go behind judgment to determine merits - whether debtor liable to petitioner as manager and not trustee of trust fund - whether liable in quasi-contract. Re Vella; Ex parte Seymour (1983) 48 A.L.R. 420 Re Marshall; Ex parte James Hardie & Coy. Pty. Ltd., unreported, Pincus J., 8 July 1985. Re Bloomer; Ex parte Ford Credit Australia Limited, unreported, Toohey J., 26 June 1985. Bankruptcy - appointment by Supreme Court of interim receiver of property of debtor on application of Corporate Affairs Commission - Companies (N.S.W.) Code, s. 324A - whether inconsistent with Bankruptcy Act 1966. » RE: EDDIE SOLOMON; EX PARTE JOHN RALPH REID No. P1809 of 1985 Beaumont, J. Sydney NU t 7 March 1985 ' ' - x we *t - ve . : IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION r - BANKRUPTCY DISTRICT OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY - RE: , EDDIE SOLOMON ~ EX PARTE: > JOHN RALPH REID MINUTES OF ORDER Judge making order: Beaumont, J. Date order made: 7 March 1986 Where made: - Sydney 4. THE! COURT ORDERS THAT: Leave he granted to the petitioner to amend the petition by adding under the debtor's name the words "(also known as Emmanuel Solomon)". Petition adjourned to 10 March 1986 at 2.15 p.m. "Before 5.00-p.m. on 7 March 1986, the petitioner serve upon the Corporate Affairs Commission notice of the adjourned hearing date of this petition together with a copy of these reasons. . Costs reserved. Note: Settlement and entry of orders is dealt with by Bankruptcy Rule 124. No. P1809 of 1985 ""IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION / : BANKRUPTCY DISTRICT OF NEW SOUTH WALES No. P1809 of 1985 AND THE AUSTRALIAN CAPITAL TERRITORY RE: "EDDIE SOLOMON / EX PARTE: JOHN RALPH REID CORAM: Beaumont, J. ae , DATED: 7 March 1986 - REASONS FOR JUDGMENT The petitioner, Mr. John Ralph Reid, has presented 2 petition for the making of a " sequestration order against the estate of the debtor, Mr. Eddie Solomon. The petitioner claims that the debtor is indebted to him in the sum of $25,153.15 for a judgment debt obtained in. the District Court of New South Wales on 14 May 1985. 'The petitioner further claims that the debtor failed to comply with the requirements of a bankruptcy notice based on that judgment and served on the debtor on 22 August '7 1985. ° The debtor seeks ' an adjournment of the petition or, alternatively, its dismissal on the ground, shortly stated, that the transaction underlying the judgment gave rise to no legal liability on his part. ' Pe rie - - ; _ The history of the matter is as follows. 'In January 1984, the petitioner, a resident of Toowoomba, Queensland, saw an 'advertisement in a magazine apparently placed by the debtor. The advertisement. ° entitled | "How to Achieve Total Financial x ' Independence" invited readers to inspect the debtor's book "Pinancial Independence" and, if interested, to purchase it. According to a coupon in the advertisement, requests for "10 days ' - f free trial" of the book were to be addressed as follows: V ~~ se '¢ rs "To Eddie Solomon . Transphere Pty. Limited 32 York Street. Sydney N.S.W. 2000" - { The petitioner sent -& coupon to the debtor and received "a copy 'of the book. No further communication occurred between the parties until the middle of September 1984 when the petitioner received a circular letter marked "private and ' confidential" from: "TRANSPHERE LIMITED ' - inc. in the Cayman Islands Reg. Office Suite 3A, 6th Floor . "32 York Street, SYDNEY, NSW 2000 ~ '_ Telex: 75730 (Eddie)" - The letter commenced: . oo "Dear Sir/Madam, : RE: THE EDDIE SOLOMON TRUST FUND No. 6" . - The letter, sianed "Eddie Solomon Bank & Trust" jin handwriting above 'the typed words "EDDIE SOLOMON BANK & TRUST CORPORATION" below which was _ typed "TRANSPHERE LIMITED", invited subscriptions to The 1 Badie Solonon Trust Fund No. 6". According to the letter, "Dransphere (Cayman Islands) Limited and the Eddie Solomon Bank & Trust Corporation acted as trustees of the fund; yO } . . the debtor was' the manager of, and major participant in, the 'trust: and the "guaranteed minimum income derived from the trust to. - was "25% p.a. compounded rate of return". The letter also stated: ' 4, ae : _"The previous trust' funds conducted by Eddie Solomon have shown tremendous success and popularity. This is without doubt a reflection ' on the trust that my valued investors have placed in me. Every participant in the Eddie Solomon Trust Fund No. 6 will be allocated an . account humber and thus the participant can - + deposit or withdraw any amount of money-any time by simply quoting the account number....Only 24 hours notice to withdraw funds from your account...."~ . "Pursuant "to this invitation. in October 1984, the -petitioner invested, to use a neutral word, amounts totalling $21,400.00 in the trust fund. The investments were made by way cand of cheques | "drawn by or at the request of the petitioner. The ae , first investment, in the sum of $7,400.00, was made by cheque forwarded 'to the debtor on or. about 1 October 1984. In accordance with the terms of an application form accompanying the - circular letter, the cheques were drawn in favour of the debtor. "ow ' aa py T4 athe ie an aco eae ae ral Se oe ot Ee a * Miele an Sanat $22 a tome ade AF hes vt inennn Haat Saadumatdnenlonatese ETE Lan TT Set ak Its receipt was acknowledged by a _ letter dated 4 October 1984 in ic ' . these terms: - ' ~ " : = o-NS "°TRANSPHERE. PTY. LIMITED ~ +t ~ ay - ' ~ wf "4 a8 . \. Telegraphic Address st, " Telephone: st eo TRANSPHERE SYDNEY : : (02) 2901920 | - _ 'Telex: 75736 #32 YORK STREET, SYDNEY N.S.W. 2000 a . "Ls . G.P.0. BOX 1681 me » SYDNEY NSW 2001 ' Your Ref: - AUSTRALIA Our Ref: ° -/ 7 4 October 1984 ' - PRIVATE & CONFIDENTIAL \ - - EST 679 Mr John R Reid 1/82 Alderley Street. . TOOWOOMBA - QLD 4350 : . Dear Mr Reid . I acknowledge with thanks receipt of your application for participation in the Eddie Solomon Trust Fund together with your payment for $7,400.00. Your application has been duly considered and accepted. I am pleased to announce that we guarantee a minimum of 25% p.a. return on funds invested in the _Trust. "A cheque for $166.50 will be sent to your mailing address on the 2nd of every month. Your account reference number is the one appearing above your name and address. . , _ I.wish ~to thank you for the trust you have placed in me and which.I shall seek at all times to justify. If "you have any queries, please donot hesitate to contact me on (02) 290 1920. . \ BY _ Sincerely Cee - me (ScD) Eddie Solomon. - ' ° (Eddie Solomon) ; . ' , TRUSTEE Y . \ a Ps. The interest rate has increased to 27% from - - 1/7/84 until 31/12/84." The second ' investment, for the sum of $14,000.00, was made, (on or about 5 October 1984. Its -receipt was acknowledged by "a letter dated 16 october 1984 as follows: - . i ' - . 2° "TRANSPHERE LIMITED 'os - a 'inc. in the Cayman Islands 'Rep. Office: | SUITE 3A 6TH FLOOR. . 32 YORK STREET SYDNEY NSW 2000 | ; "Gpo BOX 1681 °°. Co TELEX 75730 (Eddie) . SYDNEY, NSW. 2001 '°°. - TELEPHONE (02) 290 1920 PRIVATE & CONFIDENTIAL 16 October 1984 "4 - "EST 679 - coat Dear Mr. Reid «© . * : ' I acknowledge with. thanks receipt of your payment for $14,000.00 for. investment in the Eddie Solomon Trust Pund . - This amount has been added to your previous halance. I wish to thank you once again for the trust you have Placed in me and which I shall seek at all times to justify. / ' moo Sincerely . of. - (soo) "E.. DuEN i a Leanne Dupen EDDIE SOLOMON BANKING CORPORATION P. Ss. "A cheque 'for "$428. 30 will be sent to your 'mailing address on 2/11/84 and then $481. 50 will be sent monthly thereafter." . ' . ce & , , _ On 25 October 1984, an "officer of the New South Wales Corporate Affairs Commission 'informed the petitioner that in the - ets Sy wf, Wie? pow ch ory we Sa eeepc Rea need Rahal ance Sant he SE Se ha A tae te ae PEROT Suet cote s , - s ' ' ' va ' tha fo t Pa ' ~ ~ i Fa : 3 y, . , ~' +' 6. " 5 '\ \ ' 4 course _ Of an investigation of the affairs of the debtor, the Commission had discovered | that' the petitioner' s funds had "ended ~ r up 'in an account operated in the namé of Emmanuel Solomon at 'Westpac | Sydney Branch", Te was suggested 'that the petitioner 'contact Mr. , Alexander McIntosh' of Peat Marwick Mitchell & Co., Charteréd Accountants,. "as he had been appointed receiver of the whoa Trust Fund. * After, discussing the matter with one of "Mr. a Metntosh' s staffg the petitioner, on 26 October 1984, telephoned r . the. debtor' s office and asked ta speak to the debtor. He was informed that the ¢ debtor would" not be in the office that day. * The "petitioner requested the repayment of the monies he had invested. He was further informed that, for this purpose, he should contact another member of the staff, Leanne, although she was not, expected in the office until the following week. ns ' ' or eon wy a "o> ' \ - poy 'On' 11 December 1984, on the application of the Corporate Affairs Commission, the Supreme Court of New South Wales ordered, a on an 'interim basis, that Mr. McIntosh be appointed receiver of the property of Transphere Pty. Limited, of Eddie Salomon Pty. Limited and "of the debtor. "Under the terms of the order, the receiver was given: certain powers "and certain restraints were imposed upon the debtor and the companies mentioned. . - " ' "oS . on pote . ") . - e se y ot " , ' t ' ° . in _ about March 1985, the petitioner filed in the w 'District Court a statement of liquidatea claim against. the debtor ~ : f and the two companies' mentioned, pleading his cause of action as ' follows: ery ae? "oe - . or "The 'Plaintiff | pleads his cause of action as follows: . we . . ' . hae Mos casts 'all material times the Second and Third J Defendants were companies duly incorporated and liable to be sued in their corporate name and style. " ~The Defendants were, at all material times, the Trustees of " the Eddie Solomon Trust ""Pund No. 6 (the "Trust Fund"). "3. . On 2nd 'October, . 1984 the Plaintiff vo. 5. i 6. subscribed to the 'Trust Fund the sum of $37,400.. -. - On 8th October,' 1984 the Plaintiff ' subscribed to the Trust Fund the sum of +1 $14,000., 2 ,, It was a. _term of the' Trust Fund that "interest at' the rate of $27 per centum per _ annum would he payable on any monies -subscribed to the Trust Fund. It was a further term of the Trust Fund . that any monies subscribed to the Trust Fund would be repayable by the Defendants o B. 9. IO. Fy as. ' _., to the Subscriber upon the Subscriber 'giving to the Defendants twenty four (24) hours notice in writing or by telephone. The Defendants acted as agents for each other in performing their , duties as Trustees of the Trust Fund. On 26th October, 1984 the Plaintiff gave notice to the Defendants of his intention to withdraw the $21,400 subscribed by him together with any interest which had "accrued upon such a subscription. The Defendants, and each of them, have . failed to pay to the Plaintiff his subscriptions of $21,400 together with interest accrued thereon. ' 'In the alternative, the Defendants, and : each of 'them received from the Plaintiff the subscription of $7,400 on 2nd October, 1984 and $14,000 on 8th October, 1984 for 'the use of the Plaintiff and have failed to account to the Plaintiff for the said _ "subscriptions. - Further, and in the alternative, the Defendants, 'and 'each of then, have "converted the said subscriptions of $21,400 "for their own use and have wrongfully 'deprived the Plaintiff of the same ' "whereupon the. Plaintiff . has suffered loss 'and damage. . moe, Du "oo (ay Subscription of $7,400 together veto, -o1e, +. with interest thereon accruing at Sots ts parrrcurars ".''. "the rate of $27 per centum per '+. " annum from 2nd October, 1984 until evs the date of repayment. "4. (b) Subscription of $14,000 together . not. swith interest thereon accruing at "+ " the 'rate of $27 per centum per /s,° , annum from 8th October, 1984 until , the date of repayment. Y we -t - .< 2 12. In consequence "Of! the matters aforesaid the : Plaintiff claims from the Defendants: , "(ad Repayment | of the initial - t. tor, *se4'-subscription of $7,400 together . >... with interest thereon at the rate " -. - '.s, o£ '27 per centum per annum fron ' the 2nd day of October, 1984 until '' * payment pursuant 'to the terms of - 'the Trust Fund. wot ¢b) Repayment of the second subscription of $14,000 together mo. Ns a with interest thereon at the rate . : of 27 per centum per annum from » ons ys. of ae the 8th day of October, 1984 until : ",. | payment pursuant to the terms of - .,the Trust Fund. fo) Costs." On 4 May 1985, the petitioner obtained default judgment in the District court against the debtor and the two companies "mentioned in the sum of $25, 153. 15. On 20 September 1985, the deBtor filed an application in 1 the District Court seeking to set aside the Sefault judgment. 6 On 4 October 1985, the application was refused Dy, aisn, D.C. z. _on the ground that there was no ' "defence on 'the merits. ' In Novenber 1985 an application to set i. le : asidé the "bankruptcy notice was "dismissed by Morling, J. On 7 February 1986, "Solomon D. c. Te refused a further application to 'set aside the default. judgment. The debtor now proposes to seek an order, in 'the nature of " certiorari from the Court of Appeal of 4 af "the Supreme Court of New South Wales to quash the decision of ' es . yy t a: N ' - Toe . : s - ' es \ Solomon D.C.J. "" However, that application has not yet been made because the transcript " of 'his Honour's reasons is not yet available and may not be available for. some weeks. tot a . oS tele 1 2, an) aeere ~ ot 4 Even if the 'debtor were abie, at some later date, to set -aside "the | default judgment, on the expiration of the time fixed "for compliance with the _Fequirements of the bankruptcy notice, - the debtor had committed an act of bankruptcy which could not he ' retrospectively | 'nullified 'by 'the setting aside of the default judgment (see Re Vella; Ex Parte Seymour -(1983) 48 A.L.R. 420). The real question _for determination now is whether the Court should go behind © the 'judgment in the sense explained by the mace this area (see Re Marshall Ex parte James Hardie & oes Pty. Ltd., unreported, Pincus, d., 8 July 1985; Re Bloomer; . Ex parte Ford Credit Australia Limited, unreported, Toohey, J., 26 "June 1985), ' "4 , so Upon the assumption that it were appropriate in the circumstances that the Court go behind the judgment, the debtor advances two arguments to support his contention that he is under no legal liability to the petitioner. , . woe e ' feo . 1 ' s ~ 8 in' 'the first 'place, the debtor submits that he was not a trustee 'of the trust fund but ' rather only its manager. Thus, it i x 'is. said, even if the trustees of thé fund may have been liable to refund . 'the | investments made, 'the debtor, as mere manager, "incurred no personal liability on Phat account. se SivAd es oa ont mom. & SN Big e ae FE we es Ce Lae peed Ee ee eh ite ake shat ~ "y Aye ity Le c. t. fos y . . cay - 7 . "ol, In the ' ¢ivcumstances? At is unnecessary that I express « p * des any" "view "on this . "question. . 'It _is apparent from the a A ne corréspandence cited that it is at least arguable that the debtor > eR AA ee ote re, ~. assumed the office, 'of trustee by virtue of his conduct even if he - * was never, _fémmally appotrites to act as trustee. On the other "hand, 'aE the | "teuie" 'position were that 'the debtor were not a 1 - trustee, the fact 'remains that," at his request, the cheques in Ve wey _ ~ on question , \were draw" in' 'favour 'of the debtor and the proceeds j rs ast oN : ree were paid to "the credit of: 'his account, assuming, as I do, that _ \ \ the debtor is also known_as Emmanuel Solomon. 6 Co yin 2 IN. . . . + ~ . ¥ po oa Lo On, this Jhyphothests,. 'the "debtor must be taken to have ; ~ ww - - failed to "Account" "te the trustees for these proceeds in - ty a -<* - , -actordance. 'with: 'the "terms of 'the investment contract. * Consequentty, 'it' would "ecliow "that the debtor would be liable to sieht sy - 'the' petitioner in "quasi- contract for moneys had and received by < the debtor, ta" the use of the petitioner (see Halsbury's Laws of ' Englan and, ath ed. vol. "9 "at PP- 434 'et seq.) . , - Tae os 40 we 4 "4 .. way ' . : . . - o ' vy eto eke. o : "As has been noted, the petitioner sued the debtor in the . wee ye - s ' District | Court on, 'a umber 'of alternative _counts.. ' The first "Oe det - i. * count aliegea, an, exéress contract with the trustees of the fund, ' tneliding 'the "debtor, " The second count, pleaded in the an vos a) r . . - . 1 alternative, alleged, a "ability in quasi- =contract. In my view, "it is "at. least "arguable that the debtor was liable to the " yes 1 - petitioner on "the first count." The debtor may not, however, be 30 Liable if At be held that he was never a trustee, express or . constructive, of the fund. -But, in that event, the debtor would ee Mee : - be 'Liable on the second' count' by reason of his failure to account . to 'the trustees for, the' "proceeds of the cheques forwarded by the me petitioner: the debtor must be liable on either the first or the "--* Second count. " . - , rn eto. tle, we - a ; Thus, even if it were appropriate that the Court go belind the default / judgment. . it would not assist the debtor 'since, in my view, he is liable to the petitioner for the amount claimed. It is hardly riecessary to add that nothing turns on the fact that the debtor was sued jointly with other defendants. 's ; . -¢ ; = - - ee "sa lf - coe The debtor's second argument concerns the effect of the orders appointing "a receiver of the property of the debtor. It c is suggested that the operation of these orders was to "freeze" the assets of the debtor so as to make it impossible for him personally to pay the. judgment debt; so that he should not now be made bankrupt by réason of his failure to pay such debt. ' . - . - -. - The order made by the Supreme Court were expressed to Be " until the hearing, 'or further order". ' _ Apparently, the final ue hearing of the 'proceedings has not yet occurred. However, para.4 - ' "of the order xeads : oe . ee ve belle , ' 4 ' mo "4. "The Receiver shall have the powers set forth See TF - in 'Section 342A fEsc.324AJ\of the Companies (New "ot South Wales) Code and in- addition : - mo i ' ee "ay ~ 'the ipower ' to determine the assets and "cc cS vet. liabilities' of the property to which he is yet, "appointed Receiver; q we yo. 7 - . ' . ae 7 ia - - vats , . t + . 2 4a sb) The' 'power to. 'advertise' to ascertain the bet tt tte " Yassets and liabilities of the property to 'ft CO TOD, which he is .appointed Receiver." ~ rt . 7. v . ~ 7 . "It may well, be that a question could arise as to the ' - a oa - , ' 1 > proper -sénstpuetion | of this order in the event that it remained ; . we oS - ae on foot when av " sequestration 'order' were made against the estate + ~o i . . . Lotte 2 " ; of the " debtor. 'It is possible that a "question of inconsistency ue with the operation of 'the Bankruptcy Act 1966 could arise in that " - context. "Since the order is merely interlocutory, it is , . - ' unnecessary. ta express any .view on these _matters at this stage. ' The appropriate" course, is to direct that the Corporate Affairs uke - . ' ee, Commission be 'given notice of 'these 'proceedings for the purpose . =A ' - of its seeking leave to. intervene if it wishes to do so. In 4, : ee - oe wee particular, the Commission!" may wish to consider whether it should . seek a variation of the" Supreme Court order so as to discharge . . : " t the interim receivership of the property of the debtor witha te F view to. removing | any suggestion of conflict with : a sequestration a 5° bee Dey 4 "Ds ' order made against his estate. Mae . <= scene a Eas HBitaie atta dtnbaasict Ah anne et tal Sand! Utena catenin cit inn Sate <a _ oe an we - : ' - ' Le . ot ; a . - " o ee ee "I. propose "to make the following orders: . , ta vas : anal ee . } : san 4 ' rie . - nn i "Grant leave, 'to. the petitioner to amend the petition by tay = ' poy ee os 7" ry are adding under. the debtor' s* name 'the words "(also known aS ee 2 coal Emmanuel Solomon) Ml ae _ cs oot > ; 2, Adjourn petition to 10 March 1986 at 2.15 p.m. ° ; - . r ' a an Ne fore be on é ; , ' . ' . ~ eo - - . xt Fs * a tree ot we . < eo vee ' . ' Te me '3. "Direct" that; -before ( 5 'pon. on 7 March '1986, the " - - oe "petitioner serve upon the Corporate Affairs Commission - notice of the adjourned hearing date of this petition ~~ . together with a copy "of these reasons. - . . - . oe . oe - 7 o ai - . cs . 1 f a - : ar a Costs reserved. . / = oh. - . ° . . are "5, _ Tyee ~ a . . t a ' ae TL ee 7 yitce ' , - re - ° ~ > ' . ; | fag 7] Leortig tythat this and the hrlve (2) —_ oe i syecedana pagés are a true 'copy of the ' Cot easons for Judgment hereinofhisHonou. .- , oy bP ee Justice me ONT. .