JUDGMENT No 3867 8%. CATCHWORDS BANKRUPTCY ~- deed of assignment - debtors carried on farming business for undisclosed company - directors of company - receipt of wheat sale proceeds - whether agents of company - whether entitled to indemnity ~ lien - company an liquidation — mutual debts credits and dealings. COMPANIES -— directors - whether agent of company - authority to bind company. Bankruptcy Act 1966 Companies (Western Australia) Code s,218, s.438(2) Ford, Principles of Company Law (4th Edition), para.522 Gower'sS Principles of Modern Company Law (4th Edition), p.194 Fridman's Law of Agency (5th Edition) Bowstead on Agency (15th Edition) Goff and Jones, The Law of Restitution (2nd Edition), p.258 Anson's Law of Contract (26th Edition), p.549 Snell's Principles of Equity (28th Edition), p.450 Re Haycraft Gold Reduction and Mining Co. [1900] 2 Ch.230 D'Arcy v Tamar, Kit Hill and Callington Ry. Co. L.R. 2 Ex. 158 Collie's Claim LR. 12 Eq.246 Rama Corporation v Proved Tin & General Investments Ltd [1952] 2 QB 147 Harmond Properties Ltd v Gajdizis [1968] 1 WLR 1858 Sims v Bond (1833) 5 B. & Ra. 389; 110 ER 834 Day & Dent Constructions Pt Ltd (In Liq) v North Australian Properties Pty Ltd (Provisional Liquidator Appointed) (1982) 150 CLR 8 Hiley v Peoples Prudential Assurance Co. Ltd (1938) 60 CLR 468 In re Fenton. Ex parte Fenton Textile Association Ltd (No. 1) (1931) I ch-85 In re Daintrey. Ex parte Mant [1900] 1 QB 546 RE: LAWRENCE MICHAEL CLUNE and VALMA ELIZABETH CLUNE EX PARTE: EVAN ROBERT VERGE the Trustee of the property of LAWRENCE MICHAEL CLUNE and VALMA ELIZABETH CLUNE and ISABELLA NOMINEES PTY LTD (IN LIQUIDTION) ~ ~~ No. 72 of 1986/X FRENCH J. PERTH 20 JULY 1988 IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE OF ) ) GENERAL DIVISION ) ) ) ) WESTERN AUSTRALIA NO. 72 of 1986/X RE: LAWRENCE MICHAEL CLUNE and VALMA ELIZABETH CLUNE EX PARTE: EVAN ROBERT VERGE the Trustee of the property of LAWRENCE MICHAEL CLUNE and VALMA ELIZABETH CLUNE Applicant and ISABELLA NOMINEES PTY LTD (IN LIQUIDATION) Respondent MINUTE OF ORDER JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 20 JULY 1988 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. It is hereby declared that the applicant 1s entitled to retain the proceeds received by the applicant from the Australian Wheat Board and Co-Operative Bulk Handling Limited in relation to the business formerly conducted by Isabella Nominees Pty Ltd (In liquidation) and known as "L.M. & V.E. Clune" for the payment to the creditors of the debtors' estates in accordance with the provisions of the Bankruptcy Act to the extent that the 2. same equal the provable debts in the debtors' estates which debts were incurred by the debtors in the conduct and management of the aforesaid business on behalf of Isabella Nominees Pty Ltd as an undisclosed principal. The costs of this application to be taxed in accordance with the provisions of the Bankruptcy Act. Note: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA we SS NO. 72 of 1986/X RE: LAWRENCE MICHAEL CLUNE and VALMA ELIZABETH CLUNE EX PARTE: EVAN ROBERT VERGE the Trustee of the property of LAWRENCE MICHAEL CLUNE and VALMA ELIZABETH CLUNE Applicant and ISABELLA NOMINEES PTY LTD (IN LIQUIDATION) Respondent CORAM: FRENCH J. 20 July 1988 REASONS FOR JUDGMENT In this case the former members of a _ husband/wife farming partnership carried on their business through a company which traded under their names. A question has arisen in the administration of their estates assigned for the benefit of their creditors under Part X of the Bankruptcy Act 1966. The question 1s whether proceeds of wheat sales payable by the Australian Wheat Board and by Co-Operative Bulk Handling Limited, is part of their property or is the property of the company which 1s now in liquidation. Their trustee seeks a declaration that the money is part of their divisible property and not that of the company. 2. The Facts On 13 May 1986 concurrent meetings of the creditors of Lawrence Michael Clune and valma Elizabeth Clune passed _ special resolutions requiring each of the debtors to execute a deed of assignment under Part xX of the Bankruptcy Act 1966. The Clunes executed the deeds on the same day and, according to their terms, each of them assigned to the trustee, Evan Robert Verge:- ",..all [his/her] divisible property within the meaning of Part X of the Bankruptcy Act 1966 UPON TRUST to deai with the same in accordance with Part X of that Act for the benefit of the creditors of the Debtor and as to any surplus after paying in full the several debts and liabilities of the Debtor proved under this Deed together with the costs charges and expenses of or incidental to the execution of the trusts of this Deed (including the remuneration and expenses of the Trustee) UPON TRUST for the Debtor [his/her ] executors administrators or assigns". The trustee's affidavit discloses that, prior to 1976, the Clunes conducted a farming business in partnership on land owned by Mr Clune at Mukinbudin. On 25 November 1975 they incorporated Isabella Nominees Pty Ltd, a company of which they were the directors and shareholders. That company was appointed as trustee of the "Laurie Clune Family Trust". On 23 December 1975 it was resolved by Mr and Mrs Clune, as directors, that the company in its capacity as trustee, should acquire the whole of the business known as "L.M. & V.E. Clune" as from 1 January 1976. No written agreement appears to have been executed but the company subsequently registered the business name "L.M. & V.E. Clune" and carried on business under that name until 1985 when it failed to renew the registration. The company was wound up by resolution of 3. its members on 13 May 1985 and Mr R.W. Brown was appointed as its liquidator. It appears that those dealing with the company were at all material times told they were dealing with L.M. & V.E. Clune. That is to say, the existence of the company was not disclosed by Mr and Mrs Clune who, to all outward appearances, carried on the business as before and under their own trading name. According to the trustee all documents, papers and notices with respect to the business and received by third parties made no mention of the company. It was the Clunes, and they alone, who conducted the business on behalf of Isabella. I observe that the conduct of the company and that of the Clunes in this regard may well have been in breach of s.218 of the Companies (Western Australia) Code. Before Isabella took over the business, the Clunes' sold wheat produced on their farm to Co-Operative Bulk Handling Ltd ("CBH") and the Australian Wheat Board ("AWB"). The proceeds of such sales were payable to them. After transfer of the business the accounts maintained with CBH and AWB remained in their name. Since that date, however, they are said to have treated receipts from those sources as income earned by Isabella. The trustee in his affidavit claimed to exhibit "various copies of Income Tax Returns made by Isabella reflecting the proceeds from the sale of wheat as being income from the Australian Wheat Board and the tolls of Co-Operative Bulk Handling Ltd as an asset of Isabella". The "various" returns exhibited in fact covered only the two financial years ended 30 June 1983 and 30 June 1984. Nevertheless they bore out what was said in the affidavit. The trustee went on to say that he had received money in the name of L.M. and V.E. Clune from the AWB and from CBH and that moneys so received were held in his trust account. His affidavit also said that "a large number" of the trade creditors of L.M. and V.E. Clune have lodged proofs of debt in the estates of each of the debtors jointly or the male debtor only. He exhibited six proofs of debt which were presumably meant to demonstrate the truth of that proposition. The first of these was a proof lodged by a firm called "Jones Bros." for supply of goods to the Clunes. The next three were proofs of debt lodged by the National Australia Bank against the Clunes individually and jointly for $86,961 said to be owing by them as guarantors for the account of Isabella Nominees Pty Ltd. In relation to the proof of debt against L.M. Clune, there was also a claim for $31,105 owing on a personal loan account. The fifth proof was lodged by a company called "High Order Pty Ltd", initially against the individual estate of L.M. Clune on the basis of a default judgment in the District Court in the amount of $23,443.88 together with interest and costs. That proof, however, was withdrawn and a fresh proof of debt lodged on 27 August 1986 against the joint estate. Correspondence between the solicitors for High Order Pty Ltd and the liquidator of Isabella Nominees Pty Ltd disclose that at no time prior to April 1986 did Mr Clune inform High Order Pty Ltd that he was acting as agent for Isabella. The solicitors contended that previous proceedings against Mr Clune had been in the nature of a claim against an agent for an undisclosed principal and that High Order Pty Ltd was thereby permitted to 5. prove against Isabella. The text of the affidavit gives the impression that the documents exhibited to it support the proposition that "a large number" of the trade creditors of the business were unaware of the existence of Isabella. In fact only two creditors are shown by the exhibits to have been in that position. That is not to say that there were not others similarly placed. The question raised by this application 1s whether moneys received by the trustee from the AWB and from CBH and held in his trust account can be treated as part of the divisible property of the Clunes and made available to their creditors or whether it should be remitted to the company which is now in liquidation. The trustee seeks the following relief:- "A declaration that the Applicant is entitled to retain the proceeds received by the Applicant from the Australian Wheat BOARD and CO-OPERATIVE BULK HANDLING LTD in relation to the business formerly conducted by ISABELLA NOMINEES PTY LTD (IN LIQUIDATION) and known as "LL.M. & B.E. ClUNE" (sic) for the payment to the creditors of the Debtor's estate in accordance with the provisions of the Bankruptcy Act to the extent that the Same equal the provable debts in the Debtor's estates which debts were incurred by the Debtors in the conduct and management of the aforesaid business on behalf of Isabella Nominees Pty Ltd as an undisclosed principal." The liquidator of Isabella has advised the Court that because of lack of funds in the liquidation he was unable to appoint any legal representative to attend the hearing. He was served with a copy of the application and the affidavit filed by the applicant. 6. Statutory Framework Upon the execution of a deed of assignment pursuant to a resolution of creditors passed pursuant to s.204 of the Bankruptcy Act 1966 the terms of the deed become binding on all creditors (s.228) and the divisible property of the debtor vests in the trustee for the purposes of the deed (s.229). Divisible property is defined for the purposes of Pt.X of the Act, and in relation to deeds of assignment, by s.187:- ""divisible property", in relation to a deed of assignment executed by a debtor, means the property, other than property that was acquired by, or devolved on, the debtor on or after the day on which he executed the deed, that would be divisible amongst his creditors under Part VI if he had become a bankrupt on that day". By virtue of s.187A, Pt X applies with prescribed modifications (iff any) to joint debtors whether partners or not. Various provisions of the Act relating to bankruptcies apply in relation to deeds of assignment by force of s.231. Their application is modified by sub-s.231(2) so that a reference to the property of the bankrupt is to be read as a reference to the divisible property of the debtor, thus picking up the definition of "divisible property" in s.187. One of the provisions so applicable is s.116 which provides inthe relevant parts as follows:- "116(1) Subject to this Act - (a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or 1s acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge; (b) the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his discharge; is property divisible amongst the creditors of the bankrupt." By force of s.438(2) of the Companies (Western Australia) Code), s.86 of the Bankruptcy Act, relating to mutual credits, debts and dealings, applies in the liquidation of Isabella Nominees. That latter section provides:-~ "86(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy - (a) an account shall be taken of what 1s due from the one party to the other in respect of those mutual dealings; (b) the sum due from the one party shall be set off against any sum due from the other party; and (c) only the balance of the account may be claimed in the bankrupty, or is payable to the trustee in the bankruptcy, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off 1f, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he had notice of an available act of bankruptcy committed by that person." The relief sought 1n the application 1s sought under s.30 which empowers the Court, inter alia, to "make such orders (including declaratory orders...) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter." Reference should also be made to s.218 of the Companies (Western Australia) Code which provides in the relevant parts:-— "218(1) The name of a company shall appear in legible characters on —- (b) every business letter, statement of account, invoice, order for goods, order for services, official notice, publication, bill of exchange, promissory note, cheque or other negotiable instrument, indorsement on, or order in, a bill of exchange, promissory note, cheque or other negotiable instrument, receipt and letter of credit of, or purporting to be issued or signed by or on behalf of, the company, whether or not the company is carrying on business under a business name, and, if default is made in complying with this sub-section, the company is guilty of an offence. Penalty: $1,000. (2) I£ an officer of a company or any person on its behalf - (b) issues or authorizes the issue of any business letter, statement of account, invoice, order for goods, order for services or official notice or publication of the company on which the name of the company does not appear as required by that sub-section; he is guilty of an offence. Penalty: $1,000." 9. The Trustee's Submissions Counsel for the trustee began by conceding that' the money paid by the AWB and CBH to the debtors was and remained the property of Isabella. It was his contention, however, that liabilities incurred by the debtors in connection with the farming business were incurred by them as agents for the company. In respect of those liabilities, therefore, it was submitted, the debtors had a right to indemnify themselves out of the company's funds. There were, therefore, two bases upon which the Clunes' trustee could apply the proceeds of sale for the benefit of their creditors. The first was that, arising out of their indemnity, the Clunes have a lien over the moneys in question. The second was that their liability to the company in respect of the proceeds and its liability to indemnify them could be set off in the liquidation as incurred in the course of mutual credits, mutual debts or other mutual dealings, pursuant to s.86 of the Bankruptcy Act as applicable to the liquidation by virtue of s.438(2) of the Companies (Western Australia) Code. Agency Relationship Professor Ford has pointed out in the Fourth Edition of Principles of Company Law at para.522 that: "Under the usual form of memorandum and articles, no director acting singly, other than one appointed a governing or managing director, has implied authority to bind the company: Re Haycraft Gold Reduction and Mining Co. [1900] 2 Ch.230". In the case cited, Cozens-Hardy J. 10. approved the principle established by the Court of Exchequer in D'Arcy v Tamar, Kit Hill and Callington Ry. Co. L.R. 2 Ex. 158, that directors must act together as a board, and that it is not sufficient to procure the separate authority of a sufficient number of directors to constitute a quorum. He did not agree with the view of Bacon V.-C. in Collie's Claim L.R. 12 Eq.246, that an agreement signed by four directors at different dates and not as a board was a ocontract binding the company. And in the Fourth Edition of Gower's Principles of Modern Company Law at p.194, it is observed that a single director as such, usually has no authority to bind his company. The authority cited for the proposition, Rama Corporation v Proved Tin & General Investments Ltd [1952] 2 QB 147, was principally concerned with the attribution of ostensible authority to a director where the party seeking to invoke that authority had no knowledge at the relevant time of the memorandum and articles of association. Ostensible authority, it was held, could not be imputed to a single director in such a case. The 5th edition of Fridman's Law of Agency is, with respect, probably incorrect when it says that a director is a general agent of a company (p.323, footnote 2). The proposition is supported by reference to the decision of the Court of Appeal . in Harmond Properties Ltd v Gajdizis [1968] 1 WLR 1858. But in that case the Court of Appeal was proceeding on the basis of a finding of fact by the trial judge that the director in question was acting as general agent for the company. It does not establish the agency relationship as a matter of principle. However, a board may delegate its powers to a single director, for example, a managing director, or to a committee of directors. Having regard to the general principle referred to above I am 11. nevertheless prepared to infer in the present case that, in Light of the long course of conduct by which the Clunes carried on business on behalf of the company and the fact that at all material times they were its only directors and shareholders, they were acting as properly authorised agents for, and could bind it. Having found, as I do that a relationship of agent and principal existed between them and the company, it follows' that they were entitled to the enjoyment of the usual rights accruing to that relationship. One of those rights is the agent's right to be indemnified in respect of losses, liabilities and expenses incurred in the performance of his functions as an agent. In a contractual agency, which is how I think the relationship may be regarded, the right to indemnity derives from aterm of the contract that will be implied if not clearly excluded - Bowstead on Agency (15th Edition), Article 64. If the relationship is in quasi-contract, then the right of the agent, it would seem, is not to an andemnity but to reimbursement to the extent that his payment has conferred a benefit on the principal - Goff and Jones - The Law of Restitution (2nd Edition), p.258. In this case the liabilities incurred by the Clunes in running the business derived from the fact that they were acting as agents for an undisclosed principal. The question then arises whether, in those circumstances, they can set up the indemnity claimed in respect of debts incurred in the conduct of the company's business. That can, in my opinion, be answered shortly in the affirmative. The agent of an undisclosed principal may sue or be sued upon any contract he enters on behalf of that principal 12. ~- Sims v Bond (1833) 5 B. & Ad. 389, 393; 110 ER 834, 835. As a general rule, he is entitled to be indemnified by the principal in respect of any liability so incurred. Although questions of legality might arise if it were shown that the Clunes' failure to disclose the existence of their corporate principal involved a contravention by the company or themselves of s.218 of the Companies (Western Australia) Code, there is no evidence from which I can presently infer that in respect of any of the particular transactions relied upon, they have breached the provisions of the section. On the basis, therefore, that the indemnity is properly claimed in respect of liabilities incurred by them in the conduct of the business, the next question is whether, as the trustee contends, they have a lien to the extent of the indemnity over moneys of the principal in their hands or that of their trustee. The Agent's Lien It is well settled that an agent is entitled to a particular lien over the property of his principal, that is, a lien in respect of obligations incurred in connection with that property ~- Fridman (5th Edition), p.178. The agent's lien is a particular lien unless there 15 an express or implied agreement giving rise to a general lien. That can be implied from trade or other custom or usage - Fridman (supra). Bowstead on Agency (15th Edition) at Article 67 observes that:- "Strictly speaking, liens are given by law only; but an analogous right can be regarded as arising by contract, 13. and it is a right of this latter type that an agent has. Particular liens are favoured by the law, but' general liens are "founded in custom only, and are therefore to be taken strictly"." See also Anson's Law of Contract (26th Edition) at 549, Snell's Principles of Equity (28th Edition), p.450. What 1s claimed in the present case is a general lien, and there is simply no evidence of agreement or usage to support such a claim. Indeed, given that the Clunes' controlled the company and the disposition of its property, there would seem to have been little point to an agreement. I conclude that they are not entitled to a general lien in respect of the moneys paid to their trustee and therefore have no lien over them even if such were possible - as to which see Bowstead at p.258:- "It is however difficult to see how a lien can be exercised over money, which will normally be the actual property of the holder subject to a legal or equitable obligation to account for it. It seems that reference to a lien over money should in many cases be explained as references to the agent's right to set-off and counterclaim when sued by the principal for the money." Mutual Debts and Credits This limb of the trustee's submission really raises an issue arising in the liquidation of Isabella, but no point has been taken by the liquidator in that regard. The question is whether the Clunes and their trustee could set off against Isabella's entitlement to the Wheat Board and CBH moneys, the liabilities incurred by them while acting as agents for the company. It falls to be determined in accordance with s.86 of the Bankruptcy Act as applied to the administration of the winding up 14, of Isabella by s.438(2) of the Companies (Western Australia) Code. It reduces to the question whether there have been "mutual credits, mutual debts or other mutual dealings" between the Clunes and Isabella so that an account may be taken of the sums due from one to the other in respect of those mutual credits, debts and dealings, and the sum so calculated set off. It is important in this case to note that the relevant time for ascertaining whether there are mutual credits, debts or other dealings between the insolvent company and its creditor is the date of the liquidation of the company ~—- Day & Dent Constructions Pty Ltd (In Lig.) v North Australian Properties Pty Ltd (Provisional Liquidator Appointed) (1982) 150 CLR 85, 91, 98; Hiley v Peoples Prudential Assurance Co. Ltd (1938) 60 CLR 468, 480, 487, 490, 495-6; In re Fenton. Ex parte Fenton Textile Association Ltd (No. 1) (1931) 1 Ch.85, 105; In re Daintrey. Ex parte Mant [1900] 1 QB 546, 555, 572. It does not matter that, as at the date of liquidation, the liability of one of the parties is merely contingent and only becomes a fixed liability at a later date:- ",..the general rule does not require that at the moment when the winding up commences there shall be two enforceable debts, a debt provable in the Liquidation and a debt enforceable by the liquidator against the creditor claiming to prove. It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off." - Hile v Peoples Prudential Assurance Co. Ltd (supra) at 496-7 (Dixon J) See also Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (supra) at 3-107 (Mason Je). 15. The liability of the Clunes or their trustee to account for the proceeds of the wheat sales received by them arises because it is the company's money that they have received. The company's entitlement arises because of their activities as its agents. Payment of the proceeds to them was part of an established course of conduct and indeed, on the basis that they were acting as agents for an undisclosed principal, they may have been able to enforce such payment. In my opinion, although the payments received by their trustee post-dated the liquidation of the company, their obligation to pay the proceeds to the company was a liability arising out of mutual dealings which pre-dated the liquidation. It has been said that the object of s.86 is the protection of those who engage in mutual dealings with a bankrupt and that being a protective provision, it should be given a_ wide scope — Re Fenton (supra) at 104-105 (Lord Hanworth MR). In my opinion it is consistent with that purpose and the proper construction of the section to treat the liability of the Clunes and thesr trustee to pay the proceeds of sale across to Isabella as arising out of mutual dealings which also generated the right to indemnity. Having regard to the foregoing matters I am prepared to make the declaration sought 1n this case, being, 1n my opinion, empowered to do so by s.30 of the Bankruptcy Act. 16. I certify that the preceding fifteen (15) pages are a true copy of the Reasons for Judgment of his Honour Justice French. Associate: Dehrowroly Wy Ko KR Date: AO Sut IFS Counsel for the Applicant: Mr L. Christensen Solicitors for the Applicant: Messrs. Phillips Fox No appearance for the Respondent Date of Hearing: 22 December 1987 Date of Judgment: 20 July 1988