Loading...
Queensland Judgments

beta

Authorised Reports & Unreported Judgments
Exit Distraction Free Reading Mode
  • Unreported Judgment

Desmond William Knight v Octavo Investments Pty. Ltd.

 

[1979] FC 19

Petition No. 129 of 1977

DESMOND WILLIAM KNIGHT and GORDON ERIC LAWSON

(Applicants) Respondents

-v-

OCTAVO INVESTMENTS PTY. LTD.

(Respondent) Appellant

Petition No. 130 of 1977

DESMOND WILLIAM KNIGHT and GORDON ERIC LAWSON

(Applicants) Respondents

-v-

OCTAVO INVESTMENTS PTY. LTD.

(Respondent) Appellant

___________________________________

Hoare J.

W.B. Campbell J.

Andrews J.

___________________________________

Judgment delivered by Hoare J. on the 28th March, 1979. W.B. Campbell J. and Andrews J. concurring with those reasons.

___________________________________

“APPEAL DISMISSED WITH COSTS.”

___________________________________

IN THE SUPREME COURT OF QUEENSLAND

Petition No. 129 of 1977

BETWEEN:

DESMOND WILLIAM KNIGHT and GORDON ERIC LAWSON

(Applicants) Respondents

- and -

OCTAVO INVESTMENTS PTY. LTD.

(Respondent) Appellant

Petition No. 130 of 1977

BETWEEN:

DESMOND WILLIAM KNIGHT and GORDON ERIC LAWSON

(Applicants) Respondents

- and -

OCTAVO INVESTMENTS PTY. LTD.

(Respondent) Appellant

JUDGMENT - HOARE J.

Coast Line Distributors Pty. Ltd. (Coastline) was incorporated on 1st April 1975 with a capital of five one dollar shares each held by its five directors. These directors were also the directors of Octavo Investments Pty. Ltd. (Octavo). Coast Line was wound up by an Order of 25th August 1977 upon a petition presented on 26th July 1977. Within six months before the presentaties of the petition Coast Line made various payments to Octavo totalling $49,750.00 the first of such payments having been made on 28th January 1977. The liquidators of Coastline, Desmond William Knight and Gordon Eric Lawson applied pursuant to the provisions of section 293 of the Companion Act for a declaration that the payments were void as against the liquidators and for an order for repayment. Having heard a considerable volume of evidence Connolly J. held that at all material times Coastline was insolvent and that the various payments made to Octavo were void pursuant to the provisions of section 122 of the Bankruptcy Act 1966-1976 which of course is applied by Section 293 of the Companies Act. One of the arguments presented by Octavo was that because Coastline was, in effect, a trustee, section 122 of the Bankruptcy Act could not apply. It was submitted that because all property held by Coastline was trust property, such property does not vest in the trustee in bankruptcy (Bankruptcy Act section 116(a)). His Honour accepted this broad proposition but after analysing a number of authorities, held that a trustee in the position of Coastline had a right of indemnity or lien on the trust property by way of security for his right to be indemnified out of that property; that upon the bankruptcy of a trustee who carries on a business with the authority of the beneficiaries the right of indemnity passes to the trustee in bankruptcy and that the trustee in bankruptcy is entitled to have the property remain available for the purposes of the indemnity to which the bankrupt is prima facie entitled. His Honour accordingly held that the payments would be treated as void against a trustee in bankruptcy and that in the case of a company by the operation of section 293 of the Companies Act, the payments in question are, in like manner void as against the liquidators. His Honour accordingly made an appropriate declaration and orders.

Octavo Investments Pty. Ltd. appeals on the following grounds:—

“1. His Honour erred as a matter of law in holding that, had Coastline Distributors Pty. Ltd. been an individual, its trustee in bankruptcy would have had a proprietary interest in the funds paid over to Octavo Investments Pty. Ltd.

  1. His Honour erred as a matter of law in holding that Section 122 of the Bankruptcy Act 1966 (as amended) (Commonwealth) applied to the transfer of the funds which had taken place to the Appellant.”

Before us counsel for the appellant, Octavo Investments Pty. Ltd., does not dispute the validity of His Honour's findings that Coastline was at all relevant times unable to pay its debts as they became due and that the effect of the payments to Octavo was to give it an advantage over other creditors and that the relevant directors had reason to suspect the matters referred to in s. 122(4)(c)(1) and (2) of the Bankruptcy Act. Thus His Honour's finding that the appellant must be deemed not to be a payee in good faith was not challenged.

As the notice of appeal indicates what was challenged was the basis for His Honour's determination that although the assets of Coastline were held in trust nevertheless for the reasons stated in detail by His Honour, section 293 of the Companies Act and section 122 of the Bankruptcy Act applied to the payments in question.

I am satisfied that the conclusions reached by Connolly J. were correct and that the orders made in relation to the payments should stand. However, I rather prefer a somewhat different process of reasoning to arrive it that result. In my opinion it is necessary to give consideration to the circumstances under which it is said that Coastline was a trustee of all its property with the results contended for by counsel for the appellant.

By a Deed bearing date 16th April 1975 between Michael John Hetherington as settlor and Coastline of the other part, a trust was created and Coastline as trustee agreed to stand possessed of the trust fund including all additions to it upon trust for five named proprietary companies which are in turn the trustees of each of the director's respective family trusts. The provisions of the Deed of trust show that it was intended that the trustee would carry on business and in fact it embarked on a business enterprise almost immediately upon its incorporation. Clause 15 of the Trust Deed contained a number of provisions empowering the trustee inter alia to purchase, sell, transfer, mortgage, charge, let, grant licenses over, hire, lease, exchange any real and/or personal property forming part of trust and for that purpose to do all acts and execute all instruments, deeds, documents and writings which the trustee may consider expedient. Wide powers of investment were conferred on the trustee. The trustee is authorised “to carry on any business either solely or in partnership with any other person or persons ... and for that purpose to retain and employ in the said business the whole or any part of the trust fund ... and to expend any monies forming part of the trust fund in managing and carrying on the said business. There was also power to mortgage and borrow monies”.

Counsel for the appellant does not dispute the authorities relied on by Connolly J. as establishing the proposition that all property held by Coastline at the date of winding up would pass to the liquidators with the same charge or lien in support of its indemnity which the company had in respect of debts incurred by the company. However he submits that the charge or lien only existed to the extent that assets were held by the company at the time of winding up and that there was no power to require monies which had been paid by the company, to be repaid to the liquidators. He bases his argument on a consideration of sections 116 and 122 of the Bankruptcy Act. He also points out that while a trustee has a right of indemnity against beneficiaries the appellant was not a beneficiary, that Octavo was in fact a creditor and he submits that when the payment was made, its character as trust funds had changed and the indemnity no longer existed. He also referred to an article by Mr. Lee in 47 A.L.J. pp. 371-372.

Counsel for the appellant concedes that if his submissions are soundly based a very wide door would be opened whereby business could be entered into by a company as a trustee for others and payments could be made to creditors of that company, whoever they may be, in complete disregard of the provisions of section 293 of the Companies Acts enabling the setting aside of preferences in the event of that company being wound up. He submits that any possible adverse consequences are for the legislature to correct.

It is important to remember that there is a fundamental difference between the effect of a winding up order made against a company and the consequences of a sequestration order made on bankruptcy. In the case of a sequestration Order only the property of the bankrupt in which the bankrupt held a beneficial interest of some kind passes to his trustee in bankruptcy. As the English authorities referred to by Connolly J. establish, the right of indemnity which a bankrupt trustee has in respect of property held by him in trust will also pass. But there are marked differences between a company winding up and a bankruptc. In the case of a company winding up the assets of the company as they existed immediately before winding up remain vested in the company, unless an order vesting property in the liquidator is made under section 233. (Ayerst v. C. & K. (Construction) Ltd. 1976 A.C. 167 at p. 177). The company remains in existence but the directors are replaced by the liquidator.

“Winding up, whether voluntary or by the Court, does not effect a ‘cessio bonorum’, as does bankruptcy but the company's property remains vested in it as before” (Buckley 13 Edn. p. 513 citing re Webb (1922) 2 Ch. 369 at pp. 388 and 395; re Farrow's Bank (1921) 2 Ch. 164; re Wright (1949) Ch. 729. See also Gower, Modern Company Law 3rd Edn. p. 647 and p. 655).

There is no need to refer to the Bankruptcy Act to determine whether any particular assets and property rights of the company remain in being after a winding up order has been made.

The provisions of the Deed of Trust indicate that at the time it was entered into it was intended that Coastline would actively engage in business activities. It was not intended that it would be a comparatively inactive Trustee merely holding property in trust for another. It was never envisaged that the relationship being created between Coastline as Trustee and the beneficiaries under the Deed of Trust would be one under which the beneficiaries could at any time require the Trustee to deliver over the trust property or any part thereof. What was intended was that Coastline would actively engage in business activities and meet the normal financial and other commitments of such business. Any surplus after meeting those commitments would be available to the beneficiaries under the Trust. On the evidence there never was available any surplus. At all relevant times there was a deficiency of assets. Coastline did not have the resources to meet all its debts as they fell due.

No doubt it is true in a general sense that the property of Coastline was trust property. But it was trust property of a rather special kind. The beneficiaries could not have required Coastline to pay over any part of the moneys which are said to have constituted a preference. The reason why the beneficiaries would have had no such right is that the moneys had become part of the assets of Coastline necessary for carrying on the business which the deed of 16th April 1975 required and intended it to do.

Third parties would necessarily deal with the company on the basis that it was a normal business enterprise. In these circumstances, so far as concerns Coastline's dealings with all third parties, it cannot be established that its assets were of any different character from those of any other business enterprise. Coastline's asset were subject to such mortgages charger, or liens as were created or applied by the general law. The company was subject to the various provisions of the Companies Act (including Section 293) as any other trading company. Thus the Bankruptcy Act provisions applied and the order made by Connolly J. was obviously correct.

The problem may also be approached in another way similar to the way it was dealt with by Connolly J. It is clear that a trustee who trades is personally liable to creditors for debts incurred in the course of such trading (Vacuum Oil Co. Pty. Ltd. -v- Wiltshire (1945) 72 C.L.R. 319 at p. 324 and p. 335). In respect of such debts, the trustee has a right to an indemnity secured by a charge or lien over the trust property including property acquired in the course of trading (ibid). Although creditors have no direct recourse against trust property they are entitled to be subrogated to the rights of the trustee to an indemnity (Jennings -v- Mather (1901) 1 K.B. 108 at pp. 113 to 115); re Johnson, Shearman -v- Robinson (1880) 15 Ch. D. 549 at p. 552). Upon bankruptcy the right of indemnity and the charge or lien to secure it passes to the trustee in bankruptcy (Jennings v. Rather (supra) at p. 117; St. Thomas's Hospital v. Richardson (1910) 1 K.B. 271 at 278-279 per Fletcher Moulton L.J. at pp. 278-279). The right of indemnity is a right of property in such of the assets of the insolvent estate as are trust property. Retention of the property is necessary to give effect to the right of indemnity. Thus both the legal estate and the right to possession of the trust property each vest in the trustee in bankruptcy (St. Thomas's Hospital -v- Richardson (supra) at pp. 277 and 284; Morgan -v- Swansea U.S.A. (1878) 9 Ch. D. 582 at pp. 585 Williams on Bankruptcy 17th ed. p. 268, 18th ed. at p. 289 to 290.) It seems to me that the impugned payment in “property” which would vest in the trustee in bankruptcy to enable the creditors to receive the benefit of the charge or lien to which they are entitled through the trustee of the trust property.

In my opinion the appeal should he dismissed with the usual consequences.

The same reasoning applies to the order made in Coastline Distributors (Northern Rivers) Pty. Ltd. and that appeal should also be dismissed.

Close

Editorial Notes

  • Published Case Name:

    Desmond William Knight v Octavo Investments Pty. Ltd.

  • Shortened Case Name:

    Desmond William Knight v Octavo Investments Pty. Ltd.

  • MNC:

    [1979] FC 19

  • Court:

    QSC

  • Judge(s):

    Hoare J., Campbell J., Andrews J.

  • Date:

    28 Mar 1979

Litigation History

No Litigation History

Appeal Status

No Status