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07
May 2018

Quistclose, but no cigar: preference claims and transactions made for a specific purpose

In the recent decision of Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCA 567 the Full Court of the Federal Court of Australia dismissed an appeal by a bankruptcy trustee of a finding by the Federal Court that a loan to a bankrupt to pay a debt owed to the Deputy Commissioner of Taxation was not a preference within the meaning of section 122 of the Bankruptcy Act 1966 (Cth) (Act).

Background

On 18 March 2014, the Deputy Commissioner of Taxation (DCT) filed a bankruptcy petition against Ms Alex (Bankrupt). On 8 December 2014, the Federal Circuit Court of Australia made a sequestration order and trustees (Trustees) were appointed to the Bankrupt’s estate.

The bankruptcy notice the subject of the creditor’s petition served by the DCT required payment by the Bankrupt on or before 15 November 2013.

Prior to the date of the making of the sequestration order, the DCT received a bank cheque in the sum of $118,071.62, which was applied to the debts owed by the Bankrupt. A company, Quality Australia Investments Pty Ltd (QAI), advanced the money used to make the payment pursuant to a loan agreement (Loan Agreement) entered into between QAI, the Bankrupt and another company controlled by her.

The Loan Agreement provided that the advance was, in summary, for the payment of the debt owed by the Bankrupt to the DCT and her legal fees. In particular, clause 4 of the Loan Agreement provided:

[The Bankrupt] must only use the loan for the purpose presented to [QAI], namely the payment of the Income Tax Debt relating to [the Bankrupt] owed by her to the Australian Taxation Office and payment to [the Bankrupt’s legal representatives]. The lenders’ cheque for the loan will be drawn [in favour of] the Deputy Commissioner of Taxation”.

The Bankrupt was required to repay the loan on or before 1 December 2014.

Following their appointment, the Trustees commenced proceedings against the DCT claiming the Payment had the effect of giving the DCT a preference, priority or advantage over the Bankrupt’s other creditors.

Voidable preferences

Section 122(1) of the Act relevantly provides:

A transfer of property by a person who is insolvent (the debtor ) in favour of a creditor is void against the trustee in the debtor’s bankruptcy if the transfer

  1. had the effect of giving the creditor a preference, priority or advantage over other creditors; and
  2. was made in the period that relates to the debtor, as indicated in the following table.

In this case, the relevant period was the 6-month period prior to the presentation of the creditor’s petition by the DCT.

Pursuant to section 58 of the Act all property (or after acquired property as the case may be) vests in the registered trustee of that particular bankrupt estate.

Quistclose trusts

The term “Quistclose trust” comes from the House of Lords decision in Barclays Bank Ltd v Quistclose Investments Limited [1970] AC 567 (Barclays), in which one party lent money to another party to pay money owed to a third party on the basis that the money would be used for the sole purpose of discharging that debt. In this regard, Lord Wilberforce said the following:

“arrangements of this character for payment of a person’s creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years.”

The money advanced for a specific purpose does not become part of the bankrupt’s estate (Lord Wilberforce at 580-581 referring to the decision in Toovey v Milne [1819] 2B & A 683).

The decision in Barclays, that money advanced with the mutual intention that it will be used for a specific purpose, failing which it will be held on implied trust for the lender, has become settled law in Australian.

The primary Judge’s decision

At first instance, the DCT contended that the funds loaned to the Bankrupt were not property of the Bankrupt, but rather held on a Quistclose Trust for payment to the DCT, or in the event of default, repayment to QAI. As such, the DCT argued that the money advanced by QAI did not form part of the Bankrupt’s property and were not caught by section 121 of the Act.

The primary judge agreed with the DCT’s submission that the funds were not property beneficially held by the Bankrupt.

The Trustees’ submissions

On appeal, the Trustees submitted, among other things, that:

  • section 122 did not require the impugned property to be beneficially owned by the Bankrupt to be caught;
  • the Bankrupt had actual legal title to the bank cheque/the moneys represented by the bank cheque (which vested in the Bankrupt upon her being delivered the bank cheque);
  • the Bankrupt exercised her legal rights as legal owner of the bank cheque by presenting it to the bank for payment to the DCT; and
  • the Bankrupt obtained legal title to the bank cheque prior to presenting it for payment.

The decision of the Full Court

Whilst the intention of the loan agreement was to create a Quistclose Trust, the Full Court outlined that this would only have arisen had the money been advanced to the Bankrupt. As such, the Full Court found that the necessary settlement of a fund that would have given rise to a fiduciary relationship of trust did not exist.

Despite the Full Court finding that a Quistclose Trust did not exist, the Trustees were ultimately unsuccessful. In rejecting the Trustees’ submissions, the Court found that there was no transfer of property to (in receiving the moneys from QAI) or by (in paying the DCT), the Bankrupt. The payment to the DCT was at all time a transaction of QAI, rather than the Bankrupt. The Full Court distinguished this from a corporate insolvency context, where payments made on or behalf of an insolvent company have ultimately been considered a preference.

Our views

The Court’s commentary on the Quistclose Trust (even though it was not the determining factor of the case) is interesting reading for trustees. Where such a scenario exists, it is unlikely to give rise to a claim for a preferential payment as the transaction will not constitute property of the bankrupt capable of being caught by section 122 of the Act.

For further assistance or information, please contact us.