Burman, Re [1991] QSC 270 [1993] 1 Qd R 49

IN THE SUPREME COURT OF QUEENSLAND CHAMBERS JURISDICTION No. 836 of 1991 IN THE MATTER.OF the "Trust Accounts Act 1973-1988" - and - IN THE MATTER OF contract between NEVILLE JOHN BURMAN and NOWLAND MOTELS PTY. LTD. & PEBBLE INVESTMENTS (NO. 9) PTY. LTD. - and - IN THE MATTER OF Messrs. Lees Marshall & Warnick ( a firm) JUDGMENT - RYAN J. Delivered the Twentieth day of September, 1991. Counsel: Mr. P. Dutney Q.C. with Mr. A. Stone for Applicant Mr. L. Harrison Q.C. with Mr. D. Cooper for Respondent Solicitors: Barry & Nilsson T/A for MacDonalds, Solicitors,Cairns for Applicant Lees MarshallRespondent & Warnick, Solicitors for Hearing Date: 5th September, 1991 -- 1 of 13 -- IN THE SUPREME COURT OF QUEENSLAND CHAMBERS JURISDICTION No. 836 of 1991 IN THE MATTER OF the "Trust Accounts Act 1973-1988" - and - IN THE MATTER OF contract between NEVILLE JOHN BURMAN and NOWLAND MOTELS PTY. LTD. & PEBBLE INVESTMENTS (NO. 9) PTY. LTD. - and - IN THE MATTER OF Messrs. Lees Marshall & Warnick ( a firm) JUDGMENT - RYAN J. Delivered the Twentieth day of September, 1991. Neville John Burman has applied for a declaration that on the true construction of the Trust Accounts Act 1973-1988, and the contract between Nowland Motels Pty. Ltd. and Pebble Investments (No. 9) ~ty. Ltd. as vendors and Neville John Burman as purchaser dated.21st October, 1988, that Messrs. Lees Marshall & Warnick are "trustees" as that term is defined in the Statute in relation to moneys held by them pursuant to Special Conditions 2 and 3 of the contract. He applies also for a declaration that Messrs. Lees Marshall & Warnick are obliged to pay into Court the moneys held by them pursuant to Special Conditions 2 and 3 of the contract. The contract is for the sale of a hotel and liquor barn for the sum of $14,138,720. The deposit is $1,250,000. Special Condition 2 is in these terms: -- 2 of 13 -- 2 "The deposit of $1,250,000 shall be paid by the purchaser as follows:- ( a) The sum of $250, 000 to the vendor forthwith upon execution of this contract by the parties hereto. (b) The sum of $1,000,000 (hereinafter called 'the balance deposit') to the stakeholder on the 30th day of November, 1988." Special Condition 3 provides: "The parties hereto authorise the stakeholder to invest the balance deposit referred to in Clause 2(b) hereof namely $1,000,000 in an interest bearing account with a bank or institute of finance under the authority of an Act of the State of Queensland or of the Commonwealth to the credit of a general trust account or a separate trust account and interest thereon shall accrue for the benefit of the vendor provided however if this contract is not completed by reason of the default of the vendor then the interest received thereon shall be the absolute property of the purchaser." Messrs. Lees Marshall & Warnick have acted as solicitors for the vendors . On 30 November, 1988, Mr. · Burman caused his solicitors to telegraphically transfer to the trust account of Messrs Lees Marshall & Warnick the sum of $1,000,000. Prior to the settlement date of the contract, Mr. Burman terminated the contract. On 3 July 1991, he had a writ of summons issued seeking return of the deposit moneys. The vendors have issued a writ of summons seeking specific performance of the contract. The two actions have been consolidated and directions given as to further conduct of the action. By a letter dated 8 July 1991 , Mr. Burman' s solicitors wrote to Messrs. Lees Marshall & Warnick requesting that they pay the deposit moneys held by them pursuant to the contract into Court in accordance with s. 12(4)(b) of the Trust Accounts Act 1973-88. On 19 August, 1991, Messrs. Lees Marshall & Warnick replied advising that they did not consider that the provisions of the Trusts -- 3 of 13 -- 3 Accounts Act applied in this situation and accordingly that they were not in a position to disburse the moneys unless with the consent of both parties to the contract. Mr. Sadler, a member of the firm Lees Marshall & Warnick, has deposed that pursuant to cl. 3 of the special conditions the balance deposit of $1,000,000 was subsequently invested with Hongkong Bank of Australia Ltd. on 8 December 1988, and it has remained on deposit with the bank since that time. He states that the writ seeking specific performance of the contract was issued on 2 July 1991. Subsequently the vendors elected to accept what he termed Mr. Burman's wrongful repudiation of the contract and to themselves rescind the contract in reliance upon it. They notified Mr. Burman's solicitors that they would amend their writ to delete the claim for specific performance and that they would proceed with their claim in damages. On 10 July 1991, Mr. Sadler was advised that 8 per cent simple interest on minimum monthly balance would be paid on moneys paid into Court. The interest rate then being earned at the Honkong Bank was 10.35 per cent per annum. As at 1 August 1991, the amount held by the Hongkong Bank of Australia was $1,477,971 . 67. Mr. Burman' s solicitors had required payment into Court of the principal sum of $1,000,000 due to uncertainty as to the tax position in respect of interest earned, but by the terms of their summons they now require payment into Court of the whole of the moneys. Section 7(1) of the Trust Accounts Act requires a trustee to establish and keep in a bank or banks in the State one or more trust accounts designated or evidenced as such into which he -- 4 of 13 -- 4 shall pay all trust moneys. Section 12 of that Act deals with disbursements from a trust account. Relevantly, it provides: "(3) Within 14 days of demand in writing made by the person for whom or on whose behalf trust moneys have been received or are held by a trustee and to which the person is then entitled the trustee shall pay to the person entitled thereto the balance of the moneys to which that person is entitled or as that person may direct in writing unless (4) Where, before the making of a payment pursuant to subsection (3), a trustee has received notice in writing from any person who was a party to the business, proceeding a transaction in respect of which the moneys were received that the ownership of the moneys is in dispute, the trustee shall not without the written consent of the parties make payment of any such moneys until such time as (b) he is advised that legal proceedings have been commenced to determine the ownership of the moneys whereupon he shall forthwith pay the moneys into thecourt in which the proceedings have been taken to abide thedecision of the Court." An examination of the terms of s. 12 of the Act discloses that the obligation of a person to pay moneys into court is made dependent on three conditions: (a) the recept of advice that legal proceedings have been commenced to determine the ownership of moneys; ( b) the moneys are trust moneys; ( c) the person receiving the advice is a trustee. The first question in this case is whether the moneys were received by Lees Marshall & Warnick as trustees in the sense in which that term is defined ins. 4 of the Trust Accounts Act. It is there defined to mean any solicitor, conveyancer or public accountant engaged in the practice of his profession, or the carrying on of his profession, as such either solely on his own -- 5 of 13 -- 5 account or in partnership with any other person or persons and who, or the firm of which he is a partner, in the course of such practice or carrying on of business receives any money upon trust or upon terms requiring him to account to any person therefor. It is convenient to consider with this question the further question whether the moneys were "trust moneys". This term is defined ins. 4 of the Act in relation to any trustee as meaning moneys received for or on behalf of any other person by the trustee in the course of or in connection with the practice of his profession or the carrying on of his business. It was submitted for the respondents that a stakeholder does not receive a deposit on behalf of any person but as a principal. Accordingly the moneys were not "trust moneys". It was further submitted that the respondents did not receive the moneys as solicitors, and accordingly that they were not "trustees". For the applicant, it was submitted that moneys held by a stakeholder are trust moneys, and that the moneys were received by the respondents as trustees, since they were received by them while acting in the course of or in connection with their practice as solicitors. For the first proposition, the applicant referred to Skinner v. The Trustee of the Property of Ried (1967) 1 Ch. 1194 at p. 1200, where Cross J. said that if a deposit is paid to a stakeholder, then subject to any express term in the contract, the stakeholder holds the deposit on trust to deal with it in different ways in different contingencies. He referred also to a statement by Lord Denning M.R. in Burt v. Claude Cousins & Co. (1971) 2 Q.B. 426 at pp. 435-6, that - -- 6 of 13 -- 6 "if an estate agent or a solicitor, authorised in that behalf, receives a stakeholder, he is under a duty to hold pending the outcome of a future event. hold it as agent for the vendor, nor as purchaser. He holds it as trustee for the event." being dulydeposit as it in medio He does not agent for the both to await For the second proposition, I was referred to two Victorian decisions. In Law Institute of Victoria v. Cowan [1973] U.R. 293 at 299, one question was whether a defalcation was of money or other property which in the course of or in connection with the solicitor's practice was entrusted to or received by him. It was held that there was evidence to support a finding that the money was entrusted to or received by the solicitor in the course of or in connection with the solicitor's practice. It was pointed out that the money was entrusted to or received by the solicitors for or on behalf of some person other than the solicitor himself, and that the money was delivered to the solicitor in the course of his practice. In Baker v. Law Institute of Victoria (1974) V .R. 388, it was held that certain bonds were received by a solicitor in the course of or in connection with the solicitor's practice, since the person who received them was a solicitor and represented that he was acting as a solicitor for a client. For the respondents, it was submitted that a stakeholder does not receive a deposit on behalf of a person but as principal, and that a solicitor who acted as stakeholder did not receive the moneys in question in his capacity as solicitor. I was referred in support of these submissions to Hastingwood Property Ltd. v. Saunders Bearman and Anselm (1991) Ch. 114. In that case, money had been paid under an agreement between the plaintiff and a company to solicitors for the company to be held -- 7 of 13 -- 7 as stakeholders in a deposit account. The company terminated the agreement under a provision contained in it, and in that case the deposit with accrued interest but less half the professional fees and expenses incurred was to be repaid to the plaintiff. The solicitors told the plaintiff that since half the expenses incurred to date already exceeded the deposit plus interest nothing was repayable to the plaintiff and that the bank had been instructed to close the deposit account. The plaintiff denied that the expenses in question were deductible from the deposit, demanded repayment of the deposit plus interest and sought confirmation that the funds were still held on deposit pending the resolution of the dispute by an arbitrator. The solicitors replied that the company was entitled to retain the full deposit plus interest and informed the plaintiff that the funds were no longer in the deposit account. The plaintiff claimed against the solicitors an order that the deposit account be reconstituted pending the resolution of the dispute and for damages for breach of this obligation as stakeholders under the agreement. The claim was dismissed. It is stated accurately in the headnote that it was held, giving judgment for the solicitors, that where a sum of money had been paid to a person as stakeholder and it was clear that the event had happened on which the stakeholder was to pay over the stake but there was a dispute between the parties as to which of them was entitled to receive payment, the stakeholder was not bound to retain the stake pending the resolution of the dispute; that neither party had any proprietary interest in the deposit but merely a contractual or quasi-contractual personal right of action to recover it from the -- 8 of 13 -- 8 solicitors dependent on the outcome of the event; and that, accordingly, since the remedy in a case where a stakeholder had wrongly paid out the stake was an action against the stakeholder in contract or for money had and received, the plaintiff was not entitled to an order that the deposit account be reconstituted. In the course of the judgment in that case, a passage was quoted from the judgment of Pennywick V.C. in Potters v. Leppert [ 1 9 7 3 ] Ch . 3 9 9 at pp. 4 0 5-6 . It relates to the position of contract deposits as opposed to pre-contract deposits. It is in these terms:- "Looking at the position apart from authority, one might perhaps at first sight rather expect that where any property is placed in medic in the hands of a third party to await an event as between two other parties the third party receives that property as trustee, and that the property and the investments for the time being representing it represent the trust estate. Where the property is something other than money for example, an investment that must, in the nature of things, almost certainly be the position. But where the property is money - that is, cash or a cheque resulting in a bank credit - this is by no means necessarily so. Certainly the money may be paid to the third party as trustee, but equally it may be paid to him as principal upon a contractual or quasi-contractual obligation to pay the like sum to one or other of the parties according to the event. It must depend upon the intention of the parties, to be derived from all the circumstances, including any written documents, in which capacity the third party receives the money ..• turning now to authority, it is to my mind conclusive that, apart from agreement to the contrary, a contract deposit paid to a stakeholder is not paid to him as trustee, but upon a contractual or quasi-contractual liability with the consequence that the stakeholder is not accountable for profit upon it. The decisive case on this point is Harington v. Hogqart (1830) 1 B. & Ad. 577." The headnote to that case reads: "An auctioneer who is employed to sell an estate, and who receives a deposit from the purchaser, is a mere stakeholder, liable to be called upon to pay the money at any time; and, therefore, although he place the money in the funds and make interest of it, he is not : -- 9 of 13 -- 9 liable to pay such interest to the vendor when the purchase is completed; though the vendor (without the concurrence of the vendee) gave him notice to invest the money in government guarantees." Lord Tenterden C.J. said, at p. 586:- "If an agent receives money for his principal, the very instant he receives it it becomes the money of his principal. If, instead of paying it over to his principal, he thinks fit to retain it, and makes a profit of it, he may ... be liable to account for the profit. Here the defendant is not a mere agent, but a stakeholder. A stakeholder does not receive the money for either party, he receives it for both; and until the event is known, it is his duty to keep it in his own hands. If he thinks fit to employ it and make interest of it, by laying it out in the funds or otherwise, and any loss occurs, he must be answerable for that loss; and if he is to answer for the loss, it seems to me he has a right to any intermediate advantage which may arise." I consider that it is impossible, in the light of this statement, to conclude that a stakeholder of a contract deposit is a trustee of the deposit for the parties to the contract. He does not receive the deposit on trust, but he does, in my opinion, receive it upon terms requiring him to account to one or other of the parties to the contract depending upon the outcome of an event. I consider also that where a stakeholder is named in the contract as the solicitor for the vendor, he receives the money in the course of his practice as a solicitor. I accept, as is stated in Hastingwood Ltd. v. Saunders Bearman at p. 126, that the fact that a stakeholder is a solicitor does not alter the nature of the stakeholder's obligations, but the fact that it is a solicitor who receives the deposit does have the effect that he becomes a "trustee" of the money as defined ins. 4 of the Trust Accounts Act. I consider also that the moneys are "trust moneys" since they are received by the trustee in the course of the practice of his profession as a solicitor, -- 10 of 13 -- 10 and in my opinion they are received "for or on behalf of any other persons", even though they are received by him as a principal, since he is obliged to pay the moneys (including the interest) to another person depending upon the outcome of an event. The critical question, in my view, is whether the trustee has been advised that legal proceedings have been commenced to determine the ownership of the moneys. Legal proceedings have been commenced to determine whether the contract was properly terminated by the purchaser or whether it was repudiated by the purchaser. Upon the determination of those proceedings will depend whether the vendor or the purchaser is entitled to the deposit moneys and interest thereon. It was submitted by senior counsel for the respondent that the proceedings were not to determine the ownership of the money; there was no claim in detinue and there was no proprietary interest of either the vendor or the purchaser in the deposit. See Hastingwood Ltd. v. Saunders Bearman at p. 123. But the meaning of the words "ownership of the moneys is in dispute" must be determined having regard to its context. Section 12(4) deals with a situation in which there is a transaction in respect of which moneys were received by a trustee ( as defined in s. 4) . If legal proceedings are commenced which will have the effect of determining which of the parties to the transaction will be entitled to be paid these moneys by the trustee, I consider that these are proceedings to determine the ownership of the moneys. Though neither of the parties will have a proprietary interest in the deposit, they will have the right to receive it from the trustee depending upon -- 11 of 13 -- 11 the court's determination of the legal proceedings which have been commenced. The issue is not one as between the trustee and the parties, but one between the parties themselves. In my opinion, the trustee is required by s. 12(4) in these circumstances to pay the money into the court in which the proceedings have been taken to abide the decision of the court. It was submitted for the respondent that s. 12(4) can operate only following a demand pursuant to sub-s. (3). I do not think that this is so. In my view, the effect of the introductory words of sub-s. (4) is merely that the subsection cannot operate if a payment is made pursuant to sub-s. 3, for the simple reason that the trustee will have already disbursed the trust moneys. But it does not depend for its operation upon the making of a demand pursuant to sub-s. (3). It was next submitted that the moneys were not subject to s. 12 because they had already been disbursed for investment pursuant to s. 8(2). But s. 8 is not concerned with disbursements from a trust account; it is concerned with withdrawals from a trust account, and in this case the payment of the money into the account with the bank was authorised by the contract. Finally, it was submitted that the applicant was not entitled to the order sought, since s. 254(1)(d) of the Income Tax Assessment Act 1936 requires every agent and trustee to retain out of any money which comes to him in his representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains. -- 12 of 13 -- 12 Ins. 6 of the Income Tax Assessment Act the word "trustee" is defined so as to include every person acting in any fiduciary capacity, and in my opinion the solicitor stakeholder is acting in a fiduciary capacity. For reasons I have already given, I consider that the trust moneys have come to the stakeholder as a principal, but by virtue of the terms of the contract he can derive no gain from his position; he is required to account for the deposit and interest thereon to the vendor or the purchaser. I consider therefore that the money comes to him in his representative capacity, and that he is therefore subject to the obligation laid bys. 254(1)(d). It was submitted for the respondent that any lawful claim which the Commissioner of Taxation may have against the moneys is preserved bys. 11 of the Trust Accounts Act. That does not however answer the point that if the respondent is required to retain out of the moneys he has received an amount sufficient to pay tax, he will breach that duty if he pays the whole of the money into Court to abide the order of the Court. Accordingly, I consider that he should pay the moneys into Court, but retain an amount sufficient to pay tax. I make the declaration sought in para. (a) of the summons. I make the declaration sought in para. (b) of the summons, but add "retaining thereout so much as is sufficient to pay tax which is or will become due in x:~spect of the income, profits or gains". I order that the respondent pay half the applicant's costs of this application. -- 13 of 13 --