Sutherland v Hanna (No 2) [2004] NSWSC 971

In a previous judgment (see case 900), it was held that while an undischarged bankrupt, Mr Hanna had exchanged contracts for the purchase of four blocks of land in a different name. The Court also found that his wife, had no equitable interests in the properties and concluded that the properties were vested in the trustee (Mr Sutherland) of the bankrupt estate of defendant as after-acquired property divisible amongst his creditors in terms of the Bankruptcy Act 1966 (Cth), s 58 and that the trustee was entitled to be registered as the proprietor of the properties.

The contracts for the purchase of the properties were in late 2000 and Hanna was discharged from his bankruptcy in July 2001.

Hanna and his wife then claimed that one or other or both of them made payments in respect of the properties under mortgages and in discharge of rates, taxes, insurance premiums and other outgoings after the date of his discharge from bankruptcy. They submitted that the Court should order that the properties stand charged with the amount of those payments. Alternatively, they submitted that the Court should order that the value of the interests that vested in the trustee be ascertained and, upon payment of that value together with interest, the trustee should be ordered to transfer the properties to Hanna. The trustee submitted that Hanna and his wife were not entitled to recompense for any gratuitous payments made by them in the absence of unconscionability on the part of the trustee or an estoppel against him, neither of which issues were raised during the hearing and it was now too late to reopen the hearing to determine those issues.

The after-acquired property of Hanna that vested in the trustee upon its acquisition in terms of the Bankruptcy Act 1966 (Cth), s 58(1)(b) was that acquired by Mr Hanna up until the date of his discharge from bankruptcy. It could not be the case that property acquired by him after discharge vested in Mr Sutherland for the benefit of the creditors of his bankrupt estate. While any payments made after July 2001 did not enliven s 58(1)(b), they were to be considered in terms of voluntary payments made to preserve or benefit the property of another.

The general principle is that such payments do not give rise to a right of repayment.

In Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234 at 248, Bowen LJ said:

“The general principle is, beyond all question, that work and labour done or money expanded by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure.”

 In Hill v Ziymack (1908) 7 CLR 352 at 364 Griffith CJ, with whom the other members of the Court agreed, applied the principle to deny a lien over property to a person who voluntarily paid off a mortgage over that property that belonged to another under a mistake of fact that was not caused or contributed to by the borrower.

Reference was made to Ex parte James. In re Condon (1974) LR 9 Ch App 609 in which a creditor obtained execution against a debtor before his bankruptcy but paid the amount in question to the trustee in the mistaken belief that the trustee was legally entitled to the funds. The trustee was ordered to repay the moneys. Sir Williams James, LJ

“With regard to the other point, that the money was voluntarily paid to the trustee under a mistake of law, and not of fact, I think that the principle that money paid under a mistake of law cannot be recovered must not be pressed too far, and there are several cases in which the Court of Chancery has held itself not bound strictly by it. I am of opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in his hands money which in equity belongs to someone else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of bankruptcy ought to be as honest as other people.”

That decision was followed in In re Clark (a Bankrupt) (1974) 1 WLR 559 on the basis that, in ignorance of the bankruptcy, the respondent had benefited the estate and it was manifestly unfair that it should be ordered to repay two cheques paid by the bankrupt during that period of ignorance.  In neither case was relief granted merely because the recipient of the benefit was a trustee in bankruptcy. In each case the trustee was unjustly enriched.

In Australia, the rigour of the basic principle is ameliorated where it would be unconscionable not to do so. In Morris v Morris (1982) 1 NSWLR 61 the plaintiff spent money on the defendant’s property in the expectation, induced or encouraged by the defendants, that he would be able to live there indefinitely as a member of their family. McLelland J concluded that it would be unconscionable and inequitable that the defendants retain the benefit of the expenditure. His Honour imposed an equitable charge in the amount of the expenditure plus interest. He observed that in an appropriate circumstance the remedy might well be the imposition of a constructive trust.

In O’Brien v Sheahan [2002] FCA 1292 the trustee in bankruptcy stood by for over four years before seeking vacant possession of the matrimonial home of the bankrupts. In that time they continued to make mortgage payments and carried out improvements to the property. In those circumstances, Carr J concluded that it would be unconscionable to allow the trustee to exercise those rights and he determined that the trustee was estopped from doing so.

Here:

  1. A constructive trust in favour of the wife was claimed at the previous hearing based upon her contribution to the discharge of the mortgages. The present issue was not raised.
  2. The evidence that was before the Court did not suggest that the trustee caused or encouraged the continued payments. He was not aware of Hanna’s use of the other name (the properties were purchased in) until well after his discharge from bankruptcy. 
  3. Nor was evidence adduced of the augmentation in value of the properties resulting from the payments so as to ground an argument that on an objective valuation of the benefit conferred by Hanna and his wife, it would be unconscionable for the trustee not to have to pay for it.

The court held therefore there was insufficient evidence to justify the imposition of a constructive trust.

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