High Court clarifies rules on loan agreements and bankruptcy trusteeship

OUTCOME: Allowed

High Court of Australia Dixon C.J. McTiernan, [NAME], Fullagar and Kitto JJ. [NAME] v [NAME] [1954] HCA 33

ORDER Appeal allowed with costs. Order dated 28th January 1954 of the Supreme Court exercising jurisdiction in bankruptcy discharged. In lieu thereof order that the motion be dismissed with costs.

Cur. adv. vult.

[ADDRESS] delivered the following written judgment:—

Aug. 4 Dixon C.J., [NAME] and [NAME] JJ.

This is an appeal against an order of the Supreme Court of Queensland exercising the federal jurisdiction conferred by the Bankruptcy Act 1924-1950. The appeal is brought pursuant to s. 73 (ii.) of the Constitution and s. 26 (2) of the Bankruptcy Act. The order which was made by Hanger J. declared, on the motion of the [NAME], who is the respondent to the appeal, that certain property was held by the appellant in trust for a bankrupt. The bankrupt is one [NAME] who, before his bankruptcy, engaged in the conduct of a business of a [NAME] in Toowoomba. It appears that in the early part of 1950 [NAME] was inspired by a desire to purchase the business of [NAME], the [NAME] in question. An agreement was actually drawn up for the purchase by [NAME] of the business from the proprietor, [NAME]. [NAME] held the premises under a sub-lease expiring on 30th January 1954 containing a covenant not to assign without the written consent of the head [NAME] and [NAME]. There was nothing to recommend [APPELLANT] to the [NAME] or to the [NAME] as a tenant and, indeed, nothing to recommend him as a purchaser to [NAME]. In point of fact he lacked money and was not a person of any substance. The proposed purchase, therefore, could not go on. Finding himself not in a situation to proceed with it [APPELLANT] resorted in his need to the appellant [APPELLANT]. [APPELLANT] was prepared to find the money for the purchase price, a sum of £2,300, and so make the purchase possible. The draft agreement was altered by striking out [NAME] name and substituting that of [NAME] as purchaser. There was no difficulty about [NAME] securing the approval of the [NAME] and [NAME] as the assignee of the lease or fulfilling the contract of purchase. An assignment to him of the sub-lease was executed. It was not registered under the Real Property Act until 12th March 1952 but that is not material. [NAME] paid the whole of the purchase money to [NAME]. It was, however, [NAME] who was placed in possession of the premises and who actually proceeded to conduct the business. Moreover, in February 1952 he was registered under the Firms Act as constituting the firm called [NAME].

The first step in the case is to determine the true nature of the transaction between [NAME] and [NAME]. [NAME]. did not find it easy to ascertain the true character of the relationship because he was not prepared to rely upon the evidence of [NAME] and because, as is apparent, [NAME] evidence was vague, contradictory and elusive, and because in any case the latter's credibility was of no high order. It is unnecessary to discuss the facts or the evidence. It is enough to say that we agree in the view that Hanger J. adopted. [NAME] found that the relationship between [NAME] and [NAME] was that of [NAME] and [NAME] and that the assets were taken in the name of [NAME] by way of security for the loan. But he found too that it was a term of the loan that [NAME] should pay to [NAME], not the sum of £2,300 constituting the purchase price, but a sum of £2,550, a term that in the learned judge's opinion contravened s. 14 of [NAME] 1916 to 1946 prohibiting charges in the nature of procuration fees. [NAME] found that in addition interest was to be charged at five per cent per annum. There is but slender evidence of this fact, but we think that the finding was justified. To state the transaction between [NAME] and [NAME] more precisely, its terms were that [NAME] should pay to the vendor [NAME] the sum of £2,300 constituting the purchase price and do so by way of advance to [NAME], that [NAME] should become the purchaser from [NAME] in order that he might have as a security the property in the lease, the plant and other assets of the business, except stock, which was separately purchased by [NAME], and that [NAME] should pay to [NAME] within a reasonable time £2,550, with interest at five per cent per annum in the meantime.

It will be seen that [NAME] became the legal owner of the lease, plant and assets of the business other than stock as a mortgagee. [NAME] became entitled to an equity of redemption; there was no defeasance drawn up in writing, but [NAME] equity to redeem arose from the fact that [NAME] obtained the legal title in order to secure repayment of the loan together with interest and the additional sum of £250. He was entitled to have the property transferred to him upon paying £2,550 with interest according to the terms of the oral contract.

It seems to be clear enough that the addition of the sum of £250 to the amount advanced is of a description that if charged recovered or received would fall within the first paragraph of s. 14 of [NAME] 1916 to 1946 Q.. The material words of that paragraph provide that it shall not be lawful for any person to charge, recover, or receive, directly or indirectly, any moneys for or in respect of the making of any loan. [NAME]. held that the transaction violated this provision. [NAME] then proceeded to apply sub-s. (2), which provides that every contract made or entered into or transaction entered into or performed in breach of or with intent to evade or avoid the section shall be absolutely void. The result of applying the section was, in [NAME]'s view, to make the entire transaction void and to leave [NAME] in the position of trustee. It was on that basis that the declaration was made declaring him to be a trustee of the sub-lease and other assets of the business for the [NAME] as a trustee of [NAME] estate.

We think that there are two answers to this conclusion on which we are prepared to base our decision. But before dealing with them it is desirable to refer to a question concerning the application of the first paragraph of s. 14 to the transaction at the stage which it had reached. It is a question whether upon their true meaning the words "to charge, recover or receive" cover the mere making of the verbal contract that [NAME] should pay and [NAME] should receive the additional sum of £250. That is to say it is suggested that it is not enough that a mere executory promise should be made to pay moneys of the forbidden description; a violation of the paragraph does not take place unless and until there is either a recovery or a receipt of the money or something amounting to a charge in account which would be tantamount to payment. Much support for this suggestion is found in sub-s. (3), and perhaps a little more in the second part of sub-s. (2) of s.

14. The latter provision says that any money or money's worth directly or indirectly paid or allowed to or received by any person in contravention of the section may be recovered by the [NAME] from such person. This looks as if the words "paid or allowed to or received" are regarded as synonymous with "charge, recover or receive". Sub-section (3) uses in the same context the identical words of par.

1. It provides that any person guilty of an offence against the section shall be liable to the penalty provided, and, in addition, upon conviction the court may order him to repay any moneys charged, recovered or received by him contrary to the provisions of the section. It seems clear enough that the word "charged" in sub-s. (3) refers to some deduction, charge in account or other means of placing the [NAME] in funds or imparting to him the actual benefit of the moneys of the forbidden description. It is suggested that it has the same meaning in the first paragraph of s.

14. This would mean that although the sum of £250 if paid would have borne the character of moneys "charged or received for or in respect of the making of a loan", a breach of the section had not occurred because the actual charging or receiving lay in the future. Except for this point there can be no doubt that the sum of £250 was of the forbidden description. It is true that it was exacted by the [NAME] himself and not an agent or third party, but there is nothing to exclude the [NAME] from the category of persons upon whom the prohibition should operate.

We are disposed to think that the words in sub-s. (2) "every contract made" contemplate an executory contract to charge or receive moneys of the kind in question, notwithstanding the difficulties which the words "in breach of this section" must occasion in view of the foregoing considerations. We therefore pass to the two matters which appear to us to afford answers to the declaration made.

In the first place we are of opinion that upon the proper construction of sub-s. (2) of s. 14, having regard to the subject matter and the context, it does not mean to annihilate any more of a transaction comprising a charge, recovery or receipt obnoxious to the first paragraph of s. 14 than affects or relates to the moneys of the prohibited description. It does not avoid the whole transaction of which the charge in the nature of a procuration fee forms only an incident or part. It may be that the words of sub-s. (2) "every contract made or entered into or transaction entered into or performed in breach of this section" are capable of an application extensive enough to cover the entirety of the contract or transaction which contains a term or provision for a charge or recovery or receipt of moneys of a forbidden description. But they are equally capable of an application restricted to the term or condition which contravenes the first paragraph of s.

14. Statutory provisions invalidating transactions are not to be construed more widely than their language requires or the purpose of the legislation demands. In In re [NAME]; Ex parte [NAME] [1] , [NAME]., delivering the judgment of the Court of Appeal, said:—"In our judgment, clauses in statutes avoiding transactions or instruments are to be interpreted with reference to the purpose for which they are inserted, and, when open to question, are to receive a wide or a limited construction according as the one or the other will best effectuate the purpose of the statute (per [NAME]. in [NAME] v. [NAME]. [2] " [3] . The evident policy of this legislation is to penalize and prevent the exaction of what may briefly be described as payments in the nature of procuration fees and to require the repayment thereof if they are obtained. There is no reason to suppose that it was intended to destroy the validity of the entire transaction if such an exaction forms an incident in it or is attendant upon it. It is to be noticed that the sum of money which is recoverable by the [NAME] under the second part of sub-s. (2) is the money or money's worth paid, allowed to or received by any person in contravention of the section, not the full loan, if it has been repaid in full, or so much as has been repaid. In the same way, under sub-s. (3) when the court imposes a penalty for an offence against the first paragraph of sub-s. (1) the court cannot order the repayment of any moneys except moneys charged, recovered or received contrary to the provisions of the section. These considerations point to the conclusion that sub-s. (2) avoids only so much of the transaction as offends against par. 1 of s. 14 or, to express the same view in another way, it renders the transaction, not completely ineffectual, but ineffectual to accomplish a result offending against that paragraph. In the somewhat similar provision contained in s. 15 (2) express words are introduced limiting the invalidity of the particular transaction against which s. 15 is directed. It is to be invalid to the extent that it is in breach of that section. It is suggested that the legislature intended to draw a distinction between the two provisions in this respect. But the higher degree of probability is that each provision was based on the same policy and that the difference in expression is due to the accidents or exigencies of drafting.

1. (1888) 20 Q.B.D. 310. 2. (1854) 6 [NAME]. 270, at p. 275 [43 E.R. 1237, at p. 1239]. 3. (1888) 20 Q.B.D., at p. 314.

For the reasons given we construe sub-s. (2) as invalidating only so much of the arrangement between [NAME] and [NAME] as would result in requiring [NAME] to pay an extra £250. This conclusion accords with the decision of [NAME]. in [NAME] v. [NAME] [1] . [NAME] said of a contract of mortgage which included a procuration fee: "I cannot see that, because that stipulation is in contravention of the provisions of [NAME], the whole contract of mortgage is made unenforceable" [2] . After setting out the words of sub-s. (2) [NAME] proceeded: "It appears to me that that provision relates to the forbidden transaction of the extra charge or procuration fee" [2] . We think this view is to be preferred to that expressed by [NAME] J. in Re [NAME] [3] , or by [NAME]. in Re [NAME] [4] . From what has been said it follows that the transaction between [NAME] and [NAME] resulted in [NAME]'s becoming mortgagee of the sub-lease, plant and other assets of the business in respect of a debt of £2,300 with interest at five per cent, which debt was enforceable against [NAME] as a personal obligation as well as against the security. [NAME] is entitled to an equity of redemption on paying the sum of £2,300, with interest at five per cent, in the meantime.

1. (1939) Q.W.N. 36. 2. (1939) Q.W.N., at p. 63. 3. (1939) Q.W.N., at p. 63. 4. (1953) 16 A.B.C. 102; (1953) Q.S.R. 138. 5. (1953) 16 A.B.C. 247; (1953) Q.S.R. 219.

But in the second place we think that, even had our construction of the section been different, that is to say had we been of opinion that sub-s. (2) of s. 14 annihilated the whole contract or transaction which included the charge of the procuration fee, the invalidity could not have extended further than the debt for money lent. [NAME] entered into the contract with [NAME]. As between [NAME] and [NAME] it was a valid contract. He obtained an assignment of the lease from [NAME] and that assignment was registered. It was a valid assignment which, on no construction to which s. 14 (2) is possibly open, could that section invalidate. [NAME] therefore stood as the legal owner of the lease, the plant and assets of the business. The fact that the contract which imposed the personal liability for the debt was invalidated would not in itself be sufficient to entitle [NAME] to assert an unconditional equitable title to the property. It would leave him in much the same situation as if in a legal mortgage of real estate under the general law the personal covenant was invalidated. He would have no title in equity to the property except on terms that he himself did the essential equity of paying the amount provided by [NAME] to acquire the property. The mere invalidating of the contract of loan could not result in [NAME] becoming a bare trustee for [NAME] of the property which [NAME] had acquired in his own name in order to secure repayment of the sum provided. On the most favourable hypothesis to the respondent s. 14 did nothing more than destroy the contract of loan, leaving [NAME] legal owner of the assets. Neither expressly nor impliedly does it confer upon [NAME] any greater right to the assets than otherwise he would possess. No doubt [RESPONDENT] was, and the respondent as his successor in title is, entitled in equity to obtain the property in the sub-lease and assets, but only upon fulfilment of the condition or term that [NAME] should be repaid with interest the amount he provided or advanced in order to acquire the legal interest in the assets. This is the clear result of the principles explained and applied in [NAME] v. [NAME]. [1] ; [NAME] v. Handover [2] ; and [COMPANY]. v. [COMPANY]. [3] .

1. (1907) 1 Ch. 300. 2. (1929) 43 C.L.R. 334; (1929) 29 S.R. (N.S.W.) 435; 46 W.N. 46. 3. (1934) 34 S.R. (N.S.W.) 375; 51 W.N. 129.

On both the foregoing grounds we think that the appellant [APPELLANT] was not a trustee of the lease and the assets of the business but held them as security for the repayment of the amount of £2,300 with interest at five per cent per annum. The first ground we have given means that he is a creditor of the estate, but a secured creditor, the security being the property mentioned.

For these reasons we think the appeal should be allowed and the order of [NAME] J. discharged. In lieu thereof the application of the [NAME] to the Supreme Court in Bankruptcy should be dismissed.