In Rambaldi v Commissioner of Taxation, in the matter of Alex (Bankrupt),1 the Full Court of the Federal Court considered whether a Quistclose trust had arisen in circumstances where a third party lender paid a tax debt relating to a subsequently bankrupted individual.
In the primary case the bankruptcy trustee of a Ms Athina Alex (Trustee), claimed that a payment made to the Commissioner of Taxation (ATO) five months prior to sequestration orders being made was a preference pursuant to section 122 of the Bankruptcy Act2 (Act), based on the following timeline:
The effect of this preference (at least on the Trustee’s analysis) was that the transfer to the ATO was void against the Trustee.
At first instance, the Trustee submitted that when QAI loaned the money to Ms Alex, it became her property, and so when it was paid to the ATO, a preferential payment pursuant to section 122 of the Act took place.
The ATO accepted the fact of the payment and existence of a preference, priority or advantage but submitted that the loaned money was in fact the subject of a Quistclose trust, and thus was never beneficially the property of Ms Alex. As such, it was not possible for a preferential payment to have taken place. The ATO relied heavily on the fact that the loan agreement explicitly stated that the money was only to be used to pay the ATO, and impliedly, in default it was held on trust to be repaid to QAI. The ATO relied on the principle from Barclays Bank Ltd v Quistclose Investments Ltd3 that:
Where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied… a stipulation that if the purpose fails the money will be repaid.4
On appeal the Trustee submitted the primary judge erred in his application of section 122 of the Act, in particular his findings that the QAI payment was not beneficially owned by Ms Alex and that beneficial ownership was required for there to have been a transfer for the purposes of section 122.
Moreover, the Trustee argued that the existence of a Quistclose trust was not inconsistent with the finding that there has been a ‘transfer’ (by analogy to cases concerning ‘transactions’) under the Corporations Act.5
While the primary judge held that a Quistclose trust had arisen (as the purpose for which the money could be used was explicitly set out in the loan agreement), on appeal, the Full Court held that no Quistclose trust had arisen (as the QAI payment had never in fact transferred to Ms Alex legally or beneficially). However, the Full Court held that, in any event, no preferential payment had been made as the money was transferred directly from QAI to the ATO.
Trustees should carefully consider the nature of any third party payments ‘on behalf of’ a bankrupt and examine the nature of any transfer which has taken place, so that property the subject of a Quistclose trust, or a direct third party transfer, is not mischaracterised as a preferential payment.
  FCAFC 217.
 1966 (Cth).
 (1970) AC 567.
 Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335.
 2001 (Cth).