Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp
[2023] FCA 702
•28 June 2023
FEDERAL COURT OF AUSTRALIA
Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp [2023] FCA 702
File numbers: NSD 853 of 2019
NSD 928 of 2021Judgment of: PERRAM J Date of judgment: 28 June 2023 Catchwords: BANKRUPTCY AND INSOLVENCY – application by trustees in bankruptcy to recover proceeds of sale of properties – whether transfers of property void against the trustees under ss 120 and 121 of the Bankruptcy Act 1966 (Cth) – whether alienation of property void against the trustees under s 37A of the Conveyancing Act 1919 (NSW) – whether property was held on constructive trust in favour of bankrupt – equity of exoneration – Anshun estoppel
BANKRUPTCY AND INSOLVENCY – application by trustees in bankruptcy to recover proceeds of sale of properties – whether proceeds held on trust for the bankrupt estate – whether trustees entitled to relief under ss 139D(2) and 139E(2) of the Bankruptcy Act 1966 (Cth) in relation to payments to trust for services provided by bankrupt – whether payments void against trustees under ss 120 and 121 – whether trustees entitled to relief under s 37A of the Conveyancing Act 1919 (NSW) on the same basis – whether trustees entitled to taking of accounts
Legislation: A New Tax System (Goods and Services Tax) Act 1999 (Cth)
Acts Interpretation Act 1901 (Cth) ss 2(2), 23(b)
Bankruptcy Act 1966 (Cth) ss 58, 120, 120(1), 120(7)(b), 121, 121(1)(b), 121(2), 121(9)(b), 139A, 139D, 139D(1), 139D(2), 139E, 139E(1) and 139E(2)
Income Tax Assessment Act 1936 (Cth)
Conveyancing Act 1919 (NSW) s 37A
Cases cited: Aravanis (Trustee) v Twin Investors Pty Ltd, in the matter of the Bankrupt Estate of Kapp (Standing of Third Respondent) [2021] FCA 359
Baumgartner v Baumgartner (1987) 164 CLR 137
Binetter v Commissioner of Taxation [2016] FCAFC 163; 249 FCR 534
Black v S Freedman (1910) 12 CLR 105
Bosanac v Commissioner of Taxation at [2022] HCA 34; 96 ALJR 976
Calverley v Green (1984) 155 CLR 243
Cambridge Gas Transport Corporation v Official
Caron v Jahani (No.2) [2020] NSWCA 117; 102 NSWLR 537
Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508
Commissioner of Taxation v H [2010] FCAFC 128; 188 FCR 440
Commissioner of Taxation v Rozman [2010] FCA 324; 186 FCR 1
Devaynes v Noble (1816) 1 Mer 529; 35 ER 767
Farrugia v Official Receiver in Bankruptcy (1982) 58 FLR 474
Gee v Liddell [1913] 2 Ch D 62
Hall v Poolman [2007] NSWSC 1330; 215 FLR 243
Jones v Dunkel (1959) 101 CLR 298
Muschinski v Dodds (1985) 160 CLR 583
Parsons v McBain [2001] FCA 376; 109 FCR 120
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Trustees of the Property of Cummins v Cummins [2006] HCA 6; 227 CLR 278
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Number of paragraphs: 340 NSD 928 of 2021 Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp Date of last submissions: 10 March 2023 Date of hearing: 5-6 December 2022 Counsel for the Applicants: Mr B Katekar SC and Mr A Combe Solicitor for the Applicants: O’Neill Partners Counsel for the Respondent: Mr R Glasson Solicitor for the Respondent: Drayton Sher Lawyers NSD 853 of 2019 Aravanis (Trustee) v The Trustee of the Twin Trust, in the matter of the Bankrupt Estate of Kapp Date of last submissions: 23 August 2021 Date of hearing: 28 July 2021 Counsel for the Applicants: Mr A Combe Solicitor for the Applicants: O’Neill Partners Counsel for the First Respondent: The First Respondent did not appear Counsel for the Second Respondent: The Second Respondent did not appear Counsel for the Third Respondent: Mr R Glasson Solicitor for the Third Respondent: Drayton Sher Lawyers ORDERS
NSD 928 of 2021 IN THE MATTER OF THE BANKRUPT ESTATE OF PHILIP JAMES KAPP
BETWEEN: ANDREW ARAVANIS & ANDREW CLARK AS TRUSTEES IN BANKRUPTCY OF THE BANKRUPT ESTATE OF PHILIP JAMES KAPP
Applicants
AND: MARYANN KAPP
Respondent
ORDER MADE BY:
PERRAM J
DATE OF ORDER:
28 JUNE 2023
THE COURT ORDERS THAT:
1.The parties provide a minute of order giving effect to these reasons within 14 days.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 853 of 2019 IN THE MATTER OF THE BANKRUPT ESTATE OF PHILIP JAMES KAPP
BETWEEN: ANDREW ARAVANIS AND ALEXANDER CLARK AS TRUSTEES IN BANKRUPTCY OF THE BANKRUPT ESTATE OF PHILIP JAMES KAPP
Applicants
AND: TWIN INVESTORS PTY LTD ACN 608 534 505 AS TRUSTEE OF THE TWIN TRUST
First Respondent
MARYANN KAPP
Second Respondent
PHILIP JAMES KAPP, AS TRUSTEE OF THE TWIN TRUST
Third Respondent
ORDER MADE BY:
PERRAM J
DATE OF ORDER:
28 JUNE 2023
THE COURT DECLARES THAT:
1.The Applicants are entitled to 35.94% of the proceeds of sale of the Swan Bay property.
THE COURT ORDERS THAT:
2.Mr Kapp, in his capacity as the trustee of the Twin Trust, pay to the Applicants out of the proceeds of sale of the Swan Bay property and, if necessary, the Main Beach property any shortfall between that 35.94% share and the sum of $151,250.01.
3.The Applicants’ entitlement under Order 2 be secured by a charge over the proceeds of sale of the Swan Bay and Main Beach properties.
4.The Applicants’ proceeding be otherwise dismissed.
5.Each party pay their own costs.
6.The First Respondent be removed as a party to the proceeding.
7.The name of the Third Respondent be changed to ‘Philip James Kapp, as trustee of the Twin Trust’.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
PERRAM J:
These reasons deal with two different suits brought by the trustees in bankruptcy of Philip Kapp. The first suit Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp concerns the bankruptcy trustees’ claims on the sale proceeds of a home at Wahroonga held in the name of Mrs Maryann Kapp. The second suit concerns the same trustees’ claims on the sale proceeds of some properties held by a family trust associated with Philip Kapp. The second was argued sometime before the first. There are issues concerning issue estoppel arising from the existence of these two parallel proceedings which I resolve in these reasons. In order to avoid the prospect of two appeals and given that both cases arise out of the bankrupt’s insolvency and are interrelated, I have handed them down together.
Aravanis (Trustee) v Kapp, in the matter of the Bankrupt Estate of Kapp
NSD 928 of 2021
Introduction
Mr Philip James Kapp is married to Mrs Maryann Kapp although they are now separated. Without any disrespect intended, I will refer to Mr Kapp as Philip and Mrs Kapp as Maryann. On 4 March 2019 Philip became bankrupt on his own petition. The trustees in bankruptcy of Philip's bankrupt estate now sue Maryann. Their suit concerns the proceeds of sale of the former family home at Boundary Road in Wahroonga, a suburb of Sydney. That property was sold on 11 August 2021 for $4,150,088.00. Out of its proceeds of sale, and following the payment of some other debts, $616,819.00 is presently being held in the trust account of Maryann's solicitors. There are undertakings in place which limit further disbursal of these funds pending the outcome of this litigation.
The bankruptcy trustees' case has two limbs. The first relates to their claim on $232,433.60 of the sale proceeds. The manner in which they pursue this claim turns on their ability to trace that sum through a number of property transactions back to a disposition of Philip's property to Maryann in 2010. The bankruptcy trustees submit this disposition is void against them either pursuant to s 121 of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’) or s 37A of the Conveyancing Act 1919 (NSW) (‘Conveyancing Act’). In chronological order, the transactions are:
(a)Philip's transfer to Maryann of a 50% interest in a property in Leura in the Blue Mountains on 18 May 2010 (the impugned transaction);
(b)the purchase of a family home in Turramurra on 3 May 2011 in Maryann's name using funds which included a bridging loan in the amount of $230,700.00;
(c)the sale by Maryann of the Leura property on 12 September 2011 and the use of part of the proceeds of that sale to repay the bridging loan of $230,700.00 on the Turramurra home;
(d)the sale by Maryann of the home at Turramurra on 21 June 2013 and the realisation of net proceeds of that sale of $362,340.64;
(e)the purchase of another family home at Wahroonga in Maryann's name on 23 August 2013 for $2,400,000.00 funded, in part, from the proceeds of the sale of the Turramurra home; and
(f)the sale by Maryann of the home at Wahroonga on 11 August 2021 and the realisation of the proceeds of sale now subject to the bankruptcy trustees’ claims.
Both Turramurra and Wahroonga were registered in the sole name of Maryann. It is this fact which gives rise to the second limb of the bankruptcy trustees' case, which is that they are entitled to 50% of the net proceeds of sale of Wahroonga. The first reason advanced for this claim is that Maryann held her interest in Wahroonga subject to a constructive trust in favour of Philip. The constructive trust was itself pursued on two bases: (i) it was Philip and Maryann's common intention at the time she acquired Wahroonga (and, before it, Turramurra) that she would hold the property for their mutual benefit; or (ii) Philip and Maryann were engaged in a relationship, Philip provided the financial contributions which resulted in the property being in Maryann's name, the relationship had now ended and it would be unconscionable for Maryann thereafter to maintain that the property was entirely hers without recognising the role of Philip's contributions: Baumgartnerv Baumgartner (1987) 164 CLR 137 (‘Baumgartner’).
The second reason for which the bankruptcy trustees claim a 50% interest in Wahroonga (and, if it be relevant, Turramurra) is that Philip's intention in arranging to put Turramurra, and then Wahroonga, into Maryann's name was to defeat the claims of his creditors. They submit that by doing so, Philip disposed of his property to her and that these dispositions are void against them by reason of s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act. The bankruptcy trustees did not articulate in their written or oral submissions any claim against Maryann other than that the sale proceeds in her hands belong in equity to them. For example, they did not suggest that Maryann had breached her duties as constructive trustee by using the trust funds for her own benefit.
Whilst the bankruptcy trustees' claims have these two broad limbs, it is to be observed that as a matter of private law they may be seen to fall into two different categories. The first consists of claims that Philip has in equity against Maryann. These claims arise independently of his bankruptcy and only because Philip's rights against Maryann in relation to them happen now to have vested in the bankruptcy trustees in consequence of the sequestration of his estate. The second category consists of rights arising out of the administration of his bankrupt estate which relate not to pre-existing substantive rights of his but, rather, as an aspect of the bankruptcy itself; that is to say, as part of the mechanism for collective execution against the property of a debtor by creditors whose rights are admitted or established: Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508 at [14]-[15].
It is therefore useful to distinguish those claims which Philip has against Maryann in equity (now vested in the bankruptcy trustees) from those claims which the bankruptcy trustees have in their own right under s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act. Another way of putting this is to distinguish between those claims the bankruptcy trustees have as a result of Philip's own rights devolving upon them and those they have which have not devolved in that fashion.
Maryann disputes the existence of Philip's claims in equity against her. In relation to the bankruptcy trustees’ statutory claims under s 121 and s 37A, Maryann submits that those provisions are not enlivened. Put in very general terms, the applicability of those provisions turns on the ability of the bankruptcy trustees to demonstrate that Philip either intended to defeat the claims of his creditors or was insolvent when the three dispositions of property which they attack – Leura, Turramurra and Wahroonga – occurred. The bankruptcy trustees submit that, at these times, Philip had significant current or prospective debts to the Commissioner of Taxation which make it more likely than not that Philip was seeking to defeat the claims of his creditors or that he had become insolvent.
For her part, Maryann submits that no property of Philip's may be traced into her hands. She says that previous family homes long before those at Turramurra and Wahroonga had been in her name and that this reflected an intention on the couple's part that the family home was for her and the children. There was evidence that an early decision was made to put the family home in her name to guard against unexpected partnership liabilities that might be incurred by Philip. Turramurra and Wahroonga were simply repetitions of that practice funded by Maryann's ownership of previous family homes. No property of Philip's was therefore disposed of when Turramurra and Wahroonga were purchased in her name. She notes that the bankruptcy trustees do not seek to attack her ownership of the family homes which preceded Turramurra and Wahroonga and that this means that the case against her in relation to Turramurra and Wahroonga makes no sense.
Leura was not a family home and was in their joint names until Philip transferred his half interest to her. Maryann says that Philip already held his half for her so his transfer of it was not a disposition of his property. Alternatively, she submits that she paid consideration for that transfer.
If any of the three transactions involved dispositions of Philip's property which, if void, can be traced into her hands, Maryann then submits that they are not void. This she does on the basis that Philip was not insolvent at the relevant times and that it was his intention to provide for his family rather than to defeat his creditors. The determination of Philip's intentions is complicated by the fact that at the time when some of the transactions occurred he was living with a diagnosis of a terminal condition from which he was not expected to recover. As it happens, he did recover. The determination of his intentions is also complicated by the fact that Philip did not give evidence in these proceedings.
The bankruptcy trustees submit that Philip was in Maryann's camp for the purposes of these proceedings and that her failure to call him to give evidence about what his intentions had been should redound to her disadvantage in the Court's assessment of his intentions. Maryann, on the other hand, says that her relationship with Philip has broken down and that it is not reasonable to expect her to have called him.
If any of the bankruptcy trustees' claims on the Wahroonga sale proceeds should find their mark, Maryann pursues two freestanding defences. First, she says that she is entitled to have brought to account for her benefit the fact that, as Philip's surety, she paid some of his tax debts and legal fees out of her interest in Wahroonga and if, contrary to her primary case, Philip (and now the bankruptcy trustees) owned some part of Wahroonga, then she is entitled to be repaid those expenses by Philip (now the bankruptcy trustees) out of his share in Wahroonga. As such, she asserts that she is entitled to a charge on any interest the bankruptcy trustees establish in the sale proceeds to secure Philip's obligation to indemnify her; that is to say, she claims an equity of exoneration in the proceeds of sale. She also claims a right of exoneration out of the Wahroonga proceeds because, as surety, she paid some legal expenses of Philip’s which his solicitors had secured against Wahroonga.
Second, she submits that the bankruptcy trustees have already sued her once in separate proceedings they brought against a family trust (known as the Twin Trust) without at that time raising these claims. She contends that it was unreasonable for the bankruptcy trustees not to have raised their present claims in the Twin Trust proceedings so that they are now estopped from bringing them in this proceeding: Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 (‘Anshun’). In response, amongst other matters, the bankruptcy trustees submit that at the time of the Twin Trust proceedings it was not known that there would be any equity in the Wahroonga property after the claims of the mortgagees were met and it was therefore not unreasonable for them not to bring claims which, at that time, appeared pointless.
In their written submissions, the bankruptcy trustees pursued personal claims against Maryann for sums which exceed the remaining proceeds of sale for Wahroonga. The rights asserted on Philip's behalf against Maryann give rise only to proprietary remedies; in this case, the property is the proceeds of sale for Wahroonga. Likewise, the attempt by the bankruptcy trustees to void particular transactions of Philip's may have the result that some property of Maryann's should belong to them. But on no view do either set of claims give the bankruptcy trustees in personam rights against Maryann extending beyond her rights to the proceeds of sale for Wahroonga. This aspect of the bankruptcy trustees' claims is misconceived and need not be mentioned again.
A useful order in which to consider the issues which arise is as follows:
(1)First, to give an account of the history of Philip and Maryann's relationship including the property transactions into which they entered and to consider the issues of tracing which underpin the bankruptcy trustees' claims relating to Leura.
(2)Second, to examine Philip's (and subsequently Maryann's) relationship with Philip's principal creditor, the Commissioner of Taxation. These events conclude with the settlement of some litigation between Maryann and the Commissioner at the time at which Philip and Maryann separated. The litigation concerned the Commissioner's attempts to obtain possession of the Wahroonga property under a second mortgage in his favour which secured, as against Maryann, a large part of Philip's very considerable tax debt. It was the settlement of this litigation in June 2021 on terms largely favourable to Maryann that gave rise to surplus funds in Maryann's hands upon the sale of Wahroonga.
(3)Third, to make findings about the reasonableness of the bankruptcy trustees' decision to commence their current proceeding against Maryann in relation to the surplus only after the sale of Wahroonga.
(4)Fourth, to make findings about Philip's intention in alienating to Maryann his half interest in Leura on 18 May 2010 and Philip and Maryann's intentions in placing Turramurra and Wahroonga in her sole name.
(5)Fifth, to determine the bankruptcy trustees' claims for a constructive trust over the sale proceeds of Wahroonga.
(6)Sixth, to determine the bankruptcy trustees' claims under s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act in relation to each of Leura, Turramurra and Wahroonga.
(7)Seventh, to assess the extent to which Maryann is entitled to an equity of exoneration out of the sale proceeds for the sum of $480,000.00 which she says was contributed by her to the payment of Philip's tax debt, and $110,000.00 which she contends was paid by her for his legal fees in the Twin Trust litigation.
(8)Lastly, to examine Maryann's submissions concerning Anshun estoppel.
The history of Philip and Maryann's household
In what follows, I sketch the important features of their relationship from its commencement to its end. Although an important part of the case turns on Philip's relationship with the Commissioner of Taxation, it is convenient, at least at this stage, to leave the Commissioner out of the picture and only to overlay his role once a complete account of Philip and Maryann's transactions has been given.
Maryann first met Philip in 1995 when she worked as his secretary at Anderson Legal where he was then the managing partner. In 1999, Philip moved to Minter Ellison as the senior partner of their private equity group and Maryann went with him. At this time, Maryann was in a de facto relationship with another man and, in around 2000, she resigned from Minter Ellison to move to Western Australia with that man. There she began working in temporary secretarial roles. She returned to Sydney in about 2001 where she continued to work in temporary secretarial roles.
She and Philip then began to see each other in 2001. Philip had previously been married to Ms Shelley Kapp (who, with no disrespect, I will refer to as Shelley) but I infer that that marriage had ended by this time. During her formal examination by the bankruptcy trustees, Maryann gave evidence that she and Philip had begun to cohabit in January 2002. At that time, she did not have any assets of significance of her own.
In 2002 Andersen Legal closed following the collapse of Arthur Andersen in the wake of the Enron scandal. At this time Philip did not work there, having moved to Minter Ellison some years before in 1999. The significance of the closure of Arthur Andersen relates to evidence which I later discuss about protecting Philip's assets from partnership liabilities such as those generated by the Enron scandal.
Early in 2003, Maryann ceased working.
In September 2004, prior to the purchase of any properties by Philip and Maryann, Philip purchased a property at Belrose for his former wife, Shelley, and agreed with Shelley that he would make all the repayments on the loan for that property.
The first property purchased by Philip and Maryann was a property in Leura which they purchased as joint tenants. This occurred on around 22 November 2004 for a purchase price of $585,000.00. Of that purchase price, some $525,000.00 was provided by the Commonwealth Bank of Australia by way of a loan secured by a registered first mortgage.
Maryann gave evidence that her principal reason for wanting to purchase a property in Leura was that her brother and mother lived there. Her father had died in July 2004 and she said that she wanted to be able to spend as much time as she could with her family and, I would infer, to be near her mother following the death of her father. I accept this evidence. It is unclear to me the complete extent to which Philip and Maryann lived at this property. Philip's work would not have permitted him to commute from Leura and I incline to the view that it was a property used on an intermittent basis, possibly on the weekends or during vacations. This conclusion is consistent with Maryann's evidence that between September 2006 and March 2007, her brother and his family lived in the Leura property whilst renovation work was done at their own property.
On 18 February 2005 Maryann and Philip were married. By this time, Philip had left Minter Ellison to join Clayton Utz as a senior partner and was in receipt of substantial remuneration. Whilst it is unclear on the evidence where Philip and Maryann were living from early 2002, it appears that from 31 October 2005 until their separation in April 2021 they lived in a succession of properties each of which served as their home. Two of these homes do not appear to have been owned by them and I infer were rental properties. Although only Leura, Turramurra and Wahroonga are directly relevant to these proceedings, these other homes are significant for they throw light on the way in which the couple went about owning property.
The first of these homes was in Shadforth Street, Mosman, which was acquired by the couple on 31 October 2005 as tenants in common in equal shares. Philip and Maryann stayed there for just over a year, selling it for slightly more than they had purchased it on 23 November 2006. Five days later on 28 November 2006, Maryann purchased a new home at Harnett Avenue, Mosman for $1,425,000.00 in which I infer they lived. Unlike Shadforth Street, which had been equally owned by them both as tenants in common, Harnett Avenue was in Maryann's sole name. The date of 28 November 2006 is therefore significant in this litigation for it marks the time at which the family home ceased to be owned by them in equal shares and became owned by Maryann in her sole name.
The bankruptcy trustees do not claim in this proceeding that the purchase by Maryann in her sole name of Harnett Avenue was an alienation of Philip's property to her and therefore void against them under s 121 of the Bankruptcy Act or s 37A of the Conveyancing Act. Whilst the bankruptcy trustees suggest that Maryann did own these properties for Philip’s and her mutual benefit and that they are hence subject to a constructive trust in his favour, they do not claim that Maryann's subsequent disposal of Harnett Avenue and purchase of the next family home in her name involved a disposition by her of Philip's property.
Not very long after the move to Harnett Avenue, Maryann gave birth to their twin sons on 27 April 2007. The children are presently 16 years old. The family was not destined to stay put for long. On 23 October 2007, when the boys were only 6 months old, Harnett Avenue was sold for $1,700,000.00 for a tidy profit. At this time, it is apparent that there were several loans in existence. They are referred to in an email from the Commonwealth Bank to Philip explaining the manner in which the sale proceeds had been disbursed. It is explained there that the net sale proceeds from Shadforth Street, which had been solely in Maryann's name, had been $1,670,642.46 (which included the deposit released from the agent). These proceeds were then used to pay off a small amount which still remained owing under the loan in relation to Shadforth Street ($76,068.04), a large amount of $500,000.00 under a loan called the Mosman portfolio loan and $454,574.42 to reduce the loan on the Leura property. This last repayment resulted in the loan on Leura having available in it the sum of $429,666.42 by way of redraw.
At this point, it appears the family moved to premises at Sharland Avenue, Chatswood, which they did not own. They did not stay long at Sharland Avenue either. On 22 September 2008, Maryann purchased, again in her sole name, an apartment at Badham Avenue, Mosman, in which they then lived. The purchase price was $912,000.00. Again, the bankruptcy trustees do not contend that placing Badham Avenue in Maryann's name was void against them.
In about 2009, according to Maryann, Philip was diagnosed with a tumour in his right mandible and had to undergo a course of chemotherapy and radiation therapy. There is evidence which suggests that the diagnosis may have been in October 2008, just after the purchase of Badham Avenue. This evidence consists of records kept by officials within the Australian Taxation Office (‘ATO’) of conversations which Philip had with them. On 17 November 2009 there is an entry which records 'Taxpayer was diagnosed with cancer in Oct 2008 and was undergoing treatment which saw him falling behind with all his personal affairs'. Another entry in these notes for 30 August 2010 records 'Client has been ill and endured cancer battle since late 2008'. Similar references may be found in the entries for 24 November 2011 including that Philip 'was sick and recovering for most of 2009'.
I conclude that Philip was diagnosed with cancer in his jaw in October 2008. The ATO notes also suggest that a large tumour was removed from his jaw which I would infer occurred in late 2008. I find that Philip was sick for most of 2009 as a result of chemotherapy and radiation therapy but was beginning to recover by the beginning of 2010.
On 12 February 2010, Badham Avenue was sold for $1,112,000.00.
At this stage, Philip suffered a serious setback when, in April 2010, he was diagnosed with stage 3 multiple myeloma, an incurable form of blood cancer. His doctor told him that he only had a few months to live. The ATO notes record that at this time Philip told the tax authorities that he had been given a 50/50 chance of surviving for four months. I accept that, at this time, Philip expected to die.
Maryann gave evidence that around this time Philip told her that he had to get his affairs in order and that as part of that he was going to transfer his half interest in the Leura property to her. She also said that Philip said that the reason he was doing this was so that she and the boys would have somewhere to live when he died.
On its face, this evidence is plausible. The imminence of death has a clarifying effect on many people and a desire to put one's affairs in order seems understandable. However, there are problems with this evidence. The Leura property was owned by Philip and Maryann as joint tenants. The effect of Philip's death would be that the property would become fully vested in Maryann by reason of the right of survivorship attaching to her as a joint tenant. The possibilities are:
(a)Philip thought that he owned Leura with Maryann as tenants in common as to 50%;
(b)Philip did not know that on the death of one joint tenant, an estate in fee simple vests in the survivor and that he genuinely thought he had to transfer his half to her to provide a home for the family;
(c)Philip did know about the right of survivorship but in the midst of chemotherapy, radiation therapy and a terminal diagnosis became confused about it and thought that his family's best interests required him to transfer his half interest to Maryann notwithstanding that this was wrong;
(d)Philip did know about the right of survivorship but decided to lie about it to Maryann; or
(e)Philip did not say the words attributed to him by Maryann.
Proposition (b) may be dismissed as implausible given Philip was a lawyer of some aptitude. Proposition (a) is possible in light of his situation and receives some support from the fact that Shadforth Street had been owned as tenants in common. Proposition (c) is plausible. Proposition (d) is possible but it is difficult to identify any motive for Philip to lie about this. The evidence does not support (e).
Maryann gave evidence before me and I accept her as a witness of truth. As such, to embrace (e) I would need to find that she was mistaken. Whilst the lapse of time is significant, so also is the significance of the conversation from her perspective. I therefore accept the words were said. I also accept the bankruptcy trustees' submission that what Philip was saying did not make any sense because the transfer was unnecessary to achieve what Philip sought to do. If he died, the property would become hers by operation of law. I therefore conclude that (a) or (c) is the case but I do not choose between them.
In any event, regardless of what Philip's intentions were in making the transfer, there is no debate that by a transfer instrument dated 18 May 2010 Philip transferred to Maryann a one half share in the estate in fee simple in Leura. The effect of that transfer was to sever the joint tenancy which had existed, to vest in both a 50% interest as tenants in common and simultaneously to transfer Philip's 50% interest to Maryann. The result was that Maryann became the owner of Leura in her own right. The instrument of transfer does not appear to have been lodged for registration until 16 June 2010 but is expressed to be for consideration of $300,000.00. One of the bankruptcy trustees, Mr Aravanis, gives evidence which I accept that the sum of $300,000.00 does not appear to have been either paid by Maryann or received by Philip.
Maryann submitted that she had provided consideration for this transaction in two ways. First, she reminded me that on the sale of Harnett Avenue in October 2007 (which had been in her sole name), a sum of $454,574.42 had been used from its proceeds of sale to reduce the loan on Leura. This led to a submission that this sum represented the price paid by her for Philip's half of Leura.
I do not accept this submission for three reasons. First, the sale of Harnett Avenue occurred two and a half years before the transfer. Second, it is not referred to in the Commonwealth Bank's email dated 30 November 2007 (or the emails from Philip preceding that email) explaining the flow of funds following the sale of Harnett Avenue. A review of those emails suggests that Philip was moving funds between various loans to allow for the purchase of a property in Queensland. Whilst these emails are to some extent difficult to follow, they provide no support for the proposition that Maryann was purchasing Philip's half of Leura. Third, it is not consistent with Maryann's evidence that Philip told her in May 2010 that he wanted to give her his half of Leura to provide for her and the boys. If he had sold his half to her in October 2007 for $454,574.42, as she now contends, he would not have said this to her. I do not therefore accept that Maryann purchased Philip's half of Leura for $454,574.42.
The second submission from Maryann, in her amended defence at [26], was that Philip had held his interest in Leura at all times on a constructive trust in her favour. This was said to be a common intention constructive trust arising because Leura had been purchased using Maryann's funds. If this constructive trust arose then it would entail that the transfer of his half to her was no more than an adjustment of the title to reflect her true beneficial interest in the whole property. If this were correct it would imply that the transfer had not involved any disposition of Philip's property at all so that the bankruptcy trustees' claims under s 121 of the Bankruptcy Act and s 37A of the Conveyancing Act would have no disposition upon which to attach.
I do not accept that Leura was acquired by the couple with such an intention for it is inconsistent with Philip's statement to Maryann in about April 2010.
In those circumstances, I do not accept either that Maryann provided consideration for the transfer of Philip's half of Leura in the form of $454,574.42 or that the transfer simply reflected the fact that the property had always been hers.
Shortly after the transfer, Maryann says that she took steps to look for day care facilities for the two boys with the intention of moving to Leura on Philip's death. I accept this evidence.
No doubt because of the mortal condition in which he found himself, Philip signed a letter dated 29 July 2010 entitled 'Letter of Wishes'. The letter of wishes was attached to a trust deed which established a discretionary trust known as the James Trust. One curiosity is that the deed is dated 12 July 2010 whereas the letter of wishes annexed to it is dated 29 July 2010. By cl 10, the trustees of the James Trust were to take into account the contents of the letter of wishes in the exercise of their discretionary powers. The letter of wishes revealed the existence of multiple life insurance policies. The proceeds of the policies were to be contributed to the corpus of the James Trust. It was Philip's desire that the James Trust should use some of the proceeds to pay off the outstanding loan on Leura which the letter indicates Philip then understood to be in the order of $400,000.00. The letter contained this statement: 'I note that this is in effect a repayment of a loan of $400,000.00, which I borrowed from Maryann to settle a debt to the Australian Taxation Office.' It is not in dispute that $400,000.00 of the proceeds of sale for Harnett Avenue was, indeed, used to pay off some of Philip's tax debt. Maryann submits, but the bankruptcy trustees deny, that the existence of a loan of $400,000.00 demonstrates that Harnett Avenue was not only in her sole name but was treated by the couple as having been owned by her since a loan out of the sale proceeds is only consistent with her owning the funds in question. I return to this issue later in these reasons.
The letter of wishes also reveals that Philip made provision for his three daughters, Lauren, Kirsty and Michelle, from his first marriage to Shelley.
At some point, most likely in the second half of 2010, Philip undertook an experimental therapy for his multiple myeloma which included a stem cell bone marrow transplant. According to the ATO notes, Philip told the tax authorities that this treatment consisted of expensive chemotherapy and a cocktail of steroids and was accompanied by serious side effects including nerve damage, loss of memory, inability to think or concentrate, loss of the use of his limbs and damage to his immune system. There is evidence in the ATO's notes of conversations its officials had with Philip that this treatment included travelling to the United States for a period. Despite its asperity, the therapy was successful and, according to Maryann, Philip went into remission in the first few months of 2011. The cancer, however, remains incurable and Philip has to undertake blood tests every three months and an annual bone scan but, subject to these and other inconveniences, remains alive.
I saw Philip on more than one occasion during the Twin Trust litigation and was addressed by him when, from time to time, he sought to appear in that proceeding. It was obvious from these encounters that he has undergone a scarifying health experience which has left him very much diminished and, to an extent, has impacted on the soundness of his judgment. However, I accept that from early 2011 Philip has been in remission. I conclude that between October 2008 and early 2011 Philip was in a grave state of health which impaired his ability to administer his affairs as he would have liked.
On 4 February 2011, Maryann exchanged contracts to purchase a property at Fairlawn Avenue, Turramurra for $1,550,000.00 for the family to live in which was to settle on 3 May 2011. A deposit of $77,500.00 was paid, leaving a balance due on settlement of $1,472,500.00. There is, to my mind, a question about where the family lived between Badham Avenue being sold on 12 February 2010 and Turramurra being acquired on 3 May 2011. In her evidence, Maryann said that the family lived between Badham Avenue and Leura until the property at Turramurra was acquired. This would entail that they lived at Leura between 12 February 2010 and 3 May 2011. Corporate records of entities associated with Philip suggest that, during this time, he recorded his residential address as being 26 Wyalong Street, Willoughby, a property that does not appear to have been owned by either Philip or Maryann. There is other evidence to this effect: in the loan application for the Turramurra property (dealt with in more detail shortly), Philip and Maryann's residential address is listed as that address and in the ATO's notes dated 30 August 2010 the same address is recorded.
If it were necessary to decide, I would prefer this contemporaneous documentary evidence to Maryann's evidence. This was, no doubt, a stressful time in her life. Her husband had terminal cancer, her family's future was in doubt, she was moving house and she had to look after two young children. Further, as will be apparent from these reasons so far, the Kapp family was always on the move so that a precise recall of which home they lived in at a particular time might easily involve error.
Philip and Maryann completed a loan application with the Commonwealth Bank for the purchase of the Turramurra house. The proposed loan was to be for $1,470,900.00 and was to comprise three separate loan accounts in Philip’s name guaranteed by Maryann, with her guarantee secured by mortgage. The documentation appears to have been completed and submitted by Philip and Maryann sometime in March 2011 although, as will be seen, the loan was only extended on 3 May 2011.
One of these accounts was for a loan of $230,700.00. The consumer credit contract schedule in relation to this loan account provided by the bank to Philip dated 3 March 2011 indicates that it was to be serviced with 11 monthly interest-only payments and a bullet repayment of the principal and, I surmise, a small amount of interest by a twelfth and final payment in the sum of $232,003.23.
The consumer credit contract schedule states that ‘the amount of [$230,700.00] includes bridging finance’. The same document indicated that the loan was initially to be secured by mortgages over the Turramurra and Leura properties and a guarantee by Maryann. However, this security was to be replaced on the repayment of 'the bridging finance content of the Loan'. The bankruptcy trustees invited me to infer that the bridging finance was the interest-only one-year facility of $230,700.00. In my view, so much is plain from the terms of the consumer credit contract schedule in relation to this loan account.
Whereas during the pendency of the bridging loan the security consisted of mortgages over the Turramurra and Leura properties and a guarantee by Maryann, the new security was to consist only of a mortgage over the Turramurra property and a guarantee by Maryann. So once the bridging loan had been repaid, the bank’s mortgage over the Leura property would be discharged.
However, that conclusion must be considered in light of another matter. The consumer credit contract schedule also imposed a condition in relation to the bridging facility to the effect that the Leura property was to be sold within 12 months of its advance. The likely intent of this arrangement was that the proceeds of sale of the Leura property would be used to repay or reduce the bridging loan. If that occurred, and the sale proceeds proved sufficient, then the mortgage on the Leura property would necessarily be discharged. If, on the other hand, the sale proceeds were insufficient then Maryann would remain liable for the unpaid balance of the bridging facility under her guarantee.
Thus, the evidence supports the drawing of an inference that, probably in March 2011 and certainly by 3 May 2011, a decision had been made that in order to purchase Turramurra, the Leura property would need to be sold to pay down the bridging loan of $230,700.00.
The purchase of the Turramurra property settled on 3 May 2011 at which time I infer the bridging loan was advanced. Consequently, Maryann was obliged under the terms of the bridging loan to sell the Leura property by no later than 3 May 2012. The bankruptcy trustees submitted that as at March 2011 Philip and Maryann had already borrowed about $214,000.00 against the Leura property. The evidence for this was p 7 of the loan application. It is unclear to me what to make of this page. It records that Leura was subject to a 'prior charge' to the bank with a 'balance' of $153,883.35 and a 'subsequent charge' to the bank of $60,005.00. What exactly this means is unclear but I do accept that if these entries are to be read as recording the existence of loans then those loans do total $213,888.35. The significance of these loans, if they existed, to the issues in this case is not apparent to me and I do not mention them again.
Consistently with her obligation under the bridging facility, on 7 September 2011 Maryann sold the Leura property for $690,000 which sale price is broadly consistent with the valuation obtained in January of that year of $725,000. The bankruptcy trustees submit, and Maryann accepts, that 'all of the net proceeds of $620,463.08 were paid to the [Commonwealth Bank]'. The bankruptcy trustees also submitted that on that day the mortgage over Leura was discharged. This may be inferred from the fact that the property could not be sold without a discharge being tendered and I accept that this must be so.
The bankruptcy trustees then submitted that $232,433.60 of the sale proceeds was used to repay the bridging facility. This submission requires clarification. The bridging facility was only for $230,700.00. Whilst there were monthly interest payments due under it together with some other minor fees and charges, payment of these did not result, indeed could not result, in any reduction of the principal due under the facility there being no suggestion that interest or any other charge was to be capitalised. Thus whilst $232,433.60 may finally have been paid into the loan account constituting the bridging facility when Leura was sold, the principal debt has only ever been $230,700.00 and only that amount of principal can possibly have been repaid. This matters because on the bankruptcy trustees' case, only the repayment of the principal debt can serve to have increased the net proceeds of sale subsequently realised on the disposal of the Turramurra property; that is to say, the payment of interest and bank charges on the bridging facility are irrelevant to the tracing exercise that the bankruptcy trustees must undertake.
Further, the bankruptcy trustees’ submission does not constitute an accurate statement of what the single bank statement for the bridging loan actually shows. Prior to September 2011 Philip had been making monthly interest repayments on around the 15th of each month. Immediately prior to its repayment on 7 September 2011 the facility was in debit by an amount of $230,700.00. On 7 September 2011 there was a credit in the sum of $76,655.19 and a second credit in the sum of $232,433.60 (the figure now claimed by the bankruptcy trustees) which I infer came from the sale proceeds of the Leura property. This placed the account in credit by an amount of $78,388.79. However, the deposit of $76,655.19 was immediately reversed on 8 September 2011 for reasons which neither party explored. It appears appropriate to proceed on the basis that the credit for $76,655.19 should be treated as not having been made. Making that assumption, the reversal left the loan account in credit to the amount of $1,733.60 which was then consumed by a deferred establishment fee and some interest on 9 September 2011. As such $1,733.60 of the $232,433.60 was not used to repay the principal on the loan and the amount of principal repaid is the difference between these two sums which is $230,700.00, which, as might be expected, is the principal originally extended under the bridging facility.
I therefore find that the proceeds of the sale of Leura were used, in part, to repay the whole of the bridging loan of $230,700.00 to reduce Philip's debt which was secured by Maryann's guarantee and the mortgage she had given over Turramurra. I will treat the bankruptcy trustees’ submissions about the sum of $232,433.60 as being submissions about the sum of $230,700.00.
The family had moved to the Turramurra property on, or shortly after, 3 May 2011 when its purchase had been completed. I accept that during this time it was Philip who met the payments due under the loan facilities and that it was he who paid for the maintenance of the property. Whilst the bankruptcy trustees have demonstrated that the sale of Leura resulted in a repayment of principal on the bridging loan they did not seek to prove the extent of any of Philip's principal repayments under the other two loans extended to him in respect of Turramurra. They did submit that Philip had, in effect, paid for everything to do with Turramurra. But their tracing case is not concerned with Philip's payment of everything but rather with his payments of principal. Apart from the sale proceeds of Leura, no attempt was made to prove what elements of his repayments under the bank loans had been interest and what had been principal. In the absence of such an exercise, I do not find the submission that Philip paid for everything very helpful.
They remained in the Turramurra home until about 21 June 2013 when it was sold. The sale price was $1,650,000.00. Between 21 June 2013 and 24 June 2013 two amounts were paid into Maryann's account with the National Australia Bank (‘NAB’) which totalled $362,340.64 ($238,567.15 on 21 June 2013 and a further $123,773.49 on 24 June 2013). Maryann says that this sum was paid into her account with the Commonwealth Bank but, in this, she is in error (although she subsequently did pay these funds into her account with that bank, as will be seen). Those credits brought her account with the NAB to a credit balance of $371,051.32.
The bankruptcy trustees seek to trace the $230,700.00 from the proceeds of sale of Leura through the sale of Turramurra and into the purchase of the next property to be considered, Wahroonga. That purchase was completed on 23 August 2013 for $2,400,000.00. The thesis of the bankruptcy trustees' claim is that the net proceeds of sale of Turramurra were $362,340.64 and that the sale proceeds of Leura had contributed $230,700.00 to that sum. This is true inasmuch as the repayment of the bridging facility with a payment of that amount had extinguished that loan leaving only the two-year fixed loan and the variable home loan to be repaid. I therefore accept that the sale of Leura increased the net proceeds of Turramurra by $230,700.00. I therefore also accept that of the $362,340.64 that was deposited into Maryann's account with the NAB on 21 and 24 June 2013, some $230,700.00 of this represented the proceeds of sale of Leura.
The exercise in tracing, however, perhaps calls for more attention to detail than was necessarily implied in the bankruptcy trustees' submissions. Maryann's account with the NAB had been in credit immediately prior to the deposit of the Turramurra proceeds in the sum of $9,060.68 and the deposit brought the account to a credit balance of $371,051.32 (noting that this also included a debit of $350.00 as a settlement fee). As at 24 June 2013, therefore, the sale proceeds of Turramurra represented 97.65% of the contents of the account. On 19 August 2013, the sum of $380,000.00 was transferred out of the account and, as I will shortly explain, used to fund the purchase of the Wahroonga property. Between 24 June 2013 and 5 July 2013 Maryann's account balance drifted downwards as it was debited with the cost of various household living expenses which totalled $497.02. These expenses stopped after 5 July 2013. The balance was then increased by the deposit of a cheque for $1,444.85 on 11 July 2013 and a transfer from Philip of $10,000.00 on 5 August 2013 at which point the account stood in credit in the sum of $382,001.59. It remained in credit at that balance until a debit of $380,000 on 19 August 2013.
The sum of $382,001.59 therefore represented a blend of different funds. These were Maryann's initial credit balance of $9,060.68, the credit of $362,340.64 from the sale of Turramurra and the deposits of $1,444.85 and $10,000.00. The household expenses were debited immediately prior to the two deposits but after the crediting of the sale proceeds. The question at hand then is what amount of the $380,000.00 is to be seen as representing the sale proceeds of Turramurra.
Although where a fund is insufficient the application of the rule in Devaynes v Noble (1816) 1 Mer 529; 35 ER 767 is often displaced, I do not think that should happen in the case of the household expenses: Caron v Jahani (No 2) [2020] NSWCA 117; 102 NSWLR 537 at [78]-[84] per Bell P. I therefore conclude that the sale proceeds of Turramurra were reduced by the debiting of the household expenses because they immediately followed it. On this view, by 5 July 2013 the sale proceeds had been reduced to $361,843.62. Immediately prior to the transfer of the $380,000.00 on 19 August 2013 the account stood in credit in the amount of $382,001.59 and what was left of the sale proceeds after the household expenses – $361,843.62 – therefore represented 94.723% of the contents of the account. I would therefore conclude that of the $380,000.00 transferred from Maryann's NAB account on 19 August 2013, 94.723% of that figure ($359,947.65) should be apportioned to the sale proceeds of Turramurra.
The figure of $380,000.00 was deposited in Maryann's account with the Commonwealth Bank on 20 August 2013. At the time it was deposited, this account was in credit in the amount of $3,763.49. Immediately after the deposit it stood in credit in the amount of $383,763.49. Three days later, on 23 August 2013, the sum of $330,784.72 was debited from the account. The bank statement records that this was for 'SHORTFALL'. As will shortly be seen, this amount was contributed to the purchase of Wahroonga.
The next question is whether the whole of the $230,700.00 derived from the sale of Leura is to be treated as a fixed portion of the sum of $359,947.65 or whether it is to be treated as a proportion. In my view, it should be treated as a proportion. The net sale proceeds of Turramurra were $362,340.64 of which $230,700.00 represented the sums derived from the sale of Leura. This is 63.67%. That figure should be applied to the funds of $359,947.65 which I am satisfied found their way into the Wahroonga property. This is $229,176.40.
As I have said, the Wahroonga property was purchased on 23 August 2013 for $2,400,000.00. The conveyancer's file records that a deposit of $120,000.00 was paid.
The source of funds for the purchase were, according to the bankruptcy trustees, as follows:
(a)a part payment of the deposit by means of a cheque drawn on Philip’s account with the NAB in the sum of $70,000.00;
(b)a part payment of the deposit by means of a cheque drawn on Maryann's account with the Commonwealth Bank in the sum of $50,000;
(c)$330,784.72 from Maryann's account with the Commonwealth Bank; and
(d)$1,980,000.00 borrowed from the Commonwealth Bank.
These figures are not quite correct. The Commonwealth Bank extended three loans on 23 August 2013 which totalled $1,920,000.00, not $1,980,000.00. A cheque was drawn by Philip on 8 March 2013 for $70,000.00. I have not sighted the corresponding bank statement but Maryann accepted in her submissions that Philip had paid this sum. There was a debit on Maryann's account with the Commonwealth Bank on 11 March 2013 of $50,000.00. There was also a debit of $117,510.00 on her NAB account on 6 June 2013 which Mr Aravanis says, and I accept, was for stamp duty. Recourse to the conveyancer's file confirms this and demonstrates that on settlement the bank provided an amount of $2,250,784.72 to the vendors.
I am therefore satisfied of the following matters:
(a)a full deposit of $120,000.00 was paid consisting of $70,000.00 from Philip and $50,000.00 from Maryann;
(b)$330,784.72 was transferred from Maryann's account with the Commonwealth Bank on 23 August 2013;
(c)$1,920,000.00 was borrowed from the Commonwealth Bank on 23 August 2013; and
(d)the Commonwealth Bank provided the vendors with $2,250,784.72 on 23 August 2013 which consisted of Maryann's funds and its loan funds.
With the deposit, the total amount paid to the vendors was $2,370,784.72 which is less than the purchase price of $2,400,000.00. The difference is $29,215.28. This appears to be accounted for by adjustments on the day of the usual kind together with a large adjustment for a licence arrangement with the vendors, and some other adjustments for curtains and a swimming pool pump. As a side note, the bankruptcy trustees do not claim that Philip's payment of the deposit gave rise to a resulting trust in his favour. They do submit that Philip met the loan repayments but, as with Turramurra, they do not seek to identify any subsequent payments of principal made by him.
What does matter is that of the $2,400,000.00 purchase price, $380,784.72 was contributed with funds provided by Maryann. As I have explained above, $229,176.40 of that sum should be treated as having been derived from the sale proceeds of Leura. I therefore accept that 9.55% of the value of Wahroonga should be regarded as being derived from Leura being the proportion that $229,176.40 bears to $2,400,000.00.
From sometime in September 2013, the family resided at the Wahroonga property. Leaving aside Philip's (and subsequently, Maryann's) entanglements with the Commissioner, the picture from Maryann's perspective is nearly complete save for five matters. The first of these is Philip's bankruptcy which occurred on 4 March 2019 on his own petition.
The second is the commencement of a proceeding by the bankruptcy trustees against Maryann and the trustee of the Twin Trust on 31 May 2019. The third event is the separation of Philip and Maryann in April 2021 while remaining under the same roof and their complete separation in November 2021 when she locked him out of the house.
The fourth event is the sale of Wahroonga on 11 August 2021 for $4,151,252.81. The net sale proceeds following the discharge of two mortgages and other expenses were $1,233,639.07. In the result, half of that sum, $616,819.00, is being held by her solicitors in a trust account. The fund in dispute is therefore the amount of $616,819.00.
It will follow from the above that if the bankruptcy trustees are entitled to treat Philip's transfer to Maryann of his half share in Leura as void then I accept that 9.55% of the Wahroonga sale proceeds should be regarded as being derived from the sale of Leura and half of that, 4.775%, may be traced to Philip's interest in Leura.
The fifth event is the commencement of the current proceeding on 8 September 2021.
Philip's relationship with the Commissioner of Taxation
The bankruptcy trustees seek to establish three propositions. The first is that Philip intended not to pay his tax debts from at least April 2010. It was at this time that he understood himself only to have a few months to live and it was in May 2010 that he transferred his half interest in Leura to Maryann. The second is that everything Philip did after April 2010 was coloured by an ambition to ensure that his property did not fall into the hands of the Commissioner. This motive explained the transfer of his half share in Leura to Maryann and it provided the explanation for why the legal title to first Turramurra and then Wahroonga were placed in her sole name. The third is that Philip was insolvent from at least April 2010 (just before the transfer of his half interest in Leura).
It would be fair to say that Philip has lived for a long time under significant financial stress. The sources of this stress appear to be four in number. The first is his ambition to own properties on Sydney's north shore for his family. This was achieved using increasingly large amounts of bank debt which required servicing. In addition to the family homes, as I explain in my other reasons for judgment, the family owned two other properties at Swan Bay and Main Beach through the Twin Trust which were also encumbered with bank loans at various times. Leaving aside the question of who precisely owned these properties, there is no doubt that the person who was servicing the associated debt was always Philip. The same was also true of Shelley's home at Belrose. Thus, at all times, Philip has been obliged to meet the repayments on several substantial loans. I do not think, in principle, that this would have been beyond his means given the income he was earning as a lawyer.
The second concerns Philip's unresolved financial issues arising from his first marriage to Shelley. These were not finally resolved until 11 June 2015. The terms of Philip's property settlement with Shelley dealt with a number of matters. However, the bottom line of them was that Philip transferred to Shelley his interests in the property at Belrose and was to pay her $135,000.00.
The third concerns Philip's habit of not paying his tax debts in full. The bankruptcy trustees produced a table of Philip's unpaid tax debts and a graph which illustrated what it showed. The table was in these terms:
Date Bankrupt’s Taxable Income ($) Maryann’s Taxable Income ($) Bankrupt’s Tax Liabilities ($) 30/06/2001 $292,823 30/06/2002 $467,138 30/06/2003 $704,347 30/06/2004 $403,451 30/06/2005 $474,808 30/06/2006 $788,193 $180,383 30/06/2007 $1,046,895 $419,862 30/06/2008 $1,034,211 $66,079 $347,092 30/06/2009 $1,354,831 $15,450 $487,836 30/06/2010 $1,126,227 $55,175 $569,295 30/06/2011 $1,375,817 $65,148 $1,166,793 30/06/2012 $985,964 $36,775 $1,775,577 30/06/2013 $1,342,313 $15,037 $1,903,471 30/06/2014 $849,642 $85,828 $2,203,450 30/06/2015 $1,259,034 $47,409 $2,801,804 30/06/2016 $309,477 $50,006 $3,775,800 30/06/2017 $721,572 $30,000 $3,903,559 30/06/2018 $32,000 $4,450,778 4/03/2019 $4,728,486
Following the deposit of $275,000.00 on 30 April 2015 the bankruptcy trustees say that amounts totalling $567,533.30 were deposited into the Twin Trust's account which I am prepared to accept. There were also, however, a number of debits across that period. In May 2015 the debits totalled $34,028.67, in June $69,547.83, in July $44,308.68, in August $5,273.15 and in September $31,667.95. The bankruptcy trustees’ efforts at tracing did not involve any analysis of the impact of these debit entries.
Dealing with the payment in (c), in the absence of any analysis of the debits and credits on the account after 30 April 2015, I am unable to say how much of this amount ended up in the balance of the purchase price on 14 October 2015. It is likely that some of it did, however this is a matter of impression rather than analysis and impression is not proof.
As to the payment in (d), this was exceeded by the debits in June as was most of the payment in (e). The bankruptcy trustees did not make any submissions as to the priority in which a credit was to be consumed by a subsequent debit (e.g., first in, first out, in accordance with the presumption in Devaynes v Noble (1816) 1 Mer 529; 35 ER 767, or some alternative approach such as first in, last out). In the absence of any attempt at tracing, it is not the Court's role to do the bankruptcy trustees' work for them.
I thus conclude that the bankruptcy trustees have failed to demonstrate, and certainly to explain in any meaningful way, how their tracing case works. I therefore reject it. They have failed to prove an entitlement to trace into the Swan Bay proceeds beyond the single payment of $151,250.01 by Corrs. In relation to that payment I would grant the bankruptcy trustees the same relief I would give them under s 139D(2).
Main Beach
The same payments are involved. Since the Main Beach purchase was settled in December 2013, it predates any of the payments and it is impossible that any of them may be traced into the Main Beach proceeds. There remains the question of payments of principal in relation to Main Beach under the NAB facility for $60,000.00. As I have explained above, I do accept that over a period of about 5 years this loan was repaid in full. I have also explained that the bankruptcy trustees did not attempt a tracing exercise with respect to this sum. It is therefore not shown that the payments above may be traced into it. The bankruptcy trustees are therefore not entitled to a remedy under s 120 in relation to the Main Beach proceeds of sale.
Section 121
The tracing problem with s 121 is the same as with s 120. Therefore the only payment to be considered is the single payment of $151,250.01 which may be traced into the Swan Bay property. Section 121 will be engaged if Kappfam's entry into the Corrs agreement was made with either of the main purposes identified in s 121(1)(b)(i)-(ii). Section 121(2) deems that main purpose to be present in certain circumstances but it is clear that the proof of a bankrupt's main purpose is not limited to the deeming provision: s 121(3).
I have already concluded when considering s 139D(2) that Philip's purpose in using the bank accounts of the Twin Trust was to frustrate the claims of the Commissioner of Taxation. By 1 July 2015 Philip had every reason to think that he would eventually be bankrupted by the Commissioner of Taxation. I have no hesitation in inferring that his main purpose in making Kappfam, as trustee of the Twin Trust, the contracting party with Corrs was the furtherance of his aspiration to prevent any of his earnings ever falling into the hands of the Commissioner of Taxation. I therefore find that his main purpose was to prevent the payments under the Corrs consulting agreement being available to his creditors (s 121(1)(b)(i)) and, if that was not ultimately possible, at least to hinder or delay the process of making the payments available to his creditors (s 121(1)(b)(ii)). Thus I accept that the bankruptcy trustees are entitled to relief under s 121 in respect of that payment. They should have the same remedy as they have in respect of that sum under s 139D(2) and s 120.
It is not necessary in that circumstance to consider whether the deeming provision in s 121(2) was enlivened. Had it been necessary to consider the question of Philip's solvency, I would not have accepted Mr Aravanis's opinion that Philip was insolvent from 29 November 2006. Philip was in receipt of substantial remuneration at that time. To form a view on solvency one would need to know a great deal more about Philip’s financial position on 29 November 2006 than the bankruptcy trustees have undertaken to prove in this case. This would include understanding his partnership income across the period, his various investments and his capacity to borrow money.
Section 37A of the Conveyancing Act
Section 37A of the Conveyancing Act provides:
37A Voluntary alienation to defraud creditors voidable
(1)Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced.
(2)This section does not affect the law of bankruptcy for the time being in force.
(3)This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.
For the reasons I have given in relation to ss 120 and 121 I would reject the bankruptcy trustees' claims under this provision except in relation to the single payment of $151,250.01 from Corrs which may be traced into the sale proceeds of Swan Bay.
Residuary matters
There are four residuary matters. Firstly, the bankruptcy trustees submitted that the Corrs and JKL consulting agreements should be set aside. I do not see what purpose that would serve and there would appear to be procedural problems in doing so without the parties to the agreement being joined, in particular, Corrs and JKL.
Secondly, the bankruptcy trustees also sought the taking of accounts in relation to the Twin Trust as between it and Philip. I am not sure that this would be useful. The assets of the trust have been liquidated and the bankruptcy trustees have sought to demonstrate their entitlement to the proceeds. All of the bank statements were in evidence in this proceeding and it is clear that Mr Aravanis has been through all of them in detail even if the submissions made on his behalf largely steered clear of them. I do not think that any more of the creditors' money should now be spent on this exercise unless there is a real prospect of it resulting in a return to creditors. I am not persuaded that the taking of accounts would achieve that outcome.
Thirdly, there is on foot an application to restore one of the former trustees, Twin Investors, to the register of corporations. Whilst the Main Beach property was registered in its name, there was some utility in this as it would have facilitated its sale. However, it has since been sold and reinstatement is no longer necessary.
Fourthly, the bankruptcy trustees sought orders appointing them as receivers so as to sell the Main Beach property. That, too, is no longer necessary.
Conclusion
The bankruptcy trustees are entitled to orders under s 139D(2), s 139E(2) and relief to give effect to my conclusions relating to s 120 and s 121 as outlined above. Although the bankruptcy trustees have had some success they have failed on most of their claims. The Twin Trust was clearly correct when it submitted that the bankruptcy trustees had failed to engage in the tracing exercise that their claim on the sale proceeds self-evidently entailed. The parties should therefore bear their own costs. I would make the following orders:
(1)A declaration that the Applicants are entitled to 35.94% of the proceeds of sale of the Swan Bay property.
(2)Mr Kapp, in his capacity as the trustee of the Twin Trust, pay to the Applicants out of the proceeds of sale of the Swan Bay property and, if necessary, the Main Beach property any shortfall between that 35.94% share and the sum of $151,250.01.
(3)The Applicants' entitlement under Order 2 be secured by a charge over the proceeds of sale of the Swan Bay and Main Beach properties.
(4)The Applicants' proceeding be otherwise dismissed.
(5)Each party pay their own costs.
(6)The First Respondent be removed as a party to the proceeding.
(7)The name of the Third Respondent be changed to ‘Philip James Kapp, as trustee of the Twin Trust’.
I certify that the preceding three hundred and forty (340) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Perram. Associate:
Dated: 28 June 2023
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