Bredenkamp (Trustee) v McKelt (Bankrupt)
[2021] FCCA 468
•11 March 2021
FEDERAL CIRCUIT COURT OF AUSTRALIA
Bredenkamp (Trustee) v McKelt (Bankrupt) [2021] FCCA 468
File number(s): SYG 2538 of 2020 Judgment of: JUDGE STREET Date of judgment: 11 March 2021 Catchwords: 1 BANKRUPTCY – application under s 27 of the Bankruptcy Act 1966 (Cth) by applicant/trustee to recover the transfer of property of the bankrupt/transferor to the respondent/transferee – application advanced under s 121 of the Act and on the basis of constructive trust remedies and/or resulting trust – where the bankrupt was found to have used a trust entity to mask the transfer of his property to the respondent/transferee– declaration that the respondent holds the real property, in respect of a half interest in the same, upon constructive and/or resulting trust for the applicant – declaration that the applicant entitled to be registered upon the title to the Property in respect of a half interest with the Respondent Legislation: Bankruptcy Act 1966 (Cth), ss 27, 116, 121
Federal Circuit Court Rules 2001 (Cth), rr 11.01
Number of paragraphs: 45 Date of hearing: 11 March 2021 Place: Sydney Counsel for the Applicant: Mr J Baird Solicitor for the Applicant: SLF Lawyers Solicitor for the Respondent: Mr F Carles Carles Solicitors ORDERS
SYG 2538 of 2020 BETWEEN: DANIEL JOHANNES BREDENKAMP AND PAUL WESTON, THE TRUSTEES OF THE PROPERTY OF DAVID HARRY MCKELT, A BANKRUPT
Applicant
AND: KAY MARIE MCKELT
Respondent
ORDER MADE BY:
JUDGE STREET
DATE OF ORDER:
11 MARCH 2021
THE COURT DECLARES THAT:
1.The Respondent holds the property known as 261 Maleny Road, North Maleny in the State of Queensland more particularly described as Lot 9 in RP197589 (the Property) in respect of a half interest in the same upon constructive and/or resulting trust for the Applicant.
2.The Applicant is entitled to be registered upon the title to the Property in respect of a half interest with the Respondent.
3.The provision of funds by David Harry McKelt (the Bankrupt) to the Respondent in the period from January 2011 to April 2013 in order to assist her to purchase the Property and the fixture improvements was a transfer of the Bankrupt's property to the Respondent and is void as against the Applicant pursuant to s.121 Bankruptcy Act1966 (Cth).
THE COURT ORDERS THAT:
1.Leave is granted to the Applicant to file and rely upon the amended application and directs that the same be electronically filed by 5:00pm today.
2.Pursuant to s.38 Law of Property Act (Qld), 1974 the Applicant be appointed as trustee for the sale of the Property (the Trustee).
3.The Property be vested in the Trustee subject to any encumbrances affecting the entirety of the Property but free from encumbrances, if any, affecting any undivided share or shares therein, to be held by the Trustee upon statutory trust for sale under Division 6 of Part 4 of the Law of Property Act (Qld).
4.The Trustee have the sole conduct of the sale of the Property and be authorised to instruct an agent or agents, an auctioneer and/or a valuer or valuers for that purpose.
5.The Trustee have power to offer the Property for sale and to sell the Property by public auction with power to fix a reserve price, or alternatively to sell the Property by private treaty at the best available price, and for that purpose have power to do everything necessary or expedient to give effect to the same and, without limitation, to execute all documents on behalf of the Respondent including:
(a)any contract of sale;
(b)any nomination form or similar document;
(c)any transfer of land;
(d)any notice to be issued under a contract of sale; and
(e)any other document contemplated or envisaged by, ancillary to or
(f)otherwise related to, any of the above documents.
6.The proceeds of the sale of the Property be paid out in the following priority:
(a)To pay council rates, water rates, vendor’s duty, land tax, capital gains tax, GST any other statutory duties or charges if any as required on settlement of the sale of the Property;
(b)To pay the selling agent’s commission and expenses;
(c)To pay the costs and disbursements of the conveyancer/solicitor acting on the sale;
(d)To pay the Trustee’s remuneration and expenses of acting on the sale;
(e)To pay what shall be due to any encumbrancer or encumbrancers according to their priorities;
(f)To pay the Applicant’s costs of this application;
(g)To pay half the balance to the Applicant and to pay the other half of the balance to the Respondent.
7.The Respondent deliver up vacant possession of the Property to the Applicant pursuant to sections 19(1), 30(1), 58(1) and 77(1)(e) & (g) of the Bankruptcy Act (Cth), 1966 within 60 days of the date of this Order.
8.The Respondent deliver up all keys and documents for all buildings and improvements on the Property to the Applicant within 60 days of the date of this Order.
9.The Respondent remove from the Property all vehicles, rubbish and chattels which have not vested in the Applicant (the personal property) within 60 days of the date of this Order.
10.In the event that the Respondent shall fail to comply with Order 9 above, the Applicant have power to remove and dispose of all personal property and effects on the Property as he may see fit after the expiry of 60 days from the date of this Order.
11.In the event that the Respondent shall fail to deliver up vacant possession of the Property, including the Bankrupt, the Court grants leave to issue a Writ of Possession forthwith.
12.The Respondent pay the Applicant’s costs fixed in the amount of $40,000.00.
REASONS FOR JUDGMENT
JUDGE STREET:
This is an application within the Court’s jurisdiction, under s 27 of the Bankruptcy Act 1966 (Cth) (“the Act”), in which the applicant trustee is seeking to recover the transfer of property of the bankrupt to the respondent, being the bankrupt’s wife. The case has been advanced by the trustee under s 121 of the Act as well as on the basis of constructive trust remedies and/or resulting trust.
It is common ground that there was a property (“the Subiaco property”) jointly owned by the bankrupt and the respondent, which was the subject of a sale by the exchange of contracts on 10 November 2010. The settlement of that sale for $1.88 million took place on 4 January 2011. At that time, the bankrupt plainly had an half interest in the net sale proceeds.
The bankrupt permitted to occur a transaction by reason of which the whole of the net sale proceeds were placed into two term deposits with Commonwealth Bank of Australia (“CBA”) on 11 January 2011 in the name of a trust entity controlled by the bankrupt (“the trust”). The funds from those two deposits in which the bankrupt had a half interest were then used to assist the respondent in the purchase of a property, being 261 Melany Road, North Maleny (“the Maleny property”) and in respect of fixture improvements in respect of that property.
At the time of the receipt of the proceeds of sale of the Subiaco property in the name of trust entity, the bankrupt had no other assets available to meet creditors.
The circumstances at the time of sale and the use of the two deposits are such that it is apparent that the bankrupt had an unsuccessful Subiaco store in respect of which there was in existence a lease liability of which he was the guarantor to the landlord and he knew he was in arrears. Ultimately, it was the landlord that gave rise to the sequestration order against the bankrupt in respect of lease payments that were outstanding. The outstanding lease liability was the subject of demand to the bankrupt from 12 March 2012. The transfer, into the trust entity as the legal owner of the CBA term deposits, was part of an overall transaction in which the bankrupt’s half interest in those proceeds was transferred to the respondent in respect of the purchase and improvements to the Maleny property. It is that whole transfer transaction to the respondent that is the subject of s 121 of the Act.
The Court, in identifying whether or not there has been a transfer of property, is not confined as contended by the respondent, to the interim isolated step of the initial transfer to the trust entity. The Court finds the step of transfer to the trust entity was part of an overall whole transaction by the bankrupt and the respondent to transfer the half interest of the bankrupt in the net proceeds of the sale of the Subiaco property to the respondent. It is also apparent that in relation to that whole transfer transaction, it is not necessary for the trust entity to have been joined to the proceedings as a corporate entity, pursuant to r 11.01(4) of the Federal Circuit Court Rules 2001 (Cth).
It is apparent from the evidence of the bankrupt that the stores had been losing money since 2009. The bankrupt gave evidence, where he described his financial position in the words “My cause was lost”. That is a clear admission that the bankrupt well knew, at the time of the transfer that then took place into the trust entity and then transferred through the trust entity to and for the benefit of the respondent in the acquisition of the Maleny property and its fixture improvements, that his financial position was such that he was likely to be the subject, not just of proceedings, but of steps to make him bankrupt.
The bankrupt acknowledged in his affidavit a conversation with the respondent in about mid December 2010 about struggling financially with the Subiaco Store and that the store was about to close. The bankrupt and the respondent identified a conversation said to be in or about June or July 2012 anticipating the risk of bankruptcy proceedings prior to the acquisition of the Maleny property by the respondent. The bankrupt denied that he used the term bankruptcy, but that is inconsistent with his own affidavit and inconsistent with the evidence of the respondent. The Court readily infers that both parties were aware of this risk at the time of the transfer of the proceeds of sale of the Subiaco property to the trust entity as the bankrupt had no other funds.
It is clear that prior to the acquisition of the Maleny property, there had been a conversation between the bankrupt and the respondent in which he had identified he had an unresolved claim against him from the landlord in respect of the Subiaco shop. The Court finds that, at that time, in June or July, he was aware of the demand that had been made for the outstanding rent in respect of which he was the guarantor. The effect of the conversation included a reference to whether the landlord may be going to take legal proceedings or bankruptcy proceedings against him. That was a conversation in which both the bankrupt and the respondent were alive to the prospect that the bankrupt might be the subject of bankruptcy proceedings because of his inability to pay his debts, and the bankrupt identified that he did not want the landlord to be able to claim against any property which he might purchase in Queensland. The bankrupt identified this as a reason why he did not want to acquire ownership of or any interest in such property. The Court finds that this is evidence ringing with admission in respect of the whole transaction, being the initial transfer of the bankrupt’s half interest in the net proceeds of the Subiaco property that were transferred into the trust, and then completion of the transfer to the respondent by the acquisition of the Maleny property and the improvement fixtures.
The Court is satisfied that the bankrupt well knew that he had no other assets available to meet creditors at the time of the first step in the transfer by the placing of the proceeds of sale into the deposit accounts in the name of the trustee. Given that the bankrupt knew that he had no other assets, and given that the respondent also knew that he had no other assets, the Court readily finds that the steps taken by the bankrupt to transfer his interests in the net proceeds of the Subiaco property, initially into the term deposits, and then to the respondent by the purchase of the Maleny property and the fixture improvements, was for the purpose and with the intention of defeating the bankrupt’s creditors.
The contract for the purchase of the Maleny property was signed by the respondent on 14 December 2012 for a price of $285,000. That property was then a vacant block. A deposit was initially paid of $8,332.50, being 2.92 per cent of the purchase price. It is apparent that there was a transfer from one of the CBA term deposits that was closed on 27 March 2013. On 4 April 2013, the bankrupt withdrew $41,372.07 from his superannuation account and deposited it into a joint account with the CBA in the joint names of the respondent and the bankrupt. That account was used towards the purchase of the Maleny property and the fixture improvements.
On 11 April 2013, $228,000 from the CBA deposit was used towards the purchase price for the Maleny property and the CBA registered a mortgage over the Maleny property in respect of which a guarantee was given by the respondent limited to $400,000. On 15 April 2013, the settlement of the purchase of the Maleny property occurred. The total amount provided at the settlement by CBA was $286,522.06. The amount of $41,500 was withdrawn from a CBA account and applied toward the settlement, leaving a balance in the account of $9.00.
By June 2013, all the bankrupt’s Bedlam stores had closed because they had not been profitable. The last store to close was Mount Lawley in June 2013. At 30 June 2013, the trading entity used in respect of those stores had suffered a fiscal year loss of $90,000, in addition to combined losses for the 2011and 2012 fiscal years totalling $338,000. On 30 June 2013, the balance on the variable loan account was secured by a setoff letter for $472,000. On 30 June 2013, the loans by the bankrupt and the respondent to the trust were partially forgiven by letter that operated retrospectively forgiving alleged liabilities of the trust entity in the amount of $770,591 and leaving a balance outstanding for $100,000.
The Court does not accept that the 30 June 2013 transaction intervenes upon or gives rise to any consideration being given by the respondent for the receipt of the bankrupt’s transfer of his half interest in the proceeds of the Subiaco property to the respondent in the acquisition of the Maleny property and its improvements.
The petitioning creditor obtained judgment in December 2013 for $259,428.30. On 10 November 2014, the sequestration order was made against the bankrupt with the date of the act of bankruptcy being 9 June 2014.
The respondent subsequently refinanced the Maleny property with Auswide, discharging the CBA mortgage and using part of the borrowings from Auswide to make further improvements to the value of the property. That was borrowing against a property in respect of which the respondent was the transferee of property of the bankrupt as a transferor, in respect of which, s 121 of the Act has application. The use of the property loan proceeds, secured against the Maleny property by mortgage to Auswide to discharge the original mortgage and further financing improvements does not give rise to consideration being provided by the respondent for the transfer of the bankrupt’s half interest in the proceeds of the Subiaco property to the respondent.
Section 121 of the Act is as follows:
121 Transfers to defeat creditors
Transfers that are void
(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
(b) the transferor’s main purpose in making the transfer was:
(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or
(ii) to hinder or delay the process of making property available for division among the transferor’s creditors.
Note: For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
Showing the transferor’s main purpose in making a transfer
(2) The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Other ways of showing the transferor’s main purpose in making a transfer
(3) Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.
Transfer not void if transferee acted in good faith
(4) Despite subsection (1), a transfer of property is not void against the trustee if:
(a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and
(b) the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and
(c) the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Rebuttable presumption of insolvency
(4A) For the purposes of this section, a rebuttable presumption arises that the transferor was, or was about to become, insolvent at the time of the transfer if it is established that the transferor:
(a) had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or
(b) having kept such books, accounts and records, has not preserved them.
Refund of consideration
(5) The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(6) For the purposes of subsections (4) and (5), the following have no value as consideration:
(a) the fact that the transferee is related to the transferor;
(b) if the transferee is the spouse or de facto partner of the transferor—the transferee making a deed in favour of the transferor;
(c) the transferee’s promise to marry, or to become the de facto partner of, the transferor;
(d) the transferee’s love or affection for the transferor;
(e) if the transferee is the spouse, or a former spouse, of the transferor—the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975;
(f) if the transferee is a former de facto partner of the transferor—the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975.
Exemption of transfers of property under debt agreements
(7) This section does not apply to a transfer of property under a debt agreement.
Protection of successors in title
(8) This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.
Meaning of transfer of property and market value
(9) For the purposes of this section:
(a) transfer of property includes a payment of money; and
(b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and
(c) the market value of property transferred is its market value at the time of the transfer.
There must, of course, be a transfer of property by the transferor (later made bankrupt) to a transferee. As the Court has indicated, it finds that there was such a transfer of property by the bankrupt to the respondent as the transferee in respect of the bankrupt’s half interest in the proceeds of the Subiaco property, albeit with steps in between taken by the bankrupt as part of the whole transaction where those proceeds were placed on deposit with the CBA and then used to purchase the said property in the name of the respondent.
The Court finds, in respect of that transfer of property by the bankrupt, that the property being the bankrupt’s half interest in the net sale proceeds of the Subiaco property would have become part of the transferor’s estate and would probably have been available to creditors if it had not been transferred to the respondent.
The Court finds, taking into account the admissions made by the bankrupt including from the conversations identified in respect of the potential bankruptcy proceedings, and the financial plight in which the bankrupt identified his case being a lost cause, taken together with the absence of any liquid assets by which the bankrupt could meet the creditors, that the main purpose in the transfer as a whole transaction was to prevent the transfer of property of the bankrupt from becoming divisible among the creditors of the bankrupt, and/or to hinder or delay the process of making property available for division among the bankrupt’s creditors.
The Court does not accept the respondent’s contention that there was no transfer of property to the respondent by the bankrupt. The Court finds in the circumstances of the present case it is entitled to take into account the whole transaction. The conversation referred to above by the bankrupt and the respondent demonstrates that the parties’ real intention at the time of sale was the ultimate transfer of the bankrupt’s half interest in the net proceeds of the Subiaco property to the respondent. In the present case, taking into account the transaction as a whole, the Court finds that there was a transfer of the bankrupt’s property to the respondent. The property transferred was the bankrupt’s half interest in the net proceeds of the Subiaco property to the respondent reflecting in substance in the transaction as a whole a half interest that the bankrupt would otherwise have had in the Maleny property purchased in the respondent’s name.
The Court does not accept the respondent’s submission that the transferor’s purpose was not one falling within s 121(b) of the Act. The Court rejects the respondent’s submission that the transfer of that property of the bankrupt is property that would otherwise have been available to the bankrupt’s creditors within the meaning of s 121(1)(a) of the Act.
Mr Carles, on behalf of the respondent, contends that because of the timing in respect of the sale of the Subiaco property and the time that occurred prior to the commencement of the proceedings and the making of bankruptcy that it should not be inferred that the transferor was or was about to become insolvent. The Court finds in the circumstances where the bankrupt took steps to the knowledge of the respondent to divest himself of liquid assets and to place them all in the trust without any other assets to meet his creditors that the bankrupt was insolvent or about to become insolvent.
The conduct by the bankrupt in the transaction as a whole, of which the respondent was aware, was clearly one which placed the bankrupt in a position where he could not meet liabilities which he had undertaken in the lease which he had guaranteed and in respect of which it was apparent that he would be unable to meet those guaranteed lease payments. That the recovered lease guarantee payments refer to March 2012 does not displace the above finding as at the time of placing the net bankrupt’s half interest in the net proceeds of sale into the trust entity. At that time both bankrupt and respondent knew the bankrupt had no other funds to meet his creditors. The Court readily infers in the circumstances of the present case that the bankrupt and the respondent were aware of the plight that he faced and that he was at risk of being unable to pay his debts as and when they fell due.
The stores had been running at a loss. The financial difficulties in respect of rent for the stores was neatly summed up in the admission that the bankrupt’s position was a lost cause and that, the Court infers, was the reason for the transfer initially into the trust and then to the respondent by the purchase of the Maleny property. The Court finds it can be inferred from the all circumstances that the transferor was or was about to become insolvent within s 121(2) of the Act.
The Court does not, for the reasons already given, accept that the transfer to the respondent was done in good faith so as to avoid the consequence of avoidance under s 121 (4) of the Act. First, there was no valuable consideration given by the respondent in relation to that transfer of the bankrupt’s half interest in the Subiaco property proceeds to the respondent. Further the transferee, being the respondent, did know, and could reasonably have been expected to infer, that the main purpose in making the transfer was for the purpose falling within s 121(1)(b) of the Act, namely to prevent the transferred property from becoming divisible among the transferor’s creditors and/or to hinder or delay the process of making property available for the division amongst the transferor’s creditors. The Court also finds that in circumstances where the respondent was aware that the applicant had no other liquid assets at the time of the first step in the transfer of the property from the sale of the Subiaco property to the trust entity as part of a whole transaction of transfer to the respondent, it could reasonably be inferred by the transferee that the transferor was or was about to become insolvent. The absence of any other liquid funds held by the bankrupt, acknowledged by the respondent in evidence, supports that finding.
It is next contended by the respondent that there was consideration that was provided that the trustee must bring to account within s 121(5) of the Act on the basis of a contention that the transferee provided valuable consideration for that transfer. No such consideration is made out. There was no consideration provided by the transferee in relation to the transfer of the property from the transferor. There is no amount to be brought to account under s 121 (5) of the Act. In these circumstances, the transfer of the said property, being the bankrupt’s half interest in the proceeds of sale of the Subiaco property to the respondent, is void as against the trustee under s 121 of the Act and the trustee is entitled to a half interest in the Maleny property and is entitled to have orders for possession and sale of that property.
The applicant also advanced the case on the basis of either a constructive trust tracing remedy in respect of the property of the bankrupt and/or a resulting trust. The Court finds, on the evidence, that there was, in fact, a transfer of the bankrupt’s property being his half interest in the net proceeds of the sale of the Subiaco property to the respondent into the Maleny property and that there is a resulting trust that emerges in those circumstances from the use of the bankrupt’s property in the acquisition of the Maleny property and the fixture improvements.
The respondent contended that there was a presumption of advancement. No such presumption arises in the circumstances where the Court finds, as it does in this case, that the transfer was undertaken with an intention to prevent the property becoming divisible among the transferor’s creditors and with an intention to hinder or delay the process of making property available or divisible among the transferor’s creditors. Accordingly, the applicant is also entitled to a declaration of a resulting trust equivalent to half the remaining equity after the secured mortgagee interest and payment of relevant costs on the basis of that resulting trust.
The Court also finds that it would have otherwise have found that the trustee’s case in respect of a constructive trust is a remedy that should be imposed in the circumstances of the present case. That is because again, it is the bankrupt’s property in terms of his half-interest in the net proceeds of the Subiaco property that were used to purchase the Maleny property and to make fixture improvements. Given the intention to defeat creditors, it is one in respect of which the Court would readily impose a constructive trust in respect of the half-interest in the net proceeds, after the secured interest of the mortgagee and deduction of relevant costs, as an appropriate and effective remedy in the circumstances of the present case.
The respondent contended that there should be a fine accounting in respect of the Maleny property bringing to account various expenditures. Those expenditures do not reflect the full benefit that the respondent has received from the transfer transaction as a whole, which included renting part of the premises which the respondent acknowledged she had treated as her own funds. The Court is not satisfied that this is an appropriate case in which it should make a percentage order based on specific amounts contended by the respondent to be contributions that should be brought to account. The reality is that the property has been treated by the respondent in a way in which she has obtained the benefit of the renting of the property in circumstances where it in fact was property in respect of which the bankrupt had a half-interest. Further, it was the bankrupt’s half interest that facilitated the further borrowings against the Maleny property in respect of further improvements. The respondent should not be permitted to retain benefits as to the improvement of the property obtained in circumstances where a constructive trust should be imposed. Disgorging what would otherwise have been the bankrupt’s half interest in the Maleny property does equity in the present case. In those circumstances, applying a tracing remedy, the Court would still make an order for sale and payment of half of the net proceeds to the applicant.
The Court has taken into account the principles in relation to s 121 of the Act, as identified in paragraphs 41 to and including 59 of the applicant’s submissions, which are as follows:
Authorities - Section 121 Bankruptcy Act
(41)By reason of subsection 121(2), the requisite main purpose under s.121(1)(b) Bankruptcy Act can be satisfied by inference drawn from all the circumstances. It is not necessary to prove the actual intent of the transferor.
(42)In Small's Case[1] Madgwick J considered payments by Mr Small to his personal superannuation fund made at about the same time as the Deputy Commissioner of Taxation had commenced proceedings against Mr Small for taxation debts in larger amounts. The first issue for determination was whether, at the time that the contribution payments were made, it could reasonably be inferred that Mr Small “was or was about to become insolvent” for the purposes of s.121(2). It was conceded that the superannuation fund, as the alter ego of Mr Small, must have known what his purpose was in the making of each contribution payment.
(43)At [32] and following Madgwick J held:
“[32] To be void under section 121, it must either directly appear that the bankrupt's main purpose in making the transfer was to prevent the money from becoming divisible among his creditors: section 121(1)(b)(i); or the evidence must be such so as to allow a reasonable inference to be drawn that at the time of the transfer he was or was about to become insolvent. In the latter case, his purpose is then conclusively deemed to have been to prevent the property from becoming divisible amongst his creditors: section 121(2). The presumption effected by section 121(2) cannot be rebutted even by direct proof that the transferor's main purpose was other than that described by section 121(2)(b).
[33] In my opinion, it is readily to be inferred from all the circumstances that, at the time of both transfers, Mr Small was or was about to become insolvent, thereby establishing the requisite purpose in section 121(1)(b)(i). As Hill J said in Ashton v Prentice [1998] FCA 1464, "this element looks objectively at the financial position of the transferor at the time the relevant transfer was made".
[1] Official Trustee in Bankruptcy v Trevor Newton Small Superannuation Fund Pty Ltd [2001] FCA 1267
…
[35] On the basis of (the above) evidence, it is impossible not to draw the inference urged by Counsel for the applicant that, as at 26 June 1996, Mr Small was already insolvent or at the very least about to become 9 insolvent. He owed a large sum of money to the DCT, his liabilities exceeded his assets and he and his advisers were of the view they could only meet his obligations to the DCT if he could negotiate a repayment scheme, a course usually not agreed to by the DCT. Accordingly, Mr Small's main purpose in making the three transfers must be taken to have been to prevent the transferred property from becoming divisible among his creditors and, subject to any exception provided in section 121, the transfers would be void as against the applicant."
(44)In Cummins[2] the High Court considered the subsection 121(1)(b) purpose test in circumstances where the bankrupt had failed to lodge any income tax returns at all for a considerable period whilst earning a substantial income, it being clear that had returns been lodged a substantial taxation obligation would immediately have arisen. The High Court, firstly, found that if the other elements of s.121 were made out, “the Commonwealth, represented by the ATO, was a creditor for the purposes of this section” by reason that there was on the bankrupt’s part “awareness of an impending liability” or “some impending indebtedness”.[3]
[2] The Trustees of the Property of Cummins v Cummins (2006) 227 CLR 278
[3] at [31]-[32]
(45)At [34] and following their Honours said:
“[34] What had been required for the trustees to succeed at trial was that the circumstances appearing in the evidence gave rise to a reasonable and definite inference, not merely two conflicting inferences of equal degree of probability, that in making the August transactions, Mr Cummins had the "main purpose" required by the statute. Further, Counsel for the trustees accepted that, in determining the inferences to be drawn from the primary facts, regard was to be had to the seriousness of the allegations made against Mr Cummins (although he was not a party) and the gravity of the consequences of findings adverse to him. Reference was made to the well known judgment of Dixon J in Briginshaw v Briginshaw.
[35] The circumstances, taken together, which satisfied the primary judge that Mr Cummins had the requisite "main purpose" were identified by His Honour in the first judgment as follows:
· Mr Cummins was well aware in August 1987 that he had incurred very substantial liabilities to the ATO, contingent only on the ATO issuing assessments in respect of past income years;
· Mr Cummins was well aware at the time that the ATO would issue assessments once his long standing tax delinquency became known, an event that could occur at any time;
· Mr Cummins divested himself voluntarily of virtually all his substantial assets in August 1987;
· In any event, the assets retained by Mr Cummins were not sufficient to meet his taxation liabilities, if the ATO decided to issue assessments; and
· Mr Cummins saw the transfers as increasing the chances that his assets would be protected by any claim made by the ATO."
(46)In PTV Garuda Indonesia Ltd v Grellman[4], the Court cited with approval the following passage from Lewis' Australian Bankruptcy Law:
[4] (1992) 35 FCR 515 at 523
“The general principle may be stated that any dealing with property (other than by sale for a reasonable price) made with the object of putting it beyond the reach of present or future creditors comes within the definition of a fraudulent conveyance if the person concerned cannot immediately pay his debts or anticipates some event which may render him unable to pay his debts in future; such a dealing will be treated as fraudulent irrespective of the presence or absence of a conscious fraudulent intent on the part of the debtor if the necessary result of the dealing is to put the property beyond the reach of his creditors…. The word "fraudulent" indeed has received an interpretation in bankruptcy matters somewhat wider than its ordinary use, and it may be defined as an equivalent to "with an intention to deprive creditors of recourse against all or any of his assets"."
(47)In Barton[5] Stephen J, with whom Menzies and Gibbs JJ agreed, said (at [374]) that an intent may be established (in relation to intent to defraud or delay his or creditors for the purposes of s.40(1)(c) Bankruptcy Act) if the intent is formed in relation to an existing or anticipated creditor. Stephen J’s observation was cited with approval in Cannane[6] by Brennan CJ and McHugh J.
[5] Barton v The Deputy Commissioner of Taxation of the Commonwealth of Australia (1974) 131 CLR
[6] Cannane v J Cannane Pty Ltd (in liq) (1998) 153 ALR 163 at 168-169
(48)48. Gummow J in Cannane also referred to Barton and stated (at [174]):
“An intention to defeat future creditors is sufficient to enliven s.121, and if this be made out, it is no answer that at the date of the disposition of property the disponor had no creditors.”
(49)In Ebner[7] the Full Court of the Federal Court cited Cannane in holding that s.121 Bankruptcy Act was concerned with an intention to defraud any present or future creditors. It was not concerned with the realisation of that intention. If the requisite intent existed at the time of the disposition in relation to a person or persons not already creditors, it was immaterial whether or not they in fact later became creditors.
[7] Ebner v Official Trustee in Bankruptcy [1999] FCA 110
(50)Ebner was followed by Tracey J in Mathai v Nelson[8] where His Honour held:
[8] [2012] LFCA 1448
“[37] Section 121 places no temporal limitation on the status of “creditor”. If the prescribed intention is present when the relevant transfer occurs, the transfer will be void against the trustee. The intention may relate to persons who were, at that time, yet to become creditors. Such persons may or may not choose or be able to prove in the subsequent bankruptcy. It is, therefore, possible for a person to be a creditor for the purposes of s.121 even if that person never seeks to prove in the bankruptcy and was not foreseen as a future creditor at the time of the transfer.”
(51)In Prentice v Cummins[9] Sackville J at first instance held that if a debtor makes a voluntary settlement of property, leaving the debtor without sufficient assets to meet his or her debts, it could readily be inferred that the debtor's main purpose in effecting the relevant transfer was to prevent the transferred property from becoming divisible among his or her creditors. Sackville J also stated:
[9] (2002) 124 FCR 67, [2002] FCA 1503 at [98] (p91)
“[99] A fortiori, a transferor may have the requisite purpose if assets are given away at a time when he or she is aware of an impending liability, but one which has not yet crystallised into an existing indebtedness: Barton v Deputy Commissioner of Taxation at 374 per Stephen J (where the impending liability related to a taxation debt which would come into existence only once an assessment had issued).”
(52)In Alvaro[10] the Full Court of the Federal Court quoted with approval a passage from Noakes v J Harvey Holmes & Son[11] at pp10-11:
[10] Official Trustee in Bankruptcy v Alvaro, Guiseppe and ors [1996] FCA 483
[11] [1979] FCA 40, (1979) 37 FLR 5
“In the present case, the inevitable result of the transfer of shares on 13 December 1976 was to defeat or delay any attempt to execute the judgment in Norfolk Island. The case falls squarely within the line of authorities of which Freeman v Pope is the leading example, where Lord Hatherley LC said (at 541):“But it is established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors must remain unpaid, it would be the duty of the Judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that this case is within the Statute.””
(53)The above authorities have been cited and followed on many occasions.[12]
[12] See for instance Windoval Pty Ltd v Donnelly [2014] FCAFC 127; 226 FCR 89 at [131]-[147]
(54)In Donnelly v Windoval at first instance[13] Foster J had had no difficulty in finding, in circumstances not dissimilar to the present, that in relation to a transfer of a sum of money for no consideration to a trust effectively controlled by the transferor who later became bankrupt, it could be inferred under s.121(2) that the transferor’s main purpose in making the payment was to prevent the moneys from becoming divisible among his creditors or to hinder or delay the process of making property (including the relevant sum) available for division among those creditors. That finding was upheld on appeal.
(55)In Donnelly v Windoval the transfer was by way of purported gift. In the present case the transfer was by way of purported loan, subsequently forgiven: taking the transaction as a whole there is no practical difference. The artifice of a loan later forgiven is in reality and substance the same as a gift: the Trust should be regarded as a volunteer, having given no consideration. The moneys at all times remained under the control of the Bankrupt as sole director and shareholder of BDA and “could be used by him for his benefit and for the benefit of his family and associates while at the same time be beyond the reach of” his creditors – in the words of Foster J at [149].
(56)Foster J also found at ([146]) that the transferor had the requisite intention, namely to defeat or hinder his creditors within the meaning of s.121(1)(b) of the Act. The fact that the creditor in that case, the Commissioner of Taxation, did not issue a revised taxation assessment until some five years after the transfer in question did not matter at all.
(57)In Anscor Pty Ltd v Clout[14] the Full Court of the Federal Court (Wilcox, Moore and Lindgren JJ), in a case concerning s.120(1) of the Act, held at [125]-[135] that a trustee in bankruptcy could apply equitable principles of tracing to trace moneys paid away by the transferor (later bankrupt) for no consideration into properties held by various associated parties.
(58)At [132]-[135] their Honours held that there was a basis, as recorded by the primary Judge, for his finding that the steps taken after (the date in question) … were part of an elaborate exercise designed to put the properties acquired by the (associated parties) beyond the reach of the (transferor’s) prospective trustee in bankruptcy (emphasis added).
(59)Recently, Markovic J in Weston (Trustee) v Sanna[15] at [67] held that the propositions stated by Lindgren J in Anscor at [43(h)-(j)] in relation to tracing expressly or by implication applied equally to s.121 of the Act. Those propositions were:
“43(h) If the property the subject of a transfer made void by s 120 as a result of the trustee’s election to avoid, still exists in specie as at the commencement of the bankruptcy, it will vest in the trustee in bankruptcy forthwith upon the debtor’s becoming a bankrupt if it also still exists then (by reason of ss 58, 115, 116 and 5(1) (‘the property of the bankrupt’), subject always to the exceptions and the protections given to third parties found in s 120. From the date of the bankruptcy, the owner will have had the property in trust for the trustee in bankruptcy, and, if the owner sells it after that date, will be accountable to the trustee for the proceeds of sale as for money had and received: cf Brall at 384; Brady v Stapleton at 334; Alvaro at 426; Fiorino at 21. (In Fiorino, the sale by the bankrupt’s mother, to whom the bankrupt had given the property, took place after the making of the sequestration order and before avoidance by the trustee. Gummow J held that she had held the property on trust for the trustee in bankruptcy and came under a personal liability to him ‘to account for, as money had and received, the proceeds of the sale of the property by her’.)
(i) If the property the subject of a transfer made void by s 120 as a result of the trustee’s election to avoid, no longer exists in specie as at the commencement of the bankruptcy, but can be seen to exist as at that date in an identifiable substitute form of property, such as a fund representing the proceeds of sale of the property, that substitute property will vest in the trustee in bankruptcy forthwith upon the debtor’s becoming a bankrupt, if that substitute property, or an identifiable substitute for it, still exists then, subject, as ever, to the exceptions and the protections given to third parties found in s 120: cf Alvaro at 426-427; Halfey; In re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831 (‘Mouat’) at 834-835; Brady v Stapleton at 332-333; Lumsden v Snelson [2001] FCA 83 at [24]–[27].
(j) If, at the commencement of the bankruptcy, property the subject of a transfer made void by s 120 exists neither in specie nor in an identifiable substitute form, equitable relief founded in equity’s auxiliary jurisdiction may nonetheless be available to the trustee in bankruptcy. This may occur where, for example, the property, such as money, can be ‘followed’ or ‘traced’ into, other property which is not, however, simply an identifiable substitute for it: cf Mouat at 834–835; Trautwein v Richardson [1946] Arg LR 129; Issitch at [36]; O’Halloran at [80] per Allsop J and works cited by his Honour. In such a case an equitable charge over that other property in favour of the trustee in bankruptcy for the amount of the value of the property, or the amount of money which the debtor/bankrupt transferred plus interest, will often be found to be an appropriate remedy: for a recent illustration, see Fodare Pty Limited v Official Trustee in Bankruptcy [2000] FCA 1721.”
[13] Donnelly (Trustee) v Windoval Pty Ltd [2014] FCA 80 at [131]-[152]
[14] [2004] FCAFC 71; (2004) 135 FCR 468
[15] [2020] FCA 830
The Court has taken into account that there were proceeds from the superannuation fund to which the bankrupt was entitled that were then placed into a joint fund and also used in relation to the acquisition and fixture improvements of the Maleny property. The funds lost the protection of s 116(2)(d) of the Act upon being placed into the joint account of the bankrupt and the respondent. The Court accepts the applicant’s submissions in that regard, and will have identified the authorities referred to in paragraph 69 and 70:
(69)In Worrell (Trustee) v Kerr- Jones[16] Spender J said at [23]:
[16] [2002] FCA 1090
“It is true to say that if the funds in question had remained in the MLC Five-Star Variable Income Plan, they would not have been available to the Trustee (or to the creditors), because subs 112(2)(d) would have operated to exclude the funds from the “property of the bankrupt” available for distribution to creditors. The fact is that the funds did not remain in the MLC Five-Star Variable Income Plan: prior to his bankruptcy the bankrupt directed the withdrawal of those funds and the payment of them to the respondent.”
(70)Worrell v Kerr-Jones was followed and applied by Brereton J in Watson Wyatt Superannuation Pty Ltd v Oberlechner[17] at [27]-[28] where His Honour said:
“27. (CTH) Bankruptcy Act 1966, s 116(2)(d), relevantly provides that property divisible amongst the creditors of a bankrupt does not include the interest of a bankrupt in a regulated superannuation fund or a payment to the bankrupt from such a fund received on or after the date of bankruptcy, if it is not a pension. The Magistrate found that no part of the payment was an interest in the superannuation fund at the commencement of the bankruptcy, as it had been removed from the fund before the date of the bankruptcy. The payment having occurred on 7 August 1996, it was not a payment received on or after the date of the bankruptcy. Spender J recorded (at [16]) that those findings were not contested on the appeal, with the consequence that the payment was not excluded by s 116(2)(d) from being the property of the bankrupt divisible amongst his creditors. In other words, the $95,000, having been paid from the fund prior to the date of bankruptcy, was not at the relevant date the interest of the bankrupt in a superannuation fund. But his Honour added (at [23]):
‘It is true to say that if the funds in question had remained in the MLC Five Star variable income plan, they would not have been available to the trustee (or to the creditors) because sub-section 112(2)(d) would have operated to exclude the funds from the 'property of the bankrupt' available for distribution for creditors. The fact is that the funds did not remain in the MLC Five Star variable income plan. Prior to his bankruptcy the bankrupt directed the withdrawal of those funds and payment of them to the respondent.’
28. Those observations lend support to the view that it was the act of payment of the sum which removed it from the fund, not the existence of an entitlement to direct payment.”
[17] [2008] NSWSC 272
In relation to the finding of a resulting trust, the Court will have identified the principles that have been referred to in paragraph 74 of the applicant’s submissions:
(74)In Foundas v Arambatzis[18] the New South Wales Court of Appeal recently restated those principles at [46]-[51]:
“46. Where two persons jointly provide the purchase money for the property and the property is put into the name of one of them, then, unless the relationship between the parties gives rise to a presumption of advancement, it is presumed that the beneficial ownership of the property is held in the proportions in which they each contributed the purchase money (Calverley v Green (1984) 155 CLR 242 at 246-247, 258, 269; [1984] HCA 81). The presumption can be rebutted by evidence of actual intention.
47. Likewise, if two purchasers contribute to the purchase price and the property is conveyed to them as joint tenants, there is a presumption that the beneficial interest in the property is held in shares proportionate to their contribution (Calverley v Green at 246-247, 258 and 269; Jain v Amit Laundry Pty Ltd [2019] NSWCA 20 at [89(2)]).
48. This presumption of a resulting trust also applies where two purchasers contribute in unequal shares to the purchase price and the land is conveyed to them as tenants in common (Ryan v Dries [2002] NSWCA 3; (2002) 10 BPR 19,947). In Ryan v Dries land was conveyed to the parties as tenants in common in shares of one-seventh and six-sevenths, but it was held that the presumption of a resulting trust arose and was not rebutted leading to a conclusion that the beneficial ownership was held in the proportions of 57 per cent and 43 per cent.
49. The presumption of a resulting trust may be rebutted by evidence as to the parties’ actual intentions, but does not yield to slight circumstances (Shepherd v Cartwright [1955] AC 431 at 445; Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353 at 365; [1956] HCA 28; Brown v Brown (1993) 31 NSWLR 582 at 596). In principle, the presumption should be less strong where land is conveyed to the purchasers as tenants in common in defined shares. Nonetheless, the decision of this court in Ryan v Dries shows that the presumption of a resulting trust applies, whether the land is transferred to one party only, or to both parties as joint tenants, or to both parties as tenants in common.”
[18] [2020] NSWCA 47 per White JA, Bell P and Basten JA agreeing; cited with approval in French v Bremner [2020] NSWCA 339 by Leeming JA at [78]
Also in relation to the remedy of the constructive trust, the Court will have identified the principles identified in paragraph 77 of the applicant’s submissions:
(77)This question was recently considered by Markovic J in Weston v Sanna[19] at [141], where Her Honour cited with approval the following passage in Official Trustee in Bankruptcy v Alvaro (1966) 66 FCR 372 per Wilcox and Cooper JJ (with whom Moore J agreed on this issue) at 426-7:
“Although s 121 states that a disposition to which it applies is void, the courts will treat the disposition as effective until impugned in proceedings brought by the trustee in bankruptcy. Thus, where there is a disposition of property to which s 121 of the Act applies, the title which the donee receives is a defeasible one: see Brady v Stapleton (1952) 88 CLR 332 at 332-335 per Dixon CJ and Fullagar J; Harrods Ltd v Stanton [1923] I KB 516 at 520-521 per Bailache J, at 521 per McCardie J. Until the title is defeased by the trustee in bankruptcy calling for delivery up or revesting of the property to the trustee or by instituting proceedings to establish the trustee’s entitlement to the property, the donee may deal with the property as owner and is not required to account for any profit made. If the property is sold and the proceeds of sale dissipated by the donee prior to defeasance the donee is not personally liable for the value of the property: Brady v Stapleton at 332-335. Upon defeasance, if the property remains in its original form or in some derivative form in the hands of the donee, title to the property revests in the trustee in bankruptcy and the donee thereafter continues to hold the property as trustee for the trustee in bankruptcy and will be ordered to do all necessary acts to revest the property in the trustee in bankruptcy. Once the property has revested, the donee thereafter becomes personally liable to account for the property and any profits made by or from the use of that property since the time of revesting of the property. …
Where there has been a disposition of property and that property has not been retained but has been transformed into other identifiable property or mixed with the property of a third party, the court will allow a remedy against the identified specific property in order to give the trustee in bankruptcy an effective remedy upon the avoidance of the original disposition of property Re Mouat; Kingston Cotton Mills Co v Mouat [1899] 1 Ch 831 at 834-835; Trautwein v Richardson at 130, 132, 133. The decision in Re Mouat demonstrates that although the avoidance of the disposition brought about by s 121 of the Act and its predecessors is a legal remedy the courts will grant equitable relief to make good the remedy: see May on Fraudulent and Voluntary Dispositions of Property (3rd ed, 1908), pp 306-307. Where the property has altered in form, but remains in the hands of the donee, equity will allow the trustee in bankruptcy to claim the property in its altered form as, property to which it is entitled, the original disposition by the bankrupt being void as against the trustee. Where the property has been mixed with property of another person so as to constitute a mixed asset or a mixed fund it becomes necessary to look to equity in order to determine how the interest of the persons whose property has come into the mixed fund are to be ascertained and provided for.”
[19] [2019] FCA 32
For the reasons given, the Court has rejected the respondent’s contention that the only transfer was a transfer that could be said to be to the trust entity. The absence of the trust entity is irrelevant given the finding as to the whole transaction, which the Court has identified, as well as the provisions of the rules.
The Court does not accept that the provisions of s 121 of the Act become unworkable because the Court looks at the whole transaction. In this case the transaction as a whole has taken place over two and a half years and the Court finds the intention of the parties over that period of time remained to transfer the bankrupt’s half interest in the net proceeds of sale of the Subiaco property to the respondent. In the circumstances of the present case, there is compelling evidence that meets the requirements of s 121 of the Act. So far as is relevant, the Court does record that it did not find the respondent to be an impressive witness, that the respondent was not reliable in relation to the evidence given, and was evasive. The Court also finds that the bankrupt’s evidence was one in which the bankrupt was unresponsive, erroneously denied conversations that he had with his wife, clearly the subject of affidavit evidence, and the Court does not accept the credibility of the bankrupt.
The Court does not accept the respondent’s submissions that the limited number of creditors at the time of the sequestration order means that the applicant was not the subject of a position of being insolvent at the time of the transfer. Indeed, the very fact that he transferred his only liquid assets into the trust at a time when he knew he had potential liabilities and when his stores had been losing money over a substantial number of years, readily supports the finding made in respect of insolvency at the time of the transfer of the net proceeds of sale of the Subiaco property through the trust entity and ultimately to the respondent in the acquisition of the Maleny property and the fixture improvements.
The Court does not accept that the respondent did not know in respect of the transaction as a whole and could not reasonably have inferred over the whole of the transfer transaction that the bankrupt’s main purpose was to defeat or hinder his creditors.
The Court does not accept the contention that the net proceeds of the Subiaco property were not the subject of a half interest in equity by the bankrupt and finds that property would have been available to creditors but for the transfer by the transaction as a whole to the respondent.
The Court does not accept that the parlous state of the bankrupt was one which related to the position of the trust alone. Indeed, the admission by the bankrupt that his position was a lost cause supports the adverse findings made by the Court, as does the absence of any other liquid assets at the time of the first step in the transaction as a whole being the transfer to the trust entity. The timing in relation to the proceedings taken by the petitioning creditor is not a basis for the Court to make any different findings in respect of the intention of the parties as to the transaction as a whole. Nor does the timing of proceedings by the creditor justify a different finding as to knowledge by both the bankrupt and the respondent throughout the transaction as a whole that the bankrupt was insolvent or was about to become insolvent.
For the reasons given, it is apparent that the Court has accepted that the respondent did intend to participate in the transaction as a whole which was one by reason of which she as the transferee received the transfer of the bankrupt’s property with the intention of defeating or hindering creditors.
The Court accepts the applicant’s submission that there was an artifice or device adopted in this transfer of property as a whole transaction which was the artifice or device of the use of the trust entity to mask the transfer of the bankrupt’s property to the transferee in the acquisition of the Maleny property and the fixture improvements.
The Court does not accept that the contribution that was made through the joint account in respect of the bankrupt’s interest in the sum of $41,172.07 is protected by s 116(2)(d) of the Act. It is apparent that both parties (being the bankrupt and the respondent) knew the joint bank account was to be used for the purpose of completing the acquisition of the property and the fixture improvements, with the intention of that transfer hindering or preventing the creditors of the bankrupt. In these circumstances, the Court rejects the respondent’s contentions that the applicant was not entitled to relief under s 121 of the Act in respect of a half interest in the Maleny property or that there should be some deduction in respect of the $41,172.07. Any protection of that sum was lost upon placing of the same into the joint account and the intention of the parties to hinder or prevent division of property among the bankrupt’s creditors destroys any presumption of advancement in respect of this sum. That joint intention also rebuts any presumption of advancement in respect of the net proceeds of sale of the Subiaco property that were transferred through the trust to the respondent.
In these circumstances, the applicant is entitled to the relief in the form granted by the declarations and orders.
I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the transcript of the published oral reasons for judgment of Judge Street delivered in open Court on 11 March 2021 and the parties were sent a sealed copy of the Court’s orders. Associate:
Dated: 8 July 2021
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