Brown v Mikulski
[2016] FCA 1037
•1 September 2016
FEDERAL COURT OF AUSTRALIA
Brown v Mikulski [2016] FCA 1037
Appeal from: Brown v Mikulski & Anor [2016] FCCA 683 File number: NSD 825 of 2016 Judge: GLEESON J Date of judgment: 1 September 2016 Catchwords: BANKRUPTCY AND INSOLVENCY – transfer of property prior to bankruptcy – appeal from a judgment of the Federal Circuit Court of Australia declaring that the transfer of a property is void as against the first respondent – consideration of s 121 of the Bankruptcy Act 1966 (Cth) –appeal allowed Legislation: Bankruptcy Act 1966 (Cth) Cases cited: Sandell v Porter (1966) 115 CLR 666
Swinburne v David Syme & Co [1909] VLR 550; (1909) 15 ALR 579
Woolworths Ltd v Director of Liquor Licensing [2012] WASC 384
Date of hearing: 10 August 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 53 Counsel for the Appellant: Mr BJ Skinner Solicitor for the Appellant: Sullivans Solicitors Counsel for the Respondent: Mr RD Marshall with Mr EA Walker Solicitor for the Respondent: Roberts Legal ORDERS
NSD 825 of 2016 BETWEEN: DEAN SCOTT BROWN
Appellant
AND: BENJAMIN NORMAN MIKULSKI
Respondent
JUDGE:
GLEESON J
DATE OF ORDER:
1 SEPTEMBER 2016
THE COURT ORDERS THAT:
1.The appeal be allowed.
2.The orders of the Federal Circuit Court made on 13 May 2016 are set aside.
3.The respondent pay the appellant’s costs of the appeal.
4.The respondent is entitled to be indemnified out of the bankrupt estate of Angela Flora Moutinho-Brown for his costs of the appeal on a solicitor client basis.
5.Liberty to apply within seven days for any further orders required to give effect to the judgment delivered today.
THE COURT DECLARES THAT:
6.The transfer of the interest of the bankrupt in the property known as 7/9-9A Gannon Avenue, Dolls Point, New South Wales, being Folio Identifier 7/33255, to the appellant on 30 May 2012 is not void against the respondent.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
GLEESON J:
The appellant (“Mr Brown”) appeals from a decision of a judge of the Federal Circuit Court of Australia (“FCCA”) making orders concerning the property known as 7/9-9A Gannon Avenue, Dolls Point, New South Wales (“property”): Brown v Mikulski & Anor [2016] FCCA 683.
In particular, the FCCA judge declared that the transfer of the property from Ms Angela Flora Moutinho-Brown (“bankrupt”) to Mr Brown on or about 30 May 2012 is void against the first respondent (“trustee in bankruptcy”).
In summary, the FCCA judge found that the transfer of the property was void pursuant to s 121 of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”).
Section 121 provides, relevantly:
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.
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.
….
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.
…
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.
BACKGROUND FACTS
The following facts, found by the FCCA judge, were not disputed.
In December 2006, Anthony Fors advanced the sum of $100,000 to the bankrupt and her husband, Joseph Bishop, by way of a loan.
The bankrupt and her husband stopped making repayments of the loan to Mr Fors in June 2007.
In 2009, Mr Fors commenced proceedings against the bankrupt and her husband to recover the outstanding principal and interest under the loan.
Between July 2006 and September 2009, the bankrupt transferred three real properties registered in her name other than the property, the last of which occurred in around September 2009. By about September 2009, the bankrupt owned no real property other than the property.
In 2010, Mr Brown became aware that the bankrupt and her husband had undertaken a property development which “did not go well” for them, and was approached by them for a loan “because they had run out of funds”.
On 10 October 2010, Mr Brown offered the bankrupt a loan of $150,000 payable from the sale of the property by 31 August 2011.
Between 12 September 2010 and 12 October 2011, Mr Brown expended money (and, in effect, drew down the loan) on renovation works at the property. Upon the completion of these works the property was listed for sale by a real estate agent.
On 23 March 2011, the bankrupt’s husband became bankrupt.
On 20 July 2011, Rockdale Council ordered the bankrupt to demolish unauthorised building work on the property and reinstate the building on the property to its previous design within 28 days, failing which an offence would be committed by her. As a consequence of the Council rectification notice, the property was taken off the market on 26 September 2011.
On 31 August 2011, the bankrupt could not repay to Mr Brown the money lent to her.
On 30 October 2011, the bankrupt and Mr Brown extended the time for repayment of the loan by entering into a further loan agreement making any money lent repayable from the sale of the property no later than 31 December 2012, with the loan secured by a mortgage.
On 19 December 2011, judgment was entered against the bankrupt in favour of Mr Fors by the District Court of NSW in the sum of $267,925.50 plus costs (“Fors judgment”).
In early 2012, the bankrupt informed Mr Brown that “she could not afford to undertake the necessary building works to comply with the notices”. At that point, the bankrupt informed Mr Brown that she “owed $500,000 to a bank” and was “happy to sell for the discharge sum in order to satisfy the mortgage”.
On 8 March 2012, Mr Brown wrote to his conveyancer to inform her that he would buy the property from the bankrupt. He made an enquiry about whether anyone else had a caveat on the property and requested the conveyancer to “get this through quickly”.
On 27 March 2012, the bankrupt and Mr Brown entered into a contract for sale of the property recording a sale price of $500,000.
On 30 May 2012, the property was transferred by the bankrupt to Mr Brown, with the transfer lodged recording consideration of $500,000 being given for the property.
The sale of the property to Mr Brown was assessed for stamp duty on the sum of $500,000.
In July 2013, that is, approximately 15 months after the transfer of the property to Mr Brown, the bankrupt submitted a debtor’s petition, which was accepted. She lodged a statement of affairs on 16 July 2013. The statement of affairs records that the bankrupt:
(1)first had difficulty paying her debts in October 2010;
(2)had less than $500 available cash;
(3)had secured debts totalling $63,000; and
(4)had unsecured debts totalling $437,000 ($305,801 of which related to the Fors judgment).
FCCA JUDGE’S REASONS
At [40], the FCCA judge found that the property would probably have become part of the bankrupt’s estate if it had not been transferred to Mr Brown. Accordingly, s 121(1)(a) was satisfied. This finding was not challenged on the appeal.
The FCCA judge found that s 121(1)(b) was satisfied on the following two bases:
(1)it could reasonably be inferred from all the circumstances that, at the time of the transfer, the bankrupt was insolvent. The relevant findings are at [59] of the FCCA’s reasons, which states:
… by the time of the transfer of the [property] to Mr Brown, in my opinion an inference of insolvency can and should be drawn. The debt to Mr Fors had by then been established by the Judgment in his favour. Mr Brown knew that there was no prospect of the [property] being placed in a saleable condition, which was the only way the Loan to him could be repaid. The bankrupt could not afford to undertake the rectification works herself and it can fairly be assumed that Mr Brown was unwilling to further draw down the Loan, so increasing the debt to him. The only solution was the transfer of the [property] to Mr Brown. That transfer was probably a transfer for fair value, given the cost of the rectification works still required, but the transfer left the bankrupt with nothing to pay the judgment debt. She was, at the time of that transfer, insolvent.
On this basis, by s 121(2), the bankrupt’s main purpose in making the transfer was taken to be the purpose described in s 121(1)(b); and
(2)Further, the bankrupt’s main purpose was either to prevent the property from being divisible among creditors, or to hinder or delay the process of making the property available for division among her creditors, based on the following matters (at [61]):
(a)the bankrupt’s willingness to sell the property to Mr Brown only for the sum required to discharge her bank mortgage ($500,000) at a time when her husband was bankrupt, she could not afford to do the work required to meet the Council order, and had the Fors judgment against her;
(b)Mr Brown’s email sent to his conveyancer on 8 March 2012 requesting the conveyancer to get the sale of the property through to him quickly, in circumstances where the bankrupt’s husband’s estate was being sequestrated and the bankrupt had recently acquired a judgment debt of $267,925;
(c)Mr Brown asking his conveyancer to check if any other people had a caveat on the property, which suggests he and/or the bankrupt were concerned that other creditors of the bankrupt might have an interest in the property and wanted to have the transfer occur before any of those other creditors could place a caveat on the property.
Concerning s 121(4) of the Bankruptcy Act:
(1)at [67], the FCCA judge accepted that the consideration given by Mr Brown for the transfer of the property was at least market value. Accordingly, s 121(4)(a) was satisfied;
(2)at [68], the FCCA judge did not make a finding about whether s 121(4)(b) was satisfied, saying:
In relation to s.121(4)(b), it is debatable whether, at the time of the transfer, Mr Brown knew that the bankrupt’s purpose was that proscribed by s.121(1)(b). He may have remained ignorant of the judgment debt obtained by Mr Fors and the consequence of the transfer for that debt.
(3)at [68], the FCCA judge found that he was not satisfied that Mr Brown could not have inferred that, at the time of the transfer of the property, the bankrupt was, or was about to become insolvent. The FCCA judge went further, saying:
Indeed, he must have inferred that she was insolvent as he knew she would not repay the debt to him and took steps to act quickly to secure his position, vis a vis any other creditors.
At [69], the FCCA judge concluded that, as all of the elements of s 121(4) of the Bankruptcy Act had not been made out, the transfer of the property was void by the operation of ss 121(1) and 121(2) of the Bankruptcy Act.
REASONABLE INFERENCE THAT BANKRUPT WAS, OR WAS ABOUT TO BECOME, INSOLVENT (APPEAL GROUNDS 1 AND 2)
On behalf of Mr Brown, Mr Skinner of counsel submitted that the FCCA judge’s finding that the bankrupt was insolvent at the time of the transfer was against the evidence and weight of the evidence.
A person is insolvent if they are not solvent: s 5(3) Bankruptcy Act. By s 5(2) of the Bankruptcy Act, a person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. The FCCA judge correctly referred, at [52], to the following passage from the judgment of Barwick CJ in Sandell v Porter (1966) 115 CLR 666 at 670:
Insolvency is expressed in s. 95 [of the Bankruptcy Act 1924-1960] as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.
Mr Skinner criticised the trustee in bankruptcy’s failure to call the bankrupt to elicit evidence about her financial situation, and his failure to cross-examine Mr Brown on his knowledge of the bankrupt’s financial position. He noted that the trustee had not examined the bankrupt under s 81 of the Bankruptcy Act and that a transcript of such an examination would have been admissible, by s 81(17).
As to the matters identified by the FCCA judge at [59] of his Honour’s reasons, Mr Skinner submitted:
(1)the existence of the Fors judgment “in isolation is of little significance given the absence of evidence as to the overall circumstances of the bankrupt”. No bankruptcy notice had been issued, or other enforcements procedure commenced, in respect of the judgment debt;
(2)the finding as to Mr Brown’s knowledge (that there was no prospect of the property being placed in a saleable condition) is irrelevant to the bankrupt’s insolvency;
(3)whether Mr Brown was prepared to draw down the loan was not a matter which impacted upon the bankrupt’s solvency;
(4)the conclusion that the bankrupt no longer had any money with which to pay the Fors judgment debt cannot justify a finding that she was insolvent. “The fact that the bankrupt no longer had funds with which to pay the judgment creditor is unremarkable and not a matter upon which an inference of insolvency might properly be made”.
I do not accept propositions (1) and (4). It was open to the FCCA judge to conclude that the bankrupt was insolvent at the time of the transfer of the property, on the basis of the Fors judgment debt and the finding that the bankrupt lacked funds from which the judgment debt could be paid. It was not necessary for Mr Fors to issue a bankruptcy notice in order for the judgment debt to become due.
As to (2) and (3) above, I accept that the finding in [59] about Mr Brown’s knowledge is not relevant to the bankrupt’s solvency, except to the extent that it may have provided a basis for an inference about her capacity to augment her financial resources by way of further borrowings from Mr Brown. I am doubtful that it was open to the FCCA judge to make an assumption about Mr Brown’s willingness to lend more funds to the bankrupt, in the light of their previous marital relationship and his historical willingness to make loans to her. However, it is not obvious that these matters form part of the FCCA judge’s reasoning on the question of inferring insolvency under s 121(2), as opposed to the question of the inferences which Mr Brown may or may not have been able to draw (being the question raised by s 121(4)(c)). In any event, in my view, this aspect of the FCCA judge’s reasoning does not detract from the conclusion at [32] above.
Accordingly, I reject grounds 1 and 2 of the notice of appeal.
WHETHER MR BROWN COULD HAVE INFERRED THAT THE BANKRUPT WAS INSOLVENT (APPEAL GROUNDS 5, 6, 7 AND 8)
The FCCA judge stated, at [68], that:
(1)he was not satisfied that Mr Brown could not have inferred, at the time of the transfer, that the bankrupt was, or was about to become, insolvent; and
(2)Mr Brown must have inferred that she was insolvent as he knew she would not repay the debt to him and took steps to act quickly to secure his position, vis-à-vis any other creditors.
An inference of insolvency is a conclusion about a person’s inability to pay debts as and when they fall due. Even accepting, for the purposes of argument, that the evidence permitted the findings that Mr Brown:
(1)knew the bankrupt would not repay her debt to him; and
(2)took steps to act quickly to secure his position, vis-à-vis any other creditors;
I do not accept that Mr Brown could have drawn an inference about the bankrupt’s insolvency from those matters. Mr Brown would have needed to know facts from which it could be inferred that the bankrupt was, or would be, unable to repay her debts as and when they fell due. The FCCA judge did not make a finding that the loan from Mr Brown to the bankrupt was due at the time of the transfer of property: to the contrary, his Honour found that the loan was repayable from the sale of the property no later than 31 December 2012. Nor was there a finding that Mr Brown was aware of any other creditors. In those circumstances, Mr Brown was not armed with sufficient information to enable him to draw any inference about the bankrupt’s solvency one way or the other. At most, Mr Brown could have become suspicious that the bankrupt might be, or be about to become insolvent.
In this regard, it is significant that there was no finding that Mr Brown was aware of the Fors judgment debt or of the bankrupt’s inability to pay that debt. These were the significant facts bearing upon the bankrupt’s insolvency.
Accordingly, I uphold grounds 5, 6 and 8 of the notice of appeal.
Ground 7 is: “His Honour erred in finding the absence of evidence that the appellant knew that the bankrupt would not repay the debt to him.” This finding appears at [68] of the FCCA judge’s reasons. Mr Skinner did not address ground 7 in terms. Having regard to my other conclusions, it is unnecessary to give it further consideration.
WHETHER THE FCCA JUDGE SHOULD HAVE FOUND THAT S 121(4)(C) WAS SATISFIED (APPEAL GROUND 10)
Mr Marshall, on behalf of the trustee in bankruptcy, correctly observed that Mr Brown’s evidence in chief did not address Mr Brown’s capacity to drawn an inference about the bankrupt’s solvency at the relevant time.
However, in cross-examination, the following evidence was given:
You must have been concerned at the time that there might be other creditors of Angela’s out there who had a caveat on the land, is that right?---No.
Well, why did you ask for - - -?---Because I went through it once before when I bought – sold a property and someone had a caveat on my – on mine and my brother’s property that we didn’t know of, and so I thought check it this time.
Right. But you – you were – or by that time, you were concerned about Angela’s financial position and that she might - - -?--- … concerned about - - - she might go under?---No.
Well, you said earlier that you believed that she was in a difficult financial position - - -?---Yes.
- - - at the time?---But not about to go under, just in a – everyone is in some – a lot of people in difficult circumstances in life …
Well, she had come to you at an earlier point in time and said, “I’ve run out of funds”. You knew she had a property development that had - - -?---She didn’t run out – she run out of funds - - -
- - - been in trouble in Kangaroo Point?---She didn’t have enough funds to put the apartment back to how it was what the council wanted. Yes, that’s true. She didn’t have what I believe was $100,000 to put that apartment back to how it was.
Yes, and she told you that doesn’t - - -?---Yes, she doesn’t, but that - - -
- - - she didn’t have that?---The whole part of it – she’s supposed to sell the unit and give me my money. That’s why we went into it – so, yes.
Right. And you also knew that she had the property at Kangaroo Point which caused – which you say she sold at a loss?---Yes. She – well, she didn’t actually tell me how much or what –she said it didn’t go well.
Right. Well, I put it to you, Mr Brown, that the reason why you asked her to check whether or not somebody else has a caveat on the land and to push the sale through quickly was because you were concerned that the – that if the sale doesn’t go through quickly either Angela might go under or go bankrupt or another creditor might place a caveat on the land?---I didn’t know of any other creditors.
It was not suggested to Mr Brown that he was aware of any other creditors of the bankrupt apart from himself and the bank whose mortgage was to be discharged by the proceeds of sale. In those circumstances, there was no evidence of information from which Mr Brown could reasonably have inferred that the bankrupt was or was about to become bankrupt. In addition, there was positive and un-contradicted evidence from Mr Brown that he did not have information from which he could have drawn an inference about the bankrupt’s solvency.
In those circumstances, in my view, the FCCA judge should have found that Mr Brown discharged his onus of proof in relation to s 121(4)(c): cf Swinburne v David Syme & Co [1909] VLR 550 at 565; (1909) 15 ALR 579; Woolworths Ltd v Director of Liquor Licensing [2012] WASC 384 at [49].
Accordingly, I uphold appeal ground 10.
WHETHER THE FCCA JUDGE SHOULD HAVE FOUND THAT S 121(4)(B) WAS SATISFIED (APPEAL GROUNDS 3 AND 4)
The issue is whether Mr Brown did not know, and could not reasonably have inferred, that the bankrupt’s main purpose in making the transfer was:
(1)to prevent the transferred property from becoming divisible among the transferor’s creditors; or
(2)to hinder or delay the process of making property available for division among the transferor’s creditors.
The FCCA judge accepted that Mr Brown “may have remained ignorant” of the Fors judgment debt and the consequence of the transfer for that debt.
The relevant evidence identified by the FCCA judge was:
(1)Mr Brown’s email sent to his conveyancer on 8 March 2012 requesting the conveyancer to get the sale of the property through quickly, in circumstances where the bankrupt’s husband’s estate was being sequestrated and the bankrupt had recently acquired a judgment debt of $267,925;
(2)Mr Brown asking his conveyancer to check if any other people have a caveat on the property, which suggests he and/or the bankrupt was concerned that other creditors of the bankrupt might have an interest in the property and wanted to have the transfer occur before any of those other creditors could place a caveat on the property.
Mr Brown’s evidence in chief did not address Mr Brown’s knowledge of the bankrupt’s purpose in making the transfer. Nor did he give specific evidence that he could not reasonably have inferred that the bankrupt’s main purpose in making the transfer was the purpose described in s 121(1)(b).
Plainly, Mr Brown contemplated the possibility of other creditors by his question about the existence of caveats.
However, once Mr Brown’s evidence that he did not know of any other creditors is accepted, the irresistible inference is that he did not know that the bankrupt had the proscribed purpose. That purpose is predicated upon the existence of creditors. Similarly, a reasonable inference that the bankrupt’s main purpose was the proscribed purpose could not be made in the absence of a belief as to the existence of other creditors.
Accordingly, the evidence warranted a finding that s 121(4)(b) was satisfied in the circumstances of the case.
CONCLUSION
The appeal will be allowed. The decision of the FCCA judge should be set aside.
Declaratory relief to the effect sought by Mr Brown will be granted.
I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate:
Dated: 1 September 2016
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