Caddy v McInnes
[1995] FCA 640
•18 AUGUST 1995
CATCHWORDS
BANKRUPTCY - Property available for administration of debts - Bankruptcy Act 1966 s.121 - fraudulent dispositions - meaning of "disposition" - who must dispose of property - section encompasses disposition by third party on behalf of bankrupt
Bankruptcy Act 1966 ss. 120, 121
Cases Considered:
Alvaro, Re, Heerey J., 31 October 1994, unreported
Barnes, Re; Ex parte Stapleton (1962) Qd. R 231
Barton v Official Receiver (1984) 4 FCR 380
Barton v Official Receiver (1986) 161 CLR 75
Bennett v Horgan, Bryson J., 3 June 1994, unreported
Branson, Re; Ex parte Moore [1914] 3 KB 1086
Commonwealth of Australia v Verwayen (1990) 170 CLR 394
David Securities Pty. Ltd. v Commonwealth Bank of Australia (1992) 175 CLR 353
Debtor, Re A; Ex parte Official Receiver v Morrison [1965] 1 WLR 1498
Fiorino, Re, Gummow J., 14 April 1994, unreported
Hermann, Re; Ex parte the Official Assignee (1916) 16 SR (NSW) 264
Hewett v Court (1983) 149 CLR 639
Intended Action, Trustee of Rousou (a bankrupt), Re An v Rousou [1955] 2 All ER 169
Kassabian v Lagonicos (1993) NSW Conv R 55-690
Mal Bower's Macquarie Electrical Centre Pty. Ltd. (In Liq.) and the Companies Act, Re (1974) 1 NSWLR 254
Morris v Morris [1982] 1 NSWLR 61
Muschinski v Dodds (1985) 160 CLR 583
N.A. Kratzmann Pty Ltd (In Liq.) v Tucker [No 1] (1966) 123 CLR 257
Noakes v Harvy Holmes & Son (1979) 37 FLR 5
Norgard v Rocom Pty Ltd, Northrop, Davies and Lee JJ., 16 August 1990, unreported
Official Trustee in Bankruptcy v Baker, Drummond J., 5 August 1994, unreported
Official Trustee v Marchiori (1983) 69 FLR 290
Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364
P.T. Garuda Indonesia Ltd. v Grellman (1992) 35 FCR 515
Player, Re; Ex parte Harvey [1885] 15 QBD 682
Trautwein v Richardson [1946] Arg LR 129
Vansittart, Re [1893] 1 QB 181
Wagner, Re; Ex parte Stapleton v Bennett (1964) 20 ABC 133
Williams v Lloyd (1934) 50 CLR 341
World Expo Park Pty. Ltd. v EFG Australia Ltd. (1995) 129 ALR 685
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GEORGE LIONEL CADDY & ANOR v BRUCE ANTHONY McINNES & ANOR
No. G21 of 1995
BEAUMONT, WHITLAM AND TAMBERLIN JJ.
SYDNEY
18 AUGUST 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. G21 of 1995
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT
OF AUSTRALIA
BETWEEN:GEORGE LIONEL CADDY, Official Receiver for the Bankruptcy District of New South Wales
First appellant
OFFICIAL TRUSTEE IN BANKRUPTCY
Second appellant
AND:BRUCE ANTHONY McINNES and KAREN LORRAINE McINNES
Respondents
CORAM: BEAUMONT, WHITLAM AND TAMBERLIN JJ.
DATE: 18 AUGUST 1995
PLACE: SYDNEY
MINUTES OF ORDER
THE COURT ORDERS:
(1)Appeal allowed, with costs.
(2)Set aside orders 2 to 6 inclusive made at first instance; in lieu thereof, make the following orders:
(a)Declare that the payments of $99,693 made on behalf of the bankrupt between September and December 1989 described in the reasons for judgment are void as against the second appellant.
(b)Order that the respondents pay the second appellant the sum of $99,693 together with interest on that amount at the rate of 10% p.a. calculated from 5 December 1989.
(c)Order that the respondents' application to set aside the notice under s.139ZQ be dismissed.
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(d)Order that the respondents pay the appellants' costs at first instance, including the costs of preparing and serving the s.139ZQ notice.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No. G21 of 1995
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT
OF AUSTRALIA
BETWEEN:GEORGE LIONEL CADDY, Official Receiver for the Bankruptcy District of New South Wales
First appellant
OFFICIAL TRUSTEE IN BANKRUPTCY
Second appellant
AND:BRUCE ANTHONY McINNES and KAREN LORRAINE McINNES
Respondents
CORAM:BEAUMONT, WHITLAM AND TAMBERLIN JJ.
DATE: 18 AUGUST 1995
REASONS FOR JUDGMENT
THE COURT
INTRODUCTION
Section 120 of the Bankruptcy Act 1966 ("the Act") provides for the avoidance of certain voluntary settlements by a bankrupt as follows:
"120(1) A settlement of property ... not being:
(a)a settlement ... made in favour of a purchaser or encumbrancer in good faith and for valuable consideration ...
...
is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.
...
(8)In this section, 'settlement of property' includes any disposition of property."
By s.121 of the Act, provision is made for the avoidance of certain fraudulent dispositions of property by a bankrupt as follows:
"121(1) Subject to this section, a disposition of property ... made ... with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.
(2)Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property."
(3)In this section, `disposition of property' includes a mortgage of property or a charge on or in respect of property."
Section 121 is to be read with s.6 of the Act, by which it is provided:
"6.A reference in this Act to an intent to defraud the creditors of a person or to defeat or delay the creditors of a person shall be read as including an intent to defraud, or to defeat or delay, any one or more of those creditors."
On 19 (sc. 14) February 1990, Enid Dawn McInnes ("the bankrupt") became bankrupt on her own petition. In
proceedings in which, inter alia, application was made by the Official Trustee and the Official Receiver for declaratory and other relief in respect of certain payments which were claimed to be thus void against the trustee in the bankruptcy by virtue of either s.120 or s.121, a Judge of the Court (Einfeld J.) refused to make the declarations sought, and ordered that notices given in that connection (under s.139ZQ of the Act) be set aside. The Official Receiver and the Official Trustee now appeal from these orders.
THE APPELLANTS' CASE
By their statement of contentions filed at first instance, the appellants contended that the respondents, Bruce Anthony McInnes and Karen Lorraine McInnes, should be ordered to pay the Official Trustee the sum of $99,693 and interest, or that such other orders as were just and equitable should be made, on these grounds:
(a)As to the alleged fraudulent disposition (s.121)
Payments made by the bankrupt in the sum of $99,693 for the construction of a dwelling house on land owned by the respondents which were made in the following circumstances were dispositions of property made with intent to defraud creditors:
.In July 1989 the bankrupt entered into an agreement with a builder, Mr. W.D.J. Warburton, to construct an additional dwelling house on land known as "Bringa Park", Stony Point, near Leeton. The registered owners of the subject land were the first respondent (a step-son of the bankrupt - the first respondent is the son of Colin John McInnes, the bankrupt's husband) and his wife, the second respondent (the daughter of the bankrupt).
.In the previous month, in June 1989, an arbitrator's award had been made against the bankrupt in favour of D.R. and J.L. Deaton, builders ("the Deatons") which award was subsequently entered as a judgment in the Supreme Court of New South Wales in the sum of $84,668.32. The contract out of which the dispute arose was an agreement made in 1981 to erect a dwelling house on land in Drummond Street, Leeton, owned by the bankrupt.
.The contract price for the construction of the house at Bringa Park was $87,923 but the total amount in fact paid to the contractor was $99,693. Progress payments were made by bank cheques charged to the bankrupt's loan account with the National Australia Bank, Leeton Branch ("the Bank"). These funds were borrowed from the Bank and their repayment was secured by an existing first mortgage over the Drummond Street property.
.The following payments were made to Mr. Warburton:
13 September 1989 $25,000.00
25 September 1989 20,000.00
19 October 1989 25,000.00
13 November 1989 12,000.00
5 December 1989 5,885.00
5 December 1989 11,808.00
$99,693.00
.The bankrupt had no assets, apart from the Drummond Street property, to satisfy the debt to the Deatons. (The Drummond Street property was mortgaged to the Bank which, ultimately, exercised its power of sale as mortgagee. The mortgage secured all monies owed to the Bank by the bankrupt or by her husband, Mr. Colin McInnes. There was evidence before the primary Judge that, at material times, the liabilities of Mr. Colin McInnes to the Bank substantially exceeded the value of the Drummond Street property, although it appears that the Bank may not have pressed for the payment of the whole of the debt owed by Mr. Colin McInnes.)
.No monies were paid by the respondents to the bankrupt in consideration of the erection of the additional dwelling house on the "Bringa Park" property.
.The arrangement entered into by the bankrupt with the respondents was made with the intention of putting her
available assets beyond the reach of her creditors, in particular, the Deatons.
(b) As to the "settlement" alleged (s.120)
Alternatively, the payments by the bankrupt of the sum of $99,693 for the construction of the house on the respondents' land at "Bringa Park" "comprised" a "settlement of property" which was void against the Official Trustee.
THE FINDINGS AND REASONING AT FIRST INSTANCE
(a) As to the alleged "fraudulent disposition" (s.121)
.Background
There was no real dispute about the background which his Honour outlined along these lines:
In October 1981, the bankrupt entered into a contract with the Deatons for the erection of the house on the Drummond Street property. In November 1981, the bankrupt mortgaged her only significant asset, the Drummond Street property, to secure liabilities to the Bank, including borrowings made by her husband. In 1983, a dispute developed in the performance of the Deatons' building contract. After proceedings had been commenced in the Supreme Court (in 1983), the dispute was referred by the Court to arbitration. The hearing of the arbitration commenced in December 1986. On 10 June 1989, the arbitrator made an award in favour of the Deatons. An application to the Supreme Court to review the award was dismissed on 8 September 1989. Judgment in the sum of $84,668.32 was entered on 26 September 1989.
Until 1988 (sc. 1989) the bankrupt and her husband lived in the Drummond Street house. In late 1988 and in the first half of 1989, consideration had been given to a proposal that they would build a house on the respondents' land at "Bringa Park"; and that, when it was built, the respondents would transfer the land on which it stood, to the bankrupt. In July 1989, the bankrupt entered into an agreement with Mr. Warburton to build the house at a quoted price of $87,923. This was financed by the Bank on the application of several members of the McInnes family. The Bank agreed to advance up to $100,000 on the security of its existing mortgage over the Drummond Street property. (The Bank manager's notes made at the time indicate that the Bank intended that the advance be an "[i]nterim borrowing to finance house construction at Stoney [sic] Point, then clearance by sale of Leeton property [Drummond Street]". In fact, as has been said, the Drummond Street property was not then sold by the bankrupt. It was later sold by the Bank, as mortgagee, for $127,000, the sale being completed in January 1992.) Mr. Warburton received $99,693 by a series of progress payments made between September and December 1989. The house was completed at the end of 1989 and the bankrupt and her husband then moved in. By then, it had become apparent that the bankrupt was unable to meet all her debts. At about this time, the respondents decided not to transfer the "Bringa Park" land to the bankrupt as originally proposed.
On 19 (sc. 14) February 1990, the bankrupt's own petition for bankruptcy was accepted. The first respondent, who is a chartered accountant, was, his Honour said, "instrumental" in the making of her decision to present the petition. No mention was made by him, in preparing her statement of affairs, of any interest in "Bringa Park".
.The bankrupt's state of mind and poor health
Einfeld J. noted that the bankrupt suffered from Huntington's disease and was not fit to give evidence. Because of her illness, "all relevant decisions" were made by Colin McInnes and the first respondent, who, the primary Judge found, "acted as her agents, presumably under her instruction or with her approval or acquiescence or in her agreed place".
.Intent to defraud creditors?
His Honour said that, on the handing down of the arbitrator's award on 10 June 1989, the bankrupt and her family "moved very swiftly" (on 16 June) to arrange finance for the construction of the house at Bringa Park. However, at that time, the Bank was not informed of the debt owed to Deatons.
As to the respondents' knowledge of the bankrupt's financial position, Einfeld J. concluded that "by the time [July 1989] the agreements with the Bank and the builder were made, either the bankrupt alone, or the bankrupt and her husband, daughter and son-in-law, or some of them, had become aware of the decision in favour of the Deatons against the bankrupt". However, at this time, legal proceedings to set aside the award were on foot, and were not resolved until their dismissal on 8 September 1989. Until then, it appears that the respondents had "some confidence" in a successful outcome of those proceedings.
Moreover, from the time of a family meeting held around Christmas 1988, the bankrupt's family held genuine concerns for her health and this was a major factor in the decision to move to "Bringa Park". His Honour said: "[I]n the family's opinion, once the disease set in, the only options for the bankrupt were to live in a nursing home, to live with her husband and have either live-in or regular visiting help, or to live near her daughters so that they could look after her".
At the meeting held around Christmas 1988, the family discussed a proposal that the respondents would convey to the bankrupt an acre, or perhaps half a hectare, of land at "Bringa Park", upon which the house was to be built, for either $15,000 or $20,000: "[T]here was an agreement of some kind that, once the house was built, the land upon which it stood would be transferred to the bankrupt for a price. The price and the size of the land were only indicatively and not precisely defined but this is explained by the fact that the transaction was between members of a family".
In January 1990, the respondents purported to repudiate the agreement "when it was determined not to go ahead with the transfer to the bankrupt". On 15 January 1990, soon after the bankrupt's house at "Bringa Park" was completed, the first respondent met with the bankrupt's Bank manager and discussed, inter alia, the award in favour of the Deatons. The Bank manager's notes of their discussion indicated, his Honour said, "that the respondents, and presumably the bankrupt, deliberately avoided completing the transfer of land to minimise the assets that would be recoverable by the creditors, particularly the Deatons".
The primary Judge went on to say:
"On the other hand ... until the dismissal of the appeal [in September 1989] the bankrupt's precarious financial position had not become clear to them. Between the arbitrator's decision in June and the appeal result in September ... the [respondents] intended to continue with the transaction. Thus, for example, they proceeded with a development application for the subdivision of Bringa Park showing the applicant as the bankrupt. The application was received by Leeton Shire Council on 8 August 1989 and formally approved on 25 October 1989, although no actual subdivision has taken place.
...
[D]espite the fact that the presumed actual effect of the transaction was to divert assets from the reach of creditors, this was not the intention at the time the transaction was entered. The borrowed money was not intended to be disposed of to the respondents, except possibly to help buy the land at value, but to be spent on building a house on land which the bankrupt expected in the near future to own, and to which creditors would then have access.
I find, therefore, that at the time of its conception, the bankrupt's building project at Bringa Park was not expected to significantly reduce the assets available to creditors".
.Conclusions
Einfeld J. expressed the essential reasons for his conclusions as follows:
The respondents entered into the agreements with the Bank and the builder after hearing of the award against the bankrupt. It was a plan that they had held for some time, and they executed it whilst under the impression that they had a good chance of successfully appealing against the arbitrator's award against the bankrupt. At that stage, they intended that the land upon which the house stood, would be conveyed to the bankrupt when it was completed, an intention they conveyed to the Bank and expressed in the development application. (That application, for subdivision approval, was made in the name of the bankrupt as applicant, although the consent of the first respondent, as the owner, was endorsed on it.) However, some time after 8 September 1989, when the appeal was dismissed, their intentions changed. By this stage, the building and financing contracts had been entered into, and construction had begun. Furthermore, in the financial climate at the time, interest on the debt was rapidly accumulating.
It could have been as late as the end of the year that the respondent finally decided that his mother-in-law should petition for bankruptcy. From then on, all the actions of the bankrupt and the respondents were primarily designed to avoid paying the debt to the Deatons. But, Einfeld J. said, there was "insufficient evidence to permit [the Court] to infer actual fraud on the part of the bankrupt in relation to the transactions between herself, the Bank and the builder under which the house was built on Bringa Park". (Emphasis added)
(b) As to the alleged "settlement" (s.120)
The sum of $99,693 was never "settled" on the respondents, as the builder received the money. But the question remained whether the house was settled on the respondents.
For the purposes of s.120, it is established by the authorities that a "settlement" means a disposition of property of such a nature that the retention of the property in some form is contemplated, rather than its immediate disposal by consumption. Einfeld J. concluded that, since the respondents and the bankrupt intended at the time of the transaction that the house would belong to the bankrupt, that she would live in it, and that, after the conveyance of the land to her, she would own it, it followed that s.120 did not apply to the transactions by means of which the house was built on the respondents' land. His Honour said that the first respondent believed that his mother-in-law owned the house she had built, notwithstanding that it was on his land. He clearly did not intend to gain, and did not believe that he had gained, a house, or anything else, from the transactions. The building of the house was certainly not intended to confer any lasting benefit on the respondents. As legal owners of the land upon which the house was built, the respondents may have gained legal ownership of the house. If so, this position was an unintentional temporary state of affairs pending the proposed subdivision and transfer which equity would enforce. It followed that there was no settlement of the house on the respondents.
THE APPELLANTS' GROUNDS OF APPEAL
By their notice of appeal, the appellants contend that the primary Judge should have found that the payments made by the bankrupt in the sum of $99,693 for the construction of the house on the land owned by the respondents were dispositions of property made with intent to defraud creditors; and that the payments were not made in good faith; and that the respondents were parties to the making of fraudulent payments in the sum of $99,693, for the purposes of s.121. Alternatively, the appellants further contend that his Honour should have held that the payments of $99,693 comprised a "settlement of property" within s.120. The appellants now seek orders that the respondents pay the second appellant the sum of $99,693 and interest; and that the respondents' application to set aside the notices under s.139ZQ be dismissed.
CONCLUSIONS ON THE APPEAL
(a) The primary facts
It will be recalled that the sequence of the relevant events which, so far as concerned the primary facts, were not disputed, may be summarised as follows:
.October 1981 - Contract with the Deatons.
.November 1981 - Bankrupt mortgages Drummond Street to secure borrowings.
.1983 - Dispute with the Deatons and institution of Supreme Court proceedings (later referred to arbitration).
.December 1986 - Commencement of arbitration proceedings.
.December 1988 - Discussion between members of the McInnes family in which consideration is given to the proposal that, given the bankrupt's state of health, she should move to a home to be erected on "Bringa Park".
.10 June 1989 - Arbitrator's award in favour of the Deatons against the bankrupt in the sum of $39,762.19 plus interest calculated from 10 January 1983 together with costs. (At this time, apart from the possibility that the Bank might lend funds for this purpose, the bankrupt was unable to pay the Deatons the amount awarded.)
.16 June 1989 - Interview between the Bank manager (Mr. Smith) and the second respondent.
.25 June 1989 - Preparation of a plan of the proposed residence.
.July 1989 - Mr. Warburton quotes for the construction of the residence in the sum of $87,923.
.19 July 1989 - Approval by the Bank of the bankrupt's application for a line of credit.
.8 August 1989 - Development application for subdivision in the bankrupt's name lodged with the Council.
.8 September 1989 - The bankrupt's application to set aside the arbitrator's award is dismissed by the Supreme Court.
.13 September 1989 - The Bank makes the first payment ($25,000) to Mr. Warburton on behalf of the bankrupt, the repayment of which is secured upon the Drummond Street property.
.25 September to 5 December 1989 - The Bank makes further payments to Mr. Warburton (in all, a total of $99,693) on behalf of the bankrupt, similarly secured.
.January 1990 - Decision by the McInnes family not to proceed with the proposed conveyancing transaction.
.1 February 1990 - The bankrupt presents her own petition for bankruptcy. (Her statement of affairs makes no reference to any interest claimed in "Bringa Park".)
It will be convenient to consider the claims under s.120 and s.121 separately, but to turn to the s.121 claim first since this was the primary case presented by the appellants.
(b) The claim under s.121
Although there is no dispute about the primary facts, the appellants now seek to challenge some of the factual inferences drawn by the trial Judge. Before turning to the questions of law that arise in the appeal, it will be convenient to mention this challenge first.
.Factual challenge
It will be recalled that his Honour found that, until the Supreme Court dismissed the proceedings to set aside the award in favour of the Deatons (on 8 September 1989), it appeared that the respondents had "some confidence" in the outcome of those proceedings. As has been noted, this was one of the considerations that led Einfeld J. to conclude that "at the time of its conception" (i.e. late 1988 - early 1989) the building project was not expected to reduce significantly the assets available to creditors.
His Honour gave these reasons for making his critical findings in connection with the "appeal" against the award:
"THE APPEAL
However, at the time the building and financing transactions were entered in July 1989, legal proceedings were still under way to set aside the arbitrator's decision. When these proceedings were finally dismissed on 8 September 1989, the project had been arranged and the building commenced. There was some evidence that the respondents believed that they were going to win the appeal. Kenneth Smith [the Bank manager] recorded [the first respondent's] stated belief ...:
The final comment of their Legal Counsel ... was the decision was poorly administered and incorrect or unfair. There was too much cost involved to appeal any further .,.. [i.e. to appeal the decision of the Supreme Court not to overturn the arbitrator's award]
On the stand [the first respondent] confirmed that this was his belief ...
I'd always been led to believe that given
the facts of the case there was no way that Enid could lose the case so I was angry at the time ...
No evidence was brought by the trustee to suggest that the appeal to the Supreme Court was hopeless, or that the McInneses may not have had real confidence in its success. Yet on such an issue the trustee had the burden of proof, or at least the responsibility to do more than merely advance a submission. It is my conclusion in the circumstances therefore that although the respondents knew of the arbitrator's decision when they arranged the finance for the transaction, they were continuing to contest the matter, apparently with some confidence of success, and did not consider the issue to be settled against them until 8 September when building had already commenced."
However, in a related context, Einfeld J. had earlier found that the evidence of Colin McInnes and the first respondent was unreliable. In their testimony, each had sought to deny being aware of the arbitrator's award before September or October 1989. Rejecting their versions, his Honour described their evidence as "unappealing and unconvincing" in the circumstances.
On behalf of the appellants, it is submitted that his Honour's observations as to the prospects of the "appeal" were not warranted; and that, in any event, they could not justify the failure to make a finding of fraud on the part of the members of the family who were parties to the "Bringa Park" transaction. Put differently, the appellants contend that the primary Judge should have made this finding even if it were to be assumed that the "appeal" had had a reasonable prospect of success.
The appellants say that, ultimately, the question whether the transaction was entered into with fraudulent intent was an issue the resolution of which depended upon the drawing of proper factual inferences. In this connection, the appellants call in aid his Honour's conclusion that "the McInneses entered into the agreements with the Bank and the builder [Mr. Warburton] after hearing of the award against the bankrupt". Although the primary Judge went on to hold that there was insufficient evidence to warrant a finding of fraud, the appellants submit that this conclusion could not be supported when regard is had to the undisputed primary facts and to the other findings made by his Honour.
There is force in the appellants' submission that the subjective views claimed to have been held by the respondents early in September 1989 as to the bankrupt's prospects of success in the "appeal" were no real answer to the appellants' claims. As has been said, well before this time, from June through to July 1989, the award against the bankrupt having been made early in June, the respondents had put in place arrangements with the Bank to fund the "Bringa Park" project and Mr. Warburton had been asked to quote for it; but the first payment by the Bank to Mr. Warburton, made at the direction of the bankrupt, yet with the full knowledge and approval of the respondents, took place on 13 September 1989, that is, after the dismissal of the "appeal" on 8 September.
We turn now to consider the ingredients of s.121 in turn.
. "Disposition of property" by the bankrupt?
As has been said, the claim made here was that the payments of the total sum of $99,693 constituted a "disposition of property" by the bankrupt within the meaning of s.121. On behalf of the respondents, it is submitted that there was no such "disposition". Amongst other contentions, they rely on the circumstances that the Bank, not the bankrupt, made the payments and that their recipient was Mr. Warburton.
In our opinion, however, for present purposes it is the substance rather than the form of the transaction that is important and, as a matter of substance, there was here a "disposition" of the proceeds of the bank finance by the bankrupt in favour of the respondents as disponees.
Although "property" is defined very widely in s.5 of the Act, there is no statutory definition of the term "disposition" other than the inclusive definition in s.121(3) which picks up a mortgage etc. (cf. N.A. Kratzmann Pty. Ltd. (In Liq.) v Tucker [No.1] (1966) 123 CLR 257 at 284, 293). The relevant dictionary (Macquarie) meaning of "to dispose of" is -
"... to make over or part with, as by gift or sale."
The material dictionary definition of "disposition" is -
"... bestowal, as by gift or sale."
In Norgard v Rocom Pty. Ltd., Northrop, Davies and Lee JJ., 16 August 1990, unreported, after citing Williams v Lloyd (1934) 50 CLR 341 per Dixon J. at 375 and Barton v Official Receiver (1984) 4 FCR 380 per Lockhart J. at 395; and in the High Court (1986) 161 CLR 75 per Gibbs C.J., Mason, Wilson and Dawson JJ. at 78, their Honours said (at 8-9):
"These authorities show that, as the term 'settlement' includes 'any disposition of property', the form of the transaction is not significant, so long as a disposition of property, including money, is involved. Nevertheless, s.120 will not operate to avoid a transaction unless the disposition was intended to secure an enduring benefit and there was no contemplation of the immediate dissipation or consumption of the property which passed."
(Emphasis added)
(See also P.T. Garuda Indonesia Ltd. v Grellman (1992) 35 FCR 515 at 533-4.)
As to the form of the "disposition", in Barton, above, Lockhart J. said (at 395):
"I see no difference for present purposes between the disposition of something other than money and the disposition of money to buy something. The same view was expressed by Vaughan Williams J in Re Vansittart, supra (at 184) and by Stamp J. in Morrison [1965] 1 WLR 1498 at 1505."
In Vansittart's Case [1893] 1 QB 181, Vaughan
Williams J. (at 184) cited an observation of Cave J. in Re Player; Ex Parte Harvey (1885) 15 QBD 682 (at 687) that the "end and purpose of the thing must be a settlement, that is, a disposition of property to be held for the enjoyment of some other person". Vaughan Williams J. (at 184) went on to say:
"... a present of diamonds by a man to his wife is a present which I ought to hold is a settlement on his wife. It seems to me that, to use the words of Cave, J., the purpose of the transaction was the preservation of the thing, whatever its form, for the enjoyment of another person. I think the 'donor' contemplated the retention by his wife of the present which he gave her. I should have held just the same if he had given her money to buy herself a present. It will be observed that in the case of In re Player ..., where the transfer of the shares was held to fall within the section, the actual gift was of money to buy the shares."
In Re A Debtor; Ex parte Official Receiver v Morrison, [1956] 1 WLR 1498, Stamp J., speaking of the English counterpart of s.120 of the Act, said (at 1504-5):
"Holding as I do that the whole purchase price was provided by the debtor, subject only to this, that part of it was advanced on the security of that which was purchased and to which was added a life policy and a joint covenant, it would be a defect in section 42 if the transaction escaped its ambit. In construing the section, I must have regard to the fact that it is clearly framed to prevent properties from being put into the hands of relatives to the disadvantage of creditors, and as was said, in effect, by Sir George Jessel M.R. in Ex parte Hillman ..., the section falls to be construed in a commercial sense. Here something over £1,000 was subtracted from the debtor's property and was utilised in providing a house for the debtor's wife, just as much as if he had paid the money to the wife and she had purchased the house with it: a transaction which, I think, would clearly have been within the section. Similarly, if the debtor had entered into the contract and had caused the
conveyance to be made to his wife, the transaction would clearly have been within the section. I cannot hold that section 42 of the Act of 1914 may be defeated by the conveyancing machinery adopted for carrying out a transaction which would otherwise be within it. The fact that Mrs. Morrison's was the hand that signed the contract does not, in my judgment, affect the matter and the debtor did in my judgment settle the property in favour of his wife within the meaning of section 42." (Emphasis added)
In Trautwein v Richardson [1946] Arg LR 129, Latham C.J. said (at 130):
"... the son urges that sec.37A deals only with dispositions made by the bankrupt, and that, for example, a transfer of land to the son by a third party at the instance of the father and paid for by the father would not fall within the statute. If such a transfer were declared void, it is argued, the result would be to revest the land in the vendor and not in the father. But the courts have not taken this view of 13 Eliz., c.5, the substance of which is reproduced in sec.37A of the Conveyancing Act. The courts have treated the provisions of 13 Eliz., c.5 as producing the result that property bought with the debtor's money and procured by him to be vested in a volunteer with the intent of defrauding his creditors can be treated as if it belonged to the debtor - see the cases cited in Laws of England (2nd ed.), vol. XV., p.246; In re Mouat, ... . Thus there is authority to support the declarations made in the order under appeal that purchases of property arranged by the bankrupt in the name of his son were alienations of property by the bankrupt." (Emphasis added)
See also per Starke J. at 132.
Dixon J. said (at 133):
"... a purchase made in the name of another or in the joint names of the debtor and another has been considered property available, at the instance of creditors or a trustee in bankruptcy, for the satisfaction of debts, if the purpose of placing it in the name of the other party or in the joint names
was to defeat or delay creditors ... By analogous reasoning changes in the form of property made over by the debtor with intent to defraud have been held not to stand in the way of relief; creditors may follow the fund - In re Mouat, [1899] 1 Ch. 831."
(Emphasis added)
See also Re Hermann (1916) 16 SR (NSW) 264 at 269; Re Alvaro, Heerey J., 31 October 1994, unreported, at 21-2.
In Official Trustee in Bankruptcy v Baker, Drummond J., 5 August 1994, unreported, his Honour said (at 86):
"... when one person intends to pass his property to another in order to deprive actual creditors or identifiable potential creditors of timely recourse to the property and he does that in what, as a matter of fact, can be identified as a single transaction, it does not matter whether the transaction comprises a single step, e.g., an assignment of the property directly from disponor to disponee or whether, as here, a number of steps involving persons additional to the original disponor and the person he intends to be the ultimate recipient of his property are involved: the term 'disposition' is wide enough to cover both kinds of transaction. It is true that a disposition of property will occur immediately the owner divests himself of a right in that property by transferring it or by diminishing his interest in the property, e.g. by encumbering it. But the ordinary meaning of 'disposition' is, according to the Shorter Oxford English Dictionary, 'arrangement (of affairs, measures etc.), especially for the accomplishment of a purpose or plan'. The term used in its ordinary sense is apt to describe the accomplishment of a plan by the implementation of a number of separate steps all taken to achieve the planned objective."
(Emphasis added)
With respect, we agree.
(The Full Court in its judgment in the appeal in Baker (Burchett, Ryan and Carr JJ, 3 August 1995, unreported) did not need to deal with this question.)
It follows that we would reject the respondents' argument that the transactions now in question were incapable of constituting a "disposition of property" by the bankrupt within s.121. For one thing, the purpose of the payments was to secure an enduring advantage, namely, the erection of the dwelling. As to the form of the transaction, the circumstance that the Bank was interposed as an intermediary was no answer to the present claim (cf. Re Mal Bower's Macquarie Electrical Centre Pty. Ltd. (In Liq.) and the Companies Act [1974] 1 NSWLR 254 per Street J. at 258). The Bank, as Stable J. put it in Re Wagner; Ex parte Stapleton v Bennett (1964) 20 ABC 133 at 140, was really a "conduit pipe through which money flowed" from the bankrupt to Mr. Warburton.
In our opinion, (provided, of course, that the requisite intention was established, and provided further that the provisions of s.121(2) were not applicable, or the transactions were excluded from s.121(1) as being a disposition for valuable consideration in favour of a person who acted in good faith) the arrangement now challenged constituted a "disposition of property" for present purposes. Here, as in Morrison, above, at 1505, the sum of $99,693 was "subtracted" from the bankrupt's property, being the proceeds of the bank finance raised on the security of her Drummond Street property, and "utilised" in erecting a house upon the respondents' land. Although, as a matter of form, the Bank made the payments, this was done at the request of the bankrupt and of her family, including the respondents. Moreover, the liability to repay the amount paid to Mr. Warburton was secured upon the bankrupt's Drummond Street property, so that her own property was used as a necessary part of the arrangement. In substance, the arrangement was that the bankrupt make available to the respondents the sum of $99,693 for the purpose of providing a residence at "Bringa Park", thus for the benefit of the respondents. In our view, approaching the matter in a "commercial" sense, this amounted to a "disposition" of that amount in favour of the respondents. As a matter of substance, it was as if the bankrupt had purchased a prefabricated building and placed it on the respondents' land without reserving any entitlement, legal or equitable, to the building.
On behalf of the respondents, reliance is sought to be placed upon the reasoning and decision in Re Branson; Ex parte Moore [1914] 3 KB 1086. But, in our view, the special facts of that case distinguish it for our purposes. There, a bankrupt had purchased a clock and caused it to be affixed to the front of a hotel leased by his nephew. The trustee sought to recover the value of the clock from the nephew. The claim failed because the property in the clock was never in the nephew. Yet here the building was erected on the respondents' land and the bankrupt made no claim to it.
. "With intent to defraud creditors"?
In Williams v Lloyd, in a passage frequently cited, Dixon J. said (at 372):
"A real intent to defeat or delay creditors must exist, and the question always is whether, upon all the circumstances of the transaction, the transfer or other disposition was in fact made with that intent. The burden of proof is upon those alleging that it was so made... ."
See also Garuda, above, at 521-6; World Expo Park Pty. Ltd. v EFG Australia Ltd. (1995) 129 ALR 685 at 699-700.
In Garuda, Wilcox, Gummow and von Doussa JJ. said (at 526) that the intent referred to in s.121(1) may be inferred in the manner described by Brennan J in Noakes v Harvy Holmes & Son (1979) 37 FLR 5 at 10-11, applied by Fisher J. in Official Trustee v Marchiori (1983) 69 FLR 290 at 296; that an intention to defraud or defeat or delay some one or more of the creditors of the disponor may be inferred where this is the necessary consequence of a disposition to stave off action by another creditor or creditors; and that an intention to defeat future creditors may be sufficient in the particular circumstances. Their Honours added that the class of creditors referred to in s.121 is not limited to those who at the time of the dispositions had claims which were susceptible of proof under s.82 of the Act. Nor is it necessary that an intent to defraud creditors be the sole intent of the debtor.
In Noakes, Brennan J., Deane and Fisher JJ agreeing, said (at 10-11):"We were pressed with some observations in Williams v Lloyd ... where the court affirmed that the burden of proof that a transfer was made with a real intent to defeat or delay creditors is upon the party who so alleges. But that was a case where, at the time of the challenged disposition of property by a husband to his wife, he was in a sound financial position, and it was held that subsequent conduct and events were insufficient to show that the husband had at that time an intent to defraud creditors ... . In the present case, the inevitable result of the transfer of shares on 13th 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 L.C. said: `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 the case is within the statute' ... . That proposition does not trespass upon the rule as to onus of proof; it is a particular illustration of the discharge of the onus by inference from the known facts ... . In this case, the inference is strengthened by the proximity in time of the failure to have the judgment set aside and the execution of the transfer of the shares. The challenge to his Honour's finding that the transfer fell within the statute of Elizabeth therefore fails."
In our opinion, similar reasoning should be applied in the present circumstances.
It was plain on the evidence that the respondents, and the Bank, were aware of the existence of the award in
favour of the Deatons by no later than 21 July 1989. On that date, Mr. Smith, the Bank manager, informed Mr. Colin McInnes that the loan to the bankrupt had been approved and that a contract of sale of the half a hectare parcel was required. Mr. Smith's note of the telephone discussion proceeded:"6. Caveat on title. Deaton. (Drummond St).
Said he is a builder.
Offered no further comment."
(Notwithstanding the reference to the caveat, it appears that the Deatons proved in the bankruptcy as unsecured creditors.)
Subsequently, on 15 January 1990, Mr. Smith made the following note of an interview with the first respondent concerning the bankrupt's affairs:
"1.Apparently an on going Court case with builder Deaton over construction of house 22 Drummond Street Leeton has been determined.
A figure of $85,000 has been awarded which includes a settlement amount of $35,000 plus accrued interest legal fees etc.
Bruce holds the opinion the legal system has been manipulated by Deaton's representatives and that a Judge's determination on the Court ruling can't be obtained and/or won't change the position. Bruce's option and action is now fairly clear in he will put Mrs McInnes into Bankruptcy when receipt of a reply to our memo addressed to Legal Services of 4.1.90.
Furthermore he has requested the Lands Dept to withhold further conveyancing referring title ownership from B & K McInnes [the respondents]
to E.D. McInnes [the bankrupt] for obvious reasons. The stage has been reached where his payment of $500 sees the process finalized.
As he feels Deaton has been unreal then he will do something similar in return.
(Emphasis added)
Depending on ultimate result the land transfer can be amended to either Alan or Colin McInnes and used as security to NAB. This he has no problems with.
I discussed with Bruce again of our interlocking security from E.D. [the bankrupt] to C.J. & A.C. [Colin McInnes and his son Alan] and that really if the house were to be sold at auction we would apply sale proceeds towards associated debts and I feel nothing left over for Deaton... Bruce simply wishes to ensure our position is secured and there is no further comeback to family.
..."
In February 1990, Mr. Smith noted the following, after a further interview with the first respondent:
"Petition being processed for E.D. McInnes's bankruptcy.
He stated conveyancing on land transfer from himself to E.D. McInnes halted after Supreme Court decision in favour of Deaton (Dec. '89). (Emphasis added)
He will await result of above before continuing with transfer, possibly go into names of C.J. & A.C. McInnes.
If problems there then property can stay in his name and he will guarantee the debt.
Bruce quite willing to do this but only after Enid's Estate is determined.
Attorney General's Dept advice should issue early next month."
On 28 March 1990, Mr. Smith noted the following
(part of which has previously been mentioned):"COMMENT - Recent interview with Bruce McInnes.
Supreme Court decision handed down in December went against Mrs McInnes, and as follows:-
$ 85,000.00 - to builder Deaton, LEETON
$ 57,000.00 - Legal costs estimate
------------
$142,000.00
------------
The final comment of their Legal Counsel was the decision was poorly administered and incorrect or unfair. There was too much cost involved to appeal any further and therefore Bankruptcy action precipitated and accepted on 4th February 1990.
The advice of Bruce McInnes is that Deaton's [sic] become unsecured creditors and so does the court costs/barristers fees etc. However the later [sic] are able to claim back amount via indemnity and insurances subscribed to by the legal profession.
Mrs McInnes has returned to the Official Receivers Office Acknowledgement of her Bankruptcy and now awaits further instruction to wind up her estate.
When initially filing for bankruptcy the amounts shown were estimates and in due course we should be able to receive an exact listing.
The security (House property) of Mrs E.D. McInnes is a 3rd party Mortgage to also support advances to husband Colin. J. McInnes.
The construction of house on the property of B.A. and K.L. McInnes has been completed and now occupied by Colin and Enid McInnes. Conveyancing was withdrawn by Bruce McInnes and in time will be re-commenced and definitely after winding up of the Bankruptcy estate. Ownership could ultimately rest with Colin McInnes or Colin and Allan McInnes as tenants in common. If however there is a problem then title subdivision will be completed and held by B.A. & K.L McInnes and available to us as Mortgage security. (Emphasis added)
The position is complicated and will only resolve itself out now with the winding up of bankruptcy and sale of house at 22 Drummond Street Leeton.
Presently this is unoccupied and agents have made inquiries for interested buyers at $160,000.00."
On behalf of the respondents, reliance is placed upon the proposed arrangement, mooted in December 1988, to the effect that the bankrupt should purchase part of "Bringa Park". But, although a measure of consensus in some areas may have emerged, it is clear that no binding contract came into existence (see Kassabian v Lagonicos (1993) NSW Conv R 55-690 per McLelland C.J. in Eq. at 59,943). For one thing, the restrictions on disposition were not documented in any satisfactory detailed form. In any event, the bankrupt has never claimed in her statement of affairs, or otherwise, that she ever held any equitable interest in part of "Bringa Park" as purchaser. Nor has she ever claimed that she was entitled to any other form of proprietary interest by way of security for entitlement to be repaid the amount spent on building the house on the respondents' land, for instance, by way of an equitable lien (see Hewett v Court (1983) 149 CLR 639 per Deane J. at 668) or in the form of an equitable charge to secure that liability (see Muschinski v Dodds (1985) 160 CLR 583 per Deane J. at 618; Morris v Morris [1982] 1 NSWLR 61 per McLelland J. at 64; Bennett v Horgan, Supreme Court of New South Wales, Bryson J., 3 June 1994, unreported). Such a remedy is in money terms, rather than the award of specific property, and is discretionary (see J.D. Davies, "New Directions in the Employment of Equitable Doctrine in England and Wales", in Youdan (Ed.) Equity Fiduciaries and Trusts (1989) 365 at 389, 391). The availability of this remedy, moreover, depends upon a conclusion that the conduct of the other party was "unconscionable" so that there was "unjust enrichment" (see David Securities Pty. Ltd. v Commonwealth Bank of Australia (1992) 175 CLR 353 at 375; M. Cope, Constructive Trusts at 35). In particular, the prima facie entitlement to relief will be qualified in a case where such relief would exceed what could be justified by the "requirements of good conscience and would be unjust to the estopped party" (see The Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 445-6).
The position then is that, against the background of an adverse finding by the trial Judge as to the credibility of the evidence of the first respondent and Mr. Colin McInnes as to an important issue, the surrounding circumstances pointed to a desire on the part of the first respondent, apparently shared by the second respondent, to place any of the bankrupt's available assets (in the form of her ability to raise bank finance on the security of the Drummond Street property) beyond the reach of her creditors, the Deatons. This desire was evidenced in Mr. Smith's note made in January 1990, but there is no reason to suppose that it had not existed much earlier. The dispute with the Deatons, apparently a bitter one, went back seven years to 1983. As has been said, the respondents' desire to see the Deatons deprived of recourse to the bankrupt's assets was documented by the Bank in January 1990. There is no reason why the ordinary presumption of continuance should not apply here, with the consequence that the inference should be drawn that the bankrupt and those managing her affairs, including the respondents, knew at all material times (that is, no later than 13 September 1989 when bank finance for the project was first provided) that the effect of the proposed arrangements would be to place the only available assets of the bankrupt beyond the reach of her creditors. The circumstance that the bankrupt signed the application for subdivision and the fact that the respondents may have hoped for a successful outcome in the Supreme Court, cannot, in our view, detract from this conclusion. As the events in fact turned out, it was always, in our opinion, the intention of the parties that the arrangements made with the Bank in July 1989 would have the effect of depriving the Deatons of recourse to the assets of the bankrupt. With respect to the primary Judge, these circumstances justified the drawing of the inference that at least between 13 September and December 1989, when the payments were being made for the building, there was an intention to defraud at least one creditor on the part of the bankrupt and those managing her affairs, including the respondents.
It is true that it appears that one of the parties to the transaction, in fact the bankrupt, was not in full command of her affairs. But this is no defence. As Fisher J. pointed out in Marchiori, above, at 297-8:
"The difficulties on the part of creditors which were referred to by the Full Court of Victoria in Michael v Thompson ... are compounded if the person seeking to perpetrate the fraud effects a transfer to a child. If the attempt is successful, there is considerable justification for applying the label of `The Cheat's Charter' (see 91 Law Quarterly Review 86) to s.121 of the Act. It would be too easy to defeat the just claims of creditors and to avoid the intention of Parliament.
However, these difficulties can be overcome if in the first instance there is evidence to cast doubts on the transaction and then to shift the onus to the tranferee. In such a case, in my opinion, the transferee does not necessarily discharge her onus by merely proving lack of knowledge or inability through immaturity to act in bad faith. I do not consider that the question whether the transferee acted in good faith is established exclusively by reference to her subjective state of mind. It is rather, in my opinion, a matter for objective determination not merely whether she was aware of the fradulent nature of the transaction but whether she should have been aware or should be held to have been aware of the fraud being perpetrated on the creditors. In this regard it will be regarded as fraudulent if its effect is to hinder or delay creditors. As Pennycuick V.C. said in Lloyds Bank Ltd v Marcan ... at 367 the word, `defraud ... is not intended to be confined to cases of fraud in the ordinary modern sense of that word, i.e. as involving actual deceit or dishonesty.'."
.A disposition for valuable consideration in favour of a person who acted in good faith?
It will be recalled that a transaction of this kind is excluded by the terms of s.121(1).
In our opinion, the respondents, regarded as the disponees of the property, that is as the recipients, in truth and in substance if not in form, of the proceeds of the bank finance, did not provide consideration of any real or
substantial value as explained in Barton v Official Receiver (1986) 161 CLR 75 at 86. It is not possible to find the terms of any suggested contract (see J.D. Davies "Informal Arrangements Affecting Land" (1979) 8 Syd. LR 578 at 583). In short, the respondents took the full benefit of the application of the proceeds of the bank finance without there being any claim made against them, whether of a proprietary or restitutionary nature, so that they took free of any such claims.
On the question of good faith, for the reasons already given, we are of the view that the respondents were "privy to the fraud" (see Re Barnes; Ex parte Stapleton (1962) Qd. R 231 at 240; Garuda, above, at 528; Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 371-2). Indeed, it appears that the first respondent was in charge of the whole operation.
The position with respect to s.121(2) is similar. Although the Bank and Mr. Warburton are protected by this provision as intermediaries acting at arms' length in good faith and for truly valuable consideration, it cannot be said that the respondents stood in such a position in knowingly receiving the benefit of the proceeds of the transaction without cost to themselves. As has been said, this result was, in reality, something that was directed to happen by the respondents and Mr. Colin McInnes. The fact that other transactions remain undisturbed does not mean that, for bankruptcy purposes, other relief should not be claimed so far as concerns dealings as between the bankrupt and those who, in substance, are the disponees within s.121(1) (see Trautwein, above, at 130, 134-5; Re Fiorino, Gummow J., 14 April 1994, unreported, at 21-2). The present claim may be viewed as one in quasi-contract for moneys had and received and repayable in accordance with the statute, i.e. s.121 (see Re An Intended Action, Trustee of Rousou (a bankrupt) v Rousou [1955] 2 All ER 169, [1955] 1 WLR 545; Re Fiorino, above, at 21; cf. now s.139ZQ(8)).
(c) The claim under s.120
Although much of the reasoning applied in considering the claim under s.121 would also be applicable here (see Barton v Official Receiver, above, at 85) it is not necessary to pursue this alternative claim.
(d) Relief
The appellants should have an appropriate declaration and judgment against the respondents in the sum of $99,693 together with interest. Interest is claimed at the rate of 10% p.a. Nothing has been said against that rate on behalf of the respondents. It is within an acceptable range of rates and should be allowed, as from 5 December 1989, being the date of the last of the payments.
(e) Orders proposed
We would propose the following orders:
(1)Appeal allowed, with costs.
(2)Set aside orders 2 to 6 inclusive made at first instance; in lieu thereof, make the following orders:
(a)Declare that the payments of $99,693 made on behalf of the bankrupt between September and December 1989 described in the reasons for judgment are void as against the second appellant.
(b)Order that the respondents pay the second appellant the sum of $99,693 together with interest on that amount at the rate of 10% p.a. calculated from 5 December 1989.
(c)Order that the respondents' application to set aside the notice under s.139ZQ be dismissed.
(d)Order that the respondents pay the appellants' costs at first instance, including the costs of preparing and serving the s.139ZQ notice.
I certify that this and the preceding thirty-seven (37) pages are a true copy of the Reasons for Judgment herein of the Court.
Associate
Dated: 18 August 1995
Counsel and Solicitors Mr. B.J. Skinner with
for Appellants: Mr. J. Priestley instructed by Lobban McNally & Harney
Counsel and Solicitors Mr. A. McInnes Q.C. instructed
for Respondents: by Ferrier & Associates
Date of hearing: 17 May 1995
Date Judgment delivered: 18 August 1995
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