Carrafa and Lofthouse as Joint and Several Trustees of the Bankrupt Estate of Santucci and Santucci v Tile Mart (Vic) Pty Ltd
[2018] FCCA 2164
•9 August 2018
FEDERAL CIRCUIT COURT OF AUSTRALIA
| CARRAFA & LOFTHOUSE AS JOINT AND SEVERAL TRUSTEES OF THE BANKRUPT ESTATE OF SANTUCCI & SANTUCCI v TILE MART (VIC) PTY LTD | [2018] FCCA 2164 |
| Catchwords: BANKRUPTCY – Application seeking declarations pursuant to s.120 of the Bankruptcy Act 1966 (Cth) – three transfers of money from the bankrupts to the Respondent – transfers within five years prior to the date of bankruptcy – whether payments from the Respondent to the bankrupts were intended as loan repayments – whether the Respondent assumed liability for the loan – no consideration – whether the monies were held on trust for the Respondent – no proper evidence before the Court to make such a finding – orders as sought by the Applicant. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.116, 120. |
| Applicants: | MICHAEL CARRAFA & DAVID JAMES LOFTHOUSE AS JOINT AND SEVERAL TRUSTEES OF THE BANKRUPT ESTATE OF MICHAEL SANTUCCI & MARISSA SANTUCCI |
| Respondent: | TILE MART (VIC) PTY LTD |
| File Number: | MLG 1488 of 2017 |
| Judgment of: | Judge Hartnett |
| Hearing date: | 3 July 2018 |
| Delivered at: | Melbourne |
| Delivered on: | 9 August 2018 |
REPRESENTATION
| Counsel for the Applicants: | Ms Bateman |
| Solicitors for the Applicants: | Aitken Partners |
| The Respondent: | Not represented |
THE COURT DECLARES THAT:
The transfer of $100,000 by Michael and Marissa Santucci to the bank account of the Respondent on 16 May 2013 is void as against the Applicants pursuant to s.120 of the Bankruptcy Act 1966 (Cth) (‘the Act’).
The transfer of $50,000 by Michael and Marissa Santucci to the bank account of the Respondent on 20 May 2013 is void as against the Applicants pursuant to s.120 of the Act.
The transfer of $36,000 by Michael and Marissa Santucci to the bank account of the Respondent on 21 May 2013 is void as against the Applicants pursuant to s.120 of the Act.
THE COURT ORDERS THAT:
The Respondent pay to the Applicants the sum of $186,000.
The Respondent pay to the Applicants Interest and Costs as agreed or failing agreement, as determined by the Court upon written submissions by the Applicants within 28 days hereof. The Applicants are to provide a copy of such submissions to the Respondent.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1488 of 2017
| MICHAEL CARRAFA & DAVID JAMES LOFTHOUSE AS JOINT AND SEVERAL TRUSTEES OF THE BANKRUPT ESTATE OF MICHAEL SANTUCCI & MARISSA SANTUCCI |
Applicants
And
| TILE MART (VIC) PTY LTD |
Respondent
REASONS FOR JUDGMENT
Preliminary
The Applicants are the trustees of the bankrupt estates of Michael and Marissa Santucci (‘the bankrupts’) pursuant to a sequestration order made on 27 February 2014.
The date of the act of bankruptcy in respect of Mr Michael Santucci’s bankrupt estate is 20 November 2013. The date of the act of bankruptcy in respect of Ms Marissa Santucci’s bankrupt estate is 16 September 2013.
By application filed 11 July 2017, together with a Statement of Claim the Applicants seek the following declaratory relief under s.120 of the Bankruptcy Act 1966 (Cth) (‘the Act’) and consequential orders:-
“1. A declaration that the transfer of $100,000 by Michael and Marissa Santucci to the bank account of the Respondent on 16 May 2013 is void as against the Applicants pursuant to section 120 of the Bankruptcy Act 1966 (Cth) (Act).
2. A declaration that the transfer of $50,000 by Michael and Marissa Santucci to the bank account of the Respondent on 20 May 2013 is void as against the Applicants pursuant to section 120 of the Act.
3. A declaration that the transfer of $36,000 by Michael and Marissa Santucci to the bank account of the Respondent on 21 May 2013 is void as against the Applicants pursuant to section 120 of the Act.
4. Judgment for the Applicants against the Respondent in the sum of $186,000.
5. Interest pursuant to statute.
6. Costs.
7. Such further or other order as the Court sees fit.”
The Applicants rely upon affidavits of evidence sworn by Mr Michael Carrafa on 10 July 2017 and 2 July 2018.
The Respondent opposed the making of the orders sought. The Respondent set out grounds of opposition in the ‘Notice stating grounds of opposition to application, interim application or petition’ filed 7 August 2017 which were as follows:-
“1. The Respondent did provide consideration equal to the value of the transfers listed in the Application.
2. Further and the alternative, Michael and Marissa Santucci were acting as agents for the Respondent when funds were borrowed from Bank of Queensland, both in 2005, and again in 2012, any funds provided to them (including the funds set out in the application) were held on trust for the Respondent.”
On 21 August 2017 the Respondent filed a Defence to the Statement of Claim. In that Defence, the Respondent admitted that between 16 May 2013 and 21 May 2013, the bankrupts made three payments to the Respondent totalling $186,000, (‘the transfers’),[1] which were as follows:-
“(a) On 16 May 2013, the bankrupts transferred the sum of $100,000 from their Bank of Queensland Day2Day Plus bank account with BSB 123616 and account number 21996734 (Santucci Account) to the Respondent's bank account with National Australia Bank Limited with BSB 083144 and account number 115043297 (Tile Mart Account) by telegraphic transfer.
(b) On 20 May 2013, the bankrupts transferred the sum of $50,000 from the Santucci Account to the Tile Mart Account by telegraphic transfer.
(c) On 21 May 2013, the bankrupts transferred the sum of $36,000 from the Santucci Account to the Tile Mart Account by electronic funds transfer. “
[1] As set out in the Applicant’s Statement of Claim, paragraph 3.
The Respondent relied upon an affidavit of Ms Brigitte Santucci sworn on 4 August 2017.
The Applicants argued that the transfers are void as against the Applicants pursuant to s.120(1) of the Act as:-
a)the transfers took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of bankruptcy of the bankrupt; and
b)the Respondent gave no consideration for the transfers or gave consideration of less value than the market value of the transfers.
On 29 March 2017, the Applicants, by their solicitors, made demand on the Respondent for the sum of $186,000.
The Respondent has failed to make payment of $186,000, or any part thereof, to the Applicants. The Respondent argued that the transfers are not void as against the Applicants on the basis that:-
a)the Respondent did give consideration for the transfers, the particulars being that:-
“The Respondent undertook (and continues to undertake) to satisfy all interest and fee obligations of the bankrupts to the Bank of Queensland, and the value of those payments is at least equal to the value of the Transfer provided from the bankrupts.”
b)alternatively, the transfers were at all times held on trust for the Respondent, for the specific purpose of use in the business of the Respondent, and thus were not beneficially held by the bankrupts and thus not divisible amongst the creditors of the bankrupts pursuant to s.116(2)(a) of the Act.
On 4 September 2017 the Applicants filed a Reply in the proceedings, and stated further, relevantly, the following:-
“… the applicants … say further that:
a. Neither Michael and Marisa Santucci (bankrupts) nor the Respondent disclosed to the Bank of Queensland that the funds were borrowed “for the ultimate benefit of the Respondent”;
b. the bankrupts disclosed to the Bank of Queensland that the purpose of the loan was “additional funds for other personal investment (shares/property)”; and
c. the Bank of Queensland loan was not guaranteed by the Respondent, in its capacity as the trustee of Tile Mart Trading Trust, or in any other capacity.
3. … the applicants deny the allegation that the bankrupts were acting as agents of the Respondent, and say further that Michael Santucci retired from the business as early as 2011, and Marisa Santucci retired from full time work from as early as 2009.”
Background
The bankrupts are the founders of a business operated by the Respondent, which is known as Tile Mart. The business is a retailer of ceramic tiles, being wall and floor tiles. The director and secretary of the Respondent is Ms Brigitte Santucci, the daughter of the bankrupts. Ms Brigitte Santucci has been the sole director and sole shareholder of the Respondent since 21 July 2011, and in particular, was so at the time of the transfers.
In December 2006 the bankrupts obtained a home loan from the Bank of Queensland in the sum of $1,225,000. On 21 March 2013 the bankrupts applied to the Bank of Queensland to refinance (by extension of) the earlier obtained home loan (‘the home loan’).
There were matters pertinent to the home loan and the home loan application completed by the bankrupts on 21 March 2013, which included that, inter alia:-
a)the land (and home situated on it) at 60 Oakbank Road Keilor in the State of Victoria (Oakbank) was provided as security;
b)the bankrupts disclosed that each earned a monthly income of $10,000 before tax and $7,150 after tax in their full time employment as employees of the Respondent;
c)the bankrupts disclosed that they owned real estate including Oakbank, valued at $4M, and 506 Geelong Road Tottenham, valued at $6M;
d)the bankrupts disclosed that they owned two motor vehicles described as 'Merc', with a combined value of $230,000;
e)the guarantor of the home loan was to be Oakbank Investments Pty Ltd (A.C.N. 071 378 295) of which the bankrupts disclosed that each owned a 50% share and that Mr Michael Santucci was a director;
f)the purpose of the loan was ‘refinance existing loan + provide extra funds’; and
g)in a section marked ‘Manager Remarks’, the loan application records “Customers have approached OMB to assist them with refinance of their existing LOC with BOQ (1.25M) and requested additional funds ($200k); to use for other personal investment (shares/property)”.
On 16 May 2013, the sum of $198,867.22 was deposited into the bankrupts’ joint bank account, being an advance to the bankrupts of further monies from the Bank of Queensland as sought by the bankrupts in the home loan application, with security taken by the Bank of Queensland in the form of a mortgage over Oakbank and the provision of a guarantee by Oakbank Investments Pty Ltd. On 16, 20 and 21 May 2013 the bankrupts transferred the monies so advanced to them by the Bank of Queensland to the Respondent, as described in paragraph 6 herein.
On 4 April 2017, Ms Brigitte Santucci asserted to the Applicants that the bankrupts borrowed the money because the Respondent needed further funds.
The Respondent claimed:-
“The BOQ loan finalised in May 2013 was an extension of an existing loan originally taken out some years before. The loan was extended which resulted in Tile Mart (Vic.) Pty. Ltd. (“Tile Mart”) receiving an additional amount of $200,000.00. The sum of $186,000 was disbursed to Tile Mart and the balance was retained by BOQ for costs, disbursements and interest.
The original loan from BOQ and this new facility was taken out in name only by the Bankrupts. Tile Mart approached Nick Azar who was the franchise operator of the BOQ Fairfield Branch and agent of the BOQ. Mr. Azar proposed to the Bankrupts that they take the loan out in their names and not in the name of Tile Mart to save interest. The rate of interest that would be charged by BOQ to Tile Mart would be higher than the rate that would be charged if the loan was treated as a residential loan.
The Bankrupts accepted this advice and proceeded with the loan on that basis, however, at all times the loan was a loan to Tile Mart for business purposes. This was the same when the loan amount was increased by $200,000. At all times, the Bankrupts were acting as agents for Tile Mart. Tile Mart has and continues to make all loan repayments to BOQ in respect to the loan from BOQ.
…
As you should be aware, the Titles Office will not record the names of a Trust on title. The Titles Office will only record the name of the Trustee. The beneficial owner of 60 Oakbank Road, Keilor North has been Oakbank Investments Trust since December 1995 and 498-506 Geelong Road, Tottenham has been owned by the Geelong Road Trust since June 2000. The balance sheets of the Oakbank Investments Trust and the Geelong Road Trust clearly evidence the ownership by the Trusts.”[2]
[2] Affidavit of Mr Michael Carrafa sworn 10 July 2017, Exhibit MC-15.
The affidavit evidence of Ms Brigitte Santucci in her affidavit sworn 4 August 2017 was as follows:-
“12. … the borrowing was in the name of Michael and Marissa Santucci in name only and was never for their benefit.
13. Once the funds were advanced they were transferred into the business cheque account of the Respondent and were used to pay several outstanding debts of the Respondent, including, amongst others, the Australian Taxation Office and money owing for radio advertising for the business.
…
15. Since the advance of the transfers the Respondent has continued to pay the outstanding interest on the finance facility to the Bank of Queensland. The principal of the debt owing to the Bank of Queensland is anticipated to be repaid in full when the property subject to the first registered mortgage is sold by Oakbank Investments Pty Ltd as trustee for the Oakbank Investment Trust.
16. The bankrupts have never been individually liable for the amount of the Transfers set out in the affidavit of Mr Carrafa as the Respondent provided full consideration for those Transfers by assuming the liability to the Bank of Queensland pursuant to its Guarantee and Indemnity to the value of the Transfers.”
Ms Brigitte Santucci further asserted that the monies borrowed from the Bank of Queensland by the bankrupts, was a loan made to the Respondent by the Santucci Family Trust.
No financial and/or business and/or any corroborative documents were placed before the Court by the Respondent to establish any of the claims made by the Respondent.
Inability to carry on proceedings
Rule 9.04 of the Federal Circuit Court Rules 2001 (Cth) is as follows:-
“Corporation must be represented
Except as provided by or under an Act or regulations made under an Act, or with the leave of the Court, a corporation may not start or carry on a proceeding otherwise than by a lawyer.”
On 25 May 2018 the solicitors acting for the Respondent filed a notice of withdrawal as lawyer. On 21 June 2018 a Mr Graeme Knott, Chartered Accountant, wrote to the Court (not copying in the Applicants) advising that he had been consulted by the bankrupts and requesting advice as to whether the bankrupts could “appear and defend themselves”. In essence, what the bankrupts sought to do was appear for the Respondent. The Court responded in correspondence of 27 June 2018 to each of the parties stating, relevantly, the following:-
“Dear Parties,
I refer to the above matter and the letter received by the Court from Mr Graeme Knott dated 21 June 2018. A copy of the letter is enclosed for your reference.
Please be advised that Mr Knott does not have authority to correspond with the Court on behalf of Mr Michael Santucci and/or Mrs Marissa Santucci.
Chambers notes that r.9.04 of the Federal Circuit Court Rules 2001 (Cth) (‘the rules’) states the following:-
“Corporation must be represented
Except as provided by or under an Act or regulations made under an Act, or with the leave of the Court, a corporation may not start or carry on a proceeding otherwise than by a lawyer.”
Should leave be sought pursuant to r.9.04 of the rules, an application in a case should be filed via the Commonwealth Courts Portal or in person at the General Federal Law Registry (Level 7, Commonwealth Law Courts).
If you have any questions regarding the filing of an application, please contact the General Federal Law Registry on 8600 3333.”
No application for leave was filed by the Respondent. Accordingly, no leave of the Court was obtained. The Respondent could not thereafter carry on the proceeding.
Consideration
Section 120 of Act is, relevantly, as follows:-
“(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 transfer took place in the period beginning 5 years before the commencement ofthe bankruptcy and ending on the date of the bankruptcy; and
(b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.
Note: For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
…
(7) 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.”
The Applicants bears the onus of proof of the elements necessary to establish that the transfers are void by operation of s.120 of the Act.
The transfers were made by the bankrupts from the bankrupts’ joint bank account to the bank account of the Respondent within the period beginning five years before the commencement of the bankruptcy of each bankrupt. Consequently, each is a transfer of property within the period required for the purpose of s.120(1)(a) of the Act.
The issue in the proceedings is whether the Respondent gave no consideration, or less than market value consideration for the transfers for the purpose of s.120(1)(b) of the Act. The Court finds no evidence to support the Respondent’s assertion that consideration was provided for the transfers.
The Respondent claimed that the monies were borrowed for the benefit of the Respondent, who required the funds in 2013, and not the bankrupts. The Respondent claimed, in a letter to the Applicants, that the bankrupts approached the Bank of Queensland for a business loan for the Respondent however were advised to take out the loan in the names of the bankrupts to ‘save interest’. The Court notes that it was not Ms Brigitte Santucci, sole director and shareholder of the Respondent who approached the Bank of Queensland for the monies described herein as the transfers, rather it was the bankrupts and on their own behalf. Further, there is no evidence from Mr Nick Azar before the Court as would be expected if he was a witness able to support the evidence of the Respondent. By inference, he would not. There is evidence before the Court that no complaint has been made to the Bank of Queensland in respect of any alleged fraud in respect of the bankrupts or the Respondent.
In paragraph 16 of Ms Brigitte Santucci’s affidavit evidence, Ms Brigitte Santucci deposed that the Respondent provided a guarantee and indemnity to the Bank of Queensland for the home loan. This was not the case. The guarantee for the home loan was provided by a separate company, Oakbank Investments Pty Ltd. That guarantee was in evidence before the Court. The Respondent provided no security or guarantee for the Bank of Queensland home loan.
Before the Court were records from the ‘Business Cheque Account’ of the Respondent showing non regular, but monthly, payments from the Respondent to the bankrupts in the period between 2012 and 2015. In 2012, the payments to the bankrupts ranged between $1,000 and $8,000 monthly. These payments were made prior to the transfers. Mr Michael Santucci retired from the business in 2011 and Ms Marisa Santucci retired from the business in 2009. Ms Brigitte Santucci said in evidence “for my parents, their business paid for everything and their lifestyle”. Ms Brigitte Santucci claimed, in cross-examination, that the payments made from the Respondent to the bankrupts in 2012 were merely a continuation of payments from the operation of the Respondent prior to her appointment as director. In 2013, the payments to the bankrupts were not dissimilar to those in 2012, and ranged between $3,500 and $7,000 monthly. This pattern continued through to 2015. Ms Brigitte Santucci claimed that the payments made to the bankrupts after May 2013, were payments of interest in respect of the home loan being a purpose that did not exist in respect of the payments made in 2012.
Ms Brigitte Santucci said in cross examination, in relation to the payments:-
“… I had to acknowledge as the new director of that Tile Mart (Vic) that I was taking on that liability to keep the mortgage payments going, otherwise I would have negotiated with my parents after they ceased directorship to sort of say, “Well, unfortunately, these payments can’t continue. Why should I take the liability?” I took the liability because I asked for the money, so I took the whole debt on as the interest payments.”
Ms Brigitte Santucci was appointed as sole director and shareholder of the Respondent in July 2011. The payments from the Respondent to the bankrupts which continued thereafter, and on a monthly basis, prior to the home loan monies being advanced, continued for a period of almost two years. The bankrupts made representations to the Bank of Queensland when applying for the home loan refinancing and extension, that these funds transferred were received as income. There is before the Court two payslips for each of the bankrupts of 20 March 2013 and 3 April 2013 indicating receipt of monthly income from the Respondent to the bankrupts of $3,300.38 net together with $415.38 in superannuation payments with an annual income stated amount of $120,000. There was no notable change in the arrangement of payments from the Respondent to the bankrupts once the transfers were made. Although the payments made to the bankrupts occurred at times around when the interest repayments on the home loan fell due, they were not in amounts identical to the interest payments due. The Court finds the arrangement represented an ad hoc relationship of financial provision as between the bankrupts and the Respondent. The Applicants argue, and the Court accepts, the payment of the monies to the bankrupts was unrelated to the transfers, perhaps for the purposes of employee income, but in any event was not consideration in the context of s.120 of the Act. No amount was ever repaid to the bankrupts equivalent to the transfers. The Respondent did not at any time reduce the bankrupts principal debt, nor make payments of interest and fees, to the Bank of Queensland.
The Respondent claimed that if the Court was not satisfied that consideration was given for the transfers, then the Court should find that the funds provided to the bankrupts by the Bank of Queensland were to be held on trust for the Respondent. The Respondent bears the onus of establishing the existence of a trust. The Respondent did not put any evidence before the Court, other than the assertion of same, to satisfy the Court that a trust existed and/or that there was, by the Respondent, a clear intention to create a trust. On the evidence, the Court cannot find that a trust existed between the bankrupts and the Respondent, nor that any funds were obtained by the bankrupts for the benefit of the Respondent.
The Court will make the declarations and payment order as sought by the Applicants with those orders sought as to costs and interest to be quantified by the Applicants in submissions to be filed.
I certify that the preceding thirty-four (34) paragraphs are a true copy of the reasons for judgment of Judge Hartnett
Associate:
Date: 9 August 2018
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