Johnson as trustee of Bankrupt Estate of Portellos v J.S.J & a Nominees Pty Ltd - [2020] FCCA 934

FEDERAL CIRCUIT COURT OF AUSTRALIA

JOHNSON AS TRUSTEE OF BANKRUPT ESTATE OF PORTELLOS v J.S.J. & A. NOMINEES PTY LTD

[2020] FCCA 934

Catchwords:
BANKRUPTCY – Antecedent transactions – whether payment to respondent was a payment by bankrupt from his own funds – whether preference given to respondent over other creditors – declaration made.

Legislation:

Bankruptcy Act 1966 (Cth), ss.30(1)(b), 116, 121 & 122

Evidence Act 1995 (Cth), s.69

Cases cited:

James v Commonwealth Bank of Australia (1995) 13 ACLC 160

Sheahan v Carrier Air Conditioning Pty Ltd & Others (1997) 147 ALR

Re Ruwaldt (1931) 3 ABC 245

Sharrment Pty Ltd & Others v Official Trustee in Bankruptcy (1988) 82 ALR 530

Applicant:

GREGG ROBERTSON JOHNSON AS TRUSTEE OF THE BANKRUPT ESTATE OF SOTIRIOS PORTELLOS

Respondent:

J.S.J. & A. NOMINEES PTY LTD (ACN 094 973 770)

File Number:

ADG 182 of 2018

Judgment of:

Judge Heffernan

Hearing date:

6 June 2019

Date of Last Submission:

6 June 2019

Delivered at:

Adelaide

Delivered on:

23 April 2020

REPRESENTATION

Counsel for the Applicant:

Mr M Douglas

Solicitors for the Applicant:

O'Loughlins Lawyers

Counsel for the Respondent:

Mr R Ross-Smith

Solicitors for the Respondent:

PGC Legal

THE COURT MAKES THE FOLLOWING DECLARATIONS PURSUANT TO SECTIONS 30(1)(b), 122 AND 116 OF THE BANKRUPTCY ACT 1966 (CTH):

The payment made to the respondent by way of cheque number 000498 drawn on the trust account of Commercial and General Law (SA) Pty Ltd A.C.N. 126 471 547 trading as Commercial and General Law in the amount of $39,531.00 (thirty-nine thousand, five hundred and thirty-one dollars) was a payment of the monies of the bankrupt, SOTIRIOS PORTELLOS and is vested in the applicant.
The payment made to the respondent by way of cheque number 000498 of the amount of $39,531.00 had the effect of giving the respondent an advantage over other creditors and is void against the applicant.

AND THE COURT MAKES THE FOLLOWING ORDERS:

Pursuant to s 30(1)(b) of the Bankruptcy Act 1966 (Cth) the respondent is to pay to the applicant an amount of THIRTY-NINE THOUSAND, FIVE HUNDRED AND THIRTY-ONE DOLLARS ($39,531.00) plus interest.
The respondent is to pay the costs of the applicant as agreed or assessed.
The Court will hear the parties as to the calculation of interest on the judgment sum.
This matter is listed for further submissions as to interest at 2.15pm on 14 May 2020.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT ADELAIDE

ADG 182 of 2018

GREGG ROBERTSON JOHNSON AS TRUSTEE OF THE BANKRUPT ESTATE OF SOTIRIOS PORTELLOS

Applicant

And

J.S.J. & A. NOMINEES PTY LTD (ACN 094 973 770)

Respondent

REASONS FOR JUDGMENT

In this matter the applicant, a registered trustee in bankruptcy, seeks a declaration pursuant to ss 30(1)(b) and 116 of the Bankruptcy Act1966 Cth (‘the Act’) that a payment in the sum of $39,531 made to the respondent from a trust account maintained for Opal World Andamooka Australia Pty Ltd (‘Opals’) was a payment of the bankrupt’s money and vested in the trustee. Further or in the alternative, the applicant seeks a declaration pursuant to ss 30(1)(b) and 122 of the Act that the payment is void against the applicant. Further or in the alternative, the applicant seeks a declaration that the payment is void as against the applicant pursuant to ss 30(1)(b) and 121 of the Act. The applicant seeks an order that the respondent pay to him the sum of $39,531 together with interest and costs.

Materials relied on

The applicant relies on the evidence of Stephen McNamara and his own evidence, as well as the materials in the trial tender book.
The respondent did not put on any evidence.

Background

At all relevant times, the bankrupt Sotirios Portellos (‘Portellos’), was represented by Commercial and General Law (SA) Proprietary Limited (‘Commercial and General’) and in particular by the solicitor Stephen McNamara (‘Mr McNamara’). The respondent, J.S.J & A. Nominees Pty Ltd (‘J.S.J & A’), was represented by Grope Hamilton Lawyers (‘Grope Hamilton’) at the time when the disputed payment was made.
On 23 June 2011, the bankrupt committed an act of bankruptcy. On 28 November 2011, J.S.J & A issued a creditor’s petition in the sum of $30,751 to the bankrupt. On 7 December 2011, Mr McNamara received a letter from the solicitors for the respondent apparently threatening to serve a summons on the respondent. Mr McNamara attempted to dissuade the respondent’s solicitor from doing so and, enquired as to how much “your client requires our client to pay” indicating that he would make arrangements for a trust cheque to be forwarded to the offices of Grope Hamilton.[1] Later that day Mr McNamara sent a further email to the respondent’s solicitor stating the following:
“… I confirm that our client stands ready, willing and able to pay the amount of the debt as set out on the Bankruptcy Notice and the additional interest and costs incurred to date. Our client requests that you advise the additional interest and costs so that payment may be arranged.
Your client should be aware that the payment is being made by a third party and as a consequence your client’s risk of accepting the funds is substantially reduced.
Our client will use the letter sent to your office on the fifth instant and this email as evidence of his willingness to pay your client and will oppose any costs your client may seek after Monday (other than correspondence with our firm to finalise the amount payable) including any costs your client may incur in trying to serve our client with a summons, which we have advised is pointless…”[2]
(emphasis added)
[1] Court Tender Book (‘CTB’), tab 2.1.
[2] Ibid.
On 8 December 2011, a cheque in the sum of $39,531 was drawn from the trust account of Commercial and General and made payable to the Grope Hamilton trust account. Grope Hamilton, for and on behalf of the respondent, accepted payment of the sum.
By an order of the Federal Magistrates Court dated 22 May 2012, a sequestration order was made against the bankrupt and the applicant was appointed as trustee of the bankrupt estate. On or about 8 June 2012 the bankrupt completed a statement of affairs.
Mr Robertson Johnson was appointed trustee in bankruptcy of the estate of Portellos on the date that the sequestration order was made. On 31 October 2013 the trustee wrote to the respondent’s new solicitor placing them on notice that he regarded the $39,531 as having been paid by the bankrupt.[3] The solicitors for the trustee in bankruptcy replied to that letter on 18 November 2013.[4] There followed several months of correspondence to and fro between the solicitor acting for the trustee and the respondent’s solicitor in which the trustee continued to assert that the payment of the sum was a void transaction, having been made to the respondent after the creditor’s petition was issued, and the respondent seeking proof that there had been a contravention of ss 30(1)(b), 115, 122 and 121 of the Act.[5] These proceedings were filed by the applicant on 10 May 2018.
[3]     Ibid, exhibit A1 tab 2.4.
[4]     Ibid, tab 2.5.
[5]     Ibid, tabs 2.5 - 2.14.

Legislative Framework

Pursuant to s 116 of the Act, the following property is divisible among creditors:
“(a)all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b)the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and
(c)property that is vested in the trustee of the bankrupt's estate by or under an order under section 139D or 139DA; and
(d)money that is paid to the trustee of the bankrupt's estate under an order under section 139E or 139EA; and
(e)money that is paid to the trustee of the bankrupt's estate under an order under paragraph 128K(1)(b); and
(f)money that is paid to the trustee of the bankrupt's estate under a section 139ZQ notice that relates to a transaction that is void against the trustee under section 128C; and
(g)money that is paid to the trustee of the bankrupt's estate under an order under section 139ZU.”
Pursuant to s 122 of the Act, a transfer of property by an insolvent person in favour of a creditor will be void against the trustee in bankruptcy if the transfer had the effect of giving that creditor preference, priority, or advantage over other creditors, and if it was made within six months of the presentation of the creditor’s petition. The effect of s 122 is broad. It captures third party payments. Where a debtor procures a third party to pay a debt to a creditor of the debtor, the payment is liable to be held to have been made by the debtor.[6] With respect to the question of preference, the High Court has observed:
“If a debtor (as defined in s 122 of the Bankruptcy Act) makes a payment to an unsecured creditor that gives that creditor a preference over the debtor's other unsecured creditors, the payment is void against the debtor's trustee in bankruptcy even if the money used to make the payment was not the debtor's own money.”[7]
[6] James v Commonwealth Bank of Australia (1995) 13 ACLC 1604.
[7] Sheahan v Carrier Air Conditioning Pty Ltd & Others (1997) 147 ALR 1 [6].
Pursuant to s 121 of the Act, a transfer is void as against the trustee if made by a person who later becomes bankrupt and following:
“(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.
(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.
(3)Subsection (2) does not limit the ways of establishing the transferor's main purpose in making a transfer.
(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.”
The Court has power to make such orders including declaratory orders as it considers necessary for the purpose of carrying out or giving effect to the Act in any case of bankruptcy coming within the cognizance of the court.[8]
[8] Bankruptcy Act 1966 (Cth) s 30(1).

Contentions of the parties at trial

The applicant submits that the sum was paid by Commercial and General to the respondent for and on behalf of the bankrupt and on the bankrupt’s instructions. As the sum was paid to the respondent within the period of six months before the presentation of the creditor’s petition and ending immediately before the date of the sequestration order, the applicant contends that the payment of the sum had the effect of giving the respondent a preference, priority, or advantage over other creditors. For that reason the applicant submits that it is consequently void pursuant to s 122 of the Act.
In the submission of the applicant, funds advanced by a third party with the express or implied consent of the debtor are captured by the provisions of s 122 of the Act.[9] In this matter, however, the applicant contends that the sum paid was not in the true sense a third party payment because they were paid from the trust account of the solicitors acting on behalf of the bankrupt. The applicant invites the Court to find the payment was in reality a payment made using the bankrupt’s own funds which were simply being held on trust for him by his solicitors. The applicant submits that the facts support such an inference and it matters not that the transaction was made using a solicitor’s trust account cheque as opposed to a cheque drawn by the bankrupt himself. Whilst the applicant submits the facts of this case do not support a finding that in truth the payment was made by Opals, it contends that the principle remains that where a debtor procures a third party, by agreement, to make payment to a creditor, the payment is still capable of being deemed to have been made by the debtor.
[9] Re Ruwaldt (1931) 3 ABC 245.
With respect to the alternative claims pursuant to ss 121 and 116 of the Act, the applicant submits that the bankrupt, through his solicitor, transferred the money to the respondent via the respondent’s solicitor and the main purpose in making that transfer can reasonably be inferred in all of the circumstances to prevent the transferred money from becoming divisible among the bankrupt’s creditors. That inference arises given that the act of bankruptcy had been committed at least five months prior to the payment being made.
Further or in the alternative, the applicant submits that pursuant to s 116(1)(a) of the Act, the relevant payment is the bankrupt’s money and vested in the trustee.
The respondent contends that the main issues to be determined at trial are, firstly, the question of who made the payment, and that it was, in fact, the moneys of Opals. As the payment was made from funds held on trust by Commercial & General Law for certain clients (not the bankrupt) and then paid to Opals, not the bankrupt, and then paid by Opals to the respondent, the transaction is sufficiently at arm’s length to defeat the claims made by the applicant.
The respondent submits that there is no evidence that the funds constituting the payment would have been available to creditors of the bankrupt; that it cannot be established that there was a transfer of the bankrupt’s property; or that the transfer had the effect of giving the creditor a preference, priority, or advantage over other creditors.

Preliminary challenges to admissibility of evidence

The respondent made an oral application, without notice to the applicant, to exclude certain evidence. First, Mr Ross-Smith objected to the tender of a copy of Part B of the Statement of Affairs of the bankrupt on the basis of relevance.[10] The document was clearly relevant. In it the bankrupt identified unsecured creditors other than the respondent. This is a preference action. The objection then morphed into an objection on hearsay grounds because the applicant did not propose to call the bankrupt who had created the document. It was submitted that I could not rely on it to establish that the bankrupt actually had the liabilities and unsecured creditors identified in the document, but merely that he had said that was the case in his statement of affairs.
[10] Transcript (‘TX’), 6 – line 19.
I am satisfied the statement of affairs is admissible for proof of its contents as a business record.[11] In any event, the applicant’s own investigation established that the bankrupt owed in excess of one million dollars to other unsecured creditors. It is difficult to understand what the objection was designed to achieve. Other objections, also without notice, were raised by Mr Ross-Smith and ruled on during the course of proceedings.

The evidence

[11] Evidence Act 1995 (Cth) s 69.

Stephen McNamara

At all relevant times for the purpose of these proceedings, Stephen McNamara was the managing director of Commercial & General Law. He was a practising solicitor in South Australia from February 1978 until February 2015 when his practising certificate was suspended. At the relevant time, Mr McNamara acted for the bankrupt Portellos and various companies associated with him.
The bankrupt instructed Mr McNamara to act for a number of companies including:
a)Opal World Andamooka Australia Proprietary Limited;
b)Adplan Proprietary Limited (In Liquidation);
c)Smart World Enterprises Proprietary Limited (In Liquidation); and
d)Accordent Proprietary Limited (In Liquidation)
At the relevant time, the bankrupt was the sole director and secretary of Adplan, Opal World, and Accordent.[12]
[12] Affidavit of Greg Robertson Johnson, 3/6/19, exhibit ‘GRJ4’.
Commercial & General opened separate files for each of the above named companies and held separate trust ledgers for money paid in respect to them. Mr McNamara stated that from time to time, the bankrupt or the companies would deposit funds into Commercial & General’s trust account. Those funds were deposited to be used for anticipated costs and disbursements or settlement money, as the case called for, including with respect to a dispute with the respondent. Mr McNamara took instructions from the bankrupt Portellos in respect of his matters but from time to time also received some instructions from the bankrupt’s business and life partner Ms Dorothea Tomazos.
In around February 2011, Mr McNamara was instructed by Portellos in relation to a dispute in the District Court of South Australia, J.S.J & A Nominees v Sotirios Portellos. The action was well underway by that stage, and Mr McNamara’s evidence was that he had not been involved in any aspect of the dispute prior to February. Mr McNamara filed and served a notice of acting in relation to the matter on 9 February 2011. About six months earlier in July 2010, the parties had agreed to resolve the matter, and the terms of settlement were recorded in a deed. Pursuant to the Deed, the bankrupt signed a consent judgment in favour of the respondent in the amount of $30,000.
Two days after Mr McNamara filed the notice of acting, a solicitor employed by him received an affidavit from the respondent’s then solicitor Grope Hamilton with respect to an application for summary judgment. It transpired that none of the settlement moneys provided for in the Deed had been paid by the bankrupt.[13] Correspondence then ensued between the parties with Mr McNamara conducting some negotiations on behalf of the bankrupt with the respondent’s former solicitors.
[13] Affidavit of Stephen McNamara, Annexure ‘SM3’.
In late April/early May 2011, the bankrupt was served with Bankruptcy Notice No. 2718 in the amount of $30,751 issued by the official receiver for and on behalf of the respondent.
As I have noted, on or around 23 June 2011, Portellos committed an act of bankruptcy.[14]
[14] Affidavit of Gregg Robertson Johnson, date 3/6/19, Exhibit ‘GRJ4’.
On 5 December 2011, Mr McNamara, on instructions from the bankrupt, sent a letter to Grope Hamilton Lawyers enclosing a trust account cheque in the amount of $30,751, being the amount demanded in the Bankruptcy Notice issued by J.S.J against the bankrupt Portellos.[15] The letter was prepared on instructions from Portellos who instructed him to send the letter with the cheque at his behest. Mr McNamara says that Portellos instructed him to use the trust moneys which were in various subaccounts within his trust account. Mr McNamara says that his usual practise was to prepare letters either in the presence of the bankrupt or during a telephone call with him. That proposal was rejected by the respondent’s lawyer on 7 December 2011, and they advised that a creditor’s petition had been issued against Portellos but not yet served.
[15] Ibid, Annexure ‘SM5’.

On the same day, on instructions from Portellos, Mr McNamara sent the email to the respondent’s solicitor set out in paragraph five of these reasons.
On 8 December 2011, the solicitors for the respondent wrote to Mr McNamara formulating their client’s claim in the amount of $39,531 inclusive of the judgment debt plus interest and costs. The following day, on instructions he received from the bankrupt Portellos, Mr McNamara sent a letter enclosing Commercial & General trust account cheque no. 000498 in the above amount.[16] On Mr McNamara’s evidence, the settlement sum was paid from the Commercial & General trust account for and on behalf of Portellos. The moneys were paid from individual ledgers on verbal instructions from Portellos to discharge the total amount the subject of the Bankruptcy Notice and Creditor’s Petition.
[16] Ibid, Annexure ‘SM9’ & ‘SM10’.
Commercial & General’s trust account ledger indicates that the sum of $39,531 was paid by cheque to Grope Hamilton Lawyers by making payments against companies controlled by Portellos as follows:
a)$613.25 was applied from the matter of Adplan v Gerblich;
b)$7713.75 was applied from the matter of Gerblich v SWE;
c)$1873.65 was applied from the matter of Comlease v Accordent;
d)$8962.25 was applied from the matter of Smart World Enterprises Proprietary Limited v Gerblich; and
e)$20,368.10 was applied from the matter of Comlease v Accordent.[17]
[17] Ibid, Annexure ‘SM11’.
The trust ledger refers to specific transfers in the above amounts to “S. Portellos”, but, in fact, Mr McNamara issued a single trust cheque for the total amount of the above sums. Subsequently, Mr McNamara filed documents in substituted creditor’s petition proceedings in which he deposed to the payment by Portellos of the above amount to the respondent. He states that at all material times, he acted on instructions from Portellos with respect to the action against the respondent including the payment of the settlement sum.
Very little of Mr McNamara’s evidence was challenged in cross-examination. With respect to the companies associated with Portellos, as identified in his trial affidavit, he conceded that he was instructed by Portellos on the basis that he was a director, shareholder or secretary for those various companies. He stated that the monies recorded in the trust ledger for the relevant companies were received for the purpose of paying fees, settling transactions in which the company was involved, and also for paying other firms and solicitors because those companies had instructed other solicitors as well.
He was unable to recall whether the relevant monies had been deposited into his trust account before the dispute with the respondent. He agreed that he did not have a specific memory about the details of some events because he did not have access to his records anymore and that his evidence as to things he did at the request of Portellos was based on his usual practice. He told the Court there was nothing out of the ordinary about the way in which he conducted these transactions for Portellos.
Mr McNamara told the Court that prior to making the payment he had a discussion with Portellos with respect to the fact that the Creditor’s Petition had just been received. Portellos told him that he wanted to deal with it very quickly. The money had “just come in through Opal World Andamooka Australia”.[18] His instructions were to make payments from the funds available. As a result, McNamara went through the trust account to work out where moneys and had been applied and “came back to him with a proposal”[19]. That was the context in which his instructions had been received from Portellos.
[18] TX, 23, lines 26-27.
[19] Ibid, lines 30-31.

Applicant’s evidence

The evidence of the applicant was comprised primarily of his brief affidavit annexing, inter alia copies of the bankrupt’s Statement of Affairs as well as current and historical searches of various Portellos’ companies. The applicant gave evidence that there had been no dividend paid to creditors at the date of hearing. A proof of debt had been lodged by creditors of about $1.4 million. The Statement of Affairs completed by the bankrupt states in answer to question 38 that there were no secured creditors.
The applicant’s own investigations did not disclose any secured creditors. He told the Court that there was a reference in the Statement of Affairs to the relevant payment to the respondent in answer to question 36 which deals with assets/money paid to creditors in the previous 12 months. That answer indicates that in November 2011 cash was paid to the creditor “Jim Makris, J.S.J. Nominees”. The amount paid is not indicated in the answer.

Consideration

I consider the following matters particularly relevant to the applicant’s assertion that the monies used to pay the respondent were, in fact, those of the bankrupt.
It is clear that by mid-2011, the bankrupt was in significant financial difficulties. He had failed to meet the terms of the settlement to which he had agreed about a year earlier in the District Court action brought against him by the respondent.
The respondent had served a Bankruptcy Notice on him on 2 June 2011. He committed an act of bankruptcy on 23 June 2011 by failing to pay the amount claimed in the Bankruptcy Notice or to make arrangements with the respondent for payment. On 28 November 2011, the respondent issued a Creditors Petition in relation to him. About a fortnight later, the solicitor acting for the respondent was threatening service upon the bankrupt.
The funds from which the multi-cheque of $39,531 was sourced came into the Commercial & General trust account from Opals. At the relevant time the bankrupt was the sole director and secretary of that company. After the funds had been deposited into the trust account they were applied in various amounts to the ledgers relating to a number of litigation matters involving the three companies referred to in paragraphs 22(b) – (d) above in which McNamara had been instructed by the bankrupt.
As I have already noted earlier in these reasons, the bankrupt was the sole director and secretary of two of the three companies[20] and was a former director of the third[21].
[20] Adplan and Accordent.
[21] Smart World Enterprises Pty Ltd.
In addition to those matters is the particular urgency on Portellos’ part of which Mr McNamara spoke during his cross examination. The bankrupt was eager to have the payment made to the respondent as soon as possible. The monies from Opals had only recently arrived in the Commercial and General trust account when he was given instructions by the bankrupt. It was the bankrupt who was providing instructions with respect to all of the litigation matters to which the Opals money was transferred and from which the various payments were made to comprise the total amount of the multi-cheque.
The only logical inference to be drawn is that the money was deposited by Opals into the Commercial & General trust account in order to be distributed to the ledgers for the litigation so that they could then be used to satisfy the bankrupt’s debt. The manner in which the funds were transferred out of the ledgers for the litigation matters had self-evidently nothing to do with any litigation in which those companies were involved and they were applied in a way inconsistent with Mr McNamara’s description of the purpose of holding funds against the ledgers. All of the amounts transferred to the litigation matters were applied in their entirety towards the multi-cheque.
The bankrupt gave instructions as to how the money from Opals was to be applied and as to the application of money from the litigation matters to the multi-cheque. The money was used to pay a personal debt of the bankrupt, the very debt in relation to which he had committed an act of bankruptcy.
The letter sent by Commercial & General to Grope Hamilton lawyers on 5 December 2011 enclosed the trust cheque of $30,751.[22] The letter from Grope Hamilton rejecting the proposal makes clear that Ms Najar believed that Mr McNamara was corresponding with her as the solicitor for the bankrupt in his personal capacity.[23] The letter refers to Mr McNamara’s client in the singular and to the Creditors Petition which she had issued in relation to the bankrupt. It is obvious from the letter that she did not, on the basis of any of her dealings with Mr McNamara, understand herself to be dealing with Mr McNamara in relation to both the bankrupt as debtor and Opals as a third party “Good Samaritan”.
[22] Affidavit of McNamara, Annexure ‘SM-5’, specifically refers to the Bankruptcy Notice.
[23] Ibid, ‘SM-6’.
That impression was not altered by Mr McNamara in his email to the respondent’s solicitor on 7 December at 11.41am. The words “there is no utility in your client serving the summons you refer to as our client has the funds to pay your client”,[24] demonstrate what in my view was the true state of affairs. The words “our client” are clearly a reference to the bankrupt in his personal capacity.
[24] Affidavit of McNamara, Annexure ‘SM-7’.
Following that email a telephone conversation occurred between Mr McNamara and Ms Najar, the details of which are not before me in evidence. Mr McNamara’s email at 1.18pm on 7 December appears to confirm the content of that telephone conversation, reiterating that his client stood ready and willing to pay the amount of the debt sought by the respondent.
The crucial passage in that email is, of course, the following:
“Your client should be aware that the payment is being made by a third party and as a consequence your client’s risk of accepting the funds is substantially reduced.”[25]
[25] Ibid.
The reference to “third party” is in the singular and as an aside, on one view this email seems to have been deliberately elliptical as to who the third party was. The email makes no reference to Opals.
That description of a third party in the singular was itself misleading. The money had ostensibly come from Opals but was channelled through the ledgers relating to litigation involving other companies. Rather than reducing the potential risk to the respondent, the misleading wording of that sentence draws attention to the real modus operandi. To paraphrase a submission made by Mr Douglas for the applicant, Portellos was using the various companies, including Opals, as bank accounts through which he could obfuscate the true source of the funds to create the appearance of an arm’s length transaction. This shows the extent of his control of the funds.
From all of the matters I have referred to above, the inference is open that the relevant transactions were simply structured in such a way as to give the appearance of a payment coming from a third party. Why would this have been necessary? One explanation is that, first, the bankrupt knew or was concerned that the funds would be exposed as being his property, and secondly to avoid the implications of s 122 of the Act. The reference to the respondent’s risk being “substantially reduced” is particularly telling. It is open to infer, and I do, that the potential for at least a claim by a trustee pursuant to s 122 was at the forefront of Mr McNamara’s mind and given the direct role played by the bankrupt in the above events, that it was on his mind as well. Mr McNamara was not cross-examined on what was meant by that phrase. It was not put to Mr McNamara that someone other than Portellos provided the instructions or the direction to apply those monies towards the $39,000 cheque. Thirdly, the structuring was necessary because the transfer was designed to defeat creditors contrary to s 121 of the Act.
The payment of the funds to the ledgers for the various litigation matters was not a particularly ingenious ruse by Portellos to which his solicitor Mr McNamara was at the very least, overly credulous. Putting aside for a moment the relevant provisions of the Act, the conveyance of funds by Portellos, through the trust account of Mr McNamara and to the respondent’s solicitor could properly be described as a sham in the sense identified by Lockhart J in Sharrment Pty Ltd:[26]
“A ‘sham’ is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive.”[27]
[26] Sharrment Pty Ltd and Others v Official Trustee in Bankruptcy (1988) 82 ALR 530.
[27] Ibid [537].
The “false front” in the present scenario is that the funds, which were those of Portellos, were funnelled through Mr McNamara’s trust account in such a manner as to allow Portellos to cause his solicitor to present a trust cheque which purported to be a payment of Portellos’ debt to the respondent by a third party entity at arm’s length. It is telling that the description of the ruse referred to by Mr McNamara in his email to the respondent’s solicitor is not repeated in the letter which enclosed the trust cheque.
I am prepared to draw the inference and find on the balance of probabilities that the payment of $39,351 was in fact a payment of the bankrupts’ money and further that the payment had the effect of giving a preference to the respondent contrary to s 122 of the Act.
To be clear, I am satisfied that there was a transfer of the debtor’s property - that the transfer was by the debtor to a creditor (the respondent), Portellos having procured the payment via Mr McNamara who was acting as his agent - that at the time of the transfer the debtor Portellos was insolvent and that the transfer had the effect of giving the respondent a preference, priority or advantage over other creditors as identified by the applicant trustee during the course of his investigation. There is no dispute that the transfer occurred within a period during which transfers of property may be void.
I make the Declarations and Orders to be found at the beginning of these reasons.

I certify that the preceding fifty-eight (58) paragraphs are a true copy of the reasons for judgment of Judge Heffernan

Associate:

Date: 23 April 2020