Jones v Southall and Burke Pty Ltd
[2003] FMCA 27
•13 February 2003
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| JONES v SOUTHALL AND BURKE PTY LTD | [2003] FMCA 27 |
| BANKRUPTCY – Trustee application pursuant to ss.120 and 122 of the Bankruptcy Act 1966 seeking declarations that payment of sum by bankrupt to respondent and/or charge are void against Trustee – bankrupt convicted of theft from respondent – whether fiduciary duty owed by bankrupt to respondent – constructive trust – equitable restitution – whether charge against property of bankrupt in the ordinary course of business of respondent and in good faith – deeming effect of s.122(4)(c) of Bankruptcy Act. |
Bankruptcy Act 1966, ss.5, 30, 58, 115, 116, 120, 122
Sandell v Porter (1966) 115 CLR 666
Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204
Robertson v Grigg (1932) 47 CLR 257
Downes Distributing Co Pty Ltd v Associated Star Stores Pty Ltd (1948)
CLR 463
Re Hyams; Official Receiver v Hyams (1971) 19 FLR 242
Victorian Producers Co-operative Co Ltd v Kenneth (1999) FCA 1488
(29 October 1999)
Re Brechin; Ex parte the trustee (1931) 7 ABC 255
Muschinski v Dodds (1985) 160 CLR 583
Worrell v Power and Power (1993) 46 FCR 214
Burns v Leda Holdings Pty Ltd (1987) 89 FLR 365
Lyford & anor v Commonwealth Bank of Australia (1995) 130 ALR 267
| Applicant: | NORMAN KENNETH JONES AS TRUSTEE OF THE PROPERTY OF HEATHER MACNEIL-BROWN, A BANKRUPT |
| Respondent: | SOUTHALL AND BURKE PTY LTD |
| File No: | MZ 704 of 2001 |
| Delivered on: | 13 February 2003 |
| Delivered at: | Melbourne |
| Hearing Dates: | 26 & 27 February 2002 |
| Judgment of: | McInnis FM |
REPRESENTATION
| Counsel for the Applicant: | Mr P Fary |
| Solicitors for the Applicant: | Abbott Stillman & Wilson |
| Counsel for the Respondent: | Mr T Rosen |
| Solicitors for the Respondent: | Robert Richter & Associates |
ORDERS
The application filed 14 September 2001 be dismissed.
The applicant shall pay the respondent’s costs including reserved costs if any in accordance with Schedule 1 of the Federal Magistrates Court Rules to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
I certify pursuant to Rule 21.15 of the Federal Magistrates Court Rules that it was reasonable for the respondent to employ an advocate in these proceedings.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MZ 704 of 2001
| NORMAN KENNETH JONES AS TRUSTEE OF THE PROPERTY OF HEATHER MACNEIL-BROWN, A BANKRUPT |
Applicant
And
| SOUTHALL AND BURKE PTY LTD |
Respondent
REASONS FOR JUDGMENT
NORMAN KENNETH JONES ("the applicant") AS TRUSTEE OF THE ESTATE OF HEATHER MACNEIL-BROWN ("the bankrupt") makes application to the Court pursuant to ss.120 and 122 of the Bankruptcy Act 1966 (Cth) against SOUTHALL AND BURKE PTY LTD ("the respondent").
The date of bankruptcy is 17 November 1999.
In the amended application dated 14 September 2001 the applicant claimed the following:
(1)A declaration of the payment of $67,500 by Heather MacNeil-Brown to the respondent is void against the applicant pursuant to s.122 of the Bankruptcy Act 1966.
(2)
Alternatively a declaration that the giving of the charge dated
7 July 1999 over the property of Heather MacNeil-Brown (being the property described in Certificate of Title Volume 10392, Folio 638) to the respondent is void as against the applicant pursuant to s.120 and/or s.122 of the Bankruptcy Act 1966.
(3)The respondent pay the applicant $67,500.
(4)The respondent pay the applicant's cost of these proceedings.
In support of this application the applicant relies upon an affidavit of Norman Kenneth Jones sworn 13 September 2001, an affidavit of
Neil Francis Hannan sworn 29 November 2001 and a further affidavit of Norman Kenneth Jones sworn 4 February 2002.
The bankruptcy occurred following a debtor's petition presented to the official receiver. A statement of affairs filed at the time of filing debtor's petition revealed a net deficiency in assets of $53,924.
It is not in dispute that between March 1986 and January 1999 the bankrupt was employed by the respondent initially as a clerical assistant and then as office manager. Between December 1990 and December 1998 the bankrupt stole money from the respondent. The theft was initially discovered in or about December 1998. A meeting occurred shortly after that time in relation to what was then alleged to be some unauthorised cheques being paid for landscaping and costs associated with the bankrupt's own house.
On 12 April 1999 the bankrupt was charged with a number of theft offences under the Crimes Act 1958 (Vic). A summary of charges received as an exhibit to the affidavit of Norman Kenneth Jones sworn
13 September 2001 suggest that an audit had occurred of the respondent's books back to 1 July 1997 and that it was established that the bankrupt had stolen cash from the business conducted by the respondent, namely "Ballarat Books" on 241 separate occasions. The summary indicates that the method used was the same on each occasion, namely an understatement of certain sums by the bankrupt in the pre-bank worksheet when compared to the debtor's receipt book. The total value of the theft is claimed to be $138,511.12. On 18 April 2000 the bankrupt was convicted of stealing a sum of $138,511.12 belonging to the respondent. An order was made under the Sentencing Act 1991 (Vic) that the bankrupt pay the respondent the sum of $71,011.12.
The bankrupt had become the registered proprietor of the property on 30 September 1998.
On 7 July 1999 the bankrupt signed a charge in favour of the respondent ("the charge").
On 7 July 1999 the bankrupt entered into a contract of sale for the property with Barry Robert Griffith and Christine Frances Griffith ("the Griffiths") to sell the property ("the contract"). It appears that a transfer of land in favour of the Griffiths for the property was prepared pursuant to the terms of the contract in or about August 1999. At settlement of the contract arrangements were made with the conveyancer of the Griffiths on 9 August 1999 for a cheque in the sum of $67,500 to be made payable to the respondent.
By letter dated 30 November 2000 the applicant wrote to the respondent in the following terms: -
“We act on behalf of Norman Kenneth Jones who was appointed trustee of the bankrupt estate of Heather MacNeil-Brown on
17 November 1999.
As a result of our client's investigations our client has determined that your company received a sum of $67,500 from Ms Brown on 5 August 1999.
These funds were from the net proceeds of the sale of
Ms MacNeil-Brown's property situated at 3 Lesley Court, Alfredton.
At the time of the payment you were a creditor of
Ms MacNeil-Brown as a result of her theft of property from you. We note a summary of charges was prepared on 12 April 1999 against her.
At the time of the payment Ms MacNeil-Brown was unable to pay all of her debts as and when they fell due and as such was insolvent.
In view of the above it is our opinion that the payment of $67,500 to you amounts to a void preference within the meaning of s.122 of the Bankruptcy Act and as such is void against our client.
Further, given the circumstances surrounding the repayment, it is our opinion that such a repayment clearly was not made in the ordinary course of business and as such, you are unable to avail yourself of the defences provided by s.122(2) of that Act.
In view of the above we are hereby instructed to demand payment of the sum of $67,500 within a period of seven (7) days of the date of this letter failing which, legal proceedings will be issued against you without any further notice.
..…”
The letter from the applicant to the respondent is the subject of a reply by a letter dated 26 February 2001 from the solicitors for the respondent which states as follows:
“I refer to your facsimile of 23 January 2001 and advise that we are now in receipt of an advice obtained from counsel advising that we should resist your claim on the basis that the payment of the alleged sum of $67,500 to my client was not a transfer of property within the six (6) month relation back period within the meaning of s.122(1) of the Bankruptcy Act. Counsel is of the view that payment was merely satisfaction of a pre-existing (ie. prior to the relation back period) equitable right to restitution arising from the theft of money from the company by Heather MacNeil-Brown.
I further advise that the right was enforceable by way of acquiring for restitution or unjust enrichment moneys had and received or by way of a claim for damages for the tort of deceit. Accordingly any property or asset held by Heather MacNeil-Brown during this period was held on a constructive trust in favour of my client.
I am therefore instructed by my client to strenuously defend its actions should proceedings be instituted and to seek payment of solicitor-client costs.
..…”
It is against that background that the application has been made in the present case. Counsel for the applicant submits that for the applicant's claim to succeed he must prove that there has been a transfer of property, that the transfer was by a person who was insolvent, that the transfer was in favour of the creditor, that the transfer had the effect of giving the creditor a preference, priority or advantage over other creditors and that the transfer was made during the six month period before the commencement of the bankruptcy.
It should be noted that there are two transactions which are challenged. The first is the charge and the second is the making of the payment of the sum of $67,500 which is said to have occurred on 10 August 1999. It is clear that the charge and the payment of the sum of $67,500 both occurred within six months from the date of bankruptcy namely
17 November 1999.
In addition to relying upon s.122 on the grounds referred to previously, the applicant in the alternative claims, pursuant to s.120 of the Bankruptcy Act, that the purported charge is void. The applicant claims that in order to succeed in relation to the relief under s.120 of the Bankruptcy Act he must prove that there has been a transfer of property by a person who later becomes bankrupt to another person, that the transfer took place within five years before the commencement of the bankruptcy and that the transferee gave no consideration for the transfer or gave consideration less than market value for the transfer of property. Those elements, it was submitted, have been made out and the charge it is said was a preference and void.
Relevant legislation
Section 120 provides:
120 Undervalued transactions
Transfers that are void against trustee
(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 of the 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.
Exemptions
(2)Subsection (1) does not apply to:
(a)a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
(b)a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
(c) a transfer of property under a debt agreement; or
(d) a transfer of property if the transfer is of a kind described in the regulations.
Transfers that are not void
(3)Despite subsection (1), a transfer is not void against the trustee if:
(a) the transfer took place more than 2 years before the commencement of the bankruptcy; and
(b)the transferee proves that, at the time of the transfer, the transferor was solvent.
Refund of consideration
(4)The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(5)For the purposes of subsections (1) and (4), the following have no value as consideration:
(a)the fact that the transferee is related to the transferor;
(b) if the transferee is the spouse or de facto spouse of the transferor — the transferee making a deed in favour of the transferor;
(c)the transferee's promise to marry, or to become the de facto spouse of, the transferor;
(d)the transferee's love or affection for the transferor.
Protection of successors in title
(6)This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.
Meaning of transfer of property and market value
(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.
Section 122 provides:
122 Avoidance of preferences
(1)A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor's bankruptcy if the transfer:
(a)had the effect of giving the creditor a preference, priority or advantage over other creditors; and
(b)was made in the period that relates to the debtor, as indicated in the following table.
…..
(2) Nothing in this section affects:
(a)the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or
(b)the rights of a person who is making title through or under a creditor of the debtor in good faith and who gave consideration at least as valuable as the market value of the property; or
(c)a conveyance, transfer, charge, payment or obligation of the debtor executed, made or incurred under or in pursuance of a maintenance agreement or maintenance order; or
(d)a transfer of property under a debt agreement.
(3)The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection.
(4)For the purposes of this section:
(a)a transfer of property is taken to have been made in favour of a creditor if it is made in favour of a person in trust for the creditor; and
(b)a payment of tax, or of any other amount payable to the Commonwealth, or to the Commissioner of Taxation, under or because of an Act of which the Commissioner has the general administration, is taken to be made for consideration equal in value to the payment and in the ordinary course of business; and
(c)a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
(i) that the debtor was unable to pay his or her debts as they became due from his or her own money; and
(ii) that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors.
(4A)A reference in this section (other than subsection (5)) to a creditor of the debtor shall be read as including a reference to a person who would be a creditor of the debtor in relation to a contract, agreement, transaction or other dealing if the contract, agreement, transaction or other dealing were not, in whole or in part, void or unenforceable, or had not been voided in whole or in part, by or under a law of the Commonwealth or of a State or Territory of the Commonwealth.
(5)If a transfer of property is set aside by the trustee in a bankruptcy as a result of this section, the creditor to whom the property was transferred may prove in the bankruptcy as if the transfer had not been made.
(7)In this section:
tax means tax (however described) payable under a law of the Commonwealth or of a State or Territory, and includes, for example, a levy, a charge, and municipal or other rates.
(8)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.
Notice of opposition
In a notice of intention to oppose the application dated 25 September 2001 the respondent indicates that its opposition is based on the following grounds:
1.In the events which have happened there was not a transfer of property by Heather MacNeil-Brown in favour of the respondent within the meaning of s.122(1) of the Bankruptcy Act 1966.
2.In the events which have happened the respondent was not a creditor of Heather MacNeil-Brown within the meaning of s.122(1) of the Bankruptcy Act 1966.
3.Further or in the alternative to paragraphs 1 and 2 hereof, in the events which have happened the Respondent did not receive a preference, priority or advantage over other creditors within the meaning of s.122(1)(a) of the Bankruptcy Act 1966.
4.As a result of a matter before said, the payment of $67,500 by Heather MacNeil-Brown to the respondent is not void as against the applicant pursuant to s.122 of the Bankruptcy Act 1966.
The applicant’s evidence
The applicant called the bankrupt to give evidence and also called Norman Kenneth Jones who had sworn the two affidavits to which I have referred. The applicant otherwise relied upon the affidavit of Neil Francis Hannan sworn 29 November 2001.
The bankrupt
The applicant relied upon evidence of the bankrupt who confirmed the chronology of events which have already been referred to in this judgment. She gave evidence that there had been a meeting with her employer and that as a result of that meeting it was agreed that she should reimburse the employer in relation to a portion of the money stolen by her and that this would be an amount deducted from her employee entitlements. After being charged with theft by the police in March 1999 the bankrupt indicated that her solicitor had conducted all further negotiations with her former employer. She acknowledged executing a charge over property in favour of the respondents in the sum of $70,000 on 7 July 1999. It was confirmed that a copy of that charge was forwarded to the conveyancing organisation dealing with the sale of the property. A covering letter with that charge dated
8 July 1999 from Mr Jacobs to the solicitors for the respondent states in part the following: -
“The property has been sold for $175,000. I understand contracts have not yet been signed, but I would expect that to occur within the next 24 hours. There is about $85,000 owing to the bank and secured by a first mortgage, the estate agent and conveyancer will take about $5000 and Ms MacNeil-Brown aims to limit her relocation expenses and the expenses of her forthcoming committal and County Court hearing to $15,000. That leaves $70,000 and I have changed the figures in the charge to reflect this situation. I note by way of interest, that
Ms MacNeil-Brown has other debts that amount to about $70,000 which just will not be paid.”
In her evidence the bankrupt indicated that she required money in order to move to Melbourne and other associated expenses. However the bankrupt confirmed that prior to the charge being duly executed correspondence had been forwarded by the respondent's solicitors to the bankrupt's solicitors dated 23 April 1999 which provided as follows:
“We have been advised by our client that the property at 3 Lesley Court, Alfredton is listed for sale. As your client is indebted to our client for in excess of $100,000 our client wishes to protect their position. In the circumstances they require your client to agree the net proceeds of any sale will be disbursed to our client to repay the debt (the quantum may be negotiated). To secure our client's position they require your client to execute:
1.A registrable charge against the property.
2.A caveat.
..…”
A further reference was made to a letter dated 24 May 1999 from the respondent's solicitors to the bankrupt's solicitors which said in part the following:
“ … Although the amount owed to our client is well in excess of $100,000 they are prepared to accept $80,000 plus 50 per cent of the net proceeds of the sale of the property over and above the $80,000 in full settlement of this matter ...
In that letter the solicitors enclosed a deed of release, a registrable charge against the property and a consent to lodging a caveat. The documents were required to be signed and returned no later than
28 May 1999. The deed of settlement enclosed with that letter provided in the recitals that
“As a result of her employment with the Plaintiff the Defendant is in debt to Plaintiff for an amount in excess of $100,000.”
It further provides that the defendant, that is the bankrupt, was to sell her Alfredton property and pay to the respondent $80,000 plus
50 per cent of the balance of the net value of the property on sale. The deed further provided for a release and discharge of the parties “in relation to the proceedings or any other matter or circumstances arising from or in connection with the matter which is the subject of the proceedings".
A copy of the deed which was ultimately produced had in fact been completed a second time due to a fire occurring at the premises of the solicitors for the respondent. The duly executed charge dated 7 July 1999 provides as follows:
“In consideration of SOUTHALL & BURKE PTY LTD not commencing legal proceedings for recovery of the debt owed by me to them
I, the undersigned HEATHER MACNEIL-BROWN
of 3 Lesley Court, Alfredton 3350
as beneficial owner HEREBY CHARGE in favour of SOUTHALL & BURKE PTY LTD all my Estate and interest legal and equitable in all the piece of land at 3 Lesley Court Alfredton Victoria Australia 3350 being more particularly described in Certificate of Title Volume 10392 Folio 638 with payment of $80,000 plus 50% of the balance of the net value of the property on sale and I FURTHER UNDERTAKE to execute, when called upon, such mortgage and other undertakings and instruments in respect of the said land as McCORMICK’S SOLICITORS may require.”
In her evidence the bankrupt claimed that in reference to the other debts said to be about “$70,000” which “just will not be paid” that she had given her solicitor a list of debts.
In relation to her financial position in July 1999 the bankrupt indicated her assets comprised a house and contents. The sale of the house occurred on 10 August 1999 and after the sale the bankrupt indicated that she took furniture to Melbourne. She had received some money from the proceeds of sale of the property to assist in her relocation. She confirmed the statement of affairs which was dated 17 November 1999. Under the heading "Unsecured Creditors" it was noted that there was a total amount of $58,924 which the bankrupt agreed were amounts owing as at July of 1999. Most of the debts related to credit cards and it was confirmed that the respondent was not listed as a creditor. When it was put to the bankrupt that she had omitted to list as unsecured creditors the respondent she gave as her reason that she could have done that at the time.
Statements from the ANZ Bank were tendered as exhibits showing that as at 27 July the amount owing was $11,263.52 and that the minimum monthly payment was $220. ANZ Telstra visa accounts were also tendered showing a closing balance in July 1999 as $3891.20 with the minimum payment required of $193. The previous account, it is noted, for the period 26 May 1999 to 25 June 1999 refers to an opening balance of $4029.30 and a closing balance of $3817.12 with a notation that
“Your credit limit was exceeded during this statement period. Thank you for correcting this matter so promptly but we ask that in future you do not exceed your credit limit without first contacting ANZ. If you have not recently applied for a credit limit increase, you can do so by contacting ANZ on the above telephone number.”
A summary of creditors ageing of the bankrupt was produced and tendered as an exhibit which showed that in July 1999 there was a balance of $30,217.25 on credit card with a minimum payment due of $1605.19 on a credit limit of $30,000.
The income tax return of the bankrupt was produced for the year ending 30 June 1998 which showed a gross income of $28,284. Her income tax return and Centrelink Group Certificate for the year ending 30 June 1999 was tendered and showed a gross income of $20,793. However after analysing her expenses and income in July 1999 the bankrupt concluded that she was “just paying off a credit card and using the money again. So my money was going in interest. I wasn't going anywhere. I was going backwards.” She claims that she was not in a position to pay creditors in July 1999 and indeed was not in a position to pay them in August 1999 after the sale of the property.
Under cross-examination when it was put to the bankrupt that if she was not receiving the amount of money fraudulently from the respondent she would not have been able to meet all her expenses she answered, “That is ostensibly – or that is the reason why I did what I did.” She agreed that this was done to pay out whatever expenses and outgoings were incurred over the period of time that she received the money fraudulently from the respondent.
In relation to her mortgage payments the bankrupt said that they were paid directly out of her bank account. Questions were asked concerning that issue in the context of a claim by the respondent to establish a constructive trust or equitable interest on the basis that the moneys obtained fraudulently were applied either directly or indirectly to pay the mortgage on the property. The bankrupt agreed that she would not have been able to pay living expenses had she not taken out an average of $7000 to $7,500 a month over an eighteen month period from the respondent's account.
During the meeting with representatives of the respondent when discussions occurred regarding the repayment of the fraudulently obtained money the bankrupt suggested that she made it obvious that her financial position was "not good". The bankrupt believed that when settlement took place in August the moneys paid to the respondent meant that was an end to her dealings with the respondent.
The bankrupt agreed that on 18 April 2000 when she was given a two year suspended jail sentence she was then also ordered to pay $71,000 restitution to the respondent. She agreed that none of that money has in fact been paid to the respondent. She further agreed that she presented a debtor's petition in November 1999 but had not told the respondent that she was going to become bankrupt.
She further agreed that she did not tell the respondent any specific details about creditors apart from allegedly telling them that she made it obvious her financial position was not good.
The applicant otherwise relied upon an affidavit of Neil Francis Hannan sworn 29 November 2001 which essentially exhibited a chain of correspondence to which I have referred.
Norman Kenneth Jones
Mr Jones gave evidence and adopted his affidavit sworn 13 September 2001 and a further affidavit sworn 4 February 2002.
In the first affidavit the deponent provides background details to which I have already referred and exhibits documents in relation to that chronology. In his affidavit he refers to a letter of demand sent to the respondent on 30 November 2000 claiming that he had determined as a result of investigations that the respondent received the sum of $67,500 from the bankrupt on 5 August 1999. The letter asserts that the respondent was a creditor of the bankrupt and that at the time of payment by the bankrupt to the respondent she was unable to pay all her debts as and when they fell due and was therefore insolvent. Demand was made for payment of $67,500 as a void preference within the meaning of s.122 of the Bankruptcy Act 1966. By letter dated
26 February 2001 from the then solicitors for the respondent it was indicated that the respondent would resist the claim and asserted amongst other matters that payment was merely satisfaction of a pre-existing equitable right to restitution arising from the theft or was enforceable by way of a claim for restitution for unjust enrichment, moneys had and received or by way of a claim for damages for the tort of deceit. It was asserted the money was therefore paid from the sale of assets held by the bankrupt on a constructive trust in favour of the respondent.
In his second affidavit Mr Jones attaches an assessment of the bankrupt's insolvency which in part includes the statement of affairs to which reference has already been made. In summary Mr Jones in evidence indicated that the administration is without funds and that there had been no income contributions to be made by the bankrupt. They have not yet called for proofs of debts. It was clear that there was no likelihood of a dividend. If the amount of money of $67,500 was returned by the respondent there would be a five to seven cents in the dollar return to creditors.
Under cross-examination Mr Jones conceded that the respondent may be able to lodge a proof of debt for the further amount owed which is based upon an investigation going back to 1999 and reveals a figure of something in the order of $496,000.
The respondent called evidence from John Michael Burke who had sworn an affidavit on 16 October 2001 and also called as a witness
Mr Ronald Maxwell Southall.
The respondent's evidence
John Michael Burke
The respondent called evidence from John Michael Burke who adopted an affidavit sworn by him on 16 October 2002. Mr Burke is the managing director of the respondent. In his affidavit Mr Burke recites the history to which I have already referred, including the detailed chronology.
In his evidence Mr Burke referred to the meeting with the bankrupt which occurred in January 1999 and agreed the purpose of that meeting was to discuss the misappropriated cheque then known to be $5800 for landscaping for the bankrupt. He denied that anything was mentioned by the bankrupt at that meeting of her financial position. He confirmed that after detailed investigation by March of 1999 further details became apparent regarding the extent of the theft by the bankrupt. He explained that when charges were laid they were based upon the theft of the amount of approximately $138,000 for the period 1 July 1997 to December 1998 as he was advised by the police that this would be sufficient on the material then available. Mr Burke at that stage was not sure whether there was anything further and he established the method of operation of the bankrupt.
It was noted during the evidence that on one of the dates, 10 August 1999, he had received cheques of $7500 which was consistent with the correspondence in this matter. A police statement summarising the proceedings was also received as an exhibit and that was a statement by Mr Burke to the police. Included in the exhibit is a letter from the bankrupt dated 20 January 1999 making payment of the sum of $5889.50 to the respondent being the amount taken by the bankrupt to pay her own landscaping services from the respondent's account.
Under cross-examination Mr Burke indicated that during the course of the bankrupt's employment he did become aware of her personal situation and stated that,
“Certainly the impression that she gave us was one of quite independent means. Obviously I realise now why that that was - she always seemed to be quite - you know, had plenty of money to spend.”
He was aware that the bankrupt had a daughter who attended a private school in Ballarat. He denied the bankrupt's evidence that she had told him that the reason she stole the money was because of her financial situation. In response to a question in relation to that matter he said the following:
“That is incorrect. I'm under oath and I'm telling you that is incorrect. She couldn't give an explanation to that. I asked her. I said, 'Look, is it that you've got into trouble with the house?'. We knew she'd been through a divorce and she did discuss that.
I wasn't even sure if that might've been the cause of it. …”
In further evidence he denied that the use of the bankrupt's long service leave and holiday leave to pay the amount taken for landscaping was evidence that he suspected it was her only source of funds. He said that in fact he just did not want to lose the $5880 which was then important for the business. Even after termination of the bankrupt's employment he stated that he, “wasn't aware of her financial position at the time.”
During his evidence Mr Burke was taken to correspondence from his solicitors indicating the respondent had become aware of $138,000 stolen by the bankrupt and particularly where the letter states that,
“they have not spent any further funds on accounting fees to quantify a further amounts as they feel this would be a waste of money.”
When that extract was put to Mr Burke he said he did not really understand that reference. He indicated that he thought it was reasonable for his solicitors to seek a statutory declaration regarding the bankrupt's assets and based on the results of that declaration to require re-negotiation of any terms of settlement. As to the relevance of that arrangement in relation to the financial circumstances of the bankrupt and that the solicitors on the behalf of the respondent had accepted that there were no substantial other assets, Mr Burke stated the following:
“This could have been a fishing exercise. I mean, we've always been of the opinion when you've got eight years of fraud behind you, that you had plenty of time to do some sort of financial planning, as it were. She was a person that had resided in New Zealand. She went over there on frequent visits. She talked about things to do with the share market and things like that. We would have had every right to assume that, you know, this was going to take a long investigation to find out whether there are other moneys and honestly that is what's foremost in my mind and the mind of my other business partners. I mean even to this day we still don't think that we've discovered everything.”
It is also useful to set out the following exchange during cross-examination of Mr Burke,
“Why was it necessary to seek payment from Ms Brown's superannuation funds?---Again, I imagine it's just a source of assets that she has and if you're trying to retrieve money that's been stolen you obviously look in every quarter. I mean that's all I can assume. I mean, it was an asset that she had. She also sold a car. We don't know anything about that. She said in her statement about $5000 worth of furniture and $165,00 house. We know for a fact that there was a lot more furniture bought because she used to discuss this stuff with us. I mean, you know, the woman has been convicted for fraud. I mean, I'm afraid I can't accept anything that she says to me.”
When asked questions about the final payment that was received of $67,500 being lower than the previously negotiated amount which in part was explained by allowing the bankrupt $2500 to relocate to Melbourne it was suggested to Mr Burke that he knew that the only source of funds available was the equity in the house. In response he said,
“I also knew that she sold a car that wasn't disclosed. I also knew that up until when she left, she was taking $2000 in cash a week from us.” …
Mr Burke was specifically asked about the reference in a letter from the bankrupt's solicitors suggesting that the bankrupt had, “other debts that amount to about $70,000 which just will not be paid.” The following exchange occurred in cross-examination:
“I suggest to you that it puts you squarely on notice that she can't pay all of her debts?---Well, again, I have to put it to you as well that we also at that stage had found out that she'd been embezzling from our company over eight years and that's a lot of money.”
After a further analysis of the expenditure by the bankrupt referred to in correspondence in particular allocation of funds for the defence of her charges, Mr Burke was asked,
“Doesn't that suggest to you that she didn't have any other source of money out of which to pay those amounts?”
He answered as follows:
“You know, it would be in her interest not to be coming up with funds either, wouldn't it? I mean, you know, if she was able to pay all these things it wouldn't look too good at her trial either.
I wouldn't think. So, I mean, I look at it a different way than you do I'm afraid.”
Mr Burke otherwise denied that settling for the discount on the claim was based upon knowledge he then had that there would be no prospect of further moneys being recovered.
Edmond Francis Brailey
The respondent called Mr Brailey to give evidence who is the accountant for the respondent and had performed that role since 1974. He gave evidence confirming the investigation into the amounts stolen by the bankrupt from the respondent and indicated that in a summary of the amount stolen over an eight year period a total amount of $496,350.05 was revealed. It should be noted, however, that that amount was not conceded by the bankrupt who declined to answer questions relating to any further amount stolen over and above the amount which was the subject of the charges.
Arising out of the evidence of Mr Brailey it was made clear during the course of the examination-in-chief that in terms of a finding by the Court the most that could be reasonably found would be prima facie evidence that sums stolen by the bankrupt in excess of $138,000 and that the fraud has occurred over a period from 1990 until 1998 with prima facie evidence that the total amount stolen was somewhere in the region of $500,000.
Mr Brailey's concern was that the respondent had not yet lodged a proof of debt with the applicant and conceded that the precise details had not been fully determined.
Mr Brailey agreed under cross-examination that other investigations occurred in March 1999 in relation to property interests of the bankrupt to determine her financial circumstances in order to determine whether or not the claim by the respondent could be satisfied. Hence the solicitors for the respondent were instructed to seek a charge over the property of the bankrupt and if necessary proceed to seek an injunction to restrain a sale of the bankrupt's property.
Ronald Maxwell Southall
Mr Southall is a director of the respondent and gave evidence concerning the meeting with the bankrupt in January 1999. He denied that anything was said by the bankrupt at that stage confirming her financial position. The following exchange occurred in examination-in-chief:
“Well she had given evidence that she mentioned she was going to sell her house?---She definitely didn't mention that at the meeting.
She has also given evidence that at the conclusion of that meeting she believed that you were well aware of what her financial position as a result of what was said at that meeting. What do you say about that?---I always was of the opinion that Mrs MacNeil-Brown was a wealthy person. For instance, just as that meeting occurred she had just come back from eight or ten days at the Gold Coast which she took her family and a friend of her son's who was a relation to our book shop manager at our campus bookshop and that would certainly have cost her in excess of $8000 because I've had similar holidays myself, and you would think that if she had any financial difficulties that she certainly wouldn't have taken a holiday such as that. She always gave me the impression just in the course of conversation that she was a rather wealthy person.”
Submissions
Applicant's submissions
Section 122
It was submitted on behalf of the applicant that the trustee must prove under s.122 that there has been a transfer of property which in the present case would appear to be the charge dated 7 July 1999. An issue was raised as to when the charge became effective because although it was signed on 7 July 1999 there was some debate about when it was received.
As I understood the submission, reference was made to a letter dated 26 July 1999 from the respondent's solicitors to the solicitors acting for the bankrupt which refers to the charge being forwarded under cover of letter dated 5 July 1999 and returned on 9 July 1999. It should be noted that that letter refers to a fire occurring on 9 July 1999 and the documents being lost in a fire. A request was made in that letter for the documents to be again completed and returned to the respondent's solicitors. It was submitted that the charge is given when it is received by the solicitors for the respondent.
Reliance was placed upon the letter dated 8 July 1999 from the bankrupt's solicitors to the respondent's solicitors wherein the author states:
“I note by way of interest that Ms MacNeil-Brown has other debts that amount to about $70,000 which just will not be paid.”
It was submitted that that reference by way of mere assertion was relevant to the issue of knowledge concerning other creditors and then relates further to the issue of good faith referred to in s.122.
The applicant's counsel specifically referred to sub-s.122(4)(c) which provides:
(c)A creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
(i)that the debtor was unable to pay his or her debts as they became due from his or her own money; and
(ii)that the effect of the transfer would be to give him or her a preference, priority or advantage over the creditors.
It was submitted that the variation to the charge to $70,000 on the evidence does not seem to have been given pursuant to any arrangement between the respondent's solicitors and the bankrupt's solicitors.
It was submitted that the next element which the trustee must prove is insolvency. Counsel referred to the decision of Sandell v Porter (1966) 115 CLR 666 and the passage at p.670 as follows:
“An essential step in making out that a payment is a preference within s.95 is to establish by evidence to the satisfaction of the Court that the payer was at the time of the payment insolvent. Insolvency is expressed in s.95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”
It was submitted on behalf of the applicant that the evidence summarised in the trustee's report established clearly that the bankrupt was insolvent at both the date when the charge was given and the date of the payment in August 1999. Although it was conceded that the bankrupt then had an equity of something in the region of 40 to 50
per cent in her property at the time the Court, it was submitted, should also take into account the list of other creditors including credit cards which indicated that at the time the bankrupt was using credit cards by way of cash withdrawals from one credit card to pay another credit card. It was submitted that this was an indicator of insolvency.
The next element the trustee must establish according to the submissions by the applicant is that there is a debtor/creditor relationship.
It was next submitted that the trustee must prove in its claim under s.122 that the transfer had the effect of giving the respondent a preference, priority or advantage over other creditors. It was submitted that there was evidence of substantial other creditors of the bankrupt estate who were unlikely to receive any significant proceeds from the administration of the estate compared with the respondent who had received $67,500 proceeds from the sale and the benefit of the charge which then meant they were preferred creditors over the other creditors of the bankrupt.
During the course of submissions reference was made to the further element that the transaction or transfer of property must take place within six months prior to the commencement of bankruptcy. Specific reference was made to s.115 of the Bankruptcy Act. The commencement, it was submitted, was at least 17 November 1999 and it was submitted that the timing in the present case was not really in issue.
Reference was then made to the statutory defences set out in subs.122(2) of the Bankruptcy Act which do not appear to be relied upon by the respondent.
Counsel further referred to the deeming provision of s.122(4)(c) to which I have already referred and in particular a passage from the case of Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 at 224 per Priestley JA as follows:
“The circumstances of this appeal and the arguments advanced in its support are fully set out in the reasons of Clarke JA. I wish to deal only with two of these arguments which concern the interpretation and application of s.122 of the Bankruptcy Act 1966 (Cth) and raise the question of the relationship between the expressions ‘in good faith’ and ‘in the ordinary course of business’ in s.122(2). I will discuss this question first and then state my opinion on the two arguments, the first involving what test of ‘ordinary course of business’ has been established by authority (the meaning question), and the second asking whether, in applying that test, the subjective state of mind of the creditor is relevant (the subjective question).”
Counsel for the applicant referred to the following passage at p.274 of the Herkness decision where Priestley JA states:
“For the reasons I have given, in my opinion the formulation of Gavan Duffy CJ and Rich J in Robertson v Grigg is established as the binding formulation. It has a degree of amorphousness, but within it, I think it is possible, in cases such as the present, to concentrate on what would be the usual manner of payment in the circumstances of the particular transaction, and ask whether anything about that manner of payment could, on the approach of the businessmen concerned in the transaction, be realistically regarded as something other than an ordinary business payment. In nearly all the cases concerning whether a particular payment was in the ordinary course of business, although the course of business has been spoken of in the general terms typified by the formulation in Robertson v Grigg, attention has been paid to whether the payment was received in accordance with the terms of the parties understood to be required; either by specific contract or custom of the business. The cases that have been said to be outside the ordinary course are those where a creditor, on not being paid in accordance with contract or custom, the ordinary course, has agreed to change the terms of payment, in a way that, although it does not go so far as to indicate possible insolvency, nevertheless suggests that in order to increase the probability of payment it is necessary to make the terms of payment easier for the debtor to comply with.”
It was submitted on behalf of the applicant that the test referred to above has been made out in the present case in the sense that it was argued that the charge was not on the evidence raised in the ordinary course of business. Indeed it was argued that the charge was not a practice followed by the respondent in any of their previous dealings. It was submitted that the ordinary course of business has to be viewed in the context of the dealings between the parties leading up to the giving of the charge. Reliance was specifically placed upon the deeming provision of sub-s.122(4)(c) as in all the circumstances of the present case it was submitted that the respondents either knew or had reason to suspect that the bankrupt was unable to pay her debts as they became due from her own money and that the effect of the transfer would be to give the respondent a preference, priority or advantage over other creditors.
During the course of submissions I raised with counsel the prospect that the preparation of the charge may be regarded as a mechanism introduced by the respondent to provide some protection and compensation in circumstances where there had been theft by an employee. Whilst the illegal act of an employee can hardly be something said to be conduct in the ordinary course of business I raised with counsel the suggestion that it may be in the ordinary course of business generally to provide a charge over property for someone who owes you money. Accordingly the question I raised was why in those circumstances would not a charge over property known to be held by a debtor be appropriate in general terms as part of the ordinary course of business albeit in the present circumstances relating to the theft of an employee. Counsel then took me to High Court authorities reviewed in the Harkness decision at p.265 and in particular the decision of the High Court in Robertson v Grigg (1932) 47 CLR 257 where in a joint judgment of Gavan Duffy CJ and Starke J the Court said at p.267 the following:
“Therefore the test under sec.95 of the ordinary course of business is not whether the act is usual or common in the business of the debtor or of the creditor, but whether it is 'a fair transaction, and what a man might do without having any bankruptcy in view’.”
It was submitted, applying the passage which has just been set out, that in the present case the respondent had sought to secure a position to make sure that they were in a preferred position to other potential creditors rather than it simply being a fair transaction and what a man might do without having any bankruptcy in view. It was submitted that the transaction is unfair on the basis that it is entered into without any belief on the part of the creditor that the debtor might be insolvent.
It was agreed during the course of submissions that charges over property do not only occur in circumstances where parties are insolvent. I was referred to the following passage from Williams J in Downes Distributing Co Pty Ltd v Associated Star Stores Pty Ltd
(in liq) (1948) 76 CLR 463 at p.480 as follows:“… it seems to me, therefore, that the expression refers to a transaction into which it would be usual for a creditor and debtor to enter as a matter of business in the circumstances of the particular case uninfluenced by any belief on the part of the creditor that the debtor might be insolvent.”
When that passage was quoted by counsel for the applicant I raised the suggestion that the circumstances of the current case were of a dishonest employee stealing from an employer with the employer seeking some compensation. It was submitted that one would need to look in those circumstances at the question of whether it is a transaction that would be entered into uninfluenced by the belief on the part of the creditor that the debtor might be insolvent.
In dealing with the concept of good faith I was referred to the decision of Priestley JA in the Harkness case and in particular p.274 where His Honour states:
“… good faith looks to the actual knowledge and suspicions of the creditor; equally, it seems to me that what is passing in the mind of the debtor is irrelevant, unless it happens to furnish some evidence as to the mental state of the creditor.”
It was submitted that it is what is known to the creditor that is material to good faith. That is the test which applies before taking into account the deeming provision. The deeming provision as recited earlier in s.122(4)(c) it was submitted applies to the present case as at the point of the letter in late July the respondent would have had a great reason to suspect the insolvency and preferential effect including knowledge that the bankrupt was receiving Centrelink benefits. In addition the respondent apart from considering other debts should also consider the extent and nature of his own claim against the bankrupt.
Section 120
It was submitted by the applicant that the charge is voidable under s.120 of the Bankruptcy Act. If there is no debtor/creditor relationship then the charge, it is submitted, is simply a disposition of property or a transfer of property by a person who became a bankrupt in favour of another person.
It was submitted that a transfer of property includes a payment of money and extends to the giving of charges.
The next issue referred to in submissions related to the question of whether the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property (s.120(1)(b)). It was submitted that the existence of an unsecured debt does not constitute consideration for the giving of security in respect of it. Reference was made to the decision of Re Hyams; Official Receiver v Hyams (1971) 19 FLR 242 at p.254 per Gibbs J who stated:
“It is clear that the mere existence of an antecedent debt is not consideration for the giving of a security in respect of that debt; 'in order to have consideration for a further security there must be an agreement, express or implied, to give time or some further consideration, or else there must be an actual forbearance which ex post facto may become the consideration to support the deed': Wigan v English and Scottish Law Life Assurance Association. In considering whether an agreement to forbear can be implied, or whether the creditor has in fact forborne from taking action on the strength of the security, it is an important matter that the creditor has requested the giving of the security. If the creditor has requested the security, the inference is that if he had not obtained it he would have taken action which he forbears to take on the strength of the security: Glegg v Bromley. Similarly, the fact that a security was given at the request and demand of the creditor was held in Re Dundas; Moss v Dundas to support an implication of an agreement to forbear. In the present case, as I have held, the respondent in no way sought the mortgage. However, even where there has been no request or demand by the creditor, it may be inferred from the circumstances of the case that he did in fact forbear from action on the strength of the security.”
After reciting that passage, counsel for the applicant submitted that in the present case there is an issue as to whether there was a forbearance to sue and what the market value of the forbearance was in all the circumstances. Counsel submitted that the evidence in relation to whether or not there was forbearance to sue was equivocal. In any event, the difficult issue is the market value of the forbearance. It is further submitted that this would involve an examination of the threatened suit and all of the circumstances surrounding it. The question to be asked, according to the submissions, was the worth of the charge to the parties at the time. This might assist in determining the value of the forbearance. I was referred to the unreported decision of Victorian Producers Co-operative Co Ltd v Kenneth (1999) FCA 1488 (29 October 1999). That was a decision which dealt with the issue of a mortgage of livestock and a claim by the trustee that the mortgage was void under s.120 of the Bankruptcy Act on the ground that the value of the consideration given by the Co-operative which received the mortgage was less than the market value. I was specifically referred to paragraph 11 of the decision of Merkel J where His Honour states: -
“11.The current form of s.120 is intended to overcome the decision of Barton v Official Receiver (1986) 161 CLR 75, that a transaction is not void under the section if the person who claims to be a purchaser of property shows that the consideration given is real and substantial even if it is not fully adequate consideration. Unlike its predecessor, under the current form of s.120 the Court is required to assess the value of the consideration given.”
Further reference was made to the decision of Merkel J where he discusses the value of an agreement to forbear in paragraph 20 as follows:
“20.The value of an agreement to forbear from recovering a debtor's indebtedness will be closely linked to 'value' of the chose in action. In the present case the chose in action of the Co-operative in respect of the existing indebtedness of the debtors on 14 November 1995 of $78,878 plainly had a value that was significantly less than the amount as a result of the insolvency of the debtors at the time. Even if the debtors were somehow able to pay that amount to the Co-operative, the significant risk that the payment would be void under the Act by reason of the debtor's insolvency would inevitably result in the value of the chose in action being significantly less than the amount due. As no further loans were made on 14 November 1995 the agreement, presumably terminable on reasonable notice, to provide credit in the future was of little value at that date. In so far as the loans subsequently made were part of the consideration given by the Co-operative I am satisfied that at all material times the value of the consideration given by the Co-operative remained significantly less than the market value of the live stock transferred to it from time to time under the mortgage.”
After considering the authority to which I have just referred counsel submitted that it may be difficult to nominate a figure in respect of market value but otherwise submitted that it is less than the equity in the property that was charged and therefore s.120 would have operation. In the course of discussion I raised with Counsel an issue namely in the absence of any other creditors if there is a property which can be realised then why should the Court not then look at the total equity in the only known asset as being a reasonable basis for determining the amount likely to be recovered. In those circumstances, it was submitted, that if an order were made under s.120 it would be appropriate for the trustee's obligations and the applicant's obligations to be offset leaving a net balance payable by the respondent to the trustee. Reference was then made to sub-s.120(4).
It was conceded by Counsel for the applicant that reliance upon s.120 may be regarded as a “fall back position” by the applicant. Reliance was placed essentially upon the second limb of sub-s.120(1)(b) namely that the consideration given was of less value than the market value of the property. It was not suggested that there had been “no consideration” in the present case.
Counsel initially reserved the right to make further submissions concerning any claimed constructive trust or equitable charge and/or the impact of a restitution order made pursuant to the Sentencing Act. Upon hearing the submissions for the Respondent it was submitted that there is difficulty establishing any equitable claim by way of a constructive trust as in the present case there is no identifiable sum or amount which can be relied upon in contrast to the decisions on the issue which have been referred to during the course of argument. It was suggested the present case can be distinguished from examples of a thief being a constructive trustee for the clearly identified proceeds of the crime (see Black v Freedman (1910) 12 CLR 105). As I understood the argument for the applicant it was submitted that there is no identifiable property which has been transferred or handed over to a third party requiring court intervention to make a finding of a constructive trust and thereby defeat any transfer to a third party though it seemed to be conceded that in the present case the bankrupt at least had the opportunity to apply the proceeds of her crime towards meeting her current expenses and other costs. The tracing exercise in the present case is clearly different to the exercise where there is an identifiable lump sum of money which can be recovered following a more straight forward tracing exercise. At the highest it was submitted by Counsel for the applicant that all that could be said is that the bankrupt had expenses and income and the proceeds of the thefts and she might have needed to reduce her expenses if she did not have the proceeds of the theft. It was submitted that there was no tracing exercise and no evidence that any of the money stolen had found there way into the property which was the subject of the charge.
Counsel for the applicant relied upon an extract from Halsbury’s Laws of Australia (Volume 27) at paragraph 430-575 where there is reference to the circumstances in which a constructive trust is imposed. In looking at the main purposes for which a constructive trusteeship is imposed, reliance was placed on that purpose being to “render a defaulting fiduciary accountable for an improper profit from his or her fiduciary position” . The applicant further referred to the relevant statement of principal at 430-580 of Halsbury as follows:
“[430-580] Constructive trust as a means of accounting for profits obtained in breach of fiduciary duty A fiduciary must account for a profit or benefit if it was obtained either:
(1)when there was a conflict or possible conflict between his or her fiduciary duty and his or her personal interest; or
(2)by reason of his or her fiduciary position, or by reason of his or her taking advantage of opportunity or knowledge derived from his or her fiduciary position.
This accountability may be secured by means of an account of profits, or the imposition of constructive trusteeship on the errant fiduciary. As the imposition of constructive trusteeship is the most extensive form of relief available in equity, the court will not impose a constructive trust unless:
(1)to do so is the only satisfactory means of ensuring that the fiduciary accounts for the entirety of the gain derived from his or her breach of fiduciary duty; and
(2)there is a sufficient connection between the scope of the fiduciary’s obligation and the property over which it is sought to establish a constructive trust.”
It was submitted having regard to the passage to which I have just referred that in the present case there is not a sufficient connection between the scope of the fiduciary’s obligation and the property over which it is sought to establish the constructive trust.
Counsel for the applicant relied upon the High Court Decision of
Daly v The Sydney Stock Exchange Ltd(1986) 160 CLR 246.
Respondent's submissions
The respondent relied upon a notice of intention to oppose the application filed 25 September 2001 and provided an outline of submissions relied upon during the course of oral submissions.
It was submitted on behalf of the respondent that to establish that a preference has been given and is voidable under s.122 of the Bankruptcy Act the applicant must establish the following elements: -
(i)That there has been a "transfer of property" by the bankrupt in the statutory period.
(ii)That the respondent was a "creditor" of the bankrupt.
(iii)That the respondent received a "preference, priority or advantage" over the creditors.
Counsel relied upon the authority of Re Brechin; Ex parte the trustee (1931) 7 ABC 255 at 268.
Reliance was placed upon the statutory defence under s.122(2)(a) which, it was submitted, effectively defeats the applicant's claim in its own right. It was submitted that the transaction which took place was in the ordinary course of business and that the respondent acted in good faith and gave consideration at least as valuable as the market value of the property.
In considering what is meant by "the ordinary course of business" counsel referred to a decision of the High Court in Robertson v Grigg and in particular submitted that the test is not whether the act is usual or common in the business of a debtor or of the creditor but whether it is a fair transaction and what a man might do without having any bankruptcy in view. It was submitted that whilst there was obviously no course of trade or business between the bankrupt and the respondent that the bankrupt as an employee of the company in a fiduciary position had stolen from the respondent. In those circumstances, it was submitted that the Court should be considering whether given the discovery of the theft of the money by the company and given the desire of the company to protect its position in some way and to recover whatever moneys it may be able to recover a course that it followed through its solicitors of extracting the charge over the property was a fair transaction in all the circumstances.
The respondent submitted that the charge is effected once it is executed by the person giving the charge. The issue of when the charge is delivered or received by the other party is only relevant to the question of the enforcement of the charge. As an instrument which creates the interest in the land it becomes effective immediately upon execution.
In dealing with the issue of knowledge by the respondent that there were other creditors who could not be paid or that the bankrupt was then insolvent, it was submitted that the respondent had no reason to expect insolvency at all. Reference to correspondence relied upon by the applicant was merely an assertion about other creditors not being paid and it was submitted was not supported by any evidence or detail that the bankrupt had other debts. On the contrary, it was submitted, that the substance of the evidence of the witnesses sworn on behalf of the respondent was to the effect that they believed that the bankrupt was a person of independent means or had independent wealth. Their evidence, it was submitted, should be preferred over that of the bankrupt. It was submitted that there is a paucity of evidence which would support the applicant's contention that the respondent in fact did have knowledge of insolvency. The respondent, it was submitted, was entitled by its officers to make their judgment on the bankrupt based on the outward appearance and lifestyle that the bankrupt appeared to be living.
In relation to the issue of forbearance to sue, it was submitted that the express consideration in the charge could only refer to a forbearance to sue for an amount of at least $130,000 and indeed possibly more than that amount. The Court need only be satisfied that the consideration given by the respondent was more than $67,500 and once so satisfied it can be concluded that the consideration given was less than the market value of the property transferred.
It is useful to set out the grounds relied upon in the respondent's notice of intention to oppose the application and the submissions in support of those grounds.
In the events which have happened there was not a transfer of property by the bankrupt to the respondent within the statutory period
In support of this submission the respondent claimed that the extent of the theft was discovered by the company following an investigation by the directors and their accountants during March 1999. The bankrupt was charged by the police on 12 April 1999 with the theft of $138,511.12 during the period between 1 July 1997 and 15 December 1998. It was submitted that the six month relation back period commenced on 17 May 1999 with the debtor's petition being presented on 17 November 1999. The company had an immediate right to restitution against the bankrupt, it was submitted, once the theft was discovered. There was clear evidence of a breach of fiduciary obligation between the bankrupt and the company. The right to restitution is based upon a cause of action in equity, unjust enrichment, the tort of deceit, moneys had and received or based on a constructive trust arising from the breach of fiduciary duty.
In support of this submission, counsel referred to the text "Restitution Law in Australia", Mason & Carter (1995) pp.653-655 and pp.670-679. I was referred to the following passages:
[1633]… Money that is stolen may be recovered, in a restitutionary claim, from the thief or any person to whom it is paid without (full) valuable consideration.
[1634]…The claim against the thief is an independent restitutionary claim based on unjust enrichment by subtraction because the defendant's receipt is an obviously unjust enrichment resulted from the defendant's deception of the plaintiff. This generated a primary restitutionary obligation on the defendant.
[1636]…It is well established that a person who obtains money by deceit is liable to repay it, the liability stemming alternatively from the action for damages for deceit and a common money count for money had and received. Many cases have involved the deceit of a servant or agent.
[1722]…A plaintiff complaining of a breach of confidence or breach of a fiduciary or other equitable obligation may recover compensation under equity's inherent jurisdiction. …The equitable remedy of compensation give rise to an ‘equitable debt or liability in the nature of a debt. …’.
[1726]…There are strong statements that equitable compensation is designed to put a plaintiff ' in as good a position pecuniarily as before the injury'.
Further submissions were made in relation to the meaning of constructive trust and reliance was placed upon the decision of Deane J in Muschinski v Dodds (1985) 160 CLR 583 at 614 as follows:
“… a remedial institution which equity imposes regardless of actual or presumed agreement of intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.”
Reference again is made to the Mason & Carter text as follows:
[1727]…But whatever its judicial nature, the constructive trust, like the equitable lien, confers significant advantages on the successful claimant.
Reference was made to one of the advantages being "priority over unsecured creditors".
I was further referred to the following passage from the text:
[1728]…More than any other remedy, the constructive trust strips the defendant of any enrichment flowing (unjustly) from the wrong. Its role as a restitutionary remedy for an unjust enrichment is clear and well-recognised. In Pettkus v Becker, Dickson J said that 'the principle of unjust enrichment lies at the heart of the constructive trust'. …
[1730]…If there is a sufficient connection between the defaulting fiduciary's obligation and the property acquired from the breach, a constructive trust may be imposed by way of remedy, especially but not exclusively in cases of dishonesty.
Counsel referred to the principle of equitable lien and again quoting from the Mason text referred to the following:
[1733]…Equitable lien does not depend either upon contract or upon possession. It arises by operation of law, under a doctrine of equity 'as part of a scheme of equitable adjustment of mutual rights and obligations'. The lien secures the discharge of an actual or potential indebtedness, but it is not confined to contract. It may operate in aid of a purely equitable relationship between the parties.
In dealing with the issue of a constructive trust I was referred to the following extract from Ford on Principles of the Law of Trust in Australia:
[22000]…In one usage it refers to a third type of trust alongside an express trust arising from a person's intention to create a trust, manifested expressly or tacitly, and a resulting trust arising where a disposition of title to property is presumed not to carry beneficial ownership to the new title-holder. In this usage a constructive trust is a residual category accommodating widely disparate situations in which a court of equity would consider that a person who has title to property should hold for the benefit of another as a result of applying some legal or equitable principle aimed to prevent unconscionable enjoyment of the property. Viewed as a remedy, this type of constructive trust is proprietary since the person giving relief is treated as having a beneficial interest in the property from the time the constructive trust arises.
It was submitted, having regard to the authorities to which I have referred, that in the present case the Court should find that the bankrupt would not have been able to enjoy the benefit of the property which was sold by her without having the use of moneys which were stolen by her from the company over a very long period of time in clear breach of her fiduciary duty. It was submitted that in that context the bankrupt has been unjustly enriched at the expense of the respondent and had used the stolen moneys to pay for her living expenses.
During the course of submissions I raised with counsel the issue of whether the payment of the mortgage on the bankrupt's property was effected by direct debit to her account and not directly paid by the amounts which she had stolen from the respondent. There was evidence that the bankrupt had used the stolen money to accommodate a certain lifestyle including a holiday and like activities. It was submitted however by counsel for the respondent that it was open to the Court to find that the bankrupt had obtained the benefit of the property either directly or indirectly using moneys that she had stolen from the respondent. The issue, it was said, was whether she would have been able to maintain the property and fulfil obligations in respect of the property if she had not defrauded the respondent of the moneys which have been referred to.
In any event is was submitted that if the Court decides to declare a remedial constructive trust then it has wide discretion to mould the terms of the constructive trust.
Reference was made to the list of situations where unconscionable reliance on title will be remedied being open. Established categories according to the text of Ford include the situation of a thief holding stolen moneys. It was submitted that this is the case in the present application. I was particularly referred to the following passage from Ford:
Although unconscionability is not a self-sufficient ground for equitable relief, it is the connecting thread of not only a constructive trust but also other trusts. …
Although breach of fiduciary obligation is frequently remedied by imposition of a constructive trust it is not necessary in Australia to show a pre-existing fiduciary relationship between a plaintiff seeking a constructive trust and the defendant: Muschinski v Dodds (1985) 160 CLR 583 at 616-617.
It was submitted in the present case that there is a fiduciary relationship and a constructive trust. It follows therefore that in the present case the Court should provide as a remedy restitution in circumstances where a constructive trust has been established. It was submitted that there would be no other adequate remedy other than the remedy which would result in the respondent keeping the money which had been paid by the bankrupt. There was no other action which could be taken against the bankrupt given that she is still in fact a bankrupt. It is not appropriate, it was submitted, for the Court to suggest that there may be some further action in the future and nor is it appropriate to have regard to the order made under the Sentencing Act upon the conviction of the bankrupt.
It was submitted for the respondent that although payment of $67,500 from the proceeds of sale was made by the bankrupt within the six month period (9 August 1999) it was paid in satisfaction of a
pre-existing equitable right to restitution. (See Worrell v Power and Power (1993) 46 FCR 214. It was submitted that if the Court were to accept that there was an immediate right to restitution upon discovery of the theft, the fact that the money was actually paid during the 'relation back period' does not necessarily mean that there is a preference if it be that the payment is of a pre-existing right or equitable right.
In the events which have happened the respondent was not a creditor of the bankrupt
It was submitted that the debtor/creditor relationship is personal and not proprietary in nature. In the present case, the respondent had a proprietary interest in the proceeds of sale arising from an equitable charge or lien over the bankrupt's property. The payment was not received by the company in the capacity of a creditor but in the capacity of a beneficiary under a constructive trust. (See Burns v Leda Holdings Pty Ltd (1987) 89 FLR 365).
In the events which have happened the respondent did not receive a preference, priority or advantage over other creditors
It was submitted that the charge executed on 7 July is evidence of a prior agreement made between the bankrupt and the respondent. At all times, it was submitted, the respondent acted in good faith in its dealings with the bankrupt and had no knowledge that she was insolvent or reason to suspect that she was insolvent. The payment of the money to the respondent was not made to defeat creditors and was not void, it was submitted, against the trustee as the company had acted in good faith (see s.121(4)).
It was submitted that the agreement created a valid equitable charge or lien over the bankrupt's property which placed the respondent in the position of a secured creditor as defined by s.5 of the Bankruptcy Act (see Robertson v Grigg (1932) 47 CLR 257 at 270).
In the circumstances, the respondent was entitled to realise its security by accepting payment from the proceeds of sale and such payment did not vest in the trustee (see s.58(5) of the Bankruptcy Act).
It was submitted that property held in trust by a person who becomes a bankrupt is not divisible among creditors (see s.116(2)(a) of the Bankruptcy Act).
Further in the alternative the position of the company is protected pursuant to s.122(2) of the Bankruptcy Act and the transfer is not void against the trustee (see Robertson v Grigg). This was the subject of detailed submissions made at the outset by counsel for the respondent.
It was submitted that the giving of the charge (7 July 1999) over the property to Brown to the company is not void against the applicant pursuant to s.120 and/or s.122 of the Bankruptcy Act.
Counsel submitted that the company gave valuable consideration for the transfer and this was expressed in the charge. The value of the consideration at the time of the execution far exceeded $70,000 which the bankrupt had agreed to repay to the company (s.120(1)(b) of the Bankruptcy Act).
The consideration given was the agreement by the company not to commence legal proceedings against the bankrupt for the recovery of the moneys owing to the company. This is the forbearance to sue issue referred to in some detail earlier.
If either the payment of the $67,500 or giving of the charge is declared void under s.120 of the Bankruptcy Act it was submitted by the respondent that the Trustee should be ordered by the Court to pay to the respondent an amount equal to the value of consideration given at the time of the payment which is either $496,350.05 or $138,511.12 or $70,000 pursuant to s.120(4) of the Bankruptcy Act. It is said that the Court has this power pursuant to s.30(1) of the Bankruptcy Act.
It was submitted further that if either the payment of $67,500 or the giving of the charge is declared void then the respondent seeks a declaration under s.122(5) that it may still prove in the bankruptcy to the full extent of $496,350.05 as an unsecured creditor.
Findings and reasoning
In this application having heard the evidence of all witnesses I prefer the evidence of those witnesses called for and on behalf of the respondent to the evidence of the bankrupt.
It was clear to me that the bankrupt in her evidence was vague and evasive. It is also fair to conclude that the bankrupt still has some interest in continuing to benefit from her fraudulent conduct. Obviously she is a person who has been convicted of a serious act of dishonesty. Whilst that of itself is not necessarily relevant in assessing her credit, it is relevant in the present case as her dishonesty related specifically to issues which are relevant to this application. Further, the dishonesty was of a kind which has been regarded as most serious given it involves effectively a breach of trust between employee and employer.
Further I was not satisfied that the bankrupt gave reliable evidence concerning her financial circumstances and the extent to which her claimed difficult financial circumstances were revealed to the representatives of the respondent.
I prefer the evidence of the respondent’s witnesses and in particular the evidence of Mr Burke and Mr Southall. I accept the evidence of Mr Burke that at all material times he was endeavouring to determine the full extent and nature of the bankrupt’s fraudulent behaviour. I further accept as the truth of the circumstances that the bankrupt when under investigation was unlikely to reveal the full circumstances of her financial interests at that time. The evidence of Mr Southall is particularly preferred over that of the bankrupt in relation to any suggestion that the bankrupt was going to sell her house or was otherwise then suffering financial difficulties. I accept his evidence that the bankrupt appeared to him to be a “wealthy person”. He had good reason to form that view having regard to the conversations with the bankrupt and her conduct which included embarking upon what would appear to be expensive vacations.
In considering the deeming provision of s.122(4)(c), it is not relevant in my view that representatives of the respondent became aware of the bankrupt receiving Centrelink benefits. I accept the evidence of Mr Burke in particular when he said, “I mean even to this day we still don’t think that we have discovered everything”. In circumstances where there is clear evidence of a pattern of dishonest conduct it would be unfair to apply the deeming provision of the Bankruptcy Act based simply upon evidence that the bankrupt was receiving Centrelink payments which may or may not be properly due to her particularly in circumstances where there are substantial sums of money which do not appear to be properly accounted for in any reliable financial statement from the bankrupt. In my view it would be unreasonable to impute knowledge of the bankrupt’s financial arrangement whereby she paid one credit card with another to the respondent at the relevant time.
Having regard to the circumstances surrounding the execution of the charge, I am further satisfied that that document was duly executed at a time when it was clear that the respondent was forbearing to sue the bankrupt for an amount considerably in excess of the amount ultimately paid pursuant to the charge. I am satisfied that at all material times the bankrupt was indebted to the respondent in the sum of not less than $130,000 and that accordingly the payment of the amount of $67,500 in consideration for the forbearance to sue was clearly less than the market value of the property transferred.
I have accepted for the present purposes that the charge is a transfer of property for all relevant purposes (see Lyford & Anor v Commonwealth Bank of Australia (1995) 130 ALR 267).
In my view where an employer has been the victim of substantial fraud by a dishonest employee and seeks to make arrangements for the repayment of amounts stolen or indeed compromised by reaching agreement in relation to payment of a lesser amount than owed is conduct which in any event could properly be regarded as conduct of a kind that could be regarded as being undertaken in the ordinary course of business by the respondent acting in good faith. I have already dealt with the issue of the consideration being at least as valuable as the market value of the property. That is the amount of compromise easily exceeded the amount obtained by the fraud of the bankrupt. Applying the authorities to which I have referred it is clear to me that the respondent and those representing it had acted at all times in good faith. I accept the evidence of the witnesses to whom I have referred that at the time that the charge was the subject of an agreement it was the type of transaction which might be regarded as a fair transaction and particularly a transaction which might have occurred without any view to bankruptcy on the part of the bankrupt.
I further accept that in matters of this kind where there is an illegal act by an employee it is clear that that act itself is not conduct which could be regarded as being in the ordinary course of business. However, it is in the ordinary course of business to provide a charge over property for someone such as the bankrupt who owes the company money as a consequence of the fraud. The placing of a charge over property in those circumstances in my view is both appropriate and can properly be regarded as in the ordinary course of the respondent’s business. I am satisfied that at the relevant time the bankrupt was a debtor of the respondent and the arrangements thereafter entered into between the parties by way of charge was an arrangement which could be regarded as a usual business arrangement in those circumstances (see Downes Distributing Co Pty Ltd v Associated Star Stores Pty Ltd at p 480).
In reaching the decision in relation to the respondent’s acting in good faith I have applied the passage to which I have been referred from the Harkness decision at p 274 referred to earlier in this judgment.
I further note that the respondent has discharged the burden of proof required by s.122(3) of the Bankruptcy Act.
In the present case whilst there has been a transfer of property by the bankrupt within the statutory period provided pursuant to s.122 of the Bankruptcy Act, it is clear from my findings that I am satisfied that the transaction took place in the ordinary course of the business and that the respondent acted in good faith. Further I have found that the respondent gave consideration at least as valuable as the market value of the property. I accept that the date of execution of the charge is the relevant date and was therefore within the statutory period.
To the extent that I am required however I would further find that the respondent did have an immediate right to restitution against the bankrupt upon discovery of the theft. This would appear to be during March 1999 where the Court notes that the bankrupt was charged by police on 12 April 1999. Specifically with theft of $138,511.12 during the period between 1 July 1997 and 15 December 1998. The right to restitution occurred outside the statutory period.
Applying the law to which I have been referred and in particular those principles set out in Mason & Carter, I am satisfied that the respondent had an immediate right to restitution for the amount stolen by the bankrupt as at all material times that money obtained by theft or deceit is immediately repayable at the very least as money had and received. Any finding to the contrary in my view would be contrary to proper principles of equity.
I am required in making that finding to give consideration to the issue of whether I can properly find that a constructive trust has been established in the present case of a kind which would provide the restitutional remedy for an unjust enrichment in circumstances where clearly the bankrupt by operation of any constructive trust would be deprived of any enrichment flowing unjustly from her crime.
In my view the significant issue in relation to the establishment of a constructive trust arising from a breach of what I am satisfied would be regarded as the bankrupt’s fiduciary obligations to her employer resulting in property being acquired as a result of that breach is whether or not there is sufficient material to allow the tracing exercise which it had been submitted by Counsel for the applicant but not occur.
Whilst it is difficult to embark upon a tracing exercise in the present case given the extensive nature of the fraud over a significant period of time, I am satisfied that there is sufficient evidence which would establish the breach of fiduciary duty by the bankrupt towards the respondent of a kind which would normally attract the operation of a restitutional remedy for unjust enrichment and I am further satisfied that there is sufficient connection between the trustees defaulting fiduciary obligation to the respondent and property acquired from that breach. I am satisfied that in the present case the bankrupt would not have been able to enjoy the benefit of the property which was sold by her without having use of the moneys which she had stolen from the respondent over that long period of time in clear breach of her fiduciary duty. She had available to her a pool of resources including the fraudulently obtained money from her employer which either directly or indirectly she was able to apply to living expenses and payment of recurring costs including mortgage payments. The suggestion at one stage of the evidence by the bankrupt that payments of the mortgage were by way of direct debit from her bank account only reflects the method of payment and not the access to resources then available to the bankrupt to enable that method of payment to occur uninterrupted. It is clear that the receipt is such an extensive amount of money which was the subject of the fraud would have enabled the applicant to continue that method of payment uninterrupted and without default. Otherwise she may have been forced to use funds in her bank account for living expenses and other costs to which I have already referred.
Hence, I am prepared to find in the present case that there is a constructive trust and otherwise accept the submissions of the respondent. In particular I am satisfied that the existence of the constructive trust then provides a significant advantage to the respondent namely giving it priority over unsecured creditors as it provides a remedy and restitution to which I have already referred. The payment therefore of the sum pursuant to the trust could be regarded in my view as being satisfaction of the pre-existing equitable right to restitution. Hence, it could not be regarded as being a preference being paid in circumstances where it simply met that pre-existing equitable right.
It follows therefore from the reasons and findings in this judgment that the following orders be made:
(1)The application filed 14 September 2001 be dismissed.
(2)The applicant shall pay the respondent’s costs including reserved costs if any in accordance with Schedule 1 of the Federal Magistrates Court Rules to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
(3)I certify pursuant to Rule 21.15 of the Federal Magistrates Court Rules that it was reasonable for the respondent to employ an advocate in these proceedings.
I certify that the preceding one hundred and forty-three (143) paragraphs are a true copy of the reasons for judgment of McInnis FM
Associate:
Date: 13 February 2003
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