Macks as trustee of the Bankrupt Estate of Townsend v Grima
[2017] FCCA 763
•28 April 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| MACKS AS TRUSTEE OF THE BANKRUPT ESTATE OF TOWNSEND v GRIMA & ANOR | [2017] FCCA 763 |
| Catchwords: BANKRUPTCY – Antecedent transaction – was transaction undervalued – bankrupt granted mortgage in five year period of her bankruptcy – mortgage granted in favour of her parents – asserted consideration provided was forbearance to sue in respect of monies previously advanced by parents to bankrupt or company of which bankrupt was sole shareholder – market value of consideration – past consideration – operation of section 120 of the Bankruptcy Act 1966 – matters to be considered. |
| Legislation: Bankruptcy Act 1966, ss.19(1), 19(1)(e) & (f), 120, 120(1), 120(1)(b), 120(5) |
| Cases cited: Sutherland v Brian [1999] NSW SC 155 Official Trustee in Bankruptcy v Lopatinsky (2003) 30 Fam LR 499 |
| Applicant: | PETER IVAN MACKS AS TRUSTEE OF THE BANKRUPT ESTATE OF JANICE TOWNSEND |
| First Respondent: | RONALD GRIMA |
| Second Respondent: | VIOLET GRIMA |
| File Number: | ADG 153 of 2016 |
| Judgment of: | Judge Brown |
| Hearing date: | 25 November 2016 |
| Date of Last Submission: | 25 November 2016 |
| Delivered at: | Adelaide |
| Delivered on: | 28 April 2017 |
REPRESENTATION
| Counsel for the Applicant: | Ms Di Girolamo |
| Solicitors for the Applicant: | Milton Graham Lawyers SA |
| Counsel for the First & Second Respondents: | Mr Pope |
| Solicitors for the First & Second Respondents: | Bruce K Gillan |
ORDERS
A declaration be made that the transfer of property made under the mortgage dated 22 November 2012 granted by Janice Townsend to the respondents Ronald Grima and Violet Grima is void against the applicant Peter Ivan Macks.
The respondents pay the applicant’s costs of the application to be agreed or failing agreement as taxed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT ADELAIDE |
ADG 153 of 2016
| PETER IVAN MACKS AS TRUSTEE OF THE BANKRUPT ESTATE OF JANICE TOWNSEND |
Applicant
And
| RONALD GRIMA |
First Respondent
And
| VIOLET GRIMA |
Second Respondent
REASONS FOR JUDGMENT
Introduction
This case relates to a dispute concerning a mortgage granted by Janice Townsend, to her parents, Mr & Mrs Grima. Ms Townsend is now a bankrupt. The trustee of her estate claims the mortgage is void against him pursuant to the provisions of section 120 of the Bankruptcy Act 1966 (Cth) “the Act” as no consideration was provided for it.
On 7 April 2014 a sequestration order was made in respect of the Estate of Janice Townsend (née Grima), on the petition of Ozroll Pty Ltd. The petition was founded on an unsatisfied judgment debt, in the sum of $11,936.62, issued out of the Magistrates’ Court of South Australia, sitting in Adelaide.
On that date, the applicant in these proceedings, Peter Ivan Macks, was appointed trustee of Ms Townsend’s bankrupt estate. Ms Townsend’s bankruptcy has not been discharged or annulled in the period since.
The duties, incumbent upon Mr Macks, as the trustee of Ms Townsend’s bankrupt estate, are set out in section 19(1) of the Act. They include the following:
(1) The duties of the trustee of the estate of a bankrupt include the following:
…
(b) determining whether the estate includes property that can be realised to pay a dividend to creditors;
…
(e) determining whether the bankrupt has made a transfer of property that is void against the trustee;
(f) taking appropriate steps to recover property for the benefit of the estate;
(g) taking whatever action is practicable to try to ensure that the bankrupt discharges all of the bankrupt’s duties under this Act;
…
(k) exercising powers and performing functions in a commercially sound way.
It is Mr Macks’ evidence that, during the course of his investigations of Ms Townsend’s estate, he discovered that she was the registered proprietor of part of a property located at 443 Woolcock Street, Garbutt in Queensland. As a consequence his obligations arising under section 19(1) were engaged.
The relevant Certificate of Title indicates that Ronald Grima; Violet Grima; Sharon Gayle Grima; and Ms Townsend; are registered, as proprietors of the property, as tenants in common, in one-third; one-third; one-sixth; and one-sixth; shares respectively.
The relevant Certificate of Title also indicates that, on 22 November 2012, Ms Townsend mortgaged her share in the property in favour of Mr Ronald Grima and Ms Violet Grima, who are her parents. The liability said to be secured is an amount of $165,667.80. Ms Sharon Grima is Ms Townsend’s sister.
Later enquiries have revealed that the same mortgage is also registered against another property located at 832 Flinders Street, Townsville. The registered proprietors of this property are also Mr & Mrs Grima; Ms Sharon Grima; and Ms Townsend; as tenants in common, in the same proportions as the Garbutt property.
A schedule to the mortgage indicates that it was granted to Mr & Mrs Grima to secure advances made to Ms Townsend, between 17 January 2008 and 17 July 2012, in an amount of $165,667.80. Mr & Mrs Grima hold the mortgage as joint tenants.
It is Mr Macks’ position that the mortgage is void against him, as it occurred within a period of five years prior to the commencement of Ms Townsend’s bankruptcy and she gave no proper consideration for the transfer. As such, Mc Macks asserts that he had an obligation firstly to investigate the transaction in question and then secondly to have it set aside as a consequence of section 19(1)(e) & (f) of the Act.
In this regard, Mr Macks relies on section 120(1) of the Act, which reads as follows:
(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a) the transfer took place in the period beginning 5 years before the commencement 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.
As a consequence of his view that the mortgage in question was void against him, Mr Macks commenced these proceedings on 13 May 2014, naming Ronald Grima and Violet Grima as the respondents to it. In his application he seeks the following orders:
“1. That the mortgage (Queensland Land Registry Document No: 714796927) registered by the First and Second Respondent against the interest of Janice Mary Grima (AKA Janice Townsend) (a Bankrupt) on Certificate of Title Volume 730 Folio 156 on 22 November 2012 be declared a transfer that is void against the trustee pursuant to section 120 of the Bankruptcy Act 1966 (Cth).
2. Costs.”
The respondents oppose the application on the basis that Ms Townsend, their daughter, was solvent at the time she mortgaged her interest in the property and they acquired the mortgage in good faith for property consideration not less than the market value of the property concerned.
The solicitor for Mr & Mrs Grima has obtained a valuation of each of 443 Woolcock Street, Garbutt and 832 Flinders Street, Townsville, as at November of 2012. The former was valued at $550,000.00; the latter at $350,000.00.[1] Accordingly, a sixth of the total value of the two properties is a sum of $150,000.00, approximately $16,500.00 less than the value of the mortgage granted by Ms Townsend in favour of her parents.
[1] See affidavits of Alexander Dickinson and Natalie Beecroft respectively filed 6 July 2016
Background
Ms Townsend previously ran a company called NQ Blinds & Shutters Pty Ltd. She operated the company with her former husband. It provided the structure for Ms Townsend and her husband to operate a small business, which sold and installed window coverings.
The business operated from rented premises located at 365 Bayswater Road, Garbutt. The premises were rented for a monthly amount of $2,800.00. The owners of this property were Ms Townsend’s parents, Mr & Mrs Grima.
Ms Townsend was the personal guarantor of a loan to the company. When she and her former husband experienced marital difficulties, the company and the business it operated fell into difficulties and experienced cash flow problems. The business ceased to trade in November of 2012.
The business operated an account at the Queensland Country Credit Union. This was the company’s only bank account. Prior to November 2012, Ms Townsend drew approximately $1,000.00 per week from the company’s account by way of wages.
In November of 2012, Ms Townsend also owned a property located at 196 Innisfail-Japoon Road, Mundoo, which was subject to a mortgage in favour of the Queensland Country Credit Union. Ms Townsend did not occupy the property personally but leased it to a tenant for a weekly rental of $320.00. The drawings from the company and the rental from the Mundoo property were Ms Townsend’s sole sources of income.
It is Ms Townsend’s position that, as at 20 November 2012, she was personally solvent. She was able to service the mortgage on the Mundoo property, which was up to date. It is her case that, apart from the mortgage, she did not have any significant debts.
The company had borrowed moneys from the Queensland Country Credit Union, through a credit contract. Ms Townsend was the personal guarantor of this contract. In June of 2013, the company defaulted in making its required payments, under the credit contract, to the credit union. Accordingly, Queensland Country Credit Union called upon Ms Townsend to remedy the default, which she was unable to do. Ultimately, this default led to her bankruptcy.
The accountant for both Ms Townsend and NQ Blinds & Shutters Pty Ltd was Mr Paul Tsakissiris of Innisfail. He has confirmed that the company ceased trading in November of 2012. He has further deposed that Ms Townsend drew $1,000.00 per week from the business to remunerate herself and had rental income of $320.00 per week.
Mr Tsakissiris has also deposed that he knew of no claims against Ms Townsend, prior to November of 2012, when the business closed. It is common ground that Ms Townsend became unemployed, when NQ Blinds & Shutters Pty Ltd ceased to trade. The import of Mr Tsakissiris’ evidence is that he believed Ms Townsend to be solvent at the time the business closed.
Shortly after the business ceased to trade, Ms Townsend executed the mortgage in question in favour of her parents. As previously indicated, the amount secured is $165,667.80, which is repayable on demand and interest free.
In the schedule to the mortgage, [2] the principal sum is stated “to secure repayment of advances made over a period of time as follows.” Thereafter appears the following table:
[2] See affidavit of Peter Ivan Macks at annexure PIM2
17/01/2008 $11,005.37 14/09/2008 $1,321.93 14/02/2011 $1,160.50 5/04/2011 $1,000.00 25/7/2011 $1,005.00 27/10/2011 $250.00 17/02/2012 $250.00 12/07/2012 $20,000.00 16/07/2012 $20,000.00 17/07/2012 $20,000.00 between 1/06/2011 and 31/10/2012 17 months x $2,800.00 $47,600.00 Between August 2008 and October 2012 – 51 months x $885.00[3] $42,075.00 Total $165,667.80 [3] On my calculations, the total of the amount so calculated should be $45,135.00
In their affidavit evidence, Mr & Mrs Grima depose as follows:
“We advanced the funds to her set out in the Schedule to the mortgage, mainly to pay the Creditors of the Company.
We did this to assist our daughter.
We wished to have the security to the monies advanced and to that end, our daughter granted the mortgage, particularly in view of our daughter's matrimonial problems.
When the mortgage was granted we believe that we had paid out her Company's Creditors.
We also believe that she was solvent in the sense that we were her only Creditor apart from her housing mortgage and would only call on her to repay the advances when she could afford to do so or if the buildings were sold.
So far as we knew, her only personal liability was her house mortgage and there was significant equity in the house.”[4]
[4] See affidavit of Mr & Mrs Grima filed 4 July 2016 at paragraphs 8-13
The trustee has obtained copies of bank statements relating to an account in the name of R Grima & Co, held at the NAB branch in Innisfail, Queensland between January 2008 and January 2013. In addition, the trustee has statements for the account, operated by NQ Blinds & Shutters Pty Ltd, with the Queensland Country Credit Union for 2011 and 2012. The record of statements is not complete.
In her evidence, Mrs Townsend confirms that in 2008 the rent for the NQ Blinds & Shutters Pty Ltd premises was $2,800.00 per month, which was payable to her parents, who were the owners of the property concerned. Payments, in this amount, appear in the bank statements of R Grima & Co and are designated as being rent from NQ Blinds & Shutters Pty Ltd.
The last such payment appears as a credit on 16 August 2011. From July 2012 sums of $250.00 appear as credits in the account, which are also attributed to rent for NQ Blinds & Shutters. In her evidence to the court, Ms Townsend confirms that the company paid a reduced amount of rent from 2011 onwards until it ceased to trade. Evidence is confirmed by the account for the company, which indicates such payments.
In addition, the NAB account, in the name of R Grima & Co indicates the following debits:
Date
Amount
Payee
21/1/2008
$11,005.37
Not indicated
17/9/2009
$1,321.93
Not indicated
16/2/2011
$1,160.50
Not indicated
11/4/2011
$1,000.00
Not indicated
25/1/2011
$1,005.00
Not indicated
12/7/2012
$20,005.30
North Queensland Blinds & Shutters
16/7/2012
$20,005.30
North Queensland Blinds & Shutters
17/7/2012
$20,005.30
North Queensland Blinds & Shutters
The bank statements of NQ Blinds & Shutters Pty Ltd, referrable to July 2011, indicate that the company’s business account was consistently overdrawn. In July of 2011, the amount overdrawn was $34,033.67.
Shortly prior to the injection of $60,000.00, from the account of R Grima & Co, it was overdrawn to the extent of $68,644.07. After the final $20,000.00 payment was made, the overdraft stood at $43,109.40. The account also confirms that the rent payable to Mr & Mrs Grima, on account of rent, was in an amount of $250.00 per week.
In all these circumstances, it seems a reasonable inference that Mr & Mrs Grima advanced moneys to Ms Townsend’s business, between January 2008 and July of 2012, in order to keep the business’ overdraft within reasonable parameters. In addition, it was agreed between Mr & Mrs Grima, on the one hand, and Ms Townsend, on behalf of the company, on the other that the rent owed by the business would not be paid, when it fell due and in lieu thereof a lesser amount would be paid.
No evidence has been provided by either Ms Townsend or Mr & Mrs Grima as to what is meant by the statement, arising from the mortgage schedule, that between August 2008 and October of 2012, fifty-one monthly advances of $885.00 were made. In addition, it is Mr Mack’s position that he has not had access to a complete record of either Mr & Mrs Grima’s bank statements or those of NQ Blinds & Shutters Pty Ltd.
The trustee commenced these proceedings in the court’s registry in Adelaide. The respondents and Ms Townsend live in Far North Queensland. Their solicitor is based in Innisfail. In these circumstances and with the acquiescence of the parties concerned, I deemed it expedient to deal with the case by way of a video link from the Townsville registry of the court.
The video link was far from perfect and necessarily can be a somewhat alien mechanism by which to provide evidence to the court. Both Mr & Mrs Grima are elderly individuals, who were obviously greatly distressed both by the import of these proceedings for them personally and the process itself. Mr Grima was also unwell and as the respondents had filed a joint affidavit, Ms Di Girolamo elected to take evidence only from Mrs Grima of the two respondents. She was described by her counsel as being hard of hearing.
In her cross examination, Mrs Grima conceded that $60,000.00 had been advanced to “blinds and shutters” as she described the company. Mrs Grima also conceded that the mortgage was taken because the company had ceased to trade and, in this context, she and her husband were concerned that their daughter would not pay the money which they had advanced to her.
Mrs Grima was not cross-examined at length. However, it was my assessment that she was not able to give a great deal of detail in respect of her daughter’s financial affairs in the period between early 2008 and July of 2012, which coincided with the advances made by her and her husband. In particular, Mrs Grima did not give evidence as to her understanding as to whether the monies were being advanced to Ms Townsend or to NQ Blinds & Shutters Pty Ltd or more particularly whether in Mrs Grima’s mind, these two entities were inter-changeable.
In addition, no evidence was adduced as to what, if any, was the understanding between Ms Townsend and her parents, from 2008 onwards, as to when and how the monies in question were to be repaid. Certainly, it is self-apparent that there was no written loan agreement of any kind. In these circumstances, it is clear to me that Mr & Mrs Grima must be regarded as having been unsecured creditors, at least when the monies were advanced.
In this context, it is also clear that in late 2012, after NQ Blinds & Shutters Pty Ltd has ceased to trade, Mr & Mrs Grima were anxious that their then status as unsecured creditors should be changed. Ms Townsend deposes as follows:
“I can confirm that because of my previous matrimonial problems, I was informed by my parents that if I did not repay the money at the time, being November 2012, that I would have to grant a mortgage so that they were secured because they didn’t want to have a Family Law Proceeding/Matrimonial problem occur again with me in future with another partner, after having advanced the monies that they had and whilst I still had sufficient assets to repay the monies loaned.”[5]
[5] See Ms Townsend affidavit filed 15 November 2016 at paragraph 2
It is difficult to assess the accuracy of this latter statement in respect of Ms Townsend’s sufficiency of assets. Although Mrs Grima may not have had a sophisticated understanding of the distinct legal personalities relating to Ms Townsend, on the one hand and NQ Blinds & Shutters Pty Ltd, the company’s major financier did. Queensland Country Credit Union, which had provided a loan facility to the company, required Ms Townsend to guarantee it. This guarantee was secured against her property.
In her affidavit material, Mrs Grima has deposed as to her and her husband’s motivation in seeking the mortgage from Ms Townsend in the following terms:
“If our daughter … had not granted the mortgage then we would have required the money to be paid back whilst she had significant assets and the ability to repay.”[6]
[6] See Mrs & Mrs Grima’s affidavit filed 14 November 2016 at paragraph 2
In my assessment, the statement is based on a misconception of Ms Townsend’s financial situation at the time of the grant of the mortgage. The affairs of Ms Townsend and the company were inter-twined. As such, it was imprudent for Mr & Mrs Grima to have assumed, if they did, that there would be no calls on Ms Townsend’s property by other creditors.
In any event, there is no evidence to establish that Mr & Mrs Grima had a detailed knowledge of the company’s financial situation or indeed knew specifically what Ms Townsend had done with the specific sums advanced to her by them, other than they had been utilised to pay the company’s creditors.
In particular, Mr & Mrs Grima have not given any evidence that they personally understood the company to be free of debt, when it ceased to trade. To the contrary, given the actions of Queensland Credit Union, it seems clear the company was not solvent when it ceased to trade, otherwise the Credit Union would not have had recourse to its guarantee.
Regrettably, Mr & Mrs Grima’s view, as expressed in their affidavit evidence that “so far as we knew her [Ms Townsend’s] only personal liability was her house mortgage and there was significant equity in the house” was erroneous.[7] Ms Townsend had a personal guarantee in respect of the company, which was likely to engage her real property.
[7] See affidavit of Mr & Mrs Grima filed 4 July 2016 at paragraph 13
In all these circumstances, the intended effect of the mortgage was to promote Mr & Mrs Grima to a position of advantage over other potential unsecured creditors of either the company or Ms Townsend or of them both. It is also clear that this attempt was made well after the monies in question had been advanced and those circumstances had not themselves been subject to any documentary description or characterisation, in terms of to whom the loans were specifically made; when they would be repaid; and specifically how they were to be secured, if at all.
The Trustee’s position
It is the trustee’s position that the evidence available indicates that a minimum amount of $60,000.00 was advanced by Mr & Mrs Grima to NQ Blinds & Shutters Pty Ltd to pay creditors of the company. It is further the submission of Ms Di Girolamo, counsel for the trustee, that the evidence of both Ms Townsend and Mr & Mrs Grima confirms that this was the case.
In addition, it is Ms Di Girolamo’s submission that the records, which are available, indicate that the company has failed to pay its rent due to Mr & Mrs Grima. In these circumstances, it is Mr Di Girolamo’s submission that there is no evidence that Ms Townsend, in her own personal capacity, received any advances from her parents. Rather, the advances were payments made to the company to repay its creditors.
In these circumstances, it is the position of the trustee that the court should conclude that the various payments, set out in the relevant mortgage schedule, relate to moneys paid to or owed by NQ Blinds & Shutters Pty Ltd to Mr & Mrs Grima and therefore no consideration could have been or was given, by the bankrupt, for the mortgage in question, which was granted after the company had ceased to trade.
In the alternative, it is the trustee’s position that even if the court finds that the moneys were advanced to Ms Townsend personally, there was no consideration for the mortgage in question because any consideration must be considered to be “past consideration”, given the various dates in the mortgage schedule, compared to when it was executed, which was in November of 2012.
The trustee refutes any submission that Ms Townsend is to be regarded as the alter ego of NQ Blinds & Shutters Pty Ltd and therefore the monies deposited into its account, by Mr & Mrs Grima, can be regarded as advanced made by them to Ms Townsend in her personal capacity.
It is Ms Di Girolamo’s submission that the evidence available to the court indicates that the monies were paid to assist the company with its debts, as they fell due from time to time, from 2008 onwards. Accordingly, it would be erroneous for the court to determine that the monies in question were received by Ms Townsend in her personal capacity.
In support of this submission, Ms Di Girolamo relies on Ms Townsend’s statement of affairs provided in May of 2014. In the statement, Ms Townsend indicates that she personally has only one secured creditor, which is the Queensland Country Credit Union and the security held is a mortgage, under this entry is the notation “Bank has already repossed (sic) property and auctioned as mortgagee.”
The respondent’s position
Mr & Mrs Grima have deposed as follows:
“If our daughter Janice Grima (sic) had not granted the mortgage then we would have required the money to be paid back whilst she had significant assets and the ability to repay.”[8]
[8] See affidavit of the respondent’s filed 14 November 2016 at paragraph 2
Mr Pope, counsel for the respondents, contends that the evidence indicates that his clients did provide proper consideration for the mortgage granted by Ms Townsend. The consideration being that Mr & Mrs Grima forebear from suing Ms Townsend for the moneys advanced to her, in the period prior to the granting of the mortgage.
Mr Pope relies on what was said by Austin J in Sutherland v Brian[9] in which His Honour accepted that forbearance to sue has always been regarded at law as good consideration. In addition, it his submission that in calculating the value of such forbearance, it is relevant to consider any legal costs which might have arisen as a consequence of any decision to sue.
[9] See Sutherland v Brian [1999] NSW SC 155 at [19]
Mr Pope submits that Ms Townsend was the sole shareholder of NQ Blinds & Shutters. Accordingly, he would categorise the company as being Ms Townsend’s alter ego. As such, he contends that it is immaterial that the moneys in question were deposited into the bank account of the company rather than one standing in Ms Townsend’s name alone.
Essentially, as I understand their position, Mr and Mrs Grima assert that they were in a position to sue Ms Townsend, in November of 2012, for the monies, which they contend they advanced to her personally. However, they elected not to do so in return for the grant of the mortgage in question. In addition, they deposed that it was their understanding, at the time, Ms Townsend was solvent because she owned another property.
There is no evidence available to me of any specific agreement between Ms Townsend and her parents in this regard. Certainly, any such agreement was not reduced to writing. In addition, it is noteworthy that the mortgage in question was executed shortly after NQ Blinds & Shutters had ceased to trade. In this context, it is Ms Townsend’s evidence that the business’ operations, including its overdraft account, were secured by her personal guarantee, which in turn was secured against her other real property.
Conclusions
The current section 120 was inserted into the Act by the Bankruptcy Legislation Amendment Bill 1996. The relevant Explanatory Memorandum to the Bill reads as follows:
“A fundamental feature of the law of bankruptcy is that in certain circumstances, it operates to enable property and money given or transferred by a person who subsequently becomes bankrupt to be recovered by the bankruptcy trustee, to enable its sale, and the distribution of the proceeds of sale to the bankrupt’s creditors… The Bill proposes changes to this area of the law to simplify it, and to change the focus of the provisions away from the intentions of the parties to particular transactions, to the nature of the transactions and the likely effect on the creditors.”[10]
[10] See Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996 at [23]
In respect of section 120 specifically, the Explanatory Memorandum indicates that the section will make any transaction void against the trustee if it:
“… took place 2 years before the commencement of the bankruptcy of the transferor, where the transferee gave no consideration for the transfer or gave consideration less than the market value of the property transferred;”[11]
[11] Ibid at [84.7]
Section 120(1) utilises the expression transfer of property. In this context, the Explanatory Memorandum indicates that the term transfer is to have its “ordinary meaning … so that it encompasses a payment of money, or the doing of some act or thing which results in another person becoming the owner of property which did not previously exist.”[12]
[12] Ibid at [84.8]
Given this definition, I accept that the granting of the mortgage by Ms Townsend, in favour of her parents, constituted a transfer of property. Mr & Mrs Grima became the recipients of a chose in action, in respect of their daughter’s one sixth interest in both the 443 Woolcock Street, Garbutt and 832 Flinders Street, Townsville, which was valued at $150,000.00. I also accept that it would have most likely cost Mr & Mrs Grima more than this sum if they had intended to sue their daughter to recover the monies allegedly advanced by them to her between 2008 and 2012.
The expressions consideration and market value appearing in section 120(1)(b) are stated to be intended to be understood as follows:
“The consideration given by a person for the transfer of property must be an amount which is equal to at least the market value of the property at the time of the transfer… The expression ‘market value’ is intended to refer to the value of the property concerned if it were disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis of the kind disposed of, without any sort of discount or incentive for purchase being offered.”[13]
[13] Ibid at [84.13]
As previously indicated, Mr Pope relies on Sutherland v Brian.[14] In the case, Austin J quoted at length from the Explanatory Memorandum particularly as follows:
“Forbearance to sue has always been regarded at law as good consideration. Such forbearance, will, under the Act … have to be looked at in the light of the likely value of the chose in action. If for example Arthur had refrained from taking an action against Beatrice, a bankrupt, where Arthur was likely on ordinary principles to recover damages of $100,000.00 in return for Beatrice transferring a property valued at $200,000.00 to Arthur, that would be a transaction at under value for the purpose of the section. In circumstances such as this, it may be relevant to consider the likely costs Beatrice would incur in unsuccessfully defending an action brought by Arthur in working out whether the transfer was for market value.”[15]
[14] See Sutherland v Brian (supra)
[15] Ibid at [84.14]
This is the nub of Mr & Mrs Grima’s case. They contend that consideration of at least the market value of the mortgage was provided by them to Ms Townsend in the form of forbearance to sue. The value of the property transferred by mortgage being $150,000.00 together with the likely costs of suing Ms Townsend to recover the sums advanced. Therefore the mortgage was an at market value transfer, which is not liable to be set aside.
In Official Trustee in Bankruptcy v Lopatinsky[16] the Full Court of the Federal Court analysed the legislative precursors of section 120, particularly in the context of property transactions made by a bankrupt in favour of a family member, particularly in the context of married individuals. The plurality (Whitlam & Jacobson JJ) holding as follows:
“The purpose of the existing section 120 … is to prevent properties, including the matrimonial home, from being transferred to related parties to the disadvantage of the bankrupt’s creditors. Disadvantage will occur if the property is transferred for no consideration or for less than market value. Thus, unlike its predecessor, the existing section requires the Court to determine the value of the consideration given…”[17]
[16] Official Trustee in Bankruptcy v Lopatinsky (2003) 30 Fam LR 499
[17] Ibid at [92]
The plurality further determined that the term consideration in section 120(1)(b) was not “to be read in anything other than its legal sense”. As such, for the purpose of the section, consideration could not be “something less than the ordinary legal and commercial understanding of that term”. Rather, the concept of consideration, for the purposes of the section, is “to be understood as commercial people would construe it”.[18]
[18] Ibid at [94] & [96]
In this case, there is no controversy that a transfer of property occurred within five years beginning before Ms Townsend’s bankruptcy. Accordingly, in my view, in determining the current application, I must adopt a two-step process to the transaction in question, namely:
·identify the consideration actually given; and
·if consideration was given, determine if its value was less than the market value of the property transferred.
The authorities and indeed the relevant Explanatory Memorandum make it plain that forbearance to sue may represent good consideration. Whether it does so must depend on the circumstances of the particular case concerned. Necessarily, this will require a careful analysis of all aspects of the evidence arising, particularly given that the concept of consideration is to be derived primarily from commercial considerations.
I must bear in mind that I am not called upon to value the property against which the mortgage in question is secured and which it may potentially recoup if realised. The issue is the value of the chose in action represented by the forbearance to sue.
In the current case, the relevant parties concerned have close familial links. Given this context, in my view, there is a paucity of evidence regarding the commercial nature of the relationship between Mr & Mrs Grima, on the one hand and Ms Townsend and NQ Blinds & Shutters Pty Ltd on the other hand. Their relationship is one, in my view, which must be influenced significantly by considerations of family ties.
As previously indicated, one of the intentions of the legislature, in implementing section 120 of the Act, was to prevent a bankrupt’s creditors being potentially prejudiced by any improper transactions, which had the consequence of transferring property away from the control of the bankrupt, without the bankrupt being properly recompensed for the property so transferred. The aim of the section being to defeat transactions not at arms’ length or where the consideration provided for the transfer is not commercially appropriate.
The unfairness to the creditors being that they are potentially prevented from securing recompense for their proven debts by the sale of property without there having been any commensurate allowance made in the estate of the bankrupt concerned for the property so transferred. In effect, assets have been transferred to the prejudice of creditors.
By way of example, if a bankrupt sells his home on the day prior to his estate being sequestered and receives a sum equal to its market value, which is deposited into an account standing in his/her name, there is no prejudice to potential creditors, as the trustee in question will be able to access that fund, if necessary, to pay creditors.
That is not the case in the current matter. Ms Townsend did not directly receive any of the sum nominated on the face of the mortgage, on the date it was actually executed. Rather what the document purports to record is sums of monies received in the period prior to its execution.
For reasons such as these, the relevant legislation, particularly in section 120(5), delineates a variety of circumstances which have no value as consideration. They include the following:
·the fact that the transferee is related to the transferee; and
·the transferee’s love or affection for the transferor.
In this particular case, there is no evidence of any formal loan agreement between any of the entities concerned. In addition, I have not been provided with any tenancy in respect of the premises leased for the premises of NQ Blinds & Shutters and accordingly do not know who, in a formal sense, was the actual tenant and what the lease provided.
This is the import of Mr & Mrs Grima’s evidence – they wished to help out their daughter, when her business experience cash flow problems coinciding with the demise of her marriage. The available records indicate that sums of money were deposited into the trading account of NQ Blinds & Shutters. The purpose of these funds is not specifically indicated in the relevant statements and no other documentation has been provided in respect of them.
In this context, Mr Pope contends that the company must be regarded as Ms Townsend’s alter ego, as she was its only shareholder. Underpinning this submission is the implication that, to all intents and purposes, Ms Townsend and the company was interchangeable in the minds of Mr & Mrs Grima.
I accept that it is highly probable that Mr & Mrs Grima would have thought this to be the case, if they had turned their minds to the issue. In addition, I think I would be naïve to think anything other than that the ties of love and affection, which Mr & Mrs Grima held for Ms Townsend, did not play some part in the advances being made from 2008 onwards.
However, from the prospect of any sound commercial entity, no such ambiguity of potential liability could be accepted. Commercial people, by and large, are aware of with whom they are dealing and determine on what terms they will advance either funds or goods, as a consequence. In a commercial setting, there is a vast distinction between dealing with a proprietary limited company and an individual. Commercial entities need to know whom they will be able to sue and what will be the prospect of successfully suing, if it becomes necessary.
For obvious reasons, such considerations will determine the form of credit advanced and whether it will be secured or otherwise and what will be the nature of any such security required. By way of example, the company’s major financier required a guarantee from Ms Townsend before it would provide a line of credit to the company.
The evidence indicates that Mr & Mrs Grima were prepared to be accommodating to Ms Townsend and the business from 2008 onwards because of their relationship with their daughter. As such, they did not require any formal security in respect of the various transactions which arose. Rather, they hoped for the best. In this sense, the transactions were not founded on any commercial reality.
In my view, the evidence indicates that, for all practical purposes, it is more likely than not that Mr & Mrs Grima were dealing with the company, rather than Ms Townsend. The company had trade creditors, who required payment. The advances were made into the company’s bank account to pay its debts. Rent was foregone in respect of the premises from which it operated. Accordingly, in these circumstances, I find that Ms Townsend personally provided no consideration for the mortgage, which she subsequently granted. It was a retrospective devise created because of the previous lack of formality.
In this particular case, it was only a few days after NQ Blinds & Shutters Pty Ltd had ceased to trade that Ms Townsend executed the mortgage in favour of her parents, reputedly to secure a sum in excess of $165,000.00, which Ms Townsend did not directly receive. This transaction potentially removed an asset valued at approximately $150,000.00 from Ms Townsend’s estate.
There was no commensurate credit for such a sum in any account standing in Ms Townsend’s name or any other proprietorial interest created in her favour. In practical terms, her parents were transformed from being unsecured creditors of either her or the company into being secured creditors of her personally, with priority, by virtue of the mortgage, over other of her creditors arising from any insolvency, either of the company or of her. If the transaction stands, Ms Townsend’s creditors will have thus been deprived of access to an asset valued at a significant sum. This will be clearly to their detriment.
It is submitted on behalf of Mr & Mrs Grima that in return for this sum they, in effect, agreed not to sue their daughter for either back rent or the money loaned by them. Given my view about with whom it is more probable than not Mr & Mrs Grima were actually dealing, when combined with the paucity of documentation about any of the monies advanced, in my view, in a commercial sense, such forbearance can have little or no value.
In any event, there is no indication that Mr & Mrs Grima personally planned to actually sue anyone. To put it simply, it does not make commercial sense for Ms Townsend to have been granted the mortgage on this basis without receiving some actual cash advance from her parents. I do not consider that any ordinary prudent business person, without similar familial ties to Mr & Mrs Grima, would have done so.
In these circumstances, it seems likely to me that there was some other motivation for the transaction, which derived from the familial relationship between Ms Townsend and her parents. This motivation was to protect the real estate in question from any potential claims arising as a consequence of the failure of either the business or from Ms Townsend’s own possible bankruptcy and so render Mr & Mrs Grima, in effect, secured creditors with priority over her other potential creditors, who remained unsecured.
In this context, in my view, it is significant that the mortgage was executed very shortly after the business ceased trading. In these circumstances, a more likely explanation for the mortgage was that Mr & Mrs Grima were aware that they would not likely fare any better than other creditors of the business.
Mr & Mrs Grima assert that they considered Ms Townsend to be solvent, when the mortgage was granted. However, this period also coincided with Ms Townsend become unemployed and her previous source of income – the business becoming defunct. Neither Mr Tsakissiris nor Mr & Mrs Grima have deposed as to having any personal knowledge of Ms Townsend’s legal relationship with the financier of the business. As is clear from Ms Townsend’s statement of affairs, this relationship, in the form of the guarantee, led to the Queensland Country Credit taking action against Ms Townsend’s previously rented real property and ultimately seizing and selling it. A commercial lender would have been at pains to make such inquiries.
For obvious reasons, it would be a different situation if Mr & Mrs Grima had required the mortgage in 2008 or even 2012, when significant sums of money were advanced by them. It is also significant that there is no attempt at any calculation or rationalisation provided for the monthly sums of $885.00 provided between August 2008 and October 2012.
However, they did not require any mortgage, until after the business ceased to trade. Accordingly, in my view, in any event, the monies provided between 2008 and 2012 must be regarded as past rather than proper consideration for the mortgage granted in November of 2012. In effect, the mortgage is a retrospective device.
As the Explanatory Memorandum has it, the purpose of the amendments made to section 120 is to shift the focus away from the intentions of the parties to any transaction attempted to be impugned to the nature of the transaction in question and its likely effect on any creditors of the bankrupt concerned.
In this sense, the nature of the transaction was clearly designed to protect Mr & Mrs Grima retrospectively from the failure of the business of which Ms Townsend was the personal guarantor. In my view the transaction also has the obvious potential to be prejudicial to others of Ms Townsend’s creditors. This is because the effect of the transaction is to prioritise the interests of Mr & Mrs Grima over Ms Townsend’s other creditors.
In all these circumstances, I accept the trustee’s submissions that the mortgage is void against him as a consequence of section 120 of the Bankruptcy Act as it was granted in the five years prior to the commencement of Ms Townsend’s bankruptcy and Mr & Mrs Grima provided no consideration for the mortgage. Essentially, I accept that it was an undervalued transaction.
Given that the applicant has been wholly successful in these proceedings, in my view, it is appropriate that the respondents pay the cost of the application. In the event that the parties are unable to agree the quantum of those costs, it will be necessary for the costs to be taxed.
For all these reasons, the orders of the court will be as set out at the commencement of these reasons for judgment.
I certify that the preceding one hundred (100) paragraphs are a true copy of the reasons for judgment of Judge Brown
Date: 28 April 2017
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