McBain v Parsons
[2000] FCA 935
•11 JULY 2000
FEDERAL COURT OF AUSTRALIA
McBain v Parsons [2000] FCA 935
BANKRUPTCY – transfer of matrimonial home by bankrupt to wife subject to existing mortgage – stated consideration entitlement in equity – claim by trustee to set aside transfer – financial contributions by wife to acquisition of home – whether common intention constructive trust – whether valid as against trustee – mortgage executed when title in bankrupt’s name – mortgage loan necessary for survival of business which provided family income – whether any benefit for wife – whether equity of exoneration applied
Bankruptcy Act 1996 (Cth) ss 120, 121
Baumgartner v Baumgartner (1987) 164 CLR 137 followed
Green v Green (1989) 17 NSWLR 343 at 354-355 followed
Re Osborn; Ex parte Trustee of the Property of Osborn (A Bankrupt) v Osborn (1989) 25 FCR 547 followed
Farrugia v Official Receiver (1982) 43 ALR 700 at 702 distinguished
Re Popescu; Popescu v Official Trustee in Bankruptcy (1995) 55 FCR 583 applied
Re Pittortou [1985] 1 All ER 285 at 288 applied
N.A. Kratzmann Pty Ltd (In Liquidation) v Tucker [No 1] (1966) 123 CLR 257 at 283 appliedROGER GEOFFREY McBAIN The Trustee of the estate of Peter Frederick Parsons (A Bankrupt) v BRONWYN ALICE PARSONS
NO. T 7006 of 2000
ROGER GEOFFREY McBAIN The Trustee of the estate of Geoffrey James Parsons (A Bankrupt) v CATHRYN MAREE PARSONS
NO. T 7007 of 2000HEEREY J
11 JULY 2000
HOBART
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
T 7006 of 2000
BETWEEN:
ROGER GEOFFREY McBAIN The Trustee of the estate of Peter Frederick Parsons (A Bankrupt)
ApplicantAND:
BRONWYN ALICE PARSONS
RespondentT 7007 of 2000
BETWEEN:
ROGER GEOFFREY McBAIN The Trustee of the estate of Geoffrey James Parsons (A Bankrupt)
ApplicantAND:
CATHRYN MAREE PARSONS
RespondentJUDGE:
HEEREY J
DATE OF ORDER:
11 JULY 2000
WHERE MADE:
HOBART
THE COURT ORDERS THAT:
T 7006 of 2000
1.Declare the transfer by the bankrupt Peter Frederick Parsons to the respondent of his interest in the property situate and known as 80 King Street, Smithton in Tasmania as comprised in Certificate of Title Vol. 22152 fol. 9 of the Register is void.
2.Order that the respondent take such steps as may be required by the applicant and/or the Recorder of Titles to rectify the register maintained by the Recorder of Titles pursuant to the Land Titles Act1980 (Tas) as a consequence of such declaration.
3.Order that the respondent indemnify the applicant in respect of all liability incurred by the respondent pursuant to mortgage B882598 executed in favour of the Commonwealth Bank of Australia on or about 24 November 1995.
4.Order that the respondent pay the applicant’s costs, including reserved costs.
T 7007 of 2000
1.Declare the transfer by the bankrupt Geoffrey James Parsons to the respondent of his interest in the property situate and known as 2 Leesville Road, Smithton in Tasmania as comprised in Certificate of Title Vol. 213233 fol. 1 of the Register is void.
2.Order that the respondent take such steps as may be required by the applicant and/or the Recorder of Titles to rectify the register maintained by the Recorder of Titles pursuant to the Land Titles Act1980 (Tas) as a consequence of such declaration.
3.Order that the respondent indemnify the applicant in respect of all liability incurred by the respondent pursuant to mortgage C34411 executed in favour of the Commonwealth Bank of Australia on or about 30 July 1997.
4.Order that the respondent pay the applicant’s costs, including reserved costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
T 7006 of 2000
BETWEEN:
ROGER GEOFFREY McBAIN The Trustee of the estate of Peter Frederick Parsons (A Bankrupt)
ApplicantAND:
BRONWYN ALICE PARSONS
RespondentT 7007 of 2000
BETWEEN:
ROGER GEOFFREY McBAIN The Trustee of the estate of Geoffrey James Parsons (A Bankrupt)
ApplicantAND:
CATHRYN MAREE PARSONS
Respondent
JUDGE:
HEEREY J
DATE:
11 JULY 2000
PLACE:
HOBART
REASONS FOR JUDGMENT
On 21 October 1997 sequestration orders were made against Peter Parsons and his brother Geoffrey Parsons. The applicant Roger Geoffrey McBain is the trustee of each bankrupt estate. The bankrupts had carried on a transport contracting business at Smithton in partnership under the name F J Parsons & Sons. The business commenced in 1975, the first partners being Peter and Geoffrey’s parents Frederick and Flo Parsons.
In May 1993 Peter Parsons was the registered proprietor of a residential property at 80 King Street, Smithton which he and his wife the respondent Bronwyn Alice Parsons occupied as a matrimonial home. Geoffrey Parsons was the registered proprietor of a similar property at 2 Leesville Road, Smithton. This was also a matrimonial home occupied by Geoffrey Parsons and his wife the respondent Cathryn Maree Parsons.
On 25 May 1993 each bankrupt executed a transfer in favour of his wife of all his right title and interest in his property for a consideration expressed as “entitled in equity”. No monetary or other consideration passed. Each transfer was registered by the Recorder of Titles on 28 May 1993.
The transfers were made in each case subject to an existing mortgage executed the previous year in favour of the Hobart legal firm Clerk Walker and Stops (CWS). Subsequently to the transfers each of the respondents executed a mortgage over her respective property in favour of the Commonwealth Bank of Australia. In Bronwyn’s case the mortgage was executed on 24 November 1995; Catherine’s was on 30 July 1997.
The trustee claims that each transfer is void against him under s 120 or alternatively s 121 of the Bankruptcy Act 1996 (Cth) (the Act). Section 120 relevantly provides:
“120(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 and 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.
(2)…
(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.
(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.
(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.
(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.
(7)…”
Section 121 provides:
“121(1). A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
(b) the transferor’s main purpose in making the transfer was:
(i)to prevent the transferred property from becoming divisible among the transferor’s creditors; or
(ii)to hinder or delay the process of making the property available for division among the transferor’s creditors.”
(2)The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
(3)Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.
(4)Despite subsection (1), a transfer of property is not void against the trustee if:
(a)the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and
(b)the transferee did not know that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and
(c)the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.
(5) …
(6)For the purposes of subsections (4) and (5), 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.
(7) …
(8)This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.
(9) 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 the property that did not previously exist is taken to have transferred the property to the other person; and
(c)the market value of the property transferred is its market value at the time of the transfer.”
In each case the respondent says that prior to the transfer she had an equitable half-interest pursuant to a common intention constructive trust. Her allowing her husband to mortgage the property, including her beneficial interest, to CWS to raise finance for a business in which only he had an interest gave rise to an equity of exoneration whereby she was entitled to throw the burden of discharging the mortgage first upon the husband’s share in the home. Since the amount of the mortgage loan exceeded the value of the husband’s half-interest, his beneficial interest was extinguished. Therefore when the home was transferred by the husband to the wife the husband transferred no more than the bare legal title, the market value of which was nominal.
Peter and Bronwyn Parsons
In July 1977 Peter Parsons purchased 80 King Street for $19,000. He borrowed $16,000 from the Launceston Bank for Savings, obtained a first home owner’s grant of about $1,000 and made up the balance of the price from his savings. After purchasing the property he let it to tenants at a rental he does not recall but which was less than the mortgage payments.
In 1977 he was involved in a motor vehicle accident. He made a claim which was settled in November 1981 for $2,500 which he used to make a payment in reduction of his loan. By the beginning of 1984 he had met Bronwyn. She moved into the property and he remained on the family farm at Scopus. They made an arrangement that she would pay all the instalments on the property loan and he would pay the rates and land tax. Bronwyn made six monthly payments of $350 off the principal and varying interest payments. Between the beginning of 1984 and 1987 she paid $4,636.14 off the loan. She paid for her own living expenses and some unspecified repairs and maintenance. Peter paid for the rates and land tax.
Peter and Bronwyn married on 28 February 1987. Thereafter they lived together on the property. Peter deposed:
“At the time of our marriage we had several conversations about our financial affairs, I do not remember the exact words used, but we agreed to use the property as our matrimonial home and to treat it as owned equally by us.”
Bronwyn continued to work at a jeweller’s shop in Smithton until mid 1987 and then went into business with another woman in a napery and haberdashery business. She made the mortgage payments from her wages and business income. Between 20 January 1987 and 20 March 1992 she paid $8,535.66 plus some interest. Bronwyn had owned a property at Christmas Hills which she sold in 1986. Part of the proceeds of this sale were used to make loan repayments in respect of 80 King Street. In August 1990 Bronwyn recarpeted the property at a cost of $2,645.00 which she borrowed from a finance company and repaid by monthly instalments of $404.69 concluding on 7 February 1991.
In June 1992 the balance of the loan was repaid. For this purpose Bronwyn borrowed $7,032.00 from the Launceston Bank for Savings. She subsequently repaid this loan using money which had been invested from the sale of the Christmas Hills property.
In June 1992 Peter Parsons mortgaged 80 King Street to CWS to secure a loan of $36,000. He deposed that the property was then worth between approximately $44,000 and $55,000. The loan moneys were used for working capital in the partnership of F J Parsons & Sons. At that stage the Parsons brothers’ parents were still partners as well. Peter deposed:
“Bronwyn and I believed that the business would be able to generate sufficient revenue for the loan to be repaid, but we also agreed that my half share in the property was primarily at risk.”
Bronwyn deposed:
“We believed that the firm would repay the loan, but we agreed that Peter was risking his half share in the property first.”
In the years prior to 1992 the business had suffered some setbacks. In 1988 Kauri Timber Co Ltd, a timber miller in Smithton, purchased its own truck and semi-trailer. Its custom, worth about $20,000 per month, ceased. In 1990 the Straitsman ceased its cargo service to the Port of Stanley. This resulted in a loss of $20,000 per month for the firm. A number of other customers ceased to use the services of the firm, notably Bass Express, Forestry Tasmania and the Tasmanian Department of Construction.
Peter’s loan from CWS was part of an overall financial rearrangement so that the business could “continue to operate”. Frederick and Flo sold their dairy farm at Montague for $550,000. After paying off the debt on the farm and purchasing, with loan assistance, a home in Smithton, they put $440,068.59 into the business. In addition, Geoffrey Parsons borrowed $58,000 from CWS on the security of his home.
The funds obtained from the sale of the farm and the CWS loans were used to pay creditors, pay truck lease payments and pay off an overdraft of about $100,000.
In June 1992, within a few weeks of the refinancing, another major customer was lost with the withdrawal of the Bass Reefer shipping service from the Port of Stanley. This resulted in reduction in firm income of $50,000 a month plus income from back freight. The partners then set about scaling down the business to its core work. They disposed of surplus machinery and entered into arrangements with most of their creditors. However negotiations with the Deputy Commissioner of Taxation did not reach finality.
On 9 December 1992 the Deputy Commissioner issued a writ against Frederick and Flo Parsons and Peter and Geoffrey for $78,431.43 group tax and penalties.
On 2 February 1993 a loan application on behalf of the partnership to Tasmanian Development Authority stated, inter alia,
“We already have finance companies on the verge of repossessing equipment and are at the moment paying cash for fuel daily to keep the business operating. Should the business close it will end in personal bankruptcy for Peter and Geoff Parsons, with the resulting loss of their family homes and assets and also Frederick and Flo Parsons as some debts owed by the business relate back prior to their departure from the partnership.”
On 23 March 1993 a report proposed for the partnership and the individual partners by Deloitte Ross Tohmatsu said that information supplied to that firm
“… indicates that the amount received by creditors in the bankruptcy of the partners would be approximately 25 cents in the dollars owed, subject to the costs of administering the Estate. It is noted that this return is highly contingent on the ability to realise the motor vehicles of the partnership.”
On 22 April 1993 the Deputy Commissioner issued a writ against Peter and Geoffrey claiming group tax and penalties totalling $34,133.14 arising from tax instalments deducted in and between September 1992 and January 1993.
As already mentioned, in May 1993 80 King Street was transferred into Bronwyn’s name. Peter deposed:
“At the time the transfer was made I believed that any equity in the property was Bronwyn’s not mine. Any equity which I had in the property I had used with the mortgage to Clerk Walker & Stops.
…
At the time of transfer the amount owing to Clerk Walker & Stops was $35,500.00. The consent of Clerk Walker & Stops was obtained to the transfer and Bronwyn took the property subject to the mortgage to Clerk Walker & Stops.”In their affidavits neither Peter nor Bronwyn advanced any explanation as to why the transfer occurred at this time.
The partnership made payments of $4,081 in respect of the CWS loan up until the 1983 transfer and $16,695 thereafter up until February 1997. Almost all of these payments were in respect of interest.
In February 1997 the partnership sold the business to a partnership constituted by Bronwyn and Cathryn. The new partnership has continued to make payments in respect of the CWS mortgage since. As at March 2000 the balance owing was $29,988.73.
In 1995 Bronwyn purchased the neighbouring property at 78 King Street. She financed the purchase with a mortgage loan from the Commonwealth Bank of Australia secured over that property and 80 King Street. The property at 78 King Street is let to tenants and there is a shortfall between rent received and mortgage repayments. The difference is made up by Bronwyn from child endowment and monies received from her partnership.
Geoffrey and Cathryn Parsons
In about June 1977 Geoffrey Parsons purchased a vacant block of land at 2 Leesville Road for $2,000. His father contributed $1,000 and he made up the balance from his savings. At about the same time he purchased a house property at 22 Sampson Avenue, Smithton for $18,700. He borrowed $18,700 from the Launceston Bank for Savings, a first home owners grant of about $309 and the remainder from his savings. (These figures are taken from his affidavit. Either the figures are not accurate or the $309 went to pay stamp duty and other expenses.) He then let the house to tenants until September 1978 at a rental of $50 per week which was about $2 short of the amount needed to meet loan payments. From September 1978 until Geoffrey and Cathryn’s marriage on 10 March 1979 the house was vacant. They carried out repairs to damage done by tenants. They intended Sampson Avenue to be their matrimonial home, “owned equally by us” as Geoffrey deposed. Geoffrey continued to make payments in respect of the Sampson Avenue loan, $380 principal each six months and interest. The source of these payments was Cathryn, who made the required deposits from her wages to an account at the bank in order to meet the six monthly instalments.
On 6 July 1981 the Sampson Avenue property was sold for $28,000. After payment out of the balance of the loan and costs, $10,219.25 was available.
In August 1981 Cathryn’s father, a builder, commenced building a house at 2 Leesville Road. He charged for materials and for his labour for a normal working day, although not for overtime, which was substantial. The building was funded by an initial loan of $22,000 from the Launceston Bank for Savings and a further loan of $5,000 from that bank, together with the proceeds of the sale of the Sampson Avenue property and some of Cathryn’s savings and wages. While the house was being built Geoffrey and Cathryn lived with Cathryn’s parents who charged $50 per week board.
Between 4 August 1981 and 26 November 1981 payments totalling $39,797.36 were made towards the building of the house on the Leesville Road property and the purchase of associated items. Geoffrey deposed that at the time they commenced building the property Cathryn had an account with the Launceston Bank for Savings in credit $6,219.20. Over the latter half of 1981 this money was withdrawn and used to pay expenses incurred in building the house.
Geoffrey deposed:
“At the time of our marriage Cathryn and I had several conversations about our financial affairs, I do not remember the exact words she used, but it was our common intention when we married that the Sampson Avenue property would be our matrimonial home and that it was joint property even though the title was in my name. It was also our intention that the Leesville Road property we built together would be our matrimonial home and that we contributed equally to it and that it was joint property even though the title was in my name only.”
Between January 1982 and February 1987 payments were made off the Leesville Road loan totalling $21,555.31. These were made usually from Cathryn’s wages. Cathryn had worked full time up until the birth of her first child in 1986. She ceased work in July 1986 and resumed part-time work in 1993.
In April 1986 Geoffrey ceased working for the Circular Head Council and received severance pay of $10,000 and $4,000 annual leave and long service leave entitlement. This money was used to pay off the Leesville Road loan.
In March 1997 Geoffrey and Cathryn sold a motor car jointly owned by them. From the proceeds of that sale $6,340 was used as the final repayment in respect of the Leesville Road loan.
In June 1992 Geoffrey mortgaged the Leesville Road property to CWS to secure a loan of $58,000. He deposed that the property was then worth between approximately $88,000 and $97,000. This was part of the refinancing of the business already referred to. Geoffrey deposed:
“We [ie Cathryn and himself] believed that the firm would repay the loan, but we agreed that I was risking my half share in the property first.”
Cathryn deposed:
“We believed that the firm would repay the loan, but we agreed that Peter was risking his half share in the property first.”
In October 1991 Geoffrey signed a transfer of the Leeville Road property to Cathryn. It was sent to the Commissioner for Stamp Duties for assessment. Following correspondence between their solicitors and the Stamp Duties Office, an assessment was made of $400. However the transfer was not registered. Geoffrey deposed:
“In May 1993, for reasons I do not remember, another signed transfer of the Leesville Road property to Cathryn from me was forwarded to the Commissioner of Stamp Duties for stamping and this transfer was registered by the Recorder of Titles in May 1993.
…
At the time the transfer was made I believed that any equity in the property was Cathryn’s not mine.
…
At the time of the registration of the transfer the amount owing to Clerk Walker & Stops was $57,165.00 The consent of Clerk Walker & Stops was obtained and Cathryn took the property subject to the mortgage to Clerk Walker & Stops.”Cathryn deposed:
“In May 1993 the title to the [Leesville Road] property was registered in my name by the Recorder of Titles.
The affidavits of Geoffrey and Cathryn are also notable for the lack of any explanation as to why the 1993 transfer took place when it did.
The partnership made mortgage payments of $6,545 towards the CWS loan up until May 1993. After that the partnership continued to make payments amounting to $26,775. Most of this represented interest. The payments were made until February 1997 when, as already mentioned, the partnership sold the business to Bronwyn and Cathryn. The new partnership has continued to make mortgage payments amounting to $22,015 by March 2000. At this time the balance owing was $48,564.28.
On 30 June 1997 Cathryn executed a mortgage over the Leesville Road property in favour of the Commonwealth Bank to secure a loan of $20,000 in order to pay out a truck lease. The new partnership has been making current repayments of $486 per month. In addition the bank has provided an overdraft facility of $20,000 secured by the same mortgage.
Credibility and findings
I accept the evidence of the respondents and their husbands as to the monetary contributions towards the acquisition of the two properties and the repayment of loans.
However, their evidence as to actual conversations which purportedly took place between themselves at the time of the CWS loan in June 1992 and the transfers in May 1993 is quite unpersuasive. The two couples gave almost identical accounts of undocumented conversations which occurred seven or eight years ago and, on their account, without reference to each other. According to Cathryn, it was pure coincidence that each transfer was signed on the same day in May 1993 and prepared by the same solicitor. She had never discussed with her brother-in-law and sister-in-law that they were going to do the same sort of transfer. Peter’s evidence was to the same effect. Bronwyn’s evidence in cross-examination was as follows:
“Q Why was the transfer made in May of 1993?
AWe agreed that when Peter took the Clerk Walker and Stops loan out that he had risked his half of what I deemed as our property and that was a way of finally just putting it in my name.
QBut the Clerk Walker and Stops mortgage was June 1992. Why did it take until May 1993 for the property to be transferred?
AI’ve no idea.
QWas it not that in May 1993 the financial position of your husband was quite precarious: that is, it looked like he was going to be made bankrupt by the Deputy Commissioner of Taxation and that he suggested to you that he wanted to somehow protect the house. Is that not how it came about?
ANot that I’m aware of.
QDid you discuss with him at all in May 1993 his reasons for wanting to transfer the house to you?
ANot that I can remember.
QSo it just happened, did it? Somebody presented a document to you and said, ‘Sign this, the house is yours’?
AI can’t remember.”
In truth, the financial position of the partnership business was desperate at the time of the CWS mortgage in June 1992 and, if anything, had deteriorated by the time of the May 1993 transfers. In addition to the evidence already referred to, the partnership had operating losses of $195,071.79 in the year ending 30 June 1992 and $194,499 in the following year. Bankruptcy petitions had been served on Peter and Geoffrey in early 1993. The situation was so bad in 1992 that Frederick and Flo Parsons had to contribute almost half a million dollars to keep the business afloat. This was their life savings. Following this they moved to a modest house, financed by a mortgage which has been serviced out of their pensions.
In their defence the respondents pleaded s 120(3), which provides a defence if the transfer took place more than two years before the commencement of the bankruptcy (which it did) and the transferee proves that at the time of the transfer the transferor was solvent. This plea was abandoned at the hearing.
Insight into what I believe was the true situation is provided in the following passage from the cross-examination of Bronwyn:
“QAnd there must have been times, I suggest, when your husband came home to you and said, ‘Look, things aren’t going very well, the business is going bad, I don’t have much money this week.’ Did that happen?
AYes, sometimes.
QAnd did he ever discuss with you what he was considering doing to prop up the business or increase its performance or get more cash flow out of it?
ANo – oh, well, there were discussions but I can’t remember exact discussions, yes.
QWell, one of the discussions was that he said, ‘Look, I think I’ll have to get some money from Clerk Walker and Stops to pay it into the business’?
A Yes.
QHe told you about that, did he not?
AYes, it was like a loan, yes.
QWell, not like a loan, it was a loan, was it not?
AA loan, yes, yes.
QAnd did he tell you how much he was going to borrow?
A$36,000.
QDid he tell you over what period it was repayable?
AI just – just trust, it is a trust between a husband and wife that you just…
QSo, is it like this. He came home – and it might not have happened in one night, it might have happened over a course of time – he came home and said, ‘Look, we need to put some more money into the business, I’ve agreed with my brother that we borrow some money from Clerk Walker and Stops and we use that money in our business.’ Is that what he said, or words to that effect?
AWords to that effect.
QAnd I suggest that he told you that because the business was not travelling very well financially and something had to be done to prop it up; is that what happened?
AThat’s a fair assumption.
QAnd you agreed to him taking this money or borrowing this money from Clerk Walker and Stops because you wanted to see the family business continue and prosper and grow?
AYes.
QAnd you wanted to continue to receive the financial benefit from that business in that your husband was bringing home money to put food on the table and clothe the children?
AYes.
QSo do you accept that in that sense, the whole family benefited from the continuation of the business and its funding in part by the borrowing from Clerk Walker and Stops?
AI suppose if you put it that way, yes.
QYou had not thought about that before?
ANot put in that manner, no. Yes.
QBecause I think you now accept that as long as your husband and his brother could continue to keep the family business going that they had a job and they had income which they could bring home and share with their family; that was the point of it, was it not? Sorry I did not pick that up?
ASorry, yes.
QAnd so from the date the mortgage was taken, which you can accept from me was June 1992, until February 1987 which is, I think, the date you took over the business; is that correct?
AYes.
QThis arrangement continued, that is, because of funding which was available from Clerk Walker and Stops the business continued and your husband kept bringing money home for the family each week or fortnight or month which was used by the family to pay their debts and for normal living expenses?
AYes.
QAnd it was because of that source of money that you were able to stay at home and not go back to work; that is right, is it not?
AYes.
QAnd so a family decision was made, I suggest to you, that in order to continue that, to continue the business and continue the source of income and putting food on the table that you agreed to the Clerk Walker and Stops mortgage being put on the house?
AI agreed to the mortgage.”
Cathryn’s evidence was less forthcoming. She accepted that up until June 1992 the consistent pattern in the relationship with her husband was that they “were in each venture or each piece of property together as joint [sic], as husband and wife” and that there was “a mixing of resources and a pooling of funds to achieve that end”. But when it was put to her that the 1992 mortgage was “another joint decision, another mixing of funds and assets to achieve a desired family result” she replied:
“The 1992 mortgage was for the benefit of the business, not myself.”
I do not accept this. I am satisfied that in each case the pressing reality was that unless the CWS loan was obtained the business would collapse and with it the prime source of family income. The family home would be lost. The respondents and their husbands are intelligent people and I am satisfied they were aware of that reality at the time. The CWS loan had a very direct and practical benefit for each respondent.
Likewise, there can be no doubt that the 1993 transfers were made for the purpose of putting the respective homes out of the reach of Peter and Geoffrey’s creditors.
Conclusion
I accept that in each case there was between the respondent and her husband a common intention that they should acquire a joint interest in the matrimonial home and that each respondent acted pursuant to that common intention in making financial contributions. A common intention constructive trust came into existence: Baumgartner v Baumgartner (1987) 164 CLR 137, Green v Green (1989) 17 NSWLR 343 at 354-355.
However, the conflict in the present case is not that of one spouse who is the sole legal owner denying the beneficial interest of the other. Leaving aside for the moment the effect of the 1992 CWS mortgages, it will be convenient to consider first the issue raised by the 1993 transfers. Is the trustee’s claim to the properties met by any pre-existing equitable interests of the respondents?
This issue arose in Re Osborn; Ex parte Trustee of the Property of Osborn (A Bankrupt) v Osborn (1989) 25 FCR 547. In that case the bankrupt had transferred within two years prior to sequestration the title in the matrimonial home to himself and his wife as joint tenants. In upholding the trustee’s claim to set aside the transfer under s 120 of the Act (as it then stood) Pincus J said (at 553):
“Mr Dutney [counsel for the respondent] was unable to refer me to any authority in which a constructive trust based on imputed intention was held good against a trustee in bankruptcy. One conceptual difficulty in doing so is that it cannot be suggested that the trustee is himself acting unconscionably in attempting to recover property which, on the face of it, is recoverable; the argument has to be that the trustee take subject to equities good against the bankrupt: see s 116(2)(a) of the Bankruptcy Act. That provision excludes from the divisible property:
‘property held by the bankrupt in trust for another person.’
Assuming all else in favour of the respondent, did the constructive trust relied on exist when the property vested in the trustee? It is necessary to refer again to what was said by Deane J in Muschinski v Dodds. His Honour said that the constructive trust:
‘… has not outgrown in formative stages as an equitable remedy and should still be seen as constituting an in personam remedy attaching to property which may be moulded and adjusted to give effect to the application and interplay of equitable principles in the circumstances of the particular case. In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date.’
His Honour referred to ‘competing common law or equitable claims’; plainly the competing claim of the trustee deriving title from the Bankruptcy Act is within the spirit of this dictum. If a declaration of constructive trust were made in this case, it would seem to me inappropriate to predate it to August 1987 (when the transfer was executed). There is a dilemma: before the transfer was executed, there was, so far as the evidence shows, nothing unconscionable about the bankrupt’s conduct; the respondent does not suggest that she asked for and was refused recognition of her interest. At the time of and after the execution of the transfer, there was no unconscionable conduct on the part of the bankrupt either; if the respondent’s argument is correct, the bankrupt acted in accordance with the dictates of his conscience and established equitable principle by transferring the legal interest.
It appears to me, therefore, that the principle of Baumgartner v Baumgartner cannot assist the respondent against the trustee, unless the Court is obliged to extend it to cover cases where there is no unconscionable conduct alleged against the legal owner – as here. Apart from doubting the propriety of making that extension of the doctrine as defined by the High Court, I am disinclined to do so for the reason indicated above. There is a degree of inconvenience attaching to the laying down of a rule which would require the trustee, in a case of this sort, to conduct an elaborate investigation of and perhaps litigate about the history of a relationship to determine whether property which is, on the face of it, divisible among the creditors is truly so divisible. It appears that in such an inquiry non-financial contributions would be relevant, as, perhaps, would be the question of the cause of any break-up of the relationship. More generally, keeping in mind the remedial character of the doctrine, I do not think the Court should declare a constructive trust in circumstances of this sort, to operate at a date prior to bankruptcy.
I therefore hold that the property was not, and should not be declared to have been, subject to a constructive trust in favour of the respondent at a date prior to the transfer. That disposes of Mr Dutney’s principal argument, namely that there was no settlement under s 120 of the Act because the respondent had ownership in equity before the transfer.”Osborn was followed by Einfeld J in Re Popescu; Popescu v Official Trustee in Bankruptcy (1995) 55 FCR 583.
In the present case there has been no denial by the bankrupts of the respondents’ interests and thus no unconscionable conduct by them. But this does not affect the trustee’s statutory claim, for the reasons given by Pincus J.
As to the suggested equity of exoneration, senior counsel for the respondents relied on the following passage from the judgment of Deane J when a judge of this Court in Farrugia v Official Receiver (1982) 43 ALR 700 at 702:
“Where the property of a married woman is mortgaged or charged in order to raise money for the benefit of her husband, it is presumed, in the absence of evidence showing an intention to the contrary, that, as between her husband and herself, she meant to charge her property merely as a surety. In such a case, she is, as between her husband and herself, in the position of surety and entitled both to be indemnified by the husband and to throw the debt primarily on his estate to the exoneration of her own.” (Emphasis added)
However, on the facts of Farrugia part of the loan ($12,500) was applied to discharge a previous mortgage under which they were jointly liable. It was only the balance of $10,500 which was applied for the benefit of the husband alone. Deane J held (at 702) that the one borrowing could, for the purposes of the application of the relevant equitable principles, be subdivided into what was borrowed for the joint benefit of husband and wife and what was borrowed and applied for the husband’s benefit alone. It was only the latter part to which the equity of exoneration applied. Thus the question whether the equity applies turns on the circumstances of the case, and in particular whether the wife in fact obtained a benefit from the loan.
In the present case, as I have found, each respondent obtained a tangible benefit from the CWS loan. The rationale for the equity of exoneration is absent. As Einfeld J said in Popescu (at 589):
“Where equity might interfere in favour of one party to a marriage or partnership suffering from the unconscionable behaviour of the other party, it will, in my opinion, be less energetic where, in the absence of unconscionability towards the other party by the legal owner, the competition is between the creditors of the legal owner and the ‘innocent’ partner. This is particularly so where the couple have remained together as the debts accumulated. Just as the ‘innocent’ wife would have gained from improvements in her husband’s financial position, she must also bear the burden of his indebtedness.”
Reference might also be made to what was said by Scott J in Re Pittortou [1985] 1 All ER 285 at 288:
“… the equity of exoneration is a principle of equity which depends on the presumed intentions of the parties. If the circumstances of a particular case do not justify the inference, or indeed if the circumstances negate the inference, that it was the joint intention of the joint mortgagors that the burden of the secured indebtedness should fall primarily on the share of them who was the debtor, then that consequence will not follow.”
I am satisfied that the criteria of ss 120 and 121 have been established. Indeed that was not really disputed. Since I find that there is no equity of exoneration in respect of the 1992 CWS mortgages and that the common intention constructive trust does not defeat the trustee’s claims, the relief sought by the trustee must be granted.
This relief includes a claim for indemnity in respect of all liability incurred by the trustee pursuant to the mortgages to the Commonwealth Bank. The transfers of May 1993 from their inception carried within themselves the “germs of their own destruction”. The respondents never held ownership free from the risk of the transfers becoming void ab initio if bankruptcy occurred, a quality that was inherent in them because they were given by an insolvent debtor (to adopt the language of Barwick CJ in N.A. Kratzmann Pty Ltd (In Liquidation) v Tucker [No 1] (1966) 123 CLR 257 at 283). The respondents have charged property to which, as a result of the operation of the Act, they were not entitled.
Orders
T 7006 of 20001.Declare that the transfer by the bankrupt Peter Frederick Parsons to the respondent of his interest in the property situate and known as 80 King Street, Smithton in Tasmania as comprised in Certificate of Title Vol. 22152 fol. 9 of the Register is void.
2.Order that the respondent take such steps as may be required by the applicant and/or the Recorder of Titles to rectify the register maintained by the Recorder of Titles pursuant to the Land Titles Act1980 (Tas) as a consequence of such declaration.
3.Order that the respondent indemnify the applicant in respect of all liability incurred by the respondent pursuant to mortgage B882598 executed in favour of the Commonwealth Bank of Australia on or about 24 November 1995.
4.Order that the respondent pay the applicant’s costs, including reserved costs.
T 7007 of 2000
1.Declare that the transfer by the bankrupt Geoffrey James Parsons to the respondent of his interest in the property situate and known as 2 Leesville Road, Smithton in Tasmania as comprised in Certificate of Title Vol. 213233 fol. 1 of the Register is void.
2.Order that the respondent take such steps as may be required by the applicant and/or the Recorder of Titles to rectify the register maintained by the Recorder of Titles pursuant to the Land Titles Act1980 (Tas) as a consequence of such declaration.
3.Order that the respondent indemnify the applicant in respect of all liability incurred by the respondent pursuant to mortgage C34411 executed in favour of the Commonwealth Bank of Australia on or about 30 July 1997.
4.Order that the respondent pay the applicant’s costs, including reserved costs.
I certify that the preceding fifty-eight (58) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate:
Dated: 11 July 2000
Counsel for the Applicant: Mr S McElwaine Solicitor for the Applicant: Mr S McElwaine Counsel for the Respondent: Mr G Bigmore QC Solicitor for the Respondent: McLean Phillips & Bartlett Date of Hearing: 29, 30 May 2000 Date of Judgment: 11 July 2000
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