Morton, R.W. v Feteiha, S
[1995] FCA 280
•3 May 1995
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF
THE STATE OF VICTORIA
GENERAL DIVISION No VB 2756 of 1993
Re: SAVVAS CHRISTODOULOU
A Bankrupt
Ex Parte: ROBERT WILLIAM MORTON
Applicant
SAHAR FETEIHA
Respondent
Coram: Olney J
Place: Melbourne
Date: 3 May 1995
MINUTE OF ORDERS
THE COURT ORDERS THAT:
The application herein filed on 30 August 1994 be dismissed.
The applicant pay the respondent's costs of the application including any 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
BANKRUPTCY DISTRICT OF
THE STATE OF VICTORIA
GENERAL DIVISION No VB 2756 of 1993
Re: SAVVAS CHRISTODOULOU
A Bankrupt
Ex Parte: ROBERT WILLIAM MORTON
Applicant
SAHAR FETEIHA
Respondent
Coram: Olney J
Place: Melbourne
Date: 3 May 1995
REASONS FOR JUDGMENT
The applicant is the trustee in bankruptcy of the estate of Savvas Christodoulou (the bankrupt). The sequestration order was made on 7 October 1993 upon a petition presented on 22 July 1993. The act of bankruptcy relied upon to support the petition was committed on 25 January 1993.
The bankrupt was examined pursuant to s 81 of the Bankruptcy Act. A transcript of the examination was tendered in evidence in this proceeding and relied upon by the applicant as evidence of the truth of statements recorded therein as having been made by the bankrupt during the examination. As the bankrupt was not called to give evidence there was no opportunity for him to be cross-examined on behalf of the respondent. Accordingly, the transcript has only limited value as evidence in this proceeding.
The respondent is the registered proprietor of a house property situate at and known as 27 Sorrento Street Broadmeadows (the Broadmeadows property) which was purchased by her at auction on 25 July 1992 and transferred into her name on 10 May 1993. The bankrupt acted as the respondent's solicitor in relation to the completion of the purchase of the Broadmeadows property.
THE APPLICATION
On 30 August 1994 the applicant filed an application seeking the following declarations and orders:
A declaration that the applicant is entitled to be registered as the proprietor of the property situate at 27 Sorrento Street, Broadmeadows, in the State of Victoria, being land more particularly described in the Certificate of Title Volume 8979 Folio 233. (the property).
An order that the respondent forthwith:
(a)deliver up to the applicant the duplicate Certificate of Title, Volume 8979 Folio 233.
(b)vacate the property and deliver up possession thereof to the applicant.
An order that the respondent be restrained from removing from the property any of the fixtures and fittings presently installed on the property.
In the alternative to paragraphs 1 to 3 (inclusive) a declaration that payments by the bankrupt to or on behalf of the respondent totalling $91,472.43 were settlements of property not made in good faith and for valuable consideration and void against the applicant under the provisions of s 120 of the Bankruptcy Act 1966 (the Act).
In the alternative to paragraph 4 hereof, a declaration that the payments by the bankrupt to or on behalf of the respondent, totalling $83,572.43, were payments made by the bankrupt at a time he was unable to pay his debts as they became due from his own money having the effect of giving the respondent a preference, priority or advantage over other creditors being payments made within 6 months before the presentation of a petition on which or by virtue of the presentation of which the bankrupt became a bankrupt and void against the applicant under the provisions of s 122 of the Act.
In the course of the hearing of the application the applicant sought leave to amend the amount of money referred to in paragraph 5 to $105,837.88. As it happens nothing turns upon the actual amount claimed in either paragraph 4 or paragraph 5.
The application was heard on 19 April 1995. The applicant relied upon his own affidavit sworn 26 August 1994 and various documents exhibited thereto. In addition the applicant gave further oral evidence-in-chief and was cross-examined by the respondent's counsel.
The respondent relied upon an affidavit sworn 1 February 1995. She too gave further oral evidence-in-chief and was cross-examined. Much of the cross-examination was said to be directed to the question of the respondent's credit. The attack on her credit proved to be singularly unsuccessful and served only to establish the respondent as a witness of truth. To the extent that the respondent's evidence contradicts that of the applicant and the evidence given by the bankrupt during his s 81 examinations, I accept the respondent's testimony and reject the evidence to the contrary.
THE FACTS
I find the facts to be as follows:
The respondent is of Egyptian origin having migrated to Australia with her then husband in December 1990. Her first language is Arabic but she has a limited capacity to read and
communicate in English. During the proceedings she gave her evidence with the aid of an interpreter.
The respondent and her husband ceased co-habitation in January 1994 and were divorced earlier this year. During the period of time relevant to this proceeding the respondent's former husband attended to most if not all of the couple's financial and business affairs.
On 25 July 1992 the respondent was the successful bidder at an auction of the Broadmeadows property which was being sold by the Defence Housing Authority. The purchase price was $79,000. On the day of the auction the respondent, who was accompanied by her husband, signed a contract of sale in her own name as sole purchaser and paid the selling agent $7,900 in cash by way of deposit. The agreed date for settlement was 22 November 1992.
Subsequent to the auction, a friend of the respondent's husband suggested that the bankrupt, who was then a practicing solicitor, be engaged to act in relation to the settlement. The friend also suggested that the purchase money could be paid to the bankrupt so that funds would be in hand when settlement was due. The respondent and her husband gave the respondent's friend $35,000 in cash which was paid to the bankrupt on account of the purchase price. This occurred about 2 months after the auction. Neither the respondent nor her husband attended at the bankrupt's office on the occasion when the $35,000 was paid to the bankrupt, but on subsequent occasions the respondent met the bankrupt and paid him further sums totalling in all (including the initial $35,000) approximately $60,000. The respondent's husband said he would take care of the balance required to settle the transaction and although the respondent does not know what payments or other arrangements were made in that regard it is common cause that by the time the due date of settlement arrived, the bankrupt had been put in funds to the extent necessary to settle on the respondent's behalf.
The respondent expected that when the agreed settlement date came the property would be transferred into her name free of encumbrances and she was under the impression that this had in fact occurred until about a week after the settlement date the bankrupt telephoned to say that he had been unable to go through with the settlement as "the money was not ready". (the respondent's words). The bankrupt said that he was going to extend the settlement for another 3 months and because the delay was his fault he would personally take care of all the expenses associated with the extension of time. At the time the respondent's husband told her that the bankrupt had assets but he did not have the cash to pay.
Whatever arrangements the bankrupt made with the vendor, they were sufficient to enable the respondent to move into the Broadmeadows property at or about the time settlement was originally due to take place.
It appears from correspondence passing from the bankrupt to the Australian Government Solicitor (who was acting for the vendor) that the bankrupt first arranged a 3 month extension to 28 February 1993 on the basis of the payment of a monthly rental of $1,500. Later a further extension to 28 March 1993 was arranged on a similar basis and thereafter a daily rate of $48.39 was payable from 28 March 1993 until settlement was effected. The respondent did not, nor was she ever asked to, pay any of the rental payments. There is no evidence that the bankrupt paid them on a regular basis. From the evidence as to the amount paid on settlement I infer that the settlement figure included the additional amounts payable by reason of the extension of time granted by the vendor. Accordingly, I infer that the amount paid on settlement included an amount (the exact measure of which has not been established) representing the rental payments for which the bankrupt undertook personal liability.
Settlement did not take place until 10 May 1993. Prior to, and in order to facilitate, settlement the respondent was persuaded by the bankrupt to execute a mortgage over the property in favour of Bountybon Pty Ltd to secure a loan of $70,000 (the Bountybon mortgage). The bankrupt personally guaranteed the mortgage debt to the mortgagee. Not only that, he assured the respondent that he would pay the debt when it became due. Furthermore, he undertook to pay all legal costs and interest payable in respect of the loan which was for a term of 3 months with interest at the rate of 30% per annum payable in advance. At settlement the mortgagee provided the sum of $58,639.14 and the bankrupt provided the sum of $22,265.25 which was drawn on his personal bank account. It appears that the difference between the amount secured by the mortgage ($70,000) and the amount provided by the mortgagee at settlement ($58,639.14) namely $11,360.86 represents 3 months interest and a procuration fee charged by the mortgagee's solicitors.
On the day of settlement the bankrupt paid the mortgagee's solicitors $1500 from his own bank account for the costs of the mortgage.
The mortgage was discharged on 9 August 1993 when the bankrupt paid the mortgagee's solicitors $70,000 which he had drawn from his own bank account. To facilitate this the bankrupt borrowed $69,000 from another source.
To a large extent the applicant sought to rely upon evidence that the bankrupt had given at his s 81 examination. The bankrupt was not called to give evidence and accordingly there was no opportunity for him to be cross-examined on the evidence he had given during his examination. In a number of respects the bankrupt's evidence has been shown to be false. First, it is not true, as the bankrupt claimed, that he had paid the deposit of $7,900. Nor is it true as the bankrupt claimed, that the respondent had moneys invested with him "for a couple of years" prior to the purchase of the Broadmeadows property. Whatever dealings, if any, the respondent's former husband may have had with the bankrupt prior to the purchase of the property (and there is no evidence that he did have any prior dealings) I am satisfied that the respondent's first dealings with the bankrupt occurred after the auction sale and that her only dealings with the bankrupt were in relation to the purchase of the property.
I also accept the respondent's evidence that prior to signing the mortgage on 10 May 1993 the bankrupt had taken her to the office of another solicitor (not the mortgagee's solicitor) and that before doing so he told her that the other solicitor would explain to her the documents that she was to sign and that she should say yes to everything as if she understood as otherwise she would lose the house. The mortgage documents were signed in the presence of the other solicitor. The only other person present at the time was the bankrupt. The respondent's understanding of English at the time was not good and she was not offered the assistance of an interpreter.
A few months after the mortgage was signed the respondent and her husband, being concerned to know whether the mortgage had been paid out by the bankrupt, consulted a solicitor. They were told that if the bankrupt did not pay the money they would have to approach the Law Institute. The solicitor said words to the effect "It seems like he (the bankrupt) has lost the money and he can't pay it". The mortgage was later paid out by the bankrupt.
Although it has no bearing upon the outcome of this application I add the following comments concerning the source of the funds paid to the bankrupt by the respondent and her husband. I find that the deposit money and the further sums totalling approximately $60,000 were paid in part from savings and in part from the proceeds of the sale of gold which the respondent's father had given her before she migrated to Australia. I am unable to make any finding as to whether any funds were contributed from any other source. However, I accept the respondent's evidence that after her parents came to Australia in June 1993 they paid the respondent's husband about $55,000. The respondent was cross-examined at some length concerning a statement made by her in an affidavit filed in Family Court proceedings between herself and her husband in which she said that the funds for the purchase of the property were solely provided by her father. Whilst it may not be the case that the total funds paid prior to settlement were provided by her father, the fact that a major part of those funds came from the sale of gold given to the respondent by her father and the further fact that her father later paid her husband $55,000 on account of the purchase price of the property, when put in context suggest that the respondent's statement that her father financed the purchase of the property was in substance true.
I am also satisfied on the evidence that at all relevant times the respondent's husband conducted substantially all business dealings in connection with the purchase of the property. The only exceptions appear to be that the respondent attended on the bankrupt on possibly 3 occasions to pay money on account of the purchase price and on 10 May 1993 she accompanied the bankrupt to a solicitor's office for the purpose of signing the Bountybon mortgage.
THE ISSUES
The application seeks relief on 3 separate bases. It will be convenient to deal with each separately in the order in which they appear in the application.
a) Constructive trust (Paragraphs 1 to 3 inclusive)
The only ground upon which the applicant relied to support the declaration and orders sought in these paragraphs was that the property was held by the respondent on a constructive trust for the bankrupt. The applicant did not press this ground and nothing further need be said about it except to say that the applicant is not entitled to any relief under paragraphs 1 to 3 of the application.
b) Bankruptcy Act, s 120(1) (Paragraph 4)
The applicant says that each payment of money made by the bankrupt in relation to the settlement of the purchase of the respondent's property was a "settlement of property" within the meaning of s 120(1) and that all such payments were made after or within 2 years before the commencement of the bankruptcy. [The bankruptcy is deemed to have commenced on 25 January 1993 (Bankruptcy Act s 115(1)]. It is further asserted that such payments were made to or on behalf of the respondent and were not made in good faith and for valuable consideration. In the result, it is said, such payments are "void as against the trustee in bankruptcy".
The relevant provisions of the Bankruptcy Act namely ss 120(1), 120(8) and the definition of the term "property" in s 5(1) are as follows:
120(1)A settlement of property, whether made before or after the commencement of this Act, not being:
(a)a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or
(b) ...
is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.
In this section, "settlement of property" includes any disposition of property.
5(1) ...
"property" means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.
The evidence establishes that the bankrupt made 3 payments in relation to the affairs of the respondent. First, on 10 May 1993 the sum of $22,265.25 was paid from the bankrupt's bank account as part of the balance of purchase price and other moneys payable to complete the purchase of the property; second, on 10 May 1993 the sum of $1,500 was withdrawn from the bankrupt's bank account and paid to the solicitors acting for Bountybon for the costs of the mortgage; and third, on 9 August 1993 two amounts totalling $70,000 were paid out of the bankrupt's bank account to discharge the Bountybon mortgage.
The words of s 120(1) are not apt to describe the transaction which the applicant seeks to attack. However, in a literal sense, having regard to the definition of "property", it may be said that in paying the various sums of money referred to above the bankrupt disposed of that property i.e. the money. It will be convenient to examine each payment separately.
Prior to 10 May 1993 the respondent and/or her husband had paid money to the bankrupt to enable the bankrupt to complete the purchase of the Broadmeadows property. Clearly, prior to settlement the funds were either held by the bankrupt upon trust for the respondent or there was a relationship of creditor and debtor existing between the respondent and the bankrupt. On 10 May 1993 the bankrupt discharged his liability to the respondent to the extent of $22,265.25 by paying that sum to the representative of the vendor of the Broadmeadows property on the respondent's behalf. For that transaction, i.e. the payment of $22,265.25 by the bankrupt to the vendor, to be caught by s 120(1) it must first be shown to be "a settlement of property" within the meaning of that term in s 120.
In my opinion the payment of $22,265.25 on 10 May 1993 was not a settlement of property within the meaning of s 120(1).
In Re La Rosa; ex parte Norgard v Rocom Pty Ltd 21 FCR 270 French J examined in detail the historical and legislative background of s 120. After an extensive and learned consideration of the relevant authorities his Honour concluded (at p 287):
... that it is still the law that a disposition of property is not a settlement unless made with the intention that it will be retained by the recipient and not immediately dissipated or consumed.
With respect, I adopt French J's conclusion as being soundly based. It is unnecessary to repeat here the reasoning which led to that inclusion in La Rosa.
In the facts of the present case the payment of $22,265.25 made by the bankrupt on 10 May 1993 cannot be regarded as a settlement of property within the meaning of s 120(1). There is no suggestion that the payment was anything other than a straight out payment made on behalf of the purchaser of a property to a vendor. It was not in the contemplation of any of the parties involved that the payment would be retained in any way or form.
The payment of $1,500 on 10 May 1993 was made by the bankrupt in discharge of a personal liability he had undertaken to pay the costs of the mortgage. It cannot in any circumstances be regarded as a settlement of property caught by s 120(1).
When the respondent executed the Bountybon mortgage on 10 May 1993 she became personally liable to the mortgagee to repay the principal sum within 3 months. But at the same time the bankrupt not only guaranteed the repayment of the principal sum but also agreed to indemnify the respondent in respect thereof. It was not a case of the bankrupt saying to the respondent "If you can't pay, I will" but rather he undertook to pay the money himself when it became due, and that is what he did. For the same reasons as have been canvassed in relation to the payment of $22,265.25 on 10 May 1993, I am of the opinion that the payment of $70,000 made by the bankrupt to Bountybon's solicitors on 9 August 1993 was not a settlement of property caught by s 120(1).
The applicant is not entitled to any relief under paragraph 4 of the application.
c) Bankruptcy Act s 122 (Paragraph 5)
The applicant says that the payments made by the bankrupt to or on behalf of the respondent -
were made at a time that the bankrupt was unable to pay his debts as they became due from his own money;
ii)had the effect of giving the respondent a preference priority or advantage over other creditors;
iii)were made within 6 months before the presentation of a petition on which or by virtue of the presentation of which the bankrupt became a bankrupt,
and accordingly were void against the applicant under the provision of s 122.
There is no evidence to suggest that the bankrupt made any payment whatsoever to the respondent. The only payments proved to have been made that could be said to have been made on behalf of the respondent were the amounts of $22,265.25, $1,500 and $70,000. On one view of the evidence part of the payment of $22,265.25 and the payments of $1,500 and $70,000 were made by the bankrupt on his own behalf to satisfy personal liabilities that he had incurred. Be that as it may, for present purposes the claim in paragraph 5 will be dealt with on the basis that each payment was made on behalf of the respondent.
To the extent that the applicant claims that the payments were made within 6 months before the presentation of the petition upon which the bankrupt became a bankrupt, the assertion is only partially correct. The payment of $70,000 made on 9 August 1993 was made after the presentation of the petition on 22 July 1993. The other payments were made within 6 months prior to the presentation of the petition. As it happens this error has no bearing upon the outcome of the application.
So far as presently relevant s 122 provides as follows:
A conveyance or transfer of property, a charge on property, or a payment made, or an obligation incurred, by a person who is unable to pay his debts as they become due from his own money (in this section referred to as "the debtor"), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, payment or obligation executed, made or incurred:
(a)within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt; or
(b)on or after the day on which the petition on which, or by virtue of presentation of which, the debtor becomes a bankrupt is presented and before the day on which the debtor becomes a bankrupt;
is void as against the trustee in the bankruptcy.
(1A) Subsection (1) applies in relation to a conveyance or transfer of property, a charge on property or a payment made, or an obligation incurred, by the debtor in favour of a creditor:
(a)whether or not the liability of the debtor to the creditor is his separate liability or is a liability with another person or other persons jointly; and
(b)whether or not:
(i)the property conveyed, transferred or charged is his own property or is the property of the debtor and of another person or other persons;
(ii)the payment is made out of his own moneys or out of moneys of the debtor and another person or other persons; or
(iii)the obligation is incurred by the debtor on his own account only or on account of himself and another person or other persons;
as the case requires.
(2) Nothing in this section affects:
(a)the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business;
(b) ...
(c) ...
(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) ...
(b) ...
(c)a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge, payment or obligation was executed, made or incurred 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 debts as they became due from his own money; and
(ii)that the effect of the conveyance, transfer, charge, payment or obligation would be to give him a preference, priority or advantage over other creditors.
...
(7) In this section:
"payment" includes the drawing, making or endorsing of a bill of exchange, cheque or promissory note;
...
The evidence establishes that each of the payments in question was made in circumstances to which s 122(1) applies. In reaching this conclusion I have accepted as probative of the fact the assertion in evidence of the applicant that the payments were made when the bankrupt was unable to pay his debts as they became due from his own money and that the effect of the payments was to give the respondent a preference over other creditors. In other circumstances I may have been less readily persuaded without more proof than the trustee's mere assertion but in this case nothing turns upon that issue.
It being accepted for present purposes that the 3 payments were made on behalf of the respondent I will proceed on the basis that she should be treated, at least notionally, as the payee of the respective payments.
The respondent relies upon s 122(2)(a) as excluding the operation of s 122(1) in respect of the payments. She says that the payments were made in good faith and for valuable consideration and in the ordinary course of business. She accepts that the burden of proving these facts lies upon her (s 122(3)). If however it be shown that the payments were made in such circumstances as to lead to the inference that she knew or had reason to suspect that the bankrupt was unable to pay his debts as they became due from his own money and that the effect of the payment would be to give her a preference over other creditors then the benefit of
s 122(2)(a) will not be available to her. The onus of establishing the matters referred to in s 122(4)(c) lies on the applicant (Re Cooke; ex parte Official Trustee in Bankruptcy v Miller Brothers Melbourne Tankworks Pty Ltd (1985) 4 FCR 398 per Smithers J at p 411).
There is no evidence capable of leading to the inferences referred to in s 122(4)(c). The only relevant evidence is that in November 1992 the respondent was told that the money which had been paid to the bankrupt to enable him to settle the purchase of the Broadmeadows property on her behalf "was not ready" but, although the bankrupt had assets, he did not have the cash to pay. It may be inferred from the fact that in May 1993 the bankrupt required the respondent to enter into the Bountybon mortgage before settlement could be effected that she would have understood the situation then to be much the same as it was in November 1992. However, there is no evidence to suggest that at any relevant time the respondent knew or had reason to suspect that the bankrupt had other creditors nor is there anything in the evidence to support an inference that she knew or had reason to suspect that the effect of the payments made by the bankrupt would be to give her a preference over other creditors.
The question therefore remains as to whether the respondent has discharged the burden of proving that the payments were made in good faith for valuable consideration and in the ordinary course of business.
In my opinion the respondent has discharged that burden.
There is no question that the transactions which involved the making of the payments were other than legitimate business transactions. The payment made to the vendor's agent on 10 May 1993 was made in part payment of the purchase price of the Broadmeadows property. The effect of the payment was to enable the respondent to have the property transferred into her name. As between the bankrupt and the respondent the effect of the payment was either to partly execute the trust upon which he held funds paid to him by or on behalf of the respondent, or to extinguish pro tanto his liability to the respondent. The payment of $1,500 for the mortgagee's costs (assuming it was a payment made on the respondent's behalf) was part of the transaction whereby $70,000 was borrowed to facilitate the settlement. There can be no suggestion that what occurred on 10 May 1993 was done other than in good faith on all sides, for valuable consideration and in the ordinary course of business. And the same can be said of the payment of $70,000 made by the bankrupt on 9 August 1993. There was no element of sham about this transaction. The bankrupt had undertaken to repay the mortgage debt and he repaid it. He had accepted the liability as his own because he had been unable to provide the necessary funds when they were required for settlement. Having incurred the liability to repay the mortgage debt on behalf of the respondent he duly discharged that liability in good faith at the appropriate time. As a result, his remaining liability to the respondent was extinguished. Clearly, the payment was made for valuable consideration and was made in the ordinary course of business.
In the circumstances of the case the respondent is entitled to the benefit of s 122(2)(a). Accordingly, the applicant is not entitled to any relief under paragraph 5 of the application.
CONCLUSION
The applicant has failed to establish any basis for relief in respect of the matters referred to in the application.
The application will be dismissed with costs.
I certify that this and the preceding 19 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney
Associate:
Dated:
Heard: 19 April 1995
Place: Melbourne
Judgment: 3 May 1995
Appearances:
Mr B.M. McCullagh (instructed by Corrs Chambers Westgarth) appeared for the applicant.
Miss A. Wardell (instructed by Acquaro & Co) appeared for the respondent.
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