Nelson v Mathai
[2011] FMCA 686
•2 September 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| NELSON v MATHAI & ORS | [2011] FMCA 686 |
| BANKRUPTCY – Trustee Application pursuant to s.121 of the Bankruptcy Act 1966 – meaning of ‘creditor’. |
| 13 Eliz, c.5 Bankruptcy Act 1966, ss.77C, 81, 121 |
| Anscor Pty Ltd v Clout (Trustee) [2004] FCAFC 71; (2004) 135 FCR 469 PT Garuda Indonesia v Grellman [1992] FCA 188; (1992) 33 FCR 515; (1992) 107 ALR 199 Trustees of the Property of Cummins (A Bankrupt) v Cummins (2006) 227 CLR 278; [2006] HCA 6; (2006) 224 ALR 280; (2006) 80 ALJR 589; 35 Fam LR 343; 61 ATR 642 Trustee of the Property of O'Halloran, in the matter of O'Halloran v O'Halloran [2002] FCA 1305 |
| Applicant: | SIMON PATRICK NELSON AS TRUSTEE OF THE PROPERTY OF MATHEW KERALAVAKAYIL MATHAI, A BANKRUPT |
| Respondents: | MATHEW KERALAVAKAYIL MATHAI ALBERNI LIMITED |
| File Number: | MLG 841 of 2007 |
| Judgment of: | Riethmuller FM |
| Hearing date: | 4 March 2010 |
| Date of Last Submission: | 14 July 2010 |
| Delivered at: | Melbourne |
| Delivered on: | 2 September 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr P.J. Hayes |
| Solicitors for the Applicant: | Koroneos Lawyers |
| Counsel for the First Respondent to Sixth Respondent: | Mr G.T. Bigmore QC with Mr J.T. Johnson |
| Solicitors for the First Respondent to Sixth Respondent: | PH Legal Pty Ltd |
| Counsel for the Seventh Respondents: | There being no appearance |
ORDERS
It is declared that the applicant is entitled to the beneficial ownership of the property at 68A Wellington Street, Kew, Victoria (being the property more particularly described in Certificate of Title volume 8734 Folio 085) and that the second and third respondents hold the property on trust for the applicant (as the bankrupt’s trustee in bankruptcy).
That the second and third respondents transfer the title to 68A Wellington Street, Kew, Victoria (being the property more particularly described in Certificate of Title volume 8734 Folio 085) to the applicant (as the bankrupt’s trustee in bankruptcy), and in the event they fail or refuse to execute any document of transfer or instrument necessary to effect same, the Registrar of the Federal Magistrates Court be appointed to execute such document on their behalf and do all acts and things necessary to give validity to the operation of the document.
It is declared that the applicant is entitled to the beneficial ownership of the property at 69 Wellington Street, Kew, Victoria (being the property more particularly described in Certificate of Title volume 8434 Folio 197) and that the fourth respondent hold the property on trust for the applicant (as the bankrupt’s trustee in bankruptcy).
That the fourth respondent transfer the title to 69 Wellington Street, Kew, Victoria (being the property more particularly described in Certificate of Title volume 8434 Folio 197) to the applicant (as the bankrupt’s trustee in bankruptcy), and in the event he fails or refuses to execute any document of transfer or instrument necessary to effect same, the Registrar of the Federal Magistrates Court be appointed to execute such document on behalf of the fourth respondent and do all acts and things necessary to give validity to the operation of the document.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 841 of 2007
| SIMON PATRICK NELSON (AS TRUSTEE OF THE PROPERTY OF MATHEW KERALAVAKAYIL MATHAI, A BANKRUPT) |
Applicant
And
| MATHEW KERALAVAKAYIL MATHAI, WEE ENG POH, MARGARET MATHAI, MICHAEL LEE MATHAI, GERALD MATHAI, DEIDRE MATHAI AND ALBERNI LIMITED |
Respondents
REASONS FOR JUDGMENT
Background
The applicant is the Trustee in bankruptcy of the first respondent. The applicant brought proceedings to recover property from the second respondents.
The applicant claims that the bankrupt transferred property at times when he was or was about to become insolvent, the purpose of which was either to prevent the transferred property from becoming divisible amongst his creditors, or to hinder or delay the process of making the transferred property available for division amongst his creditors.
The respondents deny the applicant’s claim. Counsel for the respondents also say that in the event the applicant proves the claim, that the current creditors were not creditors of the bankrupt at the time of the transfer and therefore the applicant cannot succeed on the current wording of the relevant legislation.
The Law
The applicant relies upon s.121 of the Bankruptcy Act 1966 (Cth) which relevantly provides:
121 [Transfers to defeat creditors]
Transfers that are void
(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if:
(a) the property would probably have become part of the transferor's estate or would probably have been available to creditors if the property had not been transferred; and
(b) the transferor's main purpose in making the transfer was:
(i) to prevent the transferred property from becoming divisible among the transferor's creditors; or
(ii) to hinder or delay the process of making property available for division among the transferor's creditors.
(2) The transferor's main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
The test to be applied in s.121 is an objective one: Official Trustee v Marchiori (1983) 69 FLR 290 at 5. The applicant must show that the circumstances give rise to ‘a reasonable and definite inference’ and not simply ‘conflicting inferences of equal degree of probability’: Cummins v Cummins [2006] HCA 6 at [34].
Meaning of ‘Creditor’ in s.121
The respondents argue that the creditors referred to in s.121 must be creditors who have proved in the bankruptcy.
The Act only defines ‘creditor’ in relation to a liability under a maintenance order, which is not relevant in the present case. ‘Creditor’ is used in various senses throughout the Bankruptcy Act and the term ‘takes its colour from the particular context’: Pyramid Building Society (in liquidation) v Terry [1997] HCA 48; (1997) 148 ALR 174 at 183. There are no helpful cases on the meaning of the term in s.121 in its current form.
The section is the modern version of an enactment that has a long history. That history can be traced back to 1376, as MacPherson JA said in R v Dunwoody [2004] QCA 413:
[104] It is part of the ordinary processes of law that a judgment creditor may enforce his judgment by levying execution on land or other assets of the judgment debtor. Transferring those assets away from the judgment debtor in anticipation of such a judgment is designed to frustrate that process. Such conduct, whether or not it constitutes a crime or a “fraud” in the technical sense has long been the subject of statutory provisions avoiding that consequence. The Fraudulent Conveyances Act 1571; 13 Eliz, c 5, was by no means the first of its kind. The earliest was 50 Edw 3, c 6, passed in 1376, which recites and condemns the practice, said to be prevalent then, of secretly transferring one’s tenements and chattels into the name of another and proceeding to live on the proceeds, so frustrating the efforts of execution creditors to obtain payment of their debts. It is precisely what the appellant had in mind here.
[105] The short title of that ancient statute of 1371 was “Fraudulent assurances of land or goods to deceive creditors, shall be void”. The legislative remedy afforded was to authorise creditors to levy execution against such tenements and chattels “as if no gift had been made”. The Statute of Elizabeth of 1571 recited a similar purpose, if with much less brevity. It is legislation that has been received or re-enacted in almost every place where English law now prevails. In this State, the local analogue is now to be found in s 228(1) of the Property Law Act 1974, and was formerly in s 46 of The Mercantile Act of 1867. Such statutory provisions operate independently of and beyond the limits of various provisions of the Bankruptcy Act 1966 which themselves have a common genesis in 13 Eliz 1, cap 5, or its forebears. See “Avoiding Transactions in Insolvency” in Corporate Insolvency Law, at 186-194 (ed Lessing & Corkery); Bond University 1995. Adjudication or sequestration in bankruptcy is not an element or a prerequisite of its application even though the official receiver or a trustee in bankruptcy may take advantage of it: Williams v Lloyd [1934] HCA 1; (1934) 50 CLR 341, 362-363.
[106] It is true that statutory enactments of this kind consistently refer to defrauding or deceiving “creditors”; but the course of judicial decision over the centuries shows that this expression is not to be confined to its limited and technical sense of a person to whom a debt is presently due and owing. May, on Fraudulent and Voluntary Dispositions of Property (3rd ed, 1980), at pp 43, 102, cites a body of judicial authority beginning with Twyne’s Case [1601] EngR 4; (1602) 3 Co Rep 80b, at 81b; [1601] EngR 4; 76 ER 809, 816, in support of the proposition that the expression “creditors and others” in the old Elizabethan statute are “wide enough to include any person who has a legal or equitable right or claim against the grantor or settlor by virtue of which he is or may be entitled to rank as a creditor of the latter”. He goes on to say that the claimant may be considered to be a creditor within the Statute although his claim had not become payable at the time when the conveyance was made and even though it was then merely contingent; and although it was a claim for unliquidated damages in respect of which judgment had not yet been given. Among the authorities cited is Barling v Bishopp [1860] EngR 934; (1860) 29 Beav 417; 54 ER 689, in which Romilly MR set aside a defendant’s transfer of his land to his daughter after receiving notice of trial in an action for damages for trespass against him, in which the plaintiff obtained a verdict and judgment some two months later. Like the appellant here the defendant there subsequently sought and obtained relief in insolvency. Lord Romilly said [1860] EngR 934; (29 Beav 417, 420-421; [1860] EngR 934; 54 ER 689, 690) that “the only thing the Court has to consider is whether the object was to defeat the creditors present or in futuro”.
[107] The provision in s 228(1) of the Property Law Act 1974 does not, like 13 Eliz, c 5, speak of creditors “or others”. Having regard, however, to its history, I have little doubt that it would receive an interpretation that applied it to dispositions with intent to defeat a person with a claim that at the time of the disposition was still contingent or prospective, even one consisting as in Barling v Bishopp of unliquidated damages for a tort. But it is not necessary to decide that question now. (emphasis added)
In Barton v Deputy Federal Commissioner of Taxation [1974] HCA 43; (1974) 131 CLR 370 at 374 (‘Barton’) Stephen J said at paragraph [7]:
This awareness of an impending liability is sufficient for the purposes of s. 40 (1)(c) [of the Bankruptcy Act 1996]. That paragraph employs language very similar to the reference, in the Statute 13 Eliz. c.5, to conveyances made "with intent to defraud, defeat or delay creditors" and it is well established that conveyances may fall within that Statute, although there existed no creditors at the date of conveyance, so long as the intent to defeat future creditors be made out - Mackay v. Douglas (1872) LR 14 Eq 106 ; Re Mackay (1951) 16 ABC 18, at p 28 . In Ex parte Russell (1882) 19 Ch D 588 , in which Sir Richard Malins' decision in Mackay v. Douglas (1872) LR 14 Eq 106 was applied, the members of the Court of Appeal again referred to the Statute of Elizabeth as concerned with the protection of future creditors. In Williams v. Lloyd [1934] HCA 1; (1934) 50 CLR 341, although the majority allowed the appeal, all the members of the Court treated the "intent to defraud creditors" to which s. 37A of the Conveyancing Act 1919 (N.S.W.) referred as capable of being established despite undoubted solvency at the time of the challenged alienation of property (1934) 50 CLR, at pp 360-361, 372, 377. So too in the case of s. 40 (1)(c) there may, I think, be the requisite intent despite the absence of existing indebtedness. A fortiori, the intent may exist if the debtor, unaware of his existing indebtedness, nevertheless believes in some impending indebtedness. Moreover an intent formed in relation to only one such existing or anticipated creditor will suffice, the combined effect of s. 23 (b) of the Acts Interpretation Act (Cth) and of s. 6 of the Bankruptcy Act producing this result. (at p374) (emphasis added)
Section 40(1)(c) of the Bankruptcy Act 1966, at that time, provided:
40 [Acts of bankruptcy]
(1) A debtor commits an act of bankruptcy in each of the following cases:-
(c) if, with intent to defeat or delay his creditors-
(i) he departs or remains out of Australia;
(ii) he departs from his dwelling-house or usual place of business;
(iii) he otherwise absents himself; or
(iv) he begins to keep house; (emphasis added)
Section 121(1), in its original form, rendered void ‘a disposition of property ... with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith’. However, unlike its predecessors, s.121 does not refer to an ‘intent to defraud creditors’: instead the provision refers to the bankrupt’s main purpose being to prevent or delay the process of making the property available for division amongst the bankrupt’s creditors.
In Cannane v J Cannane Pty Ltd (In Liquidation) [1998] HCA 26, Brennan CJ and McHugh J at paragraph [10] stated:
The critical term for present purposes is "with intent to defraud creditors". Provisions of this kind, based on 13 Eliz I c 5, have been considered by the courts in various jurisdictions and it is clearly established that the party seeking to avoid a disposition of property has the onus of proving an actual intent by the disponor at the time of the disposition to defraud creditors. The creditors whom the fraudulent disponor of property might intend to defeat need not be existing creditors; they may be future creditors. The intent prescribed by s 121(1) is an intent to defraud any present or future creditors. (emphasis added)
Holmes J of the Supreme Court in Queensland in R v Dunwoody [2004] QCA 413 cited Barton when her Honour stated at paragraph [119]:
The expression “intent to defraud creditors”, as used in s 121(1) before its amendment, was given a wide compass, extending to embrace an intention to defeat not merely existing creditors, but also future creditors: see Barton v Deputy Commissioner of Taxation of the Commonwealth of Australia. (emphasis added)
In PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 523, the Court cited with approval (at 515) the following passage from Lewis’ Australian Bankruptcy Law:
The general principle may be stated that any dealing with property (other than by sale for a reasonable price) made with the object of putting it beyond the reach of present or future creditors comes within the definition of a fraudulent conveyance if the person concerned cannot immediately pay his debts or anticipates some event which may render him unable to pay his debts in future; such a dealing will be treated as fraudulent irrespective of the presence or absence of a conscious fraudulent intent on the part of the debtor if the necessary result of the dealing is to put the property beyond the reach of his creditors .... The word ‘fraudulent’ indeed has received an interpretation in bankruptcy matters somewhat wider than its ordinary use, and it may be defined as equivalent to ‘with an intention to deprive creditors of recourse against all or any of his assets’. (emphasis added)
Counsel for the respondents conceded that there have been no cases that examined this specific issue on the current version of the Act. However Counsel pointed to Gleeson CJ’s observations in arguendo in Trustees of the Property of Cummins (A Bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278. The Chief Justice is reported as having the following exchange with Coles QC for the appellant (at page 281 of the Commonwealth Law Reports):
[Gleeson CJ. Would a purpose of quarantining assets against possible future liabilities for professional negligence be a purpose which fell within s 121(1)(b)?] The difference is that if you anticipate that you will have trade creditors from a new business of a hazardous kind, the disposition will be likely to attract the inference of intention. If however you are willing to go into a new business by only to hazard as capital a limited portion of your assets, keeping the other part away from the new business and you do not anticipate there will be creditors in that new business and you do not have any creditors at the moment, an inference of intent will not be drawn.
In The Perpetual Executors and Trustees Association of Australia Ltd v Wright [1917] HCA 27; (1917) 23 CLR 185, the respondent claimed that his wife was a trustee for him in respect of a house and certain moneys in a bank account. At the time this arrangement was entered into, there was no evidence that the respondent had any creditors. Barton ACJ said (at 193):
Had there been creditors to hoodwink or, at any rate, had there been any attempt at such an act, the case would probably have been different. But, so far as we know, there were no creditors to hoodwink, and the whole thing rested on what might happen but never did happen. That such a state of things, carried no further, is not a bar to the respondent's claim to what is beneficially his own is to me apparent…(emphasis added)
In the judgment in Trustees of the Property of Cummins (A Bankrupt) v Cummins [2006] HCA 6; (2006) 227 CLR 278 at 291 the Court said:
[29] … there was no substantial controversy between the parties to the present appeal that in an appropriate case it was enough that one or more of the creditors of the transferor was the object of the main purpose spoken of in s 121(1)(b).
[30] The question then arises whether the creditor or creditors spoken of in the section must have that status at the time of the transfer. In P T Garuda Indonesia Ltd v Grellman, a case upon s 121 in its previous form, the Full Court of the Federal Court rejected a submission that the class of creditors referred to is limited to those who at the time of the disposition in question have claims of a nature which then would be susceptible to proof under s 82 of the Act.
[31] In R v Dunwoody, an appeal against convictions under s 266 of the Act, McPherson JA said[23]:
"It is true that statutory enactments of this kind consistently refer to defrauding or deceiving 'creditors'; but the course of judicial decision over the centuries shows that this expression is not to be confined to its limited and technical sense of a person to whom a debt is presently due and owing."
Section 40(1)(c) stipulates as an act of bankruptcy the departure from or remaining out of Australia of a person "with intent to defeat or delay his or her creditors". Of that expression, in Barton v Deputy Federal Commissioner of Taxation, Stephen J treated as sufficient for the commission of that act of bankruptcy "awareness of an impending liability" or "some impending indebtedness". In support of that conclusion, his Honour referred to decisions construing the Elizabethan statute and s 37A of the Conveyancing Act.
[32] In the light of authorities such as these, there was no real dispute in the present appeal that, if the other elements of s 121 were made out, the Commonwealth, represented by the ATO, was a creditor for the purposes of the section. Given the further proposition that the section may be satisfied in the absence of a plurality of such creditors, it is unnecessary to consider a further point. (emphasis added)
Significantly, in Cummins’ Case, the bankrupt was found by the trial judge to have ‘incurred very substantial liabilities to [the ATO], contingent only on [the ATO] issuing assessments in respect of past income years’ (at [35]). In this case there is no question that the relevant creditor or debt was foreseeable at the time of the transfers, in that the debt arose as a result of a costs order in the English High Court following litigation many years later.
The applicant argued that a limited interpretation of the provision would be contrary to the policy and intent of the Act as it would shut out creditors post the transfers from claiming under s.121 in situations where a debtor struggles financially but manages to avoid bankruptcy for some time. The applicant says that the bankrupt had engaged in voidable transactions, the purpose of which was to defeat creditors generally. Thus, the applicant argued by analogy, that once the transfer is ‘tainted’, even if there is a period of solvency, the ‘taint’ is never washed out. On such an interpretation the emphasis is on the main purpose of the transfer, which reflects the predecessors of s.121.
Counsel for the respondents argues that if there was any ‘taint’, it was washed out by the fact that the creditors at the time of the transfers are not creditors proving in the bankruptcy. Counsel focused on the phrase in s.121, ‘to prevent the transferred property from becoming divisible amongst his creditors’ or to delay the process of making ‘the transferred property available for division amongst his creditors’, arguing that the expression ‘divisible amongst the creditors of the bankrupt’, limits the meaning of ‘creditors’ to those who were creditors at the time of the transfer and can prove in the bankruptcy.
The argument that the operation of s.121 is limited to creditors at the time of the transfers is contrary to Cummins Case. The creditor there was not a creditor at the relevant time, although the creditor was a foreseeable future creditor. If the transactions can be set aside, s 121 must operate for the benefit of all of the creditors at the time of the bankruptcy, not only those who were creditors at the time of the transactions or foreseeable at the time of the transactions. As Wilcox, Gummow and Von Doussa JJ explained in PT Garuda Indonesia Limited v Grellman [1992] FCA 188; (1992) 25 FCR 515; (1992) 107 ALR 199 (at [39]) ‘there is no need for an intent to defraud creditors as a class.’
Thus, if creditors that were not foreseeable at the time of the transactions can share in the recovered assets, then the question is simply whether a creditor at the relevant time (or foreseeable at that time) must be a member of the group of creditors in the present bankruptcy. Such an interpretation would require the tracing of debts like thoroughbred bloodlines, rather than focusing upon the qualitative nature of the conduct and determining whether the transfer itself was one within the section (or to use the older language, fraudulent). It could not be said that the transfer is no longer fraudulent simply because the purpose of avoiding the creditors (actual or foreseen) at the time was achieved before this particular creditor’s claim arose, only to be defeated by the same transaction.
The one rhetorical conundrum that arises on the applicant’s interpretation is to ask what a debtor is to do if:
a)the transfer was fraudulent at the time;
b)the debtor later pays all of his debts and becomes solvent;
c)the debtor still wishes to nonetheless transfer the property on the same terms as the transaction; and
d)the debtor, much later, becomes bankrupt.
Notably, the intent to defraud creditors need not be the sole intent: Barton’s Case at 375 and Garuda’s Case at [43]. However, it must also be recalled that the terms of s.121(1)(a) requires a finding that ‘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’.
The answer is that the debtor has simply to rely upon the court finding that s.121(1)(a) is not satisfied. This is a question of fact for individual cases and will turn on the evidence before the court.
I therefore conclude that the operation of s.121 does not require a creditor (actual or foreseen) at the time of the transfer to be one of the creditors proving (or capable of proving) in the bankruptcy.
The Relevant Transfers
There are five transfers that are the subject of this claim.
The First and Second Transfers
The Mathai Family Trust (the ‘MFT’) was established on 20 November 1977. The bankrupt was the settlor of the trust. The second respondent Wee Poh (‘Poh’) and the third respondent (the bankrupt’s wife) were named as the trustees.
According to the trust deed the bankrupt’s wife is the primary beneficiary. With the exception of his initial role as the settlor of the trust, the deed provides no further role for the bankrupt. On the terms of the deed, it would appear that the bankrupt had relinquished any control over the trust property or operation of the trust.
The applicant says that the bankrupt provided AUD$40,000 from his ANZ Bank Account (‘the First Transfer’) which was originally sourced from the realisation of treasury stocks in around 1976. The monies were used to pay the initial deposit for the purchase of a property at 68A Wellington Street Kew (‘first Kew property’).
At page 12 of the transcript of the Federal Court proceedings dated 19 December 2007, the bankrupt was asked how the purchase of the first Kew property was financed. The bankrupt states that he brought the $40,000 with him when he came to Australia and deposited it in an account opened in his name. Accordingly, the $40,000 came directly from the bankrupt’s ANZ account.
There is no question that the bankrupt came to Australia to inspect the property, nor that it became a home for his wife and children, from whom he was not estranged and where he stayed from time to time when in Australia.
On 16 January 1978 the bankrupt applied to the Mercantile Bank in Hong Kong for a loan, in his own right, for AUD$100,000. The bankrupt’s letter to the bank indicated that the loan’s purpose was to purchase a house in Melbourne for his family. The bank loaned him the money and $100,000 was transferred to the trust account of the solicitors acting for the purchasers of the first Kew property (‘the Second Transfer’). The property was purchased in the names of the second and third respondents and Mr Brian Gill (a solicitor). The bankrupt intended to add Brian Gill as a trustee, although this had not occurred at the time of the transfer (see transcript of 19 July 2007 at 75). The property was ultimately dealt with as trust property and distributed to beneficiaries of the trust. It appears clear that the property was purchased by the bankrupt, utilizing the funds realized from the sale of treasury stocks and money borrowed from Mercantile Bank.
The First and Second transfers occurred in February/March 1978.
The applicant argues the bankrupt provided the entirety of the purchase price for the first Kew property so he effectively acquired the property. In the transcript of the proceedings on 27 October 2005 at page 2, the bankrupt’s wife states that the money used to purchase the first Kew property came from the MFT, and that the trust funds were monies she had deposited from British shares which she owned. The applicant argues that aside from her own assertion, there is no evidence that the bankrupt’s wife had such shares. She did not choose to give evidence in the proceedings.
The borrowed funds were provided to the solicitor for the purpose of the transaction. I am not persuaded that the monies were given to the trustees of the MFT upon instruction to purchase real property.
There was no reference to a trust registered on the title of the first Kew property. The title holders included a solicitor who was not a trustee under the trust deed.
The consideration for the first Kew property was $122,500 (as shown on the transfer lodged at the titles office), which is far less than the amounts transferred in the First and Second transfers ($140,000). There would also have been stamp duty and legal costs associated with the transaction. However I am not persuaded that the total costs would have exceeded the sums transferred. I find that the bankrupt provided the entirety of the funds for the purchase of this property.
In correspondence to the Mercantile Bank on 16 January 1978, the bankrupt sought overdraft facilities:
‘… which are to be used primarily for the following purposes:
(a) …
(b) The purchase of a house, expected to cost approximately A$100,000, for occupation by my family in Melbourne, Australia.’
In the transcript of 2 April 2008, at page 15, the bankrupt agreed that he was borrowing to fund the purchase of the first Kew property, and that it was his money that was advanced by the Mercantile Bank.
In the transcript of the proceedings under s.77C on 27 October 2005 at pages 12 to 13, rather than saying he settled the money on the family trust, the bankrupt explains that he settled MYR1,000 on the trust initially, then bought some English stocks, and then ‘provided the funds for the purchase of the house.’
At page 12, line 35 of the transcript of the Federal Court proceedings dated 19 December 2007, rather than saying it was the trust who arranged the loan of $100,000 from Hong Kong’s Mercantile Bank, the bankrupt states :
Subsequently I arranged for a loan to be obtained of $100,000 for the purposes of the payment for the building. (emphasis added)
At page 83, line 38 of the transcript the bankrupt gives an unequivocal response to Mr Galvin’s question concerning the $100,000:
MR GALVIN: And that was for the purpose of completing the purchase of the property at 68A Wellington Street, Kew? – Yes.
There was no property investment fund or trust bank account set up for the primary beneficiary, the bankrupt’s wife, to determine what property to purchase.
The way in which the bankrupt has characterised the transaction shows a clear intention to effect the purchase of the first Kew property, rather than to settle money on the trust.
On the weight of the evidence, I find that the transfer was for the purpose of specifically acquiring the first Kew property rather than to fund the MFT to buy a property.
Counsel for the respondents argues there was no indication that the money was held for the bankrupt after he parted with it. Counsel points to the fact that the bankrupt did not live on the property on a regular basis and spent most of his time either in America or in Malaysia earning money until he became bankrupt. Whilst this may indicate a level of disconnection between the bankrupt and the property, the fact that he came to Australia and inspected the property, and his family lived in it and the adjoining property thereafter shows a far greater level of connection.
It is a question of fact whether the bankrupt purchased the property in the name of another: Trautwein v Richardson [1946] ALR 129. The bankrupt did not provide the family trust with money to purchase the first Kew property. The $100,000 loan was made in the bankrupt’s name and $40,000 came directly from his ANZ account. I find that the bankrupt had purchased the property.
Looking at the evidence as a whole I am persuaded that the bankrupt purchased the property which was ultimately placed in the trust. In this sense the facts are similar to those in Trautwein’s Case.
The Third Transfer
In August 1983 the bankrupt provided $210,000 for the purchase of the property at 69 Wellington Street, Kew (‘second Kew property’). This property was purchased in the name of the fourth respondent (a son of the bankrupt). The fourth respondent appears to have had no detailed knowledge of where the funds came from to purchase the property, simply that his parents provided for the purchase in order to give the house to him (see transcript of 27 May 2005 at page 257). At the time his mother had not worked for many years, but his father, the bankrupt, was still working overseas.
In both transcripts of the proceedings under s.77 of the Bankruptcy Act on 27 October 2005 and under s.81 on 19 December 2007 the bankrupt stated that his wife had obtained the loan from Mr Lee. Whether the bankrupt and his wife jointly borrowed the money from the bankrupt’s friend, Mr Lee, and used it to buy the second Kew property or, whether he or his wife was the sole borrower is significant.
In the transcript of the Federal Court proceedings on 2 April 2008, at page 20, the bankrupt was asked whether Mr Lee agreed to lend the money to him or to his wife and the bankrupt answered:
No, there was no understanding as to who the money was going to be lent to, whether it was going to be lent to me or to my wife. All he was agreeing to do was to provide the funding.
This transcript revealed that the bankrupt approached Mr Lee about the loan, having previously borrowed money from Mr Lee. The bankrupt’s wife was left to contact Mr Lee when the funds were required and to inform him how much money was needed. Mr Lee had not previously advanced money to the bankrupt’s wife.
In the circumstances of the bankrupt’s pending liability under the guarantees and QT’s financial problems, the bankrupt took out a personal loan from Mr Lee. I am not satisfied as to the precise terms of that loan, and find it improbable that such a sum would have been advanced without security, otherwise than based upon a relationship of trust between Mr Lee and the bankrupt.
Whether the loan was actually arranged by the bankrupt or his wife is less than clear. The bankrupt says that his wife borrowed the money, she says that they jointly borrowed. The loan was recorded as a liability in the books of a company called TACS Sdn Bhd, which was controlled by the bankrupt. The loan was ultimately repaid from the proceeds of the sale of the bankrupt’s home in Kuala Lumpur, Malaysia.
It appears clearly that the purpose of the advance was to provide the bankrupt and his wife with the funds to purchase the second Kew property. The loan was, on the evidence, an informal one, but for a significant sum.
The loan was clear for a private purpose on the part of the bankrupt and his wife, and the monies ultimately advanced to them. The repayment was made from the sale of the home in Malaysia. If the loan was to TACS Sdn Bhd, it is clear that the funds were advanced at the direction of the bankrupt or his wife to Australia. There is no evidence to suggest that Mr Lee understood that he was loaning money to the company rather than the bankrupt and his wife. I am not persuaded that the book entry by the company can be taken to represent the real transaction, on the oral evidence (such that it is) of the bankrupt and his wife in the various transcripts. Even if Mr Lee lent the funds to the company, it is clear that the bankrupt and his wife had received the funds, which they applied to their own purposes and then repaid from the sale of the home in Malaysia. As a result, they received money from Mr Lee or the company, which they used for their own purposes and then repaid.
On the state of the evidence, it appears that the loan was advanced on the basis of the personal relationships of the bankrupt and his wife with Mr Lee.
At page 30 of the transcript of 4 July 2005 the bankrupt explained that his son ‘didn’t know the details [of the payment for the second Kew property] because I arranged the – I talked to Mr Lee in Singapore, my friend, and he sent the money to the lawyers in Melbourne.’ Although he went on (at page 31) on this occasion to say that his wife repaid it using funds from TACS, it seems clear that it was repaid from the funds realized by the sale of a house in Malaysia that he owned.
At page 57 of the transcript of 19 July 2007 the bankrupt had the following exchange with Mr Galvin of Counsel:
Well you saw [the second Kew property] become available at a good price - - -?--- Yes.
You took advantage of the opportunity to by it for a cheap price, albeit through another entity, through the assistance of others. But beneficially it was your investment, subject to the advance of Mr Lee:--- Yes.
This is not a case of an uneducated or naïve bankrupt. He is a businessman who has been involved in a number of companies, and worked as a tax planner. I find this evidence persuasive in determining the true nature of the transaction.
I am satisfied that the whole of the money came to Australia for the bankrupt to effect the purchase of the second Kew property.
Subsequently, according to the fifth respondent, the bankrupt continued to pay the upkeep, rates and levies for the second Kew property by transferring the funds to the fifth respondent (see transcript of 27 May 2005 at page 216).
The Fourth Transfer
The bankrupt had pledged a number of securities, as pleaded in the statement of claim, as security for the advance of $100,000 by the Mercantile Bank, to secure the Second transfer.
The securities had a value of around ₤150,000 sterling (and there was a small amount in Malaysian currency). The bankrupt transferred the securities to Poh, the bankrupt’s wife, and the third and sixth respondents in March 1992.
It is unclear what happened to the securities thereafter. The MFT was wound up on 10 March 1992 and the applicant is unable to prove whether the funds had been depleted from the trust before then, nor whether any of the beneficiaries received the funds. There is no evidence that any of the beneficiaries still have the funds.
The applicant has the onus of proving that the funds are available to be recovered. If the funds have been lawfully dispersed before the trustee intervenes, the applicant can not succeed: Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322.
In the circumstances I find that the applicant cannot succeed with respect to the fourth transfer.
The Fifth Transfer
The applicant did not pursue the fifth transfer claim. I therefore dismiss the claim in so far as it relates to the fifth transfer.
The bankruptcy
There is no issue that the first respondent is a bankrupt.
The bankruptcy was trigged by a judgment in England many years later in 1995, unconnected with the creditors at the time of the transfers, none of whom have proved in the bankruptcy.
Would the property have been part of the bankrupt’s estate?
In this case the operation of s.121(1)(a) is a real issue, having regard to the time that has elapsed between the dates of the transfers and the present proceedings.
I have had careful regard to the large number of years that have passed. In many cases the time that has lapsed would, of itself tell against a finding that s.121(1)(b) is satisfied. However the particular facts of the case must be considered.
The transfers were clearly for the purpose of purchasing real properties to provide homes for the bankrupt, his wife and children. Those homes were purchased at the time of the transfers. The homes have never been sold, but occupied by family members since their purchase.
The course of events demonstrates that it was never intended that the homes would not be retained – they have been retained. It is also clear that there was an intent to purchase property in Australia, and therefore even if the transfers were not made to family members or trusts then the bankrupt would have probably retained the property, just as he held property in Asia prior to the transfers.
Whilst the bankrupt has stated on various occasions that he had no need for assets and that his family would care for him, I find myself unable to accept such claims: he was, but for the financial difficulties, a successful tax consultant who had operated businesses and made extensive international investments. Until the solvency difficulties, property was in his name and not divested to family members.
To the extent that the property transferred was real property, I am satisfied that the property would probably have become part of the transferor's estate if it had not been transferred. To the extent that the transfers were arguably transfers of money used by the transferees, I am satisfied that the property would probably have been available to creditors if it had not been transferred as it would nonetheless have probably been used to purchase the real properties at Kew.
The main purpose of the transfers
Background to the transfers
The bankrupt was a director of Quality Tractors Sdn Bhd (‘QT’) between 1973 and 1976. QT traded in used tractors and operated out of Kula Lumpur, Malaysia. The bankrupt executed several guarantees between 1974 and 1975, securing QT’s debts:
a)A guarantee in favour of International Merchant Bankers (‘IMB’);
b)Two guarantees in favour of United Asian Bank (‘UAB’);
c)A guarantee in favour of the Overseas Chinese Banking Company (‘OCBC’); and
d)A guarantee in favour of Overseas Chinese Finance Corporation (‘OCFC’);
The applicant says that QT was in financial difficulty in 1976 and 1977. QT’s financial difficulty meant the bankrupt was exposed under the guarantees he had executed to secure QT’s debts. The bankrupt was aware of the company’s financial difficulty as he was kept informed of its affairs by the managing director, Mr Phillip Leong.
Mr Leong’s Evidence
Mr Leong gave evidence before me and was cross-examined. I found him an impressive witness and accept his evidence.
In his affidavit sworn on 24 July 2009, Mr Leong stated he was of the view that QT was having financial problems and having difficulty paying its debts as and when they fell due in the mid 1970’s. At the hearing Mr Leong gave evidence that towards the end of 1976 the creditors were ‘pressing’: that is, they were continuously demanding payment of debts then due. He said he believed QT was under capitalised and too highly leveraged.
Mr Leong’s cross-examination revealed that he had entered into an agreement to buy QT’s shares on 28 June 1977. Mr Leong expected to receive $200,000 commission for facilitating an unrelated transaction. That commission would have enabled him in part to fulfil the share purchase agreement that Mr Leong entered into. It was put to him that the share purchase agreement showed that Mr Leong believed QT was viable and could make a profit in the future. However, Mr Leong explained that he did not purchase the shares on the basis that QT was a good investment, nor that there was an expectation that he would ultimately own the company pursuant to the share purchase agreement.
Mr Leong explained that the bankrupt remained in control of QT. He said that the agreement was part of a scheme for QT to obtain funds, and attempt to recapitalise the company. Mr Leong intended to on-sell the shares to ethnic Malaysian directors to take advantage of their access to cheap finance under Malaysia’s then economic policy, Bulli Putera, which made finance available to ethnic Malaysians on very favourable terms. This policy would have then allowed QT to apply for additional financial facilities from the bank on the basis that indigenous Malaysians were involved in the business. It was a scheme that was unsuccessful.
Mr Leong gave evidence that in or about 1976 or 1977 QT defaulted on its facilities. UAB had provided QT with a letter of credit to facilitate the importation of tractors. Once the tractors were delivered, QT had to pay within a limited period of time, which it failed to do. The amounts due to UAB exceeded the authorised limits.
The bankrupt, in the transcript of 20 February 2008 at page 46-47, said that the company’s financial position was of concern to him by 1976, as ultimately ‘it would fall on the guarantors’, and he was a director of the company at the time as well. He explained his concerns were about the over ordering of tractors not only beyond what could be sold, but ‘beyond the limits of funds allowed by the banks to the company.’ There is no doubt that the bankrupt was aware he had given guarantees before 1978 (see transcript of 2 April 2008 at page 7).
Mr Leong executed a guarantee on 22 September 1977 on the basis that UAB would, in return, withhold issuing proceedings against QT for exceeding the limits. This is consistent with paragraph 4(a) of UAB’s amended statement of claim in the Kuala Lumpur High Court dated 7 October 1980:
The Company subsequent to the execution of the aforementioned Guarantees and Debentures exceeded the limits referred to in paragraph 3, the Defendants in consideration of the Plaintiffs (a) withholding legal action against the Company on the Debenture…the Defendant to execute guarantees referred to below on the dates set out below which they did (emphasis added. See page 206 of the court book.)
As events unfolded it became clear that the guarantees were insufficient to satisfy the creditors. Various creditors commenced proceedings or made demand under the guarantees against the bankrupt.
Proceedings against the bankrupt
In or around 1977 IMB commenced proceedings against the bankrupt claiming the amount of $337,234.43. On 20 January 1978, UAB demanded payment of part of the amount claimed in the bankruptcy petition of MYR3,786,000. On 4 February 1978, UAB demanded payment from the bankrupt of the monies owing under each of the guarantees.
There is nothing to suggest that the bankrupt could meet these claims. The First and Second Transfers occurred in February/March 1978, after these demands.
OCBC and OCFC demanded payment from QT of its outstanding debt of MYR621,331.06 on 6 and 22 November 1978 respectively. IMB obtained summary judgment against the bankrupt on 17 December 1979, having demanded payment of MYR337,234.43. UAB commenced proceedings against the bankrupt in the Kuala Lumpur High Court on 7 October 1980.
In August 1983 the Third Transfer was made.
Prior to the Fourth Transfer on 9 March 1992, UAB obtained judgment against the bankrupt (on 7 March 1985) for MYR3,786,179.25. The bankrupt was subsequently able to settle UAB’s bankruptcy petition for a nominal sum of MYR60,000 (after 28 January 1993) on the basis that he ‘did not have any assets’. The bankrupt conceded this point in the proceedings under s.77C of the Bankruptcy Act: see page 6 of the transcript (or page 589 of the court book), although he also claimed to have had a claim with respect to the guarantee.
In the transcript of the proceedings under s.77C Bankruptcy Act 1996 the bankrupt gave evidence that he had no assets in his name.
The bankrupt had a substantial level of indebtedness then due and owing, or soon to be due under the guarantees. He would not have been able to meet the debts and the business was not able to meet the debts.
Counsel for the respondents argued that the bankrupt had recourse to borrowings from the Mercantile Bank, the share purchase agreement with Mr Phillip Leong (including the indemnity under that agreement) and borrowings from Mr Lee Boon Leong. With respect to the latter, it appears that the respondents are relying on the fact that as Mr Lee Boon Leong had in the past lent the bankrupt and/or his wife funds to purchase the second Kew property, it must demonstrate that he had some capacity to meet his debts. Counsel argued the fact that the bankrupt had no assets in his name is not determinative of the issue of insolvency.
Whilst the ability to obtain loans may be indicative of solvency, this is because it may give rise to an inference that the borrower must have some capacity to provide security. Here the borrower (the bankrupt) appears to have had nothing but a scheme to access the Malaysian low interest rate funds for an ailing business. The borrowings he did achieve were used to move funds out of the jurisdiction and place assets in other persons’ names.
He failed to discharge the UAB debt at the time when proceedings had commenced and when judgment was entered against him. As the Trustee’s counsel points out the bankrupt, at the last minute (after a creditor’s petition was issued) settled for a fraction of the sums owing because he did not have any assets. He has given no evidence of assets or an income stream, nor details of any real defence.
There is no evidence as to whether the IMB debt was ever paid. The debts ultimately resulted in judgments against the bankrupt, and there is nothing to suggest they were paid, even though that would be within the bankrupt’s knowledge. The creditors are banks to whom the bankrupt had granted personal guarantees.
In the circumstances of this case I draw the inference that the debts were not met. I am satisfied that at the time of each of the transfers the bankrupt was insolvent or about to become insolvent.
Awareness of the imminence of his liabilities
In the transcript of the Federal Court proceedings on 20 February 2008 at page 37 at line 40 the bankrupt recalled that he had guaranteed QT’s debt sometime before 1978. The bankrupt must have been aware he had a guarantee pending for a company that was in real financial difficulty.
According to Mr Leong’s evidence, which I accept, the bankrupt was responsible for QT’s finances. The bankrupt would have understood that his personal liability would be triggered under the guarantee if the Company defaulted.
Awareness of the size of the liabilities
By 28 October 1978, several months after the purchase of the first Kew property, the bankrupt was informed that a demand for payment in the amount of $423,990.00 was made by OCBC. Judgment in the sum of $3,786,179.25, was entered against the bankrupt in 1985, two years after the third transfer, for the UAB debt. There is a strong inference that the bankrupt must have known he had significant contingent liabilities pending against him.
In a letter to UAB dated 27 April 1993, the bankrupt attached a brief summary of the events relating to QT’s affairs. The summary reveals that towards the end of 1977 or the start of 1978, that is before the First Transfer, the bankrupt suggested to the bank’s CEO, to take action to recover the advances given to QT. This evidence is consistent with the bankrupt’s concern of the level of his exposure on the guarantee and wish to bring it to an end. Two months later, the money is transferred into the family trust to buy real property in Australia.
Awareness of the company’s financial difficulty
At page 800 of the transcript of the Federal Court proceedings on 20 February 2008 the bankrupt stated that in 1976 or 1977 he had concerns about QT exceeding limits on the funding of UAB since as ‘[u]ltimately it would fall on the guarantees’. The bankrupt also expressed his concern in the way the company was being operated.
On 19 January 1978 UAB appointed receivers over QT’s assets. Importantly, the appointment of the receivers occurred before the transfer of the funds used to purchase the properties in February/March 1978.
Counsel for the applicant relied upon the transcript of the proceedings under s.77C on 27 October 2005. It was put to the bankrupt that he created a trust two months after the extension of the guarantee for the following reason: to divest himself of his assets so that there would be no assets available for distribution if he became bankrupt. He rejected the allegation, claiming an application for his family to migrate to Australia had already been submitted. However, I need to take into account the timing of this move.
QT’s attempt to obtain cheap finance under the Malaysian government scheme is indicative of an under-capitalised company. The bankrupt owned 100% of QT’s shares, he was a director up until 1976 and he was kept informed by Mr Leong. Therefore, the bankrupt was well aware of the company’s financial position. The post-transfer events, namely the demands of payment and judgments, speak to the level of debt that the bankrupt must have known about. With four guarantees pending on a company that he knew was struggling financially, the bankrupt created a family trust in late 1977 and went on to purchase the first Kew property, situated outside of Malaysia.
Conclusions
I find that at the time of the First, Second and Third transfers, the bankrupt’s main purpose was to place assets beyond the reach of the creditors, or at least to hinder or delay the process of making property available for division amount his creditors. It appears that this purpose was achieved with respect to the claims against him in Malaysia, with creditors ultimately receiving nothing, or a miniscule proportion of the debts.
I am also satisfied that the bankrupt was about to become insolvent at the time of the First and Second transfers, and thereafter was insolvent.
As a result I am satisfied that the applicant has satisfied the requirements of s.121(1)(b) both directly, and in reliance on the presumption in s.121(2).
The Remedy available
The respondents argue that the applicant’s relief is limited to the interest that the bankrupt would have at the point the court declares the transaction void. Allsop J of the Federal Court stated in Trustee of the Property of O'Halloran, in the matter of O'Halloran v O'Halloran [2002] FCA 1305 at paragraph [79]:
If prior to the commencement of the bankruptcy, the property transferred has been paid away or sold, no personal remedy lies against the transferee, even one with notice of a fraud by the transferor: Brady v Stapleton, supra. This is so because up to the commencement of the bankruptcy (even after avoidance) the transferee is taken to have had full right and title to deal with the property. (emphasis added)
This is consistent with the statement of Dixon CJ and Fullagar J in Brady v Stapleton [1952] HCA 62 at [15]-[16]; (1952) 88 CLR 322 at 334:
The truth seems to be that, although the statute uses, and most emphatically uses, the word "void", the courts have always treated a fraudulent assignment as effective unless and until a creditor or creditors intervene by levying execution or taking legal proceedings…
There appears to be no authority which casts any doubt on the cases cited above. And, if the position created by the statute is that which is indicated in those cases, one can find no basis for a personal liability on the part of the company in the present case. It is only on the footing that the company sold something to which it had no title or that the sale was otherwise wrongful when made, that a personal liability on the part of the company could be based. But the company, when it sold the assets in question, sold something to which it had a title, albeit a defeasible title. The sale was not wrongful when made. If the company were selling something to which it had no title, it might well be that the trustee in bankruptcy could claim to stand in the shoes of the true owner, the bankrupt, and maintain money had and received. But this is not the position. The company had a title, though a defeasible title. The defeasance has, in the event, taken place, but it cannot relate back so as to make a sale by the company wrongful and impose a personal liability on the company. (emphasis added)
In Parker v R [1997] HCA 15; (1997) 143 ALR 293; (1997) 71 ALJR 598; (1997) 186 CLR 494 at 502 Brennan CJ stated:
The equitable rule … allows the tracing of money into identifiable forms into which it is changed. In Brady v Stapleton Dixon CJ and Fullagar J said that:
" Cases in which one who has in his hands the property of another converts that property into some other form or mixes property of another with his own have been familiar both to courts of law and to courts of equity. Courts of law were concerned with legal ownership, and courts of equity with equitable ownership, but, up to a point, as is well known, the doctrines of the two systems were identical."
The passage I have cited from Frith v Cartland was cited with approval by Jessel MR in In re Hallett's Estate; Knatchbull v Hallett. In that case Jessel MR, citing earlier authority, pointed out that the changing of property belonging to a person from one form into another makes no difference to the right of that person " 'as long as it can be ascertained to be [the product of that person's property], and the right only ceases when the means of ascertainment fail' "… (emphasis added)
In Commonwealth Bank of Australia v Mohamad Saleh and Ors [2007] NSWSC 903 Einstein J stated:
[26] The property which is traced does not have to be the exact property which was misused in the first place. It is sufficient if the link between the original property and the traceable property can be established.
[27] In Foskett v McKeown [2000] UKHL 29; [2000] 3 All ER 97 at 120 Lord Millet described the process of tracing in the following terms:
“Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. ...(emphasis added)
The First & Second transfers
The applicant seeks declarations that he is entitled to the first Kew property on the basis that it was transferred by the bankrupt.
The applicant argues that where the money is used to acquire specific property and for the purpose of acquiring the property in the name of another, the property is treated as one that has been transferred. In other words, the house is transferred to the applicant: Official Trustee in Bankruptcy v Alvaro and Others (1996) 138 ALR 341; Trautwein v Richardson [1946] ALR 129.
In contrast, the respondents argue that the appropriate order is a charge over the property.
In this case I have found that the real property was, in substance, purchased by the bankrupt and transferred to the trust. As a result the applicant is entitled to recover the first Kew property.
If I am wrong in concluding that the real property was transferred, the bankrupt nonetheless funded the entirety of the first Kew property. In these circumstances the transfer of the funds would be void as against the trustee. The transfer is void and the recipients would hold the funds on trust for the applicant. The entirety of the purchase price of the first Kew property came from the funds, as no other funds were used to make the purchase. Thus, the funds can be traced to the property and the property recovered.
In such circumstances the applicant can recover the first Kew property, just as the applicant could have recovered money in a bank account, even though it had clearly changed from the original money transferred: see Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322.
In this respect the case differs from the authorities where only an equitable charge was granted for the sum transferred, as in those cases the transferred sum formed part of the purchase price, without evidence of the proportion of the price that the transferred funds represented: see Official Trustee in Bankruptcy v Alvaro [1996] FCA 1493; (1996) 66 FCR 372; (1996) 138 ALR 341; Fodare Pty Ltd v Official Trustee in Bankruptcy [2000] FCA 1721, and Anscor Pty Ltd v Clout (Trustee) [2004] FCAFC 71.
The cases limiting the remedy to a lien appear to be providing a more limited tracing remedy as a result of the matters discussed in Re Hallett's Estate (1880) 13 Ch D 696. However, where the evidence enables pro rata sharing in a mixed substitution, tracing rather than a mere charge is available: see Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102, particularly Lord Millet’s spirited attack on the proposition that a fiduciary relationship must be established to allow equitable tracing through a mixed fund.
However, the impact of the Bankruptcy Act 1966 may cause some departure from the usual principles. In O'Halloran v O'Halloran [2002] FCA 1305 Allsop J touched on this issue, saying:
[83] The applicant claims a declaration that the whole of the Property is held for the trustee. That assumes that any increase in value in the property since 31 January 1995 is to be for the account and benefit of the trustee. It does not follow at all. From 31 January 1995 to the date of the commencement of the bankruptcy, the Property was that of the respondent; notwithstanding avoidance, that still can be seen as the position. From the commencement of the bankruptcy, the identified transformed property is to be taken as held for the benefit of the trustee.
[84] According to the Full Court in Ferrier and Knight (As liquidators of Compass Airlines Pty Ltd) v Civil Aviation Authority [1994] FCA 1571; (1994) 55 FCR 28, 92-93 and the majority of the New South Wales Court of Appeal in Star v O'Brien (1996) 40 NSWLR 695, interest does not begin to run upon a preference until the date of avoidance by the liquidator.
[85] Thus, there may be a real issue about who is entitled to any increase in value of the Property between 31 January 1995 and 24 September 1999.
Unfortunately there does not appear to be a published decision answering the question that his Honour raised. Whilst the section is only engaged on the commencement of the bankruptcy, the transaction is void, not avoided at the commencement of the bankruptcy. I have considered carefully various forms in which this problem may arise. In the case of money paid, and simply sitting in a safe then interest from the date of demand is an eminently just outcome for the parties.
If one applied the reasoning possibility raised in O’Halloran’s Case to a case involving a simple transfer of land from the bankrupt, then upon setting aside the transfer, one would need to identify the increases in value between the date of the impugned transaction and the date of bankruptcy as the respondent would be entitled to retain that part of the increase in value as accrued between the two dates. Such an outcome can not be appropriate – it simply provides a windfall to the person who has the asset in the interim, in addition to the use of the land (such as the rents or profits that may have been earned from the land during the intervening period). If such an approach were adopted it would mean that a fraud on creditors would be partially successful (at least to the extent that there were accretions in value of the asset transferred in the time prior to bankruptcy). In a case such as this the fraud on the creditor would be largely successful as the value of homes in Kew would be in the order of 5 to 10 times that paid for the first Kew property.
Once one reaches the conclusion that in a case of a simple transfer of land being void, that the whole of the land is delivered up to the trustee, it follows that where there is a substitution of assets, the same outcome must flow as a substitution is simply converting an asset from one form to another.
I note that in this case there is no claim that there were repairs or improvements, or other contributions to the property that would be relevant.
The Third Transfer
The applicant seeks to recover the second Kew property. It appears that the bankrupt purchased the property as an investment, and therefore the transaction can be set aside under s.121 of the Act.
Even if I am wrong in this finding, the bankrupt nonetheless provided the purchase funds for the property, creating sufficient certainty to allow the funds to be traced to this asset.
As a result the applicant is entitled to trace the funds into the real property.
Conclusion
I therefore give judgment for the applicant with respect to the First, Second and Third transfers and make declarations and orders accordingly.
I dismiss the application in so far as it deals with the Fourth and Fifth transfers.
I certify that the preceding one hundred and thirty-two (132) paragraphs are a true copy of the reasons for judgment of Riethmuller FM
Date: 2 September 2011
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