Norgard, R.S. & La Rosa, F.C.L. v Rocom Pty Ltd

[1990] FCA 444

Re: ROSS STEWART NORGARD as Trustee in Bankruptcy of the Estate of FRANCESCO
CANDELORO LA ROSA and LINDA ROBYN LA ROSA
And: ROCOM PTY LIMITED
No. 12 of 1990
FED No. 444
Appeal

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Northrop(1), Davies(1) and Lee(2) JJ.

CATCHWORDS

Appeal - bankruptcy - transactions involving disposition of monies by bankrupt - whether disposition a "settlement" within the meaning of sub-s. 120(1) of the Bankruptcy Act 1966 - nature of a "settlement".

Bankruptcy Act 1966 (Cth) ss.5 and 121; sub-ss.120(1) and (8); para.120(1)(a)

Barton v. Official Receiver (1984) 4 FCR 380; (1986) 161 CLR 75

Re Kastropil; ex parte The Official Trustee in Bankruptcy, Unreported (Federal Court of Australia, 14 July 1989)

Re Estate of La Rosa; ex parte Norgard v. Gillbanks, Unreported (Federal Court of Australia, 23 October 1989)

Re Player; ex parte Harvey (1885) 15 QBD 682

In re Plummer (1900) 2 QB 790

Sharrment Pty. Limited v. Official Trustee in Bankruptcy (1988) 82 ALR 530

Williams v. Lloyd (1934) 50 CLR 341

HEARING

PERTH

#DATE 16:8:1990

Counsel for the Appellant: Mr G.A. Palmer QC and

Mr G. Murphy

Solicitors for the Appellant: Messrs Blake Dawson Waldron

Counsel for the Respondent: Mr N. Hasluck QC and

Mr P. Bogue

Solicitors for the Respondent: Messrs Bogue and Pass

ORDER

The appeal be dismissed.

The appellant pay the respondent's costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is an appeal from the judgment of a single judge of the Court. His Honour dismissed with costs an application seeking recovery by the Trustee in Bankrputcy of the estate of Francesco Candeloro La Rosa ("La Rosa") and his wife, Linda Robyn La Rosa, of sums totalling $290,000, the payment of which was alleged to have been a settlement by the La Rosas in favour of the respondent, Rocom Pty Limited ("Rocom") in May 1988.

1. In this appeal, we are concerned only with the operation of s.120 of the Bankruptcy Act 1966 (Cth), which provides, inter alia:-
   

"(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; . . .

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."

(8) In this section, 'settlement of property' includes any disposition of property."

The term "property" defined in s.5 is as follows:-

"'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."

1. In May 1988, the La Rosas traded in partnership in Albany as motor vehicle dealers under the name "Moor Motors". A company of which they were the shareholders also operated two motor vehicle wholesaling businesses under the names Town Auto Auctions and Australian Auto Auctions. Rocom also carried on business as a motor vehicle dealer under the name Oxford Allenby Motors. Mr Alfredo Barbagallo ("Barbagallo") was a director of Rocom and its effective controller. La Rosa and Barbagallo knew each other as persons in the motor vehicle trade.

2. At La Rosa's request, the two men, on behalf of their respective organisations, entered into two transactions, the ultimate purpose of which was not explained by the evidence before the learned trial Judge and was not truthfully explained to Barbagallo. In substance, in each case, there was a purported sale of stock by the La Rosa Group to Oxford Allenby Motors and a resale thereof shortly thereafter giving a small profit to Rocom as proprietor of Oxford Allenby Motors.

3. In the first transaction, which occurred on or about 13 May 1988, four items of property were involved. Oxford Allenby Motors paid three cheques totalling $1,000,000 for the items and received back a cheque for $1,040,000 dated 13 May 1988 drawn on the Moor Motors' account. The Oxford Allenby cheques were debited to Rocom's account on 13 May 1988. The return cheque was not debited to the Moor Motors' account until 17 May 1988. On 16 May 1988, there was a further transaction purportedly covering the whole of the stock of the La Rosa Group. Cheques totalling $10,000,000 were paid over by Rocom and a return cheque for $10,250,000 was paid for the purchase back by Moor Motors of the stock. In each case, some but not all of the paperwork for the transfer and re-transfer of the stock was carried out; but Rocom never took possession of any stock and, so far as the La Rosa Group was concerned, trading continued as usual.

4. The learned trial Judge held that such part of the transactions as purported to represent the sale and repurchase of trading stock were a sham. We accept and agree with his Honour's finding in this respect and need not review the authorities which were recently discussed in Sharrment Pty Limited and Ors v. Official Trustee in Bankruptcy (1988) 82 ALR 530.

5. But the transactions as a whole were not shams and the trial judge did not find them to be so. His Honour held:-
   

"I am satisfied that neither La Rosa nor his companies nor Rocom regarded themselves as undertaking or intended to undertake the sale and purchase of stock ostensibly the subject of their dealings. The true transaction in each case contemplated a short term advance by Rocom to be repaid virtually instanter by the return of the moneys with a substantial premium."

His Honour subsequently said, as to the payments made by the La Rosa Group:-

"They were, in my opinion, straight out payments made in order to obtain, for whatever ultimate purpose, the passage of money through the accounts of one or more of Moor Motors and the two companies, Hobourne Pty Ltd and Feli Pty Ltd."

We accept and agree with his Honour's finding in these respects.

1. The transaction was a strange one and La Rosa's ulterior purpose has not been disclosed. But so far as the La Rosa Group and Rocom were concerned, the transactions were commercial dealings in which Rocom took the risk of advancing moneys to be repaid instanter or shortly thereafter. For doing so, Rocom was offered and received an appropriate premium.

2. In this light, it could be said that the payments by the La Rosa Group to Rocom were payments "made . . . in favour of a purchaser . . . in good faith and for valuable consideration" within the meaning of paragraph (a) in s.120(1). See the discussion in Barton v. Official Receiver (1986) 161 CLR 75. However, that issue appears not to have been raised before the trial Judge. The matter appears to have proceeded on the footing that the liability to refund the $290,000 depended upon whether or not the payment of that net benefit constituted a "settlement" for the purposes of s.120.

3. The submission put to the trial Judge by counsel for the Official Receiver, and put again in this appeal, was that the payments by the La Rosa Group to Rocom constituted a "disposition of property" and that, since 1966 when the provision was cast in its present form, the authorities commencing with Re Player; ex parte Harvey (1885) 15 QBD 682, which took the view that the section avoided only transactions in the nature of a settlement, no longer applied. The trial Judge had rejected that view in Re Kastropil (unreported delivered 14 July 1989) and in the Gillbanks case (unreported delivered 23 October 1989). Because the matter was again argued before him, the trial Judge made a scholarly examination of the history of the legislation, of relevant authorities in this country, in the United Kingdom and in Canada and what had been intended by the changes introduced by the Act.

4. To repeat the same material would detract from his Honour's careful analysis, with which we respectfully agree.

5. It is clear from the use of the word "settlement" in s.120 and the use of the term "disposition of property" in s.121 and indeed from the overall content of s.120, that s.120 is not concerned with any disposition of property but is concerned with dispositions of an enduring nature, that is to say, dispositions in the nature of a settlement.

6. Moreover, the matter has been put beyond doubt by the authorities. In Williams and Ors v. Lloyd and Anor (1934) 50 CLR 341, Dixon J., with whom Rich, Starke, Evatt and McTiernan JJ. agreed, said at p 375:-
   

"The last transaction invalidated by the orders under appeal is that by which 1,000 pounds was transferred on 19th November 1929 to a Savings Bank account in the names of the bankrupt's wife and daughter. I have come to the conclusion that this payment was a settlement within the meaning of sec.94. In In re Player; Ex Parte Harvey (1885) 15 QBD, at p 687, Cave J., after stating the course of the legislation and judicial decision and discussing the inclusion of 'money' in the definition of 'property' concluded:- 'The transaction must be in the nature of a settlement, though it may be effected by a conveyance or transfer. The end and purpose of the thing must be a settlement, that is, a disposition of property to be held for the enjoyment of some other person. Thus a purchase by the father of shares, which are registered in the son's name, and upon which the son receives the dividends, is within the statute. But where the gift is of money to be expended at once, the transaction is not, in my opinion, within sec.47 of the Act of 1883' - the provision upon which sec.94 is founded. This exposition of the provision appears to have gained the approval of the Court of Appeal (In re Tankard (1899) 2 QB 57, approved in In re Plummer (1900) 2 QB 790; In re Branson; Ex parte Moore (1914) 3 KB

1086. But it does not mean that there shall be any restriction on the donee's power of disposal, but merely that the retention of the property in some sense must be contemplated and not its immediate dissipation or consumption (In re Tankard (1899) 2 QB, at p 59). In the present case I think that the proper inference is that the sum of 1,000 pounds was put by the bankrupt in the joint names of his wife and daughter as a provision to be retained by them in some form or other, and not to be spent at once."

1. In Barton v. Official Receiver (1984) 4 FCR 380, the facts were that there had been a loan by the bankrupt to his uncle of substantial size, $170,000.00, unsecured and made for a term of 20 years. At p 395, Lockhart J. said:-
   

"In my opinion for there to be a 'settlement of property' within the meaning of s 120 there must be a settlement in the ordinary sense of the word, a transaction in the nature of a settlement, though it may be effected by any disposition. The retention of the property in some sense must be contemplated and not its immediate dispersion.

The transaction impugned by the respondent was not merely the payment of $170,000 by the bankrupt to the appellant. It was a loan of money upon specific terms that included the repayment of an equivalent sum upon the expiration of twenty years. That is itself sufficient to satisfy the requirement that the property be retained in some sense and not immediately dissipated or consumed. But the transaction went further than that. The exchange of cheques by the appellant, the bankrupt, Cordec and Inexco, the contract of sale and memorandum of transfer of the house and, the deed of loan and the documents relating to the sale of the shares were all part of the one transaction which necessarily required that the money advanced by the bankrupt to the appellant be used forthwith for the purpose of buying the house and the shares. This seems to me to plainly satisfy the definition of a 'settlement of property' for the purposes of s 120."

On appeal to the High Court, reported at (1986) 161 CLR 75, Gibbs C.J., Mason, Wilson and Dawson JJ. rejected that view that the changes introduced by the Act altered the operation of the provision. For present purposes, it is sufficient to note their Honours' statement at p 78:-

"It is not now disputed that the payment in question was a 'settlement' within the meaning of s.120. Clearly it was, bearing in mind the broad definition of 'settlement of property' in s.120(8) as including 'any disposition of property' and the circumstances in which the payment was made. Although made in the form of a loan, no part of the principal was repayable for twenty years and the purpose of the loan was to enable the appellant to buy property in the form of a house and company shares. There being no contemplation of the immediate dissipation or consumption of the money, the established principles governing the making of a settlement were satisfied: See Williams v. Lloyd; In re Williams (1934) 50 CLR 341, at pp 364, 375; Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232, at pp 247-253."

1. These authorities show that, as the term "settlement" includes "any disposition of property", the form of the transaction is not significant, so long as a disposition of property, including money, is involved. Nevertheless, s. 120 will not operate to avoid a transaction unless the disposition was intended to secure an enduring benefit and there was no contemplation of the immediate dissipation or consumption of the property which passed.

2. In the present case, the premiums totalling $290,000 were not of a capital or enduring nature. From Rocom's point of view, whether they represented profits arising from the purchase and sale of trading stock or whether they represented premiums received on the loan of moneys, they were of a revenue nature and formed part of the income of Rocom's business. The moneys were not intended to be held in any form but were available as profits for use in any way that Rocom wished to use them.

3. Counsel for the Official Trustee argued that the transactions were transactions whereby the La Rosa Group conferred a benefit upon Rocom, that that benefit was of a substantial sum and, being of a sustantial sum, provided an enduring gain for Rocom. His Honour's findings of fact, which accorded with the evidence, are against that submission. The $290,000 was not a benefit which the La Rosas intended to confer upon Rocom. It was the price which the La Rosas had to pay to have the transaction effected. And, as the trial Judge said:-
   

"There was no evidence in the present case to suggest that La Rosa intended or contemplated that what I have called the premium payments paid to Rocom would be retained in any way or form."

1. In the result, we are of the view that the appeal should be dismissed with costs.

JUDGE2

This is an appeal from the judgment of a single judge of this Court in a matter which involved a sequence of extraordinary events, and in which not all material facts were disclosed.

1. I have had the advantage of reading the draft judgment of Northrop and Davies JJ. which states the relevant facts and it is unnecessary for me to restate them in full. In addition, I agree with the reasons expressed by their Honours and provide these separate reasons only for the purpose of adding some minor elaboration.

2. Mr and Mrs La Rosa ("the La Rosas") carried on business under the name Moor Motors in Albany in the south of the State of Western Australia. As proprietors of that business they were customers of the Albany branch of the Rural and Industries Bank of Western Australia. The La Rosas also controlled Hobourne Pty. Ltd. which carried on business as a trader in motor vehicles under the business names Australian Auto Auctions and Town Auto Auctions. They were also the controllers of the company Feli Pty. Ltd. It was not disclosed whether those companies also maintained accounts with the Albany branch of the Rural and Industries Bank.

3. On Friday 13 May 1988, Rocom Pty. Ltd., controlled by Barbagallo, drew three cheques on the Australia and New Zealand Banking Corporation Limited (A.N.Z. Bank) payable to the following payees:
   

Australian Auto Auctions $200,000 Feli Pty. Ltd. $400,000 Moor Motors $400,000

1. The three cheques were handed to La Rosa apparently at Rocom's premises at Osborne Park in Perth. At the same time La Rosa drew a cheque in the name of Moor Motors payable to Barbagallo in the sum of $1,040,000.

2. The three cheques drawn by Rocom were deposited by La Rosa to the credit of the Moor Motors account on the same day, presumably soon after he left Rocom's premises because the deposit was made at a branch of the R. and I. Bank at Leederville, not far from Rocom's premises. The three cheques were debited to the Rocom account on that day.

3. The Moor Motors cheque, payable to Barbagallo, was credited to the Rocom account on 17 May 1988. As a result, the Moor Motors account received the benefit of the deposit of the proceeds of the Rocom cheques for a period of four days before funds were drawn from the account to meet the Moor Motors cheque when presented for payment by Rocom's bank.

4. On Monday 16 May 1988, three cheques drawn by Rocom in a total sum of $10m were handed to La Rosa. The three payees of the cheques were:
   

Australian Auto Auctions $1.5m Town Auto Auctions $1.2m Moor Motors $7.3m

A cheque dated 16 May 1988 was drawn by Moor Motors payable to Oxford Allenby Motors in the sum of $10.25m. It is not clear where the delivery of the cheques took place, but the Moor Motors cheque bears the endorsement of the stamp of the Albany branch of the A.N.Z. Bank indicating that the cheque was deposited at that branch for credit to Rocom's account at Perth. An employee of Rocom travelled to Albany on, or about, 16 May 1988 and returned to Perth with a warrant from the Albany branch of the R. and I. Bank that the Moor Motors cheque, in the sum of $10.25m, would be met.

1. The three cheques drawn by Rocom were presented for payment on the day of delivery, 16 May 1988, and returned, unpaid, on 17 and 18 May 1988. The cheques were re-presented on 18 May 1988, honoured and credited to the account of Moor Motors. On the same day, Rocom's account at the A.N.Z. Bank was credited with the sum of $10.25m upon payment of the Moor Motors cheque.

2. It was La Rosa's evidence that it had been arranged with Barbagallo that Barbagallo would not deposit the Moor Motors cheques for credit to the Rocom account until two days after the Rocom cheques had been deposited for credit to the Moor Motors account. Barbagallo's evidence was that each party was to deposit the cheques on the day after delivery. Barbagallo's accountant stated that he had been instructed that the "La Rosa" cheque was to be presented "some days later".

3. It was contended by both La Rosa and Barbagallo on behalf of the respective parties that the cheques had been drawn and delivered in discharge of the purchase prices payable in transactions for the sale and purchase and resale and repurchase of motor vehicle stock.

4. His Honour found that there were no such transactions and merely a display of trading to conceal the true transactions. His Honour found the purported indicia of sale and purchase of stock to be a charade and a sham. (See Sharrment Pty. Limited v. Official Trustee in Bankruptcy (1988) 82 ALR 530.)

5. His Honour was satisfied that the reason given to Barbagallo by La Rosa for conducting the purported transactions was transparently false and probably false to Barbagallo's knowledge. The purpose for such transactions was not apparent and remained unexplained.

1. If there had been no other evidence of the true nature of the transaction between the parties and no other explanation offered by the parties than the sham to show how Rocom received a sum of $290,000, his Honour may have been entitled to find that Rocom held the monies upon a resulting trust for the La Rosas. Such a resulting trust would have been a settlement within the meaning of s. 120 of the Act or would have required Rocom to account for the sum to the La Rosa's Trustee in Bankruptcy.

2. However, after considering the totality of the material before him, his Honour formed the conclusion that there was a real transaction between the parties underlying the sham, namely an agreement that Rocom provide short-term advances to the La Rosas, or to entities controlled by them, in return for the payment of a fee or premium. In effect, his Honour found that the fee or premium received by Rocom was paid as consideration for the provision of short-term loans. Once Rocom received its fees in completion of such a transaction, the monies received became part and parcel of Rocom's business funds held free of any condition and incapable of being traced once mixed in the daily movement of funds in the bank account operated by the business. Upon that finding being made by his Honour, there was no room for any argument that the disposition constituted by the payment of the fee or premium was a settlement within the meaning of subs. 120(1) of the Act, (see Barton v. Official Receiver (1986) 161 CLR 75 at p 78; In re Plummer (1900) 2 QB 790 at p 804).

3. The appellant did not challenge his Honour's finding of fact as to the true nature of the transactions.

4. I agree that the appeal should be dismissed with costs.