Offermans v Trusted Buzz Pty Ltd

[2013] FCCA 1062

FEDERAL CIRCUIT COURT OF AUSTRALIA

OFFERMANS & ANOR v TRUSTED BUZZ PTY LTD & ORS [2013] FCCA 1062

Catchwords:

BANKRUPTCY – Transaction – void – transfer of property and money before bankruptcy – sale of real property to an entity controlled by relatives of the bankrupt – whether the transfer was for an illegal purpose – whether the transfer was enacted to defeat creditors – whether the assets were sold at an undervalued amount.

Legislation:

Bankruptcy Act 1966 (Cth), ss.31, 120,121, 139ZQ

Property Law Act 1974 (Qld), s.228

Cases cited:

Camm v Linke Nominees Pty Ltd (2010) 190 FCR 193
Combis (Trustee) v Spottiswood (No 2) [2013] FCA 240
Donaldson v Freeson (1934) 51 CLR 598
Gibert v Gonard (1884) 54 LJ Ch 439
Marcolongo v Chen (2011) 242 CLR 546
Payne v McDonald (1908) 6 CLR 208
Peldan v Anderson (2006) 227 CLR 471
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266
Sandell v Porter (1966) 115 CLR 666
Schmierer v Horan [2004] FMCA 16

Applicant: DENNIS OFFERMANS AND MICHAEL JOSEPH BRENNAN AS TRUSTEES IN BANKRUPTCY

First Respondent: TRUSTED BUZZ PTY LTD AS TRUSTEE FOR THE BUZZ TRUST

Second Respondents: DANNY JOSEPH BROSNAN & JOAN MARJORIE BROSNAN

File Number: BRG 984 of 2009

Judgment of: Judge Burnett

Hearing date: 18 June 2013

Date of Last Submission: 18 June 2013

Delivered at: Cairns

Delivered on: 19 June 2013

REPRESENTATION

Counsel for the Applicant: Mr M. Jonsson

Solicitors for the Applicant: MacDonnells Law

Counsel for the Respondents: Mr M. Wilson

Solicitors for the Respondents: Cleary Hoare Solicitors

ORDERS

THE COURT DECLARES THAT:

1. The transfer of the whole of that piece or parcel of land located at 102 Haynes Street, North Rockhampton in the State of Queensland described as Lot 10 on RP605630, County of Livingstone, Parish of Murchison, Title Reference 30218185 ("the Property") by one Gregory John O’Keeffe to the First Respondent, constituted by a contract dated 24 September, 2007 and Transfer No 711050293 registered under the Land Title Act 1994 (Qld) pursuant thereto on 2 October, 2007, is void as against the Applicants pursuant to Section 120 of the Bankruptcy Act 1966 (Cth).

2. The Applicants are entitled to an interest in the Property equivalent to the interest held by Gregory John O'Keeffe, less consideration in the sum of $215,000.00 given by the First Respondent.

3. The transfer of an amount totalling $98,000.00 by the said Gregory John O’Keeffe to the Second Respondents, constituted by payments to the Second Respondents in the amounts of $90,000.00 and $8,000.00 made on 16 October, 2007 and 25 October, 2007 respectively, is void as against the Applicants pursuant to Section 120 of the Bankruptcy Act 1966 (Cth) and Section 121 of the Bankruptcy Act 1966 (Cth) and all subsequent transfers by the Second Respondents are void as against the Applicants pursuant to Section 228 of the Property Law Act 1974 (Qld).

4. The Notice issued by the Official Receiver to the First Respondent on 13 February 2012 pursuant to Section 139ZQ of the Bankruptcy Act 1966 (Cth) is valid.

5. The Notice issued by the Official Receiver to the first named Second Respondent on 13 February 2012 pursuant to Section 139ZQ of the Bankruptcy Act 1966 (Cth) is valid.

6. The Notice issued by the Official Receiver to the second named Second Respondent on 13 February 2012 pursuant to Section 139ZQ of the Bankruptcy Act 1966 (Cth) is valid.

THE COURT ORDERS THAT:

1. Within 60 days of the date hereof, the First Respondent shall pay to the Applicants the sum of $33,000.

2. Within 60 days of the date hereof, the First Respondent shall pay the amount of $11,536.44 to the Applicants for interest pursuant to Section 76 of the Federal Magistrates Court Act 1999 (Cth) and Section 76 of the Federal Circuit Court Act 1999 (Cth) calculated to 17 July 2013.

3. If the First Respondent pays to the Applicants the sum of $44,536.44 in compliance with Orders 7 and 8, the Applicants shall deliver to the First Respondent's solicitors a signed Form 14 – Request to Record Removal of Caveat within 14 days of receipt by the Applicants' of payment of the sum of $44,536.44.

4. In default of compliance with Orders 7 and 8, the First Respondent is to do all acts and things necessary to transfer title to the Property to the Applicants in accordance with Order 2.

5. If title is transferred to the Applicants in accordance with Order 10, the Applicants shall pay forthwith to the First Respondent the sum of $215,000.00.

6. Within 60 days of the date hereof, the Second Respondents shall pay the amount of $89,087.11 to the Applicants as monies received by the Second Respondents to the use of the Applicants.

7. Within 60 days of the date hereof, the Second Respondents shall pay the amount of $31,544.34 to the Applicants for interest pursuant to Section 76 of the Federal Magistrates Court Act 1999 (Cth) and Section 76 of the Federal Circuit Court Act 1999 (Cth) calculated to 17 July 2013.

8. The First Respondent pay the Applicants’ costs of and incidental to the application (including reserved costs) to be assessed on the standard basis.

9. The Second Respondents pay the Applicants' costs of and incidental to the application (including reserved costs):

   (a)until 11am on 4 June 2013,  to be assessed on the standard basis; and

   (b)from 11am on 4 June 2013, to be assessed on the indemnity basis.

10. The Respondents pay the Applicants' costs, of and incidental to today's appearance to be assessed.

FEDERAL CIRCUIT COURT OF AUSTRALIA

AT CAIRNS

BRG 984 of 2009

DENNIS OFFERMANS AND MICHAEL JOSEPH BRENNAN AS TRUSTEES IN BANKRUPTCY

Applicant

And

TRUSTED BUZZ PTY LTD AS TRUSTEE FOR THE BUZZ TRUST

First Respondent

DANNY JOSEPH BROSNAN & JOAN MARJORIE BROSNAN

Second Respondent

REASONS FOR JUDGMENT

(Ex tempore)

1. The applicants as Trustees for the bankrupt estate of Gregory John O’Keefe seeks declarations and orders against the first and second respondents in respect of property and moneys alleged to have been transferred by the bankrupt to them at a time relevantly close to the commencement of his bankruptcy and which are alleged to have been transferred at an undervalued amount. The applicant seeks relief pursuant to s.120 and s.121 of the Bankruptcy Act 1966 (Cth) (the Act) and s.228 of the Property Law Act 1974 (Qld). The Trustees have also delivered notices pursuant to s.139ZQ of the Act upon the second respondent. They seek orders in respect of those notices.

2. The bankrupt is a relatively uneducated man.  He left school after grade 10 and has taken up largely unskilled unemployment since then, principally in transport related businesses.  Although his date of birth is not known he is a man who by appearance is in his fifties.  He worked for the Main Roads Department for some time and came to befriend a Mr Alan Keith Gegg.  In 2003, he and Gegg acquired a freight delivery business entitled Diamond Freight Handling Service Pty Ltd (Diamond Freight).  It is not in contest that the bankrupt was commercially naïve and had no real background or experience in business. 

3. In the conduct of Diamond Freight, Gegg and later his wife undertook the administrative functions and the bankrupt did much of the leg work, mainly delivery duties.  Ostensibly the split of work was in accordance with their respective skill sets. The bankrupt is unmarried and aside from his sister who is one of the second respondents he has had little outside support in these matters.  The foreseeable happened and the bankrupt’s partner maladministered the business. 

4. By the time these matters came to the bankrupt’s attention in March 2007 much damage had been done.  He has said that a lot of money appears to have gone missing; the company had been committed to an unprofitable contract to supply services to Australia Post; and, significant ongoing income tax withholding obligations had not been complied with.  The company was in default.  After these matters came to the bankrupt’s attention in March 2007 he took prompt action to address them, such as he could. 

5. This included engaging the assistance of his sister, Joan Brosnan, one of the second defendants.  She was a relatively experienced business woman. With her husband, Danny Brosnan, she had conducted a successful earthmoving business.  However, at about the time of these events Mr Brosnan suffered a stroke and so has not been significantly involved in the matters to date.  In the period between March and September 2007 the bankrupt, with the assistance of Mrs Brosnan, also engaged his brother-in-law, Mr Paul Griffin, an accountant, to assist. 

6. They also consulted solicitors and drew up a plan to set the business on a firm footing. Appropriate staff were employed, a proper bookkeeping system was introduced and processes appear to have been reviewed and updated. Meanwhile, the bankrupt himself continued to undertake the bulk of the delivery work and there is no question that he worked hard, and there is certainly no suggestion that he lacked industry or that he did not apply his best efforts to saving the business and restoring it to profitability. By mid-2007 it was apparent to the bankrupt, Mrs Brosnan and Mr Griffin at least that the situation was fraught.  As Mrs Brosnan deposed:

   “… we decided to obtain professional advice on what options were available to either keep the business going or close it down.  We decided to seek professional advice as none of us had been involved in this type of situation before.”

7. The immediate consideration was for the bankrupt to sell his residence and use the surplus funds to deal with creditors. Mrs Brosnan stated that if the bankrupt sold his house at market value and injected those funds into the business and paid creditors that the business could continue into the future.

8. At the time it appears that the bankrupt had about $150,000.00 equity in his home. This was the only significant asset that he owned aside from a sum of $36,735.00 he then had in his Capricornia Credit Union account and a motor vehicle with, effectively, nominal value. At this time his family rallied to support him.  A trust was established (the first respondent in this application). The bankrupt’s parents and the second respondents injected funds into the trust and the trust itself borrowed moneys from the bank in order to fund the acquisition of the bankrupt’s home.

9. The trust was then able to contract with the bankrupt to purchase the house. The purchase price agreed between the bankrupt and the trust was $250,000.00, which approximated the valuation which had been procured in respect of the property from a valuer.  Save for a condition which I will discuss below, the contract was otherwise for market value despite the parties themselves not being at arm’s length.  The contract was completed and upon settlement a sum of $149,598.78 came into the possession of the bankrupt. 

10. Accepting that the bankrupt also had at the time of contract a sum of $36,735.00 in his Capricornia Credit Union account, the total holdings then enjoyed by him at that time approximated $186,333.78.  However, against that sum the bankrupt had contingent indebtedness of a sum of $135,572.00 in respect of the Director Penalty Notice issued by the Deputy Commissioner of Taxation.  That is to say that he had at that time a net worth of approximately $50,000.00.  It is against this background that the bankrupt then made a number of transfers. On 26 September he transferred $30,000.00 to Diamond Freight. Two days later the sum of $149,598.78, being the proceeds of sale, was deposited into his Capricornia Credit Union account. 

11. He then transferred a sum of $90,000.00 to the second respondent’s account on 16 October and a further sum of $8,000.00 to the second respondent’s account on 26 October.  It follows that by a few days following the date of contract his holdings had reduced from approximately $186,000.00 to approximately $156,000.00. By about three weeks after settlement the holdings had reduced further to approximately $58,000.00. Throughout that time the contingent liability to the Australian Tax Office remained at $135,572.00.  Accordingly, as the bankrupt transferred money out of his account to Diamond Freight and to the second respondents, his situation progressed from one of solvency to possible insolvency. 

12. The Trustees seek orders in respect of essentially two transactions.  The first is the sale of the bankrupt’s house. The second is the transfer by the bankrupt of the aggregated sum of $98,000.00 from the Capricornia Credit Union account to the second respondents on 16 and 26 October respectively. 

13. I will deal first with the land contract.  It is not in issue that the value of the house at the time of contract was approximately $248,000.00.  The parties agreed that the contract between the bankrupt and the first respondent was for a sum of $250,000.00, and that, subject to an agreed retention, the contract settled and moneys were paid in accordance with it. 

14. The issue here concerns the retention and whether the contractual retention constituted in effect a sale at an undervalued amount. Relevantly, s.120 of the Act provides:

    “Undervalued transactions

    Transfers that are void against trustee

    (1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

    (a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and

    (b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.”

15. Here the question is whether the consideration was less than the market value of the property. The evidence of Mr Gabriel, the valuer, was unchallenged.  In his report, Mr Gabriel described the property.  He noted the age and condition of the property including that there was localised damage to internal wall linings, and he ultimately assessed the property on that basis as having a value of $248,000.00. 

16. By an REIQ Contract for House and Residential Land dated 24 September 2007 it was agreed that the property would be sold to the first respondent for $250,000.00.  Materially, the contract was subject to one special condition.  The special condition was in these terms:

    “NOTWITHSTANDING THE PURCHASE PRICE IS $250,000.00, THE PARTIES AGREE THE BUYER SHALL RETAIN AN AMOUNT OF $35,000.00 OF THE PURCHASE PRICE AT SETTLEMENT TO BE USED FOR THE PURPOSE OF CARRYING OUT NECESSARY REPAIRS & MAINTENANCE ON THE PROPERTY.” 

17. The applicant contends that the effect of the provision was to render a discount on the sale of the property by approximately $33,000.00.  There is no serious contest that the sale of an item of improvement related to footpaths and road guttering works worth about $8,600.00 which had been allowed for had not been undertaken.

18. Otherwise the evidence demonstrates that approximately $23,000.00 was expended by the first respondent on improvements to the house in accordance with the special condition. Allowance was also made for other improvements including footpath and guttering workings. For the first respondent it was contended that the payment of the $23,000.00 constituted consideration for that value. 

19. In his submissions commencing at paragraph 45 counsel for the respondents contended that the consideration given by the first respondent to Gregory O’Keefe, the bankrupt, of $23,489.56, for repairs and improvements effected to the property, was for his enjoyment and, accordingly, valuable consideration.  It was submitted that the consideration given by the first respondent to the bankrupt by the debt obligation and to effect further repairs and improvements in the future whilst the bankrupt continued to live in the property and would be in a position to enjoy them in their full amount in respect of the balance, that is, a sum of $11,510.44 also constituted valuable consideration. 

20. In oral argument, he sought to explain this in the nature of an incentive arrangement commonly employed in commercial transactions.  That is, that a lesser sum is received on settlement for its conversion into the house by way of improvements.  That submission in my view must fail for two reasons.  First, there was no evidence to demonstrate that the offset of the special condition was to indeed impact the rental return on the property.  Second, and perhaps more fundamentally, if there was any incidental rental benefit it did not accrue to the second respondent as purchaser but to the bankrupt as vendor. 

21. Ultimately, the purchaser still purchased the property at an under value. What the purchaser agreed to purchase was not what the valuer had valued. The valuer, when giving evidence, was never questioned as to these matters. In my view the reason is that, as a matter of common sense, if the house were to be subject to further improvements, then the value necessarily would change. Respectfully, the first respondent seeks to confuse matters by making a submission that s.120 should be applied discretely to the sum of the $35,000.00 which was to be paid by way of improvements.

22. The transaction in respect of which the application is brought is the sale of the house.  Each of the individual transactions making up the $22,000.00 in improvements are not the subject of claims by the Trustees. The house, in my view, was sold at an undervalued amount which equates with the sum of $33,000.00.  That reflects the difference between the value assessed by the valuer on the property at the time of valuation as against the contract, which was discounted by $35,000.00, albeit conditional upon the provision of improvements to the house later on. Plainly had such improvements been effected the valuation would ordinarily be expected to be increased commensurate with the quantum of such improvements.  It follows in my view that the applicant is entitled to the declarations they seek with respect to the house. I will direct the parties to submit orders to give effect to these reasons in due course.

23. Before proceeding with the remaining issues to be resolved, I will first comment upon the orders that should be made, at least in respect of this part of the application. Section 31 of the Act provides a broad power to the Court to make such orders (including declaratory orders and orders made in injunctions and other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to the Act in any such case or matter.

24. In this case, the first respondent, with the assistance of the second respondent and others including the bankrupt’s parents, together with a bank has provided cash of $215,000.00 to permit the purchase to proceed.  If they are willing and able to pay the $35,000.00 shortfall between the agreed sale price and that which they have paid to date, they ought to be afforded that opportunity.  In this case I am satisfied that the circumstances giving rise to the bankrupt and the respondents’ difficulties have arisen following a well-intentioned but misguided and perhaps an ill-advised process or scheme developed by those close to the bankrupt to afford him an opportunity to resolve his financial difficulties.

25. Although it was urged upon me to be cautious in accepting the evidence of the bankrupt, or indeed Mrs Brosnan, in relation to these matters, my impression of each of them was that they were hard-working and honest people who genuinely sought to do the right thing.  There was a ready acknowledgement and acceptance of moral responsibility for these matters.  Under these circumstances, which were not unique, many possessed of harder heads and hearts could and would lawfully have achieved a personally more satisfactory outcome than will result here.  Their current circumstances are, in my view, in part a product of their integrity, and if possible they should not suffer any more detriment than should necessarily follow this application. In addition, I am mindful of the costs that will be incurred by the Trustees in selling the property.  When all is considered, this is a case such as that before Driver FM in Schmierer v Horan,[1] where, at paragraph 27, his Honour said:

    “… It would, however, be unfortunate if the property had to be sold in order to satisfy the trustee’s claim upon it …” 

    [1] [2004] FMCA 16.

1. The Trustees also claim for declarations under s.121. I consider this claim in the event that I am wrong in my assessment of the applicant’s claim under s.120. Section 121 provides:

   “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 material time for considering the question of insolvency for the land transaction is 24 September 2007. There is no debate that as at 24 September 2007 the bankrupt’s personal balance sheet was as follows:

   a)he had assets including a house with a value of $248,000.00;

   b)a motor vehicle with a value of $6,500.00; and

   c)cash in a Capricornia Credit Union account of $36,634.00.

   Therefore, he gross asset value was in the order of $291,134.45. He had liabilities to offset against those assets in the form of a loan to the Bank of Queensland in the sum of $98,404.00 and the Director Penalty Notice in the sum of $135,572.00. His total liabilities amounted to $233,976.00. It follows his net equity at that time was about $57,158.45. 

3. The question of solvency is always one of fact, as was noted in Barwick CJ in Sandell v Porter (1966) 115 CLR 666:

   “… Insolvency is expressed in s.95 [of the Bankruptcy Act 1924–1960 (Cth)] as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not be drawn simply from evidence of a temporary lack of liquidity …”

4. I was also referred to Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 which calls for an examination in a broader temporal sense, however it does not depart from the principle outlined by his the Chief Justice. It is acknowledged that one should not look too strictly at the moment, as Kitto J noted in Queensland Bacon Pty Ltd v Rees (supra) at page 303 where his Honour observed:

   “… A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence,” as Chamber’s Dictionary expresses it. Consequently a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence …

   …

   The question thus posed by the sub-section is to be answered in the present cases as at the time when each of the relevant payments was about to be accepted. It is an objective question. What the payee or anyone else inferred at the time is not to be treated as decisive, though the Court may be assisted in reaching its own conclusion by seeing how business men in fact reacted to the circumstances ...” 

5. Although things later changed, the fact remains that as at 24 September the bankrupt was solvent.  He had a contract on his property which was to settle a matter of days later.  If he had applied the settlement funds judiciously, he would have discharged his only material creditor, the Australian Tax Office.  As the evidence demonstrates, most of the then-extant creditors were not his but rather those of Diamond Freight.  There is no suggestion that the bankrupt had any personal responsibility for the debts of Diamond Freight Services, for instance as a guarantor or surety. On balance I am satisfied that as at 24 September the bankrupt was not, or not about to become, insolvent. However, I am satisfied that a short time later he did become insolvent because of events that followed 24 September.

6. If he was following professional advice as he says he was, there ought to have been no reasonable basis to foreshadow insolvency, at least as at 24 September. It follows the deemed purpose of the transfer of the house property does not occur in this case under s.121(2). There is no evidence of any other improper purpose in terms of s.121(1)(b). Indeed, on my finding, the contrary was the case. He sought to liquidate the property to discharge his creditors and attend to his moral and legal obligations. His difficulty arose subsequently with the identification of his creditors as opposed to those of the other player in these proceedings, Diamond Freight.

7. It follows that I am not prepared to make declarations pursuant to s.121 in respect of the property.

8. The bankrupt, having received the funds in settlement into his account on 28 September 2007, did nothing with them until mid-October 2007.  Almost the entire sum was paid out in three separate tranches, with a payment of $50,000.00 on 15 October 2007, $90,000.00 on 16 October 2007 and $8000.00 on 26 October 2010. It is the last two payments that are the subject of the application for declarations.  Those two sums were paid by the bankrupt to the account of the second respondents.  The sum of $50,000.00 paid on 15 October 2007 was paid directly into the account of Diamond Freight Services, as for instance had been a number of earlier payments, which can be seen by reference to the Capricornia Credit Union account.

9. This is consistent with the evidence by the bankrupt that he was funding the business through its difficulties from his own resources. As I have noted earlier, there had been discussions between the bankrupt and his family members and advisers about how to manage the situation. In his affidavit filed 19 November 2012, the bankrupt said, commencing at paragraph 25:

   “Some time in early October 2007 I asked my sister Joan if she would attend to paying creditors of the business as I was unable to manage the accounts. Accordingly I transferred funds from the sale of the property to her account and, at my direction, she organised the payment of creditors’ accounts for the company as well as some personal bills of mine. Joan kept separate accounts in her computer accounting programs so that the monies I gave her could be kept separate for the payment of my debts. All of the payments made by Joan at this time from the monies I gave her were at my direction with Joan acting as my agent.” 

10. Mrs Brosnan related events in similar terms.  She noted:

    “Greg regularly joined us for a roast meal on Thursdays at our home and one night, early in October 2007, after tea he asked me if I would assist him in paying his accounts out of the balance of the proceeds of the sale of his house. As Greg didn’t have internet banking set up for his personal accounts, I decided it would be much more convenient to transfer the money into an account in my name (it was a joint account with Danny because we do not maintain separate accounts) and I could then pay Greg’s accounts, as and when instructed by him, using internet banking where necessary. At this time, I was very worried about Greg and his mental state as he had been carrying a very heavy work load for many months and was very stressed and upset about the possibility of losing his business which he enjoyed so much and was his dream for many years.” 

11. Accordingly, the sums were credited to the second respondent’s account. It is not in issue that the sums were disbursed by Mrs Brosnan in accordance with the bankrupt’s instructions. As she noted in her evidence, between 16 December 2007 and 20 June 2008 they were disbursed generally in favour of the creditors of Diamond Freight, with a handful of payments relating to the bankrupt personally. For the applicant, it was contended that the payments of the sums totalling $98,000.00 were caught by s.120 as undervalued transactions.

12. In his submissions, counsel for the applicant contended that there was no consideration given by the second respondents in exchange for the payment of those funds into their joint account for the simple reason that the payment was not made under or pursuant to any identifiable contract between the second respondents and the bankrupt.  At best it was a mere domestic arrangement involving the payment and receipt of the fund upon certain consensual conditions as to its further disposition.  He contended that it was the respondent’s own evidence that the moneys paid by the bankrupt and received by the second respondents were paid and received on the assumption and condition that they would only be applied by Mrs Brosnan in the manner instructed by her brother, and I accept them as the facts.  The reservation, he contended, was important and a characterising feature of the arrangement. He submitted that Mrs Brosnan had emphasised in her affidavit that she received and held the funds in the joint account of her and Mr Brosnan:

    “… and none of that amount was applied to debts of Danny or myself or any other of my or Danny’s personal expenditure but rather it was all applied to debts of Greg or his company at his specific direction as to which creditors were to be paid …”

13. It was contended that this arrangement was of the kind described by North J in Gibert v Gonard (1884) 54 LJ Ch 439 at 440 where his Honour stated:

    “… It is very well known law that if one person makes a payment to another for a certain purpose, and that person takes the money knowing that it is for that purpose, he must apply it to the purpose for which it was given.  He may decline to take it if he likes; but if he chooses to accept the money tendered for a particular purpose, it is his duty, and there is a legal obligation on him, to apply it for that purpose …”

14. It was submitted that in those circumstances, the duties that bound the second respondents as the recipients and holders of the subject funds were fiduciary rather than contractual and that they subsisted, notwithstanding the absence of any identifiable contractual relationship with the parties.  He submitted that the explicit reservation to the bankrupt of control as to the ultimate fate and disposition of the fund was an important and characterising feature of the arrangement.

15. The discretion, he contended, reserved to and exercised by the bankrupt, was subject to no identified fetter or limitation.  Accordingly, he permitted payment to stipulated creditors and recipients and it was at least implicitly revokable at will by the bankrupt, in which event, the second respondents would have been required to disgorge the funds or any balance and return the fund or residue to the bankrupt.

16. It was submitted that an informal arrangement of this kind, which falls short of an effective enforceable contract does not yield consideration in the relevant sense, even if the arrangement was sufficient to give rise to a trust and consequent obligations enforceable in equity. In submissions for the second respondent, it was contended, in answer to the applicant’s submissions, that ownership of the funds never transferred to the second respondents, that they were always beneficially held for the bankrupt and that the money was never a gift to the second respondents. Accordingly, in the circumstances it was clear that beneficial ownership did not pass to the second respondents and thus the payments could not be a transfer of property, pursuant to s.120 or, as I will discuss later, s.121.

17. He contended that the moneys were held for the bankrupt by the second respondents on an express or resulting trust and, accordingly, as trustees the second respondents had no ownership of the moneys and there was no transfer of property to enliven the relevant provisions of the Act. The respondent particularly relied upon the observations of Tracey J in the decision of Camm v Linke Nominees Pty Ltd (2010) 190 FCR 193, and in particular remarks addressing the term “transfer of property,” commencing at paragraph 32:

    “The expression “transfer of property,” as used in s.121(1) bears its ordinary meaning: See Peldan v Anderson ;(2006) 227 CLR 471 at 481. The ordinary and natural meaning of the word “transfer” in the context of s.121(1) is the conveying of a property right from one person to another as a result of an act performed by the transferor with the intention that the property would pass.”

18. However, his Honour’s observations need to be considered in context. In Camm v Linke (supra), the facts revolved around the issue of a transfer in the context of contractual rights governing the sale of real property. I have earlier made reference to his Honour’s observations in paragraph 32, which, following observations by the High Court in Peldan v Anderson (supra), were further addressed in paragraph 33, where his Honour continued:

    “In Peldan v Anderson the High Court was concerned with a construction issue which involved the interaction of s.121(1)(a) and (9)(b) of the Act. No issue arises on the facts of the present case as to whether there had been a transfer of property which did not previously exist.  Nonetheless, in dealing with this issue the High Court plurality expressed views as to the proper construction of s.121(1)(a) which do not bear on the issue currently under consideration. At 487-488, their Honours said that:

    44. Where s.121(9)(b) is relied upon, the phrase “the property” in the opening words of s.121(1)(a) should be construed as signifying “the property in the hands of the transferor prior to the act which is taken to be the transfer.”  This removes from the operation of s.121(1)(a) the assumption that it is existing property which is being transferred. It involves treating the words “the property” in s.121(1)(a) in a special sense to give to s.121(1) an extended operation as required by s.121(9)(b).”

19. That issue was plainly alive in the context of a real property transaction. However, the situation differs here. I should note at this point that for the purpose of this discussion, the differences between s.120 and s.121 are not material.

20. In this case, the Court is concerned with the transfer of money. Section 120 (7)(a) addresses those circumstances by specifically providing:

    “Meaning of transfer of property and market value

    (7) For the purposes of this section:

    (a) transfer of property includes a payment of money; and

    (b)a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and

    (c) the market value of property transferred is its market value at the time of the transfer.”

21. In any event, the remarks at paragraphs 45 to 46 of Peldan v Anderson quoted in Tracey J’s decision are, in my view, apposite. There the plurality of the High Court (Gummow, Hayne, Callinan, and Crennan JJ) stated:

    ““45. The acceptable construction is best illustrated by setting out the paragraph as if it read in this manner:

    (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 [in the hands of the transferor prior to the act taken to be the transfer] would probably have become part of the transferor’s estate or would probably have been available to creditors if the property [in the hands of the transferee after the act taken to be the transfer] has not been [taken to have been] transferred...

    ...

    The italicised words are appropriate because it would be at odds with s.121(9)(b) for the subjunctive clause to read “if the property in the hands of the transferor prior to the deemed transfer had not been deemed to be transferred.” Section 121(9)(b) expressly states that the property which is deemed to have been transferred is the “property that did not previously exist.”

    46. The effect of the acceptable construction is to shift the emphasis of the inquiry in s.121(1)(a), and to focus not upon whether the “transferred property” would have become part of the transferor’s estate in bankruptcy, but upon whether that result would have obtained in respect of the transferor’s “property” (as defined in s.5(1)) out of which the newly created property has been “carved.””

    [Tracey J] The words read into s.121(1)(a) of the Act direct attention to “the act taken to be the transfer” and require the identification of the property which had been in the hands of the transferor prior to that act being taken. It is, therefore, necessary to identify the relevant act and the time at which it occurred.”

22. Here, by operation of s.120(7)(a), the payment of money constitutes the transfer of property necessary for the purposes of s.121. The subsequent inquiry required is directed then to s.121(a) which concerns the consideration for the transfer and the time when that occurred. The focus of the second respondent’s argument is directed to beneficial title, but that is not the focus of s.120(7)(a), only the focus of inquiry in respect of s.120(7)(b), which, of course, is not apposite in this case. It is not to the point that the moneys were received by Mrs Brosnan as trustee, irrespective of how that trust might be characterised, i.e. whether it be a bare, resulting or express trust or whether it simply receives, subject to fiduciary obligations as an agent.

23. The intent of s.121 is to focus upon the transfer. By definition, the payment of money constitutes a transfer of property for the purpose of s.121. If that is correct, the remaining elements necessary to render a payment void as against the trustee are not in issue because there is plainly no consideration for the transfer.

24. However, for completeness the Trustees also contend that, irrespective of the question of transfer, even if there was an agreement the transaction itself still offends s.120 and is void because the agreement was not supported by consideration.

25. There was plainly an agreement between the bankrupt and Mrs Brosnan. However, the agreement was a loose one and not one governed strictly by contract. It was more in the nature of an understanding or arrangement. It lacked the critical characteristic of an agreement: consideration. Mrs Brosnan’s consent to undertake the payment was based upon her familial relationship and friendship.

26. If there was any consideration, it was consideration of love and affection held by Mrs Brosnan for the bankrupt. However, for the purposes of s.121(6), if that was the consideration then it was not ‘consideration.’ I am satisfied that there was no strict agreement between the bankrupt and Mrs Brosnan, but if there was it was one that was not supported by consideration. If there was an agreement, and it was supported by consideration, then the consideration was “love and affection” and, as such, it was not consideration for the purposes of s.120.

27. I am satisfied that the Trustees are entitled to declarations in respect of the sum $98,000.00, pursuant to s.120.

28. The Trustees also claim an entitlement to declarations, pursuant to s.121, which I have earlier detailed. I have earlier observed that I do not think that the bankrupt or the second respondents were motivated by any male fides. Also I expressly find that their conduct was not directed to either of the main purposes expressly provided for in s.121(1)(b). The bankrupt’s conduct, in my view, was thoughtless or ill-advised, but it was not devious or intended to cause harm.

29. Indeed, in my view, the bankrupt sought to achieve a contrary outcome.  The Trustees urged upon me that I should conclude that there was a scheme devised by the bankrupt for the purpose of advancing interests of Diamond Freight and its creditors in priority to the body of the bankrupt’s personal creditors.  I do not think that was the case.  As I have earlier noted, the principal players in this drama are not sophisticated people.

1. They probably had a fundamental appreciation of the difference between Diamond Freight and the bankrupt’s personal debts, but in a small town, which appears to have been their life-long place of residence, the view taken by the bankrupt and no doubt Mrs Brosnan as well was that they were responsible for all their debts irrespective of the distinction between corporate and personal debts. The bankrupt was after all the face of Diamond Freight, being its delivery driver.

2. His family was associated with the enterprise and I suspect that there was a commensurate sense of personal commitment and pride, and I think it is fair to say that matters of honour are more important in small regional communities. This, in effect, clouded any strict legal view about which debts were whose.  The bankrupt felt morally obliged in respect of all the debts with which he had some association and wanted to discharge both his moral and legal obligations.

3. It is unfortunate that he did not achieve this purpose. However, that does not end the matter. Section 121(2) provides for a deemed main purpose if the bankrupt was or was about to become insolvent at the time of transfer. At about the time of the first payment to the second respondent, the sum in the bankrupt’s Capricornia Credit Union account, which by then represented the only real asset of substance that he had, had been reduced to $105,243.27.

4. That occurred because on the day before the first payment to the second respondent, the bankrupt had transferred $50,000.00 from his Capricornia Credit Union account into Diamond Freight’s account.  Unwittingly, he had driven himself into a state of insolvency by his disposition on that date.  I say that because once he had transferred those funds to Diamond Freight, he became an unsecured creditor of Diamond Freight.  No doubt had he called upon Diamond Freight for a return of the funds it would have been unable to return them to him because they had been applied by Diamond Freight to address its ongoing cash requirements. It follows that on 15 October he had no real prospects of recovering that money in order to meet his own indebtedness, in particular the principal debt which was then owed to the Australian Tax Office.

5. It follows, in my view, that from that moment he was or was about to become insolvent. The subsequent transfers to Mrs Brosnan simply exacerbated that situation by extending the ambit of his irrecoverable loans to Diamond Freight because of its impending insolvency. At the time he made the payments on 16 and 29 of October he was or was about to become insolvent. Therefore, irrespective of his actual intentions, it was deemed that he had the main purpose provided for in s.121(1) and that the payments were therefore void. For reasons which I have addressed earlier, I reject the respondents’ argument advanced that because the respondents received the money in their capacity as trustees there was no transfer of property for the purpose of s.121. For the very same reasons I rejected that argument when considering the matter in respect of s.120.

6. Finally on this point, the Trustees submitted an entitlement to relief claim by operation of s.228 of the Property Law Act 1974 (Qld). Section 228 is in these terms,

   “Voluntary conveyances to defraud creditors voidable

   (1) Subject to this section, every alienation of property, made
   whether before or after the commencement of this Act, with
   intent to defraud creditors, shall be voidable, at the instance of

   any person prejudiced by the alienation of property.

   (2) This section does not affect the law of bankruptcy for the time

   being in force.

   (3) This section does not extend to any estate or interest in
   property conveyed for valuable consideration and in good
   faith to any person not having, at the time of the conveyance,

   notice of the intent to defraud creditors.”

7. The Trustees submitted in respect of these provisions that each payment that had been made by Mrs Brosnan at the direction and the behest of her brother amounted to an alienation of property with the intention to delay, hinder or otherwise defraud creditors, and thus enliven the operation of s.228. In my view, nothing turns on the word “alienation” where it is employed in s.228.

8. As can be seen from the judgment of Tracey J in Camm v Linke (supra), that word has its genesis in the earlier iteration of s.121, and as his Honour said, nothing turns on the use of the word “transfer” in the context. It follows that I reject the respondents’ submission to the contrary on this point.

9. On this matter little turns upon the question of whether the Brosnans held the funds as trustees or merely acted as agents for the result it the same. Each payment constituted an alienation of the Bankrupt’s property with an intention to delay, hinder or otherwise defraud creditors.

10. In his submission, counsel for the applicant further contended that an intention to defraud creditors can be inferred from the making of a payment which has the effect of subtracting from the proper fund that which would otherwise be available to meet the debts of the debtor. He contended, and it follows, that a subtraction of assets which but for the impugned transaction would have been available to meet the claims of present and future creditors is evidence from which an intention to defraud those creditors might legitimately be drawn.

11. He also noted, importantly, that s.228 has been held to operate where the transaction(s) can be seen to have been calculated to advance the interests of a company related to the debtor at the expense of his or her creditors. He argued that the effect of s.228 is that the payments made by the Brosnans to the creditors of Diamond Freight (as alleged in paragraph 8 of the further amended defence) must be taken to have been avoided at the instance of the applicants, and therefore as an alienation or disposition of the moneys held in the second respondent’s joint account on trust for or at the direction of the bankrupt. The payments actually made for the stipulated purposes instead must be deemed for the purpose of this proceeding to have been made out of the second respondent’s own funds.

12. While I do not accept that there was a ‘calculation’ to advance the company in the sense of male fides, I accept there was such a calculation in the sense that the bankrupt and Mrs Brosnan wanted to pay creditors generally, and that in doing so without regard to which creditors were paid, they failed to actually turn their mind to the issue, and accordingly there was a calculation to advance the interests of the company by omission. 

13. It was submitted on behalf of the applicant that further and/or alternatively there remained a basis for orders under s.228 by reason of public policy. It was contended that the payments made by the bankrupt to the second respondents should be taken to have been made not only with the intention of quarantining and camouflaging the funds from, and thus seeking to defeat the interests of, the bankrupt’s creditors, but also in actual effectation of those purposes.

14. The illegal purpose in this instance progressed beyond mere intention to the point of implementation and effectation.  In those circumstances, public policy must serve to preclude reliance by Mrs Brosnan upon the authority that she would otherwise have drawn from the underlying arrangement with the bankrupt as to the disposition of the funds she beneficially held for him in the manner directed by him.  The authorities relied upon in support of that submission are quite extraordinary, however, each was decided on facts materially different to those here. I have already stated that I am satisfied that the conduct of the bankrupt and Mrs Brosnan was ill-considered, but it was not done with the express intention to defeat creditors, although it had that effect. 

15. In such cases as Donaldson v Freeson (1934) 51 CLR 598 and Payne v McDonald (1908) 6 CLR 208, the evidence demonstrates that the purpose in each instance was an intended improper purpose. Although, as was submitted, the principle that a subtraction of assets which, but for the impugned transaction, would have been available to meet the claims of the present and future creditors is evidence from which an intention to defraud those creditors might legitimately be drawn, is a proper matter of law, I am not satisfied that drawing a legal conclusion to that effect is necessarily sufficient to support a finding of illegal purpose in circumstances where I am satisfied that there is a lack of mens rea. No authority has been referred to support such a contention. I do not accept the applicants’ submission that as a matter of public policy I too also ought be satisfied that a claim or right can be demonstrated pursuant to s.228. See generally observations in Marcolongo v Chen (2011) 242 CLR 546 at [32]. There was in this instance no evidence on my findings of any intention to hinder, delay or defeat creditors. If anything the evidence was to the contrary. In their own misguided and ill-informed manner the Bankrupt sought to discharge all his creditors without having given consideration to assess of priority. While that is sufficient to found an action under s.228 I do not think the evidence is sufficient to support a claim of ‘illegal purpose’ which imports notions of dishonesty which were not present in this instance.

16. I am satisfied in respect of the first submission and not the second submission. The final matters concern the s.139ZQ notices. The applicant seeks relief in support of the notices and the respondents’ counterclaim for orders directing that the notices be set aside. Given my findings, there is no prima facie reason why orders should not be made as contended for by the applicant. The respondents, however, contend that the proceedings on one basis or the other constitute an abuse of process. In effect the respondents contend that the applicant is disentitled to prosecute one or other of the causes, that is, the application for declarations or the application for judgments in respect of the notices, because one or the other constitutes an abuse of process evident in the face of the other.  I do not accept that submission.

17. First, the s.139ZQ notice is issued by the official trustee. The act of issue is an administrative act. Upon the issue of the notice, it then gives rise to certain rights including a statutory charge. Finally, the notice itself is one which is subject to judicial review which further highlights the administrative character of the notice as issued. An action for relief under s.120 or s.121, however, is a judicial action in nature. No relief can be afforded in respect of any complaint for contraventions of those provisions until the Court is moved to determine those matters in favour of an applicant. There may be commonality of fact, but there is not commonality of issue in respect of the two processes.

18. In any event, even if I am wrong in my assessment of it, the matter is one which commonly occurs and appears to pass frequently without comment, as perhaps is best illustrated by the failure to comment upon the approach as is evident in the decision of Logan J in Combis (Trustee) v Spottiswood (No 2) [2013] FCA 240. It follows, having regard to those reasons, that my only orders will be that the parties confer, agree a form of order that gives effect to the terms of my judgment and submit it to my chambers for formal orders within 14 days of today’s date.

I certify that the preceding seventy-two (72) paragraphs are a true copy of the reasons for judgment of Judge Burnett

Date: 9 August 2013