Official Receiver in Bankruptcy v Martin

[1990] TASSC 19

Serial No 13/1990
List "A"

COURT:  SUPREME COURT OF TASMANIA

CITATION:              Official Receiver in Bankruptcy v Martin [1990] TASSC 19; A13/1990

PARTIES:  OFFICIAL RECEIVER IN BANKRUPTCY
  v
  MARTIN, Charles Terrence
  MARTIN, Marlene Joan

FILE NO/S:  61/1988
DELIVERED ON:  18 May 1990
JUDGMENT OF:  COX J

Judgment Number:  A13/1990
Number of paragraphs:  22

Serial No 13/1990
File No 61/1988

OFFICIAL RECEIVER IN BANKRUPTCY v CHARLES TERRENCE MARTIN
and MARLENE JOAN MARTIN

REASONS FOR JUDGMENT  COX J

18 May 1990

1. The Official Receiver in Bankruptcy has made application to the court for a declaration that the transfer from the bankrupt, Charles Terrence Martin, to the second–named respondent who is his wife, of his half share, estate and interest in land known as 19 Beechworth Road in Sandy Bay and comprised in Certificate of Title Volume 3868 Folio 98 registered on 10 April 1986 is void as against the applicant who is his trustee in the bankruptcy. It is common ground that the second–named respondent, who prior to the transfer was the owner in fee simple of the other moiety, has sold the property to a bona fide purchaser for value without notice and the applicant accordingly seeks an order that the half of the proceeds of sale of the property presently the subject of an interlocutory injunction restraining its disbursement to or by the second–named respondent be paid to the applicant. The proceedings are brought in reliance upon s120 of the Bankruptcy Act 1966.

1. The first–named respondent was declared bankrupt on 4 March 1988 and the commencement of the bankruptcy was 27 January 1988. From 8 December 1980 when the first edition of Certificate of Title Volume 3868 Folio 98 was issued by the Recorder of Titles, the first and second–named respondents were registered as tenants in common in equal shares of the land therein. Their interest in the property remained free from encumbrances at all material times. By transfer purporting to bear date 26 March 1985 but registered by the Recorder of Titles on 10 April 1986, the first–named respondent transferred to the second–named respondent all his estate and interest as tenant in common in the land for a consideration of $90,000.00. The transfer was assessed for duty purposes on a value of the interest transferred of $140,000.00 and duty paid at the rate appropriate to that sum. It is the primary contention of the applicant that the transfer was a settlement of property not being a settlement made in favour of a purchaser for value in good faith and for valuable consideration which came into operation on its registration on 10 April 1986 and, that date being within two years before the commencement of the bankruptcy, it is void against him.

1. On 10 April 1985 Mr R P Whitehouse, a chartered accountant retained by the respondents and the group of companies of which they were directors and shareholders, wrote a letter to their solicitor, Mr K M Drake, to the following effect:

"re: Charles Martin

We enclose copy of memorandum to our above mutual client. Would you please establish the least value that Charles can transfer his share of the residue, unit and holiday shack to Mrs Martin.

Would you also confirm that the consideration between the parties can be executed by journal entry in the books of account. Charles would like your opinion as to the 'buy back' proposal in our memo.

We await your considerations."

Above the last two letters of the word "residue" appear in handwriting the letters "ence" and a question mark. I find that the word "residence" was intended and understood by the writer and recipient of the letter. In substance, the memorandum recorded these matters:

(a)That the first–named respondent had signed a personal guarantee to the Savings Bank of Tasmania and that in consequence a number of his assets including his half share of the house and a shack at Surveyors Bay were "at risk",

(b)That between them, the first and second–named respondents had a loan account with Charles Martin Constructions Pty Ltd of $1,090,650.00 which Mr Whitehouse estimated was equitably owned by them in the proportions of $172,912.00 by the first–named respondent and $917,738.00 by the second–named respondent,

(c)That because of the nature of her loan, the second–named respondent could pay for any assets acquired by her from the first–named respondent by a journal entry transfer of funds,

(d)That the accountant recommended that the second–named respondent should purchase the first–named respondent's share in the residence, shack and a Queensland unit, but should give him the option to repurchase the same should he be released from the guarantee, and that the consideration be paid by journal entry breaking up the loan account in the books of Charles Martin Constructions Pty Ltd.

1. On 12 April 1985 Mr Drake responded, in substance advising that he had applied to the Valuation Branch for extracts from the Valuation Roll in respect of the residence and shack, that he could see no reason why the consideration should not be made by an adjustment of the respondent's respective loan accounts in the company provided the appropriate authority was given to the accountant by the respondents, and that their "buy back proposal" could be put into operation if required, but that it should be an option to purchase the property as joint tenant only with the second–named respondent, that it be personal to the first–named respondent and incapable of assignment and that it should lapse in the event of his death or insolvency. He said he would advise the value of the properties when he had the valuation certificates.

1. On or about the same date as his letter, Mr Drake received advice from the Valuation Branch that the capital value of the residence at Beechworth Road was $180,000.00 as at 30 June, 1984.

1. There were tendered in evidence two further documents of importance purporting to be dated in March 1985. The first was exhibit P9 which contained two notations, both being signed by the second–named respondent and the lower one being signed in addition by the first–named respondent. That document in its entirety read:

"The Accountant,
Charles Martin Constructions Pty Ltd,
24 Murray Street,

HOBART...TAS...7000

I, Marlene Joan Martin hereby authorise and instruct you to charge to my loan account the settlement cost for my purchase of assets joint with Charles Terrence Martin. The amount so charged is to be in accordance with the documents of settlements as prepared by my solicitors Messrs Murdoch, Clarke, Cosgrove and Drake.

M J Martin

1st March, 1985

We CT and MJ Confirm that the transaction referred to above relates to the transfer of CTM ½ share in the properties at 19 Beechworth Road and Surveyors Bay and that the transaction took place at Government Valuation namely 90,000 and 10,000 respectively.

MJ      MARTIN        7.3.85

CT      MARTIN        7.3.85. "

While the date 1 March, 1985 is typed in the top half, the two dates 7.3.85 were handwritten by each signatory to the lower half.

1. The second document, exhibit D1, read:

"The Directors, 1st March 1985
Charles Martin Constructions Pty Ltd,
7A Magnet Court,
Sandy Bay,

TASMANIA 7005

Dear Sirs,

We wish to advise that we have agreed that Charles Martin will transfer his half share in the house at 19 Beechworth Road and the holiday cottage at Surveyors Bay to Marlene Martin, his wife, at $90,000 and $10,000 respectively and that settlement should be effected immediately by debiting the Charles Martin loan account and crediting the Marlene Martin loan account with $100,000.

Yours faithfully,

Charles T Martin (signed)

Marlene J Martin (signed) "

It was signed by both respondents. The date was typed in.

1. The first half of exhibit P9 was prepared in Mr Whitehouse's office and according to his evidence signed by the second–named respondent on or about the date it bears namely 1 March 1985. The second half was prepared by Mr Drake a year later for reasons which I will detail later. I find that it was back–dated by the respondents. As to D1, I find that this was prepared in the office of Charles Martin Constructions Pty Ltd and delivered already signed to Mr Whitehouse some time prior to July 1985. Mr Whitehouse said in evidence that he believed he received it in early March 1985, but although I accept him as an honest witness, I believe he is mistaken on this point, although he may well be right when he says that the top half of P9 was signed at that time.

1. At some time after the receipt of Mr Drake's letter of 12 April 1985 and of his advice that the Government valuation of the residence was $180,000.00 and of the shack $20,000.00 (which I infer he passed on soon after that date), Mr Whitehouse prepared a number of journal entries on exhibit P17. Mr Braithwaite, the accountant employed by the company to prepare its books and balance sheets, had already prepared working papers purporting to apportion the loan account shown in the company's balance sheet for the year ending 30 June 1984 in the sum of $1,090,650.00 owing to "CT and MJ Martin" in the proportion of $917,738.00 to the second–named respondent and $172,912.00 to the first–named respondent (which apportionment coincides with the figures mentioned in the memorandum accompanying Mr Whitehouse's letter to Mr Drake of 10 April 1985 already referred to). The journal entry purported to effect this division crediting "loan MJ Martin" with $917,738.00 and debiting "CT & MJM" with a like amount while "loan CTM" was credited $172,912.00 and "CT & MJM" was debited with the same figure. Thereafter, $500,000.00 was debited to "MJM" and credited to "portfolio transfer loan" which represented an investment by the second–named respondent in another enterprise of the company group, and then $90,000.00 was debited to "MJM" and credited to "CTM" with the notation "purchase ½ house". The next entries were a debit of $10,000.00 to "MJM" and a credit thereof to "CTM" with the notation "purchase ½ shack". The net result of these and other entries in the journal not presently material and in the working papers of Mr Braithwaite was a balance of $350,255.00 as compared with a starting balance the previous year of $1,090,650.00. The working papers contained the note:

"CTM   337017
MJM    13238

Total    350255 "

In the balance sheet for the year ending 30 June 1985 this figure was shown as an "equity" owned by "CT and MJ Martin". I find that the entries were made in the journal and the working papers not later than 31 July 1985.

1. On 13 January 1986, the first–named respondent telephoned Mr Drake and asked him to send the transfer for signature per medium of his son, Robert Martin. Mr Drake handed the transfer to the latter, but when he received it back some time in March 1986 it was found not to have been witnessed. On 12 March 1986, Mr Drake made a file note "CT Martin to transfer Beechworth Road to Mrs Martin. Surveyors Bay is also to be transferred. The Transfers are to be made in consideration of transfers by MJ Martin to CT Martin apportionate (sic) loan accounts with Charles Martin Constructions which were made in the middle of last year. Robert Whitehouse to supply figures." This note resulted from a telephone conversation with the first–named respondent. Mr Drake prepared a contract of sale for the residence and this was signed by both respondents but it was not dated and the consideration was left blank. After having done so, Mr Drake learnt of the existence of exhibit D1 which he regarded as sufficient evidence for stamp duty purposes of a contract of sale the previous year, and arranged for the second half of P9 to be typed and signed. Notwithstanding its purported date, 7 March 1985, it did not come into existence until late March or early April 1986.

1. On 18 March 1986, Mr Drake approached an officer of the Valuation Department, Mr Westwood, and advised him that the first–named defendant proposed to transfer his half of 19 Beechworth Road to the second–named respondent and that the government valuation as at 1 July 1984 was $180,000.00. He asked Mr Westwood what the value would be for Stamp Duty purposes. Mr Westwood said he estimated a 55% increase giving a total value of $280,000.00 but pointed out that he would probably make a more accurate assessment if the Stamp Duties Office referred the transfer to him.  When the transfer of the half share was registered on 10 April 1986 it was stamped at a value of $140,000.00 although the consideration was expressed to be $90,000.00.

1. In January 1985 a company within the Martin Group namely Mornington Tenpin Pty Ltd of which the respondents were both directors approached the Savings Bank of Tasmania seeking a loan of $1,846,000.00. By letters dated 1 and 14 February 1985, the Bank advised that Company that approval was granted on terms (inter alia) that the first–named respondent and his two sons, Terrence and Robert (also directors thereof), should guarantee the repayment of the loan and interest, such guarantees to be released by the Bank after a period of twelve months from the opening of the bowling centre then being built by the company "providing the Bank is satisfied with the trading results during that period". The company accepted the Bank's conditions on 18 February 1985 and on 15 May 1985 the first–named respondent and his sons executed the guarantee. On 21 March 1986 by letter addressed to the directors of Charles Martin Constructions Pty Ltd the Bank requested payment of arrears of mortgage interest amounting to $104,250.00 owed by another company within the Group, Kingscourt Pty Ltd There was some evidence that the first–named respondent had given a personal guarantee of this loan. In any event, this demand was met shortly thereafter. Mornington Tenpin Pty Ltd, however, failed to repay its loan and in a legal action commenced on 14 April 1987 against all three guarantors, a judgment for $2,338,508.00 for principal and interest was entered against the first–named respondent and the other guarantors in favour of the Bank. Judgment was dated 27 July 1987. It remained wholly unsatisfied at the date of the bankruptcy.

1. The second–named respondent was asked the following interrogatory in respect of the guarantee:

"On or about 18 January 1985 did the first–named respondent, the said Charles Terrence Martin, and the abovenamed bankrupt Robert William Martin or either of them, stating which, offer to guarantee in favour of the Savings Bank of Tasmania financial accommodation in the amount of $1,846,000.00 or thereabouts? If yes, when did you first become aware of the making of the said offer?"

Her reply, sworn on 26 March 1990 and tendered in evidence was:

"Yes. I first became aware of it about six to seven months before the bankruptcy commenced."

1. The second–named respondent gave evidence and I accept her as an honest witness doing her best to give responsive answers. Although she had for many years been a partner in her husband's business before it was incorporated and had been a director and shareholder in all the companies within the Group, her role had been totally passive. She was completely commercially naive. She took no part in the decision–making and she had virtually no understanding of the affairs of the Group. In the years 1984 – 1987 both she and the first–named respondent spent a considerable period of time travelling and spent much of each winter in Queensland. She said, and I accept, that throughout this time she never believed other than that the Group had a "very, very lucrative business" and she had no cause at all for concern as to the financial position either of the Group or of her husband himself. It was only in October 1987 upon her return with him to Tasmania after an extended trip that she realised from the conversation in the car in which the rest of the family had met them, that there were serious concerns about the business.

1. The decision to transfer the first–named respondent's half share in the residence followed in the train of certain suggestions made in February 1983 by a solicitor, MrP. M. Roach, who defined the objectives of his proposals as being to:

"(a)Divide the Corporate property equally between Mr and Mrs Martin;

(b)Ensure that losses which might be experienced in the future be isolated from areas of successful endeavour; and

(c)Avoid any disturbance to existing tax structures."

Mr Roach's advice was sought at that time for a number of reasons:

the shareholding of the respondents in the Company Group was unequal;

of their four children, their two sons were beginning to take a more active part in the running of the business and the two daughters were not, in the view of their mother at least, adequately provided for;

and the first–named respondent's health, especially his eye sight, was deteriorating alarmingly.

1. Mr Whitehouse had suggested as a variation of the Roach proposals that a highly successful company within the Group, Claremont Shopping Village Centre Pty Ltd should first be liquidated. He was the liquidator and on 12 June 1984 provided from the winding up of that company a dividend in favour of each respondent of $1,062,114.00, together with a distribution of loan funds they had in that company of $22,428.00 each. These funds were not paid direct to either of the respondents, but were retained in Charles Martin Constructions Pty Ltd where after other adjustments, not revealed by the evidence, were made, the balance of $1,090,650.00 was placed to their credit in the balance sheet for the year ending 30 June 1984. It was against this general background that Mr Whitehouse wrote his letter and memorandum of 10 April 1985 to Mr Drake.

1. I do not accept the contention advanced on behalf of the respondents that the document dated 1 March 1985, exhibit D1, constituted as at that date an enforceable contract for the sale of the property and as such amounted to a settlement of property which came into operation on that day (that is, outside the two year period contemplated by s120(1)). I find that on 1 March 1985 while the parties contemplated such a transaction, intending that if possible it be effected by journal entries (as evidenced by the authority signed by the second–named respondent and being the first half of exhibit P9), neither committed himself to any agreement at that stage. The purchase price had not been determined, it was not known that the government valuation of a half was $90,000.00 and the opinion of their solicitor was still needed as to the method of payment and as to the possibility of an option to repurchase. I find that exhibit D1, although bearing date 1 March 1985 was not in existence on that date and only came into existence and was back dated after Mr Drake's letter and advice concerning the valuation had been received shortly after 12 April 1985. However, in my view it thereupon evidenced a binding agreement for the sale of the property and a settlement for the purposes of the section came into operation by reason of the disposition thereby of the equitable interest in the first–named respondent's moiety to the second–named respondent (Voumard, The Sale of Land, 4th ed p112, Marshall v Williams [1974] VR 592, Shrager v March [1908] AC 402).

1. If this was the time at which agreement was reached, it is significant to note that the only evidence of the value of the first–named respondent's interest in the land was that of the government valuation of $90,000.00 as at the previous 1 July. The only other evidence of value tendered was that Mr Westwood considered that by mid–March 1986 it would have been worth $140,000.00. In the absence of evidence, I do not feel justified in assuming some regular progressive increase in value in the interim. I find that $90,000.00 represented the market value of the moiety between March and August 1985. There is no question of a sale at that price being a sale at under value.

1. The applicant contends, however, that the second–named respondent gave no valuable consideration for the transaction, and that as equity will not assist a volunteer, the settlement only came into operation upon the registration of the transfer in April 1986 which is within the two year period. He contends that the alleged consideration was a purported transfer from a non–existent loan account personal to the second–named respondent of funds which were then alleged to be credited to a non–existent loan account personal to the first–named respondent.

1. The evidence satisfies me that from 12 June 1984 each respondent was entitled to half the funds generated by the winding–up of Claremont Village Shopping Centre Pty Ltd The document D1 operated as an acknowledgment by both respondents that the second–named respondent was at the date of its delivery entitled to not less than $100,000.00 and as an authority from both to transfer that amount to the exclusive benefit of the first–named respondent. Counsel for the applicant relied upon Hirshorn v Evans (Barclay's Bank Ltd. Garnishees) [1938] 2 KB 801 and Trojan v Corporation of the Town of Hindmarsh (1987) 82 ALR 258 for the proposition that moneys held on a joint account are payable to those entitled thereto jointly, but not to either of them alone. I am not satisfied that the moneys, though they give the appearance in the Company's balance sheet of being a joint account, were in fact jointly held by them in the same way as the customers of a bank may hold a joint bank account with which situation the cases cited deal (and see also Russell v Scott (1936) 55 CLR 440). Whether or not moneys are held in such a way as to be payable to them jointly but not to either of them alone is a matter of fact and the evidence in this case does not enable me to find upon what basis the company had the funds in its possession, and whether or not the way they were shown in the balance sheet correctly indicates a joint account. Be that as it may, the written direction of both respondents to appropriate $100,000.00 of the total funds to the exclusive use of the first–named respondent by placing that sum in his loan account was sufficient authority for such a course to be adopted and the journal entries show that the company responded to that direction. The fact that in the next balance sheet the aggregate of the respondent's funds were shown as a single figure did not undo what had already been achieved, namely an assignment in writing by the second–named respondent to the first–named respondent of her chose in action against the company pro tanto with notice to the company. In my view, by the end of July 1985 the evidence establishes that the second–named respondent had given valuable consideration equal to the value of the interest in land sold. Mr Whitehouse's evidence of the financial viability of Charles Martin Constructions Pty Ltd as at that time clearly establishes that the value of the chose in action was not illusory. There is no reason to suppose it was not worth its full face value.

1. For these reasons, even if the date of the disposition is taken to be as late as the date of transfer as contended by the applicant and thus falls within the two year period, the settlement cannot be said to be one which is not one in favour of a purchaser in good faith and for valuable consideration. The second–named respondent gave valuable consideration in the manner set out above and can fairly be described as "a purchaser in the ordinary commercial sense who gives consideration which is real and substantial" (Barton v Official Receiver (1984) 58 ALR 328 per Lockart J p344 citing re Abbott (1982) 3 WLR 86). Furthermore, she did so without any belief or knowledge that the first–named respondent was unable to pay his debts or was financially unsound (indeed this was not, I find, in any event the case until long after the date of the transfer) or that by taking the property she might defeat or delay his creditors (re Johnstone Ex parte Cole (1984) 3 FCR 32 per Smithers J p35).

1. The application is accordingly dismissed.