Official Trustee in Bankruptcy v Dunwoody
[2005] FMCA 354
•24 March 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| OFFICIAL TRUSTEE IN BANKRUPTCY v DUNWOODY | [2005] FMCA 354 |
| BANKRUPTCY – Void transfer – whether the advance and subsequent giving of the mortgage formed part of one transaction and created an equitable mortgage interest – bankrupt convicted of bankruptcy charges relating to relevant transfer of property and whether payment to the respondent by bankrupt in the ordinary course of business and in good faith – proper construction of need for the trustee to form an opinion as provided for in Bankruptcy Act 1966 (Cth), ss.120, 121 Official Receiver v Mateo [2003] 1 ABC (NS) |
| Applicant: | OFFICIAL TRUSTEE IN BANKRUPTCY |
| Respondent: | NANCY MAY DUNWOODY |
| File No: | BZ45 of 2001 |
| Delivered on: | 24 March 2005 |
| Delivered at: | Brisbane |
| Hearing date: | 29 & 30 January 2004 |
| Judgment of: | Rimmer FM |
REPRESENTATION
| Counsel for the Applicant: | Mr Porter |
| Solicitors for the Applicant: | Dibbs Barker Gosling |
| Counsel for the Respondent: | Mr Coulson |
| Solicitors for the Respondent: | Shand Taylor |
ORDERS
IT IS DECLARED:
that the mortgage executed by John Ernest Dunwoody and Nancy May Dunwoody dated 8 April 1998 is void against the trustee of the bankrupt estate of John Ernest Dunwoody under ss.120 of the Bankruptcy Act; and
IT IS ORDERED:
That the payment by John Ernest Dunwoody to the respondent on
25 September 1998 in the amount of $147,002.20 is void as a preference under 122 of the Act.That the respondent pay the applicant the sum of $147,002.20 together with interest.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BZ45 of 2001
| OFFICIAL TRUSTEE IN BANKRUPTCY |
Applicant
And
| NANCY MAY DUNWOODY |
Respondent
REASONS FOR JUDGMENT
Applications
The Official Trustee in Bankruptcy (“the applicant”) as trustee of the estate of John Ernest Dunwoody (“the bankrupt”) makes application to the Court pursuant to ss.120 and 122 of the Bankruptcy Act1966 (Cth) (“the Act”) against Nancy May Dunwoody (“the respondent”).
The date of the bankruptcy is 9 October 1998.
This application was filed on 25 January 2001 and seeks:
i)A declaration that particular mortgages dated 8 April 1998 are an undervalued transaction under ss120 of the Act; and
ii)A declaration that a payment by the Bankrupt to the respondent on 25 September 1998 in the amount of $147,002.20 is void as a preference under 122 of the Act.
iii)That the respondent pay the applicant the sum of $147,002.20 together with interest and costs.
The application is opposed by the respondent who seeks that the application be dismissed and costs.
The bankruptcy occurred following the debtor’s petition presented to the official receiver. The respondent is the mother of the bankrupt and it is not disputed that at the time that he presented his debtor’s petition that his ordinary place of residence was on a cane farm near Mackay and that his mother lived on the same farm property but not in the same residence as the bankrupt although the two were in reasonable proximity of each other.
Originally the trustees of the bankrupt estate were Phillip Gregory Jefferson and Jay Arscott Stevenson, registered trustees in bankruptcy. On 9 August 1999 a meeting of creditors resolved, pursuant to s 181 of the Act, to remove the former trustees and as no other trustee was appointed, the Official Trustee in Bankruptcy became the trustee of the estate.
Immediately prior to 25 September 1998 the bankrupt was the sole registered owner of real property comprising of eight lots, situated at Seaforth, via Mackay, on which he operated a cane farm and cattle production businesses. The bankrupt was also an owner, as a tenant in common with David John Collier, of a further property adjacent to his eight lots. This property was also used in sugar cane farming. The bankrupt was also the lessee of a further property some 10 km from his lots. The above 10 lots and improvements will be referred to as the “Seaforth Cane Farm”.
On 18 September 1998 the bankrupt (and David Collier with respect to Lot 300) entered into an agreement to sell the Seaforth property to Chelmscliffe Pty Ltd as trustee for the Dunwoody Mackay Trust for a combined purchase price of $1,406,000.00. A Mr Michael Hickman acted on behalf of the bankrupt in respect of dealings in the Seaforth Cane Farm and the proceeds from the sale.
At the time of the settlement of the sale of the Seaforth Cane Farm the funds used to purchase the property were provided as follows:
·By loan from Nancy May Dunwoody in the sum of $147,002.20
·By loan from David Collier in the sum of $96,234.20;
·By loan from Westpac Bank in the sum of $1,039,763.60;
·By balance purchase price payable by Chelmscliffe in the sum of $123,000.00.
These proceeds of sale were distributed as follows:
·To Queensland Rural Adjustment Authority (“QRAA”) in the sum of $128,794.38;
·To Suncorp Metway in the sum of $666,622.66;
·To Nancy May Dunwoody in the sum of $147,002.20;
·To David Collier in the sum of $96,234.20;
·To the vendor or whomsoever the vendor directs in the sum of $367,346.56.
Issues
The issues that arise for the court’s consideration in these proceedings are as follows:
·Whether the applicant is entitled to recover the sum of $147,002.02 paid to the respondent by her son Ernest Dunwoody, who is now bankrupt from the proceeds of sale of a Farm, as a preference pursuant to s.122 of the Bankruptcy Act;
·Whether the mortgage granted by the bankrupt Ernest Dunwoody was void as against the trustee under s.120 of the Act as an undervalued transaction.
·Whether the bankrupt was insolvent at the time of the transfer;
·Whether the transfer was in the ordinary course of business in good faith and for consideration as valuable as the market value of the payment.
Background
The respondent is the mother of the bankrupt. Prior to his bankruptcy on the 25 September 1998 the bankrupt was the owner of a cane farm at Seaforth near Mackay in North Queensland. The cane farm was comprised of a number of separate numbered lots.
The respondent asserts that on 4 January 1998 that she and the bankrupt had a conversation whereby she made an offer to her son that she would lend him the sum of $125,000 so that he could repay a debt he owed to his brother Ken Dunwoody. In that discussion she asserts that she agreed with the bankrupt that she would do this as long as he provided her with some security and that he agreed to do this by offering her a mortgage over two of what were known in the Dunwoody family as the “rainforest lots”. She also says that they agreed that the mortgage would provide security for a sum of $20,000 owed by the bankrupt to her as a result of a past indebtedness that he had incurred with his deceased father, as the benefit of that loan had passed to the respondent as the sole beneficiary of her husband’s estate.
Both the respondent and the bankrupt state that the lots to be offered as security for the loan were to be determined after the bankrupt had approached the first registered mortgagee Queensland Development Industry Corporation (“QIDC”) but that they would be two of the “rainforest” lots.
On 5 January 1998 the bankrupt contacted the respondent’s solicitor Mr Gregory Stenson of Messrs Barry, Beaverson & Stenson in Mackay and made an appointment for he and the respondent to discuss this agreement.
On 7 January 1998 the bankrupt only attended an appointment with the respondent’s solicitor, Mr Stenson and provided him with advice as to the proposed agreement. The respondent did not attend that appointment but Mr Stenson telephoned her the following day the 8 January 1998 and discussed this with her and provided her with certain advice. I will refer to the evidence in regard to these attendances with the solicitor later in more detail.
On 8 January 1998 the respondent’s solicitor sent her written correspondence outlining certain advice to the respondent. This correspondence is annexure GVOS 2 to the affidavit of Mr Stenson.
The respondent’s solicitor says that he then had no further communication from the respondent about this matter and sent correspondence to her dated 24 February 1998. This is annexure GVOS 3 to Mr Stensons’ affidavit.
By 27 February 1998 the bankrupt says that he was able to identify the two lots that he would be able to obtain the release of the QDIC mortgage so as to be used as security for the loan.
On 3 March 1998, the respondent asserts that she lent the sum of $125,000.00 to the bankrupt and that she did this by discharging a debt due from the bankrupt to his brother Ken Dunwoody. This is conceded by the applicant for the purpose of these proceedings.
On 6 March 1998 the respondent telephoned her solicitor’s office and left a message that she wanted to go ahead and give further instructions but that her solicitor was away from his office at that time
On 18 March 1998 the bankrupt obtained the signed releases of mortgage from QDIC for the two lots to be offered to his mother as security for the loan.
On 19 March 1998 the respondent’s solicitors had a telephone conversation with the bankrupt and the solicitor was then to prepare the mortgage document.
On the 8 April 1998, the respondent and the bankrupt executed a mortgage in registrable form (“the mortgage”) over two of the lots forming part of the Farm (“the mortgaged lots”). This mortgage is contended by the respondent to have secured a total debt of $145,000.00 plus interest which is made up of the following:
i)the loan of $125,000.00 she made to her son on 3 March 1998: and
ii)a loan of $20,000 made by the bankrupt’s father to the bankrupt in 1994 which devolved on the respondent upon the death of the bankrupt’s father by Will. The value of that loan is said by the respondent to have been at the relevant time, in the sum of $20,000.00
At the relevant time of the 8 April 1998 the bankrupt was involved in litigation with his next door neighbours John and Carmel Sherry.
On 8 May 1998 the solicitors for the respondent did a search of the title with respect to the two lots contained in the mortgage and discovered that there was a further encumbrance on the titles to QRAA that had to be released prior to registration of the respondent’s mortgage. This was attended to by the bankrupt between this date and the 16 June 1998.
On 16 June 1998 the mortgage was registered on the relevant titles.
On the 7 August 1998, judgment was given in the District Court proceedings between the bankrupt and the Sherrys and the judgment was against the bankrupt for the sum of $70,000.00 plus interest.
On 1 September 1998 judgment was entered in the District court proceedings for a total of $81,140.00 plus costs to be assessed on certain terms as set out in the order.
On 25 September 1998 the bankrupt transferred his cane farm property to a company known as Chelmscliffe as trustee for the Dunwoody Family Trust. The trust deed of this trust shows that this trust was a discretionary trust.
On 25 September 1998 the respondent received the sum of $147,002.20 from the settlement proceeds on the transfer of the farm to Chelmscliffe and immediately re-lent those funds to Chelmscliffe.
The bankrupt sought and obtained advice and assistance from Mr Michael Hickman, accountant in relation to the above structure and the transactions.
On 2 October 1998 the bankrupt sent a facsimile to Mr Hickman which he admitted under cross-examination stated “Do they all have to be paid off before I declare insolvency in order not to get them caught in insolvency? If the answer is yes, I urgently need to know”. This is important evidence because it is the bankrupt’s evidence that it was not until the 7 October that the idea of bankruptcy ever entered his head and that this was when advised of this by Mr Bennett, a solicitor to whom he was referred for advice by Mr Hickman on the 5 October.
On 5 October 1998 the bankrupt became aware that a Mareva injunction had been made exparte on 2 October 1998 in the District Court against himself and Chelmscliffe as trustee for the Dunwoody Mackay Trust.
On 5 October 1998 the bankrupt obtained further advice from Michael Hickman who arranged for the bankrupt to receive advice from Mr Tony Bennett a solicitor of Bennett & Phillips and an appointment for the purpose was made on 7 October 1998. The bankrupt says that at this appointment, and for the first time, he was made aware that he was insolvent and should consult a bankruptcy expert about this matter. He says that upon receiving this advice that he, Mr Hickman and Mr Bennett went to consult Mr Phillip Jefferson of Jefferson Stevenson & Co and his position was reviewed and he was advised that he should declare bankruptcy if he could not settle the matter with the Sherrys. On that same day with the assistance of Mr Jefferson he completed and signed a debtor’s petition and statement of affairs which he then retained.
On the 9 October 1998, the bankrupt presented a debtor’s petition and was bankrupt from that date.
The respondent contends that she had no knowledge of her son’s possible insolvency nor his impending bankruptcy as at the 25 September 1998. The bankrupt says that he had not discussed this possibility with his mother
The applicant trustee’s case
The applicant maintains that as the trustee of the bankrupt’s estate, it is entitled to recover the sum of $147,002.20 which was paid to the respondent out of the proceeds of sale of the bankrupt’s farm, purportedly to discharge the mortgage, on the basis that it was a preference under s.122 of the Act.
The applicant further maintains that the mortgage itself is void against the trustee as an undervalued transaction under s.120 of the Act.
The applicant contends that there is no dispute between the parties on the facts that this did constitute a transfer of property by the bankrupt to the respondent and that it was a transfer that occurred within six months of the bankruptcy.
The respondent’s case
The respondent contends that proper consideration was given by her for the granting of the mortgage and this is not a transfer for which she gave no consideration or gave less value than the market value of the property as required by s.120 (1) (b) of the Act.
In respect to the applicant’s preference claim the respondent defends this primarily on the basis that the payment to her of the sum of $147,002.20 on or about the 25 September 1998 was not a preference in that the transaction was not an insolvent transaction of the debtor and that at all times she acted in good faith.
Documents relied upon by the parties
The applicant relies upon the following documents filed in these proceedings:
·Application filed 25 January 2001;
·Statement of Claim filed 25 January 2001;
·Amended Reply filed 27 January 2004;
·Affidavit of John Lawrence Sherry filed 1 May 2002;
·Affidavit of Robert John Siemon filed 8 May 2002;
·Affidavit of Robert Ernest Mumford filed 20 May 2002; and
·Affidavit of Matthew Joiner filed 8 May 2002.
The respondent relies upon the following documents filed in these proceedings:
·Defence filed 27 February 2001;
·Amended defence filed 2 May 2001;
·Further amended defence filed 17 June 2003;
·Affidavit of Nancy May Dunwoody filed 17 January 2003;
·Affidavit of Geoffrey Vincent Ormsby Stenson filed 17 January 2003;
·Affidavit of Geoffrey Vincent Ormsby Stenson filed 17 January 2003;
·Affidavit of John Ernest Dunwoody filed 17 February 2003.
At the hearing Mr Joiner and Mr Mumford were the witnesses who were cross-examined in the applicant’s case and the respondent and John Ernest Dunwoody were the witnesses cross-examined in the respondent’s case.
Relevant legislation
Section 120 provides:
120 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.
Exemptions
(2)Subsection (1) does not apply to:
(a)a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
(b)a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
(c) a transfer of property under a debt agreement; or
(d) a transfer of property if the transfer is of a kind described in the regulations.
Transfers that are not void
(3)Despite subsection (1), a transfer is not void against the trustee if:
(a) the transfer took place more than 2 years before the commencement of the bankruptcy; and
(b)the transferee proves that, at the time of the transfer, the transferor was solvent.
Refund of consideration
(4)The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(5)For the purposes of subsections (1) and (4), the following have no value as consideration:
(a)the fact that the transferee is related to the transferor;
(b) if the transferee is the spouse or de facto spouse of the transferor — the transferee making a deed in favour of the transferor;
(c)the transferee's promise to marry, or to become the de facto spouse of, the transferor;
(d)the transferee's love or affection for the transferor.
Protection of successors in title
(6)This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.
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.
Section 122 provides:
122 Avoidance of preferences
(1)A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor's bankruptcy if the transfer:
(a)had the effect of giving the creditor a preference, priority or advantage over other creditors; and
(b)was made in the period that relates to the debtor, as indicated in the following table.
…..
(2) Nothing in this section affects:
(a)the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or
(b)the rights of a person who is making title through or under a creditor of the debtor in good faith and who gave consideration at least as valuable as the market value of the property; or
(c)a conveyance, transfer, charge, payment or obligation of the debtor executed, made or incurred under or in pursuance of a maintenance agreement or maintenance order; or
(d)a transfer of property under a debt agreement.
(3)The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection.
(4)For the purposes of this section:
(a)a transfer of property is taken to have been made in favour of a creditor if it is made in favour of a person in trust for the creditor; and
(b)a payment of tax, or of any other amount payable to the Commonwealth, or to the Commissioner of Taxation, under or because of an Act of which the Commissioner has the general administration, is taken to be made for consideration equal in value to the payment and in the ordinary course of business; and
(c)a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
(i) that the debtor was unable to pay his or her debts as they became due from his or her own money; and
(ii) that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors.
(4A)A reference in this section (other than subsection (5)) to a creditor of the debtor shall be read as including a reference to a person who would be a creditor of the debtor in relation to a contract, agreement, transaction or other dealing if the contract, agreement, transaction or other dealing were not, in whole or in part, void or unenforceable, or had not been voided in whole or in part, by or under a law of the Commonwealth or of a State or Territory of the Commonwealth.
(5)If a transfer of property is set aside by the trustee in a bankruptcy as a result of this section, the creditor to whom the property was transferred may prove in the bankruptcy as if the transfer had not been made.
(7)In this section:
tax means tax (however described) payable under a law of the Commonwealth or of a State or Territory, and includes, for example, a levy, a charge, and municipal or other rates.
(8)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.
The applicant’s evidence
The applicant’s case was largely a documentary one.
The applicant states that on the pleadings it is clear that there is no dispute that arises that the transfer of property by the bankrupt in favour of the respondent did occur on 25 September 1998 and that this was a transfer that occurred within 6 months of the bankruptcy. The court then needs to determine whether the transfer was by a person who was insolvent and that it had the effect of giving the respondent a preference, priority or advantage over the other creditors.
With respect to s.120 the applicant’s evidence establishes that a payment made under a mortgage that itself is not a preference, does not give rise to a preference, priority, or advantage to the extent of the amount secured by the mortgage but that in this case the Official Trustee says that the mortgage should be set aside under s.120 of the Act.
The applicant states that the evidence establishes that the granting of the mortgage by the bankrupt to the respondent was an undervalue because the consideration was given one month before the advance it was said to secure. There is no dispute that the respondent provided the sum of $125,000 to the bankrupt on the 3 March 1998 and the mortgage loan document was not signed until the 8 April 1998. In the case of the additional amount secured by the mortgage, this was a debt previously outstanding from the bankrupt to his father’s estate and that his father had died some years prior to the execution of the mortgage by the respondent and the bankrupt. The evidence therefore establishes that as at the time of executing the mortgage loan document on the 8 April 1998 the consideration was past consideration for the total amount of $145,000.00.
Evidence in the respondent’s case
The respondent provided her evidence by way of her own affidavit upon which she was cross-examined, two affidavits by Gregory Stenson, her solicitor for the mortgage transaction, and an affidavit of the bankrupt upon which he was cross-examined. Mr Stenson was not cross-examined and there is no reason not to accept his evidence as the truth of the matters contained in his two affidavits and I do so.
Mrs Dunwoody is attacked on her credit by the applicant in relation to a number of issues arising from inconsistencies in her evidence and that of her solicitor. The applicant submits that the court should find that because of these inconsistencies that she is not a witness whose evidence should be accepted unless it is supported by corroborating evidence.
The applicant submits that in a practical sense, the onus in many issues in the proceedings lay on the respondent to lead evidence establishing that ss.120 and 122 did not apply. As to s.20 an evidential onus existed upon the respondent to establish how past consideration for the subsequent mortgage signed on 8 April 1998 could provide consideration for the subsequent mortgage and how her claim that all of the dealings from the 4 January 1998 discussion with the bankrupt and up until the signing of the mortgage loan document on the 8 April was a single same transaction so as to given rise to an equitable security interest that was perfected by the mortgage.
In relation to s.122(2) the onus as a matter of law lay on the respondent to establish that the transaction was in good faith and in the ordinary course of business.
The evidence of the respondent
The respondent’s evidence contained in paragraph 16 of her affidavit is that “I said to Ernest….that I would require a mortgage to be drawn up and security for the loan provided”. In paragraph 18 of that affidavit she says “Further Ernest and I discussed and agreed that for the security for the loan he should grant me a first mortgage over the two lots which the family referred to as the rainforest lots”. In her evidence under cross-examination the respondent was very clear and emphatic that she would not have lent Ernest the money if he had given her no security. She repeatedly denied under cross-examination that she would have in fact lent Ernest the money even if he had offered her no security.
The evidence given in the respondent’s own case from the file notes annexed to the affidavit of Mr Stenson GVOS 1 contains the following diary note for the 8 January 1998. “Attendance by telephone on Mrs Dunwoody advised her that Ernest had spoken to me yesterday. She said that she had spoken to Ernest last night. I advised her that although it was a generous gesture it was fraught with danger unless he could come up with security. She said that she knew that but that she was in a comfortable position financially and that even if he did not come up with security she was still prepared to lend him the money and then if not repaid when she died that her estate could deal with the matter”.
This telephone attendance between Mr Stenson and the respondent was followed up by a letter dated the same date the 8 January 1998. That letter is GVOS 2 and the re to that letter is “Loan to Son”. It further contains the following paragraphs “We refer to the writer’s telephone conversation with you on the 8th January, 1998 in respect of the above matter and confirm the writer’s advice to you that unless your son Ernest is able to come up with sufficient security by way of a first registered mortgage that I would advise against loaning the $125,000.00…. We also confirm that you advised the writer that you were aware of this but wished to help your son and that you realize that there was substantial risk involved but that you wanted to go ahead with it.”
Again in that same letter Mr Stenson states “we reiterate that although we admire your sentiments that we have a duty to advise you that if Ernest’s current litigation matters turn out badly then he may be in a position where he could not repay all or any of the monies to you from the loan”.
When the diary note was put in front of the respondent and she read it in cross-examination she admitted that the conversation did take place as recorded in the diary note. When asked why her solicitor would record her as saying that if she had not said it she said that they recorded a warning from Mr Stenson. When pressed further that this could not be so on any proper reading of the diary note, she stated that if she did say that than it was an injudicious choice of words, that she was elderly and had just woken up from a sleep.
None of those explanations made sense in light of the diary note and the letter sent the same day to the respondent. Mr Stenson’s evidence is part of the respondent’s own case. It was a clear record of a conversation that her solicitor had with her on 8 January 1998. It was a record made contemporaneously with the conversation and I accept it offers the Court the best evidence of what was actually said between the respondent and her solicitor on that day. Also the tone of the warnings in the letter sent by Mr Stenson to the respondent support the conclusion that her solicitor was concerned on her behalf as a result of her clear statement to him that she would still be prepared to lend her son the money even if he did not come up with security. It is the letter of a prudent solicitor confirming strong advice against a course of action foreshadowed by a client when that course of action may put them at risk of exposure to loss.
I accept that as at the 8 January 1998 the respondent had formed the intention to loan the bankrupt the sum of $125,000.00 and obtain security for that loan if he could arrange to provide her with security and that if he could not do so, she would go ahead and loan him the money unsecured.
The second part of the evidence of the respondent which caused concern arises from her evidence given in paragraph 23 of her affidavit. In that she swears that “A few days after the 8th of January 1998 I instructed Mr Stenson that I wanted to proceed with the loan and Mortgage and that he should attend to the documentation”. The applicant contends that the court should conclude that those instructions were not given at that time. The evidence of Mr Stenson is clear and that is that he did not hear anything from the bankrupt or the respondent and that in light of this he sent a letter to the respondent dated the 24 February 1998 asking for her further instructions. There are a number of reasons why I do not accept this evidence of the respondent. Firstly, in the concluding paragraph of the letter to which I have referred in paragraph 74, Mr Stenson tells the respondent that he will be in contact with her again when he returns from Mackay so that there is a strong inference to be drawn that he was to be absent from the office in the near future. Secondly and more importantly, the evidence of Mr Stenson leads me to the conclusion that he was a cautious solicitor who maintained diary notes of all conversations he had with clients and others on the file. There is no diary note of any conversation that he had with the respondent as she alleges took place. His evidence is clear. He did not hear anything further from the respondent or her son and then he wrote a letter which stated as follows “We refer to our letter of the 8th January 1998 in respect of the above matter and would appreciate your advice as to whether you hold further instructions for us”. This letter would make no sense if Mr Stenson had already received instructions from the respondent.
Further the evidence of the bankrupt was that he only obtained advice from QDIC as to the agreement by them to release the security they had as first registered mortgagees over the lots as at the 27 February 1998. Without that information the solicitor could not have progressed the matter by preparing the mortgage loan documents even if instructed as the respondent was not in a position to be able to provide him with instructions as the identification of the lots to be secured by such documentation.
There are other inconsistencies in the evidence given by the respondent and other witnesses in her case. In paragraph 33 of her affidavit she swears to the fact that she went with the bankrupt to Pioneer Permanent Building Society on 4 March 1998 after she says that she had a conversation with the bankrupt who told her that he had spoken to his brother Ken and that Ken needed the money immediately. She says in paragraph 34 that on this day she transferred the money to his account. This is supported by a Westpac Bank telephone transfer requisition dated that day. However the bankrupt swears to the fact that both this conversation and the transfer of funds to Ken were done on the 3 March 1998. Clearly the evidence of the bankrupt in paragraph 40 of his affidavit is not correct as to this date.
In paragraph 35 of her affidavit the respondent swears that a few days after the 4 March 1998 she arranged for Mr Stenson to draw up the mortgage documentation and requested that the mortgage documents cover an additional amount of $20,000 which was outstanding from the previous loan to her son from she and her husband in about 1994. Again there is no diary note on her solicitors file that she spoke to him or gave such instructions. The only record on Mr Stenson’s file is that she called his office and left a message on the 6 March 1998 advising she had further instructions for him. For the same reasons I have set out above about Mr Stenson’s practice of keeping diary notes on his file.
I do not accept this evidence of the respondent.The respondent has given clear evidence both in her affidavit and under cross-examination that she reached an agreement with the bankrupt that she would loan him $125,000 if he provided security over some of his property, which she said it was agreed would be the “rainforest lots”. She is clear that this was agreed to at that time. However the evidence of the bankrupt makes no mention of this part of the agreement. His evidence about the conversation that took place on 8 January 1998 with his mother about the loan is found in paragraphs 24, 26, 27, 29 and 30 of his affidavit. In effect he says that his mother raised with him that his bother Ken needed the money that he owed Ken and that she could assist by loaning him that sum of $125,000 to pay Ken back. He says that she said “I want it all done legally” and that he understood his mother use of those words to mean that she did not want her loan to him to be unsecured and the repayment arrangements to be as sloppy as the loan between he and Ken. He says that she also wanted the $20,000.00 outstanding from the loan from his father’s estate to be included in the security. He does not say anything about the fact that he and the respondent agreed as to any identified lots which would be offered as security. He says in paragraph 30 of his affidavit that he told his mother that he would speak to Leal Kerr at the QAIC about what security could be released for her to get $145,000 security.
This evidence given by the bankrupt is consistent with the evidence found in Mr Stenson’s affidavit. Mr Stenson makes no reference to any discussion with the bankrupt about the rainforest blocks. His diary note which is GVOS 1 says if the conversation he had with the bankrupt that “He {the bankrupt} would approach the bank to see if the bank could release any part of the land for security by way of a first registered mortgage even if it was a first registered mortgage over a substantial part of the loan and then a second mortgage over the balance”.
The respondent is an elderly lady but as her counsel correctly states in her submissions she is intelligent and articulate and she had no difficulty at all in understanding the questions put to her in cross-examination. She impressed me as a very dedicated mother who was fiercely supportive of her son and feels that he has been deeply wronged in the outcome of the litigation between himself and the Sherrys. Given all of the matters I have set out above and from my observations of her giving her evidence I came to the conclusion that she was supportive of her son in all he did and would do whatever he asked her to. I hasten to say not because she believed that she was deliberately doing the wrong thing but because of her belief that it is he who has been wronged in all of this, including receiving a conviction and custodial sentence. She did not demonstrate objectivity where her son was concerned but blind faith. She said in her oral testimony that she had supreme faith in her son. She said that she had never found him to do the wrong thing.
Further her actions in stating that her son give her security for the loan in January 1998 is totally at odds with her actions in September 1998 when she was prepared to provide a loan of 147,002.20 to a company about whom she says she knew nothing simply on a promise from her son that they would provide her with a mortgage later on to secure this payment.
The evidence of the bankrupt
It is submitted on behalf of the applicant that the bankrupt has been convicted of an offence of dishonesty relating to his conduct in disposing of the farm and the balance of the proceeds of the farm, the precise transaction in which the respondent has received the transfer of property the subject of s.122 claim and that this is one basis on which the evidence of the bankrupt in relation to contentious matters ought to be rejected in the absence of corroborating evidence. Obviously he has been convicted of a serious act of dishonesty and whilst that of itself is not necessarily relevant in assessing his credit, it is relevant in the present case as his dishonesty related specifically to issues which are relevant to this application.
Further I was not satisfied that the bankrupt gave reliable evidence concerning his financial circumstances and the extent to which his claimed financial circumstances stand beside his presentation of a debtor’s petition in October 1998. The bankrupt’s evidence where it relates to his bankruptcy and matters associated with it must be viewed with some caution.
I have also had regard to the evidence that the bankrupt gave to the effect that bankruptcy had never entered his head and he had never discussed it with his mother before he had a meeting with Mr Bennet and then Mr Jefferson on 7 October 1998 yet in a facsimile sent by himself to Mr Hickman dated 2 October 1998 where he asks whether certain things have to be paid off before he declared insolvency. This blatant disregard for the truth of evidence given under oath together with the criminal conviction relating directly to the matters in question leads me to the conclusion that his evidence is not to be relied upon without corroboration.
Section 120 claim
It is submitted by the respondent that the Court should find that the conversation of the 8 January 1998, the instructions given to the solicitors both by telephone and at meetings, the advance provided of $125,000 on 4 March 1998 and the subsequent execution of the mortgage document were all part of the one transaction. It is submitted that this was a family transaction and therefore the lack of precision of a dealing that would accompany an advance and mortgage between a savvy commercial entity and a financial institution is understandable. It is submitted for the respondent that the execution of the mortgage was not just an after thought and that the consistent evidence of the respondent, the bankrupt and the respondent’s solicitor made it clear was that it was the intention of the parties to the mortgage that from the agreement reached on 8 January 1998 that the monies should be advanced with some security identified as security over the rainforest lots.
It is submitted that it was sufficient for the purposes of the transaction and the creation of an equitable mortgage that it was always the intention of the parties for there to be a mortgage over some of the rainforest lots and that this was ultimately carried into effect on 8 April 1998. Therefore it is submitted that the transfer of the property and the advance were part of the same overall transaction and accordingly there was consideration for the transfer of the property and that arguments that after that the respondent had no rights to specific enforcement are irrelevant as the mortgage was in fact granted. It is also submitted that the earlier advance of $20,000 was to be made in consideration for the mortgage securing all indebtedness and that this provided fresh consideration for this earlier advance by way of the granting of the security for the further advance.
The existence of an unsecured debt does not constitute consideration for the giving of security in respect of it. In the decision of Re Hyams; Official Receiver v Hyams (1971) 19 FLR 242 at p.254 per Gibbs J who stated:
“It is clear that the mere existence of an antecedent debt is not consideration for the giving of a security in respect of that debt; 'in order to have consideration for a further security there must be an agreement, express or implied, to give time or some further consideration, or else there must be an actual forbearance which ex post facto may become the consideration to support the deed': Wigan v English and Scottish Law Life Assurance Association. In considering whether an agreement to forbear can be implied, or whether the creditor has in fact forborne from taking action on the strength of the security, it is an important matter that the creditor has requested the giving of the security. If the creditor has requested the security, the inference is that if he had not obtained it he would have taken action which he forbears to take on the strength of the security: Glegg v Bromley. Similarly, the fact that a security was given at the request and demand of the creditor was held in Re Dundas; Moss v Dundas to support an implication of an agreement to forbear. In the present case, as I have held, the respondent in no way sought the mortgage. However, even where there has been no request or demand by the creditor, it may be inferred from the circumstances of the case that he did in fact forbear from action on the strength of the security.”
The applicant submits that there was no consideration for the mortgage, either with respect to the earlier loan of $20,000 or the loan of $125,000 advanced on 4 March 1998 and that the Court should find that the evidence does not establish that the consideration, being the alleged promise by the bankrupt to grant a mortgage over the two properties described in the legal mortgage as lots 79 and 514, two of the rainforest lots, was ever made. It is conceded by the applicant that at some stage prior to the making of the advance and even in the first conversation held between the respondent and the bankrupt, that the respondent did ask for some security to be provided for the loan she proposed to make to him and that the bankrupt did advise the respondent that he would try to obtain some, it is submitted by the applicant that the agreement never got beyond that, certainly prior to the respondent making the advance to the bankrupt on the 4 March 1998.
I do not accept the evidence of the respondent that at the time of the first conversation it was agreed that the bankrupt would provide her with security over two of the rainforest lots. Her evidence under cross-examination was that there were in fact four lots out of the eight which compromised the bankrupt’s cane farm that had rainforest on them and she identified those four as having “pristine rainforest” where it was impossible to grow cane. She conceded that in fact the discussion with her son did not go so far as to even stipulate that the security would be given over two of those four lots in the initial discussions of 8 January. She said that she did not check with her solicitor or ultimately do any check that one of the lots which was ultimately offered in the mortgage as security, and which she herself was unable to readily identify as being a “rainforest lot” by its lot number, was the correct lot she thought was being offered as security because “I had complete faith in my son”.
The bankrupt’s evidence is not to the effect that there was any identification of two rainforest lots as the agreed security in the conversation he had with the respondent on 8 January and the evidence of what he told Mr Stenson also is not to that effect. The evidence of the bankrupt as corroborated by Mr Stenson’s diary note is that he would approach the QCIC (the first registered mortgagee) and see if they would release any part of the land for security he could give to the respondent. I am satisfied that if the rainforest lots had been the agreed security for the loan at that time, the bankrupt or the respondent herself in her telephone conversation to Mr Stenson would have made this clear that this was the intended security,
Given my earlier findings about the evidence of the respondent I am satisfied that she and the bankrupt agreed that she would lend him $125,000 so he could pay his brother Ken the money he owed him as the respondent was motivated by a desire to help out both of her sons and in a manner which would see her still obtain the same level of interest she had previously got on the money when invested. I accept that that discussion included the fact that if possible she wanted security and it was agreed, if it were possible for the bankrupt to do so, receive some security for this loan from the bankrupt. I find that it was not discussed nor agreed in any concluded way what lots would form that security as the bankrupt did not know at that stage whether in fact the first registered mortgagee would release any of the lots for security.
However the evidence clearly supports the finding that if security could not be provided, the loan would still be made. This is consistent with the respondent making the statement which I find she clearly made to her solicitor that she would loan the money to her son even if he could not provide security and it is consistent with the actions of her very prudent solicitor in stressing the need for her to get security for her loan and then reiterating this in his written letter of advice to her dated 8 January 1998. No other explanation is plausible, given the file notes of Mr Stenson of 7 & 8 January 1998 and his letter of the 8 January 1998. His advice was the advice of a prudent solicitor concerned that his client was about to put herself at risk of losing a substantial advance that she was proposing to make to her son, whether she got security or not. If it was agreed as the respondent says it was, there would be no reason for her solicitor to give the advice that he did, not just once but twice.
There is no evidence that either the respondent or the bankrupt told Mr Stenson the identity of the blocks available for security before the advance was made. The bankrupt did not obtain the signed releases of mortgage from QDIC until 18 March 1998, two weeks after the advance had been made. Prior to that time his evidence is that on
27 February 1998 Leal Kerr Of QDIC had indicated to him that his proposal for release of the two rainforest lots was likely to be alright but he would have to go back and evaluate it. His further evidence is that it was then that he told his mother that he could give security over these lots. This is not confirmed by the evidence of the respondent as she only says that he made this promise in the conversation of
8 January 1998.
There is no evidence provided from QDIC of any such meeting between the bankrupt and Mr Leal Kerr. Clearly at that time the bankrupt was not in a position to promise his mother that these two lots would be available by release from the QSIC mortgage for the respondent’s security as his evidence is that it was only under consideration by QAIC at that time. He gives no evidence that these lots were free to be used by him as the respondent’s security until
18 March 1998. I do not accept that any such promise or offer was made by the bankrupt to provide the respondent with the security for her loan of these two rainforest lots at that date as he clearly states in paragraph 39 of his affidavit that he did. There he said “In the evening of 27 February 1998…. and that therefore I could give her first security over those two lots in exchange for the loan She know about those two lots referred to as she had previously owned one of them and had hiked through both of them. She said she would agree with that arrangement”.
Further his evidence about this discussion under cross-examination was to say the least unsatisfactory as he interrupted and argued with counsel to the point that it was necessary for me to intervene and explain to him the process of cross-examination and the requirement for him to answer all properly put questions by counsel. However in the midst of that he stated very clearly “that based on a verbal discussion with Mr Kerr things looked OK for releasing the other security over them, the QAIC security over them, and that they should be available as properties over which she could have a first mortgage”. This is quite different from his earlier evidence that he had told her he could give her first security over those two lots. The bankrupt himself at that point in cross-examination stated that “it was an important issue” and I have no doubt from his evidence that he knew this formed a critical element of his mother’s case.
Given this contradictory evidence in the respondent’s case I am not satisfied that any promise was made that identified security over those two lots prior to the making of the advance or indeed before the
18 March 1998 at the very earliest. Despite the release being obtained from QDIC the mortgage was not signed until the 8 April 1998.
I am satisfied that the most likely explanation of the true events surrounding this loan is that things were left in a very loose manner as I have set out above in paragraph 94 until 18 or 19 March 1998 when the QDIC released their mortgage over the two lots and the respondent’s solicitor was instructed to prepare the mortgage documents. The advance was provided on 4 March as it was always going to be provided whether or not the QDIC came back from their investigations and refused to release any of their security over the title.
In these circumstances I am not satisfied that any promise was made such as to give rise to any equitable interest to a mortgage nor that in fact any promise can be found to have arisen from the conversation that took place between the respondent or the bankrupt either on 8 January 1998 or 27 February 1998 which establishes that the advance was consideration for the promise or that the mortgage satisfied the respondent’s right to enforce any performance by him of such alleged promise to provide properly identified security prior to the advance being made. Therefore I find that the only consideration for the transfer was past consideration in the earlier advance made by the bankrupt’s father and the advance made on the 4 March 1998. Clearly given these findings I am satisfied that the loan was not consideration for the mortgage because past consideration is not good consideration for the mortgage [see Official Receiver v Mateo [2003] 1 ABC (NS)].
It is also my finding that the respondent has not on the evidence satisfied the court that the advance and the mortgage were part of a single transaction. The advance was given and I find would have been given by the respondent regardless of whether QDIC ever released any suitable lots for the bankrupt to offer her by way of security. In those circumstances the mortgage was simply the best end result of what she had agreed with her son not the only end result because the loan was always going to be made by her to her son whether or not he was able to what she would prefer and that was to give her security for the loan when (and if) he was able to do that.
Section 122 claim
The next issue for consideration is the extent to which the transfer constituted by the repayment to the respondent by the bankrupt on the 25 September 1998 was a preference under s.122 of the Act.
Clearly the evidence establishes that the payment made to the respondent had the effect of giving her a preference or advantage over other creditors of the bankrupt. There were clearly other substantial creditors of the bankrupt as at the 25 September 1998. I accept evidence placed before the court of those creditors. The bankrupt has had the benefit of payment of her debt in full and there is no doubt that this payment will disturb the statutory order of priorities in the bankruptcy. [Burn v Stapelton (1959) 102 CLR 97 at p.104.]
Further the payment was made within the relevant period specified in s.122(1)(b) of the Act. It was made only 14 days prior to the presentation of the debtor’s petition.
Insolvency of the Bankrupt
Section 122 of the Act applies to a person who is insolvent at the time of the relevant transfer of property and in this case that is the
25 September 1998. The applicant’s evidence is that the bankrupt was clearly insolvent as at the 25 September 1998 when the transfer was made. The respondent submits that that evidence of the bankrupt’s insolvency is based on the date of bankruptcy, the 9 October 1998 and therefore the applicant has provided evidence of insolvency as at the wrong date.
It is submitted by the applicant that in assessing the insolvency at any particular time, one has to have regard to not only whether the person can pay the debts due at that time, but also as to whether the person could command sufficient money to satisfy all debts that were anticipated to fall due and payable in the reasonably immediate future (see Bank of Australasia Limited v Hall (1907) 1528; as applied in International Packer Management v Ensor [1999] FCA 72 at [12]. The evidence of Mr Joiner and Mr Mumford when taken together with the evidence of the bankrupt is supportive of the fact that the bankrupt was insolvent at that date.
In his statement of affairs the bankrupt disclosed the following assets and their values:
·Bank Account of $411.83;
·Superannuation Funds of $367,000;
·Household furniture and effects of $2,000;
·5000 Sampson Exploration Shares of $300.00;
·11,000 Yinnex NL options with an unknown value;
·300 Jupiter Shares with an unknown value;
·Book debts likely to be received of $5,282.50;
·Scientific Test Equipment of $2,000.
The trustee has made diligent inquiry with respect to the assets owned by the bankrupt and I am satisfied that at the 25 September 1998 the bankrupt owned assets totalling $348,340.61. There is no evidence before the court that would suggest that it is the case that the facts that existed in relation to the bankrupt’s ownership of assets changed in any way between the date he sold the Seaforth Cane Farm and the date he lodged his debtor’s position on 9 October 1998 in a positive sense.
The affidavit of the trustee establishes that existing at the relevant date the 25 September 1998 that the bankrupt had liabilities in excess of $539,062 and that as at the date of swearing his affidavit on 17 May 2002 that proofs of debt of the amount of $539,062 have been admitted to rank for dividend in the bankruptcy. There is no evidence from the bankrupt to suggest that his liabilities were markedly different between 25 September 1998 and the 9 October 1998. There is no other evidence other than that sworn to by Mr Mumford that these were his liabilities as a result of the trustee’s investigations.
Considering the evidence given by Mr Mumford and Mr Joiner I am satisfied that at the very least at the 25 September 1998, that the bankrupt had liabilities well in excess of his assets.
Further the bankrupt disclosed that at the time of lodging his statement of affairs being 9 October 1998 and only 14 days after the 25 September 1998 that the bankrupt stated that his income for the 12 months prior to his bankruptcy he had income of $7,000.00 and that in the 12 months after his bankruptcy his income was expected to be $23,400. Again there is no evidence to suggest that upon the sale of the Seaforth Cane Farm that the bankrupt had income greater than these amounts. If indeed he had any entitlement to greater income then he has provided false information to ITSA in his statement of affairs. I find that at the 25 September 1998, the applicant was in fact insolvent when one applies the test laid down in s.5 of the Act and outlined in the decision of Sandell v Porter (1966) 115 CLR 666 and the passage at p.670 as follows:
“An essential step in making out that a payment is a preference within s95 is to establish to the satisfaction of the Court that the payer was at the time of the payment insolvent. Insolvency is expressed in s95 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 case 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 to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability , utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the court and not one to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtors assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.”
In this matter a question arises as the above matter as to whether the court should only look at whether the bankrupt was able to pay his debts only as at the time of the transfer ie the 25 September 1998 in order to establish whether he was insolvent. In Bank of Australasia v Hall supra Griffith’s J at 1527 construed the phrase “the words “as they become due” require, as already pointed out, that some consideration shall be given to the immediate future: and, if it appears that the debtor will not be able to pay a debt which will certainly become due in, say, a month…by reason of an obligation already existing and which may before that day exhaust all his available resources, how can it be said he is able to pay his debts “as they become due”…?”
In this matter the debtor himself lodged a debtor’s petition 14 days after the transfer in question. In that clearly he provided, as he must in order to satisfy the Official Receiver that the petition should be accepted, evidence of his insolvency. In this regard there is also the further evidence of the bankrupt himself that he attended upon Mr Bennett a solicitor on 7 October 1998, only 12 days after the transfer in question and that solicitor, based on the information the bankrupt gave to him clearly believed that he needed to see an insolvency expert because of the state of his affairs and that when he then immediately went to see Mr Jefferson he reviewed his situation and advised him that if he could not settle the matter with the Sherry’s that he should declare bankruptcy. The only inference that can be drawn from that advice is that at that date the bankrupt was insolvent in Mr Jefferson’s opinion.
Mr Bennett in a letter he sent to Mr Elliott of Messrs Beckley Knight & Elliot, solicitors dated 7 October stated the following on behalf of the bankrupt and clearly on his instructions “In a nutshell, it seems to us that, from the information currently available, Mr Dunwoody is insolvent. He has unsecured creditors (where the amount is already due) of $287,275.24 together with current creditors of $38,823.35. The $287,275.24 amount includes the base amount of your client’s judgment of $81,140.00 but makes no allowance for costs. We note from your affidavit that it seems that the District Court costs will likely exceed $100,000.00. This amount also makes no allowance from any liability under the other District Court proceedings (of which we do not have any details at this stage). Mr Dunwoody has no available assets of any value. His main asset was the cane and cattle farm. The cane and cattle farm has been transferred to Chelmscliffe Pty Ltd for $1,406,000.0…. It seems to us at this stage that unless it is possible to reach some accommodation with your clients, then Mr Dunwoody will have to file his own petition”.
The applicant’s and the respondent’s evidence establishes that the bankrupt had sold his only real estate and farming businesses to Chelmscliffe on 25 September 1998. It is no answer to the question of his insolvency at that date as to what his belief was about this matter and in any event it is clear that his belief as to his insolvency as set out in paragraphs 51 to 55 up to his bankruptcy on 9 October 1998 are predicated on the basis that he was the owner of the Seaforth Cane Farm and the owner and sole operator of the farming businesses operated on that farm. That position changed as at the 25 September 1998 when he transferred his interest in the farm to the discretionary trust Chelmscliffe. From that point in time he was only a discretionary beneficiary of that trust and had no ownership rights at law to its assets being the farm, business assets and the business. Further as a beneficiary of a discretionary trust he had no legal entitlement to receive any particular distribution and only had the power to call upon the trustee to consider the exercise of its discretion to make a distribution. There is no evidence from the trustee Chelmscliffe of any intention or promise to make a distribution to the Bankrupt at that time or at any time in the future. There is no evidence as to Chelmscliffe’s financial position before the court.
Further, prima facie he was insolvent when he lodged his debtor’s petition and the only evidence he gives about a substantial change to his circumstances is as a result of the sale of his assets to Chelmscliffe. As at the 25 September 1998 he therefore had no real property or business interests to offer as any security or realise to obtain funds from sale or by way of loan. The three persons whom had provided him with loans in the past, I am satisfied on the evidence, in the case of the respondent and David Collier, they have been repaid and have re-lent those same sums of money to Chelmscliffe on 25 September. In the case of his brother Ken Dunwoody he has been made insolvent by presentation of his own debtor’s petition in July 1998. There is no evidence of others who were available to assist him with borrowings without having the property to offer as security. Further he had entered into a guarantee with the Westpac Bank for the sum that Bank had provided to Chelmscliffe in the sum of $1,040,000 approximately, which I find was a serious impediment to his obtaining any further borrowings from other sources.
The evidence of Mr Mumford was clear in relation to all inquiries that he had made or had been made on his behalf by others as to the position with regard to the bankrupt’s insolvency at the relevant time. He gave frank evidence and made proper answers such as when he was challenged about whether he had made any inquiries as to the entitlement the bankrupt may have had to the proceeds of the 1998 sugar crop. It is clear that his evidence about this matter is correct as shown in the agreement for sale of the cane farm which is annexure REM3 to his affidavit where clause 15 provides for the position in accordance with his evidence under cross-examination.
Given all of that evidence it is clear that as at the 25 September 1998 the bankrupt was insolvent and that he had debts of approximately $540,000 as at 25 September 1998 or likely to arise in the few months following that date and assets of approximately $378,340.6 with only a modest income from which to met the debts due and payable.
Section 122 Defences
The respondent contends that the payment of $147,002.20 made to her by the bankrupt on 25 September 1998 was made in good faith and in the ordinary course of business.
The requirement for good faith in s.122(2)(a) does not require the court to find that the respondent was dishonest. The test of determining good faith is one which is relevant to the circumstances and was stated by Barwick CJ in Queensland Bacon Limited v Rees (1966) 115 CLR 206 at 287 as follows:
“…the existence of knowledge or suspicion of insolvency negatives good faith: and the knowledge of circumstances from which ordinary men of business would conclude that the debtor is unable to meet his liabilities is knowledge of insolvency…”
The above principle although it related to the earlier Act was applied again in case of Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204 at 224 per Priestly JA it was held as follows:
“The circumstances of this appeal and the arguments advanced in its support are fully set out in the reasons of Clarke JA. I wish to deal only with two of these arguments which concern the interpretation and application of s.122 of the Bankruptcy Act 1966 (Cth) and raise the question of the relationship between the expressions ‘in good faith’ and ‘in the ordinary course of business’ in s.122(2). I will discuss this question first and then state my opinion on the two arguments, the first involving what test of ‘ordinary course of business’ has been established by authority (the meaning question), and the second asking whether, in applying that test, the subjective state of mind of the creditor is relevant (the subjective question).”
In dealing with the concept of good faith I refer to the decision of Priestley JA in the Harkness case and in particular p.274 where His Honour states:
“… good faith looks to the actual knowledge and suspicions of the creditor; equally, it seems to me that what is passing in the mind of the debtor is irrelevant, unless it happens to furnish some evidence as to the mental state of the creditor.”
One can infer lack of good faith from evidence of a failure to make inquiries one would have been expected to make as held in Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 and The Zamora (No.2) [1921] 1 AC 801 at 821-813. Lack of good faith cannot be inferred from negligence, stupidity or blindness to what others might be able to see [Official Trustee in Bankruptcy v Mitchell (supra)].
In the decision of Official Trustee v Pastro [1999] FCA 1631 as affirmed on appeal in Pastro v Official Trustee [2000] FCA 744, it was held that the lack of good faith of one person can be imputed to another person when that person has subordinated his or her knowledge or judgement to the first person.
With respect to the “ordinary course of business” speaks of the ordinary course of business in general but it goes to a determination of what would have been the ordinary and common flow of a transaction such as the one in question. This is explained in the decision of Darling Downs CO Pty Ltd v Associated Blue Star Stores(in liq) (1948) 76 CLR 463 and Collins v Harkens & Partnership Pacific (1997) 143 ALR 227 at 291 as follows:
“It is clear that the requirements that the transaction be in the ordinary course of business is not referable to any trade, vocation or business. It speaks of the ordinary course of business in general but it suppose that according to the ordinary and common flow of transactions and the affairs of business there is of course an ordinary course. It means that the transaction must fall into place as part of an undistinguished common flow of business done that it should form part of the ordinary course of business as carried on calling for no remark and arising out of no special or peculiar situation.”
The onus of proving good faith rests with the respondent. It is submitted on her behalf that on the balance of probabilities the evidence of the respondent should be accepted. Her evidence was that she had sufficient knowledge of the affairs of the family farm to satisfy herself that as at 25 September 1998 her son was not insolvent and that while she did not carry out a detailed assessment of the solvency neither could it be said that she has been reckless or simply shut her eyes. It is submitted that she was subjected to sustained cross-examination and no inconsistencies arose in her evidence and that her evidence is corroborated by that of her son.
The applicant submits that the evidence of the respondent should not be accepted and was redolent of being a reconstructed justification and at times was directly inconsistent with that of the bankrupt or her actions and decisions do not sit well beside her earlier evidence about her requirements for the earlier security for her advance of $125,000 to her son when compared with the readiness she showed to advance the sum of $147.000.02 to an unknown company Chelmscliffe in September 1998.
It is submitted by the applicant that the respondent could give no evidence as to why she thought that her son had significant equity in the cane farm except that he must have told her that. Clearly it is submitted that she gave evidence that she and her son regularly discussed his litigation with the Sherry’s and she knew what the outcome was. It was her evidence “to my mind the judgment debt was not properly due until the appeal was determined”. She said that she had no doubt that her son had sufficient resources to pay this judgment debt but she says that she knew nothing of the bankrupt’s farm finances and that she could not possibly have known what his level of debt was.
However when asked about her knowledge of the pressure from the Sherry’s to pay the judgment she said that she did not know about all of that because her son was away a lot in Brisbane. This evidence was clearly inconsistent with the evidence given by the bankrupt. His evidence was that from the period of the trial up until 25 September 1998, he did not travel to Brisbane and that he could not think of a reason why he would have done so. There is no reason for the bankrupt to say that other than what the situation was in his life at that time however, it was clearly in the interest of the respondent to distance herself from any knowledge of what was occurring for her son at this time so that she could support her position of ignorance of these important facts. I accept that it is as the bankrupt says and that as both he and his mother have given evidence was usual for them prior to that time in their lives, he would regularly see her and have meals with her in the evenings and he would be discussing the important affairs as they transpired with the Sherry’s litigation.
The applicant submits that it is not plausible that the respondent did not know what her son was doing when he transferred his farm to Chelmscliffe such that she can rely on the defence of good faith with respect to the transfer on 25 September 1998. The applicant points out that despite the fact that she was providing a loan to this company of $147,002.20 her evidence is that she did not know nor make any inquiries of her son as to who controlled the company, that she did not know or make any inquiry of her son about what arrangements he had with the company, that she released her first registered mortgage over the two lots given by her son so he could complete the sale but then re-lent the money paid for that purpose in exchange for a vague promise given by her son that security would be given to her sometime in the future. There is no evidence about what that security was to be, how the loan was to be repaid to her or how her son would be able to ensure that the company fulfilled that promise to her. She was clear that the only person she spoke to about this was her son.
She puts no evidence before the court that she obtained legal advice from her solicitor about the transaction. She says that she did not even know or make any inquiry as to the sale price of the farm. She gave evidence at the hearing that she knew nothing about the Chelmscliffe deal and the reason she did not make any inquiries was because she had supreme faith in her son.
When this evidence is contrasted with her evidence as to her insistence on security for the loan she gave to her son in the first instances, the level of involvement of her solicitor in advising her and ensuring ultimately that the transaction was documented by the mortgage, this evidence I find is highly implausible. I am satisfied that this matter is hard for this elderly woman. Her son, the bankrupt, has in an unscrupulous manner used his mother’s love, affections and natural desire to do all she could to help him against the unfair outcome of the District Court litigation and avoid any payment of the judgment debt. However, the evidence clearly establishes that when faced with the very quick sale of the cane farm by her son to Chelmscliffe, she was aware that it was being done against the background of the litigation outcome and the pressure on her son to pay this debt. She made a choice to step back and make prudent inquiry of what was needed to protect her interests and she did this in circumstances where not nine months before her solicitor had informed her clearly that she should ensure that advances she made should be supported by proper security.
Taken overall the totality of the evidence in this matter paints a clear picture. The bankrupt had good reason to doubt that he could pay all of his debts and that certainly became the reality once he transferred his major assets to the company Chelmscliffe on 25 September 1998. I do not accept his evidence that the thought of insolvency never even entered his head before his meeting with Mr Bennett on 7 October 1998. His facsimile of 2 October 1998 to Mr Hickman shows that this was well and truly under consideration by him at that date and that was just 7 days after the relevant transfer. The bankrupt is an intelligent man. He fully knew and understood what he was doing in the transaction of 25 September 1998. Whilst I do not find that his mother was privy to all of that, she certainly cannot be found by the Court to have been totally ignorant of it all or at the very least, she should have been suspicious that her son was in difficulties, given the haste and the lack of disclosure to her of what he was doing with the farm. This farm had been a family farm owned and operated by she and her husband for many years prior to it becoming the property of her son. I do not accept that she would acquiesce in its disposal to some unknown company and release her registered mortgage and re-lend the sum of $147,002.20 without some knowledge of what was occurring. If she did then it is clear that by “having supreme faith in her son” she has to be found to have the imputed knowledge of her son.
Given my findings I do not find that the respondent has established the defence of good faith. In any event, even if she had done so, the evidence does not permit a finding that the transfer was in the ordinary course of business. It is the case that prior to the 25 September 1998 the respondent had a first registered mortgage secured over two identified lots of the bankrupt’s cane farm. The agreement provided properly for interest and the terms of repayment. She was repaid the amount outstanding under that mortgage in full on 25 September 1998 by the transfer now under consideration and in the same transaction re-lent all of that sum to Chelmscliffe in the vague and uncertain manner to which I have already referred. Clearly I find this was not a transaction that occurred in the ordinary course of business. The circumstances that gave rise to her obtaining the first registered mortgage from her son have been closely examined in these proceedings. What can be seen from that is that the respondent was a woman who earlier in the same year had involved her solicitors and obtained advice. While she gave her son the money before the granting of the mortgage, she gave clear evidence that she expected to get some security if he was able to give it. In this transaction she told the court she had given the advance but did not know about the details of the company to whom she was lending the money, did not know of how her son was involved in that company and did not have any discussions with anyone from that company about what security she would be given or any of the terms of the agreement to lend the company the money. This cannot be said to be a transfer that was in the ordinary course of business for her when compared to the earlier circumstances of the loan to her son in March/April 1998.
The defence based upon the application of regulation 6.09 and s.120(2)(d)
In the middle of the cross-examination of Mr Mumford at the hearing the counsel for the respondent foreshadowed that he would be raising the argument that a further defence arises for the respondent in this matter as s.120(2)(d) of the Bankruptcy Act provides that s.120(1) does not apply to a transfer of property if the transfer of property is a kind described in the regulations and that this is just such a transfer by application of Regulation 6.09 to the evidence of the Official Trustee.
Regulation 6.09 provides :
“the kind of transfer of property to which paragraph 120(2) (d) of the Act applies is one where the costs of recovering the transferred property would, in the trustees opinion, be likely to exceed the value to the creditors of the property”
It is submitted on behalf of the respondent that as a matter of construction the regulation focuses on the value to the creditors in the recovery of the property and that therefore the cost in recovering the property must not be likely to be, in the opinion of the trustee, greater than the value to the creditors of the property.
The respondent submits that in this case the oral evidence of Mr Mumford reveals that even before this action was commenced in March 2001, the former trustee had incurred professional costs and outlays in respect of the administration of the estate of in excess of $200,000.00. He says that Mr Mumford’s evidence also reveals that in respect of this current action against the respondent that the trustee has outlaid approximately $60,000.00 in legal fees and the Official Trustee, for costs before the two day hearing even commenced and the estate will therefore receive some $30,000.00 pursuant to the Act if the full amount of $147,002.20 is recovered from the respondent. It is submitted that the words used in regulation 6.09 do not require the trustee to consider the value of the property to the estate but rather the “value of the property to the creditors”.
It is submitted that as the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee are a first priority on the estate before payments are made to creditors as provided for in s109 of the Act, then given the evidence of Mr Mumford as to the present and past costs of the administration of the estate of the bankrupt, there will be no benefit that could flow to creditors from this recovery of the transferred property.
It is further submitted by the respondent that the trustee has an obligation to turn his mind to the requirements of the regulations as to have formed an opinion prior to the commencement of this action as he is required to do and in so doing he must consider the value of the property the subject of the transfer in question to the creditors and this necessarily means that he must consider the ultimate value to the creditors. It is submitted by the respondent that the trustee opinion is able to be examined by the court [Avon Downs Pty Ltd v FCT (1949) 78 CLR 360 and FCT v Brian Hatcher Timbers (1971) 128 CLR 52 at 53] and that the trustee failed to consider the return to the creditors before commencing this action to recover property and so has failed to take into account a relevant consideration. The respondent submits that if regulation 6.09 applies, as she says it does in this matter, then the transfer to exempt from being void against the trustee under s.120(d).
The applicant submits that the construction of Reg 6.09 is as follows:
a)That the time for the trustee forming an opinion is the time of commencement of the proceedings;
b)That the criteria of relevance to the application of the section is the trustee’s opinion, which is final unless not made bona fide;
c)That the task for the trustee is to compare the likely cost of taking proceedings to recover the particular property against the value which will be realised to the benefit of the estate if the property is recovered. Ie property is of value to the creditors if it will add net amount to the assets of the estate.
It is submitted for the applicant that it must be that the trustee must form his opinion at the time of commencing the proceedings otherwise the obligation would mean that as proceedings evolve and costs of those proceedings are incurred a matter may move from being one to which s.120 applies to being one to which it does not apply and that result would mean that the trustee may find himself/herself having to abandon proceedings and that a respondent could simply force the trustee to run up costs by conduct in the proceedings and the trustee would be then in a position of having to abandon those proceedings. It is submitted that this would create uncertainty in the administration of estates because the operation of s.120 could not be fixed at a particular point in time
It is submitted that as to the interpretation put on the phrase “value to the creditors of the property” by the respondent is that only if a dividend that it can be that the trustee can undertake action under s.120. It is submitted that this would see a trustee having to review this opinion on almost a daily basis to ensure that a dividend will result to creditors and that this is an impossible interpretation of the regulation. It is submitted that the costs of administration of an estate by a trustee is not a fixed thing. That an interpretation of this regulation in the manner submitted by the respondent would mean that the trustee would during the entire life of litigation pursuant to s.120 of the Act be required to review not only the running costs of the litigation itself but the running costs of the administration of the bankrupt estate.
This could lead to a situation whereby a difficult bankrupt who was not prepared to assist the trustee and who was prepared put the many obstacles that are well known to the Court both in terms of co-operation in the actual administration of the estate and in terms of incurring legal costs for the trustee in either pursuing or defending legal action and in the many other aspects of administration in a position to thwart proceedings for recovery being brought by the trustee in appropriate circumstances simply by their actions.
It is submitted that such an interpretation would produce enormous uncertainty and the potential for litigation in many s120 claims over matters which might ultimately prove irrelevant.
It is submitted by the applicant that the proper construction of this regulation when one considers the underlying purpose of the regulation and s.120 is to permit the trustee to form an opinion to take action for recovery without being second guessed by creditors and allows the trustee to balance the costs of recovery against the ultimate benefit of recovery. Often a trustee will take a series of recovery actions, some for smaller claims and some for larger claims and that overall the trustee must be able to weigh and balance these in total and not in an isolated decision relative only to each recovery action under s120.
I am not satisfied that the interpretation submitted by the respondent is correct. Section 120 by it’s very nature is intended to allow the recovery to the bankrupt estate of property which is properly void against the trustee of the estate. Regulation 6.09 must be read with that sections intention in mind. Administration of an estate is a complex task in many bankruptcies. The very narrow interpretation submitted by the respondent would severely restrict the trustee from making properly informed choices about which recovery actions to pursue, simply because the trustee could not form an opinion about whether that particular action would result in a dividend to creditors.
I accept the submissions of the applicant that this opinion is one to be formed by the trustee at the time he commences the proceedings with a view to the benefit to creditors when considering all relevant matters in the proper administration of the estate.
The question then to be determined is whether the trustee Mr Mumford’s opinion in this matter was properly formed within the context found above. I am satisfied that he did so. In his oral evidence in chief on this issue he described how he went about forming his opinion. He properly assessed the costs of the action against the likely return and determined that it was worth bringing the action as he believed he was required to do under regulation 6.09.
He was cross-examined on the costs of the administration of the estate at that time and gave evidence that there was about $200,000 owing to the former trustees and the that he did not consider that this was something that was relevant to his forming the opinion required of him under regulation 6.09.
In this matter I find that the trustee has properly formed his opinion to bring these recovery proceedings under regulation 6.09. The words used are clear and mean that when bringing the recovery proceedings the trustee must form an opinion that the legal costs involved in recovery will not be outweighed by the benefit obtained from the recovery.
The trustee must form this opinion at the time he institutes the proceedings and not on a continuing basis. If he properly discharges his obligation and forms the opinion at that time, the recovery action proceeds. If he forms the opinion not to bring the recovery proceedings then the transfer is one which is exempt by reason of s.120(2)(d). There is in my finding, no other logical construction that can be given to regulation 6.09 which allows for proper administration of a bankrupt’s estate when that exercise is viewed in it’s totality under the Act.
Conclusion
I find that the application of the trustee must be successful given all of the matters in my decision. The mortgage executed by the respondent and the bankrupt on 8 April 1998 is void against the trustee as an under valued transaction. The trustee is entitled to recover the sum of $147,002.20 paid to the respondent by the bankrupt on 25 September 1998 as a preference under s.122 as the payment was made on the basis that it was to discharge that mortgage.
It follows therefore from the reasons and findings in this judgment that the following orders and declarations be made:
It is declared:
i)that the mortgage executed by John Ernest Dunwoody and Nancy May Dunwoody dated 8 April 1998 is void against the trustee of the bankrupt estate of John Ernest Dunwoody under s.120 of the Bankruptcy Act; and
It is ordered:
ii)That the payment by John Ernest Dunwoody to the respondent on 25 September 1998 in the amount of $147,002.20 is void as a preference under s.122 of the Act.
iii)That the respondent pay the applicant the sum of $147,002.20 together with interest.
I certify that the preceding one hundred and forty one (141) paragraphs are a true copy of the reasons for judgment of Rimmer FM
Associate: Alexandra Adsett
Date: 24 March 2005
0
10
0