Official Trustee in Bankruptcy v Pham
[2019] FCCA 797
•1 April 2019
FEDERAL CIRCUIT COURT OF AUSTRALIA
| OFFICIAL TRUSTEE IN BANKRUPTCY v PHAM & ANOR | [2019] FCCA 797 |
| Catchwords: BANKRUPTCY – Claim for Declaratory and Monetary Relief – s.120 of Bankruptcy Act 1966 (Cth) – transfer of the bankrupt’s and the second respondent’s interests as joint proprietors in a property to the first respondent and the second respondent as tenants in common was void – declaration made – applicant did not receive their full entitlement to proceeds following the sale of the property – applicant entitled to monetary relief and interest. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.5, 30, 58, 115(2), 116(1), 120, 129 |
| Cases cited: Ainsworthworth v Criminal Justice Commission (1992) 175 CLR 564 |
| Applicant: | THE OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE PROPERTY OF DUC HUY PHAM, A BANKRUPT |
| First Respondent: | DUC MINH PHAM |
| Second Respondent: | LINDA PHAM |
| File Number: | PEG 192 of 2018 |
| Judgment of: | Judge Kendall |
| Hearing date: | 5 December 2018 |
| Date of Last Submission: | 5 December 2018 |
| Delivered at: | Perth |
| Delivered on: | 1 April 2019 |
REPRESENTATION
| Counsel for the Applicant: | Ms C. Thompson |
| Solicitors for the Applicant: | Harris Carlson Lawyers |
| The First Respondent: | Appearing in person |
| No appearance by or on behalf of the Second Respondent |
DECLARATION
Instrument of Transfer M946760 whereby the Bankrupt and the second respondent transferred the whole of their estate, title and interest as joint proprietors in the property situated at 41 Lively Circle, Mirrabooka in the State of Western Australia 6061 and more particularly described in Certificate of Title Volume 2133 Folio 449 to the first respondent and the second respondent as tenants in common in equal shares is void against the applicant by virtue of s.120(1) of the Bankruptcy Act 1966 (Cth).
ORDERS
The second respondent pay the applicant the sum of $71,216.99 plus interest in the sum of $11,893.72, being the total sum of $83,110.71.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT PERTH |
PEG 192 of 2018
| THE OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE PROPERTY OF DUC HUY PHAM, A BANKRUPT |
Applicant
And
| DUC MINH PHAM |
First Respondent
| LINDA PHAM |
Second Respondent
REASONS FOR JUDGMENT
Introduction
The applicant is the trustee of the bankrupt estate of Duc Huy Pham (the “bankrupt”).
The first respondent is the father of both the bankrupt and the second respondent. The second respondent is the sister of the bankrupt.
The applicant seeks a declaration that the transfer of the bankrupt’s and the second respondent’s interests as joint proprietors in 41 Lively Circle, Mirrabooka, Western Australia 6061 (the “Mirrabooka Property”) to the first respondent and second respondent as tenants in common in equal shares is void against the applicant by virtue of s.120(1) of the Bankruptcy Act 1966 (Cth) (the “Act”).
For the reasons that follow, the Court finds that the transaction is void and that consequential relief should be granted to the applicant.
Background
The bankrupt and the second respondent purchased the Mirrabooka Property and were registered as joint tenants on 2 April 2012. The transfer for this purchase records that the consideration for the transfer was $437,000.
On 23 March 2015, by registered transfer M946760, the first and second respondents became the registered proprietors of the Mirrabooka property, as tenants in common in equal shares, with Mortgage M946761 to CBA registered against the title as at that date. Transfer M946760 records that the consideration was “natural love and affection” and that the assessed dutiable value of the transaction was $225,000 (the “2015 Transfer”).
Prior to the 2015 transfer, the Mirrabooka Property was unencumbered.
On 15 October 2015, the bankrupt filed a debtor’s petition and a statement of affairs. Pursuant to the debtor’s petition, the applicant was appointed his trustee in bankruptcy.
In his statement of affairs, the bankrupt noted that on 20 March 2015 he sold two properties, being the Mirrabooka Property to the first respondent and a property at 368 Coode Street, Dianella (the “Dianella Property”) to the second respondent.
On 12 February 2016, the respondents entered into a contract for the sale of the Mirrabooka Property. The contract for sale of land by offer and acceptance was entered into between the first and second respondents as vendors and a third party as purchaser for consideration of $460,000.
Settlement of the sale of the Mirrabooka Property took place on 30 March 2016 (the “2016 sale”). That sale resulted in the transfer of the Mirrabooka Property to the third party being registered on 1 April 2016 and the discharge of Mortgage M946761.
In the period leading up to the 2016 Sale, the applicant entered into an agreement with the respondents to remove a caveat it had lodged on 14 March 2016 over the title to the Mirrabooka Property (the “agreement”). The agreement provided that:
a)the applicant would provide a withdrawal of its caveat;
b)the respondents would ensure that 50% of the net proceeds of sale after payment of the mortgage to CBA was discharged were placed into Gadens’ trust account; and
c)the 50% of the net proceeds in the Trust account did not place a cap on the amount that the applicant might seek to recover from the respondents.
The settlement statement for the 2016 Sale records that the sale price was $460,000. Mortgage M946761 was discharged at settlement by the payment of $142,597.97 to CBA. The balance, after the payment of sale and other fees and adjustments, was to be paid as to $151,565.77 to Gadens’ Trust Account, the solicitors for the respondents in the sale, and as to $151,565.78 to the respondents.
Bank records provided under subpoena by CBA record that on 30 March 2016 $151,565.78 was deposited into an Everyday Offset Account at CBA, held solely in the name of the second respondent. On the same day, two amounts that totalled $142,597.97 were credited to other accounts held with CBA, also in the second respondent’s sole name, being a Standard Variable Rate Home Loan Account and a SVR Investment Home Loan Account.
On 29 September 2016, the $151,565.77 retained in the respondents’ solicitor’s trust account was transferred to the applicant.
Proceedings before this Court
In their application dated 9 April 2018, the applicant claims:
1. A declaration that Instrument of Transfer M946760 whereby Duc Huy Pham (Bankrupt) and the Second Respondent transferred the whole of their estate, title and interest as joint proprietors in the property situate (sic.) at 41 Lively Circle, Mirrabooka in the State of Western Australia 6061 and more particularly described in Certificate of Title Volume 2133 Folio 449 (Property) to the First Respondent and Second Respondent as tenants in common in equal shares, is void against the Applicant by virtue of section 120(1) of the Bankruptcy Act 1966 (Cth).
2. The Respondents pay the Applicant the sum of $71,216.99.
3. Interest.
4. Costs.
5. Such further orders as this Honourable Court deems appropriate.
In a one day hearing in this Court the applicant orally applied for claim two to be amended to read that “the second respondent pay the applicant the sum of $71,216.99”.
The Court accepted this amendment.
Issues
This case raises four issues for the Court to determine:
a)whether the transfer of the bankrupt’s interest in the Mirrabooka property was void under s.120 of the Act;
b)whether the distribution of the proceeds of the 2016 sale of the Mirrabooka property was in accordance with the interests of the parties entitled to those proceeds;
c)whether the applicant is entitled to an order for the payment of part of the proceeds of the 2016 sale from the second respondent; and
d)whether the applicant is entitled to interest.
Evidence before the Court
The Court had the following evidence before it:
a)an affidavit of Bronwen Markham affirmed 9 February 2018;
b)an affidavit of Duc Minh Pham affirmed 30 May 2018; and
c)an affidavit of Megan Louise Sullivan sworn 21 November 2018.
The Court also reviewed the transcript of the proceedings prior to finalising these reasons for judgment.
The respondents’ evidence and participation in proceedings
The Court had very limited evidence from the respondents. Despite an order of the Court dated 3 May 2018 that the respondents file and serve written submissions 7 days prior to the hearing, no written submissions were filed by either the first or second respondent.
The first respondent
The first respondent was not legally represented and appeared at the hearing in person.
The only document filed by the first respondent was an affidavit filed on 31 May 2018, which provided as follows:
1. This Affidavit is in response to the the (sic.) Affidavit lodged by Harris Carlson Lawyers, on behalf of Australian Financial Security Authority (AFSA).
2. Sometime in October 2015, I received a letter sent my former property address at 41 Lively Circle, advising that my son, Duc Huy Pham had gone bankrupt. This is my first knowledge of this.
3. The property at 41 Lively Circle, Mirrabooka WA 6059 was my main residence and I had paid off this mortgage over the years, with my employment income. Linda Pham and Duc Huy Pham was unofficial trustee of the estate in the sense that the titles were in their names.
4. I contacted Linda Pham who spoke to AFSA, and was told to sought legal advice, she had proceeded through Gadens Lawyers, back in February 2016.
5. The property was put on the market and sold in March 2016. I had no dealings with the sale of the home.
6. Gadens Lawyers advise was to proceed with a lengthy court case to which was decided against, and Linda Pham at the time had agreed to pay AFSA half the proceeds of the sale of 41 Lively Circle, Mirraboka (sic.).
7. I have not personally received any monetary benefits from the sale of 41 Lively Circle, Mirrabooka, WA 6059.
8. I don't believe that AFSA should be chasing me for the debt of $71,216.99. I believe I was guarantor for a property at some point in the past, but I am not sure of which property or at which point in time I had signed for it.
9. I am a 70 odd year old, retired pensioner with no other income, it is likely that I am waiting to be bankrupt myself if this amount is enforceable upon me.
10. I am currently renting, and own no real estate or have any assets to my name.
11. I note the court date being the 5 December 2018 at 10.15am, and despite my ailing health, I will endeavour to be there.
12. I will be representing myself as I have no money to pay for legal fees.
The first respondent re-iterated the above claims in oral submissions during the hearing as follows:
MR PHAM: … What happened was that I came here more than 30 years. I work very hard in order to make a stepping stone for my children. I could not give you any evidence about the fact that I give them the house so that they can serve ..... equity to build a better future. I didn’t know that my son went down the track of become a gambler and a drug user. So when he came back to me he got an ..... of that that I couldn’t imagine. So he took away all my saving in order to settle that debt but it’s not enough because it’s too big. So after giving him all my saving, my life saving and my wife lifesaving, he went ahead and decided by himself that he give the – back the property to me. I didn’t want it.
Very unwillingly because I know it is not the case that he do it of his compassion for me but he just did it because he tried to get more money out but – so that he can settle his debt. That’s what happened to him and to my family. And because Linda Pham tried to help his brother, he tried to – she tried to buy the property of 368 Lively Circle – no, 368 Coode Street so that he can have a little bit more money to
settle his debt and yet he still couldn’t settle the debt at all. So it is very upsetting for me to say this. After one year, he got involved in the drug and gambling and he got burnt. He got burnt half of his body. He came back to us to ask for help.
He was at St Stanley Hospital for a while and he couldn’t have any money to survive so we supported him all along the way with all the money left and then I worked very hard, my wife worked very hard in order to help him. Because of that, my daughter resented very badly about the situation and she said I don’t have a father and a mother like you. The fact that I, as a daughter, worked very hard in order to be with you and here you are, you help a rotten man again when he got burned by the ..... or something, I don’t know. So finally, it is the situation that I’m in. I couldn’t get in touch with my daughter because she didn’t want to know us any more.
So I lost two children of mine and I lost all the saving in my life after 33 years of hard working in this country. I don’t know – I don’t know – I have nothing left except my old age and yet I have to appear to court. I don’t know why and why I have to be here. But you can see in all the document I accept the law of this country, okay. He transfer the half of the house to me. I unwillingly take it. And then, when they sell the property I gave it, the money, to the lawyers. I have nothing there. And yet I don’t know – I don’t know why I’m here. I simply couldn’t not work out – of the fact – if you can see all the document, there’s nothing to do with me. I’m a victim of the whole situation. So I don’t know what to say any more. Thank you, your Honour.
Whilst giving his evidence, the first respondent appeared honest and quite devastated by what had occurred. The Court assessed him to be an entirely credible witness.
The first respondent’s evidence serves as a background to the circumstances surrounding the 2015 transfer.
As noted above, the applicant is not seeking an order for financial recovery from the first respondent. It is clear from the material before the Court that the first respondent did not receive any financial benefit from the 2016 sale.
The Court is sympathetic to the first respondent’s circumstances. It is clear that his intention was to assist his son and he has paid a heavy price for his generosity. Unfortunately, there is nothing the Court can do to assist the first respondent in relation to the issues before this Court.
The second respondent
The applicant filed an affidavit of service dated 2 May 2018 from Darren Richard Walker swearing that the second respondent was personally served on 26 April 2018 with the applicant’s application and an affidavit of Bronwen Markham dated 9 February 2018.
The Court is satisfied that the second respondent was served with these documents and was aware of these proceedings.
Despite this, the second respondent did not file any documents and did not appear at the hearing.
That the second respondent has not participated in these proceedings has put the Court in the position of having to rely solely on the material provided by the applicant.
In this regard, the Court relies upon the applicant as trustee and officer of the Court (Ex Parte James (1874) LR 9 Ch App 609 at 614 per James LJ) to ensure that any matters which were required to be brought to the attention of the Court were done so. The Court thanks the applicant for their assistance.
Whether the 2015 transfer of the Mirrabooka Property was void
The applicant bears the onus of proof on the elements necessary to establish that the transfer of the Mirrabooka property was void by operation of s.120 of the Act: Cook v Benson (2003) 214 CLR 370, [28].
Section 120 of the Act relevantly provides that:
Transfers that are void against the 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.
Note: For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
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)in the case of a transfer to a related entity of the transferor:
(i)the transfer took place more than 4 years before the commencement of the bankruptcy; and
(ii)the transferee proves that, at the time of the transfer, the transferor was solvent; or
(b)in any other case:
(i)the transfer took place more than 2 years before the commencement of the bankruptcy; and
(ii)the transferee proves that, at the time of the transfer, the transferor was solvent.
Rebuttable presumption of insolvency
(3A)For the purposes of subsection (3), a rebuttable presumption arises that the transferor was insolvent at the time of the transfer if it is established that the transferor:
(a)had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor's business transactions and financial position; or
(b)having kept such books, accounts and records, has not preserved them.
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 partner 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 partner of, the transferor;
(d) the transferee's love or affection for the transferor;
(e)if the transferee is the spouse, or a former spouse, of the transferor – the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975;
(f)if the transferee is a former de facto partner of the transferor – the transferee granting the transferor a right to live at the transferred property, unless the grant relates to a transfer or settlement of property, or an agreement, under the Family Law Act 1975.
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.
(Emphasis in original)
Section 120 of the Act does not purport to apply to every transfer of property by a bankrupt. A transfer of property may only be avoided against the trustee of bankruptcy pursuant to this section where two features are present:
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.
By operation of s.115(2) of the Act, the commencement of the bankrupt’s bankruptcy is the date of the presentation of his debtor’s petition, being 15 October 2015. Here, the five year period marked out by s.120(1)(a) of the Act is the period from 15 October 2010 to 15 October 2015. The transfer of the Mirrabooka property on 23 March 2015 took place within that period.
The first respondent did not give valuable consideration for the transfer as that concept is explained in ss.120(5)(a) and (d) of the Act. The 2015 transfer was for consideration of “natural love and affection”. This transfer took place at a time when the dutiable value of the bankrupt’s interest in the Mirrabooka property was $225,000. Hence, the 2015 transfer can be found to be either for no consideration, in accordance with the definitions in s.120(5) of the Act or for consideration of less than market value.
By operation s.120(3)(a), certain transfers to a related entity are not void despite s.120(1). As the father of the bankrupt, the first respondent was a related entity of the bankrupt: s.5 (‘related entity’ and ‘relative’). If the criteria which are specified by s.120(3)(a) are satisfied, transfers cannot be considered to be void as against the trustee. The criteria are twofold:
a)the transfer took place more than four years before the commencement of the bankruptcy: s.120(3)(a)(i); and
b)the transferee proves that, at the time of the transfer, the transferor was solvent.
In relation to s.120(3)(a)(i), the subject transfer took place in March 2015 which was not more than four years before the commencement of the bankruptcy. As outlined at [39] above, the act of bankruptcy occurred on 15 October 2015. Consequently, the criterion stipulated by s.120(3)(a)(i) cannot be satisfied. As the criteria stipulated by s.120(3)(a)(i) and (ii) are cumulative, the exclusion cannot apply to this case.
For completeness, in relation to s.120(3)(a)(ii), the first respondent – who bore the onus of proof – did not seek to prove that the bankrupt was solvent at the time when the transfer took place. No evidence supports a conclusion of solvency and such evidence as there is, points the other way.
The first respondent’s oral evidence in the hearing was that:
… I didn’t know that my son went down the track of become a gambler and a drug user. So when he came back to me he got an ..... of that that I couldn’t imagine. So he took away all my saving in order to settle that debt but it’s not enough because it’s too big. So after giving him all my saving, my life saving and my wife lifesaving, he went ahead and decided by himself that he give the – back the property to me. I didn’t want it.
Based on the evidence before the Court, there is nothing to indicate that at the time of the transfer the bankrupt was solvent and that s.120(3)(a)(ii) of the Act was satisfied.
Applied here, neither criterion has been satisfied. As such, the transfer is not exempt under s.120(3)(a) of the Act.
Consequently, as at the appointment of the trustee in bankruptcy, the 2015 transfer was void under s.120 of the Act and the property transferred, being the bankrupt’s half interest in the Mirrabooka Property, vested in the trustee for distribution in accordance with the Act.
Declaration – transfer void
Section 120 of the Act gives no express right of action and is silent as to the nature of the relief to which trustees are entitled in relation to a transfer that is void.
Section 30 of the Act confers certain general powers on a court having jurisdiction in bankruptcy proceedings. Section 30(1)(b) confers power to make declaratory orders. This is a discretionary power: per Judge Kelly in Woods & Lombe as Trustees of the Bankrupt Estate of Ulusoylu v Ulusoylu [2017] FCCA 935 at [166] (Woods & Lombe v Ulusoylu).
In Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421, 437-8 (Forster), Justice Gibbs stated that three requirements should, in general, be satisfied before the discretion is exercised in favour of making a declaration:
a)the question must be a real and not a theoretical question;
b)the applicant must have a real interest in raising that question; and
c)there must be a proper contradictor, that is to say, someone presently existing who has a true interest to oppose the declaration sought.
There must also be utility in exercising the wide discretionary power: Ainsworthworth v Criminal Justice Commission (1992) 175 CLR 564, 581-2 (Mason CJ, Dawson, Toohey and Gaudron JJ). Further, the power should be exercised with a proper sense of responsibility. Finally, declaratory orders ought not to be issued unless there are circumstances that call for their making: Forster.
The Court concludes that these requirements are satisfied here for the following reasons:
a)the proposed declaration relates to a transfer of property within the meaning of s.120 and the relevant conduct has been identified with sufficient accuracy;
b)the making of a declaration will serve to resolve a real and not theoretical controversy; namely, as to whether the property of the bankrupt was transferred in circumstances that attracted the operation of s.120 of the Act; and
c)the respondents were proper contradictors. In relation to the second respondent and her involvement in these proceedings, the Court is satisfied that she had every opportunity to oppose the declaration sought and elected not to participate in these proceedings.
The Court finds that it is appropriate in these circumstances to make a declaration of the sort sought by the applicant.
Distribution of funds
The net proceeds of the 2016 Sale, after the payment of sale and other fees and adjustments, were $445,893.52. The applicant argues that the trustee and the second respondent were entitled to those proceeds in proportion to their share in the property, being 50/50 – that is, each was prima facie entitled to $222,946.76.
The net proceeds of the 2016 Sale were, in fact, distributed as follows:
a)$0 to the first respondent;
b)$151,565.78 to the second respondent’s Everyday Offset Account;
c)$151,565.77 to Gadens’ Trust Account, which was then transferred to the Trustee on 29 September 2016; and
d)$142,597.97 to CBA in payment of two loan accounts in the second respondent’s name.
The applicant argues that the $142,597.97 paid to CBA was distributed to the second applicant to her benefit alone and that this did not come to the notice of the applicant until after the agreement was made and the funds had been distributed.
Bank records provided under subpoena by CBA record that on 30 March 2016 two amounts totalling $142,597.97 were credited to accounts held with CBA in the second respondent’s sole name:
a)$130,903.97 was credited to the second respondent’s CBA Standard Variable Rate Home Loan account; and
b)$11,694.00 credited to the second respondent’s CBA SVR Investment Home Loan account, for which the secured property is noted as being the Dianella Property.
The Court notes that in relation the Dianella Property, the Bankrupt and the second respondent became registered as joint tenants on 15 February 2010. The Dianella Property was subsequently transferred to the Bankrupt on 9 May 2014 and then transferred to the second respondent, as sole proprietor, on 23 March 2015. At the time of the second respondent taking sole ownership of the Dianella Property in March 2015, Mortgage M946759 was registered to CBA.
The applicant argues that by paying $142,597.97 to CBA prior to dividing the proceeds 50/50 as between the parties, the second respondent has received $294,163.75 or 65.97% of the net proceeds and the trustee has received only $151,565.78 or 33.99% of the net proceeds. Consequently, the applicant asserts, trustee has received less than his proper entitlement to the proceeds.
The applicant’s calculation of the underpayment is as follows:
a)Total proceeds of sale after costs etc.: $445,893.52;
b)50% entitlement: $222,946.76;
c)Payment to the second respondent or to her benefit: $294,163.75;
d)Payment to the trustee: $151,565.77; and
e)Difference between (b) and (c): $71,216.99.
The Court is satisfied that, based on the evidence before it, the plain inference to be drawn is that the funds distributed to CBA were to the benefit of the second respondent and to the second respondent alone. The $142,597.97 was distributed to two accounts in the name of the second respondent. There is no evidence before the Court that provides any indication that anyone other than the second respondent was linked to the accounts to which the funds were distributed or that anyone other than the second respondent benefited from the funds received by the CBA.
The Court agrees with the applicant that, as a result of the funds being distributed to the second respondent for her sole benefit, the trustee has received less than his proper entitlement to the proceeds.
The applicant’s entitlements
Once it is established that a transaction is void as against the trustee, the trustee’s rights depend on the nature of the transaction avoided and are derived from the general law which becomes applicable on the avoidance of the transaction: Westpac Banking Corporation v Bell Group Ltd (in liq) (No.3) (2012) 44 WAR 1 (Bell) at [3228].
Where a transfer of property occurred prior to the commencement of the bankruptcy, and before any vesting of property of the bankrupt, the transferee is liable to account for those transfers of money as money had and received: Re Fiorino [1994] FCA 1023 at [48].
In Re Fiorino, Gummow J held a mother liable for the proceeds of sale of property which sale she had effected after the date of a sequestration order but before the trustee had elected to avoid the settlement of that property by the bankrupt upon his mother. Gummow J held that the effect of s.120 of the Act upon the son’s disposition of the property to his mother rendered it voidable as from the time at which the trustee’s title accrued. His Honour treated as ineffectual every step taken by the bankrupt which would otherwise have caused the beneficial interest to pass under the transfer from the son to his mother. Pursuant to s.120 of the Act, Gummow J held the mother liable as trustee for the sale of property to which she had no title and therefore liable on a common law count for money had and received. Liability stemmed, not from the mother’s sale to a third party, but from the son’s own disposition.
In this case, from the date that the trustee’s title accrued, being the date of the bankrupt’s bankruptcy, the first respondent held the trustee’s 50% share in the property on trust for the trustee in bankruptcy. The trustee was therefore entitled to 50% of the proceeds of the 2016 sale. As a result of the $142,597.97 being paid to two CBA accounts solely in the name of the second respondent, the second respondent received 65.97% of the proceeds of sale, despite only holding title to 50% of the Mirrabooka property. As a consequence, the second respondent is liable to account to the trustee for money had and received by her over and above her entitlement, being $71,216.99.
In respect of the applicant’s claim for the second respondent to pay the applicant the sum of $71,216.99, the making of a declaration that the 2015 transfer was void does not create an enforceable right to payment of the additional funds received by the second respondent. The trustee has merely vindicated their claim under s.120 that the 2015 transfer was and is void: Woods & Lombe v Ulusoylu at [175].
As noted above, s.30(1)(b) confers a general power on the Court in a bankruptcy proceeding to make such orders as it considers necessary for the purposes of carrying out or giving effect to the Act in any case or matter.
As outlined by Judge Kelly in Woods & Lombe v Ulusoylu at [225]:
Before the power is engaged to make an order for payment under s.30, the applicant must establish that the respondent is under a personal liability in respect of the property transferred. That the transfer is void pursuant to s.120 of the Act does not secure that conclusion. Some other more concrete foundation must be identified as grounding liability.
The objects of Part VI of the Act, to which s.120 forms part, are to assist trustees in the administration of the property comprised in the bankrupt’s estate and to secure that property which ought to comprise part of that estate is recovered and restored to it. More particularly, Division 3 and s.120 of the Act facilitate the object that property available for the payment of debts (including property transferred in certain periods before the date of bankruptcy) is recovered by the trustees of the bankrupt’s estate. Property so recovered will then be available for distribution to creditors under the scheme of the Act: see Part VI, Division 5 of the Act.
As a general rule, where a debtor becomes bankrupt, property of the bankrupt vests in the trustee: s.5 and s.58 of the Act. Pursuant to s.5 of the Act the property of the bankrupt is defined relevantly to comprise the property which is divisible amongst the bankrupt’s creditors and any rights and powers in relation to that property that would have been exercisable by the bankrupt had he or she not become a bankrupt.
To similar effect, the property which is divisible amongst the creditors of a bankrupt relevantly includes all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy and:
the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge.
(see s.116(1)(a)-(b))
The combined effect of these provisions is to vest in a trustee not merely any real or personal property of every description, but also the capacity to take proceedings for exercising all such powers in or over such property as might have been exercised by the bankrupt at the commencement of the bankruptcy.
An obligation to pay a trustee may be found in s.129 of the Act. Section 129 is contained in Division 4 of Part VI – Realization of property – and provides for a trustee to take possession of property of the bankrupt. Relevantly, s.129(4) reads:
If a person has in his or her possession or power any moneys or security that he or she is not by law entitled to retain as against the bankrupt or the trustee, he or she shall pay or deliver the moneys or security to the trustee.
Section 129 proceeds upon the premise that a person has money in their possession that he or she is not entitled to retain as against the trustee or bankrupt. The obligation to pay or deliver that money is conditioned expressly on the absence of an entitlement to retain it as against the bankrupt or trustee.
In this case, the anterior question is whether the trustee has an entitlement to recover the proceeds of sale from the second respondent.
Applied here, s.120 of the Act operated retrospectively to avoid the transfer of the Mirrabooka property from the bankrupt and the second respondent to the first respondent and the second respondent. Every step thereafter which would otherwise have been effectual to pass the beneficial interest in those proceeds of sale to the respondents was invalidated by operation of s.120.
Title to 50% of the net proceeds of the 2016 sale vested in the applicant as from the moment of accrual of their title to the bankrupt’s estate. The second respondent received 65.97% of the proceeds of sale and is liable to account for the proceedings that exceeded her 50% share as money had and received. Given that conclusion, s.129 of the Act is engaged, so founding a liability for payment to the applicant. Section 30 then authorises the making of an order for payment to the applicant.
The applicant is thus entitled to an order that the second respondent pay the applicant the sum of $71,216.99.
Liability for interest on $71,216.99
The applicant’s application includes a claim for interest. The applicant relies upon s.76 of the Federal Circuit Court of Australia Act 1999 (Cth) (FCCA Act) as the basis for this claim.
Section 76(2)(b) of the FCCA Act confers an entitlement in this Court for a party to apply for an order for interest where the proceedings are:
for the recovery of any money (including any debtor damages or the value of any goods) in respect of a particular cause of action.
Awards of interest may be allowed in claims under s.120 of the Act: Woods & Lombe v Ulusoylu; Fodare Pty Ltd v Official Trustee in Bankruptcy [2000] FCA 1721, [11]; Anscor Pty Ltd v Clout (2004) 135 FCR 469, [43(j)]; Combis (Trustee) v Spottiswood (No.2) [2013] FCA 240, [76].
The Court is given a discretionary power by s.76(3) of the FCCA Act to allow a claim for interest. This section also provides the basis upon which such claim may be allowed and calculated. The statutory power is not engaged where good cause is shown to the contrary against an award of interest.
Section 76 of the FCCA Act does not prescribe the rate at which interest is to be awarded. Instead, s.76(3)(c) provides that the Court may allow interest on one of two bases. Relevantly, it allows for interest to be calculated at such rate as the Court thinks fit on the whole or any part of the money and for the whole or any part of the period between the date on which the cause of action arose and the date of judgment. The same principles apply in the Federal Court: Federal Court of Australia Act1976 (Cth), s.51A(1)(a); Kazar v Kargarian (2011) 197 FCR 113 (Kazar), [97] (Foster J, Greenwood and Rares JJ agreeing generally).
In Woods & Lombe v Ulusoylu, Judge Kelly considered a claim for interest in a claim made by a trustee under s.120 of the Act. His Honour was of the view that an award of interest may be informed by the Federal Court’s approach and found that the interest rate should be the Reserve Bank (the “RBA”) cash rate plus 4%.
The RBA prevailing cash rate from the 2016 Sale to date is as follows:
6 May 2015 – 3 May 2016 2.00%
4 May 2016 – 2 Aug 2016 1.75%
3 Aug 2016 – to date 1.50%
Since the award of interest ought to reflect the cost of money to the applicant, the calculation may be made from the date that the cause of action arose: Kazar (2011) 197 FCR 113, [77].
The applicant claims that the Court should exercise its discretion to award interest for the following reasons:
a)the respondents have been aware of the applicant’s claim in the Mirrabooka Property since at the latest, March 2016;
b)the second respondent has had the use of the overpaid funds since settlement of the 2016 sale;
c)the second respondent failed to disclose to the applicant the true position in respect to the disbursement of the funds at settlement;
d)the applicant has attempted to negotiate with the respondents to achieve a settlement of the claim and avoid a hearing, but to no avail; and
e)the applicant has a duty to act in the best interest of the creditors as a whole and the awarding of interest is consistent with the exercise of that duty.
The Court accepts these claims and is satisfied that the circumstances of this case justify the Court exercising its discretionary power to award the applicant’s claim for interest.
The Court agrees with and adopts Judge Kelly’s approach (as outlined at [84] above) in relation to the appropriate interest rate.
The claim for interest will be allowed for simple interest at the RBA cash rate plus 4% for the period 30 March 2016 to entry of judgment. The calculation of interest is:
From
To
Days
Rate
(RBA rate plus 4%)
Total
30/03/2016
03/05/2016
35
6%
$409.74
04/05/2016
02/08/2016
91
5.75%
$1,020.94
03/08/2016
05/04/2019
975
5.5%
$10,463.04
Total
$11,893.72
Conclusion
For the reasons given above, the Court finds that the applicant is entitled to a declaration that Instrument of Transfer M946760, whereby the bankrupt and the second respondent transferred the whole of their estate, title and interest as joint proprietors in the property situated at 41 Lively Circle, Mirrabooka in the State of Western Australia 6061 and more particularly described in Certificate of Title Volume 2133 Folio 449 to the first respondent and the second respondent as tenants in common in equal shares, is void against the applicant by virtue of s.120(1) of the Act.
The applicant is entitled to an order for payment of the additional funds received by the second respondent in excess of her 50% share of the Mirrabooka property following the 2016 sale. Upon the finding that the applicant is entitled to an order that the respondent pay the applicant $71,216.99 and in the exercise of discretion to allow interest on that sum from 30 March 2016 to the date of this judgment, being $11,893.72, judgment should be entered in favour of the applicant for the sum of $83,110.71.
The applicant applied for costs and they should follow the event.
I certify that the preceding ninety-three (93) paragraphs are a true copy of the reasons for judgment of Judge Kendall
Associate:
Date: 1 April 2019
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