Official Trustee v Marchiori

[1983] FCA 34

Re: THE OFFICIAL TRUSTEE
And: GINO and CHRISTINE GINA MARCHIORI
No. 154 of 1982
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Fisher J.

CATCHWORDS

Bankruptcy - Avoidance of transactions - disposition fraudulent as against creditors - Proof of intention to defraud - onus of proof - disposition in favour of a child - onus of establishing that child acted in good faith - matter for objective determination.

BANKRUPTCY ACT 1966 ss. 120(1), 121(1)

Noakes v Harvy Holmes & Son (1979) 26 A.L.R. 297

Michael v Thompson (1894) 20 V.L.R. 548

"Cheat's Charter" 91 L.Q.R. 86

HEARING

ADELAIDE

#DATE 11:3:1983

ORDER

1. The disposition of the 1981 Datsun Bluebird sedan in favour of the respondent Christine Gina Marchiori was a disposition made with intent to defraud creditors and was and is void as against the applicant.

2. The respondent Christine Gina Marchiori do within 14 days after service upon her of a sealed copy of this Order transfer the said motor vehicle and the registration thereof to the applicant.

3. The question of costs be reserved.

JUDGE1

This is an application by the Official Trustee in Bankruptcy as trustee of the estate of Gino Marchiori (the bankrupt") for orders setting aside the transfer by the bankrupt of a motor vehicle to his daughter Christine Gina Marchiori ("Christine"). The motor vehicle was a 1981 Datsun Bluebird sedan valued in excess of $5,000 while the bankrupt purported to sell to Christine on 12 February 1982 and the registration of which was subsequently transferred to her name. The Official Trustee ("the applicant") challenged the disposition by the bankrupt of the motor vehicle on two grounds. He contended that it was a disposition of property made by the bankrupt with intent to defraud creditors and in consequence void under s.121 of the Bankruptcy Act 1966 ("the Act"). Alternatively he based his case on s.120(1) of the Act, contending that the disposition was a settlement of property and in consequence void against him in that the settlement took effect within two years before the commencement of the bankruptcy. In his formal documents the applicant stated the date of the disposition as 12 January 1982, although the uncontradicted evidence relates it as 12 February 1982.

Section 120(1) of the Act is in the following terms:

"120(1). A settlement of property, whether made before or after the commencement of this Act, not being

(a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or

(b) a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the spouse of the settlor is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy."

Section 121(1) of the Act provides as follows:

"121(1). Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

The applicant has satisfied me, for the reasons set out hereafter that the disposition of the motor vehicle by the bankrupt was made with intent to defraud creditors, and therefore I propose to consider the matter under s.121(1) as prima facie a fraudulent disposition by the bankrupt. It arose in the following circumstances, the estate of the bankrupt being sequestrated on his own petition on 16 March 1982.

The bankrupt and his family returned to Australia in June 1981 after a trip to Italy. Shortly thereafter he purchased in Cairns, Queensland the motor vehicle, being at the time a new vehicle, for approximately $7,800. At that time and for a number of months prior thereto he, as a journalist, had been unable to work and was in receipt of Sickness benefits, probably Commonwealth Invalidity benefits. In December 1981 he and his family drove from Cairns to Adelaide. He said that he had much difficulty in driving that distance, as his wife who suffers from epilepsy, could only assist to a limited extent. On 12 February 1982 the bankrupt signed an agreement to sell the motor vehicle to Christine, who was at the time a school girl 16 years of age without any source of income. He said he prepared the agreement in a hurry and it is as follows:

"A G R E E M E N T

I, GINO MARCHIORI of 105 Winston Avenue, DAW PARK, S.A. 5041, hereby agree to the selling of my Motor Vehicle, namely a Datsun Bluebird 1981 Registered in South Australia ULB-621 to CHRISTINE GINA MARCHIORI of 105 Winston Avenue, DAW PARK S.A. 5041, for the sum of $5,600.00 (Five Thousand and Six Hundred Dollars) subject to the following conditions:

(a) That she pays $325.00 (Three Hundred and Twenty Five Dollars) as down payment or deposit (money which she has saved while working part-time as shop assistant in the past):

(b) That the remainder be paid in regular instalments as soon as she is fully employed after the termination of her Education. "Regular Instalments" meaning by definition at least $20.00 (Twenty Dollars) per week from her wages or salary:

(c) That she will lend her Motor Vehicle to her Father and Mother whenever requested or required, at any time or place, especially in case of medical treatment connected with her Father's illness:

(d) That she is forbidden from selling the abovenamed Motor Vehicle until such time as the full amount as stated above has been received by her Father, unless otherwise agreed. Dated this 12th day of February, 1982. Signed Christine Gina Marchiori (Christine Gina Marchiori)

Signed G. Marchiori (Gino Marchiori)" Signed D.C. Ridley J.P. (A Justice of the Peace)

There is no doubt that at the date of this agreement the bankrupt was in considerable financial difficulties. Apart from the motor vehicle and his furniture he had no assets other than 6,500 debentures in Cambridge Credit Corporation Ltd, which were virtually worthless. His only income was $322 gross per fortnight by way of sickness benefits and he had a wife and 3 children wholly dependent upon him. He had the following substantial liabilities and monthly commitments.

"Creditor Date Principal Monthly Net Balance Incurred Advanced Commitment at Owing at Date February 1982 of Bankruptcy --------- -------- --------- ------------- ------------- Custom Credit Corp. Ltd., Cairns 25/3/80 $7,127.00 $170.00 $4,727.46

Commonwealth Bank, Melbourne 3/9/79 6,129.23 166.00 2,865.97

Commonwealth Bank, Lilydale 18/11/80 4,147.67 142.00 2,814.67

C.B.F.C. Ltd., Brisbane 19/6/81 6,137.70 156.00 5,600.31

A.N.Z. Bankcard Various Various 71.00 1,456.73

Commonwealth Bankcard Various Various 70.00 1,517.24

C.B.C. Bankcard Various Various 77.00 799.46 ------- TOTAL $852.00 per month" --------------------------------

The bankrupt gave evidence to the effect that the abovementioned monthly commitment of $170 to Custom Credit Corporation Limited was paid on his behalf pursuant to an insurance policy taken out at the time of the loans. The actual monthly payments to these creditors therefore totalled slightly less than $700 which was somewhat more than his total monthly income, leaving nothing with which to maintain his family. He also gave evidence of the fact that his wife had a remainder interest in a dwellinghouse in Brisbane upon which he and his wife had borrowed $15,000 although he was not making any repayments of principal or interest on that borrowing.

On 17 February 1982 the registration of the motor vehicle was transferred from the bankrupt to Christine. Both the bankrupt and his wife became bankrupt on their own petitions on 16 March 1982 and the bankrupt failed to disclose in his statement of affairs either the existence of the motor vehicle or the amount allegedly owing by his daughter on the sale thereof. The applicant first became aware of the motor vehicle and the alleged sale on 21 May 1982 during the public examination of the wife of the bankrupt. I upheld by consent an objection by counsel for the respondents to the admissability in these proceedings of evidence given by the wife on her public examination. Subsequently on his public examination on 16 July 1982 the bankrupt acknowledged that he had entered into the agreement with Christine on 12 February 1982. He said that she was 16 years of age on that date and did not have a driver's licence but was learning to drive at the time. The reasons he gave for the transfer of the vehicle were that he felt he would not be able to drive in the long run and that Christine would help with the car, driving himself and his wife. She also would be under an obligation to make payments which would assist the family.

The Official Receiver on behalf of the applicant filed an application to set aside the transaction on 9 September 1982 and on 19 October 1982 both the bankrupt and Christine gave notice of their intention to oppose the making of the orders sought. The bankrupt denied that in transferring the motor vehicle to Christine he had any intention of defrauding his creditors and both he and Christine contended in effect that the transfer was for valuable consideration and in good faith. In an affidavit filed in support of her notice of opposition Christine said as follows:

"I purchased the motor vehicle because both of my parents are frequently unable to drive, and so that I could own and drive the car. It was our intention that I would assume the driving responsibilities for my family. If my father intended to transfer his motor vehicle to me for the purpose of avoiding his creditors, I had no knowledge of that intention."

It appears to be settled law that the onus of establishing that the disposition was made with intent to defraud creditors and was not a transfer for valuable consideration in favour of a person who acted in good faith lay, at least in the first instance, upon the applicant.

In his evidence the bankrupt said that it was necessary for him to keep the motor vehicle for medical reasons as he did not think he would be able to drive for very long. It is significant that only two months prior to the transfer he had driven virtually without assistance from Cairns to Adelaide. He also said he wished to tie his daughter down to help the family in their serious circumstances and to require her to commit herself to contribute to the family. He said that he received $325 in cash from his daughter and that he assessed the value of the vehicle at $5,600 or thereabouts. He agreed that his daughter had at the time a learner's permit and could only drive with someone beside her and that his wife was able to drive the children to school, to the Flinders Medical Centre and to the shops. All running expenses of the car, including petrol, registration and insurance, the bankrupt had paid and he acknowledged he would continue to pay all expenses until Christine obtained some employment. Moreover notwithstanding the terms of the agreement he said he understood he would be receiving payments from his daughter when she obtained work similar to that she had in Cairns, which was part-time work on portion of two days per week. However at the time he transferred the vehicle his daughter had no work which he said she was finding more difficult to obtain than in Cairns. He said that his daughter would probably remain at school throughout 1983.

Christine gave evidence to the effect that she was born on 17 September 1965 and thus had just attained 17 at the time she gave evidence in December 1982. She said she normally earned $23 per week in Cairns and that she had saved $350, of which she spent $25 at Christmas. She was aware of the fact that both of her parents were unwell and that both had some difficulty in driving the car. She said her father asked her if she would like to buy the car as he would not be able to sell it out of the family as he would need it, and that she might be able to drive him. She hoped to get a job similar to the work she had in Cairns but with wages slightly higher. Contrary to the terms of the agreement she contemplated paying $20 per week to her father if and when she obtained part-time employment. Apart from the medical reasons she said she agreed to buy the vehicle from her father because:

"Also, he said he would like me to give some money to the family as a weekly sort of thing, to help them in their debts. I did not know they were bankrupt then. I just thought they were in money problems; they had money problems."

She also said that at the date of the agreement she had never driven a car and at the time of giving evidence had not enough confidence to drive without someone beside her. Likewise at the time she knew nothing of her parents' financial situation except that they were having money difficulties and that their circumstances might improve as a result of her payments of $20 per week.

In cross-examination she said that she hoped after leaving school to go to University and do a 3 years' Physics course or a 6 year Medical course. In Cairns she had occasionally given money to her parents out of her earnings when "they needed it very desperately" and that if she had not signed the agreement she would probably not have been able to pay the $20 per week that her father expected. When asked if she had ever thought that her father transferred the car so that his creditors would not take it, she replied that she did not know anything "about bankruptcy or creditors or anything like that". She agreed that her father paid and was paying all running expenses and would have to do so until she obtained employment.

No question arose under either of the relevant sections of the Act on the matter of settlement or disposition of property, it being accepted that the sections would apply to the purported sale of the motor vehicle. Nor did the applicant seek to argue that the transaction was a sham and of no legal effect or that the property in the vehicle had not passed to Christine.

In my opinion the bankrupt made the disposition of the motor vehicle to Christine expressly for the purpose and with the intention of defrauding his creditors and I so find. I do not find his evidence to the contrary in any way satisfactory. In this case the words of Brennan J. in delivering the judgment of the Full Court of the Federal Court in Noakes v Harvy Holmes & Son (1979) 26 A.L.R. 297 are very much in point. He said at page 303:

"The case falls squarely within the line of authorities of which Freeman v Pope (1870) 5 Ch App 538 is the leading example, where Lord Hatherley LC said (at 541): 'But it is established by the authorities in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of the settlement (supposing it effectual) that some creditors must remain unpaid, it would be the duty of the judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that the case is within the statute'. That proposition does not trespass upon the rule as to onus of proof; it is a particular illustration of the discharge of the onus by inference from the known facts (cf Re Holland; Gregg v Holland (1902) 2 Ch 360 at 381)."

In this matter the bankrupt was patently insolvent at the time he made the disposition and unable to meet his recurrent commitments. He gave evidence of a number of other grounds which he said justified the transfer to his daughter, but none of these were convincing or even necessitated the change in ownership of the vehicle. The transaction, with all of its exceptional features, is only capable of explanation on the basis that he wished to retain the benefits of ownership whilst at the same time placing the asset beyond the reach of his creditors. Paragraphs (c) and (d) of the agreement are very significant in this regard. The services of his daughter eventually as an alternative or substitute driver for himself and his wife did not require a sale to her of the vehicle. Nor did his desire to obtain her financial assistance to meet his periodic commitments, for, as she said, he had received such assistance whilst in Queensland and there was no evidence to suggest it would not again be available when she obtained employment. If the latter ground was of great significance, a sale on the open market would have produced substantial funds, but of course denied him the benefits which accompany ownership. The fact that he continued notwithstanding transfer of ownership, to pay all running expenses and outgoings and the terms of the agreement itself satisfy me that the transaction was a cloak for retaining the benefits of the vehicle for himself whilst placing the asset beyond the grasp of his creditors. There is no doubt that as far as the bankrupt was concerned the disposition was manifestly an arrangement to defeat his creditors. However that is not the end of the matter, for s.121 excludes a "disposition for valuable consideration in favour of a person who acted in good faith".

The question whether the disposition was for valuable consideration is difficult, in that although I must accept that the relatively small deposit was paid, the prospects of enforcing payment of the balance were precarious if not illusory. If I accept that the agreement was not a sham and that it did affect the legal rights of the parties, then I consider I am bound by the authorities to hold that the payment of $325 and the obligation to pay the balance when in employment was valuable consideration although it falls far short of full consideration. I refer to the recent consideration of this question in Re Abbott (a bankrupt), ex parte the trustee of the bankrupt v Abbott (1982) 3 All E.R. 181.

The final question is whether the transfer of ownership of the vehicle was "in favour of a person who acted in good faith". I am encouraged to note that Pennycuick V.C. in Lloyds Bank Ltd v Marcan and Others (1973) 2 All E.R. 359 at p.370 saw the corresponding provision in England as "extremely obscure", for I find this aspect of the matter very difficult. I accept that in this instance also the burden of proof is on the applicant. In my opinion however there is sufficient in the surrounding circumstances established by the applicant to shift the burden to those seeking to maintain the transaction. I refer to and adopt the approach of the Full Court of the Supreme Court of Victoria in Michael v Thompson (1894) 20 V.L.R. 548, where, having found that the disposition was a fraudulent contrivance to defeat creditors, went on at p.552 to say:

"But although that be so, it would not prevail against the defendant (settlee), unless she was shown to be connected with that fraud . . . Then it is said that there is no evidence fit to be left to a jury that the settlee was connected with the fraud at all. In relation to a matter of this kind, where all the facts concerning the settlement are within the knowledge of the settlor and the settlee and are not within the knowledge of the creditors impugning the settlement, a very slight degree of proof should be sufficient to shift that burden. That is simple on the principle that, if it were not so, the most egregious frauds on creditors could never be investigated. If sufficient though slight evidence is given to impugn the deed, those who know all about the deed have only to go into the box and explain it."

In this matter Christine did go into the witness box, and gave the same explanations of the transaction as her father. Furthermore she stated that she knew nothing of creditors and bankruptcy, and inferentially that she could not be expected to know anything because of her immature years. This feature was relied upon as discharging the onus that she acted in good faith. I attach some significance to the fact that s.121 requires the person taking to have acted in good faith whereas s.120(1) refers to a settlement "made in favour of a purchaser or encumbrancer in good faith". The difference in emphasis is readily apparent and in this respect the corresponding English provisions accord with the requirements of s.120. They do not expressly impose an obligation on the person taking to have "acted in good faith".

The difficulties on the part of creditors which were referred to by the Full Court of Victoria in Michael v Thompson supra are compounded if the person seeking to perpetrate the fraud effects a transfer to a child. If the attempt is successful, there is considerable justification for applying the label of "The Cheat's Charter" (see 91 Law Quarterly Review 86) to s.121 of the Act. It would be too easy to defeat the just claims of creditors and to avoid the intention of Parliament.

However these difficulties can be overcome if in the first instance there is evidence to cast doubts on the transaction and then to shift the onus to the transferee. In such a case in my opinion the transferee does not necessarily discharge her onus by merely proving lack of knowledge or inability through immaturity to act in bad faith. I do not consider that the question whether the transferee acted in good faith is established exclusively by reference to her subjective state of mind. It is rather in my opinion a matter for objective determination not merely whether she was aware of the fraudulent nature of the transaction but whether she should have been aware or should be held to have been aware of the fraud being perpetrated on the creditors. In this regard it will be regarded as fraudulent if its effect is to hinder or delay creditors. As Pennycuick V.C. said in Lloyds Bank Ltd. v Marcan and Others at p.367 the word "defraud":

" . . . is not intended to be confined to cases of fraud in the ordinary modern sense of that word, i.e. as involving actual deceit or dishonesty."

Confining my consideration to the facts of this matter, I am reviewing the position of a child of 16 years who has had some experience in employment and who was aware of the financial difficulties of her parents. In my opinion if she was not aware, she should have been aware of the consequences of the transaction. I refer to the discussion of the expression "good faith" by Kay L.J. in Mogridge v Clapp (1892) 3 Ch 382 at 401 when he said: "Good faith in that connection must mean or involve a belief that all is being regularly and properly done."

There is no doubt that Christine knew of her parents' financial difficulties. In her words, she made contributions out of her earnings when "circumstances were desperate". The reasons that she gave in the witness box to justify the transfer can not stand critical objective examination. She merely repeated those given by her father upon which I earlier made comment. She relied upon her immaturity and lack of commercial experience, saying that she knew nothing of creditors and bankruptcy, to justify her failure to look beyond the reasons she gave for her purchase. In my opinion this state of affairs does not avail her to discharge her onus to my satisfaction. She was over 16 years of age, and thus of an age when the criminal law for many purposes regards her as an adult.

Furthermore, the onus, in the circumstances, on her to establish that she acted in good faith can not be discharged by proving that she did not have sufficient maturity to have acted in bad faith. The consequences of accepting such reasoning could equally be applied to a transferee of limited intelligence or limited education.

It would be unrealistic to accept as evidence of her good faith her limited understanding consequent upon her immaturity. This circumstance may make it more difficult for her, and the bankrupt, to sustain a defence of the transaction but, in my opinion, properly so. The crucial fact is that she failed to ask any questions of her father or to give any consideration to the consequences of the transfer of ownership of the vehicle.

I find that I am not satisfied by the explanations given by Christine in the witness box and I find that she has not established to my satisfaction that she acted in good faith. The disposition of the motor vehicle was therefore a disposition made with intent to defraud creditors and is void as against the applicant. The order of the Court is that the respondent transfer the motor vehicle and the registration thereof to the applicant within 14 days after service upon her of a sealed copy of this Order.