Posner v Chen
[2007] FMCA 394
•23 March 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| POSNER v CHEN | [2007] FMCA 394 |
| BANKRUPTCY – Transfer of property by bankrupt – alleged loan agreements – alleged irretrievable breakdown of marriage – separation and divorce in China – loan agreements shams – no consideration for transfer – no irretrievable breakdown of marriage – intention to defeat creditors – transfer void as against trustee. |
| Australian Citizenship Act, 1948 (Cth) Bankruptcy Act, 1966 (Cth), ss.120, 121 Evidence Act, 1995 (Cth), ss.55, 56 Federal Court Rules, o.62 Property Law Act, 1926 (WA), s.126 Transfer of Land Act, 1893 (WA) |
| Henderson v Amadio Pty Ltd (No.1) (1995) 62 FCR 1 Jones v Dunkel (1959) 101 CLR 298 Matthews v Nilant [2002] FMCA 201 Sharment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 Trustee of the Property of Cummins (A Bankrupt) v Cummins (2006) 3 ABC(NS) 814; [2006] HCA 6 Warwick Entertainment Centre Pty Ltd v McKenzie & Anor [2006] WASCA 280 |
| Applicant: | MELVIN MALCOLM POSNER AS TRUSTEE IN BANKRUPTCY OF THE ESTATE OF RONGBIN CHEN |
| Respondent: | XIAO JING CHEN |
| File number: | PEG 81 of 2006 |
| Judgment of: | Lucev FM |
| Hearing date: | 20 September 2006 |
| Date of last submission: | 20 September 2006 |
| Delivered at: | Perth |
| Delivered on: | 23 March 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr K. Yin |
| Solicitors for the Applicant: | Murcia Pestel Hillard |
| Respondent: | Appeared in person |
DECLARATIONS AND ORDERS
The court declares that:
the transfer of land registered on 6 September 2002 by Rongbin Chen to the Respondent (Xiaojing Chen) of his interest in the land described as Lot 220 on Plan 9055 and being the whole of the land comprised in Certificate of Title Volume 382 Folio 113A (and otherwise known as 56 Gummery Street, Bedford, Western Australia) (“the Bedford Land”) is void against the Applicant under sections 120(1)(b) and 121(1) of the Bankruptcy Act, 1966 (Cth);
the Applicant and Respondent are the beneficial owners of the Bedford Land as tenants in common with effect from 28 April 2004.
AND THE COURT ORDERS THAT:
the matter be adjourned to a directions hearing at 11.00 am on 2 April 2007 for such further directions, orders or declarations as may be required.
The Respondent pay the Applicant’s costs (including reserved costs) if not agreed, to be taxed under the Federal Court Rules, 0.62.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG 81 of 2006
| MELVYN MALCOLM POSNER AS TRUSTEE IN BANKRUPTCY OF THE ESTATE OF RONGBIN CHEN |
Applicant
And
| XIAOJING CHEN |
Respondent
REASONS FOR JUDGMENT
Under a Re- Amended Statement of Claim (“the Application”) filed with the Court on 3 August 2006 the Applicant seeks relief under ss.120 and 121 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”).
The relief sought relates to land situated at Lot 222 on Plan 9055, being the whole of the land comprised in Certificate of Title Volume 382 Folio 113A, commonly known as 56 Gummery Street, Bedford (“the Bedford Land”).
The Applicant is the trustee in bankruptcy of Rongbin Chen (“the Bankrupt”). The Respondent was the wife of the Bankrupt. The Respondent alleges that she and the Bankrupt separated in 2002, and were then divorced in 2004, but those facts are the subject of controversy in these proceedings.
A one-half interest in the Bedford Land was allegedly transferred to the Respondent by the Bankrupt by agreement between them made on or before 6 September 2002 in consideration of the payment of $147,500 by the Respondent to the Bankrupt (“the Transfer”).
There is no dispute that the sum of $147,500 said to be consideration for the Transfer was never paid by the Bankrupt to the Respondent. The Respondent alleges that the consideration was met by the forgiveness of repayment of loans from the Respondent to the Bankrupt. The alleged loans are challenged by the Applicant. In essence the Applicant says that the loans were a sham, and that the purported forgiveness of the sham loans was therefore also a sham.
The Respondent says that the alleged loans were proper loans, properly forgiven for the consideration otherwise payable in respect of the Transfer.
The Applicant seeks orders that the Respondent pay to the Applicant the sum of $147,500 plus interest from 6 September 2002 until payment or judgment (whichever is earlier); alternatively, declarations that the transfer is void under s.120 and/or s.121 of the Bankruptcy Act, and consequential orders for rectification of the registered title to the Bedford Land to reflect the Applicant’s interest and/orders for sale or petition of the land under s.126 of the Property Law Act 1968 (WA).
Bankruptcy Act
Sections 120 and 121 of the Bankruptcy Act provide as follows:
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.
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.
(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 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;
(e) if the transferee is the 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.
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.
121 Transfers to defeat creditors
Transfers that are void
(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
(b) the transferor’s main purpose in making the transfer was:
(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or
(ii) to hinder or delay the process of making property available for division among the transferor’s creditors.
Note: For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
Showing the transferor’s main purpose in making a transfer
(2) The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Other ways of showing the transferor’s main purpose in making a transfer
(3) Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.
Transfer not void if transferee acted in good faith
(4) Despite subsection (1), a transfer of property is not void against the trustee if:
(a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and
(b) the transferee did not know, or could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and
(c) the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Rebuttable presumption of insolvency
(4A) For the purposes of this section, a rebuttable presumption arises that the transferor was, or was about to become, 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
(5) 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
(6) For the purposes of subsections (4) and (5), 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;
(e) if the transferee is the 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.
Exemption of transfers of property under debt agreements
(7) This section does not apply to a transfer of property under a debt agreement.
Protection of successors in title
(8) This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.
Meaning of transfer of property and market value
(9) For the purposes of this section:
(a) transfer or 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.
Evidence
The affidavit evidence for the Applicant was:
a)the affidavit of the Applicant sworn 30 June 2006 (“Applicant’s Affidavit”)
b)the affidavit of Shu Hua Wu sworn 3 July 2006 (“Wu’s Affidavit”); and
c)the second affidavit of the Applicant sworn 12 September 2006 (“Applicant’s Second Affidavit”).
In addition there were the following exhibits tendered by the Applicant:
a)Exhibit A – Orders dated 7 January 2004 of Deputy Registrar Harman granting summary judgment against the Bankrupt (and another) (“the Abellio Action Judgments”);
b)Exhibit B – various subpoenaed documents from the Department of Immigration & Multicultural & Indigenous Affairs (“DIMIA”) (“the DIMIA Documents”);
c)Exhibit C – Bankrupt’s Personal Assets, Sub-class 845, Visa Document, January 2002 (“Bankrupts 2002 Personal Asset Statement”); and
d)Exhibit D – Respondent’s Passport (“the Passport”).
The Respondent’s evidence was:
a)Respondent’s statement made on 18 April 2006 (“Respondent’s First Statement”);
b)Respondent’s statement made on 21 July 2006 (“Respondent’s Second Statement”);
c)Respondent’s Reply filed on 25 July 2006 (“Respondent’s Reply”); and
d)Statements made from the bar table at hearing on 18 September 2006 (Transcript pp.35-39), affirmed as true, and correct by the Respondent in her evidence (Transcript p.41).
Wu’s Affidavit and the Applicant’s Second Affidavit were admitted over objection by the Respondent. The Court admitted them because they were relevant to the issues to be determined: Evidence Act, 1995 (Cth) (“Evidence Act”) ss.55 and 56. Two documents: MFI 1, being a 31 August 2006 ANZ Bank announcement concerning the opening of a branch in Guangzhou, China, and MFI 2, a September 2005 News Guangdong announcement concerning a possible 2006 initial public offering (IPO) for the Guangdong Development Bank, are not admissible as they are not relevant to any issue to be determined by the Court: Evidence Act, s.56 (2).
The Applicant’s Second Affidavit, at annexure MP 6, also contains an affidavit sworn by the Respondent on 22 March 2005 and filed in the District Court of Western Australia in relation to an action by the Applicant for summary judgment against the Respondent (Respondent’s March 2005 Affidavit), which is extensively referred to further below in this judgment.
Sequestration Order and bankruptcy
A sequestration order was made against the Bankrupt by Registrar Jan on 23 August 2004. The date of the act of bankruptcy was
28 April 2004.
Consideration and the separation/divorce and property division agreements
The failure to pay the agreed consideration for the Transfer of $147,500 by the Respondent rests upon her assertion that there were various agreements in place with the Bankrupt relating to:
a)loans by the Respondent to the Bankrupt;
b)separation;
c)division of property; and
d)divorce.
The December 1998 loan agreement
The Respondent’s March 2005 Affidavit deposed as follows:
“19. In December 1998, Mr Chen contemplated the purchase of the Bedford Land Property. While Mr Chen had no substantial assets, we sought to be equal partners in the purchase of the Property. In order to do this Mr Chen borrowed a sum of money from me pursuant to a written agreement dated 15 December 1998 (“the December Agreement”).
20. …
21. It is true that the December Agreement was not stamped by the Office of State Revenue until recently, as we envisaged it as a private agreement which need not be stamped at the time it was made.
22. The terms of the December Agreement are as follows:
a) Mr Chen borrowed $86,500 from me (the loan) in order to provide half the purchase price of the Property,
b) Mr Chen promised to repay the loan within three years,
c) in the event that Mr Chen did not pay the loan within three years, I was entitled to reclaim the share of the property which had been purchased in his name as satisfaction of the debt.
23. It was upon the breakdown of my marriage that I sought to reclaim the debt owed to me pursuant to the December Agreement.”
Various bank statements and documents are referred to, and the Respondent continues as follows:
“28. The Property was purchased using my funds. The December Agreement was put in p lace to protect my interest as the provider of the purchase funds for the Property. It is not the case that I was never going to seek repayment from Mr Chen for this loan.
29. Until in or about September 2002 … I have not received any funds from Mr Chen.
Attached to the March 2005 Affidavit as Annexure XJC5 is the written agreement of 15 December 1998 (“ the December 1998 Loan Agreement”). The December 1998 Loan Agreement is in the terms quoted from para 22 of the March 2005 Affidavit quoted above. Annexures XJC 6,7 and 8 to the March 2005 Affidavit show money transferred out of an account with the ANZ in the Respondent’s name (“the Respondent’s ANZ Account”) in the sum of $174,611.00, being the payment due on settlement, which sum is paid to Bankwest Conveyancing by an ANZ bank cheque, dated 15 December 1998. The Respondent’s ANZ Account balance prior to the transfer of the settlement sum was $176,082.78.
The December 1998 Loan Agreement was not translated from its original Chinese until 1 February 2005, and stamp duty was not paid upon the alleged agreement until 7 February 2005. That was shortly after the Applicant filed a Writ of Summons on 24 January 2005 claiming (as the Bankrupt’s trustee in bankruptcy) the $147,500 unpaid consideration for the Transfer of the Bedford Land: Applicant’s Affidavit, annexure MP11.
The evidence indicates that the Bankrupt continued to have substantial assets as at:
a)January 2002, with assets of $559,551,85 (including $250,000 for the Bedford Land and $148,827 for the Business): Bankrupt’s 2002 Personal Asset Statement; and
b)December 2004, “deposits” and “houses” in China: Divorce Agreement.
The May 2000 loan agreement
In May 2000 the Respondent and the Bankrupt allegedly entered into a further agreement (“the May 2000 Agreement”). In the March 2005 Affidavit the Respondent says:
“30. … the terms of this agreement can be summarised:
a) Mr Chen borrowed $100,100.00 from me on 10 May 2000 (”Loan Sum”).
b) I’m entitled to ask for repayment at any time.
31. Mr Chen borrowed the money to purchase/establish a business, which later gave rise to the debts causing his bankruptcy.
32. Whilst I am entitled to ask for repayment at any time, at the time of our separation I agreed not at that point to seek to recover the Loan Sum from Mr Chen on the condition that the Property will belong solely to her [sic-me] and also on the basis that we have been married for over fifteen (15) years and I was sympathetic to the financial difficulties in which he found himself.”
Like the December 1998 Loan Agreement, the May 2000 Loan Agreement was not translated from Chinese to English until
1 February 2005 and not stamped until 7 February 2005.
Separation agreement
The Bankrupt and Respondent were married in Foshan City of Guangdong Province in the Republic of China in or about February 1987: Respondent’s March 2005 Affidavit, para 5.
The Respondent alleges that she and the Bankrupt entered into a Separation Agreement on or about 28 June 2002 (“Separation Agreement”). The Separation Agreement is Annexure XJC1 (in its English translation) to the Respondent’s March 2005 Affidavit.
The Separation Agreement names the parties as party A (the Bankrupt) and B (the Respondent,) sets out their dates of birth and the fact of their marriage in February 1987. It then proceeds as follows:
“Since there are serious problems in their affections for each other, through discussions, the two parties decide to separate and agree as follows:
I The two parties will separate for two years. If in the two years affections for each other are still irredeemable, the two parties will go through the formalities of divorce.
II …
II1 Income of each party and money deposited in the name of each Party shall be possessed, controlled and used by that same Party.
IV There is a separate agreement for the division of the properties.
V…”
The parties then have appended their signature and personal seal and dated the document 28 June 2002. The translation into English of Annexure XJC1 says that the document was witnessed on the same date. The Chinese original is however dated 28 June 2004. This “translation error” was later corrected by the translator at the request of the Applicant: Applicant’s Affidavit, Annexure MP18.
The Respondent says however that the document was actually witnessed on 28 June 2004, this being a date exactly two years after the Separation Agreement was made, and that the witness (whom it transpires is the Respondent’s mother) was witnessing the fact of the two year separation: Transcript, pp.130-131.
The property division agreement
The Separate agreement for the division of property (“the Property Division Agreement”) is also dated 28 June 2002 and is annexure XJC 2 to the Respondent’s March 2005 Affidavit. The Property Division Agreement is in similar form to the Separation Agreement. That form extends to the date translation error referred to above. The substance of the Property Division Agreement is as follows:
“The two parties through discussions, agree to divide the properties in the following way:
I. The house (L220) situated at 56 Gummery Street, Bedford, of Perth in Australia (Title Certificate Number Volume 382 Folio 113A) shall be possessed by [the Respondent].
II. The Mitsubishi Magana [sic] vehicle (Registration Number 1AID823) shall be possessed by [the Respondent].
III. All the monies deposited in ANZ Bank in Australia in the name of the [Respondent] shall be possessed by the [Respondent].
IV. All the properties and shares of CHANG Hoong Pty Ltd & Hoy Hung Pty Ltd founded and registered in Australia shall be possessed by [The Bankrupt].”
Divorce agreement
On 3 December 2004 the Bankrupt and Respondent entered into a Divorce Agreement. The Divorce Agreement (which is Annexure XJC4 to the Respondent’s March 2005 Affidavit) recites the names of the parties and their birthdates and then provides as follows:
“… got married at a registry in Foshan City, Guangdong Province On February, 1987. Later they did not fall in love with each other, so they agreed to divorce and reached the following agreement through negotiation.
1. …
2. The deposits and the houses named to each other belonged to each.
3. The division of the houses after they divorced, both parties bear each other’s debts. The division of houses and the assets abroad was divided according to the agreement issued on June 28, 2002.”
The agreement is affixed with the special seal for the marriage registry of the Shengping Street Office in the Chancheng District of Foshan City and with the seal for the “Registry of Divorce”. There is a Notarial Certificate attesting to the authenticity of the Divorce Agreement from a notary in the Chancheng Notary Public Office.
No mention of loan agreement
None of the Separation Agreement, the Property Division Agreement or the Divorce Agreement mentions the December 1998 Loan Agreement or the May 2000 Loan Agreement. Rather, they refer to agreements reached through “discussion” and “negotiation”.
Registration of the transfer of land
The formal Transfer is an instrument dated 6 September 2002. The Transfer transfers the Bankrupt’s interest as a joint tenant in the Bedford Land to the Respondent for consideration of $147,500. The Transfer was signed by both the Bankrupt and Respondent in the presence of their then solicitor. See Annexure XJC9 to Respondent’s March 2005 Affidavit.
In the Respondent’s March 2005 Affidavit she says as follows:
“17. I became the sole registered proprietor of the Property as a result of the transfer …
18. It was never the understanding that I would have to make any payment to Mr Chen for the transfer … as the transfer was carried out as a result of two interdependent factors:
a) the irretrievable breakdown of my relationship with Mr Chen;
b) the effect of prior written loan agreements, one of which concerns the purchase of the Property.
Explanation of the December 1998 loan agreement
The Respondent asserts two explanations for why the money used to purchase the Bedford Land was hers and not that of the Bankrupt.
Firstly, the Respondent asserted that the Bankrupt “had no substantial assets” and in order “to be equal partners” in the purchase of the Bedford Land the Respondent loaned the Bankrupt money. Secondly, the Respondent asserted that her family had supported the Bankrupt in going into business in 1993 and in migrating to Australia “together with the Respondent” and had provided money for that purpose.
The second explanation is inconsistent with the terms of the December 1998 Loan Agreement itself. The borrowing referred to is on the face of the December 1998 Loan Agreement manifestly intended to refer to a contemporary borrowing for the purchase of the Bedford Land. That is supported by the date of the December 1998 Loan Agreement (15 December 1998) being the date the settlement cheque was paid from ANZ to Bankwest Conveyancing for the Bedford Land.
As to the first explanation, given that the Bankrupt and Respondent had been married for a considerable period of time, title was registrable (with or without contribution) as joint tenants, and it was unnecessary for the Respondent to loan money to the Bankrupt to enable him to be an equal partner: see Trustee of the Property of Cummins (A Bankrupt) v Cummins (2006) 3 ABC (NS) 814 at 832 per Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ; [2006] HCA 6 at paras 71-72 per Gleeson CJ, , Gummow, Hayne, Heydon and Crennan JJ (“Cummins”).
The first explanation is supported by evidence which shows the transfer of monies from the Respondent’s ANZ Account to meet the payment of the settlement sum. However, when it was put to the Respondent in cross-examination that the source of the funds was an account in the name of the Bankrupt with the Bank of Communications in Hong Kong (Bankrupt’s Hong Kong Bank Account”) she stoutly resisted answering, or properly answering, the questions to that end, until specifically directed to do so by the Court: Transcript pp. 95-101. So directed the Respondent conceded that the funds came from the Bankrupt’s Hong Kong Account. The stout resistance to answering was manifested in a defensive demeanour. The overall impression conveyed was that there was something the Respondent did not want to come out, which, at least, in part appears to have emerged. The Respondent contended that the funds from the Hong Kong Bank Account were hers. She said that this was a position she had mentioned to officers of the DIMIA in relation to the migration of the Bankrupt and Respondent to Australia. However, despite having had the opportunity to do so since the Applicant initiated steps to recover its alleged share of the Bedford Land (by the Writ of Summons dated 24 January 2005, and subsequently by this Application filed 29 March 2006), and being invited to do so by the Applicant’s counsel in the course of these proceedings, no documentary evidence to support the claim that the funds forwarded from the Bankrupt’s Hong Kong Bank Account to the Respondent were originally those of the Respondent was produced. In that regard the Court further notes that orders for discovery were made by the Court on 9 June 2006, and no document appears to have been produced evidencing the Respondent transferring funds to the Bankrupt’s Hong Kong Bank Account.
The evidence is that a transfer of $200,000 took place on
5 November 1998 from the Bankrupt’s Hong Kong Bank Account to the Respondent’s ANZ Account: DIMIA Documents, Part M, folio 13. It seems reasonably clear on the evidence that a substantial part of that $200,000 was subsequently used by the Respondent to fund the purchase of the Bedford Land.
The Court therefore concludes that the purchase of the Bedford Land was made with funds provided to the Respondent by the Bankrupt.
The Court has before it evidence concerning the Bankrupt’s assets. The DIMIA Documents indicate that:
a)the Bankrupt was granted a subclass 457 (Independent Executive) Visa in March 1998, and that the Respondent was listed as his “dependent”: Part N;
b)in March 1998 the Bankrupt and Respondent are listed as being the joint holders of registered capital of $140,977.44 in a company Changhong Enterprises Limited: Part P;
c)the Respondent is shown as having $383,333.14 on account with the Shen Zen Development Bank in China: Part P.
The evidence does not support the Respondent’s assertion that the Bankrupt had no substantial assets at or about the time that the December 1998 Loan Agreement was entered into.
May 2000 loan agreement
With respect to the May 2000 Loan Agreement for $100,000 the evidence indicates that on 26 April 2000 there was a transfer from the Bankrupt’s Hong Kong Bank Account to the Respondent’s ANZ Account for that amount: DIMIA Documents, Part M, folio 9. Again, the documentary evidence indicates that the source of the funds for the May 2000 Loan Agreement was from the Bankrupt, not the Respondent.
The trading accounts of the Business (Hoi Hoong Pty Ltd) as at November 2001 indicate “loans from Directors” with a balance of $114,070 as at 30 June 2000: DIMIA Documents Part L. Both the Bankrupt and Respondent were directors of the Business. The fact of the loans from the directors indicated in the accounts is not inconsistent with money having been loaned to the Business from either the Bankrupt or Respondent. However as at 30 June 2000 the amount is not consistent with the amount loaned in May 2000 and there is no evidence of other loans.
The Court therefore concludes that the money loaned for the purposes of the Business under the May 2000 Loan Agreement was money from the Bankrupt’s Hong Kong Bank Account.
Are the loan agreements shams?
The Applicant submitted that the December 1998 Loan Agreement and the May 2000 Loan Agreement were shams.
Whether a document is a sham is to be tested by reference to the judgment in Sharment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453-455 where Lockhart J canvassed the law concerning shams, and said at 454 that:
“A “sham” is therefore for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, and counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation for something else or made to appear to be something which it is not. It is something which is false or deceptive.”
That description of a sham has been adopted subsequently: Henderson v Amadio Pty Ltd (No. 1) (1995) 62 FCR 1 at 129 per Heeney J: Warwick Entertainment Centre Pty Ltd v McKenzie and Anor [2000] WASCA 280 at para 24 per Miller J.
Having regard to all the circumstances of this case, but particularly:
a)The marital relationship between the Bankrupt and the Respondent;
b)The source of the funds alleged to have been loaned;
c)The failure of the Respondent to identify an alternate source for those funds other than the Bankrupt’s Hong Kong Bank Account;
d)The fact that the Bankrupt had substantial assets, contrary to the Respondent’s assertions; and
e)The failure to make any reference to the December 1998 and May 2000 Loan agreements in the Separation Agreement, Property Division Agreement and Divorce Agreement,
the Courts view is that the Loan Agreements are shams. It appears that they were devised by the Respondent, with the concurrence of the Bankrupt, to make it appear that there were loans where there were not.
The transfer
The Transfer was said to be, on the face of the Transfer, for a consideration of $147,500.00. But that “was never the understanding”, and according to the Respondent there were two interdependent factors which resulted in the Transfer being “carried out”: Respondent’s March 2005 Affidavit, para 18. They were:
a)“irretrievable breakdown of my relationship” with the Bankrupt; and
b)the effect of the December 1998 Loan Agreement and the May 2000 Loan Agreement, the former of which the Respondent alleged related directly to the Bedford Land.
Irretrievable breakdown
The Separation Agreement was allegedly signed on 28 June 2002. Is says that the Bankrupt and Respondent have “serious problems in their affections for each other” and consequently have decided “to separate”. There is no mention of either Loan Agreement.
The Transfer was registered on 6 September 2002, allegedly as a consequence, in part, of the relationship breakdown between the Bankrupt and Respondent.
The Separation Agreement was allegedly witnessed on 28 June 2004. The Respondent says that the Separation Agreement was witnessed by her mother: Transcript 131. The Respondent asserts that her mother was a witness to the two year separation between the Respondent and the Bankrupt: Transcript 131. There is no evidence that the Respondent’s mother had come to Australia during the period of the alleged two year separation from June 2002 to June 2004. Given the evidence referred to below concerning the Respondent’s travel movements, particularly between October 2003 and November 2004, it is evident that the Respondent’s mother could not have been a witness to the separation as there is no evidence she ever left China; and the Respondent never left Australia during that period, which included the final eight and a half months of the alleged separation. If the Respondent’s mother did “witness”, by signing, the Separation Agreement (a matter as to which there is no evidence other than that of the Respondent), it is apparent that the Separation Agreement was simply sent to her in China for signing on or before 28 June 2004. There is no evidence that the Respondent’s mother knew whether or not, as a matter of fact, the Bankrupt and Respondent had separated and whether or not there had been an irretrievable breakdown in the relationship. That falls to be judged by other evidence.
On 16 September 2004 the Respondent applied for a grant of Australian citizenship: DIMIA Documents part A. In so doing the Respondent described herself as a “Business Operator”: DIMIA Documents, part A, question 14. Apart from the evidence concerning the Respondent’s involvement in the Business (Hoi Hoong), there is no evidence that the Respondent operated any other business.
The Respondent’s application for citizenship was made on the ground that she was “the spouse of a person who is currently applying for Australian citizenship”: DIMIA Documents, part A, question 35. She named the Bankrupt as her spouse: DIMIA Documents, part A, question 36, and the Bankrupt was indeed making an application for a grant of Australian citizenship at the same time: DIMIA Documents, part B.
The Respondent’s citizenship Application contains a document headed “AMEP Australian Citizenship English Language Record” (“English Language Record”). The English Language Record bears the logos of TAFEWA west coast, the Australian Government Department of Immigration and Multicultural and Indigenous Affairs and AMEP (Adult Migrant Education Program, described as “An Australian Government Initiative”). The English Language Record certifies that the Respondent “has successfully”:
“ - participated in the AMEP for 300 actual hours; or
- been awarded the certificated in Spoken and Written English (see SWE) Level 1 & 2; or
-- Achieved functional English”
The English Language Record goes on to say that the holder of the record when applying for Australian Citizenship “will be assessed as meeting the English Language requirements for Australian Citizenship without the need for further testing at the Citizenship interview”.
Immediately preceding Question 35 on the Respondent’s Citizenship Application the following appears:
“For Citizenship purposes, “spouse” means your husband or wife to whom you are legally married. It does not include a de facto partner. The marriage should be on-going.”
The Bankrupt’s Citizenship Application was made on 24 September 2004 eight days after the Respondent’s Citizenship Application.
Like the Respondent, the Bankrupt made the application on the basis that his spouse (the Respondent) was applying for Australian citizenship.
Both the Bankrupt and the Respondent gave the Bedford property address (56 Gummery Street, Bedford) as their “Current residential address”: DIMIA Documents, part A, question 9; DIMIA Documents, part B, question 9.
Both the Bankrupt’s Citizenship Application and the Respondent’s Citizenship Application contained a declaration (at question 48) that “the information I have supplied in this form is complete and correct in every detail”, and in relation to which there is an appended note indicating it is an offence under the Australian Citizenship Act, 1948 “to deliberately make a false or misleading statement”.
Even allowing for the difficulties inherent in a person from a non-English speaking background making a Citizenship Application, and the issues posed by interpretation of answers given in a court room: see “Ethnicity Language and Disadvantage” in Laster and Taylor, Interpreters and the Legal System (Sydney: Federation Press, 1994) pp. 162-163; it is clear that there was: (a) no separation, or (b) the answers to question 35 of the Respondent’s Citizenship Application (likewise the Bankrupt’s Citizenship Application), were false, or (c) both.
Less than three months after the Bankrupt and Applicant had applied for Australian Citizenship on the basis of “on-going marriage” they divorced in China: see Divorce Agreement.
An examination of the evidence in relation to other circumstances is necessary to determine whether or not there was an irretrievable breakdown in the relationship as at the time of the Transfer.
The conduct of the Respondent in relation to the Passport is instructive. On the first day of the hearing the Court made an order that the Passport be discovered to the Applicant not before 9.30 am the following day: Transcript page 8. At that stage the Respondent was somewhat equivocal as to whether or not the Passport was in Australia (although it is not clear how she would have entered or re-entered Australia without it): Transcript pages 8-9. The Respondent filed a supplementary documents list with a photocopy attached to it. The photocopy was of one page of the Passport: Transcript pages 58 and 112. Counsel for the Applicant complained about the failure to disclose the Passport itself in accordance with the Court’s order of the first morning of the hearing: Transcript pages 111-112. Following that complaint the following was said:
“HIS HONOUR: Yes alright. Well, I think the direction was that there be discovery of the Passport and not a copy. I gather from Ms Chen’s movement that she’s about to discover the Passport for you, Mr Yin, so what I will do is I will adjourn until 10.15 tomorrow and allow you with Ms Chen present to inspect the Passport now and if you require any copies then perhaps we can arrange that overnight.”: Transcript page 112.
The next morning the Court was told from the bar table about certain events which occurred following the adjournment the previous evening (the Respondent was later cross-examined in relation to them). Suffice, presently, to say that the previous evening there was a dispute concerning removal of copies of the Passport from the precincts of the Court, with the Respondent preventing the Applicant from doing so.
Following submissions the Court said:
“I would have thought a clear it from my previous order and what I said at the end of yesterday that the passport was to be discovered in its entirety which I gather that it was and that any copies which were required by the applicant would be arranged overnight. I understand from what has been said that there is some disagreement concerning that. I make it clear that for my purposes, the court’s purposes, it is the entire passport that is to be discovered. The applicant is entitled to a copy of the entire passport for the purposes of this case. And I say that because it is clear thus far in the evidence that there is a dispute in respect of more than one issue about the times which Ms Chen, possibly Ms Chen’s husband, although that won’t be disclosed by her passport, but certainly Ms Chen was or was not in China. And as I say, that goes now it seems to me on the evidence to more than one issue which is in dispute.
In any event, the production yesterday morning of a copy or partial copy of the passport was insufficient and gave rise to Mr Yin’s application yesterday as I understood it. …It is not for the Respondent in these circumstances to tell the Applicant what can and can not be copied. That is a matter for the court based on what the court perceives to be the relevant issues. In this case I think the relevant issues are such that a copy of the entire passport ought be made and provided to the Applicant.”
Orders were made accordingly, and a copy of the complete Passport was provided to the Applicant.
The Respondent was cross-examined in relation to her movements into and out of Australia as revealed by her Passport. The thrust of the cross-examination by Counsel for the Applicant was that the Respondent’s mother could never have witnessed the separation for a period of two years as the Respondent remained in Australia between November 2003 and October 2004, and that the Respondent’s mother bearing witness to that alleged fact was false; alternatively, that her signature on the document was false. The Respondent’s answers to cross-examination on this point were evasive: Transcript pages 130-133. Her demeanour was evasive. Again, it took the intervention of the Court, before the gist of the question being put was answered by the Respondent. At transcript pages 132-133 the following exchanges occurred (and followed on from cross-examination by Counsel for the Applicant at pages 130-132):
“Mr Yin: Right. So they must be correct. Can Ms Chen look at her Passport and tell me if between those two dates, namely 9 October 2003 and 29 November 2004, she left Australia at all?
The Interpreter: I got to look through myself. When you ask me this question I can’t remember, I got to think about it.
Mr Yin: Your Honour, I’ll follow that through after lunch. I’ll leave that for now, your Honour, unless you want to explore this, but I’ve read it. I can’t – there is nothing that I can find.
His Honour: Well, perhaps – I mean, just in relation to that question, if Ms Chen can look through the Passport now – it will only take two minutes – and give us a definitive answer.
Mr Yin: That’s good, your Honour. I’m happy with that.
The Interpreter: Put in a simple way, every time my son has got a school holiday I would go back to China.
His Honour: Well, put in a simple way, Ms Chen, do you agree that you did not leave Australia between 9 October 2003 and 29 November 2004?
The Interpreter: I can’t be sure, I got to look through the Passport.
His Honour: Well, look through it. Mr Yin, you can take the weight off your feet if you need to.
Mr Yin: Thank you, your Honour.
The Interpreter: I got to write them down one after another. I can’t really remember, I really cant remember.
His Honour: Well, all Ms Chen has to do is look through and confirm that she did not depart Australia between 9 October 2003 and 29 November 2004.
The Interpreter: It seems I didn’t leave during that period of time.
His Honour: Thankyou.
After further cross-examination, the Respondent resorted to asserting that “maybe” her mother came to Australia at that time but she could not remember the exact date. There is no other evidence to indicate that the Respondent’s mother was in Australia, either during or for the duration of the period of time between October 2003 and November 2004. Further, if she was in Australia for any period of time it would be expected that the Respondent would have recalled this, rather than telling the Court that the separation documents were drafted in Chinese, and “left at home”: Transcript, p. 134, which in context means they were left in China for signature by the Respondent’s mother. The Respondent rang her mother, so she says, to tell her to sign the document in China because she was not returning to China for the June 2004 holidays.
At the very least, it appears to the Court that the Respondent’s mother’s signature attesting to the fact of two year separation at
28 June 2004 was not made on the basis of the Respondent’s mother’s knowledge of the actual situation between the Respondent and the Bankrupt.
The Respondent also claimed that she did not properly understand the Citizenship Application, and believed that any person over the age of 18 could apply for citizenship and that the application for citizenship was not made “on the ground of family”: Transcript page 136. That explanation is wholly inconsistent with the wording of the Respondent’s Citizenship Application. The Court simply does not believe the Respondent when she says that she understood that the reference to spouse preceding question 35 of the Respondent’s Citizenship Application simply referred to the fact of marriage and not an “on-going marriage”. The Respondent clearly has a functional knowledge of English as indicated by the English Language Record. This, taken together with the wording of the Respondent’s Citizenship Application and the fact that the application was made on the basis of a spousal relationship, would cause an ordinary person (and even one for whom English is a second language) to question if they could make such an application in circumstances where they were allegedly “separated” from their spouse or, there had been an alleged “irretrievable breakdown” in the relationship with their spouse, and they were less than three months from being divorced.
In the Court’s view there was no effective “separation” or “irretrievable breakdown”. That conclusion is reinforced by an examination of the business affairs of the Respondent and Bankrupt which demonstrate that the Respondent and the Bankrupt continued to be involved in the running of the business on a day to day basis: see Transcript 145-151 DIMIA Documents part A (Question 14 – “Business Operator”). Also, the Statement of Affairs completed by the Bankrupt, completed on 14 September 2004, that is two and a half months after the completion of the “two year separation” and less than three months before the Divorce Agreement, indicates that the Bankrupt’s residential address is at the Bedford Land: see Applicant’s Affidavit Annexure MP6.
In all of the circumstances, the Court is simply not satisfied as to the veracity of the Respondent’s statement that there was an “irretrievable breakdown” in the relationship between the Respondent and the Bankrupt as at September 2002, such as to cause the Bankrupt to transfer the Bedford Property to the Respondent. In these circumstances, the Court does not consider that there is any, or any sufficient, evidence of an irretrievable breakdown in the relationship at all. Further, there is not sufficient evidence to satisfy the Court that the parties separated at any time prior to the Divorce Agreement being entered into in December 2004.
Further, having regard to the provisions of s.121 (6)(c) and (e) of the Bankruptcy Act, the relationship between the Respondent and the Bankrupt, and the fact that the Respondent might have granted the Bankrupt the right to live at the Bedford Land, are not consideration for the Transfer.
Loan Agreements as consideration for the Transfer
The Court has already concluded that the December 1998 and May 2000 Loan Agreements are shams. As such they can not constitute consideration for the Transfer. They are no consideration at all. In those circumstances, the Transfer is void against the Trustee by reason of s.120(1)(b) of the Bankruptcy Act.
There is a further reason that the May 2000 Loan Agreement can not be relied upon as consideration for the Transfer. The Respondent has sought to prove the May 2000 Loan as a debt in the Bankrupt’s bankruptcy. By letter dated 10 February 2005 the Respondent’s then solicitors wrote to the Applicant “concerning the debt owed” by the Bankrupt to the Respondent, under the May 2000 Loan Agreement, and asked the Applicant to forward a proof of debt form to them on behalf of the Respondent: Applicant’s Affidavit, Annexure MP12.
It would not be possible for the Respondent to sue on that loan on or after 14 October 2004 if she had already forgiven the Loan in September 2002 as consideration for the Transfer. The threat to sue on the basis of an outstanding debt based on the May 2000 Loan Agreement means that, if the Court is wrong with respect to its conclusion that the May 2000 Loan Agreement was a sham, it is nevertheless the case it was not forgiven as consideration for the Transfer: Matthews v Nilant [2002] FMCA 201. That means that if there was any consideration for the Transfer it remained as nothing, if the Court’s conclusion that the December 1998 Loan Agreement was a sham remains correct, or the Transfer was for consideration of $86,500.00 if the December 1998 Loan Agreement was not a sham. In the latter event, it is clear that the Transfer would have been effected for a consideration that was less than market value, and would have been void against the trustee under s.120(1)(b) of the Bankruptcy Act.
Intention to defeat creditors
Having regard to the findings already made by the Court, namely:
a)that the December 1998 and May 2000 Loan Agreements were a sham;
b)that the Transfer was effected for no consideration, alternately less than market value consideration;
c)that the Bankrupt and Respondent were not separated and their relationship had not irretrievably broken down at the time of the Transfer; and
d)that the Respondent was an evasive witness determined to try to hide, or at least, confuse relevant facts from the Counsel for the Applicant and the Court,
the Court considers that a basis has been laid for an inference that the acts giving rise to the above findings of fact were intended to defeat the interests of creditors, and that in particular, the Transfer was intended to defeat the interests of the creditors, and the Court so finds.
The above conclusion is supported by the fact that the Respondent knew, and was intimately involved, in defending the action that led to the Bankrupt’s bankruptcy, which related to the Business the Bankrupt and Respondent were both involved in. It can be inferred from all the circumstances of this matter that she was aware of the potential consequences, including the loss of the Bedford Land which might arise from an adverse judgment. Again, a consideration of all of the circumstances leads inevitably to the inference that the Transfer was effected for no reason other than to defeat the interests of creditors.
Absence of the Bankrupt
The Court notes that the Bankrupt, having ostensibly left Australia to visit his sick mother in December 2004, and being granted permission by the Applicant to do so, has not returned to Australia: Applicant’s Affidavit, annexures MP9,10 and 27. The Applicant asked the Court to draw an inference adverse to the Respondent by reason of the Bankrupt’s absence and his:
a)failure to assist the Applicant; and
b)failure to be called by or on behalf of the Respondent in circumstances where his evidence might have supported the case put by the Respondent: Jones v Dunkel (1959) 101 CLR 298.
In light of the evidence in this matter it is unnecessary for the Court to draw the inference. In any event, there is no evidence that any person has been in contact with the Bankrupt since the time of the Divorce Agreement. If he is uncontactable (and that is the evidence) then no inference adverse to the Respondent ought to be drawn from his absence.
Conclusions, orders and declarations
The Court concludes:
a)there was no agreement for the transfer of the Bedford Property for valuable consideration;
b)the Transfer of the Bedford Property is consequently void against the Applicant under s.120(1)(b) of the Bankruptcy Act;
c)in the alternative to (a) and (b) the Transfer was for a consideration which is less than market value and is therefore void against the Applicant under s.120(1))b) of the Bankruptcy Act;
d)in any event, the Transfer was entered into with the intention of defeating the interests of creditors, and is therefore void against the Applicant under s.121(1) of the Bankruptcy Act.
The Court will make a Declaration that the Transfer is void against the Trustee under ss.120(1)(b) and 121(1) of the Bankruptcy Act.
There will also be a Declaration that the Applicant and Respondent are the beneficial owners of the Bedford Property with effect from the date of the act of bankruptcy: Cummins at 819 per Gleeson CJ, Gummow, Hayne, Heydon and Creenan JJ; HCA at para 14 per Gleeson CJ Gummow, Hayne, Heydon and Creenan JJ.
The Respondent should pay the Applicant’s costs (including reserved costs), if not agreed, to be taxed under the Federal Court Rules O.62.
In view of the Court’s findings, the Court considers that further Orders in relation to the Bedford Land ought to be the subject of discussions between the parties to see if any agreement might be reached between them, and only if agreement is not reached, will the Court need to further determine the matter. To facilitate those discussions between the parties with a view to agreed orders being brought before the Court, the matter will be adjourned to 11am on 2 April 2007.
I certify that the preceding eighty-eight (88) paragraphs are a true copy of the reasons for judgment of Lucev FM
Associate: M Hewitt
Date: 23 March 2007
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