Rangott v Sharp
[2007] FMCA 324
•27 March 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| RANGOTT v SHARP | [2007] FMCA 324 |
| BANKRUPTCY – Transfer of bankrupt’s interest in a property – application for declaration transfer void as undervalued transaction – application for declaration transfer void as a transfer to defeat creditors – credibility and reliability of witnesses – equities in property – presumption of advancement – presumption not rebutted – consideration for natural love and affection – forgiven loans – discharge of mortgage – right to live rent free – no valuable consideration – solvency of bankrupt at time of transfer – not proved solvent – transfer void – relief – doctrine of exoneration – doctrine of unconscionability – transfer of interest to trustee. |
| Bankruptcy Act 1966 (Cth), ss.5, 120, 121 |
| Calverley v Green (1984) 155 CLR 242 Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 Jones v Dunkel (1959) 101 CLR 298 Lin v Official Trustee in Bankruptcy (No.1) [2001] FMCA 106 Parsons v McBain (2001) 109 FCR 120 Sandell v Porter (1966) 115 CLR 666 The Trustees of the Property of John Daniel Cummins, A Bankrupt v Cummins [2006] HCA 6 |
| Applicant: | WILLIAM BALFOUR RANGOTT |
| Respondent: | JOHN SHARP |
| File Number: | CAG 38 of 2004 |
| Judgment of: | Mowbray FM |
| Hearing dates: | 15 September 2005, 20 December 2005 & 20 February 2006 |
| Delivered at: | Canberra |
| Delivered on: | 27 March 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr C Erskine |
| Solicitors for the Applicant: | Colquhoun Murphy |
| Counsel for the Respondent: | Mr S Golledge |
| Solicitors for the Respondent: | The Argyle Partnership |
ORDERS
The Court declares that the transfer of Susan Sharp’s 50 per cent interest in Block 9 Section 403 Fadden in the Australian Capital Territory on or around 9 August 2002 is void against the applicant.
The Court orders the respondent to transfer 50 per cent of Block 9 Section 403 Fadden to the applicant as trustee of the bankrupt estate of Susan Sharp within 28 days.
The Court orders the respondent to pay the applicant’s costs of and incidental to these proceedings as agreed or taxed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT CANBERRA |
CAG 38 of 2004
| WILLIAM BALFOUR RANGOTT |
Applicant
And
| JOHN SHARP |
Respondent
REASONS FOR JUDGMENT
In April 1996 the respondent, John Sharp, and his wife, the bankrupt Susan Sharp, together purchased a property at 2 Luckins Place, Fadden in the Australian Capital Territory. On 9 August 2002 Ms Sharp transferred her interest in this property to Mr Sharp. The consideration nominated in the transfer document is “The Transferors natural love and affection for the Transferee”.
Ms Sharp became bankrupt on 13 August 2004 after acceptance of her debtor’s petition.
Mr Rangott who is Ms Sharp’s trustee in bankruptcy now seeks to have the 9 August 2002 transfer of the Fadden property declared void as an undervalued transaction under s.120 of the Bankruptcy Act 1966. Alternatively he seeks to have the transfer declared void as a transfer to defeat creditors under s.121 of the Act.
For the reasons that follow I have concluded that:
·Ms Sharp took the same legal and equitable interest in the Fadden property on its purchase in April 1996
·the interest which Ms Sharp transferred to Mr Sharp on 9 August 2002 was this 50 per cent interest
·
the only consideration given by Mr Sharp for the transfer was
Mr Sharp’s natural love and affection for Ms Sharp, which has no value as consideration
·accordingly Mr Sharp gave no consideration for the transfer of Ms Sharp’s interest
·Mr Sharp has not satisfied me that Ms Sharp was solvent at the time of the transfer
·the transfer of Ms Sharp’s interest in the Fadden property in August 2002 is void against Ms Sharp’s trustee in bankruptcy under section 120 and should be transferred back to him.
Background
It is common ground that:
·Mr and Ms Sharp married in 1985
·they had both been previously married
·they separated in February 2004
·in July 1987 they purchased a property at Isaacs in the Australian Capital Territory which was sold in about 1998
·Mr Sharp retired from the Australian Federal Police in December 1995 and received an early retirement package of about $450,000 together with some superannuation
·in January 1996 Mr Sharp commenced work as a security consultant based in Sydney, working three or four days a week in Sydney
·Ms Sharp purchased a bridal shop in Canberra called “Occasions Bridal Boutique” in early 1996
·Mr and Ms Sharp together purchased the Fadden property the subject of the current proceedings in April 1996
·Ms Sharp transferred her interest in this property to Mr Sharp on 9 August 2002
·Ms Sharp was declared bankrupt on 13 August 2004.
Relevant legislation
The relevant provisions of the Act which apply to a transfer on 9 August 2002 are:
Section 5 Interpretation
…
(2)A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
(3) A person who is not solvent is insolvent.
…
Section 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.
…
Transfers that are not void
(3)Despite subsection (1), a transfer is not void against the trustee if:
(a)the transfer took place more than 2 years before the commencement of the bankruptcy; and
(b)the transferee proves that, at the time of the transfer, the transferor was solvent.
Refund of consideration
(4)The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(5)For the purposes of subsections (1) and (4), the following have no value as consideration:
…
(d)the transferee’s love or affection for the transferor.
…
Meaning of transfer of property and market value
(7) For the purpose of this section:
…
(c)the market value of property transferred is its market value at the time of the transfer.
Section 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.
Issues
In this matter the major areas of contention concern:
·the credibility and reliability of several witnesses, especially Mr Sharp
·Ms Sharp’s interest in the Fadden property at the time of transfer in August 2002
·the consideration provided by Mr Sharp for the transfer in August 2002
·the solvency of Ms Sharp at the time of transfer of the Fadden property in August 2002
·the application of the doctrines of exoneration and/or unconscionability to the relief sought.
As will become apparent, there are a number of other areas of dispute which I do not need to address because of my findings on the above issues.
The witnesses
Affidavits of Mr William Rangott, Mr Garry Bates, Ms Patricia Jones, Mr Anthony Eastaway and Ms Janice Beazley were read for the Trustee, and of Mr John Sharp and Mr Terrence McFawn for Mr Sharp. Messrs Rangott, Bates and Sharp, and Ms Jones also gave oral evidence.
Mr Erskine for the Trustee questioned the credibility of Mr Sharp.
Mr Golledge for Mr Sharp has raised issues about the reliability of Ms Jones’ evidence.
Mr Sharp
The Trustee asserts that Mr Sharp should not be accepted as a witness of credit. The Trustee says:
·Mr Sharp chose not to put into evidence two earlier affidavits which were less than frank and did not contain significant relevant material which he only asserted later in the one affidavit of 5 September 2005 on which he relied
·Mr Sharp allowed his counsel to mislead the Court on whether Susan Sharp was the same person as Susan Annabel. He sat in Court and allowed his counsel to object to tendering of certain documents as they concerned Susan Annabel not Susan Sharp and to say “there’s no connection between the person named in that report and the bankrupt.” He did not make any attempt to correct his counsel’s mistaken assumption. Only after the first day of hearing and after I indicated that his counsel had some obligations to the Court did Mr Sharp give instructions that Susan Sharp and Susan Annabel were one and the same person
·Mr Sharp changed his story under cross-examination in relation to numerous issues and maintained inconsistent stories on several important facts, in particular whether the transfer was undervalued. In his evidence Mr Sharp sought to contradict various items of documentary evidence. For example, his claim that he paid Ms Sharp $20,000 as part of the consideration for the transfer conflicts with a number of documents including his own letter to his solicitor at the time of the transfer. His evidence on this was evasive and inconsistent
·similarly Mr Sharp’s evidence that he forgave $160,000 worth of debts owed by Ms Sharp as part of the consideration conflicted with the transfer document and Ms Sharp’s Statement of Affairs, as well as the Proof of Debt submitted to the Trustee by Mr Sharp
·Mr Sharp’s evidence during cross-examination was so flawed that he should not be treated as a witness of truth
·his affidavit and oral evidence should not be accepted where it conflicts with the documents and is corroborated by independent evidence.
Mr Golledge resisted this attack on Mr Sharp’s credibility, particularly as it related to the identity of Susan Annabel:
·the Trustee had nowhere asserted that Susan Annabel and Susan Sharp were the same persons
·the Court should not assume that even though present in Court, Mr Sharp appreciated the basis for the objections to evidence and therefore should have interrupted his counsel to correct any misapprehension
·this requires too high a standard of a lay person
·when the matter was raised instructions were given well before the next hearing day
·it was not put to Mr Sharp in cross-examination that he had stood by and allowed the Court to be misled
·the “other points on credit were better than that one”.
I have carefully read both the transcript of Mr Sharp’s evidence and his affidavit evidence, and have reached the conclusion that he was neither a truthful nor credible witness:
·he repeatedly advanced propositions which are completely at odds with written documents including ones produced by himself
·his explanations appear to be recent reconstructions designed to serve his present purposes
·his evidence under cross-examination was often evasive, inconsistent and unresponsive
·I formed the view that he knew somewhat more about Ms Sharp’s business affairs, particularly her financial difficulties, than he was prepared to tell the Court
·his failure to obtain supporting evidence from Ms Sharp and his solicitor for the transfer, Mr Nigel Gabbedy, suggests their evidence would not have assisted him (Jones v Dunkel (1959) 101 CLR 298). I do not accept Mr Golledge’s contention that these two people would not be in “the Respondent’s ‘camp’ ” and thus there would be no “reasonable expectation that evidence would be adduced from them.”
I therefore propose to treat Mr Sharp’s evidence with extreme caution, particularly where it contradicts written documents and where there is no corroboration.
I have reached this conclusion without having to rely on Mr Sharp’s failure to advise the Court of the identity of Susan Annabel when this issue first arose early on the first hearing day. Nevertheless this also reflects poorly on him. He is an intelligent person, a former Detective Superintendent in the Australian Federal Police, who must have understood what was happening in the Court at the time.
Ms Patricia Jones
Although not attacking Ms Jones’ truthfulness, Mr Golledge asserted that she was an unreliable historian. She had been treated dreadfully by Ms Sharp and this had infected her recollection of events. In his view she had a tendency to agree with the most recent proposition put to her.
Mr Erskine rejected this characterisation of Ms Jones’ evidence as unfair. He reproduced a portion of her evidence in response to questions I put to her and commented:
… that’s not an example of a witness who is agreeing with whatever happens to be put to her at the time. That’s an example of a witness for whom non-leading questions are put, where she is asked to elaborate or expand upon particular issues where she is given no suggestion as to what the answer ought to be, and she gives you an expansive answer.
And we would say that on a proper analysis of the rest of her evidence, your Honour will find the same thing. The only place where one might expect to see a witness going along with suggestions being put is in cross-examination, because that’s the place where leading questions can routinely be asked.
I agree in the main with Mr Erskine, notwithstanding some inconsistencies in her evidence and some parts which were not helpful. Overall I found Ms Jones to be reliable and truthful, with a consistent message flowing through her evidence.
Equities in the Fadden property
The first inquiry must be to determine the respective interests of
Mr and Ms Sharp in the Fadden property at the time of transfer of
Ms Sharp’s interest – that is at 9 August 2002.
It is agreed that both Mr and Ms Sharp held an equal legal interest in the property, reflected in the document of transfer in April 1996 when the property was purchased.
Mr Sharp contends that at 2 August 2002 Ms Sharp’s beneficial interest in the property was considerably less than 50 per cent. The Fadden property was purchased for a price of $357,500. Mr Sharp then paid a deposit of $35,750 followed by $156,441 from his retirement funds. The remainder was borrowed jointly by Mr and Ms Sharp. In view of these unequal contributions a resulting trust should be presumed in shares proportionate to the contribution of each – giving Mr Sharp an interest of about 76 per cent and Ms Sharp 24 per cent (Calverley v Green (1984) 155 CLR 242).
In Mr Sharp’s view any presumption of advancement is rebutted, in particular because:
·
Mr Sharp said in his affidavit that he did not intend by making the payments from his retirement funds to confer any interest on
Ms Sharp
·this was not challenged in cross-examination
·the marriage was the second for each
·the fund from which his payments were made came from his redundancy pay – a resource earned by him over a period which was far greater than the period of his marriage to Ms Sharp
·at the time Mr Sharp had relocated to Sydney, at least for his employment/business activities and was maintaining two separate residences
·both Mr and Ms Sharp maintained a degree of financial separation with individual bank accounts.
The Trustee submits that the presumption of advancement should apply such that the legal interests and the equitable interests were the same:
… the Court should recognise as Deane J suggested in Calverley v Green there are certain relationships in which equity infers that any benefit which is provided for one party at the cost of the other, has been provided by way of “advancement” with the result that the prima face position remains that the equitable interest is presumed to follow the legal state and be at home with the legal title.
The Trustee says:
·Ms Sharp was at all times and continues to be the wife of Mr Sharp. There is no evidence that they were estranged at the time – I note that they did not separate until February 2004
·the fact that it was a second marriage is irrelevant, especially given that the law views marriage as a serious binding partnership
·Mr Sharp’s statement in his affidavit that he did not intend by making the payments from his retirement funds to confer any interest on Ms Sharp is a bare assertion unsupported by any of the documents
·the fact that the funds came unequally and from Mr Sharp’s retirement funds does not assist as the presumption of advancement can only apply if there has been an unequal contribution
·in neither of his previous affidavits did Mr Sharp allege that the beneficial interests of the parties were unequal
·Mr Sharp had previous experience in drawing up quite comprehensive intra-family agreements, in particular concerning the interests in the property of his father-in-law Mr McFawn, yet had failed to create any document evidencing that the arrangements between himself and Ms Sharp was so substantially different from that on the Certificate of Title
·an inference should be drawn from the failure to call Ms Sharp to give evidence on this point that any evidence she gave would not assist Mr Sharp
·rebuttal of the presumption of advancement by way of intention of the parties at the time requires evidence of a common intention (Calverley v Green at 261). There is no evidence of Ms Sharp’s intention, nor anything from which an inference on it can be drawn
·it is not unusual for married couples to maintain separate bank accounts and have separate businesses
·the propositions put forward by Mr Sharp fall far short of rebutting the presumption of advancement.
In The Trustees of the Property of John Daniel Cummins, A Bankrupt v Cummins [2006] HCA 6 the High Court has recently confirmed that it will be difficult for a non-bankrupt spouse who provided a greater proportion of the purchase price to argue that he or she should have any more than 50 per cent of the equity.
The Court said at [71] – [72]:
71. The present case concerns the traditional matrimonial relationship. Here, the following view expressed in the present edition of Professor Scott's work respecting beneficial ownership of the matrimonial home should be accepted:
"It is often a purely accidental circumstance whether money of the husband or of the wife is actually used to pay the purchase price to the vendor, where both are contributing by money or labor to the various expenses of the household. It is often a matter of chance whether the family expenses are incurred and discharged or services are rendered in the maintenance of the home before or after the purchase."
To that may be added the statement in the same work:
"Where a husband and wife purchase a matrimonial home, each contributing to the purchase price and title is taken in the name of one of them, it may be inferred that it was intended that each of the spouses should have a one-half interest in the property, regardless of the amounts contributed by them." (footnote omitted)
72. That reasoning applies with added force in the present case where the title was taken in the joint names of the spouses. There is no occasion for equity to fasten upon the registered interest held by the joint tenants a trust obligation representing differently proportionate interests as tenants in common. …(footnotes omitted)
At [65] the Court considered evidence of contrary intention which may rebut the presumption of advancement:
65. In Charles Marshall, the plaintiffs were daughters of the donor and the Court said that the presumption of an intention of advancement, that they be made beneficial as well as legal owners of the shares, might be rebutted by evidence manifesting a contrary intention. Dixon CJ, McTiernan, Williams, Fullagar and Taylor JJ said of the rebuttal of presumptions by manifestation of a contrary intention:
"Apart from admissions the only evidence that is relevant and admissible comprises the acts and declarations of the parties before or at the time of the purchase (in this case before or at the time of the acquisition of the shares by allotment) or so immediately thereafter as to constitute a part of the transaction." (emphasis added)
However, as Malayan Credit illustrates, whilst evidence of subsequent statements of intention, not being admissions against interest, are inadmissible, evidence of facts as to subsequent dealings and of surrounding circumstances of the transaction may be received. (footnotes omitted)
While there are clearly factual differences between Cummins and the current case, Cummins illustrates how strong the presumption of advancement is and the difficulty in rebutting it. In my view, even without any reliance on the strong confirmation from Cummins, having regard to the matters outlined above the presumption has not been rebutted. This is particularly so where there is no evidence of
Ms Sharp’s intention, the only evidence of Mr Sharp’s intention is very recent, there are doubts about the reliability of Mr Sharp’s evidence and where the title was taken in the joint names of the spouses.
In the result Ms Sharp took the same legal and equitable interest in the Fadden property on its purchase in April 1996. The interest which she held and transferred to Mr Sharp on 9 August 2002 was this 50 per cent interest.
Consideration for 9 August 2002 transfer
On 9 August 2002 Ms Sharp transferred her interest in the Fadden property to Mr Sharp. Mr Sharp contends that he provided consideration that was at least the market value of Ms Sharp’s interest which he put at about 24 per cent. I have already rejected this last proposition, finding that Ms Sharp’s interest was 50 per cent.
Mr Sharp say that he decided in 2002 that the interest rate being charged on the loan for the Fadden property was excessive so he spoke to a broker about refinancing the mortgage. He also wanted to borrow additional monies for his security business. The broker told him that as Ms Sharp had a number of credit reference entries it would be better to borrow in his own name requiring a change in title for the house.
The consideration Mr Sharp says he gave at the time of acquiring his wife’s interest was:
·$20,000 he gave her out of the monies borrowed
·he forgave about $160,000 in loans borrowed by her during their marriage
·Ms Sharp’s joint and several liability for the mortgage debt of about $326,000 was discharged by Mr Sharp paying out the mortgage
·Mr Sharp says he allowed Ms Sharp and her father, Mr McFawn, to live rent free in the Fadden property.
Mr Sharp says that prior to meeting with his solicitor to arrange for the transfer of the title he had a conversation with Ms Sharp. She indicated that she was happy for him to take over “the property and the mortgage repayments”, saying that “apart from all of the other money you lent me, I want $20,000.” He says:
As a result of the above conversation and payment of monies to Susan ($160,000 in total), I felt that the monies given ($20,000) and the previous monies lent to Susan was a fair and reasonable bargain for the transfer of Susan’s share of the property.
Mr Sharp confirmed this evidence under cross-examination.
As the Trustee points out the only evidence of the value at 9 August 2002 of the property that Ms Sharp transferred to Mr Sharp is the assessed value for stamp duty of $300,000 on the transfer document. That same document gives as consideration “The Transferors natural love and affection for the Transferee”. This is consistent with the Statement of affairs completed and signed by Ms Sharp on 13 August 2004 where she says she received “nil” consideration for the transfer. She puts the value of the interest in the property transferred at $390,000.
$20,000 paid to Ms Sharp
Mr Sharp says that out of the monies he borrowed when refinancing the mortgage he paid Ms Sharp $20,000 as part consideration. This is not only in conflict with the transfer document and Ms Sharp’s Statement of Affairs, it is also inconsistent with a letter Mr Sharp wrote to his solicitor, Mr Nigel Gabbedy, on 6 August 2002:
In respect of item 2, it is intended that at settlement Susan receive a cheque (if that is possible) in the amount of $20,000 which we both understand to be a loan from the extra funds to Susan, for which she will be responsible, at some time later, to repay into the account.
… Your advice on how to formalise the “loan” agreement separately would be appreciated.
Under cross-examination Mr Sharp admitted that the $20,000 could not be both a loan and not a loan. He maintained it was not a loan.
Mr Sharp said that after his letter to Mr Gabbedy he had a telephone conversation with him and “it’s [that is the intention that the $20,000 was not a loan] reflected in the following documentation”. But this subsequent documentation – a letter of 8 August 2002 giving directions for payment of the settlement monies – does nothing of the sort. Furthermore, none of Mr Sharp’s affidavits – there were three including two which he did not read – depose to the conversation with Mr Gabbedy.
Mr Gabbedy was not called to give evidence. Notwithstanding
Mr Sharp’s evidence that he had parted ways with Mr Gabbedy because of unhappiness with his work, I can see no reason why I should not infer that any evidence he would have given would not have assisted Mr Sharp (Jones v Dunkel). A similar inference should be drawn that evidence from Ms Sharp on the $20,000 would also not be of assistance.
I reject Mr Sharp’s contention that the payment of $20,000 formed part of the consideration. It is in direct conflict with the documentary evidence, including contemporaneous documents. If it were part of the consideration why was it not included on the transfer document? I have already noted that Mr Sharp was an unreliable witness. In my view Mr Sharp’s contention is a recent construction to suit his current purposes. I find that the $20,000 represented a loan to Ms Sharp.
Forgiven loans
Mr Sharp says that over the period of their marriage he had loaned
Ms Sharp about $160,000. This included her share of the mortgage repayments of about $1,500 each month. He said this included about $140,000 he calculated from his cheque butts and a further $20,000 cash. He contended that he forgave these debts as part of the consideration.
This conflicts with the transfer document, Ms Sharp’s statement of affairs and the agreement dated 6 August 2002 (exhibit A6). Furthermore, Mr Sharp’s Proof of Debt of 20 February 2005 includes a figure for “Pre August 2002 Loans to Susan Sharp” of $150,000.
Mr Sharp agreed under cross-examination that this refers to the $160,000 being considered here. He attempted to explain this inconsistency as being the result of a conversation he had with the Trustee. The Trustee had explained to him that the transfer from Ms Sharp was likely to be set aside and he should therefore put in a proof of debt for anything which was owing to him. His Proof of Debt was therefore lodged by him as a contingency measure.
I reject Mr Sharp’s contention that he forgave the $160,000 debt as part of the consideration:
·this contention is inconsistent with the documentary evidence mentioned in the previous paragraph, in particular it received no mention on the transfer
·Mr Sharp’s explanation is inconsistent with a letter he sent to the Trustee on 20 December 2004 – at around the time Mr Sharp says he had the conversation with the Trustee – where there is no suggestion that the Proof of Debt was being lodged as a contingency measure
·none of Mr Sharp’s affidavits mention that the Proof of Debt was filed as a contingency measure
·none of the evidence supports Mr Sharp whose reliability I have questioned
·Ms Sharp has not given any evidence.
Again I am inclined to the view that Mr Sharp has invented this evidence to support his case in these proceedings.
Discharge of mortgage
The outstanding mortgage on the Fadden property prior to the transfer in August 2002 was about $326,000. Mr Sharp says that by paying out the previous mortgage Ms Sharp’s joint and several liability for this debt was discharged, including her liability to make ongoing payments under the mortgage. This amounted to valuable consideration from Mr Sharp.
But this can not be the case. Mr Sharp’s own evidence is that he met Ms Sharp’s share of the mortgage payments on Fadden, at least for some time before the transfer. It was part of the $160,000 he claimed she owed him (see paragraph 45 of his affidavit). Further I have found Ms Sharp was insolvent and thus in no position to make any mortgage payments from then and the next two years.
I agree with Mr Erskine that this consideration is illusory.
Right to live rent free at Fadden
Mr Sharp says that he also allowed Ms Sharp and her father to continue living at Fadden rent free. This he asserts is valuable consideration.
No attempt has been made to value this. It is in effect no different from the arrangements before the transfer. For example, both before and after the transfer Ms Sharp made no contribution to mortgage repayments.
There is no written documentation to support any life interest in the property. The agreement dated 6 August 2002 (exhibit A6) does not refer to this. Given the previous arrangements Mr and Ms Sharp had for Mr McFawn one might expect that any right such as this would have been documented.
The evidence supporting this is solely from Mr Sharp. There is nothing from Ms Sharp or Mr McFawn on this issue. Mr Sharp’s proposition that this forms part of the consideration conflicts with the transfer document and Ms Sharp’s Statement of Affairs.
I think it is unlikely that this was part of the consideration. It is much more probable than it is a recent invention to support Mr Sharp’s case.
Conclusions on consideration
Mr Sharp contends that he gave valuable consideration for the transfer in the from of $20,000, forgiving $160,000 in debts, discharging
Ms Sharp’s mortgage liability and allowing rent free use of the Fadden property after transfer.
The transfer document says the consideration was for Mr Sharp’s natural love and affection – although the document transposes the words transferor and transferee. Ms Sharp’s Statement of Affairs says there was nil consideration.
For the reasons given above I am satisfied that the only consideration was as set out in the transfer document – that is Mr Sharp’s natural love and affection for Ms Sharp. Section 120(5) expressly provides that the transferee’s love or affection for the transferor has no value as consideration.
I accordingly find for the purposes of section 120(1)(b) that Mr Sharp gave no consideration for the transfer on 9 August 2002 of Ms Sharp’s interest in the Fadden property.
Ms Sharp’s solvency at 9 August 2002
The Trustee submits that in order for the Court to assess whether
Ms Sharp was solvent at 9 August 2002 it must examine her entire financial position. It must then determine as at that date whether she was in a position to pay her debts as and when they fell due, on that date and into the immediate future. The Trustee says that “the evidence of Susan Sharp’s insolvency in August 2002 is voluminous and compelling”.
On the other hand Mr Sharp contends:
Based on the resources available to her at the time, the Court can confidently conclude that as at August 2002 Ms Sharp was paying all of her debts that were then due. Certainly, as time passed beyond that date her position deteriorated and she became insolvent but there was no substantial debts unpaid at August 2002 and she had more than sufficient resources to pay those that were.
The Trustee adduced a large volume of evidence from persons who had dealt with Ms Sharp to their detriment over a long period of time. It is not necessary to detail all this evidence, but to refer to the most important elements.
Ms Patricia Jones
Ms Patricia Jones met and established a friendship with Ms Sharp in 1994 or 1995. Initially she worked unpaid on Saturdays in Ms Sharp’s Occasions Bridal Boutique in Kingston. The first loan she made to
Ms Sharp was for $5,000 accompanied by a written loan agreement in about May 1997. Ms Sharp repaid that loan.
Ms Jones received a redundancy package of about $85,000 in March 1998 from the Australian National University where she had worked as a librarian. Subsequently Ms Sharp approached her for a loan of $40,000 also agreeing to employ her full-time at $550 per week. The loan was to be repaid over seven years. Ms Jones gave her $41,000 as Ms Sharp said she needed the extra money. Later in March 1998 she paid Ms Sharp another $9,000.
I adopt the Trustee’s summary of the subsequent transactions:
From this time on Susan Sharp convinced Patricia Jones to lend her more and more money. Initially, Susan Sharp relied on emotional pleas such as the loan of $3,000 on 29 April 1998 (referred to in paragraph 19-20 of Patricia Jones’ affidavit), however, as the amount owed to Patricia Jones grew, and Jones’ concerns also grew, Susan Sharp said words to the effect of “If you don’t lend me the money, the business will collapse and you will lose everything” (see paragraph 26 of Patricia Jones’ affidavit).
Patricia Jones felt compelled to provide Susan Sharp with more money, both because of the threat of losing what she had already invested and what she described as the emotional, and in the final stages, physical abuse that she suffered at the hands of Susan Sharp.
Patricia Jones readily admitted that she was naïve and far too trusting of Susan Sharp in making these arrangements.
By July 2002 Susan Sharp had not only convinced Patricia Jones to lend all the money that Jones had been paid by way of redundancy from the Australian National University (in excess of $85,000.00), she had also convinced her to re-mortgage her house and pay $88,000.00 worth of the proceeds of that mortgage to Susan Sharp, and had been convinced to take out credit cards, the funds which were immediately were applied to the business that Susan Sharp operated, ($4,000.00), and had gone as far as to sign a number of blank cheques which she gave to Susan Sharp who used them to pay personal and business expenses of Susan Sharp’s business.
By the time Susan Sharp transferred her interest in the property to the Respondent, she had borrowed over $212,000.00 from Patricia Jones (See Patricia Jones’ affidavit paragraph 69). (transcript references omitted)
It is Mr Sharp’s contention that Ms Jones had not, by August 2002 at least, made any demand for repayment. He says that no thought was given to making any demand until, at the earliest, after she left Ms Sharp’s employment in September 2002. In my view this conclusion is derived from a selective reading of Ms Jones’ evidence. Certainly it appears Ms Jones made no written demand until August 2003. But that is only part of her account.
Reading Ms Jones’ evidence as a whole I am satisfied that she repeatedly made verbal demands for repayment going back to 1998. She was met by the response that Ms Sharp did not have the money and, for example, “I’ll try and pay you when I’ve got moneys”. Furthermore it can be inferred from the letter of demand Ms Jones’ solicitors sent Ms Sharp’s lawyers on 26 August 2003 that there had been previous verbal demands and Ms Sharp had not been able to pay her debts to Ms Jones as they became due and payable.
I again adopt the Trustee’s submissions:
Susan Sharp never had any capacity to pay back monies that she borrowed from Patricia Jones, and never made any moves to repay the amounts, other than the initial loan of $5,000.00 …
Susan Sharp coldly and cynically used a naïve and trusting person who believed Susan Sharp was her friend, to obtain over $200,000.00 worth of money, which she had no capacity to repay from 1998 onwards.
Mr Garry Bates
Mr Garry Bates is the former solicitor for Ms Sharp. He was retained by Ms Sharp on a range of matters during 1999, 2000 and most of 2001. His evidence included:
·on about 6 March 2001 he issued a “further invoice” for $8,055.28 to Ms Sharp payable within 14 days
·on 19 March 2001 he issued another invoice totalling $24,530.47 which also included the 6 March 2001 amount
·a reminder letter was sent on 24 August 2001 indicating that $18,847.17 was still unpaid. Mr Bates sought “Urgent Action” “Please Pay at Once”. He used a form letter for people who had not paid their bills
·on 17 July 2002 Ms Sharp sent a fax to Mr Bates asking him to hold off banking two cheques, noting “Because of illness and my business being slow, I have had to apply to the Court to reduce my instalment payments on Judgments”
·eventually in 2004 – the original claim was in January or February 2004 – Mr Bates commenced proceedings to recover about $25,000, Ms Sharp having paid $12,000 of total invoices for $37,000. Interlocutory judgment was obtained against Ms Sharp in June 2004
·the debts had been the subject of invoices with payment to be within 14 days
·at some point which is not clear from the evidence Ms Sharp had entered into an instalment plan with Mr Bates to pay outstanding debts. She paid $12,000 but four cheques were dishonoured in August 2003.
It is clear from this evidence that Ms Sharp, notwithstanding any instalment arrangements entered after bills fell due, was not able to pay her debts to Mr Bates as and when they fell due. In particular she was not in a position to pay her debts as at 17 July 2002, less than a month before the transfer of her interest in the Fadden property.
Other evidence on Ms Sharp’s financial circumstances
Other evidence on Ms Sharp’s financial circumstances adduced by the Trustee included:
·Ms Sharp fell behind in rental payments for her shop to Myuna Pty Ltd in 2001 and 2002 and in March 2002 agreed to pay $400 monthly instalments. The last $400 was paid in August 2002 and she never made a full payment thereafter
·debt enforcement action was taken in late 2001 for money owed to Capital Finance and judgment obtained for about $8,300 in October 2001. Ms Sharp obtained an instalment order in May 2002 but did not keep to the schedule and a writ of execution was obtained. On the evidence Ms Sharp was in breach no later than November 2002
·by November 2000 Ms Sharp owed Melissa and Daniel Clode $1,065 which is still owing
·at 30 June 2002 Ms Sharp had a debt of $390.75 to S A Brown Pty Ltd which had been outstanding for more than 90 days
·instalment orders were made against Ms Sharp in favour of Cushla Morris, Sonja’s Italian Shoes Pty Ltd, Tony Welfare Formal Hire Pty Ltd, and Cai Qin Shen in April, May and October 2002
·in the case of Cushla Morris Ms Sharp could not afford to pay a total of $360 on 24 April 2002 without seeking an instalment order
·in July 2002 Carriage & Co obtained judgment in default on a debt of $1,000
·consumer credit reports from 2000 to 2005 include a number of accounts of Ms Sharp failing to meet her debts as they fell due
·proofs of debt for Lion Finance Pty Ltd, the National Australia Bank and the Credit Union of Canberra all record significant debts incurred before 9 August 2002 and unpaid at the date of bankruptcy.
As to Ms Sharp’s assets in August 2002 Mr Rangott, the Trustee, accepted that the business was worth possibly more than $154,000, the valuation placed on it for transfer in 2004 to Ms Sharp’s daughter. He also agreed that her interest in the house was $150,000.
Ms Sharp was not called to give evidence. In my view, given that she was able to instruct on an issue of legal professional privilege which arose in these proceedings, she could have been called by Mr Sharp had he wished. An inference can thus be drawn that any evidence she may have given on her solvency would have not assisted Mr Sharp (Jones v Dunkel).
Section 5(2) provides that a person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. As Mr Golledge says “the standard is what accountants colloquially call a ‘cash flow’ test, rather than a balance sheet one.” Thus it is clear that merely having liabilities in excess of assets is not conclusive proof of insolvency, and vice versa.
In Expo International Pty Ltd v Chant [1979] 2 NSWLR 820 Needham J said at 837:
“Solvent” in s. 294 does not mean, in my opinion, merely an absence of creditors knocking at the door. A company is not necessarily solvent on a particular day if it was, on that day, in a position to meet any demand lawfully made by a creditor. It may be necessary to investigate the sources from which such payments might be made. If, for example, the company could pay one debt only by borrowing from someone else, its solvency could come into question: cf. Re Australian Co-operative Development Society Ltd. It is clear that a lack of liquidity is not equivalent to insolvency; I think the converse is also true, namely, that the fact that a company has liquid assets is not conclusive of its solvency. (footnote omitted)
In Sandell v Porter (1966) 115 CLR 666 Barwick CJ said at 670:
…The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given …
Having considered the entirety of Ms Sharp’s financial position,
Mr Sharp has not satisfied me that Ms Sharp was solvent at 9 August 2002. In particular:
·I can not be satisfied on the balance of probabilities that at that time she was able to pay all her debts as they became due and payable, notwithstanding the interest she held in her business and in the house
·she failed to make repayments to Ms Jones despite repeated verbal demands made to her
·she again repeatedly failed to meet her obligations to Mr Bates
·Ms Sharp was unable to pay her debts to a whole range of businesses and individuals
·she regularly forced her creditors to obtain court orders on her debts and then sought instalment orders for payment
·more often than not she failed to comply with instalment arrangements
·on one occasion she sought an instalment order to pay a sum of only $360.
Mr Erskine asserts that the evidence is overwhelming and compels me to rule that Ms Sharp was insolvent in August 2002. He may well be correct – I am inclined to agree with him. However, in view of my findings above on consideration it is unnecessary to reach such a conclusion. As Mr Golledge conceded, the exception in s.120(3) places the onus on Mr Sharp to satisfy me that Ms Sharp was solvent at the relevant time. He has not satisfied me and the defence or exception is not made out.
Transfer void against Trustee
For the Trustee to be successful under s.120:
·the transfer must have taken place no longer than five years before the bankruptcy (s.120 (1)(a))
·the transferee must have given either no consideration or consideration of less than market value (s.120 (1)(b))
·if the transfer took place more than two years before the bankruptcy, the transferee fails to prove that at the time of transfer the bankrupt was solvent (s.120 (3)).
It is not in dispute that the transfer of the Fadden property took place within the five years prior to Ms Sharp’s bankruptcy. In fact the transfer occurred a few days more than two years prior to that bankruptcy. I have found that Mr Sharp gave no consideration for this transfer. Mr Sharp has not satisfied me that Ms Sharp was solvent at the time of transfer.
Accordingly by virtue of section 120 the transfer of Ms Sharp’s interest in the Fadden property in August 2002 is void against Ms Sharp’s trustee in bankruptcy.
It follows that it is not necessary for me to consider whether the transfer would also be void under section 121.
Relief – exoneration and unconscionability
In his written submissions the Trustee seeks a charge over Mr Sharp’s share in the property based on the doctrine of exoneration. The Trustee points out that when the property was transferred on 9 August 2002 $390,000 was borrowed by Mr Sharp using the property as security. Of these funds $30,000 were applied by him to the purchase of shares in his business, the Emerald Group, in which Ms Sharp had no interest.
The Trustee contends:
Under the doctrine of exoneration the Applicant has a charge over the Respondent’s share of the property, to the extent that the share that belongs to Susan Sharp was used to secure a loan which was applied wholly to the benefit of the Respondent. (See Parson v McBain 2000 FCA 376. In this case the Applicant is entitled to a charge of $15,000.00 over the Respondent’s share in the property after the share formerly belonging to Susan Sharp is conveyed to him as trustee for her.)
Having regard to Parsons & Anor v McBain (2001) 109 FCR 120, the Trustee may well be correct. However I agree with Mr Golledge that this issue should not be entertained as part of this application. The charge was not sought in the originating application and was first raised in the Trustee’s final written submissions filed on 7 February 2006. There may be relevant evidence which Mr Sharp has not had the opportunity to present. The originating application sought relief under sections 120 and 121 of the Act. The charge sought by the Trustee does not fall within those provisions.
On the other hand Mr Sharp requests a charge on any reconveyed property to the value of Ms Sharp’s share of the mortgage payments since August 2002, Mr Sharp having paid all such payments since that time. He relies on the doctrines of exoneration and unconscionability. I am not satisfied that having regard to Parsons v McBain that this fits within the doctrine of exoneration (see also Lin v Official Trustee in Bankruptcy (No.1) [2001] FMCA 106). Furthermore I agree with Mr Erskine that:
There is nothing unconscionable about the trustee not having to face a charge in respect of those payments, because it simply reflects what would have been the case had that August 2002 transfer not occurred.
Conclusions
In summary I conclude:
·Mr Sharp was neither a truthful nor credible witness. His evidence should be treated with extreme caution, particularly where it contradicts written documents and where there is no corroboration
·overall Ms Jones was reliable and truthful, with a consistent message flowing through her evidence
·the presumption of advancement contended for by the Trustee in relation to the equities in the Fadden property has not been rebutted
·consequently Ms Sharp took the same legal and equitable interest in the Fadden property on its purchase in April 1996
·the interest which Ms Sharp transferred to Mr Sharp on 9 August 2002 was therefore this 50 per cent interest
·the only consideration given by Mr Sharp for the transfer was Mr Sharp’s natural love and affection for Ms Sharp
·section 120(5) expressly provides that the transferee’s love or affection for the transferor has no value as consideration
·accordingly Mr Sharp gave no consideration for the transfer on 9 August 2002 of Ms Sharp’s interest in the Fadden property
·Mr Sharp has not satisfied me that Ms Sharp was solvent at the time of the transfer, so the defence or exception in section 120(3) is not made out
·
accordingly by virtue of section 120 the transfer of Ms Sharp’s interest in the Fadden property in August 2002 is void against
Ms Sharp’s trustee in bankruptcy
·it is thus unnecessary for me to consider whether the transfer would also be void under s.121
·the Trustee’s application for a charge over Mr Sharp’s share of the property under the doctrine of exoneration was brought too late in the proceedings to be entertained
·the doctrine of exoneration does not apply to Mr Sharp’s payment of Ms Sharp’s share of the mortgage payments, nor is Mr Sharp’s responsibility for those payments unconscionable.
The Trustee has been successful in this application. I will accordingly:
·declare that the transfer of Ms Sharp’s interest is void against the Trustee
·
order Mr Sharp to transfer that interest to the Trustee within
28 days
·order Mr Sharp to pay the Trustee’s costs of and incidental to these proceedings as agreed or taxed.
I certify that the preceding eighty-four (84) paragraphs are a true copy of the reasons for judgment of Mowbray FM
Associate: Natasha Werner
Date: 27 March 2007
7
1