Re Buggy, M.F. & L.F. Ex Parte Morton, R.W. v Buggy & anor

Re: MICHAEL FRANCIS BUGGY and LEONIE FRANCES BUGGY, Bankrupts
Ex parte: ROBERT WILLIAM MORTON, Trustee
And: MICHAEL FRANCIS BUGGY; LEONIE FRANCES BUGGY and CANOONA PTY LIMITED
No. A B67 and 68 of 1990
FED No. 149
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE AUSTRALIAN CAPITAL TERRITORY
GENERAL DIVISION
Neaves J.(1)

CATCHWORDS

Bankruptcy - Second mortgage granted over Crown lease registered under Real Property Act 1925 (A.C.T.) - Consideration expressed as advance of $500,000 already made to mortgagors - Concession by mortgagors that no debt of $500,000 owing by mortgagors to mortgagee - Lesser amount said to be consideration for the mortgage - Whether mortgage a settlement of property - Whether any consideration given for mortgage - Whether mortgagee was encumbrancer for valuable consideration - Whether transaction entered into in good faith.

Bankruptcy - Payment by bankrupt to company within "relation back" period - Whether payment made from moneys held on trust for bankrupt's son - Whether moneys property of bankrupt divisible amongst bankrupt's creditors - Whether transaction within protective provisions of s.123 of Bankruptcy Act 1966 (Cth) - Whether transaction made in good faith and in ordinary course of business.

Bankruptcy Act 1966 (Cth), ss.115, 116, 120(1), 123

HEARING

CANBERRA

#DATE 24:3:1992

Counsel for the applicant: Mr J.K. Chippindall

Solicitors for the applicant: Higgins

Counsel for the first respondents: Mr W.L. Donald

Solicitors for the first respondents: Macphillamy Donald and Co.

Counsel for the second respondent: Mr U.D. Boettcher

Mr R.C. Refshauge

Solicitors for the second respondent: Meyer Boettcher and Clapham

Macphilamy, Cummins and Gibson

ORDER

The Court:

1. Declares that the second mortgage over the Crown lease of the property known as 3 Goode Street, Torrens in the Australian Capital Territory, being Block 38, Section 32, Division of Torrens and the whole of the land in Certificate of Title, Crown Lease Register Book Volume 744, Folio 43, given by the first respondents, Michael Francis Buggy and Leonie Frances Buggy, to the second respondent, Canoona Pty Limited, and evidenced by memorandum of mortgage dated 4 April 1990 is void as against Robert William Morton, the trustee of the bankrupt estates of the first respondents.

2. Declares that the amount of $31,500 paid by Leonie Frances Buggy to the second respondent on 16 May 1990 is property divisible amongst the creditors of Leonie Frances Buggy.

3. Orders that the second respondent pay an amount of $31,500 to the said Robert William Morton within 28 days of the date of this order.

4. Orders that the second respondent pay the costs of the said Robert William Morton of and incidental to the application in so far as it relates to the mortgage and the payment referred to in Orders 1 and 2 respectively other than the costs of the hearing on 11 February 1991.

5. Orders that the application in so far as it seeks an order that the first respondents forthwith deliver up to the said Robert William Morton possession of the property known as 3 Goode Street, Torrens in the Australian Capital Territory be adjourned to a date to be fixed.

6. Reserves liberty to the said Robert William Morton to apply to the Court for such further or other orders as may be appropriate to give full effect to this judgment.
Note: Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules.

JUDGE1

The Court has before it the amended application, which was filed on 19 March 1991, of Robert William Morton ("the trustee") as trustee of the bankrupt estates of Michael Francis Buggy and his wife, Leonie Frances Buggy ("the bankrupts"). By that application the trustee sought certain declarations and orders against the bankrupts, against a company known as Canoona Pty Ltd ("Canoona"), against one Ronald David Silverstein and against one Ronald Edward Eggert.

The application in the form in which it then stood was set down for hearing on 11 February 1991. When the application came before the Court on that day, counsel appearing for Canoona and Mr Eggert sought an adjournment of the hearing on the ground that, contrary to a direction to that effect given by the Court on a previous occasion, those respondents had not been provided with all of the material upon which the trustee intended to rely. In the result, the hearing of the application was adjourned, the trustee was ordered to pay the costs of Canoona and Mr Eggert thrown away by reason of the adjournment and the costs of Mr Silverstein of the day's proceedings were reserved. No order was made as to the costs of the bankrupts. The trustee was given leave to file and serve an amended application and certain further directions were given as to the future course of the proceeding.
The hearing resumed on 19 March 1991 when the trustee was given leave to further amend the application. Immediately after the luncheon adjournment on that day, the trustee sought leave to withdraw the application in so far as it sought relief against Mr Silverstein. After hearing submissions from counsel, the application was dismissed in so far as it sought such relief, the trustee being ordered to pay Mr Silverstein's costs, including any reserved costs, on a solicitor and own client basis.
The hearing continued on 20 and 21 March 1991 when the matter was adjourned until 6 May 1991. On the latter date the Court was informed that Mr Eggert had reached an agreement with the trustee in relation to the relief sought against him. By consent, the Court declared that the document by which the bankrupts had on or about 13 January 1987 purported to grant a lease of property in the Australian Capital Territory known as Flat 2, 3 Goode Street, Torrens to Mr Eggert was an instrument entitled by the Real Property Act 1925 (A.C.T.) to be registered and not being so registered was ineffectual to pass any estate or interest in the property to Mr Eggert. The Court also, by consent, ordered that the application, in so far as it sought other relief against Mr Eggert, be dismissed, the trustee and Mr Eggert bearing their own costs.
Thereafter the hearing continued on 6, 7 and 8 May 1991. On the latter date, counsel informed the Court that pending the outcome of certain other proceedings concerning the effectiveness of the alleged exercise of an option said to have been given by the bankrupts over the property known as 3 Goode Street, Torrens, the trustee did not press the application in so far as it sought a declaration that the bankrupts deliver up possession of that property to the trustee.
Canoona filed written submissions on 22 May 1991 and the trustee filed written submissions in reply under cover of a letter dated 1 July 1991.
As the result of the events referred to above, there are two matters for determination. One relates to a memorandum of mortgage executed in favour of Canoona by the bankrupts on or about 4 April 1990 over the Crown lease of the property known as 3 Goode Street, Torrens. The other concerns a payment of $31,500 made to Canoona on or about 16 May 1990 by Leonie Frances Buggy. The trustee asserts that the mortgage is void as against him and that the amount of the payment is property divisible amongst the creditors of Mrs Buggy. He seeks appropriate declarations and orders.
Michael Francis Buggy became a bankrupt on 29 May 1990 upon the endorsement by the Deputy Registrar in Bankruptcy for the Bankruptcy District of the Australian Capital Territory of acceptance of a debtor's petition presented by Mr Buggy against himself on that day (Bankruptcy Act 1966 (Cth) ("the Act"), s.55(4A)). Leonie Frances Buggy became a bankrupt on the following day by virtue of the presentation by her of a petition against herself and its acceptance by the Deputy Registrar followed by endorsement on the petition of such acceptance. The petitions were presented following the passing, at meetings of creditors held on 25 May 1990, of resolutions requiring the presentation by Mr and Mrs Buggy of debtors' petitions within 7 days of the passing of the resolutions. By order made on 12 September 1990, the bankrupt estates were consolidated pursuant to s.53 of the Act and it was declared that the date for the purposes of the application of the provisions of Division 3 of Part IV of the Act be 29 May 1990 and that that date be the date of the bankruptcy in respect of each of the estates.
The evidence establishes that Mr Buggy had telephoned the trustee on or about 26 March 1990 to make an appointment to consult him with a view to making an arrangement under Part X of the Act, stating that he had an outstanding debt of $13,000,000 owing to a company known as Associated Holdings Ltd. Mr Buggy first met the trustee on 6 April 1990. As a result of discussions on that and subsequent occasions between the trustee and Mr and Mrs Buggy, statements of affairs were prepared for the purpose of meetings of creditors pursuant to Part X of the Act. They were signed on 26 April 1990. The statement of affairs signed by Mr Buggy showed assets of $1,437,590 and liabilities of $13,001,500 resulting in a deficiency of $11,563,910. Of the asset figure, $1,380,090 was shown as representing the value of shares in some nine companies most, if not all, of which were companies operated by Mr Buggy. The liabilities included a debt of $13,000,000 to Associated Holdings Limited. The statement of affairs signed by Mrs Buggy showed assets of $5,024 (of which $5,000 was shown as being "Cash at Bank Westpac, Woden ACT") and liabilities of $13,001,500, including a debt of $13,000,000 to Associated Holdings Ltd, with a resulting deficiency of $12,996,476. The joint statement of affairs showed assets of $2,000 (being household furniture and effects), liabilities of $13,431,500 (that figure including the debt to Associated Holdings Ltd previously referred to) and a deficiency of $13,429,500. The joint statement of affairs disclosed three secured creditors. Westpac Banking Corporation and Canoona were respectively shown as holding a first and second mortgage over the property known as 3 Goode Street, Torrens, their respective debts being shown as $130,000 and $500,000. The other secured creditor shown was Hong Kong Bank. In each of the statements of affairs, various companies, including Bank of Singapore Ltd, Hong Kong Bank of Australia Ltd and Custom Credit Corp. Ltd were shown as contingent creditors pursuant to personal guarantees given by the bankrupts. The reference to Bank of Singapore Ltd may be assumed to be a reference to Bank of Singapore (Australia) Ltd.
The evidence also establishes that, on 20 November 1989, Bank of Singapore (Australia) Ltd had commenced proceedings in the Supreme Court of New South Wales against a number of companies and individuals, including the bankrupts. The cause of action against the bankrupts was founded on a guarantee given by them on 17 March 1989 in respect of an advance by the Bank to a company known as Orm International Ltd. On 12 March 1990 judgment was entered against all the defendants to that proceeding in the sum of $3,185,465.32. The Bank subsequently caused a bankruptcy notice to be issued against the bankrupts based upon the judgment. No moneys in reduction of the judgment debt were paid to the Bank by the bankrupts or, so far as appears, by any of the other judgment debtors.
On 7 May 1990 Mr Buggy signed an authority under s.188 of the Act authorising the trustee to call a meeting of his creditors for the purposes of Part X of the Act and to take control of his property. On the same day Mrs Buggy signed a similar authority and Mr and Mrs Buggy both signed an authority relating to their joint creditors and property.
As has already been mentioned, the meetings of creditors were held on 25 May 1990.
At the hearing before me, oral evidence was given by Mr and Mrs Buggy and by Alan Christopher Leonard Buggy, a son of the bankrupts. In this judgment a reference to Mr Buggy is a reference to Michael Francis Buggy. I shall refer to Mr Alan Buggy by that name.
Mr Buggy was most unreliable as a witness. He was evasive and sought to avoid answering any question the answer to which he perceived might be prejudicial to the case he was seeking to make. In some respects there were contradictions between his evidence and that of Mr Alan Buggy. I formed the opinion that, in general, it would not be safe to act on his testimony unless it was supported by other evidence.
It is clear, if one accepts her evidence, that Mrs Buggy took no active role in the affairs of the various companies of which she was a director and shareholder or in the business dealings in which she participated, at least in name, with Mr Buggy. In particular, she expressed ignorance of Canoona and of the circumstances surrounding the giving of the mortgage in question in this proceeding. If she is to be believed, she simply signed, without reading or comprehending, any document which Mr Buggy asked her to sign. She was, however, prepared to swear an affidavit deposing to facts upon subjects of which but a few hours later in the witness box she claimed to have no knowledge whatsoever.
It is equally clear that Mr Alan Buggy knew nothing of the affairs of Canoona, of his duties as a director of that company or of the circumstances surrounding the giving of the mortgage. His evidence was vague and unsatisfactory. He clearly did whatever his father requested him to do.
Mr Eggert, whose signature appears on the memorandum of mortgage and the caveat lodged on behalf of Canoona and who is a cousin of Mrs Buggy, gave no evidence, either by affidavit or orally.
There can be no doubt, on the evidence, that Mr Eggert and Mr Alan Buggy played little or no part in the affairs of Canoona except to sign documents at the request and direction of Mr Buggy. The company was purchased at the instigation of Mr Buggy and I am satisfied that it was purchased in order to provide a vehicle to be used solely for Mr Buggy's purposes. The evidence does not establish that at the relevant time Canoona carried on any business activities.
An attempt was made to attack the credit of the trustee who was cross-examined upon the affidavit sworn by him and filed in support of the application. Having regard to the issues to be determined, it is difficult to perceive how such an attack could assist the respondents. However, as the attempt was made, I should say that, in so far as his evidence was contradicted by Mr or Mrs Buggy or Mr Alan Buggy, I prefer the evidence given by the trustee.
Evidence was also given by Robert Keith Brading, an accountant who had been engaged by Mr Buggy to do certain accounting work for him. Although Mr Brading was not in every respect a satisfactory witness - he at times seemed to be confused - he was an independent witness with no motive to mislead the Court. His evidence was not contradicted by any other witness and I accept his evidence concerning the affairs of Canoona.
Canoona was incorporated on 30 January 1990. As a shelf company, it was purchased in the early part of February 1990. It had an issued capital of 2 shares of $1 each. At all material times the directors and shareholders of that company were Mr Eggert and Mr Alan Buggy.
On 12 February 1990, the shares in various companies then held by Mr and Mrs Buggy were transferred to Canoona. In the course of his public examination on 3 August 1990, Mr Buggy described those companies as "mostly the dormant companies". Asked why the shares had been transferred to Canoona, Mr Buggy said:

"Well, Eggert had lent money - a large amount of money over a long period. Basically I was administering it as a trust. I would tell him what we were holding on his behalf, and that sort of thing. And it was a very, very loose agreement. And at this point, we made an effort to tidy it up. This is about the time that it was obvious that it had to be more formalised and tidied overall."

Later he said that the shares were transferred to Canoona because he wished "to preserve the shells so that continuity after this fiasco was over could be maintained".

Canoona had no bank account prior to 16 May 1990 when an account in its name was opened at the Woden Centre Branch of Westpac Banking Corporation. The only signatories authorised to operate on that account were Mr and Mrs Buggy. The account was opened by Mr Buggy with the deposit of a bank cheque (Westpac Banking Corporation) for $31,500 dated 4 April 1990. It will be necessary to return to the circumstances in which that bank cheque was procured.
Mr Brading's evidence was that in February or March 1990 he obtained from another accountant what he referred to as the statutory records of Canoona. He held no office in the company until he was appointed its secretary on 21 May 1990. His employment by the company ceased at the end of May 1990. The work he did for the company consisted in the preparation of two sheets of paper containing journal entries, the preparation of various share transfer forms and the execution of certain unidentified legal documents. He also said that he had access to bank statements relating to the company's bank account and that, on one occasion, he performed a banking transaction on behalf of the company. The banking transaction he performed was to deposit certain cheques in the company's account with the Westpac Banking Corporation. The cheques, he said, were given to him by Mr Buggy. His task was to arrange a special clearance on the cheques "and make sure that the moneys were available for drawing against". Although Mr Brading signed the mortgage document as a witness to the affixing of Canoona's seal to it, he was unable to give any evidence as to the circumstances in which the mortgage was given. In particular he had never seen any documentation recording the advance of moneys from Canoona to Mr and Mrs Buggy.
I am satisfied that Canoona did not have any books of account. Mr Brading said he did not establish a cash book for the company because "(t)he company was going to be a holding company and, as such, it would have very few accounting transactions each year and there was no need for sophisticated computerised records or cash books as such." No minute book was produced nor any other record authorising the making of any advance to Mr and Mrs Buggy or the execution of the memorandum of mortgage.
At the date of their respective bankruptcies and for some years prior thereto, Mr and Mrs Buggy were the registered proprietors under the Real Property Act 1925 (ACT) as joint tenants, but subject to a registered mortgage in favour of Westpac Banking Corporation, of the Crown lease of the property 3 Goode Street, Torrens, being Block 38, Section 32, Division of Torrens and the whole of the land in Certificate of Title, Crown Lease Register Book Volume 744, Folio 43. At the date of their respective bankruptcies, a caveat by Canoona was noted on the title as having been entered on 5 April 1990.
It appears that instructions for the preparation of a document creating a second mortgage over the property at Torrens were given by Mr Buggy to his then solicitors on 22 February 1990. The instructions then given, however, did not include the name of the mortgagee and Mr Buggy was to confirm that the consideration for the mortgage was to be $500,000. The memorandum of mortgage, which bears date 4 April 1990 but which may not have been executed until some days later, provides that Mr and Mrs Buggy, being the registered proprietors as lessees under a Crown Lease of the property known as 3 Goode Street, Torrens but subject to a mortgage to Westpac Banking Corporation, in consideration of $500,000 lent by Canoona, the receipt of which was thereby acknowledged, for the purpose of securing to it the payment in the manner thereinafter mentioned of the principal sum and interest thereon, mortgaged to Canoona all their estate and interest in the property. Mr and Mrs Buggy covenanted jointly and severally to pay to Canoona the sum of $500,000 on 4 April 2000. They further covenanted to pay interest on that sum, at the rate of 14 per cent. per annum, payments of accrued interest to be made on or before 4 October and 4 April in each and every year with a final payment of $500,000 to be made on or before 4 April 2000. The memorandum of mortgage is signed by Mr and Mrs Buggy. The document bears the common seal of Canoona and records that the seal was affixed by authority of the board of directors and in the presence of Mr Eggert and Mr Brading whose signatures appear on the document. The mortgage was not registered until 17 May 1990 when the caveat to which reference has already been made was withdrawn.

In the course of his public examination Mr Buggy had said that "technically" Canoona had paid him $500,000 and that the benefit he got out of the mortgage was "half a million dollars" which had been dissipated through the organisation. He had denied that the giving of the mortgage was to try and protect any money Mr Eggert may have advanced some time before. However, at the outset of the hearing counsel for Canoona informed the Court that it would not be alleged that there was in fact a debt of $500,000 due from Mr and Mrs Buggy to Canoona. He further stated that "it can only be alleged that there is a debt of $100,500". The latter amount was said to be made up of four amounts -

(a) an amount of $50,000 said to have been lent by Mr Eggert to Mr and Mrs Buggy in 1977;

(b) an amount of $8,500 said to have been lent by Canoona to Mr Buggy in April 1990;

(c) an amount of $11,000 said to have been lent by Canoona to Mr Buggy on 24 May 1990; and

(d) an amount of $31,000 said to have been lent by Canoona to Mr Buggy on 16 May 1990.

Evidence concerning the amount of $50,000 is contained in Mr Buggy's affidavit sworn on 7 May 1991 (par 4) where he states that Mr Eggert had lent that sum to his wife and himself in about 1977. That statement is to be contrasted with what he said in the course of his public examination. Having said that Mr Eggert had given him "the initial money and then backed it up over the years and kept adding to it over the years", he was asked how much Mr Eggert had given him. Mr Buggy answered:

"I am not going to make a guess because he got an insurance payment that was a large lick of money and I believe that he gave me all of that. It was his superannuation."

He was also asked when did he and his wife give Canoona a mortgage over the Torrens property. He answered:

"Initially in 1979, I think just after the payment - it might not have been 79, it might have been 78, or it might have been early 80. But around that period we gave - not Canoona, sorry. Canoona was not registered then. We gave Eggert a mortgage then which it was not intended to register."

Later he said that the reason the mortgage of 4 April 1990 was given was that Mr Eggert already had an unregistered mortgage and "he believed that he wanted a registered mortgage now". Asked why the earlier mortgage had not been registered, Mr Buggy said:

"I was under the impression it had. It was not my place to do it. He had solicitors do it."

In cross-examination on 7 May 1991, Mr Buggy said that Mr Eggert had "lent Canoona, or assigned to Canoona, some $50,000". The records of Canoona's bank account disclose no such amount being received by Canoona and, as has already been said, Canoona did not keep books of account in which any such loan or assignment was recorded.
As has already been mentioned, Mr Eggert did not give evidence. There is no documentary or other evidence, apart from Mr Buggy's assertions, that moneys were advanced to himself and his wife by Mr Eggert. The unregistered mortgage is said by Mr Buggy to have been shredded by him when the memorandum of mortgage of 4 April 1990 was executed. No caveat was ever lodged by Mr Eggert to protect any interest he may have had under an unregistered mortgage. There is no evidence to support Mr Buggy's assertion that Mr Eggert lent Canoona the sum of $50,000 or any other sum or that he assigned to Canoona any debt owing to him by Mr and Mrs Buggy.
In the absence of any other evidence to support Mr Buggy's assertions, I do not accept his evidence. Whatever may have been the arrangements between Mr and Mrs Buggy on the one hand and Mr Eggert on the other, the evidence does not establish that they provided any consideration for the grant by Mr and Mrs Buggy to Canoona of the mortgage of 4 April 1990.
In his affidavit sworn on 7 May 1991, Mr Buggy deposed (par 3) that in or about April 1990 he used $8,500 of the funds of Canoona to pay a landscaping contractor for work carried out on the Torrens property. In cross-examination, Mr Buggy said that the amount of $8,500 was paid to the contractor at a meeting at which he, Mr Alan Buggy and the contractor were present. He was unable to name the contractor and he produced no documentary evidence by way of an invoice or a receipt or otherwise to substantiate what he was saying. He said he believed Mr Alan Buggy had saved the amount of $8,500 and lent it to Canoona.
Mr Alan Buggy's recollection, though extremely vague, was that the $8,500 was paid out of his own money, that he gave the money to Mr Buggy who paid it to the landscaping contractor.
I am not satisfied, on the evidence, that there was a loan of $8,500 by Canoona to Mr and Mrs Buggy.
In his affidavit sworn on 7 May 1991 Mr Buggy said (par 10):

"As to $11,000.00, the debt arose when on 24 May 1990, Alan lent me money from Canoona for expenses I was then incurring but had no means at that time to repay from my own resources."

The evidence shows that on 24 May 1990, that is to say on the day before the meetings of creditors of Mr and Mrs Buggy were held, Mr Buggy drew a cash cheque on Canoona's account with Westpac Banking Corporation in the sum of $11,000. As appears from the bank statement, the source of the funds against which that cheque was drawn was a deposit of $12,230 made to the account on 21 May 1990. That amount represented the proceeds of one or more cheques in respect of which a special clearance was arranged. I infer that this was the banking transaction of which Mr Brading gave evidence.
At his public examination Mr Buggy, in answer to a question what the cheque for $11,000 was for, said:

"I recognise the writing. It is certainly my writing but I have got absolutely no idea what transpired with that."

Later, he suggested that the $11,000 may have been used by Canoona to "bring the Westpac mortgage (over the Torrens property) into line".

However, in his evidence given on 7 May 1991, Mr Buggy said that he cashed the cheque and handed the proceeds to Mr Alan Buggy, that Mr Alan Buggy kept the proceeds for some time in what Mr Buggy referred to as "a cash stowage area" and Mr Alan Buggy's "shoe box" and that he, Mr Buggy, subsequently borrowed that amount from Mr Alan Buggy. He said that the $11,000 handed to Mr Alan Buggy was "to refund the money that he had paid out to purchase some furniture and stuff". He also said it was to repay a loan of $10,300 which Mr Alan Buggy had made to Canoona. Again, nothing in the material before the Court supports these various assertions.
While I am unable to say, on the evidence, what became of the proceeds of the cash cheque for $11,000, I do not accept Mr Buggy's statements that he handed the proceeds to Mr Alan Buggy and some time later borrowed those moneys from him. There is nothing in the material before the Court to support the assertion that Canoona lent that sum to Mr and Mrs Buggy.
In his affidavit sworn on 7 May 1991, Mr Buggy also deposed (par 11) that the debt of $31,000 arose when on or about 16 May 1990 Mr Alan Buggy lent him money from Canoona. He further deposed that the money was used by him "to pay suppliers or wages at the Leprechaun Hotel".
The only relevant facts that can be verified are as follows. Mr Buggy signed a cheque dated 15 May 1990 drawn on Canoona's bank account at the Woden Centre Branch of Westpac Banking Corporation in the sum of $31,000 in favour of Leprechaun Hotels Pty Ltd. Canoona's bank account was not, in fact, opened until 16 May 1990, the account being opened by the deposit by Mr Buggy of a bank cheque dated 4 April 1990 for $31,500 payable to Canoona. The source of the funds used for the purchase of the bank cheque were two accounts in the name of Mrs Buggy with the Westpac Savings Bank Ltd. The accounts are identified as Savings Account No. 020037 and Investment Savings Account No. 904404. As will subsequently appear, I do not accept Mrs Buggy's assertion that the sum of $31,500 represented moneys held by her in trust for Mr Alan Buggy.
Asked during the course of his public examination what the cheque for $31,000 drawn by him on Canoona's account was for, Mr Buggy said:

"My guess is that if you had the whole picture of the organisation at that time you would find that there was a shortage somewhere that had to be paid, you know, a purchase that had to be made or something like that."

Asked how he would categorise the payment of $31,000, Mr Buggy replied:

"I have got no idea how to categorise it. You ask the Canoona people how they see it now. It is more in their point because I have been stripped of any

responsibility...."

The evidence does not satisfy me that the amount of $31,000 was a loan from Canoona to Mr and Mrs Buggy.
In his written submissions, counsel for Canoona submitted that the memorandum of mortgage was to be read as providing that the mortgage was granted to secure advances made and to be made by Canoona to the bankrupts. I am unable to accept that submission. The language used in the memorandum of mortgage is, in my opinion, explicit that the mortgage was given to secure an amount of $500,000 said to have been already advanced to the bankrupts by Canoona. That that was the operation which the mortgage was intended to have is supported by the circumstance that the form of caveat lodged to protect the interest created by the mortgage was drafted so as to provide that the mortgage was to secure a loan of $500,000 "to be advanced" to the bankrupts but, before signature, the words "to be" were struck out. However, even if the memorandum of mortgage were to be read in the manner suggested, I am not satisfied that any advances were made by Canoona to Mr and Mrs Buggy, or either of them.
At the time Canoona was purchased, Mr and Mrs Buggy were in very serious financial difficulties. Reference has already been made to the judgment for $3,185,465.32 which had been obtained against them by Bank of Singapore (Australia) Ltd and which the Bank was seeking to enforce. There was the debt due to Associated Holdings Ltd ($12,923,026) and Hong Kong Bank of Australia Ltd was making demands in respect of its debt of approximately $7,000,000. There were also other creditors. In his statement of affairs dated 29 May 1990 Mr Buggy, in answer to the question "When were you last able to pay your debts as they became due", said "About January 1990". Questioned about that answer in the course of his public examination, Mr Buggy, after perusing the document, said:

"Now in January 1990, Custom Credit pulled the pins, so to speak, on a loan for $3.2m. Now, that $3.2m would have kept my entire organisation liquid. I was told at the time that the reason for the loan failing was simply a change of policy with regards North Queensland. Now, at that stage most of my affairs were controllable. But from the moment that loan was withdrawn the sequence of events that transpired thereafter, it just became a collapse, it just became an absolute fiasco. And what I was referring to there is the - well, it says, 'When were you last able to pay your debts as they became due?' I was able in January to pay my debts."

The following exchange then occurred:

"Q. But after that you were not, is that right? A. Yes. Well, you see I am once again talking in the overall picture. Once again I am - you know I know this is an affidavit and I know that when I signed it I verily believed what I signed. When I am sitting here looking at it, my own personal debts were so very very small that I suppose that I could always at all times pay them. I am talking about company debts here, I am talking about my organisation and I have failed to differentiate between them. Q. But there is no dispute you gave a series of personal guarantees, is there, that I have been asking you about? A. No argument.

Q. And that all these guarantees were payable on demand? A. They were only payable on demand if judgment was entered into.

....

Q. There is no dispute that these companies did make demands on you, is there; the Hong Kong Bank and the Singapore Bank, for example?

A. We had a running battle with the Singapore Bank. And the Hong Kong Bank made demands around - well, January, I think."

In the light of the evidence to which I have referred, I am unable to accept Mr Buggy's statement that as at January 1990 he was able to pay his debts as they fell due. I am satisfied on the whole of the evidence that, in February 1990 and at the time the mortgage was entered into, Mr and Mrs Buggy were insolvent.
As Mr and Mrs Buggy became bankrupt on 29 May 1990 and the mortgage in favour of Canoona was granted within 2 years before the commencement of their bankruptcies, the mortgage will be void as against the trustee if it is properly to be regarded as a settlement of property within the meaning of that expression in s.120(1) of the Act and if Canoona was not an encumbrancer in good faith and for valuable consideration.
I have no doubt that the mortgage is properly to be described as a settlement of property within the meaning of that expression in s.120(1). It is sufficient in order to support that conclusion to refer to Re Hyams; Official Receiver v Hyams (1970) 19 FLR 232: Re Barton; Ex parte Official Receiver v Barton (1983) 52 ALR 95 and on appeal sub nom. Barton v Official Receiver (1984) 4 FCR 380; (1986) 161 CLR 75: Re La Rosa; Ex parte Norgard v Rocom Pty Ltd (1990) 21 FCR 270 and on appeal sub nom. Norgard v Rocom Pty Ltd (16 August 1990 - unreported).
I am also satisfied, having regard to the matters to which I have referred earlier in these reasons, that no consideration passed from Canoona so that it cannot be said that that company was an encumbrancer for valuable consideration. I am also not satisfied, having regard to the serious financial difficulties which beset Mr and Mrs Buggy at the time the mortgage document was executed, the steps which Mr Buggy had at about that time put in train for an arrangement under Part X of the Act and the circumstance that Canoona was virtually controlled by Mr Buggy, that Canoona can be regarded as having entered into the transaction in good faith. In my opinion, the mortgage was given in an attempt to ensure that the Crown lease of the property at Torrens of which Mr and Mrs Buggy were then the registered proprietors and which was then their place of residence would, in the event of an arrangement under Part X of the Act or bankruptcy, be placed beyond the reach of Mr and Mrs Buggy's creditors.
The mortgage is, therefore, void as against the trustee.
I turn to the payment by Mrs Buggy to Canoona of the amount of $31,500.
As has already been mentioned, Mrs Buggy had two accounts with the Woden Centre Branch of Westpac Savings Bank Ltd, Savings Account No. 020037 and Investment Savings Account No. 904404.
Mrs Buggy was unable to say when the Savings Account was opened. However, as appears from the pass book, the account had a credit balance of $1,463.23 as at 27 November 1987. It was into this account that salary cheques in respect of her employment as a Clerk at a Canberra school were regularly paid. Some amounts which she did not identify as salary payments were also credited to the account. The only substantial amount in this category, however, was an amount of $2927.90 credited to the account in January 1988. There were regular withdrawals from the account of amounts of $500, one may infer for living expenses. As at 4 April 1990, the credit balance in the account was $5,986.07. On that date $5,800 was withdrawn from the account, leaving a credit balance of $186.07. The account was closed on 6 June 1990.
The Investment Savings Account was opened on 15 January 1986 with a deposit of $4,500. Mrs Buggy was unable to say what was the source of that deposit. The account was opened, she said, to obtain more interest. Between 4 February 1986 and 9 June 1988 various amounts were credited to the account. Mrs Buggy was equally unable to say what the source of these credits was except as to an amount of $517.61 credited to the account on 9 June 1988. That amount, she said, was her salary. That credit was followed immediately by the withdrawal of $500 following the pattern observed in relation to the Savings Account. The amounts credited over the period from 4 February 1986 to 9 June 1988 totalled a little over $15,000. The amounts varied from an amount of $500 on 23 January 1987 to two amounts of $3,500 on 25 January and 28 April 1988. The amount of $500 to which reference has been made was the only withdrawal from the account until the withdrawal on 4 April 1990 of an amount of $25,700 reducing the credit balance from $25,838.18 to $138.18. This account was also closed on 6 June 1990.
The amounts of $5,800 and $25,700 withdrawn from those accounts on 4 April 1990 were used to obtain from Westpac Banking Corporation the bank cheque dated 4 April 1990 drawn in favour of Canoona to which reference is made earlier in these reasons. It will be recalled that the bank cheque was used to open, on 16 May 1990, Canoona's bank account at the Woden Centre Branch of Westpac Banking Corporation.
In the statement of affairs signed by her on 29 May 1990 Mrs Buggy answered "No" to the question "Have you ever been trustee of any trust". However, in her affidavit sworn on 7 May 1991, Mrs Buggy, after referring in par. 3 to the two bank accounts mentioned above, deposed to the following facts:

"4. Over approximately the last ten years, Alan had worked in various casual and minor capacities for the various business enterprises in which the family had been involved.

5. These included the businesses conducted by Leprechaun Hotels Pty Limited, Tudor Holdings Pty Limited, Taverate Pty Limited, Hope Investments Pty Limited, Tymplum Pty Limited and Fynlec Pty Limited.

6. Instead of being paid directly for this work, or getting pocket money in lieu, I accumulated the moneys which he would otherwise have been paid in the bank accounts referred to in paragraph 3 of this my affidavit.

7. It was my intention that when he was ready to leave home, or perhaps to marry, he would have a significant accumulation of funds towards a home, or perhaps towards a business. ....

9. I kept a record of these funds in a small notebook.... ....

11. I kept the moneys in the two accounts referred to because I wished to ensure that the moneys would be available for Alan when he wanted them. One account had a smaller balance than the other and if Alan called for the money before I felt he was ready for it, I intended to give him the smaller Account.

12. On or about 16 May 1990, Alan asked me to pay the moneys to his Company and I did so. As he was involved in the Company with my cousin, Ronald Edward Eggert, and was, I felt, mature enough to deal with the money sensibly, I had no concern at doing so."

The references to "Alan" are, of course, references to Mr Alan Buggy.

Cross-examined upon her affidavit, Mrs Buggy was unable to say when Mr Alan Buggy started to do any work for the various companies. She said he was going to school at the time - he was born on 7 March 1971 - and worked only at weekends. She was unable to give any idea at all of the work he did which is perhaps understandable when it is remembered that according to her evidence, she had no idea of what business was conducted by the various companies of which she was a director and shareholder. She said that Mr Alan Buggy was not paid for the work he did and that Mr Buggy gave her money to be accumulated in the two bank accounts, that money being in lieu of wages and pocket money. She could not say what moneys were received or with what regularity. She thought that, in some instances, she received a cheque and, on other occasions, cash though she said she could not remember back that far. She could not remember over what period the moneys were received. In re-examination, Mrs Buggy was asked whether she was able to tell the Court how the amount of Mr Alan Buggy's wages was determined for payment into the account. She replied:

"Not exactly. I would say to Mike (Mr Buggy), you know, I felt that Alan was due X amount of dollars and that's how I think some of those large amounts went in. It was just what I felt was due to Alan in comparison to what the other children had had."

Asked why she paid her wages into an account which she claimed was a trust account for Mr Alan Buggy, Mrs Buggy said:

"I suppose I was too lazy to open up another account."

She added:

"I was trying to build it up for Alan. As you can see, not all the money was taken out all the time."

Mrs Buggy later said that it was not the whole of her salary moneys that were paid into the Savings Account that were held on trust for Mr Alan Buggy but only that part of those moneys that remained in the account after she had withdrawn whatever moneys she needed. The following evidence was given:

"Q. What did you do to identify the part that was for Alan and what was the part that was for you?

A. Yes, I suppose I didn't give a definite.... Q. You mean you didn't ever identify it? A. No, I just had a notebook and I would just write '$200 for Alan' if I hadn't used it or '$100 for Alan'. It just wasn't anything definite."

The notebook to which Mrs Buggy referred was not produced. Mrs Buggy alleged that it had been taken by the trustee from the premises at 3 Goode Street, Torrens when executing a search warrant. The trustee denied that he had taken the notebook. He further said that, after making a thorough search for it, he did not have it. I accept his evidence.

Mrs Buggy said that a conversation took place at which Mr Buggy, Mr Alan Buggy and herself were present. Mr Buggy informed Mr Alan Buggy "that we had money in trust" and asked "could we use it for a short time". She said that Mr Buggy also said that "he would make sure that it was always safe". According to her evidence, Mr Alan Buggy said he had no objection and she said that she would get Alan the money.
Mrs Buggy said she then went to the Bank and, as the Bank could not give her that amount of cash, she arranged to obtain the bank cheque. She did not know why the bank cheque had been drawn in favour of Canoona. She said that either Mr Buggy or Mr Alan Buggy asked her to provide a bank cheque in favour of that company. She said she did think of having the cheque drawn in favour of Mr Alan Buggy.
Mrs Buggy further said that, having obtained the bank cheque in favour of Canoona, she handed it to Mr Alan Buggy at their home on the same evening. She thought the cheque then remained at home in Mr Alan Buggy's bedroom. If one accepts her evidence, the bank cheque must have remained in the possession of Mr Alan Buggy, or possibly of Mr Buggy, from 4 April 1990 until 16 May 1990 when it was used by Mr Buggy to open Canoona's bank account with Westpac Banking Corporation.
Mr Buggy said that prior to the mortgage to Canoona being signed he had a conversation with Mr Alan Buggy telling him that "he had about $32,000 in trust" and that he, Mr Buggy, "was going bad" and that he needed to borrow it from him.
In his affidavit sworn on 7 May 1991, Mr Alan Buggy deposed as follows:

"9. Over the last ten years or so, I have worked on a casual basis, after school and at weekends from time to time for the various family businesses in which the family has been involved.

10. I have rarely been paid for this work as I understood from my mother that she was saving this money for me so that there would be a worthwhile accumulation of funds when I may need it.

11. In early 1990, I decided to set up the Company (Canoona) and start investing myself. I asked my mother's cousin, Ronald Edward Eggert, to assist me in this.

12. In May 1990, on a date I cannot now precisely remember, I asked my mother to pay to the Company the funds she was holding on my behalf and she did so. The total amounted to $31,500.00."

In cross-examination he said that he thought it was about January 1990 that he first came to understand that he had a trust fund. He thought it was Mr Buggy who had told him. Asked whether his father had ever told him how these moneys had been accumulated, he said:

"Yeah, well, ever since we were younger we were working for the family trying to build the business up and that, all the rest, and after school we'd be out there having late nights working. And we always used to complain to dad, why aren't we getting paid, and all the rest, and he said 'I'm building a future up for you' type of thing."

His evidence continued:

"Q. What sort of work were you doing?

A. Oh, anything and everything, cleaning, vacuuming, cleaning windows, building offices; you name it, we've done it, I think.

Q. Was there any agreement about how much you should be paid for this work you did?

A. No, no.

Q. And did you know how much money was being paid into these accounts?

A. No.

Q. Did you know where the accounts were held? A. No.

Q. Did your mother ever discuss with you what she was doing in respect of the wages and accounts?

A. When we were younger?

Q. Yes?

A. No, not that I can remember.

Q. I suppose it came as a bit of a surprise to find that you had $31,000 or thereabouts held for you? A. Yeah. Dad always said that he'd try and fix us up for a deposit on a house and so forth, as long as we stick with him and help him when we were young and that."

He said he did not recall asking his mother to pay moneys to Canoona but when referred to what he had sworn in par 12 of his affidavit only some hours earlier, he said that what he had said in his affidavit was the correct position. He said that the request was made in May 1990. He said he saw a bank cheque for $31,500 and had it in his possession. Asked for how long, he said:

"Not very long. As in minutes."

He agreed that it would be wrong to suggest that he had it for some length of time - days or weeks.

There are patent inconsistencies within Mrs Buggy's evidence and further inconsistencies between her evidence and that of Mr Alan Buggy. I need not endeavour to resolve those inconsistencies because the evidence is such that it falls far short of establishing that Mrs Buggy created a trust in favour of Mr Alan Buggy of the amounts that were standing to the credit of the two accounts on 4 April 1990 when the sums of $5,800 and $25,700 were withdrawn to purchase the bank cheque in favour of Canoona. The assertion that amounts totalling thousands of dollars credited to the Investment Savings Account over the period between 4 February 1986 and 9 June 1988 represented unpaid wages for casual work carried out by Mr Alan Buggy who was then a teenager and unpaid pocket money strains credulity and I do not believe the moneys credited to the account are properly described as such. The Savings Account was clearly a working account used by Mrs Buggy for her own purposes.
Mrs Buggy's statement that she did not think of putting the alleged trust moneys in a separate bank account in her name as trustee for Mr Alan Buggy has a hollow ring in the light of the questions put to the trustee in the course of cross-examination, presumably on instructions, that in the course of the search of the Torrens property the trustee saw bank pass books and building society books in the names of the bankrupts' children. There is no evidence of conduct on the part of Mrs Buggy from which a trust in favour of Mr Alan Buggy is to be inferred.
It may well be that Mrs Buggy had in mind to accumulate funds from which she could, when occasion arose, provide assistance to her son but to attribute to her such a commendable intention is not sufficient to warrant a conclusion that the moneys while still in her hands and under her control were impressed with a trust in favour of Mr Alan Buggy.
The payment of $31,500 was made to Canoona on 16 May 1990 when it was credited to that company's bank account. The payment was thus made after Mr and Mrs Buggy had signed, on 7 May 1990, authorities under s.188 of the Act authorising the trustee to take control of their property and call meetings of their creditors. The signing of such an authority constitutes an act of bankruptcy (s.40(1)(i)). It follows that the payment is caught by the doctrine of relation back (s.115 of the Act) so that the amount of $31,500 is, pursuant to s.116, property divisible amongst Mrs Buggy's creditors unless the transaction can be shown to be within the protective provisions of s.123. This has not been shown. The transaction does not fall within any of the paragraphs (a) to (d) in s.123(1) and, in any event, it has not been established that the payment was made in good faith and in the ordinary course of business (s.123(1)(g)).
In the light of what is said above, I make the following declarations and orders:

1. Declare that the second mortgage over the Crown lease of the property known as 3 Goode Street, Torrens given by Mr and Mrs Buggy to Canoona and evidenced by the memorandum of mortgage dated 4 April 1990 is void as against the trustee.

2. Declare that the amount of $31,500 paid by Mrs Buggy to Canoona on 16 May 1990 is property divisible amongst her creditors.

3. Order that Canoona pay an amount of $31,500 to the trustee within 28 days of the date of this order.

4. Order that Canoona pay the trustee's costs of and incidental to the application in so far as it relates to the mortgage and the payment referred to in Orders 1 and 2 respectively other than the costs of the hearing on 11 February 1991.

5. Order that the application in so far as it seeks an order that Mr and Mrs Buggy forthwith deliver up to the trustee possession of the property known as 3 Goode Street, Torrens be adjourned to a date to be fixed.

6. Reserve liberty to the trustee to apply to the Court for such further or other orders as may be appropriate to give full effect to this judgment.

[1992] FCA 149

24 MARCH 1992