Re Cao, L.T. v Dixon, T.W.F

[1994] FCA 536

RE: LY KY TRAN CAO
EX PARTE: THOMAS WILLIAM FREDERICK DIXON v. LY KY TRAN CAO, THANH PHUONG CAO
and THANH PHU CAO
No. NB423 of 1991
RE: VAM LAM CAO
EX PARTE: THOMAS WILLIAM FREDERICK DIXON v. VAN LAM CAO, THANH PHUONG CAO and
THANH PHU CAO
No. NB424 of 1991
FED No. 536/94
Number of pages - 5
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
BANKRUPTCY DIVISION
DAVIES J

CATCHWORDS

Bankruptcy - control over bankrupt's property - voidable settlement of property prior to act of bankruptcy - whether settlors' potential tax liabilities to be considered in ascertainment of "all his debts" at the time of settlement.

Bankruptcy Act 1966 (Cth) - s.120(2)
Bankruptcy Act 1869 (UK) - s.91
Bankruptcy Act 1883 (UK) - s.47

Ex parte Russell. In Re Butterworth (1882) 19 Ch D 588
In re Ridler. Ridler v. Ridler (1883) 22 Ch D 74
Re Saebar; Official Receiver v. Saebar (1971) 18 FLR 317
Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232
Re Brown; Official Receiver v. Perpetual Trustee Co Ltd (1950) 15 ABC 74
Clyne v. Deputy Commissioner of Taxation (1981) 150 CLR 1
Federal Commissioner of Taxation v. Gosstray (1986) VR 876
Thomas v. Deputy Commissioner of Taxation (1988) VR 133
The Commissioner of Stamps (Western Australia) v. The West Australian Trustee, Executor and Agency Company Ltd (Mortimer Kelly's case) (1925) 36 CLR 98
The Commissioner of Stamps (Western Australia) v. The West Australian Trustee, Executor and Agency Company Ltd (1926) 38 CLR 63

HEARING

SYDNEY, 11 July 1994
#DATE 12:8:1994

Counsel for the applicant: S.W. Gibb

Solicitors for the applicant: Maurice Freidman and Co.

Counsel for the 1st, 2nd and 3rd respondents: M.P. Podleska

Solicitors for the 1st, 2nd and 3rd respondents: Smith and Pasternacki

ORDER

THE COURT ORDERS THAT:

1. The question:-

"Whether, for the purposes of s.120(2)(a) of the Act -

(a) the debts of the husband at the time of the making of the settlement included the husband's tax liability; and

(b) the debts of the wife at the time of the making of the settlement included the wife's tax liability?" be answered "Yes".

2. Counsel bring in within 5 days minutes of the orders which they propose with respect to the remaining issues in the proceedings.

NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

DAVIES J The issue with which I now deal arises under s.120(2) of the Bankruptcy Act 1966 (Cth) ("the Act"). The sub-section provides:-

"A settlement of property, whether made before or after the commencement of this Act, not being a settlement referred to in paragraph (1)(a) or (b) or a settlement that is void as against the trustee by reason of the operation of that subsection, is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove:-

(a) that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement; and

(b) that the settlor's interest in the property passed to the trustee of the settlement or to the donee under the settlement on its execution."

1. The estates of Mr and Mrs Cao were sequestrated on 7 May 1990. The period of 5 years prior thereto commenced on 7 May 1985. Between 29 November 1985 and 16 January 1986, Mr and Mrs Cao each made a settlement of moneys in favour of their sons, Thanh Phuong Cao and Thanh Phu Cao. It is not in dispute that, at the time of the settlements, Mr and Mrs Cao were able to pay all liquidated sums then due and payable by them and that they were able to do so without the aid of the moneys comprised in the settlements. However, on 5 May 1988, the Commissioner of Taxation issued to Mr Cao assessments or amended assessments in respect of the years of income ended 30 June 1982, 1983, 1984 and 1985. On 11 May 1988, the Commissioner issued to Mrs Cao assessments or amended assessments in respect of the years ended 30 June 1981, 1982 and 1985. It is not in dispute that neither Mr and Mrs Cao would have been able, at the time of the settlements, to pay the assessed sums without the aid of the property comprised in his or her respective settlement.

2. The following question has therefore been set aside for determination:-
   

"Whether, for the purposes of s.120(2)(a) of the Act -

(a) the debts of the husband at the time of the making of the settlement included the husband's tax liability; and

(b) the debts of the wife at the time of the making of the settlement included the wife's tax liability?"

It is agreed by counsel that the matters in dispute will be determined by the answer to that question.

1. It was submitted by Mr M.P. Podleska, counsel for the respondents, that in s.120(2) of the Act the words "or his debts" refers to debts as described in s.44(1)(b) of the Act which provides that a creditor's petition shall not be presented unless -
   

"(b) that debt, or each of those debts, as the case may be:

(i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and

(ii) is payable either immediately or at a certain future time; ..."

However, the word "debts" in s.120(2), which is defined in s.4(5)(i) to include "liability" carries a meaning similar to that of the term "all debts and liabilities" in s.82(1) of the Act which provides:-

"Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he may become subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy."

1. A like provision to s.120(2) first appeared in s.91 of the Bankruptcy Act 1869 (UK), a section which applied only to traders. The provision was repeated in s.47 of the Bankruptcy Act 1883 (UK), without this limitation. The test has always been regarded as an objective test, which looks to the settlor's ability to pay all his debts at the time when the settlement was made.

2. The early approach to the statute 13 Eliz. C.5, which now finds expression in s.121 of the Act, was similar, though the subjective elements explained by Cussen J in Cox v. Smail (1912) VR 274 are now examined when applying that section. For present purposes, it is sufficient that the approach to indebtedness has been similar for the purposes of both provisions.

3. Assets not available for the payment of debts have been disregarded. Thus, in Ex parte Russell. In Re Butterworth (1882) 19 ChD 588, it was held that the value of the implements of the trade and of the goodwill of a business should not be taken into account if the settlor was intending to continue his business and that, if taken into account, the value would be that which would be realised at a forced sale. At 601, Lindley LJ said that the settlor "must be able to pay his debts in the way in which he proposes to pay them ... ." See also May on Fraudulent and Voluntary Conveyances, 3rd Ed. (1908) at 37 and 142.

4. In Rider v. Kidder (1805) 10 Ves Jun 360; 32 ER 884, a contingent debt, a covenant by a husband to pay money to his wife if she survived him, was held to constitute relevant indebtedness. In Goodrick v. Taylor (1864) 2 De GJ and S 135; 46 ER 326, Turner LJ said at 141 an d ER 329, in the context of a bankrupt being a surety to promissory notes, that:-
   

"every surety must be taken to contemplate that he may be called upon to pay the debts for which he is surety, and he can no more be justified in placing the whole of his property out of the reach of liability to pay them than if he was the principal debtor ... on the notes."

In In re Ridler. Ridler v. Ridler (1883) 22 ChD 74, it was held that a liability under a guarantee was a relevant indebtedness which should be valued. At 82, Cotton LJ said:-

"Then as to the point that the settlor was not indebted, but only subject to a liability which might never become a debt. A man is not at liberty to take a sanguine view, but is bound to act upon a reasonable view of what is likely to happen. In the circumstances of this case, any reasonable man must have looked upon this guarantee as one which would probably be enforced, and the settlement must be taken as made with intent to delay or hinder creditors."

This decision, in which the Court was constituted by Lord Selborne LC, Jessel MR and Cotton LJ, has been since applied on many occasions both in the United Kingdom and in Australia.

1. A helpful example of the application of this approach in the United Kingdom may be seen in Taylor v. Coenen (1876) 1 ChD 636, in which the Court directed an inquiry as to the state of a trader's debts and assets at the dates of certain settlements. That inquiry was held and a valuation was made of the value of the assets and of the debts at the respective dates.

2. These principles have also been applied in this country. In Re Saebar; Official Receiver v. Saebar (1971) 18 FLR 317, Hoare J referred to a number of the authorities I have mentioned and to others and held that, in determining the debts of a settlor, a prospective liability for damages should be considered, though if the liability was purely speculative and without any real likelihood of being established, that liability should be disregarded. In Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232, Gibbs J held that, in ascertaining the settlor's debts, it was necessary to take account of contingent liabilities, if there was a reasonable possibility that the settlor would have had to meet them. At 258, his Honour referred to the fact that the bankrupt had not been called upon to make payment under guarantees but that the evidence showed that at that date it was probable that he would be required to pay, and that this is what in fact had happened. His Honour referred with approval to In re Ridler. Ridler v. Ridler.

3. Applying these principles in the context of taxation, it was held by Clyne J in Re Brown; Official Receiver v. Perpetual Trustee Co Ltd (1950) 15 ABC 74, that a potential liability to tax, which had arisen by the date of a settlement, was a liability to be taken into account in the assessment of whether the bankrupt could pay all his debts at the date of the settlement notwithstanding that no assessment had been made and that the tax had not been quantified. This decision was also referred to by Gibbs J in Re Hyams with approval.

4. In answer to this clear line of authorities, Mr Podleska relied upon cases such as Clyne v. Deputy Commissioner of Taxation (1981) 150 CLR 1, where it was held that, for the purposes of s.218(1)(a)(i) of the Income Tax Assessment Act (1936) (Cth), income tax was not due and payable until it was assessed and a notice of assessment was served, and to Re Mendonca; ex parte Commissioner of Taxation (1969) 15 FLR 256, in which Gibbs J held that income tax in respect of which no notice of assessment had issued was not a debt for the purposes of s.44(1)(b) of the Act. However, cases such as these deal with issues different from the present. In a determination of the issue whether the settlor can pay "all his debts", it is necessary to take account of contingent liabilities and, if necessary, to make a valuation.

5. In Federal Commissioner of Taxation v. Gosstray (1986) VR 876 and Thomas v. Deputy Commissioner of Taxation (1988) VR 133 it was held that a tax liability created by an Act having retrospective operation was not a contingent liability for the purposes of the bankruptcy as the Act did not commence until after, in Gosstray, the bankruptcy has been annulled and, in Thomas, the bankruptcy had been discharged. In The Commissioner of Stamps (Western Australia) v. The West Australian Trustee, Executor and Agency Company Ltd (1926) 38 CLR 63, a like principle was applied.

6. But that situation stands in contrast with the present where the liability to tax arose by reference to the events in and the taxation laws applying in the relevant years of income. In such event, the liability, though not due and owing because no assessment has issued, may nevertheless be treated as a contingent liability and therefore as a relevant debt. See The Commissioner of Stamps (Western Australia) v. The West Australian Trustee, Executor and Agency Company Ltd (Mortimer Kelly's case) (1925) 36 CLR 98.

7. It follows that the submissions put by Mr Podleska must fail and the submissions put by Mr S.W. Gibb, counsel for the Commissioner of Taxation, should be accepted.

8. In their submissions counsel proceeded on the footing that, if Mr Podleska's submission that cases such as Clyne v. Deputy Commissioner of Taxation should be applied, then the question posed must be answered "Yes". No submission was put and no evidence was called suggesting that, at the time of the settlement, the possibility of an assessment of tax or of an amended assessment was entirely unrealistic or fanciful and not a matter to be taken into account. The onus is on the settlor to establish that he was solvent at the time of settlement. In the absence of evidence going to the circumstance of the taxation affairs of Mr and Mrs Cao and as to the likelihood or probability of assessments issuing, the respondents have failed to overcome the onus of proof which lay upon them.

9. The question proposed will be answered "Yes". Incidental orders will be required to give effect to the answer to the question posed. Counsel should bring in within 5 days minutes of the orders which they propose. The minutes should deal with the question of costs.