Re Leo, J. v Ex parte Official Trustee in Bankruptcy

[1991] FCA 92

JUDGMENT NO. ?Z / . . 4 ! ~

IN THE FEDERAL COURT OF AUSTRALIA )

VICTORIAN DISTRICT REGISTRY	)	NO VB 818 of 1986
GENERAL DIVISION	)

RE: JACK LEO

A former bankrupt

EX PARTE: OFFICIAL TRUSTEE IN

EVWKRUPTCY

(As Trustee of the
property of the property

of Jack Leo when a

bankrupt )

Applicant

AND:  PATRICIA EUEN MARY LEO
Respondent

Einfeld J Melbourne 14 Februarv 1991

The first application by the Official Trustee is under section 120 of the Bankruptcy Act for a declaration that a settlement made by the former bankrupt on his wife, the respondent to the present proceedings, of his half interest in the matrimonial home then situated at 63 Walnut Avenue, Mildura be declared void as against the trustee in bankruptcy. The application is made alternatively under sub-sections (1) and (2) of the section.

sale of real estate between U Leo and his wife dated 24

The pre-requisite of sub-section (1) is that the settlement have taken place within two years before the commencement of the bankruptcy. This settlement is contained in a contract of

December 1983. That contract provides that the settlement date is the date upon which vacant possession of the property and chattels shall be given, namely upon acceptance of title and payment of the whole of the purchase money. The contract fixed the day of sale as 24 December 1983 and the payment of the purchase price was required on that date. In those circumstances, it seem to me unarguable that the date of settlement is 24 December 1983. M r Leo was made the subject of a sequestration order on 7 October 1986 in undefended proceedings. As the settlement was made more than two years before the commencement of the bankruptcy, the application under sub-section (1) must therefore fail.

As far as sub-section (2) is concerned, the relevant requirement here is that the settlement take place within five years before the bankruptcy. This settlement is therefore capable of being considered under the provisions of this sub- section. Relevantly the exculpatory or escape provisions of sub-section (2) require that the party or parties claiming

under the settlement prove that the settlor was, at the time	of making the settlement, able to pay all debts without the
aid of the property comprised in the settlement and that the
settler's interest in the property passed to the donee on its
execution.
There seems no doubt that the second of those conditions exists here. Thus the question that the respondent raises for consideration and determination in this case is whether her

husband was, at the time of making this settlement, able to pay all his debts without the aid of the Mildura property. It may be that that matter may not be open to be determined in a proceeding of this kind. However, it has been fully argued and the Official Trustee's legal representative has not taken the point that I do not have power in such a case to consider the matter raised. I will therefore assume for the purposes of this judgment that there is jurisd~ction and that I do have

the power to enterta~n the point at issue.

The argument of the respondent is that her husband who has long since been discharged from bankruptcy was able to pay all his debts on 24 December 1983 without the aid of the property concerned, because the debt which was the basis of the sequestration order against him did not exist. The assertion is that Mr Leo did not owe the money to his petitioning creditors.

That requires a brief outline of a number of facts. The

committed on 31 March 1986 by reason of non-compliance with a	petition against Mr Leo was based upon an act of bankruptcy	fourteen day bankruptcy notice issued by the petitioning creditors, Mr and Mrs Brown, on 24 February 1986. The papers reveal, and it has not been challenged here, that the bankruptcy notice was served on Mr Leo on 15 March 1986 at his Mildura home. The petition is said to have been served upon Mr Leo on 17 September 1986 at the same place.
According to the affidavits of service both of the bankruptcy notice and of the petition, M r Leo was personally served and on each occasion acknowledged that he was the person referred to in the document concerned. These affidavits also reveal that the bankruptcy notice was served by a licensed process server and the service of the petition was carried out by a senior sergeant of police at Mildura. Mr Leo gave evidence today that he has no recollection of these documents being served, but if they were served, he says he gave them to his solicitor at the time. There was no request to cross examine either of the persons said to have served these documents.
The bankruptcy notice and the subsequent petition are both based upon a judgment of the Supreme Court of Victoria given at Ballarat on 13 December 1983 by a Master of that Court. He ordered that Mr Leo and a former business partner, Mr Skinner, pay to Mr and Mrs Brown the sum of $74,570 with costs to be taxed. Mr h Mrs Leo say that no such sum was ever owing by Mr Leo.
became the judgment in the Supreme Court. He says in this Mr Leo does not deny receiving a summons for the amount which
regard that he gave the summons to his solicitor and discussed it with him, that his solicitor spoke to Mr Skinner and his solicitor, that an arrangement was made that Mr Skinner would defend those proceedings on behalf of both of them, and that therefore Mr Leo, who was impecunious, did not himself take any action to defend the proceedings. Part of the reason for this was Mr Leo's position that any amount owing to the Browns only arose after the dissolution of the Leo/Skinner
partnership and was incurred by Mr Skinner alone.
As it turns out, it appears that the Skinner interests did nothing in the Victorian Supreme Court proceedings because they went through undefended. Mr Leo does not deny but he does not recall receiving notice of the judgment of the Supreme Court of Victorla after it was entered. The actual form of judgment in the court papers is dated 19 April 1984.
Mrs Leo says that other than the $74,570 ordered to be paid to Mr and Mrs Brown, Mr Leo had no other debts of any substance which he was being pressed to pay, and therefore that he was solvent and was able to pay his debts without the aid of his interest in this property at the time of its disposition to Mrs Leo.
It is clear that the problems which have arisen for Mr Leo in
this connection are almost entirely of his own making. Apart from the assertion that only Mr Skinner, not he, could have
contracted any debt to the Browns, Mr Leo has an explanation about why the money is not owing. In substance he says that there was a total failure of consideration by Mr Brown in a contract for the hire of some construction equipment because the equipment did not function as promised. Yet this point of view is being put before a court for the first time in February 1991 in respect of a judgment pronounced in 1983 and
of a debt which arose considerably before that. In fact, the dissolution of the partnership between Mr Leo and Mr Skinner, at which time matters such as the dispute with the Browns came well and truly into view, is dated 15 March 1982, virtually nine years ago to the day.
It is understandable, as Mr Leo said in evidence, that he may have shied away from expending money which he did not have in a liquid form at the time, on defending the Supreme Court summons. One of the tragedies of our time is that even relatively simple litigation has become so expensive that it has gone beyond the reach of ordlnary men and women even when there is merit in the argument that they would wish to put before the courts. But litigation would never end at all if people were to be permitted effectively to turn the clock back right to the beginning of a long line of proceedings by as much as nine years. Although Mr Leo makes an impassioned plea concerning the reasons why he has not challenged the judgment before (he actually first raised it with the Official Receiver
subsequent to his bankruptcy) based upon the failings of the
Browns, I have of course not heard Mr and Mrs Brown's side of
the story. Nor have I been proffered any evidence of Mr Skinner.
It is therefore completely impossible for me to determine whether the debt to Mr and Mrs Brown is or is not justified. All I know, and all the Official Receiver ever knew, is that there is a judgment of the Victorian Supreme Court which,
until challenged, set aside or otherwise dealt with by that Court or some other court with power to deal with it, exists as an order of a court that money be paid. The validity of the Supreme Court's judgment is not in dispute. It is merely whether it would have been pronounced if the proceedings had been contested.
Mr Leo's claim that he did not have the funds with which to
challenge those proceedings at that t ~ m e is on the evidence somewhat less than entirely accurate. At the time he had a half share in a property which on any view had an equity available to him of something in excess of $10,000. In fact, the amount that has been obtained following the sale of the property was of the order of $35,000 and has now grown, as I am informed, to about $50,000 with interest since it has been invested. One of the reasons, and I presume the main reason, why the sum has grown so much since the Supreme Court proceeding is because permission was given to develop the property into four apartments or units which no doubt
increased its value.
Nevertheless, the fact is that like most real estate, it has always had some recognisable value which could have been turned by Mr Leo, if he had chosen to do so, by mortgage or other forms of borrowing, into sufficient funds at least to contest the original debt. I find it difficult to accept that a person served firstly with proceedings for a debt of almost $75,000 and subsequently with bankruptcy proceedings would have done nothing whatever about either if the debt had been as groundless and baseless as he says.
Mr Leo's anger about the debt and the way he has been treated
in this matter came through loud and clear in his evidence and I understand that anger. However, the society in which we live does not normally make provision to assist people with assets or capacity to borrow to give attention to their own interests. It certainly cannot provide for courts to be ignored for nine years and then activated to re-open a piece of litigation that has long since passed into history.
During the course of the argument in the case, I asked counsel for the respondent what might be done now if I acceded to his contention that the debt did not exist, in the sense at least that Mr Leo did not owe the money. Very understandably he found some difficulty in answering that question although he made a bold and commendable effort to deal with it. In fact, in the face of considerable difficulty, the respondent's
with significant skill. But he was faced with overwhelming counsel represented the interests of his client in this case facts established not by him or by those instructing him but by his client's husband many years ago.
It seems to me that significant injustice would flow if I were to uphold the submission that Mr Leo was able to pay his debts without the aid of the property within the meaning of subsection (2)(a) of section 120 of the Act. M r Leo is now

discharged from bankruptcy. The Official Trustee has administered the bankruptcy and presumably is about to dispose of the dividends from getting in half the value of the property. How could all this be undone? No party has joined the Browns or asked to do so now. How could justice be done to their interests when they possibly know nothing about these proceedings? I do not know and counsel could not assist me in this regard. The Court is just not in a position to resolve disputes of such long-standing vintage, certainly not with the hearing only of one side of the case.

The fact is that there exists a judgment of the Supreme Court which has not been paid. The Official Trustee has brought to attention a disposition of property whlch was made within the time period set out in subsection (2). The respondent has set out to establish that if I ignore the debt which formed the basis of the bankruptcy, her husband was to all intents and purposes debt-free at that time. This contention actually appears to be correct but I regret that I am unpersuaded that

Court of Victoria which has stood for 8 years, which Mr Leo	it is appropriate that I ignore a judgment of the Supreme
chose not to challenge at any earlier time and as to which no evidence has been given to this Court by the successful party in those proceedings. Our system of justice just does not operate in such a bizarre and whimsical fashion.
For those reasons I must conclude that Mr Leo, as the settlor of the interest in the property concerned, was on 24 December

- l0 -

1983 or such other time as the settlement was made, not able to pay all his debts without the aid of the property comprised in the settlement. It follows that an order should be made declaring the disposition to be void as against the Official Trustee by virtue of the provisions of subsection (2)(a) of section 120.

The second question then is what is to be done with the proceeds of the sale of the land which are apparently held by the solicitor for the Official Trustee. On this subject, there has been some confusion about the amount concerned but I have no doubt that whatever confusion exists - if it still exists - can be settled administratively. If the respondent wishes to challenge that the amount claimed by the Official Trustee to be now available for distribution is wrong, she should, in the first instance, make submissions to the solicitor for the Official Trustee in that connection. Only if there is any sustained dispute after that should the matter come again before the Court.

For the present, therefore, I order that the net proceeds of	sale held by the solicitor for the Official Trustee, so far as
they represent half the proceeds of the sale of the land, may be distributed by the applicant in accordance with his obligations under the statute.
[ After discussion ]

I order that the respondent pay the applicant's costs of the

proceedings. So far as there remains a dispute about the proceeds of sale, I reserve liberty to apply to any party on one week's notice to a Judge of the Court.

that t h ~ s and the 1 0

I ccrt~fy

l preceding pages are s true copy of the

Reasons for Judgment herem of hls Honour

Justce Etnfeld

Assoclate

, m - :	,
,  "
.:<'.	, -
. > , , G	: ,.
, S . ? , ,	, ,
>,,:t-.,	, .,
y,
$2	, -  , m

:.!~;<;7.', , ,!

;p$;:". ,	,	:	L. .; .
-?L'; P . ..	8	,	-

$.p>:<!., I , . I

'	4,. .. ', " .	,
., : , .,	,	'

v*	%.V
#$,	;.$3>:,:', .m7 , 8 .
,""A.; *'	,, f ."

gp3, , A - .

-?11$<?3,;i. c,,.-'' ,.', ,' ,, ,

<$.C

m j	,	;	. ,	,	I	I
v.	.	, . ;	, .

,. . '. , " ,.

a

&C'? f',' , , .

f , " r 'LJ ' ,> , l .	, , '	-
4.;.."?:,,;,	:,,y	. .
,	:+	,	.	;
~I:-:S, ;. , L	..	I
.xp%,;2-iy',, >; ,

,	,.%,?,.,.	. a 7 ; ,	,
1!;,>>,31?	, , . ,	,	~

,..p.$;;,i , . ,

y$$b . :  ~

,:;.m

. ( . .	,	' C .	m	.	.
,h, -1

.	: g r , . ,	.
,1:,. ,	;	, - . ~