Re Oades; Ex parte Official Trustee in Bankruptcy v Bunora Pty Limited

Re: MICHAEL GEORGE OADES
Ex parte: OFFICIAL TRUSTEE IN BANKRUPTCY as trustee of the bankrupt Estate of
Michael George Oades
And: BUNORA PTY LIMITED and MICHAEL GEORGE OADES
No. N B1028 of 1989
FED No. 149
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
Sheppard J.(1)

CATCHWORDS

Bankruptcy - settlement of property - disposition of property with intent to defraud creditors - "good faith" and "valuable consideration" - bankrupt the holder of promissory note on which was due $350,000 payable in instalments over three and a half years - note discounted to former business associate for $35,000 and certain other considerations - whether settlement of property - whether disposition of property within intent to defraud creditors - whether assignment of note taken in good faith and for valuable consideration.

Bankruptcy Act 1966 ss. 120, 131

HEARING

SYDNEY

#DATE 27:3:1991

Counsel for the Applicant/Official
Trustee: Mr J. Chippendall

Instructed by: Australian Government Solicitor

Counsel for the First Respondent: Mr R.T. McKeand

Instructed by: Baker and McKenzie

(No appearance was made for the second respondent, the bankrupt)

ORDER

The application be dismissed.

The Official Trustee in Bankruptcy pay to the Respondent Bunora Pty. Limited its costs of the application.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This is an application in which the Official Trustee in Bankruptcy seeks to avoid a transaction entered into by a bankrupt before his bankruptcy with a company Bunora Pty Limited. The transaction which is impugned is the discounting by Bunora Pty Limited of a promissory note of which the bankrupt was the holder. The grounds upon which it is sought to set the transaction aside stem from the provisions of ss. 120 and 121 of the Bankruptcy Act 1966. The allegation is that the transaction was a settlement of property within the meaning of s. 120 or a disposition of property with intent to defraud creditors under s. 121. The sections are relied upon in the alternative but, as I understand the case that is put, they would also be relied upon cumulatively.

The promissory note was dated 25 July 1988. The amount of the note is $400,000. It was given by two companies and an individual, namely Tuluma Pty Limited, Stesar Pty Limited and Dr James Woolcock. The substance of the note was that the three makers promised to pay the bearer of the promissory note the amount of the note, $400,000, in eight equal instalments of $50,000 each, payable on 11 August 1988, and then by seven further instalments payable on the first days of March 1989, September 1989, and March 1990, 3 September 1990, 1 March 1991, and the second days of September 1991 and March 1992 upon presentation of the note to any director, secretary or other officer of or any one or more of the obligors, as the makers were called, at any address or location. The note continued:-

"... and without limitation of any of the foregoing, IT IS AGREED:

(i) presentation of this Note for the purposes of procuring payment of all but the final instalment, shall not include or require delivery of this Note to any one or more or all of the Obligors and;

(ii) upon default of the payment of any instalment in accordance with the terms of this Note the whole balance then unpaid shall thereupon immediately become due and payable."

The note was given at the time of the settlement of certain litigation which was pending between Dr Woolcock, Mrs Woolcock, the two companies to which I have referred and the bankrupt. The settlement was effected by a deed dated 25 July 1988. The recitals of the deed included reference to certain proceedings in the Equity Division of the Supreme Court of New South Wales, the claims that were made therein and an acknowledgment by the company, Taluma, that it was then indebted to the bankrupt in respect of certain advances in the sum of $290,000, together with interest up to 30 June 1988 amounting to $40,000, a total sum of $330,000.
The operative part of the deed provided in clause 1 that Dr Woolcock and the two companies offered to repay to the bankrupt the sum of $330,000 as therein before recited over time, together with the sum of $70,000 for further interest on the original advances, in full satisfaction of the bankrupt's claims against them. The bankrupt in clause 2 accepted the offer to pay him a total sum of $400,000 in full satisfaction of his claims against all the other parties, such payments to be made over time as in the deed was set out. It was then provided that the settlement sum should be repaid in eight equal instalments of $50,000 apportioned as between the original advances and interest. There was a statement of what that involved to which I need not refer, but it showed that the last payment under the note would fall due on 2 March 1992 and consisted of $10,000 interest and $40,000 part of the original advance.
Clause 4 provided that Dr Woolcock and the two companies covenanted to pay the settlement sum in accordance with the promissory note, a copy of which was annexed to the deed and clause 5 provided that the note executed by Dr Woolcock and the two companies had been delivered to the bankrupt which he acknowledged. It is unnecessary to refer further to the terms of the deed. The first instalment due under the note was due for payment on 11 August 1988. It was paid with the consequence that there then remained $350,000 owing on the note, payable in seven instalments, each of $50,000 at intervals of six months, up to 2 March 1992.
There was some discussion during the argument whether a note could be in the form to which I have referred. A reference to Byles on Bills of Exchange (26th ed. at p 339) shows that the course which was adopted is a permissible course to follow.
The circumstances under which the note came to be given and the deed entered into are described in an affidavit sworn by Dr Woolcock on 1 March 1990. He was not cross-examined but generally his evidence is not in contest and I accept it.
The circumstances in which the discounting transaction occurred, that is the transaction which is in question, are described in evidence given by both the bankrupt and Mr Wolfe who is the managing director of the company, Bunora Pty Limited. I refer to the evidence given by Mr Wolfe first of all. In an affidavit sworn on 2 November 1990, he said that he first met the bankrupt in or around the 1960s. His next involvement with him was in or about 1980 and he continued to have a business relationship with him until about the middle of 1985.
Mr Wolfe said that from 1980 he had controlled Bunora Pty Limited and also two other companies, Nolan Investments Pty Limited and Mazluck Pty Limited. In 1980 and thereafter the company Mazluck owned all the shares in another company known as Heathorn Holdings Pty Limited which in turn was the major shareholder of a company known as HCH Pty Limited. Mr Wolfe was the managing director of both Heathorn and HCH and controlled those companies from 1980 until their liquidation in 1985 and 1989 respectively.
Mr Wolfe said that in 1980 the bankrupt purchased a substantial number of shares in a public company, Latec Investments Limited. In early 1981 he had meetings and discussions with the bankrupt in which the bankrupt indicated to him that he was interested in gaining control of Latec and replacing the current chairman, Mr Malouf, and becoming chairman himself. The bankrupt asked Mr Wolfe whether he could assist him.
Paragraph 12 of Mr Wolfe's affidavit is as follows:

"Subsequent to this in or around early 1981 I had a meeting with Oades and his brother Graham Oades in which a discussion to the following effect occurred:

Wolfe:

'I think I may be able to help you to gain control of Latec and become its chairman. This is what I propose. I will buy 3 million Latec shares on the market at $1.10 each and arrange for the shares to be split into parcels of 100, 200 or 400 shares in various nominees to take advantage of the sliding scale of voting. You will reimburse all my costs including legal fees, brokerage and interest on the money I propose to borrow from Tricontinental plus any loss on resale. You will pay three fees: firstly, a 10% loading on all costs paid out; secondly, a timing fee of one-tenth of a cent per share per month; and lastly, a success fee of $250,000 when Malouf is replaced as chairman.' Oades responded:

'I agree but the timing fee is to be 0.0075c not 0.01c per month.'

I replied:

'That's O.K. However, I am keen to get into your futures industry business and I will want shares in the company you have operating in the futures industry at a discount which will be offset all or in part against the Latec fees.' Oades replied:

'That suits me.'

I then said:

'I will initially use Bunora to buy the shares but I may change this later.'

Oades then said:

'That's fine.'"

Mr Wolfe said that thereafter Bunora obtained $2.4 million in finance from "Tricontinental" for the purchase of the majority of the shares in Latec. Bunora then purchased three million shares in Latec.
In or about August 1981 Mr Malouf resigned from the Board of Latec and in late 1981 or early 1982, the bankrupt succeeded in gaining control of it. Mr Wolfe said that after the bankrupt gained control of Latec, he was unable to pay the fees due on the Latec transaction. Mr Wolfe had a conversation with him in which he said, so his affidavit recounts, "I will arrange for a buyer of the Latec shares. I will reimburse you for any loss". Bunora then sold the shares to a company controlled by a Mr Johnson. The sale was procured by the bankrupt. Some of the shares were sold at a profit and others at a loss. Overall there was a loss of $1,052,350 which the bankrupt had to reimburse.
Mr Wolfe said that shortly after the bankrupt gained control of Latec he had a conversation with him in words to the following effect. Mr Wolfe said, "Now that you control Latec, I would like you to pay the success fee of $250,000. However, I would like to go ahead and take an interest through Bunora in the company you have operating in the futures market. The success fee can be taken into account in the price of entering into this business". The bankrupt, so Mr Wolfe said, gave no definite answer.
Mr Wolfe said that he had conversations to similar effect with the bankrupt over the next 18 months but he never gave any more than a vague answer such as "I hope to introduce a big brother into Darlington; we will settle things up then." The reference to Darlington was a reference to Darlington Commodities Pty Limited which was a company controlled by the bankrupt.
In August 1983 Mr Wolfe said he had a further conversation with the bankrupt in which the bankrupt said that he was prepared to offer Mr Wolfe an interest in his operations in the futures industry on the basis of 10 per cent for $100,000. Mr Wolfe replied, "But we had a deal. You were going to sell me a large interest in the company at a discount". The bankrupt replied, "It wasn't a firm deal. I don't know what's going to happen with that company."
At or about this time Darlington Commodities made an application to the Sydney Futures Exchange for Bunora to become a shareholder in Darlington Futures Pty Limited, another company controlled by the bankrupt, which would become the seat holder on the exchange. Mr Wolfe said that by 1984 most of the futures trading was being done by merchant banks and there was not much business left for small companies like Darlington Commodities. He recollected that the Commonwealth Bank was trading in the futures market at that time. He said that by late 1984 he had concluded that it was not "commercially viable" to press the bankrupt for an interest in his futures business.
Mr Wolfe then referred to some other business dealings he had had with the bankrupt. At a meeting in April 1981 he had a discussion about a transaction which involved a company, West Ryde Plaza Leasehold Pty Limited, which had a long term leasehold from the State Rail Authority over a commercial residential development. The two discussed the prospect for further development of the shops and the vacant land. There was a good deal of evidence given by Mr Wolfe about that transaction. The only relevance it has, as I understand it, is that it shows that the two had common business interests not only in relation to the taking of control of Latec by the bankrupt but in relation to other matters as well. Eventually however their business did not flourish or at least that of the bankrupt did not. Mr Wolfe said that on or about 19 May 1985 he had a meeting with the bankrupt. He said that a final payment of approximately $1.7 million was due on 30 June 1985. The bankrupt said to him, "I want to reduce my liabilities. What can you propose about the amounts due on the West Ryde transaction (that being the lease transaction) and those due on the HCH shares? Also we have not ever worked out an accounting for your position in relation to the Latec transaction."
A few days later Mr Wolfe telephoned the bankrupt and said:-

"I will cancel both the purchase of shares in West Ryde and the loan on the HCH shares and give Darlington Commodities a release of these obligations while retaining the amounts already paid for what is owed on the Latec transaction. This means that about $200,000.00 is still owing overall. I won't press you to pay for it but I expect you to pay the success fee when you can."

The bankrupt said, "That's O.K." Mr Wolfe said:

"The release on the West Ryde transaction should be documented formally. However as Bunora already has a mortgage over Darlington Commodities' shares in HCH it can exercise its rights as mortgagee over these after making a formal demand if Darlington Commodities does not pay the money due."

Mr Wolfe said that the bankrupt assented to this. Agreements were then entered into releasing Darlington Commodities from its liabilities in relation to the West Ryde and HCH transactions. At about this time, so Mr Wolfe said, Darlington Commodities owed Bunora a further $741,000 in respect of which Bunora held a mortgage over Darlington Commodities' shares in HCH. He explained how the loan was made up and said that on 26 August 1985 a demand for the repayment of $741,000 was made to Bunora. Thereafter Bunora exercised its rights as mortgagee and the shares were transferred to Mazluck.
Mr Wolfe said that after completion of his dealings with the bankrupt in 1985 he believed the bankrupt still owed the $250,000 success fee in relation to the Latec transaction.
Mr Wolfe said that he did not have contact with the bankrupt from June 1985 until about mid August 1988. At that time the bankrupt telephoned him and said he would like to see him.
On 5 September 1988, so Mr Wolfe said, the bankrupt called at his office at Chatswood and had a discussion with him to the following effect. The bankrupt said:

"I loaned some money to Dr Woolcock to establish a medical clinic at Penrith on the basis that I would be an equal partner, 50/50, but Woolcock went back on the deal. I sued him and got judgment against him which was settled by Woolcock giving me a promissory note to pay me $400,000 over a period of time. Woolcock has paid the first $50,000.00 and I want to discount the note as I need cash urgently. I expect to go back to prison soon as I have pleaded guilty to charges regarding Darlington Commodities and Bullion Sales. Can you help me?"

Bullion Sales International Pty. Limited was another of the bankrupt's companies. The charges referred to were charges brought against the bankrupt under s. 229 of the Companies (New South Wales) Code, for offences under that Act. The bankrupt, as emerges from his evidence, had been advised that he should expect that he would be sentenced to imprisonment on those charges, as indeed later occurred.

Mr Wolfe, according to his evidence, said to the bankrupt: "Do you think Woolcock will continue to pay?" The bankrupt said, "It depends on the success of his clinic but he did try to go back on the deal he made with me, hence the court case." Mr Wolfe said, "You still owe $250,000 on the Latec transaction. I can only offer to waive that and pay you about 10 cents in the dollar on the promissory note. I will think about it and get back to you."
He said that he considered the bankrupt's offer and felt it would be worthwhile speculating $35,000 on the basis that he would get the next payment from Dr Woolcock, which would cover it and he had an opportunity to recoup the success fee which was still outstanding. A few days later he telephoned the bankrupt and said, "I will offer you $35,000 on the promissory note and forego what you owe on the Latec transaction success fee". The bankrupt said he would get back to him.
Mr Wolfe said that he made no independent inquiries in relation to the discounted value of the promissory note. However, he said that from his experience in business he believed that no bank or institution would lend on the promissory note but that perhaps a finance company or private factoring company would. He said that he would have expected that they would have lent between $25,000 and $50,000. Two or three weeks later the bankrupt telephoned him and asked to see him. He came with a letter of offer from his solicitors, Blake Dawson Waldron. The bankrupt asked whether he would increase his offer; he said that he would not.
The letter of offer was then filled in with the sum of $35,000 and Mr Wolfe drew a cheque on Bunora for $35,000 and handed it to the bankrupt. As they parted, Mr Wolfe said to the bankrupt, "When you come out of prison I'll discuss with you the possibility of any future business relationship. You're a good trader but I'm not prepared to contemplate making any further deals with you at this stage".
The letter which is referred to in Mr Wolfe's evidence was dated 20 September 1988. It was addressed to the Managing Director, Bunora Pty Limited, and signed by the bankrupt. The letter said that the bankrupt thereby offered to negotiate to Bunora the promissory note on the terms set out below. The letter continued:

"This offer will remain open until 12 noon on 21st September and must be accepted by:

(i) oral communication by the Managing Director of Bunora to Oades of acceptance of all the terms of this Offer; and

(ii) delivery of a cheque payable to Oades in the sum of $35,000..."

The sum was repeated in writing and the figure $35,000 and the writing were written in handwriting; they were not typed. There then followed recitals to the offer which said that Bunora had provided financial assistance and advice to the bankrupt and Darlington Commodities in the period from 1982 to 1985 for which the bankrupt and Darlington Commodities were jointly and severally liable. It further recited that during that period the bankrupt was a director of Darlington Commodities. It then recited that a receiver was appointed to Darlington Commodities on 1 September 1986. At that date that company and the bankrupt owed Bunora in excess of $200,000 in respect of the advice and assistance provided and it was agreed that interest was to accrue on amounts owing. Finally it was recited that the bankrupt was the bearer of the note. There followed the terms of the offer which were that the bankrupt offered to negotiate the note by delivery to Bunora in return for Bunora (a) paying to the bankrupt the sum of $35,000 and (b) releasing and forever discharging the bankrupt and Darlington Commodities from the debt and all actions, proceedings, claims, demands, costs and expenses in respect of the debt. There was nothing specifically said about a success fee.

The evidence given by the bankrupt in his affidavit, which was filed on behalf of the Official Trustee in Bankruptcy, is not dissimilar in effect but I refer to some of the detail of it. He became a bankrupt on his own petition on 17 July 1989. There is no evidence of any other act of bankruptcy in the case; see para. 40(1)(da) and s. 54A of the Act. He referred to the transaction with Dr Woolcock, the settlement of the court proceedings, the promissory note and the deed of settlement. He also referred to the payment of the first instalment due under the promissory note of $50,000 and described how he had disbursed the proceeds of that payment.
He said that he had been unable to obtain any security for the amount owed to him by the Woolcock interests except the promissory note. He said that he wanted to discount the promissory note on a non-recourse basis and approached various persons and financiers on an "in-principle" basis, without disclosing full details of the proposal. He obtained what he described as "an in-principle" offer from a company called Heine Brothers, in Melbourne, to discount the note on a non-recourse basis for a sum equal to the next payment, namely $50,000.
He said that he hoped to obtain a better offer. He said he approached Mr Wolfe and then described some of the business dealings which had occurred between them in the years 1980 to 1985. It is unnecessary to refer to the detail of this evidence, but in paragraph 25 of his affidavit he said that one agreement he had with Mr Wolfe involved him and companies associated with him assisting the bankrupt and companies associated with him in taking over a publicly listed company called Latec Investments Limited. Pursuant to that agreement he became liable to Mr Wolfe, so he said, for payment of a success fee of approximately $250,000. The agreement was not in writing. He said that no formal demand for payment under the agreement was ever made by Bunora Pty Limited, or by any company controlled by Mr Wolfe or by Mr Wolfe himself. He said that Mr Wolfe's son, who worked for him at one stage, had, at irregular intervals, asked him about the matter by saying such things as "My father wants to know what you're going to do about the money you owe him."
The matter was not pursued, so the bankrupt said, and he did not pay Mr Wolfe or any of his companies any money until the promissory note transaction in late 1988. He confirmed that there had been minimal contact between the two between 1985 and 1988. He said that following discussions with Mr Wolfe in August 1988 he decided to assign the promissory note to Bunora Pty Limited. He was advised by his solicitors that if the promissory note was to be assigned it could be done on the basis of an offer to discount the note and by delivery of the note.
He instructed his solicitors to draw the letter to which I have already referred and he signed the offer made in it. He said that he delivered the promissory note to Mr Wolfe and in return received a cheque in the sum of $35,000. He said that he had disbursed the moneys which he received from Bunora in respect of the discounting of the promissory in the manner described in an affidavit filed in the proceedings brought against Dr Woolcock. He said that the consideration that he received from Bunora for the delivery to that company of the promissory note was the sum of $35,000 plus the release and discharge of a pre-existing debt owed by him to Bunora Pty Limited. He added that Mr Wolfe had offered him the incentive of possible participation in business ventures at some stage in the future. He received no other consideration either directly or indirectly from Mr Wolfe or interests associated with him.
He said that when he first approached Mr Wolfe, Mr Wolfe had said to him, "Is Woolcock an honourable man?". He did not remember the rest of the conversation but he did remember that the only cash that Mr Wolfe was prepared to offer him was $35,000 or 10 per cent of the balance due under the note, despite his request for a higher figure.
He said at the time he assigned the promissory note, he was in urgent need of funds to pay his creditors prior to his intended plea of guilty in relation to the offences with which he had been charged under s. 229 of the Companies Code.
I should at this stage mention that the hearing of the charges against the bankrupt under the Companies Code was listed for the week following his receipt of the $35,000 but, as I understand it, the hearing did not proceed then but took place on 29 November 1988. It was then that the bankrupt was sentenced to imprisonment for the offences in question. However, there had been foreshadowed to him, through his solicitors, at least as early as 4 October 1988, a claim to be made for substantial compensation to be paid to persons who had been affected by the bankrupt's conduct which was the subject of the charges.
That claim was not dealt with on 29 November 1988, but was dealt with on 17 March 1989. He was then ordered to pay, by way of compensation, a sum of almost $7 million. The bankrupt was adamant in his evidence that at the time he had the negotiations with Mr Wolfe and at the time of the discounting of the promissory note, he had no knowledge of the claim for compensation and it was not until the following week that he learnt of it.
That background explains the final paragraph of his affidavit in which he said, "At no time during my negotiations with Mr Wolfe for discounting the promissory note was I aware of any intended action against me by the Liquidators of Darlington Commodities Pty Limited or Bullion Sales International Pty Limited pursuant to Section 229(6) of the Companies (New South Wales) Code."
In due course, it will be necessary for me to express views about the credibility of the evidence to which I have referred, but before I do that I should come to the elements which the Official Trustee must establish for success under both s. 120 and s. 121 of the Bankruptcy Act.
There have been a great many cases on the question of what constitutes a settlement and also on the question of what is involved in relation to other provisions of section 120. The section, so far as it is material, is in the following terms:-

"120(1) A settlement of property, whether made before or after the commencement of this Act, not being -

(a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or

(b) a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the spouse of the settlor,

is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.

(2) 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 sub-section, 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 settlement on its execution. ........ ........ ........ ........ .

(8) In this section, "settlement of property" includes any disposition of property."

The expression "property" is widely defined in subs. (5)(1) of the Act.
The section has become the subject of yet further consideration by a Full Court of this Court in a case which is so far unreported. The decision is Norgard as Trustee in Bankruptcy of the Estate of La Rosa v Rocom Pty Limited, (Federal Court of Australia, 16 August 1990, as yet unreported). In the joint judgment of Northrop and Davies JJ. reference is made to a number of the authorities which are well known in this area. These include Barton v Official Receiver (1986) 161 CLR 75, Re Player; ex parte Harvey (1885) 15 QBD 682; Williams v Lloyd (1934), 50 CLR 341. The Barton case, when in the Full Federal Court, (1984), 4 FCR 380, and as I have mentioned the judgment of the High Court on appeal from that judgment in 161 CLR 75. Having reviewed these authorities, Northrop and Davies JJ. said (pp 8-9):-

"These authorities show that, as the term 'settlement' includes 'any disposition of property", the form of the transaction is not significant, so long as a disposition of property, including money, is involved. Nevertheless, s. 120 will not operate to avoid a transaction unless the disposition was intended to secure an enduring benefit and there was no contemplation of the immediate dissipation or consumption of the property which passed."

In his judgment in the Barton case, when in the Full Court of this Court, which was upheld by the High Court, Lockhart J. said (p 394):-

"The construction of the word 'settlement' has been settled in England and Australia for an appreciable time and it has acquired an established meaning. But it is very difficult to extract from the decided cases any clear definition of the dispositions of property which will and which will not fall within the operation of s. 120. The word was chosen by Parliament to connote a particular kind of disposition of property excluding others. It cannot be said that all dispositions of property are settlements; nor can it be said that a settlement is a settlement simply because it happens to be a disposition of property. The whole of the language of s. 120 must be considered to determine the meaning of the expression.

Parliament never intended to bring within the scope of s. 120 all dispositions of property unless they have the additional quality of being a settlement in the sense in which that term is ordinarily understood. Otherwise, for example, all gifts from a father to his children for their advancement in life, could be recovered from them where the gifts were made at any time within two years before the commencement of the father's bankruptcy notwithstanding that he may not have been insolvent when the gifts were made. Although I think that s. 120 was intended to have a wide operation, I do not think that Parliament ever intended transactions of this character necessarily to fall within the section."

I have found the question whether there is here a settlement of property within the meaning of s. 120 of the Act, a difficult one. In the view I take of the matter, I have decided that I need not come to a final conclusion about it. It seems to me, however, that one could not say, to pick up the expression used in the Norgard decision, that there was necessarily present here an intention to secure an enduring benefit to Bunora or that there was no contemplation of the immediate dissipation or consumption of the property which passed. There is no evidence of what Bunora's or Mr Wolfe's intention was in relation to the note. As events have happened, the note is still held by Bunora and Dr Woolcock has apparently paid some further instalments, although it has been found necessary to sue him and his companies for others. But as the matter was left after the discounting transaction, it would have been perfectly open to Bunora through Mr Wolfe to seek to assign the note to someone else who might have been prepared to pay more than Mr Wolfe had been prepared to pay for it. It is true that the note itself contemplated an existence, provided payments were kept up, of some three and a half years after the transaction in question. But as counsel for Bunora has stressed to me, the transaction was one involving a negotiable instrument payable to bearer. The note was freely negotiable in the market and it seems to me, having looked at the authorities, that there is a serious question whether its discounting in the circumstances described in the evidence, constituted a settlement for the purposes of s. 120. As I say, however, I have reached the conclusion that I do not need to express a final view on that matter.
The Official Trustee relies upon the first subsection of s. 120 and not the second. The reason for that is that the settlement, if there be one, came about within two years of the bankruptcy which occurred in 1989. It would seem that in those circumstances subs. 120(2) can have no application because either the settlement will be a settlement of the kind specified in para. (a) or (b) of subs. 120(1) or it will not. If it is, it is protected and it is excluded from the operation of subs. 120(2) in terms of that section. If it is not, it is void because it fails to clear the hurdles provided for in para. (a) or (b) of subs. 120(1). So I am concerned only with that subsection and in the circumstances only with para. (a) of it.
What the Official Trustee seeks to say is that the settlement here was a settlement not made in favour of a purchaser in good faith and for valuable consideration. Counsel for the Official Trustee accepts that the Official Trustee carries the onus of establishing those matters but of course it would be sufficient for the Trustee to establish any one of them. In other words if Bunora were not a purchaser it would not come within the paragraph, nor would it if it did not take in good faith or for valuable consideration.
There is no issue here about it being a purchaser; the issues concern the questions of good faith and valuable consideration. Although in a sense they may be looked at separately they do, for fairly obvious reasons, at times tend to overlap so that the considerations applicable to one of them may also have some application in relation to the other. So in relation to s. 120, upon the assumption I have made that there is here a settlement, it is for the Official Trustee to establish either that the note was not taken by Bunora in good faith or that valuable consideration was not given for it.
There are authorities on the question of what is involved in relation to both good faith and valuable consideration. I need refer only to the Barton case in the High Court and to a decision of Gibbs J. when sitting as the Judge in Bankruptcy before he became a member of the High Court. In the Barton case in the joint judgment of Gibbs C.J., and Mason, Wilson and Dawson JJ., their Honours said (p 79):-

"In the course of argument, it was submitted for the respondent that a proper construction of the paragraph required that the three elements contained in the description 'a purchaser ... in good faith and for valuable consideration' be read together in determining their application to the circumstances of a particular case. In our opinion the submission has considerable force because it will often be the case that the considerations touching each of the elements will overlap and thereby influence the conclusion as to any one element. Certainly one would expect this to be so with respect to the elements of 'purchaser' and 'valuable consideration': cf., as to 'good faith', Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232.

It would seem to me that their Honours were impliedly approving what had been said by Gibbs J in the Hyams case. His Honour was there dealing with a case about a settlement of property under s. 94 of the former Act, the Bankruptcy Act 1924. He said (p 256):-

"In Mackintosh v. Pogose (1895) 1 Ch 505 at p 510, it was said that the words 'in good faith' in the corresponding section in an English Bankruptcy Act must be taken to mean 'without notice that any fraud or fraudulent preference is intended', and in the context of the Australian statute this exposition may be modified to read 'without notice that any fraud or preference contrary to the statute is intended'."

And he concluded in that case that it had not been established that the respondent had any such notice. That is the test that I think that I should apply in the present case.

I should then refer to s. 121 which is as follows:-

"121(1). Subject to this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.

(2). Nothing in this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property.

(3). In this section, 'disposition of property' includes a mortgage of property or a charge on or in respect of property."

It is to be observed that it, like s. 120, uses the expressions "for valuable consideration" and "good faith". The disposition in question will not be avoided by the section if it is a disposition for valuable consideration in favour of a person who acted in good faith. It seems to me that the considerations that apply in relation to those words are not different from those which apply in relation to the similar words of subs. 120(1) except, of course, the word "person" is used in section 121 rather than the word "purchaser". There is only one authority to which I think I need refer in relation to section 121. It is Re Barnes; ex parte Stapleton (1961) 19 ABC 126, another decision of Gibbs J. His Honour said (p 131):-

"The first question that arises is whether the evidence establishes that the transfer of the property by the bankrupt was fraudulent. Actual fraud, that is an actual intention to defeat or defraud creditors, must be established, and whether the existence of such an intention should be inferred from the circumstances is a question of fact."

So there is a question in the present case in relation to s. 121 whether the Official Trustee has surmounted the first hurdle, namely whether he has established that there has been a disposition of property with intent by the bankrupt to defraud his creditors. The other questions, as I have said, are similar to those which arise in relation to a settlement.
I need, first of all in considering the question of good faith and valuable consideration, to make up my mind about the view I should take of Mr Wolfe's evidence. It seems to me that that is an all important question. I say at once that Mr Wolfe appeared to me to give his evidence straightforwardly and candidly. I thought, and indeed he said as much himself at one stage, that he was an extremely shrewd businessman but that does not make him dishonest. Demeanour, of course, is one thing but it is not the only thing. One can be misled by a witness whose demeanour is nevertheless impressive and it seems to me that the overall probabilities and contemporaneous documents in a case are often more likely to be reliable guides as to where the truth lies.

I suppose one of the things that strikes one about the transaction in question is the fact that the bankrupt, after some three years of not seeing Mr Wolfe, except on one or two occasions, and not doing business with him during that period, should suddenly land on his doorstep and ask him to negotiate a transaction in which he would take over a promissory note so as to provide the bankrupt with some ready cash for his obvious needs. But, as counsel for Bunora submitted, it may not be so strange. After all, Mr Wolfe was one of the contacts which the bankrupt had, albeit in years gone by. He had an apparently valuable negotiable instrument and it may well have been that he thought that Mr Wolfe was the appropriate person to go to for help.
Another aspect of the matter that perhaps may be thought to be puzzling is that the bankrupt had apparently obtained an in principle offer from Heine to pay him $50,000 for the note. Why then should he take $35,000? The bankrupt's answer to this is to say that it gave him an opportunity of discharging the indebtedness he had to Bunora for the success fee, namely the amount of $250,000 and it left open the question of whether he and Mr Wolfe might in the future do business; a matter that Mr Wolfe confirmed. But one's mind, ranging over these various factors and some others, has occasion, I think, to be rightly suspicious about the transaction and to ask questions of oneself about it and the various surrounding circumstances relating to it, to see whether one thinks that it is a probable or an improbable transaction.
At the heart of the matter, of course, is whether or not there was indeed owing an amount of $250,000 for a success fee. Counsel for the Official Trustee submitted that I should not find that any such indebtedness ever existed; but there are signs in the bankrupt's companies' own documents that the matter had been raised with the financial controller of Darlington Commodities in 1982 and 1983, shortly after the fee, if it were payable, had become due. In other words there is confirmatory evidence at least of a claim being made for the fee by Mr Wolfe or by Bunora in those years.
The evidence which establishes this is the evidence of Mr Knight who was the financial controller at the time, and whose evidence I accept, and internal documents of Darlington Commodities to which I shall not refer in detail but which are to be found in exhibits J and K. It seems to me that there can be no doubt that there were conversations between Mr Wolfe and Mr Knight in those earlier years about the fee and about it being owing, so it would be quite wrong to take the view that the story about the success fee was some recent invention on the part of Mr Wolfe and the bankrupt.
According to the evidence which the bankrupt has given, the fee was always owing and he at all times had conceded that it was owing; but, according to Mr Knight, he did say to him at one stage in 1982 or 1983, that the money was not owing. Counsel for Bunora has submitted that that may have been because Mr Knight was looking at the matter from the point of view of what was owing by Darlington Commodities, rather than by the bankrupt himself. Against that, however, is the fact that Mr Wolfe was claiming the money in financial discussions he was having with Mr Knight and was claiming it as owing by the Darlington group, I would imagine not caring by whom it was actually payable. I think a more likely explanation is that in 1982 or 1983 the bankrupt was short of money. Whatever his obligations may have been, he was not then prepared to concede that the money was owing either by his companies or himself. It seems not improbable that he would deny his obligation to pay it even though he well knew it was owing.
I have considered Mr Wolfe's evidence in this regard and taken into account the two exhibits to which I have referred and Mr Knight's evidence. I have reached the conclusion that I should accept Mr Wolfe's evidence about the fact that the success fee was agreed to and was owing. In reaching that conclusion I have taken into account a number of additional factors and I should mention one or two of them.
Mr Wolfe was asked about the fact that the debt, if it were owing, was barred by the statute of limitations by the time of the negotiation of the transaction in question. At the latest six years would have elapsed in June 1988, so that by September 1988 the action would have been barred unless there had been an acknowledgment of some kind in the meantime. Mr Wolfe said that he was not worried about the statute of limitations. He said that he believed that the bankrupt and his companies were in no position to pay the amount and he had not pursued them for that reason. He saw no purpose in instituting proceedings in order to protect his rights and indeed did not apply his mind, so he said to the statute of limitations at all. I have given this evidence some consideration and I think I should accept it too.
Then counsel for the Official Trustee pressed upon me the terms of answers made to questions asked during an examination of Mr Wolfe under s. 541 of the Companies Code. The examination was held at the behest of the liquidator of Darlington Commodities. Counsel has relied upon a number of passages in the examination which show a vagueness in Mr Wolfe's recollection of the relevant events, particularly about the success fee, which certainly contrasts with the precision of his affidavit. A problem about this is that counsel for the Official Trustee did not cross-examine Mr Wolfe about these passages and counsel for Bunora drew my attention this afternoon to the opening paragraph of the examination, where it appears that the solicitor for Mr Wolfe said at the outset, after announcing his appearance:-

"Mr Wolfe wasn't aware until somewhere between 2.00 and 2.30 yesterday he was going to be required today. He has had some minor surgery on his neck which did involve a general anaesthetic and he's agreed to come along today until 4 o'clock, but on the understanding, as at least I understand it, as between Mr Timbs' instructing solicitor and myself, but if he doesn't feel up to coming tomorrow and has to leave this afternoon if he is disabled, then I'm to make an application to you to stand his examination over for a short period of time."

And the Deputy Registrar assented to that course.

In these circumstances I feel real difficulty in taking very much from the vagueness of the answers in the examination. There is what I have just referred to and there is the fact, as I have mentioned, that there was no cross-examination on the matter. I therefore do not feel able to take the view that it in some way cuts down the credibility or veracity or accuracy of the evidence which Mr Wolfe has given.
There are a number of other matters. There are a large number of documents in evidence. There has been oral evidence given both by the bankrupt and Mr Wolfe and it is inappropriate to refer to every aspect of the evidence which there is, but in all the circumstances as I say, I have reached the conclusion that I should accept Mr Wolfe's evidence and I do so.
The question then is whether I should be satisfied as to the absence of good faith, notwithstanding my conclusion in relation to Mr Wolfe's evidence. A matter which has concerned me is the fact that Mr Wolfe plainly knew that the bankrupt's finances even before his bankruptcy were not sound. That was manifest in 1985 when their last business transactions were conducted. In the meantime the bankrupt had served a term of imprisonment for tax offences in 1987. That may not, as counsel for Bunora put to me, indicate financial difficulty but it has to be weighed in the balance with other factors, and it is plain on the face of Mr Wolfe's evidence that he himself realized that the bankrupt was in a difficult position.
Is that enough to reach the conclusion that the transaction was not one in good faith? I do not think it is. I think it leaves things too uncertain and too vague and it seems to me that, at the least, it does not warrant the conclusion that the Trustee has established absence of good faith which he is required to do if he is to succeed.
There is also this factor. The Companies Code charges were listed for hearing the following week. It would seem not unlikely that the bankrupt may have learned of the very large claim for compensation that was to be made against him about that time. It would seem that the claim was not formally notified until 4 October 1988 but one might perhaps infer, the bankrupt being represented, that the claim may have been foreshadowed a little earlier. Support for such a view is to be found in so much of the bankrupt's affidavit as says that, at the time he assigned the promissory note, he was in urgent need of funds to pay his creditors. But elsewhere in his evidence he maintained, as I have previously said, that he was not aware of the very large claim that was to be made against him by the liquidator. The bankrupt was not pressed in cross-examination about these matters. He was asked about his creditors at this time but said that, to his knowledge, they were persons or organisations to whom he owed comparatively small sums of money for current expenses. Fairly obviously he was in need of money for legal costs.
The bankrupt and Mr Wolfe remained adamant that, at the time of their transaction on 21 September 1988, they knew nothing about the claim for compensation which was to be made on behalf of the creditors of Darlington Commodities. I think I should accept Mr Wolfe's evidence about this matter. Furthermore, to put the matter at its lowest from Bunora's point of view, I am not satisfied that they did know and I do not think that that matter warrants a conclusion of absence of good faith.
Accordingly, I conclude that the transaction was not shown to have been entered into in the absence of good faith. Once one reaches that conclusion, the question of valuable consideration becomes less difficult. Plainly enough, the note was not a very valuable commodity for its own sake. Fifty thousand dollars was apparently the best the bankrupt could do on the outside market and then only on the basis of an "in principle" offer. Mr Wolfe thought that the range of value was between $25,000 and $50,000. Thirty five thousand dollars is itself a valuable consideration and in the circumstances I find that valuable consideration was given for the discounting transaction which ensued.
For all the reasons I have given then, I have come to the conclusion that the Official Trustee's case in relation to the alleged settlement under s. 120 must fail. The same considerations in relation to good faith and valuable consideration apply in relation to s. 121 as apply in relation to s. 120, so that the conclusion in relation to the case brought under that section must be the same. I do not express a view finally on whether it has been established that the bankrupt intended to defraud his creditors by the transaction but I think that the better view is that it has not been established that he did.
In all the circumstances, therefore, I have reached the conclusion that this application must be dismissed and that is the order which I make. I order that the Official Trustee in Bankruptcy pay the costs of Bunora Pty. Limited in relation to it.

[1991] FCA 149

27 MARCH 1991