Simon and Simon and Ors
[2013] FCCA 432
•5 June 2013
FEDERAL CIRCUIT COURT OF AUSTRALIA
| SIMON & SIMON & ORS | [2013] FCCA 432 |
| Catchwords: FAMILY LAW – Application to set aside instrument or disposition – where loan agreement and mortgage executed between first respondent and second respondent to defeat wife’s claim – where transaction a sham – loan agreement and mortgage set aside. BANKRUPTCY – Application for declaration that transfer of property void as against the trustee in bankruptcy of the husband – where loan agreement and mortgage a transfer of property – loan agreement and mortgage executed within 5 years of husband’s bankruptcy – where second respondent gave no consideration for the transfer of property – declarations made. |
| Legislation: Bankruptcy Act 1966, ss.108, 120BA, 120(1), 120(3), 120(7)(b) Family Law Act 1975, ss.75(2), 75(2)(ha), 79, 79(1)(b), 79(2), 79(4)(a) – (g), 79(12), 79(13), 106B, 106B(1A), 106B(3) |
| Cases cited: Balnaves v Balnaves (1988) 12 Fam LR 488 C v C (2005) Fam LR 414 Commonwealth Bank of Australia v Staatz and Staatz (1988) FLC ¶91-942 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 Evans (as Executor for the Estate of the late Evans) v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237 Halabi v Artillaga (1994) FLC 92-470 Heath and Heath (No 2) (1984) FLC 91-517 In the Marriage of Clauson (1995) FLC 92-595 In the Marriage of Ferraro (1993) FLC 92-335 In the Marriage of Hickey (2003) 30 Fam LR 355 In the Marriage of Holley (1982) FLC 91-257 In the Marriage of Ivanfy (1978) 4 Fam LR 542 In the Marriage of Lee Steere and Lee Steere (1985) FLC 91-626 In the Marriage of Toohey (1991) 14 Fam LR 843 Kessey v Kessey (1994) 18 Fam LR 149 Lemnos & Lemnos [2007] FamCA 1058 Loxton v Moir (1914) 18 CLR 360 Robb & Robb (1995) FLC 92-555 Russell v Russell (1999) FLC 92-877 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 Stanford v Stanford [2012] HCA 52 Teen Ranch Pty Limited v Brown (1995) 87 IR 308 Trustee of the property of Lemnos (a bankrupt) v Lemnos (2009) 41 Fam LR 120 |
| Applicant: | MS SIMON |
| First Respondent: | MR C SIMON |
| Second Respondent: | MR S SIMON |
| Third Respondent: | MR PETIT |
| Fourth Respondent: | MR HALEY |
| Fifth Respondent: | MR CASSAS |
| File Number: | BRC 3933 of 2012 |
| Judgment of: | Judge Jarrett |
| Hearing date: | 13 November 2012 |
| Date of Last Submission: | 13 November 2012 |
| Delivered at: | Brisbane |
| Delivered on: | 5 June 2013 |
REPRESENTATION
| Counsel for the Applicant: | Mr Galloway |
| Solicitors for the Applicant: | Finemore Walters & Story |
| No appearance for the First Respondent |
| No appearance for the Second Respondent: |
| Counsel for the Third and Fourth Respondents: | Mr Ward |
| Solicitors for the Third and Fourth Respondents: | Masons Lawyers |
| Counsel for the Fifth Respondent: | Ms Clegg |
| Solicitors for the Fifth Respondents: | McMahon Clarke |
ORDERS
The Court declares that:
pursuant to s.120(1) of the Bankruptcy Act 1966 the loan agreement dated 5 November, 2007 between the first respondent and the second respondent is void against the fifth respondent;
pursuant to s.120(1) of the Bankruptcy Act 1966 registered mortgage numbered [1] between the first respondent and the second respondent is void against the fifth respondent;
The Court orders that:
pursuant to s.106B of the Family Law Act 1975 the loan agreement dated 5 November, 2007 between the first respondent and the second respondent be set aside;
pursuant to s.106B of the Family Law Act 1975 registered mortgage numbered [1] between the first respondent and the second respondent be set aside;
the property situated at Property B (the [B] property) be listed for sale by private treaty with a Real Estate Agent to be agreed between the applicant and the fifth respondent and failing agreement being reached as to that matter within 21 days after the publication of these orders, chosen by the applicant from a panel of three given to her for her consideration by the fifth respondent. In the event that the applicant does not chose an agent within 7 days of being provided with the panel by the fifth respondent, the fifth respondent shall choose the agent. For the purposes of the listing the following shall apply:
(a)The list price of the property shall be such amount as agreed between the parties and failing agreement as advised by the agent;
(b)The applicant shall have the sole right to occupy the property up to the date of settlement whereupon she is required to vacate the property and during such right of occupation:
(i)The applicant shall cooperate in every way with the agent in relation to the marketing of the property for sale including providing reasonable access to the real estate agent for the purpose of property inspections;
(ii)The applicant shall maintain the property in an acceptable state for sale having regard to the age of the property;
(iii)That if so advised by the agent conducting the sale, a ‘For Sale’ sign shall be erected on the property and remain on the property until the property is sold.
(c)The applicant shall be solely responsible from the date of these orders up to and including the date of settlement for all payments relating to the property including but not limited to insurance, rates, outgoings, electricity and reasonable maintenance of the property as they fall due;
(d)In the event the property is not sold by private treaty within sixty (60) days from the date of listing then the parties shall do acts and sign all documents as are necessary to sell the property by auction on the following terms:
(i)The property shall be listed with the an auctioneer recommended by the agent appointed pursuant to order (5) hereof (“the auctioneer”) for sale by auction with the auction to occur no later than one (1) month from the operation of order 5(d);
(ii)The applicant and the fifth respondent shall execute all documents requested by the auctioneer for sale of the property by auction;
(iii)The reserve price of the property shall be such amount as is agreed between the applicant and the fifth respondent and failing agreement being reached by the applicant and the fifth respondent 21 days prior to the auction, then the reserve price shall be nominated by the auctioneer;
(iv)The applicant and the fifth respondent shall each pay to the auctioneer one half of any sums requested for advertising or auction expenses and if one of either the applicant or the fifth respondent pays all of the expenses, that party shall be reimbursed from the proceeds of sale in respect of one (1) half of such payments before any division between the applicant and the fifth respondent;
(v)The sale price of the property shall be any amount in excess of the reserve price but in the event of the reserve price not being reached the sale price of the property shall be such amount as is agreed between the applicant and the fifth respondent or failing agreement any offer received after the auction to buy the property at a price that is at least 90% of the reserve price shall be accepted by the applicant and the fifth respondent;
(vi)In the event that the property is not sold at the auction or within fourteen (14) days after the date of the auction by further negotiation, then the parties shall cause a further auction of the property to be held within one (1) month of the first auction and for that purpose, the provisions of order 5(d) shall apply;
(vii)Should the property not be sold at the second auction, then the applicant and the fifth respondent must do all acts and sign all documents as are necessary to arrange further auctions at two (2) month intervals until such time as the property is sold and for that purpose, the provisions of order 5(d) shall apply.
Upon completion of the sale of the property the proceeds of sale are to be applied in the following manner and priority:
(a)Payment of all liabilities associated with the sale of the property including statutory charges, legal costs, agent’s commission, auction costs (if applicable) and advertising fees;
(b)65% of the balance to the applicant; and
(c)35% of the balance to the fifth respondent.
In the event any party to these orders refuses or neglects to comply with any or all of the provisions of these orders, the Registry Manager of the Brisbane Registry of the Family Court of Australia is hereby appointed, pursuant to s.106A of the Family Law Act 1975 to execute all deeds and documents in the name of the applicant and/or respondent and to do all acts and things necessary to give validity and operation to these orders.
Any application for costs, together with any supporting affidavit and written submissions be filed within fourteen (14) days of today’s date.
The respondent to any such application shall file and serve a response, supporting affidavits (if any) and written submissions fourteen (14) days thereafter.
Any costs application be considered in Chambers. If any party wishes there to be a further oral hearing in relation to costs they should indicate so in their submissions.
IT IS NOTED that publication of this judgment under the pseudonym Simon & Simon & Ors is approved pursuant to s.121(9)(g) of the Family Law Act 1975 (Cth).
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
BRC 3933 of 2012
| MS SIMON |
Applicant
And
| MR C SIMON |
First Respondent
| MR S SIMON |
Second Respondent
| MR PETIT |
Third Respondent:
| MR HALEY |
Fourth Respondent
| MR CASSAS |
Fifth Respondent
REASONS FOR JUDGMENT
Ms Simon is the wife of the first respondent, Mr C Simon. They married [in] 1996 and separated, finally, on 22 May, 2011. They have one child together who was born in 1997. The parties’ child lives with the applicant. The parties are not divorced. In these proceedings, she seeks a property adjustment order, pursuant to s.79(2) of the Family Law Act1975.
There is only one asset of any significance in this case – the applicant’s and the first respondent’s former matrimonial home at Property B, [B], Queensland, registered solely in the name of the first respondent, but purchased using funds sourced exclusively from the second respondent.
The second respondent is the first respondent’s father. The third and fourth respondents are his trustees in bankruptcy, he having been made bankrupt on his own petition on 16 August, 2010.
The fifth respondent is the first respondent’s trustee in bankruptcy, he having been made bankrupt on his own petition on 10 July, 2012.
The issues for determination are:
a)whether a certain loan agreement and associated mortgage between the first respondent and the second respondent is void as against the fifth respondent;
b)whether the same loan agreement and associated mortgage between the first respondent and the second respondent should be set aside pursuant to s.106B of the Family Law Act1975 or because it is a sham;
c)what is a just and equitable order for property adjustment as between the applicant and the fifth respondent?
The applicant gave evidence and was briefly cross-examined. The first and second respondents did not give evidence either by affidavit or orally. There was one affidavit of evidence in chief relied upon by the third and fourth respondents. There was one affidavit of evidence in chief relied upon by the fifth respondent. The deponents of those affidavits were not cross-examined.
The Facts
The applicant and the first respondent were born in the United Kingdom. They met and married there but were invited to migrate to Australia by the second respondent. The applicant and the first respondent accepted an offer by the second respondent that he provide them with a house, a vehicle and employment for the first respondent. The applicant and the first respondent relocated from England in early 2006.
The [B] property was acquired using funds provided wholly by the second respondent. He paid the whole of the purchase price of the property – namely $310,000. It appears (from a letter dated 20 October, 2007 from the second respondent to his lawyer at the time) that the second respondent gave a total of $345,000 to the first respondent. That sum comprised the purchase price of the property ($310,000), $5,000 for legal expenses and searches, $11,500 for air conditioning and $20,000 for furniture and other items.
In the months prior to settlement, the second respondent instructed his lawyer that $150,000 of the money advanced (or to be advanced) represented a loan which was to be repaid upon the second respondent’s death, or the sale of the [B] property, whichever happened first. The loan was to be secured by a mortgage over the [B] property for that sum. Contemporaneous correspondence from the second respondent’s lawyers to the first respondent in January, 2006 is entirely consistent with those matters. However, the correspondence is silent about the characterisation of the balance of the $345,000 advance – that is to say, whether the $195,000 was a gift or a loan.
On 21 February, 2006 the second respondent as lender and the first respondent as borrower executed an agreement whereby the second respondent agreed to lend to the first respondent $150,000.00 to be repaid on the event of the sale of the [B] property or the second respondent’s death. The loan was to be secured by a registered mortgage over the [B] property. On 27 February, 2006 a mortgage was given by the first respondent over the [B] property to secure the loan.
The purchase of the [B] property settled on or about 2 March, 2006. Neither the applicant nor the first respondent contributed any money towards its purchase price. The first respondent became the sole registered proprietor of the [B] property. The mortgage was registered on the title to the [B] property on 8 March, 2006.
The applicant and the first respondent separated in August, 2007. The applicant returned to the second respondent a motor vehicle provided by him to her.
On 20 October, 2007 I find that the second respondent wrote the following letter to his solicitor:
Oct 20th 2007
Dear [first name omitted]
Property B, [B]
About 18 months ago I brought this house for $310,000 for my son Mr C Simon. I paid
Purchase price 310 000
Survey, legal fees, Stamp Duty etc 5 000
Air Conditioning 11, 500
Furniture, fittings, linen,
cookware etc for the house 20, 000
Total approx $346,500Some 4-6 months ago Ms Simon, his wife announced their marriage has been over for years & wants a Divorce & 1/2 the equity in the sale of the house after paying me the $150 000 mortgage. She arguably tried to get Mr C Simon, my Son, to move out of the house so that her boyfriend, Mr D, who is her colleague at work [omitted] can move in to the house with her & 2 children. Ms Simon leaves the house every evening at 8pm, sleeps with Mr D & returns in the morning.
What I am asking you is:-
Is it O.K. for Mr C Simon to sign & agree to a second mortgage on the house to me in the sum of $195,000 at no interest, to be repaid when the house is sold? This Second charge acknowledges that I have put this $195000 in to the house & contents, over & above the original $150 000 mortgage I took out on the house.
The house is probably worth now $350,000 to $370,000. Ms Simon & Mr C Simon expect to get a divorce in August 2008 which is 1 year after they stopped "being married & living together." They now live in the house but lead "separate lives."
If the house is sold next august or later, it may have gone up in value to $400,000 so after Agents & legal fees & repaying me $150 000 for the first mortgage & $195 000 for the second mortgage they will have a few thousand dollars each. If I want to then give Mr C Simon the $195 000 or part of it or put it down as a second charge on a house he buys for himself I can and
Ms Simon does not get her hands on the majority of the equity in the house, Property B.Is this O.K.?
Yours Sincerely
Mr S Simon
On 5 November, 2007 the first and second respondents executed a further agreement (executed as a deed) whereby it was recorded that on 2 March, 2006 the second respondent lent the first respondent $195,000. Having regard to the correspondence that I have just set out, I find that the reference in that deed to $195,000 was clearly a reference to the $195,000 which was the balance of the $345,000 initially advanced by the second respondent. I find that the applicant knew nothing of this agreement.
The terms of the second loan agreement were given effect by the parties executing a mortgage on 5 November, 2007. This mortgage was registered on the title to the [B] property on 12 November, 2007. I find that the applicant knew nothing of this mortgage.
The applicant and the first respondent reconciled in January, 2008. I find that the second respondent then wrote to his (then) lawyer in the following terms:
Dear [first name omitted]
re Mortgages on Property B
__________
As Ms Simon & Mr C Simon are now reconciled I am concerned that the Second $195 000 mortgage that I took out to spite Ms Simon was illegal. She & Mr C Simon have lived together many years and if ever she does contest the second mortgage I want you to agree for me that my original intention was for all equity in the house over the $150000 was to go to both Ms Simon & Mr C Simon. I agree this now in this letter. So the Second Mortgage should be set aside & nullified. Our correspondence at the time agreed that I was on shaky ground. Also I want the first mortgage to be cancelled & be a gift to
Mr C Simon on my death as was my original intention.Thank you
Mr S Simon
The exact date on which the above letter was written is not clear, but having regard to the context, I find that it was written between January and March, 2008.
In March, 2008 the applicant and the first respondent separated again. They reconciled in August, 2008. They separated again in October, 2008. The applicant commenced property adjustment proceedings on 22 June 2009. However, she filed a notice of discontinuance in respect of those proceedings on 3 August, 2009.
In October, 2009 the parties reconciled. They remained reconciled until 22 May, 2011 when final separation occurred.
On 16 August, 2010 the second respondent presented a debtor’s petition and became bankrupt.
On 25 November, 2011 the interests in the mortgages over the [B] property held by the second respondent were transmitted to the third and fourth respondents as the second respondent’s trustees in bankruptcy.
These proceedings were commenced by the applicant on 4 May, 2012.
On 10 July, 2012 the first respondent presented a debtor’s petition and became bankrupt.
Consideration
A. The applicant’s claim to set aside the first loan agreement and mortgage.
The applicant’s case concerning the first loan agreement is summarised in paragraph 9 of her affidavit filed on 4 May, 2012 as follows:
9. During the correspondence and discussions prior to our relocating to Australia it was intimidated (sil. intimated) by Mr Simon Snr that the property ought to be considered part of my husband's early inheritance. It was however advised to me that it was proposed that Mr Simon Snr take out a mortgage over Property B (in an amount of $150,000) for the purpose of "protecting his son's inheritance". Mr Simon Snr also stated that he did not want us to take a large mortgage to a third party as collateral to a loan (for example, to start a business) as he did not want us to lose the house.
10. 1 was aware of the mortgage being taken out but had only limited experience in relation to these matters having only borrowed once before in my previous marriage in England. At the time of taking out the mortgage it was my understanding it was never the intention to repay the loan nor were any repayments ever made in relation to same.
In her affidavit filed on 9 November, 2012 she says:
4. I have referred to the original mortgage secured over Property B in paragraphs 9 and 10 of my Affidavit of 3 May 2012. I wish to clarify those matters as follows: -
(a) There was no actual advance of money made by Mr Simon Snr to my husband and I as part of the original arrangements for acquiring the Property B property;
(b) Mr Simon Snr said to me in a telephone conversation whilst my husband and I were still residing in England that he was going to put a "paper exercise" mortgage for $150,000 to protect that amount of money should Mr C Simon (my husband) and I ever split up and as I stated previously in paragraph 9 of my earlier Affidavit to prevent my husband from taking a mortgage over the house and placing the house at risk.
Although not articulated in this way in either her written or oral submissions, in essence the applicant’s argument must be twofold, namely:
a)that notwithstanding the legal relationship evidenced by the loan and the mortgage between the first and second respondents, the arrangement was not intended to create a binding legal relationship – rather it was simply a family transaction that was not intended to be enforceable; or
b)alternatively, the transaction is liable to be and should be set aside pursuant to s.106B of the Family Law Act1975.
At the heart of the first argument is the question of whether there was any intention, objectively assessed, between the first and second respondents to enter into a legally binding relationship. Family, social, and domestic arrangements do not normally give rise to binding contracts because the parties lack the necessary intention: Teen Ranch Pty Limited v Brown (1995) 87 IR 308 at 310. However, the fundamental question, whatever the circumstances of the parties, is always whether in the situation in which they were, did their words and conduct objectively assessed evince an intention that they intended to assume legally binding contractual obligations to each other? The family or other relationship is only one circumstance that is relevant: Evans (as Executor for the Estate of the late Evans) v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237 at [14]; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95. The characterisation of promises made between people in family, domestic and social relationships is not to be governed by a presumption that they are not contractual in nature: Evans (above) at [16].
Here, I am satisfied by the evidence that the second respondent loaned to the first respondent the sum of $150,000 when the [B] property was purchased. The funds were not given directly to him, but they were paid in respect of the purchase of the property.
The second respondent’s solicitor wrote to the first respondent on 30 January, 2006 and amongst other things, said:
I also understand that your father is lending you $150,000, interest free, on the basis that that money will be repaid on your father’s death or when you sell the property (whichever occurs first). I have therefore taken the liberty of preparing the enclosed mortgage documents (which have been prepared on your father’s behalf):
…
As I have pointed out above, these documents are prepared on your father’s behalf. As I cannot act for both parties in the same transaction, you will need to obtain your own legal advice in respect of these documents….
The only evidence of any response to this letter from the first respondent is the signed loan agreement and the mortgage. I can only infer that the first respondent took no issue with the propositions set out in the letter. Those propositions are consistent with an intention to create a legally binding relationship between the first and second respondents.
That there was intended to be a loan is evidenced by both the loan agreement and the first mortgage registered over the property. It seems to me that the production of those documents and the execution of them by the parties at the time the [B] property was purchased is consistent with that proposition.
The applicant’s case that the arrangement was intended to “protect” the first respondent’s early inheritance is not necessarily inconsistent with the notion that there was a loan, to be repaid upon the death of the second respondent or the sale of the property, whichever occurred first. None of the matters set out above however, which in my view point towards a binding contractual relationship, says anything about the ability or the capacity of the second respondent to forgive the loan at any point. Clearly, the legal relationship was put in place so as to enable the second respondent to decide, at some future point, to forgive the loan to the first respondent, who would then become absolutely entitled to the advance.
Moreover, the fact that a written agreement and mortgage were put in place in respect of only part of the funds that were advanced by the second respondent tends to suggest that the first and second respondents intended that the $150,000 would be treated differently to the balance of $195,000. There is no express reference to the differential treatment of those two amounts and I am left to infer, and I do infer, that they were treated differently by the parties for a reason, namely, that the $150,000 was in fact a loan, which might be forgiven in the future.
The applicant’s second argument is that the loan agreement and mortgage were intended, or irrespective of intention, have the effect of defeating an order in these proceedings. Relevantly, s.106B provides:
(1) In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.
(1A) If:
(a) a party to a marriage, or a party to a de facto relationship, is a bankrupt; and
(b) the bankruptcy trustee is a party to proceedings under this Act;
the court may set aside or restrain the making of an instrument or disposition:
(c) which is made or proposed to be made by or on behalf of, or by direction or in the interest of, the bankrupt; and
(d) which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.
I accept that the discretionary relief available pursuant to s.106B(1A) of the Act is available in this case in that:
a)the first respondent is both a party to a marriage and a bankrupt;
b)the first respondent’s trustee in bankruptcy is a party to the proceedings under the Family Law Act;
c)the claim for relief relates to “the making of an instrument or disposition”;
d)which was made by the first respondent (the bankrupt); and
e)which was made to defeat an anticipated order in the proceedings, or irrespective of intention, likely to defeat any such order.
A mortgage may be a “disposition” under s.106B: Heath and Heath (No 2) (1984) FLC ¶91-517. Although the word “instrument” is not defined in the Act, it seems to me that a written loan agreement is an instrument for the purposes of s.106B of the Act. Whether a loan of money to a party to a marriage (or a party to a marriage who is bankrupt), not supported by any written agreement is a “disposition” is unclear: Commonwealth Bank of Australia v Staatz and Staatz (1988) FLC ¶91-942. However, the conversion of what might otherwise be a gift of money into a loan is likely to be a “disposition” for the purposes of the section.
In my view, the loan agreement executed by the first respondent on 26 February, 2006 is an instrument for the purposes of s.106B(1A) of the Act. However, given the findings I have made above about the transaction concerning the $150,000, I am not satisfied that it evidences a “disposition” for the purposes of that section because the first respondent “disposed” of nothing. As I have set out above, the $150,000 was never a gift to the first respondent.
I accept that the mortgage is both an instrument and a disposition for the purposes of s.106(1A).
However, I am not satisfied that the making of either the loan agreement or the mortgage was intended to defeat any anticipated order that the wife might have secured in proceedings that were not then even in contemplation. The advance of the $150,000 was, as I have found above, intended to be a loan by both the first and second respondents. The intention of the loan agreement and the mortgage was to safeguard the loan money and to prevent the first respondent from losing those funds by further encumbering the [B] property.
Moreover, the nature and the extent of the order anticipated by the applicant, at the time the instruments were executed, has not been identified by her. It is clear that when the relevant transaction took place, the applicant’s and first respondent’s marriage was intact and there was no suggestion, on the evidence, of any proceedings under the Family Law Act. Consistently with the approach taken in other cases dealing with this issue, I find that the loan agreement and mortgage was not likely to defeat an anticipated order in proceedings under the Act (see In the Marriage of Ivanfy (1978) 4 Fam LR 542; In the Marriage of Holley (1982) FLC 91-257; In the Marriage of Toohey (1991) 14 Fam LR 843.
There is a second reason for reaching that conclusion. As I have found above, the advance of $150,000 was a loan by the second respondent to the first respondent. Even if the loan agreement and the mortgage are set aside, the loan remains as a debt to be taken into account in the applicant’s property adjustment proceedings. That is to say, the nett property available for distribution between the parties will remain the same. The only effect of setting aside the mortgage will be to deprive the second respondent’s trustees of the benefit of the security over the [B] property they now enjoy. The debt would nonetheless remain.
In my view, there is a debt for $150,000 owed by the first respondent to the second respondent secured by mortgage over the [B] property. By dint of the second respondent’s bankruptcy, that debt and the right to enforce the security has vested in the third and fourth respondents.
B. The claims to set aside the second loan agreement and mortgage.
The claim pursuant to s.120 of the Bankruptcy Act
Both the applicant and the fifth respondent claim that the second loan agreement and the second mortgage should be set aside pursuant to s.120 Bankruptcy Act1966. Relevantly, that section provides:
120 Undervalued transactions
Transfers that are void against trustee
(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.
Note: For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
Exemptions
…
(3) Despite subsection (1), a transfer is not void against the trustee if:
(a) in the case of a transfer to a related entity of the transferor:
(i) the transfer took place more than 4 years before the commencement of the bankruptcy; and
(ii) the transferee proves that, at the time of the transfer, the transferor was solvent; or
…
Refund of consideration
(4) The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(5) For the purposes of subsections (1) and (4), the following have no value as consideration:
(a) the fact that the transferee is related to the transferor;
(b) if the transferee is the spouse or de facto partner of the transferor—the transferee making a deed in favour of the transferor;
(c) the transferee’s promise to marry, or to become the de facto partner of, the transferor;
(d) the transferee’s love or affection for the transferor;
…
Meaning of transfer of property and market value
(7) For the purposes of this section:
(a) transfer of property includes a payment of money; and
(b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and
(c) the market value of property transferred is its market value at the time of the transfer.
As set out above, the second loan agreement purports to be in respect of the sum of $195,000. For the reasons I have given above, I am not satisfied that at the time the $195,000 was paid to the use of the first respondent it was intended by the parties that it be treated as a loan by the second respondent to the first respondent. It was clearly a gift to both the first respondent and the applicant. In his undated letter extracted above, the second respondent says: “She & Mr C Simon have lived together many years and if ever she does contest the second mortgage I want you to agree for me that my original intention was for all equity in the house over the $150000 was to go to both Ms Simon & Mr C Simon. I agree this now in this letter. “ (my emphasis).
The making of the second loan agreement was clearly a device constructed by the first and second respondents to attempt to secure the $195,000 or any part of it from the applicant in the face of the separation of the applicant and the first respondent.
The second loan agreement purports to create a chose in action, namely a debt owed by the first respondent to the second respondent. The chose in action represented by a right to receive a debt is property: Loxton v Moir (1914) 18 CLR 360.
By creating the second loan agreement the first respondent has done something that has resulted in the second respondent becoming the owner of property that did not previously exist. The first respondent must be taken, by virtue of s.120(7)(b) of the Bankruptcy Act to have transferred property to the second applicant.
The transfer of property constituted by the second loan agreement, by the first respondent (who after the loan agreement was executed became bankrupt) to the second respondent, must be void as against the fifth respondent because:
a)the transfer took place in the period beginning 5 years before the commencement of the first respondent’s bankruptcy and ending on the date of the bankruptcy; and
b)the second respondent gave no consideration for the transfer.
It must follow, in my view that the second mortgage is also void as against the fifth respondent. It was a transfer of property for the purposes of s.120(7)(b) of the Bankruptcy Act which took place in the relevant period and for which, no consideration was given.
Whilst s.120(3) of the Bankruptcy Act provides that a transaction is not void if it occurred more than 4 years from the date of bankruptcy and the second respondent proves that the first respondent was solvent at the time, there was no attempt by the second respondent to establish the first respondent’s solvency at the time of the execution of the second loan agreement and mortgage or at all.
The third and fourth respondents assert, by way of a letter annexed to an affidavit of their solicitor, Mr Jeremy Charles Streten, that at all times relevant to the execution of the second loan agreement and the mortgage the first respondent was able to pay his debts as and when they fell due. However, beyond that there is little else. The onus is upon the third and fourth respondents to prove the facts upon which they rely and, in my view they have failed to do so. There is no evidence that satisfies me that the first respondent was solvent at the time the second loan agreement and mortgage were executed.
In my view the second loan agreement and the second mortgage should be set aside pursuant to s.120(1) of the Bankruptcy Act.
The claim by the applicant and the fifth respondent pursuant to s.106B of the Family Law Act
The above finding is sufficient to dispose of the claims by the third and fourth respondents in relation to the second loan agreement and the second mortgage, however in the event that I am wrong about that, it seems to me that those instruments should also be set aside pursuant to s.106B(1A) of the Family Law Act.
The evidence clearly reveals that the second respondent’s purpose in having the second loan agreement and the second mortgage prepared was to defeat an anticipated order in property adjustment proceedings that were clearly then within the contemplation of the first and second respondent. The terms of the second respondent’s correspondence to his solicitor make it clear that his only purpose in having the second loan agreement and the second mortgage executed was to “spite” the applicant. The correspondence of 20 October, 2007 makes it clear that the second respondent knew that the first respondent and the applicant had separated, were getting a divorce and that the applicant wanted “1/2 the equity in the sale of the house after paying me the $150 000 mortgage”.
Section 106B(3) provides that the Court must have regard to the interests of, and shall make any order proper for the protection of, a bona fide purchaser or other person interested. It was suggested in argument that the third and fourth respondents came within this provision. However, in my view they do not. The trustees in bankruptcy derive a title to the second respondent’s assets that is only as good as the title possessed by the second respondent. The second respondent’s trustees are not in the position of a bona fide purchaser of the relevant interest.
Moreover, there is another reason to set aside the second loan and the second mortgage. The Court will not permit a “blatant sham transaction” to defeat the operation of the Act: Balnaves v Balnaves (1988) 12 Fam LR 488. Shams can always be disregarded: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530. Further, not only can sham transactions confer no interest, but justice and equity would not permit collusion and/or dishonesty to prevent the wife receiving her further proper s.79 entitlement: Halabi v Artillaga (1994) FLC 92-470 esp. at 80,886.)
In my view, therefore, the second loan agreement and the second mortgage should be set aside:
a)on the fifth respondent’s application pursuant to s.120(1) of the Bankruptcy Act;
b)on the applicant’s application pursuant to s.106B(1A) of the Family Law Act; and
c)because the transactions are clearly shams.
B. The property adjustment claim
It remains then to consider the applicant’s claim to property adjustment orders pursuant to s.79(2) of the Family Law Act.
The law in relation to property adjustment is relatively settled. The approach to the determination of an application under s.79 of the Act is well established by the authorities such as In the Marriage of Lee Steere and Lee Steere (1985) FLC 91-626; In the Marriage of Ferraro (1993) FLC 92-335; In the Marriage of Clauson (1995) FLC 92-595; In the Marriage of Hickey (2003) 30 Fam LR 355 and C v C (2005) Fam LR 414. Generally speaking there are four stages to the proper consideration of an application for property adjustment.
Firstly, I must identify the property, liabilities, and financial resources of the parties at the time of the hearing. Secondly, I must evaluate the parties’ contributions as defined by s.79(4) of the Act with particular reference to those matters listed in s.79(4)(a) and s.79(4)(c). Thirdly, I must evaluate the matters to which my attention is directed by s.79(4)(d) to s.79(4)(g), and in particular, s.75(2) of the Act insofar as any of those matters are relevant. Finally, I must be satisfied in all the circumstances that it is just and equitable to make the order that I propose to make. It is the justice and equity of the actual orders proposed to be made that I must consider: Russell v Russell (1999) FLC 92-877, Stanford v Stanford [2012] HCA 52.
As I set out above, this case has a complication in that the first respondent is a bankrupt. The Court has power to make an order altering the interests of the fifth respondent (the first respondent’s trustee) in the property vested in him as a result of the bankruptcy: s.79(1)(b) of the Act. If such an order is made, that will necessarily affect the rights of the first respondent’s unsecured creditors – they may receive less in the bankruptcy than might otherwise have been the case if no order in favour of the applicant was made.
In Trustee of the property of Lemnos (a bankrupt) v Lemnos (2009) 41 Fam LR 120, the Full Court of the Family Court of Australia determined that:
a)The interests of the bankrupt’s unsecured creditors do not automatically prevail over the interests of the non-bankrupt spouse and nor do the interests of the non-bankrupt spouse prevail over the interests of unsecured creditors. The Court is required to balance the competing claims of the bankrupt spouse’s unsecured creditors and the non-bankrupt spouse having regard to the wide discretion conferred by s.79 of the Act: at [57], [59] – [61], [97], [99] and [200];
b)The claim of a non-bankrupt spouse pursuant to s.79(1)(b) of the Family Law Act is not of the same nature as the claim of an unsecured creditor who proves in the administration of the bankrupt spouse’s estate. The non-bankrupt spouse is not an unsecured creditor of the bankrupt spouse. Accordingly, s.108 of the Bankruptcy Act does not require the Court to treat the claim of a non-bankrupt spouse and the claims of a bankrupt spouse’s unsecured creditors equally. That is to say, the pari passu principle does not apply when exercising the discretion conferred on the court by s.79(1)(b) of the Family Law Act: [271] – [274];
c)The Court may make orders in favour of a non-bankrupt spouse, even though the combined liabilities exceed the total value of the property (including property vested in the trustee): at [97] – [101] and [202];
d)In an appropriate case, the effect of the Court’s orders may have an adverse impact upon the rights of the bankrupt’s unsecured creditors: at [97].
Insofar as the claim of the non-bankrupt spouse against property vested in the bankrupt spouse’s trustee, the Court is required to apply the same approach described by the Full Court of the Family Court of Australia in Hickey and C v C. So much is implicit from the reasons of the Full Court in Lemnos (above). The trial judge in Lemnos concluded that he was required to consider the case before him “in the usual manner adopted for consideration of Part VIII property applications with exception that I am to treat all of the former property of the husband, now vested in the Trustee, as available for distribution to the wife if that be an appropriate result”: (Lemnos & Lemnos [2007] FamCA 1058 at [62]). The Full Court did not suggest that approach was erroneous.
In a case such as this the provisions of ss.79(12) and 79(13) provide that, except with the leave of the Court (which is only to be granted in exceptional circumstances), the bankrupt party to the marriage is not entitled to make a submission to the Court in connection with any vested bankruptcy property in relation to the bankrupt party.
No such leave was sought in this case by the first respondent. He made no submissions in respect of the non-vested property.
The Assets and Liabilities
Non-vested property
The applicant and the fifth respondent approached this case on the basis that the only property under consideration as between them was the equity that was available in the [B] property. They agree that the property has a value of $335,000. It is encumbered to the second respondent (and thereby the third and fourth respondents) to the extent of $150,000. The equity in the property is therefore $185,000. In addition to that, the applicant has a motor vehicle that she values (according to her Financial Statement) at $10,000. She has a personal loan of about $7,000. The first respondent has unsecured creditors of $76,600, being an unsecured personal loan from the National Australia Bank for $73,000 and a credit card liability of $3,600.
The applicant has a superannuation interest of $10,797.81 and the first respondent has a superannuation interest (which has not vested in the fifth respondent) valued at $31,953.53.
It should be immediately apparent that there is sufficient equity in the [B] property for the first respondent’s unsecured creditors to be paid in full. Were it the case that the first respondent was not bankrupt, the property available for division between the parties’ would be their nett assets after taking into account the first respondent’s liabilities. The liabilities in this case, whilst the first respondent is solely responsible for them, would nonetheless be taken from value of the assets to reveal the nett equity of the parties’ in their assets generally. The funds borrowed by the first respondent (or most of them) were used by him for family purposes, at least according to the applicant’s evidence It is the nett value of the assets that the Court would ordinarily utilise to fashion the outcome in the case.
The bankruptcy of the first respondent affects that position in the sense that the first respondent’s unsecured creditors are only permitted to prove for their debts in the bankruptcy and in accordance with the Bankruptcy Act. The debts nonetheless remain subject to the Bankruptcy Act.
Although the matter was not raised by either party, it seems to me arguable that given the circumstances, the Court would be justified in approaching the case on the basis that the pool of assets for division is the nett pool after payment of the first respondent’s unsecured creditors. Given the surplus that would exist if the matter was not complicated by the bankruptcy, the debts due to the unsecured creditors would be accounted for in the process undertaken by the Court. But the matter was not argued in that way, and I pass from it without further consideration.
The home was acquired and placed in the first respondent’s name by the second respondent who paid the whole of the purchase price. However, $150,000 of the purchase price was a loan, interest free, that will be repaid. Thus the relevant contribution, at least in direct financial terms, is the interest saved by the parties from the interest free term. There is no evidence that would allow me to find the value of that contribution to the parties. The balance was intended to be a gift to both parties. So much appears from the undated letter written by the second respondent to his solicitor to which I have already referred.
At the commencement of the relationship both parties had minimal assets. The applicant had two children from a previous marriage. Both came to Australia with the parties, but the applicant’s older child returned to England after a short time. The other remained living with the parties until 2009. There is no evidence by which I could make any assessment of the matters suggested might be relevant in Robb & Robb (1995) FLC 92-555.
The evidence is that at the commencement of their marriage, the applicant resigned her employment and commenced to be a full-time homemaker and parent. The first respondent worked at various occupations. In 2001 he commenced work as a [omitted] on a full-time basis.
After the parties moved to Australia in April, 2006 the applicant continued her role as the primary homemaker and parent in the relationship. In mid 2007 however, she commenced working part-time. The first applicant commenced working as a [omitted] in January, 2007, but had been unemployed prior to that time. At the time of trial however, the applicant’s evidence was that he was no longer working. She thought he was earning about $74,270.00 per annum as a [omitted].
The fifth respondent submits that the majority of matrimonial pool available for division was contributed on behalf of the first respondent by the second respondent. But, apart from the value to the parties of the interest free loan, in my view the balance of the purchase price was contributed equally by the parties. In Kessey v Kessey (1994) 18 Fam LR 149 the Full Court set out the principles concerning how gifts received by parties in the course a relationship ought to be treated for s.79(4) purposes. At 161 the Full Court said:
There is certainly nothing inconsistent, in our view, between the trial judge's approach and the statements of principle made by Fogarty J in Gosper. It may well be, however, that the trial judge's approach and our approval of it, go somewhat further than what was said by Fogarty J in Gosper. This is because this case would establish that where there is no evidence of any intention by a parent-donor as to whether he or she wished to benefit only his or her child or also to benefit the spouse of the child as well as the child, then the fact of the parent-child relationship, especially in circumstances where that has been a relationship of support on the part of the child, will be sufficient to establish a contribution of the donation by or on behalf of the child of the parent. In other words, a contribution by a parent of a party to a marriage to the property of the marriage will be taken to be a contribution made by or on behalf of the party who is the child of the parent unless there is evidence which establishes it was not the intention of the parent to benefit only his or her child.
(my emphasis)
In this case, there is evidence to the contrary of the proposition that the second respondent intended only to benefit his son by the gift of $195,000. The evidence comes from the correspondence to which I have referred above. In my view the evidence permits of a finding, and I find, that the second respondent intended to benefit the applicant and the first respondent.
Aside from the dispute about the contributions to the purchase price of the [B] property, both the applicant and the fifth respondent suggest that over this long marriage, their other contributions should be viewed as equal. Given the state of the evidence about the parties’ contributions generally, I can come to no other conclusion.
I asses the contributions of the applicant and the first respondent to the [B] property that has vested in the fifth respondent as equal. I do not think, in the absence of any evidence as to the value to the parties of the interest free $150,000, that the contribution of that moves the balance away from equality.
Neither the applicant nor the first respondent seeks orders in respect of their superannuation interests. No party suggested that it was appropriate to undertake an assessment of the contributions in relation to that non-vested property, but if I was to do so, the conclusion to which I would be driven was that their contributions to their respective superannuation entitlements was equal by reason of the matters referred to above.
I turn then to a consideration of the matters raised by ss.79(4)(d) – (e).
The parties of similar age. The applicant currently works 33 hours per week on a casual basis (which will increase to full time following probation).
The first respondent’s income is unclear, but as the fifth respondent points out, he is currently assessed at $31 per week child support so his income is clearly minimal. He was previously employed as a [omitted].
As the fifth respondent points out, the first respondent’s share of the parties’ property will be applied to discharge his unsecured creditors, the funds from whom, it is suggested were used, partially at least, on improvements to the [B] property. That seems to be so having regard to the applicant’s evidence. The money sourced from the NAB was used, by and large on improvements to the [B] property.
The applicant will continue to have the primary care of the applicant’s and first respondent’s child who is presently 15 years of age. The applicant will not, I do not consider, receive anything but a derisory amount of child support from the first respondent.
The applicant sought an adjustment in her favour to take account of these matters, and the fifth respondent conceded that an adjustment of 10% – 15% was warranted. Having regard to the above matters and that the property pool in this matter has a very modest value an adjustment of 15% is warranted. In my view the adjustment would have been larger but for the fact that the debts of the unsecured creditors are debts that have been incurred in the course of this family’s day-to-day business and which would otherwise have been taken into account for their full value but for the bankruptcy. Those matters are, in my view, relevant considerations pursuant to s.75(2)(ha) of the Act.
Orders
Orders which reflect that the second loan agreement and the associated mortgage are void as against the fifth respondent, and in any event should be set aside pursuant to s.106B of the Family Law Act are appropriate. An order that divides the nett proceed of sale of the [B] property 65% to the applicant and the balance to the fifth respondent will be, in my view, just and equitable.
I make the orders set out at the commencement of these reasons.
I certify that the preceding eighty-seven (87) paragraphs are a true copy of the reasons for judgment of Judge Jarrett delivered on 5 June 2013.
Date: 5 June 2013
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