Sutherland v Byrne-Smith

[2011] FMCA 632

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SUTHERLAND v BYRNE-SMITH [2011] FMCA 632

BANKRUPTCY – Antecedent transactions – recovery of proceeds of sale of real estate after transfer of bankrupt’s share to his former de facto spouse.

FAMILY LAW – Binding property agreement – whether the agreement should be set aside considered – valuation of the bankrupt’s former de facto spouse’s contribution to the acquisition, maintenance, improvement and sale of the property.

TRUSTS – Resulting and constructive trusts.

Bankruptcy Act 1966 (Cth), ss.5, 30, 58, 115, 116, 120, 121
Family Law Act 1975 (Cth), ss.79A, 90K, 90SB, 90SL, 90SM, 90SS, 90UJ, 90UL, 90U, 90UM, 113, 114

Anscor Pty Ltd v Clout (Trustee) (2004) 135 FCR 469
Barton v DCT (1974) 131 CLR 370
Baumgartner v Baumgartner (1987) 164 CLR 137
Calverley v Green (1984) 155 CLR 242
Cannane v J Cannane Pty Ltd (In Liq) (1998) 192 CLR 557
Combis, Trustee of the Property of Peter Jensen (Bankrupt) v Jensen (2009) 179 FCR 150; [2009] FCA 778
Freeman v Pope (1870)5 Ch App 538
Muschinski v Dodds (1985) 160 CLR 583
Official Trustee v Lopatinsky (2003) 30 Fam LR 499
Official Trustee in Bankruptcy v Brown & Anor [2011] FMCA 88
Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217
Pennimpede v Pennimpede [2010] NSWCA 121
PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515

Applicant: RODERICK MACKAY SUTHERLAND AS TRUSTEE OF THE PROPERTY OF BARRY PAUL PESCOSTA, A BANKRUPT

Respondent: JENNIFER ANN BYRNE-SMITH

File Number: SYG 516 of 2011

Judgment of: Driver FM

Hearing dates: 16, 17 August 2011

Date of Last Submission: 26 October 2011

Delivered at: Sydney

Delivered on: 22 December 2011

REPRESENTATION

Counsel for the Applicant: Mr A Combe

Solicitors for the Applicant: Sally Nash & Co

Counsel for the Respondent: Mr D P O'Connor

Solicitors for the Respondent: Collins & Thompson

ORDERS

1. The Court declares and orders that the transfer of property evidenced by the documents purporting to be a Binding Financial Agreement and Transfer of folio identifier 2/223288 is a transfer of property which is void pursuant to s.120 of the Bankruptcy Act 1966 (Cth).

2. The Court declares that half of the land situate at 12 Minnamurra Place, Pymble being the whole of the land contained in Certificate of Title folio identifier 2/223288 (“the Land”) vested in the Applicant upon the filing of a Debtors Petition of Barry Paul Pescosta, a bankrupt on

   
   

   21 January 2011.

3. The applicant is to be paid $105,750.25 from moneys invested by the applicant in an interest bearing deposit.

4. The applicant is to be paid 40 per cent of the interest earned on the interest bearing deposit invested by him.

5. The applicant is to remit the balance of $158,625.37 plus 60 per cent of the accrued interest in accordance with order (4) to the respondent from the interest bearing deposit maintained by the applicant.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 516 of 2011

RODERICK MACKAY SUTHERLAND AS TRUSTEE OF THE PROPERTY OF BARRY PAUL PESCOSTA, A BANKRUPT

Applicant

And

JENNIFER ANN BYRNE-SMITH

Respondent

REASONS FOR JUDGMENT

Introduction and background

1. In these proceedings the applicant trustee in bankruptcy brings an action to recover what he claims is money owing to the creditors of the bankrupt by way of proceeds of the sale of a property known as

   
   12 Minnamurra Place

   , Pymble (“the Property”). The proceedings are brought pursuant to ss.30, 58, 116, 120 and 121 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) and ss.90SS, 90UJ, 90UM, 113 and 114 of the Family Law Act 1975 (Cth) (“the Family Law Act”).

2. The trustee in the application filed on 21 March 2011 sought numerous orders including the following final orders:

   1. A declaration and order that the transfer of property evidenced by the documents purporting to be a Binding Financial Agreement and Transfer of folio identifier 2.223288 is a transfer of property which is void pursuant to section 120 and/or 121 of the Bankruptcy Act 1966 (“Bankruptcy Act”).

   2. A declaration that half of the land situate at 12 Minnamurra Place, Pymble being the whole of the land contained in Certificate of Title folio identifier 2/223288 (“the Land”) vested in the Applicant upon the filing of a Debtors Petition of Barry Paul Pescosta, a bankrupt on 21 January 2011.

   3. Order and declarations pursuant to section 90SL and 90UM(6) of the Family Law Act, 1975 (“Family Law Act”) that the interest of the bankrupt formerly and currently recorded in his name in the Land vested in the Applicant as Trustee of the property of the Bankrupt subject to encumbrances existing at the date of bankruptcy under ss.58 and 116 Bankruptcy Act.

   4.A declaration pursuant to section 90UJ of the Family Law Act that a document purporting to be a Binding Financial Agreement said to have been entered into between the Respondent and Barry Paul Pescosta (“the bankrupt”) is not a Binding Financial Agreement.

   5. In the alternative, a declaration and order that the Binding Financial Agreement be set aside pursuant to section 90UM of the Family Law Act.

   6. A declaration pursuant to section 90SL of the Family Law Act that the bankrupt’s interest in the Land was and is held on trust by the bankrupt for the Applicant in his capacity as trustee of the property of the bankrupt.

   7. Order and declaration that the transfer under the Real Property Act, 1900 (NSW) executed by the bankrupt and the Respondent is a transfer of property and is set [a]side pursuant to section 106B of the Family Law Act.

   8. Order pursuant to section 90UM, 90SM and 90SS of the Family Law Act that the net proceeds of sale of the Land be paid as to 50% to the Applicant and 50% to the Respondent.

   …

   18. Order pursuant to section 30 Bankruptcy Act and/or sections 90UM, 90SM and 90SS of the Family Law Act that, following payment of deductions as listed in 17 above, the Trustee for Sale to pay 50% of the net proceeds of sale of the Land to the Applicant and 50% of the net proceeds of sale of the Land to the Respondent. …

   …

   22. Leave to relist for directions as to compliance with these orders on seven (7) days notice.

   23. The Respondent pay the Applicant’s costs.

   24. Such further or other Order(s) as to the Court seems fit as to do justice and equity between the parties.

3. Other relief sought in the application was not pressed.  Following the trial of the matter (and in recognition of the sale of the Property and investment of the net proceeds of sale by the trustee), other orders were sought by the trustee.

4. The applicant is the trustee of the bankrupt estate of Barry Pescosta (“the bankrupt”). The bankrupt filed a debtor’s petition that was accepted on 21 January 2011[1]. This was the first date of bankruptcy pursuant to s.115 of the Bankruptcy Act. The bankrupt has lodged a Statement of Affairs.

   [1] affidavit of the trustee dated 21 March 2011 at [2]

5. The bankrupt and the respondent (Ms Byrne-Smith) met in or about 2006. They rented adjoining properties at 39-47 Orara Street, Waitara for some time and shared food costs and some domestic duties[2].

   
   

   On 26 September 2008, the bankrupt and Ms Byrne-Smith purchased the Property for $990,000.  Their title was as “Tenants in Common in Equal Shares”[3].  The bankrupt co-habited with Ms Byrne-Smith in the Property from October 2008 until late July 2010.

   [2] affidavit of the trustee dated 20 April 2011 at [8] and [9]

   [3] affidavit of the trustee dated 20 April 2011 at page 34

6. It is not in dispute that the bankrupt and Ms Byrne-Smith purchased the Property with a view to renovations for profit.  There is a conflict in the evidence as to the underlying agreement. The bankrupt’s evidence is there would be a straight 50/50 split of the net profits after costs of sale with no allowance for monies advanced by Ms Byrne-Smith[4]. 

   [4] affidavit of Ms Byrne-Smith dated 20 April 2011 at [19], [21], [24], [51] and affidavit of the bankrupt dated 2 August 2011 at [3], [18], [19]

7. A document purporting to be a Part VIIIAB Financial Agreement under the Family Law Act was executed by the bankrupt and Ms Byrne-Smith on 13 September 2010 (“the Purported Agreement”)[5]. It purported at paragraph 3(a) to reflect an agreement that the bankrupt and Ms Byrne-Smith would transfer the Property to the sole name of Ms Byrne-Smith for no consideration.  A transfer of the bankrupt’s interest in the Property to Ms Byrne-Smith with no monetary consideration was executed on 13 September 2010 (“the Transfer”)[6].

   [5] affidavit of bankrupt of 20 April 2011 at pages 59-72

   [6] affidavit of bankrupt at page 73

8. But for the execution of the Transfer, the bankrupt’s interest in the Property as tenant in common in equal share would have vested in the trustee and been available to creditors pursuant to ss.58 and 116 of the Bankruptcy Act.

9. The Property has been sold and 50 per cent of the net proceeds distributed to Ms Byrne-Smith.  Fifty per cent of the net proceeds of sale are held by the trustee pending determination of these proceedings. Ms Byrne-Smith has in addition received $130,000 previously held on trust by her solicitors. This was for repayment of loans from her parents of $100,000 and from Antonia Smalbil, a friend, of $30,000.

10. As the Property has been sold, many of the orders sought by the trustee fall away as they related to valuation of that Property.  The trustee moved on orders 1 – 7, 18 (with amendment by not referring to the $130,000), and 21-24 of the Application filed on 21 March 2011 as set out above.  In summary, the trustee’s application is as follows:

    a)the transfer of the bankrupt’s interest in the Property is void for absence of consideration pursuant to s.120 of the Bankruptcy Act;

    b)the transfer of the bankrupt’s interest in the Property is void as a transfer to defeat creditors pursuant to s.121 of the Bankruptcy Act;

    c)as the transfer of the bankrupt’s interest in the Property is void, that interest has vested in the trustee and a declaration may be made to that effect under ss.30 and 120 of the Bankruptcy Act;

    d)the Purported Agreement is not a Binding Financial Agreement under s.90UL of the Family Law Act; and

    e)further and in the alternative, that the Purported Agreement is not valid and should be set aside pursuant to s.90UM of the Family Law Act.

11. There is no cross claim. If, however, the Court assesses the matter under s.90SM of the Family Law Act, the trustee contends that there should be no alteration of the bankruptcy trustee’s interest in the vested property, being the net proceeds of sale without any deductions for debts claimed by Ms Byrne-Smith or further contributions after July 2010 when she and the bankrupt ceased cohabiting. A 50/50 split is said to be an accurate reflection of the contribution of the bankrupt and Ms Byrne-Smith, their intention as to the allocation of interest in the Property (reflected in the tenancy in common with equal shares) and reflects the position at general law with respect to matrimonial property as per Trustees of Cummins v Cummins (2006) 227 CLR 278 at 303. Nevertheless, the applicant trustee would accept a 60/40 division of the property in favour of Ms Byrne-Smith.

The evidence and submissions

1. The trustee proceeds on the basis of the application as ultimately pressed, filed on 21 March 2011.  That application is supported by the trustee’s affidavit made on 21 March 2011, the affidavit of Daniella Fazio made on 1 June 2011 and the two affidavits of Barry Pescosta (the bankrupt) dated 20 April 2011 and 2 August 2011.  The trustee also relies on the statement of affairs made by Mr Pescosta.  Mr Pescosta was cross-examined on his affidavits.

2. Ms Byrne-Smith relies on her own affidavit made on 2 June 2011 and filed on 3 June 2011.  She was also cross-examined on her affidavit. 

3. In addition, I also received the following exhibits:

   A1 – Statement of Affairs;

   A2 – List of Creditors;

   A3 – Death Certificate;

   A4 – Citibank Declaration;

   A5 – Memo to Citibank Group from aeria Country Floors, 24.06.2009;

   A6 – letter to Pescosta and Byrne-Smith from Assured Conveyancing, 29.08.2008;

   A7 – Contract for Sale of Land;

   A8 – Documents relating to quotes;

   A9 – Citibank Statement;

   A10 – Loan Agreement.

4. The trustee contends that the Purported Agreement entered into between the bankrupt and Ms Byrne-Smith should be set aside and not less than 40 per cent of the proceeds of the sale of the Property should be paid to the trustee for the purposes of the administration of the bankrupt estate. The trustee also contends that the Purported Agreement does not comply with the Family Law Act and is, in effect, a transfer for no consideration and an attempt to defeat creditors. The trustee also contends that the Family Law Act does not apply in any event because the relationship between the bankrupt and Ms Byrne-Smith was of less than two years duration (they were not married)[7]. 

   [7] See s.90SB of the Family Law Act

5. The trustee made the following supplementary submissions in relation to consideration:

   The Applicant submits that the Respondent’s submissions at [24] and [25] of her submissions that the Purported Agreement is supported by consideration cannot be accepted.

   Section 120 of the Bankruptcy Act (“the BA”) requires that the consideration for a transfer be not less than “market value”. The Transfer dated 13 September 2010 is “Without Monetary Consideration” – see page 73 of the Bankrupt’s affidavit dated 20 April 2011. Prima facie, no market value was provided in the sense described in Official Trustee v Lopatinsky (2003) 30 FamLR 499 at [94], [96] of being consideration construed in the “ordinary and commercial understanding of that term” and “as commercial people would construe it”. The requirement for consideration to be not less than “market value” expressly excludes what would “otherwise be thought to have value at common law” – Official Trustee v Lopatinsky (supra) at [95]. This exclusion would include performance of existing obligations under contract as relied on by the Respondent.

   In any event, it cannot be said the Respondent provided consideration equivalent to market value after 13 September 2010 when the Purported Agreement was executed. Any payment of mortgage obligations before that date was past consideration and therefore no consideration. These payments cannot be considered.

   The Respondent only paid the mortgage obligations from 13 September until before 1 January 2011, a total of about $23,834.82. From 1 January 2011, Joanne Smalbill paid the mortgage and the Respondent has been compensated for these payments from the $130,000 released from the proceeds of sale. These payments were not made by the Respondent and represent performance of contractual obligations by the parties due to compensation from proceeds of sale, not the Respondent solely. These payments cannot be considered.

   The “market value” of the Bankrupt’s Tenancy in Common in Equal Share of Pymble as at 13 September 2010 was based on 50% the possible sale price of $1,000,000 - $1,050,000 less outstanding loan of $820,658.68 less some costs of sale.  This is a range of 50% of $179,341.14 - $229,341.14 less some costs of sale i.e.: $89,670.57 - $114,670.57 less some costs of sale.

   This means, to be not less than market value, the consideration that should have been provided by the Respondent to the Bankrupt for the transfer of the Bankrupt’s interest in Pymble should have been in the range of $89,000 - $114,000 or thereabouts. This was not done.

   Therefore, there was no consideration for “market value” for the transfer of 13 September 2010 as required by section 120 of the BA.

6. Ms Byrne-Smith submits that the de facto relationship between the parties was of more than two years duration and that the Family Law Act applies. She submits that there was a proper basis for the Purported Agreement between her and the bankrupt and it would not be just and equitable to set aside that agreement because of the subsequent bankruptcy of one of the parties to it. In particular, Ms Byrne-Smith submits that she is entitled to recoup her initial investment in the purchase of the property which she is unlikely to recover in the event that the Purported Agreement is set aside and that the remaining proceeds of the sale of the Property are divided between her and the trustee.

7. In the alternative, if the Court sets aside the Purported Agreement, Ms Byrne-Smith contends that the Court should, under the Family Law Act, adjust the property interests of the parties to recognise the sole contribution made by Ms Byrne-Smith to the purchase of the property, her contribution to the development of it during the course of cohabitation and her sole contribution to the development and sale of the property after the relationship ended.

8. The trustee concedes that some adjustment in favour of Ms Byrne-Smith beyond a 50/50 division of the net proceeds of the sale is justifiable but submits that that adjustment should not exceed 10 per cent. 

Consideration

Application of ss.120 and 121 of the Bankruptcy Act to financial agreements made under the Family Law Act.

1. I accept the trustee’s submissions concerning the application of the Bankruptcy Act. The trustee may bring the application under ss.120 and 121 of the Bankruptcy Act and notwithstanding the fact that the Transfer was executed pursuant to the Purported Agreement. As the Purported Agreement was not an order of the Family Court or this Court, the Purported Agreement and the Transfer may be regarded as a single “transfer” under ss.120 and/or 121 of the Bankruptcy Act: Combis, Trustee of the Property of Peter Jensen (Bankrupt) v Jensen (2009) 179 FCR 150; [2009] FCA 778 (23 July 2009) per Collier J at [41]-[43] [51]. In that decision, Collier J dealt with an application to strike out proceedings brought by a trustee in bankruptcy to set aside a transfer of a bankrupt’s interest as joint tenant in land pursuant to a Binding Financial Agreement. The trustee’s application was pursuant to s.120 of the Bankruptcy Act. The strike out application sought to rely on the decision of Official Trustee in Bankruptcy v Mateo (2003) 127 FCR 217 in which the Full Federal Court found that as a transfer of property by a husband had been pursuant to Family Court orders, an application pursuant to s.120 of the Bankruptcy Act could not succeed.

2. Collier J in Combis at [41]-[42] and [51] distinguished the facts before her Honour from Official Trustee in Bankruptcy v Mateo (supra) on the basis there were no family law orders in place. The trustee therefore did not need to make an application to set aside orders and could rely on s.120 of the Bankruptcy Act. This was confirmed by the exclusion of “financial agreements” under Part VIIIAB of the Family Law Act from the definition of a “maintenance agreement” in s.5 of the Bankruptcy Act. This is significant as a maintenance agreement is exempted from s.120(1) by s.120(2)(b). Therefore, a financial agreement is not excluded from the operation of s.120(1) of the Bankruptcy Act or by extension s.121 of the Bankruptcy Act.

3. In drawing this conclusion, her Honour summarised the application of ss.120 and 121 of the Bankruptcy Act to a financial agreement under the Family Law Act as follows at [52]-[54]:

   Further, in my view the current legislative framework applicable to financial agreements contemplates that a trustee in bankruptcy may make application pursuant to both s 120 and s 121 of the Bankruptcy Act in the Federal Court to set aside a transfer pursuant to a financial agreement executed by the parties. In relation to the trustee’s application pursuant to s 120 of the Bankruptcy Act in the instant proceedings, it is clear that:

   ·    Section 120(2)(b) operates to specifically exclude transfers pursuant to maintenance agreements under the Family Law Act from the clawback effects of s 120(1).

   ·    However following the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) and the exclusion of “financial agreement” from the definition of “maintenance agreement” in s 5 of the Bankruptcy Act, the exclusion in s 120(2)(b) clearly no longer applies to financial agreements.

   ·    As explained by the Explanatory Memorandum to the Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth), the policy rationale for the amendment to the definition of “maintenance agreement” was to ensure that trustees can use the clawback provisions of the Bankruptcy Act to recover property transferred prior to bankruptcy pursuant to such an agreement.

   ·    The inference necessarily drawn as a result is that the legislature intended that a transaction pursuant to a financial agreement would not be protected in circumstances where subsequently a trustee in bankruptcy of a party to such an agreement seeks to have transactions set aside pursuant to s 120 of the Bankruptcy Act. This is notwithstanding the operation of s 90G of the Family Law Act, which provides that financial agreements are binding on the parties thereto without the necessity for an order of the Family Court.

   ·    The position is less clear in relation to s 121 of the Bankruptcy Act. Unlike s 120, s 121 makes no mention of maintenance agreements (or financial agreements). As I have already observed in this judgment, s 123(6) specifically provides that subject to s 121, nothing in the Bankruptcy Act invalidates, inter alia, a transfer made by the debtor before bankruptcy pursuant to a maintenance agreement. It therefore follows that a transfer of property pursuant to a maintenance agreement by a debtor who subsequently became bankrupt could be challenged by a trustee in bankruptcy pursuant to s 121. As I have also noted in relation to s 120, s 5 of the Bankruptcy Act now excludes financial agreements from the definition of maintenance agreement. This is a curious outcome, the reason for which is not clear. In my view a reasonable and logical explanation is that submitted by Mr McQuade for the applicant, namely that in the absence of a specific exemption for transactions undertaken pursuant to a financial agreement, such transactions are capable of being the subject of application by the trustee in bankruptcy of the transferor pursuant to s 121 of the Bankruptcy Act. Indeed this was the position prior to the 2005 amendments and in this respect there is (as I indicated earlier) particular relevance to the decision of Ryan J in Rambaldi [2008] FCA 1957, where his Honour accepted that a trustee in bankruptcy could apply pursuant to s 121 of the Bankruptcy Act to set aside an interest in real property following a financial agreement between parties to a marriage. (Another possible explanation, namely that the effect of the 2005 amendments to the Bankruptcy Act resulted in financial agreements being excluded from the operation of s 121, in my view is completely anomalous and has no merit.)

1. As the Purported Agreement is not an order of the Family Court or the Federal Magistrates Court, the trustee does not need to make an application to set aside the Purported Agreement under s.79A or s.90SM of the Family Law Act: Combis at [41] and [51].

2. The trustee’s application may therefore be dealt with solely under ss.120 and/or 121 of the Bankruptcy Act.

Is the transfer an undervalued transaction pursuant to s.120 of the Bankruptcy Act or was the transfer a transaction to defeat creditors, pursuant to s.121 of the Bankruptcy Act?

1. I accept the trustee’s submissions concerning the result of the application of s.120. The transfer (consisting of the Purported Agreement and the Transfer) is void against the trustee pursuant to s.120 of the Bankruptcy Act as it took place in the five years before the commencement of the bankruptcy and the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the Property.

2. For the purposes of s.120(1) of the Bankruptcy Act, “consideration” is to be construed in the “ordinary legal and commercial understanding of that term” and as “commercial people would construe it”: Official Trustee v Lopatinsky (2003) 30 Fam LR 499 (Federal Court of Australia) per Whitlam and Jacobson JJ at [94], [96]. This is affirmed by s.120(5) which excludes as consideration “matters which might otherwise be thought to have value at common law”: Official Trustee v Lopatinsky (supra) at [95]. The approach to be applied to the subject “transfer” is two-step and as follows:

   a)identify the consideration actually given; and

   b)if consideration was given “was its value less than the market value of the property transferred”?: Official Trustee v Lopatinsky (supra) at [96].

3. In determining both issues, two features of consideration and property settlements involving family members are to be considered as follows:

   a)The parties’ contributions to the marriage (both financial and non-financial) cannot not be regarded as consideration for a transfer because such contributions constitute past consideration and past consideration is no consideration : Official Trustee v Lopatinsky (supra) at [97]; Official Receiver v Huen [2007] FMCA 304 (16 March 2007) per Lucev FM at [31]. This applies mutatis mutandis to de facto relationships.

   b)An informal matrimonial separation agreement is no consideration even if supported by a forbearance to sue as a party has opportunities under the Family Law Act to approach the Court to seek further property settlement: Official Trustee v Lopatinsky (supra) at [103]-[109]; Official Receiver v Huen (supra) at [31]. This would apply equally to financial agreements as these may be set aside or terminated by the Family Court or the Federal Magistrates Court on application by a party under ss.90K or 90UM of the Family Law Act.

4. The fact that the Purported Agreement and Transfer may have been executed by the bankrupt out of love or affection for Ms Byrne-Smith is expressly not consideration due to s.120(5)(d) of the Bankruptcy Act which expressly excludes those emotions as consideration.

5. The bankrupt’s interest in the Property was held as a tenant in common in equal share with Ms Byrne-Smith. As the bankrupt’s share was not less than 50 per cent, for consideration to be “commercial” and not less than market value as required by s.120(1)(b) of the Bankruptcy Act,

   
   

   Ms Byrne-Smith should have paid the bankrupt 50 per cent of the sale or market price of the Property, less costs of sale, less the discharge of the registered mortgage to Citigroup Ltd.  This did not occur.

6. There was no valuation of the Property immediately prior to sale but the trustee submits the sale price should be accepted as it was at arm’s length and apparently for market value. The sale price was $1,390,000.

7. The fact that the Property has been sold and the bankrupt’s interest no longer exists in specie but in a substituted form, being the net proceeds of sale, does not prevent the application of s.120 as the substituted form vests in the trustee: see Anscor Pty Ltd v Clout(Trustee) (2004) 135 FCR 469 at 482, [43](i).

8. Had a proper consideration been provided for the 50 per cent share held by the bankrupt as tenant in common with an equal share, then the Purported Agreement and Transfer would have required Ms Byrne-Smith to pay to the bankrupt approximately 50 per cent of the net value of the Property. In the absence of such payment, the Purported Agreement and Transfer as a “transfer” is void as against the trustee pursuant to s.120 of the Bankruptcy Act as Ms Byrne-Smith gave no consideration or gave consideration of less value than the market value of the property.

9. The trustee submits further that the Purported Agreement and Transfer as a “transfer” is void as the bankrupt’s legal title to the Property would have been part of his estate or would probably have been available to creditors. The trustee asserts that it may be inferred that the main purpose of the transfer was to prevent that legal interest from becoming divisible among creditors as per s.121(1)(b)(i) or else to hinder or delay the process of making that property available as per s.121(1)(b)(ii).

10. I accept that the intent of the bankrupt in the transfer of the tenancy can be inferred from all surrounding circumstances: Cannane v J Cannane Pty Ltd (In Liq) (1998) 192 CLR 557 at 566 per Brennan CJ and McHugh J. That intent may hypothetically be inferred from the fact the transfer reduced from the property available for the payment of the debts “an amount without which the debts cannot be paid” per Lord Hatherley LC in Freeman v Pope (1870) 5 Ch App 538 at 541; applied Cannane (supra) at 566 and PT Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515. That inference may be applied equally to both present and future creditors: Cannane (supra) at 566; Barton v DCT (1974) 131 CLR 370 at 374.

11. It is open to the Court to infer, based on the circumstances surrounding the creation of the Purported Agreement and Transfer, that the intention of the bankrupt as transferor was to prevent his legal interest from being divisible or to delay or hinder that process. The bankrupt’s affidavit dated 20 April 2011 states that he informed Ms Byrne-Smith that his 50 per cent interest in the net proceeds of sale were needed to meet a tax liability.  Her response was allegedly that she did not care and she wanted the Purported Agreement and Transfer completed to avoid any moneys going to the “Tax Department”[8].  The trustee contends that in acquiescing to Ms Byrne-Smith’s requests that he complete the Purported Agreement and Transfer, the bankrupt’s main purpose in making the transfer was to prevent his property (being his interest in the Property) from being divisible amongst creditors or else hinder or delay that process.

    [8] affidavit of the bankrupt dated 22 April 2011 at [50] and [51]

12. Although not a consideration under the section, the trustee further submits that a similar intention on the part of Ms Byrne-Smith may be inferred from the fact she knew in February 2010 of the bankrupt’s outstanding tax returns yet made no allowance for these obligations in the Purported Agreement (despite having drafted it)[9].

    [9] affidavit of Ms Byrne-Smith made on 2 June 2011 at [47] and page 4 of the Purported Agreement as to liabilities located in affidavit of the bankrupt dated 20 April 2011 at page 62

13. The trustee disputes that Ms Byrne-Smith acted in good faith pursuant to s.121(4) of the Bankruptcy Act for the following reasons:

    a)there was no consideration for market value;

    b)it would have been known and reasonably inferred by Ms Byrne-Smith that the main purpose was to avoid tax liabilities;

    c)it could be reasonably inferred by Ms Byrne-Smith that the bankrupt was or was about to become insolvent. This is evidenced by Ms Byrne-Smith’s conversation on 13 July 2010 with the bankrupt in which he stated that he “may end up having to go bankrupt”[10].

    [10] affidavit of Ms Byrne-Smith dated 2 June 2011 at [59]

14. I do not accept the trustee’s contentions regarding the application of s.121. The bankrupt gave evidence that he was tricked into signing the Transfer at the time he signed the Purported Agreement. These were plainly separate documents and I find it improbable that the bankrupt would be so careless on an issue so fundamental to his interests to sign a transfer document without paying attention to what he was signing. I do not accept that the bankrupt unknowingly signed the title transfer. Both the bankrupt and Ms Byrne-Smith also gave evidence in cross‑examination about their motivation for the Purported Agreement. That evidence was, in fundamental respects, not inconsistent and I accept it. The couple were in a difficult position at the time of their separation. They had made a substantial investment in terms of money, time and labour into the acquisition and improvement of the Property. The bankrupt was not willing to make a further contribution of time, materials or labour to complete the work. Ms Byrne-Smith was willing to complete the work but lacked the funds to do so. A forced sale at that time appeared likely to result in a capital loss. Ms Byrne-Smith had the opportunity to borrow funds from her father to complete renovations to the Property but he was only willing to advance the money if the Property was solely Ms Byrne-Smith’s. Ms Byrne-Smith’s father was seriously ill at the time and he subsequently died. It is entirely understandable that a dying father would wish to assist his daughter but would be unwilling to assist her estranged partner. The bankrupt gave evidence, which I accept, that he was willing to accept this arrangement because of his respect for Ms Byrne-Smith’s late father[11]. I find that the bankrupt intentionally signed both the Purported Agreement and the Transfer.

    [11] It appears from the evidence of Ms Byrne-Smith that her mother was also a party to the loan.  In any event, she is the beneficiary of her late husband’s estate and thus was entitled to repayment of the loan.

15. Based upon that evidence I do not accept that the trustee has established that the transfer was void pursuant to s.121 of the Bankruptcy Act. The purpose of the transfer was not to defeat creditors. The purpose of the transfer was to secure funds in order to complete the renovation of the Property that it could be sold with a possibility of a capital gain. The bankrupt gave evidence, which I accept, that he had been advised by his then solicitor not to sign the Purported Agreement because it was “worthless”. He signed it anyway in order to satisfy Ms Byrne-Smith’s father that he had not retained an interest in the Property. He may have held an expectation that at a later time he might make a claim for a share of the Property. Indeed, he is doing so through the trustee. Although the transfer was not a transaction to defeat creditors, it was a transaction without consideration and accordingly it is void pursuant to s.120 of the Bankruptcy Act.

Property vested in applicant 

1. As the transfer is void pursuant to s.120 of the Bankruptcy Act, the bankrupt’s interest in the Property vested in the trustee on 21 January 2011. A declaration to this effect is therefore apposite.

2. The bankrupt’s share of the net proceeds of sale currently retained by the trustee should therefore be available to creditors. The remaining question is what the value of that share is. The bankrupt’s interest in the property which vested in the trustee was 50 per cent of the net proceeds of the sale of the Property but that share may be altered by application of the Family Law Act or the general law.

Does the Family Law Act apply?

1. The Family Law Act has no application if the parties’ de facto relationship was one of less than two years. The following evidence supports the proposition that the Family Law Act does not apply because the relationship between the parties was of less than two years’ duration:

   a)Ms Byrne-Smith gave evidence that she and the bankrupt commenced cohabitation in October 2008;

   b)Ms Byrne-Smith gave evidence that she had dated the bankrupt between October 2006 and October 2008 but her evidence did not support the formation of a de facto relationship prior to October 2008;

   c)Ms Byrne-Smith gave evidence that she and the bankrupt separated on 30 April 2010, although they continued living under the same roof.  They slept in separate rooms.  She continued to supply and cook meals for the bankrupt and his sons on the basis that the bankrupt was not working and had no money to buy food for himself and his sons;

   d)Ms Byrne-Smith sought the advice of a psychologist and had discussions with the bankrupt about their living arrangements and financial arrangements between them;

   e)between 10 July and 13 July 2010 Ms Byrne-Smith and the bankrupt agreed upon the Purported Agreement and the Transfer and the bankrupt and his sons moved out shortly afterwards.

2. I conclude that the de facto relationship between Ms Byrne-Smith and the bankrupt was of less than two years duration and the Family Law Act does not apply. It follows that it is unnecessary to consider the setting aside of the Purported Agreement under the Family Law Act (it being void by reason of the operation of the Bankruptcy Act in any event). It is necessary to consider the contention of Ms Byrne-Smith (and the concession of the trustee) that there should be an adjustment of property interests between the parties to reflect the contributions of the parties to the acquisition, maintenance, development and sale of the Property. That contention must be addressed by reference to the general law.

3. Ms Byrne-Smith did not present as a forthright witness under cross-examination.  She failed to concede significant contributions made by the bankrupt of a financial and non-financial nature to the improvement of the Property, including direct deposits into her bank account, and work done that resulted in a comment by a real estate agent that in August 2010 the standard of works done to the Property were of a “very high standard”.  Her alleged reduction of employment as a naturopath and masseuse at St Ives cannot be accepted as there was a continuity of deposits into her bank account.  There were significant contributions by the bankrupt which Ms Byrne-Smith has either attempted to downplay or disregard entirely.  Nevertheless, Ms Byrne-Smith’s contributions after the bankrupt left the Property were real and substantial.  It was she who used the funds supplied by her late father to complete the renovation work on the Property.  She supervised that work.  She ensured, with the assistance of Ms Smalbil, that mortgage repayments continued to be made.  Without that contribution, the funds ultimately realised on the sale of the Property would have been substantially less.

A resulting trust

1. Ms Byrne-Smith relies upon the principles of Muschinski v Dodds (1985) 160 CLR 583 in the event that the trustee is successful in having the Purported Agreement set aside. This argument cannot and should not be accepted on the basis of the available evidence. Counsel for

   
   

   Ms Byrne-Smith quoted from the decision of his Honour Gibbs CJ in Muschinski v Dodds (supra) that a presumption of advancement cannot arise in respect of a woman in a de facto relationship who puts property in a man’s name. However, Gibbs CJ went on to state that the presumption of a resulting trust may be rebutted by evidence that “in fact the real purchaser intended that the other transferee should take a beneficial interest”[12] and “where only one has provided the money it is his or her intention alone that has to be ascertained”[13].  The evidence admissible to establish the intention of the real purchaser will comprise “the acts and declarations of the parties before or at the time of the purchase … or so immediately thereafter as to constitute part of the transaction”[14].  Gibbs CJ found the presumption of a resulting trust was rebutted by such evidence. Similar findings were made by Mason J at page 599 and Deane J at page 611 to rebut the presumption of a resulting trust in favour of Ms Muschinski as the “real purchaser” and the woman in the de facto relationship with Mr Dodds.

   [12] see 160 CLR at 590

   [13] ibid

   [14] ibid

2. The conclusions that a presumption of resulting trust may be rebutted by evidence of the intentions of the real purchaser are consistent with the reasoning of the High Court in Calverley v Green (1984) 155 CLR 242 per Gibbs CJ 155 CLR at 246, 251; Mason and Brennan JJ 155 CLR at 259; and Deane J 155 CLR at 269. Notably, in Calverley v Green (supra) Gibbs CJ 155 CLR at 251 had regard to the joint and several liability to service a home loan and the payments made by both of that loan as a factor in evidence rebutting the presumption of advancement. Gibbs CJ then stated as follows[15]:

   Where there are two purchasers, who have contributed unequal portions, but have taken the purchase in their joint names, the intentions of both are material. Even if the parties had no common intention, the intentions of each may be proved, for the purpose of proving or negating that one intended to make a gift to the other.

   [15] 155 CLR at 251

3. In this instance, the only reliable evidence is contemporaneous documentation which supports a finding the presumption in favour of a resulting trust has been rebutted based on the intentions of both purchasers and Ms Byrne-Smith in particular.  That evidence is the following:

   a)The Contract for Sale for the original purchase of the Property gave the option to have different shares as tenants in common but the bankrupt and Ms Byrne-Smith elected to purchase as tenants in common in equal shares: see exhibit A7.

   b)The letter from the conveyancer to Ms Byrne-Smith and the Bankrupt confirming instructions that the Property was to be purchased as tenants in common in equal shares: see exhibit A6.

   c)The transfer to Ms Byrne-Smith and the bankrupt of the Property as tenants in common in equal shares: see page 30 of the affidavit of the Bankrupt dated 20 April 2011.

   d)The obtaining of a loan and mortgage from Citibank for the purchase of the Property with the bankrupt and Ms Byrne-Smith as joint applicants and with joint and severally liable for repayments: see exhibit A4. Subsequently, the bankrupt contributed to repayments of that loan. This is analogous to Calverley v Green (supra) where the presumption of a resulting trust was rebutted.

4. This evidences an intention on the part of Ms Byrne-Smith that the bankrupt was to take an immediate, unconditional legal interest in the Property that was not subject to a resulting trust reflecting the contribution of Ms Byrne-Smith to the purchase price.  This is also confirmed by the fact that the Purported Agreement makes no mention of the Property being held pursuant to a trust reflecting the contribution of Ms Byrne-Smith to the initial purchase of the Property.  This is remarkable, given the fact that the document was drafted by solicitors and, if a resulting trust were presumed, it should have been referred to within the body of that document.  Further, were the Property genuinely held on a resulting trust basis the Purported Agreement would not have been necessary as Ms Byrne-Smith’s position would have been adequately protected in equity.  Finally, no contemporaneous document was created by Ms Byrne-Smith reflecting an obligation to repay the initial purchase moneys.

Constructive trust

1. The alternative proposition for a trust posited by Ms Byrne-Smith appears to be that of a constructive trust based on contributions made by her.  The trustee submitted that on an application of the principles of Muschinski v Dodds (supra) and Baumgartner v Baumgartner (1987) 164 CLR 137, it is unconscionable for Ms Byrne-Smith to deny the contributions made by the bankrupt and his interest in the Property. On the execution of the Transfer by the bankrupt giving Ms Byrne-Smith full title to the Property, she became a constructive trustee of the bankrupt’s share based on his financial and non-financial contributions. This submission is consistent with my reasoning in Official Trustee in Bankruptcy v Brown & Anor [2011] FMCA 88 at [30]-[31].

1. The bankrupt’s financial and non-financial contributions in the course of co-habiting with Ms Byrne-Smith were significant.  The bankrupt earned more than Ms Byrne-Smith as is evidenced from his tax returns and her concessions under cross-examination. His income during cohabitation was used to contribute to the mortgage and pay for renovation materials at the expense of not paying creditors, including the Australian Taxation Office. His labour and tools were used to conduct renovations and improvements to the Property which were described in the valuation by a real estate agent in August 2010 as being of a “high standard”. In addition, he was assisted in his work by his son.

2. It is not correct to state that the trustee has not adduced any evidence by the bankrupt to substantiate claims of financial contributions.  That evidence of a financial contribution is reflected in the bankrupt’s tax returns which are described on a net basis at [66] of the affidavit of the bankrupt dated 20 April 2011 as well as the ANZ bank statements which show multiple withdrawals from Bunnings.  Bunnings supplies were bought for the purpose of the renovations.  When the bankrupt had a downturn in paid work he continued his renovations of the Property.  On this basis, the financial and non-financial contributions of the bankrupt can be fairly described as 50/50 during cohabitation. 

3. Ms Byrne-Smith takes issue with the evidence of the bankrupt that during the period of cohabitation he may have earned up to $300,000.  This was, however, an estimate over the period of cohabitation.  His tax returns for the financial years ended 30 June 2009 and 30 June 2010 confirm the reliability of this figure.  The bankrupt’s total income for 30 June 2009 was $110,935[16].  The total income of the bankrupt for the year ended 30 June 2010 was $105,722[17].  The total business income of the bankrupt for the financial year ended 30 June 2009 was $135,354[18].  The total business income of the bankrupt for the financial year ended 30 June 2010 was $134,403[19].  Assuming that reliance can be placed on the total business income figures for 30 June 2009 of $135,354 and 30 June 2010 of $134,403, being a total of $269,757, the bankrupt’s estimate of total earnings during the period of cohabitation of about $300,000 is not unreasonable, if somewhat inaccurate.

   [16] at page 96 of the affidavit of the bankrupt dated 20 April 2011

   [17] at page 109 of the affidavit of the bankrupt dated 20 April 2011

   [18] at page 103 of the affidavit of the bankrupt dated 20 April 2011

   [19] at page 117 of affidavit of the bankrupt dated 20 April 2011

4. The question then becomes what allowance should be made for the contributions made by Ms Byrne-Smith before cohabitation and after the date of separation.  The trustee submits that no allowance should be made for the loans of $130,000 as those debts have been repaid.  I accept that submission.  Any claim by Ms Byrne-Smith to have repaid all of the mortgage after July 2010 should not be accepted, given her concessions that in fact Joanne Smalbil met mortgage repayments from December 2010.  Ms Byrne-Smith conceded under cross-examination that the payments of the mortgage by her after July 2010 totalled $23,834.82.  Ms Byrne-Smith bears the onus of proof that she should retain all of the proceeds of sale on a constructive trust basis and she has not discharged this onus. Her assertions that she made total contributions of $243,699.13 as specified at [86] of her affidavit of 2 June 2011 are not reliable for the following reasons:

   a)direct building costs are not verified by proper documentation.  There is no assurance that the transactions that appear in her bank accounts were not actually for expenses associated with her business.  She conceded that there was an intermingling of funds of a personal and business nature.  Further, an analysis of the exhibit “ee” annexed to the post hearing submissions of the trustee shows total cash payments to contractors was only $44,677.28.  Finally, the schedule of works is unreliable as the costs of roofing were significantly exaggerated and the whole schedule was copied from quotes provided by a contractor, Living Space;

   b)site servicing costs in the absence of receipts cannot be accepted as $41,735.52. Many of these costs would have been met by the moneys loaned by Ms Byrne-Smith’s parents and Joanne Smalbil;

   c)the value of Ms Byrne-Smith’s labour should be treated with caution by the Court, given the concessions made under cross-examination that there was a continuation of employment as a masseuse at the same rates and income after the date of separation as before separation.

5. The trustee submits that, if there is to be an adjustment in favour of

   
   

   Ms Byrne-Smith, it should be an adjustment of not more than 10 per cent increasing her entitlement to the total proceeds of sale (after deductions of the mortgage and the repayment of $130,000) to 60 per cent.  This concession has been made by the trustee at hearing and in post hearing submissions to reflect the termination of the relationship and that Ms Byrne-Smith did complete the renovations of the Property (albeit with funds borrowed from her parents that have been repaid). The trustee concedes that of necessity Ms Byrne-Smith would have performed some supervision of tradesmen and took steps to have the property ready for sale, including dealing with real estate agents.  That concession was properly made.

6. Ms Byrne-Smith has relied on the Court of Appeal decision of Pennimpede v Pennimpede [2010] NSWCA 121 (21 May 2010) and the decision at first instance[20] to assert that the adoption of liability for a mortgage is good consideration.  That case is distinguishable from the facts here on the basis that, as part of the overall transaction, a liability under an existing mortgage and loan was discharged and there was a refinance by the beneficiary of the settlement.  In this matter there was no discharge and refinance by Ms Byrne-Smith and the bankrupt remained liable to the mortgagee and lender on a joint and several basis until sale of the Property.  Further, all payments of the Citibank loan from December 2010 were made by Ms Smalbil and not by Ms Byrne-Smith.  Her submission that there was consideration given by way of an adoption of the obligation to repay the loan to the mortgagee was based upon the Purported Agreement and is not supported by the evidence.

   [20] [2009] NSWSC 85

7. I accept that prior to cohabitation Ms Byrne-Smith contributed $248,473.10 being the deposit, further contribution towards purchase, stamp duty and conveyancing fees, insurance and removalists fees for herself and for the bankrupt.  I further accept that after separation,

   
   

   Ms Byrne-Smith contributed $23,834.82 towards the mortgage and further funds towards the cost of renovations (although these are not quantifiable given the state of the evidence and the advance of funds from her parents).  She also made a non financial contribution by way of time.  The amount held by the trustee on deposit from the proceeds of the sale of the Property (after repayment of the loans to Ms Byrne-Smith’s mother and Ms Smalbil) is $264,375.63.  Ms Byrne-Smith’s contribution prior to and following cohabitation in my view probably equals that amount, however her entitlement to the remaining proceeds of sale is subject to the value of the bankrupt’s contributions to the Property during cohabitation (which I already found were the same as the value of the contributions of Ms Byrne-Smith over the same period).  Further, as I have already found, it was not the intention of

   
   

   Ms Byrne-Smith and the bankrupt at the time the Property was purchased that her sole contribution to the acquisition of the Property would entitle her to a greater share of the equity in the Property. The legal interest which she and the bankrupt took were the same. The Purported Agreement altered that interest but the purpose was to secure funds from Ms Byrne-Smith’s father, not to reflect her financial contribution prior to cohabitation. 

8. It is, in my view, impossible to take a strict mathematical approach to a fair and equitable division of the funds now held by the trustee.  It is fair and equitable (as the trustee concedes) that Ms Byrne-Smith should take a greater share than the trustee, reflecting her contributions prior to cohabitation and after separation, as well as her equal contribution during cohabitation.  The trustee contends that Ms Byrne-Smith should receive no more than 60 per cent of the funds retained.  I accept the trustee’s submission.  While that distribution leaves Ms Byrne-Smith well short of recovery of her initial contribution of the purchase of the Property, it was not her apparent intention at the time of the purchase that she should be guaranteed any particular return upon the ultimate sale of the Property. 

9. The funds held on deposit by the trustee have been earning interest.  That interest should be divided between the parties in the same proportions as the principal sum.  Ms Byrne-Smith should receive 60 per cent of the interest and the trustee 40 per cent.

10. I will make orders consistent with these conclusions.

11. I will hear the parties as to costs.

I certify that the preceding sixty (60) paragraphs are a true copy of the reasons for judgment of Driver FM

Date:  22 December 2011