The Official Trustee in Bankruptcy v Martin, C.T. & M.J

[1990] FCA 498

Re: THE OFFICIAL TRUSTEE IN BANKRUPTCY
And: CHARLES TERRENCE MARTIN AND MARLENE JOAN MARTIN
No. T G5 of 1990
FED No. 498
Bankruptcy
24 FCR 504
100 ALR 541

COURT

IN THE FEDERAL COURT OF AUSTRALIA

TASMANIA DISTRICT REGISTRY
GENERAL DIVISION
Jenkinson(1), Beaumont(1) and Hill(1) JJ.

CATCHWORDS

Bankruptcy - Settlement - whether made in favour of "purchaser for valuable consideration" - Bankruptcy Act 1966 s.120(1) and (2).

HEARING

HOBART

#DATE 11:9:1990

Counsel and Solicitors Mr J.G. Larkins QC and
for Appellant: Mr G.T. Bigmore instructed by

Australian Government Solicitor

Counsel and Solicitors Mr E.W. Gillard QC and
for Second Respondent: Mr. P.L. Jackson instructed by

Messrs Griffits and Jackson

ORDER

1. The appeal be dismissed.

2. The appellant pay the costs of the appeal of the second respondent.

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

JUDGE1

The estate of the first respondent, Charles Terrence Martin, was sequestrated on 4 March 1988. The appellant, the Official Trustee in Bankruptcy, the trustee in bankruptcy of Mr Martin's estate, instituted proceedings in the Supreme Court of the State of Tasmania, exercising federal jurisdiction in bankruptcy, seeking a declaratory order that the transfer from Mr Martin to his wife, Marlene Joan Martin, the second respondent, of his one half share in certain land, which transfer was registered on 10 April 1986, was void as against the trustee under s.120(1) or (2) of the Bankruptcy Act 1966 ("the Act"). Consequential relief was also sought. The Supreme Court dismissed the application. The Official Trustee now appeals from this decision.

The facts as found by the Supreme Court

1. The material facts, as found by the Supreme Court, may be summarised as follows.

2. For many years Mr and Mrs Martin had been the registered proprietors, as tenants in common in equal shares, of the land in Certificate of Title Volume 3868 Folio 98, upon which was erected a dwelling house known as 19 Beechworth Road, Sandy Bay ("the land"). Mr and Mrs Martin occupied the premises as their matrimonial home. Mr and Mrs Martin were directors and shareholders of a group of family companies referred to in the Supreme Court as the Martin Group ("the Group").

3. In February 1983 advice was sought from a solicitor, Mr P M Roach, with respect to a proposed reorganisation of the affairs of the Group. Mr Roach's advice referred to the objectives of what was proposed as being to:
   

"(a) divide the Corporate property equally between Mr and Mrs Martin;

(b) ensure that losses which might be experienced in the future be isolated from areas of successful endeavour; and

(c) avoid any disturbance to existing tax structures."

1. Mr Roach's advice was discussed with Mr Whitehouse, an accountant acting for the Group. In consequence, one of the companies in the Group, Claremont Shopping Village Centre Pty Limited, was liquidated and a dividend on winding up of $1,062,114 was distributed to each of Mr and Mrs Martin. As a result of a series of transactions the accounts of Charles Martin Constructions Pty Limited, another member of the Group, showed a credit balance as at 30 June 1984 of $1,090,650 in the joint names of Mr and Mrs Martin. That credit balance derived substantially from those dividends.

2. In January 1985 Mornington Tenpin Pty Limited, another member of the Group, requested a loan of $1,846,000 from the Savings Bank of Tasmania. The Bank approved the application on condition that Mr Martin guarantee the repayment of the loan and interest. On 15 May 1985 Mr Martin executed a guarantee in favour of the Savings Bank of Tasmania. Shortly before, on 10 April 1985, Mr Whitehouse wrote a letter to Mr Drake, solicitor for the Martin family, in the following terms:
   "Re Charles Martin
   

We enclose copy of memorandum to our above mutual client. Would you please establish the least value that Charles can transfer his share of the residue, (sc residence) unit and holiday shack to Mrs Martin. Would you also confirm that the consideration between the parties can be executed by journal entry in the books of account. Charles would like your opinion as to the `buy back' proposal in our memo. We await your considerations."

1. In substance the memorandum recorded these matters:
   

(a) That Mr and Mrs Martin had signed a personal guarantee to the Savings Bank of Tasmania and that in consequence a number of his assets including his half share of the house and a shack at Surveyors Bay were "at risk",

(b) That between them, Mr and Mrs Martin had a loan account with Charles Martin Constructions Pty Ltd of $1,090,650,00 which Mr Whitehouse estimated was equitably owned by them in the proportions of $172,912.00 by Mr Martin and $917,738.00 by Mrs Martin.

(c) That because of the nature of her loan, Mrs Martin could pay for any assets acquired by her from Mr Martin by a journal entry transfer of funds.

(d) That Mr Whitehouse recommended that Mrs Martin should purchase Mr Martin's share in the residence, shack and a Queensland unit, but should give him the option to repurchase the same should he be released from the guarantee, and that the consideration be paid by journal entry breaking up the loan account in the books of Charles Martin Constructions Pty Ltd.

1. In April 1985 Mr Drake informed Mr Whitehouse that he had applied for extracts from the Valuation Roll in respect of the Tasmanian properties. He further advised that he could see no reason why the consideration should not be provided by the loan accounts in the company provided that appropriate authority was given by Mr and Mrs Martin and that the buy-back proposal could be put into operation if required. However, Mr Drake's opinion was that the option should be an option to purchase the property as joint tenant only with Mrs Martin, that it should be personal to Mr Martin and incapable of assignment and that it should lapse in the event of his death or insolvency. In the valuation extracts it was stated that the value of the land as at 30 June 1984 was $180,000.

2. Shortly before this, on or about 1 March 1985, Mr Whitehouse prepared a document which was signed by Mrs Martin. That document, tendered as Ex. P9, read:
   "The Accountant,
   

Charles Martin Constructions Pty Ltd., 24 Murray Street,

Hobart. TAS 7000

I, Marlene Joan Martin hereby authorise and instruct you to charge to my loan account the settlement costs for my purchase of assets joint (sic) with Charles Terrence Martin. The amount so charged is to be in accordance with the documents of settlements as prepared by my solicitors Messrs Murdoch, Clarke, Cosgrove and Drake."

The document bore a typewritten date 1 March 1985. At some time between 12 April 1985 and 31 July 1985 Mr Whitehouse caused to be made a series of journal entries in the books of account of Charles Martin Constructions Pty Limited. The first set of entries apportioned the joint loan account in the sum of $1,090,650 between Mr and Mrs Martin in the proportion of $917,738 to Mrs Martin and $172,912 to Mr Martin. The second set of entries involved debiting Mrs Martin with $90,000 and crediting Mr Martin with the same amount. These entries were accompanied by the notation "purchase 1/2 house". The net result of these and other entries not presently material made at the same time was that Mrs Martin's account with Charles Martin Constructions Pty Limited stood at $337,017 and Mr Martin's account with that company stood at $13,238.

1. Some time prior to July 1985 Mr Drake prepared and arranged to be signed by both Mr and Mrs Martin a document, which became Ex. D1, in the following terms:
   "The Directors,
   

Charles Martin Constructions Pty. Ltd., 7A Magnet Court,

Sandy Bay,

TASMANIA 7005

Dear Sirs,

We wish to advise that we have agreed that Charles Martin will transfer his half share in the house at 19 Beechworth Road and the holiday cottage at Surveyors Bay to Marlene Martin, his wife, at $90,000 and $10,000 respectively and that settlement should be effected immediately by debiting the Charles Martin loan account and crediting the Marlene Martin loan account with $100,000. Yours faithfully,

Charles T. Martin (signed) Marlene J. Martin (signed)"

1. (It will be seen that there is an error in this document. It is clear from the evidence that it was intended by both parties that the account of Mrs Martin should be debited and that the account of Mr Martin should be credited. However, nothing turns on this mistake.)

2. The date 1 March 1985 was typed on the document. A memorandum of transfer was prepared and forwarded by Mr Drake to Mr Martin for signature. The transfer was returned to Mr Drake in March 1986 signed by Mr Martin but was not witnessed. Subsequently Mr Drake prepared a contract of sale for the land which was signed by Mr and Mrs Martin. However, it was not dated and the consideration was left blank. After having obtained the signature of Mr and Mrs Martin to this contract Mr Drake learnt of the existence of Ex. D1 which he regarded as sufficient evidence for stamp duty purposes of a contract of sale made the previous year. He then arranged for an addition to be made to Ex. P9. That addition was in the following terms:
   "We C T and M J Confirm that the transaction
   

referred to above relates to the transfer of CTM 1/2 share in the properties at 19 Beechworth and Surveyors Bay and that the transaction took place at Government Valuation namely 90,000 and 10,000 respectively. M J Martin 7.3.85

C T Martin 7.3.85"

The two dates "7.3.85" were handwritten by Mr and Mrs Martin. As has been mentioned, the memorandum of transfer from Mr Martin in favour of Mrs Martin of the land was registered on 10 April 1986.

The case put by the trustee in the Supreme Court

1. As has been said, the trustee put his case in the Supreme Court in two alternative ways.

2. In the first place, the trustee relied on s.120(1) of the Act, which, so far as material, provided as follows:
   

"120(1) A settlement of property...not being -

(a) ...made in favour of a purchaser...in good faith and for valuable consideration;

(b) ....

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

1. (Mr Martin's bankruptcy commenced on 27 January 1988.)

2. In the second place, the trustee relied upon s.120(2) which, so far as material, provided as follows:
   

"(2) A settlement of property...is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 5 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy, unless the parties claiming under the settlement prove -

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

The conclusions reached by the Supreme Court

1. The conclusions reached by the Supreme Court may be stated in a summary way as follows:
   (1) The letter (being Ex. D1) bearing date 1 March 1985, but in fact executed at some date prior to July 1985, evidenced a binding agreement for the sale of the land and constituted a disposition in equity by Mr Martin of his interest in the land to Mrs Martin.
   (2) The consideration for the sale expressed in Ex. D1, viz., $90,000, represented the market value of Mr Martin's interest in the period between March and August 1985.
   (3) There was a valid assignment in writing by Mrs Martin to Mr Martin of part of her chose in action against the company, being her loan account with the company, to the extent of $90,000.
   (4) By the end of July 1985, Mrs Martin had given valuable consideration equal to the value of Mr Martin's interest and there was no reason to suppose that Mrs Martin's loan account was worth less than its full face value at any material time.
   (5) Even if there were no effective disposition by Mr Martin of his interest prior to the date of the registration of the transfer, s.120(2) had no operation because the disposition (the alleged settlement) was in favour of a purchaser in good faith and for valuable consideration.

2. Accordingly, the Supreme Court ordered that the application be dismissed.
   The trustee's challenge to the conclusions of the Supreme Court

3. In this Court, the trustee does not seek to attack the findings of the Supreme Court with respect to the primary facts. However, the trustee now submits that, even if those facts be accepted, in all the circumstances of the case, Mrs Martin should not be regarded as a purchaser in good faith and for valuable consideration for the purposes of s.120(1). The trustee's argument may be relevantly summarised as follows:
   

1. "Purchaser...for valuable consideration" requires that the transaction is a real and commercial transaction. The consideration which is given must not be nominal, trivial or colourable but must be a consideration which is appropriate for a commercial transaction.

2. Mrs Martin was not a participant in any transaction which could be fairly or properly characterised as being an ordinary commercial transaction between parties at arms' length:

(a) Mrs Martin did not intend at any time to enter into any legally enforceable relationship with Mr Martin in connection with his interest in the land;

(b) Mrs Martin did not bargain for any benefit arising from any dealing with Mr Martin;

(c) Mrs Martin did not exercise and was not permitted to exercise any role in the decision-making processes leading to the execution of the transfer or to the entry into any other arrangement or agreement;

(d) Mrs Martin did not exercise any freedom of her will in relation to the events leading to the execution of the transfer or the entry into any arrangement or agreement;

(e) Mrs Martin did not understand the purported transaction;

(f) Mrs Martin was entirely under the domination of the will of Mr Martin and his advisers.

1. We have difficulty in accepting the thrust of these arguments. We accept that the consideration must be real and substantial and not merely nominal, trivial or colourable. In our view, in the present case a real and substantial consideration was provided by Mrs Martin.

2. In Barton v. Official Receiver (1986) 161 CLR 75, the meaning of s.120(1)(a) was considered by the High Court in proceedings for a declaration that a payment of $170,000 by a bankrupt to his uncle was void under s.120(1). The payment was made in the form of an unsecured loan for 20 years. No part of the principal was repayable until the uncle was 82 years of age, and no interest was payable until five years had elapsed and then at the rate of 4.25 per cent per annum. On behalf of the bankrupt, it was argued that no judicial examination of the adequacy of the consideration was permitted. It was held that the bankrupt's uncle was not a purchaser for valuable consideration within the meaning of s.120(1)(a) and that a purchaser for valuable consideration is one who has given consideration for his purchase which has a real and substantial value and not one which is merely nominal, trivial or colourable.

3. In the course of the reasoning in Barton's Case, the High Court referred (at p 81) to the decision of Jessel M.R. in Ex parte Hillman; In Re Pumfrex (1879) 10 ChD 622 and to the decision of Lord Esher M.R. in Hance v. Harding (1888) 20 QBD 732 both dealing with one of the English precursors of s.120. In Hillman's Case there was a voluntary settlement of a leasehold estate upon a trustee. It was held that, although the trustees thereby became liable for rent and on other covenants in the lease, the trustees were not "purchasers" within the meaning of the legislation, because the term, in this context, meant "a 'buyer' in the ordinary commercial sense, not a purchaser in the legal sense" (at p 625). In Hance's Case, a settlor assigned an insurance policy to trustees on trusts for the benefit of his children in consideration of his father at the same time conveying certain leasehold property to the trustees on similar trusts. Lord Esher said (at pp 737-8):
   

"Then can he be called a purchaser? He has given something to get something for other persons, viz. the family of his son. He has given up his interest in certain leaseholds to induce his son to give up his interest in these policies. That being so, I think he is a purchaser from the bankrupt within the meaning of the section."

1. The High Court further analysed some of the more recent authorities in this area, including In Re Abbott (1983) 1 Ch 45 where (at p 54) Peter Gibson J., with the agreement of Sir Robert Megarry, V.C., extracted the following propositions from the earlier cases:
   

"(1) The word 'purchaser' in section 42(1) means a buyer in the ordinary commercial sense, that is to say a person providing a quid pro quo...

(2) The consideration moving from the purchaser need not replace in the hands of the debtor the consideration moving from the debtor...

(3) The consideration given by the purchaser need not be equal in value to the consideration given by the debtor, though it must be valuable consideration in the commercial sense."

1. The High Court then referred to the short concurring judgment of the Vice Chancellor (at p 57) as follows:
   

"Plainly, 'good consideration', in the sense of the natural love and affection that a man has for his wife and children, is not enough. Nor is a merely nominal consideration, even though it would suffice to support a simple contract at common law. In the context of the avoidance of settlements by a trustee in bankruptcy, a 'purchaser...for valuable consideration' must be someone who can not only be described as being a 'purchaser' but can also be said to have given a consideration for his purchase which has a real and substantial value, and not one which is merely nominal or trivial or colourable."

1. The High Court concluded (at p 86) that it was necessary to construe "purchaser" broadly in a commercial sense. The Court said (at p 86):
   

"A beneficiary under a settlement is not a purchaser within the meaning of the section unless he has given such valuable consideration as is sufficient in all the circumstances to make him a 'buyer' in a commercial sense of the interest passing to him under the settlement. Unless there is good reason to the contrary, we believe it to be important in legislation of this kind to maintain a construction of the Australian Act which accords with English authority. We would therefore accept Sir Robert Megarry's formulation and endorse the Full Court's ruling that a 'purchaser...for valuable consideration' within the meaning of s.120(1) of the Act is one who has given consideration for his purchase 'which has a real and substantial value, and not one which is merely nominal or trivial or colourable'".

1. It follows that, for present purposes, a distinction must be drawn between a "purchaser" in the legal sense and a "purchaser" in the commercial sense. The latter sense is used to indicate that there is a quid pro quo involved in the transaction, or to put it another way, that a real or substantial consideration has been given. It is not to say that a "purchaser" will only be found where there is a transaction in trade or commerce or where there is an ordinary commercial or trading transaction between parties at arms' length. Even where, as here, the parties were not at arms' length, it does not follow that Mrs Martin was not a "purchaser" within the meaning of s.120. The reality was that she provided a substantial quid pro quo.

2. In the present case, it is true that Mrs Martin played a passive role in the transaction. But it does not follow that she was not a purchaser for valuable consideration. Mrs Martin agreed to buy her husband's interest for a price that reflected the real value of that interest. The payment of the price was to be achieved by a reduction of her loan account with one of the family companies. It was not suggested in this Court that this method of payment was illusory or otherwise ineffective.

3. But it is one thing to say that Mrs Martin's role was a passive one. It is a different thing to assert, as the trustee now seeks to do, that the subject transaction should be impugned because Mrs Martin did not really understand what she was doing. There is no finding to justify this assertion. Indeed the conclusion of the Supreme Court that there was a valid agreement for sale and purchase contradicts the assertion. As has been said, the trustee did not seek to challenge the findings of primary fact made by the Supreme Court.

1. We accept that the evidence indicated that, in some respects, Mrs Martin's recollection of the details of the transaction was not complete. But this is not to say that the agreement was vitiated for this reason. It is hardly necessary to say that an appellate court should be cautious before embarking upon the course of holding that a transaction should be set aside on the grounds now urged by the trustee and we decline to do this. Accordingly, the challenge to the decision of the Supreme Court must fail.

2. For the sake of completeness, it should be recorded that, in this Court, a submission was put on behalf of the trustee to the effect that the sale transaction should be ignored as a sham. This case was not put in the Supreme Court and it should not be permitted to be raised now. In any event, such a case would also be contradicted by the findings of fact made by the Supreme Court.
   Conclusion

3. In the result, the appeal must be dismissed, with costs.