Thomas v Tyler (No.2)
[2005] FMCA 342
•29 March 2005
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| THOMAS v TYLER (No.2) | [2005] FMCA 342 |
| BANKRUPTCY – Application under ss.120, 121 – whether sale of property by bankrupt to his nephew was a sale at an under value – whether report of court appointed valuer should be accepted – whether there should be a reconveyance of land – forms of orders. |
| Bankruptcy Act 1966 (Cth), ss.120, 121 Federal Magistrates Court Rules 2001 Land Valuation and Compensation in Australia; R O Rost and H G Land Acquisition, Douglas Brown 4th Ed The Law of Resumption and Compensation in Australia, Marcus S Jacobs The Law Affecting Valuation of Land in Australia, Alan A Hyam |
| Sellers v One Step Plumbing and Concrete Pty Ltd [2002] FCA 478 Victorian Producers’ Co-Op Co Ltd v Kenneth [1999] FCA 1488 Sutherland v Brien [1999] NSWSC 155 Spencer v Commonwealth (1907) 5 CLR 418 James v Swan Hill Sewerage Authority [1978] VR 519 Schmierer v Horan & Anor [2004] FMCA 16 |
| Applicant: | GAVIN THOMAS |
| Respondent: | MICHAEL TYLER |
| File Number: | SYG1291 OF 2004 |
| Judgment of: | Raphael FM |
| Hearing dates: | 10, 14, 15 March 2005 |
| Date of Last Submission: | 15 March 2005 |
| Delivered at: | Sydney |
| Delivered on: | 29 March 2005 |
REPRESENTATION
| Counsel for the Applicant: | Mr P McEwen SC and Mr B Skinner |
| Solicitors for the Applicant: | Argyle Partnership |
| Counsel for the Respondent: | Mr R Marshall |
| Solicitors for the Respondent: | Purcell Insolvency Lawyers |
ORDERS
The applicant, on or before 5 April 2005, bring in draft minutes of order.
The respondent pay the applicant’s costs including the costs of the court appointed valuer for the valuation and for his attendance at court to be taxed if not agreed in accordance with the Federal Court Act and Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG1291 of 2004
| GAVIN THOMAS |
Applicant
And
| MICHAEL TYLER |
Respondent
REASONS FOR JUDGMENT
Introduction
These proceedings are an application filed by the Trustee of the bankrupt estate of Douglas Keith Tyler seeking a declaration from the court pursuant to s.120 or s.121 of the Bankruptcy Act 1966 (Cth) (the “Act”) that a transfer of land described in Folio Identifiers 83/752847, 49/752847, 1/409844, 48/752847, 29/752847, 32/752847 and Perpetual Leasehold 79/752847, 1961/63 Folio Identifier 94/726640 by the bankrupt to the respondent Michael Tyler on or about 10 November 2000 was void against Gavin Thomas as trustee for the bankrupt Douglas Tyler. Mr Tyler became bankrupt on the making of a sequestration order by the Federal Court on 14 February 2003. His bankruptcy commenced on 27 May 2002, a date within two years of the transfer.
The respondent defended the claim arguing that he had purchased the property following negotiations with the Commonwealth Bank which was mortgagee in possession of the farms constituting the property owned by his uncle. He maintained that the purchase price which he paid for the property, $635,000.00 was the market value of the property at the time of sale. Section 120 of the Act is in the following form:
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.
Exemptions
(2) Subsection (1) does not apply to:
(a) a payment of tax payable under a law of the Commonwealth or of a State or Territory; or
(b) a transfer to meet all or part of a liability under a maintenance agreement or a maintenance order; or
(c) a transfer of property under a debt agreement; or
(d) a transfer of property if the transfer is of a kind described in the regulations.
Transfers that are not void
(3) Despite subsection (1), a transfer is not void against the trustee if:
(a) the transfer took place more than 2 years before the commencement of the bankruptcy; and
(b) the transferee proves that, at the time of the transfer, the transferor was solvent.
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 spouse 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 spouse of, the transferor;
(d) the transferee's love or affection for the transferor.
Protection of successors in title
(6) This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.
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.
The respondent denied that the transfer of land would be one which fell under the provisions of s.121. For the reasons which follow it is not necessary to consider this aspect of the matter.
When the case commenced before me the applicant intended to tender certain evidence of a valuation nature. For reasons which I discussed in my judgment with the citation Thomas v Tyler [2004] FMCA 864 I did not admit that evidence and determined instead to appoint a court appointed valuer pursuant to Rule 15.09 of the Federal Magistrates Court Rules 2001. This occurred and a detailed report was received from Mr LM Knight, the registered valuer agreed to by the parties. His report which was received in February 2005 was considered by both parties. There was considerable correspondence between Mr Knight and the applicant’s solicitors in which they requested him to consider certain additional information that might have a bearing upon his valuation. Mr Knight responded to that correspondence explaining why he was not prepared to change his valuation, which indicated that as at the date of transfer the market value of the property on an unrestricted freehold basis was $720,000. Mr Knight also produced a valuation of the property on a forced sale basis which he accepted was the amount paid by the respondent to the bankrupt of $635,000.
In the hearing before me evidence was given by Mr Knight and also by the respondent. Affidavit evidence from the applicant was tendered.
The course of proceedings
I am satisfied from the evidence tendered that Douglas Keith Tyler was made bankrupt on 14 February 2003 by order of the Federal Court and that the date of the commencement of his bankruptcy was 27 May 2002. It follows that I am satisfied that the transfer of land which took place on 10 November 2000 was a transfer within a date five years from the commencement of the bankruptcy. There was a suggestion made by the respondent that the transfer of land had not taken place between the bankrupt and the respondent but between the Commonwealth Bank and the respondent as the bank had been the mortgagee in possession of the farm. The documents clearly indicate that this is not the case. Although it is not denied that the respondent negotiated the purchase price with the bank and this purchase price constituted the minimum amount the bank would be prepared to accept in order to write off its secured debt and release both the property and the bankrupt, the bank allowed the sale to be effected by the bankrupt through his own solicitors. This had the affect of allowing an exemption from stamp duty in respect of the purchase because it was submitted to the Office of State Revenue that the transfer was an “intergenerational transfer of agricultural land”.
The finding which I have made above means that there was a transfer of property by a person who later became a bankrupt thus satisfying the first constituent of s.120(1). The transfer took place in a period beginning five years before the commencement of the bankruptcy ending on the date of the bankruptcy thus satisfying the requirements of s.120(1)(a). The question that fell for my decision was therefore whether the transferee gave consideration of less value than the market value of the property. Mr Knight’s report was placed in evidence as Exhibit “C1”. He was in the witness box for a period in excess of one day and was cross examined at considerable length by Mr McEwen for the trustee. Mr McEwen’s cross examination appeared to have two purposes. The first was to negate the affect of the inclusion into the valuation by Mr Knight of a forced sale value for the property. The second was to confirm the valuation of $720,000 as market value and if possible to make Mr Knight concede that his valuation on that basis should have been higher. Mr McEwen did this by putting to Mr Knight that the summation method of valuation used by him was inaccurate to the extent that he had under valued those parts of the property known as “The Tops” which could be used for cultivation or grazing. Mr McEwen also put to Mr Knight that he had excluded from his valuation the value of certain timber on the property, which could be extracted on an annual basis and sold at the rate of approximately $20,000 per annum. Mr McEwen attacked the valuation of parts of the property on the basis of the discounts or premiums to the comparable properties which Mr Knight had used. Mr McEwen also challenged the calculation of the areas into which Mr Knight had divided the land. Finally, Mr McEwen put to Mr Knight other valuations with which he had been provided and which indicated a higher market value for the land than that which Mr Knight had calculated including one valuation of over $1,000,000.
Mr Knight explained his methodology in some detail. I found him an impressive witness. He was a local valuer who obviously had a detailed knowledge of the area. He had valued a number of the properties which were used as comparables. He was aware of the uses to which land in that area was being put. In particular he was aware of the use of land in the Dorrigo area for potato farming. One of Mr McEwen’s major grounds of attack upon him would be that he had not properly taken into consideration the use for potato farming when considering that the highest and best use of the land was for grazing. I am satisfied from his evidence that Mr Knight made a thorough inspection of the property and made notes of his findings whilst on that inspection. He had travelled over the land for approximately three hours in a four wheel drive. He was in any event familiar with the site in a general way because of his association with other properties in the area. Mr Knight explained to the court his method of calculating the areas that he had used to the different classes of land within the property. He utilised an overlay system which was explained in the transcript and which appears to me to be able to pinpoint areas of land down to one hectare. This method coupled with Mr Knight’s inspection of the property leaves me to believe that his classification of the land into 190 hectares of basalt tops country, 120 hectares of lighter slopes and 440 hectares of very steep/gorge land to have been sufficiently accurate not to affect his total valuation figure and summation method.
Another area of possible dispute canvassed by Mr McEwen was annual rainfall. Mr McEwen was attempting to persuade the valuer to increase his valuation due to the high assured rainfall in the area. Mr Knight indicated that no rainfall would be assured today. He told the court that he had seen the area in drought. I accept this evidence. Climate change is now an acknowledged fact of life and this makes less relevant historical rainfall records upon which Mr McEwen wished to rely.
Mr McEwen sought to undertake a breakdown of the constituent topography of the comparables and compare those proportions to the proportions of the valued land. Mr Knight disagreed with this approach. He believed that where adjustments were required they were incorporated into his adopted values. Valuation is not an exact science and a minute analysis of every comparable would be bound to point up some small areas available for differentiation. But the valuer could only do his best. I am not convinced that Mr Knight has made any serious errors in calculation when commenting upon his comparables (and by convinced I mean on the appropriate standard on the balance of probabilities). This does not mean that Mr McEwen’s cross examination was not effective and did not point up some approaches that needed explanation. But I think that Mr Knight did provide adequate explanations. For example, some time was taken up on carrying capacity. Mr Knight accepted that he did not agree with the carrying capacity that had been advised to him by Mr Tyler (the respondent) but most importantly he did not use carrying capacity as a measure of valuation. He was also pressed about the potato production capacity of the comparables and the subject property. He remained firm that potato production capacity of this property was not relevant and would not change his valuation as he did not believe that potato production was worthwhile on a long term basis. Mr McEwen’s major difference with the value was that he argued that purchasers would pay a premium for land capable of growing potatoes. Mr Knight disagreed. It was his view that farmers in that area bought mixed properties on a grazing value and would not pay more because there was an area on which potatoes could be grown. Mr McEwen did not suggest in cross examination that he could put forward some examples of greater prices being paid for potato land. In the absence of such evidence I would be inclined to accept the evidence of the valuer.
In relation to the additional value to be given to the land because of its timber Mr Knight had a timber assessment before him produced by the applicant. He said that he had no sales of timber reported to him for the purposes of comparable valuation. He argued that without this his experience indicated that no premium would be paid for the timber on the land. Mr Knight interpreted the lack of large timber as being caused by all the good timber having been taken out of the property. This would appear to me to have been corroborated by the evidence that was put that the bankrupt had extracted timber from the land. Mr Knight accepted that a purchaser might regard the existence of timber as a bonus but felt that no premium would be paid.
Mr Knight was asked whether, if he knew that trailer loads of potatoes or large loads of timber had been taken from the property in the past, that might have made a difference to his valuation. He indicated that his information was that the access to the site had changed in recent years to a dramatic degree and he declined to change his views on the basis of some proposed access changes that had not yet taken place and which might have restored the situation to that which existed when the trailer loads were allegedly taken away from the property.
Mr Knight was taken through a sub division valuation made by the applicant’s valuer Mr Potter. Mr Knight believed that the approach taken by Mr Potter was inconsistent with his approach. The difference being that Mr Knight looked at the land as a sale in one lot. Mr Potter was looking at much smaller lots which would need a sub division and for access to be arranged. This was a possibility that required much further investigation. It seems to me that this type of valuation is far too hypothetical to produce an accurate and appropriate market value as at the date of the sale.
Mr Knight was questioned on a further valuation produced by Mr Potter on a whole of property basis in the sum of $815,000. The figure was higher than that of Mr Knight because it was made up of rates per acre significantly higher than those used by Mr Knight in his summation method. Mr Knight agreed that he had not consulted with Mr Potter and that he had relied on his own comparables. Mr Knight defended his own valuation and was satisfied of its accuracy. He was then questioned about the valuation prepared by a Mr Sanger in the sum of $1,130,000 which relied upon a timber valuation to add value to the property. Mr Knight was sceptical of this valuation. He did not know Mr Sanger and suggested that he was not a member of the Australian Property Institute. He agreed that he had not taken the figure up with him and he pointed out that only one of the comparables used by him was also used by Mr Sanger. The rest of the comparables used by Mr Sanger were either so far away in time or distance that he did not believe they were truly appropriate for use. The valuations of Mr Sanger and Mr Potter were put into evidence on the basis that they were exercises that had been done and which were known to Mr Knight when he prepared his valuation. The truth of those valuations was not thereby established.
Mr Knight confirmed that he had seen a report of the 9 March 2005 from QASCO who are surveyors who analyse slopes. This company differed in its analysis of the 0 to 18° slope which was greater than that used by Mr Knight in his summations. QASCO suggested there was 290 hectares within this band against 190 suggested by Mr Knight. Mr Knight told the court that he did not believe that his analysis of the cultivatable land gleaned from his inspection of the property which was close to that used by Mr Potter would change. The QASCO Report did not indicate what land was cultivatable or not, merely the degree of slope.
Mr Knight was also cross examined by Mr Marshall for the respondent. He agreed with Mr Marshall that in order to achieve a reliable potato crop irrigation was needed. In order to irrigate the land a licence would be required from Water Resources. No licence was presently held. The obtaining of a licence was not necessarily a given. Without such a licence potato farming is a greater risk.
In response to questions from me Mr Knight agreed that in calculating his figures for the summation method of the tops country he included the existence of some of the woodland because that was required for shade trees. He confirmed that if the property was subdivided in the manner suggested by Mr Potter some of the sites which were not attractive for cultivation or timber would be very difficult indeed to sell. Finally, he acknowledged that there would be a 5% either way leeway on his valuation.
Although I believe that Mr Knight stood his ground very well in the face of intelligent and experienced cross examination from Mr McEwen I was left with the view that his figure of $720,000 may have been towards the low end of any range. I say this because of the values placed on some of the other comparable properties where I believe Mr Knight may have overvalued their access or their size when reducing his figures on the property in question. I would therefore tend to increase the value of the land from the $720,000 by 5% which would make the property worth approximately $758,000.
Mr Marshall sought in a very complex way to convince me that the valuation of $635,000 as a forced sale valuation actually constituted a proper valuation on a market value basis. He did this by deducting first 5% from Mr Knight’s figure and then deducted the sum of $35,000 for the costs of obtaining vacant possession (the bankrupt has remained in possession of the premises and was proving difficult to dislodge by the bank). He then referred to the amount of interest waived by the bank and ended up arguing that the consideration given was the same as the consideration received. I am not satisfied that the market value assessed by Mr Knight is amenable to these deductions. Firstly, I have already said that I believe Mr Knight was low in his valuation by 5% and not high. Secondly, the cost of obtaining vacant possession was assessed at $35,000 including the cost of sale which is not a deduction. I have difficulty in understanding the relevance of the waiver by the bank of interest unpaid as the sale was not by the bank to the respondent but by the bankrupt and the respondent got no benefit from the waiver and bankrupt received no detriment. But I believe Mr Marshall was arguing that the bankrupt received a benefit of the amount waived because he did not have to pay that to the bank.
Even if Mr Marshall’s market value figure could be adjusted downwards somewhat it would not come to the figure of $635,000 and the fact that this payment was an undervalue was confirmed by the evidence of the respondent himself. He agreed that there was an arrangement whereby the bankrupt could repurchase the property at the price paid within a year. The bankrupt was also given a licence to occupy the land. The license fee was the cost of the transaction to the respondent. The respondent had never lived on the property and interestingly told the court that he grew about three acres of seed potatoes. He had tried to grow more potatoes on the land but this had resulted in some sort of unspecified disaster. Importantly, he stated that he didn’t think the property was worth as much as Mr Sanger had said but it was worth more than he had paid, although he himself would not have paid any more for it. There was tendered in court a number of documents evidencing an application for a loan from Wesfarmers by the respondent in order to enable him to buy the property in which the Sanger valuation was adopted by the respondent. I accept that an applicant for loan funds will do what he can to ensure that the lender is satisfied of the fullest possible value of the land the borrower intends to purchase. But I believe this evidence corroborates the admission by the respondent that the land was bought for consideration of less value than the market value of the property.
Discussion
An unfortunate red herring was drawn across the path of these proceedings by the inclusion in Mr Knight’s report to the court of a valuation based upon a forced sale. Mr McEwen was naturally concerned lest the court might find the forced sale value to be the market value for the purposes of s.120. I noted, and I believe Mr McEwen agreed, that there might be circumstances in which the particular situation of a vendor being known to those all about him might reduce the market value of the land but I believe such a case would be exceptional and I do not think that an approach which incorporated into market value the situation of this vendor is in any way appropriate. Mr Knight was asked to produce a valuation of the market value as at the valuation date and nothing else.
Mr McEwen assisted the court by providing it with a selection of textual authorities of the definition of market value including those found in Land Valuation and Compensation in Australia; R O Rost and H G Collins at [36 – 37] and [94 – 95]; Land Acquisition, Douglas Brown 4th Ed at [3.16]; The Law of Resumption and Compensation in Australia, Marcus S Jacobs (relating to forced sales) at [286] and The Law Affecting Valuation of Land in Australia, Alan A Hyam at [33-36]. I would also refer to the decision of Weinberg J in Sellers v One Step Plumbing and Concrete Pty Ltd [2002] FCA 478. That case had a large number of similarities with this one, although I would not consider that the respondent’s actions in regard to his uncle are in any way comparable to the actions of Mr Donald in that case. The similarities in the cases include a sale at a substantial undervalue to a person known to the bankrupt and an attempt to suggest that the sale price did constitute market value as it was all anyone was prepared to pay. The respondent in this case did not put his position as high as that. He was far more oblique. But the evidence could not substantiate such an assertion. The bank had commissioned a price indicator and marketing plan from L J Hooker which was never put into effect. The farms were not auctioned or even advertised for sale.
Weinberg J dealt with the concept of market value commencing at [95]. He set out in that paragraph an excerpt from the explanatory memorandum dealing with the Bankruptcy Legislation Amendment Bill 1999 in respect of the amendments to s.120 of the Act. This includes the sentence:
“The expression “market value” is intended to refer to the value of the property concerned if it were disposed of to an unrelated purchaser bidding in a market on an ordinary commercial basis for property of the kind disposed of, without any sort of discount or incentive for purchase being offered. The expression is not intended to include a situation where the property was being disposed of at a fire sale, at discounted prices because of some immediate need on the part of the owner to liquidate his or her assets.”
Weinberg J also considered the decision of Merkel J in Victorian Producers’ Co-Op Co Ltd v Kenneth [1999] FCA 1488 and Sutherland v Brien [1999] NSWSC 155 per Austin J at [40] where His Honour included a sentence:
“Under the new s.120 the court is required to make an assessment of the objective value of the consideration if it can, on the basis of such evidence as is available.”
Weinberg J also made reference to the definition of market value found in Spencer v Commonwealth (1907) 5 CLR 418 at [432] and per Isaacs J at [441] before noting the views of Harris J in James v Swan Hill Sewerage Authority [1978] VR 519 in which His Honour concluded:
“That this formulation, as well as that adopted in Spencer, was applicable to the determination of “market value of the land acquired”. There is nothing in ss.120 or 121 of the Act to suggest that these formulations are not equally applicable to the determination of “market value” for the purposes of those provisions.”
I have already indicated that I found all the constituents of s.120 satisfied save that of market value. The views which I have expressed above based upon the evidence that I heard satisfy me that this property was sold below market value and therefore s.120 would apply unless it was suggested that any one of the exemptions was relevant. No such suggestion has been made. I am therefore bound now to consider the form of relief which I should give. Mr Marshall submitted that even if I found that the transfer of the property was void against the trustee I would not order a reconveyance of the land but would be content with ordering the respondent to pay to the trustee the balance between the amount that he did pay (which he is entitled to have refunded pursuant to sub-s.120(4) and the amount that the property would have sold for at market value. He submitted that Federal Magistrate Driver had done this in Schmierer v Horan & Anor [2004] FMCA 16 and in that case there was what His Honour described as a “reliable valuation of the property at the time of the transfer”. His Honour went on to say at [27]:
“The trustee is entitled to relief on account of the transfers being void under s.120. It would, however, be unfortunate if the property had to be sold in order to satisfy the trustee’s claim upon it. Pursuant to s.120(4) of the Bankruptcy Act the trustee would be required to pay to Mr Horan the amount of his consideration for the transfer. That is the amount of $12,259.14 and, given that the Bendigo Bank holds security over the property for the amount of approximately $124,000, if the property were to be sold the trustee would get very little, if anything, out of it. The property provides a home for Mr Horan and his children and, in view of the very modest amount that the trustee stands to gain, I am loathe to make orders requiring the property to be sold.”
I think that the decision of Driver FM, whilst correct, was exceptional. Weinberg J did not make such an order in Sellers. He sought that short minutes be brought in giving effect to his judgment that the transfers were void against the trustee. That would presumably require a reconveyance. I think that is what should occur here. Weinberg J did make a comment at [111] which I would endorse.
“[111] I note that s.120(4) requires the trustee to 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. In the present case, the applicant does not challenge the validity of any of the mortgages which are currently in place in relation to the subject properties. He accepts that any rights he may have in relation to those properties must be subordinated to the rights of those mortgagees.
[112] It is by no means clear, having regard to the extent of borrowings by the respondents, that they have given any true consideration to the bankrupts in relation to these properties. Whether they are entitled, in those circumstances, to any payment from the trustee under s.120(4) is doubtful.”
In this case the property was financed by two loans of $600,000 and $20,000 from Wesfarmers. It would appear that the maximum that the respondent put in to the purchase price was $15,000. But I understand from his evidence that his mortgage is currently in arrears. This adds an additional complication because the trustee is taking subject to those mortgages. I do not think it would be reasonable to require the bankruptcy trustee to pay out any money to the respondent where he is also required to pay a sum in excess of $635,000 to the mortgagee. If he is required to pay less, then the amount representing the difference between what he paid and $635,000 should go to the respondent.
In the light of these complications I propose to adopt the course taken by Weinberg J in Sellers and order that the applicant, on or before 5 April 2005 bring in to court draft minutes of order to give effect to these reasons which he must also serve upon the respondent. I will restore the matter for any argument on the form of order upon application being made to my associate. I would also order that the respondent pay the applicant’s costs, including the costs of the court appointed valuer for the valuation and for his attendance at court, to be taxed if not agreed in accordance with the Federal Court Act and Rules. This order as to costs will come into effect in seven days unless prior thereto my associate is approached by either party for me to hear them on the question of costs.
I certify that the preceding twenty-eight (28) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date:
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