Trimbole, Re R. Donnelly, Ex Parte M.C.

[1986] FCA 277

Re: ROBERT TRIMBOLE
Ex Parte: MAX CHRISTOPHER DONNELLY Trustee of the Estate of the Bankrupt
And: CRAIG GRAINGER TRIMBOLE and WATER RESOURCES COMMISSION
No. NSW W1171 of 1986
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF NEW SOUTH WALES
AND THE AUSTRALIAN CAPITAL TERRITORY
Beaumont J.

CATCHWORDS

Bankruptcy - property transferred to son of bankrupt - whether settlement within s.120(1) Bankruptcy Act 1966 - whether promise to discharge future outgoings in respect of the property and to manage property constituted "valuable consideration" for purposes of s.120(1)(a) - contract for sale - whether a sham transaction.

Bankruptcy Act s.120.

Barton v. Official Receiver (1985) 58 A.L.R. 328.

Rimar Pty. Ltd. v. Pappas (1985) 64 A.L.R. 9.

Boydell v. James (1936) 36 S.R. (N.S.W.) 620.

Mullens Investments Pty. Ltd. v. Federal Commissioner of Taxation (1976) 135 C.L.R. 290.

HEARING

SYDNEY

#DATE 11:7:1986

Counsel and Solicitors for Applicant: Mr. C. Darvall Q.C. and Mr. P. Urquhart instructed by the Australian Government Solicitor.

Counsel and Solicitors for Respondent: Dr. G. Woods Q.C. and Mr. J. Foley instructed by Messrs O'Connor Bellamy.

ORDER

Declare that the disposition by the bankrupt to the first respondent of the property being Irrigation Farm Lease Number 1961 in the Mirrool No. 1 Irrigation Area in the Parish of Naunton County of Cooper Land District of Mirrool in the State of New South Wales, together with the improvements erected thereon ("the property") is void as against the applicant.

The first respondent transfer the property to the applicant as the trustee of the estate of the bankrupt.

The first respondent pay the applicant's costs.

Reserve liberty to the applicant to apply for further relief in the event that the property is not transferred to him in accordance with the previous order.

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

JUDGE1

The applicant seeks a declaration that the disposition by the bankrupt to the first respondent, a son of the bankrupt, of an Irrigation Farm Lease is void as against the applicant, as trustee of the estate of the bankrupt, by reason of the provisions of s.120(1) of the Bankruptcy Act 1966 (the Act). By s.120 -

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

(a) a settlement made before or in

consideration of marriage, or made in

favour of a purchaser or encumbrancer in good faith and for valuable consideration; or

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

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

....

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

1. On 3 December 1985, a sequestration order was made against the estate of the bankrupt. The petitioning creditor, the Deputy Commissioner of Taxation, in his petition presented on 24 August 1984, alleged that the bankrupt was indebted to him in the sum of $1,956,038.67, being the amount due under a judgment obtained in the Supreme Court of New South Wales on 28 December 1983 together with interest on the judgment. The petitioning creditor relied on an act of bankruptcy alleged to be committed from 25 February 1984 and continuing thereafter that the bankrupt, with intent to defeat or delay his creditors, remained out of Australia. The disposition of property now challenged is a transfer of property dated 26 August 1982 and registered on 24 November 1982 ("the transfer"). The applicant contends that since the bankruptcy commenced on 25 February 1984, the transfer constituted a disposition of property within the two year period provided by s.120(1).

2. There is no real dispute about the facts. The bankrupt was the proprietor of a holding under the Crown Lands Consolidation Act 1913 (N.S.W.) situated in the Land District of Mirrool being Irrigation Farm Lease No. 1961 Mirrool No. 1 Irrigation Area, having an area of 178 ha. Since at least 1976, the bankrupt farmed and grazed the property, usually under a sharefarming arrangement. The bankrupt and his family, including the first respondent, carried out improvements to the property from time to time. In 1979, in discussions with members of his family, the bankrupt proposed that he make a gift of the property to his sons, including the first respondent. However, nothing was done to carry the proposal into effect. In March 1980, the bankrupt told the first respondent:
   
   

"Providing you work this farm, I want you to have it."

The first respondent replied:

"Yes, I'll take full responsibility for the whole farm, I'll work it and I'll pay off all the

debts and bills."

1. It appears that the reference to the "debts and bills" was intended to refer to future outgoings only: it is common ground that the property was not mortgaged and as at the time of the transfer, current outgoings, including irrigation fees, had been paid as they fell due. It further appears that the reference to "working" the farm was not intended to suggest that the first respondent should personally be involved in the management of the farm operations. What was apparently intended was that the property should be managed by the first respondent under a sharefarming arrangement with another party, as had previously been the case. This has, in fact, happened.

2. On 7 May 1981, the bankrupt departed Australia. Shortly before his departure he executed a general power of attorney, bearing date 16 May 1981, in favour of the first respondent.

3. On 10 August 1981, the Commissioner of Taxation issued amended assessments in respect of the taxable income of the bankrupt requiring payment by 11 September 1981 of income tax in the sum of $1.9 million approximately. Payment was not made. It appears that the debt owed to the Commissioner was the subject of the Supreme Court judgment.

4. It further appears that in 1982, the first respondent gave instructions to Mr. Simon Mackenzie, a Griffith solicitor, to transfer the property to himself. Neither the bankrupt nor Mr. Mackenzie was called to give evidence. However, the applicant called Mr. R.A. Vardanega, another Griffith solicitor and a partner of Mr. Mackenzie. According to Mr. Vardanega, Mr. Mackenzie asked him to act on the transfer of the property from the bankrupt to the first respondent. No details of these instructions emerged from the evidence. Mr. Vardanega assumed that the transfer should be implemented by the execution of a contract for sale at a price equal to the Valuer-General's valuation of the property. Mr. Vardanega obtained that valuation. He then drew up a contract (the contract) for the sale of the property by the bankrupt to the first respondent. The contract, dated 6 May 1982, was executed by the first respondent, as attorney for the bankrupt, as vendor and by the first respondent as purchaser. It provided for a purchase price of $330,000.00 which was the Valuer General's valuation. A deposit of $1,000.00 was to be paid upon the signing of the contract. It was provided that, until the deposit was paid, the vendor was not bound by the contract. The balance of the purchase price was payable in cash on completion. Mr. Vardanega said that the transaction took the form of a contract for sale rather than a transfer by way of gift in order that an appropriate amount of stamp duty might be paid in respect of the transaction. However, it is common ground that neither the parties nor solicitors ever intended that the purchase price of $330,000.00 be paid.

5. Despite the facts that neither the deposit nor the balance purchase price was paid, steps were taken to transfer the property to the first respondent. A transfer in the form provided by the regulations made under the Crown Lands (Consolidation) Act was drawn up by Mr. Vardanega. It described the transfer as by way of sale. It was dated 26 August 1982 and was executed by the first respondent, as attorney for the bankrupt, as transferor and by the first respondent as transferee. Stamp duty was paid on the contract and on the transfer. The transfer was registered on 24 November 1982, presumably after the second respondent had consented to the transfer pursuant to s.145A of the Crown Lands (Consolidation) Act.

6. It was not disputed by the first respondent that the transfer was capable of constituting a "settlement" for the purposes of s.120(1) and (8) (see Barton v. Official Receiver (1985) 58 ALR 328 per Fisher J. at p 336; per Lockhart J. at pp 342-3). The argument put on behalf of the first respondent was that the "undertaking" given by him to the bankrupt in March 1980 that, upon the vesting of the property in the first respondent, he would discharge the future outgoings incurred in respect of the farm, should be regarded as "valuable consideration" for the purposes of s.120(1)(a). It was implicit, if not explicit, in the way the case was conducted on behalf of the first respondent that in the events which happened, the contract itself did not in fact provide any valuable consideration. In my opinion, for reasons which I will elaborate later, but in essence because the contract was a sham transaction, this concession was correctly made on behalf of the first respondent.

7. Before turning to the question whether the first respondent's "undertaking" provided "valuable consideration" within the meaning of s.120(1)(a), it is convenient to mention an argument advanced on behalf of the applicant.

8. It was submitted on behalf of the applicant that the contract was discharged upon the failure of the first respondent to pay the deposit. It was submitted that this provision constituted a condition precedent to the operation of the contract and that failure to perform the promise to pay the deposit avoided the contract. The difficulty in accepting this submission is that the subsequent conduct of the parties indicated an intention on the part of the vendor to waive any obligation to pay the deposit: the transfer, expressed to be by way of sale, was consistent only with such a waiver, or at least an election to affirm the contract notwithstanding non-payment of the deposit (see Sargent v. A.S.L. Developments Pty. Ltd. (1974) 131 CLR 634; cf. Goodwin v. Temple (1957) QSR 376 (H.C.)).

9. On the other hand, it may be that the contract could have been avoided as a transaction made by the first respondent in breach of his fiduciary obligations as attorney for the bankrupt (see Finn, Fiduciary Obligations Ch. 20); Halsbury's Laws of England, 4th ed., Vol. 1 at p.461 para.771; pp.470-1 para.787.

10. However, it is not necessary to pursue these questions. In my view, the contract was a sham transaction in the sense that it was never intended by either party to have any legal effect. It was set up as a mere pretence to cloak a different transaction, namely, that of a gift. The parties never intended that the transaction be one of sale - it was never intended that the first respondent pay $330,000.00 or any other sum of money for the property. The intention of the parties was that the transaction be one of gift. It follows, I think, that the contract document is wholly inoperative and that the only subsisting transaction is that of the transfer which was intended by both parties to be operative (see Boydell v. James (1936) 36 SR (NSW) 620 per Jordan C.J. at p 627; Mullens Investments Pty. Ltd. v. Federal Commissioner of Taxation (1976) 135 CLR 290 per Stephen J. at pp 314-316).

11. The question, however, remains whether, as the applicant contends, the transfer was by way of gift or, as the first respondent contends, the transfer was supported by the alleged collateral consideration consisting of the "committment" on his part to meet future outgoings. The answer to this question depends upon the meaning of the term "valuable consideration" where used in s.120(1)(a) and its application to the facts of the case.

12. The authorities dealing with the meaning of "valuable consideration" for the purposes of s.120(1)(a) were reviewed by Gibbs C.J. in Rimar Pty. Ltd. v. Pappas (1985) 64 ALR 9 at p 15. As Gibbs C.J. there observed, such consideration need neither move to the bankrupt nor be equal to what has been taken from the estate of the bankrupt in the transaction. At the same time, however, the consideration mentioned in s.120(1)(a) must have a "real and substantial value and must not be merely nominal, trivial or colourable."

13. In my opinion, the "undertaking" given by the first respondent to the bankrupt that he would discharge future outgoings incurred in respect of the property did not constitute "valuable consideration" within the meaning of s.120(1)(a). According to the valuation of the Valuer-General, the property was worth $330,000.00. In return for this, the first respondent did no more, in substance, than indicate to the bankrupt that it was his intention to meet his future commitments in respect of the property. These commitments were not, of course, something for which the bankrupt could in any sense be said to be liable: once the property was transferred beneficially to the first respondent, those liabilities were his alone. There was thus no benefit to the bankrupt in the transaction. On the contrary, he parted with property of the value of $330,000.00. Nor was there any detriment to the first respondent. He received the benefit of the gift of the property in return for an indication to the bankrupt that he would meet future commitments in respect of the property. The giving of that indication or "undertaking" could involve no detriment to the first respondent. He was already bound to the parties concerned to honour those commitments.

14. Independently of these considerations, it is possible that the "undertaking" given by the first respondent was, in any event, unenforceable because it was not intended to effect legal relations between the parties (see Balfour v. Balfour (1919) 2 KB 571; Cohen v. Cohen (1929) 42 CLR 91). However, in the light of the conclusion I have reached that any such consideration was illusory, it is unnecessary to pursue the point.

15. It follows, in my view, that the "undertaking" given to the bankrupt should be regarded as no consideration or, at best, from the first respondent's standpoint, an illusory consideration for the transfer of the property to the first respondent beneficially. On either view, there was no "valuable consideration" for the purposes of s.120(1)(a).

16. Accordingly, I propose to grant the relief sought. I make the declaration asked in para. 1.B of the application. I make order 2 as asked. I order that the first respondent pay the applicant's costs. Since the second respondent did not appear, no order for its costs should be made. I reserve liberty to the applicant to apply for further relief in the event that the property is not transferred to him in accordance with the previous order.