Verge v Devere Holdings Pty Ltd (No 4)

[2010] FCA 653

FEDERAL COURT OF AUSTRALIA

Verge v Devere Holdings Pty Ltd (No 4) [2010] FCA 653

Citation:

Verge v Devere Holdings Pty Ltd (No 4) [2010] FCA 653

Parties:

EVAN ROBERT VERGE and GEORGE AUBREY LOPEZ v DEVERE HOLDINGS PTY LTD, PACKHAM PTY LTD and CASTLEWORLD PTY LTD

File number:

WAD 238 of 2008

Judge:

MCKERRACHER J

Date of judgment:

24 June 2010

Catchwords:

BANKRUPTCY – s 120 Bankruptcy Act 1966 (Cth) – undervalued transactions – where Trustees in Bankruptcy seek to set aside land and share transactions – where consideration as valuable as market value of property not provided – valuation of the land – expert evidence – value of consideration – consideration must be given not promised

BANKRUPTCY – s 120 of the Bankruptcy Act 1966 (Cth) – rights of a person who acquired property from a transferee in good faith by giving consideration that was at least as valuable as the market value of the property – good faith – burden of proof – estoppel

CONSTITUTIONAL LAW – indefeasibility of title and the Bankruptcy Act – inconsistency of laws pursuant to s 109 of the Constitution – in the context of fraud

EQUITY – property of bankrupt held on trust for trustee – fiduciary duty – obligation to account – equitable compensation

Legislation:

Bankruptcy Act 1966 (Cth) ss 120, 120(1), 120(1)(b), 120(4), 120(6), 120(7), 120(7)(b), 120(7)(c)
Federal Court of Australia Act 1976 (Cth) ss 47, 47(3)

Transfer of Land Act 1893 (WA) ss 52, 63, 67, 68, 134 138B, 140, 199, 202

Constitution s 109

Cases cited:

Anscor Pty Ltd v Clout (2004) 135 FCR 469
Andrew v Zant Pty Ltd (2004) 213 ALR 812
Arcus Shopfitters Pty Ltd v Planning Commission (WA) (2002) 125 LGERA 180
Bahr v Nicolay (No 2) (1987) 164 CLR 604
Bank of South Australia Ltd v Ferguson (1998) 192 CLR 248
Breskevar v Wall (1971) 126 CLR 376
Clout v Markwell [2001] QSC 091
Commonwealth v Milledge (1953) 90 CLR 157
Deckers Outdoor Corporation Inc v Farley (No 5) (2009) 262 ALR 53
Frazer v Walker [1967] 1 AC 569
Hillpalm Pty Ltd v Heaven's Door Pty Ltd (2004) 220 CLR 472
HTW Valuers (Central QLD) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Hyams, Re; Official Receiver v Hyams (1970) 19 FLR 232
Re Jury; Ashton v Prentice (1999) 92 FCR 68
Maurici v Chief Commissioner of State Revenue (2003) 212 CLR 111
Official Trustee in Bankruptcy v Mitchell and Another (1992) 38 FCR 364
Payne v Parker (1976) 1 NSWLR 191
Peldan v Anderson (2006) 227 CLR 471
P.T. Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515
Tyler v Thomas (2006) 150 FCR 357
Sellers v One Step Plumbing and Concrete Pty Ltd (2002) 190 ALR 716
Western Australian Planning Commission v Arcus Shopfitters Pty Ltd [2003] WASCA 295

Dates of hearing:

9-20 November 2009 and 15 December 2009

Place:

Perth

Division:

General

Category:

Catchwords

Number of paragraphs:

432

Counsel for the Applicants:

PE Cahill

Solicitor for the Applicants:

Jackson McDonald

Counsel for the First and Second Respondents:

PG McGowan

Solicitor for the First and Second Respondents:

Solomon Brothers

Solicitor for the Third Respondent:

Haydn Robinson

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	WAD 238 of 2008

BETWEEN:

EVAN ROBERT VERGE
GEORGE AUBREY LOPEZ
Applicants

AND:

DEVERE HOLDINGS PTY LTD
First Respondent

PACKHAM PTY LTD
Second Respondent

CASTLEWORLD PTY LTD
Third Respondent

JUDGE:	MCKERRACHER J
DATE OF ORDER:	24 JUNE 2010
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1.The applicants do file and serve within 21 days a minute of orders and submissions to reflect these reasons and conclusions. 

2.The respondents do file and serve within 21 days a minute and submissions in response.

3.There be general liberty to apply.

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

The text of entered orders can be located using eSearch on the Court’s website.

TABLE OF CONTENTS

INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[1]
KEY STATUTORY PROVISION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[9]
AN OVERVIEW........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[10]
RELIEF CLAIMED BY APPLICANTS........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[43]
Claims in equity........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[44]
The shares claim........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[51]
THE MAIN PERSONALITIES AND THEIR ACCOUNTS........ ........ ........ ........ ........ ...	[54]
Mr Andony........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[56]
Mrs Andony........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[105]
Conclusion on the Andonys........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[115]
Mr Verge – identification of some documents........ ........ ........ ........ ........ ........ ........ .......	[118]
Mr Murphy – a valuer........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[148]
Mr Carey – a property analyst........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[149]
Mr Hamer – an investment banker........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[155]
Mr Fazio........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[160]
Evidentiary ruling........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[160]
Mr Fazio’s affidavit........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[181]
Mr Naude – the Castleworld transaction........ ........ ........ ........ ........ ........ ........ ........ .......	[185]
THE DONGARA LAND AND ITS VALUATION........ ........ ........ ........ ........ ........ ........ ...	[216]
Methodology........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[219]
Mr Bracewell........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[228]
Mr Elliott........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[229]
Mr Kalajzich........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[248]
Mr Moore........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[257]
CONCLUSION ON VALUE OF DONGARA LAND........ ........ ........ ........ ........ ........ ......	[263]
VALUATION OF THE UNIT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[279]
Mr Morgan........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[280]
ANALYSIS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[282]
The operation of s 120 of the Bankruptcy Act........ ........ ........ ........ ........ ........ ........ .......	[282]
Defences of Castleworld........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[348]
Alternative claims by the applicants for equitable relief with respect to the one-third interest in the Dongara Land........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[369]
The claims with respect to the shares in Devere........ ........ ........ ........ ........ ........ ........ ...	[378]
SUMMARY OF CONCLUSIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[414]
INTERIM DISPOSITION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[431]

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	WAD 238 of 2008

BETWEEN:

EVAN ROBERT VERGE
GEORGE AUBREY LOPEZ
Applicants

AND:

DEVERE HOLDINGS PTY LTD
First Respondent

PACKHAM PTY LTD
Second Respondent

CASTLEWORLD PTY LTD
Third Respondent

JUDGE:	MCKERRACHER J
DATE:	24 JUNE 2010
PLACE:	PERTH

REASONS FOR JUDGMENT

INTRODUCTION

1. The applicants are Trustees in Bankruptcy having been appointed in that capacity since 1996 under the provisions of Pt VIII of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act).  They have acted as Trustees of Mrs Joan Elizabeth Andony (Mrs Andony) who became bankrupt on 26 August 2003 and her husband, Mr Arthur John Andony (Mr Andony) who became bankrupt on 3 June 2004.  The Andonys continued in bankruptcy until 8 November 2006 and 4 June 2007 respectively. 

2. The applicants seek to set aside certain land and share transactions or recover compensation to the estates in relation to those transactions.  They contend the transactions were effected at values lower than the market value of the assets transferred. 

3. From 1997 until 2001, Mr Andony and Mrs Andony were the registered proprietors (as joint tenants) of a one-third share in land in Bookara, Western Australia near the northern coastal township of Dongara (the Dongara Land) together with the first respondent (Devere) holding the other two-thirds.  On 23 May 2001, Devere became the registered proprietor of all of the Dongara Land.  Later in 2007, the third respondent (Castleworld) became the registered proprietor. 

4. The applicants’ claim is that Devere gave, at the most, $45,000 as consideration for the transfer of the Andonys’ one undivided third share of the Dongara Land to Devere when the value of that share was between $236,666 and $242,000.

5. A second claim involves a transfer of Devere shares.  In 2001, Devere agreed to issue to the second respondent (Packham) 1,111,113 ordinary fully paid shares in Devere. In addition to that share issue, Mr Andony as a director of Devere also caused 1,111,111 shares in Devere to be issued to the Andonys jointly. The applicants assert that Mrs Andony was also aware of or concurred in the issue of shares in Devere by Mr Andony. They say the issue of the shares in Devere to Packham was a transfer of property at an undervalue caught by s 120(7) of the Bankruptcy Act.

6. In relation to the transfer of the Dongara Land from Devere to Castleworld in 2007, a similar claim is made.  

7. Despite some factual complexity and considerable surrounding documentation, the basic events are not in dispute.  Beyond some peripheral issues, what is substantially in contention is the value of the Dongara Land (and therefore also the value of the shares in Devere) and to some extent the motivation behind certain events.  There are also disputes as to the consequences which may arise at law. 

8. These central issues give rise to a need to evaluate the preferable valuation evidence and the credibility of key witnesses.

   KEY STATUTORY PROVISION

9. The statutory provision central to the applicants’ case is s 120 of the Bankruptcy Act which relevantly provides:

   120     Undervalued transactions

   Transfers that are void against trustee

   (1)A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

   (a)the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and

   (b)the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.

   …
   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.

   …
   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.

   AN OVERVIEW

10. In about 1997, Mr Giacomino (also known as Jack) Fazio (Mr Fazio) became involved with Mr Andony in attempts to develop the Dongara Land and to raise funds for that purpose.  Mr Fazio, through corporate entities he controlled, attempted from time to time to purchase a half interest in the Dongara Land but was unable to complete those transactions because of a lack of available funds. 

11. Ultimately, in 2001, one of those companies, Packham, obtained a half interest in the Dongara Land.  In substance, Packham acquired 50% of the shareholding in Devere which by then owned the whole of the Dongara Land.  The Andonys held the other 50% shareholding.

12. At a later time, between 2003 and 2004, the Andonys 50% shareholding in Devere was also transferred to Packham. 

13. Dealing first with the one-third interest in the Dongara Land, the applicants allege that in 2001 the Andonys transferred their one-third interest in the land to Devere so that the land would be wholly owned by Devere and so that Packham in turn could then take, in effect, a 50% interest in the Dongara Land by acquiring half of the shareholding in Devere.  The transfer from the Andonys to Devere was effected by a transfer of land dated 11 April 2001.  It was registered on 23 May 2001.

14. The consideration shown in the printed transfer form is expressed as being only $45,000.  The applicants argue that, in fact, even this amount was not given by Devere to the Andonys for the transfer. 

15. On the applicants’ case, the market value of the Dongara Land at that time in 2001 was, as to the whole of the land, between $710,000 and $725,000.  It follows that a one-third interest (on the applicants’ case) was worth between $236,666 and $241,666.

16. These events took place prior to the respective bankruptcies of the Andonys.  Mrs Andony became bankrupt in August 2003 and Mr Andony was made bankrupt in June 2004.

17. The applicants, therefore assert the rights set out in the Bankruptcy Act which entitle the trustee in bankruptcy to recover (for the benefit of creditors), property transferred by bankrupts at an undervalue within five years prior to the commencement of the bankruptcy. This provision (s 120(1) of the Bankruptcy Act) applies in circumstances where the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property. Either of these limbs contained in s 120(1)(b) of the Bankruptcy Act is applicable according to the applicants.

18. Another focus of debate has been whether ‘consideration’ in s 120(1) may be a contractual obligation to give consideration as distinct from the actual giving of the consideration as a fact. The applicants contend that the relevant ‘consideration’ for the section is that which has actually been given not that which has been promised, agreed or intended to be given.

19. Further, according to the applicants, it is only that consideration which is given by the transferor that will be relevant in determining the applicability of s 120(1) of the Bankruptcy Act, not consideration given by a person or entity other than the transferor.

20. It is common ground that the time at which the market value of the property is to be assessed is at the actual time of transfer (s 120(7)(c)). 

21. In circumstances where the section is enlivened, if the transfer is avoided as against the trustee pursuant to s 120(1), then the transferee must also be repaid by the trustee an amount equivalent to the value of the consideration actually given by the transferee (s 120(4) of the Bankruptcy Act). The applicants argue that this subsection is not triggered in the present circumstance as no consideration was ever given by Devere for the transfer of the one-third interest in the Dongara Land.

22. A number of responses to the contentions by the applicants have been raised by Devere and Packham although not all responses were actively pursued at trial. 

23. Devere and Packham contend that consideration was given for the Andonys’ one-third interest pursuant to an agreement which was made in 2001 (the 2001 Agreement). 

24. To this the applicants stress that s 120(1) of the Bankruptcy Act is concerned not with ‘agreed’ consideration but with consideration actually ‘given’. The applicants contend that Devere, in fact, gave no consideration for the transfer, the reason being that it was a company controlled by the Andonys and that the transfer was simply to facilitate Packham subsequently obtaining a 50% interest in the Dongara Land by acquiring 50% of the shareholding in Devere.

25. The applicants stress that the agreed payment of $45,000 was never made.  There is, however, as acknowledged by the applicants, an indication in the financial statements of Devere that the payment was treated as an interest free loan from the Andonys to Devere.  There is no evidence that that loan was ever repaid. 

26. The applicants contend that it cannot be argued under the 2001 Agreement that the issue of shares to the Andonys was consideration of any value.  This is for the reason that before the share issue, the Andonys together owned all of the shares in Devere.  After the share issue, they owned only half because at the same time, Devere issued a number of shares to Packham. 

27. Devere and Packham have also pleaded that miscellaneous payments were made by companies associated with Mr Fazio between 1997 and 2001 totalling approximately $132,000 which are also to be included as consideration given for the transfer of the one-third interest in the Dongara Land.  No evidence was led at trial in support of this contention.

28. The applicants point out that any such contention should not be accepted as there was no reference under the 2001 Agreement to the making of such payments or any other evidence that the parties had agreed that those payments would constitute consideration for the transfer.  Further, as indicated, in respect of many of the payments there was no evidence of the payments actually being made or that the payments were made by Devere and received by the Andonys.

29. Packham and Devere also strenuously dispute the market value of the Dongara Land at the date of the transfer of the Andonys’ one-third interest in Devere.  The amounts which they contend the land was worth vary slightly from each other but each of Packham and Devere contend that the land was worth much less than contended by the applicants.

1. Much of the trial focussed on the expert valuation evidence given in respect of the land at various dates.

2. Moving then to the second land transaction, it is necessary to consider the circumstances surrounding the transfer of the Dongara Land to Castleworld.  This transfer occurred after the commencement of these proceedings in the Federal Magistrates Court.  (The proceedings were transferred from that Court to this Court).

3. The relevant statutory provision triggered in connection with s 120 of the Bankruptcy Act is subsection (6) which provides that the section does not have application or does not affect the rights of a person who acquired property from a transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.

4. In the absence of those features, it is contended for the applicants that even if the first transfer had not been void, the transfer to Castleworld would be void. 

5. It is necessary to consider the meaning of ‘good faith’ for the purpose of subs (6) and this will be discussed further in due course.  A further question arising in relation to the Castleworld transfer is who bears the onus of proof as to ‘good faith’.  The applicants argue that the burden is on the transferee.  That position is contested.

6. The agreement under which the Dongara Land was transferred from Devere to Castleworld was dated 30 May 2007 and the purchase price expressed in the agreement and actually paid by Castleworld was $1.6 million.  For the applicants it is contended that Castleworld did not give consideration at least as valuable as the market value of the land which at the date of the transfer was at least $3.2 million. 

7. Once again, the respondents (even more) strenuously dispute the Dongara Land was then worth $3.2 million.

8. The applicants draw on the content of and circumstances surrounding loan facility agreements entered into between Castleworld and a financier, Investec Bank (Australia) Ltd (Investec) to fund the purchase of the Dongara Land.  It was a condition precedent to that facility agreement that Investec approve a valuation of the Dongara Land disclosing a valuation of not less than $6 million.  It is the case that Investec, in fact, was provided with a valuation of the land of $6 million from Colliers International (Colliers) but there is debate as to whether that figure played any role at all in the agreement by Investec to advance the purchase price of $1.6 million. 

9. Castleworld is owned and controlled by Mr Alfred Naude who also owns and controls Project Planning Management and Development Pty Ltd (PPM).  The circumstances giving rise to the Castleworld transfer were complex and extensive.  It was not a transaction consummated quickly.  From about April 2005, Castleworld had discussions and negotiations with Devere with a view to purchasing the Dongara Land or an interest in it.  In consequence of that, in October 2006, PPM entered into an in principle agreement with a company controlled by Mr Fazio to enter into a joint venture contract and commercial arrangement with Devere.  Under that agreement PPM was to provide project management and development services in relation to the Dongara Land. 

10. There was evidence that Mr Naude attempted to attend a meeting of creditors of the Andonys’ bankrupt estate held by the applicants on 29 November 2006 and some suggestion that at or around this time Mr Naude was being kept up to date by Solomon Brothers, solicitors for Mr Fazio and his entities, in relation to the position with respect to caveats which the applicants had lodged over the Dongara Land. Indeed, by a letter dated 13 December 2006, Solomon Brothers wrote to Carles Solicitors, (then acting on behalf of the applicants) indicating an intention to seek compensation under s 140 of the Transfer of Land Act 1893 (WA) (TLA) in relation to the applicants having lodged a caveat over the Dongara Land without reasonable cause. 

11. It was a week after this that Mr Naude, acting in his capacity as the Director of PPM, instructed Colliers to undertake a valuation of the Dongara Land. 

12. The remaining caveat over the Dongara Land was withdrawn on 22 December 2006 in response to the threat contained in the Solomon Brothers 13 December 2006 letter.  Neither Devere nor Castleworld at any time prior to the transfer of the Dongara Land notified the applicants of the sale agreement they had entered into or their intention to transfer the land between them.  The applicants contend that this shows that the transfer was taking place in clandestine circumstances so as to not trigger awareness on the part of the applicants who would have attempted to restrain the transfer. 

13. Mr Naude strongly rejects that contention being, as he described it, part of a ‘conspiracy theory’ and simply points out that once the caveats had been removed in response to the demand by Solomon Brothers, his belief was that any underlying claim which might have been relied upon to support the caveats, (of which he had little or no knowledge) disappeared with the withdrawn caveats.  The applicants contend that this assumption is implausible given the extensive business interests and experience which Mr Naude had accumulated by 2007. 

    RELIEF CLAIMED BY APPLICANTS

14. The claims under the Bankruptcy Act to set aside the transactions have been mentioned.

    Claims in equity

15. Over and above claims setting aside the transfers, the applicants also raise a separate equitable claim in respect of the Dongara Land. In that regard, the effect of the Bankruptcy Act is that the property of the bankrupt vests in the trustee on the debtor becoming bankrupt. The effect of s 120 of the Bankruptcy Act is to render a transfer voidable (rather than void) at the election of the trustee in bankruptcy. If the trustee exercises such an election and avoids the transfer pursuant to s 120 of the Bankruptcy Act, then if the property continues to exist in specie at the commencement of the bankruptcy, it will be treated as having vested in the trustee when the debtor becomes a bankrupt. 

16. In relation to this claim, Devere sold to Castleworld the whole of the Dongara Land and had received by way of proceeds of sale the sum of $1.6 million.  The applicants argue, therefore, that Devere is obliged to account to the applicants to the extent that those proceeds represent the sale of the applicants’ one-third interest in the Dongara Land as money had and received for the use of the applicants.  The applicants point to the fact that of the total proceeds of sale of $1.6 million for the sale of the Dongara Land, $1,597,780.70 has in fact been received by Packham. 

17. However, Packham owns all of the shares in Devere.  The applicants contend that Packham has received the funds with knowledge of the applicants’ interest in the Dongara Land and, therefore, is obliged to account to the applicants to the same extent as Devere.  Unlike Castleworld, Packham did not contend, nor did Devere, as Mr Fazio did not give viva voce evidence, that it thought the applicants’ claims had been withdrawn or resolved when the caveat over the Dongara Land was withdrawn. 

18. In addition, it is argued that (because of the allegedly void share transaction), Packham has held the shares in Devere on trust for the applicants since the commencement of the bankruptcy of the Andonys.  The receipt of the proceeds of the sale of the whole of the Dongara Land by Packham in its capacity as shareholder, it is said, represents money had and received by Packham for the use of the applicants’ shares and for which Packham is obliged to account in its entirety to the applicants. 

19. The applicants argue that the claims they have against Devere and Packham to account are in addition to, rather than being in substitution for, or as an alternative to the right to claim a one-third interest in the Dongara Land.  The applicants point to the fact that the land has now been encumbered by Castleworld with a mortgage in favour of Investec from which the monies received by Devere and Packham were advanced.  It is argued that the accounting of those monies to the applicants will permit them to eliminate or reduce the liability under the mortgage. 

20. As to Devere, the applicants also contend it has breached its fiduciary duty (as trustee of the applicants’ one-third interest in the Dongara Land) to act in the best interests of the applicants in relation to the sale of the land.  It is asserted that there has not been compliance with the obligation to exercise the power of sale with respect to the applicants’ interest in the land reasonably and in good faith and to account to the applicants for the proceeds of the sale of the interest in the land.  Again, this, as with most of the arguments, turns on the contention that there was a significant undervalue of the land and that Devere was aware of the applicants’ interest in the land but did not notify the applicants of the intended transfer or give the applicants any opportunity to prevent the sale. 

21. The applicants argue that they are entitled to equitable compensation for a breach of duty by Devere.  That compensation, it is said, is equivalent to the market value of the applicants’ one-third interest in the Dongara Land at the date of the transfer to Castleworld.  On the applicants’ case, that is $1,066,666.  Castleworld denies any liability but contends that the value at the date of the transfer to it was far less than the sum contended for by the applicants. 

    The shares claim

22. Separate claims are also made by the applicants with respect to shares in Devere. 

23. The applicants raise five claims with respect to the shares in Devere. They are:

    (a)a claim that the issue of 1,111,113 shares in Devere to Packham in November 2001 is void against the applicants pursuant to s 120(1) of the Bankruptcy Act;

    (b)a claim that the transfer in June 2003 to Packham of Mr Andony’s interest in 1,111,111 held jointly with Mrs Andony is void against the applicants pursuant to the same provision;

    (c)a claim that the registration in January 2004 of Packham as the holder of Mrs Andony’s interest of 1,111,111 shares in Devere held jointly with Mr Andony was of no effect because Mrs Andony did not agree with or consent to the transfer of that interest to Packham;

    (d)as an alternative to (c), a claim that the transfer in June 2003 to Packham of Mrs Andony’s interest of 1,111,111 shares in Devere held jointly with Mr Andony is void against the applicants pursuant to the same provision; and finally

    (e)a claim that the registration in January 2004 of Packham as the holder of 1 share in Devere belonging to Mrs Andony and 1 share in Devere belonging to Mr Andony was of no effect because neither Mrs Andony nor Mr Andony authorised or consented to the transfer of those shares to Packham. 

24. Those claims will be examined below.

    THE MAIN PERSONALITIES AND THEIR ACCOUNTS

25. Against that background and in light of those issues, the explanations given by witnesses as to their involvement in and circumstances surrounding the transactions assume importance. 

26. As it transpired, despite the extent of evidence given by key factual witnesses, little of it was of assistance in ascertaining the true nature of the circumstances surrounding the agreements under consideration and the agreements themselves.  The passage of time together with the surrounding complexity of the earlier transactions resulted in little assistance in this regard being available from the Andonys.  Mr Fazio did not adduce oral evidence.  Mr Naude in aspects of his evidence was defensive and more concerned to argue his position than give frank testimony. 

    Mr Andony

27. Mr Andony explained that the Dongara Land is close to Dongara, Western Australia and was zoned rural when his family and he purchased it.  After the purchase, the family spent ‘substantial time and money’ on planning approvals.  They ultimately succeeded in having the land rezoned for tourism after obtaining planning approvals from the local Shire and the Western Australian Planning Commission (WAPC). 

28. Although specifics were not supplied, Mr Andony estimated the costs of that exercise as being in excess of $630,000.  Those costs, he said, included holding costs on the land and approval costs. 

29. They also engaged an architect, Mr James Christou, to draw up plans and make presentations to the Council.  They engaged planners and environmental consultants to carry out environmental studies necessary to obtain the approval.  As at the date of the trial, Mr Andony had not retained any records relating to those matters.  They had either been destroyed or passed onto Mr Fazio. 

30. In about September 1989, the zoning was changed and they attempted unsuccessfully to enter into a joint venture with project managers to develop the land.  They estimated it would cost somewhere between $10 million and $20 million to bring the project to fruition and did not have the money for that.  This included the cost of headworks, such as subdivision, roads, electricity, water and such like.  At that stage the Dongara Land was mortgaged and the Andonys did not have sufficient funds to buy out the other members of the family who wanted to sell.  Accordingly, they borrowed $230,000 from the National Australia Bank (NAB) (the NAB loan).  Although the loan was taken out in the Andonys’ own names, the funds were actually used by Devere to acquire its interest in the Dongara Land secured in turn by a mortgage over both the Andonys’ interest and the interest of Devere.  Those funds were used to pay out the existing bank loan and to pay a relatively small amount to remaining family members. 

31. It was a feature of the relationship between the Andonys that Mr Andony handled all the finances and all business decisions.  He rarely discussed those issues with his wife, particularly ‘when things were going badly’.  The Dongara venture was not successful.  The holding costs for the Dongara Land between 1997 and 2000 exceeded their net income and burdened them with debt which they continued to refinance.  They had other significant financial difficulties through the 90’s and it became impossible to service the debt on the Dongara Land.

32. Mr Fazio whose company, Topfox Corporation Pty Ltd (Topfox) owned the land adjacent to the Dongara Land had approached Mr Andony in 1997 offering to buy the whole of the Dongara Land for $350,000.  Mr Andony refused.  He indicated that he would sell Mr Fazio half of the land for $350,000.  Between mid-1997 and 2001, the Andonys entered into several contracts with Mr Fazio and/or companies controlled by him in order to proceed with the sale of 50% of the Dongara Land but none of those contracts was pursued.  They were not pursued, according to Mr Andony, because Mr Fazio himself could not raise the finance.

33. In 2000, Mr Fazio told Mr Andony that he wished to obtain a valuation of the Dongara Land.  Mr Andony agreed with this step being taken.  As a result, Mr Fazio instructed Egan National Valuers (WA) (Egan) to prepare a valuation of both the Dongara Land and the adjacent property owned by Topfox.  Egan provided the valuation in September 2000.

34. By that valuation Mr RJ Bracewell of Egan assessed the market value of the Dongara Land at September 2000 as being $710,000 if it were free of all encumbrances.  That report will be considered in greater detail below. 

35. For the adjacent Topfox land, he considered an appropriate market value was $517,000.

36. Mr Andony noted that by 2001 the Andonys were indebted to the NAB for about $310,000.  This comprised the original borrowings to fund Devere’s purchase of its two-third interest from the Andony family and some of the holding costs for the Dongara Land.  Again, his old records were no longer available.  In financial statements prepared by the Andonys’ then accountants, the debt to the Andonys from Devere was shown as being $274,326 by 30 June 2000. 

37. Devere’s only asset was its interest in the Dongara Land.  The debt to the Andonys was its only material liability. 

38. A proposal was developed in discussions between Mr Fazio and Mr Andony.  Instead of paying the Andonys cash for their half interest in the Dongara Land, Mr Fazio proposed that he would transfer two units from his development of commercial units in Strang Street, Beaconsfield to the Andonys.  This was of little interest to the Andonys who needed cash to repay the NAB loan as well as other debts. 

39. Mr Andony introduced Mr Fazio to Mr Wayne Greenwood at Statewest Credit Society Limited of Western Australia (Statewest) in early 2001.  Mr Fazio assured Mr Andony that he would arrange for Packham to borrow $475,000 from Statewest using both the Dongara Land and one of the commercial units at Strang Street, Fremantle (also referred to as Strang Street, Beaconsfield) (the Unit) owned by Packham as security (the $475,000 loan).  Although the Andonys were much more interested in obtaining cash at this stage, they were conscious that the Strang Street unit, if it was transferred to them, could be used as security to raise borrowings. 

40. Mr Andony says that it was some time in 2000 that Mr Fazio first raised the idea of Packham holding its 50% interest in the Dongara Land through Devere.  The issue of shares in Devere, so that 50% of the interest in the Dongara Land could occur, was also an idea advanced by Mr Fazio. 

41. In April 2001, Mr Andony arranged for the transfer of the Dongara Land signed by him and his wife to Devere at a nominated consideration of $45,000. 

42. Mr Andony says that he never received any payment in respect of the $45,000 for the transfer.  There is no evidence that the payment made was ever made. 

43. The transfer of the Dongara Land and the registration of the mortgage to Statewest were affected on or shortly after 23 May 2001.  The evidence of Mr Andony is that he and his wife received the sum of $163,364.92 from Packham which was paid into the Statewest account and around the same time, the liability of $308,864.58 to NAB was discharged.  After these transactions in May 2001, Mr Andony began paying (direct to Statewest) at the request of Mr Fazio interest on $300,000 of the $475,000 loan borrowed by Packham.  Mr Andony said that when he expressed concerns about paying interest for $180,000 of the $300,000 borrowing to Mr Fazio, Mr Fazio pointed out that Mr Andony would be able to get rent for the Unit which would pay for that portion of the interest which should otherwise have been met by Mr Fazio.

44. Through this time, the Andonys were running two businesses known as Tot Spot Childcare and Star Pacific Travel.  Mr Andony would make the interest payments direct to Statewest from one of the two cheque accounts held by those two businesses.  Again, the records for these payments are no longer held by the Andonys.  Despite the assurances from Mr Fazio about receipt of rent, Mr Andony says that at no stage did they ever receive any rent from the Strang Street Unit and they were continually ‘fobbed off’ by Mr Fazio.  Mr Fazio assumed the running of Devere after the discharge of the NAB loan and payment into the Statewest account of $163,364.92 in May 2001. 

45. The evidence of Mr Andony was that documents and accounts were prepared either by his in-house accountant or his external accountant.  At that stage, according to Mr Andony, Mr Fazio was represented by Mr Paul Fletcher, solicitor of Solomon Brothers Solicitors, Perth (Mr Fletcher). 

46. Mr Andony said that the documents drawn up to reflect the share transfer were presented to him either by Mr Fazio or Mr Fletcher.  Mr Andony was not concerned about the mechanics of how the transaction was structured providing that the practical effect was that he and his wife owned 50% of the Dongara Land and Packham owned the other 50%.  He did not retain nor did Mr Fazio or anyone else on Mr Andony’s behalf give him any records relating to Devere.  For that reason he says that he did not examine closely the documents prepared by advisors to Mr Fazio.  He says that the loan agreement and Shareholders’ Agreement signed by Mr Fazio and the Andonys were just put in front of him by Mr Fazio and he signed.  They do not reflect, he says, the true nature of the transaction.

1. Between 2001 and 2002, the development of the Dongara Land continued to be hampered by a lack of funds.  Mr Fazio and Mr Andony continued to look without success for a developer or joint venture partner to build the project.  Mr Andony was still struggling financially and Mr Fazio told him that he was also short of funds. 

2. In 2002, it was agreed that an up to date sworn valuation of the Dongara Land should be obtained in order to assist in obtaining further borrowings in order to meet some of the accrued holding costs.  Mr Robert Elliott was approached.  Mr Elliott subsequently produced other valuations and was called by the applicants as an expert witness as to the value of the Dongara Land.

3. On 12 March 2002, Mr Elliott issued a report which was intended to be provided to Statewest (Mr Greenwood) who had previously assisted the Andonys with borrowings.  In that valuation document, Mr Elliott concluded that the Dongara Land was then worth $1,425,000.  Mr Elliott observed that the Dongara Land being the land component of the proposed Bookara Beach Resort had undergone an extensive and costly involvement through the State planning process since 1989.  It enjoyed a ‘coveted zoning status’ of Special Use, Tourism and Recreation within an absolute coastal and beach front environment where similar approvals continued to be more difficult to obtain due to the ever increasing constraint imposed by all of the various local and government authorities in Western Australia.  Mr Elliott observed that enquiries made within the Shire of Irwin which was the governing authority indicated a strong ongoing support for the project which would again benefit from an application to further subdivide the land into five ‘Superlots’ due to go before Council on 20 March 2002.  The report also indicated that he had taken into consideration various comprehensive reports and servicing proposals submitted by the planners, architects and engineers and he was also aware of the previous assessments and valuation reports which were also considered in their context at the time to which they applied. 

4. That sworn valuation was used to approach Statewest for additional funding.  On 20 May 2002, as a result, Statewest agreed to grant one facility to Packham for $150,000 and another to Packham for $122,000.  Mr Andony says the purpose of the first loan was to repay costs already spent on the Dongara Land and to meet future costs associated with its development.  The loan of $122,000 was to be for the use of the Andonys, according to Mr Andony.  It was secured by the mortgage already granted by Packham in 2001 over the Strang Street Unit.  Of the $122,000, $120,979 was paid into the Andonys’ Statewest account.  Again, the Andonys continued to pay the interest on the loan directly to Statewest from the business cheque accounts held with the Bendigo Bank. 

5. As to the $150,000 loan, Mr Andony says that the Andonys received $25,000 on about 28 May 2002.  Mr Andony and Mr Fazio had agreed that they would each take $25,000 on account of holding costs previously incurred. 

6. Notwithstanding receipt of these funds, the financial circumstances of the Andonys continued to deteriorate.

7. In the meantime, Mr Fazio sold the Strang Street Unit without reference to the Andonys. 

8. On 1 April 2003, an agreement was executed by some or all of the Andonys, Packham, Devere and Mr Fazio (the 2003 Agreement).  The 2003 Agreement was not stamped until 10 June 2004.  There is a debate about the execution of the 2003 Agreement but I will come to that shortly. 

9. Recitals to the 2003 Agreement recorded that by an undated Shareholders’ agreement executed in 2001, the Andonys and Packham as equal shareholders in a then undefined company set out the terms by which the Dongara Land and the company affairs would be managed.  The company was not defined by this agreement but I infer from all the extraneous documents and evidence that it was intended that the company be Devere.  The recitals further indicated that Packham as trustee for Devere’s holding trust had previously secured loans from Statewest of $355,000, $150,000 and $120,000, all secured by mortgage against the Dongara Land.  It continued that Packham, on behalf of the Andonys, had also previously secured a loan from Statewest of $122,000 secured against the Unit, that Mr Fazio was director of Packham and of a total of $625,000 Packham loans, the Andonys acknowledged that an amount of $375,000 was received for their separate use and $250,000 was received by Packham.  The recitals recorded that the Andonys had failed to refinance the loan in respect of the Unit and failed to transfer ownership of the Unit and now authorised Packham to sell the Unit for $160,000.  It also recorded that the Andonys acknowledged an amount of $32,000 was owed to Packham in respect of an overdraft facility obtained by Packham from Statewest for the Andonys’ use.  The Andonys, also by the recitals, purportedly acknowledged that they owed the balance of debts outstanding by Devere to Solomon Brothers and a firm known as MGY Accounting (MGY). 

10. The agreement then noted that on the sale of the Unit, Statewest would receive repayment of the $122,000 loan.  Packham would receive repayment of the $32,000 debt.  Rates, rental and taxes in respect of the Unit were to be adjusted in the balance of sale proceeds that were to be paid to Solomon Brothers and MGY and that following settlement of the sale of the Unit, the Andonys and Packham were to continue making the required payments on the Packham loans in the agreed portions of $375,000 to $250,000 respectively and that within 12 months of settlement of the sale of the Unit, the Andonys were to repay any balance still owing in respect of the Solomon Brothers and MGY debts.  The Andonys also under this agreement purportedly guaranteed and indemnified Devere and Mr Fazio in respect of the Solomon Brothers and MGY debts and undertook to pay all outstanding liabilities to Solomon Brothers and MGY and a further amount of $5,000 in reduction of the $355,000 account under the Packham loans and the amount required to fully repay the $120,000 account in the Packham loans. 

11. The agreement continued that in the event that Mr Fazio had been previously required to repay the Solomon Brothers and MGY debts, the Andonys undertook to reimburse Mr Fazio within 12 months of settlement of the sale of the Unit for the amount paid by Mr Fazio.

12. Clause 7 of the 2003 Agreement recorded:

    7.In the event of:

    (a)issue of any notice by Statewest Building Society in respect of the Packham Loans due to the Andonys’ failure to make the required repayments as and when due; or

    (b)the Andonys’ failure to make the required repayments under Clause 3;

    the Andonys authorise Packham to immediately register the share transfer form held under clause 4 in full satisfaction of the Andonys’ debts to Packham and Fazio and the parties agree that they and all their related companies shall have no further claims against each other. 

13. This 2003 Agreement is one of many documents produced in the course of the proceedings which, to say the least, is of dubious content. 

14. The 2003 Agreement refers to Packham continuing to hold ‘the share transfer form executed by the Andonys in respect of their shareholding in Devere as security for repayment by the Andonys of their liability in respect of the Packham loans’.  I am asked to infer that this is the share transfer form in which signatures supposedly being the Andonys’ as sellers bearing date 17 May or 17 June 2003 appear.  This transfer form purports to transfer 1,111,111 shares in Devere held jointly by the Andonys for the sum of $311,111.08.  However, the date of the share transfer form is after the date of the 2003 Agreement.  The share transfer form would have been of little use to Devere, Packham and Mr Fazio if it had not been signed by the Andonys.  The 2003 Agreement refers to the share transfer form having been executed but it could not have been executed as at the date of that agreement as the 2003 Agreement was purportedly made on 1 April 2003 but the share transfer form purportedly made on either 17 May 2003 or 17 June 2003.  (It was, in any event, only stamped on 21 November 2003). 

15. As to the 2003 Agreement, Mr Andony says that he does not know the identity of the witness who was purported to sign as a witness to his signature and the signature of his wife.  He is unable to recall his wife signing any documents and cannot recall whether he showed them to her or discussed them with her.  He denies signing any documents on behalf of his wife and denied having had the authority to do so. 

16. Mr Andony says that it was after the event that he learned that Mr Fazio had caused the 50% owned by the Andonys in Devere to be transferred to Packham by way of share transfer forms of 17 May/June 2003 (stamped in November that year) for the transfer of 1,111,111 shares for $311,111 and by transfer of June 2004 from each of the Andonys said to be for the same amounts but for only one share each.  Mr Andony denies ever having given power of attorney to Mr Fazio even though the share transfer forms for the transfer of each of the shares held by the Andonys purports to have been signed by Mr Fazio under a power of attorney.  Mr Fazio did not give evidence. 

17. Mr Andony gave evidence that he did not receive $311,111 or any portion of it or any sum at all from Packham in 2003 with respect to the 2003 share transfer.  He says neither he nor his wife received any monies from Packham or Devere since the Statewest advances in May 2002.  He has had no access to the books and records of Devere since the May 2001 transaction. 

18. In a supplementary statement, Mr Andony responds to a number of matters which would have been raised by Mr Fazio had he been called to give evidence.  It is unnecessary and inappropriate to consider that material other than to the extent that it may have arisen in the course of Mr Andony’s cross-examination or through other aspects of the evidence. 

19. As Mr Andony’s evidence at trial unfolded, it emerged that despite running a number of business activities, at the time of his bankruptcy, he owed $304,000 by way of unpaid superannuation contributions for employees.  He also accepted having borrowed several hundred thousand dollars from family and friends all of which, as at 2004, remained unpaid. 

20. He was tested about his knowledge as to the difference between subdivision and development and claimed familiarity with those concepts as he also controlled a real estate company.  He confirmed that he understood that although he had achieved or helped to achieve an amendment to the town planning scheme so that the zoning of the Dongara Land was changed, any development of the land would need separate approval from the local authority.  Additionally, if not in parallel, approval would be needed from the WAPC to subdivide the Dongara Land.  Subdivision in effect would have to precede any development approval.  Accordingly, it was necessary to get subdivisional approval before any development application could be submitted to the local authority. 

21. The statement ‘we have total government approval to develop a fully integrated resort’ used in a document to attract the interest of other potential investors was clearly inaccurate.  Equally so was the statement ‘we are now in a position to commence detailed plans and proceed with construction’.  He explained that the subdivision application was made ‘at the recommendation of Mr Fazio’ by a business known as ‘Development Planning Strategies’ but that subdivision application to the WAPC was refused and an appeal was lodged with the Town Planning Appeal Tribunal.  As a result, subdivisional approval was then obtained pursuant to consent orders made by the Tribunal.  The subdivision was for five lots. 

22. Mr Andony accepted that Mr Fazio took over the activity from Mr Andony because there had been little progress under Mr Andony. 

23. In a preliminary investigation commissioned by engineers in May 1988 a range of development estimates of between $800,000 and $1.8 million for earthworks, water supply, waste water disposal, Telecom, SEC Power, engineer and survey fees were given.  Additionally in a report prepared by architects in September 1989, a figure was postulated in excess of $32 million to develop a resort on the land. 

24. As to the proposition that the land was in the middle of nowhere, Mr Andony protested that it was on the ocean and had ocean frontage.  It was also within about five kilometres of the Greenough River Resort and a caravan park which was closer again.  He accepted that the sort of resort which was contemplated in the engineering and architectural reports would have been beyond the capacity of he and his family to develop.  For that reason, the project was languishing until Mr Fazio came along and drove the subdivisional application.  He had not previously made an application for subdivision or for development approval but did not consider that the idea of the resort was just an unrealistic dream. 

25. It was Mr Andony who suggested to Mr Fazio that Mr Elliott might be a suitable valuer.  At that stage Mr Fazio had a valuation from Egan (Mr Bracewell) dated 25 September 2000 valuing the land at $710,000.  It was Mr Andony who asked Mr Elliott in March 2002 for a valuation on the property so that Mr Fazio could borrow from Statewest because he could not get the finance from anywhere else.  He did not supply the 1988 and 1989 costings from the engineers and the architects to Mr Elliott. 

26. Mr Andony reaffirmed that for the whole of his married life of 40 years he had been the only person to deal with the financial or business affairs of the family.  His wife would just sign documents that he put in front of her.  This included loans, security documents and such like. 

27. Mr Andony accepted that he did borrow $122,000 secured over the Unit.  He did not provide any security for it and in fact could not.  The $122,000 loan in May 2002 was to be repaid from the proceeds of the sale of the Unit.  That money was used for Mr Andony’s own personal purposes.  He also accepted that he lent Mr Greenwood from Statewest, prior to his dismissal, $25,000 for the purchase of shares.  He denied, however, that the loan of $25,000 was by way of thanking Mr Greenwood for providing the advance of $122,000.

28. He also accepted assisting his wife in relation to her statement of affairs which the cross-examination of Mrs Andony showed was conspicuously inaccurate. 

29. Mr Andony says he treated the $122,000 as a loan secured against the Unit which would be repaid on the sale of that property.  He also expected that he would receive the balance of the sale price when that occurred.  However, he made the point that this did not take place as Mr Fazio took the balance of the sale price.  He subsequently entered into an agreement with Mr Fazio, part of the effect of which was that he would be providing to Mr Fazio security over the shares that he held in Devere.  This was required before the proceeds of the Unit could be disbursed to pay out the $122,000 loan.  That was not something he discussed with his wife.  In relation to how Mrs Andony’s signature appeared on the 2003 Agreement, or the identity of the witness to his own signature, Mr Andony was not at all helpful.  Equally, however, Mr Fazio did not give evidence on this topic. 

    Mrs Andony

30. Mrs Andony was vague about all business matters.

31. She purported to corroborate the general background evidence of her husband but had little to contribute on any of the detail.  She left the decisions in relation to the Dongara Land and all other business matters to her husband.  She did not use the cheque account and did not have card access to any bank account.  If she needed money, she asked her husband for it.  They both ran the Tot Spot Childcare business but she worked in that business full-time with her husband doing the books and accounts with the assistance of an accountant who prepared the financial accounts and tax returns.  It was her husband who ran the travel agency, Star Pacific Travel. 

32. At no time did Mrs Andony authorise her husband to sign any documents relating to the Dongara Land or any other activity on her behalf. 

33. Mrs Andony had very little communication with the Fazios other than once or twice socially with Mr Fazio.  She identified her signature on the 11 April 2001 Transfer of Land document, on the mortgage granted by Devere to Statewest, on the 2001 agreement stamped on 10 June 2004, on the Shareholders’ Agreement of 2001 (but stamped 10 June 2004), on the Loan Agreement between the Andonys and Devere of 2001 (stamped on 10 June 2004), and on the Notice of Resignation of Director on 3 November 2001.  However, she expressly denied signing the 2003 Agreement.  Although the words ‘signed by the said Joan Elizabeth Andony’ appear at the end of the 2003 Agreement with a signature purporting to be hers appearing next to those words, she denied it was her signature.  Nor did she recognise the signature of the witness to her purported signature on that document. 

34. It is not possible to decipher with any certainty the name of the person who has signed as witness to that document.  There is no printed legible inclusion of the name or occupation or address. 

35. Similarly, Mrs Andony denies ever signing the share transfer form of 17 May/June 2003 stamped 21 November 2003 for the transfer of 1,111,111 shares in Devere from the Andonys to Packham.  The first time she saw those documents was subsequent to her bankruptcy. 

36. Again, she says the share transfer form transferring one share in Devere belonging to her for supposedly $311,111 purporting to have been signed by Mr Fazio under power of attorney was never so authorised.  She did not give Mr Fazio a power of attorney of any nature and says that she never received any payment or benefit for the transfer of that share.  For Mrs Andony’s part, she was not aware that Packham had sought funding from Statewest in 2002 or that Statewest had lent any money to it that year.  Indeed, she was not aware that any of the money lent to Packham by Statewest had been paid into the Andonys’ Statewest account that year. 

37. Mrs Andony says that she did not agree to transfer her remaining 50% to Devere, to Packham or to anyone else.  Although she was aware that under the 2001 agreement the Andonys or their nominees were to receive the Unit, she denies receiving the Unit or any benefits from it.  Further, the Andonys control another company, Gold River Holdings Pty Ltd which, Mrs Andonys says, also did not receive any benefit from the Unit. 

38. Mrs Andony confirmed that in her statement of affairs in connection with her bankruptcy, she relied very substantially on advice from her husband.  She said that although she was well aware that she was liable to banks in respect of loans secured against properties jointly owned, she did not record any of those liabilities because she ‘didn’t realise that everything had to be put down, I guess’. 

39. The inaccuracies in that statement were significant.  They appeared there on the advice of her husband.  This was consistent with the pattern of all of her business conduct. 

    Conclusion on the Andonys

40. Neither of the Andonys presented as particularly reliable witnesses on these business transactions.  They could not satisfactorily explain the transactions purportedly completed or the surrounding financial or transactional circumstances. 

41. With some effect, Mr Andony’s business judgement was challenged.  Also emphasis was placed on the extent to which he had secured considerable financial assistance over several years from family and friends who were not repaid.  Despite these aspects of focus in cross-examination, there was no reason to conclude that Mr Andony’s evidence was fabricated.  I accept his evidence that the various agreements presented to him bore little resemblance to reality.  I also accept his evidence, there being nothing of any cogency to the contrary, that no consideration was in fact received by him arising out of the transfers purportedly reflected in those documents or otherwise. 

1. The position with Mrs Andony was similar.  Her evidence, while more vague about business dealings was not susceptible to challenge on the same point about receipt of consideration. While her credibility was directly challenged by the attack on the content of the statement of affairs jointly completed for her bankruptcy, no such direct challenge was made on her evidence as to lack of receipt of consideration by her and lack of execution by her of key documents.  I infer from the absence of cross-examination on those topics that propositions to contest the accounts of Mrs Andony on those topics could not properly be put to her.  Mr Fazio was not called to give evidence contrary to that of Mrs Andony. 

   Mr Verge – identification of some documents

2. Mr Evan Verge (the first named applicant), gave evidence which was primarily directed to chronologically proving the exchange of a deal of correspondence on his own behalf as Trustee with various entities involved in the transactions which have been described.

3. On 9 November 2004, Mr Verge (or his subordinate) wrote to Mr Fazio saying that the various deeds sent were not sufficient to satisfy the enquiries which had been raised.  Documentary evidence of the specific individual transactions, particularly financial transactions which involved the Andonys was sought.  That was pursued again on an urgent basis on 6 December 2004 and Mr Fazio was then advised that without receipt of the documentation, it would be Mr Verge’s view that Mr Fazio was unable to sustain an interest in Devere at all.  That correspondence concluded with a paragraph reading:

   Please note that you are expressly forbidden to conduct any further dealings in respect to shareholdings or assets of Devere, and should you ignore this direction, I will seek to recoup any loss suffered by the Administration directly from you.

4. On 10 December 2004, the applicants lodged a caveat against the Dongara Land on the basis of an interest in equity as Trustees in Bankruptcy of the Andonys pursuant to a Constructive Trust by virtue of the interest held by the Andonys in the Dongara Land as reflected in the supporting statutory declaration of Mr Verge.  The statutory declaration referred to legal advice in respect of the Constructive Trust.  On the same day he wrote to Mr Fazio pressing for the documentation which had previously been requested on several occasions.  Mr Fazio’s then solicitors, Mullins Hancock, responded on 29 December 2004 indicating that they had received instructions to review all of Mr Fazio’s documents in order to facilitate a response to the applicants.

5. In fact, no correspondence other than that letter from Mullins Hancock was received from either the Fazios or Mullins Hancock. 

6. On 15 June 2005, as a result of Mr Verge making an inquiry, Mullins Hancock informed him that they had ceased receiving instructions from Mr Fazio.  The next chain of correspondence ensued throughout September and October 2005 between Mr Verge and Solomon Brothers.  In that exchange some further information was provided. 

7. In the meantime, following the September/October exchanges between Mr Verge and Solomon Brothers, ultimately at the request of Mr Verge, the Official Receiver in Bankruptcy, on 21 October 2005 served Notices to Produce on Devere, Packham and the Fazios pursuant to s 77C of the Bankruptcy Act. The Notices were, relevantly, in the following terms:

   05-10-21=01

   …
   Devere Holdings Pty Ltd
   51 La Fayette Blvd
   BIBRA LAKE WA 6163

   WHEREAS:Evan Robert Verge, as trustee of the bankrupt estates of Arthur John Andony and Joan Elizabeth Andony (‘the Andonys’), is currently investigating the financial affairs of the bankrupts in accordance with Section 19AA of the Bankruptcy Act, 1966.

   Devere Holdings Pty Ltd (ACN 009 220 615) is the recipient of this notice in its own capacity.

   By way of background, as at 2 November 2001, the Andonys held, as tenants in common, an undivided one-third interest in land situated at Lot 2 Wakeford Road, Bookara (‘the Bookara property’), with Devere Holdings Pty Ltd (‘Devere’) holding the remaining undivided two-thirds share.

   The Andonys held two fully paid shares in Devere, which at the time represented 100% ownership of Devere’s share capital.  The Andonys, and Mr John Arthur Andony, were the directors of Devere.

   Various Deeds have been executed between various parties, namely the Andonys, Packham Pty Ltd, Devere Holdings Pty Ltd, Giacomino (Jack) Fazio and Maria Rita Fazio which purportedly detail transactions between the parties which have resulted in the transfer of the Andonys interests, rights and entitlements being taken from them without apparent compensation or consideration.

   The documentation requested below, seeks to obtain evidence of those transactions, including whether valuable consideration has been paid if those transactions have occurred.

   I, Andrew Alan Henderson, of Level 12 Durack Centre, 263 Adelaide Terrace, Perth Official Receiver for the Bankruptcy District of the State of Western Australia, require you pursuant to Section 77C(1)(a) of the Bankruptcy Act 1966, to provide me with the following information/documents relating to the examinable affairs of the Andonys:-

   1.All documents in your possession relating to the subscription and purchase of 1,111,113 fully paid shares (‘Packham shareholding’) in Devere Holdings Pty Ltd (ACN 009 220 615) (‘Devere’), by Packham, including but not limited to;

   1.1.Correspondence, other communications, or documentation relating to the subscription of the Packham shareholding,

   1.2.Documents evidencing details, including source and amount, of the consideration paid for the Packham shareholding,

   1.3.Documents evidencing the par value of the shares, and how and why the particular number of shares issued was determined,

   1.4.Where the consideration for the Packham shareholding was either all or partly by non cash consideration, documents supporting the valuation of the non cash consideration (i.e. if land, a copy of the valuation).

   2.All documents in your possession relating to Packham’s borrowing of $355,000 from the Statewest Credit Society (‘Statewest’), and secured by way of 1^st registered mortgage over the Bookara property owned by Devere, including but not limited to;

   2.1.Documents evidencing Packham’s purpose for the $355,000 such as loan applications, minutes of Directors authorising the loans, business plans and or budgets evidencing the research into the purpose of the loan, Packham’s capacity to repay the loan, without the Bookara property, including reasons why Packham needed to use the Bookara property as security for the $355,000,

   2.2.Evidence of Packham’s receipt of the $355,000 from Statewest supported by bank statements or similar showing the deposit of the funds,

   2.3.Evidence of Packham’s utilization or disbursement of the $355,000, including evidence of receipt by the recipient entity supported by bank statements or similar showing the dispersal of the funds, and an explanation as to the reasons for the disbursements effected.

   3.In respect to the Bookara property, all documents in your possession to evidence the value to be $710,000, or such other value.

   4.All documents in your possession evidencing, as at 2 November 2001, Packham’s ownership of Unit 2, 18 Strang Street, Fremantle (‘Strang Street’) (also described as Unit 2, 18 Strang Street, Beaconsfield) including but not limited to;

   4.1.Original or Duplicate Original Certificate of Title for Strang Street, and evidence of Packham’s purchase of the property,

   4.2.Documents evidencing all debts secured against Strang Street by registered charge, equitable mortgage or similar,

   4.3.Documents evidencing any other debt owed by Packham or any other entity in respect to Strang Street, in which Strang Street has been used as an incentive or collateral to advance funds to Packham,

   4.4.Documents evidencing the value of Strang Street on or before 3 November 2001,

   4.5.Documentation to evidence the transfer of the beneficial ownership of Strang Street to Devere,

   4.6.Documentation to evidence Packham’s right to mortgage Strang Street after beneficial ownership had been transferred to Devere,

   4.7.Documentation is (sic-in) respect to any subsequent borrowings against, or sale of any interest in Strang Street.

   5.All documents in your possession relating to the ‘Unit’ in Gold River Holdings Pty Ltd, transferred to the Andonys by declaration of bare trust, including but not limited to;

   5.1.      Documentation evidencing Packham’s ownership of the Unit,

   5.2.Documentation evidencing Packham’s entitlement to transfer ownership of the Unit to any party, but in particular, the Andonys, including such things as minutes of Gold River Holdings Pty Ltd authorising the transfer, evidence the Unit was not subject to escrow or other restrictive dealing issues,

   5.3.Documentation evidencing the Unit’s value as at 30 June 2000, 30 June 2001, 3 November 2001, and 30 June 2002 including such things as financial statements (e.g. balance sheets, profit and loss statements),

   5.4.Documentation supporting the existence of the bare trust effecting the transfer of ownership to the Andonys,

   5.5.Documentation evidencing the current status and value of the Units, including the current contact address, and names of the directors. 

   6.All documents in your possession relating to the loan by Packham to Devere in the amount of $180,000 which was secured by a second ranked mortgage over the Bookara property, including but not limited to;

   6.1.Documentation evidencing the actual transfer of moneys from Packham to Devere, including bank statements etc,

   6.2.Documentation evidencing the justification for the loan, including minutes of meetings of Packham directors where the provision of the loan was discussed, as well as any correspondence from Devere requesting the loan,

   6.3.Documentation evidencing Packham’s ability to advance the moneys, without the $355,000 loan from Statewest effected on or about the same time,

   6.4.Reasons why the loan to Devere is interest bearing,

   6.5.Reasons why the Deeds executed between Packham and Devere states that Packham is not obliged to repay the $355,000 loan until after Devere repays the $180,000,

   6.6.Reasons why Devere advanced the $180,000 loan directly on to the Andonys, when it could have been lent directly between Packham and the Andonys.

   7.All documents in your possession relating to the Deed executed between the Andonys, Packham, Devere and Giacomino Fazio (dated sometime in 2003), including but not limited to;

   7.1.Documentation evidencing the three loan amounts totalling $625,000 detailed at Recital B of the Deed, i.e. the $355,000, $150,000 and $120,000 loans all secured against the Bookara property,

   7.2.Documents evidencing details, including source and original amounts of the loans, the amounts repaid,

   7.3.Copies of any loan agreements, or other acknowledgements of debt

   7.4.Recital E of the 2003 Deed states that of the $625,000 loans secured by Packham from Statewest, $375,000 was received by the Andonys for their separate use, with the remaining $250,000 being received by Packham.  Please explain and identify how that break-up was determined, and provide documents evidencing the advance of those moneys.

   7.5.Please explain how the $250,000 referred to in Paragraph 7.4 above, received by Packham was expended, including evidence of the actual disbursements for the moneys (i.e. receipts, bank statements etc).

   8.All documents in your possession relating to the transfer of the 1,111,113 shares held by the Andonys to Packham, including but not limited to;

   8.1.Documentation evidencing the fact that the shares held by the Andonys were fully paid,

   8.2.Documentation evidencing the transfer of the shares, and the value at which the shares were transferred,

   8.3.Documents evidencing the consideration paid for the shares by Packham, including any amounts paid on behalf of the Andonys evidenced by invoices addressed to them, the source of the funds used by Packham or other parties to pay those invoices, and receipts from the party receiving the funds,

   8.4.Documentation evidencing the Andonys acknowledgement of the debts referred to in Paragraph 8.3 above, including their admission of liability,

   8.5.Documentation evidencing the Andonys authorisation for Packham or other parties to pay those liabilities on their behalf, and that upon payment the Andonys would reimburse the party paying on their behalf,

   8.6.To the extent Packham claims the transfer of the Andonys shareholding was effective due to the issue of default notices or other forms of demand for payment, documentation evidencing the issue of the demands and that the Andonys had been advised of those demands, including evidence of the Andonys liability to those demands,

   8.7.Documents evidencing the adjustment of moneys claimed by Packham against the Andonys to reflect a net debt. 

   9.All documents in your possession relating to Devere’s acquisition of its original 2/3 interest in the Bookara property, including evidence of the consideration paid by it to the former owners.

   …

8. By letter of 1 November 2005 to the applicants, Solomon Brothers for Mr Fazio set out a detailed schedule by which an explanation was given both as to the supporting documents for and consideration for the various transactions in respect of which Mr Verge had been making inquiries.  That letter advised as follows:

   1 November 2005

   Jones Condon
   PO Box 8258
   Perth Business Centre
   PERTH WA 6849

Attention: Mr Ross Thompson By facsimile: 9328 4949
(minus annexures)
Confirmation by post

Dear Sir

BANKRUPT ESTATE - A. ANDONY

We refer to your letter dated 19 October 2005.

As requested in that letter:-

1.we confirm that we are authorised to accept service of documents on behalf of Devere Holdings Pty Ltd ("Devere"), Jack and Maria Fazio and Packham Pty Ltd ("Packham"); and

2.we enclose copies of the following duly executed and stamped documents:¬

2.1Agreement dated 2001 between the Andonys, Packham, Devere and the Fazios ("the 2001 Agreement") (Doc 1);

2.2Shareholders Agreement dated 2001 (Doc 2);

2.3Loan Agreement dated 2001 between Packham and Devere (Doc 3);

2.4Loan Agreement dated 2001 between Devere and the Andonys (Doc 4); and

2.5Deed of Agreement dated 2003 between the Andonys, Packham and Jack Fazio (Doc 5).

You have not responded to our letter dated 20 October 2005, which requested that you attend at a meeting at our office to discuss the exact documents which you consider relevant, and which you claim have not been provided to you to date (or that you particularise the same in a letter to us). We understand from our recent telephone conversation that you are seeking evidence of the completion of each of the transactions referred to in the 2001 Agreement. We have already provided you with a substantial number of these documents, however we set out the following further information for clarity:-

No.	TRANSACTION	SUPPORTING DOCUMENTS	CONSIDERATION	SUPPORTING DOCUMENTS
1.	Devere acquired a 2/3 interest in the Bocara (sic) property from Archie Andony, Anthony Andony, Pamela Andony and Alexandra Louise Andony ("the Sellers") (the Andonys retained a l/3rd interest in the property).	DOLI transfer of land G382966 (registered 29 January 1997) (Doc 6)	·   $216,666.00 (as per the transfer of land)	·     This transaction occurred substantially before the 2001 Agreement: our clients do not therefore know how or when Devere paid $216,666.00 to the Sellers. No amount was payable by Devere to the Andonys. Even assuming (without knowing) that the Andonys  lent $216,666.00 to Devere to enable Devere to pay the said amount to the Sellers, this amount must have comprised part of the $310,000.00 loan from the Andonys to Devere referred to in recital C of the 2001 Agreement, which has been repaid to the Andonys in full (see paragraph 6 below)
2.	Transfer by the Andonys of their 1/3 interest in the Bocara (sic) property to Devere (clause 2 of the 2001 Agreement).	DOLI transfer of land H756450 (registered 23 May 2001) (Doc 7)	·   the issue to the Andonys of 1,111,111 fully paid shares in Devere; and ·   the payment by Devere to the Andonys of $45,000.00, to be treated as a loan from Andonys to Devere (see paragraph 6 below)	·     Resolution of Directors of Devere dated 3 November 2001 (Doc 8) and Share Certificate No. 3 (Doc 9). ·     The 2001 Agreement is, of itself, evidence of this loan. This loan from Andony's (sic) to Devere has been repaid by Devere to the Andony's (sic) in full (see paragraph 6 below)
3.	The issue to Packham of 1,111,113 shares in Devere (clause 3 of the 2001 Agreement)	Resolution of Directors of Devere dated 3 November 2001 (Doc 8) and Share Certificate No. 4 (Doc 10)	The payment by Packham to Devere of $355,000.00, which was satisfied as follows: ·   the payment by Packham to Devere of $175,000.00, less the amounts expended by Packham up to the date of the 2001 Agreement on behalf of Devere ·   the transfer by Packham to Devere of beneficial ownership of Unit 2, 18 Strang Street, Fremantle	·     This payment was satisfied by Packham paying this amount directly to the Andonys in satisfaction of Devere's liability to pay the Andonys the same amount (see paragraph 5 below). See letter from Statewest to Packham dated 23 May 2001, which shows that an amount of $308,864,58 (i.e. substantially in excess of $175,000.00) was credited by Packham to the Andonys' loan account with NAB (Doc 11). ·     Clause 3 of the 2001 Agreement is sufficient, of itself, to transfer beneficial ownership of the Strang Street property from Packham to Devere (and it was assessed to stamp duty on this basis). See further note 1.
4.	Packham borrows $355,000.00 from Statewest Credit Society ("Statewest") (clause 4.1 of the 2001 Agreement)	Loan number 143628 L78 advanced by Statewest to Packham on 23 May 2001 (see letter from Statewest to Packham dated 23 May 2001 (this $355,000.00 loan is comprised in the loan of $475,000.00) (Doc 11)
5.	Packham lends $180,000.00 to Devere	See loan agreement dated 2001 between Packham and Devere (Doc 3). This payment was satisfied by Packham advancing this amount directly to the Andonys (ie, Devere was required to advance the same amount to the Andonys (see paragraph 7 below)).
6.	Devere repays the $310,000.00 loan which it owes to the Andonys and the $45,000.00 loan referred to above by •    repaying $175,000.00 off Andonys loan account at NAB •    transferring (to the benefit of the Andonys and at their direction) the beneficial ownership of the Strang Street property to Gold River Holdings Pty Ltd.	·   Of the $475,000.00 advanced to Packham by Statewest, Packham paid $308,864.58 (ie, an amount exceeding $175,000.00 by approximately $134,000.00) to Andonys in reduction of their NAB loan (see letter from Statewest to Packham dated 23 May 2001) (Doc 11) (see also paragraph 3 above). ·     See Note I below.
7.	Devere lends $180,000.00 to the Andonys	The loan agreement dated 2001 between Devere and the Andonys (Doc 4).  On 23 May 2001 (from the proceeds of the $475,000.00 loan referred to in paragraph 6 above) an amount of $163,364.92 was credited to the Andonys' account (being 135310 S82). Further, part of the additional amount of approximately $134,000.00 (see paragraph 6 above) paid to the Andony's in reduction of their loan with NAB makes up the difference. This leaves a payment of approximately $118,000.00 made by Packham to the Andonys unaccounted for (see Note 1). See letter from Statewest to Packham Pty Ltd dated 23 May 2001 (Doc 11).
8.	Packham borrows $150,000 from Statewest	See letter from Statewest dated 22 May 2002 (Doc 12) - 50% of this amount was paid to the Andonys - see page 1 of bank statement dated 5 February 2003 (account 135310 is the Andonys' account and account 152620 is either the Andonys' account or was paid to that account at the direction of the Andonys) (Doc 13). The Andonys were to be responsible for the interest on this portion of the loan. The Andonys did not repay this portion of the loan.

1. The power of sale exercised by Devere in relation to the one-third interest, however, was not exercised reasonably and, I find, was not exercised in good faith.  The Dongara Land was sold at an undervalue.  Devere at the time was well aware of the claim by the applicants in respect of the land, proceedings having been commenced, yet it did not give them the opportunity to intervene and it did not notify them of the intended transfer.  Devere’s sale of the Dongara Land to Castleworld could only have been calculated to, at least in part, frustrate or defeat the claims of the applicants to interest in the land. 

2. Devere has not accounted to the applicants for the proceeds of the sale.  The applicants are entitled to equitable compensation for Devere’s breach of duty.  Precisely how that should be formulated is a matter for further submission but it would take into account the market value of the applicants’ one-third interest in the Dongara Land as at the date of the transfer to Castleworld.  It would also take in to account any amounts actually received by the applicants from Devere and/or Packham for their restitutionary claims and amounts required to eliminate the Investec mortgage on the Dongara Land. 

   The claims with respect to the shares in Devere

3. Devere and Packham contend that the share issue did not constitute a transfer. I disagree. In my view, the issue is a ‘transfer’ for the purpose of the definition set out in s 120(7)(b) of the Bankruptcy Act. This occurred after the transfer of the Andonys’ one-third interest in the Dongara Land to Devere arguably pursuant to the 2001 Agreement. I have had little regard to the precise content of the agreements but have had regard to their effect. (As to the content and circumstances, no reliable witnesses have been called to give evidence and it cannot be said that the agreements speak for themselves). Under the 2001 Agreement, Devere agreed to issue 1,111,111 shares in Devere to the Andonys jointly and 111,111,113 shares in Devere to Packham. The shares were issued to Packham and the Andonys on 3 November 2001. As a result, whereas there had been only two shares on issue in Devere prior to that time (those held by Mr and Mrs Andony), the effect of the Agreement was to issue the additional shares in Devere to Packham and the Andonys. The obvious result and purpose was to divest the Andonys of 50% of the total shareholding of Devere and for Packham to acquire that 50%.

4. Under s 120(7)(b) of the Bankruptcy Act 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 that property to the other person. Again, there appears to be no previous authority discussing the scope and application of this paragraph, however, in Peldan v Anderson (2006) 227 CLR 471, Gummow A-CJ, Kirby, Hayne, Callinan and Crennan JJ discussed the operation of s 121(9) of the Bankruptcy Act, which is in the same terms as s 120(7) but operates in circumstances of transfers to defeat creditors.

5. In that case a man who later became a bankrupt unilaterally severed a joint tenancy so that he and his wife became tenants in common in equal shares of their matrimonial home.  Some months later his wife passed away and shortly afterwards a sequestration order was made against the man’s estate.  The trustees in bankruptcy applied for declarations that the unilateral severance of the join tenancy was void against them because its purpose had been to place one half of the matrimonial home out of the reach of the bankrupt’s creditors. 

6. In their joint judgment, Gummow A-CJ, Kirby, Hayne, Callinan and Crennan JJ said (at [26]-[28]) (footnotes omitted):

   [26] As remarked earlier in these reasons, provisions in the terms of s 121(9) appeared at the same time as ss 120(7) and 122(8) of the Bankruptcy Act. It is to be expected that the sub-section has the same meaning in each provision. In the Explanatory Memorandum to the House of Representatives upon the Bill for the 1996 Act, it was said at para [84.10] of the inclusion of the provision in the undervalued transactions provision (s 120) that: "where a person creates an interest in property, for example by allowing a mortgage or charge to be created over it, the person will be taken to have transferred property, for the purposes of the section." Other examples were given, including the conferral of a trademark or patent licence. Further instances would include the grant of a lease over freehold property and a declaration of a trust over property vested in the "transferor". In all of these cases, the same act both creates the property in question and vests it in the other person.

   [27] In other cases to which the sub-section would apply, the creation of property will occur at a later time. Instances of this relate primarily to the diversion of future property (necessarily constituting property that did not previously exist) from coming into the hands of the person who later becomes bankrupt. This may occur by the assignment, whether absolutely or by way of charge, of property such as future income, royalties yet to be earned, and damages which may be recovered in pending litigation. (Consideration is required for the assignment to be effective, but that issue is dealt with by s 121(4) of the Bankruptcy Act.) In such cases, the assignment operates immediately upon acquisition by the assignor and vests the property in the assignee.

   [28]     However, in all these cases (and it is not suggested that the examples are exhaustive), the property that did not previously exist is "carved out" of "property" which is held, or which comes to be held, by the person who later becomes bankrupt.

7. Section 120(7) was introduced by the Bankruptcy Legislation Amendment Act 1996 which notes in the Explanatory Memorandum (at [84.10]) relevantly that:

   The Bill is intended to simplify the law and change the focus of the provisions away from the intention of the parties to particular transactions, to the nature of the transactions and the likely effect on creditors.  The word “transfer” will have its ordinary meaning in the new and revised provisions except to the extent that it is given an expanded definition by proposed subsections 120(7) and 121(9) and 122(8) so that it encompasses a payment of money or doing of some act or thing which results in another person becoming the owner of property which did not previously exist.  By way of explanation, it is said:

   Thus where a person creates an interest in property, for example by allowing a mortgage or charge to be created over it, the person will be taken to have transferred the property for the purposes of the section.  Likewise if Frank who subsequently became a bankrupt constructed a residence on a block of land owned by Eugenie, Frank would be taken to have transferred the property to Eugenie.  Another example might be a situation where three years before the commencement of her bankruptcy, Gertrude conferred a licence to Harold to use a trade mark, or an item the subject of a patent where no licence to use the item previously existed.  Gertrude would be taken to be transferring property to Harold and if this was done for less than what might be expected to be the market value of the rights conferred by the licence the transfer would be void unless Harold could prove that Gertrude was not insolvent at the time of giving the licence. 

8. In the present circumstances, the Andonys were the only directors and shareholders of Devere.  They entered into the 2001 Agreement in their own right.  Mr Andony entered into that Agreement on behalf of Devere and by entering into the 2001 Agreement they created an obligation on the part of Devere to issue shares in Devere to Packham and to themselves. 

9. Then Mr Andony in his capacity as a director of Devere resolved in November 2001 to issue the shares to Packham and to himself and Mrs Andony.  That resolution apparently was made immediately after Mrs Andony’s resignation as a director of Devere.  By her resignation or in any event, by her tacit approval of all business dealings by her husband, Mrs Andony permitted the resolution to issue the shares to Packham.  The Andonys were the sole proprietors of the total shareholding of Devere prior to the issue of shares in Packham.  They evidently acted together and consensually to effect the issue of the shares.  They together created or ‘carved out’ from their own property their shareholding in Devere, property that did not exist.  It is not an instance where the bankrupt has created property from property belonging to a third party.  The Andonys are persons who have ‘done something’ that has resulted in Packham becoming the owner of property and of 1,111,113 shares in Devere.  That property did not previously exist. 

10. The second aspect of this transaction was that it occurred at an undervalue.  The consideration given by Packham for the shares issued on 3 November 2001 was limited to a payment from Packham to the Andonys in the sum of $172,229.50 by the method discussed below. 

11. The consideration given for the shares cannot be assessed or determined by reference to the 2001 Agreement or the suite of agreements executed at the time.  There is no evidence that those agreements were performed substantially in accordance with their terms or at all. 

12. Devere and Packham argue that Packham also gave value by way of consideration in the beneficial ownership of the Unit.  However, this contention is not at all supported on the evidence.  Packham remained the registered proprietor of the Unit.  The 2001 Agreement, while contemplating that Packham would transfer the beneficial ownership of the Unit to Devere and then Devere would transfer the beneficial ownership to a company which the Andonys were interested, namely, Gold River Holdings Pty Ltd, each by means of a declaration of bare trust, that never occurred.  No stamp duty was paid in respect of any purported transfer of beneficial ownership until 10 March 2004.  This was long after Packham had sold the Unit to a third party. 

13. Packham, however, did use the beneficial ownership it retained in the Unit in order to provide security for borrowings from Statewest in the amount of $475,000. 

14. Had the beneficial ownership in fact been transferred to the Andonys, they or their nominee company could have used the equity in the Unit to borrow themselves directly from a financier rather than through Packham.  The fact that Packham was the primary debtor accords with the fact that beneficial ownership in the Unit clearly remained with Packham.  The Andonys did not receive any rent or profits or any income from the Unit.  It was sold without reference to them.  They received nothing from the proceeds of the sale of the Unit. 

15. It is common ground that Mr Andony did receive the proceeds of the $122,000 loan from Statewest to Packham made at a later time in May 2002 and that this was secured by the Unit.  Mr Andony, however, assumed responsibility for making repayments of that loan.  In any event that transaction does not evidence a transfer of any beneficial ownership from Packham to the Andonys.  The primary debtor for that loan was Packham not the Andonys.  The beneficial ownership remained with Packham and was not transferred to them. 

16. There is no documentary evidence or evidence at all to support an inference that the Andonys received the beneficial ownership of the Unit. 

17. I have previously commented on the absence of any other witness to support the contentions advanced by Devere and Packham.  Mr Fazio could have, but did not, give evidence about these matters.  Nor did his solicitors.  I infer that the evidence of neither Mr Fazio nor his solicitors would have been able to support the pleaded contention of Devere and Packham that Packham gave the Andonys the beneficial ownership of the Unit.  There is no evidence to support that assertion other than the pleading itself. 

18. Further, Devere and Packham did not seek to prove those aspects of their defence by which they allege that miscellaneous additional payments were made on behalf of the Andonys.  I find against that assertion. 

19. The only identifiable payments available to be characterised as consideration given for the issue of the shares are those made from the amount of $475,000 that Packham borrowed from Statewest on 16 May 2001.  On 23 May 2001, $163,364.92 was paid from the proceeds of the $475,000 loan to Statewest account number 135310 in the name of the Andonys.  At the same time, $308,864.58 was paid from the proceeds of the $475,000 loan to the NAB to discharge the Andonys’ loan from the NAB. 

20. It is an agreed fact that from those sums paid to or for the benefit of the Andonys, $180,000 was a loan from Devere to the Andonys.  That loan was not consideration given by Packham but rather a loan from Devere and was not consideration of any value or consideration at all as it had to be repaid and the Andonys paid interest to Statewest on the loan.  Devere and Packham have not advanced an argument that that $180,000 loan had any particular value. 

21. In relation to the balance of the proceeds of the $475,000 loan, a further $120,000 was a loan from Packham to the Andonys.  

22. As with the $180,000 loan from Devere, the $120,000 loan was not consideration of value or any consideration given for the shares.  It had to be repaid and the Andonys paid interest on that loan to Statewest. 

23. It follows, accordingly, that it is only the balance of the $475,000 loan, namely, $172,229.50 that was not a loan.  That appears to be the amount that constitutes consideration given by Packham for the transfer of the shares. 

24. The value of the shares in Devere that Packham acquired in 2001 was 50% of the value of the whole of the Dongara Land because at the date of the issue of the shares to Packham, Devere owned all of the Dongara Land.  The Andonys owed Devere $180,000; Devere owed Packham $180,000 (Devere may also have owed the Andonys $45,000; Devere had no other assets or liabilities).  

25. The net assets of Devere equated to no more than the value of the Dongara Land. 

26. The transfer of the Dongara Land was made at an undervalue.  I have concluded that it was worth $600,000 (see [271]).  The consideration given by Packham of not more than $172,229.50 was less than 50% of the value of the land at this time. 

27. The applicants must repay to Packham pursuant to s 120(4) of the Bankruptcy Act $172,229.50 if they elect to avoid the transfer.

28. Further, I find that Mrs Andony did not sign the 2003 Agreement or the share transfer form.  The issue was not pressed in cross-examination of Mrs Andony.  It was however put to Mr Andony, in effect, that he forged his wife’s signature on the 2003 Agreement.  Mr Andony denied the allegation when it was put to him.  His evidence was that he gave the 2003 Agreement to Mr Fazio with only his signature on it rather than that of Mrs Andony.  At that time his signature was not witnessed.  In any event, the allegation does not sit well with the previous course of conduct on the part of Mr Andony which I accept.  That previous course of conduct was that Mrs Andony signed all previous documents herself on being presented with them by Mr Andony with little or no explanation.  All decisions in relation to such business activities were made by Mr Andony himself.  If he had presented the agreement at all, Mrs Andony would have signed it if he had asked her to do so. 

29. Again, Mr Fazio could have been called but was not.  He did not give evidence as to the state of the 2003 Agreement when he received it from Mr Andony.  He did not give evidence as to whether it bore the signature of Mrs Andony or any witness.  I infer from Mr Fazio’s unexplained failure to give evidence on this topic that he would have been unable to assist the contention raised by Devere and Packham to the effect that the Agreement and share transfer had been executed by Mrs Andony or by Mr Andony having forged her signature at the point in time when they were provided to Mr Fazio. 

30. Mrs Andony’s interest in the jointly held shares, therefore, was not affected by the subsequent registration of the share transfer form because she had neither agreed nor consented to the transfer of her interest.  The interest remained hers until the commencement of the bankruptcy when the interest vested in the applicants.  In those circumstances, the applicants are ‘aggrieved persons’ for the purposes of s 175 CA and are entitled to have Devere’s Share Register of Members corrected.  The applicants themselves are also entitled as a result of s 1072E(6) CA to be registered as the holders of that interest. 

31. There is no challenge to the fact that Mr Andony signed both the 2003 Agreement and the share transfer form.  As a result, as far as his interest in the jointly held shares were concerned, the effect under the 2003 Agreement was that the Unit was to be sold to repay the loan of $120,000 from Statewest to Packham of which $120,979 had been on-lent to the Andonys.  Packham was to receive the balance of the proceeds of sale of the Unit after the $122,000 loan had been repaid.  If Mr Andony failed to make certain repayments to Statewest of other debts when required, Packham was at liberty to register the share transfer form to transfer the joint shares to Packham and the registration of the share transfer form would discharge all debts owed by Mr Fazio and the Andonys and their respective related companies to each other. 

32. The share transfer form was subsequently registered by Packham in June 2003.  The consideration which was expressed in the share transfer form for the joint shares was the sum of $311,111.08. 

33. However, the only evidence is that this sum was never paid. 

34. At most the consideration given by Packham for the shares was $265,979. This was comprised of Packham forgiving or discharging the debts owed to it by the Andonys of $120,000 (advanced by Packham at the time of the 2001 Agreement), $120,979 (advanced by Packham in May 2002 from monies borrowed by Packham from Statewest on security of the Unit), $25,000 (being the amount on-lent by Packham to the Andonys from the $150,000 loan Packham took out with Statewest in May 2002). These payments have been agreed. If the applicants elect to void the transfer this sum is to be repaid pursuant to s 120(4) of the Bankruptcy Act.

35. Finally, I find that there was also an invalid transfer of the Andonys’ individual shareholding. 

36. After the transfer or purported transfer of the Andonys’ joint shareholding of 1,111,111 shares in June 2003, each of the Andonys retained a single share held in Devere from the outset.  Unbeknown to them however, by undated share transfer forms stamped on 10 June 2004, those shares were purportedly also transferred to Packham. 

37. There is no contention that the Andonys consented to or authorised the transfer of their respective remaining share.  It is clear that Mr Fazio purported to sign as seller of each share pursuant to a power of attorney under the Shareholders’ Agreement.  However, the relevant clause of the Shareholders’ Agreement relied upon to authorise the transfer had no application.  The purported transfer was obviously not made pursuant to any provision of the Shareholders’ Agreement and there was no other power of attorney.  At some time before 10 June 2004, Packham became the registered holder of those shares.

38. In relation to those individual shares held by Mr and Mrs Andony, the position is the same as those with respect to those held jointly.  The interest they had in those shares was not affected by the subsequent registration of the share transfer form.  It remained their interest until the commencement of their respective bankruptcies when the interest vested in the applicants by operation of law.  Accordingly, the applicants are entitled, in those circumstances and pursuant to s 175 and s 1072E CA to orders for correction of Devere’s Register of Members and the registration of the applicants as the holders of those shares. 

    SUMMARY OF CONCLUSIONS

1. I will therefore summarise my conclusions from the foregoing analysis. 

2. The May 2001 transfer from the Andonys to Devere of the one-third interest in the Dongara Land is void against the applicants pursuant to s 120(1) of the Bankruptcy Act. No consideration was given by Devere for the transfer. The market value of the one-third interest in the Dongara Land as at the date of the transfer was $200,000, the Dongara Land having a total value of $600,000 (see [271] above).

3. As to the June 2007 transfer to Castleworld, the transfer of the Andonys’ original one-third interest in the Dongara Land from Devere to Castleworld in June 2007 is void against the applicants pursuant to s 120 of the Bankruptcy Act. The Dongara Land then had a value of $1,900,000 (see [277] above).

4. I reach this conclusion regardless of the onus of proof in relation to s 120(6) of the Bankruptcy Act. I have treated the onus as resting on the applicants but being an onus which readily shifts to the ‘transferee’ insofar as matters solely within the knowledge of the ‘transferee’ are concerned. Castleworld did not acquire the one-third interest in the Dongara Land from Devere in good faith. The consideration given by Castleworld for the transfer of the one-third interest in the Dongara Land was not at least as valuable as the market value of that interest.

5. I do not accept the indefeasibility argument raised by Castleworld. In that regard and relevantly to this particular case I do not consider that the rights created by s 120 of the Bankruptcy Act in favour of the applicants were affected by any of the indefeasibility provisions under the TLA and in particular, by ss 52, 63, 67, 68, 134, 199 and 202.

6. If I am wrong in that regard, I would consider that s 120 of the Bankruptcy Act would be inconsistent with those provisions of the TLA and accordingly pursuant to s 109 of the Constitution, s 120 of the Bankruptcy Act would prevail over the State provisions to the extent of any inconsistency. I reiterate, however, that I do not consider that the indefeasibility provisions operate in the circumstances.

7. If the indefeasibility provisions do prevail, then I do not accept the applicants’ contention that Castleworld procured its registration as proprietor of the Dongara Land by fraud such that its interest is subject to the rights of the applicants created pursuant to s 120 of the Bankruptcy Act with respect to the one-third interest in the land.

8. The Castleworld defence of estoppel is not made out.

9. The Castleworld defence under the Fair Trading Act is not made out.  Further, the applicants have not breached any duty of care owed to the respondents.

10. There is, therefore, no set-off available to Castleworld in respect of loss or damage caused to it. 

11. Both Devere and Packham are liable to account to the applicants for the proceeds of the sale of the one-third interest in the Dongara Land to Castleworld as monies had and received for the use of the applicants.

12. The applicants are entitled to equitable compensation from Devere arising from the sale of the one-third interest in the Dongara Land to Castleworld as the transfer of the one-third interest constituted a breach of trust.  The amount of the equitable compensation is to be the subject of further submissions. 

13. The issue of 1,111,113 shares in Devere to Packham in November 2001 is void against the applicants pursuant to s 120(1) of the Bankruptcy Act. The consideration given by Packham for the issue of the shares was at most $172,229.50. The market value of the shares as at the date of transfer was $300,000, the Dongara Land then having a value of $600,000.

14. The transfer to Packham in June 2003 of Mr Andony’s interest in 1,111,111 shares in Devere held jointly with Mrs Andony is void against the applicants pursuant to s 120(1) of the Bankruptcy Act. There being no proven consideration given by Devere for the transfer of Mr Andony’s interest whereas the market value of Mr Andony’s interest in the shares as at the date of transfer was $200,000, being an undivided half share in 50% of the Dongara Land, which I have found to have a value of not more than $800,000 at that time (see [264] above).

15. The purported transfer to Packham of Mrs Andony’s interest in 1,111,111 shares in Devere held jointly with Mr Andony was not a valid transfer.

16. The transfer to Packham in June 2003 of the 1,111,111 shares in Devere jointly held by the Andonys, alternatively, was void against the applicants pursuant to s 120(1) of the Bankruptcy Act. Consideration for the shares being $265,979 and the market value for the shares as at the date of transfer was $400,000.

17. The transfer of the remaining two shares in Devere to Packham by each of Mr Andony and Mrs Andony were both invalid. 

    INTERIM DISPOSITION

18. The parties have requested, quite appropriately, that at least in the first instance, I record my findings of fact and conclusions on the law to enable them to consider their respective positions. 

19. I propose publishing judgment, in effect, by two steps.  These reasons will be published in open court and counsel will be invited to make further submissions as to the appropriate final orders which should follow.  The following orders will be made:

    1.The applicants do file and serve within 21 days a minute of orders and submissions to reflect these reasons and conclusions. 

    2.The respondents do file and serve within 21 days a minute and submissions in response.

    3.There be general liberty to apply.

I certify that the preceding four hundred and thirty-two (432) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

Associate:

Dated:        24 June 2010