Wansley, Michael Irvine (as trustee of the bankrupt estate of Walter Percival Edwards) v Edwards, Inese

[1996] FCA 704

CATCHWORDS

BANKRUPTCY - Property available for payment of debts - Avoidance of voluntary settlements - Transfer of land - Whether disposition in good faith - Whether for valuable consideration.

Bankruptcy Act 1966, s 120

Official Trustee v Mitchell (1992) 110 ALR 484
Barton v Official Receiver (1986) 161 CLR 75
Re Hyams (1970) 19 FLR 232
Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267
Butcher v Stead (1875) LR 7 HL 839
Mackintosh v Pogose [1895] 1 Ch 505
Re Louwen (unreported, 28 April 1983)
Re Johnstone (1984) 3 FCR 32
Re Pacific Projects Pty Ltd [1990] 2 Qd R 541
PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199
Official Trustee v Mitchell (1992) 110 ALR 484
Mogridge v Clapp [1892] 3 Ch 382
Re Barnes; Ex parte Stapleton [1962] Qd R 231
Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463

MICHAEL IRVINE WANSLEY (as trustee of the bankrupt estate of Walter Percival Edwards) v INESE EDWARDS and WALTER PERCIVAL EDWARDS and THE REGISTRAR OF TITLES OF THE STATE OF VICTORIA VG 123 of 1996

COURT:Olney, Whitlam and Sundberg JJ

PLACE:Melbourne

DATE:9 August 1996

IN THE FEDERAL COURT OF AUSTRALIA      )

VICTORIA DISTRICT REGISTRY            )          No VG 123 of 1996

GENERAL DIVISION  )

BETWEEN:MICHAEL IRVINE WANSLEY

(as trustee of the bankrupt estate of Walter Percival Edwards)

Appellant

AND:INESE EDWARDS

First Respondent

AND:WALTER PERCIVAL EDWARDS

Second Respondent

AND:THE REGISTRAR OF TITLES OF THE STATE OF VICTORIA

Third Respondent

COURT:Olney, Whitlam and Sundberg JJ

DATE:9 August 1996

PLACE:Melbourne

MINUTES OF ORDER

The Court orders that:

1. The appeal be allowed.

1. The orders made by the primary judge be set aside and in lieu thereof it be declared that the disposition effected by Instrument of Transfer lodged in the Land Titles Office Victoria in dealing number S527941P and dated 20 May 1993 whereby the

second respondent transferred to the first respondent his interest in the land described in Certificate of Title Volume 3775 Folio 870 is void as against the appellant pursuant to section 120 of the Bankruptcy Act 1966.

1. The third respondent be restrained until further order from registering the said Instrument of Transfer.

1. The proceeding be remitted to a judge of the Court for determination of the question whether the land described in Order 2 should be sold and the proceeds thereof divided between the appellant and the first respondent.

1. The first and second respondents pay the appellant's costs of the appeal and the costs before the primary judge.

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

IN THE FEDERAL COURT OF AUSTRALIA      )

VICTORIA DISTRICT REGISTRY            )          No VG 123 of 1996

GENERAL DIVISION  )

BETWEEN:MICHAEL IRVINE WANSLEY

(as trustee of the bankrupt estate of Walter Percival Edwards)

Appellant

AND:INESE EDWARDS

First Respondent

AND:WALTER PERCIVAL EDWARDS

Second Respondent

AND:THE REGISTRAR OF TITLES OF THE STATE OF VICTORIA

Third Respondent

COURT:Olney, Whitlam and Sundberg JJ

DATE:9 August 1996

PLACE:Melbourne

REASONS FOR JUDGMENT

THE COURT:
The appeal
The appellant is the trustee of the bankrupt estate of the second respondent ("Mr Edwards"). He applied to the Court for a declaration that a transfer by Mr Edwards of his interest in a property at 319 Richardson Street, Middle Park ("the property") to his wife, the first respondent ("Mrs Edwards"), was void as against him pursuant to s 120, alternatively s 121, of the Bankruptcy Act 1966. Heerey J dismissed the application, and the trustee appeals against that order.

The facts
The facts found by the learned primary judge were largely undisputed.

The property was the Edwards' matrimonial home.  They are joint proprietors.  They were married in 1982, and have two young children.  Mr and Mrs Edwards are both qualified lawyers.  Mrs Edwards has for some twenty years carried on her own practice as a solicitor.  Mr Edwards had been employed as a solicitor by Monash University.  That employment ceased in late 1991, and apart from a few months in early 1992 he has not been employed since.

In late 1990 Mr Edwards became involved in a bitter and complex dispute with two officials of the Dental Technicians Association of Victoria, Terrence Wort and Ronald Anderson.  Mr Edwards was the secretary of the Association.  At a meeting of the Association in October 1991 Wort and Anderson made allegations that Mr Edwards had engaged in improper financial dealings in connexion with the Association's affairs.  In June 1991 Mr Edwards commenced defamation proceedings against Wort and Anderson in the County Court.

Mrs Edwards acted as her husband's solicitor in the action.  Mr Edwards had about $20,000 available to fund the litigation.  On a number of occasions he assured his wife that if further money was required it could come out of his share of the matrimonial home.  This was the Edwards' only substantial asset.  Mrs Edwards did a great deal of work on the case.

Towards the end of June 1992, without any warning, Mr Edwards left the matrimonial home. He did not return for about three months.  Then he told his wife he had been having an affair with another woman, Carol Harris, for some six years.  Mrs Edwards was very upset at this
disclosure, and told her husband that unless he changed his behaviour she would no longer act for him in the litigation or incur any further liabilities in connexion with it.

In October 1992 Mr Edwards obtained a loan of $40,000 from the Latvian Australian Credit Co-operative for further funding of the action.  Mrs Edwards joined with her husband in giving a third mortgage over the property as security.

On 10 February 1993 Mrs Edwards gave her husband a letter informing him she would no longer be assisting him with his case because he had failed to modify his behaviour despite many promises.  She told him the preparation of the case was virtually complete.  She reminded him of a few matters that had to be attended to prior to the trial.  Mr Edwards pleaded with her to continue to act for him and assured her she would not suffer financial loss.  In mid-February he replied to his wife's letter, thanking her for her past support and again asking her to continue to act for him because of her intimate knowledge of the case.  The letter included this passage:

As to your costs and disbursements and your obligations as a solicitor for payment of Counsel fees and other disbursements, I confirm my indemnity to you as already previously discussed.

I confirm our understanding and my assurances to you that my equity in our home is security for my above obligations and indemnity to you.

I am prepared to sign a transfer of land to you in respect of our house at 319 Richardson Street, Middle Park should you request it.

Mrs Edwards decided to continue to act in the litigation.  The case commenced on 3 March 1993 and lasted for seventeen days.  Mrs Edwards did not attend court as instructing solicitor, but employed another solicitor to perform that role.

The jury returned a verdict for Wort and Anderson, who were awarded their costs.  Mr Edwards was very upset because he had expected to win.  He did not tell his wife of the outcome.  She only found out when the instructing solicitor rang her.  Mr Edwards came home briefly, and then went to see Ms Harris.  Later that evening Ms Harris telephoned Mrs Edwards and said she did not want Mr Edwards "mooching" around her home any more.

Mr Edwards set about trying to borrow money to pursue an appeal. Mrs Edwards was concerned that he might further encumber the property, and took steps to secure her interest in it. She lodged a caveat claiming her husband held his interest in trust for her "pursuant to an implied or constructive trust" arising out of her contribution on his behalf towards the acquisition of the land "and also by virtue of [her] entitlement pursuant to section 79 of the Family Law Act". She also prepared a transfer of Mr Edwards' interest to herself. The consideration panel was left blank. They both signed the transfer. Mrs Edwards prepared a document setting out her claims in respect of the property. It reads as follows:

EDWARDS - Property settlement

(2 children in custody of wife - ages 5 and 6)

Valuation of house  $330,000

Less-  First mortgage  60,000 + 10,000  $ 70,000

-Second mortgage  25,000 + 14,000  $ 39,000

-personal loan  $  5,000

-balance due on overdraft  $  1,700           $115,700

Total equity  $214,300

70/30 settlement

70% to the wife               =  $150,000

30% to the husband         =  $ 64,290

From husband's share  $64,290

Third mortgage and disbursements paid by wife

(all re husband's court case)  -           $59,773

$ 4,517 = token maintenance for children

Balance to husband - NIL

Also each party keeps an old car

and each has equal modest superannuation benefits.

She showed the document to her husband who in substance agreed with it.

On 5 April Mrs Edwards rendered a bill of costs in connexion with the action.  The bill was only for disbursements of $76,710.99.  Included in this sum were counsel's fees of $40,470 for which Mrs Edwards was personally liable.  The amount claimed by Mrs Edwards ($59,773) was the balance after allowing for part payment by her husband.  Although the bill did not include profit costs, there was unchallenged evidence from a costs consultant that Mrs Edwards' reasonable costs would have been $24,945.80.

On 23 April Mr Edwards lodged a notice of appeal.  Mrs Edwards signed the notice as his solicitor.  On 28 April she ceased to act for him.

In the meantime both parties consulted solicitors in connexion with their matrimonial affairs.  On 30 April Mrs Edwards' solicitors issued an application in the Family Court.  It included minutes of consent orders upon which the parties had agreed.  Mr and Mrs Edwards filed statements of financial circumstances, neither mentioning the costs order in favour of Wort and Anderson.  On 20 May the Family Court made final orders dealing with the custody of the children and the parties' property rights.  Mr Edwards was to transfer his interest in the property to his wife.  She was to be responsible for the three mortgages.  The parties then completed the transfer of land Mrs Edwards had prepared by inserting in the consideration panel the words "Pursuant to orders of the Family Court of Australia made on 20th May 1993".  It was lodged in the Titles Office, but registration was withheld as a result of proceedings launched by Wort and Anderson in the Family Court.

In July Wort and Anderson obtained orders for security for costs of the appeal from the County Court.  Mr Edwards did not provide security, and his appeal was struck out.

In October Wort's costs were taxed at $72,212.25.  On 10 January 1994 a bankruptcy notice was issued on Anderson's application, and on 28 April a sequestration order was made.

Section 120(1)
Section 120(1) provides:

A settlement of property, whether made before or after the commencement of this Act not being:

(a)a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or

(b)...

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

The transfer was a disposition of property, and hence a "settlement": sub-s (6).  Since the transfer was effected within two years before the commencement of the bankruptcy, it would be void unless Mrs Edwards was a purchaser in good faith and for valuable consideration.  The trustee had the onus of proving she was not: Official Trustee v Mitchell (1992) 110 ALR 484 at 490.

Primary judge - valuable consideration
His Honour noted that the question was whether Mrs Edwards had given consideration which had "a real and substantial value and not one which is merely nominal or trivial or colourable": Barton v Official Receiver (1986) 161 CLR 75 at 86, and that the consideration need not be equal, or even nearly equal, to the value of the property: Simpson v Grellman (unreported, Full Court, 28 June 1990).

His Honour accepted that Mrs Edwards' claim against her husband was "reasonably estimated to be likely to result in at least a 70/30 division against him".  This was the division assumed in Mrs Edwards' property claim document, with which Mr Edwards in substance agreed.  His Honour went on to say that Mr Edwards could thus be rationally treated as having property worth $64,290 (30 per cent of the total equity) with which to meet his wife's claim to costs and disbursements of $59,773.  In Mrs Edwards' property claim the balance of $4517 was treated as "token maintenance for children".  His Honour said that whether it was so treated or set off against his wife's unclaimed profit costs ($24,945.80), the consideration for the transfer of her husband's interest was real and substantial.  He was transferring property which was probably worth substantially less than the value of his wife's claims under the Family Law Act and for professional work done and disbursements incurred on his behalf.
Primary judge - good faith
Having referred to the test adopted in Re Hyams (1970) 19 FLR 232 at 256 that "good faith" connoted absence of any "knowledge that any fraud or preference contrary to the statute is intended", his Honour said:

I am satisfied that Mrs Edwards was not, in relation to the transaction at issue in this proceeding, motivated by any intention to defeat any claims of Messrs Wort and Anderson or to commit any fraud or obtain any preference contrary to the Bankruptcy Act.  Rather she was concerned to protect and enforce her rights against her husband in the legitimate interest of herself and her children.

His Honour made no finding as to Mr Edwards' intention in executing the transfer - whether to satisfy his wife's demands or to defeat Wort and Anderson.

Consideration colourable?
The appellant's counsel submitted that Heerey J had failed properly to apply what was said in Barton.  It was common ground that consideration is not "real and substantial" if it is nominal, trivial or colourable.  Accepting that the consideration passing from Mr Edwards was neither nominal nor trivial, counsel contended it was "colourable" because the parties did not disclose in the statements of their financial circumstances that Mr Edwards was liable for very substantial amounts for costs awarded to Wort and Anderson.

The first two adjectives in the phrase "nominal or trivial or colourable" are directed to the quantum of the consideration.  The first to consideration which is of only token value.  The second to that which is not a mere token but is very small in relation to the value of the property for which it is exchanged.  "Colourable" on the other hand goes to the genuineness of the consideration.  Colourable consideration is that which is "pretended, feigned, counterfeit, collusory": Oxford English Dictionary.

It lay upon the trustee to show that Mrs Edwards did not give valuable consideration for her husband's share of the property.  Because he wished to establish that what appeared to be real and substantial consideration was in fact a sham, the onus was not light.  Cf Lyford v Commonwealth Bank of Australia (1995) 130 ALR 267 at 269. That onus was not discharged by the assertion that the parties' compromise might not have been approved by the Family Court had the Court been aware of the husband's liability for costs. Ms Lanteri, a family law expert, gave evidence that the Court's orders were within the range of outcomes which might have been expected had there been a trial. In view of the location of the onus under s 120(1), his Honour was quite entitled to say, as he did, that counsel for the trustee could have cross-examined Ms Lanteri in order to clarify whether the non-disclosure of the costs liability was something which, in the view of an experienced family law practitioner, would or might have affected the outcome. His Honour's conclusion that the trustee had not discharged the onus of showing the absence of valuable consideration has not been shown to be affected by any error.

Good faith - the Hyams dictum
A consideration of the meaning of "good faith" in s 120(1) must begin with the dictum of Gibbs J in Re Hyams at 256:

In Mackintosh v Pogose [1895] 1 Ch, at p 510 it was said that the words "in good faith" in the corresponding section of an English Bankruptcy Act must be taken to mean "without notice that any fraud or fraudulent preference is intended", and in the context of the Australian statute this exposition may be modified to read "without notice that any fraud or preference contrary to the statute is intended".

The concluding words of this passage mean that good faith is wanting if the disponee has notice of an intention on the part of the disponor to defraud his creditors or prefer one creditor over the body of creditors.  This is confirmed by his Honour's earlier statement that the circumstances in which the mortgage was executed did not themselves suggest to the mortgagee that it was given "with a view to defeating the rights of other creditors".

The section of the English Bankruptcy Act referred to by Gibbs J was s 92 of the Bankruptcy Act 1869 (32 & 33 Vict c 71) which provided in part that:

Every conveyance or transfer of property, or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they become due from his own moneys in favour of any creditor ... with a view of giving such creditor a preference over the other creditors, shall, if the person ... become bankrupt within three months after the date of making, taking, paying, or suffering the same, be deemed fraudulent and void as against the trustee of the bankrupt appointed under this Act; but this section shall not affect the rights of a purchaser, payee or incumbrancer in good faith and for valuable consideration.

One condition of the relevant transaction being void under the section was that it be made by a person "with a view of giving" a creditor a preference over other creditors.  The disponor must have intended to confer a preference: Butcher v Stead (1875) LR 7 HL 839 at 845, 849. The words "purchaser ... in good faith" were held to mean one who took "without notice that any fraud or fraudulent preference is intended", or "without notice that the person paying is doing anything injurious to his other creditors": per Lord Cairns LC at 847. Lord Hatherley said that to be a purchaser in good faith a person must "not be conscious himself of an intention to favour one creditor above another": at 849.

The section considered in Mackintosh v Pogose [1895] 1 Ch 505 was s 47 of the Bankruptcy Act 1883 (46 & 47 Vict c 52) which provided in part that

Any settlement of property not being a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration ... shall, if the settlor becomes bankrupt within two years after the date of the settlement, be void against the trustee in bankruptcy.

Stirling J said the words "a purchaser or encumbrancer in good faith and for valuable consideration" in s 47 contemplated a person who has for valuable consideration acquired property "affected with some infirmity without notice of the existence of such infirmity": at 510.  His Lordship noted as confirmatory of the fact that the good faith of the disponee alone was relevant, that when considering s 92 of the 1869 Act in Butcher v Stead Lord Cairns said "in good faith" meant "without notice that any fraud or fraudulent preference is intended".

The relevant verbiage of s 94(1) of the 1924 Act considered in Hyams was the same as that of s 47 of the 1883 Act.

Because of the differences between s 92 of the 1869 Act and s 94(1) of the 1924 Act it was necessary for Gibbs J to modify Lord Cairns' statement in Butcher.  This he did by replacing "fraudulent preference" with "preference".  But the modification was incomplete because it retained a reference to the disponor's intention, which was a feature of s 92 but not of s 94(1) (or for that matter s 47 of the 1883 Act).  An appropriate modification would have been "without notice that the effect of the settlement was to defeat or delay creditors".  Cf Lord Cairns' alternative formulation in Butcher at 847.
More recent cases
Later cases in which Gibbs J's dictum has been quoted with approval or apparent approval have generally not reflected the requirement that the disponee be aware of the disponor's impermissible intention.

Thus in Re Louwen (unreported, 28 April 1983), after setting out the Hyams dictum, Franki J said:

I am of the opinion that Mrs Louwen, in accepting the transfer was not a purchaser in good faith within s 120(1), if, when the transfer was executed, she knew that her husband was unable to pay his debts and that by taking the property she was not contributing in any way to the assets available to his creditors but was, if the transaction could not be attacked, removing whatever was the value of the property then available to the husband's creditors, from those creditors.

This passage looks not to an intention on the part of the disponor to disadvantage creditors, but to the disponee's knowledge of the disponor's insolvency and that the effect of the disposition will be to disadvantage creditors.

In Re Johnstone (1984) 3 FCR 32 at 35 Smithers J relied on Hyams and Louwen, amongst other cases, for the proposition that

good faith in the context of s 120(1)(a) of the Act requires an absence of knowledge or notice by the purchaser that:

1.The bankrupt is unable to pay his/her debts or is financially unsound.

2.By taking the property the purchaser is defeating or delaying creditors.

Again there is no reference to an intention on the disponor's part to disadvantage creditors.
In Re Pacific Projects Pty Ltd [1990] 2 Qd R 541 at 545 Connolly J, with whom Carter J agreed, after referring to Hyams, said:

If NatWest was aware, through Mr Gould on 9 February 1988, that the securities it was about to take, would secure it for a further $500,000 and that this was not unlikely to be at the expense of unsecured creditors in a situation in which Pacific Projects was unable to pay its debts as they fell due, it could not, in my judgment, be regarded as a purchaser in good faith.

Moynihan J expressed a similar view at 549.

In Lyford v Commonwealth Bank of Australia, at 275, after referring to Hyams and Pacific Projects, amongst other cases, Nicholson J said:

I do not accept that the law requires, as the submissions for the bank suggest, that to negative good faith the bank must be shown to have had privity to dishonesty or fraud.  ... The essential question is whether the knowledge of the bank extended to knowledge that the taking by it of either of the equitable mortgages would constitute a preference.

For the determination of this fact deliberate abstention from enquiry may be equated to actual knowledge but wilful blindness is to be distinguished from ignorance caused by failure to make more extensive enquiries: the former is akin to fraud, the latter to negligence ....

Here it is contended for the applicants that if the company was insolvent as at the date of the grant of each of the equitable mortgages and the bank knew or had reason to suspect that insolvency, there would be an absence of good faith because it would have known or suspected that the creation of both equitable mortgages preferred it as a creditor over all other creditors.

Although the proposition in the last sentence is expressed as the applicant's contention, it is in fact the proposition his Honour applied, as appears from later passages in his judgment.  See at 279, 280-281.
Pausing here, it can be seen that Louwen, Johnstone, Pacific Properties and Lyford pose a test of good faith which, putting immaterial differences of expression aside, requires an absence of knowledge or notice by the disponee that the bankrupt is unable to pay his debts and that by taking the property the disponee is securing a preference over other creditors.  Knowledge or notice by the disponee that the disponor has the intention to prefer is not an additional requirement, contrary to what Hyams would seem to suggest.

Louwen, Pacific Properties and Lyford concerned s 120 alone. Although Johnstone involved both ss 120 and 121, Smithers J's observations were directed only to the former.

There are some observations in two Full Court cases which approve the Hyams dictum in a manner which may suggest that for the purposes of s 120 there must be an awareness in the disponee of an intention on the part of the disponor to prefer one creditor over creditors generally. Those cases are PT Garuda Indonesia Ltd v Grellman (1992) 107 ALR 199 and Official Trustee v Mitchell (1992) 110 ALR 484. Both involved s 120 and s 121. Section 121 avoids dispositions of property made "with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith" where the disponor subsequently becomes bankrupt. The counterpart in s 120 of phrase in s 121 "not being a disposition for valuable consideration in favour of a person who acted in good faith" is "not being ... a settlement ... made in favour of a purchaser or encumbrancer in good faith and for valuable consideration ...". But while for s 121 there must be an intention on the part of the disponor to defraud creditors, that is not a feature of s 120(1). Indeed s 120(1) contains no element of intention.

In Garuda, after referring to Hyams and Pacific Projects, and noting the description of "good faith" given by Kay LJ in Mogridge v Clapp [1892] 3 Ch 382 at 401 - "a belief that all is
being regularly and properly done" - the Court said that "In substance the notion of good faith expressed by those authorities is the same, and should be followed". Turning to the facts, the Court agreed with the finding of the trial judge that Garuda was "privy to the intention of Mr Simpson to defraud his creditors". That of course is s 121 language, and that was the provision with which their Honours were concerned.

In saying that "the notion of good faith expressed by those authorities is the same", the Court could not have meant that the enquiry to be made under the good faith limbs of s 120 and s 121 is the same. Under s 121 the good faith of the disponee is related to what has been done by the disponor, namely disposing of property with intent to defraud his creditors. In that context it is natural, when inquiring whether the disponee acted in good faith, to ask whether he was "privy to the fraud" (Re Barnes; Ex parte Stapleton [1962] Qd R 231 at 240) or "privy to the intention of [the disponor] to defraud his creditors" (Garuda at 212, 213). But under s 120, where the acts of the disponor need involve no fraud or intention to disadvantage creditors, the good faith of the disponee cannot involve an enquiry as to whether he was privy to the fraud or privy to the disponor's intention to defraud his creditors. Since s 120 offers no express guidance as to what the disponee's good faith is to be measured against, resort should be had to the purpose behind the section - to ensure that the bankrupt's property is fairly shared amongst his creditors and not gobbled up by one of them leaving the others high and dry or with reduced shares. The disponee will not act in good faith if he is aware that that is the effect of the disposition. Cf Johnstone, Pacific Projects and Lyford.

In Mitchell, after referring to various observations about good faith made in earlier cases - "the existence of knowledge or suspicion of an inability to pay debts as they fall due negatives good faith" (Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463 at 472), "without knowledge that any fraud or preference contrary to the
statute is involved" (Hyams), "absence of dishonesty or of any conscious attempt to defraud any other person" (Barton (1984) 4 FCR 380), whether the disponee was "privy to the fraud" (Garuda), whether he had a belief that all was regular and proper (Mogridge) - the Court expressed the view that "in general, the test which should be applied to ss 120 and 121 is that favoured by Gibbs J in Re Hyams".  The Court went on to say

The test in Re Hyams may be satisfied where the court can infer the receipt of notice so that the person concerned knew of the fraud or preference: if he then went on with the transaction, he must be regarded as privy to the fraud.

That remark was made in reference to s 121. The Court had earlier said that if the trustee shows lack of good faith under s 121, "he has no need of s 120" (at 492). The ensuing discussion was all directed to s 121.

For completeness another Full Court decision should be noted: Cannane v Official Trustee (1996) 136 ALR 406. The meaning of "good faith" in s 121 was alone in issue. The only aspect of s 120 that was raised concerned the meaning of "settlement". Dealing with "good faith" in s 121, the Court referred to Garuda ("the notion of good faith expressed by these authorities is the same and should be followed") and Mitchell (expressing a preference for the Hyams test), and said it was unnecessary to consider any difference between the views.  The Court was content to accept the Hyams test.  It was clear on the facts that one disponee had "full notice" of the disponor's intention to put the shares beyond the reach of creditors.  The other disponee deliberately eschewed being put on notice of the facts and circumstances constituting the fraud, and thus could not be a purchaser in good faith.  Cannane throws no light on the meaning of "good faith" in s 120.

The applicable test
A disponee will not act in good faith for the purposes of s 120 if he knows or suspects that the effect of the disposition will be to disadvantage creditors. It is not a requirement of lack of good faith in that section that the disponee be aware of any intention on the part of the disponor to disadvantage his creditors.

Good faith - conclusion
Although the primary judge found that Mrs Edwards was aware that Wort and Anderson had obtained an order for costs against her husband and that those costs were likely to be substantial, he was satisfied that she was not, in relation to the transfer, "motivated by any intention to defeat any claims of Messrs Wort and Anderson or to commit any fraud or obtain any preference".  Rather she was "concerned" to protect her own rights and those of her children.

The disponee's "motivation" or "concern" is not the inquiry with which the "good faith" element of s 120(1) is concerned. The question is whether Mrs Edwards knew or suspected the transfer preferred her as a creditor over other creditors.

In the course of her cross-examination Mrs Edwards conceded that apart from the house property there were no other assets with which her husband could have paid Wort and Anderson.  The following exchange then occurred:

So the object of the exercise was that you would secure the entire interest in the house to the exclusion of Mr Wort and Mr Anderson? --- That was not the object of the exercise.  It may have been the consequence but that was not the object of the exercise.

...

... Do you say that you had no regard whatsoever to the costs order in favour of Messrs Wort and Anderson at the time you embarked upon these Family Court proceedings? --- I didn't think it was my duty to look after those people.  I was looking after myself and my children.

Well, did you consciously turn your mind to whether it was your duty or not? --- It crossed my mind as a consequence of this, settlement with me, they might miss out, but that was not my primary aim in this matter.  My aim was to have a property settlement and to secure what was mine and the children's.

While it was not Mrs Edwards' aim or object to defeat Wort and Anderson, she knew that the consequence of the transfer was that they might miss out.  She thus knew or suspected that the transfer would prefer her over other creditors, and accordingly she was not a purchaser in good faith.

The appeal must be allowed. In lieu of the orders made by Heerey J it should be declared that the transfer to Mrs Edwards of her husband's interest in the property is void as against the appellant pursuant to s 120(1).

In his notice of appeal the appellant sought an order under s 223, alternatively s 222, of the Property Law Act 1958 (Vict) that the property be sold and the net proceeds of sale be divided equally between the appellant and Mrs Edwards.  On the hearing of the appeal the Court was invited to remit those matters to the trial judge.  That is the appropriate course to adopt.

I certify that this and the preceding 17 pages are a true copy of the reasons for judgment of the Court

........ ........ ........ ........ ........ ........ .

Associate

9 August 1996

Counsel for the Appellant:  G T Bigmore QC and M Galvin

Solicitors for the Appellant:               J M Smith & Emmerton

Counsel for the first Respondent:                  D Perkins

Solicitors for the first Respondent:                Irlicht & Broberg

The second Respondent appeared in person.

Date of Hearing:  5 June 1996

Place of Hearing:  Melbourne

Date of Judgment:  9 August 1996