Woods, J.J. v Woods, A.D
[1995] FCA 133
•22 FEBRUARY 1995
CATCHWORDS
BANKRUPTCY - transfer of properties from bankrupt to wife pursuant to orders made by consent under s.79 of the Family Law Act - whether void against trustee in bankruptcy - whether intent to defraud creditors - relevance of a second intent relevant - whether valuable consideration paid
EVIDENCE - hearsay - admissibility of out of court statement of intent made after the time at which speaker's state of mind is relevant to a fact in issue - weight of such evidence if admitted
Bankruptcy Act 1966 (Cth) ss 120, 121
Williams v Lloyd [1934] 50 CLR 341
Vocisano v Vocisano [1974] 130 CLR 267
Barton v Deputy Commissioner for Taxation [1974] 131 CLR 370
Barton v Official Receiver [1986] 161 CLR 75
Walton v R [1989] 166 CLR 283
P T Garuda Indonesia Ltd v Grellman [1992] 35 FCR 515
Re Hymans; Official Receiver v Hymans [1970] 19 FLR 232
Noakes v J Harvey Holmes & Son [1979] 37 FLR 5
Re Barnes; Ex parte Stapleton [1962] Qd R 231
Re Holland; Greg v Holland [1902] 2 Ch 360
In re Abbott [1983] 1 Ch 45
Re McInnes; McInnes & anor v Official Receiver Einfeld J, unreported 18 November 1994
Re JOHN JEFFERSON WOODS; PETER DAVID WOODS v ANN DENISE WOODS
No. NB 491 of 1994
EINFELD J
SYDNEY
22 FEBRUARY 1995
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT OF THE STATE ) No NB 491 of 1994
OF NEW SOUTH WALES )
Re:JOHN JEFFERSON WOODS
Bankrupt
Ex Parte:PETER DAVID RODGERS
Applicant
And:ANN DENISE WOODS
Respondent
MINUTE OF ORDERS
The application is dismissed.
The applicant to pay the respondent's costs of the application.
Note: Settlement and entry of orders are dealt with in accordance with Rule 124 of the Bankruptcy Rules.
EINFELD
SYDNEY
22 FEBRUARY 1995
IN THE FEDERAL COURT OF AUSTRALIA )
BANKRUPTCY DISTRICT OF THE STATE ) No NB 491 of 1994
OF NEW SOUTH WALES )
Re:JOHN JEFFERSON WOODS
Bankrupt
Ex Parte:PETER DAVID RODGERS
Applicant
And:ANN DENISE WOODS
Respondent
REASONS FOR JUDGMENT
EINFELD J SYDNEY 22 FEBRUARY 1995
On 9 March 1994 Mr Woods was declared bankrupt on his own petition and the applicant was appointed trustee of his estate. By application filed 1 August 1994 the applicant has applied for declarations that certain properties of the respondent, the bankrupt's estranged wife, is the property of the estate or, in the alternative, for orders that the properties be transferred to the trustee by the respondent. The dispute involves two properties in New South Wales: one at 50 Parsonage Road, Castle Hill (the Castle Hill property) and the other being Lot 18 Serpentine Lane, Bowen Mountain (the Bowen Mountain property).
Factual background
The bankrupt and the respondent married in November 1986. The respondent worked as an administration manager in mining
companies from before her marriage until 1989. In February of that year she resigned from her job and commenced work in a similar position within the group of companies owned by her husband's family. These were referred to collectively by the family as "the Woods group" of companies and I shall adopt that term. The bankrupt and the respondent were the only shareholders in Tomovu Pty Limited which owned a sixth share in the group.
In June 1987 the couple purchased the Bowen Mountain property for $90,000, financing the purchase by a mortgage of approximately $60,000 with the Westpac Bank, Fairfield. In June 1988 the Castle Hill property was purchased for $155,000, secured by mortgage of $100,000 with Westpac's Spit Junction branch. The bankrupt and the respondent were registered as joint tenants of the properties.
In early 1989 the first signs of stress in the marriage started to appear. The couple commenced marriage counselling and in March the respondent spent a month living with a friend in Tasmania as a result of stress in the relationship. On 16 May 1989 the couple separated but apparently relations between them remained sufficiently cordial to permit the continued employment of the respondent in the family businesses.
In September 1990 the respondent saw a solicitor with a view to obtaining a property settlement from the bankrupt. It would appear that the bankrupt also retained a lawyer in this regard. During this period the bankrupt, presumably in concert with the rest of his family, moved the assets and business of the Woods group into a set of shelf companies, thus rendering the respondent's share in the original companies worthless. If the respondent has any residual cause of action in respect of this transfer, she has not pursued it, and it was not raised in argument. Indeed this aspect of the respondent's evidence (affidavit p 6) was ignored in submissions, despite the fact that it might have been ultimately significant to whether valuable consideration was given for the properties.
In late 1989 the couple again undertook marriage counselling, and achieved a reconciliation, upon which basis they resumed co-habitation in the Castle Hill property in August 1990. However, strains in the relationship evidently reappeared immediately and on 21 August 1990 the bankrupt abruptly terminated the respondent's employment with the Woods group. The relationship continued to decline, with the bankrupt frequently living for periods of time with his father or at the Bowen Mountain property. At one point during 1991 he lived at the Bowen Mountain property for six months.
A renewed period of attempted reconciliation commenced in January 1993. For the next three months the couple worked together, apparently quite closely, to restructure the Woods group and buy out the rest of the Woods family. As part of this attempt they negotiated with Esanda, a major creditor of the group, to replace the security provided by other members of the family with the two properties owned by the couple. During this period, if not earlier, it became apparent to the respondent that the financial affairs of the group were 'difficult' (T23). From about April 1993 relations again began to sour, and the respondent started to change her plans from running the Woods group with her husband to running her own business.
In June 1993 the couple made a final decision to separate permanently and to arrange for a division of the matrimonial property. The respondent stayed at the Castle Hill property, and the bankrupt moved permanently to Bowen Mountain. The respondent stated that she instructed solicitors in August to draw up consent orders embodying an agreement for a property settlement. Following the agreement they jointly visited the bank in October 1993 to arrange for loans to the respondent secured by mortgages over the properties to enable her to proceed with her life alone. On 17 December 1993 consent orders in the Family Court which are the concerns of these proceedings were signed (the consent orders). The respondent explained the delay between the time the agreement was allegedly made and the signing of the consent orders by testifying that she had been very busy in the intervening months, and had considered the agreement to be already concluded.
The consent orders consisted of six points. The first was that the husband transfer the Castle Hill property to the wife. The second was that the wife indemnify the husband against any liability arising from the mortgage over the land. The third and fourth points made similar provision with respect to the Bowen Mountain property. The fifth point was that the bankrupt be declared the sole and absolute owner of the shares in Tomovu Pty Ltd, which some time in 1993 had been deregistered by the Australian Securities Commission (ASC). The final point was that each of them be declared the owner of all property currently in their possession, including money. A notation to the orders stated that the agreement was intended to be a final determination of their respective financial claims on each other.
The consent orders were filed on 14 January 1994 pursuant to section 79 of the Family Law Act and the transfers of the properties pursuant to the orders were signed on 19 January 1994. On 28 March 1994 the respondent registered the transfers of the land. By these transfers the bankrupt transferred his interest in the two properties to the respondent. This application challenges these transfers.
The evidence
The trustee presented two affidavits on the application. Only three paragraphs of the first, sworn by him on 26 July 1994, were read. These did no more than annex copies of relevant title searches and transfers to demonstrate that the properties were transferred from the joint ownership of the bankrupt and the respondent to the respondent alone. Mr Rodgers was not cross examined. The other affidavit, sworn on 16 September 1994 by Warren Brian White, an employee of the trustee, annexed and analysed the bankrupt's statement of affairs and related two conversations held with the bankrupt. The second conversation merely established the refusal of the bankrupt to swear an affidavit sent to him in draft form by the trustee's office. The affidavit recorded that in a telephone conversation on 1 September 1994 (the September conversation) Mr White said to the bankrupt (p 2):
'Are you prepared to swear the affidavit that I have sent you?'
He replied:No, it is wrong, and anyway, I need to seek legal advice'.
The other conversation had occurred earlier, on 26 May 1994 (the May conversation), at the trustee's office where it is said that the following exchange occurred between Mr Hardge, an employee of the trustee's solicitor, and the bankrupt (p 3):
Mr Hardge:'Did you receive anything from the Family Court agreement?'
Mr Woods:'No, I didn't.'
Mr Hardge:'Then why did you enter the agreement?'
Mr Woods:'What else was I supposed to do?'
Mr Hardge: 'Do nothing'
Mr Woods:'Who would have got the properties then?'
Mr Hardge:'The creditors.'
Mr Woods:'Yea, I didn't want them going to Esanda.'
No other part of the affidavit was read. The respondent objected to both these conversations. The September conversation was admitted subject to relevance. I believe it to be relevant although, as will become apparent from these reasons for judgment, I have not placed any reliance on it. The May conversation was provisionally admitted subject to argument. The trustee submitted that it was admissible as evidence of the state of mind of the bankrupt. In Walton v R [1989] 166 CLR 283 Chief Justice Mason said (at 288):
The hearsay rule applies only to out-of-court statements tendered for the purpose of directly proving that the facts are as asserted in the statement. Generally speaking, evidence of out-of-court statements relied on for another purpose is not excluded by the rule. Thus, evidence of a relevant out-of-court statement is admissible evidence of the maker's knowledge or state of mind when he made the statement in a case where such knowledge or state of mind is a fact in issue or a fact relevant to a fact in issue. [my emphasis]
At 289 his Honour continued:
Even when the testimony proffered is not that of the maker of the statement, but that of a person who heard the author make the statement, it is original evidence. It is because the making of the statement has independent evidentiary value in proving the author's intentions, those intentions being a fact in issue or a fact relevant to a fact in issue, that the witness's testimony does not infringe the hearsay rule. It is original evidence rather than an exception to the hearsay rule.
Justices Wilson, Dawson and Toohey, in a joint judgment, proceeded along similar reasoning. After referring to those cases in which the hearsay rule had not prevented the admission of evidence of out-of-court statements, their Honours continued (at 302):
But in other cases a person's statements about his state of mind will only have probative value if they are truthful and accurate and to rely on them is to rely to some extent upon the truth of any assertion or implied assertion contained in them. To that extent an element of hearsay may be said to be present. This case is an example. But the element of hearsay need not necessarily preclude evidence of that kind being treated as conduct from which an inference may be drawn rather than as an assertion which is put forward to prove the truth of the facts asserted. The distinction between the two approaches is one which can be fine, but it is one which in principle ought to be drawn.
...
[304] The distinction to be drawn is that to which we have referred, namely, the distinction between evidence of conduct which, even though it may contain an assertion, is tendered as a relevant fact or a fact relevant to a fact in issue and is therefore admissible and evidence of conduct which has no probative value other than as an assertion and is therefore not admissible.
In a particularly instructive passage for current purposes, their Honours said at 305:
The unlikelihood of concoction or distortion is not sufficient of itself to render a hearsay statement admissible: see Vocisano v Vocisano (1974) 130 CLR 267 at 273. But if sometimes there is an element of hearsay in evidence which is led of statements made by a person concerning that person's state of mind, the justification for disregarding that element of hearsay may be thought to be of a similar kind. Such statements will rarely be purely assertive. Ordinarily they are reactive and are uttered in a context which makes their reliability the more probable. On the other hand, if a statement by a person about his state of mind is a bare assertion not amounting also to conduct from which a relevant inference can be drawn, then it ought to be excluded as hearsay.
The statements upon which the trustee seeks to rely fall into the category of bare assertion. Although the state of mind of the
bankrupt is a fact in issue under both sections 120 and 121 of the Bankruptcy Act, the relevant state of mind is at the time the agreement was reached. The trustee asked the Court to accept the truth of the statements and to draw the inference that the consent orders and the subsequent transfers were intended to deny his principal creditor access to his main assets. But to have any probative value in this case, any statements of this genre must relate to the bankrupt's state of mind in August 1993 when the agreement was made or, at the latest, December 1993 when the consent orders were signed. Yet in fact the statements tendered here were made up to a year after these dates. I consider the May conversation to have little or no probative value on the issue of the bankrupt's state of mind at the relevant time and have therefore placed no reliance on what he is alleged to have said. It is my opinion that the statement, five months after the consent orders, untested under cross examination, that he did not want his assets "to go to Esanda" provides no real indication of the reason for the transfers.
The trustee also tendered certain documents which, as shall become evident, were of little assistance. The bankrupt was not called. For her part, the respondent presented an affidavit sworn 26 October 1994, outlining the history of her relationship with the bankrupt, and the context of the consent orders and the transfers.
Section 121
Section 121 of the Act provides that
... a disposition of property ... with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy.
The primary factor in a successful application under this section is fraud on the part of the disponor. Yet the only evidence of fraud tendered by the trustee was the ambiguous and inadequate May conversation between the bankrupt and Mr Hardge. There was simply no direct evidence of any fraudulent intent put before the Court. Thus the only question for determination is whether the Court should infer fraud from all the circumstances of the case.
In Re McInnes; McInnes & anor v Official Receiver unreported 18 November 1994 I discussed the authorities dealing with a finding of fraud in the absence of direct evidence of an intent to defraud. It will be enough here to refer to the judgment of a Full Court of this Court (Wilcox, Gummow and Von Doussa JJ) in P T Garuda Indonesia Ltd v Grellman [1992] 35 FCR 515 where at 523 their Honours said:
The first submission for Garuda was that "fraudulent intent on the part of the bankrupt must be expressly proved". Counsel referred to the statement of Dixon J ... that there must exist " a real intent to defeat or delay creditors": Williams v Lloyd [1934] 50 CLR 341 at 372. He referred also to the statement by Gibbs J, made with reference to Queensland legislation, that there must be established actual fraud "that is an actual intention to defeat or defraud creditors": see Re Barnes; Ex parte Stapleton [1962] Qd R 231 at 237. However, in both of these passages, their Honours also referred to the necessity to have regard to all the circumstances of the transaction, and Gibbs J said it was a question of
fact whether the existence of such an intention should be inferred from the circumstances.
Their Honours went on to adopt the formulation of Justice Brennan, giving the judgment of an earlier Full Court in Noakes v J Harvey Holmes & Son [1979] 37 FLR 5 where at 10-11 his Honour said:
We were pressed with some observations in Williams v Lloyd; Re Williams where the court affirmed that the burden of proof that a transfer was made with a real intent to defeat or delay creditors is upon the party who so alleges. But that was a case where, at the time of the challenged disposition of property by a husband to his wife, he was in a sound financial position, and it was held that subsequent conduct and events were insufficient to show that the husband had at that time an intent to defraud creditors: see the judgment of Dixon J (at 372). In the present case the inevitable result of the transfer of shares on 13 December 1976 was to defeat or delay any attempt to execute the judgment in Norfolk Island. The case falls squarely within the line of authorities of which Freeman v Pope is the leading example, where Lord Hatherley LC said (at 541):
But it is established by the authorities that in the absence of any such direct proof of intention, if a person owing debts makes a settlement which subtracts from the property which is the proper fund for the payment of those debts, an amount without which the debts cannot be paid, then, since it is the necessary consequence of settlement (supposing it effectual) that some of the creditors must remain unpaid, it would be the duty of the judge to direct the jury that they must infer the intent of the settlor to have been to defeat or delay his creditors, and that the case is within the Statute.
That proposition does not trespass upon the rule as to onus of proof; it is a particular illustration of the discharge of the onus by inference from the known facts cf Re Holland; Greg v Holland [1902] 2 Ch 360 at 381. In this case, the inference is strengthened by the proximity in time of the failure to have the judgment set aside and the execution of the transfer of shares.
The solvency of the bankrupt at the time of the transfers is, therefore, clearly relevant to and in some circumstances can amount to proof of an intent to defraud, in the absence of direct evidence on the point. However, the Full Court in Garuda was careful to emphasise that such an inference must arise from all the circumstances of the case, and in Noakes Justice Brennan made it clear that the trustee cannot use solvency to displace the onus of proof, although it may be sufficient to discharge it.
It is necessary in this case to look at several factors, including solvency, that might assist in divining the state of mind of the bankrupt at the time the agreement was reached.
FAILURE TO SIGN THE AFFIDAVIT
No implication can be drawn from the fact that the bankrupt declined to sign the affidavit submitted by the trustee, especially as he had not prepared it himself and when one of the reasons expressed for not signing it was to get legal advice. As most of the draft appears uncontroversial and would be unlikely to provoke a denial, it might be of some significance that the bankrupt reportedly said that the affidavit was 'wrong'. However, the last paragraph read (sic):
Although I do not believe I received any benefit from the agreement which was the basis of the Family Court Consent Orders, annexed are marked 'A'. I entered into the agreement because I preferred my estranged wife to receiver my interests in the properties known as lot 18, Serpentine Line, Bowen Mountain and 50 Parsonage Road, Castle Hill, than for my creditors to receive the interests.
Assuming that the bankrupt's use of the word 'wrong' did not refer to the grammar employed by the drafter of the affidavit, it might be concluded that he was denying the existence of the intention to defraud creditors ascribed to him in that paragraph, upon which the trustee has based the application under section 121. Certainly this evidence does not assist the trustee.
SOLVENCY
The trustee led evidence that at the time the consent orders were signed, in December 1993, the bankrupt could not have paid all his debts without the properties. Indeed it was Mr White's conclusion (T16, affidavit p 2) that
Mr Woods was insolvent from at least July 1993 onwards.
There was no evidence from the respondent to suggest that this was not the case, and the assertion was not directly challenged in cross examination. I am prepared to accept therefore that at the time when the agreement was entered, when the orders were signed, and certainly when the transfers were registered, the bankrupt was unable to pay his debts.
The trustee also tendered documents from two of the major creditors of the bankrupt, Esanda and Westpac. These included
internal memoranda of those organisations discussing the fortunes of the bankrupt and the Woods group. If the facts asserted in them are to be accepted as true, they may assist the trustee considerably.
The documents go both ways. On the one hand, in a letter to Esanda dated 27 January 1993 the bankrupt said (sic):
As you are aware our group of companies has a considerable debt with Esanda, however over the last four years we have been reducing this debt, and at the present rate I believe that we will be able to place Esanda into a nett positive equity position within 2 years - this is only a qualified guess and gut feeling.
The rest of the letter reinforces the impression that at that stage the bankrupt recognised that he had debt but was entirely optimistic about the possibility of recovery. In the same vein, the general manager of credit control observed in an internal memo dated 17 February 1993 (sic):
Obviously, Jeff despite the groups financial position must be confident of its long term potential to commit assets owned jointly by he and his wife.
Nevertheless the writer of the memo observed that the group was unlikely to improve its position in the short term, and recommended lowering the risk grading of the group to 'D'.
On the other hand, there were indications in other tendered documents that officers of Westpac and Esanda were aware of the
irreversibly declining fortunes of the Woods group, and of the bankrupt himself. The clearest example was in a document purporting to be a memorandum of a meeting held on 24 June 1993 attended by the bankrupt and various officers of Esanda but not the respondent. The author of the memorandum included the following observations under the heading JEFF AND BRIAN WOODS:
Directors/guarantors face two alternatives:-
Bankruptcy through liability under their guarantees.
A Part X Arrangement where they would cooperate in an orderly sale of assets with full proceeds to be made available to creditors (primarily Esanda, Shell and Temford Pty Limited their current landlord).
The Woods would prefer to go Part X but this would naturally be subject to approval from the above creditors.
If this is evidence that as far back as June the bankrupt was aware that he faced these two alternatives, then it would be strong support for a finding of an intent to defraud. However, no one who was present at that meeting was called to confirm the accuracy of the document, and I therefore find it impossible to draw conclusions from it. Similar reasoning applies to other such documents tendered by the trustee. With the exception of the minutes of a few meetings of which the respondent gave evidence, there was no evidence to prove the accuracy of the documents. Indeed the documents were expressly tendered on the basis that they may prove circumstances from which inferences could be drawn. This basis for admission of the materials might have been intended to exclude the possibility that they be used
to ground a finding of fraud but whatever the intent, I do not think that the documents are available to be accepted as evidence of their truth.
THE SEPARATION
To rebut any inference of fraud deriving from the bankrupt's insolvency, the respondent points to the final resolution of the couple's marital dispute as providing a genuine motivation for the transfers. On one view of the authorities the existence of a second motivation is irrelevant. In Garuda the Court said obiter (at 526):
Nor is it necessary that an intent to defraud creditors be the sole intent of the debtor.
referring to Barton v Deputy Commissioner for Taxation [1974] 131 CLR 370. In that case at 375 Stephen J said:
... two or more intents may not be mutually exclusive, for instance an intent to defeat creditors and an intent to avoid the sanctions of the criminal law. In such a case I see no reason why the existence of the second such intent should prevent a creditor from relying upon s. 40(1)(c).
The section being considered relevantly provided that a debtor committed an act of bankruptcy if, with intent to defeat or delay creditors, he departed the country. It was significant in the reasoning in that case that the other intent relied upon by the
debtor was an intent to escape the criminal law. Stephen J explained this at 376:
The absence of evidence of any honest reason for his remaining overseas is significant; there was here no question, as there was in so many of the reported cases relating to this particular act of bankruptcy, of the debtor going abroad to seek funds, to attend to an existing business, or to return to his native country. Moreover when the only alternative inference open is that a debtor is staying abroad to escape the reach of the criminal law, the reluctance of courts to infer dishonest conduct by a debtor towards his creditors, a reluctance to which Lord Greene MR refers in In re M Kushler Ltd [1943] 1 Ch 248 at 252, scarcely arises...
As was the case in McInnes, in this case "the other reason asserted is far from such nefarious conduct". In my opinion neither of these cases represents authority that a genuine second motivation for a transaction is irrelevant if fraud could otherwise be inferred. Where a finding is made of an actual intent to defraud, evidence of the existence of a second motivation for the transaction will not alter the original finding. On the other hand, where the intent has to be inferred from the circumstances, the fact that a genuine motivation for the transaction can be proved will be at least relevant to the assessment of the probabilities upon which any inference of fraud depends. It is therefore relevant that the respondent asserts that the properties were transferred in settlement of a true dispute following a marital breakdown. Furthermore, if the bankrupt was genuinely estranged from his wife, some inference can be drawn as to the likelihood of his saving his assets from creditors by giving them to her.
In response the trustee suggested that the extent of the breakdown of the relationship had been exaggerated by the respondent, and pointed to a number of factors said to indicate that at least a constructive business relationship continued between the couple after July 1993. By this means it was sought to bolster the argument that the transaction was a joint effort to save assets rather than a bona fide settlement of a genuine dispute.
On this point I have found little to support the trustee's position. The principal 'joint venture' in the period after July 1993 to which the trustee pointed is the single visit by the two Woods to the bank together to arrange for loans for the respondent secured by mortgages over the two properties. The trustee also pointed to the continued involvement of the respondent in one of the companies in the Woods group which she ran and subsequently purchased, apparently assisted by those loans. Neither of these matters amounts to any more than evidence of necessary co-operation to clean up or finalise their financial affairs. In my opinion it does not militate at all against a finding that there was a genuine attempt to disengage from each other permanently both personally and financially.
The respondent provided detailed evidence, to which it is unnecessary to refer in detail, of a relationship that had clear difficulties. All her evidence, which I found inherently credible in this regard, was that the relationship had broken down, and that the bankrupt was willing to entertain dealings designed to "get rid of her" once and for all. I have no difficulty or hesitation in concluding that there was a real breakdown in what had been a turbulent relationship and that the consent orders represented an attempt to effect a final separation between the parties personally and financially. In these circumstances the bankrupt could expect no residual benefit from the transfers.
TIMING
The trustee made much of the fact that, although the agreement is alleged to have been reached in mid 1993, it was not actually signed until December, when the bankruptcy was all but assured and imminent. It was said that this increases the likelihood that the agreement was only constructed in retrospect to give credence to what was in reality a device to save assets in bankruptcy. Whilst undoubtedly a factor raising some suspicion, the delay was in my opinion adequately explained by the respondent when she stated that she had considered the agreement finalised, and did not see the need to expedite the formalities in what was a very busy time for her.
CONCLUSION
I am faced on this important question with a discouraging paucity of evidence, the more remarkable because it seems likely that at least some other evidence would have been readily available. I accept that when the agreement was reached the bankrupt must have
known that he was in a difficult position financially, but I have no evidence that bankruptcy was anticipated. On the other hand, in the absence of any evidence to the contrary, I must also accept the respondent's testimony that the relationship between the parties made necessary some division of property, and that this was a genuine and timely attempt to effect that division. I have been presented with no evidence that could base a finding that the bankrupt either must have held, or did hold, any fraudulent intent or even mala fides. The admissible evidence brought by the trustee disclosed no more than the bankrupt's insolvency, and in view of the other circumstances of the case I am unwilling to infer an intent to defraud creditors from that fact. Thus the application under section 121 must fail.
Section 120(1)
Section 120(1) of the Act relevantly provides:
(1)A settlement of property, whether made before or after the commencement of the Act, not being --
(a)a settlement ... made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; ...
(b)...
is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy.
The respondent's principal contention in response to the application under this section is that the settlement was made in favour of a purchaser in good faith and for valuable consideration.
VALUABLE CONSIDERATION
The trustee argued that the respondent had not given valuable consideration for the transfers, on the basis that under the consent orders, the respondent obtained the two properties, and, it was argued, gave nothing.
In Barton v Official Receiver [1986] 161 CLR 75 the High Court made it clear that fully adequate consideration is not necessary. Their Honours adopted (at 86) the formulation of Sir Robert Megarry VC in In re Abbott [1983] 1 Ch 45 where the Vice Chancellor at 57 referred to the need for a consideration:
which has a real and substantial value, and not one which is merely nominal or trivial or colourable.
The trustee argued that the consideration in this case did not satisfy that test.
Paragraph 5 of the consent orders gave the bankrupt the respondent's shares in the family company Tomovu. The trustee argued that shares in a deregistered company are no consideration at all, since the property of such a company vests in the ASC. However, in the absence of any evidence as to the value of the assets owned by the company, I am unable to assess what value might accrue to the holder of the shares on re-registration by the ASC. The only possible indication in this regard is the bankrupt's valuation of the shares in his statement of affairs at $4. Without any evidence from the bankrupt, it is impossible for me to accept this as an accurate valuation -- it might, for example, refer to the nominal value of the shares, or be a deliberate undervaluation. Referring to a diagram of the structure of the Woods group that showed Tomovu as having shares in the holding company of the Woods group, the trustee in written submissions said that:
... there is no evidence that it [Tomovu] would have held any assets other than its shares in S W Holdings Ltd. S W Holdings Pty Ltd was in voluntary liquidation by December, 1993, which pre-supposes its insolvency.
However, there was no formal proof that Tomovu was insolvent. More importantly, there was no proof that Tomovu did not have other valuable assets, the onus in this regard being on the trustee.
Of greater concern is paragraph 12 of the respondent's affidavit which stated:
On 4 August 1989 I transferred my share in Tomovu Pty Limited which held our interests in the "Woods" group of companies to Anthony Dormer a Trustee for John Jefferson Woods... At the time John Jefferson Woods did not provide any consideration to me for the transfer of the said share.
Certainly such a share transfer, years before the agreement the subject of this litigation, could not form part of the consideration for these property transfers. If paragraph 12 of the respondent's affidavit meant that she had no share left in Tomovu by the time of the consent orders, then it would point strongly in the trustee's favour. However, it seems to me that if in 1993 the respondent had no share in Tomovu to transfer to the bankrupt, this simple submission would have been clearly made by the trustee. In fact both parties appeared to proceed in submissions on the basis that Mrs Woods retained some share in Tomovu that was passed pursuant to the property transfers, and much of the respondent's other evidence was to this effect.
Furthermore, in paragraph 6 of the consent orders the parties agreed that the property and money held by each of them at the time the consent orders were signed would remain the property of each of them. This is itself capable of being consideration, subject to evidence, presumably from the trustee, that this provision gave nothing of real value to the bankrupt. Once again, the valuation of his own personalty by the bankrupt in his statement of affairs is not admissible evidence against the respondent in this action where the bankrupt was not called and was not a party.
The trustee further argued that because an order under section 79 of the Family Law Act is liable to be altered if and when conditions change, the consent orders were not a binding arrangement and therefore cannot be seen as a genuine compromise of a legal dispute, or as consideration for a forbearance not to sue. However, the consent orders and the agreement they embody stand, and are enforceable, until altered by order of a court, so that this argument cannot assist the trustee.
In these circumstances I do not have sufficient evidence to make any finding regarding what consideration was given for the transfers, except that there is a prima facie indication that some consideration was passed. This argument of the trustee fails.
GOOD FAITH
It remains for the trustee to demonstrate mala fides on the part of the respondent. In Garuda the Full Court reviewed the authorities in some detail and adopted the formulation of Gibbs J in Re Hymans; Official Receiver v Hymans [1970] 19 FLR 232 at 256 that good faith may be taken to mean
without notice that any fraud or preference contrary to the statute is intended.
It is questionable what application this definition can have in the context of a section 120 application, as opposed to an application under section 121. In this case the respondent was obviously aware that at relevant times the bankrupt faced serious financial difficulties and that the bulk of his debt arose from personal guarantees related to the businesses in which she too had been involved. Furthermore, in the period of reconciliation at the beginning of 1993, she had been intimately involved in attempts to restructure the group, and had become familiar with its parlous financial state. However, for the reasons outlined earlier, this provides an inadequate basis for a finding of fraud on the evidence presented. Importantly there is no evidence that the respondent anticipated her husband's bankruptcy at the time the agreement for the property transfers was reached. She did give evidence that he told her he was facing bankruptcy at the end of the year, but there is no indication whether this information was imparted before or after the consent orders were signed; certainly it was after the property settlement was originally agreed in August. There is no evidence that the transaction was a sham. In fact the evidence points the other way. In my opinion the respondent accepted the properties as a genuine attempt to settle a marital dispute between herself and the bankrupt. In the circumstances of this case I believe that the respondent acted in good faith.
Conclusion
The result of these findings is that the trustee's application must also fail under both section 120 of the Act.
I dismiss the application with costs.
Counsel and solicitor for I. Jackman instructed by M.
the applicantThomas of Minter Ellison Morris Fletcher
Counsel and solicitor for A. Clout instructed by
the respondent A. Stuart of Stuart & Mills
Date of Hearing 16 November 1994
Written submissions 30 November 1994
completed
Date of Judgment 22 February 1995
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