Regal Castings Ltd v Lightbody
[2008] NZSC 87
•23 October 2008
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IN THE SUPREME COURT OF NEW ZEALAND
SC 72/2007
[2008] NZSC 87
BETWEENREGAL CASTINGS LTD
Appellant
ANDG M AND G N LIGHTBODY
First RespondentsANDA C HORROCKS, G M LIGHTBODY AND G N LIGHTBODY
Second Respondents
Hearing:10 April 2008
Court:Elias CJ, Blanchard, Tipping, McGrath and Wilson JJ
Counsel:J McCartney and G S Caro for Appellant
D K Wilson for Respondents
Judgment:23 October 2008
JUDGMENT OF THE COURT
A The appeal is allowed.
BIt is declared that the second respondents (the trustees) hold a one-half share of their interest in the property at 68 Salisbury Road, Birkdale (Lot 4 DP 46944, Certificate of Title 1852/71 North Auckland Registry) upon trust for the Official Assignee of the estate of Mr Lightbody, to be dealt with by the Assignee for the benefit of Mr Lightbody’s creditors.
CThe trustees are ordered to transfer a one-half share in the property to the Official Assignee subject to the mortgage to the ANZ National Bank Ltd.
DThe appellant is awarded costs and reasonable disbursements which are to be paid by the second respondents. Costs in the High Court are to be fixed by that Court. Costs are fixed in relation to the appeal to the Court of Appeal at $6,000 and in this Court at $15,000.
ELeave is reserved to the parties and the Official Assignee to apply to the High Court for any further orders or directions as may be necessary to enable the Assignee to realise the net value of the interest in the property or as otherwise may be necessary to implement the orders of this Court.
REASONS
Para No
Elias CJ [1]
Blanchard and Wilson JJ [24]
Tipping J [80]McGrath J [165]
ELIAS CJ
[1] In November 1998 Mr Lightbody and his wife transferred their home into the ownership of a family trust of which they and their solicitor, Mr Horrocks, were trustees. The consideration for the transfer was a debt of $230,000 to be repaid in one sum on 12 November 2005. Contemporaneously with the transfer, $54,000 of the debt was forgiven. Mr and Mrs Lightbody then progressively gifted sums to the trust under a programme which extinguished the debt by December 2002. At the time of the transfer of the property, Mr Lightbody was personally responsible for the debts owed by his jewellery business, Capro Three Limited, to its major supplier, Regal Castings Limited. Regal Castings had effectively been providing working capital to Capro for many years. In a restructuring agreement in 1995, by which interest on the debt was waived, Capro’s then debt to Regal Castings of $356,358 was converted into a term loan repayable by monthly instalments and with the balance owing to be paid in 2000. By the date of the transfer in November 1998, the amount of the term loan was approximately $220,000 but the monthly instalment payments had risen to $4,000 per month. In addition, Regal Castings had continued to supply Capro on normal terms and its current account debt to Regal Castings stood at some $90,000, $65,000 of which was in arrears. Regal Castings was not told of the transfer of the house property, Mr Lightbody’s only significant asset, or the programme of gifting which effectively stripped him of any compensation for it. Capro was placed in liquidation in April 2003. Regal Castings was unable to recover in the liquidation the $15,358.57 it was owed on the term loan and $149,324 it was owed for further supplies. It obtained judgment against Mr Lightbody but failed to recover the judgment sum upon Mr Lightbody’s bankruptcy. Regal Castings then brought the present claim under s 60 of the Property Law Act 1952, seeking an order setting aside the transfer of the house property as having been made with intent to defraud. It has been accepted by the parties that the outcome sought by Regal Castings would be to transfer 50% of the property (representing Mr Lightbody’s half share after deducting the share acknowledged to belong to Mrs Lightbody) to the Official Assignee for the benefit of all Mr Lightbody’s creditors.
[2] I agree with the conclusion reached by Blanchard J that the inference that the conveyance of the house was an alienation with intent to defeat creditors within the meaning of s 60 of the Property Law Act 1952 is overwhelming and that the appeal by Regal Castings ought to be allowed. Because Blanchard J has dealt fully with the facts and the decisions in the High Court and Court of Appeal, it is unnecessary for me to cover the same ground in any detail. And because I agree with Blanchard J’s analysis of the factors which lead to the conclusion that the alienation was with intent to defeat creditors, I can summarise my own reasons. I write separately to explain my views on the manner of proof of “intent to defraud” in application of s 60 of the Property Law Act and on the application of s 60 to Land Transfer Act land. In summary, I am of the view that the question of intent to defraud is always one of fact to be determined on the evidence and is not imputed by law; and I do not think the application of s 60 of the Property Law Act is inconsistent with the indefeasibility provisions of the Land Transfer Act 1952. These questions are substantially overtaken by subsequent legislation. Section 346 of the Property Law Act 2007 now makes it clear that a disposition by gift by someone insolvent if made after 31 December 2007 can be set aside without the need to show intent to defeat creditors because the transferor has not received “reasonably equivalent value in exchange”. And under s 350(4) of the same Act the court’s powers to make remedial orders on setting aside dispositions of property are expressed to override the Land Transfer Act, as has been provided in respect of avoidance under s 60 in favour of the Official Assignee since 1967.[1]
[1]Insolvency Act 1967, s 58(7).
[3] I agree that the appeal must be allowed, with the consequence that the trustees are ordered to transfer a one-half share in the property to the Official Assignee and must pay the costs of the appellant.
Section 60 of the Property Law Act 1952
[4] Section 60 of the Property Law Act 1952 provides:
60Alienation with intent to defraud creditors
(1)Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.
(2)This section does not affect the law of bankruptcy for the time being in force.
(3)This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defeat creditors.
Section 60 is derived from an Elizabethan model, 13 Eliz. c. 5 (1571), which applied in New Zealand until the Property Law Act came into effect. The cases decided under 13 Eliz. c. 5 have been held to apply to the modern re-enactments in New Zealand and in the United Kingdom and Australia.[2]
[2]Re Proudfoot [1960] NZLR 577 at p 581 (SC) per Hutchison J, approved in Re Hale (a bankrupt) [1989] 2 NZLR 503n at p 506 (CA) per Wild CJ. In Australia, see Cannane v J Cannane Pty (in liq) (1998) 192 CLR 557 at pp 565–566 per Brennan CJ and McHugh J. In the United Kingdom, see Re Eichholz [1959] 1 Ch 708 at p 724 per Harman J.
[5] The meaning of “intent to defraud” has been held to include the purpose of delaying as well as defeating creditors, as the Elizabethan statute had expressly provided.[3] The question of intent to defraud is one of fact.[4] It must be determined at the time of alienation,[5] but the intended prejudice may be to future creditors rather than creditors existing at the date of the alienation.[6] Absence of full value obtained for an asset transferred is evidence from which an inference of intent to defraud may be taken.[7] But full value of itself may not be sufficient to displace an intent to defraud, as is illustrated by Lloyds Bank Ltd v Marcan.[8] There, the grant of a lease for a term of 20 years was held to have been made with intent to defraud the mortgagee seeking to enforce the mortgage, despite the fact that the lease was granted for full market rental. If an alienation is voluntary (that is to say, not for valuable consideration) or is at a clear undervalue, so that the fund available to creditors is depleted,[9] it may be easy to infer an intent to defraud.[10] Some cases go further, suggesting that in the case of a voluntary alienation by an insolvent debtor it is not necessary for a creditor prejudiced to establish fraudulent intent and that such intent will be presumed as a matter of law, either rebuttably (through transfer of the onus of proof to the defendant) or conclusively (through imputing intent in such circumstances as a matter of law).[11] As indicated at para [9], I think the better view is that the question of intent remains one of fact on the evidence and that such intent is not properly imputed as a matter of law.
[3]Re Hale ( a bankrupt) [1989] 2 NZLR 503n at p 509 (CA) per Wild CJ
[4]Re Keys [1932] NZLR 1239 at p 1249 (SC) per Reed J.
[5]Freeman v Pope (1870) LR 5 Ch App 538 (CA) and Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557.
[6]Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557 at p 566 per Brennan CJ and McHugh J and at p 574 per Gummow J.
[7]Lloyds Bank Ltd v Marcan [1973] 1 WLR 1387 at p 1392 (CA) per Cairns LJ and Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557 at pp 566 – 567 per Brennan CJ and McHugh J.
[8][1973] 1 WLR 1387 (CA).
[9]Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557 at p 567 per Brennan CJ and McHugh J.
[10]Lloyds Bank at p 1392 per Cairns LJ. See also Ideal Bedding Co v Holland [1907] 2 Ch 157 and Re Eicholz [1959] 1 Ch 708.
[11]Freeman v Pope (1870) LR 5 Ch App (CA). Some commentaries treat Freeman v Pope as authority for the imputation of intent to defraud (see, for example, Kerr on the Law of Fraud and Mistake (7th ed, 1952), p 309), others treat it as transferring the onus of proof to the defendant (see Halsbury’s Laws of England (3rd ed) Fraudulent and Voidable Conveyances, 3, para [1268]).
[6] If the debtor retains the benefit of the property, that may be evidence of fraudulent intent.[12] But a bona fide family arrangement is not evidence of intent to defraud.[13] Nor is an arrangement to prefer one set of creditors to others evidence from which intent to defraud can be inferred.[14] It is not determinative that a voluntary alienation may be in circumstances which contemplate what will happen on future bankruptcy.[15] Nor does the section attach simply because a disposition proves in the end to have depleted the assets available to creditors, if it cannot be determined that it was made with that intent. Dixon CJ in Hardie v Hanson suggested that an “intent to defraud” is an intention to “cheat” the creditors of access to the assets alienated.[16] Gaudron J in Cannane v J Cannane Pty Ltd (in liq) thought that “fraud” involved “the notion of detrimentally affecting or risking the property of others, their rights or interests in property, or an opportunity or advantage which the law accords them with respect to property”.[17] Such intention may arise even though the transferor hopes and expects that there will be no eventual shortfall.[18] It is necessary in each case to:[19]
look at the whole of the circumstances surrounding the execution of the conveyance, and then ask yourself the question whether the conveyance was in fact executed with the intent to defeat and delay creditors… .
[12]Lloyds Bank at p 1392 per Cairns LJ.
[13]Lloyds Bank at p 1392 per Cairns LJ.
[14]Re Fasey [1923] 2 Ch 1 at p 11 (CA) per Lord Sterndale MR; Re Hale (a bankrupt) [1989] 2 NZLR 503n at p 509 (CA) per Richmond J; Lloyds Bank at p 1392 per Cairns LJ; Glegg v Bromley [1912] 3 KB 474 at p 484 (CA) per Vaughan Williams CJ, at pp 485 – 486 per Fletcher Moulton LJ and at p 492 per Parker LJ.
[15]See, for example, Williams v Lloyd (1934) 50 CLR 341.
[16](1960) 105 CLR 451 at p 457.
[17](1998) 192 CLR 557 at p 572.
[18]Swann v Secureland Mortgage Investment Nominees Ltd [1992] 2 NZLR 144 at p 153 (CA) per Gault J.
[19]Re Holland [1902] 2 Ch 360 at p 372 (CA) per Vaughan Williams LJ.
[7] The financial position of the transferor at the time of the alienation is always a key consideration. It is not determinative against intent to defraud if the transferor is solvent at the time, particularly if he is contemplating entering into a risky venture.[20] But where the transferor’s financial position is precarious, it is objective evidence of an intention to defraud if he acts to put property beyond the reach of creditors.[21] Other indications of fraud commonly occurring are transfers to close relatives, particularly where the transfer is at an undervalue, alienations in which the transferor retains the use or benefit of the property,[22] and secrecy in the transfer or a misleading explanation for it.[23]
[20]Re McGrath (1897) 17 NZLR 646 at p 664 (CA) per Edwards J.
[21]Freeman v Pope (1870) LR 5 Ch App 538 (CA) at p 545 per Gifford LJ.
[22]Twyne’s case (1601) 3 Co Rep 80b at p 81a; 76 ER 809 at pp 812 – 813 (Star Chamber).
[23]Twyne’s case (1601) 3 Co Rep 80b at p 81a; 76 ER 809 at p 813 (Star Chamber).
[8] In assessing the financial position and prospects of the transferor at the date of the alienation, the court is concerned with practical risk rather than with an exact balance sheet calculation. So, where the transferor is subject to a liability under a guarantee, the obligation is not properly treated as though wholly contingent. In Re Ridler a Court of Appeal comprising Selborne LC, Jessel MR and Cotton LJ held that the position of the principal debtor was not the focus when considering whether an alienation was with intent to defeat creditors:[24]
We must look at the matter as if the event had already happened the possibility of which the parties must have had in contemplation when the guarantee was given of the debtor being unable to pay. I do not think that any close inquiry as to the supposed capacity of the person guaranteed to pay the debt ought to be entered into. I do not say that there might not be a state of things in which the liability of the guarantor might be so remote that it need not be regarded; but if he conveys away all his property by a voluntary settlement I think it doubtful whether the settlement could in any case be supported in the event of his ultimately being called on under his guarantee.
[24](1883) 22 ChD 74 at p 80 (CA) per Selborne LC.
The approach of Cotton LJ in the same case, to similar effect, was applied by Perry J at first instance in Re Hale (a bankrupt).[25]
[25][1974] 2 NZLR 1 at p 7 (SC), citing Cotton LJ at p 82.
[9] These general propositions, drawn in the most part from cases decided under 13 Eliz. c. 5 are affirmed by modern authority in New Zealand and Australia as applicable to the current statutory provisions which replaced the Elizabethan statute.[26] It is not necessary to go beyond these principles for present purposes. I consider that there is ample evidence upon which to conclude that an intent to defraud is properly to be inferred. I do not think it necessary to have recourse to any rule which would impute an intent to defraud. Indeed I think any such rule is not sufficiently supported by the authorities and runs counter to modern authority. I explain why briefly, because of the discussion of the point in the High Court and Court of Appeal.
[26]See, for instance, Re Hale [1989] 2 NZLR 503 at pp 508 – 509 (CA) per Richmond J; Swann v Secureland Mortgage Investment Nominees Ltd [1992] 2 NZLR 144 at p 152 (CA) per Gault J; Cannane at pp 565 – 567 per Brennan CJ and McHugh J, p 572 per Gaudron J, p 574 per Gummow J and pp 591 – 593 per Kirby J.
[10] In Re Hale, Richmond J, with whom Wild CJ and Woodhouse J concurred, set out the principles of law which emerged from cases principally decided under 13 Eliz. c. 5 but which he thought were “equally applicable in relation to s 60”.[27] The first two propositions were:[28]
(1)No alienation of property can be caught by the section unless it is first shown to fall within subs (1) as being made “with intent to defraud creditors”. With the possible exception of a voluntary alienation made by an insolvent debtor (Freeman v Pope (1870) LR 5 Ch App 538) the existence of an intention to defraud is a question of fact to be decided by a consideration of the alienation in the light of all the circumstances (Re Holland [1902] 2 Ch 360, 372; Glegg v Bromley [1912] 3 KB 474, 492). The onus of establishing intent to defraud rests on the party attacking the transaction.
(2)It is not necessary for the purposes of the present case to attempt any precise definition of “intent to defraud”. If there is an intention to prejudice creditors by putting an asset wholly or partly beyond their reach then that will be an intent to defraud creditors provided that in the circumstances the debtor is acting in a fashion which is not honest in the context of the relationship of debtor and creditor. This in essence was the view taken by Russell LJ in Lloyds Bank Ltd v Marcan [1973] 3 All ER 754, 759.
[27]At p 508.
[28]At p 508.
[11] In Re Hale, the “vital question of fact” was put by Richmond J as being:[29]
On the whole of the evidence before the Court is it affirmatively established that the real purpose of the bankrupt in the present case was to put the equity in his house, to the extent of $10,000, out of the reach of his creditors for his own benefit rather than to give a preference to his wife in relation to an existing debt? I think this question must be answered in a common sense way without reference to any artificial rules. In this context I would say with respect that I do not think that the principles adopted by the Supreme Court of Canada in Koop v Smith (1915) 25 DLR 355 should be adopted as part of the law of this country.
[29]At p 509.
In Koop v Smith, a majority of the Supreme Court of Canada had taken the view that a transfer of property to a near relative “under suspicious circumstances” transferred the burden of proving the bona fides of the transaction to the defendant when it was impeached by creditors.[30] Duff J in the same case denied that there was any such rule of law, while allowing that the circumstances supported the inference as a matter of fact.[31]
[30]At p 356 per Davies J, in a decision with which Idington, Anglin and Brodeur JJ concurred.
[31]At pp 358 – 359.
[12] As the quote from the judgment of Richmond J makes clear, he was prepared to admit only as a “possible exception” to the requirement that intent to defraud be proved, the approach adopted in Freeman v Pope. In that case, Hatherley LC
expressed concern that juries trying the question of fact might speculate “what was actually passing in the mind of the settlor”, rather than concentrating on the objective indications, especially the “necessary consequences”.[32] He thought the authorities established that, in the absence of direct proof of intention, it was the duty of the judge to direct the jury that:[33]
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 the settlement (supposing it effectual) that some creditors must remain unpaid, … the jury … must infer the intent of the settlor to … defeat or delay his creditors, and that the case is within the statute.
[32]At p 540.
[33]At p 541.
[13] In ex p Mercer, Re Wise, Lord Esher MR denied that there was any “proposition of law” that a court is bound to find that voluntary settlement which has the necessary effect of defeating or delaying creditors is made with intent to defraud.[34] The question of intent remains one of fact. In Swann v Secureland Mortgage Investment Nominees Ltd Gault J emphasised that the intent required by s 60 is an actual intent, even though it may be proved by inference from proved facts.[35] It is not an intent imputed by law from the result. Cooke P, in the same case, made the point that “real purpose” and “motive” are not the same.[36] He was prepared in the case to infer a fraudulent intent from the evidence and took the view that, following the merging of equity and common law, it did not matter whether the transaction was set aside “under s 60 of the Property Law Act or in the jurisdiction over ‘equitable’ fraud or common law fraud or all or any of them”.[37] Decisions of the High Court of Australia have also emphasised that fraud is “not to be presumed”.[38] The “real intention” is a question of fact, decided objectively.[39] It is not an intention “imputed by the law”.[40] That is not to say, however, that its inference may not be relatively straightforward in cases where a person facing financial difficulty disposes of assets. In most cases the circumstance that an insolvent debtor alienates property leaving himself unable to meet his debts will be strong evidence from which an inference of intent to defraud will be available. The intent is nevertheless an actual intent, to be established by evidence.
[34](1886) 17 QBD 290 at p 298 (CA).
[35][1992] 2 NZLR 144 at p 152 (CA).
[36]At p 147.
[37] At p 148.
[38]Williams v Lloyd (1934) 50 CLR 341 at p 361 per Starke J.
[39] Cannane at p 592 per Kirby J.
[40]Cannane at p 592 per Kirby J.
[14] The critical factors in the present case are:
·At the time of the transfer of the house property, it comprised Mr Lightbody’s only substantial asset. His only other significant property was his shareholding in Capro, which had no real value, given the indebtedness of the company.
·Mr Lightbody with his family remained in occupation of the house.
·The transfer was for no effective consideration under the scheme of gifting which was integral to the arrangement.
·Irrespective of the programme of gifting which meant that the transfer was for no effective consideration, the seven year term for repayment of the advance for the purchase price was itself to the prejudice of Regal Castings. Its term loan was to determine two years after the transfer and its debt on current account was immediately payable on demand.
·The guarantee of the indebtedness of Capro was a substantial liability which Mr Lightbody had no ability to meet and which Capro itself was unable to meet from earnings, as its deteriorating current account liability demonstrated.
·Even if Capro and Mr Lightbody were not insolvent (a proposition I regard as doubtful despite suggestions that Capro could have realised its inventory and had the capacity to borrow from the bank), their financial circumstances were precarious and the position of Regal Castings was inevitably prejudiced by alienating Mr Lightbody’s only substantial asset.
·The transfer was kept secret from Regal Castings, despite the earlier debt restructuring and the expected determination of the term loan in 2000 (later waived by Regal Castings in ignorance of the transfer).
·There is no adequate explanation for the transfer of the house property into the family trust apart from its protection from creditors.
In these circumstances, I agree with Blanchard J and William Young P in the Court of Appeal[41] that intent to defraud through defeating or delaying Regal Castings in recovery of the debt due to it is the only realistic conclusion to draw from the evidence. I am therefore of the view that, unless there is any impediment to its application, the transaction should be set aside under s 60(1) to the extent that it has prejudiced Mr Lightbody’s creditors.
Section 60(3)
[41] Regal Castings Ltd v Lightbody [2008] 2 NZLR 153 at para [120].
[15] Proof that the defence provided by s 60(3) is made out is on the transferee, here the Trust.[42] The section makes it clear that even where full value is paid, a transferee will not be able to bring himself within the exception if he had notice of the intention to defraud creditors. Kirby J in Cannane is of the view that good faith is to be purposively and objectively assessed.[43] I accept that approach. On any view, I agree with Blanchard J that there is no question of the Trust bringing itself within the section. The transfer was effectively voluntary. And the Trust is affected with the knowledge and intent of Mr Lightbody.[44]
Section 60 of the Property Law Act 1952 and the provisions of the Land Transfer Act 1952
[42]Re Hale at p 506 per Wild CJ and Cannane at p 596 per Kirby J. In Dungey v McCallum [1993] 3 NZLR 551 at p 556 (CA) Hardie Boys J accepted the view expressed by Wild CJ in Re Hale to be correct as a general statement, while considering that it had to be modified in its application to Land Transfer Act land because of the indefeasibility provisions under that Act.
[43]At pp 596 – 597.
[44]Re Fasey [1923] 2 Ch 1 (CA) is comparable. There, the transfer was to a company of which the transferor was managing director and the substantial shareholder. The Court of Appeal upheld the decision of Lawrence J that the company was fixed with knowledge.
[16] Section 3 of the Property Law Act provides that the Act is to be read and construed “so as not to conflict with the provisions of the Land Transfer Act 1952 as regards land under that Act”. To same effect, s 244 of the Land Transfer Act provided that the Property Law Act, in its application, was to be “read and construed so as not to conflict with the provisions of this Act”.[45]
[45]Section 244 has now been repealed by the Property Law Act 2007.
[17] Does the application of s 60 of the Property Law Act conflict with the provisions of the Land Transfer Act? I do not think that it does, for reasons that turn on the nature and effect of an application by a creditor under s 60 to set aside a transaction. The only authority which seems to suggest a conflict is the decision of the Court of Appeal in Dungey v McCallum.[46] That appeal was from a summary determination on a strike-out application. It seems to have proceeded on the assumption that a claim under s 60(1) of the Property Law Act to set aside an alienation is a challenge to the indefeasiblity of title under the Land Transfer Act once a certificate of title has issued under the Act. For that reason, the Court held that the claim must be struck out because it did not allege actual fraud against the registered proprietor (the fraud exception to indefeasibility being the only one available).
[46][1993] 3 NZLR 551.
[18] The brief reasons of the Court in Dungey v McCallum do not contain any analysis of the effect and nature of an application under s 60 of the Property Law Act. Although the Court had “no difficulty” with the “general statement” applied in Re Hale that whether the exception in s 60(3) of the Property Law Act was made out depended on “affirmative proof” of good faith and good value by the transferee, it considered that the view needed modification “in recognition of the particular status of a land transfer title”.[47] The point had not been considered in Re Hale, although the mortgage there in issue had been registered. In Dungey v McCallum, however, the Court seems to have been of the view that this had been an oversight:[48]
In a case such as the present where the impugned transaction has resulted in the transferee obtaining a title under the Land Transfer Act, the challenge is as to the indefeasibility of that title. For the challenge to be successful, the Land Transfer Act requires that there be proof of fraud on the part of the registered proprietor. It must therefore be for the plaintiff, not the defendant, to show, in terms of s 60(3), that the latter did not take in good faith and had notice of the debtor’s intention to defraud creditors by the alienation. That being so, it is for the plaintiff to make the appropriate allegations to this effect in his pleadings. As he has not done so, the question becomes whether Gallen J was right to assume that the necessary amendment could and should be made.
[47]At p 556.
[48]At pp 556 – 557.
The Court took the view that after 17 years and inadequate pleadings it was time for the claim to be brought to an end, and it was struck out.[49]
[49]At p 557.
[19] To opposite effect is the earlier decision of MacArthur J in the Supreme Court in Murtagh v Murtagh.[50] That case was concerned, not with s 60 of the Property Law Act, but with the avoidance provision under the Divorce and Matrimonial Causes Act 1928. MacArthur J referred to the fraudulent conveyance avoidance mechanism under s 60 of the Property Law Act as being comparable and on this topic quoted Kerr on the Australian Land Titles (Torrens) System:[51]
It is the universal opinion that the Torrens Statutes do not prevent the operation of the Statute 13 Elizabeth, c5. If however the voluntary transferee has become registered as proprietor, it becomes necessary to obtain a vesting order from the Court and a rectification of the Register Book. This is achieved by the Court declaring in effect that the transferee is a trustee of the land. Of course, a volunteer registered proprietor can confer a good title on a purchaser for value without fraud.
[50][1960] NZLR 890.
[51]At p 900, quoting Kerr (1927) at para [435].
Although this text was written before Frazer v Walker,[52] I do not think the correctness of the approach described by Kerr is affected. Upon that view, the application of the statutory remedies for conveyances with intent to defraud creditors is not precluded because the conveyance in issue is land under the Torrens system.
[52][1967] NZLR 1069 (PC).
[20] An alienation made with fraudulent intent is an effective alienation, notwithstanding the emphatic language of 13 Eliz. c. 5 that it is “void”.[53] That consequence is made more explicit in modern statutory treatment such as s 60 by which such alienations are “voidable at the instance of the person thereby prejudiced”. Only creditors or those claiming through them can attack such alienation under s 60. It remains effective until a creditor succeeds in having it set aside. The form of the consequential orders then to be made will depend on the circumstances. In many cases it will not be appropriate to obtain a reconveyance of the property. A usual form of order is that the transferee must do all things necessary to make the property available for satisfying the claims of the creditors, and only so far as the alienation is voidable under s 60 (the extent to which creditors are prejudiced).[54]
[53]Brady v Stapleton (1952) 88 CLR 322 at p 333 per Dixon CJ and Fullager J and Cannane at p 566 per Brennan CJ and McHugh J and at p 574 per Gummow J.
[54]Ideal Bedding Co v Holland [1907] 2 Ch 157 at pp 173 – 174 per Kekewich J and Halifax Joint Stock Banking Co v Gledhill [1891] 1 Ch 31 at p 40 per Kay J.
[21] An application under s 60 to set aside an alienation of property is not a claim in rem. It does not assert “encumbrances, liens, estates, or interests”,[55] such as would amount to an attack on the title obtained through registration contrary to s 62 of the Land Transfer Act. It is not properly described as an “action for possession, or other action for the recovery of any land”, such as would be in conflict with s 63(1). Nor is it an application to the Court attacking the registered title under the fraud exception contained in s 63(1)(c). An application for remedy under s 60 of the Property Law Act in respect of the conveyance of Land Transfer land with intent to defraud creditors does not assert defect in title. The principles of indefeasibility, in protection of the title created by registration, are not engaged by the statutory remedy under s 60 by which the registered proprietors can be compelled to provide satisfaction to the creditors, including by reconveyance of the property, declaration of trust in respect of it, or appointment of receivers for it. These remedies are granted against the registered proprietors personally. As the Court of Appeal explained in C N and N A Davies v Laughton:[56]
indefeasibility of title does not interfere with the personal obligations of a registered proprietor, and the principle that contracts, or trusts, or any personal equity can be enforced against the registered proprietor merely serves to indicate the limits of the doctrine.
[55]Land Transfer Act, s 62.
[56][1997] 3 NZLR 705 at p 715 (CA) per Thomas J for the Court.
[22] In Frazer v Walker, the Privy Council made it clear that the principle that a registered proprietor is immune from adverse claims, except as specifically excepted, “in no way denies the right of a plaintiff to bring against a registered proprietor a claim in personam, founded in law or in equity, for such relief as a Court acting in personam may grant”.[57] Section 60 of the Property Law Act provides foundation in law for such a claim. Recourse to it does not in my view conflict with the provisions of the Land Transfer Act.
Result
[57]At p 1078 (emphasis added).
[23] The Court being unanimous, the appeal is allowed.There will be a declaration that the second respondents (the trustees) hold a one-half share of their interest in the property at 68 Salisbury Road, Birkdale (Lot 4 DP 46944, Certificate of Title 1852/71 North Auckland Registry) upon trust for the Official Assignee of the estate of Mr Lightbody, to be dealt with by the Assignee for the benefit of Mr Lightbody’s creditors. The trustees are ordered to transfer a one-half share in the property to the Assignee subject to the mortgage to the bank. The second respondents must pay the appellant’s costs and reasonable disbursements. Those costs in the High Court should be fixed by that Court. The costs in respect of the appeal to the Court of Appeal will be $6,000, and in this Court $15,000. Leave is reserved to the parties and the Official Assignee to apply to the High Court for any further orders or directions as may be necessary to enable the Assignee to realise the net value of the interest of Mr Lightbody in the property or as otherwise may be necessary to implement the orders of this Court.
BLANCHARD AND WILSON JJ
(Given by Blanchard J)
Introduction
[24] Mr Lightbody made himself personally liable for the debts of Capro Three Ltd to its major supplier, Regal Castings Ltd. Regal agreed to continue to make the supplies which Capro needed in order to continue its business. Without telling Regal, some three years later Mr and Mrs Lightbody transferred their house, which was their only substantial asset, to a family trust of which they and a solicitor were the trustees in exchange for an unsecured acknowledgement of indebtedness equal to the amount of the purchase price payable seven years later. The trustees became registered as proprietors of the property under the Land Transfer Act 1952. Over the next four years Mr and Mrs Lightbody gradually forgave the debt, beginning with a gift on the day of the transfer. During that time Capro continued to trade with Regal substantially reducing the amount of the original indebtedness. However, Capro eventually went into voluntary liquidation, still owing Regal a large sum of money.
[25] The general question on this appeal is whether the transfer of the house to the trustees should and can be set aside on an application by Regal under s 60 of the Property Law Act 1952, which reads:
60 Alienation with intent to defraud creditors
(1)Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.
(2)This section does not affect the law of bankruptcy for the time being in force.
(3)This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defraud creditors.
[26] Regal now seeks an order that the share of the property received by the trustees from Mr Lightbody be transferred to the Official Assignee acting in his bankruptcy. He was adjudicated bankrupt under the Insolvency Act 1967 only after the High Court judgment had been given in this proceeding. No claim is now made by Regal in respect of the share in the property transferred by Mrs Lightbody who had no liability to Regal for Capro’s debt.
[27] The issues are:
(a)Whether Mr Lightbody’s transfer of his joint interest in the house property was, in terms of s 60(1), an alienation with intent to defraud his creditor, Regal;
(b)If so, whether that property interest was received by the trustees in good faith without knowledge at that time of any intent to defraud Regal; and
(c)Whether, in any event, the indefeasibility provisions of the Land Transfer Act preclude the making in the present proceeding of the order sought by Regal, in the absence of any application by the Official Assignee.
Facts
[28] Capro carried on business as a manufacturing jeweller from the Lightbodys’ family home at Salisbury Road, Birkdale, Auckland which was subject to a mortgage to the National Bank of New Zealand Ltd securing both company and personal indebtedness. Capro had a share capital of only $1,000. All its shares were owned by Mr and Mrs Lightbody. Regal was by far the largest of its suppliers and it had become heavily indebted to Regal. As an accountant’s report described the situation in 1993, Capro’s entire working capital had been virtually provided by Regal. In 1995 an agreement was entered into by Regal and Capro under which Regal agreed to convert $356,358 of Capro’s debt to a term loan repayable by instalments (originally $3,000 and later $4,000 per month) with the balance to be paid at the end of five years. Regal agreed to forgive the interest which had already accumulated of $94,322 provided Capro did not default on the term loan. Further supplies were to be made by Regal on current account on normal monthly terms. Mr Lightbody accepted personal liability to Capro and acknowledged:
the tremendous support [Regal] has provided [Capro] and agrees that if he should fail to maintain this repayment schedule he will cease trading and do everything possible to achieve a maximum return to creditors on realisation of the assets.
Later in the document Mr Lightbody’s obligation is referred to as a guarantee. For present purposes, it makes no difference whether Capro and Mr Lightbody were concurrently liable to Regal or whether his liability was as a guarantor. Either way, if Capro could not pay, Mr Lightbody would be personally liable for its debt to Regal. His only substantial asset other than his shares in Capro was his joint tenancy with his wife in the house property.
[29] Capro duly made the monthly payments under the term loan but by November 1998, although the term loan had been reduced to about $220,000, an amount of $90,000 was owing on the current account, some $65,000 of that being in arrears.
[30] On 12 November 1998, having taken advice from a lawyer, Mr Horrocks, to whom they had been referred as an expert on trusts, Mr and Mrs Lightbody transferred the house property to themselves and Mr Horrocks, as trustees of a family trust, for a consideration of $230,000. At the same time they transferred all the shares in Capro to the trustees for $1,000.
[31] No payment was made by the trustees. Instead they executed an acknowledgement of liability in favour of Mr and Mrs Lightbody which stipulated that the indebtedness would be repaid in seven years’ time, namely in one sum on 12 November 2005, with interest at 11% per annum payable meanwhile. In fact, however, on the same day in 1998 Mr and Mrs Lightbody together forgave $54,000
of the debt and they continued with a gifting programme which was completed by the end of 2002, by which time all of the indebtedness had been released.[58]
[58]On the materials before the Court the manner in which the existing indebtedness of the company and of the Lightbodys personally was treated is unclear. The trustees executed a new mortgage in favour of the National Bank, replacing that previously given by the Lightbodys. It appears to have secured both forms of liability but the acknowledgement of debt by the trustees to the Lightbodys was for an amount of $231,000 and deeds of gift were signed for the full amount.
[32] Regal was apparently aware that Mr and Mrs Lightbody had owned their own home when it made the arrangements with them in 1995 but it had not stipulated for any security over the property. When the property was transferred to the family trust Mr and Mrs Lightbody took no steps either before or after the transfer to inform Regal that had occurred. From 1998 to 2002 Regal continued to supply Capro and Capro made the monthly payments under the term loan. Regal did not insist upon the payment of the balance at the end of the original five years. The current account continued to have substantial arrears.
[33] In 2002 Capro ceased obtaining its supplies from Regal and for some undisclosed reason went instead to another supplier whose terms were evidently not as favourable as those available from Regal. Apparently for this reason, and in part because Mr Lightbody suffered an accident and was also distracted by his son’s drug problems, culminating in a criminal conviction and prison sentence, Capro’s business failed. It went into liquidation on 11 April 2003, still owing Regal $15,358.57 under the term loan and $149,324 on current account. These amounts were not able to be paid by the liquidator.
[34] Regal obtained judgment against Mr Lightbody in 2004 but the judgment was not satisfied. Mr Lightbody was adjudicated bankrupt on 14 December 2005.
[35] In the meantime, Regal had applied to the High Court for an order that the transfer of the property to the trustees be set aside. However, as has already been mentioned, it is now accepted that the transfer of Mrs Lightbody’s joint interest cannot be challenged; and, now that Mr Lightbody is bankrupt, what Regal is seeking
is an order that the share of the property (50%) received by the trustees from him should be transferred by the trustees to the Official Assignee in his bankruptcy.
The High Court judgment
[36] Ellen France J[59] reviewed the financial position of Capro in 1998 when the transfer of the house occurred. She noted, inter alia, that its sales had fallen in that year and that, after paying Mr and Mrs Lightbody salaries totalling $50,000, it had made a loss of $219. But she considered that at the time the Lightbodys consulted Mr Horrocks “there was nothing particularly new or significant in terms of the debt to Regal and/or the company’s position at that point”.[60] There was an absence of any particular difficulty or triggering event in late 1998. She referred also to the overall reduction in the debt by the monthly payments and the Lightbodys’ commitments to that.
[59]Regal Castings Ltd v Lightbody (High Court, Auckland, CIV 2005-404-352, 29 September 2005, Ellen France J).
[60]At para [31].
[37] The Judge then reviewed the evidence concerning how the Lightbodys came to consult Mr Horrocks and the advice he gave them. They had waived privilege and called Mr Horrocks as a witness. He had given evidence that the Lightbodys had not decided to go ahead with a trust when he saw them. He had to “sell them” the idea of a trust. Mrs Lightbody in particular was very hesitant. The major focus of the Lightbodys was on “family issues”, although the idea of credit protection “in a general sense” would have been addressed, without being a focus. The Regal debt was not mentioned in his meetings with the Lightbodys until the end of 2001. Mr and Mrs Lightbody had spoken in their evidence of their concern to protect their children should they both die.
[38] Although the Judge considered there was “an element of defensiveness” in the evidence of the Lightbodys and Mr Horrocks and found that, at least by the time they had completed their meeting with Mr Horrocks, the Lightbodys knew that one of the effects of the trust arrangement was to protect assets, and although she thought it surprising Mr Horrocks did not ask about the company’s creditors, the Judge accepted Mr Horrocks’s evidence. She saw nothing untoward in the terms of the trust deed. The house had been transferred “at value”. The gifting programme was “normal”. Repayment of the loans had continued for four and a half years after the transfer. There were factors other than business difficulties when it was decided to liquidate the company, this being a reference to Mr Lightbody’s injury and the problems of his son.
[39] The Judge accepted the submission made for the trustees that, if questions had been asked at the time of the transfer, “it would have been taken that the company would have continued in the same way it had been”.[61] Ellen France J concluded that Regal’s case ultimately required “a level of calculation and sophistication” on the part of the Lightbodys which she did not believe they had. She considered it was a case “where the disponors were aware of the effect of the alienation but did not have the requisite intent to defraud”.[62]
The Court of Appeal judgment
[61] At para [71].
[62] At para [45].
[40] The Court of Appeal, by majority,[63] upheld the High Court’s dismissal of Regal’s application under s 60. After discussing applicable legal principles, the majority said that the establishment of an intention to defraud is a matter of fact to be determined in the circumstances of particular cases.[64] They said that if in a particular case the facts established showed that, at the time it was made, an impugned transaction must inevitably result in loss to a creditor (loss was a “necessary
incident”[65]) an inference of intention to defraud would readily be drawn.[66] But such an intention was not established merely by showing that an alienation had the effect of defeating a creditor. Inevitability of loss had to be apparent at the time of transfer. However, the majority said somewhat delphically, in cases where it could not be said that the loss to creditors was an inevitable consequence, the courts would still draw inferences of intention to defraud “if all the circumstances justify doing so”.[67]
[63]Regal Castings Ltd v Lightbody [2008] 2 NZLR 153 (Glazebrook and Arnold JJ; William Young P dissenting).
[64]At para [55]. The majority rejected the view that in circumstances of the kind which existed in Freeman v Pope (1870) LR 5 Ch App 538 (transfer by way of gift at the time the transferor/debtor is insolvent) there is an irrebuttable presumption that there was an intent to defraud.
[65]Quoting Cooke P in Swann v Secureland Mortgage Investment Nominees Ltd [1992] 2 NZLR 144 (CA) at p 147.
[66]At para [56].
[67]At para [58].
[41] The majority considered that the High Court was correct to hold that the Lightbodys had not had the requisite intention to defraud. In addition to the matters supporting this view referred to by Ellen France J, the majority placed some weight on Regal’s continuing support of Capro’s business until it changed to another supplier in November 2002. Regal must have considered Capro in 1998 to be “a viable business in the long term”. From the Lightbodys’ perspective, the business had “not become more risky”.[68]
[68]At para [73].
[42] The majority, differing from the High Court Judge in this respect, treated the transfer of the house property as a transfer at an under-value because it was accompanied by an immediate gift of $54,000 ($27,000 from Mr Lightbody). It took into account this factor, together with the arrears on the current account in November 1998, but weighed against them Capro’s trading history, agreeing with Ellen France J that there was nothing in the operation of the company in 1998 to cause alarm or concern for the Lightbodys. “The company was continuing to operate with [Regal’s] support, and its position in relation to its indebtedness to [Regal] was improving.”[69] The majority also agreed with the High Court that the length of time until the liquidation told against an intention to defraud, supporting the view that at the time of the transfer the Lightbodys envisaged that Capro would continue in business in the long-term:[70]
It seems clear that, if Glen Lightbody had been called upon to meet all of Capro’s liabilities to the appellant at the time of the transfer, he could not have done so. But it is also clear that all those involved envisaged that Capro would continue to meet its commitments under the term loan and the current account to the appellant’s satisfaction, and so would continue in business, as in fact it did. This provides some support for Glen Lightbody’s claim that he had every intention of ensuring that Capro met its commitments to the appellant.
[69]At para [75].
[70]At para [79].
[43] On the question of the Lightbodys’ failure to inform Regal of the transfer of the house, the majority referred to Mr Lightbody’s evidence that he did not see any need to tell Regal of the transfer as he regarded his personal business and Capro’s business as being separate. The application to Regal for credit had asked only for a residential address and had not given any prominence to the personal guarantee. There was no evidence that Regal had sought any details of the assets available to Mr Lightbody to meet the guarantee nor of any discussions of his net worth when the agreement was negotiated in 1995.
[44] Concerning the evidence of Mr Horrocks, the majority said that it did not have a proper basis for saying that the Judge had been wrong to accept that evidence, the essence of which was that, as far as Mr Horrocks was concerned, the trust was a bona fide family arrangement. The majority considered that the Judge was entitled to accept that evidence.
[45] Overall the majority did not consider that the circumstances were sufficiently compelling to enable it to say that the Judge’s conclusion that there was no intention to defraud was wrong and must be overturned.[71]
[71]At para [84].
[46] Dissenting, William Young P considered that it was perfectly clear that Mr Lightbody must have had the debt to Regal in his mind at the time of the transfer to the trust. There was no finding of fact to the contrary. There was also what he took to be a finding of fact that Mr Lightbody knew that the trust would or might serve to protect assets from creditors. So the connection in the debtor’s mind between the settlement and its possible effect on creditors was established.[72] The President considered that the High Court Judge had been looking for a fraudulent and targeted purpose involving the setting up of a trust for the purpose of enabling Mr Lightbody to put his assets on “high ground” before reneging on the payments he had promised to make to Regal. That approach put more of a burden on Regal than the authorities required. The President considered that what was required to be shown was that the debtor had disposed of an asset which would be available to his creditors with the knowledge that this would prejudice them by putting it (or its worth) beyond their reach. Knowledge of a consequence was equated with an intention to bring it about. The relevant prejudice was not to be equated with inevitable loss for the creditor at the time of the alienation. The prejudice consisted of being exposed, illegitimately, to the risk of loss. There was no requirement that the prejudice to the creditor be the purpose of the transaction.[73]
[72]At para [94].
[73]At paras [98] and [99].
[47] William Young P considered that Mr Lightbody was insolvent at the time of the alienation; that he recognised that the transfer of the house prejudiced Regal as exposing Regal to a risk of loss which would crystallise if Capro defaulted; that the transfer was voluntary; and that the transfer was properly characterised as dishonest in the context of the relationship between a debtor and a creditor. He noted particularly that Capro’s current account with Regal was some $65,000 in arrears. Regal would have been perfectly entitled to recover that from Mr Lightbody with the consequence that, sooner rather than later, everything else would have become payable. Mr Lightbody had no assets of any significance apart from his interest in the house. There was no value in Capro. That was indicated by the transfer value attributed to its shares of $1,000; it was simply a vehicle through which Mr Lightbody traded and as was made clear by what happened when he was not able to work. The company had made a loss in the 1998 financial year and Mr Lightbody’s remuneration was only $50,000. “In this context, the requirement to make monthly payments of $4,000 for 56 months was of crushing significance.”[74]
[74]At para [104].
[48] William Young P pointed out that over time Mr Lightbody disposed of his entire interest in the house and was left with nothing to show for it. From the very start, he said, this was the consequence which Mr Lightbody intended to bring about. The fact that it took some time to achieve was irrelevant. With the deeds of gift which accompanied it, the transfer must necessarily be regarded as made for inadequate consideration.
[49] The President agreed that Mr and Mrs Lightbody remained committed (at least during the period of the gifting programme) to make the agreed payments. But he said that, given the burden of the debt and the limited income-earning potential of Capro and Mr Lightbody, he concluded that Mr Lightbody’s recognition of his insolvency and the likely consequences of the transfer on Regal was sufficient for his conduct to be categorised as fraudulent. That characterisation was supported by the consideration that in 1995 there had been a considerable indulgence from Regal which would otherwise presumably have wound up Capro and pursued Mr Lightbody on an existing guarantee. In this context Mr Lightbody had acted dishonestly when he made away with his assets during the period of the extension of time granted by Regal.
[50] Referring to the approach of the majority, William Young P said that the majority had been looking not for a fraudulent intention, but rather a fraudulent motive.
[51] Concerning the defences based on s 60(3) and indefeasibility of title, William Young P said that Mrs Lightbody was as well aware as Mr Lightbody of the circumstances which made it a fraudulent transaction. The Judge had found that Mr Horrocks was not aware of those circumstances. However, the President had no hesitation in attributing the state of mind of Mr and Mrs Lightbody to the trust, given that a contrary conclusion would be “a fraudster’s charter”[75] (sanitising a fraudulent transaction by the simple expedient of keeping one of the trustees in the dark about the reasons for the transaction); Mr and Mrs Lightbody were the dominant trustees and Mr Horrocks can only have made the most desultory of inquiries about the commercial background to the setting up of the trust, with Mr Lightbody not seeing fit to explain to Mr Horrocks his difficult financial situation. The President would have allowed the appeal.
Intent to defraud
[75]At para [122].
[52] The expression “intent to defraud” in s 60(1) of the Property Law Act was not happily chosen. But it has been regarded as shorthand for intent to hinder, delay or defeat a creditor in the exercise of any right of recourse of the creditor in respect of property of the debtor. That is how the concept is now expressed in s 345(1)(a) of the Property Law Act 2007. The existence of any such dishonest intent on the part of the debtor is a question of fact and the onus of proving it is upon the party attacking the transaction.[76]
[76]Re Hale (a bankrupt) [1989] 2 NZLR 503n at p 508 (CA) per Richmond J.
[53] That much is clear. But what constitutes such an intent? To answer that question it is essential to distinguish between the debtor’s purpose and his or her intention, as William Young P did in his dissenting judgment, and as, with some justification, he considered the majority’s reasons did not. It is not necessary to show that the debtor wanted creditors to suffer a loss; that it was his purpose to cause loss. It is, however, necessary to show the existence of an intention to hinder, delay or defeat them and that the debtor has accordingly acted dishonestly. This distinction was adverted to by the Court of Appeal in Swann v Secureland Mortgage Investment Nominees Ltd.[77]Cooke P remarked:[78]
In the great majority of cases of fraud the fraudulent parties plan to make a gain, and loss to the victim is an incidental consequence of carrying out their plan. The actuating motive is not usually to inflict loss for its own sake, but to achieve profit. Commonly the state of mind of those guilty of fraud is that they are prepared to act dishonestly at the expense of the person defrauded in order to serve their own ends. In other words, the risk of cheating someone else is something that cannot be avoided and is accepted, perhaps regretfully, as a necessary incident, the obverse, of pursuing their purpose. It is not the law, however, that fraud or dishonesty can only be found if the defendant's governing motive has been to cheat the victim. If it were the law, sharp practice would have a free rein.
[77][1992] 2 NZLR 144.
[78]At p 147.
And Gault J[79] cited with approval, as applicable to cases under s 60, a passage from Smith and Hogan[80] discussing the decision in R v Cooke[81] where the House of Lords had upheld a conviction for conspiracy to defraud British Rail by members of a restaurant and buffet-car crew who agreed to sell to passengers food and drink not the property of British Rail. Smith and Hogan approved the view that if it could properly be found that the defendants knew that their conduct would, inevitably, cause loss to British Rail, then it was right to hold that they intended to defraud British Rail and it should be immaterial that this was not their purpose.
[79]At p 153.
[80]Criminal Law (6th ed, 1988), p 272. See new (11th ed, 2005), p 386.
[81][1986] AC 909.
[54] Whenever the circumstances are such that the debtor must have known that in alienating property, and thereby hindering, delaying or defeating creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amounts owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause them loss. We respectfully agree with the opinion of Gaudron J in Cannane v J Cannane Pty Ltd (In Liq) that an intent to defraud:[82]
involves the notion of detrimentally affecting or risking the property of others, their rights or interests in property, or an opportunity or advantage which the law accords them with respect to property.
[82](1998) 192 CLR 557 at p 572 [emphasis added].
[55] The most simple case is one in which an insolvent debtor has gifted a substantial asset to a relative or friend or to trustees of a family trust, thereby subtracting from an already insufficient quantum of assets. There may be room for argument over whether in that circumstance there is or is not a presumption, perhaps irrebuttable, of an intent to defraud. It would be a rare case in which a difference of view on that question would affect the outcome.[83] The consequence for the creditors is so obvious that it is really beyond argument that the debtor must be taken to have intended it. Someone who claims that he or she gave no thought to the position of creditors when making a gift in circumstances of insolvency is unlikely to be believed. There has always been found to be the requisite dishonest intent where the debtor was insolvent and gifted away his or her property.
[83]The point is no longer open to doubt under the Property Law Act 2007, s 346, where a disposition by way of gift by an insolvent person is ipso facto a disposition which may be set aside, as is a disposition without receiving reasonably equivalent value in exchange.
[56] It is not necessary to show that the debtor was actually insolvent. A transaction can expose creditors to risk in circumstances where the debtor remains presently able to pay his or her debts as they fall due but there is a high level of probability that this situation will not continue. A gift or a transfer of property at an under-value in these circumstances may be with the intention of hindering, delaying or defeating creditors.
[57] Of course, if property is disposed of by the debtor at full value at the time of the disposition, the creditors will have what Brennan CJ and McHugh J called in Cannane “an undepleted fund” against which to prove their debts. Such a transaction could not be characterised as involving a dishonest intent. But, as those Judges also said:[84]
[I]f property is sold for an undervalue or is given away, that fact is relevant to the intent to be attributed to the disponor in disposing of the property.
We take the reference to a gift to be, in this connection, to a partial gift producing the equivalent of an under-value. The Judges considered a disposition at an under-value to be:
only a fact from which, dependent on the surrounding circumstances, an inference of fraudulent intention may be drawn.
[84]At p 567.
[58] R J Sutton[85] comments, and we respectfully agree, that the crucial question in all cases is one of intent, and that a debtor may have that intent even though he receives adequate consideration. He cited Lloyds Bank Ltd v Marcan[86] in which a long-term lease of the debtor’s land to his wife for a fully adequate rent was set aside because it had been entered into in order to impede the process of execution against the land and not as a bona fide family arrangement. In circumstances of this kind the “fund” cannot be regarded as undepleted by the transaction.
[85]The Law of Creditors’ Remedies in New Zealand (1978), para [5.20].
[86][1973] 1 WLR 1387 (CA).
[59] Before leaving this account of the relevant law, we should refer also to the decision of a very strong bench of the Court of Appeal in 1882 in Re Ridler, Ridler v Ridler[87] consisting of Lord Selborne LC, Jessel MR and Cotton LJ, lest it be thought that it might make a difference whether Mr Lightbody was concurrently liable to Regal along with Capro (as principal debtor) or only secondarily liable (as a guarantor). The case involved a father who had given a bank a guarantee and later, while the son still remained solvent, made a voluntary settlement of a valuable property. Some three years later the son “filed a petition for liquidation” and was found to be insolvent. The Court of Appeal held the settlement to be invalid as against the father’s creditors because it was to be inferred that he had had an intention to defeat or delay creditors. Lord Selborne, with whom Jessel MR agreed, expressed the following opinion:[88]
To hold that a guarantor can make a voluntary settlement of the whole of his property and support it by shewing that when he made it the person guaranteed had assets enough to pay the amount guaranteed, would go far to defeat the contract of suretyship. We must look at the matter as if the event had already happened the possibility of which the parties must have had in contemplation when the guarantee was given of the debtor being unable to pay. I do not think that any close inquiry as to the supposed capacity of the person guaranteed to pay the debt ought to be entered into. I do not say that there might not be a state of things in which the liability of the guarantor might be so remote that it need not be regarded; but if he conveys away all his property by a voluntary settlement I think it doubtful whether the settlement could in any case be supported in the event of his ultimately being called on under his guarantee.
Cotton LJ observed:[89]
A man who makes a settlement without leaving himself enough property to pay his creditors must be considered to do it with an intent to defeat or delay them.
…
Then as to the point that the settlor was not indebted, but only subject to a liability which might never become a debt. A man is not at liberty to take a sanguine view, but is bound to act upon a reasonable view of what is likely to happen. In the circumstances of this case, any reasonable man must have looked upon this guarantee as one which would probably be enforced, and the settlement must be taken as made with intent to delay or hinder creditors.
[87](1883) 22 ChD 74.
[88]At p 80.
[89]At p 82.
This case
[60] In our view, and with respect to those who have taken a different view, it is plain that in November 1998 Mr Lightbody had an intent to hinder, delay or defeat Regal’s recourse to his interest in the house property should it ever prove necessary for Regal to have such recourse. His action in exchanging that interest for an unsecured debt not repayable for seven years and simultaneously gifting away $27,000 of the debt constituted, in our view, a disposition at an under-value.[90] The exchange was for a debt that did not have to be paid for seven years. That was bound to hinder or delay Regal’s recourse to Mr Lightbody’s only significant asset. If it is said that Regal could have realised upon the debt by assigning it for value – an argument not advanced for Mr Lightbody – the obvious response would be that it is highly unlikely that anyone would be found willing to purchase such an unsecured debt (indeed only an interest in a debt also owned by Mrs Lightbody), at least at any consideration approaching the face value. That factor, by itself, also demonstrates the element of under-value even if the immediate gift were to be treated as a separate transaction, which we do not think it should be.
[90]Regal has not sought to set aside the gifts separately from the transfer of the property and its case has not been directed towards establishing an intent to defraud at any point in time after November 1998.
[61] And this was done in circumstances of secrecy in regard to Regal – a well recognised badge of fraudulent intent[91] – and at a time when Capro’s ability to trade and its future, if not its present, solvency depended upon Regal’s willingness to continue to support Capro. Furthermore, it is another badge of fraudulent intent if the debtor remains in possession of the asset, as the Lightbodys did. They were also discretionary beneficiaries of the trust in respect of both capital and income.
[91]Twyne’s Case (1602) 3 Co Rep 80b at p 81a; 76 ER 809 at pp 812–813.
[62] Mr Wilson, for the respondents, submitted that it is not open to this Court to conclude that either Capro or Mr Lightbody was insolvent when the transaction occurred on 12 November 1998 because that question was never directly addressed
at the hearing in the High Court. (This was said to be because the Judge erroneously did not permit any argument based on Freeman v Pope because she considered that should have been the subject of a pleading.) We proceed on the basis that actual insolvency has not been proved, as we will explain. But it does not follow that there could be, and was, no intent to defraud on the part of Mr Lightbody.
[63] Capro was some $65,000 in arrears on its current account with Regal. As at 20 November 1998 a further $29,000 was due for payment.[92] It cannot be doubted that if, immediately after the transfer of the home, which is the time at which the matter must be judged, Regal had discovered what Mr and Mrs Lightbody had done, it would have regarded it as a gross breach of faith and would have demanded payment of the $65,000, in addition to the current debt due on 20 November. The unchallenged evidence of Mr Astley of Regal was that Regal would not have continued to prop up Capro if it had known of the transfer of the house.
[92]The current account at that date was $90,276 and a $4,000 payment was due on the term loan. A figure of $113,000 is mentioned in the judgments below but that was the amount of the current account some two months later.
[64] Mr Wilson submitted that Capro could have found all these moneys and met other accounts payable by 20 November by taking steps to obtain payment of its accounts receivable and selling down its inventory and also by diverting to Capro all or part of a borrowing of $70,000, being a further advance from the National Bank arranged on the security of a mortgage of the house by the trustees (replacing a mortgage given by the Lightbodys). We do not have the advantage of a balance sheet as at November 1998 but a picture of Capro’s position is available as at 31 March 1999 with comparative figures for its previous balance date. Both sets of figures show a negative balance as between accounts receivable and accounts payable. Thus, even in the unlikely event that Capro received all the money owing to it by its customers on 20 November, it would also have needed to negotiate a substantial bulk sale of its inventory, for cash, by that date and/or find the shortfall out of the fresh advance by the bank. Such a sale of inventory, if it had to occur, would have been damaging to the business, which was already in a weak position.
Indeed, even with the transfer of the house concealed and Regal continuing to support Capro, its accountant was reporting to Mr and Mrs Lightbody as early as June 1999 that the business was struggling and, if it continued to run as it had for the past two months, “business viability becomes doubtful”.
[65] There may, however, have been some ability to meet part of a demand from Regal from the bank advance. The material before the Court includes a “File Note Lightbody Family Trust – 16 November 1998” which records that the amount of the family trust’s loan from the bank was approximately $147,000, made up of the existing loan to the Lightbodys plus $70,000 requested by Mr Lightbody “to reduce the overdraft on the Company account and provide working capital”. It was recorded that the $70,000 cleared the company’s existing indebtedness to the bank. The note also recorded a request, apparently granted, for a continuing $20,000 overdraft for the company. The level of indebtedness which was to be reduced is not apparent but some part of the $70,000 appears to have been available for the trust to pay over to Capro. Accordingly, we have come to the view that it has not been demonstrated that Capro, and therefore Mr Lightbody, was necessarily insolvent as at November 1998 in the sense of being unable to meet its indebtedness as it fell due.
[66] But, whether or not we are justified in taking that benign view, the transaction undoubtedly imperilled Regal for the future. If it had known about it, Regal would certainly have declined to continue to be Capro’s supplier. So Capro’s business would have been disrupted by the need to find a new supplier immediately, and its subsequent history reveals that it was eventually unable to do so on satisfactory terms and its business then failed. Crucially, if Regal was no longer the supplier, it would definitely not have extended the time for payment of the balance of the term loan when it fell due in 2000. Capro had little or no prospect, as at 1998, of being able to make that payment. Its borrowing capacity, with a business with a net value of $1,000 – the transfer price of the shares based on a valuation by a chartered accountant – was extremely limited. The trust had already borrowed heavily on the house. It had been established, as a minute of a meeting of trustees on 14 November 2000 recorded, “for the acquisition and protection” of the house, and would have been unlikely to give any further support to the company. Financial failure of the company in 2000 was highly probable and that would have meant the financial failure of Mr Lightbody himself. As Cotton LJ said in the passage from his judgment in Re Ridler, quoted at para [33] above, “a man is not at liberty to take a sanguine view, but is bound to act upon a reasonable view of what is likely to happen”. On any reasonable view in November 1998, Capro was likely to collapse within two years if Regal came to know of the concealed transfer of the house. The risk of loss for Regal was very significant unless it chose to stay its hand despite discovering the concealed transfer. And why should it now be treated as if it had been legally obliged to do that?
[67] It beggars belief that Mr Lightbody acted without any appreciation of the risk being created for Capro by the transfer of the house. We have been unable to think of any plausible reason why someone in the position of the Lightbodys would go to the trouble and expense of setting up a family trust and transferring the house to it other than protection of that asset against the claims of creditors. Mr Horrocks in his evidence agreed that “in the general sense” the purpose of the transfer to the trust was to protect the house. He said that the idea of forming a trust was that if creditors should come along in the future it could be an advantage, but when asked about existing creditors of Mr and Mrs Lightbody, Mr Horrocks said that was not discussed. This is surprising, particularly since, as a trustee, he surely needed to inquire how the trust’s mortgage over the house to the bank would be funded. He was also in the same capacity becoming a shareholder in the company. He said that he spoke to the Lightbodys’ accountant about the value of the shares but, according to his evidence, when told that was only $1,000 apparently still made no enquiry about how the mortgage would be funded. Mr Lightbody himself claimed that the dominant reason for transferring the house was to protect it “so my kids would have somewhere to live”. He was unable to explain who the protection was against. When asked whether he was protecting it from his creditors he claimed that they were being paid and it had never crossed his mind. “I didn’t need to protect the house from anything, I was protecting it so my kids would have somewhere to live if anything happened to myself and my wife. My creditors were being paid. I had an agreement with Regal which I tried as hard as possible to honour”. Mrs Lightbody’s evidence was that the home was being put into trust “so it would not be sold underneath the children if they lost both parents at once. It was for stability”.
[68] None of these witnesses gave any explanation of why it was necessary to transfer the house to a trust in order to create stability for the children in the event both parents died.[93] That could equally well have been done, if the debt to Regal was not the real concern, by appropriate provisions in the wills of Mr and Mrs Lightbody. Having considered their attempts at explanation and the extraordinary absence of any mention to Mr Horrocks that there was a major overdue debt owing to Regal, we have no doubt that the real reason for the transfer was to protect the house against a claim by Regal in the event that the company collapsed, however much they hoped that event would not occur. This was not a bona fide family arrangement. It was intended to protect the house against Regal – to hinder or defeat its right of recourse to the house – and created an inevitable and significant risk for Regal. Accordingly, the transfer must be characterised as having been made with fraudulent intent in terms of s 60.
The position of the trustees: s 60(3)
[93]The house was not at risk if Mr Lightbody died as it would have passed by survivorship to Mrs Lightbody who had no liability to Regal.
[69] Subsection (3) preserves the position of someone who acquires property from the debtor in good faith without notice of the debtor’s intention to hinder, delay or defeat a creditor or creditors. Where the alienee is aware of that dishonest intent, subs (3) provides no protection against the claim of the creditor to recover the property even where the purchaser has given valuable consideration. As Kerr puts it, all inquiry into consideration is overridden.[94] The principle is of ancient origin[95] and was well established in the time of Lord Mansfield CJ who said in Cadogan v Kennett that “if the transaction be not bona fide, the circumstance of its being done for a valuable consideration, will not alone take it out of the statute”.[96]
[94]Kerr on the Law of Fraud and Mistake (7th ed, 1952), p 343.
[95]Twyne’s Case at p 80b; p 809.
[96](1776) 2 Cowp 433 at p 434; 98 ER 1171 at p 1172.
[70] It is contended for the trustees that the trust acted in good faith in receiving the transfer of the property as the trustees collectively did not have, at that time, notice of Mr Lightbody’s intention to defraud any creditor. That is no doubt true in respect of Mr Horrocks who was not aware of the Regal debt until some years later. But his unawareness of the intent of Mr Lightbody cannot immunise the trust when Mr Lightbody himself was also a trustee and, of course, was the very person who was alienating the property with that intent. Mr Lightbody’s knowledge taints the receipt by the trustees of the property. They received it as a unity. They did not have separate interests in it. Taking as joint tenants, they must be treated as one purchaser who has knowledge of the fraudulent intent. We find persuasive the analysis of Windeyer J in Diemasters Pty Ltd v Meadowcorp Pty Ltd[97] which supports this conclusion.
The Land Transfer Act
[97](2001) 52 NSWLR 572 (NSWSC).
[71] We have reached the conclusion that the transfer of the house property to the trustees was an alienation with intent to defraud Regal and that, in terms of subs (3), the property was not received by the trustees in good faith without knowledge at that time of the fraudulent intent. The remaining question is whether the indefeasibility provisions of the Land Transfer Act preclude the making of the order sought by Regal, in the absence of any application by the Official Assignee. Should this Court simply treat the trustees as holding a one-half interest in the property for Mr Lightbody and make an order for the transfer of that interest to the Official Assignee or should it remit the proceeding to the High Court for the Official Assignee to be given an opportunity to intervene and seek an order to that effect?
[72] The obstacle in the way of the former course is that, although s 60 applies to land under the Land Transfer Act 1952, with s 3(2) of the Property Law Act expressly providing that all the provisions of the Act are, as far as they are applicable, to apply to land and instruments under the Land Transfer Act, subs (1) of s 3 provides that the Property Law Act is to be read and construed so as not to conflict with the provisions of the Land Transfer Act as regards land under that Act. Section 60 contains no provision expressly authorising an order to be made overriding the Land Transfer Act. In contrast, s 58 of the Insolvency Act 1967, which provides a procedure to enable the Official Assignee to invoke s 60 of the Property Law Act, does contain, in subs (7), an overriding provision:
(7)Nothing in the Land Transfer Act 1952 shall restrict the operation of this section.
[73] In favour of the view that it is implicit in s 60 that an order can be made overriding the Land Transfer Act notwithstanding s 3(1), is that the defence in s 60(3) is explicitly available in relation to any “estate”, a term which obviously refers only to land. Section 60 replaced the Statute of Elizabeth[98] on 1 January 1953. By that time there was very little deeds system land remaining in New Zealand. Was it at all likely that s 60 was to be restricted in its application to land only of that small quantity plus unregistered interests in land transfer land? There would also seem to be no good reason for limiting an override under s 60 to applications by the Official Assignee. Arguably, s 58(7) of the Insolvency Act was thought necessary only in relation to applications under the other sections for which its procedure was made available to the Official Assignee. That there is no fundamental policy reason against having a general override for the avoidance of fraudulent alienations of Torrens system land can be seen from the fact that the legislature has now provided for it in s 350(4) of the Property Law Act 2007.[99]
[160] The third matter which must be considered is whether depriving the trustees as registered proprietors of the protection of indefeasibility would be contrary to the policy and purposes of the Torrens system. In that respect it is important that no innocent third party is involved. The trustees are simply being told that as they were knowingly implicated in a transaction voidable under s 60, they cannot rely on the register to resist that consequence. This, in my view, is a classic in personam situation. Equity looks to the conscience of the registered proprietors and holds that it would be contrary to good conscience to allow them to rely on the indefeasibility of their title. Put another way, equity says that in these circumstances s 62 of the Land Transfer Act does not protect the trustees from having the transaction whereby they become registered proprietors avoided and appropriate consequential orders made.
[161] The fourth question relates to how that avoidance can be achieved, consistently with Land Transfer Act principles and the fact that Mrs Lightbody’s half of the transaction is not amenable to avoidance because she was not in any way indebted to Regal.
[162] I consider this case is an appropriate one for the use of a remedial constructive trust. That remedy was discussed by the Court of Appeal in Fortex Group Ltd (in rec and liq) v MacIntosh where the difference between institutional and remedial constructive trusts was briefly considered.[194] There are difficulties in viewing this case as one of institutional constructive trust. Logically the time at which such a trust might have arisen is immediately following the implementation of the transaction. But at that time the alienation was only voidable at best and the potential for its avoidance was contingent upon Regal or another creditor of Mr Lightbody having occasion to take the necessary steps. In a sense therefore any institutional constructive trust would itself have been at least initially of a contingent kind and to declare the existence of such a trust would be unconventional. Furthermore, any constructive trust would necessarily have been in favour of Mr Lightbody himself rather than in favour of a particular creditor or creditors generally. They would only benefit through the transmission of the trust to the Official Assignee on Mr Lightbody’s bankruptcy. This route strikes me as artificial and unnecessarily problematic when there is available the much more straightforward course of directly imposing a remedial constructive trust on the trustees of the family trust in favour of the Official Assignee.
[194][1998] 3 NZLR 171 at pp 172 – 173. In short, an institutional constructive trust arises upon the happening of the events which bring it into being. A remedial constructive trust is created by order of the Court. See also the speech of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 at pp 714 – 715; and the illuminating article by Sir Terence Etherton, Chairman of the Law Commission in England, “Constructive Trusts: A New Model For Equity and Unjust Enrichment” (2008) 67 Camb LJ 265.
[163] The ability of the Court to impose a constructive trust as a remedy was provisionally recognised in Fortex, albeit the Court emphasised the need for caution not to allow the proprietary nature of this form of remedy to undermine or subvert other recognised principles and priorities. The imposition of a remedial constructive trust in this case and an order for its implementation would not involve that sort of problem.
[164] I therefore agree that the appeal should be allowed with the consequential orders set out at the end of the Chief Justice’s reasons.
MCGRATH J
[165] I agree with Blanchard J that the transfer by Mr Lightbody of his interest in his house property to a family trust, in all the circumstances, amounted to an “alienation of property with intent to defraud creditors” within the meaning of s 60(1) of the Property Law Act 1952.[195]
[195]The Property Law Act 1952 was repealed as from 1 January 2008 by s 366(c) of the Property Law Act 2007. Unless otherwise indicated, reference in these reasons to the Property Law Act is to the 1952 Act.
[166] The alienation in this case comprised not only the transfer of the property, at a consideration determined in accordance with a registered valuer’s opinion of its worth, but also the gifting programme in relation to the vendors’ loan which financed the transaction. The result of this was that the trust’s debt to the vendors, and in particular Mr Lightbody, was extinguished after four years.
[167] The basis of the finding that the alienation was with intent to defraud his creditors lies in Mr Lightbody’s knowledge that the effect of what he was doing would be substantially to diminish his personal worth and thus the value of his personal guarantee of the debt owed by his company to Regal Castings. From the time of his initial gift, shortly after the transfer of the property, Regal Castings was exposed to an enhanced risk that the substantial debt would not be repaid in full. The fact that Mr Lightbody had an intention to pay off the debt in instalments, and believed he would be able to do so, does not affect the crucial point which was that he knew from the outset that he was putting Regal Castings at much greater risk. The legal basis on which his actions amounted to an alienation with intent to defraud is set out in Blanchard J’s judgment, and I agree with his analysis.
[168] I also agree that the trust as transferee is fixed with the knowledge of Mr Lightbody of the effect of the alienation. He has at all times been one of the trustees. The trust accordingly cannot claim to be a purchaser in good faith who, at the time of alienation, had no notice of the intention to defeat or defraud creditors. It follows that s 60(3) of the Property Law Act provides no assistance for its position and that Regal Castings has satisfied the requirements of s 60 for an order avoiding the alienation of property by Mr Lightbody.
[169] The trustees have, however, registered the transfer of the house property and, the next matter the Court must consider is whether the Land Transfer Act, and its provisions concerning indefeasibility, preclude Regal Castings from obtaining an order under s 60. Two points arise. On the first, I agree with Blanchard J that what Mr Lightbody and other trustees have done in procuring registration of the transfer to them of the property cannot be treated as actual fraud under the Land Transfer Act 1952. There is no finding of that level of dishonesty and it would not be appropriate for this Court to address whether there should be such a finding.
[170] The second point is whether the indefeasibility of the title acquired by registration under the Land Transfer Act precludes s 60 of the Property Law Act taking effect to avoid the transfer. On that point I have concluded that the application of s 60(1) of the Property Law Act as an exception to indefeasibility in this case is consistent with the policy of the indefeasibility provisions of the Land Transfer Act. There is, therefore, no impediment to this Court applying it by treating the transfer as void and ordering the vesting of the half interest of Mr Lightbody in the property in the Official Assignee. My reasons for these conclusions follow.
[171] Section 60 of the Property Law Act provides:
60 Alienation with intent to defraud creditors
(1)Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.
(2)This section does not affect the law of bankruptcy for the time being in force.
(3)This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defraud creditors.
[172] The Land Transfer Act and the Property Law Act were enacted on successive days.[196] Each came into force on 1 January 1953. Both statutes deal broadly with the same subject matter, with the Land Transfer Act providing for a system of land registration and the Property Law Act a collection of general rules concerning property. Parliament recognised that the two statutes would, to some extent, cover the same ground and it specifically addressed their linkage. At the relevant time s 3 of the Property Law Act provided:
[196]The Land Transfer Act was enacted on 23 October 1952 and the Property Law Act on 24 October 1952.
3 Application to Land Transfer land
(1)This Act shall be read and construed so as not to conflict with the provisions of the Land Transfer Act 1952 as regards land under that Act.
(2)Except as otherwise expressly provided, all the provisions of this Act shall, as far as they are applicable, apply to land and instruments under the Land Transfer Act 1952, as well as to other land and instruments.
(3)The provisions of this Act which are specified in Schedule 1 to this Act do not apply to land or instruments under the Land Transfer Act 1952.
The legislative direction for resolving conflicts between the statutes in s 3(1) was mirrored in s 244 of the Land Transfer Act which provided:[197]
244Property Law Act 1952 to be subject to this Act
The Property Law Act 1952 shall, as regards land under this Act, be read and construed so as not to conflict with the provisions of this Act.
[197]Section 244 of the Land Transfer Act was repealed by s 364(1) of the Property Law Act 2007.
[173] Where there is no conflict between the two statutes s 3(1) and s 244 have no impact on their interpretation. But if there is, the effect of these provisions is that the Land Transfer Act provisions prevail. The prior question, however, is whether there is any inconsistency. As the Court of Appeal once observed:[198]
It is inevitable that in the complex legislative processes of a modern society there will be occasional conflicts and inconsistencies between the provisions of different statutes. There are well established rules for determining which provisions are to prevail. The starting point, of course, is that there be an inconsistency. If it is reasonably possible to construe the provisions so as to give effect to both, that must be done. It is only if one is so inconsistent with, or repugnant to the other, that the two are incapable of standing together, that it is necessary to determine which is to prevail.
[198]Stewart v Grey County Council [1978] 2 NZLR 577 at p 583 (CA) per Richardson J. A similar approach was taken in relation to legislation dealing with indefeasibility of title by the Court of Appeal of New South Wales in City of Canada Bay Council v Bonaccorso Pty Ltd (2007) 156 LGERA 294 at paras [79] and [80].
It is necessary therefore to inquire into whether there is an inconsistency between the provisions in the two statutes that are relevant in this case.
[174] The traditional view of academic writers is that Torrens System legislation is compatible with statutory provisions that enable the setting aside of fraudulent conveyances. This is reflected in the observation of Kerr:[199]
[199]Kerr, The Australian Lands Titles (Torrens) System (1927), para [435].
It is the universal opinion that the Torrens Statutes do not prevent the operation of the statute 13 Eliz., c.5.
That English statute of course was the predecessor of s 60, which only ceased to have effect in New Zealand when the Property Law Act came into effect. Similar statements are made in other texts. Hogg observed:[200]
[200]Hogg, Registration of Title to Land Throughout the Empire (1920), p 110.
But it has been said that the creditors’ right under the 13 Eliz. is a “statutory right,” and “neither an unregistered title, nor an unregistered interest, nor an unregistered disposition.”
More recently, Baalman has referred to the relevant provisions of the Statute of Elizabeth[201] as being one of the “incidents of common law conveyancing [that] have been judicially recognised as being applicable to land under the [Real Property Act 1900], although not expressly mentioned in it”.[202] In New Zealand, in 1978, Hinde McMorland and Sim said:[203]
It is generally accepted that the Torrens System statutes do not prevent the operation of the legislation against fraudulent conveyances. If, therefore, a voluntary transfer of land is voidable under s 60 of the Property Law Act 1952, the transferee cannot set up his registered title against any claim by the person prejudiced by the transfer.
[201]13 Eliz. c. 5 (1571).
[202]Baalman, The Torrens System in New South Wales (2nd ed, 1974), p 5.
[203]Hinde McMorland and Sim, Land Law (1978), para [2.107].
In the current second edition of Hinde McMorland and Sim, only the first sentence of this passage appears.[204] Significantly, however, the cases cited in the texts as the basis of the principle that s 60 operates on Land Transfer land all involve transfers to volunteers and appear to be decided on the basis that a volunteer does not receive immediately indefeasible title on registration.[205]
[204]Hinde McMorland and Sim, Land Law (looseleaf), para [9.080(d)].
[205]Including Crow v Campbell (1884) 10 VLR (E) 186 (SC); Moss v Williamson (1877) 3 VLR (E) 221 (SC) and Hall v Hall (1877) 2 NZ Jur (NS) 259 (SC).
[175] Since Boyd v Mayor of Wellington[206] was decided, by a majority, in 1924, the prevailing judicial opinion in New Zealand has been that registration under the Land Transfer legislation results in immediate indefeasibility of title. In 1966 Frazer v Walker[207] put the stamp of Privy Council authority on this principle, stating emphatically that the ratio of Boyd’s case “applies as regards titles derived from registration of void instruments generally”.[208] The lack of any close analysis of the impact of this common law development casts doubt on the authority of the opinions of the textbook writers set out above.
[206] [1924] NZLR 1174 (CA).
[207][1967] NZLR 1069.
[208]At p 1078.
[176] A number of cases address situations where what is at issue is whether statutory provisions which make instruments void and ineffective override the consequences of registration under the Torrens system.[209] In general they do not. But, as McGechan J has pointed out:[210]
[T]he question at all times remains one of interpretation by way of reconciliation of those two statutes. Decisions in other jurisdictions on other statutes are a guide, but no more.
[209]Including Breskvar v Wall (1971) 126 CLR 376 and Housing Corporation of New Zealand v Maori Trustee [1988] 2 NZLR 662 at pp 677 – 678 (HC).
[210]Housing Corporation of New Zealand at p 677.
[177] In Murtagh v Murtagh,[211] MacArthur J decided that, under a provision similar to s 60 in matrimonial property legislation, an instrument entered into to defeat petitioners’ rights could be voided without the rule of indefeasibility of title having any effect on that Act. Macarthur J reasoned that the avoiding was under a separate statute to the Land Transfer Act to which s 63 did not apply. This is akin to saying that the two statutory provisions can be reconciled. But there is no discussion of how that result is reached. In Dungey v McCallum,[212] the Court of Appeal suggests that s 60 of the Property Law Act will not operate to avoid transfers of indefeasible title unless the conduct in issue amounted to Land Transfer Act fraud, which is a higher standard than required by s 60. Again, however, there is no analysis of the provisions to support this conclusion.
[211][1960] NZLR 890 at p 900 (SC).
[212][1993] 3 NZLR 551 at p 556.
[178] As the case law does not provide this Court with reasoned assistance on the question whether s 60 of the Property Law Act is to be read as a provision which can be reconciled with the Land Transfer Act, this must be ascertained on the basis of principles of statutory interpretation of the relevant provisions rather than any common law based analysis.
[179] The completion in 1951 of all work required for the issue of compulsory Land Transfer titles meant, from a practical point of view, the demise of the Deeds System in New Zealand.[213] As a consequence, by 1952, nearly all land in New Zealand had been brought under the Land Transfer registration system. This forms an important part of the context in which the meaning of the two statutes and their application to each other must be ascertained because, to the extent that s 60 was to apply to real property, that was to be Land Transfer land.
[213]See “The Demise of the Deeds System” (1951) 27 NZLJ 271.
[180] The text of s 3 of the Property Law Act makes plain that, in general, the two contemporaneous statutes are to be read together. Section 60, in particular, is to be applied to land under the Land Transfer Act, as provided in s 3(2), s 60 not being one of the provisions excluded from application under s 3(3). The text of s 60 is itself consistent with its application to Land Transfer land. Section 60(3) stipulates circumstances in which the section is not to apply to any “estate” which must mean an estate in land. Parliament’s clear intention is that outside of those circumstances s 60 does apply to land and, in the context mentioned, to land that is within the Land Transfer Act registration system.
[181] In light of these provisions, read in their context, if the matter were to turn solely on the terms of the Property Law Act, I am satisfied that it is plain that s 60 of that Act would apply to alienations of all land, the title to which has passed in accordance with the provisions for registration in the Land Transfer Act.
[182] The question then is whether the Land Transfer Act stands in the way of such an application of the Property Law Act provision. The only potentially conflicting provisions in the Land Transfer Act are those concerning indefeasibility. These provisions are, however, of great importance to the New Zealand system of land registration.
[183] In Frazer v Walker, Lord Wilberforce said of the doctrine of indefeasibility of title:[214]
[214]At p 1075.
The expression, not used in the Act itself, is a convenient description of the immunity from attack by adverse claim to the land or interest in respect of which he is registered, which a registered proprietor enjoys. This concept is central in the system of registration.
Whether the indefeasibility of title of a registered proprietor conflicts with the application of s 60 in this case turns on the meaning of the central statutory provisions creating it. Section 62 of the Land Transfer Act provides:
[T]he registered proprietor of land or of any estate or interest in land under the provisions of this Act shall, except in case of fraud, hold the same subject to such encumbrances, liens, estates, or interests as may be notified on the folium of the register constituted by the grant or certificate of title of the land, but absolutely free from all other encumbrances, liens, estates, or interests whatsoever, …
None of the exceptions in s 62(a) – (c) are relevant in this case. Section 63(1) of the Act provides:
(1)No action for possession, or other action for the recovery of any land, shall lie or be sustained against the registered proprietor under the provisions of this Act for the estate or interest in respect of which he is so registered, except in the following cases, that is to say –
…
(c)the case of a person deprived of any land by fraud, as against the person registered as proprietor of that land through fraud, or as against a person deriving otherwise than as a transferee bona fide for value from or through a person so registered through fraud:
It is only the fraud exception, provided for in s 63(1)(c) of the Act, that is relevant for present purposes.
[184] The argument in support of Mr Lightbody’s position is that the contention that the transfer to the trustees is part of a voidable alienation and a nullity, amounts to a claim for the recovery of land, which is prohibited by s 63(1). Whether s 60 of the Property Law Act conflicts with the two indefeasibility provisions is a question of statutory interpretation turning on the meaning of the text of ss 62 and 63(1) read in light of their context and purpose.
[185] The principal purpose of indefeasibility of title is to avoid any need for a person who is dealing with the registered proprietor to have to go behind the register in order to become satisfied of the validity of the registered proprietor’s title. In conjunction with s 183 of the Land Transfer Act s 62, and the prohibition on actions in s 63(1), protect a bona fide transferee or mortgagee from liability for any defect in the title of the registered proprietor.
[186] As indicated, it has been clear, since delivery of the judgment of the Privy Council in Frazer v Walker in 1966, that ss 62 and 63(1) must be read as conferring immediate indefeasibility of title, in this case on the trustees, from the time of registration of the transfer to them. The object of the immediate aspect of indefeasibility is to give protection against competing interests to transferees who have obtained title under a defective but registered instrument. Protection is given to those who have followed the procedures of the Land Transfer Act from the time they obtain registration.
[187] These policies underlie indefeasibility of title but they are not specifically addressed to situations, such as the present case, in which the registered proprietor has acted with dishonest intentions in relation to a creditor in transferring the property. This is amply demonstrated by the current position in relation to s 60 itself under the Insolvency Act 1967. Parliament expressly provided in the 1967 Act for s 60 to have effect, notwithstanding the indefeasibility provisions when invoked by the Official Assignee. Section 58 of that Act allows the Official Assignee to apply to set aside a disposition that is voidable under s 60 of the Property Law Act and s 58(7) states:
Nothing in the Land Transfer Act 1952 shall restrict the operation of this section.
[188] It should not be thought that this indicates that in other situations, where a person prejudiced seeks to avoid an alienation, that it is the Legislature’s policy that s 60 only applies subject to indefeasibility. There would be no logic in such a distinction and the legislative history is to the contrary. There was no provision equivalent to s 58(7) included in the Bankruptcy Act 1908.[215] Nor did the Insolvency Bill, when introduced in 1965, contain any clause in the form of what is now subs (7). When the Bill was reintroduced in the House of Representatives in May 1967, this subclause was, however, included. In the interim, of course, the Privy Council’s decision in Frazer v Walker had been delivered.[216] When the Privy Council decided in favour of immediate indefeasibility of title, rather than deferred indefeasibility, it was apparently seen as desirable to clarify the position in the new insolvency legislation already before the House by stating explicitly that the Land Transfer Act would not restrict the operation of s 60 in a bankruptcy. Similar changes covering all alienations with intent to defraud creditors have been introduced in the recently enacted Property Law Act 2007.
[215]The relevant provision was s 79 of that Act.
[216]On 7 December 1966.
[189] The important point for the present purpose of deciding whether effect can reasonably be given to the provisions of both Acts is that the policy underlying Land Transfer Act indefeasibility has not, at least since the enactment of the Insolvency Act in 1967, been regarded by Parliament as inconsistent with the application of s 60 of the Property Law Act to Land Transfer land.
[190] While s 60 is consistent with the policy of the Land Transfer Act, the operation of s 60 does affect the title of the registered proprietor and is in conflict with the indefeasibility provisions. It is therefore necessary to consider whether its application is permitted as an exception to indefeasibility.
[191] In Assets Co Ltd v Mere Roihi,[217] the Privy Council decided that fraud providing an exception to indefeasibility of title meant “actual fraud”, not “constructive or equitable fraud”. I have already concluded that the threshold of actual fraud is not established in the present case. It would be possible to read the provisions currently being considered in the two Acts in a way that confined fraud under s 60 to those instances which reach the standard of “actual fraud” when the property concerned is Land Transfer land. There would then be no inconsistency between them. But applying such a limited approach would severely curtail the scope of the legislative policy expressed in s 60 to alienations of land.
[217][1905] AC 176 at p 210 (PC).
[192] Section 60 of the Property Law Act enables those prejudiced to avoid alienations of property with “intent to defraud” creditors. Fraud in that sense has been established in this case. Section 60 is a very specific provision in its prescription of when an alienation is voidable and who is susceptible to loss of property.[218] It is confined to a particular type of dishonest conduct that impacts on creditors. In s 60(3) it states when transferees are protected against steps creditors may take. Section 60 applies to conduct of a dishonest kind which, however, does not have to reach the level of dishonesty that amounts to Land Transfer Act fraud. As well, the fraud exception under s 63 of the Land Transfer Act is concerned with fraud which directly deprives a person of an interest in land.This feature puts s 60 outside the scope of the Land Transfer Act fraud exception.
[218]As pointed out by Hodgson CJ in Silvera v Savic (1999) 46 NSWLR 124 at para [62] (SC).
[193] Nevertheless, having regard to the confined nature of the circumstances addressed by s 60 as a provision dealing with fraud on creditors, and Parliament’s expressed intention in s 3(2) of the Property Law Act that s 60 apply to Land Transfer land, I am satisfied that it is reasonably possible to construe s 60 consistently with the indefeasibility provisions as a special additional exception. It is closely akin to the fraud exception under ss 62 and 63 of the Land Transfer Act in dealing with dishonesty in relation to all alienations of property to defeat creditors. Section 60 can consistently stand alongside other exceptions with minimal intrusion on the doctrine of indefeasibility of title. This is an interpretation that is open in the context of two statutes that are to be read together in which continuity of legislative approach is to be expected.
[194] This approach does involve extending the number of exceptions to the indefeasibility principle. However, s 60 only applies in the specific situations mentioned, so that the extension is very limited. The intrusion fits with the clear and relevant legislative policies expressed in s 3 of the Property Law Act and the Insolvency Act. In the end, this interpretation is available, to my mind fits in with the purpose of the Land Transfer Act (as well as the Property Law Act), and is consistent with the context. It is an approach based on the meaning of the relevant statutes and accordingly does not require the additional consideration of personal rights and obligations necessarily involved in an in personam approach. I would read ss 62 and 63 of the Land Transfer Act accordingly, and hold that, under s 60 of the Property Law Act, the transfer by Mr Lightbody of his interest in his property is to be avoided. For these reasons I agree with the orders set out in the reasons of the Chief Justice.
Solicitors:
Thomas & Co, Auckland for Appellant
McVeagh Fleming, Auckland for Respondents
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