Property Transfer Voided in Bankruptcy Case

OUTCOME: Allowed

Bankruptcy - good faith trustee.

CATCHWORDS

Disposition of property -

Bankruptcy Act 1966 - s.121 Family Law Act 1975 - s.86

Vandervell v. I.R.C. £19673 2 A.C. 291.

RE: [NAME]

EX PARTE:

[NAME] v.

CORPORATION [COMPANY]. LTD.

No. 344 of 1

[NAME]. Melbourne 20 February,

Whether parties acted in - Intent to defraud creditors -

FIRST

Void as against

INSURANCE CREDIT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA

No. 344 of 1983

RE: [NAME] [NAME]

EX PARTE: [NAME] (as trustee of the estate

[APPELLANT], [NAME] )

Applicant

AND: [COMPANY].

Respondent

CORAM: [NAME]. PLACE: Melbourne DATE: 20 February, 1987

REASONS FOR JUDGMENT

Application by a [NAME]'s trustee for a declaration that a disposition of land which is occupied by [NAME] and of which the respondent is the registered proprietor of an estate in fee simple is, by virtue of the operation of 5.121 of the

Bankruptcy Act 1966, void as against the trustee.

The land is the site of a residence where [NAME] and her husband and children lived until he separated from her in 1970. Thereafter she has lived in the house with children of the

marriage. Her husband, [NAME], had become the

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registered proprietor of the fee simple estate in the land in 1963. A deed dated 20 September 1982 between [NAME] and her

husband, which included a covenant by each to "join in seeking the registration of this Maintenance Agreement in the appropriate

Court under the provisions of the Family Law Act 1975", commenced

with the following recitals:

"A. The husband and wife were married at Bendigo East in the State of Victoria on the 10th day of February 1962, and no

Application has been made for Dissolution of the Marriage.

B. That there are two children of the Marriage under the age of 18 years, as follows:

[NAME[NAME] born the 6th September 1964, and

[NAME[NAME] born the 9th June 1966.

Cc. The parties ceased to co-habit or live together as husband and wife on the 16th June 1970.

D. The husband is registered as sole

proprietor of [NAME] which is situated at and known as [ADDRESS], North Balwyn in the State of Victoria andis the land more particularly known as Lot 42 on Plan of Subdivision No. 42191 Parish of Boroondara and being the whole of the land more particularly described in Certificate of Title Volume 8485 Folio 637.

E. [NAME] is by mutual agreement valued by the parties in the sum of $150,000.00.

F. [NAME] as stated in clause BD. is subject to a registered Mortgage to the [COMPANY] (Melbourne Branch). The balance outstanding to [COMPANY] as at the 31st August 1982, was $71,186.71.

G. The husband and wife contributed equally

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to the establishment of [NAME] in which the wife and children of the Marriage have been residing since the date of separation.

H. The husband and wife have reached agreement in relation to the settlement - of their respective interests ain the former matrimonial property and is the desire of the husband and wife that their intentions with respect to [NAME] are as outlined in this Agreement."

The covenants of the agreement relating to the land were:

"1. That the husband shall within thirty (30) days of the date of this Agreement transfer to his wife absolutely [NAME] being all that piece of land being Lot 42 on Plan of Subdivision No. 42191 Parish of Boroondara and being the whole of the land more particularly described an Certificate of Title Volume 8485 Folio 637 which is situated at and known as [ADDRESS], North Balwyn in the State of Victoria.

2. That the husband shall forthwith continue and assumes liability for and to meet all instalments due pursuant to the Mortgage over the property to the [COMPANY] No. 1.2572 and shall indemnify and keep indemnified the wife in respect of all such Mortgage repayments due to the [COMPANY].

3. That the husband agrees that the wife is entitled to immediate occupation of [NAME] together with the children of the marriage indefinitely."

There were other covenants with respect to chattels and periodic maintenance payments. The agreement was registered in the Magistrates' Court at Northcote in or about September 1982,

pursuant to the provisions of 5.86 of the Family Law Act 1975.

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But the transfer contemplated in clause 1 of the agreement did not

take place.

Mr. [NAME] had been for a number of years engaged in. the business of manufacturing bodies for large motor vehicles, such as cargo vans, pantechnicons, and vehicles for specialised use, as, for example, vehicles for the transport of large sums of cash. The business was carried on by [COMPANY]., which Mr. [NAME] controlled. On 14 October 1982 the Supreme Court of Victoria ordered that the company be wound up because it was insolvent. As guarantors of some of the company's debts [NAME] and Mr. [NAME] were themselves in financial difficulty during 1982 and in 1983 until each presented a bankruptcy petition against himself which the Registrar accepted on 10 April 1983. Much of the personal property of [COMPANY]. was sold in 1982 by its liquidator to a company which at about the time of the sale took as its name [COMPANY]. and thereafter carried on a business similar to that which [COMPANY]. had carried on until the latter company went into liquidation. Mr. [NAME] was

employed by [RESPONDENT]. in a managerial capacity.

The respondent [RESPONDENT]. has at all material times been controlled by [NAME], who and whose former wife have at all material times been its only shareholders. Mr. [NAME] had for a number of years been employed by [NAME] and in the course of his employment he had maintained a friendly business connection with Mr. [NAME], to whose company and customers Mr. [NAME] had over the years arranged

the granting of loans by his employers. In 1982 Mr. [NAME] was in

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a different field of business activity, but he had heard of the financial difficulties of [NAME] and [COMPANY]. and he heard also, late in that year, that Mr. [NAME] was seeking to sell his house. Mr. [NAME] and Mr. [RESPONDENT] negotiated first the sale by the latter to the respondent of a house of which Mr. [RESPONDENT] was the owner and occupier, and then they negotiated the sale by Mr. [RESPONDENT] to the respondent of the house in which [NAME] lives. In the case of each sale there was an understanding between Mr. [RESPONDENT] and Mr. [RESPONDENT] that the respondent would lease the house, in the one case for occupation by Mr. [NAME] and in the other case for occupation by [NAME]. In effectuation of that understanding a lease at a commercially reasonable rent has been granted by the respondent to [RESPONDENT]. in each case. The latter company is associated with [COMPANY].. Each of Mr. [NAME] and [NAME] has continued at all material times in occupation of the

house each respectively was occupying at the time of sale.

The sale of the house at [ADDRESS] Balwyn

had [NAME]'s approval. In or about October 1982 Mr. [NAME] suggested that the two houses be sold and that he attempt to make arrangements under which [NAME] would be enabled to continue in occupation of the house at [ADDRESS] Balwyn, free of any obligation to pay rent. She agreed to his proposal, which he coupled with a promise to try to arrange that [NAME] be employed by [NAME] ([COMPANY].. She had been both

a director and an employee of [COMPANY]..

The only written evidence of the arrangement between [NAME] and Mr. [NAME] for sale of the [ADDRESS] house was

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the following document, signed by [NAME] and by a witness,

on writing paper of her solicitors:

[redacted]

AUTHORITY

I, [NAME] of [ADDRESS], North Balwyn in the State of Victoria, hereby confirm my instructions to my Solicitors [NAME]., on the 12th October 1982, that in view of cordial discussions between myself and [NAME] [NAME] and arrangements made between myself and [NAME] I directed my Solicitors not to implement the Terms of Agreement pursuant to Section 4&6 dated the 20th September 1982, re: the transfer of the home at [ADDRESS], North Balwyn (more particularly described in Certificate of Title Volume 8485 Folio 637), to me. I hereby confirm those instructions that arrangements had been made between myself and [NAME] and that my said Soliticors are not in default in not having pursued the Transfer of the property into my sole name in accordance with the Agreement hereinbefore mentioned.

DATED: this 9th day of February 1983."

[NAME] and Mr. [NAME] gave evidence. Mr. [NAME] did not. She swore that she did not believe that she had given any thought, at the time when the house was being sold, to the possibility that unless the house were sold under the arrangement she made with Mr. [NAME] the creditors who were pressing her and him for payment would take the house in satisfaction of her indebtedness. She swore that she thought, at the time of the sale of the house, that no great sum would remain of the purchase price after discharge of the mortgage to which she knew the land at [ADDRESS] was subject, and that ownership of the land was of

little value to her in comparison with retention of her job and a

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right to occupy the house free of rent. She swore that she simply "went along" with the proposals Mr. [NAME] made to her, just as she had habitually done his bidding in affairs of business. She swore that she took no legal advice in connection with her agreement that the house be sold. She swore that it was her belief that the proceeds of sale of the house, after payment of the indebtedness secured by mortgage, (proceeds she believed to have been about

$30,000) had been lent to [COMPANY].

If that was her belief, she was mistaken. Mr. [NAME] gave evidence that he had intended, when he first agreed to buy the [ADDRESS] house, to provide about $30,000 of the purchase price, which was $102,000, out of his own funds, which he expected to be shortly augmented by substantial commissions. The balance was to be financed by a loan to be secured by first mortgage. His expectation of the commissions was, as he swore, disappointed and he thereupon told Mr. [NAME] that he "would have to renege on the deal". It was then agreed between Mr. [NAME] and Mr. [RESPONDENT] that [RESPONDENT]. would lend the respondent $31,500 which it would apply in part payment of the price. In the result, only $10,200 of the purchase price came from Mr. [NAME] own funds. The source of the funds advanced by [NAME] ([COMPANY]. was said to be Mr. [NAME]. Certainly Mr. [NAME] lent that company $30,000 at about the time when the loan by the company to

the respondent was made.

Mr. [RESPONDENT] swore that he entered into the purchases of the two houses upon the understanding, which he confirmed before

settlement with the directors of [NAME] ([COMPANY]., that each

house would be let to that company, for occupation by Mr. [NAME] in the one case and by [NAME] in the other. He swore that he regarded the business which [NAME] ([COMPANY]. had acquired as one which would be profitable, and thought that [NAME] ([APPELLANT]. would be a satisfactory tenant. It was at some unspecified later time that [APPELLANT]. was proposed, and accepted by the respondent as tenant. Mr. [APPELLANT] swore that it was represented to him by Mr. [NAME] that it was in consideration of Mr. [NAME] undertaking employment by [NAME] ([COMPANY]. as the general Manager of the business that that company was prepared to take a

lease of each house.

Mr. [NAME] gave in evidence his belief that Mr. [NAME] was moved to sell the two houses because he "was in very dire financial straits and he had no choice; he could not meet his payments". Mr. [NAME] was not aware that [NAME] had any proprietory interest in the [ADDRESS] house. He knew that she lived there and would continue to live there, if the proposal made by Mr. [NAME] were carried out. He knew that [NAME] had

been a director of [COMPANY].. He agreed in evidence that,

if at the time of the sales of the houses he had adverted to the Matter, he would have assumed that [NAME], no less than Mr.

[NAME], had guaranteed the performance of substantial financial obligations of [COMPANY]... Mr. [NAME] swore that he did not

remember whether he had adverted to the matter.

It was the submission of Mr. [COUNSEL]. [COUNSEL] of counsel for the applicant trustee that the transfer of the legal estate in the

land known as [ADDRESS] from Mr. [RESPONDENT] to the

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respondent with the consent of [NAME] effected also a "disposition", within the meaning of that word in 5.121 of the Bankruptcy Act 1966, of the equitable fee simple estate which according to Mr. [NAME] submission had been in [NAME] from the time - and in consequence of the making - of the agreement embodied in the deed dated 20 September 1982. The disposition had been made by [NAME] with intent to defraud her creditors, and it was not a disposition in favour of a person

who acted in good faith, Mr. [NAME] submitted.

I am persuaded, notwithstanding [NAME]'s evidence, that she acceded to the proposal by Mr. [NAME] that her house be sold in the belief that thereby the house would be put beyond the reach of [NAME], whom she knew she could not pay, and that her agreement was given to the proposal with the intent that [NAME] be in that way denied recourse to the house, her equitable interest in which she believed to be worth

some thousands of dollars.

I hold that upon registration of the deed dated 20 September 1982 (if not upon its execution) [NAME] held the equitable fee simple ain the land on which the house stood, and that her agreement in the proposal that the land should be sold, coupled with the sale and transfer by Mr. [RESPONDENT] to the respondent pursuant to that agreement, constituted a "disposition of

property" by her within s.121(1) of the Bankruptcy Act 1966. ([NAME] v. I.R.C. £1967] 2 A.C. 291.) The evidence did not in my opinion support an inference that [NAME] was expressing

an intention, or that Mr. [NAME] was requesting her, to surrender or

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release to him her beneficial interest in the land.

The intention with which I have found that [NAME] acceded to the proposal for sale of the land constituted, in my opinion, an "intent to defraud creditors" within the meaning of that expression in s.121(1). If it were mecessary to find, in order to reach that conclusion, that [NAME] had no expectation, when she agreed to the sale, that the proceeds of sale remaining after discharge of the mortgage would be made available to her creditors, I would make that finding. Her understanding was, she said in evidence, that those proceeds of sale had been lent to [COMPANY]... When asked whether the loan had been made by Mr. [NAME], she replied : "Well, whoever the money belonged to, I suppose, whether it was mine or his, or it was in his name". Her evidence is not of the time before sale, but of the time after sale of the house. But my finding is that she was content that the proceeds of sale should be applied by Mr. [NAME], not in discharge of her debts, but in whatever way should be best calculated to produce the result that she would be able to

continue in occupation of the house, rent free, and able to

continue in employment in the business which Mr. [NAME] managed.

I am persuaded that the consideration agreed for the sale of the house was, although on the low side, a reasonable commercial consideration, and so "valuable consideration" within the meaning of that expression in s.121(1). But I am persuaded that Mr. [NAME] did not act "in good faith", in the sense of that phrase in that sub-section. I accept his evidence that he thought

that Mr. [NAME] was the beneficial owner of both houses, but nothing

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turns on that circumstance, for present purposes. Mr. [NAME] believed Mr. [NAME] to be in acute financial embarrassment at the time when the sales were negotiated and when they were completed. Being informed by Mr. [NAME] that [NAME] ([COMPANY]. would be responsible for a reasonable rent of each house, each of which would continue in the occupation of the person then occupying it, Mr. [NAME] must have suspected that Mr. [NAME] object in selling on the understanding that the purchaser would let each house to [NAME] ([COMPANY]. was to withdraw the two houses from the reach of Mr. [NAME] creditors without losing the benefit of the accommodation they afforded him and his family. If he had repressed those suspicions at first, they would have been confirmed by Mr. [NAME] response to Mr. [NAME] intimation that he found himself unable to proceed because of a shortage of funds. In each case [NAME] ([COMPANY]. offered to lend Mr. [NAME]

funds, so that the sales might proceed. It is to be borne in mind that Mr. [NAME] has had long experience in commerce, including money lending. I am persuaded that Mr. [NAME] believed, when the sale of the [ADDRESS] house was being completed, that the vendor's object in selling was to put the house beyond the reach of the vendor's creditors. Mistaken though Mr. [NAME] was as to the identity of the person whose creditors were to be defeated, his state of mind was in my opinion nat that of "a person who acted in good faith", within the meaning of that expression in

s.121(1), in relation to the transfer of the property.

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There will be a declaration that the disposition of

[NAME]'s property is void will hear the

the orders to be made.

representatives of the parties

as against the applicant trustee.

as to the terms

we me et

tor -

[NAME].

ff

see SO

ae

a - Ca "y -locre oa rus cony of ot a of tic

f [NAME]

f q Lapa.

Dated: 20 Februar a j

ny (4997

the I

of

No. 344 of 1983

Counsel for the Applicant Mr. [COUNSEL]. [COUNSEL]. [COUNSEL]

Solicitors for the Applicant [NAME].

Counsel for the Respondent Mr. [COUNSEL].[COUNSEL]. [COUNSEL]

[NAME] [NAME] of Hearing 4, 5, 28 and 29 August, 1986