ar 73. CATCHWORDS Bankruptcy - Action by trustee to set aside settlement - Whether settlement made in good faith. Bankruptcy Act 1966, s.120(1). Re HENRY WILLEM LOUWEN (a bankrupt) ex parte JOHN EDWARD WALKER (Trustee of the Bankrupt Estate of Henry Willem Louwen) Franki J. Sydney 28 April 1983 — IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION OF NEW SOUTH WALES AND THE ) ) BANKRUPTCY DISTRICT OF THE STATE ) No. NSW 113 of 1981 ) ) AUSTRALIAN CAPITAL TERRITORY Re HENRY WILLEM LOUWEN (a bankrupt) ex parte JOHN EDWARD WALKER (Trustee of the Bankrupt Estate of Henry Willem Louwen) ORDER JUDGE MAKING ORDERS: Franki J. DATE OF ORDERS: 28 April 1983 WHERE MADE: Sydney THE COURT ORDERS THAT: 1. Declare that, pursuant to s.120 of the Bankruptcy Act 1966, the disposition by the bankrupt to Johanna Levina Louwen of the land described in Certificate of Title Volume 9361 Folio 223 together with the improvements erected thereon known as and situated at 13 Pertaka Place, Cromer, is void against the applicant, John Edward Walker, as the trustee in bankruptcy of the bankrupt estate of Henry Willem Louwen. The respondent, Johanna Levina Louwen, execute any transfers and perform all acts necessary for the purpose of transferring the subject land and the improvements erected thereon to the applicant. The respondent is to pay the applicant's taxed costs, including any reserved costs, of this application. Bither party has liberty to apply in respect of any difficulty which may arise in relation to the form of this order or its implementation. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE STATE ) No. NSW 113 of 1981 ) ) OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY Re HENRY WILLEM LOUWEN (a bankrupt) ex parte JOHN EDWARD WALKER (Trustee of the Bankrupt Estate of Henry Willem Louwen) 28 April 1983 REASONS FOR JUDGMENT FRANKI J. This is an application by the trustee of the bankrupt estate of Henry Willem Louwen for a declaration that the settlement of a house and land at 13 Pertaka Place, Cromer is void as against the trustee in bankruptcy. The case was argued both under s.120 and s.121 of the Bankruptcy Act 1966 ("the Act") but I do not think it is necessary to deal with s.121 because in the circumstances of this case the trustee could not succeed under s.121 if he failed under s.120. So far as is relevant, s.120(1) of the Act provides: "A settlement of property ... not being -— (a) a settlement made ... in favour of a purchaser or encumbrancer in good faith and for valuable consideration; ... is ..-. void as against the trustee in bankruptcy." 2. Section 120(7) deals with the position of a purchaser in good faith and for valuable consideration and s.120(8) provides that "'settlement of property' includes any disposition of property". Mrs Johanna Levina Louwen was the wife of the bankrupt. Evidence for the trustee consisted of affidavits sworn by his solicitor, documents which were tendered, a transcript of evidence given by Mrs Louwen during an examination under s.81 of the Act by the Deputy Registrar in Bankruptcy and, if admissible, of the bankrupt in the same proceedings and also, if admissible, a transcript of evidence given by the bankrupt when he was examined before the Deputy Registrar in Bankruptcy under s.69 of the Act. Evidence for Mrs Louwen consisted of an affidavit sworn by her, an affidavit sworn by a Mr K.G. Howes, an accountant, an affidavit sworn by a Mr T.M. Dundas, a valuer, and an affidavit by Mr Hendrik Karel Louwen, the father of the bankrupt. The trustee served a subpoena to produce certain documents upon Mr Abigail, a solicitor who had acted for the bankrupt on the transfer of the subject property, and a subpoena ad test upon the bankrupt. Both Mr Abigail and the bankrupt attended to answer the subpoenas. Mr Abigail produced certain documents but he was not called by either party. The application and affidavits in support had not been served upon the bankrupt and he was not 3. called by either of the parties. I was concerned that the bankrupt had not been served but the application and affidavits which had been filed were made available to him and he was given every opportunity to give evidence and to address the court if he wished. He asked to give evidence and I allowed this request but he did not remain during addresses and did not address the court. The bankrupt had come to Australia from Holland and acquired the land upon which the subject house was built and had himself been responsible for the construction of the house. It appears that he was assisted by his father and that $8,000 was lent to him by his father for the purchase of materials and the payment of contract labour in relation to the erection of the house and, in consideration of this, the bankrupt agreed in a document drawn up in 1967 "to grant ... them (the bankrupt's parents) ... right of possession and occupation ..." of part of the ground floor for a period related to the lifetime of the bankrupt's parents and also that the sum of $8,000 should be secured by mortgage on the premises. It appears that during 1973 further money was provided to the bankrupt and the amount of $8,000 was increased to $15,000. It appears that at least for some time until about the end of 1979 the bankrupt had been carrying on business building houses and buying and selling land. His business was carried on under the name of "Any Roof Conversions". Mrs Louwen appears to have carried on a business under the name "Louwen Suspended 4. Ceilings". This business appears to have had as its primary purpose the installation and renovation of ceilings and plaster work in connection with structural work and renovations carried out by Any Roof Conversions. The business also dealt in second-hand motor vehicles. In her evidence before the Deputy Registrar Mrs Louwen agreed that she did the books of Any Roof Conversions until about October or November 1979 although the evidence which she gave before me was that the bookkeeping for Any Roof Conversions was done by a Mrs Gamsa. About November 1979 the bankrupt apparently ceased to carry on the business of Any Roof Conversions and a company Jabed Pty. Limited, of which Mrs Louwen was one of two directors and a shareholder, was acquired. This company employed the bankrupt, at a salary of about $250 per week, until about March 1982. The company is still carrying on business. In or about October 1977 an employee of the bankrupt, Mr Miltenburg, was severely injured at work and he commenced an action for damages in January 1978 and served a statement of claim upon the bankrupt in February 1978. The bankrupt was insured against workers' compensation claims and for limited liability in respect of common law claims. On 9 November 1979 a Supreme Court Judge delivered judgment for the employee in the amount of $521,030. A bankruptcy notice was served on the bankrupt in May 1980 and a sequestration order made in February 1981. 5. A contract for the sale of the relevant property at Cromer bears the date 28 July 1978 and it contains, inter alia, the following provisions:- (a) Upon the signing of the contract, a deposit of $5,500 to be paid to the vendor's agent. (b) Vacant possession to be given on completion. (c) The balance of the purchase price to be paid "in cash on completion to Messrs Lewis C. Abigail and Son or as they may in writing direct". (d) The vendor's solicitor was named as Lewis C. Abigail and Son and the purchaser was noted as "acting for self". There was evidence from Mrs Louwen that at this time she had separated from her husband and was living at a house which she owned at St. Hubert's Island. A letter dated 9 August 1978 was in evidence from Lewis C. Abigail and Son to "Mr and Mrs H. Louwen" at an address in St. Hubert's Island, which contained, so far as is relevant, the following statements: (a) That the Valuer-General had valued the subject property at $55,000. — 6. (b) That two copies of the contract for sale were enclosed for execution by the bankrupt and Mrs Louwen. (c) That a statutory declaration for Mr Louwen to swear was enclosed. This was said to be required by the Stamp Duties Office before they would stamp the contract and that the bankrupt was to note that "... you are in effect confirming the purchase price of $55,000.00 and that it is actually being paid and will be received as is the case". (d) That a Memorandum of Transfer for execution was also enclosed. The signed transfer bears the date 8 November 1978 and it was registered on 14 February 1979. It was common ground that neither the deposit of $5,500 nor the balance of $49,500 had ever been paid in cash. There was nothing in evidence to show that any document was in existence prior to a document bearing a date which I am satisfied was dated and apparently executed 29 October 1979. There was nothing in evidence to suggest that there was any record of payment of, or promise to pay, any money in respect of the purchase price of the subject property or of any release of any debt which might have 7. been due by the bankrupt to his wife. A considerable amount of evidence was given on behalf of Mrs Louwen seeking to show that in July 1978 the bankrupt owed her considerable monies. The alleged debts were said to have been debts owing by Any Roof Conversions to Louwen Suspended Ceilings. I am by no means satisfied that these debts, at least of the amount claimed, were owing by the bankrupt to Mrs Louwen. Some effort was made to support the genuineness of these debts by Mr Howes' affidavit but I do not consider that it has been established that a debt of $40,000 was due from the bankrupt to Mrs Louwen at that time. In a document of 29 October 1979, one of a series of documents all bearing that date, reference was made to the agreements between the bankrupt and his parents in relation to the $15,000 and the contract for sale of the subject premises to Mrs Louwen. The deed provided that, in consideration of the bankrupt selling the premises to Mrs Louwen for $55,000, she accepted the liabilities in the agreements with the bankrupt's parents. It was common ground that the question of the rights, if any, of the bankrupt's parents in the subject property was not one for my consideration. One of the other deeds entered into at the same time 8. between the bankrupt and his wife provided for maintenance for each child. A third recited that "The Husband has been indebted to the Wife for some considerable time in respect of the amount of forty thousand dollars ($40,000.00) and the Wife has made from time to time numerous *demands upon the Husband requiring the payment of this sum" and that "on the 28th July 1978 the Wife agreed to accept the transfer of the said home subject to the Husband's parents' right to reside in part thereof for their lifetime in full and final satisfaction of her claim for monies due to her by the Husband". This deed then provided, inter alia, that "The Wife has received and accepts the transfer of the said home subject to the Husband's parents' right to reside in part thereof and accepts the same in full and final satisfaction of her claims for monies due to her by the Husband as aforesaid for any maintenance for herself or any alteration of property interest for her benefit whether under the Family Law Act of 1975 or any other Act of the like nature repealing and amending the same". The critical issues in this case are whether the sale was both (a) in good faith and (b) for valuable consideration. I do not need to consider whether the transaction was for valuable consideration since I am clearly of the opinion that it was not one in good faith. In Re Hyams; Official Receiver v. Hyams (1970) 19 F.L.R. 232 Gibbs J., although only obiter, said in relation to s.94 of the Bankruptcy Act of 1924 at p.256: 9. "In Mackintosh v. Pogose [1895] 1 Ch. 505 at p.-510 it was said that the words 'in good faith' in the corresponding section in an English Bankruptcy Act must be taken to mean 'without notice that any fraud or fraudulent preference is intended', and in the context of the Australian statute this exposition may be modified to read 'without notice that any fraud or preference contrary to the statute is intended'." The phrase "in good faith" there under consideration appears to require the same construction as in s.120(1)(a) of the Act. Mackintosh v. Pogose, supra, is also an authority for the proposition that it is the good faith of Mrs Louwen which is material and it is not necessary that both she and the bankrupt should have acted in good faith. I am of the opinion that Mrs Louwen, in accepting the transfer was not a purchaser in good faith within s.120(1), if, when the transfer was executed, she knew that her husband was unable to pay his debts and that by taking the property she was not contributing in any way to the assets available to his creditors but was, if the transaction could not be attacked, removing whatever was the value of the property then available to the husband's creditors, from those creditors. See generally in Re Windle (1975) 1 W.L.R. 1628 at pp.1632-1633. I have approached the question which I have to determine upon the basis that the onus of proof is upon the trustee, Re Trautwein; Richardson v. Trautwein (14 A.B.C. 61 and (1946) A.L.R. 129). 10. I find it odd that neither party called Mr Abigail or the bankrupt. When the bankrupt did give evidence he was asked about his financial position in July 1978 and he said that he had other creditors at that time. This was before judgment had been given in Mr Miltenburg''s action. I set out the following questions and answers given by the bankrupt before me concerning his financial position in July 1978. "Apart from your wife, there were other ereditors?-~-I had creditors, a lot, as you probably know out of my books. Your business was in some financial difficulty at that time?---You want to call it some? Considerable?---Thank you. And because of that difficulty you came to this arrangement with your wife about meeting her debt by transferring the house to her?---In that period I was, you know, highly overdrawn with the bank. I had enormous debts to suppliers and a very large debt to my wife. Now, at that time, I had been doing a lot of hustling around to see who I could avoid paying and, unfortunately, my wife was the worst one in it because I sort of talked her into it ~- I will pay you as soon as I sell a block of land. Eventually, her debt was paid by the transfer of the Cromer house?---If then I could not come up with the brass, I could not sell the land because the economy was down the drain. You could not sell land. I could not sell the house. I had tried that years before that, not just for a couple of weeks. Eventually, I had to pass that on the way we did but that was arranged long before it was exchanged, long before. We have talked for years on that. You do not say that the exchange of contracts took place earlier than the date on the 11. contract?---No, but it took a long while to prepare those things. I was quite clever at the time to put things off which I now - it is all gone, it is all past." The critical question is whether, at the time when the contract for sale was signed, which would appear to be after the letter of 9 August 1978, Mrs Louwen knew that her husband was unable to pay debts and that the resuit of the transaction would be to remove her husband's interest in the property from the reach of his creditors. I formed an unfavourable opinion of Mrs Louwen as a witness and on this issue I do not accept her evidence. She gave evidence which I considered unsatisfactory on a number of matters including the circumstances and the place where the contract was signed, who was present, who signed the contract as witnesses to the signatures of the parties, the efforts which her husband had made to sell the subject property before it was transferred to her, her knowledge of her husband's financial affairs and in particular of his financial position, the debts which he owed as the proprietor of Any Roof Conversions, and her knowledge of the limitation in the insurance policy to the insurance company's liability in respect of common law liability. I have in mind that Mrs Louwen said that she was separated from her husband in 1976 but, apart from any contact with her husband's books of account, she was in a close business relationship with -him and saw him regularly. Jabed Pty. Limited 12. was a company of which she was a director and which was acquired after her husband's bankruptcy and it employed him after November 1979. I am satisfied that the trustee should succeed in this matter and that it is established that Mrs Louwen did not acquire the subject property in good faith and consequently the disposition of the subject property to Mrs Louwen is void as against the trustee in the bankruptcy. The orders I make are: (1) I declare, pursuant to s.120 of the Bankruptcy Act 1966, that the disposition by the bankrupt to Johanna Levina Louwen of the land described in Certificate of Title Volume 9361 Folio 223 together with the improvements erected thereon known as and situated at 13 Pertaka Place, Cromer, is void against the applicant, John Edward Walker, as the trustee in bankruptcy of the bankrupt estate of Henry Willem Louwen. (2) I order that the respondent, Johanna Levina Louwen, execute any transfers and perform all acts necessary for the purpose of transferring the subject land and the improvements erected thereon to the applicant. (3) I order the respondent to pay the applicant's taxed costs, including any reserved costs, of this application. 13. (4) I grant liberty to either party to apply in respect of any difficulty which may arise in relation to the form of this order or its implementation. cA T certify thet thre elt a Mtveltve. (12) precedinm+. 49% 87°. Loe vr of the Reasons fer Diwacment iLereriu cf his Honour fAanrke Dated: o ¥ Gyr SP E3 Mr. Justice