so --78 }77 CATCHWORDS Bankruptcy - preference - "in good faith and for valuable consideration" - constructive trust - wife of bankrupt lent money by bankrupt: whether property held on constructive crust - rule in Chalmer v Pardo2 (1963) 1 WLR 677 Bankrurtczy Act, 1966 ss, 120, 121 re: PETER WILLIAM SRUNNER én parte: THE OFFICTAL TRUSTER Il BANKRUPTCY =* -_— -_- = N.g.W. No. 796 of 1978 IN THE FEDERAL COURT OF AUSTRALIA SANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALTAN CAPITAL TERRITORY No. 796 of 1978 eee eee! Re PETER WILLIAM BRUNNER A Bankrupt Ex parte: THE OFFICIAL TRUSTER IN : BANKRUPTCY Applicant PETER WILLIAM BRUNNER First Respondent JENNIFER ENID BRUNNER Second Respondent , ORDE GuyGE MAKING SRDER : Moriing ¢ nate OF ORDER : 2 Suly 1984 THERE MADE : Syainey THE COURT CRDERS THAT: 1. Application iatsmiesed. we Applicant tc pay respondents' costs. ay IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE No. 796 of 1978 OF NEW SOUTH WALES AND THE we ee AUSTRALIAN CAPITAL TERRITORY Re: PETER WILLIAM BRUNNER A Bankrupt Ex parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY Applicant PETEP WILLIAM BRUNNER First Respondent JENNZTER ENTID BRUNNER Second Resrondent NORLING J. 3 July 1994 This 15 an apelicatic:. py the Citicial Trustsa who 1s the trustee of the bankrupt estates of Peter William Erunner ("the banxrupt"}. The respondents to the application are the bankrupt and his wife, Jennifer Enia Erunner. The trustees seeks a deciaration that Mrs Brunner nolds lane at Alstonviils ae Vibe dS upon which is erected the respcon [ar ents' matrimonial home upon trust for herseir and the applicant in squal undivided shares as cenants in commor subject to 2 mertgage by which the land encumbered. The ctrusts2 4i1so0 3¢e i) Ls iD] a declaration that 3 ya Purported loan transaction whereby the bankrupt advanced $10,000 tc his wife pursuant to a deed of loan dated 21 March 1978 is void as against him. Orders ar? sought that Mrs Brunner execute a transfer cf the land to herself and the trustee as tenants in common subject to the said mortgage and that she pay to the Trustee the said sum cf $10,000. The application in respect of the purported loan is Dbased upon 3s. 120(1): of the Bankrustsy Act 1966, as amended, tom ct + ® [c) Act"), which provides as follows: e- "229. (1) A settiament of eprcperty, whether made oefore or after cne commencement of this Act, not being _ (a) a settlement made before and in consideration of marriage, or made in favcur of a purchaser or encumbrancer zn good faith and for valuable ~~ consideration; ocr (DB) a ssttlement made on or for the srouse crs chilarean of the settior of prorerty that has accrusd to the setctior aftsr marriage ain right cf che sxiaf+ cf yne sattlcr, is, if thea settlor becomes a nanscrurt and the settlement care into operaticn after, or within 2 years before, the commencement of the banzruntcy, void as against the trustee in the bankruptcy." The trusts2 claims tnat wna ican was aA settlement <r property that was rade within two years befcre the commencement of Mr Brunney's bankrustcy and that Mrs Brunner was net a eULTABSel in goca faith ana Tor valuasle consiaeraticn. 3. As originally framed, the application was also based upon a further allegaticn that the loan transaction was a disposition of property with intent to defraud the bankrupt''s creditors - vide s.121(1) of the Act. However in the course of argument counsel for the trustee conceded that no case had been made out under s. 121(1)}. In my opinion this concession was properly made. Both the bankrupt and his wife were examined at iength as to the bankrupt 's atfairs and, in particular, as zo the circumstances in:which the loan was made and in which the matrimonial home became registered in the wife's name. It will be necessary to refer to these circumstances in some detail later in these reasons when dezling with the trustee's claim in respect of the matrimonial home. However, it is only fair to tne respondents that I should opserve that, having carefully considered the whole of the evidence, I do not think there is any evidence of fraud on their fart. Tne trustees claimed, in the alternatives, that he was entitled to the seller ssugnt pecaucs ait would be inequitanle, un the circumstances of the case, Tor Mrs Brunner to retain scle ownership of the land. Support for tnis basis of the claim was sought to be found in Chalmers v Pardoe (1963) 1 WLR 677 to which I shall later make reference. Tne facts surrounding the acquisition of the land at Alstonville and the maxing of the loan can be shortly stated. Cn 22 Cetober 1978 a sequestration oraer was made against the 4. estate of the bankrupt. In 1974, prior to their marriage, the bankrugpt and his wife purchased vacant land in Alistonville for the purpose of building their future matrimonial home. In due course a house ("the first house") was built upon this land and the respondents occupied it after their marriage. In June 1977 one of the bankrupt's creditors, the Commercial Banking Company of Sydney Limited, commenced sroceedings aqainst the bankrupt claiming a sum in excess of 326,000 in respect of an overdrawn bank account operated by him with tne bank. The bank obtained judgment in respect of this debt in May 12378. It was apparent to the bankrupt in November 1977 that he would have to raise money in order to pay the bank its debt. Accordingly the bankrupt and his wife sold the first house in order to raise money so that the bankrupt could partially repay the bank's debt from che proceeds of his equity in the house. The approximate met proceeds from the sale of the first house amsunted co about 520,000. which was civiced Upon settlement of she sale che bankrupt instructed his solicitor to offer the bank $10,000 in full settlement of the aest due te it, but the bank declined the offer. Arter che crfer had been declined th2 panxrupt loaned the sum of 519,000 to his wife. Ths loan was made on 21 March 1978. The purpose of the lcan was to enable his wife to complete the constructicn we ( ' HL m @ oe8ins tonstructed uron land in Alston Avenue, Alstonville ("the second house"). The land in Alston Avenue had been purchased by the wife for the sum of $6,000 in September 1977 out of her own moneys. At all relevant times Mrs Brunner was employed and in receipt of a separate income. At the time the loan was made a deed of loan was executed. The deed provided for rerayment of the principal sum upon demand. The deed also provided that "unless demand is made upon the Borrower interest will not be paid upon the Principal un um rut in the event that a demand is made intersst will run at ct he rate of 5% yearly until repayment in full by the Borrower." he deed also provided tnat, if required by the husband, the wi Hy @would execute a memorandum sf mortgage over the land in Alston Avenue. At the time the loan was made construction cf the zecond house on tne land in Alston avenue was half completed Mrs Brunner gaid out of her own moneys all the costs cz Dankrupt, who was a aualified carrenter, assisted in the mn buiiding of the house, as did his wife. He received no bayment for his work. There is no evidence as to the value of the gratuitous work carried cut Sy the bankrupt. Hewever there is avidance that daring at least part of the time the house was under construction he worked full time on the rob. He also draw up the plans for the house. His wite employed subcontractors, Buch as rcot tilers, sclumbers ana the lise anc faid cheic 6. Before his estate was sequestrated the bankrupt discussed with his wife the best way in which to arrange their affairs so ag to avoid any difficulties which might arise out of his possible future bankruptcy. It 18 clear that Mrs Brunner knew that her husband was in financial difficulties and that she did not wish her husband to have any interest in the house in case he snould become bankrupt. Mrs Brunner-used her own garnings to meet mortgage repayments. She was not required by her husband to make interest payments on the loan of $10,000. The bankrupt paid the day-to-day housexeesping expenses in the running of the house- hold, Between April and December 1981 the second house was extenced by the addition of a second storey. The ccst of the extensions was mst by the wile who rorrcwed [urther moneys fron = =< - ~ + ~ - ™ + no fan - . 7 & bank to meet the expense. whe weet oF construction was There is no dount tnat th2 loan was mace after tne yespondents had received legal advice. The bad @was also no doubt - = - . i 7 = chat if the bankrust hac Icaned the $10,000 to some A) berson other than his wife, he could nave obtained an interest rate in excess 7. It was put to the bankrupt in cross-examination that his true intention was not to maké a loan to his wife, but to become a joint owner cf the house which she was building. His evidence included the following: What I am suggesting to you is, that the loan which is set out in that document dated 21 March 1978, was not atrue loan cather 1t- the intention was that that money should be put into the construction of the house in such a way as to avoid your creditors realising a future asset in payment of your debts? What do you say to that?---At that stage the house was half finished and she tried to raise money to finish ict off and could not and then the other alternative was for me to lend her the money. tenticn was at all times that it tively be an asset of yours and your e's, the house in which you both lived as a mily?---It was an asset whom? (sic) have suggested to you that the document, evidencing the loan you say you have made does not set out thea true position, and I suggest further that the true sosition was that tne intention of you and your wife was cc pur that money imto tne construction cr the house to ae used as tne tamily home anc to be efrectively a joint assac of ear. oF tu? would you aaree with that?---It wat mot 2 TolLnt Asset. Lt Was her house." act 4, n ¥ mY - - =, ale o- % . r . the panhkrupt in reso the wor't cone con the houss because ey m her huspanc, ra] wm w ft) a aid that she used tha ioan from na oO rs husband to help pay for the cost of ccnstruction. one 2 te uv oO said that it was her uncerstanding that she couic be callec u os] Oo Say interest cn the loan upon cemand. 8. I see no reason to doubt the evidence given by the respondents. Whilst some aspects of the loan transaction might appear to be unusual, I think that taken in the setting in which it occurred, the advance of the $10,CCO should be seen as a genuine loan. I see nothing suspicious in the wife desiring to ensure that the second house was her sole property. Her husband's financial difficulties had already led to the sale cf their first house, and it is understandable that she intended to make sure that the second house belonged to her alone. When the bank declined to accept '<ne bankrupt's offer cf 310,000 din full sattiement of its claim, he necess w rs A bo b p rey te consider what to do with the money. It is true that he could have invested ait to better advantage than by lending it to his wite cn tne terms set out in the dsed cf loan. However, the making of the loan did not deprive the bankrupt's creditors of any part of nis assets. There 1s ne suggestion tnat the $1°,0CC the banxrup= a half interest in tne second house. = de not chink that the evidence supports a finding that an arrangement Was tome to setween the respondents chat the banarut t would have an interest in tne second house. It would have been improvisent ror the wife to have entered into any such arrangement. I think this is a genuine case in which the wife, cut of her com moneys. purcnases2 land ane e "5 ectec cherecn a new matrimonial 9. home. She was assisted in achieving this object by the advance made to her by her husband. I think the advance was a loan, and was not part of an arrangement whereby he was given any equity in the house itself. I turn now to consider whether the applicant has made out a claim to the relief sought. In my opinicn, the claim based upon $.120(1) of the Act cannot be sustained. Counsel for che respondents argued that the loan transaction did not amount 2D a settlement of property within the meaning of s. 120(1). Sine I did not hear full argument on this question it is inappropriate that I should express a final opinion cn it. However, having regard to the provisions of s.120(8) which provides that a "gettlement of property" includes any disposition of property, and to the decision of the High Court zn McGain v Federal Commisstonsr of Taxation (1966) 116 CLR 172, cd Loa er 1s mucn to be said fer the view that the loan transaction 1734S a settlement of property. But whether tnis 15 so or not am firmly of the cpiniton tnat tne wire acted in good faitn anc gave valuable consideration for the loan. It was ne part of Mrs Brunner's intentions to defeat the interests of her husband's creditors. Indeed, as I have pointed out. the tyeditors were not defea The $10,000 was not lest to the fa u ct cceditors. trustee's r32al complainc in respect of the loan is that the money might have been invested to better advantaze. But that is beside the soint for present purposes Fusthes, tne eroevisicn of an interest rate cl 5% and an - 10. obligation on the borrower to repay the money on demand made it a loan for valuable consideration. Consideration may amount to valuable consideration although i1t falls short oer full consideration. In Re Abbott (1982) 3 All E.R. 181 Sir Robert Megarr V-C. when considering the meaning of "valuable ccnsideraticn" in s.42(1) of the Bankruptcy Act 1914 (Imp) (wnich ig un almost identical terms with s.120 of the Australian Act) said at p. 187: "The question, then, is what that meaning 15. Plainly 'good consideration', in the sense of the natural love and affection that a man has for nis wife and children, 1s not enough. Nor is a merely nominal consiceration, sven though it would surfice to support a simple contract at conmon law. In the context of the avoidance of settlements by a trustee in bankruptcy, a 'purchaser . . . for valuable consideration' must be someone who can not only be described as being a 'purchaser' but can also be said to have given consideration for his purchase which has a real and substantial value, and not one which is mesaiy moninal or trivial or colourabis, n U "It 215 ain this gense that I understand the us2 of the whrase about providing & quid pro quo tnat 15 tc De Found ir tne Butnorities. In That ehras2, I donot thank that the word 'quid' 16 ccnfined to some matar1ali asset which can cr will replace in the hands of the debtor the asset of which he has disposed tc the surcnaser." The same arproach tc the meaning of the term "valuable consideration" as used in ss. 120 and i121 cf tne Act has been saken in two recent decisicns of judges cf this Court - a o wo Ks Marchicri; Ex parte The Orfitial Receiver (1983) 52 A.L.R. 33 w Indvew (1983) 52 A.L.R. 339. . il. Accepting, as I do, that the $10,000 was advanced dy che bankrupt tc his wife as a genuine loan, I am of the opinicn that the promise to repay the money with interest at 5% and uncn demand constituted valuable consideration 'for the loan interest rate of 5% is real and not nominal or trivial. The fact that she was not called upon to pay the interest prior tc her husband's estate being sequestrated did not negate her promise to pay it if it had been demanded of her. Moreover the bankrupt ostained an additional indirect advantage from making tne loan to his wife. Sy enabling her to complete the construction cf the second house the Eanarcunt - 2 atc - . - ecbtained the significant adcvantage as well as his wife. Taxing unto account all che circumstances surrounding che making cf the loar. anc cone abligaticns which the wite assumed under the deed of Loan = am of the orinion that ene srovidel valuable ccnsisarsticn for it. Accctcaingly, che cian = - -s = - Sas ° for relief under 5.12061 Faris. Toturn mow to conmsicer tne clair that the trustee is = = "sn = & > - 2 as > . 7 cool entitled cc vsliaf because 1¢ Woule oa aineguitable, in whe ai -- . a ~ oo ded rd - = - circumstances cf the case, for the wife tc retain sole ownership 7 Ta "~ OM aoe 7 a 4 3 4 ™ T, = = q 'wa s2 the land. Tn Chalrers v Dardoe .1932) L KLF 577 at 681 th: warases) anny table ecincinl? ucen pend aw "he "rose aa yolias s<-4- Tenefvan aqulcacle efincrlifl? urcn wnhicn The Trustes Vewles wa aes wn —- . "we an he awn2lTE TAM 53 Mo acuct ns onan " sean | F {nat where an owner ol expressly encouraged another to expend money upon part of his land upon the face of an assurance or promise that that part of the land will be made over to the person s0 expending his mcney, a court of equity will prima facie require the owner by appropriate conveyance to fulrti Als oDbiigation; and wnen, for example for reasons of title, mo such conveyante can effectively he made, a court of equity may declare that the person who has expended the money 1s entitled to an equitable charge or lien for the amount so expended ... It was said in Plimmer v Wellington Corvorstion (1884) 9 Arp. Cas. 699, 714 P.C. that che court must look at the circumstances in each case to decide in what way che equity can be satisfied." As McLelland J ob un @ 'S ¢ o A yta) Fs rsta v Morris (1982) 1 NSWLOR 61 at 64 the principle is a flexible one and has been applied in a great variety cf situations. Buz on no view of he facts of the present case would it pe equitaple to deciare Mes Brunner to hold the house in Alston Avenue upon trust for herself ana the applicant in equal undivided shares. The heuse 25 mow worth in excess oF $s§100,00C, There was never any aryvangement between the Tankrurnt ant his wits thac he should The facts in this case are quite different frem those co icicerau orp Molelland ¢ in 'Mesris v Morris 'swsurra). In tract 13. case the plaintiff had paid a substantial sum of money towards the cost of an extension to a home jointly owned by his son and daughter-in-law to provide accommodation for himself. Subsequently the plaintiff left the home consequent upon th breakdown of his son's marriage and the deterioration of hi relationship with his daughter-in-law. It was held that, on the facts of the case, it would be unconscionable and inequitable for the son and daughter-in-law to retain the benefit of the plaintiff's expenditure on their property free from any obligation of recoupment. In the present case no circumstances have ariser which would make 1t inequitable for Mys Brunner cc retain the benefit of har husband''s labour in building the nouse® which she owns. He continues to receive a r2al benefit from her in the form of free accommodation an there 1s nothing in tne evidence to indicate that this renefit will not continue indefinitely. Moreover, although the work he . a= - . or c ~ =i fan or ~ - 7 -- the value cf such work was not sianirticant having recara ic the present values cf tne neuse. Accoraingly I tnaink tae alternative Since Mrs Brunner has never disrutec her liability to ray to the trustee tne $10,000 borrowed Irom her ausband wnen called urcn to ac sc, it is unnecessary <i Make any aeclaraticn 14. The application must therefore be dismissed with costs. Counsel for the respondents sought an order for costs on a solicitor and client basis but I do not think that the making of such an order would be justified. However, having regard to the charge of fraud levelled against the respondents and to the nature of che issues in the case, it may well be that, in the exercise of his discretion, the taxing officer will allow the respondents the costs of senior and junior counsel.