al LS Bankruptcy ~- Application by trustee to have a_ transfer of property by the bankrupt to purchasers declared void pursuant to ss.120 and 121 of the Act - whether the disposition of property was made in good faith - whether the disposition of property was made to purchasers for valuable consideration. Bankruptcy Act 1966 sx.J]20 and 121. RE FRILFSN MARY JOHNSTONE hx parne ROBERT MOLESWORTH HODILL COLE and EILEEN MARY JOHNSTONE, JOMN LAURENCE SULLIVAN aud AY MARY JOR: LOU DAWN SULLIVAN No. 348 of 1982 17 August 1984 _ Smithers J. Melbourne. IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE NO. 348 OF 1982 OF VICTORIA GENERAL DIVISION Re: EILEEN MARY JOHNSTONE (A Bankrupt) Ex parte: ROBERT MOLESWORTH HOBLLL COLE, the Trustee of the Estate of Eileen Mary Johnstone, a bankrupt (Applicant) -and- JOHNSTONE, JOHN LAURENCE SULLIVAN and DAWN SULLIVAN (Respondents } dudge Making Order: Smithers J. Date of Order: 17 August 1984 Where Made: Melbourne. ORDER THE COURT ORDERS THAT: The transfer dated 17 July 1980 by Mrs. Johnstone to the Sullivans of all that piece of land being part of Crown Allotment 4 Section A, Parish of Wangoom, County of Villiers and being the whole of the land more ort ard N particularly described in Certificate of Title Volune 8598 Folio 755 is and was a disposition of property made within two years before the commencement of bankruptcy of Mrs. Johnstone not to a purchaser valuable consideration pursuant to s.120 of the for the Bankruptcy Act 1966 and is void as against the trustee. The Sullivans pay the Trustee's costs of and incidental to this application. All parties have liberty to apply. i pane mee ae 6 5 - -- - 3 eee BANKRUPTCY DISTRICT OF THR STATE HO. 348 OF 1982 OF VICTOPTA weer wnw CEUEPAL DIVISTON Re: EILEBN NARY JOHNGTGUE (A Bankrupt) Ex parte: ROBERT HOLUESHGORTH HOBILL COME, the Trustee of the Estate ef Eileen Mary Johnstone, a bankrupt (Applicant) -and- JOHNSTOUF,, JOHN LAUREIICE SULLIVAN and DAWN SULLIVAN (Respondcnts) Coram: Smithers J. 17 August 1984 REASONS FOR JUDGMENT This is an application by Robert Molesworth Hob11l Cole tthe trustee) for orders pursuant to 35.120 and 121 of the Bankruptcy Act 1966 (the Act) arising out of a transaction between Eileen Mary Johnstone (Mrs. Johnstone) and John Laurence Sullivan and Dawn Sullivan (the Cullivans) in 1980 resulting in property known as 214 Moore Street, Narrnamboo] geen ee oe : eo , wants Seer 'the property) being transferred to the Sullivans as trustces of the N.B. Ryan settlement. The orders soughe by the trustee are:- i. A declaration that the transfer dated the 17th day of July 1980 by Mis. Johnstone to the Sullivans of all that piece of land being part of Crown Allotment 4 Section A Parish of HWangoom, County of Villiers and being the whole of the land wore porticularly described in Certificate of Title Volume 8598 Folio 755 is and was a disposition of property made within 2 years before the commencement of the bankruptcy of Mrs. Johnitone and made without good fazrth und valuable consideration and that pursuant to Esction 120 «of the Bankruptcy Act 1966 the said transfer is void as against the trusteca, ae Alternatively, an order that pursuant to Section 120 of the Bankruptcy Act 1966 the said transfer be set aside. 3. Further or alternatively, a declaration that the said transfcr 1s and was a disposition of property madc with antent to defraud creditors pursuant to Section 121 of the Bankruptcy Act 1966 and 1s void as against the trustee. 4. Further or alternatively, an arder that pursuant to Section 121 of the Bankruptcy Act 1966 the said transfer be sect aside. 5. An order that the Sullivans pay the trustce's costs of and incidental to this application. 6. Such further or other order or relicf as this Honourable Court deems fit." The parts of s.120 of the Act relied upon by the trustee are:- "1l20(1) CSettlement not a marriage settlement] A eettlement of property, whellic: made before or after the commancement of this Act, not being ~ (ar oa settlement mide before and in consideration wi marriage, or mide in favour cf a purchaser or encumbrancer in dood faith and for valuable consideration; or uw tb) a settlement made on or for the Gpouse or children of the settlor of property that has accrued to the settlor after marriage in cight of the spouse of the setticr, is, if the settlor becomes a bankrupt and the settlement came into opération after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy. 120(8) Cinterpretation of "settlement property' 4 In this section, "settlement of property" includes any disposition of property. Transitional provisions Act No. 12 of 1980 s.56(2) provides - "(2) Notwithstanding the amendments of section 120 of the Principal Act wade by sub-section (1) of this section, the provisions of that section of the Frincipal Act continue to apply, after the commencement of this section, in relation toa settlor who became a bankrupt before the commencement of this section as if those amendments had not been made." " Section 121 of the Act reads:- "121(1) CFraudulent dispositions void} Subject to a this section, a disposition of property, whether made before or after the commencement of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in goods faith, is, if the person making the disposition subsequently becomes a bankrupt, vold as against the trustee in the bankruptcy. 121(2) CPurchaser in good faith, etc., not prejudiced] Nothing 1n this section shall be taken to affect or prejudice the title or interest of a person who has, in good faith and for valuable consideration, purchased or acquired the property the subject of the disposition or any interest in that property. 121(3) Cinterpretation of "disposition of property"J in this section, "disposition of property" imcludes a mortgage of pronerty ora charge ol, ok in respect of property. Mrs. Johnstone's Notice of Intention to oppose rclied on the followiny grounds: - 1. The Transfer was not made by Mrs. Johnstone with any intent to defraud creditors; 2. The Sullivans acted in good faith; The Sullivans were purchasers of the land for valuable consideration. us Until about 1976 Mrs. Johnstone had becn happily married and lived with her husband and seven children, four of whom were adopted, ona farm outside Warrnambool. AL that staqe onc Heather Jean Bradley (Mrs. Bradley) came to live on the farm property. Mrs. Johnstone's husband formed a relationship with her. As a result of the discovery of this relationship by Mes. Johnstone the marriage dcetcriorated. On 6 July 1977 Mrs. Johnstone made a will in favour of her seven children, as she did not feel that it was appropriate to make a will in her husband's favour. In September 1977, as a result of a depressed state resulting from her marital agifficulties she took an overdose of medication. Subseyuently Mrs. Johnstone and her husband agreed to sell the farm property jointly owned by them and on 10 Wovember 1978 it was sold by auction. Mrs. Johnstone latcr discovered that her husband was the npmince of the successful bidder. This came us a surprise to her and certainly created A suspicion that her husband did act ruthlessly to get what he ee were eee oo - wanted, She believes her husband obtained the property improperly at an undervalue although there 1s no proof of this. The net procceds trom the farm sale were equally divided pursuant to an agreement arrived at between the partics which was then ratified by the Family Court. From the proceeds of the salc of the farm property and as a result of the property settlement between the parties, Wrs. Johnstone received $77,879.33. With these proceeds she purchased, in January 1979, the property which is the subject of this dispute, for $47,000. Shortly prior to this time there was somewhat of a reconciliation between Mrs. Johnstone and het husband. He had taken to staying with her regularly. However, on ® January 1979 cn a visit tu the farm she found that Mrs. Bradley was still staying there and on that occasion Mrs. Johnstone assaulted Mrs. Bradley. As a result of this incident criminal charges were brought against Mrs. Johnstone which were heard in the County Court sittings at Warrnambool in late May 1979. She was acquitted after a trial lasting some days. On 18 May 1979 Mrs. Johnstone was served with a writ issued out of the Supreme Court of Victoria by Mrs. Bradley claiming damages for assault. That case came on for hearing in Melbourne on 18 May 1981 and judgment was entered in favour of Mrs. Bradley for $60,826 with $9,249.25 costs. For reasons discussed belaw Mrs. Johnstone decided in July 1980 to create a trust in favour of her children of the veoperty she had purchased, reserving to herself a right of seeccupancy therein during her lifctine. The legal steps necessary to achicve this objective were designed by Mrs. Johnstone's solicitor. The First step in the procedure was the creation of the trust which was achicved by a deed of settlement made by Horzen Ryan (Mrs. Ryan) in favour of Mrs. Johnstone's children. Provision was made therein for other property to be brought into the trust. The Sullivans were appointed trustees of the settlement. It was intendcd that as such trustees they should acquire and bring into the settlement the property, subject to a right of in Mrs. Johnstone to occupy it during her Life on certain terms. The second step was the making of a contract of sale under which Mrs. Johnstone as vendor agreed to sell to the Sullivans as purchasers "as trustees of the WN.B. Ryan Settlement" the property. Relevant provisions were:- (a) that the purchasers should take a transfer from the vendor of the land sold on 31 July 1980; 'b) that the vendor should relain the right to occupy the land during her lifetime, paying all rates and taxes assessed thereon and keeping the house thereon insured against fire, storm and tempest and in a good and habitable state of repair; (c) thal the sale included furniture and chattels valucd at éd) the purchase price should be $51,000 payuble as to $100 en the signing of the contract and the residue by payments of $900 on 31 July 1980 and of $1,000 on 31 July on cach subscquent year until payment in full; (e) that subject to provision (a) above the purchaser should be entitled to possession on 31 July 1980. The third step was to produce a transfer of the property registerable under the Transfer of Land Act 1958 (Victoria) under which Mrs. Jotnstone transferred to the Sullivans as joint tenants "in consideration of the sum of $49,000 paid to me by" the Sullivans. The settlement was dated 14 July 1980. The contract was dated 13 July 1980. The transfer was dated 17 July 1980. I would infer that all three documents were signed at the home of Mrs. Ryan on 13 or 14 July 12980. The question is whether for the purposes of the disposition effected by the registration of the transfer, the Sullivans arc properly to be considercd to be purchasers in good faith for valuable consideration within the meaning of s.1206(1) of the Act. Good Faith The question of guod faith relates to the good faith of the purchasers, in this case the Sullivans. It is not necessary that both the Sullivans and Mrs, Johnstone should have acted in good faith: Re Saebar £19723 QG1ld.R. 107; In re Windle (supra); Re Henry Willem Louwen ex parte John Filward Walker (unteported decision of Me. Justice Franki on 28 April 1983 N.S.W. 113 of 1981). It appears from a review of the autheoritics, that good faith in the context of s5.120(1)(a) of the Act requires an absence of knowledge or notice by the purchaser that: (a) the bankrupt is unable to pay his/her debts or 1s financially unsound, and that ib) by taking the property the purchaser 1s defeating or delaying creditors; see Fe Louwcn (supra) Re Windle (supra); Re Saebar (supra); see also Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232. The onus is upon the trustee to prove both lack of good faith and lack of valuable consideration. What is attacked is the transfer from Mrs. Johnstone to the Sullivans of the land, dated 17 July 1980. The three documents brought into being in July 1980 were designed to give effect to a desire on the part of, inter alia, the Sullivans to protect Mrs. Johnstene and her children from possible action by her ex-husband to take the property from her. They believed that the husband had an intense hostility to Mrs. Johnstone and resented het having received part of the value of the farm. They regarded the circumstances of the purchase of the farm as a trick and feared further tricks on his part. The means by which they contemplated he might regain the property from Mrs. Johnstone was not clear, but I believe the fear of his so doing was real and genuine. The motive and purpose of the creation of the trust was therefore quite rational, honest and bona fide, There was, in the plan, no element of intention to defeat any creditors or potential creditors. On the evidence the Sullivans and Mrs. Ryan were unaware, at the relevant time, that Mrs. Bradley had sued Mrs. Johnstone for damaqes for civil assault. Neither the Sullivans nor Mrs. Johnstone had any fear that Mrs. Bradley would become a creditor. As far as Mrs. Johnstone was concerned she had been acquitted on criminal charges of assault and it was believed by her that Mrs. Bradley would fail in her civil clain, There 15 no evidence that at the time the serics of transactions took place the bankrupt was in financial difficulties. Whilst there are peculiar aspects to the transactions, not the least being that no monies were ever paid and there was no intention by the Sullivans to pay any monies, that does not constitute a lack of good faith, as understood within the meaning of s.120(1)(a) of the Act. EFurchaser for valuable considsration The remaining question is whether it is shown by the trustee that the transfer was a settlement of property other - mow we me me ee treme we e - -t - - - - LO. than a settlement made in favour of a purchase for valuable consideration. Tt is difficult, if not impossible, to treat separately the questions of whelher one 15 a purchaser and whether valuable consideration was provided. It appears to me that, for the purpose of s.120(1), unless there is valuable consideration the recipient of the property is not a purchaser. This proposition is supported by a preponderance of the authorities. Reference may be made to Hance v. Harding (1888) 20 OBD 732, re Parry, ex p. Salaman £19043 1 KBR 169, and re Windle, ex p. Trustees of the property of the bankrupt v. The Punkrupt C1975 1 WLR 1628. A transaction will normally be considered as being made without consideration where it lacks commercial quality. Also, it appears from authority that a purchaser for valuable consideration is one who is so in the commercial sense the word and not merely ina nominal or conveyancing sense. -+ Thus per Sweeney J. In re Florance, ex parte Andrews NSW No. 95 of 1980 (unreported):- "In my opinion ee section 120(1) should be construed as requiring a purchaser to provide a quid pro quo in the commercial sense. He referred, inter alia, to Hance v. Harding 'supra); Re Windle (supra) and Re Abbott £19823 3 All ER 181. In Hance v. Harding the situation was that in pursuance of an arrangement between the settlor and his father, the former assigned a liic insurance policy to trustecs on trust for the benefit of his children, the settlor's father concurrently conveying leasehold property to the trustees on similar trusts. The settlor became bankrupt within 2 years from the date of settlement. At p.738 Lord Esher, M.R. said, "It is said that there is a decision in the Court of Appeal by which of course we are bound, if in point, to the effect that he is not such a purchaser, and that the term "purchaser" in the section must be limited to a purchaser in the mercantile sense of the term, viz. a person who has bought something by contract of purchase and sale. Ido not think that the case of Ex parte Hillman, 1n re Pumfrey 10 Ch.U0.622, goes that length. In that case the trustces of the settlement, who were alleged to be purchasers, had not given something to procure something for other persons. Though they micdhte in conveyancing las language be called "purchasers", they had not given anything at all. I think the case only goes the length of saying that such purchasers as those were not purchasers within the section, and that in order to make a purchaser within the section there must be valuable consideration given. T think there was such consideration here, for the father gave something in order to induce the son to give something." Sir James Hannen said at p.739: "Therefore the transaction is perfectly valid, unless if comes within the terms of s.91 of the Bankruptcy Act, 1869. The question whether it does so appears to depend on the meaning of the word "purchascr" as used in that section. In Ex parte Hillman, In re Pumfrey 10 Ch.D. 622, Jessel, M.R., was dealing with a case in which the conveyance was purely voluntary, without any consideration moving from or to either of the parties: and with reference to that case his language must be interpreted as meaning that the word "purchaser" must not be treated as a conveyancing term, but must be consicered as applying to cases where there is a quid pro quo. Here therc was an ample quid pro quo." ees yrame moyen ect eo emer soot ee + - 12. On the face of the transfer there appears to be ample consideration, namely payment of $49,000 but, of course, no such sum had been paid. The transfer was the last step in the procedure designed Ly Mrs. Johnstone's solicitors to confer the property upon the Sullivans. By virtue of the contract, the latter were, in a conveyancing sense at least, purchasers of the property. By that contract they undertook to pay $51,600 for the interest in the property acquired by them. That was the fee simple but subject to Mrs. Johnstone's right of occupation. Counsel for Mrs. Johnstone argued that $51,000 was a fair value for the property and that the valve was based on the advice of a real estate agent. He said that when one recognized what a vendor selling land but retaining a right of occupancy of it for life was disposing of, and what a purchaser of that land was getting, it was not surprising that the amount was payable by $1,000 yearly instalments. I accept both these propositions. It is clear, however, that the intention of the parties in relation to the whole series of transactions was that there would be a gift of the property, subject to Mis. Johnstone's life occupancy, for the benefit of the children. Accordingly, it is said, the contract was a sham and was not intended to create legal relatiuns according to its terms. Tt as my view that Mrs. Johnstone and the Sullivans must lave realised that one of the documents constituted a contract » 13. of sale by Mrs. Johnstone to the Sullivans providing for payment by them of a price to Mrs. Johnstone, and providing for Mrs. Johnstone's, right of occupancy. I believe that when the various documents were signed it was intended that the terms thereof were to be effective and binding in law accurding to their terms. It was essential to Mrs. Juhnstone that her right of occupancy as provided in the contract be leqally enforceable. But as between the Sullivans and Mrs. Johnstone there was an understanding that Mrs. Johnstone would preserve the Sullivans free from actual liability for any purchase money, whatever the documents night say. The solicitor must have understood this also. His method of achieving the result was to intreduce into the transfer a statement that the price payable under the contract had been paid. This was a falso statement but as between the parties and all other persons it served as evidence that Mrs. Johnstone was dealing with the Sullivans for the purpose of both of the contract of sale and of the transfer on the basis that there was no outstanding liability in the Sullivans, or that there was a complete release of liability to her for the purchase money. Of course, a transferor who, without actually receiving payment, signs a transfcr whereby he acknowledges receipt of the consideration, is not precluded from recovering the purchase price from the transferee; see Re Studley £19061 1 Ch 67 at 79; Burchell v. Thompson £19201 2 KB 80 at 86; and Peterson v. Moloney (1951) 84 CLR 91 at 100. But in this case Mrs. Johnstone could not have done so, because the implied agreement was that whatever obligations were undertaken by ewe me owe ee oe 7 an " a er - - --» 14. virtue of the solicitor's documents any obligation to pay money to Mrs. Johnstone would be released by her. It is said by counsel for Mrs. Johnstone that, looking at the matter in its worst light, even if the Sullivans nevec intended to pay any money under the contract they were under a legal liability todo so and that that liability constituted valuable consideration. In determining, for the purposes of s.120(1) of the Act whether there 1s valuable consideration it is the reality of the transaction to which regard is to be had. One sinterence arising from the circumstances might be that the agreement between the parties was that whatever documents were signed for the purpose of creating the trust, they should be considered as not creating legal rights and duties or at least that the contract chould be so considered. On this basis the contract would be but a_ sham. To my mind the correct inference is that the contract was intended to be legally effective to ensure those rights but that Mrs. Johnstone was to release the Sullivans from the obligation to pay the purchase price. In these circumstances it might Le thought necessary to determine where the beneficial interest, as distinct from the legal estate, was when the contract had been signed and Mrs. Johnstone was deened to have released the Sullivans from liability to pay the purchase money. Such a release of th: Sullivans from liability to pay the purchase price was we wy effective as between the parties because at all times it was Mes. Johnstone's intention to honour Ut. The purpose of the transaction was achieved. The Sullivans undertook duties as trustees, Mrs. Johnstone retained her right of occupancy and in accordance with the overall intention of the parties, the Sullivans were free of personal liability. In these circumstances it may be that the beneficial interest in the land subject to Mrs. Johnstone's rights of occupancy passed to the Sullivans no later than when the implied release took effect. In that case 1t would be a question whether in respect of that part of the transaction constituted by the registration of the transfer to the Sullivans, they may be regarded as purchasers for valuable consideration. I do not think so. It would be truce that at the time of the transfer the only intercst remaining in Mrs. Johnstone was the bare legal estate and that that intcrest was valueless. Compare DKLR Holding Co. (No.2) Pty. Ltd. v. Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 CLR 431 per Gibbs CJ at 443 and Brennan J. at 477. However, there is no scope for the notion of consideration where what is being dealt with is without value. Section 120(1) strikes ata disposition of property. In the circumstances specified therein the disposition is void against the trustee in bankruptcy. In this case there was a disposition of the legal and equitable interests of the property to the Sullivans. Every act performed by the parties was part of the process to effectuate the vesting of the legal and equitable intercst in the property in the Sullivans. And the agreement collateral to the legal interests effected by the dociments under which Mr. aes we - - a cen . - 16. Johnstone released or agreed to release the Sullivans from liability to her to pay the purchase money provided was as much a part of the transaction disposing vf the property as were the written documents. Each such act includimy Lhe agreement constituted part of the transaction of disposition. When then the whole transaction is looked at it is clear it lacks the commercial quality essential to the notion of a disposition to a purchaser for valuable consideration. To divide the transaction into its constitutent parts and to say for example that the legal estate was transferred for a consideration equal to its value, namely nil, would frustrate the purpose of s.120(1). If the transfer were to stand and the release of the Sullivans from liability to pay the purchase money were to stand the result would be that a disposition of the entire legal and equitable interest in the property would pass toa person not being a purchaser for valuable consideration. It 1s a disposition of that nature which 1s the subject of the section 120(1) and the effect of the section cannot be avoided by dividing the disposition into its constituent elements. In the result the trustce must succeed. Accordingly, I declare that the transfer of the property dated 17 July 1980 was a disposition of property made to transferees who were not a purchasers thereof for valuable consideration and is void as against the trustee. The trustee's costs must be paid by the Sullivans. Liberty to apply should be granted. (eee tee ee ee PP eer Tl lal eta Get st IC petres "3a .f ~ % ' pore er wi kilcel ies. ' - ~ 4 " da bas - . ne NS hy ; { of - OY { ; Lptetaze, : F (7fales . t