&"A CATCHWORDS Bankruptcy - settlement of property - whether void as against trustee in bankruptcy - sham transaction - whether in favour of purchaser for valuable consideration. Statute - interpretation "Purchaser ... for valuable consideration." Bankruptcy Act 1966: sub-s. 120(1) CRAIG GRAINGER TRIMBOLE v. MAX CHRISTOPHER DONNELLY and WATER RESOURCES COMMISSION OF N.S.W. G 319 of 1986 CORAM: Evatt, Lockhart and Wilcox JJ. 5 November 1986 Sydney ee rye oe as Ree we ae men IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT. REGISTRY ) No. G 319 of 1986 ) GENERAL DIVISION ) ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN : CRAIG GRAINGER TRIMBOLE Appellant AND: MAX CHRISTOPHER DONNELLY - Trustee of the Estate of Robert Trimbole (The Bankrupt) First Respondent WATER RESOURCES COMMISSION OF N.S.W. Second Respondent JUDGES MAKING ORDER: Evatt, Lockhart and Wilcox Jd. WHERE MADE: Sydney DATE OF ORDER: 5 November 1986 ORDERS THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The appellant pay the respondents' costs of the appeal. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. ee nen genepere cee es oe ey ne O a 7 ~~ we myer ' yt oy Wt wae pase NR te eee ree oe aoe "yay 4 1 ot pope IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G 319 of 1986 wr we GENERAL DIVISION ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN : CRAIG GRAINGER TRIMBOLE Appellant AND: MAX CHRISTOPHER DONNELLY - Trustee of the Estate of Robert Trimbole (The Bankrupt) First Respondent WATER RESOURCES COMMISSION OF N.S.W. Second Respondent COURT: Evatt, Lockhart and Wilcox JJ. DATE: 5 November, 1986 REASONS FOR JUDGMENT THE COURT This is an appeal from the judgment of a single Judge of this Court (Beaumont J.) who held that the transfer by an undischarged bankrupt, Robert Trimbole, to his son Craig Grainger Trimbole (the appellant) of his interest in an Irrigation Farm Lease in the Griffith district was void as against the trustee of his estate (the first respondent). The facts are not in dispute and are narrow in compass. The bankrupt was the proprietor of an Irrigation Farm Lease having an area yo ofa re ve en Penn ee be - - 7 op mee ee Deo ke a 2. of 178 hectares in the Griffith district. Since at least 1976 .the bankrupt and his family, including the appellant, carried on farming and grazing upon the property, usually under a share farming arrangement, and carried out improvements to the property from time to time. From 1976 onwards the property was owned by the bankrupt as to three-quarters and by the appellant's elder brother, Robert Kenneth Trimbole, as to one quarter. In 1979 there were discussions between the three men broadly to the effect that the bankrupt would transfer half of his interest in the property to the appellant and one quarter to his elder brother, thus giving the two brothers half each. Nothing was done to implement this proposal. In March 1980, at the time of the appellant's 2ist birthday, his elder brother said to him words to the following effect: "I don't want my responsibility for the farm. I want you to have it." The appellant replied in words to the effect: "I'll take it over and pay all the outstanding debts and take all the responsibility. The problem is no longer yours." On the same occasion the bankrupt said to the appellant words to the effect: "Providing you work this farm, I want you to have it." oe - aarti aT mee pee ee cnr am roe oa a ee ee er 3. The appellant replied in words to the effect: "Yes, I'1l take full responsibility for the whole farm, I'll work it and I'll pay off all the debts and bills." The text of these conversations is taken from the affidavit of the appellant. He was not cross-examined at the trial. It is common ground that the reference to "debts and bills" was intended to refer to future outgoings only, as the property was not mortgaged and, at the time of the transfer, current outgoings including irrigation fees had been paid as they fell due. It is also common ground that the reference to "working" the farm was not intended to suggest that the appellant should necessarily be involved personally in the management of the farm operations. What was apparently intended was that the property should be managed by the appellant under a share farming arrangement with another person as had previously been the case. On 7 May 1981 the bankrupt left Australia. Shortly before his departure he executed a general power of attorney in favour of the appellant which is in fact dated 16 May 1981. On 10 August 1981 the Commissioner of Taxation issued amended assessments in respect of the taxable income of the bankrupt in the sum of approximately $1.9m requiring payment by 11 September 1981. The assessments related to the years of income 1974 to 1976. Payment 4. was not made. The Commissioner sued for recovery of the tax and on 28 December 1983 obtained judgment in the Supreme Court of New South Wales against the bankrupt. In 1982 the appellant gave instructions to a Griffith solicitor to transfer the property to himself. That solicitor did not give evidence but evidence was given by a partner of his, a Mr. Vardanega. Mr. Vardanega considered that the transfer should be implemented by the execution of a contract for sale at a price equal to the Valuer-General's valuation of the property. Mr. Vardanega obtained that valuation. He then prepared a contract of sale for the property by the bankrupt to the appellant. The contract dated 6 May 1982 was signed by the appellant in two capacities: as attorney for the bankrupt as vendor and personally as purchaser. The purchase price was shown as $330,000, being the Valuer-General's valuation. The contract provided for payment of a deposit of $1,000 upon signing of the contract and also provided that until the deposit was paid the vendor was not bound by the contract. The balance of the purchase price was payable in cash on completion. Mr. Vardanega said that the transaction took the form of a contract for sale rather than a transfer by way of gift so that an appropriate amount of stamp duty might be paid in respect of the transaction. It is common ground, however, that neither the appellant nor Mr. Vardanega ever intended that the purchase price of $330,000 be paid. A transfer in the form provided by the regulations made under the Crown Lands (Consolidation) Act 1913 (N.S.W.) was prepared by Mr. IO ee oe t . ., e~ 4a we, ao ees at eee er me hoe aw wee ee poruqees an S. Vardanega. It described the transfer as being by way of sale and was dated 26 August 1982. It was executed by the appellant both as attorney for the bankrupt as transferor and personally as transferee. It described the consideration as being the sum of $330,000. The transfer was registered on 24 November 1982. On 24 August 1984 the Deputy Commissioner of Taxation presented a petition to this Court for a sequestration order against the estate of the bankrupt alleging indebtedness in the sum of $1,956,038.67, being the amount due under the Supreme Court judgment together with interest thereon. The act of bankruptcy alleged in the petition was that on 25 February 1984 and continuing thereafter the bankrupt, with intent to defeat or delay his creditors, remained out of Australia: sub-para. 40(1)(c)(i) of the Bankruptcy Act 1966. On 3 December 1985 a sequestration order was made against the estate of the bankrupt. The trustee of the bankrupt's estate applied to this Court for a declaration that the transfer of the bankrupt's interest in the property was a disposition of his property that is void as against the trustee as being a settlement of property to which s. 120 of the Bankruptcy Act refers. It is common ground that the transfer of the property answers the description for the purposes of s. 120 of "a settlement of property" that was made within the two year period provided by sub-s. 120(1). a tty, pr re er ee er ee eer = 2 rho gs . oer - ft ' wt To rn er nn re tn oe , wo tae 6. Sub-section 120(1), so far as is relevant, provides as follows: "120(1) A settlement of property ... not being - (a) a settlement... made in favour of a purchaser ... in good faith and for valuable consideration; ... is, if the settlor becomes a bankrupt and the settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy." The learned trial Judge found: ",.. the contract was a sham transaction in the sense that it was never intended by either party to have any legal effect. It was set up as a mere pretence to cloak a different transaction, namely, that of a gift. The parties never intended that the transaction be one of sale - it was never intended that the first respondent pay $330,000 or any other sum of money for the property. The intention of the parties was that the transaction be one of gift. It follows, I think, that the contract document is wholly inoperative and that the only subsisting transaction is that of the transfer which was intended by both parties to be operative ..." His Honour found that "the undertaking" given by the appellant to the bankrupt that he would discharge future outgoings incurred in respect of the property was either no consideration or, at best from the appellant's standpoint, an illusory consideration for the transfer of the property to him beneficially and that on either view there was no "valuable consideration" within the meaning of para. 120(1) (a). or ne el a nocsc cet tre ey ng ene . y ao oe ' oe we a ote we 7 TT 7. Counsel for the appellant made three principal submissions. First, it was argued that his Honour's finding that "the undertaking" given by the appellant did not constitute valuable consideration was erroneous. Second, his Honour's finding that the contract of sale was a sham was challenged. Third, an argument closely related to the second submission, that there was insufficient evidence before his Honour to sustain the finding of a sham. It was not argued before his Honour or before us on appeal by counsel for the Official Trustee that the relevant transaction was otherwise than "in good faith" within the meaning of that expression in para. 120(1)(a). In re Abbott (A Bankrupt) C19833 Ch. 45, a decision of the Divisional Court consisting of the Vice Chancellor, Sir Robert Megarry, and Peter Gibson J., Peter Gibson J. said at p. 54 in relation to s. 42 of the Bankruptcy Act 1914 (the equivalent section to s. 120 of the Australian Bankruptcy Act 1966): "*€1) The word 'purchaser' in section 42(1) means a buyer in the ordinary commercial sense, that is to say a person providing a quid pro quo... (2) The consideration moving from the purchaser need not replace in the hands of the debtor the consideration moving from the debtor... (3) The consideration given by the purchaser need not be equal in value to the consideration given by the debtor, though it must be valuable consideration in the commercial sense." The Vice-Chancellor, in a short concurring judgment, referred briefly, at p 57, to the meaning of 'purchaser ... for valuable consideration' in s. 42 in these terms: weep tee yet honor ae eae eae was eee High Court in Barton v. Official Receiver (1986) 66 A.L.R. 355 at pp. 360-361. Pp. 15. "Plainly 'good consideration,' in the sense of the natural love and affection that a man has for his wife and children, is not enough. Nor is a merely nominal consideration, even though it would suffice to support a simple contract at common 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 a consideration for his purchase which has a real and substantial value, and not one which is merely nominal or trivial or colourable." This passage was cited with approval by the Full Court of the Their Honours went on to say at pp. 361-2: "A beneficiary under a settlement is not a purchaser within the meaning of the section (s. 120) unless he has given such valuable consideration as is sufficient in all the circumstances to make him a 'buyer' in a commercial sense of the interest passing to him under the settlement. Unless there is good reason to the contrary, we believe it to be important in legislation of this kind to maintain a construction of the Australian Act which accords with English authority. We would therefore accept Sir Robert Megarry's formulation and endorse the Full Court's ruling that a 'purchaser... for valuable consideration' within the meaning of s 120(1) of the Act is one who has given consideration for his purchase 'which has a real and substantial value, and not one which is merely nominal or trivial or colourable'." See also Rimar v. Pappas (1986) 64 A.L.R. 9 per Gibbs C.J. at a x Sele taienaete ann tiered i eee + eos rp an "! a The evidence shows that it was never intended that the appellant pay the sum of $330,000 or any other sum as consideration 9. for the transfer of the property. When the conversations between the bankrupt and his two sons, the text of which is set out earlier, are considered in the light of the evidence as a whole they are, in our opinion, in essence a statement by father to son that he may have the family farm himself in the hope or with the expectation that he will manage it properly and pay the usual outgoings. The conversations were not contractual in nature and not intended to have any legal effect. If, however, the conversations may be regarded as having some contractual force, the question arises as to what is the consideration to support the transaction. It was submitted by counsel for the appellant that the consideration which moved from the appellant to the bankrupt consisted of the promise of the appellant to give up much of his working life to the farming of the property and to pay the customary debts and outgoings of the farm. Assuming this can be regarded as consideration, it cannot be said to be sufficient consideration in all the circumstances to make the appellant a "buyer", in a commercial sense, of the interest transferred to him by his father. Nor can it be said to be consideration which has a_ real and substantial value and not one which is merely nominal or trivial or colourable. The trial Judge's finding that the contract was a sham transaction in the sense that it was never intended by either party to have any legal effect is plainly correct. The word "sham"" was described by Diplock L.dJ. in Snook v. London and West Riding ape renee oe a we alt ra ye wera poe oe we en oer ee a a a eh es wocere pee eee a onan qreeo reyes 10. Investments Limited (1967) 2 9.B. 786 at p. 802 as a "popular and pejorative word." His Lordship went on to say that, if it has any meaning in law, it means: ",.. acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities... that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a 'shammer' affect the rights of a party whom he deceived." Counsel for the appellant sought to draw some comfort from the fact that the appellant was not cross-examined and submitted that in the circumstances it was not open to his Honour to make a finding that the contract was a sham transaction. We reject this submission. The undisputed facts establish plainly that the contract was an artifice that was never intended to have legal operation. The description of the consideration as $330,000 was artificial because it was never intended that the appellant pay the bankrupt any money for the purchase of the property. The instrument of transfer on the other hand was intended to have legal effect notwithstanding the statement in it that the consideration for the transfer was the sum of $330,000. It was intended that there be in fact and in law a transfer of the bankrupt's interest in the property to the appellant. It does not follow, however, from the finding that the contract was never intended hd 2 Yon fy ae Senitallisiamamnmnadenar ceteesrenamaemnane deme ts a ff 2 pee ees tyocr 7 11. to have legal effect that the appellant was guilty of fraud or deception of the creditors. That was not an issue relevant to this case nor was it explored at the trial. The evidence of the appellant in his affidavit was that, he never had any fraudulent intention with respect to the property; that in giving effect to his father's intention that he should have the property transferred to him he acted on legal advice; and that he was entitled to do so by exercising his father's power of attorney. It is plain that the solicitor approved the method of implementing the transaction initially by contract of sale with an expressed consideration of $330,000 to be followed by a transfer. A finding that the contract was a sham transaction does not therefore operate as any finding of immoral or improper conduct on the part of the appellant in the circumstances of this case. We would dismiss the appeal with costs. I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of their Honours Mr. Justice Evatt, Mr. Justi Lockhart and Mr. Justice Wilcox. sseciate Dated: 5 November 1986 porter pence ne oe tty Re 7 : oe fe epee ee vs ay ~ of og ssn were, rey