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: ELIZABETH ANN GRAY EX PARTE: STIRLING LINDLEY HORNE v. CORPORATION PTY. LTD. No. 344 of 1 Jenkinson J. 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: ELIZABETH ANN GRAY Bankrupt EX PARTE: STIRLING LINDLEY HORNE (as trustee of the estate Elizabeth Ann Gray, Bankrupt ) Applicant AND: FIRST INSURANCE CREDIT CORPORATION Pry. LTD. Respondent CORAM: Jenkinson J. PLACE: Melbourne DATE: 20 February, 1987 REASONS FOR JUDGMENT Application by a bankrupt's trustee for a declaration that a disposition of land which is occupied by the bankrupt 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 the bankrupt 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, Donald Edgley Gray, had become the 2. registered proprietor of the fee simple estate in the land in 1963. A deed dated 20 September 1982 between the bankrupt 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: PETER GRAY born the 6th September 1964, and STEVEN GRAY 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 the former matrimonial home which is situated at and known as 38 Fintonia Street, 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. The former matrimonial home is by mutual agreement valued by the parties in the sum of $150,000.00. F. The former matrimonial home as stated in clause BD. is subject to a registered Mortgage to the Hotham Permanent Building Society (Melbourne Branch). The balance outstanding to Hotham Permanent Building Society as at the 31st August 1982, was $71,186.71. G. The husband and wife contributed equally 3. to the establishment of the former matrimonial home 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 the former Matrimonial home 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 the former matrimonial home 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 38 Fintonia Street, 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 Hotham Permanent Building Society Loan Account No. 1.2572 and shall indemnify and keep indemnified the wife in respect of all such Mortgage repayments due to the Hotham Permanent Building Society. 3. That the husband agrees that the wife is entitled to immediate occupation of the former matrimonial home 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. 4. But the transfer contemplated in clause 1 of the agreement did not take place. Mr. Gray 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 Lucar Pty. Ltd., which Mr. Gray 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 the bankrupt and Mr. Gray 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 Lucar Pty. Ltd. was sold in 1982 by its liquidator to a company which at about the time of the sale took as its name Lucar (Vic.) Pty. Ltd. and thereafter carried on a business similar to that which Lucar Pty. Ltd. had carried on until the latter company went into liquidation. Mr. Gray was employed by Lucar (Vic.) Pty. Ltd. in a managerial capacity. The respondent Farst Insurance Credit Corporation Pty. Ltd. has at all material times been controlled by Ronald Andrew Miller, who and whose former wife have at all material times been its only shareholders. Mr. Miller had for a number of years been employed by finance companies and in the course of his employment he had maintained a friendly business connection with Mr. Gray, to whose company and customers Mr. Miller had over the years arranged the granting of loans by his employers. In 1982 Mr. Miller was in 5. a different field of business activity, but he had heard of the financial difficulties of Mr. Gray and lLucar Pty. Ltd. and he heard also, late in that year, that Mr. Gray was seeking to sell his house. Mr. Miller and Mr. Gray negotiated first the sale by the latter to the respondent of a house of which Mr. Gray was the owner and occupier, and then they negotiated the sale by Mr. Gray to the respondent of the house in which the bankrupt lives. In the case of each sale there was an understanding between Mr. Gray and Mr. Miller that the respondent would lease the house, in the one case for occupation by Mr. Gray and in the other case for occupation by the bankrupt. In effectuation of that understanding a lease at a commercially reasonable rent has been granted by the respondent to Ginet Pty. Ltd. in each case. The latter company is associated with Lucar (Vic.) Pty. Ltd.. Each of Mr. Gray and the bankrupt 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 38 Fintonia Street North Balwyn had the bankrupt's approval. In or about October 1982 Mr. Gray suggested that the two houses be sold and that he attempt to make arrangements under which the bankrupt would be enabled to continue in occupation of the house at 38 Fintonia Street North Balwyn, free of any obligation to pay rent. She agreed to his proposal, which he coupled with a promise to try to arrange that the bankrupt be employed by Lucar (Vic.) Pty. Ltd.. She had been both a director and an employee of Lucar Pty. Ltd.. The only written evidence of the arrangement between the bankrupt and Mr. Gray for sale of the Fintonia Street house was 6. the following document, signed by the bankrupt and by a witness, on writing paper of her solicitors: a AUTHORITY I, ELIZABETH ANN GRAY of 38 Fintonia Street, North Balwyn in the State of Victoria, hereby confirm my instructions to my Solicitors Messrs. Comito, Iacovino & Co., on the 12th October 1982, that in view of cordial discussions between myself and my estranged husband DONALD EDGLEY GRAY and arrangements made between myself and my estranged husband 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 38 Fintonia Street, 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 my ex-husband 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." The bankrupt and Mr. Miller gave evidence. Mr. Gray 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. Gray 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 38 Fintonia Street was subject, and that ownership of the land was of little value to her in comparison with retention of her job and a 7. right to occupy the house free of rent. She swore that she simply "went along" with the proposals Mr. Gray 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 Lucar (Vic.) Pty. Ltd. If that was her belief, she was mistaken. Mr. Miller gave evidence that he had intended, when he first agreed to buy the Fiantonia Street 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. Gray that he "would have to renege on the deal". It was then agreed between Mr. Gray and Mr. Miller that Lucar (Vic.) Pty. Ltd. 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. Miller's own funds. The source of the funds advanced by Lucar (Vic.) Pty. Ltd. was said to be Mr. Gray. Certainly Mr. Gray lent that company $30,000 at about the time when the loan by the company to the respondent was made. Mr. Miller swore that he entered into the purchases of the two houses upon the understanding, which he confirmed before settlement with the directors of Lucar (Vic.) Pty. Ltd., that each house would be let to that company, for occupation by Mr. Gray in the one case and by the bankrupt in the other. He swore that he regarded the business which Lucar (Vic.) Pty. Ltd. had acquired as one which would be profitable, and thought that Lucar (Vic.) _Pty. Ltd. would be a satisfactory tenant. It was at some unspecified later time that Ginet Pty. Ltd. was proposed, and accepted by the respondent as tenant. Mr. Miller swore that it was represented to him by Mr. Gray that it was in consideration of Mr. Gray's undertaking employment by Lucar (Vic.) Pty. Ltd. as the general Manager of the business that that company was prepared to take a lease of each house. Mr. Miller gave in evidence his belief that Mr. Gray 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. Miller was not aware that the bankrupt had any proprietory interest in the Fintonia Street house. He knew that she lived there and would continue to live there, if the proposal made by Mr. Gray were carried out. He knew that the bankrupt had been a director of Lucar Pty. Ltd.. 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 the bankrupt, no less than Mr. Gray, had guaranteed the performance of substantial financial obligations of Gucar Pty. Ltd... Mr. Miller swore that he did not remember whether he had adverted to the matter. It was the submission of Mr. R. Johnstone of counsel for the applicant trustee that the transfer of the legal estate in the land known as 38 Fintonia Street Balwyn from Mr. Gray to the 9. respondent with the consent of the bankrupt 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. Johnstone's submission had been in the bankrupt 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 the bankrupt with intent to defraud her creditors, and it was not a disposition in favour of a person who acted in good faith, Mr. Johnstone submitted. I am persuaded, notwithstanding the bankrupt's evidence, that she acceded to the proposal by Mr. Gray that her house be sold in the belief that thereby the house would be put beyond the reach of her unsecured creditors, whom she knew she could not pay, and that her agreement was given to the proposal with the intent that her unsecured creditors 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) the bankrupt 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. Gray to the respondent pursuant to that agreement, constituted a "disposition of property" by her within s.121(1) of the Bankruptcy Act 1966. (See Vandervell v. I.R.C. £1967] 2 A.C. 291.) The evidence did not in my opinion support an inference that the bankrupt was expressing an intention, or that Mr. Gray was requesting her, to surrender or 10. release to him her beneficial interest in the land. The intention with which I have found that the bankrupt 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 the bankrupt 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 Lucar (Vic.) Pty. Ltd... When asked whether the loan had been made by Mr. Gray, 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. Gray, 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. Gray 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. Miller 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. Gray was the beneficial owner of both houses, but nothing 11. turns on that circumstance, for present purposes. Mr. Miller believed Mr. Gray to be in acute financial embarrassment at the time when the sales were negotiated and when they were completed. Being informed by Mr. Gray that Lucar (Vic.) Pty. Ltd. 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. Miller must have suspected that Mr. Gray's object in selling on the understanding that the purchaser would let each house to Lucar (Vic.) Pty. Ltd. was to withdraw the two houses from the reach of Mr. Gray's 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. Gray's response to Mr. Miller's intimation that he found himself unable to proceed because of a shortage of funds. In each case Lucar (Vic.) Pty. Ltd. offered to lend Mr. Miller funds, so that the sales might proceed. It is to be borne in mind that Mr. Miller has had long experience in commerce, including money lending. I am persuaded that Mr. Miller believed, when the sale of the Fintonia Street 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. Miller 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. 12. There will be a declaration that the disposition of bankrupt'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 - HW Fenons for Jute. ff see SO ae a - Ca "y -locre oa rus cony of ot a of tic f Honomebic Mr. Tu uct GCOUKINSON f q Lapa. Dated: 20 Februar a j ny (4997 the I of No. 344 of 1983 Counsel for the Applicant Mr. R. M. Johnstone Solicitors for the Applicant Cornwall Stodart & Co. Counsel for the Respondent Mr. S.P. Newton Solicitors for the Respondent Batley Timms & Nicholson Dates of Hearing 4, 5, 28 and 29 August, 1986