* NUDGMENT No. 221.731 Catchwords Bankruptcy - promissory notes issued by bankrupt dishonoured before bankruptcy - notes purchased before bankruptcy by wife of bankrupt for less than their face value - evidence that purchase pursuant to an arrangement that wife should have a mortgage over bankrupt's half interest in matrimonial home to secure the amount she actually paid to purchase the notes - mortgage later executed to secure the face value of the notes - whether wife an encumbrancer in good faith within the meaning of s.120(1) of the Bankruptcy Act 1966. Bankruptcy Act 1966 ss.120(1), 121(1). RE: KENNETH HENDERSON EX PARTE: MAURICE HODGSON LYFORD AND: DENISE GERTRUDE HENDERSON No.143 of 1987 Sweeney J. Melbourne 7 October, 1987 Roo NER ~9OCT 1987 FEDERAL COURT OF AUSTRALJA PRINCIPAL REGIST IN THE FED GENERAL DIVISION BANKRUPTCY OF WESTERN RE ERAL COURT OF AUSTRALIA No. 143 of 1987 DISTRICT OF THE STATE AUSTRALIA : KENNETH HENDERSON Bankrupt EX PARTE: MAURICE HODGSON LYFORD as trustee of the estate of Kenneth Henderson Applicant AND : DENISE GERTRUDE HENDERSON Respondent THE COURT: Sweeney J. PLACE : Melbourne DATE : 7 October, 1987 MINUTES OF ORDER THE COURT: 1. Declares that the memorandum of mortgage dated 18 February 1982 and registered at the Office of Titles, Perth, on 25 March 1982 and numbered C328825, being a settlement which came into operation within 2 years before the commencement of Kenneth Henderson's bankruptcy, and not being a settlement made in favour of Note: an encumbrancer in good faith, is void as against the applicant so far as is necessary for the payment of the the debts of(bankrupt, and the costs of his bankruptcy. Liberty is reserved to the parties to apply to any judge of the court for the making of appropriate orders to give effect to the court's declaration, in the light of the course of administration of the bankrupt's estate and of the proofs of debt which are admitted by the trustee. The respondent, Denise Gertrude Henderson, pay the applicant's costs of and incidental to the application. Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No. 143 of 1987 BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA RE KENNETH HENDERSON Bankrupt EX PARTE: MAURICE HODGSON LYFORD as trustee of the estate of Kenneth Henderson Applicant AND : DENISE GERTRUDE HENDERSON Respondent THE COURT: Sweeney J. PLACE Melbourne DATE 7 October, 1987 REASONS FOR JUDGMENT By an application dated 29 January 1987 the applicant, Maurice Hodgson Lyford, as a trustee of the estate of the bankrupt Kenneth Henderson, a medical practitioner, ("Dr Henderson") sought the following orders against the respondent, the wife of the bankrupt, ("Mrs Henderson") - 1. A declaration that the disposition of property evidenced in writing by a memorandum of mortgage dated 18 February 1982 registered at the Office of Titles, Perth in the State of Western Australia on 25th March 1982 and numbered C328825 ("the mortgage"), whereby Dr Henderson mortgaged to Mrs Henderson, all his right, title and interest in property being the whole of the land comprised in Certificate of Title Volume 1254 Polio 668 ("the property"), which at all material times has been their matrimonial home, is void as against the applicant being:- (a) a settlement of property within the meaning of the provisions of Section 120(1) of the Bankruptcy Act 1966 ("the Act") not being a settlement such as is described in s.120(1)(a) or s.120(1)(b); or in the alternative {b) a disposition of property within the meaning of the provisions of s.121(1) of the Act, not being a disposition for valuable consideration in favour of a person who acted in good faith. That the respondent duly execute and deliver up to the applicant a discharge of the mortgage in registrable forn. Such further or other relief as to this Honourable Court seem meet. That the respondent pay the costs of the applicant herein. As will be seen in due course, the story of the events which gave rise to this application unfolded slowly. It began with the applicant's affidavit in support, sworn on 28 January 1987, in which he deposed, paragraph 1. set out the position as he then appreciated it. He in substance, as follows (the references being to numbers) :- the applicant is one of the trustees of the estate of Dr Henderson and authorised by the other trustee to swear the affidavit. On 11 March 1983 Dr Henderson presented a debtor's petition which was accepted by the Registrar. By reason of his appointment the applicant has had access to the books of account and records of Dr Henderson and has made due enquiry of Dr Henderson and makes the affidavit from the information so derived. By reason of his examination of the affairs of Dr Henderson the applicant believes that Dr Henderson has been insolvent at all times material to the application. On or about 9 February 1979 Dr Henderson made a series of promissory notes, the total face value of which amounted to $166,631.00, ("the promissory notes") drawn in favour of Bill Discounting Services Pty Ltd or order and all payable on 5 November 1979 at the Bank of New South Wales, East Victoria Park Branch. In and between the months of February and November 1979 the promissory notes were negotiated by Bill Discounting Services Pty Ltd to numerous investors ("the noteholders"). The noteholders duly presented the promissory notes on or about 5 November 1979 for payment 10. 11. 12. and the promissory notes were dishonoured. In the period following the dishonouring of the promissory notes Dr Henderson, together with members of the firm Clifford, Ruthven, Lee & Co., ("the accountants") "met with the noteholders to negotiate their acceptance of a lesser amount in satisfaction of the sum due at the face value of the promissory notes". In the course of negotiations at a meeting held on 18 October 1979 at the offices of the accountants it was agreed, inter alia, that in consideration of the payment of the sum of $36,000 divisible amongst the noteholders on a pro rata basis the noteholders would assign and make over the promissory notes in favour of one Malcolm Phillip Wootliff ("Dr Wootliff"). On or about 20 February 1980 the noteholders entered into a written agreement evidencing the terms of the assignment of the promissory notes by the noteholdes to Dr Wootliff. On or about 21 July 1981 the accountants requested Messrs Muir Williams Nicholson & Co, solicitors, to prepare an agreement whereby Dr Wootliff was to assign and make over the promissory notes to Mrs Henderson. By reason of his examination of the affairs of Dr Henderson and of the various documents records and books of account of Dr Henderson, and in light of subsequent events, the applicant is of the opinion that the last abovementioned agreement was in fact never executed. In or about October 1981 a written agreement purportedly made between the noteholders of the one part and Mrs Henderson of the other part ("the October agreement") came into existence. This agreement purported to evidence an assignment of the promissory notes by the noteholders to Mrs Henderson. 13-16. As a result of examination and comparison of the first 17. abovementioned agreement between the noteholders and Dr Wootliff and the October agreement the applicant believes that the noteholders "never executed" the October agreement so as to assign and make over the promissory notes to Mrs Henderson. The applicant submitted that "by reason of the matters aforesaid, I verily believe that the Bankrupt is not now and never was indebted to the Respondent in the sum of $166,631 by virtue of the purported assignment of the promissory notes by the noteholders to the Respondent". 18-19. Dr Henderson and Mrs Henderson were the joint 20. Mrs proprietors of the property and in and between the months of November 1981 and February 1982 Dr Henderson executed a mortgage over his proprietary interest in the Property in favour of Mrs Henderson to secure his purported indebtedness to her in the sum of $166,631. In the light of the matters deposed to, the applicant verily believes that the giving of the mortgage is a void settlement of property within the meaning of the provisions of either s.120(1) or s.121(1) of the Act or both and requests that the relief sought in the application be granted. Henderson, on 11 February 1987, filed a notice of intention to oppose the making of the orders sought by the applicant, on the following grounds - (a) the mortgage is not a settlement of property within 68.120(1) of the Act; (b) the mortgage is not a disposition of property that is void pursuant to the provisions of s.121(1) of the Act; and (c) the mortgage was given for valuable consideration in favour of Mrs Henderson who acted in good faith. In opening the case for the applicant it was stated that it was intended to rely on the affidavit of the applicant and upon oral evidence to be given by one Giuseppe Perrozzi. Paragraphs 4, 6, 7, 11, 13, 14 and 15 to 17 inclusive of the affidavit of the applicant were not pressed, following objections by counsel for Mrs Henderson and a submission that those paragraphs of the affidavit were based on hearsay. The substance of those paragraphs has been stated in these reasons as a part of the narrative of the history of the case. They have not been treated as evidence. Mr Perrozzi testified that he was an accountant who at the relevant time was employed by the accountants and that on instructions received by him from Graham Edward Ruthven in February 1980 he became responsible for the tax and accounting affairs of Dr and Mrs Henderson and their family company. He gave evidence that he was told by Mr Ruthven - "that Dr Henderson had a promissory note debt of $166,000 with various promissory note holders which had been acquired as a result of dealings with an accountant called Christo Moll. An agreement had been entered into between a Dr Wootliff, a friend of Dr Henderson, whereby Dr Wootliff had purchased these promissory notes from the various promissory note holders for an amount of $36,000. This agreement had been partly executed to the extent that the first $24,000 under the agreement had been paid and a remaining balance of $12,000 was now required to be paid pursuant to the terms of that agreement in quarterly instalments of $4,000 plus interest. I was to attend to. the calculation of these instalments and arrange for them to be paid. The funds with which to make the payment were to be obtained from Dr and Mrs Henderson - primarily Mrs Henderson - as it had been agreed that she would on-give all the funds to Dr Wootliff to enable him to perform his obligations under the terms of that agreement; ..." When asked about the agreement purportedly made between the noteholders and Mrs Henderson, Mr Perrozzi said that Mr Ruthven advised him that he had been unsuccessful in getting Dr Wootliff to change the decision which he had made not to execute the agreement with the noteholders, and that therefore there should be a re-execution of a new agreement directly between Mrs Henderson and the promissory noteholders. He went on to tell Mr Perrozzi - "however, the original promissory noteholders were not to be approached. The reason for this being that they had already been completely paid everything they were due under the agreement, and therefore they were totally happy with the arrangment, and that in order to save time and cost I was simply to modify the original agreement between Malcom Phillip Wootliff and Thomas Henry King by simply retyping the page - the first page to delete Malcom Phillip Wootliff and substitute Denise Gertrude Hendersons's name in its place. Then Mrs Henderson would sign this modified agreement and that would complete the matter and serve as the future basis of the evidence of her own issue for the promissory notes" (sic). In opening the case for Mrs Henderson it was stated that it was intended to rely on the affidavit evidence of Dr Wootliff and Peter Hugh Scott, an officer of Westpac Banking Corporation, and oral evidence from David Anthony Craig, a solicitor, and that Mrs Henderson "may be called". In his affidavit Dr Wootliff stated that after Mr Ruthven explained to him Dr Henderson's financial position in regard to the promissory notes, "he asked me if I would be prepared to act as the buyer, on the basis that I would really be buying the notes for Mrs Henderson, who would provide the money". Dr Wootliff continued - "I agreed to do that. I think I was told that the price was $24,000 initially but later $36,000. It did not really matter to me, as it was Mrs Henderson who had to find the money". In cross examination, Dr Wootliff admitted that he had not discussed the matter at all with either Dr or Mrs Henderson, and that he had had no meetings with the noteholders. He also said in his affidavit - "Some time later, Mr Ruthven gave me a document which had been prepared by Parker and Parker. It was a proposed agreement by the promissory note holders to sell the notes to me. I think it was already signed by the note holders. I was not absolutely sure of the meaning of clause 4 of the document which talked about recourse and I was concerned that I may possibly be stuck with a payment of $166,000. My lawyer friend's advice was that I should not sign the document. I accepted that advice, and at some later stage I told Mr Ruthven of my decision not to sign the document". On his attention being drawn to the wording of clause 3 of the agreement between him and the noteholders, Dr Wootliff agreed that it was clause 3 that referred to "with full recourse" which he assumed "referred to the full amount" of the promissory notes and that his affidavit should have referred to clauses 3 and 4, both of which, he said, frightened hin. In his affidavit Mr Scott of Westpac stated that an amount of $24,000 was credited to the account of Mrs Henderson and subsequently withdrawn, and that there were three payments of approximately $4,000 at quarterly intervals drawn by way of bank cheques payable to the noteholders. Mrs Henderson was called to give viva voce evidence and her account of the manner in which she came to take a mortgage over her husband's interest in the property is dealt with later in these reasons. When asked about the time the promissory notes became due, she said - "we actually received notification from the bank that the notes had been presented. --- I think we were notified in some cases by the noteholders that they were going to present these notes and at the time we did not have funds to pay all those promissory notes. There was a problem as to what to do. Eventually, the advice that we got was that if we could come to some arrangement with the promissory noteholders they would probably take what we could manage to pay them rather than, perhaps, get nothing at all. --- I suppose it must have been October or November 1979". In response to a question as to why she wanted to reach an arrangement with the noteholders she replied "because if they pressed for that amount of money then my husband would have to go bankrupt and he wanted to avoid that at all costs". Mr Ruthven, who was called at a later date, also said that the noteholders would have issued writs if some arrangement had not been made with them and Dr Henderson would have been forced into bankruptcy. Mrs Henderson said that a statement of assets and liabilities of Dr Henderson was drawn up by Mr Ruthven "which gave some indication of how much money Dr Henderson could pay out on the promissory noteholders if he was pushed, and that was the amount that was offered". She said the amount to be offered was $24,000 but at a meeting with one of the promissory noteholders, a Mr Woss, who was, she thought, acting as chairman on behalf of the noteholders, "it was discussed with him that I should pay another $12,000 on top of the $24,000". Mrs Henderson said - "I intended, if possible, to pay the Promissory note holders money and to take those promissory notes and keep them myself. I went to the bank and I arranged for a loan of $24,000. In the meetings that were held with the promissory noteholders, they felt that I should pay out more". She went on to say - "The arrangement, as far as I understand it, is that I was to raise the $24,000 which, hopefully, the promissory noteholders would accept as payment for those promissory notes, but Dr Wootliff was to be named as making the payments. When I had the meeting with Mr Woss it was not to discuss this payment of $24,000, it was for a further payment to come from me, directly, of $12,000". She said that she did not at any time discuss with or tell Mr Woss anything about the $24,000. She made arrangements with the bank to borrow the money and arranged for bank cheques to be drawn. She stated "I received a letter from Ruthven, Lee and Co. which gave the names and the amounts that were to be made payable to each of the different note holders" and that she made the payments. In relation to the ""purported" October agreement Mrs Henderson said that the other signatures were affixed to the document when she signed it and at that time she "believed it to be guite legal" but that "I know now that when I signed it it was not a true and honest document; that it had been tampered with Mr Craig stated that in 1979 he was an articled clerk with Messrs Parker and Parker. He recalled attending a series of meetings of note holders but could not recall the meeting of 6 November 1979. He did however testify that he made notes of the meetings he attended and that a document dated 6 November 1979 produced in court was a copy of a memorandum made by him immediately after a meeting on that date. When asked if the memorandum represented the substance of what he took down as to the course of the meeting to report to his principal, he replied "Yes, I have no hesitation; it would be correct and accurate". The memorandum records, inter alia, - "Mr Woss indicated the circumstances surrounding this new proposal, and that he had contacted Mrs Henderson on a number of occasions, who initially refused to add any money or support her husband but eventually decided to help. Accordingly, the assignee of the bills had agreed to provide a further $12,000 to pay off the liability pursuant to the Promissory Notes. General discussion continued as to whether the proposal should be accepted, in the end the Proposal was accepted by all creditors, although Mr King did have some reservations to the proposal but eventually accepted it. ...". In the course of what was then thought to be his closing address on 13 May 1987, counsel for Mrs Henderson sought leave to call further evidence, which he said would be that of Mr Woss, who was the representative of the noteholders at the meeting of 6 November 1979, for the purpose of identifying two letters, dated 22 October 1979 and 2 November 1979 respectively, sent to the noteholders. Leave was granted. When the hearing continued on 14 May 1987, counsel asked if the leave could be varied so as to substitute Mr Ruthven for Mr Woss to give evidence of his authority to negotiate with the noteholders, on the instructions given to him to arrange for the mortgage to be given, and to clarify the time at which Mr Ruthven asked Dr Wootliff to sign the agreement with the noteholders, which he refused to do. Leave also was sought to submit further evidence from Mrs Henderson regarding the reasons for the instructions for the mortgage as a result of matrimonial difficulties between Dr and Mrs Henderson at that time. Leave was granted subject to any evidence being put on affidavit and being restricted to the matters referred to by counsel. Prior to the resumption of the hearing on 27 July 1987, affidavits were filed by Mrs Henderson and Mr _ Ruthven. No affidavit by Mr Woss was filed, nor was he called as a witness. Mrs Henderson stated that she raised the first instalment of $24,000 by borrowing from the Bank of New South Wales and that the moneys were paid to Mr Ruthven for him in turn to distribute amongst the noteholders. The balance of the moneys was also distributed. She said "Graham Ruthven gave me the promissory notes, and I in turn gave them to our solicitors for safe keeping". Mr Ruthven, in his affidavit, stated that he became friends with Dr and Mrs Henderson in 1979 and had discussed with them the financial problems of Dr Henderson. He had also spoken to Dr Wootliff "who was a long standing friend of mine and of the Hendersons, and he offered to help in any way he could". He went on to state - *I cannot remember the details of the conversation that I had with Dr Wootliff, but he agreed that he would act as the buyer of the promissory notes, on the understanding that the necessary monies would be paid to him by Mrs Henderson, and he told me to do what ever was necessary to have the note holders agree to accept the reduced payment. I had that discussion with Dr Wootliff, and received his authority, before calling a meeting of note holders, and before subsequently writing to the note holders". He continued: Mr noteholders at his office on 18 October 1979, "I had many meetings with the Hendersons, during which I told them that Dr. Wootliff was prepared to help the Hendersons out by paying the promissory note holders, but that Denise would have to pay him back. She did not want to do that. She was very emotional. She told me that she wanted to return to England with or without Ken taking her son David with her. She said that she did not want to throw good money after bad, and wanted to be able to make a clean break and to start afresh in England. I spent quite some time talking with Ken and Denise, and tried to placate her. Before she agreed to pay Dr. Wootliff she asked me what kind of security she would have. I told her that she could take a security over Ken's interest in the house to protect her, so that if at any stage she could not cope any longer and wanted to leave Ken and return to England, she could pack her bags, and go knowing that she had security over Ken's interest in the house. She agreed to do that, and agreed to do what she could to raise the money to repay Dr. Wootliff". Ruthven then stated that there was a meeting of when on behalf of the Hendersons he made a proposal which he then confirmed by letter dated 22 October 1979 to each of the noteholders. letter included the following: Mr Ruthven stated that between 22 October 1979, at the between Mr Woss, stated - "The creditors agreed to consider an offer of $24,000 subject to a legal agreement being prepared between the respective parties requiring the following: a) The assignee to pursue action against the original holder of the notes for losses sustained; b) That Dr. Henderson investigate the manner in which the audit was conducted by Yarwood Vane & Co. on his partnership, Hennox Trading Co., and should it be evident that professional negligence exists then an action be instituted for losses sustained; c) Dr. Henderson to seek relief from the liability of tax, either in whole or part, in accordance with the Income Tax Act; d) That monies received by Dr. Henderson as a result of actions taken in accordance with paragraphs a), b) and c) be applied to the present Promissory Note Holders until the deficiency resulting from the proposal assignment has been extinguished. It was further proposed that any funds which may accrue to Dr. Henderson from any source whatsoever should be applied to this deficiency". "We discussed whether more than $24,000 could be paid, and Denise was asked by Mr Woss if she could contribute anything. She said she could pay another $12,000 if she was given time. At that meeting it was agreed that instead of $24,000 only being paid, payments totalling $36,000 would be made. After that meeting, I wrote to each of the note holders by letter dated the 2nd November 1979 ... I was authorised by Dr Henderson and Denise Henderson to make the proposal contained in That and 2 November request of Mr Woss, a further meeting was held Mrs Henderson and himself in respect of which he noteholders referred to the meeting between Mr Woss, and Mrs Henderson as one held the letter". proposal which would be acceptable to all parties". There was then set out under the heading following - "1. The sum of $25,000 (Note: as was later made clear, this was an error, The amount should have read $24,000) be paid to the Promissory Note holders on the signing of the assignment agreement. 2. Paragraphs a), b) and c) of the previous proposal made by you are agreed upon by both Dr Henderson and the assignee and 3. That a further sum of $12,000 be paid by the assignee by three equal instalments commencing three months from the signing of the agreement at three monthly intervals". letter stated that the proposal would be A further letter of 2 November 1979 from Mr Ruthven to the Mr Ruthven "in the hope of agreeing to a "Proposal", the formally presented to noteholders at a meeting to be held on 6 November 1979. Mr Ruthven went on to say - "There was another meeting of note holders held at Woss Nominees' office the 6th November 1979, where the proposals contained in my letters dated the 22nd October 1979 and 2nd November 1979 were put to the note holders. I told the persons present at the meeting that the proposal in paragraph (d) of the letter dated the 22nd October 1979 was withdrawn, particularly because of the last sentence of that paragraph. However, the note holders required that the first sentence of sub-paragraph (d) remain and be included in the agreement. With the Hendersons' authority, I agreed to the retention of that sentence, and the note holders agreed at that meeting the 6th November 1979 to accept the proposals set out in the letters of the 2nd November 1979 and 22nd November (sic) 1979, with the exception of the final sentence in paragraph (d) of the letter of the 22nd October 1979". A written agreement between the noteholders and Dr Wootliff evidencing the arrangements agreed at the meeting of 6 November 1979 was then prepared by Messrs Muir Williams Nicholson & Co on instructions of Mr Ruthven. This agreement was "sent to Messrs Parker and Parker, who, on behalf of the note holders, required some changes". Mr Ruthven's affidavit continued - "I then arranged for the agreements to be sent to each of the note holders, for them to sign. That took a considerable period of time, as some of the note holders were living overseas and proved difficult to locate. I ultimately received back in my office, the document signed by all note holders. Well before I received that document back, the first payment of $24,000 had been made, with funds provided by Mrs. Henderson, and the promissory notes given to my firm and passed on to Mrs. Henderson". He stated further - "in March 1980 and following up on Denise's earlier demand I asked an employee, Mr Perrozzi, to arrange for the mortgage to be given by Dr Henderson to Mrs Henderson. Mrs Henderson frequently reminded me that' she wanted the mortgage, and would ask what was happening to it'". He also stated that - "some time after all the noteholders had signed the document prepared by Parker & Parker, I took it to Dr Wootliff and asked him to sign. He said he would look at it, and get back to me. The provisions contained in Clauses 3 and 4 of the document ... were not discussed at all at any of the meetings of the note holders, and did not form part of the Proposal. The proposal agreed to was as set out in the letters dated the 22nd October 1979 and the 2nd November 1979, save that the letter of the 2nd November 1979 had a typograhical error in that the sum agreed to was $24,000 not $25,000". When the matter came on for further hearing the applicant submitted, amongst other things, that was no valid assignment of the promissory notes to Mrs Henderson and therefore no consideration for the mortgage. This issue was strongly contested but, for reasons which will become apparent, I have not found it necessary to determine it. For the purposes of this case I assume, without deciding, that Mrs Henderson became entitled to the benefit of the notes. In the course of the administration of her husband's estate, Mrs Henderson has not limited her claim to be a secured creditor to the amount of $36,000, which she had raised in 1980 in order to buy the promissory notes of the face value of $166,631, or to that amount of $36,000 together with any interest upon it. The payments totalling $36,000 had been completed by December 1980, and they were made in order to save Dr Henderson from being pressed by the noteholders for payment in full, which he would have been unable to make, and to save him from having to go bankrupt which he wanted to avoid at all costs. In relation to those 1980 discussions with her husband, Mrs Henderson gave evidence "I had raised money in order to buy promissory notes that were held over my husband's name and I wanted some form of security for the _ mone that I aid out" (emphasis supplied). She said that she first thought that she would like to have security "probably earlier in 1980 after the first and largest amount of money had been paid out - probably shortly after I organized the first bank cheques for the first payment to the promissory note holders". Mrs Henderson said that she thought that she would have mentioned it to either Mr Ruthven or Mr Perrozzi or probably to both of them. She did not say that she mentioned it to Dr Henderson, who has not heen called as a witness. After giving this evidence in chief, she said in cross~-examination that Dr Henderson had not paid interest and that she had not demanded payment, adding that she would not have done so "as long as I was living with him. I think if I decided to leave I would want what I felt was rightfully mine". Had Mrs Henderson claimed that by reason of the 1980 transaction she had become a secured creditor in the amount of $36,000, either standing alone, or with interest, it would have been necessary for the applicant to determine whether he should have admitted her claim or sought an order avoiding the transaction as against him as trustee. In the latter event, he would have needed to determine the form of the challenge to be made under the Act. Had the trustee chosen to attack the transaction under s.120(2), as a settlement which came into operation within 5 years before the commencement of the bankruptcy, the onus would have rested on Mrs Henderson to show "(a) that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the comprised in the settlement; and (b) that the settlor's interest property passed to the trustee property in the of the settlement or to the donee under the settlement on its execution". Mr Ruthven had prepared a statement of Dr Henderson's assets and liabilities as at 9 October 1979, for noteholders, which read as follows: "ASSETS submission House ~ Shelley (After Commission) $175,000 Less: Mortgage - Bank 25,000 $150,000 50% of Net Equity Household Furniture & Effects jointly owned 7,045 50% of net Equity Personal Assets & Effects Contract of Sale - being for sale of equity in nursery business (payable $125 pec month for 12 months and then balance of $1,000) to the $75,000 3,523 1,000 2,500 $82, 023 LESS: LIABILITIES Promissory Notes 166,631 Income Tax 77/78 38,058 78/79 14,000 52,058 Leased Motor Vehicles Market Value 23,000 Less: Payout 24,195 1,195 Other Sundry Creditors 1,385 221,269 ESTIMATED DEFICIENCY $141,246 NOTE: Contingent Liability Income Tax - Dr Henderson has been advised by Yarwood Vane (Chartered Accountants) that he has a possible Income Tax Liability of $118,000 to 1978. Therefore, there could be a further preferential liability of $79,942". The substitution of Mrs Henderson for the noteholders as creditors removed the pressure which they had been placing upon him, but left the estimated deficiencey and the contingent liability unaltered. By the time when Dr Henderson presented his debtor's petition dated 8 March 1983, the statement of affairs verified by his statutory declaration lodged with the petition revealed a total deficiency of $242,519. The estimated value of the property was shown as $250,000, subject to a first mortgage of $20,000. The estimated nett value of $230,000 was reduced by half, being Mrs Henderson's share, and the remaining $115,000 was shown as subject to a second mortgage to Mrs Henderson of $216,575. This amount was presumably made up of the face value of the promissory notes, $166,631, and interest. The Deputy Commissioner of Taxation was shown as an unsecured creditor for $131,178. The applicant has based his claim, in the first place, upon s.120(1) of the Act, which provides as follows - "120(1) A settlement of property, whether made before or after the commencement of this Act, not being- (a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or (b) a settlement made on or for the spouse or children of the settlor of property that has accrued to the settlor after marriage in right of the spouse of the settlor, 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". It was common ground that the mortgage was a settlement of property which came into operation within 2 years before the commencement of the bankruptcy. In Barton v. Official Receiver (1986) 161 C.L.R. 75 the High Court had granted special leave to raise what was described in the judgment (at p.79) as "the short but important point of the meaning of the phrase 'for valuable consideration' in s.120(1)(a). In the course of argument, it was submitted for the respondent that a proper construction of the paragraph required that the three elements contained in the description 'a purchaser ... in good faith and for valuable consideration' be read together in determining their application to the circumstances of a particular case. In our opinion the submission has considerable force because it will often be the case that the considerations touching each of the elements will overlap and thereby influence the conclusion as to any one element. Certainly one would expect this to be so with respect to the elements of 'purchaser' and 'valuable consideration': cf., as to 'good faith', Re Hyams (28). However, it is unnecessary to pursue this aspect of the matter separately from a consideration of the argument presented for the appellant, although in coming to a conclusion we shall take as the appropriate phrase 'purchaser eee for valuable consideration'". In Re Hyams (1970) 19 FLR 232 Gibbs J., as Federal Judge in Bankruptcy, was considering an application by the trustee of an estate for a declaration that a mortgage of Torrens land in New South Wales given by the bankrupt to his wife to secure an antecedent debt was void against the trustee. His Honour held that the mortgage was capable of being a "settlement" within the meaning of s.94(1) of the Bankruptcy Act 1924-1965 and found that the wife was not an encumbrancer for valuable consideration. His Honour then recorded his view that it had not been established that she was wanting in good faith, saying (at p.256), in the passages to which the High Court referred in Barton, that "there were perfectly good reasons for the execution of the mortgage apart from a desire to circumvent the bankruptcy laws", and, "In other words, the circumstances in which the mortgage was executed were not in themselves such as to suggest to the respondent that it was given with a view to defeating the rights of the other creditors. Furthermore, although the respondent = had reason to believe that both the company and her husband were in financial difficulties, it has not been established that she knew how desperate the position was or that she ought to have known that the bankrupt was insolvent. In Mackintosh v. Pogose (34) it was said that the words 'in goo aith' 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'. In my judgment it has not been' established that the respondent had any such notice". Unlike the position in Hyams, there were not in the present case "perfectly good reasons for the execution of the mortgage apart from a desire to circumvent the bankruptcy laws". Had the memorandum of mortgage dated 18 February 1982 not been executed, the high water mark of any claim which Mrs Henderson might have had in equity to be regarded as a secured creditor of her husband would have been in respect of the provision by her of the sum of $36,000, on the faith of his agreement that she should in return obtain a mortgage over his interest in the property to the extent of that advance. That claim may well have been challenged under s.120(2). Mrs Henderson's evidence included the statement that in 1980 she felt that the mortgage was security for the sum of $36,000 which she had expended in purchasing the promissory notes. When asked, in the witness box, if she wanted security for that amount and no more, she replied "I was told that I could claim the full amount that the promissory notes were worth and that was the way the mortgage was drawn up, I gather, for the full amount of the promissory notes". She did not say who it was who told her that. In her later affidavit Mrs Henderson set out the events leading up to October 1979, which are not now material, and then stated - "Graham told us that the tax commissioner would be a preferred creditor, if Ken went bankrupt, and if Ken went bankrupt it was quite likely that the promissory noteholders would not get paid anything at all. He said that he thought that the noteholders would agree to take a reduced amount so that they would get something". She went on to say - "Graham Ruthven asked me if I would help raise the money to pay the hoteholders. I refused to. I said that I was going to go back to England with my kids, Jane (who was then 20) and David (who was then 13). I told Graham that I intended leaving Ken and going back to England. I wanted to make a clean break of everything and start afresh because after all we had nothing left in Western Australia. ... I felt I was saddled with debts that were not mine, and was not prepared to help, at all. I wanted to leave Ken in Western Australia, and go home to England with the kids". Mrs Henderson said that at an ensuing discussion between her, Mr Ruthven and Dr Henderson, Mr Ruthven said - "that I may be being a bit premature, and to give it a go. He said that if I raised the money to pay the noteholders and took a mortgage over Ken's share of the house, and at any stage found that I could not cope, I could then pack my bags and go back to England with the children, and whatever assets I had managed to acquire in Western Australia would be preserved, including any monies that I had had _ to pay out to the noteholders"™~ Temphasis supplied) Mrs Henderson then said - "I agreed to do that, and I agreed to raise the monies so that the noteholders could be paid. Ken agreed that I would have a mortgage over his interest in the house, if I did that. We agreed with Graham that he would call meetings of the noteholders, and negotiate with them. With our authority, he called a meeting of the noteholders for the purpose of making an offer, but we did not attend that meeting". When Mrs Henderson was asked if, when the mortgage document was executed, she and Dr Henderson were in financial difficulties in relation to the promissory notes she replied "No, we were not, when it was executed. We had come to an arrangement with the promissory note holders, they had been paid $36,000 for the promissory notes. «-. they were paid in full by December 1980". However she agreed that, at the time of executing the mortgage, Dr Henderson had a tax bill of "something to the tune of $36,000 plus penalties" of "something like 200 per cent". It is true that the substitution of Mrs Henderson for the noteholders as creditors removed the pressure which they had been placing upon Dr Henderson but, it did not reduce the deficiency in his estate or his liability for taxation. From 9 October 1979, the date of the first statement of assets and liabilities, until the presentation of his petition in March 1983, Dr Henderson's financial position had continued to worsen, and I am satisfied that Mrs Henderson, who was living with him throughout the period, and had a deep personal interest in the state of his affairs, was well aware of the fact. I am satisfied that at all material times from the 1980 arrangement to provide the sum of $36,000 up to and including the date of the execution of the memorandum of mortgage, 18 February 1982, Mrs Henderson was fully aware that her husband's liabilities substantially exceeded his assets and that if the Deputy Commissioner of Taxation chose to issue proceedings, her husband's bankruptcy would have swiftly followed. During the whole of that period Dr Henderson was, to her knowledge, insolvent. The mortgage under which she was given security for the full face value of the notes, an arrangement which had never been part of the 1980 bargain would, if allowed stand give her an unjustified preference over her husband's other creditors. I am satisfied that the memorandum of mortgage was not made in favour of an encumbrancer in good faith within the meaning of $.120(1)(a). Accordingly it is appropriate to declare that the memorandum of mortgage is void as against the applicant so far as is necessary for the payment of the debts owing by the bankrupt and the costs of the bankruptcy. (See In Re McDonald ex parte McCullum (1920) 1KB 205 at p.212; Barton v. Official Receiver (1984) 58 A.L.R. 328 at 335). The question whether the applicant has also shown a lack of valuable consideration involves some reference to the terms of the memorandum of mortgage. The opening provisions on page 2 of the memorandum read as follows: "IN CONSIDERATION of the principal sum stated in Item 1(a) in the Schedule now owing by the Mortgagor to the Mortgagee the Mortgagor - FIRSTLY for the purposes of securing repayment of the principal sum and interest in the manner hereinafter provided MORTGAGES to the Mortgagee the estate and interest herein specified in the land above described subject however to the encumbrances (if any) shown hereon: SECONDLY covenants with the Mortgagee as follows: THEN the Mortgagee shall not make any such demand for payment". The second covenant is difficult to construe, as there 1s no earlier reference to a demand for payment. The memorandum continued as follows:- 1. PAYMENT OF PRINCIPAL SUM THAT the Mortgagor will pay to the Mortgagee on demand:- (L) the principal sum stated in Item 1(a) in the Schedule or so much thereof as shall for the time being remain unpaid; AND (2) interest thereon computed at the rate and from the time or times provided for in Clause 2 hereof; PROVIDED ALWAYS that if the Mortgagor shall for the period stated in Item 1(b) in the Schedule commencing from the day of the date in Item 1(c) in the Schedule:- (3) punctually pay to the Mortgagee interest as by Clause 2 hereof provided; AND (4) observe and perform all and singular the covenants agreements and conditions on the part of the Mortgagor herein contained and implied by statute or otherwise; THEN the Mortgagee shall not make any such demand for payment before the expiration of the said period in Item 1(b) in the Schedule. 2. INTEREST THAT the Mortgagor will pay to the Mortgagee in the meantime and unless and until so demanded interest as follows:- at the Rate per centum per annum stated in Item 2(a) in the Schedule computed on the principal sum or on so much thereof as shall for the time being be owed hereunder by the Mortgagor to the Mortgagee from and including the day of the date stated in Item 2(c) in the Schedule" Payment of the principal sum and interest was thus to be made by the mortgagor to the mortgagee on demand, subject to the proviso relating to punctual payment. The Schedule shows the rate of interest as 10% payable on the expiration of each successive period of twelve calendar months from 4 March 1980, which is described as the "Date When Loan Commences", and the "Date on which Interest Commences". The memorandum of mortgage was dated 18 February 1982 and no interest had been paid before that date. It appears that immediately upon execution of the memorandum Dr Henderson was in default in respect of payment of one year's interest, and Mrs Henderson was entitled on demand to payment of the principal sum and interest. The period of loan was shown in the Schedule as from 4 March 1980 up to and including 30 June 1996, but the value of this term to Dr Henderson must be considered in the light of Mrs Henderson's apparent right to demand immediate payment. The relationship between these various terms of the mortgage, in the events which had happened, were not the subject of submissions to me, and I make no findings in respect of the effect of the memorandum. »' & € In those circumstances, it does not seem appropriate to make a finding as to whether the applicant has shown a lack of valuable consideration, in the sense of a consideration "which has a real and substantial value and not one which is merely nominal, trivial or colourable" (see Barton v. Official Receiver (1986) 161 C.L.R. 75 at p.86) The applicant also sought to rely upon s.121(1) of the Act, which reads as follows:- 121(1) Subject to this section, a disposition of property, whether made before or after the commencment of this Act, with intent to defraud creditors, not being a disposition for valuable consideration in favour of a person who acted in good faith, is, if the person making the disposition subsequently becomes a bankrupt, void as against the trustee in the bankruptcy". Section 121(3) provides that in s.121(a) "disposition of property" includes a mortgage of property. As Gibbs J., sitting as a judge of the Supreme Court of Queensland exercising federal jurisdiction in bankruptcy, pointed out in Re Barnes 19 A.B.C. 126 at 131, the first question which arises in such a case is "whether the evidence establishes that the transfer of the property by the bankrupt was fraudulent. Actual fraud, that is an actual intention to defeat or defraud creditors must be established and whether the existence of such an intention should be inferred from the circumstances is a question of fact". His Honour went on to point out (at p.132) that, if fraud eye were proved against the bankrupt, the second question was whether the transferee was privy to the fraud. The bankrupt Barnes, as one would expect in every case in which a finding of such a nature is sought against a bankrupt, was a respondent to the application by the trustee. In the present case Dr Henderson has not been made a respondent to the application, and has taken no part in it. Accordingly it would not be proper to embark upon a consideration of the question whether he was guilty of fraud and I do not do so. No relief therefore may be granted under s.121. The court declares that the memorandum of mortgage dated 18 February 1982 and registered at the Office of Titles, Perth, on 25 March 1982 and numbered C328825, being a settlement which came into operation within 2 years before the commencement of Kenneth Henderson's bankruptcy, and not being a settlement made in favour of an encumbrancer in good faith, is void as against the applicant so far as is necessary for the payment ¢ of the debts of the bankrupt, and the costs of his bankruptcy. Liberty is reserved to the parties to apply to any judge of the court for the making of appropriate orders to give effect to the court's declaration, in the light of the course of the administration of the estate and of the proofs of debt which are admitted by the trustee. It is further ordered that the respondent Denise Gertrude Henderson pay the applicant's costs of and incidental to the application. ¢ brad e I certify that this and the preceding thirtyone (31) pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice Sweeney Dated: 7 October, 1987 NS? No.143 of 1987 Counsel for the applicant: Solicitors for the applicant: Counsel for the respondent: Solicitors for the respondent: Dates of hearing: 13, 14 May, Mr. K.A. Dundo Robinson Cox Mr. M.J. Hawkins McCusker & Harmer 27, 28 July 1987