NOT FOR GENERAL DISTRIBUTION JUD@MENT No. A./$1- IN THE FEDERAL COURT OF AUSTRALIA EXERCISING FED I ION N.S.W. No. 665 of 1982 we IN_BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES THE AU: IAN CAPITAL ITORY Re: JACK FRANKLIN WILLS and ANNETTE JOAN WILLS Ex Parte: JACK FRANKLIN WILLS and ANNETTE JOAN WILLS Applicants THE OFFICIAL TRUSTEE IN RUPTCY Respondent and Ex Parte: THE OFFICIAL TRUSTEE IN UPTCY Applicant PRANBRIDGE CORPORATION PTY. LTD. Respondent COURT: NORTHROP J. DATE : 4 NOVEMBER 1987 PLACE: MELBOURNE MINUTES OF ORDER THE COURT ORDERS THAT: - 1. The declaration and orders sought by the Official Trustee in his application dated 23 December 1986 be refused. 2. Pranbridge is entitled to the funds on interest bearing term deposit with the Commonwealth Trading Bank of Australia in the joint names of Pranbridge and the Official Trustee. wW The Official Trustee pay Pranbridge's taxed costs of this application. 4. The application dated 24 July 1986 by Jack Franklin Wills and Annette Joan Wills be refused. 5. There be no order for costs on that application. (This order is to be settled and filed in accordance with rule 1li¢ of the Bankruptcy Ruies.,; IN THE Cc T_OF AUS IA CISING ERAL JURISDICTION N.S.W. No. 665 of 1982 —wewvw IN _BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY Re: JACK FRANKLIN WILLS and ANNETTE JOAN WILLS Ex Parte: JACK FRANKLIN WILLS and ANNETTE JOAN WILLS Applicants THE OFFICIAL TRUSTEE IN BANKRUPTCY Respondent and Ex Parte: THE OFFICIAL TRUSTEE IN UPTCY Applicant PRANBRIDGE CORPORATION PTY. LID. Respondent COURT: NORTHROP J. DATE : 4 NOVEMBER 1387 PLACE: MELBOURNE REASONS FOR JUDGMENT: These two applications were heard together. On 20 September 1982, Jack Franklin Wills ("Wills") and Annette Joan Wills, his wife, became bankrupt by virtue of the presentation of their own petition; see s.55 of the Bankruptcy Act 1966 ("the Act"). The Official Trustee is the trustee of their joint and separate estates. They were discharged from bankruptcy by operation of law on 20 September 1985; see s.149 of the Act. It was not until some two years later that these two applications came on for hearing. In reality, what is being sought, 15 the determination of who is entitled to a sum of money currently held in a bank account in the joint names of Pranbridge Corporation Pty. Ltd. ("Pranbridge"") and the Official Trustee. In law, what is being sought, is the determination of a number of matters including questions arising under s.120 of the Act. By application dated 24 July 1986, Wills and his wife sought a declaration that they were entitled to the money in the bank account and an order that it be paid to them. The Official Trustee was named as respondent to that application. Since 19 October 1986 Pranbridge has been controlled by Wills and his wife but Pranbridge is not named as a respondent to that avplication. Pranbridge has no assets apart from its interest, if any, in the money in the bank account. There is no evidence as to the financial position of Pranbridge, whether it 15 insolvent or the nature and extent of 1ts creditors, it any. By application dated 23 December 1986, the Official Trustee sought a declaration that each of three mortgages granted by Wills to Beneficial Finance Corporation Ltd. ("Beneficial") on 16 July 1982 on each of three lots of land respectively at Port Macquarie owned by him constituted a settlement under paragraph 120(1)(a) of the Act and was void as against the Official Trustee. Alternatively, the Official Trustee sought a declaration that the sale by Wills of the three lots and the payment of the net proceeds therefrom to Heneficial was a settlement under paragraph 120(1)(a) and was void as against the Official Trustee. Alternatively, the Official Trustee sought a declaration that the payment of the proceeds of sale was made by Wills for and on behalf of Pranbridge which was obliged to contribute to Wills for that payment. To give effect to those declarations, the Official Trustee seeks an order that Wills pay to him the sum of $173,759.55 being the prsceeds sf the sale of the three sots. Further, the Official Trustee 1s seeking a declaration that he 1s entitled to the money in the bank account and an order that it be paid to him. Wills is not named as a respondent to the application by the Official Trustee. The facts giving rise to the applications are somewhat complex, but in the result can be stated simply. Despite apparent conflict of evidence as to those facts, the findings have been made without difficulty. At all material times before 20 September 1982, Wills carried on business as a developer and builder in the Port Macguarie area. As part of that business, he became registered as the proprietor of the three lots the subject of these applications. By a contract for sale of land dated 18 March 1982, Wills, as purchaser, agreed to buy the Macquarie Barracks Motor Inn ("the Motel") including the land on which the Motel was Situated, the goodwill of the business, and the furniture and fittings being used in the Motel business, for the sum of $515,000, apportioned as to $483,340 for the land, premises and goodwill and as to $31,660 for the furniture and fittings. In due course Wills became registered as the proprietor of the Motel land. On the evidence before the Court, I find that Wills purchased the Motel as trustee of what is described as the Wills Family Trust. That trust was constituted under a Deed of Settlement dated 17 March 1982, being the day before the contract to purchase the Motel was signed, and entered into between Stanley Bede Doraky as settlor and Wills as trustee. A large number of documents relating to the purchase of the Motel and made before 18 March 1982 make reference to the fact that the purchaser of the Motel was the Wills Family Trust. All this material was admissible in evidence in proceedings of this type; see Official Trustee in Bankruptcy v. Arcadiou (1985) 8 F.C.R. 4 per Woodward and Northrop JJ. at p.ll. As a result, I find that Willis surcthased the Motel as trustee of the Wills Family Trust. The agreement to purchase the Motel was completed on of about 15 July 1982 when the balance of the purchase price was paid by Wills. Thereafter, the Motel business was conducted by Wills in his capacity as trustee for and on behalf of the Wills Family Trust. In order to purchase the Motel, Wills borrowed the whole of the purchase money, namely $515,000. He borrowed $463,500 from Beneficial. Beneficial would only lend the money if, 1m addition to being granted a mortgage over the Motel land and a bill of sale over the furniture and fittings of the Motel, Wills granted a mortgage to Beneficial over each of the three lots of land at Port Macquarie owred by him. The three mortgages were described during the hearing as collateral mortgages. They were given by Wills in favour of Beneficial by way of security for the repayment of the sum or $403,500 lent Sy Beneficial to Wilis co finance the purchase of the Motel. Beneficial lent the money to Wills in his capacity as trustee of the Wills Family Trust and Wills granted mortgages in favour of Beneficial over his three lots. This was in addition to the mortgage and bill of sale acquired by Beneficial over the Motel land, furniture and fittings. Other mortgages were granted over the Motel land to other mortgagees. On 6 September 1982, Wills retired as trustee of the Wills Family Trust and Pranbridge was appointed trustee of the Wills Family Trust. Pranbridge continued to conduct the Motel business until 23 November 1383 when the Motel was sold by a mortgagee exercising a power of sale under a third mortgage. On the same day, Pranbridge sold the furniture and fittings to the purchaser of the Motel for $14,000. A discharge of the bill of sale over the furniture and fittings duly executed by Beneficial was handed to the purchaser who paid the $14,000 to Pranbridge. In the meantime, the three lots of land owned by Wills were sold and the net proceeds paid to Beneficial, the mortgagee of those lots. One of the lots was sold before Wills became bankrupt on 20 September 1982 while the other two lots were sold after that date. The net proceeds of the three sales amounted too $179,759.33 and the Official Trustee claims an order that Wills pay that sum to him. I shall consider that claim. The claim 15 base upon Sup-section 12011) of the Act. For present purposes, the relevant provisions of that sub-section are set out:- "120(1) A settlement of property ... mot being - (a) a settlement ... made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; ... is, 1f the settlor becomes a bankrupt and th e settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy." In Arcadiou, above, a Full Court of the Federal Court held that a mortgage of land registered under the Torrens system of land registration was a disposition of property and thus a settlement under 5.120 of the Act; see sub-sections 120(1) and (8). In the present case, the three lots of land owned by Wills constituted land registered under the Reali Property Act 1900 (N.S.W.) and the mortgages granted to Beneficial were mortgages under that Act. Accordingly, each of the three mortgages was a settlement under sub-section 120(1) of the Act. The question, then, is whether each of the mortgages made in favour of Beneficial, as encumbrancer, was made in good faith and for valuable consideration. If the answer is yes, each mortgage comes within paragraph 120(1)(a) of the Act and thus is not void by reason of sub-section 120(1). In those circumstances, sub-section 120(2) has no application. In the present case, there has been no suggestion that the mortgages were not made in good faith. Accordingly, the only question is whether the mortgages were given for valuable consideration. On the facts of this case, that question is whether Beneficial gave valuable consideration for each of the mortgages. The law to be applied in determining that tyoe of question was discussed by the Full Court in Arcadiou. In that case the issue was whether a mortgage made by a mother in favour of her son and daughter-in-law was a settlement made for valuable consideration under paragraph 120(l)\a) of the Act. The agreement between the parties, in its simplest form, was that the mother promised to give a mortgage of her land at Mildura to the son and daugher-in-law if the son and daugher-in-law would give a mortgage of their land at Werribee to a finance company to secure the sum of 6§50,000 to be lent by the finance company to the son's father. At pp.11-12 (8 F.C.R.) Woodward and Northrop JJ., ain considering that agreement, said:- "It is not to the point that there may have been a failure by the parties to that agreement to consider all matters in detail arising with respect to that agreement. The agreement was made. It was executed. The mother gave the mortgaqe of the Mildura iand to the son and daughter-in-law. The son and daughter-in-law gave the mortgage of the Werribee land to Guardian Investments Pty. Ltd. Guardian Investments Pty. Ltd. advanced money by way of loan to the father. The total amount' so advanced was of the order $44,000. The issue is whether what the son and daughter-in-law did constituted vaiuable consideration for the mortgage to them of the Mildura land." Their Honours then considered the opinion of Lockhart Jd. expressed in Barton v. Jificial Resaiver (1l3d4) 4 F.C.R. 335 that the phrase "purchaser ... for valuable consideration" in Paragraph 120(1)(a) of the Act comnotes "a purchaser in the ordinary commercial sense who gives consideration which is real and substantial", and continued at p.12:- "There 1s no doubt that in the ordinary commercial sense, the son and daughter-in-law gave consideration for the mortgage of the Mildura land. That consideration was real and substantial. It is not to the point that the mother received no financial benefit From the agreement. What 15 important is that the consideration moved from the encumbrancer. It was valuable consideration within the meaning of s 120(1)(a) of the Bankruptcy Act." After judgment had been given, the High Court gave judgment in an appeal from the judgment of the Full Court of the Federal Court in Barton v. Official Receiver. The High Court dismissed the appeal; see Barton v. Official Receiver (1986) 66 A.L.R. 355; and at p.362 endorsed the ruling of the Full Court of the Federal Court:- "as that a 'purchaser see for valuable consideration' within the meaning of 5s 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 colourahle'." As in Arcadiou, im the present case there is no doubt that in the ordinary commercial sense, Beneficial, as ancumbrancer, gave consideration fs5e eacn of the morcigages granted by Walls. The consideration was real and substantial. That consideration was constituted by Beneficial lending $463,500 to Wills in his capacity of trustee ot the Wills Family Trust to enable Wills to purchase tne Motel. That consideration moved from Heneficial. It was valuable consideration within the meaning of paragraph 120(1)(a) of the Act. It follows, therefore, that none of the mortgages is void as against the Official Trustee. The payment of the net proceeds of sale of each of the lots the subject of the mortgages to Beneficial cannot he treated differently. Those proceeds were paid to Beneficial pursuant to the mortgages and those payments cannot be said to constitute settlements - 10 - which are void as against the Official Trustee. On these findings, there is no basis on which the third claim by the Official Trustee can succeed. That claim is based on the equitable principle that a trustee 1s entitled to be indemnified by the beneficiary of the trust against liabilities incurred by the trustee in holding the trust property. On the facts of this case, Beneficial was enforcing its rights secured by each of the mortgages. Pranbridge, or for that matter, Wills in his capacity as trustee of the Wills Family Trust, did not incur the liability to pay the proceeas of the sSaie or each of tae three lots to Beneficial. Beneficial was enforcing its rights against Wills in his personal capacity pursuant to the terms of the mortgages. There remains for consideration what orders should be made with respect to the sum of money currently held in the bank account in the joint names of Pranbridge and the Official Trustee. It will be recalled that on 23 November 1983, the Motel was sold by a mortgagee exercising a power of sale under a third mortgage. On the same day, Pranbridge sold the furniture and fittings being used in the Motel toa the purchaser of the Motel for $14,000. The furniture and fittings were subject to a bill of sale in favour of Beneficial. A discharge of the bill of sale duly executed by Beneficial was handed to the purchaser at the time the $14,000 was paid by the purchaser to Pranbridge. Apparently a dispute arose between Pranbridge and the Official Trustee as to who was entitled to the $14,000 and it was agreed that - ll - the Money be placed in an interest bearing account in the joint names of Pranbridge and the Official Trustee pending resolution of that dispute. From the findings already made, I am satisfied that when Wills purchased the Motel, furniture and fittings, he did so in his capacity as trustee of the Wills Family Trust. When Pranbridge became the trustee of that Trust, 1t held the furniture and fittings as trustee of the Wills Family Trust. It follows, that when Pranbridge received the $14,000 it did 50 1M 103 capacity as trustee. At the hearing, counsel for the Official Trustee sought to challenge the finding that Wills, and then Pranbridge held the furniture and fittings as trustee. In reality, counsel did not dispute that Wills held the Motel as trustee but he did dispute the position with respect to the furniture and chattels. In s0 doing, counsel referred to what was said on oath by Wills at his examination under 5.69 of the Act conducted on 6 December 1982, including a statement that the proceeds of the sale of the three lots was a loan by him to the Trust. At that examination Wilis had no legal representation. All the documentary material showing that Wills purchased the Motel as trustee was not available to the Official Trustee. The evidence given by Wills was contradicted by the documents that are before the Court. The statement by Wills 1s in the nature of what a layman might conclude was the effect of the documentary material. I prefer to rely upon the documentary material which had come - 412 - into existence before Wills purchased the Motel. In association with what Wills said at his examination, counsel for the Official Trustee relied upon a statutory declaration made by Walls on 3 July 1982 and contained in the bill of sale given with respect to the furniture and fittings. In that declaration Wills declared that the chattels were his absolute property and that he was the owner by reason of the contract under which he purchased the Motel. Any apparent inconsistency between that declaration and the true position is not sufficient to show that Wills, as owner of the furnitures and fittings, neid them on his own Senalr and not as trustee of the Wills Family Trust. The chattels were Purchased as part of the purchase of the Motel and under the one contract. Accordingly, I find that Pranbridge held the furniture and fittings as trustee of the Wills Family Trust at the time they were purchased by the purchaser of the Motel on 23 November 1983 and that when Pranbridge received the sum of $14,000, 1t did so in its capacity as trustee of the Wills Family Trust. It 1s not absolutely clear why the sum of $14,000 was paid into the interest bearing account in the joint names of Pranbridge and the Official Trustee, although 1t appears to have been done because of a dispute between Pranbridge and the Official Trustee as to who was entitled to the proceeds of the sale. They agreed on the arrangement which was to remain in existence until the question of ownership was resolved. Thereafter, the sum of $14,000 together with the - 13- accrued interest, would be paid to the person entitled to the proceeds of the sale. At the time the arrangement was made, there was a dispute between the Official Trustee and Wills and his wife on the issue of whether Wills had purchased the Motel, goodwill, furniture and fittings as trustee of the Wills Family Trust. That issue has been decided in favour of Wills and his wife. It 1s not necessary to refer in detail to the terms of the Deed of Settlement dated 17 March 1982. It as a oy tnat teed ar iL id at i Surficient tc say chat the trusts cr discretionary and neither Wills nor his wife are entitled absolutely to any of the trust funds. It follows that as between Pranbridge and the Official Trustee, Pranbridge was entitled to the $14,000 being the proceeds of the sale of the furniture and fittings of the Motel. The Official Trustee was entitled to those assets only which vested in him under s.58 of the Act or constituted after acquired property of Wills or his wife. Those assets did not include the sum of $14,000 in dispute in these proceedings. At the hearing of the oBlications, additional my w rey contentions were made on behalf of the parties. In the application by Wills and his wife, the Official Trustee was mamed as respondent. Pranbridge was not named as respondent even though orders were sought which affected Pranbridge. Even though Wills and his wife control Pranbridge, that company should have been made a respondent to the application by Wills and his wife. The application by the Official -_——-—— - 14- Trustee, quite correctly, names Pranbridge as respondent since it 1s seeking an order that the fund in dispute, being the §14,000 plus accrued interest, be paid to him. At the same time the Official Trustee 15 seeking orders against Wills. Wills should have been made a respondent to the application by the Official Trustee. The basis of the claim by the Official Trustee, insofar as it rests on the fact that Pranbridge did not receive the sum of $14,000 as trustee of the Wills Family Trust, 18 rejqected. The claim, as supported in Court, was that the three mortgages granted by Wills over the three lots owned by him were settlements and were void under 5.120 of the Act, that the payment of the net proceeds of the sale of those lots to Beneficial was void and thus the Official Trustee was entitled to the sum of $179,759.33 from Wills. He contended that he was entitled to the $14,000 together with accrued interest, in vart satisfaction of the $179,753.33 which should have vested in hin. Accordingly, in my opinion, as between Pranbridge and the Official Trustee, Pranbridge 15 entitled to the sum of $14,000 together with accrued interest thereon. It follows, that the declarations and order sought by the Official Trustee in his application dated 23 December 1986 should be refused. Although not sought by Pranbridge, in that application a declaration should be made that Pranbridge is entitled to the funds on interest bearing term deposit with the Commonwealth Trading Bank of Australia in the joint - 15 - names of Pranbridge and the Official Trustee. The Official Trustee should pay Pranbridge's costs of this application. As a result of the findings made and in the absence of Pranbridge as a respondent to the application dated 24 July 1986 made by Wills and his wife, and the absence of evidence as to the solvency of Pranbridge, the declarations sought by that application should be refused. It is unfortunate that there has been long delay and the expenditure of so much in legal costs with respect to what Was, in the circumstances, a relatively s5Masi amount of money. Wills and his wife claim that from 15 July 1982 to 23 November 1983, the Motel was conducted for and on behalf of the Wills Family Trust. They claim that they managed the operations of the Motel on behalf of the Trust pursuant to the terms of a written management agreement. That written agreement was not 1n evidence before the Court. It 1s said tha iT from 15 to have been lost. Willis and his wife c¢lai July 1982 to 30 June 1983, an amount of $320,200 15 due and tJ a Payable to them by Pranbridge under the terms of the management agreement being management fees. The amount of $20,200 15 shown as a liability in the list of current iiaabilities of Pranbridge as set out in its income tax return ef the financial vear ending 30 June 1983. That return shows that Pranbridge made a loss of $51,710 in that period. Wills and his wife claim that they are entitled to further Management fees for the period 1 July 1983 to 23 November 1983 being the date the Motel was sold. - 16 - On these facts, mice questions arise as to the application of s.131 of the Act. At the hearing, no detailed submissions were made with respect to the application of that section to the facts found. The parties tendered as evidence correspondence containing offers and counter-offers relating to the disposal of the fund in the bank account. No agreement was reached and it is not for this Court to arbitrate between those competing offers. However, in the special circumstances of this case, the Court does comment that there appears to be force in the view that, on the assumption that there was awritten management agreement containing terms as alleged by Wills and his wife, the amount of fees apportioned to the date of bankruptcy should he treated as property of the bankrupts which should vest in the Official Trustee while the amount of fees apportioned from the date of bankruptcy to the sale of the Motel should be treated as income under s.131 of the Act. On that basis, and in the absence of other material bearing on the solvency of Pranbridge, the $14,000 could be apportioned as between the Official Trustee and Wills and his wife on the same proportion and those amounts with the same proportion of accrued interest, be paid to the Official Trustee and Wills and his wife respectively. In the circumstances, the application by Wills and his wife should be refused. There should be no order for costs on that application. I certify that this and the fifteen (15) preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice Northrop. Associate ..Shacdu.f. WM 4 November 1987