¢ H ye JUDGMENT No... |..2..7in. 2% Tranceneh seaennsnce oT. CATCHWORDS BANKRUPTCY -~ Cash given to daughter of bankrupt to buy property of bankrupt - whether settlement within section 120(1) Bankruptcy Act - -whether money given to daughter by bankrupt to pay for the property amounts to "valuable consideration" for purposes of section 120 - sham transaction - gift. Bankruptcy Act 1966 - ss 58, 116, 120(1), 120(8) Re DAVID CHARLES ROSS Ex parte OFFICIAL TRUSTEE IN BANKRUPTCY wm No. W 18 of 1987 »? EINFELD J. wn -\ " RECEIVED ff 28 JAN 1983 \\\_ BEDERAL COURT OF ' AUSTRALIA PRINCIPAL REGISTRY 21 January 1988 Sydney wes IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No. W18 of 1987 OF NEW SOUTH WALES AND ) ) ) ) BANKRUPTCY DISTRICT OF THE STATE ) ) ) ) THE AUSTRALIAN CAPITAL TERRITORY ) Re: DAVID CHARLES ROSS The Bankrupt Ex Parte OFFICIAL TRUSTEE IN BANKRUPTCY Trustee of the Estate of the of the Bankrupt CORAM: Einfeld J. DATE: 21 January 1988 PLACE: Sydney MINUTE OF ORDERS 1. Order that the goods particularised in the amended Application of Daniel Joseph Noel Bluett for the Official Trustee in Bankruptcy, dated 6 March are and have at all times since early April 1986 been the property of the applicant, Corina Mulholland, and not the property of the bankrupt. 2. Order the respondent to pay the applicants' costs. NOTE: Settlement and entry of these orders are dealt with in rule 124 of the Bankruptcy Rules. yon woo tee y IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION OF NEW SOUTH WALES AND ) ) ) ) BANKRUPTCY DISTRICT OF THE STATE ) No. W 18 of 1987 ) ) ) ) THE AUSTRALIAN CAPITAL TERRITORY Re: DAVID CHARLES ROSS The Bankrupt Ex Parte OFFICIAL TRUSTEE IN BANKRUPTCY Trustee of the Estate of the of the Bankrupt CORAM: Einfeld J. DATE: 21 January 1988 PLACE: Sydney REASONS FOR JUDGMENT This is an application by the bankrupt, David Charles Ross, and his daughter Corina Mulholland ("the daughter") (together called "the applicants") seeking a declaration that the goods particularised in the application of Daniel Joseph Noel Bluett, for the Official Trustee in Bankruptcy, dated 6 March 1987, are and have since early April 1986 been the property of the daughter and not the property of the bankrupt. The particularised goods ("the property") consist of the following: 1. A large alabaster lidded vase 2. A fine oval Elkington cast allegorical plaque with biue velvet frame Y ue au oo merrier we Se oe . if ete ' 3. A pair of tall silver plated cast five (5) branch candelabra and a mirrored plateau base 4. A 1974 Cadillac motor vehicle 5. A Waterford crystal chandelier 6. Paintings by Winch (4/5) 7. Paintings by Hughes (2) 8. A bronze plaque depicting St George and the dragon 9. A Waterford crystal glass suite 10. A Royal Doulton dinner service 11. A dining suite 12. An antique pedestal The bankrupt, who is suffering from Kaposi's sarcoma, an AIDS and cancer-related illness, had a sequestration order made against his property on 12 January 1987. The issue now before the Court is whether the property belongs to the daughter of the bankrupt or to the bankrupt himself. If the latter, it 1s available to the respondent for division amongst the creditors. The case turns on the validity of a transaction which took place between the bankrupt and his daughter at some time in April 1986 ("the transaction"). The evidence reveals that the principal elements involved in the transaction were as follows: 1. the bankrupt gave his daughter $5,000; 2. the daughter used this money to purchase from the bankrupt ail his personal effects, belongings and antiques; seer 3- at the time of the purchase, the bankrupt issucd his daughter with a receipt acknowledging her ownership of the goods; 4. the bankrupt was then to retain possession of the goods until his death and has done so to date. The receipt stated that the cash was received for "the purchase of all my household furniture and effects, including all works of art, antiques and jewellery". The evidence of the bankrupt revealed that the purpose of the transaction and the receipt was to prevent any possible problems in the event that his will was contested by his brother at the time of the bankrupt's death. I accept this explanation. The applicants classified the property as falling into three categories: (a) the car (b) the antiques (co) the glassware and dinner service. Submissions of Counsel for the Trustee The submissions of the trustee were basically twofold: (a) the transaction was a sham; mo tee ee (b) (a) it was a pretence to cloak a different transaction altogether, namely that of a testamentary disposition The Sham Transaction Argument The trustee contended that the bankrupt's act of giving his daughter the money and then her handing it back to him was made to look like a sale, but because 1t was not intended to effect an immediate sale, it was therefore a sham. Consequently, sections 120(1) and (8) of the Act operated to declare the transaction void as against the trustee. Section 120(1) provides: "(L) A settlement of property, whether made before or after the commencement of this Act, not being - (a) a settlement made before and in considera- tion of marriage, or made in favour of a purchaser or encumbrancer 1n 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 Yight 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, vold as against the trustee in the bankruptcy." Subparagraph (b) is not here relevant. Subsection 8 provides: (8) In this section, "settlement of property" includes any disposition of property. es Pursuant to these provisions, if there was in this case good faith and valuable consideration , the transaction will stand as valid. There seemed to be no dispute that the daughter did in fact act in good faith in the transaction. However, the trustee submitted that she was not a purchaser for valuable consideration. In Re Trambole ex parte Max Christopher Donnelly v Craig Grainger Trimbole & Water Resources Commission (unreported, 11 July 1986), Beaumont J said of the allegedly "sham transaction" then under examination (at page 7 of the judgment): "In my view, the contract was a sham transaction in the sense that 1t 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 trustee submitted that in this case the same thing has eccurred. To further support his submission, he referred to the decision of the Full Court of this Court in Trimbole v Donnelly and Water Resources Commission of NSW (Evatt, Lockhart and Wilcox JJ, unreported, 5 November 1986), where the Court adopted the interpretation given to the word "sham" by Lord Diplock in Snook v London & West Riding Investments Ltd. (1967) 2 QB 786 at 802. In essence, Lord Diplock stated that 1n order for an act or document to be ae sham, all the parties involved in the transaction must have a common intention that the act or document is not to create the legal rights and obligations which it gives the appearance of creating. Spt acter ee Toaar 4 ee eeprom rer er oT ne On the question of valuable consideration, the trustee called in aid the Full Court's reliance in Trimbolie (above) at page 8 on Barton v Official Recelver (1986) 66 ALR 355 at 360-361, where the operative definition of 'valuable' was consideration "| which has a real and substantial value, and not one which 1s merely nominal or trivial or colourable " The trustee submitted that the $5,000 paid for the goods was nominal, trivial or colourable consideration. The trustee further submitted that even if the $5,000 had come from the daughter's own pocket, it would have been inadequate. When coupled with the fact that it did not come originally from her pocket, the transaction goes beyond the realms of any kind of valuable consideration. I must confess to some doubt as to whether the origin of the money is relevant to the consideration 1n question. Alternatively, the trustee submitted that 1f the transaction was 1n good faith to a purchaser for valuable consideration, I should find that the transaction was really a gift. However, the trustee submitted that it would be an incomplete gift because there was a failure by the bankrupt to prove an act of delivery evidencing an intention to transfer physical possession of the goods. In Re Cole (1964) 1 Ch.R 175 at 185, Harman LI stated: cy oper a. ~ ry (b) "It 1s, I think, trite law that a gift of chattels 1s not complete unless accompanied by something which constitutes an act of delivery or a change of possession." It would follow that if the transaction was a gift or an incomplete gift, the property 1s entitled to be turned over to the Official Trustee. Pretence to Cloak a Different Transaction The trustee submitted that if the transaction was intended to be effective at all, the intention was realisable only upon the death of the bankrupt. What the bankrupt had intended, the argument went, was to provide his daughter with a document to be used by her after his death in the event that his brother sought to contest his will or other testamentary disposition. The trustee further submitted that the transaction had no commercial or testamentary effect. He supported this by referring to the Statement of Assets and Liabilities of the bankrupt as at 9 January 1986 which contains statements as _ to the value of his goods. The statement contains a valuation of his goods which substantially contradicts the amount for which they were sold to his daughter, but the bankrupt gave evidence that these valuations were for insurance purposes only and did not represent a statement of market values. I accept this evidence. The trustee also relied on the possibility of a discount sale to the daughter for his submission that the $5,000 was inadequate consideration. In his submission, there was actually no yor ose consideration at all for the goods in question because the receipt issued to the daughter did not itemise any of the goods involved in the transaction. Furthermore, the trustee stated that the receipt must be considered in the light of the bankrupt's evidence that the transaction was intended to include his household furniture and effects. He supported this submission by reference to both Beaumont J's decision and the Full Court's decision in Trimbole {both above). On the specific question of the Cadillac car, the facts appear to be as follows. The Cadillac was purchased by the bankrupt for $15,000 in October 1986. It was registered in the name of the daughter, even though the evidence showed that she did not contribute financially to its purchase and that the bankrupt used the car exclusively himself. The trustee submitted that the car did not come within the transaction for these reasons and because the transaction was not designed to catch any future purchases of property by the bankrupt. Consequently, whatever the fate of his other submissions, he sought a specific finding that the car is the property of the bankrupt and not of the daughter. In reply to a suggestion that the car might be considered a gift in view of the fact that the daughter had signed in blank a transfer of registration form, and based on the fact that although registration of a motor vehicle in a person's name is not necessarily definitive of ownership, it does carry with it an inference and the connotation of legal ownership, the trustee submitted that even i1f it were a gift, 1t still came within section 120(8) of the Act as a "disposition of property". ee vos eet In Ward v Dabnas (1984) 3 FCR 112 at 117, Wilcox J sought to define the limits of the expression "settlement": "The substitution in s. 120(8) of a new and wider definition of "settlement" offers to Australian courts the opportunity to re-think the desirability of adhering to the traditional tests. No longer does the definition have the connotation of pemmanent benefit suggested by "conveyance or transfer" of property. Rather 1t refers to "disposition" of property. It ought to be enough that the relevant transaction 1s a deliberate disposition of a capital fund. It ought to be immaterial whether the settlor contemplates that the capital fund will be held indefinitely in specie, converted to some other fom of capital or spent by the settlee." His Honour's dictum is, with respect, attractive to me as an appreciation of the meaning of "settlement". If the trustee's contention that the actions of the bankrupt involving the purchase and registration of the car amounted to a settlement of property within section 120 of the Act, is correct, section 120 would place it in the hands of the trustee. He also submitted that there had been no consideration passing from the daughter in relation to the car, and that the car was aiso property to which the trustee is entitled for that reason. Submissions by Counsel for the Applicants On the sham argument, the applicants submitted that the parties went to extraordinary lengths to ensure that the transaction was to have a legal effect. He relied on the following facts: (a) the parties to the transaction had a neighbour present as an independent witness; weg eee (b) they produced documents as a result of the transaction; (c) there had been full and frank disclosure; (d) the reason for the transaction was to ensure that the property was sold so that it would not be part of the estate of the bankrupt when he died. The applicants described the case as a sale of goods for consideration which at common law would be adequate. They referred to Rimar Pty. Ltd. v Pappas 64 ALR 9 per Gibbs CJ at 15: "As Goff J pointed out in Re Densham (A Bankrupt) [1975] 1 WIR 1519 at 1527, in Re Pope; Ex parte Dicksee 1t was impossible to evaluate the benefit of the consideration and therefore impossible to see whether 2t was equal to the property given up or not. In that case, and again in Re Windie [1975]1 WIR 1628, Goff J expressly rejected the view that consideration has to replace something in the debtor's estate. He said in the latter case (at p 1637):- 'It is clear that the consideration does not have to replace anything 1n the debtor's estate for 1t may be something which he has bargained shall he provided for a third party, nor does it have to be equal to that which has been taken out.'" They also distinguished Barton (above at page 6) (where it was stated that the word "purchaser" means a buyer in the commercial sense) because, they said, strict commercial rules do not apply where there is a family transaction. The applicants identified two interdependent transactions within the one, vV1z: (a) the giving of the money to the daughter; (b) the selling of the goods. Counsel submitted that if either of the two transactions was to be a section 120 settlement, 1t would have to be the giving of the money to the daughter. In the circumstances of this case, he submitted, this gift could not properly be described as a "settlement" within the meaning of the section. The applicants finally submitted that all the property in this case falls within the ambit of Section 116(2) of the Act. This subsection provides for exceptions from the general rule in subsection (1), declaring in general terms that the bankrupt's property at the time of sequestration and the after-acquired property are divisible among the creditors. The relevant exceptions in subsection (2) are: "(a) property held by the bankrupt in trust for another person; (b) necessary wearing apparel, necessary household property of the bankrupt (including any sewing machine used for domestic purposes) and such other household property of the bankrupt, if any, as the creditors by resolution detemmine; (c) ordinary tools of trade, plant and equipment, professional instruments and reference books of the bankrupt not exceeding 1n the aggregate $500, or such greater amount as 1s prescribed for the purposes of this paragraph, in value, and such other tools of trade, plant and equipment, professional instruments and reference books of the bankrupt, if any, as the creditors by resolution determine or as the Court, on the application of the bankrupt, determines." eo meet ee er Counsel for the applicants also referred to section 58 of the Act which provides for the vesting of the bankrupt's property in the Official or a registered trustee. He submitted by reason of these two provisions that this property did not vest and was not divisible amongst creditors hy the trustee. For myself I cannot see the relevance of section 58 to this matter. From this account of the argument, it can be seen that the issues for determination here are: Ca) Was the transaction a valid sale despite the conditions attached to it? (b) Does the transaction otherwise fall within section 120? (oc) Is the property 1n question covered by section 116(2)? In my view the transaction was not a sham but was clearly a genuine sale of goods subject to the condition that the vendor may retain use of the goods as a bailee pending his death. The principle that the court will go behind the transaction in order to ascertain the reality of the transaction is now well settled: see Pincus J in Re Alexander David Douglas ex parte Graham Lindsay Starkey (unreported, 20 July 1987) at page 9. The reality of the transaction 1n this case is that it was intended by the parties to be legally valid and binding. I think the bankrupt intended that he sell all his present and future property to his daughter for $5,000. The evidence showed that the bankrupt's wishes were that his daughter receive all his property upon his death and that in order to avoid possible problems after his death concerning his will, ™% weg we oy ooerocy or "ue he intended the transaction to be valid, legal and effective immediately. The evidence has revealed no other possible motive for the transaction and none has been suggested. There was no evidence or suggestion that a possible bankruptcy was even contemplated. In my view, the car and all after-acquired property were intended to be inciuded in the transaction even 1f purchased long after the date of the transaction. As for section 120, the transaction clearly arose within the two year period prior to the bankruptcy. It was not seriously contested that it was made in good faith. In order for the transaction to be then upheld as valid, two questions remain: (a) Did the giving of the $5,000 amount to a settlement of property? (b) If so, did the $5,000 amount to valuable consideration? I do not think the $5,000 could amount to a gift and therefore a settlement, because in my view, it was given conditional on the daughter using it to buy back the bankrupt's goods. The question of whether the sale and purchase was for valuable consideration is more difficult. The problem is complicated by the fact that the bankrupt gave the daughter the money to pay for the goods. It seems to me that the answer to the question of valuable consideration depends on a very intuitive assessment of the value of the goods. Although there is certainly evidence from which a conclusion can be drawn that values in excess of $5,000 have been placed on the goods by the bankrupt, the decision in Barton (above at page 6) only requires me to determine whether $5,000 1s "real and substantial". aor coe te The transaction cannot be examined in isolation from ail other circumstances (see Barton (above at page 6); Wytkin ex parte Wytkin (Forster J, unreported, 2 October 1987 at page 7). One critical circumstance here is that it was a family transaction negotiated or fixed against a distinctly tragic personal background. Another is the desire of the bankrupt to attain his testamentary wishes without fail. No expert evidence was brought by the trustee to establish that the $5,000 was a grossly inadequate net price for the goods solid as a whole without the need to advertise them, pay agent's commission, or wait for their complete liquidation. There is no evidence that all the goods had a market at all or what the size and extent of the market was. The two considerably larger valuations by the bankrupt himself, on which the trustee placed reliance, were not shown to be any more expert than the $5,000 for which the daughter purchased the goods. There is no reason not to accept the insurance explanation for at least one of them. A discount sale to a daughter 1s not a disqualification of the consideration from being "valuable"; and the fact that the daughter was not to have the use of the goods for some years means that she has to bear any net depreciation in the total value of the goods when she does take actual possession of them. For all these reasons, I think it should be concluded that the sale was for valuable consideration. In the circumstances, it 1s not necessary to rule on the applicant's submission based on section 116. Some of the goods were obviously being used by the bankrupt for his day to day living and are thus immune from division among creditors by the trustee. The situation as to others is more problematic but the matter was not really litigated, and I do not believe I should rule on the matter. wae I therefore make the declaration sought by the applicants and order the respondent to pay the applicant's costs. | certify that this and the our reen preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Einfeld Associate Micktins oh men - Dated: 2/ ganvdry /988 pam gee err me eee So ee es nee we wore aren eer Counsel and Solicitors for Applicant Counsel and Solicitors for Respondent Date of Hearing Date of Judgment Mr. B. Skinner instructed by Duffield & Duffield Solcitiors Mr. M.P. Aldridge instructed by Lobban McNally & Harney Solicitors 10 August 1987 21 January 1988 es) er rene