JUDGMENT No. 2> . 7.38... CATCHWORDS Bankruptcy - purchase of land in name of company controlled by the bankrupt - capacity in which bankrupt entered into contract of sale - whether the purchase of tha land constituted a settlement of property by the bankrupt to the company - whether thea settlement was made For valuables consideration - natura of valuable rconsideraticn. o the company by Whether payment of moneys by the bankrupt t land comstituted a way of part payment of purchase gorics of settlement of property - whether such money was money of the Bankrupt - onus of proof. Bankruptcy Act 1366 35.3,115,120 Re: JOE DE FAZIO, Bankrupt Ex parte: THE OFFICIAL TRUSTER IN BANKRUPTCY (as trustee of the property of Joe De Fazio, a bankrupt) Applicant and EOQURTH GOZBARR PTY. LTD. Respondent NORTHROP 3. — 22 FEBRUARY 1382 NON ea 1s MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA ) } EXERCISING FEDERAL JURISDICTION ) No. 197 of 1986 ) IN BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA Re: JOE DE FAZIO A Bankrupt Ex Parte: THE OFFICIAL TRUSTEE IN BANKRUPTCY {as trustee of the property of Joe De Fazio, a Bankrupt) Applicant and POURTH GOCBARB PTY. LTD. Respondent COURT: NORTHROP J. DATE : 22 FEBRUARY 1988 PLACE: MELBOURNE MINUTE OF ORDER THE COURT ORDERS THAT the application be dismissed with costs to be taxed. (This order 15 to be settled and filed in accordance with rule 124 of the Bankruptcy Rules.) IN THE FEDERAL COURT OF AUSTRALIA ) ) EXERCISING FEDERAL JURISDICTION ) No. 197 of 1986 ) ) IN BANKRUPTCY BANKRUPTCY DISTRICT OF THE STATE OF JTCTORIA Re: JOE DE FAZIO A Bankrupt Ex Parte: THE OFFICIAL TRUSTER IN BANKRUPTCY fas trustee of the property of Joe De Fazio, a Sankrupt) Applicant and FOURTH GOZBARB PTY. LTD. Respondent COURT: NCRTHROP dg. DATE : 22 FEBRUARY 1988 PLACE: MELBOURNE REASONS FOR JUDGMENT On 24 March 19686, pursuant to the Bankrupte;y Act 19656, a sequestration order was mad2@ against ths estate of Joe De Fazio, also known as Joseph Paul De Fazio, ("the bankrupt"). The order was based on an act 3F bankruptcy which was committed on 'Ls March 1385 and, pursuant to 5.115 of the Act, the bankruptcy of the bankrupt was deemed to have commenced on 15 March 1985. Within a period of two years before 15 March 1985, the debtor was involved in a number of transactions involving the purchase of a dwelling house situate and known as 29 Wimba Avenue, Kew, ("the land"). As ti a result of those transactions, on 21 December 1983, a company, Fourth Gosbarb Pty. Ltd., ("the Company"), became registered as the sole proprietor of the land. By application dated 22 January 1997, the Official Trustee in Bankruptcy, as trustee of the property of the bankrupt, ("the Official Trustee"), 15 seeking orders, in substance, that the bankrupt was the beneficial owner of the land and alternatively, that the transactions involving the purchase of the land constituted a settlement of property by the bankrupt under 5.120 of Ehe Act and waz yori under paragrapn L20(1'(a) sf the Ack. The relevant garts af that saragraph "120(1) A settlement of fraperty, ... nok being - ,a) a settlement... mad2 in favour of a purchaser ... ain good faitn and for valuable consideration .., She settlior becomes a bankrupt and th Ment came into operation after, or within years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy." i oF ow Ts fa He wm tim Ther] are a number of unsatisfactory Featuras about this case, some of which will be referred to in detail later aun these reasons. For present purposes, 1t is sufficiant to say that the case as initially presented cn behalf of the Official Trustee did not include a detailed analysis of the hi documents contained in the file of the solicitor acting an behalf of the bankrupt and the Company in relation to the purchase of the land. The file became an exhibit at the hearing of the application and it was only towards the concluding part of the hearing that the true significance of the contents sf the file became apparent. In acase whera aa the truthfulness of the bankrupt and witnesses favourable ta b his interests 15 very much in issue in relation to avents before the hearing, the fi at a that Gecurred more than four ye rn cr ul contents of documents prepared at the time the transact1 were being conductad assume a compelling roles. The case as initially presented by the Official Trustee was deceptively simple. t all material times before 2l December 19383, being the date the Company became registered as the oroprietor of the land, the land was registered in the names of a Mr. and Mrs. Waters. By & contract of sale made in May 1983, the Waters agrased to sell the iand to a Richard Dover for the sum of 3192,0090. By a2 contract of sale constituted by a sale note dated 5 Seprember 1385, Dover agreed to seil the land to the bankrupt & Nominees" for the sum sf $196,000. Pursuant to the terms sf the sale note, a deposit in the sum of $19,000 was paird by the bankrupt. Dover was unable ta complete nist purchase. By an agreement ain writing dated 27 October 1333 and made between the Waters, Dover and the bankrupt, the parties agreed to resolve the problems that had arisen between them in accordance with the terms contained in the agreement. For present purposes, it is sufficient to say that the agreement contained terms to the effect that the Waters would enter into a contract of sale to sell the land to the bankrupt for $190,000, the deposit of $19,000 already paid by the bankrupt to Dover would be treated as the deposit under the new contract of sale and that the completion date would be 5 December 1993. Pursuant to the terms of the agreement, a contract of sale dated 27 October 1983 was entered into between the Waters as vendors and the bankrupt "and/or Nominee" as purchaser for $130,000. The deposit of 319,000 was described as "has already been paid" and the residue was due on 5 December 1983. Clause 4 of the contract was as follows: - "d, If the property 15 expressed as scold to a named Purchaser 'and/or nominee 'or words of like effect) then tha named Purchaser may nominate a substitute or additional Purchaser(s) but in any event the named Purchaser shall cemain personally liable for the due oerfsarmanc2 of all his sbligations under this contract unti2 the substituted Purchaser(s) 1f any has legally taken his place and become bound to fulfil the Pucchaser's obligations under this contract whereupon the named Purchaser shall guarantee the due performance of those obligations. These arrangements shall be completed to the reasonable satisfaction of the Vendor or his solicitor at the expense of both the Purchaser and the nominee(s)." ettlement of the contract of sale occucrad on 5 December t2 1333 when the balance of the purchase price was paid and a iO) ansfer of the land from the Waters to the Company wa wT aT signed by the Waters. Pursuant to that transfer, the Company became registered as the proprietor of the land on il December 1983. On these facts, there 15 much to be said for the view that thera had been a settlement of property by the bankrupt within 5.120 of the Act. In that section a settlament of property includes any disposition of property; see sub-section 120(8). In he present case the Official Trustee did not suggest that the settlement was not made in "good faith." Thus the issue raised by the Official Trustee was whether the settlement had been made for valuable consideration within the meaning of paragraph 120(1l)(a) sf the Act. Before considering this aspect further, veferance 'D n ow bh Should be made to some further fa . Late in 1382, the bankrupt and his mother, Maria, became directors of the Company. It is true to say that at all relevant times, the that a et in bankrupt controlled the Company. The bankrupt cla.m a ry all yvelevant times the land was to be used for the benefit a ry a family trust and that the Company was to be the trustee Chat trust, The family trust, called the De Fazio Family Trust No. 2, was created by a deed of settlement dated 16 September 13983. The settlor 15 Joseph Guiliano, the trustee is the Company, the primary beneficiaries are stated to ba the bankrupt and his children, while additional members of the class of general beneficiaries are Maria and the spouse or widow of the bankrupt. Stamp duty was paid on the settlement on 4 November 1983. Counsel for the Company contended that at all relevant times with respect to the transactions leading to the transfer of the land, the bankrupt was acting as agent for the Company or as a trustee for the De Fazio Family Trust No. 2 and that at no time was he acting on his own behalf. The bankrupt gave evidence to that effect. In thes2 circumstances, the contents of the file of iD the solicitors them acting on behalf of the bankrupt 1s of amportance. The solicitor handiing the matter 15 overseas and has been overseas for a number of years. It was impracticable to obtain evidence from him. The contents of the file support the evidence of the bankrupt. The file commences with the sale note, Dover to the bankrupt, and the letter from the agent acting for Dover to the bankrupt. The next document 15 a note making reference to the setting up of a trust. Almost immediately theraafter area further notes relating to the Company as the trustee of the De Fazio Family Trust No. 2 and the position relating to nominating a Hi fas ZL ot necessary to substituted purchaser for the land. ui a a a £ . It 15 noted Pr lu refer in detail to the contents of t that by letter dated 'G1 September 1333, the solicitor 125 or wu writing to the bankrupt confirming that the land 15 to purchased by the Company. ihe arrangement was that the A.N.&. Bank, Lalor, was to finance the ourchase Dy advancing money secured by way of ,first mortgage on the land. For that purpose, the Bank was concerned to sight the documents relating to the Company and the deed of trust. Copies of the mecessary documents and the proposed transfer to the Company were forwarded to the Bank under cover of a letter dated 430 September 1983. The file contains references to the agreement between the Waters, Dover and the bankrupt that was executed on 27 October 1983. It is strange that at that time the new documentation did not make reference to the Company as being the purchaser but, even 1f 1t had, one could expect the Official Trustea to put similar arguments based upon a settlement arising from the change of purchaser under the contract from Dover and the contract from the Waters. The file contains acopy of a letter dated 17 November 13983 from the solicitors for the bankrupt and the Company to the solicitors for the Waters enclosing completed Netices of Nomination and Acceptance of Nomination together iti) with fer preparatory to settlement. The notices appear T i oD ran to be un conformity with the terms of condition 4 of the contract from the Waters to the bankrupt. These notices are not in evidence before the Court. Unsigned duplicates are in the file. Io am prepared to infer that the notices were executed and forwarded to the solicitors for the Waters. This inference i5 drawn from the fact of the transfer which was signed to transfer the title from the Waters to the Company. The Notice of Nomination is dated November 19823 and (ob is said to be signed by the bankrupt. It ref2rs to the contract of sale dated 27 October 1983. It gives nobica that the bankrupt nominates the Company as the purchaser of the land and authorises the deposit of $13,000 paid by him under the contract to be applied as a deposit paid by the Company and declares that mo consideration has passed or will pass between the Company and himself in respect of the nomination. The Notice of Acceptance of Nomination is dated November 1983 and is said to be sealed by the Company. It states that the Company consents to be nominated as the purchaser under the contract of sale dated 27 October 1983. Tt 15 obvious that the Waters acted upon the Notices of Nomination and Acceptance of Nomination. It 15 not réaliy disputed that the Company provided at least $200,000 of the balance of the purchase moneys which wers paid ts the Waters at sattlement. That was obtained by the Company from the A.N.Z. Bank at Lalor by way of a loan secured by mortgage on the land. On these facts, I am prepared to find that thers was a2 settlement of property made by the bankrupt to the Company within two years before the commencement of the bankrupt's bankruptcy undér 5.120 of the Act. That settlement was mad2 in good faith. Further, I am sa that the settlement was made in favour of a purchaser, the Company, for valuable consideration and thus comes within exclusive provisions of paragraph 120(1)'a) of the Ack with the result that the settlement is not void as against the Official Trustee. The nature of consideration sufficient to satisfy the requirements of paragraph 120(1)(a) were discussed in Official Trustee v. Arcadiou (1985) 8 F.C.R. 4 by Woodward and Northrop JJ. at pp.ll-1z2. In that passage the Court applied the opinion expressed by Lockhart J. in Barton v. Official Receiver (1384) 4 F.C.R. 380. Since Arcadiou, the High Court has approved the opinion expressed by Lockhart J.; see Barton v. Official Receiver (1986) 1651 C.L.R. 75. In the present case there 1s no doubt that in the ordinary commercial sense, the Company gave consideration for the nomination by the bankrupt pursuant to condition 4 of the contract of sale dated 27 October 1983. That consideration moved from the Company. It undertook the obligations imposed on the opurchaser by that contract. Tt executed that tf in part. Gl consideration, at lea In any event, on the whole of the evidence, I am Satisfied that when the bankrupt entered into the contract of sale dated 6 September 1983, when he entered anto the tripartite agreement dated 27 October 1983, and when he entered into the contract of sale dated 27 Octcber 1983, he did so in the capacity of a trustee of a family trusc. The family trust was formalised in the deed of settlement dated 16 September 1983 which formally created the De Fazio Family Trust No. 2. In these circumstances, when the bankrupt disposed of the land to the Company he did 50 in his capacity as trustes of the family trust. In these circumstances, far reasons similar tc those applied by me in Re Wills; Ex parte Wilis, 4 November 1337, unreported, there was no settlement of property by the bankrupt in favour of the Company within the meaning of 5.120 of the Act. For these reasons, the orders sought in the application as originally formed are refused. At a lates stage of the hearing, 1t became apparent that the orders sought in the application were not supported by the evidence. The avidence was in a confused form and it 1s almost impossible to make findings of fact with any confidence. At a late stage, the solicitor for the Official Trustee was granted leave to add additional orders to the orders sought by the application as follows:- "QA. Alternatively, an order declaring void a5 against the applicant (the Official Trustee) (as a settlement within the meaning sf 5.120 of the Bankruptcy Act 1966) the payment in and about September and December 1983 sf sums totalling $91,515.33 by the bankrupt to the respondent (the Company). 3A. An arder that the resoondent (the Company) pay to the applicant (the Official Trustee) the sum of $91,515.93. 3H. An order declaring that the land is charged in favour of the applicant (the Official Trustee) with payment of the said sum of 391,515.93; but such charge 15 subject to the rights of all persons apart from the applicant and the respondent (the Company,." The sum of $91,515.93 is calculated as follows. The contract price of the land was $130,000. At settlement, after allowances for adjustments, the total purchase price to be paid was $191,515.93. This was made up by $100,000 advanced by the A.N.2Z. Bank at Lalor, $19,000 deposit paid by a cheque drawn by the bankrupt and the balance being a cheque in the sum of $72,515.93 drawn by the bankrupt. The additional orders sought are based on evidence adduced at the hearing with respect to business and bank dealings conducted by the bankrupt, members of his family and business associates leading up to December 1983. About the middle of the year 1981 the bankrupt together with Peter Granato and Gino Giulino purchased a business xnown a5 Capitani Furniture Pty. Ltd. ("Capitani") which carried on the business of selling and manufacturing lounge room fFurnnture, In about April 1383 the bankrupt and Granatc bought out Giulino and thereafter carried oan the Capitan: , business was good and Capitani sraspered. lal business. In 198 The financial records of Capitani are not before the Court. Capitani is ain Jliguidation and the whereabouts of its financial records are not known. It is a fair comment, however, to say -Ehat it appears that the bankrupt and Granato carried on the business as though Capitani was not a corporation. They seamed to treat payments of account to Capitani as payment to them in their personal capacity. r, Capitani banked with the Richmond South Branch of Westpac Banking Corporation, but not all cheques and cash payable tos Capitani were paid into that bank. Finance tc conduct Capitani was obtained from Westpac and security for advances Made were given by the parents of the bankrupt and of Granato. In order to protect the interests of his parents, discussions took place concerning the creation of the family trust. These discussions led to the creation of the De Fazio Family Trust No. 2 and the purchase of the land. Tt was necessary for the bankrupt to obtain cash for the purpose of purchasing the land. I have formed the opinion that he was not an efficient businessman. He did not understand the difference between a corporation and the persons controlling that corporation. He entered into many unusual business dealings with his parents and with business associates using moneys supplied by them and transferring those moneys for other uses not only for his benefit but for the benefit of his parents and his business associates. There are no written records of those transactions. Oral evidence was given with respect to them but that evidence was confusing and imperfect and = am unable to rely upon any of it. ws Jeverthel 1k is necassary to make comments on aspects of itl o u if) the avidenc a In the present case, the burden of gsroof assumes an te Tru be ut important role. Under 3.120 of the Act, the Officia has the burden of proving the facts upon which an order may be made. For present purposes, the contentions made on behalf of the Official Trustee were that moneys constitute property within the méaning of 3.120 of the Act; see the wide definition of "property" contained in sub-section 5(1) of the Act, that the payment of moneys by way of part payment of purchase moneys with raspect to the purchase of the land constituted a settlement of property within s.120 of the Act Since that payment constituted a disposition of property, that that settlement is void as against the Official Trustee under paragraph 120(1)(a) of the Act since the bankrupt became a bankrupt and the commencement of that bankruptcy commenced within two years after the date of the settlement - 13 - and that as a result the Official Trustee, under 5.120 of the Act, 1s entitled to recover the amount of the moneys so paid from the Company and that right is supported by a charge over the land to satisfy the payment of that amount. In support of those contentions, reliance was based on the equitable principles of resulting and constructive trusts, mamely that where land 15 purchased by two or more persons but the land 1s transferred to one of them only, that person holds the land in trust for the persons whe provided the purchase Moneys; see for axample, Calverley v. Green (1984) 59 A.L.J.R. 111 and Muschinski v. Dodds (1385) 60 A.L.J.R. Reliance was placed also on the principle that the settlement constituted a gift by the bankrupt to the Company and the Official Trustee was antitled to recover the amount of that gift from the Company. In all avents, 1t was contended that the money and recover it it the Official Trustee could trac from the Company. In this ragard, reference was made to Official Receiver vw. Klau; Ex parte Stephenson Nominees Fty. é on Ltd. (1387) 74 A.L.R. . There are many difficulties in accepting those contentions, not the least of which is the finding already made that the Company gave valuable consideration for the settlement of property constitutad by the nomination of it by the bankrupt pursuant to condition 4 of the contract of sale dated 27 October 1983. In the result, I do not need to decide on the contentions made since, in my opinion, the Official Trustee has failed to prove that the sum of $91,515.93 was in fact moneys of the bankrupt when paid by - i4- Rim. Proof of the payment of that money from a bank account in the name of the bankrupt was sufficient to shift the evidentiary burden onto the Company, but as a result of the evidence led on behalf of the Company, unsatisfactory as it was, Iam not satisfied that the sum of $91,515.93 or any specific part of it was money of the bankrupt to support the contentions made. TI turn to consider the evidence. It must be remembered that the purpose of the transactioms was to seb up a family trust. For this purpose, the bankrupt did not go to Westpac but aporsacned the ANZ Bank at Lalor. This was a new fu stap, the bankrupt having had no pravious dealings with that branch. He understood he would be able to obtain finance from that branch. Copies of the bank statements of the bankrupt and the Company with that branch are in avidence. A number of the other documents used in connection with thase accounts are in evidence. The manager of the branch at that time gave avidence. His recollaction was hazy but I make no adverse comment about that. What 2.5 clear is that the accounts were to be used for the purchase by the Company of the land to be held by the Company as trustee for the De Pazio Family Trust. The bankrupt opened his account on 56 September 1983, the date of the sale note from Dover to the bankrupt, with a deposit of $19,056, consisting of $5,500 cash and $13,556 cheques. The cheques were cheques payable to Capitani and related to accounts for the supply of furniture. The bankrupt was used to handling large sums of cash, sometimes his money, sometimes money belonging to the - 15 - people. Capitan2 and the bankrupt owed money to the bankrupt's parents and it was said that the deposit of 319,056 was to repay in part the moneys owing. The moneys were to be used for the purchase of the land. The deposit of $19,000 was paid by a counter cheque drawn by the bankrupt on 9 September 1983 payable to the agents of Dover. The Company opened its account with the A.N.Z. Bank, Lalor, on 29 November 1983, but it is clear that the bank had advanced the $100,000 to enable the Company to settle -Ehe surchase of the land on 5S December 1383. The financing arrangements were complicated and need not ta considered further. Further deposits were made to the bankrupt's bank account on 22 November 1983 and 5 December 1392 in the sums of approximately $340,5099 and 353,409 respectively. I am unable to say where thosé amounts came from but, on tne whole of the evidence, I am not satisfied that they wers moneys owned by the bankrupt. There 15 a suggestion that part of them were in fact advanced by the banx in an indirect way for the benefit of the Company. By debit note dated 6 December 1983, the bankrupt withdrew $72,515.93 from his account for "Part settlement for Fourth Gozbarb P/L." That sum, together with the $100,000 lent by the bank directly to the Company, constituted the balance of purchase price for the land. After the deduction of various fees including an amount of $8,357.47 miscellaneous fee charged by the bank, a credit of some $13,000 remained in the account. On 15 December 1983 the bankrupt signed a cheque in the sum of $10,000 payable to Vincent and Mary Pileggi. This was said to be one of the semi-family, semi-business transactions entered into by the bankrupt whereby moneys were handed around between family, friends and business connections. Thereafter, apart from two contra entries in the sum af $10,000 made in July 19384, ¢he bankrupt's bank acrount remained static. Having regard to the whole of the evidence and having regard to the general burden of proof and the shifting or avidentiary onus of proot, I am not satisfied that the Official Trustee has proved, on the balance of probabilities, that the bankrupt used his money to pay the sum of 391,535.33 towards the purchase of the land. At the same time, I am not vr satisfied that it was not the money of the bankrupt and I am unable to find who in fact had the beneficial interest in thak money. In these circumstances, the amended orders sought by the Official Trustee should not be made. Accordingly, the application is dismissed with casts to be taxed. I certify that this and the fi Fleer a S) preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice -R MM Northrop) Sharoy PULA Associate Dated: QQ February 1988 eat Title of Action File Number Dates of Hearing Judgment Delivered Counsel for Applicant Solicitor for Applicant Counsel for Respondent ATTACHMENT A a te Solicitors for Respondent: Signea . Shonen, 7. Lduson. Date 22 February 1988 Re: Ex parte: and Fourth Gozbarb Pty. Ltd. Respondent 137 of 1936 My. G.T. Bigmcre Me. L. Watts Messrs. Joe De Fazio, a bankrupt The Officral Trustee in Bankruptcy (as trustee of the property of Joe De Fazio a bankrupt) Applicant Kiddle Briggs & Willox