<7 _ rt t Wc: - Sy / se CATCHWORDS " BANKRUPTCY - Transactions involving proprietary companies and trusts controlled by bankrupt - purchase of property and subsequent sale of property at arm's length - whether proceeds of sale formed part of the divisible property of the bankrupt - whether transactions were a sham intended to put assets of the bankrupt out of the reach of creditors - whether companies associated with the bankrupt were mere shells - circumstances in which transactions will be characterised as a "sham". COMPANY LAW - Circumstances in which the Court will lift the corporate veil so as to treat corporate assets as the beneficial property of the controller of a company. TRUSTS AND TRUSTEES - Equitable principles governing creation of a resulting trust. Bankruptcy Act 1966 (Cth): ss. 120, 121, 244 and 249. SHARRMENT PTY. LIMITED LEE _ WYNYARD MARK WYNYARD LORREINE CLAIRE WYNYARD and SEYTA PTY. LIMITED v. THE OFFICIAL TRUSTEE IN BANKRUPTCY G348 of 1967 LOCKHART, BEAUMONT and FOSTER JJ. 3 JUNE 1988 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION BETWEEN: is JUDGES MAKING ORDER: DATE ORDER MADE: WHERE ORDER MADE: No. G348 of 1987 eee ew ON APPEAL FROM A SINGLE JUDGE OF T 'HE FEDERAL COURT OF AUSTRALIA SHARRMENT PTY. LIMITED, LEE WYNYARD, MARK WYNYARD, LORREINE CLAIRE WYNYARD and SEYTA PTY. LTD. Appellants THE OFFICIAL TRUSTEE IN BANKRUPTCY Respondent LOCKHART, BEAUMONT and FOSTER JJ. 3 JUNE 1988 SYDNEY MINUTE OF ORDER THE COURT ORDERS THAT: 1. the 2. The appeal be allowed; 3. the 4. The the respondent, the Official Trustee in Bankruptcy, orders made by the learned trial Judge be set aside; respondent's application be dismissed; pay costs of the appellants of this appeal and of the proceedings at first instance. NOTE: the Federal Court Rules. Settlement and entry of orders is dealt with in Order 36 of IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G348 of 1987 GENERAL DIVISION ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: SHARRMENT PTY. LIMITED, LEE WYNYARD, MARK WYNYARD, LORREINE CLAIRE WYNYARD and SEYTA PTY. LTD. = = = Appellants AND: THE OFFICIAL TRUSTEE IN BANKRUPTCY Respondent COURT: LOCKHART, BEAUMONT and FOSTER JJ. DATE: 3 JUNE 1988 PLACE: SYDNEY REASONS FOR JUDGMENT LOCKHART J. The late John Walker Wynard died insolvent on 24 August 1985. On 2 December 1985 an order was made under s. 244 of the Bankruptcy Act 1966 ("the Act") for the administration in bankruptcy of his estate. About six years before his death Mr. Wynyard engaged in a series of complicated transactions involving a number of proprietary companies and trusts. These transactions were followed a year later by the purchase of a substantial property at Moss Vale known as "The Chase" for a price of $450,000. The transactions involved several companies controlled by Mr. Wynyard, the grant of an option by one such company to two others to acquire the former's unissued share capital, the establishment of family trusts for the benefit of Mr. Wynyard's family, the allotment of redeemable preference shares by one of Mr. Wynyard's companies to another such company, the opening of bank accounts, the exchange of cheques, the making of a gift by one of the companies to a nominee company as trustee of a family trust, and the release of a debt. The Chase was sold in December 1984, some four years after it had been purchased by one of the Wynyard companies, to a company at arm's length. A portion of the net proceeds of sale was placed on deposit with two financial institutions and at the date of commencement of these proceedings the total amount held was approximately $300,000. In these circumstances the Official Trustee in Bankruptcy ("the Official Trustee"), as trustee of the late Mr. Wynyard's insolvent estate, applied to this Court for declarations and orders that the sum of about $300,000 held on deposit with the two financial institutions formed part of the divisible property of the estate of the late Mr. Wynyard within the meaning of 8. 249 of the Act. The learned trial Judge (Wilcox J.) found in favour of the Official Trustee and it is from his Honour's judgment that this appeal is brought. In essence his Honour found that each of the relevant companies involved in the complicated series of transactions in 1979 and 1980 were "alter egos" of the late Mr. Wynyard and that' the elaborate juggling of funds and thicket of book entries were all a cloak, artifice or sham intended to create the appearance of a debt due by Mr. Wynyard to one of his family trusts known as the Wynyard Family Trust (No. 4) ("the No. 4 Trust"). The Official Trustee argued that the transactions were undertaken for the purpose of putting assets in the amount of some $420,000 out of the reach of Mr. Wynyard's creditors and hiding those assets behind the cloak or mask of a debt. The companies concerned were said to be Mr. Wynyard's puppets. Although no such accusation was levelled against the trustee of the No. 4 Trust, being the nominee company of solicitors acting for Mr. Wynyard, it was said that Mr. Wynyard could control the trusts by his power as appointor of removing the trustee and appointing another trustee in its place. The question of "sham" arises in respect of the transactions of September 1979. As the facts are set out in the reasons for judgment of Beaumont J. it is unnecessary for me to state them in detail. Jansigma Pty. Ltd. ("Jansigma") granted to Dirce Pty. Ltd. ("Dirce") and Shareholder Pty. Ltd. ("Shareholder") (all Wynyard companies) a joint option to acquire the whole of the unissued capital of Jansigma the consideration for the grant of the option being $420,000 of which Dirce was to pay $120,000 and Shareholder $300,000. On the sane day, the No. 4 Trust was established for the benefit of the Wynyard family, the trustee of the trust being the nominee company associated with the solicitors acting for Mr. Wynyard, Dare Reed Nominees Pty. Ltd. ("Dare Reed Nominees"). Subsequently by a_ series of cheques commencing with the payment of $300,000 by Wynyard to Shareholder and $120,000 by Wynyard to Dirce, the amount of $420,000 was paid by Dirce and Shareholder to Jansigma in exercise of the option. The same day Jansigma lent the amount of $420,000 to Belanto Pty. Ltd. ("Belanto"), as an interest free loan repayable at call. The amount of $420,000 was then lent interest free repayable at call by Belanto to Dare Reed Nominees. Dare Reed Nominees then paid the amount of $420,000 to Mr. Wynyard on 28 September 1979, again as an interest free loan repayable at call. On 4 October 1979 it was resolved by the shareholders of Dirce and Shareholder that those companies refrain from exercising their options to take up shares in Jansigma. The allotment on 18 October 1979 of 420,000 redeemable preference shares in Belanto to Jansigma, pursuant to resolutions of 28 September 1979 which approved an increase in the capital of Belanto offset the debt owed by Jansigma to Belanto, as a result of the September transactions. On 19 October 1979 an extraordinary general meeting of shareholders of Belanto in turn resolved to make a gift of $420,000 to Dare Reed Nominees as trustee of the No. 4 Trust. The result of these transactions was on their face to create a debt of $420,000 owed by Wynyard to Dare Reed Nominees as trustee of the No. 4 Trust. On 30 June 1980 Dare Reed Nominees retired as trustee of the No. 4 Trust, and Leduke Pty. Limited ("Leduke") - another Wynyard company - was appointed in its place. As a_ result of a resolution of the directors of Leduke to amend the Trust Deed of the No. 4 Trust passed on 14 September 1980, Seyta Pty. Limited ("Seyta") as trustee of Wynyard Family Trust (No. 6) ("the No. 6 Trust") became the beneficiary of the No. 4 Trust and so took the benefit of the debt due by Mr. Wynyard created by the transactions in September 1979. Prior to the amendment of the Trust Deed appointing Seyta as beneficiary of the No. 4 Trust, Seyta had on 22 August 1980 contracted to purchase "The Chase". It was argued by the Official Trustee before the trial Judge that "The Chase" was purchased by Seyta out of monies provided by Mr. Wynyard with the result that Seyta held the property on resulting trust for Mr. Wynyard. The trial Judge held that each of the Wynyard companies was a shell, that Mr. Wynyard treated funds held by each of the companies as his own funds and that the funds supplied for the purchase of "The Chase" were in consequence Mr. Wynyard's own funds. In particular, the trial Judge accepted the submission of counsel for the Official Trustee that the transactions of September-October 1979 were shams designed to allow Wynyard to create the appearance of a debt rather than to create a genuine liability. Pointing to the absence of a commercial purpose in the transactions, the trial Judge accepted that Mr. Wynyard's object was to convert "some of his own assets to assets of his family trust, preferably by a means which was not obviously a settlement within the meaning of s. 120 of the Bankruptcy Act". In characterising the transactions as shams, the trial Judge referred to Snook v. London & West Riding Investments Limited (1967) 2 Q.B. 276 per Diplock L.J. at 6802. The trial Judge accepted that the test for a transaction to be a "sham" required both a common intention among participants to the transaction and a disjunction between the appearance and reality of the transaction. His Honour defined the critical question as "whether Mr. Wynyard intended to give to others the appearance of creating legal rights and obligations different from the actual legal rights and obligations (if any) which he intended to create". The trial Judge concluded, as I have noted above, that the transactions were a sham, the disjunction being between the appearance of a debt by Mr. Wynyard to the family trust and the fact that when the debt was converted into realty by the purchase of "The Chase" then "Wynyard himself did not regard the realty as being an asset of the family trust, but rather as an asset at his personal disposal." The appellants, who are members of Mr. Wynyard's family and companies controlled by his family, argued on appeal that the transactions of September 1979 gave effect to Mr. Wynyard's desire to enrich the family trust at the expense of himself. The appellants submitted that the fact that the transactions were preordained and contrived does not deny the proposition that it was intended that they should take effect according to law. The appellants submitted that except for the sum of $6,000 the purchase moneys provided for "The Chase" were provided by the Wynyard companies Madnara Pty. Limited ("Madnara") and Shareholder not by Mr. Wynyard himself. The appellants submitted that even if Mr. Wynyard had in fact funded the purchase of "The Chase", he did so by way of repayment of a genuine debt due by him to the No. 4 Trust. The Official Trustee argued on the appeal that Mr. Wynyard was the owner of the $420,000 applied in the purchase of "The Chase" at all material- times, whereas the appearance created by the transactions was that No. 4 Trust had made an interest free loan to Mr. Wynyard. The Official Trustee relied upon the complexity of the transactions as indicating a motive of concealment. The Official Trustee argued that the transactions of September 1979 were a sham intended to give the appearance of a debt having come into existence to cloak the reality that no debt had come into existence, with the purpose that no actual or future creditor could recover from Mr. Wynyard the sum of $420,000 or any assets into which it had been converted. It was argued that in practice Mr. Wynyard had control of the debt as though he had been its beneficial owner. The nature of "sham" transactions "Sham" is a word which, although not infrequently having attracted the attention of the courts usually hovers on the periphery of cases. Here it is at the heart of the case. It is a word which first appeared as slang in the 17th Century and the dictionaries describe it as being of obscure origin. It is indeed a pity that it cannot be relegated to its earlier obscurity because of the ambiguity and uncertainty that surrounds its meaning and application. Ambiguous though its meaning is, it is an ambiguity that has attended the word for centuries: "Let the plot-mungers stay behind, whose art can truth to sham, and sham to truth convert": Oldham's Sat. Imit. Jur. m.W.K.S. 1703 (429); "The laws of sham and semblance which are called the 'devil's laws'": Carlyle's Past and Present L.V. 36. The meaning of the word "sham" has been considered in many cases. In Scott v. Federal Commissioner of Taxation (No. 2) (1966) 40 A.L.J.R. 265 Windeyer J. said at 279: "On the other hand, if the scheme, including the deed, was intended to be a mere facade behind which activities might be carried on which were not to be really directed to the stated purposes but to other ends, the words of the deed should be disregarded ... A disguise as a real thing: it may be an elaborate and carefully prepared thing; but it is nevertheless a disguise. The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction " I shall have occasion to refer again to this passage later in this judgment. Diplock L.J. described the "popular and perjorative word" sham in Snook v. London & West Riding Investments Limited (supra) at 802 in these terms: "I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities ... that for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating." See also Boydell v. James (1936) 36 S.R.(N.S.W.) 620 per Jordan C.J. at 627; Miles v. Bull (1969) 1 Q.B. 258 per Megarry J. at 264; Coppleson v. Federal Commissioner of Taxation (1981) 34 A.L.R. 377 per Hunt J. at 380-1; Northumberland Insurance Limited (In Liq) v. Alexander (1984) 8 A.C.L.R. 882 per Clarke J. at 888-889; Trimbole v. Donnelly, unreported, Full Court of the Federal Court, judgment delivered 5 November 1986 per Evatt, Lockhart and Wilcox JJ. at 9-10. There are many cases in the income tax field, particularly cases relating to the attempt to apply s. 260 of the Income Tax Assessment Act 1936, where the word "sham" has been considered: see, for example, Mullens v. Federal Commissioner of Taxation (1977) 135 C.L.R. 291 per Barwick C.J. at 301, per Stephen J. at 316; Alloyweld v. Federal Commissioner of Taxation (1984) 84 A.T.C. 4328 per Derrington J. at 4330; Cranstoun v. Federal Commissioner of Taxation (1984) 84 A.T.C. 4876 per Carter J. at 4882. See also the decision of a Full Court of this Court in Oakey Abbatoirs Pty. Limited v. Federal Commissioner of Taxation (1984) 55 A.L.R. 291 at 297. A "sham" is therefore, for the purposes of Australian law, something that is intended to be mistaken for something else or that is not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front. It is not genuine or true, but something made in imitation of something else or made to appear to be something which it is not. It is something which is false or deceptive. The central issue in the case is the dichotomy between appearance and reality in characterising the transactions in 1979 as a sham. This dichotomy was recognised by the trial Judge in his reasons for judgment. The real difficulty in this case is not to determine the applicable principles of law but rather to characterise the transactions as a matter of fact. 10. Particular elements of "sham" transactions Although the issue for the Court in respect of the September-October 1979 transactions is to characterise them in their entirety there is some authority which assists in recognising the significance of particular elements of the transaction. First, the fact that the transaction involved a round robin of cheques does not necessarily establish that the transaction is a sham, even when no party has funds to meet the cheques: Re _ Barnett; Perpetual Trustee Co. Limited v. Barnett (1969) 2 NSWR 721. Second, the artificiality of the transaction does not give rise to its characterisation as a sham or to the characterisation of the constituent documents as a sham so long as each document "had _ the effect that it purported to have", and so long as none of the documents purported "to do something different from what the parties had agreed to do": Inland Revenue Commissioners v. Littlewoods Mail Order Stores Limited (1962) 2 All E.R. 279 per Lord Reid at 285. Third, the complexity of the transaction does not in itself establish its character as a sham. In Coppleson's Case (supra) Hunt J. of the Supreme Court of New South Wales considered a gift to a hospital of redeemable preference shares instead of cash. His Honour observed at 4023 that the fact that "the transaction became complex and elaborate rather than simple and straightforward does not seem to me to affect its true nature if in legal form it is a gift and if the parties thereto intended it to be operative according to its tenor". ll. Fourth, a purported disposal of property, and by analogy a purported creation of a debt, may be a sham where donor and donee (or lender and debtor) do not intend to give effect to the transaction, it being agreed between them that there will be no change in the legal and beneficial ownership of the property. The fact that Mr. Wynyard continued to act as though The Chase was in his control may give rise to an inference that the transactions which led to its being purchased in the name of Seyta with funds apparently the funds of Seyta were a shan. Fifth, the fact that the transactions of 1979 may have been intended by Mr. Wynyard to present a shield against creditors does not, absent the transactions being set aside under the relevant provisions of the Bankruptcy Act, characterise them as a sham. The transactions may in themselves be legally effective although intended to achieve an unacceptable purpose. In Miles v. Bull (supra) Megarry J. said at p. 264: "A transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone werely because there was an ulterior purpose in doing t. Megarry J. went on to observe that in the context of determining whether a sale of-property was a sham so as to allow a defence to an action for possession that: "mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and substantial truth." (at 264) 12. The characterisation of a sham adopted by Megarry J. in Miles v. Bull (supra) is consistent with that adopted by Windeyer J. in Scott's Case (supra) at 279, in the passage which I cited above. Following a thorough review of the earlier authorities, Windeyer J. there defined the issue as whether the parties who entered the ostensible transaction ",.. mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction ... The appellants rely on this characterisation to assert that the transactions of September-October 1979 operated according to their terms. The appellants assert that in their entirety the transactions both appeared to create and in fact created a debt owed by Mr. Wynyard to the No. 4 Trust which could have been enforced by the trustee of the No. 4 Trust as a matter of law, whatever the influence Mr. Wynyard may have had over the trustee as a matter of fact. The Official Trustee looks to the transaction as a whole rather than to the effect of the individual steps in it and asserts that the facade or false front was the loan. The Official Trustee has some difficulty in identifying the real transaction, which on one view is merely the absence of a legally operative debtor-creditor relationship. The Official Trustee therefore relies upon the absence of a legally operative transaction rather than some other transaction which the facade might be said to 13. have obscured. In Coppleson's Case (supra) Hunt J. at p. 4021 emphasised that the inability of the Commissioner of Taxation to identify the real transaction said to be obscured by a sham transaction supported the inference that the gift of shares in issue was itself the real transaction and not a shan. Windeyer J. in Scott's Case (supra) gave some support to a purposive characterisation of a sham in describing a sham as "a _ mere facade behind which activities might be carried on which were not really directed to the stated purposes but to other ends". It is doubtful that his Honour intended this description to function as a definition of a sham which might operate apart from the other characteristics to which he referred. If his Honour's observations provide an alternative basis for a "sham" - not requiring that another and real transaction be obscured by the sham, but merely that the transaction characterised as a sham have a purpose other than which it appears to have or is claimed to have - it might be said by the Official Trustee that the loan did not in fact serve its stated purpose of enriching the family trust at the expense of Mr. Wynyard but instead had the real purpose of avoiding creditors' claims to property which might in future come into Mr. Wynyard's hands. The trial Judge appears to have accepted a version of this argument. With respect, it seems to me that there is a difficulty in the path of accepting this argument, namely, that there is no evidence which would enable a court to conclude that Mr. Wynyard in September or October 1979 had $420,000 in hand. The inference that Mr. Wynyard adopted the elaborate and complex structure of transactions to which I have referred above in order to avoid creditor's claims to monies which he did not possess but might at some point in the future possess is, in 14. my view, less readily to be drawn than an inference that the transactions occurred to avoid claims to Mr. Wynyard's present assets, if the latter inference had been available. To the extent that Windeyer J.'s approach in Scott's Case depends on a contrast of apparent and real transactions it is consistent with the approach of Diplock L.J. in Snook's Case (supra). In the passage which I also quoted above, his Honour defined the issue as whether the acts or documents of the parties to the transaction were intended by them "to give to third parties or the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create". It is not clear from Diplock L.J.'s formulation whether it is the subjective intention of the parties that is determinative, although logically this seems to be the correct result. In Coppleson's Case (supra) Hunt J. at 381 took the view that the authorities established that it is the intention of the parties to the transaction which determines the question whether the act or document was never intended to be operative according to its tenor at all but rather was meant to cloak another and different transaction. On the facts of the present case the absence of direct evidence as to Mr. Wynyard's intention and that of the companies controlled by him must leave the Court to identify those intentions by reference to the form of the transactions and the surrounding circumstances. Subsequent authorities appear to be consistent with Snook's Case. In the United Kingdom Snook was approved by Lord Fraser in W.T. 15. Ramsay Limited v. Commissioner for Inland Revenue [1982] A.c. 300 at 337. In Mullens Case (supra), which concerned the attempt to apply s. 260 of the Income Tax Assessment Act 1936 where the taxpayer had acquired shares so as to obtain a deduction of moneys paid towards petroleum exploration, Barwick C.J. said at 301 that the transaction was not a sham where "it represented a genuine commercial operation with commercial consequences". Stephen J. at 317 rejected a contention that the transaction was a sham where "the transaction was precisely what it purported to be". In the Alloyweld Case (supra) Derrington J. applied Diplock L.J.'s test in Snook in holding a loan and prepayment of interest to have been a sham. His Honour pointed to the fact that the participants "regarded the arrangement as not really being a loan at all and did not consider the company to be under any obligation other than to complete the circularity of the transaction in law" (at 4330). This case provides the strongest support for the Official Trustee's argument that Mr. Wynyard's treatment of the moneys as his own - which treatment places in doubt that the debt to the No. 4 Trust was regarded by Mr. Wynyard as a binding obligation - supports the characterisation of the transaction as a sham. A similar approach was taken by Carter J. in Cranstoun's Case (supra). In that case Carter J. held that a loan transaction was void as a sham, and held that a pre-payment of interest on the loan was not deductible where -the borrowing by the taxpayer and onlending to companies associated with the promoter was by book entries only. Carter J. referred to the definition of "sham" in the Oxford English Dictionary Vol. IX p. 615 as indicating that a sham is: 16. "Something devised to delude, it is a trick or a hoax, an imposture. It is something that is intended to be mistaken for something else, it is not really what it purports to be, it is a spurious imitation or a counterfeit." His Honour took the view that a loan agreement would be a sham where it was agreed either expressly or impliedly between the parties to the agreement that the document was intended to give the appearance only of a loan transaction. This approach, if adopted in this Court, would require that the Court characterise the dealings between Mr. Wynyard, the Wynyard companies and the trusts in determining whether there existed an implied agreement that the loan to Mr. Wynyard was not recoverable. It would be difficult if not impossible on the documentation and other evidence to find that such a term existed. The argument of the Official Trustee that as a matter of reality Mr. Wynyard could control the trustee of the No. 4 Trust and the No. 6 Trust or dismiss it if an attempt was made to recover the loan does not suggest any agreement that the loan was not recoverable, nor is it sufficient to establish that the trustee would in fact have breached its duties to beneficiaries of the Trusts by allowing the loan not to be repaid. The Official Trustee's argument requires the Court to look to the practical consequences of the transaction, rather than to the terms of the agreement between the parties. Such an approach requires a_ step beyond Carter J.'s emphasis upon the agreement of the parties in Cranstoun's Case (supra). 17. The decision of the Full Court of this Court in Oakey Abattoir Pty. Limited v. Federal Commissioner of Taxation (supra) as to the operation of s. 260 confirmed that a transaction, even though it is circular in nature and lacks commercial purpose other than to gain a tax advantage, will not amount to a sham where "although connected, the transactions were genuine and real enough" and where ""(e]very transaction would be genuinely carried through and in fact be exactly what it purported to be" (at 297). Their Honours relied on Boydell v. James (supra). In that case Jordan C.J. observed at 627 that if transactions of the sale and subsequent hire of goods "were never intended by either party to have any legal effect, but were set up as a mere pretence to cloak a loan" then the transactions would be inoperative as a sham. In Oakey Abattoir the Court characterised the legal effect of the constituent steps of the transaction, but the decision does not in my view exclude the argument that a_ transaction in its entirety may be characterised as a sham s0 as to deny legal effect to its component parts. The Official Trustee's argument There are I think difficulties in the path of the Official Trustee in this case, some of which I have alrady noted. In essence the Official Trustee asserts that the elaborate scheme of transactions was devised in 1979 by Mr. Wynyard for the purpose of defeating his creditors, and in particular the Commissioner of Taxation. The Commissioner had not at the time of the transactions assessed Mr. Wynyard to tax. However, by a statement of claim filed in the Supreme Court of New South Wales on 4 July 1985 the Commissioner claimed to recover the sum of $7,715,915.64 for income tax and additional tax due 18. and payable under Notices of Assessment issued in respect of the financial years ended 30 June 1979, 1980, 1981 and 1982. The assessment of tax for the year ended 30 June 1979 was' subsequently amended and the amended Notice of Assessment issued on 21 February 1985 claimed an amount of $477,470.85 in respect of the 1979 income year. The Notice of Amended Assessment for the 1979 income year in the form it took prior to its amendment in 1985 was not in evidence in the proceedings. On 13 August 1985, the Commissioner obtained judgment against Mr. Wynyard in the Supreme Court of New South Wales in the sum of $4,090,534.92, in respect of the years ending 30 June 1980, 1981 and 1982. Although these claims arose subsequently to the events of issue in these proceedings, it is I think reasonable to infer that Mr. Wynyard must have known in 1979 and at all material times that he had a substantial contingent liability for income tax. However, in asserting that the elaborate scheme of transactions was devised for the purpose of defeating creditors of Mr. Wynyard the Official Trustee is seeking to achieve in these proceedings indirectly what he has not sought to achieve directly by moving to avoid the transactions under s. 121 of the Bankruptcy Act, namely to set the transactions aside as a fraudulent disposition of property for the purpose of defeating or evading the bankrupt's creditors. Proceedings under s. 121 would have required a high standard of proof, and in my view the evidence in this case falls far short of satisfying that standard. The Official Trustee puts his case not on that basis, but on the basis that the whole transaction of August-September 1979 was a sham in the sense that it was never intended that there be the 19. relation of debtor and creditor between Mr. Wynyard and the No. 4 Trust, and that the transaction amounted to the artificial creation of the appearance of a debt to defeat or delay Mr. Wynyard's creditors. The Official Trustee asks the Court to make very broad sweeps of reasoning and to reach conclusions based on assumption. The conclusions which the Official Trustee asks the Court to reach are in my opinion not the only ones that are reasonably available on the evidence. Other inferences are at least equally open and satisfying as those which the Court would have to draw if the Official Trustee were to succeed. When the Official Trustee asserts that the September-October 1979 transactions were a facade or a false front which created the appearance and not the reality of a debt, the question immediately arises what was the real transaction which Mr. Wynyard and the other parties to the transaction, being interlocking companies under Mr. Wynyard's control, sought to mask. The importance of this question was recognised by Hunt J. in Coppleson's Case (supra) to which I have already referred. The Official Trustee does not suggest that there was any nexus between the events of 1979 and those of 1980 when "The Chase" was purchased, nor was it suggested that Mr. Wynyard contemplated the purchase of "The Chase" when the transactions of 1979 took place. The evidence could not support any such conclusion. Put at its highest, the argument for the Official Trustee is that the sham debt was created in 1979 so that Mr. Wynyard could in some undefined way in the future assert against his creditors, in particular the Commissioner of Taxation, that he owed the No. 4 Trust $450,000. 20. The Official Trustee must show that Mr. Wynyard never intended to create a debt: yet many of the arguments advanced before us rested upon the assumption that Mr. Wynyard in fact was possessed of $420,000 before the 1979 transactions were implemented. There is no evidence which would enable the Court to infer that Wynyard either had or did not have the sum of money in question at the time of the creation of the debt. All that is known is that when the time arrived to settle the purchase of "The Chase" in 1980 approximately $500,000 in cash was found somewhere within the Wynyard family or the Wynyard companies. Apart from some $45,000 provided by Mr. Wynyard himself, the bulk of the funds for the purchase were provided by companies within the Wynyard corporate structure. More than one possible inference is open as to the' reasons why Mr. Wynyard might have undertaken the transactions which took place in 1979. There was evidence before the trial Judge and this Court that Mr. Wynyard underwent triple bypass surgery in August 1978, although following that surgery his heart condition remained relatively stable until late 1983. Mr. Wynyard died on 24 August 1985 of cancer, although there was no evidence before the Court of when that disease was first diagnosed. The inference may in my view be drawn that when the events of 1979 occurred Mr. Wynyard either was in poor health or had reason to fear that his health would become poor and that his longevity might be limited. This is not to say that Mr. Wynyard's poor health and fears for his health in fact motivated the transactions of 1979, but it is sufficient for present purposes that such an inference is no less plausible than the inference drawn by the trial Judge, in reliance upon an absence of other explanations, that Mr. Wynyard's object was to avoid the claims of potential creditors. 21. The evidence as to Mr. Wynyard's state of health in 1979 supports the further finding that, although there was no commercial purpose in the 1979 transactions there was a family purpose in the transactions being an intention by Mr. Wynyard to benefit his family at his expense. The No. 4 Trust was in my view enriched at' the expense of Mr. Wynyard and the relation of debtor and creditor was created by the 1979 transactions. The lifting of the corporate veil in relation to the Wynyard companies Counsel for the appellants challenged the finding of the trial Judge that Jansigma and Dirce were mere shelis. The evidence before the Court leaves the Court in a position where one cannot infer either that those companies were or were not mere shells. Counsel for the appellants contended that the company Shareholder was well known as a dividend stripping company: certainly, the company's name appears as a participant in the transactions involved in the Commissioner of Taxation v. Gregrhon Invesments Pty. Limited, unreported, Full Court of the Pederal Court, judgment delivered 26 November 1987. Given the absence of evidence in the present case, I do not think it would be right to draw any inference about whether Shareholder was or was not a trading company or was or was not a mere shell. Certainly, the activities of particular companies are not to be taken as properly the subject of judicial notice merely because those companies have been mentioned in other judgments of the Court, particularly where Shareholder was not itself a party to the proceedings in Gregrhon. 22. Beaumont J. has considered in detail the question of the lifting of the corporate veil in relation to the Wynyard companies. The conclusion of the trial Judge that the Wynyard companies were "a mere shell, an alter ego of Mr. Wynyard himself" was not expressed as in terms amounting to a lifting of the corporate veil. However, this was the effect of the trial Judge's reasoning, and the basis of his Honour's conclusion that the monies provided by Madnara and Shareholder to Seyta were in fact "separate funds amongst Mr. Wynyard's own assets", and in reality were Mr. Wynyard's funds. I have concluded earlier that the evidence does not allow the inference to be drawn that as a matter of fact, Madnara and Shareholder were not possessed of the funds which were paid to Seyta to fund the purchase of the property. The separate legal personalities of the Wynyard companies and of Mr. Wynyard must be respected unless it is shown that the case falls in one of the particular situations in whcih the courts have been prepared to lift the corporate veil: see Gilford Motor Co. Ltd. v. Horne [1933] Ch. 935; Smith Stone & Knight Ltd. v. Birmingham Corporation [1939] 4 All E.R. 116; Re _ F.G. (Films) Ltd. [1953] 1 W.L.R. 482. There is no suggestion that this case is within such categories, and the possibilities that the companies may or may not have had an independent source of income, and that Mr. Wynyard may or may not have used company funds for his own purposes in breach of fiduciary duty, do not in themselves justify disregarding the separate legal personalities of company and shareholders. In my opinion, in the absence of evidence that the monies provided by Madnara_ and Shareholder were in fact Mr. Wynyard's monies, it is not open to the Court to treat the companies' assets as at law the personal property of Mr. Wynyard merely because he was in practical control of the Wynyard companies. 23. Conclusions This Court is in as good a position as the trial Judge to resolve the factual issues in this case, since nothing appears to have turned on the credibility of witnesses before him. In my view, the inferences which the Official Trustee seeks to have the Court draw are impermissible, and I respectfully disagree with the findings of the trial Judge in this respect. In particular, the inference that the creation of the debt as a result of the 1979 transactions was a mere fiction or sham is not correct. If any inference is to be drawn from the meagre evidence in this case, it is that it was intended by Mr. Wynyard and the companies involved in the transactions to create a debt owed by him to the No. 4 Trust and not merely the appearance of such a debt, and that the creation of the debt took place for family purposes. What would be done in the future about repaying such debt was, it seems, not decided at that point. It does not seem to me possible to say that there was an artifice designed to conceal some underlying truth, and the Official Trustee has not identified such underlying truth. If Mr. Wynyard wished to defeat his creditors it was in his interests to create a debt that was a real debt, not merely the pretence of a debt. The fact that the debt was created where Mr. Wynyard knew that he could for practical reasons control any call for repayment as he wished does not seem to me to deny the legal efficacy of the debt. In conclusion I would say this. Although there was much evidence in the case, little of it touched the critical question as to 24. whether what was done in August-September 1979 was a sham. The Court is left with little direct evidence and is therefore required to draw inferences from the circumstances surrounding the relevant events. The difficulty I feel about the matter is that to draw the inference of sham for which the Official Trustee contends is to reach a_ strong finding, and one which cannot be made if another inference is at least equally open. As I have indicated I think that another inference is open, namely, that what was done was to in fact create a debt in pursuance of Mr. Wynyard's desire to benefit his family through his family trusts. It is perhaps tempting to draw the inferences which were drawn by the trial Judge. I fully recognise that there is an unpleasant aura pervading the facts of the case. First comes the very complex series of interlocking transactions in 1979, followed about a year later by the purchase of "The Chase". The purchase then works to the benefit of Mr. Wynyard's family, while Mr. Wynyard's creditors and in particular the Commissioner of Taxation have recourse to little, if any, funds and are denied recourse to the proceeds of the sale of "The Chase". It remains that, when dispassionately reviewed, the evidence simply cannot support the inferences sought by the Official Trustee. 25. I would allow the appeal with costs, set aside the orders made by the trial Judge and order that the application be dismissed and that the Official Trustee pay the costs of the appellants of the proceedings at first instance. I certify that this and the preceding twenty-four (24) pages are a true copy of the reasons for judgment herein of the Honourable Mr. Justice Lockhart. Associate [\{ Bock_— Date: 3 June 1988 IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY No. G348 of 1987 GENERAL DIVISION ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: SHARRMENT PTY. LIMITED LEE WYNYARD MARK WYNYARD LORREINE CLAIRE WYNYARD SEYTA PTY. LIMITED Appellants AND: THE OFFICIAL TRUSTEE IN BANKRUPTCY Respondent CORAM: LOCKHART, BEAUMONT AND FOSTER JJ. PLACE: SYDNEY DATE: 3 JUNE 1988 REASONS FOR JUDGMENT BEAUMONT J. The Official Trustee in Bankruptcy, the respondent in this appeal, applied to this Court for declarations that certain funds formed part of the divisible estate of the late John Walker Wynyard. The primary Judge upheld the Official Trustee's contentions and made declaratory and other orders accordingly. " the present appellants, respondents at first instance, now appeal from these orders. The contest at first instance, and now, was and is between the Official Trustee, on the one hand, and members of Mr. Wynyard's family, and companies controlled by his family, on the other. Sharrment Pty. Limited ("Sharrment"), the first appellant, was a company controlled by Mr. Wynyard; Mr. Lee Wynyard and Mr. Mark Wynyard, the second and third appellants, are sons of Mr. Wynyard; Mrs. Lorreine Claire Wynyard, the fourth appellant, was Mr. Wynyard's wife; Seyta Pty. Limited ("Seyta"), the fifth appellant, was another company controlled by Mr. Wynyard. Mr. Wynyard died on 24 August 1985. On 2 December 1985, an order was made under 8.244 of the Bankruptcy Act 1966 ("the Act") for the administration in bankruptcy of his estate. In 1979, Mr. Wynyard and several of his family companies entered into a series of transactions which had the effect of increasing the wealth of these companies at the expense of Mr. Wynyard. It was an essential part of the Official Trustee's case, which case was accepted entirely by the primary Judge, that these transactions should be ignored because they were not genuine dealings but rather were "shams". The history of these dealings may be summarised as follows: (1) On 26 September 1979, the directors of Jansigma Pty. Limited ("Jansigma"), a Wynyard family company controlled by Mr. Wynyard, resolved to open a bank account with the Commercial Bank of Australia Limited, Hunter and Bligh Streets Branch. (2) On the same day, the directors of Dirce Pty. Limited ("Dirce"), another Wynyard family company controlled by Mr. Wynyard, resolved that Dirce and Shareholder Pty. Limited ("Shareholder"), another Wynyard family company controlled by Mr. Wynyard, pay the sums of $120,000.00 and $300,000.00 respectively to Jansigma in consideration for the grant of an option to acquire the whole of the unissued share capital of Jansigma at par. (3) On the same day, the directors of Shareholder resolved that it enter into the option agreement already mentioned. (4) On 27 September, Jansigma, Shareholder and Dirce executed an option agreement. At this time, Jansigma's issued capital consisted of two ordinary shares of $1.00 each, one of which was held by Mr. Wynyard and the other by Stoici Pty. Limited ("Stoici"), another Wynyard family company controlled by Mr. Wynyard. Under the option agreement, in consideration of the sum of $420,000.00 then received, Jansigma granted an option to Shareholder and Dirce to subscribe at par for 9,998 ordinary shares of $1.00 each (cl.1); the option could be exercised during the ensuing week at the expiration of which the option would lapse (cl.3). As between the grantees, in the event of the option being exercised, the shares taken up were to be held by Dirce as to 2/7ths. thereof and as to 5/7ths. by Shareholder (cl.7). (5) On the same day, a trust was established for the benefit of Mr. Wynyard's family, known. as the Wynyard Family Trust (No. 4). The trust was evidenced by a deed by which Mr. P.D. Dennis, an accountant, then settled the sum of $10.00 upon Dare Reed Nominees Pty. Limited as trustee. The trustee was a company controlled by Mr. Wynyard's solicitors. Under the trust deed, Mr. Wynyard was given the power to appoint a new trustee (c1.20). The trustee was given a limited power to vary the trusts (cl.21). (6) On 28 September, the members of Belanto Pty. Limited ("Belanto"), another Wynyard family company controlled by Mr. Wynyard, resolved by special resolution that the capital of the company be increased by the creation of 420,000 redeemable preference shares of $1.00 each. (7) On 28 September, the directors of Belanto resolved to open an account with the Commercial Bank of Australia Limited, Hunter and Bligh Streets Branch. On the same day, Jansigma, Belanto and Dare Reed Nominees opened accounts at that Branch. (8) On 28 September, the following cheques were drawn and the proceeds credited to the account of the payee in each case: (i) Cheque in the sum of $300,000.00 drawn by Mr. Wynyard on Commercial Bank of Australia Limited, Hunter and Bligh Street Branch in favour of Shareholder. (ii) Cheque in the sum of $300,000.00 drawn by Shareholder on Commercial Bank of Australia Limited, Hunter and Bligh Street Branch in favour of Jansigma. (111) Cheque in the sum of $120,000.00 drawn by Mr. Wynyard on Commercial Bank of Australia Limited, Hunter and Bligh Street Branch in favour of Dirce. (iv) Cheque in the sum of $120,000.00 drawn by Dirce on Commercial Bank of Australia Limited, Hunter and Bligh Street Branch in favour of Jansigma. (v) Cheque in the sum of $420,000.00 drawn by Jansigma on Commercial Bank of Australia Limited, Hunter and Bligh Street Branch in favour of Belanto. (vi) Cheque in the sum of $420,000.00 drawn by Belanto on Commercial Bank of Australia Limited, Hunter and Bligh Street Branch in favour of Dare Reed Nominees as trustee of the Wynyard Family Trust (No. 4). (vii) Cheque for $420,000.00 drawn by Dare Reed Nominees , as trustee of the Wynyard Family Trust (No. 4) on Commercial Bank of Australia Limited, Hunter and Bligh Street Branch in favour of Mr. Wynyard. (9) On 4 October 1979, the members of Dirce and of Shareholder resolved to refrain from exercising their options to take up shares in Jansigma. (10) On 18 October, Belanto allotted to Jansigma 420,000 redeemable preference shares of $1.00 each. (The allotment monies were set off against the sum of $420,000.00 advanced by Jansigma to Belanto on 28 September). (11) On 19 October, the members of Belanto resolved that Belanto make a gift of $420,000.00 to Dare Reed Nominees as trustee of the Wynyard Family Trust (No. 4) and that the gift be effected by Belanto releasing Dare Reed Nominees from the debt of that amount arising from the advance made on 28 September. A deed of release was executed on 19 October. His Honour held that these transactions were "shams" and therefore should be ignored with the result that Mr. Wynyard never became indebted to Dare Reed Nominees in the sum of $420,000.00 as the dealings between the parties indicated. Before explaining the primary Judge's reasons for this conclusion, it will be convenient to recite the history of the subsequent dealings between the parties as follows: (12) On 30 June 1980, Mr. Wynyard appointed Leduke Pty. Limited ("Leduke"), another company controlled by Mr. Wynyard, to be trustee of the Wynyard Family Trust (No. 4) in place of Dare Reed Nominees. (13) On 15 August 1980, another trust was established for the benefit of Mr. Wynyard's family, known as the Wynyard Family Trust (No. 6). The trust was evidenced by a deed between Mr. J.P. Connell, a company director, who then settled the sum of $10.00 upon the fifth appellant, Seyta, as trustee. Under the trust deed, Leduke was given the power to appoint a new trustee (c1.20). The trustee was given a limited power to vary the trusts (cl.21). (14) On 22 August 1980, Seyta agreed to purchase a property at Moss Vale known as "The Chase" from a party at arms' length for a price of $450,000.00. The deposit of $45,000.00 paid on exchange of contracts was provided by Mr. Wynyard. (15) On 14 September 1980, Leduke varied the trusts of the Wynyard Family Trust (No. 4) by nominating the Wynyard Family Trust (No. 6) as the beneficiary of the (No. 4) trust. (16) On the same day, Leduke gave Mr. Wynyard a notice in these terms: "To John Walker Wynyard 29 George Street SYDNEY TAKE NOTICE that LEDUKE PTY. LIMITED as trustee of the Wynyard Family Trust (No. 4) has caused Seyta Pty Limited as trustee of the Wynyard Family Trust (No. 6) to be the sole Eligible Beneficiary of the Wynyard Family Trust (No. 4) and has determined the distribution date thereof as being the date of this notice; you are therefore authorised and directed to pay the debt of $420,000 owing by you to Leduke Pty. Limited as trustee of the Wynyard Family Trust (No. 4) to Seyta Pty Limited as trustee of the Wynyard Family Trust (No. 6)." (17) On 19 December 1980, the purchase of "The Chase" was completed. A sum of $488,627.00 was paid on settlement. A total of $534,816.13 was received by Dare Reed, solicitors, on behalf of Seyta. The solicitors' ledger showed the following: "DATE DEBIT CREDIT BALANCE PARTICULARS 2/12/80 238000.00 -238000.00 BANK OF NZ PT S'MENT MONIES 8/12/80 70000.00 -308000.00 SEYTA P/L BALANCE S'MENT MONEY 8/12/80 20,000.00 -328000.00 SEYTA P/L BALANCE S'MENT MONEY 8/12/80 206816.13 -534816.13 SEYTA P/L PART S'MENT MONIES" (The sum of $238,000.00 (part of the sum of $534,816.13) was paid to Dare Reed by Shareholder. The source of the funds being the sums of $70,000.00 and $20,000.00 (part of the sum of $534,816.13) is not known. The sum of $206,816.13 (the balance of the sum of $534,816.13) was the proceeds of sale of a property owned by Madnara Pty. Limited ("Madnara"), another Wynyard family company controlled by Mr. Wynyard. After payment of the balance purchase price and costs, a surplus of $39,000.00 was paid to Mr. Wynyard.) (18) At a date not disclosed by the evidence but apparently between December 1984 and August 1985, Sharrment was appointed trustee of the Wynyard Family Trust (No. 6) in the place of Seyta. (19) In December 1984, "The Chase" was sold by Seyta to Eldercon Pty. Limited ("Eldercon"), a company at arms' length, for a price of $650,000.00 of which the sum of $250,000.00 was forborne on mortgage. The contract of sale gave Seyta the right to nominate the mortgagee and Sharrment was so nominated. (20) Upon the sale of "The Chase", Sly & Russell, solicitors acting on behalf of Seyta, received the sum of $400,000.00. Pursuant to directions given by Sly & Russell upon the instructions of Mr. Wynyard, the solicitor for Eldercon handed over three bank cheques: (i) in favour of Mrs. Wynyard in the sum of $100,000.00; (ii) in favour of Sharrment in the sum of $178,000.00; (iii) in favour of Sly & Russell in the sum of $122,000.00; this was in payment of legal fees owed to that firm by Mr. Wynyard. (21) The cheque in favour of Mrs. Wynyard was deposited to the credit of a bank account held in her name. The cheque for $178,000.00 was used to open an account No. 182998 with Australian Bank, the authorized signatories being Mr. and Mrs. Wynyard, Mr. J.D. McDonald, a director of Sharrment, and, subsequently, Mr. Lee and Mr. Mark Wynyard. In October 1985, the sum of $44,500.00 was withdrawn from this account and placed on investment deposit with Australian Bank Limited, one of the original submitting respondents. Interest has accrued and at the time of the making of the application the amount held on deposit was $46,180.05. This was one of the funds declared by the primary Judge to be part of the divisible property of Mr. Wynyard's estate. (22) Eldercon paid the amount of $250,000.00 due by it under the mortgage granted on the sale of "The Chase". This amount was held as separate funds (in the amounts of $100,000.00 and $150,000.00) to abide the outcome of these proceedings. The total amount of these funds ($250.000.00) was also declared by the primary Judge to be part of the divisible property of Mr. Wynyard's estate. (23) As has been noted, Mr. Wynyard died on 24 August 1985. The Official Trustee's primary claim - that "The Chase" property was held beneficially for Mr. Wynyard on a_ resulting trust. : The primary Judge accepted the contention of the Official Trustee that he was entitled to claim the funds in question by the application of the equitable principles which govern the creation of resulting trusts (see Calverley v. Green (1984) 155 C.L.R. 242 per Gibbs C.J. at p.246). The Official Trustee argued that "The Chase" was purchased by Seyta out of monies provided by Mr. Wynyard. It followed, the argument ran, that Seyta held the property upon trust for Mr. Wynyard with the 10. result that the remaining proceeds of the sale of the property were held on trust for his estate. The process of reasoning which led the primary Judge to reach this conclusion is complex but may be summarised as follows: (a) Mr. Wynyard controlled the activities of the numerous proprietary companies previously mentioned. They had only a small paid up capital and were described by the Judge as "two dollar" companies. (b) The effect of the transactions entered into in September and October 1979 was: (i) the cash position of each participent was unaffected; (ii) Jansigma received a "windfall" gain of $420,000.00 being the fee for the option which was not exercised; (iii) "this good fortune was at the expense of Dirce and Shareholder but their loss had been offset by payments totalling $420,000.00 from Mr. Wynyard"; (iv) Jansigma spent its windfall in subscribing for the redeemable preference shares issued by Belanto; (v) Belanto, in turn, had "given away" the $420,000.00 to Dare Reed Nominees; (vi) in the result, Mr. Wynyard was $420,000.00 "worse off" and Dare Reed Nominees, as trustee of his family trust, was $420,000.00 "better off"; that difference was not represented in cash but in the fact that Mr. Wynyard was a debtor at call to Dare Reed Nonminess in that amount; (vii) accordingly the transactions had no genuine basis and should be ignored as "shams". 11. (c) As to the 1980 transactions: (i) there was no suggestion that any funds provided by Mr. Wynyard for the purchase of "The Chase" were provided by way of loan (the appellants dispute, for reasons to be given later, that Mr. Wynyard provided the whole of the purchase price); (ii) there is no presumption of advancement in connection with the purchase of a property on behalf of a company; (iii) it was probable that the funds made available by Mr. Wynyard for the purchase of the property were "funds supplied on his personal account, as distinct from on account of some company"; (iv) in supplying those funds, Mr. Wynyard was "providing uncommitted monies for the benefit of Seyta" - it was not a case of his "merely paying to Seyta monies already owed to it, which monies Seyta then chose to use for the purchase of the property on its own account". The evidence did not establish why Mr. Wynyard incorporated, or acquired the capital of, a series of "two dollar" companies. Senior counsel for the appellants urged us to take judicial notice of the fact that some of Mr. Wynyard's companies participated in a number of "bottom-of-the-harbour" schemes with the object of avoiding income tax. He referred to Federal Commissioner of Taxation v. Gregrhon Investments Pty. Ltd. (1987) 19 A.T.R. 457. There was evidence before the primary Judge that on 13 August 1985, only two days before his death, the Commissioner of Taxation obtained judgment in the Supreme Court of New South Wales against Mr. Wynyard in the sum of $4,090,534.92 being for tax assessed in respect of the years ended 30 June 1980, 1981 and 1982. 12. His Honour placed considerable weight upon the circumstance that none of Mr. Wynyard's family companies appeared to carry on any trading activities and appeared to have no assets. On the appeal, senior counsel for the appellants challenged this finding on several grounds, including the one already mentioned, that is that the Court should take judicial notice of the participation of Mr. Wynyard's companies in schemes to avoid tax. His Honour thought that each of the family companies was - -..a mere shell, an alter ogo of Mr. Wynyard himself; having nothing but what he chose to put in its name from time to time." He thought that it was significant that - ",..despite the meticulous manner in which Mr Wynyard was accustomed to attend to formalities, he was prepared, without any formality or directors' meeting, to direct to Seyta sums of $206,816 and $238,000 nominally owned by Madnara and Shareholder respectively. He seems to have treated those substantial sums of money as if they were separate funds amongst his own assets. Having regard to the fact he had ai source of income and that the companies did not, I think that the only realistic conclusion is that this is exactly what they were. It should be concluded that the funds supplied for the purchase of "The Chase" were in reality Mr. Wynyard's own funds." His Honour found support for his conclusion in the circumstances first that Mr. Wynyard personally paid the deposit and received the surplus of $39,000.00 held by the solicitors after the sale, and secondly that the provision of the money by Mr. Wynyard to Seyta closely followed the giving to him personally of a direction by Leduke to pay Seyta $420,000.00. He said: 13. "The September 1980 variations in the trust arrangements took place shortly after the execution of the contract by Seyta and at a time when, it having no money, some arrangements would obviously be necessary to put it in funds to complete the purchase. In the absence of some other explanation it seems reasonable to infer that the purpose of substituting Seyta as trustee was to provide a basis upon which Mr. Wynyard could provide the necessary funds other than as a donation or a loan. It would be surprising if, after these arrangements had been made, the necessary funds were in fact provided by someone other than Mr Wynyard." The primary Judge said that the question "whether the monies provided by Mr. Wynyard were provided by way of repayment of a loan liability incurred in 1979 depends firstly upon whether a genuine liability was then incurred." His Honour answered this question in the negative, concluding that the transaction in September and October of that year were "shams designed to allow Mr. Wynyard to appear to decrease his personal worth by $420,0000 and to appear to increase, to the same extent, the net assets of the Wynyard Family Trust No. 4." In this connection, the primary Judge relied upon the absence of any commercial reasons first, why Dirce and Shareholder would pay $420,000.00 to secure an option to take shares in Jansigma; and secondly, why Belanto would increase its capital by $420,000.00 and would promptly give away this sum to the family trust. Adopting the language of Diplock L.J. in Snook v. London and West Riding Investments Ltd. [1967] 2 Q.B. 786 at p.802, and of Windeyer J. in Scott v. Commissioner of Taxation (No. 2) (1966) 40 A.L.J.R. 265 at p.279, his Honour held that the transactions between the various Wynyard family companies were "shams" because "Mr. Wynyard intended to give to 14. others the appearance of creating legal rights and obligations different from the actual legal rights and obligations (if any) which he intended to create." His Honour said: "The 'stated purposes' of the various transactions entered into in 1979 were, by an elaborate route, the enrichment of the family trust at the expense of Mr Wynyard personally. The 'stated purposes' of the 1980 transactions were the conversion into a different form of the major asset of the trust: a conversion of a chose in action, the debt by Mr Wynyard, into realty. But it is apparent that Mr Wynyard himself did not regard the realty as being an asset of the family trust, but rather as an asset at his personal disposal. This is graphically illustrated by the instructions he gave to Sly & Russell regarding the disbursement of the proceeds of sale." Were the 1979 transactions "shams"? On behalf of the Official Trustee it is said that, in truth, Mr. Wynyard did not become indebted to anybody as a result of the 1979 dealings because those transactions were "shams". In determining this question, it is necessary to ascertain what were the genuine intentions of the parties to the transactions (see Boydell v. James (1936) 36 S.R. (N.5.W.) 620 at p.627; Mullens v. Federal Commissioner of Taxation (1976) 10 A.L.R. 513; Coppleson v. Federal Commissioner of Taxation (1981) 34 A.L.R. 377 per Hunt J. at p.38l; Oakey Abattoir Pty. Ltd. v. Federal Commissioner of Taxation (1984) 55 A.L.R. 291 at 297; Trimbole v. Donnelly, Full Court of the Federal Court of australia, unreported, 5 November 1986 per Evatt, Lockhart and Wilcox JJ. at Pp,-9-10; Re Caruana; Ex parte Deputy Commissioner of Taxation, 23 December 1987, unreported, per Davies J. at pp.9-10; Sherdley v. Sherdley [1987] 2 W.L.R. 1071 per Lord Brandon at p.1079; 15. Yeung v. Federal Commissioner of Taxation (1988) 19 ATR 1006, per Davies J. at p.1013. Dennis Willcox Pty. Ltd. v. Federal Commissioner of Taxation 88 ATC 4,292 at p.4,295). In Scott's Case , supra, Windeyer J. said (at p.279): ",.-if the scheme, including the deed, was intended to be a mere facade behind which activities might be carried on which were not to be really directed to the stated purposes but to other ends, then the words of the deed should be disregarded...A disguise is a real thing: It may be an elaborate and carefully prepared thing; but it is nevertheless a disguise. The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction..." In Hawke v. Edwards (1947) 48 S.R. (N.S.W.) 21, Jordan C.J. said (at p.23): "...but oral evidence is admissible in such roceedings that the parties intended themselves to @ bound only by a contemporaneous oral agreement and that the document was brought into existence as a mere piece of machinery for serving some other purpose than that of constituting the real agreement between them...Oral evidence may also be given that the document is a sham - that it was never intended by the parties to be operative according to its tenor at all, but was meant to cloak another and different transaction..." The Official Trustee relied upon the following passage from the reasons of Clarke J. in Northumberland Insurance Ltd. (in lig.) v. Alexander (1984) 8 A.C.L.R. 882, (at pp.888-9): "...it is the intention of the parties to the transaction which determines the question whether the act or document was intended to be operative according to its tenor or whether it was simply a 16. facade or a disguise. It is not essential, in my view, that the facade disguise another and different transaction. It is enough if it creates an appearance that the contractual relationship between parties is different from the actual relationship." I have difficulty in accepting the Official Trustee's argument. In the first place, there is no suggestion here of any express arrangement or understanding that the transactions were not to take effect according to their terms. Nor, in my view, is there any basis for inferring that the parties intended something different from what they in fact did. It is true, as his Honour said, that there was apparently no commercial reason which might explain why Mr. Wynyard entered into the 1979 transactions. But it does not follow that the arrangements were not genuine. The dealings were between parties who were not at arms' length and, in that context, the absence of a commercial basis for their arrangements is not absurd. It is understandable that Mr. Wynyard might wish to benefit the Wynyard family companies at his own personal expense. He chose to do this by entering into a series of transactions, apparently predetermined, which, so far as appears, had their intended effect (cf. Gorton v. The Commissioner of Taxation of the Commonwealth of Australia (1965) 113 C.L.R. 604 at p.621). We can only speculate as to his real motives for wishing to confer financial benefits upon the Wynyard family companies. He did not, apparently, confide to anybody why he wished to do what he did. A number of possible motivating factors could be suggested but the relevant consideration for present purposes is not Mr. Wynyard's motives but whether he and 17. the Wynyard family companies, as the parties to these dealings, genuinely intended that their transactions take the form they did and that they operate according to their tenor. The only evidence on this question is the evidence provided by the transactions themselves. There is no material from which it could be concluded that the parties intended that their dealings have an operation which was different from that which would flow from the terms of the documents employed. That being so, with all respect to his Honour, it was not open to conclude that the parties intended that their dealings should have some different legal operation. On the contrary, it would seem, on the material available, that Mr. Wynyard and the Wynyard family companies intended that the 1979 dealings would operate in accordance with their terms. It may be accepted that the intended result was inconsistent with the existence of a commercial purpose. But, as has been said, this is explicable by the circumstance that the parties were not at arms' length. Nor is it material that the end result of the transaction could have been achieved by simpler means. In my view, the evidence is consistent only with its being the genuine intention of the parties in 1979 that they enter into a series of legal relationships in the terms of the documentation that was in fact employed. It must follow, in my opinion, that these were not "shams" but rather real transactions. They were genuine dealings notwithstanding that it was intended that a financial detriment be suffered by Mr. 18. Wynyard and that a corresponding advantage accrue to the Wynyard family companies. Can the Court "lift the veil" of incorporation? The primary Judge also referred, in connection with the 1979 dealings, to the "reality" of the situation in terms of Mr. Wynyard's control of the activities of the Wynyard family companies. His Honour relied on this, in effect, to "lift the veil" of incorporation so that the Court would look through the corporate structure of the family companies to Mr. Wynyard and, in this way, treat the companies' assets as if they were Mr. Wynyard's personal property. On behalf of the appellants, it is submitted that it was not open to his Honour to ignore the separate legal personalities of Mr. Wynyard on the one hand and the Wynyard family companies on the other. In my opinion, there is considerable force in the submission. The facts that the companies had little paid-up capital and that Mr. Wynyard controlled their affairs do not justify the conclusion that the assets of the companies are, in truth, or, "in reality", the beneficial property of Mr. Wynyard. Even if Mr. Wynyard, as controller of the affairs of the companies, had- acted without due regard for the interests of their shareholders or creditors (see Walker v. Wimborne (1976) 137 C.L.R. 1 per Mason J. at pp.6-7) it would not follow that the property of the companies became the property of Mr. Wynyard in some informal way. In such circumstances, the controller may be liable for misfeasance or for breach of fiduciary duty. But it 19. does not follow from the use, or even abuse, of control of the companies' affairs that their controller acquired any of the companies' property by some informal process. A misfeasance could hardly effect an acquisition of property. A breach of his fiduciary duties may, of course, mean that a controller will be held liable to indemnify a company for its loss (see, e.g. Nocton v. Lord Ashburton [1914] A.C. 932; cf. Federal Commissioner of Taxation v. Blakely (1951) 82 C.L.R. 388 per Latham C.J. at p.398; MacFarlane v. Federal Commissioner of Taxation (1986) 67 A.L.R. 624 at pp.641-2). But this is not in question here. What is involved in the present case is an attempt by the Official Trustee to pierce the veil of incorporation with a view to exposing Mr. Wynyard as the "real" owner of the assets in question. For some purposes, it is appropriate to pierce the veil of incorporation. An example is the statutory requirement of consolidation of the accounts of a corporate group in some instances. Nevertheless, even where consolidation is desirable, or even required, there is no merger of proprietary interests. Each company in the group still retains its separate legal identity and, consequently, retains beneficial ownership of its own assets. As Mason J. said in Industrial Equity Ltd. v. Blackburn (1977) 137 C.L.R. 567 at p.577: "It has been said that the rigours of the doctrine enunciated by Salomon v. Salomon & Co. Ltd. have been alleviated by the modern requirements as to consolidated or group accounts introduced in the United Kingdom by the Companies Act, 1948 and in New South Wales by the Companies Act, 1961 (N.S.W.) - see Gower, Modern Company Law, 3rd ed. (1969), pp.198-199. But the purpose of these requirements is to ensure that the members of, and for that 20. matter persons dealing with, a holding company are provided with accurate information as to the profit or loss and the state of affairs of that company and its subsidiary companies within the group...It is for this purpose that the Companies Act treats the business group as one entity and requires that its financial results be incorporated in consolidated accounts...However, it can scarcely be ontended that the provisions o @ Act operate to c deny the separate legal personality of each company na group. Thus, in e absence of contract creating some additional right, the creditors of company A, a subsidiary company within a group can look only to that company for payment of their debts. They cannot look to company 8, the holding company, for payment..." (Emphasis added) (See also Pioneer Concrete Services Ltd. v. Yelnah Pty. Ltd. (1986) 11 A.C.L.R. 108; Canada Enterprises Corporation Ltd. v. MacNab Distilleries Ltd. [1987] 1 W.L.R. 813 at p.817; Dennis Willcox, supra, at pp.4,295-8; Stephen Gates, "Disregarding the Corporate Entity in Favour of Beneficial Ownership and Control", (1984) 12 A.B.L.R. 162; Robert Baxt, "The Corporate Veil in Tax Law - The Legal Perception of Companies as Separate Entities", (1984) 1 A.T.F. 239; F.G. Rixon, "Lifting the Veil between Holding and Subsidiary Companies", (1986) 102 L.Q.R. 415; Phillip I. Blumberg, The Law of Corporate Groups, 1985, pp.6-7). Since neither de ure noc de facto control of the affairs of a company confers upon the controller any proprietary interest in the corporation's assets, it must follow that Mr. Wynyard's domination of the operations of the Wynyard family companies could not, of itself, give him any right to their assets. 21. Consequences of upholding the validity of the dealings in 1979 as real and not "sham" transactions on the footing that the "veil" of incorporation of the Wynyard family companies should not be lifted. It is conceded by the Offical Trustee, and I_ think, properly conceded, that unless the 1979 transactions can be ignored, he cannot sustain his claim that a resulting trust arose from the dealings in 1980. Unless the dealings in 1979 can be put aside, it must follow that, as a result of these transactions, Mr. Wynyard then became indebted to Dare Reed Nominees, as trustee for the Wynyard family trust, in the sum of $420,000.00. Once it is accepted, as I think it must be, that Mr. Wynyard owed this debt, the dealings surrounding the acquisition of "The Chase" can be explained on the footing that, even if it be assumed (and, for reasons to be given, the assumption cannot safely be made) that Mr. Wynyard paid over funds of his own by way of the purchase price, this payment was made in satisfaction of a pre-existing debt, namely, the debt of $420,000.00 incurred in 1979. If, on the other hand, contrary to my own conclusion, that debt was never created, it would have been open to the Official Trustee to argue that in 1980 Mr. Wynyard paid over his own funds to acquire "The Chase" and that this payment was not made in satisfaction of an existing debt or by way of a fresh loan. On those assumptions, it may have been necessary to enquire whether, in those circumstances, the Court should declare that there was a resulting trust. Although it is not now strictly necessary to deal with these matters, since the question was fully argued, I will consider it. 22. Was there a_ resulting trust? In Calverley v. Green, supra, (at pp.246-7) Gibbs C.J. restated the general rule that a resulting trust arises in favour of a purchaser, or in favour of two purchasers in the proportions in which they contributed the purchase money, subject to the exception created by the presumption of advancement. Of the presumption of advancement, the Chief Justice said (at p.250): "The presumption should be held to be raised when the relationship between the parties is such that it is more probable than not that a beneficial interest was intended to be conferred, whether or not the purchaser owed the other a legal or moral duty of support." (See also Muschinski v. Dodds (1985) 160 C.L.R. 583 at pp.590, 598-9, 604, 612; Stephenson Nominees Pty. Ltd. v. Official Receiver on behalf of Official Trustee in Bankruptcy; Ex parte Roberts(1987) 76 A.L.R. 485 at p.501). It follows that, in order to establish a resulting trust here, the Official Receiver had to demonstrate first, that Mr. Wynyard--provided the whole, or at least part, of the purchase monies; and, secondly, that in all the circumstances' the presumption of advancement did not apply. It is convenient to deal with these questions separately. 23. Did Mr. Wynyard provide the whole or any part of the purchase monies? (a) The deposit of $45,000.00 It will be remembered that Mr. Wynyard paid the deposit of $45,000.00 on exchange of contracts in August 1980. This amount was apparently provided by Mr. Wynyard out of his own funds. The evidence as to Mr. Wynyard's general financial position at the time is sketchy. However, the deposit was paid by a cheque drawn by Mr. Wynyard on his personal bank account. Prima facie, these funds were Mr. Wynyard's property. Nonetheless, the ultimate significance of this payment should be assessed against the background of the payment to Mr. Wynyard of the sum of $39,000.00 in December 1980 out of the funds held by the solicitors to complete the purchase. It may be that this payment was intended to be in or towards the reimbursement of the payment of the deposit. (b) The balance purchase price It will also be recalled that, with a view to completion of the purchase of "The Chase", the solicitors were put in funds from several sources. Four amounts were involved and the ascertainment of the sources, in the beneficial sense, of these funds, is central to the resolution of the question. The first item for consideration is the sum of $238,000.00 paid to the solicitors by Shareholder on 2 December 24, 1980. Prima facie, this payment was made from assets beneficially owned by that company. The second item is the sum of $70,000.00 paid to the solicitors on 8 December 1980. There is no evidence as to its source. The same position applies to the third item, the sum of $20,000.00 paid on 8 December. The fourth and final item, $206,816.13, was paid to the solicitors on 8 December by Madnara, another of the Wynyards' family companies. Again in order to show that this amount represented one of Mr. Wynyard's assets, it would be necessary for the Official Trustee to point to circumstances beyond the fact that Mr. Wynyard exercised control over the company's affairs. The primary Judge made no findings as to the original source of the funds in question. As has been noted, senior counsel for the appellants argued that we should now take judicial notice of the notorious fact that several of Mr. Wynyard's companies were heavily engaged in the tax avoidance industry. However, it also appears that Mr. Wynyard was also involved. His Honour said of the 1985 assessments issued to Mr. Wynyard: ",...these documents do suggest that, in the years 1979 and 1980, Mr. Wynyard was engaged in business activities on his own account from which he derived substantial income. It is clear that, at the time, he paid much less tax than the amount which the Commissioner thought to be appropriate. Although there is no material to suggest that the subject companies were used for tax-minimisation, the existence of the companies might not have been 25. unrelated to Mr Wynyard's desire to limit the tax paid by hin. There is no evidence to suggest that any of the relevant companies carried on any trading or other income earning activity..." Senior counsel for the appellants sought to attack these findings by referring to some business transactions apparently entered into by Mr. Wynyard's companies, and, as has been said, inviting us to take notice of cases dealt with by the courts involving "bottom-of-the-harbour" schemes where it seems Mr. Wynyard or his companies participated. In this context, a number of possibilities suggest themselves. One is that Mr. Wynyard earned substantial commissions for services rendered in the promotion of schemes to avoid tax (cf. Dalico v. Federal Commissioner of Taxation (1988) 19 A.T.R. 833 at p.835). Another is that Mr. Wynyard's companies earned commissions or profits in these activities even if Mr. Wynyard also participated (cf. Tupicoff v. Federal Commissioner of Taxation, (1984) 56 A.L.R. 151 at pp.163-4). A further possibility is that both Mr. Wynyard or his companies derived income in this connection. Another possibility is that Mr. Wynyard derived the income in the first instance but later assigned or lent it to his companies. But, in my view, no useful purpose would be served by speculating about these matters. Prima facie, funds paid over to the solicitors by the Wynyard family companies were beneficially owned by those companies and not by Mr. Wynyard. In these proceedings, the Official Trustee bears the general onus of proof (see Re De Fazio; Ex parte The Official Trustee in Bankruptcy, unreported, 22 February 1988 per *e 26. Northrop J. at p.12). The circumstance that the Wynyard family companies appeared to have few, if any, business activities can throw no real light on the different question whether these companies were beneficially entitled to the monies they paid. It appears not to have been possible to obtain any comprehensive information about the financial affairs of the companies. This made the task of reconstructing their affairs extremely difficult. Nonetheless, the Official Trustee bore the onus of making good his contention that these were Mr. Wynyard's own monies. In my view, the Official Trustee failed to discharge that onus. Even if the Official Trustee could have established that the funds provided for the acquisition of "The Chase" were the property of Mr. Wynyard, it would not necessarily follow that a resulting trust would have arisen in his favour. That would depend upon Mr. Wynyard's actual intentions at the time. It may have been that he intended that he advance the funds to his family trust by way of gift. If so, there would have been no resulting trust in his favour because Mr. Wynyard would have intended that the family trust own "The Chase" beneficially. It is not necessary to express any concluded view on this question. In the light of my conclusion that the 1979 transactions were not "shams", it must follow, in my view, that there was no room here for the creation of a resulting trust in Mr. Wynyard's favour. 27. The Official Trustee's alternative claim that there was a_settlement of property within s.120(2) of the Act. It is conceded by the Official Trustee, and I_ think correctly conceded, that this claim also can only succeed if it first be established that the 1979 transactions were not genuine. The result must be that the alternative claim also fails. I would propose that the appeal be allowed; that the orders made at first instance be set aside; in lieu thereof, it should be ordered that the application be dismissed with costs. I certify this and the TWENTY-Six (26) preceding pages to be a true copy of the Reasons for Judgment of his Honour Mr Justice Beaumont. Associate: Keane Kes Date: 3 June 1988 Counsel for the appellants: Solicitors for the appellants: Counsel for the respondent: Solicitors for the respondent: Date of Hearing: Date of Judgment: Mr. R.A. Conti QC with Mr. A.S. Martin Sly & Russell Mr. T. Simos QC with Mr. D. Yates Australian Government Solicitor 25, 26 February 1988 3 June 1988 IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G348 of 1987 ) ) GENERAL DIVISION ON APPEAL FROM A SINGLE JUDGE OF THE FEDEAL COURT OF AUSTRALIA BETWEEN: SHARRMENT PTY. LIMITED, LEE WYNYARD, MARK WYNYARD, LORREINE CLAIRE WYNYARD and SEYTA PTY. LIMITED Appellants lz =z oO THE OFFICIAL TRUSTEE IN BANKRUPTCY Respondent CORAM LOCKHART, BEAUMONT and FOSTER, JJ. DATE: FRIDAY, 3 JUNE, 1988. PLACE: SYDNEY. REASONS FOR JUDGMENT FOSTER, J. The relevant facts in this appeal are fully set out in the judgments of Lockhart and Beaumont, JJ., which I have had the advantage of reading. The applicable case law is also fully discussed in those judgments. I am in full agreement . , ' 2. with the view that the preferable inference to be drawn in relation to the 1979 transactions 1s that they were intended to be operative according to the1r tenor and to produce a Situation of indebtedness of Mr. Wynyard to the Wynyard Family Trust No. 4. There is no doubt that the transactions were complicated and artificial. One can only speculate as to what was the underlying motivation for the establishment of such an intricate pattern of commercial activity to produce a result which could have been achieved with far greater simplicity. However, the respondent has failed to satisfy me that the transactions can properly be characterised as constituting a sham within the meaning of the authorities fully set forth in their Honours' judgments. Without such a fundamental finding, the balance of the respondent's case cannot be sustained. In reaching this conclusion, I adopt the reasons given by their Honours in their judgments, with which I am in full agreement. There is nothing that I can usefully add. I agree with the orders proposed. I certify that this and the preceding one page is-a true copy of the reasons for judgment herein of his Honour, Mr. Justice M.L. Foster. Dated: Friday, 3 June, 1988.