CATCHWORDS BANKRUPTCY - encumbrance granted by bankrupt - whether granted in good faith and for valuable consideration — alleged family arrangement - agreement to buy brother's interest in father's estate - whether genuine ~ whether agreement to grant mortgage - past consideration - mortgage not supported by valuable consideration. Bankruptcy Act 1966, s.120(1) RE: TEDROS NADER EX PARTE: OFFICIAL TRUSTEE IN BANKRUPTCY Applicant AND: TEDROS NADER NAWAL NADER GEORGE NADER JIM NADER Respondents No. W963 of 1985 Morling J. 25 August 1988 Sydney IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION OF NEW SOUTH WALES AND THE ) ) BANKRUPTCY DISTRICT OF THE STATE ) No. W963 of 1985 ) ) AUSTRALIAN CAPITAL TERRITORY JUDGE MAKING ORDER DATE OF ORDER WHERE MADE RE: TEDROS NADER EX PARTE: OFFICIAL TRUSTEE IN BANKRUPTCY Applicant AND: TEDROS NADER NAWAL NADER GEORGE NADER JIM NADER Respondents MINUTE OF ORDER Morling J. 25 August 1988 oo Sydney THE COURT DECLARES AND ORDERS AS FOLLOWS: 1. NOTE: Declare that the mortgage granted by Tedros Nader and Nawal Nader over the land in Certificate of Title Volume 6764 Folio 181 in favour of George Nader is void as against the applicant as trustee of the bankrupt estate of Tedros Nader. Order that the first, second and third respondents pay the applicant's costs. Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE STATE ) No. W963 of 1985 ) ) OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: TEDROS NADER EX PARTE: OFFICIAL TRUSTEE IN BANKRUPTCY Applicant AND: TEDROS NADER NAWAL NADER GEORGE NADER JIM NADER Respondents Morling, J. 25 August 1988 REASONS FOR JUDGMENT Tedros Nader became bankrupt on his own petition on 18 October 1985. At that date he was the registered proprietor with Nawal Nader of land at Yagoona. In the bankrupt's statement of affairs his brother George Nader was disclosed as a secured creditor to whom the sum of $100,000 was owed. The security was stated to be an unregistered mortgage over the Yagoona property. In these proceedings the bankrupt's trustee in bankruptcy seeks a declaration that the granting of the mortgage is void as against hin. He claims that the mortgage was a settlement of property within the meaning of 2. $.120(1) of the Bankruptcy Act 1966 and that George Nader was not an encumbrancer in good faith and for valuable consideration. According to the bankrupt and George Nader, the mortgage document was executed in January 1985. The mortgage is expressed to have been given by the mortgagors in consider- ation of George Nader having advanced to them the sum of $200,000, not $100,000. The loan is expressed to be repayable on 3 January 1986 and the mortgagors covenant to pay interest at the rate of 14%. Both the bankrupt and George Nader concede that no part of the $200,000 referred to in the mortgage was in fact advanced to the mortgagors. They also concede that there was no agreement between them that any loan would be repaid on 3 January 1986 with interest at 14%. The facts that I have so far mentioned would, in the absence of further evidence, plainly establish the trustee's claim that the granting of the mortgage was a disposition of property by the bankrupt in circumstances that made it void as against the trustee. However, the bankrupt and George Nader submit that when regard is had to all the circumstances that occurred before the mortgage was executed in January 1985 the Court should find that George Nader took the mortgage in good faith and for valuable consideration and that, accordingly, it was not a settlement of property which 1s void as against the trustee. To understand this claim it is necessary to give a brief outline of the facts which are said to support it. The bankrupt was born in Lebanon. He is about 40 years of age and has six brothers and two sisters. He was brought up in Kafr Zena, a small village near Tripoli, where his father lived until recently. George Nader came to Australia about 30 years ago and over the succeeding years several of his brothers have also migrated here. After George established himself he assisted one of his brothers to migrate and over the succeeding years other brothers have been afforded similar assistance by members of the family already living in Australia. The bankrupt came to this country about 20 years ago. George appears to have prospered financially in Australia and the evidence suggests that he is more affluent than his siblings. As at 1984 he was more affluent than the bankrupt. He is the eldest son. The bankrupt's father carried on business in a small way in Kafr Zena. The village has a population of about 500. The father was a butcher and also dealt in a small way in olives and olive oil. I am far from being persuaded, as was suggested by the bankrupt, that the father had extensive business interests. The father also owned several parcels of land in Lebanon. There was a good deal of evidence as to the extent of the landholdings in Lebanon of the father and other members of the family. Although it is difficult to piece together an entirely comprehensive picture, I think it is fairly clear on the evidence that, as at October 1984, the father owned four or 4. five parcels of land with a total value of about & Leb. 440,000 (Lebanese pounds), the Australian dollar equivalent of which was about $75,000. In October 1984 the bankrupt and George Nader were in Lebanon visiting their father. Other members of the family were also there at the time. The father was a fairly old man and I infer from the evidence that he was probably then aged about 80 years. According to the bankrupt, the purpose of his and George's visit to Lebanon was to discuss with their father the distribution of his real estate holdings. At that time four of the bankrupt's brothers were still resident in Lebanon. The bankrupt claims that a family meeting was held at his father's home on 11 October 1984, at which Mr Sayed Saada, a person skilled in the transfer of lands, was present. According to the bankrupt, his father said that he proposed to distribute all his land among his children. However, George said that he didn't want "anything at all". The father said, in effect, that he didn't accept George's attitude and that since he was the eldest son he wished to give him more than the other children. After some argument, George said, in effect, that he would accept his father's wishes in the matter, but would sell all of his share to the bankrupt. According to the bankrupt, there was further discussion concerning the value of George's share. The bankrupt claims that the following conversation then ensued: Father: 'I£ Ted is going to have your share, Ted's got to give you Australian $200,000 when he goes back to Australia.' 5. George: 'All right.' Tedros: 'I accept on that basis.' Father (to Sayed Saada): 'will you prepare the necessary documents?' Sayed Saada: 'Yes.' Father (to Tedros): 'You must give George a mortgage in Australia to secure the moneys you owe him.' Tedros: 'Yes, I will do that as soon as he comes back to Australia. I will be returning before him, as you know.' George Nader gave an account of the conversation that differed in some significant respects from the account given by the bankrupt. In an affidavit sworn in the proceedings, George Nader said that it was his belief that it was Tedros who raised the question of a mortgage after the conversation with the father, saying that he (Tedros) would draw up a mortgage for George. According to George Nader, he replied saying that he didn't want a mortgage. However, under cross-examination he said that there was no mention of a mortgage in Lebanon and that the first suggestion of a mortgage was made in Australia at the time the mortgage was executed. When examined under s.81 of the Bankruptcy Act, George Nader said, with respect to the mortgage, that the bankrupt "did it of his own accord. I did not know nothing about it 'til he give me the mortgage." According to both the bankrupt and George Nader they, in company with Mr Saada and their father and others went to the Government Land Register Office at Zagharta on 12 October 1984. Zagharta is a village some 15 minutes drive from Kafr 6. zena. They claim that while they were at the Land Register Office they, their father and Saada signed a document which, (translated into English), is in the following terms: "Contract Whereas the first party wishes to sell his share (in his father's estate) to the second party, The two parties, in the presence of their father, Youssef Forsan Nader, hereby agree upon the following: 1. The first party agrees to sell all his share in his father's estate to the second part in return for two hundred thousand Australian dollars to be paid in Sydney, Australia; 2. The second party accepts the arrangement referred to in clause 1 and undertakes to pay in Australia the sum of money agreed upon upon their return to the country; 3. The two parties request their father to directly register the share of the first party in the name of the second party and appoint Mr Sayed Saada to carry out the registration as such with the departments dealing with matters of real estate according to the law; 4. Two copies of this contract were drawn up in the presence of the father of the two parties to the contract, Youssef Forsan Nader, and of Mr Sayed Saada whose signature appear hereunder with the signatures of the two contractants. Zagharta, October 12, 1984" It will be convenient to refer to this document as "the contract". The bankrupt and George Nader rely upon the contract, and the agreement it is said to reflect, as providing sufficient consideration for the granting of the mortgage to take it outside the operation of s.120(1) of the Bankruptcy Act. 7. Upon his return to Australia at the end of 1984 the bankrupt received some disturbing news to the effect that he was under-insured in respect of a claim being made against him in the Supreme Court of New South Wales by one Wakim, a former employee. Wakim had been injured while working for the bankrupt and had sued the bankrupt, whose defence was being undertaken by his insurer's solicitors. The bankrupt had insurance cover for only $100,000, but was advised upon his return from Lebanon that Wakim would be likely to receive a verdict in excess of that sum. In fact, in July 1985 judgment was entered against the bankrupt in the Supreme Court in the amount of $787,000. Not long after the bankrupt learned he was under- insured he executed a power of attorney in favour of his father. In January 1985 he sent this document to Lebanon and, in exercise of his powers under it, the father sold lands owned by the bankrupt. The proceeds of sale have not been forwarded to the trustee. The signatures on the mortgage were witnessed by one of the bankrupt's employees. No steps were taken to stamp or register it. However, a few days before the sequestration order was made against the bankrupt's estate a caveat was lodged protecting George Nader's interest under the mortgage. In his statement of affairs the bankrupt disclosed unsecured creditors in an amount of about $816,000, the principal creditor being Wakim. He disclosed his assets as 8. being worth about $1,000. George Nader was disclosed as a secured creditor in the sum of $100,000, not $200,000 being the amount referred to in the mortgage. The bankrupt did not disclose that he had assets in Lebanon. The trustee called evidence froma handwriting expert, Mr Anderson that a signature purporting to be that of the bankrupt's father on the contract was not, in fact, his signature. Photostat copies of a number of documents unquestionably signed by the father were tendered in evidence. The father's signature, as appearing in those documents, bears no resemblance to the signature on the contract said to have been signed by hin. Anderson, whose evidence I found impressive, was of the opinion that it would have been very difficult for the writer of the indubitably genuine signatures to so alter his hand as to write the signature which appears on the contract. Anderson said the fact that the genuine signatures were on photostat copies of documents and that they, as well as the signature on the document of 12 October 1984, were in Arabic script gave him some difficulty in concluding that it was unlikely that the writer of the genuine signatures could have written the impugned signature on the contract. Nevertheless, I am left with the most serious doubt whether the father's signature on the contract is genuine. I am bound to say that I find most of the evidence given by the bankrupt and George Nader quite unconvincing and I do not accept it. I do not think they are reliable witnesses. There is an air of unreality about their version of what is 9. Supposed to have occurred. The arrangement supposed to have been made between them strains credulity. In spite of what they would have the Court believe, I do not think their father was a very wealthy man. The bankrupt claimed that his father had a fortune of about $U.S. 2 million, but there is not the slightest evidence to support this statement. As I have observed, the father's lands were worth about $A75,000 as at October 1984. It was suggested in evidence that the father wished to distribute his lands between his children in more or less equal shares. On this basis, George's share of his father's land holdings would have been worth about $A15,000. It is beyond belief that the bankrupt would have offered to pay him $200,000 for that share, particularly having regard to George's professed wish not to share in his father's bounty. It is also unbelievable that the father, who appears to have been on good terms with all his children, would have extracted a promise from his son Tedros to pay $200,000 to his more affluent brother George. Moreover, I think it is highly unlikely that the father would have required that Tedros execute a mortgage over his property when he returned to Australia before he (the father) transferred George's share to Tedros. There is conflicting evidence as to what occurred in the father's household on the day preceding the signing of the alleged contract. According to some of the evidence, a list was drawn up of all the father's land-ownings and values ascribed to each parcel. Other evidence suggests the contrary. 10. There are many other matters about the alleged contract which make me suspicious of it. I find it difficult to believe why the parties would have gone to a Land Register Office to sign it. It was not left at the Office. It was said that it was taken back to the father's house. The contract, if it existed and was genuine, was important to the bankrupt and George Nader. Yet neither took possession of it. They claim that it remained in Lebanon after they returned to Australia. Moreover, no action was taken to carry its terms into effect. Evidence was given by Edward Nader, a brother of the bankrupt, that on 12 October 1984 he saw his brothers execute a document, the terms of which were not discussed with him. His evidence does not prove that the document he saw executed is identical with the contract now relied upon as supporting the grant of the mortgage. It appears that, as at October 1984, the most valuable of the lands owned by the father were known as Estates 49 and 299, On 7 November 1984 these lands were sold to the bankrupt and three of his brothers for % Leb. 350,000, or about $56,450 Aust. This transaction seems to be entirely inconsistent with any arrangement whereby the bankrupt agreed to pay $A200,000 for George's share. After the sale of Estates 49 and 299, the lands still retained by the father appear to have had a value of only about $A15,000. It was submitted that the value attributed to the father's lands might not have been reliable. This may have been the case but, nevertheless, the transaction 11. into which the father entered on 7 November 1984 casts the most serious doubt upon the version of the facts for which the bankrupt and George Nader contend. It is difficult to believe that, under Lebanese law, the alleged contract in 1984 was effective to transfer any interest in the father's lands to his son Tedros. Indeed, I did not understand it to be suggested that this was the case. The document does not, of course, refer to any particular land. There is no evidence that the document was produced to any official at the Land Register Office and it does not bear any endorsement such as one would expect to find if it had been lodged, even temporarily, with the Land Register Office. It would have been open to the father at any time during his lifetime to change his intentions as to distributing his lands amongst his children. It was open to him not to give any share to George, in which case the bankrupt would have been liable (if the contract was genuine and enforceable) to pay his brother $200,000 for a non-existent share. I do not accept that the bankrupt made any promise to his father or to his brother George to execute a mortgage over his Australian land securing the payment of $200,000, or any other sum. In my opinion, the execution of the mortgage in January 1985 was an entirely voluntary act on the bankrupt''s part and was unrelated to any obligation he had previously undertaken in favour of George Nader. It is not in doubt that the grant of a mortgage is a disposition of property and is 12. therefore a settlement for the purposes of s.120(1) of the Bankruptcy Act: see Official Trustee in Bankruptcy v Arcadiou (1985) 8 F.C.R. 4, I am not satisfied that any arrangement was made in October 1984 that provided consideration for the granting of the mortgage. In my opinion, the granting of the mortgage was no more than a device to make George Nader a secured creditor in the bankrupt's estate, although he had given no consideration for the mortgage. I am satisfied that George Nader was not an encumbrancer for valuable consideration within the meaning of s.120(1)(a) of the Bankruptcy Act. Such an encumbrancer is one who gives consideration for the encumbrance which has a real and substantial value and not one which is merely trivial or colourable. See Barton v The Official Receiver (1986) 161 C.L.R. 75. I should add that, even if I had been of the view that the alleged contract was genuine, the consideration moving under it from George Nader to the bankrupt would not have provided consideration of the kind necessary to take the mortgage outside the operation of s.120(1) of the Bankruptcy Act. The bankrupt was not obliged under the contract to give his brother a mortgage over his land in Australia. The contract makes no mention of the giving of security. The only obligation assumed by the bankrupt was to pay a sum of money. Even if the mortgage executed in January 1985 be accepted at face value, no consideration was given for it. Assuming the bankrupt and George Nader reached an agreement as evidenced by 13. the contract, the consideration given by George for the bankrupt's promise to pay him $200,000 was past at the time the mortgage was executed. on this basis, the case would have been distinguishable from cases such as Pao On v Lau Yiu Long (1980) A.C. 614 at p.629, and Re Douglas; Ex parte Starkey (1987) 15 F.C.R. 475. In the latter case, the encumbrance was granted by the bankrupt pursuant to a clear understanding, made at an earlier point of time, that it would be granted. In the present case, I am satisfied that the giving of a mortgage was first raised in January 1985. There was no previous agreement between the parties that security would be given to secure the performance of any obligation undertaken by the bankrupt under the contract. I am of the opinion that the sole reason for the execution of the mortgage was to diminish the value of the bankrupt's assets. The execution of the power of attorney at about the same time confirms me in this opinion. The conclusion is irresistible that the bankrupt secured the co-operation of his brother in a plan to defeat his creditors, particularly Wakim. The mortgage was not granted in good faith and for valuable consideration. Accordingly the Trustee is entitled to the declaration which he seeks. I declare that the mortgage granted by Tedros Nader and Nawal Nader over the land in Certificate of Title Volume 6764 Folio 181 in favour of George Nader is void is against the applicant as trustee of the bankrupt estate of Tedros Nader. I certify that this and the thirteen (13) preceding pages are a true copy of the Reasons for Judgment of his Honour Mr Justice Morling. Associate: a Lemand Date: Counsel for applicant: instructed by: Counsel for respondents Tedros and George Nader: instructed by: Dates of Hearing: Date of Judgment: 25 August 1988 J. Wilson Lobban McNally & Harney C.T. Barry McClellands 11, 12, 17 August 1988 25 August 1988